Delhi High Court - Orders
Pr. Cit -3 vs Dlf Ltd.(Fomerly Known As Dlf Universal ... on 23 September, 2024
Author: Yashwant Varma
Bench: Yashwant Varma
$~18-21
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 926/2016
PR. CIT -3 .....Appellant
Through: Mr. Sunil Kumar Aggarwal,
SSC with Mr. Shivansh B.
Pandya, Mr. Viplav Acharya,
JSCs & Mr. Utkarsh Tiwari,
Adv.
versus
DLF LTD.(FOMERLY KNOWN AS DLF
UNIVERSAL LTD. .....Respondent
Through: Ms. Kavita Jha, Sr. Adv. with
Mr. Aditaya Bali & Mr. Akash
Shukla, Advs.
19
+ ITA 928/2016
PR. CIT -3 .....Appellant
Through: Mr. Sunil Kumar Aggarwal,
SSC with Mr. Shivansh B.
Pandya, Mr. Viplav Acharya,
JSCs & Mr. Utkarsh Tiwari,
Adv.
versus
DLF LTD. (FORMERLY KNOWN AS DLF
UNIVERSAL LTD.) .....Respondent
Through: Ms. Kavita Jha, Sr. Adv. with
Mr. Aditaya Bali & Mr. Akash
Shukla, Advs.
ITA 926/2016 & Connected Matters Page 1 of 11
This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above.
The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:44
20
+ ITA 126/2019
THE PR. COMMISSIONER OF INCOME
TAX -3 .....Appellant
Through: Mr. Sunil Kumar Aggarwal,
SSC with Mr. Shivansh B.
Pandya, Mr. Viplav Acharya,
JSCs & Mr. Utkarsh Tiwari,
Adv.
versus
DLF LTD. .....Respondent
Through: Ms. Kavita Jha, Sr. Adv. with
Mr. Aditaya Bali & Mr. Akash
Shukla, Advs.
21
+ ITA 32/2020
THE PR. COMMISSIONER OF INCOME
TAX -3 .....Appellant
Through: Mr. Aseem Chawla, SSC with
Ms. Pratishtha Choudhary,
Adv.
versus
DLF LTD. .....Respondent
Through: Ms. Kavita Jha, Sr. Adv. with
Mr. Aditaya Bali & Mr. Akash
Shukla, Advs.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE RAVINDER DUDEJA
ORDER
% 23.09.2024 ITA 926/2016 & Connected Matters Page 2 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:44 ITA 926/2016 & 928/2016
1. The Principal Commissioner impugns the order of the Income Tax Appellate Tribunal 1 dated 11 March 2016. By order dated 24 August 2017 following questions of law were framed by this Court:
ITA 926/2016"1. Whether in the facts and circumstances of the case, the revenue recognition under percentage completion method should commence in that previous year when expenses reach 25% against the threshold of 30% of budgeted cost?
2. Whether the Tribunal erred in the facts and circumstances of the case and prevailing law in holding that Internal Development Costs/ External Development Costs have to be included for the purposes of computing threshold limit for recognition Revenue under the POCM?
3. Whether the Tribunal erred in the facts and circumstances of the case and prevailing law in deleting the addition of Rs.91,70,13,955/- on account of capitalization of interest expense as per AS-16?
4. Whether the Tribunal erred in the facts and circumstances of the case and prevailing law in deleting the addition of Rs.8,15,68,758/- on account of reclassification if Income from House Property?"ITA 928/2016
"1. Whether in the facts and circumstances of the case, the revenue recognition under percentage completion method should commence in that previous year when expenses reach 25% against the threshold of 30% of budgeted cost?
2. Whether the Tribunal erred in the facts and circumstances of the case and prevailing law in deleting the addition of Rs.27,45,00,000/- on account of capitalization of interests?"
