Case Law Details
Samarath Realities Vs DCIT (ITAT Ahmedabad)
To sum up, the main arguments of the assessee are that the land cost varies from block to block and therefore the same is variable. The cost of land gets allocated through registered sale deed and the same is transferred to the land owner. The assessee of the project has been consistently following this methodology of cost allocation where through registered deed the consideration of cost of flat is determined and later transferred to the land owner. Therefore, the ld. counsel for the assessee has submitted that in case the consideration for land cost to the extent of 15% (which comes to Rs. 49,71,556/-) is again taxed in the hands of the assessee, it would lead to double taxation. This is the last year of the project and the methodology of cost allocation has been accepted in the prior two years as well. We are in agreement with contention of the ld. counsel that once having accepted this methodology for the past years, the Department cannot reject the methodology in the third year of the project, following the principle of consistency.
We are of the view that the ld. Assessing Officer has erred in law and fact in rejecting the books of accounts of the assessee which the Department has accepted in prior years on the same set of facts. However, we note from the orders of ld. Assessing Officer and the ld. CIT(A) that the appellant has not produced any evidence in support of its claim that whatever advances have been shown by the appellant in the balance sheet, the same have been transferred to landowners and offered in the income tax return of the respective land owners. Since, the ld. CIT(A) has made a specific noting that no details were furnished to prove that this income has been offered for taxation in the hands of the land owner, in the interests of justice, we restore the matter back to the file of A.O. on the limited point to verify whether income has been transferred to the land owners and has been offered to tax in their return of income.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-10, Ahmedabad in Appeal no. CIT(A)-10/DCIT. Cir-1(2)/103/15-16 vide order dated 31/03/2017 passed for the assessment year 2012-13.
2. The assessee has raised following grounds of appeal:-
“1.1 The order passed u/s.250 on 31.03.2017 for A.Y.2012-13 by CIT(A)-10, Abad, confirming the addition of Rs.49,81,069/- as understatement of construction receipts is wholly illegal, unlawful and against the principles of natural justice.
1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the explanations, charts, documents etc. furnished and the evidence produced by the appellant. The observations made by CIT(A) in so far as the same are contrary to the evidence on record are not admitted by the appellant.
2.1 The Ld. CIT(A) has grievously erred in law as well as on facts in rejecting the book result of the appellant and confirming the addition of Rs.49,81,069/- made by AO towards understatement of construction receipts.
2.2 That in the facts and circumstances of the case as well as in law, the Id. CIT(A) ought not to have rejected the book result of the appellant and confirming the addition of Rs.49,81,069/- made by AO towards understatement of construction receipts.
3.1 Without prejudice to above and in the alternative, the Ld. CIT(A) ought to have directed AO to increase the opening stock of the succeeding year in case the impugned addition was upheld.
It is therefore prayed that the additions of Rs.49,81,069/- made by the AO and confirmed by CIT(A) should be deleted.”
3. The brief facts of the case are that the appellant is a land developer and has entered into an agreement for development of the project with the land owners. The consideration received from prospective flat buyers is divided into two parts, one part goes to the land owner towards land price and one part goes to the appellant towards construction of project, which is the income of the appellant. The portion towards cost of construction is taken by the appellant in its books of account as revenue and shown in the profit and loss account and the portion towards land cost is taken to the liability side where it is credited to the account of the land owner and shown as “liability”.
