TaxTMI 
TaxTMI 
2010 (9) TMI 237
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....al estate projects carried out under joint development agreements was assessable on 'percentage completion method'; (ii)disallowing the compounding fee of Rs. 43.96 lakhs paid by the assessee to Bangalore Mahanagar Palika (BMP); and (iii)disallowing Rs. 51,585 being the amounts paid to the Depart- ment of Company Affairs and as entry tax compounding fees; Prayer - The orders of the authorities be quashed or in the alterna- tive -no income be assessed in respect of 5 real estate projects carried out under joint development agree- ments; -compounding fees of Rs. 43.96 lakhs paid to BMP be fully allowed as a deduction; and -entry tax compounding fee of Rs. 51,585 be allowed as a deduction. II. ITA NO. 184/B/2010 3. The revenue has raised six grounds, out of which, ground Nos. 1, 5 and 6 being general and no specific issues involved, they have been dismissed as non-consequential. In the remaining grounds, the substances of the issues raised are listed out as under: The ld. CIT(A) erred in- (i)deleting the addition of Rs. 7.33 crores made on protective basis as income from 'other sources'; (ii)directing the Assessing Officer to assess the rentals from....
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....r related argument was that legal ownership of immovable property can be transferred by executing a registered sale/conveyance deed; (ii)it is to be noted that the assessee usually enters into two agreements with the persons intending to purchase apartment or office space in a project implemented under a Joint Development Agreement [JDA] - one agreement for the purchase of undivided interest in land to be made with the owners of land and another, for construction of super- structure which will be made with the developer. There was a separate consideration to be paid by the prospective buyer for each agreement. These were enforceable contracts. The assessee had also entered into JDA with the land-owners wherein there were several conditions stipulated to secure the interest of the assessee till the completion of the project. In terms of JDA, the assessee was entitled to deal and dispose of the saleable super built up area falling into its share together with the corresponding proportionate undivided share in the land. This being the case, that the act of the assessee in entering into an agreement with the buyers for construction of superstructure indicating the specification of u....
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.... disallowed the same citing the reasons recorded in the earlier assessments in the assessee's own case and also held that the expenditure incurred by the assessee was for an offence or an act prohibited by law which cannot be allowed as a deduction. 6.6 Likewise, on verification of tax audit report also, the Assessing Officer noticed that the assessee had paid Rs. 25,000 to the Department of Company Affairs and Rs. 26,585 as entry tax as compounding fee, totalling to Rs. 51,585 which has been promptly disallowed by the Assessing Officer citing a similar reasoning. 7. Agitated the assessee took up the issues with the ld. CIT(A) for relief. Taking into account the assessee's forceful contentions and also perusal of the relevant records, the ld. CIT(A) has observed thus - With regard to adoption of percentage completion method 2.2.3 ......it is noticed that the argument taken by the appellant are similar to the argument taken before the Assessing Officer. The AS-7 notified by the Institute of Chartered Accountants, is effective from 1-4-2003, according to which, the completed contract method has been replaced by percentage completion method for construction contract. Furth....
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.... income of Rs. 8,92,90,995. In view of the above, I do not find any infirmity in assessing the income of such projects on the basis of percentage completion method, accordingly, the addition of Rs. 8,92,90,995 is upheld. 7.1 With regard to the compounding fee of Rs. 43.96 lakhs paid by the assessee to BMP; the ld. CIT(A) had, after considering the assessee's contentions, observed that : "the expenses incurred as compounding fee are not allowable as per Explanation to sub-section (1) of section 37 of the Income-tax Act which provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to be have been incurred for the purpose of business and no deduction shall be allowed in respect of such expenditure. The Hon'ble ITAT also confirmed the disallowance made by the Assessing Officer on this account in the preceding year. Accordingly, the disallowance made by the Assessing Officer is confirmed." 7.2 In respect of the disallowance of Rs. 51,585 being the amounts paid to the Department of Company Affairs and as entry tax compounding fees, the observation of the first appellate authority was that the Asse....
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....t was for this reason that the income from real estate projects carried out under JDA was to be recognized only after completion of projects and not on the basis of percentage of completion method. Further submission was that- (i)the real estate projects carried out under JDA were not completed during the year; (ii)the JDAs contained various clauses which were not fulfilled and as a result, the risks and rewards of ownership were not transferred by the assessee to the buyers; (iii)there was no transfer of title to property in favour of the assessee and as a result, the assessee could not have transferred the significant risks and rewards of ownership to the buyers, consequent to which only revenues could be recognized; (iv)the assessee's methodology for recognizing revenue in relation to joint development projects was in accordance with the "Guidance Note on Recognition of revenue by Real Estate Developers" issued by the ICAI; -thus, no income was chargeable to tax in respect of five real estate projects carried out under JDA for the assessment year under dispute and the amount of addition made was to be deleted from its income. 8.1 During the course of hearing....
