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TaxTMI 
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2025 (11) TMI 1150
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....nd in law, the assessment order passed by the Deputy Commissioner of Income Tax 2(3)(1) ('learned DCIT') is void ab initio, being based on limited scrutiny notice under section 143(2) of the Income-tax Act, 1961 (the Act'), issued without complying with the procedure laid by the Central Board of Direct Taxes in this regard. 2. Addition to revenue of Rs. 47,26,83,699 2.1 The learned CIT(A) [NFAC] erred in not deleting the complete addition made in the original assessment order, since as per the working furnished by the learned DCIT in his Remand Report the learned DCIT himself has accepted that the addition of Rs. 2,29,29,00,338 made originally was incorrect due to which he has reworked the addition to Rs. 47,26,83,699. 2.2 The learned CIT(A) [NFAC] has erred in not appreciating that the learned DCIT himself during the course of the remand proceedings was not able to justify and or substantiate the manner in which the addition had been made in the original assessment order and hence the learned CIT(A) [NFAC] ought to have deleted the entire addition made by the learned DCIT. 2.3 The learned CIT(A) [NFAC] erred in sustaining the additio....
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....plying the percentage of completion of 66.39% for Phase 1 and 39.59% for Maple which is not in line with the method of percentage of work completed as per the "Guidance Note" issued by Institute of Chartered Accountants of India (ICAI). 2.10 The learned CIT(A) [NFAC] erred in upholding the unsustainable addition of Rs. 20,27,83,224 determined by learned DCIT without appreciating the fact that no revenue is required to be recognized in relation to Phase 2A Maple project where the percentage of work completed is less than 25% as per the Guidance Note issued by ICAI. 2.11 Without prejudice to the Appellant's contention that the learned DCIT has adopted ad hoc / instinctive method for computing sustainable addition, if the method were to be adopted and percentage of completion of 48.56% as computed by the appellant for Phase 1 was to be considered, the addition would reduce to 8,08,25,216. 2.12 Without prejudice to the Appellant's contention that there ought to be no addition for AY 2017-18, the Appellant adopting the percentage of completion method followed by it has computed its income and offered the same to tax in AY 2018-19 and thus any addition ....
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....,36,699 2,29,50,02,524 Revenue to be recognised in the books of RPPL based on POCM (48.56% of 6,06,85,36,699) & (19.52% of 2,29,50,02,524) 2,94,69,69,021 44,79,96,249 Add: Cost of development rights - payable to ETA 2,72,64,44,024 1,03,10,88,091 Revenue as per Profit & Loss account 5,67,34,13,045 1,47,90,84,339 3.3 It is also clarified by the assessee that the percentage of completion cannot be calculated on gross consideration, since the assessee company's entitlement is only for 69% of the gross revenue and balance 31% belongs to the Land Owners. Accordingly, the cost of land development rights has been excluded and POCM was adopted on the assessee's entitlement on sale proceeds of Rs. 606,85,36,699/- for phase-1 and 229,50,02,524/- for phase- 2A Maple. Accordingly, the land cost / cost of development rights at 31% of the total sale proceed was arrived at Rs. of Rs. 272,64,44,024/- for phase-1 and 103,10,88,091/- for phase-2A Maple. It is contended before the Ld. AO that the books of account of the assessee company are duly audited by Deloitte Haskin and Sells LLP and no deviation qua the cost recognition was pointed out by them. Further t....
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....8,98,67,111 Estimated total Cost of Dev Rights (CDR) INR 2,76,74,46,662 2,65,18,43,689 2,72,64,44,024 1,25,88,41,925 Total Estimated Project Cost INR 7,84,64,61,205 8,05,44,45,408 8,12,90,45,742 5,04,87,09,036 Actual Cost Actual Project Cost incurred till date INR 3,65,68,22,465 4,64,09,56,464 5,39,68,37,968 1,99,86,43,398 Less :CDR relating to total units sold INR (2,37,62,44,197) (2,69,13,40,142) (2,77,32,56,586) (1,25,88,41,925) Total Project Cost till date INR 1,28,05,78,268 1,94,96,16,322 2,62,35,81,382 73,98,01,473 CDR relating to secured sales 1,93,48,54,586 2,65,18,43,689 2,72,64,44,024 1,03,10,88,091 Percentage of Work Completion under POCM Budgeted Project Cost INR 5,07,90,14,543 5,40,26,01,718 5,40,26,01,718 3,78,98,67,111 Actual Project Cost INR 1,28,05,78,268 1,94,96,16,322 2,62,35,81,382 73,98,01,473 Sold out area sq. ft. 8,41,501 11,19,529 11,43,941 4,22,963 72 86....
