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Income Tax Appellate Tribunal, “E” Bench, Mumbai
O R D E R Per Shamim Yahya (AM) :- These are cross appeals by the assessee and Revenue arising out of learned CIT(A)’s order dated 11.1.2018 and pertain to Assessment year 2014- 15. 2. Grounds raised in assessee’s appeal read as under :
1. In the facts and circumstances of the case and in law, the Ld. CIT(A) ought to have directed the Ld. AO that: (a) the Property held by the appellant is a capital asset and not a business asset; (b) the Property is not transferred within the meaning of Section 2(47) of the Act during the year and accordingly, no capital gains had arisen
2 Trident Estate Private Ltd. up on entering into Agreements to Sell 3 Flats forming part of the Property; and (c) Consequently, to delete the estimated profits of Rs. 2,09,95,330/- assessed under the head profits and gains from business by adopting percentage completion method.
Notes:
(i) Property means co-ownership of the land and building thereon, know as Raj Mahal Juhu, Mumbai and on redevelopment would consist of 8 Floors and 2 Row Houses plus Parkings, out of which the appellant is entitled for 3 Flats on the 4th to 6th Floor (Each Floor consist of One Flat).
(ii) The amount vide "c" is stated at Rs. 2,09,95,330/- after considering the effect of CIT(A) Order instead of Rs. 4,65,79,478/-assessed by the AO.
2. In the facts and circumstances of the case and in law, if the Ground No.l is decided against the appellant, then the CIT (A) ought to have directed the Ld. AO:-
(a) that 33% of the appellant's share in the Property is a "capital asset" and accordingly, as per Section 45(2) of the Act the same be considered as converted into stock-in-trade on 7th August, 2007 (i.e. in the year ended 31st March, 2008), whereby the re-development activities had commenced; (b) to assess the difference between the fair market value (on 7th August, 2007) of 33% of the appellant's share in the Property and the indexed cost thereof, under the head "Long-term Capital Gains" to the extent of 63.43%, being the percentage of work completion; and (c) to replace the fair market value of the appellant's 33.33% share in the Property as part of the "total estimate cost" of the Property instead and in place of actual cost of Rs. 1,32,860/- thereof and accordingly, the profits and gains for the year be determine by applying the percentage of work completion on such revised total estimated cost.
3. It is humbly prayed that the reliefs as prayed for hereinabove and/or such other reliefs as may be justified by the facts and circumstances of the case and as may meet the ends of justice should be granted.
4. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary
Grounds raised in Revenue’s appeal read as under :
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to give the assessee one more opportunity by calling for the required details to prove the assessee's claim of adopting the cost of construction including the land cost of Rs.21,69,00,000/ while calculating
3 Trident Estate Private Ltd. profits and directing the AO to recompute the profit on the said basis, as the CIT(A) is not empowered to set aside the case in the guise of issuing directions.
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing the additional ground raised by the assessee, when the same was not covered under exceptions mentioned in Rule 46(A)(1) and Assessing Officer had not been allowed reasonable opportunity to examine the evidence or document produced as provided in Rule46(A)(3). Rs. 47,090/-
3. Without prejudice to above, the Ld CIT (A) after discussing in para 6.16, thereby rejecting the deduction of Rs. 3.90 Cr. has allowed the same while working of percentage completion at 63.47% which instead works out to 81.42%. Therefore, the CIT (A) has erred in directing the AO to recomputed the profit of Rs. 2,09,95,330/-. Rs. 77,30,009/- 4. Without prejudice to above, CIT (A) has erred in directing to apply cost inflation index for F.Y. 2003-04 and 2007-08 and allowing a deduction of Rs. 1,56,811/- from resultant profit Rs. 47,090/- 5. The appellant prays that the order of CIT (A) on these grounds be set aside and that of the Assessing Officer be restored.
