Hill County Properties Limited, ... vs Department Of Income Tax

ITA No.1644/Hyd/2014 : Assessment year 2009-10

Addl. Commissioner of Income- V/s. M/s. Hill County Properties Ltd. tax Central Range 3, (Formerly known as M/s. Maytas Hyderabad Properties Ltd.), Hyderabad (PAN - AAECM 2732 B)

(Appellant) (Respondent)

Appellant by : Shri D.Sudhakar Rao CIT-DR

Revenue by : Shri S.Rama Rao Date of Hearing 20.3.2015 Date of Pronouncement 22.5.2015

ORDER

Per P.M.Jagtap, Accountant Member :

This appeal is preferred by the revenue against the order dated 30.7.2014 passed by the Dispute Resolution Panel(DRP) under S.144C(5) read with S.144C(8) of the Income Tax Act,1961.

2. In ground No.1, Revenue has challenged the action of the learned Dispute Resolution Panel in directing the ing Officer to delete the disallowance of Rs.8,79,77,255 made on account of transfer pricing adjustment.

3. The assessee in the present case is a company, which was incorporated originally as M/s. Matytas Rajeswari Development Pvt. Ltd. on 20.5.2005 with the main object of carrying on the business of property development. After a couple of changes in the name, it is now known as Hill Country Properties Ltd. The return of income for the year under consideration was filed by the 2 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

assessee company on 30.9.2009 declaring a loss of Rs.74,98,75,451. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has made an investment of Rs.52,68,08,490 in the share application money of its wholly owned subsidiary, M/s. Maytas Properties M.E.(FZE) Pvt. Ltd., Duibai. Keeping in view that this transaction was in the nature of the international transaction entered into by the assessee company with its AE, a reference was made by the Assessing Officer to the TPO for determining its Arm's Length Price. As noticed by the TPO, no interest was charged by the assessee company on the share application money paid to its AE. According to the TPO, the assessee company in Arm's Length situation would have charged interest on the share application money paid to its AE. He therefore, worked out such interest at Rs.8,79,77,255, and since interest actually charged by the assessee was nil, he worked out the TP adjustment required to be made on this issue at Rs.8,79,77,255. When this addition on account of TP adjustment was proposed to be made by the Assessing Officer in the t assessment order, the assessee raised an objection before the Dispute Resolution Panel, who directed the Assessing Officer not to make such addition on account of TP adjustment by relying on the decision of the Tribunal in assessee's own case for the assessment year 2008-09 vide its order dated 6.6.2014 in ITA No.1404/Hyd/2014, wherein it was held that the transaction of the assessee company with its AE involving payment of share application money was not in the nature of international transactions, which could be considered under S.92E of the Act.

4. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the learned representatives of both the sides, this issue is squarely 3 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

covered in favour of the assessee and against the Revenue by the decision of the Tribunal in assessee's own case for assessment year 2008-09 (supra), wherein it was held by the Tribunal relying on its earlier decision in the case of Vijay Electricals Ltd. V/s. Addl. CIT (2013)36.taxmann.com.396(Hyd-Trib)), that the amount representing investment made by the assessee company in share capital of its subsidiary outside India was not in the nature of international transaction, as referred to in S.92B of the Act, and therefore, Transfer Pricing provisions were not applicable to such transactions. Respectfully following the said decision of the coordinate bench of this Tribunal in assessee's own case for the immediately preceding year, i.e. Assessment year 2008-09, we uphold the impugned order of the Dispute Resolution Panel directing the Assessing Officer not to make any addition on account of transfer pricing adjustment in respect of the transactions of the assessee company with its AE, involving payment of share application money. Ground No.1 of Revenue's appeal is accordingly dismissed.

5. In ground no.2, Revenue has challenged the action of the DRP in directing the Assessing Officer to allow the expenditure incurred by the assessee on staff welfare and others amounting to Rs.6,02,730 and Rs.25,19,832 respectively

6. During the year under consideration, the assessee company had claimed an expenditure of Rs.6,02,730 on distribution of gifts and Rs.13,21,000 on account of provision for LTA and Rs.11,98,832 on account of prepaid insurance. As found by the Assessing Officer during the course of assessment proceedings, the relevant bills and vouchers pertaining to these expense however, were not in the name of the assessee company, but the same were 4 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

in the name of M/s. Maytas Properties P. Ltd. He therefore, proposed to disallow the said expenses claimed by the assessee. On objections raised by the assessee, the Dispute Resolution Panel restored this issue to the file of the Assessing Officer with a direction to cause enquiry in order to find out whether M/s. Maytas Properties Ltd. has also claimed the same expenditure on the basis of the relevant bills and vouchers raised in its name or not and if it is found that there is no such double claim, the expenditure claimed by the assessee should be allowed.

7. At the time of hearing, the learned representatives of both the sides have agreed that a similar issue was involved in the case of the assessee for the assessment year 2008-09 and vide its order dated 6.6.2014 (supra), the Tribunal has decided the same holding that the department cannot disallow the expenditure merely because there is a clerical error in the bills produced by the assessee towards the expenditure. It was held that if the expenditure is not claimed by M/s. Maytas Properties Ltd., it is fair to allow deduction towards business expenditure in the hands of the assessee. Accordingly, the issue was restored by the Tribunal to the file of the Assessing Officer to verify whether the same expenditure was claimed by M/s. Maytas Properties P. Ltd. and if it is found, on such verification that there is no such double claim, the Assessing Officer was directed by the Tribunal to allow the claim of the assessee of such expenditure. Respectfully following the said decision of the coordinate bench of this Tribunal in assessee's own case for assessment year 2008-09 on similar issue, we uphold the impugned order of the Dispute Resolution Panel, setting aside this issue to the file of the Assessing Officer for deciding the same afresh as per the same directions as given by the Tribunal for 5 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

assessment year 2008-09. Ground No.2 of the Revenue's appeal is accordingly dismissed.

8. In ground no.3, Revenue has challenged the action of the DRP in directing the Assessing Officer to restrict the disallowance of expenditure of Rs.1,03,32,278 only to the extent of 10% of the expenditure for which payments were made in cash.

9. As noticed by the Assessing Officer from the report of the Special Auditor, the assessee company had made payment of certain expenditure in excess of Rs.20,000 otherwise than by crossed cheque or bank draft. As these payments aggregating to Rs.1,03,32,278 were clearly hit by the provisions of S.40A(3), the assessee was called upon by the Assessing Officer to offer its explanation in the mater. The explanation offered by the assessee in this matter, however, was not found acceptable by the Assessing Officer. Accordingly, he proposed to disallow the expenditure of Rs.1,03,32,278 by invoking the provisions of S.40A(3). He also observed that the said expenditure was not supported by any documentary evidence and the same was, therefore, liable to be disallowed alternatively as per the provisions of S.37(1). On the objection raised by the assessee, the Dispute Resolution Panel found that a similar issue was decided by the Tribunal in assessee's own case for assessment year 2008-09 vide order dated 6.6.2014 (supra) wherein similar disallowance made by the Assessing Officer by invoking the provisions of S.40A(3) was held to be not sustainable. As regards the disallowance of the said expenditure made by the Assessing Officer alternatively as per the provisions of S.37(1), it was held by the Tribunal that such expenditure claimed by the assessee, which was otherwise genuine, could not be disallowed entirely for want of vouchers. It was held by the 6 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

Tribunal that it would be fair and reasonable in the facts of the case to disallow relevant expenditure to the extent of 10% for the unverifiable element. Following the decision of the Tribunal in assessee's own case for assessment year 2008-09, the Dispute Resolution Panel directed the Assessing Officer to restrict the amount of disallowance to the extent of 10%.

