ACIT, Gurgaon V. M/s. Paras Build Call Pvt. Ltd., Gurgaon

ITA 4316/DEL/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86791 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2015
• Appeal Filed By: Department
• Bench Allotted: F
• Next Hearing Date: 12-02-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 21-09-2010
• Court: TRIBUNAL
• Assessee Lawyers: SUNIL BUCKSHEE
• Section: 143(3); 145; 148; 56; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: F : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND S HRI C.M. GARG, JM ITA NO S . 234 & 4316/DEL /20 1 0 ASSESSMENT YEAR S : 200 4 - 05 & 2005 - 06 ACIT, CIRCLE - 2, GURGAON. VS. PARAS BUILD CALL PVT. LTD., 9 TH FLOOR, PARAS DOWN TOWN CENTRE, SECTOR ROAD, SECTOR - 53, GURGAON. PAN: A ACCP9648L ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI SUNIL BUCKSHEE, CA DEPARTMENT BY : S HRI VIKRAM SAH A.Y. , SR. DR SHRI VIVEK WADEKAR, CIT, DR ORDER PER R.S. SYAL, AM : TH ESE TWO APPEALS BY THE REVENUE R ELAT E TO THE ASSESSMENT YEAR S 200 4 - 05 AND 2005 - 06. SINCE COMMON ISSUES HAVE BEEN RAISED IN THESE APPEALS, WE ARE , THEREFORE, PROCEEDING TO DISPOSING THEM OF F BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NOS.234&4316/DEL/2010 2 2. THE RE VENUE IS AGGRIEVED AGAINST THE DELETION OF ADDITION OF RS.1,56,88,100/ - MADE BY THE A SSESSING O FFICER (AO) FOR THE A . Y . 2005 - 06 AND RS.5,23,00,137/ - FOR THE A . Y . 2004 - 05. 3. 1. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE CAME INTO EXISTENCE DURING THE PREVIOUS YEAR RELEVANT TO THE A.Y. 2004 - 05 UNDER CONSIDERATION. IT IS ENGAGED IN DEVELOPING PROPERT IES AS A B UILDER AND DEVELOPER AND STARTED CONSTRUCTION OF A COMMERCIAL COMPLEX NAMED PARAS DOWN TOWN CENTRE AT SECTOR 53, G URGAON DURING THE PRE VIOUS YEAR RELEVANT TO THE A.Y. 2004 - 05. SUCH CONSTRUCTION GOT COMPLETED DURING THE PREVIOUS YEAR RELEVANT TO THE A.Y. 2005 - 06 . HERE, IT IS PERTINENT TO MENTION THAT THE ASSESSEE UNDERTOOK ONLY THIS PROJECT DURING THE TWO YEARS UNDER C ONSIDERATION AND NONE OTHER . ON PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE FOR THE FINANCIAL YEAR RELEVANT TO THE A.Y. 2005 - 06 , THE AO NOTICED THAT THE ASSESSEE RECEIVED A SUM OF RS.15,39,84,824/ - , CONSISTING OF ADVANCE BOOKING OF RS.11,11,03,624/ - AND ACTUAL SALE OF RS.4,28,81,200/ - , FROM THE PROSPECTIVE BUYERS O F THIS PROJECT. THE ASSESSEE INCURRED TOTAL EXPENDITURE OF RS.11,91,40,472/ - ITA NOS.234&4316/DEL/2010 3 WHICH WAS SHOWN AS C OST OF CONSTRUCTION OF THE COMMERCIAL C OMPLEX IN ITS BALA NCE SHEET RELEVANT TO THE A.Y. 2005 - 06 . ALTHOUGH THE CONSTRUCTION OF THE BUILDING WAS COMPLETE D DURING THE PERIOD RELEVANT TO THE A . Y . 2005 - 06 , THE ASSESSEE RECOGNIZED SALE ONLY TO THE TUNE OF RS.4.28 CRORE, COST OF WHICH WAS SHOWN AT RS.3.47 CRORE. THE REMAINING RECEIPTS OF RS.11.11 CRORE WERE SHOWN AS A C URRENT LIABILITY IN ITS B ALANCE SHEET. THE ASSESSEE HAD ALSO SHOWN WORK - IN - PROGRESS , VALUED AT COST , AMOUNTING TO RS.7.09 C RORE IN ITS BALANCE SHEET FOR THE YEAR ENDING 31.3.2005 . THE AO NOTICED FROM THE AUDIT REPORT THAT THE ASSESSEE RECOGNIZED REVENUE FROM THE SALE OF OFFICES/SHOPS ONLY ON THE REGISTRATION OF TITLE DEEDS AND TILL THAT EVENT, THE RECEIPTS WERE SHOWN AS LIABI LITY. ON BEING CALLED UPON TO EXPLAIN AS TO WHICH METHOD, NAMELY, P ROJECT COMPLETION OR P ERCENTAGE COMPLETION WAS ADOPTED BY THE ASSESSEE FOR COMPUTATION OF ITS INCOME, I T WAS SUBMITTED THAT THE ASSESSEE WAS NOT A C ONTRACTOR, BUT A B UILDER / D EVELOPER AND, HENCE, THE PROFIT WAS RECOGNIZED ONLY ON THE COMPLETION OF SALES AND NOT PRIOR TO THAT. SUCH METHOD OF SHOWING INCOME ONLY ON THE REGISTRATION OF SALE DEED WAS FOUND BY THE AO TO BE AGAINST THE BASIC PRINCIPLES OF TAXATION. ITA NOS.234&4316/DEL/2010 4 HE OPINED THAT MERELY BECAUSE THE TITLE DEED S W ERE NOT REGISTERED IN A PARTICULAR YEAR , WOULD NOT MEAN THAT NO PROFIT AROSE O R ACCRUED TO THE ASSESSEE . THE AO HELD THAT THE INCOME SHOULD BE RECOGNIZED ON THE TRANSFER OF RIGHT/INTEREST IN THE PROPERTY TO THE PROSPECTIVE BUYERS. ON EXAMINATION OF THE RELEVANT CLAUSES O F THE A GREEMENTS OF SALE DATED 15.6. 20 03 AND 15.9. 20 03 MADE BETWEEN THE ASSESSEE AND PROSPECTIVE BUYERS FOR SALE OF SHOPS, ETC. OF THIS PROJECT , THE AO OBSERVED THAT THE BUYERS BECAME ENTITLED TO RIGHT IN THE PROPERTY O N THE SIGNING OF SUCH AGREEMENTS SUBJECT TO THE TERMS AND CONDITIONS. IT WAS NOTED THAT THE BUYERS WERE ENTITLED TO SUBSTITUTE THE NAME OF NOMINEES W ITH THE APPROVAL OF ASSESSEE - VENDOR AND IT WAS OBLIGATORY ON IT TO PERMIT SUCH CHANGE S . HE NOTICED THAT THE BUYER S HAD GOT ALL LEGAL RIGHTS TO SELL OR TRANSFER THEIR INTEREST IN THE PROPERTY WITHOUT ANY CONDITION. S OME OF THE BUYERS WERE ACTUALLY FOUND TO HAVE TRANSFERRED THEIR RIGHT S AND INTEREST IN THE PROPERTY UNDER CONSTRUCTION TO THIRD PARTIES WITHOUT A NY OBJECTION FROM THE ASSESSEE , WHICH INSTANCES HAVE BEEN TABULATED ON PAGE 8 OF THE ASSESSMENT ORDER. FURTHER, CLAUSE 18 OF THE AGREEMENT WAS FOUND TO BE STIPULATING THAT THE ASSESSEE WAS BOUND TO DELIVER THE POSSESSION OF THE ITA NOS.234&4316/DEL/2010 5 COMPLETED BUILDING BY A GIVEN DATE AND IN CASE OF FAILURE TO DO SO, IT WAS LIABLE TO P AY PENALTY AT THE GIVEN RATE. ON THE BASIS OF THE ABOVE FACTORS, IT WAS HELD THAT THE BUYERS ACQUIRED PERFECT RIGHT IN THE PROPERTY ON THE DATE OF SIGNING OF THE AGREEMENT S . IT WAS ALSO SEEN THA T THE PAYMENT TO THE ASSESSEE WAS SECURED FROM ALL THE ANGLES. IN CASE OF FAILURE IN MAKING PAYMENT BY THE BUYERS , THE ASSESSEE WAS OBLIGED TO GIVE 30 D AYS NOTICE CALLING UPON THE BUYERS TO MAKE PAYMENT WITHIN THE NOTICE PERIOD