2023 (6) TMI 255 - AT - Income Tax

Tribunal affirms CIT(A)'s decisions on accounting method & interest expenses

The Tribunal dismissed the revenue's appeals for both assessment years, affirming the CIT(A)'s decisions. The Tribunal held that the Project Completion ... Project Completion Method - Transferable Development Rights (TDR) - recognition of revenue - work-in-progress (WIP) accounting - section 145(3) rejection of books of account - Accounting Standard-9 (AS-9) on revenue recognition - presumption on utilization of interest-free funds - disallowance of interest under section 36(1)(iii)Project Completion Method - Transferable Development Rights (TDR) - recognition of revenue - work-in-progress (WIP) accounting - section 145(3) rejection of books of account - Accounting Standard-9 (AS-9) on revenue recognition - Whether sale proceeds of Land TDR received under a multipartite rehabilitation agreement must be recognised as income immediately or treated as part of the composite project's receipts and assessed on project completion under the project completion method. - HELD THAT: - The Tribunal found that the assessee entered into a composite multipartite agreement with SRA under which transfer of land and construction of rehabilitation tenements formed an inseparable single project; stage-wise release of Land and Construction TDRs was linked to progress of construction and to enable financing. The assessee consistently followed the Project Completion Method (PCM), accruing project costs to WIP and setting off TDR sale proceeds against WIP until project completion. The Assessing Officer's approach of dissecting the composite project and taxing Land TDR receipts separately in the year of receipt by invoking section 145(3) was contrary to the contractual scheme and settled authorities. The Tribunal relied on Clause 17 of the agreement showing phased release of land TDR (20% on execution, 65% on 50% plinth, 15% on completion) and on AS-9 principles that risks and rewards are transferred on completion; it followed coordinate and appellate decisions (including Chembur Trading Corporation and Tribunal precedents) holding that where PCM is followed consistently and the transaction is an integrated project, receipts like TDR must be accounted on completion. Applying these principles, the Tribunal upheld the CIT(A)'s deletion of the addition made by the AO and directed assessment to be made following PCM. [Paras 21, 22, 23, 24, 25]Addition of Rs.69.88 crore on account of sale of Land TDR deleted; income to be computed following Project Completion Method.Presumption on utilization of interest-free funds - disallowance of interest under section 36(1)(iii) - Whether proportionate interest paid on interest bearing borrowings should be disallowed on the ground that interest bearing funds were deployed as interest free advances/investments to related parties. - HELD THAT: - The Tribunal examined the assessee's balance sheet and fund application and accepted the CIT(A)'s finding that the assessee had both interest bearing and interest free funds and that TDR advances constituted interest free funds. Applying the legal presumption on mixed funds, the Tribunal held that interest free funds are presumed to be applied first to non business uses; on the facts the assessee's application of funds showed utilization of interest bearing funds for business purposes in amounts equal to or exceeding interest bearing borrowings. The Tribunal followed the CIT(A)'s reliance on relevant precedent recognising TDR advances as interest free and, on that factual and legal basis, deleted the AO's disallowance of interest under section 36(1)(iii). [Paras 26]Addition of Rs.6.22 crore by way of disallowance of interest deleted.Final Conclusion: The Tribunal dismissed the revenue appeals for A.Y.2013-14 and A.Y.2014-15, upholding the CIT(A)'s deletion of the additions: the profit on sale of TDR is to be assessed under the Project Completion Method and the disallowance of interest was deleted. Issues Involved:1. Method of accounting for Transferable Development Rights (TDR) received on transfer of land to Slum Rehabilitation Authority (SRA).2. Disallowance of interest expenses on interest-bearing loans advanced to related parties.Issue-Wise Detailed Analysis:1. Method of Accounting for TDR:The revenue filed appeals against the orders of the Learned Commissioner of Income Tax (Appeals)-2, Mumbai, concerning the assessment years 2013-14 and 2014-15. The primary issue was whether the sale proceeds of TDR received from transferring land to SRA should be recognized as income in the year of receipt or upon project completion.The assessee, engaged in real estate development, followed the Project Completion Method (PCM) for accounting. The assessee argued that the TDR received for land and construction were integral parts of the same project and should not be treated separately. The Assessing Officer (AO) disagreed, treating the TDR received for land as immediate income, leading to a substantial addition to the assessee's income.The assessee contended that the PCM is a recognized method of accounting, supported by judicial precedents, and that the TDR should be recognized only upon project completion. The AO's approach resulted in inconsistent yearly profits/losses, which was not reflective of the true financial position.The Ld. CIT(A) accepted the assessee's method of accounting, emphasizing that the sale proceeds of land TDR are part of the overall project and cannot be considered independently. The CIT(A) relied on the decision in CIT vs. Chembur Trading Corporation, where it was held that the AO cannot adopt two different methods of accounting for the same project.The Tribunal upheld the CIT(A)'s decision, affirming that the PCM is appropriate and that the TDR should be recognized upon project completion. The Tribunal referenced the jurisdictional High Court's decision in CIT vs. Chembur Trading Corporation, which supported the assessee's method.2. Disallowance of Interest Expenses:The second issue involved the disallowance of interest expenses on interest-bearing loans advanced to related parties. The AO disallowed interest expenses, arguing that the assessee utilized interest-bearing funds for non-business purposes.The assessee contended that it had sufficient interest-free funds available and that there is a legal presumption that interest-free funds are used for non-business purposes. The CIT(A) agreed with the assessee, noting that the TDR advances received were interest-free and should be considered part of the interest-free funds.The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decision in CIT vs. Reliance Industries Ltd. and the jurisdictional High Court's decision in CIT vs. Reliance Utilities & Power Ltd., which support the presumption that interest-free funds are used for non-business purposes when mixed funds are available.Conclusion:The Tribunal dismissed the revenue's appeals for both assessment years, affirming the CIT(A)'s decisions. The Tribunal held that the PCM is a recognized method of accounting, and the TDR should be recognized upon project completion. Additionally, the Tribunal upheld the deletion of disallowance of interest expenses, supporting the presumption that interest-free funds are used for non-business purposes when mixed funds are available.