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Income Tax Appellate Tribunal, MUMBAI BENCH “G” MUMBAI
Before: SHRI PAWAN SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
The captioned appeals filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-14, Mumbai [in short ‘CIT(A)’] and arise out of the assessment completed u/s 143 of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience. Facts being identical, we begin with the assessment year (AY) 2009-10 ( ).
The grounds of appeal
filed by the assessee read as under:
1. The Ld.CIT(A) erred in facts and law in confirming the addition of Rs.2,59,62,160/-made by the assessing officer by re-computing the income.
2. The Ld.CIT(A) erred in not appreciating the method of accounting adopted by the appellant company, was an accepted method and in consonance with the M/s Shankala Realtors Pvt. Ltd. 3 3828, 3829 & 3830/Mum/2017 accounting standards as well as the guidance note of the Institute of Chartered Accountants of India regarding real estate transactions.
3. The Ld.CIT(A) completely misapplied himself and erred in confirming the stand taken by the assessing officer in invoking the provisions of sec. 2(47) which apply to capital asset and not to stock-in-trade.
4. The Ld.CIT(A) erred in appreciating that for two assessment years 2005-06, and 2008-09, in assessment orders framed under section 143(3) the method of accounting adopted by the appellant had been accepted and a deviation there from militated against the principle of consistency.
5. Without prejudice to the above and in the alternative the Ld.CIT(A) failed to appreciate that, since the appellant was a company where tax rates were virtually constant there is no revenue loss to the department even if the income was taxed in a year different from that in which it was submitted to tax by the appellant, as the entire income was submitted to tax albeit in different assessment years.
3. Briefly stated, the facts are that the assessee filed its return of income for the assessment year (AY) 2009-10 on 24.09.2009 declaring total income of Rs.1,01,56,550/-. The assessee-company is in the business of development of real estate. It follows the mercantile system of accounting. During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee has commenced a project of development and construction of building “Sterling Tower” at Mazgaon, Mumbai and it had received an advance of Rs.24,92,42,860/- from the prospective buyers of the flat. However, the assessee had offered the income only in respect of the flat owners with whom agreement has been entered into. The AO observed from the details that in many cases, the assessee had received almost 90% of the agreement, still it had not offered the income for taxation on the pretext that no agreement has been M/s Shankala Realtors Pvt. Ltd. 4 3828, 3829 & 3830/Mum/2017 made with the prospective buyer. As per the AO, the assessee had received total advance of Rs.24,92,42,860/- and out of this amount only certain percentage has been recognized as income and the balance was shown under the head ‘Advances’. Before the AO, the assessee submitted that the remaining income was not offered for tax on the reason that no agreement was executed in writing with the person from whom the payment is received and the revenue in respect of the balance advance could not be recognized as passing of risk and rewards by virtue of ownership is an essential condition for revenue recognition as per the accounting standard. Referring to Accounting Standard (AS)-9 i.e. revenue recognition, the AO observed that for recognition of revenue in case of real estate sales, all the conditions specified in para 10 and 11 of the above accounting standard are to be satisfied. Considering the facts of the case, the AO noted that when a prospective buyer approaches the appellant for booking the flat, allotment letter is issued to the buyer on receipt of advance money and in some cases, the assessee has taken almost 90% of the total value of the flats and in some cases by installment. Thus the AO came to a finding that all the conditions specified in the above accounting standard are fulfilled. Further referring to Explanation 2 to section 2(47) introduced with retrospective effect from 01.04.1962, the AO stated that the scope and definition of transfer has been drastically enhanced. Thus the AO held that entering into an agreement and its registration is not necessary for recognition of revenue on advances or on M/s Shankala Realtors Pvt. Ltd. 5 ITA Nos. 3827, 3828, 3829 & 3830/Mum/2017 the completed part of the project. Observing that the above condition has been dispensed with in cases falling under AS-9, the AO worked out the profit on the project at Rs.3,59,87,333/- as under : A. Total Revenue to be recognized from entire project Rs.62,47,20,998/- B. Income to be recognized as on 31.03.2009 (73%) Rs.45,60,46,329/- C. Cost of the project as on 31.03.2009 Rs.36,23,59,833/- D. Income to be recognized up to 31.03.2008 (45%) Rs.28,11,24,449/- E. Cost of the project as on 31.03.2008 (45%) Rs.22,23,72,500/- F. Sale to be recognized of FY 2008-09 (B-D) Rs.17,49,21,879/- G. Cost of the project FY 2008-09 (C-E) Rs.13,89,87,333/- H. Profit from the project 28% (F-G) Rs.3,59,87,333/- As the appellant had already declared an income of Rs.1,01,56,547/- from the project, the AO made an addition of Rs.2,58,30,786/- (Rs.3,59,87,333/- minus Rs.1,01,56,547/-) to the income shown by the assessee.
