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Issues: (i) Whether the Kandivali Project was a single, indivisible and composite project, so that profits could be determined only on completion of the project; (ii) Whether the assessee's change in profit recognition, and the treatment of receipts from assignment of development rights and contribution of development rights to a partnership firm, was liable to be assessed on the basis adopted by the Assessing Officer; (iii) Whether the disallowance under section 40A(3) was rightly deleted.
Issue (i): Whether the Kandivali Project was a single, indivisible and composite project, so that profits could be determined only on completion of the project.
Analysis: The project was governed by the Urban Land (Ceiling and Regulation) Act, 1976 and the exemption conditions, as well as the sanctioned layout, applied to the entire land as one unit. The assessee had continuing obligations for primary and secondary development, removal of encroachments, surrender of reserved areas, construction of tenements for Government nominees, and compliance with time-bound conditions, all of which affected the ultimate commercial result of the venture. The project therefore could not be split into isolated sale transactions merely because part of the development rights was assigned to others.
Conclusion: The Kandivali Project was a single, indivisible and composite project, and the profits were properly relatable to completion of the project.
Issue (ii): Whether the assessee's change in profit recognition, and the treatment of receipts from assignment of development rights and contribution of development rights to a partnership firm, was liable to be assessed on the basis adopted by the Assessing Officer.
Analysis: The assessee continued to follow the mercantile system, but altered only the policy of recognising profits during the currency of the project by estimating them at 7.5 per cent of project receipts. This was held not to be a change from mercantile to cash basis. Receipts under the agreements did not accrue in full on execution alone, as enforceability depended on further events such as statutory approvals and instalment dates. The credit arising on contribution of development rights to the partnership firm was treated as provisional and notional and therefore not an immediately taxable receipt.
Conclusion: The Assessing Officer was not justified in taxing the entire consideration on accrual basis, and the assessee's method of estimating profits was accepted.
Issue (iii): Whether the disallowance under section 40A(3) was rightly deleted.
Analysis: The amount of Rs. 1,25,000 represented compensation paid for removal of occupants, and the appellate authority accepted the assessee's claim for allowance of the amount.
Conclusion: The deletion of the disallowance was upheld in favour of the assessee.
Final Conclusion: The revenue's appeal failed, the assessee's cross-objection was not pressed, and the order in favour of the assessee was affirmed.
Ratio Decidendi: Where a real estate development venture is controlled by indivisible statutory and regulatory conditions affecting the whole project, receipts arising during execution may be recognised on a project-completion or estimated-project basis, and not as isolated accrued sales merely because development rights are partly assigned.
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