UKN Properties Pvt. Ltd. v. The Dy. Commissioner of Income-tax, Circle–12(5), Bengaluru
[Citation -2016-LL-1019-214]

Citation 2016-LL-1019-214
Appellant Name UKN Properties Pvt. Ltd.
Respondent Name The Dy. Commissioner of Income-tax, Circle–12(5), Bengaluru
Court ITAT-Bangalore
Relevant Act Income-tax
Date of Order 19/10/2016
Assessment Year 2008-09
Judgment View Judgment
Keyword Tags avoidance of double taxation • contract completion method • business of real estate • permanent establishment • private limited company • computation of income • statutory obligation • system of accounting • transfer of property • method of accounting • specified territory • technical knowledge • rights of ownership • accounting standard • consultancy charges • uk
Bot Summary: The assessee for the impugned assessment year had filed its return of income declaring a total income of Rs. 1,32,11,729/- Statutory notices were issued to the assessee and details were called for and the same were furnished by the assessee. The learned Commissioner of Income-tax confirmed the additions made by the learned assessing officer as regard to the method of accounting adopted by the assessee for recognizing the income from the project Aarcot Narian Street entered into by the assessee with the land owners. The learned Commissioner of Income-tax confirmed the findings of the learned assessing officer that the assessee is to follow the percentage completion contract method as against the method of accounting adopted by the assessee i.e. Completed Contract Method as per Accounting Standard -9 and confirmed the additions to the extent of Rs. 57,75,178/-. The learned Commissioner of Income-tax confirmed the additions made by the learned assessing officer as regard to the method of accounting adopted by the assessee for recognizing the income from the project ITA No.1559, 1654, 1534/B/13 6 Arcot Narian Street entered into by the assessee with the land owners. The learned Commissioner of Income-tax confirmed the findings of the learned assessing officer that the assessee is to follow the percentage completion contract method as against the method of accounting adopted by the assessee i.e. completed Contract Method as per Accounting Standard-9 and confirmed the additions to the extent of Rs. 1,92,53,422/-. The learned assessing officer and the learned Commissioner of Income-tax have held that the assessee has to recognize its income from the said project under Percentage of Completion Contract Method and not the Completion Contract Method adopted by the assessee in recognizing the income of the assessee. The learned assessing officer has further in the impugned order of assessment for the impugned assessment year 2008-09 has held that the assessee is following Percentage completion Contract Method for the other project and whereas the assessee is following Completion Contract Method with regard to the project Arcot Narian Street.


IN INCOME TAX APPELLATE TRIBUNAL, BENCH- C, BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA No.1559 & 1654/Bang/2013 (Asst. Year 2008-09 & 2009-10) M/s UKN Properties Pvt. Ltd., No.102, St Patriks Arcade, Residency Road, Bengalureu- 560 025. .Appellant Vs. Dy. Commissioner of Income-tax, Circle 12(5), Bengaluru. . Respondent ITA No.1534/Bang/2013 (Asst. Year 2008-09) Dy. Commissioner of Income-tax, Circle 12(5), Bengaluru. . Appellant Vs. M/s UKN Properties Pvt. Ltd., NO.102, St Patriks Arcade, Residency Road, Bengalureu- 560 025. . Respondent Revenue by : Shri Sunil Kumar Agarwala, JCIT Assessee by : Shri Shankar, Advocate Date of Hearing : 30-9-2016 Date of Pronouncement : -10-2016 ITA No.1559, 1654, 1534/B/13 2 ORDER PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER, JM These cross appeals by Revenue as well as assessee are directed against order of Commissioner of Income-tax (Appeal) III dated 27/8/2013 and it pertains to assessment years 2008-09 and 2009-10. ITA No.1559/B/2013 Assessment Year 2008-09 ITA No.1654/B/2013 Assessment year 2009-10 2. assessee is private limited company is in business of Real Estate and development of projects. assessee for impugned assessment year had filed its return of income declaring total income of Rs. 1,32,11,729/- Statutory notices were issued to assessee and details were called for and same were furnished by assessee. ITA No.1559, 1654, 1534/B/13 3 3. learned assessing officer concluded assessment by passing order of assessment under section 143[3] of Act, determining total income of assessee at Rs. 2,38,25,784/- as against income reported by assessee of Rs. 1,32,11,729/-. appellant being aggrieved by order of assessment passed by learned assessing officer preferred appeal before learned Commissioner of Income- tax[Appeals] 3, Bengaluru. learned Commissioner of Income-tax [Appeals] vide her order passed partly allowed appeal preferred by assessee in ITA No.127/C-12(5)/CIT(A)-III/Bng/10-11. learned Commissioner of Income-tax (appeals) confirmed additions made by learned assessing officer as regard to method of accounting adopted by assessee for recognizing income from project Aarcot Narian Street entered into by assessee with land owners. 4. learned Commissioner of Income-tax (Appeals) confirmed findings of learned assessing officer that assessee is to follow percentage completion contract method as against method of accounting adopted by assessee i.e. Completed Contract Method as per Accounting Standard -9 and confirmed additions to extent of Rs. 57,75,178/-. Further, learned Commissioner of Income-tax ITA No.1559, 1654, 1534/B/13 4 (Appeals) in order deleted disallowance made by learned assessing officer under provisions of section 40(a)(i) of Act in relation to payment made by assessee to consultants outside India of Rs. 40,32,861/-. 5. Being aggrieved by said order of learned Commissioner of income-tax (Appeals) to extent which is against appellant, it has preferred appeal before this Hon ble Tribunal in ITA No.1559/Bang/2013, to be precise assessee has raised ground that whether authorities below are correct in holding that assessee is to follow Percentage Completion Contract Method and not Completion Contract Method as per Accounting Standard-7, issued by ICAI. 6. revenue also being aggrieved by said order of learned Commissioner of income-tax (Appeals) to extent which is against department, has preferred appeal before this Hon ble Tribunal in ITA No. 1534/Bang/2013, challenging deletion of disallowance under section 40(a)(i) of Act. ITA No.1559, 1654, 1534/B/13 5 7. assessee for impugned assessment year had filed its return of income declaring total income of Rs. 1,00,31,316/-. Statutory notices were issued to assessee and details were called for and same were furnished by assessee. 8. learned assessing officer concluded assessment by passing order of assessment under section 143(3) of Act, determining total income of assessee at Rs. 3,59,60,466/- as against income reported by assessee of Rs. 1,00,31,316/-. 9. appellant being aggrieved by order of assessment passed by learned assessing officer preferred appeal before learned Commissioner of Income-tax (Appeals) -2, Bengaluru. 10. learned Commissioner of Income-tax (Appeals) vide her order passed partly allowed appeal preferred by assessee in ITA No.163/JC(OSD)-C-12/CIT(A)-II/Bng/13-14. learned Commissioner of Income-tax (Appeals) confirmed additions made by learned assessing officer as regard to method of accounting adopted by assessee for recognizing income from project ITA No.1559, 1654, 1534/B/13 6 Arcot Narian Street entered into by assessee with land owners. learned Commissioner of Income-tax (Appeals) confirmed findings of learned assessing officer that assessee is to follow percentage completion contract method as against method of accounting adopted by assessee i.e. completed Contract Method as per Accounting Standard-9 and confirmed additions to extent of Rs. 1,92,53,422/-. As regard to other additions and disallowances Commissioner (Appeals) deleted. 11. Being aggrieved by said order of learned Commissioner of income-tax (Appeals to extent which is against appellant, it has preferred appeal before this Hon ble Tribunal in ITA No.1606/Bang/2013, to be precise assessee has raised ground that whether authorities below are correct in holding that assessee is to follow Percentage Completion Contract Method and not Completion Contract Method as per Accounting Standard-7, issued by ICAI. 12. Aggrieved assessee filed appeal before us for asst. year 2008-09 and 2009-10. ITA No.1559, 1654, 1534/B/13 7 13. ld counsel submitted as follows: 1. solitary issue involved in appeal by assessee for impugned Assessment Years 2008- 09 is that whether finding of learned assessing officer and that of learned Commissi8oner of Income-tax (Appeals), Bengaluru, that appellant has to adopt percentage completion method holding that appellant is to necessarily follow percentage of completion method, as against completion contract method adopted by appellant as per Accounting Standard-9 being Revenue Recognition recommended by Institute of Chartered Accountants of India for project Arcot Narian Street project. 