TaxTMI 
TaxTMI 
TaxTMI 
2018 (8) TMI 440
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....t's income had to be assessed as per the method of accounting regularly followed by it and the AO could not change the appellant's method of accounting on the basis of the method followed by another assessee. The authorities below have also erred in applying the accounting standards AS-7 which are applicable to developers without appreciating the fact that appellant is not the developer but is land owner. 2. The Learned CIT(A) as also the AO failed to see that the income arising out of the development agreement between the appellant and the developer M/s JSM Devcons Pvt Ltd would accrue in the hands of the appellant only when the appellant's right to get the 32% constructed area under the Development Agreement would crystallize as per the terms of the development agreement between the parties, according to which appellant is entitled to receive 32% area on completion of the construction of that area correspondingly the method of accounting to recognize the revenue only on execution and registration of Sale Deed in favour of buyer i.e. the method to recognize revenue as per project completion method is correct and proper and the appellant's income ought to have been assessed in a....
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....eturns of income. As far as for the Assessment Year 2012-13 is concerned the assessee disclosed loss of Rs. 25,98,002/- in the returns filed regularly u/s 139(1) of the Act on 28.9.2012 and the same amount of loss i.e. Rs. 25,98,002/- was disclosed in the return filed in compliance to notice u/s 153A of the Act on 12.7.2013. Thereafter notices u/s 143(2) and 142(1) of the Act were duly served upon the assessee and necessary details were called for from the assessee. The issue linked to the grounds raised in this appeal relates to agreement dated 1.4.2009 entered into between the assessee and M/s. JSM Devcon Pvt.Ltd. The assessee is the owner of 2.039 hectare of land situated at Piplyakumar, Tehsil Indore and the same was given for development to M/s. Devcon Pvt. Ltd. As per the terms and condition of the development agreement, the developer will construct various high rise buildings on the land and in consideration for allowing the development of land, the assessee company will be entitled to 32% of the total saleable constructed area to be constructed by the developer. The units were not demarcated between the developer and the land owner. Instead, it was decided that entire reven....
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....l amount received by Developer Cost @3.41% of Sales Profit/Addition F.Y. 2011-12 16,69,26,963/- 56,92,209/- 16,12,34,754/- F.Y. 2012-13 12,68,81,842/- 43,26,671/- 12,25,55,171/- Total 29,38,08,805/- 1,00,18,880/- 28,37,89,925/- 8. Income assessed accordingly after making addition of Rs. 16,12,34,754/-. 9. Aggrieved assessee filed appeal before Ld. CIT(A) against the method and Ld.CIT(a) confirmed the action taken by Ld.AO observing as follows; "4. I have gone through the assessment order, the appellant's contentions and the audited accounts of M/ s JSM Devcon Private Limited. In the assessment year under consideration the appellant company has not reflected any revenue from the operations in the P&L account. During the course of assessment proceedings the appellant company in response to the query for not recognizing revenue in the books of account had furnished the following reasons:- i)The company has been recognizing revenue on the basis of sales deeds executed at the time of full payment coupled with possession of the opartment. ii)Advances have been received from various customers on the basis of schedule given in the allotment letter which specif....
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.... of transferring all significant risks and rewards of ownership to the buyer provided tne aqrcenicnt is legally enforceable and subject to the satisfaction of conditions which signify trarisferrino of significant risks and rewards even though the legal title is not transferred or the pos ses sion of the real estate is not given to the buyer. Once the seller has transferred all the significant risks and rewards to the buyer, any acts on the real estate performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue in such cases is recognised by applying the percentage of completion method. " iii) From the above, it is clear that the risk and reward of the transactions can be shifted even when the . legal title is not transferred or the possession is not given to the buyer. M/ s JSM Devcon Private Limited after considering all the factors has adopted Percentage Completion Method for revenue recognition, which shall be binding on assessee as well, as it is dependent on the developer on all the activities. Thus, the argument of the assessee that revenue is recognized on the basis of sales deed executed at the t....
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....moval of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily. By way of any agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been cl=xracterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India: " vi) On perusal of the above sub section, it would be seen that it deals with the transaction of transfer of capital assets and not stock in trade. In the instant case the assessee has reflected the land as stock in trade and therefore the provision of sub section are not applicable to it. vii) As regards the assessee argument that it has been recognising the revenue on the same line from years to years, it will be sufficient to state that the submission of the assessee is not as per records. On examination of the balance sheet of the assessee for the various years, it can be seen th....
