CAVALCADE PROPERTIES P. LTD,MUMBAI vs. ITO WD 12(1)(4), MUMBAI

सुनवाईकीतारीख/ : 12.09.2019 Date of Hearing घोषणाकीतारीख / : 30.10.2019 Date of Pronouncement आदेश / O R D E R

Per S. Rifaur Rahman, Accountant Member:

Building Percentage completion (approx) 88 A B 86 C 47 D 37 60 E F1 76 F2 53 F3 62 F4 36 G1 88 69 G2

DETAILS OF ROISTERED AGREEMENTS VIS-A-VIS REVENUE RECO6NITION BUILDING AGREEMENT LESAL CHARGES ELECT. METER AMOUNT INCOME VALUE IN RS. IN RS. DEPOSIT IN RS, RECEIVED IN RS. DECLARED IN RS, A 148,265,300 380,000 3,691,125 152,336,425 134,105,746 B 135,379,975 350,000 3,467,250 139,197,225 119,302,320 C 82,539,039 190,000 1,956,375 84,685,414 39,657,124 D 40,646,150 100,000 817,125 41,563,275 0 E 89,602,500 220,000 2,042,625 91,865,125 55,375,012 F1 56,834,199 250,000 1,410,750 58,494,949 44,728,061 F2 78,831,355 320,000 1,859,625 81,010,980 42,548,345 F3 76,171,830 290,000 1,795,500 78,257,330 48,418,059 F4 22,061,250 100,000 513,000 22,674,250 0 61 38,003,750 220,000 948,750 39,172,500 34,535,228 62 27,402,350 160,000 646,875 28,209,225 19,591,604 TOTAL 795.737,698 2,580,000 19,149,000 817,466,698 538,261,499

DETAILS OF UNREGISTERED A6REEMENTS VIS-A-VIS REVENUE RECOGNITION 8UILDIN6 PERCENTAGE ASREEMENT AMOUNT INCOME @ COMPLETION VALUE [IN RSJ RECEIVED [IN RS.J %OF WORK CERTIFIED BV ......... COMPLETED OF ARCHITECT AMOUNT RECEIVED {XN RS.J A 88 24,352.750 24,053,173 21,165,912 B 86 32,661,365 26,732,733 22,990,150 c 47 94.036.625 41.583,533 19,544,261 D 37 142,321.805 39,030,386 14,441,243 e 60 106,909,275 75,765,116 45,459,069 F1 76 55,Z53,775 46,896,187 35,641,102 F2 53 38,849.005 27,931,775 14,803,840 F3 62 42,183,740 30,283,245 1 8,775,611 F4 ' 36 102.136,436 42,791,769 15,405,037 G1 88 10.343.125 10,008,441 8,807.428 G2 69 23,568,030 17,629,382 12,302,274 TOTAL 672,611,931 383,904,740 229.335.927

11. During the assessment proceeding, AO verified the details of sundry creditors submitted by the assessee. In order to verify the correctness of the balances, notices u/s 133(6) of the Act. In the case of M/s D. S. Argade Promoters & Builders, the AO observed that closing balance as per the assessee’s books of 11 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. account is Rs. 7,16,03,616/- on 31.03.12, whereas the company (D. S. Argade Promoters) has shown Rs. 2,82,06,255/-. There is a difference of Rs. 4,33,97,361/- and the same was asked to the assessee to substantiate the difference, but assessee has not filed any reconciliation or explanation with regard to the above difference and the same was disallowed and added to the net profit.

5.1 During the appellate proceedings, the appellant has made following submissions:

The AO, in the Order, has not discussed the submissions filed by the Appellant during the course of the scrutiny assessment proceedings which provide the rationale for not offering the income from sale of flats in building D and F4 to tax during the A Y 2012-13. We have outlined in below the principle submissions which explain the reasons and rationale thereof 1.1.1.1 Submission #1; The Appellant has followed a consistent accounting policy which is in accordance with the applicable laws at the time • During the financial year ('FY') 2011-12, relevant for the Assessment Year ('AY') 2012-13, the Appellant was governed by the provisions of the then Companies Act, 1956 ('Old Cos Act'), which was in force at the time.

• Section 210 of the Old Cos Act provided that every company is required to prepare its financial statements in accordance with the Accounting Standards ('AS') issued by the Institute of Chartered accountants of India ('ICAI'). Consequently, the Appellant was bound by law to follow the AS, and not doing so would have resulted in contravention of applicable law at that time.

• The AS-7 along with Guidance Note on 'Recognition of Revenue by Real Estate Developers' issued in 2006 (the 'Guidance Note') were both applicable to the Appellant for the FY 2011-12'.

• As per the accounting policy consistently followed by the Appellant, revenue is recognized on sale of flats / units of under construction buildings as per the Percentage of Completion Method ('POCM') and when the following conditions are cumulatively satisfied:

- Construction of the building is at least 40 percent complete; and - Agreements, to be entered into with the purchaser of flats / units, are executed and registered, as all the significant risks and rewards of ownership gets transferred to the buyers (Refer note no. 1.08 of the Notes to Financial Statements, which are enclosed as Annexure 1A); and - POCM to be applied on the agreement values of the flats / units.

