DCIT, Bangalore V. M/s Prestige Estate Properties Pvt. Ltd., Bangalore

ITA 184/BANG/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 8777 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-08-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 18-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREETHI GARG CITIIIDR
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Business income; Depreciation
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NOS. 97/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. PRESTIGE ESTATE PROJECTS LTD., THE FALCON HOUSE, MAIN GUARD CROSS ROAD, BANGALORE 560 001. : APPELLANT VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(1), BANGALORE. : RESPONDENT ITA NOS. 184/BANG/2010 ASSESSMENT YEAR : 2006-07 THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(1), BANGALORE. : APPELLANT VS. M/S. PRESTIGE ESTATE PROJECTS LTD., THE FALCON HOUSE, MAIN GUARD CROSS ROAD, BANGALORE 560 001. : RESPONDENT ASSESSEE BY : SHRI PADAMCHAND KHINCHA, C.A. REVENUE BY : SMT. PREETHI GARG, CIT-III(DR) ITA NOS.97 & 184/B/10 PAGE 2 OF 24 O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THESE TWO APPEALS (I) ONE PREFERRED BY THE ASSES SEE COMPANY AND (II) ANOTHER BY THE REVENUE ARE DIREC TED AGAINST THE ORDER OF THE CIT (A)-VI, BANGALORE IN ITA NO:556/ DCIT, C C 1(1)/ CIT (A)- VI/2008-09 DATED: 17.12.2009 FOR THE ASSESSMENT YEA R 2006-07. I. ITA NO:97/B/2010: 2. THE ASSESSEE COMPANY [THE ASSESSEE IN SHORT] H AS RAISED FIVE GROUNDS IN AN ILLUSTRATIVE AND NARRATIVE MANNER. G ROUND NO.1 BEING GENERAL IN NATURE AND NO SPECIFIC ISSUE INVOLVED, I T HAS BECOME NON- CONSEQUENTIAL. IN THE REMAINING GROUNDS, THE ISSUE S RAISED ARE, FOR THE SAKE OF CLARITY, REFORMULATED IN A CONCISE MANNER, AS UNDER: THE AUTHORITIES BELOW HAVE ERRED IN : (I) CONCLUDING AND CONFIRMING THAT THE INCOME OF FIVE R EAL ESTATE PROJECTS CARRIED OUT UNDER JOINT DEVELOPMENT AGREEM ENTS WAS ASSESSABLE ON PERCENTAGE COMPLETION METHOD (II) DISALLOWING THE COMPOUNDING FEE OF RS.43.96 LAKHS P AID BY THE ASSESSEE TO BANGALORE MAHANAGAR PALIKE (BMP); & (III) DISALLOWING RS.51,585/- BEING THE AMOUNTS PAID TO T HE DEPARTMENT OF COMPANY AFFAIRS AND AS ENTRY TAX COMPOUNDING FEES; PRAYER - THE ORDERS OF THE AUTHORITIES BE QUASHED OR IN THE ALTERNATIVE - NO INCOME BE ASSESSED IN RESPECT OF 5 REAL ESTATE P ROJECTS CARRIED OUT UNDER JOINT DEVELOPMENT AGREEMENTS; - COMPOUNDING FEES OF RS.43.96 LAKHS PAID TO BMP BE F ULLY ALLOWED AS A DEDUCTION; & - ENTRY TAX COMPOUNDING FEE OF RS.51,585/- BE ALLOWED AS A DEDUCTION. ITA NOS.97 & 184/B/10 PAGE 3 OF 24 II. ITA NO:184/B/2010: 3. THE REVENUE HAS RAISED SIX GROUNDS, OUT OF WHICH , GROUND NOS: 1, 5 AND 6 BEING GENERAL AND NO SPECIFIC ISSUES INVOLVED , THEY HAVE BEEN DISMISSED AS NON-CONSEQUENTIAL. IN THE REMAINING G ROUNDS, THE SUBSTANCES OF THE ISSUES RAISED ARE LISTED OUT AS UNDER: THE LD. CIT(A) ERRED IN (I) DELETING THE ADDITION OF RS.7.33 CRORES MADE ON PRO TECTIVE BASIS AS INCOME FROM OTHER SOURCES; (II) DIRECTING THE AO TO ASSESS THE RENTALS FROM FORUM M ALL AND EVA MALL AS INCOME FROM PROFITS AND GAINS FROM BUSINESS/PROFESSION; & (III) DIRECTING THE AO TO ASSESS THE HIRE CHARGES IN RESP ECT OF FIT- OUTS AS INCOME FROM OTHER SOURCES. 4. AS THE ISSUES CONTESTED BY THE RIVAL PARTIES PER TAINING TO THE SAME ASSESSMENT YEAR, BOTH THE APPEALS WERE HEARD, CONSI DERED TOGETHER AND DISPOSED OFF, FOR THE SAKE OF CONVENIENCE AND CLARI TY, IN THIS COMMON ORDER. 5. THE ASSESSEE IS A PRIVATE LIMITED COMPANY INVOLV ED IN THE BUSINESS OF REAL ESTATE DEVELOPMENTS. 6. LET US FIRST ADDRESS THE GRIEVANCES OF THE ASSE SSEE. THE ISSUE, IN BRIEF, IS THAT DURING THE YEAR UNDER DISPUTE, THE ASSESSEE HAD ADOPTED PERCENTAGE COMPLETION METHOD [ PCM] FOR ITS REAL ESTATE DEVELOPMENTS. DURING THE YEAR UNDER DISPUTE , OUT OF 25 PROJECTS BEING DEVELOPED, 7 PROJECTS WERE COMPLETED AND THE REMAINING 18 ITA NOS.97 & 184/B/10 PAGE 4 OF 24 PROJECTS WERE UNDER VARIOUS STAGES OF COMPLETION. OUT OF 18 PROJECTS, 8 PROJECTS WERE LESS THAN 30% OF COMPLETION AND, THUS , NO REVENUE WAS RECOGNIZED. IN THE REMAINING 10 PROJECTS, THE ASSE SSEE HAD OFFERED TO TAX THE CUMULATIVE PROJECTS FOR ONLY 5 PROJECTS UND ER PCM. 6.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, T HE ASSESSEE WAS REQUIRED TO CLARIFY AS TO WHY IN THE REMAINING 5 PR OJECTS, THOUGH THEY WERE COMPLETED MORE THAN 30%, THEY WERE NOT OFFERED TO TAX. 6.2. AFTER DULY CONSIDERING THE LENGTHY SUBMISSION OF THE ASSESSEE WHICH HAS BEEN SET-OUT IN THE IMPUGNED ASSESSMENT O RDER, THE REASONS RECORDED BY THE AO ARE SUMMARIZED AS UNDER: I. RECOGNITION OF REVENUE : ADOPTION OF PCM: 6.3. THE ASSESSEES EXPLANATION FOR NOT RECOGNIZING REVENUE IN RESPECT OF ONGOING PROJECTS WHICH WERE BEING DEVELO PED DURING THE RELEVANT PREVIOUS YEAR UNDER JOINT DEVELOPMENT AGRE EMENT WAS CAREFULLY EXAMINED. (I) THE CONTENTION WAS THAT THE ASSESSEE DOES NOT GET O WNERSHIP RIGHTS OVER THE PROPERTY OR THE IN LANDS UNLESS IT COMPLIES WITH ALL THE CONDITIONS STIPULATED IN THE JOINT DEVELOPM ENT AGREEMENT AND ONE SUCH CONDITION WAS THAT IT NEEDS TO HAND OV ER THE SHARE OF LAND OWNERS BUILT SPACE AND, THEREFORE, THE ASS ESSEE CAN TRANSFER ALL SIGNIFICANT RISKS AND REWARDS OF OWNER SHIP TO THE PROSPECTIVE BUYERS ONLY AT THE END OF THE PROJECT AS PRACTICALLY THE TOTAL PROJECT WAS DEVELOPED IN ONE GO AND THE L AND OWNERS AND THE ASSESSEES SHARE OF SUPER STRUCTURE