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....gs that the method of accounting as adopted by it is in consonance with AS-9 issued by ICAI and deserves to' be accepted. However, as reproduced above from the Auditor's Report for the period ending 31.03.2013 the appellant's accounts do not comply with the Accounting Standard AS-9. 4.6 At this stage it is important to look at the application of revenue recognition Principles prescribed in AS-9 to real estate sales: "2. For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and ]] of Accounting Standard (AS) 9, reuenue recognition, as reproduced below are satisfied: 10. Revenue from sales or service transactions should be recognized when the requirements as to performances set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. 11. In a transaction involving the sale of goods, performance should. be regarded as being achieved when the following conditions have been fulfilled: th....
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....r accounting standard issued by any statutory or non statutory body cannot affect the computation of total income under the provisions of the Act. The Accounting Standards etc. issued by the Institute, have, of course, relevance in the manner of maintenance of accounts, but, cannot override the mandate of the provisions of the Act. 4.9 Turning to the taxation principle relevant for present purpose, section .s contains the scope of total income. It provides, inter alia, that all income from whatever Source derived which accrues or arises or is deemed to accrue or arise, is included in the scope of total income. Under the mercantile system of accounting, which the extant appellant is following, an income becomes taxable When right to receive an income is finally acquired. Ordinarily, when some goods! products are sold by a businessman, income does not arise before the transfer of title in such goods to the buyer, It is because that till that time, the buyer does not acquire any risks and rewards attached to the product, which pass only with the sale. But, if the "product under sale is of a unique nature, such as, a commercially constructed unit, for which the developer has ente....
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....to the facts prevailing in the instant case, the assessee has recognized the revenue only when the registration of the sale deed has been done in favour of the buyer. Under AS-7 and AS-9 this is not a recognized method of recognizing the revenue. This method is neither project completion method nor percentage of completion method. The method adopted by the assessee, therefore, cannot be regarded to comply with the ingredients as laid down under section 145. Registration of the sale deed represents only the transfer of the title in favour of the buyer from the assessee. It has nothing to do with the method of accounting followed by the assessee. Section 145 makes it mandatory on the part of the assessee to follow either cash or mercantile system of accounting regularly. Recognizing the revenue when the sale deed had been registered by the assessee in favour of the buyer could not be regarded to be either cash or mercantile system of accounting. Further, it is important to note that the appellant company has not received 32 of the completed flats and then entered into agreement to sell. M/ s JSM Devcon Pvt. Ltd. entered into agreements to sell for 32 of the appellant company's sh....
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....e word "entire construction" to convey to the Bench that appellant's right to 32% of the constructed area would have crystallized only on completion of construction. It was for this reason that in the year under consideration i.e. Assessment Year 2012-13, the assessee right to receive the constructed area as per the agreement had not accrued. For this very reason only, assessee has shown the advance received from proposed buyers of the flats as liability and they were offered to tax in the year when the sale deed was registered in the name of the buyer. 12. Ld. Counsel for the assessee submitted that the assessee's capacity as per the agreement with JSM DPL is only as the land owner and therefore cannot be considered either as a joint venture or a partnership firm and this is only the development agreement which was entered into in to receive 32% of the constructed salable area. He also appraised that the assessee company is following mercantile system of accounting and books of accounts are duly audited under the provision of IT Act and Company Act. It is consistently adopting the accounting system of project completion method and for the A.Y 2011-12 also he has disclosed the adv....
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....in sub section (3) of section 145 )". (2) Supreme Court in the case of CIT V/s Krishna Swamy Mudiliar reported in (1964) 53 ITR 122 (SC) , their Lordship's of Apex court while dealing provisions of section 13 of 1922 Act (the provisions of which are in pari-materia of section 145 of 1961 Act) have held as under: "Section 13 of 1922 Act merely prescribes that the computation of taxable profits shall be made according to the method of accounting regularly employed. Where in the opinion of the ITO the income , profits and gains cannot be properly deduced from the method of accounting, it is open to ITO to compute the income upon such basis and in such manner as he may determine". Comparing the provisions with the English provisions, it is held, "the only departure made by section 13 of 1922 Act from tax legislation in England is that whereas under English legislation the commissioner is not obliged to determine profits of a business venture according to method of accounting adopted by the assessee , under the Indian Income Tax Act , prima-facie , the ITO has for purposes of section 10 & 12 of 1922 act to compute income , profits and gains in accordance with method of account....
