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CaseIQ

B.K. Pate Enterprises v. Deputy Commissioner of Income-tax

Income Tax Appellate Tribunal

May 29, 2009

Judgment

Subsequent
References

CaseIQ

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Structured Summary of the Provided Opinion

Factual and Procedural Background

Source: Order by Mukul Shrawat, JM — appeal arising from order of CIT(A)-I, Pune dated 27 July 2007; assessment order dated 27 December 2006 for assessment year 2004-05.

This appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-I, Pune, dated 27 July 2007. The dispute concerns a single principal issue: disallowance by the Assessing Officer (AO) of a deduction under section 80-IB(10) of the Income-tax Act amounting to Rs. 17,69,025 in respect of a housing project known as "Pate Sanskriti".

Key factual and procedural points as narrated in the opinion:

The assessee is a promoter and builder engaged in housing projects and maintained accounts on a mercantile basis, preparing a consolidated profit & loss account for on-going projects.
Form 10CCB showed profit of Rs. 17,69,025 attributable to the "Pate Sanskriti" project, one of five on-going projects, and the assessee claimed deduction under s.80-IB(10) for that amount.
The AO observed that no sales were effected in the year under consideration in respect of the "Pate Sanskriti" project, yet profit had been declared based on the "percentage completion method" (work-in-progress method).
The AO recorded that there was no project-wise P&L account and that the project was only about 24% complete; on these bases the AO disallowed the s.80-IB(10) deduction.
The first appellate authority (CIT(A)) affirmed the AO's disallowance, reasoning that s.80-IB(10) did not permit deduction in respect of an incomplete project.
The assessee appealed to the Tribunal; the assessee reiterated prior arguments and relied on several case-law authorities before the CIT(A).

Legal Issues Presented

Whether, for the purpose of claiming deduction under section 80-IB(10), the law permits an assessee (developer/builder) to maintain books of account and determine profit by the "percentage completion method" (also described as "work-in-progress" or "project percentage completion method") and claim the deduction in the same year.
Whether deduction under section 80-IB(10) is available only to taxpayers who follow the "project completion method" (i.e., on completion of the project), and conversely whether incomplete projects are excluded from the deduction.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee followed the mercantile system and adopted the "percentage completion method" (work-in-progress) for on-going projects and declared profits accordingly in the relevant year.
The assessee claimed s.80-IB(10) deduction for the profit attributable to the "Pate Sanskriti" project (Rs. 17,69,025) despite the project not having recorded sales in that year, relying on the accepted accounting method of percentage completion and on precedents cited before the CIT(A).
Implicitly, the assessee contended that the method of accounting used should not, by itself, disqualify the claim for deduction under s.80-IB(10) when other conditions of the section are fulfilled.

Respondent's (Revenue / AO / CIT-DR) Arguments

The Assessing Officer took the position that in the absence of actual sales in respect of the project during the year and because the project was incomplete (about 24% complete), the deduction under s.80-IB(10) was not admissible.
The AO characterized the profit determination as effectively "ad hoc" because it was based on percentage completion with no project-wise P&L and no buyer/advance particulars for the project.
The learned CIT(A) agreed with the AO, holding that s.80-IB(10) did not permit deduction in respect of incomplete projects.
The Departmental Representative (CIT-DR) raised an apprehension that if deduction were allowed before completion within the prescribed period, the Revenue might be deprived of its dues in case the project ultimately failed to meet the statutory completion condition.

Table of Precedents Cited

The opinion explicitly cites multiple cases. The table below records the precedents mentioned in the opinion and reproduces only the information that the opinion itself provides about the principles or their application.

Precedent	Rule or Principle Cited For	Application by the Court (as stated in the opinion)
Mahindra Sintered Products Ltd. v. CIT [1989] 75 CTR 83 (Bom.); [1989] 177 ITR 111 (Bom.)	This information was not available in the provided opinion.	Cited by the assessee before the first appellate authority (CIT(A)); the opinion does not describe how the Tribunal applied this authority.
CIT v. Mazagaon Dock Ltd. [1991] 191 ITR 460 (Bom.)	This information was not available in the provided opinion.	Cited by the assessee before the first appellate authority (CIT(A)); the opinion does not record direct application by the Tribunal.
CIT v. Abhirami Cotton Mills (P.) Ltd. [1996] 134 CTR 123 (AP); [1996] 220 ITR 84 (AP)	This information was not available in the provided opinion.	Cited by the assessee before the first appellate authority (CIT(A)); the opinion does not explain specific reliance in the Tribunal's reasoning.
Bajaj Tempo Ltd. v. CIT [1992] 104 CTR 116 (SC); [1992] 196 ITR 188 (SC)	The opinion uses this authority to support the proposition that an incentive provision (such as s.80-IB(10)) should be construed liberally to promote the policy objective (promotion of housing projects).	The Tribunal cited Bajaj Tempo to justify a liberal construction of s.80-IB(10) in favour of promoting housing projects and to support the conclusion that the section should not be interpreted so as to deny deduction merely because a particular accounting method was adopted.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded in a structured manner. The key steps in the reasoning recorded in the opinion are as follows:

Statutory anatomy and purpose of s.80-IB(10): The Tribunal noted that s.80-IB(10) is an enabling provision granting deduction to income of an undertaking engaged in developing and building housing projects, subject to conditions (approval date, completion timeline depending on date of approval, limits on built-up area, etc.). The provision is intended to promote growth of housing projects.
Accounting methods and recognition of income: The Tribunal referred to Accounting Standard (AS) 7 — "Accounting for Construction Contracts" — which describes two commonly followed methods: (i) percentage of completion method (also referred to in the opinion as "work-in-progress" or "project percentage completion method") and (ii) completed contract method (project completion method). The Tribunal observed that both methods are recognised for the purposes of disclosing profits in the case of a builder.
Relationship between s.80-IB(10) and accounting methods: The Tribunal emphasized that s.80-IB(10) does not itself prescribe a particular method of accounting for determining income and is not part of the charging provisions (it is not governed by s.4 or s.145). Accordingly, absence of a specific statutory prescription in s.80-IB(10) as to the method of accounting means that the section cannot be interpreted to exclude taxpayers who adopt the percentage completion method.
Avoidance of anomalous taxation results: The Tribunal reasoned that accepting the Revenue's position (that deduction is available only on project completion) would create an anomalous result whereby the Revenue could tax profits declared each year under the percentage completion method yet refuse deduction until project completion — effectively taxing and then granting deduction in different years. The Tribunal regarded this as inconsistent with the general principle that the assessment year for income and the connected deduction should, broadly, fall in the same assessment year.
On factual sufficiency and AO's approach: The Tribunal found that the AO's disallowance rested largely on apprehension and absence of direct evidence (no sales, no project-wise P&L, no buyer/advance details) and that the AO could have verified the state of project completion by a physical on-site enquiry. The Tribunal held that the AO's denial on mere apprehension without supporting evidence was erroneous.
Rejection of the CIT(A)'s categorical view: The Tribunal disagreed with the CIT(A)'s conclusion that s.80-IB(10) is not available for incomplete projects. The Tribunal held instead that a taxpayer fulfilling all other requirements of s.80-IB(10) may adopt the "project percentage method" to determine eligible profits for the purpose of claiming deduction, subject to the AO being preliminarily satisfied as to the likely year of completion of the project.

Holding and Implications

Core Holding: The Tribunal allowed the appeal and decided the issue in favour of the assessee. Formally, the order concludes: APPEAL ALLOWED.