2. We note that insofar as the issues emanating from the adoption of the Percentage Of Completion Method 2 is concerned the Tribunal has while dealing with this aspect observed as follows:
"38. The brief facts of this ground are that during the year, assesse has changed its method of accounting in case of constructed 1 Tribunal 2 POCM ITA 926/2016 & Connected Matters Page 3 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:44 properties from completed project method to percentage completion method. It was noted by the AO that despite change in method of accounting, the assesse has not recognized any revenue on Mangolia Project as well as Summit Project. Therefore, the AO worked out a profit chargeable to tax from Mangolia Project of Rs.26,55,94,049/- and from Summit Project of Rs.11,45,52,376/-. The contention of the assesse is that construction of these two projects based on the percentage completion method has not reached threshold requirement of 30% as on 31.03.2006. It was submitted that profits of these projects are offered for taxation in subsequent years when the threshold yardsticks of 30% in terms of accounting policy of the assesse is achieved. Against this, AO was of the view that assesse has himself incurred expenses on land, such as, external development and construction cost on both these projects the revenue should have been recognized. Assesse further submitted that even the special auditor appointed by the revenue have also not recommended any recognition of revenue on Mangolia and Summit projects. The assesse submitted comparative data of other developers too where they are following threshold for starting of revenue recognition in development projects when 30% of the project is completed. However, the AO rejected all the contentions and held that Accounting Standard 9 issued by the ICAI and according to that Accounting Standard, there is no justification for the assesse to adopt a benchmark of 30% for recognition of the revenue and, therefore, made a total addition of Rs.72,32,38,796/- from Mangolia Project and Rs.30,52,54,713/- from Summit Project. The assesse carried the matter before the CIT (A) who in principle agreed with the contention of the assesse that internal development charges allocated to these projects have not been considered should be included in the cost of project and, therefore, upholding the addition on the principle restricting the addition to the extent of Rs.62,68,85,221/- on account of Mangolia Project and Rs.16,08,95,700/- from Summit Project. Aggrieved by this, the assesse is in appeal before us.
39. Before us, ld. AR submitted that assesse has correctly laid down a threshold limit of 30% which is in accordance with the principles laid down in the Guidance Note issued by the ICAI. He submitted that though the Guidance Note prescribes the percentage of threshold as 25%, however, the assesse based on the prevalent practices in the trade has adopted it @ 30% as threshold. For this, he submitted that assesse has given sufficiently large number of comparable developers' case where identical practice is being followed and accepted by the revenue. His next argument was that there is no doubt about the correctness of the profit of these two projects merely revenue wants to prepone taxability of these projects from subsequent years to earlier year and this is a revenue neutral exercise. For this, he relied on the decisions of Hon'ble Supreme Court in the case of CIT vs. Billahari Investment Private ITA 926/2016 & Connected Matters Page 4 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:45 Limited (supra). The next submission of the ld. AR was that in case of special audit of the assesse for AY 2010-11, revenue itself has accepted the criteria of 30% of threshold completion for revenue recognition. He submitted that the special auditor has stated that those superficial yardstick of 30% of cost incurred has not been prescribed anywhere in the publication of the ICAI, however considering the spirit of the publication, it is accepted from every assesse to calculate the correct amount of revenue for recognition under the project completion method. However, assesse who is not in the business of construction is required to estimate reliably correct amount of revenue of the respective year. The auditor further went to state that the company has initially fixed the threshold limit of 30% effect from AY 2006-07 for recognizing revenue and its method has been consistently followed by the company every year thereafter. Thereafter, auditor stated that, according to him it is reasonable to adopt revenue under the Percentage of completion (POC) Method where the level of expenditure incurred is 30% or more of the estimated project cost. Hence, auditor was of the view that the assesse company has adopted the threshold limit of 30% going by the industry claims, prudence and followed the same consistency and, therefore, there is no postponement of tax. In nutshell, the ld. AR argued that it is an opinion of the expert on accounting practices for AY 2010-11 which has been accepted by the revenue that 30% threshold limit is as per the industry norms, provisions and consistency, same should not be disturbed in this year.
40. Against this, ld. DR submitted that the CIT (A) as well as the AO has correctly decided the issue and threshold limit of 30% is rejected by both the lower authorities. However, he fairly agreed that fixing such threshold limit is required in case of projects of such scale and if the total expenditure on those projects has not crossed the threshold limit of 30% of the total cost of the project, the revenue should not be recognized. He submitted that as the AO has not examined that whether these projects have crossed the threshold limit of 30% or not, this ground of appeal should be set aside to the file of the AO for determination of income accordingly.
41. To this argument, the ld. AR submitted that it has been accepted by the lower authorities that both the projects have not exceeded the threshold of 30% for the purpose of revenue recognition and, therefore, he stated that the revenue cannot be recognized. However, he also fairly agreed that though data available at page 69 to 71 of the assessment order, according to which both the projects are at the very primitive stage i.e. Mangolia Project at approximately 10- 12% and Summit Project is also less than 20%. However, he agreed that there is no objection from the assesse side to determine the threshold limit of 30% of the total project cost for the purpose of revenue recognition."
