2023 (6) TMI 255 - AT - Income Tax

Treatment to sale proceeds of land TDR - whether be apart of the project undertaken or be treated independently of the total project for the computation of the income? - HELD THAT - As assessee has entered into an agreement to develop the slum rehabilitation scheme as per which assessee has acquired the land from M/s. Bombay Industrial Corporation and entered into multipartite agreement with SRA and different tenements. No doubt assessee has transferred the land to SRA and surrendered all the rights over the property.Assessee had a basic obligation to construct the building and receive TDR on the portion of land on which the construction is completed in the ratio of 1 1 on TDR and construction TDR in the ratio of 1 1.33. It is fact on record that the construction agreement received by the assessee is to construct the building as per the agreed terms only when assessee completes the constructions assessee gets the rights of TDR, that means assessee gets the TDR rights only when it completes the construction. We observed that assessee is following the project completion method which is recognized method of accounting. CIT(A) came to the conclusion that the sale proceeds of land TDR is part of the project undertaken and cannot be treated independently of the total project for the computation of the income by relying on the decision of the CIT v. Chembur Trading Corporation 2011 (9) TMI 1241 - BOMBAY HIGH COURT - Accordingly, he gave a direction to the Assessing Officer to accept the method of accounting followed by the assessee. As observed in the case of CIT v. Chembur Trading Corporation (supra) has held that in this case method of accounting followed by the assessee is completion of project and has offered the income received on sale of TDR in the subsequent assessment year and the same has been duly assessed. In these circumstances sustaining the addition in the assessment year in question does not arise. We are inclined to accept the findings of the Ld.CIT(A) and accordingly, grounds raised by the revenue is dismissed. Proposed addition of notional interest - As assessee has utilized the total interest bearing funds only for the purpose of business purposes which is more than interest bearing funds borrowed by the assessee. When there is a mixed funds available to the assessee, there is legal presumption that the assessee has utilized the interest free funds for the purpose of financing non business activities as held in the case of CIT v. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT . Therefore, we are inclined to accept the findings of the Ld.CIT(A) in deleting the proposed addition of notional interest. Accordingly, the ground raised by the revenue is dismissed.

Summary

Issues Involved:
1. Method of accounting for Transferable Development Rights (TDR) received on transfer of land to Slum Rehabilitation Authority (SRA).
2. Disallowance of interest expenses on interest-bearing loans advanced to related parties.

Issue-Wise Detailed Analysis:

1. Method of Accounting for TDR:
The revenue filed appeals against the orders of the Learned Commissioner of Income Tax (Appeals)-2, Mumbai, concerning the assessment years 2013-14 and 2014-15. The primary issue was whether the sale proceeds of TDR received from transferring land to SRA should be recognized as income in the year of receipt or upon project completion.

The assessee, engaged in real estate development, followed the Project Completion Method (PCM) for accounting. The assessee argued that the TDR received for land and construction were integral parts of the same project and should not be treated separately. The Assessing Officer (AO) disagreed, treating the TDR received for land as immediate income, leading to a substantial addition to the assessee's income.

The assessee contended that the PCM is a recognized method of accounting, supported by judicial precedents, and that the TDR should be recognized only upon project completion. The AO's approach resulted in inconsistent yearly profits/losses, which was not reflective of the true financial position.

The Ld. CIT(A) accepted the assessee's method of accounting, emphasizing that the sale proceeds of land TDR are part of the overall project and cannot be considered independently. The CIT(A) relied on the decision in CIT vs. Chembur Trading Corporation, where it was held that the AO cannot adopt two different methods of accounting for the same project.

The Tribunal upheld the CIT(A)'s decision, affirming that the PCM is appropriate and that the TDR should be recognized upon project completion. The Tribunal referenced the jurisdictional High Court's decision in CIT vs. Chembur Trading Corporation, which supported the assessee's method.

2. Disallowance of Interest Expenses:
The second issue involved the disallowance of interest expenses on interest-bearing loans advanced to related parties. The AO disallowed interest expenses, arguing that the assessee utilized interest-bearing funds for non-business purposes.

The assessee contended that it had sufficient interest-free funds available and that there is a legal presumption that interest-free funds are used for non-business purposes. The CIT(A) agreed with the assessee, noting that the TDR advances received were interest-free and should be considered part of the interest-free funds.

The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decision in CIT vs. Reliance Industries Ltd. and the jurisdictional High Court's decision in CIT vs. Reliance Utilities & Power Ltd., which support the presumption that interest-free funds are used for non-business purposes when mixed funds are available.

Conclusion:
The Tribunal dismissed the revenue's appeals for both assessment years, affirming the CIT(A)'s decisions. The Tribunal held that the PCM is a recognized method of accounting, and the TDR should be recognized upon project completion. Additionally, the Tribunal upheld the deletion of disallowance of interest expenses, supporting the presumption that interest-free funds are used for non-business purposes when mixed funds are available.