Full Judgment Text
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
RESERVED ON: 18.10.2016
% PRONOUNCED ON: 21.12.2016
+ ITA 159 & 326/2010
COMMISSIONER OF INCOME TAX DELHI IV..... Appellant
Through: Mr. Dileep Shivpuri, Sr. Standing
Counsel with Mr. Sanjay Kumar, Jr.
Standing Counsel and Mr. Vikrant A.
Maheshwari, Advocates, in both appeals.
versus
DLF UNIVERSAL LTD. ..... Respondent
Through: Mr. Ajay Vohra, Sr. Advocate
with Ms. Kavita Jha and Mr. Vaibhav
Kulkarni, Advocates, in both appeals.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MS. JUSTICE DEEPA SHARMA
S.RAVINDRA BHAT, J.
1. The questions of law framed in these two appeals are as
follows: -
1. Whether the Income Tax Appellate Tribunal was correct in
law in setting aside the Commissioner of Income Tax (Appeals)
order wherein it was held that the method of accounting
followed by the assessee in the past and accepted in earlier
assessment years is such that correct income cannot be properly
detected from the accounts and the Assessing Officer was
justified in invoking the provisions of First Proviso to Section
145(1) of the Income Tax Act, 1961?
2. Whether the Income Tax Appellate Tribunal was correct in
ITA Nos.159 & 326/2010 Page 1
law in holding that sale price in respect of constructed/built up
properties should not be accounted for at the time of handing
over the possession or conveyancing whichever is earlier?
3. Whether the Assessing Officer and the Commissioner of
Income Tax (Appeals) were correct in law in re-working the
cost of land at the average purchase price of land in Qutub
Enclave Complex now known as DLF city by dividing the cost
of the acquired till the end of the year by saleable area including
lands earmarked for schools, hospitals, clubs and other
community building, in each phase?
2. Both these appeals concern assessment years 1994-95 and arise
out of the order of the Income Tax Appellate Tribunal (ITAT),
allowing the appeals before it. The assessee which develops lands into
plots and sells them, declared an income of ` 8,59,28,760/ - in its return
dated 30.11.1994. This was processed on 28.03.1995. Later it filed a
revised return on 3.10.1996 declaring a loss of ` 93,39,470/-. The
original assessment under Section 143 (3) was made on 31.03.1997 by
which the income was assessed at ` 18,97,84,160/ - by estimating the
income @ 12.5% of the installments received by the assessee against
booking of plots. The order of the Assessing Officer (AO) was set
aside by the CIT (A), and the AO was directed to re-compute the
assessee’s income by recasting the trading and profit and loss account
through method indicated, i.e., division of total expenditure by number
of units in each phase in terms of the layout plan and charging of
proportionate development expenses to the profit and loss account -
depending upon the number of units of each phase sold during the
year, the sale proceeds whereof were credited to the profit and loss
account in that year. This pertained to the internal development
ITA Nos.159 & 326/2010 Page 2
expenses. The CIT (A) also directed that the method of realizing
revenue or debiting the cost of goods or valuing the stock or
determination of certain expenses was not correct. The AO ought to
have proceeded to re-compute the income after rectifying the defects
rather than rejecting the accounts altogether. The AO was directed,
therefore, to make necessary adjustments to the profit and loss
accounts in respect of different issues in terms of the discussion. The
revenue and the assessee appealed against the CIT (A)’s order. On
06.06.2008, the ITAT allowed the appeals by the assessee. The second
appeal relates to the order of the ITAT, which set aside the CIT (A)’s
order, after the appeal effect had been given to the assessment, on
remand the first time. The AO had added some amounts, during the
pendency of assessee’s appeals to the ITAT; that order was affirmed.
The ITAT, having regard to its previous findings, set aside the CIT
(A’s) order with respect to the method of accounting and certain
additions made.
3. The assessee’s deals in real estate, its acquisition, development
in various projects through layouts and sale of developed lands and
flats. Its acquisition is through subsidiary companies that in turn
purchase lands from agriculturists. The assessee directly purchases
only a small part of the total lands itself in view of certain legal
impediments. The acquisition of land, therefore, is through its 40 fully
owned subsidiary companies, which acquire lands in their own right.
The subsidiaries are funded for the purposes of such acquisition. Both
the assessee and the subsidiaries obtain licenses from the Haryana
Government for development of land. The subsidiaries do not develop
the land but have entered into agreements to sell them only to the
ITA Nos.159 & 326/2010 Page 3
assessee company or their nominees at specified rates. The rate
specified is the cost of land plus a markup of ` 2000/ - per acre. The
right to develop the land in terms of the licenses and the right to enter
into agreements to sell the land or interests thereon have been given by
the subsidiary companies to the assessee through separate agreements.
