Dilip Mehta, Jabalpur V. Addl. CIT, Jabalpur

ITA 28/JAB/2011

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 9110 (ITAT-JABALPUR)
• Duration Of Justice: 11 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 22-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAYA MAHESHWARI
• Assessee Lawyers: SAPAN USRETHA
• Keywords: Capital asset converted into stock in trade; Set aside
• Section: 28; 143(3); 73

Judgement Text

1 | P a g e IN THE INCOME TAX APPELLATE TRIBUNAL JABALPUR BENCH, JABALPUR (through web-based video conferencing platform) BEFORE SHRI SANJAY ARORA, HON‟BLE ACCOUNTANT MEMBER & SHRI MANOMOHAN DAS, HON'BLE JUDICIAL MEMBER I.T.A. No. 181/JAB/2018 (Asst. Year: 2009-10) C.O.No. 29/JAB/2018 (arising out of I.T.A. No. 181/JAB/2018) (Asst. Year: 2009-10) Assessee by : Shri Sapan Usretha, Advocate Revenue by : Smt. Maya Maheshwari, CIT-DR Date of hearing : 10/05/2022 Date of pronouncement : 08/08/2022 O R D E R Per Sanjay Arora, AM This is an Appeal by the Revenue and Cross Objection (CO) by the Assessee directed against the Order dated 31/01/2013 by the Commissioner of Assistant Commissioner of Income Tax, Circle-1(1), Jabalpur. vs. Dilip Mehta, Prop. Rajul Builders, Rajul Arcade, Napier Town, Jabalpur. [PAN: AAJPM 8444 K] (Appellant) (Respondent) Dilip Mehta, Prop. Rajul Builders, Rajul Arcade, Napier Town, Jabalpur. [PAN: AAJPM 8444 K] vs. Ast. CIT, Circle-1(1), Jabalpur. (Appellant) (Respondent) ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 2 | P a g e Income Tax (Appeals), Jabalpur („CIT(A)‟ for short), partly allowing the assessee‟s appeal contesting his assessment under section 143(3) of the Income Tax Act, 1961 („the Act‟ hereinafter) dated 30/12/201(1) for Assessment Year (AY) 2009-10. 2. The controversy in the instant case relates to the maintainability of the addition for Rs. 873.79 lacs, being „advances received from customers‟ and „other liabilities‟, made to the assessee‟s returned income in assessment, since deleted by the first appellate authority. The assessee‟s CO is principally supportive (of the impugned order), though also raises legal issues. The same, however, was not pressed during hearing, and is accordingly dismissed as not pressed. 3. It would be relevant to briefly state the back-ground facts of the case. The assessee-individual is a real estate developer (through his firm „Rajul Builders‟), besides being also engaged in the production and sale of bio-fertilisers and agents (per his firm „Rajul Agro Herbal‟). For the year under consideration, the Assessing Officer (AO) sought the following during assessment proceedings: a) Confirmations from all sundry creditors. b) Copy of agreement of advances taken from all the customers. The same, filed on 28/12/2011, were taken on record by the AO. On enquiry qua the advance from customers, the same were explained by the authorised representative to be not accounted for as income as the assessee, following mercantile system of accounting, had applied Accounting Standard (AS) 9 (i.e., recognition of income), issued by the Institute of Chartered Accountants of India (ICAI). The explanation, in the view of the AO, was not tenable as AS-9 (enclosed as a part of the assessee‟s paper-book (APB 2, pgs.60-67) and Department‟s paper- book (DPB pgs. 1-12), rather, advocates revenue recognition where the following conditions are satisfied:- ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 3 | P a g e (i) the seller of goods has transferred to the buyer the property in the goods for a price and all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. These conditions were found to be satisfied in respect of the outstanding advances from the customers by the AO on a perusal of the agreement/s furnished by the assessee. In fact, clause and sub-clause (both unspecified) of the Agreements made it clear that monies received would not be refunded even if the sale did not materialise for any reason. There was, accordingly, no question of postponement of revenue. The onus to show that any uncertainty with regard to realisation of revenue (at the time of sale) existed was only on the assessee, and qua which there was even no claim. He, also expressing doubt with regard to the genuineness of the transactions in respect of depositors, accordingly, added the entire credit of rs. 873.79 lac outstanding in the balance-sheet as at the year-end (31/03/2009), as the assessee‟s income for the relevant year (pgs. 2-6 of the assessment order). In appeal, the assessee advanced various arguments, also raising legal issues, and found favour with the ld. CIT(A), who held as under:- “2.10 (iv) I tend to agree with the counsel. Since, the AS-9 issued by ICAI is not applicable to the business of the appellant hence no addition can be made on the basis of the AS, as an assessee is required to follow the accounting standard notified by the central government in official Gazette and not by any other authority including ICAI. It is not the case of the AO that AS-9 issued by ICAI has been notified by the Central Government in its official Gazette as required by section 145(2) and hence for not following AS-9, no addition can be made to the income. The AO has neither pointed out any defects in the Books of Accounts, nor in the accounting policy adopted by the appellant. The addition has been made without rejecting the Books of Accounts, for this reason