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2010 (9) TMI 237 - AT - Income TaxAgreements was assessable on percentage completion method - the assessee had adopted Percentage Completion Method PCM for its real estate developments. During the year under dispute, out of 25 projects being developed, 7 projects were completed and the remaining 18 projects were under various stages of completion. Out of 18 projects, 8 projects were less than 30 per cent of completion and, thus, no revenue was recognized. In the remaining 10 projects, the assessee had offered to tax the cumulative projects for only 5 projects under PCM. the crux of the assessee s contention was that it doesn t get ownership rights over the property or in lands unless it complies with all the conditions stipulated in the JDA and one of the conditions was that it requires to hand over the share of land owner s built up space and, thus, the assessee can transfer all significant risks and rewards of ownership to the buyers on only at the end of the project including that of the land owner s share and the assessee s share superstructure was completed simultaneously. Another significant argument of the assessee was that the legal ownership of immovable property could be transferred by executing a registered sale/conveyance deed etc. Further, from the terms and conditions set out in the tripartite agreement, the following facts emerge (1)The relationship between the assessee the confirming party with M/s. United Breweries (Holdings) Ltd. seller and the purchaser is only as a construction contractor wherein the assessee is bound to construct a building in the manner laid down in the tripartite agreement. (2)Any disputes arising out of the tripartite agreement between the parties shall be settled by arbitration in accordance with the provisions of the prevailing Arbitration laws. (3)Specific performance clause applies between the purchaser on the one part and the seller along with the confirming party on the other part. (4)Thus the purchaser on compliance with the terms and conditions set forth in the tripartite agreement shall be entitled to his share of built-up area. (5)From the joint reading of the terms and conditions set forth in the tripartite agreement brings out the fact that if the confirming party falls out, the seller may either substitute another builder or complete the project by itself without jeopardizing the interest of the purchaser. This clearly establishes that the confirming party is only acting as a contractor for construction of the building for both the seller and the purchaser. (6)Specifically there is no exit clause provided to the confirming party in the tripartite agreement. (7)Even if the confirming party fails to complete the project, there will not be an occasion to revert back all the parties in the tripartite agreement back to square one. (8)It is pertinent to note that as per the tripartite agreement, the confirming party receives an advance as per a schedule of payment agreed upon between both the confirming party and the purchaser towards the sale consideration from which the confirming party carries out the construction activities. (9)It is obvious from the above facts that the confirming party realizes profit at every stage of construction. HELD THAT - In an overall consideration of the facts and circumstances of the issue as deliberated upon and also careful perusal of Guidance Note on Recognition of revenue by Real Estate Developers, we are of the considered view that the AO was justified in holding that the revenue from the five projects under JDA was to be assessable on percentage completion method only. It is ordered accordingly. regard to disallowance of the compounding fee - paid to BBMP - At the outset, we would like to point out that the Hon ble Tribunal in its finding in Prestige Estate Projects (P.) Ltd. v. Dy. CIT 2009 (9) TMI 627 - ITAT BANGALORE-B for the AY 2005-06 in the assessee s own case dealt with a similar issue wherein it has been held that; ''This issue has also been decided in the case of the assessee by this Tribunal while deciding appeals for the asst. years 2001-02 to 2003-04. The Tribunal while following the decision of the jurisdictional High Court in the case of Mamta Enterprises 2003 (10) TMI 26 - KARNATAKA HIGH COURT that compounding fee paid is not an allowable deduction.... In conformity with the above finding of the Hon ble Tribunal, we decide the issue against the assessee on both counts. Deletion of the addition - protective basis as income from other sources - In the assessment order under dispute, while adding a whopping sum of Rs. 7.33 crores as income from other sources, the Assessing Officer should have taken proper care to mention in the body of the order the reason for taxing the said sum even on a protective basis . In the meanwhile, the Hon ble Tribunal in its finding Prestige Estate Projects (P.) Ltd. v. Dy. CIT 2009 (9) TMI 627 - ITAT BANGALORE-B directed the AO to accept the project completion method of accounting for the year under reference. Thus, in our considered view, the taxability of the sum of Rs. 7,33,13,640 had reached a finality on a specific direction of the Hon ble Tribunal cited above for the assessment year 2005-06. Therefore, the CIT(A) was justified in his stand on this point. It is ordered accordingly. rentals from Forum Mall and Eva Mall as income from profits and gains from business/profession'' - we would like to point that an identical issue had cropped up before the Hon ble Tribunal for the AY 2005-06 in the assessee s own case wherein the Hon ble Tribunal had, after hearing the arguments of rival parties, analyzing the issue at length, extensively quoting, chiefly, the rulings of the Hon ble Apex Court as well as the jurisdictional Hon ble High Court in a number of cases on a similar issue, observed thus - ''We had discussed this issue while considering the ratio of law as laid down by the Hon ble Apex Court in the case of Sultan Brothers 1963 (12) TMI 4 - SUPREME COURT held that there should b e no consideration of primary and secondary lettings in construing the section 12(4) of 1922 Act, which has analogy to section 56( iii ). In this case, the letting of building is along with letting machinery, plant or furniture required for ancillaries services and therefore, we hold that the alternative plea of the appellant that in case the income is not to be assessed under the head Income from house property then it is required to be assessed under the head Income from other sources , this is without prejudice to our basic finding that in the instant case, the income from Mall is assessable under the head Income from business . Therefore, we direct the AO to assess the income from Mall under the head Income from business . It is ordered accordingly. hire charges in respect of fit-outs as income from other sources - As the issue before us is similar which has been decided by the Hon ble Tribunal referred 1963 (12) TMI 4 - SUPREME COURT in the assessee s own case for the preceding AY 2005-06 on similar issue wherein the Hon ble Tribunal was pleased to observe that - '' the intention of the assessee for rendering the same as income from other sources ought not to have been disturbed as in earlier years . Hence, the receipts on letting of it is to be taxed under the head Income from other sources on the basis of the decision of the Tribunal in the earlier year and also on the basis of the principal of consistency. Once the rental income on letting out is taxed under the head Income from other sources , then, the assessee will be entitled for depreciation. Therefore, we have no hesitation in directing the AO to treat the hire charges in respect of fit-outs let-out to the tenants as income from Other sources . It is ordered accordingly. Hence, The assessee s appeal is dismissed; and The revenue s appeal is dismissed.
