9911796707
TMI Blog2021 (12) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... is spread over 31.9 acres the said plot of land was purchased by the assessee for a consideration of Rs. 44,21,57,150/- and handed over to SRA, as per the SRA scheme. As per the terms of agreement with SRA, the assessee was to develop the SRA project at its own cost. Whereas, in return of the land surrendered to SRA and project cost to be incurred by the assessee, the assessee was granted the following TDR: 1. Land TDR 93623 Sq.mtr. construction 2. TDR 4,78,527.75 Sq.mtr. 4. Since, the assessee was required to fund the entire cost of the project itself, the TDR granted to the assessee in a phased manner were sold from time to time to incur the cost of the project. In the process, assessee received various amount 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 2012-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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 revenue recognition following percentage of completion method is acceptable. Notably, the assessee has received certain amount from sale of TDR in assessment years 2012-13 and 2013-14 as well. While ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 agreement of sale or any other legally enforceable documents are realised at the reporting date. 2. We are enclosing herewith copy of the architect's certificate as Annexure 1. Which certifies that the project has reached only 11% completion of the SRA Project as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertificates 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 method. According to which the assessee offers profit for taxation after 25%/30% completion of the project. In the current assessment year, the project has been completed 11%. Hence the assessee has not offered profit for taxation. In A.Y.13-14 the projection completion is 22.65%. 17. The method of revenue recognition that is percentage of completion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 that revenue recognition policy of the company for real estate project is Percentage completion method. g) Further, reliance is placed on order passed by Hon'ble Mumbai ITAT in the case of M/s Chembur Trading vs ITO 22(2) [2009] 3 ITAT INDIA 818 [MUM] wherein Hon'ble ITAT held as follows: "The recognised method of accounting in the case of construction are mainlytwo methods: i. Project completion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 is complete. Under the said method, costs are accumulated in a WIP Account during the course of the project/contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the project/contract is completed. This method leads to objective assessment of the results of the project/contract. On the other hand, the percentage of completion method tries to at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was not complete and there is no dispute about this fact. Therefore, in Assessment Year 2006- 07, TDR received has to be set off against WIP and cannot be assessed separately as income. We therefore, confirm order of CIT(A) deleting the addition made in Assessment Year 2006-07. 23. From the above it is evident that it has been recognised in the ITAT decision above that assessee's income from TDR cannot be considered independently without deducting the expenses involved. It has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge 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 ownership nor effective control over the development rights sold; (c) The amount of revenue can be measured reliably; (d) It is probable that the economic benefits associated with the transaction will flow to the entity; and (e) The costs incurred or to be incurred in respect of the transaction can be measured reliably." A reading of the above makes it amply clear that the said guidelines duly provide that sale revenue from transfer of development rights should be recognized when the amount of revenue can be measured reliably and the cost incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 10. Pertinently, in response to a query raised by the Bench regarding the present status of the SRA project, learned Counsel for the assessee submitted that project has been stalled due to dispute and litigations and the assessee has not been able to complete the project. Thus, it is clear, 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 under section 263 of the Act in assessment years 2012-13 and 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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