TaxTMI 
TaxTMI 
2019 (5) TMI 993
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....om 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 agreement for sale is also considered to have the effect of transferring all significant risks and rewards of o....
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....essary 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 derived from the real estate sales and there is no uncertainty about ultimate collection. (Collection of 100% and 90%, respectively made but till date but revenue has n....
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....ion 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 Sujata Pal appears. (4) As only part advance has been received, no possession has been given and even flats were not fully ready as on 3rt March 2011 there is no question of treating the Sale Agreement value as undisclosed sale. (5) In v....
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....n 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 Sujata Paul and Rohit Basu were submitted and verified and these are clearly an Agreement for Sale), ­As per AO, risk has been transferred to the hand of purchaser so this is undisclosed sale as per Page 9 of Assessment order. In remand report the Ao says that as Deed is registered, significant risk is transferred (Registration of Agreement to Sell is to keep both the parties binding. Assessing Officer himself has agreed to this in last para on Page 8 of Assessment Order) The AO has appli....
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....sment 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 registered sale deeds on 30-03-2016 only in assessment year 2016-17. The said registered documents indicate that vendor- vendee duly acknowledged the registered agreements dt. 25-112010 (supra). The assessee had shown the sum in issue as advances only though out in the intervening period. It duly followed project completion method only and sought to offer all receipts on gross basis whereas the Revenue's emphasis is to assess the impugned advances received from two customers in view of the two registered agreements in issue. This tribunal's decision in ITA No. 121/Ind....
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.... 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 agreement thus shows that appellant's right to get 32% of the constructed area would crystallize only on completion of construction and demarcation / division as per clause (9) or 60 months from the date of possession as aforesaid whichever is earlier. Since the agreement is executed on 01­04­2009, the period of sixty months will be completed on 31st March 2014. In other words the appellant has no right to claim possession of its share of 32% of constructed area. It would thus be clear that. in the years under consideration i.e in AY 2012­13 & 2013­14, the appellant's right to receive th....
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....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 the accounting in that respect has been done accordingly. It may further be relevant to mention that the appellant started receiving advances against the sales from A.Y. 201011 which have been duly reflected in the books of account from year to year on consistent basis. 23. From perusal of the financial statement we observe that the assessee is maintaining its books of accounts on mercantile basis and it is consistently showing the advances received from JSM DPL on behalf of various proposed buyers of flats under the head advance against sale of flat in the liability side of the balance sheet. It started receiving the mon....
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....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 permissions/approvals. The period of 60 months taken from the date of agreement shall end on 31.3.2014 and the assessee still have the right to sale the completed area as per agreement thereafter. 27. To summarize the facts we find that the assessee got the right to sell its 32% share of the salable constructed area only during the F.Y. 2014­15 and onwards and money received from the developer i.e. JSM DPL was only an advances from proposed buyers on which the assessee was not having the legal right and the fact could not be denied that when a person does not have a right to hold an amount the same can be taken back by the proposed buyers in case th....
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.... 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 provisions of which are in pari­materia 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 de....
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....t 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 liability in balance sheet. At this stage it may be relevant to mention that 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 accepted by AO for two years i.e. AY 2010­11 & 2011­12 Since the said method ....
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....nsideration. 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 the entire income on completion of the project and if such accounting standard was accepted by the Revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different sand and that too, without hearing the assessee". 35. Further in another judgment by CIT Vs. Umang Hiralal Thakur (2014) 42 taxmann.com 194 (Guj) is placed on the following paragraphs of its judgment. "In the present case, it is not the Assessing Officer's case that the appellant is not reporting or under reporting its income. In fact, I find in the subsequent assessment year, i.e. the assessment year 2007­08, the appellant has disclosed substantial income from the projects undertaken in the business proprietary concerns, viz, M....
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....ing 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 accounting standard AS7 for the purpose of charging of income tax. We find that the issue is to be decided in accordance with the provisions of section 145 of the Act shows that the business income which is assessable under the Income tax Act is to be computed in accordance with the consistent system of accounting followed by the assessee unless such system, of accounting is defective and/or from such system of accounting, profit cannot be deduced. Thus, in our considered opinion, the option for choosing the system of account is with the assessee and not with the learned Assessing Officer provided the system chosen by the assessee is consistently followed by him and such system is not a defective system. In our considered view, provisions of AS7 cannot override the ....
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....eserves 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 assessee on observing that 8% of the total project has been incurred up to the relevant assessment year the income should have declared on the percentage completion method. The Coordinate Bench decided in favour of the assessee holding that the results declared by the assessee on the basis of method of accounting consistently followed and the entire profit of the project has been offered in subsequent assessment year therefore there is no justification in rejecting the method of accounting followed by the assessee and substituting the same by adopting accounting AS­7 issued by ICAI and followed it for accounting. 38. Similarly Hon'ble High Court of Punjab & Haryana in the case of Commissioner of Income Tax (Central), Gurgaon V. Principal Officer, Hill View Infrastructure....
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....ethod 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 in the course of carrying on the business of real estate developers. The case of the assessee is that it is following one of the accepted accounting standards approved by ICAI for recognizing the revenue generated by it. The assessee had followed project completion method which had been consistently followed by the assessee for the preceding years also. The Assessing Officer on the other hand, had applied percentage completion method to compute the income in the hands of the assessee. The Commissioner of Income Tax (Appeals) had allowed the claim of the assessee. Both the methods of accounting are i.e. project completion method and percentage completion method is accepted standards of accounting and either of the methods can be applied by the assessee. In the facts of the present case b....