ITA 926/2016 & Connected Matters Page 5 of 11This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:45
3. As is evident from the above, the assessee appears to have urged that the 30% threshold is one which has been adopted by the industry as a whole had also been consistently followed by the assessee itself in subsequent years. The threshold of 30% as adopted was also accepted by the Commissioner of Income Tax (Appeals) 3 in proceedings for the subsequent year.
4. It is on an overall conspectus of the aforesaid, that the Tribunal while taking into account the stage of the two projects held that the 30% percentage as adopted would be in accordance with law for the purposes of recognition of revenue. It further held that the Accounting Standards 4 only spoke of a minimum threshold and that consequently, it was permissible for an assessee to bear in consideration a higher threshold taking into consideration the stage of completion that may have been reached as well as the expenditure incurred. It further held that since in any case the aspect of whether it was taken into consideration in a particular Financial Year or subsequently would give rise to no additional tax implications. It ultimately held that since the issue was rendered revenue neutral it was liable to be laid to rest. The conclusions of the Tribunal in this respect are reproduced below:-
"42. We have carefully considered the rival contentions and also given a careful thought to the offer of ld. DR for setting aside this ground of appeal to the file of the AO for determination of threshold limit of 30% of the total project cost incurred up to this year or not. Before that we would like to address the issue of threshold percentages determined by the assesse of 30 % instead of 25 % provided in the guidance note on accounting for real estate transactions issued by ICAI in 2012. Firstly assesse has submitted the instances where in the identical facts and circumstances there is 3 CIT(A) 4 AS ITA 926/2016 & Connected Matters Page 6 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:45 trade practice of adopting threshold of 30 % of the achievement of total project cost for commencement of recognising of revenue. According to that guidance note it is provided that "(a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable:
(i) Environmental and other clearances.
(ii) Approval of plans, designs, etc.
(iii) Title to land or other rights to development construction. (iv) Change in land use
(b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5.
(c) At least 25% of the saleable project area is secured by contracts or agreements with buyers.
(d) At least 10% of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate - If there are 10 Agreements of sale and 10 % of gross amount is realised in case of 8 agreements, revenue can be recognised with respect to these 8 agreements"
According to the above guidance note the revenue of the project can be recognised only when the above conditions specified therein. According to one of the conditions specified there in is reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. Therefore the threshold suggested by ICAI is the minimum threshold and it is not prohibited that looking to the business conditions assesse cannot fix up higher threshold. More so when the assesse has stated that many identical companies are also following similar threshold of 30 % of the total project cost, no fault can be found with the estimate made by the assesse. It is also undisputed that in subsequent years the special auditor appointed by revenue has accepted the threshold of 30 % adopted by assesse and AO has accepted the same. In view of above we are of the opinion that assesse has rightly accepted the threshold of 30 % of achievement of total project cost for commencement of revenue recognition. Further the working of the ITA 926/2016 & Connected Matters Page 7 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:45 total project should also include all types of development charges required to be included in the same. Ld. AR has stated that the details of percentage of completion of project are available in the assessment order itself. However after careful consideration and agreed by both the parties, we set aside this issue to the file of the AO to determine with respect to Magnolia Project and Summit Project following :-
(i) To determine the total project cost of both these projects including the cost of internal and external development charges of the project.
(ii) To determine whether the actual cost of expenditure incurred up to 31.03.2006 is less than 30% of the total project cost estimated by the assessee;
(iii) If the threshold limit of 30% is crossed then to determine the income of both these projects on percentage completion method in this year;
(iv) To give appropriate relief in subsequent years, if any income is taxed on these projects in these years;
(v) If the project cost incurred up to this year has not crossed threshold of the total project cost estimated then to delete the addition of Rs. 1,02,84,93,509/-.
While deciding this issue AD may however keep in mind the principle laid down by honourable Supreme court in case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295, if AD is satisfied that issue is revenue neutral the matter may be set at rest. Therefore, ground no. 8 of the appeal is allowed with the above direction"
5. We thus find no justification to interfere with the view as expressed by the Tribunal.
6. The second aspect which was sought to be canvassed for our consideration pertained to the treatment of Internal Development Charges 5 and External Development Charges6 and whether they were liable to be included for the purposes of computation of the threshold limit for recognizing revenue under the POCM. While dealing with IDC the Tribunal has ultimately observed as under:5
IDC 6 EDC ITA 926/2016 & Connected Matters Page 8 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:45 "111. We have heard the rival contentions of the parties. Regarding taxability of these two projects was also the ground no 8 of the appeal of the assesse. While this ground of appeal on the request of both the parties we have set aside the issue of determining threshold of 30% of incurring the total project cost of these projects for commencement of revenue recognition. Therefore the parties also requested to set aside this issue to the file of the AO as this is a connected issue. Therefore in the interest of justice we set aside this ground of appeal of the revenue to the file of the AO and to decide afresh according to our directions contained therein. In the result Ground No 2 of the appeal of the revenue is allowed with directions."
