TaxTMI 
TaxTMI 
2005 (10) TMI 431
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....d two buildings under the name and style of Maker Chamber-III and Maker Chamber-IV on these two plots of land. For the purpose of income-tax assessment, it opted to follow project completion method of accounting on the ground that project would take a lot of time for completion and, therefore, it would not be possible to determine the profit on yearly basis. There was no sales in the initial period and the work of reclaim was going on the building were of 15 floors plus terrace each. As per the details furnished the area constructed and sold up to the end of the accounting year relevant to assessment year under consideration are as under : Maker Chamber-III Maker Chamber-IV 1.No. of floors to be constructed 15 15 2.Total Area 202090sq.ft. 216671sq.ft. 3.Total area sold under agreement to sell 180435sq.ft. 201379sq.ft. 4.Area remaining unsold 21655sq.ft. 15292sq.ft. Total area unsold 36947sq. ft. 3. During the assessment year 1988-89 the issue was raised whether the project was completed during this year or it was completed in the assessment year 1993-94 in which the entire profit was claimed as deduction under section 33AC of the I.T. Act. Before the Assessing Offi....
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....iscussed the two certificates given by the architect one dated 13-2-1991 and other dated 11-3-1991 in which two contradictory statements were made. In earlier letter dated 13-2-1991 it was certified by the Architect that project was not completed and is under construction but in another certificate dated 11-3-1991 the same architect has claimed that work has been completed in all respects. The Assessing Officer further observed that expenses on material purchased and labour charges if any incurred in assessment year 1991-92, it related to the structural adjustment that was to be made to construct the additional area which is not a part of the original project. This is a subsequent development which was not present at the end of the relevant previous year, i.e., 1988-89. The Assessing Officer accordingly, conclusively held that both the projects were completed before the end of the previous year relevant to the assessment year 1988-89, but, for the reasons best known to it the assessee has been doing its best to see that the projects never come to an end by claiming that something or the other always remains to be done, which if allowed, would amount to giving the assessee a licence....
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....project, the project had been completed in the earlier years to the assessment year i.e., 1988-89, as no activities took place in this assessment year. 7. The ld. counsel for the assessee further contended that in assessment year 1987-88, the Assessing Officer has accepted the position that the project was not completed and in assessment year 1986-87 the proceedings under section 263 were initiated, were later on dropped by CIT. As such, there is no evidence on the basis of which it can be inferred that the project was completed during the assessment year 1988-89 or prior to it. 8. The CIT(A) re-examined the issue in the light of the material available on record and held that the project was not completed in assessment year 1988-89. The relevant observations of the CIT(A) made in assessment year 1988-89 are extracted hereunder : "A careful consideration of the relevant facts would show that the stand of the Assessing Officer in assessment years 1987-88 and 1986-87 was also correct. The present year ended on 31-12-1987. The ld. officer was held that there was no worthwhile activity during this year for one reason or the other and that is why, not much direct expenditure on the pr....
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....er in his order. She further pointed out the discrepancies in the certificate and as per these datas, 93 per cent of the premises in Maker Chambers 3 and 89 per cent in Maker Chamber No. 4 were already sold and occupied by the purchaser by 3-12-1987. Thus, if both the purchases are taken together, out of the total constructed area of 4,18,761 sq. ft., the total area already sold and handed over is 3,81,814 sq.ft., which is 91.17 per cent. With regard to the expendit-ures incurred in subsequent years, it was contended that these expenses are in respect of painting, labour charges, plumbing, sanitation and telephone installat-ions. These are expenses in the nature of giving final finishing touches to the project. Mrs. Asha Agarwal further invited our attention to the fact that during the year assessee has sold part of the construction machinery, which indicated that the project work was completed during the accounting period. 11. The ld. Departmental Representative Mrs. Agarwal further invited our attention to the discrepancies in the certificates issued by the architect. The certificate dated 17-8-1988 is of general in nature in which it has only been certified that the constructio....
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....hims of the assessee. 12. The ld. counsel for the assessee Mr. J.D. Mistry, besides rebutting the contentions of the ld. Departmental Representative, has invited our attention to the fact that undisputedly the assessee have been following the project completion method and it was accepted continuously by the revenue. He further invited our attention to the statement of net work-in- progress in which details of expenditures incurred during different assessment years were given with the submissions that in the assessment year 1991-92, a substantial expenditure were incurred in construction of the project. He further invited our attention that during the assessment year 1986-87 the revenue accepted the stand of the assessee that it has been following the project completion method. Later on, CIT issued a notice under section 263 which was duly replied by the assessee and having satisfied with the explanation of the assessee, the proceedings were dropped. In the assessment year 1987-88 the expenditure incurred on project was shown as work-in-progress and the same was accepted by the revenue. In the assessment year 1988-89 the expenditure as well as the receipts on sale of the constructe....
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.... cent of the constructed area is sold and occupied by the purchaser irrespective of the fact that the construction of the additional FSI is not completed ? (4)Whether construction with regard to additional FSI is itself an independent project or it is a continuation of old project ? 14. Before dwelling upon these questions/issues we would like to narrate the activities of the builders and developers in this field. Like the instant case, the builder forms a project of constructing a building and to sale it out in the open market and to earn profit. It is a composite profit of construction of the building and its sale in the market. In order to achieve this target, the builder purchases the plot and gets the plan sanctioned from the appropriate authority and start construction thereon. In this line of business two methods of accounting are followed - (1) Project completion method (2) Percentage completion method. In a Percentage completion method, a builder is required to estimate the profit in each assessment year and offer it to tax. But in the case of a project completion method the builder/assessee shows the investment in the building as work-in-progress and carries it over to ....
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....ntly, for some reasons or the other. The Tribunal finally concluded that the project is deemed to have been completed when its 80% of constructed area is sold. The unsold portion of the constructed area would take care of any contingencies, which may arise in future. For the sake of reference, we extract the relevant portion of the order of the Tribunal in the case of Champion Construction Co. (supra) as under :-- "We now come to the merits of the assessee's contention, viz., whether income in this case is assessable only when the project is complete, i.e., when the entire portion of the multi-storeyed building meant for sale is sold, a co-operative society of the buyers is formed and the assessee has transferred all its rights, title and interest in the project to the society. It may be that from commercial point of view in the case of a single project/venture of the type in the case before us the profits can be reasonably computed only when the venture comes to an end in the manner suggested by the assessee's counsel. In fact looked at superficially, the Bombay High Court's decision in the case of K.H. Mody (supra), the Rangoon High Court's decision in the case of A.K.A.R. Famil....
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....unt the original cost price of the land and the proportionate development expenses, the ITO computed the profits at Rs. 56,980 which were reduced to Rs. 47,533 by the AAC. In the Rangoon High Court case, the assessee was a money-lender. In the course of its money-lending business it took over certain acres of land and a house in settlement of a debt of Rs. 9,000 due to it. The lands were sold at different times at the best prices available at their respective sales. The assessee was crediting the debtor's account by crediting the sale proceeds as and when materialised. After the last sale took place, it claimed the net debit balance of Rs. 5,137 in that account as loss. In the Allahabad High Court case the assessee had purchased 28,278 sq. yds. of land between 1942 to 1947 and spent about Rs. 81,000 in the development of the area. During the assessment year 1969-70 the assessee sold for the first time 5,673 sq. yds. out of it for a sum of Rs. 1,05,700. Again by taking a proportionate cost of the land and the development expenses, the Department wanted to tax the assessee on a capital gain of Rs. 55,670. It is, thus, evident that both in the Rangoon and the Allahabad High Court c....
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....ew has been taken by the Hon'ble Supreme Court in the case of P.M. Mohammed Meerakhan (supra). The facts in that case are also quite close to the facts in the assessee's case. The land in this case was divided into 23 plots out of which 22 plots had been sold. The Supreme Court observed as under : '. . . In our opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be ascertained even on the assumption that the transaction of the adventure of trade was not completed. Under the Income-tax Act for the purpose of assessment each year is a self-contained unit and in the case of a trading adventure the profits have to be computed in the manner provided by the statute. It is true that the Income-tax Act makes no express provision with regard to the value of stock. It charges for payment of tax the income, profits and gains which have to be computed in the manner provided by the Income-tax Act. In the case of a trading adventure the profits have to be calculated and adjusted in the light of the provisions of the Income-tax Act permitting allowances prescribed thereby. For that purpose it was the duty of the ITO....
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....e from project which quite often may represent excess of receipts over expenditure. Unless there is a risk/chances of the assessee's suffering heavy liabilities, subsequently, for some reasons or the other. 18. We have examined the facts of the case from this point of view. We find that out of the total accommodation of 58,970 sq.ft. constructed, the assessee was able to sell only 25,530 sq.ft. during the previous year relevant for the assessment year 1977-78. Neither the construction of the multi-storeyed building was complete nor even the half portion of the building sold. The net sale proceeds received were much less than the total expenditure/cost incurred by the assessee up-to-date. In the circumstances, so far as the assessment year 1977-78 is concerned, we accept the assessee's submission that it would be in order if no profits or losses are estimated from the venture for the assessment year 1977-78. The assessment for this year is, therefore, cancelled even on this score. 19. However, the position as regards the assessment year 1978-79 is materially different. The construction of the building is completed in that year. Total area earmarked for sale is 61,396 sq.ft. out of....
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.... shown the completion of the project during the assessment year 1993-94 and in that assessment year, assessee got itself amalgamated with the other company i.e., M/s. Pranic Shipping & Services Ltd. and the claimed deduction of entire profit on the project under section 33AC of the Income-tax Act though he was not involved in any shipping activities during that assessment year. When the original project was completed or about to complete why the assessee did not start its construction of the additional FSI immediately after the completion of the original project and why did he wait upto assessment years 1991-92 and 1992-93. These queries remained unanswered. We are, therefore, of the view that there should be some guidelines in this regard, which may govern the assessee as and when profits in the project completion method are to be declared. The period of completion of the project cannot be stretched at the whims of the assessee to defraud the revenue. We are also conscious of the fact that assessee's object is not only to construct a building but also to sell the constructed portion and earn profit. But the time of completion of the project cannot be stretched to that extent till ....
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....year in which 80% of the constructed area is sold and occupied by the purchaser, irrespective of the fact that minor construction work is going on, on the project. 2.In a case when additional FSI is sanctioned and the builder/assessee starts construction thereon before the project is deemed to have been completed in terms defined as above, the construction of the additional FSI is an extension of the original project and is deemed to have been completed in that assessment in which 80% of the total constructed area of the entire project (original project + construction of additional FSI) is sold and occupied by the buyer. 3.In a case, where the original project is deemed to have been completed as per clause (1) and thereafter additional FSI is sanctioned on which construction is required to be raised. The construction of the additional FSI will be an independent project and it will not extend the period completion of the original project. It would be an independent project and it would be deemed to have been completed in the same manner, as the original project is deemed to have been completed i.e., on the sale of 80% of the constructed area. 4.In a case where assessee/builder ge....