ITO, Ward - 50(4), Kolkata, Kolkata v. M/s. Best & Best Construction, Kolkata

ITA 1612/KOL/2010 | 2006-2007
Pronouncement Date: 31-01-2011

Appeal Details

RSA Number 161223514 RSA 2010
Assessee PAN AAEFB9851C
Bench Kolkata
Appeal Number ITA 1612/KOL/2010
Duration Of Justice 5 month(s) 19 day(s)
Appellant ITO, Ward - 50(4), Kolkata, Kolkata
Respondent M/s. Best & Best Construction, Kolkata
Appeal Type Income Tax Appeal
Pronouncement Date 31-01-2011
Appeal Filed By Department
Bench Allotted A
Tribunal Order Date 31-01-2011
Assessment Year 2006-2007
Appeal Filed On 12-08-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BENCH : KOLKATA () BEFORE . . . . . . . . !' !' !' !' /AND . .. . . .. .! !! ! # ) [BEFORE HONBLE SRI D. K. TYAGI JM & HONBLE SRI C . D. RAO AM] '$ '$ '$ '$ / I.T.A NO. 1612 /KOL/2010 %&' !() %&' !() %&' !() %&' !()/ // / ASSESSMENT YEAR : 2006-07 INCOME-TAX OFFICER WD-50(4) KOLKATA -VS- M/S. BE ST & BEST CONSTRUCTION (PA NO. AAEFB 9851 C) ( + /APPELLANT ) (-+ / RESPONDENT ) FOR THE APPELLANT : SRI S. C. JAIN FOR THE RESPONDENT : SRI D. K. SAHA . / ORDER PER D. K. TYAGI JM ( . . . . . . . . ) THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER PASSED BY THE LD. CIT(A) KOLKATA DATED 20 TH MAY 2010 FOR ASSESSMENT YEAR 2006-07 ON THE FOLLO WING GROUNDS : 1.THE LD. COMMISSIONER OF INCOME TAX (APPEALS)- XX XII KOLKATA HAS ERRED IN DELETING THE ADDITION OF RS.9 63 587/- MADE BY YOU AS THE PROFIT AMOUNT WAS NOT RECOGNIZED IN THE ACCOUNTS OF THE ASSESSEE WITHOUT CONSIDERING THE FACTS THAT ASSESSEE HAS RECOVERED (RS.1 37 32 156/-) FROM THE PURCHASER S MORE THAN WHAT COULD BE ITS COST OF PROJECTS ( RS 1 32 45000-). 2. THE LD. COMMISSIONER OF INCOME TAX (APPEALS)- XX XII KOLKATA HAS ALSO ERRED BY HOLDING THAT THE ASSESSEE HAD NOT TRANSFERRED THE S IGNIFICANT RISK AND REWARDS OF THE OWNERSHIP OF THE PROPERTY TO THE BUYERS WITHOUT CON SIDERING THE FACTS THAT THE ASSESSEE WAS IN A POSITION TO HANDOVER THE TITLE OWNERSHIP O F FLATS BUT DID NOT DO SO. 3. ASSESSEE HAD GIVEN LOAN AMOUNTING TO RS 25.90.00 0/- TO ITS PARTNERS BUT NO INTEREST HAD BEEN SHOWN. IT SHOULD CHARGED INTEREST TO PARTN ERS IF IT WAS GIVING INTEREST ON CAPITAL OF THE PARTNERS AND FOR THE REASON INTEREST OF RS. 1 39.636- WAS NOT ALLOWED. 4. NEW PARTNER INDUCTED INSTEAD OF DECEASED PARTNER . THERE WAS NO MENTION IN AMENDED PARTNERSHIP DEED REGARDING REMUNERATION TO THIS NEW PARTNER. SO REMUNERATION PAID TO NEW PARTNER AMOUNTING TO RS 76.664/- WAS DISALLOWED . 2 2. GROUND NOS. 1 AND 2 RELATE TO THE ACTION OF THE LD. CIT(A) IN DELETING THE ADDITION OF RS.9 63 587/- AS THE PROFIT AMOUNT WAS NOT RECOGNIZED IN THE ACCOUNTS OF THE ASSESSEE. BRIEFLY STATED FACTS AS OBSERVED BY THE A SSESSING OFFICER ARE AS FOLLOWS : 2. THE ASSESSEE IS A BUILDER AND IN BUSINESS OF CO NSTRUCTING FLATS AND SELLING THEM. PROFIT AND LOSS ACCOUNT OF ASSESSEE SHOWS THAT DURI NG THE YEAR UNDER CONSIDERATION ASSESSEE HAS SHOWN VALUE OF WORK-IN-PROGRESS OF RS 41 50 000/-. ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF THIS WORK IN PROGRESS IN RE SPONSE ASSESSEE FURNISHED A CERTIFICATE FROM VALUER STATING AS UNDER : THIS IS TO CERTIFY THAT THE CIVIL CONSTRUCTION WOR K DONE FOR THE PERIOD FROM 01.4.2005 TO 31/3/2006 AT PREMISE NO 520 DUMDUM ROAD KOLKATA-70 0074 HAS BEEN WORKED OUT TO 30% (PPROX) OF THE TOTAL WORK TO BE COMPLETED AND THE MARKET VALUE OF SUCH WORK DONE HAS BEEN ESTIMATED TO BE RS.41 50 000.00 3. THE AFORESAID CERTIFICATE HAS NOT GIVEN ANY BASI S HOW THE VALUER COMPUTED THE MARKET VALUE WORK DONE DURING THE YEAR. IT ALSO DOES NOT S TATE WHETHER 30 % OF THE TOTAL WORK IS THE LAST 30% I. E BALANCE OF THE WORK LEFT OR HOW MUCH WORK STILL LEFT AFTER COMPLETION OF THESE WORK. HOWEVER FOLLOWING FACTS EMERGED DURING THE SCRUTINY PROCEEDING SHOWED THAT THE CERTIFICATE WAS FETCHED TO GIVE THE WORK-I N-PROGRESS WHICH IS ARBITRARY A COLOUR OF AUTHENTICITY OF THE VALUE OF WORK IN PROG RESS. I. BUILDING PLAN WAS SANCTIONED ON 14/11/2003. II. THE VALUER WHO VALUED WORK-IN-PROGRESS ALSO MAD E THE PROJECT REPORT FOR ASSESSEE. HIS PROJECT REPORT DATED 16/10/2004 MENTI ONED UNDER HEADING PERIOD AND STAGE OF CONSTRUCTION AS UNDER : THE PLAN HAS BEEN SANCTIONED FROM SOUTH DUM DUM M UNICIPALITY VIDE NO. THE CONSTRUCTION OF BUILDING STARTED IN 2004 AND BY THIS TIME THE FOLLOWING WORK HAS ALREADY BEEN COMPLETED. COMPLETE FOUNDATION COMPLETE R C WORK OF ALL FLOORS. COMPLETE EXTERNAL AND INTERNAL BRICK WORK. THEREFORE AS ON 16/10/2004 MAJOR WORK WAS ALREADY C OMPLETED. THE PROJECT COST WAS ESTIMATED BY THE VALUER AT RS. 1 10 04 994 WHICH INCLUDED EVEN THE ARCHITECT FEE. THE ASSESSEE HAS SPENT MORE THAN 1 30 00 000/ TILL NOW WHICH IS ALMOST 20 % MORE THAN PROJECTED COST AND S TILL CLAIMED THAT WORK IS IN PROGRESS. III. AS PER BALANCE SHEET THE ASSESSEE HAS COLLECT ED OF RS 1 37 32 156 PURCHASE PRICE IN ADVANCE WHICH MEANS THAT MORE THAN 100 % O F THE COST HAS BEEN RECOVERED ALREADY. 4. DURING THE YEAR UNDER CONSIDERATION ASSESSEE-HA S SHOWN 12 PURCHASER. IT IS SEEN THAT 7 OUT OF THEM HAVE PAID THE AMOUNT OF PURCHASE FULLY BY FY 2005-06. AND THE REST 3 OF 5 PURCHASER HAD TO PAY ONLY BALANCE 10% AS ON 31 /3/2006. THEREFORE ON THE BASIS OF AFORESAID FACTS THE ASSESSEE WAS ASKED VERY SIMPLE QUESTION VIDE NOTICE U/S 142(1) DT. 15/12/2008 AS UNDER: THE VALUE OF WORK SHOWN IN THE P & L ACCOUNT IS AR BITRARY AND WITHOUT ANY BASIS .SAME IS THE CASE OF CERTIFICATE ISSUED BY TH E REGISTERED VALUER WHO WITHOUT ASSIGNING ANY REASON STATED THAT MARKET VALUE OF TH E WORK COMPLETED DURING FY 2005-06 IS RS 41 50 000. THE REVENUE RECOGNITION HAS TO BE ACCORDING TO WELL ESTABLISHED ACCOUNTING METHOD. IT IS SEEN THAT OUT OF TOTAL 12 PARTIES WHO M YOU HAVE SOLD THE FLATS AND GARAGE 7 HAVE PAID FULLY BY FY 2005-06. EVEN REST OF THE FIVE PURCHASERS HAVE PAID MORE THAN 90 % OF THE VALUE OF FLATS. WHICH MEANS THAT THE RISK HAS SIGNFICANTLY SHIFTED TO THE PURCHASER FROM THE BUILDER. AS SUCH YOU SHOULD HAVE RECOGNIZED THE FU LL VALUE OF FLATS COMPUTED AS UNDER TOTAL SALE VALUE OF FLATS OF 12 PURCHASERS = RS 1 42 08 587 LESS VALUE ALREADY SHOWN UPTO FY 2004-05 RS. 90 95 000 REVENUE REQUIRED TO BE RECOGNIZED RS 51 13 587 EXPLAIN WHY SHOULD YOUR ACCOUNTS NOT BE REJECTED U/ S 145(3) OF THE I T ACT AS NOT RECOGNIZING THE REVENUE WHICH YOU SHOULD HAVE I S NOT SHOWING TRUE PROFIT OF YOURS. 5. THE A.R OF THE ASSESSEE SUBMITTED A LETTER DATED 19/12/2008 BY WHICH HE STATED THAT AN APPLICATION U/S 144A HAS BEEN MADE TO ADDL.CIT R ANGE -50 ON THE GROUND THAT REASONING FOR REJECTION OF ACCOUNTS U/S 145(3) BY T HE AFORESAID NOTICE U/S 142(1) DT 15/12/2008 IS NOT CORRECT. APART FROM THIS THE A.R ALSO MADE FOLLOWING ARGUMENTS : 1. IT IS FOLLOWING PERCENTAGE COMPLETION METHOD AS STATED UNDER AS-7. 2. IT IS REGULARLY FOLLOWING THIS METHOD. THE APPLICATION U/S 144A WAS REJECTED BY THE ADDL. CIT-RANGE 50 KOLKATA BY A SPEAKING ORDER VIDE NO ADDL.CITIR-50/KOII144A/2008- 09/614 DATED 30/12/2008. 6. ALTHOUGH THE ISSUE OF REJECTION OF ACCOUNTS HAS BEEN DEALT BY A HIGHER AUTHORITY STILL IT REQUIRES TO BE IMPRESSED THAT THE CONTENTION OF THE ASSESSEE THAT IT FOLLOWS THE PERCENTAGE COMPLETION METHOD IS NOT CORRECT BECAUSE THE IN CASE OF PERCENTAGE COMPLETION METHOD EVEN COST IS FOLLOWED IN PERCENT AGE TERMS. THAT IS THE COST EQUIVALENT TO THE PERCENTAGE OF WORK IS DEBITED AND THE REVENUE IS ALSO RECOGNIZED UP TO THAT PERCENTAGE OF WORK. IN CASE OF ASSESSEE WHILE THE COST IS DEBITED FULLY THE WORK IN PROGRESS IS VALUED ARBITRARILY AND CLAIMED TO BE A PERCENTAGE OF WORK. MOREOVER THE ACCOUNTING STANDARD AS-7 IS APPLICABL E IN CASE OF CONTRACTORS AND NOT BUILDERS. THE REASON FOR SUCH NON APPLICATION IS TH AT WHILE IN CASE OF CONTRACTOR THE REVENUE ACCRUES THE MOMENT A PORTION OF WORK IS FIN ISHED OR FULLY FINISHED IN CASE OF 4 BUILDERS THE REVENUE IS GENERATED ON SALE OF FINISH ED PRODUCT I.E FLAT OR HOUSE. EVEN IF THE BUILDING IS COMPLETED STILL THERE WILL NOT BE ANY REVENUE TO A BUILDER IF THE FLAT IS NOT SOLD. THERE IS NO ACCOUNTING STANDARD FOR ACCOUNTING IN C ASE OF BUILDERS IS NOTIFIED 1CAI THE HIGHEST CONSTITUTIONAL ACCOUNTING BODY- HAS ISS UED GUIDANCE NOTE ON REVENUE RECOGNITION IN CASE OF BUILDERS. THE RELEVANT PORTI ON OF THE GUIDANCE NOTE IS GIVEN AS UNDER : RECOMMENDATION REVENUE IN CASE OF REAL ESTATE SALES SHOULD BE RECO GNISED WHEN ALL THE FOLLOWING CONDITIONS ARE SATISFIED : 1. THE SELLER HAS TRANSFERRED TO THE BUYER ALL SIGN IFICANT RISKS AND REWARDS OF OWNERSHIP AND THE SELLER RETAINS NO EFFECTIVE CONTR OL OF THE REAL ESTATE TRANSFERRED TO A DEGREE USUALLY ASSOCIATED WITH OWN ERSHIP; II. AT THE TIME OF TRANSFER OF ALL SIGNIFICANT RISK S AND REWARDS OF OWNERSHIP IT IS NOT UNREASONABLE TO EXPECT ULTIMATE COLLECTION; AND III. NO SIGNIFICANT UNCERTAINTY EXISTS REGARDING TH E AMOUNT OF THE CONSIDERATION THAT WILL BE DERIVED FROM THE REAL ESTATE SALES. ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP ARE ALSO CONSIDERED TO BE TRANSFERRED IF THE SELLER HAS ENTERED INTO A LEGAL LY ENFORCEABLE AGREEMENT FOR SALE WITH THE BUYER AND ALL THE FOLLOWING CONDITION S ARE SATISFIED EVEN THOUGH THE LEGAL TITLE IS NOT PASSED OR THE POSSESSION OF THE REAL ESTATE IS NOT GIVEN TO THE BUYER: (A) THE SIGNIFICANT RISKS RELATED TO REAL ESTATE HA VE BEEN TRANSFERRED TO THE BUYER. IN CASE OF REAL ESTATE PRICE RISK IS GENERALLY CONSID ERED TO BE ONE OF THE MOST SIGNIFICANT RISKS. (B) THE BUYER HAS A LEGAL RIGHT TO SELL OR TRANSFER HIS INTEREST IN THE PROPERLY WITHOUT ANY CONDITION OR SUBJECT TO ONLY SUCH CONDITIONS WH ICH DO NOT MATERIALLY AFFECT HIS RIGHT TO BENEFITS IN THE PROPERTY THEREFORE EVEN THE GUIDANCE NOTE BY 1CM STATES THA T THE REVENUE SHOULD BE RECOGNIZED IF PAYMENTS HAVE BEEN RECEIVED EVEN THOU GH 1. LEGAL TITLE HAS NOT PASSED. 2. POSSESSION HAS NOT BEEN GIVEN TO THE BUYER. 7. IN THE INSTANT CASE ALL THE AFORESAID CONDITION S ARE SATISFIED . THE ASSESSEE HAS RECEIVED RS.1 37 32 156 FROM PURCHASERS WHEN THE TO TAL WORK IN PROGRESS INCLUDING FOR THE FY 2005-06 IS ONLY RS 1 32 45 000 . WHICH MEANS THAT ASSESSEE HAS RECOVERED MORE THAN WHAT COULD BE ITS COST. THEREFORE THERE IS NO REASON FOR IT NOT TO RECOGNIZE THE REVENUE RELATED TO SOLD OUT FLATS. AS IT HAS NOT DO NE SAME THE PROFIT WHICH IS BEING SHOWN IS NOT CORRECT WHICH IS RESULT OF WRONG ACCOU NTING FOLLOWED BY THE ASSESSEE. THEREFORE I AM COMPELLED TO INVOKE PROVISION U/S 1 