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TMI Blog2005 (10) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... the name and style of Maker Chamber-III and Maker Chamber-IV on these two plots of land. For the purpose of income-tax assessment, it opted to follow project completion method of accounting on the ground that project would take a lot of time for completion and, therefore, it would not be possible to determine the profit on yearly basis. There was no sales in the initial period and the work of reclaim was going on the building were of 15 floors plus terrace each. As per the details furnished the area constructed and sold up to the end of the accounting year relevant to assessment year under consideration are as under : Maker Chamber-III Maker Chamber-IV 1.No. of floors to be constructed 15 15 2.Total Area 202090sq.ft. 216671sq.ft. 3.Total area sold under agreement to sell 180435sq.ft. 201379sq.ft. 4.Area remaining unsold 21655sq.ft. 15292sq.ft. Total area unsold 36947sq. ft. 3. During the assessment year 1988-89 the issue was raised whether the project was completed during this year or it was completed in the assessment year 1993-94 in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has paid the advance tax at Rs. 2 lakhs only and that to in one instalment on 31-3-1991. The Assessing Officer has also discussed the two certificates given by the architect one dated 13-2-1991 and other dated 11-3-1991 in which two contradictory statements were made. In earlier letter dated 13-2-1991 it was certified by the Architect that project was not completed and is under construction but in another certificate dated 11-3-1991 the same architect has claimed that work has been completed in all respects. The Assessing Officer further observed that expenses on material purchased and labour charges if any incurred in assessment year 1991-92, it related to the structural adjustment that was to be made to construct the additional area which is not a part of the original project. This is a subsequent development which was not present at the end of the relevant previous year, i.e. , 1988-89. The Assessing Officer accordingly, conclusively held that both the projects were completed before the end of the previous year relevant to the assessment year 1988-89, but, for the reasons best known to it the assessee has been doing its best to see that the projects never come to an end by cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took place in earlier years. If percentage of sale of constructed area is the criteria for determining a year of completion of the project, the project had been completed in the earlier years to the assessment year i.e. , 1988-89, as no activities took place in this assessment year. 7. The ld. counsel for the assessee further contended that in assessment year 1987-88, the Assessing Officer has accepted the position that the project was not completed and in assessment year 1986-87 the proceedings under section 263 were initiated, were later on dropped by CIT. As such, there is no evidence on the basis of which it can be inferred that the project was completed during the assessment year 1988-89 or prior to it. 8. The CIT(A) re-examined the issue in the light of the material available on record and held that the project was not completed in assessment year 1988-89. The relevant observations of the CIT(A) made in assessment year 1988-89 are extracted hereunder : "A careful consideration of the relevant facts would show that the stand of the Assessing Officer in assessment years 1987-88 and 1986-87 was also correct. The present year ended on 31-12-1987. The ld. officer was h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90 per cent of the constructed area were sold by the assessee. She invited our attention to the data in this regard, pointed out by the Assessing Officer in his order. She further pointed out the discrepancies in the certificate and as per these datas, 93 per cent of the premises in Maker Chambers 3 and 89 per cent in Maker Chamber No. 4 were already sold and occupied by the purchaser by 3-12-1987. Thus, if both the purchases are taken together, out of the total constructed area of 4,18,761 sq. ft., the total area already sold and handed over is 3,81,814 sq.ft., which is 91.17 per cent. With regard to the expendit-ures incurred in subsequent years, it was contended that these expenses are in respect of painting, labour charges, plumbing, sanitation and telephone installat-ions. These are expenses in the nature of giving final finishing touches to the project. Mrs. Asha Agarwal further invited our attention to the fact that during the year assessee has sold part of the construction machinery, which indicated that the project work was completed during the accounting period. 11. The ld. Departmental Representative Mrs. Agarwal further invited our attention to the discrepancies in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pletion method,the assessee is required to compute its profit as and when the original project is completed and its completion cannot be extended at the whims of the assessee. 