2020 (7) TMI 217 - AT - Income Tax

Accrual of income - Income earned from the stated project - gains would be chargeable to tax as Business Profits OR capital gain - as per AO assessee transferred his right of development during the year under consideration and possession has also been handed over and has received part consideration - As per CIT-A entire consideration is not taxable during the year - deduction u/s 40A(3) - CIT(A) has held that the provisions of Sec.2(47)(v) defining the term transfer would not be applicable since the income was assessed as Business Income - HELD THAT - CIT(A) has clinched the issue in correct perspective. The assessee was engaged as civil contractor and the income earned from the stated project was assessed as Business Income. Therefore, the term transfer as defined in Sec.2(47)(v), would not apply since the same is applicable only in case of capital assets held by the assessee. The development rights were held as business assets. Proceeding further, it is evident from the terms of the Joint Venture Agreement that only part income accrued to the assessee on execution of the project agreement. The balance consideration was conditional receipt and was to accrue only in the event of assessee performing certain obligations under the agreement. Another pertinent fact to be noted is that the payments received in subsequent years have already been offered to tax. The same was in line with assessee s arguments that the balance receipts were conditional receipts. The response by M/s Shivalik also confirmed the same. Therefore, no fault could be found in the impugned order in estimating the income @10% of gross receipts. Once the income is estimated, no further disallowance u/s 40A(3) would be warranted. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI

Summary

Issues Involved:
1. Deletion of addition made by AO regarding the taxability of entire consideration during the year.
2. Estimation of income by CIT(A) at 10% without appreciating AO’s disallowance under section 40A(3).
3. Request for reversal of CIT(A)’s order and restoration of AO’s order.

Issue-Wise Analysis:

1. Deletion of Addition by AO:
The primary subject matter of the appeal was to determine the question of accrual of certain income. The assessee, a civil contractor, had transferred development rights and handed over possession of property to M/s Shivalik Ventures Pvt. Ltd. (Shivalik) for a consideration of ?336 Lacs, out of which ?100.80 Lacs was received during FY 2008-09. The AO opined that the entire consideration was taxable in the year of transfer under mercantile accounting. However, the CIT(A) concluded that only ?100.80 Lacs accrued during the year, and the balance was conditional upon the performance of certain obligations. The CIT(A) relied on Clause 17 of the Joint Venture Agreement and Accounting Standard-9 for revenue recognition. The CIT(A) also noted that the provisions of Sec. 2(47)(v) regarding part performance of the contract under Sec. 53A of the Transfer of Property Act, 1882, were not applicable as the income was assessed as Business Income.

2. Estimation of Income by CIT(A):
The AO had allowed ?58.80 Lacs as deductible expenses and determined the balance amount of ?277.20 Lacs as business income. The CIT(A) found that the assessee received payments over five years and had already offered the amounts to tax accordingly. The CIT(A) estimated the income at 10% of the consideration received during the year, amounting to ?10.08 Lacs, and directed the deletion of the balance addition. The CIT(A) rejected the applicability of Sec. 44AD as the gross receipts exceeded ?40,00,000.

3. Request for Reversal of CIT(A)’s Order:
The revenue appealed against the CIT(A)’s decision. The CIT(A) had held that the provisions of Sec. 2(47)(v) defining the term transfer were not applicable since the income was assessed as Business Income. The CIT(A) concluded that only part-payment accrued during the year, and the balance was conditional upon the performance of certain obligations. The payments received in subsequent years were already offered to tax. The ITAT confirmed the CIT(A)’s stand, stating that the term transfer under Sec. 2(47)(v) would not apply as the development rights were business assets. The ITAT found no fault in the CIT(A)’s order estimating the income at 10% of gross receipts and confirmed that no further disallowance under Sec. 40A(3) was warranted.

Conclusion:
The revenue’s appeal was dismissed, and the CIT(A)’s order was upheld. The ITAT confirmed that the income was correctly assessed as Business Income, and the estimation of income at 10% of gross receipts was appropriate. The ITAT also excluded the lockdown period for the purpose of pronouncement of the order due to exceptional circumstances caused by the COVID-19 pandemic.