M/S. BHAVESHWAR PROPERTIES PRIVATE LIMITED ,MUMBAI V. INCOME TAX OFFICER, CIRCLE 14(1)(3), MUMBAI, MUMBAI

ITA 688/MUM/2022

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The case involves M/s. Bhaveshwar Properties Private Limited, a builder and developer, appealing against the order of the CIT(A) which confirmed the Income Tax Officer's decision to recognize income from the Neelkanth Enclave project for the Assessment Year 2013-14. The primary contention was whether the 'booking advance' received for certain flats should be considered as part of the 'saleable area covered by the contracts or agreements' for recognizing revenue under the Percentage Completion method. The Tribunal examined the nature of the booking advances and found that they did not transfer significant risks and rewards of ownership to the buyers, thus should not be included in the saleable area for revenue recognition. The Tribunal also addressed issues of double taxation regarding compensation income and the separate addition of other income, which was found to be redundant as it was already included in the business income.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 471322 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Laws Referred To: Guidance Note on Accounting for Real Estate Transactions (Revised 2012)
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Set aside; Business income; Difference of opinion

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “B” BENCH : MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA No. 688/Mum/2022 Assessment Year : 2013-14 M/s. Bhaveshwar Properties Private Limited, 5th Floor, Fine House, Anandji Lane, M.G. Road, Rajawadi, Mumbai PAN : AAACB1619B vs. Income Tax Officer, Circle-14(1)(3), 4th Floor, Aayakar Bhavan, M.K. Marg, Mumbai (Appellant) (Respondent) For Assessee : Shri Nitesh Joshi For Revenue : Ms. Monika H. Pande Date of Hearing : 29-01-2025 Date of Pronouncement : 05-02-2025 PER B.R. BASKARAN, A.M : The assessee has filed this appeal challenging the order dated 14-03-2022 passed by the Ld CIT(A), NFAC, Delhi and it relates to the Assessment Year (AY.) 2013-14. 2. The assessee is a builder and developer. During the year under consideration, it was developing two residential projects, viz., Neelkanth 2 ITA No. 688/Mum/2022 Enclave and Bhaveshwar Arcade. The assessee is following Percentage Completion method for recognizing the revenue. 3. The first issue relates to the determination of percentage of completion in respect of “Neelkanth Enclave” project. Both the parties have followed the revised guidelines issued by Institute of Chartered Accountants of India (ICAI) for the purpose of determining the percentage of completion and consequent recognition of income. However, there is difference of opinion between the assessee and the AO with regard to the “percentage of saleable area” covered by the Contracts or Agreements. As per the Guidance note issued by ICAI, the revenue need not be recognized in a project only if the saleable area secured by the contracts or agreement is less than 25% of the total saleable area. 4. It is the contention of the assessee that the actual saleable area covered by the Contracts or Agreements for the year ending 31-03-2013 was 34,398 Sq. ft., as against the total saleable area of 1,43,559 sq.ft. Hence the saleable area covered by the contracts or agreement works out to 23.96% only and hence no revenue could be recognized for the year under consideration. It is submitted that the assessee has offered income in the subsequent years on the basis of contract or agreement entered into in those subsequent years. 5. However, the AO noticed that the assessee has also received booking advance for sale of certain flats and the assessee did not consider the same, while computing the saleable area covered by the contract or agreement. The AO, accordingly, recomputed the saleable area covered by the contract or agreement at 44,343 sq.ft., which worked out to 33.78%, i.e., more than 25% of the total saleable area. Accordingly, the AO recognized income from the Neelkanth Enclave project at Rs.2,52,22,000/-. The Ld CIT(A) also confirmed the same. 3 ITA No. 688/Mum/2022 6. We notice that the only question that arises for our consideration is whether the “booking advance” received by the assessee in respect of certain flats would fall under the category of “saleable area covered by the contracts or agreements” or not? As per the Guidance Note on Accounting for Real Estate Transactions (Revised 2012), revenue from a project could be recognized, if the conditions mentioned in paragraph 5.3 of the Guidance note are satisfied. The said conditions, inter alia, include a condition that “Atleast 25% of the saleable project area is secured by contracts or agreements with the buyers”. Further, paragraph 3.3 of the Guidance Notes mentions that the revenue should be recognized at that point of time at which all significant risks and rewards of ownership can be considered as transferred. It is further mentioned that the agreement for sale is considered to have the effect of transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable.. 7. In respect of booking advance received from a customer, the assessee has issued a letter, which is confirmed by the confirmed buyer. A sample copy of such letter is placed at pages 2 to 4 of paper book No.2 filed by the assessee. The Ld A.R submitted that the booking advance is received from a customer only for reserving a particular flat for the said customer. It does not significantly transfer the risks and rewards to him. He invited our attention to the specific recitals made in the said letters. On a perusal of the same, we notice that it is