12. The ld. counsel for the assessee Mr. J.D. Mistry, besides rebutting the contentions of the ld. Departmental Representative, has invited our attention to the fact that undisputedly the assessee have been following the project completion method and it was accepted continuously by the revenue. He further invited our attention to the statement of net work-in- progress in which details of expenditures incurred during different assessment years were given with the submissions that in the assessment year 1991-92, a substantial expenditure were incurred in construction of the project. He further invited our attention that during the assessment year 1986-87 the revenue accepted the stand of the assessee that it has been following the project completion method. Later on, CIT issued a notice under section 263 which was duly replied by the assessee and having satisfied with the explanation of the assessee, the proceedings were dropped. In the assessment year 1987-88 the expenditure incurred on project was shown a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction activities are going on in that assessment year ? (3)Whether the project is deemed to have been completed when original project is completed or its 80 per cent of the constructed area is sold and occupied by the purchaser irrespective of the fact that the construction of the additional FSI is not completed ? (4)Whether construction with regard to additional FSI is itself an independent project or it is a continuation of old project ? 14. Before dwelling upon these questions/issues we would like to narrate the activities of the builders and developers in this field. Like the instant case, the builder forms a project of constructing a building and to sale it out in the open market and to earn profit. It is a composite profit of construction of the building and its sale in the market. In order to achieve this target, the builder purchases the plot and gets the plan sanctioned from the appropriate authority and start construction thereon. In this line of business two methods of accounting are followed - (1) Project completion method (2) Percentage completion method. In a Percentage completion method, a builder is required to estimate the profit in each assessment year a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no justification in not taxing the income from the project which quite often may represent excess of receipt over expenditure unless there is a risk/chances of the assessee s suffering heavy liabilities, subsequently, for some reasons or the other. The Tribunal finally concluded that the project is deemed to have been completed when its 80% of constructed area is sold. The unsold portion of the constructed area would take care of any contingencies, which may arise in future. For the sake of reference, we extract the relevant portion of the order of the Tribunal in the case of Champion Construction Co. ( supra ) as under : "We now come to the merits of the assessee s contention, viz. , whether income in this case is assessable only when the project is complete, i.e., when the entire portion of the multi-storeyed building meant for sale is sold, a co-operative society of the buyers is formed and the assessee has transferred all its rights, title and interest in the project to the society. It may be that from commercial point of view in the case of a single project/venture of the type in the case before us the profits can be reasonably computed only when the venture comes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... building sites an area of about 266 acres divided into 1,000 plots. He spent about Rs. 20,000 in the development of the area. During the financial year 1936-37 the assessee sold 208 plots to various persons for a sum of Rs. 65,810. By taking into account the original cost price of the land and the proportionate development expenses, the ITO computed the profits at Rs. 56,980 which were reduced to Rs. 47,533 by the AAC. In the Rangoon High Court case, the assessee was a money-lender. In the course of its money-lending business it took over certain acres of land and a house in settlement of a debt of Rs. 9,000 due to it. The lands were sold at different times at the best prices available at their respective sales. The assessee was crediting the debtor s account by crediting the sale proceeds as and when materialised. After the last sale took place, it claimed the net debit balance of Rs. 5,137 in that account as loss. In the Allahabad High Court case the assessee had purchased 28,278 sq. yds. of land between 1942 to 1947 and spent about Rs. 81,000 in the development of the area. During the assessment year 1969-70 the assessee sold for the first time 5,673 sq. yds. out of it for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplete contract there is a well established method of calculating profits accruing in the accounting year which is set out at page 971 of Batliboi s Advanced Accounting. Mathematical certainty is not demanded in a matter of description. More or less same view has been taken by the Hon ble Supreme Court in the case of P.M. Mohammed Meerakhan ( supra ). The facts in that case are also quite close to the facts in the assessee s case. The land in this case was divided into 23 plots out of which 22 plots had been sold. The Supreme Court observed as under : . . . In our opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be ascertained even on the assumption that the transaction of the adventure of trade was not completed. Under the Income-tax Act for the purpose of assessment each year is a