SANDHU BUILDERS,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 19(3), MUMBAI

PDF

ITA 2000/MUM/2022Status: DisposedITAT Mumbai20 February 2023AY 2011-1230 pages

No AI summary yet for this case.

Cases cited in this judgment

Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.

Morvi Industries Ltd. v. CIT
82 ITR 835 · 1971 · SC
136 citing
Gursahai Saigal v. CIT
48 ITR 1 · 1963 · SC
112 citing
CIT v. A. Gajapathy Naidu
53 ITR 114 · 1964 · SC
73 citing
CIT v. T.N.K. Govindarajulu Chetty
165 ITR 231 · 1987 · SC
27 citing
T.N.K. Govindarajulu Chetty v. CIT
87 ITR 22 · 1973 · HC
12 citing

Income Tax Appellate Tribunal, MUMBAI BENCH “G” MUMBAI

Before: SHRI OM PRAKASH KANT & SHRI RAHUL CHAUDHARY

For Appellant: Mr. Vipul Joshi, Adv./S.K. Desai

For Respondent: Mr. Vinay Sinha, CIT-DR

Hearing: 25/11/2022Pronounced: 20/02/2023

PER OM PRAKASH KANT, AM These appeals by the assessee are directed against a common order dated 13/06/2022 passed by the Ld. Commissioner of Income-tax(Appeals)-National Faceless Appeal Centre (NFAC), New Delhi [in short, “the ld. CIT(A)”] for assessment year 2011-12 to ITA Nos. 2000 to 2002/M/2022 2 to 2002/M/2022 Sandhu Builders 2013-14, arising from , arising from three separate orders passed by the passed by the Assessing Officer u/s. 143(3) Assessing Officer u/s. 143(3) of the Income-tax Act, 1961 (in tax Act, 1961 (in short, the Act). 2. Firstly, we take up the appeal of the assessee for AY 2011 Firstly, we take up the appeal of the assessee for AY 2011 Firstly, we take up the appeal of the assessee for AY 2011-12. The grounds raised

by the assessee The grounds raised by the assessee are reproduced as under: reproduced as under:

1. The Ld CIT (A) erred in determining income for year at The Ld CIT (A) erred in determining income for year at The Ld CIT (A) erred in determining income for year at Rs. 9,54,37,931/ Rs. 9,54,37,931/- as against returned of income of against returned of income of Rs 8,56,08,140/ Rs 8,56,08,140/-.

2. The Ld CIT (A) erred in not considering direct cost The Ld CIT (A) erred in not considering direct cost The Ld CIT (A) erred in not considering direct cost such as premium paid to Municipal Corporation, TDR such as premium paid to Municipal Corporation, TDR such as premium paid to Municipal Corporation, TDR etc. as part of the cost of construction. etc. as part of the cost of construction.

3. The Ld CIT (A) erred in not considering revised The Ld CIT (A) erred in not considering revised The Ld CIT (A) erred in not considering revised estimated cost estimated cost of repairs which have caused due to of repairs which have caused due to delay in completion of project and damage to the delay in completion of project and damage to the delay in completion of project and damage to the building on account various litigations. building on account various litigations.

Briefly stated facts of the case are that the assessee riefly stated facts of the case are that the assessee riefly stated facts of the case are that the assessee, a partnership firm, is engaged in the business of real estate is engaged in the business of real estate is engaged in the business of real estate development. The assessee entered into a development agreement development. The assessee entered into a development agreement development. The assessee entered into a development agreement with M/s Chetak Co with M/s Chetak Co-op Housing Society Ltd,(in short the in short the ‘Chetak Society’), Pali ali hill, hill, Bandra Bandra (Mumbai) (Mumbai) on on 31/12/2005 31/12/2005 for construction of a building ( building (two wings namely ‘A’ and ‘B’) on land two wings namely ‘A’ and ‘B’) on land comprising of four different plots belonging to said Society. The total comprising of four different plots belonging to said Society comprising of four different plots belonging to said Society area available for construction was12599 square metersi.e., area available for construction was12599 square area available for construction was12599 square 1,35,616 square feet e feet, rounded off to 1,35,600 sq. feet. As per the 1,35,600 sq. feet. As per the plans which were approved on 24/01/2006, the ‘A’ Wing consist of plans which were approved on 24/01/2006, the ‘A’ Wing consist of plans which were approved on 24/01/2006, the ‘A’ Wing consist of ground +19 floors and ground +19 floors and ‘B’ wing consist of ground +5 ‘B’ wing consist of ground +5 floors. 3.1 Since the construction work had not reached ince the construction work had not reached at a at a substantial stage, for assessment year ssessment years 2006-07, 2007-08 and 2008 08 and 2008-09, entire expenditure was capitalized to work nditure was capitalized to work-in-progress and progress and no income or loss was reported by the assessee in the return of income by the assessee in the return of income by the assessee in the return of income. For assessment year 2009 assessment year 2009-10 & 2010-11, the income of the assessee 11, the income of the assessee has been assessed following percentage completion method. essed following percentage completion method. essed following percentage completion method. 3.2 The assessee filed its return of income for the year under assessee filed its return of income for the year under iled its return of income for the year under consideration consideration on on 28/06/2011 declaring total total income income of ₹12,27,61,190/-.The said return was revised on he said return was revised on he said return was revised on 25/03/2013 declaring total income at Rs. declaring total income at Rs.8,56,08,140/-. In the In the assessment ITA Nos. 2000 to 2002/M/2022 4 to 2002/M/2022 Sandhu Builders completed u/s. 143(3), the Assessing Officer det completed u/s. 143(3), the Assessing Officer determined the total ermined the total income at Rs.15,37,06,920/ 15,37,06,920/- after applying relevant relevant percentage of profits for the year on the unaccounted income on the unaccounted income being deemed sales being deemed sales consideration of Rs. 23,4 consideration of Rs. 23,42,06,400/- following the orders of earlier following the orders of earlier years being A.Y. 2009 years being A.Y. 2009-10 and 2010-11 and estimating 12% estimating 12% as percentage of profit percentage of profit instead of 10% on gross receipts on gross receiptsby rejecting books of account and books of account and also restated the Capital Work also restated the Capital Work-in-Progress to Rs. 106,58,06,907/- - as against shown at Rs. 111,70,70,589/ as against shown at Rs. 111,70,70,589/- by the assessee.

Briefly, the facts qua th Briefly, the facts qua the issue-in-dispute asculled out from culled out from the order of the ld. CIT(A) the order of the ld. CIT(A) are that a Development Agreement dated Development Agreement dated 31.12.2005 was entered into by the assessee with a co-operative 31.12.2005 was entered into by the assessee with a co 31.12.2005 was entered into by the assessee with a co housing society namely, Chetak Co housing society namely, Chetak Co-op. Housing Society who owned op. Housing Society who owned 4 different plots at Pali Hill, Bandra (West), Mumbai. The assessee 4 different plots at Pali Hill, Bandra (West), Mumbai. The assessee 4 different plots at Pali Hill, Bandra (West), Mumbai. The assessee acquired development acquired development rights from the ‘Chetak Society’ ‘Chetak Society’ to construct a building comprising of a building comprising of ‘A’ and ‘B’ wings. The total area of wings. The total area of construction was 12599.12 sq. m construction was 12599.12 sq. meters. i.e. 1,35,616 sq. ft. rounded rs. i.e. 1,35,616 sq. ft. rounded off to 1,35,600 sq. ft. as per the plans. However, later, dispute arose off to 1,35,600 sq. ft. as per the plans. However, later, dispute arose off to 1,35,600 sq. ft. as per the plans. However, later, dispute arose between the assessee and the assessee and the Chetak Society in relation to the in relation to the project on some clauses of the agreement project on some clauses of the agreement. As per the advertisement . As per the advertisement published in the newspaper dt. 3/6/2011, the society cancelled the published in the newspaper dt. 3/6/2011, the society cancelled the published in the newspaper dt. 3/6/2011, the society cancelled the development agreement dt development agreement dt. 31/12/2005 and as per another . 31/12/2005 and as per another advertisement published in the newspaper dt. 12/11/2011 society advertisement published in the newspaper dt. 12/11/2011 society advertisement published in the newspaper dt. 12/11/2011 society had cancelled Power of Attorney granted to the assessee. The had cancelled Power of Attorney granted to the assessee. had cancelled Power of Attorney granted to the assessee. ‘Chetak Society’ also filed writ petition wherein one of the also filed writ petition wherein one of the also filed writ petition wherein one of the grievances was that 5 members of the s grievances was that 5 members of the society having rights over ociety having rights over 1,111 sq. meters. i.e. 11,959 sq. ft. had not granted their rights rs. i.e. 11,959 sq. ft. had not granted their rights rs. i.e. 11,959 sq. ft. had not granted their rights for construction to the assessee, litigation of which is pending till date. to the assessee, litigation of which is pending till date. to the assessee, litigation of which is pending till date. Further, the ‘Chetak Society Chetak Society’ had also filed suit before the Hon’ble had also filed suit before the Hon’ble Bombay High Court Bombay High Court in the year 2013. As per the order dt. in the year 2013. As per the order dt.

ITA Nos. 2000 to 2002/M/2022 6 to 2002/M/2022 Sandhu Builders 30/07/2013, Hon’ble Bombay High Court granted stay against the 30/07/2013, Hon’ble Bombay High Court granted stay against the 30/07/2013, Hon’ble Bombay High Court granted stay against the assessee from carrying assessee from carrying out any further construction activity which any further construction activity which as per the order dt. 19/08/2014 was later lifted. In mid of 2018, the as per the order dt. 19/08/2014 was later lifted. In mid of 2018, the as per the order dt. 19/08/2014 was later lifted. In mid of 2018, the assessee had applied to Bombay Municipal Corporation (BMC), ied to Bombay Municipal Corporation (BMC),i.e. a ied to Bombay Municipal Corporation (BMC), competent authority monitoring competent authority monitoring construction of building construction of building, for obtaining part Occupation Certificate (OC) of obtaining part Occupation Certificate (OC) of ‘A’ wing. Permission to wing. Permission to construct building upto particular height was granted by the construct building upto particular height was granted by the construct building upto particular height was granted by the Airport Authority of India. In case of the assessee, height of the ty of India. In case of the assessee, height of the ty of India. In case of the assessee, height of the building was granted upto 110 m building was granted upto 110 meters, however, while granting OC, rs, however, while granting OC, height measured came to 111.62 m came to 111.62 meters. Accordingly, due to excess rs. Accordingly, due to excess 1.62 meters than the permission granted, 19 rs than the permission granted, 19th floor floor admeasuring 3350 sq. ft. area was demolished was demolished and part OC was received in art OC was received in October 2018. The Chetak Society The Chetak Society also challenged granting of OC also challenged granting of OC before the Hon’ble Bombay High Court before the Hon’ble Bombay High Court and also granting of height and also granting of height of the building. The writ petition was filed after the demolition of of the building. The writ petition was filed after the demolition of of the building. The writ petition was filed after the demolition of 19th floor. The Hon’ble Bombay High Court granted stay against the Hon’ble Bombay High Court granted stay against the Hon’ble Bombay High Court granted stay against the assessee from carrying on construction of assessee from carrying on construction of ‘B’ wing.

In A.Y. 2009-10, 10, the ITAT has given direction for determining given direction for determining of profit of the project based on the percentage completion method profit of the project based on the percentage completion method profit of the project based on the percentage completion method which is to be applied till the completion of the to be applied till the completion of the project. In A.Y. 2010-11, the ITAT noted that 5 members did not grant their rights ITAT noted that 5 members did not grant their rights ITAT noted that 5 members did not grant their rights for area of 11,959 sq. ft. and the area of 3,350 sq. ft. of demolished area of 11,959 sq. ft. and the area of 3,350 sq. ft. of demolished area of 11,959 sq. ft. and the area of 3,350 sq. ft. of demolished 19th floor, which required to be reduced from the saleable a which required to be reduced from the saleable a which required to be reduced from the saleable area while ITA Nos. 2000 to 2002/M/2022 7 to 2002/M/2022 Sandhu Builders calculating profit from the project and accordingly, directions were calculating profit from the project and accordingly, directions were calculating profit from the project and accordingly, directions were given to the Assessing Officer. given to the Assessing Officer. The ld. CIT(A) followed the decision of The ld. CIT(A) followed the decision of the ITAT in assessee’s own case for A.Y. 2009 in assessee’s own case for A.Y. 2009-10 wherein the 10 wherein the method of working out profits based on perce method of working out profits based on percentage completion ntage completion method is explained method is explained. After critically examining the orders of After critically examining the orders of the ITAT for A.Y. 2009-10 and 2010 10 and 2010-11 in assessee’s own case and the 11 in assessee’s own case and the order of the ld. CIT(A) in second round for A.Y. 2009-10, at para order of the ld. CIT(A) in second round for A.Y. 20 order of the ld. CIT(A) in second round for A.Y. 20 12.2 to 12.4 of his order, the ld. CIT(A) 2 to 12.4 of his order, the ld. CIT(A) has referred to some has referred to some mistakes crept in the earlier order of ld. CIT(A) and finally, mistakes crept in the earlier order of ld. CIT(A) and finally, mistakes crept in the earlier order of ld. CIT(A) and finally, recomputed the taxable profits recomputed the taxable profits at Rs. 15,28,17,792/ at Rs. 15,28,17,792/- for the year under consideration with detailed discussion at para 15.1 to para at para 15.1 to para 16.1 of his order. For ready For ready reference, said part of the order of Ld said part of the order of Ld CIT(A) is reproduced as under: CIT(A) is reproduced as under: 15.1 Thus following working is arrived at based on above Thus following working is arrived at based on above Thus following working is arrived at based on above discussion: Total estimated sale consideration of the Total estimated sale consideration of the Total estimated sale consideration of the 3,569,095,680 project project project after after after considering considering considering assessee’s assessee’s assessee’s submission that stock may be valued at the submission that stock may be valued at the submission that stock may be valued at the rate of last sale deed executed S1 of last sale deed executed S1 Total Total Total estimated estimated estimated cost cost cost excluding 2,165,200,000 excluding excluding Administrative Costs C1 Administrative Costs C1 Total profit (P1) to be bifurcated in different 1,403,895,680 Total profit (P1) to be bifurcated in different Total profit (P1) to be bifurcated in different years after reducing administrative costs years after reducing administrative costs And the bifurcation of estimated And the bifurcation of estimated costis as under: Direct cost, D1 Direct cost, D1 817,700,000 Construction cost estimate, C1 Construction cost estimate, C1 1,347,500,000 Administrative cost estimate (not considered in 498,300,000 Administrative cost estimate (not considered in Administrative cost estimate (not considered in C1) Total estimate cost including Administrative 2,663,500,000 Total estimate cost including Administrative Total estimate cost including Administrative Costs ITA Nos. 2000 to 2002/M/2022 8 to 2002/M/2022 Sandhu Builders 15.2. However now this P above is to be recomputed as per 15.2. However now this P above is to be recomputed as per 15.2. However now this P above is to be recomputed as per the additional grounds allowed in para 4.5. Now considering the additional grounds allowed in para 4.5. Now considering the additional grounds allowed in para 4.5. Now considering reduction of area available for sale accepted after verification reduction of area available for sale accepted after verification reduction of area available for sale accepted after verification by the Assessing officer in earlier year and in compliance to by the Assessing officer in earlier year and in compliance to by the Assessing officer in earlier year and in compliance to ITAT order, the revised estimate of profit is to be prepared. In the revised estimate of profit is to be prepared. In the revised estimate of profit is to be prepared. In consequence to reduction of saleable (and thereby area to be consequence to reduction of saleable (and thereby area to be consequence to reduction of saleable (and thereby area to be constructed), the Direct cost will reduce in same proportion constructed), the Direct cost will reduce in same proportion constructed), the Direct cost will reduce in same proportion and revised construction cost will also reduce. However, for and revised construction cost will also reduce. However, for and revised construction cost will also reduce. However, for 19 floor area 3350 19 floor area 3350 sqft is not reduced while computing sqft is not reduced while computing corstruction cost as this floor was already constructed. corstruction cost as this floor was already constructed. corstruction cost as this floor was already constructed. Revised estimated profit is as under: Revised estimated profit is as under: Area reduced 11958+335015.308 Area reduced 11958+335015.308 (All various adjustments claimed from time to time were (All various adjustments claimed from time to time were (All various adjustments claimed from time to time were withdrawn before CIT(A) AY 2009 withdrawn before CIT(A) AY 2009-10 dated 30.01.2017 and d 30.01.2017 and in proceedings before hon'blelTAT AY 2009 in proceedings before hon'blelTAT AY 2009-10 order dated 10 order dated 11.3.2019 and only claim of 15308 is judicially decided after 11.3.2019 and only claim of 15308 is judicially decided after 11.3.2019 and only claim of 15308 is judicially decided after ITAT direction in AY 2010 ITAT direction in AY 2010-11 order dated5.3.2020. Further 11 order dated5.3.2020. Further adjustments if any are to be considered while determining adjustments if any are to be considered while determining adjustments if any are to be considered while determining final profits in final year after completion of project where l profits in final year after completion of project where l profits in final year after completion of project where profits of AY 2006 profits of AY 2006-07, 2007-08, 2008-09 are also to be taxed 09 are also to be taxed (remained untaxed as CIT(A) allowed relief for AY 2009 (remained untaxed as CIT(A) allowed relief for AY 2009 (remained untaxed as CIT(A) allowed relief for AY 2009-10 and ITAT cancelled enhancement of CIT(A) in AY 2010 and ITAT cancelled enhancement of CIT(A) in AY 2010 and ITAT cancelled enhancement of CIT(A) in AY 2010-11 and actual sale consider actual sale consideration and actual costs incurred are to be ation and actual costs incurred are to be considered and the profits already taxed will be reduced.) considered and the profits already taxed will be reduced.) considered and the profits already taxed will be reduced.) Direct cost now estimated (to reduce in Direct cost now estimated (to reduce in 725,381,670 same same proposition) proposition) (135600 (135600- 15308)/135600), or 0.8871 timed D1, D 15308)/135600), or 0.8871 timed D1, D Construction Construction cost cost now now estimated estimated (to (to 1,228,650,500 1,228,650,500 reduce by 11958 sqft area as 3350 was reduce by 11958 sqft area as 3350 was already already constructed, constructed, (135600 (135600- 11958)/135600 or 0.9118) times C1, C 11958)/135600 or 0.9118) times C1, C Sale consideration Sale consideration Total value of area sold (as per letter dated 1,890,000,000 Total value of area sold (as per letter dated 1,890,000,000 23.06.2014) Balance area available, (B1a or 45120 ance area available, (B1a or 45120- 1,109,423,768 1,109,423,768 15308) = 29812 x 37214 per sqft 15308) = 29812 x 37214 per sqft S 2,999,423,768 2,999,423,768 Earlier 356 cr Estimated profit, P of the project pending Estimated profit, P of the project pending 1,045,391,598 1,045,391,598 Earlier 216.5 cr, determination of final profits without determination of final profits without if administrative administrative expenses to be divided in administrative expenses to be divided in costs at 49.8 cr ratio of Construction Construction cost cost of of the the is reduced then year/Total Construction cost, C:S-D-C year/Total Construction cost, C:S we get about 55 cr., earlier 90 cr.)

16.

Now the year Now the year-wise profit will be worked out. The figures wise profit will be worked out. The figures of components of cost taken in working out the profit based on of components of cost taken in working out the profit based on of components of cost taken in working out the profit based on Table WIP (para 12.2) Table WIP (para 12.2) Assessment Year -- -- 2010-11 2011-12 Construction cost estimate, C Construction cost estimate, C 1,22,86,50,500 1,22,86,50,500 Construction cost incurred during the Construction cost incurred during the 9,22,50,953 16,45,81,649 year Progress in work, w Progress in work, w 7.51% 13.40% Total estimated sale consideration, S Total estimated sale consideration, S 2,99,94,23,768 2,99,94,23,768 Gross revenue allocated for the year, Gross revenue allocated for the year, 225206193 401782370 S*w Less : proportionate direct cost, D*w : proportionate direct cost, D*w -54463943 -97167186 Less : Construction cost incurred as Less : Construction cost incurred as 9,22,50,953 -16,45,81,649 per Table WIP during the year per Table WIP during the year Less: Administrative cost debited as Less: Administrative cost debited as -4,64,13,660 -5,52,95,604 per books/Table WIP during the year per books/Table WIP during the year Profits to to be be taxed taxed subject subject to to 3,20,77,636 8,47,37,931 adjustments as per IT Act adjustments as per IT Act Add : Income tax related Add : Income tax related 32,24,746 Donation 1,00,000 1,07,00,000 Profits from housing project subject to Profits from housing project subject to 3,54,02,382 9,54,37,931 any further adjustments any further adjustments Profit assessed in Profit assessed in original assessment 7,79,75,090 15,28,17,792 order For AY 2010 For AY 2010-11, the AO may consider necessary action as per 11, the AO may consider necessary action as per law in the order giving effect to ITAT order to avoid double law in the order giving effect to ITAT order to avoid double law in the order giving effect to ITAT order to avoid double deductions for proportionate Construction costs (Rs. 50 cr deductions for proportionate Construction costs (Rs. 50 cr deductions for proportionate Construction costs (Rs. 50 cr includes cost of renovation as well as construction of both includes cost of renovation as well as construction of both includes cost of renovation as well as construction of both wings (as discussed several times in this order) and wings (as discussed several times in this order) and wings (as discussed several times in this order) and proportionate administrative costs and also to calculate proportionate administrative costs and also to calculate proportionate administrative costs and also to calculate progress on the basis of Construction cost incurred as progress on the basis of Construction cost incurred as progress on the basis of Construction cost incurred as discussed in para 9 and para 1 discussed in para 9 and para 10.

12.

The issue in dis The issue in dispute in the case is determination of profits determination of profits from the project following the percentage completion method. from the project following the percentage completion from the project following the percentage completion ITA Nos. 2000 to 2002/M/2022 11 ITA Nos. 2000 to 2002/M/2022 Sandhu Builders Regarding justification of percentage completion method in case of Regarding justification of percentage completion method in Regarding justification of percentage completion method in real estate development real estate development, it is relevant to refer to the , it is relevant to refer to the decision of the ordinate bench of Mumbai ITAT in the case of S.S. Enterprises Mumbai ITAT in the case of S.S. Enterprises co-ordinate bench of v. ACIT in for A.Y. 2014-15 wherein it v. ACIT in ITA no. 2649/Mum/2018 for A.Y. 2014 v. ACIT in ITA no. 2649/Mum/2018 for A.Y. 2014 is held as under: - “..4.1 In the reasons for the decision, we have mentioned in “..4.1 In the reasons for the decision, we have mentioned in “..4.1 In the reasons for the decision, we have mentioned in the impugned order that in CIT v. A. the impugned order that in CIT v. A. Gajapathy Naidu, (1964) Gajapathy Naidu, (1964) 53 ITR 114 (SC), it is held that income is taxable when it 53 ITR 114 (SC), it is held that income is taxable when it 53 ITR 114 (SC), it is held that income is taxable when it accrues or is earned, if the assessee's accounts are accrues or is earned, if the assessee's accounts are accrues or is earned, if the assessee's accounts are maintained on the mercantile basis. A profit can be said to A profit can be said to maintained on the mercantile basis. have accrued or a liability or loss can be said to have have accrued or a liability or loss can be said to have have accrued or a liability or loss can be said to have been incurred only when the profit is either actually incurred only when the profit is either actually incurred only when the profit is either actually due or the liability becomes due or the liability becomes enforceable. Further, it is Further, it is held in CIT v. Associated Commercial Corporation, (1963) 48 held in CIT v. Associated Commercial Corporation, (1963) 48 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 ITR 1 (Bom) that a mere claim to a profit or to a liability is not ITR 1 (Bom) that a mere claim to a profit or to a liability is not sufficient to make the sufficient to make the profit to accrue or the liability to be profit to accrue or the liability to be incurred for the purposes of the Income Tax Act. It is also incurred for the purposes of the Income Tax Act. It is also incurred for the purposes of the Income Tax Act. It is also clarified in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 clarified in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 clarified in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 (SC) that once accrued, it is liable to the charge even if, (SC) that once accrued, it is liable to the charge even if, (SC) that once accrued, it is liable to the charge even if, subsequently, it is forgone and no subsequently, it is forgone and not realized. When a statute t realized. When a statute brings to charge certain income, its intention is to enforce the brings to charge certain income, its intention is to enforce the brings to charge certain income, its intention is to enforce the charge at the earliest point of time. The same is clarified in charge at the earliest point of time. The same is clarified in charge at the earliest point of time. The same is clarified in decision in T.N.K. Govindarajulu Chetty v. CIT (1973) 87 ITR decision in T.N.K. Govindarajulu Chetty v. CIT (1973) 87 ITR decision in T.N.K. Govindarajulu Chetty v. CIT (1973) 87 ITR 22 (Mad), affirmed in (1987) 165 ITR 231 22 (Mad), affirmed in (1987) 165 ITR 231 (SC). We have stated in the impugned order that as the assessee We have stated in the impugned order that as the assessee We have stated in the impugned order that as the assessee is following consistently percentage completion method, is following consistently percentage completion method, is following consistently percentage completion method, Accounting Standard (AS) Accounting Standard (AS)-7 (Revised) is applicable which 7 (Revised) is applicable which allows only percentage of completion method for construction allows only percentage of completion method for construction allows only percentage of completion method for construction contracts and the basic ingredients of the above method are contracts and the basic ingredients of the above method are contracts and the basic ingredients of the above method are (i) the recognition o (i) the recognition of revenue and expenses by reference f revenue and expenses by reference to the stage of completion of a contract is called "the to the stage of completion of a contract is called "the to the stage of completion of a contract is called "the percentage of completion method", percentage of completion method", (ii) the contract (ii) the contract revenue is matched with the contract costs incurred in revenue is matched with the contract costs incurred in revenue is matched with the contract costs incurred in reaching the stage of completion, (iii) this results in t reaching the stage of completion, (iii) this results in t reaching the stage of completion, (iii) this results in the reporting of revenue, expenses and profit that can be reporting of revenue, expenses and profit that can be reporting of revenue, expenses and profit that can be attributed to the proportion of work completed, (iv) this attributed to the proportion of work completed, (iv) this attributed to the proportion of work completed, (iv) this ITA Nos. 2000 to 2002/M/2022 12 to 2002/M/2022 Sandhu Builders method provides useful information on the extent of contract method provides useful information on the extent of contract method provides useful information on the extent of contract activity and performance during a period, (v) contract activity and performance during a period, (v) contract activity and performance during a period, (v) contract revenue is recognized as revenue is recognized as revenue in the statement of profit revenue in the statement of profit and loss in the accounting periods in which the work is and loss in the accounting periods in which the work is and loss in the accounting periods in which the work is performed, (vi) contract costs are usually recognized as an performed, (vi) contract costs are usually recognized as an performed, (vi) contract costs are usually recognized as an expense in the statement of profit and loss in the accounting expense in the statement of profit and loss in the accounting expense in the statement of profit and loss in the accounting periods in which the work to which they rel periods in which the work to which they relate is performed, ate is performed, (vii) however, any expected excess of total contract however, any expected excess of total contract however, any expected excess of total contract costs over total contract revenue is recognized as an costs over total contract revenue is recognized as an costs over total contract revenue is recognized as an expense immediately…” expense immediately…” 12.1 Further, the Institute of Chartered Account Further, the Institute of Chartered Accountant ant of India in its Guidance Note on Accounting for Real Esta Guidance Note on Accounting for Real Estate Transactions (Revised te Transactions (Revised 2012) has prescribed as prescribed guidelines for determination of income from for determination of income from real estate development projects. ate development projects. The relevant guidelines are The relevant guidelines are reproduced as under: under: “3.3 For recognition of revenue in case of real estate sales, it 3.3 For recognition of revenue in case of real estate sales, it 3.3 For recognition of revenue in case of real estate sales, it is necessary that is necessary that all the conditions specified in paragraphs all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue 10 and 11 of Accounting Standard (AS) 9, Revenue 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition, are satisfied. As stated above, real estate sales Recognition, are satisfied. As stated above, real estate sales Recognition, are satisfied. As stated above, real estate sales take place in a variety of ways and may be subject to take place in a variety of ways and may be subject to take place in a variety of ways and may be subject to different terms and conditions as specified in different terms and conditions as specified in the agreement the agreement for sale. Accordingly, the point of time at which all significant for sale. Accordingly, the point of time at which all significant for sale. Accordingly, the point of time at which all significant risks and rewards of ownership can be considered as risks and rewards of ownership can be considered as risks and rewards of ownership can be considered as transferred, is required to be determined on the basis of the transferred, is required to be determined on the basis of the transferred, is required to be determined on the basis of the terms and conditions of the agreement for sale. In case of terms and conditions of the agreement for sale. In case of terms and conditions of the agreement for sale. In case of real estate sales, the seller usually enters into an agreement l estate sales, the seller usually enters into an agreement l estate sales, the seller usually enters into an agreement for sale with the buyer at initial stages of construction. This for sale with the buyer at initial stages of construction. This for sale with the buyer at initial stages of construction. This agreement for sale is also considered to have the effect of agreement for sale is also considered to have the effect of agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to transferring all significant risks and rewards of ownership to transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable and provided the agreement is legally enforceable and provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify subject to the satisfaction of conditions which signify subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the transferring of significant risks and rewards even though the transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real legal title is not transferred or the possession of the real legal title is not transferred or the possession of the real estate is not given to the estate is not given to the buyer. Once the seller has buyer. Once the seller has transferred all the significant risks and rewards to the buyer, transferred all the significant risks and rewards to the buyer, transferred all the significant risks and rewards to the buyer, any acts on the real estate any acts on the real estate performed by the seller are, in performed by the seller are, in ITA Nos. 2000 to 2002/M/2022 13 to 2002/M/2022 Sandhu Builders substance, performed on behalf of the buyer in the manner substance, performed on behalf of the buyer in the manner substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue similar to a contractor. Accordingly, revenue in such cases is in such cases is recognised by applying the percentage of completion method recognised by applying the percentage of completion method recognised by applying the percentage of completion method on the basis of the methodology explained in AS 7, on the basis of the methodology explained in AS 7, on the basis of the methodology explained in AS 7, Construction Contracts. Further, where individual contracts Construction Contracts. Further, where individual contracts Construction Contracts. Further, where individual contracts are part of a single project, although risks and rewards may are part of a single project, although risks and rewards may are part of a single project, although risks and rewards may have been transferred on signing of a legally enforceable n transferred on signing of a legally enforceable n transferred on signing of a legally enforceable individual contract but significant performance in respect of individual contract but significant performance in respect of individual contract but significant performance in respect of remaining components of the project is pending, revenue in remaining components of the project is pending, revenue in remaining components of the project is pending, revenue in respect of such an individual contract should not be respect of such an individual contract should not be respect of such an individual contract should not be recognised recognised until until the the performance performance on on the the remaining remaining components is considered to be completed on the basis of the components is considered to be completed on the basis of the components is considered to be completed on the basis of the aforesaid principles. This Guidance Note, thus, provides aforesaid principles. This Guidance Note, thus, provides aforesaid principles. This Guidance Note, thus, provides guidance in the application of: guidance in the application of:  Principles of AS 9 in respect of sale of goods for Principles of AS 9 in respect of sale of goods for Principles of AS 9 in respect of sale of goods for recognising recognising recognising revenue, revenue, revenue, costs costs costs and and and profi profits profi from transactions of real estate which are in substance transactions of real estate which are in substance transactions of real estate which are in substance similar to delivery of goods where the revenues, costs similar to delivery of goods where the revenues, costs similar to delivery of goods where the revenues, costs and and and profits profits profits are are are recognised recognised recognised when when when the the the revenue revenue revenue recognition process is completed; and recognition process is completed; and  Percentage completion method for recognising revenue, Percentage completion method for recognising revenue, Percentage completion method for recognising revenue, costs and profits from transactions and activities of and profits from transactions and activities of real estate which have the same economic substance real estate which have the same economic substance real estate which have the same economic substance as construction contracts. as construction contracts. 3.4 The application of the methods described in paragraph 3.4 The application of the methods described in paragraph 3.4 The application of the methods described in paragraph 3.3 above requires a careful analysis of the elements of the 3.3 above requires a careful analysis of the elements of the 3.3 above requires a careful analysis of the elements of the transaction, agreement, understanding and conduct of the n, agreement, understanding and conduct of the n, agreement, understanding and conduct of the parties to the transaction to determine the economic parties to the transaction to determine the economic parties to the transaction to determine the economic substance of the transaction. The economic substance of the substance of the transaction. The economic substance of the substance of the transaction. The economic substance of the transaction is not influenced or affected by the structure transaction is not influenced or affected by the structure transaction is not influenced or affected by the structure and/or legal form of the transaction and/or legal form of the transaction or agreement. or agreement.

ITA Nos. 2000 to 2002/M/2022 14 to 2002/M/2022 Sandhu Builders 4.2 The completion of the revenue recognition process is 4.2 The completion of the revenue recognition process is 4.2 The completion of the revenue recognition process is usually identified when the following conditions are usually identified when usually identified when the following conditions are the following conditions are satisfied: (a) The seller h (a) The seller has transferred to the buyer all significant risks as transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective and rewards of ownership and the seller retains no effective and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with control of the real estate to a degree usually associated with control of the real estate to a degree usually associated with ownership; (b) The seller has effectively handed over possession of the (b) The seller has effectively handed over possession of the (b) The seller has effectively handed over possession of the real estate unit to the buyer forming part of the transaction; te unit to the buyer forming part of the transaction; te unit to the buyer forming part of the transaction; (c) No significant uncertainty exists regarding the amount of (c) No significant uncertainty exists regarding the amount of (c) No significant uncertainty exists regarding the amount of consideration that will be derived from the real estate sales; consideration that will be derived from the real estate sales; consideration that will be derived from the real estate sales; and (d) It is not unreasonable to expect ultimate collection of (d) It is not unreasonable to expect ultimate collection of (d) It is not unreasonable to expect ultimate collection of revenue from buyers. m buyers. 4.3 Where transfer of legal title is a condition precedent to 4.3 Where transfer of legal title is a condition precedent to 4.3 Where transfer of legal title is a condition precedent to the buyer taking on the significant risks and rewards of the buyer taking on the significant risks and rewards of the buyer taking on the significant risks and rewards of ownership and accepting significant completion of the seller’s ownership and accepting significant completion of the seller’s ownership and accepting significant completion of the seller’s obligation, revenue should not be recognised till such time obligation, revenue should not be recognised till such time obligation, revenue should not be recognised till such time legal title is validly transferred to the buyer. al title is validly transferred to the buyer.

Application of Percentage Completion Method 5. Application of Percentage Completion Method 5. Application of Percentage Completion Method 5.1 The percentage completion method should be applied in 5.1 The percentage completion method should be applied in 5.1 The percentage completion method should be applied in the accounting of all real estate transactions/activities in the the accounting of all real estate transactions/activities in the the accounting of all real estate transactions/activities in the situations described in paragraph 3.3 above, i.e., where the situations described in paragraph 3.3 above, i.e., where the situations described in paragraph 3.3 above, i.e., where the economic substance is similar to construction contracts. Some economic substance is similar to construction contracts. Some economic substance is similar to construction contracts. Some further indicators of such transactions/activities are: dicators of such transactions/activities are: dicators of such transactions/activities are: (a) The duration of such projects is beyond 12 months and (a) The duration of such projects is beyond 12 months and (a) The duration of such projects is beyond 12 months and the project commencement date and project completion date the project commencement date and project completion date the project commencement date and project completion date fall into different accounting periods. fall into different accounting periods. (b) Most features of the project are common to const (b) Most features of the project are common to const (b) Most features of the project are common to construction contracts, viz., land development, structural engineering, contracts, viz., land development, structural engineering, contracts, viz., land development, structural engineering, architectural design, construction, etc. architectural design, construction, etc. (c) While individual units of the project are contracted to be (c) While individual units of the project are contracted to be (c) While individual units of the project are contracted to be delivered to different buyers these are interdependent upon delivered to different buyers these are interdependent upon delivered to different buyers these are interdependent upon or interrelated to compl or interrelated to completion of a number of common activities etion of a number of common activities and/or provision of common amenities. and/or provision of common amenities.

ITA Nos. 2000 to 2002/M/2022 15 to 2002/M/2022 Sandhu Builders (d) The construction or development activities form a (d) The construction or development activities form a (d) The construction or development activities form a significant proportion of the project activity. significant proportion of the project activity. 5.2 This method is applied when the outcome of a real estate 5.2 This method is applied when the outcome of a real estate 5.2 This method is applied when the outcome of a real estate project can be project can be estimated reliably and when all the following estimated reliably and when all the following conditions are satisfied: conditions are satisfied: (a) total project revenues can be estimated reliably; (a) total project revenues can be estimated reliably; (a) total project revenues can be estimated reliably; (b) it is probable that the economic benefits associated with (b) it is probable that the economic benefits associated with (b) it is probable that the economic benefits associated with the project will flow to the enterprise; the project will flow to the enterprise; (c) the project costs to complete the project and the stage of (c) the project costs to complete the project and the stage of (c) the project costs to complete the project and the stage of project completion at the reporting date can be measured project completion at the reporting date can be measured project completion at the reporting date can be measured reliably; and reliably; and (d) the project costs attributable to the project can be clearly (d) the project costs attributable to the project can be clearly (d) the project costs attributable to the project can be clearly identified and measured reliably so that actual project identified and measured reliably so that actual project identified and measured reliably so that actual project costs incurred can be compared with prior estimates. incurred can be compared with prior estimates. When the outcome of a project can be estimated reliably, When the outcome of a project can be estimated reliably, When the outcome of a project can be estimated reliably, project revenues and project costs associated with the project project revenues and project costs associated with the project project revenues and project costs associated with the project should be recognised as revenue and expenses respectively should be recognised as revenue and expenses respectively should be recognised as revenue and expenses respectively applying the percentage applying the percentage of completion method in the manner of completion method in the manner detailed in paragraphs 5.3 to 5.8 below. detailed in paragraphs 5.3 to 5.8 below. 5.3 Further to the conditions in paragraph 5.2 there is a 5.3 Further to the conditions in paragraph 5.2 there is a 5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate rebuttable presumption that the outcome of a real estate rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be project can be estimated reliably and that revenue should be project can be estimated reliably and that revenue should be recognised under the percentage completion method only ognised under the percentage completion method only ognised under the percentage completion method only when the events in (a) to (d) below are completed. when the events in (a) to (d) below are completed. when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the (a) All critical approvals necessary for commencement of the (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever project have been obtained. These include, wherever project have been obtained. These include, wherever applicable: (i) Environmental and othe (i) Environmental and other clearances. (ii) Approval of plans, designs, etc. (ii) Approval of plans, designs, etc. (iii) Title to land or other rights to development/construction. (iii) Title to land or other rights to development/construction. (iii) Title to land or other rights to development/construction. (iv) Change in land use (iv) Change in land use (b) When the stage of completion of the project reaches a (b) When the stage of completion of the project reaches a (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level o reasonable level of development. A reasonable level o reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on development is not achieved if the expenditure incurred on development is not achieved if the expenditure incurred on ITA Nos. 2000 to 2002/M/2022 16 to 2002/M/2022 Sandhu Builders construction and development costs is less than 25 % of the construction and development costs is less than 25 % of the construction and development costs is less than 25 % of the construction and development costs as defined in paragraph construction and development costs as defined in paragraph construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. 2.2 (c) read with paragraphs 2.3 to 2.5. (c) Atleast 25% of the saleable pro (c) Atleast 25% of the saleable project area is secured by ject area is secured by contracts or agreements with buyers. contracts or agreements with buyers. (d) Atleast 10 % of the total revenue as per the agreements of (d) Atleast 10 % of the total revenue as per the agreements of (d) Atleast 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realised sale or any other legally enforceable documents are realised sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it at the reporting date in respect of each of the contracts and it at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will asonable to expect that the parties to such contracts will asonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. comply with the payment terms as defined in the contracts. comply with the payment terms as defined in the contracts. To illustrate To illustrate - If there are 10 Agreements of sale and 10 % of If there are 10 Agreements of sale and 10 % of gross amount is realised in case of 8 agreements, revenue gross amount is realised in case of 8 agreements, revenue gross amount is realised in case of 8 agreements, revenue can be recognised can be recognised with respect to these 8 agreements. with respect to these 8 agreements. 5.4 When the outcome of a real estate project can be 5.4 When the outcome of a real estate project can be 5.4 When the outcome of a real estate project can be estimated estimated estimated reliably reliably reliably and and and the the the conditions conditions conditions stipulated stipulated stipulated in in in paragraphs 5.2 and 5.3 are satisfied, project revenue and paragraphs 5.2 and 5.3 are satisfied, project revenue and paragraphs 5.2 and 5.3 are satisfied, project revenue and project costs associated with the real estate project s project costs associated with the real estate project s project costs associated with the real estate project should be recognised as revenue and expenses by reference to the recognised as revenue and expenses by reference to the recognised as revenue and expenses by reference to the stage of completion of the project activity at the reporting stage of completion of the project activity at the reporting stage of completion of the project activity at the reporting date. For computation of revenue the stage of completion is date. For computation of revenue the stage of completion is date. For computation of revenue the stage of completion is arrived at with reference to the entire project costs incurred arrived at with reference to the entire project costs incurred arrived at with reference to the entire project costs incurred including land costs, borrowing costs and construction and g land costs, borrowing costs and construction and g land costs, borrowing costs and construction and development costs as defined in paragraph 2.2. Whilst the development costs as defined in paragraph 2.2. Whilst the development costs as defined in paragraph 2.2. Whilst the method of determination of stage of completion with method of determination of stage of completion with method of determination of stage of completion with reference to project costs incurred is the preferred method, reference to project costs incurred is the preferred method, reference to project costs incurred is the preferred method, this Guidance Note does not prohib this Guidance Note does not prohibit other methods of it other methods of determination of stage of completion, e.g., surveys of work determination of stage of completion, e.g., surveys of work determination of stage of completion, e.g., surveys of work done, technical estimation, etc. However, computation of done, technical estimation, etc. However, computation of done, technical estimation, etc. However, computation of revenue with reference to other methods of determination of revenue with reference to other methods of determination of revenue with reference to other methods of determination of stage of completion should not, in any case, exceed the stage of completion should not, in any case, exceed the stage of completion should not, in any case, exceed the revenue computed with reference to the 'project costs enue computed with reference to the 'project costs enue computed with reference to the 'project costs incurred' method. Illustration appended to this Guidance incurred' method. Illustration appended to this Guidance incurred' method. Illustration appended to this Guidance Note clarifies the method of computation of revenue. Note clarifies the method of computation of revenue. Note clarifies the method of computation of revenue. 5.5 The project costs which are recognised in the statement 5.5 The project costs which are recognised in the statement 5.5 The project costs which are recognised in the statement of profit and loss by reference to of profit and loss by reference to the stage of completion of the stage of completion of the project activity are matched with the revenues recognised the project activity are matched with the revenues recognised the project activity are matched with the revenues recognised resulting in the reporting of revenue, expenses and profit resulting in the reporting of revenue, expenses and profit resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. which can be attributed to the proportion of work completed. which can be attributed to the proportion of work completed. Costs incurred that relate to future activity Costs incurred that relate to future activity on the project and on the project and ITA Nos. 2000 to 2002/M/2022 17 to 2002/M/2022 Sandhu Builders payments made to sub payments made to sub-contractors in advance of work contractors in advance of work performed under the sub performed under the sub-contract are excluded and matched contract are excluded and matched with revenues when the activity or work is performed. This with revenues when the activity or work is performed. This with revenues when the activity or work is performed. This method provides useful information to the extent of contract method provides useful information to the extent of contract method provides useful information to the extent of contract activity and performance during a period. y and performance during a period. 5.6 The recognition of project revenue by reference to the 5.6 The recognition of project revenue by reference to the 5.6 The recognition of project revenue by reference to the stage of completion of the project activity should not at any stage of completion of the project activity should not at any stage of completion of the project activity should not at any point exceed the estimated total revenues from 'eligible point exceed the estimated total revenues from 'eligible point exceed the estimated total revenues from 'eligible contracts’/other legally enforceable agreem contracts’/other legally enforceable agreements for sale. ents for sale. 'Eligible contracts’ means contracts/agreements specified in 'Eligible contracts’ means contracts/agreements specified in 'Eligible contracts’ means contracts/agreements specified in paragraph 5.3 where atleast 10% of the contracted amounts paragraph 5.3 where atleast 10% of the contracted amounts paragraph 5.3 where atleast 10% of the contracted amounts have been realised and there are no outstanding defaults of have been realised and there are no outstanding defaults of have been realised and there are no outstanding defaults of the payment terms in such contracts. the payment terms in such contracts. 5.7 When it is probable When it is probable that total project costs will that total project costs will exceed total eligible project revenues, the expected loss exceed total eligible project revenues, the expected loss exceed total eligible project revenues, the expected loss should be recognised as an expense immediately. The should be recognised as an expense immediately. The should be recognised as an expense immediately. The amount of such a loss is determined irrespective of: (a) amount of such a loss is determined irrespective of: (a) amount of such a loss is determined irrespective of: (a) commencement of project work; or (b) the stage of commencement of project work; or (b) the stage of commencement of project work; or (b) the stage of completion of project activity. n of project activity. 5.8 The percentage of completion method is applied on a 5.8 The percentage of completion method is applied on a 5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current cumulative basis in each reporting period to the current cumulative basis in each reporting period to the current estimates of project revenues and project costs. estimates of project revenues and project costs. estimates of project revenues and project costs. Therefore, the effect of a change in the estimate of project costs, the effect of a change in the estimate of project costs, the effect of a change in the estimate of project costs, or the effect of a change in the estimate of the or the effect of a change in the estimate of the or the effect of a change in the estimate of the outcome of a project, is accounted for as a change in outcome of a project, is accounted for as a change in outcome of a project, is accounted for as a change in accounting estimate. The changed estimates are used accounting estimate. The changed estimates are used accounting estimate. The changed estimates are used in determination of the amount of revenue and in determination of the amount of revenue and in determination of the amount of revenue and expenses recognised in the statement of profit and loss expenses recognised in the statement of profit and loss expenses recognised in the statement of profit and loss in the period in which the change is made and in in the period in which the change is made and in in the period in which the change is made and in subsequent periods.” subsequent periods.” 12.2 In light of the principle laid down by the ITAT(supra) read laid down by the ITAT(supra) read , we find that in case of real alongwith guidelines of the ICAI alongwith guidelines of the ICAI (supra), we find that in case of real estate projects ,when a stage is arrived that ris when a stage is arrived that risk and rewards shift k and rewards shift from the developer to buyer irreversibly, then project revenue and from the developer to buyer irreversibly, then project revenue and from the developer to buyer irreversibly, then project revenue and project cost associated with the real estate project should be project cost associated with the real estate project should be project cost associated with the real estate project should be ITA Nos. 2000 to 2002/M/2022 18 to 2002/M/2022 Sandhu Builders recognised as revenue and expenses by reference to the stage of recognised as revenue and expenses by reference to the stage of recognised as revenue and expenses by reference to the stage of completion of the project activity at the completion of the project activity at the reporting date. reporting date. The effect of a change in the estimate of project costs, should be used in a change in the estimate of project costs, should be used in a change in the estimate of project costs, should be used in determination of the amount of revenue and expenses recognised in determination of the amount of revenue and expenses recognised in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is the statement of profit and loss in the period in which the change is the statement of profit and loss in the period in which the change is Following the above principles, made and in subsequent period made and in subsequent periods. Following the above principles the profit from project, can be profit from project, can be broadly computed in following computed in following manner: 1. Compute the estimated cost of the project including Compute the estimated cost of the project including Compute the estimated cost of the project including construction cost and development cost directly rel construction cost and development cost directly rel construction cost and development cost directly related to the real estate project the real estate project, including land co conversion cost, material, labour material, labour, depreciation of plant and Machinery, , depreciation of plant and Machinery, estimated cost of rectification and estimated cost of rectification and guarantee, guarantee, expected warranty cost etc. warranty cost etc.(A) 2. Compute the cost of construction and direct cost incurred Compute the cost of construction and direct cost incurred Compute the cost of construction and direct cost incurred as on reporting as on reporting date. (B) 3. Find out the percenta Find out the percentage of work completed on reporting ge of work completed on reporting date ( C= B/C) date ( C= B/C) 4. Compute the salable area of the project. (D) Compute the salable area of the project. (D) 5. Compute the estimate Compute the estimated cost per unit of saleable area. (E= cost per unit of saleable area. (E= A/D) 6. Compute the revenue arising from sale agreements booked. Compute the revenue arising from sale agreements booked. Compute the revenue arising from sale agreements booked. (F)

