S.P. Real Estate Developers Pvt. Ltd., ... vs Department Of Income Tax on 20 December, 2013

[Cites 31, Cited by 2]

Income Tax Appellate Tribunal - Hyderabad

S.P. Real Estate Developers Pvt. Ltd., ... vs Department Of Income Tax on 20 December, 2013

           IN THE INCOME TAX APPELLATE TRIBUNAL
              HYDERABAD BENCH 'A', HYDERABAD

 BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
      SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER

                         ITA No. 866/Hyd/2010
                        Assessment year 2008 09

The Deputy CIT                   vs.   M/s. S.P. Real Estate
Central Circle 6                       Developers Pvt. Ltd.
Hyderabad                              Secunderabad
                                       PAN: AAFCS3233H
[Appellant]                            [Respondent]

                         ITA No. 1058/Hyd/2010
                        Assessment year 2008 09

M/s. S.P. Real Estate            vs.   The Deputy CIT
Developers Pvt. Ltd.                   Central Circle 6
Secunderabad                           Hyderabad
PAN: AAFCS3233H
[Appellant]                            [Respondent]

                    Revenue by: Sri P. Soma Sekhar Reddy
                    assessee by: Sri M. Chandramouleswara Rao

              Date of hearing: 20.12.2013
      Date of pronouncement: 12.02.2014



                                ORDER

PER CHANDRA POOJARI, AM:

The above appeals are cross appeals directed against the order of the CIT(A) I, Hyderabad dated 28.4.2010 for assessment year 2008 09.

2 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

2. The Revenue raised grounds of appeal, as follows:

1. The CIT(A) erred in deleting addition made by the AO on the ground that there was a dispute with regard to the right over the land and construction as on 31.03.2008 and that no real income accrued to the assessee.

2. The CIT(A) erred in appreciating the fact that the litigation pending of writ petition No. 7333 in High Court as on 31.03.2008 is not on the title of the property of the assessee company and assessee company is not a party to the writ petition and hence it has no impact on the accrual of the income to the assessee.

3. The CIT(A) erred in appreciating the fact that the litigation has no impact on the accrual of income to the assessee company as it follows mercantile system of accounting.

3. The assessee raised the following grounds of appeal:

(i) The AO has erred in disallowing the expenditure u/s. 40(a)(ia) mentioning that the expenses attract TDS but in actual these expenses are not expenses for a contract and do not attract TDS.

(ii) The AO has again erred in disallowing the travelling expenses which are directly related to the assessee's business.

4. Brief facts of the case are that during the course of assessment proceedings, the Assessing Officer (AO) found that the assessee company had entered into a development agreement with M/s. ECE Industries Ltd. for development of 67,824 square yards (sqy) of land in Sy. No. 74/P and 75/P situated at Borabanda, Hyderabad. For this, the assessee 3 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== company was required to pay Rs. 30,50,36,525 as consideration for obtaining GPA rights. Out of this, Rs. 13.50 crores was towards reimbursement of cost, charges and taxes incurred on land and Rs. 16,72,00,000 towards site development, construction of boundary wall and other services provided by ECE Industries. The cost of the land was arrived at Rs. 28,36,525. Apparently, the assessee had already paid Rs. 13.50 crores towards reimbursement and Rs. 28,36,525 towards land cost. The balance of Rs. 16.72 crores was payable by post dated cheques issued to ECE Industries. Thereafter, the development cum general power of attorney was executed in favour of assessee company transferring development right on 24,425.80 sqy of land. On the same date, ECE Industries executed another development agreement cum GPA in favour of M/s. Janapriya Engineers Syndicate transferring 43,398 sqy of land. It was mentioned that ECE Industries was not entitled to any share of constructed area as per the development agreement entered by it with Janapriya Engineers Syndicate. The GPA was given by the ECE Industries to Janapriya Engineers Syndicate on behalf of S.P. Real Estate Developers i.e., the assessee. On 25.1.2008 another development agreement was entered by the assessee company with Janapriya transferring the development rights in the balance land of 24,425 sqy. The assessee company was to get 36% of the total built up area along with parking space and also received Rs. 3 crores as refundable deposit. As per the development agreement the assessee company was 4 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== entitled to 4,90,098 square feet (sft) of built up area and 576 of car parking area. On the same date, the assessee company sold 3,25,893.71 sft out of its share to Janapriya at the rate of Rs. 2000 per sft and also sold 382 car parking area at the rate of Rs. 60,000 per parking and received Rs. 5,00,000 as advance and the balance amount was to be received in instalments. Thus, the total consideration to be received form Janapriya was Rs. 67,47,07,420. As on 31 3 2008, the assessee company received Rs. 7,08,60,500. At the same time, the assessee company had also sold part of its share of plots to outsiders and received advances against them. However, the company had not reflected any sales in its P&L account and no income was shown in respect of sale of the flats. When questioned about the same, the assessee submitted that the income on the basis of development agreement was to be taxed as business income. The project was under construction and there was a dispute pending in the court between the assessee company and ECE Industries Ltd regarding transfer of the land. Therefore, it would offer the business income after settlement of dispute and after construction of the flats. The AO, however, did not accept the argument put forth by the assessee company. The AO held that the purchase and sale transactions were completed and the income accrued thereon is taxable on due basis since the assessee was following mercantile system of accounting. The AO referred to Accounting Standard 9 on revenue recognition. Since the assessee has transferred its rights 5 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== to Janapriya vide agreement dated 25 1 2008, the AO was of the view that the revenue shall be recognised at the time of transfer of right. The AO referred to Clause No. 11 of the agreement and stated that the risk and rewards associated with the right to develop the property were transferred on 25.1.2008. The AO also observed that it may be reasonably expected that there is no uncertainty in ultimate collection in view of the fact that municipal approval for construction of the property had been obtained vide letter dated 6 1 2007 from Municipal authorities and also the construction had commenced and was going on in full swing. The AO, therefore, concluded that the income from business was to be taxed on the above transactions.

5. The AO also observed that the assessee company had received additional built up area of 27920 sft from Janapriya Engineers which was not mentioned in the MOU. After considering the explanation filed by the assessee, the AO held that the consideration for the above additional built up area also needs to be taxed in the A.Y. 2008 09. This apart, the AO held that the sales made to Janapriya Engineers were not accounted for in the books nor reflected in the return of income. Since the assessee had not offered any profit on the above sales, the same are liable to be taxed in the A.Y. 2008

09. Apart from the above, the AO also made disallowance of Rs. 9,79,901 u/s, 40(a)(ia) and Rs. 7,11,099 on account of foreign travelling expenses. Thus the total income was assessed at Rs. 6 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== 76,18,25,970 as against the loss of Rs. 44,697 admitted in the return.

6. On appeal, the CIT(A) observed that the basic question that arises is whether the assessee should have recognised the revenue arising from the development agreement with Janapriya Engineering Syndicate. It is a fact not disputed that the assessee had initially entered into a development agreement with M/s. ECE Industries for development of land admeasuring 67,824 sqy in Survey No. 74/P and 75/P at Borabanda, Hyderabad. Even the owner of the land M/s. ECE Industries had prepared a scheme for construction of dwelling units on the aforesaid land in accordance with section 21 of the Urban Land Ceiling Act and had obtained approval for it from the competent authority. When the assessee expressed its interest and intention to construct and develop houses that the owner of the land entered into development agreement with the assessee. As per the said agreement the owner was to receive certain amount from the assessee for development and GPA rights as also reimbursement of cost, charges etc. But the assessee failed to honour its commitment in payment of the said amount. In the meanwhile the assessee had entered into development agreement with Janapriya Engineers Syndicate for developing the said land and as per the said agreement the assessee was entitled to certain built up area and car parking. Out of its own share, the assessee had apparently sold 490097 sft area to Janapriya along with 1382 car parking areas. It is the 7 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== amount resulting from the transfer of the constructed area as well as the transfer of the parking slots, that the AO has proposed to bring into the tax net as business income of the assessee. The AO in this regard observed that the amount is taxable since the assessee company is following mercantile system of accounting and since the purchase and sale with Janapriya Engineers is already complete. The AO also noted that the municipal approval for construction had been obtained from Municipal Corporation of Hyderabad and the construction had commenced on the said plot of land. The AO was also of the view that there is reasonable certainty of receipt of the income in future. The assessee, on the other hand, submitted that since it could not honour the commitment of making payment to the land owner, the land owner filed a civil suit before the court. The assessee also submitted that the Hon'ble High Court of Andhra Pradesh had given an injunction on construction on the aforesaid plot and hence there was no certainty about the income arising out of construction in future. The assessee submitted that since there was no certainty about the income arising from this sale of the development rights or sale of flats, the income could not be recognised as on 31 3 2008 in view of the injunction of the Hon'ble A.P. High Court. Apparently, this fact was also brought to the notice of the AO in course of the assessment proceedings and copy of the letter filed before the AO was submitted during the appellate hearing. The CIT(A) observed from the said letter dated 8 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== 26.11.2009 filed before the AO that the assessee had already informed the AO that they were not the owner of the land nor the building had been completed during the relevant assessment year and no amount had been earned as business income or capital gain. The assessee had also brought to the notice of the AO that though the building permission had been obtained by 31 3 2007, a civil case was filed by some ex employee of ECE Industries by writ petition No. 22153 of 2007 stating that the said land was promised to be allotted for construction of dwelling units for workmen of ECE Industries. Further, another group claiming themselves to be weaker section of the society had filed a writ petition before the High Court vide writ petition No. 7333 of 2008 claiming that the proposed dwelling units should be allotted to them only. The assessee had filed copies of the writ petition and interim order of Hon'ble High Court. The CIT(A) had gone through copy of the order of Hon'ble High Court in writ petition MP No. 7333 of 2008. In the said petition, apart from Govt. of A.P. and Special Officer and Competent Authority under the A.P. Urban Land Ceiling Act, the GHMC (Respondent No. 2), M/s. ECE Industries (Respondent 4) and M/s. Janapriya Engineers Syndicate (Respondent 5) were also named as respondents. The Hon'ble High Court had made the following order:

"Until further orders, the respondent No. 2 is directed to ensure that no construction or civil works whatsoever are carried on by the respondents 4 and 5 till the land to an extent of 56730.57 Sq. meter in Survey No. 74 and 75 in Fathenagar, Sanath Nagar Hyderabad in respect whereof the third respondent had by proceedings No. G1/10571/76/13/78 dated 4-2-2001 granted 9 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== permission for construction of quarters to weaker sections under section 21 of the Urban Land (Ceiling Regulation) Act 1976 for 8 blocks for 1900 units. The second respondent shall ensure that no construction are carried on notwithstanding the building permission granted by the second respondent in permit No. 144/48 in file No. 8483/TPS/MCH/HO/03. Notice."

7. The CIT(A) observed that in the writ petition referred to above, the second respondent was GHMC and the 4th respondent was ECE Industries. The 5th respondent was Janapriya Engineers Syndicate. From the order of the Hon'ble High Court as above, it is clear that the Hon'ble court has passed injunction directing GHMC to ensure that no construction was to be carried on either by ECE Industries or by Janapriya Engineers though building permission had been granted by GHMC earlier. It is a matter of fact that the assessee was to receive consideration in the form of constructed area and car parking. Since the High Court had passed the order dated 18 3 2008 as above which was in force as on 31.03.2008, it is clear that as on 31 3 2008, Janapriya Engineers was restrained from construction or any other civil works. It is also a matter of fact that the inflow of income to the assessee from Janapriya Engineers depends on the construction of the built up area and subsequent transfer thereof. The AO while passing the order, has relied on the building permission granted by the GHMC in order to assess the future inflow of income from Janapriya to the assessee. Since the Hon'ble High Court had passed restraint order for any further construction, the CIT(A) was of the view there could not have been any certainty 10 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== of inflow of income arising out of the constructed built up area to be transferred by the Janapriya Engineers to the assessee. Therefore, it cannot be said that the purchase and sale of flats could have reached finality as on 31.3.2008 in view of the injunction of Hon'ble High Court.

8. The CIT(A) further observed that the land owner M/s. ECE Industries itself had moved the civil court for getting back the possession of land, right over of which was transferred to the assessee for development thereof. In course of the appellate proceedings, the AR of the assessee has filed the order of the lower court and subsequent decisions and interim orders of Hon'ble A.P. High Court and Supreme Court. The Hon'ble City Civil Court Hyderabad in their order, had directed the respondent i.e., the assessee that they shall not claim equity over the construction made on the land and are bound by the decision in the suit. They were also directed to furnish the particulars of prospective buyers of residential flats in advance to the competent authority Urban Land Ceiling and it must be made clear to the prospective buyers that their purchases are subject to the result of the suit by making a specific recital in the agreement of sale or sale deed. Subsequently, the litigation has reached the Hon'ble Supreme Court in civil appeal No. 5127/5128 of 2009 wherein the assessee had been made the respondents. The Hon'ble Supreme Court in the judgment, while allowing the respondents to go ahead with the construction activities on the ground that if injunction is granted to ECE 11 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== Industries, it will substantially and irreparably injure and prejudice the defendants (the assessee in the present case). The Hon'ble Supreme Court, however, observed that the defendant/ respondent (the assessee) shall not claim equity over construction made in the suit property and they would be bound by the decision in the suit. In other words, the Hon'ble Supreme Court confirmed the view of the Civil Court with regard the claim of equity and conditional sale. From the litigation as above, it is clear that the ultimate fate of construction and right over the constructed area is still subjudice and it cannot be taken for granted that either the assessee company or M/s. Janapriya Engineers would have an unconditional right over the said construction. It is because the Supreme Court have observed that in case of the suit is decided in favour of ECE Industries the constructed structures may even have to be pulled down in order to hand over the vacant possessions of the land to its rightful owners. Thus, the CIT(A) was of the view that even if the construction work is going on by the developers, there is no certainty that the assessee would finally be rightful owner of the constructed/built up area which it is entitled to as per the agreement with the Janapriya Engineers Syndicate.

9. The CIT(A) observed that the assessee had also submitted that the AO had computed income on the entire amount of future sales by treating the same as present income accrued to the assessee at time of entering into the agreement ignoring 12 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== the fact that the subject property is not in existence and will come up only in future. Thus, the AO has taxed hypothetical income to result at a future date ignoring the concept of real income. The CIT(A) found force in the contention of the assessee especially in view of the ongoing litigation on the right over the land as well as the future construction. The assessee had relied on the Indian accounting practice in this regard as per which if a sale agreement is for sale of goods, revenue shall be recognised if the entity has transferred to the buyers the significant risk and reward of ownership of and control over the goods sold. This effectively means that the revenue on real estate sale could be recognised when the real estate is constructed and delivered to the buyer. The assessee has also submitted that clause 9 and 10 of the agreement dated 25 1 2008 clearly recognises that the agreement is only a proposed sale and in case of any dispute or litigation or by any court order or government order, if the work is disturbed or stopped no money will be paid until the work is resumed and further on receipt of each instalment the assessee will execute registered sale deed in favour of prospective buyers from the proposed built up area. Since the flats are yet to be constructed and possession yet to be given, the assessee submitted that recognition of revenue and taxing the same is contrary to the concept of real income and provisions of AS 9.

10. The CIT(A) observed that the general principle governing revenue recognition as per Accounting Standard 9 demands 13 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== that the revenue is measurable and that at the time of sale or rendering the service it would not be unreasonable to expect ultimate collection. In the case under consideration, it is a fact that the ultimate income by the assessee will flow from M/s. Janapriya Engineers Syndicate by way of handing over the constructed area and car parking space or its money worth. As the matter is under litigation as stated earlier, there is no certainty that M/s. Janapriya Engineers or the assessee would be the rightful owner of the construction that would come up on the disputed land. Accordingly, the CIT(A) was of the view that the stand of the assessee that there is uncertainty of realisation of income is not without force. As per the Accounting Standard, when consideration is not determinable within a reasonable limit the recognition of revenue is postponed. In such cases, it may be appropriate to recognise revenue only when it reasonably certain that the ultimate collection will be made. The AO proposes to tax the income that will arise in future on the basis that the assessee is following mercantile system of accounting and that approval for construction has been granted by the municipal authorities. As stated earlier as on the last day of the accounting year relevant to the assessment year under consideration, the Hon'ble A.P. High Court had directed the Municipal Corporation who had granted the approval for construction to ensure that no construction activity is carried on either by ECE Industries or by Janapriya Engineers Syndicate. To that extent it cannot be said 14 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== that realisation of collection arising out of the constructed area had reached finality or certainty as at the end of the accounting period. It is also relevant to refer to the agreement between the assessee and Janapriya Engineers Syndicate especially to Clause No. 9 of the agreement. As per the said clause, in case the project work i.e., construction activity stops due to any dispute or litigation arising because of any court order or government order or by involvement of private party payment of equated monthly instalments will be stopped for that particular period. After settlement of disputes or litigations payment of equated monthly instalments will resume. The responsibility of settlement of dispute or litigation regarding the land and its boundaries entity lied with the first party (the assessee). This shows that in view of ongoing litigation the assessee could not have received the instalment due to it from Janapriya Engineers Syndicate. Further, as per Clause 10 on payment of each equated monthly instalments the assessee would execute the registered sale deed in favour of the prospective buyer for the proportionate built up area along with undivided share of land. In view of the ongoing dispute the CIT(A) was in doubt whether the assessee could have executed such deed in favour of the buyer. In other words, the so called sale transaction between the assessee and Janapriya Engineers Syndicate cannot be said to be an unconditional sale in the light of litigation over the right of the land and the restraint order of the Hon'ble High Court for further construction. 15 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

11. The CIT(A) observed that the assessee has also put forth that it is only after completion of the project that the actual expenditure can be found and correct profit or loss on sale of flats can be completed. The assessee submitted that the AO has tried to assess the hypothetical income or notional income on the ground that the assessee is following mercantile system of accounting. The assessee had relied on the decision of Hon'ble Supreme Court in the case of Godhra Electricity Company Ltd. (225 ITR 746). In the said case, the Hon'ble apex court observed that Income tax is a levy on income. No doubt income tax act takes into account two points of time at which the liability to tax is affected i.e., accrual of income or its receipt, but the substance of the matter is income. If the income does not result at all, there cannot be a tax even though in book keeping an entry is made about a hypothetical income which may not materialise. In the case under consideration, no doubt as per mercantile system of accounting an income may accrue, but going by the fact that the very source of income is in dispute, it cannot be said that there is any real income or determinable income. The assessee in its written submission has countered the observation of the AO that the litigation has no impact on accrual of income. The assessee submitted that litigation in a court of law has a bearing on crystallisation of income or liability. The assessee in this regard relied on the decision of Hon'ble Allahabad High Court in the case of CIT vs. Girijar Udyog Pvt. Ltd (273 ITR 495), wherein it was 16 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== observed that concept of accrual of income does not create income but only recognises it when there is one. In that case it was held that when there is no chance of recovery of principal amount and the assessee chose not to charge any interest on the same, the AO was not justified in bringing into tax such interest on accrual basis. The assessee has also referred to the decision of Hon'ble Supreme Court in the case of P. Mariappa Gounder vs. CIT (232 ITR 2), wherein the decision of Hon'ble A.P. High Court in the case of Khan Bahadur Ahmed Alladdin and Sons vs. CIT was quoted. The observation of the Hon'ble Supreme Court was that disputed amount cannot be treated as income.

12. The CIT(A) after taking into consideration the decisions relied upon by the assessee and also considering the fact that there was a dispute with regard to the right over that land and construction as on 31 3 2008, observed that it cannot be said that there was any real income accrued to the assessee as on 31 3 2008 relevant to the assessment year under consideration. Therefore, he was of the view that the AO was not justified in considering the amount of Rs. 76,55,59,475 as profit arising to the assessee on the basis of development agreement for the assessment year 2008 2009. Since this profit has been worked out based on the total built up area as per the MOU and including the additional area of 27920 sft not mentioned in the MOU, the grounds of appeal raised by the assessee on this issue are automatically covered therein. He has arrived at this 17 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== conclusion on the ground that the Hon'ble Andhra Pradesh High Court had restrained the Municipal Corporation and M/s. Janapriya Engineers Syndicate for any construction to be carried on the said plot of land, which was in force as on 31.3.2008. Accordingly, he directed the AO to delete the addition so made. Against deletion of addition, the Revenue is in appeal before us.

ITA No. 866/Hyd/2010 (Dept. Appeal): DR submissions:

13. The learned DR submitted that the assessee transferred its right to develop the land in favour of Janapriya Engineers Syndicate Ltd., vide Development Agreement dated 23.9.2007 and agreement dated 25.1.2008. According to the DR, revenue shall be recognised at the time of transferring of significant risk and reward of price in the property. The transfer of right to develop the land is done along with transfer of risk and rewards of right to develop the property, vide agreement dated 25.1.2008. He drew our attention to the clause relating to transfer of risk and rewards associated with the right to develop the property as under:

"11. The first party authorizes the second party to do the following things:

a) To sell the flats, to enter into an agreement of sale with purchasers of flats, either the whole of scheduled property or portion of it or undivided share in the scheduled property and acknowledge them by issuing receipts.

b) To enter into a development agreement with any developer/builder to develop the scheduled property by 18 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== constructing individual buildings or residential apartments or commercial apartments.

c) To enter into contract agreement with any contractor.

d) To sign all the applications to be submitted to the AP Transco for supply of electricity, to the concerned authorities for providing drainage and water supply etc., and process the said applications.

e) To look after and protect the scheduled property from encroachers, land grabbers and unsocial elements and to take necessary and appropriate action against them by making applications to the concerned authorities and if necessary to approach civil and criminal courts.

f) To pay the taxes and revenue payable on the scheduled property to the state government, central government and local authority.

g) To make use of scheduled property to its maximum advantage.

h) To deal with state, central and quasi government organizations in respect to the scheduled property.

i) To file any suit or proceeding in any court or authority to protect their right and title to the scheduled property and for the same to sign the plaint vakalat and all necessary applications and documents on their behalf and also to give evidence and engage any advocate of their choice in the said suit or proceeding.

j) To defend if any suit or proceeding is initiated by any person challenging their right and title to the scheduled property and to do all the acts necessary to protect their property.

k) To mortgage the scheduled property to any bank or financial institution to get any loan for the development of the scheduled property and execute all the necessary documents for the said purpose.

l) Generally to do all the acts deeds and things whatsoever in respect of the scheduled property which the vendors will do in their interest.

Scheduled Property:

All that undivided share of land admeasuring 13,505.90 sq meters or 16,242.70 sq yards or of 20,430.50 sq meters or 19 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== 24,425.80 sq yards along with proposed to be constructed super built up area of 3,25,893.71 sq ft out of 4,90,097.72 sq ft of residential flats and 382 car parking in Sy. No. 74/P and 75/P, situated at Fathenagar village Hyderabad (emphasis supplied)."

14. Further he submitted that it is evident that the risks and rewards associated with the right to develop the property are transferred on 25.01.2008. It may be noted that the consideration is fixed in the agreement dated 25.01.2008 as Rs.

2000 per sft and 60,000 per car parking. It may be reasonably expected that there is no uncertainty in the ultimate collection in view of the following factors:

(a) The municipal approvals for construction have been obtained vide letter dated 06.01.2007 of Municipal Corporation of Hyderabad. Accordingly building permit charges and other fee amounting to Rs.

6,12,81,439/ have been paid by M/s. Janapriya Engineers Syndicate Ltd.

(b) The construction commenced and is going on in full swing.

15. Further, he submitted that Janapriya Engineers Syndicate Ltd. has paid Rs. 7,08,60,500 to the assessee. This shows implementation of the agreement for transfer of right which is in progress. Further, regarding the taxability of additional built up area, he submitted that as per the seized documents in the case of Janapriya Engineers Syndicate group annexure A/JES/1 page No. 10 contains the additional area given to S.P. Real Estates. The total saleable area as per sanctioned plan and agreement is Rs. 13,67,000. However, total saleable area as per working plan is Rs. 14,58,000. The additional area is 91,000 sft. 20 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== Out of these, assessee company is entitled to 20% of this area amounting to Rs. 18,200. However, Janapriya Managing Director accepted to allot 25000 sq. feet on this account. The excess area as per the original agreement receivable of 2920 sft is allotted in Pradeep Menon's parents name in Block 4 and the balance 25000 additional area is allotted in Block 1 and Block 4. So, the additional area received of 25000 sq. feet and 2920 sq. feet which is over and above the area mentioned in the MOU was proposed to be taxed in the hands of assessee company for the A.Y. 2008 09. The assessee company is requested to explain vide this office letter dated 9 11.2009 why the above additional area received of 27,920 sft should not be taxed. The assessee company submitted that the project is under construction and, therefore, it will be offered for tax in the year in which these are constructed and sold. However, the assessee's explanation is not acceptable for the reasons discussed in the above paras and it need to be taxed for the assessment year 2008 09 as development agreement is entered and possession of land is already handed to the developer. AR submissions:

16. On the other hand, the learned AR submitted that the assessee is a company engaged in the business of Real Estate Development and construction of residential apartments and houses. On 17/09/2007, the assessee company has acquired development rights over an extent of 67,824 sqy of land in Survey Nos. 74 & 75 at Borabanda, Fathenagar Village, 21 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== Balanagar, Hyderabad from M/s. ECE Industries Limited, New Delhi and paid Rs. 13.50 crores towards reimbursement of costs and other charges of the land as advance. As per the terms of the said development agreement, the assessee has committed to pay an amount of Rs. 16.72 crores for which post dated cheques were delivered and further agreed to pay Rs. 28,36,525 towards cost of land and issued a post dated cheque dated 05/10/2008. Subsequently, M/s. ECE Industries Limited (the Owner of the land) has executed a registered "Development Agreement Cum General Power of Attorney" in favour of M/s. Janapriya Engineer Syndicate Limited, Hyderabad for an extent of land ad measuring 43.398 sqy out of the total extent of 67824.5 sqy and another Development Agreement Cum General Power of Attorney was executed by the owner of the land in favour of the assessee company for an extent of land admeasuring 24525.8 sqy. Both these agreements were executed on 21/09/2007. Subsequent to the execution of the said Development Agreement Cum General Power of Attorney dated 21/09/2007, the assessee company has entered into an Development Agreement on 23/09/2007 with M/s. Janapriya Engineer Syndicate (the Developer) for the development and construction of residential apartments on the subject land situated in Survey Nos. 74 & 75 at Borabanda, Fathenagar, Balanagar Mandal, Hyderabad and agreed to accept 36% of the built up area to be developed as per the approved plan. Subsequent to the agreement dated 23/09/2007, the assessee 22 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== company has entered into an agreement on 21/05/2008 according to which it agreed to handover its share of flats and parking area to the Developer to sell as per the terms and conditions agreed upon. The Assessing Officer has considered the development agreement entered by the assessee company with the land Owner, M/s. ECE Industries Limited whereby it acquired development rights over the land situated in Survey Nos. 74 & 75 of Borabanda Village, and another agreement entered with M/s. Janapriya Engineer Syndicate Limited, Hyderabad on 21/05/2008 and concluded that the purchase and sale is complete in the above transaction and therefore, the transaction of 21/05/2008 resulted in accrual of income subjected the same to tax. The Assessing Officer has brought the agreement dated 21/05/2008 to tax stating that the assessee is a company and is following the Mercantile System of accounting and the agreement granting right to sell apartment that are to come up on the subject land has resulted in accrual of income.

17. The AR submitted that in the assessment order the Assessing Officer has brought to tax the value of the transaction as per the agreement dated 25/01/2008 entered by the assessee company with the developer, M/s. Janapriya Engineer Syndicate and stated the following reasons:

(a) The assessee is a company and is following Mercantile System of Accounting.

23 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

(b) The acquisition of the development rights by the assessee company as per the agreement dated 17/09/2007 and subsequently granting right to sell apartments and parking area that has to come up on the subject land as per agreement dated 25/01/2008 entered with M/s. Janapriya Engineer Syndicate, the Developer is akin to the purchase and sale and therefore, he treated that the income has accrued from the transaction of granting rights to sell the apartments and brought the same to income tax completely ignoring the fact that the construction has not completed and apartments were not available to deal with.

(c) By entering into agreement with the Developer on 25/01/2008, all significant risks and rewards of ownership have been transferred to the Developer and quoted the provisions of Accounting Standard (AS 9) as follows:

"11. In a transaction involving sale of goods, performance should be regarded as being achieved when the following conditions has been fulfilled.

(i) The Seller of the goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods 24 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== transferred to a degree usually associated with ownership; and

(ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods."

(d) He recognised revenue on the transfer of development rights.

18. The AR further submitted that the assessee company has filed an appeal before the CIT(A) and made the following submissions:

(a) That it has acquired development rights over the landed property situated in Survey Nos. 74 & 75 in Borabanda Village, Fathenagar, Balanagar Mandal, Hyderabad vide agreement dated 17/09/2007 and the agreement is conditional and certain conditions are still to be fulfilled.

(b) That it has obtained a conditional Development Agreement cum general power of Attorney dated 21/09/2007 from the owner of the land and such development rights have been transferred to the Developer M/s. Janapriya Engineer Syndicate Limited on 23/09/2007. This agreement is to obtain built up area in the capacity as co promoter and not to surrender the development rights per se.

25 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

(c) That the transfer of right to develop the land and construction of apartments given to Janapriya Engineer Syndicate Limited is a business agreement and this is a business transaction and the provisions of Sec. 2 (47) in relation to transfer of capital asset will not be applicable to the present case.

(d) That income will not accrue at the time of entering into development agreement in the case of business transactions. This is an agreement for development of apartments over the subject land and the profits will arise on the completion of the construction and delivery of the possession. Then only income can be subjected to tax.

(e) As per the provisions of Accounting Standard (AS 9) and Guidance Note on Recognition of Revenue by Real Estate Developers issued by the Council of ICAI and Para 3 of Guidance Note the real estate sales take place in a verity of ways and may be subject to different terms and conditions as specified in the agreement for sale. Accordingly, the point of time at which all significant risks and rewards of ownership can be considered as transferred, is required to be determined on the basis of the terms and conditions of the agreement for sale.

26 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

(f) That the agreement dated 25/01/2008 is mainly meant for giving rights to deal with the property of the assessee company that will come up at some time in the future and, therefore, the question of transfer of significant risks and reward in the ownership of the property cannot arise in the case of the property which is not in existence at the time of the agreement. Further, the agreement is conditional and the payments against the agreement are subjected to several conditions stated therein and without fulfilment of all the conditions, it cannot be termed as transfer of risks and rewards in the ownership of the property to the buyer.

(g) That the subject land situated in Survey Nos. 74 & 75 in Borabanda Village and the proposed project thereon has become the centre of serious disputes and number of suits were filed by various parties claiming distribution and allotment of land and flats.

(h) That, several Writ Petitions were filed before the Hon'ble AP High Court and the Hon'ble High Court has issued orders restraining the parties from proceeding with construction and from alienating the property.

27 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

(i) That, the W.P. No. 5644 of 2008 was filed by Sri S. Anthony in the Hon'ble AP High Court and the Hon'ble Court has granted stay restraining the developers from proceeding with the construction and in view of the interim orders passed on 18/03/2008 the developers were restrained from proceeding with the further construction on the subject land and also from alienating the property. The said orders of the Hon'ble High Court were continued till 23/04/2008 and the assessee company were restrained from proceeding with the construction and alienation of the property w.e.f. 25/10/2007 to 23/04/2008 and the orders of the Hon'ble High Court restraining any construction on the subject land were available and were informed as at 31/03/2008 and continued until 23/04/2008. There is complete uncertainty about the progress of the project on the disputed land and consequently, the income has not been received by the assessee company.

(j) That, the agreement which was relied on by the AO vide agreement dated 25/01/2008 has been cancelled and the parties have agreed to treat the agreement as null, void and cancelled the same. This cancellation was made by cancellation agreement dated 25/09/2008 i.e., subsequent to 28 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== the end of the previous year but before the filing of the income tax return.

(k) That, further, the land owners, M/s. ECE Industries Limited have filed cases in City Civil Court at Hyderabad praying the Hon'ble Court to grant (i) Rs.

50,00,000/ per month commencing from the month of may 2008 for the unauthorized, illegal occupation and use of the land till the delivery of the possession back to the land owner, (ii) to deliver the possession of the subject land situated in Survey Nos. 74, & 75 situated in Borabanda, Fathenagar Village, Hyderabad (iii) and to award costs and other reliefs.

(l) That on 30/05/2008 (before the date of filing of the income tax return by the assessee company), the Hon'ble City Civil Court in I.A. 262/08 in OS 126/2008 has awarded ad interim injunction restraining the assessee company or its agents, servants or any person claiming through or under the assessee company from making any constructions over the subject scheduled property including changing the nature of the same in any manner.

(m) That from that day onwards the Court cases filed by the land owner against the assessee company 29 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== and others claiming under it about the subject land has travelled up to the Hon'ble Supreme Court of India which has approved the orders of the lower court and ordered that the assessee company shall not claim equities over the construction made in the land and they are bound by the decision in the suit. The assessee company shall furnish the particulars of the prospective buyers of the residential units in advance to the Competent Authority Urban Land Ceiling and it must be made clear to the prospective buyers that their purchases are subjected to the result of the suit by making specific recital in the agreement of the sale or sale deed as the case may be.

(n) The disputes as mentioned above are continuing and pending as such in the courts and the construction could not be proceeded with and equities over the land and constructions cannot be claimed by the assessee company.

(o) That, in these circumstances the construction cannot be proceeded with and the assessee company cannot claim equities over the land and on the construction and it cannot transfer or alienate the property to the buyers of the flats. It was submitted that the claim of the AO that 30 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== significant risks and rewards of ownership have been transferred to the buyer is unjustified as the subject matter is subjudice.

(p) That the monies that are to be received by the assessee company under the agreement dated 25/01/2008 have not been received by it and ultimately this agreement has been cancelled and the subject land has become a centre of very serious litigation. Income has not accrued to the assessee and the Assessing Officer has brought to tax only a hypothetical income which is contrary to the provisions of the income tax Act.

19. The learned AR submitted that the CIT(A) has examined the entire issue and the submissions made with reference to the documentary evidences filed. The CIT(A) has made the following observations in his Appellate Order:

(a) That the assessee company has failed to honour its commitment in the payment of amounts in terms of the agreement dated 17/09/2007 entered with the land owner.

(b) That the Hon'ble High Court has passed injunction orders directing GHMC to ensure that no construction was to be carried on either by the land owner or by M/s. Janapriya Engineer 31 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== Syndicate, though building permission has been granted by the GHMC earlier. And such injunction orders were in force even on 31/03/2008 and afterwards.

(c) That the assessee company was to receive consideration in the form of constructed area and car parking area. The Hon'ble AP High court has passed the order WP No. 5644 of 2008 on 18/03/2008 which was in force as on 31/03/2008.

Consequent to such High Court Order the Developer M/s. Janapriya Engineers Syndicate was restrained from construction and other civil works.

(d) That the CIT(A) has stated that it is a matter of fact that the inflow of income to the assessee from Janapriya Engineers Syndicate limited depends on the construction of the built up area and subsequent transfer thereof. The AO while passing the order, relied on the building permission granted by the GHMC and ignored the fact of the Hon'ble High Court passed restraint order for any further construction and therefore, the commissioner is of the view that there could not have been any certainty of inflow of income arising out of the constructed built up area to be transferred by the Janapriya Engineers to the assessee company. Therefore, the CIT(A) has stated that the purchase 32 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== and sale of flats could not have reached finality as on 31/03/2008 in view of the injunction of the Hon'ble High Court.

(e) That the CIT(A) has also considered the cases filed by the land owner, M/s. ECE Industries against the assessee company for taking back the possession of the subject land and for grant of compensation, which has travelled from City Civil Court, Hyderabad to the Hon'ble Apex Court of India. He also considered the orders of the Civil Court and other superior courts, even though these orders are subsequent to the date of closure of the previous year i.e., 31/03/2008 but the same were taken palace before the filing of the income tax return.


(f)   That the CIT(A) has stated that                  "even if the

      construction     work       is    continuing     on     by    the

developers, there is no certainty that the assessee (assessee Company) would finally be rightful owner of the constructed/built up area which it is entitled to as per the agreement with M/s. Janapriya Engineer Syndicate".

(g) That the CIT(A) stated as "I find force in the contention of the assessee especially in view of the ongoing litigation on the right over the land as well 33 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== as the future construction". The CIT(A) at Para No. 5.3 has stated that "in other words, the so called sale transaction between the assessee and M/s. Janapriya Engineer Syndicate cannot be said to be an unconditional sale in the light of litigation over the right of the land and the restraint order of the Hon'ble High Court for further construction".

(h) That ultimately, at Para No. 05.5 of the Appellate Order, the CIT(A) has considered the decisions relied on by the assessee company and also considering the facts that there was a dispute with regard to the right over the subject land and construction thereon as on 31/03/2008, it cannot be said that there was any real income accrued to the assessee as on 31/03/2008 relevant the assessment year under consideration. He also stated that the AO is not justified in considering the amount of Rs. 76,55,59,475 as profit arising to the assessee company on the basis of development agreement for the assessment year 2008 09. He finally stated that his conclusions were on the ground that the Hon'ble Andhra Pradesh High Court has restrained M/s. Janapriya Engineers Syndicate from proceeding with any further construction on the said plot of land (Survey Nos. 74 & 75) which was in force as on 31/03/2008.

34 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

20. The learned AR submitted that the assessee has acquired development rights on the land belonging to M/s. ECE Industries Limited, New Delhi situated in Survey Nos. 74 & 75, Borabanda Fathenagar, Balanagar Mandal, Hyderabad vide an agreement dated 17/09/2007 and paid Rs. 13.5 crores and committed to pay Rs. 16.72 crores as per the schedule stated therein and another Rs. 28,36,525/ towards cost of land for which cheques were issued. Subsequently, a Development Agreement Cum General Power of Attorney was entered into by the assessee with the land owner on 21/09/2007 and acquired development rights over the land situated in Survey Nos. 74 & 75 subject to certain terms and conditions of payment of amounts to the land owner. Basing on the above said Development Agreement Cum General Power of Attorney, the assessee has entered into Development agreement with M/s. Janapriya Engineer Syndicate on 23/09/2007 whereby it is entitled to receive 36% of the built up area and also the parking area that will come up on the subject land. Subsequent to this agreement, on 25/01/2008 it agreed to transfer right to sell the flats and parking areas that will come up in future. The Assessing Officer has treated the development agreement as a transaction giving rise to accrued income of the sale of future property.

21. The AR submitted that entering into development agreement by the land owner is different and distinguishable 35 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== from entering to the development agreement by others. In the farmer case, such development agreement will give rise to "transfer" under the provisions of Sec. 2(47) of the Income Tax Act and may give rise to capital gains. But in the second situation, wherein development rights acquired by the assessee company for its business and were shared with another developer for development of the subject land is a business transaction and the subject land was to be treated as business asset. Therefore, the transaction entered into by the assessee company with M/s. Janapriya Engineer Syndicate Limited (Developer) is a business transaction which will give rise to business income. Income from business of development and construction of residential apartment will arise on the completion of the construction and delivery of the possession and transfer of title. The assessee is following the project completion method for Revenue Recognition. The Act will tax "income" and it cannot tax "Hypothetical Income". The Act is meant to tax the real income.

22. The AR submitted that the assessee company is in the business of real estate development and construction of residential apartments and houses. In the case of business of construction of flats or multi storied buildings, the income from sale of such flat or building will normally accrue on its completion and handing over of the possession of the same. In the case of sale of flats and where the consideration of sale is 36 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== received in instalments, the income from such sale shall be recognized after the completion of the construction of flat and delivery of the possession and transfer of the title to the ultimate buyer. Till such time the final possession is given, it cannot be said that the "risks and rewards and the ownership of the property" has been transferred to the buyer. The instalments received will be treated as advance and cannot be treated as income from sale of flats. The assessee company by not declaring revenue from the project in its P & L A/c. has impliedly declared that it will recognise income on project completion basis.

23. The AR submitted that in the present case of the assessee it has, by the agreement dated 25/01/2008 has allowed the Developer to sell the flats which on the date of agreement have not come into existence. Further, the payment against the agreement is only a deposit/advance and is not to be treated as sale income till such time that the construction is complete and possession of the built up area included the parking area were delivered to the purchaser. In the said agreement which was relied on by the Assessing Officer it was clearly agreed Clause (9) that "in case Project work i.e., construction activity stops due to any dispute on litigations arising because of any court order or Government order or by involvement of a private party, payment of equated monthly instalments will be stopped for that particular period. After settlement of disputes or litigations, payment of equated 37 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== monthly instalments will resume. The responsibility of settlement of dispute or litigations regarding land and its boundaries and title lies with first party and the second party shall cooperate with the first Party by bearing costs for such dispute settlement".

24. The AR assessee pleaded the Bench to refer to Page No. 170 of volume 1 (Edition, 2008), Indian Accounting Standards & GAAP, Interpretation, Issues and Practical Application authored by Dolphy D'Souza published by Snow White Publication Pvt. Ltd., Mumbai (copy enclosed). The author's view is that "if a sale agreement is for the sale of goods, revenue shall be recognized if the entity has transferred to the buyer the significant risks and rewards of owner ship of, and effective control over, the goods sold. These conditions shall be applied to the underlying real estate in its current state, not to the buyer's right to acquire the fully constructed real estate at the later date. This effectively means that Revenue on real estate sales is recognized when the real estate is constructed and delivered to the buyer".

25. Further, the AR submitted that the author also opined that "if the real estate developer is constructing a multi storied building and a purchaser is buying a flat in the building, with little controller over the technical specification of the flat and no control over the construction, the sale of the flat would be accounted for as a product sale. In other words the sale would be recognized by a real estate developer when the purchaser 38 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== is given the possession of the flat". In all the situations and also even under the law of Transfer of Property a Act, a "Sale" pre supposes the existence or availability of the subject property at the time of sale. If the property is not in existence like in the present case of the assessee, where the flats are not readily available and are to be constructed, sale cannot be recognized and consequently no revenue can be recognized. As per the terms of the agreement dated 25/01/2008, the agreement is only for sale of future property and sale will take place only if the construction is completed and share of the assessee is identified. The AR requested the Bench to refer to clause Nos. (9) &(10) of agreement dated 25/01/2008 which clearly recognize that the agreement is only a proposed sale and in case of any dispute or litigation or by any court order or Government order if the work is disturbed or stop, no money will be paid until the work is resumed and further, on receipt of each instalment the assessee will execute registered sale deed in favour of the prospective buyers for proportionate built up area. Since, the flats are yet to be constructed and possession was not given, the recognition of revenue and taxing the same is contrary to the concept of real income and provisions of Accounting Standard 9.

26. Further the AR submitted that the Assessing Officer also misconceived the meaning of the words "risks and rewards"

associated with the development of the property. In the case of any property risks and rewards are deemed to have been 39 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== transferred, if the title is transferred and possession of the property is given. In the present case of sale of flats, since, they are still to be constructed and not in existence, such transfer of risks and rewards associated with the residential flats cannot take place. A person cannot transfer a title to the property which is not in existence and particularly when such title is not available with him and which is in litigation and dispute. The AO has violated the provisions of the law and the concept of "prudence" in AS l, that in view of the uncertainty attached to the future events, profits are not anticipated but recognized only when they arise. It is a well known concept that future income should not be recognized unless the assessee acquires a right to such income and provision must always be made for future liabilities and known losses even though amount cannot be determined with certainty. Therefore, the AO has brought to tax hypothetical income which has not been earned by the assessee Company. He relied on the decision of the Hon'ble AP High Court in the case of Khan Bahadur Ahemed Aladdin & Sons vs CIT (1969) 74 ITR 651 wherein the court has held that "the scheme of the Act would show that only those sums are taxable which accrue as income i.e., they must actually accrue or arise. No amount can be said to accrue unless it is actually due. Claim to an amount is not tantamount to the amount being due or, in other words, that the amount".

27. The AR relied on the judgement of Supreme Court in the case of Godhra Electricity Company Ltd vs CIT (225 ITR 746) 40 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== (SC): wherein the Apex Court held that it is real income which is taxable and not any hypothetical or notional income. To arrive at this finding one has to look into the surrounding circumstances and if one applies those ratios to the factual position of the present case, the assessee has not received any amounts which can be taxed as business income.

28. The AR submitted that the ITAT Delhi Bench in the case of Athul R. Aggrawal vs. ACIT (2001) 781 ITD 343 (Delhi) wherein the Tribunal has considered a case where possession of the land cannot be taken due to unauthorised occupations and project could not be grounded. It was held that income has not accrued as the terms of the agreement could not be fulfilled due to prevalent circumstances.

29. The AR submitted that the agreement by which the assessee company has acquired development rights over subject lands situated in Survey Nos. 74 &75, Borabanda, Balanagar Mandal, Hyderabad dated 17/09/2007 has been cancelled by the land owner, M/s. ECE Industries Limited by a letter dated 05/05/2008 of their advocate Sri R. Raghunandan Rao. The Development Agreement relied on by the Assessing Officer entered into by the assessee company with M/s. Janapriya Engineers Syndicate (Developer) to tax the hypothetical income has been cancelled and treated the agreement as null, void and cancelled and replaced by an agreement dated 25/09/2008. It is submitted that the 41 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== cancellation of the development agreement is made before the date of filing of the income tax return and the fact of such cancellation has been considered by the assessee and accordingly it filed its IT return for AY 2008 09. New terms and conditions were agreed on 25/09/2008. Since the agreement has been cancelled by cancellation agreement dated 25/09/2008, the earlier agreement dated 25/01/2008 has become void and ineffective and any income has not accrued.

30. The AR submitted that subsequent cancellation of the agreement has the effect of nullifying the agreement dated 25/01/2008 and in such situation it is unjustified on the part of the Assessing Officer to tax hypothetical income deeming that cancelled agreement has given right to accrual of business income. This is contrary to the concept of taxing only the "real income" as declared by the Hon'ble Supreme Court in its several decisions. The AR relied on the decision of the Hon'ble Supreme Court in the case of Kedharnath Jute MFG. Co. Ltd. vs. CIT (1971) 82 ITR 363 and Sutlej Cotton Mills Ltd vs. CIT (1979) 116 ITR 1 (SC). The AR submitted that the mercantile system of accounting cannot give rise to income from an agreement which has not acted upon and which was cancelled by the concerned parties.

31. The AR also relied on the judgement of Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 42 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== wherein the Apex Court held that reduced income as per, the agreement received by the assessee has to be taxed and not the hypothetical income. He also relied on the decision of the Tribunal Mumbai Bench A in the case of Lok Housing and constructions Ltd vs. ACIT reported in 27 Taxmann.com 15 (Mumbai Trib). The Tribunal in this case has considered an identical issue of cancellation of immovable property agreements by the sister concerns subsequent to the close of the assessment year but before the due date for filing the revised return. The Tribunal has held that the subsequent cancellation of the agreements though made after end of the relevant previous year has to be taken into consideration in the computation of real income, because such cancellation has definite bearing on the accrual of income. The Tribunal has opined that, it is not justified to bring to tax hypothetical income stated in the original return of income ignoring the revised return filed by the assessee after taking into consideration the cancellation of agreements made subsequently after the end of the relevant previous year. Cancellation of the agreements both by the land owner and also by the Developer in the present case have resulted in no business income accrued to the assessee company and, therefore, the Assessing Officer is not justified in bringing to tax "Hypothetical Income" in its hands.

32. The AR submitted that the subject land in Survey Nos. 74 & 75 of Borabanda village over which the assessee company has acquired development rights and proposed construction of 43 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== residential apartments has become centre of serious disputes and consequently it could not proceed with the construction activity and alienation of the property to the buyers. The disputes that were raised against the development of the subject land situated in Survey Nos. 74 & 75 of the Borabanda Village which has direct bearing on the business activity and earning of real estate income by the assessee are as under:

S. WP No. Name of Petitioner's Prayer and Order Date of Restraint No. the Court Name Order

1. 22163 AP High Sri M. Lakshma To grant possession of 25.10.2007 to of 2007 Court Reddy land and distribution 05.03.2008 to workers

2. 5644 of AP High S. Anthony and Restraining from 18.03.2008 to 2008 Court others further construction on 23.04.2008 the subject land

33. The AR submitted that the Hon'ble AP High Court in WP No. 22163 of 2007 filed by M. Lakshma Reddy, ex employee of the ECE Industries Limited, Owner of the land has obtained interim directions to not to proceed with the construction and development activity on Survey Nos. 74 & 75 and not alienate the property. This order was vacated by the Hon'ble Court on 05/03/2008. Subsequently, Sri S. Anthony and others have filed Writ Petitions in the Hon'ble AP High Court. The Hon'ble High Court on 18/03/2008 has issued orders restraining the developers from proceedings with further construction and also from alienating the property. The order of the Hon'ble AP High Court has continued beyond the end of the relevant previous year and until 23/04/2008. Therefore, as on the date 31/03/2008 the development work has came to a grinding halt 44 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== and income has not received or accrued from the construction business. The restraining orders have affected the project work during the relevant previous year as work could not be proceeded on the disputed land.

34. The AR further submitted that the land owners have cancelled the agreement granting development rights dated 17/09/2007 by serving a legal notice dated 05/05/2008. Sri R. Raghunanadan Rao, Advocate of the land owner company has informed the assessee company that due to default in performance of the contract and the non negotiable conditions of payment stated in agreement dated 17/09/2007 and the subsequent development agreements dated 21/09/2007 have been terminated by the land owner namely, M/s. ECE Industries Limited. Subsequent to the cancellation of the agreement, M/s. ECE Limited has filed a Suit for recovery of possession of the subject land situated in Survey Nos. 74 & 75 of Borabanda Village and damages in the City Civil Court at Hyderabad on 30/05/2008. The Hon'ble City Civil Court in IA No. 262/08 has granted interim orders restraining the assessee company its agents, its servants or any person claiming through it from making any construction over the Suit Scheduled Property situated in Survey Nos. 74/P & 75/P in Borabanda Village and also from changing the nature of the said disputed property. Subsequently the Hon'ble City Civil Court by its order dated 21/08/2008 has ordered as follows:

45 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== (1) That the respondents shall deposit the balance value of the property which comes to around Rs. 28,00,000/ into court within one month and (2) That the respondents shall furnish bank guarantee for the value of the unreleased post dated cheques and pay/deposit the value of four cheques which were dishonoured within one month from today and (3) That the respondents shall not claim equities over the construction made in the land and they are bound by the decision in the suit. The respondents shall furnish the particulars of the prospective buyers of the residential units in advance to the Competent authority Urban Land Ceiling and it must be made clear to the prospective buyers that their purchases are subject to the result of the suit by making a specific recital in the agreement of sale or sale deed as the case may be and (4) That this court further ordered both parties shall bear their respective parties".

This order was given by the Hon'ble Court on 21/08/2008.

35. Subsequently the dispute by the land owner has travelled from City Civil Court Hyderabad to Hon'ble Supreme Court of India and presently the dispute is pending before the Hon'ble AP high Court. The following table is submitted to explain to the Hon'ble Bench that the disputes have not been cleared and 46 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== the matter has not been settled and the subject land issue is subjudice even to this date.

 S.                                                                                  Effective
             WP No.                                  Order
No.                                                                                    date
1.    IA No. 262/2008     in    Awarded interim injunction restraining              30.05.2008
      OS No. 126/2008     of    construction activity on the scheduled land.
      City Civil Court.
2.    IA No. 1823/2008    in    Mainly - (i) payment of Rs. 28,00,000, (ii)         21.08.2008
      OS No. 287/2008     of    furnishing BG for the cheques dishonoured and
      City Civil Court          (iii) assessee company shall not claim equities

over the construction made on the scheduled land and any sale of property is subject to the final decision of the court and subject to the clear recital in the purchase documents.

3. AP High Court in MA Deletion of Clauses (1) & (2) of the above 27.04.2009 No. 1297/2008 order but the third clause that the assessee company shall not claim equities over the construction on the subject land continued.

4. The Hon'ble Supreme Affirmed the Hon'ble High Court order and 06.08.2009 Court of India in Civil continued the clause No. (3) that the assessee- Appeal No. 5127-5128 company shall not claim equities over the of 2009. constructions made in the suit property and they would be bound by the decision in the suit. Further, list of prospecting buyers of the residential units to be submitted in advance to the Competent Authority Urban Land Ceiling and it must be made clear to the prospective buyers that their purchases are subject to the result of the suit by making a "specific recital"

in the agreement of sale of sale deed, as the case may be.

5. Hon'ble City Civil The Hon'ble Court has granted relief in favour 19.04.2010 Court, Hyderabad OS of the assessee-company. No. 287/2008

6. Hon'ble AP High The Court ordered that the assessee-company 25.07.2010 Court in CCAMP No. any equities over the construction made in the 359 & 360 of 2010 in suit scheduled property and they would be CCA No. 96 of 2010 bound by the decision in the suit.

36. The AR submitted that the scheduled land in Survey Nos. 74 & 75 has become a centre of very serious litigation before the date of the end of the relevant previous year i.e., 31/03/2008 and the litigation has continued even after the close of the financial year but before the date of filing of the Income Tax return by the assessee company and continued till 47 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== today. Presently, the Hon'ble High Court of Andhra Pradesh vide its order dated 25/07/2010 has ordered that the assessee company and also the Developers M/s. Janapriya Engineers Syndicate shall not claim any equities over the constructions made on the land situated in Sy. Nos. 74 & 75 of Borabanda Village and they would be bound by the decision in the pending suit. The assessee company cannot be said to have earned business income from dealing in the project proposed on the disputed land is unjustified in view of the continuous litigation and restraining orders against the construction and it was in capacitated in dealing with the property by the orders of the Hon'ble AP High Court whereby it has ordered that the assessee company shall not claim any equities over the constructions made on the disputed scheduled land. (order dated 25/07/2010) The AR submitted that the Government of Andhra Pradesh has issued G.O.MS No. and declared the subjected disputed lands as excessive in terms of the provisions of Urban Ceiling Act and ordered to take possession of the land. In view of the said orders the future of the proposed project on the subject land became uncertain and income from such a situation cannot be termed as accrued to the assessee as there are lot of uncertainties involved in the project and its completion. The AR submitted that:

(1) It is engaged in the business of construction of residential flats and houses. Revenue from the construction is recognized on the completion of the 48 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== project and delivery of the possession of the residential units to the buyers.

(2) The project could not be completed due to the fact that the land situated in Survey Nos. 74 & 75 Borabanda Village in Balanagar Mandal has become a centre of very serious disputes and several suits were filed in the courts.

(3) The Hon'ble AP High Court has issued interim injunction orders restraining to proceed construction or other civil work on the disputed land over which the assessee acquired development rights. The interim orders restraining the work on the land were in force as at the last date of the previous year relevant year 2008 09 and such restraint order has continued subsequent to the close of the relevant previous year. Due to the court orders there is lot of uncertainty prevailed over the progress of the project and on the earning of the income from the project.

================================== the subject land and they would be bound by the decision in the suit. It further ordered that this fact must be made clear to the prospective buyers that their purchases are subject to the result of the suit by making a specific recital in the agreement of sale or sale deed as the case may be.

(5) In view of the above order of the Hon'ble Supreme Court, the assessee company is completely incapacitated in dealing with the construction area on the subjected disputed land and it was prohibited from making the sales.

(6) The agreement entered by the assessee company giving right to sell the apartments vide agreement dated 25/01/2008 has been cancelled by the concerned parties by a cancellation agreement dated 25/09/2008. The cancellation of the agreement has also taken place before the date of the filing of the income tax return.

(7) The events occurred after the date of the Balance Sheet, i.e., 31/03/2008 have also to be taken into consideration in determining the amount of real income accrued to the assessee company. in view of the decision of the Tribunal Mumbai Bench in the case of Lok Housing and Constructions Ltd vs. ACIT 50 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== (2012) 27 Taxmann.com 15 (Mumbai Trib), cancellation of agreements and other events occurred after the end of the previous year but before the date of filing the IT return and which have direct bearing on the income earning capacity of the assessee have to be considered and real income has to be determined only after considering such events.

37. The learned AR relied on the following decisions:

(a) CIT vs. Moghal Builders and Planners (2001) 252 ITR 488 (AP) wherein held that income from construction and sale of flats accrues to the assessee on the basis of handing over of possession to the respective buyers and not on the basis of investment made by the assessee. The Hon'ble AP High Court has applied the decision of the Hon'ble Calcutta High Court in the case of Madgul Vidyog's case (1990) 184 ITR 484 (Cal.).

(b) CIT vs. Chandigrah Industrial and General Development Corporation Limited (2009) 319 ITR 85 (P&H). In this case the assessee has claimed the income must be assessed on receipt basis and not on accrual basis. The claim was not accepted by the Assessing Officer, but Commissioner (Appeals) and the ITAT held that income has to be brought to 51 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== tax on receipt basis in view of the nature of the transactions and this was upheld by the Hon'ble High Court.

(c) K. Radhika, K. Srinivasa Rao, K. Venkayamma and K. Hemalatha vs. DCIT (2011) 47 SOT 180 (Hyd Trib).: In this case the assessee who received a meagre amount out of total consideration the transferee is avoiding, adhering to the agreement and there is no evidence brought on record by the revenue authorities to show that there was actual construction has taken place at the impugned property in the assessment year under consideration and also there is no evidence to show that the right to receive the sale consideration was actually accrued by the assessee. Without accrual of the consideration of the assessee, the assessee is not expected to pay capital gain on the entire sale consideration.

