Ashoka Hi-Tech Builders Pvt. Ltd Vs DCIT (ITAT Indore)
In this Case ITAT Indore explains Entire law on taxation of real estate construction contracts in the context of ‘completed contract’ vs. ‘percentage completion’ with reference to Accounting Standards AS-7 and AS-9 and all important judgements on the issue. ITAT further explained Provisions of S. Section 43CB and Section 145 of Income Tax Act, 1961.
FULL TEXT OF THE ITAT JUDGMENT
These two appeals filed by the assessee pertaining to the A.Y. 2012-13 & 2013-14 are directed against the order of ld. Commissioner of Income-tax (Appeals)-III, Indore dated 30.03.2016 which is arising out of the order u/s 143(3) of the Income Tax Act dated 24.3.2015 passed by DCIT (Central)-1,Indore.
2. The assessee has raised following grounds of appeals for Assessment Year 2012-13;
1. That the Learned CIT(A) has erred in law in confirming the addition of 16,12,34,754/- made by Adopting and applying the method of accounting followed by a different assessee M/s JSMDevcons Pvt.Ltd with whom the appellant had merely entered into contract for development of the land belonging to the appellant company. The AO and CIT(A) failed to see that the appellant’s income had to be assessed as per the method of accounting regularly followed by it and the AO could not change the appellant’s method of accounting on the basis of the method followed by another assessee. The authorities below have also erred in applying the accounting standards AS-7 which are applicable to developers without appreciating the fact that appellant is not the developer but is land owner.
2. The Learned CIT(A) as also the AO failed to see that the income arising out of the development agreement between the appellant and the developer M/s JSM Devcons Pvt Ltd would accrue in the hands of the appellant only when the appellant’s right to get the 32% constructed area under the Development Agreement would crystalli2e as per the terms of the development agreement between the parties, according to which appellant is entitled to receive 32% area on completion of the construction of that area correspondingly the method of accounting to recognize the revenue only on execution and registration of Sale Deed in favour of buyer i.e. the method to recognize revenue as per project completion method is correct and proper and the appellant’s income ought to have been assessed in accordance with the said method in view of the mandatory provisions of section 145.
3. Without prejudice to above even assuming without admitting that the appellant’s income is to be assessed according to the percentage completion method, even then the addition of Rs. 16,12,34,754/- made by AO and confirmed by CIT(A) is improper and the addition ought to have been restricted to Rs. 6,53,00,764/- received by appellant from the developer towards its 32% share in the year under consideration. The addition is thus excessive and unreasonable.”
3. Assessed has also filed appeal for A.Y 2013 14 raising similar grounds against the addition of Rs. 12,25,55,171 1 – confirmed by Ld. CIT(A).
4. From the perusal of the above grounds for both the years the issue needs to be adjudicated is whether both the lower authorities were justified in confirming the addition by applying the percentage completion method as against the project completion method/completed contract method adopted by the assessee thereby showing the revenue on the basis of the sale deeds registered. As the issue raised in the appeal are common and pertaining to the same assessee, they have been heard together and are been disposed off by this common order for the sake of convenience and Brenaty. For the purpose adjudication we will take up the facts for A.Y. 2012-13 as the basis and our decision shall apply to the appeal for A.Y. 2013-14 also.
5. Briefly stated facts as culled out from the records are that the assessee is engaged in the business of purchase/sales/development of land, real estate and infrastructure and construction and civil work. Search and Seizure operations u/s 132 of the Act were carried out on the business as well as residential premises of the Apollo Group of Indore including the assessee along with other concerns/business associates on 21.09.02. As most of the concerns and individual are inter linked the case were clubbed under the over all name of Apollo (NRK) Group of Indore Assessee company is one of the company of the NRK group of Indore and was incorporated on 22.1.2009. Warrant of authorization was issued u/s 153A of the Act to the assessee on 3 1.5.2013 for A.Y. 2007-08 to 20 12-13. As the assessee was incorporated on 22.1.2009 it was required to file returns of income for the A.Y. 2009-10 to 2012-13. In compliance to the notices u/s 143(2) of the Act the assessee filed returns of income. As far as for the Assessment Year 2012-13 is concerned the assessee disclosed loss of Rs.25,98,0021- in the returns filed regularly u/s 139(1) of the Act on 28.9.20 12 and the same amount of loss i.e. Rs.25,98,0021- was disclosed in the return filed in compliance to notice u/s 153A of the Act on 12.7.20 13. Thereafter notices u/s 143(2) and 142(1) of the Act were duly served upon the assessee and necessary details were called for from the assessee. The issue linked to the grounds raised in this appeal relates to agreement dated 1.4.2009 entered into between the assessee and M/s. JSM Devcon Pvt.Ltd. The assessee is the owner of 2.039 hectare of land situated at Piplyakumar, Tehsil Indore and the same was given for development to M/s. Devcon Pvt. Ltd. As per the terms and condition of the development agreement, the developer will construct various high rise buildings on the land and in consideration for allowing the development of land, the assessee company will be entitled to 32% of the total saleable constructed area to be constructed by the developer. The units were not demarcated between the developer and the land owner. Instead, it was decided that entire revenue shall be shared in the ratio of 68:32 as decided in the development agreement. On examination of the audited accounts of the assessee, it was revealed that the assessee has not reflected any revenue from sale of units however it was getting advance against sale from the developer from 2010-11 onwards. Summary of the transactions with M/s JSM Devcon Pvt. Ltd as reflected in the books of the assessee is being reproduced as under:
