Case Law Details

Case Name : The Estate Vs ACIT (Kearnataka High Court)
Appeal Number : ITA No. 34 of 2010
Date of Judgement/Order : 10/01/2020
Related Assessment Year : 1997-98
Courts : All High Courts (6000) Kerala High Court (330)

The Estate Vs ACIT (Karnataka High Court)

In the given case the appellant is a partnership firm which is engaged in the business of real estate development, construction and sale of flats under the name and style of ‘The Estate’. The appellant filed its original return of income declaring its total income of Rs. 95,04,431/- on 31-10-1997 and subsequently on 31-3-1998 filed revised return declaring the same income with some changes in the balances of sister concerns in the balance sheet. The case of the appellant was selected for scrutiny by the Assessing Officer. Thereupon, a notice was issued to the appellant and all the details were requisitioned from him. The appellant claimed project expenses account under two heads namely, liquidated damages of Rs. 60,00,000/- and demurrages for delay in execution of the project to the tune of Rs. 54,00,000/-. The Assessing Officer, by an order dated 31-3-2000, made two additions of Rs. 60,00,000/- and Rs. 54,00,000/- in addition to the declared income.

The learned counsel for the revenue has taken us through the order of assessment and has submitted that the appellant failed to avail of the opportunity of cross-examination which was afforded to it. It is further submitted that the Assessing Officer, on the basis of meticulous appreciation of evidence on record, has disallowed the claims of the appellant for liquidated damages and demurrages for delay in completion of the project. It is also urged that the liability in question is not a crystallized liability and therefore, the other side cannot enforce it. It is further pointed out that the deed of settlement has no co-relation with the liability of the appellant for demurrage on account of delay in completion of the project. It is also urged that the findings of fact had been recorded by the Assessing Officer which has rightly been restored by the Tribunal.

We have considered the submissions made by the learned counsel for the parties and have perused the record. From perusal of the order passed by the Tribunal, it is evident that the order passed by the Tribunal is based on opinion given by Mr.S.Janardhan, advocate as well as the fact that the appellant has not been able to produce the original deed of arbitration. The Tribunal therefore, has doubted the genuineness of the entry made in the books of accounts by the appellant to the tune of Rs. 54,00,000/-. Ordinarily, HC would have dealt with the issue in this appeal itself. However, since the revenue has disputed the genuineness of the entry made in the books of accounts, therefore, HC are not inclined to decide the issue whether the Tribunal was justified in confirming the addition of Rs. 54,00,000/- in respect of demurrages for delay in execution of the project. The Tribunal has failed to take into account the remand report of the Additional Commissioner of Income-tax and joint venture agreement dated 19-9-1992.

Therefore, HC deem it appropriate to set aside the order passed by the Income-tax Appellate Tribunal.  It is also clarified that this Court has not expressed any opinion on the merits of the case and all the contentions which are available to the parties in law are kept open. Accordingly, the substantial questions of law are answered.

In view of the order of remand, the Tribunal shall be at liberty to deal with the issues involved in the substantial questions of law framed by a Bench of this Court. Accordingly, the appeal is disposed of.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

Mr. K.V. Aravind, learned counsel for the respondent.

2. This appeal under section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee which was admitted by a Bench of this Court on the following substantial questions of law:

(1) Whether the Tribunal was justified in law in confirming the addition of Rs. 54 lakhs in respect of demurrages for delay in execution of the project without considering the terms of joint venture agreement and more so when the appellant maintaining books of account under merchantile system of accounting?

(2) Whether the Tribunal was correct in law in holding that the joint development agreement does not constitute an Association of persons and consequently the income is liable for assessment under the status of association of persons?

3. The appellant is a partnership firm which is engaged in the business of real estate development, construction and sale of flats under the name and style of ‘The Estate’. The appellant filed its original return of income declaring its total income of Rs. 95,04,431/- on 31-10-1997 and subsequently on 31-3-1998 filed revised return declaring the same income with some changes in the balances of sister concerns in the balance sheet. The case of the appellant was selected for scrutiny by the Assessing Officer. Thereupon, a notice was issued to the appellant and all the details were requisitioned from him. The appellant claimed project expenses account under two heads namely, liquidated damages of Rs. 60,00,000/- and demurrages for delay in execution of the project to the tune of Rs. 54,00,000/-. The Assessing Officer, by an order dated 31-3-2000, made two additions of Rs. 60,00,000/- and Rs. 54,00,000/- in addition to the declared income.

4. Being aggrieved, the appellant filed an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) by an order dated 16-1-2008, by taking into account the remand report by the Additional Commissioner of Income Tax, allowed the appeal in part and extended the benefit of Rs. 35,32,538/- as against the claim of Rs. 50,00,000/- and did not grant any relief in respect of an amount of Rs. 10,00,000/- under the head of liquidated damages. The Commissioner of Income-tax (Appeals) allowed the claim of the appellant in respect of demurrages for delay in execution of the project. The revenue thereupon filed an appeal before the Tribunal. The appellant also filed cross objection in the aforesaid appeal. The Tribunal by order dated 21-8-2009 reversed the order of the Commissioner of Income-tax (Appeals) and restored the order passed by the Assessing Officer. In the aforesaid factual background, the appellant has approached this Court.

