TaxTMI 
TaxTMI 
2023 (5) TMI 872
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....rporation, TDR etc. as part of the cost of construction. 3. The Ld CIT (A) erred in not considering revised estimated cost of repairs which have caused due to delay in completion of project and damage to the building on account various litigations. 4. The Ld CIT (A) erred in not allowing deduction of estimated cost of repairs of Rs. 61.63.16,666/- by holding that estimated construction cost is already included in total cost of Rs2,66,35,00,000/-, not appreciating fact that what is included was cost of construction and not cost of repairs. 5. The Ld CIT (A) erred in not considering valuation of unsold flats at cost. 6. The Ld CIT (A) erred in not considering fact that due to delay in completion of project on account of various litigations, profit as per method prescribed by Hon'ble ITAT in A Y 2009-2010 cannot be worked out. 7. The Ld CIT (A) erred in interpreting order of Hon'ble ITAT for A Y 2009-2010 that cost of construction/ repairs cannot be revised. 8. The Ld CIT (A) erred in not considering estimated cost at Rs. 366.95 cr. and restricting to Rs. 266.35 cr. 9. The Ld CIT (A) erred in reducing proportionate cost of construction and direct. cost pertaining....
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....rieved by the same, the assessee is in appeal before us. 5. The ground no. 1 of the appeal is general and does not require separate adjudication. 6. The ground nos. 2 to 9 of the appeal relates to the determination of correct profits for the year under consideration by applying correct principles of percentage completion method and not by merely following the order of ITAT in assessee's own case for A.Y. 2009-10 when there is a change in estimates due to peculiar circumstances of the case. 7. Briefly, the facts qua the issue-in-dispute as culled out from the order of the ld. CIT(A) are that a Development Agreement dated 31.12.2005 was entered into by the assessee with a co-operative housing society namely, Chetak Co-op. Housing Society who owned 4 different plots at Pali Hill, Bandra (West), Mumbai. The assessee acquired development rights from the 'Chetak Society' to construct a building comprising of 'A' and 'B' wings. The total area of construction was 12599.12 sq. meters. i.e. 1,35,616 sq. ft. rounded off to 1,35,600 sq. ft. as per the plans. However, later, dispute arose between the assessee and the Chetak Society in relation to the project on some clauses of the agreement.....
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....ofits based on percentage completion method is explained. After critically examining the orders of the ITAT for A.Y. 2009-10 and 2010-11 in assessee's own case and the order of the ld. CIT(A) in second round for A.Y. 2009-10, at para 12.2 to 12.4 of his order, the ld. CIT(A) has referred to some mistakes crept in the earlier order of ld. CIT(A) and finally, recomputed the taxable profits at Rs. 15,28,17,792/- for the year under consideration with detailed discussion at para 15.1 to para 16.1 of his order. For ready reference, said part of the order of Ld CIT(A) is reproduced as under: 15.1 Thus following working is arrived at based on above discussion: Total estimated sale consideration of the project after considering assessee's submission that stock may be valued at the rate of last sale deed executed S1 3,569,095,680 Total estimated cost excluding Administrative Costs C1 2,165,200,000 Total profit (P1) to be bifurcated in different years after reducing administrative costs 1,403,895,680 And the bifurcation of estimated costis as under: Direct cost, D1 817,700,000 Construction cost estimate, C1 1,347,500,000 Administrative cost estimate (not consid....
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.... as discussed in para 9.2. 16. Now the year-wise profit will be worked out. The figures of components of cost taken in working out the profit based on Table WIP (para 12.2) Assessment Year -- 2010-11 2011-12 Construction cost estimate, C 1,22,86,50,500 1,22,86,50,500 Construction cost incurred during the year 9,22,50,953 year 16,45,81,649 Progress in work, w 7.51% 13.40% Total estimated sale consideration, S 2,99,94,23,768 2,99,94,23,768 Gross revenue allocated for the year, S*w 225206193 401782370 Less : proportionate direct cost, D*w -54463943 -97167186 Less : Construction cost incurred as per Table WIP during the year 9,22,50,953 -16,45,81,649 Less: Administrative cost debited as per books/Table WIP during the year -4,64,13,660 -5,52,95,604 Profits to be taxed subject to adjustments as per IT Act 3,20,77,636 8,47,37,931 Add : Income tax related 32,24,746 Donation 1,00,000 1,07,00,000 Profits from housing project subject to any further adjustments 3,54,02,382 9,54,37,931 Profit assessed in original assessment order 7,79,75,090 15,28,17,792 For AY 2010-11, the AO may consider necessary action as per law in the order giving effec....