self-contained unit and in the case of a trading adventure the profits have to be computed in the manner provided by the statute. It is true that the Income-tax Act makes no express provision with regard to the value of stock. It charges for payment of tax the income, profits and gains which have to be computed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the other always remains to be done. That will be a very unsatisfactory state of affairs. Moreover, when the entire cost/expenditure to the assessee is recouped and/or major portion of the venture/project is complete, there is really no justification in not taxing the income from project which quite often may represent excess of receipts over expenditure. Unless there is a risk/chances of the assessee s suffering heavy liabilities, subsequently, for some reasons or the other. 18. We have examined the facts of the case from this point of view. We find that out of the total accommodation of 58,970 sq.ft. constructed, the assessee was able to sell only 25,530 sq.ft. during the previous year relevant for the assessment year 1977-78. Neither the construction of the multi-storeyed building was complete nor even the half portion of the building sold. The net sale proceeds received were much less than the total expenditure/cost incurred by the assessee up-to-date. In the circumstances, so far as the assessment year 1977-78 is concerned, we accept the assessee s submission that it would be in order if no profits or losses are estimated from the venture for the assessment year 1977-78. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructed area was sold and occupied by the buyer, but the assessee did not compute the profit on the basis of project completion method and offered it to tax. It got the sanction of additional FSI in which major investments were made during the assessment years 1991-92 and 1992-93 and have shown the completion of the project during the assessment year 1993-94 and in that assessment year, assessee got itself amalgamated with the other company i.e., M/s. Pranic Shipping Services Ltd. and the claimed deduction of entire profit on the project under section 33AC of the Income-tax Act though he was not involved in any shipping activities during that assessment year. When the original project was completed or about to complete why the assessee did not start its construction of the additional FSI immediately after the completion of the original project and why did he wait upto assessment years 1991-92 and 1992-93. These queries remained unanswered. We are, therefore, of the view that there should be some guidelines in this regard, which may govern the assessee as and when profits in the project completion method are to be declared. The period of completion of the project cannot be stret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines to resolve all possible controversies with regard to the year of completion of project in a case where the additional FSI is sanctioned and the same are as under : 1.As held in the case of Champion Construction Co. ( supra ), a project is deemed to have been completed in that assessment year in which 80% of the constructed area is sold and occupied by the purchaser, irrespective of the fact that minor construction work is going on, on the project. 2.In a case when additional FSI is sanctioned and the builder/assessee starts construction thereon before the project is deemed to have been completed in terms defined as above, the construction of the additional FSI is an extension of the original project and is deemed to have been completed in that assessment in which 80% of the total constructed area of the entire project (original project + construction of additional FSI) is sold and occupied by the buyer. 3.In a case, where the original project is deemed to have been completed as per clause ( 1 ) and thereafter additional FSI is sanctioned on which construction is required to be raised. The construction of the additional FSI will be an independent project and it wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arashtra Government as a statutory liability. 21. The facts borne out from the record are that during the course of the assessment proceedings, the learned counsel for the assessee has raised an alternative plea that in case Assessing Officer want to assess the profits on the premises the project has been completed in this very year then the outstanding liability of over Rs. 13 crores with regard to the increased lease rent should be allowed. The Assessing Officer disallowed the claim of the assessee on the ground that it was a disputed liability. The relevant demand has been raised by the Collector of the Revenue and this demand was stayed by the Hon ble High Court of Bombay in a writ petition filed by the assessee. Unless and until the liability is quantified or determined, it cannot be allowed. The Assessing Officer further observed that the unsold portion of the property would take care this liability. Assessee went in appeal before the CIT(A) and the CIT(A) allowed the claim of the assessee after treating it to be a statutory liability and directed the Assessing Officer to consider and allow the statutory liability existed as on 31-12-1987 if the income in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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