TaxTMI 
TaxTMI 
2012 (11) TMI 163
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....evant to assessment year 2007-08 were found showing profit before taxation at Rs.142.45 crores. In the computation of total income of the assessee company as made by its accounts staff on the basis of the said financial statements, a sum of Rs.52.55 crores was shown to be payable by the assessee company for assessment year 2007-08 on account of tax as well as interest u/s 234A, 234B and 234C. During the course of survey, statement of Shri Lalit C. Gandhi, Chairman and Managing Director of the assessee company was recorded wherein he accepted that the tax so payable was not paid by the assessee company due to severe financial crunch and the return of income for the year under consideration was also not filed due to non-payment of the said tax. Subsequent to the survey, letters were also filed by the assessee company reiterating its assurance to make the payment of outstanding tax for the year under consideration. Finally, the return of income for the year under consideration was filed by the assessee on 23-09-2008 in response to notice issued by the AO u/s 142(1) on 18-09-2008 declaring total income of Rs.135.47 crores but no payment of tax due thereon was made. The said return file....
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....me for A.Y, 2007-08, as per audited accounts, was Rs. 142.45 crores, on which tax of Rs. 52.55 crores was due. However, he admitted, that the same could not be paid due to a financial crunch. Further, Mr. Gandhi also admitted that : "During the F. Y. 2006-07 and 2007-08 Lok Group had entered into certain transactions for sale of properties held as stock in trade, pursuant to which profits of approximately Rs. 300 crores were recognized. The revenues were recognized in accordance with the company's consistently followed accounting policies to recognize sales on execution of agreements. The revenue recognition resulted into tax obligations to the extent of Rs. 85 crores ........... " (b) Section 139(5) permitted an assessee to revise its return if there was any omission or wrong statement in the original return. The AO did not agree with the assessee's explanation that the revised return had been accepted by the Bombay High Court pursuant to its writ petition. The AO also did not agree with the appellant that cancellation of the sale agreements in the subsequent financial year amounted to an omission or wrong statement in the original return. In this regard, AO relied upo....
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.... Lastly, the AO held that owing to the recognition of revenue from the above cited five sale agreements, for a period of approximately 2 years from the date of sale agreement to the date of termination of the agreement, the company's/concerns connected with the assessee had made substantial profits by trading in the assessee's shares. Between January 2006 to December 2006, the share price of the assessee company, quoted in the Bombay Stock Exchange, rose from Rs.35 per share to Rs.351 per share. The share price fell to Rs.15.75 per share in 2008. As a result of the fluctuation in the share price, which was directly related to the audited accounts of the assessee and its subsequent revision, the' associate companies of the assessee made huge profits. Thus the assessee cannot now say that there was a omission or wrong statement in the original return." 4. The AO also rejected the claim of the assessee on merit relating to reversal of income recognition from the five transactions as shown in the original return of income, for the various reasons given in the assessment order which, as summarized by the learned CIT(Appeals) in his impugned order, are as under : "The sale ag....
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....basis of original return filed by the assessee ignoring revision thereof as made by the assessee. 5. Against the order passed by the AO u/s 143(3), an appeal was preferred by the assessee before the learned CIT(Appeals) challenging the action of the AO in ignoring the revised return filed by it treating the same as invalid and in holding that profit from the five transactions of immovable property was chargeable to tax in the hands of the assessee for the year under consideration on accrual basis. On the first issue relating to validity of its revised return, elaborate submissions were made on behalf of the assessee before the learned CIT(Appeals) which have been summarized by the latter in his impugned order as under : * "The revised return was filed to correctly reflect the true income of the assessee company by making suitable corrections of wrong statements inadvertently made in the earlier return with regard to certain hypothetical income allegedly flowing from some preparatory and incomplete agreements of the property executed by the assessee with some parties. * The sale agreements with regard to the five properties were nearly ....