4. In appeal, the Ld. CIT(A) agreed with the reasons given by the AO and thereafter, following the appellate order in the case of the assessee for AY 2011-12, dismissed the appeal.
5. Before us, the Ld. counsel for the assessee submits that in the impugned year the appellant had undertaken a project of development and construction of building “Sterling Tower” at Mazgaon, Mumbai and the work of construction is in progress and is likely to be completed by 31.12.2015. It is explained that the project is planned for 21 storey building of which commencement certificate was received only in respect of 14 floors permitting construction of 74 flats only. The work in respect M/s Shankala Realtors Pvt. Ltd. 6 3828, 3829 & 3830/Mum/2017 of 15 and above floors, therefore, could not have been commenced and carried out till 31.03.2010. It is stated that out of the flats spread over 14 floors, the revenue has been recognized regularly in respect of those flats for which agreements are executed. It is further stated that the commencement certificate till 14 floor was received on 17.04.2008 and the commencement certificate from 15th floor to 18th floor was received on 29.01.2011 i.e. after AY 2010-11. It is also stated by him that the commencement certificate in respect of 19th floor and above had not been received till March 2013. The Ld. counsel submits that the appellant has been regularly following the ‘Percentage Completion’ method for recognizing revenue in the books of accounts. It is stated by him that there was no accounting standard issued by the Institute of Chartered Accounts of India (ICAI) or the Ministry of Corporate Affairs (MCA) which applied to builders/developers and also there was no Income Tax Computation and Disclosure Standard (ICDS) on real estate business at the relevant point of time. In view of the same, it is argued that the appellant recognized the revenue as per the Guidance Note of the ICAI regarding accounting for real estate transactions and for recognition of revenue, the Guidance Note draws upon the principles enunciated in AS-9 on revenue recognition and AS-7 on construction contracts. The Ld. counsel explains that the appellant, accordingly, recognizes revenue on execution and registration of agreement for sale with the buyer, and however, the value of agreement is further subjected to the percentage completion as certified by the architect. It is argued by him M/s Shankala Realtors Pvt. Ltd. 7 3828, 3829 & 3830/Mum/2017 that the certificate by the architect based on the basis of survey of work perform or completion of physical proportion of the contract work is an accepted method of determination of stage of completion as per para 29 of AS-7 and therefore, if the work is 80% complete as on the last day of the financial year, the total revenue recognized till the end of the year is 80% of the total value of all agreements executed till date. Thus the difference between the total revenue, so determined and the revenue recognized up to end of the preceding year is incremental revenue and is recognized in the P&L account for the year. As far as costs are concerned, from the total expenditure actually incurred till date, the value of work- in-progress (WIP) as on the last day of the year (aggregate of cost pertaining to unsold flats and costs pertaining to incomplete portion of sold flats) is reduced to arrive at the costs, which represent expenditure incurred in respect of completed construction of flats sold and is charged to the P&L account for the year under consideration. The difference between revenue recognized for the year and costs incurred is net profit for the year which is offered to tax. Finally it is stated that the AO has not disputed the cost incurred by the appellant at all and the only dispute is about recognition of revenue where the appellant recognizes the same only when agreements with the buyers are executed, whereas the AO desires to have it recognized when advances are received. It is thus argued that on holistic basis, it would make no difference particularly when the appellant is a company with a constant rate of tax in the years and the entire revenue is accounted for albeit at different points of time. Reliance is placed by him on the decision in Awadesh Builders v. ITO 28 CCH 756 (Mum. Trib.), CIT v. Malibu Estates Pvt. Ltd. 32 CCH 262 (Delhi M/s Shankala Realtors Pvt. Ltd. 8 3828, 3829 & 3830/Mum/2017 Trib.), CIT v. Ankit Chirag Developers Pvt. Ltd. 40 CCH 18 (Jodhpur Trib.) and CIT v. Nagri Mills Co. Ltd(1958) 33 ITR 681(Bom.).
6. Per contra, the Ld. Departmental Representative (DR) relies on the decision in ACIT v. Paras Build Call (P.) Ltd. (2015) 57 taxmann.com 112 (Delhi-Trib), ACIT v. Alcon Developers (2015) 54 taxamnn.com 54 (Panaji- Trib), Prestige Estate Projects Ltd. v. DCIT (2011) 129 ITD 342 (Bangalore) and Ace Real Estate & Developers v. ACIT (2018) 100 taxmann.com 228 (Bombay). Relying on the above decisions, the Ld. DR supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We begin with the decisions relied on by the Ld. counsel. In the case of Awadhesh Builders (supra), the assessee is a builder and real estate developer. The dispute is regarding year of accounting of income. The assessee has been following project completion method as per which income has to be accounted in the year in which project is complete and flats are sold. The assessee in earlier two years followed the same method which has been accepted by the Department. However, in the current year, the Department has tried to assess the income on the basis of percentage completion method as per which the income has to be assessed on the basis of percentage of work completed during the year. The case of the Department is that the profit is inbuilt into the quantum of work done by the assessee and, therefore, the profit has to be computed annually on the basis of work done in a particular area. The Tribunal held that the project completion method adopted by the assessee builder and M/s Shankala Realtors Pvt. Ltd. 9 3828, 3829 & 3830/Mum/2017 real estate developer was held to be justified, instead of percentage completion method as contested by the Department. In the instant appeal there is no dispute about the percentage completion method adopted by the assessee, whereas in the above case, the assessee was following project completion method. Therefore, the present case is distinguishable from the above decision. In the case of Malibu Estates Pvt. Ltd. (supra), the assessee is a developer and recognized the sale of plots on execution of conveyance deed duly registered. The Tribunal held that considering all the aspects, there is no reason to change the method of accounting in the impugned assessment year, which was accepted in the past. In the case of Ankit Chirag Developers Pvt. Ltd. (supra), the assessee was engaged in business of constructing flats and selling same to retail purchasers. Assessee adopted project completion method of accounting for same, which was rejected by the AO and addition was made by applying percentage completion method. The Tribunal held that in the absence of any sale agreement or execution of any sale deed, it cannot be said that AS-9 for revenue recognition was applicable in the appellant’s case. In Nagri Mills Co. Ltd (supra), the Hon’ble Bombay High Court held:- “3. 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 question as 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 M/s Shankala Realtors Pvt. Ltd. 10 3828, 3829 & 3830/Mum/2017 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 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 in fighting 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 this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other.” 7.1 Now we discuss the decisions relied on by the Ld. DR. In the case of Paras Build Call (P.) Ltd. (supra), the assessee-company was engaged in developing properties as a builder and developer and started construction of a commercial complex during the AY 2004-05. Such construction got completed in the AY 2005-06. The assessee received certain amount as advance booking from the prospective buyers of the project. The AO noticed from the audit report that the assessee recognized revenue from the sale of the office/shops only on the registration of title deeds and till that event, the receipts were shown as liability. The AO opined that merely because the title deeds were not registered in a particular year, would not mean that no profit arose or accrued to the assessee. The AO held that income should be recognized on the transfer of right/interest in the property to the prospective buyers. As the terms and conditions of the agreements to sell provided for the transfer of risks and rewards in the ownership of the property to the buyers, without prejudice in the right of the assessee to receive sale consideration, the AO held that income was to be recognized by applying M/s Shankala Realtors Pvt. Ltd. 11 3828, 3829 & 3830/Mum/2017 percentage completion method. The Tribunal held that “where assessee, a developer, having constructed commercial units, transferred same at initial stage of construction along with significant risks and rewards of ownership to buyers, assessee’s income had to be taxed on year to year basis by applying percentage completion method”. In the case of Alcon Developers (supra), the assessee had accounted the accrual of sale proceeds on the basis of registration of sale deed in favour of the intended buyer. The AO in this case noted that the development of the plots has been carried out fully by the assessee as on 31.03.2009 but against this the assessee has received consideration to the extent of 70-90 percent and balance consideration has to be received. The assessee contended before the CIT(A) that it was following the percentage completion method. But the Tribunal noted that the assessee has not recognized revenue on the basis of project completion method. The Tribunal further observed that the development work on the plots has been completed. On the facts of the case, the Tribunal held that registration of the sale deed represents only the transfer of the title in favour of the buyer from the assessee; it has nothing to do with the method of accounting followed by the assessee; under AS-7 this is not a recognized method of recognized revenue; this method is neither project completion method nor percentage completion method and recognizing the revenue when the sale deed has been registered by the assessee in favour of the buyer cannot be regarded to be either cash or mercantile system of accounting.
M/s Shankala Realtors Pvt. Ltd. 12 3828, 3829 & 3830/Mum/2017 In the case of Prestige Estate Projects Ltd. (supra), the assessee enters into two agreements with the prospective buyers of either an apartment or a commercial complex or an office base in a project under joint development agreement; one agreement for the purchase of undivided interest in land with the landlords and another for construction of super structure which would be for the developer. The Tribunal held that “in the facts and circumstances of the case, when a prospective buyer of super built up area gave consent to the assessee developer, who simultaneously transferred ‘all significant risks’ to the prospective buyers, for all practical purposes and for the recognition of, all the conditions specified in AS-9 were fulfilled, and therefore, AO was justified in holding that revenue from the projects under joint development agreement was to be assessable on percentage completion method which was followed by the assessee for other projects also.” In the case of Ace Real Estate & Developers (supra), it is held that “where assessee, engaged in the business of land development, had been consistently following mercantile system of accounting in respect of all its projects, assessee was not justified in adopting cash system of accounting in respect of only one project”. 7.2 It is relevant here to discuss application of principles of AS-9 in respect of sale of goods to a real estate project, which is produced below: “4.1 The application of principles of AS 9 in respect of sale of goods requires recognition of revenues on completion of the transaction/activity when the revenue recognition process in respect of a real estate project is completed as explained in paragraph 4.2 below.
M/s Shankala Realtors Pvt. Ltd. 13 3828, 3829 & 3830/Mum/2017 4.2 The completion of the revenue recognition process is usually identified when the following conditions are satisfied: (a) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership; (b) The seller has effectively handed over possession of the real estate unit to the buyer forming part of the transaction; (c) No significant uncertainty exists regarding the amount of consideration that will be derived from the real estate sales; and (d) It is not unreasonable to expect ultimate collection of revenue from buyers. 4.3 Where transfer of legal title is a condition precedent to the buyer taking on the significant risks and rewards of ownership and accepting significant completion of the seller's obligation, revenue should not be recognized till such time legal title is validly transferred to the buyer.” 7.3 In the instant case as recorded by the AO when a prospective buyer approaches the assessee for booking the flat, allotment letter is issued to the buyer on receipt of the advance money. The appellant filed a written submission dated 26.03.2015 before the AO stating that the degree of work completed and certified by architect till 31.03.2009 is 73% and the assessee-company has recognized the revenue by applying 73% to the value of agreements executed till 31.03.2009. It was further stated before the AO that the revenue in respect of balance advances could not be recognized as passing of risks and rewards by virtue of ownership is an essential condition for revenue recognition as per AS-9, which has not been fulfilled in the instant case, as