SANDHU BUILDERS, MUMBAI V. ASSISTANT COMMISSIONER OF INCOME TAX 19(3), MUMBAI

ITA 2000/MUM/2022

AI Insights

The case involves Sandhu Builders, a partnership firm engaged in real estate development, which appealed against the orders of the Commissioner of Income-tax (Appeals) - National Faceless Appeal Centre, New Delhi. The appeals were related to the assessment years 2011-12, 2012-13, and 2013-14, concerning the income determined by the Assessing Officer under section 143(3) of the Income-tax Act, 1961. The primary issues revolved around the application of the percentage completion method for recognizing revenue and expenses, the inclusion of direct costs such as premiums paid to the Municipal Corporation and TDR, and the valuation of unsold flats. The Tribunal examined the method of accounting for real estate projects and the impact of various litigations and changes in estimates on the profits reported by Sandhu Builders.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123641 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: G
• Next Hearing Date: 24-11-2022
• Assessment Year: 2011-2012
• Appeal Filed On: 11-08-2022
• Other Referred Cases: CIT v. A. Gajapathy Naidu, CIT v. Associated Commercial Corporation, Morvi Industries Ltd. v. CIT, T.N.K. Govindarajulu Chetty v. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Income from undisclosed sources; Set aside
• Section: 143(3); 80G; 48; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “G” MUMBAI BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI RAHUL CHAUDHARY (JUDICIAL MEMBER) ITA No. 2000/MUM/2022 Assessment Year: 2011-12 & ITA No. 2001/MUM/2022 Assessment Year: 2012-13 & ITA No. 2002/MUM/2022 Assessment Year: 2013-14 Sandhu Builders, Sandhu Palace, 41, Pali Hill, Bandra (W), Mumbai-400051. Vs. ACIT-19(3), Matru Mandir Tardeo, Mumbai-400034. PAN No. AAXFS 4480 K Appellant Respondent Assessee by : Mr. Vipul Joshi, Adv./S.K. Desai Revenue by : Mr. Vinay Sinha, CIT-DR Date of Hearing : 25/11/2022 Date of pronouncement : 20/02/2023 ORDER PER OM PRAKASH KANT, AM These appeals by the assessee are directed against a common order dated 13/06/2022 passed by the Ld. Commissioner of Income-tax(Appeals)-National Faceless Appeal Centre (NFAC), New Delhi [in short, “the ld. CIT(A)”] for assessment year 2011-12 to 2013-14, arising from Assessing Officer u/s. 143(3) the Act). 2. Firstly, we take up the appeal of the assessee for AY 2011 The grounds raised by the assessee 1. The Ld CIT (A) erred in determining income for year at Rs. 9,54,37,931/ Rs 8,56,08,140/ 2. The Ld CIT (A) erred in not considering direct cost such as premium paid to Municipal Corporation, TDR etc. as part of the cost of construction. 3. The Ld CIT (A) erred in not considering revised estimated cost delay in completion of project and damage to the building on account various litigations. 4. The Ld CIT (A) erred in not allowing deduction of estimated cost of repairs of Rs. 61.63.16,666/ holding that estimated constr included in total cost of Rs2,66,35,00,000/ appreciating fact that what is included was cost of construction and not cost of repairs. 5. The Ld CIT (A) erred in not considering valuation of unsold flats at cost. 6. The Ld CIT (A) err to delay in completion of project on account of various litigations, profit as per method prescribed by Hon 'ble ITAT in A Y 2009 7. The Ld CIT (A) erred in interpreting order of Hon'ble ITAT for repairs cannot be revised. 8. The Ld CIT (A) erred in not considering estimated cost at Rs. 366.95 cr. and restricting to Rs. 266.35 cr. 9. The Ld CIT (A) erred in reducing proportionate cost of construction and direct. c admeasuring 15,308 sq. ft., consisting of demolished ITA Nos. 2000 to 2002/M/2022 , arising from three separate orders passed by the Assessing Officer u/s. 143(3) of the Income-tax Act, 1961 (in Firstly, we take up the appeal of the assessee for AY 2011 The grounds raised by the assessee are reproduced as under: The Ld CIT (A) erred in determining income for year at Rs. 9,54,37,931/- as against returned of income of Rs 8,56,08,140/-. The Ld CIT (A) erred in not considering direct cost such as premium paid to Municipal Corporation, TDR etc. as part of the cost of construction. The Ld CIT (A) erred in not considering revised estimated cost of repairs which have caused due to delay in completion of project and damage to the building on account various litigations. The Ld CIT (A) erred in not allowing deduction of estimated cost of repairs of Rs. 61.63.16,666/ holding that estimated construction cost is already included in total cost of Rs2,66,35,00,000/ appreciating fact that what is included was cost of construction and not cost of repairs. The Ld CIT (A) erred in not considering valuation of unsold flats at cost. The Ld CIT (A) erred in not considering fact that due to delay in completion of project on account of various litigations, profit as per method prescribed by Hon 'ble ITAT in A Y 2009-2010 cannot be worked out. The Ld CIT (A) erred in interpreting order of Hon'ble ITAT for A Y 2009-2010 that cost of construction/ repairs cannot be revised. The Ld CIT (A) erred in not considering estimated cost at Rs. 366.95 cr. and restricting to Rs. 266.35 cr. The Ld CIT (A) erred in reducing proportionate cost of construction and direct. cost pertaining to the area admeasuring 15,308 sq. ft., consisting of demolished ITA Nos. 2000 to 2002/M/2022 2 Sandhu Builders passed by the tax Act, 1961 (in short, Firstly, we take up the appeal of the assessee for AY 2011-12. reproduced as under: The Ld CIT (A) erred in determining income for year at against returned of income of The Ld CIT (A) erred in not considering direct cost such as premium paid to Municipal Corporation, TDR The Ld CIT (A) erred in not considering revised of repairs which have caused due to delay in completion of project and damage to the The Ld CIT (A) erred in not allowing deduction of estimated cost of repairs of Rs. 61.63.16,666/- by uction cost is already included in total cost of Rs2,66,35,00,000/-, not appreciating fact that what is included was cost of The Ld CIT (A) erred in not considering valuation of ed in not considering fact that due to delay in completion of project on account of various litigations, profit as per method prescribed by Hon 2010 cannot be worked out. The Ld CIT (A) erred in interpreting order of Hon'ble 2010 that cost of construction/ The Ld CIT (A) erred in not considering estimated cost at Rs. 366.95 cr. and restricting to Rs. 266.35 cr. The Ld CIT (A) erred in reducing proportionate cost of ost pertaining to the area admeasuring 15,308 sq. ft., consisting of demolished agea and in respect of which development rights not granted. 10. ws 80 G of the IT Act. 3. Briefly stated facts of the case are that the assessee partnership firm, is engaged in the business of real estate development. The assessee entered into a development agreement with M/s Chetak Co Society’), Pali hill, Bandra (Mumbai) construction of a building ( comprising of four different plots belonging to said Society area available for construction was12599 square 1,35,616 square feet plans which were approved on 24/01/2006, the ‘A’ Wing consist of ground +19 floors and 3.1 Since the construction work had not reached stage, for assessment year expenditure was capitalized to work loss was reported by the assessee in the return of income assessment year 2009 has been assessed following percentage completion method. 3.2 The assessee filed its return of income for the year under consideration on ₹12,27,61,190/-.The said return was revised on declaring total income at Rs. ITA Nos. 2000 to 2002/M/2022 agea and in respect of which development rights not granted. The Ld CIT (A) erred in not allowing deduction ws 80 G of the IT Act. riefly stated facts of the case are that the assessee is engaged in the business of real estate development. The assessee entered into a development agreement with M/s Chetak Co-op Housing Society Ltd,(in short the ali hill, Bandra (Mumbai) on 31/12/2005 building (two wings namely ‘A’ and ‘B’) on land comprising of four different plots belonging to said Society area available for construction was12599 square e feet, rounded off to 1,35,600 sq. feet. As per the plans which were approved on 24/01/2006, the ‘A’ Wing consist of ground +19 floors and ‘B’ wing consist of ground +5 ince the construction work had not reached at a ssessment years 2006-07, 2007-08 and 2008 nditure was capitalized to work-in-progress and by the assessee in the return of income assessment year 2009-10 & 2010-11, the income of the assessee essed following percentage completion method. assessee filed its return of income for the year under consideration on 28/06/2011 declaring total income he said return was revised on declaring total income at Rs.8,56,08,140/-. In the ITA Nos. 2000 to 2002/M/2022 3 Sandhu Builders agea and in respect of which development rights not The Ld CIT (A) erred in not allowing deduction riefly stated facts of the case are that the assessee, a is engaged in the business of real estate development. The assessee entered into a development agreement in short the ‘Chetak on 31/12/2005 for two wings namely ‘A’ and ‘B’) on land comprising of four different plots belonging to said Society. The total area available for construction was12599 square metersi.e., 1,35,600 sq. feet. As per the plans which were approved on 24/01/2006, the ‘A’ Wing consist of ‘B’ wing consist of ground +5 floors. at a substantial 08 and 2008-09, entire progress and no income or by the assessee in the return of income. For 11, the income of the assessee essed following percentage completion method. iled its return of income for the year under total income of he said return was revised on 25/03/2013 In the assessment completed u/s. 143(3), the Assessing Officer det income at Rs.15,37,06,920/ profits for the year on the unaccounted income consideration of Rs. 23,4 years being A.Y. 2009 percentage of profit books of account and Rs. 106,58,06,907/- the assessee. 4. Aggrieved by the action of the Assessing Officer, the assessee preferred appeal before the ld. CIT(A) who Rs. 6,55,77,792/- on suppression o making certain modifications in applying the percentage completion method to derive at the profits for the year under consideration. However, aggrieved by the same, the assessee is in appeal before us. 5. The ground no. 1 separate adjudication 6. The ground nos. 2 to 9 of the appeal relates to the determination of correct profits for the year under consideration by applying correct principles of percentage completion method not by merely following the order of ITAT in assessee’s own case for ITA Nos. 2000 to 2002/M/2022 completed u/s. 143(3), the Assessing Officer determined the total 15,37,06,920/- after applying relevant on the unaccounted income being deemed sales consideration of Rs. 23,42,06,400/- following the orders of earlier years being A.Y. 2009-10 and 2010-11 and estimating 12% percentage of profit instead of 10% on gross receipts books of account and also restated the Capital Work - as against shown at Rs. 111,70,70,589/ Aggrieved by the action of the Assessing Officer, the assessee preferred appeal before the ld. CIT(A) who deleted the addition of on suppression of sale and gave partial relief by making certain modifications in applying the percentage completion method to derive at the profits for the year under consideration. However, aggrieved by the same, the assessee is in appeal before The ground no. 1 of the appeal is general and does not require separate adjudication. The ground nos. 2 to 9 of the appeal relates to the determination of correct profits for the year under consideration by applying correct principles of percentage completion method not by merely following the order of ITAT in assessee’s own case for ITA Nos. 2000 to 2002/M/2022 4 Sandhu Builders ermined the total relevant percentage of being deemed sales following the orders of earlier estimating 12% as on gross receiptsby rejecting also restated the Capital Work-in-Progress to as against shown at Rs. 111,70,70,589/- by Aggrieved by the action of the Assessing Officer, the assessee deleted the addition of gave partial relief by making certain modifications in applying the percentage completion method to derive at the profits for the year under consideration. However, aggrieved by the same, the assessee is in appeal before does not require The ground nos. 2 to 9 of the appeal relates to the determination of correct profits for the year under consideration by applying correct principles of percentage completion method and not by merely following the order of ITAT in assessee’s own case for A.Y. 2009-10 when there is a change in estimates due to