NEHA ENTERPRISES, MUMBAI V. ACIT 17(2), MUMBAI

ITA 1281/MUM/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9765 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2007-2008
• Appeal Filed On: 23-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARJU GARODIYA
• Assessee Lawyers: DARSHAN B GA NDHI
• Keywords: Reopening of assessment
• Section: 143(3); 142(1); 147; 148

Judgement Text

1 ITA /MUM/2014 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J, MUMBAI BEFORE SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO.1281/MUM/2017 (ASSESSMENT YEAR 2007-08) M/S NEHA ENTERPRISES H-501, GUNDECHA CHAMBERS NAGINDAS MASTER ROAD FORT, MUMBAI-23 PAN : AAFN1662R VS ACIT-17(2), MUMBAI APPELLANT RESPONDENT APPELLANT BY SHRI DARSHAN B GANDHI RESPONDENT BY MS ARJU GARODIYA DATE OF HEARING 05 -07-2017 DATE OF PRONOUNCEMENT 26-07-2017 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE CIT(A)-28, MUMBAI DATED 21-01-2017 AND IT PERTAINS TO ASSESSMENT YEAR 2007- 08. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE H AS FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007-08 ON 24-10-2007 DECLA RING TOTAL INCOME OF RS.8,07,46,810. THE ASSESSMENT WAS COMPLETED U/S 1 43(3) ON 30-12-2009 DETERMINING TOTAL INCOME AT RS. 8,07,46,810 ACCEPTI NG INCOME DECLARED BY THE 2 ITA /MUM/2014 ASSESSEE. SUBSEQUENTLY, THE CASE WAS REOPENED U/S 147 FOR THE REASON THAT INCOME CHARGEABLE TO TAX HAS BEEN ESCAPED ASSESSMEN T ON ACCOUNT OF NON DISCLOSURE OF INCOME FROM SALE OF FLAT. THEREFORE, THE AO ISSUED A NOTICE U/S 148 CALLING FOR RETURN OF INCOME FROM THE ASSESSEE. THEREAFTER THE CASE WAS CONVERTED INTO SCRUTINY ASSESSMENT AND NOTICES U/S 143(2) AND 142(1) WERE ISSUED CALLING FOR CERTAIN SPECIFIC DETAILS. IN RE SPONSE TO SHOW CAUSE NOTICES, THE ASSESSEES AUTHORIZED REPRESENTATIVE APPEARED F ROM TIME TO TIME AND FURNISHED RELEVANT DETAILS, AS CALLED FOR. THE AO COMPLETED ASSESSMENT U/S 143(3) R.W.S. 147 OF THE ACT ON 26-03-2015 DETERMIN ING TOTAL INCOME AT RS.8,78,02,640 INTERALIA MAKING ADDITIONS ON ACCOUN T OF ADVANCE RECEIVED TOWARDS SALE OF FLATS AMOUNTING TO RS.34,21,000. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PRE FERRED APPEAL BEFORE THE CIT(A). BEFORE CIT(A), THE ASSESSEE CHALLENGED THE VALIDITY OF REOPENING OF ASSESSMENT. THE ASSESSEE ALSO AGITATED ADDITIONS M ADE BY THE AO TOWARDS ADVANCE RECEIVED FOR SALE OF FLATS. THE ASSESSEE F URTHER CONTENDED THAT IT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND PROJE CT COMPLETION METHOD FOR RECOGNITION OF REVENUE AND AS SUCH, THE REVENUE IS RECOGNIZED AS AND WHEN FLATS ARE SOLD TO THE BUYERS. IN RESPECT OF ADVANC E RECEIVED FROM TWO PARTIES, THE AGREEMENTS HAVE BEEN ENTERED