TMI Blog2021 (12) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... he SRA agreement to complete the SRA project. On analyzing the agreement with SRA, the Bench has observed that the assessee was under obligation to complete the project as per the agreement. The Bench has also observed that the TDR was granted to provide finance to the assessee to complete the project. Thus, assessee s income from TDR cannot be considered independently without taking the corresponding expenses, more so, when the TDR receipts are directly linked to the execution of the project. The Bench has held that since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. Though, the assessee has earned income from sale of TDR, however, no income from the SRA project, as yet, has been offered to tax. It is a fact that while deciding the appeals against the orders passed u/s 263 of the Act in assessment years 2012 13 and 2013 14 the Tribunal [ 2019 (3) TMI 1942 - ITAT MUMBAI] has recorded certain finding touching upon the merits of the issue, which, indeed, are favourable to the assessee. Admittedly, aforesaid order of the Tribunal was not available either before the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards sale of TDR in different assessment years as under:- DRC No. Date of Issue Financial Year Area as per DRC sqmt Area Sold in sqmt Sale Consideration received Area Unso ld sqmts. SRA/8/19/LAND 08/06/2019 2009-10 2010-11 93,623 93,623 152,57,98,600 0 SRA/957/CONSTN 11/08/2010 2011-12 22,510 22,510 53,35,24,118 0 SRA/994/CONSTN 09/05/2012 2012-13 21,790 21,790 63,07,78,539 0 SRA/1035/CONSTN 20/12/2012 2012-13 12,640 12,640 0 SRA/1056/CONSTN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rection is identical to the reasoning of the AO and learned Commissioner (Appeals) in the impugned assessment years. He submitted, while deciding assessee s appeals challenging the orders passed under section 263 of the Act, the Tribunal has not only accepted assessee s method of revenue recognition following percentage of completion method but has also held that the amount received from TDR by the assessee cannot be valued. He submitted, the Tribunal has also held that the amount received from TDR is not taxable at the hands of the assessee. Thus, he submitted, the issue in dispute is squarely covered by the decision of the Tribunal in assessment year 2012-13 and 2013-14. 7. The learned Departmental Representative, relied upon the observations of the AO and learned Commissioner (Appeals). She submitted, the amount received from sale of TDR has to be taxed in the year of receipt. 8. We have considered rival submissions and perused the material on record. Undisputedly, the issue arising for consideration is, whether the amount received by the assessee from sale of TDR granted in respect of the SRA project is taxable in the year of receipt or the assessee s method of revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following note on revenue recognition to the AO vide letter dated 17/03/2015. Under the instructions from our above client in response to details called by your good self we are enclosing/submitting herewith details as under: 1) Note on Revenue Recognition: The assessee firm follows percentage completion method for revenue recognition. The method of revenue recognition followed by the assessee is in line with the guidelines issued by the institute of Chartered Accountants of India (ICAI), which prescribed the Percentage of Completion Method for revenue recognition for real estate business. As per said guidance note, firm will start recognising revenue from construction and development of the project only, in case all the following condition are simultaneously satisfied: a) All the critical approvals necessary for commencement of the project have been issued; b) At least 25% of the construction cost and development cost (excluding cost incurred in relation to acquisition of land) is incurred): c) At least 25% of the saleable project area is secured by contracts or agreement with buyers; d) And at least 10% of the total revenue as per the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt rights and at least 25% of the saleable project area is secured by contracts pr agreements with buyers. Further, revenue shall be recognised out of the secured contracts/agreements only if 10% of the revenue as per the enforceable documents is realised and there is no uncertainty towards realisation of balance amount. However, from certificates received from architect your goodself will appreciate that the assessee has not reached the prescribed threshold limit upto 31st March, 2013. Hence, the assessee has not recognized the revenue. From the above note it is clear that the issue of income and receipt arising out of sale of TDR, the detailed thereof and the method of accounting for profit recognition adopted by the assessee were duly available before the AO. Hence from the above it is evident that Ld. CIT is totally incorrect in observing that the sale of TDR and the profit method of the assessee was not examined by the AO. 16. The issue now emerges whether the method of accounting adopted by the assessee and accepted by the AO is a legally permissible one not. As per the method of accounting of the assessee the accounting method is percentage completion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sale proceeds of TDR, received on account of transfer of land, was utilised by the assessee for construction of the tenements as per the terms of the agreement. e) Further the government is determined to get these projects completed through the assessee firm and accordingly provide TDRs with a view to facilitate them to complete the projects