Brief facts of the case are that the assessee Company is engaged in the business of Builders, Contractors, Construction, Engineers, Developers, Designers, Planners, Building Experts and Advisors and others. During the course of assessment proceedings, the Assessing Officer noted from the detail submitted by assessee that it is a co-owner of land and building of property known as "Raj Mahal", Juhu which is being re-developed. It was further claimed by assessee that share on the property was 49.15% of the total build up area. It was also seen that during the year under consideration, assessee has sold 3 flats for a consideration of Rs.6,75,00,000/-, out of an aggregate consideration of Rs.25,00,00,000/-, being assessee's share. Further, Assessing Officer noted that the assessee has mentioned that the percentage of the project is completed at 63.43%. The Assessing Officer noted that assessee has claimed that the said flats are its capital assets and due to pending transfer of flats there is no profit or gains which can be chargeable to tax under the head 'Capital Gains'.
4 Trident Estate Private Ltd.
During the course of assessment the Assessing Officer further observed that the assessee’s main activity is builders, contractors, construction, developers. Further assessee has capitalized all the expenses related to construction of the said building in the Balance Sheet. That moreover, assessee along with other shareholders in the property are joint owners and by agreement dated 14.11.2013, assessee has been given rights to develop the said property. That in view of the same, assessee vide notice u/s 142(1) dated 09.12.2016, was show caused to explain why the sale proceeds received should not be taxed as per Percentage Completion Method as the percentage of completion of project is shown at 63.43%. That the assessee was also asked to furnish the cost of proportionate expenses.
The assessee explained the facts as under :-
“(a) The assessee had acquired 49.15% of land along with structure thereon (Raj Mahal Juhu) in the year ended 31.03.2010 The other co-owners of the land are M/s. Ashish Estates and Properties Private Limited and Mr. Yashwardhan Pramod Goenka. The land along with expenditure on redevelopment of the property from the very beginning has been held as investment i.e. capital asset. For the purpose, the relevant extracts of audited accounts for the year ended 31-03-2010 to 3 1-03-2013 are enclosed. (Page Nos. 1 to 8).
(b) The Property owned by the co-owners was subject to the claim of 2 tenants i.e. Mrs. Jyotiben Trivedi and M/s. Pushpa Properties Private Limited.
(c) The claim of Mrs. Jyotiben Trivedi has been settled by the co-owners by entering into an Agreement dated 27-06-2007 which has been registered in the Office of the Sub-registrar on 28-06-2007. As per Agreement, she has to be provided permanent alternate accommodation in the property.
(d) The liability to settle the claim of M/s. Pushpa Properties Private Limited was that of the assessee. In the current year i.e. in the year ended 31s1 March, 2013, the assessee has settled the claim of M/s. Pushpa Properties Private Limited by entering into an Agreement dated 14-1 1-2013 whereby the said claimant i.e. M/s. Pushpa Properties Private Limited has been agreed to be provided for a permanent alternate accommodation in the said property. Zerox copy of the agreement has been furnished vide our letter dated 10th November, 2016. (e) Consequent to above, the assessee became entitled for 3 flats free from any encumbrances. Accordingly, the assessee agreed to sell these 3 flats
5 Trident Estate Private Ltd. along with its right, title and interest in the undivided portion land by executing Agreement to Sell dated 31-12-2013.The total consideration in terms of the agreement was Rs.25 crores and as against the same, it received till the year end Rs.6.75 crores. (f) The redevelopment of the property was not completed upto 31.03.2014 which Includes the units to be provided to the tenants on settlement of their claims, 3 flats agreed to be sold by the assessee and the other units owned by the co-owners.
Thereafter the assessee contended that in the facts of the assessee’s case in the absence of organised activity for acquiring properties and selling them for earning profits, the sole transaction of acquiring property for redevelopment, which was held as capital asset, cannot be regarded as business within the meaning of section 2(13) of the Act but would constitute capital asset within the meaning of section 2(14) of the Act. It was further submitted that in the notice it is stated that the assessee along with other shareholders in the property are joint owners and by agreement dated 14.11.2013, the assessee has given rights to develop in the said property is incorrect, as :
(a) The other co-owners are not the shareholders of the assessee; and (b) Vide agreement dated 14.11.2013, the assessee has not given rights to develop in the property. Agreement dated 14.11.2013 is with Pushpa Properties Private Limited, whereby its claim was settled. In fact, the assessee has not executed any agreements for giving development rights in the property. It has entered into Agreement to sell its three flats which are held as capital asset and were under construction as upto the year- end.
