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TMI Blog2022 (8) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... ance 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, ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2013 by the Commissioner of Income Tax (Appeals), Jabalpur ("CIT(A)" for short), partly allowing the assessee"s appeal contesting his assessment under section 143(3) of the Income Tax Act, 1961 ("the Act" hereinafter) dated 30/12/201(1) for Assessment Year (AY) 2009-10. 2. The controversy in the instant case relates to the maintainability of the addition for Rs. 873.79 lacs, being "advances received from customers" and "other liabilities", made to the assessee"s returned income in assessment, since deleted by the first appellate authority. The assessee"s CO is principally supportive (of the impugned order), though also raises legal issues. The same, however, was not pressed during hearing, and is accordingly dismissed as not pressed. 3. It would be relevant to briefly state the back-ground facts of the case. The assessee-individual, is a real estate developer (through his firm "Rajul Builders"), besides being also engaged in the production and sale of bio-fertilisers and agents (per his firm "Rajul Agro Herbal"). For the year under consideration, the Assessing Officer (AO) sought the following during assessment proceedings: a) Confirmations from all sundry creditors. b) Copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting standard notified by the central government in official Gazette and not by any other authority including ICAI. It is not the case of the AO that AS-9 issued by ICAI has been notified by the Central Government in its official Gazette as required by section 145(2) and hence for not following AS-9, no addition can be made to the income. The AO has neither pointed out any defects in the Books of Accounts, nor in the accounting policy adopted by the appellant. The addition has been made without rejecting the Books of Accounts, for this reason also the addition is not sustainable. The addition is also revenue neutral and hence no addition can made. The AO has also not given the working of the amount added in the assessment order, the working given in the remand report clearly shows that Rs.1,66,19,650/- is advance received from customers and Rs.7,07,59,313/- is other advance which the appellant had contended is money to be paid to the land owner. In view of this also, the addition is not sustainable. Though res-judicata is not applicable to Income Tax proceedings, Law of Consistency has to be followed. The method of accounting of the appellant has been accepted by the AO in the pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, at para 3.1(ii)/pg. 45), which reads as under: "(ii) That like earlier assessment years in this assessment year also the appellant has recognized revenue in respect of advances received from customer if the following conditions are satisfied: a) The appellant has transferred to the buyer all significant risks and rewards of ownership of the property and the appellant retains no effective control of the property to a degree usually associated with the ownership, and b) It is not unreasonable to expect ultimate collection of sale consideration from the buyer." The said two conditions afore-said represent the essential attributes of AS-9. This, further, was an admitted position and a common ground before us as well. It, thus, removes the very basis on which relief stands allowed by the ld. CIT(A). What we wonder, then, is the controversy about? Both the sides basing their respective case on the satisfaction of AS-9, the issue boils down to, and all the four grounds justifying the impugned deletion by the ld. CIT(A) coalesce into one, i.e., whether any adjustment to the returned income on account of not forming the correct basis for revenue recognition in respect of advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual/vesting of the right to receive to/in the assessee, the seller or the service provider, the second ensures that the said right is not inchoate, as it is only the real income - which only is, subject to the provisions of the Act, liable to be assessed (Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC)), as existence of an uncertainty as to realization, where so, would impair the said right. 4.4 Coming to the facts of the case, there being nothing on record to clarify this aspect, Shri Usrethe, the ld. counsel for the assessee, was during hearing specifically enquired about the point in time when the revenue from a constructed residential or commercial unit, i.e., building, a flat or a shop (say), is taken into account. As observed, there is nothing on record stating the assessee"s - admittedly following AS-9, accounting policy qua the recognition of income, much less exhibit the same. Though the face of the balance-sheet (as on 31/03/2008, at APB- 2, pgs. 28-55), states of the "Notes to the Accounts" - which generally enlist the accounting policies, including on the recognition of income, as annexed thereto (Ann. 11), i.e., as forming part thereof, the same is not en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or being regarded as an accounting policy to be followed. As afore-noted, AS-9 enunciates this criterion as the passing of the significant risks and rewards of ownership. Why, we wonder, income could not be said to accrue or arise at this stage, even as the very fact that the assessee follows AS-9 would