also the addition is not sustainable. The addition is also revenue neutral and hence no addition can made. The AO has also not given the working of the amount added in the assessment order, the working given in the remand report clearly shows that Rs.1,66,19,650/- is advance received from customers and Rs.7,07,59,313/- ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 4 | P a g e is other advance which the appellant had contended is money to be paid to the land owner. In view of this also, the addition is not sustainable. Though resjudicata is not applicable to Income Tax proceedings, Law of Consistency has to be followed. The method of accounting of the appellant has been accepted by the AO in the past year also. The AO in the assessment order of A.Yr. 06-07 passed on 28-12-201(1) on the same day has accepted the method of accounting followed by the appellant. In view of the above, the addition made of Rs.8,73,78,963/- on account of advance received from customers is deleted. In view of ground of 2 & 3 being allowed the alternate plea is infructuous and is dismissed. Ground of appeal No. 2 is allowed and ground of appeal No. 3 is part allowed.” (pgs. 9 - 10) Aggrieved, both the parties are in appeal. 4. We have heard the parties, and perused the material on record. 4.1 As apparent, the ld. CIT(A) allowed relief to the assessee for the following reasons: a) AS-9 is not applicable to the assessee‟s business; b) in any case, AS-9 is not notified by the Central Government u/s. 145(2); c) no defect in the books of account has been pointed by the AO, rejecting the book results; d) the addition is revenue-neutral. Apart from, thus, the aspect of genuineness, the first appellate authority has met the Revenue‟s case, on the basis of which the addition for Rs. 873.79 lacs stands made by the AO which, as explained by the assessee before him with reference to the audited balance-sheet as on 31/03/2009, and as is admittedly the case before us, comprises of: a) Advance received from customers : Rs. 1,66,19,650 b) Other liabilities : Rs. 7,07,59,313 , with, in fact, the confirmation from the creditors having also been filed before the AO. This also sums up the assessee‟s case before us, with the Revenue, on the ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 5 | P a g e other hand, contending a complete non-substantiation of his case, as indeed non- cooperation, by the assessee, before him (AO). 4.2 We shall take up each of the four grounds on which the addition, which in respect of advances from customers is at Rs. 166.20 lacs, stands deleted by the ld. CIT(A). As regards the non-application of AS-9, being an Accounting Standard issued by the ICAI, and not notified u/s. 145(2) by the Central Government, the assessee‟s case before the AO is of he, in fact, as in the past, following AS-9, for which reference is made to sub-para 1 of para 2, beginning with the words „After examination of the various details filed,.....‟, at pg. 2 of the assessment order. This we find to be the assessee‟s case before the ld. CIT(A) as well, for which reference is made to the written submissions (WS) before him (APB-1, pgs. 37-52, at para 3.1(ii)/pg. 45), which reads as under: „(ii) That like earlier assessment years in this assessment year also the appellant has recognized revenue in respect of advances received from customer if the following conditions are satisfied: a) The appellant has transferred to the buyer all significant risks and rewards of ownership of the property and the appellant retains no effective control of the property to a degree usually associated with the ownership, and b) It is not unreasonable to expect ultimate collection of sale consideration from the buyer.‟ The said two conditions afore-said represent the essential attributes of AS-9. This, further, was an admitted position and a common ground before us as well. It, thus, removes the very basis on which relief stands allowed by the ld. CIT(A). What we wonder, then, is the controversy about? Both the sides basing their respective case on the satisfaction of AS-9, the issue boils down to, and all the four grounds justifying the impugned deletion by the ld. CIT(A) coalesce into one, i.e., whether any adjustment to the returned income on account of not forming the correct basis ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 6 | P a g e for revenue recognition in respect of advances from customers could be made in the given facts and circumstances of the case? 4.3 While, on facts, the matter would need to be answered with reference to the material on record, in principle the answer is an emphatic „yes‟. The reason is simple. The assessee admittedly follows mercantile system of accounting, implying that income as well as expenditure is to be accounted for on accrual basis. Income is said to accrue or arise when the right to receive it inures to the assessee and, similarly, qua expenditure, when liability in its respect stands incurred, giving thus a corresponding right to receive to the other person. As explained in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC): „When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely: (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose.‟ The passing of actual entries in accounts, recognising income or booking expenditure, is another matter, i.e., separate and distinct from the accounting method followed, as explained by the Apex Court in CIT vs. Chunilal V. Mehta & Sons P. Ltd. [1971] 82 ITR 54, 61 (SC), as well as even earlier, as in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC). The latter is a case of non- accounting of closing stock where cash system of accounting was being followed. It is trite law that absence of accounting entries is not an impediment to either assessing income or claiming expenditure (Kedarnath Jute Mfg. Co. Ltd. vs. CIT [1971] 82 ITR 363 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC)). ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 7 | P a g e AS-9, it would be seen, is consistent with the concept of accrual of income; while its first condition represents the accrual/vesting of the right to receive to/in the assessee, the seller or the service provider, the second ensures that the said right is not inchoate, as it is only the real income – which only is, subject to the provisions of the Act, liable to be assessed (Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC)), as existence of an uncertainty as to realization, where so, would impair the said right. 4.4 Coming to the facts of the case, there being nothing on record to clarify this aspect, Shri Usrethe, the ld. counsel for the assessee, was during hearing specifically enquired about the point in time when the revenue from a constructed residential or commercial unit, i.e., building, a flat or a shop (say), is taken into account. As observed, there is nothing on record stating the assessee‟s – admittedly following AS-9, accounting policy qua the recognition of income, much less exhibit the same. Though the face of the balance-sheet (as on 31/03/2008, at APB- 2, pgs. 28-55), states of the „Notes to the Accounts‟ – which generally enlist the accounting policies, including on the recognition of income, as annexed thereto (Ann. 11), i.e., as forming part thereof, the same is not enclosed, and there is no reference thereto in the audit report. Even this noting, on the face of the balance- sheet as on 31/03/2008, is missing in the audited balance-sheet as on 31/03/2009 (APB-1, pgs.7-35). The sale agreements (with the customers), referred to by the AO, and relevant for determining the issue of accrual or otherwise of income, were, yet, and despite being called for, not produced. The ld. CIT(A) has not, as would be noted, issued any finding qua the aspect of accrual, with we finding his basis of deletion irrelevant inasmuch as the assessee is admittedly following AS-9, which we observe as consistent with the concept of accrual of real income. How would it matter, one may ask, if the said Standard is not mandatory on the assessee? The onus, thus, to exhibit that the conditions of AS-9 have not been met qua the impugned credits, being admittedly received from the customers in ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 8 | P a g e pursuance of agreements for sale of constructed units with them, is on the assessee, whose case is thus wholly unsubstantiated. Shri Usrethe would, in response to the query afore-said, clarify of the same as being when a buyer agrees to get the sale deed registered. Now, this is neither here nor there. In any case, it is as indefinite and vague a basis as can be. Apart from being unsubstantiated, how, one may ask, could that form a basis for recognition of income? The assessee may have received the entire sum, and even delivered the possession, retaining no control, but as the buyer is not interested in or does not intend to get the sale deed registered for the time being, there is no sale! Why, in a particular case, the buyer may, not intending to take possession, deliberately withhold a minimal part (about 2%-5% (say)) of the consideration so as to avoid incurring maintenance cost (to the housing society, etc.), and so forth. Between the buyer and the seller, the economic transaction is complete, and it is only the possession, otherwise ready, withheld, for being delivered in exchange of the minimal sum withheld. In fact, possession itself may not be regarded as determinative, and what would be more relevant is of being „ready for possession‟, as there may be a constraint for possession in the facts of an individual case, and does not therefore provide an objective and uniform basis for recognizing income. It is thus only „ready for possession‟ that could be considered for being regarded as an accounting policy to be followed. As afore-noted, AS-9 enunciates this criterion as the passing of the significant risks and rewards of ownership. Why, we wonder, income could not be said to accrue or arise at this stage, even as the very fact that the assessee follows AS-9 would make it incumbent on it to do so? As such, income in such a case would arise where there is no certainty as to the realization of income, on which aspect there is no quarrel, the AO even otherwise regarding only the outstanding credits, i.e., sums already received, as income. We may here though clarify that the foregoing is discussed only by way of an example, taking cue from Sh. Usrethe statement at bar of the „sale‟ being taken in accounts on the ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 9 | P a g e sale deed being registered. The actual accrual of income, which may not necessarily have to await the completion of the construction, would stand to be determined from the terms of