2018 (3) TMI 1039 - AT - Income Tax

Accrual of income - entitlement of additional FSI available on the land owned by the appellant - assessee firm has developed and sold the FSI to the purchaser and the society for each of the building was formed as per the Co-operative Society Act. The balanced FSI available in hand with the assessee firm in 1995 was 14202.40 sq.mtr - in 1995 the assessee firm submitted the revised plan before the BMC and got the permission for total FSI of 89226.13 sq.mtr. - Held that - The area sold upto 1,52,874.63 sq ft belonged to the assessee firm undisputedly and therefore whole of the sale consideration belongs to the assessee and has been duly accounted for in the books of accounts. As per the chart enclosed for A Y 2006-07, 2007-08 and 2008-09, the assessee started making deposit with court an amount equal to ₹ 500 per sq ft once the disputed FSI was utilized. Thus, the amount to the extent of ₹ 500 per Sq Ft has not accrued to the appellant and therefore cannot be treated as income of the assessee. The A.O has misunderstood the issue as of deduction of amount. The said amount has not accrued to the assessee and the question of claiming it as deduction would arise only if it is first held that it is income of the assessee. From the record, we also found that the ownership of additional FS1 is in dispute and the assessee has been permitted to develop and sell the such disputed additional FSI subject to certain conditions and deposit of ₹ 500 per sq ft of such additional FSI sold. The right to the said amount of ₹ 500 per sq ft has not accrued to the assessee and the owner of such amount would be decided by Courts and till such time as the issue is resolved the said amount does not accrue to the assessee. The detailed finding so given by the CIT(A) to the effect that ₹ 500/- per sq.ft of built-up area so deposited in the Court is not accrued to the assessee after relying on various judicial pronouncements, are as per material on record and which have not been controverted by learned DR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the order of CIT(A) for all the three years under consideration.

Issues Involved:
1. Deletion of addition made by the AO of Rs. 1,15,04,185/-.
2. Determination of the nature of receipts as contingent or actual income.
3. The legal standing of amounts deposited with the court as per High Court orders.
4. The impact of pending litigation on the recognition of income.

Issue-wise Detailed Analysis:

1. Deletion of addition made by the AO of Rs. 1,15,04,185/-:
The primary issue in the appeals was whether the amount of Rs. 1,15,04,185/- collected by the assessee and deposited with the court should be treated as income. The AO added this amount to the total income of the assessee, which was later deleted by the CIT(A). The AO argued that the deposit was not an ascertained liability but a contingent one and could not be deducted from the sale proceeds. The CIT(A), however, deleted the addition, considering various judicial pronouncements and the nature of the dispute.

2. Determination of the nature of receipts as contingent or actual income:
The assessee, a partnership firm engaged in construction, argued that the receipts were contingent and not actual income. The firm was required to deposit Rs. 500 per sq. ft. with the court as per a High Court order, pending the final decision on the entitlement of additional FSI. The CIT(A) and various judicial precedents supported the view that income should only be taxed when it accrues, and in this case, the accrual was contingent on the final court decision.

3. The legal standing of amounts deposited with the court as per High Court orders:
The High Court had allowed the assessee to consume additional FSI subject to depositing Rs. 500 per sq. ft. with the City Civil Court. This deposit was to be held until the final resolution of the dispute. The CIT(A) observed that since the dispute was pending, the amount could not be considered as income. The CIT(A) relied on the principle that income tax is a tax on real income, not hypothetical income, as established in various cases such as FGP Ltd. vs. CIT and Godhra Electricity Co. Ltd. vs. CIT.

4. The impact of pending litigation on the recognition of income:
The CIT(A) and ITAT noted that the pending litigation significantly impacted the recognition of income. The right to the deposited amount was disputed and would only be determined upon the final court decision. The ITAT upheld the CIT(A)'s view that the amount deposited with the court did not accrue to the assessee as income during the relevant assessment years. Judicial precedents, including the Supreme Court's rulings in Hindustan Housing and Land Development Trust Ltd. and Godhra Electricity Co. Ltd., supported the position that income should only be recognized when there is a clear right to receive it, free from substantial disputes.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the addition of Rs. 1,15,04,185/-, concluding that the amount did not accrue as income to the assessee due to the pending litigation. The appeals filed by the Revenue were dismissed, and the cross-objections by the assessee were rendered infructuous. The judgment emphasized the principle that income must be real and accrued, not contingent or hypothetical, aligning with established legal precedents.

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