TMI Blog2023 (5) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... hod is sustained. Revision of estimated cost of repairs/renovation caused due to delay in project and damage to the building on account of various litigations not being considered by the ld. CIT(A) - HELD THAT:- The events behind escalation of Renovation cost have arisen in period subsequent to AY 2011-12, and therefore, any effect of said estimate can t be given in AY 2011-12 and can only be given in subsequent assessment years. Therefore, these grounds are dismissed for AY 2011-12. Valuation of unsold flats at cost not been considered by the ld. CIT(A) - assessee has followed percentage completion method for computation of profits from the project - HELD THAT:- Under this method, after working out the profit commensurate with the construction work carried out, further expenses for maintenance of the corporate structure and other administrative and selling expenses for running the business are debited to Profit Loss A/c. and net profit is worked out accordingly. For the purpose of computing profit from the project, the valuation of closing stock has no role to play under this method. Accordingly, the ground challenging the valuation of unsold flats at market value is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble ITAT in A Y 2009-2010 cannot be worked out. 7. The Ld CIT (A) erred in interpreting order of Hon'ble ITAT for A Y 2009-2010 that cost of construction/ repairs cannot be revised. 8. The Ld CIT (A) erred in not considering estimated cost at Rs. 366.95 cr. and restricting to Rs. 266.35 cr. 9. The Ld CIT (A) erred in reducing proportionate cost of construction and direct. cost pertaining to the area admeasuring 15,308 sq. ft., consisting of demolished area and in respect of which development rights not granted. 10. The Ld CIT (A) erred in not allowing deduction ws 80G of the IT Act. 3. Briefly stated facts of the case are that the assessee, a partnership firm, is engaged in the business of real estate development. The assessee entered into a development agreement with M/s Chetak Co-op Housing Society Ltd,(in short the Chetak Society ), Pali hill, Bandra (Mumbai) on 31/12/2005 for construction of a building (two wings namely A and B ) on land comprising of four different plots belonging to said Society. The total area available for construction was12599 square meters i.e., 1,35,616 square feet, rounded off to 1,35,600 sq. feet. As per the plans whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent plots at Pali Hill, Bandra (West), Mumbai. The assessee acquired development rights from the Chetak Society to construct a building comprising of A and B wings. The total area of construction was 12599.12 sq. meters. i.e. 1,35,616 sq. ft. rounded off to 1,35,600 sq. ft. as per the plans. However, later, dispute arose between the assessee and the Chetak Society in relation to the project on some clauses of the agreement. As per the advertisement published in the newspaper dt. 3/6/2011, the society cancelled the development agreement dt. 31/12/2005 and as per another advertisement published in the newspaper dt. 12/11/2011 society had cancelled Power of Attorney granted to the assessee. The Chetak Society also filed writ petition wherein one of the grievances was that 5 members of the society having rights over 1,111 sq. meters. i.e. 11,959 sq. ft. had not granted their rights for construction to the assessee, litigation of which is pending till date. Further, the Chetak Society had also filed suit before the Hon ble Bombay High Court in the year 2013. As per the order dt. 30/07/2013, Hon ble Bombay High Court granted stay against the assessee from carrying out any furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission that stock may be valued at the rate of last sale deed executed S1 3,569,095,680 Total estimated cost excluding Administrative Costs C1 2,165,200,000 Total profit (P1) to be bifurcated in different years after reducing administrative costs 1,403,895,680 And the bifurcation of estimated costis as under: Direct cost, D1 817,700,000 Construction cost estimate, C1 1,347,500,000 Administrative cost estimate (not considered in C1) 498,300,000 Total estimate cost including Administrative Costs 2,663,500,000 15.2. However now this P above is to be recomputed as per the additional grounds allowed in para 4.5. Now considering reduction of area available for sale accepted after verification by the Assessing officer in earlier year and in compliance to ITAT order, the revised estimate of profit is to be prepared. In consequence to reduction of saleable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nents of cost taken in working out the profit based on Table WIP (para 12.2) Assessment Year -- 2010-11 2011-12 Construction cost estimate, C 1,22,86,50,500 1,22,86,50,500 Construction cost incurred during the year 9,22,50,953 year 16,45,81,649 Progress in work, w 7.51% 13.40% Total estimated sale consideration, S 2,99,94,23,768 2,99,94,23,768 Gross revenue allocated for the year, S*w 225206193 401782370 Less : proportionate direct cost, D*w -54463943 -97167186 Less : Construction cost incurred as per Table WIP during the year 9,22,50,953 -16,45,81,649 Less: Administrative cost debited as per books/Table WIP during the year -4,64,13,660 -5,52,95,604 Profits to be taxed subject to adjustments a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant to refer to the decision of the co-ordinate bench of Mumbai ITAT in the case of S.S. Enterprises v. ACIT in ITA no. 2649/Mum/2018 for A.Y. 2014-15 wherein it is held as under: - ..4.1 In the reasons for the decision, we have mentioned in the impugned order that in CIT v. A. Gajapathy Naidu, (1964) 53 ITR 114 (SC), it is held that income is taxable when it accrues or is earned, if the assessee's accounts are maintained on the mercantile basis. A profit can be said to have accrued or a liability or loss can be said to have been incurred only when the profit is either actually due or the liability becomes enforceable. Further, it is held in CIT v. Associated Commercial Corporation, (1963) 48 ITR 1 (Bom) that a mere claim to a profit or to a liability is not sufficient to make the profit to accrue or the liability to be incurred for the purposes of the Income Tax Act. It is also clarified in Morvi Industries Ltd. v. CIT, (1971) 82 ITR 835 (SC) that once accrued, it is liable to the charge even if, subsequently, it is forgone and not realized. When a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time. The same is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have the effect of transferring all significant risks and rewards of ownership to the buyer provided the agreement is legally enforceable and subject to the satisfaction of conditions which signify transferring of significant risks and rewards even though the legal title is not transferred or the possession of the real estate is not given to the buyer. Once the seller has transferred all the significant risks and rewards to the buyer, any acts on the real estate performed by the seller are, in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue in such cases is recognised by applying the percentage of completion method on the basis of the methodology explained in AS 7, Construction Contracts. Further, where individual contracts are part of a single project, although risks and rewards may have been transferred on signing of a legally enforceable individual contract but significant performance in respect of remaining components of the project is pending, revenue in respect of such an individual contract should not be recognised until the performance on the remaining components is considered to be completed on the basis of the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion method should be applied in the accounting of all real estate transactions/activities in the situations described in paragraph 3.3 above, i.e., where the economic substance is similar to construction contracts. Some further indicators of such transactions/activities are: (a) The duration of such projects is beyond 12 months and the project commencement date and project completion date fall into different accounting periods. (b) Most features of the project are common to construction contracts, viz., land development, structural engineering, architectural design, construction, etc. (c) While individual units of the project are contracted to be delivered to different buyers these are interdependent upon or interrelated to completion of a number of common activities and/or provision of common amenities. (d) The construction or development activities form a significant proportion of the project activity. 5.2 This method is applied when the outcome of a real estate project can be estimated reliably and when all the following conditions are satisfied: (a) total project revenues can be estimated reliably; (b) it is probable that the economic benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estate project should be recognised as revenue and expenses by reference to the stage of completion of the project activity at the reporting date. For computation of revenue the stage of completion is arrived at with reference to the entire project costs incurred including land costs, borrowing costs and construction and development costs as defined in paragraph 2.2. Whilst the method of determination of stage of completion with reference to project costs incurred is the preferred method, this Guidance Note does not prohibit other methods of determination of stage of completion, e.g., surveys of work done, technical estimation, etc. However, computation of revenue with reference to other methods of determination of stage of completion should not, in any case, exceed the revenue computed with reference to the 'project costs incurred' method. Illustration appended to this Guidance Note clarifies the method of computation of revenue. 