Under project completion method entire project as a whole is to be seen and hence transfer of some flats via registration is not conclusive of the year in which the income attributable to the project is to be taxed

M/s Maitri Developers Vs ITO (ITAT Mumbai)– Project completion method is well recognised method as per AS- 7. Under project completion method entire project as a whole is to be seen and hence transfer of some flats via registration is not conclusive of the year in which the income attributable to the project is to be taxed. Completion certificate is also not conclusive of the fact that the project was completed when the facility of drinking water shows it otherwise.

IN THE INCOME TAX APPELLATE TRIBUNAL ‘F’ BENCH, MUMBAI.

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-400077. PAN: AAJFM8726E	Vs.	The Income Tax Officer, Ward-15(1)(3), Mumbai.
(Appellant)		(Respondent)

ORDER

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 assessment of the business income of the assessee. The dispute arises this way. In the return of income the assessee showed work-in-progress relating to is Matunga project at Rs. 4,88,30,226 which included the year’s WIP of Rs. 2,73,69,050. The assessee 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 neither in this year nor in the assessment years 2005- 06 and 2007- 08 had the assessee declared any profit from the said project for purposes of the income-tax assessment. He observed that in the previous year ended 3 1-3-2007, relevant to the assessment year 2007-08 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 during the year ended 3 1-3-2006 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 not be brought to assessment in the year under appeal.

3. The assessee submitted detailed objections to the said proposal of the Assessing Officer. It was pointed out that the assessee was not a contractor and therefore the revised accounting standars-7 did not apply and the assessee was not obliged to declare any profits in the assessment year under appeal, that the assessee handed over possession of the flats to all the buyers after 3 1-3-2006, that the profit from the project was declared in the return for the assessment year 2007-08 and therefore there was no obligation to declare any income from the project in the year under appeal.

4. The Assessing Officer rejected the assessee’s contentions. He held that AS-7 equally applied to a builder/developer as it applied to a contractor because in a sense the builder/developer is also a contractor having entered into a contract with the tenant/ purchaser to whom he is answerable. As regards the claim of the assessee that the sale of the flats is taken cognisance of only at the time of delivery of possession, the Assessing Officer observed that 13 buyers (list given in the assessment order) had given the full amount of the agreement (i.e., Rs.3,04, 12,000) which means that the deal was over at least with regard to these persons irrespective of the grant of possession and in cases where the full consideration was received there is no justification for postponing the declaration of profits. According to the Assessing Officer, by delaying the handing over of possession the assessee can postpone 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 that at least in respect of the 13 person who have made full payment the assessee must have handed over possession.

5. The Assessing Officer thereafter proceeded to observe that in respect of a single venture, as in the case of the assessee, each year must be taken as a separate unit and by not selling a small portion of the property an assessee can always contend that the project is not complete and thus not declare the profit for a long time or postpone the payment of taxes for a considerable time.

6. The Assessing Officer also referred to the order of the Bombay Bench of the Tribunal in the case of Champion Construction Co vs ITO (5 ITD 495) in support of his 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 brought 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 assessee was not right in relying on accounting standard – 9 to contend that a person following the above method was 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 under appeal and 13 persons had given the full price of the flats. The assessee ought to have recognized the revenue from these flats.

c) The project was approved by the Bombay Municipal Corporation by letter dated 20.7.2004, the estimated cost as per architect’s certificate dated 1-4-2006 was about Rs.5 crores, the certificate was submitted by the assessee to the BMC authorities on 24-4-2006 for formal approval and all this meant that the project was completed even before the above date. This proves that a substantial part of the construction was completed before 31-3-2006.

d) The Assessing Officer’s working of the profits is not an estimate, but it is based on the actual sale price received from 13 parties who have paid the full consideration. They would not have paid the full price if the flats were not complete in all respects.

e) Even the rate of 8% adopted by the Assessing Officer is fair and reasonable, considering the location (Matunga) which is full of commercial and residential establishments, markets, etc.

In the light of the above findings, the CIT(A) upheld the assessment of the profit of Rs. 24,32,960/-.

8. The assessee is in further appeal before the Tribunal. It is well-settled that the “completion of the project” method of declaring profits, in the case of a builder/ developer, is a recognised method of accounting. There is no doubt that the assessee is following the said method. It is recognised by the AS‑7. In para.3 (not numbered) of the assessment order (first page) for the year under appeal, the Assessing Officer himself refers to the fact that the assessee is following the project completion method and that the Matunga project was commenced during the year ended 3 1-3-2005. Even in the assessment order for the assessment year 2005-06 (copy filed) the Assessing Officer, while examining the return, would appear to have asked the assessee by letter dated 15-11-2007 (page 112 of the paper book) as to why revenue should not be taken credit on the basis of “percentage completion method” since in that year 26% of the project had been completed. On being informed (by letter dated 22-11-2007 at page 113 of the paper book) that the assessee is following the project completion method, the Assessing Officer did not pursue the matter further and accepted the assessee to carry forward the work-in-progress. In accordance with the method adopted by the assessee, he has shown the profit from the Matunga project in the return filed for the assessment year 2007-08. A perusal of the return (pages 68-93 of the paper book) shows that after claiming depreciation and remuneration paid to partners the profit from the project has been shown at Rs. 14,69,036; before these deductions, the profit is 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 copy 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 assessment year 2007-08. The copy of the letter dated 3-5-06 written by the Executive Engineer of MCGB to the assessee’s architect shows that the completion certificate was submitted on 24-4-2006, which date falls within the year ended 3 1-3-2007, relevant to the assessment year 2007-08. The letter of the Executive Engineer says that the certificate has been accepted, subject to submission of certificate u/s.270A of the MMC Act within 3 months.

10. So far as the handing over of the possession is concerned, the assessee has placed the copies of the letters from page 53 onwards. A perusal thereof shows that in all cases possession has been handed over after 3 1-3-2006, mostly in the months of May, June and even November 2006. Page 103 of the paper book is a certificate issued by the Hydraulic Engineer’s 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 supply has been given only in the previous year ended 31-3-2007, relevant to the assessment year 2007-08. It cannot be postulated that possession was handed over long before the water supply 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 income did not accrue to the assessee. We have seen the list. There are only 6 such cases – 5 in which registration was completed in 2005 and 1 in which it was completed in 2004. There are totally 40 flats. Registration has not been taken as conclusive as to the assess-ability of the income because it is the project as a whole that has to be taken into consideration. Even the Assessing Officer did not go by the year of registration of the flats, and rightly so, because by not registering the flats one can delay the taxation of the profits which cannot be permitted. Only two methods are recognised: the project completion method and the percentage on the completion method. Registration of the flats has never been considered to be an effective criterion for assessment of the profits from the housing projects.

12. Another point made by the learned Sr.DR was that the letter of the Executive Engineer referring to the completion certificate dated 24-4-2006 might be indicative of the fact that even on 31-3-2006 the project was substantially completed. There is some force in the point, but when we take into account the fact that the possession has been handed over only in May, June and November 2006 coupled with the confirmation from the water supply authorities in June 2006 that adequate supply to the premises has been ensured, it would appear that it cannot be categorically asserted that the project was 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 3 1-3-2007 (asst. year 2007-08) is that the project account (page 89 of the paper book) for the year ended 3 1-3-2007 shows, in addition to the opening work-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 substantial amount, which approximates to 11% of the opening work-in-progress, it stands to reason that the project might have been completed only in the year ended 3 1-3-2007. Further, in that year the sale price received by the assessee as per the project account was Rs. 6,09,12,002 which is twice the amount of sale price received by the assessee in the year under appeal.

13. For the above reasons, we accept the contentions of the assessee. The alternative plea of the assessee that in case the addition is confirmed in the year under appeal, directions should be issued for deletion of the profits from the project in the assessment order for the assessment year 2007-08 becomes infructuous.