10. At the time of hearing, the learned representatives of both the sides have agreed that this issue is also squarely covered by the decision of the Tribunal in assessee's own case for assessment year 2008-09, which has been relied upon by the Dispute Resolution Panel to give relief to the assessee on the similar issue involved in the year under consideration, i.e. assessment year 2009-10. Respectfully following the said decision of the coordinate bench of this Tribunal in assessee's own case for assessment year 2008-09 on similar issue, we uphold the impugned order of the Dispute Resolution Panel directing the Assessing Officer to make disallowance of the amount of expenditure only to the extent of 10%. Ground No.2 of the Revenue's appeal is accordingly dismissed.

11. In ground No.4, the Revenue has challenged the action of the Dispute Resolution Panel in deleting the addition of Rs.7,70,33,626 proposed by the Assessing Officer on account of interest allegedly attributed to the advances given by the assessee company to its group concerns.

12. During the year under consideration, the assessee company had borrowed funds and interest paid thereon amounting to Rs.25,19,62,981 was claimed as expenditure. During the course of assessment proceedings, it was noticed by the Assessing Officer 7 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

that the assessee company has advanced certain amounts to its subsidiaries free of interest. He therefore, worked out the interest which the assessee company ought to have charged to its subsidiaries on such advances on notional basis at Rs.4,08,33,638 and disallowance to that extent was proposed to be made by him out of the interest expenditure claimed by the assessee. It was also noticed by the Assessing Officer that the assessee has given loans and advances to seven other companies, and no interest thereon was charged. He therefore, worked out the interest chargeable on the said loans and advances at the rate of 10.5% at Rs.3,61,91,988 and further disallowance out of interest expenditure claimed by the assessee to that extent was proposed to be made by him. Accordingly, a total disallowance of Rs.7,70,33,626 was proposed by the Assessing Officer out of interest expenditure claimed by the assessee.

13. When objection was raised by the assessee before the DRP disputing the disallowance proposed to be made by the Assessing Officer out of the interest expenditure, the DRP found that a similar disallowance made out of interest in assessee's own case for assessment year 2008-09 was deleted by the Tribunal vide its order dated 6.6.2014 (supra) involving similar facts and circumstances. Accordingly, following the said decision of the Tribunal, the learned DRP directed the Assessing Officer not to make any disallowance out of interest expenditure claimed by the assessee.

14. We have heard the arguments of both the sides and also perused the relevant material on record. As submitted by the learned counsel for the assessee, all the material facts relevant to this issue as involved in the year under consideration are similar to 8 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

assessment year 2008-09 in as much as the assessee company had interest free funds in the form of customer advances amounting to Rs.556.36 crores and debentures and CCDs amounting to Rs.600 cores, which were sufficient to give the interest free advances to the subsidiaries as well as other companies. He has also submitted that all these advances were given by the assessee company during the course of its regular business and nexus of these advances with the business of the assessee was duly explained before the Assessing Officer. He has contended that the facts involved in the year under consideration thus are similar to that of assessment year 2008-09, for which a similar issue has already been decided by the Tribunal in favour of the assessee and the Learned Departmental Representative has not been able to dispute this position.

15. We find that in its order dated 6.6.2014, the Tribunal has considered and decided similar issue in favour of the assessee for the following reasons given in paragraphs 34 of its order-

"34. We have heard both the parties and perused the record. The revenue authorities disallowed the notional interest on the amounts advanced to sister concerns on the reason t interest bearing borrowed funds were used by the assessee for non-business purposes. However, the assessee made a plea before us that it is having enough own funds in the form of share capital, reserves and surplus, interest free e from customers and deposits and the funds were diverted to the sister concern for business purpose which are in the similar nature of business of the assessee. Being so, it cannot be considered that the assessee used the interest bearing funds for non-business purposes. The assessee also placed reliance on the judgment of the Hon'ble Supreme Court in the case of SA Builders Ltd., Vs. CIT, 288 ITR 1 (SC). In our opinion, before disallowance of notional interest it is incumbent upon AO to establish that there is a nexus between the amount diverted and interest incurred by the assessee. Even if assessee has diverted interest bearing funds to the 9 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

sister concern, then it is business decision taken by e assessee to make such an investment and even if it has resulted no income to the assessee, notional interest cannot be disallowed on the reason that assessee should have d its non-interest bearing funds for the purpose of business instead of using borrowed funds. The AO cannot sit in the arm chair of businessman and decide what the assessee has to do to maximize its profit. In our opinion, the judgment relied upon by the learned AR of the assessee in the case of A Builders (supra) and also coordinate bench decision in the case of SSPDL Ltd. Vs. DCIT, 24 ITR(Trib.)(Hyd.) 290 also support the case of the assessee. Accordingly, this ground is allowed."

As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of assessment year 2008-09, we find no infirmity in the impugned order of the learned Dispute Resolution Panel in deleting the disallowance proposed by the Assessing Officer out of interest expenditure claimed by the assessee, by following the decision of the Tribunal rendered in assessee's own case for assessment year 2008-09. The same giving relief to the assessee on this issue is accordingly upheld and the ground No.4 of the Revenue's appeal is dismissed.

16. In ground No.5, Revenue has challenged the action of the learned DRP in giving direction to the Assessing Officer to restrict the disallowance on account of total expenditure of Rs.5,59,97,114 only to the extent of 10% of such expenditure for which payment is found to be made in cash.

17. In their Audit Report, the Special Auditors had reported that various expenses claimed by the assessee company aggregating to Rs.6,05,33,905 were not properly supported by bills, receipts etc. During the course of assessment proceedings, the assessee company could produce the supporting bills/receipts only in respect of such expenses amounting to Rs.45,36,791. The 10 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

Assessing Officer therefore, proposed to disallow the balance expenditure of Rs.5,59,97,114 for want of supporting evidence. On objection raised by the assessee to dispute the said disallowance, the learned DRP found that a similar issue involved in assessee's own case for assessment year 2008-09 was decided by the Tribunal vide its order dated 6.6.2014, whereby the Assessing Officer was directed to allow the expenses found to be paid by cheques on verification and to make a disallowance of 10% of the balance expenses, which are found to be made in cash. Following the said decision of the Tribunal for assessment year 2008-09, the DRP directed the Assessing Officer to decide this issue by following the same directions as given by the Tribunal in assessment year 2008-09.

18. At the time of hearing, the learned representatives of both the sides have agreed that this issue is also squarely covered by the decision of the Tribunal in assessee's own case for assessment year 2008-09, whereby the Assessing Officer was directed by the Tribunal to verify the mode of payment of the relevant expense and to allow the expenses which are found to be made by cheque and to make 10% disallowance out of the balance expenses which are found to be paid in cash. We therefore, find no justifiable reason to interfere with the order of the DRP directing the Assessing Officer to decide a similar issue involved in the year under consideration, as per the same directions as given by the Tribunal in assessment year 2008-09. The same is therefore, upheld on this issue, dismissing ground No.5 of the Revenue's appeal.

19. In ground no.6, the Revenue has challenged the action of the DRP in directing the Assessing Officer to allow expenditure of 11 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

Rs.6,67,03,479 incurred by the assessee on payments made to M/s. Chourasia Construction Co.