That in the event the assessee would have not decided to dispose of the flats pending completion, then, the same would have been capitalised in the books and would have been letted out, which is also one of the revenue model followed in a real estate industry. That just because the assessee decided to dispose of the same pending completion cannot and will not change the character of the flats from that of capital asset into Stock-in-trade.
6 Trident Estate Private Ltd.
Thereafter the assessee submitted that the same is capital asset. It was also referred to several case laws in this regard. Thereafter the assessee also made following submissions :-
“In view of the above, both in terms of facts and in law, it will rightly classified the property acquired by it as "capital asset” within the meaning in term in Section 2(14) of the Act. That being so, the gains from entering into Agreement for Sell can only be taxed in the year in which the transfer happens within the meaning of this term as provided for under Section 2(47) of the Act. In this regard, we reiterate the submissions given earlier which establishes that the transfer of capital assets within the meaning of Section 2(47) of the Act had not happened as upto the year.
As per the Agreement to Sell, the assessee's obligation bone structure basis and all the costs and expenses in relation thereto have to be brone by it. We enclose herewith relevant extracts of the Agreement to Sell for the 3 flats for ready reference. Your kind attention is drawn to internal page no. 12 & 13, Zerox copies of the entire Agreements have already submitted vide cur letter dated 10th November, 2016. On a perusal of Para 2 and 3 of the Agreement its will be observed that the assessee's obligation to complete the said flats to the extent of bare-bone basis and then handover the possession thereof subject to receipt of full consideration. However, as upto the year-end i.e upto 31.03.2014, the construction of bare-bone structure was still in progress and consideration received is Rs.6.75 crores as against total consideration of Rs.25 crores. Further, the assessee is constructing the property not in the capacity as developer but as one of the co-owner and for other co-owners from whom their share of cost is/shall be re-couped.
9.1 Hence, gains on Sale of Flats can be brought to tax only on its transfer which has not happened as upto 31.03.2014. That being so, no income has accrued in the year under reference from entering into the Agreements to Sell of flats. Necessary details and submissions in this regard are also submitted vide our letter dated 10th November, 2016. It may also be noted that as upto 31.03.2016 neither conveyance deed has been executed for the transfer of these flats nor possession has been given to the buyers, as construction work is still in progress and as such upto 31.03.2016 also transfer has not happened.
10. In view of the above, for the year under reference, no capital gains has arisen which can be brought to tax in accordance with the provisions of Section 45 of the Income Tax Act, 1961 (the Act) from the transaction of entering into Agreements to Sell for the aforesaid three flats as till 31.03.2014 construction of bare bone structure of the flats was not completed.
11. Without prejudice to the above, as directed by your goodself, we give herebelow details of proportionate expense incurred in relation to construction of 3 flats.
7 Trident Estate Private Ltd.
However, the Assessing Officer was not satisfied. He noted that during the year the assessee has sold three flats for a consideration of Rs. 6.75 crores out of an aggregate consideration of Rs. 25 crores being its share. That on perusal of agreements entered into with purchasers, certain points have emerged which shows the intention of the assessee that it was carrying out the business of builders and developers but branding the same as capital assets/capital gains. In this regard he referred to the portions of the agreement.