INTO WITH THE PART IES IN THE FINANCIAL YEAR 3 ITA /MUM/2014 RELEVANT TO AY 2008-09 AND THE SALE DEEDS FOR TRANS FER OF THE PROPERTIES HAVE BEEN EXECUTED IN THE SAME FINANCIAL YEAR AND ALSO T HE RESULTANT CONSIDERATION HAS BEEN OFFERED TO TAX IN THE ASSESSMENT YEAR 2008 -09. SINCE THE SALE AGREEMENT AND SALE DEED ARE ENTERED IN THE FINANCIA L YEAR RELEVANT TO ASSESSMENT YEAR 2008-09, IT HAS RECOGNIZED THE REVE NUE AS PER THE PROVISIONS OF ACCOUNTING STANDARD-9 (AS-9) ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI, IN SHORT) WHICH STATES THAT REVENUE FROM SALE OF GOODS AND SERVICES SHOULD BE RECOGNIZED AS AND WHEN THE SUBST ANTIAL RISK AND REWARD INVOLVED IN THE PROPERTY HAS BEEN TRANSFERRED TO TH E BUYER. THE AO IGNORING THE ABOVE FACTS, MADE ADDITION SIMPLY ON THE GROUND THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND PROJE CT COMPLETION METHOD; HENCE, THE REVENUE FROM THE PROJECT SHOULD HAVE BEE N RECOGNIZED WHEN THE PROJECT HAS BEEN DECLARED AS COMPLETE. 4. THE CIT(A), AFTER CONSIDERING THE RELEVANT SUBMISSI ONS OF THE ASSESSEE OBSERVED THAT ALTHOUGH THE SALE AGREEMENT WAS ENTER ED INTO IN THE NEXT FINANCIAL YEAR, THE CHALLENGE OF THE AO THAT THE PR OJECT WAS COMPLETE IN THE IMPUGNED FINANCIAL YEAR WAS NOT CONTROVERTED BY THE ASSESSEE. ONCE THE ASPECT OF COMPLETION OF PROJECT IN THE IMPUGNED FIN ANCIAL YEAR COUPLED WITH THE FACT THAT ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING, IT IS NATURAL AND 4 ITA /MUM/2014 LOGICAL CONCLUSION THAT AMOUNT SHOULD HAVE BEEN OFF ERED TO TAX IN ACCORDANCE WITH THE ACCOUNTING STANDARD PROFESSED TO BE FOLLOW ED BY THE ASSESSEE. IF THE REASONING OF THE ASSESSEE IS TAKEN LITERALLY, THEN IT WOULD MEAN THAT THE RECOGNITION OF REVENUE CAN BE DELAYED INDETERMINABL Y IN SPITE OF THE FACT THAT MERCANTILE SYSTEM OF ACCOUNTING IS FOLLOWED. THE C IT(A) FURTHER OBSERVED THAT THE RECOGNITION OF REVENUE PRINCIPLE IN AS-9 IS REC OMMENDATORY IN NATURE AND CANNOT BECOME A BASIS FOR OVERRIDING THE PROVISIONS OF LAW. PERUSAL OF PARA 6 OF THE SAID ACCOUNTING STANDARD MERELY MENTIONS THA T TRANSFER OF PROPERTY AS A KEY CRITERION FOR RECOGNITION OF REVENUE, BUT THE A SPECT OF TRANSFER HAS TO BE SEEN IN TERMS OF PROVISIONS OF THE TAX LAWS AND AS PER THE DEFINITION OF TRANSFER GIVEN IN SECTION 2(47) OF THE ACT, TRAN SFER DEEMS TO INCLUDE DISPOSING OF OR PARTING WITH ANY ASSET OR ANY INTER EST THEREIN. WITH THESE OBSERVATIONS, THE CIT(A) HELD THAT THE AMOUNT WAS R IGHTLY BROUGHT TO TAX IN THE IMPUGNED ASSESSMENT YEAR. HOWEVER, HE DIRECTED THE AO TO ENSURE THAT IF THE IDENTICAL AMOUNT WAS BROUGHT TO TAX IN THE SUBSEQUE NT YEAR, A CONSEQUENTIAL EFFECT TO THE PRESENT APPELLATE ORDER SHALL BE GIVE N SO THAT THE ASSESSEE DOES NOT SUFFER DOUBLE TAXATION. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE ASSESSEE HAS RAISED AS MANY AS 7 GROUNDS OF APP EAL. IN THESE GROUNDS 5 ITA /MUM/2014 OF APPEAL, THE ASSESSEE HAS AGITATED TWO ISSUES, VI Z. (I) CHALLENGING THE VALIDITY OF REOPENING OF ASSESSMENT U/S 147 OF THE ACT; AND (II) ADDITION MADE BY THE AO TOWARDS ADVANCE RECEIVED FOR SALE OF FLATS. DUR ING THE COURSE OF HEARING, THE LD.AR FOR THE ASSESSEE SUBMITTED THAT HE DID NO T PRESS GROUNDS 1 & 2 CHALLENGING THE VALIDITY OF REOPENING OF ASSESSMENT . THEREFORE, THE GROUNDS RAISED BY THE ASSESSEE CHALLENGING REOPENING OF ASS ESSMENT HAVE BEEN DISMISSED, AS NOT PRESSED. THUS, THE EFFECTIVE GRO UND THAT REMAINS FOR OUR CONSIDERATION IS ADDITION MADE BY THE AO TOWARDS AD VANCE RECEIVED FOR SALE OF FLAT. 6. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE ASSES SEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING AND PROJECT COMPLETION METHOD FOR REVENUE RECOGNITION AS PER AS-9 ISSUED BY ICAI WHICH IS MANDATORY IN NA TURE. THE REVENUE IS RECOGNIZED FROM SALE OF GOODS OR RENDERING SERVICES ONLY WHEN THE SELLER HAS TRANSFERRED THE PROPERTY IN THE GOODS TO THE BUYER FOR A CONSIDERATION ALONGWITH RISK AND REWARDS INVOLVED IN THE SAID PRO PERTY. THOUGH THE PROJECT WAS COMPLETE DURING THE RELEVANT FINANCIAL YEAR, TH ESE TWO FLATS HAVE BEEN SHOWN AS STOCK-IN-TRADE IN THE BOOKS OF ACCOUNT. I T IS FURTHER SUBMITTED THAT IT HAS ENTERED INTO AN AGREEMENT TO SELL FOR SALE OF F LATS IN THE FINANCIAL YEAR RELEVANT TO AY 2008-09 AND THE RESULTANT REVENUE HA S BEEN RECOGNIZED IN THE 6 ITA /MUM/2014 BOOKS OF ACCOUNT FOR THE ASSESSMENT YEAR 2008-09. THE SALE IS COMPLETE ONLY WHEN THE SELLER SOLD THE PROPERTY UNDER AGREEMENT F OR SALE AND ALSO HANDED OVER THE POSSESSION TO THE BUYER. IN THIS CASE, TH E AGREEMENTS FOR SALE OF PROPERTY IS ENTERED INTO IN THE FINANCIAL YEAR RELE VANT TO AY 2008-09 AND THE POSSESSION OF THE PROPERTY IS ALSO HANDED OVER DURI NG THE SAME ASSESSMENT YEAR, THEREFORE, THE AO WAS ERRED IN TAXING ADVANCE RECEIVED FOR SALE OF FLATS FOR THE ASSESSMENT YEAR 2007-08. THE LD.AR FURTHER SUBMITTED THAT THE ASSESSEE IS FOLLOWING THIS METHOD OF ACCOUNTING SIN CE FROM ITS INCEPTION AND THE SAME WAS ACCEPTED BY THE REVENUE IN THE PREVIOU S YEAR RELEVANT TO THE ASSESSMENT YEAR 2007-08. THEREFORE, ONCE A PARTICU LAR METHOD OF ACCOUNTING IS FOLLOWED FOR RECOGNITION OF REVENUE AND IT WAS A CCEPTED BY THE REVENUE, THE SAME CANNOT BE DISTURBED IN ONE PARTICULAR ASSESSME NT YEAR WITHOUT ANY CHANGE IN FACTS. THE CIT(A), WITHOUT APPRECIATING THE FACTS THAT THE ASSESSEE HAS RECOGNIZED THE REVENUE IN THE SUBSEQUENT FINANC IAL YEAR HAS UPHELD THE ADDITION MADE BY THE AO, WHICH IS INCORRECT. 7. ON THE OTHER HAND, THE LD.DR STRONGLY SUPPORTED THE ORDER OF THE LOWER AUTHORITIES. 8. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE M ATERIALS AVAILABLE ON 7 ITA /MUM/2014 RECORD. THE AO MADE ADDITIONS TOWARDS ADVANCE RECE IVED FOR SALE OF TWO FLATS ON THE GROUND THAT THE ASSESSEE IS FOLLOWING MERCAN TILE SYSTEM OF ACCOUNTING AND PROJECT COMPLETION METHOD FOR RECOGNITION OF RE VENUE. ACCORDING TO THE AO, REVENUE FROM THE PROJECT SHOULD BE RECOGNIZED W HEN THE PROJECT IS COMPLETE. THE AO FURTHER OBSERVED THAT WHEN THE PR OJECT HAS BEEN DECLARED AS COMPLETE DURING THE YEAR UNDER CONSIDERATION ANY ADVANCE RECEIVED AGAINST SALE OF FLAT CONSTRUES SALE AND THE SAME HAS TO BE OFFERED FOR TAX IRRESPECTIVE OF THE FACT WHETHER ENTIRE AMOUNT OF SALE IS RECEIVED OR NOT. THE ASSESSEE CONTENDS THAT IT HAS RECOGNIZED REVENUE AS PER AS-9 ISSUED BY ICAI AS PER WHICH, THE REVENUE FROM SALE OF GOODS AND RENDERING SERVICES NEEDS TO BE RECOGNIZED WHEN THE SELLER HAS TRANSFERRED TO THE B UYER THE SIGNIFICANT RISK AND REWARDS OF OWNERSHIP AND THE SELLER RETAINS NO EFFE CTIVE CONTROL OVER THE PROPERTY ASSOCIATED WITH OWNERSHIP. THE ASSESSEE F URTHER CONTENDED THAT THE AGREEMENTS FOR SALE OF THE TWO FLATS HAVE BEEN ENTE RED INTO IN THE FINANCIAL YEAR RELEVANT TO AY 2008-09, SALE DEEDS HAVE BEEN E XECUTED IN THE SAME FINANCIAL YEAR AND ALSO THE RESULTANT SALE CONSIDER ATION HAS BEEN RECOGNIZED FOR THE ASSESSMENT YEAR 2008-09, THEREFORE, ANY ADDITIO N IN THE CURRENT YEAR WOULD AMOUNT TO DOUBLE TAXATION OF SAME AMOUNT. IN SUPPORT OF HIS ARGUMENTS, THE LD.AR RELIED UPON THE DECISION OF HO NBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS MOTILAL C PATEL & CO (1998) 198 ITR 666 (GUJ). 8 ITA /MUM/2014 9. THE AO HAS NOT DISPUTED THE METHOD OF ACCOUNTING FO LLOWED BY THE ASSESSEE FOR RECOGNITION OF REVENUE DURING THE FINA NCIAL YEAR AND IN THE IMMEDIATELY PRECEDING FINANCIAL YEARS. THE ASSESSE E IS FOLLOWING PROJECT COMPLETION METHOD FOR RECOGNITION OF REVENUE AND AL SO FOLLOWED AS-9 ISSUED BY ICAI. AS PER AS-9, THE REVENUE FROM SALE OF SER VICES AND RENDERING OF SERVICES SHALL BE RECOGNIZED WHEN THE SELLER HAS TR ANSFERRED TO THE BUYER ALL SIGNIFICANT RISK AND REWARDS OF OWNERSHIP IN THE PR OPERTY AND THE SELLER RETAINS NO EFFECTIVE CONTROL OVER THE PROPERTY. IN THIS CA SE, THE ASSESSEE HAS ENTERED INTO SALE AGREEMENT IN THE FINANCIAL YEAR RELEVANT TO AY 2008-09 FOR TRANSFER OF FLATS. THOUGH THE ASSESSEE HAS RECEIVED PART OF SA LE CONSIDERATION IN THE RELEVANT FINANCIAL YEAR, THE AGREEMENT TO SELL HAS BEEN ENTERED IN THE SUBSEQUENT FINANCIAL YEAR AND THE FINAL SALE DEED H AS BEEN EXECUTED IN THE SUBSEQUENT