2026 (1) TMI 881 - AT - Income Tax

Real estate project accounting and taxation: project completion method upheld; several additions deleted, some remanded for verification.

Real estate taxation and accounting issues addressed: advances received in cash were held to be taxable only on project completion where the assessee ... Addition on account of on-monies received on sale of unit - unexplained income of the assessee - Year of assessment - assessee was following ‘Project Completion Method’ - assessee is a partnership firm which was formed to carry on business of real estate development - assessee was in receipt of cash advances from the doctors towards sale of part of commercial building being developed - whether the advance received by the assessee in cash during the relevant AY 2016-17 is taxable in the relevant year itself or not? - CIT(A) had held that, the cash receipts was in the nature of ‘advances’ and as per the established method of accounting, the same was required to be offered to tax, in the year in which the project was completed, as the assessee was following ‘Project Completion Method’ - HELD THAT:- Having gone through the order of the Ld. CIT(A), we countenance his reasoning for holding that, the impugned sum was in the nature of ‘advance’ and therefore, could not be taxed in the relevant AY 2016-17 but, only in the year in which project was completed. The Ld. CIT(A) is found to have relied on the decisions of Dhanvarsha Builders & Developers Pvt. Ltd. [2005 (10) TMI 276 - ITAT PUNE-A] and Fort Projects Pvt. Ltd. [2011 (7) TMI 1180 - ITAT KOLKATA] to arrive at his conclusion. Decided against revenue. Addition by way of unaccounted payment for purchase of property - HELD THAT:- When the addition on account of unexplained payments has been deleted in the hands of the purchasers, then the consequential corresponding addition made by the AO in the hands of the assessee-seller had no legs to stand on. As noted that AO relied on the statements of Doctors to saddle the addition in the hands of assessee, without giving a copy of the same to assessee, which omission was found by Ld CIT(A) to have vitiated the impugned addition by relying on judicial precedent that such an action would violate Natural Justice [Refer Mari Gold Papers (P) Ltd [1995 (6) TMI 99 - CEGAT, NEW DELHI]]. We find that in the grounds of appeal, the Revenue has not assailed such a finding of Ld CIT(A), hence such a finding of First Appellate Authority crystallizes and the observation made in the impugned order that in the absence of providing the statements recorded during the investigation, the addition based solely on such statements cannot be sustained, cannot be faulted and we give our imprimatur to it. We thus see no reason to interfere with the order of Ld. CIT(A) deleting the impugned addition. Disallowance of proportionate interest expenditure in relation to interest free advances given by the assessee firm - nexus between the deployment of own funds towards interest-free advances - AO is found to have observed that, the assessee had advanced interest free loans to five (5) parties found that the assessee had sufficient own funds to cover the interest-free advances and therefore held the interest disallowance to be unwarranted - CIT(A) found that the assessee had sufficient own funds to cover the interest-free advances and therefore held the interest disallowance to be unwarranted - HELD THAT:- It is seen that the assessee’s own capital of Rs. 9,89,24,909/- was far in excess of the interest-free advances of Rs. 86,00,000/- and therefore it could be safely presumed that the interest-free advances were made out of own funds and not the borrowings of the assessee. We do not agree with the Ld. DR that the assessee was required to demonstrate direct nexus between the deployment of own funds towards interest-free advances. As long as the amount of interest-free advances is sufficiently covered by the noninterest bearing funds of the assessee, the question of disallowance of interest paid on borrowings does not arise. The case of the assessee finds support from the decision of the Hon’ble Supreme Court in the case of CIT Vs Reliance Industries Ltd [2019 (1) TMI 757 - SUPREME COURT] Having regard to the position of own surplus funds and interest-free advances, we agree with the Ld. AR that the presumption is that the interest-free advances were given out of own funds and therefore the Ld. CIT(A) had rightly deleted the impugned disallowance. Deemed rental income on the unsold units lying in closing stock of the assessee - As relying on M/s. Inorbit Malls Pvt., Ltd [2022 (10) TMI 1150 - ITAT MUMBAI] we see no reason to interfere with the order of CIT(A) holding that the AO was correct in applying Section 22 of the Act and adding deemed rent for the unsold properties of the assessee in the relevant AY 2017-18. We thus dismiss these grounds of the assessee. Validity of the reassessment initiated u/s 147 - HELD THAT:- It is seen that, the re-assessment was initiated on the basis of audit objection raised by the Revenue audit and the AO is found to have independently examined the same and thereafter recorded his reasons to believe that income chargeable to tax in AY 2017-18 had escaped assessment. CIT(A) further observed that, the AO had followed the prescribed procedure by furnishing reasons for reopening and considered the appellant’s objections before proceeding with the reassessment and therefore there is no legal infirmity in the action of the AO which would render the reassessment order invalid. Since, no infirmity could be pointed out in the impugned action, we see no reason to interfere with the impugned action of Ld. CIT(A) dismissing this legal plea of the assessee. Accordingly, Ground No. 2 is dismissed. Disallowance on account of non-deduction of TDS under the provisions of section 194A read with section 40(a)(ia) - Non deduction of TDS on interest payment - AR, relying on the first proviso to Section 201(1) of the Act and second proviso to Section 40(a)(ia) of the Act, has argued that, the payee was a regular income-tax filer who had included the interest income in their income-tax return and paid taxes thereon, and therefore there could be no disallowance u/s. 40(a)(ia) - HELD THAT:- Though in principle we agree with the submission of the assessee, but we find that the Ld. AR was unable to furnish any evidence or requisite form to substantiate this claim. In the fitness of the matters and fair play, we consider it fit to set aside the issue back to the file of the AO to verify whether the payee i.e. IIFL-HFC had included interest income received from the assessee, in their return of income for AY 2017-18 and paid taxes thereon, which fact may be verified by the AO from the payee IIFL-HFC or the assessee may furnish the prescribed Form 26A from the payee. Needless to say, the assessee shall be afforded sufficient opportunity of hearing to provide the requisite details / evidences before the AO. This ground of appeal is therefore allowed for statistical purposes. Addition u/s 68 - unexplained cash credit - Sums credit in earlier years - assessee was unable to substantiate the low rent received or the genuineness of the deposit - HELD THAT:- Impugned sum had been received and credited in the books from tenant in Bangalore long back and that the amount represented opening balance of liability brought forward from earlier years. Having regard to this contemporaneous fact, there is merit in the assessee’s plea that, the rigors of section 68 can be applied only to sums found credited in the books of accounts in that particular year, and not those which were credited in earlier years. Hence, according to us, the lower authorities had erred in invoking and applying the provisions of Section 68 to the opening balance of liabilities brought forward from earlier years. The case of the assessee is found to be supported by the decision of the Hon'ble Bombay High Court in the case of Ivan Singh [2020 (2) TMI 850 - BOMBAY HIGH COURT] wherein deleted the addition made u/s 68 of the Act on account of sums which were credited in earlier years and had been brought forward in balance-sheet in the relevant year. Method of accounting - addition made by re-computing the income of the assessee from the real-estate project by applying the percentage completion method as against the plea of the assessee that it has been regularly following project completion method - HELD THAT:- The projects in question were commenced much prior to 1st April 2016 and therefore having regard to the transitional provisions which state that for the projects, which commenced on or before 31.03.2016 but not completed by the said date, the revenue shall be recognized based on the method regularly followed by the person prior to the previous year beginning from the 1st day of April 2016. As observed earlier, the assessee since its inception has been regularly following project completion method and therefore, in view of the aforesaid transitional provisions, the AO was unjustified in changing and applying the percentage completion method. We thus countenance the Ld. CIT(A)’s findings deleting the impugned addition by holding that, the assessee was legally allowed to follow its regular method i.e. project completion method, in respect of projects which had commenced prior to 1st April 2016. Double taxation - Our above view is further aided by the admitted fact that the assessee had subsequently offered the entire profits from the project(s) under the completed contract method in the immediately subsequent AY 2018-19 i.e., the year in which the project was completed, and the same was accepted and assessed by the same AO. It is seen that, the same AO also did not adjust the purported income brought to tax in AY 2017-18 by applying percentage completion method in that year. This subsequent action of the AO, according to us, corroborates the assessee’s case that, the AO’s approach of making addition by following percentage completion method in AY 2017-18 was erroneous and effectively led to double taxation of the same profits, which is not permissible in law. Decided against revenue. Issues: (i) Whether cash advances/on-money of Rs.1,00,00,000 received in AY 2016-17 are taxable in that year or are to be taxed on project completion method in a later year; (ii) Whether addition of Rs.4,84,59,475 based on statements of purchasers can be sustained in hands of assessee; (iii) Whether disallowance of proportionate interest of Rs.7,84,110 on account of interest-free advances is justified; (iv) Whether notional rent (ALV) of Rs.8,73,315 on unsold units is exigible as income from house property for AY 2016-17; (v) Whether interest u/s 234B levied is sustainable; (vi) Whether