2017 (4) TMI 165 - AT - Income Tax

Method of recognising the income for the assessment to tax in respect of sale of plots - Held that - The appellant firm had recognised the income in respect of sale of plots by adopting completed contract method, whereas, the Assessing Officer is of the view that income should be offered to tax received on year to year basis based on the stage of receipt of consideration, 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 stock-in-trade in the business of appellant- firm and are immovable properties. The title in the immovable property can be passed on only in terms of the provisions of the Transfer of Property Act. 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 property can be transferred or alienated in accordance with the provisions of the Transfer of Property Act. The right, title or interest in the immovable property can be transferred only by way of registering the conveyance deed executed in this behalf. Even the Accounting Standard-9 dealing with the recognition of income also lays down that the income in respect of transfer of immovable property can be recognised only when the risks, rewards and ownership of the property is transferred to the buyer. Therefore in our considered opinion, the matter requires a fresh examination by the Assessing Officer in the light of the above position of law. Therefore, we remand this matter back to the file of the Assessing Officer with a direction that the income in respect of sale of plots can be recognised only in the year in which conveyance deed executed is registered in favour of the buyers and to allow the development expenditure incurred as expenditure or the expenditure likely to be incurred on the plots sold as expenditure.

Summary

Issues:
1. Recognition of revenue based on the stage of receipt of consideration.
2. Dispute over the method of recognizing income for the assessment of tax in respect of sale of plots.
3. Applicability of section 2(47) of the Income-tax Act to transactions of stock-in-trade.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2007-08. The appellant, a firm engaged in property development, declared nil income in the return filed for the assessment year 2008-09. The Assessing Officer disagreed with the method of recognizing income adopted by the appellant for the sale of plots. The Assessing Officer argued that revenue should be recognized at every stage of receipt of sale consideration, whereas the appellant recognized revenue only upon sale and registration of conveyance deed. The Commissioner of Income-tax (Appeals) upheld the addition made by the Assessing Officer.

2. The main issue in this appeal was the method of recognizing income for tax assessment regarding the sale of plots. The appellant followed the completed contract method, recognizing income only when the risks, rewards, and ownership of the plots were transferred to buyers. On the other hand, the Assessing Officer insisted on recognizing income on a yearly basis based on the stage of receipt of consideration. The Tribunal referred to the provisions of the Transfer of Property Act and Accounting Standard-9, emphasizing that income from the transfer of immovable property can only be recognized when the risks, rewards, and ownership are transferred to the buyer. The Tribunal directed a fresh examination by the Assessing Officer to recognize income only in the year when the conveyance deed is registered in favor of the buyers.

3. The Tribunal also discussed the applicability of section 2(47) of the Income-tax Act to transactions of stock-in-trade, emphasizing that the provisions regarding the transfer of capital assets do not directly apply to stock-in-trade. The Tribunal highlighted the need for the title in immovable property to be transferred through a registered conveyance deed for income recognition. The decision was made in line with Accounting Standard-9 and the principles of accrual basis matching upheld by the Supreme Court in previous cases. As a result, the appeal was partly allowed for statistical purposes, and the matter was remanded back to the Assessing Officer for fresh examination in accordance with the legal provisions discussed.

This detailed analysis covers the issues raised in the judgment and provides a comprehensive understanding of the legal reasoning and decisions made by the Tribunal in this case.