MAITRI DEVELOPERS, MUMBAI V. ITO 15(1)(3), MUMBAI

ITA 2819/MUM/2010

• Counselvise Citation: 281919914 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 28-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 09-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY SHANKAR SR
• Assessee Lawyers: AJAY R SINGH; DR K SHIVARAM
• Keywords: Business income; Depreciation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI. BEFORE SHRI R.V.EASWAR, PRESIDENT AND SHRI R.K.PANDA, ACCOUNTANT MEMBER I.T.A. NO.2819/MUM/2010 (ASSESSMENT YEAR : 2006-07) M/S. MAITRI DEVELOPERS, A/103/104, HAVELI APARTMENTS, NAVNIR PRABHA HAVELI COMPOUND, M.G.ROAD, GHATKOPAR(E), MUMBAI-400 077. PAN:AAJFM8726E VS. THE INCOME TAX OFFICER, WARD-15(1)(3), MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : DR.K.SHIVARAM & MR.AJAY R.SINGH RESPONDENT BY : MR. VIJAY SHANKAR, SR.AR O R D E R PER R.V.EASWAR, PRESIDENT: THIS IS AN APPEAL FILED BY THE ASSESSEE AND IT RELATES TO THE ASSESSMENT YEAR 2006 -07. THE ASSESSEE IS A PARTNERSHIP FIRM CARRYING ON BUSINESS IN MUMBAI AS BUILDER-DEVELOPER. THE APPEAL ARISES OUT OF THE ASSESSMENT ORDER PASSED ON 22-12-2008 U/S.143(3) OF THE IT ACT . 2. THE ONLY GROUND IN THIS APPEAL RELATES TO THE AS SESSMENT OF THE BUSINESS INCOME OF THE ASSESSEE. THE DISPUTE ARISES THIS WAY. IN THE RETURN OF INCOME THE ASSESSEE SHOWED WO RK-IN- PROGRESS RELATING TO IS MATUNGA PROJECT AT RS.4,88, 30,226 WHICH INCLUDED THE YEARS WIP OF RS.2,73,69,050. THE ASSE SSEE HAD ALSO RECEIVED ADVANCES OF RS.4,48,33,003 IN RESPECT OF THE PROJECT DURING THE PREVIOUS YEAR. WHILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFICER NOTICED THAT NEIT HER IN THIS YEAR NOR IN THE ASSESSMENT YEARS 2005-06 AND 2007-0 8 HAD THE ASSESSEE DECLARED ANY PROFIT FROM THE SAID PROJECT FOR PURPOSES OF THE INCOME-TAX ASSESSMENT. HE OBSERVED THAT IN T HE PREVIOUS YEAR ENDED 31-3-2007, RELEVANT TO THE ASSESSMENT YE AR 2007-8 ITA NO.2819/MUM/10 2 THE TOTAL COST OF THE PROJECT WAS SHOWN AT RS.5,87, 85,212 OUT OF WHICH THE ASSESSEE HAD INCURRED RS.4,88,30,226 DURI NG THE YEAR ENDED 31-3-2006 WHICH IS THE YEAR UNDER APPEAL AND THUS ABOUT 83% OF THE TOTAL COST OF THE MATUNGA PROJECT HAD BEEN INCURRED IN THE YEAR UNDER APPEAL. THE ASSESSEE HAD ALSO RECEIVED SUBSTANTIAL ADVANCES DURING THE SAID YEAR. THE ASSESSING OFFICER, ON THESE FACTS, CALLED UPON THE ASSESSEE TO SHOW CAUSE WHY THE PROFIT FROM THE PROJECT SHOULD N OT BE BROUGHT TO ASSESSMENT IN THE YEAR UNDER APPEAL. 