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
The Income Tax Officer, Ward-15(1)(3), Mumbai.
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.
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.
14. The appeal is allowed with no order as to costs.
Order pronounced in the open court on this 20th day of May, 2011.