Thereafter the Assessing Officer observed that these points show that on receiving full consideration the assessee shall transfer all rights, title and interest in the said flat alongwith car parking to the purchasers. That moreover, on receipt of full payment and all other dues and amounts from purchasers the vendors will hand over the possession of the said premises as absolute owners without recourse to vendors. It was also noted that the assessee has submitted a copy of joint agreement dated 14.11.2013 entered jointly with Pushpa Properties, Ashish Estates & Properties Pvt. Ltd. and Beena Pramod & Yashvardhan P. Goenka. Referring to the said joint agreement the Assessing Officer made following observations :-
“(a) There are three parties in the said agreement i.e assessee company Trident Estates Pvt Ltd (Co-owner), Pushpa Properties Pvt Ltd (Tenant- Second Party) and Ashish Estates & Properties Pvt Ltd & Been Pramod and Yashvardhan Goenka (Jointly known as confirming parties-Co-owners- Third party). (b) By the said agreement, the three parties agreed to develop the property by constructing New Building of Basement + stilt and 8 upper floors (Twin row houses and New Building) on pro-rata basis. (c) M/s Trident Estate has agreed to construct and handover permanent accommodation to Pushpa Properties Pvt. Ltd. (Tenant) for surrendering tenancy rights. (d) The entire process of redevelopment work i.e. obtaining permissions/ commencement certificate etc., is the responsibility of the assessee company and the cost is also to be borne by assessee.
8 Trident Estate Private Ltd.
(e) Vide Clause 6 of page 6 of agreement, it can be seen that assessee is developer to the said redevelopment project and the rights to develop have been assigned to assessee as against assessee's claim that it is holding the property as an investment or capital asset and taxes will be offered as and when capital gain arises.
(f) Vide Clause 21 of page 12 of agreement, it is seen that assessee has the right over FSI / TDR on the property in lieu of redevelopment of property. It is noteworthy to mention that assessee has an entitlement of the FSI/TDR as a builder fit developer of the property and not as a co-owner of the property. (g) Moreover, on perusal of 'Board Resolution of Directors of Trident Estate Pvt. Ltd. attached to the agreement (which is a part and parcel of agreement), it is seen that Board of Directors have resolved as under: "Resolved that the approval of the Board be and hereby accorded for approval of all terms Et conditions of the Agreement to be executed by the company as Owner/Co-owner St Developer with Pushpa Properties Pvt Ltd(tenant) and Ashish Estates & Properties Pvt Ltd., Beena Goenka and Mr Yashwardhan Goenka (Confirming party and Co- owners) to provide free of all costs to tenant as and by way of permanent alternate accommodation on ownership basis, a residential premises admeasuring 5196.11 sq.ft.....
From the above the Assessing Officer noted that the board of directors of the assessee- company have accorded their approval to develop the said property which is also the main business activity of the assessee company. That though the property has been constructed jointly, assessee was the developer of the property and development rights have been given to assessee by virtue of the above agreement. He further noted that the Board of Directors are same as that of Pushpa Properties Pvt. Ltd. (tenant). He also noted that Board of directors are same as that of Trident Estate Pvt. Ltd. (?)
From the above the Assessing Officer held that it is an arrangement to by-pass the recognition of revenue by adopting colourable device. The owner and the tenant though recognized separately in the eyes of law, are run by same set of directors or common persons to give a different colour to the transactions. In this regard he referred to the decision of the Hon'ble Supreme Court in the case of McDowell & Co Ltd Vs Commercial Tax Officer (1985) 22 taxmann 11 (SC). The Assessing Officer further referred to the annexure-A of the joint agreement as under :-
9 Trident Estate Private Ltd.
• “the premises where the development and construction work is going on was partly rented to M/s Pushpa Properties Pvt. Ltd. (Tenant in agreement) by tenancy agreement dated 30.06.2003 by Tarun Nandkumar Seksaria.
• Thereafter, M/s Trident Estate had acquired 1/3rd share in property on 26.03.2004 from Nandkumar K. Seksaria. Subsequently, after a gap of 5 years assessee has acquired 12.99% share out of 33.33% undivided share on 16.10.2009 from Tarun Nandkumar Seksaria.