4. During the course of assessment proceedings, the Assessing Officer noticed that there is no consistency in allocation of funds received from flat buyers towards land cost and towards construction portion, which is the revenue of the assessee. The Assessing Officer on examination of one of the sale deeds noted that the ratio is 29.38% towards land cost and 70.62% towards construction. On being asked, as per the appellant’s own calculation produced before the Assessing Officer by considering all the towers, the land cost was coming at 29.42% whereas the construction cost was coming to 70.58%. However, the Assessing Officer noted that going through the schedule of advances against the land cost and against the construction cost, the Assessing Officer had shown total value of advances towards land cost at 3,65,65,875/- which is 45.10% of total advances whereas the total value against construction advance was shown at Rs. 4,45,15,529/- which comes to 54.9%. This clearly shows that against the share of land cost at 29.42% (as per assessee’s own calculation), the assessee has taken 45.10% towards land cost. The Assessing Officer held that the assessee has clearly bifurcated approximately 16% more (45.1% -29.42%) towards land owners cost since this does not form part of the contract receipts, which is taxable income in the hands of the assessee. Therefore, the Assessing Officer rejected the books of account on the basis that the books of accounts maintained by the assessee do not reflect the correct profit and applied ratio of 29.42% towards land cost and 70.5% against construction cost and worked out the income to the extent of Rs. 49,71,556/-which has been understated by the appellant in his return of income.
5. Before the ld. CIT(A), the assessee argued that method adopted by Ld. AO is defective since firstly, Assessing Officer has considered the contract receipt both for this year and of the earlier year. Secondly, as per agreement with land owners the contract receipt from flat owners was allocated to land cost first and thereafter to construction work. Third, the ld. Assessing Officer failed to appreciate that when receipts towards land has been included in the hands of the land owners it cannot again be included in the hands of the appellant as it would amount to double taxation. The ld. CIT(A) dismissed the assessee’s submission stating that ld. Assessing Officer has made a disallowance because of inconsistent method of bifurcation between advances received on account of land cost and on account of construction cost. The appellant has clearly bifurcated 16% more towards land cost because this does not form part of the contract receipt in the case of the appellant. When as per assessee’s own calculation the land owners can be paid upto 29.42%, the assessee has not been able to explain why it paid 45.1% to the land owners. Regarding the argument of double taxation, the ld. CIT(A) held that the appellant has not produced anything to prove that this income has been offered for taxation in the hands of the land owners. Even from the submission filed by the appellant during the course of appeal proceeding, it can be seen that proportion of the land cost to the total cost comes to 28.91% whereas the proportion of the construction cost comes to 71.09%. The chart is based on the working of actual bifurcation mentioned in the sale deeds entered by the assessee with prospective flat buyers. The ld. CIT(A) further noted that even in the chart furnished by appellant there is substantial variation for land rates within the same block, which proves that land cost has been adopted by the appellant at its own convenience and free will and the appellant has tried to show more towards land cost since only the construction cost is forming part of the revenue of the appellant. Therefore, the ld. CIT(A) held that the books of account of the appellant have been rightly rejected by the Assessing Officer and addition made by the Assessing Officer was accordingly confirmed.
6. Before us ld. counsel for the assessee argued that the impugned addition sustained in appeal is wholly unjustified both in facts and in law. The ld. counsel for the assessee argued that the rejection of method of bifurcation by Assessing Officer is not justified since the location, size, area, agreement date etc. of flats differ and therefore average cost method cannot be applied. The appellant has been consistently following this method and the method followed consistently cannot be rejected. The year under appeal is last year of the project and in earlier two years the book result was accepted by Department so that following the principle of consistency as held in the case of the Excel Industries Ltd. 358 ITR 295, the books of accounts of the assessee cannot be rejected. The land rate at the time of booking is the basis of bifurcation. The cost of land forms part of the sale deed and the cost of land so allocated goes to the land owner. The
calculation made by Assessing Officer would result in double taxation since the construction cost of Rs. 1,27,11,726/- has already been assessed in the hands of land owners. The ld. counsel for the assessee submitted that as per agreement with land owner, the amount received from prospective buyer is first allocated towards land cost only. This system is consistently followed by firm since inception of project and accepted by the Department in prior years. In response, the ld. Departmental Representative drew our attention to para 3.2 of the assessment order and submitted that the assessee did not give any details and therefore the Assessing Officer could not test veracity of the books of accounts. The assessee submitted only the sale deeds during the course of assessment proceedings. The Assessing Officer noted inconsistency in revenue recognition and observed that allocation of fund received from flat owners towards land portion and towards construction portion is not consistent. The assessee also did not furnish any evidence to show that land receipt has been transferred to the hands of the land owner. The ld. Departmental Representative argued that allocation between amount received against land and construction is quite contrary and there is no scientific basis for the same. Since the book results shown by the assessee do not give the correct picture of its business affairs, the books of the assessee were rightly rejected u/s. 145(3) of the Act.
7. We have heard the arguments of the parties and perused the material on record. To sum up, the main arguments of the assessee are that the land cost varies from block to block and therefore the same is variable. The cost of land gets allocated through registered sale deed and the same is transferred to the land owner. The assessee of the project has been consistently following this methodology of cost allocation where through registered deed the consideration of cost of flat is determined and later transferred to the land owner. Therefore, the ld. counsel for the assessee has submitted that in case the consideration for land cost to the extent of 15% (which comes to Rs. 49,71,556/-) is again taxed in the hands of the assessee, it would lead to double taxation. This is the last year of the project and the methodology of cost allocation has been accepted in the prior two years as well. We are in agreement with contention of the ld. counsel that once having accepted this methodology for the past years, the Department cannot reject the methodology in the third year of the project, following the principle of consistency. We also note that the assessee has brought to our knowledge that the cost of land is allocated through registered sale deed and is determined at the time of entering the agreement which is then later transferred in the hands of the land owner. We also note that once the cost of land has already been taxed to the land owner and offered to tax in its hands, the adjustment done by the ld. Assessing Officer by ignoring the registered deed and consistent method of allocation would lead to double taxation. In the case of DCIT v. Gujarat Narmada Valley Fertilizers Co. Ltd. [2014] 42 taxmann.com 438 (Gujarat), the Gujarat High Court held that where assessee’s claim for preliminary expenses had been allowed in earlier years, in absence of any change in circumstances, following principle of consistency, said claim was to be allowed in relevant year as well. In the case of CIT v. SBJ VON Compounders (P.) Ltd [2013] 37 taxmann.com 353 (Gujarat), the Gujarat High Court held that the claim of assessee in respect of valuation of stock, which was accepted in preceding assessment year was to be accepted in current year also following doctrine of consistency. In the case of Bodal Chemicals Ltd. v. Addl. CIT 112 taxmann.com 217 (Ahmedabad – Trib.), pursuant to scheme of amalgamation, assessee claimed depreciation on goodwill representing higher amount paid to transferor company as compared to its net assets. The Tribunal held that in view of fact that relevant year was second year of amalgamation whereas assessee’s claim for depreciation had been allowed in first year of amalgamation, following principle of consistency, assessee’s claim was to be allowed in assessment year in question as well. The Pune ITAT in the case of Tasty Bite Eatables Ltd. v. DCIT 111 taxmann.com 246 (Pune-Trib), held that where TPO had accepted segmental details of ready-to-serve food product divisions filed by assessee since assessment years 2007-08 to 2010-11 but rejected same in impugned assessment year, violation of principle of consistency caused by him was not proper. In view of the above for the sake of consistency, we are of the view that the ld. Assessing Officer has erred in law and fact in rejecting the books of accounts of the assessee which the Department has accepted in prior years on the same set of facts. However, we note from the orders of ld. Assessing Officer and the ld. CIT(A) that the appellant has not produced any evidence in support of its claim that whatever advances have been shown by the appellant in the balance sheet, the same have been transferred to landowners and offered in the income tax return of the respective land owners. Since, the ld. CIT(A) has made a specific noting that no details were furnished to prove that this income has been offered for taxation in the hands of the land owner, in the interests of justice, we restore the matter back to the file of A.O. on the limited point to verify whether income has been transferred to the land owners and has been offered to tax in their return of income.
8. In the result, the appeal of the assessee is treated as allowed as indicated above.
Order pronounced in the open court on 25-03-2022
