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TMI Blog2009 (9) TMI 627X X X X Extracts X X X X X X X X Extracts X X X X ..... ry for the assessee to follow percentage completion method for recognition of revenue as per provisions of AS-7. The assessee was therefore asked to show cause as to why the income should not be computed on the basis of percentage completion method. In the show-cause notice, the AO mentioned that the completed contract method has been done away w.e.f. 1st April, 2003 and therefore, the only method that is to be followed is percentage completion method. The AO referred to the guidance note issued by ICAI in December, 2005. In response to that show-cause notice, the assessee company filed a reply vide letter dt. 5th Nov., 2007. It was submitted that completed contract method. of accounting is one of the well-known accepted methods of accounting in the commercial world and there is nothing in the IT Act that militates against the adoption of the same. Having regard to the nature of the constructions where innumerable floors are involved at various stages of construction, no other rational method of accounting can be adopted for the determination for the correlation of the expenditure incurred on various items Of the complex with any single unit that might be the subject-matter of tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO towards the following extract from their letter dt. 14th March, 2000 filed before the CIT in provisions under s. 263: "Our obligation thus commences with the signing of the development agreement with the owner and subsequently agreement with the prospective buyer and completion of construction in all respects in accordance with the construction contract entered into with the customer and delivery of possession thereof to the customer. Our right to receive the moneys from the customer and appropriate the moneys paid by the customer arises only after such completion and delivery in all respects in terms of the construction contract and all other obligations connected therewith such as securing permanent water and electricity connection. Occupancy certificate and the like put the unit into a habitable condition including provision of services like lift, watch and ward and other services. Upon completion of such obligation only, we are entitled to appropriate the moneys towards the contract receipts. In the absence of our discharge of such obligation, the customer will refuse to take delivery and pay the consideration and repudiate the contract and seek for refund of the entire a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been following completed contract method in line with the then existing provisions of AS-7. (iv) As per the then existing provisions of AS-7, assessee has the option of following either percentage completion method or completed contract method of accounting. However, from 1st April, 2003 onwards, the completed contract method of accounting has been deleted from the provisions of AS-7. Thus w.e.f. 1st April, 2003, assessee has no choice except to follow only one method i.e., percentage completion method of accounting. Further, this is a mandatory method of accounting. (v) Assessee company instead of adopting percentage completion method, still following completed contract method of accounting, thus violating the very sanctity and purpose of the Accounting Standards for which they are issued. Basic purpose of following Accounting Standards is to derive the financial statements which include P&L a/c and balance sheet that reflect true and fair view of the business. It is the true and fair view of the business, which is ultimate governing principle in recognizing revenue and costs. Institute of Chartered Accountants of India (ICAI), which is the authority for issuing standards of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h it is mentioned that the tenant will have to pay additional deposit of Rs. 10 lakhs' after their initial lease term of 3 years. The assessee only owns the land but develops or enters into construction activity not on its own but with the fund of others. The assessee is a contractor because it enters into an agreement to construct a mall in stages with other's fund only. Hence, it does not come within the exception clarified by the expert committee on 16th July, 2003. Hence, AS-7 was to be mandatorily applied in ascertaining the income on the basis of percentage completion method. 3.7 During the course of proceedings before us, the learned Authorised Representative has filed two paper books containing 239 pages and 350 pages respectively. The paper book containing 239 pages will be referred as paper book No. 1 while the paper book containing 350 pages will be referred to as paper book No.2. Page Nos. 1 to 8 of paper book 2 contain the AS-7 as originally issued by the ICAI in 1983. Such Accounting Standard was applicable in the case of contractors as well as to enterprises undertaking construction activities but not as contractors but op their own account as a venture of commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on their own account as a venture of commercial nature. On the basis of the above facts, the following queries were raised: (i) In case revised AS-7 is not applicable to the company then whether a company can value its inventories in accordance with AS-2. (ii) If the activities of the company cannot be considered as a production activity and consequently AS-2 is also not applicable then which Accounting Standard should be followed for recognition of revenue and valuation of its construction work-in-progress. 