ACIT 10(1), MUMBAI vs. SHIVSHAHI PUNARVASAN PRAKALP LTD, MUMBAI

‘2.11.1 to 2.11.2 …………. 2.11.3 A careful perusal of the Accounting Standards AS-1 & AS-2 notified above shows that these are only regarding disclosure of accounting policies and disclosure of prior period expenses and extraordinary items and changes in accounting policies. These provide 6 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. that the assessee should disclose all significant accounting policies or any changes in accounting policies. It further provides that the accounting policy should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation. In this context it has been mentioned that the provisions should be made for all known liabilities. The Accounting Standard notified no where provides that the provisions for known liabilities should be allowed as deduction while computing total income. Whether the provision made can be allowed as deduction or not will depend on facts and circumstances of the case. It is a settled legal position that provisions in respect of liabilities which had been incurred during the year have to be allowed as deduction even if liabilities are required to be discharged at a future date if they can be estimated with reasonable certainty. This legal position has been declared by the Hon'ble Supreme Court in several cases such as in the case of Calcutta & Co. (37 ITR 01); in case of Metal Box Company of India (73 ITR 53); and in case of Bharat Earth Movers (245 ITR 428).It has been made clear in these cases that for claiming deduction on account of any provision for liability, the incurring of liability during the year must be certain. In case of Calcutta & Company (supra), the assessee had sold land with an undertaking to develop it within six months. The sale deed had been executed and on the sale deed date, the assessee had received part of the sale consideration and balance was to be received in installments in future. The assessee had also to develop the land within six months from the sale deed date. It was held that on the date of sale deed, income had accrued as per mercantile system even if part consideration was to be received later. Similarly on execution of sale deed, assessee incurred the liability to incur expenses to develop the land in future and therefore estimated expenditure on development of the land on a reasonable basis was held allowable as deduction. Precisely because of these reasons and the rulings mentioned above, the Accounting Standard-AS-1 notified by the government provides that provisions shall be made in respect of all known liabilities so that AO could allow deduction in respect of liabilities which had been incurred during the year. 2.11.4 The case of the assessee is different. In this case, the assessee was executing a rehabilitation project and the assessee was entitled for TDR /right to sell the additional space. The TDR accrues to the assessee only after completion of certain percentage of the project and any income on account of sale of additional space will accrue only when it has been constructed and sold. It is possible that 7 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. the assessee in some cases may abandon the project in the mid-way and in that case no income may accrue to the assessee at all. The income in the current year will accrue to the assessee only on account of TDR released and sold or in respect of any additional space constructed for which agreement for sale has been entered into and only in respect of such accrued income if any expenditure has to be incurred in future, the assessee will incur the liability in the current year itself. No agreements for sale had been entered into by the assessee. Therefore, the method followed by the assessee to show the estimated income and expenses in respect of the entire project most of which was yet to be executed could not be accepted as a proper method to compute income under the provisions of Income tax Act. In case of construction projects which are executed on own account and not as a contractor, which is the position in the present case, income from the project will accrue only when the project is complete and area is sold and therefore, completed contract method A.Y:00-01 to 03-04 will be the proper method to compute income in such cases. However, since the construction project has long gestation period, percentage completion method is also accepted method for income tax purposes as per which income/losses proportionate to the construction completed in the relevant year can be offered to tax. For this purpose, income and expenditure from the entire project is estimated on some reasonable basis and proportionate income/loss relating to the work completed during the year can be offered for tax. This is exactly what the AO has done in this case. He has allowed the losses only proportionate to the work in progress at the end of the relevant year. The loss allowed by the AO on proportionate basis to the work completed till the end of the year has therefore, been rightly confirmed by CIT(A) and the claim of the assessee for the entire anticipated losses from the entire project has been rightly rejected. We, therefore, confirm the order of CIT(A) on this issue in all the years under consideration. 2.11.5 to 2.11.6 …..……’ The decisions relied upon by the assessee, viz. CIT vs. Woodward Governor India (P) Ltd. [2009] 312 ITR 254 (SC); CIT vs. Triveni Engineering & Industries ltd. [2011] 336 ITR 374 (Del), as well as by the tribunal in the case of Mazagon Dock Ltd. vs. CIT [2009] 29 SOT 356 (Mum) and Jacob Engineering vs. Asst. CIT (in ITA Nos. 335 and 336/Mum/2007 dated 26.5.2009) were explained and 8 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. distinguished. The working of the profit/loss on the different projects on a proportionate basis; the assessee following the percentage completion method, considered proper by the Revenue, was accordingly upheld; concluding as under, dismissing the assessee’s appeals for all the years: ‘2.11.7 In view of the foregoing discussion and for the reasons given earlier, we do not see any infirmity, in the order of CIT(A) in allowing the loss only to the extent, it related to the WIP at the end of the relevant year. The order of CIT(A) is accordingly upheld.’ 3.2 The second related aspect is with regard to the income on the receipt and sale of transferable development rights (TDRs). The assessee, a company promoted by State Government, is principally engaged in executing slum rehabilitation projects approved by the Slum Rehabilitation Authority (SRA). In terms of the rehabilitation scheme, the developer is obliged to construct and provide free of cost tenement (of the size 225 sq. ft.) to all the slum dwellers. In consideration for developing the said project, the developer receives TDR/right to construct over and above the normal permissible limit and sell this additional area in the open market. The cost to the developer, thus, comprises the cost of construction of the rehabilitation area as well as the additional (free sale) area, while the revenue generated comprises the sale of TDRs and the sale of free sale construction. While the assessee offers only the income on TDRs, estimated at realizable value (or since realized), on proportionate basis, i.e., in proportion to the work completed, in the view of the tribunal the same is not correct. The TDRs were released only after completion of certain percentage of the project, i.e., in phases, in relation to the project completed. In fact, income thereon to an extent is already taken into account, i.e., as considered in working the cost benefit analysis, or the proportionate profit/loss on the project. However, once the TDRs are released, the same cannot be linked with the project in-as-much as they can be sold as soon as they are released, i.e., irrespective of the project in relation to which the same stand issued. The extent of its completion also thus looses significance. The income on their sale therefore stands accrued. The difference, i.e., 9 ITA Nos. 8458/M/10, 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. between the sale value and the income already taken into account, is to be booked as additional income or, where negative, as loss. However, as the working would require being re-examined, the matter, for examination along the lines stated, was directed; the tribunal holding as under:

‘3.2 We have perused the records and considered the matter carefully. The dispute is regarding computation of income from sale of TDR. There is no dispute that the assessee had received income from sale of TDR during the year on release by SRA. The dispute is regarding computation of income from such sale of TDR. We agree with the findings of the authorities below but income from sale of TDR had accrued during the year as per mercantile system of accounting followed by the assessee. However, part of such income has already been considered while allowing the estimated losses in relation to WIP of the relevant years as per the percentage completion method. The assessee while claiming the anticipated future loss, had computed the estimated net income from the entire project which also included the estimated income from TDRs and sale of shops etc. We have not upheld the claim of anticipated loss from the entire project. The loss which has been allowed is only proportionate to WIP of the relevant A.Y:00-01 to 03-04 year and in computation of the said proportionate loss estimated income from sale of TDR on proportionate basis has been considered. Therefore, the sale value of TDR in excess of the corresponding estimated value of TDR considered for the purpose of computation of anticipated loss or sale value of TDR received in excess of the TDR entitlement considered in the estimate is required to be added and in case sale value or entitlement is lower than the estimated rate, deduction has to be allowed. The expenses have already been considered in computation of anticipated losses. However, if actual expenditure is in excess of the estimated expenditure, the excess expenditure has to be allowed. The issue in our view requires fresh examination. We, therefore, set aside the order of CIT(A) and restore the matter back to AO for passing a fresh order on this point after necessary examination in the light of the observation made above and after allowing opportunity of hearing to the assessee.’ 3.3 No infirmity in the tribunal’s order supra, which stands discussed by us at paras 3.1 and 3.2 of this order, deciding the principal issues arising in the instant appeals, stands brought to our notice, with the facts and the respective cases of the 10 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. opposite parties being, as apparent (also refer para 2 of this order), the same. We have therefore no reason to take a different view in the matter. Respectfully following the said decision by the tribunal in the assessee’s own case for the earlier years, we decide the said issues accordingly, so that the assessee’s income u/s. 28(i) of the Act on different under-way projects is to be computed on the lines suggested by the tribunal. No doubt, we observe some projects to have been constructed to a substantial extent while, as stated, were at the initial stages of construction for those years, i.e., which were before the tribunal. That, however, would be of no moment. This is as the tribunal has accepted the booking and disclosure of income on proportionate basis, so that the income only proportionate to the work completed is, in any case, to be taken into account. With regard to the value of the work-in- progress (WIP), we observe no issue in-as-much as it is only upon placing a value thereon, i.e., as at the year-end, in terms of the AS-2 (supra), which is consistent with AS-I and AS-II notified u/s. 145(2) of the Act, that the resultant profit (or loss), i.e., the working result, arises. We decide accordingly. This decides appeals for all the years, other than Gds. 3 & 4 for A.Y. 2007-08 and Gd. 2 for A.Y. 2008-09.

