TaxTMI 
TaxTMI 
2019 (3) TMI 1942
X X X X Extracts X X X X
X X X X Extracts X X X X
....uate inquiries/verification/examination with respect to amount received on sale of TDR. 2. The revision order passed u/s 263 by the Learned Pr. CIT is bad in law and deserves to be set aside. 3. The Ld. Pr. CIT erred in alleging that the appellant is engaged in the trading of TDRs without appreciating the fact that the release entitlement and sale of TDR is sine-qua-non for developing, construction, completion, and handover of single, inseparable, indivisible and composite SRA project to the SRA Authority. 4. The Ld. Pr. CIT erred in Facts and in law in concluding that the percentage completion method followed by the appellant for revenue recognition is not applicable to the assessee's business. 5. The Ld. Pr. CIT has grossly erred in directing the LAO to tax the amount received on sale of TDR of Rs. 53,35,24,118/- without appreciating the facts of the case." 2.1 At the outset there is a delay of 96 days in the appeal filed by the assessee. The Ld. Counsel for the assessee submitted that delay was on account of wrong advice of the consultant in this regard. The acceptance letter for wrong advice by the consultant was duly submitted. Upon hearing bo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ruction on reaching various stages of development of SEA project. 7.l....b) the assessee has been consistently following Percentage completion method for revenue recognition./or its real estate project since its incorporation. It can also be referred from note no 2. 7 Revenue recognition of the audited financial statement for the year which clearly mentions that revenue recognition policy of the company for real estate project is Percentage completion method. h) Further, the Institute of Chartered Accountant of India (ICAI), came up with guidance note on Revenue Recognition by Real Estate Developer which prescribed Percentage Completion Method for revenue recognition. As per the guidance note, revenue from construction and development of the project will be recognised only after the work has progressed to the extent of 25% of the total construction cost excluding land cost and other parameters are fulfilled. The total project work completed up to March 31, 2012 is 11%. Accordingly, revenue will be recognised in the year in which the firm fulfils the desired threshold...... 10. We emphatically state that from the records of the hearing taken place during t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....measuring 93,23 sqt.mt. as identified against grant of 1 00% land component of TDRs. The 100% TDRs in respect of land component was given at the time of the signing of the agreement on 24.04.2009. Thereafter, the developers have to construct the tenements in a phase vise manner and based on phase wise and stage wise construction of the same, the assessee will be gaining construction/building component Of TDRs from time to time and the same shall he released by SRA as per the terms of the SRA agreement. 2. From the facts mentioned in the SRA agreement, the assessee shall be granted TotalLand TDRs of 93,623 sq. mts. and Construction TDRs of 4,78,527.75 sqmts. 3. The assessee was granted Land TDRs component of 93,623 sq. mts, on 8th June 2009immediately after execution of the SRA agreement dated 24th April, 2009 with 3RA. The construction TDRs were allotted to the assessee as per clause 21 of the SRA agreement. 5.1 During the assessment proceedings for A.Y. 2014-15 before the assessing officer, the assessee submitted that following details of TDRs received against the ongoing SRA project: DRC No. Date of issue Financial Year Areas as per DRC sqmt. A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....edings for the A.Y. 2014-15 and is not related to the development of any project. Therefore, he held that sale of TDRs should have been disclosed as income on accrual basis. 6. Thereafter the ld. CIT referred to guidance account of real estate transactions which was also referred by the A.O in assessment order of AY.2014-15. Thereafter he observed that: "On perusal of the above mentioned guidance note on Sale of Transferable Development Rights (TDRs), it is clearly established that the assessee has transferred development rights to the buyers. The amount of revenue can also be measured reliably as the sale of TDRs has already been executed by the assessee with its buyers. The cost incurred in respect of sale of TDRs transactions can also be measured reliably. 6.4 In the case of the assessee, there is sale of TDRs entered into by the assessee. Accordingly revenue on sale of TDRs shall he recognized on accrual basis for which rules mentioned in guidance note for accounting of sale of TDRs, as explained above, have been framed. Therefore, the assessee should have recognized the sale of TDRs on accrual basis as and when sale of TDRs agreements were executed. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss the order under guidance/supervision of the Jt. CIT, Range-31(1), Mumbai, preferably within a period of 3 months in accordance with law & after affording an opportunity of being heard to the assessee." In I.T.A. No. 3035/Mum/2018 for A.Y. 2013-14, on similar reasoning the learned CIT has exercised his powers u/s. 263 of the Act. While giving final direction, the learned CIT observed as under: "The assessment made is therefore, set aside with the following directions to the Assessing Officer: 18.1 The assessment be made by de novo by considering one of the following methods of income computation for the year. 18.1.2 (Method 1) (holistic method) 18.1.2.1 The profit realisable based on the Costing of the entire project and estimated sales and revenue according to the project reports as outlined and narrated in Paras 16 to 9 be made afresh, A percentage of the profit which bears the same ratio to the extent of construction cost incurred as a percentage of total costs can be seen and taken as profit for the year. 18.1.2.2 To illustrate if the total profit from the project is estimated at say 700 cr as done in para 9, then , 700 x 155/821cr = 132....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fficer in the course of the assessment proceedings: "a) Copy of SRA Agreement . b) Copy of TDR sale agreement. c) Copy of Deed of Conveyance for handing over land to SRA authority. d) Architect Certificate for percentage of work completed in respect of SRA project. e)Extract of Guidance Note on Revenue Recognition by Real Estate Developers issued by Institute of Chartered Accountant of India." In the said letter it was duly stated that the AO has passed the assessment order after through examination of all submission and document. Further, the ld. Counsel submitted that assessee is following percentage completion method of accounting of profits. He submitted that this method has been consistently followed. He further submitted that as per the method of accounting by the assessee profit is offered beyond completion of project to a certain stage of 30%. He referred to the architect certificate attached in paper book for the proposition that only 11% of the project was complete during the year hence no profit was offered. The ld. counsel further submitted that the ld. CIT has clearly erred in holding that there is no obligation ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation 1.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner....
X X X X Extracts X X X X
X X X X Extracts X X X X
....We find that the Learned Commissioner of Income Tax in this case has heavily relied upon assessment order of the assessee for assessment year 2014-15. He has also referred to the submissions in AY 2014-15, Relying upon the finding of the AO in assessment year 2014-15, Ld. CIT has passed an order under section 263 of the IT Act. In this order he has observed that assessee has not offered income from sale of capital TDR on accrual basis. He has also held that assessing officer has not examined the tax-ability of TDR. 12. We note that it is undisputed by the revenue that assessing officer has examined the issue of assessee's method of accounting as well as issue of receipts from sale of TDR. 13. This is evident by the submission of the assessee before the AO and the Ld. CIT. Before the Ld. CIT assessee has duly submitted that following materials were submitted before the AO in course of assessment proceedings: " a) Copy of SRA Agreement . b) Copy of TDR sale agreement. c) Copy of Deed of Conveyance for handing over land to SRA authority. d) Architect Certificate for percentage of work completed in respect of SRA project. e)Extract of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2. Copy of Project Status Certificate of Orchid hills situated at Chandivali, Andheri as on 09.05.2013 of an independent architect is enclosed herewith as Annexure 2. 3. Copy of Partnership deed of the assessee is enclosed herewith as Annexure 3. 4. Details of Interest income with supporting documents is enclosed herewith as Annexure 4. 5. Details of Sundry Creditors in the specified format as required by your goodself are enclosed herewith as Annexure 5, 6. Details of Opening and Closing stock of TDK are enclosed herewith as Annexure 6. 7. Details of TDR Sales made during the relevant P. Y. are enclosed herewith as Annexure 7. 8. Copy of Assessment Order of A. Y. 2012-13 is enclosed herewith as Annexure 8. 9. Copy of 1TR-V of all the partners of the firm is enclosed herewith as Annexure 9. 10. Note on Revenue Recognition: " The Institute of Chartered Accountants of India has issued Guidance Note on "Recognisation of Revenue by Real Estate Developers" on 11th February, 2012 in consensus with AS-9 Revenue Recognition. To follow the Guidance Note the firm has revised its policies on Revenue Recog....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a) In this respect, we would like to submit that the assessee firm has acquired/hold TDR entitlements which are allotted by Government/SRA and not otherwise. The said TDR are for the purpose of the project which is loaded with heavy charge of incurring all the construction and other related expenses till the completion of the project. Thus there is no doubt that the TDR's are directly related to the said project and sales proceeds of these TDRs are to be recognised as revenue receipt on the basis of Percentage completion method as discussed below and that to on fulfilment of desired threshold. b) The sale of TDRs does not constitute profit and the profitability of the same can be determined only at the stage when revenue will be recognised in accordance with Percentage completion method on fulfilling the desired threshold. Thus taxability of the same can be considered only at that stage. c) WE would like to inform your good self that, the assessee firm has to construct and complete the entire SRA project with its own fund. Thus the TDRs which is received/to be received is nothing but the contribution by the government to enable the assessee to complete t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ance note on Revenue Recognition by Real Estate Developer which prescribed Percentage Completion Method for revenue recognition. As per said guidance note, revenue from construction and development of the project will be recognised only after the work has progressed to the extent of 25% of the total construction cost excluding land cost and other parameters are fulfilled. The total project work completed up to March 31, 2012 is 11%. Accordingly, revenue will be recognised in the year in which the firm fulfils the desired threshold. The assessee submitted the Architect certificate for percentage of work completed as on 31-03-2012 in respect of SRA project. 18. We further note that the method of accounting and the accounting of receipts from TDR were duly disclosed in financial statements. We also find that assessee has been following this method of accounting consistently from earlier year. In this regard revenue has not found any defect and the Commissioner of income tax is placing great reliance on the assessment order of 2014-15. In the said order the assessing officer has held that percentage completion method adopted by the assessee is not applicable on the sale of TDR. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e comments passed on the assessee's method of accounting is in contravention to settled accounting principle and case laws. 21. We find that learned counsel of the assessee submission is quite germane that the sale of TDR cannot be considered in isolation of the assessee obligation under the SRA agreement to complete the slum rehabilitation project. 22. The reading of the agreement in this regard clearly shows that assessee was under obligation to complete the slum rehabilitation project as per the agreement. The said agreement has to be considered on an overall basis and the construction of the parts of the agreement has to be done in a harmonious manner. As rightly contended by the Ld. Counsel of the assessee TDRs were meant to provide finance to the assessee company to complete the project. In such circumstances the assessee has credited the amount received on sale of TDR to current liability which is utilized in the development of the project. We further note that this treatment by the assessee finds support from ITAT decision in the case of Skylark Build (supra). We may gainfully refer to the following observation of the ITAT in paragraph 8 of the said order. 8.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the receipt from the sale of TDR and treatment thereof as observed by the ITAT in the above case is fully applicable to the facts of the present case. Here also assessee has received the TDR in connection with the slum rehabilitation project. The assessee's plea is that sale of TDR is linked with the assessee's obligation to the complete the project as per the agreement. Hence the credit of the receipt from sale of TDR to current liability awaiting the discharge of assessee's total obligations under the slum rehabilitation project is quiet an acceptable method. 25. The reference to guidance on treatment of real-estate transactions in the context of TDR barrowed by the Ld. CIT from the assessment order of the AO for A.Y. 2014-15 does not actually help the case of the revenue. It nowhere mentions that's sale of TDR should be accounted for in complete disregard to the terms of agreement more particularly the SRA agreement as in this case, and the assessee's obligations therein. In this regard, we may refer to the relevant quotation of learned CIT regarding accounting of real estate transaction in case of TDS as contained in para 6 of his order "6, In this regard, the guid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s obligation under SRA agreement will be over when the entire project construction is over. Hence, sale of TDR even in view of the aforesaid guidelines cannot be accounted for in isolation of the cost likely to be incurred by the assessee in meeting this obligation under the SRA agreement. 26. From the above it is abundantly clear that the method adopted by the assessee is a legally permissible one. The observation of the Ld. Commissioner of income tax while concluding his directions that "TDR is a separate right available to the assessee, the sale of which is not consequent upon construction of the revenue not the revenue recognition from its sale can be tied up with the percentage of completion of construction" is itself fallacious on the facts and circumstances of the case and also does not pass the exposition of the ITAT as in the case of Skylark above, or even the guidance note on which learned CIT is himself placing reliance. For A.Y. 2013-14, the learned CIT has similarly based his order on assessment order of 2014-15 and order u/s 263 passed by CIT for A.Y.2012-13. However, in giving final direction he has further misled himself by specifying method for accounting of TDR....