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....o record satisfaction as contemplated in the said section. In the instant case, as categorically accepted by CIT(A) the appellant maintains accounts on mercantile basis . The said method has been consistently employed by assessee and appellant's assessment on the basis of said method has been completed by even by AO for first two years viz, A.Y. 2010-11 & 2011-12 . In both these years also the appellant has credited the advance received against proposed sales of flats to a separate account and shown as a liability in balance sheet. At this stage it may be relevant to mention in those years also the appellant has credited the advance received against proposed sale of flats to the Advance against sale of Flat A/c and not treated the same as income for said years on the basis that revenue in respect of sale of said flats would be recognized only on execution and registration of sale deeds of flats. The assessment of the said years have been completed by AO by the same common order, accepting the method of accounting and method of recognition of revenue. Thus the method followed by appellant is a consistent method which has been even accepted by AO for two years i.e. AY 2010-11 & 2011-....
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....appellant in this respect submits that it is now well settled that when a right arises as a result of contract or agreement the accrual of right would depend upon terms of agreement. A useful reference may be made to the decision of Kerala High Court in the case of Janatha Contract Co. V/s CIT reported in (1976) 105 ITR 627 where it is held as under "As the assessee had been following the mercantile system of accounting. If the money had become due during the accounting period it would be income which would have to be taken into account in determining total income of the assessee. But the question whether the money had become due and whether income had accrued would depend upon the terms of the contract." In the facts of the case before their Lordship's, their lordships in view of the retention clause came to conclusion that when there was a stipulation in the contract postponing the time for payment of the whole or part of the balance , until after the expiration of period during which contractor was liable for defects or for repairs payment would not have become due for the contractor. It is further held that what is the nature of contract and whether money had become due wo....
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....act method also. Their Lordship's approving the decision of Bombay High Court in the case of Taparia Tools Ltd. V/s JCIT reported in 260 ITR 102 have held that in every case of substitution of one method to another the burden is upon department to prove that the method in vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on accrual of income , the method of accounting followed by assessee is relevant and since there was no finding recorded by AO that completed contract method distorted profits of a particular year. Further, the court considered the entire exercise to be revenue neutral. 17. The Ld. Counsel for the assessee further submitted that in the instant case also since no finding as is contemplated u/s 145(3) has been recorded by AO, under the circumstances, the substitution of method from completed contract method to percentage completion method only on the basis of the method followed by developer JSM Devcons Pvt. Ltd , is clearly contrary to law as well as judicial pronouncements . The order thus deserves to be set aside. The appellant also relies upon following decisions where project completion method....
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....f ownership and this 32% constructed area shall vest with the assessee only upon completion of the entire construction (As agreed in Clause 9 of the agreement). 20. Before moving further it is worth discussing certain clauses of the agreement between the assessee and JSM DPL as they are the foundation of the issues emanating out at these two appeals:- (i) As per clause (9), on completion of the entire construction the completed flats are to be divided and allocated between the land owner and developer in accordance with clause (2) of the agreement which entitles the owner to get 32% constructed area upon completion of the entire construction . A combined reading of clause (2) & (9) would thus go to show that the appellant's right to get 32% of the area would crystallize / accrue on completion of the entire construction and till then owner has no right to claim any right over any of the constructed portion. (ii) Clause (7) of the agreement specifies the period for construction of buildings according to which the developer is required to complete the construction within 54 months ( subject to a grace period of 6 months ) from the date of handing over of the possession by owner a....
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.... 32% area as per the deal struck by the developer. 21. A bare reading of the agreement as a whole thus goes to show that the appellant's capacity in the said agreement is only as a land owner whereby the appellant has assigned development rights in respect of the lands in question in favour of the developer and the appellant is entitled to 32% of constructed saleable area in the project constructed by the developer. The agreement in question cannot therefore be construed either as a Joint Venture or a Partnership agreement but is merely a development agreement between the developer and the land owner and the appellant's right to receive 32% of the constructed saleable area accrues and arises only upon completion of the entire construction by developer or upon completion of the period of 60 months from the date of handing over of the possession of the land by the appellant land owner along with necessary permissions , NOCs etc , whichever is earlier. 22. It is further observed that the assessee follows mercantile system of accounting and since during the years under consideration, the construction on the lands handed over to the developer for development and construction was not c....
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....ceived as advance from proposed buyers. The revenue authorities have accepted this system for accounting adopted by the assessee for both the years in the assessment framed u/s 143(3) r.w.t 153A of the Act. 25. It was only for assessment year 2012-13, 2013-14 that the Assessing Officer applied the method of percentage completion adopted by the developer i.e. JSM DPL on the assessee and made the addition observing that assessee has entered into the agreement as a joint venture for development and the method of accounting applied by JSM DPL is binding on the appellant also. The Ld.AO without giving any weightage to the advances received during the year by the assessee as well as the accounting method adopted consistently just for the basis of the value of construction completed during the year and on the basis of the ratio agreed in the development agreement of 68:32, calculated the addition of Rs. 16.12 crores (approx) for A.Y. 2012-13 and Rs. 12.25 crores for A.Y 2013-14. 26. When the matter came up before the CIT(A) he also confirmed the addition without considering the fact that assessee is the land owner who has assigned the development right in favour of the developer on the ....
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....hod of accounting followed by another assessee nor does it empower the authorities to thrust upon the assessee to adopt the method of accounting followed by another assessee. In the instant appeal both the lower authorities have rejected the books of accounts of assessee and applied the percentage completion method adopted by the developer JSM DPL and computed the income accordingly. Whether such action of the revenue authorities is justified or not needs to be examined in light of the jurisdictional pronouncements. 29. We find that Hon'ble Supreme Court in case of Investment Ltd V/s CIT reported in (1970) 77 ITR 533 (SC) , where their Lordships have held that "assessee is free to employ for the purpose of his trade , his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. The method of accounting regularly employed may be discarded only , if , in the opinion of taxing authorities , income of the trade c....
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....rred irrespective of the date of payment . 31. Further in the decision of the coordinate Bench, ITAT Allahabad Bench in the case of Mahabir Jute Mills V/s JCIT reported in (2013) 36 Taxmann.com 587 as also on the decision in the case of CIT V/s Advance Construction Company P. Ltd reported in (2005) 275 ITR 30 (Guj) , where their Lordships have reiterated position that choice of accounting method lies with that of assessee , the only caveat being that it has to show that the chosen method has been regularly followed . The section is couched in mandatory terms and the department is bound to accept the assessee's choice of method regularly employed except for the situation wherein the AO is permitted to intervene, in case it is found that true income profits and gains cannot be arrived at by the method employed by assessee. Their Lordship's further held that the position of law is further well settled that regular method adopted by assessee cannot be rejected merely because it gives benefit to assessee in certain years. 32. Examining the facts of instant appeal we in light of above judgments we find that the method of accounting along with following project completion method for tr....
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....instead applying work in progress method and taxing 80 per cent. Thereon as net profit? held that " as assessee has followed the method which is consistent considering the decision in the case of CIT v Shivalik Buildwell P Ltd (2013) 40 taxmann.com 219 (Guj.) (supra) and CIT Vs. Umang Hiralal Thakur (2014) 42 taxmann.com 194 (Guj) (supra) and therefore this court is are of the opinion that the view taken by the Tribunal and the Commissioner of Income Tax is not correct. Issue decided in favour of assesssee. 34. Further the Hon,ble High Court of Gujarat in the case of CIT v Shivalik Buildwell P Ltd (2013) 40 taxmann.com 219 (Guj.) dealing with the similar issue observed as follows; "On the Revenue's appeal, the Tribunal confirmed the view of the Commissioner of Income Tax (Appeals), however, on slightly different ground, namely, that the assessee being a developer of the project, profit in his case, will arise on transfer of title of the property and receipt of any advances or booking amount cannot be treated as trading receipt of the year under consideration. The Tribunal further noted that such method of accounting followed by the assessee had been accepted by the Revenue in ea....
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....uction, the project completion method and percentage completion methods, both have also been recognized by the Central Board of Direct Taxes in the instruction No.4 of 2009 dated June 30, 2009. Therefore, the Assessing Officer is not considered justified in bringing to tax the profit of Rs. 1,66,70,811 in the year under consideration, particularly when such profits have already been offered to tax by the appellant in the assessment year 2007-08. The addition of Rs. 1,66,70,811 are directed to be deleted". 36. Further the co-ordinate Bench of Ahmedabad Tribunal in the case of Vraj Developers passed in ITA No.19/AHD/2008 which attained finality as it is not challenged by the department before the high forum observed as follows; "The learned Departmental representative supported the order of the learned Assessing Officer and the learned authorized representative of the assessee supported the order of the learned Commissioner of Incometax (Appeals) and also placed reliance on the Bangalore Bench of the Tribunal in the case of Nandi Housing P. Ltd v. Deputy CIT (2003) 80 TTJ (Bang) 750, wherein the Tribunal followed the decision of the Karnataka High Curt in the case of Khoday Disti....
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....t is reported that the decision of Appellate Tribunal in the case of Vraj Developers (supra) has attained the finality as the said decision is not challenged by the Department before higher forum. In view of the above and more particularly, when it has been found that the assessee is consistently following the accounting system of percentage completion method, which is permissible and accepted by ICAI and the Central Board of Direct Taxes with respect to construction work, it cannot be said that the learned Appellate Tribunal has committed any error/ or illegality, which call for the interference of this court. We see no reason to see to interfere with the impugned judgment and order passed by the learned Commissioner of Income tax (Appeals) deleting the addition of Rs. 1,66,70,881 which was made by the Assessing Officer on rejecting the accounting system on percentage completion method followed by the assessee. No question of law much less any substantial question of law arise in the present appeal. Hence, the present appeal deserves to be dismissed and is accordingly dismissed." 37. We further find the co-ordinate bench of Mumbai in the case of Prem Enterprises V Income Tax Off....
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....en distorted by following the project completion method. The impugned order is also silent as regards the position of the books of account. In other words the books have not been rejected, nor any defects pointed out. In the case of CIT vs. Bilahari Investment (P) Ltd (2008) 299 ITR 1 SC, the Apex Court held that the completion contract method adopted by the assessee for chit discount consistently over the years, is not required to be substituted by percentage completion method. In CIT v Manish Buildwell (P) Ltd (2011) 245 CTR 397 (Del), it was enunciated that project completion method is one of the recognized methods of accounting. That it cannot be said that the project completion method followed by the assessee would result in deferment of payment of taxes. Therefore, considering the discussion above, I do not find any merit on the part of the AO to have worked out the income by applying the percentage completion method". The Tribunal affirmed the order of the CIT(A). It was concluded that project completion method and percentage completion method are accepted standards of accounting and the assessee has option to adopt any one of them. The relevant findings recorded by th....
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....n pointed out by the department in the method of accounting adopted by the assessee and thus, there is no reason to reject the same. The Hon'ble Delhi High Court in CIT v Manish Buildwell (P) Ltd (supra) had held that "It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the projection completion method followed y the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act. AS-7 issued by the ICAI also recognizes the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method." Where the assessee was following a particular method of accounting consistently, which has been accepted by the department from year to year and in the absence of any defect being pointed out by the Assessing Officer that by following such method, income had escaped assessment, we find no merit in the order of the Assessing Officer in holding that percentage completion method should be applied to the assessee for the year under consideration. It is the prerogative of the assessee to arr....
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....servations: "Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the proceedings of completion method is another such method. Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract. The On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated....
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....offered the revenue for taxation from F.Y 2014-15 onwards as and when the sale deed has been registered. As held by various courts as discussed above that the method of adopting project completion method is not ultra virus and the assessee is free to adopt either the percentage completion method or project completion method with the only rider that it should be consistently adopted and in case of any deviation the effect of profit or loss should be offered to tax as the case may be. Revenue has not disputed this fact that assessee has offered the impugned advances to tax in the subsequent years i.e. from financial year 2014-15 based on sale deed registered which proves that there has been no loss to the revenue. Mere postponement of tax as a result of method employed by assessee has not been viewed adversely by courts so long as the method is regularly and consistently employed as held by Hon'ble Apex Court in the case of Excel Industries Ltd (2013) 358 ITR 295. 42. Before parting of with adjudication of this issue it would be relevant to take note of the amendment brought in statute with retrospective effect w.e.f. 1.4.2017 by way of insertion of Section 43CB for the purpose of c....