2020 (12) TMI 338 - AT - Income Tax

Accrual of income - deferred revenue income - Addition of development Funds and expenses - whether a particular receipt represents the income of the assessee in the years under consideration - AO being dissatisfied with the method of accounting for the receipt of development expenses fund held that the receipt of development expenses fund are trading receipt of the assessee - assessee has shown certain receipts as liability on the reasoning that such a liability shall be accounted for as income against the corresponding expenses but AO was of the view that such receipts, treated as deferred revenue income, has become the income of the assessee under mercantile system of accounting - HELD THAT - Assessee has been following a unique method of accounting for recognizing the certain receipts as income in the future years. Method of accounting adopted by the assessee since incorporation 14-05-1992 was accepted by the revenue till the Assessment Year 2010-11 without pointing out any flaw in such method of accounting - revenue has no authority to change the method of accounting of the assessee until and unless it contains the defects or there is any specific prohibition under the provisions of law. As such we are of the view that the principles of consistency should be adopted. Receipts which was treated by the assessee as deferred revenue income has been offered to tax by the assessee in the subsequent assessment years. In such a situation, we are of the view that there is no loss to the revenue for the simple reason that receipt has finally been suffered to the tax but in the subsequent assessment year - if any addition is sustained in the year under consideration then there has to be deletion of the corresponding amount of the income shown by the assessee in the subsequent assessment years otherwise it would lead to double addition to the total income of the assessee which is not desirable under the provisions of law. - Appeal of the Revenue is dismissed.

Summary

Issues Involved:

1. Deletion of addition made on account of development expenses (? 1,39,37,907/-).
2. Deletion of addition made on account of development funds (? 78,97,322/-).

Detailed Analysis:

1. Deletion of Addition on Account of Development Expenses (? 1,39,37,907/-):

The assessee, a listed company engaged in real estate development and operation of holiday resorts, filed its return of income declaring ? 20,55,330/-. The AO assessed the income at ? 4,29,46,219/- after making several additions, including ? 1,39,37,907/- for development expenses. The assessee argued that the development expenses were allocated as liability and not as revenue receipts, consistent with its accounting method since incorporation. The AO, however, considered these receipts as trading receipts and added them to the total income. The CIT(A) deleted this addition, noting that the assessee's method of accounting had been consistently accepted by the Revenue in previous years and was in line with accounting standards. The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency and noting that the receipts were eventually offered to tax in subsequent years, thus causing no loss to the Revenue.

2. Deletion of Addition on Account of Development Funds (? 78,97,322/-):

The AO also added ? 78,97,322/- to the assessee's income, considering the development funds as revenue receipts rather than liabilities. The AO argued that the assessee was not obligated to provide the facilities for which these funds were collected, and no such facilities were provided during the year. The CIT(A) deleted this addition as well, reasoning that the development funds were collected for future obligations and should be treated as liabilities until the corresponding expenses were incurred. The Tribunal agreed with the CIT(A), stating that the assessee's method of recognizing these receipts as income in the year the expenses were incurred was reasonable and had been consistently followed and accepted by the Revenue in other years.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the additions made by the AO on account of development expenses and development funds. The Tribunal emphasized the importance of consistency in accounting methods and noted that the receipts in question were eventually taxed in subsequent years, ensuring no loss to the Revenue. The Tribunal found no infirmity in the CIT(A)'s order and declined to interfere.