WAS COM PLETED AT THE SAME TIME. ANOTHER RELATED ARGUMENT WAS THAT L EGAL OWNERSHIP OF IMMOVABLE PROPERTY CAN BE TRANSFERRED BY EXECUTING A REGISTERED SALE/CONVEYANCE DEED; (II) IT IS TO BE NOTED THAT THE ASSESSEE USUALLY ENTERS INTO TWO AGREEMENTS WITH THE PERSONS INTENDING TO PURCHASE A PARTMENT OR OFFICE SPACE IN A PROJECT IMPLEMENTED UNDER A JO INT DEVELOPMENT AGREEMENT [JDA] ONE AGREEMENT FOR THE ITA NOS.97 & 184/B/10 PAGE 5 OF 24 PURCHASE OF UNDIVIDED INTEREST IN LAND TO BE MADE W ITH THE OWNERS OF LAND AND ANOTHER, FOR CONSTRUCTION OF SUP ER STRUCTURE WHICH WILL BE MADE WITH THE DEVELOPER. THERE WAS A SEPARATE CONSIDERATION TO BE PAID BY THE PROSPECTIVE BUYER F OR EACH AGREEMENT. THESE WERE ENFORCEABLE CONTRACTS. THE AS SESSEE HAD ALSO ENTERED INTO JDA WITH THE LAND-OWNERS WHEREIN THERE WERE SEVERAL CONDITIONS STIPULATED TO SECURE THE INTERES T OF THE ASSESSEE TILL THE COMPLETION OF THE PROJECT. IN TE RMS OF JDA, THE ASSESSEE WAS ENTITLED TO DEAL AND DISPOSE OFF THE S ALEABLE SUPER BUILT UP AREA FALLING INTO ITS SHARE TOGETHER WITH THE CORRESPONDING PROPORTIONATE UNDIVIDED SHARE IN THE LAND. THIS BEING THE CASE, THAT THE ACT OF THE ASSESSEE IN ENT ERING INTO AN AGREEMENT WITH THE BUYERS FOR CONSTRUCTION OF SUPER STRUCTURE INDICATING THE SPECIFICATION OF UNIT THAT WILL BE C ONSTRUCTED CLEARLY SUGGEST THAT IT CAN TRANSFER ALL SIGNIFICA NT RISK AND REWARDS TO THE BUYERS NOTWITHSTANDING THE FACT THA T THE ASSESSEE DOES NOT HAVE LEGAL OWNERSHIP OF LAND AS ON DATE OF ENTERING INTO SUCH AGREEMENTS. MOREOVER, IT A TYPI CAL JDP UNDERTAKEN BY THE ASSESSEE, IT NEVER GETS ITS SHARE OF INTEREST IN LAND TRANSFERRED AND REGISTERED IN ITS NAME. THERE FORE, WHEN INTEREST IN LAND TRANSFERRED TO THE BUYERS, THE AS SESSEE MAY EXECUTE THE REGISTRATION DEED, BUT THE SAME IS DONE ON BEHALF OF THE LAND OWNERS, IN ITS CAPACITY AS GENERAL POA HOL DER OR AS THE AGENT OF LAND OWNERS AND NOT IN ITS OWN RIGHT A S THE LEGAL OWNER BECAUSE FOR GETTING THE LEGAL OWNERSHIP OF LA ND, THE ASSESSEE MUST POSSESS REGISTERED DOCUMENTS IN ITS F AVOUR. THIS FACT MAKES IT CLEAR THAT LEGAL OWNERSHIP OF LAND WA S NOT NECESSARY FOR COMMERCIAL EXPLOITATION OF LAND. SO LONG AS THE BUYERS ABIDE BY THE TERMS OF BOTH THE AGREEMENTS AS MENTIONED SUPRA WHICH ARE LEGALLY ENFORCEABLE BY BOTH THE PAR TIES, THE ASSESSEE CAN TRANSFER ALL SIGNIFICANT RISK AND REW ARDS TO THE BUYERS THAT VERY MOMENT AGREEMENTS WERE SIGNED BY B OTH THE PARTIES. RISK AND REWARDS WERE ASSOCIATED WITH AN A GREEMENT EXECUTED. AFTER UNDERSTANDING OF THE WHOLE SCHEME OF PROPERTY DEVELOPMENT OF THE DEVELOPER, A BUYER WILL ENTER IN TO AN AGREEMENT BEING FULLY AWARE OF THE RISK AND REWARDS ASSOCIATED WITH THE AGREEMENT. THUS, THERE WAS NO QUESTION OF ASSESSEE NOT TRANSFERRING SIGNIFICANT RISK AND REWARDS IN SPITE OF ENTERING INTO AGREEMENTS WITH THE BUYERS WHICH WERE LEGALLY ENFORCEABLE CONTRACTS. EVEN THE GUIDANCE NOTE OF I CAI ON RECOGNITION OF REVENUE BY REAL ESTATE DEVELOPERS DO ES NOT SPEAK ANYTHING ABOUT TRANSFER OF LEGAL OWNERSHIP OF THE P ROPERTY. THUS, THE VIEW OF THE ASSESSEE THAT REVENUE CANNOT BE RECOGNIZED FROM JDP IS NOT ACCEPTABLE. ACCORDINGLY , THE REVENUE FROM THE PROJECTS OF JD WAS TO BE RECOGNIZE D UNDER POC METHOD. ITA NOS.97 & 184/B/10 PAGE 6 OF 24 6.4. THUS, THE ASSESSEE WAS ASKED TO FURNISH THE W ORKING OF INCOME IN RESPECT OF FIVE PROJECTS ON PCM. ACCORDI NGLY, THE INCOME OF RS.8,92,90,995/- IN RESPECT OF THE FIVE PROJECTS UN DER JDA WAS ADOPTED AND ADDED TO THE INCOME OF THE ASSESSEE; COMPOUNDING FEES : 6.5. ON EXAMINATION OF THE ASSESSEES BOOKS OF ACCO UNT, THE AO NOTICED THAT THE ASSESSEE HAD INCURRED COMPOUNDING FEE OF R S.43.96 LAKHS WHICH WAS CLAIMED AS A DEDUCTION. HOWEVER, THE AO DISALL OWED THE SAME CITING THE REASONS RECORDED IN THE EARLIER ASSESSMENTS IN THE ASSESSEES OWN CASE AND ALSO HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS FOR AN OFFENCE OR AN ACT PROHIBITED BY LAW WHICH CANNOT BE ALLOWED AS A DEDUCTION. 6.6. LIKEWISE, ON VERIFICATION OF TAX AUDIT REPORT ALSO, THE AO NOTICED THAT THE ASSESSEE HAD PAID RS.25000/- TO THE DEPARTMENT OF COMPANY AFFAIRS AND RS.26585/- AS ENTRY TAX AS COMPOUNDING FEE, TOT ALING TO RS.51,585/- WHICH HAS BEEN PROMPTLY DISALLOWED BY THE AO CITING A SIMILAR REASONING. 7. AGITATED THE ASSESSEE TOOK UP THE ISSUES WITH TH E LD. CIT (A) FOR RELIEF. TAKING INTO ACCOUNT THE ASSESSEES FORCEFU L CONTENTIONS AND ALSO PERUSAL OF THE RELEVANT RECORDS, THE LD. CIT (A) HA S OBSERVED THUS WITH REGARD TO ADOPTION OF PERCENTAGE COMPLETION ME THOD 2.2.3IT IS NOTICED THAT THE ARGUMENT TAKEN BY T HE APPELLANT ARE SIMILAR TO THE ARGUMENT TAKEN BEFORE THE ASSESSING OFFICER. THE AS-7 NOTIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS, IS EFFECTIVE FROM 1.4.2003, ACCORDING TO WHICH, THE COMPLETED CONTRAC T METHOD HAS BEEN ITA NOS.97 & 184/B/10 PAGE 7 OF 24 REPLACED BY PERCENTAGE COMPLETION METHOD FOR CONSTR UCTION CONTRACT. FURTHER, FROM THE PERUSAL OF THE CONTRACT AGREEMENT S, IT IS EVIDENT THAT THESE CONTAIN THE TERM AND CONDITION AS CONSTRUCTI ON CONTRACT. FURTHER, FROM THE PERUSAL OF CONTRACT AGREEMENTS, IT IS EVIDENT THAT THESE CONTAINS THE TERMS AND CONDITIONS AS CONSTRU CTION CONTRACT, THEREFORE THE ACCOUNTING STANDARD AS-7 IS CLEARLY A PPLICABLE TO THE CASE OF THE APPELLANT WHICH IS FURTHER EVIDENT FROM THE FACT THAT THE APPELLANT DURING THE COURSE OF PROCEEDINGS BEFORE T HE HONBLE ITAT