The ACIT, Cochin V. M/s.Rubber Park India P. Ltd, Ernakulam

ITA 135/COCH/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6681 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 10-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A S BINDHU
• Assessee Lawyers: V SATHYANARAYANAN
• Keywords: Revenue expenditure; Capital expenditure
• Section: 37(1); 145; 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFOR E S/ SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., J M I. T.A. NO S . 135 & 353/CO CH/2017 ASSESSMENT YEA R S : 2012 - 13 & 2013 - 14 THE ASSISTANT COMMISSIONER OF INCOME - TAX , CORP. CIRCLE - 2(1), KOCHI VS. M/S. RUBBER PARK INDIA PVT. LTD., 2AQ, KAUTEELIYAM, RUBBER PAR K, VALAYACHIRANGARA, ERNAKULAM, KOCHI - 683 665. [PAN:AABCR 7840R ] ( REVENUE - APPELLANT) ( ASSESSEE - RESPONDENT) REVENUE BY SMT. A.S. BINDHU, SR. DR ASSESSEE BY SHRI V. SATHYANARAYANAN, CA D ATE OF HEARING 02/05/ 201 9 DATE OF PRONOUNCEMENT 06 / 0 5 /201 9 O R D E R PER CHANDRA POOJARI, AM: THESE APPEALS FILED BY THE REVENUE ARE DIRECTED AGAINST THE DIFFERENT ORDERS OF THE CIT(A) - I, KOCHI DATED AND PERTAIN TO THE ASSESSMENT YEARS 2012 - 13 & 2013 - 14. 2. THE REVENUE HAS RAISED THE FOLLOWING COMMON GROUNDS OF APPEAL: 1. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.2,75,24,248/ - MADE ON ACCOUNT OF ENHANCED COMPENSATION PAID TO LAND OWNERS CLAIMED AS GENERAL EXPENSES. 2. THE CIT(A) OUGHT TO HAVE APPRECIATED WHILE REFERRING TO VARIOUS CASE ;AWS TO ALLOW THE CLAIM OF THE ASSESSEE THAT THE LEGAL AS WELL AS FACTUAL MATRIX OF I.T.A. NO S . 135 & 353/COCH/2017 2 THE ISSUE IN THE ASSESSEES CASE ARE DIFFERENT AND DISTINGUISHABLE FROM THOSE CASES. 3. THE CIT(A) FAILED TO APPRECIATE THAT THE CLAIM OF THE ASSESSEE IS NOT SUPPORTED BY ANY WRITTEN CLAUSES AS PER ANY SUBLEASE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND THE SUB - LESSEES. 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE CIT(A) I NOT JUSTIFIED IN COMING TO THE CONCLUS ION THAT THE ISSUE INVOLVED IS REVENUE NEURTRAL AND THERE IS NO LOSS TO THE REVENUE, SINCE THE ASSESSEE WILL DECLARE THE ENHANCED COMPENSATION COLLECTED FROM THE SUB - LESSEES IN THE YEAR OF RECIEPT. 5. IT IS PRAYED THAT THE ORDERS OF THE CIT(A) BE SET ASI DE AND THAT OF THE ASSESSING OFFICER HELD GOOD. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS E NGAGED IN THE BUSINESS OF ACQUIRING/PURCHASING OF FREEHOLD OR LEASEHOLD LAND AND UNDERTAKE DEVELOPMENT THEREOF AND DEVELOP ALL OTHER INFRASTRUCTURE FAC ILITIES INCLUDING POWER, WATER, TRANSPORTATION, CONDUCIVE FOR THE DEVELOPMENT OF INDUSTRIES BASED ON RUBBER AND RUBBER WOOD AND SELL, LEASE OR OTHERWISE DISPOSE OF THE DEVELOPED PLOTS AND OTHER FACILITIES INCLUDING BUILD UP STRUCTURES THEREON TO