Ita/836/2008 Of The Commissioner Income Tax v. M/S Thumbay Holdings (P) Ltd

1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 9[TH|]DAY OF SEPTEMBER 2014. PRESENT THE HON’BLE MR.JUSTICE N. KUMAR AND| THE HON’ BLE MRS.JUSTICE RATHNAKALAI.T.A.Nos.836/2008 Cc/w.835/2008 & 837/200 BETWEEN: 1.|Tne Commissioner of Income Tax, C.R.Building, Attavar, | Mangalore. 2.|Tne Asst. Commissioner of Income-Tax, — Circle -2 (1), COMMON Mangalore. ..APPELLANTS (By Sri.K.V.Aravind, Adv.,). AND: M/s.Thumbay Holdings (P) Ltd., | “Arcadia, 8[7)]Fioor, Fainir Road, Fatnir, COMMON Mangalore. D.K. ..~RESPONDENT (By Sri.S.Parathasarathi, Adv.,) KK KK K I.T.A.No.836/2008 This appeal is filed under Section 260-A of I.T.Act,.1961 arising out of order dated 04.04.2008 passed in ITA|No.1653/Bang/2004, for the Assessment year 2000-2001,|praying that this Court may be pleased to formulate the|substantial questions of law stated therein and allow theappeal and set aside the order passed by the ITAT.Bangalore in ITA No.1653/BNG/2004 dated 4.4.2008|confirm the order passed by Assessing Officer. I.T.A.No.835/2008 This appeal is filed under Section 260-A of I.T.Act,.1961 arising out of order dated 04.04.2008 passed in ITA|No.1149/BNG/2004, for the Assessment year 1999-2000,|praying that this Court may be pleased to formulate the|substantial questions of law stated therein and allow theappeal and set aside the order passed by the ITAT.Bangalore in ITA No.1149/BNG/2004 dated 4.4.2008|confirm the order passed by Assessing Officer. I.T.A.No.837/2008 This appeal is filed under Section 260-A of I.T.Act,.1961 arising out of order dated 04.04.2008 passed in ITA|No.1829/BNG/2004, for the Assessment year 2000-2001,|praying that this Court may be pleased to formulate the|substantial questions of law stated therein and allow theappeal and set aside the order passed by the ITAT.Bangalore in ITA No.1829/BNG/2004 dated 4.4.2008|confirm the orders passed by Appellate Commissioner. These appeals coming on for Hearing this day,N.KUMAR. J.,delivered the following: JUDGMENT As common questions of law are involved in all these.appeals and the parties are same and the property involved is one and the same, these appeals are taken up together|for consideration and disposed of by this common order. 2 |The assessee is a Company doing the business of|building construction and real estate. For the year ending|on 31.3.2000, the assessee had filed its return of income|on 29.11.2000 declaring a total loss ofd./,14,700/-. The)return filed was processed and the Assessing Authority|completed the assessment under section 143(3) of the Actby disallowing interest paid by the assessee on the loans|taken to an extent ofd.10,73,594/- on the ground that the.assessee had given interest free loans to sister concernsand associate concerns and the relatives of the Directors. The Assessing Authority has also brought to tax the amount.received from M/s.Prestige Constructions to an extent of|4.4,04,40,000/- shown in the assessee’s balance sheet as asundry creditor. By virtue of the sale agreement dated25.6.1998, the assessee became entitled to receive a sum.ofd.4,83,40,000/- as nomination fees. Even prior to the|date of agreement, the assessee has received a part of theamount from M/s.Prestige Constructions amounting toe.1.35 Crores. As on 31.3.1998, relevant to theassessment year 1999-2000, the assessee had receivede.2.2l1 Crores and the receipt position as on 31.3.2000relevant to the assessment year 2000-01 has been.4.3,61,00,000/-. At the time of the agreement, theassessee Nas been given credit for4.92,43,000/- by way ofadjustment towards the cost of construction of assessee’sShare in apartments and hence, as on 31.3.2000, theassessee had received a sum ot e.4,53,40,000/-. A further|amount ofd30 Lakns was due to the assessee from= M/s.PrestigeConstructions.whichhasbeenpaidsubsequently on 1.6.2000. Whereas.theaSS@C@SSCcontended that the said income has to be taxed when the.entire contract is completed i.e., in the year 2003-04.The Assessing Authority was of the view that the incomeaccrued to the assessee by virtue of the sale agreement.dated 25.6.1998 falls in the assessment year 1999-2000.Having regard to the payments made, the credit for the|entire aqmount of4.4,83,40,000/- stands crystallized in.favour of the assessee within the assessment year 2000-01.and therefore, that is the year in which the income from.nomination fees is assessable. Therefore, the Assessing|Authority assessed the said income for the assessment year2000-01. | 3.The assessee preferred an appeal against the|Said order before the Commissioner of Income Tax.(Appeals). TheAppellate|AuthorityON)acareful] examination of all the agreements held that the Assessing|Officer is not justified in bringing to tax the income from.nomination fees in respect of business venture at Bangalore|amounting to|4.4,04,40,000/- for the assessment year2O000-2OO0O1 as the said income falls for consideration for tassessment year 1999-2000 only. Accordingly, the addition |made for§4.4,04,40,000/- was deleted and the AssessingOfficer was directed to recompute the interest chargeable|under section 234B of the Act. | 4Aggrieved by the said order, both the assessee|as well as the revenue preferred appeals before theTribunal. In the meanwhile, in pursuance of the remand.order, the Assessing Authority assessed the income for theassessment year 1999-2000. Aggrieved by the said order, theassessee preferred an appeal to the Commissioner of IncomeTax (Appeals) wno dismissed the said appeal. Aggrieved by tnesaid order, the assessee preferred an appeal to the Tribunal. |That is how before the Tribunal there were three appeals. 5.|All the three appeals were taken up _ foconsideration together by the Tribunal. The Tribunal found.fault with the approach of both the Appellate Authority as.well as the Assessing Authority. According to the Tribunal,in the facts of this case, Project Completion Method is to be)adopted, as the adoption of Accounting Standard (AS) 7 has.been made mandatory with effect from the assessment)year 2004-05 and therefore, following the aforesaidaccounting practice, the Tribunal held that the income has.to be brought on record to be taxed in the year 2003-04.Accordingly, it set aside the order passed by the lower.authorities and allowed the appeal of the assessee.|Aggrieved by the said order, the revenue is in appeal. | 6.following substantial questions of law:| 6.This appeal was admitted to consider the qT.WhetherIn|thefactsand|circumstances of the case, the Tribunal was right|in law, coming to the conclusion that the| nomination fee of|a4,04,40,000/- received bythe assessee from M/s.Prestige Constructions, asper agreement dated 25.6.1998 and supplement|agreement dated 25.6.1998, is assessabie in the.assessment year 2003-04 on Project CompletionMethod, and not in the assessment year 1999-00, even though the assessee was not a Builder|for relevant project, as assessee is not entrustedwith construction work in the proposed project|but represents only a Confirming Party to these|agreements? ?.|Whether on the facts and circumstances of.the case, the Tribunal was right in law in comingto the conclusion that nomination fee received.by tne assessee could not be brought to tax inthe assessment year 1999-00 under Section2(47)(v) of the Income Tax Act in the light of|the decision of Bombay High Court in the case ofDwarkadas Kapadia Vs.CIT (2003)260 ITR 491? 3Whether the Tribunal was correct in comingto the conclusion that the nomination fee Isassessable on project completion metnod thougn the assessee was not a builder but a confirming|party to the agreement? ?.|Whether on the facts and circumstances of.the case, the Tribunal was right in law in comingto the conclusion that nomination fee received.by tne assessee could not be brought to tax inthe assessment year 1999-00 under Section2(47)(v) of the Income Tax Act in the light of|the decision of Bombay High Court in the case ofDwarkadas Kapadia Vs.CIT (2003)260 ITR 491? 3Whether the Tribunal was correct in comingto the conclusion that the nomination fee Isassessable on project completion metnod thougn the assessee was not a builder but a confirming|party to the agreement? JThe learned counsel for the revenue assailing theimpugned order contended that admittedly the assessee is following the Mercantile System of Accounting. Under theagreement dated 25.6.1998, the right of the assessee was.crystallized and an amount of< 4,83,40,000/- became dueto him. Therefore, he should have offered the said income|to tax for the assessment year 1999-2010 as rightly held by|the Commissioner of Income Tax (Appeals). As the)assessee is not a Contractor, Accounting Standard (AS 7) isnot attracted and therefore, the Tribunal erred in holding|that the income should Nave been offered to tax in the year.2003-04 on the basis of the aforesaid Accounting Standard(AS 7) which has no application to the facts of this case. 8.)Per contra, the learned counsel appearing for theassessee submitted that the contract between the parties. Originally was entered into on 30.1.1995. Subsequently,|several agreements have come into existence modifying theterms of the agreement. Under the terms of the agreement.not only the assessee received cash payment, Dut also|received amount towards part of consideration of built-up|area. It is only when the said built up area is handed over.to the assessee in terms of the Complete Project Method,|the assessee has offered the said Income to tax for the.assessment year 2003-04 and therefore, the Tribunal was.justified in upholding the claim of the assessee by setting.aside the order passed by the lower authorities andtherefore, he submits that no case for interference is made|Out. | ormThe material on record discloses that the!memorandum of understanding came to be entered on)30.1.1995under.whichtheaSS@SSCECentered intoagreement with the owner. The terms of the agreementmakes it clear, the assessee has to identify the purchasers| for the owners. Thereafter, on identifying such owners, a.Joint Development Agreement came to be entered into on.23.3.1995 between the owner, assessee and the purchaserwhere the share to which each of them is entitled to in the.built-up portions was determined. Subsequently, yet|another agreement came to be entered into on 13.5.1997,which is styled as agreement of sale whereunder theassessee agreed to sell his share of completed portion for aprice ofy4,90,72,500/-. Subsequently, a supplementary|agreement dated 13.5.1997 was entered into setting out.details of the apartment falling to the share of land owner.It is thereafter, an agreement of sale was entered into on.25.6.1998 under which the purchaser agreed to pay< 6,95,40,000/- out of which.2 4,83,40,000/- was payableto the assessee. A supplementary agreement also came tobe entered into on the aforesaid date. It is under this§sagreement, the rights of the parties were crystallized. Theconsideration due to the owner and the assessee was determined. The payments made earlier under earlieragreements were taken into account and how the balance.amount has to be paid was set out as per Annexure-'1’ to.the said agreement. Under the said agreement not only the:assessee was entitled to a sum of.z4,83,40,000/- by way|of cash, but also was entitled to a super built area asmentioned in the said agreement. However, said super|built area was delivered during 2003-04. Therefore, the|question that arose for our consideration is, whether the.assessee has to offer to tax the consideration under the)Said agreement as on the date the contract was completed.by handing over the constructed area or on the day the)agreement was entered into as he was following Mercantile|System of Accounting. | 10. Accounting Standard (AS) 7 applies to CompleteProject Method. The said system deals with accounting for|construction contracts in the financial statements of.enterprisesundertakingsuCh|contracts 1.e.,by the contractors. It also applies to enterprises undertaking|construction activities of the type dealt within. thisstatement not as contractors but on their own account as a.venture of a commercial nature where the enterprise has.entered into agreements for sale. In other words, a person.who enters into such contract should undertake the.construction personally. If those conditions are fulfilled, it.ISonly|afterthecompletion|ofthecontracttheconsideration of the contract has to be offered to tax at the.completion of the contract. | 11. In the instant case, as per the agreement,though the assessee is carrying on the business of builder|and may be contractor, having regard to the terms of the.contract, his role was only to identify the purchaser. Afteridentifying the purchaser, a tripartite agreement has been|entered into. As per the terms of tripartite agreement,|certain amounts Nave to be paid to the land owner and.certain amounts have to be paid for the services rendered to the assessee and both of them were entitled to some.built up area. Entire construction has to be put up by the)purchaser. No part of construction has to be put by the|assessee and therefore, the Statement of AccountingStandard (AS) 7 which is applied by the Tribunal to the.facts of the case has no application at all. Consequently,the question of applying Complete Project Method to the.facts of the case does not arise. 12. Admittedly,theamountsdueandtheconstructed area due to the assessee was crystallized under.the agreement dated 25.6.1998. Annexure-'1’ to the said.agreementshows,payments.receivedpriorCO theagreement and balance of payments which is to be made.But under the Mercantile System of accounting, when once)the said amount accrues, it has to be offered to tax in the|year of accrual. Therefore, when the said amount is due to.the assessee, a portion of which was already paid and aportion of it is payable in the near future as per the dates| prescribed, the amount mentioned in the said agreement|accrued on 25.6.1998 and therefore, the said amount!should have been offered to tax for the assessment year.1999-2000. That is precisely what the Appellate Authoritythe Commissioner of Income Tax (Appeals) has held. Thefact that though the parties entered into agreement in.1995,there.WeTemodifications,alterationsand|Supplementary agreements also came to be executed.Finally, the terms between the parties were crystallized|under the agreement dated 25.6.1998. Therefore, when|the|aSS@CSSCAWaSfollowingMercantile SystemofAccounting, he should have offered to tax the amounts.accrued to him under the agreement for the assessment.year 1999-2000. In that view of the matter, the order.passed by the Tribunal holding that the amount to be|offered to tax for the year 2003-04 applying Accounting|Standard (AS) 7 and treating the transaction as Complete.Project Method is opposed to the admitted facts of the case. | Therefore, the impugned order passed by the Tribunalrequires to be set-aside. Therefore, the impugned order passed by the Tribunalrequires to be set-aside. 13. It is submitted under the agreement dated25.6.1998, the assessee is entitled to built up area out ofwhich a portion has to be given to the vendor which.requires to be deducted from the income of the assessee.Infact the record discloses, the assessee has paid certain.amounts to the owner when he entered into originalagreement MOU. All the payments made by the assessee.to the owner requires to be deducted out of the money.received from the purchaser by the assessee and what he|has to offer to tax is only the net amount in excess of what)he has paid to the owner, if not allowed. — 14. Therefore, the substantial questions of law areanswered in favour of the revenue and against theassessee. The assessment has to be done for the'! assessment year 1999-2000 and the order passed by the.Tribunal contrary to this stands set-aside. Accordingly,ITA.No.835/2008|IS|ITA.Nos.836/ 2008 and 83/7/2008 are dismissed. allowed. No costs. | Sd/-.JUDGESd/-JUDGE| BSS