Milan Theatres Private Limited Vs DCIT (ITAT Mumbai)
Income Cannot Be Reworked on Sale Agreement Dates Because Section 145 Conditions Not Met; Without-Prejudice Computation Cannot Be Treated as Voluntary Surrender of Income; Capital Gains on Conversion Taxable in Year of Sale Because Section 45(2) Mandates Sequencing; Indexed Cost Must Include Capitalised Interest Because It Forms Part of Cost of Asset; Interest Disallowance Deleted Because No Nexus to Non-Business Purpose Established; TDS Credit Cannot Be Denied Merely for Year Mismatch Because Tax Was Deducted; Doctrine of Consistency Applies Because Method Accepted in Earlier Years.
The appeal arose from the assessment framed under section 143(3) for assessment year 2017–18. The assessee, engaged in real estate development, had constructed a shopping complex known as “Milan Mall,” originally comprising 24 units. Pursuant to municipal approvals obtained from the Municipal Corporation of Greater Mumbai (MCGM) in 2014, the mall was structurally reorganised into 179 units plus one theatre. The project was completed during the year ended 31.03.2017.
In the year ended 31.03.2015, the assessee converted the mall from a capital asset into stock-in-trade and adopted the Project Completion Method for revenue recognition, a method consistently followed in earlier years. Although certain sale agreements were executed from assessment year 2016–17 onwards, receipts prior to completion were shown as advances. Upon completion of the project in assessment year 2017–18, revenue from sale agreements executed till that year was credited to the Profit and Loss Account and offered as business income. Capital gains on conversion were also offered in that year in accordance with section 45(2), which provides that gains from conversion of capital asset into stock-in-trade are taxable in the year in which such stock-in-trade is sold.
During assessment proceedings, the Assessing Officer rejected the Project Completion Method without invoking section 145(3) and brought income to tax based on dates of sale agreements. He also relied on a revised computation furnished by the assessee on a “without prejudice” basis and treated it as a voluntary offering of income. The total income was assessed at Rs. 15,99,97,178/–. Further, the Assessing Officer disallowed proportionate interest of Rs. 3,13,30,672/–, disturbed the computation of long-term capital gains by denying proportionate indexed cost relating to capitalised interest and other capital assets forming part of the mall, applied section 45(2) selectively to certain units, and denied TDS credit of Rs. 24,96,716/–.
The Commissioner (Appeals) upheld the assessment, stating that similar issues had been decided in earlier years and that there was no reason to deviate.
The Tribunal examined whether the Assessing Officer was justified in rejecting the Project Completion Method. It noted that section 145(1) requires income to be computed according to the method of accounting regularly employed, and section 145(3) permits rejection only upon recording satisfaction that accounts are incorrect, incomplete, or that true profits cannot be deduced. In this case, section 145(3) was not invoked, no finding was recorded that accounts were defective, and no violation of notified accounting standards was established. The Tribunal held that the rejection of the Project Completion Method was jurisdictionally unsustainable.
The Tribunal further observed that the method had been consistently followed and accepted in earlier years, including assessment year 2015–16 which had attained finality. Applying the doctrine of consistency, it held that in the absence of change in facts or distortion of profits, the method could not be disturbed.
On section 45(2), the Tribunal held that the assessee had adhered to the statutory scheme by offering capital gains in the year of sale of stock-in-trade. Selective application of fair market value to limited units was found arbitrary.
Regarding the revised computation furnished “without prejudice,” the Tribunal held that such alternate working could not be treated as an admission or voluntary surrender, particularly when the assessee had clarified that it did not represent its stand.
The disallowance of interest was found to be ad hoc and unsupported by evidence of diversion for non-business purposes. As the interest formed part of project work-in-progress and had been accepted in earlier years, the disallowance was deleted.
The Tribunal also held that capitalised interest and other capital assets forming part of the mall were embedded in the cost of acquisition and must be considered for indexed cost computation under section 48.
On TDS credit, the Tribunal directed that credit of Rs. 24,96,716/– be allowed after verification, observing that denial based on year mismatch was not justified when tax had been deducted and reflected.
Accordingly, the Tribunal set aside the additions and disallowances and directed recomputation in accordance with the Project Completion Method, allowing interest expenditure, proportionate indexed cost, uniform application of section 45(2), and TDS credit. The appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
