External Development Charges Collected In Advance By Builder From Prospective Flat Owners, Can't Be Brought To Tax: Delhi ITAT
The Delhi ITAT held that when the project under consideration is not yet completed, the advance collected by infrastructure companies from the buyers cannot be charged to profit and loss account. The Division Bench of S. Rifaur Rahman (Accountant Member) and Anubhav Sharma (Judicial Member) observed that “the assessee has collected the same for providing the common services...
The Delhi ITAT held that when the project under consideration is not yet completed, the advance collected by infrastructure companies from the buyers cannot be charged to profit and loss account.
The Division Bench of S. Rifaur Rahman (Accountant Member) and Anubhav Sharma (Judicial Member) observed that “the assessee has collected the same for providing the common services on the approval of HUDA, this is only based on reimbursement and there is no profit element. Therefore, it cannot be forming part of Profit and loss Account”. (Para 12)
Facts of the case
The assessee company, engaged in the business of real estate development, continued to run the construction project in collaboration with M/s Gopal Das Estates and Housing P. Ltd. and M/s Ardee Mechanical Industries Delhi P. Ltd. All the parties had pooled their land for the purpose with the understanding of the profit-sharing ratio. In the pursuit of collaboration, the assessee entered into Secondary Agreement with M/s R.D. Varma & Company for the construction of flats known as Palm Grove Heights in Gurugram. As per this Secondary Agreement, 85% of the sales proceeds were earmarked for the developer and the remaining 15% was to be shared by the assessee with Gopal Das Estates and Housing and Ardee Mechanical Industries Delhi. As per the Development Agreement, the External Development Charges (EDC) paid to the Haryana Urban Development Authority (HUDA) would be collected from the prospective/ space/ units / flats buyers and the same would be passed on to the assessee.
During assessment, the AO went through the details of the treatment of EDC in the accounts of assessee and being of the opinion that the same was misreported for income purposes in the accounts brought to tax a sum of Rs.1,80,39,139/-.
Observation of the Tribunal
The Bench observed that the assessee a joint partner in the development of real estate, as per the agreement, collected EDC charges from the owners of the flats and treated the above charges as advance for execution of common facilities like, construction and commissioning of sewerage facilities, roads, electric works, laying of water pipes and other related civil works.
The Bench found that same was charged to the WIP and relevant payments made to HUDA were charged to the WIP account.
The Bench also observed that the EDC is nothing but an advance collected to provide common facilities and other services to the prospective flat owners and such provision of services are reimbursable, the same was collected in advance.
As and when it is executed, the same are charged to the WIP, added the Bench.
The Bench explained that since the project under consideration is not yet completed, the collected advance cannot be charged to profit and loss account.
Further, the assessee has collected the same for providing the common services on the approval of HUDA, this is only on the basis of reimbursement and there is no profit element, added the Bench.
Therefore, while concluding that EDC charges cannot be form part of Profit and loss Account, the High Court dismissed the Revenue's appeal.
Counsel for Appellant/ Revenue: Amisha Gupt
Counsel for Respondent/ Assessee: K. Sampath and V. Rajkumar
Case Title: ACIT versus Ardee Infrastructure Pvt. Ltd.
Case Number: ITA No.3584/DEL/2023