The accounting policy as stated above in accordance AS-7 and the Guidance Note, both of which were applicable to the Appellant for the FY 2011-12. AS-7 clearly provides that contract revenues should be 14 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. recognized only when, inter-alia, it is probable that the economic benefits associated with the contract will flow to the enterprise. The Guidance Note also states that one of the conditions for recognition of revenue for a real estate developer is that there should be no significant uncertainty existing regarding the amount of consideration that will be derived from the real estate sales.

• In real estate projects, there is always uncertainty on realization of revenue, especially in the initial stages of the project, as to whether the project will achieve ultimate collection. In view of the existing market conditions and risks involved in executing the construction of the buildings, the Appellant has adopted a policy that the economic benefits would probably accrue to it and there would be certainty of realizing the consideration only when the construction of the building is at least 40 percent complete and when the agreement executed with the buyer is registered with the statutory authorities. The threshold of 40 percent is adopted by the Appellant since, during initial stages of construction of the building, there is always an uncertainty with regard to the completion of the project / building.

• The threshold for recognition of revenue under POCM, varies in respect of each real estate company, based on the individual facts. However, it should be noted the threshold of 40% adopted by the Appellant is not uncommon in this industry. For instance, the annual report of Vipul Ltd for FY 2011-12 stated the following as its accounting policy on revenue recognition:

Revenue relating to sale of residential and commercial plots is recognized on proportionate basis when 50% of the progress has been achieved as measured in terms of actual cost incurred to total estimated cost subject to the execution of the agreement to sell.

• The accounting policy adopted by the Appellant, as discussed above, has been consistently followed by it in the preceding years. Considering that the construction of none of the buildings was completed upto 40% in the preceding years, the Appellant had not offered any income to tax at that time. The said accounting policy was disclosed to the AO at the time of scrutiny assessment proceedings for preceding AYsas well and was never disputed / challenged by the AO (copy of financial statements, assessment order for Assessment year ('AY') 2010-11 and 2011-12 are enclosed as Annexure IB).

• Consequently, the A O has disregarded the position previously accepted by the income-tax department, and erred in bringing to tax the income from sales of flats / units in buildings D andF4 in AY 2012-13, 1.1.2 Submission #2: The additional income brought- to tax by the AO in the AY 2012-13 has already been offered to tax in subsequent AYs by the Appellant Without prejudice to the above, it is respectfully submitted that the addition made by the learned AO on this aspect is merely a timing issue, ie instead of offering the income in subsequent year, the same income would be chargeable to tax in the captioned.

During the FY 2012-13, the construction of buildings D and F4 was completed by more than 40%. Consequently, the Appellant has offered the profits from sale of flats in these buildings (where such sales have been registered) in the AY 2013-14 itself.

In this regard, the computation of total income and a statement showing that income from building D and F4 are offered to tax in subsequent years where the said buildings are more than 40% complete is enclosed as Annexure 1C. Since the said addition is merely a timing issue, and the rate of tax is not changed in case of companies the said addition would be revenue neutral and would not result in any loss to the exchequer.

In view of the above, since in the facts of the present case, the transaction would be revenue neutral, no addition should be made to the total income of the Appellant for the captioned AY with regard to this aspect.

In this regard, reliance is placed on the following judicial precedents:

- CIT vs Bilahari Investment (P) Ltd (2008) (299ITR 1) (SC), wherein it was held that- "...Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral... "

- CIT v. Realest Builders & Services Ltd (2008) (307 ITR 202) (SC), wherein it was held that ".... If the Assessing Officer comes to the conclusion that there is under-estimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in under-estimation of profits and is. therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral... "

- CIT vs Nagri Mills Co Ltd (1958) (33 ITR 681) (Bom HC), wherein it was observed that- 'We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The questionas to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different: but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of 19 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies infighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of the character which do not affect the taxability of the assesses or the tax that the Department is likely to collect from him whether in one year or the other. "

CITvs TriveniEngg. & Industries Ltd (2011) (336ITR374) (Delhi HQ, wherein it was held that- " ...However, in the projected scenario of this case after taking stock of the entire situation, we are of the opinion that it is not necessary to conclusively answer the aforesaid questions formulated. It is because of the reason that we find that the entire exercise is revenue neutral. It may be pointed out that it is a matter of record that against the provision of Rs. 139 lakhs, the assessee had to actually incur expenditure ofRs. 218.03 lakhs, i.e., more than the provision made. It is undisputed that the expenditure incurred by the 20 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. assessee on the project is admissible deduction. The only dispute that the Revenue seeks to raise is regarding the year of allowability of expenditure. Considering that the assessee is a company assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowabilitv of expenditure is. in any case, revenue neutral. "

1.1.3 Submission #3: Allowing deduction for the cost of construction • Without prejudice to above submissions, even if it is assumed that the proportionate agreements value from buildings D and F4 should be chargeable to tax in the captioned AY, then, the cost of construction should also be allowed as a deduction in computing the total income of the Appellant for the captioned AY. However, the learned AO erred in not allowing the deduction for cost incurred in respect of those two buildings.

