2022 (12) TMI 347 - AT - Income Tax

Taxability of the gain arising out of the Development agreement - JDA - transfer u/s 2(47)(v) - recognition of revenue - HELD THAT - As the owner shall retain legal possession, domain and control over the property till the same is developed and sold either in whole or in parts to prospective purchasers as provided in the said agreement. It is also noted that from the commercial arrangements and the risk rewards attributable to land owners and developers, it is clear that the essence of share of revenue derived for the land owner is from transfer of the undivided share of right, title and interest in the entire land and the developer share of revenue is from construction and transfer of the super built and development of common area in the project. The reliance placed by ld. D.R on the Guidance note on accounting for real estate transaction (Revised) 2012 to hold that percentage completion method has to be followed is incorrect proposition as even the Guidance note states that revenue should not be recognized till such time legal title is validly transferred to the buyer. In our opinion, the assessee has been following project completion method of recognition of revenue and this system of accounting has been followed by from year to year which can be seen from the assessment order in assessment year from 2014-15 passed u/s 143(3) dated 19.5.2015. Thus, it was the submission ld. AR that it is not open to the department to change the method of accounting in the middle of the period of completion of the project even percentage competition method is applicable. He submitted that rule of consistency has to be followed. For this purpose, he relied on various judgements. In our opinion, the additions made under the income from business by computing the income based on percentage completion method will result in double taxation which is impermissible in law. The proposition of the learned Assessing Officer that the income offered in the subsequent years is income of the impugned assessment year will result in double taxation which is impermissible in law. It is a settled position of law that department cannot collect tax twice on the very same income and observation of the AO is absolutely contrary to the scheme of the Act that income can only' be taxed once more so when the revenue has accepted the income determined using the same method in two earlier assessment years and once subsequent assessment year. Further the information has been given to the Investigation Officer during the course of investigation. Therefore, it is more than reasonably correct to follow the same method of revenue recognition as there is an implied formidable fortified concurrence of the revenue on the method adopted by the assessee. The observation of the AO is further not under the spirit and the scheme of the Act. Department is excepted to assist the assesses in computing taxable income as per the provisions of the Act as enunciated by the CBDT in Circular No. No. 14 (XL-35) of 1955, dated 11.04.1995 and amplified by the decision Rajeshwari Cotton Ginning Pressing Industries 2015 (11) TMI 1819 - KARNATAKA HIGH COURT . Therefore, the officers of the department ought to have atleast guided the assessee in offering income correctly. Failure to even suggest the same during the course of enquiry and therefore, the statement of the CIT(A) that the assessee was not directed to offer income in subsequent years is absolutely not within the spirit and intent of the Act and also unsustainable in law. Joint Development agreement and the method of revenue recognition of the assessee are details/ information which were already available with the department during the course earlier assessment proceedings and other proceedings and the department has accepted the method of computation of income from the Habitat project as declared by the assessee i.e. completion contract method. On same set of facts, now onwards, the department wanted to change the method of computation of income by following percentage contract completion method instead of project completion method. As regards the argument of ld DR that advance received from the prospective buyers vide sale agreement represent the receipts in respect of the contracts undertaken, it was found that this was not supported by facts and figures. The assessee is not a contractor who has undertaken the construction activity. On the other hand, is a land owner who has given the land for construction to M/s. G-Corp Homes Pvt. Ltd.. He is getting his share of constructed area and against which assessee entered into sale agreement with various parties. The sale agreement is different from sale deed. In case of sale deed, the right in property transferred from seller to buyer immediately. However, it does not transfer in case of sale agreement. Sale deed is an executed contract. On the other hand, sale agreement is executory contract. In case of sale deed, seller can sue the buyer for breach of the contract. However, in the case of sale agreement, seller can sue the buyer only for damages but not for the price. In case of sale, if the property is destroyed, loss is borne by the buyer himself as he is the owner of the property. In case of agreement to sell, loss falls on the seller even though possession in the hands of buyer. Therefore, the contention that the amounts received from the prospective buyer through agreement to sell should be treated as sale was fallacious. The facts in the instant case, showed that there was no construction work done by assessee itself and it was the developer i.e. M/s. G-Corp Homes Pvt. Ltd. and there was no handing over of the constructed area by present assessee to prospective purchasers. What was received from the prospective buyers was in the nature of advance, therefore, it cannot be considered as amount received towards absolute transfer of price of flats intended to be sold. The system of accounting of working out profits on completed contract basis was an accepted system of accounting and such system had been followed consistently in the past by the assessee, which had been accepted by the department in earlier years, therefore, there was no justification, whatsoever to reject this system by invoking the provisions of section 145 of the Act and making estimate of profit by AO. Thus, in case of JDA the assessee being landlord share the proceeds arising from the development of immovable property belonging to the land owner share at specified percentage of constructed area and retains the legal ownership, domain and control of the land with him being a land owner and no portion of it will be transferred to the developer or his nominee, as the case may be. There is no allocated area designated as owner share or developer share as the case may be. The revenue shall be recognized by land owner being present assessee only at the point of transfer of risk and rewards of ownership of divided/undivided shares of land to the purchaser of unit i.e. at the point of conveyance or possession, whichever is earlier. Assessment u/s 153C - Income recognition of one business cannot be applied to another - Whether the addition could be made merely on the basis of admission made by the assessee in the statement recorded u/s 132(4) of the Act? - The date of search in the case of M/s. Ramaiah Developers Builders Pvt. Ltd. was on 23.8.2016 and the assessment has already been concluded. Thus, for the assessment year 2014-15 which is a concluded assessment, to frame assessment u/s 153C of the Act the seized material is must. In the present case, the assessing officer relying only on the basis of sworn statement recorded u/s 132(4) as well as 131 of the Act without valid seized material. In our opinion, that should be a valid seized material found during the course of search and the sworn statement of the Directors cannot substitute this seized material found during the course of search, though sworn statement is a piece of evidence to frame the assessment but it is not conclusive evidence to frame the assessment or sustain the addition. For the assessment year 2015-16 and 2016-17, these assessments were framed u/s 143(3) r.w.s. 153D of the Act and there was no valid seized material found during the course of search to frame the assessment. The ld. AO cannot rely only on the sworn statement recorded from Shri M.R. Seetharam to frame the assessment. In our opinion, as discussed in earlier para, sworn statement is not conclusive evidence to frame the assessment or to sustain the addition. The addition shall be based on the evidence found during the course of search action or during the course of assessment. CIT(A) after verifying the detailed submissions, had allowed the appeals filed by the Respondent holding that the sale of flats (received under Development Agreement) are to be taxed in the year of execution of sale deed and not in the year of advances received. In view of this, we confirm the order of the CIT(A) in all these years in deleting the addition made by AO. Since we have confirmed the deletion of additions by ld. CIT(A) made by ld. AO, at this stage, we refrain from commenting on the head of income under which the income to be taxed as there is no accrual of income in these assessment years. Appeals of the revenue are dismissed. Proceedings u/s 153C in the absence of any incriminating material is bad in law - In the present search and impugned assessment proceedings no new / hidden fact has come to light. The learned assessing officer has only changed the opinion and has now sought to tax the receipts in the year of receipt as against the year of registration. Thus, the additions in the impugned order are purely based on a change in legal opinion and not on any incriminating material . The predominant condition for satisfaction under 153C of the Act is the incriminating nature of evidence found. Though there has been change in the wordings of the section, the intention behind the section is not changed and the presence of document or evidence with incriminating nature is necessary before a notice u/s. 153C is issued. Non-recording of satisfaction u/s 153C invalidates the entire proceedings - Recording of satisfaction by Assessing Officer of searched person is a necessary pre-condition for initiation of proceedings u/s. 153C - Section 292B and 292BB would be of no use or avail to the department in the matter for the reason that the satisfaction of preconditions U/s. 153C are pre-requisite for assumption of jurisdiction u/s. 153C of the Act and department cannot take shelter u/s. 292B / 292BB of the Act, as jurisdictional defect / lacuna cannot be cured u/s. 292B /292BB of the Act. CIT(A) not dealt these grounds in his orders for these assessment years and hence all the legal grounds raised by the assessee herein remitted back to Ld. CIT(A) for his adjudication. The COs filed by the assessee are partly allowed for statistical purposes.

Summary

Issues Involved:
1. Nature of Land and Assessment of Profit
2. Revenue Recognition and Application of Accounting Standards
3. Jurisdiction and Validity of Proceedings under Section 153C
4. Statements and Admissions during Search Proceedings

Detailed Analysis:

1. Nature of Land and Assessment of Profit:
The primary issue was whether the land held by the assessee was a fixed asset or stock-in-trade. The CIT(A) held that the land was a fixed asset, contradicting the assessee's statement under Section 132(4) that it was stock-in-trade. The revenue contended that the advances received from the sale of flats should be treated as business income, while the assessee argued that the revenue should be taxed under capital gains only upon registration of the sale deeds. The Tribunal upheld the CIT(A)'s decision, confirming that the land was a fixed asset and that the income should be recognized in the year of registration of sale deeds, not in the year of receipt of advances.

2. Revenue Recognition and Application of Accounting Standards:
The revenue argued that the income should be recognized based on the percentage completion method as per Accounting Standard 9 (AS-9), given that significant risks and rewards had been transferred. The assessee contended that the revenue should be recognized under the project completion method, as the land was a fixed asset and not stock-in-trade. The Tribunal concluded that the project completion method was appropriate, as the assessee was not involved in the construction and development activities, and AS-7 was not applicable. The Tribunal noted that the assessee had consistently followed this method, which had been accepted in previous assessments.

3. Jurisdiction and Validity of Proceedings under Section 153C:
The assessee challenged the jurisdiction of the Assessing Officer (AO) under Section 153C, arguing that the transfer of jurisdiction was not properly communicated and that no incriminating material was found during the search. The Tribunal found that the transfer of jurisdiction was not in compliance with Section 127, as the assessee was not given a reasonable opportunity to be heard, and the reasons for transfer were not recorded. Additionally, the Tribunal noted that the proceedings under Section 153C were invalid in the absence of any incriminating material, as the seized documents were already part of the assessee's records and did not reveal any new information.

4. Statements and Admissions during Search Proceedings:
The revenue relied on the assessee's statements during the search, where he admitted to offering certain amounts as income. The Tribunal held that statements under Section 132(4) are not conclusive and can be rebutted. The Tribunal emphasized that income must be assessed based on actual accrual and not merely on admissions made during search proceedings. The Tribunal also noted that the assessee had consistently followed the project completion method, and there was no justification for changing the method based on the statements made during the search.

Conclusion:
The Tribunal dismissed the revenue's appeals, confirming that the land was a fixed asset and that income should be recognized under the project completion method. The Tribunal also held that the proceedings under Section 153C were invalid due to non-compliance with Section 127 and the absence of incriminating material. The Tribunal remitted the legal grounds raised by the assessee to the CIT(A) for adjudication. The appeals by the revenue were dismissed, and the cross-objections by the assessee were partly allowed for statistical purposes.