The division bench of the Delhi High Court has recently upheld the project completion method as a well-known and accepted method of accounting in an appeal filed against the revenue against the DLF Universal Ltd. The decision was based on the same Court’s decision in Paras Buildtech India P. Ltd. v. Commissioner of Income Tax.
The assessee, DLF Universal Ltd, and its subsidiaries are engaged in the business of developing land into plots and sells it after obtaining license from the Haryana Government. The purchase of land is through its 40 subsidiary companies, which purchases land from agriculturalists. The assessee grants funds for such acquisitions. The subsidiaries do not develop the land but have entered into agreements to sell them only to the assessee company or their nominees at specified rates. The right to develop the land in terms of the licenses and the right to enter into agreements to sell the land or interests thereon have been given by the subsidiary companies to the assessee through separate agreements. The assessee, buys the plots and constructs residential units/flats to the prospective buyers who pays the consideration as advance in installments. Such receipts of advance from the customer’s account till the property was conveyanced in favour of the prospective buyers are shown in the books of the assessee as ”realization under agreement to sell”.
For the assessment year under consideration, the assessees’ declared income of Rs. 8,59,28,760/– was revised by them by declaring a loss of `93,39,470/-. However, the Assessing Officer, u/s 143(3), completed assessment by rejecting the method of accounting followed by the assessee. The AO noted that the assessee was following the project completion method, as per which the transfer from the advance account and crediting to the profit and loss account the sums of money received from the prospective purchasers. All direct expenses incurred on development of land and construction was debited proportionately to the profit and loss account only in the year of conveyancing by taking the average cost of the land. It was noticed that there was no cancellation clause in the sale agreement for non-execution of the sale deed within the time nor was there any penalty clause for non-execution of the sale deed on deposit of the basic sale price. Based on these observations, the AO felt that it was not possible to arrive at a true profit and applied proviso to Section 145 (1) of the Income Tax Act, 1961 to reject the method of accounting.
The first appellate authority as well as the Appellate Tribunal refused to accept the findings of the AO and held that the assessee has adopted appropriate method of accounting. Against the order of ITAT, the Revenue preferred an appeal before the High Court.
Based on precedents, the Court held that the project completion method is a known and recognized method of accounting. The Court noticed the decision in Paras Buildtech India P. Ltd. v. Commissioner of Income Tax, in which it was held that the project completion method is a known and recognized mode of accounting and this mode was approved as a proper method, which identified receipt of income or revenue only upon the completion of the contract. It Court also noted that in the above case, the ITAT’s decision that risks and rewards’ of ownership was transferred to the buyers upon payment of booking advance amounts and even transferred to third parties was a ground for rejection, was disapproved. However, these instances did not in any manner affect the treatment of the said amounts in the books of the Assessee.
Considering the above decision as a binding precedent for the present case, the bench observed that “the change in the accounting method in 1992-93 ipso facto could not have resulted in loss of revenue as is urged by the tax authorities in the present case. The distortions, which the revenue urges relate to the treatment of development charges as well as the treatment of expenditures such as brokerage, commission and interest payments. The assessees’ explanation here is that the 30% of the sums realized by it were under compulsion of law to be treated as development expenses and kept in a separate escrow account under the control of the HUDA. The revenue has not disputed this position. In that sense, the assessee was justified by statute to appropriate the sums towards development expenses. So far as the treatment of revenue with respect to brokerage and interest payments is concerned, the assessee again has an explanation, which is a rational one: i.e., that only such of the expenses attributable to the agreement with the purchasers was debited as expenditure.”
“So far as the question of applicability to section 2 (47) of the Act or Section 53(A) of the Transfer of Property Act is concerned, legally speaking, part performance is undoubtedly an interest or right known to law. However, part performance, pre-supposes handing over a possession, at the time the agreement is entered into. Having regard to the assessee’s uniform pattern of revenue recognition that only upon execution of the conveyance/sale-deed, would the amounts lying with it be treated as profit and brought to tax, the possibility that in law certain flat or plot buyers could be handed over possession earlier per se would not result in distortion of the kind stated by the revenue. There is no material or evidence in this regard nor was cited by the revenue.” The bench said.
Read the full text of the judgment below.
