Case Law Details
DCIT Vs Vessella Constructions (ITAT Hyderabad)
In a landmark decision, the Income Tax Appellate Tribunal (ITAT) Hyderabad has passed a crucial verdict in the case of DCIT Vs Vessella Constructions. The tribunal directed for a re-adjudication concerning the gains earned by the assessee, Vessella Constructions, on the transfer of land related to villas sold. This article aims to provide an in-depth analysis of this case, covering its background, the main issues, and the implications of the decision.
Background
The crux of the matter is the addition of Rs. 12,07,70,833/- towards profits/gains earned by Vessella Constructions on the transfer of land related to the villas sold. The Assessing Officer argued that Vessella Constructions had not disclosed the entire sale consideration in its income for the assessment year 2013-14. The assessee had taken a stance that they were following the Percentage Completion Method for recognizing the revenue.
The Issue of Revenue Recognition
One of the primary issues in this case was whether the assessee had to recognize the entire sale consideration immediately or could follow the Percentage Completion Method, one of the accepted accounting methods. The assessee argued that they recognized revenue only to the tune of Rs. 2,90,98,601/- since the project was complete only to 17.16%.
CIT(A) Vs Assessing Officer
The Commissioner of Income Tax (Appeals) [CIT(A)] argued that the Assessing Officer had not adequately considered that the sale consideration of the semi-finished villas included not only the value of the structure but also the value of the land and the expenditure for future development. The CIT(A) also observed that the books of the assessee were not rejected by the Assessing Officer, making the action unjustified.
ITAT’s Verdict
ITAT noted that neither the CIT(A) nor the Assessing Officer had undertaken a factual verification of how much sale consideration was received during the financial year 2012-13. The tribunal also highlighted that it was factually incorrect to conclude that the entire construction work was over. As a result, ITAT restored the issue back to the Assessing Officer for a re-adjudication, taking into account the facts and law involved.
Conclusion
The case of DCIT Vs Vessella Constructions serves as a significant precedent concerning revenue recognition and the treatment of gains on the transfer of property. It throws light on the need for factual verification and meticulous consideration before arriving at any conclusions, particularly in complex tax cases. With the matter now restored to the Assessing Officer, it remains to be seen how the re-adjudication will unfold, potentially setting yet another crucial legal precedent.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
Aggrieved by the order dated 26/04/2017 passed by the learned Commissioner of Income Tax (Appeals)-2, Hyderabad (“Ld. CIT(A)”), in the case of M/s. Vessella Constructions (“the assessee”) for the assessment year 2013-14, Revenue preferred this appeal.
2. Only issue involved in this appeal is in respect of the addition of Rs. 12,07,70,833/- towards profits/gains earned by the assessee on transfer of land pertaining to villas that were sold.
3. From the facts on this aspect are that the assessee is a partnership concern, is in the business of development of properties for the purpose of residential/commercial. The assessee firm has taken land on development basis from M/s. Hyderabad Prime Space Development Ltd., and Smt. P. Maruthy in the month of July, 2011. The construction activity of the villas was started in the month of January, 2013. During the scrutiny of the return of income of the assessee for the assessment year 2013-14, the learned Assessing Officer noticed that in the month of March, 2013, the assessee registered 20 villas in respect of which, approximately 8% of the development activity has taken place. The aggregate sale consideration of the registered villas as per the Documents is at Rs. 16,95,00,000/-. Out of this amount, the assessee received only a part of amount. In the sale deeds, it is clearly mentioned that the property is mentioned as semi-finished villa, and photo of frame/structure submitted at the time of registration.
4. For the assessment year 2013-14, assessee filed return of income on 15/09/2013 declaring income of Rs. 23,14,944/- with turnover of Rs. 2.91 crores. During the scrutiny, learned Assessing Officer noticed that though the assessee asserted in the registered sale deeds that it has sold 20 villas for a total consideration of Rs. 18 crores, had accounted only Rs. 2.91 crores, without disclosing the entire sale consideration as received till 31/03/2013. When questioned, assessee replied that revenue was being recognized at the time of registration of sale deeds.
