TMI Blog2010 (9) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... the end of the project including that of the land owner s share and the assessee s share superstructure was completed simultaneously. Another significant argument of the assessee was that the legal ownership of immovable property could be transferred by executing a registered sale/conveyance deed etc. Further, from the terms and conditions set out in the tripartite agreement, the following facts emerge: (1)The relationship between the assessee [the confirming party] with M/s. United Breweries (Holdings) Ltd. [seller] and the purchaser is only as a construction contractor wherein the assessee is bound to construct a building in the manner laid down in the tripartite agreement. (2)Any disputes arising out of the tripartite agreement between the parties shall be settled by arbitration in accordance with the provisions of the prevailing Arbitration laws. (3)Specific performance clause applies between the purchaser on the one part and the seller along with the confirming party on the other part. (4)Thus the purchaser on compliance with the terms and conditions set forth in the tripartite agreement shall be entitled to his share of built-up area. (5)From the joint readi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis as income from other sources - In the assessment order under dispute, while adding a whopping sum of Rs. 7.33 crores as income from other sources, the Assessing Officer should have taken proper care to mention in the body of the order the reason for taxing the said sum even on a protective basis . In the meanwhile, the Hon ble Tribunal in its finding Prestige Estate Projects (P.) Ltd. v. Dy. CIT[ 2009 (9) TMI 627 - ITAT BANGALORE-B] directed the AO to accept the project completion method of accounting for the year under reference. Thus, in our considered view, the taxability of the sum of Rs. 7,33,13,640 had reached a finality on a specific direction of the Hon ble Tribunal cited above for the assessment year 2005-06. Therefore, the CIT(A) was justified in his stand on this point. It is ordered accordingly. rentals from Forum Mall and Eva Mall as income from profits and gains from business/profession'' - we would like to point that an identical issue had cropped up before the Hon ble Tribunal for the AY 2005-06 in the assessee s own case wherein the Hon ble Tribunal had, after hearing the arguments of rival parties, analyzing the issue at length, exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER Per A. Mohan Alankamony, Accountant Member. These two appeals - ( i ) one preferred by the assessee company and ( ii ) another by the revenue - are directed against the order of the CIT(A)-VI, Bangalore in ITA No. 556/DCIT, CC1(1)/CIT(A)-VI/ 2008-09, dated 17-12-2009 for the assessment year 2006-07. I. ITA No. 97/B/2010 2. The assessee company [ the assessee in short] has raised five grounds in an illustrative and narrative manner. Ground No. 1 being general in nature and no specific issue involved, it has become non-consequential. In the remaining grounds, the issues raised are, for the sake of clarity, reformulated in a concise manner, as under: The authorities below have erred in ( i )concluding and confirming that the income of five real estate projects carried out under joint development agreements was assessable on percentage completion method ; ( ii )disallowing the compounding fee of Rs. 43.96 lakhs paid by the assessee to Bangalore Mahanagar Palika (BMP); and ( iii )disallowing Rs. 51,585 being the amounts paid to the Depart- ment of Company Affairs and as entry tax compounding fees; Prayer - The orders of the authorities b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee s explanation for not recognizing revenue in respect on ongoing projects which were being developed during the relevant previous year under joint development agreement was carefully examined. ( i )the contention was that the assessee does not get ownership rights over the property or in the lands unless it complies with all the conditions stipulated in the joint development agreement and one such condition was that it needs to hand over the share of land owner s built space and, therefore, the assessee can transfer all significant risks and rewards of ownership to the prospective buyers only at the end of the project as practically the total project was developed in one go and the land owner s and the assessee s share of super- structure was completed at the same time. Another related argument was that legal ownership of immovable property can be transferred by executing a registered sale/conveyance deed; ( ii )it is to be noted that the assessee usually enters into two agreements with the persons intending to purchase apartment or office space in a project implemented under a Joint Development Agreement [JDA] - one agreement for the purchase of undivided interest i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Note of ICAI on recognition of revenue by real estate developers does not speak anything about transfer of legal ownership of the property. Thus, the view of the assessee that revenue cannot be recognized from JDP is not acceptable. Accordingly, the revenue from the projects of JD was to be recognized under POC method. 6.4 Thus, the assessee was asked to furnish the working of income in respect of five projects on PCM. Accordingly, the income of Rs. 8,92,90,995 in respect of the five projects under JDA was adopted and added to the income of the assessee. Compounding Fees 6.5 On examination of the assessee s books of account, the Assessing Officer noticed that the assessee had incurred compounding fee of Rs. 43.96 lakhs which was claimed as a deduction. However, the Assessing Officer disallowed the same citing the reasons recorded in the earlier assessments in the assessee s own case and also held that the expenditure incurred by the assessee was for an offence or an act prohibited by law which cannot be allowed as a deduction. 6.6 Likewise, on verification of tax audit report also, the Assessing Officer noticed that the assessee had paid Rs. 25,000 to the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of the project, the estimates of saleable area and cost are revised periodically by the management, the effect of such changes to the estimate is recognized in the period, such changes are determined. It is also provided that in the case of joint construction contract revenue recognition is restricted to the companies percentage share of the underlined real estate development projects. The Assessing Officer in his order has established that the construction contract entered by the appellant come under the purview of AS-7, accordingly, he obtained the detail of the projects from the appellant where the stage of completion is more than 30 per cent of the total estimated cost and on the basis of the details furnished by the appellant in regard to such projects. The Assessing Officer assessed the income of Rs. 8,92,90,995. In view of the above, I do not find any infirmity in assessing the income of such projects on the basis of percentage completion method, accordingly, the addition of Rs. 8,92,90,995 is upheld. 7.1 With regard to the compounding fee of Rs. 43.96 lakhs paid by the assessee to BMP; the ld. CIT(A) had, after considering the assessee s contentions, observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... projects were undertaken under joint development agreements [JDA] and as per the terms and conditions of the JDA, the assessee secured the right of ownership in respect of its share only after completion of construction. In other words, the assessee secured its ownership only after completion of construction. In other words, the assessee secured its ownership only after discharging its entire obligation under JDA. The agreement of sale entered into with the customers also clearly specifies that the project is carried out under JDA and the assessee would be entitled to ownership only on completion of construction. In view of the above conditions of the JDA, the significant risks and rewards of ownership as provided under the Guidance Note would be transferred only after completion of construction. It was for this reason that the income from real estate projects carried out under JDA was to be recognized only after completion of projects and not on the basis of percentage of completion method. Further submission was that- ( i )the real estate projects carried out under JDA were not completed during the year; ( ii )the JDAs contained various clauses which were not fulfilled a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to develop and did not attain any rights over the property developed unless the assessee comply all the conditions stipulated in JDAs and one of the conditions was that it had to hand over the share of land owner s built-up space. The contention of the assessee was that it enter into two types of agreements, viz., agreement to sell specifying the undivided share of the land which will be transferred to the buyer on completion of the project and construction agreement indicat- ing the specification of unit which will be constructed and transferred. On completion of the project on the terms of the said two agreements, the assessee would execute a sale deed transferring the legal title in the underlying piece in the property and hand over the possession to the buyer. Thus, it was the contention of the assessee, the risks and rewards of ownership of the properties was transferred together with the legal title for the property and/or when the buyer was given possession, because until that point the risks and rewards of ownership including the residual value of risks and rewards were retained by the assessee. 9.2 From the above, the crux of the assessee s contention was that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the registration deed as a GPA holder of the land owners, but, not in its own right as a legal owner of the said land. Being a prudent developer, the assessee doesn t register the deed as an owner of the land since it doesn t have legal ownership right over the said land. The fact remains that without having legal ownership in the land in question, it can be commercially exploited, of course, with the aid of GPH of the said land. When the prospective buyers of super build-up area giving consent to the terms of the two agreements [mentioned above], namely, agreement to sell undivided interest in land as well as the agreement for construction which are enforceable legally by either party, the assessee can naturally also transfer all significant risks and rewards to the buyers when these above agreements are authenticated by the parties involved in the said transaction. A prospective buyer will definitely weigh the pros and cons of risks involved in such a transaction before venture to enter into such an agreement for the purchase an apartment or an office space or commercial space - yet to be built-up with a developer who is executing the project under the JDA. Such being the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to which, the sellers entered into an agreement with the confirming party (the assessee) for developing the schedule property [more described as UB Factory, in Municipal No. 24, Grant Road (Vittal Mallya Road), Bangalore] into a complex and deliver 55 per cent of the total saleable super built-up area in the proposed buildings to the sellers and in consideration therefore, the sellers have agreed to transfer 45 per cent or such proportion of UDS in the land in the Schedule "A" property as is proportionate to the saleable super built-up area falling into the share of the confirming party in the proposed buildings to be built. In terms of the agreements entered into (cited supra ), the confirming party [the assessee] was entitled to deal and dispose of the saleable super built-up areas in the proposed complex falling into its shares together with the corresponding proportionate UDS in the land in Schedule A property and similarly the sellers [United Breweries (Holdings) Limited] are also entitled to deal and dispose of the saleable super built-up area falling into its share together with the corresponding proportionate UDS in the land in the schedule property. The confirming pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oportionate undivided share, right, title, interest etc., ( iii )the confirming party had nominated the purchaser to be the purchaser of the subject property and the sellers have agreed to sell the property in favour of the purchaser in terms of the agreement, to be owned, held and possessed by the purchaser in terms of the scheme and the purchaser had also entered into a construction agreement of even date with the confirming party for the construction of the proposed office space. The above terms and conditions clearly establish that the intending buyer having taken all the risks on his shoulders while entering into such an agreement, the assessee s argument that it would not transfer significant risks to the buyer in spite of entering into agreements with the buyers which are legally enforceable contracts, is rather pessimistic. 9.8 Further, from the terms and conditions set out in the tripartite agreement, the following facts emerge: (1)The relationship between the assessee [the confirming party] with M/s. United Breweries (Holdings) Ltd. [seller] and the purchaser is only as a construction contractor wherein the assessee is bound to construct a building in the mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was that ( i ) the impugned expenditure of Rs. 43.96 lakhs was incurred towards regularize- tion of constructions made in excess of the sanctioned plan which were within curable limits and ( ii ) the expenditure in- curred towards compounding fee was to be allowed as a deduc- tion. It was, further, contended that paying of compounding fee was neither prohibited by law nor was an offence in itself and, thus, compounding fee was compensatory in nature. 11. At the outset, we would like to point out that the Hon ble Tribunal in its finding in Prestige Estate Projects (P.) Ltd. v. Dy. CIT [2010] 129 TTJ (Bang.) 680 for the assessment year 2005-06 in the assessee s own case dealt with a similar issue wherein it has been held that "7.1 This issue has also been decided in the case of the assessee by this Tribunal while deciding appeals for the asst. years 2001-02 to 2003-04. The Tribunal while following the decision of the jurisdictional High Court in the case of Mamta Enterprises 266ITR 356 held vide order dated 23rd October, 2008 in ITA Nos. 1071, 1087 and 1088/Bang./2006 that compounding fee paid is not an allowable deduction...." 11.1 In conformity with the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the above, reduction of income of Rs. 7,33,13,640 under the head Profits and gains from business or profession in the computation of income by the Assessing Officer does not arise. Once the income is taxed under the head Profits and gains of business or profession , the income assessed under the head Income from other sources on protective basis is hereby deleted.... " ( v )The gamut of the issue, to our mind, is that when the Assessing Officer resorted to conclude the impugned order under dispute, precisely, on 31-12-2008, the assessment order for the assessment year 2005-06 was under appeal before the Hon ble Tribunal for adjudication which must have influenced the Assessing Officer to add the income of Rs. 7.33 crores assessed for the assessment year 2005-06 on a protective basis. In the assessment order under dispute, while adding a whopping sum of Rs. 7.33 crores as income from other sources, the Assessing Officer should have taken proper care to mention in the body of the order the reason for taxing the said sum even on a "protective basis". ( vi )In the meanwhile, the Hon ble Tribunal in its finding cited supra (on 11-9-2009) directed the Assessing Officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity with the finding of the Hon ble Tribunal referred above, we direct the Assessing Officer to assess the income from Mall under the head Income from business . It is ordered accordingly. (3) Direction of the CIT(A) to Assessing Officer to assess the hire charges in respect of fit-outs as income from other sources . ( i )Nevertheless, the revenue s brief submission was that the CIT(A) had grossly erred in directing the Assessing Officer to assess the hire charges in respect of fit-outs which were laid out to tenants as income from Other Sources . ( ii )Yet again, we find a solace from the finding of the Hon ble Tribunal in the assessee s own case for the assessment year 2005-06 on similar issue wherein the Hon ble Tribunal was pleased to observe that - "6.1 This issue has been decided by this Tribunal in the case of the assessee for the asst. year 2004-05. The Tribunal vide order dated 29th May, 2009 in ITA No. 851/Bang./2008 vide para 14 of the order held that the facts and circumstances brought on record by the assessing authorities and the learned counsel indicate that the intention of the assessee for rendering the same as income from other sources ought not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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