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TMI Blog2010 (5) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was allowed to take extracts of the seized papers, which would find mention later in this order. After examining the evidence and details furnished and evidence produced, and after giving due opportunity to the assessee-firm of being heard, the assessment was completed. Held that- the issue was to be decided favour of the assessee and against the revenue. - 65 of 1996. - - - Dated:- 31-5-2010 - PRAKASH RAO B., KANTHA RAO R. JJ. S.R. Ashok for the Commissioner. S. Ravi for the respondent. JUDGMENT The judgment of the court was delivered by B. Prakash Rao J.- This reference arising under section 256(1) and (2) of the Income-tax Act, 1961 raises the question as to "whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal is correct in holding that the annual value of the property, of which the assessee was the legal owner, cannot be assessed in the hands of the assessee under section 22 of the Income-tax Act ?" 2. Heard both sides. 3. Before the issue is taken up for consideration, it necessitates to re-extract the facts which gave raise to the present disputed question, as succinctly narrated from the emanating orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrived at and the same is offered as income in the returns filed. The cost of construction together with anticipated profit forms the work-in-progress. The work-in- progress each year is added to the opening work-in-progress and the total is carried to the balance-sheet at the end of each previous year. This pattern is continued each year, till the venture is completed. This, in effect, means the income offered, while the project was taking shape, is only on an estimate basis, and the real income from the profit will be assessed only in the year of completion of project. As profit assessed on the estimate basis forms part of the work-in-progress, the difference between the total sale consideration and the work-in-progress (cost of construction plus profit assessed in the earlier years) reflects the total income for the venture, which is to be assessed in the year of completion of the project venture. The same method of accounting is followed by the other firms of the group, viz., M/s. Shahzahan Builders, M/s. Hyderabad Builders and M/s. Babukhan Constructions, which were managed by the same persons and assisted and advised by the same accountant for filing the income-tax retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived towards sale of flats and shown as "advance for sale of flats" in the balance-sheet are not adjusted towards the sale consideration even in respect of the flats registered, and no entries were passed in the ledger accounts, which show that the books of account of the assessee are incorrect and incomplete. Hence, rejected under section 145(2) of the Act. It was stated that even assuming for a moment, the income assessable under the Act cannot be properly deduced from the books of account of the firm or from the method employed by the assessee. In fact, neither the managing partner, Sri Ghiasuddin Babukhan, nor Mr.Ghousuddin, the accountant, who prepared the profit and loss account and the balance-sheet for the assessment year 1986-87 onwards could say as to when the firm would treat the sale consideration as income and offer the same to tax. It was stated by them that they are filing returns and pre- paring the statements, i.e., profit and loss account and balance-sheet as per the advice given. Thus, though the project was completed and the income has accrued and was realized by the firm, no income was offered for taxation. Hence, the method of accounting followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factors are taken into consideration for computing the revenue. The relevant portion is again extracted, and given in the annexure. 12. The assessee-firm has constructed a multi storied building known as "Al Karim Trade Centre" at M. G. Road, Secunderabad during the period 1980 to 1984 and the building consists of about 190 flats/portion/floor spaces and at the end of the accounting year ended December 31, 1986 all such portions except two have been sold, and registered and consideration was received before the registration as per the agreements entered into with various purchasers of such portions. 13. Thus, it is clear that 99.5 per cent. of business activity is completed, and the agreements entered into with the flat buyers have been fulfilled and executed. As the assessee-firm has entered into contractual agreement with the flat buyers for the construction, and sale and handing over possession, and as mentioned above such handing over and sale was completed in all but two cases. It can be concluded that 99.5 per cent. of the contractual agreements are completed. Even in respect of the unregistered portions, it is clear from the details furnished by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction activity was completed long back the income from the sale of these two flats would also become liable to tax in the assessment for the assessment year 1987- 88 itself and income can be computed from the sale of these two flats, as below : (Rs.) Advance for flat No. 703 1,34,250 Advance for flat no. 23-A 47,000 1,81,250 Less : Cost of these two flats : 23-A 236 Sq. ft. 703 901 sq. ft. 1137 sq. ft. Cost of 1137 sq. ft. @ Rs 99.25 per sq. ft. 1,12,847 (The cost of construction per sq. ft. is worked out as per the books of account and statements filed by the assessee from the assessment years 1981-82 to 1985-86 68,403 17. During the search in the assessee's business premises, these are found in file No. MBP-(B)-(2) (M/s. Moghul Builders and Planners are the selling agents for the flats of the assessee-firm). These statements were put to Sri S. Ghousuddin, who was examined on oath on October 5, 1988. He has identified the seized documents as having p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch had created a fear and scare in the market and also the purchasers. One of the purchasers had cancelled the portion, he has purchased and which still remained unsold till December 5, 1988. After filing the estimate of advance tax the municipal corporation of Hyderabad also issued a notice memo No. 3539/M1/83 dated September 20, 1986, followed by another demolition notice No. 348/TP/Sd/AS/77 dated October 17, 1986 which had created a lot of confusion and panic among the partners and also with the purchasers as the demolition notice issued by MCH included some of the portions which were sold and registered. After receipt of notice from the Municipal Corporation of Hyderabad, some of the purchasers started pressurizing for refund of the amounts paid towards the purchase consideration and demanded payment of damages for the same. They have filed a civil suit and also obtained a stay from the High Court against the demolition till the disposal of the civil suit. Under the circumstances, it was impossible for the firm to judge the final profit as they would not have got any profit at all if the part of the building is demolished. The firm claimed that perhaps they might end in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s might demolish a part of the building, it was not possible for them to judge the final profit, is wrong and totally incorrect. The assessee was following the mercantile system of accounting, and offering anticipated profit every year. The project is completed and the income has to be offered for the assessment. 22. The assessee has offered the income from this venture, i.e., "Al Karim Trade Centre" in the assessment year 1989-90. The income shown was Rs.17,05,517. It may be interesting to mention that even here the cost of construction is shown as Rs. 1,09,22,118 which is the same amount, which was shown in the balance-sheet from March 31, 1984, onwards till January 4, 1989. The assessee has added provisions for lifts and municipal fees, which show that it has not incurred any additional expenditure. The sale consideration shown also is Rs. 1,21,01,300 which is only marginally different from the total sale consideration. (Rs. 1,21,39,000) adjusted earlier. 23. Coming back to the question, for convenience sake, it requires to refer to section 22 of the Income-tax Act, which reads as follows : " 22 Income from house property.-The annual value of property consistin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are sharply divided on this issue, one set of High Courts taking the view that the promoters/ contractors after parting with possession on receipt of full consideration thereby enabling the 'purchasers' to enjoy the fruits of the property, even though no registered document as required under section 54 of the Transfer of Property Act was executed, can be 'owners' for the purpose of section 22 of the Act. The other set of the High Courts had taken a contrary view holding unless a registered sale document transferring the ownership as required under the Transfer of Property Act the so-called purchasers cannot become owners for the purpose of section 22 of the Act. As a matter of fact, the judgment of the Delhi High Court in I. T. R. No. 84 of 1977 reported in Sushil Ansal v. CIT [1986] 160 ITR 308 (Delhi), the appeal against which is C. A. No. 4549 of 1995 (supra) the learned judge has made the following observation (page 317) : 'Before we conclude, we may mention that, during the course of the hearing, we suggested to the standing counsel for the Department that the Central Board should consider various practical aspects of this problem and formulate guidelines which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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