Dileep Kumar for the Revenue. Anil Kshtariya, AR for the Assessee.

The appeal has been filed by the Revenue for A.Y. 1997-98which is arising from the order of the CIT(A)-6,Ahmedabad dated 23.02.2017, in the proceedings under Section 143(3) (of Income Tax Act, 1961) r.w.s. 254 (of Income Tax Act, 1961) (in short “the Act”).

2. The Revenue has raised the following grounds of appeal as under:

“1) “Whether the Ld. CIT9A0 is right in law and on facts in deleting the addition of Rs.1,39,37,907/- made on account of development expenses.”

2) “Whether the Ld. CIT(A) is right in law and on facts in deleting the addition of Rs.78,97,322/- made on account of development funds.””

3. The interconnected issue raised by the Revenue is that the Ld. CIT-A erred in deleting the addition made by the AO for Rs. 1,39,37,907/- and Rs. 78,97,322/- on account of development expenses and development funds respectively.

4. Brief facts of the case on hand are that the assessee in the present case is a listed company and engaged in the business of development of real estate and operation of holiday resorts & club. The assessee for the year under consideration filed its return of income declaring an income of Rs. 20,55,330/- only. Thereafter, the case of the assessee was selected under scrutiny and income for the year was assessed under Section 143(3) (of Income Tax Act, 1961) at Rs. 4,29,46,219/- after making the additions as detailed under:

(i) Sales proceeds directly taken to balance sheet Rs. 3,79,26,874/-

(ii) Development fund Rs. 23,28,084/-

(iii) Disallowances of interest Rs. 6,35,935/-

5. The assessee carried the matter before the Learned CIT(A) who vide order dated 25th March 2002granted partly relief to the assessee. Aggrieved by the order of the Learned CIT (A) both the Assessee and Revenue filed cross appeals before ITAT ‘C’ Bench Ahmadabad. The Tribunal vide order dated 26th February 2012 set aside the issue to file of the AO for fresh verification and adjudication.

6. The assessee before the AO in the set aside proceeding submitted that it had developed the projects namely Garden City-I to VI and a Bungalow project in the year under consideration situated at village of Dantali, Lilapur,Lapkaman near Vaishnavdevi Circle, S.G. Highway Ahmadabad. During the year, the assessee has received an amount of Rs. 4,76,96,199/- against the Garden City Projects and Rs. 1,85,94,701/- against the bungalow project aggregating to Rs. 6,62,90,900/- only with respect to the development projects as discussed above.

7. The assessee accounted the receipts of Rs. 4,76,96,199/-against the land development projects of Garden City III,IV and V in the manner as detailed below:

1. Club Fee Rs. 2,89,200/- Accounted in P/L a/c

2. Maintenance Contribution Rs. 30,82,585/- Treated as non-revenue receipt

3. Electricity Contribution Rs. 23,45,000/- Treated as non-revenue receipt

4. Land contribution Rs. 24,92,803/- Transferred to land cost

5. Development fund Rs. 78,97,122/- Transferred to liability

6. Development expenses Rs. 2,36,91,967Transferred to liability

7. Professional Fee Rs. 78,97,122/- Accounted in P/L a/c

8. The assessee further submitted that the above mentioned booking amount was allocated as revenue, non-revenue and liability in the manner, as also adopted in the AY 1995-96, as detailed under:

2. Method of Allocation of Receipts/Booking Amount: The Booking amount is allocated as under in the uniform manner for all real estate Land scheme - Land Cost on actual basis

- Club Fees Rs. 5200/- (its fixed for all plot holders)

- Maintenance Contribution Rs. 15 per sq. yds.

- Electricity Contribution Rs. 5000/- its fixed for all plot holders)

- The booking rates depend on the location in below mentioned illustration it is Rs.260 per sq. yds which is bifurcated as under:

- Development Deposit Fund: 20% (account in Current Liabilities)

- Development Expenses 60% (account in Current Liabilities)

- Professional Fees 20% (account in P & L A/c)

The Compnay’s immediate profit was 20% of the Land Booking Value which is in addition to club fees.

The Company collects two types of development deposits as stated above i.e. Development Fund and Development Expenses from the potholders. There is profit from these funds on the 100% of the expenditure incurred for the development i.e. it can be said that company have a profit margin of 40% in the development funds 50%of (60%+20%) & %50% is actual exp. but as per policy and method of accounting profit transfer to the P & L A/c in the year of actual expenditure incurred for the development.

