THE COMMISSIONER INCOME TAX V. M/S THUMBAY HOLDINGS (P) LTD.,

ITA/836/2008

AI Insights

The case involves multiple appeals by the revenue against the orders of the Income Tax Appellate Tribunal (ITAT) Bangalore, which had allowed the assessee's appeal regarding the assessment of income from nomination fees received from M/s.Prestige Constructions. The primary legal issue was whether the income from nomination fees should be taxed in the assessment year 2003-04 under the Project Completion Method or in the assessment year 1999-2000 when the income was accrued and crystallized. The Tribunal had applied the Project Completion Method, leading to the income being taxed in 2003-04, whereas the revenue contended it should be taxed in 1999-2000 when the rights and payments were fully crystallized.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 728965 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 09-09-2014
• Assessment Year: misc
• Other Referred Cases: Dwarkadas Kapadia Vs.CIT (2003)260 ITR 491
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: S PARATHASARATHI
• Assessee Lawyers: K V ARAVIND
• Keywords: Assessment Year; Income Tax; Mercantile system of accounting; Project completion method; Nomination Fees
• Section: 143(3); 234B; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 9TH DAY OF SEPTEMBER 2014 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MRS.JUSTICE RATHNAKALA I.T.A.Nos.836/2008 c/w.835/2008 & 837/2008 BETWEEN: 1. The Commissioner of Income Tax, C.R.Building, Attavar, Mangalore. 2. The Asst. Commissioner of Income-Tax, Circle -2 (1), COMMON Mangalore. …APPELLANTS (By Sri.K.V.Aravind, Adv.,) AND: M/s.Thumbay Holdings (P) Ltd., “Arcadia”, 8th Floor, Falnir Road, Falnir, COMMON Mangalore. D.K. …RESPONDENT (By Sri.S.Parathasarathi, Adv.,) ****** 2 I.T.A.No.836/2008 This appeal is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 04.04.2008 passed in ITA No.1653/Bang/2004, for the Assessment year 2000-2001, praying that this Court may be pleased to formulate the substantial questions of law stated therein and allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1653/BNG/2004 dated 4.4.2008 confirm the order passed by Assessing Officer. I.T.A.No.835/2008 This appeal is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 04.04.2008 passed in ITA No.1149/BNG/2004, for the Assessment year 1999-2000, praying that this Court may be pleased to formulate the substantial questions of law stated therein and allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1149/BNG/2004 dated 4.4.2008 confirm the order passed by Assessing Officer. I.T.A.No.837/2008 This appeal is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 04.04.2008 passed in ITA No.1829/BNG/2004, for the Assessment year 2000-2001, praying that this Court may be pleased to formulate the substantial questions of law stated therein and allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1829/BNG/2004 dated 4.4.2008 confirm the orders passed by Appellate Commissioner. 3 These appeals coming on for Hearing this day, N.KUMAR. J., delivered the following: J U D G M E N T As common questions of law are involved in all these appeals and the parties are same and the property involved is one and the same, these appeals are taken up together for consideration and disposed of by this common order. 2. The assessee is a Company doing the business of building construction and real estate. For the year ending on 31.3.2000, the assessee had filed its return of income on 29.11.2000 declaring a total loss of `.7,14,700/-. The return filed was processed and the Assessing Authority completed the assessment under section 143(3) of the Act by disallowing interest paid by the assessee on the loans taken to an extent of `.10,73,594/- on the ground that the assessee had given interest free loans to sister concerns and associate concerns and the relatives of the Directors. 4 The Assessing Authority has also brought to tax the amount received from M/s.Prestige Constructions to an extent of `.4,04,40,000/- shown in the assessee’s balance sheet as a sundry creditor. By virtue of the sale agreement dated 25.6.1998, the assessee became entitled to receive a sum of `.4,83,40,000/- as nomination fees. Even prior to the date of agreement, the assessee has received a part of the amount from M/s.Prestige Constructions amounting to `.1.35 Crores. As on 31.3.1998, relevant to the assessment year 1999-2000, the assessee had received `.2.21 Crores and the receipt position as on 31.3.2000 relevant to the assessment year 2000-01 has been `.3,61,00,000/-. At the time of the agreement, the assessee has been given credit for `.92,43,000/- by way of adjustment towards the cost of construction of assessee’s share in apartments and hence, as on 31.3.2000, the assessee had received a sum of `.4,53,40,000/-. A further amount of `.30 Lakhs was due to the assessee from 5 M/s.Prestige Constructions which has been paid subsequently on 1.6.2000. Whereas the assessee contended that the said income has to be taxed when the entire contract is completed i.e., in the year 2003-04. The Assessing Authority was of the view that the income accrued to the assessee by virtue of the sale agreement dated 25.6.1998 falls in the assessment year 1999-2000. Having regard to the payments made, the credit for the entire amount of `.4,83,40,000/- stands crystallized in favour of the assessee within the assessment year 2000-01 and therefore, that is the year in which the income from nomination fees is assessable. Therefore, the Assessing Authority assessed the said income for the assessment year 2000-01. 3. The assessee preferred an appeal against the said order before the Commissioner of Income Tax (Appeals). The Appellate Authority on a careful 6 examination of all the agreements held that the Assessing Officer is not justified in bringing to tax the income from nomination fees in respect of business venture at Bangalore amounting to `.4,04,40,000/- for the assessment year 2000-2001 as the said income falls for consideration for the assessment year 1999-2000 only. Accordingly, the addition made for `.4,04,40,000/- was deleted and the Assessing Officer was directed to recompute the interest chargeable under section 234B of the Act. 4. Aggrieved by the said order, both the assessee as well as the revenue preferred appeals before the Tribunal. In the meanwhile, in pursuance of the remand order, the Assessing Authority assessed the income for the assessment year 1999-2000. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals) who dismissed the said appeal. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. That is how before the Tribunal there were three appeals. 7 5. All the three appeals were taken up for consideration together by the Tribunal. The Tribunal found fault with the approach of both the Appellate Authority as well as the Assessing Authority. According to the Tribunal in the facts of this case, Project Completion Method is to be adopted, as the adoption of Accounting Standard (AS) 7 has been made mandatory with effect from the assessment year 2004-05 and therefore, following the aforesaid accounting practice, the Tribunal held that the income has to be brought on record to be taxed in the year 2003-04. Accordingly, it set aside the order passed by the lower authorities and allowed the appeal of the assessee. Aggrieved by the said order, the revenue is in appeal. 6. This appeal was admitted to consider the following substantial questions of law: 1. Whether in the facts and circumstances of the case, the Tribunal was right in law, coming to the conclusion that the 8 nomination fee of `.4,04,40,000/- received by the assessee from M/s.Prestige Constructions, as per agreement dated 25.6.1998 and supplement agreement dated 25.6.1998, is assessable in the assessment year 2003-04 on Project Completion Method, and not in the assessment year 1999- 00, even though the assessee was not a Builder for relevant project, as assessee is not entrusted with construction work in the proposed project but represents only a Confirming Party to these agreements? 2. Whether on the facts and circumstances of the case, the Tribunal was right in law in coming to the conclusion that nomination fee received by the assessee could not be brought to tax in the assessment year 1999-00 under Section 2(47)(v) of the Income Tax Act in the light of the decision of Bombay High Court in the case of Dwarkadas Kapadia Vs.CIT (2003)260 ITR 491? 3. Whether the Tribunal was correct in coming to the conclusion that the nomination fee is assessable on project completion method though 9 the assessee was not a builder but a confirming party to the agreement? 7. The learned counsel for the revenue assailing the impugned order contended that admittedly the assessee is following the Mercantile System of Accounting. Under the agreement dated 25.6.1998, the right of the assessee was crystallized and an amount of `.4,83,40,000/- became due to him. Therefore, he should have offered the said income to tax for the assessment year 1999-2010 as rightly held by the Commissioner of Income Tax (Appeals). As the assessee is not a Contractor, Accounting Standard (AS 7) is not attracted and therefore, the Tribunal erred in holding that the income should have been offered to tax in the year 2003-04 on the basis of the aforesaid Accounting Standard (AS 7) which has no application to the facts of this case. 8. Per contra, the learned counsel appearing for the assessee submitted that the contract between the parties 10 originally was entered into on 30.1.1995. Subsequently, several agreements have come into existence modifying the terms of the agreement. Under the terms of the agreement not only the assessee received cash payment, but also received amount towards part of consideration of built-up area. It is only when the said built up area is handed over to the assessee in terms of the Complete Project Method, the assessee has offered the said income to tax for the assessment year 2003-04 and therefore, the Tribunal was justified in upholding the claim of the assessee by setting aside the order passed by the lower authorities and therefore, he submits that no case for interference is made out. 9. The material on record discloses that the memorandum of understanding came to be entered on 30.1.1995 under which the assessee entered into agreement with the owner. The terms of the agreement makes it clear, the assessee has to identify the purchasers 11 for the owners. Thereafter, on identifying such owners, a Joint Development Agreement came to be entered into on 23.3.1995 between the owner, assessee and the purchaser where the share to which each of them is entitled to in the built-up portions was determined. Subsequently, yet another agreement came to be entered into on 13.5.1997 which is styled as agreement of sale whereunder