TaxTMI 
TaxTMI 
2019 (5) TMI 993
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....t order is as under :­ "As per reply received from The Addl. District Sub Registrar, Durgapur in reply to notice u/s 133(6) of [he Income Tax Act 1961, it is found that the sale agreement without possession of the following flats were registered during the relevant year: Sl Date of Registration Name of the purchaser Flat Details Value as per Agreement Paid till date 1. 25/11/2010 Sujata Pal & Madhusudhan Pal Block-C2 Site C, Flat 03, 3rd Floor Rs. 11,93,500 Rs. 11,93,500 2. 25/11/2010 Rohit Basu & Kumud Ranjan Basu Block - B3 Site C, Flat E 4, 4th Floor Rs. 14,69,600 Rs. 13,22,520 Rs. 26,63,100 The assessee is following "Project Completion Method", i.e. when the project is complete and all the flats are registered with possession, only then revenue is recognized. For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in Accounting Standards (AS)­9, are satisfied. In case of Real Estate Sale, the seller usually enters into an agreement for sale with the initial stage of construction. This agr....
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....equest of the respective purchasers and the risk factor has not been transferred. For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in Accounting Standards (AS) ­ 9, are satisfied In case of Real Estate Sale, the seller usually enters into an agreement for sale with the initial stage 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 the agreement is legally enforceable which signify transferring of significant risk and reward even though the legal title is not transferred or the possession of the real estate is not given to the buyer. In this case, the seller has transferred all the significant risks and reward of ownership to the buyer and other conditions for recognition of revenue specified in AS­9 are satisfied Once the sale agreement has been registered the seller has transferred to the buyer all significant risks and rewards of and the seller retains no effective control of the real estate. No significant uncertainty exists regarding the amount of the consideration that will be deri....
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....ter applying Section 50C of Income Tax Act, 1961, the same has been taxed as Short Term Capital Gain. The appellant has entered into sale agreement with two parties and received advance. No possession has been given. Entire sale value as per agreement has been taxed as undisclosed sale. Hence the appeal before your honour. Grounds of Appeal No.1 to 4 Addition for undisclosed sale Rs. 2663100/- (1) As is mentioned on page 7 of the Assessment Order 2 Sale Agreements were registered without possession for total Rs. 2663100/­. (2) Upto 31st March 2011 relevant to Asst. Year 2011­12 for which assessment is being made advance received against these 2 flats was as follow ­ Sujata Pal 1014475 (Not Rs. 1193500/­ as mentioned ill Asst. Order) Rohit Basu 273920 (Not Rs. E322520/­ as mentioned in Asst. Order.) (3) In support of above Audited Accounts and Advance from Customers list is enclosed marked Annexure 'A' and Annexure 'B '. Schedule 'L' shows Advance from Customers of Rs. 81295899/­. At S. No. 89 of Advance from customer list name of Rohit Easu appears and at S.No. 119 name of....
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....39;D' and 'E'. Accounting Standards 9 (As ­ 9) as stated by the ITO for recognition of revenue in case of real estate sales is wrong. Rather AS­9 says that " This statement does not deal with the following aspects of revenue recognition to which special considerations apply. Revenue arising from Construction Contracts". Relevant page of AS ­ 9 is enclosed ­ Annexure 'F'. AS ­ 7 for Accounting for Construction Contracts applies. A mere advance against booking of flat which has been duly shown in Accounts and that without possession which is under construction cannot give rise to a sale. On Page 8 of Assessment Order ITO has agreed that sale agreement is registered to keep other party binding. Hence there is no sale and addition for undisclosed sale should be deleted. 3.2 I have considered the submissions of the appellant as well as the facts of the case. The following facts relating to this ground of appeal are important and they are : ­ As per Assessment Order Page 7 Agreement for 2 flats were registered on 25.11.2010 for value of 26,63,100/­ ( Copy of Two Agreement for Sale for Su....
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....s there is no case of concealed Sales of Rs. 26,63,100/­ and is hereby deleted. " 3. Mr. Pradip Majumdar vehemently contends during the course of hearing that the Assessing Officer rightly followed the Accounting Standard (AS-7) in assessing the tax payer's impugned receipts totaling to Rs. 26,63,100/- as income of the relevant previous year only. He places his reliance on the assessment findings that the assessee had transferred its flats in issue vide registered agreement(s) dated 25-11-2010. He therefore, he seeks to restore the impugned addition in assessment year under consideration. The assessee supports the CIT(A)'s action deleting the impugned addition vide aforesaid discussion. 4. We have given our thoughtful consideration to rival contentions. The Revenue's instant substantive formal grievance seeks to assess the instant tax payer for sale consideration of Rs. 26,63,100/- in the relevant previous year. Its case solely rests on the fact that the agreement in question is a registered document transferring the twin residential units in vendee's favour. We find no merit in the Revenue's instant arguments. Case records suggest that the assessee had in fact executed r....
