PER BENCH : These two appeals by assessee against the order dated 03/1/2013 of Ld. CIT(Appeals)-1, Jaipur raise the following grounds: Asstt. Year : 2008-09 :
1. Under the facts and circumstances of the case and in law, Ld. CIT(A)-1, Jaipur has erred in upholding that the invocation of the provisions of Section 147 and 148 of the Act, 1961 by the Ld. ITO, Ward 1(1), Jaipur was right in law.
2. Under the facts and circumstances of the case and in law, Ld. CIT(A)-1, Jaipur has erred in confirming the computation of the profits of the business of the assessee by applying percentage of completion method instead of project completion method. 2
3. Under the facts and circumstances of the case and in law, Ld. CIT(A)-1, Jaipur has erred in confirming the disallowance of deduction u/s 80IB(10) of the Income Tax Act, 1961 to the assessee: a. by considering the real estate development business carried out by appellant as “Works Contracts” and accordingly applying the Explanation to Section 80IB(10); b. by not following the Board Instruction No. 4 of 2009, dated
30.06.2009 while computing the profits of the business on percentage of completion method.
4. Under the facts and circumstances of the case and in law, Ld. CIT(A)-1, Jaipur has erred in confirming the levy of interest u/s 234A and 234B of the Income Tax Act, 1961.
5. The appellant craves to alter, amend and modify any ground of appeal on or before the date of hearing. Asstt. Year : 2009-10 :
1. Under the facts and circumstances of the case and in law, Ld. CIT(A)-1, Jaipur has erred in confirming the order passed by the Ld. ITO, Ward 1(1), Jaipur u/s 143(3) of the Income Tax Act, 1961.
2. Under the facts and circumstances of the case and in law, Ld. CIT(A)-1, Jaipur has erred in confirming the computation of the profits of the business of the assessee by applying percentage of completion method instead of project completion method.
3. Under the facts and circumstances of the case and in law, Ld. CIT(A)-1, Jaipur has erred in confirming the disallowance of deduction u/s 80IB(10) of Income Tax Act, 1961 to the assessee : a. by considering the real estate development business carried out by appellant as “Works contracts” and accordingly applying the Explanation to Section 80IB(10): b. by not following the Board Instruction No. 4 of 2009, dated
30.06.2009 while computing the profits of the business on percentage of completion method.
4. Under the facts and circumstances of the case and in law, Ld. CIT(A)-1, Jaipur has erred in confirming the levy of interest u/s 234A and 234B of the Income Tax Act, 1961. 3
2. In assessment year 2008-09, briefly the facts are that the assessee a private limited company and filed return declaring loss of Rs. 4,25,107/-. It had claimed refund of Rs. 61,94,160/-. Since the refund was claimed on account of credit of tax at source deducted by Central Government Employees Welfare Housing Organization (hereinafter to be referred as CGEWHO) and assessee did not declare any corresponding receipt or income in its return of income, the Assessing Officer issued a notice u/s 148 of the Income Tax Act, 1961 (in short the Act) on 01/7/2010. In response thereto, the assessee filed a letter dated 04/8/2010 stating that the return already filed may be treated as a valid return in response to such notice. The assessee’s objection to the issuance of notice were disposed of by the Assessing Officer vide order dated 09/12/2011.
3. On merits, the Assessing Officer took note of the main object clause No. 2 as contained in the memorandum of association of the company and reproduced the same as under:-
“2. To carry on the business as colonizers, developers to act as civil engineers, managers, advisers, consultants, planners, architects, designers, building experts, promoters, contractors, sub-contractors of government, semi government, general contractors in the field of real estate in India or abroad.”
4. In pursuance of the above objects, the assessee company purchased agricultural land admeasuring 5.47 hectares at Jaipur by sale deed dated 08/5/2006 for a total consideration of Rs. 4,00,00001/- only. Thereafter, the assessee company got the land use changed from agricultural land to residential use from Jaipur Development Authority (in short JDA), who issued a patta in favour of the assessee company. This patta was also registered at the office of Sub-Registrar, Jaipur as per details contained at internal page 3 of assessment order. Subsequent thereto, the assessee company made an application to 4 the J.D.A. for sub-division of entire land into three independent parts i.e. three plots of land. This approval stood granted for independent group housing projects on 29/3/2007 and the area independent sub-divided plots of land stood as under:- S.No. Area of Land Name of Group Housing Project
1. 32907.20 Sq. Yard ASHADEEP GREEN ORCHIDS
2. 9139.65 Sq. Yard ASHADEEP GREEN MEDOWS
3. 15633.92 Sq. Yard ASHADEEP GREEN VISTA Thereafter Central Government Employees Welfare Housing Organization [an institution under the aegis of Ministry of Urban Employment & Poverty Alleviation, Government of India and a Society registered under the Societies Registration Act, 1860], 6 th Floor, A Wing, Janpath Bhawan, Janpath, New Delhi had published an advertisement in various newspapers on 01/11/2006 inviting tender for CGEWHO’s Turnkey Housing Project Jaipur, Phase-II. Assessee’s bid was accepted and CGEWHO has issued a Letter of Intent (LOI) to the assessee vide letter No. T-111/3 dated 31 st October, 2007. The composite obligations of the company in the said Turnkey Housing Project is to develop a Group Housing Project comprising of fully operational dwelling units as per agreed specifications alongwith specified common facilities as per the tender documents forwarded by the organization vide its letter No. T-111/3 dated 12/2/2007. Although it is a Turnkey Housing Project as per the stipulations of the tender; terms and conditions of the bid; and the Letter of Intent, the same has to be completed in stages and as a security of performance of obligations by the Company the Plot of land was required to be transferred in favour of the Organization as a first stage. The various stages of completion as agreed between the two parties were as under:- a) Stage 1, II & II: Provisioning & Transfer of land as security in favour of CGEWHO; b) Stage IV : Building construction of dwelling units including pile foundation etc. c) Stage V : Development of all external services including boundary wall etc.
5. The appellant after obtaining approval of the housing project as per original area/site plan on 30/3/2007 from the J.D.A. also took further approval for the revised plan on 18/3/2008. Thereafter, pursuant to the stipulation contained in the Letter of Intent, the assessee company transferred the land without any consideration in favour of CGEWHO 5 vide deed of transfer dated 30/1/2008, which is to be read in terms of the provisions of the Bid documents and Letter of Intent dated 31/10/2007 issued by the organization. The consideration as agreed between the parties is contained in clause (IB) of the Agreement has been reproduced as under by the Assessing Officer:-
“1b. It has been agreed and accepted that the rates for Turnkey Housing Project as per the scope of work mentioned in the succeeding clauses including land, complete planning, designing and approval of project plans, development of land and the housing project comprising of dwelling units and specified common facilities and all external services and inclusive of all taxes/levies etc. shall be calculated on per sq.ft of super built up area (SBA) of dwelling units, parking in stilt and basement area.”
The Assessing Officer found that in terms of payment schedule for the consideration as contained in clause(7) of the agreement, the assessee was paid a sum of Rs. 26,91,17,640/- during the period under consideration i.e. for assessment year 2008- 09, which was not included as income by the assessee in the return filed by him.
6. In response to show cause notice, the assessee stated that he is a developer who has to develop and deliver fully completed residential flats to CGEWHO for an agreed price. The income from such project in the hands of developer can be computed only upon the completion of the project and delivery of completed flats. During the year under consideration, the project has only commenced but was not completed and hence no income can be assessed by applying the principles and procedures laid down in Accounting Standard 7 i.e. AS-7 issued by the Institute of Chartered Accountants of India. Further on the basis of guidance note on recognition of revenue by Real Estate Developer, the income has to be computed on the basis of stage of completion. This is so contained in para 21 of the AS-7. The stage of completion has to be ascertained in terms of para 29 of AS-7. The assessee had completed only 6.10% of total contract work during 6 the period under consideration. In the event the assessment is to be made by applying AS-7 and working of the profit on ‘percentage completion method’ as given to the Assessing Officer for both the assessment years i.e. 2008-09 and 2009-10 has been reproduced at the internal page 5 of the assessment order. According to said working, the Assessing Officer took note of assessee’s claim of gross profit of current year’s income at Rs. 2,24,90,042/-.
7. Vide para 7 of the assessment order, the assessing officer recorded that the assessee has no objection in computing the total income of the current year based on the working as per AS-7 subject to the condition that deduction u/s 80IB of the Act is provided from the income arising from the development of housing project as the assessee has also filed report of auditors in the prescribed form No. 10CCB as a requisite to the provisions of Section 80IB(10) of the Act. In support the assessee placed reliance on the instruction No. 4 of 2009 dated 30/6/2009 issued by CBDT vide F NO. 178/32/2009-I.T.A.I [(2009) 224 CTR (st) 196)].
8. Upon examination of assessee’s claim, the Assessing Officer required the assessee to show as to how deduction u/s 80IB is allowable to him when his case is considered with reference to Explanation below u/s 80IB(10) of the Act as the activity undertaken by the assessee falls within the meaning of execution of housing project as a “works contract” awarded by” Central Government Employees Welfare Housing Organization”.
9. In response thereto, the assessee furnished reply vide letter dated 21/12/2011, which has been made as a part of the assessment order containing therein that the assessee has fulfilled all the conditions prescribed u/s 80IB(10) of the Act except that the 7 projection is at the stage of completion which he asserted that the project will be completed before the end of the stipulated period of five years from the date of approval of the project by J.D.A. Thus, benefit be allowed under the instruction No. 4 of 2009 and the assessee shall be entitled for deduction. The explanation to Section 80IB (10) was inserted by the Finance Act, 2009, which reads as under:-
“Explanation- For the removal of doubts, it is hereby declared that nothing contained in this sub section shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including the central or state government.”
Thus, as per the above explanation an assessee not engaged in developing and building housing project but merely executing the housing project under a works contract is not eligible to deduction u/s 80IB(10) of the Act.
10. The assessee vide para 7 of the said letter, submitted as to how he is eligible to deduction u/s 80IB(10) of the Act. The reasoning contained in the assessee’s letter is reproduced as under:- a. The contract is for development and sale/transfer of “Housing Project” comprising of dwelling units and common facilities as well as land on which they are being developed. Neither the housing project nor any of its constituents as mentioned above can be termed as “Goods” because they are immovable properties. Further, if what is being transferred is essentially an immoveable property, the same is specifically excluded from the definition “Goods”. This is not a case of brick by brick construction by contractor over the property of owner where transfer in property of such goods is involved. It is rather a case where whole housing project is being developed and built up under the ownership of the assessee and no goods are transferred or sold to CGEWHO. Once the development of the housing project is over in the ownership of the assessee he has to convey the title of such immoveable property developed by it through a conveyance onto CGEWHO or its beneficial allotees. It is evident from the definition of “Works Contract” read with the definition of “Goods” and the definition of “Sale” that unless there are goods and unless the transfer of property in goods is involved, there cannot be a Works Contract or even a sale. Therefore, the transaction of developing and transferring the housing project through a Turnkey Contract does not amount to a Works Contract. The following definitions 8 of ‘works contract, ‘goods’, ‘price’ and ‘sale’ are being produced hereinbelow for ready reference. Section 2 (44) of the Rajasthan Value Added Tax Act, 2003 defines works contract as under:- “Works Contract” means a contract for works and labour of services involving transfer of property in goods (whether as goods or in some other form) in its execution. Thus, “Works Contract” means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repaid, or commissioning of any movable or immovable property. As per Section 2(15) of the RVAT Act, 2003 “goods” means all kinds of moveable property, whether tangible or intangible, other than newspapers, money, actionable claims, stocks, shares and securities, and includes materials, articles and commodities used in any form in the execution of works contract, livestock and all other things attached to or forming part of the land which is agreed to be severed before sales or under the contract of sale. Further as per Section 2(7) of Sale of Goods Act, 1930 “Goods” means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract or sale. The definition of the term “Sale” as per Section 2(35) of RVAT Act, 2003: “Sale” with all its grammatical variations and cognate expressions means every transfer of property in goods by one person to another for cash, deferred payment or other valuable consideration and includes. (i) a transfer, otherwise than in pursuance of a contract, of property and goods for cash, deferred payment or other valuable consideration; (ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (iii) any delivery of goods on hire-purchase or other system of payment by installments; (iv) a transfer of the right to use goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (v) a supply of goods by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; and (vi) a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption of any drink (whether or not intoxicating), where such supply is for cash, deferred payment or other valuable consideration, and such transfer, delivery or such supply shall be 9 deemed to be a sale and the work “purchase” or “buy” shall be construed accordingly; Explanation- Notwithstanding anything contained in this Act, where any goods are sold in packing, the packing material is such case shall be deemed to have been sold with the goods. Further, Section 4(1) of the Sale of Goods Act, 1930 defines what is a sale. The same sub-section reads as follows:-
“A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another”
. As per Section 2(10) of the Act “Price”, means the money consideration for a sale of goods. b. The assessee is a ‘developer’ of the housing project and not a mere ‘contractor’ It is only the assessee who is developing the property throwing itself into the business of development and building of housing projects by taking all risks associated with the business by engaging architects, structural consultants, designing and planning of the housing schemes, payment of development charges, obtaining necessary permissions, approving plans, hiring machinery and equipments, hiring engineers, appointing contractors, etc. It is the fact that the assessee is a ‘developer’ and not a ‘contractor’. The risk involved is the assessee’s risk and he is a working as a developer-cum-builder.
11. The assessee also placed reliance on the judgment by Ahmadabad Bench of the Tribunal in the case of ACIT Vs M/s Yug Corporation ITA No. 2700 to 2703/Ahd/2009. c. Transfer of land by the assessee as security does not prejudice claim u/s 80IB(10) of the Act. A perusal of sub section (1) of Section 80-IB reveals and makes, it evident that there must be an undertaking developing and building a housing project as approved by a local authority. It does not have any further condition that such development and building of the housing project should also be on a land owned by an assessee undertaking. Thus, transfer of land to CGEWHO by the assessee as security also does not prejudice its claim of deduction u/s 80-IB(10) of the Act. This proposition is clearly supported by the judgments quoted in clause (a) hereinabove. d. Further, to the above, the objective of introducing tax benefits under section 80IB(10) of the Act was to promote house building activity and for augmenting availability of dwelling units for low and middle class. The objective, thus, is to extend the benefit to persons/undertakings engaged in 10 actual activity of building housing projects. The explanation to the said section was introduced with an objective to prevent contractors from availing undue benefit of this section. In the present case, CGEWHO is not the developer of the project. Further, the contractors of the assessee who work on the project are also not the developers because they shall be the ones who shall be working only on a ‘works contract’ on the said project. The assessee is the developer of the project as per the terms and obligations under the agreement with CGEWHO and therefore, the assessee is the one eligible for deduction u/s 80IB(1) of the Act. e. It is further, respectfully submitted that the development of the Housing Project by the assessee is not considered as ‘works contract’ under the VAT and Service Tax Laws by the concerned authorities. In view of the above, it is respectfully submitted that the assessee is the developer of the housing project and is not a works contractor. Therefore, it is eligible for deduction u/s 80IB(10) of the Act and is outside the purview of the explanation to the said section pertaining to works contract.
12. The Assessing Officer, however, was not satisfied with the argument of the assessee for the simple reason that : in response to the invitation of the tenders by the CGEWHO, the assessee has offered to execute the required terms of the tender by offering land and further to develop a housing project on the said land in accordance with the terms and conditions prescribed in the Letter of Intent dated 31/12/2007. It is in furtherance of the terms and conditions of this LOI that the assessee has executed the agreement and then commenced the development of the housing project. Therefore, on the facts of the case, the assesee’s status in relation to the development of the above ASHADEEP GREEN ORCHIDS housing project is treated as that of a “works Contractor” within the meaning of EXPLANATION given below section 80IB(10) and held the assessee is not entitled for deduction u/s 80IB(10).” The assessment stood completed at an income of Rs. 2,20,64,936/- after disallowing deduction u/s 80IB(10) of the Act and expenditure incurred with respect to the other two projects, which were not yet commenced.
13. The Ld. CIT (A) on the issue of transaction under section 148(2)/147 of the IT Act, after considering detailed arguments and written submissions and case laws relied 11 upon by the assessee found that the assessee had received an amount of Rs. 26,91,17,640/- on which tax at source amounting to Rs. 60,98,206/- has been deducted by CGEWHO. The receipt, however, was not reflected as part of assessee’s turnover in the Profit & Loss account. The Assessing Officer, therefore, had reason to believe that income to the extent of Rs. 26,91,17,640/- had escaped assessment. The exercise of jurisdiction is in accordance with provisions of law. On the assessee’s alternate plea that reassessment proceedings could have been initiated only after regular assessments have been completed, the Ld. CIT (A) found that the time for issuing notice under section 143(2)(ii) were barred by limitation as the income returned stood processed under section 143(1) of the Act. In this view of the matter the Assessing Officer was justified in initiating proceedings under section 148 of the Act and the revenue’s case is covered by findings contained in the judgment by Honble Apex Court in the case of ACIT vs. Rajesh Jhaweri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC) and thus dismissed the legal ground raised by the assessee on the facts.
14. The Ld. CIT (A) after considering entire gamut of the issue found certain defects and accordingly issued show cause notice to the assessee to explain as to why the books of account may not be rejected by invoking provisions of section 145(3) of the Act, particularly when the cost of transferred land was included in the working process while on the other hand the payment received after completion of the first stage of construction from CGEWHO was not reflected as income as per AS-7. After considering assessee’s reply, it was found that the nature of transaction by the company with CGEWHO was a contract. The assessee had not disclosed income in accordance with AS-7. Therefore, the books of account of the appellant were held to be unreliable by invoking provisions of 12 section 145(3) of the Act. On the issue of transaction to be in the nature of a contract, the Ld. CIT (A) reproduced excerpts from the Letter of Intent dated 31.10.2007 as under :- Letter of Intent : Vide your aforementioned letters you have offered to develop a composite housing project on turnkey basis on approx 12 acres of land at sector – 30/37 Jagatpura. Out of this initially only 7 acres (approx) shall be utilized for the CGEWHO project and balance 5 acres shall be transferred and utilized by CGEWHO based upon the subscription received by it.
2. The salient’s are as below :- a) The land offered by you measuring approx 12 acres totality is with proper approach as required under the local by-laws and is to be developed by CGEWHO in a phased manner. b) The land use of the plot is “Residential”. As a first step the land shall be transferred in favour of the organization in a span of two months from date of issue of COI after ascertaining non-encumbrance …. d) After transfer of land in favour of CGEWHO and within a period of 3 months of such transfer you shall get the building plans/layout etc. approved by the local authorities in favour of CGEWHO. However, prior to submitting the building plans/layout etc. to the local authorities, same will have to be got approved by this organization. g) Subsequent to the approval of plans CGEWHO will sign with you a comprehensive Contract Agreement for the development of external services and construction of the dwelling units and common facilities etc. upon the said land. h) The Contract Agreement shall include :- i) Articles of Agreement and its annexures. ii) Scope of work Schedule A. iii) General Conditions of Contract iv) Specifications. i) Till the contract agreement is signed with you the Broad scope of work & conditions of contract agreement shall be as per the tender document forwarded to you vide letter No. T-111/3 dated 12/02/2007 and shall include the following :- 13 i) Development of land. ii) Planning and designing of the project.
3. CGEWHO’s Approval : The design of the entire scope of work will be undertaken by your Architects. This will be based on the basic design, date and design of criteria as already given to you ….. A number of different designs will have to be produced to the satisfaction of the CGEWHO. Only upon approval by the CGEWHO and the concerns statutory authority the works will be executed. 5(i) Payments : The break up of the above accepted rates against various elements of the Turnkey Project shall be as per Clause No. 7 & 8 of Articles of Agreement as under :- Stage I- 20% of the value of contract against a special retention money equal to 10% of the amount released at this stage and the performance guarantee already submitted by the company. Stage II(a)- 5% of the value of contract. Stage II(b)- 2% of the value of contract. Stage III- 11% of the value of contract. Stage IV- 65% of the value of contract. Stage Vs- 7% of the value of contract. ii) An amount equivalent to 5% of Gross Value of work done shall be deducted towards retention money from all payments made to you subject to maximum of 3% of the value of the contract.
6. Definition & Intention of the Turnkey Contract : The turnkey contract envisages a fully functional housing complex to be constructed for the organization by you on the land provided by you upto and including handing over of the same to the organization/beneficiaries performing defect rectification during the defect liability period of 12 months extendable by another 12 months(s) and obtaining completion certificates. 14
7. Escalation : Labour and material escalation shall be payable to you as per the Clause No. 29.0.0 of the General Conditions of Contract. The last date of receipt of tender for the project will be the base date for application of escalation clause.
8. Registration and Stamp Duty : The cost of stamp duty and registration charges for transfer of land to CGEWHO will be borne by the CGEWHO. Thus on perusal of the above excerpts of the LOI it is seen that the appellant company was merely a contractor because all the details of the contract were specified by the contractee. Detailed specifications of construction required to be made were noted, even the brand of the products to be used were specified, payment was to be released only after inspection and approval of the construction as per these specifications by the contractee. In fact, the sample of the material also had to be subjected to approval by the contractee and failure to do so would ensue in disallowance of 5% of the gross value of work done to be deducted from the retention money from all payments to ensure that the contractor rendered the services as per the requirements of the contractee. Thus in A.Y. 2008-09 the withheld money required to be released after inspection was Rs. 1,24,75,490/- and the retention money was Rs. 3,23,93,790/-. There was also an in-built provision for allowance of escalation in prices.” The appellant was found to have executed Sale Deed and by taking the value of this land under transfer to be Rs. 9,66,20,248/-, stamp duty of Rs. 62,79,320/- was found paid. In this view of the matter, she held that the matter of transaction by the appellant company with CGEWHO is a contract. The Ld. CIT (A) vide para 4 of the impugned order summarized the fact that the ownership of the property of land was transferred by the appellant in favour of CGEWHO through a registered Sale Deed. Once the ownership of the property stood transferred, the appellant no longer remains principal but a contractor for rendering the service of building the houses as per the specifications of the contractor. 15 The appellant was thus not engaged in the sale of property or goods but had rendered service as a contractor to CGEWHO. That besides the appellant was not entitled to develop the property entirely at his choice, convenience and discretion. The house built by the appellant were to be handed over to the CGEWHO and the appellant could not sell them to a third party as the assessee was held to be a contractor. The income of the assessee was to be assessed as per AS-7. She, therefore, found no error in the decision taken by the assessing authority and accordingly gross profit of Rs. 2,24,90,042/- worked out by the assessing authority stood upheld. Consequently the appellant being a contractor and having regard to the explanation below section 80IB(10) of the Act held that the deduction under section 80IB(10) of the Act for the works contract is not allowable.
14. For parity of reasons as taken in assessment year 2008-09, the Ld. CIT (A) upheld the computation of income of Rs. 2,23,13,700/- and as the assessee was the work contractor only, the denial of deduction under section 80IB(1) of the Act in that year also stood upheld.
15. Assessee’s counsel Shri Sanjay Jhanwar made elaborate written submissions for both the years under appeal and the same are laid on record. On the issue of initiating proceedings under section 147/148 of the Act it is contended that the very initiation of the proceedings is bad in law as the mere deduction of tax at source do not necessarily mean accrual of income in the hands of the appellant. For this purpose reliance has been placed to the judgment by Honble Supreme Court in the case of Transmission Corporation of AP Ltd. and Another vs. CIT, (1999) 239 ITR 587 (SC) . That apart, the appellant has followed Project Completion Method as per his choice and thus for the purpose of 16 recognition of revenue no bifurcation as to profit was made particularly when the actual profit and loss will be recognized only when the actual cost are known to the appellant. It, therefore, is wrong to say that the ground taken in the reason by the Assessing Officer constitute reason to belief. Reliance has been placed to the judgment by Honble Calcutta High Court in the case of Baijnath Saboo & Others vs. ITO (1978) 113 ITR 303 (Cal.).
16. On merit, it was stated that the agreement with the CGEWHO was for the completion and handing over of housing project as turnkey project and was not for different component of the project. The project is indivisible and only for the purpose of enabling the assessee to carry out development activities. The advance payments were made to it. The appellant submitted working of profit as per Percentage Completion method only to facilitate and to carry out the direction of the assessing authority. Whereas the assessee is maintaining books of account as per Project Completion method. Thus the income of the appellant on the basis of method of accounting not regularly employed by the appellant is neither proper nor justified. That apart, Ld. CIT (A) has grossly erred in holding that the books of account of the appellant are unreliable. He has also assailed the application of percentage completion method as against the project completion method adopted by the assessee for recognizing revenue in case of a builder and developer in accordance with AS-9 read with Guidance Note on Revenue Recognition issued by the Institute of Chartered Accountants of India. The Ld. Counsel vide para 2.13 to 2.38 of the written submissions emphasized with the aid and assistance of case laws on issue that the difference between a builder and developer and work contractor has been explained. It has to be analyzed in the right perspective with reference to the terms and conditions of the Agreement between CGEWHO and 17 Appellant. Unless all the significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated ownership, revenue should not be recognized. In the appellant’s case no significant risks and rewards of ownership were transferred to CGEWHO during the year under consideration. Hence no income was recognized during the year under consideration. The accounting treatment and presentation of financial statements of transactions and events should be governed by their substance and not merely by the legal form. The Ld. CIT (A) has, therefore, erred in upholding the computation of income of the housing project on the basis of percentage completion method as against the claim of the assessee for computing its income on the project completion method. Reliance has been placed on the judgment by Jaipur Bench of the Tribunal in the case of Unique Builders & Developers in ITA Nos. 73 to 77/JP/2012 and others dated 14.03.2013 and again in the case of Krish Infrastructure (P) Ltd. vs. ACIT in ITA Nos. 1096 and 1097/JP/2011.
17. On the issue of appellant’s claim that the contract for developing the housing project is not a works contract, the elaborate submissions have been made in para 3.6 to
3.13 containing therein that the appellant is developing the property by throwing itself into the business of development and building of housing projects by taking all risks associated with the business by engaging architects, structural consultants, designing and planning of the housing scheme, payment of development charges, obtaining necessary permissions, approving plans, hiring machinery and equipments, hiring engineers, appointing contracts etc. The risks involved in the development and building of such housing projects is the assessee’s risk and it is working as developer-cum-builder and not 18 a contractor. The assessee’s assertions contained in para 3.7 to 3.13 in the back drop of the judgment relied upon by him are also reproduced as under :- 3.7. It is imperative to appreciate the meaning of the term “works contract” before considering the applicability of the provisions of section 80IB(100. In State of A.P. v. Kone Elevators (India) Ltd., (2005) 3 (SC) 389 : (2005) 140 STC 22 , the Honble Supreme Court explained the distinction between a “works contract” and a “contract of sale” in the following words.”
“ If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a ‘contract of sale’, the main object is the transfer of property and delivery of possession of the property, whereas the main object in a ‘contract for work’ is not the transfer of the property but it is one for work and labour. Another test often to be applied is : when and how the property of the dealer in such a transaction passes to the customer : is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer’. If it is the former, it is a ‘sale’; if it is the later, it is a ‘works contract’. Therefore, in judging whether the contract is for ‘sale’ or for ‘work and labour’, the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a ‘sale’ or a ‘works contract’. Essentially, the question is of interpretation of the ‘contract’. It is settled law that the substance and not the form of the contract is material in determining the nature of transaction.”
It is, thus, evident that in a works contract, the contractor carri3s on the work for the Principal and during guest house expenses course of such work, whatever goods (movable property) he utilizes of the Principal on a ‘’brick to brick’’ basis. On the contrary, in a contract for sale, the seller first becomes the owner of the property during its formation and then, he transfers it to the buyer, Another important point is that in a works contract, VAT or sales tax has to be charged on the transfer of construction material, whereas in a contract of sale of immovable property, VAT does not apply and stamp duty is chargeable on such transfer. It is, thus important to note that when the contractor uses the goods in the course of construction, the ownership or property in such goods gets 19 transferred to the ultimate owner of the immovable property and at no point of time, he becomes the owner of an immovable property. Accordingly, immovable property is not required to be sold or transferred or conveyed to the ultimate owner of the immovable property and as soon as the construction material is fastened on the Earth, the same becomes property of the ultimate owner of the house/ construction. On the other hand, in case of a developer, when he used the construction material, which are falling within the definition of goods, and fastens / erects them on Earth, at the first instance, be becomes the owner of the immovable property which is then required to be sold or transferred or conveyed to the ultimate owner of the immovable property. In other words, in case of a contractor no conveyance is required by the contractor to confer title of the constructed building in favour of the ultimate owner; whereas in the case of developer, the same is required to convey the title of immovable property in favour of the ultimate owner of the house.
3.8 In case of the appellant, it is evident from the documents on record and the substance of the transaction, the complete dwelling unit is required to be conveyed and transferred in favour of the allottees of CGEWHO: and for this purpose, a conveyance is required to be executed by the appellant and the CGEWHO as envisaged in the agreement between the appellant and the CGEWHO. It is evident from the terms and conditions of the contract between CGEWHO and the appellant that the contract under reference is essentially a contract for development and sale/ transfer of fully operational dwelling units to the allottees of the CGEWHO. Relevant portion of the preamble of the contract is reproduced herein for ready reference: ‘’The composite obligations of the company in the said Turkey Housing Project is to develop a Group Housing Project comprising of fully operational dwelling units as per agreed specifications alnogwith common facilities as per the tender document forwarded by the organization vide its letter no. T-111/3 dated 12-02-07 and thereafter transfer the same in favour of the allottees of the organization.’’ It is also pertinent to mention that since substance of the transaction has to be seen to determine that real nature of the transaction, the transfer of land as security for performance of the contract does not alter the status of the appellant from a builder and a seller to a works contractor. Even otherwise, it is not necessary that a developer should own the land. Even if the developer owns the development before he transfers it to the buyer, he is still a developer and not a works contractor. 20 Further, the risk and reward as well as the ownership of dwelling units shall be transferred to the allottees of CGEWHO only on completion of the project. Before that, neither the buyers/ allottees can sell such dwelling units nor can they mortgage or insure the same. If before transfer to them, there is a damage to the dwelling unit, it is the damage of the builder and not of the buyer as the buyer will accept the dwelling unit only in good condition. On the contrary, in case of a contractor, if there is a loss after construction, it is the loss of the Principal and not of the contractor.
3.9. In sum and substance, the activity of development and building of housing project in terms of the tender documents, letter of intent and agreement with CGEWHO cannot be termed as ‘work contract’ in the case of the appellant due to the following reasons: (1) The appellant is real estate developer-cum-builder which is having all risk of business in development and building of housing business. (2) In terms of the agreement between CGEWHO and the appellant, appellant is not working for any fixed remuneration in consideration of development of housing projects. (3) There is no transfer of property in goods involved in developing and building the housing project in the case of appellant. (4) Development and building of housing project is not ‘Goods’ defined under Sale of Goods Act, Rajasthan Value Added Tax 2003 as explained by appellant in its consolidated reply dated 21/12/2011. (5) The agreements in question did not provide that the appellant would be working as a contractor or agent on behalf of the CGEWHO. (6) Appellant has charged in its profit and loss account, all the development expenses, including charges for material, labour and other incidental cost, which establishes that it is developer in its own right and assuming the risk of development and building of housing project. (7) Development and Building of housing project is not considered as ‘Works Contract’ under the VVAT and Service Tax Laws by the concerned authorities. (8) Without prejudice, CGEWHO, being land owner in accordance with alleged transfer of land as security, has not made any conscious attempt to develop the property. 21
3.10 The only substantive reason and ground on which the Ld. AO and the Ld. CIT(A) have denied the deduction u/s 80-IB(10) and held the appellant as a contractor is that the appellant first transferred the land and then, while carrying out the construction of the units, he did not remain the owner of the land implying that a person cannot be a developer in absence of the ownership of the land and he has to be considered as a contractor when he does not own the land. In respect of this ground, it is respectfully submitted that it is not a condition precedent that assessee should be owner of land for being a developer within the meaning of section 80-IB(10) of the Act, and for claiming deduction of profits and gains arising from developing and building housing project u/s 80-IB(10). Reliance is placed on the judgment of Hon’ble ITAT Ahmedabad Bench in the case of Radhe Developers V. ITO (2008) 23 SOT 420 and ITO V. Shakti Corpn (2009) 32 SOT 438 (Ahd.). The Revenue appeal against the said judgment has been decided in favour of assessee by Hon’ble Gujrat High Court in its recent decision dated 13.12.2011 reported at (2012) 341 ITR 403 (Guj.). It was held by Honble Gujarat High Court that ownership of land is not condition precedent for claiming benefit of deduction u/s 80IB(10) and assessee who is developer taking all risk of developing and building the housing project cannot be termed as “Works Contractor”. The relevant extracts from para 38 of this judgment of the Honble Gujarat High Court are reproduced herein below :
“ 38. In the present case, as already held the assessee had undertaken the development of housing project at its own risk and cost. The land owner had accepted only the full price of the land and nothing further. The entire risk of investment and expenditure was that of the assessee. Resultantly, profit and loss also would accrue to the assessee alone. In that view of lthe matter, the addition of the Explanation to Section 80IB with retrospective effect of 1.4.2001 would have no material bearing in the cases on hand. We may recall that the said Explanation introduced by Finance (No.2) Act, 2009 provided as under :- (Explanation – For the removal of doubts, it is hereby declared that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including the Central or State Government)”
.
3.11. Reliance is also placed on the following judgements to support the claim of the appellant wherein the assessee’s have been allowed the deduction u/s 80IB(10) of the Act in various circumstances : 22 Amaltas Associates vs. ITO (2011) 131 ITD 142 (Ahd.) Assessee having purchased land and developed a housing project over it consisting of residential flats having built up area of less than 1500 sq. ft. each by incurring all expenses and taking all the risk involved therein and received entire sale consideration from the buyers after completion of the housing project in its own right, deduction under s. 80IB(10) cannot be denied to the assessee on the ground that the permissions and approvals by the local authorities were in the name of the housing society (landowner) and not in the name of the assessee; open terrace cannot be treated as analogous to balcony/verandah and included for determining the built up area of the flats. Income-tax Officer vs. Shakti Corporation (2009) 32 SOT 438 (Ahd) There is no explicit condition enumerated in s. 80IB(10) as regards to requirement of ownership for the claim of deduction; where by virtue of ‘agreement to sale’ and ‘development agreement’, the assessee has acquired dominion over the land to the exclusion of others and he has completed the project in terms and conditions laid down under s. 80IB(10), he is entitled to the deduction.
3.12. Further, Honble Supreme Court in the case of Gujarat Industrial Development Corporation reported at (1997) 227 ITR 414 (SC), considering the meaning of “Developer” held that the word “Development” appearing in the provisions should be understood in its wider sense and, therefore, granted exemption even though the Gujarat Industrial Development corporation was engaged in the Industrial development. The development means the realization of potentialities of land or territory by building or mining. Accordingly, it can be safely said that a person who undertakes to develop real estate by developing and constructing a housing project shall be considered to be an eligible undertaking developing and building housing projects within the meaning of Section 80IB(10) of the Act. It is further submitted that since the Ld. A.O. and the Ld. CIT (A)-I have denied the appellant’s claim for deduction which is beneficial provision provided under the Act to the developers/builders for development of the housing units, therefore, liberal approach has to be adopted while considering the above issue. Reliance is placed on the decisions of the Honble Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT (1992) 196 ITR 188 and CIT vs. South Arcot District Coop. Marketing Society Ltd. (1989) 176 ITR 117 ; in these cases it has been held by Honble Apex 23 Court that provisions granting incentive should be construed liberally and that if a literal construction would defeat the purpose of the section then it becomes necessary to resort to a construction which reasonable and purposeful to make the provision meaningful.
3.13. It is humbly submitted that the Board Instruction No. 4 of 2009 dated 30.06.2009 issued vide F.No. 178/32/209-ITA.I [(2009) 224 CTR (st) 196)] allows the benefit u/s 80IB(10) of the Act even while following the percentage of completion method. The copy of the said instruction is enclosed at page no. 61 of paper book. The Board has clarified through this instruction that – a. The deduction can be claimed on a year to year basis where the assessee is showing profits from partial completion of project in every year ; b. In case it is late, found that the condition of completing the project within the specified time limit of 4 years as stated in section 80IB(10) has not been satisfied, the deduction granted to the assessee in the earlier years should be withdrawn. In view of the specific board instruction on the issue of claim of deduction on year to year basis, while showing profits on percentage completion basis, deduction u/s 80IB(10) should have been allowed by Ld. A.O. and failing him, the Ld. CIT (A)-I, which both of them have failed to do so. The assessee draws support from the judgement in case of B.K. Pate Enterprises vs. DCIT reported at (2009) 125 TTJ (Pune) 974, wherein deduction u/s 80IB(10) was allowed on profits computed on percentage of completion basis to the assessee on year to year basis.”
17.1. In the alternate, it has been contended that the claim of the assessee is not hit by the Explanation below section 80IB(10) of the Act and the authorities below have erred in denying the justified claim after the assessee had also laid on record the report of the auditors as required under section 80IB(10) of the Act.
18. On the other hand, the Ld. CIT D/R contends that the assessee has transferred the land to CGEWHO vide registered Sale Deed. The risks of business and development passed on to CGEWHO. The appellant remain no longer the real estate developer but 24 acted merely as a contractor and rendered services as per the very specific requirement of the contract. The perusal of LOI and contract agreement will reveal that there was a specific scheme for payment which tantamount to payment of fixed remuneration. Any violation in the provisions of contract, penalty was to be paid. The payment was to be released after inspection and approval of work done as per specification by a team of contractee. A certain percentage of payment has to be upheld as retention money to ensure that the appellant adhere to the terms and conditions of the contract. It thus is evident that the appellant was working only as a works contractor. The Board Circular, in this view of the matter, will not be applicable and as the assessee is merely a works contractor, his case clearly falls with in the Explanation below section 80IB(10) of the Act. In this view of the matter, the ground raised by assessee needs to be rejected.
18.1. On all other aspects, the findings and conclusions reached by Ld. CIT (A) has been relied upon.
19. We have heard parties with reference to material on record. On the ground of initiation of proceedings under section 147/148 of the Act, it is found that the assessing authority after processing the return under section 143(1) of the Act and after expiry of statutory period for issuing notice under section 143(2) of the Act, cause and justification that income of the assessee had escaped assessment. He thus entertained a bonafide belief that income of the assessee has escaped from assessment as the receipts from contract on which tax at source has been deducted are not disclosed as income in the Profit & Loss account. In this view of the matter, we do not find any error in the order of Ld. CIT (A) 25 in upholding the action taken by the assessing authority. The ground raised in appeal being devoid of any merit, the same stands rejected.
