Project completion method of accounting — AO cannot adopt two methods of accounting in one project to determine income of assessee — In case of an assessee following project completion method, profit arising on sale of TDR, which was received as considera

ITAT ‘C’ Bench, Mumbai

Before Sunil Kumar Yadav (JM) and

D. Karunakara Rao (AM)

ITA No. 2593/Mum./2006

A.Y. : 2000-01. Decided on : 21-1-2009

Counsel for revenue/assessee : Yeshwant U. Chavan/J. P.
Bairagra

Per Sunil Kumar Yadav :

Facts :

The assessee was in the business of construction of
buildings and was regularly following project completion method which method
was accepted by the Revenue. The assessee started project of construction of a
building known as ‘Kailash Towers’ (KT) on a plot of land at Anik Village,
Chembur of which the assessee was the owner. Till 31-3-1994, the assessee
received Rs.32,31,159 as advances for sale of flats in KT. The assessee had
incurred expenditure of Rs.87,35,285 (which included cost of land and also
cost of work done on this project).

While the project was on, the entire plot of land
admeasuring 44544.25 sq.mts. was required by the Government of Maharashtra for
construction of Eastern Express Freeway and also for construction of tenements
for rehabilitation of slum dwellers. An agreement was executed between the
assessee, the Slum Rehabilitation Authority (SRA) and the Government of
Maharashtra through PWD which agreement detailed modalities as to how the land
was to be acquired and in what manner TDR was to be granted to the assessee.
The agreement was a composite agreement for construction of Eastern Express
Freeway to be carried out by the Government of Maharashtra after acquiring
land from the assessee and also for rehabilitation of the slum dwellers living
in 7500 hutments on the freeway land required for the purpose of Eastern
Express Freeway. 1474 tenements and 92 shops were to be constructed by the
assessee. The assessee was entitled to receive land TDR for handing over land
to the Government and Construction TDR for constructing tenements and shops on
land belonging to it. The grant of TDR was to be in phases. The assessee was
not entitled to any monetary consideration.

During the previous year relevant to the assessment year
under consideration the assessee sold certain TDR and the sale consideration
was reflected on the liability side of the balance sheet. Sale consideration
of TDR was regarded by the assessee as a receipt of the project to be taxed in
the year of completion of the project.

The AO dissected the entire project into two schemes (1)
Transfer of land for construction of Eastern Express Freeway by the Government
of Maharashtra and the Road TDR granted to the assessee in lieu thereof; (2)
Transfer of land and construction of tenements and shops by the assessee
itself and the grant of TDR in lieu thereof. The AO, accordingly, applied
different methods of accounting to both the projects. In respect of road TDR
he taxed the assessee yearwise in the year in which TDR was sold and in
respect of the project for transfer of land and construction of tenements and
shops he accepted project completion method. In A.Y. 2000-01 the AO made an
addition of Rs.1,88,86,810.

The CIT(A) held that Road TDR was directly related to the
said project and sale proceeds against this TDR were to be recognised as a
revenue receipt in the year in which the project was completed.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the agreement was a composite
agreement for handing over land for Expressway and also for construction of
tenements and shops by the assessee on land belonging to it. The Tribunal also
noted that the entire land was acquired in phases and also consideration in
the form of TDR was received in phases. Consideration was received in kind.
The funds received on sale of TDR were utilised for construction of tenements
and shops. The Tribunal held that it was clearly one project and not two
projects as they have been treated by the AO. The Tribunal held that the AO
cannot adopt two methods of accounting in one project to determine the income
of the assessee. It observed that in case of construction activity there are
two recognised methods of accounting viz. (1) Project Completion Method
and (2) Percentage Completion Method. The Tribunal stated that the assessee
has a right or a privilege to adopt any one of the methods of accounting for
determining its profit. In the present case, the assessee had been following
the project completion method to determine the profits of a project for last
so many years, but, during the year under consideration the AO had dissected
the project in two segments and for one segment he applied project completion
method and for the remaining segment, he determined the profit on sale of TDR.
The method of accounting adopted by the AO was held to be neither prevalent
nor recognised by the ICAI or under any law. The Tribunal held that the
assessee had rightly computed its profit on the basis of the project
completion method. Accordingly, it upheld the order of CIT(A) and dismissed
the appeal filed by the Revenue.