• In this regard, we wish to submit that, it is a fundamental principle /canon of taxation that only the "net income " should be chargeable to tax and not the gross income, unless specifically provided in the Act. Reliance in this regard is placed on the following judgements:

- Calcutta CoLtdvsCIT(1959) (37ITR1) (SC)

"........... The appellant here is being assessed in respect of the profits and gains of itsbusiness and the profits and gains of the business cannot be determined unless and until the expenses or the obligations which have been incurred are set off against the receipts. The expression "profits and gains" has to be understood in its commercial sense and there can be no computation of such pro fits and gains until the expenditure whcih is necessary for the purpose of earning the receipts is deducted therefrom whether the expenditure is actually incurred or the liability in respect thereof hasaccrued even though it may have to be discharged at some future date. As was observed by Lord Herschell in Russel v. Town and County Bank Ltd. [1888] 13 App. Casals. .........

The duty is to be charged upon 'a sum not less than the full amount of the balance of the profits or gains of the trade, manufacture, adventure, or concern :' and it appears to me that that language implies that for the purpose of arriving at the balance of profits all that expenditure which is necessary for the purpose of earning the receipts must be deducted, otherwise you do not arrive at the balance of profits, indeed, you do not ascertain, and cannot ascertain, whether there is 22 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. such a thing as profit or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word 'profits' in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name 'profits ' can properly be applied. "

Gresham Life Assurance Society vs Styles (1892) (3 TC 185)

... When we speak of the profits and gains of a trader we mean that which he had made by his trading. Whether there be such a thing as profit or gain can only be ascertained by setting against the receipts the- expenditure or obligations to which they have given rise....

Topman Exports vs CIT (342 ITR 49) (SC)

"... ... ... The word "profit" means the gross proceeds of a business transaction less thecosts of the transaction. To quote from Black's Law Dictionary (Fifth Edition):

Profit. Most commonly, the gross proceeds of a business transaction less the costs of the transaction, i.e. net proceeds. Excess of revenues over expenses for 23 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. a transaction; sometimes used synonymously with net income for the period. Gain realized from business or investment over and above expenditures.

'Profits', therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a per son.

Kaluram Ganeshram (HUF) vs CIT (1 72 ITR 154) (MP HQ ".. When section 2(24) defines the term 'income' it does not make any distinction between the gross income and taxable income for the purposes of taxation. However, there is no doubt that it is not the gross income, but it is the taxable income which basis of determination of the amount of tax payable... "

If the deduction for the cost of construction of the buildings D and F4 is allowed, the net income which would be chargeable to tax in the captionedAY would be reduced toINR 19,06,459 (Copy of computation of corresponding cost related to building D and F4 is enclosed as Annexure ID)

In any case, it seems that the learned AO agrees with the above proposition that the deduction for the cost of construction should be allowed since in the letter rejecting the Appellant's application for stay of demand, dated May 6, 2015, the learned AO has stated that even after allowing deduction for cost, there is a huge demand (Copy of rejection letter dated May 6, 2015 is enclosed herewith as Annexure IE)

5.2 I have considered the facts of the case, submissions and contentions of the Appellant and also the order of the AO. From the audited financials of the Appellant, it is noted that the Appellant has followed the provisions of the Companies Act, 1956 which provides to prepare the financial statements in accordance with the mandatory Accounting Standards (AS). The Appellant has followed AS-7 along with Guidance Note on 'Recognition of Revenue by real estate developer' issued in 2006. It is also observed from the audited financial and assessment order of earlier years that the 25 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. appellant has been consistently following AS-7 along with the said Guidance Note.

5.3 On a careful reading of AS-7 and Guidance Note, it is clear that there is no stipulation on completion of minimum percentage of construction for recognition of revenue. The Accounting Standard and Guidance Note refer to recognition of income in case of real estate developer when there is no significant uncertainty regarding the amount of consideration that will be derived from the sale of flat and when the significant risk and reward of ownership is transferred to the buyer. In absence of specific stipulation of percentage in AS and Guidance Note, there is variation in adopting the threshold percentage for recognition of revenue in Real Estate Industry. The variation ranges from 25% to 50% based on individual facts and circumstances of each case. There is no dispute that the Appellant has been consistently following the method of declaring income based on POCM on achieving 40% completion of construction. Further the AO has accepted this method followed by the appellant in earlier assessment years without bringing out any faults as to how the method distorts the project revenue recognition. Since there is neither any change in the 26 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. method adopted by the Appellant nor any substantial change in law from earlier year, there is not much basis for the AO to change the method of accounting adopted by the appellant in this year based on method of accounting of earlier years. I have also gone through the judicial pronouncement relied upon by the Appellant. The case law cited by the Appellant are squarely applicable to the facts of Appellant's case. Reliance is also placed on SC judgement in case of CIT vs Realest Builders & Services Pvt Ltd (2008) [170 Taxman 218) wherein it is held that tax department needs to provide facts and figures that the method adopted by the tax payer results in under estimation of profits for changing the method of accounting u/s 145, otherwise it will be presumed that the entire exercise is revenue neutral. AO has not pointed out any discrepancy that the method followed regularly by the assessee was distorting or under estimating the profits and since no such facts and figures have been brought on record by the AO, the method followed by the assessee cannot be interfered with.

5.4 In any case, the Appellant has submitted that the income from these two buildings has been offered to tax in the subsequent assessment year and the 27 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. assessment order for that year is also passed. Thus, it is merely a timing factor of one year and thus, there is no loss to revenue. In view of this discussion it is noted that the addition made by the AO on account of proportionate agreement values in respect of executed and registered agreements, based on POC for buildings D & F4 cannot be sustained in appeal and is directed to be deleted. Accordingly this ground of appeal is allowed.

15. With regard to the second issue, assessee has filed the following submission before Ld. CIT(A):-

2.3.1 Submission #1: Accounting policy of the Appellant is in accordance with POCM as prescribed in the AS and Guidance Note • As submitted above in para 1.3.1 the accounting policy followed by the Appellant was in accordance with the applicable AS and Guidance Note, which the Appellant was bound to follow per the Old Cos Act and any different manner of accounting and revenue recognition in its books would result in contravention of the applicable law at the time.

• As per the Guidance Note, recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraph 10 and 11 ofAS-9 - Revenue recognition which is reproduced below, are satisfied:

"10. Revenue from sales or service transactions should be recognized when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.

(i) the seller of goods has transferred to the buyer the property in the goods for a price or 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; and 29 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd.

(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods."

• In this regard, the Guidance Note specifically states that all significant risks and reward in the fiats are said to have been transferred to the buyer when the seller has entered into a legally enforceable agreement for sale with the buyer. This condition cannot have said to be satisfied till such time the agreement for sale has been executed and registered.

• In the Appellant's case, entering into the MOU would not be sufficient to transfer all risks and rewards in relation to the fiats/units to the intended buyer. As can been seen in the MOU, it is merely a confirmation that the intended buyer is willing to purchase the fiat / unit and the same should be reserved for him until such time as the actual sale is consummated by way of the executed and registered sale agreement.

Empirically as well, it has been seen that cancellations at the MOU stage are far higher than cancellations once the buyer has entered into a registered sale agreement. A comparative statement depicting the same upto the FY 2011-12 is enclosed as Annexure 1H. The fact that the buyer also pays stamp duty on the 30 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. registered sale agreement adds further assurance that he intends completing the sale transaction.

'• For the above reasons, it would be a gross violation of the applicable AS and the Guidance Note to record revenue in the Appellant's books of accounts merely on entering into the MOU.

• Further, the mere existence of a contract, whether written or oral, does not satisfy the conditions for recognition of revenue under the AS and Guidance Note. A legally enforceable contract which enjoins a sale would require a proper conveyance deed, duly executed and registered, on which stamp duty has been paid. Absent this, a sale cannot be said to have taken place. Consequently, in accordance with the Guidance Note, the Appellant has not recognized revenue until such time as the agreement for sale of the flats with the buyer has been executed and registered and has treated the amount received pursuant to the MOU as advances in its books of accounts.

• The aforementioned accounting policy adopted by the Appellant is not uncommon or specific only to the Appellant. It is widely followed in the real estate industry. The following are the examples of the 31 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. accounting policies by certain leading real estate companies:

- Marathon Nexgen Realty Ltd-Annual Report for FY 2011-12 "Revenue in respect of realty development activities is recognized upon transfer of significant risks and rewards to the buyer in terms of underlying sale agreement, provided it is not unreasonable to expect ultimate collection. The Company perceives that risk and reward stand transferred to the buyer when the underlying sale agreements are registered with the appropriate authorities. " (emphasis supplied)

- Purvankara Projects Ltd-Annual Report for FY 2011-12 "Revenue from the sale of properties is recognized when the significant risks and rewards of ownership have been transferred to the customer, which coincides with the entering into a legally binding agreement" (emphasis supplied)

In this regard, the Appellant would respectfully like to submit that the learned AO erred in determining the income in respect of proportionate advance amounts received in respect of unexecuted and / or unregistered agreements, based on POCM for all the eleven buildings, disregarding the accounting policy consistently followed by the Appellant which was in accordance with the Guidance Note, as applicable to the Appellant.

2.3.2 Submission #2: Appellant has followed the mercantile system of accounting • Section 145 of the Act permits an assessee to either follow the cash or mercantile system of accounting and requires that the accounting policy adopted by the assessee should then be consistently followed by it in each AY. • The Appellant fulfills the requirements of the Act by following the mercantile system of accounting consistently, wherein it recognizes income as and when such income "accrues " to it, and not when it receives any payment or cash.

• To determine when an income accrues, the Appellant was required to refer to the applicable laws, in its case the Old Cos Act, the AS and the Guidance Note. As submitted above (in para 2.3.1), the assessee has recognized in accordance with the applicable laws under the POCM on registration of the agreement with buyers when all significant risks and reward have been 33 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. transferred to the buyers of the flats / units in the buildings.

• In this regard, reliance is placed on the following judgements:

- CIT vs Woodward Governor India (P) Ltd (2009) (312ITR 254) (SC), wherein it was held that- "... In this case, we are concerned with section 28. Therefore, section 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed, (see judgment of this Court in the case of United Commercial Bank v. CIT [1999] 240 ITR 3551). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the Asseessing Officer comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the Assessing Officer on the correctness of the accounting standard followed by the assessee(s) in this batch of Civil Appeals."

Challapalli Sugars Ltd. vs CIT (1975) (98 ITR 167)(SC), wherein it was held that- "It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary."

- CIT vs Triveni Engg. & Industries Ltd (2011) (196 Taxman 94) (Delhi HC), wherein it was held that- "... in the given scenario where in relation to the project works undertaken by the assessee, completed contract method of accounting is followed, which is consistent with the Accounting Standards and these accounting standards also lay down the norms indicating the particular point of time when the provisions for all known liabilities and losses has to be made, the making of such a provision by the assessee appears to be justified more so when the assessee had recognized gain as well on such project during this year itself. This appears to be in consonance -with principle of matching cost and revenue as well. "

- DCIT vs Ganga Developers (ITA no 949/Mumbai) (ITAT Mumbai),wherein it was held that "... we find that the income from different projects under execution during the year under consideration was offered by the assessee to tax by following consistently the well-recognized method and there was no justification in the action of the A.O. in estimating the profit of the said projects at higher value by disturbing the method consistently followed by the assessee which clearly resulted in double addition of the same income..."

- M/s Unique Enterprise vs ITO (ITA no S109/Mum/2008) (ITAT Mumbai), wherein it has been held that - "...In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, -which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present case, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. ... "

In view of the above, we submit that the learned AO should have respected the accounting policy followed by the Appellant and hence, there should be no addition on account of proportionate advances received on unexecuted/unregistered agreements.

2.3.3 Submission #3: The additional income brought to tax by the AO in the AY2012-13 has already been offered to tax in subsequent AYs by the Appellant Without prejudice to the above, as submitted in paragraph 1.3.2, since this transaction would be revenue neutral, no addition should be made on this 37 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. aspect in the captioned AY. The computation of total income of the Appellant for subsequent years and a statement showing that the advances received have been recognized as a revenue and offered to tax post execution and registration of the agreements is enclosed as Annexure 11. 2.3.4 Submission #4: Allowing deduction for the cost of construction • Without prejudice to above, even if it is assumed that the proportionate advance amounts received in respect of unexecuted & unregistered agreements should be chargeable to tax in the captioned AY, then, the cost of construction should also be allowed as a deduction in computing the total income of the Appellant for the captioned A Y. However, the learned AO has not granted corresponding deduction for cost of construction of INR 20,16,31,381 in computing the taxable income of the Appellant for the captioned AY. • As submitted above (in para 1.3.3), we wish to submitted that where the deduction for the cost of construction is granted, the net addition to the total income of the Appellant for the captioned AY would be 38 I.T.A. No. 4030 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. reduced to 1NR 2,77,04,546 (Copy of computation of corresponding cost is enclosed as Annexure 1J).

• Further, as can been seen in the letter, the AO agrees with the proposition that the deduction for the cost of construction should be allowed.

16 After considering the submission of the assessee, Ld. CIT(A) partly allowed the ground raised by the assessee with the following observations:-

6.2 On perusal of AO's order and submission of the Appellant, I am of the view that the contention of the Appellant that all the significant risks and rewards of ownership get transferred to buyers only on execution and registration of agreements cannot be accepted. I agree with the AO that execution and registration are only the legal formalities and do not change the accrual of income under mercantile system of accounting. What all the AS and Guidance Note provide is that there should be transfer of significant risk and reward. In case of appellant, the buyer has paid advances for purchase of a particular flat by entering into an MOU and non-execution and non- registration do not give right to the appellant to postpone the income as they are just legal formalities.

When flat holders have been paying advances towards flat as per the scheduled date, the income on sale of flats as per the amount received has to be offered to tax irrespective of the fact whether agreement is registered or not. However as held in Para 5 above, it is noted that the advances received in respect of buildings D & F4 cannot be considered for the revenue recognition as they have not yet reached the stage of revenue recognition.

6.3 It is noted that Income tax is a tax on the profit of the business and not on the gross receipts unless specifically provided in the Act. As per section 28 net profit of the business is to be taxed and not gross receipts. Profit cannot be computed until the expenditure incurred which are necessary for the purpose of earning receipts is deducted. Thus the contention of the Appellant that proportionate cost of construction should have been allowed against the additions on account of proportionate advance amounts received in respect of unexecuted & unregistered agreements, based on the percentage of completion of buildings is justified. Further, the fact that the AO has accepted the deduction of cost for portion of revenue declared by the appellant justifies that the cost of construction has to be allowed while determining the profit from the project. The AO cannot adopt a different stand for the declared revenue and additions made from the same project in the same assessment order. Since no reason has been assigned and there is no adverse remark of the AO and the tax auditors as regards the cost of construction, it appears that the AO has inadvertently failed to allow the cost of construction which has resulted in taxing the receipt on gross basis. The Appellant has provided a detailed working of proportionate cost to be allowed against the additional revenue which needs to be allowed. In order to arrive at the correct figure of taxable profit earned by the appellant. Subject to this verification of the facts by the AO, Appellant is entitled to claim deduction of the cost as detailed in the working. The AO is directed to verify the same from the records and allow the corresponding cost against the said revenue. Accordingly, this ground of appeal is partly allowed.

17 With regard to third issue, assessee has filed the following submission before Ld. CIT(A):- 4.4.1 Submission #1: The Appellant -was not provided-with adequate time /opportunity to provide reconciliation of the Creditor's balance in its books The Appellant respectfully submits that the learned AO has not provided the appellant adequate time /opportunity of being heard in order to reconcile the said difference and submit requisite documents.

• It should be noted that the reply provided by the Creditor for confirming the balance outstanding in his books was only shown once to the Appellant and no copy was provided. Further, the discrepancies in the balance outstanding in the books of the Creditor and the Appellant was only orally discussed by the AO and no opportunity was provided to the Appellant to file any written submissions and documentary evidence in this regard prior to making an addition of INR 4,33,97,361 to the total income of the Appellant without giving any reasons as to why such amounts should be treated as income of the Appellant. The learned AO has merely stated in the Order that since there is a difference, the Appellant has shown excess liability. • In view of the above and in the interest of justice to which the Appellant is entitled to, we humbly request your goodself to kindly make available a copy of the reply received from the Creditor, on account of which the alleged excess liability exists in the Appellant's books of accounts.

4.4.2 Submission #2: Evidence for reconciliation of the Creditor's balances • The Appellant further wishes to submit documentary evidence confirming the amounts outstanding and payable to the Creditor as on March 31, 2012 basis which the liability has been recognized in the books of the Appellant as Annexure IK. It is further submitted that the fact that this outstanding liability payable to the Creditor is genuine is evidenced from the report of the auditor in the financial statements of the Appellant, wherein no qualification has been made in this regard by the auditor. 4.4.3 Submission #3: Discrepancy in balance of Creditor in the books of the Appellant and Creditor cannot result in additional taxable income and the addition is bad in law • Without prejudice to the above, it is respectfully submitted that merely because there is a difference between the balances as per the books of accounts of the Appellant and the Creditor, the AO cannot treat the said difference as income of the Appellant. The AO has to demonstrate, with cogent material and strong reasons that the difference is not a liability of the Appellant and hence, should be considered as income. • Reliance, in this regard, can be placed on the decision of the Delhi Tribunal in the case of 43 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. Continental Carbon India Limited vs Income tax Officer (ITA no 2858/Del/2Ql 1) (ITATDelhi), wherein it was held as under: "Apropos difference in balances ofassessee and supplier, the same cannot be added u/s 68 as the existence of assessee, supplier and purchases are admitted. The difference in accounts may be due to various reasons including discount, goods returns; quality, differences, rebates and so many other business exigencies. Such differences cannot lead to addition u/s 68/69C. At the most, if the differences remain unresolved for number of years, the AO may proceed to 41(1), but not u/s 68 or 69C. Suppliers existence and transactions having been accepted, the - difference thus cannot be added as income. The assessee furnished reconciliation, if the same were wrong, it was the burden of AO to demonstrate that it was not proper. If AO fails to discharge his onus, it will be inappropriate to punish assessee for the same." (emphasis supplied)

• Further, it is respectfully submitted that the addition is bad in law, since the AO has not sighted the provisions of the Act under which such addition is being made. An addition cannot be arbitrary, but only to comply with the provisions of the Act.

• Even under the Act, the difference in the balances could have been chargeable to tax either under section 68 or Section 41(1). In the facts of the present case, we wish to submit as under: The learned AO has not doubted the genuineness of the creditor and hence, the provisions of Section 68 of the Act should not apply; and The Appellant has not obtained any benefit by way of cessation / remission of liability with regard to the amounts payable to said creditor and there has not been substantial time for which the said creditor remained unpaid and hence, the provisions of Section 41 (1) of the Act should not apply. The High Court of Gujarat in the case of CIT vs Bhogilal Ramjibhai Atara (43 taxmann.com 55) has held that: "We are in agreement with the view of the Tribunal. Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007- 08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made exparte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) of the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, me Tribunal not having made any error, this Tax Appeal is dismissed."

