2011 (8) TMI 1080 - AT - Income Tax

Enhancement Notice u/s 251(2) - Appellant's income was enhanced without issuing a notice to that effect - HELD THAT - We find merit in the submissions of the assessee that the learned CIT(A) while enhancing the income of the assessee has not issued the enhancement notice which is statutorily required as per the provisions of sec. 251(2), for which his order has to be set aside. Revenue Recognition as per AS 7 regarding Percentage Completion Method - Applicable on Developers/ Builders or not? - Deduction u/s 80-IB - As per CIT(A), AS 7 is applicable only for contractors engaged in the civil construction business and the same does not apply to builders/developers - Therefore, CIT (A) didn't grant deduction u/s 80-IB(10) - CIT(A) also held, all risks and rewards in the property sold has been transferred to buyer as per the sale agreement HELD THAT - Since the assessee was regularly following the project completion method and has offered the income in the year of completion of project, therefore, we do not find any sound reason as to why the same should be rejected and percentage completion method be followed. The Bangalore Bench of the Tribunal in the case of PRESTIGE ESTATE PROJECTS (P) LIMITED. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX. 2009 (9) TMI 627 - ITAT BANGALORE-B and relying on the decision of the Hon'ble Supreme Court in the case of COMMISSIONER OF INCOME TAX, CHENNAI VERSUS M/S BILAHARI INVESTMENT (P) LTD 2008 (2) TMI 23 - SUPREME COURT has held that the assessee developer having regularly employed project completion method, which is an accepted method of accounting and the Central Government having not notified AS-7 under sec. 145(2), the AO could not reject the accounts u/s 145(3) on the ground that the assessee has not followed percentage completion method of accounting. We find merit in the submission of assessee that he has to construct the complete building as per the specifications over a period and receive the purchase consideration from time to time from the purchasers and hand over the possession of the building when the building is fully completed, it is only at that time the risks and rewards are transferred to the purchaser. Therefore, Revenue authorities are not justified in rejecting the project completion method. In our opinion, merely on the basis of one sample agreement, the learned CIT(A) cannot come to the conclusion that all the risks and rewards in the property sold as per the sale agreement have been transferred to the buyer. Since the project completion method of the assessee has been accepted by us, the without prejudice ground of the assessee challenging non-granting of deduction u/s 80-IB(10) becomes academic in nature and hence the same is not being adjudicated. Deduction u/s 80-IB (10) - Maximum Permissible Commercial Area - Commercial area constructed by the assessee works out to 6.75% and is more than 2000 sq. ft. which is more than permissible area i.e 5% of total project area or 2000 sq.ft whichever is less - Therefore, deduction was denied by AO HELD THAT - We find that Co-ordinate Bench of the Tribunal in the case of ACIT CIRCLE -2, KALYAN VERSUS SHRI GIRDHARILAL K. LULLA, SHREE GANESH BUILDERS OSHO DHARA DEVELOPERS 2011 (5) TMI 867 - ITAT MUMBAI , found that - the condition of 2,000 sq. ft. or 5 per cent of the project was brought to the statute by the Finance (No. 2) Act, 2004 w.e.f. 1st April, 2005. Prior to this insertion, there was no such condition. Further, in the case of HIRANANDANI AKRUTI JV VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 36, MUMBAI 2010 (3) TMI 876 - ITAT MUMBAI , it was held that we find the issue stands decided in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in the case of Brahma Associates where the decision of Special Bench of the Tribunal in the case of BRAHMA ASSOCIATES. VERSUS JOINT COMMISSIONER OF INCOME-TAX., DHARESHWAR PROMOTERS AND BUILDERS, TUSHAR DEVELOPERS VS ITO AND KUMAR BEHARY RATHI AND RAVIRAJ KOTHARI PUNJABI ASSOCIATES VS DCIT 2009 (4) TMI 215 - ITAT PUNE has been upheld according to which the project having commercial area upto 10 per cent of the project is eligible for deduction u/s 80-IB(10). Since admittedly the commercial area in the instant case is less than 10 per cent of the built-up area, therefore, the assessee is entitled to the deduction u/s 80-IB(10) and the learned CIT(A) was not justified in restricting the deduction Since the approval in the instant case