the sale agreement. We may though clarify that the recognition of income is not to be confused with the receipt of the consideration, being normally defined to be at stated points of time in the said agreement. If the buyer has agreed to purchase the construction at the inception, and all the significant risks and rewards of ownership have transferred, or substantially so, revenue has accrued and ought to be recognized, with the payment being made and received under the agreement only in lieu of that right. A builder may, for example, allow easy payment terms to customers, with the view to attract them, or insist on advance payment. That is, extend credit, or not. That, as explained, is a different matter, akin to the sale of goods on credit, as against on cash, even as sale is, in either case booked and revenue thereon recognized on the delivery of goods. It is the agreement which defines and confers enforceable contractual rights on the parties. Continuing further, as certified by the Auditor, the assessee has not maintained any stock register, wherein completed units, as indeed those at various stages of completion, are recorded, which would stand to be valued as at the year- end, and without which, without doubt, the correct profit/loss for the accounting period cannot be determined (Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC); Krishnaswami Mudaliar (A.) (supra)). The audited annual accounts, further, clearly state of the closing inventory being valued and certified by the proprietor. The same contains, both at the beginning and close of the year, only work in progress (WIP), and no finished goods. This is most surprising inasmuch as it means that all the completed units, ready for „sale‟, stand sold as at the year-end. That is, no completed unit remains unbilled as at the year-end and, as it appears, regularly so. This would itself raise several questions, viz.: Have all the units of a particular project, therefore, been booked as „sales‟? True, sale may not arise in a ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 10 | P a g e particular case, as where there is no buyer or the buyer has (say) not paid the instalments already due; the assessee, it is apparent, collecting payment from the customers, as the Builders generally do, over the construction period. This is clearly not the case in the instant case where income aspect is being considered only in respect of sums realized. Further, it is nobody‟s case that all the units of a particular project are either sold or unsold. Alternatively, and more likely, it may also imply that the firm sells units directly from the WIP, i.e., without routing them through the finished goods account. The details (including valuation) were sought by the Bench during hearing, but were not supplied stating that the matter is old. Needless to add, no quantitative details stand furnished by the Auditor in their audit report. 4.5 The factual position that thus emerges is as: a) there is no stock accounting, i.e., the actual output during the accounting period or its transfer; b) there is nothing to suggest of even a physical inventory having been taken at the year-end, much less its profiling in terms of the stage of completion; c) there is nothing to show that construction costs, direct or indirect, are allocated to the physical output during the year; d) there is no definite accounting policy for recognizing income.; e) there is no record of the sale agreements or even purchase agreements entered into by the assessee during the year, much less noting of their substantial compliance; and f) there is no system in place for recognizing income. We find the foregoing as a matter/s of fact. 4.6 It is said that no defect in accounts has been observed by the AO, which only could entitle him to make the adjustment qua income accrued, though not accounted for. We have already found as a fact that there is no accounting policy qua recognising revenue on constructed units; no accounting of stock-in-trade; and ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 11 | P a g e an absence of a basis for allocating cost, only whereupon could inventory, essential for being taken and appropriately valued for determining correct operating result, for an accounting period, be valued. How could, then, one may ask, the book results be accepted as such? That apart, there is also breach of AS-1 („Disclosure of Accounting Policies‟) and AS-2 („Disclosure of changes in Accounting Policies‟) notified u/s. 145(2). The AO has on the basis of agreements, as afore-noted, stated of completion of the economic transaction in substance, and which finding has not been rebutted at any stage, including before us. In his view, therefore, revenue ought to have been booked, and proceeds to make specific adjustment qua all such agreements. He is fully entitled to do so, and need not to reject the books of account for the purpose. He is not required to set aside the declared results, estimating profit, but making a specific adjustment/s to the returned income on the basis of a specific finding/s. The Apex Court in Krishnaswami Mudaliar (A.) (supra) explained as: „If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income-tax Officer the profits cannot properly be deduced from the system accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits.‟ (pg. 129) It further held as follows: „No express order was recorded by the Income-tax Officer that in his opinion the income, profits or gains of the business could not properly be deduced from the method of accounting employed by the firm, but it is implicit in what is stated by him that without valuation of the unexpired exploitation rights the profits of the year of account could not be computed. With this view, it appears, the Appellate Assistant Commissioner agreed.‟ (pg. 126) 4.7 It is well settled that in the absence of any provisions of the Act to the contrary, it is the principles of commercial accounting that are to hold or be accorded primacy, and the profits and gains of a business determined following the same are to be adopted for the purpose of assessing business income u/s. 28 ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 12 | P a g e (Poona Electric Supply Co. Ltd. (supra); Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC); Sutlej Cotton Mills Ltd. v. CIT [1978] 116 ITR 1 (SC)). AS-9, which calls for recognising income where the risks and rewards of the ownership of goods, i.e., the subject matter of sale, stands substantially transferred and there is little uncertainty as to the ultimate realisation of the sale consideration, only articulates these principles, so that nothing turns on the same being not notified or not mandatory. The assessee’s case, rather than, therefore, being based on AS-9, which he claims to follow, or even an alternate thereto, showing it as equally valid, is found to be without any basis whatsoever. The next question, therefore, is the adjustment to be therefore made to the declared results. Attention of the parties was during hearing also drawn to the decision in Calcutta & Co. v. CIT [1959] 37 ITR 01 (SC), on which they were required to offer their comments. In the facts of that case, the assessee, a land developer, received the entire consideration for development of land, even as little work had been completed on the land. The Apex Court, on the matter travelling to it, held that the assessee having received the entire consideration, with time being not of essence, the same is to be recognised as income, in computing which though the estimated expenditure on development is to be allowed; the assessee admittedly following mercantile system of accounting. That is, the expenditure on the work to be undertaken is to be regarded as incurred, making an informed provision in its respect, which again represents well-settled law: (see, inter alia, Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC); Bharat Earth Movers Ltd. v. CIT [2000] 245 ITR 428 (SC)). 4.8 Coming to the facts of the instant case, the AO clearly states, with reference to clauses of the agreement (without though specifying them), that the amount received is not to be refunded. This finding has not been rebutted at any stage, including before us. There is thus indeed, on facts, a case for recognising income even on semi-constructed units, much less completed units awaiting sale ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 13 | P a g e registration. Reference in this context be made to KCP Ltd. v. CIT [2000] 245 ITR 421 (SC), wherein it stands clarified that it is the nature of receipt, trading or not so, that is relevant and not the head of account under which it is entered in books. That the assessee may, at his discretion, travelling beyond the sale agreement, refund the amount to the buyers, as claimed before us, is another matter, in which case, the return of the funds to the buyer shall be accompanied by reversal of income, valuing the construction at cost. Income, accordingly, is to be booked: a) construction is at least 25% complete, i.e., reckoned on estimated cost basis; b) where no significant uncertainty attends the realisation of income. As such, if on a unit valued at Rs. 10 lacs and estimated to cost Rs. 8 lacs (say), a cost of Rs. 2 lacs (or more) is incurred as at the year-end, income to the proportionate extent (with reference to cost) is to be booked. For example, a 40% completed unit would signify a sale of Rs. 4 lacs, adjusting cost incurred to the extent of Rs. 3.2 lacs. Money received in excess of Rs. 4 lacs shall continue to outstand as a liability in accounts, while a shortfall would reflect as recoverable from the buyer. This, it may be noted, shall be consistent both with the principles of commercial accounting – which in effect AS-9 captures, as indeed the assessment sought to be made. Also, this may not pose much problem, as it may appear to, as all the units of a particular project are complete up to a particular stage and have the same cost. Difference amongst different units of a project would thus stand to arise only where and to the extent there is any uncertainty as to ultimate realization of revenue in a given case. For example, a receipt of Rs. 6 lacs on a unit 80% complete (sale value: Rs. 10 lacs), would, in such a case operate to book sale only upto Rs. 6 lacs. Cost in excess of that adjusted against sale (at Rs. 4.8 lacs, i.e., going by our earlier example), is to be carried in accounts as un-billed sales (valued at cost). The exercise would need to be carried, both at the beginning and close of the year, as each year is under the Act a self-contained unit of assessment, so that profits for that year only could be brought to tax in assessment ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 14 | P a g e (Krishnaswami Mudaliar (A.) (supra)). The amount received (or even not received), cannot though form the basis of determining the profits and gains of a business following mercantile system of accounting, as adopted by the AO, though to be fair to him, there is no declared basis for recognizing income by the assessee despite being in business for long and avowedly following mercantile system of accounting. One could argue that the suggested method amounts to following the percentage completion method, while the registration of sale deed (as a basis for recognizing income) suggests a project completion method. In this regard, it may be stated that the argument is only wholly without basis. The assessee is admittedly following AS-9, which is itself in complete harmony with the principle of accrual and, in any case, the assessee has not shown any alternative method for determining accrual, a matter of fact. We state this as a matter of abundant caution, even as it is difficult to conceive of two methods for determining accrual of income. The assessee‟s case, on facts is completely opaque and unproved. The sale agreements, the primary document, based on which the AO has issued definite and clear findings, were, as afore-sated, not produced despite being called for, with, further, and on the contrary, the assessee himself claiming to be following AS-9, toward which the AO‟s findings are. No valuation details of stock-in-trade, either at the opening or closing of the year, are produced. There is thus no factual basis to contend consistency, a claim even otherwise found unacceptable by the Apex Court in CIT vs. Realest Builders & Services Ltd reported in [2008] 307 ITR 202 (SC), even as was the case earlier in CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC). Here it may also be clarified that s.43CB stands inserted on the statute book w.e.f. 01/04/2017, which statutorily mandates adoption of percentage completion method where mercantile system of accounting is followed, i.e., except where the construction period of a project is at a maximum of 90 days. Sure, the AO has not mentioned clause numbers of the agreement. However, his ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 15 | P a g e finding has not been challenged in principle at any stage, for which all that the assessee had to do was to produce the agreements, and which were, despite being called for, not. The AO‟s findings in the matter, which have not been reversed/ modified by the ld. CIT(A), would therefore hold. Even otherwise, non-production of the relevant material would entitle drawing adverse inference (Union of India v. Rai Deb Singh Bist [1973] 88 ITR 200 (SC)). This also rubbishes the assessee‟s claim of the exercise being revenue neutral. How could he claim so, where there is no demonstrated basis for recognizing income or indeed the closing of accounts? The matter, accordingly, is restored to the file of the AO for working the income of the assessee‟s real estate business in terms of the foregoing. Further, income, we may clarify, is to be considered only to the proportionate extent, inasmuch as only the same could be said to have accrued during the relevant year. The exception may be where the entire money due on a construction has been received from the customers under the agreement, and uniformly so, signifying the passing of the rights to the buyers. The assessee shall in such a case be allowed estimated expenditure on the work yet to be completed. 4.9 The matter, accordingly, is set aside to the file of the AO for the purpose. The AO shall adjudicate taking all the relevant facts and circumstances into account, in accordance with law, issuing definite finding of facts after hearing the assessee, who shall cooperate in the said proceedings, furnishing the materials sought and relevant for deciding the issues arising, as indeed for finalisation of accounts. We decide accordingly. 4.10 This leaves us with second part of the addition, i.e., for rs. 707.59 lacs. The same do not represent advances from customers, but a liability nevertheless. The confirmations qua which being furnished only by 28/12/2011, i.e., on the last date of hearing in the assessment proceedings, no meaningful verification was possible. How could the AO under the circumstances issue a definite finding in the matter, ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 16 | P a g e as Sh. Usrethe would asseverate before us. He would though seek to clarify that the delay was not on the part of the assessee, who had furnished all the documents called for on the next date of hearing. In the absence of any definite finding by the AO qua the same, we would therefore remit the matter only on the back of a finding as to the assessee being recalcitrant, else not. Be that as it may, we, however, much to our surprise observe that the said amount, though credited to the account of the land owners, is only received direct by the assessee from his customers. As explained during hearing (as also clarified before the ld. CIT(A)), the land purchase agreements (APB-2, pgs. 8 to 27) specify a percentage (which for the townships under construction vary from 30% to 40%) of the sale consideration received or receivable from the buyer, i.e., as toward land cost. As given to understand during hearing, the assessee, as a builder/real estate