Assessee Must Follow Consistent Accounting Method for All Projects, Rules High Court

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Case Name:

ACC Real Estate & Developers vs. Assistant Commissioner of Income Tax (High Court of Bombay)

Income Tax Appeal No.452 of 2016

Key Takeaways

- The assessee must consistently follow either the mercantile or cash system of accounting for all projects.

- The court upheld the ITAT's decision that the assessee could not selectively apply different accounting methods to different projects.

- The court emphasized that income should be offered to tax based on accrual, not actual receipts, if the mercantile system is followed.

Issue

Can the assessee selectively follow the cash system of accounting for one project while using the mercantile system for others?

Facts

- The appellant-assessee is a partnership firm engaged in land development.

- For the Assessment Year 2007-08, the assessee entered into an agreement for land development and later assigned its rights to another company.

- The assessee followed the cash system of accounting for this specific project, while using the mercantile system for others.

- The Assessing Officer taxed the entire income on an accrual basis, which was upheld by the Commissioner (A) and the ITAT.

Arguments

- Assessee's Arguments:

- Claimed that it is permissible to follow different accounting methods for different projects.

- Argued that the income did not accrue until the repeal of the Urban Land Ceiling Act.

- Contended that the entire income was eventually offered to tax, albeit in later years.

- Revenue's Arguments:

- Asserted that the assessee cannot selectively apply different accounting methods.

- Emphasized that the transaction was valid and income accrued during the relevant year.

Key Legal Precedents

- Section 145 of the Income Tax Act, 1961:

This section mandates that income should be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee.

- The court cited this section to emphasize that the assessee cannot switch between accounting methods for different projects.

Judgement

The High Court dismissed the tax appeal, ruling that the assessee must follow a consistent accounting method for all projects. The court held that the assessee was bound to follow the mercantile system of accounting and offer income to tax based on accrual, not actual receipts. The court found no merit in the assessee's argument that the income did not accrue until the repeal of the Urban Land Ceiling Act.

FAQs

Q1. Can an assessee use different accounting methods for different projects?

A1. No, the court ruled that the assessee must consistently follow either the mercantile or cash system of accounting for all projects.

Q2. What was the main legal issue in this case?

A2. The main issue was whether the assessee could selectively follow the cash system of accounting for one project while using the mercantile system for others.

Q3. What did the court decide regarding the method of accounting?

A3. The court decided that the assessee must follow a consistent accounting method for all projects and cannot switch between methods.

Q4. What is Section 145 of the Income Tax Act, 1961?

A4. Section 145 mandates that income should be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee.

Q5. Why was the assessee's appeal dismissed?

A5. The appeal was dismissed because the court found that the assessee was bound to follow the mercantile system of accounting and offer income to tax based on accrual, not actual receipts.

1. Assessee has filed this appeal against the judgment of the Income Tax Appellate Tribunal dated 24th July, 2015.

2. Following questions are presented for our consideration.

“I. Whether on the facts and in the circumstances of the case, the ITAT erred in holding that the assessee­appellant could not have followed cash system of accounting for Hadapsar project, without appreciating that the method of accounting followed by the assessee was fully permissible in law?

II. Whether on the facts and circumstances of the case, the ITAT ought to have held that the amount of Rs.10 crore did not accrue in AY 2007­ 08 in view of the facts that:(a) the relevant transactions could be completed only after the repeal of the Urban Land Ceiling Act, which repeal took place after the relevant year ;(b) s.2(47) relied on by the AO was admittedly not applicable as the present case was not one of transfer of capital assets; and (c) under the relevant agreements, the amount of Rs.10 crore did not at all fall due in the previous year relevant to AY 2007­08?”

3. Brief facts are as under:­ Appellant­assessee is the partnership firm. The issue pertains to the Assessment Year 2007­08.

