Income Tax Appellate Tribunal - Mumbai
Ito-1(1)(1), Mumbai vs M/S Aristo Shelters Pvt. Ltd., Mumbai on 6 February, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "A", MUMBAI
BEFORE SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND
SHRI SANDEEP SINGH KARHAIL, HON'BLE JUDICIAL MEMBER
ITA.NO.1931/MUM/2019 (A.Y: 2013-14)
Income Tax Office -1(1)(1) v. M/s Aristo Shelters Pvt. Ltd
579, 5th Floor, Aayakar Bhavan 43/11, Rajabahadur building
M.K. Road, Mumbai- 400020 Tamrind Lane, Fort
Mumbai- 400001
PAN: AAHCA7596F
(Appellant) (Respondent)
ITA.NO.5181/MUM/2019 (A.Y: 2014-15)
Income Tax Office -1(1)(1) v. M/s Aristo Shelters Pvt. Ltd
579, 5th Floor, Aayakar Bhavan 8th Floor, Aristo House
M.K. Road, Mumbai- 400020 N.S. Phadke Road
Near E/W Flyover, Andheri (E)
Mumbai- 400069
PAN: AAHCA7596F
(Appellant) (Respondent)
Assessee Represented by : Shri V. G. Ginde &
Shri Kumar Kale
Department Represented by : Shri R. S. Srivastav
Date of Hearing : 15.11.2022
Date of Pronouncement : 06.02.2023
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
PER S. RIFAUR RAHMAN (AM)
1. These appeals are filed by the revenue against different orders of
the Learned Commissioner of Income Tax (Appeals)-2, Mumbai
[hereinafter in short "Ld.CIT(A)"] dated 03.01.2019 and 09.05.2019 for
the A.Ys.2013-14 and 2014-15 respectively.
2. Since the issues raised in both these appeals are identical, therefore,
for the sake of convenience, these appeals are clubbed, heard and
disposed off by this consolidated order. We are taking Appeal in ITA.No.
1931/MUM/2019 for Assessment Year 2013-14 as a lead appeal.
3. Brief facts of the case are, assessee filed its return of income on
30.09.2013 declaring total income of ₹.NIL. The case was selected for
scrutiny and notices u/s.143 (2) and 142(1) of Income-tax Act, 1961
(in short "Act") were issued and served on the assessee along with
questionnaire. In response to the notices, AR of the assessee attended
and submitted the relevant information as called for.
4. During the assessment proceedings, while verifying the details
submitted by the assessee, Assessing Officer observed that in the
F.Y.2011-12 assessee has transferred its land purchased at a cost of
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M/s Aristo Shelters Pvt. Ltd
₹.201 Crores from M/s. Bombay Industrial Corporation in F.Y.2009-10 to
Slum Rehabilitation Authority ("SRA") for a consideration in terms of
Transferable Development Rights (TDR) of 16,86,083 sq. ft. The assessee
has made a multipartite agreement between M/s Bombay Industrial
Corporation, Assessee and SRA on 30.04.2011. As per the agreement, the
project is proposed as per Clause 3.11 [under regulation 33(10)] of
Development Control Regulation for Greater Mumbai, as per which
assessee will convey the land to SRA and then construct tenements for
Project Affected People as per Government directive and hand-over the
constructed tenements to the Project Implementing Authority, viz. Slum
Rehabilitation Authority. Assessing Officer observed that, in lieu of the
above, the company will receive TDR in the ratio of 1:1 for land portion
surrendered to SRA and in the ratio of 1:1.33 (1.33 times) for constructed
area which can be sold to other developers in the open market to generate
revenue.
5. Further, Assessing Officer observed that Assessee has to construct
59 buildings (G+24) (having 8582 Tenements) and other buildings
comprising of one (1) school, one (1) Primary Health Care Centre & one
(1) Dispensary, with a total construction area of 83,55,246 sq.ft. and is
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
entitled to receive a total of 1,27,98,560 sq.ft. of TDR. Out of the Total
land TDR 16,86,083 sq.ft receivable, the assessee has received Land TDR
of 1264561.93 sq. ft till 27.07.2012. The said land TDR received was sold
by assessee company in the open market as under: -
Assessment Year TDR Amount
AY. 2012-13 1,78,790sqft Rs. 39,72,94,104/-
A. Y. 2013-14 10,85,664 sq ft Rs. 2,19,52,15,898/-
6. Further, Assessing Officer observed that the stages of release of
TDR as under: -
(A) Land TDR is to be released in the following tranches:
Land TDR
Land
to be
Sr. No. Stages TDR
released
(Sq. ft.)
Sq. Mtr.
1. For the Land under PAP Tenement 89061.89 9,58,662
buildings
2. For the area kept as Buffer Zone as 28418.78 3,05,900
per the directions issued in the
hearing, under no SRA/Eng/Destk-
1/563 dated 23/04/2012
3. Against Amenity space CL. 57(4)(C) 39160.23 4,21,521
Sub-Total (A): TOTAL LAND TDR 16,86,083
(B) Construction TDR is to be released in the following tranches:-
% of Cons.
Sr. Cons. TDR
TDR to be
No. Items (Sq.ft.)
released
1. On completion of Plinth 18% 20,00,246
2. On completion of RCC Work upto 12m slab 31% 34,44,868
(Mesonry Work, Internal & External Plaster will
be carried out proportionately with the slab due
to aluminum from work system)
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M/s Aristo Shelters Pvt. Ltd
% of Cons.
Sr. Cons. TDR
TDR to be
No. Items (Sq.ft.)
released
3. On completion of RCC Work upto 24 slab th 31% 34,44,868
(Mesonry Work, Internal & External Plaster will
be carried out proportionately with the slab due
to aluminum from work system)
4. Building external CPVC Vertical lines 2% 2,22,249
5. On completion Flooring & Internal Plumbing 8% 8,88,998
Work (Except sanitary ware, Drainage, Water,
Electricity, Doors, Windows, Painting, Polishings,
Lifts, Balance RCC Work etc.)
6. On completion the building & obtaining O.C. 8%- 8,88,998
7. Retention at the time of occupation to be 2% - 2,22,250
released only defect liability period of 2Years is
over.
Sub - Total (B): TOTAL CONSTRUCTION TDR 100% 1,11,12,477
GRAND TOTAL (A+ B) TOTAL TDR 1,27,98,560
7. On verification of Balance Sheet and Profit and Loss account and its
schedules filed by the assessee, it was observed by the Assessing Officer
that the assessee has not recorded any transactions in Profit and Loss
Account and declared ₹.NIL profit of the business. On verification of the
balance sheet, it was observed that the assessee has increased its WIP
Account for Chembur site by debiting direct expenses such as purchases,
labour charges, and by debiting administrative expenses such as financial
expenses, selling and distribution expenses. The WIP for the year was
declared by the assessee at ₹.21,75,00,546/-. The above said sum of WIP
along with brought forward WIP of ₹.23,07,302,814/- has been reduced
from the TDR sale declared at ₹.2,19,52,15,898/- and thus the closing
WIP was declared at ₹.32,95,87.461/- Assessing Officer observed that
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M/s Aristo Shelters Pvt. Ltd
since the assessee has sold the TDR received in lieu of transfer of land to
SRA and the income from sale of TDR so received constitutes the income
of the assessee for the year under consideration and thus by reducing the
amount received as against sale of TDR the assessee has not followed
correct method of accounting. Accordingly, a show-cause notice was
issued asking for clarification.
8. In response, assessee vide letter dated 18.03.2015 submitted as
under: -
"With reference to above subject, we submit as under-
We have perused your aforesaid letter dated 10/02/2016.
