18 January 2014
Dear Sir, Sole proprietor commenced his apartment construction business in FY 2010-11. It had receipts of below 40 lacs in FY 2010-11. It had receipts of 42 lacs in 2011-12. However ,out of ignorance, it obtained service tax registration only in Sep,2011(FY2011-12) and demanded and received service tax from its purchasers and paid ST on all the payments ie Rs 82 lac made by flat purchasers till the date of service tax registration including those made in FY2010-11. But due to the mistake of the service tax consultant the entire payment/receipts was shown as having been received in one Quarter only in S T Returns. And to add to the woes of the assesse proprietor the S T return was not even revised by his consultant.Also due to this mistake presumptive return u/s 44AD also could not be filed of AY 2011-12 and AY 2012-13. The proprietor died in Aug 2012 and the business was succeeded by his middle son as per mutual agreement between his three sons. Since the service tax registration is given premise wise therefore the son did not obtain a fresh ST registration rather continued paying the ST on the ST code of his deceased proprietor father.The project was completed in march 2013. All along the CA was doing accounting work on the basis of COMPLETION ACCOUNTING METHGOD. But unfortunately the original proprietor died in Aug 2012. MY QUESTION IS CAN THE SUCCESSOR PROPRIETOR FILE HIS INCOME TAX RETURN FOR THE ENTIRE PROJECT AS PER COMPLETION ACCOUNTING METHOD AS NO OTHER OPTION IS LEFT?EVEN THE ASSESSEE'S CA IS CONFUSED.
19 January 2014
No doubt the situation is critical but if the project is on work completed method then at the time of death of the father whatever construction cost was incurred should be shown as WIP and as per books the entire construction business assets and liabilities should have been transferred to the Middle son and this should have been done by execution of Memorandum of family settlement. Anyhow, if not done it can be done now and the income tax returns can be filed for the middle son by showing the profit whatever on-completion of the project. If the CA is unable then write to ssunderagarwal@gmail.com which will cost you for doing the work.
19 January 2014
Respected Sir, The mutual agreement of business continuation between the 3 brothers was like a Memorandum of family settlement only whereunder all brothers agreed that the middle brother shall continue the proprietory business of their father as successor proprietor till the completion of the said project and he shall take over the assets and liabilities of the business as per the books on the date of death of their father and for addressing the liabilities and further expenses of the business the middle brother shall sell more flats if needed and the other 2 brothers shall join as confirming parties/vendors wherever required by the vendees/banks etc and after the completion of the said project there will be division of assets as per Hindu sucession laws after which the middle brother will be free to continue or discontinue the existing business. But there was no division of assets of their fathers business per se under this agreement. It was postponed till the completion of the project. Is it OK SIR OR should the division of shares of all brothers have been affected through the aforesaid agreement itself ?
03 August 2025
This is quite a complex scenario involving succession, accounting methods, service tax compliance, and income tax return filing. Here's a detailed perspective to help you:
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### 1. **Regarding Service Tax Return Filed by Consultant**
* The mistake of showing entire receipts in one quarter instead of correctly spreading across quarters is an error. * Since the service tax registration was obtained late (Sep 2011), tax should ideally be paid from that date. However, collecting and paying service tax on amounts received before registration is not standard and may invite scrutiny. * The returns can be revised to correct the quarterly breakup, but since the proprietor is deceased and the consultant did not revise the returns, you should consider:
* Filing **voluntary revised returns** if the law permits, or * Disclosing this as part of any possible audit or inquiry.
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### 2. **Regarding Income Tax Filing & Succession**
* The successor (middle son) continuing the business is valid as per the **family settlement agreement**. * Since the project was ongoing at the time of father’s death, the **work-in-progress (WIP)** should be accounted as an asset. * The successor can file income tax returns for the project as per **Completion Accounting Method**, showing income only upon completion (or proportionate income based on WIP if partial completion accounting is used). * The agreement among brothers acts as a **Memorandum of Family Settlement**, which is acceptable for business continuation.
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### 3. **Regarding Division of Assets**
* It is not mandatory that the division of assets happens immediately through the agreement. * Postponing the division till completion of the project is legally acceptable if all parties agree. * However, for clarity and to avoid future disputes, a **written, notarized agreement clearly stating roles, rights, and profit sharing** among brothers is advisable. * Eventually, division should be done as per **Hindu Succession Act**, especially for ownership and tax clarity.
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### Summary & Recommendations:
* **Service Tax Compliance**: Consider revising service tax returns or making voluntary disclosures to avoid penalties. * **Income Tax Filing**: Successor can file return using completion method; include WIP and transferred assets/liabilities. * **Documentation**: Maintain clear, legal family settlement documents. * **Professional Help**: Given the complexity, it’s advisable to consult a CA/tax expert experienced in succession and indirect tax matters.
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If you want, I can help draft a summary letter or point out key steps for compliance in this matter. Would you like that?
CAclubindia