3. THE ASSESSEE SUBMITTED DETAILED OBJECTIONS TO TH E SAID PROPOSAL OF THE ASSESSING OFFICER. IT WAS POINTED O UT THAT THE ASSESSEE WAS NOT A CONTRACTOR AND THEREFORE THE REV ISED ACCOUNTING STANDARS-7 DID NOT APPLY AND THE ASSESSE E WAS NOT OBLIGED TO DECLARE ANY PROFITS IN THE ASSESSMENT YE AR UNDER APPEAL, THAT THE ASSESSEE HANDED OVER POSSESSION OF THE FLATS TO ALL THE BUYERS AFTER 31-3-2006, THAT THE PROFIT FRO M THE PROJECT WAS DECLARED IN THE RETURN FOR THE ASSESSMENT YEAR 2007-08 AND THEREFORE THERE WAS NO OBLIGATION TO DECLARE ANY IN COME FROM THE PROJECT IN THE YEAR UNDER APPEAL. 4. THE ASSESSING OFFICER REJECTED THE ASSESSEES CO NTENTIONS. HE HELD THAT AS-7 EQUALLY APPLIED TO A BUILDER/DEVE LOPER AS IT APPLIED TO A CONTRACTOR BECAUSE IN A SENSE THE BUIL DER/DEVELOPER IS ALSO A CONTRACTOR HAVING ENTERED INTO A CONTRACT WITH THE TENANT/PURCHASER TO WHOM HE IS ANSWERABLE. AS REGAR DS THE CLAIM OF THE ASSESSEE THAT THE SALE OF THE FLATS IS TAKEN COGNIZANCE OF ONLY AT THE TIME OF DELIVERY OF POSSE SSION, THE ASSESSING OFFICER OBSERVED THAT 13 BUYERS (LIST GIV EN IN THE ASSESSMENT ORDER) HAD GIVEN THE FULL AMOUNT OF THE AGREEMENT (I.E., RS.3,04,12,000) WHICH MEANS THAT THE DEAL WA S OVER AT LEAST WITH REGARD TO THESE PERSONS IRRESPECTIVE OF THE GRANT OF POSSESSION AND IN CASES WHERE THE FULL CONSIDERATIO N WAS RECEIVED THERE IS NO JUSTIFICATION FOR POSTPONING T HE DECLARATION ITA NO.2819/MUM/10 3 OF PROFITS. ACCORDING TO THE ASSESSING OFFICER, BY DELAYING THE HANDING OVER OF POSSESSION THE ASSESSEE CAN POSTPON E ASSESSMENT OF THE PROFITS WHICH CANNOT BE PERMITTED . HE HELD THAT THE MORE APPROPRIATE CRITERION WOULD BE TO SEE IF THE BUYER HAS MADE FULL PAYMENT OF THE PRICE OF THE FLAT AND IF HE HAS PAID IT, THE ASSESSEE IS BOUND TO DECLARE THE PROFIT ON THE SALE OF THE FLAT NOTWITHSTANDING THAT POSSESSION WAS NOT HANDED OVER TO THE BUYER. HE ALSO NOTED THAT IT IS USUAL FOR THE BUYER TO MAKE FULL PAYMENT ONLY WHEN POSSESSION IS TAKEN, IMPLYING THA T AT LEAST IN RESPECT OF THE 13 PERSON WHO HAVE MADE FULL PAYM ENT THE ASSESSEE MUST HAVE HANDED OVER POSSESSION. 5. THE ASSESSING OFFICER THEREAFTER PROCEEDED TO OB SERVE THAT IN RESPECT OF A SINGLE VENTURE, AS IN THE CASE OF T HE ASSESSEE, EACH YEAR MUST BE TAKEN AS A SEPARATE UNIT AND BY N OT SELLING A SMALL PORTION OF THE PROPERTY AN ASSESSEE CAN ALWAY S CONTEND THAT THE PROJECT IS NOT COMPLETE AND THUS NOT DECLA RE THE PROFIT FOR A LONG TIME OR POSTPONE THE PAYMENT OF TAXES FO R A CONSIDERABLE TIME. 6. THE ASSESSING OFFICER ALSO REFERRED TO THE ORDER OF THE BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF CHAMPIO N CONSTRUCTION CO VS ITO (5 ITD 495) IN SUPPORT OF HI S VIEW. HE ESTIMATED THE PROFIT AT 8% OF THE RECEIPTS OF RS.3, 04,12,000 FROM THE 13 PERSONS WHICH CAME TO RS.24,32,960 AND BROUG HT THE SAID AMOUNT TO ASSESSMENT. 7. THE ASSESSEE APPEALED TO THE CIT(A) CHALLENGING THE ASSESSMENT ORDER. THE CIT(A) UPHELD THE ASSESSMENT ON THE FOLLOWING GROUNDS: A) THE ASSESSEE OUGHT TO HAVE DECLARED PROFIT AT LEAST IN RESPECT OF THE SALE OF THE FLATS TO THE 13 PERSONS DESPITE FOLLOWING THE PROJECT COMPLETION METHOD. THE ASSESS EE ITA NO.2819/MUM/10 4 WAS NOT RIGHT IN RELYING ON ACCOUNTING STANDARD 9 TO CONTEND THAT A PERSON FOLLOWING THE ABOVE METHOD WA S BOUND TO DISCLOSE THE PROFIT FROM THE PROJECT ONLY ON COMPLETION OF THE PROJECT. B) ABOUT 80% OF THE PROJECT WAS COMPLETE IN THE YEAR U NDER APPEAL AND 13 PERSONS HAD GIVEN THE FULL PRICE OF T HE FLATS. THE ASSESSEE OUGHT TO HAVE RECOGNIZED THE REVENUE F ROM THESE FLATS. C) THE PROJECT WAS APPROVED BY THE BOMBAY MUNICIPAL CORPORATION BY LETTER DATED 20.7.2004, THE ESTIMATE D COST AS PER ARCHITECTS CERTIFICATE DATED 1-4-2006 WAS A BOUT RS.5 CRORES, THE CERTIFICATE WAS SUBMITTED BY THE A SSESSEE TO THE BMC AUTHORITIES ON 24-4-2006 FOR FORMAL APPR OVAL AND ALL THIS MEANT THAT THE PROJECT WAS COMPLETED E VEN BEFORE THE ABOVE DATE. THIS PROVES THAT A SUBSTANTI AL PART OF THE CONSTRUCTION WAS COMPLETED BEFORE 31-3-2006. D) THE ASSESSING OFFICERS WORKING OF THE PROFITS IS N OT AN ESTIMATE, BUT IT IS BASED ON THE ACTUAL SALE PRICE RECEIVED FROM 13 PARTIES WHO HAVE PAID THE FULL CONSIDERATIO N. THEY WOULD NOT HAVE PAID THE FULL PRICE IF THE FLATS WER E NOT COMPLETE IN ALL RESPECTS. E) EVEN THE RATE OF 8% ADOPTED BY THE ASSESSING OFFICE R IS FAIR AND REASONABLE, CONSIDERING THE LOCATION (MATU NGA) WHICH IS FULL OF COMMERCIAL AND RESIDENTIAL ESTABLISHMENTS, MARKETS, ETC. IN THE LIGHT OF THE ABOVE FINDINGS, THE CIT(A) UPHE LD THE ASSESSMENT OF THE PROFIT OF RS.24,32,960/-. 8. THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRI BUNAL. IT IS WELL-SETTLED THAT THE COMPLETION OF THE PROJECT M ETHOD OF DECLARING PROFITS, IN THE CASE OF A BUILDER/DEVELOP ER, IS A RECOGNIZED METHOD OF ACCOUNTING. THERE IS NO DOUBT THAT THE ASSESSEE IS FOLLOWING THE SAID METHOD. IT IS RECOGN IZED BY THE AS- ITA NO.2819/MUM/10 5 7. IN PARA.3 (NOT NUMBERED) OF THE ASSESSMENT ORDER (FIRST PAGE) FOR THE YEAR UNDER APPEAL, THE ASSESSING OFFICER HI MSELF REFERS TO THE FACT THAT THE ASSESSEE IS FOLLOWING THE PROJECT COMPLETION METHOD AND THAT THE MATUNGA PROJECT WAS COMMENCED D URING THE YEAR ENDED 31-3-2005. EVEN IN THE ASSESSMENT O RDER FOR THE ASSESSMENT YEAR 2005-06 (COPY FILED) THE ASSES SING OFFICER, WHILE EXAMINING THE RETURN, WOULD APPEAR TO HAVE AS KED THE ASSESSEE BY LETTER DATED 15-11-2007 (PAGE 112 OF TH E PAPER BOOK) AS TO WHY REVENUE SHOULD NOT BE TAKEN CREDIT ON THE BASIS OF PERCENTAGE COMPLETION METHOD SINCE IN THAT YEA R 26% OF THE PROJECT HAD BEEN COMPLETED. ON BEING INFORMED (BY L ETTER DATED 22-11-2007 AT PAGE 113 OF THE PAPER BOOK) THAT THE ASSESSEE IS FOLLOWING THE PROJECT COMPLETION METHOD, THE ASSESS ING OFFICER DID NOT PURSUE THE MATTER FURTHER AND ACCEPTED THE ASSESSEE TO CARRY FORWARD THE WORK-IN-PROGRESS. IN ACCORDANCE W ITH THE METHOD ADOPTED BY THE ASSESSEE, HE HAS SHOWN THE PR OFIT FROM THE MATUNGA PROJECT IN THE RETURN FILED FOR THE ASS ESSMENT YEAR 2007-08. A PERUSAL OF THE RETURN (PAGES 68-93 OF TH E PAPER BOOK) SHOWS THAT AFTER CLAIMING DEPRECIATION AND RE MUNERATION PAID TO PARTNERS THE PROFIT FROM THE PROJECT HAS BE EN SHOWN AT RS.14,69,036; BEFORE THESE DEDUCTIONS, THE PROFIT I S RS.23,90,873/-. THESE FACTS HAVE ALSO BEEN POINTED OUT TO THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS FOR THE YEAR UNDER APPEAL, VIDE LETTER DATED 14-7-2008, A C OPY OF WHICH IS PLACED AT PAGES 31-32 OF THE PAPER BOOK. 9. THE PROJECT (MAITRI HEIGHTS) WAS COMPLETED ON 24-4- 2006, DURING THE PREVIOUS YEAR RELEVANT TO THE ASSE SSMENT YEAR 2007-08. THE COPY OF THE LETTER DATED 3-5-06 WRITTE N BY THE EXECUTIVE ENGINEER OF MCGB TO THE ASSESSEES ARCHIT ECT SHOWS THAT THE COMPLETION CERTIFICATE WAS SUBMITTED ON 24 -4-2006, WHICH DATE FALLS WITHIN THE YEAR ENDED 31-3-2007, R ELEVANT TO THE ASSESSMENT YEAR 2007-08. THE LETTER OF THE EXEC UTIVE ITA NO.2819/MUM/10 6 ENGINEER SAYS THAT THE CERTIFICATE HAS BEEN ACCEPTE D, SUBJECT TO SUBMISSION OF CERTIFICATE U/S.270A OF THE MMC ACT W ITHIN 3 MONTHS. 10. SO FAR AS THE HANDING OVER OF THE POSSESSION IS CONCERNED, THE ASSESSEE HAS PLACED THE COPIES OF THE LETTERS F ROM PAGE 53 ONWARDS. A PERUSAL THEREOF SHOWS THAT IN ALL CASES POSSESSION HAS BEEN HANDED OVER AFTER 31-3-2006, MOSTLY IN THE MONTHS OF MAY, JUNE AND EVEN NOVEMBER 2006. PAGE 103 OF THE P APER BOOK IS A CERTIFICATE ISSUED BY THE HYDRAULIC ENGIN EERS DEPARTMENT OF THE BRIHANMUMBAI MAHANAGARAPALIKA ON 20-6- 2006, TO THE EFFECT THAT ADEQUATE WATER SUPPLY HAS BEEN PROVIDED IN THE PREMISES. THUS, EVEN THE WATER SUPP LY HAS BEEN GIVEN ONLY IN THE PREVIOUS YEAR ENDED 31-3-2007, RE LEVANT TO THE ASSESSMENT YEAR 2007-08. IT CANNOT BE POSTULATED TH AT POSSESSION WAS HANDED OVER LONG BEFORE THE WATER SU PPLY WAS PROVIDED. 11. THE LEARNED SR.DR POINTED OUT FROM THE DETAILS GIVEN IN PAGE 34 OF THE PAPER BOOK THAT SOME FLATS HAD BEEN REGISTERED IN THE NAMES OF THE BUYERS IN THE YEARS 2004 AND 2005 AND EVEN IN RESPECT OF THESE FLATS IT CANNOT BE SAID THAT IN COME DID NOT ACCRUE TO THE ASSESSEE. WE HAVE SEEN THE LIST. THER E ARE ONLY 6 SUCH CASES 5 IN WHICH REGISTRATION WAS COMPLETED IN 2005 AND 1 IN WHICH IT WAS COMPLETED IN 2004. THERE ARE TOTA LLY 40 FLATS. REGISTRATION HAS NOT BEEN TAKEN AS CONCLUSIVE AS TO THE ASSESSABILITY OF THE INCOME BECAUSE IT IS THE PROJE CT AS A WHOLE THAT HAS TO BE TAKEN INTO CONSIDERATION. EVEN THE A SSESSING OFFICER DID NOT GO BY THE YEAR OF REGISTRATION OF T HE FLATS, AND RIGHTLY SO, BECAUSE BY NOT REGISTERING THE FLATS ON E CAN DELAY THE TAXATION OF THE PROFITS WHICH CANNOT BE PERMITTED. ONLY TWO METHODS ARE RECOGNIZED: THE PROJECT COMPLETION METH OD AND THE PERCENTAGE ON THE COMPLETION METHOD. REGISTRATION O F THE FLATS ITA NO.2819/MUM/10 7 HAS NEVER BEEN CONSIDERED TO BE AN EFFECTIVE CRITER ION FOR ASSESSMENT OF THE PROFITS FROM THE HOUSING PROJECTS . 12. ANOTHER POINT MADE BY THE LEARNED SR.DR WAS THA T THE LETTER OF THE EXECUTIVE ENGINEER REFERRING TO THE C OMPLETION CERTIFICATE DATED 24-4-2006 MIGHT BE INDICATIVE OF THE FACT THAT EVEN ON 31-3-2006 THE PROJECT WAS SUBSTANTIALLY COM PLETED. THERE IS SOME FORCE IN THE POINT, BUT WHEN WE TAKE INTO ACCOUNT THE FACT THAT THE POSSESSION HAS BEEN HANDED OVER O NLY IN MAY, JUNE AND NOVEMBER 2006 COUPLED WITH THE CONFIRMATIO N FROM THE WATER SUPPLY AUTHORITIES IN JUNE 2006 THAT ADEQ UATE SUPPLY TO THE PREMISES HAS BEEN ENSURED, IT WOULD APPEAR T HAT IT CANNOT BE CATEGORICALLY ASSERTED THAT THE PROJECT W AS FULLY OR SUBSTANTIALLY COMPLETED IN THE YEAR ENDED 31-3-2006 . WHAT CLINCHES THE ISSUE IN FAVOUR OF THE CLAIM THAT THE PROJECT WAS COMPLETED IN THE YEAR ENDED 31-3-2007 (ASST.YEAR 20 07-08) IS THAT THE PROJECT ACCOUNT (PAGE 89 OF THE PAPER BOOK ) FOR THE YEAR ENDED 31-3-2007 SHOWS, IN ADDITION TO THE OPENING W ORK-IN- PROGRESS OF RS.4,88,30,226, PURCHASES AMOUNTING TO RS.53,25,795 WHICH IS QUITE SUBSTANTIAL. IF IN THE NEXT YEAR THE ASSESSEE HAD TO BUY MATERIALS FOR SUCH A SUBSTANTIA L AMOUNT, WHICH APPROXIMATES TO 11% OF THE OPENING WORK-IN-PR OGRESS, IT STANDS TO REASON THAT THE PROJECT MIGHT HAVE BEEN C OMPLETED ONLY IN THE YEAR ENDED 31-3-2007. FURTHER, IN THAT YEAR THE SALE PRICE RECEIVED BY THE ASSESSEE AS PER THE PROJECT A CCOUNT WAS RS.6,09,12,002 WHICH IS TWICE THE AMOUNT OF SALE PR ICE RECEIVED BY THE ASSESSEE IN THE YEAR UNDER APPEAL. 13. FOR THE ABOVE REASONS, WE ACCEPT THE CONTENTION S OF THE ASSESSEE. THE ALTERNATIVE PLEA OF THE ASSESSEE THAT IN CASE THE ADDITION IS CONFIRMED IN THE YEAR UNDER APPEAL, DIR ECTIONS SHOULD BE ISSUED FOR DELETION OF THE PROFITS FROM T HE PROJECT IN ITA NO.2819/MUM/10 8 THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2007- 08 BECOMES INFRUCTUOUS. 14. THE APPEAL IS ALLOWED WITH NO ORDER AS TO COSTS. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF MAY , 2011. SD/- ( R.K. PANDA ) SD/- ( R.V.EASWAR ) ACCOUNTANT ME MBER PRESIDENT MUMBAI, DATED 20 TH MAY, 2011. SOMU COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-15, MUMBAI. 4. THE CIT(A)-26, MUMBAI 5. THE DR F BENCH /TRUE COPY/ BY ORDE R ASSTT. REGISTRAR, I.T.A.T, MUMBAI