Real estate project accounting and taxation: project completion method upheld; several additions deleted, some remanded for verification.

Real estate taxation and accounting issues addressed: advances received in cash were held to be taxable only on project completion where the assessee consistently followed the project completion method, and the AO was unjustified in applying percentage completion for projects commenced before 1 April 2016; unexplained payments additions were deleted where corresponding purchaser additions were removed and statements were not furnished, invoking natural justice; interest disallowance was deleted on presumption that interest-free advances were out of own funds; deemed rental income on unsold units was sustained; reassessment based on audit objection was validated; TDS disallowance was remanded for verification of payee returns; unexplained cash credit additions were not applicable to opening balances brought forward.

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Issues: (i) Whether cash advances/on-money of Rs.1,00,00,000 received in AY 2016-17 are taxable in that year or are to be taxed on project completion method in a later year; (ii) Whether addition of Rs.4,84,59,475 based on statements of purchasers can be sustained in hands of assessee; (iii) Whether disallowance of proportionate interest of Rs.7,84,110 on account of interest-free advances is justified; (iv) Whether notional rent (ALV) of Rs.8,73,315 on unsold units is exigible as income from house property for AY 2016-17; (v) Whether interest u/s 234B levied is sustainable; (vi) Whether reopening of assessment u/s 147 for AY 2017-18 was legally valid; (vii) Whether addition of Rs.15,00,000 as unexplained credit u/s 68 (opening balance) is sustainable; (viii) Whether AO was justified in applying percentage completion method / sec.43CB and ICDS-III for projects commenced before 01.04.2016.

Issue (i): Whether the cash advance of Rs.1,00,00,000 received in AY 2016-17 is taxable in that year or to be taxed on project completion.

Analysis: The assessee consistently followed Project Completion Method; the receipt was accounted as advance and included in work-in-progress; the project completed and income was offered and assessed in AY 2019-20; CIT(A) relied on consistent accounting practice and tribunal precedents permitting recognition on completion; Revenue did not point to specific infirmity in those findings.

Conclusion: In favour of Assessee the Rs.1,00,00,000 was correctly treated as advance and not taxable in AY 2016-17.

Issue (ii): Whether the addition of Rs.4,84,59,475 based on statements of Drs. Murugu Sundaram and Raja Sundaram is sustainable against the assessee-seller.

Analysis: The addition rested primarily on purchaser statements; identical additions in purchasers' cases were deleted by CIT(A) and upheld by ITAT; statements were not supplied to the assessee thereby vitiating reliance for addition; Revenue failed to show reversal by higher court or independent corroborative material.

Conclusion: In favour of Assessee the addition of Rs.4,84,59,475 is deleted.

Issue (iii): Whether disallowance of interest Rs.7,84,110 is justified because borrowed funds funded interest-free advances.

Analysis: Assessee demonstrated substantial partners capital/non-interest funds exceeding advances; absence of evidence linking specific borrowings to advances; established jurisprudence presumes advances made from interest-free funds if sufficient.

Conclusion: In favour of Assessee disallowance of Rs.7,84,110 deleted.

Issue (iv): Whether notional rent (ALV) on unsold stock is taxable under section 22 for the relevant year.

Analysis: Pre-amendment position includes binding precedent of the Delhi High Court (Ansal) holding ALV taxable on ownership irrespective of stock-in-trade; coordinate tribunal decision followed that view; statutory amendment in sec.23(5) effective from AY 2018-19 is prospective and does not affect earlier years.

Conclusion: In favour of Revenue deemed rent addition of Rs.8,73,315 sustained for the relevant year.

Issue (v): Whether interest u/s 234B is tenable.

Analysis: Levy of interest under section 234B is mandatory when applicable; the issue is consequential on additions and taxable income determination.

Conclusion: Neutral (alternate remedy) interest to be recomputed by AO if applicable; allowed for statistical purposes.

Issue (vi): Whether reopening u/s 147 for AY 2017-18 was invalid (change of opinion / lack of fresh material).

Analysis: AO recorded reasons based on audit objection, independently examined and followed prescribed procedure; CIT(A) found no legal infirmity; assessee did not demonstrate procedural illegality.

Conclusion: In favour of Revenue reopening held valid.

Issue (vii): Whether addition of Rs.15,00,000 u/s 68 (credit entry) is sustainable where it is an opening balance carried from earlier years.

Analysis: Section 68 applies to sums found credited in books for the previous year; where credit pertains to earlier years and is an opening balance, invoking sec.68 for the current year is impermissible; persuasive and binding decisions (including Bombay and Delhi High Courts) support deletion.

Conclusion: In favour of Assessee addition of Rs.15,00,000 deleted.

Issue (viii): Whether AO correctly applied percentage completion method / sec.43CB and ICDS-III to projects commenced before 01.04.2016.

Analysis: ICDS-III transitional provisions permit continuing previously adopted method for contracts commenced on or before 31.03.2016; assessee consistently followed project completion method; AO ignored transitional rule and subsequent acceptance of income in AY 2018-19 leading to potential double taxation; alternate submission that sec.43CB/ICDS-III is directed to contractors and not developers has persuasive support from CBDT clarification.

Conclusion: In favour of Assessee AO wrongly applied percentage completion method; addition of Rs.4,19,97,354 deleted.

Final Conclusion: The Tribunal upheld deletions of major additions and disallowances relating to advances, unexplained receipts and interest disallowance, sustained the notional rent addition, remitted certain TDS verification (s.40(a)(ia)) to AO for enquiry and directed recomputation of interest if applicable; overall the assessment adjustments challenged were substantially in favour of the assessee while some consequential and verification directions were left to the AO.

Ratio Decidendi: Where a taxpayer consistently follows a recognized accounting method for ongoing projects commenced before the ICDS/ statutory change, transitional provisions preserve the prior method for those projects; advances accounted as work-in-progress and subsequently taxed on project completion cannot be taxed earlier without resulting in impermissible double taxation; additions based solely on third-party statements not supplied to the assessee and deleted in the hands of those third parties cannot stand in the hands of the assessee absent independent corroboration.

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