• On the same day i.e. 16.10.2009, M/s Ashish Estates & Properties Pvt. Ltd. (Co-owners in agreement) has acquired 30.51% share out of 33.34% from Harsh Nandkumar Seksaria.
• Again Tarun Nandkumar Seksaria has transferred his 20.34% rights out of 33.33% to Pramod K Goenka and by gift deed. Pramod Goenka gifted his entire share of 20.34% to Bina P. Goenka and Yashvardhan P. Goenka (Co-owners in agreement).”
The Assessing Officer observed assessee’s affairs are very intricate and it is difficult to pierce the corporate veil. Nevertheless he found this a fit case for piercing of corporate veil. Accordingly the Assessing Officer made the impugned assessment as under :- “In view of the detailed discussion made above, the undersigned is of the firm view that assessee is carrying on business activity by taking up redevelopment project and the proceeds received from sale of 3 flats amounting to Rs.25,00,00,0007- (being flat No.s 4, 5 & 6 exclusively allotted to assessee in the agreement) are nothing but revenue earned during the course of business activity. Accordingly, the receipts are taxed by adopting the percentage completion method as the percentage of completion of project is shown at 63.43% by assessee and the profit is estimated as under:
Computation of income from business or profession:
63.43% of total consideration from 3 flats Rs.15,85,75,000/- (Rs.25,00,00,000/-* 63.43/100)
Total cost including land cost as on 31.03.2016 (Rs.17,65,65,540/- * 63.43/100) Rs.11,19,95,522/- (Rs.28,15,59,417 (-) Rs.10,49,93,877/- Cost recouped from co-owners)
Profit from business & profession Rs.4,65,79,478/-
10 Trident Estate Private Ltd.
Upon assessee’s appeal learned CIT(A) noted and repeated facts of the case and was of the same opinion as that of the Assessing Officer. That the assessee is engaged in the business of constructing and developing Rajmahal Property, Juhu, Mumbai on a continuous basis as a stand alone entity for itself and on behalf of other two co-owners. That the said property was held by the assessee as business asset and not as a capital asset. Thereafter the learned CIT(A) reiterated the facts of the case again and concluded as under :-
6.12 In nutshell, it is held that the assessee, Trident Estate Private Limited, carried on the business activity of constructing and redeveloping the Rajmahal Juhu Mumbai property during FY 2013-14 relevant to AY 2014-15 and hence the profits and gains from the sale of three flats in Rajmahal Juhu Mumbai property constituted 'income from business and profession' and these 'profits and gains of business and profession from the carrying on of the activity of constructing and redeveloping Rajmahal, Juhu Mumbai property upto 31/3/2014 to the extent of completion of work shall be taxed as ' Income From Business and Profession' along with income from other sources of Rs. 6,96,215/- shall be taxed as total income of the assessee for AY 2014-15. Only issue is that of computation of 'income from business and profession' and that is dealt with in following paragraph.
Thereafter learned CIT(A) dealt with the working of the income of the assessee. He noted that the assessee has challenged the working of the profits of Rs.4,65,79,478/- on the basis of percentage completion method and later on submitted that the cost of construction from other co-owners pending recoupment from other co-owners as on 31.3.2014 of Rs.3,90,00,000/- was not included while working out the construction cost and this figure of Rs 3,90,00,000/- needs to be included in the cost of construction and the percentage of 63.43% applied and profits worked out as follows in letter dated 5/12/2016 :-
S.N. Particulars Amount Rs. in crores. A. Details of Consideration Receivable on entering into Agreement to Sell dated 31. 12.201 3 1 Total Consideration 25.00 2 Consideration received upto 31.03.2014 6.75 3 % of Sale consideration received 27%
