TMI Blog2009 (1) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in the alternative, if the project is treated as completed in assessment year 2002-03, then Business Purchase Expenses of Rs. 6,36,848 and Development Expenses Rs. 73,16,292 be allowed as cost of the project. 2. The Assessing Officer erred in treating Maintenance Charges receivable Rs. 34,99,193 (Jogeshwari Project) and Rs. 92,088 (Nalasopara Project) as Income from the project, when in fact the same represent the Maintenance charges received." 3. After hearing learned representatives of the parties the additional grounds raised are admitted in the interest of justice. 4. As regards original second ground the ld. A.R. submitted that rectification application is pending before the ld. CIT(A). Since issue is not out of the order of the ld. CIT(A), therefore, this ground of appeal is dismissed. However, ld. CIT(A) is directed to dispose rectification application as early as possible. 5. The original first ground and additional grounds of appeal pertain to computation of profit from Jogeshwari and Nalasopara Project. 6. The brief facts of the case are that the assessee is a proprietor of M/s. Millan Corporation, engaged in the business of builder and developer. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient. In view of the facts as mentioned above, it is evident that both the projects viz., Jogeshwari Nalasopara are incomplete and therefore it is not justified to treat them as completed." The ld. A.R. submitted that the assessee furnished certificate of his Architect dated 15-3-2005, wherein it was stated that the Jogeshwari Project was incomplete as on 31-3-2002 as the fourth floor was not constructed. The ld. A.R. submitted that the assessee wrote to his Architect for obtaining TDR for the purpose of construction of fourth floor of the Project. But the architect informed that it was not possible to purchase TDR till the final order of the High Court as the project was started between Western Railway Track and S.V. Road (known as corridor area). 9. As regards Nalasopara Project, the ld. A.R. submitted that construction of the project had commenced in 1999. The project had three wings consisting of 40 flats The construction of the said project was completed in 2001. The second phase of construction was commenced in 2005 wherein third and fourth floor of "A" Wing has to be constructed as per the commencement certificate dated 14-5-2004. The Architect gave a certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usually fall into different accounting period. There are two well accepted methods of accounting in relation to construction contracts. One is the method of completed contract method and the other is the percentage of completion of contract method. The two said accounting methods have been enunciated by the premier accounting body in the country, namely, ICAI. The said body which is incorporated under an Act of Parliament issues accounting statements, guidance notes, accounting standards, etc., in the field of accountancy on various complex issues. One such Accounting Standard issued by the ICAI is Accounting for Construction Contracts (AS 7) which deals with accounting for construction contract in the financial statements of enterprises undertaking construction activities. Indeed, the two alternative methods of accounting for construction contracts have been recommended by the ICAI. The selection of a particular method of accounting for construction contracts depends on appropriate considerations. The choice of a method of accounting by an assessee is represented by the accounting policy followed by the assessee. The major considerations governing the selection of accounting poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 145 will apply and the Income-tax Officer would be entitled to compute the profits upon such basis and in such manner as he may determine. 13.2 The term of the section 145 read with the proviso makes it clear that the choice of method in maintaining accounts for the purposes of assess-ment is left with the assessee and it is open to him to adopt any method of accounting that he likes. That, however, is subject to two minimum conditions firstly that the method of accounting should be one which has been regularly employed by him and secondly that the method should be such as in the opinion of the Income-tax Officer should indicate properly the income, profits and gains of the assessee. As long as these two conditions are fulfilled by the account maintained by the assessee, that account in law has to be the basis of computation compulsorily and the Income-tax Officer has no option to follow any other method of accounting. 13.3 The method is set out at page 971 of Batliboi s Advanced Accounting as follows: "If a contract is nearly complete and only a small portion of the work remains to be done, an estimate will be made of the further expenditure on the portion r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forementioned case a military contract extended beyond the accounting period and the accounts were closed only after the completion of the contract. The court had held that merely because the contract was completed after the accounting period, it could not be presumed that no profits arose or accrued to the assessee in the accounting year and that in the case of an incomplete contract, there is a well established method of calculating profits accruing in the accounting year, which was pointed out in Batliboi s Advanced Accounting, that this decision was later on confirmed by the Supreme Court also in Tirath Ram Ahuja (P.) Ltd. v. CIT [1990] 186 ITR 428. Thus, it was obvious that the Apex Court has approved the method of yearly accounting in the case of contracts. 13.5 That in the case of running contracts , no income, profits or gains can in fact be computed unless the contract is completed and if the contract is completed in a period of more than a year, the crucial time for calculating the income, profits and gains arrives only when the entire contract is completed. In other words, argument was that the only method by which the gains or profits of the assessee could be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion. The ITAT Mumbai Bench in the case of Prerna Premises (P.) Ltd. ( supra ) has laid down certain guidelines. The relevant finding of the ITAT reads as under. (Page 306) "19. No doubt, construction of additional FSI cannot be called to have any independent existence. It is merely a continuation or extension of the original project, but under the garb of sanction of additional FSI a builder or assessee cannot stretch the period of completion of project to its own convenience. In this regard, there may be three situations under which construction or additional FSI is raised by the builders. These situations are as under : 1.Where, builder/assessee gets sanction of additional FSI and he starts its construction thereon before the completion of project in terms defined as above. 2.Where, the builder/assessee get the sanction of additional FSI before the completion of the project, but, he starts its construction thereon after the completion of the project. 3.Where the assessee gets sanction of additional FSI after the comple- tion of the project. To deal with this different type of situations certain guidelines are required to be laid down in the light of the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s indicated above. But, if the gap between the completion of project and the start of the construction is unreasonable i.e., about more than six months, the construction of the additional FSI is entirely an independent project and it would not extend the period of completion of the original project. It would be treated as an independent project. The year of completion would be worked out independently in a manner as defined in clause ( 1 )." 13.8 For the sake of reference, we also extract the relevant portion of the order of the Tribunal in the case of Champion Construction Co. v. First ITO [1983] 5 ITD 495 (Bom.) from the order of ITAT in case Prerna Premises (P.) Ltd. ( supra ) as under : (Pages 301 to 304) "We now come to the merits of the assessee s contention, viz., whether income in this case is assessable only when the project is complete, i.e., when the entire portion of the multi-storied building meant for sale is sold, a co-operative society of the buyers is formed and the assessee has transferred all its rights, title and interest in the project to the society. It may be that from commercial point of view in the case of a single project/venture of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land for Rs. 60,000 in the year 1930. Out of this area he 266 acres divided into 1,000 plots. He spent about Rs. 20,000 in the development of the area. During the financial year 1936-37 the assessee sold 208 plots to various persons for a sum of Rs. 65,810. By taking into account the original cost price of the land and the proportionate development expenses, the ITO computed the profits at Rs. 56,980 which were reduced to Rs. 47,533 by the AAC. In the Rangoon High Court case, the assessee was a money-lender. In the course of its money-lending business it took over certain acres of land and a house in settlement of a debt of Rs. 9,000 due to it. The lands were sold at different times at the best prices available at their respective sales. The assessee was crediting the debtor s account by crediting the sale proceeds as and when materialised. After the last sale took place, it claimed the net debit balance of Rs. 5,137 in that account as loss. In the Allahabad High Court case the assessee had purchased 28,278 sq. yds. of land between 1942 to 1947 and spent about Rs. 81,000 in the development of the area. During the assessment year 1969-70 the assessee sold for the first time 5,67 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an incomplete contract there is a well established method of calculating profits accruing in the accounting year which is set out at page 971 of Batliboi s Advanced Accounting. Mathematical certainty is not demanded in a matter of description. More or less same view has been taken by the Hon ble Supreme Court in the case of P.M. Mohammed Meerakhan ( supra ). The facts in that case are also quite close to the facts in the assessee s case. The land in this case was divided into 23 plots out of which 22 plots had been sold. The Supreme Court observed as under : . In our opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be ascertained even on the assumption that the transaction of the adventure of trade was not completed. Under the Income-tax Act for the purpose of assessment each year is a self-contained unit and in the case of a trading adventure the profits have to be computed in the manner provided by the statute. It is true that the Income-tax Act makes no express provision with regard to the value of stock. It charges for payment of tax the income, profits and gains which have to be compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIDCO issued commencement certificate for construction on 14-5-2003, almost three years after the first phase of the project was fully constructed. 13.10 Apart from above finding of CIT(A), if we examine the issue from the point of view of accounting, for that purpose we would like to refer Accounting Standard AS-7 - Construction Contracts issued by the Chartered Accountants of India which is as under "6. Combining and Segmenting Construction Contracts. The requirements of this Statement are usually applied separately to each construction contract. However, in certain circumstances, it is necessary to apply the Statement to the separately identifiable components of a single contract or to a group of contracts together in order to reflect the substance of a contract or a group of contracts. 7. When a contract covers a number of assets, the construction of each asset should be treated as a separate construction contract when : ( a )separate proposals have been submitted for each asset; ( b )each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and ( c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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