Shri.Gopi Moothedath, Thrissur V. ITO, Trichur

ITA 231/COCH/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 52310 (ITAT-COCHIN)
• Duration Of Justice: 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 07-04-2011
• Court: TRIBUNAL
• Department Lawyers: S R SENAPATI
• Assessee Lawyers: K KITTU ADV
• Keywords: Principle of natural justice
• Section: 44AD; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND SANJAY AROR A, AM I.T.A NO. 231/COCH/2011 ASSESSMENT YEAR:2006-07 SHRI GOPI MOOTHEDATH, PROP. INLAND PROPERTIES & DEVELOPERS MARAVANCHERY LANE, PUNKUNNAM THRISSUR-680 002. [PAN: ADLPG 1969N] VS. THE INCOME TAX OFFICER, WARD-2, RANGE-1, THRISSUR. (ASSESSEE-APPELLANT) (REVENUE- RESPONDENT) ASSESSEE BY SHRI K.KITTU, ADV.-AR REVENUE BY MS. S.R.SENAPATI, SR. DR DATE OF HEARING 19/10/2011 DATE OF PRONOUNCEMENT 27/12/2011 O R D E R PER SANJAY ARORA, AM: THIS APPEAL BY THE ASSESSEE CONTESTS THE ORDER BY THE COMMISSIONER OF INCOME- TAX (APPEALS)-V, KOCHI (CIT(A) FOR SHORT) DATED 0 5-01-2011, AND THE ASSESSMENT YEAR (A.Y.) UNDER REFERENCE IS 2006-07. 2. THE APPEAL RAISES SEVERAL GROUNDS, THOUGH THEY C ONCERN THE SAME ISSUE, I.E., THE VALIDITY OF THE ADDITION IN THE SUM OF ` 25,22,365/- MADE BY THE ASSESSING OFFICER (AO) VIDE ASSESSMENT U/S. 143(3) OF THE INCOME-TAX ACT, 1961 ('THE ACT', HEREINAFTER) DATED 22- 12-2008 BY ESTIMATING THE TRADING PROFIT, AND WHICH STANDS SINCE SUSTAINED BY THE LD. CIT(A) AT ` 21,96,082/-. I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 2 3. IT WOULD BE RELEVANT TO RECOUNT THE BACKGROUND F ACTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE, AN INDIVIDUAL, IS A REAL ESTAT E DEVELOPER, CONSTRUCTING VARIOUS TYPES OF BUILDINGS, VIZ., FLATS, VILLAS (INDEPENDENT HOUSES) , COMMERCIAL COMPLEXES, ETC. HE FILED HIS RETURN OF INCOME FOR THE YEAR ON 21-12-2006, RETURN ING AN INCOME OF ` 4,00,285/-. FOR THE RELEVANT PREVIOUS YEAR, I.E., F.Y. 2005-06, THE ASS ESSEE WAS FOUND TO BE UNDERTAKING THREE DIFFERENT PROJECTS, I.E., WESTEND VILLAS, WESTEND P ALACE; AND WESTEND AMBADY. THE SECOND AND THIRD PROJECTS, I.E., WESTEND PALACE AND WESTEND AMBADY, WERE FOR APARTMENTS, CONSISTING OF 54 AND 11 RESIDENTIAL FLA TS RESPECTIVELY. THE DETAILS OF THE AMOUNTS RECEIVED IN THE THREE PROJECTS; THE ADVANCE PAID FOR LAND, AS WELL AS THE CONSTRUCTION EXPENSES INCURRED THERE-UNDER, I.E., U P TO 31-03-2006, AS REFLECTED BY THE AUDITED ACCOUNTS, ARE AS UNDER:- S.NO. PROJECT FLAT ADVANCE RECEIVED ADVANCE PAID FOR LAND CONSTRUCTION EXPENSES ( ` ) ( ` ) ( ` ) 1. WESTEND AMBADY 43,62,500 23,47,400 1,03,300 2. WESTEND PALACE 72,93,200 69,35,001 1,13,99,022 3. WESTEND VILLAS 58,52,580 18,37,500 25,29,762 ON THE BASIS OF THE MODUS OPERANDI BEING FOLLOWED BY THE ASSESSEE FOR THE EXECUTION OF HIS CIVIL CONSTRUCTION PROJECTS, AS GA THERED FROM THE VARIOUS AGREEMENTS, THE AO WAS OF THE VIEW THAT THE ASSESSEE WAS ACTING AS A CIVIL CONTRACTOR. THIS IS AS THE AGREEMENT WITH THE LAND OWNER/S PERMITS HIM TO TAKE POSSESSION OF THE LAND AND CONSTRUCT BUILDING THEREON. IN FACT, A PART OF THE COST FOR T HE SAME IS MET BY DELIVERING THE CONSTRUCTED FLAT/AREA TO THE LAND