Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI PRADIP KUMAR KEDIA
आदेश/O R D E R
PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals)-XIV, Ahmedabad (‘CIT(A)’ in short), dated 12.08.2011 arising in the assessment order dated 21.12.2010 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2008-09.
[ACIT (OSD) vs. Satyam Developers Ltd.) A.Y. 2008-09 - 2 -
The solitary ground of appeal raised by the Revenue reads as under:
“1). The Ld. Comissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on fact sin deleting the addition of Rs.82,90,562/- made by the Assessing Officer on account of estimation of net profit by invoking provisions of Section 145 of the Act.
Briefly stated, the assessee company is a builder and developer and engaged in building and developing certain residential towers. During the year, the assessee purchased land costing Rs.2,70,18,398/- and incurred direct and indirect expenses of Rs.4,50,71,261/- on the said project. As against the development work, the assessee has collected an amount of Rs.5,52,70,410/- from its customers who had given advances against purchase of sale of units of total consideration of Rs.10,35,96,192/-. The assessee company filed return of income declaring taxable income of Rs.49,637/- which was subjected to scrutiny assessment. It was noticed by the AO that the assessee has received advances from its customers amounting to Rs.5,52,70,410/-. The AO also observed that assessee has completed substantial and considerable work on the project which has enabled him to collect such huge amount from his customers aggregating to Rs.5.52 Crores which is nearly 53% of the sale consideration of Rs.10.35 Crores. The AO accordingly show caused the assessee to explain as to why profit should not be held to have crystalized during the year as worked out on percentage of work completion method in respect of project already and nearly (2/3rd of the total) executed on which the assessee has also collected a significant sum of Rs.5,52,70,410/- from the customers of these units. The response of the assessee for non-taxability in its defense was rejected by the AO. The AO broadly observed that substantial and considerable work has been completed on the project and the assessee has collected nearly 53% of the sales. The AO observed that the accounting method followed by the assessee is not commensurate with the provisions of Section 145 of the Act which [ACIT (OSD) vs. Satyam Developers Ltd.) A.Y. 2008-09 - 3 - provides that income chargeable under the head ‘profits and gains of business or profession’ shall subject to provision of sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee and sub section (3) provide that where accounting standard notified by the Central Government for any class of income is not followed regularly by assessee, the AO may make best judgment assessment. It was alleged that assessee has failed to comply with the accounting standard. The AO accordingly invoked the provisions of Section 145 of the Act and rejected the book results reported by the assessee. The AO referred to AS-7 which provides for percentage completion method and held that the assesse was required to recognize the Revenue by applying percentage completion method. The failure to do so by the assessee has given incorrect and distorted picture of the profits of the assessee company. The AO accordingly proceeded to estimate the profits of the assessee at 15% of the advances received from the customers amounting to Rs.5,52,70,410/- with the aid of Section 145(3) of the Act. The AO accordingly estimated net profits of the company at Rs.82,90,562/- being 15% of the advances received from customers and added the same to the total income of the assessee.
Aggrieved by the addition of Rs.82,90,562/- made by the AO by applying percentage completion method, the assessee preferred appeal before the CIT(A). The CIT(A) recorded the defense of the assessee in support of its action as per para 2.2 of its order. The CIT(A) accordingly found merit in the plea of the assessee for non taxability of estimated income. The relevant operative para of the order of the CIT(A) is reproduced hereunder:
“2.3. Decision I have carefully perused the Assessment Order and the written submission alongwith Paper Book filed by the Ld. AR of the appellant company. It is seen that the A.O has estimated the profit of the appellant [ACIT (OSD) vs. Satyam Developers Ltd.) A.Y. 2008-09 - 4 - company at 15% of the gross receipt equal to the amount collected. The A.O has observed that as against the final sales consideration of Rs. 10,35,96,192/- agreed between the appellant and its customers, the appellant has received an amount of Rs. 5,52,70,410/- from the customers. The A.O has observed that the appellant has completed the construction nearly 82% of the project. Accordingly, the A.O was of the view that the revenue is to be recognized to the extent of amount already collected from the customers on percentage completion method. Further, the A.O has invoked the provisions of section 145(3) of the Act for the purpose of estimating the profits from the project. The appellant company is a real estate developer, developing the scheme on its own land. The appellant has rightly contended that the revised AS-7 is not applicable to the appellant company as it is applicable to contractor. Accounting Standard - 9 is applicable to the appellant company. The A.R has also relied upon the decision in the case of Awadhesh Builders vs. Income Tax Officer 37 SOT 122 (Mumbai) in support of the contention that the Accounting Standard - 7 is not applicable to the appellant company and Accounting Standard - 9 is applicable to it. The appellant is following AS - 9 prescribed by the ICAI. From the perusal of various documents filed in the Paper Book, it is seen that the land for the project has been acquired by the appellant company in the month of December, 2007 only. The appellant company got the possession of the land at the time of executing the sale agreement in the month of December, 2007. Therefore, it is improbable to assume that by 31-3-2008 i.e. within a period of three and a half month, the construction of Four Towers out of Five Towers has been completed substantially as observed by the A.O. Further, the appellant company has obtained the commencement letter for construction (Raja Chhitti) from the Ahmedabad Municipal Corporation in the month of November, 2007 which was in the name of original land owners at the relevant time. For getting the separate electricity connection for the units to be built under the said project, the appellant company has paid necessary charges to Torrent Power Ltd., in the month of April, 2008. Further, the appellant company has received BU Permission from Mahahagar Seva Sadan, Ahmedabad, as per their letter dated 22-01-2009 i.e. at the fag end of F.Y. 2008-09. From verification of the agreements in respect of different units of the project of the appellant company, it is seen that the agreement for sale in respect of Unit - B & Unit - E were executed in the month of August, 2008 i.e. after 31-3-2008 and therefore, the observations and findings of the A.O hat substantial construction work has been completed in the project is factually incorrect and based on wrong appreciation of the facts. The agreement for sale in respect of Unit - D has been executed in the month of March, 2008 and as per the terms and conditions No. 2 of the said agreement for sale, the appellant company has not given the physical possession of the said unit to the prospective member. Further, the tenure of the agreement for sale has been fixed for 9 months. Accordingly, Unit - D was also not completed by 31-3-2008 and therefore, there is no question of recognizing the revenue from the said unit. In respect of Unit - A, as per the details of work schedule given in the agreement, the drawings and proposed project was to be finally approved by the prospective buyer and to submit the same to the Ahmedabad Municipal Corporation for its approval within a period of 3 months from the date of said agreement.
[ACIT (OSD) vs. Satyam Developers Ltd.) A.Y. 2008-09 - 5 -
After getting the approval from the Ahmedabad Municipal Corporation, the project was supposed to be completed within a period of 9 months and accordingly, by 31-3-2008, it is not possible to complete substantial work as observed by the A.O.
On the basis of the all the above factual evidences placed on the record in the form of Paper Book, the appellant has rightly contended that these evidences establishes beyond doubt that as on 31-3-2003, no major work was completed as alleged by the A.O.
The appellant has further contended that booking amount received from the prospective buyer for any identifiable towers is only a proposal made by the prospective buyer to the appellant company which is subject to finalization by the appellant company only when the prospective buyer makes the full payment as per the terms and conditions of the appellant company and the prospective buyer is finally willing to fake the possession of the ur.it which has been proposed to be booked and acquired by the prospective buyer, it was submitted that if the prospective buyer after paying a booking amount to the appellant company does not make full payment for the units in the commercial complex which is proposed to be acquired by the prospective buyer then the booking amount is required to be refunded or forfeited as per the negotiation between the appellant company and prospective buyer.
Therefore, the booking amount given by prospective buyer To the appellant company is a current liability of the appellant company and it does not have the characteristic of a revenue receipt of the appellant company and accordingly the booking amount received from the prospective buyer has been shown under the head current liabilities. Further the fact that bank has given finance to the prospective acquirer of the property is not relevant as the bank is giving finance on the basis of agreement to sale the property and the same is based on submission of papers and other relevant norms of the bank.
I am inclined to agree with the argument of the appellant that in a real estate sale, all significant risks and rewards of ownership are normally considered to be transferred when legal title passes to the buyer at the time of registration with the relevant authority or in the name of buyer or when the seller enters into an agreement to sale and give the possession to the buyer. In the present case of the appellant company, it has not given the physical possession of any units to the prospective buyer by 31- 3-2008. Accordingly, it cannot be said that significant risks and rewards have been passed to the prospective buyers of various units from the appellant company.
The A.R of the appellant company has also referred the decision of Hon'ble Hydrabad ITAT Bench 'A' in the case of Shapoorji Pallonji Biotech Park (P) Ltd., 138 TTJ 62 wherein on the facts of the said case, the Hon'ble ITAT has held that " the sale deed executed by the assessee did not give rise to any income assessable to tax during the assessment under consideration since such income was charged with the several obligations relating to the development work and common facilities in the bio-tech park which the assessee was to discharge before the delivery of plots to the buyers in terms of the sale deeds itself".
[ACIT (OSD) vs. Satyam Developers Ltd.) A.Y. 2008-09 - 6 -
It is seen from the copies of agreement for sale provided by the appellant in the paper book that the facts of the present case are identical and therefore, in my opinion, the ratio of the above decision is applicable in appellant company's case. Further, it is seen that the appellant company has recognized the revenue from the project in the subsequent assessment year i.e. A.Y. 2009-10 on the completion of the project while executing conveyance deed in favour of the prospective buyers and giving them the physical possession of the units. In view of the above facts, I hold that the addition made by the A.O of Rs. 82,90,562/- at 15% of the gross receipts being the amount collected by the appellant is factually incorrect and is therefore directed to be deleted. The ground of appeal, is therefore, allowed.” The CIT(A) accordingly observed that the significant risk and rewards was not passed to the prospective buyers and therefore the assessee was right in applying completed project method. The CIT(A) accordingly reversed the action of the AO and granted relief in terms of observations noted above.
Aggrieved, the Revenue is in appeal before the Tribunal.
The learned DR for the Revenue relied upon the order of the AO and submitted that the action of the assessee in not declaring the profits from the construction project in progress is not justified at all and is in departure with the accounting practices and accounting standard notified in this regard. The learned DR submitted that substantial construction work has been carried out and the assessee has already collected more than 50% of total sale consideration agreed. Thus, the assessee ought to have offered the estimated income accrued over the period of construction as contemplated under accounting standard – 7 (AS-7) issued by the ICAI. The learned DR thus contended that the CIT(A) fell in error in disturbing the order of the AO. [ACIT (OSD) vs. Satyam Developers Ltd.) A.Y. 2008-09 - 7 -
The learned AR, on the other hand, relied upon the order of the CIT(A). The learned AR thereafter pointed out that the case of the assessee is governed by AS-9 and not AS-7 as the assessee is engaged as a Real Estate Developer and not merely engaged in construction contract. The learned AR emphasized that the Revenue has been duly recognized in AY 2009-10 by the assessee for which the assessment was carried out under s.143(3) of the Act determining the total income at Rs.8.13 Crores. The order so passed under s.143(3) of the Act was also subjected to revisionary proceedings under s.263 of the Act. The Pr.CIT however dropped the proceedings under s.263 of the Act in the absence of any infirmity in the action of the AO in passing the assessment order under s.143(3) of the Act. The learned AR submitted that the profit from the project has thus been ultimately assessed in the later AY 2009-10 and vetted by the Pr.CIT. In support of the revenue recognition in FY 2008-09 concerning AY 2009-10, the learned AR referred to the financial statement of the later year and pointed out that income has already been offered from the project and duly assessed. Under these circumstances, the action of the AO in applying the percentage completion method and preponing the year of chargeability is not justified more so where the AO has not given the credit for the additions so made in AY 2008-09 in the later years resulting in double jeopardy to the asessee. The learned AR submitted that the action of the AO has resulted in double taxation of the same profits, one by applying percentage completion method by the AO and, other by completed contract method as offered by the assessee in AY 2009-10. The learned AR next pointed out that the completed contract method adopted by the assessee is accepted method of accounting under the Income Tax Act. It was further emphasized that the assessee is a builder and developer developing the Real Estate Scheme on its own land and selling the Real Estate units and not merely a Civil Contractor. It was submitted that in the case of a developer/builder, [ACIT (OSD) vs. Satyam Developers Ltd.) A.Y. 2008-09 - 8 - accounting standard – 9 (AS-9) is applicable for revenue recognition. The action of the assessee is thus in tune with AS-9 as applicable to the assessee. The learned AR also disputed the substantial completion of construction work as observed by the AO and referred to the findings of the CIT(A) in this regard. The learned AR referred to various case laws to support the order of the CIT(A).
“1. Awadhesh Builders vs. ITO, ITAT, Mumbai (2010) 37 SOT 0122 2. Nandi Housing (P) Ltd. vs. DCIT, ITAT, Bangalore, (2003) 80TTJ 0750 3. Dy.CIT vs. Shapoorji Pallonji Biotech Park (P) Ltd. ITAT, Hyderabad, (2011) 138 TTJ 0062 4. M/s. Unique Enterprises vs. ITO, ITAT, Mumbai, (ITA No. 5109/Mum/2008) 5. ACIT vs. M/s.Vraj Developers, ITAT Ahmedabad (ITA No. 19/Ahd/2008) 6. Krish Infrastructure (P.) Ltd. vs. ACIT, Alwar, ITAT Jaipur, 35 taxmann.com 38 (2013) 7. Prem Enterprises vs. ITO -22(2)(2)-2, Vashi ITAT Mumbai (2012) 25 taxmann.com 179”
The learned AR in conclusion submitted that the order of the CIT(A) reversing the action of the AO is wholly justified in the facts of the case and law enunciated thereon and thus does not call for any interference.
We have considered the rival submissions. The taxability on estimated income from the development and construction project of building is in controversy. As noticed by the CIT(A) as well as pointed out on behalf of the assessee, we observe that the assessee is engaged as a developer and constructor of the building project and is not a mere Civil Contractor. Thus, the AO could not challenge the project completion method adopted by the assessee to the percentage completion method unless all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. The assessee has referred to BU permission etc. and has demonstrated on facts that the risks associated [ACIT (OSD) vs. Satyam Developers Ltd.) A.Y. 2008-09 - 9 - with the project continued with the developer in a significant way during the year under consideration. It is also not in dispute that the income has been ultimately offered in the later assessment year and duly assessed. Thus, the entire exercise of the AO is revenue neutral. The CIT(A) in our view correctly appreciated the facts and circumstances of the case and has taken note of the revenue recognition in the later year. We are unable to see any infirmity in the process of reasoning adopted by the CIT(A) while granting relief to the assesse. The assessee has also demonstrated that the revenue recognized from project has been actually assessed and accepted in 143(3) r.w.s. 263 of the Act proceedings. We thus see no merit in the appeal of the Revenue.
In the result, the appeal of the Revenue is dismissed.
This Order pronounced in Open Court on 05/08/2019
Sd/- Sd/- (RAJPAL YADAV) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated 05/08/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।