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TMI Blog2021 (12) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines and judicial precedents - the sale of TDR cannot be considered in isolation of assessee s obligation under the SRA agreement to complete the SRA project. On analyzing the agreement with SRA, the Bench has observed that the assessee was under obligation to complete the project as per the agreement. The Bench has also observed that the TDR was granted to provide finance to the assessee to complete the project. Thus, assessee s income from TDR cannot be considered independently without taking the corresponding expenses, more so, when the TDR receipts are directly linked to the execution of the project. The Bench has held that since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. Though, the assessee has earned income from sale of TDR, however, no income from the SRA project, as yet, has been offered to tax. It is a fact that while deciding the appeals against the orders passed u/s 263 of the Act in assessment years 2012 13 and 2013 14 the Tribunal [ 2019 (3) TMI 1942 - ITAT MUMBAI] has recorded certain finding touching upon the merits of the issue, which, indeed, are favourable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of TDR in different assessment years as under:- DRC No. Date of Issue Financial Year Area as per DRC sqmt Area Sold in sqmt Sale Consideration received Area Unso ld sqmts. SRA/8/19/LAND 08/06/2019 2009-10 & 2010-11 93,623 93,623 152,57,98,600 0 SRA/957/CONSTN 11/08/2010 2011-12 22,510 22,510 53,35,24,118 0 SRA/994/CONSTN 09/05/2012 2012-13 21,790 21,790 63,07,78,539 0 SRA/1035/CONSTN 20/12/2012 2012-13 12,640 12,640 0 SRA/1056/CONSTN 16/08/2013 2013-14 8,820 5,460 35,42,98,441 3360 1,59,383 1,56,023 304,43,99,698 3360 5. In course of assessment proceedings for the impugned assessment year, the AO called upon the assessee to explain, why the amount received from sale of TDR should not be treated as income of the assessee in the respective assessment years. In response, the assessee submitted that since it is following percentage completion method for recognizing the revenue from the SRA project and since 25% of the total estimated project is not completed till date, TDR cannot be treated as income but has to be shown as a current liability. The AO did not accept assessee's submissions and held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material on record. Undisputedly, the issue arising for consideration is, whether the amount received by the assessee from sale of TDR granted in respect of the SRA project is taxable in the year of receipt or the assessee's method of revenue recognition following percentage of completion method is acceptable. Notably, the assessee has received certain amount from sale of TDR in assessment years 2012-13 and 2013-14 as well. While completing the assessment for these assessment years, the AO accepted the method of accounting followed by the assessee. However, in exercise of jurisdiction under section 263 of the Act, the revisionary authority held the assessment orders to be erroneous and prejudicial to the interest of the revenue, since, the AO failed to tax the amount received by the assessee from sale of TDR. While setting aside the assessment orders, learned Pr.CIT directed the AO to assess the amounts received from sale of TDR. However, while deciding assessee's appeals challenging the aforesaid direction of learned Pr.CIT, the Tribunal in ITA No. 3034 and 3035/Mum/2018 dated 08.03.2019 held as under:- "11. We find that the Learned Commissioner of Income Tax in this case has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is incurred): c) At least 25% of the saleable project area is secured by contracts or agreement with buyers; d) And at least 10% of the total revenue as per the agreement of sale or any other legally enforceable documents are realised at the reporting date. 2. We are enclosing herewith copy of the architect's certificate as Annexure 1. Which certifies that the project has reached only 11% completion of the SRA Project as on 31/03/2012. Accordingly, revenue will be recognised in the year in which the assessee firm fulfils the above threshold criteria. 15. For A.Y. 2013-14, the assessee had given following detailed submissions to the ITO vide letter dated 30.11.2015, submitted at pages 24 and 25 of the paper-book. Under the instructions from our above client and in response to the details as called for by your goodself in the previous hearing, we are herewith enclosing/submitting the following details: 1. Copy of Lease Agreement with Pawar Charitable Trust is enclosed herewith as Annexure 1. 2. Copy of Project Status Certificate of Orchid hills situated at Chandivali, Andheri as on 09.05.2013 of an independent architect is enclosed herewith as Annexure 2. 3. Copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot. As per the method of accounting of the assessee the accounting method is percentage completion method. According to which the assessee offers profit for taxation after 25%/30% completion of the project. In the current assessment year, the project has been completed 11%. Hence the assessee has not offered profit for taxation. In A.Y.13-14 the projection completion is 22.65%. 