(d) M/s. Lanco Kondapalli Power Pvt. Ltd. vs. DCIT in ITA No. 1615/Hyd/2010. The Tribunal in this case has considered the decision of the Hon'ble Supreme Court in the case of Godhra Electricity Company Ltd vs. CIT 225 ITR 746 and also considered the "Effects of Uncertainty on Revenue Recognition" 52 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== stated in Accounting Standard 9 of ICAI has held that simply bills were raised for making claim cannot result in accrual of income as the matter is subjudice. The Tribunal had made it clear that the amount will be taxable in the year of its receipt.

38. The AR submitted that the accrual of income in the hands of the present assessee company is contingent and inchoate and its accrual is dependent on the final settlement of the disputes pending in courts and completion of the construction of apartments and delivery of the possession to the buyers. Since, the disputes have not been settled at the end of the relevant previous year and further, the agreements entered with the land owner as well as with the Developer have been cancelled, the income cannot be said to have accrued to the assessee company. The income will be offered to tax on the completion of the construction and after clearing of the court cases and delivery of possession and transfer of legal title to the buyers. At present, due to court orders, hope on the project has become completely uncertain and highly doubtful. The AR prayed to consider the above facts of pending litigation and uncertainties surrounding the ultimate implementation of the project and realization of sale proceeds and affirm the order of the CIT(A). Further he drew our attention to the following documents:

53 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

                                        ==================================

 S                                                                        Page Nos.
                                Description
No.                                                                        in PB-II
 1.   Writ Petition No. 22163 of 2007 filed by M. Lakshma Reddy, ex-          1-9

employee of the land owner company in AP High Court

2. Order in the above WP by AP High Court 10-27

3. WP No. 5644 of 2008 by S. Anthony and others in AP High Court 28-37

4. Order of the High Court in the above WP No. 5644 of 2008 38-61

5. Court cases filed by the land owner in City Civil Court 62-79

6. Orders of the City Civil Court in the above petitions 80-160

7. Order of the Hon'ble High Court 161-187

8. Copy of memos filed in AP High Court 188-191

9. Order of the Hon'ble Supreme Court in the case filed by the land 192-207 owner

10. Judgement of the City Civil Court dated 19.04.2010 208-259

11. WP filed in AP High Court and copy of the order in the litigation 260-274 filed by land owner

12. Copies of caution notices advertised in newspapers against the 275-278 construction on the disputed land

13. Government order No. 1534 of the Revenue Department of Govt. 279-289 of AP ordering for resuming the land situated in the disputed Survey Nos. 74 and 75.

39. We have heard both the parties and perused the material on record. In this case, the assessee initially entered into Development Agreement with M/s. ECE Industries Ltd. on 17.9.2007 for development of land admeasuring 67824 sqy situated at Sy. Nos. 74/P and 75/P at Borabanda, Fathenagar village, Ashok Marg, Hyderabad for which the assessee was required to pay Rs. 30,50,36,525 to M/s. ECE Industries Ltd. as a consideration for obtaining Development and GPA rights. Out of the above amount, the assessee has actually paid Rs. 13.5 crores and another amount of Rs. 28,36,525 and balance is only Rs. 16.72 crores for which post dated cheques are issued to M/s. ECE Industries Ltd.. Subsequently, M/s. ECE Industries Limited (the Owner of the land) has executed a registered "Development Agreement Cum General Power of Attorney" in favour of M/s. Janapriya Engineer Syndicate Limited, Hyderabad for an extent 54 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== of land ad measuring 43.398 sqy out of the total extent of 67824.5 sqy and another Development Agreement Cum General Power of Attorney was executed by the owner of the land in favour of the assessee company for an extent of land admeasuring 24525.8 sqy. Both these agreements were executed on 21/09/2007. Subsequent to the execution of the said Development Agreement Cum General Power of Attorney dated 21/09/2007, the assessee company has entered into an Development Agreement on 23/09/2007 with M/s. Janapriya Engineer Syndicate (the Developer) for the development and construction of residential apartments on the subject land situated in Survey Nos. 74 & 75 at Borabanda, Fathenagar, Balanagar Mandal, Hyderabad and agreed to accept 36% of the built up area to be developed as per the approved plan. Subsequent to the agreement dated 23/09/2007, the assessee company has entered into an agreement on 21/05/2008 according to which it agreed to handover its share of flats and parking area to the Developer to sell as per the terms and conditions agreed upon. The Assessing Officer has considered the development agreement entered by the assessee company with the land Owner, M/s. ECE Industries Limited whereby it acquired development rights over the land situated in Survey Nos. 74 & 75 of Borabanda Village, and another agreement entered with M/s. Janapriya Engineer Syndicate Limited, Hyderabad on 21/05/2008 and concluded that the purchase and sale is complete in the above transaction and 55 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== therefore, the transaction of 21/05/2008 resulted in accrual of income subjected the same to tax. The Assessing Officer has brought the agreement dated 21/05/2008 to tax stating that the assessee is a company and is following the Mercantile System of accounting and the agreement granting right to sell apartment that are to come up on the subject land has resulted in accrual of income as follows:

Total built up area to be as per MOU (sq. ft) 4,90,098 Additional area not mentioned in the MOU as per para No. 3 (sq. ft) 27,920

-----------

                                                  Total area (sq. ft)        5,18,018
                                                                              ======
Sale consideration value @ 2000 per sq. ft. of the above area (2000     103,60,36,000
x 5,18,018) (Rs.)
Add: Sale of car parking (576 x 60,000) (Rs.)                              3,45,60,000
                                                                        -----------------
                                Total sale consideration value (Rs.)    107,05,96,000
Less: Cost of the land purchased from ECE Industries Ltd. (Rs.)          30,50,36,525
                                                                        -----------------
                                                   Total profit (Rs.)    76,55,59,475
                                                                        ==========

40. Now the contention of the Department is that the assessee sold 5,18,018 sft area to M/s. Janapriya Engineers Syndicate along with 576 car parking area. As per the AO, since the assessee is following mercantile system of accounting, income arising out of the transaction with M/s. Janapriya Engineers Syndicate is to be offered to tax. According to the AO income is accrued to the assessee and the same is to be taxed in the assessment year under consideration. On the other hand, the contention of the assessee's counsel is that there is uncertainty in fulfilling the contract as there are litigations pending before various courts and performance of the contract is doubtful.

56 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== Hence no income could be recognised in certainty. Being so, recognition of revenue is not possible and the ultimate collection of sale proceeds is doubtful. It is also on record that the agreement entered into by the assessee with the land owner i.e., M/s. ECE Industries Ltd., has been cancelled by letter dated 5.5.2008. Further the agreement entered by the assessee with M/s. Janapriya Engineers Syndicate is as follows:

"11. The first party authorizes the second party to do the following things:

a) To sell the flats, to enter into an agreement of sale with purchasers of flats, either the whole of scheduled property or portion of it or undivided share in the scheduled property and acknowledge them by issuing receipts.

b) To enter into a development agreement with any developer/builder to develop the scheduled property by constructing individual buildings or residential apartments or commercial apartments.

c) To enter into contract agreement with any contractor.

d) To sign all the applications to be submitted to the AP Transco for supply of electricity, to the concerned authorities for providing drainage and water supply etc., and process the said applications.

e) To look after and protect the scheduled property from encroachers, land grabbers and unsocial elements and to take necessary and appropriate action against them by making applications to the concerned authorities and if necessary to approach civil and criminal courts.

f) To pay the taxes and revenue payable on the scheduled property to the state government, central government and local authority.

g) To make use of scheduled property to its maximum advantage.

h) To deal with state, central and quasi government organizations in respect to the scheduled property.

57 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

j) To defend if any suit or proceeding is initiated by any person challenging their right and title to the scheduled property and to do all the acts necessary to protect their property.

k) To mortgage the scheduled property to any bank or financial institution to get any loan for the development of the scheduled property and execute all the necessary documents for the said purpose.

l) Generally to do all the acts deeds and things whatsoever in respect of the scheduled property which the vendors will do in their interest.

Scheduled Property:

All that undivided share of land admeasuring 13,505.90 sq meters or 16,242.70 sq yards or of 20,430.50 sq meters or 24,425.80 sq yards along with proposed to be constructed super built up area of 3,25,893.71 sq ft out of 4,90,097.72 sq ft of residential flats and 382 car parking in Sy. No. 74/P and 75/P, situated at Fathenagar village Hyderabad (emphasis supplied)."

41. This agreement has also been cancelled and the assessee entered into a new agreement on 25.9.2008 which is before filing the return of income. The agreement entered on 25.1.2008 with M/s. Janapriya Engineers Syndicate is no more surviving.

Further, it is also brought on record by the assessee that there were various litigations relating to the impugned property in Sy. Nos. 74/P and 75/P, Borabanda, Fathenagar village, Ashok Marg, Hyderabad as follows:

58 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

                                             ==================================

 S.                                                                                  Effective
             WP No.                                  Order
No.                                                                                    date
1.    IA No. 262/2008     in    Awarded interim injunction restraining              30.05.2008
      OS No. 126/2008     of    construction activity on the scheduled land.
      City Civil Court.
2.    IA No. 1823/2008    in    Mainly - (i) payment of Rs. 28,00,000, (ii)         21.08.2008
      OS No. 287/2008     of    furnishing BG for the cheques dishonoured and
      City Civil Court          (iii) assessee company shall not claim equities

over the construction made on the scheduled land and any sale of property is subject to the final decision of the court and subject to the clear recital in the purchase documents.

3. AP High Court in MA Deletion of Clauses (1) & (2) of the above 27.04.2009 No. 1297/2008 order but the third clause that the assessee company shall not claim equities over the construction on the subject land continued.

4. The Hon'ble Supreme Affirmed the Hon'ble High Court order and 06.08.2009 Court of India in Civil continued the clause No. (3) that the assessee-

Appeal No. 5127-5128 company shall not claim equities over the of 2009. constructions made in the suit property and they would be bound by the decision in the suit. Further, list of prospecting buyers of the residential units to be submitted in advance to the Competent Authority Urban Land Ceiling and it must be made clear to the prospective buyers that their purchases are subject to the result of the suit by making a "specific recital"

in the agreement of sale of sale deed, as the case may be.

5. Hon'ble City Civil The Hon'ble Court has granted relief in favour 19.04.2010 Court, Hyderabad OS of the assessee-company.

No. 287/2008

6. Hon'ble AP High The Court ordered that the assessee-company 25.07.2010 Court in CCAMP No. any equities over the construction made in the 359 & 360 of 2010 in suit scheduled property and they would be CCA No. 96 of 2010 bound by the decision in the suit.

42. Further, as per the AR scheduled land in Survey Nos. 74 & 75 has become a centre of very serious litigation before the date of the end of the relevant previous year i.e., 31/03/2008 and the litigation has continued even after the close of the financial year but before the date of filing of the Income Tax return by the assessee company and continued till today.

Presently, the Hon'ble High Court of Andhra Pradesh vide its order dated 25/07/2010 has ordered that the assessee company and also the Developers M/s. Janapriya Engineers 59 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== Syndicate shall not claim any equities over the constructions made on the land situated in Sy. Nos. 74 & 75 of Borabanda Village and they would be bound by the decision in the pending suit. The assessee company cannot be said to have earned business income from dealing in the project proposed on the disputed land is unjustified in view of the continuous litigation and restraining orders against the construction and it was incapacitated in dealing with the property by the orders of the Hon'ble AP High Court whereby it has ordered that the assessee company shall not claim any equities over the constructions made on the disputed scheduled land. (order dated 25/07/2010) The AR submitted that the Government of Andhra Pradesh has issued G.O.MS No. 1534 dated 20.12.2008 and declared the subjected disputed lands as excessive in terms of the provisions of Urban Land Ceiling Act and ordered to take possession of the land. In view of the said orders the future of the proposed project on the subject land became uncertain and income from such a situation cannot be termed as accrued to the assessee as there are lot of uncertainties involved in the project and its completion. It is also observed that:

(1) It is engaged in the business of construction of residential flats and houses. Revenue from the construction is recognized on the completion of the project and delivery of the possession of the residential units to the buyers.

60 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== (2) The project could not be completed due to the fact that the land situated in Survey Nos. 74 & 75 Borabanda Village in Balanagar Mandal has become a centre of very serious disputes and several suits were filed in the courts.

(4) The land owner has cancelled the agreements and filed cases initially in the City Civil Court and the matter has travelled up to Hon'ble Supreme Court of India which ordered that the assessee company shall not claim any equities over the construction on the subject land and they would be bound by the decision in the suit. It further ordered that this fact must be made clear to the prospective buyers that 61 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== their purchases are subject to the result of the suit by making a specific recital in the agreement of sale or sale deed as the case may be.

(7) The events occurred after the date of the Balance Sheet, i.e., 31/03/2008 have also to be taken into consideration in determining the amount of real income accrued to the assessee company. in view of the decision of the Tribunal Mumbai Bench in the case of Lok Housing and Constructions Ltd vs. ACIT (2012) 27 Taxmann.com 15 (Mumbai Trib), cancellation of agreements and other events occurred after the end of the previous year but 62 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== before the date of filing the IT return and which have direct bearing on the income earning capacity of the assessee have to be considered and real income has to be determined only after considering such events.

43. Considering all the above facts of the case, in our opinion, it is too early to assess business profit out of the sale of constructed area to M/s. Janapriya Engineers Syndicate. The assessee neither received substantial consideration or assets to be sold are ready for handing over the possession to the concerned parties so as to transfer the title in the property. Till such time, it cannot be said that the parties involved in are ready to perform the contract. In the present case, neither possession of the property has been given to the ultimate buyer or the assessee has received any substantial consideration. When the property is to be sold is not readily available or constructed, the assessee cannot recognise income with certainty. The agreement entered into by the assessee herein is only for sale of piece of property and sale will take place only after completion of construction and after assessee's share of property is identified. The proposed sale agreement cannot be put into action due to various litigations pending with various courts. Nobody can transfer title in a property when the property is not in existence. More so, when there is litigation pending on the same property and no profit can be anticipated when the agreement itself is subject matter of 63 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== litigation. It is not possible to bring the same to tax. We have to see all surrounding circumstances to decide accrual of income to the assessee. Looking at the prevailing circumstances in the present case, it is not possible to hold that income has actually accrued to the assessee. When consideration is not determinable with reasonable certainty, the assessee is justified in postponing recognition of income and it is appropriate to recognise the income only when it is reasonably certain that the ultimate realisation is possible. Being so, revenue could be recognised at the time of sale or handing over of possession of flats to the ultimate customers. The Department cannot thrust upon the assessee so as to tax the future income.

44. In our opinion, the assessee has recognised the income in accordance with the true terms of the agreement and if there is any inconsistency in recognising the income then only revenue authorities can disturb the same. Once the assessee recognised the income in accordance with the agreements, the AO cannot substitute his assessment to say that the assessee has postponed the tax liability. There is no basic deviation in the method followed by the assessee regarding recognising of income. However, the AO was of the opinion that there is basic flaw in the method followed by the assessee to recognise the income. When there is no deviation in recognising the income by the assessee, the AO cannot recompute the profit of 64 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== the assessee by observing that there is basic flaw in the method followed by the assessee.

45. In our opinion, income arising out of sale of flats to M/s. Janapriya Engineers Syndicate in which constructed property was sold by the assessee, profit on such transaction is to be assessable not in the year of agreement and it should be assessable proportionately in the previous years in which the constructed area was sold by the assessee or constructed flats were handed over by the assessee to the buyers. This view of ours is supported by the following decisions:

(a) R. Gopinath (HUF) vs. ACIT, 133 TTJ (Chennai) 595 wherein the Tribunal Chennai Bench held as under:

"9. We are unable to agree with the contentions of the learned Departmental Representative that the transaction of transfer is complete by applying the provisions of s. 53A of Transfer of Property Act on the date when the possession of the property was handed over to the developer as per the development agreement dt. 1st Sept., 2003. Sec. 53A of the Transfer of Property Act does not provide the conditions for transfer but it provides protection to the transferee of any immovable property by a written contract, the terms of which constitute the transfer and can be ascertained with reasonable certainty and the transferee as part performance of the contract has taken the possession of the property and has performed or willing to perform his part of contract, then even the said contract though required to be registered has not been registered and the transfer has not been completed in the manner prescribed therefore by law, the transferor is barred from enforcing against the transferee any right in respect of the property other than the right expressly provided by the terms of the contract. Under the IT Act, 1961 by inserting cls. (v) and (vi) of s. 2(47), the definition of the term transfer includes the transaction which fulfils the conditions provided under s. 53A of Transfer of Property Act. Therefore, s. 53A of the IT Act, 1961 (sic- Transfer of Property Act) is borrowed only with respect to the transfer of capital asset as provided under s. 2(47) of the IT 65 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== Act, 1961 and the same is not applicable in other cases which do not fall under s. 2(47) of the IT Act, 1961. Sec. 45(1) of the IT Act, 1961 deals with the profit and gain arising from the transfer of capital asset, whereas s. 45(2) deals with the profit or gain arising from the transfer by way of conversion of capital asset into stock-in-trade and shall be chargeable to income-tax in the previous year in which such stock-in-trade is sold or otherwise transferred. Therefore, the time of chargeability to income-tax of capital gain arising from the conversion of capital asset to stock-in-trade is the point when the stock-in-trade is sold or otherwise transferred, whereas the chargeability of capital gain under s. 45 of the IT Act, 1961 from transfer of capital asset shall be in the previous year in which the transfer took place including the transfer as provided under s. 2(47) of the IT Act, 1961. The sale/transfer of stock-in- trade cannot be equated with the transfer of capital asset. The decisions relied upon by the learned Departmental Representative as well as the lower authorities are with respect to the transfer of capital asset under s. 2(47) of the IT Act, 1961 and not in respect of stock-in-trade. Therefore, these decisions are not relevant and applicable in the facts of the present case. As far as s. 53A of the Transfer of Property Act is concerned, the said section provides only a protection to the transferee on fulfilment of certain conditions provided therein but does not provide that even on fulfilment of that condition the transfer is complete. As per provision of s. 53A of the Transfer of Property Act when a right is created in favour of the transferee which cannot be defeated, otherwise then by the terms and conditions expressly provided in the contract itself.

10. From the development agreement dt. 1st Sept., 2003 as well as the supplementary agreement dt. 23rd Dec., 2003, the assessee handed over the possession of the property for construction of residential apartments by the developer. The assessee did not receive any consideration for handing over the possession of the property to the developer but as per the agreement the assessee got the right to get the built-up area of 25,130 sq. ft. and proportionate car park as per Schs. E and E1 of the agreement and the rest of the constructed area was to be sold out for recovery of the cost and margin of the developer. From the development agreement, the possession was handed over for carrying out the construction work by the developer and there is no other document except the development agreement which transfers the title of the property to the developer. In the absence of the transfer of the title of the property and any consideration at the time of development agreement, the handing over of the possession was merely a temporary measure for carrying out the construction work by 66 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== the developer and the exclusive possession of the property in legal sense remains with the assessee which was finally handed over at the time of execution of the sale deed of the constructed flats by the assessee. One cannot presume any intention in executing the documents between the parties other than what was stated or can be inferred reasonably from the documents itself. A regard must be given to the words used in the documents. The nature of the transaction between the parties by way of development agreement cannot be said to be a sale of immovable property which is stock-in-trade or otherwise transfer as provided in the Transfer of Property Act. We agree with the contentions of the learned Authorized Representative of the assessee that the meaning of the words, "otherwise transferred", in s. 45(2), should be according to its ordinary popular and natural sense, and it should not include a transaction referred to under sub-cl. (v) of sub-s. (47) of s. 2 of the IT Act, 1961 in relation to a 'capital asset'. By no stretch of imagination, the said transaction can be termed as transfer more or less as sale. When the legal title and possession of the property were with the assessee, then the transfer of the said is not possible merely by allowing the developer to carry out the construction work.

13. Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of immovable property as held by the Hon'ble apex Court in the case of Alapati Venkataramiah vs. CIT (supra). Until and unless the title of the property is passed on to the purchaser, there cannot be a sale or transfer of immovable property, since in the present case the question is whether the handing over of the possession under the development agreement of the property which is stock-in-trade of the assessee can be treated as a transfer by applying the definition of transfer in s. 2(47) of the IT Act, 1961. As we have already stated earlier that in the case of stock-in-trade, the definition of transfer under s. 2(47) of the IT Act, 1961 is not applicable, therefore, the contextual or the ordinary meaning of the word transfer is applicable in the present case.

15. In the present case, the business profit arises to the assessee on the sale of the stock-in-trade only when the constructed apartments were sold and not at the time when the development agreement was entered into. Moreover, in the development agreement, the assessee has not agreed for sale of the entire constructed property on the land, the assessee has agreed only for a portion of the constructed property for sale for the purpose of recovery of the cost of construction and margin of the developer. The assessee has executed all the sale 67 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== deeds for transfer of the constructed apartments in favour of the end-user/purchaser, therefore the transfer of the proportionate land took place only when the assessee transferred the construction property by way of sale deeds and offered the business income which was accepted by the Department. In any case, when the assessee has retained the portion of the land being proportionate to the constructed area to be retained by the assessee, then there is no question of transfer of the entire land to the developer. In view of the above discussion, we hold that the orders of the lower authorities, qua this issue are not sustainable on the facts as well as on law. We set aside the orders of the lower authorities, qua this issue and direct the AO to tax the capital gain arising from the conversion of the land and building into stock-in-trade proportionately into the previous years in which the constructed property was sold by the assessee or retained for self-use and corresponding business income was offered."

(b) B.L. Subbaraya vs. DCIT, 9 SOT 297 (Bang) wherein the Bangalore Bench of the Tribunal held as under:

"8. The fact which is undisputed is that the entire settlement is still a subject-matter of dispute being sub judice and there is no finality attained even during the year under consideration. This is clear from the following facts. Subsequent to the deed of settlement between the assessee and Smt. Sundari Ramachandran on 9th Aug., 1997, the disputes arose on its implementation. The assessee filed a company petition against M/s Electronics & Controls Power Systems (P) Ltd., under s. 433 of the Companies Act, 1956, seeking winding up for its failure to pay the dues to the assessee. Incidentally, subsequent to the deed of settlement dt. 9th Aug., 1997, the business of the partnership firm M/s Electronics & Controls was taken over by a private limited company, M/s Electronics & Electronics Power Systems (P) Ltd. The said winding up petition came to be dismissed by the Hon'ble High Court of Karnataka on 2nd March, 2000 on the plea that there was no sum due from the company inasmuch as the settlement was between the assessee and the individual, Smt. Sundari Ramachandran. Subsequently, the assessee instituted a suit for recovery of the amount in terms of the settlement before the Civil Court at Bangalore in O.S. No. 5898/2000, a copy of which is placed in the paper book filed before us. We also find from the paper book that the defendant, Smt. Sundari Ramachandran, has denied the existence and execution of the said settlement agreement dt. 9th Aug., 1997 as been concocted/ fabricated. Therefore, undisputedly the entire settlement agreement dt. 9th Aug., 1997 68 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== is in jeopardy. Of course, the assessee has withdrawn a sum of Rs. 23 lakhs from the firm, M/s Electronics Controls. Therefore, having regard to the binding nature of judgment of the Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra), to the proposition that where an amount was in dispute, it could not be treated as income, we do not find any infirmity in the conclusion of the CIT(A) that a sum of Rs. 77,00,000 cannot be brought to tax during the year under consideration as the matter had not attained finality. However, the CIT(A) went wrong in not applying the same principle to the amount of Rs. 23 lakhs received by the assessee. Even this amount of Rs. 23 lakhs is disputed and the right of the assessee in the said amount is inchoate and therefore, the same also cannot be brought to tax during the year under consideration."

"2.3 After going through the rival submissions and also after perusing the material available on record, I am not inclined to concur with the finding of the CIT(A), because the assessee had entered into the development agreement with M/s Arora Builders (Sukhmani Construction). The FSI on the said plot was revised, but the project could not be completed. Therefore, at the cost of this hardship no interest was paid by the owner to the assessee company on its deposit at the rate of 12 per cent per annum of the same amount. It is undisputed fact that the assessee had paid the amount of Rs. 99.90 lakhs as on 31st March., 2003, but no interest was paid to the assessee because the project was legally not feasible and due to legal restriction the whole amount invested might not have been realized in the said project. Accordingly, the owner did not make any payment to the assessee. Under the facts and circumstances, the assessee cannot be subjected to be taxed on notional income. There is nothing on record, to suggest that any such interest income was materialized. The assessee has pointed out that because of non-availability of FSI on the said plot of land for which the assessee had entered into development agreement with M/s Arora Builders (Sukhmani Construction), the assessee company could not develop the said property in view of the statutory restrictions and, therefore, the whole project has become unviable to continue. Hence, no interest had accrued to the assessee in the year under consideration. Accordingly, the addition of Rs. 4,99,260 is directed to be deleted."

69 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

(d) M/s. Neon Solutions Pvt. Ltd. vs. ITO in ITA Nos. 5032/Mum/2011 and 6222/Mum/2012 order dated 30.04.2013, the Mumbai 'B' Bench of the Tribunal held as under:

"5. We have heard both the parties and perused the material on record. As regards the findings of the AO and the Ld.CIT(A) that various resolutions have been back dated and the same cannot be relied, in our view is based on presumptions and assumptions of the lower authorities as the perusal of the records and the subsequent events leading to the amalgamation establishes that the debenture issuing company has been under serious financial crisis and the impugned resolutions passed to the effect of waiver of interest are reliable. Regarding the requirement of the resolution to be registered u/s 106 r.w.s. 192 of the Companies Act as observed by the Ld.CIT(A), it is pertinent to mention that the said provisions are not applicable as the resolutions passed by the debenture issuing company do not fall under the resolutions prescribed by the provisions of section 192(4) of the Companies Act. Also in similar set of facts, the ITAT in the case of Riya Holdings Ltd in ITA Nos. 1119 to 1124/Mum/2011, where the present Account Member is also one of the parties to the said order, has directed the AO delete a similar amount of interest brought to tax. The relevant principles summarized by the ITAT in the said cases on the basis several judgments of the High Courts and Supreme Court is extracted hereunder:

A) that merely because assessee was following mercantile system of accounting, it could not be held that income had accrued to it.

B) earning of the income, whether actual or notional, has to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides not to charge interest in order to safeguard the principal amount and ensure its recovery, it cannot be said that he has acted in a manner in which no reasonable person can act.

C) The guidance note on accrual of income on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made.

D) Non-recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of accounting, when the same is in accordance with AS-I notified by the Government E) It is one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the 70 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. F) The provisions of section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that 'Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies'. In the name of compliance with section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of instant case, the assessee was justified in following the policy of not recognizing these interest revenues till the point of time when the uncertainty to realize the revenues vanished. "

As the principles laid down in recognizing the income equally applies to the facts of the assessee's present case, we are of the view that the authorities below are not justified in bringing the impugned notional interest to tax. Accordingly, we delete the impugned additions. Thus, Ground no 1 is allowed."

46. In view of the above discussion, we are inclined to hold that the CIT(A) is justified in deleting the addition made by the AO as there is no income accrued to the assessee on the basis of agreement entered by the assessee with M/s. Janapriya Engineers Syndicate. We do not find any infirmity in the order of the CIT(A) and the same is confirmed. Grounds taken by the Revenue are rejected and the appeal is dismissed. ITA No. 1058/Hyd/2010 (assessee's appeal):

47. The issue involved in assessee's appeal is with regard to disallowance of expenditure invoking provisions of section 40(a)(ia) of Income tax Act, 1961, disallowance of travelling expenses and disallowance of foreign travel expenditure. 71 ITA Nos. 866 & 1058/Hyd/10

M/s. S.P. Real Estate Developers Pvt. Ltd.

==================================

48. The learned AR submitted that the assessee is a company engaged in the business of development and sale of real estate. The assessee company has taken up a real estate development project at Survey Nos. 74/P & 75/P situated at Borabanda, Fathenagar Village, Ashok Marg, Hyderabad. It has filed its return for AY 2008 09. In the assessment the AO has made the following disallowances/additions to the total income.

(a) Disallowance of expenditure invoking the provisions of Sec. 40(a)(ia).

(b) Disallowance of travelling expenditure.

49. The assessee has challenged the above disallowances/ additions before the CIT(A) and could not obtain any relief. The present appeal is filed by the assessee against confirmation of the above disallowances/additions made by the AO in the assessment order.

50. With regard to ground No. 1, the learned AR submitted that the Assessing Officer has erroneously invoked the provisions of sec. 40(a)(ia) and disallowed the expenditure ignoring the fact that the provisions of section will apply to the expenses outstanding at the end of the previous year. In the present case the amount of expenditure is actually paid and it is not outstanding at the year end. This fact has also not been considered by the CIT(A). The provisions of s. 40(a)(ia) are deeming provisions and are to be strictly interpreted. They 72 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== should not be pressed beyond the purpose for which they are created. The provisions of s. 40(a)(ia) are enacted with an objective of curbing bogus expenditure to be entered in the accounts without intention of making payment and to reduce tax liability. Therefore, the payments are made before the year end, such expenditure cannot be disallowed for default in the TDS. He relied on the following decisions:

(a) Merlyn Shipping and Transports vs. ACIT (2012) 20 Taxmann.com 244 (Vizag.)

(b) Rajamahendri Shipping & Oil Fields Services Ltd vs. Addl.

CIT (2012) 20 Taxmann.com 474 (Vizag.)

(c) K. Srinivas Naidu vs. ACIT (2010) 131 TTJ 17 (HYD)(UO) ITAT, Hyderabad Bench A'.

(d) Teja Constructions vs. ACIT (2010) 36 DTR (HYD) (Trib) 220.

(e) Jaipur Vidyut Vitran Nigam Ltd vs. DCIT 123 TTJ 888 (Hyd).

51. Further, the AR submitted that the AO as well as the CIT(A) have ignored the fact that the expenditure disallowed has not been claimed by the assessee in the computation of total income. The Expenditure has been added to the Closing Stock of Work in Progress. Therefore, it is unjustified to disallow the expenditure which was not at all claimed by the assessee and this is contrary to the law. Amounts which were not claimed as deduction cannot be added to the taxable income as a disallowance of expenditure. He prayed that the Bench may consider the facts and allow this ground.

52. With regard to disallowance u/s. 40(a)(ia) of the Act, we are inclined to direct the AO not to disallow the expenditure if TDS has been remitted by the assessee before due date of filing 73 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== of the return of income as held by the Hon'ble Andhra Pradesh High Court in the case of CIT vs. PEC Electricals Pvt. Ltd. in ITA No. 263 of 2013 dated 12.7.2013. The Hon'ble High Court held as under:

"With regard to the next question, the Tribunal by following the decision of the Kolkata High Court in CIT vs. Virgin Creations (GA No. 3200/2011), wherein it has been held that the amendment to the provisions of section 40(a)(ia) is retrospective in operation and consequently in respect of any payment of TDS made before the due date for the filing of the return of income, the provisions of section 40(a)(ia) cannot be invoked. Therefore, we do not find any reason to see that any further decision on this point is required by this Court."

53. Further, we also make it clear that if the expenditure is not debited to Profit and Loss A/c., the same could not be disallowed by invoking the provisions of section 40(a)(ia) of the Act. Accordingly, this issue is remitted back to the file of the AO to decide the issue afresh in the light of our above observations. This ground is partly allowed for statistical purposes.

54. With regard to Ground No. 2 regarding disallowance of foreign Travel Expenditure, the AR submitted that the assessee has claimed Rs. 7,11,099 towards foreign travel expenditure of the director of the company. It was explained to the Assessing Officer and also before the CIT(Appeals) that the Director of the company, Mr. Sameer Jain has visited Germany to finalize import of fabricated panels of Peri Frames from Germany. The AO was of the view that there is no necessity for the company to incur the travel expenditure, since the project has been handed over to M/s. Janapriya Engineers Syndicate P Ltd. The 74 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== AO and also the CIT(A) disallowed the Foreign Travel Expenditure, ignoring the fact that the Technology will help in the construction business of the assessee and this knowledge will also be useful in all its future projects. The Assessing Officer is not justified in deciding what is necessary and what is not necessary for the business as long as the expenditure is incurred for the purpose of its business. He prayed the Bench to allow the appeal of the assessee.

55. The learned DR submitted that the assessee has not produced any evidence either before the AO or before the CIT(A). Therefore, the addition confirmed by the CIT(A) is to be sustained.

56. In this case, Director of the assessee company went on foreign travel for the purpose of business. The expenditure on this could will be allowed if the same is incurred for the purpose of business. Before us, the learned counsel for the assessee pleaded that the expenditure is directly related to assessee's business. However, the CIT(A) recorded his finding that the assessee had failed to produce necessary evidence to prove that the expenditure is incurred for the purpose of business. It is also not brought on record by the lower authorities that the expenditure is in the nature personal expenses. Hence in the interest of justice, we remit the issue back to the file of the AO for fresh consideration with a direction to the assessee to place necessary evidence to prove that the expenditure is incurred for 75 ITA Nos. 866 & 1058/Hyd/10 M/s. S.P. Real Estate Developers Pvt. Ltd.

================================== the purpose of business. The Assessing Officer shall pass a fresh order on this issue after considering the evidence produced by the assessee company. This issue is allowed for statistical purposes.

57. In the result, Revenue appeal is dismissed and assessee's appeal is partly allowed for statistical purposes.

Order pronounced in the open Court on 12th February, 2014.

                Sd/                             Sd/
     (ASHA VIJAYARAGHAVAN)                (CHANDRA POOJARI)
         JUDICIAL MEMBER                 ACCOUNTANT MEMBER

Hyderabad, dated the 12th February, 2014
tprao

Copy forwarded to:

1. The Deputy CIT, Central Circle 6, 7th Floor, Aayakar Bhavan, L.B. Stadium Road, Basheerbagh, Hyderabad 4

2. M/s. S.P. Real Estate Developers Pvt. Ltd., 7 2, 2011 & 2012, Emerald House, SD Road, Secunderabad.

3. The CIT(A) I, Hyderabad.

4. The CIT (Central), Hyderabad.

5. The DR - Bench 'A', ITAT, Hyderabad

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S.P. Real Estate Developers Pvt. Ltd., ... vs Department Of Income Tax on 20 December, 2013