11 Trident Estate Private Ltd.
B Details of Cost incurred and cost to be incurred for three flats 1 Total Estimated Cost to be incurred including Land Cost 21.69 2 Land Cost included in above 3.88 3 Total Estimated Construction cost, excluding Land Cost (1-2) 17.81 4 Land and Construction Cost incurred as on 31. 03.20 V: 28.16 Less: (a) Cost of construction re-couped from other co-owners (10.50) (b) Cost of construction pending to be re-couped from other co-owners (3.90) 13.76 5 Land Cost incurred as on 31.03.2014 3.88 6 Construction Cost incurred as on 31.03.2014 9.88 7 % completion as on 31.03.2014 including Land Cost (4/1) 63.43% 8 % of completion based on only construction cost incurred (6/3) 55.46% Learned CIT(A) was of the opinion that percentage completion method has been adopted by the Assessing Officer, which is well recognised method. He upheld the action of the Assessing Officer adopting percentage completion method. Thereafter learned CIT(A) rejected the assessee’s claim for deduction of Rs. 3.9 crores for deduction by way of recoupment from other co-owners by holding that it was not substantiated. Thereafter learned CIT(A) granted part relief in computation by observing as under :-
“6.17 However even though the system and method adopted by the AO is fair, reasonable and correct, there appears to be a mistake in adoption of erroneous base of Rs.17,65,65,540/- representing only cost of construction instead of adopting the cost of construction including the land cost of Rs.21,69,00,000/- to be reduced from the adopted percentage of completed work percentage of 63.43% since receipts are also worked out at Rs.15,85,75,000/ @ 63.43% of the total receipts accruing at Rs.25,00,00,000/- which works out as follows :-
A—63.43% of Total Receipts of Rs.250000000......... RS.158575000 B—63.43% of Total Estimated Expenses of Rs.216900000.....Rs. 137579670 C—Profits of Business ((A Minus B )...................... .....Rs. 20995330.
6.18 It is submitted that the information was already furnished before the AO vide letter dated 05/12/2016 and also application for rectification filed dated 16/02/2017, but the AO did not consider the same.
6.19 Hence, amount of profits and gains from the carrying on of the business activity of construction and redevelopment of Rajmahal, Juhu Mumbai taxable up to and including FY 2013-14 relevant to AY 2014-15 was adopted at Rs.2,09,95,330/-instead of Rs.4,65,79,478/- worked out by the AO. The 12 Trident Estate Private Ltd.
Assessing Officer is directed to verify once again relevant documents before computing the cost.”
Lastly learned CIT(A) noted that following additional ground of the assessee :- “Without prejudice to Ground No.1 of the 0riginal ground of appeal and in the alternate, in the facts and circumstance of the Ground No. 1 is decided against the appellant. Learned CIT(A) be pleased to hold that :- (a) 33% of the appellant's share in the property as capital asset and accordingly in terms of provisions of section 45(2)of the Act should be held as converted into stock-in-trade in the year ended 31st March 2008 being the year in which re-development activities had commenced.
(b) Consequent to the above, in quantifying the assessment year under reference by applying percentage Completion Method, the fair market value of the appellant’s share 33.33% share in the property should be considered as unadmissible deduction. For the purpose the date of conversion should be regarded as 7th August, 2007 whereby the re- development activities had commenced.
(c) Accordingly, the difference between the fair market value of 33% of the appellant's share in the property and the indexed cost should be brought to tax under the head long term capital gains for the assessment year under reference to the extent of percentage applied in quantifying the profits and gains for the assessment year under reference. Note: Consequent to the above, the Additional ground No. 2 filed by letter dated 12th April, 2018 should be considered as cancelled and the Original Ground of Appeal
No.2 should be read as Ground No. 3.3. It is humbly prayed that the reliefs as prayed for hereinabove and/or such other reliefs as may be justified by the facts and circumstances of the case and as may meet the ends of justice should be granted.
3. It is humbly prayed that the reliefs as prayed for hereinabove and/or such other reliefs as may be justified by the facts and circumstances of the case and as may meet the ends of justice should be granted.
4. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary."
