TMI Blog2019 (5) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... and in issue as a fixed asset cannot form the sole criteria to hold that the same gives rise to capital loss. As decided in KEDARNATH JUTE MANUFACTURING COMPANY LIMITED VERSUS COMMISSIONER OF INCOME-TAX (CENTRAL), CALCUTTA [ 1971 (8) TMI 10 - SUPREME COURT] an assessee s book treatment cannot form the sole guiding factor giving rise to a tax incidence. This tribunal s decision in Canara Bank v/s. JCIT [ 2017 (11) TMI 1425 - ITAT BANGALORE] also holds that any treatment given at the assessee s behest in books of account; item-wise on expenditure, has no relevant to decide taxability or otherwise thereof under the provisions of the Income-tax Act, 1961. We reject Revenue s instant substantive ground as well and cured that the assessee is entitled to treat its land as stock-in-trade than fixed assets/investments. DR contended that the AO in his assessment order had recorded assessee s consent on the instant issue during scrutiny - No substance in the technical plea as well as the purpose of a scrutiny assessment is to determine appropriate taxable income as per provisions of the Act only. This tribunal s co-ordinate bench s decision in Canara Bank (supra) holds that est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 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 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. The assessee also claimed that they affected registration of agreement without possession certificate at the request of the respective purchaser and risk has not been transferred. However the assessee could not elaborate how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orceable 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 AS 9 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 not yet been recognized). When the seller has transferred to the buyer all significant risks and rewards of ownership, it would be appropriate to recognise revenue at that stage. When the assessee itself has taken the 'Thumb Rule' of Registration to be taken as effective Sale, now it can not backtrack only because possession was not given. When the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale Agreements were registered without possession for total ₹ 2663100/ . (2) Upto 31st March 2011 relevant to Asst. Year 2011 12 for which assessment is being made advance received against these 2 flats was as follow Sujata Pal 1014475 (Not ₹ 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 ₹ 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 view of above submissions add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -5-11 1,19,350 4-7-12 3,42,400 1,79,025 5-10-12 2,05,440 12-4-13 1,41,260 21-5-13 17,100 10,48,600 Final total (as wrongly taken by the Income-tax Officer in the assessment order) 11,93,500 13,22,520 Provisional Possession letter issued on 15.3.14 to Rohit Basu and on 17. 4.14 to Sujata Pal is enclosed as additional evidence Annexure 'D' and 'E'. Accounting Stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,14,475 11,93,500 12,88,375 (Datewise details of above amount is given in Supplementary Written Submission Page 2) The AO while making Assessment for Asst. Year 2011 12 has taken into account payments made after 31st March 2011. The AO has wrongly taken into account payments made up date of Assessment Order which is obvious not correct. It is seen that Accounting Standard 9 has been applied by AO. I agree with the appellant that only AS 7 applies in the case of t appellant. Thus it can be admitted stated that mere registration of Agreement for Sale without full payment and without possession does not complete the Sales and this cannot be termed as concealed Sales. The advances received by the appellant ₹ 12,88,375/ from the two parties were clearly part of the total advances received (₹ 8,12,95,899/ ) shown by the appellant in its balance sheet (Rohit Basu (₹ 2,73,920/ ) appears at serial number 89 while Sujata Pal (₹ 10,14,475/ ) appears at serial number 119). In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue for our consideration in these two appeals is that whether both the lower authorities were justified in making additions in the hands of assessee by applying percentage completion method as against the project completion method/completed contract method followed by the assessee. The assessee company which was incorporated in June, 2009 owns a land. Vide agreement dated 1.4.2009 (registered on 17.4.2009) it 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he owner a sum of ₹ 5,01,00,000/ (Rupees Five Crores One Lakhs) towards refundable security deposit for ensuring the performance of the terms of contract. The security deposit is refundable as per clause (11) of the agreement. The refund of security is also linked with completion of construction and handing over of possession of 32% of the constructed area to the owner. The manner of refund of security deposit is phase wise as specified in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed u/s 153A r.w respect to section 143(3) of the Act. This fact cannot be disputed that the assessment of income/loss in these years support the contention of the assessee that the accounting method followed by the appellant stands accepted according to which the amounts received from proposed buyers (through developer) in advances against sale of flats shown as liability in the balance sheet has been accepted. The reason for showing such advances was the liability of assessee 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 ₹ 19 lakhs and for the assessment year 2011 12 sum of ₹ 4,65,35,702/ was received as advance from proposed buyers. The revenue authorities have accepted this system for accounting adopted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which was not devolved on it. 28. Now the issue as to whether a person is mandatorily required to adopt percentage completion method or not. The method of accounting is governed by section 145 of the Act and as per section 145(2) of the Act the income is to be computed in accordance with either cash or mercantile system of accounting to be regularly employed. This sub section further empowers Central Government to notify the accounting standards to be followed by any case of assessee or in respect of clause from time to time and sub section 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Act, prima facie, the ITO has for purposes of section 10 12 of 1922 act to compute income, profits and gains in accordance with method of accounting regularly employed. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profits may be properly deduced, the ITO is bound to compute profits in accordance with method of accounting. but where in the opinion of ITO, the profits cannot be properly deduced from eth system of accounting adopted by assessee it is open to him to adopt a more suitable basis 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deviated in the present two years without there being any finding as contemplated u/s 145(3) on the basis of satisfaction required by that section viz., (1)about correctness or completeness of the accounts of the assessee or (2) about the fact that the assessee has not regularly employed the method of accounts provided in section 145(1) or (3) that the income has not been computed in accordance with the standards notified u/s 145(2). 33. Now it is an admitted fact based on the financial statement and audited reports for 2010 11 and 2011 12 accepted by the revenue authorities in the assessment proceedings 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprises, M/s. Ghanshyam Enterprises and M/s. Swaminarayan Enterprises. In the subsequent year, i.e. the assessment year 2007 08 the profit declared from the projects run by these three proprietary concerns ranges from 43 per cent to 46 per cent. The Supreme Court in the case of Sanjeev Woolden Mills v. CIT (supra), has clearly held that to attract the proviso to section 145(1) of the Act, the Assessing Officer should be of the view that the accounts are correct and complete but the method employed is such that the income cannot be property deduced there from. The choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show that 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ride the provisions of section 145 in so far as the computation of business income under the Income Tax Act for the purpose of determining income is concerned. In the instant case, we find that the learned Assessing Officer has brought no material on record to show that the system of accounting adopted by the assessee for the year under appeal was not consistently followed y the assessee or the system adopted was a defective system. In our considered view, even a project completion method is also a recognized system of accounting. Simply the Institute of Chartered Accountants of India has recommended the percentage completion method does not mean that project accounting or the same is a defective 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure (P) Ltd (2017) 81 taxmann.com 58 (Punjab Haryana) order dated 13.8.2015 confirmed the view taken by the Tribunal deciding in favour of the assessee relating to the issue of the project completion method adopted by the assessee vis vis percentage completion method applied by us, the Assessing Officer observing as follows; The assessee in reply to the query raised by the Assessing Officer had inter alia claimed that it had been consistently following method of booking of the revenue on the completion of the flat when full payment had been made to it by the person concerned and possession was delivered to him. It was pointed out that neither Accounting standard 9 (AS 9) or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case before us, the assessee had chosen to compute its income on the basis of project completion method i.e. recognizing the income on the completion of the project and not from year to year whereas the case of the revenue was that it should account for the income as it is generated in the hands of the assessee i.e. from year to year on the basis of the work completed being relatable to the revenue generated from year to year. The Hon ble Supreme Court in CIT Vs. Bilahari Investment (P) Ltd (supra) had held that 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income. In the absence of any prohibition or restriction under the Act for doing so, it cannot be held that the approach of the CIT(A) and the Tribunal was erroneous or illegal in any manner so as to call for interference by this Court. No substantial question of law arises. Consequently, finding no merit in these appeals, the same are dismissed. 38. It is well settled that the project completion method is one of the recognized methods of accounting. In CIT v Hyundai Heavy Industries Co. Ltd (2007) 291 ITR 482/ 161 Taxman 191 (SC) the Supreme Court held as follows: Lastly, there is a concept in accounts which is called the concept 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 N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessing officer to adopt the percentage completion method for one year(the year under appeal) on selective basis. This will distort the computation of the true profits and gains of the business. For these reasons, we are of the view that no substantial question of law arises. We, therefore, decline to admit question Nos. 2 and 3. 