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....hetical income in the original return on the basis of 5 agreements. The revised return filed excluding the hypothetical Income has not been accepted by the AO. The AO committed mistake in making factually incorrect observations in para 4.1 that all the terms of the agreement has been satisfied. He further factually erred in observing that all the requirements as per the Transfer of Property Act, 1882 & Sale of Goods Act, 1930 to constitute the transactions of sale during the A.Y. (para 4.3). thus, he came to the conclusion, on erroneous assumption of facts, that the income is sought to be reversed only on account of non-payment of balance consideration mentioned in these agreements. The AO further misconstrued the true purport of existing accounting policy on revenue recognition to discard the reversal of notional income. He further questioned the validity of the revised return on the ground that there is no wrong statement in the original return to entitle the assessee to file the revised return. * The case of the assessee is that no income has accrued or arisen at any point of time from impugned 5 agreements merely on account of erroneous book entries. The a....
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....p of 3 sellers to whom only a token amount was paid by the agreement. The property could be transferred in favour of the assessee by these groups of sellers only on clearance from the State Govt of Karnataka. No such approval has been obtained. The title or possession of the property has not been transferred to the assessee. Therefore, the assessee itself was constrained from executing such joint venture. No formal assignment of property in favour of joint venture. No possession of property to the co venture. No work whatsoever has been done pursuant to the joint venture. The joint venture did not take off at all. No bank account was opened. No PAN number was obtained for the proposed joint venture. Therefore, in the absence of any transfer of property to the joint venture, no question of income arises. * No material has been brought on record to disprove the version of the assessee. No inquiry was considered necessary from the contracting parties either. * The statement of CMO' of the assessee co. was based merely on book entries. He was not alive to the legal position that such book entries recording hypothetical income on the basis of ....
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....lation of the sale agreements, if any, was always given in the year in which they were cancelled. He held that this was the regular system of accounting being followed by the assessee regularly in the earlier years which was violated in the revised return filed by the assessee for the year under consideration. He held that the action of the assessee in revising the return as well as in revising the audited accounts thus was not bona fide. According to him, there was a gap of two years between the sale agreements and their cancellation and during this period, the value of share of the assessee company had increased substantially which aspect was utilized or exploited by its associate concerns by selling the shares of the assessee company at huge profits. He held that the arguments of the assessee that the income accruing in its balance sheet was hypothetical and it amounted to a wrong statement thus was not borne out by facts. He held that acceptance of such argument of the assessee would amount to rigging the share market. 8. As regards the contention of the assessee that the revised return was filed on the basis of the revised audited accounts for the year under consideration, ....
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....real income accrued to it from the relevant transactions/agreements since necessary sanctions and approvals had not been received or specific obligations were not performed, the learned CIT(Appeals) held that the same were not acceptable since there was no provision in the relevant agreements for termination or cancellation due to non-performance. Relying on the decision of the Hon'ble Supreme Court in the case of Morvi Industries Ltd. 82 ITR 835, he held that the income had accrued to the assessee the moment the relevant agreements were signed and termination of the said agreements after a period of two years could not affect the accrual of income. He held that the assessee was not only maintaining its books of account on mercantile basis but it was also consistently crediting its books as and when agreements for sale were entered into in respect of immovable property which constituted its stock in trade. He held that the act of terminating the agreements much after the end of the relevant previous year, therefore, would not exempt the assessee from its liability of paying its taxes on the accrued income. Accordingly, the learned CIT(Appeals) rejected all the contentions raised by....
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....come filed by the assessee as non-est. 14. In support of the assessee's case that the revised return filed by it was in accordance with the provisions of section 139(5), the learned counsel for the assessee submitted that the accounting policy consistently followed by the assessee had two limbs. He submitted that the original return was filed by the assessee relying on the first limb of the accounting policy whereby income from the five transactions in immovable property was declared subject to execution of conveyance and compliance of applicable legal formalities, which was the second limb of the accounting policy followed by the assessee. He submitted that none of the parties to the said transactions/agreements actually acted thereupon due to change in the real estate market condition and the same were finally cancelled by mutual consent in the month of November and December, 2008. He contended that the second limb of the accounting policy thus became operative and the statement made in the original return by recognizing the revenue in respect of five transactions in real estate turned out to be wrong. He submitted that the assessee became aware of this wrong statement only af....