ENTREPRENE URS. THE ASSESSEE HAD SET UP AN INDUSTRIAL PARK FOR MAKING AVAILABLE LAND ON LONG TERM LEASE TO ENTREPRENEURS ENGAGED IN MANUFACTURE OF RUBBER BASED PRODUCTS. FOR THIS PURPOSE, THE ASSESSEE HAD TAKEN A PROPERTY ON A LONG TERM LEASE, ADMEASURING 106.4 ACRES OF LAND (I.E., AGGREGATE OF LAND LEASED OUT AND TREATED AS INVENTORY AND THE LAND USED FOR ROADS AND UTILITIES AND THE LAND NOT USABLE) PER THE LEASE DEED EXECUTED BETWEEN KERALA INDUSTRIAL INFRASTRUCTURE DEVELOPMENT CORPORATION (KINFRA) AND THE ASSESSEE OF AN AREA, FOR A VALUE OF RS.3,74,50,8 70/ - . (THOUGH THE AREA I.T.A. NO S . 135 & 353/COCH/2017 3 MENTIONED IN THE LEASE DEED AGGREGATED TO 106.40 ACRES, THE ACTUAL AREA OF LAND MADE AVAILABLE TO THE ASSESSEE WAS 107.52 ACRES. THE DIFFERENCE IS VERY MARGINAL). OF THESE LAND TAKEN ON LEASE AS ABOVE, THE ASSESSEE HAD CONVERTED AN AREA OF 77.07 ACRES INTO STOCK - IN - TRADE IN AN EARLIER ASSESSMENT YEAR, AS THE SAID LAND WAS TO BE LEASED TO ENTREPRENEURS FOR SETTING UP INDUSTRIAL UNITS ON LONG TERM BASIS. THE BALANCE AREA OF 23.98 ACRES WAS USED FOR SETTING UP THE COMMON UTILITIES FOR USE OF THE UNITS TO SET UP IN THE INDUSTRIAL PARK. THE ASSESSING OFFICER FOUND THAT THE COMPENSATION WAS PAID ON THE BASIS OF CLAUSE 3 OF THE LEASE DEED WITH KINFRA DT. 25.02.2005. ACCORDING TO THE ASSESSING OFFICE R , IN THE LEASE AGREEMENT ENTERED INTO BETWEEN THE ENTREPRENEURS AND THE ASSESSEE , THERE WAS NO PROVISION TO RECOVER THE ENHANCED COMPENSATION. INCOME FROM REVENUE OPERATION WAS RECEIVED DURING THE PERIOD 2003 - 04 AND ONWARDS . IT WAS NOTICED THAT THERE WAS NO SPECIFIC CONDITION TO COLLECT ENHANCED COMPENSATION FROM THE SUB - LESSEES. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE H AD ISSUED DEMAND NOTICES TO ALL LESSEES AND THE RECEIPTS FROM THE LESSEES TOWARDS ENHANCED LAND COMPENSATION RECEIVED IN THE RE SPECTIVE YEARS WERE CREDITED TO THE PROFIT AND LOSS ACCOUNT AND OFFERED AS INCOME . THE ASSESSING OFFICER WAS OF THE VIEW THAT THE RECOVERABILITY OF ENHANCED LAND VALUE FROM THE LESSEE WAS NOT CERTAIN EVEN THOUGH THE COMPANY HA D ISSUED DEMAND NOTICES TO AL L LESSEES BECAUSE THERE WAS NO SPECIFIC CLAUSE IN THE SUB - LEASE DEED IN RESPECT OF COLLECTION OF ENHANCED COMPENSATION . THE ASSESSING OFFICER CONCLUDED THAT T HE ENHANCED COMPENSATION PAID IS NOT ALLOWABLE AS REVENUE EXPENDITURE U/S.37 (1) OF THE IT ACT AN D THE A RGUMENTS OF THE ASSESSEE THAT THE I.T.A. NO S . 135 & 353/COCH/2017 4 COMPANY HAD TREATED THE ORIGINAL COST OF LAND LEASED AS AN EXPENSE IN THE PRECEDING YEARS' ACCOUNTS ARE INCORRECT . 