Asstt. CIT v. Punjab Urban Development Authority

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The Tax Publishers2014 TaxPub(DT) 1683 (Chd-Trib) : (2014) 057 (II) ITCL 0177 : (2014) 161 TTJ 0553 : (2014) 100 DTR 0118 : (2014) 032 ITR (Trib) 0481 Asstt. CIT v. Punjab Urban Development Authority INCOME TAX ACT, 1961 --Transfer of case--ValidityObjections not raised within prescribed time--Assessee had itself filed return with Circle 6(1), Chandigarh, whereas originally it was filing return with Circle 2(1). Further, when assessee filed revised return and a notice under section 143(2) was issued by AO, Circle 6(1) the assessee did not raise any objection as required under section 124(3)(a). Therefore, assessee thereafter cannot take objection of lack of jurisdiction. Sub-section (3) of section 127 clearly provides that no opportunity is required to be provided to the assessee if the case is transferred within the city because in such cases the assessee is not inconvenienced and therefore, reasons may not be required to be recorded. However, at the same time it is not clear whether this order was served on the assessee or not. Therefore, basically it can be said that an order under section 127 for transfer of the case has already been passed but even if assuming for the sake of argument that this order was not served on the assessee and this is not proper order, the jurisdiction has still to be exercised properly and legitimately by the AO by Circle 6(1) for the following reasons. Firstly, if the assessee had problem with the jurisdiction, then the assessee should have raised the objection under section 124(3)(a) which clearly provides that if the objection is not raised during the assessment within a period of one month from the issue of notice under section 143(2), then the issue of jurisdiction cannot be called in question after completion of assessment. The Punjab & Haryana High Court in case of Subhash Chander v. CIT (supra) has clearly held that jurisdiction cannot be called in question by the assessee after expiry of one month from the date of completion of assessment if no objection is raised during that period. The counsel of the assessee tried to distinguish this case by submitting that in this case notice under section 143(2) was issued by the AO who had jurisdiction. In case, the assessee has itself filed return in Circle 6(1) and notice has been finally issued by the AO of Circle 2 (1) against the revised return filed by the assessee in Circle 6(1) which was having initially jurisdiction to Circle 2(1) but the return was again transferred to Circle 6(1). Another objection was that since the AO of Circle 2(1) had already issued notice under section 143(2) on 5-1-2004, therefore, the jurisdiction will be that of the AO Circle 2(1). There is no force in this submission because after filing of revised return the authorities get fresh powers to issue notice under section 143(2) against such revised return which was issued on 12-7-2005. The revised return filed on 7-2-2005 under section 139(5) which was well in time. At the relevant point of time notice under section 143(2) could have been issued within a period of 12 months from the end of the month in which the return has been furnished. [Para 21] Sub-section (2) of section 143 refers to section 139 which means that the return under various sub-sections of section 139 are included herein. Since notice has been issued on 12-7-2005 which is well within time and therefore, if the assessee had any objection he should have raised the same under section 124(3)(a) within one month of issue of such notice. The counsel of the assessee had made another objection that section 124(3)(a) which refers to the objection to be raised by the assessee, in fact, makes reference to returns filed under section 139(1) and, therefore, this requirement of raising the objection cannot be read in cases of revised returns which are filed under section 139(5). There is no force in this contention. Requirement for raising the objections regarding jurisdiction has been incorporated in section 124(3)(a) because it is settled law that the issue of transfer is a administrative matter and if any question arises regarding jurisdiction the same can be determined by the Director General of Income-tax or the Chief CIT. This is specifically provided in sub-section (2) of section 124. Another aspect is that in section 246A which gives right to assessee for filing of appeals, no appeal has been prescribed in respect of jurisdiction issues, i.e., against sections 120, 124 and 127, etc. The reason for not making a provision for filing of an appeal is that the issue of jurisdiction is an administrative act and that is why issue of jurisdiction has been left alone to be decided by the administrative authority under section 124. Therefore, merely not mentioning sub-section (5) of section 139 in section 124(3)(a) cannot lead to the conclusion that objection is not required to be raised under section 124(3)(a) if the assessee disputes the jurisdiction. If this interpretation is adopted then that would mean that first the assessee allows the assessing authority to complete the assessment and then later on dispute the jurisdiction by way of an appeal which is not provided in the Act itself. It is settled law that appeal is a statutory right and no appeal can be entertained which has not been provided in a particular statute. In other words, the remedy