specifically stated in that letter as under:- (i) As requested by you, we have „provisionally reserved‟ Flat No.803 as shown in the plan annexed hereto… (ii) Please note that the aforesaid flat is provisionally reserved for you. In case you fail to pay any installments or fail to enter 4 ITA No. 688/Mum/2022 into the Agreement within the stipulated period as stated above, the aforesaid reservation shall stand cancelled and you shall not have any claim of whatsoever nature against us. (iii) Please further note that this reservation made hereunder is personal and is neither transferable nor assignable. The above said clauses would show that the parties have well understood that the buyers only get reservation of a particular flat on paying the booking advance and no legal rights for transferring or assigning the said property is given to the buyers. The Ld A.R also submitted that some of the buyers have changed the flat, when the actual agreement was entered. For example, a buyer booked flat No.704 by paying booking advance, but finally bought flat No.804. Similarly, another buyer booked flat no.1203, but shifted to 1202, meaning thereby, the letter issued on receipt of booking advance does not create any right over the flats. Further, the same is also flexible in the sense, the buyers could change the flats, which is not possible if the agreement or contract is registered. 8. We noticed that the guidance note specifically mentions that the “saleable area covered by the contract or agreement” has to be taken into consideration for determining the percentage of completion. It is further stated that the agreement should have the effect of transferring all significant risks and rewards to the buyers. A perusal of the letter issued at the time of receipt of booking advance would show that the same is received for reserving a particular flat with specific condition that no legally enforceable right is created for transferring or assigning the reservation of the flat. Hence, the buyers do not get any legally enforceable right upon giving the booking amount. Accordingly, we are of the view that there is merit in the submission of the assessee that AO was not right in law in taking into consideration the booking advance received by the 5 ITA No. 688/Mum/2022 assessee, as it cannot be said that the said „booking advance‟ will fall under the category of „contract or agreement legally enforceable‟. There is no dispute with regard to the fact that, if the booking advance received by the assessee is excluded, then the actual area sold by the assessee, which are covered by the contract or agreement will be less than 25%. In that case, there was no requirement of recognizing any income in this year. Accordingly, we hold that the AO was not right in recognizing income in this year in respect of Neelkanth Enclave Project. 9. In view of the foregoing, we set aside the order passed by the Ld CIT(A) on this issue and direct the AO to delete the addition made by him in respect of income estimated from the above said project. 10. The next issue relates to the addition of compensation income of Rs.1,41,31,004/-. It is the submission of the assessee that the assessee had already offered the above said amount to taxation by way of reducing the same from “Other construction expenses” falling under the head “Project Development and Construction Expenses” explained in Note no.15 of the Annual report. The note no.15 is placed at page 47 of the Paper book No.1. The details of “Other construction expenses” are placed at page 308 of the paper book. It is noticed from the details of “Other construction expenses” given at page 308 that the compensation amount of Rs.1,41,31,004/- has already been reduced and the net amount of „other construction expenses‟ is carried to the profit and loss account. In that case, there was no necessity to make addition of the very same amount. Accordingly, we are of the view that the tax authorities have fell into error in making the addition of compensation amount again, as it resulted in double taxation of very same income. Accordingly, we set aside the order passed by the Ld CIT(A) on this issue and direct the AO to delete the addition of compensation amount mentioned above. 6 ITA No. 688/Mum/2022 11. The last issue relates to addition of „other income‟ of Rs.22,99,952/-. We noticed that the AO had estimated the project income under percentage completion method at Rs.2,52,22,000/-. The profit and loss account of the assessee disclosed other income of Rs.22,99,952/- separately and accordingly, the AO added the said sum separately, while computing the total income. The Ld CIT(A) also confirmed the same. It is the submission of the assessee that the other income of Rs.22,99,952/- also formed the part of business income declared by the assessee. The said business income has been substituted by the AO and hence there is no requirement of making separate addition of Rs.22,99,952/-. In the earlier paragraphs, we have held that there was no requirement of estimating income from Neelkanth Enclave project, meaning thereby, the addition made by the AO in respect of the said project was deleted by us. Hence, the AO shall be computing the total income as returned by the assessee. Hence, this grievance of the assessee would get automatically redressed while passing the order for giving effect to this order of the Tribunal. 12. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 05-02-2025 Sd/- Sd/- [SANDEEP SINGH KARHAIL] [B.R. BASKARAN] JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 05-02-2025 TNMM 7 ITA No. 688/Mum/2022 Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT, Mumbai 5) Guard file By Order Dy./Asst. Registrar I.T.A.T, Mumbai "