1. We find that your office would like to follow Method of
Accounting for transactions on Transfer of Development rights'
(TDR) available from project at Chembur, Mumbai as devised by your
office and referred to while passing Assessment Order for the A.Y.
2012-13.
2. At outset, we submit that we have preferred Appeal before
CIT(A) against above referred Asst Order for AY 2012-13 AND do not
agree with Department's Stand. We submit that method of
Accounting followed by us is correct method of Accounting per
attached detailed explanatory note (Exhibit-1).
Note explaining method of accounting employed by the
company
1. Facts:
Briefly stated, the material facts of the case are as under.
i) The assessee company is engaged in the business of real
estate development. During the course of its business, the company
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
vide Agreement for Sale dated 5.2.2010 entered into with M/s.
Bombay Industrial Corporation purchased land admeasuring
approximately 1,56,640 sq. meters situate at CTS No. 619/A, 619/B,
620/A, 621/A, 621/B, 621/C, 623/A1, 623/A2 and 623/B at Village
Mahul, Chembur, Mumbai ("said land") for purchase of price of
Rs.201 crores with a view to develop the same.
ii) The company had given a rehabilitation proposal to the Slum
Rehabilitation Authority ("SRA") for development of the said land
under provisions of Clause 3.11 read with Clause 3.5 & 3.9 (ii) of
Appendix-IV of Development (Control & Regulations) Rule 33(10),
by constructing certain number of tenements at its own cost to be
handed over the Municipal Corporation of Greater Mumbai
("MCGM"), free of cost, which in turn would allot these tenements to
the slum dwellers removed from hutments along water mains of
MCGM. In lieu of this our company would get Transferable
Development Rights ("TDR") from MCGM. This rehabilitation project
was declared as a Vital Public Project by the Government of
Maharashtra.
iii) By Letter of Intent ("LOP") dated 31.3.2011 issued by SRA,
our company is to construct 9002 tenements and other amenities to
be handed over to MCGM through SRA free of cost for which
following TDR would be allotted to the company:-
(A) Land TDR Sq. Meters Sq. Ft
1. Project Affected 89,061.89 9,58,662
People Tenements
2. Buffer Zone Area 28,418.78 3,05,900
3. Amenity Portion 39,160.23 4,21,521
Total 16,86,083
(B) Construction 1,11,12,477
TDR
Total 1,27,98,560
iv) Simultaneous with the issue LOI dated 31.3.2011, a
multipartite Agreement ("the Agreement") was executed between
M/s. Bombay Industrial Corporation (as "Vendors"), our company (as
"Developers") and the SRA (as 'Purchaser') and the SRA (as "Project
Implementing Authority") setting out the terms and conditions for
development of the said land in accordance with the LOI dated
31.3.2011. Clause (3) and (4) of the Agreement provide for
consideration in the form of TDR to be allotted to our company
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
described as "Rehabilitation Component and Land Component"
respectively for the obligations undertaken by the company in
implementing the rehabilitation scheme at the said land
v) The aforesaid LOI was amended from time to time by several
supplementary LOIS, the last being LOI dated 16.6.2012, which
modified the no. of tenements to be constructed by the company to
8,399 and also other amenity tenements as per Clause (21) thereof.
vi) Clause (7) of the Agreement provides that the company shall
be entitled to the benefit of TDR in the ratio of 1:1 in respect of the
Land Component from the SRA, and the SRA will cause the MCGM of
issue TDR in the form of Development Right Certificate ("DRC") in
the name of the company in stages after the said land is transferred
to SRA as specified in the Agreement. Clause (17) of the Agreement
provides the time when the company will be entitled to the Land
Component of TDR; while clause (18) of the Agreement provides the
time when the company will be entitled to the Rehabilitation, Le.
Construction Component of TDR. Clause (15) of the Agreement
stipulates the compensation to be paid by the company to the SRA
in case of default committed by the company in delaying the
construction work.
vii) The company received the following TDR in respect of the
Land Component:
Date of Date of Nature of TDR TDR in Sq. TDR in Sq.
Release Receipt Meters Ft.
18.5.2011 16.9.2011 PAP Tenements- 17,810.00 1,91,706.84
part
18.6.2012 16.7.2012 Buffer Zone Area 28,418.78 3,05,899.75
26.6.2012 27.7.2012 PAP Tenements - 71,251.89 7,66,955.34
Balance
Total 1,17,480.67 12,64,561.93
viii) The company has been consistently following project
completion method for recognising revenue from this project.
Consequently, all the expenses incurred on this project have been
accumulated under the head "Work-in-Progress" till the completion
thereof. The sales proceeds realized on sale of TDR during the
construction period has been reduced from the cost of WIP, and the
balance cost carried forward.
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M/s Aristo Shelters Pvt. Ltd
ix) It is important to state that after 27.07.2012, the company
has not received any TDR. The said land being situated near HPCL
and BPCL Refineries, they have taken serious objections to our
project. Further, Public Interest Litigation involving our project is
pending before the Hon'ble Bombay High Court. In view of these
facts, the said project is couched in significant uncertainties at the
moment. The copies of litigation filed by f) HPCL V/s. The Slum
Rehabilitation Authority and Others including us is enclosed and (ii)
Public Interest Litigation No. 140 of 2006 filed by Janhit Munch &
Others V/s. MCGM, us and others - Volume-I & II enclosed.
2. Issue:
In the letter dated 10/02/2016, you have raised the issue of method
of accounting qua this project. While our company did not recognise
any profit or loss during the year ended 31.3.2013, you have
proposed to invoke section 145(3) to compute profit of Rs.52.58
crores, as worked out in the said letter. We seriously object to this
proposal on the principles of accounting, among others, for the
following reasons:
3. Submissions:
3.1 We have followed correct method of accounting:
We respectfully submit that there can be no issue about the method
of accounting followed by our company for this project. The Project
Completion Method ("PCM") is a recognised method accounting that
is followed by many enterprises operating in real estate business as
it is a scientific method that has stood the judicial scrutiny in a
number of precedents a few of which are mentioned as under:
(a) CIT us. V. S. Dempo & Co. Pvt. Ltd. (1996) 131 CTR 203 (Bom)
(b) Shapoorji Pallonji (Rajkot) Put. Ltd. vs. CIT (1994) 49 ITD 479 (Bom)
(c) Nandi Housing Pvt. Ltd. vs. DCIT (2004) 2 SOT 395 (Bang)
(d) DCIT vs. Ranka Developers (2006) 6 SOT 815 (Bang)
(e) Haware Constructions (P) Ltd. vs. ПO (2011) 64 DTR
(Mumbai) (Trib) 251
(f) DCIT vs. Ankit Chirag Developers Pvt. Ltd. (2014) 40 CCH 018
JodhTrib
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M/s Aristo Shelters Pvt. Ltd
As per PCM, profit/loss of a project is recognised only on completion
of the given project, and until then the costs are accumulated as WIP
and advances received on account of any sales are carried forward
as liability in the balance sheet
In accordance with this method, our company has consistently, year
after year, taken all the costs to the WIP, and the proceeds realized
on sale of TDR deducted from the cost of WIP, there was no question
of recognising any profit or loss during the construction period until
the project is completed.
3.2 Land Component of TDR cannot be considered de hors
the total project:
The project under consideration is to develop/construct certain
number of tenements and other amenity tenements on the said land
to be given free of cost to MCGM, through the SRA, in lieu of the TDR
in the form of DRC to be issue by the MCGM Though there are two
components of the TDR, namely, the Land TDR and Construction
TDR, they both form an integral and inseparable part of the project
revenue, and cannot be separated and considered in isolation.
