2022 (8) TMI 456 - AT - Income Tax

Addition being advances received from customers and other liabilities - CIT-A deleted the addition - HELD THAT - The matter, is restored to the file of the AO for working the income of the assessee's real estate business in terms of the foregoing. Further, income, we may clarify, is to be considered only to the proportionate extent, inasmuch as only the same could be said to have accrued during the relevant year. The exception may be where the entire money due on a construction has been received from the customers under the agreement, and uniformly so, signifying the passing of the rights to the buyers. The assessee shall in such a case be allowed estimated expenditure on the work yet to be completed. The matter, accordingly, is set aside to the file of the AO for the purpose. AO shall adjudicate taking all the relevant facts and circumstances into account, in accordance with law, issuing definite finding of facts after hearing the assessee, who shall cooperate in the said proceedings, furnishing the materials sought and relevant for deciding the issues arising, as indeed for finalisation of accounts. Receipt shall be a business receipt in his hands, though he has no means of writing his accounts as the right to receive arises, as it appears to us from the entries in the assessee s accounts, only on the receipt of sale consideration by the assessee, i.e., where and to the extent it is regarded as a sale by the assessee. The land owner has thus no means to either specify the amount to sale; decide the time of sale; and finally, even the extent of its receipt, which is much after the receipt by the assessee; his accounts reflecting credit in no insubstantial sums due to the land owners (who rather than by name are stated in the name of the relevant project). It is all this that raises considerable doubts as to the genuineness of the credit/s; the land sale extending to years. CIT(A), though noting that the land owner is entitled to a part of sale consideration, has not issued any finding in the matter even as he deletes the addition. We have, even ignoring the legal aspect of the transaction, examining it strictly from the stand-point of accountancy and tax perspective, find it untenable from the point of view of confirmation, as indeed from the practical stand-point. It would be a different matter where the land owner and the assessee have entered into a joint venture, agreeing to share the profits of the real estate development. The issue qua the genuineness of these credits, as indeed their true nature, is also, accordingly, restored to the file of the AO for proper verification and determination, followed by adjudication in accordance with law, issuing a clear and definite findings of fact/s, after allowing the assessee a reasonable opportunity of being heard. Needless to add, the conduct as well as evidence produced by the land-owners, including the accounting and tax treatment of the transactions, shall also be examined; the matter being indeterminate. We clarify that we may not construed as having issued any final findings on the merits of the matters restored to the AO for adjudication; our observations being strictly on the basis of the pleadings before us and our examination of the material on record, finding the same as inextricably linked to the accounting of sales and recognition of income, leading us to the conclusion that the issue at hand is indeterminate. Nothing more nothing less. We decide accordingly. Finally, we may advert to the addition in respect of other liabilities, i.e. other than the sums credited to the account of the land owners. We have already clarified no adverse findings by the AO qua this addition, remission to the file of the AO qua the credits in the case of land owners has been on account of the same having been found as inextricably linked to the income arising to the assessee from the business of the real estate development, even if u/s. 68. There is further no basis for addition of sums other than the sums credited to the account of and, thus, received from, the land owners, which is accordingly confirmed for deletion.

Issues Involved:
1. Maintainability of the addition for Rs. 873.79 lacs as "advances received from customers" and "other liabilities".
2. Application and relevance of Accounting Standard (AS) 9.
3. Defects in the books of account and the accounting policy adopted by the assessee.
4. Revenue neutrality of the addition.
5. Genuineness of the transactions and confirmations from creditors.

Detailed Analysis:

Issue 1: Maintainability of the Addition for Rs. 873.79 Lacs
The primary issue in this case is whether the addition of Rs. 873.79 lacs, comprising "advances received from customers" and "other liabilities," should be included in the assessee's income. The Assessing Officer (AO) added this amount to the assessee's income, citing that the conditions for revenue recognition under AS-9 were satisfied. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, leading to the current appeal by the Revenue.

Issue 2: Application and Relevance of AS-9
The AO argued that AS-9, issued by the Institute of Chartered Accountants of India (ICAI), was applicable and that the conditions for revenue recognition were met. The CIT(A) disagreed, stating that AS-9 was not notified by the Central Government under section 145(2) of the Income Tax Act, 1961, and thus was not mandatory for the assessee. However, the tribunal noted that the assessee claimed to follow AS-9, which aligns with the principles of accrual accounting. Therefore, the tribunal found that the CIT(A)'s reasoning for deleting the addition based on the non-applicability of AS-9 was flawed.

Issue 3: Defects in the Books of Account and Accounting Policy
The tribunal observed significant deficiencies in the assessee's accounting practices. There was no definite accounting policy for revenue recognition, no stock register, and no evidence of physical inventory at the year-end. The AO had not pointed out specific defects in the books but had questioned the genuineness of the transactions and the basis for revenue recognition. The tribunal held that the AO is entitled to make specific adjustments to the returned income without rejecting the books of account entirely.

Issue 4: Revenue Neutrality of the Addition
The CIT(A) had also deleted the addition on the grounds of revenue neutrality, arguing that the method of accounting had been accepted in previous years. The tribunal found this reasoning unconvincing, noting that each assessment year is a separate unit, and the correctness of income must be determined independently for each year. The tribunal emphasized that the absence of a demonstrated basis for recognizing income undermines the claim of revenue neutrality.

Issue 5: Genuineness of Transactions and Confirmations from Creditors
The AO expressed doubts about the genuineness of the transactions. The tribunal noted that the confirmations from creditors were submitted late, making meaningful verification difficult. Furthermore, the tribunal found the arrangement with landowners, where a percentage of the sale consideration was credited to their accounts, problematic. The tribunal observed that the confirmations from landowners were based on the assessee's accounts and lacked independent verification.

Conclusion:
The tribunal set aside the matter to the AO for a detailed examination and determination of the income from the real estate business. The AO is to consider the principles of commercial accounting and AS-9, ensuring that revenue is recognized appropriately based on the stage of completion and certainty of realization. The tribunal also directed the AO to verify the genuineness of the credits and the true nature of the transactions with landowners. The Revenue's appeal was partly allowed for statistical purposes, and the assessee's cross-objection was dismissed.

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