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....re was thus no omission or wrong statement made by the assessee in the original return which could be said to be subsequently discovered by it. She contended that cancellation of the agreement after a passage of more than two years by the assessee and that too with the parties who were at its command and control cannot be equated to discovery of any omission or wrong statement within the meaning of section 139(5) of the Act so as to make the assessee entitled to file a revised return. She contended that the assessee cannot take a stand that the revenue was recognized in the original return on conditional basis and that it could cancel the revenue so recognized at its own will at any time by virtue of its accounting policy without establishing that there was any omission or wrong statement made in the original return. She submitted that as per the accounting policy followed by the assessee in the earlier years, the effect of cancellation of sale agreements was given in the year in which the cancellation had taken place and going by this policy adopted by the assessee, it cannot be said that there was any omission or wrong statement made in the original return of income. She contende....
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....of income originally filed by the assessee and whether the assessee was not aware of such wrong statement at the time of filing the original return. For this purpose, we are of the view that the claim made by the assessee in the revised return of income viz-a-viz the return of income filed originally needs to be examined on merit to ascertain as to whether there was any wrong statement made in the original return of which the assessee was not aware at the time of filing the same. In our opinion, such examination of the assessee's claim on merit only will reveal as to whether the condition No. (ii) was satisfied in the present case in order to enable the assessee to furnish the revised return u/s 139(5). We, therefore, now proceed to examine the said issue on merit and will revert back to the issue relating to validity of the revised return filed by the assessee u/s 139(5) thereafter. 18. The issue that has been raised by the assessee in the present appeal on merit is relating to the addition made by the AO and confirmed by the learned CIT(Appeals) on account of profit from five transactions in immovable properties as declared in the original return of income ignoring the revised....
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....the assessing officer under section 143(3)(ii). He emphasized that none of the five agreements entered into by the assessee in the present case could be acted upon and they remained just on paper only without yielding income of a single rupee to the assessee during the year under consideration or even thereafter. 21. Relying inter-alia on the decisions of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT 82 ITR 363 (SC) and Sutlej Cotton Mills Ltd. v. CIT 116 ITR 1 (SC), the learned counsel for the assessee contended that even where an assessee following mercantile system of accounting makes entries in its books of accounts on the basis of accrual of income, if on the peculiar facts and circumstances of his case resultant income is not really earned or otherwise not going to be received by the assessee, then such resultant income based on accrual should be ignored and the assessment should be made on the basis of 'Real Income' actually earned or loss actually incurred. He also relied on the decision of Hon'ble Supreme Court In the case of CIT v. Shoorji Vallabhadas & Co. 46 ITR 144 (SC) and submitted that the assessee in the said case was a firm which ente....
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.... acted upon and resulted into any income to the assessee. All that the assessee received was the sum of Rs.9 crores by way of advance and not as sale proceeds or income which became refundable on cancellation of agreements. He contended that the insistence of the assessing officer as well as ld. CIT(A) upon assessing the sum of Rs.135.47 crores as income of the assessee is in gross violation of law as pronounced by the Apex Court and other courts in India. He contended that even if the assessee had not reversed entries in its books of accounts of F.Y. 2006-07, the assessment of its income in relation to the five agreements in question could not be made at any amount other than NIL. 23. The learned counsel for the assessee then proceeded to meet the various objections raised by the AO as well by the learned CIT(A). He submitted that the observations of the Assessing Officer that the assessee had correctly recognized revenue in the original return of income since in the case of the assessee the requirements of provision of section 54 of Transfer of Property Act, 1882 and section 4 (3) of Sale of Goods Act, 1930 were satisfied are ridiculous and betray complete lack of application ....