20. During the year under consideration, the expenditure incurred by the assessee on account of payment made to M/s. Chourasia Construction for construction work amounting to Rs.6,67,03,479 was claimed as deduction. According to the Assessing Officer, since the entire construction work was entrusted by the assessee company to M/s. Maytas Infra P. Ltd., there was no requirement for entrusting any construction work to M/s. Chourasia Construction. He therefore, held that the payment claimed to be made by the assessee to M/s. Chourasia Construction was not a genuine payment and the same did not represent the expenditure wholly and exclusively incurred by the assessee company for the purpose of its business. Accordingly, the amount of Rs.6,67,03,479 claimed by the assessee was proposed to be disallowed by the Assessing Officer.

21. When the assessee raised an objection before the learned DRP against the disallowance proposed by the Assessing Officer on account of payment made to M/s. Chourasia Construction, the learned DRP found that a similar disallowance made by the Assessing Officer on account of payment made to M/s. Chourasia Construction in assessment year 2008-09 was deleted by the Tribunal vide its order date 6.6.2014. Accordingly, following the said order of the Tribunal in assessee's own case for assessment year 2008-09, the DRP directed the Assessing Officer to allow the expenditure claimed by the assessee on account of payment made to M/s. Chourasia Construction.

12 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

22. At the time of hearing, learned representatives of both the sides have agreed that this issue is also squarely covered by the decision of the Tribunal rendered in assessee's own case for assessment year 2008-09, wherein a similar issue has been decided by the Tribunal in favour of the assessee vide paragraph No.43 which reads as under-

"43. We have heard both the parties, perused the record and gone through the orders of the revenue authorities. The DRP came to the conclusion that the agreement entered by the assessee is not genuine on the reason that M/s Chourasia Construction was a small time contractor based at Bangalore and there were certain inconsistencies in the agreement. No enquiry was carried on by the Department to suggest that there was no contract work carried on by M/s Chourasia Construction company in respect of this expenditure. The expenditure incurred by the assessee cannot be disallowed on mere presumptions and surmises and it is necessary to ring on record the evidence to suggest that payment is not genuine. In the present case, there is a valid agreement between the assessee and M/s Chourasia Constructions company and they have rendered services and payment was made. It is not the case of the revenue authorities that particulars of person to whom the amounts were paid could not be furnished. We are of the view that allowance or disallowance of a claim of business expenditure should depend upon the existence or otherwise of the followin conditions:

1. Expenditure in question should not be of the nature described in the provisions of section 30 to 36.

2. Expenditure should not be of nature of capital expenditure and it should not be a personal expenditure.

3. Expenditure has been laid out for wholly and exclusively for the purpose of business or profession.

In the present case, assessee has fulfilled requirement of the provisions of section 37 of the IT Act. The claim of payment to subcontractor by the assessee is not disqualified for deduction under the Act. Now coming to the next question as to whether the expenditure is capital or not, we are of the opinion that the expenditure is not a capital expenditure since 13 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

the assessee did not acquire any capital asset and the payment is also not in the nature of personal expenditure and not brought any personal benefit to any employees or contractor of the assessee company. The expenditure incurred wholly and exclusively for the purpose of business. It was held in the case of Sassoon J. David, 118 ITR 261 (SC) by the Apex Court as under:

"In the instant case it is necessary to bear in mind that the company was neither dissolved nor was its business undertaking sold. It continued to exist as a juristic entity even after the transfer of its shares. On account of such transfer of shares, the transferees no doubt gained control of the company. But one important fact of the case was that n r the transferor nor the transferee derived any direct benefit out of the payment of retrenchment compensation to the employees even though such retrenchment might have facilitated the transfer of shares. It is also not the case of the Department that the payment was excessive. That there a substantial reduction in the wage bill in the future years as a consequence of retrenchment was also not disputed. It is too late in the day to treat the expenditure incurred a management in paying reasonable sums by way of gratuit bonus, retrenchment compensation or compensation for termination of service as not business expenditure. In order to claim deduction under s. 10(2)(xv), an assessee had to show that the expenditure in question, (i) was not an allowance of the nature described in any of the cls. (i) to (xiv) of s. 10(2), (ii) was not in the nature of a capital expenditure or personal expenses of the assessee, and (iii) had been laid out or expended wholly and exclusively for the purposes of his business, profession or vocation. Even assuming that the motive behind the payment of retrenchment compensation was that the terms of the agreement of the sale of shares should be satisfied, as long as the amount had been laid out or expended wholly and exclusively for the purpose of e business of the assessee, there appears to be no good reason for denying the benefit of s. 10(2)(xv) to the company if there is no other impediment to do so.

The company continued to function even after its control passed on to the hands of T and the expenditure in question was laid out for the purpose of the company's own trade and not for the trade of T who were only the shareholders of the company. As a result of the expenditure in question, the company was in fact benefited and it was possible for to earn more profits as a consequence of the reduction in the 14 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

wage bill. Subsequent to 31st Dec., 1955, the company had by passing the resolution incurred liability to pay retrenchment compensation and compensation for termination of service. On account of the said resolution, the total value of the assets of the company was reduced by the amount payable to the employees by way of compensation. It is natural that the purchaser of the shares would ordi y claim reduction in the consideration payable for the shares by the amount which the company had undertaken to pay as assets of the company became reduced to that extent. It cannot, therefore, be said that T were in any way bene d financially by reason of the reduction in the consideration payable by them for the shares. The High Court was, therefore, in error in holding that the amount involved in the case did not satisfy the test applicable to the expenditure allowable under s. 10(2).

The expression "wholly and exclusively" used in s. 10(2)(xv) does not mean "necessarily". Ordinarily it is for the e to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and it s incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by e expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 10(2)(xv) if it satisfies otherwise the tests laid down by law. In the instant case, it was the case of the company that many of the employees were old and superfluous and the business could be carried on with a smaller number and the only way in which they could reduce the number was to terminate the services of all the employees by paying them compensation and thereafter reemploying some of them only. If the company felt that was a method which would enure to it benefit, it cannot be said that the payment of compensation was made with an oblique motive and without regard to commercial consideration or expediency. Hence, amount d to directors and employees is allowable as a deduction."

Further, it is also noticed that the dispute went before the Court and MOU was filed before the Court, which is placed on record at pages 234, 225 & 204 of the paper book. It is also brought on record that Maytas Infra Ltd. is not carried on any work of this and there is no overlapping of work. Considering the above proposition, we find that the entire payment to 15 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

sub- contractor shall not be disallowed as there is evidence on record for such payment. More so, the assessee has produced payment details and it has been subjected to tax deduction. Being so, considering the totality of the facts and circumstances, we are inclined to allow the claim of the assessee. This ground is allowed."

As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to assessment year 2008-09, we respectfully follow the decision of the coordinate bench of the Tribunal and uphold the impugned order of the DRP giving relief to the assessee on this issue. Ground no.6 of the Revenue's appeal is accordingly dismissed.

23. In ground No.7. Revenue has challenged the action of the DRP in directing the Assessing Officer to accept the income as recognized by the assessee by adopting a change in the method of rcognition of income based on registration of agreements for sale or completion of possession and consequential reversal of revenue on cancellations/legal cases.

