2009 (9) TMI 627 - AT - Income Tax

Method of accounting - Percentage completion method Vs. completed contract method - The assessee is following consistently a method of accounting to declare the profit on project completion method as the assessee can account for the receipt as and when the registration takes place - When the assessee company is required to follow the Accounting Standard as prescribed by ICAI, then naturally it has to take into account the replies given by the Institute for the expert committee on the queries raised by the companies - The appellant undertakes construction activity for those persons to whom it intends to sell the super-built area along with undivided share of land in a project which it is developing as a developer - the assessee has changed the method of accounting from project completion method to percentage completion method in the subsequent year - it is held that in case the revised AS-7 is to be applied then the opening inventories are also to be valued as per revised AS-7 though we are holding that revised AS-7 is not applicable in the case of the assessee - When the guidance note provided that revised AS-7 is applicable to real estate developers, the assessee has itself changed the method of accounting - Appeal is allowed by way of direction to AO to adopt project completion method Regarding business income or house property - As per the lease agreement, the assessee agreed to create a lease in favour of the tenant in respect of the premises, which is part of the building known as The Forum - The person concerned taking the property cannot use for any business except for the specified business - the assessee company is not only managing the property but is also providing common services and common area - assessee is getting composite lease rent payable for all the services under Group-I, Under Group-I, there are nine types of services - held that the rent relating to the building is to be taxed under the head Income from house property - In the result, the appeal is partly allowed

Issues Involved:
1. Assessing income from real estate projects based on the percentage completion method.
2. Assessing rental receipts from Forum Mall under the head 'Income from house property'.
3. Treating hire charges in respect of fit outs let out to tenants as income from house property instead of income from other sources.
4. Disallowance of compounding fee paid to Bangalore Mahanagar Palika.

Issue-wise Detailed Analysis:

1. Assessing Income from Real Estate Projects Based on Percentage Completion Method:
The assessee contested the assessment of income using the percentage completion method instead of the completed contract method. The AO argued that the percentage completion method was mandatory as per AS-7, effective from 1st April 2003, and cited a guidance note from ICAI. The assessee countered that the completed contract method was a well-accepted accounting method and that AS-7 was not applicable to developers undertaking commercial ventures. The Karnataka High Court's decision in CIT vs. Khoday Distilleries Ltd. supported the assessee's right to choose its accounting method. The Tribunal concluded that revised AS-7 was not applicable to the assessee, who was not a construction contractor but a developer. The Tribunal also noted that the Central Government had not notified AS-7 under s. 145(2) of the IT Act, and therefore, the AO could not reject the assessee's accounts based on non-compliance with AS-7. The Tribunal directed the AO to accept the project completion method for the year under reference.

2. Assessing Rental Receipts from Forum Mall Under the Head 'Income from House Property':
The AO treated the rental receipts from Forum Mall as income from house property, relying on the Supreme Court decision in Shambhu Investment (P) Ltd. vs. CIT. The assessee argued that the income should be considered business income due to the commercial exploitation of the property and the provision of various amenities and services. The Tribunal noted that the assessee provided significant services and amenities, indicating commercial exploitation rather than mere rental income. The Tribunal distinguished the facts from Shambhu Investment (P) Ltd. and concluded that the income from Forum Mall should be assessed under the head 'Income from business'. The Tribunal also considered the possibility of assessing the income under 'Income from other sources' if not under business income.

3. Treating Hire Charges in Respect of Fit Outs Let Out to Tenants as Income from House Property Instead of Income from Other Sources:
The Tribunal referred to its earlier decision for the assessment year 2004-05, where it held that the hire charges for fit outs should be treated as income from other sources. The Tribunal emphasized the principle of consistency and directed that the hire charges be taxed under the head 'Income from other sources', allowing the assessee to claim depreciation.

4. Disallowance of Compounding Fee Paid to Bangalore Mahanagar Palika:
The Tribunal upheld the disallowance of the compounding fee paid to Bangalore Mahanagar Palika, following its previous decisions and the jurisdictional High Court's ruling in CIT vs. Mamta Enterprises. The Tribunal concluded that the compounding fee was not an allowable deduction.

Conclusion:
The Tribunal allowed the appeal partly, directing the AO to accept the project completion method for assessing the income from real estate projects, treating the rental income from Forum Mall as business income, and recognizing the hire charges for fit outs as income from other sources. The disallowance of the compounding fee was upheld.

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