2023 (10) TMI 1017 - AT - Income Tax

Property sale income must be taxed in year transaction occurred, not when book entries made

M/s. Economical Credit & Construction Co. Pvt. Ltd. Versus ITO, Ward 8 (1), New Delhi

The ITAT Delhi held that income from property sale must be taxed in the correct assessment year when the transaction actually occurred, not when book ... Expenses/income for relevant assessment year - Principal of tax jurisprudence - income from other sources and the expenses disallowed by observing that the transaction was complete in FY 2006-07 and therefore the inventory stock was to be amended accordingly in that year itself. HELD THAT:- As entries in the books of accounts are not determinative of true nature of transaction and nature of income as per preposition rendered in the case of Kedarnath Jute Mfg. Co. Ltd. [1971 (8) TMI 10 - SUPREME COURT] It is also a well established and accepted principal of tax jurisprudence that the right income should be taxed in the right hands, under right head of income in the right year of assessment. Undisputedly, in the present case the transaction of sale of property was undertaken by the assessee during FY 2006-07 pertaining to AY 2007-08 but the assessee did not recorded the entry in the books of accounts and continuously shown the property in the balance sheet till AY 2012-13. Hence, the books of accounts of assessee were not revealing correct factual position of properties owned by assessee till 2012-13. As noted that as per assessee during assessment proceedings of AY 2012-13 AO issued notice u/s. 133(6) to the purchaser and in response to said notice the purchaser company submitted that “the company has not purchase any property from the above party (the assessee) during the financial year 2011-12”. Copy of sale deed available at pages 108 to 155 shows that the assessee company sold the land on 21.03.2007 which falls within the ambit of AY 2007-08 and as per recital in the sale deed the assessee had received sale consideration also at the time of execution and registration of sale deed on 21.03.2007. We note that despite the fact that during AY 2012-13 no transaction of sale of property/land was undertaken by the assessee but the assessee recorded book entries pertaining to the sale of property/land transaction, which was in fact, undertaken during AY 2007-08, in the books and financial statements for AY 2012- 13 by passing books entries only. As following the principal of tax jurisprudence that the right income should be taxed in the right hands, under right head of income in the right year of assessment, we direct the Assessing Officer to tax the income/profit accrued to the assessee from sale of land/property in AY 2007-08. Grounds of assessee are partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts of Rs. 1,06,70,000 credited as 'prior period income' in the assessment year under appeal (AY 2012-13) could be assessed as income from undisclosed sources in that year, notwithstanding a registered sale deed dated 21.03.2007. 2. Whether the profit on sale of land (sale deed dated 21.03.2007) ought to be taxed in the assessment year 2007-08 (year of accrual/receipt) rather than in AY 2012-13 when entries were made by way of prior period adjustments. 3. Whether expenses of Rs. 76,91,960 claimed as prior period expenses in AY 2012-13 could be allowed against the credited sale consideration where the underlying sale and alleged receipt occurred in FY 2006-07. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of Rs. 1,06,70,000 credited as 'prior period income' in AY 2012-13: legal framework Legal framework: Principle that income must be taxed in the year in which it accrues or is received; entries in books are not conclusive of the true nature of transactions (Kedarnath Jute principle as applied in tax jurisprudence). AO's powers to treat unexplained credits as income from other sources where receipts are not supported by contemporaneous evidence; powers under section 133(6) for verification. Precedent treatment: Tribunal relied on the settled principle (Kedarnath Jute) that book entries do not determine the true nature or timing of income; cited that the right income should be taxed in the right year. Interpretation and reasoning: The Tribunal examined documentary evidence (registered sale deed dated 21.03.2007) and the results of AO's verifications under section 133(6) (responses from purchaser and bank indicating no transaction in AY 2012-13). It found that although the assessee recorded the amount as prior period income in AY 2012-13, the substantive sale transaction occurred on 21.03.2007 (FY 2006-07) and the sale deed recorded receipt of consideration at registration. The Tribunal accepted that books did not reflect the factual position (property remained on balance sheet until 2012-13) and held that the timing of accrual/receipt governs taxation notwithstanding the later accounting entry. Ratio vs. Obiter: Ratio - entries in the books cannot override the factual timing of accrual/receipt; income must be taxed in the year of accrual/receipt. Obiter - remarks doubting the assessee's explanation about misplaced cheques, insofar as they are ancillary to the primary conclusion. Conclusion: The Tribunal held that the AO was not justified in treating the credited sum as income from unexplained sources in AY 2012-13; instead the income/profit from sale must be assessed in AY 2007-08 (year of sale/receipt). Accordingly, the addition in AY 2012-13 was not to stand as charged in that year. Issue 2 - Taxation year for profit on sale of land (AY 2007-08 v. AY 2012-13): legal framework Legal framework: Taxation follows accrual/receipts; registration and sale deed recitals are relevant evidence of transaction date and receipt. Assessing Officer may inquire with purchaser and banks to verify actual receipt and date. Prior period adjustments in financial statements cannot be used to shift taxable income to a later year where substantive accrual occurred earlier. Precedent treatment: Tribunal applied established principle that the right income should be taxed in the right year and relied on the sale deed recital as determinative of timing; the assessment authority's verification under section 133(6) was treated as material evidence about contemporaneous non-receipt only to the extent it corroborated the factual position. Interpretation and reasoning: The Tribunal reconciled documentary evidence: the sale deed dated 21.03.2007 indicated the sale and receipt at that date, while the purchaser's statement in response to section 133(6) indicated no purchase in FY 2011-12. Given these facts and the principle that the true nature of transactions is not conclusively shown by later entries, the Tribunal directed assessment of the profit in AY 2007-08. The Tribunal found that maintaining the property on the balance sheet until 2012-13 demonstrated that the books did not reflect the correct factual position, supporting taxation in the earlier year. Ratio vs. Obiter: Ratio - profit on sale is taxable in the year when the sale/receipt occurred (AY 2007-08) despite later accounting as prior period income. Obiter - comments on the implausibility of forgetting to record a sale in the true year, which underlines but does not alone decide the legal outcome. Conclusion: The Tribunal directed that the Assessing Officer tax the income/profit from the sale of land in AY 2007-08; the assessee's grounds on timing were partially allowed. Issue 3 - Allowability of prior period expenses of Rs. 76,91,960 in AY 2012-13 Legal framework: Expenses are allowable against income of the year to which they relate; where income is found to have accrued in an earlier year, corresponding cost must be linked to that year for allowance. AO may disallow expenses if they do not pertain to the relevant year or lack documentary support. Precedent treatment: Authorities below disallowed the expenses in AY 2012-13 because the sale was found to have occurred in FY 2006-07 and the claimed expenses did not pertain to AY 2012-13; Tribunal applied the same temporal linkage principle. Interpretation and reasoning: Since the Tribunal concluded that the sale and receipt occurred in FY 2006-07 (AY 2007-08), the claimed prior period expenses recorded in AY 2012-13 could not be allowed in that year; expenses must be matched to the year of sale/receipt. The AO's independent verification and the absence of contemporaneous evidence supporting expenditure in AY 2012-13 supported disallowance in the later year. Ratio vs. Obiter: Ratio - expenses claimed as prior period deductions in a year distinct from the year of accrual of corresponding income are not allowable in the later year; they must be considered in the year to which they properly pertain. Obiter - none additional beyond temporal matching principle. Conclusion: The Tribunal upheld that the expenses claimed in AY 2012-13 could not be allowed in that year against the sale consideration and must be considered in AY 2007-08 in accordance with the timing of the sale; this supports taxing the net profit in AY 2007-08. Ancillary findings and outcome The Tribunal emphasized that book entries alone are not determinative and that factual evidence (registered sale deed and verification responses) control the timing of taxation. The Assessing Officer's treatment of the credited amount as income from unexplained sources in AY 2012-13 was not sustained; instead the Assessing Officer was directed to assess the profit on sale in AY 2007-08. The appeal was partly allowed to that extent.