Income accrues only when due and on corresponding liability of other party to pay

Pr. CIT Vs. Rohan Projects (Bombay High Court)

Background: It is commonly understood that execution of an agreement leads to completion of a transaction and that the consideration agreed therein accrues to the seller. However, accrual of the consideration completely or in part depends upon the express terms mentioned in the agreement or any other type of document executed between the parties for carrying out a transaction.

This order of ITAT Mumbai, upheld by the Bombay High Court further establishes the principle that for an income to accrue to a person, corresponding liability to pay should also arise to the other party.

Facts of the case:

• The assessee, M/s. Rohan Projects is a Promoter and Developer, engaged in purchase of land, development rights of land, construction and sale of flats.
• The assessee had entered into an MOU with M/s Symbiosis (purchaser), for sale of land, construction and development for educational purposes at Rs. 120 Crores.
• Various stages were identified, on completion of which the assessee would become liable to receive the consideration.
• The assessee offered to tax Rs. 100 Crores, in respect of which it had completed the necessary task and become liable to receive the payment from purchaser, one of which was execution of sale deed.
• The Assessing Officer (AO) held that since the sale deed has been executed, transfer as defined u/s 2(47) has been completed and the entire consideration of Rs. 120 Crores needs to be offered to tax.
• Aggrieved, the assessee appealed to CIT (A), arguing that income which has not accrued cannot be taxed. Moreover, land is a stock-in-trade and not capital asset for the assessee. The CIT (A) agreed with the assessee, that land is stock-in-trade and not capital asset. However, he held that since the sale deed has been executed, the transaction of sale has been completed, and income accrues to the assessee, just like raising an invoice amounts to completion of sale of commodities. The time of payment can be a matter of convenience among the parties and hence, that does not determine whether or not the income has accrued. He upheld the addition of Rs. 20 Crores made by the AO.
• Aggrieved, the assessee appealed to ITAT Pune Bench.
  

Findings: