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TMI Blog2013 (8) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... s to assume financial responsibility to guarantee the purchase of a full issue of stocks or bonds - Perusal of the underwriting agreement makes it clear that VGP (underwriter) has to pay the agreed amount in a phased manner to the assessee by January 1998. In lieu of the consideration received, the assessee has to complete the apartments and hand over the possession to the prospective buyers brought in by VGP. In the book of accounts, the assessee has shown the amount received from VGP in lieu of underwritten apartments as advance. The assessee is appropriating the amount shown as advance to sale in the year of execution of sale deed. The assessee has received the amount much prior to the date of execution of sale deed and delivery of possession of property - The risk, responsibility and liability to sell the flats underwritten is on the underwriter. If VGP brings any buyer of the flat and requests assessee to execute sale deed in his favour, the assessee is duty bound to get sale deed executed in favour of the prospective buyer and handover possession of the flat. In case the assessee refuses to do so, it shall be breach of contract between the assessee and underwriter - From t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VGP to the owner and the builder/assessee as follows: a) Rs. 3,65,73,100/- paid on various dates under original agreement dated 09-02-1996 and appropriated as part consideration. (Rs. 25.00 Lakhs was agreed to be treated as earnest money to be adjusted at the time of payment of entire balance payable); b) Rs. 7,00,000/- payable on or before 15-10-1997; c) Rs. 7,00,000/- payable on or before 15-11-1997; d) Rs. 7,00,000/- payable on or before 15-12-1997; e) Rs. 16,44,250/- payable on or before 30-01-1998; The assessee followed project completion method for accounting purposes and as per ARs submissions, the project was completed in the year 1999. The assessee filed its return of income for the Assessment Year 1999-2000 declaring loss of Rs. 1,50,115/-. The return of the assessee was on 25-10-1999 processed u/s. 143(1) of the Income Tax Act, 1961 (herein after referred to as 'the Act'). During the course of scrutiny for the Assessment Year 2002-03, the Assessing Officer observed that the actual sale value of flat for the period relevant to the Assessment Year 2002-03 was much higher where as the assessee was only accounting the sale value received in the Financial Year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the flats were sold by VGP, the amount of advance was appropriated and treated as sale proceeds. The ld. DR further submitted that although the assessee claims that it is following completed contract method for recognizing the income, the stand of the assessee is contrary as the assessee is booking income from sales made by it during the Assessment Year 2000-2001 onwards though according to them, majority of flats were un-sold in that year. The ld. DR vehemently argued that the completed contract method is directly not applicable in the case of the assessee as the assessee is not into construction activity. Completed contract method is applicable to construction contract business wherein a specific contract work is undertaken by the assessee for a specified sum or a specified profit margin whereas in the present case, the assessee is a builder/promoter of real estate business and is not doing any construction contracts. The ld. DR further submitted that the CIT(Appeals) has erred in considering the cost of all the flats where as he is taking the sale price of only thirty flats to determine the profits. The CIT(Appeals) has failed to take into consideration underwriting agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the letter of Chartered Accountant dated 14-12-2004 which is at Pg. Nos. 1 to 3 of the Paper Book of the Revenue wherein it has been mentioned that the project was completed in the Financial Year 1998-99. The said statement is against the facts and documents on record as is evident from the notes to the accounts for the year ended 31-03-1999 which are at Page No. 40 of the Paper Book of the assessee. It has been categorically mentioned in the notes that the project 'Lake View Apartments' is shown as work-in- progress under the current asset schedule in the Balance Sheet and the advance money received is shown under current liabilities. The AR strongly supported the order of the CIT(Appeals) and prayed for the dismissal of the appeal of the Revenue. 5. We have heard the submissions made by the representatives of both the sides and have perused the orders of the authorities below as well as documents on record. From the submissions made by the rival parties, the following questions emerge for adjudication: i) When was the project completed?; ii) Whether the amount received by the assessee from underwriter is the purchase cost of the flats or advance against the sale of under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to complete the apartments and hand over the possession to the prospective buyers brought in by VGP. In the book of accounts, the assessee has shown the amount received from VGP in lieu of underwritten apartments as advance. The assessee is appropriating the amount shown as advance to sale in the year of execution of sale deed. The assessee has received the amount much prior to the date of execution of sale deed and delivery of possession of property. Whether the underwriter (VGP) is eventually able to sell all the flats or not will in no way affects the contract already entered by it with the assessee. The risk, responsibility and liability to sell the flats underwritten is on the underwriter. 9. As per the case of the assessee, the assessee is following project completion method for accounting. It is on the completion of the project that the amount received by the assessee on account of sale of the apartments is liable to be taxed. It is in the year of completion the total cost of the project is determined. The assessee has relied on Exhibit-I showing the amount received and the expenditure incurred on the project. Exhibit-I is reproduced herein below:- Receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the nominee/s of the UNDERWRITER provided such power of attorney shall contain a stipulation as having been received by the OWNER and BUILDER in excess of the consideration fixed under this agreement". If viewed from another angle, if VGP brings any buyer of the flat and requests assessee to execute sale deed in his favour, the assessee is duty bound to get sale deed executed in favour of the prospective buyer and handover possession of the flat. In case the assessee refuses to do so, it shall be breach of contract between the assessee and underwriter. Clause-18 of the supplemental agreement (supra) specifically states that the underwriter shall have the right at any stage to insist the owner and builder (assessee) to arrange for execution and registration of documents in favour of its nominee(s). The relevant clause 18 of the agreement is reproduced herein below: "18) It is specifically agreed that until full payment is received from the UNDERWRITER there shall be no privity of contract whatsoever between the OWNER and BUILDER of the one part and the nominee/s of the UNDERWRITER. However, the UNDERWRITER shall have the right at any stage to insilst on the OWNER and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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