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2006 (7) TMI 680 - AT - Income TaxMethod of accounting - business of construction of multi-storied buildings - liability to pay the L DO charges - HELD THAT - In the present case initially upto and including the assessment year 1988-89 the Assessing Officer accepted the assessee s method of computing the profits i.e., the project completion method, and completed the assessments on that basis. For the first time in the assessment year 1989-90 he switched to the percentage of completion method presumably because he found that the assessee had handed over possession in respect of 54 flats out of the total 86 flats constructed by it and had received sale consideration of ₹ 2,02,24,253. In the assessment years 1990-91 and 1991-92 the Assessing Officer accepted the project completion method as the basis of computing the profits of the business, thereby making a departure from his own stand taken in the assessment year 1989-90. We are unable to approve of this action of the Assessing Officer. As already noted the decision taken in the initial year to compute the profits of the assessee s business under a particular method has to be given effect to in all the years till the project is completed. Any departure for some of the years fall in between will distort the entire picture. The assessments in such a case may not be fair to the assessee as well as the Department. It is not in dispute that the assessee has shown the entire profits from the construction in the return for the assessment year 1992-93. This is consistent with its stand. In these circumstances, we direct the Assessing Officer to compute the income of the assessee under the project completion method. The entire profits are assessable in the assessment year 1992-93. The Income-tax authorities were not justified in assessing the sale price of ₹ 2,02,24,253 in respect of the 54 flats in the assessment year 1989-90. We direct accordingly and allow the first two grounds filed by the assessee in the appeal for the assessment year 1989-90. Liability to pay the L DO charges - We agree with the points raised by the learned Senior DR on the basis of the agreement entered into between the assessee and the flat purchasers. We accordingly uphold the disallowance of the liability for both the years. However, we find force in the alternative contention of the assessee raised by way of additional ground, which has already been admitted by the Tribunal. The amount has merely been collected by the assessee, but it does not form part of the sale price of the flats. Therefore, we direct exclusion of the amount collected by the assessee at the rate of ₹ 90 per sq. ft. from the flat purchasers for both the years under consideration. The deduction on account of liability to L DO charges has been claimed by the assessee only because the amount of ₹ 90 per sq. ft. has been included in the receipts. If the deduction is not allowable on the ground that the assessee is not liable to pay the L DO charges, for the same reason the amount collected cannot also be assessed as part of the receipts of the business. We accordingly accept the additional ground for both the years directing the Assessing Officer to exclude the amount collected by the assessee from the flat owners as charges L DO from the assessment. In the result, both the appeals are partly allowed.
Issues Involved:
1. Method of computation of income from the construction business. 2. Allowability of L&DO charges for the assessment years 1989-90 and 1992-93. Issue-wise Detailed Analysis: 1. Method of Computation of Income from the Construction Business: The assessee, a domestic company engaged in the construction of multi-storied buildings, followed the project completion method for computing its income. This method involves debiting construction expenditure to a work-in-progress account, carrying it forward until the project's completion, and offering the profits for taxation in the completion year. The alternative method, the percentage of completion method, computes profits annually based on project completion percentage. For the assessment year 1989-90, the Assessing Officer (AO) noticed that the assessee handed over possession of 54 flats and received Rs. 2,02,24,253. He assessed the income based on the percentage of completion method, deeming the project substantially complete. However, in subsequent years (1990-91 and 1991-92), the AO reverted to the project completion method, accepted by the assessee and the Income-tax Department in earlier years. The Tribunal found force in the assessee's contention that the AO's vacillation between methods across years would cause "complete chaos and confusion," distorting the computation of profits. The Tribunal emphasized that the AO should consistently follow the initially accepted method until project completion. It directed the AO to compute the income under the project completion method, assessing the entire profits in the assessment year 1992-93, and not to include the Rs. 2,02,24,253 in the assessment year 1989-90. Thus, the first two grounds for the assessment year 1989-90 were allowed in favor of the assessee. 2. Allowability of L&DO Charges: The issue involved the allowability of L&DO charges of Rs. 80,11,576 for the assessment year 1989-90 and Rs. 3,50,732 for the assessment year 1992-93. The assessee contended that the liability was incurred upon receiving permission from the L&DO to construct the building and that it collected Rs. 90 per sq. ft. from purchasers towards these charges, which were included in the sale price and taxed. The AO disallowed the charges, citing clauses in the agreement with flat buyers that placed the responsibility for L&DO charges on the buyers, not the assessee. The CIT (Appeals) confirmed this disallowance. The Tribunal reviewed the facts, including the clauses in the agreement and the conduct of the assessee in its accounts. It concluded that the primary liability to pay L&DO charges was not on the assessee but on the flat purchasers. Hence, the disallowance of the liability was upheld for both years. However, the Tribunal found merit in the assessee's alternative contention that if the liability was not allowable, the corresponding amount collected from purchasers should be excluded from the assessment. It directed the AO to exclude the amount collected at Rs. 90 per sq. ft. from the flat purchasers from the assessment, as it did not form part of the sale price of the flats. Conclusion: Both appeals were partly allowed. The Tribunal directed the AO to compute the income under the project completion method and exclude the L&DO charges collected from the flat purchasers from the assessment.
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