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Champion Construction Co. Vs. First Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1983)5ITD495(Mum.)
AppellantChampion Construction Co.
RespondentFirst Income-tax Officer
Excerpt:
1. the assessee is a firm, its business being that of earning income by constructing multi-storeyed buildings and selling flats and other accommodation therein. the proceedings relate to the assessment years 1977-78 and 1978-79 for which the respective previous years ended on 30-6-1976 and 30-6-1977. it is common ground that the assessee-firm undertook a project of constructing a multi-storeyed building known as 'monalisa' at bandra, bombay, during the previous year relevant for the assessment year 1976-77. for this purpose, it acquired a plot of land on long lease. the position as regards cost of construction and the receipts by way of sale of flats/other accommodation by the end of the assessment years 1976-77, 1977-78 and 1978-79 is as under ; assessment year2. sale value of nil.....
Judgment:
1. The assessee is a firm, its business being that of earning income by constructing multi-storeyed buildings and selling flats and other accommodation therein. The proceedings relate to the assessment years 1977-78 and 1978-79 for which the respective previous years ended on 30-6-1976 and 30-6-1977. It is common ground that the assessee-firm undertook a project of constructing a multi-storeyed building known as 'Monalisa' at Bandra, Bombay, during the previous year relevant for the assessment year 1976-77. For this purpose, it acquired a plot of land on long lease. The position as regards cost of construction and the receipts by way of sale of flats/other accommodation by the end of the assessment years 1976-77, 1977-78 and 1978-79 is as under ; Assessment year2. Sale value of Nil 30,73,216 58,02,516 flats/other (out of which (net) It is also common ground that the total area to be constructed in this regard was 61,396 sq. ft. and that the building was complete by the end of the assessment year 1978-79. However, the total area sold by the end of the previons year relevant for the assessment year 1978-79 was 49,065 sq. ft. only. It was 52,426 sq. ft. up to the end of the next previous year, i.e., up to the end of the assessment year 1979-80 which position continues up to date. In other words, the position is that shops on the ground floor and two flats on the top floor covering an area of about 8,700 sq. ft. still remain unsold.2. The assessee filed returns for both the assessment years showing nil income on the ground that until all the flats and other accommodation in the multi-storeyed building were sold and the building is conveyed to a co-operative society to be formed by all the purchasers of flats and other accommodation, the correct taxable profit would not be ascertained and, therefore, nothing was taxable so far as the two years under appeal were concerned. On the other hand, the ITO held that under the Income-tax Act, 1961 ('the Act'), each year was a self-contained unit of assessment and, therefore, taxable income will have to be computed for each year.

For the assessment year 1977-78, the ITO prepared a draft assessment order on 15-3-1980 computing the income at Rs. 1,45,038 by applying net profit rate of 5 per cent on the money received during the previous year in respect of forty-five flats sold during the previous year. Copy of the draft assessment order was forwarded to the assessee on the same date. The assessee's objections to the order are dated 24-3-1980 on receipt of which the ITO forwarded the draft order together with the objections to the IAC who has, after discussing the matter with the assessee on few occasions, issued instructions on 25-9-1980 directing the ITO to compute the assessee's income at Rs. 4,60,983 as against Rs. 1,45,038 proposed by the ITO, i.e., by applying a net profit rate of 15 per cent as against 5 per cent applied by the ITO. The assessment order has been passed by the ITO on 25-9-1980 in conformity with the directions contained in the order of the IAC under Section 144B(4) of the Act, as stated above.

