TaxTMI 
TaxTMI 
2016 (12) TMI 1295
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....s correct in law in holding that sale price in respect of constructed/built up properties should not be accounted for at the time of handing over the possession or conveyancing whichever is earlier? 3. Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) were correct in law in re-working the cost of land at the average purchase price of land in Qutub Enclave Complex now known as DLF city by dividing the cost of the acquired till the end of the year by saleable area including lands earmarked for schools, hospitals, clubs and other community building, in each phase? 2. Both these appeals concern assessment years 1994-95 and arise out of the order of the Income Tax Appellate Tribunal (ITAT), allowing the appeals before it. The assessee which develops lands into plots and sells them, declared an income of Rs. 8,59,28,760/- in its return dated 30.11.1994. This was processed on 28.03.1995. Later it filed a revised return on 3.10.1996 declaring a loss of Rs. 93,39,470/-. The original assessment under Section 143 (3) was made on 31.03.1997 by which the income was assessed at Rs. 18,97,84,160/- by estimating the income @ 12.5% of the installments received b....
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.... only to the assessee company or their nominees at specified rates. The rate specified is the cost of land plus a markup of Rs. 2000/- per acre. The right to develop the land in terms of the licenses and the right to enter into agreements to sell the land or interests thereon have been given by the subsidiary companies to the assessee through separate agreements. The subsidiary companies' returns, are at a fixed rate of Rs. 2000/- per acre. The assessee appropriates the rest of the amounts collected from the prospective buyers of the developed land. Question nos.1&2 4. The assessee used to advertise its schemes and after receipt of forms, the plots or constructed residential units/flats or commercial flats were sold to various prospective buyers each of whom entered into an agreement to pay the consideration of the plot or residential/commercial unit. The assessee showed these installments as receipts credited to "realization under agreement to sell" advance from the customer's account till the property was conveyanced in favour of the prospective buyers. At the time of conveyancing of the land to the prospective buyers, the subsidiary companies write off the property from th....
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....come accrues on a date earlier than when it is received, but it could be difficult to state whether income or amounts received earlier would accrue later. Noticing the peculiarities of the agreement to sell entered into between the plot/flat buyers and the assessee, the CIT (A) felt that in the absence of a penalty clause in the event of delay by the assessee or the absence of a cancellation and forfeiture condition, and furthermore there being practically no instance of termination of agreements, the agreements themselves effectively conveyed the property. The CIT (A) relied upon the decisions of the ITAT as well as the Supreme Court in CIT v. Podar Cement (Pvt.) Ltd., (1997) 226 ITR 625 and held that even without a conveyance deed, there was in effect transfer of lands. The CIT (A) directed re-computation of the assessee's income in the light of the adjustments to be made in terms of the directions in paragraph 27 of its order. Those directions are extracted below: - "27. In the light of the foregoing discussion, I find that there are certain material defects in the method of accounting employed by the appellant which leads to distortion of the real profit. It is not pos....
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....ced and the sale proceeds credited to the profit and loss account. If any alternation in the method of accounting is made by the A.O. at this stage, it may unsettle a large number of assessments and may result in certain income getting doubly taxed or not taxed altogether. Looking to entirety of facts and circumstances it would be fair both to the assessee as also the Revenue to let the method of accounting continue for the remaining part of the project despite certain distortions as stated above as far as plots of land are concerned. (II) As regards the constructed properties, the method of accounting was changed by the appellant in the recent past. The possession of the property is handed over to the buyers on payment of at least 40% of the sale price and the balance amount is payable in installments under the Deferred plan for which the appellant is charging interest from them. The buyers become the beneficial owners of these properties under the circumstances and for the reasons discussed above. The appellant's right to the full realization of sale consideration accrues at the time the possession is handed over and from then onwards for all purposes, the buyers are onl....
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....may be pointed out that the market value of these sites cannot be zero. These are capable of getting premium as seen in respect of 42 sites transferred to different individuals/institutions through the medium of trust. The AO should obtain a yearly stock inventory of the land acquired by the assessee in various phases, rate at which acquired, area acquired and also the details of land conveyance out of the acquisition. (V) The internal development expenses should be debited to the profit and loss account on the basis of actual expenditure. By the time the sale proceeds are credited to the profit and loss account, the development work is already over and the actual expenditure on the development of each phase is known. The question of estimating such expenses may arise when these expenses are required to be charged before the actual execution of the work. Such an eventuality would have arisen if the profits were to be worked out before the completion of the project. In the present case the revenues are being realized only at the time of conveyancing and in any case after the completion of the project or sub-project. There should not be any difficulty in finding out the tota....
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....is that when the assessee books a sale on registration of the sale deed, then its credits work-in- progress by the average cost of land on the date of sale and debits its profit & loss account by the same amount. In principle, both the AO and CIT (A), as well as, the learned DR agree with this method; the only variation they are proposing is that average should be in respect of Phases, I, II and III, not including therein Phase IV, whereas, as per books of accounts maintained by the assessee from 1981 to 1993-94, the assessee is doing it in respect of all the four Phases, i.e., principally, the methodology is not under dispute. The only variation that is being pressed is in the exact working thereof. The criteria adopted by the Ld. CIT (A) is not justified. Firstly, the entire area under phase I to IV has been considered by the HUDA authorities as one single project, in terms of sanction given as per their letter. Secondly, the extent of the area to be held for benefit of the community like school, hospital, fire station, parks, police station etc. are to be set apart from the entire land of Phase I to IV jointly and not phase wise. Thus the cost of land in phase I to IV have to be....
