Tribunal Orders Income Reassessment; Excludes Rs. 2,02,24,253 & Rs. 90/sq.ft. Charges from Assessment.

The Tribunal partially allowed both appeals. It directed the AO to compute the assessee's income using the project completion method, assessing the entire profits in the assessment year 1992-93, excluding Rs. 2,02,24,253 from 1989-90. Additionally, the Tribunal upheld the disallowance of L&DO charges but instructed the AO to exclude the Rs. 90 per sq. ft. collected from flat purchasers from the assessment, as it did not constitute part of the sale price.

---

---

Issues Involved:

1. Method of computation of income from the construction business.
2. Allowability of L&DO charges for the assessment years 1989-90 and 1992-93.

Issue-wise Detailed Analysis:

1. Method of Computation of Income from the Construction Business:

The assessee, a domestic company engaged in the construction of multi-storied buildings, followed the project completion method for computing its income. This method involves debiting construction expenditure to a work-in-progress account, carrying it forward until the project's completion, and offering the profits for taxation in the completion year. The alternative method, the percentage of completion method, computes profits annually based on project completion percentage.

For the assessment year 1989-90, the Assessing Officer (AO) noticed that the assessee handed over possession of 54 flats and received Rs. 2,02,24,253. He assessed the income based on the percentage of completion method, deeming the project substantially complete. However, in subsequent years (1990-91 and 1991-92), the AO reverted to the project completion method, accepted by the assessee and the Income-tax Department in earlier years.

The Tribunal found force in the assessee's contention that the AO's vacillation between methods across years would cause "complete chaos and confusion," distorting the computation of profits. The Tribunal emphasized that the AO should consistently follow the initially accepted method until project completion. It directed the AO to compute the income under the project completion method, assessing the entire profits in the assessment year 1992-93, and not to include the Rs. 2,02,24,253 in the assessment year 1989-90. Thus, the first two grounds for the assessment year 1989-90 were allowed in favor of the assessee.

2. Allowability of L&DO Charges:

The issue involved the allowability of L&DO charges of Rs. 80,11,576 for the assessment year 1989-90 and Rs. 3,50,732 for the assessment year 1992-93. The assessee contended that the liability was incurred upon receiving permission from the L&DO to construct the building and that it collected Rs. 90 per sq. ft. from purchasers towards these charges, which were included in the sale price and taxed.

The AO disallowed the charges, citing clauses in the agreement with flat buyers that placed the responsibility for L&DO charges on the buyers, not the assessee. The CIT (Appeals) confirmed this disallowance.

The Tribunal reviewed the facts, including the clauses in the agreement and the conduct of the assessee in its accounts. It concluded that the primary liability to pay L&DO charges was not on the assessee but on the flat purchasers. Hence, the disallowance of the liability was upheld for both years.

However, the Tribunal found merit in the assessee's alternative contention that if the liability was not allowable, the corresponding amount collected from purchasers should be excluded from the assessment. It directed the AO to exclude the amount collected at Rs. 90 per sq. ft. from the flat purchasers from the assessment, as it did not form part of the sale price of the flats.

Conclusion:

Both appeals were partly allowed. The Tribunal directed the AO to compute the income under the project completion method and exclude the L&DO charges collected from the flat purchasers from the assessment.

---