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TMI Blog2013 (1) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... em, i.e., at 54% of its value, as a contractor would be, where not by paid in cash. In favour of assessee Deduction u/s. 80IB(10) – In absence of any sales – Assessee had shown inflated profit, i.e., at 60%, as against the rate of 23% for another non-80IB – Held that:- We set aside the impugned order to this extent, and remit the issue of determination of the accrual of income, including, where so, its extent, back to the file of the AO Also clarify as to the revenue neutrality of this exercise, as, if and to the extent income has not accrued, it could neither be brought to tax nor deduction in its respect claimed by, or allowed to, the assessee. The same though is crucial in the overall context of the case, inasmuch as only the real income, since accrued, can be assessed. Further, the value of the closing WIP, as assessed, shall be adopted as the opening WIP for the following year. Also, as this is the first year of construction, and some qualifying conditions u/s. 80IB(10) are subject to satisfaction over time, which has since elapsed, the AO shall also, if not already so verified, i.e., while framing the assessment for any succeeding year(s), satisfy himself as to the sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (WIP), taking into account future realizations, which is clearly not acceptable; and (c) the assessee had shown inflated profit, i.e., at 60%, as against the rate of 23% for another non-80IB project; even though the profit rate in both the cases stands reckoned on gross profit basis, the difference in their rates exhibits the inflation that attends the assessee's claim u/s. 80IB. 3.2 The assessing officer's (AO's) claims were vehemently countered before the first appellate authority. Owning of land is not one of the conditions specified u/s. 80IB(10), all of which stand satisfied in the instant case. The land owners, though not paid directly in cash, were to be compensated by way of 46% share in the constructed space on the undivided land. The assessee-company was not by any means a 'Contractor', but a 'Developer', which had undertaken the relevant project (Sadguru Krupa), bearing all the risks and rewards of the development activity, i.e., of the real estate. The entire work, i.e., from conception, through execution, to finally sale, was to be performed by it, at its own cost and risk, including seeking approvals and sanction from the various authorities, deploying its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f. 3.6 As regards the method of accounting employed, 'project percentage method' is an accepted method, on the basis of which deduction u/s. 80IB(10) can be claimed and allowed, even as opined by the tribunal in the case of B.K. Pate Enterprises v. Dy. CIT, [2009] 125 TTJ 974 (Pune). The same, in fact, finds endorsement by the CBDT itself, vide its Instruction No.4 of 2009 dated 30.6.2009; it clarifying thereby that deduction u/s. 80IB(10) can be claimed from year to year, i.e., on the basis of partial completion. No defect in the book-keeping stands pointed out by the assessing officer, and the income has been arrived at after taking into account all the direct and indirect expenditure incurred during the year. As such, even though no sales had admittedly been made during the year, no fault could be pointed out where profits are estimated on the basis of future realizations, anticipated in view of the sales made, toward which advances have been received during the year. Reliance was placed on the decisions in the case of Asstt. CIT v. Yug Corpn. [ITA Nos.2700-2703/Ahd/2009, dated 17-6-2011]. Further, mere difference in profitability cannot justify denial of the assessee's claim, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total sale consideration arising on the sale of residential units, or, equivalently, credits only the sale of the earmarked 54% of the construction, while incurring the total cost thereof, it effectively debits the cost of land in its accounts. The only issue that would arise is the valuation of the WIP as at the close of the year. This is as the same has necessarily has to be inclusive of the cost of land (to the assessee), which, being at 46% of the total cost of construction, is yet to be incurred, and would be so only during the course of the construction period. The same, however, is a valuation aspect, for which a suggested course would be an informed provision in accounts, which would further be subject to revision at each year-end (during the said period) on the basis of the developments in the interim. Coming back to the issue under reference, the other and perhaps legally more sound way of looking at the transaction, is that the assessee develops only 54% of the project on its own account, and the balance 46% on account of the land owners, toward discharge of the liability thereto for the land falling to its share (54%). That, however, would not matter as it, in fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strikes us in the matter is: How could there be any income without 'sale' or 'sale agreement/s'? Income, by definition, is a (or at least a) bilateral process, so that it has to flow from outside one's own self, and one cannot generate it within itself. This represents (or marks) the first step. The second step is the recognition of income, i.e., the point in time when the income is or could be or ought to be recognized. The third step is its quantification, which is essentially a valuation aspect, so that it has to be, firstly, an informed estimate and, secondly, marked by conservatism, a fundamental accounting principle, since also statutorily recognized per s.145 of the Act, i.e., through the Accounting Standard -I notified thereunder. This represents the broad contours of the concept of income and its accounting, while in practice there could be some overlap between the different processes, and the distinction may not be as neat as it may appear to be. 'Project Percentage Method' comes into play at the second and third steps enumerated above. 5.4 We may now examine the facts of the case. The assessing officer states that in the absence of any sales, profits, much less correc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment. The same becomes essential as the transaction is scheduled over a long period of time, which bestows uncertainty. Advance, thus, besides causing to provide a (regular) source of finance for the project executor, lends certainty in-as-much as it is exhibits (continuing) commitment on the part of the buyer, who thus also partakes of some risk. In fact, being only in terms of the Agreement, the same should not be, strictly speaking, construed as an 'advance'. As afore-noted, neither the aggregate amount of the sale agreements entered into nor of the advance received there-against during the relevant year, which appears to be the first year of the project, has been mentioned by the assessee or any authority. Reasonable certainty as to the realization (of the sale proceeds) is crucial to income recognition, and both sale agreement as well as advance received in pursuance thereof are vital thereto. 5.5 Next, i.e., assuming a satisfaction on this count, comes the quantum of or the extent to which income can be said to have accrued. The same would, without doubt, depend foremost on: (a) the quantum of work done (usually, technically specified), including its valuation; (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, proper valuation of which is crucial to ascertainment of correct profits. The assessing officer raises valid questions, which ought to have been met by the assessee on the basis of facts and figures, duly supported, while, as aforesaid, we observe none, so that the assessee's case in this regard, though has found approval by the first appellate authority, is completely unsubstantiated. His order, therefore, in this regard cannot find our acceptance. As regards the tribunal's decision in the case of Yug Corpn. (supra), cited by him, the same, an unreported order, is, firstly, not on record and, two, on the basis of the discussion in its respect by him, we find no parity on facts; with we rather having found the facts in the instant case as indeterminate. The assessing officer has, we repeat, also made faux pas by assessing income, which he himself holds as having not accrued, so that there was no question of the claim for deduction u/s. 80IB there-against. 5.7 In view of the foregoing, we set aside the impugned order to this extent, and remit the issue of determination of the accrual of income, including, where so, its extent, back to the file of the AO. The assessing officer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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