2022 (4) TMI 277 - AT - Income Tax

Understatement of construction receipts - Rejection of book results - AO rejected the books of account on the basis that the books of accounts maintained by the assessee do not reflect the correct profit and applied ratio of 29.42% towards land cost and 70.5% against construction cost and worked out the income which has been understated by the appellant in his return of income - main arguments of the assessee are that the land cost varies from block to block and therefore the same is variable - HELD THAT - The cost of land gets allocated through registered sale deed and the same is transferred to the land owner. The assessee of the project has been consistently following this methodology of cost allocation where through registered deed the consideration of cost of flat is determined and later transferred to the land owner - assessee has submitted that in case the consideration for land cost to the extent of 15% is again taxed in the hands of the assessee, it would lead to double taxation. This is the last year of the project and the methodology of cost allocation has been accepted in the prior two years as well. We are in agreement with contention of the ld. counsel that once having accepted this methodology for the past years, the Department cannot reject the methodology in the third year of the project, following the principle of consistency. We also note that the assessee has brought to our knowledge that the cost of land is allocated through registered sale deed and is determined at the time of entering the agreement which is then later transferred in the hands of the land owner. We also note that once the cost of land has already been taxed to the land owner and offered to tax in its hands, the adjustment done by the ld. Assessing Officer by ignoring the registered deed and consistent method of allocation would lead to double taxation AO erred in law and fact in rejecting the books of accounts of the assessee which the Department has accepted in prior years on the same set of facts. However, we note from the orders of ld. Assessing Officer and the ld. CIT(A) that the appellant has not produced any evidence in support of its claim that whatever advances have been shown by the appellant in the balance sheet, the same have been transferred to landowners and offered in the income tax return of the respective land owners. Since, the ld. CIT(A) has made a specific noting that no details were furnished to prove that this income has been offered for taxation in the hands of the land owner, in the interests of justice, we restore the matter back to the file of A.O. on the limited point to verify whether income has been transferred to the land owners and has been offered to tax in their return of income. Appeal of the assessee is treated as allowed as directed.

Summary

Issues:
Appeal against order of CIT(A) regarding understatement of construction receipts for assessment year 2012-13.

Analysis:
1. The appellant, a land developer, entered into agreements for project development with landowners. Funds from flat buyers were divided between land cost and construction cost. The Assessing Officer found inconsistencies in fund allocation and rejected the books of account. The AO applied a ratio of 29.42% towards land cost and 70.5% towards construction, resulting in an understatement of income by ?49,71,556.

2. Before the CIT(A), the appellant argued against the rejection of the method of bifurcation, citing inconsistency in revenue recognition and potential double taxation. The CIT(A) upheld the AO's decision, noting discrepancies in the appellant's calculations and lack of evidence regarding income offered for taxation by landowners. The CIT(A) confirmed the addition made by the AO.

3. The appellant contended before the ITAT that the rejection of the method was unjustified, emphasizing consistency in cost allocation methodology. The ITAT agreed with the appellant, citing principles of consistency and legal precedents. However, noting the lack of evidence regarding income transfer to landowners, the ITAT remanded the matter to the AO for verification.

4. The ITAT allowed the appeal, directing the AO to verify if income had been transferred to landowners and offered for taxation in their returns. The decision was based on the principle of consistency and the need for evidence to support the appellant's claims.