OWNER. THE ASSESS EE THEN ENTERS INTO AN AGREEMENT WITH THE PROSPECTIVE FLAT OWNERS/BUYER, WHEREBY THE LATT ER ENTRUSTS THE CONSTRUCTION WORK TO THE ASSESSEE, PAYING AN ADVANCE THEREFOR, AND WHICH AS AT THE END OF THE RELEVANT YEAR WORKS TO ` 175.08 LAKHS. ACCOUNTING STANDARD (AS)-7 ISSUED BY THE ICAI W.E.F. 01-04-2003, WHICH OBLIGES IT TO RECOGNISE INCOME ON PERCENTAGE COMPLETION METHOD, WOULD, THEREFORE, APPLY. ACCORDINGLY, THE AO COMPUTED THE PROFIT AT 1 0% OF THE VALUE OF WORK-IN-PROGRESS I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 3 (W.I.P), THE COST OF WHICH WAS RECKONED (AT THE TOT AL AMOUNT INVESTED BY THE ASSESSEE BOTH IN LAND AND CONSTRUCTION) FOR THE SECOND (WEST END PALACE) AND THE THIRD (WESTEND VILLAS) PROJECTS AT ` 227.01 LAKHS, OR AT 1/9 TH OF THE STATED COST, ESTIMATING THE PROFIT THUS AT ` 25,22,365/-. THE MATTER WAS CARRIED IN APPEAL, WHIC H WAS EXAMINED BY THE LD. CIT(A) AT LENGTH, WHO PERUSED THE AGREEMENTS ENTERED INTO BY THE ASSESSEE. THE OWNERSHIP OF LAND NEVER VESTS WITH THE ASSESSEE, BEING TRANSFERRED DI RECTLY BY THE LAND OWNERS TO THE CLIENTS/BUYERS (OF THE FLATS, CONSTRUCTED BUILDING) , IN WHOSE NAMES THE SAME IS REGISTERED. THE AGREEMENT WITH THE PROSPECTIVE BUYERS BY THE AS SESSEE WAS AGAIN BY WAY OF A STANDARD CONSTRUCTION CONTRACT, INCORPORATING ALL T HE NORMAL CONDITIONS AND INCIDENTS AS FOUND IN A CIVIL CONTRACT AGREEMENT. AS SUCH, AS-7 WOULD BE APPLICABLE TO THE ASSESSEE. THE CONTENTION THAT EVEN THOUGH THE LAND WAS NEVER OWNED BY HIM AT ANY STAGE, YET THERE WAS A TRANSFER IN HIS FAVOUR IN VIEW OF S. 53A OF T HE TRANSFER OF PROPERTY ACT, 1882, WAS NOT CONSIDERED AS RELEVANT BY THE LD. CIT(A). THE A O, THOUGH PROPOSED THE PROFIT AT 12.5% OF THE WORK PERFORMED, FINALLY ESTIMATED THE SAME AT 10% THEREOF, TO WHICH THE ASSESSEE HAS NOT BEEN ABLE TO SHOW ANY INFIRMITY. SO HOWEVER, THE ASSESSEES CONTENTION THAT IT BE ALLOWED DEDUCTION IN RESPECT OF PRE-OPER ATIONAL EXPENSES INCURRED, I.E., U/S. 35D OF THE ACT, AT ` 29.37 LAKHS (FOR THE WESTEND PALACE PROJECT) WAS CO NSIDERED BY HIM AS ACCEPTABLE, RESULTING IN THE ADDITION BEING SUSTAIN ED AT ` 21,96,082/-. AGGRIEVED, THE ASSESSEE IS IN APPEAL. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 4.1 THE FIRST BONE OF CONTENTION BETWEEN THE PA RTIES IS WHETHER THE ASSESSEE IS A CIVIL CONTRACTOR OR NOT, AS, IF SO, THE ACCOUNTING STANDA RD-7 (AS 7) WOULD APPLY TO HIM, OBLIGING HIM TO DISCLOSE THE WORKING RESULTS ON A P ROPORTIONATE BASIS. WE THINK THAT THIS IS NOT ACTUALLY THE ISSUE IN-AS-MUCH AS EVEN IF THE AS SESSEE WERE TO BE A DEVELOPER, HE IS BOUND TO RECOGNISE REVENUE ON THE BASIS OF THE WORK DONE ON A YEAR TO YEAR BASIS, AS IT IS ONLY THE PROFIT OR INCOME ACCRUED EACH YEAR WHICH I S LIABLE TO BE TAXED FOR THAT YEAR; EACH ASSESSMENT YEAR BEING AN INDEPENDENT UNIT OF ASSESS MENT. IT IS NOT THE CASE THAT THE ASSESSEE IS FOLLOWING CASH METHOD OF ACCOUNTING, AN D TOWARD WHICH WE HAVE ALSO EXAMINED THE AUDITED FINAL ACCOUNTS AND THE AUDIT R EPORT/S ON RECORD. IN FACT, WE FIND THE I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 4 REVENUES INSISTENCE ON THE ASSESSEE BEING A CONTRA CTOR, WHICH, AS WE OBSERVE, IS TOWARD APPLYING AS 7 THERETO, TO BE SELF-CONTRADICTORY; IT ADOPTING THE VALUE OF THE WIP AS INCLUSIVE OF THE INVESTMENT IN LAND. CLEARLY, IF TH E ASSESSEE IS ONLY A `CONTRACTOR, THERE IS NO QUESTION OF HIM HAVING ANY INTEREST IN LAND AND/ OR OF LAND COST FORMING PART OF THE PROJECT COST. IN FACT, IT IS NOT SO, AND THE ASSESS EE, EVEN AS CONTENDED BY HIM, IS A PROPERTY DEVELOPER, WHO PROCEEDS TO DEVELOP THE PROPERTY AND RAISING CONSTRUCTION THEREON EVEN WITHOUT THERE BEING ANY OR SUFFICIENT BUYERS OF THE HOUSE PROPERTY PROPOSED TO BE CONSTRUCTED, WITH THE BUYERS ENTERING AT DIFFERENT STAGES OF THE PROJECT EXECUTION, WITH PRESUMABLY VARIABLE PRICES CORRESPONDING TO THE STA GE OF COMPLETION OF THE PROJECT. EVEN THE LAND OWNERS ARE PAID BY THE ASSESSEE ONLY; IN F ACT MEETING A PART OF THE AGREED CONSIDERATION BY ALLOTMENT (TRANSFER) OF THE CONSTR UCTED AREA. THE SEPARATE AGREEMENTS ENTERED INTO, I.E., FOR LAND ACQUISITION AND CONSTR UCTION, ARE ONLY WITH A VIEW TO AVOID PAYMENT OF STAMP DUTY TWICE OVER, I.E., ONCE IN THE HANDS OF THE ASSESSEE AND, SECONDLY, IN THAT OF THE ULTIMATE BUYER OF THE PROPERTY/CONSTRUC TED BUILDING. THE ASSESSESS CONTENTION WITH REGARD TO THE APPLICABILITY OF SEC. 53A OF THE TRANSFER OF PROPERTY ACT IS VALID. SO, HOWEVER, ALL THIS WOULD NOT OF NO MOMENT, WITH, AS AFORE-STATED, THE ASSESSEE BEING OBLIGED TO RETURN HIS INCOME ON ACCRUAL BASIS ANNUA LLY, AND TOWARD WHICH WE FIND THE PERCENTAGE COMPLETION METHOD, AS ADVOCATED BY AS 7, AS APPLICABLE EVEN WHERE THE ASSESSEE IS A PROPERTY DEVELOPER. THE ASSESSEE IN F ACT ITSELF ADMITS TO THE SAID METHOD PER ITS STATEMENT OF `SIGNIFICANT ACCOUNTING POLICIES, FORMING PART OF ITS BALANCE-SHEET (SCH. XII THERETO/ PB PG. 12). CONTINUING FURTHER, IN OUR VIEW, NEVERTH ELESS, THE REQUIREMENT OF AS-9 (I.E., THE ACCOUNTING STANDARD FOR REVENUE RECOGNITION), WOULD ADMITTEDLY HAVE TO BE CONSIDERED AND GIVEN REGARD TO. THE SAME, ON THE PREMISES OF T HE FUNDAMENTAL ACCOUNTING PRECEPTS OF `PRUDENCE AND `CONSERVATISM, STIPULATES RECOGNITI ON OF REVENUE WHERE THERE IS NO (OR NEARLY SO) UNCERTAINTY AS TO THE ULTIMATE REALISABI LITY OF REVENUE, I.E., AT THE RELEVANT TIME. THE SAME IN FACT AGAIN STANDS ARTICULATED AND SPECI FIED PER SCH. XII TO ITS BALANCE-SHEET AS AT 31/3/2006 IN THE FOLLOWING WORDS: I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 5 ` REVENUE FROM PROPERTY DEVELOPMENT ACTIVITY IS RECOG NISED WHEN ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP IN THE LAND AND/OR BUILDING AR E TRANSFERRED TO THE CUSTOMER AND A REASONABLE EXPECTATION OF COLLECTION OF THE SALE CO NSIDERATION FROM THE CUSTOMER EXISTS WHERE THE CONSTRUCTION IS AT INITIAL STAGES, THERE IS THEREFORE NO SCOPE FOR RECOGNITION OF REVENUE. THE SAME IS, AND WOULD ALWAYS BE, A QUESTI ON OF FACT, WHICH NEEDS TO BE ADDRESSED WITH REFERENCE TO THE TOTAL /ESTIMATED PR OJECT COST AND OTHER RELEVANT FACTORS HAVING A BEARING THEREON. 4.2 IN THE FACTS OF THE PRESENT CASE, THE PRO JECT `WESTEND VILLAS AND `WESTEND AMBADY ARE EVIDENTLY AT IN THEIR INITIAL STAGE OF CONSTRUCTION AS AT THE RELEVANT YEAR-END, SO THAT THERE IS DEFINITELY NO QUESTION OF ANY INCO ME HAVING ARISEN IN THEIR RESPECT, THOUGH THE REVENUE HAS EXCLUDED ONLY THE `WESTEND AMBADY PROJECT. AS REGARDS THE REMAINING PROJECT, I.E., `WESTEND PALACE, WHICH IS FOR 54 AP ARTMENTS, AT AN ESTIMATED `COST OF ` 6.72 CRORES, THE ASSESSEE, ON THE BASIS OF A LETTER SUBM ITTED DURING THE APPELLATE PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY, CLAIMS THAT I T HAS NOT YET REACHED EVEN 20% COMPLETION, I.E., AS RECKONED ON THE BASIS OF THE C ONSTRUCTION EXPENSES. IT IS NOT CLEAR WHETHER THE PROJECT `COST OF ` 6.72 CRORES INCLUDES THE COST OF LAND OR NOT, AND I F SO, AT WHAT VALUE. IT IS ALSO NOT CLEAR WHETHER THE SAID A MOUNT OF ` 6.72 CRORES IS RECKONED WITH REFERENCE TO THE `COST OF THE PROJECT OR REPRESENT S ITS `SALE VALUE . FURTHER, EVEN IF THE AMOUNT PAID AS ADVANCE FOR LAND IS TAKEN INTO ACCOU NT, I.E., FOR DETERMINING THE PERCENTAGE OF COMPLETION, IT CANNOT BE SAID THAT THE PROJECT H AS REACHED A STAGE OF COMPLETION TO A SUBSTANTIAL DEGREE, SO THAT NO UNCERTAINTY WITH REG ARD TO THE PROJECT COMPLETION OBTAINS, MAKING THE EXERCISE OF REVENUE RECOGNITION A MEANIN GFUL AND RELEVANT. A PROJECT MAY TAKE A NUMBER OF YEARS TO COMPLETE, OVER WHICH IT M AY ENCOUNTER NUMEROUS IMPEDIMENTS, THOUGH WE MAY CLARIFY THAT THE SAME CANNOT BE TAKEN AS AN ALIBI OR A PLEA, AND IS TO BE BASED ON AN HONEST ASSESSMENT OF FACTS. THERE DO NO T APPEAR TO ANY LEGAL IMPEDIMENTS IN THE PRESENT CASE, SO THAT PERHAPS THE ONLY CONSIDER ATION WOULD BE OF THE PROJECT HAVING (OR NOT) REACHED A PARTICULAR THRESHOLD LIMIT, I.E., WH ERE IT COULD BE SAID THAT THE WORK HAS BEEN UNDERTAKEN TO A REASONABLE EXTENT, MAKING REVE NUE RECOGNITION FEASIBLE AND A REASONABLE PROPOSITION, SO THAT IT COULD BE BOOKED ON A PROPORTIONATE BASIS. AS SOUGHT TO I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 6 BE EMPHASIZED DURING THE HEARING BY THE LD. AR, EXP ENSES OF ` 113.99 LAKHS REFLECTED UNDER THE SAID PROJECT INCLUDE ADVANCES OF VARIOUS SUMS TO VARIOUS CONTRACTORS, AND AGAINST WHICH NO SUBSTANTIAL WORK HAS BEEN DONE, SO THAT THE SAME BY ITSELF CANNOT BE SAID TO BE A REFLECTION, OR A RELIABLE MEASURE, OF THE W ORK ACTUALLY EXECUTED. IN OTHER WORDS, IT COULD NOT BE SAID THAT THE WORK HAS BEEN COMPLETED AT SAY 17% ( ` 1.14 CRORES DIVIDED BY ` 6.72 CRORES). WE AGREE. IN FACT, EVEN WHERE THE % A GE COMPLETION METHOD IS ADOPTED, WHICH WE CONSIDER AS BEING NOT IN DISPUTE OR IN ISS UE, THE SAME HAS TO BE WITH REFERENCE TO THE PHYSICAL PARAMETERS OF THE CONSTRUCTION, DULY C ERTIFIED, RATHER THAN GOING ON THE BASIS OF THE AMOUNTS REFLECTED AS `EXPENDED UNDER THE RE LEVANT PROJECT. IT IS ONLY WHEN THE PROJECT IS PHYSICALLY COMPLETED TO A PARTICULAR STA GE, THAT ITS PROPORTIONATE COST CAN BE FINALIZED, WHICH WOULD NEED TO BE DEDUCTED FROM THE PROPORTIONATE REVENUE, WHILE THE BALANCE COST, I.E., RELATING TO WORK OVER AND ABOVE THAT COMPLETED TO THE DEFINED DEGREE, CARRIED OVER SEPARATELY AS WORK-IN-PROGRESS (UNCERT IFIED). IN FACT, EVEN THE PAYMENTS FROM CUSTOMERS ARE GENERALLY LINKED TO COMPLETION UP TO PREDEFINED STAGES, SO THAT ITS MEASUREMENT