K. Sahni Bros. Pvt. Ltd., New Delhi vs Department Of Income Tax

ITA No. 782/Del/2011 Assessment Year: 2007-08 Income-tax Officer, vs. K. Sahni Bros. Pvt. Ltd., Ward 5(1), 656 Gandhi Cloth Market, New Delhi. Chandni Chowk, New Delhi. (PAN: AAACK0291L) (Appellant) (Respondent)

Revenue by: Shri P. Damkaunjma, Sr. DR Assessee by: S/Sh. Salil Aggarwal & Shailesh Gupta, CA

Date of hearing : 29.01.2015 Date of pronouncement: 31:03.2015

ORDER

PER I.C. SUDHIR: JUDICIAL MEMBER This appeal by the Revenue is directed against the order of learned

CIT(Appeals) VIII, New Delhi dated 9.02.10 for the assessment year 2007-

08.

2. The Grounds of appeal raised in this appeal are as under:-

"1. The order of the Learned CIT(Appeals) is erroneous & contrary to facts & law.

2. On the facts and in the circumstances of the case and in law, the Learned CIT(Appeals) has erred in deleting the addition of Rs.7,10,94,646 made by the A.O. by applying percentage of completion method.

2 2.1 The Learned CIT(Appeals) ignored the finding recorded by the A.O. and the fact following AS-7(Accounting Standard) is mandatory in the case of the assessee.

3. On the facts and in the circumstances of the case and in law, the Learned CIT(Appeals) has erred in deleting the addition of Rs.1,46,25,071 made by the A.O. being the unaccounted sales proceeds received in cash.

3.1 The Learned CIT(Appeals) ignored the findings recorded by A.O. and also the fact that the provisions of Sec.50C are neither applicable in the case of assessee nor has been invoked by the A.O.

4. The appellant craves leaves to add, to alter or amend any grounds of the appeal raised above at the time of the hearing".

3. The facts as evident from the record are that the assessee company is

engaged in the business of real estate Developer / Builder, trading in cloth

items and also running a multiplex by the name of M4U at Ghaziabad. The

assessee is owner of a commercial plot at Ghaziabad having acquired the

same from Ghaziabad Development Authority in 1981 and the construction

of office-cum-residential flats and multiplex cinema has been done by the

assessee on this plot from 1987 onwards and the office / residential flats are

sold as and when the same is ready and the construction is still under

progress. The assessee is occupying a part of this complex for running its

multiplex business and the other parts of this complex have been constructed 3

and sold by the assessee to various parties and revenue is recognised by the

assessee only in the year when possession is handed over and the sale deed

of the flat sold is registered. The balance amount spent on construction is

shown as stock in trade of the assessee. The assessee has been following the

same method of accounting of income consistently and the same has been

accepted in all the preceeding and succeeding years. During the instant year

the assessee has recognised revenue on account of sales of real estate at

Rs.1,26,44,200/- against total area sold of 7987.11 sq. ft. The Assessing

Officer however, was not satisfied with the actual sale rate declared by the

assessee in the registered sale deeds and found that the value adopted by the

stamp valuation authority was higher and accordingly he made a reference to

the Departmental Valuation Officer during the course of assessment

proceedings. The report of the D.V.O. was not received till the conclusion

of assessment proceedings and accordingly the Assessing Officer adopted

the circle rate fixed for stamp duty purposes and adopted the same as the

actual sale price of the entire area sold and on this account made an addition

of Rs.1,46,25,071/- as undisclosed sales received by the assessee in cash

outside the books of accounts. The A.O. was further of the view that the

method of accounting of income adopted by the assessee namely to account

for sales in the year when possession was handed over and registered sale 4

deed was executed, was not the correct method and that the assessee ought

to have adopted the percentage completion method and according to the

percentage of completion method the A.O. computed the income of the

assessee by applying the circle rate for stamp duty purpose on the area which

was not sold during the year but only advances were received and he

computed such income at Rs.7,10,94,646/- and made addition thereof to the

income of the assessee. Before the CIT(Appeals) it was contended by the

assessee that there was no valid basis for the Assessing Officer to adopt the

circle rate as fixed by stamp valuation authority as the sale price of the

assessee as it was not a case of computation of capital gains but only

business income . It was further contended that there was no material on

record on the basis of which it could be said that the assessee had received

any sales proceeds / consideration over and above the amount declared in the

registered sale deeds and also confirmed by the purchasers before the

Assessing Officer. As regards the percentage completion method, it was

contended by the assessee that the same was not notified by the Central

Govt. u/s 145(2) of the Act, and therefore there was no valid basis to say that

the same was mandatory on the assessee for computation of its income. It

was further contended that the method of accounting of income followed by

the assessee in the instant year was consistently followed by the assessee in 5

all the earlier years as well as succeeding years and the same method stood

duly accepted in all the preceeding and succeeding years and therefore also

there was no valid basis to change the method only during the instant year.