9. The assessee further claimed that it has employed the above method of accounting regularly and consistently.

10. However, the AO being dissatisfied with the method of accounting for the receipt of development expenses fund of Rs. 2,36,91,967/-, held that the receipt of development expenses fund are trading receipt of the assessee. Hence, the same should have been recorded fully in its profit and loss account.

The AO further found that the assessee out of the entire receipt of Rs. 2,36,91,967/- has transferred part of the amount of Rs. 97,54,060/- to the Profit and loss account. Accordingly, the AO added the balance amount of Rs. 1,39,37,907/-to the total income of the assessee.

11. The AO, similarly, for the amount of Rs. 78,97,322/- shown by the assessee as receipt of Development Fund under liability found that it was received for providing certain facilities in future as detailed under:

“(i) Concession on life membership of Sterling Contry Club.

(ii) Concession on school, patron membership with priority of admission of children.

(iii) Towards concession of bus service with priority in season tickets.

(iv) Concession on Dispensary /Medical Centre/Shopping Centre with priority treatment.

Towards any other amenities or services which developer may plan in future at his sole discretion.”

12. However, the AO was of the view that the assessee was not under the obligation for providing such facilities as the same was completely at the discretion of the assessee. In case, the assessee does not provide such facilities,the purchaser would not compel for the same fromassessee. Furthermore, there was no time frame for starting/providing such facilities to the customers. The AO also observed that during the year under consideration none of the facilitywas started by the assessee.

13. In view of the above, the AO held the aforesaid receipts represents the income of the assessee for the year under consideration under mercantile system of accounting. Accordingly, the AO rejected the contention of the assessee and made the addition of Rs. 78,97,322/- to the income of the assessee.

14. Aggrieved assessee preferred an appeal before the Learned CIT(A).

15. The assessee before the Learned CIT-A submitted that it is engaged in the activity of developing the land in a phased manner. Similarly, it receives the proceeds in installments over a period of time which is allocated among the land cost, development fund, maintenance fund, development charges, club membership and professional charges etc. It considers certain receipts as deferred revenue income which are actually accounted as income in the year in which the corresponding expenses are incurred. The assessee further submitted that it has been following same method of accounting consistently since the incorporation which was also accepted by the revenue except in the Assessment Years 1995-96, 1997-98, 2001-02 and 2002-03. The assessee in support of his contention filed the copy of the income and expenditure for the last ten years. As per the assessee the method adopted for accounting the income was inconsonance with the accounting standard and guidance note issued by the ICAI.

16. The assessee also contended that the method of accounting adopted by it for recognizing the revenue was also accepted by the AO in the assessment framed under Section 143(3) (of Income Tax Act, 1961) for the Assessment Year 2010-11 dated 16th November 2012.

17. In view of the above, the assessee prayed before the Learned CIT (A) that its claim should be allowed without any disallowance as made by the AO.

18. The Learned CIT (A) after considering the submission of the assessee deleted the addition made by the AO vide combined order for A.Y. 1995-96, 1997-98, 2001-02 and 2002-03 dated 23rd February 2017. The relevant extract of the order for the Assessment Year 1995-96 is reproduced as under:

“5.8 After carefully perusing the order of the AO, I find that the AO erred in law in making this addition as he failed to appreciate the nature ofn development work involved.

The assessee has been following mercantile system of accounting since its inception. It is a matter of record that the AO has not rejected the method of accounting which is consistently followed by and accepted by the department in the past completed It is also a matter of record that the assessee has been following the completed contract method of accounting for recognition of revenue and recognized the allocation of related cost to the particular phase of construction and development project i.e. receipts and cost were recognized with respect to only phase of construction. The AO was therefore .wrong in drawing a conclusion, that development expenses totaling to Rs.44,98,587/- represents assessee's trading receipts which ought to have been credited to P & L Account. The AO on the other hand also took on record that out of the sum of Rs. 44,98,587/-, the assessee has already credited Rs.34,11,050/- to the P & L Account. The appellant clarified that the amount of Rs.44,98,587/- is booking amount/receipts which collection is made from persons booking the premises, in the books of account (P.B.P.10). Out of the same the Assessee has transferred Rs.34,11,050/- on account of actual expenditure the balance amount of Rs.10,87,537/-, is on account of liability yet to be honoured by the assessee. It is settled position in law that the outstanding liability (non- statutory) cannot be added back to the income of the appellant.

5.9 Apart from the fact as stated supra, the fact that need due consideration is that assessee is a public Ltd. company whose books of accounts are audited under the Companies Act (besides u/s 44 (of Income Tax Act, 1961) AB of the IT. Act), and they are open to the general public. It is pertinent to place on record that in the A.Y.1997-98, exactly an identical issue in the case of the appellant, the Ld. CIT(A)-XIV while deciding the appeal has recorded categorical finding in order dated 26.03.2002 on page no. 27 and 28 as under:

“Hence in my opinion, the collection so made is the liability of the appellant. in any case, the collection so made cannot be considered as income for the purpose of IT Act. The income is to be arrived at only after the expenses are deducted from the sales/receipts of the appellant. In the present case the expenditure is not incurred or not claimed at the time of collection. However, the appellant has adopted a method of transfer the amount from the expenses to the profit & loss account as and when expenditure is incurred and such amount credited to the profit and loss account is twice the amount of expenditure. From the detail submitted by the appellant as explained in para 3.2 above, I find that in fact the appellant has consistently adopted the some method of crediting twice the amount of actual development expenditure from year to year to the profit & loss account. The assessee has incurred such expenditure for various works like development of land, levelling the same, fencing, road work, tube-well, electric supply cable etc. In the circumstances, in my opinion, the above directions of the CIT(A) in appellate order for A.Y.1995-96 do not take into consideration the income aspect but it considers only receipts of the appellant which is not correct. To this extent I differ from the said appellate order. The method of accounting for this item of receipt and income there from adopted by the appellant is found to be reasonable and therefore it is the correct income which is offered but the appellant in the relevant year. Hence, I direct the assessing officer to tax only that amount which is credited to the P& L account in the year under consideration against the development expenditure instead of the funds for which collection is made from persons booking the premises. The appellant therefore, gets a relief of the amount of Rs.2,36,91,967/- referred to above.”

5.10 Having regard to the aforesaid findings given by my Ld. Predecessor, I don't find any reasons to differ as assessing officer has neither noticed any defects in the books of account maintained by the assessee and verified in the course of scrutiny nor he has brought any material on record to prove that expenditure claimed were not incurred or were bogus. Therefore,there is no justification in ignoring book result as given in audited accounts and making arbitrary addition. It is a sad state of affairs that despite getting the case passing through third stage of assessment and having clear cut direction from the ITAT, the AO failed to apply his mind to the given accounting standard and follow the berated line of argument without any application of mind. It is equally important to place on record that AO has not under taken; any investigation/independent inquiriestoarriveatany conclusion when the whole assessment was to be framed de-novo in consequent to the order of the Hon’ble ITAT.

5.11 The appellant is following mercantile system of accountingis a proper course to show the expenses on the basis of accrual and also show the income on the basis of accrual. It is seen from the agreement with the members that the appellant recovered from the members on account of land cost development fund deposit, development work, professional fees etc. It is also a matter of record that the development is on going project and the lot of work is yet to be undertaken by the assessee. To say that every receipt by the assessee constitutes a trading receipt/sale only, is a incorrect statement of fact. As per the agreement the total contribution in the year under consideration and lots of works as per plan has yet to be undertaken by the assessee, contribution received from the purchaser/members constitutes various contributions for life members and Sterling country Club and also represents land value.

5.12. The next addition of Rs. 22,96,764/- represents development fund which was directly taken into the balance sheet. However as per the agreement the development fund was suppose to use in providing the various facilities related to club membership, schooling of the member's children, bus service and other various service. As per the agreement, these facilities were the prime responsibilities of the developer and agreement clearly shown that the developer the terms of had sole discretion to provide this services and the buyer had no right to Enforce this facilities. The AO has not fully taken into consideration standard agreement, in para 7, 20% of sale proceeds after excluding and cost, contribution for electricity connection, one time maintenance contribution and contribution for life membership of the club has Been allocated for development fund deposit and the development deposit is supposed to provide following specific facilities existing or in future. It is not in dispute as agreed upon by the AO that work had not started that in itself is proof that the money collected is a liability and not an income as income is to be taken into account after expenses laid are accounted for. These amenities have to be provided for which land has been provided by the purchasers free of cost (refer to clause-16 of the sale agreement). Since the assessee is following mercantile system of accounting and the sale of plot has taken place." Significantly, the AO himself has noted at para 6 that assessee has incurred expenditure of Rs.34,11,050/- which is transferred to P&L account,while discussing the issue of 'development expenses'. The averment of the AO that the assessee has made no efforts whatsoever to determine its liabilityin respect of development fund or the amenities to be provided out of this fund, is out context and contradictory to what he has noted in the order. Whereas at para 7 of the impugned assessment order the AO has categorically noted the details of facilities supposed to be provided from the development deposit. Thus, the amount of future liability on account of development work had been specified in the agreement between the parties,then that future obligation had to be taken into consideration. Therefore, the entire booking receipts of development fund cannot be taken into P&L Account, what could be taken to the P&L Account is the profit on the said transaction, which has precisely been done by the assessee.”

29. The view taken by the Learned CIT (A) for the assessment year 1995-96 was also taken for the year under consideration. Accordingly, the Learned CIT (A) deleted the addition made by the AO.

30. Being aggrieved by the order of Learned CIT (A), the Revenue is in appeal before us.

31. The Learned DR before us vehemently supported the order of the AO. On the contrary the Learned AR before us filed a Paper Book running from pages 1 to 68 and submitted that it has been following its method of accounting consistently which has been accepted by the Revenue. Therefore, he contended that there being no change in the facts and circumstances, no addition is warranted in the year under consideration.

32. The Learned AR further submitted that the receipts which were treated as deferred income were offered to tax in the year in which the expenses were incurred. The Learned AR in support of his contention drew our attention on page 68 of the Paper Book where the details of the receipt of the development fund and the amount transferred to income was shown. The Learned AR vehemently supported the order of the Learned CIT (A).

33. We have heard the rival contentions of both the parties and perused the materials available on record. In the instant case the assessee has shown certain receipts as liability on the reasoning that such a liability shall be accounted for as income against the corresponding expenses. However, the AO was of the view that such receipts, treated as deferred revenue income, has become the income of the assessee under mercantile system of accounting. Accordingly, the AO treated such deferred income as the income of the year under consideration. Thus, the AO made the addition to the total income of the assessee for an amount of Rs. 2,18,35,222/- (1,39,37,907 + 78,97,322). However the Learned CIT (A) was pleased to delete the addition made by the AO.

34. Before, we touch upon the issue whether a particular receipt represents the income of the assessee in the years under consideration as discussed above,we find that the assessee has been following a unique method of accounting for recognizing the certain receipts as income in the future years. This method has been accepted by the Revenue in the assessment framed under Section 143(3) (of Income Tax Act, 1961) including the Assessment Year 2010- 11 except in few of the Assessment Years namely 1995-96, 1997-98, 2000-01 and 2002-03. In other words, we find that the method of accounting adopted by the assessee since incorporation 14-05-1992 was accepted by the revenue till the Assessment Year 2010-11 without pointing out any flaw in such method of accounting.

Accordingly, we are of the view that the revenue has no authority to change the method of accounting of the assessee until and unless it contains the defects or there is any specific prohibition under the provisions of law. As such we are of the view that the principles of consistency should be adopted.

In addition to the above, we also note that the receipts which was treated by the assessee as deferred revenue income has been offered to tax by the assessee in the subsequent assessment years. In such a situation, we are of the view that there is no loss to the revenue for the simple reason that receipt has finally been suffered to the tax but in the subsequent assessment year.

Accordingly, we note that if any addition is sustained in the year under consideration then there has to be deletion of the corresponding amount of the income shown by the assessee in the subsequent assessment years otherwise it would lead to double addition to the total income of the assessee which is not desirable under the provisions of law. In view of the above and after considering the facts in totality, we are of the view that the order of the Learned CIT (A) does not suffer from any infirmity. Accordingly we decline to interfere in his order. Hence, the ground of appeal of the Revenue is dismissed.

20. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the Court on 22nd October,2020 at Ahmedabad.

Sd/- Sd/-

(MAHAVIR PRASAD)

JUDICIAL MEMBER

(WASEEM AHMED)

ACCOUNTANT MEMBER

Ahmedabad; Dated 22/10/2020