IS INTEGRAL TO THE BUSINESS MODEL AND P RACTICE AS GENERALLY FOLLOWED. THE SPECIMEN AGREEMENT ON RECORD, THOUGH, STIPULATES PA YMENT IN PRE-DETERMINED INSTALMENTS BY TIME. THIS WOULD HOWEVER NOT MATERIALLY ALTER TH E POSITION AS THE TIME STIPULATED WOULD ONLY BE BY FACTORING IN THE ANTICIPATED PROJE CT COMPLETION AT THE RELEVANT TIME/S. ALSO, THIS MAKES IT INDEPENDENT OF THE REQUIREMENT OF COMMUNICATING THE STAGE OF COMPLETION TO THE CUSTOMER, LEGALLY OBLIGING HIM TO PAY THE AMOUNT, SO THAT THE SAME UNDER NORMAL CIRCUMSTANCES COULD BE CONSIDERED AS D UE. FURTHER, AS REVENUE WOULD NOT FLOW MERELY ON INCURRING COST OR PERFORMING THE WOR K, BUT ONLY FROM THE CUSTOMERS OR BUYERS, THE SAME (REVENUE) CAN ONLY BE RECOGNIZED T O THE PROPORTIONATE EXTENT. TO CITE AN EXAMPLE, GOING BY THE CASE AT HAND, IF OUT OF 54 AP ARTMENTS, AGREEMENTS WITH BUYERS HAVE BEEN SIGNED ONLY IN RESPECT OF 30 FLATS, THEN, IRRE SPECTIVE OF THE AMOUNT RECEIVED THERE- AGAINST (30 FLATS), WHICH, IN FACT, WOULD NORMALLY CORRESPOND WITH THE STAGE OF PROJECT COMPLETION, REVENUE CAN BE RECOGNISED ONLY IN RESPE CT OF 30 FLATS AND NOT THE TOTAL 54 AND, AGAIN, TO THE PROPORTIONATE EXTENT. AS SUCH, EVEN T HOUGH THE PHYSICAL CONSTRUCTION UP TO A PARTICULAR LEVEL, SAY 30%, IS COMPLETED FOR THE ENT IRE PROJECT CONSISTING OF 54 FLATS, IT IS I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 7 ONLY THAT RELATABLE TO 30 FLATS WHICH WOULD BE RELE VANT AND LIABLE TO BE RECKONED FOR THE PURPOSE OF PROPORTION REVENUE RECOGNITION. 4.3 COMING TO THE ASPECT OF THE MINIMUM THRESHO LD LEVEL OF PHYSICAL COMPLETION, I.E., WHICH WOULD TRIGGER REVENUE RECOGNITION. IN OUR VIE W, THIS IS NOT SOMETHING FOR US TO DECIDE, THOUGH THE INDUSTRY EXPERTS TOGETHER WITH T HE ACCOUNTING EXPERTS COULD DESIRABLY EVOLVE SOME CONSENSUS FOR UNIFORM APPLICATION. IN A NY VIEW OF THE MATTER, THE SAID MINIMUM LEVEL, IN OUR VIEW, WOULD NOT BE LESS THAN 25% OF THE PHYSICAL COMPLETION, WHEREAT ONLY THE QUESTION OF REVENUE RECOGNITION WO ULD ARISE FOR CONSIDERATION. THIS WOULD BE FURTHER SUBJECT TO AN HONEST ASSESSMENT AS TO THE REALIZABILITY OF THE REVENUE HAVING REGARD TO THE VARIOUS FACTORS IMPINGING THER EON, WITH THOUGH CANNOT BE ARBITRARY, AND WHERE REQUIRED WOULD NEED TO BE SPELLED OUT, EV EN AS THE ASSESSEE WOULD DO TO HIS AUDITORS FINALIZING THE ACCOUNTS. THIS IS AS QUANTI FICATION WOULD ONLY SUCCEED AN ACTUAL ACCRUAL OF INCOME, WHICH IS AND WOULD REMAIN ESSENT IALLY A QUESTION OF FACT. THIS STAGE CAN NOT BE CONSIDERED AS HAVING ARRIVED FOR THE SEC OND PROJECT (WESTEND PALACE) AS WELL. THOUGH A SUM OF ` 72.93 LACS STANDS RECEIVED ON THIS PROJECT, IT NEED S TO BE APPRECIATED THAT OF THE SAME ` 69.35 LACS IS TOWARD LAND COST (WHICH MAY EVEN COST MORE), WHICH THOUGH DOES NOT AT ALL ADD TO THE PHYSICAL CONSTRUC TION EXECUTED. NO DOUBT, A PART OF THE PROFITS ARISING ON THE PROJECT WOULD BE ATTRIBUTABL E TO LAND COST AS WELL, BEING ONLY A PART OF THE PROJECT COST, YET THE SAME WOULD ARISE ONLY IN PROPORTION TO THE PROJECT COST COMPLETED. AS SUCH, FOR ESTIMATING THE PERCENTAGE P HYSICAL COMPLETION ON THE BASIS OF FINANCIAL COSTS, WHICH HAS