Income Tax Appellate Tribunal - Mumbai
Assistant Cit, Circle 3(3) vs Prerna Premises (P) Ltd. on 21 October, 2005
Equivalent citations: [2006]7SOT288(MUM)
ORDER
Sunil Kumar Yadav, J.M. These appeals are directed by the revenue against the respective orders of the Commissioner (Appeals). Since common issues are involved in these appeals, these were heard together and are being disposed off by the single consolidated order for the sake of convenience.
2. Facts in brief resulting into controversies in all these appeals are that the assessee-company was carrying on business as developers and builders. It acquired plot Nos. 222 and 223 from the Government of Maharastra in the year 1974 to develop and construct Offices and sell the same in ownership basis after reclaiming the land from the sea known as Bankbay Reclamation scheme. The assessee reclaimed the land from the sea and accordingly constructed two buildings under the name and style of Maker Chamber-III and Maker Chamber-IV on these two plots of land. For the purpose of income-tax assessment, it opted to follow project completion method of accounting on the ground that project would take a lot of time for completion and, therefore, it would not be possible to determine the profit on yearly basis. There was no sales in the initial period and the work of reclaim was going on the building were of 15 floors plus terrace each. As per the details furnished the area constructed and sold up to the end of the accounting year relevant to assessment year under consideration are as under :
Maker Chamber-III Maker Cbamber-IV
1.
No. of floors to be constructed 15 15
2. Total Area 202090 sq.ft.
216671 sq.ft.
3. Total area sold under agreement to sell 180435 sq.ft.
201379 sq.ft.
4. Area remaining unsold 21655 sq.ft.
15292 sq.ft.
Total area unsold 36947 sq. ft.
3. During the assessment year 1988-89 the issue was raised whether the project was completed during this year or it was completed in the assessment year 1993-94 in which the entire profit was claimed as deduction under section 33AC of the Income Tax Act. Before the assessing officer, during the course of the assessment proceedings for the assessment year 1988-89 it was claimed by the assessee that the construction of the project was in progress and had not been completed in all respects as on the last date of the accounting period i.e., 31-12-1987. In support of this plea, assessee has produced the certificate from the architect and has also pointed out that the assessee has incurred substantial expenses on the projects in succeeding year and this would go to show that the project was not completed during the year. This contention of the assessee was rejected by the assessing officer at the threshold and with regard to the certificate of architect, it was observed by the assessing officer that it was too general and do not contain any date relating to work already done and the work remaining to be done. As such, it cannot be relied on to decide the issue of assessment year of completion of the project. From the details furnished by the assessee, it was observed by the assessing officer that 93 per cent of the premises in Maker Chamber 3 and 89.3 per cent in Maker Chamber No. 4 were already sold and occupied by the purchasers by 31-12-1987. The assessing officer further observed that if both the projects are taken together, out of the total area of 4,18,761 sq. feet the total area already sold and handed over is 3,81,814 sq. feet which is around 91.17 per cent. The total area remained to be constructed in both the buildings is only 34,808 sq. feet which shows that 91.7 per cent is completed in respect of total projects. Following the ratio laid down by the Tribunal in the case of Champion Construction Co. v. First Income Tax Officer (1983) 5 ITD 495 (Bom) and the judgment of the Patna High Court in Sri Sukhdeodas Jalan v. CIT (1954) 26 ITR 617 (Pat), the assessing officer held that the project is treated effectively ended during the accounting period and the income has to be computed accordingly.
4. With regard to the contention of the assessee raised before the Commissioner (Appeals) in first round that the project was terminated in assessment year 1991-92 and paid advance tax on estimated income of Rs. 400 lakhs the assessing officer observed that the record shows that the assessee has not terminated the project during assessment year 1991-92 and has paid the advance tax at Rs. 2 lakhs only and that to in one instalment on 31-3-1991. The assessing officer has also discussed the two certificates given by the architect one dated 13-2-1991 and other dated 11-3-1991 in which two contradictory statements were made. In earlier letter dated 13-2-1991 it was certified by the Architect that project was not completed and is under construction but in another certificate dated 11-3-1991 the same architect has claimed that work has been completed in all respects. The assessing officer further observed that expenses on material purchased and labour charges if any incurred in assessment year 1991-92, it related to the structural adjustment that was to be made to construct the additional area which is not a part of the original project. This is a subsequent development which was not present at the end of the relevant previous year, i.e., 1988-89. The assessing officer accordingly, conclusively held that both the projects were completed before the end of the previous year relevant to the assessment year 1988-89, but, for the reasons best known to it the assessee has been doing its best to see that the projects never come to an end by claiming that something or the other always remains to be done, which if allowed, would amount to giving the assessee a licence to put off its tax liability for unlimited period. This is squarely not the intention of the statute.
5. It was also pleaded before the assessing officer that if the percentage sales of flat is taken as a guiding factor to determine the completion of the project, the project can be said to have been completed during the earlier years and not in assessment year 1988-89 as the facts for assessment year 1986-87 to assessment year 1988-89 are the same. In support of his plea that the project cannot be called to have been completed on the basis of percentage of sales of flat he relied upon the order of CIT dated 7-3-1991 whereby he dropped the proceedings initiated under section 263 for assessment year 1986-87, The assessing officer was also commented on these contentions and observed that this issue was never examined in assessment year 1986-87 by the assessing officer and if the proceedings were initiated under section 263 by the Commissioner and was finally dropped, it might have been done for some other reasons and not on the issue of completion of project. The assessing officer accordingly held that the project was completed in the assessment year 1988-89 and he computed the profits on the project. With regard to the contingent outstanding liability of 13.51 crores, it was observed by the assessing officer that since it is a contingent liability and has been disputed by the assessee, it cannot be called to have become due in the impugned assessment year. It can only become due when the writ petition of the assessee is decided by the High Court and the liability is ascertained. He disallowed the claim of the assessee accordingly. In other assessment years, i.e., 1989-90, 1990-91 and 1991-92 the assessing officer did not allow the carry forward of work-in-progress.
6. Aggrieved, the assessee has preferred an appeal before the Commissioner (Appeals) with. a plea that the project was not completed during the assessment year 1988-89. It was rather completed during the assessment year 1993-94. It was also contended before the Commissioner (Appeals) that the assessing officer himself has given a specific finding that there were no sale whatsoever of the premises during the previous year ending on 31-12-1987 meaning thereby whatever sales of the constructed area were done it took place in earlier years. If percentage of sale of constructed area is the criteria for determining a year of completion of the project, the project had been completed in the earlier years to the assessment year i.e., 1988-89, as no activities took place in this assessment year.
7. The learned counsel for the assessee further contended that in assessment year 1987-88, the assessing officer has accepted the position that the project was not completed and in assessment year 1986-87 the proceedings under section 263 were initiated, were later on dropped by Commissioner. As such, there is no evidence on the basis of which it can be inferred that the project was completed during the assessment year 1988-89 or prior to it.
8. The Commissioner (Appeals) re-examined the issue in the light of the material available on record and held that the project was not completed in assessment year 1988-89. The relevant observations of the Commissioner (Appeals) made in assessment year 1988-89 are extracted hereunder :
"A careful consideration of the relevant facts would show that the stand of the assessing officer in assessment years 1987-88 and 1986-87 was also correct. The present year ended on 31-12-1987. The Id. officer was held that there was no worthwhile activity during this year for one reason or the other and that is why, not much direct expenditure on the project took place. On 27-10-1991, the appellant company got amalgamated with M/s. Pranik Shipping & Services Ltd. (FSSL) after due approval of the company court. The project was ultimately completed in March, 1993 and the successor who completed the project returned the income from this project, inter alia showing total sales of Rs. 22.24 crores and project cost of Rs. 6.6 crores. The net profit was returned at Rs. 13.61 crores. As on 31-3-1993, the stock-in-hand remained only Rs. 3,53 lakhs. I have also looked into the year-wise sales and it is found that the sales up to 31-3-1989, ie., much later than the end of the relevant previous year stood at Rs. 10.96 crores. The total cost came to Rs. 6.6 crores. However, the cost met during the year was only Rs. 14.31 lakhs including the direct and indirect expenses and the total cost incurred up to 31-12-1987 was Rs. 2.89 crores which is much than 50 per cent of the total cost of Rs. 6.6 crores. The total sales on the completion of the project came to Rs. 22.25 crores approximately. The sales affected up to 31-12-1987 came to Rs. 10.96 crores which again is a little less than 50 per cent of the total sales of the project. It is not understood as to how the learned officer came to the conclusion that over 90 per cent of the area has been sold and sale proceeds have been received up to 31-12-1987. Therefore, by applying the ratio of 5 ITD 495 (Bom), it can be said that up to 31-12-1987, the project could not be said to be completed and the profits could not be assessed as if the project was complete in assessment year 1988-89."
