2016 (12) TMI 1295 - HC - Income Tax

Method of accounting - whether sale price in respect of constructed/built up properties should not be accounted for at the time of handing over the possession or conveyancing whichever is earlier? - Held that - The change in the accounting method in 1992-93 ipso facto could not have resulted in loss of revenue as is urged by the tax authorities in the present case. The distortions, which the revenue urges relate to the treatment of development charges as well as the treatment of expenditures such as brokerage, commission and interest payments. The assessee s explanation here is that the 30% of the sums realized by it were under compulsion of law to be treated as development expenses and kept in a separate escrow account under the control of the HUDA. The revenue has not disputed this position. In that sense, the assessee was justified by statute to appropriate the sums towards development expenses. So far as the treatment of revenue with respect to brokerage and interest payments is concerned, the assessee again has an explanation, which is a rational one i.e., that only such of the expenses attributable to the agreement with the purchasers was debited as expenditure. So far as the question of applicability to section 2 (47) or Section 53(A) of the Transfer of Property Act is concerned, legally speaking, part performance is undoubtedly an interest or right known to law. However, part performance, pre- supposes handing over a possession, at the time the agreement is entered into. Having regard to the assessee s uniform pattern of revenue recognition that only upon execution of the conveyance/sale- deed, would the amounts lying with it be treated as profit and brought to tax, the possibility that in law certain flat or plot buyers could be handed over possession earlier per se would not result in distortion of the kind stated by the revenue. There is no material or evidence in this regard nor was cited by the revenue. - Decided in favour of the assessee. Re-working the cost of land - dividing the cost of the acquired till the end of the year by saleable area including lands earmarked for schools, hospitals, clubs and other community building, in each phase - Held that - The factual findings are against the revenue, which had clearly accepted the legal position interpreted by the ITAT as correct - evidenced by not filing an appeal on this question. Therefore, the revenue cannot be permitted to urge this as a grievance. In any case, this kind of treatment was permitted during all other years and there is no compelling rationale for the court to examine it especially because the facts found point to a contrary picture. The question of law is therefore, answered against the revenue/appellant.

Summary

Issues Involved:

1. Correctness of ITAT's decision to set aside the CIT(A)'s order regarding the method of accounting.
2. Correctness of ITAT's decision on the timing of accounting for the sale price of constructed properties.
3. Correctness of the AO and CIT(A)'s reworking of the cost of land in the Qutub Enclave Complex.

Issue-wise Detailed Analysis:

1. Correctness of ITAT's decision to set aside the CIT(A)'s order regarding the method of accounting:

The High Court examined whether the ITAT was correct in setting aside the CIT(A)'s order which rejected the assessee's method of accounting. The assessee, involved in real estate development, followed the project completion method. The AO had rejected this method, arguing it did not reflect true profits and invoked the proviso to Section 145(1) of the Income Tax Act, 1961. The CIT(A) upheld the AO's decision but directed a re-computation of income by adjusting defects rather than rejecting the books entirely. The ITAT, however, allowed the assessee's appeal, maintaining that the method of accounting was valid and in line with recognized accounting principles. The High Court supported the ITAT's view, referencing the Supreme Court's decision in CIT v. Bilahari Investment P. Ltd., which validated both the project completion and percentage completion methods. The Court concluded that the project completion method was appropriate and did not distort profits, thus answering the question in favor of the assessee.

2. Correctness of ITAT's decision on the timing of accounting for the sale price of constructed properties:

The Court analyzed whether the ITAT was correct in holding that the sale price of constructed properties should be accounted for at the time of handing over possession or conveyancing, whichever is earlier. The CIT(A) had directed that sales should be recognized in the profit and loss account in the year possession is handed over if sold under a deferred payment plan, or in the year of conveyancing for outright sales. The ITAT upheld this view, noting that the assessee's method of recognizing revenue only upon conveyancing was consistent and did not result in revenue loss. The High Court agreed, emphasizing that the method was in line with statutory requirements and did not distort financial results. The Court thus affirmed the ITAT's decision, answering this question in favor of the assessee.

3. Correctness of the AO and CIT(A)'s reworking of the cost of land in the Qutub Enclave Complex:

The Court reviewed whether the AO and CIT(A) were correct in reworking the cost of land by averaging the purchase price and dividing it by the saleable area, including lands earmarked for communal purposes. The CIT(A) had directed an average cost calculation for each phase, considering the peculiarities of the project. The ITAT, however, found that the assessee's method of pooling land costs across all phases was justified and consistent with the Haryana Urban Development Authority's (HUDA) treatment of the project as a single unit. The High Court upheld the ITAT's findings, noting that the revenue had accepted this method in other assessment years and there was no compelling reason to deviate. The Court concluded that the factual findings supported the assessee's method, answering this question against the revenue.

Conclusion:

The High Court dismissed the appeals, affirming the ITAT's decisions on all issues. The Court found that the assessee's method of accounting was appropriate, the timing of revenue recognition was justified, and the cost reworking method was consistent with statutory and regulatory requirements. The appeals were dismissed with no orders as to costs.