7. Find out the area sold corresponding to sale agreements. ( Find out the area sold corresponding to sale agreements. ( Find out the area sold corresponding to sale agreements. ( G) 8. Compute the project cost relatable to the area sold.( H= Compute the project cost relatable to the area sold.( H= Compute the project cost relatable to the area sold.( H= G*E) 9. Compute the profit from sale of the area sold ( I= Compute the profit from sale of the area sold ( I= Compute the profit from sale of the area sold ( I= F-H) 10. Then, finally work out the profit corresponding to the stage finally work out the profit corresponding to the stage finally work out the profit corresponding to the stage of work comple of work completed by multiplying the profit computed at ng the profit computed at step 9 to the percentage work completed on reporting date to the percentage work completed on reporting date to the percentage work completed on reporting date( J= I*C) (* stands for multiplication) * stands for multiplication) 11. Any administrative expenses Any administrative expenses or indirect expenses or indirect expenses related to the business of the assessee incurred during the year, w the business of the assessee incurred during the year, w the business of the assessee incurred during the year, will then be allowed to be deducted in whole from profit allowed to be deducted in whole from profit allowed to be deducted in whole from profit recognized above at step No. 10. recognized above at step No. 10. 12.3 In view of above principles and steps of computation of profit In view of above principles and steps of computation of profit In view of above principles and steps of computation of profit following percentile completed method, the profit from the project is following percentile completed method, the profit from the project is following percentile completed method, the profit from the project is computed in the case of the a computed in the case of the assessee as under: (a) Total estimated cost of the project: Total estimated cost of the project: (i) Regarding Regarding the direct cost attributable to the project the direct cost attributable to the project, it is undisputed that same undisputed that same shall be included in the total Project shall be included in the total Project Cost. In this case, earlier the assessee had claimed a . In this case, earlier the assessee had claimed a . In this case, earlier the assessee had claimed a total estimated Project Cost of Rs. Project Cost of Rs.366,95,00,000/ 366,95,00,000/-, however, later on, the assessee vide submission dated 26.02.2015 later on, the assessee vide submission dated 26.02.2015 later on, the assessee vide submission dated 26.02.2015 before Assessing Officer in the set aside proceedings of A.Y. before Assessing Officer in the set aside proceedings of A.Y. before Assessing Officer in the set aside proceedings of A.Y. to 2002/M/2022 20 ITA Nos. 2000 to 2002/M/2022 Sandhu Builders 2009-10 had revised it to Rs. 266,35,00,000/ 10 had revised it to Rs. 266,35,00,000/ 10 had revised it to Rs. 266,35,00,000/-. The break- up of this revised estimated cost of up of this revised estimated cost of Rs. 266,35,00,000 as Rs. 266,35,00,000 as referred in para 15.1 of the order of ld. CIT(A) is as referred in para 15.1 of the order of ld. CIT(A) is as referred in para 15.1 of the order of ld. CIT(A) is as under: - Particulars Amount (Rs.) Direct Cost 81,77,00,000 Construction Cost Construction Cost 134,75,00,000 Administrative cost Administrative cost 49,83,00,000 Total Estimated Cost Total Estimated Cost 266,35,00,000 Total Estimated Cost excluding administrative cost 216,52,00,000 (ii) The Direct Cost referred above includes TDR entitlement The Direct Cost referred above includes TDR entitlement The Direct Cost referred above includes TDR entitlement from society, TDR purchased from others, stamp duty & from society, TDR purchased from others, stamp duty & from society, TDR purchased from others, stamp duty & registration charges and payments to BMC taxes & registration charges and payments to BMC taxes & registration charges and payments to BMC taxes & premium as discussed in para 12.2 of the premium as discussed in para 12.2 of the premium as discussed in para 12.2 of the order of ld. CIT(A). So, in principle, we agree with the contention of the n principle, we agree with the contention of the n principle, we agree with the contention of the assessee for allowing the direct cost incurred for purchase assessee for allowing the direct cost incurred for purchase assessee for allowing the direct cost incurred for purchase of TDR, stamp duty, and BMC charges etc. Accordingly, , stamp duty, and BMC charges etc. Accordingly, , stamp duty, and BMC charges etc. Accordingly, the ground No. 2 of the appeal, is allowed. ground No. 2 of the appeal, is (iii) The The The construction construction construction cost cost cost referred referred referred above above above includes includes includes purchases, payment to contractors and labour as discussed purchases, payment to contractors and labour as discussed purchases, payment to contractors and labour as discussed in para 12.2 of the order of ld. CIT(A). in para 12.2 of the order of ld. CIT(A). (iv) The administrative cost referred above includes The administrative cost referred above includes The administrative cost referred above includes administrative expenses, interest & finance charges and administrative expenses, interest & finance charges and administrative expenses, interest & finance charges and marketing expenses. marketing expenses. (b) Cost of the project incurred till the year end Cost of the project incurred till the year end :

ITA Nos. 2000 to 2002/M/2022 21 to 2002/M/2022 Sandhu Builders As per para 12.2 of the order of ld. CIT(A), the assessee has As per para 12.2 of the order of ld. CIT(A), the assessee has As per para 12.2 of the order of ld. CIT(A), the assessee has incurred total project cost (including administrative cost of incurred total project cost (including administrative cost of incurred total project cost (including administrative cost of Rs. 15.76 crores) of Rs. 111.63 crores upto the year under Rs. 15.76 crores) of Rs. 111.63 crores upto the year under Rs. 15.76 crores) of Rs. 111.63 crores upto the year under consideration from the inception of the project. In so far as ideration from the inception of the project. In so far as ideration from the inception of the project. In so far as the cost of the project is concerned, the administrative cost the cost of the project is concerned, the administrative cost the cost of the project is concerned, the administrative cost cannot be the part thereof and accordingly, the same is cannot be the part thereof and accordingly, the same is cannot be the part thereof and accordingly, the same is excluded resulting into project cost of Rs. 95.87crores project cost of Rs. 95.87crores excluded resulting into (111.63 crores minus 15. (111.63 crores minus 15.76 crores). (c) Thus, up to the year under consideration i.e. A.Y. 2011 the year under consideration i.e. A.Y. 2011-12, the year under consideration i.e. A.Y. 2011 the the the percentage percentage percentage of of of completion completion completion of of of project project project comes comes comes to to to [(95.87/216.52)*100] = [(95.87/216.52)*100] = 44.28% (d) Salable area of the project Salable area of the project: Further, in this case, the total area Further, in this case, the total area Further, in this case, the total area available for construction construction is 1,35,600 sq. ft., out of which area for 600 sq. ft., out of which area for constructing “A” wing is 1,28,760 sq. ft. and that for “B” constructing “A” wing is 1,28,760 sq. ft. and that for “B” constructing “A” wing is 1,28,760 sq. ft. and that for “B” wing is 6,840 sq. ft. wing is 6,840 sq. ft.Till A.Y. 2009-10, the assessee has 10, the assessee has taken into consideration the total area of 1,35,600 sq. ft. taken into consideration the total area of 1,35,600 sq. ft. taken into consideration the total area of 1,35,600 sq. ft. However, in A.Y. 2010 However, in A.Y. 2010-11, for the first time, 11, for the first time, the assessee submitted that the total saleable area needs to be revised submitted that the total saleable area needs to be revised submitted that the total saleable area needs to be revised due to two events, firstly, due to the dispute arisen with 5 due to two events, , due to the dispute arisen with 5 members in the society encompassing area of 11,958 sq. ft. members in the society encompassing area of 11,958 sq. ft. members in the society encompassing area of 11,958 sq. ft. who restrained to give any permission for development and who restrained to give any permission for development and who restrained to give any permission for development and secondly, due to demolition of area of 3,350 sq.ft. of 19 dly, due to demolition of area of 3,350 sq.ft. of 19 dly, due to demolition of area of 3,350 sq.ft. of 19th floor of “A” wing because of height restrictions by the airport floor of “A” wing because of height restrictions by the airport floor of “A” wing because of height restrictions by the airport ITA Nos. 2000 to 2002/M/2022 22 to 2002/M/2022 Sandhu Builders authority. We have considered the submission of the We have considered the submission of the We have considered the submission of the assessee for revising the saleable area to 1,20,292 sq. ft. assessee for revising the saleable area to 1,20,292 sq. ft. assessee for revising the saleable area to 1,20,292 sq. ft. However, we do not agree However, we do not agree with the assessee. As far as the with the assessee. As far as the disputed area disputed area of 11,958 sq. ft. is concerned, the assessee is concerned, the assessee has been restrained from selling for the time being due to has been restrained from selling for the time being due to has been restrained from selling for the time being due to the injunction by the Hon’ble High Court but that area the injunction by the Hon’ble High Court but that area the injunction by the Hon’ble High Court but that area still remained with the assessee. So, it cannot be remained with the assessee. So, it cannot be remained with the assessee. So, it cannot be reduced from the overall saleable area available with the assessee. the overall saleable area available with the assessee. the overall saleable area available with the assessee. The change in saleable area sought, secondly secondly is due to change in saleable area sought, demolition of 19 demolition of 19th Floor of A wing admeasuring 3350 sft admeasuring 3350 sft. As far as the demolished area is concerned, that has far as the demolished area is concerned, that has far as the demolished area is concerned, that has extinguished due to demolition and therefore, that area is extinguished due to demolition and therefore, that area is extinguished due to demolition and therefore, that area is allowed to be reduced. Accordingly, the revised saleable allowed to be reduced. Accordingly, the revised saleable allowed to be reduced. Accordingly, the revised saleable area available with the assessee works out to 1,32,250 sq. area available with the assessee works out to 1,32,250 sq. area available with the assessee works out to 1,32,250 sq. ft. (e) The cost of the salable The cost of the salable area per unit thus works out to Rs. area per unit thus works out to Rs. 16,372/-. (f) Till the year end the assessee has reported area sold of Till the year end the assessee has reported area sold of Till the year end the assessee has reported area sold of 86,986 sft for sale agreements of Rs. 175,29,25,800/ 86,986 sft for sale agreements of Rs. 175,29,25,800/ 86,986 sft for sale agreements of Rs. 175,29,25,800/-. (g) The project cost relatable to the area sold of 86,986, thus The project cost relatable to the area sold of The project cost relatable to the area sold of works out Rs. 86,986 * 16,372 =142,41 works out Rs. 86,986 * 16,372 =142,41,36,765/ ,36,765/-. (h) The The The profit profit profit from from from the the the area area area sold sold sold thus thus thus would would would be be be (175,29,25,800 ,29,25,800 – 142,41,36,765) = 32,87,89,034/ 142,41,36,765) = 32,87,89,034/-.

ITA Nos. 2000 to 2002/M/2022 23 to 2002/M/2022 Sandhu Builders (i) The profit The profit recognized up to the year under consideration the year under consideration in view of percentage completion of 4 in view of percentage completion of 44.28 8% , thus works out out out to to to 32,87,89,034 32,87,89,034 32,87,89,034 * * * 4 44.28= 4 Rs.14,55,80,107/ Rs.14,55,80,107/- (j) The administrative cost during the year has been The administrative cost during the year has been The administrative cost during the year has been incurred at Rs. 5,52,95,604/ incurred at Rs. 5,52,95,604/-, so after reducing this cost, so after reducing this cost, the net profit from the project following the percentile the net profit from the project following the percentile the net profit from the project following the percentile completion method works out to Rs. completion method works out to Rs. 9,02,84,503 9,02,84,503/-. 12.4 Thus, upto AY2011 AY2011-12, the cumulative profit from the project 12, the cumulative profit from the project works out to Rs. 9,02,84,503 9,02,84,503/-. 12.5 The ground No. 6 and 7 of the appeal are accordingly allowed. The ground No. 6 and 7 of the appeal are accordingly allowed. The ground No. 6 and 7 of the appeal are accordingly allowed. relates to revision of estimated cost of 13. Ground no. 3 and 4 Ground no. 3 and 4 relates to revision of estimated cost of repairs/renovation of Rs. 61,63,16,666 c of Rs. 61,63,16,666 caused due to delay in aused due to delay in project and damage to the building on account of various litigations project and damage to the building on account of various litigations project and damage to the building on account of various litigations not being considered by the ld. CIT(A). not being considered by the ld. CIT(A). The events behind escalation The events behind escalation of Renovation cost have arisen in period subsequent to AY 2011-12, of Renovation cost have arisen in period subsequent to AY 2011 of Renovation cost have arisen in period subsequent to AY 2011 and therefore, any effect of and therefore, any effect of said estimate can’t be given in AY 2011 said estimate can’t be given in AY 2011- 12 and can only be given in subsequent assessment years. 12 and can only be given in subsequent assessment years. 12 and can only be given in subsequent assessment years. Therefore, these grounds are dismissed for AY 2011 Therefore, these grounds are dismissed for AY 2011- -12.

