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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri Shamim Yahya & Shri Ravish Sood
O R D E R
PER RAVISH SOOD, JM
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-21, Mumbai, dated 23.02.2016, which in turn arises from the order passed by the A.O under Sec.143(3)(ii) of the Income Tax Act, 1961 (for short „I.T Act‟), dated 27.03.2014. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal :
P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) “1. Ld. CIT (A) on the facts and circumstances of case and in law erred in confirming the addition of Rs.1,06,85,293/- being 12% of estimated sales price on an undisclosed area of 56,970 sq. ft.
The Ld. CIT (A) failed to take note that possession of the flats were given in FY 2002-03 and there is no reason to work out profit and charge the same to tax in the present assessment year.
3. Ld. CIT(A) erred in not appreciating the fact when amount received is in dispute same cannot be brought to tax.
4. Ld. CIT(A) on the facts and circumstances of case and in law erred in confirming the taxing of Interest on bank deposit of Rs.97,892/-as income from other sources.
5. That the appellant craves leaves to add, alter or delete all or any of the grounds of appeal
.”
2. Briefly stated, the assessee company which is engaged in the business of construction and real estate development had e-filed its return of income for A.Y 2011-12 on 22.09.2011, declaring total income of Rs. 49,038/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the I-T Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2).
During the course of the assessment proceedings the A.O on a perusal of the „balance sheet‟ observed that though the assessee had received substantial amount of advances from its customers over the years, but the same were not offered as income by claiming that the projects were incomplete. The A.O called upon the assessee to clarify as to how the projects were yet not completed and the profits as regards the same not determined. In reply, it was submitted by the assessee that as it had assailed an order of the Municipal Corporation, Mumbai for demolition of its buildings before the Hon‟ble High Court of Bombay and the Hon‟ble Supreme Court, therefore, in the absence of any certainty about the profit/loss from the project, no revenue was recognised by it. The A.O in order to verify the factual position issued notices under Sec. 133(6) to some of the buyers. On a perusal of the replies received from some of the parties, it was observed by the A.O P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) that the flats under consideration were sold prior to the year 2002-03, and the same were in the occupation of the buyers. The Income Tax Inspector who was deputed for making necessary verifications also confirmed the said fact. Apart there from, it was reported by the inspector that there were more flats in the buildings as against that reported by the assessee. The assessee on being confronted with the aforesaid details, submitted, that it had entered into a Joint Development Agreement (for short „JDA‟), dated 10.04.2000 with M/s Nova Nirman Nigam to develop a project viz. “Gaurav Garden”. It was submitted by the assessee that it had developed and sold project Gaurav Garden Phase I and II, whereas Phase III was jointly developed with M/s Nova Nirman Nigam. Further, it was stated by the assessee that Gaurav Garden Phase III comprised of buildings viz. (i) Divya Drashti A and B; (ii) Divya Shrushti A, B and C & CS; (iii) Divya Plaza; (iv) Divya Gunjan; (v) Divya Satkar; and (vi) Gaurav Gagan. It was submitted by the assessee that except for one of the building viz. Gaurav Gagan, all other buildings were physically completed and their possession was also delivered to the buyers. As per the details divulged by the assessee, the ownership of the area as per the terms of the „JDA‟‟ was to be shared between M/s Nova Nirman Nigam and the assessee in the ratio of 55:45. As claimed by the assessee, out of the total area of 84,214 sq. ft falling to its share it had sold 27,245 sq. ft., while for the balance area of 56,970 sq. ft. on account of an ongoing dispute was yet not received from M/s Nova Nirman Nigam. Insofar the area of 27,245 sq. ft. was concerned, it was submitted by the assessee that the profits arising from the sale of the same was already taxed, vide order passed by the A.O under Sec.143(3) r.w.s 254, dated 13.12.2011 for A.Y. 2003-04. Apart there from, it was submitted by the assessee that as it had incurred expenses of Rs.13,38,91,580/- towards completion of the project, therefore, the same be considered P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) while calculating its profit. However, the assessee on being called upon by the A.O to furnish the complete details of the expenses which were claimed to have been incurred on the project failed to place on record any supporting documentary evidence.
The A.O while framing the assessment observed that pursuant to the directions of the Tribunal in the case of the assessee for A.Y. 2003- 04, his predecessor in his order passed under Sec.143(3) r.w.s. 254, dated 13.12.2011, had estimated the profits of the assessee from its project @ 12% of its sales receipts of Rs.4,25,83,906/-. Accordingly, as noticed by the A.O an amount of Rs.51,10,069/- was already brought to tax in the hands of the assessee. In the backdrop of the aforesaid facts, the A.O called upon the assessee to explain as to why its income for the year under consideration may not be worked out by taking the sale price per sq. ft. and the percentage of profit as was adopted by his predecessor while giving effect to the directions of the Tribunal, vide his order u/s. 143(3) r.w.s 254, dated 13.12.2011. However, the assessee failed to furnish any reply to the aforesaid query raised by the A.O.
The A.O observed that as the buildings/project was completed and the possession of the flats was already delivered to the buyers, therefore, the profit earned by the assessee from the same was liable to be brought to tax and could not be deferred for the reason that there was litigation pending in the courts. Further, the A.O not finding the „book results‟ of the assessee as reliable, rejected the same. Thereafter, the A.O on the basis of the order passed by the A.O under Sec.143(3) r.w.s. 254, dated 13.12.2011 for A.Y. 2003-04 worked out the estimated sale price @ Rs.1,563/- per sq. ft. [i.e Rs.4,25,83,906/27,245 sq. ft.] and estimated the sale price of the balance area of 56,970 sq. ft. of the assessee at Rs.8,90,44,110/- [i.e P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) 56,970 sq. ft. X Rs.1,563/- per sq.ft.]. Accordingly, the A.O after applying the profit rate of 12% (as was adopted in the order passed u/s 143(3) r.w.s. 254, dated 13.12.2011 for A.Y. 2003-04), therein worked out the total profit at Rs.1,06,85,293/- in the hands of the assessee.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). In the course of the appellate proceedings, it was reiterated by the assessee that M/s Nova Nirman Nigam had not handed over the possession of the balance area of 56,970 sq. ft. and the matter was pending in the court. Apart there from, it was claimed by the assessee that it had not received the commencement certificate from the Municipal Corporation (for short „BMC‟) due to non-filing of TDR to the extent of 88,708 sq. ft. on the above buildings. It was the claim of the assessee that BMC had served on it a notice under Sec. 53(1) of the M.R & T.P Act, 1966, dated 29.07.2002 for demolition of the buildings as they were irregular. It was further submitted by the assessee that though the Hon‟ble High court of Bombay, had vide its order dated 18.02.2003 observed that only the Municipal Commissioner could regularise the buildings as per the laws of BMC, however, the same was not regularised by the Bombay Municipal Corporation. Apart there from, it was submitted by the assessee that the Municipal Commissioner had by its order dated 14.05.2007 issued directions for demolition of 17 floors of one of the building of its project viz. Gaurav Gagan. As regards the writ petition that was filed by the assessee against the aforesaid order of the Municipal Commissioner, it was submitted by the assessee that the same was dismissed by the Hon‟ble High Court of Bombay, vide its order dated 16.12.2009. In sum and substance, it was the claim of the assessee that due to the aforementioned multiple reasons viz. (i) non-filing of the requisite TDR; (ii). non-regularisation of the above buildings; and (ii) the impending P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) demolition order of the Hon‟ble High Court of Bombay, no revenue of the aforesaid project was recognised by it. It was the claim of the assessee that upto A.Y 2002-03 it was following “percentage completion method” and had offered income @ 9% in the earlier years. Further, income was also partially offered in A.Y 2003-04. It was the claim of the assessee that subsequent to the order of the Hon‟ble High Court of Bombay, wherein the order of the Municipal Commissioner, Mumbai, for demolition of certain floors of its building viz. Gaurav Gagan was confirmed, it had keeping in view the potential liability that may arise viz. returning of the advances to the buyers; liability for hefty compensation to flat buyers in case the demolition of floors was executed; payment of substantial amount for TDR expenses in case the buildings were regularized etc., had thereafter for the said reasons no more recognized any income from the said project. Further, it was submitted by the assessee