2020 (5) TMI 239 - HC - Income Tax

Accrual of income - Accounting as prescribed by accounting standard AS-7 - Completed Contract Method of accounting followed by the assessee did not reflect the correct profits and percentage method of accounting as prescribed by accounting standard AS3 7 issued by ICAI after amendment to Section 145 - HELD THAT - In the instant case, it has been noticed by the appellate Tribunal that assessee was in the activity of projects and was not a construction contractor. Thus, the revised AS-7 would be applicable to an enterprise undertaking construction activities on their own account as a venture of commercial nature. The assessee undertakes construction activities for those persons to whom it intends to sell super built area along with undivided share of land in a project which it is developing as a developer. In the instant case, the Tribunal has rightly held that in case of revised AS-7 is to be applied, then the opening inventories is also to be valued as per revised AS-7. In fact, the revenue had accepted the method of accounting adopted by the assessee for the previous years and in the light of guidance note provided that AS-7 is applicable to real estate developers, assessee itself has changed the method of accounting and for the subsequent years, it has changed from Project Completion Method to Percentage Completion Method in the subsequent year and as such, there is revenue neutral in the assessment year in question. Hence, for the reasons aforestated, we answer the substantial question of law No.1 in the affirmative i.e., in favour of the assessee and against the revenue. Characterisation of income - Rental income received from Forum Mall - Income from business OR Income from house property - HELD THAT - As said issue involved is no longer res integra in view of law laid down by this Court in the matter of COMMISSIONER OF INCOME TAX-III VS. VELANKANI INFORMATION SYSTEMS (P) LTD. 2013 (8) TMI 113 - KARNATAKA HIGH COURT whereunder it has been held if assessee is in the business of taking land, putting up commercial building thereon, letting out such building with all furniture as his profession or his business then notwithstanding the fact that he has constructed building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the income from house property and as such, question Nos.2 and 3 are answered against revenue and in favour of the assessee.

Summary

Issues:
1. Correctness of accounting method followed by the assessee.
2. Classification of rental income from Forum Mall.
3. Tax treatment of rental income received.

Analysis:

Issue 1: Correctness of accounting method
The dispute arose regarding the accounting method adopted by the assessee, a real estate company, for its projects. The Assessing Officer insisted on the Percentage Completion Method as per Accounting Standard AS-7, while the assessee followed the Completed Contract Method. The tribunal held that the assessee, not being a construction contractor, was correctly following its method. The Central Government's power under Section 145 of the Income Tax Act to notify Accounting Standards was discussed, and it was noted that the Companies Act allowed for deviations from prescribed Accounting Standards. The Tribunal's decision was supported by the Expert Committee's opinion, and it was concluded that the assessee's method was acceptable, resulting in the substantial question of law being answered in favor of the assessee.

Issue 2: Classification of rental income
The tribunal determined that the rental income received from Forum Mall should be considered as "Income from business" rather than "Income from house property." The argument centered around the nature of the agreement between the landlord and tenant, with the tribunal concluding that the relationship and payment frequency indicated a business income classification. The decision was supported by a previous court ruling, and the substantial question of law was answered against the revenue and in favor of the assessee.

Issue 3: Tax treatment of rental income
The tribunal also addressed the tax treatment of rental income received, determining that it should be taxed under the head "income from other sources" and not as "income from house property." This decision was in line with established legal precedent, as discussed in a previous court case. Consequently, the substantial questions of law related to this issue were answered against the revenue and in favor of the assessee.

In conclusion, the High Court dismissed the appeal, affirming the Tribunal's order and providing clarity on the accounting method, classification of rental income, and tax treatment of rental income received by the assessee for the assessment year in question.