16. Considering the above, learned CIT(A) gave following directions :-
“All the three sub grounds are inter related are concerned with the question of conversion of capital asset into stock in trade on 7.8.2007 during FY 2007- 08 relevant to AY 2008-09 when the cost of land was shown at Rs. 1,32,500/- which was purchased during FY 2003-04 for Rs.1,32,500/- and even if the contention of the assessee in grounds of appeal no.3.1 were to be accepted since assessee started construction and development activity
13 Trident Estate Private Ltd. during FY 2007-08 since the company spent Rs. 2,76,74,651/- on cost of construction during FY 2007-08. even then if the rates of indexation for FY 2003-04 to 2007-08 of 129 divided by 109 were applied, then resultant figure will work out to Rs.1,56,811/- and this amount of indexed profits will be given as a deduction from the resulting profits of Rs.2,09,95,330/- and net amount of Rs.2,08,38,519/- will be taxed as income from business for AY 2014-15.”
17. Against the above order the assessee and Revenue are in cross appeals before us.
We have heard both the counsel and perused the records. We find that the assessee-company is engaged into redevelopment of property in co ownership with two other parties. The assessee’s claim is that the said property is capital asset of the assessee and not a business venture. The assessee has received Rs. 6.75 crores against proposed sale of his share of the property out of total consideration of Rs. 25 crores. The assessee’s claim is that registration and handing over the possession of the property has not been done. The property is still under development stage. Moreover, the assessee has also to recoup some of the development expenses from some other co- owners. In nutshell, it is assessee’s claim that the project is incomplete. Hence, the assessee’s claim is that the assessee is not liable to pay any tax on this. On the other hand the Assessing Officer’s view is that the assessee is engaged into the business of development and since work is complete to the extent of 63.43%, hence, the Assessing Officer has applied percentage complete method and computed the impugned gain to the assessee.
Learned CIT(A) principally upheld the action of the Assessing Officer. However, he has granted part relief by directing the Assessing Officer to make adjustment in the cost of the project.
We note that as regards the claim of the assessee that it is not a business venture but a capital asset of the assessee, the same is not based upon convincing material. The assessee’s claim is that since inception the assessee has debited all cost of the project as investment and the Revenue has 14 Trident Estate Private Ltd.
always accepted the same. We find that on the facts and circumstances narrated above the assessee’s plea that it is a capital asset and not a business venture has been rightly rejected by the authorities below. The detail of different agreement referred by the authorities below in their orders referred above duly corroborate this aspect.
Now we come to the issue of computation of gain. We note that it is undisputed fact that since inception the assessee has capitalised cost of redevelopment. In this regard we may gainfully refer to the balance-sheet for previous year, which is not disputed by the Revenue which is as under :-
Non-current Investments (Refer Note No. 14 & 15
As at March 31, 2014 March, 31, 2013 Land cost (A) - 38,801,055 Add : Expenditure incurred on re-development of Immovable Property pending completion (net)
Opening balance - 154,083,518 - Direct cost of construction - 19,472,997 Salaries, allowances and staff welfare expenses 2,092,349 Other overheads (net of recoveries) - 414,327 Closing balance (B) - 176,063,191 Less : (A+B) - 214,864,246 Cost of construction re-couped from other co-owners - 93,493,877 121370,369 Total 121,370,369
Working for the current year in this regard is as under :-
Other non-current assets (Refer Note No. 14 & 15 As at March 31, 2014 March 31, 2013 Investment in property Land cost (A) 38,801,055 - Add : Expenditure incurred on re-development of Immovable Property pending completion (net)