was obtained on 10th Oct., 2003 i.e. prior to 1st April, 2005, we hold that the amendment as introduced by the Finance Act, 2004 w.e.f. 1st April, 2005 i.e. asst. yr. 2005-06, is not applicable to assessee's case. The project undisputedly was approved before 1st April, 2005 therefore the provisions of the old law will apply. Therefore, the assessee cannot be denied the benefit of deduction under sec. 80-IB(10) for the commercial area exceeding 5 per cent of the built-up area or 2,000 sq. ft. whichever is less - Decision in favour of Assesee Deduction u/s 80- IB - Purchasers combined more than one flat- Exceeds Permissible Build Up Area - Revenue objected that the assessee has sold two or more than two flats to one party, the combined area of which is more than 1,000 sq. ft HELD THAT - We find merit in the submission of assessee that the area of two flats should not be combined even though the two flats were sold to one person as the built-up area of each flat as approved by CIDCO is less than 1,000 sq. ft. as per the approved plan and occupancy certificate received. Also, there is no evidence with the Department that the assessee has sold after combining the two flats together and sold to one party. Therefore, merely because some of the purchasers have purchased more than one flat and combined the same, the same in our opinion, will not disentitle the assessee to claim the deduction under sec. 80-IB(10) Further the condition that not more than one residential unit in the housing project is allotted to any person not being an individual has been inserted by the Finance (No. 2) Act, 2009 w.e.f. 1st April, 2010 - Decision in favour of Assessee. Balcony and Terrace included in Build- Up Area u/s 80-IB or not? - As per Revenue, if the terrace area is included, the total built-up area in some of the cases exceeds 1,000 sq. ft - Denied benefits of deduction HELD THAT - In the instant case, undisputedly the project was approved on 10th Oct., 2003 i.e. prior to 1st April, 2005, therefore, we are of the opinion, that the Revenue authorities are not justified in including the balcony/terrace in the built-up area so as to deny the benefit of deduction u/s 80-IB(10). Further, if some of the flats in a housing project exceed the permissible limit, then the benefit of deduction under s. 80-IB(10) has to be granted on pro rata basis and the assessee cannot be denied the exemption. However, since the area of none of the flats exceeds 1,000 sq. ft. after excluding the balcony/terrace, the assessee, in our opinion, has not violated this condition. We therefore, direct the AO to grant the benefit of deduction. Taxability of income from wings where Occupancy Certificate were already Received - Assessee submitted though Occupancy Certificate was received by assessee in 2006 but possession was handed over in next year after meeting specifications of purchasers HELD THAT - The assessee is right in recognizing the revenue in assessment year when flats were handed over. Further, we also find merit in the submission of the learned counsel for the assessee that since the assessee fulfils all the conditions prescribed under s. 80-IB(10), the entire profit has to be allowed as deduction under sec. 80-IB(10) and it does not affect the computation. Deemed Dividends u/s 2(22)(e) - Assessee company took unsecured loan from Haware Engineers Builders (P) Ltd.(HEBPL) - Mrs. Ujjwala Haware holds more than 20% equity capital in assessee company and (HEBPL) - AO treated unsecured loan as receipt of deemed dividend and made addition in income of Assessee HELD THAT - It is clear that the assessee is not a registered shareholder in HEBPL nor HEBPL is a registered shareholder in the assessee company. It has been held by the Special Bench of the Tribunal in the case of ASSISTANT COMMISSIONER OF INCOME-TAX. VERSUS BHAUMIK COLOUR (P) LIMITED. 2008 (11) TMI 273 - ITAT BOMBAY-E that deemed dividend can be assessed only in the hands of the person who is a shareholder of the lender company and not in the hands of a person other than a shareholder and not in the hands of the borrowing concern in which such shareholder is member or partner having substantial interest. Since the assessee company is not a shareholder in HEBPL, therefore, merely because Smt. Ujjwal Haware is a shareholder in both the concerns having 20 per cent equity share no amount can be taxed in the hands of the assessee company under sec. 2(22)(e) - Addition made deleted - Decision in favour of Assessee

