TaxTMI 
TaxTMI 
2024 (6) TMI 1540
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.... (hereinafter referred to as 'the Act') along with questionnaire, in response to which the assessee furnished its replies. From the various details furnished by the assessee, the Assessing Officer noted that the assessee is recognizing the revenue on the basis of completion of project method. He observed that there are 54 properties, regarding which registration deeds were executed by the Sub-Registrar / authorities concerned which partakes the character of complete transfer. The total sale proceeds of such properties works out to Rs. 22,29,15,353/-. However, the assessee has not taken into consideration the same while computing the gross receipts for the year under consideration and the assessee reflected the work in progress as on 31.03.2018 at Rs. 67,05,37,121/-. He observed that no details were brought on record as to the distinction between the properties / flats sold as per the details available with the department amounting to Rs. 22,29,15,353/- and the value of the remaining properties totaling to Rs. 67,05,37,121/-. Further, the assessee had not reflected any sales for the year under consideration except a petty amount of Rs. 2,44,800/- which is on account of sale of cemen....
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....3/- is concerned, he upheld the same by observing as under: "6.2 Findings and decision: I have carefully considered the facts of the case as wel1 as submissions filed by the appellant. I find no force in the arguments of the Appellant. The registered sale deed is a critical document in property transactions, in which at the time of registration, the seller admits before the Registrar of the documents that full consideration is received and the property along with full possession is conveyed to the purchaser After the registration of the documents the rights of the seller gets extinguished. Even the stamp duty has been paid on such transactions as noted by the Assessing Officer. In such a scenario, the profits from these transactions must be recognized. Further a specific provision of section 43CB for such projects has been introduced w.e.f. 01.04.2017 in the Income-Tax Act, which reads as under:- [Computation of income from construction and service contracts. 43CB. (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance wi....
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....y the Assessing Officer. Hence, though we do not agree with the assessee that it is not a business project, we agree that the project is incomplete and in substance if assessee wishes to offer for taxation its gain on completion of project i.e. apply completed contract method the same cannot be rejected. This proposition is duly supported by Hon'ble Supreme Court exposition as above. Also percentage completion method has been made compulsory by subsequent insertion of section 43CB of the Act, which is not applicable to the impugned assessment year. As per Assessee's own admission, registration deeds of 55 units out of total 111 units has been done. Hence profits are to be recognised during the year. The case laws cited by the Appellant have been considered but they are distinguishable on facts from the instant case. The law has been changed by the introduction of section 43CB of the Income-Tax Act. In light of these circumstances, the Assessing Officer is rightly justified to compute the profits of the year of Rs. 2,29,15,350/- by applying the net profit rate of 10% on the amount of total sale proceeds of Rs. 22,29,15,353/- and the addition so made by the AO, is he....
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....nfirming the addition of Rs. 2,29,15,350/- on account of profit estimated @ 10% on the alleged sale proceeds of Rs. 22,29,15,353/- of the flats of which the agreements to sale were registered during this year. 2] The learned CIT(A) failed to appreciate that for the following reasons, the above income was not taxable in this year - a. The appellant had registered agreements to sale of the flats and not the sale deeds and the flats were under construction and the sale proceeds were to be received in future as per the agreements in installments and thus, the question of holding that the sale had taken place in this year did not arise at all. b. Just because. Agreements to sale of the flats were registered as per law, it did not imply that the flats were sold. c. The appellant had not received the entire sale proceeds of the flats at the time of registering the agreements, the flats were under the construction and the question of handing over the possession of the flats did not arise in this year and hence, no profit on registering the agreements accrued to the appellant in this year. 3] The learned CIT(A) further failed to appreciate that f....
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....e apportionment thereof done in a bona-fide manner should have been accepted. 7] The learned CIT(A) failed to appreciate that the appellant had floated an entity called VTP Constructions for incurring the common expenses amongst the group entities and the distribution of such expenses amongst the various entities was done in a bona-fide manner and thus, there was no reason to disallow any portion of such expenses. 8] The learned CIT(A) failed to appreciate that the appellant had capitalized such common expenses to the WIP as per its system of accounting which was project completion method and thus, there was no reason to disallow these expenses just because, the appellant had followed the project completion method. 9] Accordingly, the appellant prays for deletion of the disallowance of Rs. 3,27,91,602/-. 8. So far as the first issue is concerned, the same relates to the order of Ld. CIT(A) / NFAC sustaining the addition of Rs. 2,29,15,350/- made by the Assessing Officer being profit @ 10% on sale of 54 flats. Ld. Counsel for the assessee submitted that in the year under consideration the assessee was developing three projects as under: a. Urbe....
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....he customer in the year under consideration and secondly, substantial amount of the consideration has been received in the subsequent year. 11. He submitted that it is the allegation of the Assessing Officer that the assessee has entered into registration deed and therefore, sale is to be required to be recognized. Similarly, the CIT(A) / NFAC has held that registered deed is a critical document wherein the seller admits of receipt of full consideration and the possession is handed over to the purchaser. He submitted that both the lower authorities have not appreciated the fact that the assessee has entered into agreement for sale and not sale deeds wherein the consideration would be received over a period of time and the possession has not been handed over. Further, the assessee has followed the project completion method even in the earlier years and for assessment year 2017-18 the assessment has been completed and the method followed by the assessee has not been disturbed. For the above proposition, the Ld. Counsel for the assessee drew the attention of the Bench to the copy of assessment order for assessment year 2017-18 placed at page 132 of paper book. 12. So far as the ....
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....ngalore Bench of the Tribunal in the case of Corporate Leisure and Property Development Pvt. Ltd. vide ITA No.1006/Bang/2024, he submitted that the Tribunal in the said decision has held that the provisions of ICDS III are not applicable for real estate developer. Referring to the following decisions, he submitted that the project completion method is a recognized method for determining revenue: a. CIT vs. Hill View Infrastructure Pvt. Ltd. [81 taxmann.com 58 (P&H)] b. CIT vs. Varun Developers [126 taxmann.com 235 (Kar)] 14. So far as the decision of the Mumbai Bench of the Tribunal in the case of Trident Estate Pvt. Ltd. relied on by the CIT(A) / NFAC is concerned, he submitted that the said case relates to assessment year 2014-15 where the assessee was following the project completion method. The Tribunal accepted the contention of the assessee and held that the project completion method or completed contract method is a recognized method and there is no requirement to determine the income as per percentage completion method. In that context as a general remark, the Tribunal observed that the provisions of section 43CB of the Act are applicable w.e.f. assessm....
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....ction of the government by making percentage completion method compulsory for recognition of revenue was squashed by Hon'ble Delhi High Court in Chamber of Tax Consultants v. UOI [2017] 87 taxmann.com 92/[2018] 252 Taxman 77/[2018] 400 ITR 178 (Delhi). To overcome the said judgment of Hon'ble Delhi High Court, Section 43CB was specifically inserted vide Finance Act, 2018 in Income Tax Act, 1961 ("Act") w.r.e.f. 1-4-2017. As per section 43CB of the Act, business income in case of construction contract and service contracts in specified cases, shall be determined on the basis of percentage completion method. 3. Section 145 of the Act provides for method of accounting to be followed by an assessee for computation of business income. Section 145(1) of the Act provides that business income, subject to the provisions of sub-section (2) of the said section, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Section 145(2) of the Act gives power to the Central Government to notify ICDS to be followed for computation of business income. By virtue of power given in the said section, ICDS were notified from ....
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....iny taken up through CASS. Further, the Percentage Completion Method has been made compulsory for the real estate business vide amendment by Finance Act 2018 whereby section 43CB was introduced w.e.f. 01.04.2017. Prior to the said amendment it was not mandatory for the real estate business to apply Percentage Completion Method as for the year under consideration the newly inserted section 43CB is not applicable. The Id. AR of the assessee has relied upon the decision of Coordinate Bench of ITAT, Indore in case of Ashoka Hi-tech Builders (P.) Ltd. vs. DCIT (supra) on this point wherein the tribunal has specifically discussed this issue as under: "42. Before parting of with adjudication of this issue it would be relevant to take note of the amendment brought in statute with retrospective effect w.e.f 1.4.2017 by way of insertion of Section 43CB for the purpose of computation of income from construction and service contract. The relevant provision of Section 43CB of the Act reads as follows: 43CB. Computation of income from construction and service contracts.- (1) The profits and gains arising from a construction contract or a contract for providing services....
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....ting Method for Real Estate Transactions as per Accounting Standards: 6. AS-7 in respect of construction contracts was issued in 1985. In the said AS, percentage completion method as well project completion method was permitted for recognition of revenue and expenditure. Further, it was also applicable to real estate developers. AS-7 was revised in the year 2002, which prescribes only percentage completion method for recognition of revenue. However, said revised AS-7 was not applicable on real estate developers which were also clarified by Expert Advisory Committee (EAC) of ICAI in one of its opinions. In this opinion, it was further noted that principles laid down in paras 10 and 11 of AS 9 relating to sale of goods should be applied for recognizing revenue in case of real estate developers thereby resulting into permitting project completion method for recognizing revenue and expenditure by the said developers. To overcome the confusion, ICAI had issued guidance note titled "Guidance Note on Recognition of Revenue by Real Estate Developers" in the year 2006. Said guidance note recommends that percentage completion method should be followed for recogniti....
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....escribed in paragraph 3.3 above 8. Thus even if it is considered for academic purpose that ICDS-III and ICDS-IV are not applicable, the Guidance note clearly classifies the real estate transactions especially the agreement to sell as construction contract and further goes on to clarify that even if legal title is not transferred or possession is not given, significant risks and rewards are transferred. Thus percentage of completion method needs to be followed. Even in the case in hand, the assessee has entered into agreement with customers." 17. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs. 2,29,15,350/- being 10% of the sale proceeds of 54 units totaling to Rs. 22,29,15,353/- on the ground that registration deeds were executed by the Sub-Registrar / authorities concerned and therefore, it partakes the character of complete transaction. We find the CIT(A) / NFAC upheld the action of the Assessing Officer, the reasons o....
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....as requested to delete the addition. In support of the grounds raised the appellant submitted as under. "Submission of Appellant:- The appellant would like to submit as under:- 1. During the course of assessment hearing the learned AO asked us to submit revenue calculation as per the provisions of section 43 CB of the act. In response to the said notice we explained in detail that the provisions of section 43 CB are applicable to a construction contractor and not to a builder and it was also explained to him that the appellant firm is a promoter builder and developer and not a construction contractor 2. The appellant was also asked to submit a copy of agreement to sales entered into with the prospective customers which was also duly provided to the learned assessing officer 3. The appellant was also asked to submit a total tentative project calculations of revenue and cost which was also submitted in reply to the notice to the learned AO 4. In the show cause notice, the learned AO referring to certain clauses with respect to construction and payment plan, as mentioned in the agreement to sales, came to a conclusion that the asse....
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....DS on Real Estates transaction. This clearly shows that a clear cut distinguish is made between a construction contractor and a builder in in the Income tax Act as well. c. The term "Construction contract" is not defined under the Act. However, it is defined under ICDS III. '"Construction contract" is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes: (i) contract for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; (ii) contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets. Plain reading of the above definition clearly suggests that the construction undertaken by real estate developer does not satisfy the above definition as the contract is not negotiated for the constriction of asset. The real estate developer constructs the asset as per his scheme and contracts with t....
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....ice to above, it is further submitted that the assessee since its inception is following Project Completion method and the same is accepted by the department in all earlier assessments. Following the Principle of Consistency Rule without any change in law and facts, the method consistently adopted by the assessee cannot be changed. Reliance is placed upon the following judgments 1. Decision of Gujarat High Court in the case of Manjusha Estates (P) Ltd Vs ITO reported in (2017) 393 ITR 644. 2. Decision of ITAT- Mumbai in the case of Prem Enterprises ITO reported in (2012) 25 3. Decision of High Court of Punjab & Haryana in the case of CIT Vs. Principal Officer, Hill view Infrastructure reported in (2016) 384 ITR 451- Follows CIT Vs. Bilahari Investment (P) Ltd. reported in (2008) 299 ITR 1 (SC) 4. Decision of ITAT-Mumbai in the case of Hardware Infrastructure P. Ltd 5. Decision of ITAT- Ahmedabad in the case of Unity constructions V/s ITO 6. Decision of Delhi High Court in the case of Manish Buildwell Pvt. Ltd. reported in (2016) 16 com 27 (Del) 7. Decision of Ashoka Hitech Builders Pvt Ltd Vs DCIT (Indore ITAT) ....
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.... appellant on 16.09.2022 the AO had asked for a sample copy of prospective buyer agreement duly signed by the buyer and to provide the details about the project cost and project revenue. In response to the same, the appellant had submitted the reply on 19.09.2022 providing one sample buyer agreement and project details. The AO calculated profit of the said project with respect to the section 43CB of the Act as per percentage of completion method of accounting as under. % Completion (on the basis of cost Incurred actually) = actual cost Incurred/total estimated cost of project 62/75% = 82.00% % of total revenue offered (69.01 + 20.86)/112% = 80.24% Calculation of deferred revenue (82% - 80.24% = 1.76% x 112 crores) = Rs. 1,97,12,000/- 13,67,96,960/- Profit declared Rs. 11,70,84,960/- Difference to tax Rs. 1,97,12,000/- As per working in the above chart, the profit for A.Y. 2020-21 on the basis of percentage completion method is Rs. 13,67,96,960/-. Later on, the AO issued a show cause notice to the appellant on 20.09.2022, asking it as to why the difference of Rs. 1,97,12,000/- (Rs. 13,67,96,960 - Rs. 11,70,84,960) should not be made taxable. In....
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....of accounting stands accepted in preceding assessment years; and more particularly, in assessment year 2018-19. We wish to make it clear that this is not even the Revenue's case in it"s pleadings that the relevant facts herein stand as an exception to those involved in the said preceding assessment year(s). Faced with this situation and keeping in mind the fact that the Ld. CIT(A) has already considered a catena of case law having decided the very issue in assessee"s favour, we see no merit in the Revenue's instant sole substantive grievance. The same stands declined therefore. Ordered accordingly." 19. Since the addition in the instant case is made on adhoc basis and the Assessing Officer has considered the total agreements value of 54 units and estimated the profit @ 10% whereas neither sales were effected during the year nor the possession of the flats handed over to the purchasers during the year and since substantial amount has been received in the subsequent year, therefore, in view of the above discussion and in view of the decision of the Tribunal in the case of DCIT vs. G.K. Wonders (supra), we hold that the CIT(A) / NFAC is not justified in sustaining the adhoc additio....
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....rm but their salary was paid by VTP Constructions which has been charged to the assessee. He submitted that the Assessing Officer has not pointed out any discrepancies in the said details furnished by the assessee. Similarly, VTP Constructions has charged marketing expenses of Rs. 23,41,337/-, the details of which are given at pages 237 to 251 of paper book, Even in respect of such expenses, the Assessing Officer has not pointed out any discrepancy. The Ld. Counsel for the assessee submitted that there are certain common expenses on account of marketing expenses, administration expenses which are allocated to the various entities on the basis of business volume, the details of which are placed at pages 232 to 233 of the paper book. He submitted that the expenses so allocated can be bifurcated into two parts i.e. actual expenses pertaining to the assessee firm only and the second part is common expenses which are allocated to the assessee firm and other concerns of the group on the basis of business volume. All these details were submitted to the lower authorities. He accordingly submitted that without pointing out any specific defect in the details furnished by the assessee, the As....
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....s like interest/misc receipts etc. Thus it is prayed that disallowance of expenditure be confirmed." 23. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us by both sides. We find the Assessing Officer in the instant case made adhoc addition of Rs. 3,27,91,602/- being 10% of total expenditure debited to the Profit and Loss Account of Rs. 32,79,16,026/- on the ground that no substantial material was provided to justify the allocation of expenditure. We find the Ld. CIT(A) / NFAC upheld the adhoc addition made by the Assessing Officer, reasons of which are already reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that the total expenditure which is debited to the Profit and Loss Account and capitalized to the work in progress is Rs. 32,21,66,747/-, out of which an amount of Rs. 6,56,18,006/- has been allocated to the assessee by VTP Constructions while the balance expenditure is incurred by the assessee. The details of the above expenses of Rs. 6,56,18,006/- w....