2013 (8) TMI 555 - AT - Income Tax

Taxable event - Completion of contract - profit on sale of the flats - Year of completion of the residential complex built by a developer - CIT(Appeals) has given a categoric finding that the project was completed in the Financial Year relevant to the AY. 1999-2000 - Chartered Accountant of the assessee vide letter dated 14-12-2004 has mentioned in his letter that the housing project was completed in the Financial Year 1998-99 - Assessee had applied for issuance of Completion Certificate in the month of August 1999 and the Completion Certificate was issued to the assessee by CMDA on 29-12-1999 Held that - Project is completed when it becomes habitable and all activities relating to the construction of the project are completed. It is the choice of the developer when to apply to the concerned, authority for the issuance of completion certificate - Year of completion of project as 1998-99. Amount received by the assessee from underwriter is the purchase cost of the flats or advance against the sale of underwritten flats - Held that - The term underwrite means to assume financial responsibility to guarantee the purchase of a full issue of stocks or bonds - Perusal of the underwriting agreement makes it clear that VGP (underwriter) has to pay the agreed amount in a phased manner to the assessee by January 1998. In lieu of the consideration received, the assessee has to complete the apartments and hand over the possession to the prospective buyers brought in by VGP. In the book of accounts, the assessee has shown the amount received from VGP in lieu of underwritten apartments as advance. The assessee is appropriating the amount shown as advance to sale in the year of execution of sale deed. The assessee has received the amount much prior to the date of execution of sale deed and delivery of possession of property - The risk, responsibility and liability to sell the flats underwritten is on the underwriter. If VGP brings any buyer of the flat and requests assessee to execute sale deed in his favour, the assessee is duty bound to get sale deed executed in favour of the prospective buyer and handover possession of the flat. In case the assessee refuses to do so, it shall be breach of contract between the assessee and underwriter - From the documents on record and the facts of the case, it is evident that the amount received by assessee from underwriter is the sale price of the flats. Taxable event AY in which the income of the assessee is liable to be taxed Held that - The assessee is following project completion method. Therefore, the assessee is liable to be taxed in the year of completion of the project - Project of the assessee was completed in the year 1998-99 relevant to the AY. 1999-2000, the income from sale of flats is liable to be taxed in AY. 1999-2000 Advance received from VGP which in fact is the sale proceeds of the flats, on completion of the project has to be treated as sale consideration. The consideration can only be treated as advance till the time the project is in progress. The day the project is completed, the advance has to be treated as sale consideration Decided in favor of Revenue.

Issues Involved:
1. When was the project completed?
2. Whether the amount received by the assessee from the underwriter is the purchase cost of the flats or advance against the sale of underwritten flats?
3. What is the taxable event and in which Assessment Year (AY) is the income of the assessee liable to be taxed?

Detailed Analysis:

1. When was the project completed?

The completion of the project is a pivotal issue in this case. The CIT(Appeals) determined that the project was completed in the Financial Year (FY) 1998-99, relevant to the AY 1999-2000. This conclusion was supported by a letter from the Chartered Accountant dated 14-12-2004, which stated that the housing project was completed in FY 1998-99. Although the assessee applied for the Completion Certificate in August 1999 and received it on 29-12-1999, the Tribunal held that the project is considered complete when it becomes habitable and all construction activities are finished. The assessee did not contest the CIT(Appeals)' finding regarding the year of completion, leading the Tribunal to accept FY 1998-99 as the year of project completion.

2. Whether the amount received by the assessee from the underwriter is the purchase cost of the flats or advance against the sale of underwritten flats?

The nature of the agreement between the assessee and VGP (the underwriter) was scrutinized. The term 'underwrite' was interpreted to mean assuming financial responsibility to guarantee the purchase of flats. The underwriting agreement indicated that VGP was to pay the agreed amount in a phased manner by January 1998, and the assessee was to complete the apartments and hand over possession to buyers identified by VGP. The assessee recorded the amounts received from VGP as advances in its books, appropriating these advances to sales upon the execution of sale deeds. However, the Tribunal found that the amounts received from VGP were, in fact, the sale proceeds of the flats, as the responsibility and liability of selling the 30 underwritten flats had been transferred to VGP. The Tribunal highlighted that the discretion to execute a power of attorney was with the underwriter, and the assessee was contractually obligated to execute sale deeds in favor of buyers brought by VGP, making the amounts received the sale price of the flats.

3. What is the taxable event and in which Assessment Year (AY) is the income of the assessee liable to be taxed?

The assessee followed the project completion method for accounting, meaning the income from the sale of apartments was taxable in the year the project was completed. Since the project was deemed completed in FY 1998-99, the income from the sale of flats was liable to be taxed in AY 1999-2000. The Tribunal noted that the assessee received Rs. 3,43,10,790 from VGP for 30 flats and Rs. 10,66,000 from Ms. Hajira Sultana for one flat, with all amounts received by 31-03-1999. These amounts, initially recorded as advances, were to be treated as sale consideration upon project completion. Therefore, the income from the sale of flats was taxable in AY 1999-2000.

Conclusion:

The Tribunal concluded that the project was completed in FY 1998-99, the amounts received from VGP were the sale proceeds of the flats, and the income was taxable in AY 1999-2000. Consequently, the appeal of the Revenue was allowed, and the order of the CIT(Appeals) was set aside.

Order Pronounced:

The order was pronounced on Monday, the 12th of August, 2013, at Chennai.

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