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....risks and rewards of ownership of the properties was transferred together with the legal title for the property and/or when the buyer was given possession, because until that point the risks and rewards of ownership including the residual value of risks and rewards were retained by the assessee. 9.2 From the above, the crux of the assessee's contention was that it doesn't get ownership rights over the property or in lands unless it complies with all the conditions stipulated in the JDA and one of the conditions was that it requires to hand over the share of land owner's built up space and, thus, the assessee can transfer all significant risks and rewards of ownership to the buyers on only at the end of the project including that of the land owner's share and the assessee's share superstructure was completed simultaneously. Another significant argument of the assessee was that the legal ownership of immovable property could be transferred by executing a registered sale/conveyance deed etc. 9.3 However, as rightly highlighted by the Assessing Officer in his impugned order which is in dispute, the assessee enters into two agreements with the prospective buyers of either an apart....
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....the parties involved in the said transaction. A prospective buyer will definitely weigh the pros and cons of risks involved in such a transaction before venture to enter into such an agreement for the purchase an apartment or an office space or commercial space - yet to be built-up with a developer who is executing the project under the JDA. Such being the prevailing practice in a project under JDA, the assessee's assertion that it was transferring 'significant risk and rewards' only after completion of the project in spite of entering into agreements with the prospective buyers is hypothetical and there would be no takers of its theory. 9.5 Let us now have a glance of Application of revenue recognition Principles prescribed in AS-9 to real estate sales: "2. For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, revenue recognition, as reproduced below are satisfied: 10. Revenue from sales or service transactions should be recog- nized when the requirements as to performances set out in para- graphs 11 and 12 are satisfied, provided that at the time of perfor- mance i....
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....res together with the corresponding proportionate UDS in the land in Schedule A property and similarly the sellers [United Breweries (Holdings) Limited] are also entitled to deal and dispose of the saleable super built-up area falling into its share together with the corresponding proportionate UDS in the land in the schedule property. The confirming party (the assessee) was entitled to deal and dispose of the saleable super built-up areas in UD CITY falling into its shares together with the corresponding UDS in the land in the schedule property as per the power of attorney executed by the seller in this behalf. 9.6 From careful reading of the recitals of the abovesaid agreement, as rightly highlighted by the Assessing Officer in his impugned order which is under dispute, in a joint development project undertaken by the assessee, it never gets its share of interest in land transferred and got registered in its name. Thus, when interest in land was to be transferred to a prospective buyer, the assessee was executing the registration deed on behalf of the land owner [as it was vested with a General Power of Attorney by the land owners] or it can be more described as a conduit for ....
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.... 9.8 Further, from the terms and conditions set out in the tripartite agreement, the following facts emerge: (1)The relationship between the assessee [the confirming party] with M/s. United Breweries (Holdings) Ltd. [seller] and the purchaser is only as a construction contractor wherein the assessee is bound to construct a building in the manner laid down in the tripartite agreement. (2)Any disputes arising out of the tripartite agreement between the parties shall be settled by arbitration in accordance with the provisions of the prevailing Arbitration laws. (3)Specific performance clause applies between the purchaser on the one part and the seller along with the confirming party on the other part. (4)Thus the purchaser on compliance with the terms and conditions set forth in the tripartite agreement shall be entitled to his share of built-up area. (5)From the joint reading of the terms and conditions set forth in the tripartite agreement brings out the fact that if the confirming party falls out, the seller may either substitute another builder or complete the project by itself without jeopardizing the interest of the purchaser. This clearly establishes that the co....
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....als for the asst. years 2001-02 to 2003-04. The Tribunal while following the decision of the jurisdictional High Court in the case of Mamta Enterprises 266ITR 356 held vide order dated 23rd October, 2008 in ITA Nos. 1071, 1087 and 1088/Bang./2006 that compounding fee paid is not an allowable deduction...." 11.1 In conformity with the above finding of the Hon'ble Tribunal, we decide the issue against the assessee on both counts. 12. Turning our attention towards the grievances of the revenue [in ITA 184/B/10], the issues raised by the revenue are dealt with chronologically as under: (1) Deletion of the addition of Rs. 7.33 crores made on protective basis as income from 'other sources' : (i)The brief contention of the revenue was that the CIT(A) erred in deleting the addition of Rs. 7.33 crores made on protective basis as income from 'Other sources'. (ii)On a glimpse of the impugned assessment order, we find that there was no discussion at all in the body of the order, however, as pointed out by the CIT(A), in the computation, it was mentioned as 'Income from other sources: Income assessed in the assessment year 2005-06 on protective basis as discussed in Para .... Rs.....
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....g sum of Rs. 7.33 crores as income from other sources, the Assessing Officer should have taken proper care to mention in the body of the order the reason for taxing the said sum even on a "protective basis". (vi)In the meanwhile, the Hon'ble Tribunal in its finding cited supra (on 11-9-2009) directed the Assessing Officer to ac- cept the project completion method of accounting for the year under reference. Thus, in our considered view, the taxability of the sum of Rs. 7,33,13,640 had reached a finality on a specific direction of the Hon'ble Tribunal cited above for the assessment year 2005-06. Therefore, the CIT(A) was justified in his stand on this point. It is ordered accordingly. (2) Assessing of the rentals from Forum Mall and Eva Mall as income from "profits and gains from business/profession" : (i)The revenue's submission was very blunt to the effect that the CIT(A) erred in directing the Assessing Officer to assess the rental receipt from Forum Mall and Eva Mall as income from 'Profits and gains from business' and that the CIT(A) grossly erred by ignoring the fact that the sample agreement in respect of the rental receipt clearly establishes a typical landlord-tenan....