3.9 The expert committee noticed that the revised AS-7 does not contain the statement that such Accounting Standard will be applicable in the case of contractors, who undertake construction activities not as contractors on their own but as a venture of commercial nature where the enterprises entered into agreement for sale. Non-mentioning of such sentence in the revised AS-7 means that revised AS-7 will apply in accounting for construction contracts in the case of the queries, recognition of revenue is to be done as per the principles contained therein in AS-9. It was further opined by the expert committee that revenue from sales is to be recognized when the requirement as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting regularly employed by the assessee. Sec. 145(2) authorizes the Central Government to notify the Accounting Standard to be followed by any class of assessees in respect of any class of income. The Central Government has issued a Notification No. S.O. 69(E), dt. 25th Jan., 1996 [(1996) 130 CTR (St) 33 : (1996) 218 ITR (St) 1]. The Central Government has notified the AS-1 relating to disclosure of accounting policies. If there is any change in an accounting policy which has a material effect in the previous year or in the subsequent to previous years then that change is to be disclosed. The impact of, and the adjustments resulting from, such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. If the effect of such change is not ascertainable, wholly or in part, then such fact is also to be indicated. There is no notification under s. 145(2) vide which the AS-7 has been made applicable in the case of builders. The learned Authorised Representative submitted that the issue which was raised before the Hon'ble apex Court in the case of J.K. Industries Ltd. was as under: "Whether AS-22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing judgments to say that the project completion method is an acceptable method and the income can be computed on that basis: - Asstt. CIT vs. Rajesh Builders (2004) 3 $OT 917 (Mumbai); - Abode Construction Ltd. vs. ITO (2005) 95 TTJ (Mumbai) 35. 3.14 Thereafter, the learned Authorised Representative drew our attention to s. 145(3) of the IT Act. The books of account can be rejected in case the AO is pot satisfied about the correctness and completeness of the accounts of the assessee. There is no such finding by the AO that the accounts are incorrect or incomplete. The books of account can be rejected if the method of accounting notified under s. 145(2) is not followed. In the instant case, no such method of Accounting Standard is prescribed under s. 145(2) of the IT Act. The learned Authorised Representative therefore submitted that the income returned by the assessee on the method of accounting followed should have been accepted. 3.15 On the other hand, the learned Departmental Representative drew our attention that the revised AS-7 came into effect in respect of the contracts entered into during the accounting period on or after 1st April, 2003 and therefore, it is mandatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allotted as per the agreement between the two parties. The super-built area, which falls into the share of the appellant, can be sold. Before construction of the built-up area falling in its share, the assessee company enters into agreement with the proposed buyer to construct the portion as per their specification. Thus, such construction is undertaken by the assessee company on behalf of the proposed buyer. Hence, when such constructed portion along with undivided share of land is sold to the buyer then for stamp purpose only the value of land is taken. We were intimated that this procedure is being followed by all the builders. This procedure was also being followed by the assessee in the earlier years. The assessee is following consistently a method of accounting to declare the profit on project completion method as the assessee can account for the receipt as and when the registration takes place. It is true that the assessee constructs the super-built area for the proposed buyer. 3.17 As per s. 211 (3A) of the Companies Act, P&L a/c and balance sheet of the company is to comply with the Accounting Standard. As per proviso to s. 211(3C), standards of accounting specified by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject completion method as an accepted method of accounting. 3.19 The Hon'ble apex Court in the case of CIT vs. Bilahari Investment (P) Ltd. (2008) 215 CTR (SC) 201 : (2008) 3 DTR (SC) 329 : (2008) 299 ITR 1 (SC) had an occasion to consider the case when the Department tried to change the method of accounting. The Hon'ble apex Court at para 20 observed as under: "As stated above, we are concerned with the asst. yrs. 1991-92 to 1997-98. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from the completed contract method to deferred revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not justified in holding that revised AS-7 could have been applied to compute the profit in the case of the assessee company. 3.23 While applying the revised AS-7, the AO has not changed the opening work-in-progress. The alternative contention of the assessee is that in case the revised AS-7 is to be applied then the opening inventories are also to be valued on the same basis. 