Income accrues only when due and on corresponding liability of other party to pay

Principal Commissioner of Income Tax, Pune v. M/s. Rohan Projects
ITA No. 1345 of 2017 Assessment Year: 2012-13
(In the High Court of Judicature at Bombay)

Background:

It is commonly understood that execution of an agreement leads to completion of a transaction and that the consideration agreed therein accrues to the seller. However, accrual of the consideration completely or in part depends upon the express terms mentioned in the agreement or any other type of document executed between the parties for carrying out a transaction.

This order of ITAT Mumbai, upheld by the Bombay High Court further establishes the principle that for an income to accrue to a person, corresponding liability to pay should also arise to the other party.

Facts of the case:

• The assessee, M/s. Rohan Projects is a Promoter and Developer, engaged in purchase of land, development rights of land, construction and sale of flats.
• The assessee had entered into an MOU with M/s Symbiosis (purchaser), for sale of land, construction and development for educational purposes at Rs. 120 Crores.
• Various stages were identified, on completion of which the assessee would become liable to receive the consideration.
• The assessee offered to tax Rs. 100 Crores, in respect of which it had completed the necessary task and become liable to receive the payment from purchaser, one of which was execution of sale deed.
• The Assessing Officer (AO) held that since the sale deed has been executed, transfer as defined u/s 2(47) has been completed and the entire consideration of Rs. 120 Crores needs to be offered to tax.
• Aggrieved, the assessee appealed to CIT (A), arguing that income which has not accrued cannot be taxed. Moreover, land is a stock-in-trade and not capital asset for the assessee. The CIT (A) agreed with the assessee, that land is stock-in-trade and not capital asset. However, he held that since the sale deed has been executed, the transaction of sale has been completed, and income accrues to the assessee, just like raising an invoice amounts to completion of sale of commodities. The time of payment can be a matter of convenience among the parties and hence, that does not determine whether or not the income has accrued. He upheld the addition of Rs. 20 Crores made by the AO.
• Aggrieved, the assessee appealed to ITAT Pune Bench.

Findings:

• The Ld. Counsel for the assessee argued that the MOU specified the completion of various stages of the deal and the accrual of consideration accordingly. Execution of sale deed was also one of the stages as per the MOU. The stages on which the balance Rs. 20 Crores will accrue to the assessee, had not been completed and hence Rs. 20 Crores were not offered to tax.

• The amount of Rs. 20 Crores was offered for tax in the subsequent assessment years, when the stages were completed. He asserted that MOU was not an after-thought to avoid tax and merely because the MOU is not registered does not mean that it can be ignored for the purpose of taxation, as per the judgement of Apex Court in Thakur Raghunathji Maharaj and Ors., vs. Ramesh Chandra.

• The Ld. Counsel for the Department supported the order of the CIT (A) and held that as per the Transfer of Property Act, once the sale deed is registered, the amount accrues to the assessee.

• The Tribunal held that since land is stock-in-trade for the assessee, Section 2(47) does not apply in the case of the assessee. The Revenue has not demonstrated any evidence either to prove the completion of stages as per the MOU, for the balance Rs. 20 Crores to accrue to the assessee, or to prove that the MOU was an after-though to avoid tax .

• The Tribunal further held that tax cannot be levied on hypothetical income. As per the decisions of the Apex Court in the case of CIT vs. Shoorji Vallabhdas & Co., and Morvi Industries Ltd., vs. CIT, income accrues only when due and also when accompanied by the corresponding liability pf the other party to pay .

• The submission of the assessee that those Rs. 20 Crores have been offered to tax in the subsequent assessment years has also not been disputed by the Revenue.

• Considering the above points, the Tribunal set aside the addition of Rs. 20 Crores made by the AO, allowing the assessee's appeal.

• Aggrieved, the Revenue appealed to the Hon. Bombay High Court. The Revenue reiterated the stand taken in Tribunal, placing reliance on the orders of the AO and CIT (A), in support of its appeal.

• The Hon. High Court noted that the finding of the Tribunal about non-completion of the stages for accrual of Rs. 20 Crores to the assessee has not been disputed. Also, nothing has been shown as to why the observations made by the Tribunal for applying the ratio of the judgements of the Apex Court in the case of Shoorji Vallabhdas & Co., and Morvi Industries Ltd., can be disputed.

• In any case, the amount has been offered to tax in subsequent assessment years. The Hon. High Court, referring to its own judgement in the case of Nagri Mills Co. Ltd, stated that when the income has been offered to tax in the subsequent assessment years and there has been no change in the rate of tax, it should be of no consequence of the department that in which assessment year has the income been offered to tax..

• In view of these points, the Hon. High Court concluded that the stand taken by the Tribunal on the basis of facts is a possible view, calling for no interference, not giving rise to any substantial question of law and dismissed the appeal.

The author can also be reached at rahulsgogate@gmail.com

Source:

www.itatorders.in
www.bombayhighcourt.nic.in