has been provided to the assessee by making a provision for raising the objection regarding jurisdiction by section 124(3) (a) and that is why no appeal has been provided in the Act. [Para 21] One more objection was raised in respect of the issue of notice by the AO Circle 6(1), i.e., this notice was issued only to comply with the provisions of section 129. No doubt assessing authority has clearly mentioned that notice under section 143(2) and section 142(1) dt. 12-7-2005 were issued to comply with the requirement of provisions of section 129 but this is not correct position (this Tribunal has already observed earlier that even the Revenue has not handled the issue properly). This Tribunal has already reproduced section 129. This provision would come into operation where the incumbent officer in a particular office ceases to exercise the jurisdiction. Thus it is clear that this provision is not required to be used where a particular case is transferred from one particular jurisdiction to another jurisdiction. Even if assuming for the argument sake that section 129 would apply even in cases of transfer of jurisdiction one fails to understand how the assessee cannot be allowed to raise objection against the jurisdiction under section 124(3)(a) particularly in the light of legal scenario that no remedy is available later on by way of appeal. [Para 22] The Departmental Representative for the Revenue has referred to one more aspect of the case, i.e., in this case orders passed under section 120 fixing the jurisdiction would show that Mohali area would fall under Circle 6(1) and therefore, in terms of section 124(5), the inherent jurisdiction was with the AO Circle 6(1). Notification No. CCIT/NWR/ Tech/Juri/2001-02/617 issued on 11-5-2001 by Chief Commissioner, NW Region, Chandigarh clearly shows that areas falling within the Revenue district of SAS Nagar (Mohali) Punjab excluding the areas falling within the jurisdiction of Range V SAS, Nagar (Mohali) would fall in Range VI, Chandigarh. Now it has to be noticed that sub-section (5) of section 124 starts with non obstante clause which means even if some directions have been given by the CIT or other authorities still different AO of the territory which has been notified under section 120 can still exercise the jurisdiction. [Para 32] Assessment which has been made by an assessing authority who holds territorial jurisdiction over the assessee in terms of notification issued under section 120, then validity of such assessment is completely protected by sub-section (5) of section 124. [Para 32] Once it is not a case of lack of inherent jurisdiction and also if the assessee has participated in the assessment proceedings without raising any objection regarding jurisdiction then the jurisdiction cannot be called into question later on. [Para 37] Firstly, the assessee has itself filed return with Circle 6(1). No doubt, the department has also not handled the issue very well (i.e. original return and revised returns were transferred to Circle 2(1) and again transferring the same to Circle 6(1)). However, as far as the assessee is concerned, it submitted itself to jurisdiction of Circle 6(1). Secondly, when the assessee filed revised return and a notice under section 143(2) was issued by AO, Circle 6(1), the assessee did not raise the objection as required under section 124(3)(a). This clearly shows that the assessee had no objection on the jurisdiction but this issue is being raised merely as a matter of technicality to get the assessment annulled which is not possible, because even if the assessment was to be made by the AO, Circle 6(1) no inconvenience was caused to the assessee. Thirdly, inherent jurisdiction of the assessee being located at Mohali lies with AO, Circle 6(1). In view of these facts and above detailed discussion, the order of the CIT(A) and hold that the AO, Circle 6(1) holds jurisdiction over the assessee. The CIT(A) has no power to entertain the additional ground in respect of the jurisdiction. In the result, ground raised by the revenue in this regard is allowed. [Para 38] Income Tax Act, 1961 Section 127 Income Tax Act, 1961 Section 120 Income Tax Act, 1961 Section 124 INCOME TAX ACT, 1961 --Accounting method--Change in income Adjustment for earlier years heads/items--Where due to change in system of accounting income of earlier year, which affected result in two years, assessee had no right to change income to earlier year, i.e., 2002-03 by simply saying that income belongs to that year. It is settled position of law that whenever system of accounting is changed such change has to be bona fide and the system should clearly reflect the income of the concerned year. It has not been explained why the profit in respect of two schemes was not recognized in assessment year 2002-03 earlier simply by saying that it was not done by mistake, is not enough. Even if assuming that because of the change in system the income of earlier year has come to this year, then the assessee has no right to change income to earlier year, i.e., assessment year 2002-03 by simply saying that the income belongs to that year and was not recognized in the earlier year. This cannot be done particularly in view of the fact that in the assessment year 2002-03, the income was exempt under section 10(20A). Moreover, the assessment which has become final cannot be reopened again. The assessee has no time left in terms of section 139(5) to