5. Learned Senior counsel for the appellant submitted that the authorities failed to take into account the joint venture agreement dated 19-9-1992. It is submitted that as per the agreement with the owners, the appellant was supposed to deliver their share of buildings on or before 30-6-1995, however, actual delivery took place on 30-9-1996. It is also pointed out that under the agreement the owners were entitled to a sum of Rs. 12,000/- per day of delay that is an amount of Rs. 3,60,000/- per month. There was a delay of 15 months in completion of the project and therefore, the owners were entitled to total demurrages for delay in execution of the project to the tune of Rs. 54,00,000/-. Our attention has also been invited to clause 4 of joint venture agreement dated 19-9-1992. In support of the aforesaid submission, it is also argued that Assessing Officer has not disputed the fact of the origin of the liability and the entry in the books. It is also pointed out that the appellant is maintaining books of accounts under mercantile system of accounting and therefore, the appellant mentioned the liability in the books of accounts for the assessment year 1997-98 on the principles of accountancy. It is also urged that however the Tribunal neither considered the aforesaid aspect of the matter nor the remand report submitted by the Additional Commissioner of Income Tax. The Tribunal failed to appreciate that the expenses had been debited by the appellant based on the agreement and not solely on the basis of arbitration award. It is also pointed out that the Tribunal grossly erred in reversing the order of the Commissioner of Income-tax (Appeals) by holding that the liability for such expenditure has not accrued in the financial year relevant to the assessment year under consideration as the liability was disputed as well. Even after settlement of such liability, the appellant has not offered the amount for tax. Alternatively, it is submitted that if the appellant’s claim towards demurrages of Rs. 54,00,000/- is disallowed, there is a consequent reduction in the value of cost of construction and therefore, the valuation of the closing stock for the year undergoes a change to the extent of Rs. 14,69,820/- which eventually results in reduction of profits to that extent. In support of aforesaid submission, learned counsel for the appellant has placed reliance on the decisions in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC), Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), Jiwanram Sheoduttrai v. CIT [2005]  555/279 ITR 512 (Cal.), CIT v. Burhwal Sugar Mills Co. Ltd. [1971] 82 ITR 784 (All.) and Sarsoon J David & Co. (P.) Ltd. v. CIT [1979] 1 Taxman 485/118 ITR 261 (SC).

6. On the other hand, learned counsel for the revenue has taken us through the order of assessment and has submitted that the appellant failed to avail of the opportunity of cross-examination which was afforded to it. It is further submitted that the Assessing Officer, on the basis of meticulous appreciation of evidence on record, has disallowed the claims of the appellant for liquidated damages and demurrages for delay in completion of the project. It is also urged that the liability in question is not a crystallized liability and therefore, the other side cannot enforce it. It is further pointed out that the deed of settlement has no co-relation with the liability of the appellant for demurrage on account of delay in completion of the project. It is also urged that the findings of fact had been recorded by the Assessing Officer which has rightly been restored by the Tribunal.

7. We have considered the submissions made by the learned counsel for the parties and have perused the record. From perusal of the order passed by the Tribunal, it is evident that the order passed by the Tribunal is based on opinion given by Mr.S.Janardhan, advocate as well as the fact that the appellant has not been able to produce the original deed of arbitration. The Tribunal therefore, has doubted the genuineness of the entry made in the books of accounts by the appellant to the tune of Rs. 54,00,000/-. Ordinarily, we would have dealt with the issue in this appeal itself. However, since the revenue has disputed the genuineness of the entry made in the books of accounts, therefore, we are not inclined to decide the issue whether the Tribunal was justified in confirming the addition of Rs. 54,00,000/- in respect of demurrages for delay in execution of the project. The Tribunal has failed to take into account the remand report of the Additional Commissioner of Income-tax and joint venture agreement dated 19-9-1992.

8. Therefore, we deem it appropriate to set aside the order passed by the Income-tax Appellate Tribunal. Needless to state that it would be open to the Tribunal to pass such order as it may deem fit in accordance with law. The Tribunal, after affording an opportunity of hearing to the parties, shall decide the appeal preferably within a period of three months from the date of receipt of the certified copy of the order passed today. It is also clarified that this Court has not expressed any opinion on the merits of the case and all the contentions which are available to the parties in law are kept open. Accordingly, the substantial questions of law are answered.

9. In view of the order of remand, the Tribunal shall be at liberty to deal with the issues involved in the substantial questions of law framed by a Bench of this Court by order dated 21-4-2010.

Accordingly, the appeal is disposed of.

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