peculiar circumstances of the case. 7. Briefly, the facts qua th the order of the ld. CIT(A) 31.12.2005 was entered into by the assessee with a co housing society namely, Chetak Co 4 different plots at Pali Hill, Bandra (West), Mumbai. The assessee acquired development a building comprising of construction was 12599.12 sq. m off to 1,35,600 sq. ft. as per the plans. However, later, dispute arose between the assessee and project on some clauses of the agreement published in the newspaper dt. 3/6/2011, the society cancelled the development agreement dt advertisement published in the newspaper dt. 12/11/2011 society had cancelled Power of Attorney granted to the assessee. ‘Chetak Society’ also filed writ petition wherein one of the grievances was that 5 members of the s 1,111 sq. meters. i.e. 11,959 sq. ft. had not granted their rights construction to the assessee, litigation of which is pending till date. Further, the ‘Chetak Society Bombay High Court ITA Nos. 2000 to 2002/M/2022 10 when there is a change in estimates due to peculiar circumstances of the case. Briefly, the facts qua the issue-in-dispute asculled out from the order of the ld. CIT(A) are that a Development Agreement dated 31.12.2005 was entered into by the assessee with a co housing society namely, Chetak Co-op. Housing Society who owned 4 different plots at Pali Hill, Bandra (West), Mumbai. The assessee acquired development rights from the ‘Chetak Society’ a building comprising of ‘A’ and ‘B’ wings. The total area of construction was 12599.12 sq. meters. i.e. 1,35,616 sq. ft. rounded off to 1,35,600 sq. ft. as per the plans. However, later, dispute arose the assessee and the Chetak Society in relation to the project on some clauses of the agreement. As per the advertisement published in the newspaper dt. 3/6/2011, the society cancelled the development agreement dt. 31/12/2005 and as per another advertisement published in the newspaper dt. 12/11/2011 society had cancelled Power of Attorney granted to the assessee. also filed writ petition wherein one of the grievances was that 5 members of the society having rights over rs. i.e. 11,959 sq. ft. had not granted their rights to the assessee, litigation of which is pending till date. Chetak Society’ had also filed suit before the Hon’ble Bombay High Court in the year 2013. As per the order dt. ITA Nos. 2000 to 2002/M/2022 5 Sandhu Builders 10 when there is a change in estimates due to peculiar culled out from Development Agreement dated 31.12.2005 was entered into by the assessee with a co-operative op. Housing Society who owned 4 different plots at Pali Hill, Bandra (West), Mumbai. The assessee ‘Chetak Society’ to construct wings. The total area of rs. i.e. 1,35,616 sq. ft. rounded off to 1,35,600 sq. ft. as per the plans. However, later, dispute arose in relation to the . As per the advertisement published in the newspaper dt. 3/6/2011, the society cancelled the . 31/12/2005 and as per another advertisement published in the newspaper dt. 12/11/2011 society had cancelled Power of Attorney granted to the assessee. The also filed writ petition wherein one of the ociety having rights over rs. i.e. 11,959 sq. ft. had not granted their rights for to the assessee, litigation of which is pending till date. had also filed suit before the Hon’ble in the year 2013. As per the order dt. 30/07/2013, Hon’ble Bombay High Court granted stay against the assessee from carrying as per the order dt. 19/08/2014 was later lifted. In mid of 2018, the assessee had applied to Bombay Municipal Corporation (BMC), competent authority monitoring obtaining part Occupation Certificate (OC) of construct building upto particular height was granted by the Airport Authority of India. In case of the assessee, height of the building was granted upto 110 m height measured came to 111.62 m 1.62 meters than the permission granted, 19 3350 sq. ft. area was demolished October 2018. The Chetak Society before the Hon’ble Bombay High Court of the building. The writ petition was filed after the demolition of 19 th floor. The Hon’ble Bombay High Court granted stay against the assessee from carrying on construction of 8. In A.Y. 2009-10, of profit of the project based on the percentage completion method which is to be applied till the completion of the 2010-11, the ITAT noted that 5 members did not grant their rights for area of 11,959 sq. ft. and the area of 3,350 sq. ft. of demolished 19 th floor, which required to be reduced from the saleable a ITA Nos. 2000 to 2002/M/2022 30/07/2013, Hon’ble Bombay High Court granted stay against the assessee from carrying out any further construction activity which as per the order dt. 19/08/2014 was later lifted. In mid of 2018, the ied to Bombay Municipal Corporation (BMC), competent authority monitoring construction of building obtaining part Occupation Certificate (OC) of ‘A’ wing. Permission to construct building upto particular height was granted by the ty of India. In case of the assessee, height of the building was granted upto 110 meters, however, while granting OC, came to 111.62 meters. Accordingly, due to excess rs than the permission granted, 19 th floor was demolished and part OC was received in The Chetak Society also challenged granting of OC before the Hon’ble Bombay High Court and also granting of height of the building. The writ petition was filed after the demolition of Hon’ble Bombay High Court granted stay against the assessee from carrying on construction of ‘B’ wing. 10, the ITAT has given direction for determining profit of the project based on the percentage completion method to be applied till the completion of the ITAT noted that 5 members did not grant their rights area of 11,959 sq. ft. and the area of 3,350 sq. ft. of demolished which required to be reduced from the saleable a ITA Nos. 2000 to 2002/M/2022 6 Sandhu Builders 30/07/2013, Hon’ble Bombay High Court granted stay against the any further construction activity which as per the order dt. 19/08/2014 was later lifted. In mid of 2018, the ied to Bombay Municipal Corporation (BMC),i.e. a construction of building, for wing. Permission to construct building upto particular height was granted by the ty of India. In case of the assessee, height of the rs, however, while granting OC, rs. Accordingly, due to excess floor admeasuring art OC was received in also challenged granting of OC and also granting of height of the building. The writ petition was filed after the demolition of Hon’ble Bombay High Court granted stay against the given direction for determining profit of the project based on the percentage completion method project. In A.Y. ITAT noted that 5 members did not grant their rights area of 11,959 sq. ft. and the area of 3,350 sq. ft. of demolished which required to be reduced from the saleable area while calculating profit from the project and accordingly, directions were given to the Assessing Officer. the ITAT in assessee’s own case for A.Y. 2009 method of working out profits based on perce method is explained ITAT for A.Y. 2009-10 and 2010 order of the ld. CIT(A) in second round for A.Y. 20 12.2 to 12.4 of his order, the ld. CIT(A) mistakes crept in the earlier order of ld. CIT(A) and finally, recomputed the taxable profits under consideration 16.1 of his order. For ready CIT(A) is reproduced as under: 15.1 Thus following working is arrived at based on above discussion: Total estimated sale consideration of the project after considering assessee’s submission that stock may be valued at the rate of last sale deed executed S1 Total estimated cost excluding Administrative Costs C1 Total profit (P1) to be bifurcated in different years after reducing administrative costs And the bifurcation of estimated Direct cost, D1 Construction cost estimate, C1 Administrative cost estimate (not considered in C1) Total estimate cost including Administrative Costs ITA Nos. 2000 to 2002/M/2022 calculating profit from the project and accordingly, directions were given to the Assessing Officer. The ld. CIT(A) followed the decision of in assessee’s own case for A.Y. 2009-10 wherein the method of working out profits based on percentage completion method is explained. After critically examining the orders of 10 and 2010-11 in assessee’s own case and the order of the ld. CIT(A) in second round for A.Y. 20 2 to 12.4 of his order, the ld. CIT(A) has referred to some mistakes crept in the earlier order of ld. CIT(A) and finally, recomputed the taxable profits at Rs. 15,28,17,792/ with detailed discussion at para 15.1 to para For ready reference, said part of the order of Ld CIT(A) is reproduced as under: Thus following working is arrived at based on above Total estimated sale consideration of the project after considering assessee’s submission that stock may be valued at the of last sale deed executed S1 Total estimated cost excluding Administrative Costs C1 Total profit (P1) to be bifurcated in different years after reducing administrative costs And the bifurcation of estimated costis as under: Direct cost, D1 Construction cost estimate, C1 Administrative cost estimate (not considered in Total estimate cost including Administrative ITA Nos. 2000 to 2002/M/2022 7 Sandhu Builders calculating profit from the project and accordingly, directions were The ld. CIT(A) followed the decision of 10 wherein the ntage completion After critically examining the orders of the 11 in assessee’s own case and the order of the ld. CIT(A) in second round for A.Y. 2009-10, at para has referred to some mistakes crept in the earlier order of ld. CIT(A) and finally, at Rs. 15,28,17,792/- for the year at para 15.1 to para said part of the order of Ld Thus following working is arrived at based on above Total estimated sale consideration of the project after considering assessee’s submission that stock may be valued at the 3,569,095,680 Total estimated cost excluding 2,165,200,000 Total profit (P1) to be bifurcated in different 1,403,895,680 817,700,000 1,347,500,000 Administrative cost estimate (not considered in 498,300,000 Total estimate cost including Administrative 2,663,500,000 15.2. However now this P above is to be recomputed as per the additional grounds allowed in para 4.5. Now considering reduction of area available for sale accepted after verification by the Assessing officer in earlier year and in compliance to ITAT order, the revised estimate of profit is to be prepared. In consequence to reduction of saleable (and thereby area to be constructed), the Direct cost will reduce in same proportion and revised construction cost will also reduce. However, for 19 floor area 3350 corstruction cost as this floor was already constructed. Revised estimated profit is as under: Area reduced 11958+335015.308 (All various adjustments claimed from time to time were withdrawn before CIT(A) AY 2009 in proceedings before hon'blelTAT AY 2009 11.3.2019 and only claim of 15308 is judicially decided after ITAT direction in AY 2010 adjustments if any are to be considered while determining final profits in final year after completion of project where profits of AY 2006 (remained untaxed as CIT(A) allowed relief for AY 2009 and ITAT cancelled enhancement of CIT(A) in AY 2010 actual sale consider considered and the profits already taxed will be reduced.) Direct cost now estimated (to reduce in same proposition) (135600 15308)/135600), or 0.8871 timed D1, D Construction cost now estimated (to reduce by 11958 sqft area as 3350 was already constructed, (135600 11958)/135600 or 0.9118) times C1, C Sale consideration Total value of area sold (as per letter dated 23.06.2014) Balance area available, (B1a or 45120 15308) = 29812 x 37214 per sqft Estimated profit, P of the project pending determination of final profits without administrative expenses to be divided in ratio of Construction cost of the year/Total Construction cost, C:S ITA Nos. 2000 to 2002/M/2022 15.2. However now this P above is to be recomputed as per the additional grounds allowed in para 4.5. Now considering reduction of area available for sale accepted after verification by the Assessing officer in earlier year and in compliance to the revised estimate of profit is to be prepared. In consequence to reduction of saleable (and thereby area to be constructed), the Direct cost will reduce in same proportion and revised construction cost will also reduce. However, for 19 floor area 3350 sqft is not reduced while computing corstruction cost as this floor was already constructed. Revised estimated profit is as under: Area reduced 11958+335015.308 (All various adjustments claimed from time to time were withdrawn before CIT(A) AY 2009-10 dated 30.01.2017 and in proceedings before hon'blelTAT AY 2009-10 order dated 11.3.2019 and only claim of 15308 is judicially decided after ITAT direction in AY 2010-11 order dated5.3.2020. Further adjustments if any are to be considered while determining l profits in final year after completion of project where profits of AY 2006-07, 2007-08, 2008-09 are also to be taxed (remained untaxed as CIT(A) allowed relief for AY 2009 and ITAT cancelled enhancement of CIT(A) in AY 2010 actual sale consideration and actual costs incurred are to be considered and the profits already taxed will be reduced.) Direct cost now estimated (to reduce in same proposition) (135600- 15308)/135600), or 0.8871 timed D1, D 725,381,670 Construction cost now estimated (to reduce by 11958 sqft area as 3350 was already constructed, (135600- 11958)/135600 or 0.9118) times C1, C 1,228,650,500 Sale consideration Total value of area sold (as per letter dated 1,890,000,000 ance area available, (B1a or 45120- 15308) = 29812 x 37214 per sqft 1,109,423,768 S 2,999,423,768 Estimated profit, P of the project pending determination of final profits without administrative expenses to be divided in Construction cost of the year/Total Construction cost, C:S-D-C 1,045,391,598 ITA Nos. 2000 to 2002/M/2022 8 Sandhu Builders 15.2. However now this P above is to be recomputed as per the additional grounds allowed in para 4.5. Now considering reduction of area available for sale accepted after verification by the Assessing officer in earlier year and in compliance to the revised estimate of profit is to be prepared. In consequence to reduction of saleable (and thereby area to be constructed), the Direct cost will reduce in same proportion and revised construction cost will also reduce. However, for sqft is not reduced while computing corstruction cost as this floor was already constructed. (All various adjustments claimed from time to time were d 30.01.2017 and 10 order dated 11.3.2019 and only claim of 15308 is judicially decided after 11 order dated5.3.2020. Further adjustments if any are to be considered while determining l profits in final year after completion of project where 09 are also to be taxed (remained untaxed as CIT(A) allowed relief for AY 2009-10 and ITAT cancelled enhancement of CIT(A) in AY 2010-11 and ation and actual costs incurred are to be considered and the profits already taxed will be reduced.) 1,228,650,500 1,890,000,000 1,109,423,768 2,999,423,768 Earlier 356 cr 1,045,391,598 Earlier 216.5 cr, if administrative costs at 49.8 cr is reduced then we get about 55 cr., earlier 90 cr.) The administrative costs will be reduced as actually incurred as discussed in para 9.2. 16. Now the year of components of cost taken in working out the profit based on Table WIP (para 12.2) Assessment Year -- Construction cost estimate, C Construction cost incurred during the year Progress in work, w Total estimated sale consideration, S Gross revenue allocated for the year, S*w Less : proportionate direct cost, D*w Less : Construction cost incurred as per Table WIP during the year Less: Administrative cost debited as per books/Table WIP during the year Profits to be taxed subject to adjustments as per IT Act Add : Income tax related Donation Profits from housing project subject to any further adjustments Profit assessed in order For AY 2010 law in the order giving effect to ITAT order to avoid double deductions for proportionate Construction costs (Rs. 50 cr includes cost of renovation as well as construction of both wings (as discussed several times in this order) and proportionate administrative costs and also to calculate progress on the basis of Construction cost incurred as discussed in para 9 and para 1 9. Now, coming back to the respective grounds raised by the assessee, same are dealt with as ITA Nos. 2000 to 2002/M/2022 The administrative costs will be reduced as actually incurred ed in para 9.2. Now the year-wise profit will be worked out. The figures of components of cost taken in working out the profit based on Table WIP (para 12.2) -- 2010-11 Construction cost estimate, C 1,22,86,50,500 Construction cost incurred during the 9,22,50,953 Progress in work, w 7.51% Total estimated sale consideration, S 2,99,94,23,768 Gross revenue allocated for the year, 225206193 : proportionate direct cost, D*w -54463943 Less : Construction cost incurred as per Table WIP during the year 9,22,50,953 Less: Administrative cost debited as per books/Table WIP during the year -4,64,13,660 to be taxed subject to adjustments as per IT Act 3,20,77,636 Add : Income tax related 32,24,746 1,00,000 Profits from housing project subject to any further adjustments 3,54,02,382 Profit assessed in original assessment 7,79,75,090 For AY 2010-11, the AO may consider necessary action as per law in the order giving effect to ITAT order to avoid double deductions for proportionate Construction costs (Rs. 50 cr includes cost of renovation as well as construction of both wings (as discussed several times in this order) and proportionate administrative costs and also to calculate progress on the basis of Construction cost incurred as discussed in para 9 and para 10. Now, coming back to the respective grounds raised by the assessee, same are dealt with as under: - ITA Nos. 2000 to 2002/M/2022 9 Sandhu Builders The administrative costs will be reduced as actually incurred wise profit will be worked out. The figures of components of cost taken in working out the profit based on 2011-12 1,22,86,50,500 16,45,81,649 13.40% 2,99,94,23,768 401782370 -97167186 -16,45,81,649 -5,52,95,604 8,47,37,931 1,07,00,000 9,54,37,931 15,28,17,792 11, the AO may consider necessary action as per law in the order giving effect to ITAT order to avoid double deductions for proportionate Construction costs (Rs. 50 cr includes cost of renovation as well as construction of both wings (as discussed several times in this order) and proportionate administrative costs and also to calculate progress on the basis of Construction cost incurred as Now, coming back to the respective grounds raised by the 9.1 Ground no. 2 relates to direct cost such as premium paid to Municipal Corporation, TDR, etc. not being considered as part of cost of construction. 9.2 In Ground no. 6 method prescribed by the ITAT in A.Y. 2009 out in the year under consideration. 9.3 All the above grounds are interconnected in as much as the manner in which the percentage completion method is to be applied. 10. Before us the Ld. counsel view of the changed events escalated and same is to be given effect in working of the profit following the percent completion method. He also submitted that estimate of renovation cost has also gone up from Rs.63, 81,38,718/-. But he submitted that the have recorded said figure at estimation of the renovation should accordingly be revised inclusion in the total cost of the project. 11. The Ld. DR on the other hand relied on the order of the authorities. 12. The issue in dis from the project following the percentage completion ITA Nos. 2000 to 2002/M/2022 relates to direct cost such as premium paid to Municipal Corporation, TDR, etc. not being considered as part of Ground no. 6& 7, the assessee has raised an issue that the method prescribed by the ITAT in A.Y. 2009-10 cannot be worked out in the year under consideration. All the above grounds are interconnected in as much as the manner in which the percentage completion method is to be Ld. counsel of the assessee submitted that in view of the changed events, the estimated cost of the project has escalated and same is to be given effect in working of the profit following the percent completion method. He also submitted that estimate of renovation cost has also gone up from Rs. . But he submitted that the lower d figure at ₹61,63,16,666/ estimation of the renovation should accordingly be revised the total cost of the project. The Ld. DR on the other hand relied on the order of the The issue in dispute in the case is determination of profits from the project following the percentage completion ITA Nos. 2000 to 2002/M/2022 10 Sandhu Builders relates to direct cost such as premium paid to Municipal Corporation, TDR, etc. not being considered as part of , the assessee has raised an issue that the 10 cannot be worked All the above grounds are interconnected in as much as the manner in which the percentage completion method is to be of the assessee submitted that in the estimated cost of the project has escalated and same is to be given effect in working of the profit following the percent completion method. He also submitted that Rs. 50 crores to lower authorities 61,63,16,666/-and therefore estimation of the renovation should accordingly be revised for The Ld. DR on the other hand relied on the order of the lower determination of profits from the project following the percentage completion method. Regarding justification of percentage completion method in real estate development co-ordinate bench of v. ACIT in ITA no. 2649/Mum/2018 for A.Y. 2014 is held as under: - “..4.1 In the reasons for the decision, we have mentioned in the impugned order that in CIT v. A. 53 ITR 114 (SC), it is held that income is taxable when it accrues or is earned, if the assessee's accounts are maintained on the mercantile basis. have accrued or a liability or loss can be said to have been incurred only when the profit is either actually due or the liability becomes held in CIT v. Associated Commercial Corporation, (1963) 48 ITR 1 (Bom) that a mere claim to a profit or to a liability is not sufficient to make the incurred for the purposes of the Income Tax Act. It is also clarified in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 (SC) that once accrued, it is liable to the charge even if, subsequently, it is forgone and no brings to charge certain income, its intention is to enforce the charge at the earliest point of time. The same is clarified in decision in T.N.K. Govindarajulu Chetty v. CIT (1973) 87 ITR 22 (Mad), affirmed in (1987) 165 ITR 231 We have stated in the impugned order that as the assessee is following consistently percentage completion method, Accounting Standard (AS) allows only percentage of completion method for construction contracts and the basic ingredients of the above method are (i) the recognition o to the stage of completion of a contract is called "the percentage of completion method", revenue is matched with the contract costs incurred in reaching the stage of completion, (iii) this results in t reporting of revenue, expenses and profit that can be attributed to the proportion of work completed, (iv) this ITA Nos. 2000 to 2002/M/2022 Regarding justification of percentage completion method in real estate development, it is relevant to refer to the ordinate bench of Mumbai ITAT in the case of S.S. Enterprises v. ACIT in ITA no. 2649/Mum/2018 for A.Y. 2014 “..4.1 In the reasons for the decision, we have mentioned in the impugned order that in CIT v. A. Gajapathy Naidu, (1964) 53 ITR 114 (SC), it is held that income is taxable when it accrues or is earned, if the assessee's accounts are maintained on the mercantile basis. A profit can be said to have accrued or a liability or loss can be said to have incurred only when the profit is either actually due or the liability becomes enforceable. Further, it is held in CIT v. Associated Commercial Corporation, (1963) 48 ITR 1 (Bom) that a mere claim to a profit or to a liability is not sufficient to make the profit to accrue or the liability to be incurred for the purposes of the Income Tax Act. It is also clarified in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 (SC) that once accrued, it is liable to the charge even if, subsequently, it is forgone and not realized. When a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time. The same is clarified in decision in T.N.K. Govindarajulu Chetty v. CIT (1973) 87 ITR 22 (Mad), affirmed in (1987) 165 ITR 231 (SC). We have stated in the impugned order that as the assessee is following consistently percentage completion method, Accounting Standard (AS)-7 (Revised) is applicable which allows only percentage of completion method for construction contracts and the basic ingredients of the above method are (i) the recognition of revenue and expenses by reference to the stage of completion of a contract is called "the percentage of completion method", (ii) the contract revenue is matched with the contract costs incurred in reaching the stage of completion, (iii) this results in t reporting of revenue, expenses and profit that can be attributed to the proportion of work completed, (iv) this ITA Nos. 2000 to 2002/M/2022 11 Sandhu Builders Regarding justification of percentage completion method in case of , it is relevant to refer to the decision of the Mumbai ITAT in the case of S.S. Enterprises v. ACIT in ITA no. 2649/Mum/2018 for A.Y. 2014-15 wherein it “..4.1 In the reasons for the decision, we have mentioned in Gajapathy Naidu, (1964) 53 ITR 114 (SC), it is held that income is taxable when it accrues or is earned, if the assessee's accounts are A profit can be said to have accrued or a liability or loss can be said to have incurred only when the profit is either actually Further, it is held in CIT v. Associated Commercial Corporation, (1963) 48 ITR 1 (Bom) that a mere claim to a profit or to a liability is not profit to accrue or the liability to be incurred for the purposes of the Income Tax Act. It is also clarified in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 (SC) that once accrued, it is liable to the charge even if, t realized. When a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time. The same is clarified in decision in T.N.K. Govindarajulu Chetty v. CIT (1973) 87 ITR We have stated in the impugned order that as the assessee is following consistently percentage completion method, 7 (Revised) is applicable which allows only percentage of completion method for construction contracts and the basic ingredients of the above method are f revenue and expenses by reference to the stage of completion of a contract is called "the (ii) the contract revenue is matched with the contract costs incurred in reaching the stage of completion, (iii) this results in the reporting of revenue, expenses and profit that can be attributed to the proportion of work completed, (iv) this method provides useful information on the extent of contract activity and performance during a period, (v) contract revenue is recognized as and loss in the accounting periods in which the work is performed, (vi) contract costs are usually recognized as an expense in the statement of profit and loss in the accounting periods in which the work to which they rel (vii) however, any expected excess of total contract costs over total contract revenue is recognized as an expense immediately...” 12.1 Further, the Institute of Chartered Account Guidance Note on Accounting for Real Esta 2012) has prescribed real estate development projects. reproduced as under: “3.3 For recognition of revenue in case of real estate sales, it is necessary that 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition, are satisfied. As stated above, real estate sales take place in a variety of ways and may be subject to different terms and conditions as specified in for sale. Accordingly, the point of time at which all significant risks and rewards of ownership can be considered as transferred, is required to be determined on the basis of the terms and conditions of the agreement for sale. In case of real estate sales, the seller usually enters into an agreement for sale with the buyer at initial stages of construction. This agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real estate is not given to the transferred all the significant risks and rewards to the buyer, any acts on the real estate ITA Nos. 2000 to 2002/M/2022 method provides useful information on the extent of contract activity and performance during a period, (v) contract revenue is recognized as revenue in the statement of profit and loss in the accounting periods in which the work is performed, (vi) contract costs are usually recognized as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed, however, any expected excess of total contract costs over total contract revenue is recognized as an expense immediately...” Further, the Institute of Chartered Accountant Guidance Note on Accounting for Real Estate Transactions (Revised as prescribed guidelines for determination of income from ate development projects. The relevant guidelines are under: 3.3 For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition, are satisfied. As stated above, real estate sales take place in a variety of ways and may be subject to different terms and conditions as specified in the agreement for sale. Accordingly, the point of time at which all significant risks and rewards of ownership can be considered as transferred, is required to be determined on the basis of the terms and conditions of the agreement for sale. In case of l estate sales, the seller usually enters into an agreement for sale with the buyer at initial stages of construction. This agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real estate is not given to the buyer. Once the seller has transferred all the significant risks and rewards to the buyer, any acts on the real estate performed by the seller are, in ITA Nos. 2000 to 2002/M/2022 12 Sandhu Builders method provides useful information on the extent of contract activity and performance during a period, (v) contract revenue in the statement of profit and loss in the accounting periods in which the work is performed, (vi) contract costs are usually recognized as an expense in the statement of profit and loss in the accounting ate is performed, however, any expected excess of total contract costs over total contract revenue is recognized as an ant of India in its te Transactions (Revised for determination of income from The relevant guidelines are 3.3 For recognition of revenue in case of real estate sales, it all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition, are satisfied. As stated above, real estate sales take place in a variety of ways and may be subject to the agreement for sale. Accordingly, the point of time at which all significant risks and rewards of ownership can be considered as transferred, is required to be determined on the basis of the terms and conditions of the agreement for sale. In case of l estate sales, the seller usually enters into an agreement for sale with the buyer at initial stages of construction. This agreement for sale is also considered to have the effect of transferring all significant risks and rewards of ownership to provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real buyer. Once the seller has transferred all the significant risks and rewards to the buyer, performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue recognised by applying the percentage of completion method on the basis of the methodology explained in AS 7, Construction Contracts. Further, where individual contracts are part of a single project, although risks and rewards may have been transferred on signing of a legally enforceable individual contract but significant performance in respect of remaining components of the project is pending, revenue in respect of such an individual contract should not be recognised until the performance components is considered to be completed on the basis of the aforesaid principles. This Guidance Note, thus, provides guidance in the application of:  Principles of AS 9 in respect of sale of goods for recognising revenue, costs and profi transactions of real estate which are in substance similar to delivery of goods where the revenues, costs and profits are recognised when the revenue recognition process is completed; and  Percentage completion method for recognising revenue, costs real estate which have the same economic substance as construction contracts. 3.4 The application of the methods described in paragraph 3.3 above requires a careful analysis of the elements of the transaction, agreement, understanding and conduct of the parties to the transaction to determine the economic substance of the transaction. The economic substance of the transaction is not influenced or affected by the structure and/or legal form of the transaction 4. Application of principles of AS 9 in respect of sale of goods to a real estate project 4.1 The application of principles of AS 9 in respect of sale of goods requires recognition of revenues on completion of the transaction/activity when respect of a real estate project is completed as explained in paragraph 4.2 below. ITA Nos. 2000 to 2002/M/2022 substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue in such cases is recognised by applying the percentage of completion method on the basis of the methodology explained in AS 7, Construction Contracts. Further, where individual contracts are part of a single project, although risks and rewards may n transferred on signing of a legally enforceable individual contract but significant performance in respect of remaining components of the project is pending, revenue in respect of such an individual contract should not be recognised until the performance on the remaining components is considered to be completed on the basis of the aforesaid principles. This Guidance Note, thus, provides guidance in the application of: Principles of AS 9 in respect of sale of goods for recognising revenue, costs and profi transactions of real estate which are in substance similar to delivery of goods where the revenues, costs and profits are recognised when the revenue recognition process is completed; and Percentage completion method for recognising revenue, and profits from transactions and activities of real estate which have the same economic substance as construction contracts. 3.4 The application of the methods described in paragraph 3.3 above requires a careful analysis of the elements of the n, agreement, understanding and conduct of the parties to the transaction to determine the economic substance of the transaction. The economic substance of the transaction is not influenced or affected by the structure and/or legal form of the transaction or agreement. 4. Application of principles of AS 9 in respect of sale of goods to a real estate project 4.1 The application of principles of AS 9 in respect of sale of goods requires recognition of revenues on completion of the transaction/activity when the revenue recognition process in respect of a real estate project is completed as explained in paragraph 4.2 below. ITA Nos. 2000 to 2002/M/2022 13 Sandhu Builders substance, performed on behalf of the buyer in the manner in such cases is recognised by applying the percentage of completion method on the basis of the methodology explained in AS 7, Construction Contracts. Further, where individual contracts are part of a single project, although risks and rewards may n transferred on signing of a legally enforceable individual contract but significant performance in respect of remaining components of the project is pending, revenue in respect of such an individual contract should not be on the remaining components is considered to be completed on the basis of the aforesaid principles. This Guidance Note, thus, provides Principles of AS 9 in respect of sale of goods for recognising revenue, costs and profits from transactions of real estate which are in substance similar to delivery of goods where the revenues, costs and profits are recognised when the revenue Percentage completion method for recognising revenue, and profits from transactions and activities of real estate which have the same economic substance 3.4 The application of the methods described in paragraph 3.3 above requires a careful analysis of the elements of the n, agreement, understanding and conduct of the parties to the transaction to determine the economic substance of the transaction. The economic substance of the transaction is not influenced or affected by the structure or agreement. 4. Application of principles of AS 9 in respect of sale of 4.1 The application of principles of AS 9 in respect of sale of goods requires recognition of revenues on completion of the the revenue recognition process in respect of a real estate project is completed as explained in 4.2 The completion of the revenue recognition process is usually identified when the following conditions are satisfied: (a) The seller h and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership; (b) The seller has effectively handed over possession of the real estate unit to the buyer forming part of the transaction; (c) No significant uncertainty exists regarding the amount of consideration that will be derived from the real estate sales; and (d) It is not unreasonable to expect ultimate collection of revenue from buyers. 4.3 Where transfer of legal title is a condition precedent to the buyer taking on the significant risks and rewards of ownership and accepting significant completion of the seller’s obligation, revenue should not be recognised till such time legal title is validly transferred to the buyer. 5. Application of Percentage Completion Method 5.1 The percentage completion method should be applied in the accounting of all real estate transactions/activities in the situations described in paragraph 3.3 above, i.e., where the economic substance is similar to construction contracts. Some further indicators of such transactions/activities are: (a) The duration of such projects is beyond 12 months and the project commencement date and project completion date fall into different accounting periods. (b) Most features of the project are common to const contracts, viz., land development, structural engineering, architectural design, construction, etc. (c) While individual units of the project are contracted to be delivered to different buyers these are interdependent upon or interrelated to compl and/or provision of common amenities. ITA Nos. 2000 to 2002/M/2022 4.2 The completion of the revenue recognition process is usually identified when the following conditions are (a) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with (b) The seller has effectively handed over possession of the te unit to the buyer forming part of the transaction; (c) No significant uncertainty exists regarding the amount of consideration that will be derived from the real estate sales; (d) It is not unreasonable to expect ultimate collection of m buyers. 4.3 Where transfer of legal title is a condition precedent to the buyer taking on the significant risks and rewards of ownership and accepting significant completion of the seller’s obligation, revenue should not be recognised till such time al title is validly transferred to the buyer. 5. Application of Percentage Completion Method 5.1 The percentage completion method should be applied in the accounting of all real estate transactions/activities in the situations described in paragraph 3.3 above, i.e., where the economic substance is similar to construction contracts. Some dicators of such transactions/activities are: (a) The duration of such projects is beyond 12 months and the project commencement date and project completion date fall into different accounting periods. (b) Most features of the project are common to const contracts, viz., land development, structural engineering, architectural design, construction, etc. (c) While individual units of the project are contracted to be delivered to different buyers these are interdependent upon or interrelated to completion of a number of common activities and/or provision of common amenities. ITA Nos. 2000 to 2002/M/2022 14 Sandhu Builders 4.2 The completion of the revenue recognition process is usually identified when the following conditions are as transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with (b) The seller has effectively handed over possession of the te unit to the buyer forming part of the transaction; (c) No significant uncertainty exists regarding the amount of consideration that will be derived from the real estate sales; (d) It is not unreasonable to expect ultimate collection of 4.3 Where transfer of legal title is a condition precedent to the buyer taking on the significant risks and rewards of ownership and accepting significant completion of the seller’s obligation, revenue should not be recognised till such time 5. Application of Percentage Completion Method 5.1 The percentage completion method should be applied in the accounting of all real estate transactions/activities in the situations described in paragraph 3.3 above, i.e., where the economic substance is similar to construction contracts. Some dicators of such transactions/activities are: (a) The duration of such projects is beyond 12 months and the project commencement date and project completion date (b) Most features of the project are common to construction contracts, viz., land development, structural engineering, (c) While individual units of the project are contracted to be delivered to different buyers these are interdependent upon etion of a number of common activities (d) The construction or development activities form a significant proportion of the project activity. 5.2 This method is applied when the outcome of a real estate project can be conditions are satisfied: (a) total project revenues can be estimated reliably; (b) it is probable that the economic benefits associated with the project will flow to the enterprise; (c) the project costs to complete the project and the stage of project completion at the reporting date can be measured reliably; and (d) the project costs attributable to the project can be clearly identified and measured reliably so that actual project incurred can be compared with prior estimates. When the outcome of a project can be estimated reliably, project revenues and project costs associated with the project should be recognised as revenue and expenses respectively applying the percentage detailed in paragraphs 5.3 to 5.8 below. 5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognised under the percentage completion method only when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable: (i) Environmental and othe (ii) Approval of plans, designs, etc. (iii) Title to land or other rights to development/construction. (iv) Change in land use (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level o development is not achieved if the expenditure incurred on ITA Nos. 2000 to 2002/M/2022 (d) The construction or development activities form a significant proportion of the project activity. 5.2 This method is applied when the outcome of a real estate project can be estimated reliably and when all the following conditions are satisfied: (a) total project revenues can be estimated reliably; (b) it is probable that the economic benefits associated with the project will flow to the enterprise; (c) the project costs to complete the project and the stage of project completion at the reporting date can be measured reliably; and (d) the project costs attributable to the project can be clearly identified and measured reliably so that actual project incurred can be compared with prior estimates. When the outcome of a project can be estimated reliably, project revenues and project costs associated with the project should be recognised as revenue and expenses respectively applying the percentage of completion method in the manner detailed in paragraphs 5.3 to 5.8 below. 5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be ognised under the percentage completion method only when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever (i) Environmental and other clearances. (ii) Approval of plans, designs, etc. (iii) Title to land or other rights to development/construction. (iv) Change in land use (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level o development is not achieved if the expenditure incurred on ITA Nos. 2000 to 2002/M/2022 15 Sandhu Builders (d) The construction or development activities form a 5.2 This method is applied when the outcome of a real estate estimated reliably and when all the following (a) total project revenues can be estimated reliably; (b) it is probable that the economic benefits associated with (c) the project costs to complete the project and the stage of project completion at the reporting date can be measured (d) the project costs attributable to the project can be clearly identified and measured reliably so that actual project costs When the outcome of a project can be estimated reliably, project revenues and project costs associated with the project should be recognised as revenue and expenses respectively of completion method in the manner 5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be ognised under the percentage completion method only when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever (iii) Title to land or other rights to development/construction. (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. (c) Atleast 25% of the saleable pro contracts or agreements with buyers. (d) Atleast 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate gross amount is realised in case of 8 agreements, revenue can be recognised 5.4 When the outcome of a real estate project can be estimated reliably and the conditions stipulated in paragraphs 5.2 and 5.3 are satisfied, project revenue and project costs associated with the real estate project s recognised as revenue and expenses by reference to the stage of completion of the project activity at the reporting date. For computation of revenue the stage of completion is arrived at with reference to the entire project costs incurred including land costs, borrowing costs and construction and development costs as defined in paragraph 2.2. Whilst the method of determination of stage of completion with reference to project costs incurred is the preferred method, this Guidance Note does not prohib determination of stage of completion, e.g., surveys of work done, technical estimation, etc. However, computation of revenue with reference to other methods of determination of stage of completion should not, in any case, exceed the revenue computed with reference to the 'project costs incurred' method. Illustration appended to this Guidance Note clarifies the method of computation of revenue. 5.5 The project costs which are recognised in the statement of profit and loss by reference to the project activity are matched with the revenues recognised resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. Costs incurred that relate to future activity ITA Nos. 2000 to 2002/M/2022 construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. (c) Atleast 25% of the saleable project area is secured by contracts or agreements with buyers. (d) Atleast 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it asonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate - If there are 10 Agreements of sale and 10 % of gross amount is realised in case of 8 agreements, revenue can be recognised with respect to these 8 agreements. 5.4 When the outcome of a real estate project can be estimated reliably and the conditions stipulated in paragraphs 5.2 and 5.3 are satisfied, project revenue and project costs associated with the real estate project s recognised as revenue and expenses by reference to the stage of completion of the project activity at the reporting date. For computation of revenue the stage of completion is arrived at with reference to the entire project costs incurred g land costs, borrowing costs and construction and development costs as defined in paragraph 2.2. Whilst the method of determination of stage of completion with reference to project costs incurred is the preferred method, this Guidance Note does not prohibit other methods of determination of stage of completion, e.g., surveys of work done, technical estimation, etc. However, computation of revenue with reference to other methods of determination of stage of completion should not, in any case, exceed the enue computed with reference to the 'project costs incurred' method. Illustration appended to this Guidance Note clarifies the method of computation of revenue. 5.5 The project costs which are recognised in the statement of profit and loss by reference to the stage of completion of the project activity are matched with the revenues recognised resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. Costs incurred that relate to future activity on the project and ITA Nos. 2000 to 2002/M/2022 16 Sandhu Builders construction and development costs is less than 25 % of the construction and development costs as defined in paragraph ject area is secured by (d) Atleast 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it asonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. If there are 10 Agreements of sale and 10 % of gross amount is realised in case of 8 agreements, revenue with respect to these 8 agreements. 5.4 When the outcome of a real estate project can be estimated reliably and the conditions stipulated in paragraphs 5.2 and 5.3 are satisfied, project revenue and project costs associated with the real estate project should be recognised as revenue and expenses by reference to the stage of completion of the project activity at the reporting date. For computation of revenue the stage of completion is arrived at with reference to the entire project costs incurred g land costs, borrowing costs and construction and development costs as defined in paragraph 2.2. Whilst the method of determination of stage of completion with reference to project costs incurred is the preferred method, it other methods of determination of stage of completion, e.g., surveys of work done, technical estimation, etc. However, computation of revenue with reference to other methods of determination of stage of completion should not, in any case, exceed the enue computed with reference to the 'project costs incurred' method. Illustration appended to this Guidance Note clarifies the method of computation of revenue. 5.5 The project costs which are recognised in the statement the stage of completion of the project activity are matched with the revenues recognised resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. on the project and payments made to sub performed under the sub with revenues when the activity or work is performed. This method provides useful information to the extent of contract activity and performance during a period. 5.6 The recognition of project revenue by reference to the stage of completion of the project activity should not at any point exceed the estimated total revenues from 'eligible contracts’/other legally enforceable agreem 'Eligible contracts’ means contracts/agreements specified in paragraph 5.3 where atleast 10% of the contracted amounts have been realised and there are no outstanding defaults of the payment terms in such contracts. 5.7 When it is probable exceed total eligible project revenues, the expected loss should be recognised as an expense immediately. The amount of such a loss is determined irrespective of: (a) commencement of project work; or (b) the stage of completion of project activity. 5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimates of project revenues and project costs. the effect of a change in the estimate of project costs, or the effect of a change in the estimate of the outcome of a project, is accounted for as a change in accounting estimate. The changed estimates are used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent periods.” 12.2 In light of the alongwith guidelines of the ICAI estate projects ,when a stage is arrived that ris from the developer to buyer irreversibly, then project revenue and project cost associated with the real estate project should be ITA Nos. 2000 to 2002/M/2022 payments made to sub-contractors in advance of work performed under the sub-contract are excluded and matched with revenues when the activity or work is performed. This method provides useful information to the extent of contract y and performance during a period. 5.6 The recognition of project revenue by reference to the stage of completion of the project activity should not at any point exceed the estimated total revenues from 'eligible contracts’/other legally enforceable agreements for sale. 'Eligible contracts’ means contracts/agreements specified in paragraph 5.3 where atleast 10% of the contracted amounts have been realised and there are no outstanding defaults of the payment terms in such contracts. When it is probable that total project costs will exceed total eligible project revenues, the expected loss should be recognised as an expense immediately. The amount of such a loss is determined irrespective of: (a) commencement of project work; or (b) the stage of n of project activity. 5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimates of project revenues and project costs. the effect of a change in the estimate of project costs, or the effect of a change in the estimate of the outcome of a project, is accounted for as a change in accounting estimate. The changed estimates are used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent periods.” principle laid down by the ITAT(supra) read alongwith guidelines of the ICAI (supra), we find that in case of real when a stage is arrived that risk and rewards shift from the developer to buyer irreversibly, then project revenue and project cost associated with the real estate project should be ITA Nos. 2000 to 2002/M/2022 17 Sandhu Builders contractors in advance of work contract are excluded and matched with revenues when the activity or work is performed. This method provides useful information to the extent of contract 5.6 The recognition of project revenue by reference to the stage of completion of the project activity should not at any point exceed the estimated total revenues from 'eligible ents for sale. 'Eligible contracts’ means contracts/agreements specified in paragraph 5.3 where atleast 10% of the contracted amounts have been realised and there are no outstanding defaults of that total project costs will exceed total eligible project revenues, the expected loss should be recognised as an expense immediately. The amount of such a loss is determined irrespective of: (a) commencement of project work; or (b) the stage of 5.8 The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimates of project revenues and project costs. Therefore, the effect of a change in the estimate of project costs, or the effect of a change in the estimate of the outcome of a project, is accounted for as a change in accounting estimate. The changed estimates are used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in laid down by the ITAT(supra) read , we find that in case of real k and rewards shift from the developer to buyer irreversibly, then project revenue and project cost associated with the real estate project should be recognised as revenue and expenses by reference to the stage of completion of the project activity at the a change in the estimate of project costs, should be used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent period the profit from project, can be manner: 1. Compute the estimated cost of the project including construction cost and development cost directly rel the real estate project material, labour estimated cost of rectification and warranty cost etc. 2. Compute the cost of construction and direct cost incurred as on reporting 3. Find out the percenta date ( C= B/C) 4. Compute the salable area of the project. (D) 5. Compute the estimate A/D) 6. Compute the revenue arising from sale agreements booked. (F) ITA Nos. 2000 to 2002/M/2022 recognised as revenue and expenses by reference to the stage of completion of the project activity at the reporting date. a change in the estimate of project costs, should be used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent periods. Following the above principles profit from project, can be broadly computed in following Compute the estimated cost of the project including construction cost and development cost directly rel the real estate project, including land co material, labour, depreciation of plant and Machinery, estimated cost of rectification and guarantee, warranty cost etc.(A) Compute the cost of construction and direct cost incurred as on reporting date. (B) Find out the percentage of work completed on reporting date ( C= B/C) Compute the salable area of the project. (D) Compute the estimated cost per unit of saleable area. (E= Compute the revenue arising from sale agreements booked. ITA Nos. 2000 to 2002/M/2022 18 Sandhu Builders recognised as revenue and expenses by reference to the stage of reporting date. The effect of a change in the estimate of project costs, should be used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is Following the above principles , computed in following Compute the estimated cost of the project including construction cost and development cost directly related to conversion cost, , depreciation of plant and Machinery, guarantee, expected Compute the cost of construction and direct cost incurred ge of work completed on reporting cost per unit of saleable area. (E= Compute the revenue arising from sale agreements booked. 7. Find out the area sold corresponding to sale agreements. ( G) 8. Compute the project cost relatable to the area sold.( H= G*E) 9. Compute the profit from sale of the area sold ( I= 10. Then, finally work out the profit corresponding to the stage of work comple step 9 to the percentage work completed on reporting date J= I*C) (* stands for multiplication) 11. Any administrative expenses the business of the assessee incurred during the year, w then be allowed to be deducted in whole from profit recognized above at step No. 10. 12.3 In view of above principles and steps of computation of profit following percentile completed method, the profit from the project is computed in the case of the a (a) Total estimated cost of the project: (i) Regarding undisputed that same Cost. In this case, earlier the assessee had claimed a estimated Project Cost of Rs. later on, the assessee vide submission dated 26.02.2015 before Assessing Officer in the set aside proceedings of A.Y. ITA Nos. 2000 to 2002/M/2022 Find out the area sold corresponding to sale agreements. ( Compute the project cost relatable to the area sold.( H= Compute the profit from sale of the area sold ( I= finally work out the profit corresponding to the stage of work completed by multiplying the profit computed at to the percentage work completed on reporting date * stands for multiplication) Any administrative expenses or indirect expenses the business of the assessee incurred during the year, w allowed to be deducted in whole from profit recognized above at step No. 10. In view of above principles and steps of computation of profit following percentile completed method, the profit from the project is computed in the case of the assessee as under: Total estimated cost of the project: Regarding the direct cost attributable to the project undisputed that same shall be included in the total Project . In this case, earlier the assessee had claimed a Project Cost of Rs.366,95,00,000/ later on, the assessee vide submission dated 26.02.2015 before Assessing Officer in the set aside proceedings of A.Y. ITA Nos. 2000 to 2002/M/2022 19 Sandhu Builders Find out the area sold corresponding to sale agreements. ( Compute the project cost relatable to the area sold.( H= Compute the profit from sale of the area sold ( I= F-H) finally work out the profit corresponding to the stage ng the profit computed at to the percentage work completed on reporting date( or indirect expenses related to the business of the assessee incurred during the year, will allowed to be deducted in whole from profit In view of above principles and steps of computation of profit following percentile completed method, the profit from the project is the direct cost attributable to the project, it is shall be included in the total Project . In this case, earlier the assessee had claimed a total 366,95,00,000/-, however, later on, the assessee vide submission dated 26.02.2015 before Assessing Officer in the set aside proceedings of A.Y. 2009-10 had revised it to Rs. 266,35,00,000/ up of this revised estimated cost of referred in para 15.1 of the order of ld. CIT(A) is as Particulars Direct Cost Construction Cost Administrative cost Total Estimated Cost Total Estimated (ii) The Direct Cost referred above includes TDR entitlement from society, TDR purchased from others, stamp duty & registration charges and payments to BMC taxes & premium as discussed in para 12.2 of the CIT(A). So, in principle, we agree with the contention of the assessee for allowing the direct cost incurred for purchase of TDR, stamp duty, and BMC charges etc. Accordingly, ground No. 2 of the appeal, is (iii) The construction cost referred above includes purchases, payment to contractors and labour as discussed in para 12.2 of the order of ld. CIT(A). (iv) The administrative cost referred above includes administrative expenses, interest & finance charges and marketing expenses. (b) Cost of the project incurred till the year end ITA Nos. 2000 to 2002/M/2022 10 had revised it to Rs. 266,35,00,000/ up of this revised estimated cost of Rs. 266,35,00,000 as referred in para 15.1 of the order of ld. CIT(A) is as Construction Cost Administrative cost Total Estimated Cost Cost excluding administrative cost The Direct Cost referred above includes TDR entitlement from society, TDR purchased from others, stamp duty & registration charges and payments to BMC taxes & premium as discussed in para 12.2 of the n principle, we agree with the contention of the assessee for allowing the direct cost incurred for purchase , stamp duty, and BMC charges etc. Accordingly, ground No. 2 of the appeal, is allowed. The construction cost referred above includes purchases, payment to contractors and labour as discussed in para 12.2 of the order of ld. CIT(A). The administrative cost referred above includes administrative expenses, interest & finance charges and marketing expenses. Cost of the project incurred till the year end ITA Nos. 2000 to 2002/M/2022 20 Sandhu Builders 10 had revised it to Rs. 266,35,00,000/-. The break- Rs. 266,35,00,000 as referred in para 15.1 of the order of ld. CIT(A) is as under: - Amount (Rs.) 81,77,00,000 134,75,00,000 49,83,00,000 266,35,00,000 216,52,00,000 The Direct Cost referred above includes TDR entitlement from society, TDR purchased from others, stamp duty & registration charges and payments to BMC taxes & premium as discussed in para 12.2 of the order of ld. n principle, we agree with the contention of the assessee for allowing the direct cost incurred for purchase , stamp duty, and BMC charges etc. Accordingly, the The construction cost