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....hlighted that the assessee changed its method of accounting in assessment year 1992-93 before which it was in fact followings the project completion method and claiming development expenses as part of work in progress. This method of accounting was changed by the assessee, which offered sales on the basis of conveyances. By this revised method, the assessee did not offer a portion of sales consideration in the year of its receipt claiming that provisions for development expenses was made inspite of the fact that those expenses were not incurred in the year under consideration. 10. Mr. Shivpuri submitted that 30% appropriated towards development as expenses could not be in fact done on a uniform pattern across the board given that development of the individual plots was never undertaken at one go and was in fact on project to project and layout to layout basis. In fact, no supporting evidence was offered to show such expenditure. Likewise, appropriation of the entire brokerage and sales commission to the expenses, as debited, though the conveyance of the property was much later, also showed that there was no consistent pattern in the accounting behaviour of the assessee. Learned ....
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.... not a matter of remand but rather set aside the second assessment order and the second order of the CIT (A), nothing survived. In this regard, the order of the ITAT dated 06.06.2008 deals with the question of method of accounting and holds as follows: - "Now coming back to the first issue raised by the AO and accepted by the CIT (A), it is with regard to the fact whether the assessee should not have treated Phases I to IV as one project for purposes of application of project completion method. The CIT (A) has opined that Phases I, II and III should be treated as one complex and Phase IV should be treated separately. This is for the reason, as per CIT (A) and the AO, that Phase IV could go on indefinitely and this could lead to reduction in profits because the purchase of land subsequently would be at the higher rates vis-à-vis the rate at which the land was purchased earlier at lower rates. As explained before, the appellant assessee follows the project completion method whereunder all its costs are capitalized to work-in-progress, including the purchase of land - whether it is purchased at earlier point of time or later point of time. So, there is no dispute betwe....
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....lopment Authority has also treated these four Phases as one as mentioned at pages 212 to 215 of the Paper Book." 13. It is evident from the above discussion that the assessee followed the project completion method. This Court has in its decision in Paras Buildtech India P. Ltd. v. Commissioner of Income Tax, (2016) 382 ITR 630 (Delhi) held that the project completion method is a known and recognized mode of accounting. It is also held that this mode was approved as a proper method, which identified receipt of income or revenue only upon the completion of the contract. This Court relied upon the judgment of the Supreme Court in CIT v. Bilahari Investment P. Ltd. [2008] 299 ITR 1 (SC) where both the methods of accounting were specified and which stated inter alia as follows: - "Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method. Under the completed contract method, the revenue is not recognized until t....
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....ble to the agreement with the purchasers was debited as expenditure. So far as the question of applicability to section 2 (47) of the Act or Section 53(A) of the Transfer of Property Act is concerned, legally speaking, part performance is undoubtedly an interest or right known to law. However, part performance, pre- supposes handing over a possession, at the time the agreement is entered into. Having regard to the assessee's uniform pattern of revenue recognition that only upon execution of the conveyance/sale- deed, would the amounts lying with it be treated as profit and brought to tax, the possibility that in law certain flat or plot buyers could be handed over possession earlier per se would not result in distortion of the kind stated by the revenue. There is no material or evidence in this regard nor was cited by the revenue. 16. This Court is furthermore of the opinion most importantly that in the previous order of the Tribunal dated 06.06.2008 on the justification by the assessee in following the project completion method (in ITA 1884/Del/1998 and 2052/Del/1998- DLF Universal v. ACIT), which became conclusive, the revenue could not have urged all over again this aspect. F....
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....ay not be able to sell these lands. But sale is just one of the several ways in which profit may be derived from land. Mere fact that the appellant is precluded from selling the land, or does not intend to do so does not imply that appellant has ceased to be its owner or that he cannot derive profit from it in other ways. Thus, it may be observed that the appellant continues to be the owner of the institutional sites, and he is not barred from deriving profit from tem by building and running schools and hospitals thereon. The acquisition of these sites by the Government is a contingency which may or may not arise. Hence, I agree with my learned 'predecessor that these sites should not be written off till they are actually acquired by the government, or are transferred 10 any other person or institution. For the same reasons, I hold that it would be proper to value these spaces at nil. as per the alternative argument put forth on behalf of the appellant. The argument that in case these sites are to be treated as property of the appellant then the projected cost of construction of these sites should be allowed as part of internal development cost, is also not valid, because even ....
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....ng these sites i.e. this has been free of cost, either to the Govt. of Haryana or to the charitable trusts etc. After handing over these sites, the assessee's compliance of law comes to an end. The transferees i.e. the Govt. of Haryana and these charitable trusts have to follow the law. If they did not follow the law for any reason, whatsoever, then action could be taken by the authorities, but no such facts have been proved before us; though some allegations have been made against the transferees. Be a sit may, as far as the assessee is concerned, it has followed the law and no violation of the same has been done. Therefore, when the assessee writes off 45% of the land when it sells the land to any buyer, then it follows the law. From every 100 sq. yds of land that the assessee purchases, it is entitled to sell 55sq. yds. And, by law it has to keep 45% of land vacant or for community sites. As per record which we have carefully perused, this is what the assessee has done. Therefore, loading of cost of the vacant portion of the saleable portion is an automatic corollary of the law.CIT(A) has varied this figure to 60.77.% but ultimately the assessee cannot vary this percentage w....