3.1 AS PER CLAUSE 2 OF THE AGREEMENT EXECUTED WITH KINFRA , IF ADDITIONAL (ENHANCED) COMPENSATION BECOMES PAYABLE IN RESPECT OF THE LAND COVERED UNDER THE LEASE DEED AS A RESULT OF ANY ORDERS OF ANY COURT, IN PROCEEDINGS PURSUANT TO THE PROVISIONS OF THE LAND ACQUISITION ACT, THE PREMIUM PAYABLE WILL GET ENHANCED PROPORTIONATELY TO THAT EXTENT AND THE ASSESSEE SHALL BE LIABLE TO PAY THE SAME AS AND WHEN CALLED UPON TO DO SO. DURING THE RELEVANT ASSESSMENT YEARS ON THE BASIS OF THE DECISION OF THE H IGH COURT, IT WAS LEGALLY DETERMINED THAT KINFRA IS LIABLE TO PAY ENHANCED (ADDITIONAL) COMPENSATION WHICH AS PER THE CLAUSE REFERRED ABOVE BECAME LEGALLY PAYABLE BY THE ASSESSEE. AS PER THE CONSISTENT ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE, THE VALUE OF LAND CLASSIFIED AS STOCK IN TRADE AND THEN LEASED TO VARIOUS UNITS WERE TAKEN TO THE PROFIT AND LOSS A CCOUNT OF THE RESPECTIVE ASSESSMENT YEARS AS BELOW: S L .NO ASST. YEAR PROPORTIONATE COST OF LAND DEBITED (RS.) INCOME FROM SUBLEASE OF LAND (RS.) 1 2003 - 04 2 1 , 13,639.00 3 5 , 08,200.00 2 2004 - 05 4 7 , 81,727.00 1 ,0 4 , 95,000. 00 3 2005 - 06 6 , 69,838.00 18, 65,100.00 4 2006 - 07 8 6 , 18,379,00 2 ,7 2 , 12,200.00 5 2007 - 08 28, 32,952.00 9 1 , 30,200.00 6 2008 - 09 1 ,4 2 , 38,748.00 5 ,9 3 , 79,790.00 I.T.A. NO S . 135 & 353/COCH/2017 5 7 2009 - 10 78 , 60,488 .00 4 ,1 0 , 41,650.00 8 2010 - 11 2 1 , 7 7, 458.00 1 ,3 4 , 10,900.00 9 2011 - 12 5,34,164.00 56,40,000.00 8. 4. ON APPEAL, THE CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO. HOWEVER, THE CIT (A) REWORKED THE CLA IM OF ENHANCED COMPENSATION PAID, WITH REFERENCE TO THE PORTION OF LAND ACQUIRED AND ASSIGNED TO KINFRA BY GOVERNMENT OF KERALA FROM VARIOUS PRIVATE PARTIES, WHICH ARE SUBJECT MATTER OF ENHANCED COMPENSATION. THE CIT (A) REWORKED THE ALLOWABLE EXPENSES AT RS. 2,72,59,316/ - FOR THE AY 2012 - 13 AND AT RS.2,83,42,420/ - FOR AY 2013 - 14. THE CIT (A) ALLOWED THE REMA INDER AMOUNTS (I.E., RS. 34,34, 193/ - AND RS.35,70,645/ - RESPECTIVELY FOR AY 2012 - 13 & AY 2013 - 14) TO BE RETAINED AS STOCK IN TRADE, SINCE THE SAID AMOU NTS RELATED TO STOCK OF LAND NOT YET SOLD. THE CIT(A) OBSERVED THAT CLAUSE NO.2 OF THE LEASE DEED WITH KINFRA STIPULATES THAT IF ANY ADDITIONAL PREMIUM PAYABLE WILL GET ENHANCED PROPORTIONATELY TO THAT EXTENT AND THE LESSEE SHALL BE LIABLE TO PAY THE SAME AS AND WHEN CALLED UP ON TO DO SO. ACCORDING TO THE CIT(A), ANY CHANGE IN THE ACCOUNTING SYSTEM ON ACCRUAL - MERCANTILE BASIS WILL CREATE INTER - TEMPORAL ENTRIES AND TRANSFERS THAT ARE REVENUE NEUTRAL IN THE LONG - RUN AND THEREFORE COUNTER PRODUCTIVE IN TERM S OF COSTS AND EFFORT. T HE CONSISTENT TREATMENT BY THE DEPT. OF THESE RECEIPTS IN THE ACCOUNTS OF THE ASSESSEE OVER THE PRECEEDING FINANCIAL YEARS PROVIDES FOR A VALID CLAIM IN THE CURRENT FINANCIAL YEAR TOO. THE CIT (A) RELIED ON THE DECISION OF THE SU PREME COURT I.T.A. NO S . 