It is only a mechanism to provide the consideration to the developer,
but the basic and fundamental obligation of the developer is to
construct the required number of tenements and other infrastructure
amenities as per the Agreement as a part of Rehabilitation Scheme
of the SRA. Therefore, we submit that no profit or loss can be
considered only in respect of the Land Component of TDR, when the
project is still under construction.
Even the objective underlying the rehabilitation scheme is to create
additional housing stock of rehabilitation tenements, which is to be
utilized for rehabilitating project affected persons of vital public
projects of the Government or its agencies (please refer Recital
Clause (C) of the Agreement]. The arrangement between our
company and the SRA is therefore for creating additional tenements
for housing for project affected people. Transfer of the said land to
the SRA is only a preliminary step in that direction; and not the end
in it. Hence, the Land Component of the TDR cannot be separated
from the main construction project for measuring any profit or loss
from the same.
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M/s Aristo Shelters Pvt. Ltd
Further, and more importantly, as per Clause (17)(a) we are entitled
to only 20% of the total Land TDR on execution of the Agreement,
while as per Clause 17(b) & (c), the balance 80% is linked to
construction of tenements. This clearly demonstrates that both these
components are inseparable and cannot be considered in isolation
independent of each other.
Therefore, any profit or loss of this project should be recognised only
upon completion of the project as a whole when our company fulfils
all its obligations under the Agreement.
3.3 Accounting Standard-9 (AS-9) on Revenue Recognition:
AS-9 pronounced by the Institute of Chartered Accountants of India
lays down the accounting standard for recognising revenue by an
enterprise. As per AS-9, revenue in case of sale is to be recognised
when significant risks and rewards stand transferred between the
parties. Further, the revenue can be recognised only when there is
no significant uncertainty about its ultimate collectability.
Having regard to the nature of project under execution, it cannot be
said that our company has transferred any significant risks of the
project to the SRA when land is transferred to it while the
construction of tenements, which is the basic obligation, is still in
progress. It is only after handing over of the constructed tenements
with occupation certificate obtained for the same, that one can say
the company has transferred the associated risk and reward of the
same to the SRA.
Further, the accrual of TDR in the form of DRC is also doubtful until
construction is completed as stipulated. The stage-wise allotment of
TDR is for the purpose of enabling the developer to raise finance
required for the implementation of the project. This is provided in
Clause (16) of the Agreement.
In any event, recognising revenue at every stage of allotment of TDR
would mean adoptionof percentage completion method; while our
company follows PCM. It is legally well settled that it is the choice of
the assessee to adopt a particular method of accounting; the only
requirements are that (a) it should be a recognised method of
accounting, and (b) the same method once adopted should be
followed consistently. Thus, the method of accounting adopted by
our company cannot be rejected, and a new method, i.e. percentage
completion method thrust upon us by recognising profit/loss on sale
of TDR receivable at different stages of the project.
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M/s Aristo Shelters Pvt. Ltd
3.4 Judicial Precedent supports our stand:
i. We would like to submit that our case is saucrely covered by
our sister concern's case of M/s. Atithi Builders And Constructors
Private Limited (ITA No. 4047 & 4048/Mum/2009) for A.Y. 2004-05
and 2005-06 by Hon'ble Mumbai ITAT-A Bench (the copy of decision
is enclosed) where CIT (A)'s decision is confirmed upending Project
Completion Method for TDR sales. It was held as follows:
"We have heard the rival submissions and perused the relevant
material on record. The only issue before us is whether TDRs should
be taxed on receipt basis as has been done by the Assessing officer
or in the year in which the project is completed. The assessee is
admittedly following mercantile system of accounting and the project
completion method has been approved by the Ld. CIT(A) as well. The
Mumbai Bench of the Tribunal in Chembur Trading Corporation
(supra) vide its order dated 21.01.2009 has held that when the
assessee is following project completion method, sale proceeds of
TDRs should be included in the year in which the project is
completed. Similar view has been taken by another Bench of the
Tribunal in ITO Vs. Sudhir V.Shetty in ITA No.4687/Mum/2006,
copies of these two orders have been placed on record. The Ld. DR,
after going through the above orders candidly admitted that the facts
and circumstances of the instant appeals were mutatis mutandis
similar. In view of these decisions it has become apparent that the
sale of TDRs is to be accounted for in the year in which the project
is completed and not when the work is going on. As the four
assessment years under consideration are the years in which the
project was unfinished, naturally the sale of TDRs cannot be included
in the income of the assessee. However it is made clear that the sale
proceeds of TDRS would be included in the total income of the
assessee in the assessment year 2008-2009, subject to the
availability of other deductions, as per law. The learned A.R. has
stated at Bar that the assessee voluntarily included such amount in
the income for the assessment year 2008-2009, assessment of which
is still in progress and the assessment order has not yet been passed.
We, therefore, hold that the amount of sale of TDRS in the years in
question should not be taxed but the same are accounted for in the
year of completion of project, that is A.Y. 2008- 09. We, therefore,
uphold the impugned order on this issue."
ii. The accounting treatment given by our company is also
supported by the judgment of the Appellate Tribunal in ACIT vs.
Skylark Build [2011] 48 SOT 306 (Mumbai), wherein on identical facts
and circumstances of the case, it was held as follows:
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M/s Aristo Shelters Pvt. Ltd
"8...... The assessee has been following project
completion method which is an accepted method of
accounting in construction business and also
recommended as per accounting standard AS-7 of ICAL
Therefore, in such cases the income from the project has
to be computed in the year of completion. The TDRS
received are directly linked to the execution of the project
and therefore, before the completion of the project the
income from TDR or any other receipt inextricably linked
to the project will only go to reduce costs of the project.
Therefore, in our view the assessee had rightly set off
TDR received against WIP. The addition made by the AO
in 2006-07 on account of TDR receipt is not
justified............ The cost of the buildings is claimed to be
more than income from TDR, full details of which were
given to the CIT(A) and therefore, even on this ground
no income can be assessed in case of the assessee. In
the asst. yr. 2006-07, the project was not complete and
there is no dispute about this fact. Therefore, in asst. yr.
2006-07, TDR received has to be set off against WIP and
cannot be assessed separately as income. We therefore,
confirm order of CITYA) deleting the addition made in
asst. yr. 2006-07. The position regarding asst. yr. 2007-
08 is not clear. The AO has not given any finding
regarding the year of completion of the project. Though
the CIT(A) has held that the project was completed in
asst. yr. 2007- 08, he has not given any basis of such
finding not any such specific plea was taken by the
assessee before CIT(A). This aspect therefore requires
verification. The construction of the transit buildings was
only a part of the project. The actual year of completion
of the project is required to be verified. We therefore,
restore this aspect to the file of the AO for fresh order. In
case on verification it is found that the project was
completed in 2007-08, AO will compute the income from
project after taking into account entire expenditure and
the receipts from the beginning of the year including the
TDRs as directed by CIT(A). However, in case the project
is not found complete, the AO will set off TDR receipts
against work in progress and no income will be assessed
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M/s Aristo Shelters Pvt. Ltd
on account of TDR receipts separately. We direct
accordingly."