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....nd calculations provided in assessment order. Ld. CIT(A) has called a remand report for clarification from the Ld. AO. In the remand report, Ld. AO proceeded to rework the revenue recognition of the assessee under POCM and had made certain modifications, in consideration with provisions of Karnataka RERA applicable in the present case, as per directions of Ld CIT(A). Finally, Ld. AO after revisiting the working done earlier in Assessment order had corrected the same and arrived at a conclusion to reduce the addition to Rs. 47,26,83,699/- instead of Rs. 229.29 crores originally added. The remand report, since has substantial information to be referred to has been culled out hereunder: 4.1 During the course of appeal, a remand report was called for, from the AO, who has submitted a detailed report as below: "2. The first ground raised was with regards to the procedure for limited scrutiny. The assessee claims that the assessing officer exceeded his brief in going beyond the issues identified in the reasons for limited scrutiny. To show that the case was under limited scrutiny the assessee referred to para 1 of the assessment order where it is categorically mentioned....
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.... scrutiny is misplaced and does not deserve any merits. 3. Ground no 2 to 20 pertain to the addition made by the assessing officer. Admittedly, on the first reading of the assessment order, there appears to be no clarity as to how the assessing officer has arrived at the additions made. There are references to certain working which was not tabulated properly primarily due to conversion of excel table to format in the system. However, on close reading and on comparing the facts and figures submitted by the assessee during the assessment proceedings, the figures arrived at by the assessing officer could be deciphered. Accordingly, the explanation of the assessment order was communicated to the assessee vide letter dated.21.11.2023. The copy of the letter is attached Annexure D. 4. The facts of the case are that the assessee entered into a joint development agreement with the land owners to develop the land comprising of 4.5 acres. The joint development agreement is a composite agreement, where the revenue received on sale of residential/ commercial space is shared between the assessee and the landowners. The assessee being the developer is entitled to 69% of the gro....
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....cost (col % completion (8/5) *100 col 3 Cdr cost (col 3+ col 4) col 6 1 2 3 4 5 6 7 8 9 phase 1 31- Mar-17 5402601718 2726444024 8129045742 TA 2623581382 2773256586 5396837968 66.39 maple 31- Mar-17 3789867111 1258841925 5048709036 739801473 1258841925 1998643398 39.59 7. Based on the above percentages the assessing officer reworked the revenues and determined the income for the year. For the AY 2017-18, the assessee has computed 48.56% completion of the project, with respect to Phase 1 project consisting, Olive, Emerald and Mulberry, which is computed at Rs.89,15,59,966. No revenue of Maple project has been offered under the POCM method as the percentage of completion was below 25%. The detailed working of the assessee is as tabulated below in table 3. Table 3 Phase 1 Maple 31-Mar-17 31-Mar-17 3 4 1 % of Work Completion under POCM 48.56% 19.52% 2 Total sale consideration relating to secured ....
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....fore, the additions made by the assessing officer was the resultant of the impact of the change of the percentage of completion. The addition made by the assessing office of Rs.229 crores is therefore explained as under: Table 6 description of addition amount of addition remarks 1) Addition on account of Phase 1 (-18,90,88,836) COME Difference between the current year income determined as per assessee 891559966 col no 8 of table 2 and the current year income determined as per assessing officer Rs. 702471131 col no 8 of table 3 2). Addition on account of Maple 1,93,96,15,718 Difference between the current year income as determined by the AO and the assessee with respect of Maple as computed in col no 3 of table 4 3). Addition on account of opening bal. 1,97,34,65,957 Difference between the current year income as determined by the AO and the assessee with respect of phase 1 as computed in col no 3 of table 4 Less on account of cost of flat 1,43,10,92,502 cost of construction as claimed by the assessee with respect to Maple Total addition to revenue 2,29,29,00,338 11. The assessee was accordingly informed and vid....
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....ss expenses of maple not claimed by the assessee due to no income offered. 1431092502 7 net addition to be made by the assessing officer 1590429208 8 addition made by the assessing officer in the assessment order 2292900338 9 excess addition made by the assessing officer -702471130 13. From the above statement it can be seen that the effective additional revenue in respect of phase 1 should as per the assessing officer be Rs. 1081905992/- (1973465958-891559966) and Rs.50,85,23,217/-(1939615719-1431092502), totalling to Rs. 159,04,29,208/- 14. Your goodself had directed to examine if the said addition is sustainable under the circumstances. In order to examine the same, since the project was registered in Karnataka RERA, certain data was obtained from the RERA portal and also the assessee records for AY 2018-19 was examined. 15. From the RERA portal it was seen that the occupancy certificate of the phase 1 project was available. From the Partial Occupancy certificate issued by the appropriate authority on 18.12.2017, it can be seen t....
