2012 (6) TMI 440 - AT - Income Tax

Addition on account of sale of TDR - slum rehabilitation project. - AO observed that TDR was nothing but FSI granted by SRA which could be used by recipient for construction of flats /premises in Mumbai. Held that - approach adopted by the Assessing Officer for assessing the income from TDR independently without deducting the expenses incurred is not justified. - The assessee has been following project completion method which is an accepted method of accounting in construction business and also recommended as per accounting standard AS-7 of ICAI. Therefore, in such cases the income from the project has to be computed in the year of completion. The TDRs received are directly linked to the execution of the project and therefore, before the completion of the project the income from TDR or any other receipt inextricably linked to the project will only go to reduce costs of the project. order of CIT (A) deleting the addition confirmed. - appeal of the revenue for the Assessment Year 2006-07 is dismissed

Summary

Issues:
Assessment of income from sale of Transfer of Development Rights (TDR) in a construction project.

Analysis:
The dispute in this case revolves around the assessment of income from the sale of TDRs in a construction project undertaken by the assessee. The Assessing Officer contended that the income from the sale of TDRs should be recognized in the year of receipt, treating it as an independent item of income. However, the assessee argued that it followed the project completion method of accounting, where income is recognized only upon completion of the project. The assessee received TDRs in exchange for transit buildings constructed for slum dwellers, and therefore, the cost of TDRs should be considered as the cost of the completed buildings. The CIT (A) supported the assessee's position, citing the accepted method of project completion accounting in the construction business. The CIT (A) referred to relevant decisions and accounting standards to justify the treatment of TDR receipts against work-in-progress until project completion.

The Appellate Tribunal agreed with the assessee's contentions, emphasizing that the Assessing Officer's approach of assessing TDR income independently without deducting expenses was unjustified. The Tribunal upheld the project completion method followed by the assessee, stating that income from the project should be computed in the year of completion. The Tribunal also highlighted that TDR receipts were directly linked to the project execution and should be set off against project costs until completion. Therefore, the Tribunal confirmed the CIT (A)'s decision to delete the addition made by the Assessing Officer in the Assessment Year 2006-07. However, the Tribunal directed further verification for the Assessment Year 2007-08 to determine the project's completion status. If the project was completed in 2007-08, the income would be computed considering all expenses and receipts from the beginning of the project. Otherwise, TDR receipts would continue to be set off against work in progress without separate income assessment.

In a corrigendum, the Tribunal clarified the outcome of the appeals, confirming the dismissal of the revenue's appeal for the Assessment Year 2006-07 and allowing it for statistical purposes for the Assessment Year 2007-08. The correction rectified the error in the initial judgment regarding the party filing the appeals.

This detailed analysis showcases the legal intricacies involved in determining the treatment of income from TDR sales in construction projects, emphasizing the importance of adhering to recognized accounting methods and relevant legal precedents.