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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
O R D E R
PER PAVAN KUMAR GADALE, JM:
1. The assessee has filed the appeal against the order of the Commissioner of Income Tax (Appeals)-16, Mumbai passed u/s 143(3) and 250 of the Act. The assessee has raised the following grounds of appeal:
1. On the facts and circumstances of the case the CIT(A) erred in confirming the addition of Rs.4,15,32,500/- the difference between agreement value and fair market value as per stamp duty reckoned under section 43CA of the Income Tax Act without considering peculated fact of the case particularly GF Reality Pvt Ltd., Mumbai. - 2 -
when Assessee follow project completion method of accounting and in Asst. year 2015-16 is not even started.
2. The Ld. CIT(A) erred in confirming the charging of interest under section 234B, 234C and 234D of the Income Tax Act 1961.
3. The Ld. CIT(A) erred in confirming the initiation of the penalty proceeding under section 271(1)(c) of the Income Tax Act 1961.
4. The Assessee craves leave to add further grounds or to amend or alter the existing grounds of appeal
on or before the date of hearing.
2. The brief facts of the case are that the assessee company is engaged in the business as civil contractors and real estate . The assessee has filed the return of income for the A.Y 2015-16 on 30.09.2015 disclosing a total income of Rs. Nil and the return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act along with questionnaire was issued. In compliance to the notice, the Ld. AR of the assessee appeared from time to time and filed the details and the case was discussed. The Assessing Officer(A.O) found that the assessee has GF Reality Pvt Ltd., Mumbai. - 3 - taken a project at Khar and as per the Profit and loss account, the assessee has not disclosed any other income and whereas the assessee has debited indirect expenditure of Rs.1,19,08,837/- and the opening work- in-progress(WIP) of Rs.5,82,07,289/-.During the course of assessment proceedings, the assessee has filed copy of the agreements on 04.09.2017 explaining that the assessee has not sold any property during the year and assessee has received only booking amount pertaining to the flat/shop against the registration of the agreement.The A.O. has issued notice u/s 133(6) of the Act to the Jt.sub-registrar and called for the details of assessees agreements registered.
3. The assessee has submitted the details of agreement registered and the amount received in the F.Y.2014-15 on 9-10-2017. Whereas,the assessee has sold the property as and when the prospective buyer approach and hence the index value of the property is higher than the under construction property/prelaunch property. The assessee has filed the submissions in respect of the seven transactions dealt at Para 4.1 of the assessment order and the assessee has adopted the percentage completion method(PCM). The assessee has GF Reality Pvt Ltd., Mumbai. - 4 - filed a letter dated 13.11.2017 mentioning that it has not sold any flat or shop to any person during the year but only made agreement for the booking of the flat, and as and when the building is completed, the same would be registered with the registering authorities. On perusal of the agreement, the A.O is of the view that the purchaser agrees to purchase from the promoters and the promoters agrees to sell to purchasers and the sale was affected but actually the building has not been completed. The assessee has filed the letter dated 13.11.2017 submitting the details of allotments of flat/shop. Whereas the A.O. was not satisfied with the explanations and is of the opinion the assessee has sold the seven units and out of which one unit is provided as alternate accommodation to the existing tenant and invoked the provisions of Section 43CA of the Act. Finally, the A.O. has made a chart of comparison of fair market value as per stamp duty valuation and the sale consideration as per the agreement and treated the difference as addition u/s 43CA of the Act and assessed the total income of Rs. 4,15,32,500/- and passed the order u/s 143(3) of the Act dated 29.11.2017. GF Reality Pvt Ltd., Mumbai. - 5 -
4. Aggrieved by the order, the assessee has filed an appeal before the CIT(A), whereas the CIT(A) considered the grounds of appeal, submissions of the assessee and the findings of the A.O and is of the opinion that the assessee cannot be allowed relief as no evidences has been filed by the assessee to substantiate the claim made before the lower authorities and confirmed the action of the A.O and dismissed the assessee appeal. Aggrieved by the CIT(A)order, the assessee has filed an appeal before the Hon’ble Tribunal.
5. At the time of hearing, the ld. AR submitted that the CIT(A) has erred in confirming the action of the A.O. overlooking the material evidences and the information and revenue recognition policy adopted by the assessee. Further the provisions of Sec. 43CA of the Act are not applicable to the assessee as there is no transfer of ownership of the flats but booking amount was received as per the registered agreements.
The assessee is in the line of construction business and has submitted the details of internal accruals of GF Reality Pvt Ltd., Mumbai. - 6 - amounts. The AO has erroneously made the addition based on the difference of fair market value of the flats and agreement value registered though there is no transfer of ownership and the assessee has received the commencement certificate to start the project in April 2017. The Ld. AR substantiated the contentions with the written submissions, copies of registered agreements, judicial decisions and the factual paper book and prayed for allowing the appeal. Contra, the Ld. DR supported the orders of the lower authorities.
6. We heard the rival submissions and perused the material on record. Prima-facie the sole disputed issue is with respect to the addition u/s 43CA of the Act sustained by the CIT(A). The contentions of the Ld.AR are that the provisions are not applicable as the assessee has not sold any property during the year and the project commencement certificate was obtained in April 2017.The Assessee follows Project Completion method(PCM) as per the Accounting Standard (AS) 9 GF Reality Pvt Ltd., Mumbai. - 7 - issued by the Institute of Chartered Accountants of India (ICAl) were the revenue is recognized as and when significant risk and reward of ownership/title is transferred. All sums received for the construction project till such time are treated as advances and disclosed as liability. And all the expenses incurred in the construction are accounted for in the stock in trade and/or block of buildings and are reflected in the balance sheet. Whereas, the project completion method is one of the recognized method consistently followed by assessee and the Ld.AR relied on the fallowing judicial decisions:
ITO-22(2)-2, Vashi [2012] 25 taxmann.com 179 (Mum.Trib.)
Ashoka Hi-Tech Builders (P.) Ltd. V. DCIT, (Central)-I, [2018] 96 taxmann.com 547 (Indore - Trib.)
Krish Infrastructure (P.) Ltd. V. ACIT, Central Circle, Alwar [2013] 35 taxmann.com 38 (Jaipur - Trib.)
GF Reality Pvt Ltd., Mumbai. - 8 -
CIT-IV V. Shivalik Buildwell (P.) Ltd [2013] 40 taxmann.com 219 (Gujarat)
CIT V/s DLF UNIVERSAL LTD. ITA N. 159 of 2010 order dated 21.12.2016 (Del HC).
Sabh Infrastructure Limited, New Delhi vs. DCIT, Circle 7(1), vide (Del) of 2009
7. DCIT Vs. Ansal Landmark Township P Ltd ITA No. 2859/Del/2012.
8. Unique Enterprises Vs. ITO (2010-TIOL - 737 - ITAT - MUM
9. Prestige Estate Projects (P) Ltd. vs. Dy.CIT ( (2010) 33 DTR 514 (Bang.)
10. CIT v. Tata Iron & Steel Co. Ltd. [1977] 106 ITR 363 (Bom HC).
Swastik Group Versus ACT 15(3), Mumbai
12. Sheth Developers P Ltd, Mumbai Vs. ITO ITO Mumbai.
ACIT Vs. Dharti Estate [2011] 129 ITD 1 (Mum).
GF Reality Pvt Ltd., Mumbai. - 9 -
Prem Enterprises Vs. ITO [2012] 25 Taxmann.com 179 (Mum).
Nandi Housing P Ltd Vs. DCIT 2004, 2 SOT 395 (Bang)
HM Constructions Vs. JCIT, [2003] 84 ITD 429 (Bang).
CIT Vs. Vraj Developers 19/Ahd/2008.
The Ld.AR demonstrated the seven registered agreements in the Paper book, and the title being the "Agreement" and not "Sale deed" which was entered by the assessee company with the prospective buyers for the only reason that the allotment letter is not legal document which create right to the buyer. Whereas in the case of sale of property, the assessee would have executed sale deed instead of registering the agreement of receipt of Advance against flat booking. The Provision of Section 43CA of the Act are applicable to all kind of immovable properties being Land or Building or both, held as stock in trade. It may be a residential flat, commercial flat, industrial building or plot, residential plot in a township, GF Reality Pvt Ltd., Mumbai. - 10 - agricultural land whether in rural or urban area etc. Provision of Section 43CA of the Act shall also applicable in case of transfer of ownership of property by any mode. In case, transfer of immovable property takes place without registration of sale deed but by way of execution of sale agreement / Power of Attorney or by way of transfer with the regulatory authority or in any other manner. Whereas, in the present case, the assessee has registered only agreements for receiving advance against the booking of flat based on the pre- launch price and there is no transfer of asset. The Assessee has not sold any flat/ shop to any person during the year. But only made the agreement for booking of the flat and same was registered with the registering state authority.
Further the assessee had received the commencement certificate to start with the project on 03.04.2017.Even if percentage completion method was followed by the assessee, then also there is no applicability of Section 43CA of the Act on real estate developer/ the assesee for the year under consideration. In normal case, profits or gains are computed at the time of transferring the ownership. GF Reality Pvt Ltd., Mumbai. - 11 - The real estate developers are required to follow percentage completion method for revenue recognition, as per the Guidance Note on Revenue Recognition for Real Estate Transactions issued by ICAI.
Whereas in the percentage completion method, the revenue is required to be recognized and profit or gain from the real estate activity is required to be computed as per stage of completion of project on year to year basis even when the asset is under construction and has not come into existence and even before the asset is transferred by the developer to the buyer. Whereas, Section 43CA of the Income Tax Act creates a deeming fiction to substitute stamp duty value of the asset with the actual sale consideration to compute profits or gains arising on transfer of asset, when actual sale consideration is less than the stamp duty value. The language of sub section (1) of section 43CA of the Act evidently requires such substitution of sale consideration for the purpose of computing profits and gains accruing as a result of transfer of the asset and it is evident that unless the asset comes into existence and the "transfer" of asset takes place, the provisions of Section 43CA of the Act cannot be applied. Hence GF Reality Pvt Ltd., Mumbai. - 12 - the stamp duty value/ SRO value of the asset has to be considered only at the time of "transfer" of the asset for the purpose of section 43CA of the Act. But, when the revenue is recognized on the basis of percentage of completion method, the date of "transfer" of asset is a future event dependent upon several contingencies and thus cannot be determined. Also the stamp duty value which would be applicable on the future date of transfer of the asset is not determinable. Therefore, deeming fiction of section 43CA of the Act cannot be applied on year to year basis while recognizing revenue based on percentage of completion method. However the revenue/income cannot be recognized on percentage completion method based upon the stamp duty value prevalent on the date of sale agreement, because the basic condition of sub section (1) of section 43CA of the Act has to be given full effect to which requires the taxability of the difference at the time of transfer of the asset. This is also for the reason that sub section (3) is merely an enabling provision which may not be applicable in all cases e.g. when payment is made in cash at the time of agreement or when stamp duty value as on the date of the transfer of GF Reality Pvt Ltd., Mumbai. - 13 - the asset is less than the stamp duty value as on the date of the sale agreement.
Further it is a well settled principle of interpretation of tax statute that a deeming provision has to be interpreted strictly in terms of the language employed. When the section requires provision to be applicable on "transfer" of asset, it cannot be applied prior to that, merely for the reason that revenue with respect to such asset is being recognized. The underlying principle of revenue recognition under percentage of completion method is that risks and rewards of ownership are substantially transferred along with entering into legally binding sale agreement and after entering into such sale agreement, real estate developer acts on behalf of the buyer as contractor.
Whereas, while entering into binding sale agreement with the real estate developer, the buyer of the property gets merely a right to purchase property which cannot be equated with the ownership of the property. The right to purchase property is itself a distinct and transferable intangible asset. Unless the property is constructed and comes into existence and GF Reality Pvt Ltd., Mumbai. - 14 - possession is handed over by the developer to the buyer, it cannot be said that "transfer" of property has taken place.The revenue recognition under percentage of completion method is full of contingencies based upon reliability of outcome of the project or uncertainty creeping in ultimate collection of revenue from the customer. There may be situation where under the percentage of completion method, revenue recognized in earlier year(s) may be required to be reversed in subsequent years depending upon such contingency or uncertainty taking place during the development of the project at a later date.
11. Further it can be stated that provisions of Section 43CA of the cannot be made applicable on year to year basis while recognizing revenue on percentage of completion method as per Guidance note before the "transfer" of property takes place. The Ld.AR emphatically substantiated the submissions with the facts, evidences and judicial decisions filed before the lower authorities and we find the submissions of the Ld.AR are realistic. Accordingly, we set aside the order of the CIT(A) and direct the Assessing officer to delete GF Reality Pvt Ltd., Mumbai. - 15 - the addition u/sec43A of the Act and allow the grounds of appeal in favour of the assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 05.08.2022.