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TMI Blog2023 (6) TMI 255X X X X Extracts X X X X X X X X Extracts X X X X ..... completion method which is recognized method of accounting. CIT(A) came to the conclusion that the sale proceeds of land TDR is part of the project undertaken and cannot be treated independently of the total project for the computation of the income by relying on the decision of the CIT v. Chembur Trading Corporation [ 2011 (9) TMI 1241 - BOMBAY HIGH COURT] - Accordingly, he gave a direction to the Assessing Officer to accept the method of accounting followed by the assessee. As observed in the case of CIT v. Chembur Trading Corporation (supra) has held that in this case method of accounting followed by the assessee is completion of project and has offered the income received on sale of TDR in the subsequent assessment year and the same has been duly assessed. In these circumstances sustaining the addition in the assessment year in question does not arise. We are inclined to accept the findings of the Ld.CIT(A) and accordingly, grounds raised by the revenue is dismissed. Proposed addition of notional interest - As assessee has utilized the total interest bearing funds only for the purpose of business purposes which is more than interest bearing funds borrowed by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ater Mumbai, as per which assessee will convey the land to SRA and then construct tenements for Project Affected People as per Government directive and hand-over the constructed tenements to the Project Implementing Authority, viz. Slum Rehabilitation Authority. Assessing Officer observed that, in lieu of the above, the company will receive TDR in the ratio of 1:1 for land portion surrendered to SRA and in the ratio of 1:1.33 (1.33 times) for constructed area which can be sold to other developers in the open market to generate revenue. 5. Further, Assessing Officer observed that Assessee has to construct 59 buildings (G+24) (having 8582 Tenements) and other buildings comprising of one (1) school, one (1) Primary Health Care Centre one (1) Dispensary, with a total construction area of 83,55,246 sq.ft. and is entitled to receive a total of 1,27,98,560 sq.ft. of TDR. Out of the Total land TDR 16,86,083 sq.ft receivable, the assessee has received Land TDR of 1264561.93 sq. ft till 27.07.2012. The said land TDR received was sold by assessee company in the open market as under: Assessment Year TDR Amount AY. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Retention at the time of occupation to be released only defect liability period of 2Years is over. 2% - 2,22,250 Sub Total (B): TOTAL CONSTRUCTION TDR 100% 1,11,12,477 GRAND TOTAL (A+ B) TOTAL TDR 1,27,98,560 7. On verification of Balance Sheet and Profit and Loss account and its schedules filed by the assessee, it was observed by the Assessing Officer that the assessee has not recorded any transactions in Profit and Loss Account and declared ₹.NIL profit of the business. On verification of the balance sheet, it was observed that the assessee has increased its WIP Account for Chembur site by debiting direct expenses such as purchases, labour charges, and by debiting administrative expenses such as financial expenses, selling and distribution expenses. The WIP for the year was declared by the assessee at ₹.21,75,00,546/-. The above said sum of WIP along with brought forward WIP of ₹.23,07,302,814/- has been reduced from the TDR sale declared at ₹.2,19,52,15,898/- and thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts along water mains of MCGM. In lieu of this our company would get Transferable Development Rights ( TDR ) from MCGM. This rehabilitation project was declared as a Vital Public Project by the Government of Maharashtra. iii) By Letter of Intent ( LOP ) dated 31.3.2011 issued by SRA, our company is to construct 9002 tenements and other amenities to be handed over to MCGM through SRA free of cost for which following TDR would be allotted to the company:- A) LAND TDR Sq.meters Sq. Ft 1. Project Affected People Tenements 89,061.89 9,58,662 1,11,12,477 2. Buffer Zone Area 28,418.78 3,05,900 3. Amenity Portion 39,160.23 4,21,521 Total 16,86,083 (B) Construction TDR Total 1,27,98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 27.7.2012 PAP Tenements - Balance 71,251.89 7,66,955.34 Total 1,17,480.67 12,64,561.93 viii) The company has been consistently following project completion method for recognising revenue from this project. Consequently, all the expenses incurred on this project have been accumulated under the head Work-in-Progress till the completion thereof. The sales proceeds realized on sale of TDR during the construction period has been reduced from the cost of WIP, and the balance cost carried forward. ix) It is important to state that after 27.07.2012, the company has not received any TDR. The said land being situated near HPCL and BPCL Refineries, they have taken serious objections to our project. Further, Public Interest Litigation involving our project is pending before the Hon'ble Bombay High Court. In view of these facts, the said project is couched in significant uncertainties at the moment. The copies of litigation filed by f) HPCL V/s. The Slum Rehabilitation Authority and Others including us is enclosed and (ii) P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the TDR, namely, the Land TDR and Construction TDR, they both form an integral and inseparable part of the project revenue, and cannot be separated and considered in isolation. It is only a mechanism to provide the consideration to the developer, but the basic and fundamental obligation of the developer is to construct the required number of tenements and other infrastructure amenities as per the Agreement as a part of Rehabilitation Scheme of the SRA. Therefore, we submit that no profit or loss can be considered only in respect of the Land Component of TDR, when the project is still under construction. Even the objective underlying the rehabilitation scheme is to create additional housing stock of rehabilitation tenements, which is to be utilized for rehabilitating project affected persons of vital public projects of the Government or its agencies (please refer Recital Clause (C) of the Agreement]. The arrangement between our company and the SRA is therefore for creating additional tenements for housing for project affected people. Transfer of the said land to the SRA is only a preliminary step in that direction; and not the end in it. Hence, the Land Component of the TD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected, and a new method, i.e. percentage completion method thrust upon us by recognising profit/loss on sale of TDR receivable at different stages of the project. 3.4 Judicial Precedent supports our stand: i. We would like to submit that our case is securely covered by our sister concern's case of M/s. Atithi Builders And Constructors Private Limited (ITA No. 4047 4048/Mum/2009) for A.Y. 2004-05 and 2005-06 by Hon'ble Mumbai ITAT-A Bench (the copy of decision is enclosed) where CIT (A)'s decision is confirmed upending Project Completion Method for TDR sales. It was held as follows: We have heard the rival submissions and perused the relevant material on record. The only issue before us is whether TDRs should be taxed on receipt basis as has been done by the Assessing officer or in the year in which the project is completed. The assessee is admittedly following mercantile system of accounting and the project completion method has been approved by the Ld. CIT(A) as well. The Mumbai Bench of the Tribunal in Chembur Trading Corporation (supra) vide its order dated 21.01.2009 has held that when the assessee is following project completion method, sale pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of the buildings is claimed to be more than income from TDR, full details of which were given to the CIT(A) and therefore, even on this ground no income can be assessed in case of the assessee. In the asst. yr. 2006-07, the project was not complete and there is no dispute about this fact. Therefore, in asst. yr. 2006-07, TDR received has to be set off against WIP and cannot be assessed separately as income. We therefore, confirm order of CITYA) deleting the addition made in asst. yr. 2006-07. The position regarding asst. yr. 2007-08 is not clear. The AO has not given any finding regarding the year of completion of the project. Though the CIT(A) has held that the project was completed in asst. yr. 2007- 08, he has not given any basis of such finding not any such specific plea was taken by the assessee before CIT(A). This aspect therefore requires verification. The construction of the transit buildings was only a part of the project. The actual year of completion of the project is required to be verified. We therefore, restore this aspect to the file of the AO for fresh order. In case on verification it is found that the project was completed in 2007-08, AO will compute the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Net Profit as stated in your letter can not be assessed as Income for F.Y.12-13 (A.Y.13-14). 