2018 (12) TMI 820 - AT - Income Tax

Undisclosed profits from the payments received from HPC - accrual of income - receipt in the nature of advance - accounting treatment - Held that - The advance amount so received by HAN from HPC was to be refunded in case the land acquisition doesn t materialize in time bound manner. Post the execution of the above amended MOA, the very premise of the AO i.e the amount received is non-refundable has ceased to exist. Further proof for the above comes in the future transactions entered into by the assessee with HPC. The assessee has already refunded an amount of ₹ 5.13 crores to HPC as on date. The same has been verified by the ledger account of HPC in the books of the assessee and the confirmation given by HDFC bank which reflects the payments made by the assessee to HPC. On the basis of above, the question of refundability or otherwise becomes immaterial and the said advance cannot be treated as income in the hands of the assessee. Assessee fails to perform the future services with respect to acquiring land, conducting a land survey and providing Title certificate all the services performed in the past would be rendered futile and the assessee would be required to refund the advance received owing to its inability to provide the services agreed upon. For income to accrue to the assessee, the transaction should have been materialized. Since, there is no accrual the consideration received shall be treated as advance and not as an income item. Thus, the original Memorandum of agreement alongwith new deed of amendment dated 15/03/2012 establishes in clear and unambiguous terms that the amount received by the assessee was as advance and was refundable in case the objectives were not met. Further as per Clause 2 of MOA, it is evident that the acquisition of land was the essence of the agreement entered into as MoA. Once the same is established, it flows that the amount received cannot be bifurcated between the past services and future services . The land as envisaged as available by both the parties to MoA never became available due to the stiff opposition to the proposed power plant. To confirm the position from the perspective of opposite party HPC, a confirmation was received from the said party. The said confirmation also supports the position that the MoA was entered with the objective of land acquisition which never materialized. CIT(A) has dealt with the issue threadbare after meeting with all the observation of the AO with regard to the nature of advance and after recording detailed finding reached to the conclusion that amount so received was in the nature of advance not liable to tax during the year under consideration. - Decided against revenue

Issues Involved:
1. Whether the amount of ?10,12,50,000 received by the assessee from HPC should be treated as undisclosed profits or as an advance.
2. Whether the CIT(A) erred in deleting the addition made by the AO on account of the said amount.
3. Compliance with Rule 46A of the I.T. Rules, 1962.

Issue-Wise Detailed Analysis:

1. Treatment of ?10,12,50,000 as Undisclosed Profits or Advance:
The AO treated the amount of ?10,12,50,000 received by the assessee from HPC as undisclosed profits, arguing that the services had been performed and the amount was non-refundable as per the MOA dated 07/03/2011. The AO also noted that HPC had treated the amount as CWIP in their books, which indicated that the amount was not an advance.

The assessee contended that the amount was an advance for future services related to land acquisition for HPC's power project, which was scuttled due to opposition from local villagers. The assessee argued that the amount was refundable if the project objectives were not met, as clarified in the amended MOA dated 15/03/2012.

The CIT(A) observed that the original MOA and the amended MOA both indicated that the amount was an advance, refundable if the land acquisition did not materialize. The CIT(A) noted that the refund of ?5.13 crores by the assessee to HPC further substantiated the claim that the amount was an advance. The CIT(A) concluded that the amount should be treated as a liability and not as income.

2. Deletion of Addition by CIT(A):
The CIT(A) deleted the addition made by the AO, reasoning that the amount received was an advance and not income. The CIT(A) emphasized that the essence of the agreement was the acquisition of land, which did not materialize. The CIT(A) also highlighted that the accounting treatment by HPC should not determine the nature of the receipt for the assessee.

The Tribunal upheld the CIT(A)'s decision, agreeing that the amount was an advance and not income. The Tribunal noted that the assessee had refunded part of the advance and that the amended MOA clearly stipulated the refundable nature of the amount.

3. Compliance with Rule 46A of the I.T. Rules, 1962:
The Revenue argued that the CIT(A) violated Rule 46A by relying on documents not furnished during the assessment proceedings. The CIT(A) relied on the amended MOA dated 15/03/2012, which the AO claimed was not presented during the assessment.

The Tribunal found that the amended MOA was available before the AO during the assessment proceedings. Therefore, there was no violation of Rule 46A. The Tribunal concluded that the CIT(A) had rightly considered the amended MOA in deciding the nature of the receipt.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the amount of ?10,12,50,000 received by the assessee from HPC was an advance and not undisclosed profits. The Tribunal found no reason to interfere with the CIT(A)'s findings, which were based on a thorough examination of the facts and relevant documents. The Tribunal also confirmed that there was no violation of Rule 46A by the CIT(A).

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