5.5 The project costs which are recognised in the statement of profit and loss by reference to the stage of completion of the project activity are matched with the revenues recognised resulting in the reporting of revenue, expenses and profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge is made and in subsequent periods. Following the above principles, the profit from project, can be broadly computed in following manner: 1. Compute the estimated cost of the project including construction cost and development cost directly related to the real estate project, including land conversion cost, material, labour, depreciation of plant and Machinery, estimated cost of rectification and guarantee, expected warranty cost etc.(A) 2. Compute the cost of construction and direct cost incurred as on reporting date. (B) 3. Find out the percentage of work completed on reporting date ( C= B/C) 4. Compute the salable area of the project. (D) 5. Compute the estimated cost per unit of saleable area. (E= A/D) 6. Compute the revenue arising from sale agreements booked. (F) 7. Find out the area sold corresponding to sale agreements. (G) 8. Compute the project cost relatable to the area sold.( H= G*E) 9. Compute the profit from sale of the area sold ( I= F-H) 10. Then, finally work out the profit corresponding to the stage of work completed by multiplying the profit computed at step 9 to the percentage work completed on reporting date(J= I*C) (* stands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.63 crores upto the year under consideration from the inception of the project. In so far as the cost of the project is concerned, the administrative cost cannot be the part thereof and accordingly, the same is excluded resulting into project cost of Rs. 95.87crores (111.63 crores minus 15.76 crores). (c) Thus, up to the year under consideration i.e. A.Y. 2011-12, the percentage of completion of project comes to [(95.87/216.52)*100] = 44.28% (d) Salable area of the project: Further, in this case, the total area available for construction is 1,35,600 sq. ft., out of which area for constructing A wing is 1,28,760 sq. ft. and that for B wing is 6,840 sq. ft.Till A.Y. 2009-10, the assessee has taken into consideration the total area of 1,35,600 sq. ft. However, in A.Y. 2010-11, for the first time, the assessee submitted that the total saleable area needs to be revised due to two events, firstly, due to the dispute arisen with 5 members in the society encompassing area of 11,958 sq. ft. who restrained to give any permission for development and secondly, due to demolition of area of 3,350 sq.ft. of 19th floor of A wing because of height restrictions by the airport author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has followed percentage completion method for computation of profits from the project. Under this method, after working out the profit commensurate with the construction work carried out, further expenses for maintenance of the corporate structure and other administrative and selling expenses for running the business are debited to Profit Loss A/c. and net profit is worked out accordingly. For the purpose of computing profit from the project, the valuation of closing stock has no role to play under this method. Accordingly, the ground challenging the valuation of unsold flats at market value is irrelevant, whether taken at cost or market value. We set aside the finding of the ld. CIT(A) on the issue of dispute for considering valuation of unsold flats at market value Thus, this ground no. 5 of the assessee is allowed. 15. The ground No. 8 of the appeal was not pressed, therefore, same is dismissed. 16. The ground no. 9 of the appeal relates to the issue raised by the assessee that the ld. CIT(A) erred in reducing the proportionate cost of construction and direct cost pertaining to area admeasuring 15,308 sq. ft. consisting of demolished area and in respect of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as per the principles of percentile completion method reproduced above. The details of the estimate of expenses were filed before lower authorities and also filed before us in the paper book. The Ld. CIT(A) has mentioned the figure at Rs.61,63,16,666/- so we restored the amount to that extent only. Accordingly, we revise the estimate of cost of project to Rs. 216.52 plus Rs. 11.05 crores totaling to Rs. 227.67 crores for AY 2012-13 and onward. Further, we also note that in AY 2013-14, the cost incurred has been reduced from 133.13 cores to 128.81 due credit of service tax in said year. 19.3 In this manner, the project cost incurred and percentage completion of project is worked out as under: - A.Y. Total Project cost incurred (incl. administrative cost) (Rs. In crores) Administrative cost (Rs. crores) In Total Project Cost (excl. administrative cost) (Rs. In crores) Total Estimated Project Cost (in Rs. Crores) % of work completed 2010-11 2011-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total amount of Sale (Agreements) entered upto year end 1752925800 1882925800 1882925800 Less: Total cost of area sold upto year end 1424136765 1556682045 1556682045 Cumulative Profit from the project upto year end 328789035 326243755 326243755 Cumulative Profit recognized as per percentage completion method 145580107 190842842 184683092 Year-wise profit before admn expenses 0 145580107 45262735 (-)6159750 Less: ..... 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