24. The assessee company followed consistently the project percentage completion method of accounting. Accordingly income was recognized on the basis of percentage of work completed, which was calculated with reference to the budgeted cost of construction of the total project. Such budgeted cost of construction was initially estimated at Rs.437.33 crores, which was subsequently revised to Rs.584.72 and Rs.816.86 crores in Assessment year 2008-09 and 2009-10 respectively. As a result of increase in the budgeted cost of construction, the percentage of work completion was reduced in assessment year 2008-09 and as well as in the year under consideration i.e. 2009-10. Consequently, there was reversal of revenue. The previous year relevant to assessment year 2009-10 also witnessed some extraordinary events creating uncertainty in 16 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

the progress of work of the project undertaken by the assessee company, as a result of which, some of the agreement holders sought cancellation of the booking of flats and bungalows. Some agreement holders also filed cases against the assessee company. Keeping in view these uncertainties, the assessee company changed its method of recognition of income and adopted registration of agreements for sale or handing over of the possession of the flats and bungalows, as the basis of recognition of income as against execution of agreements for sale adopted in the earlier years. The revenue recognised in the earlier years on the basis of execution of agreements for sale was also reversed by the assessee company in the year under consideration on the basis of cancellation of agreements for sale, as sought by some of the agreement holders. All these aspects affected the revenue of the assessee company for assessment year 2009-10 adversely and the revenue recognized by the assessee finally worked out at a negative figure of Rs.41.61 crores.

25. The method followed by the assessee company for recognising the income at a negative figure of Rs.41.61 cores was not accepted by the Assessing Officer. According to him, the design of the project remaining the same, there was no way that the budgeted cost of the same design could escalate to such an extent as claimed by the assessee within a period of one year. He held that the increase in the estimated budgeted cost, as claimed by the assessee was itself flawed and the claim of the assessee for such escalation and calculation of less percentage completion based on such escalation could not be accepted. He held that the percentage completion for assessment year 2009-10, therefore, has to be calculated based on the budgeted cost as estimated originally for reckoning the income of the assessee company.

17 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

26. As regards the change in the method adopted by the assessee company in the year under consideration to recognize the revenue only on the basis of registration of the agreements for sale or possession of the flats and bungalows as well as consequential reversal of income recognized in the earlier years on the basis of execution of agreements for sale, which were sought to be cancelled by the agreement holders, the Assessing Officer noticed that the assessee company has not paid back any amount to the customers in the wake of purported cancellation and legal cases. He also noted that the Special Auditor in their report has reported that there was no need to refund any amount in the wake of cancellation of agreements for sale sought by some customers by filing legal cases. It was also found by the Assessing Officer that the collection of amount from the customers was to the tune of 87% of the agreements for sale entered into by the assessee company. According to the Assessing Officer, there was no uncertainty with regard to the amounts already received from the customers and consequently, no reversal of income could justifiably be made on the basis of cancellation/legal cases. He, therefore, declined to accept the change in the method of recognition of income adopted by the assessee company as well as reversal of income made by it on the basis of cancellation/legal cases and computed the income of the assessee for assessment year 2009-10 on the basis of percentage of completion method at Rs.228.17 crores (as against negative income of Rs.41.61 cores), on the basis of budgeted cost of construction as estimated originally at Rs.437.33 crores.

27. The income computed by the Assessing Officer at Rs.228.17 crores as against its declared income at a negative figure of Rs.41.67 crores was challenged by the assessee by way of an objection raised before the Dispute Resolution Panel. The learned 18 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

DRP found that a similar issue involved in assessee's own case was already decided by the Tribunal in assessment year 2008-09 vide its order dated 6.6.2014 (supra), wherein the method of accounting followed by the assessee and income recognised by following the said method was accepted by the Tribunal. Accordingly, following the said order of the Tribunal in assessee's own case for assessment year 2008-09, the learned DRP directed the Assessing Officer to accept the income, as recognized by the assessee for assessment year 2009-10.

28. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the learned DRP has allowed the relief to the assessee on this issue relying on the decision of the Tribunal in assessee's own case for assessment year 2008-09, wherein the issue was considered and decided by the Tribunal vide paragraph No.47 and 48 of its order which read as under-

"47. We have heard both the parties, perused the record and gone through the orders of the authorities below. In this case, admittedly the assessee is engaged in the business of construction of residential plots and houses and the revenue from construction is recognized on the basis of percentage completion method. In the assessment year under consideration, project cost was increased and accordingly revised budget was made, which is as follows:

2006-07 - Rs. 410.33 crores 2007-08 - Rs. 437.33 crores 2008-09 - Rs. 484.72 crores

The assessee considered the revised budget to determine profit for the assessment year under consideration. According to the department, the percentage of work completed should 19 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

be computed on the basis of original estimate and not on the basis of revised estimate thereby DR pleaded that it is self- serving budget to reduce the tax liability. It is a normal feature in construction activity that cost gets escalated in view of increase in price of construction materials. The Department has not doubted the fact of increase in cost and has stated that assessee's books of account does not represent the true picture of the actual works completed by the assessee and wholly relied on the special auditor's report. The other reason given by the AO is for changing the method of computation of the profit though saleable area is not increased though the budget cost is increased. It is not necessary to increase saleable area when the cost of construction gone up due to various reasons. It is also a fact that assessee has recognized the income in accordance ith the accounting standards. We have to see surrounding circumstances to decide accrual of income of the assessee. Looking at the prevailing circumstances of market in the present case it is not possible to hold that income actually accrued to the assessee as estimated by the AO. Once the assessee recognized the income in accordance with the accounting standard and in terms of the agreements the assessee entered into, revenue authorities cannot disturb the same. AO cannot substitute the assessment to say that assessee has postponed the tax liability. There is no ic deviation in the method of accounting followed by the assessee regarding recognition of income. Being so, the AO cannot dispute the profit of the assessee by observing there is a flaw in the method followed by the assessee. Further, merely because assessee was following mercantile system of accounting, it could not be held that income had accrued to it as estimated by AO. Earning of the income, whether actual or notional, has to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides to change the budget in order to safeguard the business, it cannot be said that it has acted in a manner in which no reasonable person can act. The guidance note accrual of income on accounting issued by the ICAI lays down 20 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made. Non-recognition of income on the ground that the income had not really accrued is legally correct under the mercantile system of accounting, when the same is in accordance with AS-I notified by the Government. It is one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of t that there is a reasonable degree of certainty of its realization while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. The provisions of section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies'. In the name of compliance with section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of instant case, the assessee was justified in following the policy of not recognizing these revenues till the point of time when the uncertainty to realize the revenues vanished. As the principles laid down in recognizing the income equally applies to the facts of the assessee's present case, we are of the view that the authorities below are not justified in bringing the impugned notional income to tax.

47.1 In view of the above, in our opinion, unless and until the department has proved that agreement executed by the assessee with M/s Maytas Infra Ltd., is collusive agreement, the agreement cannot be rejected as both are different 21 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

assessees and it is to be followed in true spirit. In our opinion, the method followed by the AO is not correct. Our view is fortified by the coordinate bench of Hyderabad in case of SP Real Estate in ITA Nos. 866 & 1058/Hyd/2010 order date 13/02/2014 wherein the Bench held as follows:

"43. Considering all the above facts of the case, in our opinion, it is too early to assess business profit out of the sale of constructed area to M/s. Janapriya Engineers Syndicate. The assessee neither received substantial consideration or assets to be sold are ready for handing over the possession to the concerned parties so as to transfer the title in the property. Till such time, it cannot be said that the parties involved in are ready to perform the contract. In the t case, neither possession of the property has been given to the ultimate buyer or the assessee has received any substantial consideration. When the property is to be sold is not readily available or constructed, the assessee cannot recognise income with certainty. The agreement entered into by the assessee herein is only for sale of piece of property and sale will take place only after completion of construction and after assessee's share of property is identified. The proposed sale agreement cannot be put into action due various litigations pending with various courts. Nobody can transfer title in a property when the property is not in existence. More so, when there is litigation pending on the same property and no profit can be anticipated when the agreement itself is subject matter of litigation. It is not possible to bring the same to tax. We have to see all surrounding circumstances to decide accrual of income to the assessee. Looking at the prevailing circumstances in the present case, it is not possible to hold that income has actually accrued to the assessee. When consideration is not determinable with reasonable certainty, the assessee is justified in postponing recognition of income and it is appropriate to recognise the income only when it is reasonably certain that the ultimate realisation is possible. Being so, revenue could be recognised at the time of sale or 22 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

handing over of possession of flats to the ultimate customers. The Department cannot thrust upon the assessee so as to tax the future income.

