Income Tax Appellate Tribunal - Hyderabad
Income-Tax Officer vs Tirumala Constructions Ltd. on 26 August, 1986
Equivalent citations: [1987]20ITD494(HYD)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is a departmental appeal directed against the order of the Commissioner (Appeals), Hyderabad, dated 9-8-1984 and it relates to the assessment year 1981-82.
2. The assessee is a registered firm. The assessment year involved is 1981-82 for which the previous year ended by 7-11-1980. The assessee is a builder of multi-storey flats and it offers to sell the same to the public. During the course of its business the assessee-firm would be entering into contracts with purchasers and admittedly according to the stipulations of every contract the purchasers of flats have to pay amounts of purchase price in instalments as well as deposit certain amounts as advances with the assessee. The amounts of advances as well as instalment receipts would be shown as receipts in the account books maintained by the assessee and the assessee was in the habit of estimating gross profit against receipts. For the assessment year 1980-81 the assessee returned gross profit of 18 per cent as against which the ITO completed the assessment estimating the net profit at 20 per cent of the gross receipts as income of the assessee. During the accounting year relevant to the assessment year 1981-82 the assessee had received advance deposits amounting to Rs. 32,27,000. The names of the purchasers of flats, the date of the agreements entered into with each of them, the various dates on which advance amounts are received from each of the purchasers during the relevant accounting year and the particulars of the amounts of advances received from each of the purchasers during the relevant accounting year are all furnished in a tabular form on behalf of the assessee. It would show that the assessee had received advances of Rs. 32,37,000 during the relevant accounting period. During the enquiry before assessment the assessee addressed two letters dated 29-12-1983 and 7-1-1984 wherein the assessee-firm had explained that even though there is increase in cost of labour, cost of material they could not increase the price of flats agreed upon with the purchasers as there is no provision in the agreement of sale to increase the sale price and there was DO likelihood of their getting more profit than what they had shown in their return. For the assessment year 1981-82 the assessee-firm had estimated the gross profit at 9 per cent on the total deposits of Rs. 32,27,000 and estimated the gross profit at Rs. 2,87,980. The assessee-firm returned an income of Rs. 2,31,760. The ITO completed the assessment on protective basis. He found that up to the end of the accounting year no sales were effected and none of the purchasers occupied the flats. The ITO also found that normally in a business of this type profit arises in the year in which sales of flats are actually effected. He, therefore, held that the income has to be assessed in the year in which the sales of flats are effected. However, without prejudice to the computation of income in the year in which flats are sold since the assessee had admitted an income of Rs. 2,31,760 the ITO thought he would assess the same on protective basis. Thus, the ITO completed his assessment dated 7-3-1984.
3. Aggrieved against the said assessment the assessee went in appeal before the learned Commissioner (Appeals). Firstly it is contended before the learned Commissioner (Appeals) that making or completing assessment on protective basis is illegal in the facts and circumstances of the case. The learned Commissioner (Appeals) found that whereas for the assessment year 1980-81 the gross profit was estimated at 18 per cent in this year, however, the ITO accepted when the assessee returned the gross profit only at 9 per cent. He held that the estimating of gross profit at 9 per cent accepted by the ITO after considering the explanation furnished by the assessee explaining the possibility of reduction in the rate of profit. However, after doing this, according to the learned Commissioner (Appeals) it was not proper for the ITO to hold that the income is to be assessed in the year in which the sales of flats are affected and thereafter to complete the assessment on the income admitted by saying that the same is assessed on protective basis. The learned Commissioner (Appeals) held that the only option to the ITO was to assess the income or to reject it. He further observed that the ITO cannot assess the assessee-firm on protective basis and keep the assessee in perpetual anxiety. Ultimately he held that the completion of assessment on protective basis is not justified. He ordered that the assessment made should be treated as regular assessment and further ordered that credit for the income assessed in this assessment should be given in computing the income when the sales of the flats are finally effected.
4. Aggrieved by the impugned order of the Commissioner (Appeals) the revenue filed the second appeal. It is contended by the learned departmental representative that no flats were sold to the intending purchasers and, therefore, the assessee could not be said to have made profits out of itself. Profit will arise only in the year when the sale is effected. Since the assessee had filed a return admitting a profit the ITO correctly accepted the return on a protective basis. The learned Commissioner (Appeals) ought not to have confirmed 9 per cent gross profit after finding that it was accepted by the ITO. At the outset the learned Commissioner (Appeals) could have set aside the assessment for finding out the real profit earned by the assessee. Firstly, it was argued by the learned departmental representative that no appeal lies against protective assessment under Section 246(1)(c) of the Income-tax Act, 1961 ('the Act'). Section 246(1)(c) is as follows :
(1) Subject to the provisions of Sub-section (2), any assessee aggrieved by any of the following orders of an Income-tax Officer may appeal to the Appellate Assistant Commissioner against such order--
(a) and (b) ** ** **
(c) an order against the assessee, where the assessee denies his liability to be assessed under this Act or any order of assessment under subsection (3) of Section 143 or Section 144, where the assessee objects to the amount of income assessed, or to the amount of tax determined, or to the amount of loss computed, or to the status under which he is assessed ;
According to the learned departmental representative even though the assessment is made under Section 143(3) of the Act only in four instances enumerated in the section and in none others the assessee has got right of appeal. The four instances are : (i) where the assessee objects to the amount of income assessed, (ii) to the amount of tax determined, (iii) to the amount of loss computed, and (iv) to the status under which he is assessed. Now, in this case, according to the learned departmental representative, the assessee is not questioning any order passed relating to the four points mentioned above and, therefore, the learned Commissioner (Appeals) ought not to have entertained an appeal at the instance of the assessee at all. However, having entertained the appeal the impugned order is vitiated by error of jurisdiction. In support of his primary contention that no appeal lies against protective assessment the learned departmental representative relied upon the following decisions :
Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC), and order of the Tribunal Bench 'B', Calcutta in Official Trustee of West Bengal for Trust of Smt. Shitra Dassi v. ITO [1986] 16 ITD 483.
5. Shri Ratnakar, the learned Counsel for the assessee countered the arguments of the learned departmental representative by stating that a reading of the impugned assessment order passed by the ITO would show that whereas the assessee came forward stating that he is liable to tax at a certain amount, however, the ITO says he is not liable and he would be liable only in later assessment years. In such a case can anybody say that there is no controversy about the income to be assessed. The controversy which in fact arises from out of the impugned assessment order is whether the income offered for assessment is assessable either now or in future.
6. After considering the arguments on both sides we are of the opinion that the arguments advanced on behalf of the assessee are to prevail against those of the learned departmental representative for the following reasons. In Smt. Tara Devi Aggarwal's case (supra) the following is held :
The learned advocate for the assessee contends that under Section 33B the Commissioner had no jurisdiction to cancel the assessment made by the ITO inasmuch as it cannot be said that where an assessee has been assessed to tax it was prejudicial to the interests of revenue on the ground that no assessment could have been made in respect of the income of which she made a voluntary return. This contention in our view is unwarranted by the language of Section 33B . . . Even where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands in order to assist someone else who would have been assessed to a larger amount, an assessment so made can certainly be erroneous and prejudicial to the interests of the revenue. If so--and we think it is so--the Commissioner under Section 33B has ample jurisdiction to cancel the assessment and may initiate proceedings for assessment under the provisions of the Act against some other assessee who according to the income-tax authorities is liable for the income thereof....
7. The Calcutta Bench of the Tribunal in Official Trustee of West Bengal for Trust of Smt. Shitra Dassi's case (supra) also considered a case where there was a protective assessment made against an AOP. In the protective assessment the ITO left a finding that he had reserved the right to proceed against somebody else if permitted under the law. The question is whether such a remark could not give rise to any grievance to the assessee who has been assessed exactly on the basis of the returns, filed by it. In that connection, no doubt, the Calcutta Bench while interpreting Section 246(1)(c) held as follows :
. . . Section 246(1)(c) states that if an assessee is aggrieved as to his liability under the Act or the amount of income assessed or to the amount of tax determined or to the amount of loss computed or to the status under which he is assessed then, and then alone, he has been given a right to appeal against those points. In other words, there is no right of appeal conferred by law against any other point decided in the assessment order or any other statement made therein....
8. Shri Ratnakar wanted to distinguish these two cases on the ground that in those two cases the question was who was the correct assessee ? Is it A or B ? When the revenue was not able to decide which of the persons was the correct assessee it reserved its right to determine the correct assessee at a later point of time. Then a protective assessment was framed. In those cases and against such a protective assessment it is stated no appeal lies. Therefore, it can be seen that at least two persons are involved in the case before the Calcutta Bench. But in the case before us no two persons are involved. The question is whether the assessee was assessable in the present assessment year or any future assessment year. The same situation is not obtaining in the facts of the case either before the Calcutta Bench or before the Hon'ble Supreme Court in the above two cases and, therefore, the ratio of the two cases cited above are distinguishable and do not apply to the facts of the case before us. We accept this argument and the point of distinction drawn and hold that it is valid and correct. Commenting upon another Supreme Court decision cited on behalf of the revenue, viz., Kanpur Coal Syndicate's case (supra) Shri Ratnakar argued that the ratio of the Hon'ble Supreme Court in that case helps the assessee more than the department. In that case an AOP had been assessed. The assessee filed the appeal contending that it would be more appropriate if the individual members of the association were assessed. The revenue was contending that the assessee which is an AOP had no right of appeal, as it cannot deny its liability to tax. When the matter went to the Supreme Court the following is held :
. . . Under Section 30 an assessee objecting to the amount of income assessed under Section 23 or the amount of tax determined under the said section or denying his liability to be assessed under the Act can prefer an appeal against the order of the Income-tax Officer to the Appellate Assistant Commissioner. It is said that an order made by the Income-tax Officer rejecting the plea of an association of persons that the members thereof shall be assessed individually does not fall under one or other of the three heads mentioned above. What is the substance of the objection of the assessee ? The assessee denies his liability to be assessed under the Act in the circumstances of the case and pleads that the members of the association shall be assessed only individually. The expression 'denial of liability' is comprehensive enough to take in not only the total denial of liability but also the liability to tax under particular circumstances. In either case the denial is a denial of liability to be assessed under the provisions of the Act. In one case the assessee says that he is not liable to be assessed to tax under the Act, and in the other case the assessee denies his liability to tax under the provisions of the Act if the option given to the appropriate officer under the provisions of the Act is judicially exercised. We, therefore, hold that such an assessee has a right of appeal under Section 30 of the Act against the order of the Income-tax Officer assessing the association of members instead of the members thereof individually....
Here also the question is whether the assessee should be assessed to income-tax on the income returned either in the relevant accounting year or in a later accounting year. The ITO in substance says that the assessee is not liable to be assessed on the income disclosed by him in this assessment year and the income disclosed this year should be considered as part of the income of the assessee while he would be assessed after complete sale of the flats were effected. Therefore, the Supreme Court decision in Kanpur Coal Syndicate's case (supra) at p. 229 held that denial of liability is comprehensive enough not only to include total denial but also the denial of liability to tax under particular circumstances. To our minds it appears that the ratio of the Supreme Court in Kanpur Coal Syndicate's case (supra) helps the assessee rather than the department inasmuch as the assessee offered income to tax in the relevant accounting year whereas the ITO states that it should not be considered its income that it is not liable to tax in the relevant accounting year and it should be assessed only in a later accounting year. Thus, in our opinion, there was a dispute between the assessee and the department about the income assessed and, therefore, appeal clearly lies against the impugned assessment order under Section 246(1)(c).
9. It is contended by the learned departmental representative that when the assessee itself filed the return in which a certain amount of income was offered for tax the ITO cannot but complete the assessment. Shri Ratnakar countered the argument by submitting that there is nothing like protective assessment recognised under the Act and the so-called protective assessment is as good as a regular assessment and an appeal lies against it. He cited before us an unreported decision of the Andhra Pradesh High Court rendered in Case Referred Nos. 75 and 169 of 1979. The Andhra Pradesh High Court by its decision dated 12-2-1981 held as follows :
The assessment against the other three assessees was made in the status of individuals for the assessment year 1973-74, but labelled a protective assessment. It was argued that a protective assessment is an assessment which acquires no finality and which can be varied later on. But in support of this agreement, no statutory provision has been shown to us. The provisions of the Income-tax Act would only permit the levying of assessment within the period of limitation. The assessment so made by the Income-tax Officer cannot be contingent. It must be final and definite. In the absence of any statutory provision authorising the Income-tax Officer to make the so-called protective assessment, we are compelled to hold that in law a protective assessment, is a final determination of the tax payable by the assessee and is incapable of being varied, except on the grounds which are available for interfering with the ordinary assessments.
Therefore, in view of the abovesaid authoritative pronouncement of the Andhra Pradesh High Court the argument that no appeal lies against protective assessment cannot be accepted. So also the argument that protective assessment cannot be valid at any time and it had no finality is also to be rejected. It is further argued by Shri Ratnakar that there is no compulsion on the part of the ITO to pass a protective assessment even if a person comes forward with the claim that he is liable to tax on a certain income. In case the ITO feels either that the assessee is not liable to tax on that income or that income is not assessable in that particular accounting year but it was assessable only in a later accounting year he could have as well made a nil assessment. Nothing prevented the ITO to do so in this case. We accept this argument as correct, and we have to reject the argument of the learned departmental representative that no option is left to the ITO but to complete the assessment on protective basis.
10. It is next argued that the case of a contractor is quite different from a case of a builder. The learned departmental representative concedes that the contractor derives profit even while the contract work is being executed and the work is in progress. But that is not possible in the case of builders. The learned departmental representative submits that income arises either on accrual or receipt basis but not in any other way. The learned departmental representative also submits that though the flats in a multi-storeyed building built by a builder are stock-in-trade in his hands but yet they do not shed their character as immovable property. In the case of immovable property under the mandatory provisions of Section 54 of the Transfer of Property Act, 1882, the sale should not be considered complete unless regular registered document is executed involving the transfer of title of a flat in favour of a purchaser. Now in this case inasmuch as the assessee did not execute regular registered sale deeds in favour of any one of the purchasers the sale of flats cannot be considered to be complete and the amount reflected in the books of account of the assessee cannot be taken to be gross receipts on which profit is derived and unless profit is derived the assessment cannot be made on the business income. Shri Ratnakar countered this argument both factually as well as legally. Firstly, he invited our attention to the fact that in the case of this very assessee when certain amount was offered as profit derived from the business for the assessment year 1980-81 the ITO felt that 18 per cent gross profit disclosed was not enough and completed the assessment adopting 20 per cent gross profit. He never stated that the assessee is not liable to tax because he did not earn any business income inasmuch as the sale was not complete. When in the same way profit derived by the assessee was returned for the assessment year 1981-82 how can the ITO treat this income differently ? Further, Shri Ratnakar filed several assessment orders where the other builders were assessed on the gross receipts by estimating their profits at certain percentage of gross receipts. For instance, at page 1 of the paper book he had filed the assessment order of the ITO dated 13-3-1985 representing the assessment made against registered firm called Jabbar Real Estates, Nallagutta, Secunderabad, for the assessment year 1980-81. A reading of the assessment order itself would disclose that the assessee is engaged in the business of construction of flats and their sale and during that year the firm received gross bills of Rs. 2,55,500. The ITO estimated the net income at 12½ per cent on the gross receipts of Rs. 2,55,500 which works out to Rs. 31,940. At page 3 the assessment order dated 4-3-1985 representing the assessment made against a registered firm called Land Mark Builders, Khairtabad for the assessment year 1982-83 was provided. The returned business income in that case was Rs. 34,683. How the business income was arrived at was explained at pages 4-5. Page 5 represents construction account. It shows that the assessee received an advance of Rs. 2,31,222 from its customers and 15 per cent thereof was estimated as gross profit and thus Rs. 34,683 was shown as business profit. By the assessment order the ITO accepted the business income returned at Rs. 34,683. Similarly at page 7 the order of the assessment of the same firm Land Mark Builders for the assessment year 1983-84 was provided. The business income returned was shown at Rs. 83,554. During the relevant accounting year the said firm received an advance of Rs. 7,30,170, 15 per cent thereof was shown as gross profit. The gross profit worked out to Rs. 1,09,525. After making adjustments as per particulars shown in the profit and loss account the total business income was shown at Rs. 83,554 which was accepted by the department as per the assessment order. Again at page 12 the assessment framed against another registered firm Emerald Builders for the assessment year 1983-84 was furnished. A reading of the assessment order discloses that the total receipts as per trading account was Rs. 24,68,200. The total receipts estimated by the ITO works out to Rs. 22,68,200 and the income from business of the assessee was estimated at 12½ per cent of the said estimated amount and the income from business was taken at Rs. 2,83,525.
11. All the above evidence would show that the department has been accepting the profit returned by the builders even from out of the advances received from the purchasers and even though the sales were not complete by any registered documents. So estimating the profit even while the work was in progress was not foreign to the line of business conducted by the builders. Shri Ratnakar argued that the ITO can reject the accounts of the assessee only if the real income derived by the assessee cannot be culled out from those accounts and not otherwise. He further argued that profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. But the assessee must show that he has followed the method regularly for his own purposes. Section 145(1), proviso, clearly makes such method of accounting regularly employed by the assessee a compulsory basis for computation unless in the opinion of the ITO the income, profits and gains cannot properly be deduced therefrom. Whenever a regular method of accounts maintained by the assessee they should form part of the basis of computation of income. In this connection Shri Ratnakar cited the following decisions :
1. In CIT v. Mcmillan & Co. [1958] 33 ITR 182 (SC) it is held as follows :
The section enacts that for the purposes of Section 10 (profits of business, profession or vocation) and Section 12 (income from other sources) income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. The choice of the method of accounting lies with the assessee ; but the assessee must show that he has followed the method regularly for his own purposes. The section and the proviso read together clearly make such a method of accounting regularly employed by the assessee a compulsory basis of computation unless, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom. If the true income, profits and gains cannot be ascertained on the basis of the assessee's method, or where no method of accounting has been regularly employed, the income must be computed upon such basis and in such manner as the Income-tax Officer may determine.
2. In CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC) where it is held as follows :
. . . The section leaves it to the assessee to adopt any system of accounting and obliges the Income-tax Officer to compute the income, profits and gains for the purposes of Sections 10 and 12 in accordance with such method of accounting regularly employed, if profits of the business can properly be deduced therefrom....
3. In CIT v. Tata Iron & Steel Co. Ltd. [1977] 106 ITR 363 (Bom.) where it is held that even if better method of accounts can be visualised the method followed by the assessee-company cannot be rejected as long as the said method could not be said to be unreasonable.
4. In CIT v. K. Sankarapandia Asari & Sons [1981] 130 ITR 541 (Mad.) where it is held as follows :
. . .Nor can we say with definiteness that by adopting such a method the profits and gains cannot properly be deduced therefrom. We have also to keep in mind that while Section 145 enables the ITO not to accept the method of accounting of the assessee if he was of the opinion that the method employed is such that the income cannot properly be deduced therefrom, there is no power in the ITO to impose his own method....
The ratio of the above decisions was not disputed by the learned departmental representative. Having regard to the above arguments we have to hold that the impugned order was not vitiated by an error or lack of jurisdiction to entertain the appeal. We hold that the learned Commissioner (Appeals) had requisite authority to entertain the appeal which was culminated in the impugned orders. So also we hold that estimating the profits even before the sale was not technically complete by execution of registered sale deed is correct and this method is also followed by the revenue not only in the case of the assessee in earlier years but also in other cases of builders and so we hold that the method of accounting maintained by the assessee during the course of its business as builder cannot be found fault with. We further hold that the learned Commissioner (Appeals) is correct in finding that the completion of assessment on protective basis is not justified. It is not as if the ITO blindly accepted the returned income simply because he felt that under law that there was no other go or alternative except accepting the returned income estimated at 9 per cent of the gross receipts. If the above is to be accepted as correct it cannot be explained as to why the ITO questioned the adequacy of the returned income which should alone led the assessee to explain its stand by means of the letters dated 29-12-1983 and 7-1-1984. In those letters the assessee explained that though the cost of labour and cost of building material go on increasing they could not increase the price of the flats as there is no provision in the agreement of sale to increase the sale price and so after duly completing the whole of construction activity the ultimate profit which would be derived would not be more than the returned percentage of the gross receipt for this accounting year.
12. This explanation must have been found favour with the ITO or prevailed with the ITO. Otherwise instead of accepting 9 per cent of gross receipts he would have raised it to 18 per cent or 20 per cent and then would have accepted the resultant figures as income of the assessee on protective basis, especially the reason why he made a protective assessment was only because he felt that the said profit is not assessable in this year but in a future year. Under those circumstances we hold that the ITO had deliberately accepted 9 per cent of the gross receipts as profits earned by the assessee. Therefore, we are unable to give credence to the argument that the learned Commissioner (Appeals) should have set aside the assessment and direct the ITO to adopt reasonable percentage of gross receipts as profits of this accounting year. We cannot also find fault with his direction that the so-called protective assessment framed by the ITO should be treated as regular assessment. Therefore, we fail to see any merit in the revenue's appeal and hence it is dismissed.