9. After considering the submissions of the assessee, Assessing Officer rejected the same and came to the conclusion that the TDR consists of 20% of the total TDR on execution of the agreement and balance 80% is linked to the construction of the tenements. Therefore, he is of the opinion that as per the tripartite agreement, the assessee has transferred the land with all its rights acquired on purchase of such land to the SRA. In return, assessee has received TDR from SRA. The cost of Land TDR is the cost of land purchased and expenses incurred on development of land. On acquisition of Land TDR, it can be said to be held as stock in trade and the cost of said TDR is the cost of land and the cost incurred on development of such land. By selling the TDR held as stock in trade, the assessee is acting just like a trader and he proceeded to treat the profit sale of TDR as income of the assessee after adjusting the cost of land and observed as under: - 7.3 As per the multipartite agreement, the assessee got privilege and the right in construction of rehabilitation component. Such con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,19,52,15,898 Direct Expenses 16,31,263 Administrative Expenses 14,91,85,667 Financial Expenses 6,20,75,907 Selling Distribution Expenses 46,07,709 Profit 69,88,79,747 Closing Stock 50,26,28,147 Total: 2,69,78,44,045 Total 2,69,78,44,045 Note on closing stock 1. Total land TDR receivable 16,86,083 sq ft. 2. Cost of land TDR as opening stock Rs. 201,00,00,000/- 3. Cost of 1sq ft and land TDR Rs. 1192.11/- 4. Land TDR sold during the year 10,85,664 sq ft. 5. Sale pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 52/- 2. From related parties Rs. 41.02,36,335/- Interest fund available with assessee total Rs.41,13,05,187/- B. Interest free loan/advances given to director and related parties: 1. To Director Rs. 4,57,950/- 2. To Aristo Realtors Ltd Rs.167,36,35,000/- 3. Investment in related parties Rs. 18,00,00,000/- 4. Total Rs. 1,85,40,92,950/- 13.4 From the above working, it is seen that the assessee has given interest free loans/investment to related parties over and above interest free fund available with it. 13.5 Thus the assessee has given advances and made investments to related parties from the interest bearing fund meant for business amounting to Rs. 144,27,87,763/- so as to enhance its work in progress and thereby reduce its tax liability. 13.6 Since, the assessee has utilized its interest bearing business fund amounting to Rs. 144,27,87,763/- for interest free advance to its related parties, the interest paid on interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting authority. ii) 65% upon developer constructing 50% of the plinth of the tenements iii) Balance 15% upon developer completing the construction of tenements. Therefore, I am inclined to agree with the appellant's contention that the sale proceeds of land TDR is part of the project undertaken and cannot be considered independently of the total project, for the computation of income for A.Y.2013-14.Reliance is placed on the following decisions, as cited by the appellant in its submissions: i) CIT vs. M/s Chembur Trading Corporation (Bombay High Court IT Appeal No. 3179 of 2009) ii) ACIT vs. M/s. Atithi Builders Constructors p. Ltd. (ITA No. 4047 4048/MUM/2009) 4.3.1 Further, I find that the issue raised in Grounds 1, 2 3 of Appeal has been decided in favour of the appellant by the CIT(A)-2, Mumbai for the A.Y. 2012-13, vide the Order dated 06.02.2017, in Appeal No.: CIT(A)-2/IT-120/2015-16. In the said order dated 06.02.2017, the decision of the jurisdictional Hon'ble Bombay High Court in CIT vs. Chembur Trading Corporation (IT Appeal No. 3179 of 2009), which upheld the decision of the Hon'ble Tribunal in CIT vs. Chembur Trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment with related concerns/ Director are out of interest free funds. Thus, no disallowance of interest is called for u/s 36(1)(ii) of the Act, in view of the decision in the case of CIT vs. Reliance Utilities Power Ltd. [2009] 313 ITR 340. In view of above discussion, the addition of Rs.6,22,22,922/-,made to total income on account of disallowance of interest paid is deleted. Ground no. 4 is allowed and ground no. 5 is dismissed as academic and infructuous. 15. Aggrieved revenue is in appeal before us raising following grounds in its appeal: - 1. Whether On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 69.88 Crore made by the AO on account of sale of Transferable Development Right (TDR) received on transfer of land to Slum Rehabilitation Authority (SRA), by holding that the TDR is part of the project work. in-progress; without appreciating the fact that sale of sand to SRA has no nexus with the contract awarded for construction of free homes to Project Affected Persons (PAP) for which TDR is receivable on different stages of construction. 2. Whether On the facts and in the circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the other hand, Ld. AR submitted as under: - The Respondent-assessee is engaged in the business of real estate development. During the course of its business, the Respondent vide Agreement for Sale dated 05.02.2010 entered into with M/s. Bombay Industrial Corporation, purchased land admeasuring approximately 1,56,640 sq. meters situate at CTS No. 619/A, 619/B, 620/A, 620/B, 621/A, 621/B, 621/C, 623/A1, 623/A2 and 623/B at Village Mahul, Chembur, Mumbai ( said land ) for purchase price of Rs. 201 crores, with a view to develop the same under Slum Rehabilitation Scheme The Respondent had given a rehabilitation proposal to the Slum Rehabilitation Authority ( SRA ) for development of the said land under provisions of Clause 3.11 read with Clause 3.5 3.9 (ii) of Appendix-IV of Development (Control Regulations) Rule 33(10), by constructing certain number of tenements at its own cost to be handed over the Municipal Corporation of Greater Mumbai ( MCGM ), free of cost, which in turn would allot these tenements to the slum dwellers removed from hutments along water mains of MCGM. In lieu of this the Respondent would get Transferable Development Rights ( TDR ) from MCGM. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Work-in- Progress till the completion thereof. The sales proceeds realized on sale of TDR during the construction period has been reduced from the cost of WIP, and the balance cost carried forward from year to year. It is important to state that after 27.07.2012, the Respondent has not received any TDR. The said land being situated near HPCL and BPCL Refineries, they have taken serious objections to this project. Further, Public Interest Litigation involving this project is pending before the Hon'ble Bombay High Court. HPCL filed W.P. No. 2107 of 2013 before Hon'ble Bombay High Court against the SRA, Respondent-assessee and Ors., against sanction of development of this project. Vide Order dated 30.03.2016 passed by Hon'ble High Court this Writ Petition has been clubbed with Notice of Motion No. 19 of 2013 filed by Respondent-assessee in PIL. No. 140 of 2006 pending before the High Court. All these matters are pending. In view of these facts, the said project is couched in significant uncertainties even at present. In the immediately preceding year, i.e. A.Y.2012-13, the then Ld. AO had rejected the method of accounting employed by the Respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed, which method once adopted, should be consistently followed year after year, which the Respondent has done. 1.2 Assessing Officer can invoke section 145(3) if he is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting referred to in sub-section (1) or accounting standards notified under sub-section (2), have not been regularly followed by the assessee. The Ld. AO has not given any reason to discredit the accounts maintained by the Respondent, which are duly audited by a firm of Chartered Accountants under the provisions of the Companies Act, 1956. Further, no reasons are adduced to show that generally accepted accounting principle were not adopted by the Respondent in preparation of its financial statements. The Ld. AO's only case is that the Respondent ought to have recognized revenue from sale of TDR even though the project did not take off. 1.3 In Respondent's case, PCM is the most appropriate method of accounting because the approach adopted by the Ld. AO has resulted in distorted profit/loss from year-to-year as under, even though the project has not yet taken off due to the pendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary on site infrastructures such as water supply line, electricity supply and drainage line, etc., the Developer shall be entitled to the balance Land TDR . Clause (17) of the Agreement provides the time when TDR for the Land Component will be recommended by the SRA in favour of the Respondent, and it is clearly linked to progress in the construction of tenements, and the final 15% TDR will be released only upon completion of construction of tenements and the occupation certificate for the same is issued by the SRA. Recital T' and 'J' of the Conveyance Deed dated 30.4.2011 (pp.71 72 of PB) also stipulates that Respondent has agreed to undertake project of construction of tenements comprising certain built-up area sanctioned by SRA in phase in lieu of TDR in respect of the said land and conveyance is made in advance as required by SRA. Thus, conveying this land in favour of SRA was only because such advance conveyance was required by SRA; but it is a part and parcel of the rehabilitation project of construction of tenements for settlement of PAP. Further, the main body of the Conveyance Deed at p.5 onwards (pp.72 -74 of PB) stipulates that the said land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T.O. vs. Chembur Trading Corporation (ITA No. 2593/Mum/2006) [pl refer pp. 9-10 of Compilation of Case Laws), wherein the agreement was a composite agreement for handing over land for Expressway and also for construction of tenements and shops by the assessee on land belonging to it. The entire land was acquired in phases and also consideration in the form of TDR was received in phases. Consideration was received in kind. The funds received on sale of TDR were utilised for construction of tenements and shops. Hon'ble Tribunal held that it was clearly one project and not two projects as they have been treated by the AO. It was held that the AO cannot adopt two methods of accounting in one project to determine the income of the assessee. It observed that in case of construction activity there are two recognised methods of accounting viz. (1) Project Completion Method and (2) Percentage Completion Method. It is stated that the assessee has a right or a privilege to adopt any one of the methods of accounting for determining its profit. In this case, the assessee had been following the project completion method to determine the profits of a project for last so many years, but during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso doubtful until construction is completed as stipulated. The stage-wise allotment of TDR is for purpose of enabling the developer to raise finance required for the implementation of the project. This is provided in Clause (16) of the Agreement. In view of pending litigation before Hon'ble Bombay High Court, execution of this project is standstill, and therefore, it is now couched with very significant risks as to its ultimate completion and realization of revenue, though Respondent incurred costs (including interest on borrowings) year after year. Therefore, it is submitted that in view of AS-9 also, there is no case for recognition of any revenue from this project at this stage.AY 2013-14: Ground No.2: Submissions: The details of interest-bearing funds and interest-free funds available to Respondent and also its utilization for business purposes and non-business purposes are summarised as under: Available Funds Amount (Rs.) Utilization of Funds Amount (Rs.) I) Interest Free Funds I) Non- Business Purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entally interest-free funds available to the Respondent about which there can be no dispute. Reliance is placed on the order of Ld. CIT(A) on this issue. In view of above, the Ld. CIT(A) had correctly, based on the facts and also in law, deleted the disallowance of interest paid of Rs.6,22,22,922/-. Without prejudice to the above, the Respondent further submits that the Ld. AO erred in adding the sum of Rs.6,22,22,922/- being the amount of disallowance of interest paid. The Ld. AO ought to have noted that the Respondent did not claim any deduction for the interest paid during the year under appeal, and the same was added to the WIP of the project. If at all, the disallowance was to be made, then, the same could be deducted from the WIP that is carried forward to the subsequent year. Reliance for this proposition is placed on the decision in Savala Associates vs. ITO [2010] 35 SOT 148 (Mum-Trib). Prayer: The Respondent prays Your Honours to kindly confirm the orders of Ld. CIT(A) and dismiss both the Grounds of Appeal raised by the Appellant-revenue for AY 2013- 14 and sole Ground of Appeal raised by the Appellant-revenue for AY 2014-15. 19. Considered the riv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Bench decided the issue in ITO v. Chembur Trading Corporation in ITA.No. 2593/Mum/2006 dated 21.01.2009 for the A.Y. 2000-01 and held as under: - The Tribunal noted that the agreement was a composite agreement for handing over land for Expressway and also for construction of tenements and shops by the assessee on land belonging to it. The Tribunal also noted that the entire land was acquired in phases and also consideration in the form of TDR was received in phases. Consideration was received in kind. The funds received on sale of TDR were utilised for construction of tenements and shops. The Tribunal held that it was clearly one project and not two projects as they have been treated by the AO. The Tribunal held that the AO cannot adopt two methods of accounting in one project to determine the income of the assessee. It observed that in case of construction activity there are two recognised methods of accounting viz. (1) Project Completion Method and (2) Percentage Completion Method. The Tribunal stated that the assessee has a right or a privilege to adopt any one of the methods of accounting for determining its profit. In the present case, the assessee had been following t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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