Delhi High Court

Greater Ashoka Land & Dev. Co. (P) ... vs Asst. Cit on 21 August, 2001

Equivalent citations: 2001 79 ITD 595 Delhi

ORDER

Singhal, J.M.

The first and the main issue arising out of this appeal relates to the computation of profits in the case of the assessed engaged in the development of land and sale of plots.

2. Brief facts of the case are these. A proprietary concern namely M/s Ashoka Land & Development Corporation was engaged in the business of development of land and sale of plots. This business was being carried on since 1963. The assessed-company came into existence on 20-4-1984 with a view to take over the business of the aforesaid proprietary concern. The said business was taken over by the assessed and since then the same is being continued. During the year under consideration, the assessed had sold 49 plots measuring total area of 10489 sq. yards against total consideration of Rs. 23,88,127. Since the assessed had been following the project completion method/Single venture method, it credited the aforesaid consideration to the accounts of the customers and the same was shown as liability in the balance sheet. On the other hand, the expenditure incurred on the development of land was shown as work-in-progress and the same was being carried over to the next year and so on. Hence, no profit on the sale of such plot was shown by the assessed.

3. The assessed was asked to explain as to why the profits arising out of the sale proceeds of the plots should not be charged to tax in the year under consideration. In reply, vide letter dated 1-5-1989, it was stated by the assessed that it was following single venture method of accounting and accordingly, the profits/losses, as the case may be, in respect of such venture would be determined only in the year in which the venture is completed. It was also stated that such method was being accepted in the past and, therefore, no addition could be made on this account.

4. However, the aforesaid contention of the assessed was rejected by assessing officer. According to him, the plots had already been sold and registration deeds had also been executed in favor of the customers. Further the expenditure incurred on the project till the end of the accounting year was also available on the record. The estimated expenditure yet to be incurred on the project was also available as per the information given by the assessed. Accordingly he was of the view that it was not difficult to work out the profits from the sale of the plots during the year under consideration. According to him, the profits are integral part of the consideration received by the assessed and, therefore, the same has to be assessed in the year in which sales are affected. According to him, the assessed had been postponing its tax liability by adopting single venture method which was nothing but a mere device to get away from the tax liability. It was also observed by him that principles of res judicata does not apply to income-tax proceedings and, therefore, the contention of the assessed that such method of accounting was being accepted in the past, does not hold good. He also relied on the decision of Delhi High Court in the case of Tirath Ram Ahuja (P) Ltd. v. CIT (1976) 103 ITR 15 (Del). The particular reference was made to the following observations :

"It is a judicially recognised proposition that in the case of contracts, in order to ascertain the income, one need not wait till the contract is completed, and that it is open to the revenue to estimate the profits on the basis of receipt in each year of consideration, although the contract is not complete."

In view of the above observations, he determined the total cost of work-in-progress at Rs. 1,83,59,173 which was spread over to the total plotted area of 1,11,765 sq. yards and accordingly determined the rate of Rs. 164.26 per sq. yard as cost of the plot sold by the assessed. In this manner, he made the addition of Rs. 6,65,204 on account of the profits earned by the assessed on the sale of plots in the year under consideration.

5. The matter was carried before the Commissioner (Appeals) before whom various contentions were raised on behalf of the assessed. Firstly, it was stated that money is received by them are only in the form of advance and not the sale price. Secondly, it was submitted that substantial development work was still to be executed and consequently, profits could not be determined in the year under appeal. Thirdly, the single venture method of accounting employed by the assessed had been accepted in assessment years 1986-87 and 1987-88 and, therefore, there was no justification to make any departure there from. Fourthly, it was submitted that estimate of profit as made by assessing officer was excessive. Lastly. it was submitted that decision of Delhi High Court in the case of Tirath Rain Ahuja (P) Ltd. (supra) was distinguishable on the facts of the case in as much as that decision was rendered in the case of a contractor. Various details were also filed to establish that development work was still continuing and the venture was not complete.

6. The Commissioner (Appeals) agreed with the contention of the assessed's counsel that the judgment of Delhi High Court in the case of Tirath Ram Ahuja (P) Ltd. (supra) was not applicable to the case. However, he was of the view that true profits could not be deduced from the details furnished by the assessed and, therefore, provisions of section 145(1) could be invoked. However, he was of the view that profits determined by assessing officer was on higher side. Accordingly he applied the profit rate of 12.5 per cent on the sale profits of the plots and determined the profits at Rs. 2,98,515. Still aggrieved, the assessed has preferred this appeal before the Tribunal.

7. The learned counsel for the assessed has vehemently assailed the order of the Commissioner (Appeals) by raising various contentions. Firstly, it has been contended by him that books of account had not been rejected by the assessing officer and, therefore, the provisions of section 145(1) could not be invoked for the first time by the Commissioner (Appeals). In this connection, he relied on the decision of Madras High Court in the case of Sree Shanmugar Mills Ltd. v. CIT (1974) 96 ITR 411 (Mad) and the decision of Andhra Pradesh High Court in the case of CIT v. Margadarsi Chit Funds (P) Ltd. (1985) 155 ITR 442 (AP). Secondly, it was contended by him that rule of consistency must prevail. According to him, the single venture system of accounting had been accepted by the assessing officer for assessment years 1986-87 and 1987-88 and therefore, no departure should have been made in this regard. Reliance was placed on the decision of Supreme Court in the case of Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) and the decision of Delhi High Court in the case of CIT v. Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del). Further reliance was placed on the two decisions of Supreme Court in the case of Satish Pannalal Shah (2001) 168 CTR 1 (SC) and in the case of Kaumadani Narain Dala (2001) 168 CTR 3 (SC). Thirdly, it was submitted by him that single venture system of accounting or project completion method is a recognised method of accounting. Reference was made to three decisions of the Tribunal i.e., in the case of D.K. Enterprises v. ITO (1991) 39 ITD 394 (Bom), Shapoorji Pallonji & Co. (Rajkot) (P) Ltd. v. ITO (1994) 49 ITD 479 (Bom), and in the case of ITO v. W.D. Estate (P) Ltd. (1993) 45 ITD 473 (Bom). He has also relied on High Court decisions namely, in the case of Addl CIT v. Madan Lal Ahuija (1982) 136 ITR 640 (All.), in the case of CIT v. Kayarts (1977) 107 ITR 119 (Bom), and the decision of Rangoon High Court in CIT v. A.KA.R. Family (1941) 9 ITR 347 (Rang). Fourthly, it was contended by him that there was no basis for Commissioner (Appeals) to apply the rate of profit of 12.5 per cent. Alternatively, it was contended by him that cost of the plot should be determined after taking into consideration the entire expenditures of the project undertaken by the assessed in view of the Supreme Court decision in the case of Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC). It was submitted by him that the project has now been completed in the year 2001 and the entire details of expenditure are available. A chart has been furnished before us showing an year wise expenditure incurred by the assessed right from assessment years 1986-87 to assessment year 2000-2001. According to this chart, the total cost of the project is Rs. 3,77,89,194. Hence it has been prayed by him that this cost should be spread over to the saleable area. According to this chart, it has been worked out at Rs. 372 per sq. yard as against Rs. 164.26 worked out by the assessing officer.

8. The learned Senior Departmental Representative has vehemently opposed the contentions as raised by the learned counsel for the assessed. Firstly, it was contended by him that section 4 is a charging section, according to which the profits of each year are to be taxed in accordance with the rates specified by the Finance Act of each year. Accordingly it was submitted by him that once the profits are accrued in a particular year then tax has to be levied in respect of such profits and consequently, such profits cannot be deferred to future years. It was pointed out by him that if the method of accounting as employed by the assessed is accepted then it would amount of taxing the accumulated profits of various years in one year which is not the intention of the Act. According to him, the single venture system is a defective system since it does not allow the profits of each year to be taxed under section 4. Proceeding further, it was pointed out from page 2 of the assessment order that assessing officer had impliedly invoked the provisions of section 145(1) and, therefore, Commissioner (Appeals) was justified in invoking the provisions of the proviso to section 145(1) specifically. He has also relied on the decision of Supreme Court in the case of P.M. Mohd. Meera Khan v. CIT (1969) 73 ITR 735 (SC) for the proposition that it was not correct to say that profits of the venture could be determined only at the time of completion of the sale of the entire Estate. It was also submitted by him that the decision of jurisdictional High Court in the case of Tirath Ram Ahuja (P.) Ltd. (supra) has not been properly appreciated by Commissioner (Appeals). According to him, the principles laid down by the High Court are still applicable to the facts of present case.

9. In reply, the learned counsel for the assessed has submitted that the decision of Supreme Court in the case of PM. Mohd. Meerakhan (supra) cannot be applied to the facts of the present case in as much as in that case there was no obligation of the assessed to develop the land while in the present case, the assessed had to incur expenses on various activities of development i.e., laying of roads, water supply, drainage system, electricity etc.

10. Rival submissions of the parties, the material placed before us and the case law referred to, have been considered by us carefully. The core question to be considered by the Bench is whether, in the case of land development, the project completion method can be said to be the proper method for ascertaining the true and correct profits of each year. According to this method, as explained by assessed, all the receipts from the sale of plots are credited to the accounts of the customers and the same is shown as liability in the balance sheet while all the expenditures incurred in developing the land are debited under the head "Work-in-Progress" and the same is carried forward year after year till all the plots are sold. The profits or loss, as the case may be, is determined only in the last year. So no profit or loss is declared in earlier years despite the sale of plots in various years. In the present case, the project was commenced in the year 1963 by the proprietary concern and completed by the assessed in the year 2001. The plots were sold in assessment years 1987-88 to 2001-02 as is apparent from the statement furnished before us. The learned counsel for the assessed has vehemently argued that assessed is entitled to adopt any method of accounting particularly when such method has been accepted by the courts in India and by the assessing officer in the present case in assessment years 1986-87 and 1987-88. After giving our deep thought to the issue, we are unable to accept this contention of the learned counsel for the assessed. According to section 4 of the Income Tax Act, 1961, the income-tax is chargeable in respect of the total income of each previous year. As a necessary corollary, we are of the view, the income accruing in one year cannot be deferred to future years by adopting an incorrect method of accounting with a view to postpone the tax liability. Once an income has accrued to the assessed in a particular year then it has to be assessed in that very year irrespective of the method adopted by the assessed. It is now settled legal position that method of accounting cannot override the legal provisions as held by the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC). In that case it was observed by their Lordships "the accountants might have taken some other view but accountancy practice was not necessarily good law!' According to their Lordships if a particular receipt was chargeable to tax under section 4 of the Act, then the tax liability could not be escaped only because of the method of accounting adopted by the assessed. Similarly in the case of CIT v. K.C.P. Ltd. (2000) 245 ITR 421 (SC), the Hon'ble Supreme Court held that it is the true nature and quality of the receipt and not the head under which it is entered in the account books which is decisive. Therefore, it follows that if any receipt is taxable in any particular year then the tax liability cannot be avoided by following a particular system of accounting. Section 145 of the Act permits the assessed to adopt any method of accounting for computing the income chargeable under the head "Profits and Gains of Business or Profession" and Income from other sources". What is chargeable to tax is the income of the previous year as provided in section 4. Therefore, in our considered opinion, the method of accounting must be such by which the income of each year accruing to the assessed can be properly, determined. Hence any method which allows the assessed to defer the accrued income of a particular year to future year cannot said to be a proper method under section 145. In the project completion method, as adopted by the assessed, the profits are to be computed only in the last year of the project despite the fact that plots are sold in various years. Such computation of income, in our opinion, represents the accumulated profits of various years arising on the sale of plots in as much as the profits in the case of an adventure in the nature of trade or in a business of trading or manufacturing of goods, accrue only on the sale of such plots or goods, as the case may be. The computation of profits as per assessed would be contrary to the provisions of section 4 because such profits would not belong to the last year alone. Accordingly it is held that in the case of land developer the true and correct profits of each year cannot be deduced by following the project completion method as adopted by the assessed. Consequently, the tax authorities would be justified in invoking the proviso to section 145(1). However, it is clarified that we are not discarding project completion method altogether. Whether true and correct profits can be determined from a particular method or not would depend upon the facts of each case. The correctness of such method in cases other than the land developer is left open and may be decided by the Tribunal in some other appropriate case.

