ITO, KOLKATA vs. HARMONY VINIMAY PVT LTD, KOLKATA
Before: SHRI RAJESH KUMAR, AM & SHRI PRADIP KUMAR CHOUBEY, JM ITO, Kolkata Ward11(1), P-7, Chowringhee Square, 6 th floor, Kolkata-700069 West Bengal Vs. Harmony Vinimay Pvt. Ltd. 67, Chistopher Road, Kolkata West Bengal (Appellant) (Respondent) PAN No. AACCH3211P
Per Rajesh Kumar, AM:
This is an appeal preferred by the Revenue against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 24.06.2024 for the AY 2018-19. 02. The issue raised in ground nos.1,2 and 3 is against the deletion of addition by ld. CIT (A) of ₹12,18,46,800/- which was added by the AO on the ground of non disclosure of revenue from project Altius by the assessee as per ICDS-III issued by ICAI and by applying AS-7. 03. The facts in brief are that the return of income was filed on 08.10.2018, declaring total income at ₹1,98,137/- which was processed u/s 143(1) of the Act. Thereafter, the case of the assessee was selected for complete scrutiny under Cass and accordingly, statutory notices were duly issued along with questionnaires and also Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
served upon the assessee. The assessee is engaged in the business of real-estate developer and during the year company has undertaken one residential project namely ALTIUS, Kolkata which is real-estate project for construction of flats. The assessee was co-owner and developer of the said project with other 15 co-owners. The said project was developed by the assessee at its own cost and expenses and area/revenue of the project was agreed to be shared with the other co-owners of the land. The assessee was following project completing method of accounting and accordingly, all the direct and indirect expenses incurred have been transferred to project work-in- progress account and the advances received against booking of flats were credited to long term liabilities. The assessee was following mercantile system of accounting. According to the ld. AO, the assessee has not recognized the revenue of the said project on the basis of Percentage Completion Method. According to the ld. AO, out of the total estimated cost of the project of ₹125.00 crores, the assessee has already incurred construction cost to the tune of ₹91,00,35,369/- meaning thereby that the construction work of the project ALTIUS was completed to the tune of 72.8%. The ld. AO also noted that the assessee had made booking of flats for ₹1,62,716/- sq.
fts out of total saleable area of 3,45,562/- sq. ft meaning thereby that 47.08% of the total area was already sold and also correspondingly received ₹82,10,49,756/- out of the total sale value of amount of ₹1,11,83,19211/- which comes to 73.42%. Accordingly, the show cause notice was issued to the assessee as to why the income of the project should not be computed in accordance with AS-
7 and ICDS-III notified by the ld. CBDT, which was replied by the assessee by submitting that the AS-7, is not applicable to the assessee and the ICDS-III notified by the CBDT was applicable from A.Y. 2016-17 if the construction work was commenced on or after
Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
1stApril, 2015. It was stated that in the assessee’s own case that the construction of the project started in F.Y. 2012-13. Finally, the ld. AO by rejecting the contention of the assessee and the amount of addition of ₹12,18,46,700/- was computed by reducing the proportionate cost to ₹81,23,97,068/- from revenue to be recognized of ₹93,52,43,868/- and added the same to the income of the assessee.
04. In the appellate proceedings, the ld. CIT (A) allowed the appeal of the assessee on this issue after taking into consideration the contentions and submissions made by observing as under:-
“6.11 From the above discussion, it is clear that the AO has invoked ICDS-III and AS7
in the case of the appellant during the relevant financial year for recognition of revenue under POCM, whereas in the scrutiny proceedings of the immediately preceding year, the AO had accepted AS-9 and Project Completion method of accounting. The appellant has established that it is regularly following ‘Project Completion method’ of accounting and AS-9 for recognition of revenue w.r.t ALTIUS project and has further established on a without prejudice basis that even under ICDS-III sought to be applied by the AO, the appellant is allowed to continue the regularly followed method of accounting for recognition of revenue, since its construction had started before the stipulated date as laid out in ICDS and CBDT notifications. The appellant has further also established, on a without prejudice basis, that the computation of the AO regarding revenue recognized during the relevant FY by following POCM suffers from certain mistakes and by considering the specific two changes – i.e considering only the cost of land incurred by the appellant ( and resultant percentage) and share of sales attributable/receivable by the appellant - the figure of revenue to be recognized during the relevant FY under POCM comes out as a loss.
6.12 Therefore, the claim of the appellant that it is a developer and regularly following
AS-9 and ‘Project Completion Method’ of accounting which has been accepted by the Department in the immediately preceding year and therefore the same should also be followed in the relevant FY w.r.t ‘ALTIUS’ project is found correct.
6.13 Based on the above discussion, the addition of Rs 12,18,46,800/- made by the AO as revenue recognized from the project ‘ALTIUS’ is not found correct, and is directed to be deleted. Consequently, the figure of Work in Progress revised by the AO also stands canceled, and accordingly WIP gets restored to the original claim. Based on the above discussion, Grounds 2 to 9 taken by the appellant are considered as partly allowed.”
05. The ld. Authorized Representative vehemently submitted before us that the assessee was engaged in the business of real estate
Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
development and during the relevant financial year it was engaged in the real estate project called by ALTIUS which was being developed a piece of land which was co-owned by the assessee along with 15 other co-owners.
The ld.
Authorized
Representative submitted a development agreement dated 11.05.2021 according to which the 15
land co-owners would be paid their proportionate sale proceeds of the project ALTIUS aggregating to 51.56% of the total sale proceeds. The ld. Authorized Representative submitted that out of the total sale value of ₹111,83,19,211/- the assessee’s share was 48.44% which came to ₹54,17,13,826/- and the remaining share of 51.56%
belonged to 15 land co-owners which amounted to ₹57,66,05,385. The ld. Authorized Representative stated that out of said share in sale value of ₹57,66,05,385/-, the assessee has paid to 15 land co-owners an advance of ₹7,80,19,021 for the said project Altius and the assessee has also paid 6,00,00,000/- to other land owners in the other proposed project at B.T. Road, Kolkata which was yet to be started.
06. The ld. Authorized Representative submitted that the assessee is a real estate developer and is not a civil contractor. It was argued that the civil contract could not be equated with the contract for sale of flats by relying on the decision of the co-ordinate Bench in the case of Avadesh Builders (2010)37 SOT 122 (Mum). The ld. Authorized
Representative submitted that ICDS-III was not applicable in the case of the assessee for revenue ecognition. Since the definition of construction contract as given in ICDS-III did not apply to the construction of flats by the assessee as a real estate developer which was in the nature of combined contract. The ld. Authorized
Representative further stated that ICDS-III was applicable only if the construction work commenced on or after 1st April 2015, whereas the Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
construction of the instant project ALTIUS had already commenced during the F.Y. 2012-13 as apparent from the reply furnished by the assessee before the ld. AO a copy of which is available at page no.
120 to 125 and also evident from the notice of commencement dated
26.02.2013, given to the Municipal Commissioner under rule 19 of Kolkata Municipal Corporation building Rules 2009 as per building permit no.201 2070165 dated 29th August, 2012, wherein it has been stated that the construction of the building of flats would be commenced on 11th March, 2013, as per building permit dated 29th
August, 2012, a copy of which is available at page no. 27. The ld.
Authorized Representative submitted that ICDS-4 and AS-9 were instant applicable to the assessee. It was argued that assessee has regularly been following AS-9 and Project Completion Method, since start of the project ALTIUS, which has been accepted in the earlier years during the assessment proceeding also. Even on the rule of consistency the same treatment should be given to the Altius project so far as the revenue recognition is concerned unless there is a change in the facts and circumstances.
The ld.
Authorized
Representative placed before the Bench the copy of the assessment order for A.Y. 2017-18, wherein the said treatment has been accepted by the ld. AO. The ld. Authorized Representative also stated that reasons for selection of scrutiny for A.Y. 2017-18 and for A.Y. 2018-19
(the instant assessment year) were similar i.e. income from the real estate business, investment, advances/ loans and sale turnover/
receipts. The ld. Authorized Representative contended that in A.Y.
2017-18, AS-9, has been accepted so far as the method of accounting is concerned. Therefore, the rule of consistency has to be followed and in defense of his argument the ld. Counsel for the assessee relied on the decision of Hon'ble Apex Court in case of Radhasoami Satsang
Vs. CIT (1992) 193 ITR 320 (SC).
Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
The ld. Counsel for the assessee raised without prejudice argument that the addition made by the ld. AO of ₹12,18,46,800/- is patently wrong and even if the Percentage Completion Method was followed as applied by the ld. AO the same would result into a loss of ₹17,83,33,535/-. The ld. Counsel for the assessee further submitted that as per the agreement between the land owners, the total sale value was Rs 111,83,19,211/- which had to be shared between the assessee and the 15 other co-owners in the ratio of 48.44% on 56.51%, whereas the ld. AO has taken the entire sale value of ₹111,83,19,211/- as belonging to the assessee instead of actual share of sale value of ₹55,17,13,826/-. Therefore, the ld. Counsel for the assessee submitted that the excess value to the tune of ₹57,67,05,385/- was taken in the hands of the assessee while computing the impugned addition of ₹12,18,96,800/-. Thus, even if the Percentage Completion Method is applied there would be loss of ₹17,83,33,535/-. The ld. Counsel for the assessee submitted that on both the courses, the ld. AO could not have made any addition. 08. The ld. DR on the other hand vehemently submitted before us that the addition was rightly made by the ld. AO in the hands of the assessee by invoking the ICDS-III and AS-7 which was wrongly reversed by the First Appellate Authority. The ld DR though admitted that there may be factual mistakes while calculating the addition as the entire sale value was taken instead of 48.44% belonging to the assessee however relied heavily on the order of the ld. AO and prayed that same may be restored by reversing the order of ld. Commissioner of Income-tax (Appeals). 09. After hearing the rival conventions and perusing the material available on record, we find that the assessee has undertaken a project named Altius for construction of flats which was commenced in the F.Y. 2012- Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
13 relevant to A.Y. 2013-14 as is apparent from the notice of commencement of construction dated 26.02.2013 addressed to Municipal Corporation, Kolkata, a copy of which is available at page no.127. The assessee had incurred the expenses on the said project and accordingly, the expenses were debited under the head flats construction in progress which was carried over to the current financial year. The assessee again incurred expenses and these were also transferred to the flat work-in-progress and was carried over to the next financial year in the books of accounts of the assessee.
However, according to the ld. AO the assessee has completed the construction of flat to the extent of 73.42% based on the actual expenditure incurred by the assessee vis-à-vis the total estimated expenditure to be incurred on the project. According to the ld. AO, the income should be assessed based on the Percentage Completion
Method in view of ICDS-III and AS-7 issued by the Institute of Chartered Accountant (ICAI). We note that the case of the assessee has been assessed under scrutiny in the preceding assessment year i.e. 2017-18 and the accounting method of re-cognizing the revenue on project completion method has been accepted by the Revenue as is apparent from the assessment order for A.Y. 2017-18, a copy of which is placed in the paper book. Therefore, unless there is a change in the facts ,no deviation is allowed in the current financial year from the practice followed by the assessee as has been held in the case of Radhasoami Satsang (supra), wherein the Hon'ble Apex Court has held that Rule of consistency has to be maintained unless there is a change in facts and circumstances of the case.
010. We further note that even the ld. AO has wrongly computed the addition under the Percentage Completion Method by even taking the whole sale value of the project including the one attributable to the Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
15 co-owners of the project. We note that the assessee and the co- owners shares were 48.44% and 51.56% respectively and thus, out of the total sale value as per agreement between the land owners
₹111,83,19,211/-, the share of the assessee would work out to be at ₹54,17,13,826/- and thus, the ld. AO has taken excess value of to the extent of Rs. 57,66,05,385/- while computing the addition as per the Percentage Completion Method at ₹12,18,46,800/- in the hands of the assessee. We even note that ultimately the project was completed in A.Y. 2021-22 and finally, outcome of the project was loss of ₹18,71,78,668/-, which was declared in the return filed for A.Y. 2021-
22. Besides, we note that in the appellate order the ld. CIT (A) has given a clear-cut finding that ICDS-III and AS-7, were applicable in the instant case for recognition of the revenue and even it is accepted for a moment that AS-9, ICDS-III and Percentage Completion
Method of accounting to be applicable even during the in A.Y. 2017-
18, even then there was loss from the project as stated hereinabove.
The ld. CIT (A) noted that once the practice is followed in one accounting year/assessment year that has to be followed in all the subsequent assessment years also as a matter of consistency as there was no change in the facts and circumstances of the case. The ld. CIT
(A) even noticed that the calculation made by the ld. AO about profits on Percentage Completion Method suffered from a patent error as has been noted above. Therefore, we do not find any infirmity in the order of the ld. CIT (A) and accordingly, the same is upheld by dismissing the ground nos.1,2,3. 011. The issue raised in ground no.4 and 5 is against the deletion of addition of ₹1,66,95,828/- by ld. CIT (A) as made by the ld. AO under the head interest expenses paid to land co-owners.
Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
The facts in brief are that the ld. AO observed during the assessment proceedings that assessee has taken interest bearing funds but has made interest free advances to the land co-owners / parties during the financial year and accordingly, disallowed the proportionate interest not charged from the land co-owners/ parties amounting to ₹1,66,95,828/-. The ld. AO noted that the assessee has taken loan at interest ranging from 9% to 15% from various other parties and had paid interest on unsecured borrowings of ₹3,80,71,552/- to unsecured parties. The ld. AO noted that the assessee has shown interest income of ₹8,76,344/-. Thus, the ld. AO observed that the loans were raised at higher rate of interest while interest free advances were given to various parties. Accordingly, the ld. AO, after taking into account the opening balance of unsecured loans and advances, closing balances of unsecured loans and advances, computed the excess interest paid claimed by the assessee amounting to ₹1,66,95,828/- by applying a rate of 13.19% and added the same to the income of the assessee. 013. In the appellate proceedings, the ld. CIT (A) allowed the appeal of the assessee after taking into consideration the reply and contention of the assessee by observing and holding as under:- “6.14 In Ground 10 of appeal, the appellant has disputed the addition of Rs.1,66,95,828/- made by the AO on account of excess interest expenses claimed by the appellant. The AO has stated that the appellant was taking interest bearing funds, but has made interest free advances to the land co- owner parties during the relevant financial year and has accordingly disallowed the excess interest expenses quantified by him at Rs.1,66,95,828/-, In this regard, it is noted that in the reply dated 12/4/2021 filed by the appellant in response to the show cause notice issued by the AO, the appellant had claimed that the advances made to the 15 land owners are much lesser than the amounts due to be payable to them ( @ 51.56% of total sale proceeds), and that in terms of the development agreement. the appellant had made such advances to the land owners of Rs 13,82,73,184/-. In this regard, the relevantcolumns of the development agreement dated 11/5/2011 have been discussed while dealing with the other grounds of appeal 2 to 9 in paragraphs above. It has been discussed that the entire sale proceeds were wrongly considered in the hands of the appellant, whereas the land co-owner companies Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
were clearly entitled to sale proceeds/saleable are of 51.56%. In this regard, the sale proceeds out of the amount of Rs.111.83 Crore(approx) quantified by the AO which were found attributable to these 15 land co-owner companies was Rs.57,66,05,385/-. Thus, the advances of Rs.13,82,73,184/ given to the land co-owners are duly explained since these parties are entitled to much higher quantum as receivables on account of their share of sale proceeds. The stand of the AO is that there is no specific clause in this regard and that the appellant has only advanced funds to only 6 land owners. However, the fact remains that as per the development agreement dated 11/05/2011, the appellant was required to bear all construction and development cost, whereas these land owner companies were entitled to certain sale proceeds on sale of assets over which they have part -ownership as per the development agreement. The amount advanced by the appellant is substantially lower that its liability till date of share of sale proceeds towards such land co-owner parties. Further, the amount has been advanced in terms of the business necessity in terms of the development agreement only, and the AO has not brought out ant related party transactions also before making theimpugned disallowances. Hence, the stand of the AO in disallowing the interest expenses of Rs.1,66,95,828/- is not found correct, and therefore this addition /disallowance of Rs.1,66,95,828/- made by the AO is directed to be deleted. As a result, ground 10 of appeal is allowed.”
014. Thus, the aggregate amount of advance of ₹13,18,19,021/- has been shown in note no.12 under the head Long Term loans and advances in the audited financial statements. The ld. Authorized Representative stated that out of the total sale value of ₹57,66,05,385 payable to 15
land co-owners, the assessee has given an advance of ₹7,18,19,021/- estimated during A.Y. 2018-19 and balance of ₹49,85,86,364/- remained unpaid. Therefore, there is no question of receiving any interest from land co-owners since the amount paid to them was on account of sale value of the ALTIUS project.
015. The ld. DR on the other hands, relied on the order of the ld. AO.
016. After hearing the rival contentions and perusing the materials available on record, we find that the ld. AO has himself appreciated the facts of the case by taking into account the advances given to 15
land co-owners of ₹7,80,19,021/- against the total amount payable of ₹576605385/- and the balance outstanding was ₹49,85,86,364/-.
Therefore, there is no question charging any interest from advances
Harmony Vinimay Pvt. Ltd; A.Y. 2018-19
to the land co-owners. The ld. CIT (A) has correctly appreciated this issue and given a very clear-cut finding. We also note that the second advance given by the assessee was in respect of another project at BT
Road Kolkata which was yet to be started and same was the position with regard to that advance as the same was also given to land owners. Therefore, considering these facts on record and finding of ld.
CIT (A), we find no infirmity in the appellate order. Accordingly, ground nos. 4 & 5 are dismissed by upholding the order of ld.
Commissioner of Income-tax (Appeals).
017. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 15.01.2025. (PRADIP KUMAR CHOUBEY)
(RAJESH KUMAR)
(JUDICIAL MEMBER)
(ACCOUNTANT MEMBER)
Kolkata, Dated: 15.01. 2025
Sudip Sarkar, Sr.PS
Copy of the Order forwarded to :
The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, 5. Guard file. BY ORDER,//
Sr. Private Secretary/ Asst.