ITA Nos. 2000 to 2002/M/2022 24 to 2002/M/2022 Sandhu Builders 14.1 The assessee has followed percentage completion method for The assessee has followed percentage completion method for The assessee has followed percentage completion method for computation of profits from the project. Under this method, after computation of profits from the project. Under this method, after computation of profits from the project. Under this method, after working out the profit commensurate with the construction work working out the profit commensurate with the construction work working out the profit commensurate with the construction work carried out, further expenses for maintenance of the corporate carried out, further expenses for maintenance of the corporate carried out, further expenses for maintenance of the corporate structure and other administrative and selling expenses for running structure and other administrative and selling expenses for running structure and other administrative and selling expenses for running the business are debited to Profit & Loss A/c. and net profit is the business are debited to Profit & Loss A/c. and net profit is the business are debited to Profit & Loss A/c. and net profit is worked out accordingly. For the purpose of computing profit from worked out accordingly. For the purpose of computing profit from worked out accordingly. For the purpose of computing profit from the project, the valuation of closing stock has no role to play under the project, the valuation of closing stock has no role to the project, the valuation of closing stock has no role to this method. Accordingly, the ground challenging the valuation of this method. Accordingly, the ground challenging the valuation of this method. Accordingly, the ground challenging the valuation of unsold flats at market value is irrelevant, whether taken at cost or unsold flats at market value is irrelevant, whether taken at cost or 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 market value. We set aside the finding of the ld. CIT(A) on the issue market value. We set aside the finding of the ld. CIT(A) on the issue of dispute for considering valuation of of dispute for considering valuation of unsold flats at market value unsold flats at market value Thus, this ground no. 5 of the assessee is allowed. Thus, this ground no. 5 of the assessee is allowed.

ITA Nos. 2000 to 2002/M/2022 26 to 2002/M/2022 Sandhu Builders 19.2 Before the lower authorities, the assessee submitted that due the lower authorities, the assessee submitted that due the lower authorities, the assessee submitted that due to various litigation and inj various litigation and injunctions of the Hon’ble High court, the ctions of the Hon’ble High court, the cost of the project has been fu cost of the project has been further escalated for keeping the project rther escalated for keeping the project saleable. The assessee submitted before the ld CIT(A) that the saleable. The assessee submitted before the ld CIT(A) that the saleable. The assessee submitted before the ld CIT(A) that the estimate cost of Rs. ate cost of Rs.50,57,86,069/- which was included in the included in the estimate cost of project of project of Rs. 216 .52 crores but said but said estimate of cost had gone up to Rs. gone up to Rs.63,81,38,718/- during the year under during the year under consideration, which which need to be considered. In this need to be considered. In this manner, the assessee claimed for further estimation assessee claimed for further estimation of Rs.13,23,52,64 13,23,52,649/-. The lower authorities, denied any change in total estimated cost of the lower authorities, denied any change in total estimated cost of the lower authorities, denied any change in total estimated cost of the Project. We are of th Project. We are of the opinion that due to changed circumstances, e opinion that due to changed circumstances, the liability to incur expenses has gone up, which has to be taken the liability to incur expenses has gone up, which has to be taken the liability to incur expenses has gone up, which has to be taken into consideration as into consideration as and when visualized by the assessee as by the assessee as ascertained and the assessee need to be allowed said change in the the assessee need to be allowed said change in the the assessee need to be allowed said change in the year of such certainty as per the principles of percentile completion tainty as per the principles of percentile completion tainty as per the principles of percentile completion method reproduced above. method reproduced above. The details of the estimate of expenses The details of the estimate of expenses were filed before lower authorities and also filed before us in the were filed before lower authorities and also filed before us in the were filed before lower authorities and also filed before us in the paper book. The Ld. CIT(A) has mentioned the figure at The Ld. CIT(A) has mentioned the figure at The Ld. CIT(A) has mentioned the figure at Rs.61,63,16,666/- so we restored the amount to that extent only. so we restored the amount to that extent only. so we restored the amount to that extent only. Accordingly, we revise the estimate of cost of project to Rs. 216.52 Accordingly, we revise the estimate of cost of project to Rs. 216.52 Accordingly, we revise the estimate of cost of project to Rs. 216.52 plus Rs. 11.05 crores crores totaling to Rs. 227.67 crores for AY 2012 crores for AY 2012-13 and onward. Further, we also note that in AY 2013 Further, we also note that in AY 2013 Further, we also note that in AY 2013-14, the cost incurred has been reduced from 133.13 cores to 128.81 due ed has been reduced from 133.13 cores to 128.81 due credit ed has been reduced from 133.13 cores to 128.81 due of service tax in said year. in said year.

ITA Nos. 2000 to 2002/M/2022 27 to 2002/M/2022 Sandhu Builders 19.3 In this manner, the project cost incurred and percentage manner, the project cost incurred and percentage manner, the project cost incurred and percentage completion of project completion of project is worked out as under: - A.Y. Total Project Administra Administra Total Project Total Total Estimated Estimated % of cost tive tive cost cost Cost (excl. Project Cost Project Cost work incurred (Rs. (Rs. In In administrativ (in Rs. Crores) (in Rs. Crores) complete (incl. crores) crores) e cost) (Rs. In d administrati crores) ve cost) (Rs. In crores) 2010-11 2011-12 111.63 15.76 15.76 95.87 216.52 44.28 2012-13 152.65 19.52 19.52 133.13 227.57 58.50 2013-14 150.89 22.08 22.08 128.81 227.57 56.61 19.4 In the course of hearing, the ld. Counsel of the as In the course of hearing, the ld. Counsel of the as In the course of hearing, the ld. Counsel of the assessee has furnished the detail of area sold and sale agreements entered of area sold and sale agreements entered into with the customers upto the following years as with the customers upto the following years as under: under: - A.Y. Area Sold (sq. ft.) Sale Agreements (Rs.) 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 submitted before us that in earlier year actually submitted before us that in earlier year actually no profit has been assessed from the project, therefore same might no profit has been assessed from the project, therefore same might 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 In view of the above, the revenue to be recognised In view of the above, the revenue to be recognised cumulatively and cumulative profit and cumulative profit as per the percentage as per the percentage completion method thod thod for the three assessment years under for the three assessment for the three assessment years under years under consideration before us consideration before us is worked out as under: - Amount in Rs. Particulars A.Y. 2011-12 A.Y. 2012-13 A.Y. 2013-14 ITA Nos. 2000 to 2002/M/2022 28 ITA Nos. 2000 to 2002/M/2022 Sandhu Builders 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 132250 132250 132250 Area sold upto year end 86986 90465 90465 Total amount of Sale (Agreements) entered upto year end 1752925800 1882925800 1882925800 Less: Total cost of area sold upto year end 1424136765 1556682045 1556682045 Cumulative Profit from the project upto year end 328789035 326243755 326243755 Cumulative Profit recognized as per percentage completion method 145580107 190842842 184683092 Yearwise profit before admn expenses 0 145580107 45262735 (-)6159750 Less: Administrative and other expenses 55295604 37570306 25572209 Profit / (loss) for the year 90284503 7692429 (-)31731959 to 2002/M/2022 29 ITA Nos. 2000 to 2002/M/2022 Sandhu Builders 19.6 In view of above profit from the project computed following the In view of above profit from the project computed following the In view of above profit from the project computed following the percentage completion completion of method is sustained in the case of the of method is sustained in the case of the assessee, as worked out above. , as worked out above. We accordingly direct so. We accordingly direct so. The Assessing Officer is directed to Assessing Officer is directed to adopt above prfit worked out for AY prfit worked out for AY 2011-12 to AY 2013- -14 for the purpose of net profit of the assessee for the purpose of net profit of the assessee from business or profession from business or profession.