135 & 353/COCH/2017 6 IN THE CASE OF CIT V. REALEST BUILDERS AND SERVICES LTD . ( 307 1TR 202 ) WHEREIN IT WAS HELD THAT IF THE AO IS TO DISTURB THE ACCOUNTING METHOD FOLLOWED BY THE ASSESSEE, HE MUST GIVE FACTS AND FIGURES IN THAT REGARD AND DEMONSTRATE TO THE UNDERES TIMATION OF PROFITS. THE CIT (A) ALSO RELIED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT V. BILAHARI INVESTMENT PVT LTD ( 299 1TR 1 ) , WHICH READS AS FOLLOWS: 'EVERY ASSESEE IS ENTITLED TO ARRANGE ITS AFFAIRS AND FOLLOW THE METHOD OF ACCOUNTING ............................................................................... THE METHOD OF ACCOUNTING CANNOT BE REJECTED' THE CIT(A) HELD THAT THE ABOVE DECISIONS ARE SQUARELY APPLICABLE TO THE ASSESSEES CASE. ACCORDING TO THE CIT(A), THE AO DID NOT BOTHER TO CONSIDER THE EVENTUALITY THAT BY MAKING THE IMPUGNED ADDITION , H E WAS INTERFERING WITH THE ACCOUNTING PRACTICE/METHOD CONSISTENTLY BEING FOLLOWED BY THE APPELLANT OVER THE PREVIOUS YEARS, TO WHICH NO CHALLENGE HAS APPARENTLY BEEN MADE BY THE DEPT AND H E HAS NOT SHOWN OR DEMONSTRATED IN ANY MANNER THAT THERE HAS BEEN ANY UNDERESTIMATION OR UNDER - REPORTING OF TAXABLE INCOME UNDER THE SAID ACCOUNTING PRACTICE/METHOD . 5. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 5.1 THE LD. DR SUBMITTED THAT THE PAYMENT OF ENHANCED COMPENSATION TO THE 70 L AND OWNERS OF 47.28 ACRES OF LAND CANNOT BE TREATED AS GENERAL EXPENSES AND IT DOES NOT COME UNDER THE PROVISIONS OF SECTION 37 ( 1) OF THE INCOME - TAX ACT . IN VIEW OF THE SAME, A PORTION OF TH E COST OF LAND VALUE ORIGINALLY FIXED BY THE KINFRA HAD I.T.A. NO S . 135 & 353/COCH/2017 7 B EEN TREATED AS FIXED ASSETS OF THE COMPANY AND THE REMAINING VALUE IN RESPECT OF 77.07 ACRES OF LAND WAS ACCOUNTED AS STOCK IN TRADE IN THE AUDITED ACCOUNTS OF THE ASSESSEE COMPANY UNTIL THE LEASE RE NTS ARE COLLECTED FROM THE LESSEES IN PROPORTION TO THE LAND SUB - LEASED , THE CLAIM OF EXPENDITURE UNDER ENHANCED COMPENSATION WA S RESTRICTED TO THE EXTENT OF ADDITIONAL AMOUNT OF ENHANCED COMPENSATION COLLECTED FROM THE SUB - LESSEES. THUS , THE EXPENDITURE UNDER LAND COMPENSATION EXPENSES WAS RESTRICTED TO RS. 16,59,1367 - BEING THE AMOUNT COLLECTED FROM THE LESSEES AND THE BALANCE AMOUNT OF RS. 2,75,24,248/ - [RS. 2.91,83,384 - 16,59,136 = RS. 2,745,24,248] WA S ADDED TO THE RETURNED INCOME. HE RELIED ON THE ORD ER OF THE ASSESSING OFFICER. 