revise the return. Therefore, the CIT(A) has erred in giving relief by simply stating that this income actually belongs to the earlier year without giving any reasons how and why this income was not recognized in the earlier year. Accordingly, the order of the CIT(A) is set aside and that of the AO in this regard is restored. [Para 51] Income Tax Act, 1961 Section 145 Income Tax Act, 1961 Section 5 Income Tax Act, 1961 Section 139(5) INCOME TAX ACT, 1961 --Income --Accrual Instalment received under hire purchase transaction--It is very surprising how an assessee who was having a large organisation, i.e., construction and developer, could follow cash system of accounting and if it sells houses/flats outrightly or on instalments, then such instalments would be in nature of income and in the year of receipt, expenses are also allowable. Plain reading of section 145 shows that the assessee could follow only one system of accounting in respect of income under the head 'Profits and gains of business or profession or 'income from other sources'. These restrictions have not been prescribed for other heads of business.- In case before this Tribunal, income of the assessee is chargeable under the head 'Profits and gains of business', therefore, the assessee could have adopted only one system of accounting. Before the present assessment year, the assessee was following mercantile system of accounting and in this year system has been changed from mercantile system of accounting to cash system of accounting. Though it is very surprising how a large organization such as the assessee, could follow cash system of accounting but it is admitted fact that the assessee followed cash system of accounting. In fact, in respect of other additions like receipt of interest from bank and receipt of interest from Government of Punjab, it was vehemently argued on behalf of the assessee that these receipts can be taxed only when the same have been actually received by the assessee because the assessee was following cash system of accounting. Therefore, admitted position is that the assessee is following cash system of accounting. [Para 62] When the traders follow cash system and whenever such traders sell any merchandise on credit, he would enter the transaction only in a memorandum account or in some other rough account as a record so that he does not forget the same. This is the reason this Tribunal is surprised that assessee is following cash system of accounting when in assessee's case large number of transactions are involved then how can an organization follow cash system because in the transaction where no cash is incoming or outgoing such transactions are not recorded under this system and they are only noted as memorandum entries or in rough jotting. Under the cash system of accounting such trader would not enter the sale proceeds on the income side in his books of account or cash book until the same is actually received. Similarly an item of expenditure will be booked only when actual cash payment is made. In case of mercantile system of accounting income as well as expenditure would be recognized on the principle of accrual. [Para 63] Whenever the cash is received on income side the same has to be taxed if the cash is received on capital side for example loan from bank then the same would not be required to be taxed. However, if there is simply a right to receive such cash the same cannot be taxed in the cash system of accounting. This would answer the question and/or contention raised by the counsel of the assessee that before taxing an item the same has to pass through the test of charging section. [Para.] Plain reading of section 4 would show that tax can be charged at the rate prescribed by any Central Act which is practically done through passing of Finance Act in every year by the Parliament. Such tax can be charged in respect of total income of the previous year. Total income has been defined in section 5. The word 'income' has been defined in section 2(24). Therefore, before charging tax it has to be seen that an item is in the nature of 'income' and covered by the definition of income given in section 2(24). It is further to be noted that income has been defined in inclusive manner. This is very complex issue and without going into the details this Tribunal would simply take the simple meaning of the 'income'. In the normal commercial parlance, an item which is of revenue nature, is taken as income. Now, in a case where an organization which is carrying out the business of construction and development of houses and if such organization sells the same outrightly or on instalments basis, then such instalments would be in nature of income. Therefore, there is no force in the submissions of the counsel of the assessee that instalments received by the assessee do not come under the charging section and therefore, same cannot be taxed simply because under section 145 the receipt, under cash system has to be taxed. No doubt, section 145 is a machinery section but machinery section also have lot of bearing on determination of income and cannot be ignored lightly. [Para.] The assessee has been given a choice and in the present case the assessee has deliberately and after applying its mind decided to follow cash system of accounting, therefore, the assessee has to bear the consequences of such system of accounting. [Para 63] The original return filed by the assessee, was for income