44. In our opinion, the assessee has recognised the income in accordance with the true terms of the agreement and if there is any inconsistency in recognising the income then only revenue authorities can disturb the same. Once the assessee recognised the income in accordance with the agreements, the AO cannot substitute his assessment to say that th assessee has postponed the tax liability. There is no ic deviation in the method followed by the assessee regarding recognising of income. However, the AO was of the opinion that there is basic flaw in the method followed by the assessee to recognise the income. When there is no deviation in recognising the income by the assessee, the AO cannot recompute the profit of the assessee by observing that there is basic flaw in the method followed by the assessee.

45. In our opinion, income arising out of sale of flats to M/s. Janapriya Engineers Syndicate in which constructed pro y was sold by the assessee, profit on such transaction is to be assessable not in the year of agreement and it should be assessable proportionately in the previous years in which the constructed area was sold by the assessee or constructed flats were handed over by the assessee to the buyers. This view of ours is supported by the following decisions:

(a) R. Gopinath (HUF) vs. ACIT, 133 TTJ (Chennai) 595 wherein the Tribunal Chennai Bench held as under:

"9. We are unable to agree with the contentions of the learned Departmental Representative that the transaction of transfer is complete by applying the provisions of s. 53A of Transfer of Property Act on the date when the possession of the property was handed over to the developer as per the development agreement dt. 1st Sept., 2003. Sec. 53A of the Transfer of Property Act does not provide the conditions for transfer but it provides protection to the transferee any 23 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

immovable property by a written contract, the terms of which constitute the transfer and can be ascertained with reasonable certainty and the transferee as part performance of the contract has taken the possession of the property and has performed or willing to perform his part of contract, then even the said contract though required to be registered has not been registered and the transfer has not been completed in the manner prescribed therefore by law, the transferor is barred from enforcing against the transferee any right in respect of the property other than the right expressly provided by the terms of the contract. Under the IT Act, 1961 by inserting cls. (v) and (vi) of s. 2(47), the definition of the term transfer includes the transaction which fulfils the conditions provided under s. 53A of Transfer of Property Act. Therefore, s. 53A of the IT Act, 1961 (sic-Transfer of Property Act) is borrowed only with respect to the transfer of capital asset as provided under s. 2(47) of the IT Act, 1961 and the same is not applicable in other cases which do not fal under s. 2(47) of the IT Act, 1961. Sec. 45(1) of the IT Act, 1961 deals with the profit and gain arising from the transfer of capital asset, whereas s. 45(2) deals with the profit gain arising from the transfer by way of conversion of capital asset into stock-in-trade and shall be chargeable to income- tax in the previous year in which such stock-in- trade is sold or otherwise transferred. Therefore, the time of chargeability to income-tax of capital gain arising from the conversion of capital asset to stock-in-trade is the point when the stock-in-

trade is sold or otherwise transferred, whereas the chargeability of capital gain under s. 45 of the IT Act, 1961 from transfer of capital asset shall be in the previous year in which the transfer took place including the transfer as provided under s. 2(47) of the IT Act, 1961. The sale/transfer of stock-in-trade cannot be equated with the transfer of capital asset. The decisions relied upon by the learne Departmental Representative as well as the lower authorities are with respect to the transfer of capital asset under s. 2(47) of the IT Act, 1961 and not in respect of stock-in-trade. Therefore, these decisions are not relevant and applicable in 24 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

the facts of the present case. As far as s. 53A of the Transfer of Property Act is concerned, the said section provides only a protection to the transferee on fulfilment of certain conditions provided therein but does not provide that even on fulfilment of that condition the transfer is complete. As per provision of s. 53A of the Transfer of Property Act when a right is created in favour of the transferee which cannot be defeated, otherwise then by the terms and conditions expressly provided in the contract itself.

10. From the development agreement dt. 1st Sept., 2003 as well as the supplementary agreement dt. 23rd Dec., 2003, the assessee handed over the possession of the propert for construction of residential apartments by the developer. The assessee did not receive any consideration for handing over the possession of the property to the developer but as per the agreement the assessee got the right to get the built-up area of 25,130 sq. ft. and proportionate car park as per Schs. E and E1 of the agreement and the rest of the constructe area was to be sold out for recovery of the cost and margin of the developer. From the development agreement, the possession was handed over for carrying out the construction work by the developer and there is no other document except th development agreement which transfers the title of the property to the developer. In the absence of the transfer of the title of the property and any consideration at the time of development agreement, the handing over of the possession was merely a temporary measure for carrying out the construction work by the developer and the exclusive possession of the property in legal sense remains with the assessee which was finally handed over at the time of execution of the sale deed of the constructed flats by the assessee. One cannot presume any intention in executing the documents between the parties other than what was stated or can be inferred reasonably from the documents itself. A regard must be given to the words used in the documents. The nature of the transaction between the parties by way of development agreement cannot be said to be a sale of 25 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

immovable property which is stock-in- trade or otherwise transfer as provided in the Transfer of Property Act. We agree with the contentions of the learned Authorized Representative of the assessee that the meaning of the words, "otherwise transferred", in s. 45(2), should be according to its ordinary popular and natural sense, and it should not include a transaction referred to under sub-cl. (v) of sub-s. (47) of s. 2 of the IT Act, 1961 in relation to a 'capital asset'. no stretch of imagination, the said transaction can be termed as transfer more or less as sale. When the legal title and possession of the property were with the assessee, then the transfer of the said is not possible merely by allowing the developer to carry out the construction work.

13. Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of immovable property as held by the Hon'ble apex Court in the case of Alapati Venkataramiah vs. CIT (supra). Until and unless the title of the property is passed on to the purchaser, there cannot be a sale or transfer of immovable property, since in the present case the question is whether the handing over of the possession under the development agreement of the property which is stock-in-trade of the assessee can be treated as a transfer by applying the definition of transfer in s. 2(47) of the IT Act, 1961. As we have already stated earlier that in the case of stock-in-trade, the definition of transfer under s. 2(47) of the IT Act, 1961 is not applicable, therefore, the contextual or the ordinary meaning of the word transfer is applicable in the present case.