4. The assessee is engaged in the business of land development. As part of the business the assessee has entered into an agreement for development of land with the owners thereof, ad­measuring 31 acres situated at Hadapsar, for total consideration of Rs.4.75 crores on 29th November, 2004. Thereafter, on 12th October, 2006 assessee executed a Deed of Assignment assigning all its rights and interest in respect of the said land in favour of one M/s Sahastrajeet Reality Private Limited for consideration of Rs.12.44 crores.

5. For the Assessment Year 2007­08 the assessee offered a sum of Rs.2.44 crores by way of tax, crediting such sum to its profit and loss account. The balance of Rs.10 crores was received during the period relevant to the Assessment Year 2008­09 and 2009­10 and was offered to the tax as its business income. The assessee contended that for the said project the assessee had followed the cash system and offered the income to tax on actual receipt basis.

6. The return of the assessee for the said Assessment Year 2007­08 was taken in scrutiny by Assessment Officer. He taxed the entire income during the said year on accrual basis. Assessee challenged the order before the Commissioner(A). Such appeal was dismissed. After which appeal of the assessee was also dismissed by the Tribunal.

7. In this context, the above noted questions have been raised by the assessee in the present tax appeal. Learned counsel for the assesee argued that there is no prohibition for the assessee following mercantile system or project completion system in one project and the cash method of accounting in the another. Learned counsel further argued that the land in question was within the purview of Urban Land Ceiling Act. Such Act was abolished in the State of Maharashtra only with effect from 29th November, 2007. On the date of assignment, therefore, no rights accrued in favour of assignee. It was, therefore, that once the Urban Land Ceiling Act was abolished, the parties executed a sale deed in favour of the purchaser in which the assessee was the confirming party. Learned counsel further submitted that in any case the entire income was offered to tax though in later years.

8. On the other hand, the learned counsel for the Revenue contended that Tribunal has given cogent reasons. The assessee cannot take advantage of its own wrong by claiming that the transaction of the assignment was invalid and that no income accrued to the assessee by virtue of such arrangement.

9. It is undisputed that the assessee except for the project in question had been following the mercantile system of accounting. The Tribunal has recorded that the assessee has been regularly following mercantile system of accounting and that there has been no change in the method of accounting. Further, for the rest of the projects also the assessee made no change in its accounting system. In other words, it was only for the limited purpose of the present project that the assessee adopted the cash system.

10. Sub­section 1 of Section 145 of the Income Tax Act, 1961 provides that income payable under the head “profit and loss account of business” and income from other source shall subject to the provisions of Sub­section 2 be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. In terms of this provision, therefore, the choice of the assessee would be either of following mercantile or cash system of accounting. The assessee, however, cannot choose to follow mercantile system for all other projects and make a departure only for one of the projects by changing the system of accounting. The Tribunal, therefore, correctly held this issue against the assessee.

11. We, therefore, hold that the assessee was bound to follow the mercantile system of accounting and offer the income to tax on the basis of accrual and not actual receipts. The assessee, however, argued that the assignment under which such accrual arose itself was invalid and therefore, it cannot be stated that accrual of income crystallized till the Urban Land Ceiling Act was repealed and sale deed was executed. There are many short- comings of this contention of the assessee. Firstly, the assessee had claimed to have acquiesced certain rights in the property in question by way of assignment. Further, even when the Urban Land Ceiling Act was still in forced, such rights the assessee desired to pass on to the assignee for which the deed of assignment was executed. The assessee had never questioned such deeds. In fact, once ULC Act was repealed, such arrangement was finalised.

12. Further, whatever be the nature of the agreement and accrual of rights in favour of the purchaser of the land or the assignor or the assignee the assessee never argued that its right to receive the consideration was under jeopardy. Under the assignment agreement itself there was specific mention of transfer of rights in the property in lieu of which the assignee would pay agreed sum to the assessee.

13. In the result, Tax Appeal dismissed.

(M.S.SANKLECHA,J.) (AKIL KURESHI,J.)