Direct consequences and practical implications explicitly stated in the opinion:

The Tribunal held that an assessee engaged in a housing project and meeting all other statutory requirements of s.80-IB(10) may adopt the "project percentage method" (percentage completion / work-in-progress method) to compute profits eligible for deduction under s.80-IB(10).
The AO's disallowance of the deduction in the facts of this case (noting absence of sales, project incompleteness and reliance on percentage completion) was held to be erroneous because it was grounded on unsupported apprehension and without on-the-spot verification of project progress.
The entitlement to deduction when profits are declared under the percentage completion method is subject to preliminary satisfaction of the AO regarding the year of completion of the project (i.e., the AO retains the ability to satisfy itself by appropriate verification of facts).

Broader precedent status: The opinion reasons about the proper construction of s.80-IB(10) and articulates a legal position favourable to taxpayers using the percentage completion method. The opinion itself does not state whether it is intended to be treated as establishing a binding precedent beyond this case; accordingly, this summary notes only the direct effect on the parties in this appeal.

End of summary. The above captures the facts, issues, arguments, precedent citations and stepwise reasoning as set forth in the provided opinion and does not add information not contained in the source text.

Show all summary ...

ORDER

Mukul Shrawat, JM. :

This is an appeal at the behest of the assessee emanates from the order j of CIT(A)-I, Pune, dt. 27th July, 2007. There is only one issue in this appeal in respect of disallowance of deduction under s. 80-IB(10) of Rs. 17,69.025 pertaining to a project viz., "Pate Sanskriti". Though in the grounds of appeal few more grounds are raised however they are argumentative in nature and in support of the main ground to be dealt within the following paras of this order. However at the incipience we may like to draw the main issue that whether for the purpose of claim of deduction under s. 80-IB(10) the law permits a claimant assessee to maintain the books of accounts on "percentage completion method". In other words whether the s. 80-IB(10) entitles the deduction only to those claimant assessees who maintain their books of accounts on "project completion method" basis.

2. Facts in brief related to the main ground as emerged from the corresponding assessment order passed under s. 143(3), dt. 27th Dec, 2006 for asst. yr. 2004-05 were that the assessee is in the business of construction and worked as a promoter and builder of housing projects. The AO has noted that few housing projects were undertaken by the assessee however the issue in hand was only in respect of a project viz., "Pate Sanskriti". It has also been noted by the AO that the assessee has followed mercantile method of accounting and prepared a single consolidated P&L a/c in respect of on-going projects. It was perused from the Form 10CCB certificate that out of the total profits; the assessee had earned profit of Rs. 17,69,025 from the project "Pate Sanskriti" which was one of the projects out of the five on-going projects and the assessee claimed the deduction under s. 80-IB(10) in respect of the said project only. Further, it has also been noted by the AO that the sale of flats shown in the P&L a/c were of Rs. 4,56,03,351 however no sales were effected during the year under consideration pertained to the project "Pate Sanskriti". The AO has also perused the method of accounting of the assessee and have found that the assessee has followed "work-in-progress method" in respect of all housing projects. According to AO "work-in-progress" was inventorised and valued in accordance with the percentage completion method. The AO has thus recorded a factual finding that a net profit was shown in respect of a housing project "Pate Sanskriti" on the basis of "percentage completion method" at Rs. 17,69,025 and claimed exemption under s. 80-IB(10) of IT Act though admittedly no sales were made in respect of the said project. May it be noted that inverted commas or quotation marks are applied to identify the different methods referred to in this judgment. Further, according to AO there was no project-wise P&L a/c. In the absence of any sales pertaining to the said project, the AO has held that the deduction under s. 80-IB(10) was not admissible. On that basis the AO has concluded that the conditions specified under s. 80-IB(10) have not been fulfilled therefore, the assessee is not eligible for the deduction. According to him, though the project was stated to be completed to the extent of 24 per cent but in the absence of actual sales the profit determined was basically on ad hoc method simply by following "percentage completion method". It has also been noted that the assessee was unable to furnish the details of the buyers or the advance received etc. so AO has raised an apprehension that in the years under consideration it could not be presumed that the project would be completed within the prescribed time hence resulted into the denial of exemption. This was challenged.