as early as possible. The assessee firm cannot get away with the project at their own sweet will, because these matters are taken up by the public before the Hon ble High Courts also through Public Interest Litigations ( PILs) f) We would like to submit that the assessee company is engaged into the business of real estate development. In the case of real estate developers there are mainly two kind of accounting policies for revenue recognition: i. Project completion method ii. Percentage completion method In the present case, the assessee has been consistently following Percentage completion method for revenue recognition for its real estate project since its incorporation. It can also be referred from note no. 2.7 Revenue recognition of the audited financial statement for the year which clearly mentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Hillside construction company private Limited. 20. In this regard, we note that the observations of the revenue authority on the incorrectness of the method of accounting adopted by the assessee are not by reference to any Accounting Standards or any provision of the Act. As a matter of fact, as noted above the assessing officer has noted that the method of accounting adopted by the assessee cannot over ride the Income tax Act. Here we note that there is no specifications as to which provision of income tax provides that the method of accounting adopted by the assessee is incorrect. We find that the percentage completion method for revenue recognition in case of assessee engaged in real estate development is well recognized as per the ICAI guidelines as well as case laws in this regard. In this regard, we may refer that the Hon ble Supreme Court explained the 'Project Completion Method or Completed Contract Method' and 'Percentage of Completion Method' in the case of C.I.T. Vs. Bilahari Investment Pvt. Ltd. (299 ITR 1) as under: Under the Project Completion Method or Completed Contract Method, the revenue is not recognized until the project/contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted method of accounting in construction business and also recommended as per accounting standard AS7 of ICAI. Therefore, in such cases the income from the project has to be computed in the year of completion. The TDRs received are directly linked to the execution of the project and therefore, before the completion of the project the income from TDR or any other receipt inextricably linked to the project will only go to reduce costs of the project. Therefore, in our view the assessee had rightly set off TDR received against work-in-progress. The addition made by the Assessing Officer in 2006-07 on account of TDR receipt is not justified. Further even if TDR receipt is assessed as independent item, deduction has to be allowed on account of the expenses incurred. The TDRs have been received in lieu of handing over of constructed transit buildings and therefore, cost of those buildings has to be deducted against income from sale of TDR. The cost of the buildings is claimed to be more than income from TDR, full details of which were given to the CIT(A) and therefore, even on this ground no income can be assessed in case of the assessee. In the Assessment Year 2006-07, the project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p area (c) Giving up of rights over existing structures or open land. 6.1 When development rights are acquired by way of direct purchase or on development or construction of built-up area, cost of acquisition would be the cost of purchases or amount spent on development or construction of built-up area, respectively. Where development rights are acquired by way of giving up of rights over existing structures or open land, the development rights should be measured in accordance with the principles of exchange of assets enunciated in paragraphs 45 to 47 of Ind AS 38, Intangible Assets. When development rights are utilized in a real estate project by an entity, the cost 'thereof-as arrived at in accordance with the principles stated in paragraph above should be added to the project costs. 6.2 When development rights are sold or transferred, revenue should be recognized when the following conditions are fulfilled: (a) The entity has transferred to the buyer the significant risks and rewards of ownership of development rights; (b) The entity retains neither continuing managerial involvement to the degree usually associated with owners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted is a legally permissible one, it has been held in the Catena of case laws that learned Commissioner of income tax cannot exercise of jurisdiction under section 263 of the act if he is of a different opinion. 9. As could be seen from the aforesaid observations, the co-ordinate Bench has held that the percentage completion method followed by the assessee is a well recognized method as per ICAI guidelines and judicial precedents. Further, the Bench has held the sale of TDR cannot be considered in isolation of assessee s obligation under the SRA agreement to complete the SRA project. On analyzing the agreement with SRA, the Bench has observed that the assessee was under obligation to complete the project as per the agreement. The Bench has also observed that the TDR was granted to provide finance to the assessee to complete the project. Thus, assessee s income from TDR cannot be considered independently without taking the corresponding expenses, more so, when the TDR receipts are directly linked to the execution of the project. The Bench has held that since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against t ..... 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