2018 (11) TMI 1341 - HC - Income Tax

Method of accounting - following mercantile system or project completion system in one project and the cash method of accounting in the another - Held that - Subsection 1 of Section 145 of the Income Tax Act, 1961 provides that income payable under the head profit and loss account of business and income from other source shall subject to the provisions of Subsection 2 be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. In terms of this provision, therefore, the choice of the assessee would be either of following mercantile or cash system of accounting. The assessee, however, cannot choose to follow mercantile system for all other projects and make a departure only for one of the projects by changing the system of accounting. The Tribunal, therefore, correctly held this issue against the assessee. The assessee was bound to follow the mercantile system of accounting and offer the income to tax on the basis of accrual and not actual receipts. The assessee had claimed to have acquiesced certain rights in the property in question by way of assignment. Further, even when the Urban Land Ceiling Act was still in forced, such rights the assessee desired to pass on to the assignee for which the deed of assignment was executed. The assessee had never questioned such deeds. In fact, once ULC Act was repealed, such arrangement was finalised. Further, whatever be the nature of the agreement and accrual of rights in favour of the purchaser of the land or the assignor or the assignee the assessee never argued that its right to receive the consideration was under jeopardy. Under the assignment agreement itself there was specific mention of transfer of rights in the property in lieu of which the assignee would pay agreed sum to the assessee. - Decided against assessee.

Summary

Issues:
1. Whether the ITAT erred in holding that the assessee could not follow cash system of accounting for the Hadapsar project?
2. Whether the amount of ?10 crore accrued in AY 2007-08?
3. Whether the assessee was bound to follow the mercantile system of accounting?
4. Whether the assignment under which the accrual arose was invalid?

Analysis:

Issue 1: The ITAT's decision on the cash system of accounting for the Hadapsar project was challenged by the assessee. The appellant contended that the method of accounting followed was permissible in law. The Tribunal found that the assessee had consistently followed the mercantile system for all projects except the Hadapsar project. Section 145 of the Income Tax Act allows the choice between cash or mercantile system, but the assessee cannot switch methods for different projects. The High Court upheld the Tribunal's decision, stating that the assessee was required to follow the mercantile system for the Hadapsar project.

Issue 2: The question of whether the ?10 crore accrued in AY 2007-08 was raised. The assessee argued that the amount did not accrue in that year due to the repeal of the Urban Land Ceiling Act and the subsequent completion of transactions. The High Court examined the validity of the assignment agreement and the rights transferred. It was found that the assessee had acquiesced rights in the property and never questioned the validity of the assignment. The Court concluded that the accrual of income crystallized before the Urban Land Ceiling Act was repealed, and the sale deed was executed. Therefore, the High Court dismissed the appeal on this issue.

Issue 3: The assessee contended that it was entitled to follow the cash system of accounting for the Hadapsar project. However, the High Court held that the assessee was bound to follow the mercantile system of accounting and offer income to tax on an accrual basis, not on actual receipts. The Court emphasized that the choice of accounting system must be consistent across projects, and the assessee could not selectively switch methods.

Issue 4: The validity of the assignment agreement under which the income accrued was questioned. The Court found that the rights in the property were transferred as per the agreement, and the assessee never disputed the validity of the arrangement. The Court rejected the argument that the accrual of income was invalid due to the timing of the Urban Land Ceiling Act's repeal. The Court concluded that the assessee's right to receive consideration was not in jeopardy, and the assignment agreement was finalized after the Act's repeal. Consequently, the Tax Appeal was dismissed.