15 Trident Estate Private Ltd.
Opening balance 176,036,191 - Direct cost of construction 62,432,888 - Salaries, allowances and staff welfare expenses 2,380,837 - Other overheads (net of recoveries) 1,881,446 - Closing balance (B) 42,758,362 - Less : (A+B) 281,559,417 - - (a)Cost of construction re-couped from other co-owners 104,993,877 - (b)consideration received from purchasers 67,500,000 (C) 1,72,493,877 - - Total 10,90,65,540
In this regard we note that it is not disputed that upto now the assessee has debited the cost of redevelopment along with land cost and capitalised the same in the balance sheet. In the present assessment year the assessee has received Rs. 6.75 crores against proposed sale out of its share of three flats out of total consideration of Rs. 25 crores. The authorities below have not disputed that the project is not complete. Further redevelopment is under progress. Final agreement has not been registered, and possession has not been passed over to the proposed buyers. Redevelopment cost in part is still to be recovered from other co-owners. In these circumstances we have to examine whether the Revenue can thrust upon the assessee’s percentage completion method of accounting that also for the first time. We note that completed contract method and percentage complete method in the extant period were duly recognised method of accounting for construction project. In this regard we may gainfully refer to the decision of Hon'ble Supreme Court exposition in the case of CIT Vs. M/s. Bilahari Investment (P) Ltd. (Civil Appeal No. 1625 of 2008 vide order dated 27.2.2008):-
“15. Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method.
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Under completed contract method, the revenue is not recognised until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to P & L account. The said method determines results only when contract is completed. This method leads to objective assessment of the results of the contract.
On the other hand, percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognised under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract.”
From the above it is clear that percentage completion method and competed contract method are both recognised method of construction project. Similar proposition was laid down by Hon'ble Supreme Court in the case of CIT v Hyundai Heavy Industries Co. Ltd (2007) 291 ITR 482 wherein Hon'ble Apex Court held as follows :- "Lastly, there is a concept in accounts which is called the concept of contract accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely, "completed contract method" and "percentage of completion method". To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No.7. They are "completed contract method" and "percentage of completion method".
Thus, we note that completed contract method and percentage complete method both were recognised method of accounting for computation of gains from construction contract. Section 43CB was inserted by the Finance Act, 2018 w.e.f. 1.4.2017 which provides that profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards. However, this section was not in existence and applicable in the assessment year 2014-15 which we are concerned with. Thus it is amply clear that percentage complete method and completed contract method were both acceptable method and accounting of construction contract in the impugned period. We note that the assessee has 17 Trident Estate Private Ltd.
all along treated the said project as capitalised item and debited all the expenses to the capital account. This method has been accepted by the Revenue in the past. It is also undisputed that in the current year project is not at all complete. Redevelopment is still in progress. The assessee has also to recoup expenditure from other co-owners. Agreement to sale has not been registered, possession of the property has not been handed over. In these circumstances, assessee cannot be thrust upon percentage of completion method of accounting by the Assessing Officer. Hence, though we do not agree with the assessee that it is not a business project, we agree that the project is incomplete and in substance if assessee wishes to offer for taxation its gain on completion of project i.e. apply completed contract method the same cannot be rejected. This proposition is duly supported by Hon'ble Supreme Court exposition as above. Also percentage completion method has been made compulsory by subsequent insertion of section 43CB of the Act, which is not applicable to the impugned assessment year.
Furthermore, we find that this issue is revenue neutral. As and when the contract/project is complete, the gain would be exigible to tax. Thus the effect is only revenue neutral as revenue shall collect necessary taxation when the project is complete. In such circumstances also Hon'ble Supreme Court decision in the case of Union of India & Ors v Exide Industries & Anr (Civil Appeal No 3545/2009 dated 24 April 2020) is in favour of the assessee. Accordingly, we hold that on the facts and circumstances of the case thrusting of percentage completion method upon by the Revenue is not sustainable. Hence, computation of gains adopting the said method is not sustainable. Hence, we set aside the orders of the authorities below and delete the addition.
Since we have already held that the Revenue was not justified in applying percentage completion method and computing gains in the current assessment year, other issues raised in these appeals are only of academic interest. Hence, we are not engaging into the same. Hence, we set aside the 18 Trident Estate Private Ltd.
orders of the authorities below and decide the issue partly in favour of the assessee.
In the result, assessee’s appeal is partly allowed as above and Revenue’s appeal is treated as infructuous.
Pronounced in the open court on 27.4.2021.