3.24 There are two situations when the method of accounting is changed-(i) when the method of accounting changed, by the assessee; (ii) when the method of accounting is changed by the Revenue. When the method of accounting is changed be the Revenue then the issue as to whether the opening stock should also by valued on that basis is considered by this Bench in the case of Motor Industries Company Ltd. vs. Asstt. CIT in ITA Nos. 335 and 336/Bang/2005. While deciding the issue, this Bench has considered the following decisions: - Vasavi Industries Ltd. vs. Asstt. CIT in ITA Nos. 1091/Hyd/2002 and 965/Hyd/2003 for asst. yr. 1999-2000, order dt. 29th Oct., 2004 - CIT vs. The Ahmedabad New Cotton Mills Co. Ltd. AIR 1930 PC 56; - CIT vs. Bengal Jute Mills Co. Ltd. (1992) 107 CTR (Cal) 34; - CIT vs. Mahavir A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned IT authorities have erred in: (a) not properly considering the facts of the case and submissions of the appellant; (b) drawing incorrect inferences and conclusions based on irrelevant, incomplete as also incorrect facts. (iii) The lower IT authorities have erred in relying on the decision of the Supreme Court in Shambhu Investment (P) Ltd. vs. CIT (2003) 184 CTR (SC) 91 : (2003) 263 ITR 143 (SC). The said decision is distinguishable on both facts and law. (iv) The lower IT authorities have erred in not appreciating that: (a) merely because income is attached to immovable property, it cannot be the sole factor for assessing such income as income from house property; (b) income from letting out of the property by way of commercial exploitation and as an organized commercial activity accompanied by provision of services, amenities or facilities is chargeable to tax as business income and not as income from house property; (c) the appellant carried out an organized commercial activity by way of commercial exploitation of the property accompanied with provision of a host of services and amenities. (v) Assuming without admitting that the income from Forum Mall is not taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead 'Income from house property' and disallowed the expenses claimed. 4.2 Before the learned CIT(A) it was submitted that the activity of the assessee is not merely letting out the property. The assessee is providing 11 different amenities to the tenants in a structured and planned way which needs organized commercial activity and not mere one time letting out and collection of rent therefrom. Before the learned CIT(A), the assessee relied on the following decisions: - PFH Mall & Retail Management Ltd. vs. ITO (2007) 112 TTJ (Kol) 523 : (2007) 16 SOT 83 (Kol); - Global Tech Park (P) Ltd. vs. Asstt. CIT (2008) 119 TTJ (Bang) 421 : (2008) 14 DTR (Bang)(Trib) 613; - Asstt. CIT vs. Toyota Park India (P) Ltd. (2008) Tax Corp. 17934 (Bang)(Trib). 4.3 The learned CIT(A) observed that PFH Mall owns a chain of commercial complex at Mumbai, Kolkata and Ahmedabad and provides mainly services to the shopkeepers besides providing space. At p. 10 of his order, the learned CIT(A) has pointed out the various services being provided in the case of PFH Mall. In that case the lease agreements mentioned the lessee as user of the accommodation accompanied with services and aineI1ities and not as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of a technical park thereon and providing infrastructure facilities to the sublessees. However, in the instant case, the ownership of property rests in the appellant. The learned CIT(A) thereafter recorded his finding in para 13 of his order as below: "To summarise the above, I find AO has appropriately applied the ratio decidendi of the case of Shambhu Investments cited supra to the facts of the case. The. ownership of the property as well as the plant and machinery necessary for providing incidental services rest with the appellant. Monthly rents are being collected by the appellant on the floor space as well as the services provided. The basic fact of ownership and rent receipts has not been denied by the appellant. Under such circumstances, I see no reason to interfere in the addition made by the AO. Addition is upheld. The alternative plea of the Authorised Representative to treat the same income as 'other sources' also does not find favour with me. Appeal is dismissed in these grounds. On similar reasoning I also uphold the addition of Rs. 4,51,875 as income from hire charges of fitouts and dismiss the ground No. 13." 4.6 During the course of proceedings before us, the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the premises leased should be carried out in accordance with the plans and specifications approved in writing by the appellant and the tenant shall not make additions, alterations or renovations except with the prior approval in writing by the appellant. 5. The activities or line of business carried out by the tenants in the premises shall be strictly approved by the appellant at the time of entering into the agreement. 6. The tenant is required to open and keep the premises for business on all seven days of the week from 10 a.m. to 9 p.m. 7. Without the prior approval of the appellant, the tenant shall not erect, display, affix or exhibit any signs, lights, advertisements, name or notice inside or outside the premises which do not conform to reasonable requirements and standards of the appellant as to design, quality, size and appearance. 8. Without the prior approval of the appellant, the tenant shall not use the name and logo of the premises for any purpose other than for display. 9. Without the prior approval of the appellant, the tenant shall not use radio, television or aerials in the premises. 10. The tenant shall not permit trade vehicles while being used for del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head 'Business income'. 4.10 The learned Authorised Representative drew our attention to the definition of the word 'business' as defined under s. 2(13) of the IT Act. The learned Authorised Representative submitted that the Hon'ble Andhra Pradesh (sic-Orissa) High Court in the case of Narasingha Kar & Co. vs. CIT 1976 CTR (Ori) 403 : (1978) 113 ITR 712 (Ori) has held that the concept of business is of wide and indefinite import. It includes any activity which occupies time, attention and labour. It embraces an activity embarked upon with a view to make profit. The activity of taking lands on lease, constructing buildings and leasing them out, involving outlay of capital, attention and other appropriate elements for the purpose of making a profit would therefore amount to a business. 