6. THE LD. AR SUBMITTED THAT D URING THE ASSESSMENT YEARS 2012 - 13 & 2013 - 14, THE ASSESSEE WAS REQUIRED TO PAY ENHANCED COMPENSATION OF RS.2,91,83,384/ - & RS.3,19,13,065/ - RESPECTIVELY IN RESPECT OF THE 77.07 ACRES OF LAND CONV ERTED INTO STOCK IN TRADE IN AY 2003 - 04 . HOWEVER, IN THE ABSENCE OF ANY ENFORCEABLE CLAUSE IN THE AGREEMENTS BASED ON WHICH THE PROPERTY WAS LEASED OUT BY THE RESPONDENT, THE RESPONDENT COULD NOT RECOVER THE FULL AMOUNT OF COMPENSATION FROM THE LESSEES. H ENCE, THE AMOUNTS TO THE EXTENT RECEIVED FROM LESSEES WAS OFFERED TO TAX BY THE RESPONDENT ASSESSEE. THIS TREATMENT WAS CONSISTENTLY FOLLOWED BY THE ASSESSEE AND ACCEPTED BY THE REVENUE FOR THE ABOVE ASSESSMENT YEARS AND THE INCOME WAS ASSESSED TO TAX AND THE EXPENDITURE WAS ALLOWED AS SUCH. I.T.A. NO S . 135 & 353/COCH/2017 8 6.1 THE LD. AR SUBMITTED THAT THE ASSESSEE H AD CONVERTED THE PROPERTY UNDER REFERENCE AS STOCK - IN - TRADE IN THE ASSESSMENT YEAR 2003 - 04 AND AS AND WHEN THE PROPERTY WAS SOLD/ LEASED OUT, THE COST PORTION OF THE STOCK I N TRADE WAS DEBITED TO P&L A/C AND THE AMOUNTS RECOVERED FROM SUBLEASES WERE OFFERED AS INCOME. IT WAS SUBMITTED THAT I N THE CASE OF ENHANCED COMPENSATION PAID TO LESSORS RELATING TO THE STOCK IN TRADE, THERE IS NO ENABLING CLAUSE IN THE LEASE DEEDS TO RE COVER SUCH ENHANCED COMPENSATION AND HENCE , THERE IS HIGH DEGREE OF UNCERTAINTY OF COLLECTION OF SUCH AMOUNTS FROM THE SUBLESSEES. HENCE, IT WAS SUBMITTED THAT THE RELATIVE REVENUE IS ACCOUNTED AND OFFERED TO TAX AS AND WHEN IT IS ACTUALLY RECOVERED WHICH IS IN ACCORDANCE WITH THE ACCOUNTING POLICY CONSISTENTLY FOLLOWED BY THE ASSESSEE AND ACCEPTED BY THE REVENUE IN THE PAST COMPLETED ASSESSMENTS. THE LD. AR SUBMITTED THAT IT WAS LE GALLY LIABLE TO PAY ADDITIONAL COMPENSATION IN RELATION TO THE PROPERTY WH ICH WAS TREATED AS STOCK - IN - TRADE AND WAS LEASED OUT/SOLD IN THE PRIOR YEARS WHICH WAS ACCEPTED BY THE REVENUE . 6. 2 THAT BEING SO, IT WAS SUBMITTED THAT THE RESULTANT EXPENDITURE IS REVENUE EXPENDITURE IN NATURE AND IS ALLOWABLE U/S.28 OF THE IT ACT AS IT IS INCURRED IN THE COURSE OF BUSINESS OF LEASING OUT OF THE PROPERTY. THE LD. AR SUBMITTED THAT AS PER SEC. 145 OF THE INCOME TAX ACT, WHILE COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS FROM BUSINESS OR PROFESSION, THE ACCOUNTING STANDARD NO TIFIED BY THE CENTRAL GOVERNMENT IS REQUIRED TO BE MANDATORILY FOLLOWED. BY VIRTUE OF PROVISIONS OF SEC. 145(2) OF THE INCOME TAX ACT, THE CENTRAL GOVERNMENT BY NOTIFICATION NO. S.O 69(E), DT 25.01.2996, HAS NOTIFIED ACCOUNTING STANDARDS I & II, TO BE FOLL OWED I.T.A. NO S . 135 & 353/COCH/2017 9 BY ALL ASSESSES FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. ACCORDING TO THE LD. AR, ACCOUNTING STANDARD I IS 'DISCLOSURE OF ACCOUNTING POLICIES'. IN ACCORDANCE WITH THE SAID ACCOUNTING STANDARD, THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS ARE: - GOING CONCERN - ACCRUAL & - CONSISTENCY IT WAS SUBMITTED THAT THE ACCOUNTING STANDARD DESCRIBES THE TERM 'ACCRUAL' AS THE ASSUMPTION THAT REVENUES AND COSTS ARE ACCRUED, THAT IS, RECOGNIZED AS AND