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TMI Blog2016 (12) TMI 1295X X X X Extracts X X X X X X X X Extracts X X X X ..... of the expenses attributable to the agreement with the purchasers was debited as expenditure. So far as the question of applicability to section 2 (47) or Section 53(A) of the Transfer of Property Act is concerned, legally speaking, part performance is undoubtedly an interest or right known to law. However, part performance, pre- supposes handing over a possession, at the time the agreement is entered into. Having regard to the assessee’s uniform pattern of revenue recognition that only upon execution of the conveyance/sale- deed, would the amounts lying with it be treated as profit and brought to tax, the possibility that in law certain flat or plot buyers could be handed over possession earlier per se would not result in distortion of the kind stated by the revenue. There is no material or evidence in this regard nor was cited by the revenue. - Decided in favour of the assessee. Re-working the cost of land - dividing the cost of the acquired till the end of the year by saleable area including lands earmarked for schools, hospitals, clubs and other community building, in each phase - Held that:- The factual findings are against the revenue, which had clearly accepted the legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t filed a revised return on 3.10.1996 declaring a loss of ₹ 93,39,470/-. The original assessment under Section 143 (3) was made on 31.03.1997 by which the income was assessed at ₹ 18,97,84,160/- by estimating the income @ 12.5% of the installments received by the assessee against booking of plots. The order of the Assessing Officer (AO) was set aside by the CIT (A), and the AO was directed to re-compute the assessee s income by recasting the trading and profit and loss account through method indicated, i.e., division of total expenditure by number of units in each phase in terms of the layout plan and charging of proportionate development expenses to the profit and loss account - depending upon the number of units of each phase sold during the year, the sale proceeds whereof were credited to the profit and loss account in that year. This pertained to the internal development expenses. The CIT (A) also directed that the method of realizing revenue or debiting the cost of goods or valuing the stock or determination of certain expenses was not correct. The AO ought to have proceeded to re-compute the income after rectifying the defects rather than rejecting the accounts al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redited to realization under agreement to sell advance from the customer s account till the property was conveyanced in favour of the prospective buyers. At the time of conveyancing of the land to the prospective buyers, the subsidiary companies write off the property from their closing stock. The AO noticed that the assessee followed the mercantile system of account and was of the opinion that the assessee was following the project completion method. This involved transfer from the advance account and crediting to the profit and loss account the sums of money received from the prospective purchasers. All direct expenses incurred on development of land and construction were debited proportionately to the profit and loss account only in the year of conveyancing by taking the average cost of the land. The development expenses were debited @ 30% of the total sale consideration. All other expenses such as interest payment, advertisement, brokerage expenses etc. were debited to the account in the year they were actually incurred. The AO found fault with this method of accounting and felt that the assessee should have followed the substantial completion of projects method of accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 of its order. Those directions are extracted below: - 27. In the light of the foregoing discussion, I find that there are certain material defects in the method of accounting employed by the appellant which leads to distortion of the real profit. It is not possible to deduce the profit from the method of accounting so deployed in any year of account. Hence, the A.O. has rightly invoked the provisions contained in the proviso to section 145 (1) of the Act. However, the appellant ahs regularly employed this method. It is not the case of the A.O. that the books of accounts are not correct or complete. It would, therefore, not be correct to reject the books of accounts altogether and resort to estimation of profit in the manner done by the A.O. If the method of realizing the revenues or debiting the cost of goods or valuing the stock or determination of certain expenses is not correct, the A.O. should proceed to compute the income after rectifying such defects. The application of net profit rate should be resorted to only if there is no other way of arising at the profit of the assessee. Besides, in the present case, the A.O. has no rational basis for applying a net profit rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of these properties under the circumstances and for the reasons discussed above. The appellant s right to the full realization of sale consideration accrues at the time the possession is handed over and from then onwards for all purposes, the buyers are only debtors of the appellant for the remaining amount of installments. Thus in respect of constructed properties, the sales should be taken to the profit and loss account in the year in which the possession is handed over to the buyers if the sale is made under a deferred payment plan. In respect of properties sold against outright payment, the sales should be credited to the accounts in the year in which possession is handed over or the year in which the conveyancing is done whichever is earlier. (III) As regards the cost of land, average purchase price of each phase should be worked out. Phases I, II, III were started at the same point of time. Phase IV was started much later and phase V still later. The total cost of lands falling in each phase (Phase I, II III may be regarded as one phase for this purpose) should be worked out and the cost so arrived at should be divided by the total saleable area in each phase as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the completion of the project. In the present case the revenues are being realized only at the time of conveyancing and in any case after the completion of the project or sub-project. There should not be any difficulty in finding out the total amount of internal development expenses on each phase. The total amount of expenditure should be divided by the number of units in each phase as per the layout plan. The proportionate development expenses should be charged to the profit loss accounts depending upon the number of units of each phase sold during the year (the sale proceeds whereof are credited to the profit and loss account in that year). It was very seriously contended that the appellant has to incur a large amount of expenditure even after the sale of plots/flats. I do not find any difficulty in this regard. If the assessee incurs any further expenditure in future in the said phase the same can always be claimed against the similar receipts to be credited in future. The expenses can be claimed even if there are no receipts in any particular year. (VI) The A.O. is directed to recompute the income of the appellant company after making the above adjustments and by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for benefit of the community like school, hospital, fire station, parks, police station etc. are to be set apart from the entire land of Phase I to IV jointly and not phase wise. Thus the cost of land in phase I to IV have to