TaxTMI 
TaxTMI 
TaxTMI 
2023 (6) TMI 255
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....t, 1961 (in short "Act") were issued and served on the assessee along with questionnaire. In response to the notices, AR of the assessee attended and submitted the relevant information as called for. 4. During the assessment proceedings, while verifying the details submitted by the assessee, Assessing Officer observed that in the F.Y.2011-12 assessee has transferred its land purchased at a cost of Rs..201 Crores from M/s. Bombay Industrial Corporation in F.Y.2009-10 to Slum Rehabilitation Authority ("SRA") for a consideration in terms of Transferable Development Rights (TDR) of 16,86,083 sq. ft. The assessee has made a multipartite agreement between M/s Bombay Industrial Corporation, Assessee and SRA on 30.04.2011. As per the agreement, the project is proposed as per Clause 3.11 [under regulation 33(10)] of Development Control Regulation for Greater Mumbai, as per which assessee will convey the land to SRA and then construct tenements for Project Affected People as per Government directive and hand-over the constructed tenements to the Project Implementing Authority, viz. Slum Rehabilitation Authority. Assessing Officer observed that, in lieu of the above, the company will receive....
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....riod of 2Years is over. 2% - 2,22,250 Sub - Total (B): TOTAL CONSTRUCTION TDR 100% 1,11,12,477 GRAND TOTAL (A+ B) TOTAL TDR 1,27,98,560 7. On verification of Balance Sheet and Profit and Loss account and its schedules filed by the assessee, it was observed by the Assessing Officer that the assessee has not recorded any transactions in Profit and Loss Account and declared Rs..NIL profit of the business. On verification of the balance sheet, it was observed that the assessee has increased its WIP Account for Chembur site by debiting direct expenses such as purchases, labour charges, and by debiting administrative expenses such as financial expenses, selling and distribution expenses. The WIP for the year was declared by the assessee at Rs..21,75,00,546/-. The above said sum of WIP along with brought forward WIP of Rs..23,07,302,814/- has been reduced from the TDR sale declared at Rs..2,19,52,15,898/- and thus the closing WIP was declared at Rs..32,95,87.461/- Assessing Officer observed that since the assessee has sold the TDR received in lieu of transfer of land to SRA and the income from sale of TDR so received constitutes the income of the assesse....
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....A, our company is to construct 9002 tenements and other amenities to be handed over to MCGM through SRA free of cost for which following TDR would be allotted to the company:- A) LAND TDR Sq.meters Sq. Ft 1. Project Affected People Tenements 89,061.89 9,58,662 1,11,12,477 2. Buffer Zone Area 28,418.78 3,05,900 3. Amenity Portion 39,160.23 4,21,521 Total 16,86,083 (B) Construction TDR Total 1,27,98,560 iv) Simultaneous with the issue LOI dated 31.3.2011, a multipartite Agreement ("the Agreement") was executed between M/s. Bombay Industrial Corporation (as "Vendors"), our company (as "Developers") and the SRA (as 'Purchaser') and the SRA (as "Project Implementing Authority") setting out the terms and conditions for development of the said land in accordance with the LOI dated 31.3.2011. Clause (3) and (4) of the Agreement provide for consideration in the form of TDR to be allotted to our company described as "Rehabilitation Component and Land Component" respectively for the obligations undertaken by ....
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....cant uncertainties at the moment. The copies of litigation filed by f) HPCL V/s. The Slum Rehabilitation Authority and Others including us is enclosed and (ii) Public Interest Litigation No. 140 of 2006 filed by Janhit Munch & Others V/s. MCGM, us and others - Volume-I & II enclosed. 2. Issue: In the letter dated 10/02/2016, you have raised the issue of method of accounting qua this project. While our company did not recognise any profit or loss during the year ended 31.3.2013, you have proposed to invoke section 145(3) to compute profit of Rs.52.58 crores, as worked out in the said letter. We seriously object to this proposal on the principles of accounting, among others, for the following reasons: 3. Submissions: 3.1 We have followed correct method of accounting: We respectfully submit that there can be no issue about the method of accounting followed by our company for this project. The Project Completion Method ("PCM") is a recognised method accounting that is followed by many enterprises operating in real estate business as it is a scientific method that has stood the judicial scrutiny in a number of precedents a few of which are mentioned as under: (a) CIT u....
