TMI Blog2021 (5) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... tly rejected by the authorities below. The detail of different agreement referred by the authorities below in their orders referred above duly corroborate this aspect. Computation of gain - whether the Revenue can thrust upon the assessee s percentage completion method of accounting that also for the first time? - HELD THAT:- We note that it is undisputed fact that since inception the assessee has capitalised cost of redevelopment - We note that completed contract method and percentage complete method in the extant period were duly recognised method of accounting for construction project. In this regard we may gainfully refer to the decision of Hon'ble Supreme Court exposition in the case of CIT Vs. M/s. Bilahari Investment (P) Ltd. [ 2008 (2) TMI 23 - SUPREME COURT] wherein held percentage completion method and competed contract method are both recognised method of construction project. Also see HYUNDAI HEAVY INDUSTRIES COMPANY LIMITED [ 2007 (5) TMI 196 - SUPREME COURT] . Percentage complete method and completed contract method were both acceptable method and accounting of construction contract in the impugned period. We note that the assessee has all along treated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year and accordingly, no capital gains had arisen up on entering into Agreements to Sell 3 Flats forming part of the Property; and (c) Consequently, to delete the estimated profits of ₹ 2,09,95,330/- assessed under the head profits and gains from business by adopting percentage completion method. Notes: (i) Property means co-ownership of the land and building thereon, know as Raj Mahal Juhu, Mumbai and on redevelopment would consist of 8 Floors and 2 Row Houses plus Parkings, out of which the appellant is entitled for 3 Flats on the 4th to 6th Floor (Each Floor consist of One Flat). (ii) The amount vide c is stated at ₹ 2,09,95,330/- after considering the effect of CIT(A) Order instead of ₹ 4,65,79,478/-assessed by the AO. 2. In the facts and circumstances of the case and in law, if the Ground No.l is decided against the appellant, then the CIT (A) ought to have directed the Ld. AO:- (a) that 33% of the appellant's share in the Property is a capital asset and accordingly, as per Section 45(2) of the Act the same be considered as converted into stock-in-trade on 7th August, 2007 (i.e. in the year ended 31st March, 2008), whereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08 and allowing a deduction of ₹ 1,56,811/- from resultant profit ₹ 47,090/- 5. The appellant prays that the order of CIT (A) on these grounds be set aside and that of the Assessing Officer be restored. 4. Brief facts of the case are that the assessee Company is engaged in the business of Builders, Contractors, Construction, Engineers, Developers, Designers, Planners, Building Experts and Advisors and others. During the course of assessment proceedings, the Assessing Officer noted from the detail submitted by assessee that it is a co-owner of land and building of property known as Raj Mahal , Juhu which is being re-developed. It was further claimed by assessee that share on the property was 49.15% of the total build up area. It was also seen that during the year under consideration, assessee has sold 3 flats for a consideration of ₹ 6,75,00,000/-, out of an aggregate consideration of ₹ 25,00,00,000/-, being assessee's share. Further, Assessing Officer noted that the assessee has mentioned that the percentage of the project is completed at 63.43%. The Assessing Officer noted that assessee has claimed that the said flats are its capital assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty. Zerox copy of the agreement has been furnished vide our letter dated 10th November, 2016. (e) Consequent to above, the assessee became entitled for 3 flats free from any encumbrances. Accordingly, the assessee agreed to sell these 3 flats along with its right, title and interest in the undivided portion land by executing Agreement to Sell dated 31-12-2013.The total consideration in terms of the agreement was ₹ 25 crores and as against the same, it received till the year end ₹ 6.75 crores. (f) The redevelopment of the property was not completed upto 31.03.2014 which Includes the units to be provided to the tenants on settlement of their claims, 3 flats agreed to be sold by the assessee and the other units owned by the co-owners. 7. Thereafter the assessee contended that in the facts of the assessee s case in the absence of organised activity for acquiring properties and selling them for earning profits, the sole transaction of acquiring property for redevelopment, which was held as capital asset, cannot be regarded as business within the meaning of section 2(13) of the Act but would constitute capital asset within the meaning of section 2(14) of the Act. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber, 2016. On a perusal of Para 2 and 3 of the Agreement its will be observed that the assessee's obligation to complete the said flats to the extent of bare-bone basis and then handover the possession thereof subject to receipt of full consideration. However, as upto the year-end i.e upto 31.03.2014, the construction of bare-bone structure was still in progress and consideration received is ₹ 6.75 crores as against total consideration of ₹ 25 crores. Further, the assessee is constructing the property not in the capacity as developer but as one of the co-owner and for other co-owners from whom their share of cost is/shall be re-couped. 9.1 Hence, gains on Sale of Flats can be brought to tax only on its transfer which has not happened as upto 31.03.2014. That being so, no income has accrued in the year under reference from entering into the Agreements to Sell of flats. Necessary details and submissions in this regard are also submitted vide our letter dated 10th November, 2016. It may also be noted that as upto 31.03.2016 neither conveyance deed has been executed for the transfer of these flats nor possession has been given to the buyers, as construction work is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) M/s Trident Estate has agreed to construct and handover permanent accommodation to Pushpa Properties Pvt. Ltd. (Tenant) for surrendering tenancy rights. (d) The entire process of redevelopment work i.e. obtaining permissions/ commencement certificate etc., is the responsibility of the assessee company and the cost is also to be borne by assessee. (e) Vide Clause 6 of page 6 of agreement, it can be seen that assessee is developer to the said redevelopment project and the rights to develop have been assigned to assessee as against assessee's claim that it is holding the property as an investment or capital asset and taxes will be offered as and when capital gain arises. (f) Vide Clause 21 of page 12 of agreement, it is seen that assessee has the right over FSI / TDR on the property in lieu of redevelopment of property. It is noteworthy to mention that assessee has an entitlement of the FSI/TDR as a builder fit developer of the property and not as