The assessee further contended before the CIT (Appeals) that the Assessing

Officer ought to have accepted the method of accounting of income

consistently followed by the assessee and accepted by the Department u/s

143(3) of the Act. The learned CIT(Appeals) vide his order dated 9.12.10

has accepted the contentions of the assessee and has deleted both the

additions of Rs.1,46,25,071/- as well as Rs.7,10,94,646/- by holding that

neither the A.O. was justified in adopting the sales consideration on the basis

of circle rate prescribed for charging of stamp duty nor was he justified in

considering the taxability of transactions relating to office / residential flats

against which only advances had been received during the year and actual

sale had not been made.

4. Against the above order of the CIT (Appeals) the Revenue is in appeal

before us.

5. In support of the ground, the Learned CIT(DR) has basically placed

reliance on the assessment order, discussed above. He contended before us

that the learned CIT (Appeals) has erred in deleting the addition of

Rs.1,46,25,071/- on the ground that the provisions of section 50C of the Act 6

are not applicable in the case of the assessee who is in the business of

building and selling of property. It was the contention of the learned D.R.

that the Assessing Officer has rightly made the addition of Rs.1,46,25,071/-

as it was not imaginary but based on the relevant circle rate for stamp duty

purposes fixed by the Government and that the sale rates declared by the

assessee in the registered sale deed were found to be on a much lower side

even though stamp duty was paid according to the circle rate. According to

the Learned CIT(DR), the A.O. was thus justified in taking the circle rate

fixed for stamp duty purpose as the actual sales price of the entire area sold

and in treating the same as undisclosed income of the assessee received in

cash outside the books of accounts. The learned CIT(DR) further reiterated

the finding of the A.O. to contend that the addition of Rs.7,10,94,646/- was

also correctly made by the A.O. as percentage of completion method was

required to be mandatorily followed by the assessee and that since

substantial amounts were received as advances, therefore the assessee ought

to have applied the percentage of completion method and accordingly the

addition made of Rs.7,10,94,646/- ought to be upheld.

6. The learned A.R. appearing on behalf of the assessee contended

before us that there was no valid basis for the Revenue to contend that AS-7

issued by ICAI was required to be mandatorily followed by the assessee for 7

computing its taxable income. It was argued by him that neither the assessee

was a construction contractor on whom AS-7 is applicable nor such method

viz. percentage of completion method is notified under the provisions of

sections 145(2) of the Income Tax Act and therefore there was no

requirement on the assessee to follow the percentage of completion method

as against the method of accounting of income consistently followed by the

assessee in all the earlier years as well as succeeding years, namely to

account for the sales in the year when possession was handed over and

registered sale deed was executed in favour of the buyer. The learned A.R.

further contended that such method of accounting stood duly accepted in the

case of the assessee in all the earlier years and succeeding years when

assessments were framed u/s 143(3) of the Act. The learned A.R. filed the

copies of the assessment orders passed u/s 143(3) for assessment year 1998-

99, assessment year 2009-10, assessment year 2010-11 as well as assessment

year 2011-12 when same method of accounting followed by the assessee

was duly accepted by the Revenue. It was contended by him that the learned

CIT (Appeals) had correctly deleted the addition made by the Assessing

Officer by arbitrarily applying the percentage of completion method as

against the method of accounting consistently applied by the assessee. The

learned A.R. further relied on the judgement of the Hon'ble jurisdictional 8

Delhi High Court in the case of CIT vs. Manish Buildwell Private Ltd. in

ITA No. 928/2911 dated 15.11.2011 to contend that there was no

justification on the part of the A.O. to adopt the percentage completion

method for one year (the year under appeal) on selective basis when the

method of accounting of income on the basis of handing over of possession

and registered sale deed stood accepted in the case of the assessee in all the

earlier and succeeding years. He further relied on the order of Delhi ITAT

in the case of Malibu Estates Private Ltd. (ITA No. 4085/Del/2009) as also

the judgement of Hon'ble Delhi High Court in the case of Siddhartha Trade

Links Private Ltd. reported in 206 Taxman 92 in support of his contention.

The learned A.R. further argued that there was no material on record to

prove that the assessee had received any sales consideration over and above

the amount declared by the assessee in the registered sale deeds and that the

learned CIT(Appeals) was fully justified in deleting the addition made by the

Assessing Officer to the sales proceeds without discharging the onus that lay

upon him to prove that any amount over and above the declared amount was

actually received by the assessee in cash as sales proceeds. He further

argued that in the instant case the provisions of section 50C also were not

applicable as the assessee was engaged in the business of building and

selling of properties and had not earned any income from capital gains. The 9

Learned AR also relied on the judgment of Hon'ble Delhi High Court in the

case of CIT vs. Discovery Holdings Pvt. Ltd. 356 ITR 159 (Del.) in support

of his contention that sale price of a property by a dealer thereof cannot be

enhanced only on suspicion and also that the provisions of sec. 50C of the

Act were not applicable in the case of a builder. The learned A.R. thus

prayed that the order of the learned CIT (Appeals) should be upheld.

7. We have considered the submissions and perused the records. We

find that the learned CIT(Appeals) has given a finding that the value adopted

for the purpose of charging the stamp duty cannot be taken into

consideration for assessing the business income in relation to the area sold

by the assessee and therefore the A.O. was not justified in adopting the circle

rate for the purpose of estimating the income. Even before us, the Revenue

has not been able to bring any such material on record on the basis of which

it could be said that the assessee has actually received any amount of sales

proceeds over and above the amount declared by it in the registered sale

deeds and its books of accounts and therefore we do not find any infirmity in

the order of the learned CIT(Appeals) in deleting the addition of

Rs.1,46,25,071/-. This view of ours is also in conformity with the judgment

of Hon'ble Delhi High Court relied upon by the Learned AR in the case of 10 CIT vs. Discovery Holdings Pvt. Ltd. in 356 ITR 159 (Del.). The order of

the CIT(Appeals) on this issue is upheld and the Revenue's appeal on this

ground is dismissed.

8. After considering the arguments of both the sides and the facts of the

case in relation to the addition of Rs.7,10,94,646/-, we do not find any

infirmity in the order of the learned CIT(Appeals). The fact that the assessee

has consistently followed the same method of accounting of income in all

the earlier years as well as the succeeding years, has not been disputed by

the Revenue. Thus the facts remains that the assessee has always been

accounting for the sale proceeds of the portions sold by it as income in the

year when the possession is given and the registered sale deeds are executed.

This method of accounting of income stands accepted in the hands of the

assessee u/s 143(3) in the earlier as well as succeeding years. On these facts

the A.O. is not justified in adopting the percentage completion method for

one year (the year under appeal) only on selective basis. Infact this will

distort computation of the true profits and gains of the business. Further

same income will be assessed again in the hands of the assessee in the year

when sales have been declared in the subsequent years and assessments have

been framed u/s 143(3) of the Act which is not tenable in law. It is further 11

seen that percentage completion method as sought to be applied by the A.O.

for computing the income of the assessee by not accepting the method of

accounting of income declared by the assessee, is also not prescribed u/s

145/145A of the Income Tax Act, 1961 and therefore also there is no

justification for the Assessing Officer to insist that the assessee ought to

have applied only percentage completion method. For this proposition we

derive further support from the orders of Delhi Bench of ITAT in the cases

of Sabh Infrastructure Limited for assessment year 2006-07 to assessment

year 2009-10 decided by the Co-ordinate 'G' Bench at Delhi. It has been

held in the case of the above company for assessment year 2006-07 and

2007-08 in ITA No. 4572/Del/ 2009 and 2813/Del/ 2010 that where the

assessee was a Real Estate Developer and not a construction contractor, AS-

7 was not applicable. Even in the case of Sabh Infrastructure Limited

(supra) the assessee recognised revenue at the time of execution of sale deed

through which significant risks and rewards of owner of the property were

transferred to the buyer and the same was stated to be in accordance with

AS-9 issued by ICAI and that the advance received from buyers of the flats

was shown as advances from customers. The ITAT in this case found that

the method of accounting adopted by the assessee is an accepted method of

accounting and placed reliance for this proposition on the judgement of 12

Hon'ble Delhi High Court in the case of CIT vs. Manish Buildwell Private

Ltd. in ITA No. 928/2011 dated 15.11.2011. This order of the ITAT was

followed by it in assessment year 2008-09 and 2009-10 also and the appeal

of the Revenue in the Hon'ble Delhi High Court against the order for

assessment year 2008-09 and 2009-10 was also dismissed vide order of the

Hon'ble Delhi High Court dated 7th January 2015 in ITA No. 111 and 113 of

2014 wherein the judgement of Hon'ble Delhi High Court in the case of CIT

vs. Manish Buildwell Private Ltd. as well as the judgement of Hon'ble

Supreme Court in the case of Belahari Investments Private Ltd. (299 ITR 1)

were relied on to hold that it cannot be said that project completion method

would result in deferment of taxes which are to be assessed annually and that

the same was an established method of accounting. Thus the orders of the

ITAT in the case of Sabh Infrastructure Private Ld. have been upheld by the

Hon'ble jurisdictional Delhi High Court also. On these facts and

circumstances, even in the case of this assessee no infirmity is found in the

order of the learned CIT (Appeals) deleting the addition of Rs.7,10,94,646/-

as there was no justification for the Assessing Office to discard the

consistently followed method of accounting selectively only for one year to

make the impugned addition. This has infact resulted in assessment of same

income in the hands of the assessee twice, which is not tenable in law. 13

Therefore the order of the learned CIT (Appeals) on this issue is upheld and

the ground of appeal raised by the Revenue is dismissed.

9. In the result the appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 31 .03.2015

Sd/- Sd/- ( PRAMOD KUMAR ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 31 /03/2015 Mohan Lal

Copy forwarded to:

1) Appellant

2) Respondent

3) CIT

4) CIT(Appeals)

5) DR:ITAT

ASSISTANT REGISTRAR 14

Date Draft dictated on computer 16.03.2015 Draft placed before author 16.03.2015 Draft proposed & placed before the second member

Draft discussed/approved by Second Member. 27.03.2015 Approved Draft comes to the Sr.PS/PS 31.03.2015 Kept for pronouncement on 31.03.2015 File sent to the Bench Clerk 31.03.2015 Date on which file goes to the AR Date on which file goes to the Head Clerk.

Date of dispatch of Order.