Assessee’s Appeal - (A.Y. 2007-08) 4. Gd. 3 agitates the confirmation of addition of Rs.4,18,500/- in respect of ‘Shed Complex’ project. The same was withdrawn by the assessee during hearing. The same is accordingly dismissed as not pressed.

‘9.2. During appellate proceedings, the appellant argued that it was a company promoted by the State of Maharashtra to facilitate and undertake slum rehabilitation schemes. Under the schemes, the appellant undertakes physical development of slum areas. Under the scheme, slum hutments on a plot of land were cleared and the land made vacant for development. The occupants of the slum area had to be moved to transit accommodation. The appellant builds tenements for slum developers and also develops other area which coupled with TDR generated, if any, could be sold in the open market for recovering the total cost. The appellant further argued that once a property is developed, it had also in some cases to be managed before it was finally handed over to the slum dwellers. In order to manage such property, the appellant had to provide certain basic amenities like water, light, TV cables, etc. For construction and for providing other communities, the appellant receives services from other agencies like that of a cable TV operator. The appellant also floats tenders for selecting contractors and service providers and receives deposits earnest money with the above back ground. The appellant explained each item of income as under:

Cable Networking: The appellant developed Matunga Labour Camp property. In order to provide cable TV connections to the slum dwellers, the appellant floated tenders and selected M/s. Standard Cable Vision for providing the services. The appellant received from the party Rs.1,47,205/- for allowing it to provide services. Thus, the income was arising in the course of business activities of the company, and should not be treated as "Income from Other Sources".

Deposit Forfeited: The appellant had allowed M/s. Matru Krupa Builders, the use of its Transit Camps which it owns, for the purpose of housing slum dwellers during slum redevelopment. The said Matru Krupa did not pay rent for the period from 9th March, 2006 to 8th March, 2007 and therefore the deposit which was received from to the said Developers was forfeited to the extent of Rs.10,22,400/-. Thus, the income from the forfeiture was arising in the course of business of the appellant.

Sale of Scrap: The development work generated small scrap which was sold for Rs.521/-. This income had arisen in the course of business and should no be treated as "Income from Other Sources".

Lease Rent of Sub-Station & Misc. The amount is only Rs.5/- and arises in the course of business.

Rent of Transit Camps: The appellant has to move slum dwellers to transit camps while the redevelopment work of slums was going on. For the purpose the appellant owns Transit Camps from which it earns income. Thus, the income was arising in the course of business.

Wadala Water Charges: The Transit Camps of the company were leased to Pioneer India Development Pvt. Ltd. which was developing slums. The dwellers in the transit camps were provide with the water connection for which the bills were raised on the appellant. The company had therefore in turn made recovery of water charges from Pioneer India Dev. Pvt. Ltd. 13 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. Thus, the recovery was towards off setting expenditure and was arising in the course of business.

Interest on delayed Rent: Transit camps were used by Pioneer India Dev. Pvt. Ltd. which paid rent to the appellant. This was discussed above and it is submitted that this rent is business income. The said Pioneer delayed payment of lease rent and interest of Rs.10,13,414/- was recovered from them. Thus, this income arises in the course of regular business activities.’ The facts are not in dispute. In our clear view, each of these incomes arises in the course of, and is incidental to, the carrying on of its’ business by the assessee. Even the interest on the delayed payment of rent - itself a business receipt, would therefore be liable to be assessed as business income, and toward which we rely on the decision in the case of Nirma Industries Ltd. vs. Dy. CIT [2006] 283 ITR 402 (Guj). We decide accordingly, and the assessee succeeds on this Ground.