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.... Value of secured sales INR 8,825,061,723 3,808,696,743 12,633,758,466 8 Average rates achieved [7/5] sq. ft. 7,671 7,794 15,465 Budget 9 Estimated Cost of Construction per Sft. [13/1] INR 4,356 4,133 8,489 10 Estimated Cost of Development Rights per Sft. [(4/2)*31%] INR 2,388 2,451 4,838 Total (9+10) INR 6,744 6,583 13,327 11 Estimated total cost of construction INR 5,202,601,718 3,232,730,173 8,435,331,891 12 Estimated total Cost of Dev Rights (CDR) INR 2,851,618,420 1,917,047,651 4,768,666,071 Total Estimated Project Cost [11=12] INR 8,054,220,138 4,781,943,603 12,836,163,741 Actual Cost 13 Actual Project Cost incurred till date INR 6,566,570,922 2,741,110,203 9,307,681,126 14 Less: CDR relating to total units sold [4*31%] INR 2,826,023,474 1,549,213,430 4,375,236,904 15 Total Project Cost till dated [13 + 1....
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.... Estimated gross profit on secured sales 1060433307 4 Percentage of completion 66.39% as determined by the AO (col 3* 66.39%) 704021673 5 gross profits already declared 6 AY 2015-16 (302,06,85,988-283,71,08,519) 183577469 7 AY 2016-17 ( 176,11,67,091 -164,22,14,707) 118952384 8 AY 2017-18 ( 89,15,59,966- 75,99,68,621 ) 131591345 434121198 9 gross profit estimated for the year* 269900475 * For AY 2015-16 the assessing has determined additional profit to tune of Rs. Rs.15,02,56,189/- which has been disputed by the assessee in appeal and therefore effect for the same will be subject to the outcome of appeal. 20. Applying similar logic to the maple project, the profits which can be scientifically estimated is Rs. 20,27,83,224/- as tabulated as under: Maple Sold out area in respect of secured sales in sq.ft as reported by the assessee 422963 estimated gross profits ( 7794 - 6583) 1211 estimated gross profits on secured sales 512208193 Percenta....
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....assessee in its books of accounts. 25. Ground no 18 to 20 pertains to the claim that revenue should be estimated year on year and thus the estimated revenue of earlier year cannot be taxed in the present assessment year. It can be seen from the computation of income that the assessing Officer has made addition of Rs.229 crores which is clarified in para 6 and 7 above. From the same it can be seen that the assessing officer has determined the addition during the year being the difference between the revised revenue recognised on the basis of the percentage of completion estimated by the assessing officer, and the revenue recognised by the assessee upto the preceding FY. Therefore, effectively there is no income of earlier year being taxed in the current year. 26. All the remaining grounds are consequential. 27. The above remand report is sent after taking approval from Addl. CIT. Range-2(3), Mumbai vide letter no. Addl. CIT Cir.2(3)/Remand/ Relationship/2023-24 dated 15.12.2023. 4.1 In rebuttal to the aforesaid remand report furnished by the Ld. AO, assessee raised following points as observations / objections: a. The AO had realised the mistak....
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.... completed only 19.52% in the year under context, so no revenue has been recognised in terms of Guidance Note. Ld. AO, reworked the entire revenue recognition under POCM under his own perceptions and reached to a figure of Rs. 229.29 Crores, which was later corrected at the appellate stage by way of a remand report and reported at Rs. 47.27 crores. The working of AO was under wrong impression that the land cost would also be considered while computing the % of completion, thus he computed the % of completion for Phase-1 at 66.39% (as against assessee's working at 48.5614%) and for Phase-2A, Maple at 39.59% (as against assessee's working at 19.5205%). It is submitted that, during remand proceedings Ld. AO himself was unable to justify the workings done at assessment stage, thus, had realised the mis takes in workings but % of completions was kept same. Ld. CIT(A) accepted the revised workings and sustained the additions to that extent, however the moot question as to whether the Land Cost / Cost of Development Right (CDR) would be part of cost to work our the % of Completion under POCM could not be answered by both the authorities. To strengthen he accounting treatment of th....
