ISSUES OF ACCOUNTING (FOCUS :- REVENUE RECOGNITION AND ICAI GUIDANCE NOTE, 2012) & DIRECT TAXES...

ISSUES OFACCOUNTING (FOCUS :- REVENUE RECOGNITION AND ICAI GUIDANCE

NOTE, 2012) & DIRECT TAXES (FOCUS:- AMENDMENTS, 2013 & SELECTED CASE

LAWS) OF BUILDERS & DEVELOPERS.

H.G. JOSHI & CO. CHARTERED ACCOUNTANTS 1

CA HEMANT G JOSHI

DT: 17TH AUGUST 2013

RAJKOT BRANCH of WIRC of INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Full day Workshop on Real Estate Transactions.

OVERVIEW OF REAL ESTATE INDUSTRY

2H.G. JOSHI & CO. CHARTERED ACCOUNTANTS

OVERVIEW OF REAL ESTATE INDUSTRY

• KEY DRIVERS OF STRONG REAL ESTATE GROWTH : Demographic transition and rising urbanization Shortage of affordable housing. High infra spend in 12th plan. Attracting both domestic real estate developers and foreign

investors. Attracting FDI of $ 22 billion, in real estate investment

markets, of which $ 1.26 billion for first eleven months of 2012-13.

Investment of $ 1.2 trillion over next 20 years needed to modernize urban infrastructure.


•RESIDENTIAL MARKET OVERVIEW AND OUTLOOK : High inflation and expensive credit facilities to buyers.High absorption in the affordable mid income project segment and marginal increase in capital values of premium residential properties.Forecasted growth in average capital values of 5-7% year on year in 2013 and 6-8% year on year in 2014.Allocation of ` 2000 crores for creation of urban housing fund at the national housing bank to provide housing finance in urban areas.Additional 10% investment in housing finance companies by debt mutual funds, as permitted by SEBI.Demand projections across top seven cities (NCR-Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Kolkata and Pune) – 6,00,000 units in 2013 to 7,00,000 units in 2014.


• RETAIL MARKET OVERVIEW AND OUTLOOK : Slow down in revenue growth of organized retailers. Over 50% demand for mall space is expected to come from

top 7 cities. Favorable demographic change, rising disposable incomes and

urbanization, are the key growth drivers. Allowing FDI into multi brand retail will open entry of major

MNC retail brands in India. Demand projection across top 7 cities – 7million sq. feet in

2013 to 10 million sq. feet in 2014.


• COMMERCIAL OFFICE MARKET OVERVIEW AND OUTLOOK : Slow down in leasing activity and continuing pressure on

rentals. Slower absorption of office space in Banking, Financial

Services and Insurance (BFSI) and Information technology / Information technology enabled services (IT / ITeS ).

20% year on year decline in absorption of office space seen in 2012 at 27 million sq. feet in 7 major cities as against 35 million sq. feet in 2011.

Demand projections across top 7 cities – 42 million sq. feet in 2013 to 44 million sq. feet in 2014.


ICAI Guidance Note On Accounting for Real Estate

Transactions(Revised 2012)


• APPLICABILITY OF ANY GUIDANCE NOTES ISSUED BY ICAI: Guidance Notes are primarily designed to provide guidance to

members on matters which may arise in the course of their professional work and on which they may desire assistance in resolving issues which may pose difficulty.

Guidance Notes are recommendatory in nature. A member should ordinarily follow recommendations in a

guidance note relating to an auditing matter except where he is satisfied that in the circumstances of the case, it may not be necessary to do so.

Similarly, while discharging his attest function, a member should examine whether the recommendations in a Guidance note relating to an accounting matter have been followed or not. If the same have not been followed, the members should consider, keeping in view the circumstances of the case, a disclosure in his report necessary.


• BACKGROUND:Currently, no separate Accounting Standard (AS) in India , for

recognition of revenues from real estate sale transactions.In practice, the accounting and reporting for such real estate

sale transactions is based on certain principles specified in AS-9 – Revenue Recognition , AS-7 Construction Contracts ( Revised) , and further supplemented by Guidance Note on Recognition of Revenue by Real Estate Developers, issued by ICAI in June, 2006.

None of the Accounting Standards of ICAI mentions Completed Contract method. Even revised AS-7 indicates that CCM is not considered appropriate for Contractors.


• DIVERSITY IN APPLICATION OF OLD ICAI GN OF 2006 :Completed contract v/s Percentage Of Completion method

(POC). Method of determining POC – input v/s output method .Threshold of revenue recognition from booking advances

received from buyer.Cost of land and development rights , forming part of project

cost.Capitalization and manner of computation of borrowing cost.Liberal methods of early booking of revenues at different

stages of construction, allows accounting discretion and hence, leading to financial results of the realty companies , not comparable.


•ICAI GUIDANCE NOTE ON ACCOUNTING FOR REAL ESTATE TRANSACTIONS (REVISED 2012): Revised GN issued on 11th February, 2012 by ICAI supersedes the existing GN of June, 2006 and seeks to achieve uniformity in the accounting and reporting practices in Recognition of Revenues from Real Estate sale transactions.Recommendations in a Guidance Note is relating to an accounting matter of real estate transactions.Applies to attest function of the member of the ICAI and therefore, a member should ordinarily follow recommendations in the Guidance Note. If the ICAI GN have not been followed, the members should consider, keeping in view the circumstances of the case, a disclosure in his report necessary.Applies to ‘Real Estate Developers/ Property Developers’ or ‘Builders’.Projects in real estate which have commenced after 01.04.2012.Projects which have already commenced but revenue being recognized for the first time on or after 01.04.2012.Option to apply for running projects provided GN is applied from commencement of the project.


• PRINCIPALS OF ICAI GN 2012. Guidance Note is based on Principles of AS – 7 related to the

construction type contract and AS – 9 which are in substance similar to delivery of goods.

Basis of Revenue Recognition:For recognition of revenue in case of real estate sales, it is

necessary that ALL the following conditions, specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition are satisfied:

Ultimate collection is reasonably assured the property in the goods or all significant risks and rewards of

ownership have been transferred to the buyer Seller retains no effective control of the goods transferred to a

degree usually associated with ownership no significant uncertainty exists regarding the amount of the

consideration 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.


• PRINCIPALS OF ICAI GN 2012. Transferring significant risks and rewards of ownership to

the buyer Legally enforceable Agreement for sale.(allotment letter??). Revenue be recognized even though legal title of the

property is not transferred and possession is not given. Once seller transfers significant risks and rewards of

ownership to buyer, seller thereafter acts like a contractor. Accordingly revenue recognition will have to be as in Percentage Completion Method. (AS – 7)


•TRANSACTIONS OF REAL ESTATE COVERED BY ICAI GN, 2012.

•THE REVISED ICAI GN 2012 – •TRANSACTIONS WHICH ARE IN SUBSTANCE CONSTRUCTION TYPE CONTRACTS•PERCENTAGE OF COMPLETION METHOD (POCM)The GN mandates the application of the POC method in respect of transactions in real estate where the economic substance is similar to construction type contracts.Indicators for determining when the economic substance of the transactions is similar to construction type contracts ( Para 5.1 of ICAI GN 2012 ):Period of Project is in excess of 12 months and Project commencement date and Project completion date falls into different accounting periods.


•TRANSACTIONS OF REAL ESTATE COVERED BY ICAI GN, 2012.

•THE REVISED ICAI GN 2012 – •TRANSACTIONS WHICH ARE IN SUBSTANCE CONSTRUCTION TYPE CONTRACTS•PERCENTAGE OF COMPLETION METHOD (POCM)Project features are common to construction contracts – such as land development, structural engineering, architectural design, construction etc. Individual units are to be delivered to different buyers and such units are interdependent upon or interrelated to completion of a number of common activities or provision of common amenities.Construction or development activities form a significant proportion of the project activity.


IMPACT OF EXECUTION OF AGREEMENT FOR SALE WITH THE BUYER AND APPROACH TO APPLY POC METHOD :

Builder/Developer/Seller enters into an agreement for sale with the buyer at the initial stages of construction

Agreement for sale is legally enforceable on its execution between the parties and have an effect of transferring all significant risks and rewards of the ownership to the buyer.

Agreement for sale transfers Price risk to the buyer.The legal title to the property is deemed to have been

transferred to the buyer on entering into an agreement for sale and registration of an agreement for sale with the local authority, may be seen as formality which could be completed at a later date.

Agreement for sale confers rights to buyer to sell or transfer his interest in the property, without any material conditions, which are not affecting his rights to the benefits in the property.


IMPACT OF EXECUTION OF AGREEMENT FOR SALE WITH THE BUYER AND APPROACH TO APPLY POC METHOD :Agreement for sale does not give possession of the flat/unit to

buyer but creates rights to obtain possession of the property.Performance risk/Delivery risk is not transferred to the buyer

and ICAI GN 2012 is explicit to state in its Para 3.3 (in contrast to Para 3 of ICAI GN 2006 ) as under:

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.

Builder/Developer/Seller may decide that the construction risk is more critical than the price risk and may not apply POC method.


Para 3.4 of ICAI GN 2012 states as under : The application of the methods described in paragraph 3.3 above (POCM or CCM) requires a careful analysis of the elements of the transaction, agreement, understanding and conduct of the parties to the transaction to determine the economic substance of the transaction. The economic substance of the transaction is not influenced or affected by the structure and/or legal form of the transaction or agreement.Para 3.4 of ICAI GN 2012 read with Para 9 of ICAI GN 2006 requires careful assessment of the nature and extent of continuing involvement of Builder/Developer/Seller to determine whether the seller retains effective control after the execution of agreement for sale with the buyer.


Accordingly, sale and repurchase (buyback) agreement, which include put and call options, agreement with the guarantee of occupancy of the property for a specified period and transactions with related parties which are considered as non genuine, are not accepted for recognizing revenues, on the ground that the seller has retained effective control after the execution of agreement for sale.

When the Builder/Developer/Seller is obliged to perform any substantial acts after the transfer of all significant risks and rewards of ownership to buyer on execution of the legally enforceable agreement for sale with the buyer, then the revenue should be recognized on proportionate basis as the acts are performed by the seller.


When all the following events are completed, then revenues should be recognized based on POC method only:

• All critical approvals necessary for commencement of the project have been obtained (on the reporting date.)

•Expenditure incurred on construction and development costs (of saleable project on the reporting date ) is higher than 25 percent of the estimated total construction and development costs (of saleable project) .•At least 25 percent of the saleable project area is secured by (legally enforceable ) contracts or agreements, with buyers; and•At least 10 percent of the total revenue (receivable ) is realized at the reporting date from each ( legally enforceable ) contract and it is reasonable to expect that buyer will comply with the payment terms as defined in the contract. Overall restriction on recognition of revenue when there are outstanding defaults in payment by customers.


•PROJECT ICAI GN 2012 defines project as smallest group of dependent units / plots / saleable spaces which are linked with a common set of amenities. Manner in which Project is defined by ICAI GN 2012, it will impact revenues, costs and profits of the Project of Builder/Developer.Choice to the Developer to decide size of the project, consisting of more than one buildings with independent facilities and not dependent on the common facilities- eg: two buildings are being constructed adjacently and simultaneously with independent facilities and not dependent on common facilities – In this case, there could be One Project of two buildings or Two separate Projects of individual building. Project may be of Development of township or of each building of the township…? Common underground water tank to supply water to more than one building… all buildings form part of one ProjectCommon swimming pool – is it critical for occupancy of more than one building…?