15. In the present case, the business profit arises to the assessee on the sale of the stock-in-trade only when the constructed apartments were sold and not at the time when the development agreement was entered into. Moreover, the development agreement, the assessee has not agreed for sale of the entire constructed property on the land, the assessee has agreed only for a portion of the constructed property for sale for the purpose of recovery of the cost of 26 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

construction and margin of the developer. The assessee has executed all the sale deeds for transfer of the constructed apartments in favour of the end-user/purchaser, therefore the transfer of the proportionate land took place only when the assessee transferred the construction property by way sale deeds and offered the business income which was accepted by the Department. In any case, when the assessee has retained the portion of the land being proportionate to the constructed area to be retained by the assessee, then there is no question of transfer of the entire land to the developer. In view of the above discussion, we hold that the orders of the lower authorities, qua this issue are not sustainable the facts as well as on law. We set aside the orders of the lower authorities, qua this issue and direct the AO to tax the capital gain arising from the conversion of the land and building into stock-in-trade proportionately into the previous years in which the constructed property was sold by the assessee or retained for self-use and corresponding business income was offered."

(b) B.L. Subbaraya vs. DCIT, 9 SOT 297 (Bang) wherein the Bangalore Bench of the Tribunal held as under:

"8. The fact which is undisputed is that the entire settlement is still a subject-matter of dispute being sub judice and there is no finality attained even during the year under consideration. This is clear from the following facts. Subsequent to the deed of settlement between the assessee and Smt. Sundari Ramachandran on 9th Aug., 1997, the disputes arose on its implementation. The assessee filed a company petition against M/s Electronics & Controls Power Systems (P) Ltd., under s. 433 of the Companies Act, 1956, seeking winding up for its failure to pay the dues to e assessee. Incidentally, subsequent to the deed of settlement dt. 9th Aug., 1997, the business of the partnership firm M/s Electronics & Controls was taken over by a private limited company, M/s Electronics & Electronics Power Systems (P) Ltd. The said winding up petition came to be dismissed by the 27 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

Hon'ble High Court of Karnataka on 2nd March, 2000 on e plea that there was no sum due from the company inasmuch as the settlement was between the assessee and the individual, Smt. Sundari Ramachandran. Subsequently, the assessee instituted a suit for recovery of the amount terms of the settlement before the Civil Court at Bangalore O.S. No. 5898/2000, a copy of which is placed in the paper book filed before us. We also find from the paper book that the defendant, Smt. Sundari Ramachandran, has denied the existence and execution of the said settlement agreement dt. 9th Aug., 1997 as been concocted/ fabricated. Therefore, undisputedly the entire settlement agreement dt. 9th Aug., 1997 is in jeopardy. Of course, the assessee has withdrawn a sum of Rs. 23 lakhs from the firm, M/s Electronics Controls. Therefore, having regard to the binding nature of judgment of the Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra), to the proposition that where an amount was in dispute, it could not be t d as income, we do not find any infirmity in the conclusion of the CIT(A) that a sum of Rs. 77,00,000 cannot be brought to tax during the year under consideration as the matter had not attained finality. However, the CIT(A) went wrong in not applying the same principle to the amount of Rs. 23 lakhs received by the assessee. Even this amount of Rs. 23 lakhs is disputed and the right of the assessee in the said amount is inchoate and therefore, the same also cannot be brought to tax during the year under consideration."

(c) Bhavesh Estates (India) (P) Ltd. vs. ITO, 1 DTR (Mum) (Trib) 366 wherein the Mumbai 'SMC' Bench held as under:

"2.3 After going through the rival submissions and also after perusing the material available on record, I am not inclined to concur with the finding of the CIT(A), because the assessee had entered into the development agreement with M/s Arora Builders (Sukhmani Construction). The FSI on the said lot was revised, but the project could not be completed. Therefore, at the cost of this hardship no interest was paid by 28 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

the owner to the assessee company on its deposit at the rate of 12 per cent per annum of the same amount. It is undisputed fact that the assessee had paid the amount Rs. 99.90 lakhs as on 31st March., 2003, but no interest was paid to the assessee because the project was legally not feasible and due to legal restriction the whole amount invested might not have been realized in the said project. Accordingly, the owner did not make any payment to the assessee. Under facts and circumstances, the assessee cannot be subjected to be taxed on notional income. There is nothing on record, to suggest that any such interest income was materialized. The assessee has pointed out that because of non-availability of FSI on the said plot of land for which the assessee had entered into development agreement with M/s Arora Builders (Sukhmani Construction), the assessee company could not develop the said property in view of the statutory restrictions and, therefore, the whole project has become unviable to continue. Hence, no interest had accrued to the assessee in the year under consideration. Accordingly, the addition of Rs. 4,99,260 is directed to be deleted."

(d) M/s. Neon Solutions Pvt. Ltd. vs. ITO in ITA Nos. 5032/Mum/2011 and 6222/Mum/2012 order dated 30.04.2013, the Mumbai 'B' Bench of the Tribunal held as under:

"5. We have heard both the parties and perused the material on record. As regards the findings of the AO and the Ld.CIT(A) that various resolutions have been back dated and the same cannot be relied, in our view is based on presumptions and assumptions of the lower authorities the perusal of the records and the subsequent events leading to the amalgamation establishes that the debenture issuing company has been under serious financial crisis and the impugned resolutions passed to the effect of waiver of interest are reliable. Regarding the requirement of the resolution to be registered u/s 106 r.w.s. 192 of the Companies Act as observed by the Ld.CIT(A), it is pertinent to 29 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

mention that the said provisions are not applicable as the resolutions passed by the debenture issuing company do not fall under the resolutions prescribed by the provisions of section 192(4) of the Companies Act. Also in similar set of facts, the ITAT in the case of Riya Holdings Ltd in ITA Nos. 1119 to 1124/Mum/2011, where the present Account Member is also one of the parties to the said order, has directed the AO delete a similar amount of interest brought to tax. The relevant principles summarized by the ITAT in the said cases on the basis several judgments of the High Courts and Supreme Court is extracted hereunder:

A) that merely because assessee was following mercantile system of accounting, it could not be held that income had accrued to it.

B) earning of the income, whether actual or notional, to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides not to charge interest in order to safeguard the principal amount and ensure its recovery, it cannot be said that he has acted in a manner in which no reasonable person can act.

C) The guidance note on accrual of income on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made.

D) Non-recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of accounting, when the same is in accordance with AS-I notified by the Government E) It is one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the 30 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

point of time that there is a reasonable degree of certainty of its realization while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred.

F) The provisions of section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that 'Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies'. In the name of compliance with section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of instant case, th assessee was justified in following the policy of not recognizing these interest revenues till the point of time when the uncertainty to realize the revenues vanished. "

As the principles laid down in recognizing the income equally applies to the facts of the assessee's present case, we are of the view that the authorities below are not justified in bringing the impugned notional interest to tax. Accordingly, we delete the impugned additions. Thus, Ground no 1 is allowed."

46. In view of the above discussion, we are inclined to hold that the CIT(A) is justified in deleting the addition by the AO as there is no income accrued to the assessee on the basis of agreement entered by the assessee with M/s. Janapriya Engineers Syndicate. We do not find any infirmity in the order of the CIT(A) and the same is confirmed. Grounds taken by the Revenue are rejected and the appeal is dismissed.

48. Since the issue under consideration is identical to that of the said case, following the decision of the Tribunal in the said case, it is to be held that real income to be taxed an not 31 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

notional income and accordingly, we delete the addition made. This ground is allowed."

29. At the time of hearing before us, the Learned Departmental Representative has submitted that the issue relating to the recognition of income of the assessee and quantification of such income as involved in the year under consideration, i.e. assessment year 2009-10 has two aspects; (1) relating to the budgeted cost that has to be adopted for working out the percentage of completion of project; and (2) relating to the change in the method of recognition of income adopted by the assessee in the year under consideration as well as the consequential reversal of revenue on the basis of cancellation/legal cases. He has contended that although the first aspect relating to the budgeted cost of the project was involved in the assessee's own case for assessment year 2008-09, the second aspect relating to the change in the method of recognition of revenue was not involved in assessment year 2008-09 and the Tribunal therefore, had no occasion to give any finding thereon. The Learned Departmental Representative has contended that this issue has arisen for the first time in year under consideration, i.e. assessment year 2009-10, although the learned counsel for the assessee has not disputed this position, he has contended that the ratio of the decision of the Tribunal rendered for assessment year 2008-09 on the first aspect is equally applicable to the second aspect, as both the methods followed by the assessee company are based on prudential norm of recognition of revenue and the same are duly supported by the Accounting Standards issued by the Institute of Chartered Accountants of India(ICAI). The learned Departmental Representative, however, has not agreed with this contention of tedhe learned counsel for the assessee and proceed to make 32 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

submissions to support the view as taken by the Assessing Officer initially in the draft assessment order while rejecting the change adopted by the assessee company to recognise the income for assessment year 2009-10.

30. The Learned Departmental Representative has submitted that the assessee company having entered into agreements for sale with the concerned buyers of the flats and bungalows in the project and having received substantial amounts from them, there was no uncertainty of revenue generation and the method followed by the assessee company upto assessment year 2008-09 to recognise the income on the basis of execution of agreements for sale was perfectly in order. He has submitted that there was no justifiable reason to change this method consistently followed by the assessee company upto assessment year 2008-09, merely because of the cancellation of agreements for sale as sought by the agreement holders in some cases during the year under consideration. He has contended that such unilateral cancellation cannot create any uncertainty in the recognition of income of the assessee company, unless and until the assessee company also agrees for such cancellation. He has contended that there was however, no such mutual agreement for cancellation of agreements for sale and since the assessee company had not agreed for such cancellation nor refunded any amount, received under the agreement for sale already executed, there was no justification on the part of the assessee to change the method of recognition of income and consequently to reverse the income already recognised in the earlier years on the basis of cancellation of agreement for sale sought by some of the agreement holders.

33 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

31. The learned counsel for the assessee, on the other hand, has submitted that the extraordinary events witnessed during the month of January, 2009 in the entire Satyam group as a whole resulted in uncertainty in the execution of project undertaken by the assessee as a result of which some of the agreement holders sought cancellation of the units booked by them, by filing applications as well as by lodging cases in the court of law. He has submitted that the advances paid by them under the agreements for sale were also demanded back, and subsequently, their stand was not only upheld by the National Consumer Dispute Redressal Commission, Delhi, but also finally by the Hon'ble Supreme Court. He has submitted that the amounts paid by them thus have become refundable and the assessee company has already started issuing such refunds. He has contended that all these events are sufficient to show that there was an uncertainty created with regard to receipt of income, as a result of cancellation of agreement for sale as sought by some of the agreement holders and as per the Accounting Standard 9, the assessee company was fully justified in changing the method of recognition of revenue as well as reversing the revenue recognized earlier on the basis of execution of agreement for sale, which were sought to be cancelled by some of the agreement holders during the year under consideration. He has contended that such reversal of income in any case cannot be construed as a loss to the assessee company, as there is bound to be a corresponding increase in the closing work in progress, since when the sale is cancelled, the cost of such sale is taken to the work in progress.

32. After considering the rival submissions and perusing the relevant material on records, we find that in so far as the first aspect of the issue involved in ground no.7 is concerned, relating to 34 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

the estimation of budgeted cost for the purpose of determining percentage of completion of project, the same is squarely covered by the decision of the Tribunal in assessee's own case for assessment year 2008-09, wherein it was held that the percentage of completion is required to be worked out on the basis of budgeted cost of construction, as revised from time to time, depending on the facts of the case. Respectfully following the said decision of the Tribunal in assessee's own case for assessment year 2008-09, relevant portion of which is extracted hereinabove, we uphold the impugned order of the DRP on this aspect of the matter.

33. As regards the second aspect of the issue relating to the change in the method of recognition of income adopted by the assessee company, we agree with the Learned Departmental Representative that the same was not involved in the case of the assessee for assessment year 2008-09 since the change in the method of recognition of income was adopted by the assessee only in the year under consideration, i.e. assessment year 2009-10. At the same time, we also find merit in the contention of the learned counsel for the assessee that the ratio of the decision of the Tribunal rendered while deciding the first aspect of the matter is applicable even in relation to the second aspect, as both these aspects involve the claim of the assessee based on prudential norms of revenue recognition, which is duly supported by the Accounting Standards issued by the ICAI. The relevant observations of the Tribunal in this context as recorded in paragraph 47 of its order dated 6.6.2014 (supra) are reproduced below-

"47. ......It is also a fact that assessee has recognized the income in accordance with the accounting standards. We have to see surrounding circumstances to decide 35 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

accrual of income of the assessee. Looking at the prevailing circumstances of market in the present case it is not possible to hold that income actually accrued to the assessee as estimated by the AO. Once the assessee recognized the income in accordance with the accounting standard and in terms of the agreements the assessee entered into, revenue authorities cannot disturb the same. AO cannot substitute the assessment to say that assessee has postponed the tax liability. There is no basic deviation in the method of accounting followed by the assessee regarding recognition of income. Being so, the AO cannot dispute the profit of the assessee by observing there is a flaw in the method followed by the assessee. Further, merely because assessee was following mercantile system of accounting, it could not be held that income had accrued to it as estimated by AO. Earning of the income, whether actual or notional, has to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides to change the budget in order to safeguard the business, it cannot be said that it has acted in a manner in which no reasonable person can act.

The guidance note on accrual of income on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made. Non- recognition of income on the ground that the income had not really accrued is legally correct under the mercantile system of accounting, when the same is in accordance with AS-I notified by the Government. It is one of the fundamental principles of accounting that, as a measur of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. The provisions of section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies'.

In the name of compliance with 36 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of instant case, the assessee was justified in following the policy of not recognizing these revenues till the point of time when the uncertainty to realize the revenues vanished. As the principles laid down in recognizing the income equally applies to the facts of the assessee's present case, we are of the view that the authorities below are not justified in bringing the impugned notional income to tax."

34. A perusal of the relevant portion of the Tribunal's order in assessee's own case for assessment year 2008-09 clearly shows that while deciding the first aspect of the mater in favour of the assessee, reliance was heavily placed by the Tribunal on the relevant Accounting Standard which provided for prudential norms of revenue recognition. The Tribunal also took note of the uncertainty involved in revenue recognition and held that in terms of the Guidance Note issued by the ICAI, it was appropriate to recognise the Revenue in such cases only when it became reasonably certain that ultimate collection would be made. The Tribunal also held that non-recognition of income on the ground that the income has not really accrued is legally correct under the mercantile system of accounting, when the same is in accordance with the relevant accounting standard. The Tribunal also took note of the fundamental accounting principle that, as a measure of prudence and following the principle of conservation, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realisation.

35. In so far as the second aspect of the matter is concerned, it is observed that the claim of the assessee for change in the method of recognizing the revenue on the basis of 37 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

registration of agreements for sale or handing over possession of the units to the agreement holders is also based on prudential norms of revenue recognition and the same is supported by Accounting Standard 9, which clearly states that the key criterion for determining when to recognize the revenue from a transaction involving sale is that the seller has transferred the property in the goods to the buyer for a consideration. It is clarified that the transfer of property in goods results in or connotes the transfer of significant risks and rewards of ownership to the buyers. Further, there may be situations, where transfer of property in fact does not coincide with the transfer of significant risks and rewards of ownership. Cases may arise where delivery has been delayed due to the fault of the seller and the goods are at the risk of the parties at default.

36. As per AS-9, recognition of revenue requires that revenue is measurable and that at the time of sale, it would not be unreasonable to expect ultimate collection. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, Revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. When the uncertainty relating to collectabilty arises subsequent to the time of sale, it is more appropriate to make a separate provision to reflect the uncertainty. It is also provided that when recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.

37. In the present case, as a result of extra-ordinary events witnessed by the Satyam group of companies to which the assessee 38 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

company belonged in the month of January, 2009, there was uncertainty with regard to the completion of project by the assessee company and delivery of units booked. Keeping in view this uncertainty, some of the agreement holders tendered applications for cancellation of the units booked and demanded refund of the advances paid. Some of the agreement holders also filed cases against the assessee company for cancellation the agreements and refund of the amounts paid by them. The ultimate collection from these agreement holders thus became uncertain and the assessee company, in our opinion, rightly decided to postpone the revenue recognition to the extent of such uncertainty, by adopting the new method of recognition of income on the basis of registration of agreements for sale or handing over of possession of the units, as the same enabled it to assess the ultimate collection with reasonable certainty. As a matter of fact, the claim made by some of the agreement holders for cancellation of agreements for sale already executed and for refund of the advances already paid created uncertainty relating to collectability which arose even after the execution of the agreements for sale, and this uncertainty was also provided for by the assessee by reversing the income already recognized on the basis of execution of the agreements for sale. The change in the method of recognition of income, as adopted by the assessee company in the year under consideration as well as the consequent reversal of income on the basis of cancellation/legal cases thus was in terms of the relevant Accounting Standard laying down prudential norms of revenue recognition, and as held by the coordinate bench of the Tribunal in assessee's own case for assessment year 2008-09, the same was legally correct under the mercantile system of accounting followed by the assessee company. It is pertinent to note here that the AP State Consumer Dispute Redressal Commission, Hyderabad (vide its 39 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

order at pages 38 to 55 of the paper book) as well as National Consumer Disputes Redressal Commission, New Delhi (vide order at pages 56 to 87 of the assessee's paper-book) subsequently allowed the claim of the agreement holders seeking cancellation of the agreements for sale and also directed the assessee company to refund the amounts paid by them along with interest, and even the SLP filed by the assessee against the order of the National Consumer Dispute Redressal Commission was dismissed by the Hon'ble Supreme Court. These subsequent events clearly show that there was an uncertainty in assessing the ultimate collection and revenue recognition was rightly postponed by the assessee company to the extent of such uncertainty involved by changing the method of recognition of income as well as providing for reversal of revenue already recognised earlier on the basis of cancellations/legal cases.

38. As such, considering all the facts of the case, we are of the view that the learned DRP was fully justified in directing the Assessing Officer to accept the change in the method of revenue recognition adopted by the assessee and consequential reversal of revenue on the basis of the cancellations/legal cases, and upholding its order giving relief to the assessee on this issue, we dismiss ground No.7 of the Revenue's appeal.

39. During the course of appellate proceedings before the Tribunal, the Revenue has raised three additional grounds and also filed an application seeking admission thereof. Since all the issues raised in those additional grounds are arising from the impugned order of the DRP and the learned counsel for the assessee has also not raised any objection for the admission thereof, the additional grounds raised by the Revenue have been 40 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

admitted by us. We now proceed to adjudicate upon the issues raised by the Revenue in the additional grounds.

40. As regards the issue involved in additional ground No.1 of the Revenue, relating to disallowance of various expenses amounting to Rs.5,72,62,133 proposed to be made by the Assessing Officer on the ground that the bills produced by the assessee company in support of the said expenses were not in its name, but were in the name of other group companies, it is observed that a similar issue as involved in ground No.2 originally raised in the appeal of the Revenue has already decided by us in the foregoing portion of this order by following the decision of the coordinate bench in assessee's own case for assessment year 2008-

9. Following the said decision, we uphold the impugned order of the DRP directing the Assessing Officer to verify the relevant expenses and if it is found on such verification that the payments are made by the assessee company by cheque and the same expenses are not claimed by the other group companies, in whose names the relevant bills are issued, the same may be allowed as deduction in the case of the assessee. Additional Ground No.1 of the Revenue's appeal is accordingly dismissed.

41. As regards the issue involved in additional ground No2. relating to the disallowance of Rs.59,84,34,562 proposed to be made by the Assessing Officer under S.40(a)(ia) for the alleged default on the part of the assessee to deduct tax at the rate of 1% for the payments made to Maytas Infra P. Ltd., instead of 2%, it is observed that this issue is squarely covered by the decision of the Hon'ble Calcutta High Court in the case of CIT V/s. S.K.Tekriwal (ITA No.183 of l2012 dated 10.12.2012) wherein it was held that the provisions of S.40(a)(ia) are applicable for non-deduction of tax 41 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

and not for short deduction of tax, and no disallowance under the said provision could be made in a case where there is only a short deduction of tax at source. Respectfully following the said decision of the Hon'ble Calcutta High Court in the case of S.K.Tekriwal (supra), we uphold the impugned order of the learned DRP directing the Assessing Officer not to make disallowance on this issue under S.40(a)(ia). Additional ground No.2 of the Revenue's appeal is accordingly dismissed.

42. As regards the issue involved in additional ground No3 of the Revenue's appeal relating to disallowance of Rs.6,17,27,356 proposed to be made by the Assessing Officer under S.40(a)(ia) for the failure of the assessee to deduct tax at source from the payment of interest made to MIL ICD, as required under S.194C of the Act, it is observed that a similar issue was involved in assessee's own case for assessment year 2008-09 and the Tribunal vide its order dated 6.6.2014 (supra), restored this matter to the file of the Assessing Officer with a direction to verify as to whether corresponding interest was duly offered to tax by MIL in its return of income and tax thereon was also duly paid. The Assessing Officer was directed by the Tribunal that if it is found on such verification that tax has already been paid by the payee, on the interest income, the disallowance under S.40(a)(ia) need not be made. As the learned DRP vide its impugned order has remitted this matter involved in assessment year 2009-10 to the file of the Assessing Officer for deciding the same as per the same directions as given by the Tribunal in assessee's own case for assessment year 2008-09, we find no justifiable reason to interfere with the order of the DRP on this issue. We accordingly dismiss the additional ground No.3 raised in the appeal of the Revenue.

42 ITA No.1644/Hyd/2014 M/s. Hill County Properties Ltd.

(Formerly known as M/s. Maytas Properties Ltd.), Hyderabad

43. In the result, Revenue's appeal is dismissed.

Pronounced in the court on 22.5.2015

Sd/- Sd/-

(Saktijit Dey) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 22nd May, 2015

Copy forwarded to:

1. M/s. Hill County Properties Ltd. (Formerly known as M/s.

Maytas Properties Ltd.), Bachupally, Hyderabad 500 072

2. Addl. Commissioner of Income-tax, Central Range 3, Hyderabad

3. Dispute Resolution Panel, Hyderabad

4. Director General of Income-tax, International Taxation, Hyderabad 500 004.

5. Departmental Representative, ITAT, Hyderabad. B.V.S