Whole profit of project can’t be taxed in first year just because Co. received all payment through post-dated cheques

Case Details: Pearl Coschem (P.) Ltd. v. DCIT - [2021] 129 taxmann.com 319 (Mumbai - Trib.)

Judiciary and Counsel Details

• • Mahavir Singh, Vice President and S. Rifaur Rahman, Accountant Member.
  • Vijay Mehta, AR for the Appellant.
  • Ms. Shreekala Pardeshi, DR for the Respondent.

Facts of the Case

During the assessment, Assessing Officer (AO) observed that assessee had entered into a Memorandum of Understanding (MoU) with SIPL to invest in the project to be executed by SIPL. It was agreed between them that SIPL will complete the project and help the assessee to market and sell the flats. Accordingly, SIPL issued 18 post-dated cheques to the assessee and in MOU it was agreed that the above said post-dated cheques will be deposited by the assessee without reference to SIPL.

AO made additions relying on the cheque collection clause of the MOU that the post-dated cheques shall be deposited on due dates without reference to SIPL. Aggrieved-assessee preferred an appeal before CIT(A) which was later dismissed. Assessee filed the instant appeal before the Mumbai Tribunal.

ITAT Held

The Mumbai Tribunal has held that the assessee had received the promised amount from SIPL in the current assessment year but considered the same as advance since the project was not completed nor sold any flats current year. Further, it was submitted by the assessee that even in other assessment years also assessee had received certain payments as per the MOU but not received the whole payment on the promised date. Even the project was not completed.

AO had proceeded to make the addition of whole expected profit in current AY based on the promised payment schedule since the assessee is a company and expected to follow the mercantile system of accounting.

It was found that the project was not completed in the current assessment year, and promised payments against this project are part of the total agreed sales proceeds when the project shall be completed. Thus, AO wasn’t justified in bringing the whole profit of the project in the first year of execution of the MOU.