FOR ASSESSMENT YEAR 2005-06 ADMITTED THAT THE ASSE SSEE HAS CHANGED THE METHOD OF ACCOUNTING FROM PROJECT COMPLETION ME THOD TO PERCENTAGE COMPLETION METHOD IN SUBSEQUENT YEAR. THE HONBLE ITAT BANGALOREB BENCH, IN ITA NO.218/BANG/2009 IN THE ORDER PASSED FOR ASSESSMENT YEAR 2005-06 IN PARA 3.25 GIVEN A FI NDING THAT WHEN THE GUIDANCE NOTE PROVIDED THAT REVISED AS-7 IS APP LICABLE TO REAL ESTATE DEVELOPERS, THE ASSESSEE HAS ITSELF CHANGED THE METHOD OF ACCOUNTING, HENCE WE DIRECT THE ASSESSING OFFICER T O ACCEPT THE PROJECT COMPLETION METHOD OF ACCOUNTING FOR THE YEAR UNDER REFERENCE. THE ABOVE FINDING OF THE HONBLE ITAT ALSO SUPPORT THE VIEW OF THE ASSESSING OFFICER THAT THE APPELLANT HAS TO FOLLOW THE PERCENTAGE COMPLETION METHOD AS PER ACCOUNTING STANDARD AS-7 F OR THE PROJECT, ACCORDING TO WHICH THE PERCENTAGE COMPLETION METHO D IS APPLIED ON A CUMULATIVE BASIS IN EACH ACCOUNTING PERIOD TO THE C URRENT ESTIMATES OF THE CONTRACT REVENUE AND CONTRACT COST, WHEN THE ST AGE OF COMPLETION OF EACH PROJECT REACHES A SIGNIFICANT LEVEL WHICH IS E STIMATED TO BE AT LEAST 30% OF THE TOTAL ESTIMATED COT OF THE PROJECT , THE ESTIMATES OF SALEABLE AREA AND COST ARE REVISED PERIODICALLY BY THE MANAGEMENT, THE EFFECT OF SUCH CHANGES TO THE ESTIMATE IS RECOGNIZE D IN THE PERIOD, SUCH CHANGES ARE DETERMINED. IT IS ALSO PROVIDED THAT I N THE CASE OF JOINT CONSTRUCTION CONTRACT REVENUE RECOGNITION IS RESTRI CTED TO THE COMPANIES PERCENTAGE SHARE OF THE UNDERLINED REAL E STATE DEVELOPMENT PROJECTS. THE ASSESSING OFFICER IN HIS ORDER HAS E STABLISHED THAT THE CONSTRUCTION CONTRACT ENTERED BY THE APPELLANT COME UNDER THE PURVIEW OF AS-7, ACCORDINGLY, HE OBTAINED THE DETAIL OF THE PROJECTS FROM THE APPELLANT WHERE THE STAGE OF COMPLETION IS MORE THA N 30% OF THE TOTAL ESTIMATED COST AND ON THE BASIS OF THE DETAILS FURN ISHED BY THE APPELLANT IN REGARD TO SUCH PROJECTS. THE ASSESSING OFFICER ASSESSEE THE INCOME OF RS.8,92,90,995/-. IN VIEW OF THE ABOVE, I DO NO T FIND ANY INFIRMITY IN ASSESSING THE INCOME OF SUCH PROJECTS ON THE BASIS OF PERCENTAGE COMPLETION METHOD, ACCORDINGLY, THE ADDITION OF RS. 8,92, 90,995/- IS UPHELD. 7.1. WITH REGARD TO THE COMPOUNDING FREE OF RS.43.9 6 LAKHS PAID BY THE ASSESSEE TO BMP; THE LD. CIT (A) HAD, AFTER CO NSIDERING THE ITA NOS.97 & 184/B/10 PAGE 8 OF 24 ASSESSEES CONTENTIONS, OBSERVED THAT THE EXPENSES INCURRED AS COMPOUNDING FEE ARE NOT ALLOWABLE AS PER EXPLANATIO N TO SUB-SECTION (1) OF SECTION 37 OF THE INCOME-TAX ACT WHICH PROVIDE T HAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO BE HAVE BE EN INCURRED FOR THE PURPOSE OF BUSINESS AND NO DEDUCTION SHALL BE ALLOW ED IN RESPECT OF SUCH EXPENDITURE. THE HONBLE ITAT ALSO CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ACCOUNT IN THE PRE CEDING YEAR. ACCORDINGLY, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS CONFIRMED. 7.2. IN RESPECT OF THE DISALLOWANCE OF RS.51,585/- BEING THE AMOUNTS PAID TO THE DEPARTMENT OF COMPANY AFFAIRS AND AS EN TRY TAX COMPOUNDING FEES, THE OBSERVATION OF THE FIRST APPE LLATE AUTHORITY WAS THAT THE AO HAD IN HIS ORDER MENTIONED THAT THE EXP ENSES WERE INCURRED FOR OFFENCE PROHIBITED BY LAW. THE APPELLANT DURI NG THE COURSE OF THE APPELLATE PROCEEDINGS HAD ALSO FAILED TO PROVE THAT THESE EXPENSES DO NOT COME IN THE PURVIEW OF EXPLANATION TO SUB-SECTI ON (1) OF S.37 OF THE ACT AND, THUS, THE CIT(A) HAD UPHELD THE DISALLOWAN CE MADE BY THE ASSESSING OFFICER. 8. AGGRIEVED, THE ASSESSEE HAS COME UP WITH THE PRE SENT APPEAL. THE SUBMISSIONS OF THE ASSESSEE ARE SUMMARIZED AS U NDER: THE ASSESSEE FOLLOWS THE GUIDANCE NOTE ON RECOGNIT ION OF REVENUE BY REAL ESTATE DEVELOPERS ISSUED BY ICAI FOR RECOGNITION OF REVENUE ARISING FROM REAL ESTATE PROJECTS. AS PER THE SAID GUIDANCE NOT E, FOR RECOGNITION OF REVENUE IN CASE OF REAL ESTATE SALES, THE ASSESSEE CONTENDED THAT IT WAS ITA NOS.97 & 184/B/10 PAGE 9 OF 24 NECESSARY THAT ALL THE CONDITIONS SPECIFIED IN PARA GRAPHS 10 AND 11 OF AS 9 ARE SATISFIED. IT WAS, FURTHER, SUBMITTED THAT PA RA 7 OF THE GUIDANCE NOTE STATES THAT THE DETERMINATION OF THE POINT OF TIME WHEN ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP ARE TRANSFERRED DEPE NDS ON THE FACTS AND CIRCUMSTANCES OF EACH CASE CONSIDERING THE TERMS AN D CONDITIONS OF THE AGREEMENT. THE GUIDANCE NOTE PROVIDES CERTAIN INST ANCES AS TO HOW THE SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP COULD BE SAID TO BE TRANSFERRED THROUGH AGREEMENT TO SALE ENTERED INTO WITH THE C USTOMERS. THE SAID GUIDANCE NOTE, HOWEVER, DOES NOT ENVISAGE OTHER TYP ES OF REAL ESTATE TRANSACTIONS SUCH AS DEVELOPMENT OF PROPERTY UNDER JOINT DEVELOPMENT AGREEMENT AND SUBSEQUENT SALE TO CUSTOMERS. IN THE PRESENT CASE, FIVE PROJECTS WERE UNDERTAKEN UNDER JOINT DEVELOPMENT A GREEMENTS [JDA] AND AS PER THE TERMS AND CONDITIONS OF THE JDA, THE ASSESSEE SECURED THE RIGHT OF OWNERSHIP IN RESPECT OF ITS SHARE ONLY AF TER COMPLETION OF CONSTRUCTION. IN OTHER WORDS, THE ASSESSEE SECURED ITS OWNERSHIP ONLY AFTER COMPLETION OF CONSTRUCTION. IN OTHER WORDS, THE ASSESSEE SECURED ITS OWNERSHIP ONLY AFTER DISCHARGING ITS ENTIRE OBLIGAT ION UNDER JDA. THE AGREEMENT OF SALE ENTERED INTO WITH THE CUSTOMERS A LSO CLEARLY SPECIFIES THAT THE PROJECT IS CARRIED OUT UNDER JDA AND THE A SSESSEE WOULD BE ENTITLED TO OWNERSHIP ONLY ON COMPLETION OF CONSTRU CTION. IN VIEW OF THE ABOVE CONDITIONS OF THE JDA, THE SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP AS PROVIDED UNDER THE GUIDANCE NOTE WOULD BE TRANSFERRED ONLY AFTER COMPLETION OF CONSTRUCTION. IT WAS FOR THIS REASON THAT THE INCOME FROM REAL ESTATE PROJECTS CARRIED OUT UNDER JDA WAS TO BE RECOGNIZED ONLY AFTER COMPLETION OF PROJECTS AND NO T ON THE BASIS OF PERCENTAGE OF COMPLETION METHOD. FURTHER SUBMISSION WAS THAT (I) THE REAL ESTATE PROJECTS CARRIED OUT UNDER JDA WERE NOT COMPLETED DURING THE YEAR; (II) THE JDAS CONTAINED VARIOUS CLAUSES WHICH WERE NOT F ULFILLED AND AS A RESULT, THE RISKS AND REWARDS OF OWNERSHI P WERE NOT TRANSFERRED BY THE ASSESSEE TO THE BUYERS; (III) THERE WAS NO TRANSFER OF TITLE TO PROPERTY IN FAVOU R OF THE ASSESSEE AND AS A RESULT, THE ASSESSEE COULD NOT HA VE TRANSFERRED THE SIGNIFICANT RISKS AND REWARDS OF OW NERSHIP TO THE BUYERS, CONSEQUENT TO WHICH ONLY REVENUES COULD BE RECOGNIZED; (IV) THE ASSESSEES METHODOLOGY FOR RECOGNIZING REVENUE IN RELATION TO JOINT DEVELOPMENT PROJECTS WAS IN ACCORDANCE WI TH THE GUIDANCE NOTE ON RECOGNITION OF REVENUE BY REAL ES TATE DEVELOPERS ISSUED BY THE ICAI; - THUS, NO INCOME WAS CHARGEABLE TO TAX IN RESPECT OF FIVE REAL ESTATE PROJECTS CARRIED OUT UNDER JDA FOR THE ASSES SMENT ITA NOS.97 & 184/B/10 PAGE 10 OF 24 YEAR UNDER DISPUTE AND THE AMOUNT OF ADDITION MADE WAS TO BE DELETED FROM ITS INCOME. 8.1. DURING THE COURSE OF HEARING, THE LD. A R FURN ISHED A VOLUMINOUS PAPER BOOK CONTAINING 1 223 PAGES WHICH CONSISTS AMONG OTHERS, COPIES OF (I) VARIOUS JDAS FOR THE VARIOUS PROJECTS ; (II) CORRESPONDENCES WITH THE REVENUE; (III) P & L WORKING SHEET UNDER P CM ETC. AND ALSO COPIES OF (I) AGREEMENT TO SELL DT.15.12.03 BETWEEN UB (HOLDINGS) LTD. AND ADIL SHACOOR AND THE ASSESSEE AS A CONFIRMING P ARTY; (II) AGREEMENT TO SELL DT.29.1.04 BETWEEN UB (HOLDINGS) LTD AND S .K.MODI WITH THE ASSESSEE AS A CONFIRMING PARTY; AND (III) CONSTRUCT ION AGREEMENT DT.15.12.03 BETWEEN ADIL SHACOOR AND THE ASSESSEE. 8.2. ON THE OTHER HAND, THE LD. D R WAS VERY FIRM I N HER URGE THAT THE ISSUE HAD, IN FACT, BEEN ANALYZED AT LENGTH BY THE AUTHORITIES BELOW AND ARRIVED AT A CONCLUSION IN A JUDICIOUS MANNER WHICH REQUIRES TO BE SUSTAINED. DURING THE COURSE OF HEARING, THE LD. D R HAD FURNISHED A COPY OF THE COMPUTATION OF PROFITS UNDER PCM FOR T HE ASSESSMENT YEAR IN DISPUTE FOR THE PERUSAL OF THE BENCH. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS, METICULOUSLY PERUSED THE RELEVANT RECORDS AND ALSO VARIOUS DOCUM ENTARY EVIDENCES IN THE SHAPES OF COPIES OF JDAS, AGREEMENTS TO SELL ET C., ADDUCED BY EITHER PARTY IN SUPPORT OF THEIR RESPECTIVE STAND. 9.1. THE ASSESSEES MAIN CONTENTION, IN BRIEF, WAS THAT MOST OF ITS PROJECTS WERE UNDER JDAS WHERE THE LAND OWNER TRANS FERS A CERTAIN AGREED PORTION OF LAND AND IN TURN GETS A CERTAIN AGREED PORTION OF BUILT ITA NOS.97 & 184/B/10 PAGE 11 OF 24 UP SPACE IN THE TOTAL DEVELOPMENT. IN JOINT DEVELO PMENT PROJECTS, THE ASSESSEE WAS ONLY GIVEN RESTRICTIVE PERMISSION/LICE NSE TO DEVELOP AND DID NOT ATTAIN ANY RIGHTS OVER THE PROPERTY DEVELOP ED UNLESS THE ASSESSEE COMPLY ALL THE CONDITIONS STIPULATED IN JD AS AND ONE OF THE CONDITIONS WAS THAT IT HAD TO HAND OVER THE SHARE O F LAND OWNERS BUILT-UP SPACE. THE CONTENTION OF THE ASSESSEE WAS THAT IT ENTER INTO TWO TYPES OF AGREEMENTS, VIZ., AGREEMENT TO SELL SPECIFYING THE UNDIVIDED SHARE OF THE LAND WHICH WILL BE TRANSFERRED TO THE BUYER ON COMPLETION OF THE PROJECT AND CONSTRUCTION AGREEMENT INDICATING TH E SPECIFICATION OF UNIT WHICH WILL BE CONSTRUCTED AND TRANSFERRED. ON COMP LETION OF THE PROJECT ON THE TERMS OF THE SAID TWO AGREEMENTS, THE ASSESS EE WOULD EXECUTE A SALE DEED TRANSFERRING THE LEGAL TITLE IN THE UND ERLYING PIECE IN THE PROPERTY AND HAND OVER THE POSSESSION TO THE BUYER. THUS, IT WAS THE CONTENTION OF THE ASSESSEE, THE RISKS AND REWARDS OF OWNERSHIP OF THE PROPERTIES WAS TRANSFERRED TOGETHER WITH THE LE GAL TITLE FOR THE PROPERTY AND/OR WHEN THE BUYER WAS GIVEN POSSESSION , BECAUSE UNTIL THAT POINT THE RISKS AND REWARDS OF OWNERSHIP INCLUDING THE RESIDUAL VALUE OF RISKS AND REWARDS WERE RETAINED B Y THE ASSESSEE . 9.2. FROM THE ABOVE, THE CRUX OF THE ASSESSEES CON TENTION WAS THAT IT DOESNT GET OWNERSHIP RIGHTS OVER THE PROPERTY OR I N LANDS UNLESS IT COMPLIES WITH ALL THE CONDITIONS STIPULATED IN THE JDA AND ONE OF THE CONDITIONS WAS THAT IT REQUIRES TO HAND OVER THE SH ARE OF LAND OWNERS BUILT UP SPACE AND, THUS, THE ASSESSEE CAN TRANSFER ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP TO THE BUYERS ON ONLY AT T HE END OF THE PROJECT INCLUDING THAT OF THE LAND OWNERS SHARE AND THE A SSESSEES SHARE SUPER ITA NOS.97 & 184/B/10 PAGE 12 OF 24 STRUCTURE WAS COMPLETED SIMULTANEOUSLY. ANOTHER SI GNIFICANT ARGUMENT OF THE ASSESSEE WAS THAT THE LEGAL OWNERSHIP OF IMM OVABLE PROPERTY COULD BE TRANSFERRED BY EXECUTING A REGISTERED SALE /CONVEYANCE DEED ETC., 9.3. HOWEVER, AS RIGHTLY HIGHLIGHTED BY THE AO IN H IS IMPUGNED ORDER WHICH IS IN DISPUTE, THE ASSESSEE ENTERS INTO TWO A GREEMENTS WITH THE PROSPECTIVE BUYERS OF EITHER AN APARTMENT OR A COMM ERCIAL COMPLEX OR AN OFFICE SPACE IN A PROJECT UNDER JDA, OF COURSE, ONE AGREEMENT FOR THE PURCHASE OF UNDIVIDED INTEREST IN LAND WITH THE LAN DLORDS AND THE ANOTHER FOR THE CONSTRUCTION OF SUPER-STRUCTURE WHICH WOULD BE WITH THE DEVELOPER. THE PROSPECTIVE BUYER WILL HAVE TO PAY FOR EACH AGREEMENT, I.E., ONE FOR THE UNDIVIDED INTEREST IN LAND AND AN OTHER FOR BUILT-UP SPACE WHICH IS CONSIDERED TO BE ENFORCEABLE CONTRACTS. S IMULTANEOUSLY, THE ASSESSEE WOULD ENTER INTO JDA WITH THE LAND-OWNERS, ACCORDING TO THE TERMS AND CONDITIONS CONTAINED IN SUCH JDAS, THE AS SESSEE WOULD BE ENTITLED TO DEAL AND DISPOSE OF THE SUPER-STRUCTURE (BUILT-UP AREAS) EARMARKED/AGREED UPON AS ITS SHARE TOGETHER WITH TH E CORRESPONDING PROPORTIONATE UDS IN THE LAND. THIS BEING A GROUND REALITY AND WHEN THE ASSESSEE ENTERS INTO AN AGREEMENT WITH A PROSPECTIV E BUYER FOR CONSTRUCTION OF A SUPER-STRUCTURE OR BUILD UP AREA AS THE CASE MAY BE, THE UNIT WHICH WOULD BE CONSTRUCTED AS PER THE SPEC IFICATION, UNAMBIGUOUSLY IMPLIES THAT THE ASSESSEE COULD TRANS FER ALL SIGNIFICANT RISK AND REWARDS TO THE PROSPECTIVE BUYERS OF THE P ROPOSED UNIT(S) EVEN THOUGH THE ASSESSEE DOESNT HOLD ANY LEGAL OWNERSHI P OF THE LAND WHEN IT ENTERS INTO SUCH AGREEMENT. ITA NOS.97 & 184/B/10 PAGE 13 OF 24 9.4. AS RIGHTLY UNCOVERED BY THE AO, THE JOINT DEVE LOPMENT PROJECT UNDERTOOK BY THE ASSESSEE, IT DID NOT GET ITS SHARE OF INTEREST IN LAND TRANSFERRED AND GOT REGISTERED IN ITS NAME. WHEN T HE ASSESSEE RESORTS TO TRANSFER INTEREST IN LAND TO A PROSPECTIVE BUYER , OF COURSE, THE ASSESSEE WOULD EXECUTE THE REGISTRATION DEED AS A G PA HOLDER OF THE LAND OWNERS, BUT, NOT IN ITS OWN RIGHT AS A LEGAL O WNER OF THE SAID LAND. BEING A PRUDENT DEVELOPER, THE ASSESSEE DOESNT R EGISTER THE DEED AS AN OWNER OF THE LAND SINCE IT DOESNT HAVE LEGAL OW NERSHIP RIGHT OVER THE SAID LAND. THE FACT REMAINS THAT WITHOUT HAVING LE GAL OWNERSHIP IN THE LAND IN QUESTION, IT CAN BE COMMERCIALLY EXPLOITED, OF COURSE, WITH THE AID OF GPH OF THE SAID LAND. WHEN THE PROSPECTIVE BUYE RS OF SUPER-BUILD UP AREA GIVING CONSENT TO THE TERMS OF THE TWO AGREEME NTS [MENTIONED ABOVE], NAMELY, AGREEMENT TO SELL UNDIVIDED INTERES T IN LAND AS WELL AS THE AGREEMENT FOR CONSTRUCTION WHICH ARE ENFORCEA BLE LEGALLY BY EITHER PARTY, THE ASSESSEE CAN NATURALLY ALSO TRANSFER ALL SIGNIFICANT RISKS AND REWARDS TO THE BUYERS WHEN THESE ABOVE AGREEMENTS ARE AUTHENTICATED BY THE PARTIES INVOLVED IN THE SAID TRANSACTION. A PROSPECTIVE BUYER WILL DEFINITELY WEIGH THE PROS AND CONS OF RISKS INVOLVE D IN SUCH A TRANSACTION BEFORE VENTURE TO ENTER INTO SUCH AN AGREEMENT FOR THE PURCHASE AN APARTMENT OR AN OFFICE SPACE OR COMMERCIAL SPACE - YET TO BE BUILT UP - WITH A DEVELOPER WHO IS EXECUTING THE PROJECT UNDER THE JDA. SUCH BEING THE PREVAILING PRACTICE IN A PROJECT UNDER JD A, THE ASSESSEES ASSERTION THAT IT WAS TRANSFERRING SIGNIFICANT RIS K AND REWARDS ONLY AFTER COMPLETION OF THE PROJECT IN SPITE OF ENTERING INT O AGREEMENTS WITH THE ITA NOS.97 & 184/B/10 PAGE 14 OF 24 PROSPECTIVE BUYERS IS HYPOTHETICAL AND THERE WOULD BE NO TAKERS OF ITS THEORY. 9.5.1. LET US NOW HAVE A GLANCE OF APPLICATION OF REVENUE RECOGNITION PRINCIPLES PRESCRIBED IN AS-9 TO REAL E STATE SALES: 2. FOR RECOGNITION OF REVENUE IN CASE OF REAL ESTA TE SALES, IT IS NECESSARY THAT ALL THE CONDITIONS SPECIFIED IN PARA GRAPHS 10 AND 11 OF ACCOUNTING STANDARD (AS)9, REVENUE RECOGNITION, AS REPRODUCED BELOW ARE SATISFIED: 10. REVENUE FROM SALES OR SERVICE TRANSACTIONS SHOULD BE RECOGNIZED WHEN THE REQUIREMENTS AS TO PERFORMANCES SETOUT IN PARAGRAPHS 11 AND 12 ARE SATISFIED, PROVIDED THAT A T THE TIME OF PERFORMANCE IT IS NOT UNREASONABLE TO EXPECT ULTIMA TE COLLECTION. IF AT THE TIME OF RAISING OF ANY CLAIM IT IS UNREASONA BLE TO EXPECT ULTIMATE COLLECTION, REVENUE RECOGNITION SHOULD BE POSTPONED. 11. IN A TRANSACTION INVOLVING THE SALE OF GOODS, PERFORMANCE SHOULD BE REGARDED AS BEING ACHIEVED WHEN THE FOLLO WING CONDITIONS HAVE BEEN FULFILLED: (I) THE SELLER OF GOODS HAS TRANSFERRED TO THE BUYE R THE PROPERTY IN THE GOODS FOR A PRICE OR ALL SIGNIFICANT RISKS AND REWARDS OR OWNERSHIP HAVE BEEN TRANSFERRED TO THE BUYER AND TH E SELLER RETAINS NO EFFECTIVE CONTROL OF THE GOODS TRANSFERRED TO A DEGREE USUALLY ASSOCIATED WITH OWNERSHIP; AND (II) NO SIGNIFICANT UNCERTAINTY EXISTS REGARDING TH E AMOUNT OF THE CONSIDERATION THAT WILL BE DERIVED FROM THE SALE OF THE GOODS. IN THE INSTANT CASE, AS NARRATED IN THE FORE-GOING PARAGRAPHS THAT WHEN A PROSPECTIVE BUYER OF SUPER BUILD UP AREA GIVING CON SENT TO THE TERMS OF TWO AGREEMENTS REFERRED SUPRA, THE ASSESSEE SIMULTA NEOUSLY TRANSFER ALL SIGNIFICANT RISKS TO THE PROSPECTIVE BUYERS WHEN THE SAID AGREEMENTS ARE INKED BY THE PARTIES INVOLVED THE SAID TRANSACTION. FOR ALL PRACTICAL PURPOSES AND FOR THE RECOGNITION OF REVENUE, ALL TH E CONDITIONS SPECIFIED IN PARAGRAPHS 10 AND 11 OF AS-9 HAVE SINCE BEEN FUL FILLED. ITA NOS.97 & 184/B/10 PAGE 15 OF 24 9.5.2. ON A GLIMPSE OF THE COPY OF THE AGREEMENT TO SELL DATED 15.12.2003 WHEREIN M/S UNITED BREWERIES (HOLDINGS) LIMITED, BANGALORE WHICH WAS REPRESENTED BY THE ASSESSEE AS THE SELLE RS OF ONE PART AND THE ASSESSEE OF THE SECOND PART AND ADIL SHACOOR AS THE PURCHASER OF THIRD PART, ACCORDING TO WHICH, THE SELLERS ENTERED INTO AN AGREEMENT WITH THE CONFIRMING PARTY (THE ASSESSEE) FOR DEVELOPING THE SCHEDULE PROPERTY [MORE DESCRIBED AS UB FACTORY, IN MUNICIPAL NO.24, GRANT ROAD (VITTAL MALLYA ROAD), BANGALORE] INTO A COMPLEX AND DELIVER 55% OF THE TOTAL SALEABLE SUPER BUILT UP AREA IN THE PROPOSED BUILDI NGS TO THE SELLERS AND IN CONSIDERATION THEREFORE, THE SELLERS HAVE AGREED TO TRANSFER 45% OR SUCH PROPORTION OF UDS IN THE LAND IN THE SCHEDULE A PROPERTY