2022 (8) TMI 685 - AT - Income Tax

Accrual of income - treating of advances received by the assessee from flat buyers as income of the assessee for AY 2006-07 - selection of Project Completion Method or Completed Contract Method - as per DR advance received against sale of the flat should have been assessed in the year of the receipt as same became income of the assessee on receipt of the said advance - development agreements entered into by the owners of the land and the developer - HELD THAT - CIT(A) in his detailed finding held that land in question was not transferred to the developer till completion of the construction and therefore entire risk of the project remained with the landowners including the assessee, therefore, he justified in adoption of completed contract method (or Project Completion Method) followed by the assessee. For assessment year 2007-08 and 2008-09 the Ld. CIT(A) has followed his finding in assessment year 2006-07. We further note that that assessee has already paid tax on the advance received against the sale of flat in assessment year 2008-09 and 2009-10. CIT(A) has pointed out that the land in question was treated as a stock in trade by the assessee in its books of accounts and therefore transfer of the same was not liable to be taxed as capital gain. Hon ble Supreme Court in the case of Seshasayee Steal Private Ltd 2019 (12) TMI 702 - SUPREME COURT considered a development agreement granting permission to start advertising, selling and construction and permitted to execuate sale agreement to the developer. The Hon ble Supreme Court held that such permission is not possession under section 53 of the transfer of the property Act. We concur with the finding of the Ld. CIT(A) that possession of land has been handed over to the prospective buyers consequent to the conveyance in favour of co-operative Society of flat owners. The Ld. CIT(A) has further held that the assessee was regularly following accounting method of Completed Contract Method consistently from year to year. The Ld. CIT(A) has further observed that in the case of the developer also Contract Completed Method has been accepted. The Ld. DR has not controverted any of the above factual finding of Ld. CIT(A). No error in the finding of the Ld. CIT(A) in upholding the Project Completion Method or Completed Contract Method followed by the assessee for declaring income from the project under reference. The grounds of the appeal of the revenue in all the three years are accordingly dismissed.

Summary

Issues Involved:
1. Treatment of advances received by the assessee from flat buyers as income.
2. Adoption of the Project Completion Method (PCM) for revenue recognition.
3. Tax implications of converting land into stock-in-trade.
4. Determination of the year in which the tax liability arises for advances received.

Issue-wise Detailed Analysis:

1. Treatment of Advances Received by the Assessee from Flat Buyers as Income:
The primary issue was whether the advances received by the assessee from flat buyers should be treated as income in the year of receipt. The assessee argued that these advances were not income until the project was completed, as they followed the Project Completion Method (PCM) for accounting. The Assessing Officer (AO) contended that since the developer bore all construction costs and the advances were final and certain, they should be treated as income in the year of receipt. However, the Ld. Commissioner of Income-tax (Appeals) [CIT(A)] and the Tribunal upheld the assessee's method, noting that the advances were related to the land component and were refundable in case of booking cancellations. The Tribunal agreed that the advances should not be treated as income until the project was completed and possession was handed over to the buyers.

2. Adoption of the Project Completion Method (PCM) for Revenue Recognition:
The assessee consistently followed the PCM, recognizing income only upon project completion, receipt of occupation certificates, and execution of conveyance deeds. The AO argued for immediate recognition of advances as income, but the CIT(A) and the Tribunal upheld the PCM. The Tribunal noted that the land was not transferred to the developer until project completion, and the entire risk remained with the landowners. The Tribunal cited various clauses from the development agreement, emphasizing that the legal and juridical possession of the land remained with the landowners until the completion of the buildings and conveyance to the association of flat purchasers.

3. Tax Implications of Converting Land into Stock-in-Trade:
The assessee had converted the land into stock-in-trade in the assessment year (AY) 2004-05 and consistently treated it as such in subsequent years. The Tribunal noted that the land, being a business asset, would not be governed by the definition of transfer under section 2(47) of the IT Act but by general law/Transfer of Property Act, 1882. The Tribunal upheld the CIT(A)'s view that revenue from the land could be recognized only upon project completion and execution of sale deeds, aligning with the PCM.

4. Determination of the Year in Which the Tax Liability Arises for Advances Received:
The Tribunal agreed with the CIT(A) that the tax liability for advances received should arise in the year when the project is completed, and possession is handed over to the buyers. The Tribunal cited the case of CIT vs Ashaland Corporation, where it was held that an agreement to sell does not create any interest in favor of the purchaser until the sale transaction is completed by executing a registered sale deed. The Tribunal noted that the assessee had already paid tax on the total sale proceeds in the years of project completion (AY 2008-09 and 2009-10), ensuring no loss to the revenue.

Conclusion:
The Tribunal upheld the Project Completion Method (PCM) followed by the assessee for revenue recognition, rejecting the AO's contention to treat advances as income in the year of receipt. The Tribunal emphasized that the land remained a business asset and that tax liability should arise only upon project completion and possession handover. The Tribunal dismissed the revenue's appeals, affirming the CIT(A)'s order.