2020 (1) TMI 1132 - AT - Income Tax

Rejection of books of accounts - recognition of income - Development of housing project - assessee has not followed percentage completion method whereas as per the Guidance Note issued by ICAI the assessee is required to follow percentage completion method of accounting - HELD THAT - It is noted from the available records that the assessee is regularly following an accounting policy whereby sales is recognized by following project completion method . According to this method, the sales are recognized when the sale deed is executed and possession of the flat is given to the buyer. There is no provision under the Act which makes percentage completion method of accounting in real estate project mandatory as observed by the AO. The Guidance Note issued by the ICAI is recommendatory. The same do not override the choice of method of accounting to be followed by the assessee provided under the Act. The complete detail of subsequent recognition is also placed by the assessee at page PB 27 of the paper book. Therefore when such amount is already recognised as revenue or reflected back in the subsequent years, assessing the same in the year under consideration has resulted into double taxation. The AO has not considered the expenditure incurred by the assessee against such receipt. In the present case in the project Grandeur, total value of stock as on 31- 03-2015 was ₹ 6,10,28,779/-. Therefore, deduction on account of cost against the receipt of ₹ 3,96,99,161/- ought to have been allowed instead of assessing the receipt as income. Hence, taking into consideration the facts and circumstances, we find no reason to interfere with the order of the ld. CIT(A). Thus Ground No. 1 of the Revenue is dismissed. Disallowance of commission expenses as bogus - persons could not furnish the details of the flats or project of flat number or person to whom they has allegedly sold the flats - CIT-A granted part relief - HELD THAT - The onus upon the assessee to prove before the Revenue authorities and to furnish the evidence with regard to rendering of services to whom alleged commission was paid. Since the assessee could not prove the actual rendering of services, therefore, the assessee is not entitled to claim commission expenses. Thus while taking into consideration the entire facts and circumstances of the case, we allow the commission expenses to Shri Akhil Boolia only and with regard to commission expenses paid to other persons are concerned, we set aside the order of the ld. CIT(A) and uphold the order of the AO. Therefore, the Ground No. 2 of the Revenue is partly allowed.

Summary

Issues Involved:
1. Deletion of addition made by AO of ?3,96,99,161/- by rejecting the books and treating the receipts from customers as income.
2. Granting relief of ?24,79,385/- out of total addition of ?25,79,385/- on account of disallowance of commission expenses.

Detailed Analysis:

Issue 1: Deletion of Addition of ?3,96,99,161/- by AO
Facts:
The assessee, engaged in the real estate business, filed a return of income for AY 2015-16 declaring a loss of ?1,59,40,582/-. The assessee followed the Project Completion Method of accounting, recognizing income upon receipt of full consideration and execution of sale deeds. The AO observed that the advances related to Project Grandeur amounting to ?3,96,99,161/- should have been recognized as revenue based on the Percentage Completion Method as per ICAI guidelines, leading to the rejection of the books of accounts under Section 145(3) and addition of the said amount as income.

CIT(A) Findings:
The CIT(A) noted that the choice of accounting method lies with the assessee and cannot be imposed by the department, especially when the method has been consistently followed and accepted in the past. The CIT(A) emphasized that there is no mandatory provision under the Act requiring the Percentage Completion Method for real estate projects and that the ICAI's Guidance Note is recommendatory. The CIT(A) also pointed out that the AO's addition was incorrect as it taxed the entire receipt without considering the corresponding costs, leading to double taxation since the income was recognized in subsequent years.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the assessee consistently followed the Project Completion Method, which is permissible under the Act. The Tribunal referenced the ITAT Bangalore Bench's decision in S.K. Properties vs ITO, which supported the recognition of income upon the transfer of ownership as per the Transfer of Properties Act. The Tribunal also highlighted that recognizing the advances as income in the year under consideration would result in double taxation since the amounts were subsequently recognized as sales in later years. Thus, the Tribunal dismissed Ground No. 1 of the Revenue.

Issue 2: Granting Relief of ?24,79,385/- on Disallowance of Commission Expenses
Facts:
The assessee claimed commission expenses of ?80,79,385/- for two projects. The AO issued summons to verify these expenses and found that some individuals had no knowledge of the commission work and could not provide details of the flats sold. The AO disallowed ?25,79,385/- of the commission expenses, suspecting them to be bogus.

CIT(A) Findings:
The CIT(A) noted that the assessee provided complete addresses, and the payments were made by account payee cheques with tax deducted at source. Out of seven individuals produced before the AO, six confirmed receipt of the commission. The CIT(A) restricted the disallowance to ?1,00,000/- for one person who denied receiving the commission, granting relief for the remaining ?24,79,385/-.

Tribunal's Decision:
The Tribunal reviewed the facts and the statements recorded by the AO. It found that several individuals had no knowledge of the commission work and could not provide details of the flats sold, indicating that the commission expenses were not substantiated. The Tribunal cited the Supreme Court and Punjab & Haryana High Court rulings, stating that the onus is on the assessee to prove the genuineness of the commission expenses. Consequently, the Tribunal upheld the AO's disallowance except for the commission paid to Shri Akhil Boolia, thus partly allowing Ground No. 2 of the Revenue.

Conclusion:
The Tribunal dismissed the Revenue's appeal regarding the addition of ?3,96,99,161/- but partly allowed the appeal concerning the disallowance of commission expenses, upholding the AO's disallowance except for one individual. The appeal was partly allowed with no order as to cost.