of Rs. 21.19 crores, whereas in the revised return a loss of Rs. 19.12 crores was claimed. The AO examined the reasons for loss and he found that main reason was that expenditure accounts show the figures of cost of plots and therefore, sale which was not there in the original income and expenditure account. [Para 66] This explanation of the assessee was found to be convincing and accepted. Thus, it is clear that the assessee itself contended that sale of plots has to be accepted on the basis of actual cash receipt on sale effected during the year. Therefore, the assessee could not take a different stand in respect of sale of houses and flats. [Para.] The assessee sold certain houses and flats under the hire purchase agreement. The allottees were treated as tenant during the completion of such hire purchase agreement till all the instalments were paid by such allottees. The instalments as well as expenditure incurred by the assessee, was being accumulated in various schemes and was reflected in the balance sheet because the assessee was following mercantile system of accounting till assessment year 2002-03. However, in this year the assessee has changed accounting system and now adopted cash system of accounting. Tribunal has already expressed surprise on adoption of cash system by the assessee but admittedly this system has been adopted and therefore, the assessee has to bear the consequences. First contention was that houses and flats were sold on hire purchase basis and under the Hire Purchase Act, 1972 the buyer does not get the ownership right till the completion of the purchase as provided in the agreement and as per the agreement till all the instalments are paid such buyer or allottees will not become the owners. However, there is no force in this contention because no other Act can override the provisions of the Act and this has been clarified by the Supreme Court in case of Southern Technologies Ltd. v. Jt. CIT* (supra). Therefore, the instalments received against such sales which are in the nature of revenue receipts, are required to be taken into consideration for determination of income in this year because the assessee has adopted cash system of accounting during the year. Next contention was that the assessee was following continuously project completion method and therefore, no income can be determined unless the projects are completed. Again as discussed above in detail the issue of system of accounting and the meaning of cash system of accounting, this contention cannot be accepted because the assessee cannot follow two different systems of accounting under the same head. Therefore, the AO has correctly included all the instalments received from the allottees of the houses and flats in the income of the assessee. [Para 67] However, the submissions of the assessee that if such instalments are included then the corresponding expenditure which has been incurred should also be allowed on matching principle. [Para 68] In case where cash system of accounting is followed, then whatever expenditure has been incured in cash during the year, has to be allowed in the case before this Tribunal, the assessee has neither offered the instalments as income nor claimed expenditure incurred. Since instalments received have been rightly included in the income of the assessee, therefore, corresponding expenditure which has been incured in cash towards construction of such houses and flats sold under hire purchase is also to be allowed. [Para 70] One more angle needs to be considered, that is, what would happen to the opening stock as well as closing stock. In the cash system of accounting, closing stock is not considered, therefore, what has been accumulated in the schemes is also required to be considered. Considering the contentions of the parties and the principles this Tribunal has already discussed, the Tribunal is of the opinion that whatever instalments were accumulated in the schemes needs to be considered along with the opening stock whenever a particular scheme was completed. This is so because it was pointed out by the counsel of the assessee that the profit in each of the scheme was offered for taxation when a particular scheme was completed. Therefore, the results of individual schemes have to be recalculated and instalments accumulated should be taken as income and expenditure incurred after reducing the expenditure incurred in cash which has been allowed in various years, should be reduced from the such instalments and net results should be considered in the year of completion of each of the housing schemes in the year in which profits of such completed scheme were actually offered by the assessee. [Para 71] In these circumstances the order of the CIT(A), is set aside and the AO is directed to include instalments received on sale of various houses and flats under hire purchase agreement and at the same time allow corresponding expenditure which has been expended by the assessee in cash (including through cheque). Further, in the year of completion of a particular scheme effect has to be given in respect of accumulated instalments as well as accumulated expenditure which has not been already considered in a particular year on cash basis as observed earlier. [Para 72] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2014 TaxPub(DT) 1683 (Chd-Trib) : (2014) 057 (II) ITCL 0177 : (2014) 161 TTJ 0553 : (2014) 100 DTR 0118 : (2014) 032 ITR (Trib) 0481

Asstt. CIT v. Punjab Urban Development Authority

INCOME TAX ACT, 1961

--Transfer of case--ValidityObjections not raised within prescribed time--Assessee had itself filed return with Circle 6(1), Chandigarh, whereas originally it was filing return with Circle 2(1). Further, when assessee filed revised return and a notice under section 143(2) was issued by AO, Circle 6(1) the assessee did not raise any objection as required under section 124(3)(a). Therefore, assessee thereafter cannot take objection of lack of jurisdiction.

Sub-section (3) of section 127 clearly provides that no opportunity is required to be provided to the assessee if the case is transferred within the city because in such cases the assessee is not inconvenienced and therefore, reasons may not be required to be recorded. However, at the same time it is not clear whether this order was served on the assessee or not. Therefore, basically it can be said that an order under section 127 for transfer of the case has already been passed but even if assuming for the sake of argument that this order was not served on the assessee and this is not proper order, the jurisdiction has still to be exercised properly and legitimately by the AO by Circle 6(1) for the following reasons. Firstly, if the assessee had problem with the jurisdiction, then the assessee should have raised the objection under section 124(3)(a) which clearly provides that if the objection is not raised during the assessment within a period of one month from the issue of notice under section 143(2), then the issue of jurisdiction cannot be called in question after completion of assessment. The Punjab & Haryana High Court in case of Subhash Chander v. CIT (supra) has clearly held that jurisdiction cannot be called in question by the assessee after expiry of one month from the date of completion of assessment if no objection is raised during that period. The counsel of the assessee tried to distinguish this case by submitting that in this case notice under section 143(2) was issued by the AO who had jurisdiction. In case, the assessee has itself filed return in Circle 6(1) and notice has been finally issued by the AO of Circle 2 (1) against the revised return filed by the assessee in Circle 6(1) which was having initially jurisdiction to Circle 2(1) but the return was again transferred to Circle 6(1). Another objection was that since the AO of Circle 2(1) had already issued notice under section 143(2) on 5-1-2004, therefore, the jurisdiction will be that of the AO Circle 2(1). There is no force in this submission because after filing of revised return the authorities get fresh powers to issue notice under section 143(2) against such revised return which was issued on 12-7-2005. The revised return filed on 7-2-2005 under section 139(5) which was well in time. At the relevant point of time notice under section 143(2) could have been issued within a period of 12 months from the end of the month in which the return has been furnished. [Para 21] Sub-section (2) of section 143 refers to section 139 which means that the return under various sub-sections of section 139 are included herein. Since notice has been issued on 12-7-2005 which is well within time and therefore, if the assessee had any objection he should have raised the same under section 124(3)(a) within one month of issue of such notice. The counsel of the assessee had made another objection that section 124(3)(a) which refers to the objection to be raised by the assessee, in fact, makes reference to returns filed under section 139(1) and, therefore, this requirement of raising the objection cannot be read in cases of revised returns which are filed under section 139(5). There is no force in this contention. Requirement for raising the objections regarding jurisdiction has been incorporated in section 124(3)(a) because it is settled law that the issue of transfer is a administrative matter and if any question arises regarding jurisdiction the same can be determined by the Director General of Income-tax or the Chief CIT. This is specifically provided in sub-section (2) of section 124. Another aspect is that in section 246A which gives right to assessee for filing of appeals, no appeal has been prescribed in respect of jurisdiction issues, i.e., against sections 120, 124 and 127, etc. The reason for not making a provision for filing of an appeal is that the issue of jurisdiction is an administrative act and that is why issue of jurisdiction has been left alone to be decided by the administrative authority under section 124. Therefore, merely not mentioning sub-section (5) of section 139 in section 124(3)(a) cannot lead to the conclusion that objection is not required to be raised under section 124(3)(a) if the assessee disputes the jurisdiction. If this interpretation is adopted then that would mean that first the assessee allows the assessing authority to complete the assessment and then later on dispute the jurisdiction by way of an appeal which is not provided in the Act itself. It is settled law that appeal is a statutory right and no appeal can be entertained which has not been provided in a particular statute. In other words, the remedy has been provided to the assessee by making a provision for raising the objection regarding jurisdiction by section 124(3) (a) and that is why no appeal has been provided in the Act. [Para 21] One more objection was raised in respect of the issue of notice by the AO Circle 6(1), i.e., this notice was issued only to comply with the provisions of section 129. No doubt assessing authority has clearly mentioned that notice under section 143(2) and section 142(1) dt. 12-7-2005 were issued to comply with the requirement of provisions of section 129 but this is not correct position (this Tribunal has already observed earlier that even the Revenue has not handled the issue properly). This Tribunal has already reproduced section 129. This provision would come into operation where the incumbent officer in a particular office ceases to exercise the jurisdiction. Thus it is clear that this provision is not required to be used where a particular case is transferred from one particular jurisdiction to another jurisdiction. Even if assuming for the argument sake that section 129 would apply even in cases of transfer of jurisdiction one fails to understand how the assessee cannot be allowed to raise objection against the jurisdiction under section 124(3)(a) particularly in the light of legal scenario that no remedy is available later on by way of appeal. [Para 22] The Departmental Representative for the Revenue has referred to one more aspect of the case, i.e., in this case orders passed under section 120 fixing the jurisdiction would show that Mohali area would fall under Circle 6(1) and therefore, in terms of section 124(5), the inherent jurisdiction was with the AO Circle 6(1). Notification No. CCIT/NWR/ Tech/Juri/2001-02/617 issued on 11-5-2001 by Chief Commissioner, NW Region, Chandigarh clearly shows that areas falling within the Revenue district of SAS Nagar (Mohali) Punjab excluding the areas falling within the jurisdiction of Range V SAS, Nagar (Mohali) would fall in Range VI, Chandigarh. Now it has to be noticed that sub-section (5) of section 124 starts with non obstante clause which means even if some directions have been given by the CIT or other authorities still different AO of the territory which has been notified under section 120 can still exercise the jurisdiction. [Para 32] Assessment which has been made by an assessing authority who holds territorial jurisdiction over the assessee in terms of notification issued under section 120, then validity of such assessment is completely protected by sub-section (5) of section 124. [Para 32] Once it is not a case of lack of inherent jurisdiction and also if the assessee has participated in the assessment proceedings without raising any objection regarding jurisdiction then the jurisdiction cannot be called into question later on. [Para 37] Firstly, the assessee has itself filed return with Circle 6(1). No doubt, the department has also not handled the issue very well (i.e. original return and revised returns were transferred to Circle 2(1) and again transferring the same to Circle 6(1)). However, as far as the assessee is concerned, it submitted itself to jurisdiction of Circle 6(1). Secondly, when the assessee filed revised return and a notice under section 143(2) was issued by AO, Circle 6(1), the assessee did not raise the objection as required under section 124(3)(a). This clearly shows that the assessee had no objection on the jurisdiction but this issue is being raised merely as a matter of technicality to get the assessment annulled which is not possible, because even if the assessment was to be made by the AO, Circle 6(1) no inconvenience was caused to the assessee. Thirdly, inherent jurisdiction of the assessee being located at Mohali lies with AO, Circle 6(1). In view of these facts and above detailed discussion, the order of the CIT(A) and hold that the AO, Circle 6(1) holds jurisdiction over the assessee. The CIT(A) has no power to entertain the additional ground in respect of the jurisdiction. In the result, ground raised by the revenue in this regard is allowed. [Para 38]

Income Tax Act, 1961 Section 127

Income Tax Act, 1961 Section 120

Income Tax Act, 1961 Section 124

INCOME TAX ACT, 1961

--Accounting method--Change in income Adjustment for earlier years heads/items--Where due to change in system of accounting income of earlier year, which affected result in two years, assessee had no right to change income to earlier year, i.e., 2002-03 by simply saying that income belongs to that year.

It is settled position of law that whenever system of accounting is changed such change has to be bona fide and the system should clearly reflect the income of the concerned year. It has not been explained why the profit in respect of two schemes was not recognized in assessment year 2002-03 earlier simply by saying that it was not done by mistake, is not enough. Even if assuming that because of the change in system the income of earlier year has come to this year, then the assessee has no right to change income to earlier year, i.e., assessment year 2002-03 by simply saying that the income belongs to that year and was not recognized in the earlier year. This cannot be done particularly in view of the fact that in the assessment year 2002-03, the income was exempt under section 10(20A). Moreover, the assessment which has become final cannot be reopened again. The assessee has no time left in terms of section 139(5) to revise the return. Therefore, the CIT(A) has erred in giving relief by simply stating that this income actually belongs to the earlier year without giving any reasons how and why this income was not recognized in the earlier year. Accordingly, the order of the CIT(A) is set aside and that of the AO in this regard is restored. [Para 51]

Income Tax Act, 1961 Section 145

Income Tax Act, 1961 Section 5

Income Tax Act, 1961 Section 139(5)

INCOME TAX ACT, 1961

--Income --Accrual Instalment received under hire purchase transaction--It is very surprising how an assessee who was having a large organisation, i.e., construction and developer, could follow cash system of accounting and if it sells houses/flats outrightly or on instalments, then such instalments would be in nature of income and in the year of receipt, expenses are also allowable.

Plain reading of section 145 shows that the assessee could follow only one system of accounting in respect of income under the head 'Profits and gains of business or profession or 'income from other sources'. These restrictions have not been prescribed for other heads of business.- In case before this Tribunal, income of the assessee is chargeable under the head 'Profits and gains of business', therefore, the assessee could have adopted only one system of accounting. Before the present assessment year, the assessee was following mercantile system of accounting and in this year system has been changed from mercantile system of accounting to cash system of accounting. Though it is very surprising how a large organization such as the assessee, could follow cash system of accounting but it is admitted fact that the assessee followed cash system of accounting. In fact, in respect of other additions like receipt of interest from bank and receipt of interest from Government of Punjab, it was vehemently argued on behalf of the assessee that these receipts can be taxed only when the same have been actually received by the assessee because the assessee was following cash system of accounting. Therefore, admitted position is that the assessee is following cash system of accounting. [Para 62] When the traders follow cash system and whenever such traders sell any merchandise on credit, he would enter the transaction only in a memorandum account or in some other rough account as a record so that he does not forget the same. This is the reason this Tribunal is surprised that assessee is following cash system of accounting when in assessee's case large number of transactions are involved then how can an organization follow cash system because in the transaction where no cash is incoming or outgoing such transactions are not recorded under this system and they are only noted as memorandum entries or in rough jotting. Under the cash system of accounting such trader would not enter the sale proceeds on the income side in his books of account or cash book until the same is actually received. Similarly an item of expenditure will be booked only when actual cash payment is made. In case of mercantile system of accounting income as well as expenditure would be recognized on the principle of accrual. [Para 63] Whenever the cash is received on income side the same has to be taxed if the cash is received on capital side for example loan from bank then the same would not be required to be taxed. However, if there is simply a right to receive such cash the same cannot be taxed in the cash system of accounting. This would answer the question and/or contention raised by the counsel of the assessee that before taxing an item the same has to pass through the test of charging section. [Para.] Plain reading of section 4 would show that tax can be charged at the rate prescribed by any Central Act which is practically done through passing of Finance Act in every year by the Parliament. Such tax can be charged in respect of total income of the previous year. Total income *has been defined in section 5. The word 'income' has been defined in section 2(24). Therefore, before charging tax it has to be seen that an item is in the nature of 'income' and covered by the definition of income given in section 2(24). It is further to be noted that income has been defined in inclusive manner. This is very complex issue and without going into the details this Tribunal would simply take the simple meaning of the 'income'. In the normal commercial parlance, an item which is of revenue nature, is taken as income. Now, in a case where an organization which is carrying out the business of construction and development of houses and if such organization sells the same outrightly or on instalments basis, then such instalments would be in nature of income. Therefore, there is no force in the submissions of the counsel of the assessee that instalments received by the assessee do not come under the charging section and therefore, same cannot be taxed simply because under section 145 the receipt, under cash system has to be taxed. No doubt, section 145 is a machinery section but machinery section also have lot of bearing on determination of income and cannot be ignored lightly. [Para.] The assessee has been given a choice and in the present case the assessee has deliberately and after applying its mind decided to follow cash system of accounting, therefore, the assessee has to bear the consequences of such system of accounting. [Para 63] The original return filed by the assessee, was for income of Rs. 21.19 crores, whereas in the revised return a loss of Rs. 19.12 crores was claimed. The AO examined the reasons for loss and he found that main reason was that expenditure accounts show the figures of cost of plots and therefore, sale which was not there in the original income and expenditure account. [Para 66] This explanation of the assessee was found to be convincing and accepted. Thus, it is clear that the assessee itself contended that sale of plots has to be accepted on the basis of actual cash receipt on sale effected during the year. Therefore, the assessee could not take a different stand in respect of sale of houses and flats. [Para.] The assessee sold certain houses and flats under the hire purchase agreement. The allottees were treated as tenant during the completion of such hire purchase agreement till all the instalments were paid by such allottees. The instalments as well as expenditure incurred by the assessee, was being accumulated in various schemes and was reflected in the balance sheet because the assessee was following mercantile system of accounting till assessment year 2002-03. However, in this year the assessee has changed accounting system and now adopted cash system of accounting. Tribunal has already expressed surprise on adoption of cash system by the assessee but admittedly this system has been adopted and therefore, the assessee has to bear the consequences. First contention was that houses and flats were sold on hire purchase basis and under the Hire Purchase Act, 1972 the buyer does not get the ownership right till the completion of the purchase as provided in the agreement and as per the agreement till all the instalments are paid such buyer or allottees will not become the owners. However, there is no force in this contention because no other Act can override the provisions of the Act and this has been clarified by the Supreme Court in case of Southern Technologies Ltd. v. Jt. CIT (supra). Therefore, the instalments received against such sales which are in the nature of revenue receipts, are required to be taken into consideration for determination of income in this year because the assessee has adopted cash system of accounting during the year. Next contention was that the assessee was following continuously project completion method and therefore, no income can be determined unless the projects are completed. Again as discussed above in detail the issue of system of accounting and the meaning of cash system of accounting, this contention cannot be accepted because the assessee cannot follow two different systems of accounting under the same head. Therefore, the AO has correctly included all the instalments received from the allottees of the houses and flats in the income of the assessee. [Para 67] However, the submissions of the assessee that if such instalments are included then the corresponding expenditure which has been incurred should also be allowed on matching principle. [Para 68] In case where cash system of accounting is followed, then whatever expenditure has been incured in cash during the year, has to be allowed in the case before this Tribunal, the assessee has neither offered the instalments as income nor claimed expenditure incurred. Since instalments received have been rightly included in the income of the assessee, therefore, corresponding expenditure which has been incured in cash towards construction of such houses and flats sold under hire purchase is also to be allowed. [Para 70] One more angle needs to be considered, that is, what would happen to the opening stock as well as closing stock. In the cash system of accounting, closing stock is not considered, therefore, what has been accumulated in the schemes is also required to be considered. Considering the contentions of the parties and the principles this Tribunal has already discussed, the Tribunal is of the opinion that whatever instalments were accumulated in the schemes needs to be considered along with the opening stock whenever a particular scheme was completed. This is so because it was pointed out by the counsel of the assessee that the profit in each of the scheme was offered for taxation when a particular scheme was completed. Therefore, the results of individual schemes have to be recalculated and instalments accumulated should be taken as income and expenditure incurred after reducing the expenditure incurred in cash which has been allowed in various years, should be reduced from the such instalments and net results should be considered in the year of completion of each of the housing schemes in the year in which profits of such completed scheme were actually offered by the assessee. [Para 71] In these circumstances the order of the CIT(A), is set aside and the AO is directed to include instalments received on sale of various houses and flats under hire purchase agreement and at the same time allow corresponding expenditure which has been expended by the assessee in cash (including through cheque). Further, in the year of completion of a particular scheme effect has to be given in respect of accumulated instalments as well as accumulated expenditure which has not been already considered in a particular year on cash basis as observed earlier. [Para 72]