referred above includes purchases, payment to contractors and labour as discussed The administrative cost referred above includes administrative expenses, interest & finance charges and : As per para 12.2 of the order of ld. CIT(A), the assessee has incurred total project cost (including administrative cost of Rs. 15.76 crores) of Rs. 111.63 crores upto the year under consideration from the inception of the project. In so far as the cost of the project is concerned, the administrative cost cannot be the part thereof and accordingly, the same is excluded resulting into (111.63 crores minus 15. (c) Thus, up to the year under consideration i.e. A.Y. 2011 the percentage of completion of project comes to [(95.87/216.52)*100] = (d) Salable area of the project Further, in this case, the total area construction constructing “A” wing is 1,28,760 sq. ft. and that for “B” wing is 6,840 sq. ft. taken into consideration the total area of 1,35,600 sq. ft. However, in A.Y. 2010 submitted that the total saleable area needs to be revised due to two events, members in the society encompassing area of 11,958 sq. ft. who restrained to give any permission for development and secondly, due to demolition of area of 3,350 sq.ft. of 19 floor of “A” wing because of height restrictions by the airport ITA Nos. 2000 to 2002/M/2022 As per para 12.2 of the order of ld. CIT(A), the assessee has incurred total project cost (including administrative cost of Rs. 15.76 crores) of Rs. 111.63 crores upto the year under ideration from the inception of the project. In so far as the cost of the project is concerned, the administrative cost cannot be the part thereof and accordingly, the same is excluded resulting into project cost of Rs. 95.87crores (111.63 crores minus 15.76 crores). the year under consideration i.e. A.Y. 2011 the percentage of completion of project comes to [(95.87/216.52)*100] = 44.28% Salable area of the project: Further, in this case, the total area construction is 1,35,600 sq. ft., out of which area for constructing “A” wing is 1,28,760 sq. ft. and that for “B” wing is 6,840 sq. ft.Till A.Y. 2009-10, the assessee has taken into consideration the total area of 1,35,600 sq. ft. However, in A.Y. 2010-11, for the first time, submitted that the total saleable area needs to be revised due to two events, firstly, due to the dispute arisen with 5 members in the society encompassing area of 11,958 sq. ft. who restrained to give any permission for development and dly, due to demolition of area of 3,350 sq.ft. of 19 floor of “A” wing because of height restrictions by the airport ITA Nos. 2000 to 2002/M/2022 21 Sandhu Builders As per para 12.2 of the order of ld. CIT(A), the assessee has incurred total project cost (including administrative cost of Rs. 15.76 crores) of Rs. 111.63 crores upto the year under ideration from the inception of the project. In so far as the cost of the project is concerned, the administrative cost cannot be the part thereof and accordingly, the same is project cost of Rs. 95.87crores the year under consideration i.e. A.Y. 2011-12, the percentage of completion of project comes to Further, in this case, the total area available for 600 sq. ft., out of which area for constructing “A” wing is 1,28,760 sq. ft. and that for “B” 10, the assessee has taken into consideration the total area of 1,35,600 sq. ft. 11, for the first time, the assessee submitted that the total saleable area needs to be revised , due to the dispute arisen with 5 members in the society encompassing area of 11,958 sq. ft. who restrained to give any permission for development and dly, due to demolition of area of 3,350 sq.ft. of 19 th floor of “A” wing because of height restrictions by the airport authority. We have considered the submission of the assessee for revising the saleable area to 1,20,292 sq. ft. However, we do not agree disputed area has been restrained from selling for the time being due to the injunction by the Hon’ble High Court but that area remained with the assessee. So, it cannot be the overall saleable area available with the assessee. change in saleable area sought, demolition of 19 far as the demolished area is concerned, that has extinguished due to demolition and therefore, that area is allowed to be reduced. Accordingly, the revised saleable area available with the assessee works out to 1,32,250 sq. ft. (e) The cost of the salable 16,372/-. (f) Till the year end the assessee has reported area sold of 86,986 sft for sale agreements of Rs. 175,29,25,800/ (g) The project cost relatable to the area sold of works out Rs. 86,986 * 16,372 =142,41 (h) The profit from the area sold thus would be (175,29,25,800 ITA Nos. 2000 to 2002/M/2022 We have considered the submission of the assessee for revising the saleable area to 1,20,292 sq. ft. However, we do not agree with the assessee. As far as the disputed area of 11,958 sq. ft. is concerned, the assessee has been restrained from selling for the time being due to the injunction by the Hon’ble High Court but that area remained with the assessee. So, it cannot be the overall saleable area available with the assessee. change in saleable area sought, secondly demolition of 19 th Floor of A wing admeasuring 3350 sft far as the demolished area is concerned, that has extinguished due to demolition and therefore, that area is allowed to be reduced. Accordingly, the revised saleable area available with the assessee works out to 1,32,250 sq. The cost of the salable area per unit thus works out to Rs. Till the year end the assessee has reported area sold of 86,986 sft for sale agreements of Rs. 175,29,25,800/ The project cost relatable to the area sold of works out Rs. 86,986 * 16,372 =142,41,36,765/ The profit from the area sold thus would be ,29,25,800 – 142,41,36,765) = 32,87,89,034/ ITA Nos. 2000 to 2002/M/2022 22 Sandhu Builders We have considered the submission of the assessee for revising the saleable area to 1,20,292 sq. ft. with the assessee. As far as the is concerned, the assessee has been restrained from selling for the time being due to the injunction by the Hon’ble High Court but that area still remained with the assessee. So, it cannot be reduced from the overall saleable area available with the assessee. The secondly is due to admeasuring 3350 sft. As far as the demolished area is concerned, that has extinguished due to demolition and therefore, that area is allowed to be reduced. Accordingly, the revised saleable area available with the assessee works out to 1,32,250 sq. area per unit thus works out to Rs. Till the year end the assessee has reported area sold of 86,986 sft for sale agreements of Rs. 175,29,25,800/-. The project cost relatable to the area sold of 86,986, thus ,36,765/-. The profit from the area sold thus would be 142,41,36,765) = 32,87,89,034/-. (i) The profit in view of percentage completion of 4 out to 32,87,89,034 * 4 Rs.14,55,80,107/ (j) The administrative cost during the year has been incurred at Rs. 5,52,95,604/ the net profit from the project following the percentile completion method works out to Rs. 12.4 Thus, upto AY2011 works out to Rs. 9,02,84,503 12.5 The ground No. 6 and 7 of the appeal are accordingly allowed. 13. Ground no. 3 and 4 repairs/renovation of Rs. 61,63,16,666 c project and damage to the building on account of various litigations not being considered by the ld. CIT(A). of Renovation cost have arisen in period subsequent to AY 2011 and therefore, any effect of 12 and can only be given in subsequent assessment years. Therefore, these grounds are dismissed for AY 2011 14. Ground no. 5 relates to valuation of unsold flats at cost not been considered by the ld. CIT(A). ITA Nos. 2000 to 2002/M/2022 The profit recognized up to the year under consideration in view of percentage completion of 44.28 out to 32,87,89,034 * 4 Rs.14,55,80,107/- The administrative cost during the year has been incurred at Rs. 5,52,95,604/-, so after reducing this cost, the net profit from the project following the percentile completion method works out to Rs. 9,02,84,503 AY2011-12, the cumulative profit from the project 9,02,84,503/-. The ground No. 6 and 7 of the appeal are accordingly allowed. Ground no. 3 and 4 relates to revision of estimated cost of of Rs. 61,63,16,666 caused due to delay in project and damage to the building on account of various litigations not being considered by the ld. CIT(A). The events behind escalation of Renovation cost have arisen in period subsequent to AY 2011 and therefore, any effect of said estimate can’t be given in AY 2011 12 and can only be given in subsequent assessment years. Therefore, these grounds are dismissed for AY 2011- relates to valuation of unsold flats at cost not been considered by the ld. CIT(A). ITA Nos. 2000 to 2002/M/2022 23 Sandhu Builders the year under consideration 8% , thus works out to 32,87,89,034 * 44.28= The administrative cost during the year has been so after reducing this cost, the net profit from the project following the percentile 9,02,84,503/-. 12, the cumulative profit from the project The ground No. 6 and 7 of the appeal are accordingly allowed. relates to revision of estimated cost of aused due to delay in project and damage to the building on account of various litigations The events behind escalation of Renovation cost have arisen in period subsequent to AY 2011-12, said estimate can’t be given in AY 2011- 12 and can only be given in subsequent assessment years. -12. relates to valuation of unsold flats at cost not 14.1 The assessee has followed percentage completion method for computation of profits from the project. Under this method, after working out the profit commensurate with the construction work carried out, further expenses for maintenance of the corporate structure and other administrative and selling expenses for running the business are debited to Profit & Loss A/c. and net profit is worked out accordingly. For the purpose of computing profit from the project, the valuation of closing stock has no role to this method. Accordingly, the ground challenging the valuation of unsold flats at market value is irrelevant, whether taken at cost or market value. We set aside the finding of the ld. CIT(A) on the issue of dispute for considering valuation of Thus, this ground no. 5 of the assessee is allowed. 15. The ground No. 8 of the appeal was not pressed, therefore, same is dismissed. 16. The ground no. 9 of the appeal relates to the issue raised by the assessee that the ld. CIT(A) erred in reducing the proportionate cost of construction and direct cost pertaining to area admeasuring 15,308 sq. ft. consisting of demolished area and in respect of which development rights were not granted. 16.1. This issue is already cov the profit from the project is computed and therefore, no separate ITA Nos. 2000 to 2002/M/2022 The assessee has followed percentage completion method for computation of profits from the project. Under this method, after working out the profit commensurate with the construction work carried out, further expenses for maintenance of the corporate structure and other administrative and selling expenses for running the business are debited to Profit & Loss A/c. and net profit is worked out accordingly. For the purpose of computing profit from the project, the valuation of closing stock has no role to this method. Accordingly, the ground challenging the valuation of unsold flats at market value is irrelevant, whether taken at cost or market value. We set aside the finding of the ld. CIT(A) on the issue of dispute for considering valuation of unsold flats at market value Thus, this ground no. 5 of the assessee is allowed. The ground No. 8 of the appeal was not pressed, therefore, The ground no. 9 of the appeal relates to the issue raised by the . CIT(A) erred in reducing the proportionate cost of construction and direct cost pertaining to area admeasuring 15,308 sq. ft. consisting of demolished area and in respect of which development rights were not granted. This issue is already covered in our decision above the profit from the project is computed and therefore, no separate ITA Nos. 2000 to 2002/M/2022 24 Sandhu Builders The assessee has followed percentage completion method for computation of profits from the project. Under this method, after working out the profit commensurate with the construction work carried out, further expenses for maintenance of the corporate structure and other administrative and selling expenses for running the business are debited to Profit & Loss A/c. and net profit is worked out accordingly. For the purpose of computing profit from the project, the valuation of closing stock has no role to play under this method. Accordingly, the ground challenging the valuation of unsold flats at market value is irrelevant, whether taken at cost or market value. We set aside the finding of the ld. CIT(A) on the issue unsold flats at market value The ground No. 8 of the appeal was not pressed, therefore, The ground no. 9 of the appeal relates to the issue raised by the . CIT(A) erred in reducing the proportionate cost of construction and direct cost pertaining to area admeasuring 15,308 sq. ft. consisting of demolished area and in respect of which in our decision above, wherein the profit from the project is computed and therefore, no separate finding on this issue is required. Accordingly, this ground is allowed partly. 17. The ground no. 10 relates to disallowance of deduction claimed u/s. 80G of the Act by the assessee. 18. On perusal of para 16.2 of the CIT(A) order, we find that ld. CIT(A) has directed the Assessing Officer to verify this claim of assessee u/s. 80G while giving effect to his order. In view of this fact, we direct the Assessing CIT(A) if he has not yet given. Accordingly, this ground of appeal is allowed for statistical purposes. 19. For, AY 2012-13 and 2013 the projects can be worked out keeping in v circumstances of the case. 19.1 In this regard, we find that the ld. CIT(A) at para 13 of his order has referred to a sum of Rs. 50 crores being the estimated cost of renovation covered in Rs.266,35,00,000/- o A.Y. 2009-10 as discussed at page 28 in internal para 4 therein it is stated that the ld. CIT(A) had held that as the estimated cost of repair due to damages had already been considered in the total estimated cost of construction, no separate deduction can be allowed in calculating the profit. ITA Nos. 2000 to 2002/M/2022 finding on this issue is required. Accordingly, this ground is allowed The ground no. 10 relates to disallowance of deduction the Act by the assessee. On perusal of para 16.2 of the CIT(A) order, we find that ld. CIT(A) has directed the Assessing Officer to verify this claim of assessee u/s. 80G while giving effect to his order. In view of this fact, we direct the Assessing Officer to give effect to the finding of ld. CIT(A) if he has not yet given. Accordingly, this ground of appeal is allowed for statistical purposes. 13 and 2013-14 also the cumulative profit from the projects can be worked out keeping in view the change in circumstances of the case. In this regard, we find that the ld. CIT(A) at para 13 of his order has referred to a sum of Rs. 50 crores being the estimated cost of renovation covered in the total estimated cost of of the project. In the earlier rounds of appeal in 10 as discussed at page 28 in internal para 4 therein it is stated that the ld. CIT(A) had held that as the estimated cost of repair due to damages had already been considered in the total ed cost of construction, no separate deduction can be allowed in calculating the profit. ITA Nos. 2000 to 2002/M/2022 25 Sandhu Builders finding on this issue is required. Accordingly, this ground is allowed The ground no. 10 relates to disallowance of deduction On perusal of para 16.2 of the CIT(A) order, we find that ld. CIT(A) has directed the Assessing Officer to verify this claim of assessee u/s. 80G while giving effect to his order. In view of this Officer to give effect to the finding of ld. CIT(A) if he has not yet given. Accordingly, this ground of appeal is 14 also the cumulative profit from iew the change in In this regard, we find that the ld. CIT(A) at para 13 of his order has referred to a sum of Rs. 50 crores being the estimated the total estimated cost of f the project. In the earlier rounds of appeal in 10 as discussed at page 28 in internal para 4 therein it is stated that the ld. CIT(A) had held that as the estimated cost of repair due to damages had already been considered in the total ed cost of construction, no separate deduction can be 19.2 Before the lower authorities, the assessee submitted that due to various litigation and inj cost of the project has been fu saleable. The assessee submitted before the ld CIT(A) that the estimate cost of Rs. estimate cost of project of cost had gone up to Rs. consideration, which assessee claimed for further estimation lower authorities, denied any change in total estimated cost of the Project. We are of th the liability to incur expenses has gone up, which has to be taken into consideration as ascertained and the assessee need to be allowed said change in the year of such certainty as per the principles of percentile completion method reproduced above. were filed before lower authorities and also filed before us in the paper book. The Ld. CIT(A) has mentioned the figure at Rs.61,63,16,666/- so we restored the amount to that extent only. Accordingly, we revise the estimate of cost of project to Rs. 216.52 plus Rs. 11.05 crores and onward. Further, we also note that in AY 2013 incurred has been reduced from 133.13 cores to 128.81 due of service tax in said year. ITA Nos. 2000 to 2002/M/2022 the lower authorities, the assessee submitted that due various litigation and injunctions of the Hon’ble High court, the cost of the project has been further escalated for keeping the project saleable. The assessee submitted before the ld CIT(A) that the ate cost of Rs.50,57,86,069/- which was included in the project of Rs. 216 .52 crores but said gone up to Rs.63,81,38,718/- during the year under which need to be considered. In this assessee claimed for further estimation of Rs.13,23,52,64 lower authorities, denied any change in total estimated cost of the Project. We are of the opinion that due to changed circumstances, the liability to incur expenses has gone up, which has to be taken into consideration as and when visualized by the assessee as the assessee need to be allowed said change in the tainty as per the principles of percentile completion method reproduced above. The details of the estimate of expenses were filed before lower authorities and also filed before us in the The Ld. CIT(A) has mentioned the figure at so we restored the amount to that extent only. Accordingly, we revise the estimate of cost of project to Rs. 216.52 crores totaling to Rs. 227.67 crores for AY 2012 Further, we also note that in AY 2013 ed has been reduced from 133.13 cores to 128.81 due in said year. ITA Nos. 2000 to 2002/M/2022 26 Sandhu Builders the lower authorities, the assessee submitted that due ctions of the Hon’ble High court, the rther escalated for keeping the project saleable. The assessee submitted before the ld CIT(A) that the included in the but said estimate of during the year under need to be considered. In this manner, the 13,23,52,649/-. The lower authorities, denied any change in total estimated cost of the e opinion that due to changed circumstances, the liability to incur expenses has gone up, which has to be taken by the assessee as the assessee need to be allowed said change in the tainty as per the principles of percentile completion The details of the estimate of expenses were filed before lower authorities and also filed before us in the The Ld. CIT(A) has mentioned the figure at so we restored the amount to that extent only. Accordingly, we revise the estimate of cost of project to Rs. 216.52 crores for AY 2012-13 Further, we also note that in AY 2013-14, the cost ed has been reduced from 133.13 cores to 128.81 due credit 19.3 In this manner, the project cost incurred and percentage completion of project A.Y. Total Project cost incurred (incl. administrati ve cost) (Rs. In crores) Administra tive cost (Rs. In crores) 2010-11 2011-12 111.63 15.76 2012-13 152.65 19.52 2013-14 150.89 22.08 19.4 In the course of hearing, the ld. Counsel of the as furnished the detail with the customers upto the following years as A.Y. 2011-12 2012-13 2013-14 19.5 The assessee submitted before us that in earlier year actually no profit has been assessed from the project, therefore same might be taken at NIL. In view of the above, the revenue to be recognised cumulatively and cumulative profit completion method for the three assessment years under consideration before us Particulars ITA Nos. 2000 to 2002/M/2022 manner, the project cost incurred and percentage completion of project is worked out as under: - Administra tive cost (Rs. In crores) Total Project Cost (excl. administrativ e cost) (Rs. In crores) Total Estimated Project Cost (in Rs. Crores) 15.76 95.87 216.52 19.52 133.13 227.57 22.08 128.81 227.57 In the course of hearing, the ld. Counsel of the as of area sold and sale agreements entered with the customers upto the following years as under: Area Sold (sq. ft.) Sale Agreements (Rs.) 86,986 175,29,25,800 90,465 188,29,25,800 90,465 188,29,25,800 submitted before us that in earlier year actually no profit has been assessed from the project, therefore same might In view of the above, the revenue to be recognised and cumulative profit as per the percentage thod for the three assessment years under consideration before us is worked out as under: - A.Y. 2011-12 A.Y. 2012-13 ITA Nos. 2000 to 2002/M/2022 27 Sandhu Builders manner, the project cost incurred and percentage Total Estimated Project Cost (in Rs. Crores) % of work complete d 44.28 58.50 56.61 In the course of hearing, the ld. Counsel of the assessee has of area sold and sale agreements entered into under: - Sale Agreements (Rs.) submitted before us that in earlier year actually no profit has been assessed from the project, therefore same might In view of the above, the revenue to be recognised as per the percentage thod for the three assessment years under Amount in Rs. A.Y. 2013-14 Estimated cost of the project Project cost incurred till year end. % of work completed Revised salable area Area sold upto year end Total amount of Sale (Agreements) entered upto year end Less: Total cost of area sold upto year end Cumulative Profit from the project upto year end Cumulative Profit recognized as per percentage completion method Yearwise profit before admn expenses 0 Less: Administrative and other expenses Profit / (loss) for the year ITA Nos. 2000 to 2002/M/2022 2165200000 227,57,00,000 958700000 1331300000 44.28 58.50 132250 132250 86986 90465 1752925800 1882925800 1424136765 1556682045 328789035 326243755 145580107 190842842 145580107 45262735 55295604 37570306 90284503 7692429 ITA Nos. 2000 to 2002/M/2022 28 Sandhu Builders 227,57,00,000 1288100000 56.61 132250 90465 1882925800 1556682045 326243755 184683092 (-)6159750 25572209 (-)31731959 19.6 In view of above profit from the project computed following the percentage completion assessee, as worked out above. Assessing Officer is directed to 2011-12 to AY 2013- from business or profession 19.7 Impact of future events which has occurred subsequent AY 2013-14, we can’t comment in these appellate proceedings, and same shall be decided in relevant year 19.8. The ground raised by the assessee for AY 20112 14 are accordingly adjudicated mutatis mutandis. 21. In the result, all partly for statistical purposes. Order pronounced in the open Court on Sd/- (RAHUL CHAUDHARY JUDICIAL MEMBER Mumbai; Dated: 20/02/2023 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to 1. The Appellant 2. The Respondent. 3. The CIT(A)- ITA Nos. 2000 to 2002/M/2022 In view of above profit from the project computed following the completion of method is sustained in the case of the , as worked out above. We accordingly direct so. Assessing Officer is directed to adopt above prfit worked out for AY -14 for the purpose of net profit of the assessee from business or profession. mpact of future events which has occurred subsequent 14, we can’t comment in these appellate proceedings, and same shall be decided in relevant year(s). 19.8. The ground raised by the assessee for AY 20112 14 are accordingly adjudicated mutatis mutandis. all the three appeals of the assessee are allowed partly for statistical purposes. Order pronounced in the open Court on 20/02/2023. Sd/- RAHUL CHAUDHARY) (OM PRAKASH KANT JUDICIAL MEMBER ACCOUNTANT MEMBER Copy of the Order forwarded to : ITA Nos. 2000 to 2002/M/2022 29 Sandhu Builders In view of above profit from the project computed following the of method is sustained in the case of the We accordingly direct so. The prfit worked out for AY for the purpose of net profit of the assessee mpact of future events which has occurred subsequent to the 14, we can’t comment in these appellate proceedings, and 19.8. The ground raised by the assessee for AY 20112-13 and 2013- appeals of the assessee are allowed 02/2023. - OM PRAKASH KANT) ACCOUNTANT MEMBER 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// ITA Nos. 2000 to 2002/M/2022 BY ORDER, (Assistant Registrar) ITAT, Mumbai ITA Nos. 2000 to 2002/M/2022 30 Sandhu Builders BY ORDER, (Assistant Registrar) ITAT, Mumbai