FINANCIAL YEAR. THE ASSESSEE ALSO RECOG NIZED THE REVENUE FROM SALE OF FLATS IN THE ASSESSMENT YEAR 2008-09. THESE FAC TS WERE NOT DISPUTED BY THE AO AS WELL AS THE CIT(A). THE AO MADE ADDITIONS ON LY ON THE GROUND THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG AND PROJECT COMPLETION METHOD FOR RECOGNITION OF REVENUE AND ACCORDINGLY N EEDS TO RECOGNIZE REVENUE IN RESPECT OF ADVANCES RECEIVED FOR SALE OF PROPERT Y EVEN THOUGH THE SALE AGREEMENT OR SALE DEED WAS NOT EXECUTED FOR TRANSFE R OF PROPERTY. WE DO NOT FIND ANY MERIT IN THE FINDINGS OF THE AO FOR THE RE ASON THAT UNLESS A WRITTEN SALE 9 ITA /MUM/2014 AGREEMENT IS ENTERED INTO SPECIFYING THE TERMS AND CONDITIONS FOR SALE, IT CANNOT BE CONSTRUED THAT THE PARTIES HAVE AGREED FO R TRANSFER OF PROPERTY. SINCE THE ASSESSEE HAS ENTERED INTO AGREEMENT FOR S ALE IN THE FINANCIAL YEAR RELEVANT TO AY 2008-09 AND ALSO EXECUTED THE SALE D EEDS IN THE SAME FINANCIAL YEAR, THE REVENUE THEREFROM TOWARDS SALE OF FLATS N EEDS TO BE RECOGNIZED AS AND WHEN THE SALE IS COMPLETE. WE FURTHER OBSERVE THAT THE ASSESSEE HAS RECOGNIZED REVENUE FROM SALE OF THESE FLATS IN THE FINANCIAL YEAR RELEVANT TO AY 2008-09 AND THIS FACT WAS NOT DISPUTED BY THE AO AS WELL AS THE CIT(A). THEREFORE, WE ARE OF THE VIEW THAT THE ASSESSEE HAS RIGHTLY RECOGNIZED REVENUE FROM SALE OF FLATS AS PER THE METHOD OF ACCOUNTING REGULARLY FOLLOWED IN ITS BUSINESS AND ALSO AS PER THE ACCOUNTING STANDARD-9 ISSUED BY THE ICAI. 10. THE ASSESSEE HAS RELIED UPON THE DECISION OF HONBL E GUJARAT HIGH COURT IN THE CASE OF CIT VS MOTILAL C PATEL & CO (SUPRA) . THE HONBLE HIGH COURT, UNDER SIMILAR FACTS HAS OBSERVED THAT INCOME ACCRU ES TO A BUILDER OR DEVELOPER ONLY WHEN TRANSACTION OF SALE IS COMPLETE AND ANY A DVANCE RECEIVED UNDER THE AGREEMENT FOR SALE OR MERE EARNEST MONEY CANNOT BE TAXED AS INCOME BEFORE THE TRANSACTION OF SALE IS COMPLETE. 11. IN THIS VIEW OF THE MATTER AND CONSIDERING THE RATI O OF JUDGEMENT OF THE 10 ITA /MUM/2014 HONBLE GUJARAT HIGH COURT, IN THE CASE CITED SUPRA , WE ARE OF THE VIEW THAT THE ASSESSEE HAS RIGHTLY RECOGNIZED REVENUE FROM SALE O F FLATS WHEN THE SALE OF FLAT WAS COMPLETED BY WAY OF INSTRUMENT OF SALE WHICH HA S HAPPENED IN THE FINANCIAL YEAR RELEVANT TO AY 2008-09. THE CIT(A) WITHOUT APPRECIATING THE FACTS, SIMPLY UPHELD THE ADDITIONS MADE BY THE AO. THEREFORE, WE REVERSE THE FINDINGS OF THE CIT(A) AND DIRECT THE AO TO DELETE ADDITION MADE TOWARDS ADVANCE FOR SALE OF PROPERTY. 12. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH JULY, 2017. SD/- SD/- (SAKTIJIT DEY) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 26 TH JULY, 2017 COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI