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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SANJAY ARORA, AM & SHRI RAM LAL NEGI, JM
O R D E R Per Sanjay Arora, A. M.: These are set of five appeals, both by the Assessee and the Revenue, in respect of the assessee’s assessments for four consecutive years, being assessment years (A.Ys.) 2006-07 to 2009-10, for which (last) year there are cross appeals. The issues arising being common, the appeals were posted for hearing, and were accordingly heard, together. 2.1 Explaining the background facts of the case, it was pointed out by the ld. Authorized Representative, Shri Pankaj Toprani, the assessee’s counsel, that it could 2 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. be necessary to highlight the back-ground facts of the case, so as to enable a better appreciation and understanding of the issues arising in these appeals. The assessee is a wholly owned company of the Government of Maharashtra, set up for the purpose of slum rehabilitation, principally for the reason that on account of economic unfeasibility, private participation for housing projects in such areas is not forthcoming, and toward which he would, adducing a copy of the Memorandum of Association, advert to the object clauses thereof. Continuing further, the assessee follows percentage completion method for recognizing income. It estimates the working results of its’ different projects under- way as on each valuation date, i.e., as at the end of the account period, 31st March of each year. For the projects it anticipates a loss, the entire of it (loss) is booked, which stands denied by the Revenue. The Tribunal in its’ case for A.Ys. 2000-01 to 2003- 04 (in ITA Nos. 5002/M/2010, 3050/M/2007, 5003/M/2010 and 3486/M/2007 dated 31.10.2011/copy on record), decided by allowing the loss in proportion to the percentage construction completed, so that if the total loss on a project, 40% (say) complete, is estimated at Rs.1,000/-, Rs.400/- stands allowed. The estimation thus, for each project, is an ongoing process, carried forward as on the valuation date each year, revising the figure of anticipated loss on the ongoing projects. Where, however, the assessee perceives a profit (on the entire project), proportionate profit is booked. Further, the entire loss provided each year is written back in, and the loss as per the revised estimate provided for, the following year, so that only the differential amount is claimed or, in case of reduction in loss, brought to tax. This exercise is carried from year to year. Further, though the assessee has, acceding to the order of the tribunal (supra) (which though it has carried in appeal before the Hon’ble High Court), provided only proportionate (i.e., in proportion to the completion of the project) loss on it’s projects, i.e., for which the loss estimate obtains, the assessee has been denied the benefit of the (balance) loss to be carried forward in the form of 3 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. enhanced value of closing work-in-progress (WIP) and, consequently, the opening WIP for the succeeding year. The second aspect of the matter is that it needs to be appreciated that the construction that is undertaken for the purpose of slum rehabilitation cannot be sold and, accordingly, does not fetch any direct return. Consequently, the construction cost is in the nature of sunk cost, though the assessee has claimed the same only on the basis of percentage completion. The revenue flows from the additional construction which it is permitted to undertake in equal measure, by allowing additional FSI, i.e., as against a regular FSI of (say) 1:2 (i.e., 2 sq. ft. of built-up area on 1 sq. ft. of land occupied), it is allowed a FSI of up to 1:4. This extra construction is called ‘free sale construction’. However, no revenue can be recognized as the free sale is not allowed unless the primary construction is completed and delivered to the slum dwellers being rehabilitated. The Revenue has not appreciated this aspect and denied the cost of the construction carried out during the year on the ground that no revenue has been booked. On an enquiry by the Bench, that the said (free sale) construction has in any case to be sold, being carried forward only for that purpose, so that the revenue realizable on the sale may be considered for the purpose of estimation of profit or loss, as the case may be, he replied in the affirmative, though would submit that the revenue is booked only against actual sale and, further, in proportion to the percentage completed. On being further questioned if such construction (free sale) is in design or material, i.e., qualitatively, the same as the other (regular) construction, so that the same cost estimated could be applied for both, he stated that it would depend from project to project and that the Revenue has, in any case, not disturbed the assessee’s cost estimates. The second principal area of revenue generation is the sale of Transferable Development Rights (TDRs). Where the assessee does not deem it proper to construct and carry forward the construction, so that it may not use the available FSI, 4 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. it may sell the corresponding TDR to another developer (to be used for construction in a project in Mumbai toward the North of the relevant project, i.e., for which the TDRs arise). The same, thus, constitutes an integral part of the project cost-benefit analysis, and cannot be segregated therefrom. In this respect too the tribunal has (for AY 2003-04), for which year this issue arose, held that the entire sale proceeds of the TDRs would be liable to be recognized as income for the year in which their sale take place, and it is only the proportionate TDRs, i.e., in proportion to the work completed, valued at estimated realizable value, that forms part of the project cost, that would be subject to the cost-benefit analysis and, thus, being recognized on proportionate (percentage completion) basis. The income in respect of TDRs sold, to the extent already taken into account, would though surely be allowed credit for, and only the difference brought to tax or, where the sale price is lower than the estimated value, expensed.
2.2 The ld. DR would, on the other hand, rely on the order by the tribunal (supra) in the assessee’s case, stating that the same squarely covers the corresponding issues arising in the instant appeals. No infirmity therein has been shown by the assessee, who has even otherwise carried the matter in appeal before the Hon’ble High Court.
We have heard the parties, and perused the material on record. 3.1 The first issue arising in the instant appeal relates to the manner in which the income on the assessee’s – a Builder and Developer, on-going projects, is to be recognized and computed for the purpose of its assessment under the head ‘profit and gains from business and profession’ u/s. 28(i) of the Act. The facts of the case as well as the respective cases of the parties are the same as before the tribunal in the assessee’s case for earlier years, being A.Ys. 2000-01 to 2003-04 supra. The assessee admittedly following mercantile method of accounting and adopting the percentage completion method, the tribunal after noting and discussing various arguments raised by both the sides, upheld only the proportionate income (loss) on the project on the 5 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. proportion sold, to the extent completed as at the year-end. The assessee’s claim for (estimated) loss on the entire project, relying on AS-II notified by the Government of India u/s. 145(2) of the Act, was found unacceptable by it both from the (mercantile) accounting point of view as well as the matching principle it entails/endorses. What the assessee is claiming was in its view future, anticipated loss, which cannot be allowed even under the mandate of AS-II (which, along with AS-I, finds reproduction in its’ order). Only liabilities actually incurred or liable to be so (incurred), as estimated - with reasonably certainty, corresponding to the revenue booked, could be allowed. What the assessee was seeking is the allowance of the future expenses, adjusted against future income, which is not permissible for deduction, save where (and to the extent) the developer had entered into sale agreement/s. The assessee’s accounts are prepared on a going concern basis, which is a fundamental accounting assumption, statutorily recognized per AS-I issued u/s. 145(2) of the Act. The entire cost of construction, whether meant for sale or as free tenement (to slum dwellers), forms part of the composite cost of the project to the assessee, which is to be, in time, adjusted against the corresponding sales, i.e., on proportionate basis. It is the provisions of the Act and not the Accounting Standard/s, which stands further not notified, that would prevail in computing the income under the Act, with the assessee rather itself conceding to AS-2 (‘Valuation of Inventories’, issued by ICAI, New Delhi) being applicable in its case. Reliance was placed on the decisions in the case of Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 1 (SC); Metal Box Company of India Ltd. vs. Their Workmen [1969] 73 ITR 53 (SC); and Bharat Earth Movers vs. CIT [2000] 245 ITR 428 (SC). We reproduce the relevant part of the tribunal’s order as under:
‘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.
Gd.4 reads as under: ‘4. The learned CIT(A) erred in law and on facts in confirming the action of the A.O. in treating the following items as Income from Other Sources in place of Income from Business: i) Cable Networking Rs.1,47,205 ii) Deposit forfeited Rs.10,22,400 iii) Sale of Scrap Rs.521 iv) Lease rent of sub-station Rs.5 and Misc. receipts 11 7864/M/11, 1959/M/13, 8251/M/10 & 1497/M/13 (A.Ys. 2006-07 to 2009-10) Shivshahi Punarvasan Prakalp Ltd. v) Rent of Transit Camps Rs.20,59,596 vi) Wadala Water Charges Rs.12,87,053 vii) Interest on delayed of rent Rs.10,13,414 The said items be treated as income from business.’
We have heard the parties, and perused the material on record. The issue before us is as to whether the relevant incomes are assessable as business income of the assessee u/s. 28, or are liable to be assessed as income from other sources u/s. 56. Surely, it is only a clear nexus with the assessee’s business that would determine if the income is assessable as business income or, where not so, as income from other sources, which is by definition income which is not chargeable to tax under any of the other heads specified in section 14 (items A to E), i.e., apart from incomes specifically provided for u/s. 56(2). The incomes under reference do not fall u/s. 56(2). We would, therefore, consider the facts and circumstances with regard to each of the impugned incomes, which stand clearly brought out in the impugned order, as under:
‘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.