TaxTMI 
TaxTMI 
TaxTMI 
2022 (8) TMI 456
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....thority. The assessee"s CO is principally supportive (of the impugned order), though also raises legal issues. The same, however, was not pressed during hearing, and is accordingly dismissed as not pressed. 3. It would be relevant to briefly state the back-ground facts of the case. The assessee-individual, is a real estate developer (through his firm "Rajul Builders"), besides being also engaged in the production and sale of bio-fertilisers and agents (per his firm "Rajul Agro Herbal"). For the year under consideration, the Assessing Officer (AO) sought the following during assessment proceedings: a) Confirmations from all sundry creditors. b) Copy of agreement of advances taken from all the customers. The same, filed on 28/12/2011, were taken on record by the AO. On enquiry qua the advance from customers, the same were explained by the authorised representative to be not accounted for as income as the assessee, following mercantile system of accounting, had applied Accounting Standard (AS) 9 (i.e., recognition of income), issued by the Institute of Chartered Accountants of India (ICAI). The explanation, in the view of the AO, was not tenable as AS-9 (enclosed as a part of th....
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....his reason also the addition is not sustainable. The addition is also revenue neutral and hence no addition can made. The AO has also not given the working of the amount added in the assessment order, the working given in the remand report clearly shows that Rs.1,66,19,650/- is advance received from customers and Rs.7,07,59,313/- is other advance which the appellant had contended is money to be paid to the land owner. In view of this also, the addition is not sustainable. Though res-judicata is not applicable to Income Tax proceedings, Law of Consistency has to be followed. The method of accounting of the appellant has been accepted by the AO in the past year also. The AO in the assessment order of A.Yr. 06-07 passed on 28-12-201(1) on the same day has accepted the method of accounting followed by the appellant. In view of the above, the addition made of Rs.8,73,78,963/- on account of advance received from customers is deleted. In view of ground of 2 & 3 being allowed the alternate plea is infructuous and is dismissed. Ground of appeal No. 2 is allowed and ground of appeal No. 3 is part allowed." (pgs. 9 - 10) Aggrieved, both the parties are in appeal. 4. We have heard the partie....
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....onsideration from the buyer." The said two conditions afore-said represent the essential attributes of AS-9. This, further, was an admitted position and a common ground before us as well. It, thus, removes the very basis on which relief stands allowed by the ld. CIT(A). What we wonder, then, is the controversy about? Both the sides basing their respective case on the satisfaction of AS-9, the issue boils down to, and all the four grounds justifying the impugned deletion by the ld. CIT(A) coalesce into one, i.e., whether any adjustment to the returned income on account of not forming the correct basis for revenue recognition in respect of advances from customers could be made in the given facts and circumstances of the case? 4.3 While, on facts, the matter would need to be answered with reference to the material on record, in principle the answer is an emphatic "yes". The reason is simple. The assessee admittedly follows mercantile system of accounting, implying that income as well as expenditure is to be accounted for on accrual basis. Income is said to accrue or arise when the right to receive it inures to the assessee and, similarly, qua expenditure, when liability in its respe....
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....ee, was during hearing specifically enquired about the point in time when the revenue from a constructed residential or commercial unit, i.e., building, a flat or a shop (say), is taken into account. As observed, there is nothing on record stating the assessee"s - admittedly following AS-9, accounting policy qua the recognition of income, much less exhibit the same. Though the face of the balance-sheet (as on 31/03/2008, at APB- 2, pgs. 28-55), states of the "Notes to the Accounts" - which generally enlist the accounting policies, including on the recognition of income, as annexed thereto (Ann. 11), i.e., as forming part thereof, the same is not enclosed, and there is no reference thereto in the audit report. Even this noting, on the face of the balance-sheet as on 31/03/2008, is missing in the audited balance-sheet as on 31/03/2009 (APB-1, pgs.7-35). The sale agreements (with the customers), referred to by the AO, and relevant for determining the issue of accrual or otherwise of income, were, yet, and despite being called for, not produced. The ld. CIT(A) has not, as would be noted, issued any finding qua the aspect of accrual, with we finding his basis of deletion irrelevant inas....
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....e., sums already received, as income. We may here though clarify that the foregoing is discussed only by way of an example, taking cue from Sh. Usrethe statement at bar of the "sale" being taken in accounts on the sale deed being registered. The actual accrual of income, which may not necessarily have to await the completion of the construction, would stand to be determined from the terms of the sale agreement. We may though clarify that the recognition of income is not to be confused with the receipt of the consideration, being normally defined to be at stated points of time in the said agreement. If the buyer has agreed to purchase the construction at the inception, and all the significant risks and rewards of ownership have transferred, or substantially so, revenue has accrued and ought to be recognized, with the payment being made and received under the agreement only in lieu of that right. A builder may, for example, allow easy payment terms to customers, with the view to attract them, or insist on advance payment. That is, extend credit or not. That, as explained, is a different matter, akin to the sale of goods on credit, as against on cash, even as sale is, in either case b....
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....onstruction costs, direct or indirect, are allocated to the physical output during the year; d) there is no definite accounting policy for recognizing income.; e) there is no record of the sale agreements or even purchase agreements entered into by the assessee during the year, much less noting of their substantial compliance; and f) there is no system in place for recognizing income. We find the foregoing as a matter/s of fact. 4.6 It is said that no defect in accounts has been observed by the AO, which only could entitle him to make the adjustment qua income accrued, though not accounted for. We have already found as a fact that there is no accounting policy qua recognising revenue on constructed units; no accounting of stock-in-trade; and an absence of a basis for allocating cost, only whereupon could inventory, essential for being taken and appropriately valued for determining correct operating result, for an accounting period, be valued. How could, then, one may ask, the book results be accepted as such? That apart, there is also breach of AS-1 ("Disclosure of Accounting Policies") and AS-2 ("Disclosure of changes in Accounting Policies") notified u/s. 145(2). The AO ....
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.... turns on the same being not notified or not mandatory. The assessee's case, rather than, therefore, being based on AS-9, which he claims to follow, or even an alternate thereto, showing it as equally valid, is found to be without any basis whatsoever. The next question, therefore, is the adjustment to be therefore made to the declared results. Attention of the parties was during hearing also drawn to the decision in Calcutta & Co. v. CIT [1959] 37 ITR 01 (SC), on which they were required to offer their comments. In the facts of that case, the assessee, a land developer, received the entire consideration for development of land, even as little work had been completed on the land. The Apex Court, on the matter travelling to it, held that the assessee having received the entire consideration, with time being not of essence, the same is to be recognised as income, in computing which though the estimated expenditure on development is to be allowed; the assessee admittedly following mercantile system of accounting. That is, the expenditure on the work to be undertaken is to be regarded as incurred, making an informed provision in its respect, which again represents well-settled law: (s....
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....ase operate to book sale only upto Rs. 6 lacs. Cost in excess of that adjusted against sale (at Rs. 4.8 lacs, i.e., going by our earlier example), is to be carried in accounts as un-billed sales (valued at cost). The exercise would need to be carried, both at the beginning and close of the year, as each year is under the Act a self-contained unit of assessment, so that profits for that year only could be brought to tax in assessment (Krishnaswami Mudaliar (A.) (supra)). The amount received (or even not received), cannot though form the basis of determining the profits and gains of a business following mercantile system of accounting, as adopted by the AO, though to be fair to him, there is no declared basis for recognizing income by the assessee despite being in business for long and avowedly following mercantile system of accounting. One could argue that the suggested method amounts to following the percentage completion method, while the registration of sale deed (as a basis for recognizing income) suggests a project completion method. In this regard, it may be stated that the argument is only wholly without basis. The assessee is admittedly following AS-9, which itself in compl....
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.... entire money due on a construction has been received from the customers under the agreement, and uniformly so, signifying the passing of the rights to the buyers. The assessee shall in such a case be allowed estimated expenditure on the work yet to be completed. 4.9 The matter, accordingly, is set aside to the file of the AO for the purpose. The AO shall adjudicate taking all the relevant facts and circumstances into account, in accordance with law, issuing definite finding of facts after hearing the assessee, who shall cooperate in the said proceedings, furnishing the materials sought and relevant for deciding the issues arising, as indeed for finalisation of accounts. We decide accordingly. 4.10 This leaves us with second part of the addition, i.e., for rs. 707.59 lacs. The same do not represent advances from customers, but a liability nevertheless. The confirmations qua which being furnished only by 28/12/2011, i.e., on the last date of hearing in the assessment proceedings, no meaningful verification was possible. How could the AO be under the circumstances issue a definite finding in the matter, as Sh. Usrethe would asseverate before us. He would though seek to clarify that....
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....he assessee. The land owner has thus no means to either specify the amount to sale; decide the time of sale; and finally, even the extent of its receipt, which is much after the receipt by the assessee; his accounts reflecting credit in no insubstantial sums due to the land owners (who rather than by name are stated in the name of the relevant project). It is all this that raises considerable doubts as to the genuineness of the credit/s; the land sale extending to years. The ld. CIT(A), though noting that the land owner is entitled to a part of sale consideration, has not issued any finding in the matter even as he deletes the addition. We have, even ignoring the legal aspect of the transaction, examining it strictly from the stand-point of accountancy and tax perspective, find it untenable from the point of view of confirmation, as indeed from the practical stand-point. It would be a different matter where the land owner and the assessee have entered into a joint venture, agreeing to share the profits of the real estate development. The issue qua the genuineness of these credits, as indeed their true nature, is also, accordingly, restored to the file of the AO for proper verifica....