reopening of assessment u/s 147 for AY 2017-18 was legally valid; (vii) Whether addition of Rs.15,00,000 as unexplained credit u/s 68 (opening balance) is sustainable; (viii) Whether AO was justified in applying percentage completion method / sec.43CB and ICDS-III for projects commenced before 01.04.2016.Issue (i): Whether the cash advance of Rs.1,00,00,000 received in AY 2016-17 is taxable in that year or to be taxed on project completion.Analysis: The assessee consistently followed Project Completion Method; the receipt was accounted as advance and included in work-in-progress; the project completed and income was offered and assessed in AY 2019-20; CIT(A) relied on consistent accounting practice and tribunal precedents permitting recognition on completion; Revenue did not point to specific infirmity in those findings.Conclusion: In favour of Assessee the Rs.1,00,00,000 was correctly treated as advance and not taxable in AY 2016-17.Issue (ii): Whether the addition of Rs.4,84,59,475 based on statements of Drs. Murugu Sundaram and Raja Sundaram is sustainable against the assessee-seller.Analysis: The addition rested primarily on purchaser statements; identical additions in purchasers' cases were deleted by CIT(A) and upheld by ITAT; statements were not supplied to the assessee thereby vitiating reliance for addition; Revenue failed to show reversal by higher court or independent corroborative material.Conclusion: In favour of Assessee the addition of Rs.4,84,59,475 is deleted.Issue (iii): Whether disallowance of interest Rs.7,84,110 is justified because borrowed funds funded interest-free advances.Analysis: Assessee demonstrated substantial partners capital/non-interest funds exceeding advances; absence of evidence linking specific borrowings to advances; established jurisprudence presumes advances made from interest-free funds if sufficient.Conclusion: In favour of Assessee disallowance of Rs.7,84,110 deleted.Issue (iv): Whether notional rent (ALV) on unsold stock is taxable under section 22 for the relevant year.Analysis: Pre-amendment position includes binding precedent of the Delhi High Court (Ansal) holding ALV taxable on ownership irrespective of stock-in-trade; coordinate tribunal decision followed that view; statutory amendment in sec.23(5) effective from AY 2018-19 is prospective and does not affect earlier years.Conclusion: In favour of Revenue deemed rent addition of Rs.8,73,315 sustained for the relevant year.Issue (v): Whether interest u/s 234B is tenable.Analysis: Levy of interest under section 234B is mandatory when applicable; the issue is consequential on additions and taxable income determination.Conclusion: Neutral (alternate remedy) interest to be recomputed by AO if applicable; allowed for statistical purposes.Issue (vi): Whether reopening u/s 147 for AY 2017-18 was invalid (change of opinion / lack of fresh material).Analysis: AO recorded reasons based on audit objection, independently examined and followed prescribed procedure; CIT(A) found no legal infirmity; assessee did not demonstrate procedural illegality.Conclusion: In favour of Revenue reopening held valid.Issue (vii): Whether addition of Rs.15,00,000 u/s 68 (credit entry) is sustainable where it is an opening balance carried from earlier years.Analysis: Section 68 applies to sums found credited in books for the previous year; where credit pertains to earlier years and is an opening balance, invoking sec.68 for the current year is impermissible; persuasive and binding decisions (including Bombay and Delhi High Courts) support deletion.Conclusion: In favour of Assessee addition of Rs.15,00,000 deleted.Issue (viii): Whether AO correctly applied percentage completion method / sec.43CB and ICDS-III to projects commenced before 01.04.2016.Analysis: ICDS-III transitional provisions permit continuing previously adopted method for contracts commenced on or before 31.03.2016; assessee consistently followed project completion method; AO ignored transitional rule and subsequent acceptance of income in AY 2018-19 leading to potential double taxation; alternate submission that sec.43CB/ICDS-III is directed to contractors and not developers has persuasive support from CBDT clarification.Conclusion: In favour of Assessee AO wrongly applied percentage completion method; addition of Rs.4,19,97,354 deleted.Final Conclusion: The Tribunal upheld deletions of major additions and disallowances relating to advances, unexplained receipts and interest disallowance, sustained the notional rent addition, remitted certain TDS verification (s.40(a)(ia)) to AO for enquiry and directed recomputation of interest if applicable; overall the assessment adjustments challenged were substantially in favour of the assessee while some consequential and verification directions were left to the AO.Ratio Decidendi: Where a taxpayer consistently follows a recognized accounting method for ongoing projects commenced before the ICDS/ statutory change, transitional provisions preserve the prior method for those projects; advances accounted as work-in-progress and subsequently taxed on project completion cannot be taxed earlier without resulting in impermissible double taxation; additions based solely on third-party statements not supplied to the assessee and deleted in the hands of those third parties cannot stand in the hands of the assessee absent independent corroboration.