3. Before the first appellate authority basic arguments were reiterated and reliance was placed on the following three decisions :

(a) Mahindra Sintered Products Ltd. v. CIT [1989] 75 CTR 83 (Bom.) : [1989] 177 ITR 111 (Bom.);
(b) CIT v. Mazagaon Dock Ltd. [1991] 191 ITR 460 (Bom.);
(c) CIT v. Abhirami Cotton Mills (P.) Ltd. [1996] 134 CTR 123 (AP) : [1996] 220 ITR 84 (AP).

3.1 Learned CIT(A) has held that s. 80-IB(10) lays down that the deduction is available in respect of a housing project whose development and construction is commenced on or after 1st Oct., 1998 and to be completed by the specified date as contained under s. 80-IB(10)(a)(ii). Learned CIT(A) has drawn a conclusion that the deduction is not available in respect of incomplete project. The action of the AO was affirmed.

4. Heard the submissions of both the sides. As marked at the very off-set of this judgment the issue is short but interesting because of the primary reason that the law is developing in respect of claim of deduction under s. 80-IB(10) of IT Act having varied ramification. Therefore, it is necessary, to know the anatomy of the section and also the purpose of its enactment. This section gives deduction to an income of an undertaking engaged in developing and building housing projects. The conditions are that the approval should have been granted after 1st Aug., 1998. if the approval is granted before 1st April, 2004 the construction should be completed on or before 31st March, 2008. If approval is granted after 1st April, 2004 the construction should be completed within four years of approval. Rest of the conditions are about the built-up area of each residential unit as also the total area of the project. An entrepreneur undertaking the development and construction of a housing project may qualify for deduction subject to completion of the project within the specified period. However, this aspect of an expanded period of completion of the Revenue Department definitely cannot be ignored that at the time of preliminary stage of construction it cannot be presumed that the project shall always going to be completed within the prescribed time. Therefore, even at this stage we can make an observation that it is incorrect to grant deduction in each and every case just at the nascent stage of the project without judging its feasibility and future prospects of completion whether to be accomplished within the desired time frame or not. This is the one aspect of the issue needs due consideration and fair judgment, at the time of proceedings of assessment, naturally based upon the facts of each case. Side by side the other aspect has equal bearing that in such cases where a builder-cum-developer of a real estate is following "work-in-progress" method or "project percentage completion method" as against the "work completion method" or "project completion method" then what will be his entitlement for the deduction prescribed under s. 80-IB(10) of IT Act. At this point it is worth to mention that in the case of long-term contract, according to accepted principle of accountancy it is often appropriate to spread the estimated earning over the period of the completion of the project. So the question of adoption of "work-in progress" method and declaration of profit as "profit percentage completion method" cannot be ruled out or in any manner to be discouraged.

5. Therefore, to resolve this legal problem it is obvious to first examine both the methods though cursorily but to get a fair idea about these two methods. For the purpose of recognition of income in the case of a businessman doing construction work as a builder the guidelines are issued by the ICAI under the head "Accounting for Construction Contracts", Accounting Standard-7. As per cl. 7.1 of AS-7 two methods of accounting for construction, commonly followed by the contractors are prescribed :

(i) percentage of completion method;
(ii) completed contract method.

In common language percentage of completion method is also termed as "work-in-progress" method or "project completion method". Under the cl. 7.2 of AS-7 the method in respect of "percentage of completion method" is prescribed to determine the profits.

5.1 Though we are concerned with this method, nevertheless for the sake of completeness we also discuss in short keeping brevity in mind the determination of profit under "project completion method".

5.2 From the above discussions, it is evident that both the methods are recognized in the context of IT Act for disclosing the profits in the case of a builder.

