2015 (3) TMI 681 - AT - Income Tax

Jurisdiction of Assessing officer - transfer of jurisdiction over the case under section 127 - Held that - The assessee has itself filed return with Circle 6(1). No doubt the Department has also not handled the issue very well (i.e. original return and revised returns were transferred to Circle 2(1) and again transferring the same to Circle 6(1)). However, as far as the assessee is concerned, it submitted itself to jurisdiction of Circle 6(1). Secondly when the assessee filed revised return and a notice under section 143(2) was issued by Assessing Officer Circle 6(1), the assessee did not raise the objection as required under section 124(3)(a). This clearly shows that the assessee had no objection on the jurisdiction but this issue is being raised merely as a matter of technicality to get the assessment annulled which is not possible because even if the assessment was to be made by the Assessing Officer, Circle 6(1), no inconvenience was caused to the assessee. Thirdly inherent jurisdiction of the assessee being located at Mohali lies with the Assessing Officer, Circle 6(1). In view of these facts and the above detailed discussion, we set aside the order of the learned Commissioner of Income-tax (Appeals) and hold that the Assessing Officer Circle 6(1) holds jurisdiction over the assessee. We also hold that the learned Commissioner of Income-tax (Appeals) has no power to entertain the additional ground in respect of the jurisdiction. In the result, ground raise by the Revenue in this regard is allowed. Change in accounting policy - whether Commissioner of Income-tax (Appeals) has failed to appreciate the fact that the assessee has adopted cash system of accounting, and as such its income from different sources is required to be computed under cash system of accounting - Held that - It is a settled position of law that whenever a system of accounting is changed such change has to be bona fide and the system should clearly reflect the income of the concerned year. It has not been explained before us why the profit in respect of two schemes was not recognised in the assessment year 2002-03 earlier simply by saying that it was not done by mistake, is not enough. Even if assuming that because of the change in system the income of the earlier year has come to this year then the assessee has no right to change income to the earlier year, i.e., assessment year 2002-03 by simply saying that the income belongs to that year and was not recognised in the earlier year. This cannot be done particularly in view of the fact that in the assessment year 2002-03 the income was exempt under section 10(20A). Moreover the assessment which has become final cannot be reopened again. The assessee has no time left in terms of section 139(5) to revise the return. Therefore, we are of the opinion that the learned Commissioner of Income-tax (Appeals) has erred in giving relief by simply stating that this income actually belongs to the earlier year without giving any reasons how and why this income was not recognised in the earlier year. Accordingly we set aside the order of the learned Commissioner of Income-tax (Appeals) and restore that of the Assessing Officer in this regard. - Decided in favour of revenue. Increase in income shown from sales of houses and flats and interest on instalments - CIT(Appeals) deleting the addition - Held that - the assessee sold certain houses and flats under the hire purchase agreement. The allottees were treated as tenant during the completion of such hire purchase agreement till all the instalments were paid by such allottees. The instalments as well as expenditure incurred by the assessee, was being accumulated in various schemes and was reflected in the balance-sheet because the assessee was following mercantile system of accounting till the assessment year 2002-03. However, in this year the assessee has changed accounting system and now adopted cash system of accounting. We have already expressed our surprise on adoption of cash system by the assessee but admittedly this system has been adopted and therefore, the assessee has to bear the consequences. The first contention was that houses and flats were sold on hire purchase basis and under the Hire Purchase Act, 1972, the buyer does not get the ownership right till the completion of the purchase as provided in the agreement and as per the agreement till all the instalments are paid such buyer or allottees will not become the owners. However, we find no force in this contention because no other Act can override the provisions of the Act and this has been clarified by the hon'ble Supreme Court in the case of Southern Technologies Ltd. v. Joint CIT 2010 (1) TMI 5 - SUPREME COURT OF INDIA . Therefore, the instalments received against such sales which are in the nature of revenue receipts, are required to be taken into consideration for determination of income in this year because the assessee has adopted cash system of accounting during the year. The next contention was that the assessee was following continuously project completion method and therefore, no income can be determined unless the projects are completed. Again as discussed above in detail the issue of system of accounting and the meaning of cash system of accounting, this contention cannot be accepted because the