4.11 The learned Authorised Representative drew our attention to the decision of Hon'ble Rajkot Bench in the case of ITO vs. Tejmalbhai & Co. (2006) 100 TTJ (Rajkot) 898 : (2006) 282 ITR 224 (Rajkot)(AT), in which ii was held that merely because income is attached to immovable property it cannot be the sole factor for assessment of such income as income from house property. One has to see the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the company constituted business income and not income from house property. The learned Authorised Representative submitted that the facts of the assessee's case are similar to those available in the case of Sri Balaji Enterprises and Manmit Arcade (P) Ltd. and accordingly, the rental income is to be assessed as business income. 4.14 The learned Authorised Representative submitted that the decision of the Hon'ble apex Court in the case of Shambhu Investment (P) Ltd. vs. CIT is not applicable. In that case, the Hon'ble High Court held that if the main intention of the assessee is to let out the property then the income must be considered as rental income and if the primary object is to exploit the immovable property by way of complex commercial business activities, then it must be held as business income. The facts in the instant case are distinguishable. The land on which the property has been constructed was taken on lease. It was therefore submitted that income is to be assessed under the head 'Profits and gains of the business'. The learned representative alse relied on the following decisions: - Asstt. CIT vs. Mahaveer Shopping Complex, Tribunal, Bangalore decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. The tenant was to get approval of type of material proposed to be used for the shop fitting design. For carrying out any installation and partitions, the tenant was required to take the approval of the assessee. The tenant was to open and keep the premises open for business on all the seven days of the week during the normal business hours i.e. 10 a.m. to 9 p.m. The tenant was required to use the premises only for the specified business for which the premises has been given to tenant. Thus, the assessee gave different premises to various tenants so that no two tenants may have the same type of business or may have the same trade name of business. By putting such conditions, the intention of the assessee was to commercially exploit the Forum Mall. The intention was not simply to earn the rental income. 4.18 Part of the building is owned by the landowner. There are three groups which are owning the land and with one of the groups, the assessee has taken the built-up area on lease. Hence, the rental receipt from such portion of the building cannot be taxed at all under the head 'Income from house property' because the assessee is not the owner. 4.19 The Hon'ble apex Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating it to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation." 4.20 The Hon'ble apex Court in the case Of S.C. Mercantile Corporation (P) Ltd. vs. CIT 1972 CTR (SC) 8 : (l972) 83 ITR 700 (SC) had an occasion to consider as to whether income from subletting by a company who. is in the business of lease of property, development and subletting of shops and stalls is to be taxed under the head 'Business income' or 'Income from other sources'. The Hon'ble apex Court observed as under: "It is, therefore, manifest that s. 12 of the Act can be invoked in the present case only if we exclude the applicability of s. 10 by holding that the income of the appellant company from the property in question is not income from business. The definition of the word. 'business', as given in s. 2(4) and reproduced above shows its wide amplitude and we agree with Mr. Chagla that it can embrace ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company shall think fit, proper and convenient and to collect rents and income, water, electricity, maintenance and other charges from the tenants, occupiers and others and to equip the same or any part thereof with all or any amenities or conveniences, garages, recreation facilities and other amenities from time to time as and when the company shall consider desirable or to arrange such management, letting and advantages as aforesaid by employing any person, firm, company to carry out and furnish the same on such terms and conditions as the company thinks fit, proper and expedient. 3. To carry on the business of real estate consultants, advisors, surveyors and to render and provide consultancy services and assistance including project management services, construction, formation of layouts, landscaping, design, legal and financial matters, rentals, lease and for the purpose to advertise and to carry out surveys, prepare reports, plans, certificates or arrange to procure capital, finance, land, building, machinery and to represent the clients to various Government, local, municipal authorities, bank, financial institutions and such other authorities and obtain clearances, lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a High Court in the case of Commercial Properties Ltd. AIR 1928 Cal. 456 and the Hon'ble apex Court in the case of East India Housing & Land Development Trust Lid. vs. CIT (1961) 42 ITR 49 (SC) held in those cases that income is to be assessed under the head 'Income from house property'. The jurisdictional High Court at p. 804 observed as under: "It is therefore seen that the activities in the case of Commercial Properties Ltd. and East India Housing case were very