•CRITICAL APPROVALS NECESSARY FOR THE PROJECTEnvironmental and other clearances,Approval of building plans , design etc. , Title to land or other rights to development/construction, Change in land use.

PROJECT COSTS –NORMALLY COMPRISES OF :

•COST OF LAND AND COST OF DEVELOPMENT RIGHTS : cost for land and for acquisition of land,cost of development rights,stamp duty, registration, brokerage and incidental expenses etc,Rehabilitation costs –Cost incurred for meeting obligations to rehabilitate the displaced people by providing alternative property/accommodation and/or incurring other social obligation.


•BORROWING COSTS :Incurred directly in relation to the project in accordance with AS-16Borrowing cost for acquiring land and development rights.- Borrowing costs incurred while land is under development are capitalized during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization. (Para 16 of AS-16)Capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted (Para 17 of AS 16).However, capitalization of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. Capitalization of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. (Para 18 of AS 16)


•BORROWING COSTS :When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalization of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete. (Para 21 of AS 16)Borrowing cost capitalization will be based on actual cash outflowBorrowing cost on the cash outflow on security deposits given for the purpose of securing land or development rights cannot be capitalized, as security deposit is not part of project cost (EAC ICAI).those which are apportioned to the project


• CONSTRUCTION AND DEVELOPMENT COSTS OF THE PROJECT Cost directly related to the specific project.Land conversion costs, betterment charges, municipal sanction fee

and other charges for obtaining building permissions.Site labour costs, including site supervision.Costs of materials used in construction or development of

property.Depreciation of plant and equipment used for the project.Costs of moving plant, equipment and materials to and from the

project site.Costs of hiring plant and equipment.Costs of design and technical assistance that is directly related to

the project.Claims from third parties.Estimated costs of rectification and guarantee work, including

expected warranty costs – incurred during or post completion of construction.


•CONSTRUCTION AND DEVELOPMENT COSTS OF THE PROJECT

Cost which are attributable to project activity in general and which can be allocated to the specific project (to be allocated based on normal level of project activity):InsuranceCost of design and technical assistanceConstruction or development overheads ( includes preparation and processing of construction personnel payroll cost)Borrowing costs


•Construction and development costs –exclusion, if they are material :General administration costs.Selling costs (like brokerage charges).Research and development costs.Depreciation of idle plant and equipment.Cost of unconsumed or uninstalled material delivered at site.Payments made to sub-contractors in advance of work performed.

•Project revenues includes consideration received or receivable from :Sale of plotsUndivided share in landSale of finished / semi-finishes structuresConsideration for constructionConsideration for amenities and interiorsConsideration for parking spacesSale of development rights


• Project revenues excludes :VAT, Service Tax, Stamp duty etc. collected from buyers and

paying to the authorities concerned, as an agent for buyers.

• Project revenues should be split into identifiable components such as:

Construction and delivery of real estate unit.Property management /maintenance services after the

occupancy of real estate unit.Receipt towards extra amenities and additional decorative

fittings.ICAI GN 2012 does not specify any method for split up of

project revenues and IFRS suggests such allocation on the basis of fair market value of each of component of project revenues.


Approach to apply POC method:

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Components of Costs

Land Cost (A)

Construction Cost till Reporting date.

(B)

Estimated total construction cost on completion of the project.

(C )

Estimated Project Costs on completion of the project

(D)= (A)+ (C) i.e Land Cost + Estimated total Construction Cost on completion of the project

H.G. JOSHI & CO. CHARTERED ACCOUNTANTS

Approach to apply POC method:

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Components of Revenues Threshold limit

Total saleable area of the Project (E)

Area sold till the reporting date, pursuant to the legally enforceable agreement for sale, executed with the buyers.

(F) At least 25% of the saleable project area is secured by legally enforceable agreement for sale, executed with the buyers

Total Sales consideration receivable as per agreement for sale executed with the buyer

(G)

Advance sales consideration received till the reporting date, pursuant to the legally enforceable agreement for sale, executed with the buyers

(H) At least 10% of the total sales consideration is received as at reporting date, as per legally enforceable agreement for sale, executed with the buyers


Computation of % of construction work completed Minimum threshold

limit

Construction cost till Reporting date.Estimated total construction cost on completion of the project.

(B)(C)

25% of (C)

Computation of % of total work completed

Land cost + Construction cost till Reporting dateEstimated Project Costs on completion of the project

(A) + (B)(D)

Revenue recognized to the profit and loss account for the reporting year ( I)

(G) ** (A) + (B) (D)

Proportionate cost to be debited to the profit and loss account for the reporting year (J)

(F)**(A)+(B) (E)

Income from the project for the reporting year (I)- (J)

Work in Progress to be carried forward to Balance Sheet (A)+(B)-(J)


ICAI GN 2012 ILLUSTRATION

Total saleable area 20,000 Sq. ft.

Estimated Project Costs( This comprises land cost of Rs. 300 lakhs andconstruction costs of Rs. 300 Lakhs)

Rs. 600 Lakhs

Total construction Cost incurred till end of reportingperiod(This includes land cost of Rs 300 Lakhs and constructioncost of Rs 60 Lakhs)

Rs. 360 Lakhs

Total Area Sold till the date of reporting period 5,000 Sq. ft.

Total Sale Consideration as per Agreements of Saleexecuted

Rs. 200 Lakhs

Amount realized till the end of the reporting period Rs.50 Lakhs

Percentage of completion of work 60% of total project cost including land cost ( 360/600*100) or 20% of total construction cost (60/300*100)

REVENUE RECOGNITION : cannot be made since at least 25% of total construction/development cost not incurred, though other three criteria are complied with.

If the work completed till end of reporting period is (This includes land cost of Rs 300 Lakhs and construction cost of Rs 90 Lakhs)

Rs. 390 Lakhs

Percentage of completion of work would be 65% of total project cost including land cost ( 390/600*100) or 30% of construction cost ( 90/300*100)


The enterprise would be able to recognize revenues at the end of the accounting period. The revenue recognition and profits would be as under:

Revenue recognized(65 % of Rs 200 Lakhs as per Agreement of Sale)

Rs. 130 Lakhs

Proportionate cost (5000 sq.ft./20,000 sq.ft.) X390

Rs. 97.50 Lakhs

Income from the project Rs. 32.50 Lakhs

Work in progress to be carried forward ( Rs 390 lacs less Rs 97.50 lacs)

Rs. 292.50 Lakhs


Profit & Loss A/c

Profit and Loss Account

To Land 300.00 By Sales 130.00

To Cost of constn/dev

90.00 ByWIP 292.50

total 390.00

To Gross profit

32.50

Total 422.50 Total 422.50


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•Revenue from other methods (i.e. output methods) should not excess revenue as per input methods.•Progress payments and advances received often do NOT reflect work performed.


•ACCOUNTING FOR LOSS MAKING PROJECTS UNDER POCM :

Where it is probable that total project costs will exceed total eligible project revenues, loss to be recognized as an expense immediately.

Loss to be determined irrespective of :Commencement of project work ; orStage of completion of project activity

•CHANGE IN ACCOUNTING ESTIMATE:

Effect of changes in estimate of project cost and project revenues is to be accounted in the period in which such changes are made.Changes may be arising out of cancellation of agreement for sale in respect of which revenues are previously recognized.Changes may be arising out of property or part of the property is subsequently earmarked for own use.



COST OF ACQUISITION OF TDR

*Fair market value may be determined by reference either to the asset or portion thereof given up or to the fair market value of rights acquired whichever is more clearly evident.

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Method of purchase Determination of cost

Direct purchase Cost of purchase

Development and construction of built-up area

Amount spent on development and construction of built-up area

Giving up rights over existing structures or open land

Lower of * Fair market value OR Net book value


ACCOUNTING FOR SALE OF TDR• Revenue should be recognized when both the following

conditions are fulfilled:• Title to development rights is transferred • It is not unreasonable to expect ultimate realization


•Disclosures under ICAI GN 2012 - POCM•Amount of project revenues recognized during the period•Methods used to determine project revenues•Method used to determine stage of completion of the project.•Aggregate amount of costs incurred and profits recognized to date (less losses recognized)•Amount of advances received•Amount of WIP and value of inventories•Excess of revenues recognized over actual bills raised (i.e. unbilled revenues )


• Draft Accounting Policies to be included in Notes to Accounts forming part of Financial Statements of Builders & Developers:

Operating Cycle• The normal operating cycle in respect of operation relating to under

construction real estate project depends on signing of agreement, size of the project, phasing of the project, type of development, project complexities, approvals needed & realization of project into cash & cash equivalents and ranges from 2 to 5 years. Accordingly assets & liabilities have been classified into current & non-current based on operating cycle of respective projects.

Inventories• Inventories are valued as under:a) completed Flats/Units - at lower of cost or Market valueb) construction Work-in-Progress - at costConstruction Work-in-Progress includes cost of land, premium for

development rights, construction costs, allocated interest and expenses incidental to the projects undertaken by the company


Revenue Recognition• The company is following the “Percentage of completion Method”

of accounting. As per this method, revenue from sale of properties is recognized in statement of Profit & loss in proportion to the actual cost incurred as against the total estimated cost of projects under execution with the company on transfer of significant risk and rewards to the buyer. Up to 31st March 2012, revenues was recognized only if the actual project cost incurred is 20% or more of the total estimated project cost.

• Effective 1st April 2012, in accordance with the “Guidance note on accounting for Real Estate Transactions (Revised 2012)” (Guidance note), all projects commencing on or after the said date or projects which have already commenced, but where the revenue is recognized for the first time on or after the above date, construction revenue on such projects have been recognized on percentage of completion method provided the following thresholds have been met:


Revenue Recognition

(a) all critical approvals necessary for the commencement have been obtained;

(b) The expenditure incurred on construction and development costs is not less than 25 per cent of the total estimated construction and development costs;

(c) at least 25 percent of the saleable project area is secured by contracts or agreements with buyers; and

(d) at least 10 percent of the agreement value is realized at the reporting date in respect of such contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts.


Revenue Recognition• Determination of revenues under the percentage of completion method

necessarily involves making estimates, some of which are of a technical nature, concerning, where relevant, the percentages of completion, costs to completion, the expected revenues from the project or activity and the foreseeable losses to completion. Estimates of project income, as well as project costs, are reviewed periodically. The effect of changes, if any, to estimates is recognized in the financial statements for the period in which such changes are determined. losses, if any, are fully provided for immediately.

• Revenue on bulk deals on sale of its properties is recognized on execution of documents.

• Income from operation of commercial complexes is recognized over the tenure of the lease / service agreement.


Development Manager Fees• The company has been entering into Development & Project

Management agreements with landlords. Accounting for income from such projects is done on accrual basis on percentage of completion or as per the terms of the agreement.

Borrowing Cost• Interest and finance charges incurred in connection with

borrowing of funds, which are incurred for the development of long term projects are transferred to construction Work in Progress / Due on Management Project, as a part of the cost of the projects at weighted average of the borrowing cost / rates as per agreements respectively.

• Other borrowing costs are recognized as an expense in the period in which they are incurred.


Allocation of Expenses• Corporate Employee Remuneration and administration

expenses are allocated to various projects on a reasonable basis as estimated by the management.


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OTHER ISSUES ON ACCOUNTING :

•Valuation of Inventories:As per AS – 2 inventories should be valued at lower of cost and net realizable value (AS 2 para 5)

•Cost of Inventories (WIP):Cost of inventories should comprise of all cost of purchases, cost of conversion and other costs incurred to bring the inventories to their present location and condition (AS 2 para 6)

•Accounting of borrowing costs: (AS 16 - para 6)Borrowing costs that are directly attributable to acquisition, production and construction of a qualifying asset should be capitalized.Other borrowing costs should be recognized as EXPENSES in the period in which they are incurred.


IMPORTANT TERMS OF REAL ESTATE BUSINESS


IMPORTANT TERMS OF REAL ESTATE BUSINESS

• PROPERTY The Supreme Court defined the term Property in the

landmark case of R.C. Cooper v/s Union of India ( AIR 1970 SC 564 ) as under :

“ The highest right a man can have to do anything, being that right which on has, lands or tenements, goods or chattels, which does not depend on another’s courtesy, it includes ownership, estates and interest in corporate things and also rights such as trademarks, copyrights, patents and even rights in personam, capable of transfer or transmission such as debts and signifies a beneficial right to or a thing considered as having a money value especially with reference to transfer and succession and to their capacity of being injured.”


TYPES OF PROPERTY

• CORPOREAL PROPERTY means real or personal property having material form or structure , such as a house, furniture, land, equipment or an automobile.

• CORPOREAL PROPERTY can be either immovable property or movable property.

• INCORPOREAL PROPERTY includes intangible personal property lacking in physical substance, such as property rights, leases, licenses and mortgages, intellectual property.


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•IMMOVABLE PROPERTY

•The Transfer of Property Act, 1882 •The term immovable property is not defined under the Transfer Of Property Act.

•Section 3 of the Transfer Of Property Act merely states that immovable property “ does not include standing timber, growing crops or grass”.

•The General Clauses Act, 1897.•Section 3(26) of the General Clauses Act defines “immovable property” as:“Immovable property shall include land, benefit to arise out of land, things attached to the earth, or permanently fastened to anything attached to the earth.”

•Section 3 of the Transfer of Property Act defines “attached to the earth” means –• rooted in the earth, as in the case of trees and shrubs;•embedded in the earth, as in the case of walls or buildings; or•attached to what is so embedded for the permanent beneficial enjoyment of that to which it is attached.


• The Indian Registration Act, 1908.• Section 2(6) of the Indian Registration Act defines “immovable property” as: “Immovable property includes land, buildings, hereditary allowances, rights to

ways, lights, ferries, fisheries, or any other benefits to arise out of land and things attached to earth, but not standing timber, growing crops of grass.”

• The Income Tax Act, 1961.• Section 269UA(d) of the Income Tax Act defines "immovable property" as "immovable property" means—• (i) any land or any building or part of a building, and includes, where any land

or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also.

• Explanation.—For the purposes of this sub-clause, "land, building, part of a building, machinery, plant, furniture, fittings and other things" include any rights therein ;

• (ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building ;


MOVABLE PROPERTY

• The Transfer of Property Act, 1882• The Transfer Of Property Act does not define “movable property”.

• The General Clauses Act, 1897.• Section 3(35) of the General Clauses Act defines “movable property” as : “property of every description except immovable property”.

• The Indian Registration Act, 1908.• Section 2(9) of the Registration Act defines movable property as: "movable property" includes standing timber, growing crops and grass, fruit upon and juice

in trees, and property of every other description, except immovable property;

• The Income Tax Act, 1961. Section 2(14) defines “capital asset “… but does not include-(ii) personal effects, that is to say, movable property (including wearing apparel and furniture)

held for personal use by the assessee or any member of his family dependent on him, but excludes—

(a) jewellery;(b) archaeological collections;(c) drawings;(d) paintings;(e) sculptures; or(f) any work of art….


BUILDER DEVELOPER CONTRACTOR

• Builds for himself & also for others on contract.

• Develops a residential/commercial complex in his name on his own or through another person.

• General term for any person carrying on business under a contract.

• Project known by name of the party they build for.

• Sells the units under his banner.

• Has a fixed price & receives payments to the extent of work Completed


• PROMOTER• The Maharashtra Ownership Flats ( Regulation of the

Promotion of Construction, Sale, Management & Transfer) Act, 1963 (MOFAct)

• Section 2(c) of the MOFAct, 1963 defines Promoter as: “promoter” means a person who constructs or causes to be constructed a block or building of flats; or apartments for the purpose of selling some or all of them to other

persons, or to a company, co-operative society or other association of persons,

and includes his assignees; and where the person who builds and the person who sells are different persons, the term includes both;


• Chief features of Promoters: The Promoter is responsible for paying all outgoings including taxes in respect

of the flats/units until he transfers the property to the flat owners/ society / company, etc.

Once the approved plans and specifications are disclosed to the flat/unit purchasers, the promoter cannot without the purchasers’ previous consent make any alterations or additions in the structures of the flats/units. In case the flat/unit purchaser notifies any defect in the building/materials used/ any unauthorized changes, etc. within three years of taking possession, then the promoter shall, if possible, rectify the same free of cost.

If the promoter fails to give possession of the flat/unit as per the date specified in the agreement or any further agreed date or in case of any reasons beyond control within a further extended time, then the promoter shall be liable, on demand to refund the amounts received by him along with interest, if any per annum, till the date of refund.

After execution of the agreement for sale, the promoter cannot create any mortgage/charge on the flat/unit without the consent of the flat purchaser.


• SALE & CONTRACT FOR SALE

• Transfer Of Property Act, 1882 & MOFAct. Section 54 of the Transfer Of Property Act defines “Sale” and

“contract for sale” as:• "Sale" is a transfer of ownership in exchange for a price paid

or promised or part-paid and part-promised.• Sale how made: Such transfer, in the case of tangible

immovable property of the value of one hundred rupees and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument.

• In the case of tangible immovable property of a value less than one hundred rupees, such transfer may be made either by a registered instrument or by delivery of the property.

• Delivery of tangible immovable property takes place when the seller places the buyer, or such person as he directs, in possession of the property.


• Contract for sale: A contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties.

• It does not, of itself, create any interest in or charge on such property.

• Impact of contract for sale: A contract for sale is mere agreement of a proposed sale of an

immovable property, on the terms and conditions mentioned in the contract. The intending purchaser only has a right to get conveyance as per the terms of contract. It is only upon delivery of possession that the purchaser becomes the owner.

A contract for sale need not be registered as per explanation to Section 17 of the Indian Registration Act, 1908.

A contract for sale is to be registered as per Section 4 (2) of the MOFAct, and to be presented for registration under Indian Registration Act, 1908, by the Promoter under MOFAct.


• FSI OR FLOOR SPACE INDEX• Regulation 2(3)(42) of The Development Control Regulations

for Greater Bombay, 1991 defines “Floor space index (FSI) “ as “the quotient of the ratio of the combined gross floor area of all floors, excepting areas specifically exempted under these regulations, to the total area of the plot, viz:-

• Floor Space Index ( FSI ) = Total covered area on all floorsPlot area• FSI is the ratio of constructed, built up area of all floors on a

property to the plot area.


• TDR OR TRANSFER OF DEVELOPMENT RIGHTS UNDER THE DCR, MUMBAI.

• Rule 34 of The Development Control Regulations for Greater Bombay, 1991 defines TDR as the developmental potential of a plot of land which may be separated from the land itself and may be made available to the owner of the land in the form of TDR.


DIRECT TAX ISSUES ON BUILDERS & DEVELOPERS


• TURNOVER FOR TAX AUDIT U/S 44AB OF THE INCOME TAX ACT

• Whether advance payment received from prospective buyers by Builder/Developer is “Gross receipt “ for the purpose of section 44AB?

• Judgment in favor of Income Tax Department.

• DCIT vs Gopalkrishna Builders (272ITR 1) (91 ITD 124) ITAT Lucknow

• Gross receipts mentioned u/s 44AB includes money taken by the builder and shown as advance in balance sheet. Gross receipts be considered for section 44AB: Advance receipts received will be considered as ‘Gross Receipts’ if such amounts have profit making quality in them. If accounts are not subjected to Tax audit, very objective of section 44AB will be defeated.


• TURNOVER FOR TAX AUDIT U/S 44AB OF THE INCOME TAX ACT

• Contrary Judgment by ITAT Mumbai:

• Siroya Developers vs DCIT [ ITA no 600/MUM/2010/12.01.2011]• In case of project completion method, advance received will be treated as liability

and sales be recognized in the year of completion of the project. In case of percentage completion method, turnover will be accounted in Profit & loss

Statement each year and will be considered for Tax Audit.

• ACIT vs B K Jhala & Associate (Pune Branch) 69 ITD 14

• Turnover, sales Gross Receipts are commercial terms.• Gross Receipts : refer to Gross inflow of funds arising in the Turnover for Tax Audit

ordinary course of sale of goods / services to the BUYER.• - In case of WIP :There is no buyer.• Two parties required for ‘sale’.• There is no profit element.• ‘Turnover’ : essentially requires transfer of title to the Goods to the buyers


FINANCE ACT 2013DIRECT TAX AMENDMENTS

AFFECTING BUILDERS AND DEVELOPERS


65

SECTION AMENDMENTS IN BRIEF

43CA ( New Section) Stamp duty valuation to be considered while computing gains on transfer of land / building held as stock-in-trade

56(2)(vii) Immovable property received for inadequate consideration, now taxed

194-IA TDS on transfer of immovable property


• SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION FOR TRANSFER OF ASSETS OTHER THAN CAPITAL ASSETS IN CERTAIN CASES

• SECTION 43CA.

1. Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both,

is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer,

the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such

asset, be deemed to be the full value of the consideration received or accruing

as a result of such transfer.

2. The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far as may be, apply in relation to determination of the value adopted or assessed or assessable under sub-section (1).


•SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION FOR TRANSFER OF ASSETS OTHER THAN CAPITAL ASSETS IN CERTAIN CASES

•SECTION 43CA.

3. Where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same, the value referred to in sub-section (1) may be taken as the value assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer on the date of the agreement.

4. The provisions of sub-section (3) shall apply only in a case where the amount of consideration or a part thereof has been received by any mode other than cash on or before the date of agreement for transfer of the asset.


• FINANCE BILL 2013 : PROVISIONS RELATING TO DIRECT TAXES• WIDENING OF TAX BASE AND ANTI TAX AVOIDANCE MEASURES• Computation of income under the head “Profits and gains of business or

profession” for transfer of immovable property in certain cases

• Currently, when a capital asset, being immovable property, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then such value (stamp duty value) is taken as full value of consideration under section 50C of the Income-tax Act. ( Section 50C is constitutionally held valid in case law of Bhatia Nagar Premises Co-operative Society Ltd. V. Union of India [2011] 334 ITR 145/197 TAXMAN 249/[2010] 6 TAXMANN.COM 120 (Bom) and in the case of K.R. Palanisamy vs. UOI (2008) 306 ITR 61(Mad))

• These provisions (Section 50C ) do not apply to transfer of immovable property, held by the transferor as stock-in-trade, ( as decided by judgments in the case of K.R. Palanisamy vs. UOI (2008) 306ITR 61(Mad) and CIT-II v/s Kan Construction and Colonizers (P.) Ltd. (2012) 208 Taxman 478 (All))


• FINANCE BILL 2013 : PROVISIONS RELATING TO DIRECT TAXES• WIDENING OF TAX BASE AND ANTI TAX AVOIDANCE MEASURES• Computation of income under the head “Profits and gains of business or

profession” for transfer of immovable property in certain cases

• It is proposed to provide by inserting a new section 43CA that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business of profession”.