The subsidiary companies’ returns, are at a fixed rate of ` 2000/ - per
acre. The assessee appropriates the rest of the amounts collected from
the prospective buyers of the developed land.
Question nos.1&2
4. The assessee used to advertise its schemes and after receipt of
forms, the plots or constructed residential units/flats or commercial
flats were sold to various prospective buyers each of whom entered
into an agreement to pay the consideration of the plot or
residential/commercial unit. The assessee showed these installments
as receipts credited to “realization under agreement to sell” advance
from the customer’s account till the property was conveyanced in
favour of the prospective buyers. At the time of conveyancing of the
land to the prospective buyers, the subsidiary companies write off the
property from their closing stock. The AO noticed that the assessee
followed the mercantile system of account and was of the opinion that
the assessee was following the project completion method. This
involved transfer from the advance account and crediting to the profit
and loss account the sums of money received from the prospective
purchasers. All direct expenses incurred on development of land and
construction were debited proportionately to the profit and loss
account only in the year of conveyancing by taking the average cost of
the land. The development expenses were debited @ 30% of the total
ITA Nos.159 & 326/2010 Page 4
sale consideration. All other expenses such as interest payment,
advertisement, brokerage expenses etc. were debited to the account in
the year they were actually incurred. The AO found fault with this
method of accounting and felt that the assessee should have followed
the “substantial completion of projects” method of accounting in
respect of its transactions. This was because the assessee claimed
substantial expenditure and debited them from the profit and loss
account but corresponding sales were not declared in the credit side of
the trading account. It was noticed that there was no cancellation
clause in the sale agreement for non-execution of the sale deed within
the time nor was there any penalty clause for non-execution of the sale
deed on deposit of the basic sale price. Therefore, the AO felt that it
was not possible to arrive at a true profit and applied proviso to
Section 145 (1) of the Income Tax Act, 1961 to reject the method of
accounting.
5. In the first instance, the CIT (A) upheld the order of the AO by
his previous order of 30.01.1998. The appellate Commissioner held
that the expression “method of accounting” under Section 145 was
wide enough to include not only the two recognized systems of
accounting, i.e., cash and mercantile but all such methods employed
by the assessee that have direct or indirect bearing on the working of
the profits. It was reasoned that the assessee’s business, i.e., township
development is different from that of a contractor or one assessed for
construction activity. The peculiar feature of this business is that it is
an open ended ongoing project and the completion of one project or
the other is not conclusive because other phases of the project - even
multiple might continue. The CIT (A) felt that it could be said that
ITA Nos.159 & 326/2010 Page 5
income accrues on a date earlier than when it is received, but it could
be difficult to state whether income or amounts received earlier would
accrue later. Noticing the peculiarities of the agreement to sell entered
into between the plot/flat buyers and the assessee, the CIT (A) felt that
in the absence of a penalty clause in the event of delay by the assessee
or the absence of a cancellation and forfeiture condition, and
furthermore there being practically no instance of termination of
agreements, the agreements themselves effectively conveyed the
property. The CIT (A) relied upon the decisions of the ITAT as well
as the Supreme Court in CIT v. Podar Cement (Pvt.) Ltd. , (1997) 226
ITR 625 and held that even without a conveyance deed, there was in
effect transfer of lands. The CIT (A) directed re-computation of the
assessee’s income in the light of the adjustments to be made in terms
of the directions in paragraph 27 of its order. Those directions are
extracted below: -
“27. In the light of the foregoing discussion, I find that there
are certain material defects in the method of accounting
employed by the appellant which leads to distortion of the real
profit. It is not possible to deduce the profit from the method of
accounting so deployed in any year of account. Hence, the A.O.
has rightly invoked the provisions contained in the proviso to
section 145 (1) of the Act. However, the appellant ahs regularly
employed this method. It is not the case of the A.O. that the
books of accounts are not correct or complete. It would,
therefore, not be correct to reject the books of accounts
altogether and resort to estimation of profit in the manner done
by the A.O. If the method of realizing the revenues or debiting
the cost of goods or valuing the stock or determination of
certain expenses is not correct, the A.O. should proceed to
compute the income after rectifying such defects. The
application of net profit rate should be resorted to only if there
is no other way of arising at the profit of the assessee. Besides,
ITA Nos.159 & 326/2010 Page 6
in the present case, the A.O. has no rational basis for applying
a net profit rate of 12.5% on the value of installments received
during a year. He has referred to the case of M/s Unitech Ltd.
But in the said case the rate is applied to arrive at the gross
profit and estimation is subject to final accounting on the
completion of the project. The A.O. has drawn support from the
case of S.P. Viz construction CO reported in 163 ITR 666 which
was the case of a contractor and not of a colonizer or a
developer or a dealer in real estate. The net profit rate of
12.5% is purely adhoc and arbitrary and has no rational basis.
It is possible in the present case to work out the profits of the
appellant after rectifying the defects in the accounts and by
making the necessary changes in the profit and loss account.
Thus the action of the A.O. in completely disregarding the
books of account and applying a flat net profit rate cannot be
upheld. The A.O. should, therefore, make necessary changes in
the profit and loss account in respect of different issues as per
the guidelines discussed herein below.
(I) The discussion made in the preceding paragraphs with
regard to the realization of revenues in respect of sale of plots
of land at the time of conveyancing clearly shows that the
method is not correct and defers the accrual of income.
However, this method has been employed since the very
beginning of the QE complex. The assessments have also been
completed on the same basis. By now 90% of the plots of land
have already been conveyanced and the sale proceeds credited
to the profit and loss account. If any alternation in the method
of accounting is made by the A.O. at this stage, it may unsettle a
large number of assessments and may result in certain income
getting doubly taxed or not taxed altogether. Looking to
entirety of facts and circumstances it would be fair both to the
assessee as also the Revenue to let the method of accounting
continue for the remaining part of the project despite certain
distortions as stated above as far as plots of land are
concerned.
(II) As regards the constructed properties, the method of
accounting was changed by the appellant in the recent past.
The possession of the property is handed over to the buyers on
ITA Nos.159 & 326/2010 Page 7
payment of at least 40% of the sale price and the balance
amount is payable in installments under the Deferred plan for
which the appellant is charging interest from them. The buyers
become the beneficial owners of these properties under the
circumstances and for the reasons discussed above. The
appellant’s right to the full realization of sale consideration
accrues at the time the possession is handed over and from then
onwards for all purposes, the buyers are only debtors of the
appellant for the remaining amount of installments. Thus in
respect of constructed properties, the sales should be taken to
the profit and loss account in the year in which the possession is
handed over to the buyers if the sale is made under a deferred
payment plan. In respect of properties sold against outright
payment, the sales should be credited to the accounts in the
year in which possession is handed over or the year in which
the conveyancing is done whichever is earlier.
(III) As regards the cost of land, average purchase price of
each phase should be worked out. Phases I, II, III were started
at the same point of time. Phase IV was started much later and
phase V still later. The total cost of lands falling in each phase
(Phase I, II & III may be regarded as one phase for this
purpose) should be worked out and the cost so arrived at should
be divided by the total saleable area in each phase as per the
approved layout plan. This will give the average purchase
price of land for each phase. In respect of multi-storeyed
building, the average cost of land utilized for the construction of
the building may have to be further divided by the number of
units in the building. The average cost of land to be debited to
the profit and loss account in any given year should be
determined on the basis of the area of plots of land/constructed
units of each phase sold during the year, (the sale proceeds
whereof are credited to the profit loss account in that year) and
the total cost of land of each phase.
(IV) For arriving at the value of closing stock of land, only the
land utilized for roads, parks etc. should be written off
proportionately at the time of sale of land or constructed
properties. The land earmarked for schools, hospitals, clubs or
other community buildings should be written off only in the year
ITA Nos.159 & 326/2010 Page 8
in which such land is transferred to third parties. For the year
under appeal, such land (except 5 sites retained by the
company) should neither appear in the closing stock nor in the
opening stock as it stood transferred long back to the Govt or to
the trusts. However, the sites which have been retained by the
appellant will continue to be shown in the closing stock. The
value of such lands till these remain in the closing stock will
have to be determined in accordance with the method of
valuation adopted by the appellant. It may be pointed out that
the market value of these sites cannot be zero. These are
capable of getting premium as seen in respect of 42 sites
transferred to different individuals/institutions through the
medium of trust. The AO should obtain a yearly stock inventory
of the land acquired by the assessee in various phases, rate at
which acquired, area acquired and also the details of land
conveyance out of the acquisition.
(V) The internal development expenses should be debited to
the profit and loss account on the basis of actual expenditure.
By the time the sale proceeds are credited to the profit and loss
account, the development work is already over and the actual
expenditure on the development of each phase is known. The
question of estimating such expenses may arise when these
expenses are required to be charged before the actual execution
of the work. Such an eventuality would have arisen if the profits
were to be worked out before the completion of the project. In
the present case the revenues are being realized only at the time
of conveyancing and in any case after the completion of the
project or sub-project. There should not be any difficulty in
finding out the total amount of internal development expenses
on each phase. The total amount of expenditure should be
divided by the number of units in each phase as per the layout
plan. The proportionate development expenses should be
charged to the profit & loss accounts depending upon the
number of units of each phase sold during the year (the sale
proceeds whereof are credited to the profit and loss account in
that year). It was very seriously contended that the appellant
has to incur a large amount of expenditure even after the sale of
plots/flats. I do not find any difficulty in this regard. If the
assessee incurs any further expenditure in future in the said
ITA Nos.159 & 326/2010 Page 9
phase the same can always be claimed against the similar
receipts to be credited in future. The expenses can be claimed
even if there are no receipts in any particular year.
(VI) The A.O. is directed to recompute the income of the
appellant company after making the above adjustments and by
recasting the trading and profit and loss account. The
assessment is accordingly set aside for recomputation of income
by the A.O. The A.O. will, however, provide adequate
opportunity to the appellant in this regard.”
6. The ITAT accepted the assessee’s appeal but rejected the
revenue’s appeal on other issues and held as follows: -
“Now coming back to the first issue raised by the AO and
accepted by the CIT (A), it is with regard to the fact whether the
assessee should not have treated Phases I to IV as one project
for purposes of application of project completion method. The
CIT (A) has opined that Phases I, II and III should be treated as
one complex and Phase IV should be treated separately. This is
for the reason, as per CIT (A) and the AO, that Phase IV could
go on indefinitely and this could lead to reduction in profits
because the purchase of land subsequently would be at the
higher rates vis-à-vis the rate at which the land was purchased
earlier at lower rates. As explained before, the appellant
assessee follows the project completion method whereunder all
its costs are capitalized to work-in-progress, including the
purchase of land – whether it is purchased at earlier point of
time or later point of time. So, there is no dispute between the
appellant assessee and the Department that its work-in-
progress has been properly reflected in its books of accounts.
The issue that has been raised is that when the assessee books a
sale on registration of the sale deed, then its credits work-in-
progress by the average cost of land on the date of sale and
debits its profit & loss account by the same amount. In
principle, both the AO and CIT (A), as well as, the learned DR
agree with this method; the only variation they are proposing is
that average should be in respect of Phases, I, II and III, not
including therein Phase IV, whereas, as per books of accounts
maintained by the assessee from 1981 to 1993-94, the assessee
ITA Nos.159 & 326/2010 Page 10
is doing it in respect of all the four Phases, i.e., principally, the
methodology is not under dispute. The only variation that is
being pressed is in the exact working thereof. The criteria
adopted by the Ld. CIT (A) is not justified. Firstly, the entire
area under phase I to IV has been considered by the HUDA
authorities as one single project, in terms of sanction given as
per their letter. Secondly, the extent of the area to be held for
benefit of the community like school, hospital, fire station,
parks, police station etc. are to be set apart from the entire land
of Phase I to IV jointly and not phase wise. Thus the cost of land
in phase I to IV have to be aggregated by pooling all these
lands together. This justifies the action of the assessee in
allocating the cost of entire land in phase I to IV by pooling
them together. On the contrary, there is no justification for
excluding the cost of phase IV alone without any intelligible
criteria for the same. There is no intelligible criteria for
making this change. Ultimately, profit and loss even out over a
period of time and life of the project. This tinkering with the
books of accounts does not result in any gain to the Revenue as
it only reduces profit in one year and increases in the other year
and as observed by the CIT (A), most of the sales in these four
Phase have been completed. Therefore, over the period of life
of this colonization, this variation being proposed by the AO
and the CIT (A) does not serve the purpose of the Revenue and
this should not have been tinkered with. The finding by Ld. CIT
(A) in this regard is incorrect for the reasons stated in this
paragraph, especially in view of the fact that Haryana Urban
Development Authority has also treated these four Phases as
one as mentioned at pages 212 to 215 of the Paper Book.”
7. After the remand, in the meanwhile, the AO had completed the
assessment pursuant to the directions of the CIT (A). Now, this
exercise was rendered entirely academic in view of the later decision
of the ITAT, which was, however, rendered on 6.6.2008. This
assessment order after working out the remit, even as per the previous
order of the CIT (A), determined the net profit as per profit and loss
ITA Nos.159 & 326/2010 Page 11
account @ ` 2,74,36,834/ - . The total taxable income was determined to
be ` 2,38,11,766/ - . The CIT (A)’s order on this aspect was of
30.05.2001. The assessee had to appeal against that order because its
previous appeal against the first assessment order was still pending.
8. In the order impugned in these appeals, the ITAT reiterated its
decision of 06.06.2008 and held that rejection of the assessee’s
method of accounting was not justified.
9. Mr. Dileep Shivpuri, learned counsel for the revenue urges that
the impugned order is unsustainable. It is stated that the assessee’s
method of accounting in effect postpones the profit which is not
permissible in law and besides results in prejudice to the revenue.
The method of accounting did not truly and accurately reflect the
picture of profit earned by the assessee. It is highlighted that the
assessee changed its method of accounting in assessment year 1992-93
before which it was in fact followings the project completion method
and claiming development expenses as part of work in progress. This
method of accounting was changed by the assessee, which offered
sales on the basis of conveyances. By this revised method, the
assessee did not offer a portion of sales consideration in the year of its
receipt claiming that provisions for development expenses was made
inspite of the fact that those expenses were not incurred in the year
under consideration.
10. Mr. Shivpuri submitted that 30% appropriated towards
development as expenses could not be in fact done on a uniform
pattern across the board given that development of the individual plots
was never undertaken at one go and was in fact on project to project
and layout to layout basis. In fact, no supporting evidence was offered
ITA Nos.159 & 326/2010 Page 12
to show such expenditure. Likewise, appropriation of the entire
brokerage and sales commission to the expenses, as debited, though
the conveyance of the property was much later, also showed that there
was no consistent pattern in the accounting behaviour of the assessee.
Learned counsel relied upon Section 2 (47) of the Income Tax Act,
1961 and Section 53 (A) and submitted that transfer is not evidenced
only by conveyancing but in fact also by possession which is a
recognized mode under income tax law as well as general civil law of
the land. He relied upon the decision of the Supreme Court in Mysore
Minerals Ltd. v. Commissioner of Income Tax , 234 ITR 775.
11. Mr. Ajay Vohra, learned senior counsel for the assessee
submitted that questions sought to be urged should be answered
against the revenue. He placed heavy reliance upon the ITAT’s
decision dated 06.06.2008 and submitted that the method of
accounting as well as the appropriation of expenses towards
development etc. were directly in issue and in fact accepted. It is
urged that the State Government treated all phases or stages of the
assessee’s project as one development unit or colony, though the
assessee developed them in different phases on specific timelines.
The license and approval received by it on 26.07.1994 clearly showed
that it was one unit. It was submitted further that 51 sites were
earmarked as community sites to be handed over to the Haryana
Urban Development Authority (HUDA) which was also contained in
Annexure and that details of taking over of such sites in the four
phases were also mentioned. Colonization is a highly regulated
activity involving a large number of cheques and balances. HUDA
monitored every receipt by the assessee; 30% of the amounts received
ITA Nos.159 & 326/2010 Page 13
had to be deposited in a special bank account to meet the internal
development expenses. This account is under the control of the
Director, Town and Country Planning, Haryana, copies of these
documents were produced before the AO and the other revenue
authorities. These documents also indicated that 50% of the amounts
received from the plot holders were kept in a separate account under
the control of the Director, Town and Country Planning, Haryana.
This was later reduced to 30% in the assessee’s case - a fact noticed by
the CIT (A). The account in turn was subjected to audit. If the
assessee violated any terms of the Act, its license to colonize could be
cancelled under Rule 8 of the Regulations.
12. It is pointed out that the findings of the ITAT on the question of
adopting the method of accounting are conclusive and that since the
revenue did not prefer any appeal against those findings which were
not a matter of remand but rather set aside the second assessment
order and the second order of the CIT (A), nothing survived. In this
regard, the order of the ITAT dated 06.06.2008 deals with the question
of method of accounting and holds as follows: -
“Now coming back to the first issue raised by the AO and
accepted by the CIT (A), it is with regard to the fact whether the
assessee should not have treated Phases I to IV as one project
for purposes of application of project completion method. The
CIT (A) has opined that Phases I, II and III should be treated as
one complex and Phase IV should be treated separately. This is
for the reason, as per CIT (A) and the AO, that Phase IV could
go on indefinitely and this could lead to reduction in profits
because the purchase of land subsequently would be at the
higher rates vis-à-vis the rate at which the land was purchased
earlier at lower rates. As explained before, the appellant
assessee follows the project completion method whereunder all
its costs are capitalized to work-in-progress, including the
ITA Nos.159 & 326/2010 Page 14
purchase of land – whether it is purchased at earlier point of
time or later point of time. So, there is no dispute between the
appellant assessee and the Department that its work-in-
progress has been properly reflected in its books of accounts.
