S.K. Properties, Bangalore V. ITO, Bangalore

ITA 783/BANG/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9281 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 21-09-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 25-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KAMALADHAR
• Assessee Lawyers: BALACHANDAR
• Keywords: Capital asset; Cost of acquisition
• Section: 45(2); 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SMT ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO.783/BANG/2015 ASSESSMENT YEAR : 2007-08 M/S. S. K. PROPERTIES, NO.103, ALFA CARLESTON, WHEELER ROAD, COOKE TOWN, BANGALORE - 560005. PAN : ABDFS 7819 P VS. INCOME TAX OFFICER, WARD-1(2), BANGALORE. APPELLANT RESPONDENT ASSESSEE BY : SHRI. BALACHANDAR, ADVOCATE REVENUE BY : SHRI. KAMALADHAR, STANDING COUNSEL DATE OF HEARING : 21.09.2016 DATE OF PRONOUNCEMENT : 04 .11.2016 O R D E R PER INTURI RAMA RAO, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE DIRECTED AGAINS T THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - I, B ANGALORE DATED 22.07.2011 FOR THE ASSESSMENT YEAR 2007-08. ITA NO.783/BANG/2015 PAGE 2 OF 9 2. BRIEFLY THE FACTS OF THE CASE ARE THE AP PELLANT IS A FIRM ENGAGED IN THE BUSINESS OF DEVELOPMENT OF PROPERTY. THE RETUR N OF INCOME FOR THE ASSESSMENT YEAR 2008-09 WAS FILED ON 08.05.2008 DEC LARING NIL INCOME IN RESPONSE TO NOTICE UNDER SECTION 142 OF THE INCOME TAX ACT (HEREINAFTER CALLED THE ACT). SUBSEQUENTLY THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE INCOME TAX ACT AFTER ISSUING THE REQUISITE NOTICE UNDER SECTION 143(2) OF THE ACT VIDE ORDER DATED 29 .12.2009 AT A TOTAL INCOME OF RS.2,37,37,172/-. WHILE DOING SO, THE LE ARNED ASSESSING OFFICER HAD NOT ACCEPTED THE METHOD OF RECOGNIZING THE INCO ME ADOPTED BY THE APPELLANT IN RESPECT OF SALE OF PLOTS. THE APPELLA NT RECOGNIZED REVENUE ONLY IN THE YEAR IN WHICH THE PLOTS WERE SOLD AND R EGISTRATION OF CONVEYANCE DEED. THE ASSESSING OFFICER IS OF THE VIEW THAT TH E REVENUE SHOULD BE RECOGNIZED AT EVERY STAGE OF RECEIPT SALE CONSIDERA TION. THE RELEVANT OBSERVATIONS OF THE ASSESSING OFFICER ARE GIVEN IN PARA 6 OF THE ASSESSMENT ORDER WHICH READS AS UNDER: 6. ARRIVAL OF WORK IN PROGRESS AND QUANTIFICATION OF I NCOME: THE ACCOUNTING STANDARD AS-2 DEALS WITH VALUATION O F INVENTORIES. IT DEFINES THE TERM COST FOR THE PURP OSE OF VALUATION OF INVENTORY TO INCLUDE THE FOLLOWING: COST OF PURCHASE COST OF CONVERSION OTHER ATTRIBUTABLE COSTS MINUS ABNORMAL WASTE, STORAGE AND DISTRIBUTION COSTS. ITA NO.783/BANG/2015 PAGE 3 OF 9 IN THE ASSESSMENTS FOR THE EARLIER YEARS, THE VALUE OF CLOSING STOCK WAS ARRIVED AT BY INCLUDING THE COST AND THE DEVELOPMENT COST OF LAND AS FURNISHED BY THE ASSESSEE AND IN ACCORDA NCE WITH THE PRINCIPLES OF AS 2. THE ASSESSEE WAS THEREFORE ASK ED TO FURNISH THE PARTICULARS OF COST AND DEVELOPMENT COST FOR THE CU RRENT YEAR TOO WITH REFERENCE TO THE CLOSING STOCK. THE VALUE OF CLOSI NG BALANCE OF STOCK ARRIVED AT FOR THE PREVIOUS ASSESSMENT YEAR IS TAKE N TO BE THE OPENING STOCK FOR THIS YEAR. THE TOTAL REVENUE REC EIVED ON SALES OF SITES AND THE DEVELOPMENT COSTS COLLECTED FROM SUCH PURCHASERS IS CONSIDERED AS SALES MADE DURING THE YEAR. WITH THI S THE TRADING ACCOUNT IS DRAWN AS UNDER: OPENING BALANCE 1,80,75,849 SALES 3,31,90,915 DEVELOPMENT COST 56,61,952 CLOSING STOCK 1,49,44,660 GROSS PROFIT 2,43,97,774 THE GROSS PROFIT OF RS.2,43,97,774 HAS TO BE SET OF F AGAINST THE ADMINISTRATIVE EXPENSES CLAIMED FOR RS.9,69,819 .50. THUS, THE NET PROFIT OF RS.2,34,27,955/- IS DETERMINED AS INC OME FOR THE YEAR AND ACCORDINGLY BROUGHT TO TAX. 3. THUS THE ASSESSING OFFICER IS OF THE OPINION THA T THE REVENUE SHOULD BE RECOGNIZED BASED ON THE STAGE OF RECEIPT OF CONS IDERATION. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE THE CIT(A ). THE CIT(A) CONFIRMED THE ADDITION VIDE PARA 10 OF THE IMPUGNED ORDER WHICH IS AS FOLLOWS: ITA NO.783/BANG/2015 PAGE 4 OF 9 10. THE FACTS RELATING TO THIRD GROUND ARE THAT TH E APPELLANT SUBMITTED RETURN OF INCOME ON PROJECT COMPLETION METHOD AT RS.NIL SINCE THE PROJECT WAS GOING ON DURING THE YEAR UNDER CONSIDERATION. AS AGAINST TH IS, THE ASSESSING OFFICER ARRIVED INCOME UNDER MERCANTILE SYSTEM OF DERIVING INCOME ON YEARLY BASI S. IN THE APPELLATE ORDER OF CIT(A) FOR THE ASST. YEAR S 2004-05, 2005-06 AND 2006-07 (COMMON ORDER) IN ITA NO.31/32/33/W-1(2)/A-I/08-09, DATED 27.04.2009, (AGAINST WHICH AN APPEAL IS PENDING BEFORE ITAT, BANGALORE BENCH), MY PREDECESSOR DISMISSED THIS GROUND BY OBSERVING (PAGE 20): THE AO IS PERFECTLY RIGHT IN INTERPRETING THE ACCOUNTING STANDARDS IN THE MANNER THAT HE HAS. IT IS QUITE APPARENT IN THE CASE OF THE APPELLANT THAT TH E PROFITABILITY OF THE BUSINESS CANNOT BE COMPUTED IGNORING OPENING AND CLOSING WORK-IN-PROGRESS. THE APPELLANT ITSELF HAS FOLLOWED THIS PRINCIPLE FOR AY 2004- 05 AND THERE IS NEITHER REASON NOR RHYME TO ALTER T HIS ACCOUNTING METHODOLOGY. CONSIDERATION THE FACTS, I T WOULD APPEAR THAT IF THE PROJECT COMPLETION METHODOLOGY WERE TO BE ADOPTED IN THE INSTANT CASE, THE DEPT. WOULD INDEFINITELY BE WAITING FOR THE CO WS TO COME HOME AS IT WERE, BEFORE BEING ABLE TO COLLECT ITA NO.783/BANG/2015 PAGE 5 OF 9 ANY TAX FROM THE APPELLANT AS THE PROJECT COMPLETIO N WOULD NEED TO BE INDEFINITELY AWAITED. 4. BEING AGGRIEVED, THE APPELLANT IS IN APPEAL BEFO RE US. 5. THE LEARNED COUNSEL FOR THE APPELLANT VEHEMENTLY POINTED OUT THAT THE REVENUE IN RESPECT OF SALE OF PLOTS CAN BE RECO GNIZED ONLY WHEN THE RISK AND REWARDS AND OWNERSHIP OF THE PLOTS ARE TRANSFER RED TO THE BUYERS TILL SUCH TIME THE REVENUE CANNOT BE RECOGNIZED ON SALE OF PLOTS. THUS, HE CONTENDED THAT THE APPELLANT HAD ADOPTED THE CORREC T METHOD OF RECOGNIZING THE INCOME IN RESPECT OF SALE OF PLOTS BY ADOPTING COMPLETED CONTRACT METHOD. THUS, HE PRAYED THAT THE ASSESSM ENT MADE BY THE ASSESSING OFFICER BE QUASHED. ON THE OTHER HAND, T HE LEARNED DR PLACED RELIANCE ON THE ORDER OF THE CIT(A). 6. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE M ATERIAL ON RECORD. THE ONLY DISPUTE IN THIS APPEAL IS WITH REGARD TO T HE METHOD OF RECOGNIZING THE INCOME FOR THE ASSESSMENT TO TAX IN RESPECT OF SALE OF PLOTS. THE APPELLANT FIRM HAD RECOGNIZED THE INCOME IN RESPECT OF SALE OF PLOTS BY ADOPTING COMPLETED CONTRACT METHOD, WHEREAS, THE AS SESSING OFFICER IS OF THE VIEW THAT INCOME SHOULD BE OFFERED TO TAX RECEI VED ON YEAR TO YEAR BASIS BASED ON THE STAGE OF RECEIPT OF CONSIDERATIO N, IRRESPECTIVE OF THE FACT THAT THE TITLE IN THE PLOTS HAVE BEEN PASSED ON THE BUYER OR NOT. IT IS AN UNDISPUTED FACT THAT THE PLOTS FORMS A PART OF STOC K-IN-TRADE IN THE BUSINESS OF APPELLANT FIRM AND ARE IMMOVABLE PROPERTIES. TH E TITLE IN THE IMMOVABLE PROPERTY CAN BE PASSED ON ONLY IN TERMS OF THE PROV ISIONS OF TRANSFER OF ITA NO.783/BANG/2015 PAGE 6 OF 9 PROPERTIES ACT. IN THIS CONNECTION, THE OBSERVATIO NS MADE BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF WIPRO LTD. VS. DCIT 382 ITR 179 AT PARA 136 TO 138, PAGE 248 ARE AS UNDER: 136 SECTION 45(1) DEALS WITH PROFITS OR GAINS ARISING F ROM THE TRANSFER OF A CAPITAL ASSET . THEREFORE, IT DOES NOT DEAL WITH TRANSFER OF A BUSI NESS ASSET OR A STOCK-IN-TRADE. IT PROVIDES THAT THE PRO FITS AND GAINS ARISING FROM THE TRANSFER OF THE CAPITAL ASSET SHALL BE CHARGEAB LE TO INCOME-TAX UNDER THE HEAD 'CAPITAL GAINS' AND SHALL BE DEEMED TO BE THE INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE . IT IS HERE THAT THE DEFINITION OF TRANSFER UNDER SECTION 2(47) ASSUMES IMPORTANCE. THE DEFINITION OF TRANSFER CONTEMPLATED IN THE PROVISIO N IS ONLY IN RELATION TO THE CAPITAL ASSET AND NOT IN RELATION TO THE STO CK-IN-TRADE OR A BUSINESS ASSET . HOWEVER, SUB-SECTION (2) CONTAINS A NON-OBSTANTE CLAUSE BY SAYING NOT WITHSTANDING ANYTHING CONTAINE D IN SUB-SECTION (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO OR ITS TREATME NT BY HIM AS STOCK-IN - TRADE OF BUSINESS CARRIED ON BY HIM SHALL BE CHAR GEABLE TO INCOME-TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH ST OCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM. THEREFORE, IN SO F AR AS STOCK-IN- TRADE IS CONCERNED, THE RELEVANT YEAR IN WHICH THE CAPITA L GAIN TAX IS LEVIABLE IS THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE I S SOLD. THE WORD USED IS SOLD OR OTHERWISE TRANSFERRED BY HIM. IN VI EW OF THE EXPRESSED WORDS USED IN SECTION 45(2), IT IS CLEAR THAT SECTI ON 45(1) DEALS WITH CAPITAL GAINS ON TRANSFER OF CAPITAL ASSET, SECTION 45(2) DEALS WITH PAYMENT OF CAPITAL GAINS IN A TRANSACTION WHERE STO CK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM. 137 UNDER SECTION 45(1), THE CAPITAL GAINS ARE CHARGEAB LE TO INCOME- TAX OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE . THE SAID TRANSFER MAY BE IN ANYONE OF THE MODES PRESCRIBED U NDER SECTION 2(47) . IT NEED NOT NECESSARILY BE BY WAY OF SALE, EXCHANGE OR RELINQUISHMENT OF THE ASSET AS EVIDENCED BY REGISTE RED DOCUMENTS. IT CAN BE IN ANYONE OF THE MODES CONTEMPLATED IN CLAUS E (I) TO (VI) OF SECTION 2(47) . HOWEVER, WHEN IT COMES TO LEVYING OF CAPITAL GAINS UNDER SUB-SECTION (2) OF SECTION 45, IT DEALS WITH CAPITAL ASSET CONVERTED BY THE OWNER THEREOF INTO, OR IS TREATED BY HIM AS STOCK-IN- TRADE OF A BUSINESS CARRIED ON BY HIM AS CONTEMPLAT ED UNDER SECTION 2(47)(IV) . ONCE SUCH CAPITAL ASSET WHICH IS CONVERTED AS STOCK -IN-TRADE IS SOLD, IT IS ALSO SUBJECTED TO CAPITAL GAINS, BUT THE SAID CAPITAL GAINS IS CHARGEABLE TO INCOME-TAX IN THE PREVIOUS YEAR IN WH ICH SUCH STOCK-IN- TRADE IS SOLD. THE WORD USED IS SOLD, NOT TRANSFERR ED. HOWEVER, IF THE STOCK-IN- TRADE IS NOT SOLD, BUT IS TRANSFERRED OTH ERWISE, WHICH HAS THE EFFECT OF A SALE, THEN THE CAPITAL GAINS IS CHARGEA BLE TO INCOME-TAX IN THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS O THERWISE TRANSFERRED. HAVING REGARD TO THE SCHEME OF THE ENT IRE SECTION AND THE ITA NO.783/BANG/2015 PAGE 7 OF 9 EXPRESS WORDS USED IN SUB-SECTION (2) OF SECTION 45 , THE CASE OF CONSIDERING STOCK-IN-TRADE OTHERWISE TRANSFERRED, WOULD ARISE ONLY IF STOCK-IN-TRADE IS NOT SOLD. IF STOCK-IN-TRADE IS SOLD, THE QUESTION OF CONSIDERING WHETHER THE STOCK-IN-TR ADE IS OTHERWISE TRANSFERRED WOULD NOT ARISE FOR CONSIDERATION. THE OBJECT OF USING THE WORDS' OTHERWISE TRANSFERRED' AS IT IS IN THE OTHER PROVISIONS IN THE SAME SECTION IS TO PREVENT AVOIDANCE OF PAYMENT OF CAPITAL GAINS BY THE OWNERS THEREOF BY RESORTING TO MODES WHICH ARE NOT RECOGNIZED IN LAW, BUT WHICH IN SUBSTANCE HAS THE SAME EFFECT . IN OTHER WORDS, IF THE OWNER BY SUCH TRANSFER CEASES TO HAVE ANY INTEREST IN THE PROPERTY AND TRANSFERS ALL HIS INTEREST IN THE PROPERTY T O THE TRANSFEREE AND EARNS PROFITS AND GAINS, BUT DECLINES TO PAY THE CAPITA L GAIN, ON THE GROUND THAT SUCH TRANSFER IS NOT ONE S UCH TRANSFER RECOGNIZE D IN LAW, THEN THE LAW IN SUCH CASES TO PLUG THE LOOP HOLE HAS USED THE TERM OTHERWISE TRANSFERRED. ONCE IT IS SOL D, THE QUESTION OF CONSIDERING WHETHER I T HAS BEEN OTHERWISE TRANSFERRED WOULD NOT ARISE . 13 8 IN THE INSTANT CASE, THE ASSESSEE ENTERED INTO AN A GREEMENT WITH M/S . PRESTIGE ESTATES PVT. LTD. ON FEBRUARY 9, 2000, TO SELL THE AFORESAID PROPERT Y FOR A SUM OF RUPEES TWELVE CRORES FIFTY THOUSAND. CLAUSE (6) OF THE SAID AGREEMENT PROVIDES THAT , AS DESIRED BY THE PURCHASERS, IN ORDER TO ENABLE THE PURCHASERS TO PR OCESS WITH THE PREPARATION OF THE PLAN, SANCTION AND OTHER ORDERS REQUIRED FOR COMMENCEMENT OF THE CONSTRUCTION IN THE SCHEDULE PR OPERTY, THE VENDORS HAVE THIS DAY EXECUTED A POWER OF ATTORNEY IN FAVOUR OF THE PURCHASERS AND THEIR NOMINEES TO ENABLE THEM TO SEC URE APPROPRIATE CLEARANCE AND OTHER SANCTIONS AS DETAIL ED THEREIN WHICH SHA LL BE VALID TILL COMPLETION OF SALE IN TERMS OF THIS B USINESS . FURTHER, IT STATE D ANYTHING CONTAINED HEREIN SHALL ON DELIVERY OF POSS ESSION OF THE SAID PROPERTY OR EMPOWER THE PURCHASERS TO CLAI M ANY PROSPECTIVE RIGHTS IN THE SCHEDULE PROPERTY. IN THE POWER OF AT TORNEY EXECUTED, THERE IS NO WHISPER OF DELIVERY OF POSSESSION OF TH E SCHEDULE PROPERTY TO THE POWER OF ATTORNE Y HOLDER . UNDER SECTION 2(47), ANY TRANSACTION INVOLVING THE ALLOWING POSSESSION OF IMMOVABLE PROP ERTY BE TAKEN OR RETAINED IN PART PERFORMANC E OF A CONTRACT OF THE NATURE REFERRED TO IN SECTION 53A OF THE TRANSFER PROPERTY ACT IS A DEEME D TRANSFER IN RELATION TO A CAPITAL ASSET . THEREFOR E EVEN IF THE STOCK-IN-TRADE WHICH WAS PRIOR TO ITS CONVERSION A CAPITAL ASSET AS TREA TED BY THE TRIBUNAL AS A CAPITAL ASSET , AS POSSESSION IS NOT DELIVERED . IT WOULD NOT BECOME A TRANSFER AND QUESTION OF PAYMENT OF CAPITAL GAIN S WOULD NOT ARISE. 7. THUS THE PROVISIONS OF SECTION 2(47) OF THE ACT HAVE NO APPLICATION TO THE TRANSACTIONS OF STOCK-IN-TRADE. IN THIS CASE, THE STOCK-IN-TRADE IN IMMOVABLE PROPERTY AND THE TITLE IN IMMOVABLE PROPE RTY CAN BE TRANSFERRED OR ALIENATED IN ACCORDANCE WITH THE PROVISIONS OF T HE TRANSFER OF PROPERTIES ACT. THE RIGHT, TITLE OR INTEREST IN THE IMMOVABLE PROPERTY CAN BE TRANSFERRED ITA NO.783/BANG/2015 PAGE 8 OF 9 ONLY BY WAY OF REGISTERING THE CONVEYANCE DEED EXEC UTED IN THIS BEHALF. EVEN THE ACCOUNTING STANDARD 9 DEALING WITH THE REC OGNITION OF INCOME ALSO LAYS DOWN THAT THE INCOME IN RESPECT OF TRANSFER OF IMMOVABLE PROPERTY CAN BE RECOGNIZED ONLY WHEN THE RISKS, REWARDS AND OWNE RSHIP OF THE PROPERTY IS TRANSFERRED TO THE BUYER. THEREFORE IN OUR CON SIDERED OPINION, THE MATTER REQUIRES A FRESH EXAMINATION BY THE ASSESSING OFFIC ER IN THE LIGHT OF THE ABOVE POSITION OF LAW. THEREFORE, WE REMAND THIS M ATTER BACK TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION THAT THE INC OME IN RESPECT OF SALE OF PLOTS CAN BE RECOGNIZED ONLY IN THE YEAR IN WHICH C ONVEYANCE DEED EXECUTED IS REGISTERED IN FAVOUR OF THE BUYERS AND TO ALLOW THE DEVELOPMENT EXPENDITURE INCURRED AS EXPENDITURE OR THE EXPENDIT URE LIKELY TO BE INCURRED ON THE PLOTS SOLD AS EXPENDITURE. AND THIS DIRECTI ON ALSO GOES IN LINE IN CONSONANCE WITH THE PROVISIONS OF ACCOUNTING STANDA RD 9 WHICH CLEARLY LAYS DOWN THAT MATCHING IS REQUIRED TO BE DONE ON ACCRUA L BASIS IN RESPECT OF THE INCOME OFFERED TO TAX AND UPHELD BY HONBLE SUP REME COURT IN THE CASE OF CIT VS. TAPARIA TOOLS LTD. 8. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 04 TH DAY OF NOVEMBER, 2016. SD/- SD/- (ASHA VIJAYARAGHAVAN) (INTURI RAMA RAO) JUDICIAL MEMBER ACC OUNTANT MEMBER BANGALORE. DATED: 04 TH NOVEMBER, 2016. /NS/ ITA NO.783/BANG/2015 PAGE 9 OF 9 COPY TO: 1. APPELLANTS 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.