Pr. Commissioner Income Tax \\u2013 6 BMTC Complex Koramangala Bangalore and Deputy Commissioner of Income-Tax Central Circle \\u2013 1[4] Bengaluru V. Esteem Classic

ITA/842/2018

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The case involves a series of appeals by the Revenue against M/s. Esteem Classic concerning the method of revenue recognition for a housing project over several assessment years (2010-2011 to 2012-2013). The Revenue challenged the Income Tax Appellate Tribunal's decision, which favored the assessee's use of the completed contract method over the percentage of completion method as prescribed by Accounting Standard AS-7. The Tribunal's decision was based on the grounds that the assessee's method did not significantly impact the overall revenue of the Department and was in line with legal provisions allowing such flexibility in accounting methods for real estate developers. The High Court of Karnataka, after reviewing precedents and the specifics of the case, upheld the Tribunal's decision and dismissed the Revenue's appeals.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 798956 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 22-03-2021
• Assessment Year: misc
• Other Referred Cases: CIT vs. PRESTIGE ESTATE PROJECTS (P) LTD., CIT vs. BANJARA DEVELOPERS & CONSTRUCTIONS P. LTD., CIT vs. S.N. BUILDERS & DEVELOPERS, DCIT vs. VARUN DEVELOPERS, CIT vs. EXCEL INDUSTRIES, CIT vs. BILAHARI INVESTMENTS
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A
• Assessee Lawyers: SANMATHI
• Keywords: Accounting Standard AS-7; Assessment Year; Income Tax; Revenue Neutral; Percentage of Project Completion Method
• Section: 143(3); 153(A); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 22ND DAY OF MARCH 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE M.G.S. KAMAL I.T.A. NO.842 OF 2018 CONNECTED WITH I.T.A. NO.843 OF 2018 I.T.A. NO.844 OF 2018 IN I.A.No.842 OF 2018 BETWEEN: 1. Pr. Commissioner Income Tax – 6 BMTC Complex Koramangala Bangalore. 2. Deputy Commissioner of Income-Tax Central Circle – 1[4] Bengaluru. ... Appellants (By Sri. Sanmathi E.I. - Advocate) 2 AND: M/s. Esteem Classic Unit Nos.32, 33 & 34 3rd floor, SNS Chambers Sadashivanagar Bengaluru PAN.AACFE2663F. ... Respondent (By Sri. A. Shankar – Sr. Counsel for Sri. Lava M - Advocate) This I.T.A. is filed under Section 260-A of Income Tax Act 1961, arising out of order dated 02.05.2018 passed in ITA Nos.1053/Bang/016, for the Assessment year 2010-2011, praying to decide the foregoing question of law and / or such other questions of law as may be formulated by the Hon’ble Court as deemed fit; set aside the appellate order dated 02.05.2018 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Bangalore in appeal proceedings in I.T.A. No.1053/Bang/2016 for Assessment Year:2010-11, as sought for in this appeal. IN I.A.No.843 OF 2018 BETWEEN: 1. Pr. Commissioner Income Tax – 6 BMTC Complex Koramangala Bangalore. 2. Deputy Commissioner of Income-Tax 3 Central Circle – 1[4] Bengaluru. ... Appellants (By Sri. Sanmathi E.I. - Advocate) AND: M/s. Esteem Classic Unit Nos.32, 33 & 34 3rd floor, SNS Chambers Sadashivanagar Bengaluru PAN.AACFE2663F. ... Respondent (By Sri. A. Shankar – Sr. Counsel for Sri. Lava M - Advocate) This I.T.A. is filed under Section 260-A of Income Tax Act 1961, arising out of order dated 02.05.2018 passed in ITA Nos.1054/Bang/016, for the Assessment year 2011-2012, praying to decide the foregoing question of law and / or such other questions of law as may be formulated by the Hon’ble Court as deemed fit; set aside the appellate order dated 02.05.2018 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Bangalore in appeal proceedings in I.T.A. No.1054/Bang/2016 for Assessment Year:2011-12, as sought for in this appeal. IN I.A.No.844 OF 2018 BETWEEN: 1. Pr. Commissioner Income Tax – 6 BMTC Complex Koramangala Bangalore. 4 2. Deputy Commissioner of Income-Tax Central Circle – 1[4] Bengaluru. ... Appellants (By Sri. Sanmathi E.I. - Advocate) AND: M/s. Esteem Classic Unit Nos.32, 33 & 34 3rd floor, SNS Chambers Sadashivanagar Bengaluru PAN.AACFE2663F. ... Respondent (By Sri. A. Shankar – Sr. Counsel for Sri. Lava M - Advocate) This I.T.A. is filed under Section 260-A of Income Tax Act 1961, arising out of order dated 02.05.2018 passed in ITA Nos.1055/Bang/016, for the Assessment year 2012-2013, praying to decide the foregoing question of law and / or such other questions of law as may be formulated by the Hon’ble Court as deemed fit; set aside the appellate order dated 02.05.2018 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Bangalore in appeal proceedings in I.T.A. No.1055/Bang/2016 for Assessment Year:2012-13, as sought for in this appeal. These I.T.As’ coming on for Hearing, this day ALOK ARADHE J., delivered the following: 5 JUDGMENT These appeals under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) have been filed by the Revenue in respect of the Assessment years 2010-2011, 2011-2012 and 2012- 2013. ITA No.842/2018 pertains to Assessment year 2010-2011 whereas ITA No.843/2018 pertains to Assessment year 2011-2012 and ITA No.844/2013 pertains to Assessment year 2012-2013. 2. The appeals emanate from a common order passed by the Income Tax Appellate Tribunal dated 02.05.2018. The appeals are therefore heard analogously and decided by this common judgment. The appeals were admitted by a bench of this Court vide order dated 02.01.2020 on the following substantial questions of law: “i) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that assessing authority is not right in observing that assessee was 6 required to apply Accounting Standard AS-7 on the ground that it does not apply to real estate developers whereas in the instant case, assessee has received significant advances and also project is complete around 97% and as such, the date of completion of registration becomes insignificant as it is a mere tactic to postpone payment of income tax which is due for taxation for period under consideration? ii) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the tax effect is neutral / revenue neutral proposition whereas it is against the real income theory of ‘pay as you earn’ and further it is not tax neutral because the assessee gets ‘such fund’ which ought to have been deposited as tax, at his disposal and also interest calculated on such fund? iii) Whether on the facts and in the circumstances of the case, the Tribunal is justified in setting aside addition made by assessing authority under the head income from business by adopting percentage of 7 project completion method as against project completion method, which is contrary to Accounting Standards AS-7 and Section 145 of the Act?” 3. Facts leading to filing of these appeals briefly stated are that the assessee is a registered partnership firm carrying on the business of constructions and developers in the name and style of ‘M/s. Esteem Classic’. The assessee commenced development of a housing project on a piece of land bearing Sy.no.147/A, Municipal No.25/2, in Industrial Suburb, I Stage, Rajajinagar, Bengaluru. The Housing Project of the assessee is popularly known as ‘Esteem Classic’. The assessee purchased the land and started developing the land. The assessee had completed the work of construction of 71 flats and sold the same in the year ending 31.03.2012. The assessee sold 22 flats during the year ending 31.03.2013 and 21 flats during the period ending 31.03.2014. The assessee followed the completed contract method of recognizing the revenue 8 as per Accounting Standard-9. In accordance with the aforesaid method of computation, the income for the Assessment year 2010-2011 to 2012-2013 and 2013- 2014 and 2014-2015 was completed and was declared. 4. The Assessing Officer accepted the income return filed for the assessment year 2013-2014 and 2014-2015. However, the Assessing Officer passed an order under Section 143(3) read with Section 153-A of the Act on 31.03.2014 for the Assessment years 2010- 2011, 2011-2012 and 2012-2013. In the Assessment order, the Assessing Officer had adopted the percentage completion method holding that the assessee ought to have followed the same in accordance with the Accounting Standard-7. The assessee thereupon filed appeals before the Commissioner of Income Tax (Appeals) in respect of Assessment year 2010-2011, 2011-2012, 2012-2013. The Commissioner of Income Tax (Appeals), by a common order dated 30.03.2016, dismissed the appeals 9 preferred by the assessee. Being aggrieved, the assessee filed appeal before the Income Tax Appellate Tribunal. The Tribunal, by a common order dated 02.05.2018, interalia held that the issues raised by the assessee with regard to validity of the addition made in the proceeding under Section 153-A of the Act, are not required to be taken into consideration. Being aggrieved by the order of the Tribunal, the revenue has filed these appeals. 5. Learned counsel for the Revenue submitted that the Tribunal erred in law in holding that accounting standard, namely Accounting Standard-7 is not applicable to the assessee on the ground that it does not apply to real estate developers even when assessee has received significant advances and also project is completed upto 97% and as such, the date of completion of registration becomes insignificant, as it is a tactic to postpone the payment of income tax which is due for taxation for the period under consideration. It is 10 further submitted that the Tribunal held that the tax effect is neutral / revenue neutral and the aforesaid finding is contrary to law. It is further submitted that the assessee has not shown his income, which indicates that this is a tactic to postpone the payment of tax. It is also submitted that the Assessing Authority had correctly adopted the project completion method. 6. On the other hand, learned Senior counsel for the assessee submits that the substantial questions of law involved in these appeals are no longer res integra and same are covered by the following decisions: i) CIT vs. PRESTIGE ESTATE PROJECTS (P) LTD. (2020) 116 TAXMANN.COM 554 (KAR) ii) CIT vs. BANJARA DEVELOPERS & CONSTRUCTIONS P. LTD. (2020) 117 TAXMANN.COM 747 (KAR) iii) CIT vs. S.N. BUILDERS & DEVELOPERS IN ITA No.393 OF 2014 DATED 07.01.2021 (KAR) iv) CIT vs. S.N. BUILDERS & DEVELOPERS IN ITA 11 No.739 OF 2018 DATED 20.01.2021 (KAR) v) DCIT vs. VARUN DEVELOPERS IN ITA No.198 OF 2014 DATED 08.02.2021. 7. It is further submitted that since the assessee has adopted one of the two methods which is permissible in law, the same does not impact the overall revenue of the Department, as the amount which could not be subjected to tax in the Assessment year 2010- 2011 and 2011-2012 if any, would be taxed in the subsequent years, i.e., in the Assessment year 2012- 2013. It is also pointed out that no portion of project is completed in Assessment year 2010-2011 and Assessment year 2011-2012 and therefore, no revenue has been realized. It is further submitted that the aforesaid transaction is revenue neutral and the contention of the Revenue that the assessee should follow percentage completion method is without any specific provision, for the same is not in accordance with law. In support of 12 the aforesaid submissions, reliance has been placed on the decisions of: i) CIT vs. EXCEL INDUSTRIES (2013) 358 ITR 295 (SC) ii) CIT vs. BILAHARI INVESTMENTS (2008) 299 ITR 1 (SC) It is also pointed out that the completed contract method of computation has been accepted by the Revenue for the subsequent Assessment years 2013- 2014 and 2014-2015. 8. We have considered the submissions made on both sides and have perused the afore-mentioned decisions carefully. On perusal of the afore-mentioned decisions referred to supra rendered by this court in the case of PRESTIGE ESTATE PROJECTS, BANJARA DEVELOPERS & CONSTRUCTIONS (P) LTD., VARUN DEVELOPERS, S.N. BUILDERS & DEVELOPERS IN ITA 393/2014 AND ITA 739/2018 as well as the decisions of 13 the Hon’ble Supreme Court in EXCEL INDUSTRIES and in BILAHARI INVESTMENTS supra and taking into account the fact that the Revenue itself has recognized the completed contract method for computation of the subsequent Assessment years, that is 2013-2014 and 2014-2015, we answer the substantial questions of law against the Revenue and in favour of the assessee. In the result, the appeals preferred by the Revenue fail and are hereby dismissed. Sd/- JUDGE Sd/- JUDGE KS "