Summary

Issues Involved:
1. Rejection of Project Completion Method vs. Percentage Completion Method.
2. Deduction under Section 80-IB(10) of the Income Tax Act.
3. Treatment of deemed dividends under Section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Rejection of Project Completion Method vs. Percentage Completion Method:

The assessee, engaged in the business of civil construction and development, followed the Project Completion Method for accounting profits, which was accepted in earlier and subsequent assessment years. However, the AO rejected this method for the assessment year 2005-06, adopting the Percentage Completion Method instead. The AO argued that the assessee's method did not align with AS-9 and AS-7, which apply to construction contracts and real estate developers respectively. The AO estimated the income at 5% of the Work-in-Progress (WIP) shown for the completed projects, resulting in an assessed income of Rs. 51,51,731 against the declared loss.

The CIT(A) upheld the AO's decision, applying a net profit ratio of 26.74% based on the previous year's profit ratio. However, the Tribunal found that the Project Completion Method is a recognized accounting method for builders, consistently followed by the assessee, and accepted in other years. The Tribunal cited various decisions, including Awadesh Builders vs. ITO and Prestige Estate Projects (P) Ltd. vs. Dy. CIT, supporting the Project Completion Method. Consequently, the Tribunal set aside the CIT(A)'s order, allowing the assessee's appeal for the assessment year 2005-06.

2. Deduction under Section 80-IB(10) of the Income Tax Act:

For the assessment year 2006-07, the assessee claimed a deduction under Section 80-IB(10) for profits from the "Gulmohar" and "Splendor" projects. The AO denied this deduction, arguing that the commercial area exceeded the permissible limit of 5% or 2000 sq. ft., and some residential units exceeded 1000 sq. ft. when combined. The AO also contended that the project was a residential-cum-commercial project, not solely a housing project.

The CIT(A) upheld the AO's decision, but the Tribunal found merit in the assessee's arguments. The Tribunal noted that the project was approved before the amendment introduced by the Finance Act, 2004, which imposed restrictions on commercial area. The Tribunal cited decisions in Saroj Sales Organisation vs. ITO and Hirananadani Akruti JV vs. Dy. CIT, holding that the amendment did not apply to projects approved before 1st April 2005. The Tribunal also found that individual flats sold under separate agreements should not be combined for the purpose of calculating the 1000 sq. ft. limit. Consequently, the Tribunal allowed the assessee's appeal for the assessment year 2006-07 and directed the AO to grant the deduction under Section 80-IB(10).

3. Treatment of deemed dividends under Section 2(22)(e) of the Income Tax Act:

The AO treated a sum of Rs. 8,01,97,900 received by the assessee from Haware Engineers & Builders (P) Ltd. (HEBPL) as deemed dividends under Section 2(22)(e), as Mrs. Ujjwala Haware held more than 20% equity in both companies. The CIT(A) upheld this decision, but the Tribunal found that the assessee was not a registered shareholder in HEBPL. Citing the Special Bench decision in CIT vs. Bhaumik Colour (P) Ltd., the Tribunal held that deemed dividend can only be assessed in the hands of the registered shareholder, not the borrowing concern. Therefore, the Tribunal directed the AO to delete the addition, allowing the assessee's appeal on this issue.

Conclusion:

The Tribunal allowed the appeals for the assessment years 2005-06 and 2007-08, and partly allowed the appeal for the assessment year 2006-07, providing relief to the assessee on all contested issues.