AS IS PROPORTIONATE TO THE SALEABLE SUPER BUILT UP AREA F ALLING INTO THE SHARE OF THE CONFIRMING PARTY IN THE PROPOSED BUILDINGS TO B E BUILT. IN TERMS OF THE AGREEMENTS ENTERED INTO (CITED SUPRA), THE CONFIRMI NG PARTY [THE ASSESSEE] WAS ENTITLED TO DEAL AND DISPOSE OFF THE SALEABLE SUPER BUILT UP AREAS IN THE PROPOSED COMPLEX FALLING INTO ITS S HARES TOGETHER WITH THE CORRESPONDING PROPORTIONATE UDS IN THE LAND IN SCHE DULE A PROPERTY AND SIMILARLY THE SELLERS [UNITED BREWERIES (HOLDINGS) LIMITED] ARE ALSO ENTITLED TO DEAL AND DISPOSE OFF THE SALEABLE SUPER BUILT UP AREA FALLING INTO ITS SHARE TOGETHER WITH THE CORRESPONDING PROP ORTIONATE UDS IN THE LAND IN THE SCHEDULE PROPERTY. THE CONFIRMING PART Y (THE ASSESSEE) WAS ENTITLED TO DEAL AND DISPOSE OFF THE SALEABLE SUPER BUILT UP AREAS IN UD CITY FALLING INTO ITS SHARES TOGETHER WITH THE CORR ESPONDING UDS IN THE LAND IN THE SCHEDULE PROPERTY AS PER THE POWER OF A TTORNEY EXECUTED BY THE SELLER IN THIS BEHALF. ITA NOS.97 & 184/B/10 PAGE 16 OF 24 9.6. FROM CAREFUL READING OF THE RECITALS OF THE AB OVE SAID AGREEMENT, AS RIGHTLY HIGHLIGHTED BY THE AO IN HIS IMPUGNED OR DER WHICH IS UNDER DISPUTE, IN A JOINT DEVELOPMENT PROJECT UNDERTAKEN BY THE ASSESSEE, IT NEVER GETS ITS SHARE OF INTEREST IN LAND TRANSFERRE D AND GOT REGISTERED IN ITS NAME. THUS, WHEN INTEREST IN LAND WAS TO BE TR ANSFERRED TO A PROSPECTIVE BUYER, THE ASSESSEE WAS EXECUTING THE R EGISTRATION DEED ON BEHALF OF THE LAND OWNER [AS IT WAS VESTED WITH A G ENERAL POWER OF ATTORNEY BY THE LAND OWNERS] OR IT CAN BE MORE DESC RIBED AS A CONDUIT FOR THE LAND OWNER, BUT , NOT IN ITS OWN RIGHT AS THE LEGAL OWNER OF THE SA ID LAND. TO BE A LEGITIMATE OWNER OF THE SAID LAND, T HE ASSESSEE SHOULD HAVE IN ITS POSSESSION THE REGISTERED DOCUMENT WHIC H SHOULD BE IN ITS NAME. AS SUCH, THE ASSESSEES FORCEFUL CONTENTION THAT IT CAN TRANSFER ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP TO T HE PROSPECTIVE BUYER ONLY AT THE COMPLETION OF THE PROJECT UNDER JDA , TO PUT IT GENTLY, DOESNT CARRY ANY CONVICTION. 9.7. ON A CRITICAL EXAMINATION OF THE TRIPARTITE AG REEMENT BETWEEN M/S UNITED BREWERIES (HOLDINGS) LIMITED (THE SELLER), T HE ASSESSEE (THE CONFIRMING PARTY) AND THE BUYER (ADIL SHACOOR), THE CRUCIAL POINTS ARE EMERGED, VIZ.: (I ) THE CONFIRMING PARTY SHALL BE ENTITLED TO REALIZ E IN ITS OWN NAME THE VALUE OF THE UNDIVIDED INTEREST I N THE LAND AND ALSO THE COST OF CONSTRUCTION OF THE SALEABLE SUPER BUILT UP AREAS FROM THE INTENDING PURCHASERS IN TERMS OF THE SCHEME; (II) THE PURCHASER DESIROUS OF OWNING THE SALEAB LE SUPER BUILT-UP SPACE IN THE UB CITY OFFICE SPACE HAVING UNDERSTOOD THE SCHEME OF OWNERSHIP STATED ABOVE AND AFTER BEING FULLY SATISF IED WITH THE TITLE OF ITA NOS.97 & 184/B/10 PAGE 17 OF 24 THE SELLER TO THE SUBJECT PROPERTY AND AFTER VERIFY ING VARIOUS SANCTIONS AND APPROVALS FOR CONSTRUCTION OF UB CITY HAD REQUE STED THE CONFIRMING PARTY (THE ASSESSEE) TO NOMINATE HIM TO BE THE PURCHASER OF THE CORRESPONDING PROPORTIONATE UNDIVIDED INTERE ST IN THE SUBJECT PROPERTY AS FOR THE PURPOSE OF ACQUIRING ABSOLUTE O WNERSHIP, RIGHT, TITLE AND INTEREST TO THE OFFICE SPACE TO OWN, HOLD , POSSESS AND ENJOY THE PROPORTIONATE UNDIVIDED SHARE, RIGHT, TITLE, IN TEREST ETC., (III) THE CONFIRMING PARTY HAD NOMINATED THE PURCHA SER TO BE THE PURCHASER OF THE SUBJECT PROPERTY AND THE SELLERS HAVE AGREED TO SELL THE PROPERTY IN FAVOUR OF THE PURCHASER IN TERMS OF THE AGREEMENT, TO BE OWNED, HELD AND POSSESSED BY THE PURCHASER IN TE RMS OF THE SCHEME AND THE PURCHASER HAD ALSO ENTERED INTO A CONSTRUCTION AGREEMENT OF EVEN DATE WITH THE CONFIRMING PARTY FO R THE CONSTRUCTION OF THE PROPOSED OFFICE SPACE. THE ABOVE TERMS AND CONDITIONS CLEARLY ESTABLISH TH AT THE INTENDING BUYER HAVING TAKEN ALL THE RISKS ON HIS SHOULDERS W HILE ENTERING INTO SUCH AN AGREEMENT, THE ASSESSEES ARGUMENT THAT IT WOUL D NOT TRANSFER SIGNIFICANT RISKS TO THE BUYER IN SPITE OF ENTERI NG INTO AGREEMENTS WITH THE BUYERS WHICH ARE LEGALLY ENFORCEABLE CONTRACTS, IS RATHER PESSIMISTIC 9.8 FURTHER, FROM THE TERMS AND CONDITIONS SET OUT IN THE TRIPARTITE AGREEMENT, THE FOLLOWING FACTS EMERGE: (1) THE RELATIONSHIP BETWEEN THE ASSESSEE [THE CONF IRMING PARTY] WITH M/S. UNITED BREWERIES (HOLDINGS) LTD. [SELLER] AND THE PURCHASER IS ONLY AS A CONSTRUCTION CONTRACTOR WHEREIN THE ASSES SEE IS BOUND TO CONSTRUCT A BUILDING IN THE MANNER LAID DOWN IN THE TRIPARTITE AGREEMENT. (2) ANY DISPUTES ARISING OUT OF THE TRIPARTITE AGRE EMENT BETWEEN THE PARTIES SHALL BE SETTLED BY ARBITRATION IN ACCORDAN CE WITH THE PROVISIONS OF THE PREVAILING ARBITRATION LAWS. ITA NOS.97 & 184/B/10 PAGE 18 OF 24 (3) SPECIFIC PERFORMANCE CLAUSE APPLIES BETWEEN TH E PURCHASER ON THE ONE PART AND THE SELLER ALONG WITH THE CONFIRMI NG PARTY ON THE OTHER PART. (4) THUS THE PURCHASER ON COMPLIANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THE TRIPARTITE AGREEMENT SHALL BE ENTI TLED TO HIS SHARE OF BUILT UP AREA. (5) FROM THE JOINT READING OF THE TERMS AND CONDIT IONS SET FORTH IN THE TRIPARTITE AGREEMENT BRINGS OUT THE FACT THAT IF TH E CONFIRMING PARTY FALLS OUT, THE SELLER MAY EITHER SUBSTITUTE ANOTHER BUILDER OR COMPLETE THE PROJECT BY ITSELF WITHOUT JEOPARDIZING THE INTEREST OF THE PURCHASER. THIS CLEARLY ESTABLISHES THAT THE CONFIRMING PARTY IS ONLY ACTING AS A CONTRACTOR FOR CONSTRUCTION OF THE BUILDING FOR BOTH THE SELLER AND