45(3) TO HOLD THAT THE ASSESSES PROFIT HAS TO BE COMPUTED BY RECOGNIZING REVENUE OF RS 51 13 587 AS COMPUTED IN THE SHOW 5 CAUSE (PARA 4). THAT MEANS THAT PROFIT HAS TO BE I NCREASED BY RS 9 63 587 (RS 51 13 587 RS 41 50 000 ). IN APPEAL THE LD. CIT(A) DELETED THE SAID ADDITION . AGGRIEVED BY THE SAID ORDER THE REVENUE IS NOW IN APPEAL BEFORE US. 3. AT THE TIME OF HEARING BEFORE US THE LD. DR RELI ED ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF BUILDERS AND CONSTRUCTING FLATS AND SELLING THEM. IN THE ASSESS MENT YEAR 2006-07 ADDITION TO ASSESEES INCOME WAS MADE ON ACCOUNT OF REVENUE NOT RECOGNIZED AT RS.9 63 587/-. THE ASSESSING OFFICER MADE THE ADDITION FOR THE REASON THAT DURING THE FINANCIAL YEAR 2005- 06 ASSESSEE HAD SHOWED 12 PURCHASERS AND OUT 12 PUR CHASERS 7 PURCHASERS PAID THE FULL AMOUNT BY F.Y. 200506 AND REST 5 PURCHASERS PAID M ORE THAN 90% BY F.Y. 2005-06. IN VIEW OF ABOVE FULL VALUE OF FLATS OF 12 PURCHASE RS: RS. 1 42.08.587/- LESS: VALUE ALREADY SHOWN IN F.Y.2004-05 : RS. 90 95.000/- REVENUE REQUIRED TO HE RECOGNIZED : RS. 51 13 587/ THE ASSCSSEE HAD RECEIVED RS. 1 37 32 156/- FROM PU RCHASERS WHEN THE TOTAL WORK-IN- PROGRESS INCLUDING FOR THE FINANCIAL YEAR 2005-06 W AS ONLY RS. 1.32.45 000/- WHICH MEANS THAT ASSESSEE HAS RECOVERED MORE THAN WHAT CO ULD HE ITS COST. THEREFORE THERE IS NO REASON FT)R IT NOT TO RECOGNIZE THE REVENUE RELA TED TO SOLD OUT FLATS. AS IT HAS NOT DONE SAME. THE PROFIT WHICH WAS BEING SHOWN WAS NOT CORR ECT WHICH RESULT OF WRONG ACCOUNTING FOLLOWED BY THE ASSESSEE. THEREFORE PRO FIT HAD TO BE COMPUTED BY RECOGNIZING RCVENUE OF RS.51 13 587/-AND THAT MEANS PROFIT HAD TO BE INCREASED BY RS.9 63 587 AND ADDED TO THE TOTAL INCOME. HE LAST LY PRAYED BEFORE THE BENCH THAT THE ORDER OF THE LD. CIT(A) MAY BE SET ASIDE AND THAT O F THE ASSESSING OFFICER BE RESTORED. 4. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSES SEE WHILE REITERATING HIS SAME SUBMISSIONS AS SUBMITTED BEFORE THE LD. CIT(A) PLAC ED RELIANCE ON HIS ORDER AND URGED BEFORE THE BENCH TO CONFIRM THE SAME. HE ALSO PLAC ED RELIANCE ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS. REALEST B UILDERS & SERVICES LTD. REPORTED IN (2008) 307 ITR 202 (SC). 5. AFTER HEARING BOTH THE PARTIES PERUSING THE MA TERIAL AVAILABLE ON RECORD AND THE CASE LAW CITED BY THE LD. COUNSEL FOR THE ASSESSEE WE FIND THAT WHILE DELETING THE ADDITION OF RS.9 63 587/- AS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF REVENUE NOT 6 RECOGNIZED THE LD. CIT(A) HAD PASSED A VERY SPEAKI NG ORDER. FOR THE SAKE OF BREVITY WE REPRODUCE THE RELEVANT PORTION OF HIS ORDER AS U NDER : I HAVE CAREFULLY CONSIDERED THE REASONING ADOPTED BY THE A.O. IN MAKING THE IMPUGNED ADDITION AND ALSO THE SUBMISSIONS OF THE A.R. IT IS A FACT THAT THE ASSESSEE HAS FOLLOWED THE SAME METHOD OF ACCOUNTING DURING THE RELEVANT Y EAR WHICH IT HAD FOLLOWED IN THE PAST. THOUGH RULE OF CONSISTENCY IS NOT SACROSANCT FOR THE PURPOSE OF INCOME TAX PROCEEDINGS BUT THE SAME CANNOT BE DISREGARDED ALTO GETHER UNLESS AND UNTIL IT CAN BE SHOWN THAT THE METHOD OF ACCOUNTING CONSISTENTLY FO LLOWED BY THE ASSESSEE HAS RESULTED IN UNDER ESTIMATION OF HIS INCOME IN THE PAST. THE ASSESSEE HAS BEEN FOLLOWING WHAT CAN BE LOOSELY TERMED AS PERCENTAGE COMPLETION METHOD IN RESPECT OF ITS BUSINESS. THE A.O. HAS MADE AN OBSERVATION THAT THE VALUER WHO PR EPARED THE PROJECT REPORT FOR THE ASSESSEE HAD ESTIMATED THE COST OF THE ENTIRE PROJE CT AT RS. 1 10 04 994/- AND SINCE THE ASSESSEE HAD SPENT AN AMOUNT OF RS.1 30 00 000/- BY THE END OF THE FINANCIAL YEAR UNDER CONSIDERATION IN THE PROJECT AND RECOVERED RS.1 37 32 156/- IN CONSIDERATION. THE A.O. FURTHER OBSERVED THAT OUT OF THE TWELVE PURCHASERS DECLARED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION SEVEN OF THEM HAVE PAID T HE FULL AMOUNT OF PURCHASE CONSIDERATION AND FROM THE REST OF THE FIVE SUCH PU RCHASERS ONLY 10% OF THE PURCHASE CONSIDERATION WAS REMAINING TO BE RECEIVED. CONSIDE RING THESE FACTS THE A.O. CONCLUDED THAT ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP OF THE PROPERTY HAD BEEN TRANSFERRED TO THE BUYERS AND SINCE THE ASSESSEE HAD RECOVERED MORE THAN THE COST OF ITS PROJECT THERE WAS NO REASON NOT TO RECOGNIZE THE REVENUE RE LATED TO THE SOLD FLATS. THE A.O. HAS ALSO MADE REFERENCE TO THE GUIDANCE NOTES ON REVENU E RECOGNITION M THE CASE OF BUILDERS WHICH HAVE BEEN REPRODUCED ABOVE IN THE PR ECEDING PARAS). FOR THE SAKE OF CONVENIENCE THE RECOMMENDATIONS CONTEND IN THE SAID GUIDANCE NOTE ARE REPRODUCED BELOW: RECOMMENDATIONS - REVENUE IN CASE OF REAL ESTATE SALES SHOULD BE RECO GNIZED WHEN ALL THE FOLLOWING CONDITIONS ARE SATISFIED: (VI) THE SELLER HAS TRANSFERRED TO THE BUYER ALL SI GNIFICANT RISKS AND REWARDS OF OWNERSHIP AND THE SELLER RETAINS NO EFFE CTIVE CONTROL OF THE REAL ESTATE TO A DEGREE USUALLY ASSOCIATED WITH OWN ERSHIP; (VII) NO SIGNIFICANT UNCERTAINTY EXISTS REGARDING T HE AMOUNT OF THE CONSIDERATION THAT WILL BE DERIVED FROM THE REAL ES TATE SALES; AND (VIII) IT IS NOT UNREASONABLE TO EXPECT ULTIMATE CO LLECTION. THE DETERMINATION OF POINT OF TIME WHEN ALL SIGNIFI CANT RISKS AND REWARDS OF OWNERSHIP ARE TRANSFERRED DEPENDS ON THE FACTS AND CIRCUMSTANCES OF EACH CASE CONSIDERING THE TERMS AND CONDITIONS OF THE AGREEME NT. IN CASE OF REAL ESTATE SALES ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSH IP ARE NORMALLY CONSIDERED TO BE TRANSFERRED WHEN LEGAL TITLE PASSES TO THE BUYER (E.G. AT THE TIME OF THE REGISTRATION WITH THE RELEVANT AUTHORITIES OF THE REAL ESTATE IN THE NAME OF THE BUYER) OR WHEN THE SELLER ENTERS INTO AN AGREEMENT FOR SALE AND GIVES POSSESSION OF THE REAL ESTATE TO THE BUYER UNDER THE AGREEMENT . ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP ARE ALSO CONSIDERED TO BE TRAN SFERRED IF THE SELLER HAS ENTERED INTO A LEGALLY ENFORCEABLE AGREEMENT FOR SA LE WITH THE BUYER AND ALL THE FOLLOWING CONDITIONS ARE SATISFIED EVEN THOUGH THE LEGAL TITLE IS NOT PASSED OR THE POSSESSION OF THE REAL ESTATE IS NOT GIVEN TO THE B UYER. 7 (A) THE SIGNIFICANT RISKS RELATED TO REAL ESTATE HA VE BEEN TRANSFERRED TO THE BUYER. IN CASE OF REAL ESTATE PRICE RISK IS GE NERALLY CONSIDERED TO BE ONE OF THE MOST SIGNIFICANT RISKS. (B) THE BUYER HAS A LEGAL RIGHT TO SELL OR TRANSFER HIS INTEREST IN THE PROPERTY WITHOUT ANY CONDITION OR SUBJECT TO ONLY SUCH CONDITIONS WHICH DO NOT MATERIALLY AFFECT HIS RIGHT TO BENEFITS IN T HE PROPERTY. WHEN THE SELLER HAS TRANSFERRED TO THE BUYER ALL SI GNIFICANT RISKS AND REWARDS OF OWNERSHIP IT WOULD BE APPROPRIATE TO RECOGNIZE REV ENUE AT THAT STAGE SUBJECT TO FULFILLMENT OF OTHER CONDITIONS SPECIFIED IN PARAGR APH 6 ABOVE PROVIDED THE SELLER HAS NO FURTHER SUBSTANTIAL ACTS TO COMPLETE UNDER THE CONTRACT. HOWEVER IN CASE THE SELLER IS OBLIGED TO PERFORM ANY SUBSTA NTIAL ACTS AFTER THE TRANSFER OF ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP REV ENUE SHOULD BE RECOGNIZED ON PROPORTIONATE BASIS AS THE ACTS ARE PERFORMED I.E. BY APPLYING THE PERCENTAGE OF COMPLETION METHOD IN THE MANNER EXPLAINED IN ACCOUN TING STANDARD (AS)7 CONSTRUCTION CONTRACTS. AN EXAMPLE IS A BUILDING OR OTHER FACILITY ON WHICH CONSTRUCTION HAS NOT BEEN COMPLETED THOUGH ALL SIGN IFICANT RISKS AND REWARDS OF OWNERSHIP HAVE BEEN TRANSFERRED PURSUANT TO THE FUL FILLMENT OF CONDITIONS STATED IN PARAGRAPH 7 ABOVE. ANOTHER EXAMPLE IS OF A LAND WHICH IS YET TO BE DEVELOPED THOUGH THE SELLER HAS TRANSFERRED ALL SIGNIFICANT R ISKS AND REWARDS OF OWNERSHIP OF THE LAND TO THE BUYER THROUGH AN AGREEMENT FOR S ALE AS PER PARAGRAPH 7 ABOVE. A PERUSAL OF THE ABOVE SHOWS THAT THE REVENUE IN CA SE OF REAL ESTATE DEVELOPERS SHOULD BE RECOGNIZED WHEN THE SIGNIFICANT RISKS AND REWAR DS OF OWNERSHIP RELATED TO THE REAL ESTATE HAVE BEEN TRANSFERRED TO THE BUYERS. THIS HA PPENS GENERALLY WHEN EITHER THE PROPERTY IS TRANSFERRED TO THE BUYER BY WAY OF REGI STRATION IN HIS NAME WITH THE RELEVANT AUTHORITIES WHEN THE SELLER ENTERS INTO AN AGREEMEN T FOR SALE AND GIVES POSSESSION OF THE PROPERTY TO THE BUYER UNDER THE AGREEMENT. THE GUID ANCE NOTE ALSO RECOMMENDED THAT REVENUE MAY BE RECOGNIZED EVEN THOUGH THE LEGAL TIT LE OF THE PROPERTY IS NOT PASSED OR THE POSSESSION OF THE PROPERTY IS NOT HANDED OVER T O THE BUYER WHEN THE SELLER HAS TRANSFERRED ALL THE SIGNIFICANT RISKS AND REWARDS O F THE OWNERSHIP AND THE SELLER RETAINS NO EFFECTIVE CONTROL OVER THE PROPERTY AND SELLER H AS NO FURTHER SUBSTANTIAL CAUSE TO COMPLETE UNDER THE CONTRACT. IN THE INSTANT CASE NO LEGAL TITLE OF THE PROPERTI ES HAD BEEN TRANSFERRED TO THE BUYERS NOR POSSESSION OF THE PROPERTY HAD BEEN GIVEN TO TH EM. AS REGARDS THE TRANSFER OF RISKS AND REWARDS OF OWNERSHIP OF THE PROPERTY TO THE BUY ERS THOUGH 90% OR MORE OF THE SALE CONSIDERATION HAS ALREADY BEEN RECEIVED BY THE ASSE SSEE IT IS OBSERVED FROM THE ASSESSMENT ORDER ITSELF THAT ONLY 30% OF THE PROJEC T HAD BEEN COMPLETED DURING THE RELEVANT FINNCIAL YEAR AND THE JOB REGARDING FOUNDA TION RC WORK AND EXTERNAL AND INTERNAL BRICKS HAD BEEN COMPLETED. THIS ITSELF SHO WS THAT THE BUILDING CONSTRUCTION WAS STILL INCOMPLETE AND THE SELLER STILL HAD SUBSTANTI AL ACT TO COMPLETE UNDER THE CONTRACT IN RESPECT OF THE PROPERTY UNDER CONSIDERATION THEREF ORE THE SELLER WAS NOT IN A POSITION TO PASS ON THE RISKS AND REWARDS OF THE OWNERSHIP OF T HE PROPERTY TO THE BUYERS. IN THE LIGHT OF THE ABOVE FACTS IT IS CLEAR THAT T HE ASSESSEE HAD NOT TRANSFERRED SIGNIFICANT RISKS AND REWARDS OF THE OWNERSHIP OF THE PROPERTY TO THE BUYERS THEREFORE THE RECOGNITION OF REVENUE AS HAS BEEN DONE BY THE A.O . BY TREATING THE TRANSACTIONS WITH THE TWELVE BUYERS WHO HAD PAID 90% OR MORE OF THE S ALE CONSIDERATION TO BE COMPLETED TRANSACTIONS IS NOT CORRECT. ACCORDINGLY THE CONC LUSION BY THE A.O. THAT THE ACCOUNTING METHOD FOLLOWED BY THE ASSESSEE HAS RESULTED IN INC ORRECT COMPUTATION OF PROFITS IS NOT CORRECT. SINCE AS HAS BEEN HELD ABOVE THE SALE OF FLATS TO THE 12 BUYERS HAD NOT BEEN 8 COMPLETED AND SINCE THE METHOD OF THE ACCOUNTING F OLLOWED BY THE ASSESSEE DURING THE RELEVANT YEAR WAS CONSISTENT WITH THAT THE METHOD O F ACCOUNTING BEING FOLLOWED BY IT IN ALL THE EARLIER YEARS THE ADDITION OF RS.9 63 5 87 1- MADE BY THE A.O. IS FOUND TO BE UNJUSTIFIED THEREFORE THE SAME IS DELETED. THUS GROUND NO.2 OF THE APPEAL IS ALLOWED. IN VIEW OF THE ABOVE AND IN THE ABSENCE OF ANY CONT RARY MATERIAL BROUGHT ON RECORD BY THE REVENUE TO REBUT THE AFORESAID FINDING OF THE L D. CIT(A) WE DO NOT FIND ANY INFIRMITY IN HIS ORDER AND THE SAME IS HEREBY UPHEL D. THEREFORE THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 6. IN RESPECT OF GROUND NO. 3 BRIEF FACTS OF THE CA SE ARE THAT THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD CLAIMED INTEREST TO PARTNERS OF RS.1 39 636/-. SHE ALSO OBSERVED THAT THE ASSESSEE HAD EXTENDED LOAN WORTH RS.25 90 000/- TO ITS PARTNERS ON WHICH NO INTEREST WAS CHARGED BY IT. ACCORDINGLY THE A.O. DISALLOWED THE CLAIM OF INTEREST OF RS.1 39 636/- PAID BY THE ASSESSEE TO I TS PARTNERS ON THEIR CAPITAL. IN APPEAL THE LD. CIT(A) RESTRICTED THE DISALLOWANCE ON THIS ACCOUNT TO THE INTEREST RELATABLE TO RS.7 40 000/-. AGGRIEVED BY THE SAID ORDER THE RE VENUE IS NOW IN APPEAL BEFORE US. 7. AT THE TIME OF HEARING BEFORE US THE LD. DR RE LIED ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT FROM THE BALANCE SHEET I T WAS SEEN THAT THE ASSESSEE GAVE LOAN TO THEIR PARTNERS AMOUNTING TO RS.25 90 000/- AND NO INTEREST WAS SHOWN. DURING THE SCRUTINY ASSESSMENT THE ASSESSEE WAS ASKED WHY INTEREST WAS NOT CHARGED ON THIS LOAN THERE WAS NO REPLY ON BEHALF OF THE ASSESSEE. THEREFORE IT WAS CLEAR THAT IF THE FIRM GIVES LOAN TO PARTNERS IT SHOULD CHARGE INTER EST TO PARTNERS IF IT IS GIVING INTEREST ON CAPITAL OF THE PARTNERS. FOR THIS REASON THE ASSE SSING OFFICER HAS RIGHTLY DISALLOWED THE INTEREST OF RS.1 39 636/-. HE THEREFORE URGED BE FORE THE BENCH TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND THAT OF THE ASSESSING OFFICER BE RESTORED. 8. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSES SEE RELIED ON THE ORDER OF THE LD. CIT(A) AND URGED BEFORE THE BENCH TO CONFIRM THE SA ME. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. WE FIND THAT THE INTEREST OF RS.1 39 636/- PAID BY THE ASSESSEE TO ITS PARTNERS ON THEIR CAPITAL WAS DISALLOWED BY THE ASSESSING OFFICER AS BUSINESS EXPENSES SINCE THE ASSESEE HAD EXTENDED LOAN WORTH RS.25 90 000/- TO ITS PARTNERS ON WHICH NO INTEREST WAS CHARGED BY IT. HOWEVER THE LD. CIT(A) RESTRICTED THE DISALLOW ANCE ON THIS ACCOUNT TO THE INTEREST RELATABLE TO RS.7 40 000/- OF THE INTEREST BEARING FUNDS BY OBSERVING AS UNDER : 9 THOUGH IT IS TRUE THAT CHARGING OF INTEREST ON LO ANS EXTENDED TO THE PARTNERS IS NOT MANDATORY BUT IT IS EXPECTED THAT THE FUNDS OF THE ASSESSEE ARE UTILIZED FOR THE PURPOSES OF ITS BUSINESS ESPECIALLY INTEREST BEAR ING FUNDS. FROM THE PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE FOR THE RELEVANT YEA R IT IS OBSERVED THAT THE PARTNERS HAD OPENING CAPITAL OF RS.11 63 642/- WHICH WAS INTERE ST HEARING. IT IS FURTHER OBSERVED HAT THE ASSESSEE HAD RECEIVED LOANS OF RS 17 00 000/- FROM THE PARTNERS ON WHICH NO INTEREST HAS BEEN PAID. THERE IS ANOTHER LOAN OF R S. 1 50000/- FROM ANOTHER CREDITOR ON WHICH NO INTEREST IS SHOWN TO HAVE BEEN PAID. AS A RESULT THE ASSESSEE HAD TOTAL INTEREST FREE FUNDS TO THE TUNE OF RS. 18 50 000/- DURING T HE RELEVANT YEAR. SINCE THE ASSESEE HAD INTEREST FREE FUNDS OF RS.18 50 000/- THE AO WAS NOT JUSTIFIED IN DISALLOWING THE ENTIRE AMOUNT OF INTEREST ALLOWED TO THE PARTNERS. IN MY VIEW DISALLOWANCE OF INTEREST RELATABLE TO RS.7 40 000/- OF THE INTEREST BEARING FUNDS WILL BE JUSTIFIED. THEREFORE THE DISALLOWANCE ON THIS ACCOUNT IS RESTRICTED TO THE INTEREST RELATABLE TO RS.7 40 000/-. IN VIEW OF THIS AND ALSO IN THE ABSENCE OF ANY CONT RARY MATERIAL BROUGHT ON RECORD BY THE REVENUE AUTHORITIES TO REBUT THE AFORESAID FINDING OF THE LD. CIT(A) WE DO NOT FIND ANY INFIRMITY IN HIS ORDER AND THE SAME IS HEREBY UPHEL D. THIS GROUND OF APPEAL OF THE REVENUE IS THEREFORE DISMISSED. 