the assessee agreed to sell his share of completed portion for a price of `.4,90,72,500/-. Subsequently, a supplementary agreement dated 13.5.1997 was entered into setting out details of the apartment falling to the share of land owner. It is thereafter, an agreement of sale was entered into on 25.6.1998 under which the purchaser agreed to pay `.6,95,40,000/- out of which `.4,83,40,000/- was payable to the assessee. A supplementary agreement also came to be entered into on the aforesaid date. It is under this agreement, the rights of the parties were crystallized. The consideration due to the owner and the assessee was 12 determined. The payments made earlier under earlier agreements were taken into account and how the balance amount has to be paid was set out as per Annexure-‘1’ to the said agreement. Under the said agreement not only the assessee was entitled to a sum of `.4,83,40,000/- by way of cash, but also was entitled to a super built area as mentioned in the said agreement. However, said super built area was delivered during 2003-04. Therefore, the question that arose for our consideration is, whether the assessee has to offer to tax the consideration under the said agreement as on the date the contract was completed by handing over the constructed area or on the day the agreement was entered into as he was following Mercantile System of Accounting. 10. Accounting Standard (AS) 7 applies to Complete Project Method. The said system deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts i.e., by the 13 contractors. It also applies to enterprises undertaking construction activities of the type dealt within this statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale. In other words, a person who enters into such contract should undertake the construction personally. If those conditions are fulfilled, it is only after the completion of the contract the consideration of the contract has to be offered to tax at the completion of the contract. 11. In the instant case, as per the agreement, though the assessee is carrying on the business of builder and may be contractor, having regard to the terms of the contract, his role was only to identify the purchaser. After identifying the purchaser, a tripartite agreement has been entered into. As per the terms of tripartite agreement, certain amounts have to be paid to the land owner and certain amounts have to be paid for the services rendered 14 to the assessee and both of them were entitled to some built up area. Entire construction has to be put up by the purchaser. No part of construction has to be put by the assessee and therefore, the Statement of Accounting Standard (AS) 7 which is applied by the Tribunal to the facts of the case has no application at all. Consequently, the question of applying Complete Project Method to the facts of the case does not arise. 12. Admittedly, the amounts due and the constructed area due to the assessee was crystallized under the agreement dated 25.6.1998. Annexure-‘1’ to the said agreement shows, payments received prior to the agreement and balance of payments which is to be made. But under the Mercantile System of accounting, when once the said amount accrues, it has to be offered to tax in the year of accrual. Therefore, when the said amount is due to the assessee, a portion of which was already paid and a portion of it is payable in the near future as per the dates 15 prescribed, the amount mentioned in the said agreement accrued on 25.6.1998 and therefore, the said amount should have been offered to tax for the assessment year 1999-2000. That is precisely what the Appellate Authority the Commissioner of Income Tax (Appeals) has held. The fact that though the parties entered into agreement in 1995, there were modifications, alterations and supplementary agreements also came to be executed. Finally, the terms between the parties were crystallized under the agreement dated 25.6.1998. Therefore, when the assessee was following Mercantile System of Accounting, he should have offered to tax the amounts accrued to him under the agreement for the assessment year 1999-2000. In that view of the matter, the order passed by the Tribunal holding that the amount to be offered to tax for the year 2003-04 applying Accounting Standard (AS) 7 and treating the transaction as Complete Project Method is opposed to the admitted facts of the case. 16 Therefore, the impugned order passed by the Tribunal requires to be set-aside. 13. It is submitted under the agreement dated 25.6.1998, the assessee is entitled to built up area out of which a portion has to be given to the vendor which requires to be deducted from the income of the assessee. Infact the record discloses, the assessee has paid certain amounts to the owner when he entered into original agreement MOU. All the payments made by the assessee to the owner requires to be deducted out of the money received from the purchaser by the assessee and what he has to offer to tax is only the net amount in excess of what he has paid to the owner, if not allowed. 14. Therefore, the substantial questions of law are answered in favour of the revenue and against the assessee. The assessment has to be done for the 17 assessment year 1999-2000 and the order passed by the Tribunal contrary to this stands set-aside. Accordingly, ITA.No.835/2008 is allowed. ITA.Nos.836/ 2008 and 837/2008 are dismissed. No costs. Sd/- JUDGE Sd/- JUDGE Bss "