THOUGH BEEN DISCOUNTED B Y US AS NOT YIELDING ACCURATE RESULTS, THE LAND COST WOULD NEED TO BE EXCLUDED. AGAIN, WE CONSIDER THAT IT IS ONLY APPROPRIATE FOR THE ASSESSEE TO DISCLOSE THE SAID MINIMUM PERCENTAG E COMPLETION BEING FOLLOWED BY IT FOR REVENUE RECOGNITION, AS ALSO THAT ATTAINED ON THE S EVERAL PROJECTS UNDER EXECUTION, AS A PART OF ITS `NOTES TO THE ACCOUNTS, INDICATING THE BASIS ON WHICH THE SAME HAS BEEN ARRIVED AT, AS ALSO THE REVENUE PROPORTION ADOPTED FOR EACH PROJECT, WHICH MAY AGAIN BEAR SOME PROVISION FOR CONTINGENCIES. I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 8 4.4 AS REGARDS THE QUESTION OF ESTIMATION OF PROFIT , I.E., 10%, OR AT 8%, AS BEING CONTENDED BY THE ASSESSEE WITH REFERENCE TO S. 44AD OF THE ACT, WE CONSIDER EITHER RATE AS ONLY NOTIONAL. THIS IS AS WE HAVE ALREADY CLARIFIED THAT INCOME, IF ANY, HAS TO BE WITH REFERENCE TO THE CONTRACTS AND THE ACTUAL COSTS INC URRED IN RESPECT OF THE PHYSICAL COMPLETION AS CONFIRMED OR CERTIFIED ON PHYSICAL/TE CHNICAL EVALUATION. AS SUCH, THERE IS NO SCOPE FOR `ESTIMATING THE SAME ON A PRE-DETERMI NED OR NOTIONAL BASIS. AS ANY OTHER BUSINESS, THE SAME IS LIABLE TO FLUCTUATE FROM TIME TO TIME, AND FROM PROJECT TO PROJECT. FURTHER, THE ACTUAL COST INCURRED WOULD ONLY BE AT VARIANCE WITH THE STANDARD COST ASSUMED WHILE WORKING OUT THE ESTIMATED PROJECT COS T AT ITS INCEPTION, AND THIS VARIANCE WOULD POSITIVELY OR NEGATIVELY IMPACT THE OPERATION AL RESULT, WHICH HAS TO BE WITH REFERENCE TO THE ACTUAL COST. WHY, WE HAVE ALSO CLA RIFIED THAT THE BUYERS OF PROPERTY WOULD BE AGREEING TO DO SO AT DIFFERENT POINTS OF T IME AND, THUS, ONLY LIABLE TO BE CHARGED A DIFFERENT SALE PRICE, CORRESPONDING TO THE STAGE OF PHYSICAL COMPLETION OF THE PROJECT AND, OF COURSE, THE MARKET POSITION AS OBTAINING IN THE REAL ESTATE INDUSTRY AT THE RELEVANT TIME. FURTHER, WHILE THE INVESTMENT IN LAND OR LAND COST COULD DEFINITELY BE EXCLUDED WHILE RECKONING THE PERCENTAGE COMPLETION OF THE PR OJECT (IF RECKONED ON THE BASIS OF FINANCIAL COST), BEING ONLY WITH REFERENCE TO THE P HYSICAL CONSTRUCTION, SO THAT IT IS INDEPENDENT OF IT, THE SAME WOULD DEFINITELY STAND TO FORM A PART OF THE PROJECT COST. THE QUESTION WHETHER THE SAME (COST OF LAND) WOULD HAVE TO BE TAKEN INTO ACCOUNT OR NOT IN THE FACTS OF A CASE, WOULD NEVERTHELESS NEED TO BE SEEN ON THE BASIS OF THE BUSINESS AND REVENUE MODEL ADOPTED. AS IT APPEARS THE AMOUNT REA LISED OR REALISABLE FROM THE CUSTOMERS INCLUDES THE COST OF LAND AS WELL, SO THA T EVEN THOUGH HE ACQUIRES RIGHTS IN LAND PER A SEPARATE AGREEMENT WITH THE LAND OWNER, THE M ONEYS ARE ROUTED THROUGH THE ASSESSEE. THE ENTRIES IN THE BOOKS OF ACCOUNTS; THE RELEVANT AGREEMENTS, AND THE BUSINESS/REVENUE MODEL, WOULD HAVE TO BE TAKEN INTO CONSIDERATION. 