• It is also proposed to provide that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

• These amendments will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years


DATE OF APPLICABILITY:These amendments will take effect from 1st April, 2014 and will, accordingly, apply in relation to the Assessment Year 2014-15 and subsequent Assessment Years. Thus, all transactions of consideration received or accruing as a result of the transfer of an asset, ( other than capital asset ) being land or building or both, to the Assessee, who is declaring business profits, will be covered.


What is “Transfer” ?

Is Section 2(47) to be extended to this Section 43CA or to any other meaning, definition of transfer is to be adopted?

"transfer", in relation to a capital asset, includes,—•the sale, exchange or relinquishment of the asset ; or•the extinguishment of any rights therein; or•the compulsory acquisition thereof under any law ; or•in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ;][or]Iva. the maturity or redemption of a zero coupon bond; or]v. any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; orvi. any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.[Explanation 1].—For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA.][Explanation 2.—For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;]


R.Gopinath (HUF) v. ACIT [2010] 5 taxmann.com 80 (Chennai - ITAT)The sale/transfer of stock-in-trade cannot be equated with the transfer of capital asset under Section 2(47).Once capital asset is converted into stock-in-trade provision of Section 2(47) becomes irrelevant and does not applyThe meaning of the words "otherwise transferred" in Section 45(2), should be according to its ordinary popular and natural sense, and it should not include a transaction referred to under sub-clause (v) of sub-section (47) of Section 2 in relation to a 'capital asset’ Hence, the definition of “transfer” as provided in Section 2(47) is not applicable to transfer of asset other than capital asset/stock-in-trade.


• The transfer of stock – in- trade of the Assessee, declaring business profits: Section 145 :1. Income chargeable under the head "Profits and gains of business or profession" or

"Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

2. The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

3. Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.]

Section 28, Section 41 & Section 176 defines scope of chargeability of income under the head profits and gains of business.

Method of recognition of revenues by the Builders/Developers will decide the manner of applying Section 43CA in his case.

Builder/Developers recognizes revenues either under POCM or CCM, of accounting regularly employed by him.


SECTION 43CA & RECOGNIZING REVENUES BY BUILDERS/DEVELOPERS

Under the POC Method of recognizing revenues as per ICAI GN 2012, the Builder/Developers is obliged to recognize revenues in respect of legally enforceable contract for sale, executed with the buyers, on which minimum 10% of sales price is received, provided construction costs of minimum 25 % of estimated total construction costs is incurred.

Sale/Transfer of stock-in-trade, being land or building or both, will depend on the terms and conditions of the legally enforceable agreement for sale with the buyer, which has the effect of transferring all significant risks and rewards of ownership to the buyer, even though the legal title is not transferred or the possession of the real estate is not given to the buyer.

Once the seller has transferred all the significant risks and rewards to the buyer, any acts on the real estate performed by the seller, are in substance, performed on behalf of the buyer in the manner similar to a contractor. Accordingly, revenue in such cases is recognized by applying the percentage of completion method on the basis of the methodology explained in AS 7, Construction Contracts.


AGREEMENT AND REGISTRATION

Section 43CA requires comparison of consideration as per agreement and stamp duty value, for transfer of the asset, as at the date of agreement, provided part of the consideration is received by any mode other than cash, on or before the date of agreement.

Such agreement need not be contract for sale, which is intended for registration at a later date.

The Indian Contract Act has defined “contract” in Section 2(h) as "an agreement enforceable by law".

This definition of “contract” resolves into two distinct parts. First, there must be an agreement. Secondly, such an agreement must be enforceable by law. To be enforceable, an agreement must be coupled with an

obligation. A contract therefore, is a combination of the two elements:

(1) an agreement and (2) an obligation.


AGREEMENT AND REGISTRATION

Agreement An agreement occurs when two minds meet upon a common purpose, i.e. they mean the

same thing in the same sense at the same time. The meeting of the minds is called consensus-ad-idem, i.e., consent to the matter. Section 2(e) of the Indian Contract Act provides that "every promise and every set of

promises forming the consideration for each other is an agreement.“

Obligation An obligation is the legal duty to do or abstain from doing what one has promised to do or

abstain from doing. A contractual obligation arises from a bargain between the parties to the agreement who are

called the promisor and the promisee. Section 2(b) says that when the person to whom the proposal is made signifies his assent

thereto, the proposal is said to be accepted; and "a proposal when accepted becomes a promise."

In broad sense, therefore, a contract is an exchange of promises by two or more persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is recognized and enforced by law.


AGREEMENT AND REGISTRATION Agreement between parties will fix the consideration payable

for the transfer of asset at a future date. The date of such agreement Is relevant for fixing stamp duty value, provided part consideration is received by seller by any mode other than cash on or before the date of agreement.

It is clear from the language of Section 43CA(3) that above agreement is not intended to be registered, as Section 43CA(3) clearly states the date of registration of (contract for sale of ) such transfer of asset and not the date of registration (of such agreement).

The document which transfers asset in favor of buyer i.e contract for sale, requires registration under MOFAct and consideration stated in such contract for sale, whether registered or not, is to be compared with stamp duty value of the asset, as prevailing on the date of agreement between the parties.


The agreement as required by Section 43CA must comply with the requirements of section 2(e) of the Indian Contract Act, which provides that "every promise and every set of promises forming the consideration for each other is an agreement.“

Hence, such agreement must contain the following particulars and to be signed by both parties :

a. Part payment/ part consideration received by seller by any mode other than cash.

b. Name, Complete address and PAN of transferor and transferee.c. Property description and identification with complete address, d. The date by which possession of the flat would be handed over,e. The carpet area and balcony area of the flat(shown separately),f. The price of the flat along with installments in which the same is to be

paid, price for extra amenities, g. The precise nature of organization of flat purchasers to be formed,h. The nature, extent, description and percentage of undivided interest in

the common areas and facilities,i. The copies of title certificate, property card extract, approved plans, IOD,

CC etc.j. Probable date of execution of regular contract for sale as per MOFAct, etc.


Is letter of allotment/MOU/letter of intention etc. qualify as an agreement?

A contract for sale need not be registered as per explanation to Section 17 of the Indian Registration Act, 1908 as follows,

Section 17 Documents of which registration is compulsory(b) other non-testamentary instruments which purport or operate to create,

declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees, and upwards, to or in immovable property;

[Explanation: A document purporting or operating to effect a contract for the sale of immovable property shall not be deemed to require or ever to have required registration by reason only of the fact that such document contains a recital of the payment of any earnest money or of the whole or any part of the purchase money.]

A contract for sale is to be registered as per Section 4 (2) of the MOFAct, and to be presented for registration under Indian Registration Act, 1908, by the Promoter.

Section 47 - Time from which registered document operates• A registered document shall operate from the time from which it would

have commenced to operate if no registration thereof had been required or made, and not from the time of its registration.


What types of Assets are considered as Land or Building or both?

Whether Section 43CA applies to transfer of Agricultural Land?

Whether Section 43CA applies in case of Slump Sale?

Consideration received in mode other than cash:

What includes the term “Mode other than cash”? (Book entries, transfer by agreement to exchange etc)

Whether Section 43CA applies on conversion of a capital asset into stock in trade ? Or on transfer of such stock in trade ?



Year & TaxabilityProject completion methodPercentage completion method

Position in case of Buyer : Section 56(2)(vii)(b) : Immovable property received for inadequate considerationApplicable for A.Y 2014-15 onwards.If a buyer is an Individual or Huf, then he will be taxed for differential amount in view of amendment in Section 56(2)(vii)(b). However buyer will get the benefit of additional cost of acquisition as per Section 49(4) of the Act.

Is it possible to capitalize additions u/s 43CA in the books of the seller ? Refer Explanation 2 to Section 271(1)(c) of the Income Tax Act.

• OTHER BENEFITS & NECESSITY FOR REGISTRATION OF DOCUMENTS:-• Generally, registered documents are admissible as evidence in court of law. In other words,

some unregistered documents are considered as invalid document and may not be accepted as evidence in court of law.

• Registered Documents safeguards the interest of purchaser as it takes effects in respect of property comprised therein as against every unregistered documents relating to the same property. In other words, registration of documents preserves the title of purchaser as regard to such property.

• The Registered document is the notice to the public at large in respect of particular property, which is subject matter of registration. Registration is a process by which such fact and contents of the same are recorded in the government records maintained by the Registrar, which can be made available to the any body – including public at large.

• As per amendment effected on 25-9-2001 under the Indian Registration Act, 1908. Registration is made compulsory in respect of certain immovable properties including transfer of flat in registered co-operative housing society.


•OTHER BENEFITS & NECESSITY FOR REGISTRATION OF DOCUMENTS:-•In recent time, many properties purchased are financed by borrowing through various financiers. Housing loan is financed by banks, financial institutions etc. The disbursement of loan is made by such financiers only on submitting originally registered documents. Sometimes, such financier insists to have earlier chain of documents duly registered before disbursement of loan. For such types of finances in respect of property, registration is pre-condition of finance. It is proposed to impound documents on which proper stamp duty is not paid, such financial institute are proposed to held is able for such stamp duty.•Registration is normally done only after payment of proper stamp duty as regards to those documents. A registered document serves as a proof of payment of proper stamp duty. However, the sub-registrar can refuse acceptance of document for registration on the fact that the proper stamp duty has not been paid. The reason for the same is that the sub-registrar is not a collector, who can impound the documents. For determination of proper stamp duty, party has remedy to approach collector of stamps for adjudication. If proper stamp duty is paid & other requirements are satisfied, generally Registrar registers such document.•With effect from 1-4-2003, under Section 50 C of Income Tax Act, 1961, the market value calculated for the purpose of stamp duty is accepted by Income Tax Department as base for valuation of property for capital gain computation purpose. Stamp Duty Authority calculates this stamp duty as per Government Ready Recknor. Registration department registers documents only on payment of proper stamp duty. Hence, the registered documents reflects true market value on which stamp duty is paid and for capital gain purpose income-tax department accept the value determined by stamp duty and registration authorities.•The Registrar or Sub-Registrar while registering any agreement for purchase or sale of an immovable property having higher of recknor value or agreement value adopted is ` 30 Lakh and more, are required to file annual information return (AIR) u/s 285 BA of Income Tax Act, 1961. The AIR provides tool for checking & crosschecking of such transaction of immovable property of ` 30 Lakh and above.•As per the amendment dtd. 24-9-2001 in Indian Registration Act, 1908 which specified that section 53A of Transfer of Property Act, document executed in part performance of the contract requires compulsory registration.•With effect from 01.06.2013, TDS of 1% is to be deducted on purchase of any immovable property having agreement value above Rs. 50 lakh and registration of the document may be refused for the non payment of TDS by the purchaser.


SECTION 194IA : PAYMENT ON TRANSFER OF CERTAIN IMMOVABLE PROPERTY OTHER THAN AGRICULTURAL LAND

194-IA. (1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax thereon.(2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

Explanation.— For the purposes of this section,—(a) "agricultural land" means agricultural land in India, not being a land situate in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2;(b) "immovable property" means any land (other than agricultural land) or any building or part of a building.


WIDENING OF TAX BASE AND ANTI TAX AVOIDANCE MEASURES

Tax Deduction at Source (TDS) on transfer of certain immovable properties (other than agricultural land)There is a statutory requirement under section 139A of the Income-tax Act read with Rule 114B of the Income-tax Rules, 1962 to quote Permanent Account Number (PAN) in documents pertaining to purchase or sale of immovable property for value of Rs.5 lakh or more. However, the information furnished to the Income Tax Department in Annual Information Returns by the Registrar or Sub Registrar indicate that a majority of the purchasers or sellers of immovable properties, valued at Rs.30 lakh or more, during the financial year 2011-12 did not quote or quoted invalid PAN in the documents relating to transfer of the property. Under the existing provisions of the Income-tax Act, tax is required to be deducted at source on certain specified payments made to residents by way of salary, interest, commission, brokerage, professional services, etc. On transfer of immovable property by a non-resident, tax is required to be deducted at source by the transferee. However, there is no such requirement on transfer of immovable property by a resident except in the case of compulsory acquisition of certain immovable properties. In order to have a reporting mechanism of transactions in the real estate sector and also to collect tax at the earliest point of time, it is proposed to insert a new section 194-IA to provide that every transferee, at the time of making payment or crediting of any sum as consideration for transfer of immovable property (other than agricultural land) to a resident transferor, shall deduct tax, at the rate of 1% of such sum. In order to reduce the compliance burden on the small taxpayers, it is further proposed that no deduction of tax under this provision shall be made where the total amount of consideration for the transfer of an immovable property is less than fifty lakh rupees. This amendment will take effect from 1st June, 2013.


SECTION 194IA : • Payment on transfer of certain immovable property other than agricultural land•W.e.f. 01/06/2013, •Every transferee •at time of making payment or crediting sum as consideration•for transfer of immovable property•other than agricultural land•to the resident transferor•shall deduct tax @ 1%•if total consideration is Rs 50 Lakhs or more.


• Transaction before 01st June 2013, Agreement is after 01st June 2013. Is TDS required to be deducted?

TDS is to be deducted on payment or credit whichever is earlier, after 01/06/2013 and not on the full consideration as per Agreement .

• What is the meaning of the term Agricultural Land? Agricultural land situated in Municipality area or in a designated

area near municipality as per items (a) and (b) of sub-clause (iii) of clause (14) of section 2, are covered by the provisions of Section 194-IA

• Does the explanation exclude requirement of user for agricultural purpose ?


• ISSUES: Consideration as per agreement and not as per stamp duty value? Whether consideration receivable includes service tax and vat and TDS is

to be deducted on which amount? The word 'consideration' has not been defined in the T.P. Act, but means

the same as in the Contract Act excluding natural love and affection. The word 'consideration' means valuable consideration, i.e. consideration

either of money or money's worth. Section 2(d) of the Indian Contract Act defines consideration as , “When at the desire of the promisor, the promisee or any other person

has done or abstained from doing or does or abstains from doing or promises to do or to abstain from doing something, such as act or abstinence or promise is called a consideration for the promise.”


• ISSUES: Consideration would therefore mean a benefit to one party and a

detriment to other . Consideration takes the form of money payment for delivery of goods

( immovable property). Invoice for the delivery of goods always includes taxes chargeable on goods and payable by the buyer.

Therefore TDS @ 1%, is to be deducted on payment of consideration, inclusive of taxes.

Total consideration is Rs 60 Lacks. Rs 40 Lakhs received as advance before 01st June 2013, Rs 20 Lakhs received as final payment after 01st June 2013. TDS on what amount?

If the income of the seller is not subject to tax. Is TDS required to be deducted?

There is cancellation of an agreement at a later date. In this case what is the position of Tax deducted?

The limit of Rs 50 Lakhs is to be taken on stamp duty value or the actual consideration?


• ISSUES: TDS will also be on advance payments received, but income to accrue in subsequent years.

Revenue recognition? If the transferor/seller is non-resident, then Section 194-IA do not apply but Section 195

applies and actual tax liability is to be computed. TDS return cum challan in form 26QB and TDS certificate in form 16B. Resident seller do not hold valid PAN then TDS is required to be deducted @ 20%, as required

u/s 206AA of the Income Tax Act. TDS to be deducted upfront on full consideration or on each installment. In case of bank finance, whose onus is it to ensure TDS compliance. The limit of Rs. 50 lacs applies incase of each joint transferor or to consideration for

immovable property. Credit for TDS in the hands of seller? Mismatch of income recognition and TDS ?- Refer Section 199 and CPC allows TDS as per 26AS Statement. - Incase of Toyo Engineering India Ltd v JCIT (2005-TIOL-234-ITAT-MUM, it was held that credit

for TDS cannot be denied on the ground that the income of the project will be assessed in future, since TDS is a machinery for collecting tax on the potential income and it is not out of the income and section 199 do not stand in the way of the assessee to claim the credit of TDS

Applicability of Section 194-IA on transfer of development rights by Land Lord? Applicability of Section 194-IA on long term lease agreements?


TDS – BUILDERS AND DEVELOPERS

SECTION 194A: INTEREST OTHER THAN INTEREST ON SECURITIES

• Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.

• nature of transaction for money received by builders – open to change from flat booking to unsecured loan to other liability or bulk booking to joint venture or tie up with investor.

SECTION 194C – PAYMENTS TO CONTRACTORS AND SUBCONTRACTORS:

• Contract for carrying out a “work”• “Work” shall include:

a. Advertisingb. broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

• c. Carriage of goods or passengers by ay mode of transport other than by railways.• d. catering;• e. Manufacturing or supplying a product according to the requirement or specification of a

customer by using material purchased from such customer, but does not include manufacturing or supplying a product according the requirement or specification of a customer by using material purchased from a person other than such customer.


• SECTION 194C:• Subsection 6: No deduction shall be made from any sum credited or paid or likely to be

credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his Permanent Account Number, to the person paying or crediting such sum ( subject to complying with the requirements of E-TDS return )

• Site visit arrangements – not a goods carriage and hence subject to TDS)• Water tanker - water supply is for potable water – natural resource - Substance over form -

there is contract for water supply to construction site and hence TDS.• Bharani expenses or leveling expenses.• Hire of JCB or Dumper - such hire is for shifting of material or demolishing and charges are

per hours. Substance over form hire of equipment or contract for demolishing - covered by 194I or 194C ? Rate of TDS 2% under both sections.

• Payment to Supervisor and provider of labour gangs.

• 194 H: COMMISSION OR BROKERAGE• includes any payment received or receivable, directly or indirectly, by a person acting on

behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.

• Builders pay brokerage for getting bookings of the flats / apartments.• Brokerage is generally paid after full payment is received and possession is given.• Policy for brokerage accrual and due and for release of payment?• What about cancelled contracts?


• SECTION 194I: RENT• DEFINITION OF RENT FROM 13-7-2006:• “rent” means any payment, by whatever name called, under any lease, sublease, tenancy or

any other agreement or arrangement for the use of (either separately or together) any:-a. Land; orb. building (including factory building); orc. land appurtenant to a building (including factory building); ord. machinery; ore. plant; orf. equipment; org. furniture; orh. fittings,

Whether or not any or all of the above are owned by the payee.

• SECTION 194I: RENT • shifting charges or dislocation or compensation for alternate accommodation are payments

to tenant for them as a compensation.• whether subject to TDS in the nature of rent.?


• SECTION 194J: PROFESSIONAL SERVICE MEANS• Services rendered by a person• In the course of carrying on• Legal,• Medical,• Engineering or architectural profession or the• Profession of accountancy or• Technical consultancy or interior decoration or• Advertising or• Such other profession as is notified by the board for the purposes of section 44AA or of this section

• SECTION 194J ..• “FEES FOR TECHNICAL SERVICES” SECTION 9(1)(vii) EXPL 2:• Means any consideration (including any lump sum consideration) for the rendering of any managerial,

technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “salaries”

• “ROYALTY” – Meaning in Section 9(1)(vi) Expl 2.

• 194 J:• On account payment or advance payment attracts TDS• Water or Soil testing, Survey fees, Drilling for pile foundation – covered under 194J - It is a specialized

professional service.


SELECTED CASE LAWS IN TAXATION OF

BUILDERS / DEVELOPERS


• PROJECT COMPLETION METHOD V.S PERCENTAGE COMPLETION METHOD• CASES RELIED UPON BY THE INCOME TAX DEPARTMENT TO SUBSTANTIATE PERCENTAGE

COMPLETION METHOD.• S K Estates (P) Ltd. v. ACIT (1997) 60 ITD (BOM) 621 Assessment—Determination of income—Accrual of income—Construction of building by

assessee on behalf of ‘U’—Agreement with ‘U’ to receive profit rate of 5 per cent calculated on actual cost of construction—Income accrued to assessee on completion of construction—Liability to incur possible additional expenditure had nothing to do with the accrual of income on completion of the project—Assessee was liable to be taxed on accrued income

• Tirath Ram Ahuja (P) Ltd. Vs. Commissioner Of Income Tax (1976) 103 ITR 15 (DEL) Business income—Chargeability—Outbreak of war resulting into abandonment of contract—

Assessee not in a position to arrive at work-in-progress so as to arrive at profit or loss relatable to receipts towards running bills—Tribunal justified in directing that neither profits nor loss to be taken into account.

• Champion Construction Co. v. ITO (1983) 5 ITD (BOM) 495 Assessment—Draft assessment—Reference to IAC—Scope of powers of IAC—IAC, in exercise

of powers under s. 144B, cannot direct application of a profit rate higher than the one applied by the ITO without hearing the assessee specifically on the point

• P.M. Mohammed Meerakhan Vs. Commissioner Of Income Tax (1969) 73 ITR 735 (SC) Business income—Business—Adventure in the nature of trade—Assessee purchased vast

extent of land parcelled into plots and sold all plots except one—Transaction, as per surrounding circumstances constituted adventure in the nature of trade—Revenue justified in estimating profits treating unsold plot as stock-in-trade


• CASES RELIED UPON BY THE INCOME TAX DEPARTMENT TO SUBSTANTIATE PERCENTAGE COMPLETION METHOD.

• Sri Sukhdeodas Jalan v CIT (26 ITR 617)(Patna) Profits and gains from business—Computation of income—Accounting method for

incomplete contracts—In the case of an incomplete contract there is a well-established method of calculating profits accruing in the accounting year—merely because a contract was completed after the accounting year it could not be said that no profit accrued or arose in the accounting year—Accounts of contract business should therefore show profits in respect of incomplete contracts on yearly basis

• Uttam Singh Duggal & Co. (P.) Ltd. Vs. Commissioner Of Income Tax (1981) 127 ITR 21 (DEL) : (1981) 5 TAXMAN 175

Income—Accrual—Assessee, a contractor receiving a sum as payment for the timber which was to belong to the party—If the contractor failed to perform the work in time, this amount was refundable—In 1957, no work was done so the sum was treated as advance—In 1958, the work was done for 12 months and the expenditure has been debited to the P&L a/c—Hence income accrued as it was payment for work to be done or goods to be supplied—Tribunal rightly held that the sum was taxable during the relevant assessment year.