The issue that has been raised is that when the assessee books a
sale on registration of the sale deed, then its credits work-in-
progress by the average cost of land on the date of sale and
debits its profit & loss account by the same amount. In
principle, both the AO and CIT (A), as well as, the learned DR
agree with this method; the only variation they are proposing is
that average should be in respect of Phases, I, II and III, not
including therein Phase IV, whereas, as per books of accounts
maintained by the assessee from 1981 to 1993-94, the assessee
is doing it in respect of all the four Phases, i.e., principally, the
methodology is not under dispute. The only variation that is
being pressed is in the exact working thereof. The criteria
adopted by the Ld. CIT (A) is not justified. Firstly, the entire
area under phase I to IV has been considered by the HUDA
authorities as one single project, in terms of sanction given as
per their letter. Secondly, the extent of the area to be held for
benefit of the community like school, hospital, fire station,
parks, police station etc. are to be set apart from the entire land
of Phase I to IV jointly and not phase wise. Thus the cost of land
in phase I to IV have to be aggregated by pooling all these
lands together. This justifies the action of the assessee in
allocating the cost of entire land in phase I to IV by pooling
them together. On the contrary, there is no justification for
excluding the cost of phase IV alone without any intelligible
criteria for the same. There is no intelligible criteria for
making this change. Ultimately, profit and loss even out over a
period of time and life of the project. This tinkering with the
books of accounts does not result in any gain to the Revenue as
it only reduces profit in one year and increases in the other year
and as observed by the CIT (A), most of the sales in these four
Phase have been completed. Therefore, over the period of life
of this colonization, this variation being proposed by the AO
and the CIT (A) does not serve the purpose of the Revenue and
this should not have been tinkered with. The finding by Ld. CIT
(A) in this regard is incorrect for the reasons stated in this
paragraph, especially in view of the fact that Haryana Urban
ITA Nos.159 & 326/2010 Page 15
Development Authority has also treated these four Phases as
one as mentioned at pages 212 to 215 of the Paper Book.”
13. It is evident from the above discussion that the assessee
followed the project completion method. This Court has in its
decision in Paras Buildtech India P. Ltd. v. Commissioner of Income
Tax , (2016) 382 ITR 630 (Delhi) held that the project completion
method is a known and recognized mode of accounting. It is also held
that this mode was approved as a proper method, which identified
receipt of income or revenue only upon the completion of the contract.
This Court relied upon the judgment of the Supreme Court in CIT v.
Bilahari Investment P. Ltd. [2008] 299 ITR 1 (SC) where both the
methods of accounting were specified and which stated inter alia as
follows: -
“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
ITA Nos.159 & 326/2010 Page 16
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.
The above indicates the difference between the completed
contract method and the percentage of completion
method.”
14. Proceeding to analyze the facts before it in Paras Buildtech
(supra) , the ITAT’s decision that risks and rewards' of ownership was
transferred to the buyers upon payment of booking advance amounts
and even transferred to third parties was a ground for rejection, was
disapproved. It was noted that these instances did not in any manner
affect the treatment of the said amounts in the books of the Assessee.
15. This Court is of the opinion that the above decision in Paras
Buildtech (supra) concludes the issue against the revenue. Besides,
the change in the accounting method in 1992-93 ipso facto could not
have resulted in loss of revenue as is urged by the tax authorities in the
present case. The distortions, which the revenue urges relate to the
treatment of development charges as well as the treatment of
expenditures such as brokerage, commission and interest payments.
The assessee’s explanation here is that the 30% of the sums realized
by it were under compulsion of law to be treated as development
expenses and kept in a separate escrow account under the control of
the HUDA. The revenue has not disputed this position. In that sense,
the assessee was justified by statute to appropriate the sums towards
development expenses. So far as the treatment of revenue with respect
to brokerage and interest payments is concerned, the assessee again
ITA Nos.159 & 326/2010 Page 17
has an explanation, which is a rational one: i.e., that only such of the
expenses attributable to the agreement with the purchasers was debited
as expenditure. So far as the question of applicability to section 2 (47)
of the Act or Section 53(A) of the Transfer of Property Act is
concerned, legally speaking, part performance is undoubtedly an
interest or right known to law. However, part performance, pre-
supposes handing over a possession, at the time the agreement is
entered into. Having regard to the assessee’s uniform pattern of
revenue recognition that only upon execution of the conveyance/sale-
deed, would the amounts lying with it be treated as profit and brought
to tax, the possibility that in law certain flat or plot buyers could be
handed over possession earlier per se would not result in distortion of
the kind stated by the revenue. There is no material or evidence in this
regard nor was cited by the revenue.
16. This Court is furthermore of the opinion most importantly that
in the previous order of the Tribunal dated 06.06.2008 on the
justification by the assessee in following the project completion
method (in ITA 1884/Del/1998 and 2052/Del/1998- DLF Universal v.
ACIT ), which became conclusive, the revenue could not have urged all
over again this aspect. For the forgoing reasons, the findings on this
question are in favour of the assessee. Question nos.1 and 2 are
answered in favour of the assessee and against the revenue.
Re Question No. 3
17. On this question, the court notices that even after the first
remand, the AO had in fact verified and granted relief, which was
upheld by the CIT (A) in his order of 30.05.2001 (during the pendency
of ITA 1884/Del/1998 before the ITAT leading to the present round).
ITA Nos.159 & 326/2010 Page 18
It was held that:
“The issue has been discussed on p.6. of the assessment order.
Qutab Enclave Complex developed by the appellant is located at
Gurgaon and hence is covered by the rules of Haryana
Government. As per Haryana Development and Regulations of
Urban Land Area Rules, the appellant could sell only 55% of
land and 45% of the land has to be left open to be utilized by
roads, parks, schools, colleges, hospitals, clubs and community
sites. On this basis, the Appellant is writing off 1000 sq. mtr. of
land for the sale of 550 sq. mtr. My predecessor in his order for
Assessment Year 1995-96 and' 1996-97 has discussed this issue
in para 3.5 more elaborately and held as under:
“3.5 I have considered the matter in the Haryana Development
and Regulation of Urban Area Rules, 1976, there is a difference
in the treatment of land left for roads, open spaces, public parks'
and public health services on the one hand, and the land reserved
for schools, hospitals, community centres and other community
buildings on the other hand. Rule 19 (2) (d) requires that the
roads, open spaces, public parks and public health services shall
be transferred to the Government or the local authority Within a
period of five years after the completion of the colony. However,
there is no such mandatory requirement of transfer in Rule
10(2)(e) which deals with the lands reserved for institutional
buildings. In respect of institutional lands, there is only an
obligation to transfer them to the Government, whenever desired
by it, free of cost. There is no mandate that the Government shall
do so. Till the Government takes over these lands, there is .no
restriction on the use of these lands, except that they have to be
used for the purposes for which they are reserved; and there is
no bar on the appellant to derive profit from the use of these
lands for the specified purposes. It is true that the appellant may
not be able to sell these lands. But sale is just one of the several
ways in which profit may be derived from land. Mere fact that the
appellant is precluded from selling the land, or does not intend to
do so does not imply that appellant has ceased to be its owner or
that he cannot derive profit from it in other ways. Thus, it may be
observed that the appellant continues to be the owner of the
institutional sites, and he is not barred from deriving profit from
ITA Nos.159 & 326/2010 Page 19
tem by building and running schools and hospitals thereon. The
acquisition of these sites by the Government is a contingency
which may or may not arise. Hence, I agree with my learned
'predecessor that these sites should not be written off till they are
actually acquired by the government, or are transferred 10 any
other person or institution. For the same reasons, I hold that it
would be proper to value these spaces at nil. as per the
alternative argument put forth on behalf of the appellant. The
argument that in case these sites are to be treated as property of
the appellant then the projected cost of construction of these sites
should be allowed as part of internal development cost, is also
not valid, because even if the appellant incurs any expenditure on
their construction, they will represent valuable assets in the
hands of the appellant, and it will not be correct to change this
cost to the internal development of the colony. Hence, for the
purposes of income-tax assessment, these sites shall continue to
form part of the stock-in-trade of the appellant at cost, until they
are actually transferred It follows that the appellant shall be
entitled to write off these site and charge their cost to the profit
& loss account when they are actually transferred to the
government or any other person or institution.”
--------- -------- --------
Based on the above, my predecessor worked out the saleable
area @ 60.77%.This issue also has also been adjudicated upon
by me in appeal no. 82/200'0-2001 for Assessment Year 1997-98
and I have held that the salable area at 60.77% is correct. The
appellant has filed a revised working of the land cost @
60.77%which comes to Rs. 34,46,861/-. Since the Assessing
Officer has allowed the land cost based on 62.84% at Rs.
32,74,405/-, the appellant will get a relief of Rs. 1,72,456/- on
this account. The Assessing Officer is, therefore directed to give
this relief to the appellant accordingly.”
18. On this issue, factually, the ITAT had concluded as
follows:
“The AO and the CIT(A) have attempted to go beyond the
HDRUA Act and against the CIT(A)'sown finding contained at
p.21, first paragraph and p.22; there is a contradiction in the
ITA Nos.159 & 326/2010 Page 20
order of the CIT(A). The CIT(A) has himself recorded that out of
162 sites earmarked for schools, hospitals and clubs, 106 sites
were transferred to charitable/educational and recreational
trusts created by the appellant assessee as early as in the year
1988. Out of the balance, 51 sites were acquired by the
Government of Haryana and only five sites have been retained by
the appellant assessee. Some aspersions have been cast by
CIT(A) at page 22 of his order, but the fact remains and which
has also been' recorded by CIT (A) in his order is-"In any case,
the settling of these sites on these trusts is a gratuitous act of the
appellant". Once this finding of fact has been recorded by CIT
(A) that the assessee has followed the HDRUA law, reproduced
by him at p.20 and called out by him at p.21, Para 1,it is obvious
that the appellant assessee has not taken any sum for transferring
these sites i.e. this has been free of cost, either to the Govt. of
Haryana or to the charitable trusts etc. After handing over these
sites, the assessee's compliance of law comes to an end. The
transferees i.e. the Govt. of Haryana and these charitable trusts
have to follow the law. If they did not follow the law for any
reason, whatsoever, then action could be taken by the authorities,
but no such facts have been proved before us; though some
allegations have been made against the transferees. Be a sit may,
as far as the assessee is concerned, it has followed the law and
no violation of the same has been done. Therefore, when the
assessee writes off 45% of the land when it sells the land to any
buyer, then it follows the law. From every 100 sq. yds of land that
the assessee purchases, it is entitled to sell 55sq. yds. And, by law
it has to keep 45% of land vacant or for community sites. As per
record which we have carefully perused, this is what the assessee
has done. Therefore, loading of cost of the vacant portion of the
saleable portion is an automatic corollary of the law.CIT(A) has
varied this figure to 60.77.% but ultimately the assessee cannot
vary this percentage when the entire project comes to an end; it
can never sell more that 55% of the area by any accounting
jugglery or notional calculations. As contended by ld. AR that the
assessee has followed the law consistently right from 1981 and
no violation of the law has been pointed out by the authorities
below or by the learned DR or by Haryana Urban Development
Authority against the assessee. This position has also been
accepted by the A.O. himself from assessment year 2003-04 to
ITA Nos.159 & 326/2010 Page 21
assessment year 2005-06. So the result is that this was accepted
in original assessments from 1981-82 to 1993-94 and has also
now been accepted from 2003-04to 2005-06. It is only in the
intervening 10 years that the variation has been proposed.' This,
as submitted, would unnecessarily distort the profit & loss of the
project; in some years there would be loss to the Revenue and in
some years there would be loss to the assessee. But, overall it
will get evened out. Variation in this kind of long-term project
can never be made without keeping the full picture in mind, as it
would only lead to more work and complications, with no real
profit or gain to the Revenue.”
19. It would thus be clear that the factual findings are against the revenue,
which had clearly accepted the legal position interpreted by the ITAT as
correct - evidenced by not filing an appeal on this question. Therefore, the
revenue cannot be permitted to urge this as a grievance. In any case, this
kind of treatment was permitted during all other years and there is no
compelling rationale for the court to examine it – especially because the
facts found point to a contrary picture. The question of law is therefore,
answered against the revenue/appellant.
20. Since both questions of law have been answered against the revenue
and in favour of the assessee, the appeals are to be dismissed; but with no
orders as to costs.
S. RAVINDRA BHAT
(JUDGE)
DEEPA SHARMA
(JUDGE)
DECEMBER 21, 2016
/ vikas /
ITA Nos.159 & 326/2010 Page 22