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....icer 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 assessee. Upholding the order of Commissioner of Income Tax (Appeals), we dismiss ground of appeal raised by the revenue". The Delhi High Court in CIT v Manish Build Well (P) Ltd (2011) 16 taxmann.com 27(2002) 204 Taxman 106 noted that project completion method is one of the recognized methods of accounting. It was held as under:­ "It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act" The assessee respondent had been consistently following one of the recognized methods of accountancy, i.e project completion method, for computation of its income. In the absence of any prohi....
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....ct. 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 judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the Income Tax Act. Accounting Standards 7 (AS7) issued by the Institute of Chartered Accountants of India also recognize the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method. In view of the judgments of the Supreme Court (Supra), the finding of the CIT(A), upheld by the Tribunal, does not give rise to any substantial question of law. Further, the Tribunal has also found that there was no justification on the part of the assessing officer to adopt the percentage completion method for one year(the year under appeal) on selective basis. This will dist....
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....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; "43CB. Computation of income from construction and service contracts.-(1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under subsection (2) of section 145: Provided that profits and gains arising from a contract for providing services,- (i) with duration of not more than ninety days shall be determined on the basis of project completion method; (ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub­section (1)- (i) the contract revenue shall include retention money; (ii) the contra....
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....e'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 the instant issue reads as under:- 4. Ground numbers 5 to 7 relate to the addition of Rs. 51,73,068 plus Rs. 6,73,482 = Rs, 58,46,550 which was added to the income as Short Term Capital Gain. The relevant portion of the assessment order is as under " The main activity of the assessee being Real Estate Developer, the assessee also has Investments in Lands as fixed assets. On verification of accounts, it is found that the assessee has claimed "Loss on Sales of Landed Property' amounting Rs. 6, 73,482/­. A letter issued to The Addl. District Sub Registrar, Durgapur for verification of such land sales and its Stamp­duty value: Office of the Income­tax Officer, Ward­7(1),Kolkata Aayakar Bhizvan, P­7, Chowing/zee Square,Kol­700069 Ph. 8902196988 No.ITOIW­7(l)/NadialI33(6)/20I3­14/ Dated ....
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.... 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 Rs. 1,95,86,366 Corresponding Purchases of lands were as below: Sl Date of purchase Mouza Land Area Purchase Cost Full Value of Consideration Total 1. 10/03/2018 Gopalpur 332 decimal Rs. 30,18,212 Rs. 191,470 Rs. 32,09,682 2. 10/03/2018 Gopalpur 255 decimal Rs. 23,18,205 Rs. 126,290 Rs. 24,44,495 3. 10/03/2018 Gopalpur 302 decimal Rs. 27,45,482 Rs. 164,730 Rs. 29,10,212 4. 10/03/2018 Gopalpur 599 decimal Rs. 54,45,509 Rs. 403,400 Rs. 58,48,909 Rs. 1,44,13,298 Out of the above, Purchases vide sl. no. (3) & (4) were undisclosed, which you are required to explain. Now, you are hereby asked to explain why Short Term Capital Gain of (Rs. 1,95,86,366 minus Rs. 1,44,13,298), i.e. Rs,51, 73,0681­ shall not ....
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.... land has to be held in course of business and not as sale of investments. (6) Supreme Court cases cited on Page 5 Para 8 of earlier written submissions will support the fact that only because Land is shown by mistake in Fixed Assets and not in Stock it is not a Short Term Capital Gain but is a Business Profit/ Loss. (7) On Page 6 of Assessment Order the ITO has said " The assessee accepted the addition vide letter dated 21.11.2013 is not correct. A copy of letter is enclosed ­­ Annexure 'G' The essence of letter is not to accept Short Term Capital Gain but to request for not imposing penalty. Moreover an acceptance under wrong presumption of law is no acceptance at all. 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 sale 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/ Loss on Sale of Land has to be assessed under the head Business"....
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....5 of Accelerated Freez and Drying Co. Vs. Dy. CIT in 1 ITR (Tribunal) Page 226 Cochin Bench where various Supreme Court decision like Kedarnath Jute 82 ITR 363, Punjab Distilling 35 ITR 519. Delhi Stock Exchange 41 ITR 495 and Hoshiarpur Electric 41 ITR 608 have been Quoted. Thus as appellant is engaged in Property Development, only because land is shown as Fixed Assets and not as Stock would not be detrimental to the interest of The assessee. Land is part of business stock to which Section 50C does not apply and accordingly loss of Rs. 6,73,4821­ has to be accepted and Short Term Capital Gain u/s 50C of Rs. 51.73,0681­ has to be deleted. The appellant has in Supplementary Written Submission Page Para 7 contended as below ­­­­ (7) On Page 6 of Assessment Order the ITO has said "The assessee accepted the addition vide letter dated 21.11.2013" is not correct. A copy of letter is enclosed ­­ Annexure 'G' The essence of letter is not to accept Short Term Capital Gain but to request for not imposing penalty. Moreover an acceptance under wrong presumption of law is no acceptance at all. A Company incorporated with the object of carrying o....
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....essee has claimed a loss in these two properties as under : 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 Assessing Officer has treated these properties as investments and applied section 50C of the Income-tax Act and has taken stamp value (as valued by the Additional District Sub-Registrar, Durgapur) of all four properties and computed short-term capital gain as follow as per page 5 of the assessment year Sl. No. Stamp value (as per 50C) (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 The main claim of the Appellant is that the properties were business assets as they are in realty business but had wrongly reflected them in fixed assets in their Balance Sheet. The appellant has submitted "that nomenclatur....