developer, has not agreed for a definite sum as land cost. That is, the land owner has agreed to allow the assessee access to his land to raise civil construction thereon for being sold to another, a part of which shall be toward land cost. And, as it appears, transfer the land directly to the buyer of the constructed unit, i.e., proportionately. The assessee, accordingly, credits the agreed ratio to the account of the land owner on the receipt from the buyer. How can the land owner, who thus relies on the assessee’s accounts, issue a confirmation? The same is only based on the assessee‟s accounts, of which the land owner has no means to verify and, in any case, to no effect, i.e., as an independent verification. What value, then, the said confirmation/s? The arrangement (of land purchase) thus becomes an open-ended arrangement. That does not, however, mean that there is anything wrong with arrangement for sale. All that it means, from the stand-point of the transaction, is that the confirmation/s is of no significance. Two, there is no outright sale of his/her land by the land owner, who agrees to sell it, albeit independently, as part of product in the form of a constructed unit. That is, the receipt shall be a business receipt in his hands, though he has no means of writing his accounts as the right to ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 17 | P a g e receive arises, as it appears to us from the entries in the assessee‟s accounts, only on the receipt of sale consideration by the assessee, i.e., where and to the extent it is regarded as a sale by the assessee. The land owner has thus no means to either specify the amount to sale; decide the time of sale; and finally, even the extent of its receipt, which is much after the receipt by the assessee; his accounts reflecting credit in no insubstantial sums due to the land owners (who rather than by name are stated in the name of the relevant project). It is all this that raises considerable doubts as to the genuineness of the credit/s; the land sale extending to years. Not only, thus, the land owner/s waits for years for credit by the assessee, i.e., only when the sale deed is finally registered and the sale booked, he is not paid the amount credited, which thus piles up in crores! Why, we wonder, considering it a tripartite arrangement, the land owner/s paid his share – clearly defined, and on which the assessee, irrespective of the time period for which he may retain it, has no right – as soon as it is received? The ld. CIT(A), though noting that the land owner is entitled to a part of sale consideration, has not issued any finding in the matter even as he deletes the addition. We have, even ignoring the legal aspect of the transaction, examining it strictly from the stand-point of accountancy and tax perspective, find it untenable from the point of view of confirmation, as indeed from the practical stand-point. It would be a different matter where the land owner and the assessee have entered into a joint venture, agreeing to share the profits of the real estate development. 4.11 The issue qua the genuineness of these credits, as indeed their true nature, is also, accordingly, restored to the file of the AO for proper verification and determination, followed by adjudication in accordance with law, issuing a clear and definite findings of fact/s, after allowing the assessee a reasonable opportunity of being heard. Needless to add, the conduct as well as evidence produced by the land-owners, including the accounting and tax treatment of the transactions, shall also be examined; the matter being indeterminate. We clarify that we may not be ITA No. 181/JAB/2013 (A.Y. 2009-10) C.O. No. 29/JAB/2013 Dilip Mehta 18 | P a g e construed as having issued any final findings on the merits of the matter/s restored to the AO for adjudication; our observations being strictly on the basis of the pleadings before us and our examination of the material on record, finding the same as inextricably linked to the accounting of sales and recognition of income, leading us to the conclusion that the issue at hand is indeterminate. Nothing more and, nothing less. We decide accordingly. 4.12 Finally, we may advert to the addition in respect of other liabilities, i.e. other than the sums credited to the account of the land owners. We have already clarified no adverse findings by the AO qua this addition, remission to the file of the AO qua the credits in the case of land owners has been on account of the same having been found as inextricably linked to the income arising to the assessee from the business of the real estate development, even if u/s. 68. There is further no basis for addition of sums other than the sums credited to the account of and, thus, received from, the land owners, which is accordingly confirmed for deletion. We decide accordingly. 5. In the result, the Revenue‟s appeal is partly allowed for statistical purposes, and the assessee‟s CO is dismissed. Order pronounced in open Court on August 08, 2022 Sd/- S d/- (Manomohan Das) (Sanjay Arora) Judicial Member Accountant Member Dated: 08/08/2022 vr/- Copy to: 1. The Assessee: Shri Dilip Mehta, Prop. Rajul Builders, Rajul Arcade, Napier Town, Jabalpur. 2. The Revenue – ACIT, Circle-1(1), Jabalpur. 3. The CI T-1, Jabalpur (MP) 4. The CI T( A), Jabalpur (MP) 5. The Sr . D.R., I TAT, Jablapur 6. Guard File.