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....e SRA is only a preliminary step in that direction; and not the end in it. Hence, the Land Component of the TDR cannot be separated from the main construction project for measuring any profit or loss from the same. Further, and more importantly, as per Clause (17)(a) we are entitled to only 20% of the total Land TDR on execution of the Agreement, while as per Clause 17(b) & (c), the balance 80% is linked to construction of tenements. This clearly demonstrates that both these components are inseparable and cannot be considered in isolation independent of each other. Therefore, any profit or loss of this project should be recognised only upon completion of the project as a whole when our company fulfils all its obligations under the Agreement. 3.3 Accounting Standard-9 (AS-9) on Revenue Recognition: AS-9 pronounced by the Institute of Chartered Accountants of India lays down the accounting standard for recognising revenue by an enterprise. As per AS-9, revenue in case of sale is to be recognised when significant risks and rewards stand transferred between the parties. Further, the revenue can be recognised only when there is no significant uncertainty about its ultimate coll....
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.....01.2009 has held that when the assessee is following project completion method, sale proceeds of TDRs should be included in the year in which the project is completed. Similar view has been taken by another Bench of the Tribunal in ITO Vs. Sudhir V.Shetty in ITA No.4687/Mum/2006, copies of these two orders have been placed on record. The Ld. DR, after going through the above orders candidly admitted that the facts and circumstances of the instant appeals were mutatis mutandis similar. In view of these decisions it has become apparent that the sale of TDRs is to be accounted for in the year in which the project is completed and not when the work is going on. As the four assessment years under consideration are the years in which the project was unfinished, naturally the sale of TDRs cannot be included in the income of the assessee. However it is made clear that the sale proceeds of TDRS would be included in the total income of the assessee in the assessment year 2008-2009, subject to the availability of other deductions, as per law. The learned A.R. has stated at Bar that the assessee voluntarily included such amount in the income for the assessment year 2008-2009, assessment of wh....
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....rification it is found that the project was completed in 2007-08, AO will compute the income from project after taking into account entire expenditure and the receipts from the beginning of the year including the TDRs as directed by CIT(A). However, in case the project is not found complete, the AO will set off TDR receipts against work in progress and no income will be assessed on account of TDR receipts separately. We direct accordingly." [Emphasis supplied] 5. In view of above discussion, we respectfully submit that the accounting treatment given by our company to the sales proceeds of Land TDR by deducting the same from the cost of WIP is correct and, therefore, it should be accepted. We, therefore, pray that in our case provisions of section 145(3) should not be invoked. The assessee further submitted that, without prejudice to above, A) your goodself may note that, for Builders & Developers, who follows Project Completion Method, while computing net profit of the particular Project, financial figures of more than one year needs to be considered to arrive at profitability of such Project. Your goodself may note that we have borrowed funds of 90,00,00,000/- from IL&FS TRU....
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....ivilege and the right in construction of rehabilitation component. Such construction of buildings in the project commenced as per the direction of the SRA. In lieu of expenses incurred on construction of tenements/building of the project, the assessee will get TDR for sale in open market after commencement of work of construction of building in phased manner. In this process, the assessee is acting like a contractor and not a developer. As such, the assessee is not having any control over commencement of construction, allotment of residential tenements and the completion of whole project. 7.4 As per the multipartite agreement, the assessee has got privilege and right in construction of 9002 tenements. In the said agreement, there is a clause to construct a building by the assessee within 5 years of issue of commencement certificate. The project in question, comprising of 59 buildings for residential tenements and 3 other buildings for amenities. Since the project is so large and there is no time bound completion of the 'whole project, the method followed by the assessee itself is questionable. During the course of assessment proceedings the assessee has never come forward wit....
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....terest received on FD Rs..1832412 Rs..,60390507 11. He observed that interest payments were made to secured loan from bank, convertible debenture and to unsecured loans from parties not related to the assessee. Further, he observed that assessee has utilized the interest bearing fund/business fund for advancing it to its associate concern. The closing balance of advances given to associates concern is as under: - To Director Rs..4,57,950/- To M/s. Aristo Realtors Pvt. Ltd. Rs.. 167,36,35,000/- 12. Since the assessee utilized its business/interest bearing funds for non-business and non interest generated advance, in order to verify the assessee was show caused as to why the proportionate interest expenses debited on interest bearing fund not utilized for business purpose should not be disallowed. 13. In response, assessee submitted that assessee has interest free funds available in the business and as per the presumption the interest free funds are applied which for such other purposes. However, Assessing Officer rejected the same by disallowing the proportionate interest as under: - "13.3. Considering the above facts and as per statement given by the asses....