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....ent 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 and obtaining necessary permissions, approvals, NOCs etc. The developer is thus required to handover the landowner's share of 32% of the completed constructed saleable area within 60 Months from above date failing which the developer is required to first allocate 32% area to the land owner out of the area constructed till then. This has been stated to be an essential condition of the agreement. The failure of developer to give such 32% area, makes the developer liable to pay interest @ 12% p.a. on the remaining area. A closure study of the ag....
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....greement 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 completed but the appellant had merely received advances from the proposed buyers, no revenue was recognized by appellant and the advances received against proposed sales were credited in advances against sale of flat account and shown as liability in the Balance Sheet. At this stage it may be relevant to note that since as per the agreement, exclusive right of sale was given to the developer M/s JSM Devcons Pvt. Ltd., the advances against sales were to be received by appellant through the developer, as such th....
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....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. 2012­13 and Rs. 12.25 crores for A.Y 2013­14. 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 terms and conditions specified in the agreement between the parties. We find that the assessee is entitled to the possession of its share of 32% of constructed area only upon completion of entire construction and before that the assessee has no right to claim possession of its 32% constructed area which is required to be completed within 60 months from the date of handing over of possession of land along with all necessary permis....
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.... 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 stock­in­trade 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 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 )". 30. Further in another judgment of Hon'ble 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 p....
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....choice of accounting method lies with that of assesse, 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 treatment of advances received from proposed buyers the assessee has been consistently followed this method and appellant's assessment has been completed by the Ld. AO for first two years viz, A.Y. 2010­11 & 2011­12. 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 lia....
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.... 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 earlier years. The Tribunal was, therefore, of the opinion that the Assessing Officer's decision to reject the book results during the year under consideration was not justified. We are of the opinion that the Tribunal committed no error. If as per the accounting standard available, the assessee was entitled to claim....
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..... 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 2007­08. The addition of Rs. 1,66,70,811 are directed to be deleted". 36. Further the co­ordinate 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 Income tax (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 Distillers Ltd, in ITRC Nos. 19mto 21 of 1993. This, it is observed that the issue which requires our adjudication is that the income in the instant case is to be computed as per system of accounting followed by the assessee or as per accounting followed by the assessee or as per ....
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....t 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 co­ordinate bench of Mumbai in the case of Prem Enterprises V Income Tax Officer (2012) 25 taxmann.com 179 (Mum.) deal with the similar issue wherein the assessee was constructing a project and was consistently following project completion method and the assessing officer rejected the method of project completion adopted by the as....
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....ri 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 the Tribunal read thus:­ "We have heard the rival contentions and perused the record. The issue arising in the present appeal before us is in relation to the method to be applied for recognizing the revenue generated by the assessee ....
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....led 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. AS­7 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 arrange its affairs in such a manner and follow any recognized method of accounting to compute its profits. In view thereof, we find no merit in the order of the Assessing Officer in recomputing the income in the hands of the asse....
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....ng 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 total costs of contract. The above indicates the difference between the completed contract method and the percentage of completion method." (underlining ours) 40. After the above....
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....pting 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 2014­15 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 computation of income from construction and service contract. The relevant provision of Section 43CB of the Act reads as follows; "43C....
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....rbitrarily making addition to the income ignored the fact that project completion method/ completed contract method of accounting has been consistently adopted by the assessee and even have been accepted by the revenue authority for the A.Y. 2010­11 and A.Y. 2011­12. We therefore set aside the findings of Ld.CIT(A) and delete the addition of Rs. 16,12,34,754/­ for Assessment Year 2012­13." 5.. We adopt the above detailed reasoning mutatis mutandis to conclude that the assessee builder/ developer had rightly not recognized advances received from the two customers as income ongoing by project completion method as per its past practice accounting system regularly followed. More so in view of the fact that it had actually sold the flats in issue in AY 2016-17 (supra). We therefore confirm the CIT(A) 's findings deleting the impugned addition of undisclosed sales. The Revenue fails in this former ground. 6. The Revenue's second substantive ground is that the CIT(A) has erred in law and on facts in treating the loss disallowance of Rs. 58,46,550/- under the head 'business' than short term capital loss treated during assessment. The CIT(A)'s detailed discussion on th....
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....cause letter was issued: Office of the Income­tax Officer, Ward­7(1),Kolkata Aayakar Bhavan, P­7, Chowinghee Square,Kol­700069 Ph.8902196988 No.ITOIW­7(l)INADIAl2013­141 Dated 8­11­2013 To The Principal Officer M/s. Nadia Construction Pvt. Ltd. 81/2A, Raja Dinendra Street, Kolkata ­ 700006 Sub : Final Show Cause before completion of Assessment u/s 143(3) For A. Y. 2011­12­Mattter regarding Please refer to the above. On verification of Profit & Loss a/c. it is found that you have claimed Loss on Sale of Landed Property amounting Rs. 6, 73,482/­. But, from the fixed assets schedule, it is found that you have shown Land worth Rs. 56,54,177/­ sold during the year. From the reply received from Addl. Dist. Sub­Registrar, Durgapur, Burdwan in reply notice u/s 133 (6), it is found that you have sold the following lands during the relevant year: Sl Date of Sale Mouza Lan....
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....disclose two pieces of land but also failed to take stamp duty value as per Sec.50C of Income Tax Act 1961. The following two piece of land sales were undisclosed by the assessee: Sl Date of purchase Mouza Land Area Purchase Cost Registration Cost Total 1. 10/03/2018 Gopalpur 302 decimal Rs. 27,45,482 Rs. 164,730 Rs. 29,10,212 2. 10/03/2018 Gopalpur 599 decimal Rs. 54,45,509 Rs. 403,400 Rs. 58,48,909 Now, the sale proceeds of undisclosed land has been taken into consideration and capital Gain computed on sale of all the four piece of land applying Stamp Duty Value as per Sec 50C of Income Tax Act 1961. Accordingly, Rs. 51,73,068 plus Rs. 6,73,482 = Rs, 58,46,550 added to the Total Income of the assessee as Short Term Capital Gain.. The appellant has submitted as under :­" Addition of Rs. 58,46,5501­ for Short Term Capital Gain. (1) Land was purchased on 10.3.2008 and sold on 2.11.2010 after about 2 Years 7 Months. (2) Copy of Memorandum and Articles filed with your honour also shows that appellant is engaged in the business of real estate. (3) As par....
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....e Rs. 49,80,695 Business loss Rs. 6,73,482 As per the assessment order pages 5 and 6 property Nos. 3 and 4 purchase is undisclosed Sl. No. Purchase cost (Rs.) Sale value (Rs.) 3. 29,10,212 25,62,470 4. 58,48,909 50,82,515 87,59,121 76,44,980 Purchase Rs. 87,59,121 Sale Rs. 76,44,980 Business loss Rs. 11,14,136 The Income-tax Officer wrongly applying section 50C has taken the stamp value of all four properties and computed the short-term capital gain as follows as per page 5 of the assessment year- Sl. No. Stamp value (Rs.) Purchase cost (Rs.) 1. 46,82,534 32,09,682 2. 35,66,632 24,44,495 3. 39,26,372 29,10,212 4. 74,10,828 58,48,909 1,95,86,366 1,44,13,298 Stamp value Rs. 1,95,86,366 Less : Purchase cost Rs. 1,44,13,298 Alleged short-term capital gain Rs. 51,73,068 ITO has relied on 3 things to apply Section 50C ­­­­ In accounts land shown under Fixed Assets Letter dated 31.11.2013 of Assessee on Page 6 of Assessment Order. ....
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....ribunal, Kolkata 'A' Bench in the case of Sushil Kumar Das Vs. ITO was filed reported in 11 ITR. ( T ) 17 Kolkata whereby it has been held that even if amount is erroneously offered to tax Assessee is entitled to raise plea before Appellate Authorities against its Assessment. 4.2 I have considered the facts of the case and the submissions of the appellant. The facts of the case in brief are:­ " The appellant is a Property Developer and the main activity of the assessee is Real Estate Developer and the assessee also has Investments in Lands as Fixed Assets. The assessee has claimed Loss on Sales of Land Property of an amount of Rs. 6,73,482/­. 4 Land Parcels were sold by the appellant as per following details. Sl Date of Sale Mouza Land Area Sale Value Full Value of Conisderation 1. 02/11/2010 Gopalpur 332 decimal Rs. 28,17,020 Rs. 46,82,534 2. 02/11/2010 Gopalpur 332 decimal Rs. 21,63,675 Rs. 35,66,632 3. 02/11/2010 Gopalpur 302 decimal Rs. 25,62,470 Rs. 39,26,372 4. 02/11/2010 Gopalpur 599 decimal Rs. 50,82,515 Rs. 74,10,828 &nb....
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.... have been been Quoted." I have considered the judgements relied upon by the appellant. The appellant is engaged in Property Development. Only becasue land is shown as Fixed Assets in the balance sheet and not as Stock should not be detrimental to the interest of the assessee. Land being part of business stock to which Section 50C does not apply and accordingly loss of Rs. 6,73,482/­ has to be accepted and Short Term Capital Gain u/s 50C of Rs. 51,73,068/­ has to be deleted. A Company incorporated with the object of carrying out real estate transactions and on very first day acquires land cannot be presumed to have made Investments but rather it is business assets with a view to sell them at a later date. Only because in Balance Sheet Land is shown in Fixed Assets and not in Stock cannot change the nature of Land which is part of Business Assets and as such Section 50C does not apply and Profit 1 Loss on Sale of Land has to be assessed under the head Business. The appellant has relied upon the order dated 13 May 2011 of Hon'ble Income Tax Appellate Tribunal, Kolkata 'A' Bench in the case of Sushil Kumar Das Vs. ITO reported in 11 ITR (....