20. On the issue of deduction under section 80IB(10) of the Act, we have perused the entire material on record with reference to the rival arguments. The covenants contained in the agreement dated 31.12.2008 placed at assessee’s paper book pages 18 to 33 and documents on record clearly reveal that the land on which the project under consideration was to come up was initially purchased by the appellant in his own name by making actual payment to the agriculturists. The land use from agriculture to residential use was also allowed to the appellant. A further division of plot into three projects was also permitted by the Jaipur Development Authority in the name of the appellant itself. The Deed of Transfer executed by the appellant and CGEWHO placed in assessee’s paper book pages 142 to 148 reveals that the Transfer of land in the name of CGEWHO is merely a part of development and delivery of the complete turnkey housing project and the same is necessitated as a security of performance obligation of assessee company as one of the conditions towards the complete turnkey group housing project. The terms and conditions in the tender and letter of intent have also been made a part and parcel of such Deed of Transfer. The perusal of definition of turnkey contract as contained in the Agreement placed in assessee’s paper book page 18, relevant page 22, it has been agreed and accepted by the parties that under a Turnkey Housing Contract, a fully functional complex has to be developed for the organization, on the land of the company upto and including transferring and handing over the complete complex to the beneficiaries of the organization including fully operational dwelling units as per the specifications including land, development and specified common facilities to the beneficiaries of the 26 organization, performing Defect rectification during the Defect Liability Period of 12 months extendable by another 12 months and obtaining completion certificates. It is scope of the work of the assessee company that complete planning, designing and approval of project plans, development of land and the housing project is to be carried out by the appellant and the appellant has agreed and undertaken to give possession of all the dwelling units and external services inclusive of all taxes levies etc. to the beneficial/ allottees of the organization. The appellant has laid on record the copies of letters according approval of building plans as well as occupancy certificate in his name by Jaipur Development Authority and the same were also a part of record of the authorities below. All these documents read together thus reveals that the appellant has entered into a contract with CGEWHO for development and sale/transfer of composite housing complex comprising of dwelling units and specified common facilities on a Turnkey basis which included providing of land, carrying out development etc. Merely the payment of stamp duty for transfer of land does not mean that the assessee had lost control and possession of the land that vested in him prior to execution of such transfer deed in favour of CGEWHO without receiving any sale consideration in lieu thereof, in particular when such a transfer was for a limited purpose of performance security only. The land under question remained in possession of the appellant prior to the date of such transfer deed as well as subsequent to that date till the housing project is completely constructed and possession is handed over by the appellant to the CGEWHO or its beneficial allottees in the composite turnkey contract and there is no separate consideration for land or development/contract or other constituents of turnkey project. The preamble of the contract is reproduced below : 27
“ The composite obligations of the company in the said Turnkey Housing Project is to develop a Group Housing Project comprising of fully operational dwelling units as per agreed specifications along with common facilities as per the tender document forwarded by the organization vide its letter no. T-111/3 dated 12.02.2007 and thereafter transfer the same in favour of the allotees of the organization.”
The perusal of the preamble clearly reveals that the contract under reference is a contract for development and sale/transfer of the fully operational dwelling units to the allottees of CGEWHO and going by this substance of the transaction, the transfer of land as a security for performance of the contract will not alter the status of the appellant from a builder and a seller to a works contractor, even though the ownership of land is not a necessary ingredient for a person to be termed as a developer in terms of judgment rendered by Honble Gujarat High Court in the case of CIT vs. Radhe Developers (2012) 341 ITR 403 (Guj.). In the present case in appeal, the authorities below are found to have erred in holding that the appellant is a work contractor and did not appreciate the material fact that CGEWHO did not become owner of the property on a brick to brick basis. It is a case where is the appellant has first become the owner of the property during its formation and thereafter was to transfer the property to the CGEWHO/its allottees by way of handing over of the possession and executing a joint deed in that regard. Before the delivery of the possession to the allottees, the assessee had full right to develop the land by putting the housing project at its on risks and costs and not that of the CGEWHO. The Ld. CIT (A) has not brought on record any significant risk and reward of ownership transferred in this regard to CGEWHO. In the light of above findings, it has to be held that the explanation below section 80IB(10) of the Act is not applicable to the case of the 28 appellant. In the case of Unique Builders & Developers vs. DCIT (supra), the Appellate Tribunal at Jaipur vide its order dated 14.3.2013 has held that it is the option of the assessee to follow any method of accounting but such a method has to be followed consistently. It has also been held that in a case where a method applied in the first year is followed in the subsequent year, the rule that it has consistently been followed shall be applicable to such first year also. In the present case in appeal even though the appellant followed Project Completion method but it has given up his claim and agreed to be assessed on the basis of Percentage Completion method provided the deduction under section 80IB(10) of the Act is allowed to it in the light of Board’s Instruction No. 4/2009 as has been reproduced in para 8.2 of the assessment order as the tax audit report as envisaged before allowing deduction has also been furnished by the assessee. We, therefore, on the peculiar facts and considering entire gamut of the case laws are satisfied that the assessee is a builder and developer and cannot be termed as a works contractor for invoking Explanation below section 80IB(10) of the Act. The appellant having agreed to be assessed on Percentage Completion method, the estimation of income after rejecting accounts by the Ld. CIT (A) in both the years under appeal does not require any interference so that the appellant in this case having filed the requisite audit report also is entitled to deduction under section 80IB(10) of the Act in terms of the Instruction No. 4/2009 issued by the CBDT. The assessing authority accordingly shall allow the deduction to the appellant in both the years under appeal.
21. The assessee has challenged levy of interest under section 234A and 234B of the Act. The same being consequential, effect shall be given accordingly. 29
22. Ground nos. 1 & 2 being are found devoid of any merit in both the years under appeal. The same stand rejected.
23. In the result, both the appeals stand partly allowed. Order pronounced in the open court on ( B.R. JAIN ) ( KUL BHARAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER Jaipur, Dated _____/08/2013. d/- Copy forwarded to :- Renaissance Buildhome Pvt. Ltd., Jaipur. The ITO Ward 1(1), Jaipur. The CIT (A) The CIT The D/R Guard file (ITA No. 226(2)/JP/2013.) By Order, AR ITAT Jaipur.