Based on the facts and circumstances of the case, Cavalcade Properties Private Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the learned Commissioner of Income Tax (Appeals) - 20, Mumbai [hereinafter referred to as the 'CIT(A)'] under section 250 of the Income-tax Act, 1961 ('Act'), on the following grounds which are independent and without prejudice to one another:

1. On facts and circumstance of the case and in law, the learned CIT(A) erred confirming the action of the learned AO in respect of an addition of INK 22,93,35,927 to the total income of the Appellant on the proportionate value of advance amounts received by the Appellant aggregating to INK 38,29,04,740 in respect of unexecuted and unregistered sale agreements of flats/ units of the eleven under- construction buildings though instructing the learned AO to allow the proportionate cost against such addition.

2. On facts and circumstance of the case and in law, the learned CIT(A) erred confirming the action of the learned AO in respect of an addition to the total income of the Appellant of INR 4,33,97,361 being the difference in the closing balance as per the books of accounts of the Appellant and as per the records of one sundry creditor of the Appellant viz., M/s. D S Argade Promoters & Builders.

The Appellant craves leave to add, alter, omit or substitute any or all of the above grounds of appeal, at any time before or at the time of appeal, to enable the learned Income Tax Appellant Tribunal to decide the appeal according to law.

And the grounds of appeal raised by the revenue are as 20. under:-

1."On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.2,35,41,142/- made in respect of income accrued to Assessee on basis of percentage completion method in 49 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. respect of Building 'D' 85 *F4', without appreciating the fact that the Assessee has received entire amount receivable from the buyers of the flats whose agreements are registered, which eliminates the element of risk entirely."

2. "On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 2,98,46,289/- on percentage completion method of unregistered agreement in respect of Building 'D' & 'F4', though on identical issue, in principle, he agreed that the net income [after allowing cost of construction] may be brought to tax in respect of unregistered documents pertaining to units/flats located in other 9 buildings of the same project [other than Building 'D' 85 T4']."

5. "The appellant craves leave to add, amend or alter all or any of the grounds of appeal."

Before us, Ld. AR submitted that at page no. 30 of the 21. paper book in which assessee sold the flat to the intended buyer, assessee only enters into a memorandum of understanding (MOU), which is a form for ‘Provisional Booking’ and this agreement was accepted on payment of agreed amount as evidence for the impending sale of the flat/unit. Following the MOU, the assessee enters into the actual sale agreement which is executed by both the parties and duly registered with the authorities on payment of applicable stamp duty. As mentioned in the MOU, the actual sale takes place only on execution and registration of the actual sale agreement. Ld. AR brought to our notice a copy of the Provisional Booking, in which, it clearly indicates that subject to confirmation only on execution of 51 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. registered document of ownership agreement. He submitted that with the Provisional Booking, intended buyers asked to pay which may be 10% to 15% of cost of flats. Since it is provisional booking, it cannot be considered as a final booking until and unless, the significant risks and rewards of ownership have been transferred to the intended buyers and the seller retains no effective control over the property. He brought to our notice Guidance Note on recognition of revenue of real estate developers, as per which, all significant risks and rewards of ownership can be considered as transferred provided the agreement is legally enforceable and subject to the satisfaction of the following conditions, which signify transfer of significant risk and reward to the buyer even though legal title is not transferred or the possession of the real estate is not given to the buyer: a) The significant risk related to the real estate have been transferred to the buyer, in case of real estate sales, price risks is generally is considered to be one of the most significant risk. b) The buyer has a legal right to sell or transfer his interest in the property without any condition or subject to only such conditions which do not materially affect his right to benefits in the property.

29 With regard to advance from unregistered buyers, assessee has received advance from the intended buyers by entering into MOU at the time of initial inquiry and assessee treated the advances for the purpose of revenue only when assessee enters into agreement for sale and registers the same. Till such time, it is treated as regular advance. The AO brought to tax based on the percentage of completion method even on the advance received by the assessee from the un-registered buyers.

30 On the other hand, assessee submitted as per the guidance note issued by the ICAI, the same is submitted by the assessee as per which the significant risks and rewards got transferred to buyers only on execution and registration of agreements.

31 Since the assessee is following the accounting standard and guidance note, we notice that Ld. CIT(A) has recognized the above method of accounting followed by the assessee in the case of recognition of revenue based on percentage of completion method even on the advances received from unregistered buyers.

