Asstt. Commissioner ... v. M/S. Sunrise Managem...

Shamim Yahya, A.M:— This appeal by the revenue is directed against the orders of the ld. CIT(A) dated 4.7.2008 pertaining to assessment year 2004-2005.

2. The first issue raised is that ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 3,13,68,250/- made by the AO on account Common Maintenance Charge since the assessee company is not maintaining accounts on Mercantile/Accrual basis which is mandatory for the corporate assessee as per provisions of Section 145 of the IT act, 1961.

3. In this case the assessee company is a real estate management company pursuant to which high-rising/multistoried buildings (both residential and commercial) are being maintained by it as being primary objective. The maintenance of buildings include repair and maintenance of immovable properties involving buildings hfts, water supply, electrical, AC systems, kitchen exhaust systems, fire fighting and RO Plant etc. installed in various high-rising buildings owned and constructed by Ansal Housing & Constructions Ltd.

3.1 During the course of assessment AO proceeded to verify the common maintenance charges account for. AO examined the assessee's reconciliation statement submitted in respect of 5 projects out of 33 projects. AO found that in some case the billing has not been done. However, there were receipts for substantial amount during the year and the closing balance was shown as liabilities. He further noted that certain rebates have been allowed without any basis.

3.2 From his analysis in respect of 5 projects and the discrepancy noted, the AO opined as under:—

“From the above mentioned facts in respect of five projects and the discrepancies pointed out, it is clearly evident that assessee company is not maintaining accounts on Mercantile/Accrual basis which is mandatory for a corporate assessee as per provisions of section 145 of the IT Act, 1961 read with section 209 of the Companies Act, 1956. The details of five projects out of 33 projects, furnished by the assessee company, extracts of parts of which are reproduced hereinabove shows that the assessee company is following hybrid system of accounting i.e Cash and Accrual at its own convenience which is not permissible for a corporate assessee.

The AR of the assessee company furnished incomplete details of receipts of CMC charges in the shape of Debtors Reconciliation Statements of five projects out of 33 projects instead of ledger accounts of all the heads of receipts of ‘Common Maintenance Charges’. From the details furnished as discussed hereinbefore it is not at all possible to compute and verify the true income of the assessee company shown under various heads even on the test check basis at randomly. Keeping in view the manners in which accounts are maintained and the discrepancies pointed out therein, there is, therefore, no alternative but to computlate the total ‘Common Maintenance Charges’.

Accordingly, the ‘Common Maintenance Charges’ are logically and reasonably computed as follows:

Total no. of billing units of all the projects as per details filed alongwith letter dated 16.12.2006 and reproduced hereinabove. 15503 Minimum per unit average Common Maintenance Charges on estimate @ Rs. 400/- per month i.e Rs. 4800/- per annum. Total Common Maintenance Charges of All the 15,503 billing units - Rs. 4800 × 15503 i.e - Rs. 7,44,14,400/-.

In view of the above receipts of Common Maintenance Charges are computated and taken at Rs. 7,44,14,400/- as against as Rs. 4,30,46,150/- credited to the profit and loss account as per Schedule - 10 to the Balance Sheet. An addition of Rs. 3,13,68,250/- is, accordingly made to the income of the assessee company on this account.”

3.3 Upon assessee's appeal ld. CIT(A) accepted the assessee's contention that no opportunity was given to the assessee with regard to proper explanation for mercantile system of accounting vis-a-vis prudent Accounting Standard 9 followed by the assessee. Ld. CIT(A) noted the contention that if an income is neither accrued nor received within the meaning of section 5 whatever section 145 may say such an income could not be charged to tax regardless of entries made in the books of account or not. In this regard, ld. CIT(A) further noted the decision of the Hon'ble Apex Court in Godhra Electricity Co. Ltd. as under:—

“Even though the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee company in respect of those enhanced charges. The Tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made, represented only hypothetical income and the amounts in question brought to tax by the income tax officer did not represent income which had really accrued to the assessee company during the relevant previous years.”

3.4 Further, ld. CIT(A) noted that income on certain products was not recognized due to various litigations pending at various forums namely Consumer Courts, Civil suits filed by the independent Resident Welfare Association, MRTP Commission at state level case etc. Ld. CIT(A) further noted the contention that there were certain projects which were not in existence during the financial year 2003-2004, but the AO has assumed income on notional basis for all those projects which had not come into being during the year under consideration. CIT(A) also noted that in some cases payments for services rendered was subject to fulfillment of certain terms and conditions. Under such circumstances, ld. CIT(A) observed that there were revenue recognition is prescribed to be determined through Accounting Standard AS-9 laid down by I.C.A.I He noted that there is no wisdom in creation of debts unilaterally and subsequently writing off such debts as bad debts. Ld. CIT(A) further referred to ITAT Pune decision in the case of Western Maharastra Development Corporation v. DCIT 22 SOT 13. Ld. CIT(A) observed that the judgement in the case was fitting to the facts of the assessee's case pursuant to which revenue recognition has been based on Accounting Standard AS-9 due to certain uncertainty involved on account of various factors/issues involved in which income is not recognised but postponed to be recognized on receipt basis due to various innumerable uncertainties involved. Ld. CIT(A) further found that AO has not made any reference to the past history of the case or cited any comparable cases of similar in nature. In this regard, ld. CIT(A) referred to Apex Court decision in the CIT v. Realest Builders & Services Ltd. 216 CTR 345 wherein, it was held that if the AO comes to the conclusion that there is under estimation of profits on account of one reason or the other, he must give relevant facts and figures in that regard based on past history of the case and demonstrate the method of accounting adopted by the assessee results in under-estimation of profits. Ld. CIT(A) concluded as under:—

“4.5 Furthermore, I am also of the view that Accounting Standards AS-9 superseding mercantile system of accounting could not be brushed aside without any cogent material in the custody of the department and having disregard to the past history of the case and without giving any comparable case of similar trade in the service sector/industry. I had pursed the submission made by the appellant with the copies of the letters addressed to the Ld. AO filed before me and had forwarded to me in two voluminous files addressed to the ld. Assessing Officer filed at the time of appeal and the same were furnished for seeking remand report. Despite various opportunities given over a period of one and half year to produce assessment records with the orders sheet recorded during the course of assessment proceedings, the same have not been produced before me and/or made available to me and hence I am left with no other alternative but to accept the contention of the ld. counsel who having placed reliance in the paper books filed before me. The acknowledged letters filed before the ld. AO supply copies of orders sheets were placed on record before me but could not be complied with due to assessment records as stated above having not been traceable. Thus, the remand report giving generalized comments by the present Dy. CIT; can prove to be no help and hence cannot be relied upon so as to accept the adverse comments against the appellant based on mere conjectures and surmises, assumption and presumptions without any cogent material so as to support the addition sustained. Neither any past history of the case nor any comparable cases in the similar trade and industry in the service sector were cited and relied upon by the ld. Assessing Officer so as to justify such an addition made. The Accounting method consistently employed by the assessee over the years cannot be disturbed without any distortions to the results declared and assessed in the subsequent years. I am apprised by the ld. counsel that no such addition has been made in the assessment year 2005-2006 as the case was not picked up for the scrutiny assessment by the learned Assessing Officer.

4.6 In view of the above, I find that there is sufficient force in the argument of ld. Counsel that mandatorily laid out accounting standard AS-9 applicable for recognizing revenue has been followed for the results declared. Based on the above arguments and factual position stated, I hold that the contention of the assessee is convincing and therefore the addition of Rs. 3,13,68,250/- stands hereby deleted.”

3.5 Against this order the revenue is in appeal before us.

4. We have heard both the counsels and perused the records. Ld. counsel of the assessee submitted that the assessee has been following the consistent method of accounting and there were uncertainties in case of recovery of certain cases. Assessee has followed accounting standard-9 issued by the I.C.A.I There were certain uncertainties in case of recovery in some cases. Ld. counsel submitted that assessee has maintained detailed chart in this regard. Non-recognition of common maintenance charges in some cases were due to the fact that the customers had not taken the possession of the flats. In some cases there were disputes pending at various forums. He showed that in some cases the maintenance charges have been received alognwith the arrear which was duly credited in the individual account. Ld counsel contended that AO has totally erred in understanding the accounts maintained by the assessee and made the addition simply on guess work. Hence, he submitted that order of the ld. CIT(A) be sustained.

4.1 Ld. DR on the other hand placed reliance upon the orders of AO.

4.2 We have carefully considered the submissions. We find that as per assessee's submission accounting for recognition of income of common maintenance charges is done on the following basis consistently.

i) regular customers 100% income has been recognized.

ii) arrears recovered - recognized as additional income in current year.

iii) defaulters whose income has been booked to the extent of amount as per para 9 of AS-9.

iv) chronic defaulters whose income have not been booked because of uncertainties involved.

4.3 Accounting Standard-9 issued by the ICAI pertaining to revenue recognition in this regard mentions following under para 9 which is as under:—

“9. Effect of Uncertainties on Revenue Recognition

9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.

9.2 Where the ability to assessee the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g, for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by instalments.

9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

9.5 When recognition of revenue is postponed due to the effect of uncertainties it is considered as revenue of the period in which it is properly recognized.”

4.4 The above Accounting Standard makes it clear that when realization with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved. In such cases it had been mentioned that it may be appropriate to recognize the revenue only when it is reasonable certainty that the ultimate conclusion will be made.

4.5 The said Accounting Standard is quite in conformity with the Hon'ble Apex Court decision in the case of Godhra Electricity cited above. Moreover, acceptability of accounts prepared as per Accounting Standard provided by the Institute of Chartered Accounts of India (ICAI) has been held to be appropriate by the Courts in catena of cases including the following decisions:—

i) CIT v. Indo Nippon chemicals ltd. 261 ITR 275 (SC) and

ii) CIT v. Woodward Governor India P. Ltd. 294 ITR 451 (Jurisdictional High Court).

4.6 In the background of the aforesaid discussion and precedent, we are in agreement with the cogency of method of accounting followed by the assessee. AO has not properly appreciated the method of accounting being followed by the assessee. He has estimated income even in projects which have not been completed. Moreover, as noted by the ld. CIT(A) he has neither referred to the past history of the assessee nor comparative cases. We also note that this is the first year in which assessee's method of counting of Common Maintenance Charges has been over turned. In this regard, Hon'ble Apex Court decision in the case of CIT Realest Builders and Services Ltd. 216 ITR 345 cited above is also relevant. In this case it was held that in case where department wants to tax the assessee on the ground of liability arising in a particular year, it should always ascertained method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profits are being under estimated under impugned method of accounting and if AO comes to the conclusion that there is under estimation of profits he must give facts and figures in that regard. Examining the present case on the touchstone of above, we find that AO has not at all examined or appreciated the method of Accounting of assessee in the accounting of common maintenance charges. His estimate in this regard is not based upon facts and figures, but is a mere conjecture. On the other hand, ld. CIT(A) has elaborately dealt with and appreciated the method of accounting followed by the assessee and found that no interference in the same is called. Our examination of records in this regard is also in conformity with the finding of the ld. CIT(A).

4.7 Thus we agree with the ld. CIT(A) that there is no reason to disturb the method of accounting being consistently followed by the assessee.

4.8 Under the circumstances, we did not find any infirmity or illegality in the orders of the ld. CIT(A). Accordingly, we uphold the same.

5. The next issue raised is that the ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 32,61,811/- made by the AO on account of transfer of 25% receipt of Common Maintenance Charge to Common Assets Replacement Fund since the assessee company had not been following the accounting practice and policies constantly.

5.1 On this issue AO enquired about the liability reflected in the assessee's balance-sheet named as ‘Common Asset Replacement Fund’. He also referred to Note-2 Schedule 14 of Accounting Polices which reads as under:—

“In case of no separate recovery being made from the customer in respect of ‘Common Asset Replacement Fund’ where rate of common maintenance charge includes “Common Asset Replacement Fund.”

5.2 AO was of the opinion that assessee's company has transferred the ‘common maintenance charges’ (income) amounting to Rs. 3261811/- to the provision of uncertainty and indefinite future expenditure, camouflaged under liability in the name of ‘Assets Replacement funds’ without any basis or agreement with the concerned parties. Hence he treated the amount of Rs. 32,61,811/- as income of the assessee.

5.3 Against this order the assessee appealed before the ld. CIT(A). It was explained that based on the contractual agreement entered into by the company and its allottees 25% of common maintenance charges of certain project is transferred from common maintenance charges account to the ‘common asset replacement fund’. It was stated that the basis of this with the past experience of the company according to which initially when the asset is installed and predominately put to use, it does not require any maintenance as the maintenance work commences only after the normal wear and tear. The ‘common asset replacement fund’ is collected from the customers for maintenance and upkeep of major repairs in respect of air conditioners, generator sets, water pump, RO's, transformers and lifts etc. These equipments are required to maintain by the company for a period of 10-15 years in terms of the agreement and these maintenance charges are pooled together to be accumulated in a manner that the requisite replacement fund should be available with the company to replace these assets at current prevalent market price, in a case where the maintenance is taken over by another Association created by residents/inhabitants of the housing project, the common assets replacement funds gets automatically transferred to the new mutual associations/entities/enterprises in a manner that common assets replacement fund will provide adequate maintenance of multistoried buildings for the benefits of the beneficiaries occupying the premises/flats/units.

5.4 In this regard, following case laws were referred:—

- 109 TTJ 593 (Pune), 105 ITD 485 Pune, 283 ITR 295 Madras and 297 Mad 286 ITR 586 (Bombay)

- Dy. CIT v. Spirax Marshall Ltd. [2007] 109 TTJ (Pune) 593

- National Heavy Engg. Co-operative Ltd. v. Dy. CIT [2007] 105 ITD 485 (Pune).

- CIT v. Shree Panchagana Sahakari Sakhar Karkhana Ltd. [2002] 254 ITR 572, 575, 575-76 (Bom).