7. In light of the fact that the matter has merely been remitted to the Assessing Officer 7 for the purposes of verification, we find no justification to entertain the appeal on that score.
8. Similarly, and with respect to EDC the Tribunal has while dealing with the aforesaid ground observed as under:
"126. We have carefully considered the rival contentions. The brief facts of the case are that there is construction account with respect of 13 projects which has a credit balance of Rs.37,81,33,632/- tabulated at page 123 of the assessment order. The assessee explained before the AO that these credit balances are not appearing in the books of accounts of the assessee but auditor has only picked up the credit side of such ledgers without considering the debit balance in the part of those ledgers. The explanation was submitted before the AO but he did not consider this and made an addition of opening credit balance of Rs.37,81,33,632/-. In fact, the CIT (A) has considered this aspect and has held that there is an opening debit balance of Rs.66,27,71,032/- which has been ignored by the AO. Project wise details of the construction expenses showing opening balances as at 01.04.2005 are added as income of the assessee without granting credit for the debit entries. Merely picking up some ledger balances and excluding some ledger balances addition has been made by the AO. Merely there are some ledgers of the main ledger account, it cannot be said that they are income of the assessee when they have been already considered by adjustment of the main ledger account. In the remand report submitted by the AO before the CIT (A), it was not controverted that the charts submitted by the assessee considering all the accounts of the trial balance and which was also before the AO vide its letter dated 27.03.2009 is incorrect in any manner.7
AO ITA 926/2016 & Connected Matters Page 9 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:45 Therefore, we do not find any infirmity in the order of the CIT (A) and none has been pointed out by the ld. DR. Now coming to the argument of the Id. DR that the CIT (A) has set aside this aspect about the verification of the amount to the AO is beyond his powers. We disagree with the argument of the ld. DR and without commenting on that much, we are of the view that CIT (A) has given one more opportunity over and above the opportunity of assessment and remand proceedings for verification of these details, cannot be said that it is against the revenue. In fact, according to us, it is in favour of the revenue. Further, in the appeal effect order passed by the AO on 20.11.20121, after verification of these facts, the AO has deleted the addition pursuant to the order of the CIT (A) after verification. In view of the above facts, we are of the view that the addition on account of Rs.37,81,33,639/- is unsustainable and hence we confirm the order of CIT (A) on this ground. Therefore, ground no.5 of the revenue's appeal is dismissed."
9. The aforesaid findings are clearly of fact which have come to be decided in favour of the assessee and merit no further consideration by this Court.
10. Question no. 3 as proposed and which pertains to the capitalization of interest expenses as per AS-16 read alongwith Section 36(1)(iii) of the Income Tax Act, 1961 8, is stood over at the request of learned counsels for respective sides.
11. That only leaves us to deal with the question of reclassification of rental income which was earned with it being urged on behalf of the appellants that it was liable to be treated as income from business and profession. We note that the aforesaid question stands answered in favour of the assessee itself by this Court in light of the decisions rendered in Commissioner of Income Tax, Delhi-IV vs. DLF Ltd. (Earlier DLF universal Ltd.)9; Commissioner of Income Tax, Delhi - IV vs. DLF Universal Ltd.10; Commissioner of Income Tax 8 Act 9 [ITA No. 408/2008] 10 [ITA No. 407/2009] ITA 926/2016 & Connected Matters Page 10 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:45 vs. DLF Universal Ltd. 11 and Commissioner of Income Tax vs DLF Ltd. 12. We thus find no justification to take a contrary view.
12. The appeals shall now be examined only with respect to question no. 3 which survives.
13. Let these appeals be called again on 14.10.2024.
ITA 126/2019 & 32/2020
14. Since these appeals raise separate questions, let them be listed on 25.11.2024.
YASHWANT VARMA, J.
RAVINDER DUDEJA, J SEPTEMBER 23, 2024/kk 11 [ITA No. 176/2010] 12 [ITA No. 264/2010] ITA 926/2016 & Connected Matters Page 11 of 11 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 17/11/2024 at 11:59:45