9. Following this order of the Commissioner (Appeals), the Commissioner (Appeals) in another assessment years has directed the assessing officer to allow the carry forward of the work-in -progress. He accordingly deleted the additions, which were made on the presumption that the project was completed in the assessment year 1988-89.
10. Now the revenue has preferred an appeal before the Tribunal against the order of the Commissioner (Appeals). During the course of hearing, the learned Commissioner Departmental Representative Ms. Asha Aggarwal has invited our attention to the fact that the assessee's project for constructing Maker Chambers 3 & 4 were completed during the assessment year 1988-89 as more than 90 per cent of the constructed area were sold by the assessee. She invited our attention to the data in this regard, pointed out by the assessing officer in his order. She further pointed out the discrepancies in the certificate and as per these datas, 93 per cent of the premises in Maker Chambers 3 and 89 per cent in Maker Chamber No. 4 were already sold and occupied by the purchaser by 3-12-1987. Thus, if both the purchases are taken together, out of the total constructed area of 4,18,761 sq. ft., the total area already sold and handed over is 3,81,814 sq.ft., which is 91.17 per cent. With regard to the expenditures incurred in subsequent years, it was contended that these expenses are in respect of painting, labour charges, plumbing, sanitation and telephone installations. These are expenses in the nature of giving final finishing touches to the project. Mrs. Asha Agarwal further invited our attention to the fact that during the year assessee has sold part of the construction machinery, which indicated that the project work was completed during the accounting period.
11. The Id. departmental Representative Mrs. Agarwal further invited our attention to the discrepancies in the certificates issued by the architect. The certificate dated 17-8-1988 is of general in nature in which it has only been certified that the construction work of the buildings known as Maker Chambers 3 and 4 was not completed as on 31-12-1987. Nothing has been stated in the certificate as to how much work was done and how much work remained to be done. She further pointed out from the statement of account of M/s. Pranic Shipping and Services Ltd. for the assessment year 1993-94, in which the assessee-company has amalgamated, that the entire profit earned on this project was claimed as deduction under section 33AC on the ground having stated through note that main object of the assessee was operation of the ships whereas the assessee was not engaged in any shipping business during the year. Till the assess ee- company amalgamated with M/s. Pranic Shipping & Services Ltd., the assessee made all the efforts not to complete the project and to carry forward its work-in-progress so that no tax liabilities would accrue against the assessee. In support of this plea, she has invited our attention to the Profit and Loss account of Pranic Shipping & Services Ltd. with the submission that whatever profit was earned; it was earned on account of said project. She further invited our attention to the Profit and, Loss account of the assessee ending on 31-12-1987 with the submission that assessee itself has shown the work-in-progress as Rs. 540.26 lakhs against opening work-in -progress in assessment year 1993-94 at Rs. 581.16 meaning thereby 90 per cent project was completed and sold to the buyer the end of 3 1 st December, 1987. Mrs. Asha Agarwal further contended that the major expenses were incurred in this project after assessment year 1988-89 was only in the assessment year 1991-92 on construction of additional FSI. The learned Departmental Representative further invited our attention to the original project which was up to the 15th floor of the building and it was accordingly sanctioned by the appropriate authority and when this project is completed, the assessee got a further sanction of an additional FSI on which it made further investment on its construction. The additional sanctions of FSI cannot be a part of the original project in as much as it was not taken into account by the assessee while forming an original project. Since the assessee has been following project completion method,the assessee is required to compute its profit as and when the original project is completed and its completion cannot be extended at the whims of the assessee.
12. The learned Counsel for the assessee Mr. J.D. Mistry, besides rebutting the contentions of the learned Departmental Representative, has invited our attention to the fact that undisputedly the assessee have been following the project completion method and it was accepted continuously by the revenue. He further invited our attention to the statement of net work-in-progress in which details of expenditures incurred during different assessment years were given with the submissions that in the assessment year 1991-92, a substantial expenditure were incurred in construction of the project. He further invited our attention that during the assessment year 1986-87 the revenue accepted the stand of the assessee that it has been following the project completion method. Later on, CIT issued a notice under section 263 which was duly replied by the assessee and having satisfied with the explanation of the assessee, the proceedings were dropped. In the assessment year 1987-88 the expenditure incurred on project was shown as work-in-progress and the same was accepted by the revenue. In the assessment year 1988-89 the expenditure as well as the receipts on sale of the constructed portion were almost the same, meaning thereby that there was neither any construction activity nor any sale of constructed portion was effected during the assessment year 1988-89. Before the project is completed, the assessee has got the sanction on additional FS1 and thereafter construction was started and project was finally completed during the assessment year 1993-94. If the contention of the revenue that project is completed on the basis of 80 per cent of the constructed area sold is accepted then the project might have been completed even prior to the assessment year 1988-89 because in the assessment year 1988-89 no major construction activity was done nor was any constructed area sold. In any case the project was not completed during the assessment year 1988-89. In support of this plea, the learned Counsel for the assessee has invited our attention to the Profit and Loss Account ending 31-3-1993 and the statement of net work-in-progress. The learned counsel for the assessee further urged that the entire project was either completed during the assessment year 1993-94 as claimed by the assessee or prior to the assessment year 1988-89 if the stand of the revenue is accepted but in any case it was not completed during the assessment year 1988-89. As such the orders of the Commissioner (Appeals) in all these years deserves to be confirmed.
13. Having carefully examined the orders of the lower authorities and the documents placed on record, we find that undisputedly assessee have been following the project completion method and the revenue has accepted the same in these years. The main controversy before us is only with regard to the time when the project is completed. In order to resolve this controversy, we are of the view that certain following questions are to be addressed first :
(1) Whether project is completed on a date when the entire project is constructed and the assessee obtains a completion or an occupancy certificate from the concerned authorities irrespective of the fact the entire project is sold or not ?
OR (2) Whether the project is deemed to have been completed as and when its more then 80 per cent constructed portion, have been sold and occupied by the purchaser, irrespective of the fact that construction activities are going on in that assessment year ?
(3) Whether the project is deemed to have been completed when original project is completed or its 80 per cent of the constructed area is sold and occupied by the purchaser irrespective of the fact that the construction of the additional FSI is not completed ?
(4) Whether construction with regard to additional FSI is itself an independent project or it is a continuation of old project ?
14. Before dwelling upon these questions/ issues we would like to narrate the activities of the builders and developers in this field. Like the instant case, the builder forms a project of constructing a building and to sale it out in the open market and to earn profit. It is a composite profit of construction of the building and its sale in the market. In order to achieve this target, the builder purchases the plot and gets the plan sanctioned from the appropriate authority and start construction thereon. In this line of business two methods of accounting are followed-(1) Project completion method (2) Percentage completion method. In a Percentage completion method, a builder is required to estimate the profit in each assessment year and offer it to tax. But in the case of a project completion method the builder/assessee shows the investment in the building as work-in-progress and carries it over to a next succeeding assessment year. He finally works out the profit of the entire project on its completion. It is also observed in this type of case that when the original project is about to complete or completed, the assessee gets the sanction of the additional FSI on which further construction is raised.
15. During the course of hearing, our attention was invited to a judgment of the Tribunal in the case of Champion Construction Co. (supra) in which the Tribunal has dealt upon the issue as to when the project is deemed to have been completed in the light of various judicial, pronouncements which are as under:
1. K.H. Mody, In re (1940) 8 ITR 179 (Bom)
2. CIT v. A.K.A.R. Family (1941) 9 ITR 347 (Rangoon)
3. Addl, CIT v. Madan Lal Ahuja (1982) 136 ITR 640 (All)
4. Neelkamal Construction Co. v. Income Tax Officer (sic)
5. Sri Sukhdeodas Jalan v. CIT(1954) 26 ITR 617 (Pat)
6. P.M. Mohammed Meerakhan v. CIT (1969) 73 ITR 735 (SC)
7. Tirath Ram Ahuja (P.) Ltd. v. CIT(1976) 103 ITR 15 (Del).
16. Having gone through the issue in dispute, the Tribunal has held that it is not a correct proposition to say that profits of the assessee from a single venture/project in the nature of trade cannot be ascertained until the venture/project has come to an end. Under the Act each year is a self-contained unit and unless it is impossible to compute the profits or losses of each year reasonably if necessary by estimating the value of the liabilities to be incurred, valuing the work-in-progress, stock-in-trade etc., the profits should be computed year-wise and taxed. The Tribunal has further observed that the acceptance of a bald proposition of the assessee that the profits should be computed at the final completion of the projects, amount to giving the assessee a licence to put off his tax liabilities for a unlimited period by seeing to it that the venture/project never comes to an end in the sense something or the other always remains to be done. That will be a very unsatisfactory state of affairs. The Tribunal has further observed that when the entire cost/expenditure to the assessee is recouped and/or the major portion of the venture/project is complete, there is really no justification in not taxing the income from the project which quite often may represent excess of receipt over expenditure unless there is a risk/chances of the assessee's suffering heavy liabilities, subsequently, for some reasons or the other. The Tribunal finally concluded that the project is deemed to have been completed when its 80% of constructed area is sold. The unsold portion of the constructed area would take care of any contingencies, which may arise in future. For the sake of reference, we extract the relevant portion of the order of the Tribunal in the case of Champion Construction Co. (supra) as under :
"We now come to the merits of the assessee's contention, viz., whether income in this case is assessable only when the project is complete, i.e., when the entire portion of the multi-storeyed building meant for sale is sold, a co-operative society of the buyers is formed and the assessee has transferred all its rights, title and interest in the project to the society. It may be that from commercial point of view in the case of a single project/ venture of the type in the case before us the profits can be reasonably computed only when the venture comes to an end in the manner suggested by the assessee's counsel. In fact looked at superficially, the Bombay High Court's decision in the case of K. Mody. (supra), the Rangoon High Court's decision in the case of A.K.A.R. Family (supra) and the Allahabad High Court's decision in the case of Madan Lal Ahuja (supra) support the assessee's contention, viz., when there is a single venture in the nature of trade, the question of assessing profits arises or should arise only when the venture comes to an end. This is also the impression one gets from the order of the Tribunal dated 4-10-1971 in the case of Neelkamal Construction Co. v. Income Tax Officer (copy of the order placed on record at pages 168 to 175 of the assessee's paper book). However, when all these decisions are read carefully in the light of the Patna High Court decision in the case of Sri Sukhdeodas Jalan (supra) and the Supreme Court's decision in the case of P.M. Mohammed Meerakhan v. CIT (1969) 73 ITR 735 (SC) and that of the Delhi High Court in the case of Tirath Ram Ahuja (P) Ltd. v. CIT(1976) 103 ITR 15 (Delhi) we find that the proposition that profit from a single venture cannot be ascertained for tax purposes until the venture has come to an end is not absolute. There may be cases where such a proposition should hold good while there would be other cases where the profit from a single venture can be computed yearwise. In any event, there will be no justification for treating the surplus of receipt afterthe entire cost/expenditure to the assessee is recouped as the income of the assessee unless the assessee shows that it is under an obligation to meet a heavy liability which might altogether change the complexion of the resultant profit or loss from the venture. In this context it has to be borne in mind that if the proposition as stated by Shri Harish is accepted, it would be very easy for any assessee to evade payment of tax. All that he will need to do is to retain a small portion of the accommodation constructed by him unsold, which will always be possible.
15. It is, thus, desirable to briefly refer to the facts of each case to show why we have come to the aforesaid condition. The facts in the Bombay High Court case were that the assessee had purchased about 1,330 Acres of land for Rs. 60,000 in the year 1930. Out of this area he earmarked for development and sale as building sites an area of about 266 acres divided into 1,000 plots. He spent about Rs. 20,000 in the development of the area. During the financial year 1936-37 the assessee sold 208 plots to various persons for a sum of Rs. 65,810. By taking into account the original cost price of the land and the proportionate development expenses, the Income Tax Officer computed the profits at Rs. 56,980 which were reduced to Rs. 47,533 by the Appellate Assistant Commissioner.
In the Rangoon High Court case, the assessee was a money-lender. In the course of its money-lending business it took over certain acres of land and a house in settlement of a debt of Rs. 9,000 due to it. The lands were sold at different times at the best prices available at their respective sales. The assessee was crediting the debtor's account by crediting the sale proceeds as and when materialised. After the last sale took place, it claimed the net debit balance of Rs. 5,137 in that account as loss.
In the Allahabad High Court case the assessee had purchased 28,278 sq. yds. of land between 1942 to 1947 and spent about Rs. 8 1,000 in the development of the area. During the assessment year 1969-70 the assessee sold for the first time 5,673 sq. yds. out of it for a su mi of Rs. 1,05,700. Again by taking a proportionate cost of the land and the development expenses, the department wanted to tax the assessee on a capital gain of Rs. 55,670.
It is, thus, evident that both in the Rangoon and the Allahabad High Court cases the assessee was not having any adventure in the nature of trade as such in real estate. Besides the sales were of a small portion as compared to the total area purchased or exploited, both in the Bombay and the Allahabad High Court cases. Therefore, all the above three cases are distinguishable on facts.
The Tribunal's order dated 4-10-1971, relied upon by the assessee's counsel, is also distinguishable. In that case the assessee-firm had purchased one plot of land for which an agreement of sale was entered into on 29-6-1962, However, a deed of conveyance was not executed. It was for that reason that the Tribunal held that until the registration took place there was no transfer and, consequently, no sale.
16. On the other hand, nine-tenth work of the project had been completed during the previous year in the Patna High Court case and the assessee had received a sum of about Rs. 3,00,000 on account of the execution of the contract. These facts are very close to the facts in the assessee's case. Duly recognising the commercial principles involved in such matters the Patna High Court has observed as under:
'In the case of contracts, if accounts are maintained and completed on contract basis the profits or gains of the previous year cannot properly be extracted from the accounts, for a contract may take several years for being completed and payments in regard to it may also be received by the assessee in several years. It may be convenient from the point of view of the assessee that profit should be ascertained on the completion of the contract and assessment of the profit should take place afterthe completion of the contract. But section 3 imposes a charge of income-tax upon the profits and gains of the assessee for the accounting year and it is the duty of the income-tax authorities to ascertain the profits and gains accruing to the assessee in respect of the payment received during the accounting year.
It cannot be said that merely because a contract was completed after the accounting year, no profits arose or accrued to the assessee in the accounting year. In the case of an incomplete contract there is a well established method of calculating profits accruing in the accounting year which is set out at page 971 of Batliboi's Advanced Accounting. Mathematical certainty is not demanded in a matter of description.' More or less same view has been taken by the Hon'ble Supreme Court in the case of P.M. Mohammed Meerakhan (supra). The facts in that case are also quite close to the facts in the assessee's case. The land in this case was divided into 23 plots out of which 22 plots had been sold. The Supreme Court observed as under:
'. . . In our opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be ascertained even on the assumption that the transaction of the adventure of trade was not completed. Under the Income Tax Act for the purpose of assessment each year is a self-contained unit and in the case of a trading adventure the profits have to be computed in the manner provided by the statute. It is true that the Income Tax Act makes no express provision with regard to the value of stock. It charges for payment of tax the income, profits and gains which have to be computed in the manner provided by the Income Tax Act. In the case of a trading adventure the profits have to be calculated and adjusted in the light of the provisions of the Income Tax Act permitting allowances prescribed thereby. For that purpose it was the duty of the Income Tax Officer to find out what profit the business has made according to the accountancy practice. As a normal rule, the profit should be ascertained by valuing the stock-in-trade at the beginning and at the end of the accounting year. . . .' Though the finding of the Tribunal that neither profit nor loss for the construction contract for the year should be taken was not interfered with by the Delhi High Court in the case of Tirath Ram Ahuja (P) Ltd. (supra), Their Lordships have following the Patna High Court's decision in Sri Sukhdeodas Jalan's case (supra) clearly observed :
'. . . in the case of contracts, one need not wait till the contract was completed in order to ascertain the income and that it was open to the revenue to estimate the profit on the basis of the receipts in each year of construction although the contract was not complete. . . .' The counsel for the assessee, it may not be out of place to mention, had referred to the orders of the assessments in three cases (copies of the assessment orders filed at pages 175, 176 and 179 of the paper book). However, the facts in those cases are not clearly stated. In any event, in view of the Supreme Court and the High Court decisions referred to by us above, the assessment orders will hardly provide any guidance in the matter.
17. Having regard to the case law discussed by us hereinabove, we hold that it is not a correct proposition to say that profits of the assessee from a single venture/project in the nature of trade cannot be ascertained until the venture/project has come to an end. Under the Act each year is a self contained unit and unless it is impossible to compute the profits or losses of each year reasonably if necessary by estimating the value of the liabilities to be incurred, valuing the work-in-progress, stock-in-trade, etc., the profits should be computed year-wise and taxed. The acceptance of a bald proposition put forward by Shri Harish would amount lo giving the assessee a licence to put off his tax liabilities for an unlimited period by seeing to it that the venture/project never comes to an end in the sense something or the other always remains to be done. That will be a very unsatisfactory state of affairs. Moreover, when the entire cost /expenditure to the assessee is recouped and/or major portion of the venture/project is complete, there is really no justification in not taxing the income from project which quite often may represent excess of receipts over expenditure. Unless there is a risk/chances of the assessee's suffering heavy liabilities, subsequently, for some reasons or the other.
18. We have examined the tacts of the case from this point of view. We find that out of the total accommodation of 58,970 sq.ft. constructed, the assessee was able to sell only 25,530 sq.ft. during the previous year relevant for the assessment year 1977-78. Neither the construction of the multi-storeyed building was complete nor even the half portion of the building sold. The net sale proceeds received were much less than the total expenditure/ cost incurred by the assessee up-to-date. In the circumstances, so far as the assessment year 1977-78' is concerned, we accept the assessee's submission that it would be in order if no profits or losses are estimated from the venture for the assessment year 1977-78. The assessment for this year is, therefore, cancelled even on this score.
19. However, the position as regards the assessment year 1978-79 is materially different. The construction of the building is completed in that year. Total area earmarked for sale is 61,396 sq.ft. out of which up to the end of that year the assessee had sold 49,965 sq.ft., i.e., about 80 per cent of the area. The net receipts have far exceeded the total cost or expenditure to the assessee. Assuming there is any possibility of the assessee's incurring some liability in future in connection with the completion of the project or otherwise, the unsold portion comprising of 12,331 sq.ft. and the difference between the net receipts and the total expenditure and the amount actually treated as the assessee's income are more than sufficient to take care of any such contingency."
17. This order of the Tribunal has not been reversed so far nor any contrary order of the Tribunal was brought to our notice during the course of hearing of the appeal. We, therefore, following the same, hold that the project deemed to have been completed in that assessment year in which 80% of the constructed area is sold. The other questions posed before us were not dealt upon by the Tribunal in its aforesaid order i.e., Champion Construction Co., but keeping in view the ratio laid down by the different High Courts in aforementioned cases, which were considered by the Tribunal in case of Champion Construction Co., we are also of the view that the time for completion of the project cannot be extended at the whims of the assessee. If the assessee is allowed to do so it would declare the completion of project in those years in which it suffered a loss from other activities to evade tax. It is also observed that most of the time when the project of the assessee is about to complete, he obtained a sanction of the additional FSI and starts the construction thereon and that construction would be lingered on to an extent till the assessee is able to set off the profit against loss of other activities.
18. Turning to the case in hand, we find that the assessee took a project of construction of Maker Chamber No. 3 and Maker Chamber No. 4 at different plots and the original project was almost completed upto the assessment year 1988-89 or even prior to it, if the assessee's contention is accepted and 80% of the constructed area was sold and occupied by the buyer, but the asscssee did not compute the profit on the basis of project completion method and offered it to tax. It got the sanction of additional FSI in which major investments were made during the assessment years 1991-92 and 1992-93 and have shown the completion of the project during the assessment year 1993-94 and in that assessment year, assessee got itself amalgamated with the other company i.e., M/s. Pranic Shipping & Services Ltd. and the claimed deduction of entire profit on the project under section 33AC of the Income Tax Act though he was not involved in any shipping activities during that assessment year. When the original project was completed or about to complete why the assessee did not start its construction of the additional FSI immediately after the completion of the original project and why did he wait upto assessment years 1991-92 and 1992-93. These queries remained unanswered. We are, therefore, of the view that there should be some guidelines in this regard, which may govern the assessee as and when profits in the project completion method are to be declared. The period of completion of the project cannot be stretched at the whims of the assessee to defraud the revenue. We are also conscious of the fact that assessee's object is not only to construct a building but also to sell the constructed portion and earn profit. But the time of completion of the project cannot be stretched to that extent till the assessee finally construct the building and acquire the completion or the occupancy certificate. As and when the entire building is completed/ constructed and 80% of its constructed portion is sold and occupied by the purchaser, the project is deemed to have been completed irrespective of a fact that minor construction work in the building is going on. In makes no difference whether the builder has obtained the occupancy certificate or not. Once more than 80% of the constructed area is sold/occupied by the builder, the project is deemed to have been completed. The remaining constructed portion would take care of the contingent liabilities, which may occur in future.
19. No doubt, construction of additional FSI cannot be called to have any independent existence. It is merely a continuation or extension of the original project, but under the garb of sanction of additional FSI a builder or assessee cannot stretch the period of completion of project to its own convenience. In this regard, there may be three situations under which construction or additional FSI is raised by the builders. These situations are as under :
1. Where, builder/assessee gets sanction of additional FSI and he starts its construction thereon before the completion of project in terms defined as above,
2. Where, the builder/ assessee get the sanction of additional FSI before the completion of the project, but, he starts its construction thereon after the completion of the project,
3. Where the assessee gets sanction of additional FSI after the completion of the project.
To deal with this different type of situations certain guidelines are required to be laid down in the light of the fact that the additional FSI does not have any independent existence. Some times, it is a continuation or extension of original project, but it cannot be uniformly laid down that it is only an extension of the original project. When construction of additional FSI starts after the completion of the original project, it is certainly an independent project. Having pondered upon all these situations, we lay down certain guidelines to resolve all possible controversies with regard to the year of completion of project in a case where the additional FSI is sanctioned and the same are as under:
1. As held in the case of Champion Construction Co. (supra), a project is deemed to have been completed in that assessment year in which 80% of the constructed area is sold and occupied by the purchaser, irrespective of the fact that minor construction work is going on, on the project.
