When assessee follows project completion method as per AS-7, it is entitled to set off receipts from sale of TDR against costs of work-in-progress and such amount taxable in the year of receipt

ACIT Vs M/s Skylark Build (ITAT Mumbai)– Approach adopted by the Assessing Officer for assessing the income from TDR independently without deducting the expenses incurred is not justified. The assessee has been following project completion method which is an accepted method of accounting in construction business and also recommended as per accounting standard AS-7 of ICAI. Therefore, in such cases the income from the project has to be computed in the year of completion.

The TDRs received are directly linked to the execution of the project and therefore, before the completion of the project the income from TDR or any other receipt inextricably linked to the project will only go to reduce costs of the project. Therefore, in our view the assessee had rightly set off TDR received against work-in-progress. The addition made by the Assessing Officer in 2006-07 on account of TDR receipt is not justified. Further even if TDR receipt is assessed as independent item, deduction has to be allowed on account of the expenses incurred. The TDRs have been received in lieu of handing over of constructed transit buildings and therefore, cost of those buildings has to be deducted against income from sale of TDR. The cost of the buildings is claimed to be more than income from TDR, full details of which were given to the CIT(A) and therefore, even on this ground no income can be assessed in case of the assessee. In the Assessment Year 2006-07, the project was not complete and there is no dispute about this fact. Therefore, in Assessment Year 2006- 07, TDR received has to be set off against WIP and cannot be assessed separately as income. We therefore, confirm order of CIT(A) deleting the addition made in Assessment Year 2006-07.   The position regarding Assessment Year 2007-08 is not clear. The Assessing Officer has not given any finding regarding the year of completion of the project. Though the CIT(A) has held that the project was completed in Assessment Year 2007-08, he has not given any basis of such finding not any such specific plea was taken by the assessee before CIT(A). This aspect therefore requires verification. The construction of the transit buildings was only a part of the project. The actual year of completion of the project is required to be verified. We therefore, restore this aspect to the file of the Assessing Officer for fresh order. In case on verification it is found that the project was completed in 2007-08, Assessing Officer will compute the income from project after taking into account entire expenditure and the receipts from the beginning of the year including the TDRs s directed by CIT(A). However, in case the project is not found complete, the Assessing Officer will set off TDR receipts against work in progress and no income will be assessed on account of TDR receipts separately. We direct accordingly.

The Asst. Commissioner of Income Tax Vs. Skylark Build

ITAT Mumbai

ITA No. 4307/Mum/2009

Assessment Year: 2006- 07

ITA No. 4308/Mum/2009

Assessment Year: 2007- 08