41. From perusal of all the judgments it has been consistently held rather a settled law that the action of revenue authorities cannot be held justified if they substitute another method of accounting on the assessee which in the instant case was imposing of percentage completion method on the assessee even when it has been consistently maintaining the regular books of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub section (1)- (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains. . 43. From the perusal of above section it is crystal clear that before the insertion of this section there was no legal obligation on the part of the assessee to follow percentage completion method only. Before insertion of this section person engaged in construction and service contracts were free to follow either the project completion/ Completed project method or percentage completion method in accordance with the provisions of Section 145 of the Act. In the instant appeal assessee even though not directly involved in the construction activity and it is merely gave its land for development and it was agreed between the assessee company and the developer that 32% of the saleable area shall be given to the assessee. The assessee is constituently followed completed project contract/per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rict Sub Registrar, Durgapur for verification of such land sales and its Stamp duty value: Office of the Income tax Officer, Ward 7(1),Kolkata Aayakar Bhizvan, P 7, Chowing/zee Square,Kol 700069 Ph. 8902196988 No.ITOIW 7(l)/NadialI33(6)/20I3 14/ Dated 31 7 2013 To The Addl. District Sub Registrar, Durgapur City Centre Durgapur 713216 Sub: Information sought for u/s 133(6) of the Income tax Act in the case of Nadia Construction Pvt. Ltd. (PAN: AACCN8686N) For the F. Y 2010 11 relevant to the A. Yr. 2011 12 Matter regarding Please refer to the above As evident from the records of Nadia Constructions Pvt. Ltd. for the F. Y 2010 11 relevant to the A. Yr. 2011 12, my abovementioned assessee sold some lands. Now, regarding the same, following information are to be submitted by your office : Details of Sale of land by Nadia Constructions Pvt. Ltd during the financial year 2010 11 (including Stamp duty value) Details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63,675 ₹ 35,66,632 3. 02/11/2010 Gopalpur 302 decimal ₹ 25,62,470 ₹ 39,26,372 4. 02/11/2010 Gopalpur 599 decimal ₹ 50,82,515 ₹ 74,10,828 ₹ 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 decima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds value instead of stamp duty value. Thus, there was not deliberate intention on our part to conceal anything for tax. Thus, it is crystal clear that the assessee not only failed to 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 ₹ 27,45,482 ₹ 164,730 ₹ 29,10,212 2. 10/03/2018 Gopalpur 599 decimal ₹ 54,45,509 ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness . In support of the appeal the appellant has furnished the following written submission first on 08.05.2015: The appellant is a Property Developer as per Point 9 of the face of Assessment Order. As per Page 2 of Assessment Order the main activity of the assessee being Real Estate Developer and the assessee also has Investments in Lands as Fixed Assets. As per Asst. Order Page 2 on verification of accounts it is found that the assessee has claimed Loss on Sales of Land Property ₹ 6,73,482/ . 4. Land Parcels were sold as per Page 5 of Assessment Order. As per Accounts and also as per Page 5 of Assessment Order Property No. Purchase cost (Rs.) Sale value (Rs.) 1. 32,09,682 28,17,020 2. 24,44,495 21,63,675 56,54,177 49,80,695 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In remand report ignorance is no excuse . The appellant has in Written Submission Page 5 Para8 contended as below (8) Now as regards Land being shown erroneously under the head Fixed Assets it has been held that nomenclature is not sole test to decide a matter. Treatment of a transaction in books is not decisive. Accountancy is a matter of taste. Bad Accounting does not effect taxability or non taxability. Please refer to Para 22 on Page 235 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale Value Full Value of Conisderation 1. 02/11/2010 Gopalpur 332 decimal ₹ 28,17,020 ₹ 46,82,534 2. 02/11/2010 Gopalpur 332 decimal ₹ 21,63,675 ₹ 35,66,632 3. 02/11/2010 Gopalpur 302 decimal ₹ 25,62,470 ₹ 39,26,372 4. 02/11/2010 Gopalpur 599 decimal ₹ 50,82,515 ₹ 74,10,828 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 1,95,86,366 Less : Purchase cost ₹ 1,44,13,298 Alleged short-term capital gain ₹ 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 nomenclature is not sole test to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 7. Heard rival contentions. The Revenue s only endeavor during hearing is to go by the assessee s books treating the land in issue as a fixed asset than stock-in-trade. It vehemently urges us to treat the asset not as stock in trade there giving rise to business loss. We find no reason to accept the Revenue s instant arguments. The fact remains that the assessee is engaged in property development business. It has been developing residential projects throughout all preceding assessment years. We therefore are of the view that the assessee s mere book treatment of the land in issue as a fixed asset cannot form the sole criteria to hold that the same gives rise to capital loss. Hon ble apex court landmark is Kedarnath Jute Mills case (1971) 82 ITR 363(SC) already holds that an assessee s book treatment cannot form the sole guiding factor giving rise to a tax incidence. This tribunal s co-ordinate bench decision in (2017) 60 ITR (Trib) 1 (Bang) Canara Bank v/s. JCIT also holds that any treatment given at the assessee s behest in books of account; item-wise on expenditure, has no relevant to decide taxability or otherwise thereof under the provisions of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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