5. On that, the learned Assessing Officer inferred that since the assessee accounted only for a nominal profit of 8% on the construction value pertaining to the sale of villas, the profits/gains on the transfer of land were not accounted for. He accordingly calculated the proportionate value of the land pertaining to 20 villas at Rs. 15,12,50,000/- and reduced it by Rs. 3,04,79,167/- towards cost of the proportionate land pertaining to 20 villas sold and added the balance of Rs. 12,07,70,833/- to the income of the assessee.
6. Assessee preferred appeal before the learned CIT(A) and contended that it did not sell 20 villas but they sold only 19 villas for Rs. 16.95 crores and out of this amount, following the Percentage Completion Method, they have recognized revenue only to the tune of Rs. 2,90,98,601/- since the project was complete only to 17.16%. It further stated that Percentage Completion Method is one of the correct methods of offering income.
7. Learned CIT(A) perused the record and recorded that the assessee submitted the income on Percentage Completion Method, which is not disputed by the learned Assessing Officer and the books of assessee were not rejected by the learned Assessing Officer. Learned CIT(A) referred to the case of one Smt. R.P. Prashanthi, vide document No. 4477/2013, dated 22/03/2013 and observed that the action of the learned Assessing Officer was not correct as the sale consideration mentioned in respect of semifinished villas also includes the value of the land, the value of the structure as on the date of registration and also to the expenditure to be incurred for the development of villas up to final stage.
8. Secondly, on a perusal of the balance sheet which is available in the paper book, learned CIT(A) found that on the liabilities side, the advances from the customers at Rs. 10.24 crores as on the date of 31/03/2013 was shown; whereas on receipts side of Income and Expenditure account, the construction income of Rs. 2.91 crores and closing work in progress at Rs. 2.94 crores was shown. Basing on these observations, learned CIT(A) returned a finding that no separate addition was required towards sale of land and, therefore, he directed the learned Assessing Officer to delete the impugned addition.
9. Aggrieved by such a finding of the learned CIT(A), the Revenue preferred this appeal, stating that proper appreciation of the fact that reveal that by the date of registration of 20 villas, the construction of villas was complete and when the assessee admitted income on registration of sale deed as brought out in the assessment order, the learned CIT(A) is not justified in deleting the addition that too when the assessee is not following the Percentage Completion Method as held by the learned CIT(A). Revenue further contends that the registered value of the sale consideration of 20 villas sold was not offered as ‘gross receipts’ as attributable to the sale of land, villas as discussed in the assessment order ought to have been sustained.
10. Learned DR contends that the crux of this matter is that the assessee did not disclose the entire amount of sale consideration in respect of 20 villas but accounted for only Rs. 2,90,98,601/- and even if the assessee has been following the Percentage Completion Method, it is imperative for the assessee to disclose the entire sale consideration and then, plead for the Percentage Completion Method. According to the learned DR, the sale deeds reveal that as on the date of registration of such sale deeds, the entire construction of the villas was over and the assessee received the entire sale consideration also.
11. Per contra, it is the submission by the learned AR that the assessee has been following the Percentage Completion Method for recognizing the revenue and this is also one of the accepted methods. Further contention of the learned AR is that the sale deeds contain the entire sale consideration amount and they also show the mode of payment, but, as a matter of fact, as stated in the assessment order itself, though the entire sale consideration was Rs. 18 crores by 31/03/2013, only a sum of Rs. 9.03 crores alone were realized and all this amount is properly accounted in the books of the assessee. Learned AR further referred to the observations of the learned CIT(A) that a perusal of the balance sheet shows on liabilities side, advanced from the customers at Rs. 14.24 crores as on 31/03/2013 and on receipts side of the Income and Expenditure Account, construction income at Rs. 2.91 crores and closing work in progress at Rs. 2.94 crores were shown. He, therefore, prays that there are no merits in this appeal and the appeal may be dismissed.
12. We have gone through the record in the light of the submissions made on either side. The main plank of argument of the learned Assessing Officer in the assessment order is that though the assessee had asserted in the registered sale deeds that it had sold 20 villas for a total consideration of Rs. 18 crores had accounted only for Rs. 2.91 crores and out of the above sum, Rs. 18 crores have received till 31/03/2013. The entire amount of sale consideration was not disclosed in the turnover, but it reported turnover of only Rs. 2.91 crores. Learned Assessing Officer further recorded that the assessee replied that the revenue is being recognized at the time of registration of sale deed.
13. Learned CIT(A), on the other hand, found that in the balance sheet which is available in the paper book, found that on the liabilities side, the advances from the customers at Rs. 10.24 crores as on the date of 31/03/2013 was shown: whereas on receipts side of Income and Expenditure account, the construction income of Rs. 2.91 crores and closing work in progress at Rs. 2.94 crores were shown. On a careful consideration of the sale deeds, we find that in many of the sale deeds, the sale consideration was reported by way of cheques and such cheques were dated beyond 31/03/2013. For example, we find it from the sale deed in favour of Sri Chidura Satish, where out of nine cheques issued, only four cheques were in the relevant assessment year, whereas the five cheques were for the assessment year 2014-15. So also in the case of Shri P.V. Narasimha Reddy out of eight cheques, two cheques were relevant for the assessment year 2012-13 and one cheque was relevant for the assessment year 2013-14 and whereas the balance five cheques were relevant for the assessment year 2014-15.
14. However, when we come to the case of Smt. R.P. Prashanthi, sale deed No. 4477/2013, dated 22/03/2013, the mode of payment of sale consideration was that Rs. 15 lakhs by way of cheque and Rs. 65 lakhs through cheques from home loan, sanctioning bank. No date of either of the cheques is given in the sale deed, but in the chart furnished by the learned AR in respect of payment of sale consideration relating to 19/20 villas in question, in the financial year 2012-13, only a sum of Rs. 30,000/-is shown to have been realised. When the cheques mentioned in the sale deed do not contain any date and when the information supplied by the assessee shown that only a sum of Rs. 30,000/- was received during the financial year 2012-13, it is a matter of verification. When we approach this fact in the light of our observations that for many of the sale deeds registered during the year, cheques towards sale consideration were issued postdated, the facts remains for verification is about how much of money was realized during the financial year 2012-13.
15. Neither the learned Assessing Officer nor the learned CIT(A) undertook this exercise. The observations made by the learned CIT(A) that the balance sheet reveals the construction income at Rs.2.91 crores and the advances from customers as on 31/03/2013 as Rs. 10.24 crores, come nearer to the figures given in the chart furnished by the assessee. It is so because the chart furnished by the assessee shows the receipts during the financial year 2012-13 at Rs. 5,49,10,250/- whereas according to the learned CIT(A), the aggregate of the construction income and closing work in progress comes to Rs.5.93 crores and the interest of Rs. 7.79 lakhs is excluded from it to reach the correct figure.
16. In these circumstances, we are of the considered opinion that factual verification as to how much of sale consideration that was received during the financial year 2012-13 is necessary. Apart from this, from the sale deeds, the copies of which are found in the paper book filed before us clearly reveal that the construction activity on relevant plots had not reached even the lintels level. Observations of the learned Assessing Officer that the entire construction work was over and vacant possession of the villas was handed over to the respective buyers is, therefore, factually incorrect. When the sale deeds were available to the learned Assessing Officer, it is evident from the photos appended to the sale deeds that the construction work is at preliminary level, the learned Assessing Officer could have verified this fact from the field. It is, therefore, incorrect to conclude that the project work was complete or that the assessee should recognize the entire revenue.
17. In view of all these factors, we deem it just and necessary to quash the orders of the authorities below and restore the issue to the file of learned Assessing Officer to cause enquiry as to the sale consideration that was received during the relevant assessment year and also whether the percentage on recognition of revenue was inconsonance with the percentage of completion of the project as on 31/03/2013. Needless to say that the learned Assessing Officer will decide the issue as per facts and law, after giving due opportunity of being heard to the assessee. We hold and direct so.
18. In the result, appeal of Revenue is treated as allowed for statistical purposes.
Order pronounced in the open court on this the 27th day of July, 2023.