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.... 478,18,53,079 0 Current year's revenue recognized in the profit and loss account (I-J) 89,15,59,966 0 For Phase 1- Particulars FY 2014-15 FY 2015-16 FY 2016-17 Cumulative cost Cost of development rights 2,37,62,44,197 31,50,95,945 8,19,16,444 2,77,32,56,586 Statutory approval fees 7,30,99,875 1,05,000 - 7,32,04,875 Material and contractual pymts 36,76,77,048 56,79,96,186 62,31,99,189 1,55,88,72,423 Professional and technical fees 56,21,81,723 2,33,07,206 2,74,61,330 61,29,50,259 Other expenses 27,76,19,622 7,76,29,661 2,33,04,542 37,85,53,825 Total-Phase 1 3,65,68,22,465 98,41,33,999 75,58,81,504 5,39,68,37,968 Phase 2A-Maple Particulars FY 2014-15 FY 2015-16 FY 2016-17 Cumulative cost Cost of development rights - 9,99,03,873 1,15,89,38,052 1,25,88,41,925 Statutory approval fees - 4,97,39,007 - 4,97,39,007 Material and contractual pymts 6,68,92,401 1,20,62,067 15,43,37,293 23,32,91,761 Other expenses 3,23,81,066 9,12,23,271 7,42,67,145 19,78,71,483 Professional and technical ....
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....xtracted here under: 2. Definitions 2.1 Project - Project is the smallest group of units/plots/saleable spaces which are linked with a common set of amenities in such a manner that unless the common amenities are made available and functional, these units/plots/saleable spaces cannot be put to their intended effective use. A larger venture can be split into smaller projects if the basic conditions as set out above are fulfilled. For example, a project may comprise a cluster of towers or each tower can also be designated as a project. Similarly, a complete township can be a project or it can be broken down into smaller projects. 2.2 Project Costs - Project costs in relation to a project ordinarily comprise: (a) Cost of land and cost of development rights -All costs related to the acquisition of land, development rights in the land or property including cost of land, cost of development rights, rehabilitation costs, registration charges, stamp duty, brokerage costs and incidental expenses. (b) Borrowing Costs - In accordance with Accounting Standard (AS) 16, Borrowing Costs which are incurred directly in relation to a project or which are apportioned to a p....
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....eration for parking spaces and sale of development rights. Project revenues are measured as the consideration received or receivable. The measurement of project revenues is affected by a variety of uncertainties that depend on the outcome of future events. The estimates often need revision as events occur and uncertainties are resolved. Therefore, the amount of project revenue may increase or decrease from one reporting period to the next. 3. Accounting for Real Estate Transactions 3.1 Real estate activities and transactions take diverse forms. While some are for sale of land (developed or undeveloped), others are for construction, development or sale of units that are not complete at the time of entering into agreements for construction, development or sale. 3.2 The typical features of most construction/development of commercial and residential units have all features of a construction contract - land development, structural engineering, architectural design and construction are all present. The natures of these activities are such that often the date when the activity is commenced and the date when the activity is completed usually fall into different a....
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....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 requires a careful analysis of the elements of the transaction, agreement, understanding and conduct of the parties to the transaction to determine the economic substance of the transaction. The economic substance of the transaction is not influenced or affected by the structure and/or legal form of the transaction or agreement. 4. Application of principles of AS 9 in respect of sale of goods to a real estate project 4.1 The application of principles of AS 9 in respect of sale of goods requires recognition of revenues on completion of the transaction/activity when the revenue recognition process in respect of a real estate project is completed as explained in paragraph 4.2 below. 4.2 The completion of the revenue recognition process is usually identified when the following conditions are satisfied: (a) The seller has ....
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....tributable 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 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognised under the percentage completion method only when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable: (i) Environmental and other clearances. (ii) Approval of plans, designs, etc. (iii) Title to land or other rights to development/construction. (iv) Change in land use (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not ach....
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....d 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% of the contracted amounts have been realised and there are no outstanding defaults of the payment terms in such contracts. 5.7 When it is probable that total project costs will exceed total eligible project revenues, the expected loss should be recognised as an expense immediately. The amount of such a loss is determined irrespective of: (a) commencement of project work; or (b) the stage of completion of project activity. 5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimates of project revenues and project costs. Therefore,....
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....the revenue, which could not be recognized during the year under consideration has been duly recognized in the subsequent years and offered for tax purposes. It is also a fact that the tax rate for the year under consideration and the year in which such revenue was offered remain unchanged. In view of such facts and circumstances, it cannot be presumed that the assessee had intentionally made any violation by way of wrongly computing the percentage of threshold for revenue recognition under POCM so as to evade the payment of taxes. 12. It is also brought to our notice that the assessee is following a method of accounting consistently in the preceding as well as succeeding years to the relevant assessment year which cannot be disturbed without any cogent reason leading to tax evasion, unless the same is otherwise proved by the revenue. In present case, a consistent method of accounting and working of revenue recognition under POCM has been followed by the assessee therefore, dehors any observation or allegation regarding change in such practices, the working cannot be doubted or changed based on surmises as there was no change in the facts and law in the year under consideration ....