The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the claim on the cost of construction shall be made in accordance with the Supplementary Development Agreement.
The assessee is a widely held public limited company that earlier owned a textile mill land which was converted into a residential house and the assessee entered into the real estate business. The assessee entered into an agreement with Godrej Properties Limited (GPL) for the development of a residential project in which there was an arrangement to share the surplus from the project at an agreed percentage.
The assessee filed the return of income declaring an income of Rs.25,73,24,918/- The case was selected for scrutiny and the statutory notices were duly served on the assessee.
The Assessing Officer, during the course of assessment proceedings, noticed that as per the agreement entered into with GPL, the cost of construction for Towers I to IV was estimated at Rs.2,315/- per sq.ft. and in respect of Tower V at Rs.3,815/-. Therefore, an addition of Rs.10,32,70,436/- the assessee’s share in the differential cost was imposed.
The Authorized Representative submitted that GPL had given the average cost of the project to be Rs.3,599/- and the assessee had claimed the cost of construction at Rs.3,438/- which is lower than the cost as given by GPL. The supplementary development agreement was entered into between the assessee and GPL whereby the final rate was agreed at Rs.4,118/- for Tower I to V as per clauses 1 and 2 of the agreement.
Therefore, it was submitted that the cost of construction was considered based on GPL’s submission i.e..3166 cannot alone be taken as the basis since GPL itself has been issuing letters quoting the higher cost of construction.
It was further submitted that under the percentage completion method, which the assessee is following the figures of the cost of the project would change from year to year as compared to the original estimates and that the cost claimed in the subsequent years would also include the incremental per sq.ft cost in respect of units sold in the earlier years.
The Two-member bench comprising of Pavan Kumar Gadale (Judicial member) and Padmavathy S. (Accountant member) held that there was merit in the submissions of the Authorized Representative that the cost of construction as given by GPL keeps changing from time to time and that what the assessee for the year under consideration has taken as cost is less than the average rate submitted by GPL.
The final cost of construction agreed between the assessee and GPL as per the supplementary agreement was Rs.4,118/-. Considering these facts, there was no infirmity in the cost of construction claimed by the assessee for the year under consideration at Rs.,3438/- per sq.ft. which is below the average rate communicated by GPL and the final rate agreed with GPL. Therefore, the disallowances of Rs.10,32,70,436/- was deleted and the appeal of the assessee was allowed.
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