2. assessee had entered in development project with land owners to develop Commercial project at Kamraj Road, Bengaluru which was known as Arcot Narian Street vide development agreement dated 11/09/2006 which is registered with Sub-Registrar. assessee constructed and developed project and recognized income from said project under method Completion Contract Method following ITA No.1559, 1654, 1534/B/13 8 Accounting Standard-9. assessee declared income from said project as and when possession or sale of units was made by assessee. 3. learned assessing officer and learned Commissioner of Income-tax (Appeals) have held that assessee has to recognize its income from said project under Percentage of Completion Contract Method and not Completion Contract Method adopted by assessee in recognizing income of assessee. learned assessing officer has further in impugned order of assessment for impugned assessment year 2008-09 has held that assessee is following Percentage completion Contract Method for other project and whereas assessee is following Completion Contract Method with regard to project Arcot Narian Street . said finding of learned assessing officer was confirmed by learned Commissioner of Income-tax(Appeals). As against this assessee is in appeal before this Hon ble Tribunal for both impugned assessment years 2008-09 & 2009- 10. amount of addition made by learned assessing officer on method of accounting for ITA No.1559, 1654, 1534/B/13 9 Assessment Year 2008-09 is Rs. 57,75,178/- and for Assessment Year 2009-10 is Rs. 1,92,53,422/-. 4. It is submitted that in project i.e. Arcot Narian Street assessee is developer and not contractor, hence completion contract method adopted by assessee is appropriate method of accounting and not percentage of completion contract method adopted by learned assessing officer and confirmed by learned Commissioner (Appeals). facts that are required to appreciate facts of case are that appellant took property at Aarcot Srinivachar Narain Street and was entitled to about 11,479 square fet of built up area. appellant had sold only 7,334 square feet of built up area ato two persons and had retained balance of 4145 square feet which was let out to earn rental income. appellant had in accordance with correct method for developer offered income for Assessment eyars 2011-12 and 2012-13 which has ITA No.1559, 1654, 1534/B/13 10 been accepted by assessing officer in those years substantially and thus taxing same income in two different assessment years amounts to double taxation. total advances received and income offered is tabulated and placed at Page Number 200 of Paper book. method adopted by assessing officer indicates taxing income in relation to unit which was never sold and even retained as on date. Thus issues that arises in assessee appeal in present case are as follows. a) Whether percentage contract completion method is applicable to developer and on facts of case b) Without prejudice whether working adopted by assessing officer is fair and correct on facts of case. ITA No.1559, 1654, 1534/B/13 11 5 Whether percentage contract completion method is applicable to developer and on facts of case. learned authorities below were not correct in law and also not justified in law in adopting Accounting Standard -7 issued by Institute of Chartered Accountants of India, which is applicable only to Contractors and not Developer or Builder. It is submitted that learned Commissioner of Income-tax (Appeals) failed to appreciate Hon ble Jurisdictional Tribunal in case of Varun Developers Vs. JCIT, in ITA No s 372 & 373/Bang/2013, has held as under: We are also of view that AO cannot thrust any particular method of accounting on assessee. In this regard, even unamended AS-7 which applied to construction contracts could not have been thrust upon assessee who is in business of real estate development. Under section 145(2) of Act, assessee is free to adopt either cash or mercantile system of accounting. When method of accounting is ITA No.1559, 1654, 1534/B/13 12 followed by assessee, jurisdiction of AO only extends u/s. 145(2) of Act to verify as to whether method of accounting is being regularly followed by assessee. Beyond this, AO has no jurisdiction in matter of accounting followed by assessee. It is submitted that there is difference between Developer/Builder with that of Contractor. As per meaning given to word contractor as per P.Ramanatha Aiyar s, Advanced Law Lexicon is that One who contracts to furnish supplies, or to perform any work or service at certain price or rate; one who enters into contract . Therefore, there is clear distinction that has been drawn between contractor and developer. factual matrix pertaining to Accounting Standard and Guidance Note issued by Institute of Chartered Accountants of India are as follows: ACCOUNTING STANDARD 07: There is Accounting Standard -07, titled Construction Contracts . Issued by Institute of Chartered Accountants which is revised in year 2003. Post ITA No.1559, 1654, 1534/B/13 13 revision Accounting Standard is not applicable to Developers, while pre-revision was applicable to Contractors as well as Developers. This is accepted fact. Therefore AS-7 do not apply to Developers per se. However there is Guidance Note on Revenue recognition, which is dealt with in subsequent paras. Now let us examine AS 9, its applicability to Real Estate Developers. key word is SIGNIFICANT RISK & RWARDS of OWNERSHIP is transferred to buyer and seller retains no effective control of goods transferred to degree usually associated with ownership. This has to be examined with reference to what is prevalent practice in Industry. As per prevailing practice, buyer of unit gets nothing, when agreement is signed. It is said that person having agreement to sell in his favor does not get any right in property, except right of litigation on that basis. Therefore it may not be right to say that seller has transferred his rights of ownership in such unit to buyer. More importantly, buyer does not get any LEGAL RIGHT to sell unit, based on agreement, ITA No.1559, 1654, 1534/B/13 14 which is one of essentials to apply proportionate method in terms of AS 9. As per prevailing practice, buyer does not get anything at all in property, till such time, property is delivered. He has no absolute right, he has no right to stop construction, even if it is against his interest. His visit to his own property (if we are permitted to say so) is restricted and he cannot hinder construction of his flat. He is subjected various conditions and restrictive covenants as contained in agreement. Virtually he enjoys no ownership rights, so is risk and rewards associated with such ownership. He enjoys no ownership rights whatsoever when agreement is signed. For this purposes we can examine section 54 of Transfer of Property Act, which clearly says that no right is conferred, when agreement of sale is signed between parties. This is confirmed by Supreme Court in Ramabran Vs. Ram Mohit, No.1, SCR 293, wherein Apex Court has held that person who has contracted to buy land is not owner of any interest in land and is therefore is not competent to ITA No.1559, 1654, 1534/B/13 15 apply to set aside execution sale of same land . Even for argument sake if it is agreed that he gets right of ownership, this has no effect, as section 17(1A) of Indian Registration Act, 1908, clearly nullifies effect of such transfer. As per section 17(1A) of Registration Act, every document containing transfer u/s 53A should be registered, failing which it shall have no effect for purposes of section 53A. learned authorities below are not justified in applying Accounting Standard -7 to instant case of assessee. Scope of accounting Standard -7 categorically included in Scope paragraph that this Statement should be applied in accounting for construction contracts in financial statements of contractors . Apart from this there is basic difference between contractor and Developer as explained in earlier paragraphs. This makes contractors different from Builder or Developer. This is very well recognized principle and in recognition of this difference between developer and Contractor, law has been amended with respect to various ITA No.1559, 1654, 1534/B/13 16 incentive provisions provided to Developers in Statute. It is submitted that in instant case admittedly case is that of Development of property. In terms of Guidance Note, issued by Institute of Chartered Accountants of India Revenue in case of Real Estate Developers is recognized when all following conditions as stated in AS-9 (Revenue Recognition) are satisfied . One of condition specifies that no Significant uncertainty exists regarding amounts of consideration that will be received . 14. ld DR relied on orders of CIT(A). 