a co-owner of the property. (g) Moreover, on perusal of 'Board Resolution of Directors of Trident Estate Pvt. Ltd. attached to the agreement (which is a part and parcel of agreement), it is seen that Board of Director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred his 20.34% rights out of 33.33% to Pramod K Goenka and by gift deed. Pramod Goenka gifted his entire share of 20.34% to Bina P. Goenka and Yashvardhan P. Goenka (Co-owners in agreement). The Assessing Officer observed assessee s affairs are very intricate and it is difficult to pierce the corporate veil. Nevertheless he found this a fit case for piercing of corporate veil. Accordingly the Assessing Officer made the impugned assessment as under :- In view of the detailed discussion made above, the undersigned is of the firm view that assessee is carrying on business activity by taking up redevelopment project and the proceeds received from sale of 3 flats amounting to ₹ 25,00,00,0007- (being flat No.s 4, 5 6 exclusively allotted to assessee in the agreement) are nothing but revenue earned during the course of business activity. Accordingly, the receipts are taxed by adopting the percentage completion method as the percentage of completion of project is shown at 63.43% by assessee and the profit is estimated as under: Computation of income from business or profession: 63.43% of total consideration f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- was not included while working out the construction cost and this figure of ₹ 3,90,00,000/- needs to be included in the cost of construction and the percentage of 63.43% applied and profits worked out as follows in letter dated 5/12/2016 :- S.N. Particulars Amount Rs. in crores. A. Details of Consideration Receivable on entering into Agreement to Sell dated 31. 12.201 3 1 Total Consideration 25.00 2 Consideration received upto 31.03.2014 6.75 3 % of Sale consideration received 27% B Details of Cost incurred and cost to be incurred for three flats 1 Total Estimated Cost to be incurred including Land Cost 21.69 2 Land Cost included in above 3.88 3 Total Estimated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the AO vide letter dated 05/12/2016 and also application for rectification filed dated 16/02/2017, but the AO did not consider the same. 6.19 Hence, amount of profits and gains from the carrying on of the business activity of construction and redevelopment of Rajmahal, Juhu Mumbai taxable up to and including FY 2013-14 relevant to AY 2014-15 was adopted at ₹ 2,09,95,330/-instead of ₹ 4,65,79,478/- worked out by the AO. The Assessing Officer is directed to verify once again relevant documents before computing the cost. 15. Lastly learned CIT(A) noted that following additional ground of the assessee :- Without prejudice to Ground No.1 of the 0riginal ground of appeal and in the alternate, in the facts and circumstance of the Ground No. 1 is decided against the appellant. Learned CIT(A) be pleased to hold that :- (a) 33% of the appellant's share in the property as capital asset and accordingly in terms of provisions of section 45(2)of the Act should be held as converted into stock-in-trade in the year ended 31st March 2008 being the year in which re-development activities had commenced. (b) Consequent to the above, in quantifying the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -15. 17. Against the above order the assessee and Revenue are in cross appeals before us. 18. We have heard both the counsel and perused the records. We find that the assessee-company is engaged into redevelopment of property in co ownership with two other parties. The assessee s claim is that the said property is capital asset of the assessee and not a business venture. The assessee has received ₹ 6.75 crores against proposed sale of his share of the property out of total consideration of ₹ 25 crores. The assessee s claim is that registration and handing over the possession of the property has not been done. The property is still under development stage. Moreover, the assessee has also to recoup some of the development expenses from some other coowners. In nutshell, it is assessee s claim that the project is incomplete. Hence, the assessee s claim is that the assessee is not liable to pay any tax on this. On the other hand the Assessing Officer s view is that the assessee is engaged into the business of development and since work is complete to the extent of 63.43%, hence, the Assessing Officer has applied percentage complete method and computed the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 414,327 Closing balance (B) - 176,063,191 Less : (A+B) - 214,864,246 Cost of construction re-couped from other co-owners - 93,493,877 121370,369 Total 121,370,369 22. Working for the current year in this regard is as under :- Other non-current assets (Refer Note No. 14 15 As at March 31, 2014 March 31, 2013 Investment in property Land cost (A) 38,80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that also for the first time. We note that completed contract method and percentage complete method in the extant period were duly recognised method of accounting for construction project. In this regard we may gainfully refer to the decision of Hon'ble Supreme Court exposition in the case of CIT Vs. M/s. Bilahari Investment (P) Ltd. (Civil Appeal No. 1625 of 2008 vide order dated 27.2.2008):- 15. Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method. 16. Under completed contract method, the revenue is not recognised until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to P L account. The said method determines results only when contract is completed. This method leads to objective assessment of the results of the contract. 17. On the other hand, percentage of completion method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isputed that in the current year project is not at all complete. Redevelopment is still in progress. The assessee has also to recoup expenditure from other co-owners. Agreement to sale has not been registered, possession of the property has not been handed over. In these circumstances, assessee cannot be thrust upon percentage of completion method of accounting by the Assessing Officer. Hence, though we do not agree with the assessee that it is not a business project, we agree that the project is incomplete and in substance if assessee wishes to offer for taxation its gain on completion of project i.e. apply completed contract method the same cannot be rejected. This proposition is duly supported by Hon'ble Supreme Court exposition as above. Also percentage completion method has been made compulsory by subsequent insertion of section 43CB of the Act, which is not applicable to the impugned assessment year. 26. Furthermore, we find that this issue is revenue neutral. As and when the contract/project is complete, the gain would be exigible to tax. Thus the effect is only revenue neutral as revenue shall collect necessary taxation when the project is complete. In such circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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