10. IN RESPECT OF GROUND NO. 4 THE RELEVANT FACTS A S OBSERVED BY THE ASSESSING OFFICER ARE THAT THE ASSESSEE HAD INDUCTED A NEW PA RTNER ON THE DEATH OF ONE OF ITS PARTNERS WHO IS THE WIFE OF THE DECEASED PARTNER. THE ASSESSEE HAD ALSO PRODUCED AN AMENDED DEED OF PARTNERSHIP BEFORE THE ASSESSING OF FICER. SINCE THERE WAS NO MENTION OF REMUNERATION TO THE NEW PARTNER IN THE AMENDED P ARTNERSHIP DEED THE ASSESSING OFFICER DISALLOWED THE CLAIM OF REMUNERATION PAID T O HER. IN APPEAL THE LD. CIT(A) DELETED THE SAID ADDITION. AGGRIEVED BY THE SAID O RDER THE REVENUE IS IN APPEAL BEFORE US. 11. AT THE TIME OF HEARING BEFORE US THE LD. DR RE LIED ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT SINCE THE AMENDED PARTNE RSHIP DEED DOES NOT MENTION REGARDING REMUNERATION TO THE NEW PARTNER THE ASSE SSING OFFICER HAS RIGHTLY DISALLOWED THE PAYMENT OF REMUNERATION TO THE NEW PARTNER. HE THEREFORE PRAYED BEFORE THE BENCH TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTOR E THAT OF THE ASSESSING OFFICER. 12. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSE SSEE WHILE REITERATING HIS SAME SUBMISSIONS AS SUBMITTED BEFORE THE LOWER AUTHORITI ES RELIED ON THE ORDER OF THE LD. CIT(A) AND PRAYED BEFORE THE BENCH TO CONFIRM THE S AME. HE ALSO CONTENDED THAT THE NEW PARTNER SMT. SUNANDA ROY WAS INDUCTED IN PLACE OF DECEASED PARTNER SWAPAN KUMAR ROY THE HUSBAND OF SMT. SUNANDA ROY AND ALL THE TERMS AND CONDITIONS OF THE 10 ORIGINAL PARTNERSHIP DEED SHALL REMAIN UNALTERED AN D SHALL FORM PART AND PARCEL OF THE AMENDED PARTNERSHIP DEED. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL PLACED BEFORE US. WE FIND THAT THE ASSESSING OFFICER DISALLOWED THE R EMUNERATION PAID TO THE NEW PARTNER SINCE THE AMENDED PARTNERSHIP DEED DOES NOT MENTION REGARDING REMUNERATION TO THE NEW PARTNER. WE FIND FORCE IN THE SUBMISSION OF TH E LD. COUNSEL THAT THE NEW PARTNER SMT. SUNANDA ROY WAS INDUCTED IN PLACE OF DECEASED PARTNER SWAPAN KUMAR ROY THE HUSBAND OF SMT. SUNANDA ROY AND ALL THE TERMS AND C ONDITIONS OF THE ORIGINAL PARTNERSHIP DEED SHALL REMAIN UNALTERED AND SHALL F ORM PART AND PARCEL OF THE AMENDED PARTNERSHIP DEED. THE LD. CIT(A) ALSO IN THE LIGHT OF THE ABOVE SUBMISSION DELETED THE ADDITION SO MADE BY THE ASSESSING OFFICER. IN VIEW OF THE ABOVE AND IN THE ABSENCE OF ANY CONTRARY MATERIAL BROUGHT ON RECORD BY THE REVE NUE AUTHORITIES WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) IN DELETIN G THE DISALLOWANCE OF REMUNERATION OF RS.76 664/- TO SMT. SUNANDA ROY AND THE SAME IS HE REBY UPHELD. THIS GROUND OF REVENUE IS THEREFORE DISMISSED. 14. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED. 15. ORDER IS PRONOUNCED IN THE OPEN COURT ON 31.1.2 011. SD/- SD/- . . ! # . . (C. D. RAO) (D. K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER ( # # # #) )) ) DATED : 31ST JANUARY 2011 !/0 %&12 %3! JD.(SR.P.S.) . 4 -%%5 65(7- COPY OF THE ORDER FORWARDED TO: 1 . + / APPELLANT ITO WARD-50(4) KOLKATA. 2 -+ / RESPONDENT M/S. BEST & BEST CONSTRUCTION 347/1 DUM DUM ROA D KOLKATA-74.. 3 . %.& / THE CIT KOLKATA. 4. %.& ( )/ THE CIT(A) KOLKATA. 5 . !=% -%& / DR KOLKATA BENCHES KOLKATA 5 -%/ TRUE COPY .&>/ BY ORDER ? '2 /DEPUTY REGISTRAR .