The Ahmedabad bench of Income Tax Appellate Tribunal ( ITAT ) has directs to follow the Principle of Consistency and held that department Cannot Reject the methodology followed for the past years without change in circumstance.
The appellant, M/s. Samarath Realities, is a land developer and has entered into an agreement for development of the project with the land owners. The consideration received from prospective flat buyers is divided into two parts, one part goes to the land owner towards land price and one part goes to the appellant towards construction of project, which is the income of the appellant. The portion towards cost of construction is taken by the appellant in its books of account as revenue and shown in the profit and loss account and the portion towards land cost is taken to the liability side where it is credited to the account of the land owner and shown as “liability”.
During the course of assessment proceedings, the Assessing Officer noticed that there is no consistency in allocation of funds received from flat buyers towards land cost and towards construction portion, which is the revenue of the assessee. The Assessing Officer held that the assessee has clearly bifurcated approximately 16% more towards land owners cost since this does not form part of the contract receipts, which is taxable income in the hands of the assessee. Therefore, the Assessing Officer rejected the books of account on the basis that the books of accounts maintained by the assessee do not reflect the correct profit and applied ratio of 29.42% towards land cost and 70.5% against construction cost and worked out the income to the extent of Rs. 49,71,556/- which has been understated by the appellant in his return of income. Aggrieved assessee filed appeal before CIT (A) which confirmed the addition made by the AO.
On appeal before the Tribunal the counsel for the assessee submitted that the land cost varies from block to block and therefore the same is variable. The appellant has been consistently following this method and the method followed consistently cannot be rejected. The year under appeal is last year of the project and in earlier two years the book result was accepted by Department so that following the principle of consistency as held in the case of the Excel Industries Ltd. 358 ITR 295, the books of accounts of the assessee cannot be rejected. The land rate at the time of booking is the basis of bifurcation. The cost of land forms part of the sale deed and the cost of land so allocated goes to the land owner. The calculation made by Assessing Officer would result in double taxation since the construction cost of Rs. 1,27,11,726/- has already been assessed in the hands of land owners.
The Tribunal has observed that once having accepted this methodology for the past years, the Department cannot reject the methodology in the third year of the project, following the principle of consistency. Note that the assessee has brought to knowledge that the cost of land is allocated through registered sale deed and is determined at the time of entering the agreement which is then later transferred in the hands of the land owner. It was also noted that once the cost of land has already been taxed to the land owner and offered to tax in its hands, the adjustment done by the Assessing Officer by ignoring the registered deed and consistent method of allocation would lead to double taxation.
The Coram of Sri P.M. Jagtap, Vice President and Ms. Suchitra Kamble, Judicial Member while allowing the appeal has held that “we are of the view that the AO has erred in law and fact in rejecting the books of accounts of the assessee which the Department has accepted in prior years on the same set of facts. However, we note from the orders of AO and the CIT (A) that the appellant has not produced any evidence in support of its claim that whatever advances have been shown by the appellant in the balance sheet, the same have been transferred to landowners and offered in the income tax return of the respective land owners. Since, the CIT (A) has made a specific noting that no details were furnished to prove that this income has been offered for taxation in the hands of the land owner, in the interests of justice, we restore the matter back to the file of A.O. on the limited point to verify whether income has been transferred to the land owners and has been offered to tax in their return of income”.
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