that as per the Accounting Standard-9 (for short „AS-9‟) and the guidance note on revenue recognition of real estate sector, the revenue was only to be recognised when viz. (i). all the significant risks and rewards of ownership had been transferred to the buyer; (ii). that at the time of transfer of all significant risks and rewards of ownership it is not unreasonable to expect ultimate collection; and (iii). that no significant uncertainity exists regarding the amount of the consideration that will be derived. It was submitted that as in the backdrop of the aforesaid facts there was no certainty about the income arising from the sale of flats, therefore, no income in respect of the said project was recognized in the „books of accounts‟. In sum and substance, it was the claim of the assessee that as the amount received from the buyers of the flats was inchoate one, and it was not possible to calculate the exact amount of profit in view of the impending litigation, therefore, the same could only be brought to tax in the year when the aforesaid disputes were finally settled.
P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) 7. The CIT(A) after deliberating on the contentions advanced by the assessee was however not persuaded to accept the same. It was observed by the CIT(A) that the project of the assessee was completed, flats were sold and their possession was also given to the buyers before the year 2002-03. Insofar the contention of the assessee that as the realisation from the project was uncertain, thus for the said reason it had not recognised the revenue as regards the same, it was observed by the CIT(A) that similar contentions which were advanced by the assessee in A.Y. 2003-04 were rejected by the A.O at the threshold and its income was estimated @12% of the sale receipts, which thereafter was principally upheld by the Tribunal. The CIT(A) observed that as per the „JDA‟ between the assessee and M/s Nova Nirman Nigam, the area falling to the share of the assessee was 84,214 sq. ft., out of which income pertaining to sale of 27,245 sq. ft. was already brought to tax in its hands in A.Y. 2003-04. As such, the CIT(A) observed that the assessee had not offered income as regards the balance share of 56,970 sq. ft., despite the fact that the project was completed, the amounts were received from the flat buyers and the possession of the flats was given to them. It was further observed by him that no demolition of the building was carried out till date. Rather, it was noticed by him that the Hon‟ble Supreme Court, had vide its order passed in SLP No. 257/2010, dated 11.08.2015, directed the Municipal Commissioner, Greater Mumbai, to give a hearing to the flat buyers and also the members of the community in respect of the building before taking any decision on the demolition of the same. Apart there from, it was observed by the CIT(A) that the resale of the flats had also taken place. In the backdrop of his aforesaid observations, the CIT(A) not finding any merit in the contention of the assessee that the revenue had not been recognised due to uncertainty, rejected the same. As the assessee had not maintained project vise P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) accounts, therefore, in the totality of the facts of the case the addition made by the A.O which was found to be in conformity with the method that was principally confirmed by the Tribunal while disposing off the appeal of the assessee for the A.Y. 2003-04 was upheld by the CIT(A).
The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee reiterated the submissions made before the lower authorities. The ld. A.R took us though the facts of the case and submitted that due to multiple factors viz. (i) non-loading of the requisite TDR; (ii) non-regularisation of any of the buildings of the project; and (iii) the demolition order of the Hon‟ble High Court of Bombay, as there was no certainty about the income arising from the sale of flats, therefore, no income in respect of the said project was recognized in the books of accounts. It was submitted by the ld. A.R that in the backdrop of the aforesaid facts, as the amounts received from the buyers of the flats was inchoate one, thus it was not possible to calculate the exact amount of profit in the hands of the assessee. Further, it was the contention of the ld. A.R that the income, if any, from the said project could only be brought to tax in the year in which the aforesaid disputes were finally settled. In support of his aforesaid contention the ld. A.R relied on the judgement of the Hon‟ble High Court of Bombay in the case of CIT Vs. Seksaria Biswan Sugar Factory (P) Ltd. (1992) 63 taxman 167 (Bom).