THE PURCHASER. (6) SPECIFICALLY THERE IS NO EXIT CLAUSE PROVIDED TO THE CONFIRMING PARTY IN THE TRIPARTITE AGREEMENT. (7) EVEN IF THE CONFIRMING PARTY FAILS TO COMPLETE THE PROJECT, THERE WILL NOT BE AN OCCASION TO REVERT BACK ALL THE PARTIES I N THE TRIPARTITE AGREEMENT BACK TO SQUARE ONE. (8) IT IS PERTINENT TO NOTE THAT AS PER THE TRIPART ITE AGREEMENT, THE CONFIRMING PARTY RECEIVES AN ADVANCE AS PER A SCHED ULE OF PAYMENT AGREED UPON BETWEEN BOTH THE CONFIRMING PAR TY AND THE PURCHASER TOWARDS THE SALE CONSIDERATION FROM WHICH THE CONFIRMING PARTY CARRIES OUT THE CONSTRUCTION ACTIV ITIES. (9) IT IS OBVIOUS FROM THE ABOVE FACTS THAT THE CO NFIRMING PARTY REALIZES PROFIT AT EVERY STAGE OF CONSTRUCTION. ITA NOS.97 & 184/B/10 PAGE 19 OF 24 IN AN OVERALL CONSIDERATION OF THE FACTS AND CIRCUM STANCES OF THE ISSUE AS DELIBERATED UPON IN THE FORE-GOING PARAGRAPHS AND A LSO CAREFUL PERUSAL OF GUIDANCE NOTE ON RECOGNITION OF REVENUE BY REAL ESTATE DEVELOPERS, WE ARE OF THE CONSIDERED VIEW THAT THE AO WAS JUSTIFIED IN HOLDING THAT THE REVENUE FROM THE FIVE PROJECTS UND ER JOINT DEVELOPMENT AGREEMENTS WAS TO BE ASSESSABLE ON PERCENTAGE COMPLETION METHOD ONLY. IT IS ORDERED ACCORDINGLY. 10. WITH REGARD TO (I) THE DISALLOWANCE OF THE COMPOUNDING FEE OF RS.43.9 6 LAKHS PAID TO BBMP;& (II) THE DISALLOWANCE OF RS.51,585/- BEING THE AMOUNTS P AID TO THE DEPARTMENT OF COMPANY AFFAIRS AND AS ENTRY TAX COMP OUNDING FEES; THE BRIEF SUBMISSION OF THE ASSESSEE WAS THAT (I) T HE IMPUGNED EXPENDITURE OF RS.43.96 LAKHS WAS INCURRED TOWARDS REGULARIZATION OF CONSTRUCTIONS MADE IN EXCESS OF THE SANCTIONED PLAN WHICH WERE WITHIN CURABLE LIMITS AND (II) THE EXPENDITURE INCURRED TO WARDS COMPOUNDING FEE WAS TO BE ALLOWED AS A DEDUCTION. IT WAS, FURTHER, CONTENDED THAT PAYING OF COMPOUNDING FEE WAS NEITHER PROHIBITED BY LAW NO R WAS AN OFFENCE IN ITSELF AND, THUS, COMPOUNDING FEE WAS COMPENSATORY IN NATURE. 11. AT THE OUTSET, WE WOULD LIKE TO POINT OUT THAT THE HONBLE TRIBUNAL IN ITS FINDING IN ITA NO.218/BANG/09 DATED: 11.9.20 09 FOR THE ASSESSMENT YEAR 2005-06 IN THE ASSESSEES OWN CASE DEALT WITH A SIMILAR ISSUE WHEREIN IT HAS BEEN HELD THAT 7.1. THIS ISSUE HAS ALSO BEEN DECIDED IN THE CASE OF THE ASSESSEE BY THIS TRIBUNAL WHILE DECIDING APPEALS FOR THE ASST. YEARS 2001-02 TO 2003-04. THE TRIBUNAL WHILE FOLLOWING THE DECISION OF THE JU RISDICTIONAL HIGH COURT ITA NOS.97 & 184/B/10 PAGE 20 OF 24 IN THE CASE OF MAMTA ENTERPRISES 266 ITR 356 HELD V IDE ORDER DATED 23 RD OCTOBER, 2008 IN ITA NOS:1071, 1087 AND 1088/BANG/2 006 THAT COMPOUNDING FEE PAID IS NOT AN ALLOWABLE DEDUCTION . 11.1. IN CONFORMITY WITH THE ABOVE FINDING OF THE H ONBLE TRIBUNAL, WE DECIDE THE ISSUE AGAINST THE ASSESSEE ON BOTH COUNT S. 12. TURNING OUR ATTENTION TOWARDS THE GRIEVANCES OF THE REVENUE [ IN ITA 184/B/10] , THE ISSUES RAISED BY THE REVENUE ARE DEALT WITH CHRONOLOGICALLY AS UNDER: (1). DELETION OF THE ADDITION OF RS.7.33 CRORES MADE ON PROTECTIVE BASIS AS INCOME FROM OTHER SOURCES : (I) THE BRIEF CONTENTION OF THE REVENUE WAS THAT THE CIT(A) ERRED IN DELETING THE ADDITION OF RS.7.33 CRORES MADE ON PRO TECTIVE BASIS AS INCOME FROM OTHER SOURCES. (II) ON A GLIMPSE OF THE IMPUGNED ASSESSMENT ORD ER, WE FIND THAT THERE WAS NO DISCUSSION AT ALL IN THE BODY OF THE O RDER, HOWEVER, AS POINTED OUT BY THE CIT (A), IN THE COMPUTATION, IT WAS MENTIONED AS INCOME FROM OTHER SOURCES: INCOME ASSESSED IN THE A.Y 2005-06 ON PROTECTIVE BASIS AS DISCUSSED IN PARA______ RS.7 ,33,13,640. (III) THE BACKGROUND OF THE ISSUE, IN BRIEF, WAS THAT IN THE ASSESSMENT ORDER FOR THE AY 05-06, AN ADDITION OF RS.7,33,13,640/- TO THE BUSINESS INCOME WAS MADE AS ADMITTED BY THE ASSESSEE, ON THE PREMISE THAT THE ASSESSEE S HOULD HAVE FOLLOWED PERCENTAGE COMPLETION METHOD [PCM] OF RECO GNIZING REVENUES IN RESPECT OF REAL ESTATE ACTIVITIES. WHEN THE ISSUE FINALLY REACHED BEFORE THE TRIBUNAL, THE HONBLE TR IBUNAL IN ITS FINDING CITED SUPRA DIRECTED THE AO TO ACCEPT THE PROJECT COMPLETION METHOD OF ACCOUNTING FOR THE YEAR UNDER REFERENCE. ITA NOS.97 & 184/B/10 PAGE 21 OF 24 (IV) EXTENSIVELY QUOTING THE HONBLE TRIBUNALS FIN DING REFERRED SUPRA, THE LD. CIT (A) HAD, IN HIS IMPUGNED ORDER UNDER DI SPUTE (FOR THE AY 06-07), OBSERVED THUS 3.3..THUS, THE FINDING IS LIMITED TO ASSESSMENT YEAR 2005-06, HOWEVER, IN THE ASSESSMENT YEAR UNDER APPEAL, THE ASSESSING OFFICER HAS TREATED THA T INCOME OFFERED BY THE APPELLANT TO THE ABOVE EXTENT ON THE BASIS OF THE PROJECT COMPLETION METHOD UNDER THE HEAD INCOM E FROM OTHER SOURCES ON PROTECTIVE BASIS. CONSIDERING TH E FACT THAT THE SAID ADDITION HAS BEEN DELETED BY THE HONBLE I TAT IN ASSESSMENT YEAR 2005-06, THE INCOME HAS TO BE ASSES SED ON SUBSTANTIVE BASIS IN ASSESSMENT YEAR 2006-07 AS OFF ERED BY THE APPELLANT. AFTER DELETION OF THE INCOME BY THE ITAT, IN ASSESSMENT YEAR 2005-06, THERE IS NO QUESTION OF DO UBLE TAXATION IN THE ASSESSMENT YEAR 2006-07 WHERE THE A PPELLANT HIMSELF (SIC) ITSELF OFFERED THE INCOME FOR TAXATIO N. IN VIEW OF THE ABOVE, REDUCTION OF INCOME OF RS.7,3 3,13,640/- UNDER THE HEAD PROFIT AND GAINS FROM BUSINESS OR PROFESSION IN THE COMPUTATION OF INCOME BY THE ASS ESSING OFFICER DOES NOT ARISE. ONCE THE INCOME IS TAXED U NDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION, THE INCOME ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES ON PROTECTIVE BASIS IS HEREBY DELETED. (V) THE GAMUT OF THE ISSUE, TO OUR MIND, IS THAT W HEN THE AO RESORTED TO CONCLUDE THE IMPUGNED ORDER UNDER DISPU TE, PRECISELY, ON 31.12.2008, THE ASSESSMENT ORDER FOR THE AY 2005- 06 WAS UNDER APPEAL BEFORE THE HONBLE TRIBUNAL FOR ADJUDICATION WHICH MUST HAVE INFLUENCED THE AO TO ADD THE INCOME OF RS.7.33. CRORES ASSESSED FOR THE AY 2005-06 ON A PROTECTIVE BASIS . IN THE ASSESSMENT ORDER UNDER DISPUTE, WHILE ADD ING A WHOPPING SUM OF RS.7.33 CRORES AS INCOME FROM OTHER SOURCES, THE AO SHOULD HAVE TAKEN PROPER CARE TO MENTION IN THE BODY OF THE ORDER THE REASON FOR TAXING THE SAID SUM EVEN O N A PROTECTIVE BASIS. (VI) IN THE MEANWHILE, THE HONBLE TRIBUNAL IN ITS FINDING CITED SUPRA (ON 11.9.2009) DIRECTED THE AO TO ACCEPT THE PROJECT COMPLETION METHOD OF ACCOUNTING FOR THE YEAR UNDER REFERENCE. THUS, IN OUR ITA NOS.97 & 184/B/10 PAGE 22 OF 24 CONSIDERED VIEW, THE TAXABILITY OF THE SUM OF RS.7, 33,13,640/- HAD REACHED A FINALITY ON A SPECIFIC DIRECTION OF T HE HONBLE TRIBUNAL CITED ABOVE FOR THE AY 2005-06. THEREFORE, THE CIT (A) WAS JUSTIFIED IN HIS STAND ON THIS POINT. IT IS OR DERED ACCORDINGLY. (2.) ASSESSING OF THE RENTALS FROM FORUM MALL AN D EVA MALL AS INCOME FROM PROFITS AND GAINS FROM BUSINESS/PROFESSION: (I) THE REVENUES SUBMISSION WAS VERY BLUNT TO THE EFF ECT THAT THE CIT (A) ERRED IN DIRECTING THE AO TO ASSESS THE REN TAL RECEIPT FROM FORUM MALL AND EVA MALL AS INCOME FROM PROFITS AND GAINS FROM BUSINESS AND THAT THE CIT (A) GROSSLY ERRED BY IGN ORING THE FACT THAT THE SAMPLE AGREEMENT IN RESPECT OF THE RENTAL RECEIPT CLEARLY ESTABLISHES A TYPICAL LANDLORD TENANT RELATIONSHI P BETWEEN THE ASSESSEE AND TENANTS AND, THEREFORE, THE INCOME REC EIVED AS RENTAL RECEIPTS SHOULD HAVE BEEN ORDERED TO BE TREA TED AS INCOME FROM HOUSE PROPERTY. (II) AT THE OUT-SET, WE WOULD LIKE TO POINT THAT AN IDE NTICAL ISSUE HAD CROPPED UP BEFORE THE HONBLE TRIBUNAL FOR THE AY 2 005-06 IN THE ASSESSEES OWN CASE WHEREIN THE HONBLE TRIBUNAL HA D, AFTER HEARING THE ARGUMENTS OF RIVAL PARTIES, ANALYZING T HE ISSUE AT LENGTH, EXTENSIVELY QUOTING, CHIEFLY, THE RULINGS O F THE HONBLE APEX COURT AS WELL AS THE JURISDICTIONAL HONBLE HI GH COURT IN A NUMBER OF CASES ON A SIMILAR ISSUE, OBSERVED THUS 5.1. WE HAD DISCUSSED THIS ISSUE WHILE CONSIDER ING THE RATIO OF LAW AS LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF SULTAN BROTHERS (SUPRA). THE HONBLE APEX COURT HAS HELD THAT THERE SHOULD BE NO CONSIDERATION OF P RIMARY AND SECONDARY LETTINGS IN CONSTRUING THE SECTION 12 (4) OF 1922, WHICH HAS ANALOGY TO 56(III) OF I.T. ACT OF 1 961. IN THIS CASE, THE LETTING OF BUILDING IS ALONG WITH LE TTING MACHINERY, PLANT OR FURNITURE REQUIRED FOR ANCILLAR IES SERVICES AND THEREFORE, WE HOLD THAT THE ALTERNATIV E PLEA OF THE APPELLANT THAT IN CASE THE INCOME IS NOT TO BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY THEN IT IS REQUIRED TO BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES. THIS IS WITHOUT PREJUDICE TO OUR BASIC FINDING THAT ITA NOS.97 & 184/B/10 PAGE 23 OF 24 IN THE INSTANT CASE, THE INCOME FROM MALL IS ASSESS ABLE UNDER THE HEAD INCOME FROM BUSINESS. (III) IN CONFORMITY WITH THE FINDING OF THE HONBL E TRIBUNAL REFERRED ABOVE, WE DIRECT THE AO TO ASSESS THE INCOME FROM M ALL UNDER THE HEAD INCOME FROM BUSINESS. IT IS ORDERED ACC ORDINGLY. (3.) DIRECTION OF THE CIT (A) TO AO TO ASSESS THE HIRE CHARGES IN RESPECT OF FIT-OUTS AS INCOME FROM OTHER SOURCES. (I) NEVERTHELESS, THE REVENUES BRIEF SUBMISSION WA S THAT THE CIT(A) HAD GROSSLY ERRED IN DIRECTING THE AO TO ASS ESS THE HIRE CHARGES IN RESPECT OF FIT OUTS WHICH WERE LAID OUT TO TENANTS AS INCOME FROM OTHER SOURCES. (II) YET AGAIN, WE FIND A SOLACE FROM THE FINDING O F THE HONBLE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AY 200 5-06 ON SIMILAR ISSUE WHEREIN THE HONBLE TRIBUNAL WAS PLEA SED TO OBSERVE THAT 6.1. THIS ISSUE HAS BEEN DECIDED BY THIS TRIBUN AL IN THE CASE OF THE ASSESSEE FOR THE ASST. YEAR 2004-05. T HE TRIBUNAL VIDE ORDER DATED: 29 TH MAY, 2009 IN ITA NO:851/BANG/2008 VIDE PARA 14 OF THE ORDER HELD THAT THE FACTS AND CIRCUMSTANCES BROUGHT ON RECORD BY THE ASSESSING AUTHORITIES AND THE LEARNED COUNSEL INDICATE THAT T HE INTENTION OF THE ASSESSEE FOR RENDERING THE SAME AS INCOME FROM OTHER SOURCES OUGHT NOT TO HAVE BEEN DISTURBED AS IN EARLIER YEARS. HENCE, THE RECEIPTS ON LETTING OF IT IS TO BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES ON THE BASIS OF THE DECISION OF THE TRIBUNAL IN THE EARLIE R YEAR AND ALSO ON THE BASIS OF THE PRINCIPAL OF CONSISTENCY. ONCE THE RENTAL INCOME ON LETTING OUT IS TAXED UNDER THE HEA D INCOME FROM OTHER SOURCES, THEN, THE ASSESSEE WILL BE ENT ITLED FOR DEPRECIATION. (III) AS THE ISSUE BEFORE US IS SIMILAR WHICH HAS BEEN DECIDED BY THE HONBLE TRIBUNAL REFERRED SUPRA IN THE ASSESSEES O WN CASE FOR THE PRECEDING ASSESSMENT YEAR, WE HAVE NO HESITATIO N IN DIRECTING THE AO TO TREAT THE HIRE CHARGES IN RESPE CT OF FIT-OUTS LET- ITA NOS.97 & 184/B/10 PAGE 24 OF 24 OUT TO THE TENANTS AS INCOME FROM OTHER SOURCES. IT IS ORDERED ACCORDINGLY. 13. IN THE RESULT : (IV) THE ASSESSEES APPEAL IS DISMISSED ; & (V) THE REVENUES APPEAL IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER, 2010. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 30 TH SEPTEMBER, 2010. DS/- COPY TO: BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE. 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE