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* IN THE HIGH COURT OF DELHI AT NEW DELHI
6.
+ ITA 602/2015
PARAS BUILDTECH INDIA PRIVATE LIMITED ..... Appellant
Through Mr Salil Aggarwal and Mr Ravi Pratap
Mall, Advocates.
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through Mr Rohit Madan, Advocate.
AND
7.
+ ITA 603/2015
PARAS BUILDTECH INDIA PRIVATE LIMITED ..... Appellant
Through Mr Salil Aggarwal and Mr Ravi Pratap
Mall, Advocates.
versus
COMMISSIONER OF INCOME TAX , ..... Respondent
Through Mr Rohit Madan, Advocate.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE VIBHU BAKHRU
ORDER
% 18.11.2015
S. Muralidhar,J.:
1. These two appeals by the Assessee under Section 260A (1) of the Income
Tax Act, 1961 (`the Act') are directed against the orders dated 17th February,
ITA Nos. 602/2015 & 603/2015 Page 1 of 12
2015 of the Income Tax Appellate Tribunal (`ITAT') in ITA No.
4316/Del/2010 [for the Assessment Year (`AY') 2005-06] and ITA No.
235/Del/2010 [for AY 2006-07].
2. Admit.
3. The following questions of law are framed for consideration:
(a) For AY 2005-06, whether the ITAT was justified in setting aside
the order of the CIT (A) and holding in the facts and circumstances of
the case the advance amount received by the Assessee should be
treated as income in its hands in the year in which the advance
amounts were received and in applying AS-7 (revised) i.e. the
percentage completion method to the Assessee?
(b) For AY 2006-07, whether the ITAT was justified in setting aside
the order of the CIT (A) deleting the addition of the sum received by
the Assessee on account of advance from bookings and restoring the
case to the file of the AO for a fresh decision?
4. The background to the filing of the present appeals is that the Appellant
Assessee is engaged in the business of real estate as a developer. The
Assessee either purchases land in its own name or gets the power of attorney
from the land owner in case the property is owned by another party so as to
carry out activities of development on the land in terms of a collaboration
agreement. The Assessee enters into agreements to develop and sell overall
projects in terms of sharing with the owner. It enters into contracts with
various buyers and receives sums by way advance for booking or reserving
flats/shops/areas. On completion of the project, the Assessee hands over the
possession of the flats booked to the respective customers/buyers along with
the execution of the sale/conveyance deed.
ITA Nos. 602/2015 & 603/2015 Page 2 of 12
5. It is stated that the Assessee regularly follows Accounting Standard (AS)
9 issued by the Institute of Chartered Accountants of India (ICAI). In this
method, revenue is recognized as and when significant risk and reward of
ownership/title is transferred. All sums received for the construction project
till such time are treated as advances and shown as liability. All expenses
incurred in the construction are accounted for in the stock in trade and/or
block of buildings and are reflected as such in the balance sheet of the
Assessee.
6. The Assessee started construction of a nine floor commercial complex,
viz., 'Paras Down Town Centre' at Sector-53, Gurgaon in the financial year
(FY) 2003-04. The said project was completed during FY 2004-05. As per
the P & L Account and Balance Sheet, for financial year 2004-05, the
Appellant had received Rs.15,39,84,824/- of which Rs.11,11,03,624/- was
on account of advance bookings and Rs.4,28,81,200/- on account of actual
sale. The Assessee incurred Rs.11,91,40,472 as total expenditure shown as
total cost for construction of the commercial complex. However, the
Assessee only showed the costs of Rs. 3.47 crores, corresponding to the
recognised sales of Rs 4.28 crores, as costs in its balance sheet. The
remaining receipts of Rs. 11.11 crore were shown as a current liability.
7. The Assessee filed a return of income along with an audited financial
statement on 13th October 2005 for AY 2005-06 by declaring an income of
Rs.57,75,159. A question arose during the assessment proceedings whether
the percentage completion method (encapsulated in AS 7 issued by the
ITA Nos. 602/2015 & 603/2015 Page 3 of 12
ICAI) should be applied to the Assessee? The Assessing Officer (AO) called
upon the Assessee to submit whether the working of the profit was done as
per the project completion method or the percentage completion method as
provided in AS-7 issued by ICAI. In reply thereto, the Assessee took the
categorical stand that AS-7 was not applicable since it was a developer and
not a contractor. It further took the stand that it had booked sales on signing
of title deeds in AYs 2005-06 and 2006-07.
8. The AO however rejected this contention and held that AS-7 is applicable
to the Assessee. The AO held that the Assessee was acting as a contractor. It
was held that significant risks and rewards of ownership had been
transferred by the Assessee to buyers when the agreements to sell were
entered into with them. The books of account of the Assessee were rejected
under Section 145 of the Act and its profits were computed by applying the
AS-7. The AO added a sum of Rs.1,56,88,100 to the Assessee's declared
income by applying the percentage completion method. Apart from this the
AO disallowed certain other sums including the sums on account of
depreciation and under Section 14A of the Act. The income of the Assessee
was determined at Rs.2,28,68,559/- as against the declared income of
Rs.57,75,159/-.
9. Aggrieved by the order dated 28th December, 2007 passed by the AO, the
Assessee file an Appeal before the Commissioner of Income Tax (Appeals)
[CIT (A)]. By the order dated 2nd July, 2010 the CIT (A) held that the
Assessee was only a developer and not a contractor and that AS-7 would not
apply to it. It was held that the action of rejecting the books of account of the
ITA Nos. 602/2015 & 603/2015 Page 4 of 12
Assessee under Section 145 of the Act could not be upheld. The AO was
directed to compute the income of the Assessee in terms of the Revenue
recognition method followed by the Assessee. The addition made by the AO
in the sum of Rs. 5,23,00,137/- was directed to be deleted. Significantly, the
CIT (A) also noted that the entire exercise was revenue neutral as the AO
had only advanced the accrual of income from AY 2006-07 to AYs 2004-05
and 2005-06.
10. As far as AY 2006-07 is concerned, the AO by the assessment order
dated 31st December, 2007 again applied the percentage completion method
and made an addition of Rs.10,76,70,521 (constituting the advance booking
amounts received) to the income of the Assessee. It was urged by the
Assessee before the AO in respect of the aforementioned advance booking
amount, that the civil work/construction activities had not even started and
no amount could therefore be booked either under the project completion or
the percentage completion methods. It was further pointed out that a sum of
Rs.53.5 lakhs had been refunded in the immediate next year since the
transaction could not materialise. The AO, however, negatived the above
pleas.
11. The appeal filed by the Assessee for AY 2006-07 was allowed by the
CIT (A) by a separate order dated 12th November, 2009 accepting the plea of
the Assessee that the advances received against two of the projects could not
be treated as income since construction had not started. No expenses had
been booked by the Assessee against the said advances. Therefore, even on
the basis of AS -7 the said sum could not be assessed as income of the
ITA Nos. 602/2015 & 603/2015 Page 5 of 12
Assessee.
12. Aggrieved by the above orders of the CIT (A) in relation to AYs 2005-
06 and 2006-07, the Revenue filed appeals before the ITAT.
13. It may be mentioned that the ITAT passed two sets of orders. By one
order dated 17th February, 2015 the ITAT disposed of the Revenue's appeals
pertaining to AY 2004-05 (ITA Nos. 234/Del/2010) and AY 2005-06 (ITA
No. 4316/Del/2016). As far as the appeal concerning AY 2004-05 is
concerned, it was held by the ITAT that since the AO had bifurcated the
income from the Paras Down Town Centre, Sector-53 into two years i.e.,
AY 2004-05 and 2005-06, the addition made by the AO for AY 2004-05 had
to be deleted. To this extent, therefore, the Assessee is not aggrieved by the
said order and has, therefore, not filed any appeal as far as AY 2004-05 is
concerned.
14. As far as AY 2005-06 is concerned, the ITAT reversed the order dated
2nd July 2010 of the CIT (A) and accepted the plea of the Revenue that the
percentage completion method would apply since the Assessee had
transferred risks and rewards to the buyers even prior to commencement of
construction activities. The further factor which weighed with the ITAT was
that some of the buyers had transferred their rights in construction to third
parties during the currency of the construction.
15. A separate order was passed by the ITAT in ITA No. 235/Del/2010
being the Revenue's Appeal for AY 2006-07. The ITAT recorded the
ITA Nos. 602/2015 & 603/2015 Page 6 of 12
submission that the parties were agreement that there was not much
discussion on the factual aspects either in the order of the AO or the order of
the CIT (A). The ITAT proceeded to set aside the order of the CIT (A) and
remand the matter to the AO for deciding it afresh in conformity with the
ITAT's order for AYs 2004-05 and 2005-06.
16. At the outset, it is required to be noticed that the ITAT has in the
impugned order dated 17th February, 2015 in ITA No. 4316/Del/2010 upheld
the finding rendered by the CIT (A) that the Assessee was only a developer
and not a contractor. This finding is significant because, as noticed
hereinbefore, the agreements entered into by the Assessee are only on the
basis that it is a developer. The Assessee has throughout been contending
that it is not a contractor. This finding has been accepted by the Revenue
inasmuch as it has not filed any appeal against the impugned order of the
ITAT.
17. The other significant aspect is that the Assessee has been able to make
good its plea regarding treatment of the sum received by it as advance in its
books of accounts. The balance sheets filed by the Assessee, copies of which
are enclosed with the memorandum of Appeal, do bear out the fact that the
cost of construction is capitalized as regards the flats the construction of
which is yet to be completed, and no conveyance deed has been executed or
possession has not been handed over. The Assessee's balance sheet dated
31st March, 2005 discloses under the sub-head 'Inventory' under the head
`Current loans and advances' a sum of Rs.7,09,93,957. The explanatory
Schedule 4 describes the said figure as `Stock and inventory'. It is also
ITA Nos. 602/2015 & 603/2015 Page 7 of 12
stated in Item No. 1 (b) of Schedule 19 in the Notes to the Accounts forming
part of the final audit statement as under:
"b) Revenue Recognition
Sale of building:
i) When building is ready to be delivered
Sale is booked in the books of accounts on the date of
possession agreed upon or on the date of sale if the
sale deed is executed before the date of possession
agreed.
ii) When the building is not ready to be delivered-
Sale is booked on the date of the building transferred
and possession handed over.
The income and expenditure are accounted for on accrual basis
revenue of sale of offices/shops etc is recognized on signing of
title deeds. All sums received till then for the construction
project are treated as advances and shown as liability."
18. Section 145 (1) of the Act states that the income chargeable under the
heads `Profits and gains of business or profession' shall be computed in
accordance with either cash or mercantile system of accounting "regularly
employed by the Assessee". It is only with effect from 1st April 2015 that a
change has been brought about in Section 145 (2) which permits the central
government to notify in the Official Gazette from time to time the income
computation and disclosure standards to be followed by any class of
Assesses or in respect of any class of income. That change is prospective
and in any event does not apply to the case on hand.
19. The settled legal position as far as Section 145 of the Act is concerned is
that it is not open to an AO to reject the accounts of an Assessee unless he
ITA Nos. 602/2015 & 603/2015 Page 8 of 12
comes to a determination that notified accounting standards have not been
regularly followed by the Assessee. As pointed out by the CIT (A) in the
order dated 2nd July, 2010, the AS of the ICAI did not have any statutory
recognition under the Act although it was binding under the Companies Act,
1956. The method of accounting followed by the Assessee in the present
case i.e. project completion method was certainly one of the recognized
methods and has been consistently followed by it.