- Commissioner Of Income-Tax v. Krishna Sahakari Sakhar Karkhana Ltd. [2002] 255 ITR 568, 572 (Bom).

- CIT v. Malegaon SSK Ltd. [2003] 174 Taxation 19, 20 (Bom).

5.5 Considering the above ld. CIT(A) held as under:—

“In view of the above submissions and decision on similar and identical issue and fact, I find the present ground have been duly covered in favour of the appellant's contention. Respectfully following the stated decision, I have to hold and sustain the view that maintenance security deposit refundable to the customers and flat owners, common assets replacement fund are not trading receipts and therefore not subject to tax in the relevant year in which the funds are deposited for fulfillment of future obligation. Therefore, I find the addition of Rs. 32,61,811/- is not based on sustainable material ground in view of the facts involved and the stated decisions and accordingly the said addition is directed to be deleted. The AO is directed accordingly as indicated above.”

5.6 Against this order the revenue is in appeal before us.

5.7 We have heard both the counsels and perused the records. Ld. Counsel of the assessee contended that it has been the clear accounting policy of the assessee and it has been consistently followed that where no separate amount is collected for ‘common asset replacement fund’ 25% of the common maintenance charges received is transferred to the common assets replacement fund. Hence, ld. Counsel pleaded that ld. CIT(A)'s order is justified and should be sustained.

5.8 Ld. DR on the other hand relied upon the orders of the AO.

5.9 We find that it has been a consistent policy of the assessee company to transfer 25% of the commons maintenance charges to the ‘common asset replacement fund’. The rationale for the same is that newly installed assets require replacement and maintenance after certain time lag of their installation. It is also noted that when the maintenance work is taken over by the Resident Welfare Association or inhabitants themselves, the entire balance in common assets replacement fund is transferred. Moreover in assesses group company case in ITA no. 6928.Del/95 for the assessment year 1992-1993 and 93-94 in the case of Star Estates Management P. Ltd. v. DCIT,. The Tribunal vide order dated 11.2.2003 has held that the amount lying in common asset replacement fund cannot be treated as income in the hands of the assessee. Under the circumstances, we do not find any infirmity or illegality in the order of the ld. CIT(A). Hence, we affirm the same.

6. The last issue raised is that the ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 8,59,085/- made by the AO on account of disallowance out of Common Maintenance Charges since the assessee company had not been following proper system of accounting and not produced the relevant bills/vouchers.

6.1 On this issue the AO noted that AR of the assessee company was asked to produce bills and vouchers, as per the specific details mentioned. However, out of the bills and vouchers mentioned by the AO, assessee could not produce certain bills. Hence, AO opined that the total amount of Rs. 859085/- in respect of those bills and vouchers, not produced as mentioned above is disallowed from the expenses claimed on account of common maintenance expenses and added to the income of the assessee.

6.2 Before the ld. CIT(A), it was submitted that AO has passed the order sheet dated 18.12.2006 to produce the various bills/vouchers out of which major vouchers/bills were furnished and the AO was thoroughly satisfied by simple scrutiny. It was further mentioned that with the paucity of time, certain vouchers could not be furnished.

6.3 Considering the above, ld. CIT(A) concluded as under:—

“It appears that there is no discussion as contended by the assessee company in the order sheet of 26 December, 2006 justifying such an addition of Rs. 8,59,085/-. Since the assessment records have not been produced during appeal proceedings nor copies of order sheets have been supplied during appeal during appeal proceedings apparently nor to the assessee company, the Learned Assessing Officer could not materially, as apparent from the order, find any fault in the vouchers and documents furnished before him so as to enable him to justify to make such an addition. On the contrary, it could be safely presumed that the copy of invoices/books not produced earlier have been given in the paper book, copies of which are also forwarded to the AO for specific comments, within the given time frame and also the extended period thereafter, are found to be satisfactory and hence the addition made of Rs. 8,59,085/- for want of evidence is being deleted as no comments in this regard are available in the Remand Report.”

6.4 We have heard both the counsels and perused the records. We find that in the ld. CIT(A)' order it has been noted that there was some paucity of time and certain vouchers could not be gone through by the A.O AO has clearly mentioned in his order that certain vouchers were required and were not produced. It is also not the case that ld. CIT(A) has examined the said vouchers. Ld. CIT(A) has only mentioned that “it could be safely presumed that copy of invoices/books, not produced earlier have been given in the paper book”. In this regard, we draw support from the Apex Court decision in the case of Kapurchand Shrimal v. CIT, 131 ITR 451 has held that the appellate authority has jurisdiction as well as the duty to correct the errors in the proceedings under appeal. Accordingly, we remit this issue to the files of the AO to examine the issue afresh after giving the assessee adequate opportunity of being heard.

7. In the result, the revenue's appeal is partly allowed for statistical purposes.