15. We have heard rival submissions and perused material on record. issue in this appeal is whether assessee can be permitted to adopt one particular method of accounting i.e., Contract Completion Method in respect of some projects, and another method of accounting Percentage of Completion Method in respect of other projects. It is admitted fact that assessee has been following Percentage of Completion Method continuously. It is only during year under consideration that assessee adopted project Completion ITA No.1559, 1654, 1534/B/13 17 Method in respect of project at Kamraj Road, Bangalore. This project was taken under joint development agreement. No doubt law is settled to extent that it is open to assessee to adopt any particular system of accounting and assessing officer cannot impose particular method of accounting on assessee. But once assessee had chosen to adopt particular system of accounting, he is under statutory obligation to follow it continuously same method of accounting. It is not open to assessee to adopt one method of accounting in respect of some projects and other method of accounting in respect of other projects. If assessee is allowed to adopt different method of accounting in respect of each project, it results in distortion of financial results and amounts to arbitrary method of accounting which is not permissible under law and goes against very spirit of provisions of section 145 and 145A of Act. Thus assessee is debarred to adopt different methods in respect of different projects. assessee having chosen percentage of completion method is expected to follow same method in respect of all projects and for all years. Once percentage of completion method is applied, addition made by assessing officer is justified and we do not find any reason to interfere ITA No.1559, 1654, 1534/B/13 18 with orders of learned CIT(A). In result, appeal is dismissed. ITA No. 1534/Bang/2013 A.Y.2008-09] 16. grounds of appeal raised by Department are as under: 1. order of ld CIT(A) is opposed to law and facts of case. 2. On facts and in circumstances of case, ld CIT(A) erred in law in deleting disallowance made u/s 40(a)(ia) by applying Article 15 of Double Taxation Avoidance Agreement with UK instead of Article 13, which actually provides for taxation on royalties and fees for technical services. 3. For these and other grounds that may be urged at time of hearing, it is prayed that order of CIT(A) is so far as it relates to above grounds may be reversed and that of Assessing Officer may be restored. 4. appellant craves leave to add, alter, amend and/or delete any of grounds mentioned above. ITA No.1559, 1654, 1534/B/13 19 17. department has preferred appeal before this Hon ble Tribunal for A.Y. 2008-09 in ITA No. 1534/Bang/2013, wherein department has contested findings and relief allowed by learned Commissioner of Income-tax [Appeals] of sum of Rs. 40,32,861/- being disallowance made by learned assessing officer by applying provisions of section 40[a][i] of Act. learned assessing officer in order of assessment had disallowed amount of Rs. 40,32,861/- being amounts paid by assessee to consultants located abroad towards consultation for project, on which appellant had not deducted at source. 18. In this regard assessee submitted that assessee during impugned assessment year 2008-09 had made payments to foreign consultants i.e. M/s Allies & Morrison, London amounting to Rs. 34,36,599/- towards architectural Service Fees and sum of Rs. 3,01,469/- consultancy charges paid to M/s Christopher Bradley Hole Ltd., towards landscaping consultancy. assessee had not deducted TDS on said payments made by it to two of above mentioned consultants. ITA No.1559, 1654, 1534/B/13 20 19. assessee has made two fold submissions in this regard. a) In view of fact that recipient has no permanent establishment in India question of taxing any part of amount paid to him for service rendered by him from his home country cannot be taxed in India. b) Without prejudice even for arguments sake Technical fees are liable to be taxed in India in view Article 13(4) there is no make available and hence nothing is taxable in India. 20. learned Commissioner of Income-tax [Appeals] in her order at page 7 and 8 of her order has giving her finding which is as under: I have carefully considered issue. It is seen that appellant has made payments for architect fees and landscaping consultancy. This payment is made to parties who are not resident in India and who do not have any permanent establishment in India. In terms of Article 15 of DTAA with UK, ITA No.1559, 1654, 1534/B/13 21 Income derived by individual, whether in his own capacity or as member of partnership, who is resident of Contracting State in respect of professional services or other independent activities of similar character may be taxed in State. Such income may also be taxes in order Contracting State if such services are performed in that other State and if: (a) He is present in that other state for period or periods aggregating to 90 days in relevant fiscal year; or (b) He, or partnership, has fixed base regularly available to him, or it in that other State for purpose of performing his activities; but in each case only so much of income as its attributable to those services. For purposes of paragraph 1 of this Article on individual who is member of partnership shall be regarded as being present in other state during days on which, although he is not present, another individual member of partnership is so present and performs professional services or other independent activities of similar character in that State ITA No.1559, 1654, 1534/B/13 22 term professional services includes independent, scientific, literary, artistic, educational or teaching activities as well as independent activities as well as independent activities or physicians, surgeons, lawyers, engineers, architects, dentists and accountants. As recipients are not resident in India and do not have fixed base, it would appear thata appellant s contention has merit. decision of Hon ble Supreme Court in case of GE India Technology P Ltd Vs CIT reported in 327 ITR 456 would be relevant to appellant s case. Further, contention of appellant that no disallowance under section 40(a)(ia) is to be made as there is no claim of expenditure for computation of income under head business also has considerable force. Considering facts in entirety, this ground is allowed. 21. Before us, it is submitted that payments have been made by assessee in accordance with DTAA with relevant countries prevalent at time of making payment. Further, in terms of section 90[2] of Income tax Act, 1961 stated as under: ITA No.1559, 1654, 1534/B/13 23 Whereas Central Government has entered in to agreement with Government of any country outside India or specified territory outside India, as case may be, under sub-section [1] for granting relief of tax, or as case may be, avoidance of double taxation, then in relation to assessee to whom such payment Applies, provisions of this act shall apply to extent they are more beneficial to assessee. It is submitted that according to provisions of DTAA/Income-tax Act, 1961, whichever is more beneficial to assessee on that provisions assessee made payments and hence no part of payment can be disallowed. It is undisputed fact that payments made by assessee to consultants abroad are payments towards project of assessee. said amount has not been claimed as expenditure in books of assessee and same has been considered as cost towards project and debited to work-in- progress. Consequently, there cannot be any disallowance as per provisions of section ITA No.1559, 1654, 1534/B/13 24 40[a][i]of Act, since payments made by assessee are not debited in profit and loss account. In respect of without prejudice arguments that there is no make available technical knowledge, we rely on decision of Karnataka High court in case of CIT Vs DE beers India Minerals Private Limited 346 ITR 467 which is applicable to facts of case. 22. ld DR relied on order of Assessing Officer. 23. We find that recipients are not resident in India and do not have fixed base and hence decision of Hon ble Supreme Court in case of GE India Technology (Ind) Pvt. Ltd., Vs. CIT, 327 ITR 456 would apply in present case. assessee has also further contended that no disallowance u/s 40a(ia) is to be made as there is no claim of expenditure for computation of income under head business . We find merit in argument of assessee. Hence, Departmental grounds raised are dismissed. ITA No.1559, 1654, 1534/B/13 25 24. In result, appeals in ITA Nos.1534 / 1559/ & 1654/Bang/2013 are dismissed. Order pronounced in open court on 19th October, 2016. Sd/- Sd/- (INTURI RAMA RAO) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore Dated : 19/10/2016 Vms Copy to :1. Assessee 2. Revenue 3.The CIT concerned 4.The CIT(A) concerned 5.DR 6.GF By order Asst. Registrar, ITAT, Bangalore. UKN Properties Pvt. Ltd. v. Dy. Commissioner of Income-tax, Circle12(5), Bengaluru
Report Error