5.3 On the basis of the above discussion now again we have to revert back to the preliminary question that in the absence of any mention in s. 80-IB(10) specifying the application of any particular method of accounting so as to arrive at the eligible profit, whether the AO is legally justified in rejecting assessee's "project percentage completion method" of accounting and thereby held that the deduction is available only to those having "project completion method". Before we proceed further, we have to borne in mind that we are dealing with an enabling section i.e., s. 80-IB(10) which prescribes deduction in respect of category of profit being earned from housing projects. This section is not part materia with the charging section or a section prescribing method of computation of profits. Therefore, s. 80-IB(10) cannot be said to be governed by s. 4 or s. 145 of IT Act. Therefore, if an income is offered to tax following the governing section then only thereafter applies on the computed income the next part of Act i.e., provisions of deductions. The purpose of granting this incentive is to promote the growth of housing projects hence otherwise also the section is to be construed liberally; for this proposition reference is Bajaj Tempo Ltd. v. CIT [1992] 104 CTR 116 (SC) : [1992] 196 ITR 188 (SC) .

6. Not only this, if we accept the suggestion of the Revenue that s. 80-IB(10) is to be granted to those taxpayers who follow only "project completion method" then quite an absurd situation shall arise that the developers following "project percentage method" shall be taxed on time to time declaration of percentage profit but shall not be entitled for the deduction though all other requirements of the section being fulfilled. It would tantamount to denial of exemption to a taxpayer though otherwise admissible being conditions fulfilled but due to not following particular method of accounting. No one can pass such an anomalous dictum; specially while dealing a legal problem. A Judge has to keep in mind an overall situation; factual as also legal, so thereupon pronounce a dictum ought to be legally sustainable in the eyes of law. In the present situation the Revenue is taxing the profit on "project percentage method" but suggesting to grant deduction only on completion of the project. If we accept the stand of the Revenue and pass a dictum that the deduction should be available only on completion of a project then undisputedly an anomaly shall arise as to how and when the tax should be charged. This is not the scheme of the Act to first tax an income in a particular year and grant deduction on that very income in a different later year i.e., on completion of project, as was applied by AO in the present case. Rather the broadly accepted principle is that the year of assessment of income and connected deduction should fall in the same assessment year. If the Revenue is taxing the profit in the year under consideration on the ground that the assessee is adopting "project percentage method" as happened in this case, then the natural corollary should be that the connected deduction ought to be granted simultaneously in this very year or the other method of computation of income is that the Revenue must not tax the profit of the project yearly on the basis of "project percentage method"; but tax the entire profit at the completion of the project by applying "project completion method".

6.1 An apprehension was expressed by learned CIT-Departmental Representative, Shri R. Kaushal that in case of violation of one of the conditions of completion of the project i.e., to complete within the prescribed time the Revenue shall deprive of its legal dues. We are of the opinion that such an apprehension can be said to be ill-founded and premature because the Revenue has enough powers duly supported by several provisions to assess an escaped income or a deduction wrongly granted. Peculiar facts of this appeal revealed as pointed out by learned Authorised Representative, that by the time the assessment was completed in the year 2006. the date of order is 27th Dec, 2006, the project was near completion since it was started in the November, 2003. So instead of apprehending or concocting some happening, the AO could have removed such suspicion by conducting an on the spot enquiry to verify the progress of completion of the housing project. Under no logic such an unsupported apprehension can get the sanction of law hence we hereby overrule the same. On given facts we can pronounce that the AO has erred in disallowing the claim mainly on an apprehension that too without any supporting evidence. We also cannot endorse the view of the learned CIT(A) that s. 80-IB(10) is not available to incomplete projects because of the reason, as discussed in detail ante, that the section does not debar such a claim on one hand and on the other hand the method of accounting permits declaration of profit on "percentage completion method" as also taxed in the hands of the assessee in the present case. We therefore can conclude inter alia, that a taxpayer having housing project and fulfilling all other requirements of s. 80-IB(10) can adopt "project percentage method" to arrive at the eligible profits for claim of prescribed deduction subject to preliminary satisfaction of the AO about the year of completion of the project. Resultantly the issue is hereby decided in favour of the assessee.

7. Appeal allowed.