2024 (3) TMI 716 - AT - Income Tax

Revision u/s 263 - Deemed rental value - income from house property - applicability of provisions u/sec. 23(5) - CIT has passed the revision order with a directions to assessing officer to examine and verify on two aspects (i) annual rental value of unsold flats in respect of completed projects determined under the provisions of section 23(5) and (ii) method of accounting adopted for revenue recognition of the project - HELD THAT - We on perusal of the information and correspondence of the assessee in the assessment proceedings, found that there is no discussion on the provisions of section 23(5) of the Act. Whereas the AO has called for the information with respect to various inventories and the details of flats as referred in the order u/sec. 143(3) of the order but there is no specific query raised or dealt on the applicability of provisions u/sec. 23(5) of the Act in the proceedings. The provisions are applicable from A.Y 2018-19 and the AO should have made enquiries on these facts and in the correspondence of the assessee there is a general information with respect to unsold flats but not on determination of deemed rent on the flats as per the provisions of section 23(5) of the Act. Whereas in the A.Y 2017-18, the A.O has made addition of the notional rent on the projects of Chaturbhuj and Yashvawin and passed order u/sec. 143(3) r.w.s 263 r.w.s 144B of the Act and the appeal is pending before the CIT(A). Further the assessee has not challenged the revision order u/s 263 of the Act and the AO has passed the order u/sec. 143(3) r.w.s 263 of the Act. DR submissions are that the Pr.CIT has dealt on these facts which proves that the A.O. has not applied his mind and the A.O has not made enquiries on the specific issue. We find the A.O has called for the information, but there is no examination and verification of the facts or findings by the A.O on the determination of deemed rental income - matter needs to be verified and reasons for claim should be justified by the assessee as discussed above. No infirmity in the order of the Pr.CIT on the directions to A.O. on the determination of deemed rental value u/sec. 23(5) of the Act and we up hold the same and dismiss this ground of appeal of the assessee. Method of accounting adopted for revenue recognition of the project - The assessee has applied the method of accounting consistently from earlier years and was accepted by the revenue authorities and the assessee has offered the income on adopting project completion method and the income was offered in the A.Y 2019-20 which is not disputed. We find the assessee has filed the information incompliance to the notices issued and clarifications are filed over a period of time in the assessment proceedings. AR emphasized that the assessee has been fallowing project completion method from the earlier years and was being accepted by the revenue and it cannot be disturbed. AO has applied the mind and has accepted the assessee s project completion method, were the assessee has been consistently fallowing the policy of revenue recognition as per Accounting Standards. Whereas the assessee has diligently complied with the provisions of Act, and maintained the facts /details in the books of accounts and fallowed the method of accounting. Accordingly we find that the AO has applied his mind on method of accounting and the information and took a possible view considering the information of offering of income for the A.Y 2019-20. Therefore we are of the opinion that the directions of the Pr.CIT order in respect method of accounting of revenue recognition cannot be sustained and we set aside the order of the Pr. CIT on this directions and allow this ground of appeal in favour of the assessee. Appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Jurisdiction under section 263 of the Income Tax Act, 1961.
2. Revenue recognition method for the project.
3. Deemed rental income on unsold flats under section 23(5) of the Act.

Summary of Judgment:

Issue 1: Jurisdiction under section 263
The assessee argued that the Principal Commissioner of Income Tax (Pr.CIT) erred in assuming jurisdiction u/s 263 without satisfying the condition precedents, making the order dated 29.03.2023 without jurisdiction and bad-in-law. The Pr.CIT found the assessment order dated 04.02.2021 erroneous and prejudicial to the interest of the revenue, thus justifying the issuance of a revision notice u/s 263.

Issue 2: Revenue recognition method for the project
The Pr.CIT contended that the assessee's method of recognizing revenue for the "Yashaskaram Project" was not in accordance with the percentage completion method or project completion method, but rather an estimated basis, which was not acceptable. The assessee argued that it followed the project completion method consistently and offered the income in A.Y. 2019-20. The tribunal found that the assessee had been consistent in its method of accounting, which was accepted by revenue authorities in earlier years. Therefore, the tribunal set aside the Pr.CIT's direction concerning the method of accounting for revenue recognition.

Issue 3: Deemed rental income on unsold flats under section 23(5)
The Pr.CIT argued that the assessee failed to recognize deemed rental income on unsold flats held as stock-in-trade, which should be taxed under "Income from House Property" as per section 23(5). The tribunal noted that the AO did not make specific inquiries regarding the applicability of section 23(5) during the assessment proceedings. Since the AO failed to examine and verify these facts, the tribunal upheld the Pr.CIT's direction to the AO to make a fresh assessment considering the deemed rental value u/s 23(5).

Conclusion:
The appeal was partly allowed. The tribunal upheld the Pr.CIT's direction on the determination of deemed rental value but set aside the direction concerning the method of accounting for revenue recognition.