WHEN THEY ARE EARNED (AND NOT AS MONEY IS RECEIVED OR PAID) AND RECORDED IN THE FINANCIAL STATEMENTS OF THE PERIODS TO WHICH THEY RELATE. IN THE ASSESSEES CASE, THE ENHANCED COMPENSATION EXPENSES RELATING TO STOCK IN TRADE WERE INCURRED AND PAID AND HENCE AS PER THE ABOVE DEFINITION OF THE TERM 'ACCRUAL' THE SAID EXPE NDITURE WAS ACCRUED. HENCE, THE ASSESSEE HAD RIGHTLY ACCOUNTED SUCH ENHANCED COMPENSATION PAID RELATING TO STOCK IN TRADE AS EXPENDITURE AND CLAIMED IN THE RETURN OF INCOME U/S.28 OF THE ACT. IT WAS SUBMITTED THAT BY VIRTUE OF LACK OF ENABLING CLAUSES IN THE SUB LEASE DEEDS, THERE IS HIGH DEGREE OF UNCERTAINTY IN THE CASE OF RECEIPT OF INCOME BY WAY OF RECOVERY OF ENHANCED COMPENSATION FROM SUB LESSEES AND THE AO HIMSELF HA D ACCEPTED TH AT T HERE IS NO ENABLING CLAUSE IN THE SUB LEASE DEED TO COLLECT PROPORT IONATE ENHANCED COMPENSATION FROM THE SUB LESSEES. ACCORDINGLY, AS PER THE ABOVE ACCOUNTING STANDARD, THE RELATIVE INCOME CANNOT BE SAID TO HAVE BEEN EARNED OR RECEIVED. IN SUCH A CASE, THE SAID INCOME CAN BE ACCOUNTED AS INCOME AND OFFERED TO TAX ONLY WH EN IT IS RECOVERED/RECEIVED. IN THE ABOVE CIRCUMSTANCES, IT WAS SUBMITTED THAT THE QUESTION OF ACCOUNTING FOR INCOME PRIOR TO ACTUAL RECEIPT I.T.A. NO S . 135 & 353/COCH/2017 10 DOES NOT ARISE. THE ASSESSEE HAD THEREFORE OFFERED THE INCOME RELATING TO ENHANCED COMPENSATION AS AND WHEN IT WAS RECOVERED . 6. 3 THE L D . AR REFERRED TO ACCOUNTING STANDARD 11 WHICH RELATES TO DISCLOSURE OF PRIOR PERIOD AND EXTRAORDINARY ITEMS AND CHANGES IN ACCOUNTING POLICIES. THE ACCOUNTING STANDARD II REQUIRES THAT ANY CHANGE IN AN ACCOUNTING POLICY SHALL BE MADE ONLY IF: - THE ADOPTION OF A DIFFERENT ACCOUNTING POLICY IS REQUIRED BY STATUTE OR - IF IT IS CONSIDERED THAT THE CHANGE WOULD RESULT IN A MORE APPROPRIATE PREPARATION OR PRESENTATION OF THE FINANCIAL STATEMENTS BY AN ASSESSEE. IN VIEW O F THE ABOVE, THE LD. AR SUBMITTED THAT THERE IS NO POWER FOR THE AO TO CHANGE THE ACCOUNTING POLICY CONSISTENTLY ADOPTED BY THE ASSESSEE , SINCE THERE WAS NO SITUATION WARRANTING SUCH CHANGE DURING THE PERIODS UNDER APPEAL, I.E., NEITHER SUCH CHANGE IS REQU IRED BY THE STATUE NOR THE CHANGE WOULD RESULT IN A MORE APPROPRIATE PREPARATION OR PRESENTATION OF FINANCIAL STATEMENTS. HENCE, IT WAS SUBMITTED THAT AO GROSSLY ERRED IN CHANGING THE CONSISTENTLY FOLLOWED ACCOUNTING POLICY WITHOUT LOOKING INTO WHETHER T HERE IS A REQUIREMENT UNDER THE ENABLING PROVISIONS OF SEC. 145 OF THE IT ACT. 6. 4 THE LD. AR REFERRED TO PARA 9 OF THE MANDATORY ACCOUNTING STANDARD (AS - 9), PRESCRIBED BY THE COMPANY'S ACCOUNTING STANDARD RULES 2006: '9.1. RECOGNITION OF REVENUE REQUI RES THAT REVENUE IS MEASURABLE AND THAT AT THE TIME OF SOLE OR THE RENDERING OF THE SERVICE IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIMATE COLLECTION . I.T.A. NO S . 