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....r and the submissions made by the appellant. I find that the appellant has followed the project completion method which is a recognized method of accounting. Further, the appellant has entered into agreement with Slum Rehabilitation Authority (SRA) to construct certain numbers of residential tenements, balwadis, welfare centres, and other amenities as approved by SRA in consideration of Transfer of Development Rights (TDR). The TDRS are to be received for the land component i.e. land to be transferred by the appellant/developer to the SRA and construction TDR in respect of the construction of various buildings in the SRA project. The release of TDR in the form of Development Rights Certificates (DRCs) is to be done in stages to enable the developer/appellant to raise finance and construct and complete the buildings/tenements within the time agreed between the SRA and Developer. Even the land TDR is to be released, as per clause 17 of the agreement dated 30.4.2011, in following manner: (i) 20% on the execution thereof and lodging the conveyance with the registrar in respect of land agreed to be conveyed in favour of PIA i.e. Project implementing authority. ii) 65% upon develop....
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....eavy compensation and the same was claimed as a business loss. This view of the AO is not found to be correct since the nature of TDR advance is like any other advance received in the course of business and since interest is not chargeable on such advance, it has rightly been considered as part of interest free funds available with the appellant. The appellant's claim of compensation paid on non delivery of TDRS as a business expenditure has to be considered on its own merit and the claim of such expense would not decide if the advance received is interest free or not. Therefore, I am of the considered opinion that TDR advances available with the appellant should be treated as part of the interest free funds. 5.2.1. The AO has considered the advances and investments made to related parties from interest bearing funds, meant for business, amounting to Rs.144,27,87,763/-, by excluding the TDR advances available with the appellant of Rs. 1,56,44,69,461. However, as noted above, the TDR advance has rightly been considered by the appellant as part of interest free fund and on that basis, the interest free advances and investment with related concerns/ Director are out of interest....
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.... the TDR received by the assessee for land is separate and for construction is separate which itself is not proper. Therefore, he submitted that the above finding of the Ld.CIT(A) is against the accounting principle followed by the assessee. He submitted that TDR are accrued to the assessee based on the project completion status. He strongly supported the findings of the Assessing Officer and prayed that Assessment Order may be restored. 17. With regard to, interest disallowance he brought to our notice Page No. 15 of the Assessment Order and supported the findings of the Assessing Officer. Further, he brought to our notice Page No. 19 and 22 of the Ld.CIT(A) order, to brought to our notice the interest free funds available in the balance sheet to the extent of Rs..1,97,57,74,648/- the utilization of non business purpose extent of Rs..1,88,05,85,350/-. He submitted that the balance sheet clearly shows that assessee has deployed the interest bearing funds for the non business purposes. Accordingly, he prayed that the findings given by the Assessing Officer in the Assessment Order may be restored. 18. On the other hand, Ld. AR submitted as under: - * The Respondent-assessee is ....
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....ause (21) thereof. * Clause (7) of the Agreement provides that the Respondent shall be entitled to the benefit of TDR in the ratio of 1:1 in respect of the Land Component from the SRA, and the SRA will cause the MCGM of issue TDR in the form of Development Right Certificate ("DRC") in the name of the Respondent in stages after the said land is transferred to SRA as specified in the Agreement. Clause (17) of the Agreement provides the time when the Respondent will be entitled to the Land Component of TDR; while clause (18) of the Agreement provides the time when the Respondent will be entitled to the Rehabilitation, i.e. Construction Component of TDR. Clause (15) of the Agreement stipulates the compensation to be paid by the Respondent to the SRA in case of default committed by the Respondent in the construction work. * The Respondent received the following TDR in respect of the Land Component: * The Respondent has been consistently following project completion method for recognizing revenue from this project. Consequently, all the expenses incurred on this project have been accumulated under the head "Work-in- Progress" till the completion thereof. The sales proceeds reali....
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....tion Method (PCM) is a recognized method of accounting: 1.1 PCM is a recognized and scientific method that has stood the test of judicial scrutiny in a number of cases, reference to which has been made in the written submissions filed before the Ld. CIT(A), a copy of which is placed at pp.187-204 of Paper Book (PB) field by Respondent. The assessee has choice of the method of accounting to be followed, which method once adopted, should be consistently followed year after year, which the Respondent has done. 1.2 Assessing Officer can invoke section 145(3) if he is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting referred to in sub-section (1) or accounting standards notified under sub-section (2), have not been regularly followed by the assessee. The Ld. AO has not given any reason to discredit the accounts maintained by the Respondent, which are duly audited by a firm of Chartered Accountants under the provisions of the Companies Act, 1956. Further, no reasons are adduced to show that generally accepted accounting principle were not adopted by the Respondent in preparation of its financial statements. The L....
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....or its agencies. Upon the Developer obtaining the occupation certificate from the SRA after completing all necessary on site infrastructures such as water supply line, electricity supply and drainage line, etc., the Developer shall be entitled to the balance Land TDR......." Clause (17) of the Agreement provides the time when TDR for the Land Component will be recommended by the SRA in favour of the Respondent, and it is clearly linked to progress in the construction of tenements, and the final 15% TDR will be released only upon completion of construction of tenements and the occupation certificate for the same is issued by the SRA. Recital T' and 'J' of the Conveyance Deed dated 30.4.2011 (pp.71 & 72 of PB) also stipulates that Respondent has agreed to undertake project of construction of tenements comprising certain built-up area sanctioned by SRA in phase in lieu of TDR in respect of the said land and conveyance is made in advance as required by SRA. Thus, conveying this land in favour of SRA was only because such advance conveyance was required by SRA; but it is a part and parcel of the rehabilitation project of construction of tenements for settlement of PAP.....
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....the Respondent got 75% of the total Land Component TDR. 2.5 Respondent relies upon decision in I.T.O. vs. Chembur Trading Corporation (ITA No. 2593/Mum/2006) [pl refer pp. 9-10 of Compilation of Case Laws), wherein the agreement was a composite agreement for handing over land for Expressway and also for construction of tenements and shops by the assessee on land belonging to it. The entire land was acquired in phases and also consideration in the form of TDR was received in phases. Consideration was received in kind. The funds received on sale of TDR were utilised for construction of tenements and shops. Hon'ble Tribunal held that it was clearly one project and not two projects as they have been treated by the AO. It was held that the AO cannot adopt two methods of accounting in one project to determine the income of the assessee. It observed that in case of construction activity there are two recognised methods of accounting viz. (1) Project Completion Method and (2) Percentage Completion Method. It is stated that the assessee has a right or a privilege to adopt any one of the methods of accounting for determining its profit. In this case, the assessee had been following th....
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....ssociated risk and reward to SRA. Further, accrual of TDR is also doubtful until construction is completed as stipulated. The stage-wise allotment of TDR is for purpose of enabling the developer to raise finance required for the implementation of the project. This is provided in Clause (16) of the Agreement. In view of pending litigation before Hon'ble Bombay High Court, execution of this project is standstill, and therefore, it is now couched with very significant risks as to its ultimate completion and realization of revenue, though Respondent incurred costs (including interest on borrowings) year after year. Therefore, it is submitted that in view of AS-9 also, there is no case for recognition of any revenue from this project at this stage.AY 2013-14: Ground No.2: Submissions: The details of interest-bearing funds and interest-free funds available to Respondent and also its utilization for business purposes and non-business purposes are summarised as under: Available Funds Amount (Rs.) Utilization of Funds Amount (Rs.) I) Interest Free Funds I) Non- Business Purpose i) From Directors i) To Directors 4,57,950 ii) From r....
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....ame could be deducted from the WIP that is carried forward to the subsequent year. Reliance for this proposition is placed on the decision in Savala Associates vs. ITO [2010] 35 SOT 148 (Mum-Trib). Prayer: The Respondent prays Your Honours to kindly confirm the orders of Ld. CIT(A) and dismiss both the Grounds of Appeal raised by the Appellant-revenue for AY 2013- 14 and sole Ground of Appeal raised by the Appellant-revenue for AY 2014-15." 19. Considered the rival submissions and material placed on record, we observe that assessee has entered into an agreement to develop the slum rehabilitation scheme as per which assessee has acquired the land from M/s. Bombay Industrial Corporation and entered into multipartite agreement with SRA and different tenements. No doubt assessee has transferred the land to SRA and surrendered all the rights over the property. However, assessee had a basic obligation to construct the building and receive TDR on the portion of land on which the construction is completed in the ratio of 1:1 on TDR and construction TDR in the ratio of 1:1.33. 20. It is fact on record that the construction agreement received by the assessee is to construct the buildi....
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....cannot adopt two methods of accounting in one project to determine the income of the assessee. It observed that in case of construction activity there are two recognised methods of accounting viz. (1) Project Completion Method and (2) Percentage Completion Method. The Tribunal stated that the assessee has a right or a privilege to adopt any one of the methods of accounting for determining its profit. In the present case, the assessee had been following the project completion method to determine the profits of a project for last so many years, but, during the year under consideration the AO had dissected the project in two segments and for one segment he applied project completion method and for the remaining segment, he determined the profit on sale of TDR. The method of accounting adopted by the AO was held to be neither prevalent nor recognised by the ICAI or under any law. The Tribunal held that the assessee had rightly computed its profit on the basis of the project completion method. Accordingly, it upheld the order of CIT(A) and dismissed the appeal filed by the Revenue." 25. Respectfully following the above said decisions, we are inclined to accept the findings of the Ld.C....