TaxTMI 
TaxTMI 
2023 (5) TMI 872
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....onsidering direct cost such as premium paid to Municipal Corporation, 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.....
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....ations in applying the percentage completion method to derive at the profits for the year under consideration. However, aggrieved 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. Howev....
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....icer. The ld. CIT(A) followed the decision of the ITAT in assessee's own case for A.Y. 2009-10 wherein the method of working out profits 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 c....
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....e year/Total Construction cost, C:S-D-C 1,045,391,598 Earlier 216.5 cr, if administrative costs at 49.8 cr is reduced then we get about 55 cr., earlier 90 cr.) The administrative costs will be reduced as actually incurred 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 ....
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....T v. A. Gajapathy Naidu, (1964) 53 ITR 114 (SC), it is held that income is taxable when it accrues or is earned, if the assessee's accounts are maintained on the mercantile basis. A profit can be said to have accrued or a liability or loss can be said to have been incurred only when the profit is either actually due or the liability becomes enforceable. 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 (Revise....
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....l title is not transferred or the possession of the real estate is not given to the buyer. Once the seller has transferred all the significant risks and rewards to the buyer, any acts on the real estate performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue in such cases is recognised by applying 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 g....
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.... Some further indicators of such transactions/activities are: (a) The duration of such projects is beyond 12 months and the project commencement date and project completion date fall into different accounting periods. (b) Most features of the project are common to construction contracts, viz., land development, structural engineering, architectural design, construction, etc. (c) While individual units of the project are contracted to be delivered to different 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....
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....orting date. For computation of revenue the stage of completion is arrived at with reference to the entire project costs incurred including land costs, borrowing costs and construction and development costs as defined in paragraph 2.2. Whilst the method of determination of stage of completion with reference to project costs incurred is the preferred method, this Guidance Note does not prohibit other methods of determination of stage of completion, e.g., surveys of work done, technical estimation, etc. However, computation of revenue with reference to other methods of determination of stage of completion 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 pay....
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....in following manner: 1. Compute the estimated cost of the project including construction cost and development cost directly related to the real estate project, including land conversion cost, material, labour, depreciation of plant and Machinery, estimated cost of rectification and guarantee, expected warranty cost etc.(A) 2. Compute the cost of construction and direct cost incurred as on reporting date. (B) 3. Find out the percentage of work completed on reporting date ( C= B/C) 4. Compute the salable area of the project. (D) 5. Compute the estimated cost per unit of saleable area. (E= A/D) 6. Compute the revenue 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 e....
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....xcluded resulting into project cost of Rs. 95.87crores (111.63 crores minus 15.76 crores). (c) Thus, up to the year under consideration i.e. A.Y. 2011-12, the percentage of completion of project comes to [(95.87/216.52)*100] = 44.28% (d) Salable area of the project: Further, in this case, the total area available for construction is 1,35,600 sq. ft., out of which area for constructing "A" wing is 1,28,760 sq. ft. and that for "B" wing is 6,840 sq. ft.Till A.Y. 2009-10, the assessee has taken into consideration the total area of 1,35,600 sq. ft. However, in A.Y. 2010-11, for the first time, the assessee submitted that the total saleable area needs to be revised due to two events, firstly, due to the dispute arisen with 5 members in the society encompassing area of 11,958 sq. 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. ....
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....with the construction work carried out, further expenses for maintenance of the corporate structure and other administrative and selling expenses for running the business are debited to Profit & Loss A/c. and net profit is worked out accordingly. For the purpose of computing profit from the project, the valuation of closing stock has no role to play under this method. Accordingly, the ground challenging the valuation of unsold flats at market value is irrelevant, whether taken at cost or market value. We set aside the finding of the ld. CIT(A) on the issue of dispute for considering valuation of unsold flats at market value Thus, this ground no. 5 of the assessee is allowed. 15. The ground No. 8 of the appeal was not pressed, therefore, same is dismissed. 16. The ground no. 9 of the appeal relates to the issue raised by the assessee that the ld. CIT(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 theref....
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....iled before us in the paper book. The Ld. CIT(A) has mentioned the figure at Rs.61,63,16,666/- so we restored the amount to that extent only. Accordingly, we revise the estimate of cost of project to Rs. 216.52 plus Rs. 11.05 crores totaling to Rs. 227.67 crores for AY 2012-13 and onward. Further, we also note that in AY 2013-14, the cost incurred has been reduced from 133.13 cores to 128.81 due credit of service tax in said year. 19.3 In this manner, the project cost incurred and percentage completion of project is worked out as under: - A.Y. Total Project cost incurred (incl. administrative cost) (Rs. In crores) Administrative cost (Rs. crores) In Total Project Cost (excl. administrative cost) (Rs. In crores) Total Estimated Project Cost (in Rs. Crores) % of work completed 2010-11 2011-12 111.63 15.76 95.87 216.52 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 ....