The issues before the Tribunal are - Whether an accounting method followed by an assessee continuously for a given period of time can be presumed to be correct, utill the AO has reasons to believe that system does not reflect true and correct profit; Whether in terms of section 145, AO is required to establish any illegality or facts creating hurdles in computing the corrct income, before rejecting the principle of accounting; Whether when res judicata not being applicable to income-tax proceedings, principle of consistency can still be followed unless there is material change in the fact; Whether the sale value of the plots/flats can be included in the revenue of the assessee, when the assessee has rightfully assigned the allotment rights of such flats/plots in favour of its sister concern and Whether expenses not claimed by the assessee can be added back during the computation of the income of the assessee. And answers to all these questions go in favour of the assessee.
Facts of the case
A) Assessee company was engaged in the business of development of township in the name and style of “Malibu Towne” at Gurgaon (Haryana). The assessee company filed its return of income which was selected for scrutiny and a notice u/s 143(2) was served. The assessee company followed partial project completion method of accounting. During the assessment proceedings, AO observed that against the name of certain purchasers, assessee had shown zero balance towards receivable. In the opinion of the AO, once nothing was to be recovered then assessee ought to have accounted for these receipts in the sale. Therefore, he issued a show cause notice to the assessee inviting its explanation as to why advances received from some customers, when there was a zero balance to be recovered, were not accounted for sales.
In response to this AR submitted that, the revenue in respect of sale of plots/apartment were recognized upon registration of the Sale Deed of the plot in favour of the customer. The physical possession of the plots/apartment was to be handed over simultaneously upon registration of the Sale deed and in the absence thereof, possession was not handed over. The sale deed was executed only upon receipt of all monies due and receivable by the assessee company. AR further submitted that, the total receipt comprised of (a) basic sale price (b) preferential location charges (c) external development charges (d) maintenance deposit (e) property registration charges and stamp duty. In respect of the statement furnished disclosing 'NIL' balance, the customer was still liable to pay demand raised by the company in respect of (a) maintenance deposits (b) contingency deposit (c) property registration charges and stamp duty. Thus, in such circumstances the assessee continued to remain the legal owner of the property and no sale had been recorded in accordance with the method of accounting regularly followed and approved by the Revenue. Thus, assessee relied upon the concept of consistentency.
AO observed that partial project completion method valued by the assessee was in total disregard to AS-7. In terms of AS-7, percentage completion method had to be mandatorily followed by all developers and if the same was not followed by assessee, his accounts were not correct, accurate and complete. Therefore, assessee's income or revenue for the relevant A.Y. was recomputed by including properties which were complete and ready for possession and all advances received by the assessee company.
Aggrieved, the assessee appealed before the CIT (A). AR contended that AS-7 was applicable only to construction contractors and not to builder or real estate developers. The assessee further submitted that it was following similar method of accounting in the past also which was never disputed by the AO in AYs 2003-04 to 2005-06. It was also contended that accounting standard not prescribed under the Act were not binding for tax assessment. The assessee had emphasized that it was not a contractor but it was engaged in the business of developer and sale of real estates. The sale of immoveable property and agreement for the same was an independent agreement between the purchaser and the seller as an independent party. The assessee contended that its rights vis-à-vis the rights of the purchasers were to be seen in the light of agreement. The assessee also contended that it was not given due opportunity of hearing and sought permission for leading additional evidence. CIT(A) called for a remand report from the AO on the admission of additional evidence as well as his comments on the merits of such evidence.
AO contended that conditions enumerated in Clauses A to D in sub-rule (1) of Rule 46A were not available in this case, therefore, the additional evidence should not be admitted. Upon perusal of the additional evidence, CIT(A) observed that the objective of AS-7 was to prescribe the accounting treatment of revenue and cost associated with construction contract i.e. the allocation of contract revenue and contract cost to the accounting period in which construction was performed. CIT(A) followed the principles of consistency and CIT (A) observed that sales had not materialized and therefore, they cannot be recognized as a revenue in this year. Hence, the addition was deleted.
DR submitted that once total amount was received by the assessee towards sale of a plot then it should be construed that sale had been finalized and assessee ought to have recognized the revenue. By not registering the conveyance deed, assessee cannot defer the recognition of revenue. DR relied upon the Tribunal’s order in the case of Pratima Builders Vs. ITO where it was held that there was no justification for not booking credit for any profit until the sale deeds were registered in favour of the purchasers even though the sales have been made and the price was received.
On the other hand, assessee's counsel submitted that in terms of section 145 of the Act income chargeable under the head “profits and gains of business” was to be computed in accordance with either cash or mercantile system of accounting. The assessee was following mercantile system of accountancy which was accepted by the revenue in the past. AR further submitted that the department cannot change the accounting method adopted by the assessee unless, some illegalities or some facts which created a hurdle for the AO in computing the true income of the assessee was established.
B) Assessee had entered into an agreement with its sister concern M/s. Kohli One Housing & Development Pvt. Ltd (KOHD). By virtue of this agreement, assessee had agreed to give allotment rights of 44 plots and 11 condominiums for a consideration. This agreement was entered into in 2003. There was no registered sale deed and only allotment rights were allotted which were transferable. Out of said 44 plots and 11 condominiums, booking rights of 24 plots were sold by KOHD. Rest were shown in the closing stock. Conveyance deeds in respect of 12 plots were executed during this year and the sale proceeds were taken to the revenue account in consonance with accounting policy regularly followed by the assessee. KOHD had shown sale of 24 plots at Rs.12,09,45,742 out of which Rs.3,79,23,057 was shown as payable to the assessee. KOHD had shown balance amount of Rs.830,22,685 as profit on sale of 24 plots. The case of the AO was that this arrangement was sham. The assessee cannot assign the allotment rights to the sister concern. It was a developer and there was no reason as to why it would assign such rights to the sister concern. AO rejected all the contentions of the assessee. He observed that total sale value of all the plots and the flats was to be considered as revenue of the assessee. On appeal, CIT(A) accepted the contention of the assessee and deleted the addition.
C). Assessee had filed a Cross-objection, where it was pleaded that CIT(A) had erred in rejecting assessee’s claim for deletion of addition relating to expenditure pending adjustment amounting to Rs.705,66,000. The assessee submitted that the amount of Rs.705,66,000 was a debit balance under the head “development expenses pending adjustment” in the balance sheet. AO had disallowed this amount and added back to taxable income. The assessee contended before the CIT(A) that it had not claimed the deduction of this amount as expenses in this year, therefore, it cannot be added back.
Having heard the parties, the Tribunal held that,
A) ++ as far as the submissions of the DR that CIT(Appeals) has entertained additional evidence and did not provide opportunity of hearing to the Assessing Officer is concerned, we do not find any force in this submission. We find from the assessment order that Assessing Officer had issued a show-cause notice on 21.11.2008. The assessee has submitted a detailed reply to this notice. Assessing Officer has passed the assessment order on 29.12.2008. He did not call for any further information and no such issue is discernible from his order. First Appellate Authority has admitted the additional evidence in order to understand what treatment has been given to these receipts in the future years when according to the method of accounting followed by the assessee, sales were materialized, therefore, there is no violation of Rule 46A and the judgments relied upon by the DR to this effect are not applicable on the facts of this case. As far as the other judgments relied upon by him are concerned, they are quite distinguishable on facts. He made reference to the decision of the ITAT, Bangalore in the case of Pratima Builders. The rights of the parties are to be seen in the light of the agreement executed by them. In the clauses 21 and 22 specifically provide that unless a conveyance deed is executed and registered, the seller shall continue to be the owner of the plot. Apart from this factual aspect, we find that from assessment years 2003-04, 2004-05 and 2005-06, similar accounting principles adopted by the assessee have been accepted by the revenue. In the findings of the Assessing Officer, he nowhere assigned any reason enabling him to change the method of accounting consistently followed by the assessee. Sub-section (3) of section 145 suggest that where Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee or the method of accounting is not inconsequence with the accounting standard notified under sub-section (2) and they are not regularly followed by the assessee. A.O. may determine the true income as per his best judgment. In the assessment order, nowhere Assessing Officer has expressed his difficulty either about the method or about the completeness of the accounts which can create an hindrance in computing the true income. Accounting method followed by an assessee continuously for a given period of time has to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that system does not reflect true and correct profit. Taking into consideration all these aspects, we do not find any reason to change the method of accounting in this year which was accepted in the past. The A.O. has not assigned any reason for this change;
++ that the doctrine of res judicata does not apply to income-tax proceedings since each assessment year is independent of the other but where an issue had been decided consistently in a particular manner for earlier assessment years, for the sake of consistency the same view should continue to prevail for subsequent years unless there is material change in the fact;
B) ++ on due consideration of the facts and circumstances, we do not find any force in the contentions of the Assessing Officer that it is a sham transaction. It can be explained with a simple example, namely, assessee has launched a scheme for development of plots and flats, “A” books a plot with the assessee. After 2-3 years when the plot was developed, “A” wants to sell the plot to “B”. He approached the assessee with the purchaser and made a prayer that he is surrendering all his purchase rights in favour of “B”. Kindly execute the sale deed. Assessee would charge the amount agreed with the “A” at the time of booking. If “A” is getting something more from “B” then the amount paid or payable by him to the assessee in lieu of assignment of his allotment rights then how that can be an income of the assessee. Assessing Officer miserably failed to appreciate this aspect, and observed that it is a bogus and sham transaction. He has not assigned any reason for such conclusion. DR also pointed out that it is a colourable device. According to him, it should be appreciated in the light of human probability and he referred three decisions, which are quite distinguishable on facts. Assessing Officer has not brought any facts on the record which suggests any collusion, any attempt to evade tax, he simply observed that booking of plot/flat by the sister concern is not acceptable. To our mind, that cannot be a basis to doubt the transaction. We could understand the case of Assessing Officer, if he had find out that booking rights were not given on arm’s length to the sister concern. The Assessing Officer has not referred any material in the assessment order. In view of the above discussion, we do not find any merit in these two grounds of appeal. They are rejected;
C) ++ we have duly considered the rival contentions and gone through the record carefully. When expenses are not claimed by the assessee in the year they cannot be added, it would amount double addition. Therefore, we allow the solitary ground raised in the cross objection and delete the addition of Rs.7,05,66,000 from the computation of income because its deduction was not claimed by the assessee.
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