11. The view taken by us is further fortified by the decision of the Supreme Court in the case of P.M. Mohd. Meerakhan (supra). In that case the assessed carried an adventure in the nature of trade by purchasing the land and selling the same after plotting. The assessed had sold 22 plots out of 23 plots and the 23rd plot was retained by the assessed. The contention of the assessed was that profits could not be ascertained unless all the plots were sold. This stand of the assessed was rejected by holding "It was not correct to say that the profits of the adventure could be determined only at the time of completion of the sale of the entire Estate. Each year was a self contained unit and in the case of a trading adventure for computing the true profits of the year, the value of stock in trading at the beginning and at the end of the accounting year had to be taken into account." This decision has been sought to be distinguished by the learned counsel for the assessed on the ground that in that case the assessed was not a developer of the land but was merely a trader while in the present case, the assessed is a land developer who has to incur huge expenditure on the development of the land like construction of roads, laying of drainage system, sewerage system, installation of lights etc. According to him, the profits cannot be determined unless all such obligations are fulfillled. We are unable to accept this plea of the assessed in view of the Supreme Court Judgment in the case of Calcutta Co. Ltd. (supra). In that case the Supreme Court was considering the case of a land developer, who had undertaken to develop the land by laying out roads, providing of drainage system and installation of lights etc. Some of the plots was sold by the assessed against a consideration of Rs. 29,392. Following mercantile system of accounting, the assessed credited the entire sum of Rs. 43,692 being the full sale price of the land. At the same time, it also debited an estimated sum of Rs. 24,809 on account of the expenditure for development it had undertaken to carry out, even though no part of that amount was actually spent. The department had disallowed such expenditure. Ultimately the matter reached Supreme Court and it was held that assessed was justified in computing the profit in the manner it did. This decision, therefore, clearly shows that even in the case of land developer the profits on the sale of land can be determined in the year of sale of plots i.e., before the completion of the project. Somewhat similar view has been taken by the Jurisdictional High Court in the case of Tirath Rain Ahuia (P) Ltd. (supra). The principle laid down in that case cannot, in our opinion, be distinguished merely on the ground that it related to a contractor. If profits can be determined for a particular year before completion of the project in the case of contractor, that is no reason why such profits cannot be determined before completion of project in the case of land developer. The next question to be considered is whether rule of consistency should be followed despite the fact that method of accounting adopted by the assessed is such that true profits cannot be deduced there from, in our opinion, this issue is covered by the decision of the Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC). In that case the assessed was consistently adopting the method of valuation of closing stock exclusively at cost of raw materials totally excluding overhead expenditure. This method of valuation was rejected by the tax authorities. Finally, the matter reached the Supreme Court. The contention of the assessed before the court was that method of valuation adopted by the assessed was being adopted consistently and, therefore, there could not be any departure from the same. This contention was rejected by the court by observing "It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessed, the correctness of which had not been questioned in the past. There is no stipple in these matters and the officer is not bound by the method followed in the earlier years." These observations squarely applies to the facts of the present case. The learned counsel for the assessed has heavily relied on the decision of Supreme Court in the case of Radhasoami Satsang (supra) for the following observations :

"Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."

The aforesaid observations show that rule of consistency is an exception to the general rule that principles of res judicata does not apply to income-tax proceedings. The above observations refers to an exception where a finding of fact has been recorded in the earlier years which remains unchallenged but those observations cannot be applied where such finding is contrary to the legal provisions of an enactment for the simple reason that there cannot be estoppel against the statute as observed by the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra). Once it is found that method of accounting followed by the assessed is not such from which true profits can be ascertained then in such cases the provisions of the proviso to section 145(1) becomes applicable and it becomes the duty of the taxing authority to determine the true and correct profits in the best possible manner though such determination must be on the basis of material on the record. Accordingly we reject the plea of the assessed's counsel in this regard.

12. The next question to be considered is whether the Commissioner (Appeals) could invoke the provisions of the proviso to section 145(1). In our opinion, the answer to this question is covered by the decision of the Hon'ble Supreme Court in the case of CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) wherein it has been held that powers of the first appellate authority are co-terminus with that of the Income Tax Officer. He can do what the Income Tax Officer can do and can also direct him to do what he has failed to do. The Apex Court in the case of British Paints India Ltd. (supra) has held that where the profits cannot be properly be deduced from the method of accounting employed by the assessed then it is the duty of the assessing officer to reject such accounts and apply the proper method for determining the true income of the assessed. In the present case, if the assessing officer failed to record a specific finding in this regard then, in our considered opinion, the Commissioner (Appeals) was justified in invoking the provisions of section 145(1) proviso.

13. The next question to be considered is whether the Commissioner (Appeals) was justified in applying the profit rate of 12.5 per cent on the receipts of the assessed. In this connection, we are in agreement with the learned counsel for the assessed that there was no basis with the Commissioner (Appeals) for coming to such conclusion. No comparable case has been brought on record to justify such conclusion. Accordingly, it is held that Commissioner (Appeals) was not justified in applying the profit rate of 12.5 percent.

14. Now the question arises as to how the profits should be computed in such case. The answer to this question is covered by the decision of Hon'ble Supreme Court in the case of Calcutta Co. Ltd., (supra). In that case the Supreme Court was considering a case of a land developer, who had undertaken to develop the land by laying out roads, providing of drainage system and installation of lights etc. Some of the plots were sold by the assessed against a consideration of Rs. 29,392. Following mercantile system of accounting, the assessed credited the entire sum of Rs. 43,692 being the full sale price of the land, At the same time, it also debited an estimated sum of Rs. 24,809 on account of the expenditure for development it had undertaken to carry out, even though no part of that amount was actually spent. The department had disallowed such expenditure. Ultimately the matter reached Supreme Court and it was held that assessed was justified in computing the profit in the manner it did. Respectfully following the aforesaid decision, it is held that profits should be determined by spreading over the estimated cost in carrying out the development of land over the saleable area of the plots. Since by now, as informed to us, the project has been completed by the assessed in 2001, the actual cost incurred by the assessed on the development of the land can be considered for spreading over the same over the saleable area of the plots and accordingly appropriate deduction should be allowed against the sale consideration of the plots sold in the year under consideration. Accordingly the order of Commissioner (Appeals) is set aside on this issue and the matter is restored to the file of assessing officer who shall determine the profits for the year under consideration in accordance with the guidelines given above. However, it is clarified that the Tribunal does not have any power of enhancement. Since the department is not in appeal against the order of the Commissioner (Appeals), the fresh working of profits would not exceed the amount of profit determined by the Commissioner (Appeals). The assessing officer shall keep in mind this aspect of the matter while computing the income of the assessed.

15. The next ground relates to the disallowance of Rs. 15,313 on traveling expenses of Shri Sunil Sharma, Rs. 9,740 on other traveling expenses, Rs. 3,693 on car repairs and maintenance, Rs. 6,546 on car depreciation, Rs. 4,097 on telephone expenses and Rs. 763 on donations. This ground has not been seriously argued by the learned counsel for the assessed. After going through the orders of both the authorities, we do not find any, merit in this ground of the assessed.

16. The next ground relates to charging of interest under section 215/217. This ground is consequential. The assessing officer is directed to recompute the same after giving effect to our order.

17. In the result, appeal of the assessed shall be treated as partly allowed.