[Emphasis supplied]
5. In view of above discussion, we respectfully submit that the
accounting treatment given by our company to the sales proceeds of
Land TDR by deducting the same from the cost of WIP is correct and,
therefore, it should be accepted. We, therefore, pray that in our case
provisions of section 145(3) should not be invoked. The assessee
further submitted that, without prejudice to above,
A) your goodself may note that, for Builders & Developers, who
follows Project Completion Method, while computing net profit of the
particular Project, financial figures of more than one year needs to
be considered to arrive at profitability of such Project. Your goodself
may note that we have borrowed funds of 90,00,00,000/- from IL&FS
TRUST COMPANY LIMITED (ILFS) vide Debenture Subscription
Agreement (copy placed as Exhibit-2). The Principal amount of
Rs:30,00,00,000/- was repaid in FY 2012- 13. Balance Principal
amount of Rs: 60,00,00,000/- and interest of Rs: 64,20,61,040/- was
paid in F.Y. 2014-15. We enclose herewith (i) copy of Ledger A/c of
ILFS(Exhibit-3): (ii) our Audited Accounts, both for FY 2011-12;2012-
13;2013-14 & 2014-15.(Exhibit-4)
B) After debiting interest as referred to in para 4(A) above, we have
prepared Profit/Loss A/c of the Chembur Project with Total cost
incurred vis a vis Revenue generated from sales of TDR for the period
1-4-2011 to 31-03-2015 per method of accounting denied by your
office and also for valuation of closing stock as on 31.03.2015(the
copy as Exhibit- 5). The result of the Project period till 31.03.2015
shows net loss of Rs. 24,01, 73,617/- So taxing Income in particular
year ignoring total life of the Project would give absurd results. Your
goodself may note that Project is at halt due to litigation and stay by
H'ble Bombay High court since 17/01/2013 (copies of two documents
on litigation and stay are placed as Exhibit-6). These documents were
also submitted during the course of assessment proceedings for A.Y.
2012-13.
So, in our humble view, Net Profit as stated in your letter can not be
assessed as Income for F.Y.12-13 (A.Y.13-14)."
9. After considering the submissions of the assessee, Assessing Officer
rejected the same and came to the conclusion that the TDR consists of
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M/s Aristo Shelters Pvt. Ltd
20% of the total TDR on execution of the agreement and balance 80% is
linked to the construction of the tenements. Therefore, he is of the
opinion that as per the tripartite agreement, the assessee has transferred
the land with all its rights acquired on purchase of such land to the SRA.
In return, assessee has received TDR from SRA. The cost of Land TDR is
the cost of land purchased and expenses incurred on development of land.
On acquisition of Land TDR, it can be said to be held as stock in trade and
the cost of said TDR is the cost of land and the cost incurred on
development of such land. By selling the TDR held as stock in trade, the
assessee is acting just like a trader and he proceeded to treat the profit
sale of TDR as income of the assessee after adjusting the cost of land and
observed as under: -
"7.3 As per the multipartite agreement, the assessee got privilege and
the right in construction of rehabilitation component. Such construction
of buildings in the project commenced as per the direction of the SRA.
In lieu of expenses incurred on construction of tenements/building of
the project, the assessee will get TDR for sale in open market after
commencement of work of construction of building in phased manner.
In this process, the assessee is acting like a contractor and not a
developer. As such, the assessee is not having any control over
commencement of construction, allotment of residential tenements and
the completion of whole project.
7.4 As per the multipartite agreement, the assessee has got privilege
and right in construction of 9002 tenements. In the said agreement,
there is a clause to construct a building by the assessee within 5 years
of issue of commencement certificate. The project in question,
comprising of 59 buildings for residential tenements and 3 other
buildings for amenities. Since the project is so large and there is no time
bound completion of the 'whole project, the method followed by the
16
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
assessee itself is questionable. During the course of assessment
proceedings the assessee has never come forward with any proposal
that when the said project will be completed and when it will offered the
income generated from such project. The assessee by claiming that it
has followed project completion method and the income will offered
after the completion of project raises doubts about the intention of the
assessee.
8. Since the assessee failed to determine profit of the business on
sale of land TDR, the book result of the assessee are considered not
reliable and accordingly stands rejected within the meaning of provisions
of section 145(3) of the Act and the assessment is completed in the
manner provided u/s 144 of the Act, on discussion hereinbelow.
9. While issue of the show cause regarding rejection of books of
accounts, inadvertently closing stock balance has been taken at Rs.
32,95,87,461/-, representing figure as per capital work in progress
shown by the assessee company instead of Rs. 50,26,28,147/-, cost of
balance land TDR (421629 1192.11).
10. Considering the facts narrated above, evolution of evidences,
references of facts and discussion, the correct method to determine
profit on sale of land TDR is given here under:-
Opening Stock 1,78,14,63,752 Sale of TDR 2,19,52,15,898
Direct Expenses 16,31,263
Administrative Expenses 14,91,85,667
Financial Expenses 6,20,75,907
Selling & Distribution 46,07,709
Expenses
Profit 69,88,79,747 Closing Stock 50,26,28,147
Total: 2,69,78,44,045 Total 2,69,78,44,045
Note on closing stock
1. Total land TDR receivable 16,86,083 sq ft.
2. Cost of land TDR as opening stock Rs. 201,00,00,000/-
3. Cost of 1sq ft and land TDR Rs. 1192.11/-
4. Land TDR sold during the year 10,85,664 sq ft.
5. Sale price of land TDR for the year 2,19,52,15,898/-
6. Balance land TDR with the assessee company 4,21,629 sq ft.
7. Cost of balance land TDR Rs. 50,26,28,147/-
(421629* 1192.11)
17
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
Accordingly profit on sale of land TDR is determined at
Rs.69,88,78,747/- and same is treated as income of the
assessee for the AY. 2013-14."
10. Further, Assessing Officer observed that assessee has debited
interest expenses under the head "Financial Expenses" and adjusted in
work-in-progress account as under: -
Finance expenses:
Interest account ₹.62222922/-
Interest received on FD ₹.1832412
₹.,60390507
11. He observed that interest payments were made to secured loan
from bank, convertible debenture and to unsecured loans from parties not
related to the assessee. Further, he observed that assessee has utilized
the interest bearing fund/business fund for advancing it to its associate
concern. The closing balance of advances given to associates concern is
as under: -
To Director ₹.4,57,950/-
To M/s. Aristo Realtors Pvt. Ltd., ₹. 167,36,35,000/-
12. Since the assessee utilized its business/interest bearing funds for
non-business and non interest generated advance, in order to verify the
assessee was show caused as to why the proportionate interest expenses
18
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
debited on interest bearing fund not utilized for business purpose should
not be disallowed.
13. In response, assessee submitted that assessee has interest free
funds available in the business and as per the presumption the interest
free funds are applied which for such other purposes. However, Assessing
Officer rejected the same by disallowing the proportionate interest as
under: -
"13.3. Considering the above facts and as per statement given by
the assessee, interest free find available with the assessee and
interest free advances given is worked out as under: -
A. Interest free loans received from Director & related parties:
1. From Director Rs. 10,68,852/-
2. From related parties Rs. 41.02,36,335/-
Interest fund available with assessee total Rs.41,13,05,187/-
B. Interest free loan/advances given to director and related parties:
1. To Director Rs. 4,57,950/-
2. To Aristo Realtors Pvt. Ltd Rs.167,36,35,000/-
3. Investment in related parties Rs. 18,00,00,000/-
4. Total Rs. 1,85,40,92,950/-
13.4 From the above working, it is seen that the assessee has given
interest free loans/investment to related parties over and above
interest free fund available with it.
13.5 Thus the assessee has given advances and made investments
to related parties from the interest bearing fund meant for business
amounting to Rs. 144,27,87,763/- so as to enhance its work in
progress and thereby reduce its tax liability.
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
13.6 Since, the assessee has utilized its interest bearing business
fund amounting to Rs. 144,27,87,763/- for interest free advance to
its related parties, the interest paid on interest bearing fund taken
from bank (secured) and from other parties (unsecured) amounting
to Rs. 6,22,22,922/- is not allowable as business expenses as
provided u/s 36(1)(iii) of the IT Act, 1961.
13.7 As regards to the reliance placed on in the case of CIT v/s
Reliance Utilities & Power Ltd, the facts of the assessee case to the
case relied upon are distinguishable and not identical as discussed in
above paras. In the assessee case, advances given to its related
parties and investment made is over and above of interest free fund
available with the assessee. Hence, the decision relied upon does not
help the assessee.
13.8 Considering the above facts, interest paid and
debited/claimed against income amounting to Rs. 6,22,22,922/- is
disallowed and added back to total income of the assessee. Since the
assessee filed inaccurate particulars of income and thereby
concealed particulars of income, penalty proceedings u/s 271(1)(c)
is hereby initiated."
14. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and
filed detailed submissions before him. After considering the detailed
submissions Ld.CIT(A) allowed the appeal of the assessee, observing as
under: -
"4.3 I have considered the A.O's order and the submissions made
by the appellant. I find that the appellant has followed the project
completion method which is a recognized method of accounting.
Further, the appellant has entered into agreement with Slum
Rehabilitation Authority (SRA) to construct certain numbers of
residential tenements, balwadis, welfare centres, and other
amenities as approved by SRA in consideration of Transfer of
Development Rights (TDR). The TDRS are to be received for the land
component i.e. land to be transferred by the appellant/developer to
the SRA and construction TDR in respect of the construction of
various buildings in the SRA project. The release of TDR in the form
of Development Rights Certificates (DRCs) is to be done in stages to
20
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
enable the developer/appellant to raise finance and construct and
complete the buildings/tenements within the time agreed between
the SRA and Developer. Even the land TDR is to be released, as per
clause 17 of the agreement dated 30.4.2011, in following manner:
i) 20% on the execution thereof and lodging the
conveyance with the registrar in respect of land agreed to be
conveyed in favour of PIA i.e. Project implementing authority.
ii) 65% upon developer constructing 50% of the plinth of
the tenements
iii) Balance 15% upon developer completing the
construction of tenements.
Therefore, I am inclined to agree with the appellant's contention that
the sale proceeds of land TDR is part of the project undertaken and
cannot be considered independently of the total project, for the
computation of income for A.Y.2013-14.Reliance is placed on the
following decisions, as cited by the appellant in its submissions:
i) CIT vs. M/s Chembur Trading Corporation (Bombay
High Court - IT Appeal No. 3179 of 2009)
ii) ACIT vs. M/s. Atithi Builders & Constructors p. Ltd. (ITA
No. 4047 & 4048/MUM/2009)
4.3.1 Further, I find that the issue raised in Grounds 1, 2 & 3 of
Appeal has been decided in favour of the appellant by the CIT(A)-2,
Mumbai for the A.Y. 2012-13, vide the Order dated 06.02.2017, in
Appeal No.: CIT(A)-2/IT-120/2015-16. In the said order dated
06.02.2017, the decision of the jurisdictional Hon'ble Bombay High
Court in CIT vs. Chembur Trading Corporation (IT Appeal No. 3179
of 2009), which upheld the decision of the Hon'ble Tribunal in CIT
vs. Chembur Trading Corporation (ITA No.2593/Mum/2009), has
been followed and the AO has been directed to accept the method
of accounting followed by the appellant company i.e project
completion method. Since the facts of the case remains the same for
A.Y.2013-14 and the AO has followed the findings of AO in A.Y.2012-
13, following the decision of the CIT(A) in A.Y.2012-13, it is held that
the AO was not correct in rejecting the method of accounting
followed by the assessee and making an assessment u/s.144 r.w.s
145(3) of the Act. It follows that the profit on sale of TDR is to be
assessed in the year of completion of the project. Accordingly, the
addition of Rs.69,88,79,747/-, made by the AO by treating the profit
on sale of TDR as income for A.Y. 2013-14, is deleted. The AO is
21
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
directed to compute the income for A.Y.2013-14 by following the
project completion method as done by the appellant. Ground No.1,
2, & 3 taken by the appellant are Allowed.
....
5.2. I have considered the AO's order and the submissions of the
appellant. The AO has held that the TDR advances was in the nature
of business fund and could not be treated as interest free fund mainly
on the ground that if the assessee was not able to arrange the TDR,
then it has to pay heavy compensation and the same was claimed as
a business loss. This view of the AO is not found to be correct since
the nature of TDR advance is like any other advance received in the
course of business and since interest is not chargeable on such
advance, it has rightly been considered as part of interest free funds
available with the appellant. The appellant's claim of compensation
paid on non delivery of TDRS as a business expenditure has to be
considered on its own merit and the claim of such expense would
not decide if the advance received is interest free or not. Therefore,
I am of the considered opinion that TDR advances available with the
appellant should be treated as part of the interest free funds.
5.2.1. The AO has considered the advances and investments made
to related parties from interest bearing funds, meant for business,
amounting to Rs.144,27,87,763/-, by excluding the TDR advances
available with the appellant of Rs. 1,56,44,69,461. However, as
noted above, the TDR advance has rightly been considered by the
appellant as part of interest free fund and on that basis, the interest
free advances and investment with related concerns/ Director are
out of interest free funds. Thus, no disallowance of interest is called
for u/s 36(1)(ii) of the Act, in view of the decision in the case of CIT
vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340. In view of
above discussion, the addition of Rs.6,22,22,922/-,made to total
income on account of disallowance of interest paid is deleted. Ground
no. 4 is allowed and ground no. 5 is dismissed as academic and
infructuous.
15. Aggrieved revenue is in appeal before us raising following grounds
in its appeal: -
"1. Whether On the facts and in the circumstances of the case
and in law, the ld. CIT(A) has erred in deleting the addition of Rs.
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
69.88 Crore made by the AO on account of sale of Transferable
Development Right (TDR) received on transfer of land to Slum
Rehabilitation Authority (SRA), by holding that the TDR is part of the
project work. in-progress; without appreciating the fact that sale of
sand to SRA has no nexus with the contract awarded for construction
of free homes to Project Affected Persons (PAP) for which TDR is
receivable on different stages of construction."
2. "Whether On the facts and in the circumstances of the case
and in law, the ld. CIT(A) has erred in deleting the disallowance of
Rs. 6.22 crore made by the AO being the proportionate interest on
the interest free loan advanced out of the interest bearing loans, by
holding that TDR advances are in the nature of interest free loan
without appreciating the fact that the assessee has no adequate free
funds available and that no evidences was furnished to prove the
nexus of advance out of TDR advance."
16. At the time of hearing, Ld. DR brought to our notice findings of the
Ld.CIT(A) at Page No. 17 of his order and he submitted that assessee has
received two types of TDRs as per the Tripartite agreement. Assessee
has transferred all the rights over the land to the SRA, accordingly, TDR
received on the land has to be recognized as income of the assessee and
with regard to TDR received for construction of the property, the assessee
is following the of project completion method of accounting, accordingly,
it can follow the procedure. Therefore, he submitted that the land TDR
received by the assessee which has reached finality i.e. 20% of the TDR
amount. Ld. DR submitted that Assessing Officer has treated the entire
TDR as income of the assessee. However, Ld.CIT(A) has come up with
the proposition that the TDR received by the assessee for land is separate
23
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
and for construction is separate which itself is not proper. Therefore, he
submitted that the above finding of the Ld.CIT(A) is against the
accounting principle followed by the assessee. He submitted that TDR
are accrued to the assessee based on the project completion status. He
strongly supported the findings of the Assessing Officer and prayed that
Assessment Order may be restored.
