Full Judgment
2. The assessee in this case, a company, was formed with the object of a building project in association with M/s Salsette Parsi Association, which is a charitable trust. The assessee-company entered into a Memorandum of Understanding (MoU) with the said charitable trust on dt.
28th April, 1993, for the purpose of executing building projects in the land belonging to the said trust. This is in fact a development agreement executed in between the assessee-company and the charitable trust. The said agreement was approved by the Charity Commissioner of Maharashtra State and the terms of the deed entered into between the assessee-company and the charitable trust have been approved by him.
3. As per the agreement, the assessee-company was to construct eight buildings in the landed property owned by the charitable trust. One out of the eight buildings was to be constructed and handed over to the charitable trust, free of cost. The trust would thereafter let out the said building to augment its resources for charitable purposes. Another building is again to be constructed free of cost for the trust to use as a community hall and fire temple. The balance of buildings available for construction with the assessee was six. Out of the remaining six, the assessee has to construct one building to be handed over to the State Government to include in its scheme of housing provided for weaker sections of the society. The said building was to be constructed not free of cost. The assessee could sell the flats in the said building assigned to the State Government @ Rs. 654 per sq. ft. The remaining five buildings would be constructed by the assessee-company and sold to weaker sections of Zoroastrian community at the rates to be fixed by the Charity Commissioner of the State Government.
4. During the previous year relevant to the assessment year under appeal, the assessee-company completed the construction of one building meant for Zoroastrian community and the assessee was permitted to sell the flats @ Rs. 1,000 per sq. ft. as determined by the Charity Commissioner. On completing the construction of the said building, the assessee-company sold the flats and handed over the possession. The sale process was of course @ Rs. 1,000 per sq. ft. The assessee earned a profit of Rs. 1.57 crores on sale of the said building No. 1. The assessee-company also had income from interest and altogether it returned an income of Rs. 1.83 crores for the assessment year under appeal.
5. While arriving at the above profit on the construction of building No. 1, the assessee had debited the estimated cost of construction of the non-saleable area to be handed over by the assessee-company to the trust, free of cost. As per the agreement, the assessee-company had to construct one building for the purpose of the charitable trust and another building to be used as community hall and fire temple and both free of cost. The assessee-company estimated the cost of construction of the above two buildings required to be handed over free of cost and claimed the same as a deduction by way of liability. The amount so worked out by the assessee-company was Rs. 1,08,16,500. This amount was in fact debited in the accounts of the assessee-company.
6. In the course of the assessment proceedings, the AO called for the details of the said amount of Rs. 1,08,16,500 debited by the assessee-company in its books of account and claimed as a deduction in computing its taxable income for the impugned assessment year. The assessee-company explained that the amount represented the cost of the non-saleable area. The assessee-company further submitted that it was following completed contract method of accounting and was offering income in the year of completion of each building and the pro rata cost of non-saleable area was deducted therefrom. The assessee-company further explained that the estimated cost of construction of non-saleable area as per the project estimates worked out to Rs. 3,07,53,000 as against a saleable area of Rs. 3,07,539 sq. ft. The area of building sold by the assessee was 1,08,165 sq. ft. and on the basis of proportionate estimation, the liability worked out towards non-saleable area was Rs. 1,08,16,500 @ Rs. 1,000 sq. ft. The assessing authority relying on the decision of the Supreme Court in the case ofTuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT held that the accounting practice said to be followed by the assessee-company cannot overtake the provisions of law and, therefore, as the method of apportionment worked out by the assessee-company was not acceptable to him, the same would be disallowed. He held that as far as the assessee's case is concerned, the sale of flats and the construction of two buildings free of cost are too separate transactions within the composite project to be executed on the basis of the agreement. He held that the said expenditure could not be held as incurred during the relevant previous year. In short, the finding of the assessing authority was that the amount deducted by the assessee-company represented contingent liability alone and not actual liability. In other words, the conviction of the assessing authority was that the claim of the assessee-company was premature.
7. When the matter was taken in first appeal, the CIT(A) agreed to the view taken by the assessing authority and held that the expenses relatable to free buildings could be allowed in the assessment as and when they are actually incurred by the assessee-company. He dismissed the appeal on the said ground. It is against the above that the assessee has come in appeal before us.
8. We heard Shri M.M. Golwala, the learned chartered accountant, appearing for the assessee-company. He explained in detail the scheme of the project made out on the basis of the agreement entered into between the assessee-company and the charitable trust. The learned chartered accountant further explained the nature of the liability undertaken by the assessee-company in respect of construction of buildings free of cost to the charitable society and the need of defraying of the said cost on the remaining buildings on a pro rata basis. The learned chartered accountant submitted that as far as the assessee-company is concerned, the expenditure incurred for constructing the free buildings is a cost to be borne by it and the cost need to be absorbed by the remaining buildings constructed by it and sold for a consideration. He, therefore, submitted that the estimation of the liability towards construction of the free buildings and deducting the said estimated cost from the profit of the remaining buildings is perfectly in accordance with law and in accordance with the standard accounting practices.
9. The learned chartered accountant further relied on the decision of the Supreme Court in the case of Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC), where the Court has examined the nature of a business liability. In the said case, the Court held that where the liability has become fastened on an assessee, the same has to be allowed as a deduction in computing its taxable income and the claim of deduction towards such liability cannot be refused only on the ground that the liability has not been actually quantified. The Court held that fastening of liability is different from quantification of the liability. Once liability is fastened in a particular previous year, the liability need to be estimated and has to be allowed as expenditure in the assessment year relevant to that previous year. He explained that in the present case also, the liability of the assessee-company towards constructing free buildings was fastened on the company in the first year of project itself and, therefore, the said liability need to be deducted in computing the income of the assessee. He stated that the liability has been scientifically estimated on a pro rata basis depending upon the cost and the area of free buildings and saleable buildings.
10. The learned Counsel further relied on the decision of the Tribunal, Mumbai Bench 'B', in Dy. CIT v. Rajgir Builders (1999) 65 TTJ (Mumbai) 538 : (1999) 70 ITD 226 (Mumbai).
11. Shri O.P. Sharma, the learned Departmental Representative appearing for the Revenue, contended that the deduction of liability in computing the taxable income of the impugned assessment year is against the method of accounting employed by the assessee-company. There is no dispute that the assessee-company is following project completion method. The development project undertaken by the assessee-company on an agreement with the charitable society was a composite project. The assessee had to construct free of cost buildings as well as saleable project. The construction of both categories of buildings should be taken together and as a whole and the project has to be viewed as a comprehensive and integrated one. Therefore, the liability/cost relating to the construction of free buildings could be deducted only on the completion of the entire project. As far as the impugned assessment year is concerned, the project was not complete and the assessee-company was in fact trying to deduct the liability on sale of single building of the project. Therefore, the claim made by the assessee-company is not allowable in the light of the accounting practice followed by the assessee-company itself.
12. The learned Departmental Representative further submitted that the liability now worked out by the assessee-company was contingent in nature. The liability towards incurring cost to construct free buildings could be recognised only when such expenditure was actually incurred by the assessee. The assessee could claim the expenditure incurred for constructing free buildings when in fact such buildings were completed and the whole project was executed. Till then, computation of interim liability would be in the nature of contingent liability.
13. In the facts and circumstances, the learned Departmental Representative submitted that the lower authorities have rightly disallowed the claim of the assessee towards deduction of liability in respect of construction cost of free buildings.
14. We heard both sides in detail and considered the matter. It is true that the project undertaken by the assessee-company was an integrated and composite project in its overall perspective. The assessee had the freedom to construct these buildings which are saleable at different rates and two buildings free of cost to be handed over to the charitable society. Therefore, it is clear that the assessee had assumed the contractual liability of incurring cost towards constructing two free buildings. The cost incurred by the assessee-company towards the construction of the two free buildings needs to be adjusted against the sale consideration of the six saleable buildings. In other words, the total cost of the project, i.e., of constructing all the eight buildings would be offset against the sale consideration of six buildings. This would be the scheme of computing the profit or loss of the project of the assessee-company on an overall basis.
15. In this context, it is the contention of the Revenue that the liability towards construction of the free buildings could be claimed by the assessee-company as a deduction only on the completion of the entire project. If that is the contention of the Revenue, the said contention should hold good for income also. If the income and expenditure with reference to the project could be recognised only on the completion of the entire project as a whole, how the AO is justified in assessing the income recognised by the assessee-company on the completion of sale of the first building, constructed by it. The AO should have deferred the recognition of income worked out in respect of the completed building till the entire buildings are completed and sold of. When it is the question of deduction of liability by way of expenditure, the assessing authority states that it could be allowed on completion of entire project. At the same time, while recognising the income for the purpose of taxation, the AO accepts that on sale of the flats of the first completed building, the assessee has earned income and, therefore, it is to be taxed. Obviously, the stand taken by AO is contradictory.
16. In fact, what the assessing authority has done is a pick and choose method. The assessing authority recognised the income at the earliest point of time and recognised the corresponding expenditure only at the latest point of time. Neither the assessing authority nor the CIT(A) have explained the logic and reasoning of the above disparity. The stand taken by the lower authorities is against the basic matching principle of accounting; matching principle of cost and revenue.
17. The assessee is under a contractual obligation to construct two buildings and hand over them to the charitable trust free of cost. This liability could be discharged by the assessee-company only by incurring cost in constructing two free buildings. The cost incurred for the construction of the two buildings should be defrayed by the remaining six saleable buildings. Therefore, it is to be seen that the expenditure of constructing two free buildings, forming part of the total project cost runs concurrently with the income earned out of the project. Income cannot be recognised at one point and the corresponding expenditure cannot be deferred to a later point. The construction of every saleable building is loaded with a proportionate cost attributable to the construction of the free buildings. Therefore, the assessee has rightly worked out the proportionate cost of the free buildings attributable to the building No. 1 constructed, completed and sold by it.
18. In this context, the only dispute is with reference to at what stage the project is said to be completed. Even though the total project is an integrated one, it is the compendium of projects divided into segments of buildings. When one building is constructed, as far as that building is concerned, it is complete even though the entire project as a whole may not be completed. As the composite project itself is divisible into segments, the completion of one segment can be considered as a completed unit for the purpose of accounting and income taxation. To insist that completion of the project means the completion of the entire project would be justified only from the legal angle of contractual liability and not from the practical view of accounting. To insist that for the purpose of accounting and taxation, the project is to be completed only when the entire project is completed, is too philosophical and pedantic. Even if the project is an integrated and comprehensive one, it is a bundle of few projects. Once an individual project out of the overall project is complete, the profit or loss arising from the completion of the said individual project could be recognised for the purpose of income-tax. That has rightly been done by the assessing authority while recognising income in the hands of the assessee-company.
19. In the facts and in the circumstances of the case, we are of the considered view that the assessee-company is justified in claiming by way of deduction, the liability of Rs. 1,08,16,500, attributable to the proportionate expenditure relating to the construction of free buildings.
20. In fact, the Tribunal, Mumbai Bench 'B', in the case of Dy. CIT v.Rajgir Builders (supra) has considered an exactly similar case. In that case the assessee, a builder, entered into an agreement with another party for construction of flats and shopping centre. As per the agreement, the assessee was to take and appropriate the sale proceeds of 57 flats in consideration of constructing and handing over of free of cost, 39 flats and 24 shops to the other party. Construction and sale of 57 flats were completed in the period relevant to the assessment year under appeal and the construction of 24 flats to be handed over to the other party was not complete. While computing taxable income, the assessee estimated the cost of construction of 24 flats and claimed the same as deduction. The assessing authority disallowed the claim but the CIT(A) held that the construction and sale of flats were subject to the liability attached to it in the form of construction of other sets of flats and shopping complex and the income of the assessee could be rightly worked out only if the expenditures towards construction of those flats and shopping complex also were taken into consideration. The above position of the CIT(A) was confirmed by the Tribunal in the said order holding that the liability was real and had to be deducted in computing the taxable income of the assessee.
21. In the facts and the circumstances of the case, we direct the assessing authority to allow the amount of Rs. 1,08,16,500 as deduction in computing the taxable income of the assessee-company.
22. In result, this appeal filed by the assessee is allowed. Order accordingly.