INCOME TAX ACT, 1961

Section 145

Accounting method - Revenue recognition - CIT(A) deleted addition made by AO towards advance received from customers/other liabilities -

Assessee was engaged in real estate development. AO sought for (a) Confirmations from all sundry creditors, and (b) Copy of agreement of advances taken from all the customers. The same, filed on 28-12-2011, were taken on record by AO. On enquiry qua the advances received from customers, the same were explained by assessee to be not accounted for as income as assessee, following mercantile system of accounting, had applied Accounting Standard (AS) 9 (i.e., recognition of income), issued by the Institute of Chartered Accountants of India (ICAI). The explanation, in the view of AO, was not tenable as AS-9 rather advocates' revenue recognition where the following conditions are satisfied:- (i) the seller of goods has transferred to the buyer the property in the goods for a price and all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. These conditions were found to be satisfied in respect of outstanding advances from the customers by AO on a perusal of the agreement/s furnished by assessee. In fact, clause and sub-clause (both unspecified) of the Agreements made it clear that monies received would not be refunded even if the sale did not materialise for any reason. There was, accordingly, no question of postponement of revenue. The onus to show that any uncertainty with regard to realisation of revenue (at the time of sale) existed was only on the assessee, and qua which there was even no claim. AO, also doubted genuineness of the transactions in respect of depositors, accordingly, added the entire credit of Rs. 873.79 lac outstanding in the balance-sheet as at the year-end (31-3-2009), as assessee's income for the relevant year. Held: The sale agreements, the primary document, based on which AO has issued definite and clear findings, were, not produced despite being called for, further, and on the contrary, the assessee himself claiming to be following AS-9, toward which AO's findings were. No valuation details of stock-in-trade, either at the opening or closing of the year, were produced. Sure, AO had not mentioned clause numbers of the agreement. However, his finding was not challenged in principle at any stage, for which all that assessee had to do was to produce the agreements, and which were, despite being called for, were not produced. AO's findings in the matter, which were not reversed/modified by CIT(A), would, therefore hold. Even otherwise, non-production of the relevant material would entitle drawing of adverse inference. The matter was accordingly, restored to AO for working income of assessee's real estate business which only to the proportionate extent, could be said to have accrued during the relevant year. The exception might be where entire money due on construction had been received from the customers under the agreement, and uniformly so, signifying the passing of rights to the buyers. The assessee would in such a case be allowed estimated expenditure on the work yet to be completed.

REFERRED :

FAVOUR : Matter remanded.

A.Y. : 2009-10

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