2005 (1) TMI 592 - AT - Income Tax

Summary

Issues Involved:
1. Whether the Kandivali Project is a single, indivisible, and composite project.
2. Whether the method of accounting adopted by the assessee for recognizing profits is acceptable.
3. Whether the income from the assignment of development rights should be taxed in the year of receipt.
4. Whether the CIT(A) erred in directing the Assessing Officer to allow the amount of Rs. 1,25,000 under section 40A(3).

Issue-wise Detailed Analysis:

1. Single, Indivisible, and Composite Project:
The primary issue was whether the Kandivali Project should be treated as a single, indivisible, and composite project. The Assessing Officer contended that the project was not single and indivisible, citing the sale of smaller properties to various sub-developers and the absence of unfulfilled obligations by the assessee. However, the CIT(A) and the Tribunal found that the project was indeed single, indivisible, and composite. The project was governed by the Urban Land (Ceiling and Regulation) Act, 1976, and the Bombay Municipal Corporation's layout plans, both of which were indivisible. The terms and conditions of the exemption order under the ULC Act, such as the time limit for completion, infrastructural development, and reservation for government nominees, further supported the project's indivisibility. The Tribunal concluded that the assignment of development rights to sub-developers was merely a mode employed by the assessee to ensure timely completion and raise funds, without altering the project's composite nature.

2. Method of Accounting for Recognizing Profits:
The Assessing Officer argued that there was a change in the method of accounting from the mercantile system to the cash system, which he deemed unjustifiable. However, the Tribunal found that the assessee continued to follow the mercantile system and only modified the method of recognizing profits during the project's currency. The assessee shifted from the Completed Contract Method to recognizing estimated net profits at 7.5% of the sales receipts during the year. This change was in line with generally accepted accounting principles and the Accounting Standard (AS-7) for construction contracts, which allows for either the Completed Contract Method or recognizing revenue during the project's currency. The Tribunal held that this change was not for tax avoidance but to pre-pone tax liability, and hence, the method adopted by the assessee was acceptable.

3. Taxation of Income from Assignment of Development Rights:
The Assessing Officer treated the entire consideration from the assignment of development rights as having accrued during the year, which the Tribunal found incorrect. The Tribunal agreed with the assessee that the enforceable right to receive consideration crystallized upon the happening of various events, such as obtaining no objection certificates and installment due dates, not merely upon the execution of agreements. The Tribunal relied on the Bombay High Court decision in CIT v. Ace Builders (P.) Ltd. to support the view that profits from a single, indivisible project are determinable only upon its completion. Therefore, the income from the assignment of development rights should not be taxed in the year of receipt but recognized over the project's duration.

4. Allowance of Rs. 1,25,000 under Section 40A(3):
The CIT(A) directed the Assessing Officer to allow the amount of Rs. 1,25,000, which was disallowed under section 40A(3) as compensation paid for the removal of two occupants. The Tribunal upheld this direction, agreeing with the CIT(A) that the amount was admissible.

Conclusion:
The Tribunal concluded that the Kandivali Project is a single, indivisible, and composite project. The method of accounting adopted by the assessee for recognizing profits during the project's currency was acceptable and in line with accounting standards. The income from the assignment of development rights should not be taxed in the year of receipt but recognized over the project's duration. The Tribunal also upheld the allowance of Rs. 1,25,000 under section 40A(3). Consequently, the revenue's appeal and the assessee's cross-objections were dismissed.