Issues Involved:
1. Adoption of Percentage Completion Method (PCM) for revenue recognition. 2. Disallowance of compounding fee paid to Bangalore Mahanagar Palika (BMP). 3. Disallowance of amounts paid to the Department of Company Affairs and as entry tax compounding fees. 4. Deletion of the addition made on protective basis as income from 'other sources'. 5. Assessment of rentals from Forum Mall and Eva Mall as 'income from profits and gains from business/profession'. 6. Assessment of hire charges in respect of fit-outs as income from 'other sources'. Issue-wise Detailed Analysis: 1. Adoption of Percentage Completion Method (PCM) for Revenue Recognition: The assessee adopted the Percentage Completion Method (PCM) for its real estate developments. Out of 25 projects, 7 were completed, and 18 were at various stages of completion. The assessee did not recognize revenue for 8 projects that were less than 30% complete and offered tax for only 5 projects under PCM. The Assessing Officer (AO) required clarification on why revenue was not recognized for the remaining 5 projects that were more than 30% complete. The AO concluded that the assessee could transfer all significant risks and rewards to the buyers upon entering into agreements, even if the legal ownership of the land was not transferred. The AO added an income of Rs. 8,92,90,995 for the five projects under JDA to the assessee's income. The CIT(A) upheld the AO's decision, stating that the assessee must follow the percentage completion method as per AS-7 for construction contracts. The assessee's contention that revenue could only be recognized after completing the project was not accepted. 2. Disallowance of Compounding Fee Paid to Bangalore Mahanagar Palika (BMP): The AO disallowed the compounding fee of Rs. 43.96 lakhs paid by the assessee to BMP, citing that the expenditure was for an offense or an act prohibited by law. The CIT(A) confirmed the disallowance, referencing the Explanation to sub-section (1) of section 37 of the Income-tax Act, which prohibits deductions for expenses incurred for any purpose that is an offense or prohibited by law. 3. Disallowance of Amounts Paid to the Department of Company Affairs and as Entry Tax Compounding Fees: The AO disallowed Rs. 51,585 paid to the Department of Company Affairs and as entry tax compounding fees, citing similar reasoning as the compounding fee paid to BMP. The CIT(A) upheld the disallowance, noting that the assessee failed to prove that these expenses did not fall under the purview of the Explanation to sub-section (1) of section 37 of the Act. 4. Deletion of the Addition Made on Protective Basis as Income from 'Other Sources': The CIT(A) deleted the addition of Rs. 7.33 crores made on a protective basis as income from 'other sources'. The AO had added this amount based on the premise that the assessee should have followed PCM for recognizing revenues in the previous assessment year. The CIT(A) noted that the Tribunal had directed the AO to accept the project completion method for the previous year, and therefore, the income should be assessed on a substantive basis in the current year. 5. Assessment of Rentals from Forum Mall and Eva Mall as 'Income from Profits and Gains from Business/Profession': The CIT(A) directed the AO to assess the rental income from Forum Mall and Eva Mall as 'income from profits and gains from business/profession'. The Tribunal had previously held that the income from the mall should be assessed under the head 'Income from business'. The CIT(A) followed this precedent. 6. Assessment of Hire Charges in Respect of Fit-outs as Income from 'Other Sources': The CIT(A) directed the AO to assess the hire charges in respect of fit-outs as income from 'other sources'. The Tribunal had previously held that the receipts from letting out fit-outs should be taxed under 'income from other sources' and allowed the assessee to claim depreciation. Conclusion: Both the assessee's appeal and the revenue's appeal were dismissed, upholding the decisions made by the CIT(A) and the AO on all issues.
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