VISHWAKARTA BUILD SOLUTIONS P.LTD,MUMBAI vs. CIT (A) 22, MUMBAI

On the facts and circumstances of the case, learned Assessing Officer has erred in treating 60% upto completion of 4th slab of Rs. 71,19,510/- and agreement value in respect of flat Nos. 701 and 702, as income.

The learned Assessing Officer has failed to appreciate that the accounting standard issued by Institute of Chartered Accountants of India, which is duly followed by the appellant. The learned Assessing Officer has failed to appreciate that there is a cancellation of agreement in respect of flats Nos. 701 and 702 and M/s.Vishwakarta Build Solutions Pvt. Ltd., also made the addition on the basis of agreement executed by appellant in respect of the said flat. 3. The learned Assessing Officer has failed to consider the system of percentage completion method. 2. Rival contentions have been heard and record perused. 3. Facts in brief are that assessee is a Private Limited Company engaged in business of builders and developers and currently doing re-development project titled Dushyant CHS Ltd. in Sajjanwadi, Mithagar Road, Mulund (East), Mumbai-400081. During the course of assessment, the learned A.O. treated 2 agreements which were on the 7th floor of the redevelopment building viz., flat No.701 & 702 which were under dispute and plan was not approved by MCGM as income up to completion of 4th slab Rs.7190510/- and levied tax on it. Thus, the AO treated 60% (upto completion of 4th slab) of Rs. 71,90,510/- of the Agreement Value, from agreements of Flat no. 701 and 702 as income. 4. By the impugned order CIT(A) confirmed the action of AO against which assessee is in further appeal before us. 5. It was contended by learned AR that Para 6 of the 'Guidance Note on Recognition of Revenue by Real Estate Developer issued by Accounting Standards Board of the Institute of Chartered Accountants of India, which is followed by all the Real Estate Developers for recognition of income states as follows:

In terms of the above guiding note, learned AR pleaded that assessee was not liable to offer taxes in respect of the proposed construction on 7th Floor. As per the terms of the agreement, developer was retaining the effective control. Developer had to perform substantial act and was obliged to get these flats approved from the government department MCGM for its legal ownership. Hence, the condition No. (i) was not satisfied. (ii) Due to lack of availability of FSI in the financial year, plan for the 7th floor of the building was not approved by the Government Department MCGM and hence significant uncertainty crept into the agreements due to non-approval by government authority. Therefore, the agreements enforceability became questionable. Hence, the condition No. (ii) was not satisfied (iii) The prospective purchasers had approached Banks for Home Loan to pay their respective dues for the purchase of flats. The Bank had refused to lend loan to the purchasers due to 7th Floor plan was M/s.Vishwakarta Build Solutions Pvt. Ltd., not approved by Government authority and hence agreements were not legally enforceable to lend loan to the prospective purchasers. The Purchasers had also created dispute on making payment due to non-approval and demanded the approved plan of the 7th floor by government authority to make payments. So, it was unreasonable to expect ultimate collection. Hence, the condition No. (iii) was not satisfied.

He further contended that in the next year when permission was obtained, the assessee has offered the income in respect of 7th floor and paid taxes thereon.

On the other hand, learned DR relied on the order of the lower authorities and contended that assessee has entered into agreement to sale, therefore, advance so received was liable to tax as current year income irrespective of the fact that assessee did not get permission to construct flats on the 7th floor.

We have considered rival contentions and carefully gone through the orders of the authorities below. From the record, we found that the assessee company has under taken the redevelopment project of M/s. Dushyant CHS limited as per the development agreement executed between both the parties dated 18-07-2008. The Assessee Company has to abide with the provisions of law while constructing the new building by way demolishing the old building and getting the building plans approved from MCGM was the essence of contract. On receipt of the development rights from the said society the Assessee M/s.Vishwakarta Build Solutions Pvt. Ltd., Company has got the building plan approved on 08-08-2008 which is ground to 3rd floor of the building from the MCGM as per 1 FSI under the provisions of DCR 1991. The copy of IOD and Approved plan upto 3rd floor dated 08/08/2008 was filed before the lower authorities. As per the provisions of the said DCR the Assessee Company was allowed to construct further 4 upper floors after obtaining further approvals from the MCGM which is to be counted in 2nd FSI. To obtain further approvals of the building the Assessee Company was required to purchase TDR from the open market and was also required to make payment towards fees, charges and premiums to the MCGM towards the granting a Staircase, lift and lobby area free of FSI as per the section 35(2) (c) of DCR 1991. From the record we found that on 31-03-2010 the Assessee Company had permissions to build only upto 3rd floors as per plan approved by MDGM dated 08-08-2008. The Assessee Company has purchased the TDR from the open market in the month of May 2010 for getting further building plans approved from the MCGM as per DCR 1991. On 10th June 2010, the Bombay High Court has issued two different orders in two different cases restricting MCGM not to charge premiums for granting additional extra FSI and to give exemption in FSI for the areas like Staircase, lift and passage. The Bombay high court has ordered against the premium for staircase, lift, lobby which was charged by the MCGM. On issue of the Bombay High court order, the Municipal Corporation of Greater Mumbai has decided not to exempt the M/s.Vishwakarta Build Solutions Pvt. Ltd., common area like Staircase, Lift and passage from the Floor Space Index (FSl) calculation. The Municipal Commissioner has asked to the all developers and builders to include the area of Staircase, Lift and passage into Floor Space Index (FSI) while obtaining further building plans approval. The decision taken by the MCGM has resulted into reduction of sellable are of the building. In the case of assessee, it has proposed to construct 7 storey building and due to decision implemented by the MCGM against the Bombay high court order the assessee company ended with the building FSI upto 6th floor only because of non exemption of common areas like Staircase, Lift and lobby from the FSI. The copy of Amended approved plan upto 6th floor dated 13-09-2010 considering Staircase, Lift and lobby area into FSI was filed by assessee before the lower authorities.

The assessee company prior to the purchase of TDR and the Bombay high court order has already entered into the agreements to sell with prospect purchasers for the flats proposed to be constructed on the 7th floor of the building. These agreements were subject to various terms and conditions mentioned therein. Due to the stand taken by the MCGM against the Bombay High Court Order an uncertainty came up to the tune of construction of proposed 7th floor of the building. Due to non-approval of building plans for the 7th floor of the building the agreements which were executed became not legally enforceable. The purchaser's of flats also disputed making of progress payments since their banks refused to grant housing loan M/s.Vishwakarta Build Solutions Pvt. Ltd., due to non availability of building plan approved for the 7th floor where these 2 flats were situated. Also due to the non approval of the 7th floor of the building by the MCGM an uncertainty came into the agreement and the flats which were agreed to sell were into the question. Since as per the clause no.7 of the agreements for sale the purchaser were entitled to get full refund on demand on developer fails to give possession of the fiats within stipulated time period.

It is also not in dispute that as on 30th Sept, 2010, the building plan was approved only upto 6th floor of the building. A complete uncertainty was existed in respect of further approval and construction of 7th floor of the building. The Assessee Company has followed accounting standards issued by lCAI. As per AS-7 revenue was booked on the flats agreed to sale by % completion method. As per the said method revenue was booked up to a 60% of agreement value of respective flats agreed to sell upto 6th floor. However an uncertainly existed pertaining to construction of flats no. 701 and 702 the booking amount received against these 2 flats was kept under head Advance received in the balance sheet. As per the understanding of AS-9 the revenue should be booked when all the following 2 conditions are satisfied. (i) 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.