be aggregated by pooling all these lands together. This justifies the action of the assessee in allocating the cost of entire land in phase I to IV by pooling them together. On the contrary, there is no justification for excluding the cost of phase IV alone without any intelligible criteria for the same. There is no intelligible criteria for making this change. Ultimately, profit and loss even out over a period of time and life of the project. This tinkering with the books of accounts does not result in any gain to the Revenue as it only reduces profit in one year and increases in the other year and as observed by the CIT (A), most of the sales in these four Phase have been completed. Therefore, over the period of life of this colonization, this variation being proposed by the AO and the CIT (A) does not serve the purpose of the Revenue and this should not have been tinkered with. The finding by Ld. CIT (A) in this regard is incorrect for the reasons stated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation of the entire brokerage and sales commission to the expenses, as debited, though the conveyance of the property was much later, also showed that there was no consistent pattern in the accounting behaviour of the assessee. Learned counsel relied upon Section 2 (47) of the Income Tax Act, 1961 and Section 53 (A) and submitted that transfer is not evidenced only by conveyancing but in fact also by possession which is a recognized mode under income tax law as well as general civil law of the land. He relied upon the decision of the Supreme Court in Mysore Minerals Ltd. v. Commissioner of Income Tax, 234 ITR 775. 11. Mr. Ajay Vohra, learned senior counsel for the assessee submitted that questions sought to be urged should be answered against the revenue. He placed heavy reliance upon the ITAT s decision dated 06.06.2008 and submitted that the method of accounting as well as the appropriation of expenses towards development etc. were directly in issue and in fact accepted. It is urged that the State Government treated all phases or stages of the assessee s project as one development unit or colony, though the assessee developed them in different phases on specific timelines. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e project completion method whereunder all its costs are capitalized to work-in-progress, including the purchase of land whether it is purchased at earlier point of time or later point of time. So, there is no dispute between the appellant assessee and the Department that its work-in- progress has been properly reflected in its books of accounts. The issue that has been raised is that when the assessee books a sale on registration of the sale deed, then its credits work-in- progress by the average cost of land on the date of sale and debits its profit loss account by the same amount. In principle, both the AO and CIT (A), as well as, the learned DR agree with this method; the only variation they are proposing is that average should be in respect of Phases, I, II and III, not including therein Phase IV, whereas, as per books of accounts maintained by the assessee from 1981 to 1993-94, the assessee is doing it in respect of all the four Phases, i.e., principally, the methodology is not under dispute. The only variation that is being pressed is in the exact working thereof. The criteria adopted by the Ld. CIT (A) is not justified. Firstly, the entire area under phase I to IV has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting methods. The completed contract method is one such method. Similarly, the percentage of completion method is another such method. Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract. On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under the method determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract. The above indicates the difference between the completed contract method and the percentage of completion method. 14. Proceeding to analyze the facts before it in P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in following the project completion method (in ITA 1884/Del/1998 and 2052/Del/1998- DLF Universal v. ACIT), which became conclusive, the revenue could not have urged all over again this aspect. For the forgoing reasons, the findings on this question are in favour of the assessee. Question nos.1 and 2 are answered in favour of the assessee and against the revenue. Re Question No. 3 17. On this question, the court notices that even after the first remand, the AO had in fact verified and granted relief, which was upheld by the CIT (A) in his order of 30.05.2001 (during the pendency of ITA 1884/Del/1998 before the ITAT leading to the present round). It was held that: The issue has been discussed on p.6. of the assessment order. Qutab Enclave Complex developed by the appellant is located at Gurgaon and hence is covered by the rules of Haryana Government. As per Haryana Development and Regulations of Urban Land Area Rules, the appellant could sell only 55% of land and 45% of the land has to be left open to be utilized by roads, parks, schools, colleges, hospitals, clubs and community sites. On this basis, the Appellant is writing off 1000 sq. mtr. of land for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese sites are to be treated as property of the appellant then the projected cost of construction of these sites should be allowed as part of internal development cost, is also not valid, because even if the appellant incurs any expenditure on their construction, they will represent valuable assets in the hands of the appellant, and it will not be correct to change this cost to the internal development of the colony. Hence, for the purposes of income-tax assessment, these sites shall continue to form part of the stock-in-trade of the appellant at cost, until they are actually transferred It follows that the appellant shall be entitled to write off these site and charge their cost to the profit loss account when they are actually transferred to the government or any other person or institution. --------- -------- -------- Based on the above, my predecessor worked out the saleable area @ 60.77%.This issue also has also been adjudicated upon by me in appeal no. 82/200'0-2001 for Assessment Year 1997-98 and I have held that the salable area at 60.77% is correct. The appellant has filed a revised working of the land cost @ 60.77%which comes to ₹ 34,46,861/-. Since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, loading of cost of the vacant portion of the saleable portion is an automatic corollary of the law.CIT(A) has varied this figure to 60.77.% but ultimately the assessee cannot vary this percentage when the entire project comes to an end; it can never sell more that 55% of the area by any accounting jugglery or notional calculations. As contended by ld. AR that the assessee has followed the law consistently right from 1981 and no violation of the law has been pointed out by the authorities below or by the learned DR or by Haryana Urban Development Authority against the assessee. This position has also been accepted by the A.O. himself from assessment year 2003-04 to assessment year 2005-06. So the result is that this was accepted in original assessments from 1981-82 to 1993-94 and has also now been accepted from 2003-04to 2005-06. It is only in the intervening 10 years that the variation has been proposed.' This, as submitted, would unnecessarily distort the profit loss of the project; in some years there would be loss to the Revenue and in some years there would be loss to the assessee. But, overall it will get evened out. Variation in this kind of long-term project can ne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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