DCIT- CC- 2(3), MUMBAI vs. SHREEPATI CASTLE, MUMBAI

Briefly stated the facts are that the Assessee is in the business of redevelopment of old buildings and providing alternate accommodation to old tenants. The Assessee is also selling surplus permissible area to the people in the open market. Therefore, the main revenue of the Assessee is sale proceeds from free sales and differential cost of construction wherever collected from occupants for providing amenities better than the standard amenities provided in the rehab buildings.

In the course of assessment proceedings, the Assessing Officer noticed that the Assessee has undertaken Housing Project “Shreepati Castle” in a phased manner. He noticed that in the first phase, the Assessee claimed to have undertaken redevelopment on three plots and later on three additional plots were purchased and amalgamated with the same. The Assessing Officer noticed that the Assessee has shown that it had completed 58% of the construction work on the above amalgamated plot and as such offered total income at Rs.27,56,653/- against the total revenue recognition at Rs.6,60,08,698/- which was further adjusted against the brought forward losses pertaining to preceding years. The Assessing Officer observed that the Assessee had received Rs.1,06,29,600/- as construction cost and the same was considered as sale proceeds during the current assessment year and at the same time, 42% of the said revenue was transferred to deferred sales suspense account.

The Assessing Officer required the Assessee to explain as to why the said amount of Rs.44,64,332/- being 42% of the revenue was reduced from the sales though the nature of such receipt was basically reimbursement of expenses incurred during the year and as such, the profit for the year should have been increased by the amount of sale transferred to deferred sales suspense account. In response to the query raised by the Assessing Officer, the Assessee submitted its reply stating that Assessee follows percentage completion method for recognizing its revenue based on the work completion certified by the architects. It was also the submission of the Assessee that on agreement with occupants for cost of construction, the cost of construction received account under sales is credited and the occupant account is debited. It was however submitted that the consideration for the said work is received as work progresses or as agreed between the parties. Therefore, it was submitted that the nature of revenue accounted in cost of construction received account is not in the nature of reimbursement of the cost actually incurred but it is the consideration agreed between the occupant and developer towards extra amenities already provided or likely to be provided. It was further submitted that as per the accounting policy followed by the Assessee its revenue is recognized on percentage completion method on project as a whole and not on the basis of completion of individual unit. Therefore, it was submitted that Assessee has transferred 58% of the amount from the cost of construction received account to the sales for the year and 42% amounting to Rs.44,64,432/- has been carried over as deferred sales suspense account in accordance with the accounting policy and method consistently followed by the Assessee. Not convinced with the submissions of the Assessee, the Assessing Officer treated 4 M/s Shreepati Castle Rs.44,64,432/- as income of the Assessee for the current assessment year. On appeal, the Ld. CIT (Appeals) deleted the disallowance against which the Revenue is in appeal before us.

The Ld. DR vehemently supported the orders of the Assessing Officer in treating the amount transferred to deferred sales suspense account as income of the current year. The Ld. AR vehemently supported the orders of the Ld. CIT (Appeals).

We have heard the rival submissions, perused the orders of the authorities below. This aspect of the matter has been elaborately considered by the Ld.CIT (Appeals) with reference to the submissions made by the Assessee as well as the contentions of the Assessing Officer and deleted the disallowance holding that this method of accounting i.e. the percentage completion method is followed by the Assessee consistently and similar claims were accepted by the Revenue in the previous assessment years and also in the subsequent assessment years and therefore it was held by the Ld. CIT (Appeals) that following the principle of consistency, the addition should be deleted. While holding so, the Ld. CIT (Appeals) observed as under :

"2.5 I have carefully considered submissions of appellant and order of AO, case records I other material on record The appellant received Rs 1,06,29,600/- from his old tenant occupants as per terms of agreements with them As per appellant, this amount is receivJ it for providing better amenities in project which is being developed with consent of so tenants. Further such tenants had to be provided free of cost new flats and tenants had to p to appellant 5 M/s Shreepati Castle at cost some extra money for providing better amenities / facilities in new flats. 2.6 According to appellant such proceeds represents revenue receipts and had to accounted as per accounting policy adopted by appellant. The appellant follows percentage completion method of project as a whole and accounted for 58% of such receipts as revenue receipt and balance 42% was transferred to Deferred Sales Suspense account and accounted the same in subsequent year based on stage of construction of project. On the other hand, the AO contended that such receipts represented reimbursement of cost and same had to be counted in full and could not be deferred in part in subsequent year. 2.7 The appellant has been consistently following recognised provisions of Accounting Standard 7 issued by the Institute of Chartered Accountant of India relating to percentage completion method of revenue recognition. In such method of accounting, the cost incurred in reaching the stage of completion of project is taken as a whole and is not based on individual unit and the same is matched with the revenue resulting thereon while reporting the results attributable to the proportion of work completed. Thus, in present case 58% of work relating to project was completed and appellant accounted 58% percentage of revenue receipts and balance amount was transferred to Deferred Sales Suspense Account and accounted for in subsequent year based on stage of construction of project. The appellant was allowed to develop the project only because of consent granted by tenants or occupants as per development agreements entered into with them. The accounting of expenses and income in a year has to be considered on basis of project as a whole and not on basis 'of individual units. So the amount received from tenants/occupants for extra facilities or amenities represents revenue receipts and the same has to be accounted for on basis of percentage completion method. It may be mentioned that the appellant had been following this method of accounting consistently from initiation of the project i.e. from A.Y.2009-1 0. 6 M/s Shreepati Castle A.Y.2010-11 2.8 In appellant's case, from initial assessment year i.e. AY 2009- 10 and onwards all assessment orders have been passed us 143(3) after scrutiny and in all these years no addition was made on the impugned issue mainly because appellant had been following recognised method of accounting i.e. percentage completion method Therefore, in my opinion following the principle of consistency, addition deserves to be deleted.”

On a careful consideration of the facts and circumstance of the case and the findings of the Ld. CIT (Appeals), we do not find any infirmity in the order passed by the Ld. CIT (Appeals). The Ld. DR could not rebut the findings of the Ld. CIT (Appeals) in holding that the accounting of expenses and income in a year has to be considered on the basis of project as a whole and not on the basis of individual units. Therefore, the amount received by the Assessee from tenants / occupants for extra facilities or amenities represents revenue receipts and the same is to be accounted for on the basis of percentage completion method which was consistently followed by the Assessee right from the beginning and the Revenue has accepted such accounting of percentage completion method on such projects in the previous assessment years and also in the subsequent assessment years and therefore following the principle of consistency there is no justification in bringing to tax the amount transferred to deferred sales suspense account for which no work has been carried out by the Assessee in the current assessment year. In view of the above findings of the Ld. CIT (Appeals), we do not find any valid reason to interfere with the findings of the Ld CIT (Appeals).

In the result, appeal of the Revenue is dismissed.