2014 (10) TMI 294 - AT - Income Tax

Accrual of capital gain - transfer - sale proceeds of plots - Whether that the assessee should have recognized the revenue when the allotment letters were issued to the prospective buyers - Mercantile system followed - Held that - The sale deeds in respect of the plots of which letter of allotments were given have not been registered, the transaction would not qualify as sale because the risks and rewards are not transferred to the buyers legally, the AO mentioned that there is no provision in the income tax Act saying that registration is compulsory for the purpose of transfer/sale of immovable property - A letter of the allotment is nothing but it is a first stage of acceptance of the offer of the buyer by issuing him to letter - the assessee company has undertaken a project GIRIVAN and as per the facts on record it appears that the GIRIVAN project is the farming or agricultural project - The assessee company acquired the huge land in the Village Dongargaon/Hotale, Tal. - Mulshi, Distt. Pune and after developing the infrastructure like road, water provision etc. made the plots and offer the same for sale - On the basis of the survey action u/s. 133A the AO issued the notice u/s 148 to the assessee on the charge that for these six assessment years the assessee has not properly declared the income - the AO has re-casted the entire profit and loss account of the assessee which is merely basis of the allotment letter issued by the assessee to the prospective buyers. Both the authorities have not at all understood the nature of the allotment letter - The allotment letter is issued on company letter head. On perusal of the contents of the allotment letter, it is like a booking letter accepting the offer of the buyer - Nowhere there is mentioned in the allotment letter that the possession of the plot is given to the prospective buyers - The assessee has filed the copy of allotment letter dated 26-07-2002 issued to one Mr. Arun Ramdas Pangarkar - As per the allotment letter said Mr. Arun Ramdas Pangarkar has applied for the allotment of the plot and booking an amount was paid to the assessee company and the assessee agreed to allot him the plot of agricultural land as per the particulars given - It is stated in the allotment letter that the said buyer has inspected the plot and the same is allotted as per his choice. In respect of the private roads there is mentioned in the allotment letter - even the allotment letters were issued when the project was under developed that there were no proper roads but demarcation was done - It appears that the electricity poles and water facility was under progress - The cost of the plot is mentioned as well as administrative and security expenses are mentioned - There is condition that the said person has to use the plot for an agricultural purpose and for construction of his own farm house as per rules and regulations and prospective buyer has to prove that he is agriculturist - It is in clear terms clarified that the assessee company will execute sale deed of the said plot depending upon the buyers agriculture status and claiming the amount towards cost of plot administrative expenses etc. It is also mentioned that the buyer has to become member of GIRIVAN project. The assessee is following consistent method of accounting in respect of the GIRIVAN project recognizing income on execution of sale deed and save these six assessment years the same has been accepted - Allotment letter cannot be said to be conferring the possession on the prospective buyers but it is only accepting the offer of the buyer to sale the specific plot - As per the Transfer of Property Act the title is transferred only on the completion of the terms and conditions agreed between the parties - authorities below have referred to Sec. 2(47) of the Act - the income is computed under the head business hence, the definition is not applicable at all - as the letter of allotment does not disclose nor it is meant for conferring the right of the enjoyment or possession on the date of issue - the method of accounting regularly employed by the assessee cannot be disturbed - The AO did all the exercise merely on the basis of the survey action u/s. 133A which he could have done in normal assessment proceedings u/s. 143(3) by verifying method of accounting adopted by the assessee for recognizing income - the assessee has filed the copies of letters from the buyers of the plots and as per the letters given by the buyers of the plots, the possession of the plot is given only on the execution on the sale deed - both the authorities below have misunderstood the provisions of law nor they have properly appreciated the letter of allotment issued by the assessee to the prospective buyers thus, the order of the CIT(A) is set aside and the AO is directed to accept the method of accounting regularly followed by the assessee and also to accept the return/loss declared Decided in favour of assessee.

Summary

Issues Involved:
1. Timing of revenue recognition for sale of plots.
2. Whether possession and ownership of plots were transferred at the time of issuing the letter of offer of allotment.
3. Applicability of Section 2(47) of the Income Tax Act regarding transfer.
4. Consistency in the method of accounting followed by the assessee.

Detailed Analysis:

1. Timing of Revenue Recognition for Sale of Plots:
The primary issue was whether the revenue from the sale of plots should be recognized at the time of issuing the letter of offer of allotment or at the time of execution of the sale deed. The Assessing Officer (A.O.) contended that since the assessee followed the mercantile system of accounting, the revenue should be recognized when the letter of allotment was issued, as it conferred the right of enjoyment over the property to the buyer. The A.O. argued that the letter of allotment was akin to an agreement of sale, transferring significant risks and rewards of ownership to the buyer, and thus, the income should be recognized in the year of allotment. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that the letter of allotment enabled the buyer to use and enjoy the plot, and thus, the revenue should be recognized at that point.

2. Transfer of Possession and Ownership:
The A.O. and CIT(A) held that the transfer of possession and ownership occurred at the time of issuing the letter of allotment. The A.O. cited statements from plot owners and the Vice President of the plot owners' association, who indicated that the buyers had full rights over the property upon receiving the letter of allotment. The CIT(A) also noted that the buyers were allowed to develop the plots and construct structures, which indicated possession and control over the property. The assessee, however, argued that the letter of allotment was merely an acceptance of the buyer's offer and did not confer possession or ownership. The actual transfer occurred only upon execution of the sale deed, after fulfilling all conditions, including payment and proof of being an agriculturist.

3. Applicability of Section 2(47) of the Income Tax Act:
The A.O. applied Section 2(47) of the Income Tax Act, which defines "transfer" in relation to capital assets, to argue that the issuance of the letter of allotment constituted a transfer. The CIT(A) supported this view, stating that the letter of allotment enabled the enjoyment of the property, thus meeting the criteria of Section 2(47). The assessee contended that Section 2(47) was not applicable as the income was assessed under the head "Income from business or profession" and not "Capital gains."

4. Consistency in Method of Accounting:
The assessee argued that it had consistently followed the method of recognizing revenue upon execution of the sale deed since 1990-91, which had been accepted by the Department in previous assessments. The CIT(A) dismissed this argument, stating that the principles of estoppel and res judicata do not strictly apply to income tax proceedings, and new facts discovered during the survey justified re-examining the method of revenue recognition.

Judgment:
The Tribunal found that both the A.O. and CIT(A) had misunderstood the nature of the letter of allotment. It held that the letter of allotment did not confer possession or ownership but was merely an acknowledgment of the buyer's offer. The Tribunal noted that the assessee had consistently followed the method of recognizing revenue upon execution of the sale deed, which was in accordance with the Transfer of Property Act. The Tribunal also ruled that Section 2(47) was not applicable as the income was assessed under "Income from business or profession." The Tribunal allowed the appeals, set aside the orders of the CIT(A), and directed the A.O. to accept the method of accounting regularly followed by the assessee and the returns declared.

Conclusion:
The Tribunal concluded that the revenue from the sale of plots should be recognized at the time of execution of the sale deed, not at the time of issuing the letter of allotment. The consistent method of accounting followed by the assessee was upheld, and the appeals were allowed in favor of the assessee.