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that the lower authorities after taking cognizance of the order of the Tribunal in the assesses own case for A.Y. 2003-04, had rightly worked out the income as regards the balance area of 56,970 sq. ft. at Rs.1,06,85,293/-.
P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4)
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record and the judicial pronouncements relied upon by them. As is discernible from the orders of the lower authorities, the assessee had received huge amount of advances from its customers over the years, which were shown as advances in the „balance sheet‟. As observed by us hereinabove, though the project of the assessee was completed, flats were sold and their possession was also given to the buyers before 2002-03, however, no revenue subsequent to A.Y 2003- 04 was recognized primarily for the reason that as there was an order of the Hon‟ble High Court of Bombay for demolition of its buildings, thus there was no certainty about the income arising from the said project. In fact, it is the case of the assessee that subsequent to the order of the Hon‟ble High Court of Bombay, wherein the order of the Municipal Commissioner for demolition of certain floors of its building viz. Gaurav Gagan was confirmed, it had keeping in view the potential liability that may arise on account of multiple reasons viz. returning of the advances to the buyers; liability for hefty compensation to be paid to the flat buyers in case the demolition of floors was executed; payment of substantial amount for TDR expenses in case the buildings were regularized etc., had thus no more recognized revenue for the said project from A.Y 2003-04. As per the information gathered by the A.O the flats were sold by the assessee before 2002-03, and the possession of the same was also delivered to them. On being confronted with the aforesaid fact, it was submitted by the assessee that it had entered into a „JDA‟ with M/s Nova Nirman Nigam, as per which the ownership of the area was to be shared between them in the ratio and of 55:45. It was the claim of the assessee that out of its share of 84,254 sq. ft. it had sold 27,245 sq. ft., while for the balance P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) area of 56,970 sq. ft. due to certain pending litigation was yet not received from M/s Nova Nirman Nigam.
11. We find that as observed by the CIT(A) similar arguments which were advanced by the assessee for justifying the reason for not recognising its income in respect of the aforesaid project were rejected by the A.O while framing the assessment in its case for A.Y 2003-04. Insofar the facts for A.Y 2003-04 are concerned, we find that the assessee in the said year had partly recognised the revenue as regards 27,245 sq.ft of the property falling to its share (out of its total share of 84,254 sq.ft) that were sold by it. The A.O while framing the assessment in A.Y 2003-04 declined to accept the aforesaid reasons which were advanced by the assessee for not recognizing the revenue in respect of the aforesaid project. After rejecting the „books of accounts‟ u/s 145(3) of the I-T Act, the A.O had estimated its income by applying a profit rate of 12% on the total receipt of advances of Rs. 7,41,61,053/-, and had worked out the consequential income at Rs. 88,99,326/-. On appeal, the CIT(A) observed that the income of the assessee was to be determined as per the “percentage completion method” that was consistently being followed in the past, irrespective of the fact as to whether the project was completed or otherwise. At the same time, the CIT(A) directed the A.O to give benefit of the amounts that were refunded by the assessee to its customers. On further appeal, the Tribunal principally upheld the order of the CIT(A), observing as under :
