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. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

FACTS
The assessee, a partnership firm, engaged in the business of real estate development entered into an agreement with the Slum Rehabilitation Authority (SRA) to develop a project over a plot of land spread over 31.9 acres. The said plot of land was purchased by the assessee for a consideration of Rs. 44.21 crore and handed over to SRA as per SRA scheme. As per the terms of the agreement with SRA, the assessee was to develop the SRA project at its own cost. In return of the land surrendered to SRA and the project cost to be incurred the assessee was granted Land TDR of 93,623 sq. mts. and construction TDR of 4,78,527 sq. mts.

Since the assessee was required to fund the entire cost of the project itself, the TDR granted to the assessee in a phased manner was sold from time to time to incur the cost of the project. In the process, the assessee received various amounts aggregating to about Rs. 304 crore in financial years 2009-10 to 2013-14.

In the course of assessment proceedings for the assessment year under consideration, the Assessing Officer (AO) called upon the assessee to explain why the amount received from the sale of TDR should not be treated as income of the assessee in respective assessment years. In response, the assessee submitted that since it is following percentage completion method for recognising the revenue from the SRA project and since 25% of the total estimated project is not completed till date, TDR income cannot be treated as income but has to be shown as current liability.

The AO did not accept the contentions of the assessee and held that the amount received by the assessee from sale of TDR has to be added to the income of the assessee in the respective assessment years.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that-

(i) sale of TDR is integrally connected to the SRA project, hence, cannot be considered in isolation;

(ii) since SRA is not funding the project, the assessee has to incur the cost of project by utilizing the amount received from sale of TDR;

(iii) the very idea of granting TDR to the assessee is for enabling it to finance the project;

(iv) since the project is not complete even to the extent of 25%, no amount is taxable, much less, the amount received from sale of TDR, that too, without looking at the corresponding cost incurred by the assessee.

HELD
The Tribunal noted that the issue for its consideration is whether the amount received by the assessee from the 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. It also noted that the assessee has received certain amount from the sale of TDR in A.Ys. 2012-13 and 2013-14 as well.

While completing the assessment, the AO accepted the method of accounting followed by the assessee. However, PCIT held the assessment orders to be erroneous and prejudicial to the interest of the revenue since AO failed to tax the amount received by the assessee from the sale of TDR. While setting aside the assessments, the PCIT directed the AO to assess the amounts received from the sale of TDR.

However, while deciding the assessee’s appeals challenging the aforesaid direction of PCIT, the Tribunal held that percentage completion method followed by the assessee is a well-recognised method as per ICAI guidelines and judicial precedents; the sale of TDR cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project; the assessee was under obligation to complete the project as per the agreement; the TDR was granted to provide finance to the assessee to complete the project. Thus, the assessee’s income from TDR cannot be considered independently without taking the corresponding expenses, more so when the TDR receipts are directly linked to execution of the project. 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.

Since the project has been stalled due to dispute and litigations and the assessee has not been able to complete the project, the bench observed that though assessee has earned income from sale of TDR, however, no income from SRA project, as yet, has been offered to tax. It also observed that the Tribunal has in appeals against orders passed under Section 263 has recorded findings touching upon the merits of the issue, which indeed, are favourable to the assessee and the said order of the Tribunal was not available before the AO or CIT(A) the applicability of the said order to the facts of the case needs to be examined.  The Tribunal set aside the order of CIT(A) and restored the issue to the file of the AO for fresh adjudication after examining the applicability of the order of the Tribunal for A.Ys. 2012-13 and 2013-14.