4.5 FINALLY, AS REGARDS THE DEDUCTION U/S. 35D OF THE ACT ALLOWED BY THE LD. CIT(A). THE CLAIM, IN OUR VIEW, IS INDEPENDENT OF ANY PROFI T THAT MAY INURE, OR THE BUSINESS RESULT FOR THAT MATTER, FROM THE RELEVANT PROJECT/S, WHICH IS THE SUBJECT MATTER OF DISPUTE BEFORE THE FIRST APPELLATE AUTHORITY. ACCORDINGLY, THE SAM E DOES NOT ARISE OUT OF THE ASSESSMENT I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 9 ORDER; THERE BEING NO CLAIM BY THE ASSESSEE IN ITS RESPECT PER HIS RETURN OF INCOME. THE PROPER COURSE FOR THE LD. CIT(A), WHERE HOWEVER HE CONSIDERS THE ASSESSEES CLAIM AS VALIDLY RAISED, AS WHERE IT IS INEXTRICABLY LINKED WITH THE ASSESSEES CLAIM ALREADY RAISED, AND THUS LIABLE FOR ADMISSION AND CONSIDERATION, AN D QUA WHICH WE OBSERVE THE REVENUE TO HAVE RAISED NO OBJECTION BEFORE HIM, IS TO CALL FOR A REMAND REPORT FROM THE ASSESSING AUTHORITY IN THE MATTER, AND DECIDE ON THAT BASIS, SO THAT THE REVENUE IS AFFORDED AN OPPORTUNITY TO VERIFY THE CLAIMS AND PLACE ITS OBJE CTIONS, IF ANY, ON RECORD. CLEARLY, THERE HAS BEEN THUS A VIOLATION OF THE PROVISIONS OF R. 4 6A, WHICH ARE MANDATORY. NO ARGUMENTS WERE ALSO RAISED BY EITHER SIDE IN THE MATTER BEFOR E US. THIS IS PERHAPS FOR THE REASON THAT BOTH THE PARTIES HAVE TREATED IT AS AN ADJUNCT TO, AND LINKED IT TO THE `INCOME FROM THE RELEVANT (WESTEND PALACE) `PROJECT, AND WHICH IS I N APPEAL. HOWEVER, AS AFORE-NOTED, THE SAID `PROJECT IS ONLY, AND THE CORRESPONDING INVES TMENT THEREIN ONLY REPRESENTS THE COST OF, THE ASSESSEES STOCK-IN-TRADE, EVEN AS APPARENT FROM THE FACT OF ITS VALUATION BY THE REVENUE AS, AS WELL AS ITS REFLECTION IN THE ASSESS EES ACCOUNTS AS, WORK-IN-PROGRESS. THAT BEING SO, AS WE SEE IT, THE ASSESSEE HAS THUS BEEN ALLOWED `DOUBLE RELIEF, I.E., AS A PART OF THE COST OF THE STOCK DEEMED SOLD DURING THE YEAR, AND THEN AGAIN AS PART OF SET-UP CAPITAL COST IN THE FORM OF `PRE-OPERATIVE EXPENSES. EVEN THE NATURE OF THE EXPENSES COMPRISING THE `PRE-OPERATIVE EXPENSES, I.E., AS TO THEIR ELI GIBILITY FOR INCLUSION WITHIN THE AMBIT OF S. 35D, HAS NOT BEEN EXAMINED. ACCORDINGLY, THE CLAIM FOR DEDUCTION U/S. 35D HAS NO NEXUS WITH, OR WE FIND NO APPARENT REASON FOR LINKING IT WITH, THE INCOME FOR THE RELEVANT YEAR, WHATEVER IT MAY BE, FROM THE `WESTEND PALACE PROJE CT. IN FACT, IT ALSO IS NOT THE CASE THAT THE ASSESSEE HAS COMMENCED A NEW BUSINESS, OR THERE HAS BEEN A COMMENCEMENT OF PRODUCTION (OR OPERATION) OF A NEW INDUSTRIAL UNDER TAKING, DURING THE CURRENT YEAR. IT IS TO PREVENT SUCH-LIKE ISSUES AND/OR SITUATIONS CROPPING UP, THAT THE LAW PRESCRIBES A PROCEDURE WHERE A CLAIM IS ADMITTED BY AN APPELLATE AUTHORITY FOR THE FIRST TIME, AND WHICH ALSO INCLUDES ITS ADMISSION BY IT. THIS IS ALL THE MORE INCUMBENT IN THE INSTANT CASE AS THE DEDUCTION U/S.35D HAS A RIPPLE EFFECT; ITS ALLOWANC E FOR ONE (THE FIRST) YEAR LEADING TO A REPETITIVE CLAIM AT THE SAME AMOUNT FOR THE FOL LOWING NINE YEARS. THOUGH THE SAME (ADMISSION) IS NOT UNDER DISPUTE, THE ISSUE (AS TO THE ELIGIBILITY TO, AS WELL AS EXTENT OF, DEDUCTION U/S. 35D) WOULD STILL HAVE TO BE DECIDED ONLY AS PER THE LAW, AND BY FOLLOWING I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 10 THE PROCEDURE LAID DOWN AS WELL AS THE PRINCIPLES O F NATURAL JUSTICE. FURTHER, IT IS THIS FINDING AS TO `DELINKING AND `DOUBLE DEDUCTION TH AT ENABLES US TO CONSIDER IT AS A SUBJECT MATTER OF APPEAL, WHICH WOULD OTHERWISE GET SUBSUME D IN OUR ADJUDICATION IN RESPECT OF THE PRINCIPAL ISSUE IN APPEAL, I.E., QUA THE ACCRUAL OF PROFIT/INCOME FROM THE SAID PROJECT , AND ITS CONSEQUENT ESTIMATION. THE MATTER WOULD THE REFORE REQUIRE BEING RESTORED TO THE FILE OF THE ASSESSING AUTHORITY FOR ADJUDICATION ON MERITS AFTER EXAMINING BOTH THE FACTUAL AND LEGAL ASPECTS OF THE MATTER, AS WELL AS HEARING THE ASSESSEE THEREON, PER A SPEAKING ORDER IN ACCORDANCE WITH LAW. WE MAY FURTHER CLARIFY THAT THE ASSES SEE HAVING BEEN ALREADY ALLOWED TOTAL RELIEF BY US IN RESPECT THE ADDITION ON ACCOUNT OF PROFITS ESTIMATED BY REVALUING ITS WIP, I.E., AT RS. 252.24 LACS, CONFIRMED BY THE LD. CIT(A), A FUR THER RELIEF IN RESPECT OF DEDUCTION U/S. 35D, IF AND TO THE EXTENT ALLOWED BY THE AO ON MERITS , WOULD RESULT IN THE ASSESSEES INCOME FALLING BELOW THAT RETURNED. THE REVENUE UND ER SUCH INSTANCES HAS BEEN OBSERVED TO DENY THE ASSESSEE REFUND OF TAX PAID BY ADVERTIN G TO THE DECISION IN THE CASE OF CIT V . SHELLY PRODUCTS & ANR. , 261 ITR 367 (SC), AND WHICH MAY GIVE RISE TO ANOT HER BOUT OF LITIGATION. WE WISH TO THEREFORE BRING ON RECORD TH E CONSISTENT VIEW OF THIS TRIBUNAL, THAT THE REFUND ARISING OUT OF THE PROCEEDINGS UNDER THE ACT CANNOT BE WITHHELD. IT IS ONLY THE TAX LIABLE ON THE INCOME AS FINALLY ASSESSED, FOLLO WING THE DUE PROCESS OF LAW, AND/OR THE INTEREST LEVIABLE IN RESPECT THEREOF UNDER THE DIFF ERENT PROVISIONS OF LAW, TO WHICH THE ASSESSEES LIABILITY UNDER LAW EXTENDS TO, AND WHIC H CAN ONLY THEREFORE BE LEGALLY RECOVERED FROM HIM IN TERMS OF ART. 265 OF THE CONS TITUTION OF INDIA. REFERENCE IN THIS CONTEXT IS MADE TO THE THIRD MEMBER DECISION BY THI S TRIBUNAL IN THE CASE OF ASST. CIT, PALAKKAD V. RUBFILA INTERNATIONAL LTD . (IN ITA NO.985/COCH/2008). THE DECISION IN THE CASE OF CIT V. SHELLY PRODUCTS (SUPRA) STANDS DISCUSSED AND EXPLAINED THEREIN. NE EDLESS TO ADD, WE ARE ISSUING THIS CLARIFICATION ONLY AS A MATTER OF ABUNDANT CAUTION, AND SHOULD NOT BE CONSTRUED AS HAVING PRE-DECIDED THE ISSUE AS REGARDS THE DEDUCTION U/S. 35D, WHICH SHALL HAVE TO BE DECIDED ON ITS OWN MERITS; OF COUR SE, KEEPING IN VIEW AND HAVING REGARD TO OUR OBSERVATIONS AFORE-STATED, RAISING PERTINENT ISSUES, WHICH WOULD NEED TO BE ADDRESSED. WE DECIDE ACCORDINGLY. I.T.A. NO. 231/COCH/2011 GOPI MOOTHEDATH VS. ITO, THRISSUR 11 5. UNDER THE CIRCUMSTANCES, WE ONLY CONSIDER THAT THERE IS NO OCCASION TO INTERFERE WITH THE INCOME AS DISCLOSED BY THE ASSESSEE PER IT S RETURN OF INCOME, AND ESTIMATION OF NOTIONAL PROFIT EARNED THEREON. THE ISSUE QUA DEDUCTION U/S. 35 D WOULD, AS AFORE-STATED, BE REQUIRED TO BE ADJUDICATED INDEPENDENTLY. WE DEC IDE ACCORDINGLY. 6. IN THE RESULT THE ASSESSEEES APPEAL IS PAR TLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (N.R.S.GANESAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 27TH DECEMBER, 2011 GJ COPY TO: 1. SHRI GOPI MOOTHEDATH, PROP. INLAND PROPERTIES & DEVELOPERS,MARAVANCHERY LANE, PUNKUNNAM, THRISSUR - 680 002. 2. THE INCOME TAX OFFICER, WARD-2, RANGE-1, THRISSU R - 680 001. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-V, KOCH I. 4. THE COMMISSIONER OF INCOME-TAX, TRICHUR. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE .