TMI Blog2012 (10) TMI 1056X X X X Extracts X X X X X X X X Extracts X X X X ..... Air Port Authority of India on 16.5.2006, to develop the said open land, measuring in aggregate to over one acre. Separate Agreements were entered into by each of these land owners with the assessee-company, in the business of civil construction; it obtaining the requisite approval from the Commissioner, Kukatpally Municipality, RR District on 30.3.2007 for construction of a residential-cum-commercial complex on the said land. The assessee returned its income for the year on 29.9.2008 at an income of ₹ 35.14 lakhs, i.e., after claiming deduction u/s. 80IB(10) at ₹ 311.80 lakhs. The Assessing Officer, however, found the assessee s claim in its respect as not maintainable, as: (a) the construction of the proposed complex by the assessee is in the capacity of a Contractor and, thus, specifically excluded from the benefit of deduction u/s. 80IB(10) by Finance (No.2) Act, 2009 with retrospective effect from 1.4.2001. The land was never transferred to the assessee, and some of the regulatory approvals were also in the names of the land owners; (b) the assessee has claimed the impugned deduction even as there were no sales during the year, i.e., only on Work-in-Progr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h only deduction u/s. 80IB is exigible and claimed. And, further, would vary from project to project. Then, the two projects are not comparable. While the project under reference is for Apartments , the other project (Lake View) was for Villas . The profits in any case are subject to variation from year to year, and the results of one year could not be the basis for forming an opinion with regard to the profitability of the project; the profit for the succeeding year, i.e., assessment year 2009-10, falling to 23%, with that for the other, non-80IB project climbing to 41%. 3.5 The assessee found favour with the learned CIT(A) on that basis. The terms of the agreement entered into by the assessee-company with the land owner clearly showed that the construction, on completion, was not required to be handed over back to the owners, who never intended to develop the land by setting up a housing project thereon themselves. The housing project was always within the dominant control of the assessee, who would, thus, rightly be called developer . As regards the transfer of land, there was an effective transfer u/s. 2(47) r/w s. 53A of the Transfer of Property Act, 1882, with 46% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008) 23 SOT 420 (Abhd.), since affirmed by the hon ble high court. 4.2 True, a housing project, which is the object matter of the deduction u/s. 80IB(10), i.e., where qualified in terms of the said provision, cannot be sans land, which is an intrinsic part thereof, as also of the sale price of the residential unit, and which is admittedly not owned by the assessee, so that it cannot be sold by it. But then, what is relevant is not who transfers the ownership of the land appurtenant thereto in favour of the ultimate buyer of the residential unit, but that the sale price thereof, being inclusive of the rights in land and, thus, the consideration in its respect, how is the cost of land, admittedly not purchased by the assessee, accounted for in the assessee s books, only whereupon the true profits from the project could be arrived at? 4.3 However, as would be borne out by the development agreement-cum GPA, 46% of the constructed space and, consequently, 46% of the land continues to belong to the land owners, who have thus divested themselves, through this arrangement, of only the balance 54% of the land against the value of 46% of the construction. As such, when the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not by paid in cash. The Revenue s case on this count is without merit, and rightly rejected by the ld. CIT(A). 5.1 The second issue before us is whether, even so, the assessee s claim for deduction u/s. 80IB(10) at ₹ 311.80 lakhs is maintainable in the absence of any sales during the year. This issue, though not specifically raised by the Revenue per its grounds of appeal, arises in the context of the Revenue s case, i.e., as per the assessment order, relied upon by the ld. DR before us, and the pleadings made with reference thereto, so that it would stand to be covered by its ground no.1 before us. It needs to be appreciated that there is no question of any deduction u/s. 80IB(10) in the absence of accrual of any profit or, in any case, in excess of that accrued. 5.2 Without doubt, project percentage method is an accepted accounting method, and rather, a preferable one, where the project is a long term one, apportioning profit over its construction period on a definite, reasonable basis, i.e., the quantum (ratio) of the project completed, which explains its name. However, it is not the principle that is in question, but its application in the facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and the advance(s) received there-under, it is considered appropriate to book income on the project. In fact, sales to the proportionate extent can be said to have materialized, irrespective of the fact that the transfer of property would only be on the completion of construction and its delivery. In fact, there could in practice be a time lag even between these stages, i.e., the completion of construction (so that the product fructifies); it s delivery (which may be conditional on the payment of the entire consideration); and the actual transfer of property (which, being an immovable property, is subject to registration with the appropriate authority). As such, the first thing is whether income has - as a matter of fact - accrued, to whatever extent. There has to be, firstly, a third party, having agreed to buy the property (residential unit), i.e., a sale agreement, defining the various aspects, including the terms and conditions, of the transaction. This alone creates a binding, contractual relationship, leading to, subject to satisfaction of other ingredients, accrual of income, besides lending certainty to its generation (process), as well as to its realization, as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal problems; the project being completed in time, etc., resolution of which, though lying in the womb of future, is crucial to and impacts the revenue recognition thereon, some provision against income is made. As such, as against 15%, income may be recognized at (say) 13.5% (or lower), providing a 10% (or higher) margin toward the same. In fact, prudence needs to be exercised in this regard, lack of which can be perceived from the fact of the steep decline in the rate of profit from this project for the immediately succeeding year, belying the assessee s claims, i.e., of having made a reasonable estimation. 5.6 We are, therefore, at a loss to understand the basis on which income has been booked; there being no clue as to it on record. This is all the more surprising as the assessing officer casts a genuine shadow of doubt by stating of the absence of any sales, and of the same (income) having been booked at an abnormally higher figure, quoting the percentage of profit for the year on another residential project. While, no doubt, a higher profit by itself can be no ground for denying deduction, if otherwise due, the question is: how could profit at all arise on WIP ..... X X X X Extracts X X X X X X X X Extracts X X X X
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