Project completion method and accrual principles govern taxation of development rights receipts and security deposits.

Income from sale of development rights is taxable only when it actually accrues or arises in the relevant year under the applicable accounting method, and not merely because a surplus is retained from a project. The commentary notes that the amount linked to Poddar Projects was received in later years and recognised on the Project Completion Method, so it was not taxable in the year under consideration. It also explains that a security deposit from Dheeraj Promoters, being adjustable against final payment on completion or expiry of the stipulated period, was likewise attributable to a later year and could not be taxed in the year in question.

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Issues: (i) Whether the amount retained from Poddar Projects could be taxed in the year under consideration as income from sale of development rights; (ii) Whether the amount received from Dheeraj Promoters as security deposit could be taxed in the year under consideration.

Issue (i): Whether the amount retained from Poddar Projects could be taxed in the year under consideration as income from sale of development rights.

Analysis: The addition was founded on the premise that the surplus retained from the project represented income of the year. The appellate record showed that the amount was not actually received in the relevant year and was received in subsequent years. The assessment order did not establish accrual in the year under consideration on a mercantile basis. The project was also stated to have been completed later and the income was recognized in the year of completion under the Project Completion Method.

Conclusion: The addition was not sustainable in the year under consideration and was deleted.

Issue (ii): Whether the amount received from Dheeraj Promoters as security deposit could be taxed in the year under consideration.

Analysis: The agreement showed that the amount was received as a security deposit, adjustable against the final payment on completion of the project or expiry of the stipulated period, whichever was earlier. On that basis, the amount was held to relate to a later assessment year and not to the year under appeal. The later assessment of the amount when income actually accrued under the project completion basis supported that view.

Conclusion: The addition was not chargeable in the year under consideration and was deleted.

Final Conclusion: The Revenue's challenge to the deletion of both additions failed, and the assessment year in question did not attract tax on the disputed receipts.

Ratio Decidendi: Income cannot be brought to tax in a particular year unless it is shown to have actually accrued or arisen in that year under the applicable method of accounting, and a security deposit or project-related receipt governed by deferred adjustment or project completion principles is taxable only in the year in which the right to treat it as income crystallizes.

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