• CIT v. Nandram Hunatram (1976) 103 ITR 433 (ORI) Accounts—System of accounting—Neither work-in-progress register produced nor assessee

contractor's payments verifiable—Credit entry of amount received by assessee could be taken as income accruing to assessee— Gross profit rate based on that receipt could not be said to be unjustified


• CASES WHERE PROJECT COMPLETION METHOD HAS BEEN ACCEPTED:

• CIT v. V. S. Dempo & Co. Pvt. Ltd. (1996) 131 CTR (Bom) 203 Accounts—Rejection—Assessee regularly following completed contract method for determining its income

from contract business—Similar system was also accepted by Revenue in the case of other assessees having same line of business—Tribunal holding that method of accounting followed by assessee was correct and resort to s. 145(1) was not called for—Justified—Finding of Tribunal being based on facts of case does not require interference

• CIT v. Vikas Oberoi (165 Taxation 7)(Bom HC)

• CIT v Khoday Distilleries Ltd (Kar HC) (ITRC Nos. 19 to 21 of 1993, dated 12.9.1995) Mumbai Bench of ITAT vide decision dated 20.2.1995 in the case of CIT v Nahalchand Lalchand Pvt. Ltd and

the decision dated 31.12.1996 in the case of Billimoria Construction Co. Ltd. has upheld the change of method to Project Completion Method and the RA against the same stands rejected by the Hon’ble Bombay High Court.

• CIT v Bilahari Investment (P) Ltd (2008) 215 CTR (SC) 201 : (2008) 299 ITR 1 (SC) : (2008) 169 TAXMAN 95 : (2008) 3 DTR 329

Business income—Business loss—Year of deductibility of discount on chit amount—Assessee companies are subscribing to chits as their business activities and following completed contract method which has been accepted by the Department over several years—Every assessee is entitled to follow the method of accounting which the Department has earlier accepted—Department can insist on substitution of the existing method of accounting only in those cases where it records a finding that the method adopted by the assessee results in distortion of profits—There is no finding recorded by the AO that the completed contact method distorts the profits of a particular year — Further, the entire exercise arising out of change of method from completed contract method to deferred revenue expenditure would be revenue neutral—Therefore, the completed contract method adopted by the assessees for chit discount is not required to be substituted by percentage completion method



• CIT v. Manju Gupta (RA No. 756/Bom/94 and RA No. 757/Bom/94 order dated 10th Feb, 1995, AY 1990-91)

Revenue required the Tribunal to refer the following question to Bom HC for its opinion whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the completion of the project is an absolute and necessary precondition to determine the profit earned by a builder year after year before the completion of such projects, in the light of the Apex Court judgment in the case of British Paints India Ltd. (188 ITR 44)

• Malka Construction Co. in ITA No. 4068-4069/Bom/85 dt. 7.3.1989;

• Awadhesh Builders v. ITO (2010) 37 SOT 122 (Mumbai) Method of accounting—System of accounting—AO assessing the income from the building project on the

basis of percentage completion method instead of project completion method adopted by the assessee—Assessee submitting that income had to be accounted on completion of the project as per guidelines of ICAI—Assessee in the earlier two years followed the same method which has been accepted by the Department—Case of a contractor is different from that of the real estate developer—In case of real estate developer, he can earn the profit only when the space constructed is sold—In case, due to some reasons, the project is terminated or is abandoned the builder has to refund the advances received from the buyers and in that case, there cannot be any profit because the flats/shops could not be sold as the construction remained incomplete—Profit which will arise only on sale of flats—Entire income to be assessed when the project is completed

• Krish Infrastructure (P.) Ltd. V. ACIT [2013] 35 taxmann.com 38( Jaipur – Trib.)



• Inspecting Assistant Commissioner Vs. Flowmore (P) Ltd (1989) 33 TTJ (Del) 17 Income—Accrual—Supply of machineries in turnkey contracts—Assessee entered into

contract with a power station for supply, erection and commissioning of pumping sets manufactured by assessee—Such erected pump sets were to be tested by engineers of power station before taking over them—Term of such supply could not, therefore, be treated as mere sale of goods—It was a comprehensive turnkey contract—Property in erected pumping sets passed on to customer only when same were erected and commissioned finally—Amount received by assessee in connection with supplies from time to time would not represent sale prices and thus no profits could be assumed with regard to same

• Super Builders & Developers P. Ltd. in ITA 2080/Bom/1986 dt. 5.6.1990;

• Maitri Developers v. ITO (2011-TIOL-472-ITAT-Mum)

• P.D.R. Pvt. Ltd in ITA 2704/B/82 dt. 22.1.1983;

• Rajesh Constructions (ITAT No. 3592/Bom/95, Order dated 05.09.2003)(Bom ITAT)

• D. K. Enterprises. Vs. Income Tax Officer (1991) 39 ITD (BOM) 394 Accounts—Rejection—Project completion method—Assessee, a builder firm following the

method of reporting profits as and when a project was completed—Same method followed consistently—No justification to reject this system

• Davy Power Gas Ltd. in ITA No. 819/Bom

• ACIT v. Rajesh Builders (2004-TIOL-88-ITAT-MUM)


• CASES WHERE IT WAS HELD THAT REVISED AS 7 APPLIES TO CONTRACTORS AND DOES NOT APPLY TO BUILDERS / DEVELOPERS

• DCIT v. Shiv Construction Consortium (2012-(ID2)-GJX-1296-TAhd)

• ACIT v. National Builders (2012) 137 ITD 277 (Ahmedabad) Assessment—Income on work-in-progress—Taxability—Assessee-firm had shown "work in-progress" as on

31.3. in balance-sheet—AO remarked that assessee had not recognized revenue on work-in-progress, as according to him revenue was required to be recognized as per percentage completion method— According to him, income has to be computed in each year without waiting for completion of project—AO, therefore, held that 10% was income generated on said work-in-progress, hence by applying percentage completion method, an amount of Rs.22,10,000/- was taxed in hands of assessee—CIT(A) reversed action of AO—Held, AS-7 has also made a provision that advances received from customers may not necessarily reflect work performed—Outcome of a contract cannot be estimated reliably, therefore, no profit can be recognized—Clauses of agreement dated 1.3.2002 prescribe that lease of units agreed to be allotted by assessee to intending allottees become legally enforcible only upon GSRTC approving allotment and uptil that time, there would be no legally tenable transaction by appellant in favour of intending lessee—Such approvals have in fact been granted by GSRTC in F.Y. 2004-05 relevant for A.Y. 2005-06 onwards—Vide order dated 18/5/2004 District Collector has restrained assessee from leasing in any manner whatsoever any of shop in GSRTC project—Therefore, AO has incorrectly applied AS-7 on assessee—Since the assessee can be termed as a contractor as also a developer, therefore Revenue can be recognized in terms of AS-9 guidelines—As per statement made by assessee, completion certificates of respective projects were obtained on 15.3.2005, 10.8.2004 and 31.12.2004—AO is empowered to examine this aspect and in view of guidelines and position of law narrated hereinabove, can take appropriate action prescribed under law— It was wrong on part of AO to assess income irrespective of year of completion of project when amount received in advance has not reached certainty and that too AO has merely estimated 10% as recognition of Revenue of construction contract, without assigning any specific basis of such an estimation, such an estimation is not approved—Order of CIT(A) is upheld.

• Unique Enterprises v. ITO (2010-TIOL-737-ITAT-Mum)


• CASES WHERE IT WAS HELD THAT REVISED AS 7 APPLIES TO CONTRACTORS AND DOES NOT APPLY TO BUILDERS / DEVELOPERS

• Prem Enterprises v. ITO (2012)(54 SOT 367)(TBom) Accounts—Rejection of method of accounting followed by assessee—Validity—Assessee was carrying on

project and was consistently following project completion method and declared its profit from project in A.Y. 2007-2008, on basis of completion of project and occupation certificate issued by BMC on 22.09.2006—AO observed that assessee is following project completion method for determining profit of project—AO observed that 80 percent of total project costs including land cost, construction cost and administrative expenses have been incurred up to end of previous year relevant to this A.Y.—Hence, AO concluded that by following work completion method, assessee is creating loss to revenue and estimated profit at rate of 8 percent of total cost including land cost, construction cost and administrative expenses of Rs. 4,58,07,762/- and determining profit at Rs. 36,64,620/-—CIT(A) held that AO was correct in bringing to tax amount of deemed profit in current years and not in A.Y. 2007-2008, which according to revenue authorities was postponement of tax liability—Held, applicability of 8 percent is acceptable if profit is to be accepted as per section 44AE, where no books are claimed to have been maintained—AO neither ignored books nor rejected books, but he applied 8 percent of profit as estimated/ computed, which is neither legal nor permissible—There was no observation from either of two revenue authorities that results declared by assessee did not show correct results—Rejection of books could have, possibly and consequently, amounted to estimation of income u/s 44AE, which revenue authorities did apply—There is no justification in rejecting method of accounting followed by assessee and substituting same, and adopting AS-7 and then follow it up by estimation—Theory adopted by revenue authorities is rejected—As per project completion method followed by assessee, entire profit of project has been offered to tax by assessee in A.Y. 2007-08 and same has been accepted by AO—Therefore, order of CIT(A) is set aside and AO is directed to delete addition—Appeals allowed

• ITO v. Bhadrasen Construction Pvt Ltd. (2010-TIOL-421-ITAT-Mum)

• DCIT v. Omega Shelters Pvt. Ltd. (2011-(ID2)-GJX-3005-THYD)


• OBSERVATIONS• In the case of ITO v. Peter Fernandes (2010-(ID1)-GJX-2839-TBOM) The Tribunal has observed that estimation of income on the basis of

Champion Construction Co. will arise only when the assessee has completed substantial part of the project.

• In case of Champion Construction Co. (5 ITD 76)• The Bombay Tribunal in the case of Champion Construction Co. v.

ITO (5 ITD 76), has taken a view that no profits be offered for tax if : Construction is incomplete; Not even half portion of the building was sold (43%); and The net sale proceeds are much less than the total expenditure. However, in the same judgment, for a subsequent year, when 80%

work was complete, the Tribunal held that proportionate profits must be charged to tax.


• In the case of ACIT v Rajesh Builders (2004-TIOL-88-ITAT-MUM) The Tribunal was faced with a situation where the assessee followed

project completion method consistently when it offered for taxation profits when all the sales were completed. The AO held that revenue cannot wait indefinitely for collection of its revenue and that the scheme of the Act is such that assessee will have to be taxed on the profit of the year. He accordingly estimated profit @ 8% of the work-in progress during the year. The Tribunal in this case has interalia observed as under –

“As regards the judicial decisions of various High Courts other than the Jurisdictional (Bombay) High Court, we are bound by the judgment of the Jurisdictional High Court, which accordingly we need follow in preference to the judgment of other High Courts. As regards Mumbai Tribunal's order in Champion Construction Co.'s case (supra) there is another subsequent order dated 5-9-2003 of ITAT, Mumbai in I.T.A. No. 3592/Bom./95, referred to above which we need preferably follow for the reason that this order is based on Hon’ble Jurisdictional High Court’s judgment in Dempo & Co. (P) Ltd.’s case (supra)


• As such, considering all the facts and circumstances of the case as also the legal position and respectfully following Dempo & Co. (P.) Ltd.'s case (supra) and order dated 5-9-2003 of ITAT, Mumbai in ITA No. 3592/Bom./95 in the case of Rajesh Construction, we are of the considered opinion that the Assessing Officer having not drawn any finding that the accounts of assessee suffer from any defect nor that from the method of accounting followed by assessee, true/correct profits of assessee cannot be deduced and the assessee having been following the "Completed Project" method consistently, which being a recognized method of accounting, the assessee's method of accounting cannot be rejected nor is there any justification for estimating assessee's profits of the year from the assessee's business activity of building construction by resorting to applying of percentage of profit to the work-in-progress of the year.