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.... neither the Assessing Officer nor the learned CIT(A) in any case has thrown any light upon as to how these allegations support the assessment of huge income of Rs. 135.47 Crores in the hands of assessee when it is undisputed fact that the assessee did not earn a single rupee from the five agreements under consideration. He submitted that it is also not their case that the assessee's company earned any income on sale of its own shares. He contended that the entire arguments and exercise of Assessing Officer and learned CIT(A) in this respect is futile and malicious mud-slinging having no logical nexus with the additions to income made in their orders. He also contended that this stand taken by the revenue denounces the original return of income filed by the assessee which is the sole basis of the impugned assessment order and thus takes away the wind from the sail of the assessment order. 25. As regards the stand of the authorities below that the cancellation of the agreements was not a bona fide action of the assessee, the learned counsel for the assessee submitted that there is nothing brought on record to show that these five agreements were acted upon. He reiterated that as ....
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....arguments of learned Assessing Officer and learned CIT(A) are justified, then all their objections are to the agreements and recognition of revenue based thereupon. He contended that this is the fallacy in their argument inasmuch as they argue against the original return of income but want to hold the revised return as not bona fide. 27. As regards the objection of the revenue authorities that under the Companies Act audited accounts approved by the shareholders cannot be subsequently revised, the learned counsel for the assessee contended that charge of income tax is not restricted to computation of income as arising from the final accounts of an assessee. The charge of income tax is on the actual facts of the case of an assessee as found from the scrutiny and enquiry made by the Assessing Officer and other income tax authorities. He reiterated that entries in the books of accounts of an assessee are not conclusive and it is to be seen which of the two final accounts are closer to actual facts of the case and lead to correct computation of income chargeable to tax. Relying on the decision of Hon'ble Supreme Court in the case of CIT v. Simon Carves Ltd. 105 ITR 212 (SC), he cont....
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....ation of agreements took place in two different financial years, the assessee should have given the effect of cancellation in the assessment year relating to the date of cancellation of agreements, the learned counsel for the assessee reiterated that there are two limbs of the Accounting Policy of the assessee which both the Assessing Officer and learned CIT(A) have ignored. They have taken into consideration only the first limb of the Accounting Policy that results into recognition of revenue entirely on anticipation and in advance long before accrual of such income and have ignored the second limb that clearly states that the anticipated recognition of revenue is subject to subsequent accrual. In the event of anticipated revenue not materializing the recognition of the revenue itself would be cancelled or modified. He contended that it is not open to them to accept the Accounting Policy in part and reject in part especially when such piecemeal acceptance and rejection results into absurd assessment of income as has been done by Assessing Officer and upheld by learned CIT(A) in the present case. 30. In reply, the learned DR at the outset narrated the sequence of events that is ....
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.... of the said Agreements in subsequent years cannot relate back to the year when agreements were executed. In support of this contention, the learned DR relied on the following case laws :- i. Shiv PrakashJanak Raj & Co. Ltd. v. CIT 222 ITR 583 (SC) ii. Saraswati Insurance Co. (P.) Ltd. v. CIT 252 ITR 430 (Delhi) iii. H.P. Mineral & Ind. Development v. CIT 302 ITR 120 (HP) iv. Rohini Holdings (P.) Ltd. v. CIT 345 ITR 466 (Mad.) 32. The learned DR submitted that the assessee has tried to distinguish these transactions and accounting policy regarding cancellations followed in the earlier assessment years. She pointed out that the Assessing Officer had rightly observed in the remand report submitted to CIT(A) that in the earlier years a different treatment was given to the cancellation of Agreements and that in its revised return of income, the assessee has changed its method of accounting which is not permissible. She invited our attention to para 7.2(i) on page No.14 & 15 of the impugned order of the learned CIT(A) wherein he has observed that in the financial years 2002-03, 2003-04, 2004-05 & 2005-06, the assessee was reducing the ....
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.... been revised to meet the technical requirements of any other law for the time of being in force as is required by the Circular of the Ministry of Corporate Affairs. 35. The learned DR submitted that it appears that at one point of time the assessee follows 'mercantile' method of accounting and suddenly at another point of time, the assessee opts for 'cash' system of accounting and revises all its books of accounts from the year of execution of Agreements which goes on till the year of cancellation of such Agreements. She read out and relied on para 7.2 on page No.21 of the impugned order of the learned CIT(A) wherein he has critically examined the relevant aspects of the Agreements in question and held that income from these transactions were liable to be assessed in the relevant assessment year as per the original return of income and subsequent cancellation of those agreements cannot retrospectively replace income offered in the original return of income. The learned DR submitted that the development rights and TDRs assigned by the assessee represent its stock-in-trade as evident from the copies of the relevant Balance Sheets and Profit & Loss Accounts. Therefore, the asse....
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....evenue. 37. The first objection raised by the Revenue is based on the accounting entries as made by the assessee in the books of account originally prepared. During the course of survey, the said accounts were found and on the basis of profits reflected in the said accounts, Chairman and Managing Director of the assessee company agreed to pay the tax thereon and file the return after payment of tax. Although no such tax was finally paid by the assessee company, the original return of income was filed declaring the total income of Rs.135.47 crores on the basis of profits reflected in the books of accounts as found during the course of survey. Thereafter, a revised return was filed by the assessee declaring Nil income which was claimed to be filed on the basis of the revised accounts. The Revenue has not accepted either the revised return or the revised accounts holding that the revision of accounts was not permissible under the Companies Act. They have relied on the entries made by the assessee in the books of accounts originally as found during the course of survey to hold that income of Rs.135.47 crores had accrued to the assessee from the five agreements for sale of properties....
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....five transactions in immovable property is required to be considered keeping in view the true nature of the said transactions and whether in fact the said transactions have resulted in profit to the assessee. 38. Another objection raised by the Revenue is that as a result of huge profits shown by the assessee in its books of accounts arising from the relevant five transactions in immovable properties, the share price of the assessee company had gone up substantially and its sister concerns exploited this situation by selling the shares of the assessee company held by them at higher market price. We really fail to understand how this aspect is relevant for the purpose of determining whether there was any income actually accrued to the assessee as a result of the said transactions. If the allegation of the Revenue is about insider trading or rigging of share prices on the part of the assessee company or its sister concerns, the assessee can be liable for suitable action by the SEBI. However, as submitted by the learned counsel for the assessee, no such action has been initiated by the SEBI against the assessee company or even against the sister concern. The Revenue authorities, in....
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.... in order to meet these objections of the Revenue, we are of the view that nothing real turns on this aspect keeping in view the decision of Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. (supra) wherein it was held that the way in which entries are made by the assessee is not determinative of the question whether the assessee has earned any profit and what is to be considered to decide this question is the true nature of the transaction and whether in fact it has resulted in profit to the assessee. It is, however, worthwhile to note here that the revised accounts were approved by the shareholders of the assessee company and the same were duly filed with the Registrar of Companies is shown by the learned counsel for the assessee from the relevant evidence placed on record. 41. In the present case, as per the accounting policy followed by the assessee company, revenue in respect of property sale transactions is claimed to be recognized on the basis of agreement of sale subject to execution of conveyance and compliance of applicable legal formalities. Accordingly, the assessee is claimed to have recognized the income in respect of five transactions of properties in ....
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....evant five transactions of property having regard to the true nature of the transactions. The first and foremost issue in this context is that the relevant properties, the sale of which has given rise to the dispute relating to the taxability of the profit arising from transactions therein, were held by the assessee company as stock in trade. The contention raised by the learned counsel for the assessee in this regard is that the sale of immovable property being stock in trade is governed by the provisions of Transfer of property Act and not the Sale of Goods Act. He has contended that section 2(47) giving the definition of transfer in relation to capital asset thus is not relevant and since there was no sale of immovable property being stock in trade in the year under consideration as per the Transfer of Property Act, no income can be said to have accrued to the assessee from the relevant transactions in the year under consideration. We find that this contention of the learned counsel for the assessee is duly supported by the decision of coordinate bench of this Tribunal at Chennai in the case of R. Gopinath (HUF) v. CIT 42 DTR 127 wherein it was held that sale/transfer of immovab....
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....was accrual of income to the assessee as a result of the relevant transactions/agreements in immovable properties in the year under consideration, the said transactions/agreements having been cancelled subsequently, there was really no accrual of such income which can be brought to tax in the hands of the assessee in the year under consideration. The learned DR in this regard has contended that the cancellation of the agreement took place subsequently after a gap of more than two years and such subsequent event taking place in the succeeding year cannot affect the accrual of income which had taken place in the year under consideration. In support of this contention, she has relied on certain judicial pronouncements. A perusal of the same, however, shows that the said case laws cannot be of any help to the Revenue's case on the issue involved in the present appeal as the issue involved therein was relating to accrual of interest income and since the interest income accrues periodically when it falls due, Courts held that interest had already accrued to the assessee on the due dates and waiver of such interest subsequently was not relevant in this context. 44. It is observed that ....
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....urt in the case of Birla Gwalior (P.) Ltd. 89 ITR 266 and after considering the same, it was held by the Hon'ble Supreme Court that although emphasis was also placed in the course of judgment delivered in the case of Morvi Industries Ltd. (supra) on the fact that the assessee was maintaining its accounts on the basis of mercantile system, it was not on that basis alone that the Court came to the conclusion that the income in question had accrued on 31st December, 1955 and 31st December, 1956. It was held that in arriving at that conclusion, the Court primarily took into consideration the terms of the agreement. Hon'ble Supreme Court in the judgment delivered in the case of Birla Gwalior (P.) Ltd. (supra) found that its judgment in the case of Shoorji Vallabhadas & Co. (supra), on the other hand, was directly on the point and following the same, it was held by the Hon'ble Supreme Court that it is not hypothetical accrual of income that has got to be taken into consideration but the real accrual of income. 46. In the case of H.L. Keshariparekh & Co. Ltd. (supra), the concept of real income was expounded by the Hon'ble Bombay High Court which has been approved by the Hon'ble Suprem....
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....ion cannot be sustained by the doctrine of real income. 48. Keeping in view the legal position emanating from the judicial pronouncements discussed above and having regard to all the facts of the case, we are of the considered view that no income can be said to have really accrued to the assessee as a result of the five relevant transactions in the immovable properties which is chargeable to tax in its hands for the year under consideration. The declaration of such income, which was not accrued to the assessee in the real sense in the original return thus represented a wrong statement which was corrected by the assessee by filing the revised return and the AO as well as the learned CIT(Appeals), in our opinion, was not justified in bringing to tax such hypothetical income in the hands of the assessee company on the basis of original return of income ignoring the revised return filed by the assessee. We, therefore, decide this issue in favour of the assessee on merit and delete the addition made by the AO and confirmed by the learned CIT(Appeals) on this issue. 49. Having decided the issue on merit in favour of the assessee, now we revert back to the issue relating to the vali....
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....gainst the assessee as a result of the disputed transactions on account of tax and interest is Rs.75.68 crores. It is difficult to comprehend how and why the assessee would accept the liability of Rs.75.68 crores on account of tax and interest in order to enable its sister concerns to make a profit of Rs.77 crores. The allegation made by the Revenue about the so called intention of the assessee behind executing the agreements and cancelling the same thus is based purely on conjectures and surmises and it is very difficult to accept the stand of the Revenue that everything was done by the assessee with that intention. On the other hand, we are of the view that the profits reflected in the accounts found during the course of survey was offered to tax as its income by the assessee in the bona fide manner and accordingly return of income was also originally filed declaring the said income. The relevant transactions/agreements, however, were subsequently cancelled/terminated as a result of which the declaration of income as made by the assessee in the original return turned out to be a wrong statement and after becoming aware of the same, the revised return was filed by the assessee whi....