restricted and consisted of only in owning property and collecting of rent. There was no exploitation of the property for commercial or business purposes in those cases. The Supreme Court considered the question in the case of CIT vs. National Storage (P) Ltd. (1967) 66 ITR 596 (SC). In that case the assessee after purchasing a plot of land constructed 13 units thereon, 12 units meant for the members of the Indian Motion Picture Distributors' Association, who had floated the company, and one unit for foreign film distributors in Bombay, who were not members of the association. Each unit was divided into four vaults, having a ground floor for rewinding of films and an upper floor for storage of films. The assessee entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the specific purpose for which it has been leased. The person concerned taking the property cannot use for any business except for the specified business. The partition and interior decoration is also with the approval of the assessee. In law there is a well-marked distinction between the grant by the owner on land or building, of the occasional or even continuous use of it for some particular purpose for the creation of any interest therein and the grant by exclusive possession of it by demise which creates an interest in the same. In the former case law regards the authority, granted by the owner, of use the land or building for a particular purpose as licence and in the latter case, the grant of exclusive user of the land or building is called a lease [Corporation of Calcutta vs. Anil Prakash Basu AIR 1958 Cal. 423]. 4.26 In the instant case, the occupiers of the property are in the nature of licensee as they cannot use the building as per their own choice. 4.27 We are aware that jurisdictional High Court in the case of Dharak Ltd. vs. CIT (1987) 163 ITR 734 (Kar) has observed that the assessee's reliance solely on its power to lease its assets under the objects clause by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee must himself exploit the commercial asset. It may be exploited by himself or through the agency of somebody else. There are circumstances, which prevent or make it impossible for an assessee to exploit the asset himself or, it may be more convenient to exploit the asset through another agency. If the asset remains a commercial asset in the hands of the assessee after the letting out arrangement has been made, the income continues to be classed as business income. But if it ceases to be a commercial asset, then the income has to be taxed as income from 'other sources'." 4.29 In the instant case, the total area of the mall is 6,21,180 sq. ft. The plinth area of the shops is 2,23,703 sq. ft. Common area including service area is 4,03,450 sq. ft. Thus, the plinth area of the shop is 36 per cent as against 64 per cent for common and service area. This shows that the mall was built, to be exploited as a commercial asset. The intention of the assessee was not to enjoy the rental income but to exploit the property as a commercial asset. Hence, applying the test as laid down by the Hon'ble Delhi High Court referred to above, it is clear that the income is required to be assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion thereon. In that case, the assessee company took the land on lease from one of the directors. The Hon'ble jurisdictional High Court considered as to whether the assessee company can be considered as an owner. After taking into account the judgment of the Hon'ble apex Court in the case of CIT vs. Podar Cement (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC), the Hon'ble jurisdictional High Court held the assessee company as owner and on the basis of such fact held that the income is to be assessed under the head 'Income from property'. However, in the instant case, as we have pointed out, the assessee company is not only managing the property but is also providing common services and common area. The quantum of common area is much more than the plinth area of the shops. We had already pointed out that the Hon'ble jurisdictional High Court has stated the points to be considered for considering the income as income from property or business. These facts were noted by the Hon'ble jurisdictional High Court in the case of Hind us tan Machine Tools Ltd. While deciding the case of Bhoopalam Commercial Complex & Industries (P) Ltd., the decision in the case of Hindustan Machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, we hold that the alternative plea of the appellant that in case the income is not to be assessed under the head 'Income from house property' then it is required to be assessed under the head 'Income from other sources'. This is without prejudice to our basic finding that in the instant case, the income from the mall is assessable under the head 'Income from business'. 6. The fourth grievance of the appellant is that the lower IT authorities have erred in treating the hire charges in respect of fit outs let out to tenants as income from house property instead of as income from other sources. 5.1 This issue has been decided by this Tribunal in the case of the assessee for the asst. yr. 2004-05. The Tribunal vide order dt. 29th May, 2009 in ITA No. 851/Bang/2008 vide para 14 of the order held that "the facts and circumstances brought on record by the assessing authorities and the learned counsel indicate that the intention of the assessee for rendering the same as income from other sources ought not to have been disturbed as in earlier years". Hence, the receipts on letting of it is to be taxed under the head 'Income from other sources' on the basis of the decision of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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