For the assessment year 1978-79, the draft assessment order was prepared by the ITO on 9-2-1981 computing the income at Rs. 8,74,514 by applying net profit rate of 15 per cent on the total value of the flats sold. However, through inadvertence, the ITO assumed that all the eighty-three flats were sold during the previous year relevant for the assessment year 1978-79 while the actual position was that only thirty-eight flats were sold during the previous year relevant for the assessment year 1978-79 and forty-five flats had been sold in the earlier previous year. A copy of the draft assessment order was forwarded to the assessee and the objections to the proposed assessment order are dated 17-2-1981. The draft order together with the objections was forwarded by the ITO to the IAC on receipt of the objections from the assessee. However, in this case, the ITO in pursuance of the directions given to him by the IAC under Section 144A of the Act, sent a notice to the assessee dated 18-3-1981 requiring it to furnish certain details. The assessee's letters in this regard to the IAC, inter alia, are dated 26-3-1981, 27-3-1981 and 30-3-1981. The ITO prepared a second draft assessment order in which he computed the assessee's income at Rs. 8,27,064 as against Rs. 8,74,515 as per the original draft assessment order mainly by applying net profit rate of 30 per cent on the value of the thirty-eight flats sold during the year as distinct from what was done originally, i.e., application of net profit rate of 15 per cent on the value of the eighty-three flats sold during both the years. The assessee's objections to the second draft assessment order are dated 7-4-1981. The ITO again forwarded the draft order together with the objections to the IAC who issued his direct ions to the ITO in this regard vide his order dated 26-9-1981. On this very date, the ITO has completed the regular assessment in conformity with the directions given by the IAC under Section 144B(4) for the assessment year 1978-79.

3. It is pertinent to mention that when the appeal for the assessment year 1977-78 came up for hearing before the Commissioner (Appeals), the IAC requested the Commissioner (Appeals) to enhance the assessment by applying net profit rate of 30 per cent as against 15 per cent applied originally on the sale proceeds of the flats and the Commissioner (Appeals) had issued a notice on 17-3-1981 to the assessee requiring it to show cause as to why the assessment of income be not enhanced in terms of the IAC's request to him which was ad verbum quo ted in the show-cause notice. However, on merits, the Commissioner (Appeals) has found that the net profit rate of 15 per cent applied by the ITO in pursuance of the directions of the IAC under Section 144B(4) was quite reasonable. Accordingly, he confirmed the order of assessment, at the same time rejecting the IAC's request for enhancement of assessment.

As regards the appeal for the assessment year 1978-79, the Commissioner (Appeals) has noted the preliminary objections raised by the assessee's counsel, namely, that the assessment order was passed on the directions issued under Section 144A after the assessment year was over, that there were two draft assessment orders and that in view of the decision of the Delhi High Court in the case of Sudhir Sareen v. ITO [1981] 128 ITR 445, the ITO could have issued only one draft assessment order. The Commissioner (Appeals) has also noted the assessee's other objection regarding the computation of income after the transaction is complete, etc. However, it appears that finding force in the assessee's preliminary objection, the Commissioner (Appeals) has cancelled the order for the assessment year 1978-79.

4. It is for this reason that while for the assessment year 1978-79 the department alone is in appeal, there is an appeal by the assessee and cross-objections by the ITO for the assessment year 1977-78.

5. It is reiterated before us by Shri D.M. Harish, the learned counsel for the assessee, that in the case of a business like the one by the assessee, the income could be arrived at properly only after the project is complete and not earlier. For this purpose, he strongly relies on the decision of the Bombay High Court in the case of K.H.Mody, In re [1940] 8 ITR 179 and the Rangoon High Court in the case of CIT v. A.K.A.R. Family [1941] 9 ITR 347. Alternatively, it is stated that the ITO having computed the assessee's income at Rs. 1,45,038 the I AC had no jurisdiction to increase the income to Rs. 4,60,983 in the proceedings under Section 144B, particularly when no opportunity in terms of the proviso to Section 144B(4) was given to the assessee. In this connection, Shri Harish has invited our attention to the Board's instructions being 'No. 1167 XXIV/1/14 Sections 144A and 144B of the Income-tax Act, 1961, Clarification regarding' to show that the Board's view was that the IAC cannot issue directions for enhancement of income in a reference under Section 144B(4) and that though the IAC could issue directions under Section 144A during the pendency of reference before him under Section 144B(4), such directions can be issued within the normal time limit for completion of assessment provided under Section 153 of the Act. It is, thus, contended that the IAC was not at all justified in directing the ITO to compute the assessee's income at Rs. 4,60,983 as against Rs. 1,45,038 proposed by him by issuing directions on 25-9-1980 for two reasons, namely : (i) instructions were not issued under Section 144A and (ii) if it is assumed that these instructions are issued under Section 144A, these instructions could not have been issued after 31-3-1980, i.e., the normal time limit within which the assessment could have been completed under Section 143 of the Act. Our attention, in particular, is invited to the fact that even otherwise a specific notice as required under the proviso to Section 144B(4) was not issued by the IAC and, therefore, his directions to the ITO, were illegal and the assessment made in conformity with such directions by the ITO on 25-9-1980 was also illegal.

6. As regards the assessment year 1978-79, Shri Harish has strongly relied on the Board's instructions above for the purpose of showing that the second draft assessment order, if any, could be made by the ITO within the normal time limit though according to him, in view of the decision of the Delhi High Court in the case of Sudhir Sareen (supra) there was no scope for issuing two draft assessment orders at all. Apart from reiterating that the income from the business of the type we are considering in this case, no taxable income could be computed for the year, Shri Harish contended that the assessment was invalid having been made in pursuance of directions issued by the IAC under Section 144A after a reference had already been made to him under Section 144B(4) and on the basis of the second draft assessment order.

7. The departmental representative has, on the other hand, strongly relied on the decision of the Patna High Court in the case of Sri Sukhdeodas Jalan v. CIT [1954] 26 ITR 617. According to him, the decision of the Allahabad High Court in the case of Addl. CIT v. Madan Lal Ahuja [1982] 136 ITR 640 and other orders of the Tribunal relied upon by the assessee's counsel were distinguishable. According to the departmental representative, the IAC had given a number of opportunities to the assessee after receipt of the draft assessment order and the objections from the ITO about which he has specifically mentioned in the order containing the directions. It is pointed out that Section 144B(4) read with its proviso means and can only mean that even in the proceedings under Section 144B(4), the IAC has the power of enhancing the income. As regards the assessment year 1978-79, the submission is that the directions under Section 144A were issued by the ITO during the financial year and, in fact, the second draft assessment order is dated 31-3-1981 so much so that considered from any point of view, the draft assessment order is valid and, accordingly, the final assessment order passed on 26-9-1981 in conformity with the directions of the IAC, being within one hundred and eighty days of the second draft assessment order, is within time.

8. For the sake of convenience we will dispose of the legal contentions first. There is no dispute that for the assessment year 1977-78, the ITO prepared the draft assessment order on 15-3-1980 computing the assessee's income at Rs. 1,45,038 as against the nil income shown by it and, thus, the variation in the income returned and the income proposed to be assessed exceeded the amount fixed by the Board under Sub-section (6) of Section 144B. The provisions of Section 144B were obviously attracted and the ITO was justified in forwarding and serving the draft assessment order on the assessee as required under Sub-section (1) of Section 144B. The assessee, admittedly, filed its objections to the proposed assessment order on receipt of the draft assessment order and the ITO forwarded the draft assessment order together with the objections to the IAC as required under Sub-section (4) of Section 144B. In this connection, it may be necessary to mention that the IAC can issue such directions as he thinks fit for the guidance of the ITO to enable him to complete the assessment after considering the draft order and the objections and after going through, wherever necessary, the records relating to the draft order. However, the proviso to Sub-section (4) of Section 144B places an obligation on the IAC to give the assessee a specific opportunity to be heard if he wants to issue any directions which are prejudicial to the assessee.

9. The first question that requires consideration is regarding the purport and scope of Sub-section (4) of Section 144B read in the light of its proviso. In order to understand the purport and scope of Section 144B, it is necessary to keep in mind that simultaneously with the introduction of Section 144B, the Legislature, in its wisdom, introduced Section 144A also. While under Section 144A the IAC can on his own motion or on a reference made to him by the ITO or on an application by the assessee can examine the records and issue directions both in favour and against the assessee subject only to the limit that in case the directions issued are prejudicial to the assessee an opportunity will have to be given to the assessee, the scope of Section 144B appears to be to decide whether and to what extent the variation in income proposed by the ITO is justified having regard to the objections filed by the assessee. Considered from this point of view the proviso to Section 144B(4) should only mean that if the IAC's directions are prejudicial to the assessee in the sense that the IAC directs the ITO to make further investigation in the matter which might result in the increase in the variation of income as distinct from a positive directions to compute income at a figure higher than proposed by the ITO, an opportunity will have to be given.

This becomes quite clear when one keeps in mind that under the Explanation to Section 144A the directions given, on the lines on which the investigation should be made, are not deemed to be directions prejudicial to the assessee. This, to our mind, is the distinction between the scope and powers of the IAC under Sections 144A and 144B.Therefore, on the face of it when the IAC directed the ITO to compute the assessee's income at Rs. 4,60,983 as against Rs. 1,45,038 by applying the net profit rate of 15 per cent as against 5 per cent, the IAC was asking the ITO to do something under Section 144B which he was not empowered to do : more so when it is evident from the records that though the assessee was heard on a number of days by the IAC, no specific opportunity of hearing as required under the proviso to Section 144B(4) seems to have been given to the assessee. In our this view we find support from the instructions issued by the CBDT, referred to us in paragraph 6 above. We also find support for the view we have taken in the order of the Special Bench of the Tribunal in the case of Rex Cinema Co-owners v. Sixth ITO [1983] 3 ITD 633 (Bom.) where referring to the scope of the ITO's powers under Section 144B(4) the Special Bench held that Section 144B is procedural Section. Having regard to the above discussion, we are inclined to hold that the directions given by the IAC in this regard are invalid and, consequently, the assessment made in pursuance of the directions is also invalid.

10. As regards the assessment year 1978-79, factually, the position is that the first draft assessment order was prepared by the ITO on 9-2-1981. This was served on the assessee and the assessee filed its objections on 17-2-1981 itself. However, after the draft assessment order and the objections filed by the assessee were forwarded to the IAC under Section 144B(4), the IAC issued directions to the ITO under Section 144A on the basis of which the ITO issued a notice to the assessee dated 18-3-1981 requiring it to furnish certain details. The second draft assessment order has been prepared on 31-3-1981 and the assessment has been finally made on receipt of the directions under Section 144B(4) on 26-9-1981.

11. The questions that arise for consideration for this year are : (/) whether after the draft assessment order was prepared by the ITO and served on the assessee, the IAC has any jurisdiction to examine the case with a view to issue directions as contemplated under Section 144A and (ii) whether the ITO can prepare a second draft assessment order after he has already prepared one draft assessment order and has served the same on the assessee. We have examined the provisions of Section 144A and Section 144B from this point of view.

12. In this connection it is pertinent to mention that a similar issue had come up for consideration before Delhi Bench 'A' of the Tribunal in the case of Shagoon Emporium v. ITO [1983] 3 ITD 376, 386 (TM). There was a difference of opinion between the learned members who heard the appeal originally. However, the Third Member passed his order under Section 255(4) of the Act holding that the action under Section 144A is possible till the ITO prepares an order and forwards the same to the assessee and not thereafter. He has taken the view that once a reference is made under Section 144B, the operation of Section 144A is excluded. Support in this regard was drawn from the Board's Circular No. 201/25/1976-IT (A-II), dated 29-4-1978. We are in agreement with the view expressed by the Third Member in that case which is reported in the case of Shagoon Emporium (supra) onwards and hold that there was no, scope for the IAC to issue directions under Section 144A after the ITO had prepared the first draft assessment order, served it on the assessee and forwarded the draft order as well as the assessee's objections to the IAC under Section 144B(4). As a natural corollary, we will have to hold that the draft assessment order prepared by the ITO in pursuance of the directions of the IAC was invalid and cannot be taken cognizance of. In fact, this is what has been held by the learned judge in the decision of the Delhi High Court in the case of Sudhir Sareen (supra).

13. All the same, however, this will not make a material difference in the situation. This will only mean that what is done by the IAC or the ITO under cover of powers vested in them under Section 144A, is not valid in law. But this does not mean that the first draft assessment order and the directions of the IAC under Section 144B, to the extent they are valid in the eye of law, can be ignored. In this connection it is worth noting that the net result of the IAC's eventual directions under Section 144B(4) is reduction of income from Rs. 8,74,515 to Rs. 8,27,064. It is only the basis of computation of income which may be prejudicial but not the directions taken as a whole.

The assessments are also not barred by limitation. Explanation l(iv) to Section 153 provides for exclusion of period |from the date the draft assessment is forwarded by the ITO to the assessee, to the receipt of the IAC's directions under Section 144B(4) by him. In case the time taken in these proceedings exceeds hundred and eighty days, the Legislature in its wisdom fixed a ceiling of hundred and eighty days.

There being no dispute that in both the years the period between the date of the forwarding of the draft assessment order and the receipt of the directions by the ITO under Section 144B(4) is more than hundred and eighty days, the time for completion of assessment gets extended by hundred and eighty days only. In other words, the assessments would be within time if completed on or before 27-9-1980 and 27-9-1981 respectively. In the circumstances, the invalidity of the assessment order for the assessment year 1977-78 referred to by us in the earlier paragraphs would only mean that the assessment as made for that assessment year cannot be upheld as such. The same may have to be made afresh according to law if necessary. On the other hand, the assessment order for the assessment year 1978-79 is valid and is in time.

14. We now come to the merits of the assessee's contention, viz., whether income in this case is assessable only when the project is complete, i.e., when the entire portion of the multi-storeyed building meant for sale is sold, a co-operative society of the buyers is formed and the assessee has transferred all its rights, title and interest in the project to the society. It may be that from commercial point of view in the case of a single project/venture of the type in the case before us the profits can be reasonably computed only when the venture comes to an end in the manner suggested by the assessee's counsel. In fact looked at superficially, the Bombay High Court's decision in the case of K.H. Mody (supra), the Rangoon High Court's decision in the case of A.K.A.R. Family (supra) and the Allahabad High Court's decision in the case of Madan Lal Ahuja (supra) support the assessee's contention, viz., when there is a single venture in the nature of trade, the question of assessing profits arises or should arise only when the venture comes to an end. This is also the impression one gets from the order of the Tribunal dated 4-10-1971 in the case of Neelkamal Construction Co. v. ITO (copy of the order placed on record at pages 168 to 175 of the assessee's paper book). However, when all these decisions are read carefully in the light of the Patna High Court decision in the case of Sri Sukhdeodas Jalan (supra) and the Supreme Court's decision in the case of P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 and that of the Delhi High Court in the case of Tirath Ram Ahuja (P.) Ltd. v. CIT [1976] 103 ITR 15 we find that the proposition that profit from a single venture cannot be ascertained for tax purposes until the venture has come to an end is not absolute. There may be cases where such a proposition should hold good while there would be other cases where the profit from a single venture can be computed year-wise. In any event, there will be no justification for treating the surplus of receipt after the entire cost/ expenditure to the assessee is recouped as the income of the assessee unless the assessee shows that it is under an obligation to meet a heavy liability which might altogether change the complexion of the resultant profit or loss from the venture. In this context it has to be borne in mind that if the proposition as stated by Shri Harish is accepted, it would be very easy for any assessee to evade payment of tax. All that he will need to do is to retain a small portion of the accommodation constructed by him unsold, which will always be possible.

15. It is, thus, desirable to briefly refer to the facts of each case to show why we have come to the aforesaid conclusion. The facts in the Bombay High Court case were that the assessee had purchased about 1,330 acres of land for Rs. 60,000 in the year 1930. Out of this area he earmarked for development and sale as building sites an area of about 266 acres divided into 1,000 plots. He spent about Rs. 20,000 in the development of the area. During the financial year 1936-37 the assessee sold 208 plots to various persons for a sum of Rs. 65,810. By taking into account the original cost price of the land and the proportionate development expenses, the ITO computed the profits at Rs. 56,980 which were reduced to Rs. 47,533 by the AAC.In the Rangoon High Court case, the assessee was a money-lender. In the course of its money-lending business it took over certain acres of land and a house in settlement of a debt of Rs. 9,000 due to it. The lands were sold at different times at the best prices available at their respective sales. The assessee was crediting the debtor's account by crediting the sale proceeds as and when materialised. After the last sale took place, it claimed the net debit balance of Rs. 5,137 in that account as loss.

In the Allahabad High Courtcase the assessee had purchased 28,278 sq.

yds. of land between 1942 to 1947 and spent about Rs. 81,000 in the development of the area. During the assessment year 1969-70 the assessee sold for the first time 5,673 sq. yds. out of it for a sum of Rs. 1,05,700. Again by taking a proportionate cost of the land and the development expenses, the department wanted to tax the assessee on a capital gain of Rs. 55,670.

It is, thus, evident that both in the Rangoon and the Allahabad High Court cases the assessee was not having any adventure in the nature of trade as such in real estate. Besides the sales were of a small portion as compared to the total area purchased or exploited, both in the Bombay and the Allahabad High Court cases. Therefore, all the above three cases are distinguishable on facts.

The Tribunal's order dated 4-10-1971, relied upon by the assessee's counsel, is also distinguishable. In that case the assessee-firm had purchased one plot of land for which an agreement of sale was entered into on 29-6-1962. However, a deed of conveyance was not executed. It was for that reason that the Tribunal held that until the registration took place there was no transfer and, consequently, no sale.

16. On the other hand, nine-tenth work of the project had been completed during the previous year in the Patna High Court case and the assessee had received a sum of about Rs. 3,00,000 on account of the execution of the contract. These facts are very close to the facts in the assessee's case. Duly recognising the commercial principles involved in such matters the Patna High Court has observed as under : In the case of contracts, if accounts are maintained and completed on contract basis the profits or gains of the previous year cannot properly be extracted from the accounts, for a contract may take several years for being completed and payments in regard to it may also be received by the assessee in several years. It may be convenient from the point of view of the assessee that profit should be ascertained on the completion of the contract and assessment of the profit should take place after the completion of the contract.

But Section 3 imposes a charge of income-tax upon the profits and gains of the assessee for the accounting year and it is the duty of the income-tax authorities to ascertain the profits and gains accruing to the assessee in respect of the payment received during the accounting year.

It cannot be said that merely because a contract was completed after the accounting year, no profits arose or accrued to the assessee in the accounting year. In the case of an incomplete contract there is a well established method of calculating profits accruing in the accounting year which is set out at page 971 of Batliboi's Advanced Accounting. Mathematical certainty is not demanded in a matter of description. (p. 618) More or less same view has been taken by the Hon'ble Supreme Court in the case of P.M. Mohammed Meerakhan (supra). The facts in that case are also quite close to the facts in the assessee's case. The land in this case was divided into 23 plots out of which 22 plots had been sold. The Supreme Court observed as under : ...In our opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be ascertained even on the assumption that the transaction of the adventure of trade was not completed. Under the Income-tax Act for the purpose of assessment each year is a self-contained unit and in the case of a trading adventure the profits have to be computed in the manner provided by the statute. It is true that the Income-tax Act makes no express provision with regard to the value of stock. It charges for payment of tax the income, profits and gains which have to be computed in the manner provided by the Income-tax Act. In the case of a trading adventure the profits have to be calculated and adjusted in the light of the provisions of the Income-tax Act permitting allowances prescribed thereby. For that purpose it was the duty of the Income-tax Officer to find out what profit the business has made according to the true accountancy practice. As a normal rule, the profit should be ascertained by valuing the stock-in-trade at the beginning and at the end of the accounting year....(p. 743) Though the finding of the Tribunal that neither profit nor loss for the construction contract for the year should be taken was not interfered with by the Delhi High Court in the case of Tirath Ram Ahuja (P.) Ltd. (supra), their Lordships have following the Patna High Court's decision in Sri Sukhdeodas Jalar's case (supra) clearly observed : ...in the case of contracts, one need not wait till the contract was completed in order to ascertain the income and that it was open to the revenue to estimate the profit on the basis of the receipts in each year of construction although the contract was not complete....

(p. 15) The counsel for the assessee, it may not be out of place to mention, had referred to the orders of the assessments in three cases (copies of the assessment orders filed at pages 175, 176 and 179 of the paper book). However, the facts in those cases are not clearly stated. In any event, in view of the Supreme Court and the High Court decisions referred to by us above, the assessment orders will hardly provide any guidance in the matter.

17. Having regard to the case law discussed by us hereinabove, we hold that it is not a correct proposition to say that profits of the assessee from a single venture/project in the nature of trade cannot be ascertained until the venture/project has come to an end. Under the Act each year is a self-contained unit and unless it is impossible to compute the profits or losses of each year reasonably if necessary by estimating the value of the liabilities to be incurred, valuing the work-in-progress, stock-in-trade, etc., the profits should be computed year-wise and taxed. The acceptance of a bald proposition put forward by Shri Harish would amount to giving the assessee a licence to put off his tax liabilities for a unlimited period by seeing to it that the venture/project never comes to an end in the sense something or the other always remains to be done. That will be a very unsatisfactory state of affairs. Moreover, when the entire cost/expenditure to the assessee is recouped and/or major portion of the venture/project is complete, there is really no justification in not taxing the income from project which quite often may represent excess of receipts over expenditure unless there is a risk/chances of the assessee's suffering heavy liabilities, subsequently, for some reasons or the other.

18. We have examined the facts of the case from this point of view. We find that out of the total accommodation of 58,970 sq. ft. constructed, the assessee was able to sell only 25,530 sq. ft. during the previous year relevant for the assessment year 1977-78. Neither the construction of the multi-storeyed building was complete nor even the half portion of the building sold. The net sale proceeds received were much less than the total expenditure/cost incurred by the assessee up to date. In the circumstances, so far as the assessment year 1977-78 is concerned we accept the assessee's submission that it would be in order if no profits or losses are estimated from the venture for the assessment year 1977-78. The assessment for this year is, therefore, cancelled even on this score.

19. However, the position as regards the assessment year 1978-79 is materially different. The construction of the building is completed in that year. Total area earmarked for sale is 61,396 sq. ft. out of which up to the end of that year the assessee had sold 49,965 sq. ft., i.e., about 80 per cent of the area. The net receipts have far exceeded the total cost or expenditure to the asseesee. Assuming there is any possibility of the assessee's incurring some liability in future in connection with the completion of the project or otherwise, the unsold portion comprising of 12,331 sq. ft. and the difference between the net receipts and the total expenditure and the amount actually treated as the assessee's income are more than sufficient to take care of any such contingency.

20. There is one more aspect which we have kept in mind while confirming the assessee's total income at Rs. 8,27,064. The Commissioner (Appeals) has confirmed the computation of income by applying the net profit rate of 15 per cent on the net sale proceeds in the case of the assessment year 1977-78. No doubt, the ITO has computed the profits for this year by applying the net profit rate of 30 per cent. However, if a rate of 15 per cent is applied on the net sale proceeds up to the end of the assessment year, the total income would come to Rs. 8,74,514 and this is more than Rs. 8,27,064. In the circumstances, the total income of the assessee for the assessment year 1978-79 at Rs. 8,27,064 is confirmed.

21. In the result, the assessee's appeal for the assessment year 1977-78 is allowed, the cross-objections by the department for the assessment year 1977-78 are dismissed but the departmental appeal for the assessment year 1978-79 is allowed.


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