make it incumbent on it to do so? As such, income in such a case would arise where there is no certainty as to the realization of income, on which aspect there is no quarrel, the AO even otherwise regarding only the outstanding credits, i.e., sums already received, as income. We may here though clarify that the foregoing is discussed only by way of an example, taking cue from Sh. Usrethe statement at bar of the "sale" being taken in accounts on the sale deed being registered. The actual accrual of income, which may not necessarily have to await the completion of the construction, would stand to be determined from the terms of the sale agreement. We may though clarify that the recognition of income is not to be confused with the receipt of the consideration, being normally defined to be at stated points of time in the said agreement. If the buyer has agreed to purchase the constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on) were sought by the Bench during hearing, but were not supplied stating that the matter is old. Needless to add, no quantitative details stand furnished by the Auditor in their audit report. 4.5 The factual position that thus emerges is as: a) there is no stock accounting, i.e., the actual output during the accounting period or its transfer; b) there is nothing to suggest of even a physical inventory having been taken at the year-end, much less its profiling in terms of the stage of completion; c) there is nothing to show that construction costs, direct or indirect, are allocated to the physical output during the year; d) there is no definite accounting policy for recognizing income.; e) there is no record of the sale agreements or even purchase agreements entered into by the assessee during the year, much less noting of their substantial compliance; and f) there is no system in place for recognizing income. We find the foregoing as a matter/s of fact. 4.6 It is said that no defect in accounts has been observed by the AO, which only could entitle him to make the adjustment qua income accrued, though not accounted for. We have already found as a fact that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing the same are to be adopted for the purpose of assessing business income u/s. 28 (Poona Electric Supply Co. Ltd. (supra); Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC); Sutlej Cotton Mills Ltd. v. CIT [1978] 116 ITR 1 (SC)). AS-9, which calls for recognising income where the risks and rewards of the ownership of goods, i.e., the subject matter of sale, stands substantially transferred and there is little uncertainty as to the ultimate realisation of the sale consideration, only articulates these principles, so that nothing turns on the same being not notified or not mandatory. The assessee's case, rather than, therefore, being based on AS-9, which he claims to follow, or even an alternate thereto, showing it as equally valid, is found to be without any basis whatsoever. The next question, therefore, is the adjustment to be therefore made to the declared results. Attention of the parties was during hearing also drawn to the decision in Calcutta & Co. v. CIT [1959] 37 ITR 01 (SC), on which they were required to offer their comments. In the facts of that case, the assessee, a land developer, received the entire consideration for development of land, even as little wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial accounting - which in effect AS-9 captures, as indeed the assessment sought to be made. Also, this may not pose much problem, as it may appear to, as all the units of a particular project are complete up to a particular stage and have the same cost. Difference amongst different units of a project would thus stand to arise only where and to the extent there is any uncertainty as to ultimate realization of revenue in a given case. For example, a receipt of Rs. 6 lacs on a unit 80% complete (sale value: Rs. 10 lacs), would, in such a case operate to book sale only upto Rs. 6 lacs. Cost in excess of that adjusted against sale (at Rs. 4.8 lacs, i.e., going by our earlier example), is to be carried in accounts as un-billed sales (valued at cost). The exercise would need to be carried, both at the beginning and close of the year, as each year is under the Act a self-contained unit of assessment, so that profits for that year only could be brought to tax in assessment (Krishnaswami Mudaliar (A.) (supra)). The amount received (or even not received), cannot though form the basis of determining the profits and gains of a business following mercantile system of accounting, as adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also rubbishes the assessee"s claim of the exercise being revenue neutral. How could he claim so, where there is no demonstrated basis for recognizing income or indeed the closing of accounts? The matter, accordingly, 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. 4.9 The matter, accordingly, is set aside to the file of the AO for the purpose. The 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, is that the confirmation/s is of no significance. Two, there is no outright sale of his/her land by the land owner, who agrees to sell it, albeit independently, as part of product in the form of a constructed unit. That is, the 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. The ld. 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, ev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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