Tribunal allows project completion method for real estate income, deems Forum Mall rent as business income, fit-out charges as other sources.

The Tribunal partially allowed the appeal by directing the AO to accept the project completion method for assessing income from real estate projects. It determined that rental income from Forum Mall should be considered business income due to commercial exploitation. The hire charges for fit outs were classified as income from other sources for consistency. However, the disallowance of the compounding fee paid to Bangalore Mahanagar Palika was upheld.

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Issues Involved:
1. Assessing income from real estate projects based on the percentage completion method.
2. Assessing rental receipts from Forum Mall under the head 'Income from house property'.
3. Treating hire charges in respect of fit outs let out to tenants as income from house property instead of income from other sources.
4. Disallowance of compounding fee paid to Bangalore Mahanagar Palika.

Issue-wise Detailed Analysis:

1. Assessing Income from Real Estate Projects Based on Percentage Completion Method:
The assessee contested the assessment of income using the percentage completion method instead of the completed contract method. The AO argued that the percentage completion method was mandatory as per AS-7, effective from 1st April 2003, and cited a guidance note from ICAI. The assessee countered that the completed contract method was a well-accepted accounting method and that AS-7 was not applicable to developers undertaking commercial ventures. The Karnataka High Court's decision in CIT vs. Khoday Distilleries Ltd. supported the assessee's right to choose its accounting method. The Tribunal concluded that revised AS-7 was not applicable to the assessee, who was not a construction contractor but a developer. The Tribunal also noted that the Central Government had not notified AS-7 under s. 145(2) of the IT Act, and therefore, the AO could not reject the assessee's accounts based on non-compliance with AS-7. The Tribunal directed the AO to accept the project completion method for the year under reference.

2. Assessing Rental Receipts from Forum Mall Under the Head 'Income from House Property':
The AO treated the rental receipts from Forum Mall as income from house property, relying on the Supreme Court decision in Shambhu Investment (P) Ltd. vs. CIT. The assessee argued that the income should be considered business income due to the commercial exploitation of the property and the provision of various amenities and services. The Tribunal noted that the assessee provided significant services and amenities, indicating commercial exploitation rather than mere rental income. The Tribunal distinguished the facts from Shambhu Investment (P) Ltd. and concluded that the income from Forum Mall should be assessed under the head 'Income from business'. The Tribunal also considered the possibility of assessing the income under 'Income from other sources' if not under business income.

3. Treating Hire Charges in Respect of Fit Outs Let Out to Tenants as Income from House Property Instead of Income from Other Sources:
The Tribunal referred to its earlier decision for the assessment year 2004-05, where it held that the hire charges for fit outs should be treated as income from other sources. The Tribunal emphasized the principle of consistency and directed that the hire charges be taxed under the head 'Income from other sources', allowing the assessee to claim depreciation.

4. Disallowance of Compounding Fee Paid to Bangalore Mahanagar Palika:
The Tribunal upheld the disallowance of the compounding fee paid to Bangalore Mahanagar Palika, following its previous decisions and the jurisdictional High Court's ruling in CIT vs. Mamta Enterprises. The Tribunal concluded that the compounding fee was not an allowable deduction.

Conclusion:
The Tribunal allowed the appeal partly, directing the AO to accept the project completion method for assessing the income from real estate projects, treating the rental income from Forum Mall as business income, and recognizing the hire charges for fit outs as income from other sources. The disallowance of the compounding fee was upheld.

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