AND IN THE EVENT OF DEFAULT, IT WAS ENTITLED TO FORFEIT THE AMOUNT ALREADY PAID BY THE BUYERS. CONSIDERING THE ABOVE FACT OR S, THE AO CAME TO HOLD THAT ALL THE SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP IN THE PROPERTY STOOD TRANSFERRED TO BUYERS AT THE TI ME OF ENTERING INTO THE AGREEMENT S INASMUCH AS THEY COULD FURTHER SELL OR TRANSFER THEIR INTEREST IN THE PROPERTY BEFORE THE HAPPENING OF THE EVENT OF REGISTRATION OF THE SALE DEED BY THE ASSESSEE IN THEIR FAVOUR . THE ASSESSEE S CONTENTION THAT IT WAS A B UILDER , WAS ALSO JETTISONED . THE AO HELD THE ASSESSEE TO BE A CONTRACTOR . ITA NOS.234&4316/DEL/2010 6 3.2. THE AO ALSO TOOK INTO CONSIDERATION THE ACCOUNTING STANDARD (AS) - 7 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (HEREINAFTER CALLED `THE INSTITUTE) IN 1983 PROVIDING TWO ALTERNATIVE METHODS FOR ACCOUNTING TREATMENT FOR CONSTRUCTION CONTRACTS, NAMELY, THE P ERCENTAGE COMPLETION METHOD AND THE C OMPLETED CONTRACT METHOD. IT WAS NOTICED THAT THE AS - 7 WAS REVISED IN 2002 W.E.F. 1.4. 20 03 ELIMINATING THE P ROJECT COMPLETION METHOD OR ANY OTHER METHOD AND RESTRICTING THE RECOGNITION OF REVENUE ON THE BASIS OF THE P ERCENTAGE OF COMPLETION METHOD ALONE . THE AO ALSO TOOK INTO CONSIDERATION THE M ERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE UNDER WHICH INCOME I S RECOGNIZED AT THE TIME OF ITS ACCRUAL . THE AO ALSO WENT THROUGH AS - 9 STIPULATING THAT FOR RECOGNITION OF REVENUE IN THE CASE OF REAL ESTATE SALES, IT WAS NECESSARY THAT THE CONDITIONS SPECIFIED IN PARAGRAPHS 10 AND 11 OF AS - 9 SHOULD BE SATISFIED . CONSIDERING THE PRESCRIPTION OF THE SAME, IT WAS HELD THAT THE REAL ESTATE SALE TAKES PLACE AT A POINT OF TIME WHEN ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP ARE TRANSFERRED AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT TO SELL. H E HELD THAT THE EVENT OF ENTERING INTO A GREEMENT TO SELL IS TO BE CONSTRUED ITA NOS.234&4316/DEL/2010 7 AS HAVING THE EFFECT OF TRANSFERRING OF THE SIGNIFICANT RISKS AND REWARDS OF THE OWNERSHIP TO BUYERS, PROVIDED, THE AGREEMENT IS LEGALLY ENFORCEABLE. 3.3. APPLYING THESE PRINCI PLES TO THE FACTS OF THE CASE, T HE AO FOUND THAT BY VIRTUE OF CLAUSE 13 OF THE AGREEMENT TO SELL ENTERED INTO WITH THE BUYERS, THE ASSESSEE TRANSFERRED THE PRICE RISK WHICH IS THE MOST SIGNIFICANT RISK IN THE REAL ESTATE BUSINESS. AS PER THIS CLAUSE, THE O NUS WA S ON THE BUYER TO STRICTLY ADHERE TO THE PAYMENT SCHEDULE, FAILING WHICH THE ENTIRE AMOUNT ALREADY PAID , WA S LIABLE TO BE FORFEITED. THAT IS HOW, HE OPINED THAT THERE WAS NO SIGNIFICANT UNCERTAINTY REGARDING THE AMOUNT OF CONSIDERATION TO BE RECEIVED BY THE ASSESSEE FR OM THE SALES AND IT WAS REASONABLE TO EXPECT THE ULTIMATE COLLECTION. HE FURTHER NOTICED THAT THE ASSESSEE TRANSFERRED TO THE BUYERS ALL THE RIGHTS AND INTERESTS IN THE PROPERTY INASMUCH AS THEY WERE ENTITLED TO TRANSFER SUCH RIG HTS AND INTERESTS IN THE PROPERTY TO THIRD PART IES WHICH MEAN T THAT THE ASSESSEE EXERCISED NO EFFECTIVE CONTROL IN SO FAR AS THE SALE ASPECT WAS CONCERNED. AS THE TERMS AND CONDITIONS OF THE AGREEMENTS TO SELL PROVIDED FOR THE TRANSFER OF RI SKS AND REWARD S IN THE OWNERSHIP OF THE ITA NOS.234&4316/DEL/2010 8 PROPERTY TO THE BUYERS, WITHOUT PREJUDICING THE RIGHT OF THE ASSESSEE TO RECEIVE SALE CONSIDERATION, THE AO HELD THAT THE INCOME SHOULD BE RECOGNIZED BY APPLYING THE PERCENTAGE OF COMPLETION METHOD. 3 . 4. IN VIEW OF THE ABOVE STATED FACTS, THE AO REJECTED THE BOOKS OF ACCOUNT RECOGNIZING REVENUE ONLY AT THE TIME WHEN TITLE DEEDS WERE REGISTERED IN FAVOUR OF THE BUYERS U NDER S ECTION 145 INCOME - TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) . HE WENT THROUGH THE DETAILS FILED BY THE ASSESSEE ABOUT THE ESTIMATED SALES OF THE PROJECT AT RS.17.79 CRORE . BY REDUCING TOTAL COST OF THE PROJECT AT RS.10.57 CRORE, THE AO ESTIMAT ED TOTAL PROFIT AT RS.7.22 CRORE. A PPL YING THE P ERCENTAGE COMPLETION METHOD, T HE AO BIFURCATED TOTAL PROFIT FROM THIS VENTURE IN TWO YEARS UNDER CONSIDERATION, NAMELY, RS.5.23 CRORE FOR THE A.Y. 2004 - 05 AND RS.1.56 CRORE FOR THE A.Y. 2005 - 06. ADDITION FOR A SUM OF RS.1.56 CRORE WAS MADE IN THE TOTAL INCOME DETERMINED U/S 143(3) OF THE ACT FOR THE A.Y. 2005 - 06. NOTICE U/S 148 WAS ISSUED FOR THE A.Y. 2004 - 05 AND IN THE ASSESSMENT COMPLETED U/S 147, HE COMPUTED TOTAL INCOME OF THE ASSESSEE AT A SUM OF RS. 5.23 CRORE . ITA NOS.234&4316/DEL/2010 9 4. THE LD. CIT(A) ACCEPTED THE CONTENTION S ADVANCED ON BEHALF OF THE ASSESSEE TO THE EFFECT THAT I) IT IS A `D EVELOPER AND NOT A `C ONTRACTOR ; II) THE REVISED AS - 7 EFFECTIVE FROM 1.4.2003, PROVIDING FOR RECOGNIZING REVENUE ON THE BASIS OF PERCENTAGE COMPLETION METHOD IS APPLICABLE ONLY TO THE C ONTACTORS AND NOT TO THE D EVELOPERS; AND III) THE GUIDANCE NOTE ON RECOGNITION OF REVENUE BY REAL ESTATE DEVELOPERS HAS BEEN ISSUED BY THE INSTITUTE IN M AY , 2006 AND, HENCE, THE SAME IS NOT APPLICABLE TO THE COMPUTATION OF INCOME OF THE AS SESSEE FOR THE YE AR S IN QUESTION. HE, THEREFORE, APPROVED THE ACTION OF THE ASSESSEE IN OFFERING INCOME FOR TAXATION ON THE REGISTRATION OF SALE DEEDS. THIS RESULTED INTO THE DELETION OF ADDITION OF RS.1.56 CRORE FOR THE A.Y. 2005 - 06 . THE LD. CIT(A) IN HIS ORDER FOR TH E A.Y. 2004 - 05 , REJECTED THE GROUNDS RAISED BY THE ASSESSEE CHALLENGING THE INITIATION OF REASSESSMENT. HOWEVER, F OLLOWING HIS REASONING GIVEN IN THE ORDER FOR THE A.Y. 2005 - 06, HE DELETED THE ADDITION OF RS.5.23 CRORE MADE BY THE AO FOR THE A.Y. 2004 - 05. I T WAS DIRECTED IN THE IMPUGNED ORDERS FOR BOTH THE YEARS THAT SUCH INCOME BE CONSIDERED IN CORRECT YEARS. THE REVENUE IS AGGRIEVED AGAINST THE DELETION OF ADDITIONS BY THE LD. CIT(A) . ITA NOS.234&4316/DEL/2010 10 5 . WE HAVE HEARD THE RIVAL SUBMISSION S AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS VIVID FROM THE NARRATION OF FACTS THAT WHEREAS THE ASSESSEE CLAIMED THAT THE INCOME IS CHA RGEABLE TO TAX AT THE TIME OF REGISTRATION OF SALE DEEDS TO THE BUYERS, THE AO HELD SUCH INCOME TO BE TAXABLE DURING THE PROGRESS OF CONTRACT ITSELF , THAT IS , ON THE BASIS OF PERCENTAGE COMPLETION METHOD. THUS THE ENTIRE CONTROVERSY REVOLVES AROUND THE TIMING OF THE ACCRUAL OF INCOME . T HE RE IS NO DISPUTE ON THE OTHERWISE TAXABILITY OF THE INCOME, AS THE ASSESSEE ALSO ADMITS THAT THE INCOME IS CHARGEABLE TO TAX , BUT IN THE YEARS OF REGISTRATION OF SALE DEED S . 6. 1. CHAPTER II OF THE ACT WITH THE MARGINAL NOTE : `BASIS OF CHARGE STARTS WITH SECTION 4, WHICH IS A CHARGING SECTION. SUB - SECTION (1) OF SECTION 4 PROVIDES THAT : ` WHERE ANY CENTRAL ACT ENACTS THAT INCOME - TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOME - TAX AT THAT RATE OR THOSE RATES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH, AND SUBJECT TO THE PROVISIONS (INCLUDING PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME - TAX) OF THIS ACT IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON . SCOPE OF ` TOTAL INCOME HAS BEEN SET OUT ITA NOS.234&4316/DEL/2010 11 IN SECTION 5 . IT PROVIDES THAT THE TOTAL INCOME OF ANY ` PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH IS (A) RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR ; OR (C) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR. THE TERM ` P REVIOUS YEAR HAS BEEN DEFINED IN SECTION 3 OF THE ACT TO MEAN : `THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE ASSESSMENT YEAR . THE TERM 'A SSESSMENT YEAR' HAS BEEN DEFINED IN SECTION 2(9) OF THE ACT TO MEAN : THE PERIOD OF TWELVE MONTHS COMMENCING ON THE 1ST D AY OF APRIL EVERY YEAR . A CONJOINT READING OF THE ABOVE PROVISIONS MAKES IT ADEQUATELY PALPABLE THAT INCOME EARNED DURING THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE ASSESSMENT YEAR IS CHARGEABLE TO TAX FOR THE RELEVANT ASSESSMENT YEAR. IN OTHER WORDS, IN THE ABSENCE OF ANY EXPRESS CONTRARY PROVISION IN THE ACT, INCOME OF A PERSON IS CHARGEABLE TO TAX FOR THE YEAR IN WHICH IT IS EARNED. THUS THE UNIT OF ASSESSMENT IS THE INCOME EARNED BY OF A PERSON DURING THE RELEVANT PREVIOUS YEAR. NEIT HER THE REVENUE CAN PREPONE THE TAXABILITY OF INCOME TO AN EARLIER YEAR NOR THE ITA NOS.234&4316/DEL/2010 12 ASSESSEE CAN POSTPONE THE TAXABILITY OF INCOME TO A LATER YEAR. THERE CAN BE NO ESTOPPEL AGAINST THE PROVISIONS OF THE ACT INASMUCH AS IT IS NOT OPEN TO AN ASSESSEE TO DETERMINE THE TIMING OF THE TAXABILITY OF INCOME AS PER HIS OWN SWEET WILL . IF A PARTICULAR INCOME IS CHARGEABLE TO TAX IN YEAR ONE, IT SHOULD BE CHARGED TO TAX IN THE SAME YEAR AND CANNOT BE SHIFTED TO YEAR TWO. IF SUCH A CHOICE IS USURPED BY AN ASSESS EE , IN CONTRADICTION O F THE EXPRESS PROVISIONS OF THE ACT, THEN INCOME OF BOTH THE YEARS, NAMELY, ONE AND TWO, WILL BE DISTORTED . INCLUDING AN INCOME IN THE TOTAL INCOME OF A WRONG YEAR, NOTWITHSTANDING THE SIMILAR RATE OF TAXATION IN BOTH THE YEARS , NOT O NLY BREACHES THE EXPRESS PROVISIONS OF THE ACT, BUT ALSO AFFECTS THE INTEREST LIABILITY OF THE ASSESSEE UNDER THE ACT . THUS, I T IS NOT ONLY EXPEDIENT BUT ALSO MANDATORY TO ENSURE THAT INCOME IS CHARGED TO TAX IN THE CORRECT YEAR. 6.2. THE ABOVE LEGAL POSITION HAS BEEN RECOGNIZED UNIFORMLY BY ALL THE HON BLE COURTS. THE HON BLE SUPREME COURT IN SIR KIKABHAI PREM CHAND VS. CIT (1953) 24 ITR 506 (SC) HAS HELD THAT : `FOR INCOME - TAX PURPOSES, EACH YEAR IS A SELF - CONTAINED ACCOUNTING PERIOD AND O NE CAN ITA NOS.234&4316/DEL/2010 13 ONLY TAKE INTO CONSIDERATION INCOME, PROFITS AND GAINS MADE IN THAT YEAR AND NOT POTENTIAL PROFITS WHICH M AY BE MADE IN ANOTHER YEAR. THE HON BLE APEX COURT IN P.M. MOHAMMED MEERAKHAN VS . CIT (1969) 73 ITR 735 (SC) HAS HELD THAT : `UNDER THE IT ACT FOR THE PURPOSE OF ASSESSMENT EACH YEAR IS A SELF - CONTAINED UNIT AND IN THE CASE OF A TRADING ADVENTURE THE PROFITS HAVE TO BE COMPUTED IN THE MANNER PROVIDED BY THE STATUTE. THE HON BLE SUMMIT COURT IN CIT VS . BRITI SH PAINTS INDIA LTD. (1991) 188 ITR 44 (SC) TURNED DOWN THE VIEW OF THE TRIBUNAL BY NOTICING THAT THE SYSTEM ADOPTED BY THE ASSESSEE, AS FOUND BY THE TRIBUNAL, IS APT TO DIMINISH THE ASSESSMENT OF THE TAXABLE PROFIT OF A YEAR. THE PROFIT OF ONE YEAR IS LIKELY TO BE SHIFTED TO ANOTHER YEAR WHICH IS AN INCORRECT METHOD OF COMPUTING PROFITS AND GAINS FOR THE PURPOSE OF ASSESSMENT. EMPHASIZING ON THE PRINCIPLE OF THE DEDUCING CORRECT INCOME FOR EACH YEAR, THEIR LORDSHIPS HAVE HELD THAT : ` EACH YEAR BEING A SELF - CONTAINED UNIT, AND THE TAXES OF A PARTICULAR YEAR BEING P AY ABLE WITH REFERENCE TO THE INCOME OF THAT YEAR , AS COMPUTED IN TERMS OF THE ACT, THE METHOD ADOPTED BY THE ASSESSEE HAS BEEN FOUND TO BE SUCH THAT INCOME CANNOT PROPERLY BE DEDUCED THEREFRO M. IT IS, THEREFORE, ITA NOS.234&4316/DEL/2010 14 NOT ONLY THE RIGHT BUT THE DUTY OF THE ASSESSING OFFICER TO ACT IN EXERCISE OF HIS STATUTORY POWER, AND REJECT THE ACCOUNTING SYSTEM ADOPTED BY THE ASSESSEE, AS HE HAS DONE IN THE INSTANT CASE, FOR DETERMINING WHAT, IN HIS OPINION, IS THE CORRECT TAXABLE INCOME. IT IS MANIFEST FROM THE ABOVE ENUNCIATION OF LA W BY THE HON BLE SUPREME COURT THROUGH VARIOUS DECISIONS THAT INCOME FOR EACH YEAR SHOULD BE CORRECTLY COMPUTED. IN NO CASE, CAN THE INCOME OF ONE YEAR BE SHIFTED TO ANOTHER YEAR. 7. 1. COMING TO THE FACTS OF THE EXTANT CASE, I T CAN BE SEEN THAT THE ASSESSEE CLAIMED ITSELF TO BE A `D EVELOPER OF A BUILDING, WHEREAS THE AO HELD IT TO BE A `C ONTRACTOR . WE, ERGO, NEED TO DECIDE FIRST AS TO WHETHER THE ASSESSEE IS A DEVELOPER/ B UILDER OR A C ONTRACTOR. IN THE CONTEXT OF CONSTRUCTION ACTIVITY, A CONTRACTOR IS ORDINARILY A PERSON WH O UNDERTAKES TO EXECUTE THE CONSTRUCTION ACTIVITY ON BEHALF OF ANOTHER PERSON FOR A CONSIDERATION . WHER E A CONTRACTOR IS REQUIRED TO INCUR SOME COSTS ALSO IN THE EXECUTION OF THE CONTRACT, THEN, THE CONSIDERATION IS COSTS INCURRED PLUS A FURTHER AMOUNT , WHICH IS THE REMUNERATION OF THE CONTRACTOR. ON THE OTHER HAND, I N A CASE WHERE THE O WNER UNDERTAKES ITA NOS.234&4316/DEL/2010 15 CON STRUCTION ACTIVITY UPON ITSELF AND CONSTRUCTS A COMMERCIAL BUILDING FOR SALE, HE IS CALLED A DEVELOPER OR A BUILDER . SINCE THE ENTIRE PROJECT BELONGS TO SUCH O WNER /DEVELOPER , HE IS ENTITLED TO INCOME FROM THE TRANSFER OF COMMERCIAL UNITS TO THE BUYER S . IN A NUTSHELL, WHEREAS, A C ONTRACTOR DOES NOT HOLD ANY OWNERSHIP INTEREST IN THE CONSTRUCTED BUILDING AND EARNS INCOME FROM THE OWNER OF THE COMMERCIAL VENTURE FOR THE CONSTRUCTION ACTIVITY UNDERTAKEN BY HIM, A D EVELOPER /B UILDER HOLDS OWNERSHIP INTEREST I N THE CONSTRUCTED BUILDING AND EARNS INCOME ONLY FROM THE TRANSFER OF THE COMMERCIAL UNITS. 7. 2. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE ENTERED INTO AN AGREEMENT WITH SEVEN PERSONS DESCRIBED AS ` THE OWNERS AND ONE PERSON DESCRIBED AS ` THE CONFIRMING VENDOR ON 13.2.2003 , A COPY OF WHICH IS AVAILABLE ON RECORD. PURSUANT TO THIS A GREEMENT, THE CONFIRMING VENDOR AGREED TO SELL THE RIGHTS OF CONSTRUCTION AND OWNERSHIP OF THE GIVEN AREA TO THE ASSESSEE AND THE OWNERS CONFIRMED SUCH SALE . THE ASSESSEE AGREED TO P AY A SUM OF RS.313 .16 LAC AS CONSIDERATION TO THE CONFIRMING VENDOR AND ACTUALLY PAID A SUM OF ITA NOS.234&4316/DEL/2010 16 RS.313.06 LAC VIDE CHEQUE DATED 13.2.2003 AT THE TIME OF EXECUTION OF THIS A GREEMENT , LEAVING A SUM OF RS.10,000/ - TO BE PAID LATER ON. CLAUSE 2 OF THE AGREEMENT PROVIDES THAT THE CONFIRMING VENDOR HAS GIVEN POSSESSION OF THE PROPERTY TO THE ASSESSEE. C LAUSE 3 PROVIDE S THAT THE OWNER S AND THE CONFIRMING VENDOR EMPOWER THE ASSESSEE TO DEV ELOP, CONSTRUCT AND MARKET THE PROJECT. CLAUSE 4 OF THE A GREEMENT STIPULATES THAT: THE C ONFIRMING VENDOR AND THE O WNERS HAVE BEEN LEFT WITH NO RIGHT, INTEREST, CLAIM OR CONCERN OF ANY NATURE WITH THE SAID PROPERTY AND, HENCEFORTH, THE S ECOND P ARTY (NAMEL Y, THE ASSESSEE) IS FULLY ENTITLED AND EMPOWERED TO CONSTRUCT, USE AND ENJOY THE SAID PROPERTY IN ANY MANNER THE S ECOND PARTY LIKES , WITHOUT ANY OBJECTION/HINDRANCE BY THE C ONFIRMING VENDOR AND/OR THE O WNERS OR ANY OTHER PERSON CLAIMING THROUGH OR UNDER TH EM . CLAUSE 5 OF THE A GREEMENT , WHICH IS QUITE RELEVANT, PROVIDES THAT: THE SECOND PARTY (I.E. THE ASSESSEE ) SHALL HAVE FULL RIGHT TO RECEIVE, REALIZE, RECOVER AND COLLECT THE SALE PROCEEDS, RENT AND PROFIT OF THE SAID PROPERTY IN ANY MANNER. A PERUSAL OF THE ABOVE CLAUSES OF THE AGREEMENT AMPLY INDICATES THAT PURSUANT TO THIS A GREEMENT , THE ASSESSEE ACQUIRED OWNERSHIP RIGHTS OVER THE LAND FOR THE ITA NOS.234&4316/DEL/2010 17 PURPOSE S OF CONSTRUCTION , DEVELOPMENT AND TRANSFER OF THE COMMERCIAL BUILDING TO THE EXCLUSION OF THE ERSTWHILE OWNERS, WHO SURRENDERED THEIR RIGHTS FOR A DEFINED CONSIDERATION . THUS, IT IS A MANIFEST, THAT T HE ASSESSEE IS A B UILDER /D EVELOPER IN CONTRAST TO A C ONTRACTOR, WHO FIRST ACQUIRED THE OWNERSHIP RIGHTS OVER THE LAND BY P AY ING THE AGREED CONSIDERATION AND THEN UNDERTOOK THE CONSTRUCTION AND SALE OF SUCH COMMERCIAL UNITS UPON ITSELF WITHOUT ANY SORT OF INTERVENTION BY THE ERSTWHILE OWNERS. THE IMPUGNED ORDER IS COUNTENANCED TO THIS EXTENT. 8. 1. IT CAN BE SEEN FROM TH E ORDERS OF THE AUTHORITIES BELOW THAT A LOT OF ATTENTION HAS BEEN GIVEN TO THE MANDATE OF VARIOUS ACCOUNTING STANDARDS AND GUIDANC E NOTES ISSUED BY THE INSTITUTE. THOUGH SOME OF THE GROUNDS RAISED IN THE PRESENT APPEAL S ASSAIL THE FINDING RENDERED BY THE LD. CIT(A) ON THE APPLICABILITY OR OTHERWISE OF SUCH ASS AND THE GUIDANCE NOTE, BUT THE DECISION HAS ALSO BEEN CHALLENGED ON THE DELETION OF ADDITION DE HORS SUCH ASS ETC. AS SUCH, IT BECOMES IMP E R A T IVE TO HAVE A GLANCE AT THE MATERIAL CONTENTS OF THE RELEVANT ASS . ITA NOS.234&4316/DEL/2010 18 8.2. THE AS - 7 DEAL ING WITH ACCOUNTING FOR CONSTRUCTION CONTRACTS , P RIOR TO ITS REVISION IN THE YEAR 2002 APPLICABLE FROM 1.4. 20 03 , PROVIDES THAT IT APPLIES BOTH TO THE C ONTRACTORS AND D EVELOPERS. THIS AS - 7 SPECIFIES TWO METHODS OF ACCOUNTING FOR CONSTRUCTION CONTRACTS, NAMELY, THE P ERCENTAGE /PROGRESSIVE COMPLETION METHOD AND THE C OMPLETED CONTRACT METHOD , WHICH IS ALSO CALLED PROJECT COMPLETION METHOD . THE REVISED AS - 7 APPLIES ONLY TO C ONTRACTORS AND NOT TO D EVELOPERS FOR THE ACCOUNTING TREATMENT OF CONSTRUCTION CONTRACTS. IT PROVIDES THE ONLY METHOD OF ACCOUNTING FOR SUCH CONTRACTS , BEING , THE P ERCENTAGE OF COMPLETION METHOD. 8.3. THEREAFTER, THE INSTITUTE ISSUED GUIDANCE NOTE ON: RECOGNITION OF REVENUE BY REAL ESTATE DEVELOPERS IN 2006. SUCH GUIDANCE NOTE PROVIDES THAT ALTHOUGH AS - 9 IS APPLICABLE FOR RECOGNITION OF REVENUE ARISING FROM REAL ESTATE SALES, YET, A NEED WAS BEING FELT TO AMPLIFY THE APPLICATION OF PRINCIPLES OF AS - 9 TO REAL ESTATE SALES, PARTICULARLY, IN CASES WHERE THE SELLER HAS ENTERED INTO AN AGREEMENT FOR SALE WITH THE BUYER AT THE INITIAL STAGES OF CONSTRUCTION. IN ESSENCE, THIS GUIDANCE NOTE APPLIES TO DEVELOPERS. IT PROVIDES THAT THE AGREEMENT FOR SALE IS AL SO ITA NOS.234&4316/DEL/2010 19 CONSIDERED T O HAVE THE EFFECT OF TRANSFERRING ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP TO THE BUYER PROVIDED THE AGREEMENT IS LEGALLY ENFORCEABLE AND SUBJECT TO THE SATISFACTION OF THE CONDITIONS, BEING, I) THE SELLER HAS TRANSFERRED TO THE BUYER ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP AND THE SELLER RETAINS NO EFFECTIVE CONTROL ON THE REAL ESTATE TO A DEGREE USUALLY ASSOCIATED WITH OWNERSHIP; II) NO SIGNIFICANT UNCERTAINTY EXISTS REGARDING THE AMOUNT OF CONSIDERATION THAT WILL BE DERIVED FROM THE REAL ESTATE SALES; AND III) IT IS NOT UNREASONABLE TO EXPECT ULTIMATE COLLECTION. ONCE THE SELLER HAS TRANSFERRED ALL THE SIGNIFICANT RISKS AND REWARDS O F OWNERSHIP TO THE BUYER AND OTHER CONDITIONS FOR RECOGNITION OF REVENUE SPECIFIED IN PARAGRAPHS 10 AND 11 OF AS - 9 ARE SATISFIED, ANY FURTHER ACTS ON THE REAL ESTATE PERFORMED BY THE SELLER ARE, IN SUBSTANCE, PERFORMED ON BEHALF OF THE BUYER IN THE MANNER SIMILAR TO A CONTRACTOR. WHEN THE ABOVE MENTIONED THREE CONDITIONS ARE FULFILLED, THE SELLER IS CONSIDERED TO HAVE TRANSFERRED ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP TO THE BUYER ON THE ENTERING INTO AGREEMENT FOR SALE PROVIDED SUCH AGREEMENT IS LE GALLY ENFORCEABLE . I NCOME IN SUCH CASES SHOULD BE RECOGNIZED BY APPLYING THE P ERCENTAGE COMPLETION METHOD. ITA NOS.234&4316/DEL/2010 20 8.4. THE INSTITUTE CAME OUT WITH ` GUIDANCE NOTE O N ACCOUNTING FOR REAL ESTATE TRANSACTIONS (REVISED 2012) . THIS APPLIES BOTH TO THE CONTRACTORS AND DEVELOPERS. IT SUBSTANTIALLY REITERAT ES THE PRESCRIPTION OF 2006 GUIDANCE NOTE BY PROVIDING THAT IN CASE OF REAL ESTATE SALES, THE SELLER USUALLY ENTERS INTO AN AGREEMENT FOR SALE WITH THE BUYER AT INITIAL STAGES OF CONSTRUCTION. THIS A GREEMENT FOR SALE IS ALSO CONSIDERED TO HAVE THE EFFECT OF TRANSFERRING ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP TO THE BUYER PROVIDED THE AGREEMENT IS LEGALLY ENFORCEABLE AND SUBJECT TO THE SATISFACTION OF CONDITIONS WHICH SIGNIFY TRANSFERRING OF SI GNIFICANT RISKS AND REWARDS EVEN THOUGH THE LEGAL TITLE IS NOT TRANSFERRED OR THE POSSESSION OF THE REAL ESTATE IS NOT GIVEN TO THE BUYER. ONCE THE SELLER HAS TRANSFERRED ALL THE SIGNIFICANT RISKS AND REWARDS TO THE BUYER, ANY ACTS ON THE REAL ESTATE PERFO RMED BY THE SELLER ARE, IN SUBSTANCE, PERFORMED ON BEHALF OF THE BUYER IN THE MANNER SIMILAR TO A CONTRACTOR. ACCORDINGLY, R EVENUE IN SUCH CASES IS RECOGNIZ ED BY APPLYING THE P ERCENTAGE OF COMPLETION METHOD. ITA NOS.234&4316/DEL/2010 21 8.5. ON AN OVERVIEW OF THE ABOVE ACCOUNTING STANDARDS AND GUIDANCE NOTE S , IT IS MANIFEST THAT FROM TIME TO TIME, THE INSTITUTE HAS LAID DOWN THE ` P ROCEDURE FOR ACCOUNTING OF CONSTRUCTION CONTRACTS UNDERTAKEN BY C ONTRACTORS AND D EVELOPERS. WHEREAS THE PRE - REVISED AS - 7 PROVIDED FOR ACCOUNTING O F CON STRUCTION CONTRACTS EITHER UNDER THE P ROJECT COMPLETION METHOD OR THE P ERCENTAGE COMPLETION METHOD AS APPLICABLE BOTH TO THE C ONTRACTORS AND D EVELOPERS ; THE REVISED AS - 7 , APPLICABLE FROM 1.4. 20 03 , LIMIT S ITS APPLICABILITY ONLY TO C ONTRACTORS BY PROVIDING THAT ACCOUNTING BE DONE ONLY AS PER THE P ERCENTAGE OF COMPLETION METHOD . GUIDANCE NOTE ISSUED IN 2006 AGAIN EXTENDS TO BOTH THE C ONTRACTORS AS WELL AS THE D EVELOPERS AND PROVIDES FOR ACCOUNTING CONSTRUCTION AS PER P ERCENTAGE COMPLETION METHOD. SIMILAR IS THE POSITION UNDER GUIDANCE NOTE 2012 WHICH A LSO EX T ENDS TO BOTH AND STIPULATES FOR ACCOUNTING UNDER P ERCENTAGE COMPLETION METHOD. A QUESTION ARISES AS TO WHETHER INCOME OF DEVELOPERS DURING THE PERIOD , AFTER COMING INTO FORCE OF THE REVISED AS - 7 BUT B EFORE THE GUIDANCE NOTE IN 2006 , IS NOT AMENABLE TO ANY PARTICULAR RULE OF TAXATION? THE CONCLUSION OF THE LD. CIT(A) IS THAT DURING THIS PERIOD, THE INCOME CHARG E ABLE TO TAX SHOULD BE DETERMINED IN ITA NOS.234&4316/DEL/2010 22 ACCORDANCE WITH THE PRE - REVISED AS - 7. THE NATURAL COROLLARY OF THE LD. CIT(A) S VIEW IS THAT THE INCOME SHOULD BE CHARGED TO TAX AS PER THE MANDATE OF THE ASS. A PERTINENT QUESTION WHICH LOOMS LARGE IS WHETHER, THE ACCOUNTING STANDARDS DETERMINE THE TAXABILITY OF AN INCOME UNDER THE ACT ? 9.1. THERE CAN BE NO QUARREL THAT THE A CCOUNTING STANDARDS ISSUED BY THE INSTITUTE FROM TIME TO TIME RESTRICT THEIR APPLICATION TO THE ASPECTS OF MAINTAINING ACCOUNTS AND DETERMINING TRUE PROFIT OR LOSS ACCORDINGLY. THESE A CCOUNTING STANDARDS OR GUIDANCE NOTES CAN HAVE NO BEARING ON THE QUESTION OF DETERMINATION OF TOTAL INCOME UNDER THE INCOME - TAX ACT, 1961. SUCH A CCOUNTING STANDARDS ETC. DO NOT ACQUIRE ANY STATUTORY FORCE UNDER THE PROVISIONS OF THE ACT IN SO FAR AS THE QUESTION OF DETERMINA TION OF TOTAL INCOME IS CONCERNED. S COPE OF THE TOTAL INCOME IS CONT ROLLED BY SECTION 5 OF THE ACT AND NOT BY THE A CCOUNTING STANDARDS ETC. ISSUED FROM TIME TO TIME. AT THIS JUNCTURE, IT IS SIGNIFICANT TO NOTE THE DIRECTIVE OF S ECTION 145 OF THE ACT, WHICH PROVIDES FOR THE METHOD OF ACCOUNTING. SUB - SECTION (1) STATES THAT INCOME CHARGEABLE UNDER THE HEAD 'PROFITS ITA NOS.234&4316/DEL/2010 23 AND GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURCES' SHALL, SUBJECT TO THE PROVISIONS OF SUB - SECTION (2), BE COMPU TED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. SUB - SECTION (2) OF SECTION 145 , WHICH IS RELEVANT FOR OUR PURPOSE , STIPULATES THAT: THE CENTRAL GOVERNMENT M AY NOTIFY IN THE OFFICIAL GAZETTE FROM T IME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. SUB - SECTION (3) OF SECTION 145 PROVIDES THAT: `WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUN TS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB - SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB - SECTION (2), HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER M AY MAKE AN ASSESSMENT IN THE MANNER PROVID ED IN SECTION 144 . IT TRANSPIRES FROM THE PRESCRIPTION OF SECTION 145 THAT ONLY THE ACCOUNTING STANDARDS ISSUED BY THE CENTRAL GOVERNMENT UNDER THIS SECTION ARE MANDATORY AND HAVE A BEARING ON THE COMPUTATION OF TOTAL INCOME. ANY OTHER A CCOUNTING STANDARD ISSUED BY ANY STATUTORY OR NON - STATUTORY BODY CANNOT AFFE CT THE COMPUTATION OF TOTAL INCOME UNDER THE ITA NOS.234&4316/DEL/2010 24 PROVISIONS OF THE ACT. THE A CCOUNTING STANDARDS ETC. ISSUED BY THE INSTITUTE, HAVE, OF COURSE, RELEVANCE IN THE MANNER OF MAINTENANCE OF ACCOUNTS, BUT, CANNOT OVERR IDE THE MANDATE OF THE PROVISIONS OF THE ACT. 9.2. IT IS A WELL SETTLED LEGAL POSITION THAT THE TAXING PRINCIPLES DO NOT NECESSARILY GO HAND IN HAND WITH THE ACCOUNTING PRINCIPLE. T HE HON BLE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. CHEMICALS VS . CIT (1997) 227 ITR 172 (SC) HAS LAID DOWN IN SO MANY WORDS THAT THE TAXING PRINCIPLES CANNOT WALK ON THE FOOTSTEPS OF THE ACCOUNTING PRINCIPLES. FOLLOWING OBSERVATIONS OF THE HON BLE SUPREME COURT IN THE AFORE NOTED CASE MERIT CONSIDERATION : `IT IS TR UE THAT THIS COURT HAS VERY OFTEN REFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MADE BY A COMPANY OR VALUE OF THE ASSETS OF A COMPANY. BUT WHEN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FROM TH AT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIPLES OF LAW AND NOT IN ACCORDANCE WITH ACCOUNTANCY PRACTICE . ACCOUNTING PRACTICE CANNOT OVERRIDE SECTION 56 OR ANY OTHER PROVISION OF THE ACT. AS WAS POINTED OU T ITA NOS.234&4316/DEL/2010 25 BY LORD RUSSELL IN THE CASE OF B. S. C. FOOTWEAR LTD. [1970] 77 ITR 857, 860 (CA), THE INCOME - TAX LAW DOES NOT MARCH STEP BY STEP IN THE FOOTPRINTS OF THE ACCOUNTANCY PROFESSION. THE SAME VIEW HAS BEEN REITERATED BY THE HON BLE SUPREME COURT IN GODHRA ELECTRICITY COMPANY LTD. VS . CIT (1997) 225 ITR 746 (SC) , BY HOLDING THAT : `INCOME - TAX IS A LEVY ON INCOME. NO DOUBT, THE INCOME - TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED, VIZ., THE ACCRUAL OF THE INCOME OR I TS RECEIPT; BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOK - KEEPING, AN ENTRY IS MADE ABOUT A HYPOTHETICAL INCOME, WHICH DOES N OT MATERIALISE. I T , THEREFORE, FOLLOWS FROM THE RAT IO DECIDENDI OF THE ABOVE JUDGMENTS THAT ACCOUNTING PRINCIPLES HAVE ABSOLUTELY NO ROLE TO PL AY IN THE MATTER OF DETERMINATION OF TOTAL INCOME UNDER THE ACT. 9.3. HERE, WE WOULD LIKE TO RECORD THAT SOME TIMES THE JUDICIAL BODIES REFER TO THE ACCOUNTING P RINCIPLES IN THEIR JUDGMENTS. I F AN ACCOUNTING PRINCIPLE IS REFERRED TO BY SOME JUDICIA L BODY , THEN THERE IS AN UNDERLYING PRESUMPTION THAT SUCH ACCOUNTING PRINCIPLE IS IN CONFORMITY WITH AND NOT ITA NOS.234&4316/DEL/2010 26 IN DEROGATION OF THE TAXATION PRINCIPLE. A CCOUNTING P R INCIPLES , IN THE ABSENCE OF THEIR CONFORMITY WITH THE TAXATION PRINCIPLES , HAVE NO PLACE IN THE MATTER OF COMPUTATION OF TOTAL INCOME. THE CRUX OF THE MATTER IS THAT ONLY THE TAXATION PRINCIPLES ARE TO BE FOLLOWED IN THE COMPUTATION OF TOTAL INCOME UNDER THE ACT. 10. TURNING TO THE TAXATION PRINCIPLE RELEVANT FOR OUR PURPOSE , WE FIND THAT S ECTION 5 CONTAINS THE SCOPE OF TOTAL INCOME . IT PROVIDES, INTER ALIA , THAT ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE, IS INCLUDED IN THE SCOPE OF TOTAL INCOME. UNDER THE M ERCANTILE SYSTEM OF ACCOUNTING, WHICH THE EXTANT ASSESSEE IS FOLLOWING, AN INCOME BECOMES TAXABLE WHEN RIGHT TO RECEIVE AN INCOME IS FINALLY ACQUIRED. ORDINARILY, WHEN SOME GOODS /PRODUCTS ARE SOLD BY A BUSINESSMAN , INCOME DOES NOT ARISE BEFORE THE TRANSFER OF TITLE IN SUCH GOODS TO THE BUYER. IT IS BECAUSE THAT TILL THAT TIME, THE BUYER DOES NOT ACQUIRE ANY RISKS AND REWARDS ATTACHED TO THE PRODUCT , WHICH PASS ONLY WITH THE SALE. BUT IF THE PRODUCT UNDER SALE IS OF A UNIQUE NATURE , SUCH AS , A COMMERCIAL LY CONSTRUCTED UNIT , FOR WHICH THE DEVELOPER HAS ENTERED INTO AGREEMENT FOR SALE AT THE INITIAL STAGE OF CONSTRUCTION BY TRANSFERRING ITA NOS.234&4316/DEL/2010 27 ALL SIGNIFICANT R ISKS AND REWARDS OF THE OWNERSHIP TO THE BUYER, THE INCOME ACCRUES ON YEAR - TO - YEAR BASIS BY CONSIDERING THE PERCENTAGE OF COMPLETION OF THE PROPERTY UNDER TRANSFER. IT IS SO FOR THE REASON THAT AFTER SIGNING AGREEMENT TO SELL, T HE DEVELOPER ACQUIRES AN INFALLIBLE RIGHT OVER THE PAYMENT S RECEIVED TOWARDS SALE CONSIDERATION WHICH COINCIDE WITH THE PROGRESS IN CONSTRUCTION . T HE BUYER SIMULTANEOUSLY ACQUIR ES OWNERSHIP OF THE RIGHT IN THE PROPERTY MUCH BEFORE THE TRANSFER OF LEGAL TITLE IN HIS FAVOUR . SUCH A RIGHT IN THE HANDS OF BUYER IS A VALUABLE RIGHT CAPABLE OF TRANSFER TO ANY THIRD PERSON AT ANY STAGE OF CONSTRUCTION. AS SUCH, IT IS WRONG TO S AY THAT NO PROFIT ACCRUES TO THE DEVELOPER/BUILDE R TILL THE EXECUTION OF REGISTERED SALE DEED. THE PO SITION M AY BE DIFFERENT WHE N THE DEVELOPER UNDERTAKES THE CONSTRUCTION WORK WITHOUT ENTERING INTO ANY AGREEMENT FOR SALE TO THE BUYERS AT THE INITIAL STAGE. WHE N THE DEVELOPER FIRST COMPLETES THE CONSTRUCTION WORK AT HIS OWN AND THEN SELLS THE COMMERCIAL UNITS TO THE BUYERS, NO INCOME CAN BE SAID TO HAVE ACCRUED TO THE DEVELOPER TILL THE CONSTRUCTION IS COMPLETED AND SALE IS MADE TO THE BUYERS BY TRANSFER OF LEGAL TITLE. THE REASON BEING, THAT TILL THE TRANSFER OF TITLE TO THE BUYERS, IT IS ON LY THE DEVELOPER WHO HOLDS ALL ITA NOS.234&4316/DEL/2010 28 THE RISKS AND REWARDS OF OWNERSHIP. INCOME BECOMES TAXABLE ONLY WHEN IT ACCRUE S AND IT ACCRUES WHEN RIGHT TO RECEIVE IT IS FINALLY ACQUIRED. A R IGHT TO RECEIVE INCOME IN THE CASE OF SALE OF COMMERCIAL UNIT IS ACQUIRED WHEN RISKS AND REWARDS ATTACHED TO ITS OWNERSHIP ARE TRANSFERRED TO THE BUYERS AND NOT BEFORE OR AFTER THAT. IT IS BUT NATURAL THAT NO DEVELOPER WILL TRANSFER RISKS AND REWARDS OF O WNERSHIP TO THE BUYERS UNTIL HE HAS SECURED THE RECEIPT OF SALE CONSIDERATION. THIS APPEARS TO BE THE REASON WHICH PROPELL ED THE INSTITUTE TO COME OUT WITH GUIDANCE NOTE IN 2006 REQUIRING THE ADOPTION OF THE PERCENTAGE COMPLETION METHOD ALONE FOR THE RECORDING OF ACCOUNTING TRANSACTIONS BY DEVELOPERS SO THAT THE ACCOUNTS GIVE A TRUE AND FAIR VIEW OF ITS PROFITS. SIMILAR VIEW HAS BEEN REITERATED IN THE GUIDANCE NOTE ISSUED IN 2012. SO THE LITMUS TEST OF ACCRUAL OF INCOME OF A DEVELOPER UNDER THE MER CANTILE SYSTEM OF ACCOUNTING IS THE PASSING OF RISKS AND REWARDS OF OWNERSHIP TO THE BUYER S. 11 . 1. THE HON BLE DELHI HIGH COURT IN TIRATH RAM AHUJA PVT. LTD. VS. CIT (1976) 103 ITR 15 (DEL) , HAS HELD THAT IN THE CASE OF A CONTRACT, THE ITA NOS.234&4316/DEL/2010 29 PROFITS CAN BE ESTIMATED ON THE BASIS OF RECEIPTS IN EACH YEAR AND ONE NEED NOT WAIT TILL THE COMPLETION OF CONTRACT. THE FOLLOWING OBSERVATIONS OF THE HON BLE JURISDICTIONAL HIGH COURT MERIT CONSIDERATION : IT IS A JUDICIALLY RECOGNIZED PROPOSITION THAT IN THE CASE OF CONTRACTS, IN ORDER TO ASCERTAIN THE INCOME, ONE NEED NOT WAIT TILL THE CONTRACT IS COMPLETED, AND THAT IT IS OPEN TO THE REVENUE TO ESTIMATE THE PROFIT ON THE BASIS OF THE RECEIPTS IN EACH YEAR OF CONSTRUCTION, ALTHOUGH THE CONTRACT IS NOT COMPLETE. IT IS SIGNIFICANT TO MENTION THAT THIS JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT , WHICH HAS SINCE BEEN AFFIRMED BY THE HON BLE SUPREME COURT IN TIRATH RAM AHUJA PVT. LTD. VS. CIT (19 90 ) 1 86 ITR 428 ( SC ), WAS RENDERED IN THE CONTEXT OF A CONTRACTOR AND NOT A BUILDER /DE VELOPER . NOT WITHSTANDING THE ABOVE JUDGMENT ADVOCATING FOR THE ADOPTION OF P ERCENTAGE COMPLETION METHOD, WE FIND THAT THE HON BLE DELHI HIGH COURT IN CIT VS. SABH INFRASTRUCTURE LTD ., VIDE ITS RECENT JUDGMENT DATED 7.1. 20 15, HAS APPROVED THE VIEW TAKEN BY THE TRIBUNAL TAKEN IN DCIT VS. M/S SABH INFRASTRUCTURE LTD. , A COPY OF WHICH ORDER HAS BEEN PLACED ON RECORD. IN THIS CASE, THE TRIBUNAL NOTICED THAT THE ASSESSEE WAS A REAL ESTATE DEVELOPER AND NOT A CONSTRUCTION CONTRA CTOR. IT ITA NOS.234&4316/DEL/2010 30 RECORDED IN PARA 9.1 OF ITS ORDER THAT: THE ASSESSEE IN THIS CASE HAS FOLLOWED PROJECT COMPLETION METHOD WHICH IS ONE OF THE PRESCRIBED METHODS. IT FURTHER OBSERVED IN PARA 10 THAT: PROJECT COMPLETION METHOD IS AN ESTABLISHED METHOD OF ACCOUN TING WHICH THE ASSESSEE HAS BEEN FOLLOWING CONSISTENTLY FROM THE PRECEDING SO MANY YEARS AND THE SAME HAS NEVER BEEN DISTURBED BY THE R EVENUE. THAT IS HOW , THE TRIBUNAL APPROVED THE FOLLOWING OF THE P ROJECT COMPLETION METHOD AND THE HON BLE HIGH COURT, I N TURN, APPROVED THE VIEW TAKEN BY THE TRIBUNAL. APART FROM THESE CASES, WE FIND THAT THERE ARE MANY JUDGMENTS APPROVING EITHER OF THESE METHODS, CONSISTENTLY FOLLOWED BY THE TAXP AY ER S . IF WE LOOK AT THE JURISPRUDENCE ON THE ACCRUAL OF INCOME IN THE CIRCUMSTANCES AS ARE PREVAILING BEFORE US, IT EMERGES THAT THE HON BLE C OURTS HAVE FOLLOWED ONE OF THE TWO METHODS, NAMELY, EITHER THE P ROJECT COMPLETION METHOD OR THE P ERCENTAGE COMPLETION METHOD , AS CONSISTENTLY FOLLOWED BY THE ASSESSEE . 11.2. THE D OCTRINE OF S TARE DECISIS MEANS `TO STAND BY THE DECIDED C ASES OR `TO UPHOLD PRECEDENTS . IT STATES THAT WHEN A POINT OF LAW HAS ITA NOS.234&4316/DEL/2010 31 BEEN DECIDED, IT TAKES THE FORM OF A PRECEDENT WHICH IS TO BE FOLLOWED SUBSEQUENTLY AND SHOULD NOT NORMALLY BE DEPARTED FROM. A DECISION WHICH IS FOLLOWED FOR A LONG TIME WILL GENERALLY BE FOLLOWED, EVEN THOUGH THE COURT BEFORE WHOM THE MATTER ARISES AFTERWARDS MIGHT BE OF DIFFERENT VIEW. THIS RULE HAS BEEN QUOTED WITH APPROVAL BY THE HON BLE SUPREME COURT IN U NION OF INDIA VS . AZADI BACHAO ANDOLAN (2003) 263 ITR 706 (SC) . 11.3. NOTWITHSTANDING OUR OBSERVATIONS IN PARA 10 SUPRA , AND RESPECTFULLY FOLLOWING THE DICTUM OF S TARE DECISIS , WE WOULD ALSO PROCEED WITH THE OPTION TO THE ASSESSEE TO FOLLOW ONE OF THE TWO METHODS ON A CONSISTENT BASIS, NAMELY, THE PROJECT COMPLETION METHOD AND THE PERCENTAGE OF COMPLETION METHOD. 12.1. BEFORE APPLYING THEM, IT IS SINE QUA NON TO NOTE THEIR S ALIENT FEATURES. UNDER THE P ERCENTAGE OF COMPLETION METHOD, INCOME ACCRUES MATCHING WITH THE STAGE OF COMPLETION REACHED UP TO THE END OF THE YEAR . CAVEAT IS THAT THE RISKS AND REWARDS IN THE CONSTRUCTION MUST HAVE BEEN ITA NOS.234&4316/DEL/2010 32 TRANSFERRED TO THE BUYER. IN THE A BSENCE OF SUCH A TRANSFER, THERE CAN BE NO QUESTION OF ACCRUAL OF INCOME SIMPLY ON THE BASIS OF THE OWNER CONSTRUCTING HIS PROPERTY MEANT FOR SALE ON COMPLETION AT A LATER STAGE . INCOME IS COMPUTED UNDER THIS METHOD BY DEDUCTING T HE COSTS INCURRED IN REACHING THE STAGE OF COMPLETION FROM THE PROPORTIONATE SALE PRICE ATTRIBUTABLE TO THE WORK COMPLETED. IN CONTRAST TO THAT, UNDER THE PROJECT COMPLETION METHOD, OR AS WE ALSO COMMONLY CALL, THE C OMPLETED CONTRACT METHOD, INCOME ACCRUE S ONLY WHEN THE CONTRACT IS COMPLETED OR SUBSTANTIALLY COMPLETED . SUBSTANTIALLY COMPLETED MEANS THAT WHEN ONLY MINOR CONSTRUCTION WORK IS LEFT TO BE DONE . UNDER THIS METHOD, THE COSTS INCURRED ON YEAR TO YEAR BASIS UP TO THE STAGE OF COMPLETION OR SUBSTAN TIAL COMPLETION OF CONSTRUCTION ARE TREATED AS WORK - IN - PROGRESS. SIMILARLY THE PAYMENT S RECEIVED ARE ALSO ACCUMULATED DURING THE COURSE OF THE CONTRACT AND SHOWN AS LIABILITY IN THE BALANCE SHEET . INCOME ACCRUE S ONLY UPON THE COMPLETION OR SUBSTANTIAL COMPLETION OF THE CONSTRUCTION ACTIVITY . HERE AGAIN, THE SAME CAVEAT APPLIES THAT THE DEVELOPER SHOULD HAVE TRANSFERRED THE RISKS AND REWARDS OF OWNERSHIP TO THE BUYERS AT INITIAL STAGE. IF THERE IS A PRIOR AGREEMEN T BUT THERE IS NO ITA NOS.234&4316/DEL/2010 33 TRANSFER OF RISKS AND REWARDS OF OWNERSHIP TO THE BUYER , THEN NO INCOME WOULD ACCRUE TILL THE PASSING OF RISKS AND REWARDS TO THE BUYER AT THE TIME OF COMPLETION OR SUBSTANTIAL COMPLETION OF THE CONSTRUCTION ACTIVITY . ON THE OTHER HAND, I F THERE IS NO PRIOR AGREEMENT FOR SALE, THEN INCOME ACCRUE S ONLY WHEN SALE IS ACTUALLY MADE, WHICH EVENT M AY HAPPEN AFTER THE COMPLETION OR SUBSTANTIAL COMPLETION OF CONSTRUCTION. 1 2 . 2. IT CAN BE NOTICED FROM THE DECISIONS AVAILABLE ON THE POINT THAT THE ASSESSEE HAS A CHOICE OF CONSISTENTLY FOLLOWING EITHER THE P ROJECT COMPLETION METHOD OR THE P ERCENTAGE COMPLETION METHOD , WHEN IT HAS ENTERED INTO AN AGREEMENT FOR SALE AND TRANSFERRED RISKS AND REWARDS OF OWNERSHIP TO THE BUYER AT THE INITIAL STAGE . OBVIOUSLY, THE CHOICE TO THE ASSESSEE IS RESTRICTED TO EITHER OF THE TWO METHODS AND IT CANNOT BREACH BOTH OF THEM. WHE N A DEVELOPER , HAVING TRANSFERRED RISKS AND REWARDS OF OWNERSHIP TO THE BUYER AT THE INITIAL STAGE, FOLLOWS THE P ERCENTAGE COMPLETION ME THOD ON A CONSISTENT BASIS, THE INCOME ACCRUES ON YEAR TO YEAR BASIS IN LINE WITH THE PROGRESS OF THE CONSTRUCTION. ON THE OTHER HAND, WHEN SUCH A DEVELOPER FOLLOWS THE P ROJECT COMPLETION METHOD, ITA NOS.234&4316/DEL/2010 34 INCOME ACCRUES ON THE COMPLET ION OR SUBSTANTIAL COMPLET ION OF THE PROJECT. THE ESSENCE OF THE P ROJECT COMPLETION METHOD IS THE COMPLETION OR THE SUBSTANTIAL COMPLETION OF CONSTRUCTION . BUT WHEN SUCH A DEVELOPER , HAVING INITIALLY TRANSFERRED ALL THE RISK S AND REWARDS OF OWNERSHIP TO THE BUYERS, OFFERS INCOME AT THE TIME OF THE R EGISTRATION OF SALE DEED , THEN THIS MANNER OF OFFERING I NCOME FAILS TO ACCORD WITH THE PROJECT COMPLETION METHOD . SUCH A COURSE OF ACTION, OBVIOUSLY, RESULTS INTO SHIFTING OF INCOME FROM THE YEAR OF COMPLETION OR SUBSTANTIAL COMPLET ION OF CONSTRUCTION CONTRACT TO LATER YEAR(S), WHICH IS IMPERMISSIBLE. 13. T URN ING TO THE FACTS PREVAILING IN THE INSTANT CASE, WE FIND THAT THE ASSESSEE CATEGORICALLY STATED BEFORE THE AO DURING THE COURSE OF ASSESSMENT PROCEEDING FOR THE A.Y. 2005 - 06 T HAT THE CON STRUCTION STOOD COMPLETED IN THE YEAR IN QUESTION AND THE AO HAS RECORDED THE SAME ON PAGE 3 OF THE ASSESSMENT ORDER. SIMILAR POSITION ABOUT THE COMPLETION OF THE CONSTRUCTION DURING THE YEAR CAN BE SEEN FROM PARA 2.1 OF THE IMPUGNED ORDER FOR THIS YEAR , WHICH HAS NOT BEEN CONTROVERTED BY THE LD. ITA NOS.234&4316/DEL/2010 35 AR. FURTHER, I T IS APPARENT FROM THE AGREEMENT S TO SELL BETWEEN THE ASSESSEE AND BUYERS THAT RISKS AND REWARDS OF OWNERSHIP WERE INITIALLY TRANSFERRED , WHICH IS MANIFEST FROM THE TERMS AND GET CORROBORATION FROM THE FACT THAT SOME OF THE BUYERS ACTUALLY TRANSFERRED THEIR RIGHT S IN CONSTRUCTION TO THE THIRD PARTIES DURING THE CURRENCY OF CONSTRUCTION. IN SUCH A SITUATION AND GOING BY THE AFOR E - DISCUSSED JURISPRUDENCE, THE ASSESSEE HAS AN OPTION TO CHOOSE BETWEEN THE PERCENTAGE COMPLETION AND THE P ROJECT COMPLETION METHOD. SINCE THE ASSESSEE DID NOT OFFER INCOME UNDER THE PERCENTAGE COMPLETION METHOD, AND GIVING THE BENEFIT OF CHOICE TO THE ASSESSEE, WE HO LD THAT THE ASSESSEE OUGHT TO HAVE SHOWN INCOME FROM TH E PROJECT PARAS DOWN TOWN CENTRE IN ITS RETURN FOR THE A.Y. 2005 - 06. 14. AS THE AO HAS BIFURCATED THE INCOME FROM THIS PROJECT IN TWO YEARS, NAMELY, THE A.Y. S 2005 - 06 AND 2004 - 05, W E HOLD THAT THE ADDITION MADE BY THE AO IN RESPECT OF INCOME FROM THIS PROJECT FOR THE A.Y. 2004 - 05 BE DELETED. IT APPEARS THAT THE LD. CIT(A), WHILE DISPOSING OF THE APPEAL FOR THE A.Y. 2004 - 05 , LOST SIGHT OF THE FACT THAT THE AO ITA NOS.234&4316/DEL/2010 36 DETERMINED TOTAL INCOM E FOR SUCH YEAR AT RS.5.23 CRORE. THE DELETION OF A DDITION OF RS. 5.23 CRORE HAS RESULTED INTO THE OBLITERATION OF EVEN THE RETURNED INCOME AT RS.3,13,414 , WHICH IS NOT CORRECT AND CANNOT BE SUSTAINED. THE COMPONENTS OF THE RETURNED INCOME NEED VERIFICATION. IF IT IS UNRELATED WITH THE PROJECT, THEN IT SHOULD BE CHARGED TO TAX. FURTHER, T HE DIRECTION GIVEN BY THE LD. CIT(A) FOR INCLUDING INCOME FROM THIS PROJECT IN THE LATER YEARS , AT THE TIME OF EXECUT ION OF REGISTERED SALE DEED S, IS ALSO VACATED BECAUSE ON C E INCOME HAS BEEN DIRECTED TO BE CHARGEABLE TO TAX IN ONE YEAR, THEN IT CANNOT BE CHARGED TO TAX IN A LATER OR EARLIER YEAR S AS WELL. THE AO SHOULD ALSO ENSURE THAT NO INCOME FROM THIS PROJECT, WHE THER INCLUDED BY THE ASSESSEE VOLUNTARILY OR ADDED BY HIM , SHOULD FORM SUBJECT MATTER OF ASSESSMENT FOR ANY YEAR OTHER THAN THE A . Y . 2005 - 06. IF IT IS SO INCLUDED, THEN THE SAME SHOULD BE E LIMINATED . THE END RESULT IS THAT THE INCOME OF THE ASSESSEE FROM THIS PROJECT IS CHARGEABLE TO TAX IN ENTIRETY IN THE ASSESSMENT YEAR 2005 - 06. APPEAL OF THE REVENUE FOR THE A.Y. 2006 - 07 IS ALSO TAGGED WITH THE PRESENT SET OF APPEALS, WHICH, WE ARE DISPOSING BY A SEP ARATE ORDER. EX CONSEQUENTI , THE IMPUGNED ORDERS ARE SET ASIDE AND THE MATTER IS SENT ITA NOS.234&4316/DEL/2010 37 BACK TO THE AO FOR FRAMING THE ASSESSMENTS AFRESH IN CONFORMITY WITH OUR ABOVE DIRECTIONS. 15 . IN THE RESULT, THE APPEALS ARE DISPOSED OF ACCORDINGLY. THE ORDER PRO NOUNCED IN THE OPEN COURT ON 17 .0 2 .201 5 . SD/ - SD/ - [ C.M. GARG ] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 17 TH FEBRUARY, 201 5 . DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.