2. In a case when additional FSI is sanctioned and the builder /assessee starts construction thereon before the project is deemed to have been completed in terms defined as above, the construction of the additional FSI is an extension of the original project and is deemed to have been completed in that assessment in which 80% of the total constructed area of the entire project (original project + construction of additional FSI) is sold and occupied by the buyer.
3. In a case, where the original project is deemed to have been completed as per clause (1) and thereafter additional FSI is sanctioned on which construction is required to be raised. The construction of the additional FSI will be an independent project and it will not extend the period completion of the original project. It would be an independent project and it would be deemed to have been completed in the same manner, as the original project is deemed to have been completed ie., on the sale of 80% of the constructed area.
4. In a case where assessee /builder gets the sanction of the additional FSI before the project is deemed to have been completed as defined above in clause (1), but construction has been started after the completion of project. If the gap between the completion of original project and the start of the construction of Additional FSI is reasonable, that is less than six months, it amounts to an extension of the original project and the entire project is deemed to have been completed in terms indicated above. But, if the gap between the completion of project and the start of the construction is unreasonable i.e., about more than six months, the construction of the additional FSI is entirely an independent project and it would not extend the period of completion of the original project. It would be treated as an independent project. The year of completion would be worked out independently in a manner as defined in clause (1).
Since all these aspects were not lexamined by the lower authorities and the revenue has taken a contrary stand in different assessment years as at one place they held that the project was completed in the assessment year 1988-89 and on the other hand they accept the return of the assessee in 1993-94 in which the entire profit was claimed as deduction under section 33AC of the Income Tax Act. In these circumstances, we are of the view that the entire issue of the completion of the project should be examined afresh in the light of the aforesaid guidelines after making necessary investigations/ inquiries by the assessing officer in this regard. We, therefore, set aside the order of the Commissioner (Appeals) in all these assessment years and restore the matter to the file of the assessing officer with the directions to adjudicate the issue afresh in terms indicated above and to determine the assessment year of the completion of the project and tax the profit accordingly after affording an opportunity of being heard to the assessee.
20. Ground No. 2 in Appeal No. 6015 relates to the claim of outstanding contingent liability of Rs. 13.51 crores with regard to the increased lease rent by Maharashtra Government as a statutory liability.
21. The facts borne out from the record are that during the course of the assessment proceedings, the learned counsel for the assessee has raised an alternative plea that in case assessing officer want to assess the profits on the premises the project has been completed in this very year then the outstanding liability of over Rs. 13 crores with regard to the increased lease rent should be allowed. The assessing officer disallowed the claim of the assessee on the ground that it was a disputed liability. The relevant demand has been raised by the Collector of the revenue and this demand was stayed by the Hon'ble High Court of Bombay in a writ petition filed by the assessee. Unless and until the liability is quantified or determined, it cannot be allowed. The assessing officer further observed that the unsold portion of the property would take care this liability. Assessee went in appeal before the Commissioner (Appeals) and the Commissioner (Appeals) allowed the claim of the assessee after treating it to be a statutory liability and directed the assessing officer to consider and allow the statutory liability existed as on 31-12-1987 if the income in the hands of the assessee is assessed on the presumption that project has been completed. Now the revenue is in appeal before us and placed heavy reliance upon the assessing officer order.
22. Having given a thoughtful considerations to the rival submissions as well as the factual aspects, we are of the view that since we have set aside the orders of the Commissioner (Appeals) and restore the matter to the file of the assessing officer to determine the year of completion of project and to compute the profit. The liabilities which might have been settled by now be also taken into account while computing the profits. If the dispute is not settled the provision should be made to meet the liability if the unsold portion of this constructed area is failed to take care of this liability. Accordingly, the issue is also restored to the file of the assessing officer to determine the nature of liabilities whether it is accrued against the original project or the additional project and if it is found to be accrued to on account of original project, it should be adjusted against the profit of the original project, otherwise, it would be adjusted against the profit of the additional project. We, therefore, order accordingly.
23. In result, appeals of the revenue are allowed for statistical purposes.