17. The method of revenue recognition that is percentage of completion of method of revenue recognition has been claimed to be in in line with the guidelines issued by the institute of Chartered Accountants of India (ICAI). In fact, the assessee has duly placed reliance upon the Hon'ble Mumbai ITAT in the case of M/s Chembur Trading vs ITO 22(2) (2) [2009] 3 ITAT INDIA 818 [MUM]. In this regard we may refer to the submission of the assessee before the Ld. CIT in response to the notice u/s 263 (II) Note on Taxability of receipts from sale of TDR: a) In this respect, we would like to submit that the assessee firm has acquired/hold TDR entitlements which are allotted by Government/SRA and not otherwise. The said TDR are for the purpose of the project which is loaded with heavy charge of incurring all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al statement for the year which clearly mentions that revenue recognition policy of the company for real estate project is Percentage completion method. g) Further, reliance is placed on order passed by Hon'ble Mumbai ITAT in the case of M/s Chembur Trading vs ITO 22(2) [2009] 3 ITAT INDIA 818 [MUM] wherein Hon'ble ITAT held as follows: "The recognised method of accounting in the case of construction are mainlytwo methods: i. Project completion Method ii. Percentage Completion Method. The assessee has a right or privilege to adopt any one of the method of accounting for determining its profits.: The assessee submitted the copy of said judgment during the course of assessment proceedings Hence, the percentage completion method should be applied in the case of the assessee. h). Further, the Institute of Chartered Accountant of India (ICAI), came up with guidance note on Revenue Recognition by Real Estate Developer which prescribed Percentage Completion Method for revenue recognition. As per said guidance note, revenue from construction and development of the project will be recognised only after the work has progressed to the extent of 25% of the total construction cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plete. Under the said method, costs are accumulated in a WIP Account during the course of the project/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 project/contract is completed. This method leads to objective assessment of the results of the project/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 is 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." Thus, we note that the adverse comments passed on the assessee's method of accounting is in contravention to settled accounting principle and case laws. 21. We find that learned counsel of the assessee submission is quite germane that the sale of TDR cannot be considered in isolation of the assessee obligation under the SRA agreement to complete the slum rehabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no dispute about this fact. Therefore, in Assessment Year 2006- 07, TDR received has to be set off against WIP and cannot be assessed separately as income. We therefore, confirm order of CIT(A) deleting the addition made in Assessment Year 2006-07. 23. From the above it is evident that it has been recognised in the ITAT decision above that assessee's income from TDR cannot be considered independently without deducting the expenses involved. It has also been held that TDR receipts are directly linked to the execution of the project. It has been observed that income from TDR is inextricably linked to the project and its cost. It was further held that TDRs have been received in lieu of handing over the construction buildings and therefore cost of building have to be deducted against income from sale of TDR. 24. We note that understanding of the receipt from the sale of TDR and treatment thereof as observed by the ITAT in the above case is fully applicable to the facts of the present case. Here also assessee has received the TDR in connection with the slum rehabilitation project. The assessee's plea is that sale of TDR is linked with the assessee's obligation to the complete the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easured reliably; (d) It is probable that the economic benefits associated with the transaction will flow to the entity; and (e) The costs incurred or to be incurred in respect of the transaction can be measured reliably." A reading of the above makes it amply clear that the said guidelines duly provide that sale revenue from transfer of development rights should be recognized when the amount of revenue can be measured reliably and the cost incurred or to be incurred in respect of transaction can be measured reliably. Examining the present case on the touchstone of aforesaid, the assessee's submission is quite germane that in the present case the cost to be incurred for the completion of the SRA project are remaining to be incurred and assessee's obligation under SRA agreement will be over when the entire project construction is over. Hence, sale of TDR even in view of the aforesaid guidelines cannot be accounted for in isolation of the cost likely to be incurred by the assessee in meeting this obligation under the SRA agreement. 26. From the above it is abundantly clear that the method adopted by the assessee is a legally permissible one. The observation of the Ld. Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject, learned Counsel for the assessee submitted that project has been stalled due to dispute and litigations and the assessee has not been able to complete the project. Thus, it is clear, though, the assessee has earned income from sale of TDR, however, no income from the SRA project, as yet, has been offered to tax. It is a fact that while deciding the appeals against the orders passed under section 263 of the Act in assessment years 2012-13 and 2013-14 (supra), the Tribunal has recorded certain finding touching upon the merits of the issue, which, indeed, are favourable to the assessee. Admittedly, aforesaid order of the Tribunal was not available either before the Assessing Officer or learned Commissioner (Appeals). Therefore, applicability of the aforesaid order of the Tribunal to the facts of the present case needs to be examined. This is so because, the order passed by the Tribunal was in the context, whether the revisionary authority has correctly exercised jurisdiction under section 263 of the Act to revise the assessment orders. In view of the aforesaid, we set aside the impugned order of learned Commissioner (Appeals) and restore the issues back to 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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