135 & 353/COCH/2017 11 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLECTION WITH REASONABLE CERTAINTY IS LACKING AT THE TIM E OF RAISING ANY CLAIM, E.G., FOR ESCALATION OF PRICE, EXPORT INCENTIVES, INTEREST ETC., REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN SUCH CASES, IT MAY BE APPROPRIATE TO RECOGNISE REVENUE ONLY WHEN IT IS REASONABLY CERTAIN TH AT THE ULTIMATE COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAINTY AS TO ULTIMATE COLLECTION, REVENUE IS RECOGNISED AT THE TIME OF SALE OR RENDERING OF SERVICE EVEN THOUGH PAYMENTS ARE MADE BY INSTALMENTS...' TH US, IT WAS SUBMITT E D THAT THE ASSESSEE HAD BEEN CORRECTLY FOLLOWING THE ABOVE MANDATORY ACCOUNTING STAND ARD CONSISTENTLY AND ACCOUNTING FOR ENHANCED COMPENSATION AS AND WHEN IT WAS RECOVERED, IN VIEW OF THE HIGH DEGREE OF UNCERTAINTY INVOLVED. THUS, IT WAS SUBMITTED THAT THE FINDINGS OF THE AO WERE NOT SUPPORTED BY ANY OF THE PROVISIONS OF THE INCOME TAX ACT. 6. 5 IT WAS SUBMITTED THAT A S PER THE PROVISIONS OF SEC. 37(1) OF THE ACT, ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR P ROFESSION'. HENCE, THE ENHANCED COMPENSATION PAID RELATING TO STOCK IN TRADE IS TO BE ALLOWED ALSO U/S.37(L) OF THE ACT, SINCE IT IS NOT IN THE NATURE OF CAPITAL EXPENSES OR PERSONAL EXPENSES OF THE RESPONDENT ASSESSEE AND THE EXPENDITURE WAS INCURRED WHOL LY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. 6. 6 IT WAS SUBMITTED THAT THE ASSESSEE HAD OFFERED THE AMOUNTS RECOGNIZED IN THE ASSESSMENT YEAR UNDER APPEAL AND THEREAFTER TO TAX AS DETAILED BELOW: I.T.A. NO S . 135 & 353/COCH/2017 12 S L . NO ASST. YEAR AMOUNT ACTUAL LY RECEIVED (RS.) WHETHER OFFERED TO TAX 1 2012 - 13 1,659,136.00 YES 2 2013 - 14 9,707,630.00 YES 3 2014 - 15 7,913,119.00 YES 4 2015 - 16 1,533,210.00 YES 5 2016 - 17 NIL NOT APPLICABLE 6 2017 - 18 1,344,159.00 YES 7 2018 - 19 16,620 ,955.00 YES THE LD. AR SUBMITTED THAT THE AO THOUGH DISALLOWED THE ASSESSEES CLAIM OF EXPENDITURE IN THE AY 2012 - 13 AND ALSO IN THE AY 2013 - 14, NO ALLOWANCE WAS GIVEN WHEN THE SAME AMOUNT WAS ACTUALLY OFFERED TO TAX WHICH RESULTED IN TAXING AN INCOME TWICE, WHICH IS AGAINST THE BASIC PRINCIPLES OF INCOME TAX LAW. FROM THE ABOVE, IT MAY BE SEEN THAT THE AO WAS NOT JUSTIFIED IN DISTURBING THE CONSISTENTLY ACCEPTED ACCOUNTING POLICY IN RESPECT OF THE YEARS UNDER APPEAL, VIZ., FOR THE AY 2012 - 13 & AY 2013 - 14, WITHOUT STATING ANY DETAILED REASONS, THOUGH THE SAID POLICY WAS ACCEPTED BY THE REVENUE FROM THE AY 2003 - 04 TO AY 2011 - 12. THUS, IT WAS SUBMITTED THAT THE FINDINGS OF THE AO WERE NOT SUPPORTED BY ANY OF THE PROVISIONS OF THE INCOME TAX ACT. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. IN THESE APPEALS, THE ASSESSEE CLAIMED ENHANCED COMPENSATION AS EXPENDITURE. ACCORDING TO THE I.T.A. NO S . 135 & 353/COCH/2017 13 ASSESSING OFFICER THE ASSESSEE IS ENTIT L ED TO RECOVER IT FROM THE LESSEE FROM WHOM THE LOAN WAS TAKEN. IN VIEW OF THIS, HE ALLOWED PAYMENT OF ENHANCED COMPENSATION TO THE EXTENT OF AMOUNT RECOVERED FROM THE LESSEE WHICH WAS OFFERED AS INCOME. THE BALANCE COMPENSATION PAYABLE WAS NOT ALLOWED BY THE ASSESSING OFFICER. HOWEVER, NEITHER THE ASSESSING OFFICER NOR THE CIT(A) HAS EXAMINED THE LEASE AGREEMENTS BASED ON WHICH THE ASSESSEE IS ENTITLED TO RECOVER THE ENHANCED AMOUNT OF COMPENSATION FROM THE LESSEE. WITHOUT EXAMINING THE LEASE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH THE LESSEE, IT IS NOT POSSIBLE FOR US TO HOLD THAT TO WHAT EXTENT THE ASSESSEE IS ENTITLED FOR THE CLAIM OF ENHANCED COMPENSATION AS AN EXPENDITURE . IF THERE IS ENFORCEABLE CLAUSE IN THE LEASE AGREEMENT BASED ON WHICH THE PROPERTY WAS LEASED OUT BY THE ASSESSEE, THE ASSESSEE CAN RECOV ER THE AMOUNT OF ENHANCED COMPENSATION FROM THE LESSEE. HENCE, THE AMOUNT TO THE EXTENT RECEIVED OR RECEIVABLE FROM THE LESSEE IS TO BE BROUGHT TO TAX. IN OTHER WORDS, WHEN THE ASSESSEE IS CLAIMING THE PAYMENT OF ENHANCED COMPENSATION AS AN EXPENDITURE, I T IS INCUMBENT ON THE PART OF THE ASSESSEE TO OFFER THE RECOVERABLE AMOUNT OF COMPENSATION FROM ITS LESSEE. THE ASSESSEE CANNOT PICK AND CHOOSE ONLY THE CLAIM OF EXPENDITURE TOWARDS PAYMENT OF ENHANCED COMPENSATION AND CANNOT WITHHOLD THE OFFERING OF RECE IPT OF ENHANCED COMPENSATION FROM ITS LESSEE. HENCE, IN OUR OPINION, IT IS APPROPRIATE TO REMIT THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE RELEVANT LEASE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS LESEE AND DECIDE THEREUPON . HOWE VER, WE MAKE IT CLEAR THAT IF THE ASSESSEE OFFERED THE RECEIPT OF ENHANCED COMPENSATION FROM ITS LESSEE IN ANY OTHER ASSESSMENT YEAR, I.T.A. NO S . 135 & 353/COCH/2017 14 THERE CANNOT BE DOUBLE TAXATION IN THESE YEARS. WITH THIS OBSERVATION, WE REMIT TH IS ISSUE TO THE FILE OF THE ASSESSING O FFICER FOR FRESH CONSIDERATION. 8 . IN THE RESULT, THE APPEAL S FILED BY THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 6 TH MA Y, 2019 SD/ - SD/ - (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 6 TH MAY , 2019 GJ COPY TO: 1 . M/S. RUBBER PARK INDIA PVT. LTD., 2AQ, KAUTEELIYAM, RUBBER PARK, VALAYACHIRANGARA, ERNAKULAM, KOCHI - 683 665. 2. THE ASSISTANT COMMISSIONER OF INCOME - TAX, CORP. CIRCLE - 2 (1) 3 . THE COMMISSIONER OF INCOME - TAX (AP P EALS) - I, KOCHI . 4. THE PR. COMMISSIONER OF INCOME - TAX, KO CHI. 5 . D. R., I.T.A.T., COCHIN BENCH, COCHIN. 6 . GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN