Tax Tribunal: Project Completion & Liability Guidelines

The Tribunal held that a project is deemed completed for tax purposes when 80% of the constructed area is sold and occupied by purchasers. The completion year cannot be extended at the assessee's discretion to avoid tax liabilities. Guidelines were set for projects involving additional Floor Space Index (FSI). The Tribunal directed a fresh examination by the Assessing Officer (AO) regarding project completion and contingent liability for increased lease rent, following outlined principles. The revenue's appeals were allowed for statistical purposes, with the matters remanded to the AO for reconsideration based on the Tribunal's guidelines.

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Issues Involved:
1. Completion of the project for tax purposes.
2. Treatment of contingent liability regarding increased lease rent.

Issue-wise Detailed Analysis:

1. Completion of the Project for Tax Purposes:

The main controversy revolves around determining the assessment year in which the project was completed for tax purposes. The assessee-company, engaged in business as developers and builders, reclaimed land and constructed two buildings, Maker Chamber-III and Maker Chamber-IV. The company followed the project completion method of accounting, arguing that the project would take a lot of time for completion, making it difficult to determine the profit on a yearly basis.

During the assessment year 1988-89, the Assessing Officer (AO) determined that the project was effectively completed, as 93% of the premises in Maker Chamber-III and 89.3% in Maker Chamber-IV were sold and occupied by 31-12-1987. The AO held that the project was deemed completed based on the ratio laid down by the Tribunal in Champion Construction Co. v. First ITO [1983] 5 ITD 495 (Bom.) and the judgment of the Patna High Court in Sri Sukhdeodas Jalan v. CIT [1954] 26 ITR 617.

The assessee contended before the CIT(A) that the project was not completed during the assessment year 1988-89 but in 1993-94. The CIT(A) re-examined the issue and concluded that the project was not completed in 1988-89, noting that significant construction activities and sales occurred after 31-12-1987. The CIT(A) directed the AO to allow the carry forward of the work-in-progress for subsequent assessment years.

On appeal, the Tribunal considered the principles laid down in the case of Champion Construction Co. and other judicial pronouncements. It held that the project is deemed completed when 80% of the constructed area is sold and occupied by the purchasers. The Tribunal noted that the time for completion of the project cannot be extended at the whims of the assessee, as this would allow the assessee to evade tax liabilities indefinitely.

The Tribunal laid down guidelines for determining the completion of the project, especially when additional FSI (Floor Space Index) is sanctioned:
1. A project is deemed completed in the assessment year in which 80% of the constructed area is sold and occupied.
2. If additional FSI is sanctioned and construction starts before the project is deemed completed, it is considered an extension of the original project.
3. If additional FSI construction starts after the original project is deemed completed, it is treated as an independent project.
4. If the gap between the completion of the original project and the start of additional FSI construction is less than six months, it is an extension of the original project; otherwise, it is an independent project.

The Tribunal set aside the orders of the CIT(A) and restored the matter to the AO to re-examine the issue of project completion afresh, following the outlined guidelines.

2. Treatment of Contingent Liability Regarding Increased Lease Rent:

During the assessment proceedings, the assessee raised an alternative plea that if the project is considered completed in the assessment year 1988-89, the outstanding contingent liability of Rs. 13.51 crores for increased lease rent by the Maharashtra Government should be allowed. The AO disallowed this claim, stating that the liability was disputed and not yet quantified or determined. The CIT(A) allowed the claim, treating it as a statutory liability existing as of 31-12-1987.

The Tribunal, considering the restoration of the project completion issue to the AO, also directed the AO to re-examine the nature of the contingent liability. The AO should determine whether the liability accrued due to the original project or the additional project and adjust it accordingly against the profits of the respective project.

Conclusion:

The appeals of the revenue are allowed for statistical purposes, with the matter being restored to the AO for fresh adjudication on both the project completion and the contingent liability issues, following the guidelines provided by the Tribunal.

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