assessee cannot follow two different systems of accounting under the same head. Therefore, in our opinion, the Assessing Officer has correctly included all the instalments received from the allottees of the houses and flats in the income of the assessee. set aside the order of the learned Commissioner of Income-tax (Appeals) and direct the Assessing Officer to include instalments received on sale of various houses and flats under hire purchase agreement and at the same time allow corresponding expenditure which has been expended by the assessee in cash (including through cheque). Further in the year of completion of a particular scheme effect has to be given in respect of accumulated instalments as well as accumulated expenditure which has not been already considered in a particular year on cash basis as observed earlier. We have observed right in beginning that this issue is involved in all the years before us therefore, similar treatment as observed by us, should be given in each of the year. - Decided in favour of revenue. Addition on amount received from the hire purchase debtors - CIT(A) deleted addition - Held that - On principle the issue remains the same as in ground No. 5 and since the facts as well as the arguments are same principally we decide this issue against the assessee following our decision in ground No. 5. Since we have held that the instalments received during the year have to be added to the income, this means instalments received earlier remaining unreconciled cannot be added to the income in the later years. Therefore, we set side the order of the learned Commissioner of Income- tax (Appeals) and remit the matter to the file of the Assessing Officer with the direction to consider only those instalments which have been received during the particular year as income of the assessee - Decided in favour of revenue . Disallowance on account of C.P.F and interest on C.P.F. contribution - contributions have neither been made to a provident fund approved by the Chief Commissioner or Commissioner of Income-tax nor to a provident fund established under a scheme framed under the Employees Provident Funds Act, 1952 - CIT(A) deleted addition - Held that - The fixed deposit receipts have been debited and made in the name of the CPF FDRs which means separate FDRs have been made but how it has clearly been controlled by the managing committee, is not very clear. Therefore, to this extent we set aside the order of the learned Commissioner of Income-tax (Appeals) and direct the Assessing Officer to examine whether provident fund was independently monitored in the light of the directions issued by the hon'ble Supreme Court in the case of Textool Company Ltd. (2009 (9) TMI 66 - SUPREME COURT). Another contention was also raised that the funds have not been invested in the long-term FDRs. We have seen various notes issued by the committee where FDRs have been made only for one year and justification for the same has been given that presently interest is on lower side and interest is likely to go up therefore, FDR was made for one year. This aspect also need further examination by the Assessing Officer where regularly FDRs have been made for a period of one year or longer period and where no justification for such shorter period is there or not ? Therefore, the Assessing Officer should examine this matter further and decide the issue in accordance with law.- Decided in favour of revenue for statistical purposes. Addition made being interest income on FDRs - CIT(A) deleted addition - Held that - provisions of section 145 which mandates that the assessee can follow either cash system of accounting or mercantile system of accounting in respect of the profits and gains of the business or profession and income of other sources. Thus the assessee had the right to follow the cash system of accounting even in respect of income to be assessed under the head Income from other sources . Though in the assessment order income has not been computed head-wise but even if assuming that the income on account of interest is assessed under the head Income from other sources even then the assessee had right to offer the same on receipt basis. Therefore, we find nothing wrong in the order of the learned Commissioner of Income-tax (Appeals) and confirm the same. - Decided against revenue. Depreciation on flats/SCOs/booths as well as PUDA building at Sector 62, Mohali and PUDA building at Ludhiana, PUDA building at Patiala, community centre, swimming pool and store shed disallowed - CIT(A) allowed the claim - Held that - the learned Commissioner of Income-tax (Appeals) has correctly adjudicated this issue. The Revenue has not shown anything to prove that the value of the land was also included in the cost of building, when the first appellate authority has decided the issue in favour of the assessee, the burden was on the Revenue to prove otherwise. In this case the assessee came into existence in 1995 after inheriting Punjab Housing Development Board. The assessee is being a Government authority, may have large chunks of land and it is not possible to identify only plots used for buildings for capitalisation and therefore, there is merit in the argument that value of land was considered in various schemes. In these circumstances, we find nothing wrong with the order of the learned Commissioner of Income-tax (Appeals) and confirm the same.- Decided in favour of assessee. Disallowance of administrative and maintenance expenses - Held that - Basically once the cash system of accounting is followed then all receipts which relate to the revenue field, have to be taxed. Similarly all cash outgoings which are in the revenue field, had to be allowed as expenditure. Since the assessee is in the business of purchase and developing the land and selling the same after the development of the same and therefore, administrative expenses incurred is clearly in the field of revenue. Further the assessee was following cash system of accounting, therefore, once cash has been spent or outgone from the assessee the same has to be treated as expenditure - Decided in favour of assessee. Addition on account of legitimate claim of the assessee of bad debts under section 36 of the Act - Held that - Section 36(1)(vii) provides for allowing of claim of bad debt which means good debt cannot be written off. No doubt after the amendment from April 1, 1989, the claim for bad debt can be made merely by writing off the amount which has become bad but this claim cannot be made by writing off the good debt. In the case of South India Surgical Co. Ltd. v. Asst. CIT 2006 (1) TMI 111 - MADRAS High Court the assessee was carrying on the business of manufacturing and marketing of surgical instruments. The assessee has sold the goods to Government hospitals during the year and made the claim for bad debts. It was observed that the concerned hospital has in fact delayed the payment of dues to the assessee on account of paucity of funds and the claim was not paid during the year. Therefore, such claim cannot be said to have become bad. In our opinion, this decision is still valid because what can be written off is only bad debt and not good debt. In view of this discussion, we find nothing wrong in the order of the learned Commissioner of Income-tax (Appeals) and confirm the same. - Decided against assessee. Addition on earnest money from prospective buyers - Held that - While adjudicating the Revenue's appeal for the assessment year 2003-04, it was observed that once houses and flats, etc. were allotted to the allottees and possession was given, the same was in the revenue field. However, same logic cannot be applied if no allotment has been made at all. The assessee authority may have invited the application for allotment of proposed houses and some of the public members may have applied for the same and authority may not have allotted the houses/flats therefore, unless the allotment is made the same cannot be called sales. Further if no money has been received during the year then no addition is possible under the cash system of accounting because under cash system of accounting addition can be made only if the money was received during the year. At the same time all these details are not available on record and even learned counsel of the assessee did not file these details before us, therefore, in the interest of justice, we set aside the order of the learned Commissioner of Income-tax (Appeals) and remit the matter back to the file of the Assessing Officer to find out the exact nature of earnest money received by the assessee. If the same is received from public without making any allotment of the house/flat/plot then the same cannot be brought to tax. However, if allotments have been made then the situation would change. - Decided in favour of revenue for statistical purposes. Disallowance of expenses for land for International Air Port (AAI) at Mohali - main contention of the assessee is that the amount was spent for the purpose of business and this was allowable expenditure under section 37 - Held that - Any expenditure in the case of Government Corporations is allowable if the same are established under some enactment of the Central or State. However, at the same time under this provision, the capital expenditure is not allowable. Since we have already observed that the expenditure is of capital nature, therefore, the same is not allowable under this section.In view of the above discussion it becomes absolutely clear that firstly the expenditure has not been incurred for the purpose of business. In any case the expenditure is in the nature of capital expenditure and therefore, the same is not allowable - Decided against assessee. Contribution to the development of airport at Mohali disallowed - Held that - refinery was causing some pollution in the area therefore, the assessee felt obliged to provide certain facility to the local residents and spent this money. In the absence of this contribution the assessee could have faced legal problems because the manufacturing facility of the assessee was causing pollution in the surrounding villages. Therefore, this case is distinguishable. But as we have already observed in the case of PUDA that the assessee has basically contributed towards acquisition of land which was contributed to the joint venture against which the Government of Punjab through GMADA was to receive 24.5 per cent. stake and therefore, the expenditure was in nature of capital expenditure. As observed earlier an identical issue in the case of PUDA has been decided by us for the assessment year 2008-09 and following the same we decide this issue against the assessee.

Summary

Issues Involved:
1. Transfer of Jurisdiction under Section 127 of the Income-tax Act.
2. Change in Method of Accounting.
3. Deletion of Additions on Account of Income from Sale of Houses and Flats.
4. Deletion of Additions on Account of Instalments Received.
5. Deletion of Additions on Account of Contributions to Provident Fund.
6. Deletion of Additions on Account of Interest Income on Fixed Deposits.
7. Deletion of Additions on Account of Administrative Expenses.
8. Deletion of Additions on Account of Bad Debts.
9. Deletion of Additions on Account of Contribution to the Construction of Airport.

Detailed Analysis:

1. Transfer of Jurisdiction under Section 127 of the Income-tax Act:
The issue revolved around the transfer of jurisdiction from one Assessing Officer to another without a valid order under section 127. The Tribunal held that the transfer of jurisdiction was not valid as no proper order was passed under section 127. The assessment order was canceled as the Assistant Commissioner of Income-tax, Circle 6(1), did not have jurisdiction over the assessee in the absence of an order under section 127.

2. Change in Method of Accounting:
The assessee changed its method of accounting from mercantile to cash system. The Tribunal noted that the change in the method of accounting was bona fide and the income should be computed based on the cash system of accounting. The Tribunal emphasized that the assessee had the right to follow either the mercantile system or the cash system of accounting.

3. Deletion of Additions on Account of Income from Sale of Houses and Flats:
The Tribunal found that the assessee had revised its accounts and recognized income from the sale of houses and flats for the assessment year 2002-03. The Tribunal upheld the deletion of the addition of Rs. 2,55,15,406 as the income pertained to the assessment year 2002-03, which was exempt under section 10(20A) of the Act.

4. Deletion of Additions on Account of Instalments Received:
The Tribunal held that the instalments received on the sale of houses and flats under hire purchase agreements were taxable in the year of receipt as the assessee followed the cash system of accounting. However, corresponding expenditure incurred should also be allowed on a matching principle.

5. Deletion of Additions on Account of Contributions to Provident Fund:
The Tribunal noted that the assessee's provident fund was governed by the Provident Funds Act, 1925, and was not required to be recognized under the Income-tax Act. The contributions were allowable under section 37 of the Act, and the employees' share was allowable under section 36(1)(va). The Tribunal remitted the matter to the Assessing Officer to verify whether the provident fund was independently monitored.

6. Deletion of Additions on Account of Interest Income on Fixed Deposits:
The Tribunal upheld the deletion of the addition of Rs. 2,24,44,923 as interest income on fixed deposits, noting that the assessee followed the cash system of accounting, and interest income should be taxed on receipt basis.

7. Deletion of Additions on Account of Administrative Expenses:
The Tribunal allowed the administrative expenses incurred in cash, noting that under the cash system of accounting, all cash outgoings in the revenue field should be allowed as expenditure.

8. Deletion of Additions on Account of Bad Debts:
The Tribunal disallowed the claim of bad debts of Rs. 3,63,74,569, noting that the assessee did not prove that the amount was accounted for while computing the income in earlier years and that the debts from the Government could not be written off.

9. Deletion of Additions on Account of Contribution to the Construction of Airport:
The Tribunal held that the contribution of Rs. 225 crores towards the development of the International Airport at Mohali was not incurred wholly and exclusively for the purpose of the assessee's business and was in the nature of capital expenditure. The expenditure was disallowed under section 37 of the Act.

Conclusion:
The Tribunal's judgment addressed multiple issues related to the transfer of jurisdiction, method of accounting, recognition of income, contributions to provident funds, interest income, administrative expenses, bad debts, and contributions to infrastructure projects. The Tribunal provided a detailed analysis and remitted certain matters to the Assessing Officer for further verification while upholding or disallowing various claims based on the facts and applicable legal provisions.