17. With regard to, interest disallowance he brought to our notice Page
No. 15 of the Assessment Order and supported the findings of the
Assessing Officer. Further, he brought to our notice Page No. 19 and 22
of the Ld.CIT(A) order, to brought to our notice the interest free funds
available in the balance sheet to the extent of ₹.1,97,57,74,648/- the
utilization of non business purpose extent of ₹.1,88,05,85,350/-. He
submitted that the balance sheet clearly shows that assessee has
deployed the interest bearing funds for the non business purposes.
Accordingly, he prayed that the findings given by the Assessing Officer in
the Assessment Order may be restored.
18. On the other hand, Ld. AR submitted as under: -
The Respondent-assessee is engaged in the business of real
estate development. During the course of its business, the
Respondent vide Agreement for Sale dated 05.02.2010 entered into
with M/s. Bombay Industrial Corporation, purchased land
24
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
admeasuring approximately 1,56,640 sq. meters situate at CTS No.
619/A, 619/B, 620/A, 620/B, 621/A, 621/B, 621/C, 623/A1, 623/A2
and 623/B at Village Mahul, Chembur, Mumbai ("said land") for
purchase price of Rs. 201 crores, with a view to develop the same
under Slum Rehabilitation Scheme
The Respondent had given a rehabilitation proposal to the
Slum Rehabilitation Authority ("SRA") for development of the said
land under provisions of Clause 3.11 read with Clause 3.5 & 3.9 (ii)
of Appendix-IV of Development (Control & Regulations) Rule 33(10),
by constructing certain number of tenements at its own cost to be
handed over the Municipal Corporation of Greater Mumbai
("MCGM"), free of cost, which in turn would allot these tenements to
the slum dwellers removed from hutments along water mains of
MCGM. In lieu of this the Respondent would get Transferable
Development Rights ("TDR") from MCGM. This rehabilitation project
was declared as a Vital Public Project by the Government of
Maharashtra.
By Letter of Intent ("LOI") dated 31.3.2011 issued by SRA,
the Respondent is to construct 9002 tenements and other amenities
to be handed over to MCGM through SRA free of cost for which
following TDR would be allotted to the Respondent:
(A) Land TDR Sq. Meters Sq.Ft
Project Affected People Tenements 89,061.89 9,58,662
Buffer Zone Area 28,418.78 3,05,900
Amenity Portion 39,160.23 4,21,521
Total 16,86,083
(B) Construction TDR 1,11,12,477
Total 1,27,98,560
Pursuant to the LOI dated 31.3.2011, a Multipartite
Agreement ("the Agreement") was executed on 30.4.2011 between
M/s. Bombay Industrial Corporation (as "Vendors"), the Respondent
(as "Developers") and the SRA (as "Purchaser') and the SRA (as
"Project Implementing Authority") setting out the terms and
conditions for development of the said land in accordance with the
LOI dated 31.3.2011. Clause (3) and (4) of the Agreement provide
for consideration in the form of TDR to be allotted to the Respondent
described "Rehabilitation Component" and "Land Component" as
respectively for the obligations undertaken by the Respondent in
implementing the rehabilitation scheme at the said land.
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
The aforesaid LOI was amended from time to time by several
supplementary LOIS, the last being LOI dated 16.6.2012, which
modified the no. of tenements to be constructed by the Respondent
to 8,399 and also other amenity tenements as per Clause (21)
thereof.
Clause (7) of the Agreement provides that the Respondent
shall be entitled to the benefit of TDR in the ratio of 1:1 in respect
of the Land Component from the SRA, and the SRA will cause the
MCGM of issue TDR in the form of Development Right Certificate
("DRC") in the name of the Respondent in stages after the said land
is transferred to SRA as specified in the Agreement. Clause (17) of
the Agreement provides the time when the Respondent will be
entitled to the Land Component of TDR; while clause (18) of the
Agreement provides the time when the Respondent will be entitled
to the Rehabilitation, i.e. Construction Component of TDR. Clause
(15) of the Agreement stipulates the compensation to be paid by the
Respondent to the SRA in case of default committed by the
Respondent in the construction work.
The Respondent received the following TDR in respect of the
Land Component:
Date of Date of Nature of TDR TDR in Sq. TDR in Sq.
Release Receipt Meters Ft.
18.5.2011 16.9.2011 PAP Tenements- 17,810.00 1,91,706.84
part
18.6.2012 16.7.2012 Buffer Zone Area 28,418.78 3,05,899.75
26.6.2012 27.7.2012 PAP Tenements- 71,251.89 7,66,955.34
Balance
Total 1,17,480.67 12,64,561.93
The Respondent has been consistently following project
completion method for recognizing revenue from this project.
Consequently, all the expenses incurred on this project have been
accumulated under the head "Work-in- Progress" till the completion
thereof. The sales proceeds realized on sale of TDR during the
construction period has been reduced from the cost of WIP, and the
balance cost carried forward from year to year.
It is important to state that after 27.07.2012, the Respondent
has not received any TDR. The said land being situated near HPCL
and BPCL Refineries, they have taken serious objections to this
project. Further, Public Interest Litigation involving this project is
pending before the Hon'ble Bombay High Court. HPCL filed W.P. No.
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
2107 of 2013 before Hon'ble Bombay High Court against the SRA,
Respondent-assessee and Ors., against sanction of development of
this project. Vide Order dated 30.03.2016 passed by Hon'ble High
Court this Writ Petition has been clubbed with Notice of Motion No.
19 of 2013 filed by Respondent-assessee in PIL. No. 140 of 2006
pending before the High Court. All these matters are pending. In
view of these facts, the said project is couched in significant
uncertainties even at present.
In the immediately preceding year, i.e. A.Y.2012-13, the then
Ld. AO had rejected the method of accounting employed by the
Respondent and after invoking Section 145(3) of the Act, determined
business loss of Rs. 38,01,13,034/- as against 'Nil' total income
declared by the Respondent. The Respondent had carried the matter
in appeal before the Ld. CIT(A)-2, Mumbai, who vide the Order dated
06.02.2017, upheld the Respondent's stand. No further appeal was
filed against this order of CIT(A) before the Hon'ble ITAT.
Submissions:
1. Project Completion Method (PCM) is a recognized
method of accounting:
1.1 PCM is a recognized and scientific method that has stood the test
of judicial scrutiny in a number of cases, reference to which has been
made in the written submissions filed before the Ld. CIT(A), a copy
of which is placed at pp.187-204 of Paper Book (PB) field by
Respondent. The assessee has choice of the method of accounting
to be followed, which method once adopted, should be consistently
followed year after year, which the Respondent has done.
1.2 Assessing Officer can invoke section 145(3) if he is not
satisfied about the correctness or completeness of the accounts of
the assessee, or where the method of accounting referred to in sub-
section (1) or accounting standards notified under sub-section (2),
have not been regularly followed by the assessee. The Ld. AO has
not given any reason to discredit the accounts maintained by the
Respondent, which are duly audited by a firm of Chartered
Accountants under the provisions of the Companies Act, 1956.
Further, no reasons are adduced to show that generally accepted
accounting principle were not adopted by the Respondent in
preparation of its financial statements. The Ld. AO's only case is that
the Respondent ought to have recognized revenue from sale of TDR
even though the project did not take off.
1.3 In Respondent's case, PCM is the most appropriate method of
accounting because the approach adopted by the Ld. AO has resulted
27
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
in distorted profit/loss from year-to-year as under, even though the
project has not yet taken off due to the pending litigation:
Assessment
Income Income Order
declared by computed by u/s.145(3)
A.Y.
the the Ld.AO r.w.s 144
Respondent Rs. dated
2012-13 NIL (38,01,13,034) 31.03.2015
2013-14 NIL 76,11,02,669 30.03.2016
2014-15 NIL (73,89,32,572) 29.12.2016
2. Land Component of TDR cannot be considered de hors the
total project:
2.1 The Ld. AO erred in considering sale of Land TDR as an
independent stream of income detached from the above project. Though
there are two components of the TDR, namely, the Land TDR and
Construction TDR, they both form an integral and inseparable part of the
project revenue, which cannot be separated and considered in isolation.
Clause (16) of the Agreement (p.87 of PB) provides that the release of
TDR in the form of DRC in phases is to facilitate the developer to raise
finance and construct tenements within the agreed time limit. The basic
and fundamental obligation of the developer is to construct the required
number of tenements and other infrastructure amenities as per the
Agreement as a part of Rehabilitation Scheme of the SRA. Therefore,
revenue from sale of Land TDR can be assessed only upon completion
of the project, and not when the project is not yet taken off due to the
pending litigation.
2.2 The Agreement dated 30.04.2021 (pp. 78-115 of PB) read as a
whole, would show that it was a composite agreement for transfer of
the land and construction of tenements/infrastructure facilities on the
land. Recital 'B', "C', 'D' and Clause (3), (7), (8) of the Agreement shows
this fact. Clause (9)(ii) of the Agreement reads as under-
"TDR in respect of the said Land Component which is declared to be part
of the approved SRA project in this Agreement;"
Clause (12) of the Agreement reads as under-
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ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
"The SRA confirms that this scheme is for erecting of housing stock of
rehabilitation tenements for rehabilitation project affected persons
affected by vital public purpose project undertaken by Government
and/or its agencies. Upon the Developer obtaining the occupation
certificate from the SRA after completing all necessary on site
infrastructures such as water supply line, electricity supply and drainage
line, etc., the Developer shall be entitled to the balance Land TDR......."
Clause (17) of the Agreement provides the time when TDR for the Land
Component will be recommended by the SRA in favour of the
Respondent, and it is clearly linked to progress in the construction of
tenements, and the final 15% TDR will be released only upon completion
of construction of tenements and the occupation certificate for the same
is issued by the SRA.
Recital T' and 'J' of the Conveyance Deed dated 30.4.2011 (pp.71 & 72
of PB) also stipulates that Respondent has agreed to undertake project
of construction of tenements comprising certain built-up area sanctioned
by SRA in phase in lieu of TDR in respect of the said land and conveyance
is made in advance as required by SRA. Thus, conveying this land in
favour of SRA was only because such advance conveyance was required
by SRA; but it is a part and parcel of the rehabilitation project of
construction of tenements for settlement of PAP. Further, the main body
of the Conveyance Deed at p.5 onwards (pp.72 -74 of PB) stipulates that
the said land has been conveyed in favour of SRA in the consideration
of the SRA agreeing and undertaking with Respondent to provide or
cause to be provided TDR in the form of DRC in respect of the said land
as set out in the Agreement, and that the terms and conditions thereof
are binding and form part of this Conveyance. In other words, the
transfer of the said land was a part of the overall rehabilitation project
undertaken by Respondent and could not be considered in isolation on
standalone basis. It is further provided that the said Conveyance is
conditional upon and subject to the obligation on the part of the SRA as
stipulated in the Agreement and that Respondent is in possession of the
said land for and on behalf of the SRA with a right to carry out
construction of the tenements and develop the same in accordance with
the terms of the Agreement and that the assessee has a special lien on
the said land which will not be disturbed, affected and prejudiced by the
SRA unless the term of the Agreement are complied with, observed and
performed and the SRA shall not convey this land to anybody unless and
29
ITA.NO.1931 & 5181/MUM/2019
M/s Aristo Shelters Pvt. Ltd
until SRA release all the benefit of TDR under the Agreement (p.74 of
PB).
2.3 All the above provisions, stipulations and conditions clearly establish
the inextricable, inseparable and organic nexus between the transfer of
the said land and construction of tenements. It would be erroneous to
consider transfer of the said land as a separate, independent and
standalone transaction between Respondent and SRA, de hors the
overall composite project undertaken by Respondent. Transfer of the
said land to the SRA is only a preliminary step in that direction; and not
the end in it. Clause (2) of the Agreement for Sale dated 5.2.2010 [p.139
of PB] entered into by Respondent with Bombay Industrial Corporation
shows its clear intention to develop the said land under a scheme of SRA
etc. It was never the intention of any of the parties to the Agreement to
consider the land transfer as an independent transaction; it is always
considered and intended as an integral part of the overall rehabilitation
project.
2.4 Further, the Ld. AO also erred in not appreciating that until the end
of the year under appeal, Respondent did not receive total TDR of Land
Component. The Ld. AO himself has admitted in para (5.3) of the
assessment order that till date the Respondent got 75% of the total Land
Component TDR.
2.5 Respondent relies upon decision in I.T.O. vs. Chembur Trading
Corporation (ITA No. 2593/Mum/2006) [pl refer pp. 9-10 of
Compilation of Case Laws), wherein 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 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. Hon'ble Tribunal held that it was clearly one
project and not two projects as they have been treated by the AO. It
was 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. It is stated that the assessee has a right or a privilege to adopt
any one of the methods of accounting for determining its profit. In this
case, the assessee had been following the project completion method to
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ITA.NO.1931 & 5181/MUM/2019
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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 ICA! or under any law. Hon'ble 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.
Hon'ble Bombay High Court confirmed the above decision by dismissing
the Revenue's appeal CIT vs. M/s. Chembur Trading Corporation
(Bombay High Court - IT Appeal No.3179 of 2009) [pl refer p. 1
of Compilation of Case Laws]
Reliance is also placed on the following judicial rulings:
a) ACIT vs. M/s. Atithi Builders & Constructors P. Ltd. (ITA No. 4047
& 4048/Mum/2009) [pl. refer pp. 14-22 of Compilation of Case
Laws]
b) CIT vs. Shri. Sudhir V. Shetty (Bombay High Court - IT Appeal
No.6159, 6160 & 6161 of 2010) [pl refer pp.2-3 of Compilation of
Case Laws]
c) ACIT vs. M/s. Videocon Atithi Shelters Pvt. Ltd. (ITA No. 3496-
3499/Mum/2009)[pl refer pp.11-13 of Compilation of Case Laws]
d) ACIT vs. Skylark Build [2011] 48 SOT 306 (Mumbai)[pl refer
pp.4-8 of Compilation of Case Laws
e) M/s. Pushpa Construction Co. vs. ITO (ITA No.193/Mum/2010)
[pl refer pp.23-25 of Compilation of Case Laws]
3. Impact of Accounting Standard-9 (AS-9) on Revenue
Recognition:
AS-9 pronounced by the Institute of Chartered Accountants of India lays
down the accounting standard for recognising revenue by an enterprise.
As per AS-9, revenue is to be recognised when significant risks and
rewards stand transferred between the parties. Further, the revenue can
be recognised only when there is no significant uncertainty about its
ultimate collectability. Having regard to the nature of the project under
execution, it cannot be said that Respondent has transferred any
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significant risks of the project to SRA when land is transferred to it, while
construction of tenements, which is the basic obligation, is not even
started. On handing over of constructed tenements with occupation
certificate one can say Respondent has transferred the associated risk
and reward to SRA.
Further, accrual of TDR is also doubtful until construction is completed
as stipulated. The stage-wise allotment of TDR is for purpose of enabling
the developer to raise finance required for the implementation of the
project. This is provided in Clause (16) of the Agreement.
In view of pending litigation before Hon'ble Bombay High Court,
execution of this project is standstill, and therefore, it is now couched
with very significant risks as to its ultimate completion and realization of
revenue, though Respondent incurred costs (including interest on
borrowings) year after year.
Therefore, it is submitted that in view of AS-9 also, there is no case for
recognition of any revenue from this project at this stage.
AY 2013-14: Ground No.2:
Submissions:
The details of interest-bearing funds and interest-free funds available to
Respondent and also its utilization for business purposes and non-
business purposes are summarised as under:
Available Funds Amount (Rs.) Utilization of Amount (Rs.)
Funds
I) Interest Free Funds I) Non- Business
Purpose
i) From Directors 10,68,852 i) To Directors 4,57,950
ii) From related parties 41,02,36,335 ii) To related parties 167,36,35,000
iii) TDR Advances 1,56,44,69,461 iii) TDR Advances 20,64,92,400
Total (I) 1,97,57,74,648 Total (I) 1,88,05,85,350
II) Interest Bearing Funds (II) Business
Purpose
i) From non- related parties 1,03,78,20,098 i) Work in Progress 32,95,87,462
(Secured)
ii) From non- related parties 31,38,04,913 ii) Sundry Debtors 31,54,70,092
(unsecured)
iii) Fixed Assets 86,25,65,386
iv) Deposits 2,37,80,484
Total (II) 1,35,16,25,011 Total (II) 1,53,14,03,424
Total Funds (I) + (II) 3,32,73,99,659 Total Funds (I) +(II) 3,41,19,88,774
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It is submitted that where assessee has both, interest-free as well as
interest- bearing funds, which are mixed, then, there is a legal
presumption that the assessee has utilised interest-free funds for the
purpose of financing non-business purposes. Reliance is placed on
decision of Hon'ble Supreme Court in CIT vs. Reliance Industries
Ltd. [2019] 410 ITR 466 and Hon'ble Jurisdictional High Court in
CIT vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340.
It is further submitted that merely because the TDR Advances were
received in the course of carrying on business cannot convert them
into interest-bearing, when factually, they are not so. The claim of
compensation that would be payable on non-delivery of TDR as
business expenditure is to be considered on its own merits and the
claim of such expenses can alter the fact that the TDR advances are
interest free. Thus, TDR advances received are fundamentally
interest-free funds available to the Respondent about which there
can be no dispute. Reliance is placed on the order of Ld. CIT(A) on
this issue.
In view of above, the Ld. CIT(A) had correctly, based on the facts
and also in law, deleted the disallowance of interest paid of
Rs.6,22,22,922/-.
Without prejudice to the above, the Respondent further submits that
the Ld. AO erred in adding the sum of Rs.6,22,22,922/- being the
amount of disallowance of interest paid. The Ld. AO ought to have
noted that the Respondent did not claim any deduction for the
interest paid during the year under appeal, and the same was added
to the WIP of the project. If at all, the disallowance was to be made,
then, the same could be deducted from the WIP that is carried
forward to the subsequent year. Reliance for this proposition is
placed on the decision in Savala Associates vs. ITO [2010] 35
SOT 148 (Mum-Trib).
Prayer:
The Respondent prays Your Honours to kindly confirm the orders of
Ld. CIT(A) and dismiss both the Grounds of Appeal raised by the
Appellant-revenue for AY 2013- 14 and sole Ground of Appeal raised
by the Appellant-revenue for AY 2014-15."
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19. Considered the rival submissions and material placed on record, we
observe that assessee has entered into an agreement to develop the slum
rehabilitation scheme as per which assessee has acquired the land from
M/s. Bombay Industrial Corporation and entered into multipartite
agreement with SRA and different tenements. No doubt assessee has
transferred the land to SRA and surrendered all the rights over the
property. However, assessee had a basic obligation to construct the
building and receive TDR on the portion of land on which the construction
is completed in the ratio of 1:1 on TDR and construction TDR in the ratio
of 1:1.33.
20. It is fact on record that the construction agreement received by the
assessee is to construct the building as per the agreed terms only when
assessee completes the constructions assessee gets the rights of TDR,
that means assessee gets the TDR rights only when it completes the
construction.
21. Further, we observed that assessee is following the project
completion method which is recognized method of accounting. We
observe that Ld.CIT(A) has extracted the clause (17) of the agreement
dated 30.04.2011 as under: -
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i) 20% on the execution thereof and lodging the conveyance
with the registrar in respect of land agreed to be conveyed in
favour of PIA i.e. Project implementing authority.
ii) 65% upon developer constructing 50% of the plinth of the
tenements
iii) Balance 15% upon developer completing the construction of
tenements.
22. By reference to the above Ld.CIT(A) came to the conclusion that
the sale proceeds of land TDR is part of the project undertaken and cannot
be treated independently of the total project for the computation of the
income by relying on the decision of the CIT v. Chembur Trading
Corporation (I.T. Appeal No. 3179 of 2009). Accordingly, he gave a
direction to the Assessing Officer to accept the method of accounting
followed by the assessee.
23. We observe that Hon'ble Jurisdictional High Court in the case of
CIT v. Chembur Trading Corporation (supra) has held that in this case
method of accounting followed by the assessee is completion of project
and has offered the income received on sale of TDR in the subsequent
assessment year and the same has been duly assessed. In these
circumstances sustaining the addition in the assessment year in question
does not arise.
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24. Further, we observe that the Coordinate Bench decided the issue in
ITO v. Chembur Trading Corporation in ITA.No. 2593/Mum/2006 dated
21.01.2009 for the A.Y. 2000-01 and held as under: -
"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."
25. Respectfully following the above said decisions, we are inclined to
accept the findings of the Ld.CIT(A) and accordingly, grounds raised by
the revenue is dismissed.
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26. With regard to Ground No. 2, we observe that assessee has utilized
the funds to its director and to its related concerns and we observe from
the balance sheet submitted by the assessee that assessee has both
interest free funds of ₹.1,97,57,74,648/- and interest bearing funds of
₹.1,35,16,25,011/-. From the submissions we observe that assessee had
interest bearing funds of ₹.1,35,16,25,011/- and assessee has applied for
business purpose in the work-in-progress, sundry debtors, fixed assets
and other deposits totaling to ₹.1,53,14,03,424/-. Therefore, assessee
has utilized the total interest bearing funds only for the purpose of
business purposes to the extent of ₹.1,53,14,03,424/- which is more than
interest bearing funds borrowed by the assessee. When there is a mixed
funds available to the assessee, there is legal presumption that the
assessee has utilized the interest free funds for the purpose of financing
non business activities as held in the case of CIT v. Reliance Industries
Ltd., [2019] 410 ITR 466. Therefore, we are inclined to accept the
findings of the Ld.CIT(A) in deleting the proposed addition of notional
interest. Accordingly, the ground raised by the revenue is dismissed.
27. In the result, appeal filed by the Revenue is dismissed.
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ITA.No. 5181/MUM/2019 (A.Y. 2014-15)
28. Coming to the appeal relating to A.Y. 2014-15, since facts in this
case are mutatis mutandis, therefore the decision taken in A.Y.2013-14 is
applicable to this Assessment Year also. Accordingly, this appeal is
dismissed.
29. In the result, both the appeals filed by the Revenue are dismissed.
Order pronounced in the open court on 06th February, 2023
Sd/- Sd/-
(SANDEEP SINGH KARHAIL) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai / Dated 06/02/2023
Giridhar, Sr.PS
Copy of the Order forwarded to:
1. The Assessee
2. The Respondent.
3. The CIT(A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file.
//True Copy//
BY ORDER
(Asstt. Registrar) ITAT, Mum