TaxTMI 
TaxTMI 
2018 (8) TMI 440
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The AO and CIT(A) failed to see that the appellant'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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompliance to the notices u/s 143(2) of the Act the assessee filed returns 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 deve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....espectively. Amount of addition was calculated in the following manner; Particular Sales being 32% of total 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 wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "In case of real estate sales, the seller usually enters into an agreement for sale Wltil the buyer at initial stages of construction. This agreement for sale is also considered to have the effect 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....effect of transferring, or enabling the enjoyment of any Immovable property. Explanation I =Fo r the purposes of sub-clauses (v) and (vi). "immovable property" shall have the same meaning as in clause (d) of section 269UA. Explanation 2. -- For the removal 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss, comply with the mandatory Accounting Standards referred to in sub-section (3C) of section 211 of the Companies Act, except AS-7 and AS-9, read together with Notes op: Accounts as per Note 11 annexed with Balance Sheet .... ' ..' 4.5 The appellant company has submitted during the appeal proceedings 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from time to time. At this juncture, it is significant to note the directive of section 145, which provides for the method of accounting. It transpires from the prescription of section 145 that only the accounting standards issued by the Central Government under this section are mandatory and have a bearing on the computation of total income. Any other 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 busin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the recording of accounting transactions by developers so that the accounts give a true and fair view of its profits. Similar view has been reiterated in the guidance note issued in 2012. So the litmus test of accrual of income of a developer under the mercantile system of accounting is the passing of risks and rewards of ownership to the buyers. 4.10 Turning 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 be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the constructed area. As per Clause-9 of the agreement it is mentioned that on completion of the entire construction, the completed plots are to be divided and allocated between the land owner and the assessee/ Developer (JSM DPL) . In accordance with Clause 2 of the agreement which entitles to the owner to keep 32% constructed area upon completion of entire construction. Ld. Counsel for the assessee asserted the 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 cannot be properly deduced there from ( as per provisions of 1922 Act in force at that time , presently only if case falls 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....adopted by assessee cannot be rejected merely because it gives benefit to assessee in certain years. 12. The Ld. Counsel for the assesee further submitted that in view of the above settled legal position, provisions of section 145 being mandatory in nature, Ld. AO is bound to assess appellant's income in accordance with the method of accounting regularly employed by assessee except in the case when the case falls in section 145(3) for which the AO is required to 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 tre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ank reported in (2003) 261 ITR 528 . It is thus clear that the accrual of income under the mercantile system of accounting depends upon the accrual or crystallization of right to receive and hence in view of the accepted position that the appellant has maintained its accounts on mercantile basis, the question that requires consideration is as to when the right to receive the constructed flats which in turn are agreed to be sold arises in favour of the assessee. The 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." ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uyer i.e. the completed contract method . According to CIT(A) project completion method / completed contract method or percentage of completion method are not methods of accounting but methods of revenue recognition . Such view of CIT (A) appears to be contrary to view of Supreme Court in case of CIT V/s Billahari Investment Ltd. Reported in 299 ITR 1 where their Lordship's have considered these methods as methods of accounting and has placed its seal of approval upon completed contract 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entered into development agreement with another company namely JSM Devcon (P) Ltd for development of the lands owned by the company in the capacity as land owner. As per the agreement placed in the paper book, on getting necessary sanctions, approvals and NOC the developer would construct high rise buildings on the land belonging to the appellant with all necessary facilities, amenities etc. Out of the total constructed saleable area the appellant as the land owner would be entitled to 32% of total constructed salable area as the right of 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 construc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....said clause. However, the total refund is only upon completion of construction and handing over of 32% of the constructed area to the owner. (iv) Clause (10) of the agreement gives exclusive right of sale of constructed flats to the developer along with right to determine / fix the rates for sale , conditions and other policies about sale of Flats , obviously from the point of view of uniformity of the policy in that behalf . Since the exclusive right of sale has been conferred upon the developer, the owner is required to execute sale deeds in respect of its 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 appellan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee as the transaction of sale was not completed and treated as sales when sale deed was executed and registered in favour of the buyer and as the assessee has adopted project completion method it has recognized the revenue only on the completion of sale i.e. upon execution and registration of sale deeds in favour of the buyer. 24. Audited financial statement for the A.Y. 2010-11 and 2011-12 placed at 49 and 64 of paper book shows that during the assessment year 2010-11 the assessee received Rs. 19 lakhs and for the assessment year 2011-12 sum of Rs. 4,65,35,702/- was received 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 weight....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 3 of section 145 empowers the Assessing Officer to make the assessment of the assessee in the manner provided under section 144, in case he is not satisfied about the correctness or completeness of the assessee or where the method of accounting have not been regularly followed by the assessee. Once the assessee followed accounting regularly the Assessing Officer is bound to assess the income of the assessee on the basis of such method of accounting. On perusal of the provision of section 145 shows that it nowhere empowers the authorities to assess the income on the basis of method 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for computation of true profits. Their Lordships then also dealt with method of accounting and observed as under- "among Indian businessmen as elsewhere, there are current two principle systems of book keeping , there is , firstly, the cash system in which record is maintained of actual receipts and actual disbursements , entries being posted when money or money's worth is actually received , collected or disbursed . There is secondly, mercantile system in which entries are posted in eth books of account on the date of transaction i.e. on the date on which rights accrue or liabilities are incurred 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s u/s 143(3) read with respect of 153(A) of the Act that the assessee has been consistently following project completion method/completed contract method for the treatment of advances received from proposed buyers through developer JSM DPL. In the light of the above fact we observe that Hon'ble Gujarat High Court in the case of Manjusha Estates (P) Ltd Vs ITO reported in (2017) 393 ITR 644 (Guj,) adjudicating similar issue i.e. "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in rejecting the project completion method which was followed consistently by the assessee and 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld be required to show tat he has followed the chosen method regularly. The Department is bound by the assessee's regular method would not be rejected as improper merely because it gives the assessee the benefit in certain years or that as per the Assessing Officer, the other method would have been more preferable. If the method adopted does not afford true picture of profit, it would be rejected, but then such rejection should be based on cogent evidence and should be done with caution. In the present case, the appellant has declared substantial profits on the basis of project completion method in the subsequent years. In construction, 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 Ah....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive system of accounting. The learned Commissioner of Income-tax (Appeals) has recorded a finding after pursuing the assessment records of the subsequent years that the assessee has offered for taxation its income in the subsequent year as per the consistent system of accounting followed by the assessee. The learned Departmental representative could not point out any error in the above finding of the learned Commissioner of Income-tax (Appeals). In view of the above discussion, we do not find any error in the order of the learned Commissioner of Income-tax (Appeals) and therefore, the same is upheld and the appeal of the Revenue is dismissed. It 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 com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r Accounting Standard 7 (AS 7) issued by the Institute of Chartered Accounts of India has been recognized by the Act and in such circumstances, there was no guidance or strict procedure for adopting a particular accounting standard under the /act and it depends upon facts and circumstances of each case. In other words, the assessee was entitled to adopt Project Completion method for determining its income which was being regularly followed by it. Though the Assessing Officer had rejected the plea of the assessee, but the CIT(A) while accepting the appeal of the assessee made the following observations:- "It is however not the AO's case that the profits have been 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld be attained by any one of the accounting methods. Completed contract method is one such method. "It was further held that "Every assessee is entitled to arrange its affairs and follow the method of accounting which the Department has earlier accepted. It is only on those cases where the department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method". Applying the above said principles to the facts of the present case we find that the assessee before us has been following the systematic method of accounting from year to year which has been accepted by the department and no defects have been 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 assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cept of contract accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely, "completed contract method" and "percentage of completion method". To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No.7. They are "completed contract method" and "percentage of completion method". 39. This view was reiterated by the Supreme Court in CIT v. Bilahari Investment (P) Ltd. (2008) 299 ITR 1/168 Taxman 95 with the following observations: "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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f accounts on mercantile basis u/s 145 of the Act adopting project completion method to account for the revenue and the revenue authorities have failed to bring forth any inconsistency in the books of accounts. The Assessing Officer in the instant case has merely applied the method of percentage completion adopted by the Developer JSM DPL and calculated the income of the assessee completely ignoring the fact that the assessee was merely the owner of land and he was entitled to 32% of saleable area only on completion of construction and the deadline of which was 60 months from the date of agreement i.e. from 1.4.2009. The Ld.A.O also ignored the fact that right to sale its share of constructed area with the assessee was only from April, 2014 onwards and the assessee has 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 ef....