2016 (9) TMI 263 - HC - Income Tax

Accrual of income - accrued income on grant of development rights - Held that - In the instant case, since no sale occurred, no income can be said to have accrued to the assessee.The assessee s submission that sale is deemed to have taken place when proper conveyance is executed, in the circumstances is sound. In the absence of any sale, the revenue s attempt to bring to tax the advances received by the assessee must also fail, given that such advances were not towards any income that the assessee was entitled to receive in the two assessment years. Indeed, the Business Development Agreement dated 02.08.2006 between M/s DLF Ltd. and the assessee and the Memorandum of Understanding dated 06.12.2006 between M/s DLF Ltd., the assessee and CBDL indicate that the advances received by the assessee from M/s DLF Ltd. and CBDL were for sale of development rights. Since the assessee failed to sell any such rights in the two years in question, the advances received cannot be classified as income.

Summary

Issues:
1. Whether the receipts amounting to a specific sum in the hands of the respondent-assessee constituted accrued income on grant of development rights.

Analysis:
The case involved a dispute regarding the tax treatment of receipts by the respondent-assessee totaling ?58,03,59,600 as accrued income from granting development rights. The assessee, engaged in real estate development, purchased land and entered into an agreement with a developer. The Assessing Officer taxed the development rights amount, but the CIT (A) and ITAT ruled in favor of the assessee. The High Court referred to a previous judgment highlighting that income cannot be deemed accrued until the sale of development rights, emphasizing the significance of the effective date as per the agreement.

2. Whether the revenue's appeal on the treatment of income was valid based on the accounting policies and agreements involved.

Analysis:
The revenue contended that the assessee's accounting policies recognized income on an accrual basis, citing discrepancies in the treatment of sale of developed plots versus development rights. However, the High Court noted that no actual sale of development rights occurred during the assessment years, rendering the revenue's argument invalid. The court emphasized the accrual system of accounting, stating that income accrual is contingent on an actual sale taking place, which was not the case here. The court rejected the revenue's attempt to tax advances received by the assessee, as they were not linked to any income the assessee was entitled to receive in the relevant years.

3. Whether there was a legal basis to challenge the ITAT's findings and the reasoning behind the judgment in a related case.

Analysis:
After reviewing the submissions and the precedent set in a related case, the High Court found no grounds to dispute the reasoning or conclusions reached by the ITAT. The court emphasized that no question of law merited consideration based on the established legal principles and factual circumstances. Consequently, the appeal was dismissed, affirming the decision in favor of the respondent-assessee regarding the tax treatment of the receipts related to development rights.