2011 (11) TMI 35 - HC - Income Tax

Block assessment - Nature of cancellation charges - the addition was made by the assessing officer on the ground that the assessee ought to have charged cancellation charges from customers who cancelled their bookings and not on the basis of any material found during search. - CIT(A) and ITAT held that the addition for cancellation charges was not justified. - No substantial question of law arises - decided in favor of assessee. Project completion method or the completed contract method - Accounting Standards 7 (AS7) - The finding of the CIT (A) was approved by the Tribunal with the observation that the department has accepted the assessee s method of accounting namely the project completion method and therefore there was no justification for adopting the percentage completion method for one year on selective basis. - In view of decision of Supreme Court in Commissioner of Income-Tax v. Bilahari Investment P. Ltd. 2008 (2) TMI 23 - SUPREME COURT held that - No substantial question of law arises - decided in favor of assessee. Addition of Rs. 3, 82, 94, 536/- being stamp duty and electrification charges recoverable by the assessee. - . It was explained that in case there is any surplus of the registration and electrification charges collected from the customers over the amounts paid to the State Government the surplus would be shown as income in the year of receipt. The assessing officer rejected the explanation on the ground that revenue receipts and capital expenditure cannot be adjusted against each other. He therefore added the amount of Rs. 3, 82, 94, 536/- as the assessee s income. - when the assessee paid the registration and electrification charges they were not claimed as deduction in the profit and loss account. On these findings of fact the Tribunal agreed with the CIT(A) that the amount cannot be added. - Held that - No substantial question of law arises - decided in favor of assessee. Acceptance of additional evidence - Held that - The Tribunal erred in its interpretation of the provisions of Rule 46A vis- -vis Section 250(4). Its view that since in any case the CIT (A) by virtue of his conterminous powers over the assessment order was empowered to call for any document or make any further enquiry as he thinks fit there was no violation of Rule 46A is erroneous. The Tribunal appears to have not appreciated the distinction between the two provisions. If the view of the Tribunal is accepted it would make Rule 46A otiose and it would open up the possibility of the assessees contending that any additional evidence sought to be introduced by them before the CIT (A) cannot be subjected to the conditions prescribed in Rule 46A because in any case the CIT (A) is vested with conterminous powers over the assessment orders or powers of independent enquiry under sub-section (4) of Section 250. That is a consequence which cannot at all be countenanced. - Decided in favor revenue. Receipt of advances from customers - genuineness of the advances - Held that - The issue relating to the addition of Rs. 1, 61, 67, 600/- made under Section 68 of the Act is restored to the CIT (A) who shall comply with the requirements of Rule 46A and take a fresh decision on the merits of the addition in accordance with law.

The core legal questions considered by the Court in this appeal filed by the Revenue against the Income Tax Appellate Tribunal's order relate to the correctness and legality of various additions made to the assessee's income under the Income Tax Act, 1961. The issues raised are:

1. Whether the assessing officer was justified in adding cancellation charges retained by the assessee to its income when the assessee failed to explain the same satisfactorily.

2. Whether the assessing officer was correct in holding that the assessee's determination of income on completion of projects amounted to deferment of tax liability, which should be assessed annually.

3. Whether the addition based on the percentage completion method of accounting was correct or whether the project completion method followed by the assessee was valid.

4. Whether undisclosed transfer charges received by the assessee from sale of space were liable to be added to income at 3.6% during the relevant year.

5. Whether the amount recoverable by the assessee for stamp duty and electrification charges was liable to be added back to income as revenue receipts.

6. Whether the assessing officer rightly invoked Section 68 of the Act to treat advances received by the assessee as unexplained cash credits due to failure to furnish confirmation evidence.

7. Whether the Tribunal correctly upheld the CIT (A)'s admission of additional evidence without providing the assessing officer an opportunity to rebut, allegedly violating Rule 46A of the Income Tax Rules.

Issue 1: Addition of Cancellation Charges

The assessing officer added Rs. 10,97,850/- to the assessee's income as cancellation charges, based on seized documents showing forfeiture of earnest money in one instance and presumed similar treatment in other cases. The assessee contested that the single seized document was not representative and related to a different entity. The CIT (A) found no evidence of cancellation charges received outside the books and noted the seized document pertained to forfeiture, not cancellation, and belonged to a separate group entity. The Tribunal upheld the CIT (A)'s view that the addition was based on assumption rather than material found during search.

The Court observed that this issue was purely factual, with the authorities having examined the seized documents and facts in detail. No substantial question of law arose, and the Court declined to admit this issue.

Issues 2 and 3: Method of Accounting - Project Completion vs. Percentage Completion

The assessing officer added Rs. 28,21,000/- on the basis that the assessee's use of the project completion method deferred tax liability, and profits should be computed annually using the percentage completion method. The CIT (A) found that possession was handed over only after full payment and project completion, supported by occupancy certificates. The CIT (A) held that the project completion method was a recognized and suitable accounting method for developers, and the assessee's books were properly maintained without manipulation. The Tribunal concurred, holding that selective application of the percentage completion method for one year was unjustified and distorted true profits.

The Court referenced Supreme Court precedents confirming that both methods are recognized under Accounting Standard 7 and the Income Tax Act. The project completion method does not amount to impermissible tax deferral. The Court found no substantial question of law and declined to admit these issues.

Issue 4: Addition of Transfer Charges

The assessing officer added Rs. 2,19,701/- as transfer charges based on seized material showing one transaction with transfer charges at 3.6%. The assessee argued this single instance could not be generalized. The CIT (A) found the seized receipt did not mention the assessee or actual receipt of transfer charges and deleted the addition. The Tribunal did not entertain any further challenge by the Revenue.

The Court noted no grounds were raised to challenge the deletion and declined to admit this issue.

Issue 5: Addition of Stamp Duty and Electrification Charges

The assessing officer added Rs. 3,82,94,536/- representing stamp duty and electrification charges recoverable from buyers, treating these as revenue receipts improperly shown as loans and advances. The assessee contended these charges were recoverable advances, not expenses or revenue. The CIT (A) found these charges were not claimed as expenses, were shown as recoverable advances, and no revenue effect arose until actual recovery. The Tribunal agreed, holding the assessee's method of accounting acceptable and the addition unjustified.

The Court emphasized that these findings were factual and based on books of accounts. No material was presented to disturb these findings. The issue did not raise any substantial question of law and was not admitted.

Issues 6 and 7: Addition under Section 68 and Admission of Additional Evidence under Rule 46A

The assessing officer added Rs. 1,61,67,600/- as unexplained cash credits under Section 68, due to the assessee's failure to furnish confirmation letters for advances received from 28 customers. The assessee submitted confirmations for cash advances as required but not for advances received by cheque, which were not originally demanded by the AO. The CIT (A) admitted confirmations produced during appeal proceedings, treating them as fresh evidence under Rule 46A, and deleted the addition. The Tribunal upheld this, rejecting Revenue's contention that Rule 46A was violated and that the AO was denied opportunity to rebut.

The Court framed two substantial questions of law: (1) whether the Tribunal erred in deciding the addition on merits without affording the AO an opportunity to be heard as mandated by Rule 46A(3); and (2) whether the CIT (A) could admit additional evidence without complying with Rule 46A, relying instead on his powers under Section 250(4).

The Court held that Rule 46A strictly governs admission of additional evidence before the CIT (A). While the CIT (A) has conterminous powers under Section 250(4) to call for evidence suo moto, this does not exempt him from complying with Rule 46A when the assessee invokes it to produce fresh evidence. The CIT (A) admitted the confirmations on the ground that the assessee was prevented from producing them earlier, satisfying Rule 46A(1)(c), and recorded reasons as required by Rule 46A(2). However, he failed to comply with Rule 46A(3), which mandates that the AO must be given a reasonable opportunity to examine and rebut the additional evidence before it is taken into account.

The Tribunal erred by conflating the CIT (A)'s powers under Section 250(4) with the procedural safeguards under Rule 46A, thereby rendering Rule 46A ineffective. The Court emphasized the importance of strict adherence to Rule 46A to ensure fairness and finality in tax proceedings, referencing Supreme Court precedent that parties must produce all evidence at the earliest stage.

The Court restored the issue relating to the addition under Section 68 to the CIT (A) with directions to comply fully with Rule 46A, including affording the AO an opportunity to examine and rebut the additional evidence, and to decide the matter afresh in accordance with law.

Significant Holdings and Core Principles

Regarding the method of accounting, the Court reiterated that both the project completion method and the percentage completion method are recognized accounting methods under Accounting Standard 7 and the Income Tax Act. The Court quoted:

"Recognition/identification of income under the 1961 Act is attainable by several methods of accounting... The completed contract method is one such method. Similarly, the percentage of completion method is another such method."

The Court emphasized that the project completion method does not constitute impermissible deferment of tax liability.

On the procedural issue of admission of additional evidence, the Court held:

"The conditions prescribed in Rule 46A must be shown to exist before additional evidence is admitted and every procedural requirement mentioned in the Rule has to be strictly complied with so that the Rule is meaningfully exercised and not exercised in a routine or cursory manner."

It further held:

"It is only when [the CIT (A)] exercises his statutory suo moto power under sub-Section (4) of Section 250 that the requirements of Rule 46A need not be followed. On the other hand, whenever the assessee who is in appeal before him invokes Rule 46A, it is incumbent upon the CIT (A) to comply with the requirements of the Rule strictly."

And:

"The Tribunal erred in its interpretation of the provisions of Rule 46A vis-`a-vis Section 250(4)... If the view of the Tribunal is accepted, it would make Rule 46A otiose and it would open up the possibility of the assessees' contending that any additional evidence sought to be introduced by them before the CIT (A) cannot be subjected to the conditions prescribed in Rule 46A."

Accordingly, the Court's final determination was to uphold the Tribunal's order on all issues except the addition under Section 68. That issue was remanded to the CIT (A) for fresh consideration after strict compliance with Rule 46A, ensuring the AO is given an opportunity to examine and rebut the additional evidence.

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