20. In Commissioner of Income Tax v. Bilahari Investment P Ltd. (2008)
299 ITR 1 (SC) it was observed as under:
"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. The completed contract method is one
such method. Similarly, the percentage of completion method
is another such method.
Under the completed contract method, the revenue is not
recognized 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 the profit and loss
account. The said method determines results only when the
contract is completed. This method leads to objective
assessment of the results of the contract.
On the other hand, the percentage of completion method tries
to attain periodic recognition of income in order to reflect
current performance. The amount of revenue recognized
under the method determined by reference to the stage of
completion of the contract. The stage of completion can be
looked at under this method by taking into consideration the
proportion that costs incurred to date bears to the estimated
total costs of contract.
ITA Nos. 602/2015 & 603/2015 Page 9 of 12
The above indicates the difference between the completed
contract method and the percentage of completion method."
21. In the present case, there was therefore no good reason for the ITAT to
have reversed the finding of the CIT (A). The only reason given in the
impugned order of the ITAT is that `risks and rewards' of ownership were
transferred to the buyers who had paid the booking advance amounts and in
some cases these rights were transferred to third parties. However, this does
not in any manner affect the treatment of the said amounts in the books of
the Assessee. As noted hereinbefore, the expenses of construction were not
debited to the P & L account of the Assessee. It was shown as cost of
construction or block of buildings. It is only as and when a conveyance deed
was executed or possession delivered that the receipt was shown as income.
The explanation added by way of Notes to the Accounts was not taken note
of by the ITAT when it came to the conclusion that the percentage
completion method should apply to the Assessee.
22. The other aspect that appears to have escaped the attention of the ITAT
is that the Assessee offered to tax in the subsequent FY the amounts
received and therefore there was no actual loss to the revenue. In similar
circumstances, the Supreme Court in CIT v. Excel Industries Limited 2013
ITR 295 (SC) observed that the dispute if any raised at the instance of the
Revenue would be at best academic. The stand of the Assessee in the present
case also finds support in the decision of the Gujarat High Court in CIT-IV
v. Shivalik Buildwell (P) Ltd. (2013) 40 taxmmann.com 219 (Gujarat). It
was held that the Assessee in that case, who was a developer, was entitled to
ITA Nos. 602/2015 & 603/2015 Page 10 of 12
book the amount received as booking advance as income on transfer of the
property. Till then the advance booking amounts could not be treated as his
trading receipt. The High Court recognized that the Assessee in that case
was entitled to apply the project completion method in terms of the
applicable AS.
23. This Court too has by order dated 7th January 2015 in ITA 111/2014
(CIT v. SABH Infrastructure Ltd.) held likewise, after noticing the
decisions of the Supreme Court in CIT v. Bilahari Investment P. Ltd.
(supra) and the order dated 15th November 2011 in ITA No. 928 of
2011(CIT v. Manish Buildwell Pvt. Ltd.).
24. For the aforementioned reasons this Court answers question (a) as far as
AY 2005-06 is concerned in the negative, i.e. favour of the Assessee and
against the Revenue.
25. As far as AY 2006-07 is concerned, it is apparent that the ITAT in the
impugned order lost sight of the fact that the advances received by the
Assessee were in respect of a project that never took off. A part of the
advance amount was returned in the following FY since the transaction itself
fell through. In the circumstances the question of treating the amounts as
income in the hands of the Assessee did not arise. No purpose was going to
be served in remanding the matter to the AO for a fresh determination.
Consequently, as far as AY 2006-07 is concerned, question (b) is answered
in the negative i.e. in favour of the Assessee and against the Revenue.
ITA Nos. 602/2015 & 603/2015 Page 11 of 12
26. The impugned orders dated 17th February 2015 of the ITAT to the
above extent are hereby set aside.
27. The appeals are allowed in the above terms. No order as to costs.
S.MURALIDHAR, J
VIBHU BAKHRU, J
NOVEMBER 18, 2015
pkv
ITA Nos. 602/2015 & 603/2015 Page 12 of 12
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