32 With regard to the advance received from intended buyers, the guidance note clearly indicates that the significant risks and rewards of the ownership has an impact on recognition of revenue. We need to determine as and when assessee receives an advance from the intended buyers, whether the buyers received the significant risks on the above property and whether the intended buyer has legal right to sell or transfer interest on the property without any condition. Whether the assessee has a significant certainty with regard to the receipt of consideration and there is no unreasonableness to ultimate collection. The Period between entering into MOU with the intended buyer and actual registration of agreement for sale, the intended buyer may change his mind not to buy or go ahead with the purchase or may not agree with the payment schedule proposed by the builder. May be the buyer may not have proper credit line with the banker or may not satisfy the builder with the realistic settlement plan. In such a situation such MOU may be cancelled. The assessee has to consider all the aspects and make sure it can receive the sale consideration reasonably. In case, the assessee recognizes the initial down payment from the intended buyer and when the intended buyer cancels the initial agreement. The revenue recognized by the assessee may not be real. Therefore, in our considered view, the method adopted by the assessee is as per the guidance note issued by ICAI.

33 Further, Ld. AR relied upon the following judgments:

DCIT vs Pancards Club Ltd (2014) (3 70ITR 45) (Bom. HC), wherein it was held that- The Tribunal then referred to the judgment of the Hon'ble Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd v. CJT [2004] 270 ITR 1/139 Taxman 434. The concept of deposit or expression as such, would denote according to the Hon'ble Supreme Court that the amount received as 59 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. such, was to be refunded. The right to demand the refund would accrue to the member/depositor. The right though contingent in nature, initially,inheres in the depositor from the beginning. It is in these circumstances and relying upon the principle laid down in this decision that the Supreme Court concluded that in view of the obligation on the assessee to refund the amount of advance received on sale of room nights that it cannot be treated as a trading receipt.... "

DCJT vs Shiv Sai Developers (2012) (134 ITD 445) (ITAT Mumbai), wherein it was held that – "...There was thus a conclusive evidence in the form of memorandum of understanding to show that the amount ofRs. 1.51 crore was received by the assessee in cash as earnest money or advance against the transaction of land. In the case ofHasmukhlal M. Parikh (supra), cited by learned counsel for the assessee, the earnest money was received by the assessee against the transaction of sale of land in the relevant year but the sale deed was executed in the latter year and it was held by the hon'ble Bombay High Court that the entire profit on sale of land was accrued to the assessee in the latter year and not in the year under consideration. To the similar effect is the 60 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. decision of the hon'ble Gujarat High Court in the case ofAshaland Corpn. (supra), wherein it was held that the amount received as earnest money and advance received towards transaction would not, by itself, partake of the character of taxable income as the transfer of land was taken place only in the subsequent year. In the present case, it is not in dispute that the transfer of land by the assessee had not taken place in the year under consideration and this being so, we hold respectfully following the judgment of the hon'ble Bombay High Court in the case ofHasmukhlal M. Parikh (supra) and the hon'ble Gujarat High Court in the case of Ashaland Corpn. (supra), that the amount of Rs. 1.51 crores received by the assessee as earnest money or advance could not be treated as its income in the year under consideration."

3.3.4 Submission M: Profits from sale of the property should be chargeable to tax under the head PGBP • It is submitted that the transfer of the said Property should be chargeable to tax under the head PGBP since the Appellant is engaged in the business of real estate development and related activities and acquisition of the land and transferring the same is also one of the objects of the Appellant (copy of the Memorandum and Articles of Association of the 61 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd. Appellant is enclosed as Annexure 1Q ). The said fact has also been recognized by the learned AO in his assessment order wherein it is mentioned that the nature of business of the Appellant is Builders and developers.

3.3.5 Submission #5: Cost of the land should be allowed as a deduction in any case • The property has been acquired by the Appellant in separate parcels for an aggregate consideration of INR 125,10, 80,748. This fact has been accepted by the AO in the Order as well.

The Appellant would like to respectfully submit that whether the income from transfer of the land is considered as PGBP or IOS only the profits, ie net income after reducing the cost from the consideration of, INR 145,00,00,000 should be brought to tax.

• If the income is brought to tax under the head IOS, deduction then the cost of acquisition of INR 125,10, 80,748 should be allowed as a deduction in computing the total income of the Appellant under Section 57 of the Act as it is an expenditure incurred wholly and exclusively for earning the income.

• In this regard, we wish to submit that various judgments, inter-alia, including the following, have held that only the "net income" ie after allowing deductions for the cost of earning such income, as per the provisions of Section 57 of the Act, should be chargeable to tax:

CIT vs Bokaro Steels Ltd (170ITR 522) (Patna HC), wherin it was held that ".....The word 'income' is a more general term than 'profits' or 'gains'. A receipt may be taxable as income, although it may contain no element of profit or gain. 'Profits' or 'gains' means something which is in the nature of interest or fruit, as opposed to the principal or tree. 'Gains' is really the equivalent of 'profits'. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. The tax is upon income, profits or gains; it is not a tax on gross receipts. The expression 'profits' or 'gains' is not limited to business only, but is used in the Act with reference to other sources of income as well." (emphasis Supplied)

The above High Court decision has been subsequently affirmed by the Supreme Court in 236 ITR 315. 63 & 4273/Mum/2017 M/s Cavalcade Properties Pvt. Ltd.