• In the case of CIT v Guttofnungasghutto Serkrado (197 ITR 66)(Ori HC) In respect of an ongoing project where project completion method has

been accepted in the past for certain years, the Tribunal was justified in its opinion that the profit of the assessee’s business can only be properly deduced year wise from the method employed by the assessee by maintaining its accounts on complete work basis and not by the method of dividing the net profit year wise in proportion to yearly gross receipts.


• WHETHER EXTENSION OF PROJECT IS PART OF THE ORIGINAL PROJECT OR ITS AN INDEPENDENT PROJECT?

• ACIT V. Prerna Premises (P) Ltd. (2006) 7 SOT 288 (Mumbai) Accounts—Method of accounting—Project-completion method—Period of completion of project cannot

be allowed to be stretched at the whims of assessee— 80 per cent of constructed are having been sold to occupied by the buyer in asst. yr. 1989-90, project is

deemed to have been completed irrespective of the minor construction work going on— Where additional FSI is sanctioned and builder starts construction thereon before original project is

deemed to have been completed, construction of additional FSI will be considered as an extension of original project and will be deemed to have been computed in the assessment year in which 80 per cent of constructed area of entire project is sold and occupied by buyer—

Construction of addition FSI will be an independent project and will not extend the period of completion of original project—Guidelines laid down to resolve possible controversies with regard to the year of completion of project in a case where the additional FSI is sanctioned and matter remanded to be considered in the light of those guidelines.

• Guidelines for year of completion of project in a case where the additional FSI is sanctioned and the same are as under :

• As held in the case of Champion Construction Co. (supra), a project is deemed to have been completed in that assessment year in which 80% of the constructed area is sold and occupied by the purchaser, irrespective of the fact that minor construction work is going on, on the project.

• In a case when additional FSI is sanctioned and the builder/assessee starts construction thereon before the project is deemed to have been completed in terms defined as above, the construction of the additional FSI is an extension of the original project and is deemed to have been completed in that assessment in which 80% of the total constructed area of the entire project ( original project + construction of additional FSI) is sold and occupied by the buyer.


3. In a case, where the original project is deemed to have been completed as per clause (1) and thereafter additional FSI is sanctioned on which construction is required to be raised. The construction of the additional FSI will be an independent project and it will not extend the period completion of the original project. It would be an independent project and it would be deemed to have been completed in the same manner, as the original project is deemed to have been completed i.e., on the sale of 80% of the constructed area.

4. In a case where assessee/builder gets the sanction of the additional FSI before the project is deemed to have been completed as defined above in clause (1), but construction has been started after the completion of project. If the gap between the completion of original project and the start of the construction of Additional FSI is reasonable, that is less than six months, it amounts to an extension of the original project and the entire project is deemed to have been completed in terms indicated above. But, if the gap between the completion of project and the start of the construction is unreasonable i.e., about more than six months, the construction of the additional FSI is entirely an independent project and it would not extend the period of completion of the original project. It would be treated as an independent project. The year of completion would be worked out independently in a manner as defined in clause (1).


• Under the project completion method can the recognition of profits be delayed on the ground that the sale deeds are not registered?

When flats have been sold, price received and purchasers are put in possession, there is no justification, even where the assessee follows project completion method to postpone the declaration of income is the ratio of the decision of the Bangalore Bench of ITAT in the case of Pratima Builders v ITO (2009-TIOL-95-ITAT-BANG).

• Is it correct to state that only the gross profit can be estimated by the AO and not the net profit?

No it is not correct to state that only the gross profit can be estimated by the AO. The AO may even estimate the net profit. In the case of Pratima Builders v ITO (2009-TIOL-95-ITATBANG), the counsel of the assessee argued that the AO could only estimate the gross profit and not the net profit..


In a case where 94% of the project has been sold but profits not offered to tax, the AO charges to tax 12% of the receipts as income of the project – is it correct to contend that it is only 12% of the receipts for the year which can be charged and not 12% of the entire receipts since the commencement till the end of the previous year?

In the case of ITO v Savoy Real Estate Developers Pvt. Ltd. (2010-TIOL-399-ITAT-MUM), the assessee was a builder who constructed a building which had attained 94% completion level but did not offer any income from the said project for taxation. The AO following the ratio of the Mumbai Bench of ITAT in the case of Champion Construction Co. v ITO 5 ITD 495 estimated the profits to be 12% of the receipts and charged them to tax in AY 2003-04. The CIT(A) upheld the action of the AO in principle, but held that only 12% of the receipts during the year and not the entire receipts of the project need to be taken into account.

On an appeal by the Revenue,

Tribunal held as follows :

The short issue that we have to thus decide is whether 12% of entire project receipts are to be brought to tax or only such receipts, as pertained to the relevant assessment year are to be taken into account. The question of taxability arises only in the year in which project is completed or is substantially completed. Therefore, the taxability cannot be confined to the receipts of that year alone as there may or may not be revenue receipts in that year The profits are to be ascertained in respect of the work that is completed year. and to the extent it is completed, in the year of such completion – provided the threshold of “substantial completion” is achieved. In this view of the matter, in our considered view, revenues to be taken into account are revenues pertaining to such work and it is immaterial whether or not the said revenues are actually received in that year. We, therefore, see no merits in relief granted by the learned CIT(A).


• Expenditure incurred on construction of a club house could not be denied merely on the ground that club house was not mentioned in the agreements though the same was mentioned in the construction plans as approved by BMC. (ITO v. Juhu Construction Co. Ltd (2009- TIOL-497-ITAT-MUM))

• In case of ITO v Bhadrasen Construction Pvt. Ltd (2010 – TIOL – 421 – ITAT- MUM), for the A.Y 2005-06, the Tribunal accepted the contention of the assessee that the project was not completed, relying on the facts of WIP for 2005,2006,2007 and occupancy certificate issued in 2007, when assessee was following project completion method


In a case where assessee follows project completion method, the assessee is entitled to set off interest earned on surplus funds out of booking advances of buyers against cost of WIP.

Commissioner Of Income Tax Vs. Lok Holdings(2009) 308 Itr 356 (Bom) : (2010) 189 Taxman 452

In a case where assessee follows project completion method, the assessee is entitled to set off receipts from sale of TDR against cost of WIP.

(ACIT v Skylark Build (2011-TIOL-400-ITAT-MUM)(2011) 48 SOT 306 (Mumbai)Capital gain—Chargeability—TDRs had been received in exchange of transit buildings

constructed for slum dwellers as part of on going project—Since the project was not complete, the assessee had set off TDRs against work-in-progress—AO observed that TDR was nothing but FSI granted by SRA which could be used by recipient for construction of flats/premises in Mumbai and assessed the income on account of receipt of sale of TDR as income of the assessee—Assessee was following project completion method consistently—In such cases, the expenses incurred have to be shown as WIP and any income received from the execution of the project has to be adjusted against WIP till project was completed—TDRs received are directly linked to the execution of the project and therefore, before the completion of the project the income from TDR or any other receipt inextricably linked to the project will only go to reduce costs of the project— Therefore, the assessee had rightly set off TDR received against WIP—Income from sale of TDRs could not be considered as capital gain


DIFFERENT UNITS / FLATS HAVE BEEN SOLD BY THE ASSESSEE AT DIFFERENT PRICES:

In the case of DCIT v. Sumer Ville Investments (2011-(ID2)-GJX-3587-TBOM) the Tribunal has accepted the contention of the assessee that except for presumption and assumption nothing has been brought on record by the AO to establish that assessee had received higher sale price than that declared in the agreement and recorded in the books of accounts and sale is at a price greater than the Stamp Duty Value of the flat / unit and therefore there is no justification for addition on the ground that sales of some units are at a lower price in comparison with the sales of other units of the same building. It is well settled principle by different judicial pronouncements that the burden is on the Assessing Officer to prove that the assessee has received more than what is recorded in the books of accounts.


• In respect of land held as stock-in-trade when does the transfer take place?

• Is S. 53A of the Transfer of Property Act relevant to come to the conclusion that the transfer has taken place and the profits have accrued.

The Gujarat High Court, in the case of CIT v. Ashaland Corporation 1981 25 CTR GUJ 294, has held that the land of which the assessee is the owner, is its stock-in-trade and the land which is sold, i.e., the land of which the ownership or title is transferred, ceases to be its stock-in-trade only when the transaction is complete , and sale would not be complete unless it executes a registered sale deed. Even if the method followed is the cash method, then also, such amounts cannot be treated as trading receipts till the title passes to the purchaser and the land for which the amount is received goes out of the stock-in-trade of the assessee.


In the case of CIT v. Motilal C Patel & Co. (173 ITR 666)(Guj), the Court held that the money received by the assessee in the earlier year would become profit in the hands of the assessee only on completion of the sale in favour of the Society. Till such time as the sale was completed, the amount received was to remain only an advance towards the price or consideration.

In the case of CIT v. Shah Doshi & Co. (Income Tax Reference No. 232 of 2976 decided on March 24/25, 1981, It was observed that a mere agreement to purchase land would not confer any title on the assessee and the stock which the assessee had contracted, but the property in which has not passed to the assessee, cannot be regarded as the assessee‘s stock-in-trade.

Support for similar proposition can be had from the decision of Madras High Court in the case of Chidambaram Chettiar (4 ITR 309)(Mad).


• ALLOWABILITY OF PROVISION FOR PURCHASE OF TDR AND OTHER EXPENSES, POST CONSTRUCTION:

In case of ACIT v. Leela Creators & Others (2012-(ID1)-GJX-0461-TBOM) and in case of Leela Estate (ITA No. 141/M/2010 dated 11.5.2011) Tribunal set aside the order of CIT(A) and restored the matter to the file of AO for taking fresh decision, to allow deduction for cost of TDR, which was provided in the books of the assessee, if BMC rules allows purchase of TDRs post construction and regularize such violation of the BMC laws. The cross objections of the assessee to exclude sales of flats to the extent of TDR to be regularized was dismissed by the Tribunal.


• Regularization fees paid to municipality is penal in nature and covered by restrictions provided u/s 37 of the income tax act.

CIT v. Mamta Enterprises [2004] 266 ITR 356(Kar)

• However, fees paid to regularize violation in construction of a building forms part of construction cost and depreciation u/s 32 is allowable on such cost

Dr. K. Senthilnathan [ITANos. 493,494 and 495/Mds/2010


• Manish Builders v. ITO (2012-TIOL-159-ITAT-MUM)This decision is an authority for the proposition that in a case where the project is

regarded as complete and all the receipts from the project are considered for taxation, provision for expenses which are yet to be incurred need to be allowed as a deduction while computing the profits chargeable to tax. If the same are not allowed the assessee will not be able to claim deduction in future when the expenses are actually incurred because in the said years the assessee will not have any receipts from the project to set them off against the expenditure.

• Persepolis Construction Co. (P.) Ltd. v Addl CIT (99 TTJ 92)(Bom)In this case the Tribunal held that, where the developer has to hand over constructed

area to the land lord and the profits are computed / offered for taxation before the completion of the entire project, the proportionate cost of the portion to be given free of cost, needs to be considered as forming part of cost, while computing the profits, even though the same may not have incurred. Such a provision cannot be regarded as a contingent liability.

The cost incurred for the construction of the two free buildings should be defrayed by the remaining six saleable buildings. Therefore, it is to be seen that the expenditure of constructing two free buildings, forming part of the total project cost runs concurrently with the income earned out of the saleable project

The construction of every saleable building is loaded with a proportionate cost attributable to the construction of the free buildings. Therefore, the assessee has rightly worked out the proportionate cost of the free buildings attributable to the building No. 1 constructed, completed and sold by it.


• Dy. CIT v. Rajgir Builders (70 ITD 226)(Mum)In this case, it was held that the construction and sale of flats were subject to

the liability attached to it in the form of construction of other sets of flats and shopping complex, and the income of the assessee could be rightly worked out only if the expenditures towards construction of those flats and shopping complex also were taken into consideration.

• Provision for expenses to be incurred needs to be allowed as a deduction

• Aditi Developers v ACIT (2011) 10 ITR 241 (Mumbai).Revision by CIT—Orders prejudicial to Revenue—CIT set aside order of AO on

the assessee construction company referring to audit objection that provision for construction expenses represented the expenses that are likely to be incurred on the project, were contingent liability and not allowable—CIT directed AO to pass fresh assessment order de novo after making proper verification—Whereas AO has called for details and after examining the same, has accepted the claims of the assessee—When such an exercise has been done, the conclusion drawn by the AO, cannot be said to be erroneous—Order passed under s. 263 quashed


• DISALLOWANCE U/S 40(A)(IA) – WHETHER TO BE REDUCED FROM WIP?

• ITO v. P. C. Developers Pvt. Ltd (Del ITAT){2010-(ID1)-GJX-1133-TDEL}

WIP A/c reduced to the extent of Architect fees paid without TDS

• Savala Associates v ITO (2010) 35 SOT 148 (Mumbai)In this case, the tribunal held that the correct procedure in

"completed contract method" is that instead of addition work-in making addition, the Assessing Officer should correct the amount of work in progress by reducing or enhancing work-in-progress as the case may be. Such corrected WIP will be finally considered in profit and loss account/contract account for the year in which work is completed.


RENTAL INCOME IN RESPECT OF LET OUT / VACANT FLATS HELD AS STOCK-IN-TRADE.Decision where it was held as business income:•CIT v. M P Bazaz & Ors. {(200 ITR 131)(Ori)}•CIT v. Neha Builders (P.) Ltd. {(2007) 164 Taxman 342 (Guj)}Business income—Vis-a-vis income from house property—Rental income from property held as stock-in-trade—If the property is held as stock-in-trade, any income derived from such property would be income from business and not income from house property—Assessee-company engaged in the business of development, sale, lease, etc. of land and property, was treating the property as stock-in-trade—Therefore, rental income derived from the property cannot be assessed under the head "Income from house property"

Decision where it was held as Income from House Property•Commissioner Of Income Tax Vs. Ansal Housing Finance And Leasing Co. Ltd.. (2012) 83 Cch 046 Delhc Income from house property—Levy of income tax—On basis of ownership— Determination—AO assessed ALV of flats which assessee had constructed but were lying unsold—Assessee argued that flats were stock-in-trade and therefore could not be charged on ALV—Held, levy of income tax in case of one holding house property is premised not on whether assessee carries on business as landlord but on ownership— Further, it was held that application of ALV to determine tax is regardless of whether actual income is received; it is premised on what constitutes reasonable letting value, if property were to be leased out in marketplace—Revenue’s appeal allowed

•Azimganj Estate (P) Ltd. v CIT (2012) 206 Taxman 308 (Calcutta) : (2012) 251 CTR (Cal) 48 : (2012) 72 DTR (Cal) 341Income—House property income vs. business income—Assessee-company was a property developer and builder—In course of its business activities, it constructed a building in which there were some unsold flats which were appearing as stock-in-trade under the current assets in balance sheet—Assessee showed the rental income from such flats under the head "income from house property" and, thus, claimed statutory reduction of Rs.9,80,122 being the 1/5th on account of repair from annual letting out value of Rs.49,00,612—AO pointed out that in the wealth tax proceedings the assessee had taken the plea that the unsold flats as shown in stock-in-trade were not assets for the purpose of Wealth Tax Act, therefore since the assessee had been treating the unsold flats as stock-in-trade of its business, the income from such business assets should be treated as business income and not income from house property, as claimed by the assessee—AO also rejected the claim of the statutory reduction on account of repair—CIT(A) however, held that the income should be treated as income from house property—Order upheld—Unsold flats being house property, pure and simple and having fallen under the head, income from house property, as provided in s. 22 of the Act, CIT(A) rightly held that the rental income of such property should be assessed under s. 22 of the Act


•ALLOWABILITY OF INTEREST AND ADMINISTRATIVE EXPENSES AS A PERIOD COST IN CASE OF AN ASSESSEE FOLLOWING PROJECT COMPLETION METHOD.

•Decisions in favour of the assessee:

•DCIT v. Thakker Developers (115 TTJ 841)(Pune)•CIT v. Lokhandwala Construction Industries Ltd. (2003) 180 CTR (Bom) 136 : (2003) 260 ITR 579 (Bom) : (2003) 131 TAXMAN 810 Business expenditure—Interest on borrowed capital—Scope of s. 36(1)(iii)—For the purpose of deduction under s. 36(1)(iii), the nature of expenses, whether on capital account or revenue account, is irrelevant—Assessee-builder had undertaken a project of construction of flats—Said project constituted stock-in-trade of the assessee—Since the assessee had taken loan for execution of said project, it was entitled to deduction of interest on loan under s. 36(1)(iii).•JCIT v. K Raheja Pvt. Ltd (2006-TIOL-220-ITAT-MUM)•ACIT v Tata Housing Development Co. Ltd. (2011) 139 TTJ (Mumbai) 8 : (2011) 45 SOT 9 : (2010) 48 DTR 452Business expenditure—Disallowance under s. 40A(2)—Payment of rent to subsidiary company—Assessee company has rented out a building to its subsidiary company for a rent of Rs. 57.6 lakhs wherein the latter is running a business centre which is also used by the assessee, and it paid a rent of Rs. 12 lakhs to the subsidiary company therefor— AO treated only Rs. 3 lakhs to be reasonable amount for the services rendered by the subsidiary company and disallowed the balance amount of Rs. 9 lakhs by applying the provisions of s. 40A(2) on the ground that the whole building is owned by the assessee company itself and there is very little logic in the arrangement of first receiving rent of Rs. 57 lakhs and then paying back a rent of Rs. 12 lakhs—Not justified—Reasons shown by the AO for making the disallowance have no basis—Moreover, no such disallowance was made in earlier year—Disallowance rightly deleted by CIT(A)



•Decisions in favour of the assessee:

•K. Raheja Development Corporation Vs. Assistant Commissioner Of Income Tax (2005) 2 SOT 744 (Bang) [IT Appeal No. 240 (Bang.) Of 1997, Dated 22-9-1997] Business expenditure—Bad debt—Allowability—Scope of amendment of s. 36(1)(vii) w.e.f. 1st April, 1989—As the amount was advanced in the course of business of property development was to be allowed if otherwise proved to be a bona fide write off—Sec. 36 (1)(vii), as amended from the asst. yr. 1989-90, grants deduction in respect of any bad debt which is written off as irrecoverable in the accounts of the assessee for the previous year—Write off in the books of account is to be treated as a sufficient compliance and it is no more required to be proved that the debt has become bad only in the particular year—After 31st Aug., 1999 nothing was paid till October, 2002 and in between, several cheques issued by the debtor bounced—There was a general recession in property market—Initiation of legal proceedings is not a condition precedent for claim of bad debt and at the same time, there is no prohibition for initiation of legal proceedings subsequent to write off.(reference filed by the Department against the above decision of the Bangalore Tribunal has been rejected by the Karnataka High Court through its order dated 8-11-2000 in Civil Petition No. 832/2000/(IT)).



•Decisions against the assessee:

•Siddharth Properties v DCIT (2012-(ID2)- GJX-1518-TPUNE)

•Wall Street Construction Ltd. v JCIT (2006) 102 TTJ (Mumbai)(SB) 505 : (2006) 101 ITD 156 (Mumbai)(SB) : (2006) 5 SOT 103 (Mumbai)(SB) Business expenditure—Interest on borrowed capital—Year of allowability—Assessee following project-completion method of accounting, the interest identifiable with that project should be allowed only in the year when the project is completed and the income from that project is offered for taxation—Same cannot be deducted as period cost from year to year—True profits in such a case can be determined only when entire cost of the project, direct or indirect, including finance cost is added to the value of work-inprogress.

•S K Estates (P) Ltd. v. ACIT (1997) 60 ITD (BOM) 621 Assessment—Determination of income—Accrual of income—Construction of building by assessee on behalf of ‘U’—Agreement with ‘U’ to receive profit rate of 5 per cent calculated on actual cost of construction—Income accrued to assessee on completion of construction—Liability to incur possible additional expenditure had nothing to do with the accrual of income on completion of the project—Assessee was liable to be taxed on accrued income

•DCIT v. Lokhandwala Construction Industries Pvt. Ltd. (2010-(ID1)-GJX-1635)(TBOM)



•Decisions against the assessee:

•JCT Ltd. v. ACIT (1998) 61 TTJ (Cal) 206 : 65 ITD 169Business expenditure—Interest on borrowed capital—Assessee capitalised the amounts—Same is in accordance with well-established principle of accountancy—To this extent, the entries made in books of account are as much binding as the method of accounting itself—Assessee, therefore, not entitled to claim these amounts as revenue expenditure for the reason only that it was otherwise permissible to do so—Once these expenses are capitalised they only represent the cost of the assets—Such interest can be included in computation of cost even in case of existing business—There is no basis to hold that provisions of s. 36(1)(iii) supersede the provisions of s. 43(1) relating to "actual cost“ insofar as interest paid on borrowings made for acquisition of capital assets is concerned—Provisions of s. 36(1)(iii) have no application to cost of assets which is governed by s. 43(1)

•Decisions where the issue was restored to the file of AO

•DCIT v. Lokhandwala Construction Industries Pvt. Ltd. (2010-(ID1)-GJX-1635)(TBOM)•Income Tax Officer V. Panchvati Developers. (2008) 115 TTJ (Mumbai) 139Business expenditure—Year of allowability—Assessee following project completion method—Advertisement expenses incurred by ‘D’ group of companies for five projects, three belonging to ‘D’ group and two belonging to assessee firm—2/5th of expenses so incurred allocated to assessee—Therefore, it could not be said that expenses were not allocable to particular project as 50 per cent of expenditure could be allocated to each project of assessee—Hence, they cannot be allowed in the year in question but have to be capitalised as work-in-progress of individual project to be allowed deduction in the year of completion of project


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125

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