“Ground no. 2 relates to an estimation of the profit of Rs.88,99,326/- ld.AR for assessee in this regard submitted before us that the estimation of profit by the A.O was arbitrary both in applying the percentage @ 12% as well as the determination of gross receipts at Rs.741.61 lakhs. AR argued that 9% has been the assesses estimation over the years and regarding gross receipts he mentioned that Rs.4,92,39,165/- share the correct total receipts. He further argued that the figure of Rs.4,92,39,165/- should replace the amount of Rs.741.65 lakhs. The relevant calculation in this regard are tabulated as under: Name of building Agreement Amount Balance Other Amt Total Amount amount Received Amount Received P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4)
Divya Drashti-B 43,21,260 33,42,745 9,78,515 42,000 33,84,745 Divya Gunjan-A 2,19,02,755 1,63,22,755 55,80,000 9,19,485 1,72,42,240 Gaurav Satkar 24,58,500 23,98,500 60,000 31,000 24,29,500 Divya Shrusti-B 80,85,500 71,56,988 9,28,512 1,43,600 73,00,588 Divya Shrusti-C 40,21,000 40,21,000 - 11,000, 40,32,000 Divya Shrusti-CS 23,20,650 28,71,651 -5,51,000 - 28,71,651 Divya Drashti-A 20,47,000 20,47,000 - 11,000 20,58,000 Divya Plaza 40,82,500 40,82,500 - 55,000 41,32,500 Sub-Total-A 4,92,39,165 4,22,43,139 69,96,026 12,13,685 4,34,56,224 Name of Building Agreement Amount Balance Other amt Total Amount amount received amount Received Building already sold & amts. Required to be refunded Gaurav Garden 3,25,000 3,25,000 Gaurav Gunjan B 7,80,000 - - 7,80,000 Gaurav Gunjan C - 5,61,000 - - 5,51,000 Gaurav Jamuna - 3,61,155 - - 3,61,155 Gaurav Malhar - 23,97,500 - - 23,97,500 Sub total –B - 44,24,655 - - 44,24,655 Building incomplete Gaurav Gagan 5,15,79,000 2,59,88,854 2,55,90,116 2,91,320 2,62,89,174 Sub Total C 5,15,79,000 2,59,88,854 2,55,90,146 2,91,320 2,62,80,174 Total A+B+C - 7,26,56,648 3,25,86,172 15,04,405 7,41,61,053
10. From the table above, it is evident that the assessee excluded that receipts relating to the buildings already sold, the amounts required to be refunded and also the receipts attributable to the buildings not completed for arising that the amount of Rs.4,92,39,165/-. During the proceedings before the CIT(A) the assessee repeated the agreements made before the A.O. the CIT(A0 restored the matter to the file of the A.O for verification of the claim of the assessee. However, he directed the A.O to give benefit to the amounts refunded to the clients. CIT(A) has also noted that the profits have to be estimated as per the declared method of accounting i.e. “percentage completion method” without consideration whether particular project is completed or otherwise. Accordingly, the CIT(A0 upheld the action of the A.O is estimating the profits in respect of the completed buildings as well as incompleted ones. The ld. D.R for revenue relied on the orders of the lower authorities and stated that this issue was already discussed by the CIT(A) in Para 2.3 of the impugned order.
We have heard both the parties in this regard and perused the relevant materials available on records. We have perused Para 2.4 on page 5 of the impugned order for discussion of the CIT(A) in confirming the estimation @ 12% as well as the estimation on the receipts of Rs.741.61 lakhs. We find it is relevant to mention that the amount of Rs.741.61 lakhs is the gross figure and its includes various ingredients such as (i) the receipts already suffered tax @ 9% in the earlier years assessments years as opined by the assessee; (ii) the receipts relatable to the 100% completed projects/buildings; (iii) the receipts relatable to the party completed buildings; and (iv) the receipts which have been refunded to the flat buyers for one reason or other. While confirming the action of the A.O and the CIT(A) in principle, we find it necessary to record that, so far a ingredient no. (i) and (iv) above, assessee is entitled to belief. Obviously, it is for the reason that it amounts to taxing the receipts at (i) twice and taxing the receipts at (iv) above, which is deductible. On the other hand, the receipts of ingredient no. (ii) A.O‟s action of taxing the total sale receipts @ 12% is fully upheld and so in the case with the receipts at ingredient (iii) above. Thus, in continuation of our adjudication relating to the issue of rejection of the books of accounts, the estimation made by the A.O applying the 12% margin on P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) the total receipts, we proceed to confirm the action of the revenue authorities subjected to our discussion above.
12. Regarding the quantification of the total receipts on which 12% should be applied, we object to the AR‟s arguments for not considering incomplete buildings. When the assessee following mercantile system of accounting together with percentage completion method, what has to be seen is work-in-progress or the advance as the assessee has been regularly employed or followed. Accordingly, we are of the considered opinion, A.O is justified in estimation of profits on the total receipts of the completed projects and percentage completion method of the incomplete projects and AO must restrict to the estimation of profits based on the completion of the work of the project, as regularly followed by the assessee instead of total advances received in this regard. In the interest of justice, AO is directed to give relief from the total receipts for all the buildings under consideration towards the refunds, if any. Therefore, the order of the CIT(A) does not call for any interference. Accordingly, ground 2 of the assessee is dismissed.”
As is discernible from the aforesaid observations of the Tribunal while disposing off the appeal of the assessee for A.Y 2003-04, the A.O was directed to reduce the gross receipts of Rs. 7,41,61,053/- by two amounts viz. (i) the receipts that had already suffered tax @ 9% in the earlier assessment years in the hands of the assessee; and (ii). the receipts which had been refunded to the flat buyers for one reason or the other. Apart there from, the Tribunal concluded that the A.O was justified in estimating the profits on the total receipts of the completed projects and as per the percentage completion method in case of the incomplete projects. Further, the A.O was directed to restrict the estimation of profits based on the completion of the work of the project that was regularly followed by the assessee, instead of total advances received in this regard. Accordingly, the A.O giving effect to the said directions of the Tribunal had vide his order passed u/s 143(3) r.w.s 254, dated 13.12.2011 for A.Y 2003-04 worked out the sale receipts at Rs. 4,25,83,906/- and after applying the profit rate of 12%, worked out the income of the assessee.
In the course of the hearing of the appeal, the ld. A.R had placed on record the assessment orders passed u/s 143(3) in the case of the assessee for the preceding years viz. A.Y 2004-05 and A.Y 2005-06.
P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4) We find that the A.O while framing the assessment for A.Y 2005-06, had observed that insofar the work-in-progress in respect of the building/project viz. “Gaurav Garden” was concerned, as the assessee company had failed to comply with the bye-laws of BMC, therefore, the latter had issued stop work notice for the said building in June, 2002, and the position as regards the same remained as such as on date. The ld. A.R drawing support from the aforesaid factual position had submitted, that as during the year under consideration viz. A.Y 2011- 12 the fact situation remained the same, therefore, no addition was called for in the hands of the assessee.
We have given a thoughtful consideration to the facts of the case, and finding ourselves to be in agreement with the view taken by the Tribunal while disposing off the appeal of the assessee for A.Y 2003- 04, respectfully follow the same. Accordingly, on similar lines we direct the A.O to compute the gross receipts in the hands of the assessee by reducing the same by two amounts viz. (i). the receipts that had already suffered tax @9%/@12% in the earlier assessment years in the hands of the assessee; and (ii). the receipts which have been refunded to the flat buyers. The A.O shall estimate the profits @ 12% on the total receipts of the completed projects, and as per the percentage completion method in case of the incomplete projects. Also, the A.O is directed to restrict the estimation of profits based on the completion of the work of the project, as had regularly been followed by the assessee in the past, instead of total advances received in this regard. We thus in terms of our aforesaid observations restore the matter to the file of the A.O for giving effect to our aforesaid directions.
The appeal of the assessee is partly allowed.
P a g e | M/s Ravi Real Estate Developers Pvt. Ltd. Vs. ITO-9(3)(4)