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....ble. Further, it is held in CIT v. Associated Commercial Corporation, (1963) 48 ITR 1 (Bom) that a mere claim to a profit or to a liability is not sufficient to make the profit to accrue or the liability to be incurred for the purposes of the Income Tax Act. It is also clarified in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 (SC) that once accrued, it is liable to the charge even if, subsequently, it is forgone and not realized. When a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time. The same is clarified in decision in T.N.K. Govindarajulu Chetty v. CIT (1973) 87 ITR 22 (Mad), affirmed in (1987) 165 ITR 231 (SC). We have stated in the impugned order that as the assessee is following consistently percentage completion method, Accounting Standard (AS)-7 (Revised) is applicable which allows only percentage of completion method for construction contracts and the basic ingredients of the above method are (i) the recognition of revenue and expenses by reference to the stage of completion of a contract is called "the percentage of completion method", (ii) the contract revenue is matched with the contract costs incurred i....
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....pplying the percentage of completion method on the basis of the methodology explained in AS 7, Construction Contracts. Further, where individual contracts are part of a single project, although risks and rewards may have been transferred on signing of a legally enforceable individual contract but significant performance in respect of remaining components of the project is pending, revenue in respect of such an individual contract should not be recognised until the performance on the remaining components is considered to be completed on the basis of the aforesaid principles. This Guidance Note, thus, provides guidance in the application of: * Principles of AS 9 in respect of sale of goods for recognising revenue, costs and profits from transactions of real estate which are in substance similar to delivery of goods where the revenues, costs and profits are recognised when the revenue recognition process is completed; and * Percentage completion method for recognising revenue, costs and profits from transactions and activities of real estate which have the same economic substance as construction contracts. 3.4 The application of the methods described in paragraph 3.3 above requi....
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....fferent buyers these are interdependent upon or interrelated to completion of a number of common activities and/or provision of common amenities. (d) The construction or development activities form a significant proportion of the project activity. 5.2 This method is applied when the outcome of a real estate project can be estimated reliably and when all the following conditions are satisfied: (a) total project revenues can be estimated reliably; (b) it is probable that the economic benefits associated with the project will flow to the enterprise; (c) the project costs to complete the project and the stage of project completion at the reporting date can be measured reliably; and (d) the project costs attributable to the project can be clearly identified and measured reliably so that actual project costs incurred can be compared with prior estimates. When the outcome of a project can be estimated reliably, project revenues and project costs associated with the project should be recognised as revenue and expenses respectively applying the percentage of completion method in the manner detailed in paragraphs 5.3 to 5.8 below. 5.3 Further to the conditions in paragraph 5.....
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....mpletion should not, in any case, exceed the revenue computed with reference to the 'project costs incurred' method. Illustration appended to this Guidance Note clarifies the method of computation of revenue. 5.5 The project costs which are recognised in the statement of profit and loss by reference to the stage of completion of the project activity are matched with the revenues recognised resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. Costs incurred that relate to future activity on the project and payments made to sub-contractors in advance of work performed under the sub-contract are excluded and matched with revenues when the activity or work is performed. This method provides useful information to the extent of contract activity and performance during a period. 5.6 The recognition of project revenue by reference to the stage of completion of the project activity should not at any point exceed the estimated total revenues from 'eligible contracts'/other legally enforceable agreements for sale. 'Eligible contracts' means contracts/agreements specified in paragraph 5.3 where atleast 10% o....
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....e arising from sale agreements booked. (F) 7. Find out the area sold corresponding to sale agreements. (G) 8. Compute the project cost relatable to the area sold.( H= G*E) 9. Compute the profit from sale of the area sold ( I= F-H) 10. Then, finally work out the profit corresponding to the stage of work completed by multiplying the profit computed at step 9 to the percentage work completed on reporting date(J= I*C) (* stands for multiplication) 11. Any administrative expenses or indirect expenses related to the business of the assessee incurred during the year, will then be allowed to be deducted in whole from profit recognized above at step No. 10. 12.3 In view of above principles and steps of computation of profit following percentile completed method, the profit from the project is computed in the case of the assessee as under: (a) Total estimated cost of the project: (i) Regarding the direct cost attributable to the project, it is undisputed that same shall be included in the total Project Cost. In this case, earlier the assessee had claimed a total estimated Project Cost of Rs.366,95,00,000/-, however, later on, the assessee vide submission dated 26.02.2015 bef....
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.... ft. who restrained to give any permission for development and secondly, due to demolition of area of 3,350 sq.ft. of 19th floor of "A" wing because of height restrictions by the airport authority. We have considered the submission of the assessee for revising the saleable area to 1,20,292 sq. ft. However, we do not agree with the assessee. As far as the disputed area of 11,958 sq. ft. is concerned, the assessee has been restrained from selling for the time being due to the injunction by the Hon'ble High Court but that area still remained with the assessee. So, it cannot be reduced from the overall saleable area available with the assessee. The change in saleable area sought, secondly is due to demolition of 19th Floor of A wing admeasuring 3350 sft. As far as the demolished area is concerned, that has extinguished due to demolition and therefore, that area is allowed to be reduced. Accordingly, the revised saleable area available with the assessee works out to 1,32,250 sq. ft. (e) The cost of the salable area per unit thus works out to Rs. 16,372/-. (f) Till the year end the assessee has reported area sold of 86,986 sft for sale agreements of Rs. 175,29,25,800/-. (g) The pro....
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....(A) erred in reducing the proportionate cost of construction and direct cost pertaining to area admeasuring 15,308 sq. ft. consisting of demolished area and in respect of which development rights were not granted. 16.1 This issue is already covered in our decision above, wherein the profit from the project is computed and therefore, no separate finding on this issue is required. Accordingly, this ground is allowed partly. 17. The ground no. 10 relates to disallowance of deduction claimed u/s. 80G of the Act by the assessee. 18. On perusal of para 16.2 of the CIT(A) order, we find that ld. CIT(A) has directed the Assessing Officer to verify this claim of assessee u/s. 80G while giving effect to his order. In view of this fact, we direct the Assessing Officer to give effect to the finding of ld. CIT(A) if he has not yet given. Accordingly, this ground of appeal is allowed for statistical purposes. 19. For, AY 2012-13 and 2013-14 also the cumulative profit from the projects can be worked out keeping in view the change in circumstances of the case. 19.1 In this regard, we find that the ld. CIT(A) at para 13 of his order has referred to a sum of Rs. 50 crores being the estimated co....
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....2 44.28 2012-13 152.65 19.52 133.13 227.57 58.50 2013-14 150.89 22.08 128.81 227.57 56.61 19.4 In the course of hearing, the ld. Counsel of the assessee has furnished the detail of area sold and sale agreements entered into with the customers upto the following years as under: - A.Y. Area Sold (sq. ft.) Sale Agreements (Rs.) 2011-12 86,986 175,29,25,800 2012-13 90,465 188,29,25,800 2013-14 90,465 188,29,25,800 19.5 The assessee submitted before us that in earlier year actually no profit has been assessed from the project, therefore same might be taken at NIL. In view of the above, the revenue to be recognised cumulatively and cumulative profit as per the percentage completion method for the three assessment years under consideration before us is worked out as under: - Amount in Rs. Particulars A.Y. 2011-12 A.Y. 2012-13 A.Y. 2013-14 Estimated cost of the project 2165200000 227,57,00,000 227,57,00,000 Project cost incurred till year end. 958700000 1331300000 1288100000 % of work completed 44.28 58.50 56.61 Revised salable area 1....