ATreatiseon

IncometaxAssessmentin
RealEstateCases

SYAMALDATTA

1stEdition:April,2010

Disclaimer
Theopinionsexpressedinthisbookareexclusivelyoftheauthorandthesemustnotbeconsidered
astheofficialviewoftheIncometaxdepartment.Inspiteofeffortsmadetoavoiderrors,theremay
besomeinadvertentmistakes&omissionsinthisbook.Further,thisworkshouldnotbetreatedas
exhaustive statement on relevant law. To avoid doubt on any point the reader should refer to the
actual bare Acts, Rules, judgments, circulars, notifications etc. It is notified that the author or
publisher of this book shall not be responsible for any mistake, omission, loss, damage, action or
inactioncausedto/byanyoneduetofollowingthisbookbyanyone.

Dedication
This book is the product of honest, sincere
and tenacious efforts of four years.
I submit this work at the feet of
my parents who showed me
the light of this world
and then, taught me
these values
also.

R.S.Upadhyay,I.R.S.,
CommissionerofIncomeTax
DirectTaxesRegionalTrainingInstitute
16BRowlandRoad,Kolkata700020.

FOREWORDTO1STEDITION

ThemostvisiblemanifestationofIndiaseconomicgrowthisprobablywitnessedintheRealEstate
market.ThismarketinIndiaisreportedlyestimatedat15billionU.S.dollarsin2008whichwhen
convertedintorupeescomestoRs.63,000crores.TheResidentialhousingmakesup75percentof
therealtymarketwhilecommercialspaceincludingofficeandretailaccountfortherest.
In the above scenario it is vital that the tax component from this Rs.63, 000 crores market is
properlyassessedandrealized.Toachievethisgoalitisimperativethattheofficersatthecutting
edge (Assessing Officers & Investigation Wing) understand the specifics and nuances of this trade
whereDevelopersandBuildersaremakingastronomicalinvestmentsandachievinghugeturnover.
TherecentandsuddenclimbinRealEstatesectorhasgivenaspectacularboosttotheinfluxofblack
moneyalso.
The credit for undertaking this daunting task solely rests with Mr. Syamal Datta, Deputy Director
(Training), who, so to speak, has sweated blood on this. He had demonstrated missionary zeal in
collecting,collating,anddevelopingthetechnicalinputsonthishighlyintricatesubject.Heneedsto
becommendedforthisextraordinaryfeat.

Kolkata,25June,2008

R.S.Upadhyay


PREFACETO1STEDITION
Real Estate related businesses constitute about 1415% of Indias GDP estimated at $ 12
billionandisgrowing@30%(Source:Pressreleasedt.21092006ofFICCIduringitssummiton
realestate).This30%growthinrealestatesectorissignificantbecause,incomparison,IndiasGDP
growthratein200607was9.4%.Thequantumofgrowthinthissectormaybeguessedfromthe
figureofadvancesgiven:

200405(incrore)

Advancesincapitalmarket

15860.10

Advancesincommoditiesmarket 2366.49
AdvancesinRealEstatemarket
145604.55

200506(incrore)

22076.91
4391.38
260222.60

On the other hand the nature of these cases is multifarious, elaborate and complex. As
constructiontakestime,businesstransactionsspilloverfromoneaccountingyeartoanother.Also,
development of a project may be of different nature and composition in different cases, causing
revenue stream from different sources and cost outlay of different nature. From 1.4.2003
Accounting Standard(AS)7hasbecome mandatoryforconstructioncontracts.Inadditiontothe
revised AS 7, from 1/4/2011 IAS (Indian Accounting Standards) will converge with IFRS
(International Financial Reporting Standards) which will bring new concepts. Thus, indeed,
assessment of real estate related cases is increasingly becoming a very challenging job to the
AssessingOfficers(AOs).Thattheindustryistryingtoimproveknowledgeandskillisevidentfrom
thefactthatmoreandmoreinstitutesareofferingcoursesonRealEstateManagement.
It is essential for the departmental officers also to equip themselves with the requisite
knowledgeandskillinthisfield.Thesecasesareverysensitivealso.Ontheonesidethereisriskof
loss of revenue and consequent audit objection and on the other side is the possibility of doing a
wrong assessment on the assessee. During my interaction with officers of different cadres I found
that they need some comprehensive reference material on the subject. But presently there is
probablynosuchbook.ThereforeIstartedwritingthisbookin2007whenIwasassignedthejobof
coordinatingatrainingcourseonthis.Inthisbookallcomprehensibleissueshavebeenincluded.
ThoughthisbookwillmainlyserveasaguidetotheofficersoftheIncometaxdepartment,it
may nevertheless be extremely useful for assessees and practitioners as well because the critical
analysisinthiswillfunctionasamirroroftheirworks.Sofartheywerehearingfromtheirfraternity
only.Fromthisbooktheywilllearnhowtheothersideisthinkingandcontemplating.Afterall,this
book is not innuendo about the work of practitioners. A lot of academic substance exists in it and
thisbookisthefirstofitskindintheentirecountry.Itmaybeappreciatedthatthesubjectandthe
disciplinewillbericheronlyifmoreandmoresuchintellectualworkscomeintoexistence.
Ihopethisworkwillbeofhelptothefollowing:
a) Officers of Income tax department in making just and legally correct assessment in real estate
cases
b) Officers of Investigation wing of Income tax department in getting a 3600 view of all pertinent
issuestounderstandtaxanglesinthecasesofdevelopers,buildersandconstructioncontractors
forthepurposeofprocessingacaseforsearchandsurvey
c) Training Institutes of Income tax, Service Tax, Commercial tax, CBI etc. departments for
comprehensivehumanresourcesdevelopmentonthissubject

d) Appellate authorities handling Income tax and Service Tax cases of developers, builders and
construction contractors for discerning understanding of merits and pitfalls of assessment
orders
e) Officers of other revenue departments and investigating agencies like Service Tax department,
CommercialTaxandCBItounderstandthewholematterformakingeffectiveinvestigationand
analysis
f) Audit Officers working under CAG (Comptroller & Auditor General of India) to enable them
understandtaximplicationsandissuesregardingadherencetoproceduralaspects
g) CharteredAccountants,AdvocatesandotherIncometaxpractitioners
h) InstitutesofCharteredAccountants,CostAccountants,CompanySecretariesetc
i) Chambersofcommerceandorganizationsofdevelopers,buildersandconstructioncontractors
Onerequesttothereaders:pleasehavethepatiencetoreadthewholebookseriously.Inmy
opinion,readingallrelevantthingsisnecessarytoformawholesomeideaaboutthesubjectandthat
iswhyIhavecollected,collatedandpresentedmaterialsofsomanyvarietiesfromsomanysources.
Suggestionsandopinionsarewelcomeandmaybesenttomeatsyamaldatta2009@gmail.com

Kolkata,25June,2008

SyamalDatta


ACKNOWLEDGEMENT
I started writing this book in 2007 when I was a faculty member at Direct Taxes Regional
TrainingInstituteandIwasgiventhetaskofconductingthetrainingcourseonassessmentofreal
estatecases.Ittookfinalshapeonlyin2010.InwritingthisbookIhavereceivedresourcematerials
fromsomedepartmentalcolleaguesandafewexpertprofessionalsrelatedtorealestatebusinesses.
Iamgratefultothem.
SriR.S.Upadhyay,formerCommissioner,DirectTaxesRegionalTrainingInstitute,Kolkata,
gave me unwavering support and constant encouragement. Sri Upadhyay, who has a formidable
personalcollectionofbooks,journals,magazinesetc.andregularlykeepshimselfupdatedondirect
taxissues,gavemearticles,clippingsandinputsinotherformsonmanyoccasionsandthesewereof
immensehelpinwritingthisbook.Iexpressmyheartfeltgratitudetohim.
This book has been in great demand from many officers working at different parts of the
country. But I could not help them all as copies ran out of print. Dr. Poonam Kishore Saxena,
respectedChairman,CBDT,Smt.AnitaKapur,theDGIT(Admn),ShriAmitabhKumar,DIT(PRPPOL)
and Smt. Sujata Maitra, JDIT (P & P) have been very kind to support the effort to get this book
brought out through the department so that it reaches all in the department who need it. But for
their support this would not have seen the light of the day. Language at my command fails to
adequatelyexpressmysincerethanksandheartfeltgratitudetothem.
My mother and wife have been sources of my strength in this massive work. It is their
support which sustained me through the gruelling task of writing this highly analytical book. This
workwouldnothavebeenpossiblewithouttheirsupport.

NewDelhi,14September,2012.

SyamalDatta

Chapter
1

CONTENTS

Topic

Concepts
Definitionofdeveloper,builder,contractor

Featuresandcompositionsofdifferenttypesofrealestateprojects

Revenuestreamsandcostsindifferenttypesofprojects

Differentplayersintherealestatebusiness

Differentstagesofaproject

Howdevelopersmakeprofitabilitystudyofaproject

Howaprojectisexecuted,officialsinvolvedanddocumentsmaintained

PowerofAttorney

Stepsintheprocessofimplementationofaproject

Manpowerinvolvedinconstructionofaproject

ProvisionsofPromotersAct,RulesandKMCBuildingRules

TheControversy
Whatisthecontroversy?

Whydevelopers/buildersdonotliketofollowAS7

Afewwordsabouttheapprehension

Page

1
1
1
2
9
11
11
12
13
16
19
20
23
23
23

23

ViewpointofAssessingOfficers

WhyAS7ispreferablebytheAssessingOfficers

Relevancy/redundancyofProjectCompletionMethodtorealestate
constructioncasessince1.4.2003

TheQuery

Thequestion,replyofexpertadvisorycommitteeofICAI,statusofsuch
opinionandauthorscomments

TextofAccountingStandard9

CanAS9beapplicableincasesofdevelopersandbuilders

Why AS 7 may actually be beneficial for developers, builders and

constructioncontractors:

TheGuidanceNote
AuthorityandstatusofGuidanceNoteissuedbyICAI

24
27
27
28
28
32
36
38

40
40

5
6

8
9
10

11

TextofAccountingStandard7
ClausebyclauseanalysisofAccountingStandard7
WhatiscontractasperIndianContractAct,1872andwhoiscontractor

Illustrationsofconstructionofmultipleassetsinacontractfromthe
brochureofadeveloper

Illustrationsshowingelementsofcontractinagreementswithbuyersand
DevelopmentAgreements

Flatbuyersagreementtoshowthatitcontainselementsofcontract

Anotherflatbuyersagreementtoshowthatitcontainselementsofcontract

Developmentagreementbylandlordinfavourofbuilder

WhatisturnoverforadeveloperasperASI29

Exampleofcaseswhererecognitionofrevenueisdeferredevenwhen
followingAS7

Illustrationsastohowrevenueoutcomeoftheprojectcanbereliably
estimatedatthebeginningofaproject

DiscussionaboutconceptofWorkinprogress(WIP)underrevisedAS7

IllustrationsshowingcalculationofprofitunderAS7

Why,howandonwhomAccountingStandard7ismandatory
Announcementsofthecouncilregardingstatusofvariousdocumentsissued
bytheinstituteofcharteredaccountantsofIndia

ListofAccountingStandardsmandatoryasonJuly1,2006

CompliancewiththeAccountingStandardsasperPrefacetotheStatements
onAccountingStandardsissuedbyICAI

ProvisionsofCompaniesAct,1956andCompanies(AccountingStandards)
Rules,2006regardingmandatorynatureofAS7

CaseStudies:Financialstatementsofafewdevelopersandcontractors
andcriticalreviewofthem

Criticalreviewofafewassessmentorders
Informationminingfrombanks,agreements,servicetax
department,localauthority,housingdepartment,tenders,
brochuresandapplications,BarChartforinvestigationand
assessmentespeciallyassessmentu/s144
Effectiveuseofsurveyu/s133Aasatoolofinformationmining

WhatifAS7notfollowed

SamplelettertoAuditorifAS7isnotfollowedifAS7isnotfollowedby
assesseeorforthatmatter,hisauditor
ExcerptofCharteredAccountantsAct,1949regardingrelevantprovisionsin
caseoffailurebyauditortofollowguidelineslikeAS7issuedbyICAI

45
55
55
56
74
74

87
100
121
125
128
135
141
147
147
148
150
150
154
216
221

282
284
284

286

12
13

HowtoapplyAccountingStandard7inrealestatecases:Howtoreject
booksofaccountsanditsresultspreparedbyassesseeonproject
completionmethod

Section145,Notificationno.9949,Accountingpolicies,accounting
principles,accountingstandards

HowtorejectbookswhendisclosurehasnotbeenmadeasperASI

HowtorejectbookswhendisclosurehasbeenmadeasperASIbutitdoes
notgivetrueandfairview

Illustrationregardingmakingbestjudgmentassessmentu/s145(3)/144in
percentageofcompletionmethodafterrejectionofbookspreparedon
projectcompletionmethod

Scopeandeffectofscrutinyassessment

Otherincomesofdevelopers/builders

InvestigationpointsforA.O.s

PracticeStudywithAnnualReportofUnitechLtd
Section80IB(10)
Section80IB(10),(13),(14),80IA(5),80IA(7)to(12),80A,Rule18BBB,
FormNo.10CCB,

Somerelevantcaselaws
Issueof1000/1500sqftbuiltuparea

291

291
291
296
297

298
301
301
304
315
315
323

323

Issueofcompletionofconstructionwithinfouryears

325

InstructionNo.4dated30/6/2009

Casestudyon80IB(10)

326

InvestigationpointsregardingadmissibilityofS.80IB(10)

14

15

TaxliabilityofLandownersandafewotherissues

Conversiontablerelatedtorealestate
Casescited
DictionaryofRealEstateTerms

327

327
329
331
334
335

Concepts

DEVELOPER,BUILDER,CONTRACTORANDPROMOTER

GenerallyDeveloper,BuilderandPromoterareconsideredtobesameandaccordingly
these are used interchangeably for the same person. But there are some technical
differences and therefore understanding the concepts of these terms is important for the
purposeofIncometaxassessment.

(a)
A developer purchases land or rights therein and entrusts the work of actual
constructiontoacontractor.Hisprofitwouldnormallyconsistofrewardforriskinvolved
in acquisition of land, the incidental risk in the title and the accretion in the value of land
from the time of acquisition of land till properties are sold. A developer means an
entrepreneurwhohasaninterestinaproperty,initiatesitsdevelopmentandensuresthatthis
iscarriedout(foroccupation,investmentordealing)andfromtheoutsetacceptstheultimate
responsibility for providing or procuring the funds needed to finance the whole project
(Source:www.joneslanglasalledictionary.com)

(b)
Abuilderdoesalltheactivitiesofadeveloperbuthemayalsobeactivelyinvolvedin
the activity of construction. He may appoint a contractor but he himself may do the
constructionbyengagingownmanpowerandthenselltheconstructedproperty.Thushe
desirestoretainanelementofprofitalsothataccruesincarryingouttheconstruction.

(c)
Clarity about the concept of contractor is more important because Accounting
Standard7isapplicableonlyifanassesseeisconstructioncontractorandthereisalotof
controversywhetherdevelopers/builders/promotersareconstructioncontractorsornot.
ThetermContractorisnotdefinedinthestatutesbutdefinedindictionaryasaperson/
business firm who enters into a contract. Contract is a term defined in Indian Contract
Act,1872.Incommonparlancecontractorisconsideredtobeapersonwhoexecutessome
work in pursuance of a tender by a contracting organization. But as per definition of
contract given in Indian Contract Act, 1872, contract is defined as a set of legally
enforceablepromisesandconsiderationsagreeduponbythecontractingpartieswhichmay
be two or more than two. So, suchwork may be contract even if it is done not as per a
tenderbutitisaspertermsandconditionsfixedwithapersonotherthananorganization.
So the meaning of contractor is not restricted to only a person doing contract work in
pursuanceoftender.ThetermisalsointerpretedbytheSupremeCourtinChintamanRao
v.StateofMadhyaPradesh,AIR1958SC388,392as,Acontractorisapersonwho,inthe
pursuitofanindependentbusiness,undertakestodoaspecificjobofworkforotherpersons,
withoutsubmittinghimselftotheircontrolinrespecttothedetailsofthework.

(d)
Promoter is a term popularly used to mean both developer and builder. It is
actuallyatermusedinsomepiecesoflegislationlikeWestBengalBuilding(Regulationof
PromotionofconstructionandTransferbyPromoters)Act,1993.

DIFFERENTTYPESOFBUSINESSES:
Differenttypesofrealestateprojectsdonebydevelopers/buildersare:
Residentialhousingprojects:
Features:
Apartments,bungalows,villasetc.dwellingunits

Lift, sewerage, water supply etc. In bigger projects, additionally there are community
hall,park,playgroundetc.

Revenue stream: The following are the sources from which the builder/developer gets
revenuefromaresidentialhousingproject:
Saleproceedsofflats
Sale proceeds or rental income from portion of commercial nature, if any, in the
building.
Maintenance Charges and Sinking Fund: The builder / developer get maintenance
charges and also collects sinking fund till apartment owners association is formed.
However,thisincomestopswhenthesocietyisformedandthesocietytakespossession
of the property. But the builder earns interest from these, particularly sinking fund,
whichmaybebigamount.
AdvertisingIncome:
Builder/ developer get extra income if rights for
advertisementglowsign,banner,mobiletelephonetoweretc.areretainedandsoldby
him.Otherwise,theseincomesalsogotothesocietyifthedealsaremadebythesociety.

Costelements:Thebuilder/developereitherbuyslandonanoutrightbasisortakesaland
parcel from the landlord with a development agreement. Hence the following are the cost
elementsforaresidentialproject:
Costofland
Costofconstruction
Technical costs like fees for architect /landscape design/ project management/
outsourcedengineeringsupport/marketingcosts/brokeragespaidetc.
Other Costs: Interest cost in case of bank/ private funding, sanction fees, other
incidental business costs/ administration costs/ maintenance cost till complete
possession/applicablemunicipaltaxestillpossessionifapplicable.

Grouphousingprojects
Group Housing Projects are basically of the same nature in terms of revenue and cost as
mentionedabove.Onlydifferenceisthatitisbiggerinsizeandmanagedbyacooperative
housingsocietyformedbyagroupofindividuals.

Integrated township project: Integrated township project consists of residential units

which could be apartments, bungalows, villas and chalets as well as shopping area, club,
school, offices, hospital, entertainment, transport infrastructure and anything which has
synergytothepeoplewhowillenjoythebaseproduct,i.e.,thehousingunits.Thefacilities
mentionedabovecanbeforexclusiveuseoftheresidentsofthetownshipbutinmostcases
itisforopencommercialuse.KolkataWestInternationalCity,bySalimgroupofIndonesia
with others, is a satellite township being developed near Howrah in West Bengal across
390.2acres with 6,100 bungalows, four high rise residential towers, three IT parks, a 13
acreclub,a200bedhospital,twoschoolsandshoppingandentertainmentzones.Oneofthe
mostambitiousintegratedhousingprojectinIndia,TheAambyValleyprojectnearLonavala
(Maharashtra)bySaharaIndiagrouphas,apartfrombungalows,villasandchalets,features
like private airport, hospital, school, crche, security service, petrol pump, laundry,
greenhouse for plants, plumbing & electrician service center, disco, message center,
shopping mall,multiplex,circus,sportsacademy,assistedliving facility forseniorcitizens,
golf course, convention center facility with all facilities like accommodation, banquet,
recreation,transportetc.Accordingly,insuchproject,thedeveloperhasmanymoresources
ofrevenueinadditiontosaleproceedsofconstructedproperty.TheAssessingOfficersjob
isveryelaborateinsuchcases.

3
For the sake of explanation lets consider an integrated township which has the following
facilities:
ResidentialFlats
Amallwithamultiplex
Acomprehensiveclub
EntertainmentZoneslikevideogameparlour
Ahospital
Aschool
Anofficetower
Ahotel
RestaurantsandFastfoodjoints

Cost elements: The basic cost inputs for the developer/builder to create an integrated
townshiparethesameaswhatismentionedforaresidentialproject.Inaddition,theremay
be some more outlay on payment to consultants and specialists to execute the special
features like hospital, purchase of equipments (capital and revenue expenses), retainer
ship/fixedpaymentstopartieswhoactuallyruntheancillaryservicesetc.

Revenuerealizationfromanintegratedtownshipprojectisfromthefollowingsources:

Apartments/bungalows:Sameasmentionedabovein"ResidentialFlats"

Mallwithmultiplex:Thesehavefeatureslikeescalators,nonskidtreads,electronicdigital
controls, builtin alarms and safety features, parking areas, central air conditioning, 100%
Powerbackup,latestfirealarmandfirefightingsystems,roundtheclocksecuritysystems,
CCTVandotherhitechcontrols,publicaddresssystem,pipedmusicinallpublicareas,3
screenmultiplex,specialcrchefortinytots,FoodCourt,multicuisinerestaurantorsuper
specialty fast food joints, Hotel. Generally space in these are leased out and rarely sold.
Dependingonthatrevenuemaybeeitherleaserentoroutrightsaleproceeds.

Club:Thisisagainaseparatebusinessforthebuilder/developer.Therevenueisgenerated
by selling memberships for the club and the recurring income generated by the various
facilitiesoftheclubonaperusagebasis.Intownshipswhichhasaclubexclusivelyforthe
use of the flat owners the club is run by the society and the cost of making the club is
includedbythebuilder/developerwithintheconceptof'superbuilt"componentandthe
salevalueoftheflats.Sometimestheflatownersmaygetacomplimentarymembershipto
the club by virtue of buying a flat in the township. But in some projects, as in Parsvnath
PrideAsiaofParsvnathDevelopersLtd.inChandigarh,clubmembershipismandatoryand
Rs.5lakhextrapaymenthastobemadeforthat.Detailsofsuchmiscellaneousonetimeand
recurringrevenuecanbecollectedbyAOfrombuyersagreement,brochureandallotment
letteretc.documents.

Hospital/School:developer/buildermaysellofftheseassetstoahospitalchainoraschool
chaininwhichcaseitsrevenuestreamisthesaleproceeds.Thedeveloper/buildermayalso
retain these assets and have a hospital chain/school chain to operate the facilities. As
example, Unitech Ltd has joined with Marriott group and DLF Ltd has joined with Hilton
groupformanagingthehospitalitypropertiesconstructedandownedbythedevelopers.In
that case the revenue stream for the builder/developer becomes same as in running a
hospitaloraschool.

Anofficetower:Incasethebuilder/developerhasanofficebuildingwithinthetownship
heeithersellsitofftoinvestorsorretainstheassetstoearnleaserentalincome.

4
AHotel/Restaurant/Fastfoodjoint:Thebuilder/developereithersellsthehoteletc.to
aninvestor/hotelchainorgivestheassetoflongleasetoahotelchainorretainstheasset
andhasahotelchainrunningitforhimorrunsithimself.Inthiscasehisrevenuestream
becomesequaltotherevenuestreamofahotelbusiness.

RevenuefromtheseancillaryservicesmaybeshownintheIncometaxfileofdeveloper
as other income or operational income or it may be shown in the files of some
subsidiariesofitfloatedasSpecialPurposeVehicles(SPV)fortheseservices.IntheAnnual
Report of big corporate developers, consolidated accounts as per AS21 show the details
includingaccountsofsuchsubsidiaries.AnnualReportofUnitechLtdforyearendingon31st
March, 2007 showed 135 subsidiary companies some of which were Unitech Hospitality
Services Ltd, Tulip Schools Ltd, High Vision Healthcare Pvt. Ltd., Kolkata International
ConventionCenterLtd.

Preferentialpaymentrateswhichmaybechargedinsomecases
GroundFloor7.5%
First/SecondFloors5%
PentHouse/TopFloorUnitswithTerrace7.5%
MandatoryCoveredCarParkingRs.3,00,000/
OpenCarParking(optional)Rs.1,50,000/
Similarly, customer would be liable to pay holding charges @ Rs.10/ per sq. ft. per
monthifhefailstotakepossessionwithin30daysfromthedateofissueofpossession&
interest@24%perannumondelayedpayments,ifany
The saleable area include the covered area plus proportionate common areas such as
corridors, passages, lifts, lift rooms, club, staircase, underground and overhead water
tanksetc.

SamplePaymentschedule

PLANA:DOWNPAYMENTPLAN(WITH8%REBATE)
Atthetimeofbooking:
12.5%
Within45daysofbooking:
74.5%+CarParking
Atthetimeofpossession: 5%

PLANB:CONSTRUCTIONLINKEDPAYMENTPLAN
Atthetimeofbooking:

12.5%
Within30daysofbooking:
12.5%+CarParking
OnBhoomiPujan(auspicious
commencementofconstruction):
10%+CarParking
OnstartofBasement:

10%
OnstartofGroundFloorRoofSlab:
10%
OnstartofSecondFloorRoofSlab:
10%
OnstartofFourthFloorRoofSlab:10%
OncompletionofSuperStructure:10%
OnstartofInternalPlaster:

5%
OnstartofFlooring:

5%
Atthetimeofofferofpossession: 5%

IllustrativepricelistofamallatMohaliw.e.f.24.06.2006

Rates(Rs.persq.ft.)
Floors
GroundFloor
16500
UpperGroundFloor
15000

5
FirstFloor
12500
SecondFloor
12000
The above rates are for super area which include the covered are plus proportionate
commonareasuchascorridors,passages,lifts,staircase,projection&architecturalfeatures,
etc.

PreferentialLocationCharges
Corner
: 7.5%ofthebasiccost
CornercumMainRoadFacing : 10%ofthebasiccost
: 5%ofthebasiccost
AtriumFacing
Interest@24%p.a.willbechargedondelayedpayments,ifany.
Customerwouldbeliabletopayholdingcharges@Rs.10/persq.ft.permonthif
he fails to take possession within 30 days from the date of issue of offer of
possession.

SamplePaymentschedule
PLANADOWNPAYMENTPLAN(With8%Rebate)

Atthetimeofbooking
10%
Within15daysofbooking
5%
Within45daysofbooking
72%
Atthetimeofofferofpossession
5%

PLANBCONSTRUCTIONLINKEDPAYMENTPLAN
Atthetimeofbooking

10%
Within15daysofbooking
5%
Within45daysofbooking
10%
Within90daysofbooking
10%
OnstartofFoundation
10%
OnstartofGroundFloorRoofSlab
10%
OnstartofFirstFloorroofSlab
10%
OnstartofSecondFloorRoofSlab
10%
OnstartofSuperStructure
10%
OncompletionofFlooring
10%
Atthetimeofofferofpossession

5%

Servicedapartments:
Serviced Apartments are flexible types of accommodation; instead of the rigid format of a
hotelroomanapartmenthotelcomplexusuallyoffersacompletefullyfittedapartment.The
lengthofstayinthisisveryvariedwithanywherefromafewdaystomonthsorevenyears.
Thepeoplethatstayinapartmenthotelsusethemasahomeawayfromhome.Occupants
are allowed to do everything they would at home, such as cleaning, washing and cooking.
The houses have wider corridors for the cleaning trolleys to manoeuvre, a kitchenette, in
case the tenant wants to cook something light. There will be a convenience store, laundry
services, a fully equipped kitchen, clubhouse, gym and swimming pool. It is very popular
with IT industries. Employer extends use of the transit houses for a period of 15 days for
employees on transfer to other locations, before they can find their own accommodation.
Employer firstly saves approximately 40 per cent of accommodation costs than hotels
throughsuchtransithouses.Secondlythecompaniespreferthattheiremployeesstaynear
workplaceasthiswouldgetthempunctuallyatwork.Thereisnocosttoemployeesduring
their stay in any of these apartments. Many developers are doing business of service
apartments. A serviced apartment project can be a standalone project or part of an

6
integratedtownshipproject.InboththecasesthefollowingaretheRevenueandcosttothe
builder/developer.

Revenue:Abuilder/developermakesmoneyoutofaservicedapartmentprojectbyoneof
thefollowingways:
Sell the asset: The builder/developer sells the assets to an investor/Hotel Chain/
ServicedApartmentChainandhisincomeisoutofthesaleproceeds.
DoesaJointVenture:TheBuilder/developercangetintoaJVwhichmeansisthatthe
asset/income/liabilitiesaresharedbyboththepartnersasperagreeduponJVterms.
LongLease:Thebuilder/developermaygivetheassetonaleasetoahotel/serviced
apartmentchain.Inthiscasehisrevenuebecomestheleaserental.
Retaintheassetandoperatebyself:Thebuilder/developercanretaintheassetand
runiteitherthroughanoperatororthoughhisownbranding.Inthiscaserevenueis
same as a hotel/serviced apartment which in short is income from rooms/food &
beverage/allied services like travel, telephone, laundry and income from any other
facility that the asset has on per usage basis. The costs hence are same as the
operationalcostsforahotel/servicedapartment

Costs: Same as that mentioned in 'Residential Flats". Only addition is that if the owner/
builder/developer gets into an agreement with a hotel operator/serviced apartment
operatortooperationallyrun/manage/markettheroomsundertheoperator'sbrandthen
thereisafixedandavariablefeespayabletotheoperatorforitsservices.

Informationtechnology(I.T.)parks:
Apartfromthepremise,specialfacilitiesrequiredforI.T.andITeScompaniesareprovided,
e.g., power backup, separate trenches for electrical and communication cabling,
independent earthing pit for each floor, special ducts (inbuilt) for cabling network, AC
piping,Airconditioning,RadioFrequencyTower,undergroundpipelineforlayingtelephone
cables, OFC connection with broadband application, canteen, 24hour water, clubhouse,
gymnasium, swimming pool, amphitheatre, lockers, steam bath etc. which enables the
industryworkin24x7scheduleandmakelifeconvenientforthepeoplewhoworkthere.

Revenue:Sameasmentionedforofficebuildingsabove.Maintenanceofanofficebuildingis
mostlyretainedandcontrolledbythebuilder/developerandanyexcessinthemaintenance
charges collected from the tenants over the actual spent on maintenance is additional
incomeforthebuilder/developer.Incomefromparkingisanotherrevenuesource.Theseall
canbegatheredfromleasedeedsoragreements.
Cost:Sameasmentionedaboveforofficebuildings.

SEZprojects:
SEZ (Special Economic Zone) projects are basically real estate projects from the point of
viewofthebuilder/developer.TheonlydifferenceisthatanSEZprojecthasseveraltaxand
dutyincentivesfortheoccupiersoftheprojectandthebuilder/developeralsohassometax
benefits. SEZs are almost the same as an integrated township. Hence, revenue and cost
remainthesameasanyotherrealestateprojectwhicharementionedaboveinthevarious
other categories. As example, Parsvnath SEZ Ltd. (PSL) has been formed as a Special
Purpose Vehicle (SPV) to develop IT / ITES SEZ at Indore in which Total BuiltUp Area
(TBUA)willbe5.81millionSquareFeet

IT/ITESSEZatIndore
CompositionofaSEZwillbeclearfromthefollowingdetails:
IT/ITeSSEZatIndoreon30.76hectares(76.01acres)
Developmentpotential

7
Totalplotarea
Processingarea
Nonprocessingarea

307,600Sq.m.
153,800Sq.m.
153,800Sq.m.

Uses

Proposedprocessingareadetails

AREA(sq.m) FAR(FloorAreaRatio)

IT/ITESOffices&Industries
EssentialCommercialShopping,Food
Complexetc.
AdminOffice,PublicAmenityetc
Roads/Services/Allied
InfrastructureFacilities
Total

138,420
9,228

2.5
2.5

TBUA
(Sq.m.)
346,050
23,070

6,152
19,225

2.5

15,380

384,500

153,800

Nonprocessingareadetails

Uses
CommercialFacilities(Shopping,Hotel,Offices)
CommunityFacilities
Institutional,HealthCare,Educational&Hospitaletc.
ResidentialApartments/GroupHousing
ResidentialPlotted
Roads/Services/InfrastructureFacilities
Total
TotalBuiltUpArea(TBUA)inSq.m(notincludingPlotted)

Area
sq.m
38,450
10,766
12,304
55,368
36,912
8,750
153,800

FAR TBUA
sq.m
1.5 57,675
1.5 16,149
1.5 18,456
1.5 83,052
1.5 55,368

230,700

615,200

Nonprocessingarea
TotalBuiltUpArea(TBUA)
Therefore,therevenuesourcesfromprocessingareawillbeleaserentalsfromcommercial
areas constructed and miscellaneous income from Services/ infrastructural facilities and
from nonprocessing areas the revenue will be from sale proceeds of apartments/
developed plots, rentals from commercial facilities and miscellaneous income from
Services/infrastructuralfacilities.

LayoutdiagramofITSEZatIndore

BOT: In a BOT contract, the owner of the project awards the complete job of "Building"
"Operating" and then "Transferring" the asset back to the owner. This kind of contract is
awardedinthefollowingcircumstances.
Theownerdoesnothavethetechnicalcompetency/financialcapacitytobuildand
operatetheproject.
Theprojectdoesnotfallintothecoreareaofbusinessoftheowner.
Combinationofboth

The entity who takes the BOT contract operates the facility till the time its agreed upon
duringthecontractandthentransferstheassetbacktotheowner.Anexampleoftheabove
istheSecondHooghlyBridgeinKolkata.ParsvnathDevelopersLtd.,NewDelhihasentered
into a B.O.T arrangement with the Metro Rail Corporation, New Delhi, (a Government
Undertaking)toundertakeconstructionofeightshoppingmallsalongtherailwaytracksat
ShahdaraMetroStation.Thefeatureswillberoundtheclocksecurity,uninterruptedpower
& water supply, ample Car parking space, central airconditioning apart from shop
space.MostBOTcaseshappenwhereinowneroflandisthegovernment.Itssegmentwise
disclosure revealed that in the year ending on 31.3.2007 it has received Rs. 4.60 crore
revenueandRs.2.55croreprofitfromBOTprojects.

ThecostandrevenuefortheownerisaspertheagreedtermsoftheBOTagreement.In
mostcasestheowneroflandmakesaminimumamountornoamountofrevenuefromthe
assettillthetimethecontactoris"operating"thefacility.Themainrevenuestreamtothe
owner starts when the asset is transferred back to the owner and the nature of revenue
dependsonthenatureofasset.Forexampleforabridgetherevenueisthetollfees,fora
porttherevenueis"portusagefees",foranairporttherevenueisthe"airportusagefees"
andalliedincomes.

Different players in the real estate market apart from developer, builder and
contractor:
Trader/Speculator:Thesearepeoplewhomostlyplayashortterm"investmentstrategy
inrealestate.Thismeansthattraders/speculatorswillnotholdontoapropertyforavery
longtimeandwilloffloadtheinvestmentassoonashethinksthatthevalueoftheassethas
peaked. These people usually get into a project when the project isto belaunched/just
launchedand when the builder/developer requires working capital/promoter capital to
start a project. During this phase the builder/developer sells the stock at a significantly
lower value than what the fair market value of the property should be. The
trader/speculator either pays the entire amount (thus gets further discount in value)or
pays the first few installments in this kind of cases. Within a short period of time the
trader/speculatorsellsoffhisallotmentsinthemarkettoendusersatthecurrentmarket
price of the asset. Hence, the income for the trader/speculator comes from the difference
betweenthevalueatwhichheboughtandthevalueatwhichhesellstoanenduser.These
incomes are usually treated as short term capital gains/long term capital gains. For the
builder/developer, selling to traders/speculators is the best way to generate unsecured
financetogethisprojectstartedwithoutbearinghighcostofborrowing/debtservicingand
proceduralhassles.Thedeveloper generallysellstothesepeopleat basic marginandthus
getsquick,thoughmaybelesser,return.
Investors in Real Estate: They are generally long term investors whose objective is to
create assets to provide long term capital appreciation and/or rental incomes. Real estate
investorslargelyfollowthefollowingmethodsofinvestment.
Outrightbuyer:Buysrealestateassetswithalongterminvestmentplan.Incomeisderived
whentheassetissoldofflaterandcanbeclassifiedaslongtermcapitalgains.Hemayget
somerentalincomeintheinterveningperiod.

10
Outrightbuyerofleasedassets:Buysrealestateassetswhichareputonlease(couldbe
on immediate rental or rental could start after completion of project). Income is derived
fromtherentalwhichisarevenueincome;plustheinvestorownsassetswhicharehaving
capitalappreciation.
Project Financing: In this case the investor finances a builder/developer through a JV
modelorthroughasecured/unsecuredprivatefinancemodel.
Through Real Estate funds/REITs /Private Equity Funds: In this case the investor
investsintoanyofthementionedfundsandthefundsinturninvestthecombinedmoney
into real estate projects and thus individual investors enjoy the benefits of owning an
interestinthesecuritizedrealestatemarket.Itisasecuritywhichissoldlikeastockonthe
majorexchanges.REITs(RealEstateInvestmentTrusts)receivespecialtaxconsiderations
andtypicallyofferinvestorshighyields.Incomeisderivedfromthedividendsprovidedor
theoverflowdistributionwhichthefundgivesafterthetenureofthefundcomestoanend.
This gives individual investor easier liquidity than direct investment in a property. Like a
manbeingpartownerofacompanybyhavingafewshares,aninvestorcanderivebenefit
ofprofitinrealestateprojectsbymakingsmallinvestmentthroughREIT.
PropertyMarketingAgents/Brokers/Underwriters:MarketingAgents/Brokersarethe
intermediaries between the builder/developer and the end consumer/investor. Marketing
agents/Brokers helps the developer to either sell the property/put the property on
lease/sellaleasedproperty/helpinmarketingtheproject/salespromotionsetc.Thereare
variouscategoriesof Marketing agents/Brokersinthemarketandvary fromasingle man
broker to a large corporate broking outfit. The revenue stream of a broker/marketing
agent is the fees which are agreed upon with the builder/developer to conclude the
transaction. The fee structure varies depending on the broker/marketing agent and the
scopeofwork.
Thecostinputsforabroker/marketingagentaretheoperationalcostswhichheincursto
implementtheassignmentwhichmostlyincludemanpower/infrastructure/administrative
andmarketingcosts.Thedifferencebetweentheincomeandthecostsarehisnetmargin.
Underwriters are basically marketing agents/brokers who either gives a written
underwritingoftimeboundminimumproductivitywithapenaltyclause(withnoupfront
financial investment towards the project) to the builder/developer or invests his own
moneyatanagreeduponvaluetobuystockfromthebuilder/developer andthensellthe
stock at a premium in the market. In case of the later, the income is derived from the
difference between the underwriter's cost price and the selling price minus the costs
involvedtosellthestock.

Consultant/ProjectManager/PropertyManager:
Consultant: Aconsultantisaperson/firmwhoprovidesspecifictechnical expertise vis
visrealestatetoabuilder/developer/owner.Aconsultancyfirmcanalsobeanoutfitwitha
multiple service delivery capability. Most large Real Estate Consulting organizations have
multiple service delivery capabilities which includes Research ( City Profiling/ Best use
option studies/catchment profiling/valuations/commercial feasibility/ financial viability/
product and pricing validations/bankable reports etc), Agency (broking activity in
commercial, retail, residential), Capital Markets (Equity transactions, debt syndications,
investment sales) Hospitality, (Sale /lease/ management contracts of hospitality assets),
FacilitymanagementandProjectManagement.
The consultant/firms revenue comes in from fees paid by the builder/developer/
occupierfeespayableagaindependsonthescopeofworkandalsoonwhatisthekindof
fee agreement which is mutually accepted and agreed upon. Cost inputs for the
consultant/firm are largely manpower/infrastructure/ administrative/ operational
expensesetc.
Project Manager: A Project Management firm is awarded the job of managing the
constructiononbehalfofthebuilder/developer.Theextentofresponsibilitiesoftheproject
management firm and its delivery depends on the scope of work which has been agreed

11
uponandawardedtotheprojectmanagementfirmbythebuilder/developer/owner.The
scope of work can be as vast as a turnkey contract ( starting from appointment of
architect/bidpreparation/evaluationandappointmentofprimarycontractor/appointment
ofsubcontractors/supervisingtheconstruction/maintainingcostandtimelines/ensuring
quality and technical compliance/ delivery of the project) to any part of the total scope
mentioned here. Project Management firms usually work on a fixed fee basis or work on
costplusbasis.Costinputsfortheprojectmanagementfirmaretheactualcosts(incaseof
costplusmodel)andowncosts(manpower/operational/administrative).
Facility/PropertyManager:Afacility/propertymanagementfirmmanagestheassetafter
the asset is operational. This again has various scope of work which includes electro
mechanical maintenance and upkeep/ housekeeping/ security/ event management/
coordinationamongstoccupiers/ambiencemanagement/softfeaturemanagementetc.The
developer/builderappointsthefacilitymanagementfirmtillthetimetheassetiscontrolled
by him after which the society which takes over the asset appoint/ renew/ reappoint a
facilitymanagementfirmfortheasset.

The facility management firm also works for a fixed fee basis or a cost plus basis. The
revenue stream and cost inputs for a facility management firm are similar to a project
managementfirmmentionedabove.

Differentstagesofaproject:
Ingeneral,theconstructionprocesscouldbedividedintofourphases,viz.Landacquisition,
preconstructionphase,constructionphase,postconstructionphase.

A. Landacquisition:
Market survey and draft calculation to find out profitability of the property to be
constructed

Howprofitabilitystudyisdonebybuilder:
Calculationtodeterminesellingpricetobefixedinaproject:
Say,costoflandintheareaRs.6,00,000/perkatha(1katha=720sq.ft.)(Rs.833.33
persq.ft.)
IfFAR(FloorAreaRatio)/FSI(Floor
SpaceIndex)=1.25,valueofland
istakenas=Rs.833.33x1.25=
Rs.1,042/sq.ft.
Add:Costofstampduty,say@1%= Rs.17/
Add:Costofconstruction

Rs.1000/sq.ft.
Add:Buildersprofit(generallytaken
as30%ofsellingprice/45%of
costprice)=

Rs.927/sq.ft.
So,Builderssellingpricehasto
be(minimum)=

Rs.2,986persq.ft.
Buildercomparesthispricewithpriceprevailinginthearea.Ifhefeelshecangetthis
price,heconsidersitfeasible

Back calculation to find out whether builder should buy a land at a particular price
(completionperiod,say,3years):
Prevailingpriceofflatinthatareais,say,Rs.6000/sq.ft.(1)
Costofconstruction,say(from
contemporaryexperience),
Rs.1000/sq.ft.(2)
Add:Costofregistration,architectural
fee,sanctioncostetc.=

Rs.150/sq.ft...(3)
Add:Costofoverheads=

Rs.150/sq.ft.(4)

12

Add:Costofmarketingadvertisement=Rs.200/sq.ft.(5)
Add:Costofborrowings=

Rs.200/sq.ft(6)
Totalexpensesforitemsother
thanland=

Rs.1700/sq.ft.(7)
Netrealization(17)=

Rs.4300/sq.ft.(8)
Grossmarginatwhichbuilderwouldliketowork
(Generally30%ofsellingprice)=
Rs.1800/sq.ft...(9)
Priceforland=

Rs.2500/sq.ft.(89)
IfFAR/FSIis2,pricewhichhecanofferforlandis=2500x2x720(1katha=720sq.
ft.)=Rs.36lakh/kathaorRs.7.2crore/bighaorRs.21.78crore/acre
Inthiswaythebuilderroughlydeterminesprofitability
Afterthishemaydecidetoacquiretheproperty

Thevariouswaysthroughwhichlandmaybeobtainedbydeveloper:
9 Outright purchase of land. Sometimes such purchase is along with a sanctioned
buildingplan
9 But in case of purchase of land, the purchaser has to pay stamp duty, registration
expensesetc.Toavoidthese,developers/buildersadoptdifferentstrategyinsteadof
outrightpurchase.TheyexecuteDevelopmentAgreementwithlandownertostate
that the owner would transfer the undivided portion of the land or interest in the
land to the developer or his nominees (i.e. purchasers of flats) in consideration of
theownersshareintheflatsconstructedbythedeveloper.Inthiswaythelandis
legallytransferreddirectlytothepurchasersofconstructedpropertyanddeveloper
escapes payment of stamp duty as well as legal formalities of transferring land to
himforashortperiod.
9 Asperthis,
Ownergrantsrightofconstructionandcommercialexploitationtothedeveloper
Ownersubmitsbuilding plan,aspreparedbydeveloper,to municipalityandallother
plansatthecostofdeveloperordeveloperdoesthesamethroughPowerofAttorney
Immediately after sanction of plan the owners have to shift to an alternative premise
AND the developer shall start paying an amount monthly till owners allocation in
constructedpropertyisnothandedover.
Immediately after the owners vacate the old building, demolition work is given to a
contractor andthe receiptsfromsaleofdemolishedmaterialsare takenbytheowner
ordeveloperorbothasperagreement.
Within 2 months of sanction of plan the owners allow the developer to start
constructionandcompletethesamewithinanagreedperiod
Allexpensesofconstructionarepaidbythedeveloper
Developeractsaslicenseeoftheownerwhichwillentitlehimtobeinoccupationof
thepremise.
Developerwillnothaveanypossessoryrighttotreatthepropertyastransfer.
Developeragreestohandovertheownersallocationwithinaperiodspecifiedinthe
agreement.
Owneranddevelopergetcertainagreedshareoftotalsaleablespace,i.e.,totalsuper
builtup area excluding common areas in the constructed property. The shares are
demarcatedinthemapandsoverymuchwelldefinedbeforehand.
Similarly,bothpartiesgetproportionateshareincarparkingspace,roofandterrace
Afterconstruction,thoughtheentireinvestmentinthebuildingisofthedeveloper,he
givesaportionofittotheownerofthelandasconsiderationforsaleandtransferof
undividedproportionateshareinthelandcomprisedinthesaidpremise.Thelandowner
executesdeedofconveyanceofsuchproportionateshareoflandinfavorofdeveloper
oritsnominee/(s)(nomineesarethebuyers).Infact,suchtransferisnevertakenby

13

thedeveloperinhisownnameandultimatelyitisthebuyerofflatwhoactuallypays
thestampdutyetc.
TheagreementbetweenthetwoshallneitherbepartnershipnorjointventurenorAOP
Developermaychooseapartnershipfirmorcompanyashisnomineeandafterthatall
hisrightsandentitlementsundertheagreementdevolvesonthenominee.
Ifthelandisalreadyleased,developer/buildernegotiatesandconvincesthelesseeto
surrender the unexpired lease right in favor of lessor to convert the property into
freeholdandthenacquirethelandineitherofthetwowaysmentionedabove
Sometimes the landowner gives to builder a specific power of attorney to construct
building and general power of attorney to sell the property (including property after
construction)andreceiveconsiderationforthat.Indoingthisalso,heescapespayment
ofstampduty/registrationfees
The consideration given to the landowner for the development agreement may be in
cashorasaportionofbuiltupareaintheproposedbuilding.Incaseswherelandis
owned by a company, it may even issue majority shares to prospective buyers at a
convenient priceandthebuyerbecomes majorityshareholdertodecidedevelopment
oftheproperty.Bydoingthis,theyavoidstampduty,registrationfeesetc
Also, there may be Family Settlement to enable developers commercially exploit
jointlyownedproperties.Insuchcasethedeedismadeinsuchalanguageastoshow
thatthejointownersthemselvesappliedforsanctionofbuildingplantomunicipality
andthentheyapproachedthebuilder/developerascontractortoconstructthesaid
building for them as the joint owners do not have the expertise and in lieu of land
theygetportionofconstructedpropertyandtheproportionatecostofconstructionis
treated as value of land. But the undivided share of land related to developers
allocation is also transferred to the actual buyers in the capacity of nominees of
developerandthusstampdutiesetc.areescaped.
Sometimestheoriginalownerhasexpiredandoutoftheseveralinheritorsinthejoint
family, one or more of the others relinquish right in favor of one person to deal with
developer/builder.
Iftherearemanycoownersandoneormoreofthemcannotappear,theyissuepower
ofattorneyinfavorofonewhothenexecutesnecessaryagreements.
In case of tenanted/ encroached property, builder/developer negotiates with
tenants/other occupiers to remove and rehabilitate them. In some projects cash
compensation is the expenditure for this and in some others, certain number of
dwelling units for removed persons is constructed by the developer in a separately
enclosedcomplexintheplotoflandandso,inthosecases,revenuereceiptisless.
Theseagreements/deedsetc.givealotofinformationtotheAOforassessment

A sample power of attorney (POA) between developer and landowner for land
developmentisgivenbelow:

POWEROFATTORNEYFORSANCTIONOFBUILDINGPLANSETC.

BY THIS POWER OF ATTORNEY I, BD, son of EF, residing at do hereby

constituteandappointMr.XYof.asmyAttorneyinmynameandonmy
behalfmakeperformexecutealloranyoftheseveralacts,deeds,powers,authorities,matters
andthingsstatedherein.

WHEREAS I am seized and possessed of a piece of land measuring about . and

structures thereon being premises no. and briefly described in the Schedule
hereunder.

ANDWHEREASbyanagreementdatedexecutedbyandbetweenmeandthesaid
Attorney I have entrusted the said Attorney the said premises for developing the same and

14
afterdemolitionoftheexistingstructuretobuildamultistoriedbuildingwithdwellingunitsor
flats on ownership basis and I have given possession thereof to the Attorney upon the terms
andconditionscontainedtherein.

ANDWHEREASbyanAgreementIhaveagreedtoexecuteaPowerofAttorneyinhisfavour
whichIherebydo.

NOWTHESEPRESENTSWITNESSETHasfollows:

1(a) Tonegotiatewiththetenantsintheexistingbuildingsforthepurposeofvacatingthe
portions in their occupation by giving them alternative accommodation and to allot them
similar accommodation in the new building to be constructed and to sign and execute the
necessarydocumentsandregisterthesamewiththeRegisteringauthorityand,ifnecessary,to
takealllegalproceedingsforevictinganyoccupier.

(b)
To prepare plans for development of the said property and construction of the new
buildingsthereon,

(c)
Tosubmitthesametotheconcernedauthoritiestogettheplansanctioned.

1.
To obtain permission or approval form other authorities as may be required for the
development and construction of the said new building in accordance with the said
Agreement and for that purpose to sign such applications, papers, writings,
undertakings, appeal etc. as may be required in relation to the said property,
developmentandconstructions.
2.
Toenteruponthesaidpropertywithmen and materialas may berequiredforthe
purposeofdevelopmentworkandforthatpurposetodemolishtheexistingbuilding
and structures standing thereon and erect new buildings, structures etc. as per the
plan to be sanctioned, and to remove the debris and other materials of type
demolishedstructure,anddisposeofthesameinthemannertheAttorneymaythink
fit.
3.
ToappointArchitects,Contractors,SubcontractorsandSurveyorsasmayberequired
and to supervise the development work in respect of the said new contraction of the
proposedbuildingsandstructuresonthesaidpropertyinaccordancewiththeplansto
besanctionedandspecificationsagreedtoand/orsanctioned.
4.
ToapplyformodificationsoftheBuildingPlansfromtimetotimeasmayberequired
inrelationtotheconstructionofthesaidnewbuildingsonthesaidproperty.
5.
To approach the concerned authorities for the purpose of obtaining the permissions
and other service connections including water and electricity for carrying out and
completing the development of the said property and construction of the new
buildings.
6.
To make deposits with the concerned authorities for the purposes of obtaining the
permissionsandotherserviceconnectionsincludingwaterandelectricityforcarrying
out and completing the development of the said property and construction of the
newbuildings.
7.
Aftercompletionofthesaidconstructiononthesaidpropertytoapplyforandobtain
OccupationandCompletionCertificateinrespectofthesaidbuildingsorpartsthereof
fromtheconcernedMunicipality.
8.
To enter into agreements for sale or lease of the Developers Allocation or any part
thereofwithsuchpersonsandonsuchtermsandconditionsasthesaidAttorneymay
thinkfitandproperbutsubjecttotheconditionscontainedinthesaidagreement.
9.
ToapplyforandobtainonmybehalfTaxClearanceCertificatesunderSection230A
oftheIncometaxAct,1961forthepurposeofRegistrationoftheConveyance,lease

15

10.
11.

12.

13.

14.

15.

16.

17.

and/orotherdocumentsoftransferinrespectthesaidproperty,buildingsflats,space
thatmaybeexecutedbythesaidattorney.
Tosellanddisposeoffalloranyoftheflats,spaceorparkingspacefromwithinthe
DevelopersAllocationonsuchtermsandforsuchconsiderationastheAttorneymay
thinkfitandproperandtodoallthingsnecessaryinrelationthereto.
To execute from time to time agreements for sale on ownership basis of such flats,
shops,garages,spaces,conveyancesinrespectofthesaidnewconstructedbuildings
but in relation to the Developers Allocation or portions thereof and present the
documents for registration and admit the execution of such documents before the
appropriateauthority.
Toinsurethesaidproperty,buildingsandfittingsandfixturesagainstdamages,fire,
tempest,riots,civilcommotion,floods,earthquake,bombblasts,maliciousdamagesfor
destructionandagainstotherrisksastheAttorneymaythinksufficienttoprotectthe
interestofallconcernedtherein.
Toaskfor,receiveandrecoverfromallthepurchaserofflatsonownershipbasisand
other occupies whatsoever all rents, charges, profits, emoluments, services charges
andotherchargesandsumsofmoneysnowdueorowingandpayableoratanytime
hereaftertobecomedue,owingandpayableinrespectofthesaidproperty,buildings,
flatsspacesinanymannerwhatsoeverandalsoonnonpaymentthereoftoenter
uponandrestrainand/ortakelegalstepsfortherecoverythereoftoenteruponand
restrainand/ortakelegalstepsfortherecoverythereofastheAttorneymaythinkfit.
ToacceptanyserviceofWritorSummonsorotherlegalprocessformeand/orinmy
nameandtoappearinanyCourttoauthorityasmyAttorneyandtocommenceany
action or legal proceedings in any Court or before any Authority and to prosecute,
discontinueorbecomenonsuitedandtosettle,compromiseorreferanydisputeto
arbitrationasthesaidAttorneymaythinkfitandproperandforsuchpurposesto
appointanySolicitor,Advocate,LawyerinmynameorinthenameoftheAttorney
andpaythecosts,Advocate,LawyerinmynameorinthenameoftheAttorneyand
paythecosts,expenses,feesandotheroutgoing.

GENERALLY to do and perform all acts, deeds, matters and things necessary and
convenient for all or any the purposes aforesaid and for giving full effect to the
powersandauthoritieshereinbeforecontainedasfullyandeffectuallyasIcouldin
persondo.

IherebydeclarethatthisPowerofAttorneyisgiveninfavourofthesaidAttorney
forthepurposesofdevelopmentofthesaidproperty,constructionofthesaidnew
buildings, allocation of Owners Allocation of the buildings, sell or disposal of
DevelopersAllocationandforsuchotheractsandthingsasmentionedhereinIagree
toratifyandconfirmwhatsoeverthesaidAttorneyshalldointhepremisesbyvirtue
ofthesepresents.

Iherebydeclarethatthepowersandauthoritiesherebygrantedandconferredon
theAttorneyareirrevocabletillthesaidpropertyisfullandproperlydevelopedas
per the said Agreement, the concerned rules and regulations and the allotment of
Owners Allocation and Developers Allocation and the transfer or conveyance of
DevelopersAllocationoranypartthereofinfavouroftheultimatetransfereeor
allotteeoroccupier

INWITNESSWHEREOFwehavehereuntosetourhandsatNewDelhithisdayof
..

THISSCHEDULEABOVEREFERREDTO

16
Signedanddeliveredby

Mr.BD

Inthepresenceof

(BD)

Stepsintheprocessofimplementationofaproject
Ontheotherhand,projectimplementationprogressesasperfollowingsteps

B. Preconstructionphase
Process
DocumentswhichmaybeusefultoAO
RegistrationunderPromotersAct(inWest DocumentssubmittedbeforetheAuthorized
Bengal) as per Sec. 3 of West Bengal Officer
(Regulation of Promotion of Construction
and Transfer by Promoters) Act, 1993
(PromotersActinshort).
Siteinvestigationandsoiltesting

Appointment of architect, preparation of BuildingPlan

plan
Designfinalization
Design,Layoutdiagramandsiteplans
Procedureforapprovalofdrawings
Obtain statutory clearance schedule from Permission orders/ certificates and
different authorities including sanction of
names & addresses of relevant
planbymunicipality#
authorities
Engaging marketing agent, putting up Advertisementbrochureandapplication
advertisement and inviting application
form
frombuyers
Receiptofapplicationsandscrutinythereof
Issue of allotment letter, executing
agreement for sale with the purchaser of
constructed property and call for payment
of installments/ down payment. Thus
revenuestartstoflowin
Preparationofinitialcostestimate.

Compilation of the bill of quantities,

specifications and drawings prepared by
Architect and Consultants for flotation of
competitivetenders

Preparation of final budget based on

expectedbidsandtenders

If required, other arrangements are made

forfundingtheprojectlikeloan,IPO(Initial
PublicOffer),stakesale,jointventureetc.
Discussandfinalizethemodeoftendering.

Prepare Construction Schedule and

incorporatingthesameintenderdocument
Prequalification and shortlisting of

Finance and account departments

organizationchart
Documentsshowingcostestimates
Documents
showing
funding
arrangements
Cost and financial accounts coding
system(codesusedbyassessee)
Documents of disbursement schedule
andprocedure
Claimsprocedure
Loan, IPO etc papers are sources of
wealthofinformationfortheAO
Tenderingandcontractingprocedures
Different type of contracts and their
importantfinancialconditions
ConstructionSchedule
Organization chart of the contracts

17
contractorsandvendors.

Tenderanalysisandrecommendations

Contract documents preparation and

assistanceinplacingoforder(s).

DevelopaProjectExecutionPlan.

Preparation of Master Schedule for the

overall project using MS Project software
basedonthedrawingreleaseschedule.

Develop a procurement plan, identifying

longneeditemsforbulkprocurement.

department

Contractors organization chart and

manpowerschedule
Contractorsdocumentation
Vendorsdocumentation
ProjectOrganizationchart
ProjectEngineeringcontrolprocedures
ProjectDescription
Timeschedule
ResourcesSchedule
Materialsdepartmentorganizationchart
Procurementprocedure
Preferredvendorslist
Nominatedsubvendorslist
Preferred transporters names and
contacts
Materials receiving, issuing store
keepingandaccountinginstructions
Inventorycontrolprocedure

Followingdocumentsarerequiredtobesubmittedbeforemunicipality:
ThreeSet/Copiesofplan
BuildingApplicationForm
NOCfromCalcuttaImprovementTrust
ObservationofSurveyandValuationDepartment
ApplicationAnnexureA,B,C,D
F.A.R.CalculationSheetShowing:
i.
DetailsofArea
ii.
CalculationofCarParkingAreas
RegisteredUndertakingForRehabilitationofTheExistingTenant(S)
CopyofDeed&DeedPlan
StructuralDesignCalculation
So, if required for investigation on any point, AO may obtain these from the
municipality.

i.
Demolitionofexistingbuilding,ifany:saleproceedsgoeithertodeveloperorowner
orbothasperagreement.
ii.
Constructionstarts
iii.
Givesintimationofcommencementtomunicipality
iv.
Afterconstruction,occupancy/completioncertificateisobtainedfrommunicipality.
Forthis,applicationhastobefiledintheformgivenattheendofthisbook.
Amongotherdocuments,PhotocopyofasetofvalidBuildingSanctionPlanalongwithall
plansregularizedU/S400,416ofCMCAct,1980andU/Rule25ofCMCBuildingRules90
withrevalidationPlanU/S399ofCMCAct,ifany,arerequiredtobesubmittedwithnotice
ofcompletion:

C. ConstructionPhase
Constructionactivityusuallyconsistsoffollowingmainstages:

i.
Layingoffoundationforthesuperstructure
ii.
Raisingofconcretecolumnsandbuildingthewalls

18
iii.
Layingofpipelinesforwater,seweragesystems
iv.
Layingofconduitpipesforelectricwiring
v.
Workfordoor/window
vi.
Flooring,whitewashing,paintingetc.
vii.
Preparationofgardens,parks,internalroads
AdditionalworkincaseofspecialprojectslikeI.T.Parks,Integratedhousingprojectsetc.

Process
DocumentswhichmaybeusefultoAO
Maintain fulltime technical staff at the Engineering departments organization
work site for coordination and inspection
chart
of the work as per drawings, Composition of project teams & their
specifications, explanatory notes, and
responsibilities
contractdocuments.
Conduct periodic job meetings with Construction departments organization
Clients representative, trade Contractors,
chart
Architect and other concerned parties to Productivitystandards
discuss procedures, progress, problems, Takeoverproceduresandcertificates
schedulingandopenitems.
Commissioningandstartupprocedure
Penaltiesforshortfallsinoutput
Maintain record of all tests and Suchrecords
inspections conducted, findings, and test
reports.
Assistance in the resolution of difference Documents to scrutinize claims for
andsettlementofextraclaims
expendituremadebyassessee
Monitoring the project in terms of cost Measurementbook
andtimescheduleandreporttheprogress ProgressReports
oftheworkfromtimetotime.
Tocheckandcertifyrunningbillsandfinal Contractorsperformancereports
accounts bills of all Contractors for their Claimsdocumentationprocedure
correctness.
To check all equipment and material for Procedure for issue of owners
qualityandspecificationsandalsotokeep
materials, construction equipment and
records of receipts and issue of such
services
material by Client's and coordinate with
Client,
Contractors
and
Suppliers/Vendors.
Preparation of reports to outline the Materialsandequipmentrequisitionand
following:
orders
BudgetandExpenditure
Procedure for transfer of documents to
permanentdatabaseandrecordrooms
TimeSchedulesandWorkProgress
Procedurefordestructionofdocuments
StatusofProject
anddrawings
QualityCheckReports
List or names of documents and files to
LabourDeployed
bepreserveforsomeyears
Names of departments which will take
over such documents and files and the
methodanddurationpreservations

D. PostConstructionPhase

Process
DocumentswhichmaybeusefultoAO
Commissioning

19
Ensure all necessary documents are FinancialaccountingprocedureandWIP
submitted to relevant authorities prior to
(workinprogress)valuation
anyrequiredinspections.
Inspectionsbydifferentauthorities/client

Prepare punch lists, indicating the items of WorkandPunchlists

balanceworkanddefects
All clearance certificates from Fire Service,

PCBetc.areobtained
Prepare Certificates of substantial and final Practical completion certificate (useful
completionasrequired.
to determine stage of completion for
Check and certify final payment to
assessmentasperAS7)
contractors.
IssuePracticalCompletionCertificates.
Occupancy(completion)certificateobtained Occupancycertificate
frommunicipality
Land owners allocation of constructed

propertyhandedover(inJV)
Possession of property out of developers

allocationhandedovertobuyers
Executionofdeedofconveyance
deedofconveyance

Manpowerinvolvedinconstructionofaproject
Forexecutionoftheseactivitiestheenterpriserequiresmaterials,supervisorystaff,labour
andequipment.Materialsareofnumeroustypes.Thesemayberelatedtocivilengineering
work,electricalworkorothers.Labourisonemajoritemofonsiteexpenditure.Itincludes
masons, carpenters, plumbers, welders, painters, machine operators, electricians and
unskilled labours. They are employed directly or through subcontractors. Nowadays
labourcosthasincreasedconsiderably.Tosavelabourcost,labourtroublesandtoreduce
construction time, builders/ developers/ contractors are increasingly mechanizing their
work.Thiswillbereflectedinmorefixedassetsinbalancesheetanddepreciation/machine
operating expenses in P & L A/c. and lesser labour charges in P & L A/c. The AO should
considerthesetwoaspectssimultaneously.

Supervisory staffs are broadly in management and Finance & Accounts. The bigger and
diversetheproject,thegreaterthenumberandvarietyofstaffis.Actually,iftheAOobtains
alistofstaffsitgivesindicationofthetypesofworkhappeningandhelpsAssessingOfficer
understand the process in a project. As example, in an Integrated Housing Project, the
followingarethemajorpostsofsupervisorystaffs:
Department Post
Mainjobsdone
Marketing
Manager
Increasebusiness
Business Development
Executive
Sales & Marketing
Executive
Technical
GM/AGM/DGM
Constructionriskidentificationandmitigation,
adherence to construction schedule and
budget, meeting production and productivity
target, variance reporting and management
etc.
ProjectCoordinator
Designandcoordination
Senior
Manager Planning, Resource Management, Project
(Project)
Scheduling, Develop and implement process,
controlofquality,cost&time.

20
StructuralEngineer
Curtain
glazing
Engineering
LiaisonOfficer
Architecture
Manages/Interior
Designer/Landscape
Architect
Planning and Manages(Contracts)
contract

Engineer(Planning)

Quality
Control

Engineer
(Building/Quantity
survey)
Manager(Quality)

Makingstructuraldesign
Design and erection and curtain wall glazing
andstructuralglazing.
Liaisonjob

Analysis of rates and BOQ with reference to

schedule of rates and IS codes, interpretation
of contracts, Estimation of manpower and
equipment requirement, quality survey,
projectscheduling
Planning(withCPM/PERTtechniquesetc.and
software packages like Prima Vera /MS
Project)
Quantity surveying, verification of bills in
constructionindustry.

Taking daily measurements, evaluating work

completed by applying contractual rates,
compiling monthly progress certificates and
agreement with client, Recording, measuring
and valuing variations in accordance with
contract document, control, agreement and
acceptanceofvariationswithclients.
Manager For maintenance of all ancillary and
Manager supportinginfrastructure

Services (Day Chief

today
(Facility)
maintenance) (Electrical),
Manager
(Plumbing
and
fire
fighting
engineer)
Fire safety Manager,
Horticultural Officer
ProcurementManager
Finance,
Legalmanager
Finance,Accounts,Law,Compliance
Accounts and Accountsmanager
Law
Land
Procurement
Manager
Comml.Executive
Club
GeneralManager
Hospitalityarea
Front Office Executive
F&BControllerCooks

ProvisionsofPromotersAct,RulesandKMCBuildingRules

The W.B. Building (Regulation of Promotion of Construction and Transfer by

promoters)(Amendment)Act,1993

Rule2(d)
Contractormeansanypersonwhoundertakesacontract
2(e)
Flat means for construction of any building , a separate residential unit,
whetherselfcontainedornot

21

2(g)
Promoter means a person who constructs or causes to be constructed a
building on a plot of land for the purpose of transfer of such building by sale, gift or
otherwisetoanyotherpersonandincludes
hisassignee
thepersonwhoconstructs(ifthetransferisdifferent)
Purchasermeanswhohasenteredintoagreement
toconstructabuildingmeans
toconstructanewbuilding
reconstructabuilding
convertabuildingintoflatorblock

R.3(1)Registration
Promoterappliesatleast90daysbeforecommencementofconstructiontoauthorized
officerforregistrationandpermissionforconstruction.
Applicationtobeaccompaniedby:
Plan
Agreement
Deedofland
Alldetailsofflat
EstimatedexpenditureANDsourceoffinance
Detailsoffinancialagreementwithbank
Detailsofadvancepaymenttaken
Periodwithinwhichpossessionisproposedtobegiven
Copiesofagreementswithbuyers
Nameofarchitect
NameandaddressofContractorproposedtobeengaged
Separateapplicationforseparateplot/separatebuilding
NameofeveryregisteredpromoterenteredintoaRegisterbyAuthorisedofficer
AcertificateofRegistrationissued
CopyofcertificatesentbyA.O.toplansanctionauthority
R.4. (1)Certificatevalidfor10years
(2)(c)Certificatemaybecancelledifusessubstandardmaterial/violatesanyrule
R.4A. Permissionforconstructionvalidfor5yearsfromdateofgranting
R.7. Promotershallenterintowrittenagreementbeforetakingadvance
R.8.(1)Aftergrantofpermissionandafteragreementwithpurchaser,promotercannot
alterstructureofflat/building/additionwithoutconsentofpurchaserand priorpermission
ofplansanctionauthority.
(1a) If promoter has created a change on the land and/or building, he shall deliver
possessionfreefromencumbrances.
(2)
Ifviolatesthese,liabletorefundwithin3monthsondemand.
Proviso a) if gives possession after expiry of specified period, promoter liable to
paycompensationtobeadjustedwithprice.
R.11.Promoter+Landownershallexecuteallrelevantdocumentsasperagreement.
R.12.Insurancepolicycoveringminimum90%ofestimatedvalueofbuildingtobetaken.
SoA.O.cangetideaofvalueofbuildingfromit.

PromotersRules,1995
R.2(c)AuthorizedOfficermeansanofficernotbelowtherankofD.M./D.C.orany
otherofficerappointedbyStateGovernment.
R.2(e)StateGovt.meansDept.ofHousingofGovt.ofWestBengal.
R.3(1) FormforapplicationforRegistrationFormA
FeesRs.2000/.
(2)
AppropriateauthoritymaintainsregisterinFormBfortheseparticulars
(3)RegistrationcertificateinFormC

22
R.4.ApplicationforpermissionforconstructioninFormD.
FeesRs.10000/ifcostofconstructionuptoRs.50lakh
Rs.15000/ifcostofconstructionuptoRs.1crore
Rs.20000/ifcostofconstructionmorethanRs.1crore
PermissionissuedinFormE.
R.8. Agreement between promoter and purchaser must contain details about details of
land,builtuparea,price,scheduleofpayment,dateofpossession.

KolkataMunicipalCorporation(KMC)BuildingRules,1990

R.2.(13) Commencement of work means actual commencement/erection of a building

includingfoundationworkorreerectionoralteration,butnotmereexcavationofearth.
(21) Floorareameansthecoveredareaofabuildingatanyfloorlevel.
(22) FAR=Totalfloorareaonallfloors

Areaoftheplot
(ChartasperR.61)
(41) Plinthareameansthebuiltupcoveredareameasuredatthefloorlevelofbasement
orofanystorey.
R.3. (1) No construction/addition/alteration without sanction in the form of Building
Permit.
(2) Instances for which no building permit is required (e.g. erection/re
erection/addition/alterationofinternalpartitionwallwhichdoesnotviolateanyrule).
R.4.ApplicationtoKMCCommissionerinScheduleIalongwithenclosuresmentionedin
R.4. including building plan, location plan, site plan (showing existing buildings)
specification.Forcommercialpropertiessomeadditionaldetailstobefiled.
R.21. Within2yearsfromdate ofissueofbuildingplanbut7daysbeforecommencement
oferectionpromotertogivenoticeofcommencementinScheduleIX.
R.23. After construction up to plinth level/one metre above ground, promoter to give
noticetoKMCinScheduleXforinspection.
R.25.Nodeviationfromsanctionedplanallowed.
R.26.NoticeofcompletiontobegiveninScheduleXIIalongwithcompletionplan.
R.27(1)Within15daysKMCwillcauseinspection
(2)Within10daysofinspection,KMCwillissueoccupancycertificate
R.27APartialoccupancycertificatemaybeissuedsubjecttoundertakingsbypromoter.
R. 29. No person shall occupy/permit to occupy a building constructed for which
occupancycertificateorpartialO.C.hasnotbeenissued.
R.30.Forreerection/addition/alteration,freshnoticeisnecessary.

ChapterXPermissibleheight,floorareaetc.

23

TheControversy

Whatisthecontroversy?
It is important to understand what the controversy is because; if there is no controversy
thereisnogroundforanalyticaldiscussion.Thecontroversyhasstartedsinceintroduction
ofrevisedAS7.ThecontroversyisthatsomedevelopersandbuildersfeelthatrevisedAS
7 is applicable only to Contractors who are doing construction contracts, i.e.,
constructiononthebasisoftenders.
They argue that, old Accounting Standard (AS) 7, 'Accounting for Construction
Contracts',issuedbytheInstituteofCharteredAccountantsofIndiainDecember,1983,
stated in Paragraph1 that "The Statement also applies to enterprises undertaking
construction activities of the type dealt with in this Statement not as contractors but on
theirownaccountasaventureofacommercialnaturewheretheenterprisehasentered
intoagreementsforsale"whileParagraph1ofrevised(in2002)AS7(w.e.f.1.4.2003)
statesthat,"ThisStatementshouldbeappliedinaccountingforconstructioncontractsin
thefinancialstatementsofcontractors."
When Expert Committee of ICAI has said in reply to a query and also stated in a
GuidanceNotethatAS7willnotbeapplicableandAS9willbeapplicable,thatisfinal.
They argue that they are not contractors as they undertake construction activities on
their own account as a venture of a commercial nature where they enter into
agreementswithbuyersforsaleofconstructedproperty.
So they claim that they can recognize revenue only after transfer of the flats/
constructedunitsandnotbeforethat(asprescribedinAS7).Consequentlydevelopers
showrevenueoutofsaleofflatsetcspreadingitinseveralyears(evenaftercompletion
of project) while they book the expenses in the year of construction itself and
accumulate these expenses as WIP (work in progress). They argue that their contract
withbuyersisforsaleandnotforconstruction.
Theysaythattheymerelysellaflatorunit,theydonotdoanythingasacontractor.
Itisfurtherarguedbysomeaccountantsthatbeforeaprojectiscompleted,allreceipts
aremerelyadvanceswhichcannotbeputinthecreditsideofaP&Laccountandifthe
credit side is empty, profit cannot be computed in any case and so, no income can be
taxed.

Whydevelopers/buildersdonotliketofollowAS7?
Developers/ builders do not like to follow AS 7 or Percentage of Completion Method
becauseinthissystemprofitiscalculatedonthebasisofestimatesofsaleaswellasfuture
cost.Iftheprojectisofmorethanoneyear,theestimatesofprofitmadebyassesseeinone
yearmayprovetobewrongandfinallytheassesseemayenduppayingtaxonsomeprofit
whichhefailedtoearnaspercalculationinthefinalyear.Theyfeelthatthislosscanbeset
offonlyifassesseehasanotherproject.Theyalsofeelthatthereisnowaytogetbackthetax
hepaidinsomeearlieryearonestimatedprofitifthathappenedtobehisonlyprojectat
leastforthetimebeing.

Afewwordsabouttheapprehension
AS7isbasedonreasonableestimatesonly.Alongwiththis,AS1saysthataccountsaretobe
basedonprudenceandconservatism.Thereforeassesseehastheoptiontobeconservative

24
at the time of making estimate for earlier years. Thus there is adequate safeguard
mechanisminbuiltinAS7.Onlythedeveloperoritsaccountanthastobeabletoharnessthe
mechanism. In anycase, AS7wasbeing followedby manydevelopers andbuildersforall
these days and it was fine with them. So it should not create any problem now also. Even
now, many developers and builders are following this. Further, such loss can be carried
forwardandsetoffwithanybusinessorprofessioncarriedonbyhimandnotnecessarily
realestatebusiness.Itistobekeptinmindthatsuchasituationisnotuniquetorealestate
business. Even in any other business, like trading/ transport/ manufacturing etc., if a
businessmansufferslossduringoneyearhecannotsetitoffunlesshehassomebusiness
profitinthenextyear.

ViewpointofAssessingOfficers
Ontheotherhand,manyofficersoftheIncometaxdepartmentfeelthattherevisedAS7is
applicabletodevelopersandbuildersalso.Theyarguethat:
Firstly, the word contractors does not simply mean the people whom we
conventionally call as contractors doing construction work in pursuance of some
tender; the word contractors here means all people doing construction work in
pursuanceofsomecontracts(whichmaynotbemerelyatender)withanyoneifsuch
contract has characteristics of contract defined in Indian Contracts Act, 1872. The
SupremeCourtpronouncedinthecaseofStateofOrissav.TitaghurPaperMillsCo.
Ltd.(1985)TaxLR2948,2984,3006(SC),Thedictionarymeaningofawordcannot
be looked at where that word has been statutorily defined or judicially interpreted but
where there is no such definition or interpretation, the Court may take the aid of
dictionaries to ascertain the meaning of a word in common parlance. The word
contractorisnotdefinedinIncomeTaxAct,1961butasperOxfordAdvanceLearners
Dictionary, contractor means a person who enters into a contract. As per Oxford
Advance Learners Dictionary, contract means binding agreement between two or
more persons or parties. The term contract is defined in Indian Contract Act, 1872
and agreements of developers/builders are nothing but contracts (though not as per
tender)andso,theirbusinessisliabletobetreatedasconstructioncontracts.Supreme
Court interpreted the term contractor in Chintaman Rao v. State of Madhya
Pradesh,AIR1958SC388,392as,Acontractorisapersonwho,inthepursuitofan
independent business, undertakes to do a specific job of work for other persons, without
submittinghimselftotheircontrolinrespecttothedetailsofthework.
Itiswrongtosaythatthecontractofdeveloperswithbuyersisonlyforsaleofflatsasit
isprimarilyforconstructionandsecondarilyforsale.Ifbuildingisnotfirstconstructed,
what is there to sell? And that construction is generally done after buyer accepts the
specificationsintheformofexecutinganagreement.
ManybigdevelopersarealreadyfollowingPercentageofCompletionMethodfortheir
realestatedevelopmentbusiness.HowthesebigdevelopersarefollowingPercentage
ofCompletionMethodifitisnotapplicabletorealestatedevelopment business?The
annualreportsoftwodevelopersstate(availableintheirwebsites):
(ii)RecognitionofRevenuefromRealEstateDevelopmentalProjects:
RevenuefromeachRealEstateDevelopmentalProjectisrecognized:
(a)OnthebasisofPercentageCompletionMethod.
(b) The percentage completion method is applied on a cumulative basis in each
accounting period to the current estimates of contract revenue and contract costs
(Para 1.2 (ii) of Schedule 19 in Page 62 of Annual Report of 200607 of Sobha
DevelopersLtd).
(ii)RealEstateProjectsundertakenonandafter1stApril,2004.
Revenue from real estate projects is recognized on the Percentage of Completion
Method of accounting (Para A 4 (a) (ii) of Schedule 16 of Balance Sheet as at
31.3.2007atPage87ofAnnualReportof200607ofUnitechLtd.).

25

IncomeistobetaxedasperprovisionsofIncometaxAct,1961.AccountingStandards
areonlyaidsindoingthat.S.5ofI.T.Act,1961statesthatanincomewillbetaxedwhen
itisreceivedoraccruedorarisenordeemedtobereceivedoraccruedorariseninIndia.
Section145stateshowtocomputeanincomewithmethodofaccounting.Asheldbythe
SupremeCourtinTuticorinAlcaliChemicals&FertilizersLtdv.CIT(1997)227ITR
172(SC),accountingpolicyisnotnecessarilygoodlawandtaxabilityofanincomewill
beguidedbyprovisionsofIncomeTaxActandnotbyaccountingprinciples.Inthatlight,
even if the revised AS 7 does not contain the words "The Statement also applies to
enterprisesundertakingconstructionactivitiesofthetypedealtwithinthisStatementnot
as contractors but on their own account as a venture of a commercial nature where the
enterprise has entered into agreements for sale" and states that it is applicable for
contractors, computation and taxation of income out of construction by
developers/builderswillnotbedecidedsolelybythetextofAccountingStandardsbut
definitely by provisions of Income Tax Act, 1961 and other allied Acts in conjunction
withAccountingprinciplesincludingAccountingStandards.
If, as argued by developers/ builders, nonexistence of the words, "The Statement also
applies to enterprises undertaking construction activities of the type dealt with in this
Statement not as contractors but on their own account as a venture of a commercial
naturewheretheenterprisehasenteredintoagreementsforsaleinrevisedAS7isthe
determiningfactortodecidewhetherrevisedAS7isapplicabletodevelopers/builders
or not, it may be noted that similar words are nonexistent in AS 9 which they are
claiming to be applicable now. AS 9 was and is for sale of goods. If business of
developers and builders is sale of goods now, why was it not so earlier? AS 9 has
remained same and has not acquired any new characters to attract a new class of
business transactions into its fold. If nonexistence of those italicized words are the
reasonbehindnonapplicationofAS7now,suchwordsarenotplacedinanyotherAS
alsoandinthesameargumentnoAccountingStandardshouldbeapplicable!
Thus,whileS.5oftheActisthemaingoverningprovision,thethreesubsectionsofS.
145 indicate that accounting system (including accounting standards) followed by
assessee is important for determining profit or computing income. But the accounting
systems are to fulfill the three conditions mentioned in subsection (3) of S. 145, viz.,
completeness & correctness, adherence to the Accounting standards notified by the
CBDT and regularity in following a particular system of accountancy. Therefore, it is
importantforAssessingOfficerstoseewhetherassesseeisfollowingcorrectaccounting
system (including accounting standards) and when actually the income is accruing or
beingreceivedbydevelopersandbuildersinthelightofapplicablelawandaccounting
principlesincludingaccountingstandards.
Ifinaprojecttherewere10or1000apartments,thedevelopercollectedhugerevenue
fromcustomerswiththeprogressofprojectevenbeforeactualcompletionofthesame.
Say, as per Plan B in page 6, 45 % payment is collected from buyer by the time the
construction reaches roof of ground floor. Cost of construction up to this level is less
than 45% of total projectcost and so there is accrual of profit even in this portion of
construction (it may be negative profit or loss also). The same is true even in a case
where 100% down payment is made (not installments). Even otherwise, if Rs. 100 is
spent for construction up to this 45%, there must be some appreciation (including
negative appreciation) in the value of this asset called 45% constructed project. This
45%constructedprojecttoohasasalevalue.Incaseofatradertooifastockintradeis
purchasedatRs.100anditisnotsold,thenitsvalueasattheendofaccountingyearis
shownintherightsideoftheP&Laccountandinthatwaytheprofitelement(including
negativeprofit)embeddedinitbyaccrualistaxed.ThereforeasperS.5andmercantile
systemofaccounting,thisprofitelementinincompletelyconstructed/unsoldproperty
should be taxed in every year of accrual itself and not wait up to the year of sale by
registeredconveyancedeed.ThisiswhatAS7saysandthisisthereasonwhyprofitof

26

adeveloper/builderdoingconstructionunderagreementwithabuyershouldbetaxed
onthebasisofpercentageofcompletionofconstruction.IFRSwillbemandatoryforthe
financialstatementsfortheperiodsbeginningonorafter1/4/2011andtheunderlying
assumptionsofIFRSare:
Accrual basis, i.e., the effect of transactions and other eventsare recognized when they
occur,notascashisgainedorpaid
Goingconcern,i.e.,anentitywillcontinuefortheforeseeablefuture.

As per these two assumptions of IFRS also, the revenue received by developers/
builders/contractorsaretoberecognizedintheyearinwhichtransactionsoccurand
not when they receive full cash. Sometimes apprehension is raised that there is no
guarantee that the project will be completed or that the revenue will be actually
received.Buttheseapprehensionshavenovalueduetotheprincipleofgoingconcern
mentioned above. This going concern principle has actually been a cornerstone of
existing accounting principles also as evident from Para 5 of AS I of Notification No.
9949 notified by CBDT on 25/1/1996. But many developers/builders/ contractors do
not pay tax on this because they say that they followed project completion method.
Even if some work in one or two flats is incomplete, the whole project is treated as
incompleteandtheytakeadvantageofittodefertaxation.Developersshowthemoney
received from customers as liability in the form of Advance received in the balance
sheet and balances this by showing constructed property as workinprogress. Thus
tax is deferred to the advantage of assessee while the income out of that revenue has
alreadyaccruedtohimwhichisagainstthebasicprincipleoftaxation.
To the argument that When Expert Committee of ICAI has said in reply to a query and
alsostatedinaGuidanceNotethatAS7willnotbeapplicableandAS9willbeapplicable,
that is final it is relevant to mention that in ANNOUNCEMENTS OF THE COUNCIL
REGARDING STATUS OF VARIOUS DOCUMENTS ISSUED BY THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF INDIA (source: www.icai.org) ICAI has stated about
the status of such opinion of Expert committee and Guidance notes. It is stated that
GuidanceNotesarerecommendatoryinnature.WhenGuidanceNotesarenotbinding
evenonthemembersofICAI,i.e.,theCharteredAccountants,thesecannotbebindingon
others,moresoonquasijudicialauthoritieslikeAssessingOfficers.Ontheotherhand,
whilethisisthestatusandauthorityoftheGuidanceNoteissuedbyICAI,thereplyto
the query mentioned in Chapter 3 of this book is the opinion only of the Expert
Advisory Committee and not of the Council of the Institute. Therefore the status and
authorityof suchreplyislessereven onthe membersof ICAI.Forthesereasons,such
argumentisnotcorrect.
Theargumentthatbeforeaprojectiscompleted,allreceiptsaremerelyadvanceswhich
cannot be put in the credit side of a P & L account and if the credit side is empty, profit
cannot be computed in any case and so, no income can be taxed cannot be correct
becausethereisatleastoneAccountingStandard(AS7),institutedbyICAIitself,which
provides that profit can be computed even with estimated receipt (and not actual
receipt). Profit computation in As 7 operates entirely on a different plane. So, the big
question is actually whether AS 7 is applicable. If that is applicable, profit can be
computedevenwithoutanamountinthecreditsideoftheP&La/c.

The controversy became stronger with an opinion of the Executive Committee of ICAI
publishedintheSeptember,2003issueofTheCharteredAccountantjournalofICAI(given
in Chapter 3) in which the Executive Committee said in reply to a particular developers
query that in the given facts of that developer, not AS 7 but, AS 9 was applicable. The
controversy remained alive with the Guidance Note issued by ICAI for its members which
waspublishedintheJune,2006issueofTheCharteredAccountant(giveninChapter4)in
whichitwasstatedthatAS9wasapplicabletorealestatesalesbusiness.Butafurther

27
twistappearedduetoitssayinginthesameGuidanceNotethatasperAS9therevenue
may be liable to be recognized even at the time when agreement was executed and not
necessarily after the flat/ constructed unit is transferred. This may mean difference of
severalyearsinrecognitionofrevenueandcostsandhenceprofit.

WhyAS7ispreferablebytheAssessingOfficers:
Inprojectcompletionmethodfirstproblemwasofdefermentofrevenue.

Secondly,asallexpensesarealreadyshowninyearsearlierthantheyearofsale,the
TaxOfficerisnotinapositiontoexaminethoseitemsofexpenditureintheyearof
scrutiny.

Thirdly, when the tax demand is raised, the project is sold and the proceeds are
already enjoyed as a result of which recovery becomes difficult. Sometimes the
project is done through a SPV (Special Purpose Vehicle) which is a legal entity
formed only for the execution of the project and would up after that. As a result
AssessingOfficerfacesdifficultyinrecoveringthetaxes.ThereforeTaxOfficersfeel
thatrecognizingrevenueonactualtransferofflatsetcisprejudicialtotheinterests
ofrevenue.

Relevancy/ redundancy of Project Completion Method to real estate construction

casessince1.4.2003
Theremaybescopeforcontroversyinthematterwhetherdevelopersandbuildersarealso
construction contractors or not but there cannot be any controversy in the matter that
project completion method has no existence at all since 1.4.2003. In the old Accounting
Standard (AS) 7, i.e., which was effective till 31.3.2003, there were two methods for
computation of profit in real estate construction cases, viz., Project Completion Method
andPercentageofCompletionMethod.In2002ICAI(InstituteofCharteredAccountantsof
India)introducedarevisedAS7andmadethismandatoryforitsmembersw.e.f.1.4.2003.
Inthis,thereisonlyPercentageofCompletionMethodandnothingelse.Asaresult,since
1.4.2003 there is no such method called Project Completion Method in existence in the
subjectofAccountancybeitinAS7or9oranyotherAccountingStandard.Thereforeno
Chartered Accountant can prepare (or audit an accounts prepared by someone else) the
accountsofabusinesswhichisinthenatureofconstructioncontractinsocalledProject
Completion Method (some call it Completed Construction Method) from the Accounting
Year200304onwards.HenceitisobviousthatifanyoneclaimstohavefollowedProject
CompletionMethod,ithasnobasis.

28

3
TheQuery

The query referred to in the previous chapter and reply of ICAI to it is as below.
Simultaneously are given critical review of this in italics. Underlines are provided by the
authortosupplyemphasis:

THECHARTEREDACCOUNTANT,SEPTEMBER,2003(Page232233)
ApplicabilityofrevisedAS7toenterprisesundertakingconstructionactivitiesontheir
ownaccountasaventureofcommercialnature

ThefollowingisthebriefversionofanopiniongivenbytheExpertAdvisoryCommitteeof
the Institute in response to query sent by a member. This is being published for the
informationofreaders.

(The Opinion is only that of the Expert Advisory Committee and does not necessarily
representtheOpinionoftheCounciloftheInstitute.

Authorscomments:WhateverisstatedhereisnotofficialopinionofICAI.Moreimportantly,
asstatedbytheSupremeCourtinTuticorinAlcaliChemicalscase(1997)227ITR172,whether
asumistaxableasincomeornotwillbedecidednotbyaccountingprinciplebutbyIncometax
law.

1.AcompanyisajointsectorenterprisepromotedjointlybyWestBengalHousingBoard
andanotherprivatesectorcompany.Thecompanyisengagedinthebusinessofdeveloping
mass scale housing projects, which, inter alia, include development of small commercial
complexes(hereinaftercollectivelyreferredtoas'housingprojects').

Authors comments: Stated nature of business Development of housing projects including

commercialcomplexesandNOTmeresale.

(Authorscomments:AS9saysthatitisapplicableforsaleofgoodsorservice.Later,in
Paragraph9ofthisarticleitisstatedthatsuchactivityisnotservice.Butisitsaleofgoods
either? Here it is stated that the business is NOT sale of housing/ commercial units but of
developmentbuttheopinionisbasedontheassumptionthatnatureofbusinessissale).

2. The aforesaid activities are undertaken by the company on its own account (Authors
comments:Isitreallyso?Itwouldhavebeenownaccountonlyifentireprojectwascompleted
with own fund and not involving purchasers with terms and conditions before actual sale of
constructed units) and not on contractual basis, (Authors comments: How can it be? The
agreementisnothingbutasetofcontracts,
viz.,promisesandconsiderationsonlywhicharelegallyenforceableasperIndianContractAct,
1872)i.e.,onaprojectbeingconceived,designsanddrawingsarefinalized,landisprocured,
someinitialdevelopmentalactivitiesarecarriedoutbythecompany(Authorscomments:
Till this period there is no construction activity and for actual construction activity to start,
there are contracts with buyers), and thereafter flats/commercial spaces (shop, office, etc.)
areofferedtothepublicforbooking/salethroughadvertisementsfollowedbyallotmentof

29
thesameusuallybywayoflotterytothesuccessfulallottees(eventualowners).Allotmentis
documentedbywayofanallotmentlettertoeachallottee.

Theletterbearsreferencetothebrochure(i.e.,offerdocument),which,interalia,contains
various terms and conditions (Authors comments: i.e. the revenue and expenses of the
underlyingtransactionofsaleofconstructedunitafterconstructionaresubjecttotheseterms
and conditions that may be called more aptly as contract entered into by the two parties).
Considerationforaflat/commercialspaceispayableinaphasedmannernormallylinkedto
various stages of completion of construction [Authors comments: Another important
statement.ThismeansthatthetransactionisnotmerelysaleofgoodsasmentionedinAS9.
It is essentially a contract of I construct and you pay (from developers viewpoint) or you
constructandIpay(frombuyersviewpoint).Andifitisacontractforconstruction,itistobe
guided by AS 7 only]. Major construction activities pertaining to buildings are usually
undertakenafterallotmentprocessasaforesaidisover(Authorscomments:Thisisavery
important statement. This indicates that construction activities are undertaken only after
allotment process, i.e, communication perusal negotiation acceptance execution of
terms&conditions).Aftercompletionofconstruction,possessionofflats/commercialspaces
is handed over to the respective allottees followed by execution of deeds/other legal
documentsintheirfavourevidencingownershipofproperties.

3. The company has, hitherto, been recognizing revenue under percentage of completion
method and valuing workinprogress in its books of account as per Accounting Standard
(AS) 7, 'Accounting for Construction Contracts', issued by the Institute of Chartered
Accountants of India in December 1983, as the said Standard was also applicable to
enterprisesundertakingconstructionactivitiesnotascontractorsbutontheirownaccount
asaventureofcommercialnature.

4.AS7hasrecentlybeenrevisedandthesamecomesintoeffectinrespectofallcontracts
enteredintoduringaccountingperiodscommencingonorafter01.04.2003,forthepurpose
ofpreparationofthefinancialstatementsofthecontractors.TherevisedAS7issilentabout
its applicability to construction activities undertaken by enterprises on their own account
andnotascontractors.

5. In the light of the above, the querist has sought the opinion of the Expert Advisory
Committeeonthefollowingissues:

(a) Whether the revised AS 7 would be applicable to the company for accounting for new
housingprojects,whichmaybeundertakenbythecompanyonorafter01.04.2003onthe
samebusinessmodelasmentionedinthefactsofthecase.
(b)Incase,revisedAS7isnotapplicabletothecompany,whetherthecompanycanvalue
its inventories in accordance with Accounting Standard (AS) 2, 'Valuation of Inventories',
issued by the Institute of Chartered Accountants of India, considering the definition of
inventoryas'anassetintheprocessofproductionforthepurposeofsale',i.e.,whetherthe
activityofdevelopinghousingprojectsonitsownaccountasacommercialventurebythe
companycanbeconstruedasaproductionactivity.

(c) If the activities of the company cannot be considered as a production activity and
consequentlyAS2isalsonotapplicable,whichAccountingStandardshouldbefollowedfor
recognitionofrevenueandvaluationofitsconstructionworkinprogress?

C.PointsconsideredbytheCommittee
6. The Committee notes that Accounting Standard (AS) 7, 'Accounting for Construction
Contracts', issued by the Institute of Chartered Accountants of India in December 1983,
states in paragraph 1 that "The Statement also applies to enterprises undertaking

30
construction activities of the type dealt with in this Statement not as contractors but on
their own account as a venture of a commercial nature where the enterprise has entered
intoagreementsforsale".Therefore,theStandardwasapplicabletotheactivitiescarriedon
bythecompanyasstatedinparagraphs1and2above.TheCommitteealsonotesthatthe
revised Accounting Standard (AS) 7, 'Construction Contracts', issued by the Institute of
CharteredAccountantsofIndiain2002,doesnotcontaintheaforesaidsentencecontained
intheprerevisedAS7.Ontheotherhand,paragraph1ofrevisedAS7,clearlystatesthat,
"This Statement should be applied in accounting for construction contracts in the financial
statementsofcontractors."Therefore,theCommitteeisoftheviewthattherevisedAS7is
notapplicabletosuchenterprises. (Authorscomments:ThecommitteesaidthatAS7is
not applicable because the words "The Statement also applies to enterprises undertaking
constructionactivitiesofthetypedealtwithinthisStatementnotascontractorsbutontheir
own account as a venture of a commercial nature where the enterprise has entered into
agreements for sale" are no more present in AS 7 now. If that is so, these words are not
presentinAS9oranyotherAccountingStandardalso.So,inthatlogic,itshouldnotfollow
AS9alsoassuggestedbythecommitteehere).

7.Onthebasisoftheabove,theCommitteeisoftheviewthatforthepurposeofrecognition
of revenue and valuation of inventories by the company in question, the principles as
contained in Accounting Standard (AS) 9, 'Revenue Recognition' and Accounting Standard
(AS) 2, 'Valuation of Inventories', respectively, would be applicable (Authors comments:
ThecommitteehasnotexplainedwhyAS9isapplicable.ThesameAS9wasinexistence
beforerevisionofAS7also.Iffeaturesofthetypeofconstructionbusinessdiscussedabovedo
attractAS9now,whydiditnotattractearlier?ThereisnochangeatallinAS9toattract
anewtypeoftransactionswithinitsfold)

8.TheCommitteenotesthattheterm'inventories'hasbeendefinedinparagraph3ofAS2
asbelow:
"Inventoriesareassets:
(a)heldforsaleintheordinarycourseofbusiness;
(b)intheprocessofproductionforsuchsale;or
(c) in the form of materials or supplies to be consumed in the production process or in the
renderingofservices."

9. The Committee notes that the activities carried on by the company under
consideration as explained in paragraphs 1 and 2 above, cannot be construed as
rendering of services. The construction activities carried on by the company are of the
nature of production activities. Accordingly, in terms of the above definition of the term
'inventories', the Committee is of view that the company should value the completed
projects as inventories heldforsale in the ordinary course of business; the semifinished
housing projects as inventories in the process of construction for such sale; and materials
andsuppliesheldforuseinthehousingprojectsasinventoriesintheformofmaterialsor
suppliestobeconsumedintheconstructionprocess.

10.Inrespectofrecognitionofrevenue bythecompany,theCommittee notesparagraphs

10and11ofAS9,whichstateasbelow:

"10.Revenue from sales or service transactions should be recognised when the

requirementsastoperformancesetoutinparagraphs11and12aresatisfied,providedthat
atthetimeofperformanceitisnotunreasonabletoexpectultimatecollection.Ifatthetime
ofraisingofanyclaimitisunreasonabletoexpectultimatecollection,revenuerecognition
shouldbepostponed.
11. In a transaction involving the sale of goods, performance should be regarded as being
achievedwhenthefollowingconditionshavebeenfulfilled:

31
(i)thesellerofgoodshastransferredtothebuyerthepropertyinthegoodsforapriceorall
significantrisksandrewardsofownershiphavebeentransferredtothebuyerandtheseller
retains no effective control of the goods transferred to a degree usually associated with
ownership;and
(ii)nosignificantuncertaintyexistsregardingtheamountoftheconsiderationthatwillbe
derivedfromthesaleofthegoods."

11. The Committee is of the view that revenue should be recognised by the company in
respect of its housing projects only when the conditions in respect of sale of goods as
aforesaidaresatisfied.

D.Opinion
Onthebasisoftheabove,theCommitteeisofthefollowingopinionontheissuesraisedby
thequeristinparagraph5above:
(a)TherevisedAS7wouldnotbeapplicabletothecompanyforaccountingfornewhousing
projectswhichareundertakenbythecompanyduringtheaccountingperiodscommencing
onorafter1.4.2003.
(b)Theactivityofdevelopinghousingprojectsonitsownaccountasacommercialventure
bythecompanyisofthenatureofproductionactivityand,therefore,shouldbeconstruedas
such. The inventories should be valued by the company in accordance with AS 2 as
explainedinparagraph9above.
Authorscomments:InN.C.Budharajav.CIT(1993)204ITR412[Alsosee[2007]289
ITR26(SC)S.A.BuildersLtd.v.CIT(Appeals)andanother]theSupremeCourtheld,It
isequallydifficulttosaythattheprocessofconstructingadamisaprocessofmanufactureor
aprocessofproduction.Itistruethatadamiscomposedofseveralarticles;itiscomposedof
stones, concrete, cement, steel and other manufactured articles like gates, sluices etc. But to
saythattheendproduct,thedam,isanarticleistobeunfaithfultothenormalconnotationof
the word. A dam is constructed; it is not manufactured or produced. The expressions
"manufacture"and"produce"arenormallyassociatedwithmovablesarticlesandgoods,big
and small but they are never employed to denote the construction activity of the nature
involvedintheconstructionofadamorforthatmatterabridge,aroadorabuilding.Ifthe
constructionofadam,abridgeorabuildingasawholedoesnotamounttomanufactureor
productionofanarticle,itisdifficulttoseehowthelayingoffoundationorfoundationsfor
such dam, bridge or building can be characterized as manufacturing or production of
articles. There cannot be any doubt that when the Supreme Court held that
constructionactivityisnotproductionactivity,ExpertAdvisoryCommitteesabove
opinioniswrong.Moreover,ifgoodsaretheproductsofmanufactureorproduction
andconstructionisnotmanufacture/production,constructedunitsofadeveloper/
builder cannot be goods. If these are not goods, transaction in these cannot be
guidedbyAS9.

(c)AS2isrelevantforvaluationofinventoriesincludingconstructionworkinprogressand
notforrecognitionofrevenue.AS9wouldberelevantforrecognitionofrevenue.
Authors comments: The Expert Advisory Committee commented that AS 2 is applicable
for inventories in construction businesses also. No exception is made. So that includes
constructionbusinessofthenatureofcontractalso.ButthetextofAS2quotedbelowshows
that if the construction is of the nature of contract, AS 2 will not be applicable. Thus the
opinionisnotwhollycorrect.Theconsistentopinionexpressedinthisbookisthatinmany
casesevenbuilders/developerscanbetreatedascontractors.Ifitisso,theirbusinessis
constructioncontractandso,AS2willnotbeapplicable.
Scope
1.ThisStatementshouldbeappliedinaccountingforinventoriesotherthan:
(a) Work in progress arising under construction contracts, including directly related service
contracts(seeAccountingStandard(AS)7,AccountingforConstructioncontracts3);

32

Definitions
3.ThefollowingtermsareusedinthisStatementwiththemeaningsspecified:
Inventoriesareassets:
(a)heldforsaleintheordinarycourseofbusiness;
(b)intheprocessofproductionforsuchsale;or
(c) in the form of materials or supplies to be consumed in the production process or in the
renderingofservices.

Flatsarenotheldforsalelikesoapsandvegetablesintheordinarycourseofbusinessofa
developer/ builder. So (a) above is not fulfilled. As mentioned earlier, in the case of N. C.
Budharajav.CIT(1993)204ITR412(SC)ithasbeenheldthatconstructionofbuilding/
road/damisnotprocessofproduction.Therefore(b)isalsonotfulfilled.Lastly,ICAIitself
has stated in Paragraph 9 of this reply above that construction activity by a developer/
builder is not rendering of service. Therefore (c) above is also not applicable. For the
above cumulative reasons Expert Committees saying AS 2 is relevant for valuation of
inventoriesincludingconstructionworkinprogressandnotforrecognitionofrevenuedoes
notseemtobefullycorrect.

ThetextofAS9isgivenbelow:

STATEMENTSOFACCOUNTINGSTANDARDS(AS)9

RevenueRecognition
Itismandatoryincharacter.

Introduction
1.ThisStatementdealswiththebasesforrecognitionofrevenueinthestatementofprofitand
lossofanenterprise.TheStatementisconcernedwiththerecognitionofrevenuearisinginthe
courseoftheordinaryactivitiesoftheenterprisefrom
thesaleofgoods
therenderingofservices,and
theusebyothersofenterpriseresourcesyieldinginterest,royaltiesanddividends.

2. This Statement does not deal with the following aspects of revenue recognition to
whichspecialconsiderationsapply:
(i) Revenuearisingfromconstructioncontracts
(ii) Revenuearisingfromhirepurchase,leaseagreements;
(iii) Revenuearisingfromgovernmentgrantsandothersimilarsubsidies
(iv) Revenueofinsurancecompaniesarisingfrominsurancecontracts

3.Examplesofitemsnotincludedwithinthedefinitionof"revenue"forthepurposeof
thisStatementare:
(i) Realized gains resulting from the disposal of, and unrealized gains resulting from the
holdingof,noncurrentassetse.g.appreciationinthevalueoffixedassets;
(ii) Unrealisedholdinggainsresultingfromthechangeinvalueofcurrentassets,andthe
naturalincreasesinherdsandagriculturalandforestproducts;
(iii) Realised or unrealised gains resulting from changes in foreign exchange rates and
adjustmentsarisingonthetranslationofforeigncurrencyfinancialstatements;
(iv) Realised gains resulting from the discharge of an obligation at less than its carrying
amount;

33
(v) Unrealised gains resulting from the restatement of the carrying amount of an
obligation.Definitions

4.ThefollowingtermsareusedinthisStatementwiththemeaningsspecified:
4.1. Revenue is the gross inflow of cash, receivables or other consideration arising in the
courseoftheordinaryactivitiesofanenterprisefromthesaleofgoods,fromtherenderingof
services, and from the use by others of enterprise resources yielding interest, royalties and
dividends.Revenueismeasuredbythechargesmadetocustomersorclientsforgoodssupplied
and services rendered to them and by the charges and rewards arising from the use of
resourcesbythem.Inanagencyrelationship,therevenueistheamountofcommissionandnot
thegrossinflowofcash,receivablesorotherconsideration.

4.2.Completedservicecontractmethodisamethodofaccountingwhichrecognisesrevenue
in the statement of profit and loss only when the rendering of services under a contract is
completedorsubstantiallycompleted.

4.3Proportionatecompletionmethodisamethodofaccountingwhichrecognisesrevenue
in the statement of profit and loss proportionately with the degree of completion of services
underacontract.

Explanation
5. Revenue recognition is mainly concerned with the timing of recognition of revenue in
the statement of profit and loss of an enterprise. The amount of revenue arising on a
transaction is usually determined by agreement between the parties involved in the
transaction. When uncertainties exist regarding the determination of the amount, or its
associatedcosts,theseuncertaintiesmayinfluencethetimingofrevenuerecognition.

6.SaleofGoods
6.1. A key criterion for determining when to recognise revenue from a transaction involving
thesaleofgoodsisthatthesellerhastransferredthepropertyinthegoodstothebuyerfor
aconsideration.Thetransferofpropertyingoods,inmost cases,resultsinorcoincideswith
thetransferofsignificantrisksandrewardsofownershiptothebuyer.

However,theremaybesituationswheretransferofpropertyingoodsdoesnotcoincidewith
thetransferofsignificantrisksandrewardsofownership.
Revenueinsuchsituationsisrecognisedatthetimeoftransferofsignificantrisksandrewards
ofownershiptothebuyer.

Suchcasesmayarisewheredeliveryhasbeendelayedthroughthefaultofeitherthebuyeror
thesellerandthegoodsareattheriskofthepartyatfaultasregardsanylosswhichmightnot
haveoccurredbutforsuchfault.

Further,sometimesthepartiesmayagreethattheriskwillpassatatimedifferentfromthe
timewhenownershippasses.

6.2. At certain stages in specific industries, such as when agricultural crops have been
harvested or mineral ores have been extracted, performance may be substantially complete
priortotheexecutionofthetransactiongeneratingrevenue.
In such cases when sale is assured under a forward contract or a government guarantee or
wheremarketexistsandthereisanegligibleriskoffailuretosell,thegoodsinvolvedareoften
valuedatnetrealisablevalue.

Suchamounts,whilenotrevenueasdefinedinthisStatement,aresometimesrecognisedinthe
statementofprofitandlossandappropriatelydescribed.

34

7.RenderingofServices
7.1 Revenue from service transactions is usually recognised as the service is performed,
eitherbytheproportionatecompletionmethodorbythecompletedservicecontractmethod.
i. Proportionate completion methodPerformance consists of the execution of more than
one act. Revenue is recognised proportionately by reference to the performance of each act.
Therevenuerecognisedunderthismethodwouldbedeterminedonthebasisofcontractvalue,
associatedcosts,numberofactsorothersuitablebasis.Forpracticalpurposes,whenservices
are provided by an indeterminate number of acts over a specific period of time, revenue is
recognisedonastraightlinebasisoverthespecificperiodunlessthereisevidencethatsome
othermethodbetterrepresentsthepatternofperformance.
ii. Completed service contract methodPerformance consists of the execution of a single
act.
Alternatively, services are performed in more than a single act, and the services yet to be
performedaresosignificantinrelationtothetransactiontakenasawholethatperformance
cannotbedeemedtohavebeencompleteduntiltheexecutionofthoseacts.
The completed service contract method is relevant to these patterns of performance and
accordingly revenue is recognised when the sole or final act takes place and the service
becomeschargeable.

8.TheUsebyOthersofEnterpriseResourcesYieldingInterest,RoyaltiesandDividends
8.1.Theusebyothersofsuchenterpriseresourcesgivesriseto:

(i) interestchargesfortheuseofcashresourcesoramountsduetotheenterprise;
(ii) Royaltiescharges for the use of such assets as knowhow, patents, trademarks and
copyrights;
(iii) Dividendsrewardsfromtheholdingofinvestmentsinshares.

8.2. Interest accrues, in most circumstances, on the time basis determined by the amount
outstanding and the rate applicable. Usually, discount or premium on debt securities held is
treatedasthoughitwereaccruingovertheperiodtomaturity.

8.3.Royaltiesaccrueinaccordancewiththetermsoftherelevantagreementandareusually
recognisedonthatbasisunless,havingregardtothesubstanceofthetransactions,itismore
appropriatetorecogniserevenueonsomeothersystematicandrationalbasis.

8.4.Dividendsfrominvestmentsinsharesarenotrecognisedinthestatementofprofitand
lossuntilarighttoreceivepaymentisestablished.

8.5. When interest, royalties and dividends from foreign countries require exchange
permissionanduncertaintyinremittanceisanticipated,revenuerecognitionmayneedtobe
postponed.

9.EffectofUncertaintiesonRevenueRecognition
9.1.Recognitionofrevenuerequiresthatrevenueismeasurableandthatatthetimeofsale
ortherenderingoftheserviceitwouldnotbeunreasonabletoexpectultimatecollection.

9.2.Wheretheabilitytoassesstheultimatecollectionwithreasonablecertaintyislackingat
the time of raising any claim, e.g., for escalation of price, export incentives, interest etc.,
revenuerecognitionispostponedtotheextentofuncertaintyinvolved.
Insuchcases,itmaybeappropriatetorecognizerevenueonlywhenitisreasonablycertain
thattheultimatecollectionwillbemade.
Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of
saleorrenderingofserviceeventhoughpaymentsaremadebyinstallments.

35

9.3.Whentheuncertaintyrelatingtocollectabilityarisessubsequentto thetimeofsaleor
therenderingoftheservice,itismoreappropriatetomakeaseparateprovisiontoreflectthe
uncertaintyratherthantoadjusttheamountofrevenueoriginallyrecorded.

9.4.Anessentialcriterionfortherecognitionofrevenueisthattheconsiderationreceivable
forthesaleofgoods,therenderingofservicesorfromtheusebyothersofenterpriseresources
isreasonablydeterminable.
When such consideration is not determinable within reasonable limits, the recognition of
revenueispostponed.

9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is

consideredasrevenueoftheperiodinwhichitisproperlyrecognised.

AccountingStandard
(AccountingStandardcomprisesparagraphs1014ofthisStatement.TheStandardshouldbe
readinthecontextofparagraphs19ofthisStatementandofthe'PrefacetotheStatements
ofAccountingStandards'.)

10. Revenue from sales or service transactions should be recognised when the
requirementsastoperformancesetoutinparagraphs11and12aresatisfied,provided
thatatthetimeofperformanceitisnotunreasonabletoexpectultimatecollection.Ifatthe
time of raising of any claim it is unreasonable to expect ultimate collection, revenue
recognitionshouldbepostponed.

11.Inatransactioninvolvingthesaleofgoods,performanceshouldberegardedasbeing
achievedwhenthefollowingconditionshavebeenfulfilled:
(i)thesellerofgoodshastransferredtothebuyerthepropertyinthegoodsforapriceorall
significant risks and rewards of ownership have been transferred to the buyer and the
sellerretainsnoeffectivecontrolofthegoodstransferredtoadegreeusuallyassociatedwith
ownership;and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derivedfromthesaleofthegoods.

12.Inatransactioninvolvingtherenderingofservices,performanceshouldbemeasured
either under the completed service contract method or under the proportionate completion
method,whicheverrelatestherevenuetotheworkaccomplished.

Suchperformanceshouldberegardedasbeingachievedwhennosignificantuncertaintyexists
regardingtheamountoftheconsiderationthatwillbederivedfromrenderingtheservice.

13.Revenuearisingfromtheusebyothersofenterpriseresourcesyieldinginterest,royalties
and dividends should only be recognised when no significant uncertainty as to
measurabilityorcollectabilityexists.

Theserevenuesarerecognisedonthefollowingbases:
Interest:
On a time proportion basis taking into account the amount
outstandingandtherateapplicable.

Royalties:
on an accrual basis in accordance with the terms of the
relevantagreement

Dividendsfrom
whentheowner'srighttoreceivepaymentisestablished
Investmentsinshares:

36

Disclosure
14. In addition to the disclosures required by Accounting Standard 1 on 'Disclosure of
Accounting Policies' (AS 1), an enterprise should also disclose the circumstances in which
revenuerecognitionhasbeenpostponedpendingtheresolutionofsignificantuncertainties.

Appendix
Thisappendixisillustrativeonlyanddoesnotformpartoftheaccountingstandardsetforthin
thisStatement.
The purpose of the appendix is to illustrate the application of the Standard to a number of
commercialsituationsinanendeavortoassistinclarifyingapplicationoftheStandard.

3.Saleswherethepurchasermakesaseriesofinstallmentpaymentstothesellerandtheseller
deliversthegoodsonlywhenthefinalpaymentisreceived:
Revenuefromsuchsalesshouldnotberecognizeduntilgoodsaredelivered.
However, when experience indicates that most such sales have been consummated, revenue
mayberecognizedwhenasignificantdepositisreceived

IsAS9applicabletocasesofdevelopersandbuilders:
(Authorscomments:AS9isapplicabletothefollowingthree
thesaleofgoods
therenderingofservices,and
theusebyothersofenterpriseresourcesyieldinginterest,royaltiesanddividends.
Businessofdevelopers/buildersisneitherrenderingofservicenoruse byothersof
enterprise resources yielding interest, royalties and dividends. In Paragraph 9 of the
reply to query mentioned in this chapter the expert committee also admitted that
builders/developersbusinessisnotservice.Thereforetheonlythingleftissaleof
goods.Theexpertcommittee,whilegivingopinionthatAS9willbeapplicable,stated
thatbusinessofthetypementionedinthequeryissaleofgoods.
Letusnowseewhethersuchviewiscorrect.BoththewordsSaleandgoodsarenot
definedinIncometaxAct,1961butdefinedinSaleofGoodsAct,1930.S.4(3)ofSaleof
GoodsAct,1930provides,whereunderacontractofsalethepropertyinthegoodsis
transferredfromthesellertothebuyer,thecontractiscalledasale,butwherethe
transferofthepropertyinthegoodsistotakeplaceatafuturetimeorsubjecttosome
conditionthereaftertobefulfilled,thecontractiscalledanagreementtosell.
GoodsisdefinedinS.2(7)ofSaleofGoodsAct,1930aseverykindofmoveable
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
agreedtobeseveredbeforesaleorunderthecontractofsale.
InN.C.Budharajav.CIT(1993)204ITR412[Alsosee[2007]289ITR26(SC)S.A.
Builders Ltd. v. CIT (Appeals) and another] the Supreme Court held, It is equally
difficult to say that the process of constructing a dam is a process of manufacture or a
processofproduction.Itistruethatadamiscomposedofseveralarticles;itiscomposed
of stones, concrete, cement, steel and other manufactured articles like gates, sluices etc.
But to say that the end product, the dam, is an article is to be unfaithful to the normal
connotationoftheword.Adamisconstructed;itisnotmanufacturedorproduced.The
expressions "manufacture" and "produce" are normally associated with movables
articlesandgoods,bigandsmallbuttheyareneveremployedtodenotetheconstruction
activityofthenatureinvolvedintheconstructionofadamorforthatmatterabridge,a
roadorabuilding.Iftheconstructionofadam,abridgeorabuildingasawholedoesnot
amounttomanufactureorproductionofanarticle,itisdifficulttoseehowthelayingof
foundationorfoundationsforsuchdam,bridgeorbuildingcanbecharacterizedas
manufacturingorproductionofarticles.Therecannotbeanydoubtthatwhenthe

37

SupremeCourtheldthatconstructionactivityisnotproductionactivity,Expert
Advisory Committees above opinion is wrong. Moreover, if goods are the
products of manufacture or production and construction is not manufacture /
production, constructed units of a developer/ builder cannot be goods. If these are
notgoods,transactioninthesecannotbeguidedbyAS9.
Itisconsistentopinionoflawthatimmovablepropertyisnotgoods.Thatiswhyitis
not subjected to Central Excise duty and plain trading in immovable property is not
subjected to service tax or VAT. Consequently, there cannot be any sale of goods in
case of sale of immovable property. So AS 9 cannot be applicable in case of sale of
immovableproperty.
The expert committee has not discussed the features of this case and those of AS 9
which match with each other while commenting that AS 9 is applicable. But these
questionsremainunansweredifoneacceptstheopinion.
Further, the same AS 9 was there before revision of AS 7 also. If such businesses
attractAS9now,whydidtheynotattractearlier?
Atthispoint,aquestionmayariseastowhichAccountingStandardwillbeapplicable
inthecaseofanassesseewhoisnotinvolvedinanyconstructionandeitherjustbuys
and sells flats/ shops claiming it to be stockintrade (and not capital asset) or an
assesseewhobuysland,doessomeearthfillingandplottingandthensellsitinsmaller
plots with neither construction nor contract with anybody. Whether, AS 9 will be
applicableinthatcase?
Asdiscussedabove,saleofimmovablepropertycannotbetreatedassaleofgoodsand
ifitisnotsaleofgoodsAS9cannotbeappliedtorecognizerevenuefromit.Forthis
reasonevenintheabovetwosituationsAS9cannotbeapplicable.
From a study of AS 7 and 9 it seems that neither of these Accounting Standards
perfectlyfitsthebill
Butthatshouldnotandcannotbeareasonfornottaxingincomeoutofsuchbusinesses
to tax. As mentioned at the beginning of this chapter, citing the Supreme Court
judgment in the case of Tuticorin Alcali Chemicals (1997) 227 ITR 172 (SC) an
AssessingofficerassessingincomeunderIncometaxAct,1961,istotaxtheincomeas
per provisions of the Act and Accounting principles or standards are not good law.
Accountingpracticecannotoverridesection56oranyotherprovisionoftheAct.Aswas
pointedoutbyLordRussellinthecaseofB.S.C.FootwearLtd.[1970]77ITR857,860
(CA),theincometaxlawdoesnotmarchstepbystepinthefootprintsoftheaccountancy
profession[Also,KedarnathJuteMfg.Co.Ltd.v.CIT[1971]82ITR363(SC)].
Therefore,theAOhastofindoutwhethertheincomehasaccruedtoorbeenreceived
in a previous year by the assessee from such sale of immovable property and
accordingly taxitinthatyearasper S.5.Thatwillalwaysbetheforemostgoverning
provision.It cannot bedeniedthatifanincome hasfulfilledabovecriterionofS.5of
theAct,itwillhavetobetaxedevenifthereisnoaccountingstandardforit.
Next factor, as per S. 145, will be the mercantile or cash system of accountancy
regularly followed by assessee. As per cash system revenue will be recognized in the
yearitisreceived.Aspermercantilesystemrevenuewillberecognizedintheyearthe
amount accrued to him. So, if the AO finds that an amount from sale of immovable
propertybyanypersonincludingadeveloperfollowingmercantilesystemaccruedto
himinaparticularyear,itwillberecognizedinthatyearitselfalongwiththeexpenses.
Thesearetheprovisions oftheActandthesecannotbeignoredbysayingthatthereis
noAccountingStandardtorecognizesuchrevenue.
In fact, even ICAI also recognizes such dichotomy between accounting profit and
taxable profit as is evident from AS 22 (which is mandatory for Chartered
Accountants while preparing and auditing financial statements of all enterprises and
whichissimilartoInternationalAccountingStandard12):

38
Objectives
TheobjectiveofthisStatementistoprescribeaccountingtreatmentfortaxesonincome.Taxes
onincomeareoneofthesignificantitemsinthestatementofprofitandlossofanenterprise.
Inaccordancewiththematchingconcept,taxesonincomeareaccruedinthesameperiodas
therevenue andexpensestowhich theyrelate.Matchingofsuchtaxesagainstrevenuefora
periodposesspecialproblemsarisingfromthefactthatinanumberofcases,taxableincome
may be significantly different from the accounting income. This divergence between taxable
income and accounting income arises due to two main reasons. Firstly, there are differences
betweenitemsofrevenueandexpensesasappearinginthestatementofprofitandlossandthe
items which are considered as revenue, expenses or deductions for tax purposes. Secondly,
therearedifferencesbetweentheamountinrespectofaparticularitemofrevenueorexpense
as recognised in the statement of profit and loss and the corresponding amount which is
recognisedforthecomputationoftaxableincome.

Tosumup,ifagreementsshowingredientsofcontractforconstruction,%ofcompletion
methodofAS7isapplicable.Ifingredientsofcontractforconstructionarenotpresent,
AS7willnotbeapplicablebutAS9willalsonotbeapplicable.Insuchcase,likesale
purchase of ready flat or plot of land, there seems to be no prescribed Accounting
StandardnowduetoremovalofsomewordsfromoldAS7butstillitwillbetaxedatthe
time of accrual or receipt as per Section 5 of I. T. Act, 1961 because taxation does not
followAccountingStandardsorAccountingPrinciplesbutfirstfollowsthestatute.
Theconceptofshowingperiodicalreceiptsbydeveloper/buyerfrombuyersasadvance
is wholly inappropriate. Advance is an amount which is paid or received before
significanttransferofrisk&reward ofownershipofgoods,likepaymentofRs.1lakh
received before it became due for supply of some goods to be done after six months.
Unlikegoods,incaseofimmovablepropertyalegallyenforceableagreementisexecuted
through which significant (though not all) risks and rewards of ownership are
transferred which is tangible asset. And these amounts termed by developer as
advance very much became due, i.e., accrued to the developer as per the executed
agreement. Therefore there is fundamental and glaring difference between advance
and these payments. As these are received after becoming due, these are very much
taxableintheyearofaccrual.

Why AS 7 may actually be beneficial for developers, builders and construction

contractors:
In fact, it is felt that even from the viewpoint of developers, builders and construction
contractors,%ofcompletionmethodasperAS7maynotbeasdisadvantageousasitseems
tobeconsideredbythembecauseoffollowingfactors:
i. Thesocalledprojectcompletionmethodissimplynonexistent
ii. IftheyfollowAS9assuggestedinthereplybyexecutivecouncilofICAItoaquery
andintheGuidanceNotebyICAI,thereistheriskthatentirerevenuementioned
in the agreement may be recognized as revenue in the very first year as
suggestedbyICAIitself
iii. Otherwisealso,AS9maynotalwaysmeanrecognitionofrevenueaftertransferof
constructed units; it is linked with transfer of significant risks and rewards
only
iv. And then, AS 9 may not be accepted by Assessing Officer for the reason that, as
statedabove,saleofimmovablepropertyisnotsaleofgoodstoqualifyforAS9
v. AS7hastheinbuiltmechanismtoallaytheirapprehensions
vi. AS7providesforspreadingofrevenueoverseveralyearsduringwhichconstruction
continues

39
vii. AS7doesnotevenmakeitcompulsorytorecognizerevenueonlywithintheyears
ofconstruction;itmaybepostponedintheyearsofconstructionandrecognized
laterasperParagraphs27,31,32,33,34,35and36
viii. In that sense, AS 7 is a product of not only very logical but also very liberal
philosophy. But it seems that the revised AS 7 has been a victim of some
misconceptionandmisplacedapprehension
ix. Under mercantile system normally only ascertained liabilities are allowed as
deductions and not liabilities which are just anticipated. But AS 7 allows even
that kind of deduction. This is held by ITAT, Mumbai Bench in Jacobs
engineeringCo.Pvt.Ltd.V.ACITBCAJAugust2009inITANo.335/Mum./2007
&336/Mum./2007
x. Form 1.4.2011 Indian Accounting Standards will be modified to converge with
InternationalFinancialReportingStandards(IFRS).Oneofthemainunderlying
assumptions of IFRS is accrual, i.e., transactions and other events are
considered when they occur, not when cash is received or paid and going
concern,i.e.,theconcernwillremaininexistenceinfuture.Asperbothofthese,
developers, builders and construction contractors can no longer decline to
recognizerevenuewhentheeventofaccrualofincomeishappeningintheform
ofprogressivelydeveloped/builtprojectwithrecurrentandperiodicreceiptof
revenue. It seems that in the IFRScompatible IAS situation, % of completion
method will be even more rigorously applicable in the cases of developers a,
builders and construction contractors. Therefore it may be in the interests of
them also to start following % of completion method in letter and spirit at the
earliest.
xi. Any possible confusion over availability of deduction u/s 80IB (10) for partially
completed projects is also now cleared by the CBDT in the form of Instruction
No.4dated30/6/2009.So,iftheyqualifyforit,developersandbuilderswillnot
haveanytaxburdeneveniftheyfollow%ofcompletionmethod.

40

TheGuidanceNote

TheGuidanceNoteissuedbyICAIreferredtoinChapter2isasbelow.Thisisverytopical
becauseofdevelopers,builders,accountantsandpractitionersclaimapplicabilityofAS9on
thebasisofthisGuidanceNote.Thecriticalpointsareunderlined.Simultaneouslyaregiven
criticalreviewoftheauthoronthisinitalics:

GuidanceNoteonRecognitionofRevenuebyRealEstateDevelopersPage17641767
ofTheCharteredAccountant,June,2006

The following is the text of the Guidance Note on Recognition of Revenue by Real Estate
Developers,issuedbytheCounciloftheInstituteofCharteredAccountantsofIndia.

INTRODUCTION
1.Thetermrealestatereferstolandaswellasbuilding.ThisGuidanceNoterecommends
principles for recognition of revenue arising from real estate sales by the enterprises
engaged in such activities (commonly referred to as real estate developers, builders or
propertydevelopers).

APPLICATION OF REVENUE RECOGNITION PRINCIPLES PRESCRIBED IN AS 9 TO REAL

ESTATESALES
(Authors comments: Even the Guidance Note says that it is applicable only for real estate
sellerswhoareactuallycalledrealestatedealers.Suchdealersjustbuyandsellrealestate
propertyandarenotinvolvedindevelopmentorconstructionpart.Incaseofdevelopers,main
activityisdevelopmentincludingconstruction.Asmentionedinearlierchapteralso,S.4(3)of
Sale of Goods Act, 1930 defines, where under a contract of sale the property in the goods is
transferredfromthesellertothebuyer,thecontractiscalledasale,butwherethetransferof
the property in the goods is to take place at a future time or subject to some condition
thereafter to be fulfilled, the contract is called an agreement to sell. Sale here is essentially
linkedtodevelopment/construction.Thecontractintheagreementwithbuyerisnotmerely
for sale but primarily for construction and all payments are linked to the progress of
constructiononly).

2. For recognition of revenue in case of real estate sales, it is necessary that all the
conditions specified in Paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue
Recognition,asreproducedbelow,aresatisfied:
(Authorscomments:ThismeansthatunlessALLconditionsofParagraphs 10& 11of AS9
arenotfulfilled,AS9willnotbeapplicableevenasperICAI)
10. Revenue from sales or service transactions should be recognized when the
requirementsastoperformancesetoutinparagraphs11and12aresatisfied,providedthat
atthetimeofperformanceitisnotunreasonabletoexpectultimatecollection.Ifatthetime
ofraisingofanyclaimitisunreasonabletoexpectultimatecollection,revenuerecognition
shouldbepostponed.
11. In a transaction involving the sale of goods, performance should be regarded as being
achievedwhenthefollowingconditionshavebeenfulfilled:

41
(i)thesellerofgoodshastransferredtothebuyerthepropertyinthegoodsforapriceorall
significantrisksandrewardsofownershiphavebeentransferredtothebuyerandtheseller
retains no effective control of the goods transferred to a degree usually associated with
ownership;and
(ii)nosignificantuncertaintyexistsregardingtheamountoftheconsiderationthatwillbe
derivedfromthesaleofthegoods.
(Authors comments: Below follows the interpretation of ICAI about abovementioned
Paragraph11ofAS9)

3.Therealestatesalestakeplaceinavarietyofwaysandmaybesubjecttodifferentterms
andconditionsasspecifiedintheagreementforsale.Accordingly,thepointoftimeatwhich
allsignificantrisksandrewardsofownershipcanbeconsideredastransferred,isrequired
to be determined on the basis of the terms and conditions of the agreement for sale.
(Authorscomments:Thismeansthatthepoint,atwhichrevenuewillberecognizedmaybe
varied,willnotbefixedasdoneinmanycasesontransferoftheflatandwillessentiallybe
determinedwiththehelpoftheagreement).Incaseofrealestatesales,theevents,suchas,
transferoflegaltitletothebuyerorgivingpossessionofrealestatetothebuyerunderan
agreement for sale, usually, provide an evidence to the effect that all significant risks and
rewards of ownership have been transferred to the buyer (Authors comments: It means
thatrecognitionofrevenueaftertransferoflegaltitleorgivingpossessionismerelyoneofthe
manypossibilitiesitisnottheonlyonebutmanyassessees/practitionersfeelthatasperAS
9thisistheonlytimewhenrevenuecanberecognized).

Itmay,however,benotedthatincaseofrealestatesales,thesellerusuallyentersintoan
agreementforsalewiththebuyeratinitialstagesofconstruction.Thisagreementforsaleis
also considered to have the effect of transferring all significant risks and rewards of
ownership to the buyer (Authors comments: This is very important. This means that even
according to ICAI, even as per AS 9 whole revenue involved in a sale of flat etc can be
recognized in P & L A/c in the very year in which agreement was executed. This is in sharp
contrasttowhatassessees/practitionersdo,i.e.,showingsalerevenueonlyintheyearflatis
transferred or handed over possession) provided the agreement is legally enforceable
(Authors comments: The agreement is definitely a legally enforceable document made in
stamppaperasperrequirementsofIndianContractact,1872)andsubjecttothesatisfaction
of all the following conditions which signify transferring of significant risks and rewards
eventhoughthelegaltitleisnottransferredorthepossessionoftherealestateisnotgiven
tothebuyer:
(a)Thesignificantrisksrelatedtotherealestatehavebeentransferredtothebuyer;incase
ofrealestatesales,priceriskisgenerallyconsideredtobeoneofthemostsignificantrisks
(Authorscomments:Itiscommonknowledgethatifabuyerhasexecutedagreementwitha
developertopayRs.2200/persquarefootoftheconstructedunitandlatertheratefallsor
increases in the market, he has to pay @ Rs. 2200/ which was agreed upon by him and the
developer.Inthisway,risk(incaseofslump)aswellasreward(incaseofrise)istransferred
tothebuyerandthusthefirstconditionisfulfilled).

(b) The buyer has a legal right to sell or transfer his interest in the property, without any
condition or subject to only such conditions which do not materially affect his right to
benefitsintheproperty
(Authors comments: Yes, a buyer can transfer his right to buy the property to his chosen
person of course subject to payment of certain fees which may be called nomination fees /
assignment fees/ transfer fees etc and he or his legal heirs are not required to wait till
completionoftheprojectorlegaltransferoftheflatetcfortransferofhisinterestinit.Thus
thesecondconditionisalsofulfilled).

42
4.Oncethesellerhastransferredallthesignificantrisksandrewardsofownershiptothe
buyerandotherconditionsforrecognitionofrevenuespecifiedinparagraphs10and11of
AS 9 are satisfied, any further acts on the real estate performed by the seller are, in
substance,performedonbehalfofthebuyerinthemannersimilartoacontractor
(Authorscomments:becauseherealsoworkisdoneaspercertaintermsandconditions.It
seems strange that ICAI felt these jobs attract AS 7 because these are as per legally
enforceable terms and conditions while the construction of the flat etc not attracting AS 7
thoughthatwasalsoaspercertainlegallyenforceabletermsandconditions).
Accordingly,incasethesellerisobligedtoperformanysubstantialactsafterthetransferof
all significant risks and rewards of ownership, revenue is recognized by applying the
percentageofcompletionmethodinthemannerexplainedinAS7,Constructioncontracts
(Authors comments: Very important to decide admissibility of deduction u/s 80IB (10) on
profit out of these works which may be attributable to a housing project but derived not
exactlyfrom itandonlyfromsomeextendedpart oftheworkofconstructionofthehousing
projectasapproved).

5.Paragraph9.2ofAS9providesasfollows:
9.2Wheretheabilitytoassesstheultimatecollectionwithreasonablecertaintyislacking
atthetimeofraisinganyclaim,e.g.,forescalationofprice,exportincentives,interestetc.,
revenuerecognitionispostponedtotheextentofuncertaintyinvolved.Insuchcases,itmay
be appropriate to recognize revenue only when it is reasonably certain that the ultimate
collectionwillbemade.Wherethereisnouncertaintyastoultimatecollection,revenueis
recognized at the time of sale or rendering of service even though payments are made by
installments.
Accordingly,incaseitisunreasonabletoexpectultimatecollection,therevenuerecognition
ispostponedtotheextentofuncertaintyinvolved.

RECOMMENDATIONS
6. Revenue in case of real estate sales should be recognized when all the following
conditionsaresatisfied:
(i)Thesellerhastransferredtothebuyerallsignificantrisksandrewardsofownershipand
thesellerretainsnoeffectivecontroloftherealestatetoadegreeusuallyassociatedwith
ownership;
(ii)Nosignificantuncertaintyexistsregardingtheamountoftheconsiderationthatwillbe
derivedfromtherealestatesales,and
(Authors comments: Significant uncertainty does not exist, because the transaction takes
placeunderalegallyenforceablecontractdocumentwithconsequencesfastenedtofailureor
breachofcontractonthepartofthebuyer);
(iii)Itisnotunreasonabletoexpectultimatecollection
(Authorscomments:InParagraph10ofthisGuidanceNoteICAIitselfhasstatedthatincase
ofrealestatesales,sincenormallytheamountofconsiderationisspecifiedintheagreement,
nosignificantuncertaintyexistsregardingtheamountoftheconsiderationthatwillbederived
fromthesales.Thereforethisconditionisalsofulfilled).

7. The determination of point of time when all significant risks and rewards of ownership
aretransferreddependsonthefactsandcircumstancesofeachcaseconsideringtheterms
andconditionsthatallsignificantrisksandrewardsofownershiphavebeentransferredto
thebuyer.Itmay,however,benotedthatincaseofrealestatesales,thesellerusuallyenters
intoan agreementforsalewiththebuyeratinitialstagesof construction.Thisagreement
forsaleisalsoconsideredtohavetheeffectoftransferringallsignificantrisksandrewards
ofownershiptothebuyerprovidedtheagreementislegallyenforceableandsubjecttothe
satisfactionofallthefollowingconditionswhichsignifytransferringofsignificantrisksand
rewardseventhoughthelegaltitleisnottransferredorthepossessionoftherealestateis
notgiventothebuyer:

43
(a)Thesignificantrisksrelatedtotherealestatehavebeentransferredtothebuyer;incase
ofrealestatesales,priceriskisgenerallyconsideredtobeoneofthemostsignificantrisks.
(b) The buyer has a legal right to sell or transfer his interest in the property, without any
condition or subject to only such conditions which do not materially affect his right to
benefitsintheproperty.
(Commentsalreadygivenabove)

8. When the seller has transferred to the buyer all significant risks and rewards of
ownership,itwouldbeappropriatetorecognizerevenueatthatstagesubjecttofulfillment
of other conditions specified in paragraph 6 above, provided the seller has no further
substantial acts to complete under the contract. However, in case the seller is obliged to
perform any substantial acts after the transfer of all significant risks and rewards of
ownership,revenueshouldberecognizedonproportionatebasisastheactsareperformed,
i.e., by applying the percentage of completion method in the manner explained in
Accounting Standard (AS) 7, Construction Contracts. An example is a building or other
facility on which construction has not been completed though all significant risks and
rewardsofownershiphavebeentransferredpursuanttothefulfillmentofconditionsstated
inparagraph7above.(Authorscomments:Thisisthecleareststatementwhichmeansthat
if risks and rewards as illustrated above are transferred at the time of agreement but
construction is not completed which is the case with almost all developers projects
proportionate revenue denoted by the asset constructed up to that date is to be recognized
even as per AS 9 and the remaining revenue to be recognized as per AS 7). Another
example is of a land which is yet to be developed though the seller has transferred all
significantrisksandrewardsofownershipofthelandtothebuyerthroughanagreement
for sale as per paragraph 7 above (Authors comments: Important for developers doing
businessofsaleofplots.Revenuecanberecognizedevenbeforelegaltransfer).

9.Whetherthesellerretainsnoeffectivecontrol oftherealestatetransferredtoadegree
usuallyassociatedwithownershipalsodependsonthefactsandcircumstancesofeachcase
consideringthetermsandconditionsoftheagreement.Thenatureandextentofcontinuing
involvement of the seller should be assessed to determine whether the seller retains
effective control. In some cases, real estate may be sold with a degree of continuing
involvementbythesellersuchthattherisksandrewardsofownershiparenottransferred.
Examples are sale and repurchase agreements which include put and call options, and
agreementswherebythesellerguaranteesoccupancyofthepropertyforaspecifiedperiod.

10.Incaseofrealestatesales,sincenormallytheamountofconsiderationisspecifiedinthe
agreement,nosignificantuncertaintyexistsregardingtheamountoftheconsiderationthat
willbederivedfromthesales.(Authorscomments:Veryimportantstatement.Asdiscussed
insubsequentchapters,manydevelopersaredeferringrecognitionofrevenueonthepleathat
significant uncertainty exists about sales but as per this statement of ICAI, such practice is
wrong)

11. For determining whether it is not unreasonable to expect ultimate collection, a seller
should consider the evidence of the buyers commitment to make the complete payment.
Wheretheabilitytoassesstheultimatecollectionwithreasonablecertaintyislackingatthe
time all significant risks and rewards of ownership are transferred to the buyer, revenue
recognition is postponed to the extent of uncertainty involved. For example, when the
aggregate of the payments received, including the buyers initial down payment, or
continuingpaymentsbythebuyer,provideinsufficientevidenceofthebuyerscommitment
tomakethecompletepayment,revenueisrecognizedonlytotheextentofrealizationofthe
considerationprovidedotherconditionsforrecognitionofrevenuearesatisfied.
(Authorscomments:Theabovecriticalcommentsshowthat:

44
i.

Even as per AS 9 not always revenue arising from sale of a flat/ other constructed
property is liable to be recognized for determining profit after handing over of
possessionortransferoflegaltitleasisdonebymanyassessees/practitioners
ii. Even as per AS 9 the entire revenue to arise from sale of a flat/ other constructed
propertymaybeliabletoberecognizedfordeterminingprofitintheveryyearin
which merely the agreement is executed if certain conditions are fulfilled (as
discussedabove)butinrealitynodeveloper/builderisdoingthis
iii. As explained above, all three conditions mentioned in Paragraph 3 and 6 above are
fulfilled in the case of most developers/ builders and so, if they claim to be
followingAS9,entiresalerevenueshouldberecognizedintheveryyearinwhich
agreementisexecuted.
iv. Andfinally,whileassessees/auditorsarenotfollowingAS7sayingthattheyarenot
Contractors,theyarenotfollowingAS9toocorrectly. Inreality,whattheyare
doingseemstobenotsupportedbyanycomprehensibleaccountingpolicy.
12. An enterprise should disclose the accounting policy regarding recognition of revenue
arising from the real estate sales, including the timing of transfer of significant risks and
rewardsofrealestatewhichisthesubjectmatterofsale.
(Authors comments: We all know that in most of the cases the assessees/ auditors are not
doingthisandthus,atleastincaseofauditorsitisviolationoftheirparentbodysdirectives.
At the same time it may be appreciated that if such disclosures are made, it would be very
advantageousfortheAOsindischarginghisdutyofproperassessment.

TheauthorityandstatusofsuchGuidanceNote(source:www.icai.org)
ANNOUNCEMENTS OF THE COUNCIL REGARDING STATUS OF VARIOUS DOCUMENTS
ISSUEDBYTHEINSTITUTEOFCHARTEREDACCOUNTANTSOFINDIA
ClarificationregardingAuthorityAttachedtoDocumentsIssuedbytheInstitute
1. The Institute has, from time to time, issued Guidance Notes and Statements on a
numberofmatters.WiththeformationoftheAccountingStandardsBoardandtheAuditing
Practices Committee, Accounting Standards and Statements on Standard Auditing
Practicesarealsobeingissued.
2. Members have sought guidance regarding the level of authority attached to the various
documentsissuedbytheInstituteandthedegreeofcompliancerequiredinrespectthereof.
Thisnoteisbeingissuedtoprovidethisguidance.GuidanceNotesareprimarilydesigned
to provide guidance to members on matters which may arise in the course of their
professionalworkandonwhichtheymaydesireassistanceinresolvingissueswhichmay
posedifficulty.GuidanceNotesarerecommendatoryinnature.Amembershouldordinarily
followrecommendationsinaguidancenoterelatingtoanauditingmatterexceptwherehe
issatisfiedthatinthecircumstancesofthecase,itmaynotbenecessarytodoso.Similarly,
while discharging his attest function, a member should examine whether the
recommendationsinaguidancenoterelatingtoanaccountingmatterhavebeenfollowedor
not. If the same have not been followed, the member should consider whether keeping in
viewthecircumstancesofthecase,adisclosureinhisreportisnecessary.
Authorscomments:ItisclearfromtheabovethatsuchGuidanceNotesarenotbindingeven
onthemembersofICAI,i.e.,theCharteredAccountants.Thereforethesecannotbebindingon
others, more so on quasijudicial authorities like Assessing Officers. On the other hand, while
this is the status and authority of the Guidance Note issued by ICAI, the reply to the query
mentionedinChapter3ofthisbookistheopiniononlyoftheExpertAdvisoryCommitteeand
not of the Council of the Institute. Therefore the status and authority of such reply is lesser
evenonthemembersofICAI.Forthesereasons,AssessingOfficersofIncometaxdepartment
neednotbemuchconcernedabouttheabovereplyorGuidanceNote.Whilestudyofsuchreply
orGuidanceNoteisrelevanttoacquirecomprehensiveideaabouttheissue,theyhavetostrive
totakethemostjudiciousdecisionintheirassessmentworkbytakingallrelevantpointsinto
considerationandnotsimplytakesuchcommunicationsfinalorbindingorsacrosanct.

45

TextofAS7

AccountingStandard(AS)7(revised2002)(OriginallyissuedinDecember1983andtitled
asAccountingforConstructionContracts)

ConstructionContracts
(This Accounting Standard includes paragraphs set in bold italic type and plain type, which
have equal authority. Paragraphs in bold italic type indicate the main principles. This
Accounting Standard should be read in the context of its objective and the Preface to the
StatementsofAccountingStandards1.)
Accounting Standard (AS) 7, Construction Contracts (revised 2002), issued by the Council of
the Institute of Chartered Accountants of India, comes into effect in respect of all contracts
enteredintoduringaccountingperiodscommencingonorafter142003andismandatoryin
naturefromthatdate.Accordingly,AccountingStandard(AS)7,AccountingforConstruction
Contracts, issued by the Institute in December 1983, is not applicable in respect of such
contracts.EarlyapplicationofthisStandardis,however,encouraged.

ThefollowingisthetextoftherevisedAccountingStandard.
Objective
TheobjectiveofthisStatementistoprescribetheaccountingtreatmentofrevenueandcosts
associated with construction contracts. Because of the nature of the activity undertaken in
construction contracts, the date at which the contract activity is entered into and the date
when the activity is completed usually fall into different accounting periods. Therefore, the
primary issue in accounting for construction contracts is the allocation of contract revenue
and contract costs to the accounting periods in which construction work is performed. This
StatementusestherecognitioncriteriaestablishedintheFrameworkforthePreparationand
PresentationofFinancialStatementstodeterminewhencontractrevenueandcontractcosts
should be recognized as revenue and expenses in the statement of profit and loss. It also
providespracticalguidanceontheapplicationofthesecriteria.

Scope
This statement should be applied in accounting for construction contracts in the financial
statementsofcontractors

3.Definitions:
Thefollowingtermsareusedinthisstatementwiththemeaningsspecified:

Aconstructioncontractisacontractspecificallynegotiatedfortheconstructionofanasset
or a combination of assets that are closely interrelated or interdependent in terms of their
design,technologyandfunctionortheirultimatepurposeoruse.

A Fixed price contract is a construction contract in which the contractor agrees to a fixed
contract price, or a fixed rate per unit of output, which in some cases is subject to cost
escalationclauses.

A Cost plus contract is a construction contract in which the contractor is reimbursed for
allowableorotherwisedefinedcosts,pluspercentageofthesecostsorafixedfee.

46

3.Aconstructioncontractmaybenegotiatedfortheconstructionofasingleassetsuchasa
bridge,building,dam,pipeline,road,shiportunnel.Aconstructioncontractmayalsodealwith
the construction of a number of assets which are closely interrelated or interdependent in
terms of their design, technology and function or their ultimate purpose or use: Examples of
suchcontractsincludethosefortheconstructionofrefineriesandothercomplexpiecesofland
orequipment.

4.Forthepurposesofthestatement,constructioncontractsinclude:
a)Contractsfortherenderingofservicewhicharedirectlyrelatedtotheconstructionofthe
asset,forexample,thosefortheservicesofprojectmanagersandarchitects;and
b) Contracts for destruction or restoration of assets, and the restoration of the environment
followingthedemolitionofassets.

5.Constructioncontractsareformulatedinanumberofwayswhich,forthepurposesofthe
statement, are classified as fixed price contracts and costs plus contracts. Some construction
contracts may contain characteristics of a fixed price contract and a cost plus contract, for
example, in the case of a cost plus contract with an agreed maximum price. In such
circumstances,acontractorneedstoconsideralltheconditionsinparagraph22and23in
ordertodeterminewhentorecognizecontractrevenueandexpenses.

Combiningandsegmentingconstructioncontracts
6. The requirements of the statement are usually applied separately to each construction
contract. However, in certain circumstances, it is necessary to apply the statement to the
separatelyidentifiablecomponentsofasinglecontractortoagroupofcontractstogetherin
ordertoreflectthesubstanceofacontractoragroupofcontract.

7. When a contract covers a number of assets, the construction of each assets should be
treatedasaseparateconst.ructioncontractwhen
a)separateproposalhasbeensubmittedforeachasset
b)eachassethasbeensubjecttoseparatenegotiationandthecontractorandcustomerhave
beenabletoacceptorrejectthatpartofthecontractrelatingtoeachasset;and
c)theconstandrevenuesofeachassetcanbeidentified.

8.Agroupofcontracts,whetherwithasinglecustomerorwithseveralcustomers,shouldbe
treatedasasingleconstructioncontractwhen:
(a)
Thegroupofcontractsisnegotiatedasasinglepackage;
(b)
thecontractsaresocloselyinterrelatedthattheyare,ineffect,partofasingleproject
withanoverallprofitmargin;and
(c) Thecontractsareperformedconcurrentlyorinacontinuoussequence.

9.A contract may provide for the construction of an additional asset at option of the
customer or may be amended to include the construction of an additional asset. The
construction of the additional asset should be treated as a separate construction contract
when:
(a)
Theassetdifferssignificantlyindesign,technologyorfunctionfromtheassetorassets
coveredbytheoriginalcontract;or
(b) Thepriceoftheassetisnegotiatedwithoutregardtotheoriginalcontractprice.

ContractRevenue
10.Contractrevenueshouldcomprise:
(a)theinitialamountofrevenueagreedinthecontract;and
(b) variationsincontractwork,claimsandincentivepayments:
(c)totheextentthatitisprobablethattheywillresultinrevenue;and

47
(d) theyarecapableofbeingreliablymeasured.

11.Contract revenue is measured at the consideration received or receivable. The

measurementofcontractrevenueisaffectedbyavarietyofuncertaintiesthatdependonthe
outcome of future events. The estimates often need to be revised as events occur and
uncertainties are resolved. Therefore, the amount of contract revenue may increase or
decreasefromoneperiodtothenext.Forexample:
(a)
a contractor and a customer may agree to variations or claims that increase or
decrease contract revenue in a period subsequent to that in which the contract was initially
agreed;
(b)the amount of revenue agreed in a fixed price contract may increase as a result of cost
escalationclauses;
(c)the amount of contract revenue may decrease as a result of penalties arising from delays
causedbythecontractorinthecompletionofthecontract;or
(d)when a fixed price contract involves a fixed price per unit of output, contract revenue
increasesasthenumberofunitsisincreased.

12.Avariationisaninstructionbythecustomerforachangeinthescopeoftheworktobe
performedunderthecontract.Avariationmayleadtoanincreaseoradecreaseincontract
revenue. Examples of variations are changes in the specifications or design of the asset and
changesinthedurationofthecontract.Avariationisincludedincontractrevenuewhen:
(a)
itisprobablethatthecustomerwillapprovethevariationandtheamountofrevenue
arisingfromthevariation;and
(b)
theamountofrevenuecanbereliablymeasured.

13.Aclaimisanamountthatthecontractorseekstocollectfromthecustomeroranother
partyasreimbursementforcostsnotincludedinthecontractprice.Aclaimmayarisefrom,for
example,customercauseddelays,errorsinspecificationsordesign,anddisputedvariationsin
contractwork.Themeasurementoftheamountsofrevenuearisingfromclaimsissubjecttoa
highlevelofuncertaintyandoftendependsontheoutcomeofnegotiations.Therefore,claims
areonlyincludedincontractrevenuewhen:
(a)
negotiations have reached an advanced stage such that it is probable that the
customerwillaccepttheclaim;and
(b)theamountthatitisprobablewillbeacceptedbythecustomercanbemeasuredreliably.

14.Incentive payments are additional amounts payable to the contractor if specified

performance standards are met or exceeded. For example, a contract may allow for an
incentivepaymenttothecontractorforearlycompletionofthecontract.Incentivepayments
areincludedincontractrevenuewhen:
(a)
thecontractissufficientlyadvancedthatitisprobablethatthespecifiedperformance
standardswillbemetorexceeded;and
(b)theamountoftheincentivepaymentcanbemeasuredreliably.

Constructioncosts:
15.Contractcostsshouldcomprise:
a)Coststhatrelatedirectlytoaspecificcontract;
b)Coststhataredirectlyattributable tocontractactivityingeneralandcanbeallocatedto
thecontract;and
c) such other costs as are specifically chargeable to the customer under the terms of the
contract

16.Coststhatrelatedirectlytoaspecificcontractinclude:
(a)sitelabourcosts,includingsitesupervision;
(b)costofmaterialsusedinconstruction;

48
(c)depreciationofplantandequipmentusedonthecontract;
(d)costsofmovingplant,equipmentandmaterialstoandfromthecontractsite.
e)Costsofhiringplant&equipment;
f)costofdesign&technicalassistancethatisdirectlyrelatedtothecontract;
g)theestimatedcostsofrectificationandguaranteeworks,includingexpectedwarrantycosts;
and
h)claimsfromthirdparties
Thesecostsmaybereducedbyanyincidentalincomethatisnotincludedincontractrevenue,
forexample,incomefromthesaleofsurplusmaterialsandthedisposalofplantandequipment
attheendofthecontract.

17.Costsmaybeattributabletocontractactivityingeneralandcanbeallocatedtospecific
contractinclude:
(a)insurance;
(b)designandtechnicalassistancethatisnotdirectlyrelatedtoaspecificcontract;and;
(c)constructionoverheads.
Such costs are allocated using methods that are systematic and rational and are applied
consistently to all costs having similar characteristics. The allocation is based on the normal
level of construction activity. Construction overheads include bcosts such as the preparation
and processing of construction personnel pay roll. Costs may be attributable to contract
activity in general and can be allocated to specific contracts also include borrowing costs as
peraccountingstandard(AS)16,borrowingcosts

18. Costs that are specifically chargeable to the customer under the terms of the contract
may include some general administration costs and development costs for which
reimbursementisspecifiedinthetermsofthecontract

19.Coststhatcannotbeattributedtocontractactivityorcannotbeallocatedtoacontract
areexcludedfromthecostsofaconstructioncontract.Suchcostsinclude:
a) generaladministrationcostsforwhichreimbursementisnotspecifiedinthecontract
b) sellingcosts;
c) research and development costs for which reimbursement is not specified in the
contract;and
d) depreciationofplantandequipmentthatcannotbeallocatedtoaparticularcontract.

20.Contractcostsincludethecostsattributabletoacontractfortheperiodfromthedateof
securingthecontracttothefinalcompletionofthecontract.However,coststhatrelatedirectly
toacontractandwhichareincurredinsecuringthecontractarealsoincludedaspartofthe
contractcostsiftheycanbeseparatelyidentifiedandmeasuredreliablyanditisprobablethat
thecontractwillbeobtained.Whencostsincurredinsecuringacontractarerecognizedasan
expenseintheperiodinwhichtheyareincurred,theyarenotincludedincontractcostswhen
thecontractisobtainedinasubsequentperiod.

RecognitionofContractRevenueandExpenses:
21. When the outcome of a construction contract can be estimated reliably, contract
revenue and contract costs associated with the construction contract should be
recognizedasrevenueandexpensesrespectivelybyreferencetothestageofcompletion
ofthecontractactivityatthereportingdate.Anexpectedlossontheconstructioncontract
shouldberecognizedasanexpenseimmediatelyinaccordancewithparagraph35.

22. In the case of fixed price contracts, the outcome of a construction contract can be
estimatedreliablywhenallthefollowingconditionsaresatisfied:
a) totalcontractrevenuestobereceivedcanbemeasuredreliably

49
b) Itisprobablethattheeconomicbenefitsassociatedwiththecontractwillflowtothe
enterprise
c) boththecontractcoststocompletethecontractandthestageofcontractcompletion
atthereportingdatecanbemeasuredreliably;and
d) thecontractcostsattributabletothecontractcanbeclearlyidentifiedandmeasured
reliablysothatactualcontractcostsincurredcanbecomparedwithpriorestimates.

23. In the case of cost plus contracts, the outcome of a construction contract can be
estimatedreliablywhenallthefollowingconditionsaresatisfied:
a) Itisprobablethattheeconomicbenefitsassociatedwiththecontractwillflowtothe
enterpriseand
b) The contract costs attributable to the contract, whether or not specifically
reimbursable,canbeclearlyidentifiedandmeasuredreliably

24.The recognition of revenue and expenses by reference to the stage of completion of a

contract is often referred to as the percentage of completion method. Under this method,
contract revenue is matched with the contract costs incurred in reaching the stage of
completion,resultinginthereportingofrevenue,expensesandprofitwhichcanbeattributed
totheproportionofworkcompleted.Thismethodprovidesusefulinformationontheextentof
contract activity and performance during a period.http://www.eircindia.org/as7Rev.htm UP#UP

25.Underthepercentageofcompletionmethod,contractrevenueisrecognizedasrevenuein
the statement of profit and loss in the accounting periods in which the work is performed.
Contractcostsareusuallyrecognizedasanexpenseinthestatementofprofitandlossinthe
accounting periods in which the work to which they relate is performed. However, any
expected excess of total contract costs over total contract revenue for the contract is
recognizedasanexpenseimmediatelyinaccordancewithparagraph35.

26.A contractor may have incurred contract costs that relate to future activity on the
contract.Suchcontractcostsarerecognizedasanassetprovideditisprobablethattheywill
berecovered.Suchcostsrepresentanamountduefromthecustomerandareoftenclassified
ascontractworkinprogress.

27.When an uncertainty arises about the collectability of an amount already included in

contractrevenue,andalreadyrecognizedinthestatementofprofitandloss,theuncollectable
amountortheamountinrespectofwhichrecoveryhasceasedtobeprobableisrecognizedas
anexpenseratherthanasanadjustmentoftheamountofcontractrevenue.

28.An enterprise is generally able to make reliable estimates after it has agreed to a
contractwhichestablishes:
(a)
eachpartysenforceablerightsregardingtheassettobeconstructed;
(b) theconsiderationtobeexchanged;and
(c) themannerandtermsofsettlement.

Itisalsousuallynecessaryfortheenterprisetohaveaneffectiveinternalfinancialbudgeting
and reporting system. The enterprise reviews and, when necessary, revises the estimates of
contract revenue and contract costs as the contract progresses. The need for such revisions
doesnotnecessarilyindicatethattheoutcomeofthecontractcannotbeestimatedreliably

29. The stage of completion of a contract may be determined in a variety of ways. The
enterprise uses the method that measures reliably the work performed. Depending on the
natureofthecontract,themethodsmayinclude:

50
a)

the proportion that contract costs incurred for work performed up to the reporting
datebeartotheestimatedtotalcontractcosts;or
b) surveysofworkperformed;or
c) completionofaphysicalproportionofthecontractwork
Progresspaymentsandadvancesreceivedfromcustomersmaynotnecessarilyreflectthework
performed.

30.Whenthestageofcompletionisdeterminedbyreferencetothecontractcostsincurred
uptothereportingdate,onlythosecontractcoststhatreflectworkperformedareincludedin
costsincurreduptothereportingdate.Examplesofcontractcostswhichareexcludedare:
(a)
contractcoststhatrelatetofutureactivityonthecontract,suchascostsofmaterials
that have been delivered to a contract site or set aside for use in a contract but not yet
installed,usedorappliedduringcontractperformance,unlessthematerialshavebeenmade
speciallyforthecontract;and
(b)
payments made to subcontractors in advance of work performed under the
subcontract.

31.Whentheoutcomeofaconstructioncontractcannotbeestimatedreliably:
(a)
revenue should be recognized only to the extent of contract costs incurred of which
recoveryisprobable;and
(b)contractcostsshouldberecognizedasanexpenseintheperiodinwhichtheyareincurred.
An expected loss on the construction contract should be recognized as an expense
immediatelyinaccordancewithparagraph35.

32.Duringtheearlystagesofacontractitisoftenthecasethattheoutcomeofthecontract
cannotbeestimatedreliably.Nevertheless,itmaybeprobablethattheenterprisewillrecover
the contract costs incurred. Therefore, contract revenue is recognized only to the extent of
costs incurred that are expected to be recovered. As the outcome of the contract cannot be
estimatedreliably,noprofitisrecognized.However,eventhoughtheoutcomeofthecontract
cannot be estimated reliably, it may be probable that total contract costs will exceed total
contractrevenue.Insuchcases,anyexpectedexcessoftotalcontractcostsovertotalcontract
revenue for the contract is recognized as an expense immediately in accordance with
paragraph35.http://www.eircindia.org/as7Rev.htm - UP#UP

33.Contract costs recovery of which is not probable are recognized as an expense

immediately.Examplesofcircumstancesinwhichtherecoverabilityofcontractcostsincurred
maynotbeprobableandinwhichcontractcostsmay,therefore,needtoberecognizedasan
expenseimmediatelyincludecontracts:
(a)
whicharenotfullyenforceable,thatis,theirvalidityisseriouslyinquestion;
(b)thecompletionofwhichissubjecttotheoutcomeofpendinglitigationorlegislation;
(c)
relatingtopropertiesthatarelikelytobecondemnedorexpropriated;
(d)wherethecustomerisunabletomeetitsobligations;or
(e)wherethecontractorisunabletocompletethecontractorotherwisemeetitsobligations
underthecontract.

34. When the uncertainties that prevented the outcome of the contract being estimated
reliablynolongerexist,revenueandexpensesassociatedwiththeconstructioncontractshould
berecognisedinaccordancewithparagraph21ratherthaninaccordancewithparagraph31.

RecognitionofExpectedLosses
35.When it is probable that total contract costs will exceed total contract revenue, the
expectedlossshouldberecognizedasanexpenseimmediately.

51
36.Theamountofsuchalossisdeterminedirrespectiveof:
(a)
whetherornotworkhascommencedonthecontract;
(b)
thestageofcompletionofcontractactivity;or
(c)
theamountofprofitsexpectedtoariseonothercontractswhicharenottreatedasa
singleconstructioncontractinaccordancewithparagraph8.

ChangesinEstimates

37.The percentage of completion method is applied on a cumulative basis in each

accountingperiodtothecurrentestimatesofcontractrevenueandcontractcosts.Therefore,
theeffectofachangeintheestimateofcontractrevenueorcontractcosts,ortheeffectofa
changeintheestimateoftheoutcomeofacontract,isaccountedforasachangeinaccounting
estimate(seeAccountingStandard(AS)5,NetProfitorLossforthePeriod,PriorPeriodItems
andChangesinAccountingPolicies).Thechangedestimatesareusedindeterminationofthe
amountofrevenueandexpensesrecognizedinthestatementofprofitandlossintheperiodin
whichthechangeismadeandinsubsequentperiods.http://www.eircindia.org/as7Rev.htm UP#UP

Disclosure

38.Anenterpriseshoulddisclose:
(a)
theamountofcontractrevenuerecognizedasrevenueintheperiod;
(b) themethodsusedtodeterminethecontractrevenuerecognizedintheperiod;and
(c) themethodsusedtodeterminethestageofcompletionofcontractsinprogress.

39.An enterprise should disclose the following for contracts in progress at the reporting
date:
(a)
theaggregateamountofcostsincurredandrecognizedprofits(lessrecognizedlosses)
uptothereportingdate;
(b)
theamountofadvancesreceived;and
(c)
theamountofretentions.

40.Retentions are amounts of progress billingswhich are not paid until the satisfaction of
conditionsspecifiedinthecontractforthepaymentofsuchamountsoruntildefectshavebeen
rectified.Progressbillingsareamountsbilledforworkperformedonacontractwhetherornot
theyhavebeenpaidbythecustomer.Advancesareamountsreceivedbythecontractorbefore
therelatedworkisperformed.

41.Anenterpriseshouldpresent:
(a)
thegrossamountduefromcustomersforcontractworkasanasset;and
(b) thegrossamountduetocustomersforcontractworkasaliability.

42.Thegrossamountduefromcustomersforcontractworkisthenetamountof:
(a)
costsincurredplusrecognizedprofits;less
(b) the sum of recognized losses and progress billings for all contracts in progress for
whichcostsincurredplusrecognizedprofits(lessrecognizedlosses)exceedsprogress
billings.http://www.eircindia.org/as7Rev.htm - UP#UP

43.Thegrossamountduetocustomersforcontractworkisthenetamountof:
(a)
thesumofrecognizedlossesandprogressbillings;less
(b) costsincurredplusrecognizedprofitsforallcontractsinprogressforwhichprogress
billingsexceedcostsincurredplusrecognizedprofits(lessrecognizedlosses).

52
44.AnenterprisedisclosesanycontingenciesinaccordancewithAccountingStandard(AS)
4,ContingenciesandEventsoccurringaftertheBalanceSheetDate.Contingenciesmayarise
fromsuchitemsaswarrantycosts,penaltiesorpossiblelosses.

Appendix
The appendix is illustrative only and does not form part of the Accounting Standard. The
purposeoftheappendixistoillustratetheapplicationoftheAccountingStandardtoassistin
clarifyingitsmeaning.

DisclosureofAccountingPolicies
Thefollowingareexamplesofaccountingpolicydisclosures:
Revenuefromfixedpriceconstructioncontractsisrecognisedonthepercentageofcompletion
method,measuredbyreferencetothepercentageoflabourhoursincurreduptothereporting
date to estimated total labour hours for each contract. Revenue from cost plus contracts is
recognisedbyreferencetotherecoverablecostsincurredduringtheperiodplusthefeeearned,
measuredbytheproportionthatcostsincurreduptothereportingdatebeartotheestimated
totalcostsofthecontract.

TheDeterminationofContractRevenueandExpenses
The following example illustrates one method of determining the stage of completion of a
contractandthetimingoftherecognitionofcontractrevenueandexpenses(seeparagraphs
21 to 34 of the Standard). (Amounts shown hereinbelow are in Rs. lakhs). A construction
contractor has a fixed price contract for Rs. 9,000 to build a bridge. The initial amount of
revenueagreedinthecontractisRs.9,000.Thecontractorsinitialestimateofcontractcostsis
Rs.8,000.Itwilltake3yearstobuildthebridge.Bytheendofyear1,thecontractorsestimate
of contract costs has increased to Rs. 8,050. In year 2, the customer approves a variation
resultinginanincreaseincontractrevenueofRs.200andestimatedadditionalcontractcosts
ofRs.150.Attheendofyear2,costsincurredincludeRs.100forstandardmaterialsstoredat
the site to be used in year 3 to complete the project. The contractor determines the stage of
completionofthecontractbycalculatingtheproportionthatcontractcostsincurredforwork
performed up to the reporting date bear to the latest estimated total contract costs. A
summaryofthefinancialdataduringtheconstructionperiodisasfollows:

Illustration:
Facts:
i.
AconstructioncontractorhasafixedpricecontractforRs.9,000lakhtobuildabridge.
TheinitialamountofrevenueagreedinthecontractisRs.9,000lakh.Thecontractors
initial estimate of contract costs is Rs. 8,000 lakh. It will take 3 years to build the
bridge.
ii.
By the end of year 1, the contractors estimate of contract costs has increased to Rs.
8,050lakh.
iii.
In year 2, the customer approves a variation resulting in an increase in contract
revenueofRs.200lakhandestimatedadditionalcontractcostsofRs.150lakh.Atthe
endofyear2,costsincurredincludeRs.100lakhforstandardmaterialsstoredatthe
sitetobeusedinyear3tocompletetheproject.http://www.eircindia.org/as7Rev.htm
- UP#UP
iv.
Thecontractordeterminesthestageofcompletion ofthecontract by calculatingthe
proportion that contract costs incurred for work performed up to the reporting date
bear to the latest estimated total contract costs. A summary of the financial data
duringtheconstructionperiodisasfollows:
(amountinRs.lakh)

Year1
Year2
Year3
Initialamountofrevenueagreedincontract
9,000
9,000
9,000

53

Variation

Totalcontract

Contractcostsincurreduptothereportingdate

Contractcoststocomplete

Totalestimatedcontractcosts

EstimatedProfit

Stageofcompletion

9,000

2,093

5,957

8,050

950

26%

200

9,200

6,168

2,032

8,200

1,000

74%

200

9,200

8,200

8,200

1,000

100%

v.

The stage of completion for year 2 (74%) is determined by excluding from contract
costsincurredforworkperformeduptothereportingdate,Rs.100lakhofstandard
materialsstoredatthesiteforuseinyear3.
vi.
Theamountsofrevenue,expensesandprofitrecognizedinthestatementofprofitand
lossinthethreeyearsareasfollows:

UptoReportingDate Recognizedin Recognizedin

Prioryears
currentyear
Year1

Revenue(9,000x.26)
2,340

2,340
Expenses
2,093

2,093
Profit
247

247
Year2

Revenue(9,200x.74)
6,808
2,340
4,468
Expenses (6168100 stored for6,068
future)(8200x74%)
Profit
740
Year3

Revenue(9,200x1.00)
9,200
Expense
8,200
Profit
1,000

2,093

3,975

247

6,808
6,068
740

493

2,392
2,132
260

ContractDisclosures
Acontractorhasreachedtheendofitsfirstyearofoperations.Allitscontractcostsincurred
have been paid for in cash and all its progress billings and advances have been received in
cash.ContractcostsincurredforcontractsB,CandEincludethecostofmaterialsthathave
beenpurchasedforthecontractbutwhichhavenotbeenusedincontractperformanceupto
the reporting date. For contracts B, C and E, the customers have made advances to the
contractorforworknotyetperformed.

ContractDisclosures
Acontractorhasreachedtheendofitsfirstyearofoperations.Allitscontractcostsincurred
have been paid for in cash and all its progress billings and advances have been received in
cash.ContractcostsincurredforcontractsB,CandEincludethecostofmaterialsthathave
beenpurchasedforthecontractbutwhichhavenotbeenusedincontractperformanceupto
the reporting date. For contracts B, C and E, the customers have made advances to the
contractorforworknotyetperformed.

54
Thestatusofitsfivecontractsinprogressattheendofyear1isasfollows:

Contract(amountinRs.lakh)

A
B
C
D
E
ContractRevenuerecognizedinaccordancewith 145 520 380 200 55
para21

Contract Expenses recognized in accordance 110 450 350 250 55

withpara21

Expected Losses recognized in accordance with

40
30
para35
Recognizedprofitslessrecognizedlosses
35 70
30
(90) (30)

ContractCostsincurredintheperiod
110 510 450 250 100
Contract Costs incurred recognized as contract 110 450 350 250 55
expenses in the period in accordance with
paragraph21

##Contract Costs that relate to future

60
100
45
activityrecognizedasanassetinaccordance
withparagraph26
ContractRevenue(seeabove)
145 520 380 200 55

ProgressBillings(paragraph40)
100 520 380 180 55

UnbilledContractRevenue
45

20

Advances(paragraph40)

80
20

25
##Herethecostofmaterialsnotutilizedisshownasworkinprogress

TheamountstobedisclosedinaccordancewiththeStandardareasfollows:

Contractrevenuerecognizedasrevenueintheperiod(paragraph38(a))

Total
1300
1215

70
15

1420
1215

205

1300

1235

65
125

1,300

Contract costs incurred and recognized profits (less recognized losses) up to the 1,435
reportingdate(paragraph39(a))

Advancesreceived(paragraph39(b))
125

Grossamountduefromcustomersforcontractwork
220
presentedasanassetinaccordancewithparagraph41(a)

Grossamountduetocustomersforcontractwork
(20)
presentedasaliabilityinaccordancewithparagraph41(b)

Theamountstobedisclosedinaccordancewithparagraphs39(a),41(a)and41(b)are
calculatedasfollows:

Contract(amountinRs.lakh)

A
B
C
D
E
Total
ContractCostsincurred.(a)
110 510 450 250 100 1420
Recognizedprofitslessrecognizedlosses..(b)
35
70
30
(90) (30) 15
(a)+(b)=
145 580 480 160 70
1435
Progressbillings
100 520 380 180 55
1235

55
Duefromcustomers
45
60
100
15
220
Duetocustomers

(20)
(20)
Theamountdisclosedinaccordancewithparagraph39(a)isthesameastheamountforthe
currentperiodbecausethedisclosuresrelatetothefirstyearofoperation.

AnalysisofAS7

Clauses of AS 7 (given here in italics) and authors comments are given below. This will
showwhetherAS7isapplicableinthecasesofdevelopersandbuilders:

Scope
This statement should be applied in accounting for construction contracts in the financial
statementsofcontractors

AnalysisofScope

Whatisthelaw?

ItissaidthatAS7isapplicableonlyinthecaseofcontractorsthattooforconstruction
contracts. Therefore these two terms need detailed discussion. In common parlance
contractormeanspeoplewhodoworkonthebasisoftenders.Butforthepurposeoflaw
one has to see its meaning under the law. The word contractor is not defined in Income
Tax Act, 1961. Supreme Court said in State of Orissa v. Titaghur Paper Mills Co. Ltd.
(1985)TaxLR2948,2984,3006(SC),Thedictionarymeaningofawordcannotbelooked
atwherethatwordhasbeenstatutorilydefinedorjudiciallyinterpretedbutwherethereisno
such definition or interpretation, the Court may take the aid of dictionaries to ascertain the
meaning of a word in common parlance. Supreme Court has interpreted contractor in
ChintamanRaov.StateofMadhyaPradesh,AIR1958SC388,392as,Acontractorisa
personwho,inthepursuitofanindependentbusiness,undertakestodoaspecificjobofwork
for other persons, without submitting himself to their control in respect to the details of the
work. A developer indeed undertakes to do a specific job for customers and that is done
withoutsubmittinghimselftothedetailslikehowmanyworkerstobeengaged,howmany
hoursworkshouldbedoneetc.details.Dictionarymeaningofcontractorispersondoing
workoncontract.ThetermcontractisaworddefinedinIndianContractAct,1872.Soit
isnecessarytoexaminewhetherbusinessofdevelopersandbuildersattractsthedefinition
of contract. If their business attracts definition of contract as per Indian Contract Act,
1872, then they are definitely within the connotation of contractors even though in
common parlance they may not be considered so and even if they are not doing their
businessinpursuanceoftenders.
WhatiscontractunderIndianContractAct,1872?

Contract need not be in writing, unless there is specific provision in law that the
contract should be in writing. [e.g. Contract for sale of immovable property must be in
writing, Contracts which need registration should be in writing, Contract made without
considerationonaccountofnaturalloveandaffectionshouldbeinwriting.

56

Averbalcontractisequallyenforceable,ifitcanbeproved.
EssentialIngredientsofacontract
AsperContractAct,anagreementenforceablebylawisacontract.[Section2(h)].There
is no contract if there is no agreement. Hence, we have to understand first what
agreementis.
Everypromiseandeverysetofpromises,formingtheconsiderationforeachother,isan
agreement.[Section2(e)].Apersonmakesaproposal(offer).Whenitisacceptedbythe
other, it becomes a promise. However, promise cannot be one sided. Only a mutual
promiseformingconsiderationforeachotherisagreement.
Illustration: For example, A agrees to pay Rs 100 to B and B agrees to give him a book
whichispricedatRs100.Thisissetofpromiseswhichformconsiderationforeachother.
However, if A agrees to pay Rs 100 to B, but B does not promise anything, it is not set of
promisesformingconsiderationforeachotherandhencenotanagreement.
ConsiderationforpromiseThedefinitionofagreementitselfstatesthatthemutual
promisesshouldformconsiderationofeachother.Thus,considerationisessentialfor
anagreement.Apromisewithoutconsiderationisnotagreementandhencenaturally,
it is not a contract. Thus, if A invites B to dinner and B agrees to come, it is not an
agreementasdefinedinContractAct.
DefinitionofconsiderationItisnotnecessarilymoneyalways.When,atthedesire
ofthepromisor,thepromiseeoranyotherpersonhasdoneorabstainedfromdoing,or
does or abstains from doing, or promises to do or to abstain from doing, something,
such act or abstinence or promise is called a consideration for the promise. [Section
2(d)].
All agreements are not contracts Only those agreements which are enforceable by
lawarecontracts.Hence,intentionshouldbetocreatelegalrelationship.Agreements
of social or domestic nature are not contracts. A contract can be enforced or
compensationanddamagesforbreachofcontractcanbeobtainedthroughCivilCourt.
StepsinvolvedincontractThestepsinvolvedinacontractare
i.
Proposal
ii.
Itscommunication
iii.
Acceptanceofproposalanditscommunication.Acommunicationiscompleteonly
whenotherpartyreceivesit.
iv.
Agreementbymutualpromises
v.
Contract.Partiesshouldbecompetenttocontract.Objectshouldbelawful.Certainty
and possibility of performance. Contract should not have been declared as void
underContractActoranyotherlaw
vi.
Mutualandlawfulconsiderationforagreement
vii.
PerformanceofContract.

Now it is to be seen whether these ingredients and steps of contract are present in the
business of developers and builders. In the first part they acquire the land either by
purchase or by development agreement with landowner (private/government). In the
second part is construction and sale of property. When the developer/builder does
construction, he does it either fully for his buyers (when he is not required to give some
constructedspacetothelandownerasconsiderationforland)orpartlyforhisbuyersand
partlyforthelandowner.Asfarashisconstructionforthelandownerisconcerned,though
thisconstructionis also asper acontractwiththelandowner,developer doesnotgetany
revenueoutofitandactuallytheexpensesonitbecomespartofhiscostofthetotalproject.
Asfarastheconstructionforthebuyersisconcerned,thisisessentiallydoneasperlegally
enforceable contract between developer and buyer (of flat) because of the existence of
followingingredientsandstepsintheagreementbetweenthem:
i. Firstlythedevelopermakestheproposal

57
ii. Thenthebuyerseesit,acceptsitandcommunicateshisacceptance(maybebyfiling
application)
iii. By this, both sides enter into agreement with some promise from one side and
considerationfromthecounterpart
iv. The developers promise is to construct the property of certain specifications as
proposed by him and as accepted by the buyer. Again, this property is the
considerationfortheotherside,i.e.,buyer,forthemoneyhewillpay
v. The buyers promise is to pay the money or moneys worth as proposed by
developerandasacceptedbyhim.Again,thisistheconsiderationfortheother
side,i.e.,developerforthepropertyhewillconstructandhandover
vi. Thisagreementismostlyinwriting,i.e.,intheformofapplicationsignedbybuyer

Thereforeitisclearthattheentireconstructionbythedevelopersandbuildersfullyattracts
all the ingredients and steps of the definition of contract as given in the Indian Contract
Act,1872.Theconstructionundertakenbythemisinpursuanceofcontractsandsothese
arenothingbutconstructioncontracts.Andso,theyarecontractorsforthepurposeof
law even if their construction work is not as per any tender. Developers argue that their
contractwithbuyersisforsaleonlyandnotforconstruction(asstatedinthereplytoquery
inChapter3.Butitisfactthatthecontractisprimarilyforconstructionandsecondarilyfor
sale of such constructed property. Unless there is construction first, what a developer can
sell?Hadthecontractbeennotforconstruction,theagreementwouldnothavebeenfullof
terms and conditions regarding various aspects (like time, specifications, construction
linkedpaymentetc) ofconstruction. The abovediscussionprovesthatthescopeof AS7
fully attracts cases of developers and builders too and not merely persons who are
popularlycalledcontractors.Infact,accordingtotheprincipleofthejudgmentlaiddown
inthelandmarkcaseofMcDowell&CoLtdv.CTO(1985)154ITR148(SC),colourable
devicescannotbepartoftaxplanninganditiswrongtoencourageorentertainthebelief
thatitishonourabletoavoidthepaymentoftaxbyresortingtodubiousmethods.InCITv.
B.M.Kharwar(1969)72ITR603(SC)itwasheldthatthetaxingauthorityisentitled,and
is indeed bound, to determine the true legal relation resulting from a transaction. If the
parties have chosen to conceal by a device the legal relation, it is open to the taxing
authoritiestounravelthedeviceandtodeterminethetruecharacteroftherelationship.In
CITv.MeenakshiMillsLtd(1967)63ITR609(SC)itwasheldthatthecourthaspower
to disregard the corporate entity if it is used for tax evasion or to circumvent tax
obligations.InJuggilalKamlapatBankerv.CIT(1969)73ITR702(SC)itwasreiterated
thatthecourthadthepowertodisregardthecorporateentityifitwasusedfortaxevasion
ortocircumventtaxobligationsortoperpetratefraud,andthattheIncomeTaxauthorities
were entitled to pierce the veil of corporate personality and look at the reality of the
transaction. On the strength of the above judgments, though the words appearing in
agreement are agreement for sale and not agreement for construction and sale,
AssessingOfficerscanconcludethatthetruesubstanceisagreementforconstructionand
sale.Thoughtheapparentisagreementforsale,therealisagreementforconstruction
andsale.However,itisobviousherethatiftheseingredientsareabsentinanagreement
between buyer and developer/builder, the contract will not be construction contract
thoughitmaybecontractandso,itisimportanttokeepinmindthattoattractAS7itis
necessarytoprovethattheseingredientsarepresentintheagreements,ifany.

Infact,itismentionworthyherethatbigdeveloperslikeUnitechLtd,AnsalPropertiesand
InfrastructureLtd,SobhaDevelopersLtdetc.discloseintheirAnnualReportsthattheyare
following percentage of completion method for their projects (though they are not doing
these in pursuance of any tender from any organization). These corporate assessees take
theadviceoftoplawyersandaccountantsandwhentheyareacceptingthattheyfallwithin
the scope of AS7, this is an example for other developers also. Relevant portions of their

58
Annual Report for the year ending on 31.3.2007 are given below (available in their
websites):

UnitechLtd
SCHEDULE`16
SIGNIFICANTACCOUNTINGPOLICIESANDNOTESTOTHEACCOUNTS
A:SIGNIFICANTACCOUNTINGPOLICIES
4.RECOGNITIONOFINCOME
a)RealEstateProjects
(ii)RealEstateProjectsundertakenonandafter1stApril,2004.
Revenue from real estate projects is recognized on the Percentage of Completion
Methodofaccounting.

SobhaDevelopersLtd

Schedule19SignificantAccountingPoliciesandNotestoAccounts:
1.0.SignificantAccountingPolicies:
1.2(i)RecognitionofRevenuefromContractualProjects:
RevenuefromContractualProjectsundertakenisrecognizedonthebasisofthecertification
issuedbytheclientorcompletionofaphysicalproportionofthecontractwork.
(ii)RecognitionofRevenuefromRealEstateDevelopmentalProjects:
RevenuefromeachRealEstateDevelopmentalProjectisrecognized:
(a) OnthebasisofPercentageCompletionMethod.

AnsalProperties&InfrastructureLtd.

8.REVENUERECOGNITION
a)TheCompanyfollowsPercentageofCompletionMethodofaccountingforcontracts
and constructed residential, Institutional and commercial properties. As per this method,
the revenue is recognized in proportion to the actual cost incurred as against the total
estimatedcostoftheprojectsunderexecutionsubjecttoactualcostbeing30%ormoreof
thetotalestimatedcost.

2.Definitions:
Thefollowingtermsareusedinthisstatementwiththemeaningsspecified:

Aconstructioncontractisacontractspecificallynegotiatedfortheconstructionofanasset
or a combination of assets that are closely interrelated or interdependent in terms of their
design,technologyandfunctionortheirultimatepurposeoruse.

A Fixed price contract is a construction contract in which the contractor agrees to a fixed
contract price, or a fixed rate per unit of output, which in some cases is subject to cost
escalationclauses.

A Cost plus contract is a construction contract in which the contractor is reimbursed for
allowableorotherwisedefinedcosts,pluspercentageofthesecostsorafixedfee.

All the projects of developers and builders and contractors are generally fixed price
contracts because in this case they agree to construct and sell the property at a fixed
price or fixed rate per unit (say, per square foot) and there may be some clauses for
extrapaymentslikecostescalation

59

Cost plus contracts are few. It is learnt that NBCC Ltd (National Building Construction
CorporationLtd),aGovernmentofIndiaundertaking,doescontractworksoncostplus
method. Here, both parties agree on an amount of cost at which the project will be
completed and then contractor is paid certain amount or percentage as their
remuneration.

3.Aconstructioncontractmaybenegotiatedfortheconstructionofasingleassetsuchasa
bridge,building,dam,pipeline,road,shiportunnel.Aconstructioncontractmayalsodealwith
the construction of a number of assets which are closely interrelated or interdependent in
terms of their design, technology and function or their ultimate purpose or use: Examples of
suchcontractsincludethosefortheconstructionofrefineriesandothercomplexpiecesofland
orequipment.

Authorscomments:
Apartfromconstructingsomebuildings,theconstructioncontractmayincludesomeother
worklikeroad,park,communityhalletc.InanintegratedhousingprojectoranSEZoranI.T
Parkasdiscussedearlierorarefineryorathermalpowerplantmanyotherthingsarealso
constructed.ButstilltheseotherconstructionswillalsobetreatedunderAS7ifthebasic
conditionsdiscussedabovearefulfilledasthesearecloselyinterrelatedorinterdependent
intermsoftheirdesign,technologyandfunctionortheirultimatepurposeoruse.Belowis
givenasampleadvertisementcumprospectusbyadeveloperwhichshowsconstructionof
suchotherassetsinahousingproject.

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74
Authorscomments:
i.
The project is Rajiv Gandhi Chandigarh Technology Park which is divided into
residentialpartof40.67acresandnonresidentialpartofbalance83.119acres.
ii.
83.119 acres have been given by the landowner (Chandigarh Housing Board) to
developerfor99yearslease.Thoughitisnotknownfromthisdocument,itislikely
that this leased area was utilized by the developer on BOOT (BuildOwnOperate
Transfer)basisforbuildingI.T.ParkorSEZ.Asfarasavailablefromthisdocument,
landowner promises to give land for 99 years free of cost, developer promises to
constructentireprojectofresidentialandnonresidentialportionatitscostonPSP
basisandconstructthereinasalsotofinance,market/sell,develop,provideservices,
operate, maintain, generally manage the project and hand over ownership of the
entireTechnologyparkof83.119acresafter99years.
iii.
The agreement with CHB is a DA (Development agreement) in which land is not
transferredbyregistrationtodeveloper

ThoughthisisnotexactlythecontractdocumentexecutedbetweenCHB(landowner) and
developer,itcontainsthetermsofthecontractagreementbetweentheminbrief.Itshows
the promises and considerations agreed upon by the landowner and developer for the
construction.Atthesametime,thisdocumentalsocontainsgistofalltermsandconditions
containedinthecontractbetweenthedeveloperandbuyers,i.e.,allthepromisesmadeby
thedeveloperandconsiderationstobepaidbythebuyers.Theseare:

i.
Developertocompleteconstructionwithinaperiodof36months.Para9(b)
ii.
DevelopershallconstructthepropertyasperspecificationgiveninAnnexureIIand
facilitiesasperPara8
iii.
Developershallhandoverthepropertyaspertimementioned(Para9)
iv.
After completion of the project, developer will continue to give services regarding
operation and maintenance as per Para 10 (this shows different other income
accruing to the developer from the project, which the AO can harness later at the
stageofassessmenttoverifywhetheralltheseincomeshavebeendisclosedornot)
v.
Thesearethepromisesofthedeveloper
vi.
BuyerstopaythepricementionedinAnnexureI
vii.
BuyerstopayperiodicallyasperschedulegiveninAnnexureIII
viii.
Buyerstoacceptotherterms&conditions
ix.
These are the proposals of the developer regarding considerations to be paid by
buyer.
The buyer considered these and sent the following application after filling up duly and
signing,i.e.acceptingandcommunicatingtheacceptance.Acontractinvolvestwoormore
parties. By the buyers applying, he became the other party to the contract with the
developer.Thusitisclearthatallthefeaturesofcontractarepresentinthisconstruction
work.ThereforeitattractsAS7.WhattheAssessingOfficerswillhavetodoisdissectand
analyzethecasebeforehiminthiswayanddecidewhetherAS7willbeapplicableornot.

After this, contractual agreement is done between developer and buyer as per
followingdraft1:
PARSVNATHPRIDEASIA
FLATBUYERSAGREEMENT
THISAGREEMENTismadeatChandigarhonthis____________dayof__________________2007
BY
Parsvnath Developers Limited, a company incorporated under the provisions of the
CompaniesAct,1956,andhavingitsregisteredofficeat6thFloor,ArunachalBuilding,19,
BarakhambaRoad,NewDelhi110001andlocalofficeat__________________________(hereinafter
referred to as the Developer which expression shall unless repugnant to the context
hereofincludeitssuccessors,nomineesandassigns)oftheFirstPartAffix

75

AND
Chandigarh Housing Board, established and constituted under Section 3 of the Haryana
HousingBoardAct,1971,asextendedtoUTChandigarh,andhavingitsofficeat8,JanMarg,
Sector9,Chandigarh160009(hereinafterreferredtoasCHB,whichexpressionshall
unless repugnant to the context hereof include its permitted assigns and successorsin
interest)oftheSecondPart;
(TheFirstPartyandSecondPartyarehereinafterjointlyreferredtoasSellers)
Infavorof

1.Mr./Mrs./Ms._____________________________
Affix Photo
Son/daughter/wifeof______________________
Of Buyer
_______________________________________
Residentof_______________________________
________________________________________

(Hereinafter referred to as the Buyer which expression shall unless repugnant to the
contexthereofmeanandincludehisheirs,executors,administrators,legalrepresentatives
andpermittedassigns)oftheThirdPart;

WhenevertheBuyerisafemale,theexpressionhe,him,himselfetc.,inthisAgreement
in relation to the Unit shall be read and construed as she, her, herself etc. These
expressions shall be deemed as modified and read suitably and whenever the Buyer is a
JointStockCompany,BodyCorporateoraFirmoranyAssociationofPersonsandwhenever
therearemorethanoneBuyertheexpressionBuyerintheAgreementshallbeconstruedas
including each of such Buyers and their respective heirs, executors, administrators, legal
representativesandpermittedassignsetc;
(a) Whereas pursuant to the execution of Development Agreement on 6.10.2006 between
the Chandigarh Housing Board and Parsvnath Developers Ltd. (the Developer), the
Developerhaveacquireddevelopmentrightsin123.79acresofland(ProjectLand)located
in the Rajiv Gandhi Chandigarh Technology Park at Chandigarh to develop the same on
Private sector Participation (PSP) basis and construct therein/thereupon the Project
comprising Residential (only 40.671 acre of freehold land), Commercial and other related
Infrastructure in accordance with the details provided in ScheduleI of the Development
Agreementasalsotofinance,market/sell,develop,providenecessaryservices,operateand
maintain and generally manage the Project in the manner and subject to the terms and
conditionssetoutintheDevelopmentAgreement/thisAgreement.

(b)WhereasoutoftheProjectLand,83.119acrehavebeentransferredtotheDeveloperfor
aleaseperiodof99yearsundertheLeaseDeeddated06102006thetitleoftheremaining
40.671 acre earmarked for residential development (the Residential Land) has been
reserved by CHB to be transferred on freehold basis in respect of the land under and
appurtenanttotheResidentialUnitsshallbetransferredbyCHBdirectlytotheResidential
UnitBuyersatthetimeofhandingoverthepossessionoftheUnit.

(c.)WHEREAStheChandigarhHousingBoardhasassuredandrepresentedtotheDeveloper
that:

(i) The Chandigarh Administration has appointed CHB as Nodal Agency vide Chandigarh
Administration (Finance Department) Order No. Endst. No. 2689 UTFI (4) 2005/8321
dated 01122005 for execution of a residential, commercial and other related
infrastructure facilities as anintegrated project (herein after referred to as the Project)
ontheProjectLandwithprivatesectorparticipation.

76

(ii) The Chandigarh Housing Board is the lawful owner of the Project Land and it has the
capacityandiscapableofexecutingafull,validandregistrabletransferoftheProjectLand
eitheronfreeholdoronleaseholdbasis.

(d) AND WHEREAS the ownership of the Project Land shall remain vested with the CHB
duringtheperiodofdevelopmentandthereafter thefreeholdrightsinrespectofthe land
underandappurtenanttotheResidentialUnitsshallbetransferredbyCHBdirectlytothe
ResidentialUnitBuyersatthetimeofhandingoverthepossessionoftheUnit

(e) AND WHEREAS the Developer has planned to put up a residential group housing
complexcomprisingofresidentialunitsonthefreeholdareaoftheProjectLand(hereinafter
referred to as the Complex/ Residential Complex) and named it as Parsvnath
Prideasia and has already submitted building plans of the Complex to the competent
authoritiesforapproval.

(f) AND WHEREAS the land for the housing scheme has been provided by CHB and the
Developershallbesolelyresponsibleforqualityparameters,timelydeliveryofResidential
Units, and all claims/liabilities and compensation towards defects / delay. In case of any
exceptionalcircumstancesleadingtononclearanceofenvironmentalissues,theDeveloper
shallbeliabletotheprospectivebuyersforrefundofamountcollectedalongwithinterest
(equivalent to SBI term deposit rate applicable on the date of such refund) for the period
starting from the acceptance of such booking amount till the date when such refund is
made.

(g)ANDWHEREAStheDevelopershallbesolelyandexclusivelyliabletotheresidentialunit
ownersforacts&omissionsattributabletothedeveloperand/orhisContractorand/orhis
operator.

(h)ANDWHEREAStheCHBandDeveloperareentitledtobookthesaleoftheResidential
Units to prospective buyers, to receive consideration amount in the Escrow Account
pending receipt of such approvals as per the terms of the Development Agreement and to
enterintothisAgreementwhichisalsotobesignedbyCHBinconfirmationandincapacity
asacoselleralongwiththeDeveloper.

6 AND WHEREAS the Buyer in response to the invitation of offers by the CHB and
Developer though advertisements in the ____________________________________ dated
__________________ 2007, and after having fully acquainted and satisfied himself with the
termsoftheschemeofallotmentandthefactsasaforesaidaswellasandthetermsand
conditions of the development rights granted to the Developer in terms of the
Agreement dated 6th October 2006 (read with the clarifications), has applied for
allotment of a residential unit in category _________ i.e. a _________ bedrooms unit in the
said Complex and the Developer and CHB (Sellers) have agreed to allot a category
__________ residential unit on the terms agreed as recorded hereinafter by way of this
Agreement.

NOW,THEREFORE,THISAGREEMENTWITNESSETHTHAT:

1. Subject to the premises and covenants contained herein to be observed and in

considerationoftheBuyerhavingagreedtopaytheconsiderationamountcomprisingofthe
BasicPriceandothercostsandchargesasstipulatedherein,theSellersherebyagreetosell
and the Buyer agrees to purchase the Residential Unit in category __________ bearing No.
_____________________ on __________ Floor in Block No. ____________ having an approx.
____________________sq.ft.(equivalentto________________sq.mtrs.)ofsuperbuiltarea(covered

77
area ____________ sq. ft. i.e. ________ sq. mtrs.) consisting of ________ Bed rooms, one
Drawing/Dining Room, , Kitchen, ___ Toilets, Lawn/ Balconies and Servant Quarter
(excludingfor1BHK)withBathroom&Kitchen,inthesaidComplexnamedPARSVNATH
PRIDEASIA on the said Project Land at Chandigarh (hereinafter referred to as the said
Unit)togetherwithproportionateundivided,unidentifiedinterestinthelandunder and
appurtenanttotheunit.

(Authorscomments:Thoughthismayseemtobeagreementforsaleandnotagreement
forconstruction,itistobenoticedthatasondateofagreementthesubjectmatterofthe
agreement, viz., the flat was not in existence. So, though the words are written as hereby
agreetosell,thisclauseinherentlycontainsthecontractforconstructionoftheflatbefore
sale.Ifitisnotso,thentherewillbenoflattobesold!Thatthiscontractisprimarilyand
substantiallyforconstructionisfurtherprovedbysubsequenttermsandconditions.)

2. (a) The Basic Price of the Unit shall be Rs._________________ (Rupees ______________only)
calculatedattherateofRs._____________persq.ft.(equivalenttoRs._____________persq.mtr.)
ofsuperareatobereducedorincreasedcorrespondingtoactualsuperareaoftheUnitat
thetimeoffinalmeasurementoncompletionoftheUnit.

(b)The Sellers have also agreed to allot along with the Unit exclusive user right of
open/covered car parking spaces as follows and for consideration as mentioned against
themwhichshallbepayableadditionallytothebasicprice:

(i).Oneopencarparkspacefor1,2,3BHKunitsRs._____lakh

(ii).Twoopencarparkspacesfor4,5BHKunitsRs.______lakh

(iii). One covered car park space optional (subject to availability) Rs. ______ lakh The user
rights of open car parking spaces by the Buyer are mandatory. The user rights of covered
carparkingspaceshallbeoptionalanditsallotmentshallbesubjecttoavailability.

(c)Fivepercent(5%)ofthebasicpriceshallconstitutetheEarnestMoney.

(d)Allpaymentstowardstheconsiderationamountincludingbasicpriceandothercharges
payableintermsofSchemeofAllotmentandthisAgreementshallbepaidbyAccountPayee
Cheque (s)/ Bank Draft(s) in the name of ParsvnathCHB Escrow A/C No. 30184417088,
payableatChandigarh.

3. (a) There shall be no additional charges for provision for 100% power back up, fire
Fighting installations (if required), pipes for gas supply, split unit airconditioners in
drawing/diningandallthebedrooms.

(b) The basic price does not include charges for the following which shall be payable
additionallyasandwhendemandedbytheDeveloper:

AdditionalChargesoftheUnitasfollows:
GroundFloor:

7.5%ofBasicPrice
TopFloor:

7.5%ofBasicPrice
Mandatoryopencarparking:

Rs.1,00,000/
Coveredcarparkingoptional(subjecttoavailability):Rs.3,00,000/
Mandatoryclubmembershipfee:

Rs.5,00,000/

(ii)Chargesforopencarparkingspaces(mandatory)andoptionalforcoveredcarparking
spaces(subjecttoavailability)

78

(iii)Costsofwatermeter,electricitymeter,securitydeposits,energizingchargesetc.

(iv) Proportionate charges for provision of any other items/facilities not specifically
mentioned in this Agreement as may be required by any authorities or considered
appropriatebytheDevelopers.

(v)OnetimeMembershipFeefortheRecreationClubandSportsComplexamountingtoRs.
5.0lac(RupeesFivelac)

(vi)Onthesaleoftheunits,anylevies,taxeslikeservicetax,turnovertax/VAToranyother
levies/taxesimposedbytheCentralorStateGovernmentoranyauthorities.

(c) Charges for consumption of water, electricity, gas supply etc inside the units shall be
payableonthebasisof actualconsumption asperbills,raisedmonthly bytheDeveloper/
Operator.

(d) Stamp Duty, Registration Fees and other incidental charges for execution and
registrationofConveyanceDeedoftheUnitshallbebornebytheBuyer.

4.TheBuyerhaspaidasumofRs._______./(Rupees______only)towardsBasicPriceatthe
timeofbookingvidehischeque(s)/bankdraftNo.____dated_____drawnon____________,the
receipt of which sum the Sellers do hereby acknowledge. The Buyer agrees to pay the
remainingBasicPriceinthemanner/PaymentPlanindicatedinAnnexure_____.TheBuyer
agreestopayanyotherchargesasmaybedemandedunlessotherwisespecifiedherein.

5. (a) Timely payment of the installments /amounts due shall be of the essence of this
Agreement.IfpaymentisnotmadewithintheperiodstipulatedandortheBuyercommits
breachofanyofthetermsandconditionsofthisAgreement,thenthisAgreementshallbe
liabletobecancelled.Intheeventualityofcancellation,earnestmoneybeing5%ofthebasic
price would be forfeited and the balance, if any, would be refundable without interest.
However, the Sellers may allow the revival of the allotment of the unit (subject to its
availability)inthenameoftheBuyeronpaymentofrevivalchargesamountingto10%of
earnestmoney.

(b) Without prejudice to the right to the sellers to cancel the allotment of the unit for the
delayedpaymentoftheinstallmentandotherdues,thebuyershallpayinterest@24%per
annumoftheamountduefortheperiodindefault.

(c)IncaseofConstructionLinkedPaymentPlan,DemandNoticebytheSellerstotheeffect
thatinstallmentamounthasbecomedueshallbefinalandbindingontheBuyer.Incaseof
Down Payment Plan and Time Bound Installment Plan, the Buyers shall pay the amount
without issue of any Demand Notice. However, the Sellers may in its discretion issue the
DemandNotice.

6. The Basic Price of the Unit and provision for other charges in respect of the Unit have
been fixed keeping in view the normal practices, conventions and the statutory
requirements as of date. Should at any time hereafter, either by statutory requirement, it
become necessary to provide for any further equipment/facilities etc. or there be any
demands or levies by any authorities, then the cost of such additional provisions,
installations, demands of levies, taxes like service tax, turnover tax, VAT or other taxes
imposed by Central and/or State Government or any authorities shall be charged
additionallyonsaleoftheunit,proportionatetotheareaoftheUnit.

79
7 (a) The Super area shall mean and include the plinth area i.e. built up covered area
measuredatthefloorlevelofthebasementoranystorey(includingareaofthewallatthe
floorlevelexcludingplinthoffsetsifany,internalshafts,staircase,mumty,machineroomof
lift, porch etc.) balconies, cupboards, lofts plus proportionate common areas such as
projections,corridors,passages,undergroundandoverheadwatertanks,entrancelobbies,
electricsubstation,pumphouse,shafts,guardrooms,lifts,andothercommonfacilitiesetc.
The carpet area is the covered area of the usable rooms at the floor level i.e. plinth area
excluding verandah, corridor, passage, entrance hall, porch, stair case, mumty, shaft,
machine room of lift, bathroom, lavatory, kitchen, pantry, store, canteen, airconditioning
duct,plantroom,shaftforsanitaryplumbing).Thecalculationofsuperareaasstatedherein
shallbemadebytheDeveloperandshallbefinalandbindingupontheparties.

(b) Notwithstanding the fact that a portion of the common area has been included for the
purposeofcalculatingthesaleable/superareaoftheUnit,itismadeclearthatitisonlythe
coveredareaoftheUnittowhichtheBuyershallhavetheexclusiverightandtheinclusion
ofthecommonareasinthecomputationshallnotconferanyexclusivetitlethereontothe
Buyer.

(c) The Buyer of the Top Floor Unit shall have the right of exclusive user of part of the
terraceasattachedtotheUnitexcludingtheareameantforcommonservicesandfacilities
likewatertanks,antennasetc.whichshallalwaysbeopentoapproachbytheSellers/their
nominees,themaintenanceagency,formaintenance,repairandreplacementetc.Theentire
area of the terrace shall be open to all the other Unit Buyers/Occupants in cases of any
commonemergencieslikefireetc.TheBuyerofthetopfloorUnitshallnothavetherightto
covertheterraceattachedtotheUnitortoputupanytemporaryorpermanentstructures
thereon. This right of user of terrace shall be subject to provisions of applicable laws
includingtheApartmentRules.

(d)TheBuyerofgroundfloorUnitmaybeallocatedsomeopenareabytheSellersonthe
groundfloorexclusivelyformaintenanceasgreen,ifany.

8.(a) The Buyer has seen the drawings and building plans displayed in the office of the
Developer showing the proposed Buildings on the project land and the same may be
changedattheinstanceofthesanctioningauthoritiesortheDeveloperduringthecourseof
constructionorotherwise.Thebroadspecificationsofconstructionhavebeenindicatedin
Annexure

(b)TheareaoftheUnitagreedtobesoldistentative.Ifduringthecourseofconstructionor
otherwisetheareaorthenumberoftheUnitorlocationchangesorduetoChangeinLawor
Approvals, the final reallocation will be done by the Sellers whose decision shall be final
andbindingontheBuyerandtheBuyerwillhavenoclaimonthisaccountexceptthatthe
pricewouldbepayableonthebasisoftherevisedarea/locationoftheUnit.

9.(a)Constructionoftheresidentialunitsislikelytobecompletedwithinaperiodofthirty
six(36)monthsofthesigningoftheDevelopmentAgreementi.e06102006betweenthe
Developer and CHB and/or as may be extended in terms of the Development Agreement
shall be subject to force majeure and circumstances beyond the control of the Developer,
and any restraints/restrictions from any courts/authorities. The delay in grant of
environmentalclearancesbeyond12monthsofthesigningoftheDevelopmentAgreement
shallnottobecountedtowardsthesaidperiodof36months.

(b)TheSellersoncompletionofconstructionshallissueafinalcallnoticetotheBuyer,who
shallremitalldueswithin30daysthereofandtakepossessionoftheUnit.TheBuyershall
be liable for payment of all taxes, levies, assessments, and maintenance charges from the

80
datesthesearelevied/madeapplicableirrespectiveofthefactthattheBuyerhasnottaken
possessionoftheUnitorhasnotbeenenjoyingbenefitofthesame.

(c)IncasepossessionofthebuiltupareaisnotofferedtotheBuyerwithinaperiodof36
monthsorextendedperiodasstipulatedinsubclause(a)above,theBuyershallbeentitled
toreceivefromtheDevelopercompensation@Rs.107.60persq.mtr.(Rs.10/persq.ft.)of
thesuperareaoftheunitpermonthandtonoothercompensationofanykind.Incasethe
Buyerfailstoclearhisaccountandtakepossessionoftheunitwithin30daysofoffer,the
BuyershallbeliabletopaytotheDeveloperholdingcharges@Rs.107.60persq.mtr.(Rs.
10/ per sq. ft.) of the super area of the unit per month in addition to the liability to pay
interesttothesellersandotherconsequencesofdefaultinpayment.

(d)IfasaresultofanyrulesordirectionsoftheGovernmentorifanycompetentauthority
delays,withholds,deniesthe grant ofnecessaryapprovalsfortheProject,orifdue toany
force majeure conditions, the Developer is unable to deliver the unit to the Buyer, the
Developer and CHB shall be liable to refund to the Buyer the amounts received from the
BuyerwithinterestattheSBITermDepositRateasapplicableonthedateofrefund.

(e) Since only Land has been provided by CHB and the Developer is to develop the said
ProjectassuchtheDeveloperissolelyresponsibleforallqualityparameters,timelydelivery
ofResidentialUnits,allclaims/Liabilitiesandcompensationtowardsdefects/delay.The
Buyershall havenoclaimagainstanydefectsrelatingtoconstructionoftheUnit afterSix
(6)monthsoftakingoverofpossession.TheDevelopershallbesolelyandexclusivelyliable
toResidentialUnitownerstowardsnonperformanceofitsobligationsandshallbeliableto
refundtheadvancescollectedifanyfromtheResidentialUnitownersincaseoftermination
ofProject.

10 (a) CHB shall execute the tripartite sale/conveyance deed with the purchasers of
ResidentialUnitsalongwiththeDeveloper,inrespectofthelandunderandappurtenantto
the Residential Units, for transfer of title of the Residential Units after completion and on
receipt of full consideration towards sale of Residential Units. All expenses in respect of
execution and registration of Sale/Conveyance Deed, including the Stamp Duty and
registrationfee,shallbebornebytheResidentialUnitpurchasers.

(b)IncaseoftheBuyertakingloanfromanyBank/FinancialInstitution,theconveyanceof
the unit in favour of the Buyer shall be executed only upon the Sellers receiving No
ObjectionCertificatefromsuchBank/FinancialInstitutionandtheConveyancedeedshall
behandedovertothelendinginstitution,ifsorequiredbythem.

11.(a)TheBuyershallhaveonlyproportionateundividedinterestinthecommonareaand
facilitiesandshallnothaveanyindividualrighttherein.

(b)TheBuyeragreesthatincaseduringthecourseofconstructionorsubsequently,further
constructiononanyportionofbuildingorontheterracebecomespermissible,theSellers
shallhavetheexclusiverighttotakeuporcompletesuchfurtherconstructionasbelonging
to the Sellers notwithstanding the allotment of any Common Areas as Limited Common
Areas with any Unit or otherwise. It is agreed that in such a situation the proportionate
share of the Buyer in the Common Areas and facilities and Limited Common Areas and
facilitiesshallstandvariedaccordinglywithoutanyclaimfromtheBuyer.

12.(a)SolongastheConveyanceDeedoftheUnitisnotexecutedandregisteredinfavour
oftheBuyer,theSellersshallcontinuetobetheownerinpossessionandincontrolofthe
Unit. The Buyer shall, however, be entitled to assign his rights and obligations under this
Agreement to any third party or to get his name substituted by another person with the

81
prior consent in writing of the Sellers which shall be granted subject to rectification of
breaches,ifany,ofthetermsandconditionsofthisAgreement,paymentofanyoutstanding
duesandpaymentofadministrativechargesasprescribedbytheSellersfromtimetotime.
Any change in name of the Buyer (including addition/ deletion) as registered with the
Sellers will be deemed as assignment for this purpose. Claims, liabilities, if any, between
Assignor and Assignee relating to the assignment will be settled between Assignor and
AssigneethemselvesandtheSellerswillnotbeapartyto,orberesponsibleforthesame.
TheAssigneeshallbeboundbythetermsoftheAgreement.

(b)BuyershallpaytotheSellersadministrativechargesfortheAssignmentoftherights&
obligation under the agreement before conveyance deed amongst family members
{husband/wife,son(s),daughter(s)andmother,father,brother(s)andsister(s)}whichwill
be25%ofthenormaladministrativechargesprescribedbytheSellers.

13. The Buyer agrees to abide by the provisions of the Apartment Rules, and other
applicableLawsgoverningorrelatingtotheUnit/Project.

(a) The Buyer shall keep the Unit in good repair at all times and shall not make any
additions/alterationsintheUnitorcausedamagetoornuisanceintheUnitortheComplex
inanymanner.Incaseanypartitions,interiors,falseceilingsetc.areinstalledbytheBuyer,
then all necessary permissions from the authorities, if required, will be obtained by the
Buyerdirectlyathisowncost.InanycasetheBuyershallnotbeentitledtocarryoutany
structuralchangesintheUnit/building.

(b) The Buyer shall not put up any name plate, sign board, neon sign, publicity or
advertisement material, hanging of clothes etc. in the common areas of the building and
shallnotchangethecolourschemeoftheouterwallsorpaintingoftheexteriorsideofthe
doorsandwindowsetc.orcarryoutanychangeintheexteriorelevationordesign,witha
viewtomaintainuniformaesthetics.

(c)TheBuyershallnotusetheUnitorpermitthesametobeusedforpurposeotherthan
residentialorforanypurposewhichmayorislikelytocausenuisanceorannoyancetothe
occupiers of other Units or for any illegal or immoral purposes and shall not do or suffer
anything to be done in or about the said Unit which may tend to cause damage to any
flooring, ceiling or walls of any other Unit/floor or in any manner interfere with the use
thereof or of space, passages or amenities available for common use. The Buyer shall also
notstoreanyhazardousmaterialsintheUnitorinthecommonareasoftheBuilding.

14. (a) Besides residential, commercial and recreational area, all estate service and
infrastructure developed, such as parks, green areas, common areas, sports complex, club,
garbage collection and disposal, facilities for lighting, water security, waste management,
leisure valley, gardening etc, shall be managed/ maintained by the Developer or a
professional agency to be engaged by the Developer, on a selfsustainable basis, but the
ultimateresponsibilityshallresidewiththeDeveloper.TheDevelopermaymodify,repairor
otherwise make improvement to the Project in accordance with specifications and in
accordance with Good Industry Practice, applicable Indian laws and Indian directives and
shallforthatpurposedoallsuchacts,deedsandthingsnecessaryandexpedientincluding,
withoutlimitation,thefollowing:

(i)Obtaining(orcausingitsagentsandContractorstoobtain)alltheApprovalsrequiredfor
the development, Operation & Maintenance of the Project in accordance with Applicable
Laws;

82
(ii) Providing and maintaining of services within the Project including ensuring complete
securityandsafetyoftheconstructionsandoftheProjectasawhole.

(b)Thecomplexshallbemaintainedforaperiodof99(NinetyNine)Yearsfromthedateof
execution of the Development Agreement, i.e. 06102006. During the Operation and
MaintenancePeriod,theDevelopershallmanage,operate,maintainandrepairtheProject,
entirelyatitscost,charges,expensesandinaccordancewithprovisionsofDevelopment/
thisAgreementnotlimitedtothefollowing:

(i)makeavailableallnecessaryfinancial,technological,managerialandotherresourcesfor
operation,maintenance,repairandreplacementoftheprojectinatimelymanner.

(ii)manageandoperatetheprojectonacommonuserbasis,opentoanyandallusersina
fairmannerwithoutdiscriminationagainstanyuserorpotentialuserthereof;

(iii) ensure maintenance of proper and accurate record/data/accounts relating to

operationsoftheProjectandtherevenueearnedtherefrom;

(iv) comply with the Applicable Laws including those relating but not limited, health,
environmentandlabour;

(c) TheBuyershallpaytheFeesforoperationandmaintenanceofthecommon
facilities and infrastructure ( such as parks, green areas, roads, common areas, sports
complex, garbage collection, and disposable facilities for lighting, water, security, waste
management,leisurevalley,gardeningetc.)fromthedateofcommencingwithin30daysof
Offer of possession / actual possession whichever is earlier and necessary maintenance
chargesasdemandedfortheupkeepoftheComplexasalsoforotherinfrastructurefacilities
fortheentireProjectincludingtheLeaseLand.Thefeestobecollectedshallhaveadirect
correlationwiththeareaofResidentialUnitownedbytheResidentialUnitownersandshall
beinconsonancewiththeexpensesincurredbytheDeveloper/Operator,asthecasemay
be, for the purpose thereof. The charges shall be based on multiplying factor of the
Residential area charges to be charged for common user facilities from commercial area
excludingservice/studioapartments.

(d)NoOperationandMaintenancechargesshallbechargedfortheBusTerminalandFire
Station except for electricity and water consumption charges. However, charges shall be
claimed for School, Crche, Polyclinic and Petrol pump once these are developed and
occupation certificate issued. The charges shall be fixed subsequently in consultation with
CHB.

(e)Suchchargesmaycompriseoftwoormoreseparatecomponentsasfollows:

(i)chargesonaccountofmaintenanceofallthecommonareasandfacilitiesinthebuildings
under the Complex including on consumption of electricity, water, security and sanitation
forcommonareas;

(ii) charges on account of maintenance of all infrastructural services, facilities including

roads,watersupplyandseweragesystems,electrification,security,parks,waterbodiesetc.
and

(iii)Insurancepremium.

(f) The maintenance charges in terms of (d) (i), (d)(ii), and (d) (iii) above have been
tentativelyestimatedasunderforthefirst(3)threeyearsfromthedateofexecutionofthe

83
Sale / Conveyance Deed with the Buyer which are subject to revision on the basis of
outflowsatthetimeofhandingoverpossessionoftheunit:

(i) Rs. 1.00 per sq. ft. per month of super area of the Unit on account of items included in
subclause(d)(i)and(d)(iii)above.

(ii)Rs.1.50persq.ft.permonthofsuperareaoftheUnitonaccountofitemsincludedin
subclause(d)(ii)and(d)(iii)aboveChargesmentionedate(i)arenotapplicableforVillas.

(g)Themaintenancechargesarealwayssubjecttoreview/escalationdependinguponthe
costs of inputs including on consumption of electricity, water and other consumables and
/orincreaseinleviesorimpositionofnewonesbyanyauthorities.

(h)DelayinpaymentofmaintenancechargeswillmaketheBuyerliableforinterest@24%
per annum. In default of payment of maintenance charges the Buyer shall be liable, after
service of notice, to disconnection/discontinuation of services including electricity and
watersupplyanduseofliftstillsuchtimethepayment(s)is/aremade.
(i)Security Deposit @ Rs. 50/ per sq. ft. of the super area of the Unit towards timely
paymentsofmaintenancecharges,payableatthetimeoftakingoverpossessionoftheUnit.

15(a)TheBuyeragreestopaycontribution@Rs.0.50persq.ft.permonthofsuperareaof
the Unit to maintain a Replacement /Sinking Fund. As and when any plant & machinery
installedintheComplex/Projectincludingbutnotlimitedtoelectricsubstations,pumps,
lifts, firefighting equipment, gensets, any other plant/equipment of capital nature etc.
requirereplacement,upgradation,additionsetc.,thecostthereofshallbemetfrom/outof
the said replacement/sinking fund. In case the funds available in the said Replacement /
SinkingFundmaynotbesufficienttomeetthecontingencyatanytimethentheBuyershall
contribute necessary funds proportionate to the super area of the Unit, to meet the
requirements of such contingency. The Developer or the nominee Operator/ Maintenance
Agency shall have the sole authority to decide the necessity of such replacement,
upgradation, additions etc. including its timings or cost thereof and the Buyer agrees to
abidebythesame.TheDevelopershallbeundernoobligationtocarryoutmajorrepairsor
replacements of equipments/installations if funds are not available in the
replacement/sinkingfundorthesearenotcontributedbytheBuyer(s)whenrequired.

(b)Solongasthemaintenanceandreplacementchargesarepaidregularly,asprovidedin
these presents, the Buyer or anyone else lawfully claiming under him, shall be entitled to
userofcommonfacilities.Indefaultofsuchpayments,itshallnotbeopentotheBuyerto
claimuserofanyrightofthecommonfacilitiesandtheDeveloperoritsnomineeOperator/
Maintenance Agency, in their sole discretion, shall be entitled to stop the user of such
common facilities by the Buyer/Occupiers of the Unit. The user of such common facilities
shallbepermittedassoonasthebreachisrectified.

(c) As part of Operation and Maintenance the Developers shall make provision for the
security / Watch & Ward of the complex for the purpose the Developer or its nominee
Operator / Maintenance / Security Agency shall have a free hand to regulate the entry of
outsidersintothecomplexandtomakenecessaryRegulationswhichshallbebindingupon
alltheBuyers.Notwithstandingtheprovisionofthesecurity/Watch&Wardtobemadeby
the Developer, the Developer or nominee Operator / Maintenance / Security Agency shall
notbeliableforanymishapresultingatthehandsofthemiscreantsandoranylosseson
accountoftheftsetc.

(d) Not later than four Months prior to the anticipated completion, the Developer shall
maintaininrespectofthefacilitysuchinsuranceasmayberequiredunderIndianLawand

84
suchinsuranceasDevelopermayreasonableconsidernecessaryordesirableinaccordance
withGoodIndustryPractice.Suchinsuranceshallinclude:

(i)Comprehensivethirdpartyliabilityinsuranceagainstliabilitytothirdpartiesforbodily
injury or damage to property arising out of activities carried out by or on behalf of the
DeveloperduringtheOperation&Maintenancestage;

(ii)Workerscompensationinsuranceincludinginsuranceofworkeremployedandengaged
forthepurposesoftheOperation&Maintenance.Thecoverageshallincludecompensation
for injury and disability and other insurance as required by the Laws, save that coverage
shallalsoextendtoanysuchworkerforwhomsuchinsuranceisnotrequiredbysuchlaws.
Thesuminsuredinrespectofsuchworkershallnotbelessthanprescribedbysuchlaws;

(iii)Businessinterruptioninsuranceforlossofrevenues;

(iv) Any other insurance that may be required pursuant to a financing Documents of
statutoryrequirement;and

(v)Professionalindemnityinsuranceforadequateamount.

(e)TheBuyeragreestosignaseparateMaintenanceAgreementwiththeDeveloperorits
nomineeOperator/MaintenanceAgencybeforetakingpossessionoftheUnitincorporating
inter alia the aforesaid terms. The Buyer agrees and consents to the arrangement as
stipulatedherein.

16. (a) The Developer shall set up a Recreation Club and a Sports Complex on the Lease
Landontheareademarcatedforthesame.TheRecreationclubwouldincludefacilitiessuch
as Banquet hall, Conference room, Swimming pool, Fitness Centre, Yoga Centre, Eating
joints,Badmintoncourt,Squashcourt,Billiardroom,etc.TheSportsComplexwhichisapart
of recreation area and both being treated as one entity for membership purposes and
management/operations,wouldprovideoutdoorfacilitiesshallcompriseaStadiumonan
aareaofabout6acreswhichcanbeusedforvarioussportsactivitiesvizfootball,hockey,
cricket,athleticsetc.andshallhavesupportingfacilitieslikesitting,parking,toilets,offices,
changing rooms etc. It shall also include a Water Body with a minimum area of 10 (ten)
acresalongwithwalkingtracksandlandscape.TheWaterBodyshallhavethefacilities.

(b) TherightofmembershipoftheClubandSportsComplexiscompulsorilyattachedtothe
ResidentialUnitandincasetheresidentialunitistransferredbytheBuyer/Owner,the
corresponding membership right to Recreation Club and Sports Complex shall stand
automatically transferred to the new Buyer/Owner of such Residential Unit. The
Recreation Club and Sports Complex is exclusively meant for the Residential Unit
holders of the Project. Management of the Recreation Club would have adequate
representationoftheResidentialUnitowners.Thesellingofanyadditionalmembership
tooutsidersshallbedonewithpriorapprovaloftheManagement.

(c)Theperiodofenjoymentofthesefacilitiesshallbecoterminouswiththeexpiryofperiod
ofleaseoftheLeaseLandasthesefacilitiesshallbelocatedontheLeaseLand.However,on
the Club becoming functional, the Buyer shall pay Operation & Maintenance charges as
prescribed from time to time by the Management of the Club. Service tax and any other
taxesasmaybeleviedbyanyauthorityshallalsobepaidbytheMembersoftheClub.The
Buyer agrees to abide by the rules and regulations formulated by the Developer/
ManagementoftheClubforthepropermanagementoftheClub.

85
17.TheBuyershallbeliabletopaypropertytax,andallrates,taxes,charges,assessments,
levies, by whatever name called, assessed or imposed by municipal or other authorities,
whetherleviedpresentlyorinfutureinrespectoftheUnitirrespectiveofthefactthatthe
BuyerhasnottakenoverpossessionorhasnotbeenenjoyingthebenefitoftheUnit.Tillthe
assessment of individual to property tax is made or any other charges as aforesaid are
leviedbytheauthorities,theBuyershallbeliabletopaytotheDeveloperondemand,such
taxes/charges levied presently or in future on the Residential Units in the Complex,
proportionate to the area of the Unit. Apportionment of such taxes, charges, levies by the
Developer or its nominee Operator/ Maintenance Agency shall be conclusive and binding
upontheBuyer.

18 The Buyer, if resident outside India, shall be solely responsible to comply with the
necessary formalities as laid down in the Foreign Exchange Management Act and other
applicable laws including that of remittance or payment(s) and obtaining permission as
prescribedbylawforacquisitionoftheUnit.TheSellerswillnotberesponsibleorliablefor
anyconcealmentsorviolationsinthisrespectbytheBuyer.

19.TheBuyerhasgothiscompleteaddress,asrecordedabove,registeredwiththeSellersat
thetimeofbookinganditshallbehisresponsibilitytoinformtheSellersbyregisteredpost
/e_mailaboutallsubsequentchanges,ifany,inhisaddressfailingwhichallcallnoticesand
letters posted through registered post/ e_mail at the last address registered with the
Sellers/ Developer shall be deemed to have been received by the Buyer at the time when
thoseshouldhavenormallyreachedatsuchaddressandtheBuyershallberesponsiblefor
anydefaultinpaymentandotherconsequencesthatmightaccruetherefrom.

20ItisexpresslyagreedbetweenthepartiesthattheBuyershallnotassailthisAgreement
on the ground of want of mutuality even if any stipulations herein are held to be lacking
mutuality

21.ThisAgreementshallbesubjecttothejurisdictionofCourtsatChandigarhonly.

IN WITNESS WHEREOF, the parties hereto have set their hands to this Agreement on the
day,monthandyearfirstabovewritteninthepresenceofwitnesses.

WITNESSES
1.

forParsvnathDevelopersLimited

AuthorizedSignatory(Developer)

2.

ForChandigarhHousingBoard

AuthorizedSignatory(CHB)

(________________)
Buyer

The above sample agreement was between developer and buyer. This is full of such
promises and considerations which are ingredients of the definition of contract as per
IndianContractAct,1872andClauses9,11etcareclearevidencesthatthecontractwas
firstly,primarilyandsubstantiallyforconstructionandsecondly,secondarilyandpartially
forsale.

86

Belowisgivenanothersampleagreement,downloadedfromthewebsiteofCREDAIBengal
(Confederation of Real Estate Developers Associations of India) which is a deed of
conveyanceofflatsfromtheshareoflandownerintheconstructedproperty.Clauseiiin
Page 2 of this document clearly mentions, the developer as a common contractor for
such intending purchaser(s) shall construct. And this document is signed by developer
and landowner. When developers own document declares him as a contractor, the stand
that such developers/builders are liable to be assessed as per percentage of completion
method stands vindicated. AOs may utilize this and similar clauses from this or analogous
documenttootoestablishthatthecaseisofcontract,thenofconstructioncontractand
so AS 7 will apply, i.e., percentage of completion method. Further, there are many other
clauses (like the very first one) which show that the agreement with the buyers and/or
landownerwasactuallyacontractforconstructionfirstandsalethen.

87

88

89

90

91

92

93

94

95

96

97

98

99
a) But then the developer executes another deed of conveyance for transfer of flat &
common areas by the developer (from his allocation), undivided share of land
comprised in the premise by the landowner and right to ingress & egress by both
developer&landownerinwhichthelandownerisvendoranddeveloper&purchaser
oftheflataretheothertwoparties.Thisrecites(ClauseIofHistory),theDeveloperas
the common contractor shall undertake the construction of a particular unit/ flat
togetherwithproportionateshareinthecommonportionsandfacilitiesandtogetherwith
car parking spaces for such consideration called the cost of construction as shall or
maybemutuallyagreedupon.Asubsequentclausereads,constructedonbehalfof
andonaccountofthepurchasershereinbythesaidDeveloper.
b) Thisshowsthatevenincasesotherthanfamilysettlementcasesasmentionedearlier,
the developer is actually playing the role of a contractor only. The difference is that
whileintheformerthedeveloperwasappointedascontractorbythelandowner,inthe
latter he was appointed by the purchasers of the flat. This is very important as this
enables the AO treat the developer as a contractor and assess as per AS7 which is
beneficialtotheIncometaxdepartment,primarilybecauseitdoesnotallowdeferment
ofrevenue.
c) In Para iii of the same deed it recites, the Developer shall also nominate such
intending purchaser (s) for acquiring the undivided variable proportionate share of
interest in the land. A subsequent clause also reads, Vendors . shall execute and
register . deed of conveyance in respect of undivided proportionate share of land in
favor of the developer or its nominee or nominees. By doing this the developer is not
requiredtotaketransferoflandtohimatanystage.
d) Clause 4 (d), (e), (f) and (o) read with Fourth schedule of this deed is important
because it shows the various types of other income that a developer gets from a
project. Of course some of these amounts are transferred to Apartment Owners
Associationafteritsformation.Butnointerestispaidthoughthedevelopermusthave
earnedinterestonit.
e) In Mumbai there are two terms, FSI (Floor Space Index) and TDR (Transferable
Development Right) in real estate sector. The term FSI means the quotient of ratio of
combinedgrossfloorareaofallfloorsinabuildingtothetotalareaoftheploti.e.,
Totalcoveredareaonallfloors=FSI

Totalplotarea

Hence,FSIquotientdenotestotalconstructedareawhichispossibleonagivenplotofland.
Asexample,iftheareaofaplotoflandis1000sq.m.andtheprevailingFSIquotientforthat
area is 1.5, then the total possible constructed area on that plot would be 1500 sq. mts.
Now,inmanysituationsthelandowneriseligibletohaveFSIathisplace,buthemaynotbe
permittedbyauthoritiestoactuallymakeconstruction(maybe,govt.wantstoconstructa
park/roadetc).Insuchsituationthelandownermaysurrenderhislandfreeofcosttothe
BMC(BrihanmumbaiMunicipalCorporation)andthenheiseligibletogetFSIintheformof
TDR, i.e., right to construct at another location. The FSI by way of TDR would be of like
mannerandtothesameextenthadthelandnotbeenreserved.Thisrightcanbeutilizedby
ownerorhemaysellittoanotherperson.So,inMumbai,inthiswayalso,thedevelopers
acquireconstructionrightonland/alreadyconstructedproperty.
Again, below is given another type of Development Agreement where landowner gets
money, and not share in constructed property, as consideration for transferring
development rights on the land. As per Para 24 of this document the landowner is
requiredtoexecutedeedofconveyanceofland(undividedshare)toeachbuyer.Inthisway
thepropertytoberegisteredcompulsorily,i.e.,landistransferreddirectlytobuyeranditis
the buyer, and not developer, who pays stamp duty on the consolidated value of land and
building.Thedevelopmentrightisalegallyenforceablerightbutmovablepropertyandso
developer escapes payment of the stamp duty. Clauses like 12, 18, 21 and 24 of this too
showthattheagreements/contractswithbuyersareessentiallyforconstructionfirst.

100

Developmentagreementbylandlordsinfavourofabuilder

THIS AGREEMENT made at . this ....... day of ............, 2000, between (1) X, son of P,
residentof..;(2)Y,sonofQ,residentof..(3)Z,sonofR,residentof..
(4)A,sonofS,residentof..(5)B,sonofT,residentof..,and(6)Smt.C,sonof
U, resident of .., hereinafter called "the Vendors" (which expression shall unless
repugnant to the context or meaning thereof mean and include their respective heirs,
executors, administrators and assigns) of the FIRST PART; Smt. N wife of Shri M, resident of
.., hereinafter called "the Confirming Party" (which expression shall unless
repugnant to the context or meaning thereof mean and include her heirs, executors,
administrators and assigns) of the SECOND PART and ... a partnership firm
throughitsPartner,D,sonofF,residentof.............,hereinaftercalled"theDevelopers"
(whichexpressionshallunlessrepugnanttothecontextormeaningthereofmeanandinclude
partnerorpartnersforthetimebeingofthesaidfirm,survivorsorsurvivorofthemandthe
heirs,executors,administratorsofsuchsurvivor,their,hisorherassigns)oftheTHIRDPART.

WHEREAStheVendorsareabsolutelyseizedandpossessedandsufficientlyentitledtoallthose
piecesorparcelsofagriculturalland,ground,hereditamentsandpremisesoneofwhichisthe
property bearing No. ............, admeasuring about ........ sq. meters, situated at
................................ and more particularly described in the Schedule hereunder written
and delineated on the plan hereto annexed and thereon shown surrounded by a red colour
boundary line (which property shall hereinafter for brevity's sake be referred to as 'the
property').

AND WHEREAS the said property was owned and possessed by Shri X and after the death of
saidShriX,thesaidpropertywastransferredtothenameofhisdaughterSmt...............and
afterthedeathofthesaid...................whodiedon.......................thesaidpropertyisinherited
bytheVendorshereinastheonlylegalheirsandrepresentativesofthesaidShriX.

AND WHEREAS the name of Smt. N, who is the second daughter of the said....................... was
entered into by Mutation Entry No. .............. only on ................. However, the
VendorscontinuedintheabsolutepossessionofthesaidpropertybeingtheheirsofsaidSmt.
N, who had inherited the property of her deceased father Shri X and claimed the same
absolutelyshebeingundercustomaryformofmarriageandallowedtoretainthepropertyto
herfatherabsolutelyandassuchthesaidSmt.Ndoesnotclaimanyright,titleandinterestin
thesaidpropertyandagreedtoconfirmthisagreementwithoutclaiminganyright,titleand
interesttherein.

ANDWHEREAStheVendorshaverepresentedtotheDevelopershereinthattheyhavefiledthe
returnoftheirtotallandholdingaspersection6(1)oftheUrbanLand(Ceiling&Regulation)
Act, 1976 with the Competent Authority under the said Act, and have also submitted the
schemeundersection21ofthesaidActtothesaidCompetentAuthoritytherebyrequestingthe
CompetentAuthoritytopermittheDeveloperstodevelopthepropertyaspertheScheme.

AND WHEREAS the Developers herein have approached the Vendors with an intention to
developthesaidpropertyfromtheVendorsandpursuanttothenegotiationsbyandbetween
the parties hereto and subject to the necessary approval being granted by the Competent
Authority under the provisions of Urban Land (Ceiling & Regulation) Act, 1976 which
approval/sanctionisagreedtobepersuadedbytheDevelopersattheirowncostsandexpenses
and also subject to the plan of the proposed development being sanctioned by the Municipal
Corporationof,whichresponsibilityisagreedtobeshoulderedbytheDevelopers
herein as a result of which hereof the Vendors are desirous of appointing the Developers as

101
developersofthesaidpropertymoreparticularlydescribedintheSchedulehereunderwritten
fortheconsiderationanduponthetermsandconditionshereinafterappearing:

NOW THESE PRESENTS WITNESSETH AND IT IS HEREBY AGREED BY AND BETWEEN THE
PARTIESHERETOASFOLLOWS:

(1) The Vendors do hereby nominate, constitute and appoint the Developers to
develop/purchasethesaidpropertyattheirowncostmoreparticularlydescribedintheFirst
Schedulehereunderwrittenbyconstructingbuilding/sthereonaspertheplans/specifications
tobeapprovedand/orsanctionedbytheBombayMunicipalCorporationandtheCompetent
AuthorityundertheUrbanLand(Ceiling&Regulation)Act,1976.

(2)InconsiderationoftheVendorshavingappointedtheDevelopersastheDevelopersofthe
saidpropertyandtheVendorsagreeingtoallowtheDeveloperstoappropriatetothemselves
the entire profits arising from the development scheme as is hereinafter provided, the
DevelopersagreetopaytotheVendorsasumofRs..............(Rupees........................only)lumpsum
inthefollowingmanner:

(a)
Rs............... (Rupees ............................) being the part consideration and/or earnest
moneypaidbytheDeveloperstotheVendorsonorbeforetheexecutionofthesepresents(the
paymentandreceiptwhereoftheVendorsdothherebyadmit,acknowledge,acquit,releaseand
dischargetheDevelopersforever).OnexecutionofthesepresentstheVendorsshallhandover
vacant and peaceful possession of the said property to the Developers for the purpose of
development.

(b)
Rs............... (Rupees ................. only) being the further payment in the share of the
developmentpayablebytheDeveloperstotheVendorsonorbefore..................;whichfailure
topaythisamountonstipulateddatewillentitleVendorstoclaiminterestat.....%p.a.from
thedateofdefaulttillpayment.

(c)
Rs..............(Rupees............only)tobepaidonorbeforethe.......dayof...........,2000.

(d)
Rs......(Rupees....only)tobepaidbyDeveloperstoowneronorbeforethe.....of.....,2000.

(e)
Rs............(Rupees..................only)onorbeforethe..........of...............,2000.

(f)
Rs..............(Rupees..............only)onorbeforethe.........of..................,2000.

(g)
Rs...............(Rupees.............only)onorbeforethe...........of...............,2000.

TheabovestatedpaymentshallentitletheVendorsaninterestfromthedateofdefaulttillthe
payment on the stipulated rate of ..... % p.a. as stated hereinabove, on the balance of the
purchase price in full and final settlement of the Vendor's claim over the said land on
completion of the sale and/or execution of the Conveyance Deed and if more than one
Conveyance Deedaretobeexecuted onexecutionoflastconveyanceand allothernecessary
writings in favour of the Developers, his/their nominee/s including a proposed cooperative
housing society or a Body Corporate as is hereinafter provided. It is made clear that if the
Developers fail to take conveyances in his/their favour or in favour of the said proposed co
operativehousingsocietybeforetheamountstatedinthissubclauseistobedepositedbythe
Developers with the Vendors till the conveyances and all other necessary writings as stated
hereinabovearecompletedand/orexecutedandthepropertyinquestionistransferredtothe
name of the said proposed cooperative society, but if the Developers fail to deposit the said
amountasstipulatedherein,theyshallbeliableforpenalinterestattherateof.....%fromthe
dateofdefaultasstatedabove.

102

ProvidedthatifanyFARinadditiontotheexistingavailableFARbecomesavailableinrespect
ofthesaidproperty,theDevelopershallpayanadditionalsum@Rs..............perSq.ft.tothe
Vendors on such additional FAR being sanctioned by the Municipal Corporation. The said
paymentwillbemadein2installmentsonorbefore..................and...................,2000.

(3)Withinsevendaysfromtheexecutionofthesepresents,thevendorsshalldeliverorcauseto
bedeliveredallthetitledeeds,propertycard,certifiedcopyoftheplansofCitySurvey,etc.in
relation to the property hereby agreed to be developed to Builder's Solicitors M/s.
.....................................&Co.forthepurposeofinvestigationofVendor'stitletothesaidproperty.

(4)ThepresentpriceofRs...........isbasedontheareashownin..i.e................sq.
meters, which are to be ascertained by the parties hereto on joint survey and if the area is
variedi.e.increasedordecreased,thepricewillfluctuateeitherincreaseordecreaseatthe
rateofRs.............persq.meter.

(5) As per the present development plan, certain areas of the property hereby agreed to be
developedisreservedforPGTheDevelopersarenotboundtopayforthesaidreservation,but
incasetheygetthebenefitofFARandusethesameforthepurposeofdevelopment,theyshall
paytheVendorsattheabovestatedstipulatedratetotheextentofbenefittheyhavereceived
fromthesaidP.G.reservation.

(6)TheVendorsdeclarethattheyhavealreadyfiledthereturnasrequiredundersection6of
theUrbanLand(Ceiling&Regulation)Act,1976.However,tilldate,theyhavenotpursuedthe
matterwiththeCompetentAuthority.TheVendorsherebyauthorizetheDeveloperstoobtain
theN.O.C.undertheUrbanLand(Ceiling&Regulation)Acttotheextentofamaximumshare
availableandshallnotobjectanysharenotbeingusedforthepurposeofdevelopmentofthe
propertyhereby agreedtobedeveloped.The Vendorsfurtherassuretoextendmaximumco
operationforobtainingN.O.C.andforgivingdeclarations,affidavits,etc.

(7)Upon thepaymentof thesaidsumspecifiedinclause2(b)above, the Vendorsshallhand

overthevacantandpeacefulpossessionofthesaidpropertytotheDevelopersandDevelopers
shall thereafter be authorized to commence construction of buildings on the said land in
accordancewiththeplansapprovedand/orsanctionedbytheMunicipalCorporation
aswellasundertheUrbanLand(Ceiling&Regulation)Act,1976andtakesuchstepsasmay
benecessaryorexpedientandincidentaltocarryoutthedevelopmentofthesaidlandattheir
own costs, expenses. For the said purpose, the Developers shall be entitled to appoint
Architects,Engineers,Surveyors,Contractors,Agentsandotherpersonnelandshallbeentitled
totakeallsuchstepsasmaybenecessaryorincidentalforsuchdevelopmentandconstruction
workattheirowncostsandexpenses.

(8) It is agreed and undertaken by the Developers that they shall at their own costs and
expensespersuadethematterregardingNOCwiththeCompetentAuthorityundertheUrban
land(Ceiling&Regulation)Act,1976andobtainNOCfromsuchauthority.Itisfurtheragreed
by the Developers that all the necessary permission and/or sanction required from the
Competent Authority and/or State Government either for the purpose of development of the
saidpropertyorforthetransferofthesaidpropertyincludingtheproposedstructurethereon
undertheprovisionsoftheUrbanLand(CeilingandRegulation)Act,1976shallbeobtainedby
theDevelopersattheirowncostsandexpensesandtheVendorsshallnotbeliableforanysuch
NOC,expensesrelatingtheretoordelayinobtainingthesame.

(9)Immediatelyontheexecutionofthesepresents,theVendorshereinshallexecuteaPowerof
AttorneyinfavouroftheDevelopersortheirNominee(s)asmaybedesiredbytheDevelopers
for the purpose of signing and/or executing all the applications, proceedings, plans, etc. to

103
obtainnecessaryapprovalfromthevariousauthoritiesinconnectionwiththedevelopmentto
be submitted by the Developers on behalf of the Vendors to the Competent Authority, Urban
Land Ceiling, Municipal Corporation of , Town Planning Authority or any other
Government or SemiGovernment authority in connection with the development so as to
facilitatethedevelopmentofthepropertyherebyagreedtobedevelopedbytheDeveloperson
behalfoftheVendors.TheVendorsherebyagreethatthesaidPowerofAttorneyshallnotbe,
underanycircumstances,revokedbytheVendorsaslongasthesepresentssubsistandremain
bindinguponthepartieshereto.IfthesaidPowerofAttorneyisrevokedbytheVendorsand
delay is caused in developing the property hereby agreed to be developed the consequences
arisingthereofshallbeatthecostsoftheVendorsalone.

(10) It is agreed and undertaken by the Developers that they shall at their own costs and
expenses persuade the matter with Town Planning Authorities, Municipal Corporation of
., Electric Supply for the purpose of removing the
reservation/restriction,ifanyandforthe purposeofallotting theplotsunder.Scheme,
etc.andundernocircumstances,theDevelopersshallcallupontheVendorstopaythecostsof
such actions. The Developers agree and undertake that at any post and under any
circumstances they will get the property released from reservation, if any, and get the said
allotted under . Scheme. in favour of the Vendors. It is agreed by the Developers that
whatevermaybethefinalsanctionunder.Schemetheyshallpaytothevendorsasper
theoriginalplotarea.

(11)TheVendorsshallrenderallassistance,cooperationandsignandexecuteorcausetobe
signedandexecutedallapplications,plans,authoritiesandotherwritingsasmaybenecessary
orrequiredtoenabletheDevelopersfordevelopmentofthesaidplotandtoobtainapprovalof
the..MunicipalCorporationandPlanningAuthoritytothePlans,designsanddrawings
forputtingupbuildingandstructuresandshallontheexecutionthereonexecuteaPowerof
Attorney in favour of the Developers or their Nominee/s to enable them to develop the said
propertyandtheDevelopersshallindemnifyandkeepindemnifiedandharmlesstheVendors
andtheirestateandeffectsfromandlossesordamagesoranyconsequenceswhichmayflow
byvirtueoftheirsigningthesaidPowerofAttorney.

(12) All buildings to be constructed on the lands comprised under this Agreement and the
dwelling units thereon will be in accordance with the Scheme sanctioned by the Competent
AuthorityorStateGovernmentundertheprovisionsofUrbanLand(Ceiling&Regulation)Act
and will be dealt with in accordance with the directions, if any, given by the Competent
AuthorityorStateGovernmentwhilesanctioningthesaidscheme.IftheDevelopersdesireany
variationsinthesaidscheme,soastoprovidedwellingunitsoflargersizesinthebuildingto
be constructed on the said land and/or to receive higher price for such dwelling units the
Developers,shallbeatlibertytomakenecessaryapplicationforthepurposetotheauthorities
concernedattheirowncostsandtheVendorsshalljointheDevelopersinthesaidapplications
providedhowever,iftheauthoritiesconcernedrefuseordeclinetogive,anysuchapplications,
whichmaybemadebytheDevelopers,dwellingunitsonthesaidpropertywillbeconstructed
inaccordancewiththeschemewhichmaybesanctionedbytheCompetentAuthorityorState
GovernmentunderthesaidAct.

(13)TheDevelopersshallnotcommenceanyworkofdevelopmentonthesaidproperty,unless
thenoobjectionandcommencementcertificateisissuedbytheStateGovernment/Municipal
Corporationinfavourofthevendors.

(14) It is expressly agreed by the Developers that they shall at their own costs and expenses
obtainpermission/sfromtheCompetentAuthorityforthepurposeofdevelopmentofthesaid
property and/or for the purpose of implementing the construction scheme in respect of the
entire property hereby agreed to be sold, so as to enable the Developers to construct the

104
dwelling units as per the scheme sanctioned by the Competent Authority and to enable the
Developers to consume the entire available F.S.I. and after being constructed to allot
flats/shops/garages, etc. to the intending flat purchasers and ultimately to transfer the said
propertytoacooperativehousingsocietyand/oracompany.Itisalsoagreedandundertaken
bytheDevelopersthattheyshallapplyforandobtainnonagriculturaluserfromtheCollector,
inrespectofthesaidpieceorparcelofland.

(15) The Vendors shall make out a clear and marketable title to the said property,
hereditamentsandpremisesagreedtobedevelopedandultimatelytobeconveyedfreefrom
reasonabledoubtsandallencumbrancesandshallattheirowncostsandexpensesgetinall
outstandingestatesandclearalldefectsinthetitleandallencumbrancesandclaimsonorto
the said property including all claims by way of sale, exchange, mortgage, gifts, trust,
hereditaments,possession,exceptthepossessionofagriculturaltenants,easement,lease,lien
orotherwise.

(16) It is agreed and understood that the Vendors shall not in any way obstruct the
developmentworktobecarriedoutbytheDevelopersandshallnotdoanyact,matterorthing
wherebytheDeveloperswillbepreventedfromcarryingouttheDevelopmentworkenvisaged
underthisAgreement.

(17)TheDevelopersshallattheirowncostmake necessaryarrangementforconstructionof
thebuildingsonthesaidlandinaccordancewiththescheme,whichmaybeapprovedbythe
Competent Authority or State Government under the provisions of the said Act and the
Developersshallexecuteanindemnityinfavourofthevendorsforthedueperformanceofthe
termsofthesaidorder.

(18)TheDevelopersshallbeatlibertytoallotthedwellingunitsofflatsinthesaidbuildingsto
beconstructedonthesaidpropertyortoenterintoanypackagedealagreementforallotment
ofcompletedbuildingorbuildingstobeconstructedonthesaidlandwithsuchpartyorparties
andatsuchprice'andonsuchtermsandconditionsastheDevelopers/Purchasersmaydeem
fit and proper. All such allotments and arrangements shall, however, be made by the
Developersattheirowncostsandexpensesandattheirownrisk,theintentionbeingthatthe
Developers shall alone be liable and responsible to such party or parties, provided, however,
that the price and the terms and conditions at or on which the said building or buildings or
partthereofaretobeallottedshallnotinanymannerbeinconsistentwithorincontravention
of any law and conditions imposed in NOC under section 20 or 21 of the said Urban Land
(Ceiling & Regulation) Act, as may be sanctioned by the Competent Authority or State
Government.TheDevelopersherebyindemnifyandkeepindemnifiedtheVendorsinrespectof
anysuchclaimthatmaybemadeorsufferedbytheVendorsandcosts,chargesandexpenses
onaccountofsaleorallotmentofflatsorotherwise.

(19) The Developers shall be entitled to enter into usual Agreement for sale of flats/shops/
garages/officepremiseswithvariousintendingbuyers,onwhatisknownasownershipbasis,
on such terms and conditions and at such price as the Developers may think fit and proper:
PROVIDED,however,theDevelopersshallnotpartwithpossessionoftheflats,shops,garages,
units, etc. in the buildings that will be constructed by them in pursuance of this Agreement
unlessanduntiltheentireamountpayabletotheVendorsasperthesepresentsispaidbythe
DeveloperstotheVendors.

(20) All amounts payable by the allottees of the dwelling units and the buildings to be
constructed on the said piece of land or from the allottees of completed building in case of
package deals under any arrangements made by the Developers with such allottees shall be
receivedandappropriatedbytheDevelopers.

105
(21) The entire development work in respect of the property shall be carried out by the
DevelopersinaccordancewiththeplansthatmaybeapprovedbytheMunicipalCorporation
of . and other concerned authorities and while carrying out construction work, the
Developers will strictly comply with the building rules and byelaws of the Municipal
Corporation of Greater Bombay, various instructions, orders and directives, that may from
time to time be issued in regard to the construction work by the Bombay Corporation and
other concerned authorities. The Developers shall carry out the entire construction work at
theirownaccountandriskandattheirownresponsibilityandshallpayanddischargeallthe
costs,chargesandexpensesinrelationtotheconstructionworkincludingpaymentofsalaries
andwagestothepersonnelandworkmenemployedinconstructionwork,billsofthesuppliers
ofbuildingmaterials,Municipalratesandtaxesinrespectofthesaidpropertyandfromthe
datetheDevelopersbeingputinpossessionandallowedtoenteruponthesaidproperty,fees
of the architects and R.C.C. specialists and consultants and all other professionals charges
and/orretainedinregardtotheconstructionwork.TheDevelopersherebyagreetoindemnify
andkeepindemnifiedtheVendorsoflandfromoragainstanyclaimthatmaybemadeagainst
Vendorsbyanyoneand/oranydamagetheVendorsmaysufferasaresultoftheDevelopers
committingbreachofanyofthebuildingbyelaws,rules,orders,directives,instructionsthat
maybeissuedbytheMunicipalCorporationof.andotherconcernedauthoritiesin
connectionwiththeconstructionworkasaforesaidand/ortheDeveloperscommittingdefault
in payment of the salaries, wages and fees including the payment for injuries or any
compensations during the progress of work of various mentioned hereinabove as also in
payment of the Bills of Suppliers of the building materials and in payment of the Municipal
taxesorinanydamagesorlossthatmaybesufferedorsustainedbytheVendorsasaresultof
theDeveloperscarryingouttheconstructionworkand/ordevelopmentonthesaidproperty.

(22) It is agreed that the developers shall carry out ail the work of development in their
name/sorinthenameoftheirnominees,shallnotdoorcausetobedoneanyact,deed,matter
or thing in the name of the Vendors. It is expressly understood that all the agreements,
arrangementsorwritingswhichtheDevelopersmayenterintoshallbeintheirownnameand
not in the name of the Vendors. It is also expressly understood that the Developers will be
entitledtothebenefitofrightsofdevelopmentunderanyorderorpermissionwhichmaybe
issuedbytheGovernmentofundersection20and/or21oftheUrbanLand(Ceding&
Regulation)Act,1976.

(23)TheVendorsherebydeclarethat:
(a)
Thesaidpropertyisequivalenttofreeholdandisnotheldunderanyagreement;
(b)
There are no outstanding encumbrances, mortgages, liens (notice for acquisitions,
requisitionsorsetback)easements,rightsoftenantsoroutstandinginterestorclaimbyany
partiesotherthantheVendorsnoristhesaidpropertysubjectmatterofanypendingsuitor
attachment either before or after judgement. No notification is issued under any Ordinance,
Act,statute/rulesorregulationsaffectingthesaidproperty;
(c)
The Vendors further declare that neither the Vendors nor his/their predecessorsin
titlenoranybodyclaimingfrom/orunderthemoranyofthemhaveorhavegrantedanyright
ofwayoreasementorotherrightstoanypersonoverthesaidproperty;
(d)
TheVendorsagreeandundertaketoobtainconsentandconfirmationfromSmt.Nand
incaseofherdemisebeforetheexecutionoftheconveyancefromthelegalheirsofsaidSmt.N
confirming the sale in favour of the Developers or their nominee/s including a co operative
housingsocietyasthecasemaybe.

(24) It is agreed that the Vendors and all other necessary parties shall execute the Deed of
Conveyanceand/orallotherwritingsinfavourofsuchperson/sastheDevelopersmaydirect
andintheeventofConveyance/sbegiveninfavouroftheNominee/softheDevelopersora
proposedcooperativehousingsociety.TheDevelopersshallalsojoinasaConfirmingPartyto
thesaidConveyance.

106

(25)TheVendorswillensurethatatthetimewhentheDevelopersareallowedtoenterupon
the said piece of land described in the Schedule hereunder written, the said piece of land is
absolutelyvacantandnobodyisinoccupationofthesame.

(26) The Vendors hereby agree and confirm that the Developers shall be entitled to transfer
thebenefitandburdenofthisAgreementsubjecttothetermsandconditionsmentionedherein
eitherasawholeorinparttooneormorepartiesandthattheVendorsshallhavenoobjection
to the same and the terms and conditions of this agreement shall remain binding over such
transferees.

(27) It is agreed that the Developers shall carry out the work of development in their own
nameandshallnotcauseorcausetobedoneanydeedormatterorthingwherebytheVendors
are put to loss and have to discharge any liability. It is expressly agreed that the agreement
which the Developers may enter into with any person in connection with the development
scheme or for sale of flats, etc. shall be entered into only in the name of the Developers on
principaltoprincipalbasisandnotasagentsoftheVendorsherein.

(28)TheDevelopersagreetopayMunicipal,bettermentcharges,T.P.charges,watercharges,
electricitycharges,finesandpenaltiesarisingasaresultofchangeintheuserofthesaidland.

(29) The Vendors declare that the land, hereditaments and premises hereby agreed to be
developedandconveyedarenotsubjecttotheeasementorrightsinthenatureofeasement.

(30) The Vendors hereby declare that no notice from Government or any other body or
authorityorunderthe.MunicipalCorporationActorLandAcquisitionActorTown
PlanningAct,TheDefenceofIndiaActorunderanyotherlegislativeenactments,Government
Ordinances,OrderorNotification(includinganynoticeforacquisitionorrequisitionofplotsor
anypartthereof)hasbeenreceivedbyorserveduponthemoranyotherperson/sinterested
thereinnoristhesaidplotoranypartthereofincludedinanyintendedorpublishesschemeof
improvementoftheMunicipal,GovernmentbodyorPublicBodyorauthoritysaveandexcept
thatthesaidplotisincludedinthedevelopmentplansfor.andportionofitisintended
forreservationofplayground.

(31)TheVendorsherebyagreetopayanddischargealltaxesandoutgoingsinrespectofthe
saidlandpriortothesaleonwhichtheDevelopersareputinpossessionofthesaidland.

(32)TheVendorsshallbeentitledtoreceivetherentandprofitsandshallbeliabletopayall
outgoings,suchasMunicipaltaxes,landrevenue,etc.priortothedatetheDevelopersareput
inpossessionandtheDevelopersshallfromthedatetheyareputinpossessionbeentitledto
receive the rents and profits and liable to pay all outgoings (including Municipal taxes, land
revenuechargesforconsumption).

(33)TheVendorsshallpayalloutgoingsincludingthegroundrent,municipalandCollector's
billsandchargesinrespectofthesaidpropertyherebyagreedtobedevelopedandconveyed
previoustothedateofhandingoverofthepossessiontotheDevelopers.TheDevelopersagree
andundertaketobearallthebettermentchargesinrespectofthesaidpropertyandalltaxes,
Municipal,Collector'sbills,etc.afterthedateoftakingoverofthepossession.

(34) On the execution of these presents, the Vendors have authorised and allowed the
Developers to put up the notice/signboards @herein indicating the proposed development
schemeoftheDevelopers)nthesaidproperty.

107
(35) From the date of the possession, the Developers shall be entitled to commence the
constructionofthenewbuildingattheirowncostsandresponsibilityandalsoenterintothe
agreementforsaleofunits/flats,etc.,hereinattheirentireresponsibilityonwhatisknownas
ownershipbasis'.

(36)TheVendorsherebyauthorisetheDeveloperstosignandexecuteapplications,writings,
undertakingsforamalgamation,layout,subdivision,buildingplansandotherassurancesand
submit the same D the Municipal and Public authorities and to obtain commencement
certificate, etc. for obtaining N.A. and transfer Permission for the purpose of and for the
development of the said property and also to appoint the Architect at Developers' costs and
expenses.Itisalsoagreedthatallthecosts,chargesandexpensestoeincurredinpursuanceof
thisclausesaveandexceptasprovidedotherwiseinthisAgreementshallbeborneandpaidby
theDevelopersaloneirrespectiveofthefactwhetherthetransactiongoesthroughornot.

(37)TheVendorsdeclarethatthepropertyinquestionisancestralproperty.However,thereis
nominorinterestedinthepropertyandhencethequestionofobtainingthesanctionfromthe
competentCourtrelatingtominor'sinterestinthepropertydoesnotarise.

(38) If the Development/sale be not completed due to any wilful default on the part of the
Vendors,theDevelopersshallbeentitledtospecificperformanceofthisAgreement.

(39)TheVendorsshallimmediatelyonexecutionoftheConveyanceapplyforandshallobtain
his/theirIncomeTaxClearanceCertificateundersection230AoftheIncometaxAct,1961in
respect of Deed of Conveyance of the said property and till that time the balance purchase
pricetotheVendorsshallremaindepositedwiththeVendor'sAdvocatesashisstakeholders.

(40) The Developers are aware of the fact that at present there is no proper access to the
property to be developed and the Developers have agreed to construct a road thereby
facilitating an access to the properly hereby agreed to be developed at the Developers own
costsandexpensesandundernocircumstances,theDevelopersshallcancelthesepresentson
thegroundofnonavailabilityofaccessasitisagreedbytheDevelopersthattheyshallbear
thecostsoftheaccess,ifnecessary.

(41)Ontheexecutionofthesepresents,theVendorsauthoriseandallowtheDeveloperstoput
up the notice/signboards therein indicating the proposed development scheme of the
Developers on the said property. However, it is made clear by the Vendors to the Developers
that to put up the signboards does not mean even by implication the handing over of the
possession and mere putting of the signboards does not give any right to the Developers of
possession and the Developers shall not have any interest whatsoever against the said
property.

(42) This agreement shall not be treated as a partnership between the Vendors and the
Developers.

(43) The Developers shall indemnify and keep indemnified the Vendors from and against all
actions, claims, demands, proceedings, fines, penalties and all costs, expenses and damages
incurredorsufferedbytheVendorsinthecourseofsuchdevelopment.

(44)Saveandexceptashereinbeforeotherwiseprovided,allcosts,chargesandexpensesofthe
Vendors and of the Developers and incidental to this Agreement and Conveyance and other
writingorwritingstobemadeinpursuancehereofincludingstampduty,registrationcharges,
plan, certified copies, correspondence and all the expenses shall be borne and paid by the
Developersalone.ThefinesandpenaltiespayabletotheCollectorortransferoftheproperty
notincurredbyreasonofanydelayinlodgingtheDeedofConveyancebytheDevelopersshall

108
bepaid by theDevelopersalone.The penaltypayabletotheRegistrarofAssurancesshallbe
paidbythepartybywhosedefaultsuchpenaltymayhavebecomeleviable.

IN WITNESS WHEREOF the parties hereto have hereunto set and subscribed their respective
handsandsealsthedayandyearfirsthereinabovewritten.

TheScheduleabovereferredto

ALLTHATpieceorparcelofland,ground,hereditamentsandpremisesbearingNo.............and
admeasuring about .......... sq. meters, situated at .......................................... and delineated on the
Plan hereto annexed and thereon shown surrounded by a red colour boundary line and
boundedasfollows:

OnortowardstheEast
OnortowardstheWest
OnortowardstheNorth
OnortowardstheSouth

Signed,sealedanddeliveredbythe
withinnamedVendors
1.
X
2.
Y
3.
Z
4.
A
5.B
6.Smt.C

Signed,sealedanddeliveredbythe
withinnamedConfirmingPartySmt.N
WITNESSES;
1.

2.

ReceivedthedayandyearfirsthereinabovewrittenofandfromthewithinnamedDevelopers
asumofRs.............(Rupees...................only)asandbywayofearnestmoneytobepaidby
them to us by Cheque No . .................... dated .................... for Rs . ................ drawn by the
...................................

WeSayReceived
1.X
2.Y
3.A
4.B
5.Smt.C

SIGNED,SEALEDANDDELIVEREDbythe

WithinnamedDevelopersM/s.bythehandsofShri..,itspartner.

Further,belowisasampleagreementbetweendeveloperandbuyerwhichagainisfullofall
theingredientsofcontractandconstructioncontract

109

FormofagreementbetweenPromoterandpurchaserofflat

ThisAgreementmadeat_____________this__________dayof_______________,2000_________between
______________ hereinafter referred to as the Promoter ( ____________________ ) of the One Part
and ( _____________________ ) hereinafter referred to as the Flat Purchaser ( __________
________________________)oftheOtherPart.

Whereas the Promoter has by an Agreement / Conveyance dated _____________ day of

____________, 2000 and executed between ______________________________ of the One Part
(hereinafter referred as the Vendor) and the Promoter of the Other Part, the Vendor has
agreed with the Promoter for the absolute sale to the Promoter / sold absolutely to the
Promoter an immovable property being piece or parcel of freehold land lying and being at
______________ in the Registration SubDistrict of _____________ admeasuring __________________ sq.
mts. or thereabouts more particularly described in the First Schedule hereunder written
(hereinafterreferredtoasthesaidland).

And Whereas by and under a lease / an agreement for Lease dated the ________ day of
__________________,2000madebetween______________________oftheOnePart(hereinafterreferred
to as the Lessor) and the Promoter of the Other Part, the Lessor agreed to grant unto the
Promoter a lease in perpetuity / for a term of ____________________ years in respect of an
immovable property being piece or parcel of leasehold land being at ________________ in the
Registration SubDistrict of ____________________ admeasuring _________ sq. mts. or thereabouts
moreparticularlydescribedintheFirstSchedulehereunderwritten(hereinafterreferredtoas
the said land) at a rent of Rs. ____________________per annum / month and on the terms and
conditionscontainedinthesaidLease/AgreementforLease.

AndWhereas,theLease/AgreementforLeaseiswiththebenefitandrighttoconstructany
newbuilding/s,ifsopermittedbytheconcernedlocalauthority.

AndWhereasbyanagreementdated___________dayof______________,2000PowerofAttorney,
dated____________executedbetweenShri_________________(hereunderreferredtoastheOriginal
Owner) of the One Part and the Promoter of the Other Part (hereinafter referred to as the
Development Agreement) the Original Owner has appointed the Promoter as his agent to
develop the piece or parcel of freehold land lying and being at ___________ in the Registration
SubDistrictof_____________admeasuring______________sq.mts.orthereaboutsmoreparticularly
described in the First Schedule therein as well as in the First Schedule hereunder written
(hereinafterreferredtoasthesaidland)andtoconstructthereonbuilding/sinaccordance
withthetermsandconditionscontainedintheDevelopmentAgreement/PowerofAttorney:

And Whereas as a result of the Urban Land (Ceiling and Regulation) Act, 1976 (hereinafter
referred to as The Ceiling Act) which came into force in the State of _____________ on
______________. Vendor / Lessor / Original Owner / Promoter were not entitled to hold any
vacantlandinexcessoftheceilinglimitexceptasotherwiseprovidedintheCeilingAct.

And Whereas the Vendor/Lessor/Original Owner/Promoter having been shown to be the

owner of the said land in the Government and revenue records, the Vendor/ Lessor/Original
Owner/Promoter submitted to the Government of _________________ (hereinafter referred to as
"the Government") in the name of the Vendor/Lessor/Original Owner and or promoter an
application under section _______ of the Ceiling Act for exempting the said land from the
provisionsoftheCeilingAct.

110
And Whereas by an Order ___________ dated _________ (hereinafter referred to as "the said
Order")theGovernmentexempted,subjecttotheconditionsstatedinthesaidOrder,thesaid
landfromtheprovisionsoftheCeilingAct.

And Whereas as per the said Order and as a result of the Development Agreement the
Promoterisentitledandenjoinedupontoconstructbuildingsonthesaidlandinaccordance
withthesaidorder.

And Whereas the Vendor/Lessor/Original Owner/Promoter having been shown to be the

ownerofthesaidlandintheGovernmentandRevenuerecords,theVendor/Lessor/Original
Owner/Promoter submitted to the Government of ________________ (hereinafter referred to as
"the Government") in the name of the Vendor/lessor/Original Owner and Promoter an
application under section _______of the Ceiling Act and the guidelines framed by the
Governmentinrespectofsection____oftheCeilingActforthepurposeofdevelopingthesaid
landasstatedintheapplicationinaccordancewiththeprovisionsoftheCeilingAct.

And Whereas by Order No. _______ dated ____________ (hereinafter referred to as "the said
Order"),theCompetentAuthorityundertheCeilingActpermittedtheVendor/Lessor/Original
Owner and/or Promoter to continue to hold the said land for the construction of houses for
weaker sections of the society through the Promoter subject to the terms and conditions
thereincontained.

And Whereas the Vendor/Lessor/Original Owner/Promoter being in possession of the said

land and building thereon will be demolishing/have demolished the old buildings and
structuresandconstructing/hasconstructedinsteadnewmultistoriedbuildingthereon.

AndWhereaspermissioncontemplatedbysection_____oftheCeilingActforDevelopmenthas
beenobtainedbytheVendor/Lessor/OriginalOwner/Promoter.

And Whereas the Promoter has proposed to construct on the said land __________ new multi
storiedbuildingsofgroundflooratstiltleveland______________ormoreupper
floors.(hereinafterreferredtoas"thesaidbuilding/s").

And Whereas the promoter has entered into a standard agreement with an Architect
registered with the Council of Architects and such agreement is as per the agreement
prescribed by the Council of Architects; whereas the promoter has appointed a 'structural
Engineer for the preparation of the structural design and drawings of the buildings and the
promoteracceptstheprofessionalsupervisionoftheArchitectandthestructuralEngineertill
thecompletionofthebuilding/buildings.

AndWhereasbyvirtueoftheDevelopmentAgreement/PowerofAttorney,thePromoteralone
hasthesoleandinclusiverighttoselltheflatsinthesaidbuilding/stobeconstructedbythe
Promoteronthesaidlandandtoenterintoagreement/swiththepurchaser/softheflatsand
toreceivethesalepriceinrespectthereof.

And Whereas the Flat Purchaser demanded from the Promoter and the Promoter has given
inspectiontotheFlatPurchaserofallthedocumentsoftitlerelatingtothesaidland,thesaid
Order,theDevelopmentAgreementandtheplans,designsandspecificationspreparedbythe
PromotersArchitectsMessrs_______________andofsuchotherdocumentsasarespecifiedunder
the _____________ Ownership Flats (Regulation of the Promotion of Construction, Sale,
managementandTransfer)Act,(hereinafterreferredtoasthesaidAct)andtherulesmade
thereunder.

111
AndWhereasthecopiesofCertificateofTitleissuedbytheattorneyatlaworadvocateofthe
Promoter,copiesofPropertycardorextractofVillageForms__________oranyotherrelevant
revenuerecordshowingthenatureofthetitleofthePromotertothesaidlandonwhichthe
flatsareconstructedoraretobepurchasedbytheFlatPurchaserapprovedbytheconcerned
localauthorityhavebeenannexedtheretoandmarkedAnnexuresABandCrespectively.

AndWhereasthePromoterhasgotapprovedfromtheconcernedlocalauthoritytheplans,the
specifications,elevations,sectionsanddetailsofthesaidbuildings.

AndWhereaswhilesanctioningthesaidplansconcernedlocalauthorityand/orGovernment
haslaiddowncertainterms,conditions,stipulationsandrestrictionswhicharetobeobserved
and performed by the Promoter while developing the said land and the said building/s and
upon due observance and performance of which only the completion and occupation
certificatesinrespectofthesaidbuilding/sshallbegrantedbytheconcernedlocalauthority.

AndWhereasthePromoterhasaccordinglycommencedconstructionofthesaidbuilding/sin
accordancewiththesaidplans.

AndWhereastheFlatPurchaserappliedtothePromoterforallotmenttotheFlatPurchaser
FlatNo.______________on__________floorinbuildingno._________situatedat___________________.

And Whereas prior to making application as aforesaid, as required by the provisions of

_____________CooperativeSocietiesAct,theFlatPurchaserhasmadeadeclarationtotheeffect
firstly,thatneitherthatFlatPurchasernotthemembersofthefamily[Familyasdefinedunder
the Urban Land (Ceiling and Registration) Act of 1976] of Flat Purchaser own a tenements,
houseorbuildingwithinthelimitsof______________(Nameoftowninwhichflatappliedforis
located.)

And Whereas relying upon the said application, declaration and agreement, the promoter
agreed to sell to the Flat Purchaser a flat at the price and on the terms and conditions
hereinafterappearing.

And Whereas prior to the execution of these presents, the Flat purchaser has paid to the
PromoterasumofRs.____________(Rupees_________________________)only,beingpartpaymentof
thesalepriceoftheflatagreedtobesoldbythepromotertotheFlat purchaserasadvance
payment or deposit (the payment and receipt whereof the promoter both hereby admit and
acknowledge)whichshallinnoeventexceedfifteenpercentofthesalepriceoftheflatagreed
to be sold to the Flat Purchaser and the Flat Purchaser has agreed to pay to the promoter
balanceofthesalepriceinthemannerhereinafterappearing.

And Whereas under section ___ of the said Act the Promoter is required to execute a written
agreement for sale of said flat to the Flat Purchaser being in fact these presents and also to
registersaidagreementundertheRegistrationAct.

NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED BY AND BETWEEN THE
PARTIESHERETOASFOLLOWS:

1.
ThePromotershallconstructthesaidbuilding/sconsistingofgroundand............upper
floors on the said land in accordance with the plans, designs, specifications approved by the
concernedlocalauthorityandwhichhavebeenseenandapprovedbytheFlatPurchaserwith
onlysuchvariationsandmodificationsasthePromotermayconsidernecessaryorasmaybe
requiredbytheconcernedlocalauthority/theGovernmenttobemadeinthemoranyofthem:

112
ProvidedthatthePromotershallhavetoobtainpriorconsentinwritingoftheflatpurchaser
in respect of such variations or modifications which may adversely affect the flat of the
purchaser.

2.
The Flat Purchaser hereby agrees to purchase from the Promoter and the Promoter
herebyagreestoselltotheFlatPurchaseroneflatNo......................oftheType............................of
carpet area admeasuring ................... sq. metres. (Which is inclusive of the area of balconies)
on................... Floor as shown in the floor plan thereof hereto annexed and marked Annexure
D/Shop No. ................... /covered/open Garage No. .................. in the .................... Building
(hereinafterreferredtoas"theFlat")forthepriceofRs...................includingRs................being
the proportionate price of the common areas and facilities appurtenant to the premises, the
nature, extent and description of the common/limited common areas and facilities/limited
common areas and facilities which are more particularly described in the Second Schedule
hereunderwritten.TheFlatPurchaserherebyagreestopaytothatpromoterbalanceamount
ofpurchasepriceofRs................(Rupees................)havingbeenpaidtothePromoteronor
beforetheexecutionofthisagreementinthefollowingmanner:

(i) 10percentPlinth,
(ii) 20percentSlab,
(iii) 7percentwalling,
(iv)
10percentDoorsandWindows,
(v) 7percentflooring,
(vi)
7percentplaster(internalandexternal),
(vii) 10percentSanitaryFittingsandPlumbing,
(viii) 14percentorremainingattimeofoccupation.

3.
The Promoter hereby agrees to observe, perform and comply with all the terms,
conditions,stipulationsandrestrictions,ifanywhichmayhavebeenimposedbytheconcerned
localauthorityatthetimeofsanctioningthesaidplansorthereafterandshall,beforehanding
over possession of the Flat to the Flat Purchaser, obtain from the concerned local authority
occupationand/orcompletioncertificatesinrespectoftheFlat.

4.
The Promoter hereby declares that the Floor Space Index available in respect of the
saidlandis............squaremetresonlyandthatnopartofthesaidfloorspaceindexhasbeen
utilised by the Promoter elsewhere for any purpose whatsoever. In case the said floor space
indexhasbeenutilizedbythePromoterelsewhere,thenthePromotershallfurnishtotheFlat
Purchaserallthedetailedparticularsinrespectofsuchutilizationofthesaidfloorspaceindex
byhim.Incasewhiledevelopingthesaidland,thePromoterhasutilizedanyfloorspaceindex
ofanyotherlandorpropertybywayoffloatingfloorspaceindex,thentheparticularsofsuch
floorspaceindexshallbedisclosedbythePromotertotheFlatPurchaser.TheresidualF.A.R.
(F.S.I) in the plot or the layout not consumed will be available to the promoters till the
registration of the society. Whereas after the registration of the Society the residual F.A.R.
(F.S.I),shallbeavailabletotheSociety.

5.
IncasethePromoterisactingasanagentoftheVendor/Lessor/OriginalOwnerofthe
saidland,then,thePromoterherebyagreesthatheshall,beforehandingoverpossessionofthe
Flat to the Flat Purchaser and in any event before execution of a conveyance/assignment of
lease of the said land in favor of corporate body to be formed by the purchasers of
flats/shops/garagesinthebuildingtobeconstructedonthesaidland(hereinafterreferredto
as"theSociety"/"thelimitedCompany"makefullandtruedisclosureofthenatureofhistitle
tothesaidlandaswellasencumbrances,ifany,includinganyright,title,interestorclaimof
anypartyinoroverthesaidland,andshall,asfaraspracticable,ensurethatthesaidlandis
free from ail encumbrances and that the Vendor/lessor/Original Owner/the Promoter
has/haveabsolute,clearandmarketabletitletothesaidlandsoastoenablehimtoconveyto

113
thesaidSociety/LimitedCompanysuchabsolute,clearandmarketabletitleontheexecutionof
a conveyance/assignment' of lease of the said land by the Promoter in favour of the said
Society/limitedCompany.

6.
TheFlatPurchaseragreestopaytothepromoterinterestatninepercentperannum
on all the amounts which become due and payable by the Flat Purchaser to the promoter
under the terms of this agreement from the date the said amount is payable by the Flat
PurchasertothePromoter.

7.
OntheFlatPurchasercommittingdefaultinpaymentonduedateofanyamountdue
and payable by the Flat Purchaser to the promoter under this Agreement (including his/her
proportionateshareoftaxesleviedbyconcernedlocalauthorityandotheroutgoing)andon
theFlatPurchasercommittingbreachofanyofthetermsandconditionshereincontained,the
promotershallbeentitledathisownoptiontoterminatehisagreement:

Providedalwaysthatthepowerofterminationhereinbeforecontainedshallnotbeexercised
bythepromoter,unlessanduntilthepromotershallhavegiventotheFlatPurchaserfifteen
days prior notice in writing of his intention to terminate this agreement and of the specific
breachorbreachesoftermsandconditionsinrespectofwhichitisintendedtoterminatethe
agreementanddefaultshallhavebeenmadebytheFlatPurchaserinremedyingsuchbreach
orbreacheswithinareasonabletimeafterthegivingofsuchnotice:

Provided further that upon termination of this agreement as aforesaid, the promoter shall
refundtotheFlatPurchasertheinstallmentsofsalepriceoftheFlat,whichmaytillthenhave
beenpaidbytheFlatPurchasertothePromoterbutthepromotershallnotbeliabletopayto
the Flat Purchaser any interest on the amount so refunded and upon termination of this
agreementandrefundofaforesaidamountbythePromoter,thePromoter,shallbeatliberty
to dispose of and sell the Flat to such person and at such price as the Promoter may in his
absolutediscretionthinkfit.

8.
ThefixturefittingsandamenitiestobeprovidedbythePromoterinthesaidbuilding
andtheFlatarethosethataresetoutinAnnexure'E'annexedhereto.

9.
ThePromotershallgivepossessionoftheflattotheFlatPurchaseronorbefore.........
.......dayof................19........ifthePromoterfailsorneglectstogivepossessionoftheFlattothe
FlatPurchaseronaccountofreasonsbeyondhiscontrolandofhisagentsaspertheProvisions
of section 8 of ______________ Ownership Flats Act, by the aforesaid date or the date or dates
prescribedinsection8ofthesaidAct,thenthePromotershallbeliableondemandtorefund
tointerestatninepercentperannumfromreceivedbyhiminrespectoftheflatwithsimple
the date the promoter received the sum till the date the amounts and interest thereon is
repaid, provided that by mutual consent it is agreed that dispute whether the stipulations
specified in section 8 have been satisfied or not will be referred to the Competent Authority
who will act as an Arbitrator. Till the entire amount and interest thereon isrefunded by the
promotertotheFlatPurchaserthereshall,subjecttopriorencumbrancesitany,beacharge
onthesaidlandaswellastheconstructionorbuildinginwhichtheFlatsaresituatedorwere
tobesituated:

ProvidedthatthePromotershallbeentitledtoreasonableextensionoftimeforgivingdelivery
ofFlatontheaforesaiddate,ifthecompletionofbuildinginwhichtheFlatistobesituatedis
delayedonaccountof
(i)Nonavailabilityofsteel,cement,otherbuildingmaterials,waterorelectricsupply;
(ii)War,civilcommotionoractofGod;
(iii)Anynotice,order,rule,notificationoftheGovernmentand/orotherpublicorcompetent
authority.

114

10.
The Flat Purchaser shall take possession of the Flat within......... days of the Promoter
givingwrittennoticetotheFlatPurchaserintimatingthatthesaidFlatisreadyforuseand
occupation:

Provided that if within a period of three years from the date of handing over the Flat to the
FlatPurchaser,theFlatPurchaserbringstothenoticeofthePromoteranydefectintheFlator
the building in which the Flat is situated or the material used therein or any unauthorized
change in the construction of the said building, then, wherever possible such defects or
unauthorizedchangesshallberectifiedbythePromoterathisowncostandincaseitisnot
possible to rectify such defects or unauthorized changes, then the Flat Purchaser shall be
entitledtoreceivefromthePromoterreasonablecompensationforsuchdefectorchange.

11.
TheFlatPurchasershallusetheFlatoranypartthereoforpermitthesametobeused
onlyforpurposeofresidence/officeshowroom/shop,godownforcarryingonanyindustryor
business.Heshallusethegarageorparkingspaceonlyforpurposeofkeepingorparkingthe
FlatPurchaser'sownvehicle.

12.
The Flat Purchaser along with other purchasers of flats in the building shall join in
forming andregistering the society or a Limited Company to be known by such name as the
FlatPurchasersmaydecideandforthispurposealsofromtimetotimesignandexecutethe
application for registration and/or membership and other papers and documents necessary
fortheformationandtheregistrationoftheSocietyorLimitedCompanyandforbecominga
member,includingthebyelawsoftheproposedSocietyanddulyfillin,signandreturntothe
Promoter within .................... days of the same being forwarded by the Promoter to the Flat
Purchaser, so as to enable Promoter to register the occupation of the Flat Purchaser under
section10ofthesaidActwithinthetimelimitprescribedbyrule8ofthe___________Ownership
Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Rules,
1964. No objection shall be taken by the Flat Purchaser if any changes or modifications are
made in the draft byelaws or the Memorandum and/or Articles of Association, as may be
requiredbytheRegistrarofCooperativeSocietiesortheRegistrarofCompaniesasthecase
maybeoranyotherCompetentAuthority.
13.
Unlessitisotherwiseagreedtobyandbetweenthepartieshereto,thepromotershall,
withinfourmonthsofregistrationoftheSocietyorlimitedCompany,asaforesaidcausetobe
transferred to the society or Limited Company all the rights, title and the interest of the
Vendor/lessor/Original Owner/Promoter and/or the owners in the aliquot part of the said
landtogetherwiththebuildingsbyobtaining/orexecutingthenecessaryconveyance/landor
assignmentofleaseofthesaidland(ortotheextentasmaybepermittedbytheauthorities)
and the said building in favor of such Society or Limited Company, as the case may be such
conveyance/assignment of lease shall be in keeping with the terms and provisions of this
Agreement.

14.
Commencing a week after notice in writing is given by the Promoter to the flat
Purchaserthattheflatisreadyforuseandoccupation,theflatPurchaserbeliabletobearand
pay the proportionate share (i.e. in proportion to the floor area of the Flat) of outgoing in
respectofthesaidlandandbuilding/snamelylocaltaxes, bettermentchargesorsuchother
leviesbytheconcernedlocalauthorityand/orGovernment,watercharges,insurance,common
lights, repairs and salaries of clerks, bill collectors. chowkidars, sweepers and all other
expensesnecessaryandincidentaltothemanagementandmaintenanceofthesaidlandand
building/s. Until the Society/Limited Company is formed and the said land and building/s
transferred to it, the Flat Purchaser shall pay to the promoter (such proportionate share of
outgoing as may be determined. The Flat Purchaser further agrees that till the Flat
Purchaser's share is so determined, the Flat Purchaser shall pay to the Promote (provisional
monthlycontributionsofRs...........permonthtowardstheoutgoing.Theamountssopaidbythe

115
Flat Purchaser to the Promoter shall not carry any interest and remain with the Promoter
until a conveyance/assignment of lease is executed in favour of the society or a limited
company as aforesaid. Subject to the provisions of section 6 of the said Act, on such
conveyance/assignment of lease being executed, the aforesaid deposits (less deductions
providedforthisAgreement)shallbepaidoverbythePromotertothesocietyortheLimited
Company,asthecasemaybe.TheFlatPurchaserundertakestopaysuchprovisionalmonthly
contribution and such proportionate share of outgoing regularly on the 5th day of each and
everymonthinadvanceandshallnotwithholdthesameforanyreasonwhatsoever.

15.
TheFlatPurchasershallonorbeforedeliveryofpossessionofthesaidpremiseskeep
depositedwiththePromoterthefollowingamounts:
(i)Rs.................forlegalcharges.
(ii)Rs................forsharemoneyapplication,entrancefeeoftheSocietyorLimitedCompany.
(iii)Rs.................forformationandregistrationoftheSocietyorlimitedCompany.
(iv)Rs.................forproportionateshareoftaxesandothercharges.

TotalRs...........................

16.
The Promoter shall utilise the sum of Rs ............... paid by the Flat Purchaser to the
Promoterformeetingalllegalcosts,chargesandexpenses,includingprofessionalcostsofthe
Attorneyatlaw,AdvocatesofthePromoterinconnectionwithformationofthesaidSociety,
orasthecasemaybeLimitedCompany,preparingitsrules,regulationsandbyelawsandthe
costofpreparingandengrossingthisAgreementandtheconveyanceor'assignmentoflease.

17.
At the lime of registration, the Flat Purchaser shall pay to the Promoter the Flat
Purchaser'sshareofstampdutyandregistrationchargespayable,ifany,bythesaidSocietyor
Limited Company on the conveyance or lease or any document or instrument of transfer in
respect of the said land and the building to be executed in favour of the Society or limited
Company.

18.
The Flat Purchaser/s or himself/themselves with intention to bring all persons into
whosoeverhandstheFlatmaycome,dothherebycovenantwiththePromoterasfollows:

(a)
Tomaintaintheflatathisowncostingoodtenantablerepairandconditionfromthe
datethepossessionoftheflatistakenandshallnotdoorsufferedtobedoneanythinginorto
thebuildinginwhichtheFlatissituated,staircaseoranypassageswhichmaybeagainstthe
rules, regulations or byelaws or concerned local or any other authority or change/alter or
makeadditioninortothebuildinginwhichtheFlatissituatedandtheFlatitselforanypart
thereof.

(b)
NottostoreintheFlatanygoodswhichareofhazardous,combustibleordangerous
natureoraresoheavyastodamagetheconstructionorstructureofthebuildinginwhichthe
Flat is situated or storing of which goods is objected to by the concerned local or other
authorityandshallnotcarryorcausetobecarriedheavypackageswhoseupperfloorswhich
maydamageorlikelytodamagethestaircases,commonpassagesoranyotherstructureofthe
buildinginwhichtheFlatissituated,includingentrancesofthebuildinginwhichtheFlatis
situatedandincaseanydamageiscausedtothebuildinginwhichtheflatissituatedorthe
flatonaccountofnegligenceordefaultoftheFlatPurchaserinthisbehalf,theFlatPurchaser
shallbeliablefortheconsequencesofthebreach.

(c)TocarryathisowncostallinternalrepairstothesaidFlatandmaintaintheflatinthe
same condition, state and order in which it was delivered by the promoter to the Flat
Purchaserandshallnotdoorsufferingtobedoneanythinginortothebuildinginwhichthe
flatissituatedortheflatwhichmaybegivenbytherulesandregulationsandbyelawsofthe

116
concerned local authority or other public authority. And in the event of the Flat Purchaser
committing any act in contravention of the above provision, the Flat Purchaser shall be
responsible and liable for the consequences thereof to the concerned local authority and or
otherpublicauthority.

(d)NottodemolishorcausetobedemolishedtheFlatoranypartthereof,noratanytime
makeorcausetobemadeanyadditionoralterationofwhatevernatureinortotheFlator
anypartthereof,noranyalterationintheelevationandoutsidecolourschemeofthebuilding
in which the Flat is situated and shall keep the portion, sewers, drains, pipes in the Flat and
appurtenances thereto in good tenantable repair and condition, and in particular, so as to
support shelter and protect the other parts of the building in which the Flat is situated and
shallnotchiselorinanyothermannerdamagetocolumns,beams,wall,slabsorRCC,Pardis
orotherstructuralmembersintheflatwithoutthepriorwrittenpermissionofthePromoter
and/ortheSocietyortheLimitedCompany.

(e)Nottodoorpermittobedoneanyactorthingwhichmayrendervoidorvoidableany
insuranceofthesaidlandandthebuildinginwhichtheFlatissituatedoranypartthereofor
wherebyanyincreasedpremiumshallbecomepayableinrespectoftheinsurance.

(f)Nottothrowdirt,rubbish,rags,garbageorotherrefuseorpermitthesametobethrown
fromthesaidFlatinthecompoundoranyportionofthesaidlandandthebuildinginwhich
theFlatissituated.

(g)PaytothePromoterwithin..............daysofdemandbythePromoter,hisshareofsecurity
deposit demanded by concerned local authority or Government for giving electricity or any
otherserviceconnectiontothebuildinginwhichtheFlatissituated.

(h)Tobearandpayincreaseinlocaltaxes,watercharges,insuranceandsuchotherlevies,if
any, which are imposed by the concerned local authority and/or Government and/or other
publicauthority,onaccountofchangeofuseroftheFlatbytheFlatPurchaserviz.userforany
purposesotherthanforresidentialpurpose.

(i)TheFlatPurchasershallnotlet,sublet,transfer,assignorpartwithFlatPurchaserinterest
or benefit factor of this Agreement or part with the possession of the Flat, until all the dues
payablebytheFlatPurchasertothePromoterunderthisAgreementarefullypaidupandonly
if the Flat Purchaser had not been guilty of breach of or nonobservance of any of the terms
andconditionsofthisAgreementanduntiltheFlatPurchaserhasintimatedinwritingtothe
Promoter.

19.
TheFlatPurchasershallobserveandperformalltherulesandregulationswhichthe
society or the Limited Company may adopt at its inception and the additions, alterations or
amendmentsthereofthatmybemadefromtimetotimeforprotectionandmaintenanceofthe
said building and the flats therein and for the observance and performance of the Building
Rules, Regulations and Byelaws for the time being of the concerned local authority and of
Governmentandotherpublicbodies.TheFlatPurchasershallalsoobserveandperformallthe
stipulations and conditions laid down by the Society / Limited Company regarding the
Occupation and use of the Flat in the Building and shall pay and contribute regularly and
punctuallytowardsthetaxes,expensesorotheroutgoinginaccordancewiththetermsofthis
Agreement.

20.
TillaconveyanceofbuildinginwhichFlatissituatedisexecuted,theFlatPurchaser
shall permit the promoter and their surveyors and agents, with or without workmen and
others,atallreasonabletimes,toenterintoanduponthesaidlandandbuildingsoranypart
thereoftoviewandexaminethestateandconditionthereof.

117

21.
The Promoter shall maintain a separate account in respect of sums received by the
PromoterfromtheFlatPurchaserasadvanceordepositsumsreceivedonaccountoftheshare
capitalforthepromotionoftheCooperativeSocietyoracompanyortowardstheoutgoing,
legal charges and shall utilize the amounts only for the purposes for which they have been
received.

22.
Nothing contained in this Agreement is intended to be nor shall be construed as a
grant,demiseorassignmentinlawofthesaidFlatorofthesaidPlotandBuildingoranypart
thereof.TheFlatPurchasershallhavenoclaimsaveandexceptinrespectoftheFlathereby
agreed to be sold to him and all open spaces, parking spaces, lobbies, staircases, terraces,
recreation spaces, etc. will remain the property of the promoter, until the said land and
BuildingistransferredtotheSociety/LimitedCompanyashereinbeforementioned.

23.
Anydelaytoleratedorindulgenceshownbythepromoterinenforcingthetermsofthis
Agreement or any forbearance or giving of time to the Flat Purchaser by the Promoter shall
notbeconstruedasawaiveronthepartofthepromoterofanybreachornoncomplianceof
anyofthetermsandconditionsofthisAgreementbytheFlatPurchasernorshallthesamein
anymannerprejudicetherightsofthePromoter.

24.
The Flat Purchaser and/or the Promoter shall present this Agreement as well as the
conveyance / assignment of lease at the proper registration office of registration within the
time limit prescribed by the Registration Act and the promoter will attend such office and
admitexecutionthereof.

25.
AllnoticestobeservedontheFlatPurchaserascontemplatedbythisAgreementshall
be deemed to have been duly served if sent to the Flat Purchaser, by Registered Post AD /
UnderCertificateofpostingathis/heraddressspecifiedbelow:

Viz.
_______________
________________

_______________
________________

IT IS ALSO UNDERSTOOD AND AGREED BY AND BETWEEN THE PARTIES hereto that the
terracespaceinfrontoforadjacenttotheterraceflatsinthesaidbuilding,ifany,shallbelong
exclusivelytotherespectivepurchaseroftheterraceflatandsuchterracespacesareintended
for the exclusive use of the respective terrace Flat Purchaser. The said terrace shall not be
enclosed by the Flat Purchaser till the permission in writing is obtained from the concerned
localauthorityandthePromoterortheSociety,orasthecasemaybe,theLimitedCompany

26.
This Agreement shall always be subject to the provisions of the ___________________
Apartment Ownership Act and the rules made thereunder/said Act and the rules made
thereunder.

Note:Testimonialclausetobefinalizedinindividualcaseshavingregardtotheconstitutionof
thepartiestotheagreement.

FirstScheduleabovereferredto
(Descriptionofthefreehold/leaseholdland).

SecondScheduleabovereferredto
(Here set out the nature, extent and description of common areas and facilities/limited
commonareasandfacilities)

118

ANNEXUREA

NameoftheAttorneyatLaw/Advocate.
Address:
Date:
NO.
RE:

CERTIFICATE

This is to certify that we have investigated the title to the aforesaid property, which is more
particularly described below in the Schedule hereunder written and have perused title deeds
and certify that in our opinion the title of ...................... the Vendor/Lessor/ Original
Owner/Promoterisclear,marketableandfreefromencumbrance,chargesand/orclaims.

TheScheduleabovereferredto
(Descriptionofproperty)
_________:

Dated..............Dayof............................,200

(Signed)
SignatureofAttorneyatlaw/Advocate

ANNEXUREB
(Copies of Property Card or any other revenue record showing nature of the title of the
Vendor/lessor/OriginalOwner/Promotertothesaidland).

ANNEXUREC
(CopyoftheplansandspecificationsoftheFlatasapprovedbytheconcernedlocalauthority).

ANNEXURED
(DescriptionoftheFlat).

ANNEXUREE
(SpecificationsandamenitiesfortheFlat).

Note.Executionclausestobefinalizedinindividualcaseshavingregardtotheconstitutionof
thepartiestotheagreement.ReceivedofandfromtheFlatPurchaserabovenamedthesumof
Rupees ........... being the fifteen per cent of the sale price of the Flat as advance payment or
depositpaidbytheFlatPurchasertothePromoter.
Isayreceived.

ThePromoter/s.

Authorscomments:
Here also clauses like 2, 3, 9 etc. show that the agreement is essentially a contract for
construction first and sale then though in Clause 2 it is shown as if it is contract
exclusively for sale. Such drafting would have been correct had it been in respect of
goodsreadyforsalewhichisnotinthiscase.
Readers may wonder as to why I have given samples of so many agreements/ offer
document/developmentagreementspreadoversomanypages.Butitistoberealized

119
thatapplicabilityofAS7orotherwiseisdependentexclusivelyonfindingevidencesto
showthatthedeveloperdidconstructioncontracts.And,itisthesedocumentswhich
willdeterminewhetheritisconstructioncontractornot.Therefore,thereadersmust
familiarize them with different types of these documents to prove, clausebyclause,
pointbypoint, extracting from these documents, that these were indeed construction
contracts.Wheneveraccrualofincomeorliabilitytopaytaxflowsfromanagreementin
writing,theentireagreement,andnotitsparticularclausesbypart,shouldbereadasa
wholesoastoascertainitstrueintention110ITR145(Bom),JanathaContractCo.
v.CIT105ITR627(Kerala).

NowIwilltravelbacktotheremainingclausesofAS7foranalyticaldiscussion:

4.Forthepurposesofthestatement,constructioncontractsinclude:
a)Contractsfortherenderingofservicewhicharedirectlyrelatedtotheconstructionofthe
asset,forexample,thosefortheservicesofprojectmanagersandarchitects;and
b) Contracts for destruction or restoration of assets, and the restoration of the environment
followingthedemolitionofassets.
Authorscomments:Incaseofdevelopers/builderstheseverymuchhappen.

5.Constructioncontractsareformulatedinanumberofwayswhich,forthepurposesofthe
statement, are classified as fixed price contracts and costs plus contracts. Some construction
contracts may contain characteristics of a fixed price contract and a cost plus contract, for
example, in the case of a cost plus contract with an agreed maximum price. In such
circumstances,acontractorneedstoconsideralltheconditionsinparagraph22and23in
ordertodeterminewhentorecognizecontractrevenueandexpenses.

Combiningandsegmentingconstructioncontracts

6. The requirements of the statement are usually applied separately to each construction
contract. However, in certain circumstances, it is necessary to apply the statement to the
separatelyidentifiable componentsofa singlecontractortoa groupof contractstogetherin
ordertoreflectthesubstanceofacontractoragroupofcontract.
Authors comments: Requirements of AS7 are usually applied separately to each
constructioncontract.Therefore,AOcanrequireassesseetoprepareandfurnishseparate
financial statement for each project constructed. In fact, such demand from AO is neither
strangenorfreaknorunrealisticnorimpossibletocomplybecauseitisverymuchknown
thatdevelopersmakeaprofitabilityandcostestimatestudy,budgetingbeforeactualstartof
everyprojectseparately (hefurnishesthesametodifferentauthoritieslikelenderbanks/
Municipality etc. also, as discussed in later part of this book) and regularly monitors the
same either manually or throughproject softwares like MS Project or Prima Vera because
such cost & time estimates and budgeting are actually the life line of a project. In Rule
18BBBreadwithS.80IB(10)alsopreparationofsuchseparateaccountsismentioned.

7. When a contract covers a number of assets, the construction of each asset should be
treatedasaseparateconstructioncontractwhen
a)separateproposalhasbeensubmittedforeachasset
b)eachassethasbeensubjecttoseparatenegotiationandthecontractorandcustomerhave
beenabletoacceptorrejectthatpartofthecontractrelatingtoeachasset;and
c)theconstandrevenuesofeachassetcanbeidentified.
Authorscomments:MostofthedevelopersdonotshowtheirfinancialstatementslikeP&
L account etc separately for each project. Instead, they prepare a single, composite P & L
accountandbalancesheet.Thisisillustratedbythesamplefinancialstatementsgivenlater
in this book. If there are projects at different places, separate plan has definitely been
obtained, each flat/ house has definitely been negotiated separately with its respective

120
buyerandestimateforcostandreceiptforeachprojectmusthavebeendone(asallprudent
businessman does and which the developer is required to file with lending banks or
municipalityorsomeotherregulators/facilitators)andthusalltheconditions,(a),(b)and
(c)havebeenfulfilledbutstillthisclauseofAS7isnotfollowed.AOshavetotakehelpof
this clause to get separate accounts for each project, which will help untangle many
cobwebsintheaccountsandmakehisjobsimplerandclinicallyprecise.

Onepracticalquestionontheearlierpoint.Theassesseemaysay,Sir,Ihaveenteredinto
separate contract for construction and sale of flat with each buyer. Then as per your
argument I should prepare separate P&L Account and balance sheet for each buyer
separately.Para7repliestothis.Itsthreeconditionsarenotfulfilledincaseofindividual
buyerbecause,foreachindividualflatinamultistoriedbuilding(a)and(c)arenotfulfilled,
inanintegratedhousingprojectlikeParsvnathPrideAsiaofParsvnathDevelopersLtdin
Chandigarh (where club membership at Rs. 5 lakh is compulsory) discussed earlier or
AambyValleyprojectcustomerdoesnothavethediscretiontoacceptorrejectthatpart
ofthecontractrelatingtoeachassetasmentionedin(b)above,likehecannotsaythat
hedoesnotwantclubfacility.Thereforeassesseessuchargumentdoesnothaveanymerit
andsotheycannotbetreatedasseparatecontracts.

8.Agroupofcontracts,whetherwithasinglecustomerorwithseveralcustomers,shouldbe
treatedasasingleconstructioncontractwhen:
(a)
Thegroupofcontractsisnegotiatedasasinglepackage;
(b)
thecontractsaresocloselyinterrelatedthattheyare,ineffect,partofasingleproject
withanoverallprofitmargin;and
(c) Thecontractsareperformedconcurrentlyorinacontinuoussequence.
Authors comments: This makes it 100% clear that in such cases, not each flat but each
projectwillhavetohaveaseparateP&LAccountandBalancesheet

9.A contract may provide for the construction of an additional asset at option of the
customer or may be amended to include the construction of an additional asset. The
construction of the additional asset should be treated as a separate construction contract
when:

(a)
Theassetdifferssignificantlyindesign,technologyorfunctionfromtheassetorassets
coveredbytheoriginalcontract;or
(b) Thepriceoftheassetisnegotiatedwithoutregardtotheoriginalcontractprice.

ContractRevenue
10.Contractrevenueshouldcomprise:
(a)theinitialamountofrevenueagreedinthecontract;and
(b) variationsincontractwork,claimsandincentivepayments:
(c)totheextentthatitisprobablethattheywillresultinrevenue;and
(d) theyarecapableofbeingreliablymeasured.
Authors comments: This conveys one of the most important principles of recognition of
revenueunderAS7whenitsaysthatrevenuewillberecognizedonlyifitisprobablethat
contract amount will result into revenue and second, revenue can be reliably measured.
ThesetwoaspectsshowthatprincipleofrecognitioninAS7isbasedonprobabilityand
reliabilityandnotdependentontimeandamountofactualsales.Itmeans,atthetimeof
preparationofaccountsfortheyearsbeforeactualsales,someguessworkandimagination
isinvolved.However,wewillfindlaterthatitdoesnotmeanthatAS7doesnottakeinto
considerationreality,i.e.,theincreaseordecreaseatthetimeofactualreceipt.Wecansay
thatinitiallyrevenueisrecognizedonadhocbasiswhichisadjustedlater.

121
11.Contract revenue is measured at the consideration received or receivable. The
measurementofcontractrevenueisaffectedbyavarietyofuncertaintiesthatdependonthe
outcome of future events. The estimates often need to be revised as events occur and
uncertainties are resolved. Therefore, the amount of contract revenue may increase or
decreasefromoneperiodtothenext.Forexample:
(a)
a contractor and a customer may agree to variations or claims that increase or
decrease contract revenue in a period subsequent to that in which the contract was initially
agreed;
(b)the amount of revenue agreed in a fixed price contract may increase as a result of cost
escalationclauses;
(c)the amount of contract revenue may decrease as a result of penalties arising from delays
causedbythecontractorinthecompletionofthecontract;or
(d)when a fixed price contract involves a fixed price per unit of output, contract revenue
increasesasthenumberofunitsisincreased.
Authorscomments:Thissaysthatcontractrevenueisthecontractedamountreceivedor
receivableanditacknowledgesthatthatitdependsonmanyuncertaintiesasaresultof
which the estimate regarding revenue receivable may change from time to time.
Therefore,theamountofcontractrevenuemayincreaseordecreasefromoneperiodtothe
next, i.e., if total receivable from sale of flats was shown initially as say, Rs. 10 crore and
finally Rs. 9 crore could be realized, AS7 has the provision to take into account this
reduction.

12.Avariationisaninstructionbythecustomerforachangeinthescopeoftheworktobe
performedunderthecontract.Avariationmayleadtoanincreaseoradecreaseincontract
revenue. Examples of variations are changes in the specifications or design of the asset and
changesinthedurationofthecontract.Avariationisincludedincontractrevenuewhen:
(a)
itisprobablethatthecustomerwillapprovethevariationandtheamountofrevenue
arisingfromthevariation;and
(b)
theamountofrevenuecanbereliablymeasured.

13.Aclaimisanamountthatthecontractorseekstocollectfromthecustomeroranother
partyasreimbursementforcostsnotincludedinthecontractprice.Aclaimmayarisefrom,for
example,customercauseddelays,errorsinspecificationsordesign,anddisputedvariationsin
contractwork.Themeasurementoftheamountsofrevenuearisingfromclaimsissubjecttoa
highlevelofuncertaintyandoftendependsontheoutcomeofnegotiations.Therefore,claims
areonlyincludedincontractrevenuewhen:
(a)
negotiations have reached an advanced stage such that it is probable that the
customerwillaccepttheclaim;and
(b)theamountthatitisprobablewillbeacceptedbythecustomercanbemeasuredreliably.

14.Incentive payments are additional amounts payable to the contractor if specified

performance standards are met or exceeded. For example, a contract may allow for an
incentivepaymenttothecontractorforearlycompletionofthecontract.Incentivepayments
areincludedincontractrevenuewhen:
(a)
thecontractissufficientlyadvancedthatitisprobablethatthespecifiedperformance
standardswillbemetorexceeded;and
(b)theamountoftheincentivepaymentcanbemeasuredreliably.
Authorscomments:Clauses1214dealwithnatureofamountsduetowhichthecontract
revenue may change. Here, ASI 29 (Accounting Standard interpretation) is relevant, the
textofwhichisgivenbelow:

CompendiumofAccountingStandards
AccountingStandardsInterpretation(ASI)291
TurnoverincaseofContractors

122
AccountingStandard(AS)7,ConstructionContracts(revised2002)

ISSUE
1. AS 7, Construction Contracts (revised 2002) deals, inter alia, with revenue recognition in
respect of construction contracts in the financial statements of contractors. It requires
recognition of revenue by reference to the stage of completion of a contract (referred to as
percentageofcompletionmethod).Thismethodresultsinreportingofrevenuewhichcanbe
attributed to the proportion of work completed. Under this method, contract revenue is
recognizedasrevenueinthestatementofprofitandlossintheaccountingperiodinwhichthe
workisperformed.Theissueiswhethertherevenuesorecognizedinthefinancialstatements
ofcontractorsaspertherequirementsofAS7canbeconsideredasturnover.
CONSENSUS
2.Theamountofcontractrevenuerecognizedasrevenueinthestatementofprofitandlossas
pertherequirementsofAS7shouldbeconsideredasturnover.
(1PublishedinTheCharteredAccountant,August2005,pp.323324.Theauthorityofthis
ASIisthesameasthatoftheAccountingStandardtowhichitrelates.)

BASISFORCONCLUSIONS
3.TheparagraphdealingwiththeObjectiveofAS7providesasfollows:

ASI29
Objective
TheobjectiveofthisStatementistoprescribetheaccountingtreatmentofrevenueandcosts
associated with construction contracts. Because of the nature of the activity undertaken in
construction contracts, the date at which the contract activity is entered into and the date
when the activity is completed usually fall into different accounting periods. Therefore, the
primary issue in accounting for construction contracts is the allocation of contract revenue
and contract costs to the accounting periods in which construction work is performed. This
StatementusestherecognitioncriteriaestablishedintheFrameworkforthePreparationand
PresentationofFinancialStatementstodeterminewhencontractrevenueandcontractcosts
should be recognized as revenue and expenses in the statement of profit and loss. It also
provides practical guidance on the application of these criteria. From the above, it may be
noted that AS 7 deals, inter alia, with the allocation of contract revenue to the accounting
periodsinwhichconstructionworkisperformed.

4.Paragraphs21and31ofAS7provideasfollows:
21.Whentheoutcomeofaconstructioncontractcanbeestimatedreliably,contractrevenue
andcontractcostsassociatedwiththeconstructioncontractshouldberecognizedasrevenue
and
expenses respectively by reference to the stage of completion of the contract activity at the
reporting date. An expected loss on the construction contract should be recognized as an
expense
immediatelyinaccordancewithparagraph35.

31.Whentheoutcomeofaconstructioncontractcannotbeestimatedreliably:
(a) Revenue should be recognized only to the extent of contract costs incurred of which
recoveryisprobable;and
(b)Contractcostsshouldberecognizedasanexpenseintheperiodinwhichtheyareincurred.
Anexpectedlossontheconstructioncontractshouldberecognizedasanexpenseimmediately
inaccordancewithparagraph35.

Fromtheabove,itmaybenotedthattherecognitionofrevenueasperAS7maybeinclusiveof
profit (as per paragraph 21 reproduced above) or exclusive of profit (as per paragraph 31
above) depending on whether the outcome of the construction contract can be estimated

123
reliablyornot.Whentheoutcomeoftheconstructioncontractcanbeestimatedreliably,the
revenueisrecognized
inclusiveofprofitandwhenthesamecannotbeestimatedreliably,itisrecognizedexclusiveof
profit.However,ineithercaseitisconsideredasrevenueasperAS7.

5.Revenueisawiderterm.Forexample,withinthemeaningofAS9,RevenueRecognition,the
termrevenueincludesrevenuefromsalestransactions,renderingofservicesandfromtheuse
byothersofenterpriseresourcesyieldinginterest,royaltiesanddividends.Thetermturnover
isusedinrelationtothesourceofrevenuethatarisesfromtheprincipalrevenuegenerating
activity of an enterprise. In case of a contractor, the construction activity is its principal
revenuegeneratingactivity.Hence,therevenuerecognizedinthestatementofprofitandloss
ofacontractorinaccordancewiththeprincipleslaiddowninAS7,bywhatevernomenclature
describedinthefinancialstatements,isconsideredasturnover.

Authorscomments: ThiswillhelpAOstodecidewhatisthedevelopersturnover forall

purposes like allowance/ disallowance of expenses/ deduction etc. and tackle assessees
argumentsinthisregard.

Constructioncosts:
Authorscomments:Clauses1518statetheamountswhichcanbeallowedascostsfrom
therevenueintheconstructioncontractaccountofaproject.

15.Contractcostsshouldcomprise:
a)Coststhatrelatedirectlytoaspecificcontract;
b)Coststhataredirectlyattributable tocontractactivityingeneralandcanbeallocatedto
thecontract;and
c) such other costs as are specifically chargeable to the customer under the terms of the
contract
Authors comments: This again shows that accounts are to be made separately for each
specific contract, i.e., project and while doing scrutiny assessment the AO has to consider
onlythesethreetypesofcostsfordeterminationofpercentageofcompletion.

16.Coststhatrelatedirectlytoaspecificcontractinclude:
(a)sitelabourcosts,includingsitesupervision;
(b)costofmaterialsusedinconstruction;
(c)depreciationofplantandequipmentusedonthecontract;
(d)costsofmovingplant,equipmentandmaterialstoandfromthecontractsite.
e)Costsofhiringplant&equipment;
f)costofdesign&technicalassistancethatisdirectlyrelatedtothecontract;
g)theestimatedcostsofrectificationandguaranteeworks,includingexpectedwarrantycosts;
and
h)claimsfromthirdparties
Thesecostsmaybereducedbyanyincidentalincomethatisnotincludedincontractrevenue,
forexample,incomefromthesaleofsurplusmaterialsandthedisposalofplantandequipment
attheendofthecontract.

17.Costsmaybeattributabletocontractactivityingeneralandcanbeallocatedtospecific
contractinclude:
(a)insurance;
(b)designandtechnicalassistancethatisnotdirectlyrelatedtoaspecificcontract;and;
(c)constructionoverheads.
Such costs are allocated using methods that are systematic and rational and are applied
consistently to all costs having similar characteristics. The allocation is based on the normal
levelofconstructionactivity.Constructionoverheadsincludecostssuchasthepreparationand

124
processingofconstructionpersonnelpayroll.Costsmaybeattributabletocontractactivityin
general and can be allocated to specific contracts also include borrowing costs as per
accountingstandard(AS)16,borrowingcosts

18. Costs that are specifically chargeable to the customer under the terms of the contract
may include some general administration costs and development costs for which
reimbursementisspecifiedinthetermsofthecontract

19.Coststhatcannotbeattributedtocontractactivityorcannotbeallocatedtoacontract
areexcludedfromthecostsofaconstructioncontract.Suchcostsinclude:
(i)generaladministrationcostsforwhichreimbursementisnotspecifiedinthecontract
(ii)sellingcosts;
(iii)researchanddevelopmentcostsforwhichreimbursementisnotspecifiedinthecontract;
and
(iv)depreciationofplantandequipmentthatcannotbeallocatedtoaparticularcontract.
Authors comments: This says which amounts cannot be treated from construction
contract account of a project. These include expenses on selling cost. Expenses on
advertisementfortheprojectmaybeonesuchitem.Butthesemaybeallowedelsewhere,
i.e., general P&L Account. What AS7 prohibits is inclusion of it in construction contract
account because otherwise % of completion will be affected. Such expenses like selling
costmaybedebitedfromgeneralP&LAccountbecause,inanycase,asperSection37of
IncomeTaxact,1961thesearetobeallowedifthesearewholly,necessarilyandexclusively
forthepurposeofthebusiness.

20.Contractcostsincludethecostsattributabletoacontractfortheperiodfromthedateof
securingthecontracttothefinalcompletionofthecontract.However,coststhatrelatedirectly
toacontractandwhichareincurredinsecuringthecontractarealsoincludedaspartofthe
contractcostsiftheycanbeseparatelyidentifiedandmeasuredreliablyanditisprobablethat
thecontractwillbeobtained.Whencostsincurredinsecuringacontractarerecognizedasan
expenseintheperiodinwhichtheyareincurred,theyarenotincluded incontract costswhen
thecontractisobtainedinasubsequentperiod.
Authors comments: Thus construction costs mentioned in clause 15 above are clearly
specifiedsothatthereisnoconfusionaboutwhatshouldbeincludedandwhatnot.Thisis
very useful to the AO to decide allowability and to examine the accounts of each project
separatelyasmentionedinclause6to9mentionedabove.Costsaregenerallyrecognized
only if they are incurred during the period between date of securing the contract and
completion of it. But it may also include expenses incurred before date of securing the
contract(incaseofdevelopersandbuilders,thesemayincludeexpensesonmarketsurvey,
feasibilitystudyandotheritemsincurredbeforeapprovalunderPromotersAct).Buthere
also,likerevenue,suchcostsarerecognizedonlyiftheycanbemeasuredreliablyanditis
probablethatthecontractwillbeobtained.

RecognitionofContractRevenueandExpenses:
21. When the outcome of a construction contract can be estimated reliably, contract
revenue and contract costs associated with the construction contract should be
recognizedasrevenueandexpensesrespectivelybyreferencetothestageofcompletion
ofthecontractactivityatthereportingdate.Anexpectedlossontheconstructioncontract
shouldberecognizedasanexpenseimmediatelyinaccordancewithparagraph35.
Authors comments: This is the clause which provides for percentage of completion
method. Notably, there is only one method mentioned here and that is percentage of
completionmethodandnotlikepre1.4.2003situationwhentherewasprojectcompletion
method too. This clearly proves that from 1.4.2003 in case of all construction contracts
percentageofcompletionmethodistheonlymethodandthereisnochoicetotheassessees
or auditor. Often a question is asked, how % of completion method is mandatory. The

125
answeristhat,thereisnosecondmethodunderAS7.Conditionforapplicationofthisis
that the outcome of the construction contract can be reliably estimated. Definitive
knowledge is not required. Only likelihood is. Second, the recognition is done ONLY by
referencetothestageofcompletionofworkandNOTbyreferencetoanyotherthinglike
amountrealizedorsaledone.

A very disturbing development, which is bound to be a matter of concern for AOs, is that
some developers/builders/contractors are taking shelter under the words when the
outcomeoftheconstructioncontractcanbereliablyestimatedtodefertaxation.Thiswillbe
evidentfromillustrationsgivenbelow:

ExampleofcaseswhererecognitionofrevenueisdeferredevenwhenfollowingAS
7

UnitechLtd.
F.Y.200607(page87)(source:www.unitechgroup.com)

SCHEDULE`16
SIGNIFICANTACCOUNTINGPOLICIESANDNOTESTOTHEACCOUNTS

4.RECOGNITIONOFINCOME
a)RealEstateProjects
(ii)RealEstateProjectsundertakenonandafter1stApril,2004.
RevenuefromrealestateprojectsisrecognizedonthePercentageofCompletionMethodof
accounting.Revenuecomprisestheaggregateamountsofsalepriceintermsoftheagreements
entered into and is recognized on the basis of percentage of actual costs incurred thereon,
includingproportionatelandcostandtotalestimatedcostofprojectsunderexecution,subject
tosuchactualcostsbeing20percentormoreofthetotalestimatedcost.

Whereaggregateofthepaymentreceivedprovideinsufficientevidenceofbuyerscommitment
to make the complete payment, revenue is recognized only to the extent of realization. The
estimates of the saleable areas and costs are reviewed periodically by the management and
any effect of changes in estimates is recognized in the period such changes are determined.
However,whenthetotalprojectcostisestimatedtoexceedtotalrevenuesfromtheproject,the
lossisrecognizedimmediately.
SobhaDevelopersLtd.
AnnualReportofF.Y.200607(source:www.sobhadevelopers.com)
Schedule19SignificantAccountingPoliciesandNotestoAccounts(Page62)
1.1BasisofAccounting:
The Company follows accrual method of accounting except where the receipt of income is
uncertainandisinaccordancewiththeAccountingStandardsreferredtoinsubsection3(c)of
Section211oftheCompaniesAct,1956.
1.2(i)RecognitionofRevenuefromContractualProjects:
Revenue from Contractual Projects undertaken is recognized on the basis of the certification
issuedbytheclientorcompletionofaphysicalproportionofthecontractwork.
(ii)RecognitionofRevenuefromRealEstateDevelopmentalProjects:
RevenuefromeachRealEstateDevelopmentalProjectisrecognized:
(a)OnthebasisofPercentageCompletionMethod.
(b) The percentage completion method is applied on a cumulative basis in each accounting
periodtothecurrentestimatesofcontractrevenueandcontractcosts.
(c) When the stage of completion of each project reaches a significant level, which is
estimatedtobeatleast25%ofthetotalestimatedconstructioncostoftheproject.
(d)Earningsrelatingtoconstructionactivityrepresentchargescollectedfromclientstowards
registration,electricity&watercharges,propertytaxes&khatachargesandothercharges.

126

AnsalProperties&InfrastructureLtd.
AnnualReportofF.Y.200607
(Source:www.ansalapi.com)

SCHEDULE17
ACCOUNTINGPOLICIESANDNOTES

A.SIGNIFICANTACCOUNTINGPOLICIES
8.REVENUERECOGNITION
a)TheCompanyfollowsPercentageofCompletionMethodofaccountingforcontracts and
constructed residential, Institutional and commercial properties. As per this method, the
revenueisrecognizedinproportiontotheactualcostincurredasagainstthetotalestimated
costoftheprojectsunderexecutionsubjecttoactualcostbeing30%ormoreofthetotal
estimatedcost.
b) The revenue on sale of residential, institutional and commercial plots is recognized on a
proportionate basis when 50 % of the progress has been achieved as measured in terms of
actualcostincurredtototalestimatedcost.
c) Income from know how fee is recognized in terms of the agreement with the recipient of
knowhow.
d) The estimates relating to saleable area, sale value, estimated costs etc., are revised and
updatedperiodicallybythemanagementandnecessaryadjustmentsaremadeinthecurrent
yearsaccounts.
e)Indirectcosts(asdetailedinSchedule16)aretreatedasPeriodCostsandarechargedto
theProfit&LossAccountintheyearincurred.
f)SurrenderofflatsbybuyersarevaluedatcostandaccountedforasCostofConstruction.
Whensold,proceedsaretreatedasSales.
g)Forrecognizingincomeandworkingoutrelatedcostofconstruction,majorselfcontained
residential township projects are divided into following broad categories i.e. Constructed
Houses,Institutional,CommercialFlatsandInstitutional,Commercial,ResidentialPlots.
h) Whereas all income and expenses are accounted for on accrual basis, interest on delayed
paymentsbycustomersagainstduesistakenintoaccountonacceptanceorrealizationowing
topracticaldifficultiesanduncertaintiesinvolved.
i) Repair, maintenance and other costs incurred after the completion of the project are
chargedtothecostofconstructionintheyearofincurrence.

MukandLtd.(contractor)
Accountingforlongtermengineeringcontracts
a) Revenue for engineering contract works executed (including supply and services) is
recognized on the basis of percentage of completion method and only after the work has
progressed to the extent of 10% in each composite contract. Till such time, all the costs
are carried forward to the next Accounting year as accumulated contract costs under
Inventories. Recognition of revenue is matched with expenses incurred (on accrual basis)
after considering the contract value with associated costs. Costs and revenue are both
recognizedupto90%anddebtorsarereflectedaccordingly.Balanceisrecognizedonlyupon
preliminary/finalacceptanceofjobbytheclient.Periodicadvancesreceivedfromcustomers
arenotconsideredasincome.

Larsen&ToubroLtd.
AnnualreportofF.Y.200607(Source:www.larsentoubro.com)(Page123)ScheduleQ

SIGNIFICANTACCOUNTINGPOLICIES:
2.RevenueRecognition

127
(b) Revenue is recognized based on the nature of activity, when consideration can be
reasonablymeasuredandthereexistsreasonablecertaintyofitsrecovery.
(i)Revenuefromsaleofgoodsisrecognizedwhensubstantialrisksandrewardsofownership
aretransferredtothebuyerunderthetermsofthecontract.
(ii) Revenue from construction/project related activity and contracts for
supply/commissioningofcomplexplantandequipmentisrecognizedasfollows:
a) Cost plus contracts: Contract revenue is determined by adding the aggregate cost plus
proportionatemarginasagreedwiththecustomer.
b) Fixed price contracts received up to March 31, 2003: Contract revenue is recognized by
applying percentage of completion to the contract value. Percentage of completion is
determinedasfollows:
i.
in the case of item rate contracts, as a proportion of the progress billing to contract
value;and
ii.
inthecaseofothercontracts,asaproportionofthecostincurredtodatetothetotal
estimatedcost.
c)FixedpricecontractsreceivedonorafterApril1,2003:Contractrevenueisrecognized
by adding the aggregate cost and proportionate margin using the percentage completion
method. Percentage of completion is determined as a proportion of cost incurredtodate to
thetotalestimatedcontractcost.Fullprovisionismadeforanylossintheperiodinwhichitis
foreseen.
(iii)Revenuefrompropertydevelopmentactivityisrecognizedwhenallsignificantrisksand
rewards of ownership in the land and/or building are transferred to the customer and a
reasonableexpectationofcollectionofthesaleconsiderationfromthecustomerexists.
(iv)Revenuefromservicerelatedactivitiesisrecognizedusingtheproportionatecompletion
method.
(v)Commissionincomeisrecognizedasandwhenthetermsofthecontractarefulfilled.
(vi) Revenues from construction/project related activity and contracts executed in Joint
Ventures under worksharing arrangement [being Jointly Controlled Operations, in terms of
Accounting Standard (AS) 27 Financial Reporting of Interests in Joint Ventures], are
recognizedonthesamebasisassimilarcontractsindependentlyexecutedbytheCompany.
(c)Otheroperationalincomeisrecognizedonrenderingofrelatedservices,asperthetermsof
thecontracts.
(d) Profit/Loss on contracts executed by Integrated Joint Ventures under profitsharing
arrangement [being Jointly Controlled Entities, in terms of Accounting Standard (AS) 27
Financial Reporting of Interests in Joint Ventures], is accounted as and when the same is
determined by the Joint Venture. Revenue from services rendered to such Joint Ventures is
accountedonaccrualbasis.
(e)Otheritemsofincomeareaccountedasandwhentherighttoreceivearises.

Authors comments: The above examples show that some of the developers/ builders/
contractorsarenotrecognizingrevenuefromaprojecttill10%to40%oftheprojectcostis
completed probably on the pretext of outcome of the construction contract cannot be
reliably estimated. This means, in a project of Rs. 1000 crore including cost of land,
developerisdeferringrevenuerecognitiontillRs.400croreisspentandnotpayinganytax
at all till that time. Till reaching that percentage (10% to 40% in above cases) they are
keeping this an item of balance sheet and not of P & L account. But if we read AS 7
comprehensively,wewillfindthatnowhereitisprovidedinAS7thatrevenueandcost
willnotberecognizedtillprojectreachesanyparticularpercentageorratiooftotalwork.
Another peculiar observation is that different developer/ builder/ contractor illustrated
above have taken different percentage of total cost, upon arrival of which they have
recognized revenue. Unitech did it when 20% of total contract/ project cost have been
spent,SobhaDevelopers25%,Ansal30%,Mukand10%whileL&Thasnotfollowedthem.
They are probably doing it on the above pretext but AS 7 is such a beautiful piece of
pronouncementthatithasnotlefttoanybodysimaginationorrelativeinterpretationasto

128
when it can be said that outcome of the project can be reliably estimated because in
subsequentclauses22to23ithasbeenclearlyspecifiedwhenoutcomeoftheprojectcanbe
reliably estimated. Even the ICAI stated in Para 10 of its Guidance Note issued in June,
2006,Incaseofrealestatesales,sincenormally theamount ofconsiderationisspecifiedin
the agreement, no significant uncertainty exists regarding the amount of the consideration
that will be derived from the sales. Yes, it is true that the guidance note was issued in the
context of AS 9 but this gives important indication that the mention of consideration
amount in the agreement is enough to conclude that no significant uncertainty exists
regarding receipt of consideration. To put it in the context of AS 7 it may be said that if
considerationismentionedintheagreement(itmaybeavailableinotherdocumentsalso)
it may be concluded that no uncertainty exists or outcome of the project can be reliably
estimated.Developersprojectsarealmostalwaysfixedpricecontractsbecausepriceofthe
flats etc. are fixed at the time of offer itself, as evident from the brochure of Parsvnath
PrideAsiagivenearlierinthisbook.Letustakeafewrelevantpagesfromthebrochureof
thatprojectasanexampleforourdiscussion:

Illustrations as to how revenue outcome of the project can be reliably estimated at

thebeginningofaproject:

129

Number of units
available here

130

Price
of
each unit
and other
details
available
here

131

Extra
charges
for each
unit
available
here

132

From these AO
can
reliably
estimate
at
what time he
will
receive
how
much
revenue

133

From these AO
can
reliably
estimate
at
what time he
will
receive
how
much
revenue

134
Authorscomments:Fromtheseportionsofthebrochure,totalcontractrevenuecanvery
muchbemeasuredreliablybecausenumberofeachtypeofunits,size&otherspecifications
andpriceofeachunithasbeenfixed.So,justbysomemultiplicationandadditionexerciseit
can be found out. Even Para 2 of the agreement between developer and buyer given in
Page 112 of this book states the consideration. Yes, it may be claimed that there is no
guaranteethatallunitswillbebooked.AS7hasprovisionforthatsituationalsoandthatis
whyinClause37itis providedthatestimates ofrevenueaswellascostwillhavetobe
madeattheendofeveryyear.Clause27goesastepfurthertosaythatiftheassesseehas
alreadyrecognizedrevenueestimatingitsreliablemeasurementbutsubsequentlythesame
turns out to be incorrect, he can take correctional steps. Thus condition of Clause 22 (i)
standsfulfilled.ConditionofClause22(ii)alsoisfulfilledbecausewhenlegallyenforceable
agreements are executed by applicant buyers, it can definitely be said that It is probable
thattheeconomicbenefitsassociatedwiththecontractwillflowtotheenterprise.Contract
coststocompletetheprojectcanbemeasuredreliablybecauseeverydeveloper/contractor
orforthatmattereverybusinessmanmakesestimatebeforestartinghisventure.Infact,he
has to file such project report/ estimate to different authorities like lender banks,
municipality,AuthorizedOfficerunderPromotersActetc.Stageofcompletionoftheproject
can also be measured reliably because AS 7 itself has provided in Clause 29 three
methods.Therefore,clause22(iii)isalsofulfilled.Thefourthandlastconditionof22(iv)
also stands fulfilled because Clause 6 provided that financial statements have to be made
separatelyforeachconstructioncontractandifthatisdonecontractcostsattributableto
thecontractcanbeclearlyidentifiedandmeasuredreliably.Thus,allconditionsofclause
22canbeprovedtobefulfilledandso,revenuerecognitionasperclause21canverymuch
bedoneatanystage.Infact,oneoftheGAAPisTimeperiodassumptionwhichsaysthat
this accounting principle assumes that it is possible to report the complex and ongoing
activitiesofabusinessinrelativelyshort,distincttimeintervalssuchasthefivemonthsended
May31,2007,orthe5weeksendedMay1,2007.Theshorterthetimeinterval,themorelikely
the need for the accountant to estimate amounts relevant to that period. For example, the
propertytaxbillisreceivedonDecember15ofeachyear.Ontheincomestatementfortheyear
ended December 31, 2007, the amount is known; but for the income statement for the three
monthsendedMarch31,2007,theamountwasnotknownandanestimatehadtobeused.
WiththeseargumentstheAOcaneffectivelyhandlesuchtaxevasionmechanisms.

InthiscontextPara28isalsoveryimportantwhichclearlysaysthatoutcomeissaidtobe
able to be estimated if three conditions are fulfilled, viz. each partys enforceable rights,
amount of consideration to be exchanged and terms of settlement. It is very much known
thatthesethreethingsareavailableinagreementdocuments.Para28alsosaysthatinAS7
periodicreviewofrevenueandcostsaretobemadeasaresultofwhichthesemaychange
fromtimetotimebut,veryimportantlyitisdeclared,theneedforsuchrevisionsdoesnot
necessarilyindicatethattheoutcomeofthecontractcannotbeestimatedreliably.

Therefore builders/ developers/ contractors cannot take the plea that they are unable to
estimatetheoutcomeofcontractreliablybeforecompletionoftheprojectoractualsaleof
thepropertyandhencetheywillnotpayanytaxbeforethat.

22. In the case of fixed price contracts, the outcome of a construction contract can be
estimatedreliablywhenallthefollowingconditionsaresatisfied:
(i)
totalcontractrevenuestobereceivedcanbemeasuredreliably
(ii) It is probable that the economic benefits associated with the contract will flow to the
enterprise
(iii)
boththecontractcoststocompletethecontractandthestageofcontractcompletion
atthereportingdatecanbemeasuredreliably;and
(iv) the contract costs attributable to the contract can be clearly identified and measured
reliablysothatactualcontractcostsincurredcanbecomparedwithpriorestimates.

135

23. In the case of cost plus contracts, the outcome of a construction contract can be
estimatedreliablywhenallthefollowingconditionsaresatisfied:
(i)
Itisprobablethattheeconomicbenefitsassociatedwiththecontractwillflowtothe
enterprise
Thecontractcostsattributabletothecontract,whetherornotspecificallyreimburseable,can
beclearlyidentifiedandmeasuredreliably
(ii) costsotherthanthosethatarespecificallyreimbursableunderthecontractcanbereliably
estimated.

24.The recognition of revenue and expenses by reference to the stage of completion of a

contract is often referred to as the percentage of completion method. Under this method,
contract revenue is matched with the contract costs incurred in reaching the stage of
completion,resultinginthereportingofrevenue,expensesandprofitwhichcanbeattributed
totheproportionofworkcompleted.Thismethodprovidesusefulinformationontheextentof
contract activity and performance during a period.http://www.eircindia.org/as7Rev.htm UP#UP
Authors comments: Cost incurred up to reporting date (i.e. 31st March for Income tax
assessment) will be matched with total estimated cost for the purpose of calculating
revenue as well as profit up to the stage of construction completed. As example, if total
estimatedreceipt(revenue)fromaproject/contractisRs.120,costalreadyincurredupto
reporting date is 57, cost (already incurred cost + estimated future cost) of the
project/contractisRs.100,thenpercentageofcompletionis57%(57x100/100)andit
will be applied to the estimated profit of Rs. 20 (120 100), i.e, proportionate profit
attributable to that stage is taken at 57% of Rs. 20, i.e., Rs. 11.40 in the Construction
Contractaccount(likeTradingaccountofatrader)

25.Underthepercentageofcompletionmethod,contractrevenueisrecognizedasrevenue
inthestatementofprofitandlossintheaccountingperiodsinwhichtheworkisperformed.
Contractcostsareusuallyrecognizedasanexpenseinthestatementofprofitandlossinthe
accounting periods in which the work to which they relate is performed. However, any
expected excess of total contract costs over total contract revenue for the contract is
recognizedasanexpenseimmediatelyinaccordancewithparagraph35.
Authorscomments:Bothrevenueandcostarerecognizedinthestatementofprofitand
lossintheaccountingperiodsinwhichtheworkisperformed.Thisdeclarationisloud&
clear and so these cannot be deferred to offer for taxation in the year in which the
constructedpropertyissold.

DiscussionaboutconceptofWorkinprogress(WIP)underrevisedAS7
26.A contractor may have incurred contract costs that relate to future activity on the
contract.Suchcontractcostsarerecognizedasanassetprovideditisprobablethattheywill
berecovered.Suchcostsrepresentanamountduefromthecustomerandareoftenclassified
ascontractworkinprogress.

Authors comments: AOs must realize that this concept of workinprogress is altogether
different from the conventional concept. Generally workinprogress is shown by
developers as the total of cost incurred during the year(s) before sale of the constructed
property.Butthatisnomorevalidbecauseinpercentageofcompletionmethodsuchcost
which is utilized up to the end of accounting year shall be recognized in calculating the
percentageofcompletion.Itisnomorepartofworkinprogress.Theaboveclausereads,A
contractormayhaveincurredcontractcoststhatrelatetofutureactivityonthecontract.Such
contractcostsarerecognizedasanassetprovideditisprobablethat they willberecovered.
Such costs represent an amount due from the customer and are often classified as contract

136
workinprogress.Hereanillustrationisgivenbelowtodistinguishearlierconceptofwork
inprogressandthatunderrevisedAS7i.e.Percentagecompletionmethod.Earlier,incase
ofacontractor,hiscontracta/cwaslikethis:

Dr Amount Cr
Amount
To
By

Bills received (bills, for which cheques have been received)

[Say,thelastchequewasforworkmeasuredon12thDecember
forwhichthebillwassubmittedon16thDecember]
In case of developers, bills received is the payment received
frombuyers.
To
By

Bills receivable (for which bills have been submitted but

chequesnotreceivedyet)[Say,lastmeasurementwastakenon
23rd February when the Previous Year ends at 31st March and
bill for this measurement was filed on 27th February. So bills
receivablemeansbillssubmittedafter16thDecemberupto27th
February]. In case of developers, bills receivable is the
paymentsyettobereceived.

To
By
Workinprogress (means total expenses incurred for
construction works from the date after last measurement, i.e.,
24thFebruaryupto31stMarch]

To
By
Closingstock(ofcement,sand,brick,steel,woodetc.materials
otherthanfixedassetslyinginstockason31stMarch)

But in the revised AS7 no differentiation is made for Bills received/Bills

receivable/Work done but measurement not taken for the purpose of recognition of
revenueasitistheestimatedsalevalueoftheconstructionmadeuptothereportingdate
which is recognized as revenue irrespective of actual sale and all actual expenses are
recognizedascostssubjecttoabovementionedPara26,i.e.,costswhicharenotlikelyto
beutilizedduringtheyearwillbeassetsandnotcostsintherelevantyear.Thereforeall
of the above three items will go as one & the same. However, what was being shown as
closingstock(likecement,steel,bricketc.purchasednowbutnotutilizedtillnowandhence
notincludedinthecostincurreduptotheendoftheaccountingyear;however,thisalso
willberelevantforcalculating%ofcompletionasthisispartoffuturecostestimated)will
now be shown as workinprogress and the basis is that these are costs which will be
utilizedinfutureactivityinthecontract.
This new concept of workinprogress is found in an illustration given below the text of
AS7intheCompendiumofAccountingStandards.Thesameisreproducedbelowforbetter
understanding:

ContractDisclosures
Acontractorhasreachedtheendofitsfirstyearofoperations.Allitscontractcostsincurred
have been paid for in cash and all its progress billings and advances have been received in
cash.ContractcostsincurredforcontractsB,CandEincludethecostofmaterialsthathave
beenpurchasedforthecontractbutwhichhavenotbeenusedincontractperformanceupto
the reporting date. For contracts B, C and E, the customers have made advances to the
contractorforworknotyetperformed.

137

Thestatusofitsfivecontractsinprogressattheendofyear1isasfollows:

Contract(amountinRs.lakh)

A
B
C
D
E
Total
Contract Revenue recognized in accordance 145 520 380 200 55
1300
withPara21

Contract Expenses recognized in accordance 110 450 350 250 55

1215
withpara21

ExpectedLossesrecognizedinaccordancewith

40
30
70
para35

Recognizedprofitslessrecognizedlosses
35 70
30
(90) (30) 15

ContractCostsincurredintheperiod
110 510 450 250 100 1420

Contract Costs incurred recognized as contract 110 450 350 250 55

1215
expenses in the period in accordance with

paragraph21
##Contract Costs that relate to future
60
100
45
205
activity recognized as an asset in

accordancewithparagraph26
ContractRevenue(seeabove)
145 520 380 200 55
1300

ProgressBillings(paragraph40)
100 520 380 180 55
1235

UnbilledContractRevenue
45

20

65
Advances(paragraph40)

80
20

25
125
##Herethecostofmaterialsnotutilizedisshownasworkinprogress

27.When an uncertainty arises about the collectability of an amount already included in

contractrevenue,andalreadyrecognizedinthestatementofprofitandloss,theuncollectable
amountortheamountinrespectofwhichrecoveryhasceasedtobeprobableisrecognizedas
anexpenseratherthanasanadjustmentoftheamountofcontractrevenue.
Authorscomments:Ifanamountwasrecognizedasrevenueinanearlieryearhopingthat
itwillberealizablebutiflateritturnsouttobeirrecoverable,thesamecanbedebitedto
ContractAccountasexpenses.

28.An enterprise is generally able to make reliable estimates after it has agreed to a
contractwhichestablishes:
(a)
eachpartysenforceablerightsregardingtheassettobeconstructed;
(b) theconsiderationtobeexchanged;and
(c) themannerandtermsofsettlement.
Itisalsousuallynecessaryfortheenterprisetohaveaneffectiveinternalfinancialbudgeting
and reporting system. The enterprise reviews and, when necessary, revises the estimates of
contract revenue and contract costs as the contract progresses. The need for such revisions
doesnotnecessarilyindicatethattheoutcomeofthecontractcannotbeestimatedreliably
Authors comments: If AO finds situation like that mentioned in Para 21 of AS 7 in this
chapterwhereassesseeisnotrecognizingrevenuetillcertain%ofworkisnotdone,AOhas
toaskassesseethereasonfordoingsoandifitisrepliedthatbeforecompletionofsuch%

138
reliableestimatecouldnotbemade,AOhastotakehelpofthisclauseandseewhether(a),
(b)and(c)arefulfilled.Iffulfilled,AOcanrejectassesseesaction.

29. The stage of completion of a contract may be determined in a variety of ways. The
enterprise uses the method that measures reliably the work performed. Depending on the
natureofthecontract,themethodsmayinclude:
a) the proportion that contract costs incurred for work performed up to the reporting
datebeartotheestimatedtotalcontractcosts;or
b) surveysofworkperformed;or
c) completionofaphysicalproportionofthecontractwork
Progresspaymentsandadvancesreceivedfromcustomersmaynotnecessarilyreflectthework
performed.
Authors comments: Percentage of Completion method may be calculated in three ways,
viz. by survey of work done, by the ratio of physical proportion of completed work to the
physicalproportionofwholeworkandbyratioofcostincurreduptoreportingdatetototal
costofthecontract.Amountofrunningbillsoradvance(bycontractors)/installments(by
developersandbuilders)receivedcannotbetakenasindicatorsforthesame.However,in
caseoflargework,(a)isgenerallyfollowedaswillbeevidentfromtheillustrationsgivenby
ICAIinthetextofAS7.

30.Whenthestageofcompletionisdeterminedbyreferencetothecontractcostsincurred
uptothereportingdate,onlythosecontractcoststhatreflectworkperformedareincludedin
costsincurreduptothereportingdate.Examplesofcontractcostswhichareexcludedare:
(a)
contractcoststhatrelatetofutureactivityonthecontract,suchascostsofmaterials
that have been delivered to a contract site or set aside for use in a contract but not yet
installed,usedorappliedduringcontractperformance,unlessthematerialshavebeenmade
speciallyforthecontract;and
(b)
Payments made to subcontractors in advance of work performed under the
subcontract.
Authorscomments:Clause30isinconformitywithClause26becauseitsaysthatcostof
materialspurchasedbutnotutilized(Clause26termeditasworkinprogress)willnotbe
taken into consideration for the purpose of determining % of completion unless the
materialshavebeenmadeespeciallyforthecontract.Togiveanillustration,say,ason31st
March, 1000 bags of cement are existing at a project site. Cost of entire 100 bags may be
workinprogress(asperPara26)butasperPara30out oftheseonlythecostofthose
many bags will be considered for calculation of % of completion which will surely be
requiredandusedintheconstructionofthatproject.

31.Whentheoutcomeofaconstructioncontractcannotbeestimatedreliably:
(a)
revenue should be recognized only to the extent of contract costs incurred of which
recoveryisprobable;and
(b)
contract costs should be recognized as an expense in the period in which they are
incurred.
An expected loss on the construction contract should be recognized as an expense
immediatelyinaccordancewithparagraph35.

32.Duringtheearlystagesofacontractitisoftenthecasethattheoutcomeofthecontract
cannotbeestimatedreliably.Nevertheless,itmaybeprobablethattheenterprisewillrecover
the contract costs incurred. Therefore, contract revenue is recognized only to the extent of
costs incurred that are expected to be recovered. As the outcome of the contract cannot be
estimatedreliably,noprofitisrecognized.However,eventhoughtheoutcomeofthecontract
cannot be estimated reliably, it may be probable that total contract costs will exceed total
contractrevenue.Insuchcases,anyexpectedexcessoftotalcontractcostsovertotalcontract

139
revenue for the contract is recognized as an expense immediately in accordance with
paragraph35.http://www.eircindia.org/as7Rev.htm - UP#UP
Authorscomments:Thissayswhatamountwillhavetoberecognizedasrevenueinthe
initial stages of work. Earlier (after Para 21) a few cases have been mentioned where
revenuewasnotrecognizedbydevelopers(likeUnitechLtd)andcontractors(likeMukand
Ltd)wherereveuewasnotrecognizedtillconstructionreached10/20/30/40%.Thisclause
says that in such case they have to recognize at least the cost (or they may treat loss as
expense)buttheycannotsimplyrefusetorecognizetheworkdone.Thisshowsthatwhat
these assessees are doing is not correct, particularly when they have disclosed that they
werefollowingAS7.

33.Contract costs recovery of which is not probable are recognized as an expense

immediately.Examplesofcircumstancesinwhichtherecoverabilityofcontractcostsincurred
maynotbeprobableandinwhichcontractcostsmay,therefore,needtoberecognizedasan
expenseimmediatelyincludecontracts:
(a)
whicharenotfullyenforceable,thatis,theirvalidityisseriouslyinquestion;
(b)
thecompletionofwhichissubjecttotheoutcomeofpendinglitigationorlegislation;
(c)
relatingtopropertiesthatarelikelytobecondemnedorexpropriated;
(d)
wherethecustomerisunabletomeetitsobligations;or
(e)
where the contractor is unable to complete the contract or otherwise meet its
obligationsunderthecontract.
Authorscomments:Ifprospectofrecoveryofeventhecostsincurredisdoubtful(letalone
profit),thelossmayberecognizedinthatyearitself.However,asstatedearlierinPara28,if
onfuturereviewitisfeltthattherewillnotbeloss,thenaccordinglyrevenueisrecognized
to offset the loss recognized in earlier year/(s). This is further clarified in Para 34 saying
that though as per earlier provisions profit may not be recognized if outcome cannot be
estimatedreliably,thesamewillbedonewheneverreliableestimatecanbemade.

34. When the uncertainties that prevented the outcome of the contract being estimated
reliablynolongerexist,revenueandexpensesassociatedwiththeconstructioncontractshould
berecognisedinaccordancewithparagraph21ratherthaninaccordancewithparagraph31.

RecognitionofExpectedLosses
35.When it is probable that total contract costs will exceed total contract revenue, the
expectedlossshouldberecognizedasanexpenseimmediately.

36.Theamountofsuchalossisdeterminedirrespectiveof:
(a)
whetherornotworkhascommencedonthecontract;
(b)
thestageofcompletionofcontractactivity;or
(c)
theamountofprofitsexpectedtoariseonothercontractswhicharenottreatedasa
singleconstructioncontractinaccordancewithparagraph8.
Authors comments: At any stage (even before commencement) loss may be recognized
wheneveritisfeltthatcostswillbemorethanrevenue.

ChangesinEstimates
37.The percentage of completion method is applied on a cumulative basis in each
accountingperiodtothecurrentestimatesofcontractrevenueandcontractcosts.Therefore,
theeffectofachangeintheestimateofcontractrevenueorcontractcosts,ortheeffectofa
changeintheestimateoftheoutcomeofacontract,isaccountedforasachangeinaccounting
estimate(seeAccountingStandard(AS)5,NetProfitorLossforthePeriod,PriorPeriodItems
andChangesinAccountingPolicies).Thechangedestimatesareusedindeterminationofthe
amountofrevenueandexpensesrecognizedinthestatementofprofitandlossintheperiodin

140
whichthechangeismadeandinsubsequentperiods.http://www.eircindia.org/as7Rev.htm UP#UP
Authors comments: Makes a significant comment on Percentage of Completion Method
sayingthatitismadeoncurrentestimatesofrevenueandcostseveryyear,i.e.,developer/
builder/ construction contractor has to make a reasonable and realistic estimate of total
revenue receivable and expenses to be made in the contract at the end of every year and
thatthewholethingofdeterminationofprofitunderAs7isnotexclusivelyonactualbut
onestimates.

Disclosure
38.Anenterpriseshoulddisclose:
(a)
theamountofcontractrevenuerecognizedasrevenueintheperiod;
(b) themethodsusedtodeterminethecontractrevenuerecognizedintheperiod;and
(c) themethodsusedtodeterminethestageofcompletionofcontractsinprogress.

39.An enterprise should disclose the following for contracts in progress at the reporting
date:
(a)
theaggregateamountofcostsincurredandrecognizedprofits(lessrecognizedlosses)
uptothereportingdate;
(b)
theamountofadvancesreceived;and
(c)
theamountofretentions.

40.Retentions are amounts of progress billingswhich are not paid until the satisfaction of
conditionsspecifiedinthecontractforthepaymentofsuchamountsoruntildefectshavebeen
rectified.Progressbillingsareamountsbilledforworkperformedonacontractwhetherornot
theyhavebeenpaidbythecustomer.Advancesareamountsreceivedbythecontractorbefore
therelatedworkisperformed.

Authors comments: These disclosures may be immensely helpful to the AO. Such
disclosureisrequirementoftheAS7itself.So,ifAOfindsthatsomeoneisfollowingAS7
orconcludesthatsomeoneisliabletofollowAS7,AOcanseethathehasfollowedPara38,
i.e.,madetheabovedisclosuresalso.Aswillbeevidentfrom afewinstancesgiveninthe
later part of this book, most of the developers/ builders/ contractors do not bother to
disclosethesebut,evidently,ifthesearedisclosed,theAssessingOfficercantakeremedial
actions.Soheshouldrequiretheassesseetomakethesedisclosures.Theimportantthings
aboutPercentageofCompletionMethodthattheconstructioncontractorhastodiscloseare
generally done in Schedule 16 to the P&L Account in the Annual Report of Corporate
assessees.Theseare:
i.
Amountrecognizedasrevenue
ii.
Whatmethodhasbeenfollowedforrecognitionofrevenue
iii.
Whatmethodhasbeenfollowedtodeterminestageofcompletion
If the contract work has not been completed then the following extra items have to be
disclosed:
a. Aggregatecostandrevenue(andloss,ifany)
b. Amountofadvancereceived
c. Amountofretentions,ifany

The type of disclosure that such assessees have to make is found in an illustration given
belowthetextofAS7intheCompendiumofAccountingStandardsoftheICAI.Thesameis
reproducedbelowforbetterunderstanding:

TheamountstobedisclosedinaccordancewiththeStandardareasfollows:

141
Contractrevenuerecognizedasrevenueintheperiod(paragraph38(a))

1,300

Contract costs incurred and recognized profits (less recognized losses) up to the 1,435
reportingdate(paragraph39(a))

Advancesreceived(paragraph39(b))
125

Grossamountduefromcustomersforcontractwork
220
presentedasanassetinaccordancewithparagraph41(a)

Grossamountduetocustomersforcontractwork
(20)
presentedasaliabilityinaccordancewithparagraph41(b)

Theamountstobedisclosedinaccordancewithparagraphs39(a),41(a)and41(b)are
calculatedasfollows:

Contract(amountinRs.lakh)

A
B
C
D
E
Total

ContractCostsincurred.(a)
110 510 450 250 100 1420

Recognizedprofitslessrecognizedlosses..(b)
35
70
30
(90) (30) 15

(a)+(b)=
145 580 480 160 70
1435

Progressbillings
100 520 380 180 55
1235

Duefromcustomers
45
60
100
15
220

Duetocustomers

(20)
(20)

Theamountdisclosedinaccordancewithparagraph39(a)isthesameastheamountforthe
currentperiodbecausethedisclosuresrelatetothefirstyearofoperation.

41.Anenterpriseshouldpresent:
(a)
Thegrossamountduefromcustomersforcontractworkasanasset;and
(b) thegrossamountduetocustomersforcontractworkasaliability.

42.Thegrossamountduefromcustomersforcontractworkisthenetamountof:
(a)
costsincurredplusrecognizedprofits;less
(b) the sum of recognized losses and progress billings for all contracts in progress for
whichcostsincurredplusrecognizedprofits(lessrecognizedlosses)exceedsprogress
billings.

43.Thegrossamountduetocustomersforcontractworkisthenetamountof:
(a)
thesumofrecognizedlossesandprogressbillings;less
(b) costsincurred plusrecognized profitsforallcontractsinprogressforwhichprogress
billingsexceedcostsincurredplusrecognizedprofits(lessrecognizedlosses).
Authors comments: Para 41 to 43 state that the construction contractor has to show
receivables from customers as assets and payables to customers as liabilities in Balance
sheet.

Illustrationsshowingcalculationofprofitin%ofcompletionmethod:

IllustrationNo.1(Acasewheretheprojectiscompletedinoneyear):

142
Totalsalesexpectedatthebeginningoftheyear:750lakh
Totalcostsestimatedatthebeginningoftheyear:600lakh
Totalprofitsestimatedatthebeginningoftheyear:150lakh

FirstYear
Rs.(inlakh)
st
Costactuallyincurredduring1 year
250
Less:Costofunutilizedmaterial
()60
Costrelatedto1styear
190
Stageofcompletion

Totalexpectedcost
600
Totalactualcostof1styear
190
Stageofcompletion=
(190 x 100)/
(Costincurredtillendofaccountingyearx100)/Totalestimatedcost
600=31.66%
Profitoffirstyear

Totalexpectedsales
750
Costincurredinthefirstyear
250
Less:Unutilizedmaterial(Closingstockofrawmaterial)
()60

190
Add: Estimated cost to complete the contract (at the end of every year 430
fresh estimate has to be prepared on the future cost to complete the
project)

620
Totalprofit=(750620)
130
Stageofcompletion
31.66%
Profittobeconsideredinthefirstyear=31.66%of130
41.16

IllustrationNo.2(Acasewheretheprojectiscompletedinmorethanoneyear):

Thefollowingarethefactsofacasewherecostandsalesareestimatedattheendofevery
year:
Endofyear
Actualcostincurred Estimatedtotalsales Estimatedtotalcost
(Rs.Inlakh)
(Rs.Inlakh)
(Rs.Inlakh)
1
110
700
550
2
140
800
650
3
160
930
700

Firstyear
Rs.Inlakh
Totalestimatedcost
550
Actualcostincurred
110
Percentageofcompletion=(110X100)/550
20%
Estimatedtotalsales
700
Less

Costincurreduptoendoftheyear(110)+Estimatedcosttocompleteproject 550
(440)
Estimatedtotalprofit(700550)
150
Proportionateprofitforthe1styear=20%of150
30
Secondyear

Estimatedtotalsales
800
Less Cost incurred up to the end of the year (110+ 140)+ Estimated cost to
completetheproject(400)
650
Estimatedtotalprofit
150

143
Percentage of completion= (Cost incurred to date X 100)/ Total estimated 38.46%
cost=(250x100)/650
Proportionateprofitforthe2ndyear=38.46%of150
57.69
ThirdYear

Estimatedtotalsales
930
Less:Costincurreduptotheendoftheyear(110+140+160)Estimatedcost 700
tocompletetheproject(290)
Estimatedtotalprofit
230
Percentageofcompletion=(Costincurredtodatex100)/Totalestimatedcost 58.57%
Proportionateprofit=58.57%of230
134.47
Less:Profitdeclaredinthe2ndyear
57.69
rd
Profitforthe3 year
76.78

Fourthyear(Theprojectiscompletedinthe4thyear)
Totalactualsalesoftheproject
920
Totalactualcost
750
Totalprofitoftheproject
170
Less:Profitdeclaredfor1styear
30
Profitdeclaredfor2ndyear
57.64
Profitdeclaredfor3rdyear
76.78
rd
Totalprofitdeclaredupto3 year
164.47
Profitforthe4thyear(170164.47)
5.53

Illustration3:
Facts:
i.
A construction contractor has a fixed price contract for Rs. 9,000 lakh to build a
bridge. The initial amount of revenue agreed in the contract is Rs. 9,000 lakh. The
contractorsinitialestimateofcontractcostsisRs.8,000lakh.Itwilltake3yearsto
buildthebridge.
ii.
Bytheendofyear1,thecontractorsestimateofcontractcostshasincreasedtoRs.
8,050lakh.
iii.
In year 2, the customer approves a variation resulting in an increase in contract
revenueofRs.200lakhandestimatedadditionalcontractcostsofRs.150lakh.At
theendofyear2,costsincurredincludeRs.100lakhforstandardmaterialsstored
at
the
site
to
be
used
in
year
3
to
complete
the
project.http://www.eircindia.org/as7Rev.htm - UP#UP
iv.
Thecontractordeterminesthestageofcompletionofthecontractbycalculatingthe
proportionthatcontractcostsincurredforworkperformeduptothereportingdate
bear to the latest estimated total contract costs. A summary of the financial data
duringtheconstructionperiodisasfollows:
(amountinRs.lakh)

Year1 Year2 Year3

Initialamountofrevenueagreedincontract
9,000
9,000
9,000

Variation

200
200

Totalcontract
9,000
9,200
9,200

Contractcostsincurreduptothereportingdate
2,093
6,168
8,200

Contractcoststocomplete
5,957
2,032

144
Totalestimatedcontractcosts
8,050
8,200
8,200

EstimatedProfit
950
1,000
1,000

Stageofcompletion
26%
74%
100%

Thestageofcompletionforyear2(74%)isdeterminedbyexcludingfromcontractcosts
incurred for work performed up to the reporting date, Rs. 100 lakh of standard
materialsstoredatthesiteforuseinyear3.
Theamountsofrevenue,expensesandprofitrecognizedinthestatementofprofitand
lossinthethreeyearsareasfollows:

UptoReportingDate Recognizedin Recognizedin

Prioryears
currentyear
Year1

Revenue(9,000x.26)
2,340

2,340
Expenses
2,093

2,093
Profit
247

247
Year2

Revenue(9,200x.74)
6,808
2,340
4,468
Expenses (6168100 stored for6,068
future)(8200x74%)
Profit
740
Year3

Revenue(9,200x1.00)
9,200
Expense
8,200
Profit
1,000

2,093

3,975

247

6,808
6,068
740

493

2,392
2,132
260

ThiscalculationcanalternativelybeshowninthewayofIllustration2alsoasbelow:

1styear

Expensesuptoreportingdate
2093
Totalestimatedcost
8050
Percentageofcompletion(2093x100/8050)
26%
Estimatedtotalsales
9000
Estimatedprofit(90008050)
950
Proportionateprofitfor1styear(950x26%)
247
nd
2 year

Expensesuptoreportingdate(6168100)
6068
Totalestimatedcost
8200
Percentageofcompletion(6068x100/8200)
74%
Estimatedtotalsales
9200
Estimatedprofit(92008200)
1000
Proportionateprofituptoreportingdate(74%of1000)
740
Profitdeclaredfor1styear
247
Profitfor2ndyear(740247)
493
3rdyear

Expensesuptoreportingdate
8200
Percentageofcompletion
100%
Estimatedtotalsales
9200
Estimatedprofit(92008200)
1000

145
Profitdeclaredfor1stand2ndyear(247+493)
Profitfor3rdyear(1000740)

740
260

Illustration 4 (example of Para 27 with the figures of Illustration 3 changed in 3rd

year)(Changedfiguresshowninbold):

(amountinRs.lakh)

Year1
Year2
Year3
9,000
Initialamountofrevenueagreedincontract
9,000
9,000

200
Variation

200

9,200
Totalcontract
9,000
9,200

9250
Contractcostsincurreduptothereportingdate 2,093
6,168

Contractcoststocomplete
5,957
2,632

9250
Totalestimatedcontractcosts
8,050
8800

(50)
EstimatedProfit
950
400

Stageofcompletion
26%
6068
x100%
100/
8800=
68.95%

Calculation:

Up to ReportingRecognizedin
Recognizedin
Date
Prioryears
currentyear
Year1

Revenue(9,000x.26)
2,340

2,340
Expenses
2,093

2,093
Profit
247

247
Year2

Revenue(9,200x68.9545%)
6343.8
2,340
4003.8
Expenses (6168100 stored for6,068
future)
Profit
275.8
Year3

Revenue(9,200x100%)
9,200
Expenses
9,250
Profitinthiscontract
(50)

CalculationinthewayofIllustrationNo.2:

1styear
Expensesuptoreportingdate
Totalestimatedcost
Percentageofcompletion(2093x100/8050)

2,093

3,975

247

6343.8
6,068
275.8

28.8

2856.2
3182
(325.8)

2093
8050
26%

146
Estimatedtotalsales
Estimatedprofit(90008050)
Proportionateprofitfor1styear(950x26%)
2ndyear
Expensesuptoreportingdate(6168100)
Totalestimatedcost
Percentageofcompletion(6068x100/8800)
Estimatedtotalsales
Estimatedprofit(92008800)
Proportionateprofituptoreportingdate(68.95%of400)
Profitdeclaredfor1styear
Profitfor2ndyear(275.8247)
3rdyear
Expensesuptoreportingdate
Percentageofcompletion
Estimatedtotalsales
Finalprofit(92009250)
Profitdeclaredfor1stand2ndyear(247+28.8)
Profitfor3rdyear=(50)275.8

9000
950
247

6068
8800
68.95%
9200
400
275.8
247
28.8

9250
100%
9200
(50)
275.8
(325.8)

147

WhyAS7ismandatory

Many Assessing Officers may face this question from assessees or their representatives.
Therefore,itisnecessarytoseewhy,howandforwhomAS7ismandatoryandhowmuch
bindingitisonthem.
InthewebsiteofICAI,www.icai.org,underResourcesthereisANNOUNCEMENTSOF
THE COUNCIL REGARDING STATUS OF VARIOUS DOCUMENTS ISSUED BY THE
INSTITUTEOFCHARTEREDACCOUNTANTSOFINDIA(Availableinpage232,Vol.52,
No.3ofCompendiumofAccountingStandards).Inthis,isgivenClarificationregarding
AuthorityAttachedtoDocumentsIssuedbytheInstitute.Itsays:
Statementsthereforearemandatory(Para3)
GuidanceNotesarerecommendatoryinnature(Para5)
TheAccountingStandardsandStatementsonStandardAuditingPracticesissuedbythe
AccountingStandardsBoardandtheAuditingPracticesCommittee,respectively,establish
standards which have to be complied with to ensure that financial statements are
preparedinaccordancewithgenerallyacceptedaccountingstandardsandthatauditors
carryouttheirauditsinaccordancewiththegenerallyacceptedauditingpractices.
They become mandatory on the dates specified either in the respective document or by
notificationissuedbytheCouncil.(Para7)
It is clarified that once an Accounting Standard /Statement on Standard Auditing
Practicesbecomesmandatory,theconcernedStatementortherelevantpartthereofshall
automaticallystandwithdrawn(Para8)
ItisherebynotifiedthattheCounciloftheInstitute,atits144thmeeting,heldonJune79,
1990, has decided that the following Accounting Standards will become mandatory in
respectofaccountsforperiodscommencingonorafter1.4.1991
(a)AS1DisclosureofAccountingPolicies
(b)AS7AccountingforConstructionContracts21
(c)AS8AccountingforResearchandDevelopment22
(d)AS9RevenueRecognition
(e)AS10AccountingforFixedAssets
(PartII,Para1)
The Companies Act, 1956, as well as many other statutes requires that the financial
statements of an enterprise should give a true and fair view of its financial position and
working results. This requirement is implicit even in the absence of a specific statutory
provisiontothiseffect.However,whatconstitutestrueandfairviewhasnotbeendefined
either in the Companies Act, 1956 or in any other statute. The pronouncements of the
Institute seek to describe the accounting principles and the methods of applying these
principlesinthepreparationandpresentationoffinancialstatementssothattheygivea
trueandfairview.(Para2,PartII)

148

The Preface to the Statements of Accounting Standards issued by the Institute in 1979
states(paragraphs6.1and6.2):
6.1 While discharging their attest function, it will be the duty of the members of the
InstitutetoensurethattheAccountingStandardsareimplementedinthepresentationof
financialstatementscoveredbytheirauditreports.Intheeventofanydeviationfromthe
Standards,itwillbealsotheirdutytomakeadequatedisclosuresintheirreportssothat
theusersofsuchstatementsmaybeawareofsuchdeviations.(Para3)
Accordingly,whiledischargingtheirattestfunction,itwillbethedutyofthemembersof
the Institute: (a) to examine whether Statements relating to accounting matters are
complied with in the presentation of financial statements covered by their audit. In the
event of any deviation from the Statements, it will be their duty to make adequate
disclosuresintheirauditreportssothattheusersoffinancialstatementsmaybeawareof
suchdeviations(Para5(a)
OnceanAccountingStandardbecomesmandatory,thedutiesofanauditorwithrespectto
such Standard are the same as those specified at paragraph 5(a) above. (Para 6)
[Authors note: This means that it is the Auditors duty to examine whether these
mandatory accounting standards are complied with in presentation of financial
statements]
AccountingStandards1,7,8,9,10and11shouldbemandatoryinrespectofaccountsfor
periodsbeginningonorafter1.4.1991forcompaniesgovernedbytheCompaniesAct,1956
aswellasforotherenterprisesexceptthefollowing
(a)Soleproprietaryconcerns/individuals
(b)Partnershipfirms
(c)SocietiesregisteredundertheSocietiesRegistrationAct
(d)Trusts
(e)Hinduundividedfamilies
(f)Associationsofpersons.

Inrespectoftheenterpriseslistedat(a)to(f)above,AccountingStandards1,7,8,9,10&1139
shouldbemandatoryinrespectofaccountsforperiodsbeginningonorafter1.4.1993.(Part
III)
Itisherebyclarifiedthatthemandatoryaccountingstandardsalsoapplyinrespectof
financial statements audited under section 44AB of the Incometax Act, 1961.
Accordingly, members should examine compliance with the mandatory accounting
standardswhenconductingsuchaudit.(PartVI)
4.Accordingly,inviewoftheannouncementspublishedintheInstitutesJournalfrom
time to time, in respect of specified status of Accounting Standards, read with this
announcement, the extant position is that all the accounting standards, issued by the
Institute which have been made mandatory by the Institute as indicated in the
respective standards or made mandatory by way of a separate announcement are
specifiedforthepurposeoftheprovisotosection211(3C)andsection227(3)(d)of
theAct.(PartXV,Para4)

6.3 FinancialStatementscannotbedescribedascomplyingwiththeAccountingStandards
unlesstheycomplywithalltherequirementsofeachapplicableStandard.

ListofAccountingStandardsmandatoryasonJuly1,2006

Applicability to Applicability to Applicability

Sl. Accounting
Titleofthe
Level
I Level
II toLevelIII
Accounting
No. Standard
Enterprises
Enterprises
Enterprises
Standard
(AS)No.
(seeNote1)
(seeNote1)
(seeNote1)
1
AS1
Disclosureof Yes
Yes
Yes

149

2
3
4
5

Accounting
Policies
AS2(Revised) Valuationof
Inventories
AS7(Revised) Construction
(SeeNote2
Contracts
also)
AS9
Revenue
Recognition
AS19
Leases
(SeeNote5
also)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes{Except
paragraphs
22(c),(e)and
(f);25(a),(b)
and (e); 37(a),
(f)and(g);and
46(b), (d) and
(e)}

Yes{Except
Paragraphs
22(c),(e)and
(f);25(a),(b)
and(e);37(a),
(f)and(g);
and46(b),(d)
and(e)}

1.ForthepurposeofapplicabilityofAccountingStandards,enterprisesareclassifiedintothree
categories,viz.,LevelI,LevelIIandLevelIII.LevelIIandLevelIIIenterprisesareconsideredas
SMEs.Thecriteriafordifferentlevelsaregivenbelow.

LevelIEnterprises
Enterpriseswhichfallinanyoneormoreofthefollowingcategories,atanytimeduringthe
accountingperiod,areclassifiedasLevelIenterprises:

(i)EnterpriseswhoseequityordebtsecuritiesarelistedwhetherinIndiaoroutsideIndia.
(Note:Thismeansalllistedcompanies)

(ii)Enterpriseswhichareintheprocessoflistingtheirequityordebtsecuritiesasevidencedby
theboardofdirectorsresolutioninthisregard.

(iii)Banksincludingcooperativebanks.

(iv)Financialinstitutions.

(v)Enterprisescarryingoninsurancebusiness.

(vi) All commercial, industrial and business reporting enterprises, whose turnover for the
immediatelyprecedingaccountingperiodonthebasisofauditedfinancialstatementsexceeds
Rs. 50 crore. Turnover does not include other income. (Note: This includes even non
companies)

(vii) All commercial, industrial and business reporting enterprises having borrowings,
includingpublicdeposits,inexcessofRs.10croreatanytimeduringtheaccountingperiod.

(viii) Holding and subsidiary enterprises of any one of the above at any time during the
accountingperiod.

LevelIIEnterprises
Enterprises which are not Level I enterprises but fall in any one or more of the following
categoriesareclassifiedasLevelIIenterprises:

150
(i) All commercial, industrial and business reporting enterprises, whose turnover for the
immediatelyprecedingaccountingperiodonthebasisofauditedfinancialstatementsexceeds
Rs.40lakhbutdoesnotexceedRs.50crore.Turnoverdoesnotincludeotherincome.

(ii)Allcommercial,industrialandbusinessreportingenterpriseshavingborrowings,including
publicdeposits,inexcessofRs.1crorebutnotinexcessofRs.10croreatanytimeduringthe
accountingperiod.

(iii) Holding and subsidiary enterprises of any one of the above at any time during the
accountingperiod.

LevelIIIEnterprises
(i) Enterprises which are not covered under Level I and Level II are considered as Level III
enterprises. The following may also be noted in respect of applicability of Accounting
Standards to Small and Medium Sized Enterprises (SMEs): An enterprise, which does not
disclose certain information pursuant to the exemptions/relaxations available to an SME,
shoulddisclosethefact.

(ii)Whereanenterprisehaspreviouslyqualifiedforanyexemption/relaxation(beingunder
Level II or Level III), but no longer qualifies for the relevant exemption/relaxation in the
current accounting period, the relevant standards/requirements become applicable from the
currentperiod.However,thecorrespondingpreviousperiodfiguresneednotbedisclosed.

(iii)WhereanenterprisehasbeencoveredinLevelIandsubsequently,ceasestobesocovered,
theenterprisewillnotqualifyforexemption/relaxationavailabletoLevelIIenterprises,until
theenterpriseceasestobecoveredinLevelIfortwoconsecutiveyears.Similaristhecasein
respectofanenterprise,whichhasbeencoveredinLevelIorLevelIIandsubsequently,gets
coveredunderLevelIII.

Note 2: AS 7 (revised 2002) is applicable in respect of all contracts entered into during
accountingperiodscommencingonorafter142003.Inrespectofallcontractsenteredinto
during accounting periods commencing on or before 3132003, AS 7 (issued 1983) is
applicable.

PrefacetotheStatementsonAccountingStandardsrevisedin2004byICAI(which
supersedesthatissuedin1979andstatedabove)states,

6.CompliancewiththeAccountingStandards

6.1TheAccountingStandardswillbemandatoryfromtherespectivedate(s)mentionedinthe
AccountingStandard(s).ThemandatorystatusofanAccountingStandardimpliesthatwhile
discharging their attest functions, it will be the duty of the members of the Institute to
examine whether the Accounting Standard is complied with in the presentation of
financial statements covered by their audit. In the event of any deviation from the
Accounting Standard, it will be their duty to make adequate disclosures in their audit
reportssothattheusersoffinancialstatementsmaybeawareofsuchdeviation.

6.2.EnsuringcompliancewiththeAccountingStandardswhilepreparingthefinancial
statementsistheresponsibilityofthemanagementoftheenterprise.Statutesgoverning
certainenterprisesrequireoftheenterprisesthatthefinancialstatementsshouldbeprepared
incompliancewiththeAccountingStandards,e.g.,theCompaniesAct,1956(section211),and
the Insurance Regulatory and Development Authority (Preparation of Financial Statements
andAuditorsReportofInsuranceCompanies)Regulations,2000.

151
In case of company assessees it is mandatory even by the Companies Act, 1956.
DifferentsubsectionsofSection211,asreproducedbelow,showthis:

(3A)Everyprofitandlossaccountandbalancesheetofthecompanyshallcomplywiththe
accountingstandards.

(3B)Wheretheprofitandlossaccountandthebalancesheetofthecompanydonotcomply
withtheaccountingstandards,suchcompaniesshalldiscloseinitsprofitandlossaccountand
balancesheet,thefollowing,namely:
(a)
Thedeviationfromtheaccountingstandards;
(b)
thereasonsforsuchdeviation;and
(c)
thefinancialeffect,ifany,arisingduetosuchdeviation.

(3C)Forthepurposesofthissection,theexpression"accountingstandards"meansthe
standardsofaccountingrecommendedbytheInstituteofCharteredAccountantsofIndia
constitutedundertheCharteredAccountantsAct,1949

(7)Ifanysuchpersonasisreferredtoinsubsection(6)ofsection209failstotakeall
reasonablestepstosecurecompliancebythecompany,asrespectsanyaccountslaidbefore
thecompanyingeneralmeeting,withtheprovisionsofthissectionandwiththeother
requirementsofthisactastothematterstobestatedintheaccounts,heshall,inrespectof
eachoffence,bepunishablewithimprisonmentforatermwhichmayextendtosixmonths,or
withfinewhichmayextendtotenthousandrupees,orwithboth

(8)Ifanyperson,notbeingapersonreferredtoinsubsection(6)ofsection209,havingbeen
chargedbythemanagingdirectorormanager,orBoardofdirectors,asthecasemaybe,with
thedutyofseeingthattheprovisionsofthissectionandtheotherrequirementsaforesaidare
compliedwith,makesdefaultindoingso,heshall,inrespectofeachoffence,bepunishable
withimprisonmentforatermwhichmayextendtosixmonthsorwithfinewhichmayextend
totenthousandrupees,orwithboth.

Again, the following is the text of Companies (Accounting Standards) Rules, 2006
enactedbytheGovernmentofIndiawhichisbindingonallcompanies:

MinistryofCompanyAffairs
NOTIFICATION
NewDelhi,the7thDecember,2006
ACCOUNTINGSTANDARDS

G.S.R.739(E).Inexerciseofthepowersconferredbyclause(a)ofsubsection(1)ofsection
642oftheCompaniesAct,1956(1of1956),readwithsubsection(3C)ofsection211andsub
section (1) of section 210A of the said Act, the Central Government, in consultation with
National Advisory Committee on Accounting Standards, hereby makes the following rules,
namely:

1.Shorttitleandcommencement.

(1)TheserulesmaybecalledtheCompanies(AccountingStandards)Rules,2006.
(2)Theyshallcomeintoforceonthedateoftheirpublication
intheOfficialGazette.

2.Definitions.Intheserules,unlessthecontextotherwiserequires,
(a) Accounting Standards means the Accounting Standards as specified in rule 3 of these
rules;

152
(b)ActmeanstheCompaniesAct,1956(1of1956);
(c)AnnexuremeansanAnnexuretotheserules;
(d)GeneralPurposeFinancialStatementsincludebalancesheet,statementofprofitandloss,
cashflowstatement(whereverapplicable),andotherstatementsandexplanatorynoteswhich
formpartthereof.
(e)Enterprisemeansacompanyasdefinedinsection3oftheCompaniesAct,1956.
(f)SmallandMediumSizedCompany(SMC)means,acompany
(i)whoseequityordebtsecuritiesarenotlistedorarenotintheprocessoflistingonanystock
exchange,whetherinIndiaoroutsideIndia;
(ii)whichisnotabank,financialinstitutionoraninsurancecompany;
(iii) whose turnover (excluding other income) does not exceed rupees fifty crore in the
immediatelyprecedingaccountingyear;
(iv)whichdoesnothaveborrowings(includingpublicdeposits)inexcessofrupeestencroreat
anytimeduringtheimmediatelyprecedingaccountingyear;and
(v) which is not a holding or subsidiary company of a company which is not a small and
mediumsizedcompany.
Explanation:Forthepurposesofclause(f),acompanyshallqualifyasaSmallandMedium
SizedCompany,iftheconditionsmentionedthereinaresatisfiedasattheendoftherelevant
accountingperiod.

(2) Words and expressions used herein and not defined in these rules but defined in the Act
shallhavethesamemeaningrespectivelyassignedtothemintheAct.

3. Accounting Standards. (1) The Central Government hereby prescribes Accounting

Standards 1 to 7 and 9 to 29 as recommended by the Institute of Chartered Accountants of
India,whicharespecifiedintheAnnexuretotheserules.
(2) The Accounting Standards shall come into effect in respect of accounting periods
commencingonorafterthepublicationoftheseAccountingStandards.

4.ObligationtocomplywiththeAccountingStandards.
(1)Everycompanyanditsauditor(s)shallcomplywiththeAccountingStandardsinthe
mannerspecifiedinAnnexuretotheserules.

(2) The Accounting Standards shall be applied in the preparation of General Purpose
FinancialStatements.

5.Anexistingcompany,whichwaspreviouslynotaSmallandMediumSizedCompany(SMC)
andsubsequentlybecomesanSMC,shallnotbequalifiedforexemptionorrelaxationinrespect
of Accounting Standards available to an SMC until the company remains an SMC for two
consecutiveaccountingperiods.[No.1/3/2006/CLV]

JITESHKHOSLA,
Jt.Secy.
ANNEXURE
(Seerule3)
ACCOUNTINGSTANDARDS

A.GeneralInstructions
1. SMCs shall follow the following instructions while complying with Accounting Standards
undertheserules:
1.1.
the SMC which does not disclose certain information pursuant to the exemptions or
relaxationsgiventoitshalldisclose(bywayofanotetoitsfinancialstatements)thefactthat
itisanSMCandhascompliedwiththeAccountingStandardsinsofarastheyareapplicableto
anSMConthefollowinglines:TheCompanyisaSmallandMediumSizedCompany(SMC)as

153
defined in the General Instructions in respect of Accounting Standards notified under the
CompaniesAct,1956.Accordingly,theCompanyhascompliedwiththeAccountingStandards
asapplicabletoaSmallandMediumSizedCompany.
1.2.
Where a company, being a SMC, has qualified for any exemption or relaxation
previously but no longer qualifies for the relevant exemption or relaxation in the current
accountingperiod,therelevantstandardsorrequirementsbecomeapplicablefromthecurrent
periodandthefiguresforthecorrespondingperiodofthepreviousaccountingperiodneednot
berevisedmerelybyreasonofitshavingceasedtobeanSMC.Thefactthatthecompanywas
anSMCinthepreviousperiodandithadavailedoftheexemptionsorrelaxationsavailableto
SMCsshallbedisclosedinthenotestothefinancialstatements.
1.3.
If an SMC opts not to avail of the exemptions or relaxations available to an SMC in
respect of any but not all of the Accounting Standards, it shall disclose the standard(s) in
respectofwhichithasavailedtheexemptionorrelaxation.
1.4.
IfanSMCdesirestodisclosetheinformationnotrequiredtobedisclosedpursuantto
the exemptions or relaxations available to the SMCs, it shall disclose that information in
compliancewiththerelevantaccountingstandard.
1.5.
TheSMCmayoptforavailingcertainexemptionsorrelaxationsfromcompliancewith
therequirementsprescribedinanAccountingStandard:

Providedthatsuchapartialexemptionorrelaxationanddisclosureshallnotbepermittedto
misleadanypersonorpublic.

2. Accounting Standards, which are prescribed, are intended to be in conformity with the
provisions of applicable laws. However, if due to subsequent amendments in the law, a
particularaccountingstandardisfoundtobenotinconformitywithsuchlaw,theprovisions
ofthesaidlawwillprevailandthefinancialstatementsshallbepreparedinconformitywith
suchlaw.

3.AccountingStandardsareintendedtoapplyonlytoitemswhicharematerial.

4. The accounting standards include paragraphs set in bold italic type and plain type, which
haveequalauthority.Paragraphsinbolditalictypeindicatethemainprinciples.Anindividual
accountingstandardshallbereadinthecontextoftheobjective,ifstated,inthataccounting
standardandinaccordancewiththeseGeneralInstructions.
B.AccountingStandards

Authors comments: Thus, it is clear that in cases of contracts for construction AS 7 is

mandatory on the Chartered Accountants by the guidelines issued by ICAI. If they do not
follow these, they are liable to disciplinary actions by the ICAI. As far as corporate
developers, builders and contractors are concerned, it is binding on them as per S. 211 of
CompaniesAct,1956andCompanies(AccountingStandards)Rules,2006.Ifnecessary,AO
may write to the corporate assessee about these provisions andwhy action should not be
initiatedagainsthimforprosecution.

154

CaseSudies

Atthispoint,afewreturnsandaccompanyingP&LA/c,Balancesheetsarebeingshownto
giveanideaaboutreturnsofdevelopersandaccountsfollowedbyassessees:
Belowarethefinancialstatementsofonesmallbuilder:

155

156

AuditReport:

157
Authorscomments:Theabovecaseshowsthat:

During the year the assessee received advance from four customers. Customers may have
paid such advance after executing agreement (generally it is in writing). Such agreement
contained some promises and considerations from both sides. Assessee promised to
constructandhandoverpossessionofapropertyandbuyerpromisedtopaysomemoney
for it. Assessee also did some preliminary development work. If it is so, then such
construction is very much a contract as per Indian Contract Act, 1872 and further,
importantlyforourpurpose,itisconstructioncontract.Also,Para22ofAS7isfulfilled,
i.e.,outcomeofthecontractcanbereliablyestimatedhere andthereforeAS7mustapply
here(ofcourse,ifthereiseithernoconstructionorconstructionwithoutcontract,thenitis
notconstructioncontract).
i.
Accordingly,assesseeshouldhaverecognizedrevenueevenbeforeendofconstruction.
But return and computation sheet shows that it has shown NIL income and even no
ContractA/corP&LA/chasbeenprepared.
ii.
Now,asseenearlier,forAS7weneedactualcostuptothereportingdate,totalcostas
estimated on the reporting date and total receivables (including amount already
received)
iii.
During the year the assessee spent money on construction which is the cost of
construction
iv.
Total cost is also very much available as every developer makes a calculation of
profitabilityofhisproject.Ifhehasnotdonealready,AOmayaskhimtodoonenow.
Even if assessee refuses to give such figure, AO may obtain the same from different
sourceslikebank(ifloantakenfortheproject),Municipality,Housingdepartmentetc.
aswillbediscussedindetaillater.Thismaybeavailablebyconductingsurveyalso.
v.
Totalreceivablesasexpectedonreportingdate(31stMarch)arealsoavailablefromthe
agreements (with buyers), bank, brochures etc. sources. The assessee has shown
expenses of Rs. 33,903/ on account of application fees. This is probably for the
approvals/ sanctions received from different departments. AO may collect the
applicationformsfromthesedepartmentswhichmaygivealotofinformation.
vi.
Inthiscase,wehaveonlytheactualcostavailablefromthereturn.Say,thisisthefirst
year ofconstruction,totalcostestimatedas on 31.3.2005is Rs.30,00,000/andtotal
revenue estimated as on 31.3.2005 is Rs. 44,00,000/. So, total profit as estimated on
such reporting date is Rs. 14,00,000/, percentage of completion is 3,13,699 x 100/
44,00,000/ = 7.1295% and profit for this 1st year is 7.1295% of 14,00,000 = Rs.
99,813/
vii.
Ofcourse,AOhastoscrutinisethethreemostimportantcomponentsinthiscalculation
duringassessmentproceedings.HehastocheckgenuinenessoftheexpensesofRs.3,
13,699. For example, here electricity expenses are shown at Rs. 60,608 while the
projectisatitsinfancyandsothisseemstobehigh.CostofmaterialsisRs.51,293only.
In fact, direct expenses like materials, wages etc. constitute very little (materials, site
preparation,transportation)oftotalexpenses.TransportationexpensesisshownasRs.
470/whilecostofmaterialsisRs.51293/.Sothetransportationcostseemstobelow.
Say,theAOhasexaminedallthesepointsanddisallowedRs.70,000/.
viii.
As per Para 19 of AS7 selling costs and general office administration expenses are
nottobetakenintocontractaccount.Thiswillnotbeincludedintheaccountsofthe
projecttofindoutthe%ofcompletionbutafterfindingouttheprojectsprofit,willbe
takentogeneralaccounts.
ix.
Further, say, the AO has detected unexplained expenditure on some items used for
construction(say,transportcost)asRs.50,000/.
x.
Hehasalsotocheckgenuinenessoftotalexpectedrevenue(receivedplusreceivables).
Say,itremainsatRs.44,00,000/.

158
xi.
xii.
xiii.
xiv.
xv.
xvi.

Lastly, he has also to check total expected cost of the project from different sources.
Say, it is found to be Rs. 32, 00,000/ from the Housing department (who grants
permissiontopromoters).
Accordinglythenewestimatedprofitwillbe44,00,00032,00,000=Rs.12,00,000
Percentage of completion will be Rs. 2,93,699/ (3,13,699 70,000 + 50,000) (this is
thetotalcostincurreduptoreportingdateasperAO)x100/32,00,000=9.17%
Profitfortheyearwillbe9.17%ofRs.12,00,000=Rs.1,10,040/.Thusadditionwill
be1,10,040/99,813/=Rs.10,227/
InadditiontothistherewillbeadditionforunexplainedexpenditureofRs.50,000/
Further,heretheassesseefailedtomakedisclosureasrequiredunderPara38to43
of AS7 and the Auditor, despite not following AS7, certified that the accounts gave
true and fair view. Such certification is wrong and contrary to ICAIs declaration.
ThereforealettermaybesenttotheAuditorinthelineofthesamplegiveninChapter
9ofthisbook

Yetanothercaseabiggerdeveloperscase:

Computationsheet:

ExcerptfromitsAuditReport:

159

160

161

162

163

Authors comments: This is a medium size case where assessee is a firm but turnover is

164
biggerthanearliercase.Studyofcopiesofitsaccountsandauditreportgiveninpreceding
pagesshowsthat:

i.
AssesseehasshownNILincomestatingthereasonassincetheprojectunderprogress
neitherprofitearnednoranylossincurredduringtheperiod
ii.
ThereisnoContractAccountorP&LAccountbutonlyBalancesheethasbeenenclosed.
Thisshowsthatassesseehasreceivedsubstantialamountofadvancefrombuyers.In
fact, 89.3% of the sources of fund are such payments only and assessees own fund
constitutes meagre 3.04%. Like case study no. 1 given earlier, in this case also such
buyers have definitely paid such money after execution of agreements (written or
verbal) and therefore, for the reasons explained above, AO can treat this as
construction contract and accordingly apply AS7. To strengthen this point of
application of AS7 the AO can also cite definitions and features of contract as per
Indian Contract Act, 1872 and find out from the recitation of agreement documents
whetherthewordscontractororcontractappearsthere.
iii.
The Auditor has stated in Statement of Accounting Policies and notes on Account in
Schedule G that to recognize revenue and to charge against revenue all cost and
expensesareaccountedforonmercantilesystemofaccounting(ingeneral).Buthere
heisrequiredtodiscloseasperPara38to43ofAS7.InPara6theauditorhaswritten
vaguely, Other Accounting Policies: These are consistent with generally accepted
Accounting Principles and prepared under the historical cost convention using accrued
method of accounting. In fact, in the cases of all big developers such disclosures are
made.Asexample,inthecaseofUnitechLtd.,Schedule16ofAnnualreportfortheyear
endingon31.3.2007istheSIGNIFICANTACCOUNTINGPOLICIESANDNOTESTOTHE
ACCOUNTSwhere,inPara4(a)(ii)itisdisclosed,Revenuefromrealestateprojectsis
recognized on the Percentage of Completion Method of accounting. In case of Ansal
Properties & Investment Ltd., in Para 8 in Schedule 18 of the Annual Report for the
same year it is written, The Group follows Percentage of Completion Method of
accounting for contracts and constructed residential, Institutional and commercial
properties.Asperthismethod,therevenueisrecognizedinproportiontotheactualcost
incurred as against the total estimated cost of the projects under execution subject to
actual cost being 30% or more of the total estimated cost.The point is that if these
disclosuresweremade,AOcouldhavemadetheassessmentinabetterway,evenex
parte, if required. Therefore the AO should try to obtain these disclosures by writing
lettertotheAuditorinthemannerstatedintheearliercase.
iv.
InAuditorsreporttheAuditorhasalsocertifiedthatthestatementsgiveatrue&fair
viewwhichcannotbetrueasdiscussedinearlierchapters.
v.
It is found from Schedule E that cost up to reporting date is Rs. 1, 52, 68,349.13 and
costincurredinthisyearisRs.48,58,112.61.Totalcostoftheprojectasestimatedon
31.3.2005isnotavailableintheserecords.Say,itisRs.2,12,00,000.Sopercentageof
completion is 1,52,68,349 x 100/ 2,12,00,000 = 72.02% and % of completion in this
yearaloneis48,58,112x100/2,12,00,000(iftotalcostoftheprojectwasestimatedat
thesamefigureonlastreportingdatetoo)=22.9156%.
vi.
Total revenue of the project is also not available from these papers but already Rs.
1,41,74,985/ has been received as advance and so, let us presume the figure as Rs.
2,50,00,000/.Para10ofAS7sayswhatitemsaretobetreatedascontractrevenue.
ParticularlyPara10(a)underlinestheimportanceofreadingtheagreement(contract)
minutelytofindoutwhataretheitemsofpaymentagreedbythebuyer.
vii.
Therefore, the total profit estimated as on reporting date is Rs. 2,50,00,000 Rs.
2,12,00,000=Rs.38,00,000/andprofituptoreportingdateis72.02%of38,00,000=
Rs. 27,36,760/ and if profit disclosed up to last year was, say, Rs. 18,65,967/ then
profitofthisyearisRs.8,70,793/
viii.
But, as pointed out earlier also, the three main issues, viz., total revenue within the
meaning of Para 10 14 of AS7, total cost of the project as reasonably estimated on

165

ix.
x.
xi.

xii.
xiii.

xiv.

xv.

reportingdateandthecostincurreduptoreportingdatewithinthemeaningofPara15
20aretobedeeplyinvestigated.
For verifyingtotalrevenue,the AOshouldchecktheadvertisements,agreements,bank
accountofdeveloper,papersfiledwithlendinginstitutiontoobtainloanetc.
For verifying total cost, AO can consult papers filed with lending institutions,
municipalityetc.
For verifying cost up to the reporting date as claimed in Schedule E, i.e., 31st March,
2005here,AOhastoexamineledger,cashbook,bills&vouchers,bankstatementsetc.
asdoneinallgeneralcases.MaterialspurchasedareclaimedatRs.32,39,004.50.This
should be examined by collecting item wise quantity and value for the whole year
(opening balance, purchase and closing balance of each item). The items are to be
compared with building plan/ agreements (where specifications are written). The
closing balance will have to be shown as closing stock in the contract account as per
Para26ofAS7.
Rs. 8, 42,161 has been claimed as construction expenses which is a vague term.
Detailsshouldbeobtainedandthenexaminedwithevidences.
SomeitemslikeAccountingcharges(Rs.20,000),Donation&subscription(Rs.3,601),
PujaExpenses(Rs.6,927),Rent(Rs.60,000),Partnersremuneration(Rs.2,52,000)
and interest (Rs. 33, 840) and depreciation (Rs. 20, 412) on office computers &
equipments may attract Para 19 of AS 7 and hence have to be excluded while
computingpercentageofcompletionandprofitinthecontractaccount.
As we have seen in advertisement of Parsvnath in earlier pages, payments by buyers
arelinkedwith%ofcompletionschedules.AOcanfindoutastowhatinstallmenthas
beencalledandthatwilltellhimthe%ofcompletionasclaimedbybuilderhimself.AO
cancomparethis%withthe%obtainedbydividingcostuptoreportingdatebytotal
costandmultiplyingquotientwith100asexplainedabove.Thistechniquemayexpose
contradictoryclaims.
SomepeopleinthedepartmentfeelthatengagingengineersofValuationcellofIncome
taxdepartmentbyissuingcommissionu/s131(1)(d)tofindoutcostofconstruction(
it will not include indirect expenses like printing & stationery or telephone charges)
maybeveryusefulinassessmentofrealestatecases.ButIfeelthatitcanbeoflimited
useonlyanditshouldbeinvokedwithgreatcaution.Wemustappreciatethatcasesof
developers/ builders/ contractors where they are constructing scores of, may be
thousands, dwelling units along with other facilities are fundamentally different from
thecasesofIndividualorotherassesseswhoconstructonebuilding(maybeverybig
even) and where Percentage of Completion method is not applicable and where such
assignmentisgiventoValuationcellonlyafterfullconstructionisover.Inrealestate
cases, firstly, even in a project which is completed in one year, finding cost of
construction is possible only in small project. It is almost impossible in projects like
Integrated housing (having many other things in addition to dwelling units), Group
housing (say, with 1000 apartments), BOT projects (like construction of airport/ sea
port/ refinery/ power plant/ large bridge or viaducts etc.). Secondly, in projects
spanningoverseveralyears,itispossibleonlyaftertheprojectiscompletedbecause,
say,aprojectstartsfromFY200607andendsinFY200910,theassesseeclaimscost
incurredupto31.3.2007(1styear)asRs.40,00,000/inthereturnfiledon31.10.2007
andtheAOissuescommissiontoValuationcellonlyon,say,18.4.2008.Now,whenthey
will visit site for actual physical measurement etc., the stage of construction at which
the project stood 13 months back has completely changed and so, not available. And
thereareroads,parks,mechanical,electrical&electroniccomponentsetc.apartfrom
dwellingunits.So,issuingcommissionatthisstageislikelytobeofnouseorlittleuse
fraughtwithproblems.Onthecontrary,thesamemaybedoneaftercompletionofthe
project.Eventhen,itisalmostimpossibletodeterminecostofconstructionofaproject
involvingcroreofrupees.Thatiswhyitmaybemorepracticalifthevaluationcellis
asked to furnish scientific/ technical report on whether the construction was as per

166
sanctioned plan (whether built up area was same, whether specifications have been
followed, whether materials were used as claimed in brochure/ agreement, whether
theprojecthasbeencompletedonthedateasclaimed).Thus,thetermsofreferenceof
thecommissionmustbespecificandnottoogeneralorvague.Itmustbekeptinmind
thatinthismattertheAOislikethejudgeofacourtwhoasksdifferenttechnicalpeople
(includingappointmentoflawyersasamicuscuriae)toassistthecourtinadjudicating
a matter. For the years other than final year the AO himself may examine the case
through other means including conventional ones and those suggested at different
placesofthisbook.Asamatteroffact,ifanomnibusreportcomesfromValuationcell
thenitwillcreateproblemforAObecausehehastofindreasonsastowhyhehasnot
accepted part or full of such report. Again, as per the judgment of Supreme Court in
Smt.AmiyaBalaPaulv.CIT(2003)262ITR407(SC),referencecannotbemadeu/s
55A of IT Act, 1961 to Valuation Cell for filing report for anything other than Capital
Gains.IfareportistobeobtainedfromValuationCellforinvestigationinbusinesscase
(i.e.,arealestatecase),commissionhastobeissuedu/s131(1)(d)ofITAct,1961and
insuchcaseunlesstheprocedurelaiddowninRule75ofOrderXXVIreadwithRule9
of Code of Civil Procedure, 1908 is followed, such report cannot be used as evidence
against assessee. Requirement of Rule 9 is "Commissions to make local
investigationsinanysuitinwhichthecourtdeemsalocalinvestigationtoberequisite
or proper for the purpose of elucidating any matter in dispute, or of ascertaining the
marketvalueofanyproperty,ortheamountofanymesneprofitsordamagesorannual
netprofits,thecourtmayissueacommissiontosuchpersonasitthinksfitdirectinghim
tomakesuchinvestigationandtoreportthereontothecourt:Providedthat,wherethe
state government has made rules as to the persons to whom such commission shall be
issued,thecourtshallbeboundbysuchrules."
xvi.
Labour charges of Rs. 19,740/ is a suspect because such construction job is manual
labourintensiveanditiswhollydisproportionatetothematerialspurchased(andput
into use) particularly when there is no payment to contractor/ subcontractor also
(through whom he might have done labour intensive jobs). Similarly all other items
mustbeexaminedfromtheviewpointofnotonlycorrectnessoftheamountsbutalso
ofreasonablenessofeachamountvisvisamountofotheritemsbecause,asexplained
inthematteroflabourchargesabove,eachitemislinkedwithanother.
xvii.
If any or more of these three figures change, % of completion as well as profit will
change.
xviii.
Apartfromthesepoints,AOhastoexamineotherusualpointsofscrutinydiscussion
of which is, of course, not the purpose for this book on such special topic like the
purpose of giving loans and advances of Rs. 5, 66,418/ and its implication on other
points and may also lead to addition under the head undisclosed sources (Income
fromothersources).
Now I will take up the above P & L Account to show how hearings/ inquiries/ adverse
detectionsvisvisAS7affectseveryyearsassessment:
ToMaterialsPurchases
32,39,004.50 By
Proportionate 2,04,79,473.00
revenue up to this year
of
Rs.
(71.8578%
2,85,00,000.00)
ConstructionExpenses
8,42,161.00

Architects
Consultancy

Charges
Materials
Carrying
3,980.00

Charges
MachineHireCharges
12,000.00

ElectricityCharges.
59,485.84

AccountingCharges
20,000.00

167
BankCharges
1,301.00

ConveyanceCharges
24,752.20

Donation&Subscription
3,601.00

Insurance

StaffSalary
1,68,016.00

StaffExgratia
6,500.00

StaffTeaExpenses
2,563.00

LabourCharges
19,740.00

Legal&Prof.Charges

OfficeMaintenance
438.00

Postage&Telegram
625.00

Printing&Stationery
2,715.00

PujaExpenses
6,927.00

Rent
60,000.00

TelephoneCharges
25,036.00

AuditFees
2,755.00

Partners'Remuneration
2,52,000.00

Interest on Partners
33,840.00

Capital
EarthFillingCharges

ElectricInstallation
36,000.00

GMDAPermissionFees

SoilInv.Charges

Depreciation on Fixed
20,412.00

Assets
SecurityServiceCharges
14,260.00

ByGrossprofituptothis
52,11,123.87

year

2,04,79,473.00
2,04,79,473.00
Step1:Expensesinearliertwoyears=Rs.1,04,10,236.52
Step2:Profitdeclaredinlasttwoyears=Rs.31,29,673.00
Step3:Totalexpensesuptotheendofthisyear=Rs.1,52,68,349.13
Step4:Estimatedfurtherexpenses=Rs.59,79,650.87
Step5:Estimatedtotalcostofthecontract/project=Rs.2,12,48,000.00
Step6:Expectedrevenue(includingsaleproceedsofflats)=Rs.2,85,00,000.00
Step7:Percentageofcompletion=(1,52,68,349.13x100/2,12,48,000)=71.8578%
Step8: Proportionate revenue = Rs. 2,85,00,000.00 x 71.8578% = Rs. 2,04,79,473.00
(Thisonlywillgotothecreditside)
Step9:Estimatedprofit=(Rs.2,85,00,000.00Rs.2,12,48,000)=Rs.72,52,000.00
Step10: Proportionate profit up to this year = Rs. 72,52,000 x 71.8578% = Rs.
52,11,127.65
Step11:Profitofthisyear=(Rs.52,11,127.65Rs.31,29,673.00)=Rs.20,81,454.65
Step12:Theprojectiscompletednextyear.Say,expensesinthenextyearisclaimedat
Rs.59,79,650.87asestimatedthisyear(Step4)
Step13: So, next year the total/ cumulative profit will be 2,85,00,000.00 Rs.
2,12,48,000.00=Rs.72,52,000
Step14:AndprofitfornextyearalonewillbeRs.72,52,000.00Rs.52,11,127.65=Rs.
20,40,872.35

Asamplefinancialstatementisgivenbelowinwhichassessee(builder)hasshownsaleof
flatatRs.3lakhinF.Y.200405andshownthesameflatasOpeningBalanceatRs.2lakh.
Theassesseeclaimedthatconstructionwasstartedin1991andcompletedin1999butout

168
ofseveralflatsonlythisoneremainedunsolduptoF.Y.200405andnowhehassoldthis.
Suchclaimsarepreposterousandsuchassesseesweretakingthedepartmentforarideas
they wished. Now these can be effectively handled with revised AS7. Secondly, even the
hearing and inquiry is difficult because after such a long gap, most of the evidences and
witnessesmaynotbeavailable.Sotheassessmentqualityisboundtosuffer.

Anothermediumsizecaseofadevelopercumcontractor:

169

170

171

172

173

174

175

176

177
Authors comments: This is a case of a firm which includes both construction contract
works and construction works as developer. Scanned copies of accounts and audit report
areenclosedinthefollowingpages,studyofwhichshows:
i.
AtPara8ofauditreportitismentionedthattheassesseewasacivilcontractor.
ii.
From the P & L account it is found that assessee was not only a civil construction
contractorbutalsoadeveloper.ButinPara11(d)ofauditreportagainstwhether
there is deviation from the accounting standards prescribed u/s 145 it is written
no. As will be found from later discussion in this book, AS I prescribed vide
Notification no. 9949 u/s 145 required assessee (and its auditor) to disclose
accountingstandardemployedwhichithasnotdone.Thefeaturesofbusinessas
evidentfromP&LA/cetcclearlyshowthatAS7wouldhavebeenapplicableat
leastincivilconstructionbusiness(agreementswouldshowwhetheritisapplicable
fordevelopmentbusinessalso)yetitisnotfollowed.
iii.
Here,thatAS7isapplicableisclearfromfollowingfacts:
a. ContractworkswithKPTwereconstructionworks
b. Balance sheet showed receipt of substantial advance from buyers of flats like
earliertwocaseswhichimpliesthattherewereagreementsandthesewerealso
legallycontracts(forreasonsdiscussedextensivelyearlier)
c. Outcomeofthecontractcanbeestimatedreliably(asrequiredinPara21)asthe
revenue is very much available in the tender/ work order. Of course even if it
cannotbedone,Para31isapplicablehere.
iv.
P&LAccountshowsthatassesseehastwobusinesses,viz.,ContactworkwithKPT
and Construction & Sale of flats. But it has not made separate accounts which is
contrarytoPara6ofAS7.
v.
The revenue from flat construction business is recognized on actual sale basis,
receipt of Rs. 11,15,000/ has been shown as sale proceeds of flat and receipt of
anotherRs.16,49,000/isshownsimplyasadvance(whichtheasssesseewilloffer
fortaxationathisadvantageoustime),constructionofRs.56,75,586/isshownas
workinprogressandthustaxationofitisdeferredwhichtooiswrong.
vi.
StilltheAuditorhascertifiedthatthestatementsgivetrueandfairviewwhichitself
isuntrue
vii.
AOsfirstactionpointwillbetogetseparateP&LAccountwithoutwhichhecannot
make effective scrutiny. To get this he may send letter to the assessee and the
auditorinthemannermentionedabove
viii.
As far as business of contract work with KPT are concerned, AO will get the total
revenue from the tender/ work order, total cost will be available from his own
estimates/banketc.(whichwillbediscussedveryextensivelyinaseparatechapter
undertheheadSourcesofinformation)andcostuptoreportingdate(31stmarch,
2006) will be available from the running bills filed so far (running bills contain
physical measurements, cost thereof plus certain profit percentage which can be
known from the KPT, i.e, contractee department). With these figures AO can
calculate the percentage of completion. The same can be done from the physical
measurementsavailablefromrunningbillsalsoasstatedinPara29ofAS7.
ix.
It is interesting to note that materials purchase was Rs. 11,23,906.47 but labour
wagescostwasRs.43,93,670/whichissuspiciouslyhighbecauseinaconstruction
processlabourcostsarelessthanmaterialscost.Thedisproportioncanbefurther
exposedbyhighlightingtherationbetweenthesetwolastyear.
x.
Labourwagesofaveryhighamount,Rs.17,72,810/hasbeenshownasoutstanding
ason31stMarch.Labourersarepoorpeopleandtheydonotworkonlongcredit.At
besttheytakepaymentonweeklybasisandnotmorethanthat.Itseemsthatasper
assessees claim wages of about 5 months remained unpaid (total wages Rs. 43.93
lakh divided by 12 months gives average wage of a month which is about Rs. 3.5
lakh)whichcanneverbetrue.

178
xi.

xii.
xiii.

ItemslikeBusinesspromotionRs.9,850/,depreciationonfurniture&motorcar,
Accountingcharges,Rates&TaxesandlikewhichattractPara19ofAS7shouldbe
excluded to find out % of completion and profit of each of the above two
constructioncontractbusinesses.
Asitisalsoanothernoncorporatecase,thelineofinvestigationandactionwillbe
thesameasearlierthreecases.
Asample142(1)requisitionletterisgivenbelowforthiscaseasillustration:

To
TheManagingPartner,
M/s.

Sub:Requisitionu/s142(1)ofIncometaxAct,1961inyourcaseA.Y.200607.

PleasefurnishthefollowingrelatedtoyourP&LA/candBalanceSheetfiledwithreturnfor
A.Y.200607:
A.RegardingcontractsfromKPT:
1.
Particularsinfollowingformat:
Identification/ Distinctive No. of each Value of each contract Description
of
contract

work
work
(1)
(2)
(3)
2.(a)PhotocopyofdocumentsoftenderswhichyouwereawardedinF.Y.200506
(b)DetailsofexpenditureinworkofeachsuchtenderdoneinF.Y.0506
3.(a)Photocopyofdocumentsoftenderswhichyouwereawardedearlierbutworkwas
actuallydoneinpart/fullduringF.Y.200506.
(b)Totalofexpenditureinworkeachsuchtenderdonebefore.1.4.05(i.e.openingbalance
ason1.4.05inrespectofeachwork)
(c)Detailsofexpenditureincurredinrespectofeachtender(separately)duringF.Y. 2005
06.
4.Detailsofbillssubmittedandreceivedduringtheyearinthefollowingformat:
Tender
Total
Totalvalue Of Value and date Amount
Additional
distinctive value of bills
submitted of submission received
amount
No.
the
before 1.4.05 in ofeachbill
against
received
of
contract respect
during F.Y. 05 bill in col. col.2

such in
06
4
excess of this

contract
1
2
3
4
5
6

5.Detailsregardingcostsofeachcontract:
Tender
Total value Costs incurred (i.e. Costincurred in
Estimated cost to
distinctive of
the workin progress) respect of such be incurred in
No.
contract
before1.4.05 in
contract
during respectofsuch
eachcontract
F.Y.200506
Contract
after

31.3.06

1
2
3
4
5

B.Businessofdevelopment&saleofflats:
Filethefollowing:
1.Addressofproject
2.CopyofpermissionunderPromotersAct
3.Copyofapplicationfiledforsuchpermission(ScheduleI)

179

4.Copyofbuildingplansanctionletterandplan
5.Copyofapplicationforgrantofsuchsanction(ScheduleA)
6.Copyofnoticeofcommencementofconstruction
7.Modeofacquisitionofland(Purchase/jointventure/others(specify)
8.Whetheranyloanobtainedanyloanobtainedforfinanceoftheproject
9.Dateofcommencementofconstruction
10.Dateofcompletionofconstruction(Copyofoccupancy/completioncertificateenclosed)
11.Numberofflatsintheproject
12.Followingparticularsinrespectoftheproject
(a)
Flat Name & Consider Paymentreceived
Date of hand
No. address of ation
over
of
purchaser value
possession

Mode Cheque/
Amount Bank &
Draft No &
Branch
Date
1 2
3
4
5
6
7
8

(b)Estimatedsalepriceofflatsnotalreadybooked/sold:
FlatNo.
Area

Price
1
2
3
(c)Similardetailsofcommercialspace,ifany.
13.Copyofdeedofacquisitionofland(purchase/developmentagreementincaseofjoint
venture)
14.Copiesofagreement/deedofsaleofflats
15.Constructiondetails:
(a)Numberofbuildings
(b)Numberofbuildings
(c)Numberofflats
Flattype
Area(sqft)/flat
Numberofflats
1BHK

2BHK

3BHK

(c) Totalconstructionarea(sq.ft.)
(e) Saleable area of flats available to you (deducting owners allocation in case of joint
venture)
(f)Timescheduleforconstruction:

Completion(done/plannedon)
Itemofwork
Plinthlevel
Superstructure
Plastering&plumbing
Finishing
PermissibleFAR/FSI
(g) Carparkingfacility(insq.ft.)
(h) Commercial/shopspaceforsale(insq.ft.)
(i) copyofdocumentshowingreceiptofwater/electricity/sewerageconnection:
(15) Anyarea/rightretainedwithyouintheproject.
(16)Anycommercialactivity(likerunningmaintenanceoperationoftheprojectinlieuof
charges)donebyyou.
(17)Totalestimatedprojectcost
(18)Costincurredupto31.3.05and31.3.06.
(19)Breakupofpurchaseforflats:

180
Item
Month

Amount

(20)Breakupoflabourchargesforflats:
Site

Month

Amount

(21) Details of collateral security pledged with bank (enclose copy of overdraft sanction
letter)
(22) BreakupofVATcharges.
(23) Breakupofbankcharges&commission(monthwise)
Item
Month

Amount

(24) Xeroxcopyofbankaccountstatement

NowseeaDeveloperCompanys(LimitedCo.)financialstatements:

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

Authorscomments:ThisisacaseofareputedbuilderwithturnoverofRs.16.82crorein
the yearendingon31.3.2004.Scannedcopiesof its balancesheet,profit&lossaccountand
schedulesareenclosedinthefollowingpages.Studyoftheseshowsthat:
i.
Assessee has not made any disclosure regarding accounting standard or policy
followedandthatisviolationofS.145(2).Butwehaveseenfromearlierdiscussion
inChapter5thatevenifaccountsaremadeasperAS9,theentireorsubstantial
revenuemayberecognizedattheverytimeofagreement.ItisclearthatAS7was
notfollowedbutitisalsonotclearwhichonewasfollowed.
ii.
InP&LAccountcreditsideconsistsofRealizationfromsale ofproperty (Rs.4.25
crore),otherincome(Rs.58.09lakh)andWorkinprogress(Rs.11.98crore).This
andSchedule14showthatrevenuehasbeenrecognizedonactualsalebasis.Onthe
otherhand,constructiondoneduringtheyearisshownasworkinprogressonly
anditisclearthat%ofcompletionmethodhasnotbeenfollowed.
iii.
Therefore let us see whether AS 7 is applicable in this case or not. In the Balance
sheet, Rs. 33, 86, 02,787.67 has been shown as Current Liabilities out of which Rs.
32, 70, 89,331.67 is Advance against Booking. Project wise break up of advance
received is given which shows that it executed 11 (eleven) projects, e.g., in Merlin
GreensprojectRs.1,51,45,190/hasbeenreceived.Again,customerwisebreakup
of this amount has been given which shows that this money was paid by 33
customers.Similardetailsareavailableforother10projectsalso.
iv.
AS7isapplicableinaccountingofconstructioncontractsinthefinancialstatements
of contractors. As per AS 7 a construction contract is a contract specifically
negotiatedfortheconstructionofanassetorcombinationofassets.
v.
The AOs first duty is to obtain the agreements under which buyers paid such
advances. After meticulous study he will find that the agreement was indeed
specificallynegotiatedforconstructionofthedwellingunitforaconsideration.This
willgivetheAOthemandatetoapplyAS7inthiscase.
vi.
AfterelaboratelydiscussingthereasonsofapplyingAS7,AOhastonowimplement
it correctly. As discussed above, as per Para 6 of AS 7 the statements. i.e., P & L
Account, Balance sheet etc. are to be prepared separately for each construction
contract.Therewere9(nine)projects(asfoundfromSchedule6,7and14),viz.,121
Rash Behari Avenue, 18 British India Street, Amtala, 18 Asutosh Mukherjee Road,
115/1HazraRoad,PrinceAnwarShahRoad,DebendraGhoshRoad,BaburamGhosh
Road and Diamond Harbour Road. Accordingly there will be 9 (nine) Contract
Accounts.
vii.
But from Schedule 6 it seems that only 3 (three) projects, viz., 121 Rash Behari
Avenue,18BritishIndiaStreet,18AsutoshMukherjeeRoad,weretherewhichhad
noclosingbalanceon31.3.2003buthasclosingbalanceofworkinprogresswhich
indicatesthatthesecontractswereenteredonorafter1.4.2003.So,revisedAS7will
be applicable for only these three projects. For others it will be continued to be
guided by old AS 7, i.e., percentage of completion method or project completion
method,whicheveritfollowed(hereitwasprojectcompletionmethod).
viii.
121RashBehariAvenueA/c
a. Cost up to reporting date = Rs. 1, 38, 13,335.80 (winp) (Rs. 25,000/ closing
stockisnot tobe addedasthiswasopeningbalancetooasperSchedule16and
so,notthisyearsexpenditure)
b. The project wise break up enclosed with return shows that Rs. 72, 52,557.82
wasreceivedasadvanceagainstbookingbybuyersofthisproperty.Therefore,
like earlier cases, there must be agreements (AO can get these by issuing
summons u/s 131 or sending Inspector u/s 142(2) even if assessee does not
comply)andwiththatitmaybesaidthatthesewereconstructioncontractsand
accordinglyAS7maybeappliedtothis.
ix.
18BritishIndiaStreet

198
x.

a. Costuptoreportingdate=Rs.2,12,72,475/
18AsutoshMukherjeeRoad
a. Costuptoreportingdate=Rs.3,69,10,122/
b. Searchoninternetshowedthatthisisacommercialcomplex.Thoughthebreak
updoesnotshowanysuchadvancereceiptinthesetwoprojects,stillAOhasto
checkduringhearingwhetheranyadvancehasbeenreceived.
c. Evenifnoadvanceisreceived,thereisanothertestwhichtheAOhastoapplyto
determine whether there was any construction contract. In many cases the
developersenterintodevelopmentagreementwiththelandowner.Inthecase
of project at 18 Asutosh Mukherjee Road, it is found that Rs. 98, 35,000/ was
paidto4landlords.AOmayseewhethertherewasanydevelopmentagreement
or whether the land was purchased outright. If there was development
agreement, the terms & conditions generally speak of construction contract. A
sample development agreement is already given at page . In it, Article IV
contains8clauseswhicharenothingbutcontractsforconstructionresplendent
with promises of work and consideration by both parties. Further, Article VI
(Para 6.1 and 6.2 important), VII (Para 7.4 to 7.10 important, 7.4 most
important), IX (Para 9.3 most important), XI (Para 11.1 most important) also
show that constructions under this kind of arrangement are nothing but
construction contracts full of legally enforceable rights of both parties under
IndianContractAct,1872.
d. Eventheothertypeofdevelopmentagreement,sampleofwhichisgivenearlier,
is full of contractual agreements regarding promises for certain works and
considerationsforthesamebyboththecontractingparties.Itclearlyshowsthat
itisnotasimpledeedofsaleofland.Itisessentiallylinkedwithconstructionof
a property. Para 1 says that land owner will give the land for development
(purposeisspecifiedunlikeasalewheresellerhasnosayinusagebythebuyer),
Para2isallaboutconsiderationtobepaidbydeveloper(thesearenotsimple
installmentpayments,instead,thesearelinkedandvariablewithconstruction
in amount, nature and time). Particularly, Para 2 (b) contains the words,
payment in the share of the development payable by the Developers to the
Vendors.Thewords,shareofdevelopment,provethatitisnotameresale
purchase.
e. So, even if no advance has been received from buyers, AO can treat this as
constructioncontractintheabovemanner.

199
Andlastly,thecaseofoneofthebiggestdevelopersinIndia:

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214
Apossiblerequisitionu/s142(1)inthiscaseisgivenbelowforthisA.Y.:

To
ThePrincipalOfficer,
M/s.

Sir,

Sub:Requisitionu/s142(1)ofI.T.Act,1961forA.Y.200607inyourcase.

In connection with the proceedings u/s 143 (3) in your case for A. Y. 200607, you are
requestedtofilethefollowingevidencesandparticulars(amountsinlakh):

1. Depreciation:
PurchasePlant&machinery(32.71),F&F(37.11),AC&vehicles:
Listofitems,bills,dateofpurchaseandinstallation/puttingtouse,source,whereinstalled
2. Sale
Office&residential(15.46),P&M(330.64),F&F(1.87),vehicles(50.10)filedetails

3. Reasonforprovisionfordeferredtax(85.66)
4. Rentreceived(712.41)(Sch.13)details(Butrentfromflatsshownat25.74inincome
fromHP)
NatureofpropertyAddress

Payer Amount
TDS
5. Detailsofprofitonsaleoffixedassets(5.96)
6. EvidencesofallitemsofSec43BpaymentsinApril,2004

P&LA/cSchedule13:
1. Sales(18432.46)breakupprojectwise,naturewise
Nature
Project
Amount
TDS
2. Knowhowfeefromwhom,forwhat
3. Maintenancecharges(lastyearreceived419.4)fromwhom
4. Interestpaid/receiveddetails
Nameofdebtor/creditorAddressLoanOBInterestaccruedRepaid/receivedCl.
BalanceTDS
5. Why124.08debitedagaininSchedule15asInterestonloans?
6. Adminchargesbreakup:Itemwiseandmonthwisetotal
7. Detailsofforfeiture
Name&address
Project
Amount
8. Exchangegaindetailsoftransaction(0.01)
9. Otherreceipts(263.84)itemwisebreakupanddetails
10. Detailsofsaleofshares
Scrip Purchase(Dt.,Qty.,Rate,Amount)
Sale(Dt.,Qty.,rate,Amount)
11. Detailsandreasonofamountwrittenback(184.98)
12. Itemwisebreakupofopeningstockandclosingstock(Schedule14ridiculous)
Schedule15
13. Costofland(3275.01)locationwise,partywisebreakup(whyinterestwaspaid)
14. Materials consumed (2156.89) Details of parties of transactions above Rs. 5 lakh in
theyear
15. Surrenderofrights(1082.48)details
16. Commission&brokerage(476.8)details
17. Expensesthroughcollaborators(473.74)andExpensesthroughcontractors(7610.11)
18. Nameofcollaborator/contractorAddressProjectAmountpaidNatureofworkTDS
19. Externaldevelopmentcharges(1149.5)projectwisedetails
20. Architectfees(42.06)filereceipts

215
21. Licence/scrutiny/conversioncharge(1192.77)
22. ProjectNatureofpaymentAmountReceiptenclosed
23. Compoundingfees(21.08)details
24. Commercializationchargesdetails
25. Assetswrittenoffdetails(thoughwrittenoff,mayaffectnextyear)
26. Miscellaneousincome(48.26)whatarethese?
27. Givebreakupof13690.58whichischargedtoP&LA/cascostofconstruction
28. Rationaleoftakingabout6000toB/sheetoutoftotal
Schedule16
29. Evidenceofpaymentofgratuityetc.(127.63)
30. Otherbenefitsdetails&evidences(54.70)
31. Rent(57.75),Leaserentals/hirecharges(8.3),Rates&taxes(1.16),Advertisement&
Publicityreceipts
Schedule17:
1. AsperClause6ofAccountingStandard7,therequirementsofthisStatementare
usuallyappliedseparatelytoeachconstructioncontract.AsperClause7ofthesame
when a contract covers a number of assets, the construction of each asset should be
treated as a separate construction contract when: (a) separate proposals have been
submittedforeachasset;(b)eachassethasbeensubjecttoseparatenegotiationandthe
contractor and customer have been able to accept or reject that part of the contract
relatingtoeachasset;and(c)thecostsandrevenuesofeachassetcanbeidentified.In
viewoftheseyouwererequiredtoprepareaccountsasperpercentageofcompletion
method separately for each project. Consequently you are requested to produce
accountsforeachprojectseparately.
2. Whyrevenueisrecognizedinpercentageofcompletionmethodonlysubjecttoactual
costbeing30%ormoreofthetotalestimatedcost[Para6(a)]particularlybecause
As 7 does not provide such deferment of recognition till any percentage, to the
discretionofdeveloper,oftotalworkisachieved?
3. WhyrevenuefromsaleofplotsshouldnotberecognizedasperAS9,i.e.,whenever
significant risks and rewards of ownership is transferred and why you have
recognized revenue from this when 2/3rd of the progress has been achieved as
measured in terms of actual cost incurred 10 total estimated cost [Para 6(b)]
particularlybecauseAS9doesnotprovidesuchthing?
4. Why Income from works contracts is recognized on the basis of running bills raised
duringtheyear[Para6(c)]particularlywhenconstructioncontractsarerequiredto
beguidedbyAS7andrecognitionofrevenueunderithasnothingtodowithreceipt
ofbills?
5. State the accounting standard followed by you in stating, Whereas all income and
expensesareaccountedforonaccrualbasis,Interestondelayedpaymentsbycustomers
against dues is taken into account on acceptance or realization owing to practical
difficulties and uncertainties involved and also explain the nature & reason of
uncertaintiesforwhichyouhavenotrecognizedinteresttillrealization,becauseitis
feltthatwhentheinterestsaccruedtoyouunderalegallyenforceablecontractthere
wasnouncertaintiesinvolved.

AssessingOfficer

216

9
Criticalreviewof
assessmentorders

In this chapter a few assessment orders in the cases of developers are being taken up for
criticalanalysis.
1. In one case at a mofussil town in West Bengal, the AO made addition of several lakh
rupeesonlyonthegroundofundervaluationofWIP(workinprogress)butthesewere
fully deleted by CIT (Appeal). It was a case where developer entered into agreements,
took advances or installments or periodic payments as may be called and then
executed the construction. The AO did not examine the case from the angle of
applicabilityofrelevantaccountingstandardorinthelightofS.145orNotificationno.
9949 etc. In fact, it is to be realized that the concept of WIP has a wholly different
meaning in AS 7. Therefore, even if he had to make addition on the ground of WIP, it
would have been better he had done it on the lines of the concept of the term in AS 7
afterfirstdiscussingwhetherAS7wasapplicableinthecase.

2. In another case of a private limited company of Assessment Year 200304 (Fin. Year
200203), AO mentioned nature of business as construction but later in the order
mentioned the nature as Project Manager to develop a plot of land owned by others
and that assessee filed copy of agreement related to its employment as project
manager. At yet another place he mentioned that assessee was acting as contractor
with no stake in the property. Then it was stated by AO that as per agreement the
assesseewastogetRs.100persquareftoncompletionofprojectasremuneration.It
wasalsostatedthattheonlyrevenuetoaccruetoassesseewasRs.100andsomerights
on roof on payment of agreed consideration. Then AO stated that revenue out of such
contract@Rs.100persq.ft.canreliablybecomputedbutintheP&Laccountassessee
hadnotrecognizedanyrevenuefromthecontractbusiness.Thustheorderwasfullof
contradictionsastowhetherassesseewasemployeeasprojectmanageroracontractor,
whether its revenue was remuneration (of an employee) or contract revenue of a
contractor. In the first case it would be salary and in the second case it would be
businessincome.ThenAOmentionedthatassesseementionedinascheduleofbalance
sheetthatitwasfollowingcompletedcontractmethod.Ifit wasmentionedso,there
wasnoreasononthepartoftheAOtowritesuchconfusingthings.Bothcannotbetrue.
Otherwise, if it was merely giving service of overseeing the construction work, its
receiptcouldbeliabletoberecognizedunderAS9.Incaseofacontractor,heprovides
not only technical supervision but also all materials and manpower. AO should have
discussed all these to come to the conclusion regarding the nature of business or
profession. Then the AO stated that completed contract method was abolished since
1.4.2002byICAI.Thisstatementwaswhollyincorrect.Aswouldbefoundfromthetext
ofAS7giveninthisbook,andavailablefordiscerningreaderinwww.icai.org,AS7was
revisedin2002(no1.4.2002orotherdatementionedinthetext)butcomesintoeffect
inrespectofallcontractsenteredintoduringaccountingperiodscommencingonorafter
142003,i.e.,effectivefromF.Y.200304.ThusAOwasincorrectinsayingthatinthe
relevantAssessmentyearcompletedcontractmethod(projectcompletionmethod)was
abolished.OnthiswrongassertionAOproceededtorejectassesseesaccountsmadeon
projectcompletionmethodandapply%ofcompletionmethod.Thenhecompletedthe

217
assessment holding that as 40% of the construction was completed as per his
calculation,totalrevenuewastheproductofcompletedareainsq.ft.multipliedbyRs.
100/(remunerationasprojectmanager).FromthisalsoitseemsthatAOwaswrongto
treat assessee as a contractor. May be it could have been assessed as income from
professional charges. However, AO was convinced of the legal correctness and
excellenceoftheordersimplybecauseCIT(Appeal)confirmedit!
3. InoneassessmentorderofAY200506 from,AOmentioned thenatureofbusinessas
developer and builder of real estate and that the assessee was following project
completion method. AO noted that the A/R submitted the relevant particulars/
documents as called for (no elaboration). Then AO wrote, in view of the above
discussionstotalincomeistakenasNILwhileactuallyhemadenodiscussionatall!In
NotforassesseenotebelowtheorderAOnotedthatsincetheassesseewasfollowing
project completion method and since the project has not been completed during the
yearunderconsiderationtheincomewastakenasNIL.Thecasewillbeagainselected
for scrutiny for the AY 2006 07. AO did not realize that there was no method called
projectcompletionmethodwhenhedescribedassesseetobeadeveloperofrealestate.
Inthiscase(thefinancialstatementsofthiscasearegivenasthesecondcaseinChapter
8)therewasexpenditure(costofconstruction)ofRs.48.58lakhduringthisyearandAO
failed to realize that even if return of AY 200607 was selected for scrutiny, this
expenditurecannotbescrutinized.
4. InanothercaseforAssessmentYear200304(PreviousYear200203),assesseewasa
private limited company engaged in the business of real estate development and
construction.AOobtaineddetailsofthefourprojectsthedeveloperdidintheprevious
year which showed that two projects were completed and sold during the year while
twootherswereunderconstruction.Fortheearliertwo,saleproceedswereshownas
revenue in the year. For the latter two projects, substantial money was collected from
buyersbutnothingoutofitwasrecognizedasrevenuereceiptforcalculationofprofit
this year. Instead, this was shown as advance from customers on the liability side of
the balance sheet because the assessee was following project completion method. AO
statedthatprojectcompletionmethodresultsindefermentofrevenuerecognitionand
thencitedanumberofcaselawstoconcludethatasperIncometaxAct,1961,profit/
losshastobecomputedeveryyearontherevenuereceived/accruedinthatyear.Then
AOarguedthatthesocalledadvancefromcustomerswas,inreality,paymentreceived
for work done for which expenses were incurred and so, when both income and
expenditurewerepresent,profitelementwasembeddedintherevenue,i.e,incomewas
received/ accrued to the assessee in the relevant previous year. AO stated that it was
clear from the agreements that the assessee builder was engaged in construction
contracts but did not analyze the terms and conditions in the agreements to explain
whytheagreementswereconstructioncontracts.ItwouldhavebeenbetterifAOcited
afewprovisionsofIndianContractAct,1872 andthenexplainedhowtheagreements
attractedthoseprovisionstoactuallybecontracts.ThenAO,thoughcorrectlypointed
out that as per the Companies Act the accounting standards of ICAI are to be
mandatorilyfollowed,didnotmentiontherelevantsectionoftheCompaniesAct,1956
(whichisS.211)andthatinthiscaseitwasAS7,i.e.,%completionmethod.Atthis
point,AOwasincorrectbecause,asmentionedinthediscussionaboutthesecondcase
inthischaptertoo,AS7wasnotmandatorily%ofcompletionmethodinF.Y.200203
asthismethodaswellasprojectcompletionmethodwasprescribedinAS7effectivefor
that year. So, if a construction contractor followed either of these two regularly, there
couldnotbeanythingwronginthat.AOwrotethatassesseereceivedpaymentsasper
agreements and incurred expenditure but showed profit out of these receipts and
expenses in some future year which is not permitted under the law but did not
elaboratetherelevantprovisionsoflawunderwhichitwasnotpermittedleavingthe
readerconfused.ThentheAOstatedthat,forthisreason,methodofaccountingfollowed
byassesseedidnotallowcomputationofitsprofitscorrectlyandsoitwasrejected.But

218
it seems that it would have been better had the AO accompanied every assertion with
legal provision or case law. Otherwise these assertions ran the risk of lacking legal
authenticity. In fact, S. 145 allowed assessee to follow mercantile system and (as per
that and Companies Act, 1956) Accounting Standard 7 which again permitted project
completionmethoduptothisyear(FY200203).Theonlyrequirementu/s145(3)was
thatthesewererequiredtobefollowedregularly.AOdidnoteversaythatthesewere
notregularlyfollowed.ThereforeitseemsthatAOssuchassertiondoesnothavelegal
support.Ironically,AOstatedinNotforassesseenoteafterassessmentorderthat%
completion method was mandatory since 1/4/2003 (i.e. FY 200304 or Assessment
Year200405)!TherewasanothersmallmistakethemethodwastermedbyAOas%
completion method while it was actually % of completion method. However, after
rejectingbookresults,AOproceededtodobestjudgmentassessmentu/s145(3)read
with144andaskedassesseetofilethefewparticularswithoutwhichprofitcannotbe
calculatedunder%ofcompletionmethod.Theseparticularswereestimatedsalevalue
oftheprojectandestimatedcostoftheprojectbuttheassesseedidnotfurnishthese
andarguedthatAS7wasnotapplicableinitscase.ThenAOcompletedtheassessment
making a fair estimate of income because of being left with no option and the
estimation was done @ 8% of total receipts in the year saying that generally the
contractswereexecutedatamarginof810%.Itisanothermatterthatheretoo,no
comparablecasewascitedornootherinformationfromanybook/journal/chamberof
commerce/ any other expert source was cited to support the assertion that generally
thecontractswereexecutedatamarginof810%.IntheNotforassesseenotethese
samethingswererepeatedandsuggestedthatsuitableactionwastobetakenfornext
twoyears.Thestrengthoftheordererodedduetoitsbeingbasedonrejectionofbook
resultsfornotfollowing%ofcompletionmethodonthewrongpresumptionthatitwas
theonlymethodpermittedbyAS7inthatyear.Butmoreimportantly,itisapitythat
though the AO made a valiant effort to show how % of completion method was
applicableintheassesseescasebycitingaplethoraofgoodcaselaws,everythingwas
lost at the end due to resorting to assessment of income on estimate basis pleading
helplessness due to assessees noncompliance. It is very important here to remember
thatanAOisnotthathelplessincaseofnoncomplianceasIwillexplainthetechniques
of collection of relevant information (which the AO wanted from assessee in this case
butdeniedbyassessee)fromvarioussourcesinthenextchapter.
5. The last one is the case of a listed company which happened to be one of the biggest
developersinIndia(itsfinancialstatementsareavailableinitswebsiteandpartlygiven
intheprecedingchapter).Itwaslearntthatthiswasasearchcaseandsubjectmatterof
block assessment for A.Y.s 1990 91 to 200001 and the following facts emerged and
proceedingsfollowed:
i.
AssesseeCompanyenteredintoDevelopmentAgreement(DA)withtheownerofa
piece of land in Delhi. Later, it filed a suit against the landowner but during
pendencyofthesuit,thelandownersoldthepropertytoanothercompany.Assessee
won the suit but an appeal was filed by the buyer company. During pendency of
appeal,out ofcourtsettlementwas reachedwithbothcompanies agreeinginjoint
venturebysharingconstructedspace.
ii.
Fromthedocumentsfoundincourseofsearchatthepremiseofoneofthedirectors
it was learnt that assessee transferred its right in the joint venture under a
settlementtoanothercompanyataconsiderationofRs.52crore.
iii.
But as the total consideration was broken into two parts and received under
differentagreements
iv.
Rs.42crorewasreceivedbyassesseeasconsiderationtotransfer,assignandsellall
therightstothebuyersandRs.10croreunderthreeseparateagreementsasbooking
amounts to purchase residential flats in one of the projects of assessee developer
company

219
v.

vi.

vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.

xv.

xvi.

OutofthetotalconsiderationofRs.42crore,Rs.40crorewasreceivedinoneyearas
security deposit for due and timely performance of the obligations of buyer. This
could be forfeited by assessee if it failed to complete construction within 7 years
(maysoundstrange).
TheremainingamountofRs.2crorewasreceivedbyanothergroupcompanyofthe
assessee as interest free inter corporate deposit to be recovered and paid to
assessee company at a later date. If it is not paid to assessee company, it could
recoveritfromthebuyercompany.
InthefinancialstatementstheentireamountofRs.40crorewasbeingcarriedover
year after year as nonrefundable security deposit under this agreement in the
balancesheetandthusnotallowedintheP&LAccount.
AOdidnotgointothedetailsofthetransactionasalsotheagreementindetails
The Rs.10 crore was received under three agreements (Rs.4 crore, Rs.3 crore and
Rs.3crore)asbookingamountsagainstthesaleof108residentialapartmentsina
projectofassessee.
As per the terms of agreement if the buyer fails to make payments as per agreed
schedule, the agreement is to be cancelled and determined and the entire booking
amountstobeforfeited.
UltimatelynopaymentwaspaidbythebuyerandtheRs.10crorewasallowedtobe
forfeitedandthebuyeracceptedsuchforfeiturewithoutawordofdissentbutthis
toowasnevershownasincome
Allthesethingscametolightonlyaftersearchu/s132
But probably these things would have come to light if AO examined details of
securitydepositsandpeculiarlyforfeitedamountofflatbookingadvances.
Many of us feel that in big cases it is not possible. Some even feel that when these
cases are audited by reputed chartered accountants, they will definitely not do
something illegal. But, this case study shows us that the accounts can be prepared
andauditedhidingactualfactsandpresentedingarbs.Thatisprovedevenbyrecent
case of Satyam InfoTech Ltd where auditors belonging to Price Water House have
beenbookedforfalsereporting.
IntheassessmentorderthoughadditionofaboutRs.8crorewasmade,itwasmade
ontwocounts.FirstRs.2croreonaccountofannualvalueofflatslyingvacantinthe
developers possession. Balance Rs. 6 crore was on account of disallowance of
expenses on completed projects. Additions made on both these counts in earlier
yearsweredeletedbyCIT(A)andITATbutAOstillmadetheadditionsnotforany
newreasonornewfindingbutforthereasonthatdepartmenthadnotacceptedthe
ordersofITAT and filedappealbeforeHighCourt.Noeffort wasmadetoexamine
thecasefromanyotheraspect.Butitseemsthattherewerequiteafewpointson
whichdetailedscrutinycouldhavebeenpossible.
Theseallshowthatalmostallthedevelopers,exceptverybigonesarenotdisclosing
their Accounting Standard at all. Some big developers are declaring that they are
following%ofcompletionmethodbutactuallynotdoingso.Theseillustrationsalso
show that AOs in different parts of the country are not doing assessments on any
uniformsystemorprocedure.Thesealsoindicatekindofconfusedstateofmindon
their parts. The result is that both the revenue and the assessees are suffering. In
manycasesAOfailstoinvestigateoranalyzeorconcludeorassessacaseproperly
leading to loss of revenue. In some other cases the assessee is the victim of a bad
assessmentorder.Italsoseemsthatthereisalotofconfusionandignoranceinthe
mindsofassesseesandpractitionersalsointhissubject.AsperCentralActionPlan
of 200607 all cases following project completion method were to be under
compulsory scrutiny. By this clause alone, almost all cases (about 95%) of
developers/ builders/ construction contractors were required to be completed
under scrutiny assessment. Even among the remaining few cases following
percentageofcompletionmethod,thosewithturnoverofRs.5crorewererequired

220
to be completed under scrutiny assessment. Then, from the remaining cases (say,
2% of total cases), housing construction cases claiming deduction u/s 80IB for the
first year were required to be completed under scrutiny assessment. Thus, only
about 12% cases remained outside scrutiny and, again, some of these were also
required to be completed under scrutiny assessment under CASS. Thus, it is seen
that the AOs were required to do scrutiny assessment in almost all cases of
developers/ builders and construction contractors. This is just illustrative of one
year. Similarly in other years also, effective scrutiny assessment of real estate
builderscasesisimportantandforthatAOshavetohonetheirknowledgeandskill.

221

10

Informationmining

Knowledgeandskillabouttechniquesofinformationmininginrealestatecasescan
prove to be very useful to the Income tax department for scrutiny assessment as well as
processingofacaseforsurveyandsearch.Itmaybemoresowhenthereisnoncompliance
fromtheassessee.Asisdiscussedinthepenultimatecasegivenintheprecedingchapter,AO
madealotofeffortstojustifyapplicationof%ofcompletionmethodbutultimatelycould
notdothecaseasperthatmethodbecauseoffailuretogettherequiredfiguresoftotalsale
proceedsandcostintheprojects.AssesseerefusedandtheAOsimplyfelttobehelpless.But
is he really so? Not really. Only thing is that he will have to know how to tackle such
stonewallingbyassessee.Thereforeinthischapterafewsourcesandtechniquesarebeing
discussedwithwhichdepartmentalofficerscanovercomethisproblem.

InformationminingfromBanks:
First of all, banks are always a good source of information. If developer has applied for a
loanfromanybank,hemakesaformalapplicationinaveryelaborateform.Aslenderbank
will be eager to safeguard its interests, it will seek very detailed information about the
developer,itspromoters,itsfinancialstrength,itspastprojectsand,ofcourse,thecurrent
project. These can virtually give almost all information that an AO may require. A sample
loanapplicationform(fordevelopers)ofabank(ICICIBank)isgivenbelow:

APPLICATIONFORMFORCONSTRUCTIONFINANCEFORRESIDENTIALUNITS

ReceivedOn:<date>

Place:
Proposalfor:Projectname,Address,LoanRequired,Term,SecurityOffered,
CollateralSecurity
Basicdata
I.
i)
NameoftheBuilder

:
ii)
Concern

:Proprietorship/Partnership/Pvt.HFC/PublicLTD.
iii)
Regd.Office

iv)
ResidentialAddressofmainPartner/Director
v)
IncorporationYear

vi)
NamesofProprietor/Partners/Directors:

vii)
DetailsoftheShareholding
:
NameofthePartner/Shareholder
%ofequity/%contribution

viii)
KeyPerson(C.No.)

ix)
NamesofGroupCompaniesifany
:
(Pleaselistallthecompanies)
x)
CostoftheProject

:
(Rs.Millions)
xi)
TermLoanRequired

:
(Rs.Millions)
xii)
ConstructionPeriod
:
months
xiii)
Tenureforwhichloanisrequired
:
months

222
II.
Businessbackground
i) Please provide a brief write up of about 100 words on the group profile highlighting
yearofformation,mainbusinessinwhichthegroupisinvolved,areas/regionsinwhich
thegroupnormallyoperates,totalnumberofprojectsexecutedbytheGrouptilldate
andthetotalarea(insq.ft.)builtupbytheGrouptilldate.
ii) Please provide a brief write up on the promoters, indicating age, educational
backgroundandexperience
iii) Pleaseprovideanorganizationalstructure
iv) PleaseattachcopiesofArticlesofAssociationandMOA,PartnershipDeedasapplicable
fortheConcernforwhichloanissought
v) Pleaseprovideabriefnoteonthekeyexecutives
vi) DetailsofthelandbankavailablewiththeGroupmaybefilledupintheenclosedfile
vii) DetailsofProjectsFullyCompleted&soldoutinlast5yearsaspertheformatinthe
enclosedfiles:
viii) WhetherAnyprojectwasrated(ifso,pleasefurnishRatingdetails)
III.
Presentproposal
(If the Receivables of a Project other than the project in respect of which funding is being
soughtisbeingofferedassecuritythefollowingdetailswouldberequiredinrespectofeach
ofsuchprojectsbeingofferedassecurity)
A. Projectdetails
i) NameoftheProject

:
ii) Address&Location

iii) Name of the land owner (if applicant is not the land owner/ else attach copies of all
relevantpropertydocuments)
iv) Whether it is a Joint Venture project. If so, whether the land Owners will join in the
Agreement
:
v) IflandisacquiredondevelopmentalBasis,pleasespecifytheterms&conditionsofthe
same.(AttachcopyofDevelopmentAgreement)
vi) ArchitectsName/Address/Tel.No.
:
vii) Lawyers/SolicitorsName

B.
Technical/ApprovalDetails
i) LandArea

ii) TenureofLand

:
Freehold/Leasehold
iii) WhetherclearanceunderULCAct&IT Actisrequired,ifso,whether thesehavebeen
obtained.
:
iv) NatureofLand

:
Residential /Agricultural / Commercial
(Whethernecessarypermissionobtained)
v) Howhasthelandbeenacquired?
:Outright Purchase / Development
Agreement
vi) IflandhasbeenacquiredbydevelopmentagreementandanyconstructedAreaisto
be allotted to land owner, how much area (sq.ft) to be given, whether at any rate or
freeofcost:
vii) PleaseattachcopiesoffollowingApprovals:
1. ApprovalunderULCAct
2. ApprovalunderITAct
3. ApprovaloftheDevelopmentPlan
4. IntimationofDisapproval
IncaseanyoftheaboveapprovalsdonotcovertheentirescopeoftheProposedProject
please indicate the variance and the likely date by which the approval for the entire
scopeoftheprojectislikelytobeobtained.
C. ConstructionDetails

223
i) No.ofBuildings
ii) No.ofFloors/Building
iii) No.ofFlats

FlatType.
1BHK
2BHK
3BHK
4BHK

:
:
:
Area(Sq.ft)/flat

No.ofFlats

iv) TotalConstructionArea(sq.ft)
:
v) SaleableAreaofFlats(AfterdeductinganyareatobeallottedtoLandownerinlieuof
landcost)
vi) ConstructionCommencedOn
:
vii) ProjectProgress:

:
Percentagecompletion

:
Progressvisvisplan
Numberofflatssold

:
Areaofflatssold

:
Valueofflatssold

:
Bookingamountreceived

:
viii)
TimeScheduleforitemwiseCompletion
:
ItemOfWork
CompletionPlannedOn
PlinthLevel
Superstructure
Plastering
Plumbing
Finishing

ix) PermissibleFSI

x) Carparkingfacility(area)

xi) Commercial/ShopsSpaceforSale
.ifYes,Givedetails
xii) Pleaseprovideabriefwriteupontheresidential projectsmarketwheretheprojectis
located.
xiii) Water/Electricity&SewerageClearance
:

xiv) If TDR (Transferable Development Rights) acquired , details of the same to be

attached:

D. Projectcost
Components
Rs.(lacs)
LandCost

(Purchase price & Not Valued Price , if Joint venture Agreement mention the
amountofNonRefundableDepositGiventotheLandOwners)
DevelopmentCost

ConstructionCost

ArchitectsExpenses

Marketing&AdvertisementExpenses

AdministrativeExpenses

FinanceCharges

Contingencies

TotalProjectCost

224
E. Sourceoffunds

Options
PromotersContribution
BookingMoney
ProposedLoanfromICICI
UnsecuredLoan
Total

Rs.(lacs)

F.
InvestmentMadeTillDate&SourcingoftheSame
Components
Rs./lacs %oftheTotalCost
LandCost

DevelopmentCost

ConstructionCost

ArchitectsExpenses

Marketing&AdvertisementExpenses

AdministrativeExpenses

TotalProjectCost

Summary(Rs./lacs)
PromotersContribution

BookingMoney

UnsecuredLoan

Total

G. Bookingposition

i)
DetailsofFlatsBookedtillDate
:
FlatType. No.FlatsBooked
BookingRate(Rs./Sq.ft)
1BHK

2BHK
3BHK
4BHK
ii)
iii)
iv)

SourcedBy

AmountReceived

EnquiriesReceived
MarketingArrangements&TieupsMade
TargetSellingRate/Sq.ft
Flat

CarParking :
v)
TimeScheduleforBookingmoneyreceivable
vi)
ExpectedDateofPossession

IV.
Financialbackground
(Last3yearsAuditedAnnualReportsofthealltheGroupCompaniestobeattached)
PleasefilluptheenclosedfilesinrespectofeachoftheGroupcompanies:
PersonalFinancialsofthePromoters
(Income Tax Returns & Wealth Tax Returns of the promoters to be furnished for the last 3
years)
PleasefilluptheenclosedFile(inMSExcel)

V.
Bankinginformation

V.
ContactPerson<Builder/tel.>

225
Pleaseprovidecontactdetailsofthefollowingintheenclosedfile
1. ThreeCustomers
2. ThreeSuppliers
3. Bankers
Signature/AuthorizedSignatory
Place:
Date:
Declaration:
We declare that all the particulars and information given in the application form are true,
correct & complete & up to date in all respect and we have not withheld any information.
We confirm that we have had no insolvency proceeding initiated against us nor have we
everbeenadjudicatedinsolvent.Wehavereadtheapplicationformandrelateddocuments
and are aware of all the terms and conditions of availing finance from ICICI HFC We
authorizeICICIHFCOritsagenttomakereferenceandinquiriesrelativetoinformationin
this application which ICICI HFC considers necessary. We also authorize ICICI HFC To
exchange,part,sharewithallinformationrelatingtoourloandetailsandrepaymenthistory
informationtoBanks/FIs/CreditbureausasmayberequiredandshallnotholdICICIHFC
Liableforuseofthisinformation.Wefurtheragreethatourloanshallbegovernedbythe
rulesofICICIHFCwhichmaybeinforcefromtimetotime.ICICIHFCreservestherightto
rejectanyapplicationwithoutprovidinganyreason.
Name

Signature:
Designation
Place
Date

Pleasesignandplacetherubberstampofthebuilder/developeroneverypage.

ChecklistforDocumentation:

Pleaseensurethatthefollowingarecompletedandenclosedbeforesubmittingtheform:
1. CompletedApplicationForminSoftCopyandHardCopy
2. CompletelyfilledupExcelFile<ApplicationForm_Details.xls>
3. Briefwriteupofabout100wordsonthegroupprofile
4. Briefwriteuponthepromoters,indicatingage,educationalbackgroundandexperience
5. Organizationalstructure
6. Copies of Articles of Association and MOA, Partnership Deed as applicable for the
Concernforwhichloanissought
7. Briefnoteonthekeyexecutives
8. CopyofrelevantPropertyDocuments/DevelopmentAgreement
9. CopiesoffollowingApprovals:
ApprovalunderULCAct
ApprovalunderITAct
ApprovaloftheDevelopmentPlan
IntimationofDisapproval
10. Briefwriteupontheresidentialprojectsmarketwheretheprojectislocated
11. CopiesofAuditedAnnualReportsforlastthreeyearsforeachoftheGroupcompanies
12. CopiesofIncomeTaxandWealthtaxReturnsforlastthreeyearsforallthepromoters

Forcalculationofprofitunder%ofcompletionmethodthefiguresnecessaryare:totalcost
ofeveryprojectseparately,actualcostincurredintheyearanduptotheyearandestimated
totalsaleproceeds(whichmayincludeactualsaleproceedsalso).Formtheaboveitisclear
that AO can get total project cost and sale proceeds of flats already sold (from which

226
estimatedsalevalueofotherflatscanbecalculated).Actualcostincurredintheyearandup
totheyearisalwaysavailableinthereturnitself.ThereforeAOcanverywellcompletethe
assessmentevenifassesseestopscompliance.AOcangetalotofotherdetailstoo.Allthese
itemsareshowninboldabove.

InformationfromAgreements(withbuyersandlandowner):

The agreement between the developer and the buyer (copy given in Chapter 6) and/or
landownergivesfollowingimportantinformation/leadsforfurtherinvestigation:
i. Thatthedeveloperappliedfor registrationunderPromotersAct(copy
ofitmaybecollected)
ii. RegistrationNo.underthatAct
iii. ThatthedeveloperobtainedpermissionunderPromotersAct(Copyof
permissionunderPromotersActmaybecollected)
iv. Thatadevelopmentagreementwasexecutedwithlandowner
v. Thatsanctionforbuildingplanhasbeenobtainedfrommunicipality(a
copymaybecollected)
vi. Theconsiderationandadvancemoneyandthescheduleofpaymentof
installments (Clause 10(b) of Schedule B) as per which, 90 95%
hastobepaidbeforepossession.Interestingly,suchperiodicpayments
by customer are similar to running bills received by contractors and
particularsofinterest(25%p.a.)receivable by developerfordefaultin
payment
vii. Clause 11 read with Schedules E and F shows the other income
received by developer like Rs.20/ (or more)/sq. ft. towards
purchasers proportionate share of expenses and outgoing as
deposit, Rs.5000/ (or more) towards share money application/
entrance fee and purchasers share in connection with formation of
holdingorganization,Amountcalculatedonthebasisofbillsproduced
by developer towards electric deposit on per sq. ft. basis, Rs.7/ (or
more)/sq.ft.aslegal&documentationfees,Actualamountofstamp
fee,registrationandother/legalexpenses,Rs.12/(ormore))/sq.ft.
as proportionate share of maintenance of building for one year,
Rs.12/(ormore))/sq.ft.asmunicipaltaxandSinkingfund(fundto
bepaidbyeachflatownertowardssinking/reservefundtobeheldby
the developer along with accumulated interest on account of capital
expenses and upon formation of flat owners society the same will be
transferred to it). Clause8 of ScheduleF is important because it says
that developer will not pay any interest on these deposits and will
remain with developer till execution of conveyance deed. After
deducting actual expenses, the balance will be refunded to the
AssociationofApartmentowners.A.O.mayhavetoinvestigateseveral
pointshere.

InformationfromServiceTaxdepartment:
BelowisaletterfromCommissionerofServiceTaxdepartment,Bhubaneswarwhichshows
that developers are liable to service tax also. Therefore relevant information can be
collectedbyAOsfromservicetaxdepartmentalso.

COMMISSIONERATEOFCENTRALEXCISE,CUSTOMS&SERVICETAX,
C.R.BUILDING,RAJASWAVIHAR,BHUBANESWAR7.

C.no:v(5)7/s.Tax/B1/05/
Dated:22.12.05

227
To
TheSecretary
RealEstateDevelopersAssociationofOrissa,
202,LordGaganCommercialcomplex,
GajapatiNagar,Bhubaneswar05

DearSir,

SUB:Levyofservicetaxonbuilders/Developersreg

Please refer to your letter, dated 14.11.05 on the subject cited above wherein you
haveraisedfurtherqueriesonthesubject.
Inthisconnection,incontinuationtothisofficeearlierletterofevenno.21707dated
07.11.05thematterisonceagainexplainedtoyou,asunder.
POSITIONOFSERVICETAXLAW
Savingforcertainexemptions,aspersection65(zzzh)oftheFinanceAct,1994any
person providing any service to another person in relation to construction of residential
complexisliablegethimselfregisteredandpayservicetaxtothedepartment.Inthiscase,
the builder/developer who provides the service in relation to construction of residential
complextothecustomerownerofthedwellingunit)isliabletogethimselfregisteredand
payservicetax.Duringthecourseoftheserviceifthedeveloper/builderreceivesanysuch
servicefromanother contractor,inotherwords,outsourcespartoftheservicetoanother
serviceprovider,thentheotherserviceproviderisalsoliabletopayservicetax.
EXEMPTIONS
In addition to certain general exemptions, there are some specific exemptions.
Firstly the residential complex having only 12 or less residential units is exempted from
service tax. Secondly, the residential complex constructed by an individual, which is
intendedforpersonaluseasresidencebydirectlyavailingservicesofaconstructionservice
providerisalsoexempted.
Fromtheabove,itcanbeinferredthatiftheownerofalandconstructsresidential
complexesofhisownorbydirectlyavailingservicesofaconstructionserviceproviderand
thensellstheresidentialunitsalongwiththeland,thesaidownerofthelandisnotliableto
payservicetaxashehasntrenderedhisservicetoanyone.Otherthanthis,incaseswhere
thedeveloper/builder,whetherdirectlyorindirectly,constructsresidentialcomplexesfor
another person on that persons land/some other persons land by virtue of power of
Attorneyorotherwise,thensuchbuilder/developerisliabletopayservicetax.Inthiscase
hehasrenderedservicetothelandowner/residentialunitsowner.
InOrissamajorityofcasesfallunderthelattercategory,i.e.,thelandonwhichthe
developers/builders construct residential complexes are not in the name of the
builders/developers.Thelandownerdirectlysellsthelandtotheindividualresidentialunit
owners. The developers/builders act as facilitators/middlemen between the landowners
and the purchasers. They also render construction service either directly or indirectly. So,
suchtypesofbuilders/developersareliabletopayservicetax.
OPINIONOFRKAGARWAL,CA.
At the outset this is to make it very clear that the opinions offered by Mr. R.K.
Agarwal,CA,areofhisownviewsanddoesnthaveanylegalbacking.Hisopinionscannot
serveasthebasefornottakingregistrationandnotpayingtax.
Furthermore,asitappearsfromthesaidletter,thequeristM/STritanHappyHomes
Pvt.Ltd.,forwhichtheCAhasgivenhisopinion,constructs&sellsresidentialcomplexeson
the land of which he has the absolute title right. In that case M/s Tritan Happy Homes
doesntrenderserviceratherdirectlysellstheresidentialunits.
Therefore, you are once again requested to intimate your members who render
constructionofresidentialcomplexservicetogetthemregisteredwiththedepartmentand
payservicetaxalongwithappropriateinterestw.e.f.16.06.05withoutfurtherdelay.Their

228
failingtotakeregistrationimmediatelymayattractlegalactionfromthisend.

Yoursfaithfully

(B.Acharya)
JT.Commissioner(S.Tax)

Belowisgivensampleofaservicetaxreturn(onlyrelevantportiongiven):

FORMST3

(INTRIPLICATE)
(Returnundersection70oftheFinanceAct,1994)
(PleaseseetheinstructionscarefullybeforefillingtheForm)

[ORIGINAL/REVISEDRETURN(StrikewhicheverisNOTapplicable)]

FinancialYear

Fortheperiod(Pleaseticktheappropriateperiod)

AprilSeptember

1A

HastheassesseeoptedtooperateasLargeTaxpayer[Y/N]

1B

OctoberMarch

(AsdefinedunderRule2(ea)oftheCentralExciseRules,2002readwithrule2(1)(cccc)of
theServiceTaxRules,1994)

Ifreplytocolumn1Aisyes,nameofLargeTaxpayerUnit
(LTU)optedfor(nameofcity)

2A

NameofAssessee

2B

STCNo.

2C

Pre

mis
esCodeNo.

2D

ConstitutionofAssessee (i)

Individual/Proprie
tary

(ii)

(Please
Tick
the
(iii)
appropriatecategory)

Registered Public

Ltd.Company

(iv)

(v)

RegisteredTrust

(vi)

(vii
)

Other

Partnership

Registered
Private
Ltd.
Company
Society/CoOp

Society

229
3.

A1
A2

ComputationofServiceTax(Tobefilledbyapersonliabletopayservice/Nottobefilledby
input service distributor) (To be repeated for every category of taxable service on which
servicetaxispayablebytheassessee)
Name of Taxable

Service
Assesseeisliabletopayservicetaxonthistaxableserviceas,
(Pleaseticktheappropriatecategory)
a service provider;
(i)

or
aservicereceiverliabletomakepaymentofservice
(ii)

tax
SubClauseNo.ofClause(105)ofsection65(Please

seeinstructions)

C1

Has the assessee availed benefit of any exemption

notification('Y/N')

C2

IfreplytocolumnC1isyes,pleasefurnishnotificationNos.

If abatement is claimed as per notification

No.1/2006ST,pleasefurnishSr.No.inthe
notificationunderwhichsuchabatementis
claimed
Whether provisionally assed
E1

('Y/N')
Prov. assessment order No. ('if

E2

any')

Valueoftaxableservice,servicetaxpayableandgrossamountcharged

Month/Quarter*

Apr/Oc
t

May/No
v

June/De
c

July/Ja
n

Aug/Fe
b

Sept/Ma
r

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(I)

ServicetaxPayable

(a)

Grossamountreceived(paid#)inmoney

(b)

(i) against service

provided
(ii) in advance for
servicetobeprovided
Money equivalent of
considerations
received/(paid#) in a
form other than
money

230
(c)

(d)
(e)
(f)

(g)

(h)

(i)

Value
on
which
service
tax
is
exempt/notpayable
(i) Amount received
against export of
service^
(ii)
Amount
received/(Paid#)
towards
exempted
service (other than
export of service, i.e..,
(i)above)
(iii) Amount received
as/ (paid to#) pure
agent (Please see
instructions)
Abatementamount
claimed
Taxable value = (a+b)
minus(c+d)
Service tax rate wise
breakup of taxable
value=(e)
(i) Value on which
service tax is payable
@5%
(ii) Value on which
service tax is payable
@8%
(iii) Value on which
service tax is payable
@10%
(iv) Value on which
service tax is payable
@12%
(v) other rate, if any,
(pleasespecify)
Service tax payable =
(5% of f(i)+8% of
f(ii)+10%
of
f(iii)+12%
of
f(iv)+f(v) X other
rate)
Education
cess
payable (@ 2% of
servicetax)
(i) Secondary and
higher education cess
payable (@ 1% of
Service Tax) (Please

231
seeinstructions)
(ii) Taxable amount

charged
Gross amount for
which
bills/invoices/challan
s are issued relating
(j) to service provided/

to
be
provided
(including export of
service and exempted
service)
Money equivalent of
other consideration
(k) charged, if any, in a

form other than

money
Amount charged for
exported
service
(l)

provided/to
be
provided^
Amount charged for
exempted
service
provided/ to be
(m)

provided (other than

export of service
givenat(1)above)
Amount charged as
(n) pureagent(Pleasesee

Instructions)
Amount claimed as
(o)

abatement
Net taxable amount
(p) charged=(j+k)minus

(l+m+n+o)

** Assessee liable to pay service tax on quarterly basis may furnish details quarter
wisei.e.AprJun,JulSep,OctDec,JanMar

#Applicablewhenservicereceiverisliabletopayservicetax;

^Notapplicabletoservicereceiverliabletopayservicetax

4.

Amountofservicetaxpaidinadvanceundersubrule(1A)ofrule6

Month/Quarter* Apr/Oct May/Nov June/Dec July/Jan Aug/Feb Sept/Mar

(1)
(2)
(3)
(4)
(5)
(6)
(7)
Amount deposited
(a)

inadvance
(b) ChallanNos.

(c) Challandates

232

**Assesseeliabletopayservicetaxonquarterlybasismayfurnishdetailsquarterwisei.e.
AprJun,JulSep,OctDec,JanMar

ServiceTax,educationcessandotheramountspaid(Tobefilledbyapersonliable
4A.
topayservicetax/Nottobefilledbyinputservicedistributor)
Apr/Oc May/No June/De July/Ja Aug/Fe Sept/Ma

Month/Quarter*
t
v
c
n
b
r

(1)

(2)

(3)

(4)

(5)

(6)

(I)

Servicetax,educationcess,secondaryandhighereducationcesspaid

(a)

ServiceTaxpaid
(i)incash

(ii)byCENVATcredit^

(i)incash

(ii)byCENVATcredit^

(iia) by adjustment of
amount earlier paid in
advanceandadjustedin
this periodunderrule6
(1A).
(iii) by adjustment of
excess amount paid
earlier and adjusted in
this period under Rule
6(3)ofSTRules
(iv) by adjustment of
excess amount paid
earlier and adjusted in
this period under Rule
6(4A)ofSTRules
(b)

(7)

Educationcesspaid

(iia) by adjustment of
amount earlier paid in
advanceandadjustedin
this periodunderrule6
(1A)
(iii) by adjustment of
excess amount paid
earlier and adjusted in
this period under Rule
6(3)ofSTRules
(iv) by adjustment of
excess amount paid
earlier and adjusted in

233
this period under Rule
6(4A)ofSTRules
Secondaryandhighereducationcesspaid

(c)

(d)

(i)incash

(ii)byCENVATcredit^

(v)Interestpaid

(vi)Penaltypaid

(iia) by adjustment of
amount earlier paid in
advanceandadjustedin
this periodunderrule6
(1A)
(iii) by adjustment of
excess amount paid
earlier and adjusted in
this period under Rule
6(3)ofSTRules
(iv) by adjustment of
excess amount paid
earlier and adjusted in
this period under Rule
6(4A)ofSTRules
Otheramountpaid
(i) Arrears of revenue
paidincash
(ii) Arrears of revenue
paidbycredit^
(iii)
Arrears
of
education cess paid in
cash
(iv) Arrears of Sec &
higher edu cess paid by
credit

(II)
(a)

(vii)
Section
73A

amountpaid^
(viii) Any other amount

(pleasespecify)
Details of Challan (Vide which service tax education cess , secondary and higher
educationcessandotheramountspaidincash)
ChallanNos
(i)

(ii)

(iii)

234

(b)

(iv)

Challans
Date (i)
(May please be
furnished in the (ii)
order of Challan
Nos.
furnished (iii)
above)
(iv)

Entryintable4Aabove
S.No.

SourceDocuments
No./Period

Month/Quater

Sourcedocuments
date

8 If the return has been prepared by a Service Tax Return Preparer (STRP), furnish further
. detailsasbelow.

(a)

IdentificationNo.ofSTRP

(b)

NameofSTRP

(SignaturesofServiceTaxReturnPreparer)

(NameandSignatureofAssesseeorAuthorizedSignatory
Place:
Date:
ACKNOWLEDGEMENT
IherebyacknowledgethereceiptofyourST3returnfortheperiod___________
Date:
Place:
(SignatureoftheOfficerofCentralExcise&ServiceTax)
(WithName&OfficialSeal)
AnnexuretoInstructions
SubclauseNo.(underclause(105)ofsection65)
Stockbroking

(a)

Railtravelagent

(zz)

Telephoneconnection

(b)

Storageandwarehousing

(zza)

RadioPaging

(c)

Businessauxiliary

(zzb)

GeneralInsurance

(d)

Commercialcoachingortraining

(zzc)

235
Advertisingagency

(e)

Erection,commissioningorinstallation

(zzd)

Courier

(f)

Franchiseservice

(zze)

ConsultingEngineer

(g)

InternetCafe

(zzf)

CustomsHouseAgent

(h)

Management,maintenanceorrepair

(zzg)

SteamerAgent

(i)

Technicaltestingandanalysis

(zzh)

ClearingandForwarding

(j)

Technicalinspectionandcertification

(zzi)

Man Power Recruitment and

Supplyagency

(k)

AirTravelAgent

(l)

Mandapkeeper

(m)

AirportServices

(zzm)

TourOperator

(n)

AirTransportofGoodsservice

(zzn)

RentaCaboperator

(o)

BusinessExhibitionService

(zzo)

Architect

(p)

GoodsTransportbyRoad

(zzp)

InteriorDecorator

(q)

Constructionofcommercialcomplex

(zzq)

ManagementConsultant

(r)

IntellectualPropertyService

(zzr)

CharteredAccountant

(s)

OpinionPollService

(zzs)

CostAccountant

(t)

OutdoorCateringService

(zzt)

CompanySecretary

(u)

Television and
Production

(v)

SurveyandExplorationofMinerals

(zzv)

SecurityAgency

(w)

PandalandShamiana

(zzw)

CreditRatingagency

(x)

TravelAgent

(zzx)

MarketResearchagency

(y)

ForwardContractBrokerage

(zzy)

Underwriter

(z)

TransportthroughPipeline

(zzz)

(za)

Sitepreparation

(zzza)

(zb)

Dredging

(zzzb)

Real
Estate
Consultant

Scientific
and
consultancy
Photography

Agent/

technical

Forexexchangebrokingbyabrokerother
thanthosecoveredin'zm'above
Port other than those covered in 'zn'
above

Radio

Programme

(zzk)
(zzl)

(zzu)

236
Conventionservices

(zc)

Surveyandmapmaking

(zzzc)

Leasescircuits

(zd)

Cleaningservice

(zzzd)

Telegraph

(ze)

Clubsandassociationservice

(zzze)

Telex

(zf)

Packagingservice

(zzzf)

Facsimile(FAX)

(zg)

Mailinglistcompilationandmailing

(zzzg)

Online information and

database
access
and/or
retrieval

(zh)

Residentialcomplexconstruction

(zzzh)

Videotapeproduction

(zi)

Registrarservicetoanissue

(zzzi)

Soundrecording

(zj)

Sharetransferagent

(zzzj)

Broadcasting

(zk)

Automated teller machine operation,

management,maintenance

(zzzk)

Insurance auxiliary (General

Insurance)

(zl)

Recoveryagents

(zzzl)

Bankingandotherfinancial

(zm)

Saleofspaceforadvertisement

(zzzm)

Portservices

(zn)

Sponsorship

(zzzn)

Authorised Automobile repair

andmaintenance

(zo)

Internationalairtravel

(zzzo)

Beautyparlour

(zq)

Containerizedrailtransport

(zzzp)

Cargohandling

(zr)

Businesssupportservice

(zzzq)

CableOperators

(zs)

Auctionservice

(zzzr)

Drycleaning

(zt)

Publicrelationmanagement

(zzzs)

EventManagement

(zu)

Shipmanagment

(zzzt)

Fashiondesigner

(zv)

Internettelephony

(zzzu)

(zw)

ShipCruisetour

(zzzv)

LifeInsurance

(zx)

Credit/debit/chargedcard

(zzzw)

Insurance auxiliary service

(lifeinsurance)

(zy)

Telecommunicationservice

(zzzx)

Health Club
Centres

and

Fitness

Miningofmineral,oilorgas

(zzzy)

Development and supply of content for

telecom,
advertising
and
online (zzzzb)
informationanddatabaseretrievable

237
Renting
property

of

immovable

Assets management service (other than

(zzzzc)
(Zm)above)
Design services (other than (q) and (zv)
Workscontract
(zzzza)
(zzzzd).
above)
Services
provided
by
a

Information
technology
association (zzzzh)
software
services
for (zzzze) recognized/registered

(commodityexchanges)fortransactionin
furtherance of business or
goodsorforwardcontracts.
commerce.
Management of investment

Processing and clearing house services in (zzzzi)

under unit linked insurance (zzzzf) relation to processing, clearing and
business(ULIP)scheme
settlement of transactions in securities,
goodsorforwardcontracts
Stockexchangeservices

Supplyoftangiblegoodsservices
(zzzzj)
(zzzzg)

The above Annexure to Instructions shows that construction of commercial and

residentialcomplexes,RealEstateagentsanddealersandWorksContractservicesarevery
muchunderServiceTax.NamesandValuesoftheseservicesareavailablefromParaA1and
Fofthereturnform.Valueofserviceincaseofconstructionservice(zzqandzzzh)means
estimatedsalevalueoftheprojectrequiredfor%ofcompletionmethod.AOmaygetsome
otherrelevantinformationalsofromit.

Informationminingfromlocalauthority(likemunicipality):
Developerisalwaysrequiredtogetbuildingplansanctionedbythelocalauthority.Forthat
heisrequiredtoapplytothelocalauthority.ApplicationformsinScheduleItoXIIIasper
Kolkata Municipal Corporation Building Rules, 1990 (and similar statutes of other towns
andcities)filedbeforeMunicipalityatdifferentstagesofaprojectcanagainbeverygood
source of information in respect of the following allimportant three information for
percentage of completion method to enable the AO to complete the assessment in % of
completionmethodeveninthefaceofnoncompliance:
i.
Totalcostofeachcontract/projectseparately
ii.
Totalcostincurreduptotheendofeveryfinancialyear
iii.
Total estimated bill amount (in case of contract work)/ sale and other
amount(incaseofdevelopers/buildersproject)
Samplesofrelevantformsaregivenbelow:
(zzzz)

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260
Information mining from the application form in Form A and other forms filed by
developers/builderswithAuthorizedOfficerunderPromotersAct:
These also give valuable information relevant to assessment as per percentage of
completionmethod.Sampleformsaregivenbelow:

261

262

263

264

265

266

267
InformationminingfromTenderdocuments:
Inthecaseofcontractorsperse,i.e.,peoplewhoarepopularlycalledcontractorsandwho
do construction in pursuance of tender, such tender documents can be another very good
source of extremely relevant information for assessment in percentage of completion
methodbyAOsaswillbeevidentfromthefollowingdocumentsofNBCC(NationalBuilding
Construction Corporation) Ltd. It will be found that total project cost, percentage of
completion of work (along with photograph of work and bar chart) are available from
contractee organization because preparing such documents & maintaining these, then
adhering to the time & job percentage schedule and filing relevant papers are essentially
linkedtoreleaseofpaymentsandlevyofpenalty.SoAOcancollecttheseu/s133(6)/131
fromthecontracteeorganization.

Estimatedcostoftheprojectasatthebeginningisavailablefromhere.Unlessthereisclaim
otherwisebycontractor(supportedbyreasons),itmaybetakensameattheendoftheyear.

268

269

270
Para7,8and9oftheaboveSpecialterms&conditionsareextremelyuseful.Theseshow
thatcontractorisrequiredto,andactuallydoes,maintainworkschedulesupportedbyBar
Chartetc.tangible(andobtainablebyAssessingofficer)documents.ThereforeAOcancross
checkperiodofconstructionclaimedbyassesseeandexpensesclaimedinthatperiod.Ifany
expenses claimed beyond that, it should not normally be allowable. This Bar Chart is
actuallymaintainedbynotonlycontractorsbutalsodevelopersandbuilders.Barchartalso
helpsincalculating%ofcompletionofwork.Moreover,alldevelopersengagecontractors
todotheconstructionlikeRiverbankDevelopersPvt.Ltd.,KolkatahasengagedAhluwalia
Contracts Pvt. Ltd. Documents obtained from the contractor will show the construction
detailsofdeveloperalso.

271

272

273

The above, along with Para 7, 8 and 9 of Special terms and conditions given above and
progressrecordedinBarChart,readilygivesthe%ofcompletionofconstructionwork.And
this is prepared by assessee himself and then scrutinized by technical persons
(engineers/draughtsman)workingatthesite.Sothesecannotbedisownedbyassesseeor
ignoredbyanyappellateauthority.Infact,everydeveloperdoeshisprojectforprofitandso
hemaintainsthiskindoftimescheduleforeveryprojectseparately.Ifitisnotsubmittedin
courseofhearingthiswillbeavailablebysurveyu/s133A(orsearch).IftheAOrequisitions
these documents at the very time of issuing notice u/s 142(1) such requisition becomes
legallystrongerandassesseemaynotbeinapositiontorealizedirectionofinvestigation.
Soheshouldobtainthisattheverybeginning.

274

275

276

277

278

279
Thesedocumentsshowthatpaymentsreceivedbythecontractorcanalsogiveindicationof
% of work completed if AO can obtain this document from contractee organization. To
elaborate,ifAOlinkseverypaymentreceived/accruedtothecontractortothe%ofworkof
this document, he will know the total % of work completed. In case of developers and
builders also, the brochure itself shows that payments are linked to progress of
construction. Example of Parsvnath Developers is given in brief below and in detail in
Chapters1and6.

280

1.

InformationminingfromBarChart:

281

282
Barchartsshowtheprogressofconstructionfromtimetotimeandfromthatsome
ideaabout%ofcompletionmaybegathered.Barchartismaintainedateachproject
separately.Surveyu/s133Amaybedonetogetthis.

Effectiveuseofsurveyu/s133Aasatoolofinformationmining:

Importance of survey u/s 133A of I. T. Act, 1961 as a tool of collection of information is

already known to and recognized by all officers of Income tax department. But real estate
cases may be one of those few types of businesses where survey may be the only way of
gettingcertainessentialinformation.Forthebestresultinsurveyoperationinarealestate
case,theofficerhastobeconscioustotheuniquenessofrealestatecasesandkeepinmind
whattheAssessingOfficerwillrequireforthepurposeofassessmentinsuchcasesbecause,
be it survey or search or a simple inquiry, ultimate utilization will be in assessment and
recovery!.Beforesettingout forthe survey,atthestage ofplanning thesurveythe officer
hasto;
i. studyaboutlawandprocedureoftaxationofrealestatecases
ii. studytherecentandcurrentassessmentrecordsofthedeveloper/builder
iii. makenotesaboutsuspectedlineofevasion
iv. makealistoffactsand figuresthat willberequiredformakingthe assessmentby
AssessingOfficer
v. makealistofdocumentsfromwhichsuchfactsandfiguresmaybeavailable
vi. makealistofprobablesourcesfromwheresuchdocumentsmaybeavailable
vii. makealistofpersonswhomaybeexaminedincourseofsurveyorbysummoning
later(u/s131ofI.T.act,1961)
viii. makealistofrelevantissuesonwhichyoumayaskquestionsduringdepositionsin
courseofsurveyorlateru/s131
ix. makealistofpremisestobecovered(thatmayincludeoffice,projectsite,residence
ofpromotersandimportantofficialsoftheorganization,officeofaccountantand
adviseretc)
x. makenotesaboutbesttimeofstrikeforeachpremise
xi. makenotesaboutparticularamountsshownintheliabilitiessideyearafteryearin
theformofloanorsecuritydepositoradvancereceived
During conduct of actual survey the officer should be very much awake to his
requirementsatthetimeofrummagingandnotsimplycartawayallpapersfound.Someof
theimportantdocumentsmaybe:
a. Papers showing exact role of assessee, if he is claiming something other than
developer/builder(likeProjectManager)
b. Bankstatementsandloanapplicationsalongwithattachments
c. Documentsshowingactualreceiptsfromthebuyersandotherparties
d. Documentsshowingothersourcesofrevenuetothedeveloperlikeagreementwith
aMobilephonecompanyforpermissiontoerectatower
e. Projectreportsfiledwithotherfinanciers/lenders,ifany
f. PapersfiledwithSEBIifIPOissued
g. Papers regarding acquisition of land (or development right on land) by purchase/
lease/developmentagreement/powerofattorney/purchaseofTDRetcmodes
h. Papers showing estimates prepared by developer through architects/ engineers
regardingprobablecostoftheproject
i. Agreementswithbuyers
j. Papers evidencing what is popularly called onmoney, i.e., consideration paid by
buyer in excess of amount mentioned in agreement either mostly in cash or
sometimesotherwise(thesearenotdisclosedbydeveloperinthereturn)
k. Brochureandcopiesofapplicationsfiledbybuyers
l. Application and other papers filed by developer to local authorities, pollution
control bureau, housing department, electricity department showing various

283

m.
n.
o.
p.
q.

r.

importantthingslikedateofcommencementofproject,dateofcompletion,costof
the project, size of the plot of land, size of constructed residential units and
commercialunits,ratioofresidentialareatocommercialareaintheproject
Bar charts or analogous documents (may be softwares like MS Project or Prima
Vera)usedtomonitorprogressoftheproject
Papersregardinggenesisofamountsshownintheliabilitiessideyearafteryearin
theformofloanorsecuritydepositoradvancereceived
Papersshowingcorrespondencebetweendeveloperandbuyerregardingjoiningof
twosmallerflatstomakeabiggerone
Rough(original)notesindiary,notebook,computer,file,loosepapersetc.regarding
actualexpenditureincurredineachyear
Stockissueregisterfromwhichitmaybedeterminedastohowmuchmaterialwill
qualifytobeincludedin theactual expensesincurredintheyear andhowmuch
will go into workinprogress within the meaning of Para 26 of Accounting
Standard7
Thesedocumentsmustbecollectedprojectwiseindividually

Asalreadymentioned,todoanassessmentin%ofcompletionmethodAOneeds:
i.
Totalcostactuallyincurredduringtheyear(availableinthereturnofcurrentyear)
anduptotheyear(sumoftheformerandthefiguresavailableinearlieryears
returns)
ii.
Total cost of the project as estimated at the end of the year (Cost estimated at the
beginningoftheprojectwillbeavailablefrombankpapers,projectreportpapersfiledwith
state financial corporation or HUDCO etc lender organizations and also local authorities.
Costestimatedattheendoftheyearmayalsobeavailablefromlenderorganizations.Itmay
be availablefrom correspondencemadebycontractor/developertocontractee/buyersfor
escalationalso)
iii.
Total estimated sales (available from brochures, agreements, bank loan papers,
service tax returns, application papers filed with local authority, housing department and
pollutioncontrolboardauthority)

ThusitisclearthatAOcangetalltheinformationrelevantto%ofcompletionmethodmay
beobtainedfromdifferentsources.ButAOhastobecautiousandmaketherequisitionat
the very beginning presuming that there will be noncompliance. Even if there is
compliance,itisAOsspecificrequisitionofthesepapersthatwillenableAOtocompareand
verifygenuinenessofassesseesclaims.Knowledgeandskillaboutsuchinformationcanbe
veryhelpfulinprocessingacaseforsurveyandsearchevenmorebecauseinthatcasethe
officerwillhavetodependlargelyonexternalsourcesofinformation.Thus,Ifeelthatina
caselikethepenultimateoneintheprecedingchaptertheAOwouldnothavefelthelplessif
thesetechniquesandsourceswereknown.

284

WhatifAS7notfollowed

11

Asdiscussedinearlierchapters,first,theAOhastoseewhetheraccountshavebeenmade
asperAS7.Ifyes,hehastoseewhetherithasbeenfollowedcorrectly.Ifnot,hehasto
examinetheagreementstofindoutwhethertherewereelementsofcontractinit.Ifyes,
hecanconcludethatAS7willbeapplicable.Inthatcase,hewillhavetorejectbooksof
accounts and then compute profit of construction contract as per AS 7. The mandatory
nature of AS 7 for construction contracts on Chartered Accountants is through the
Accounting Standards and other pronouncements issued by ICAI read with Chartered
Accountants Act, 1949. Therefore if they do not follow this while preparing financial
statements and / or auditing, AO has to enforce this by taking recourse primarily to that
very statute, viz., Chartered Accountants Act, 1949. Chapter V of the said Act contains
provisionsrelevanttosituationswhereAuditorhasnotcompliedwiththeabove.Toreject
the accounts and to ensure that AS 7 and other pronouncements of ICAI on accounting
mattersarecompliedwithbytheauditor,alettermaybewrittentoauditorinthemanner
givenbelow:

To
Sri.,
CharteredAccountant(MembershipNo.)
(Address)

Sub: YourauditreportforF.Y,inthecaseof..

1. AsperPara1to3ofNotificationNo.9949dt.25.01.96oftheCBDTreadwithSec.145
(2)ofI.T.Act,1961youwererequiredtodiscloseinyourAuditreporttheaccounting
policies followed. Accounting policies are defined to include accounting principles and
themethodsofapplyingtheseinpreparationoffinancialstatements.Again,accounting
principles include accounting standards. So you were required to disclose the
accountingstandardfollowedinpreparingthe balancesheetandP&Laccountaudited
byyou.ButyouhavefailedtodosowithinthemeaningofS.145(2).
6. It seems that the financial statements audited by you are made in Project Completion
method.Butyoumustbeawarethatnosuchmethodcalledprojectcompletionmethod
isinexistencesince1.4.2003.Ifitisconstructioncontract,ithastobeasperpercentage
of completion method mentioned in AS7. ICAI (Institute of Chartered Accountants of
India)hasdeclaredAccountingStandard(AS)7asmandatoryformF.Y.200304forall
three levels of Construction contractors, viz., Level1, 2 and 3 ( your case falls under
level3)ascategorizedbytheICAI.Butyouhavenotfollowedthesame.Youhavealso
notmadeanydisclosureasrequiredbyparagraphs38to43ofAS7whichagainisa
violationoftherequirementsofAS7.
7. Youhavefurnishedanauditreportintheabovecaseon24.10.2005.InPara3(C)ofthe
reportyouhavecertifiedthatincaseoftheprofit&lossaccount,theaccountsaudited
givesatrueandfairviewoftheprofitoftheassesseefortheyearendingon31.03.2005
and the balance sheet gives a true & fair view of the affairs of the assessee as at

285
31.03.2005.Para2ofPartIIofAnnouncementsoftheCouncilregardingstatusof
various documents issued by the Institute of Chartered Accountants of India The
pronouncements of the Institute seek to describe the accounting principles and the
methods of applying these principles in the preparation and presentation of financial
statements so that they give a true and fair view. So, as per ICAI, financial statements
madeasperaccountingstandardsandotherpronouncementsissuedbyitonlycangive
trueandfairview.Asyouhavenotfollowedthesame,thesefinancialstatementscannot
givetrueandfairviewandyourcertificateiscontrarytoyourInstitutesview.
8. AsperPara3ofAnnouncementsoftheCouncilregardingstatusofvariousdocuments
issuedbytheInstituteofCharteredAccountantsofIndiasuchAS7ismandatoryonall
its members for their auditing functions and accounting functions. Preface to the
StatementsonAccountingStandardsrevisedin2004byICAIstates,
6.CompliancewiththeAccountingStandards
6.1.TheAccountingStandardswillbemandatoryfromtherespectivedate(s)mentionedin
theAccountingStandard(s).ThemandatorystatusofanAccountingStandardimpliesthat
while discharging their attest functions, it will be the duty of the members of the
Institute to examine whether the Accounting Standard is complied with in the
presentation of financial statements covered by their audit. In the event of any
deviation from the Accounting Standard, it will be their duty to make adequate
disclosuresintheirauditreportssothattheusersoffinancialstatementsmaybeawareof
suchdeviation.
9. Inviewoftheaboveyouarerequestedtorectifywithin_______(date)theabovedefects
inyourauditreportfailingwhichstepswillbetakenforreportingthemattertotheICAI
totreatitasprofessionalmisconductasperClause1ofPartIIandClauses5to9of
PartIofScheduleIIofCharteredAccountantsAct,1949andalsofornecessaryaction
underRule60ofIncometaxRules,1962.
10. Further,ifasperPara3abovetheaccountsarenotcapabletogivetrueandfairview,it
attracts Para 4 of AS I of Notification No. 9949 dated 25/1/1996 of CBDT which
requiresthataccountsshouldgivetrueandfairview.IfthatPara4ofnotifiedASIis
notfollowed,S.145(3)attractsandconsequentlythesaidaccountsauditedbyyouwill
beliableto berejected u/s145(3)ofI.T.act,1961forviolationofS.145(2) andfor
being incomplete and incorrect. A separate show cause notice in this regard is being
issuedtotheassesseeasrequiredu/s144readwith145(3).

()

ITOWard

ItisrelevantheretomentiontheprovisionsofCharteredAccountantsActreferredtoabove.
ThereforecopyofrelevantChapterVofitisgivenbelowforcomprehensivestudy:

286

287

288

289

290

291
IfAOdecidestotakeactionasperaboveprovisions,hehastosendproposalthroughproper
channelonly.

1.1.
HowtoapplyAccountingStandard7inrealestatecases:

Howtorejectbooksofaccountsanditsresultspreparedbyassessee?

ThestartingpointisSection145ofI.T.Act,1961whichreads,
Methodofaccounting.
145. (1) Income chargeable under the head Profits and gains of business or profession or
Income from other sources shall, subject to the provisions of subsection (2), be computed in
accordance with either cash or mercantile system of accounting regularly employed by the
assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting
standardstobefollowedbyanyclassofassesseesorinrespectofanyclassofincome.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the
accounts of the assessee, or where the method of accounting provided in subsection (1) or
accounting standards as notified under subsection (2), have not been regularly followed by
theassessee,theAssessingOfficermaymakeanassessmentinthemannerprovidedin section
144.

Subsection(3)stipulatesthreesituationswhenAOmaymakeassessmenttothebestofhis
judgment,i.e,rejecttheaccounts(anditsresult)oftheassessee,viz.:
If Assessing Officer is not satisfied about the correctness or completeness of the
accountsoftheassessee
If method of accounting provided in subsection (1) (cash/ mercantile) have not been
regularlyfollowedbytheassessee
If accounting standards as notified under subsection (2), have not been regularly
followedbytheassessee

Nowletusgotothelastoneoftheabovethree.Whataretheaccountingstandardsnotified
u/s145(2)?TheanswerliesinNotificationNo.9949videS.O.69(E)dated25.1.1996.,textof
whichisgivenbelow:
Notification:S.O.69(E)
Section(s)Referred:145,145(2)
Statute:INCOMETAX
DateofIssue:25/1/1996
[No.9949/F.No.132/7/95TPLI]

In exercise of the powers conferred by subsection (2) of section 145 of the Incometax Act,
1961(43of1961),theCentralGovernmentherebynotifiesthefollowingaccountingstandards
tobefollowedbyallassesseesfollowingthemercantilesystemofaccounting,namely:
ACCOUNTINGSTANDARDIRELATINGTODISCLOSUREOFACCOUNTINGPOLICIES:
1)Allsignificantaccountingpoliciesadoptedinthepreparationandpresentationoffinancial
statementsshallbedisclosed.
2) The disclosure of the significant accounting policies shall form part of the financial
statementsandthesignificantaccountingpoliciesshallnormallybedisclosedinoneplace.

Authorscomments:

292
Oftenitisfoundthatdevelopers/buildersdonotdisclosewhichaccountingstandardthey
followedbutsimplyshowthesaleproceedsaftertransferoftheconstructedunit.Butitis
pertinentheretonotethatdisclosureofaccountingstandardisarequirementoflaw.S.145
(2) of the Act provides that notified accounting standards are to be followed by assessee.
Notificationno.9949dated25/1/1996saysthatAccountingStandardsIandIIhavebeen
notified for the purpose of S. 145 (2). Out of these, Accounting Standard I says that
accounting policy (which includes accounting standard) followed must be disclosed. Thus
such disclosure is a requirement of law and so assessees/ auditors cannot evade it. When
theyshowsaleproceedsaftertransferofconstructedunit,theymusthavefollowedAS9
becauseAS7doesnothaveanyprovisionforrecognitionofrevenueaftertransferwhile
AS 9 provides for recognition of sale after transfer of significant risks and rewards of
ownership. But most of them simply mention Cash or Mercantile in the Audit Report
and not the Accounting Standard followed which is clear noncompliance to the
requirementoflaw.

3)Anychangeinanaccountingpolicywhichhasamaterialeffectinthepreviousyearorinthe
yearssubsequenttothepreviousyearsshallbedisclosed.Theimpactof,andtheadjustments
resulting from, such change, if material, shall be shown in the financial statements of the
periodinwhichsuch changeismadetoreflecttheeffectofsuchchange.Wheretheeffectof
suchchangeisnotascertainable, whollyorinpart,thefactshallbeindicated.Ifachangeis
made in the accounting policies which has no material effect on the financial statements for
the previous year but which is reasonably expected to have a material effect in any year
subsequenttothepreviousyear,thefactofsuchchangeshallbeappropriatelydisclosedinthe
previousyearinwhichthechangeisadopted.

4)Accountingpoliciesadoptedbyanassesseeshouldbesuchsoastorepresentatrueandfair
view of the state of affairs of the business, profession or vocation in the financial statements
preparedandpresentedonthebasis ofsuchaccountingpolicies.Forthis purpose,the major
considerations governing the selection and application of accounting policies are the
following,namely:

i) Prudence Provisionsshould be made for all known liabilities and losses even though the
amountcannotbedeterminedwithcertaintyandrepresentsonlyabestestimateinthelightof
availableinformation;

ii)SubstanceoverformTheaccountingtreatmentandpresentationinfinancialstatements
oftransactionsandeventsshouldbegovernedbytheirsubstanceandnotmerelybythelegal
form;

iii) Materiality Financial statements should disclose all material items, the knowledge of
whichmightinfluencethedecisionsoftheuserofthefinancialstatements.

5) If the fundamental accounting assumptions relating to going concerns, consistency and

accrualarefollowedinfinancialstatements,specificdisclosureinrespectofsuchassumptions
is not required. If a fundamental accounting assumption is not followed, such fact shall be
disclosed.

6)Forthepurposesofparagraphs(1)to(5),theexpressions,
a) "Accounting policies" means the specific accounting principles and the methods of
applying those principles adopted by the assessee in the preparation and presentation of
financialstatements;

293
b)"Accrual"referstotheassumptionthatrevenuesandcostsareaccrued,thatis,recognized
as they are earned or incurred (and not as money is received or paid) and recorded in the
financialstatementsoftheperiodstowhichtheyrelate;

c) "Consistency" refers to the assumption that accounting policies are consistent from one
periodtoanother;

d) "Financial statements" means any statement to provide information about the financial
position, performance and changes in the financial position of an assessee and includes
balancesheet, profit and loss account and other statements and explanatory notes forming
partthereof;

e)"Goingconcern"referstotheassumptionthattheassesseehasneithertheintentionnorthe
necessity of liquidation or of curtailing materially the scale of the business, profession or
vocationandintendstocontinuehisbusiness,professionorvocationfortheforeseeablefuture.

ACCOUNTING STANDARD II RELATING TO DISCLOSURE OF PRIOR PERIOD AND

EXTRAORDINARYITEMSANDCHANGESINACCOUNTINGPOLICIES:

7)Priorperioditemsshallbeseparatelydisclosedintheprofitandlossaccountintheprevious
yeartogetherwiththeirnatureandamountinamannersothattheirimpactonprofitorloss
inthepreviousyearcanbeperceived.

8) Extraordinary items of the enterprise during the previous year shall be disclosed in the
profitandlossaccountaspartofincome.Thenatureandamountofeachsuchitemshallbe
separatelydisclosedinamannersothattheirrelativesignificanceandeffectontheoperating
resultsofthepreviousyearcanbeperceived.

9) A change in an accounting policy shall be made only if the adoption of a different

accountingpolicyisrequiredinthestatuteorifitisconsideredthatthechangewouldresultin
amoreappropriatepreparationorpresentationofthefinancialstatementsbyanassessee.

10) Any change in an accounting policy which has a material effect shall be disclosed. The
impactof,andtheadjustmentsresultingfromsuchchange,ifmaterial,shallbeshowninthe
financial statements of the period in which such change is made to reflect the effect of such
change.Wheretheeffectofsuchchangeisnotascertainable,whollyorinpart,thefactshallbe
indicated.If achangeismadeinthe accountingpolicieswhichhasno materialeffectonthe
financialstatementsforthepreviousyearbutwhichisreasonablyexpectedtohaveamaterial
effectinyearssubsequenttothepreviousyears,thefactofsuchchangeshallbeappropriately
disclosedinthepreviousyearinwhichthechangeisadopted.

11)Achangeinanaccountingestimatethathasamaterialeffectinthepreviousyearshallbe
disclosedandquantified.Anychangeinanaccountingestimatewhichisreasonablyexpected
tohaveamaterialeffectinyearssubsequenttothepreviousyearshallalsobedisclosed.

12)Ifaquestionarisesastowhetherachangeisachangeinaccountingpolicyorachangein
anaccountingestimate,suchaquestionshallbereferredtotheBoardfordecision.

13)Forthepurposesofparagraphs(7)to(12),theexpressions:

a)"Accountingestimate"meansanestimatemadeforthepurposeofpreparationoffinancial
statements which is based on the circumstances existing at the time when the financial
statementsareprepared;

294
b)"Accountingpolicies"meansthespecificaccountingprinciplesandthemethodofapplying
those principles adopted by the assessee in the preparation and presentation of financial
statements;

c)"Extraordinaryitems"meansgainsorlosseswhicharisefromeventsortransactionswhich
are distinct from the ordinary activities of the business and which are both material and
expected not to recur frequently or regularly. Extraordinary items include material
adjustments necessitated by circumstances which though related to the years preceding the
previousyearsaredeterminedinthepreviousyear:

Provided that income or expenses arising from the ordinary activities of the business or
professionorvocationofanassesseethoughabnormalinamountorinfrequentinoccurrence
shallnotqualifyasextraordinaryitems.

d) "Financial statements" means any statement to provide information about the financial
position, performance and changes in the financial position of an assessee and includes
balancesheet, profit and loss account and other statements and explanatory notes forming
partthereof;

e)"Priorperioditems"meansmaterialchargesorcreditswhichariseinthepreviousyearas
a result of errors or omissions in the preparation of the financial statements of one or more
previousyears:

Providedthatthechargeorcreditarisingontheoutcomeofacontingency,whichatthetime
ofoccurrencecouldnotbeestimatedaccuratelyshallnotconstitutethecorrectionofanerror
butachangeinestimateandsuchanitemshallnotbetreatedasapriorperioditem.

This notification shall come into force with effect from 1st day of April, 1996, and shall
accordinglyapplytotheAssessmentyear199798andsubsequentassessmentyears.
Sd/K.D.Gupta
JointSecretarytoGovernmentofIndia

So,asperSec.145(2)readwith3rdconditionofSection145(3),AOcaninvoke145(3)to
reject book result done on project completion method if he can prove that the above
guidelines of AS I and / or II have not been followed by assessee. ASI, stated above,
requires:
Accounting policies have to be disclosed and such disclosure shall be part of financial
statements like balance sheet and P & L account (i.e., without such disclosure such
statements shall be incomplete). In this context, accounting policies has been defined in
ASI itself as the specific accounting principles and the methods of applying those
principles adopted by the assessee in the preparation and presentation of financial
statements. What are accounting principles? The website, www.accountingcoach.com
says,the phrase"generallyacceptedaccountingprinciples"(or"GAAP")consistsofthree
importantsetsofrules:
(1)Thebasicaccountingprinciplesandguidelines,
(2) The detailed rules and standards issued by FASB@ (Federal Accounting Standard
BoardofUSA)(@Authorsnote:InthecontextofIndiaitisICAIInstituteofChartered
AccountantsofIndia)anditspredecessortheAPB(AccountingPrinciplesBoard),and
(3)Thegenerallyacceptedindustrypractices.

Soaccountingpoliciesincludeaccountingprinciplesandalsoaccountingstandardsissued
byFASB(inUSA)(or,forthatmatter,byICAIinIndia)andso,ifsuchaccountingstandards
are not disclosed, it can be said that accounting principles are not disclosed and, in turn,
accounting policies are not disclosed. But disclosure of accounting policies is a mandatory

295
requirement of ASI and if that is not done, 3rd condition of Sec. 145 (3) also attracts to
enableAOtorejectbooksofaccountpreparedonprojectcompletionmethod.Wehaveseen
from the sample cases given above that the Chartered Accountants have not disclosed the
Accounting standards and simply written mercantile system. But the opening lines of
Notificationno.9949dated25.1.96read,CentralGovernmentherebynotifiesthefollowing
accounting standards to be followed by all assessees following the mercantile system of
accounting.Thatmeans,whenassesseefollowedmercantilesystem,itmusthavedisclosed
accountingstandardfollowedasperPara1to3ofASI.Bynotdoingso,theyviolatedASI
mademandatoryby145(2)andsoAOsareenabledtorejectbooksu/s145(3).

The following is a document downloaded from the website of Reserve Bank of India,
www.rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/18354.pdf. Its middle columns
heading is Indian GAAP and it contains materials sourced from different accounting
standards. This is reproduced here to prove that accounting principles (or GAAP) indeed
consistofaccountingstandardsasmentionedinboldlettersintheimmediatelypreceding
paragraph.

AnnexureIV
ComparisonbetweenUSGAAP,IndianGAAPandIAS(asonApril2000)

ComparativeAnalysisbetweenUSGAAP,IndianGAAPandIAS
AcomparativeanalysisofaccountingpronouncementsunderUSGAAP,IndianGAAPandIASis
presentedinthetablebelow.Theanalysisseekstoidentifythesignificantareasofaccounting,
a summary of the important applicable pronouncements under these three frameworks of
reportingandacomparisonofthesimilaritiesanddifferencesbetweenthese.Inthisanalysis,
US GAAP is taken as the primary reporting framework and Indian GAAP and IAS
pronouncementsarecomparedalongside.Thisisorganizedbyprincipalaccountingarea.To
enable ease of use, a topicwise index is presented first. This index identifies the accounting
area under US GAAP together with the relevant accounting pronouncements and the
correspondingapplicablepronouncementunderIndianGAAPandIAS.Acomparisonbetween
USGAAP,IndianGAAPandIASisthenpresentedforeachidentifiedarea.

Index
USGAAP
IndianGAAP
IAS

Accountingchanges(Source:APB
ChangesinAccounting
ChangesinAccounting
20)
Policies(Source:AS5)
Policies(Source:IAS8)
Accountingpolicies(Source:APB
DisclosureofAccounting
PresentationofFinancial
22)
Policies(Source:AS1)
Statements(Source:IAS1)
Adjustmentstofinancialstatements Priorperiodadjustments Priorperiodadjustments
ofpriorperiods(Sources:FAS16
(Source:AS5)
(Source:IAS8)
and109,APB9and20)

Balancesheetclassificationand
Nospecificaccounting
PresentationofFinancial
display(Sources:ARB43,ch3A,APB pronouncement
Statements(Source:IAS1)
6and10,FAS6,FIN39and41)

BusinessCombinations(Sources:
Accountingfor
BusinessCombinations
ARB43,Ch1A,ARB51,APB16,AIN Amalgamations(Source:
(Source:IAS22)
APB16,FAS10,38,72,79,87,106,
AS14)

109,111,121and135,FIN4and9,
FTB855)
Capitalstock(Sources:ARB43,
Nospecificaccounting
PresentationofFinancial
ch1A,ch1Bandch7B,APB6,9,12,
pronouncement
Statements(Source:IAS1)
14and29,FAS129)

296
Cashflowstatements(Sources:
FAS95,102,104,115and117)

Cashflowstatements
Cashflowstatements
(Sources:AS3andSEBI
(Source:IAS7)
guidelinesoncashflow

statementsforlisted
companies)
Commitments:Longterm
Nocorresponding
Nocorresponding
obligations
accounting
accounting
(Sources:FAS47and129)
pronouncement
pronouncement

Compensation:Stockbased
SEBI(EmployeeStock
Nocorresponding
(Sources:APB25,AINAPB25,ARB OptionSchemeAnd
accounting
43,ch13B,FAS109,123and128,
EmployeeStockPurchase pronouncement
FIN28andFTB971)
Scheme)Guidelines,1999.
[applicabletolisted
companiesonly]
CompensationtoEmployees:
Nospecificaccounting
Nospecificaccounting
DeferredCompensationAgreements pronouncement
pronouncement
andPaidAbsences[Sources:APB12,

FAS43,106,111,112and123]
Comprehensiveincome(Source:FAS Nocorresponding
PresentationofFinancial
130)
accounting
Statements
pronouncement
(Source:IAS1)

HowtorejectbookswhendisclosurehasbeenmadeasperASIbutitdoesnotgive
trueandfairview:
When assessee has disclosed accounting standard (like the case of Ansal Properties &
Industries Ltd or Unitech Ltd or Sobha Developers Ltd etc.), there may not be violation of
Para 13 of AS I but still books of account and its result may be liable to be rejected for
violationof1stconditionofSection145(3),i.e.,duetobooksofaccountsbeingnotcomplete
&correct.Forthatthefollowingproceduremaybeadopted:
Para 4 of AS I says, Accounting policies adopted by an assessee should be such so as to
representatrueandfairviewofthestateofaffairsofthebusiness,professionorvocationin
thefinancialstatementspreparedandpresentedonthebasisofsuchaccountingpolicies.And
for such true and fair view, Prudence, Substance over form and Materiality are the
majorconsiderationsgoverningtheselectionandapplicationofaccountingpolicies(Para
4). Regarding materiality it is written in AS1, Materiality Financial statements should
discloseallmaterialitems,theknowledgeofwhichmightinfluencethedecisionsoftheuserof
thefinancialstatements.Ifpercentageofcompletionmethodisnotfollowed,alltheusersof
the statements (including investors, buyers of flats, shareholders, tax officers, regulating
organizations, lenders etc) will not be in a position to know the performance of the
developer/ builder/ contractor and this may influence their decisions. Therefore, AO can
argue that by not following percentage of completion method assessee has not complied
withtherequirementofmaterialityandsothereisviolationofPara4ofAS1.
Condition1ofSection145(3)providesthat,whenAssessingOfficerisnotsatisfiedabout
the correctness or completeness of the accounts of the assessee, AO can reject books of
accounts(inthiscase,doneinprojectcompletionmethod).ThereforeifAOcanprovethat
theaccountsdonotgivetrueandfairview,thesamecanbeheldtobenotcompleteand
correct for the purpose of rejection of books as per 1st situation of Sec. 145 (3) also, in
addition to the 3rd condition of it. Now, in the Compendium of Accounting Standards
publishedbyICAI(www.icai.org),thereisachaptertitled,AnnouncementsoftheCouncil
regardingstatusofvariousdocumentsissuedby theInstituteofCharteredAccountantsof
Indiainwhichitiswritten:

297
The Companies Act, 1956, as well as many other statutes, requires that the financial
statements of an enterprise should give a true and fair view of its financial position and
working results. This requirement is implicit even in the absence of a specific statutory
provision to this effect. However, what constitutes true and fair view has not been defined
either in the Companies Act, 1956 or in any other statute. The pronouncements of the
Instituteseektodescribetheaccountingprinciplesandthemethodsofapplyingthese
principlesinthepreparationandpresentationoffinancialstatementssothattheygive
atrueandfairview.(PartII,Para2)
Thus,itimpliesthatintheopinionoftheICAI,trueandfairviewcannotbeavailableifits
pronouncements(includingAccountingStandards)arenotfollowed.Thisismoresoincase
of accounting standards declared mandatory. So, when percentage of completion method
under AS7 is mandatory, if the same is not followed by assessee, his accounts cannot be
correctandcompleteandthiswillenableAOtoinvoke1stconditionofSec.145(3).
ASIImentionedinNotificationNo.9949isactuallythesummarizedformofAS5issued
by ICAI (as the AS I in the same notification is the summarized form of AS 1 issued by
ICAI).Itspeaksaboutdisclosureofpriorperioditems,theirnatureandamountbutinthe
case of Ansal (APIL) we find that only Prior period item (amount) is given and not
nature andamount ofeachitem.Similarly,extraordinaryitemslikerentalincome/saleof
scrap etc were not disclosed separately for each item by their nature and amount. Thus
there was violation of Para 7 and 8 of the AS II of the notification issued u/s 145 (2)
whichenableAOtorejectbooksofaccountmadeinprojectcompletionmethod.

Tosummarize,theabovestepswillenabletheAOtodothefirststepinhisscrutiny
assessment,viz.,rejectresultsofassesseesbooksofaccounts.

Nextstepistomakeanassessmentinthemannerprovidedinsection144,i.e.tothe
best of his judgment. For that, he has to apply the relevant accounting standard to
compute profit / loss. The calculation of profit as per % of completion method is already
discussed in the earlier chapters. Here one actual case is taken to illustrate how findings
aboutitemsofP&LAccountincourseofscrutinyassessmentcanaffecttheprofitcalculated
under % of completion method too though that profit is not necessarily calculated by
debitingdebitsidetotalfromcreditsidetotaloftheP&LAccount.

Illustration:

NowIwilltakeupaP&LAccounttoshowhowhearings/inquiries/adversedetectionsvis
visAS7affectseveryyearsassessment:
32,39,004.50
To
By
2,04,79,473.00
MaterialsPurchases
Proportionate revenue
up
to
this
year
(71.8578%
of
Rs.
2,85,00,000.00)
ConstructionExpenses
8,42,161.00

Architects
Consultancy

Charges
MaterialsCarryingCharges 3,980.00

MachineHireCharges
12,000.00

ElectricityCharges.
59,485.84

AccountingCharges
20,000.00

BankCharges
1,301.00

ConveyanceCharges
24,752.20

Donation&Subscription"A 3,601.00

Insurance

298
StaffSalary
1,68,016.00

StaffExgratia
6,500.00

StaffTeaExpenses
2,563.00

LabourCharges
19,740.00

Legal&ProfessionalCharges

OfficeMaintenance
438.00

Postage&Telegram
625.00

Printing&Stationery
2,715.00

PujaExpenses
6,927.00

Rent
60,000.00

TelephoneCharges
25,036.00

AuditFees
2,755.00

Partners'Remuneration
2,52,000.00

InterestonPartnersCapital 33,840.00

EarthFillingCharges

ElectricInstallation
36,000.00

GMDAPermissionFees

SoilInvestigationCharges

DepreciationonFixedAssets 20,412.00

SecurityServiceCharges
14,260.00

By Gross profit up to this 52,11,123.87

year

2,04,79,473.00
2,04,79,473.00

Step1:Expensesinearliertwoyears=Rs.1,04,10,236.52
Step2:Profitdeclaredinlasttwoyears=Rs.31,29,673.00
Step3:Totalexpensesuptotheendofthisyear=Rs.1,52,68,349.13
Step4:Estimatedfurtherexpenses=Rs.59,79,650.87
Step5:Estimatedtotalcostofthecontract/project=Rs.2,12,48,000.00
Step6:Expectedrevenue(includingsaleproceedsofflats)=Rs.2,85,00,000.00
Step7:Percentageofcompletion=(1,52,68,349.13x100/2,12,48,000)=71.8578%
Step8: Proportionate revenue = Rs. 2,85,00,000.00 x 71.8578% = Rs. 2,04,79,473.00
(Thisonlywillgotothecreditside)
Step9:Estimatedprofit=(Rs.2,85,00,000.00Rs.2,12,48,000)=Rs.72,52,000.00
Step10: Proportionate profit up to this year = Rs. 72,52,000 x 71.8578% = Rs.
52,11,127.65
Step11:Profitofthisyear=(Rs.52,11,127.65Rs.31,29,673.00)=Rs.20,81,454.65
Step12:Theprojectiscompletednextyear.Say,expensesinthenextyearisclaimedat
Rs.59,79,650.87asestimatedthisyear(Step4)
Step13: So, next year the total/ cumulative profit will be 2,85,00,000.00 Rs.
2,12,48,000.00=Rs.72,52,000
Step14:AndprofitfornextyearalonewillbeRs.72,52,000.00Rs.52,11,127.65=Rs.
20,40,872.35

Scopeandeffectofscrutinyassessment:
Firstly,theactualexpenditureitemsofthedebitsidewillbeexamined.Ifthisispartly
addedback(say,thisyearRs.3,89,378.00hasbeenaddedbackasdisallowableitems),
thesamewillbeRs.44,68,734.61thisyearandRs.1,48,78,971.13uptothisyear
Then the AO has to examine estimated total cost, as reviewed this year, also from
various sources like the loan application forms filed with bank, papers filed with
municipalityforsanctionofplanetc.whichwillbediscussedingreaterdetaillater

299

These two figures give percentage of completion. Say, in this case, total cost remains
unchangedatRs.2,12,48,000.00.Sopercentageofcompletionwillbe1,48,78,971.13x
100/2,12,48,000.00=70.0252%
Accordinglycreditsidewillalsobeaffected.Itwillbe70.0252%ofRs.2,85,00,000.00=
Rs.1,99,57,182.00
So gross profit up to this year will be Rs. 1,99, 57,182.00 Rs. 1,48,78,971.13 = Rs.
50,78,210.87insteadofRs.52,11,127.65
And profit for this year will be Rs. 50,78,210.87 Rs. 31,29,673.00 = Rs. 19,48,537.87
insteadofRs.20,81,454.65
Ofcourse,theAOhasalsotoexaminewhetherassesseesestimateasattheendofthis
year(everyyearhehastodoso)abouttotalrevenuetobereceivediscorrectornot.
One may wonder what the benefit is if GP is reduced by doing so. But it may be
appreciatedthatinthenextyearitsimplicationwillbetotheadvantageoftherevenue.
Elaboration on this point will make the point clearer. Next year revenue will be
2,85,00,000.00andcostwillbe(Rs.2,12,48,000.00Rs.3,89,378.00)Rs.2,08,58,622.00
andsotheprofituptonextyear(cumulative/total)willbeRs.76,41,378.00insteadof
Rs.72,52,000.00
And the profit for next year alone will be Rs. 76,41,378.00 Rs. 50,78,210.87 = Rs.
25,63,167.13insteadofRs.20,40,872.35,i.e.,effectiveadditionisRs.5,22,294.78evenif
thereisnonewdisallowancenextyear.

9 However, in case of civil construction contractors (which effectively will include

developers & builders) attracting Sec. 44AD, presumptive rate of profit would apply.
TheSectionreads,
44AD.(1)Notwithstandinganythingtothecontrarycontainedinsections28to43C,inthe
case of an assessee engaged in the business of civil construction or supply of labour for civil
construction,asumequaltoeightpercentofthegrossreceiptspaidorpayabletotheassessee
inthepreviousyearonaccountofsuchbusinessor,asthecasemaybe,asumhigherthanthe
aforesaid sum as declared by the assessee in his return of income, shall be deemed to be the
profits and gains of such business chargeable to tax under the head Profits and gains of
businessorprofession:
Provided that nothing contained in this subsection shall apply in case the aforesaid gross
receiptspaidorpayableexceedanamountoffortylakhrupees.
Explanation.Forthepurposesofthissection,theexpressioncivilconstructionincludes

(a) theconstructionorrepairofanybuilding,bridge,damorotherstructureorofany
canalorroad;

(b) theexecutionofanyworkscontract
So, all cases above Rs. 40 lakh turnover (proportionate revenue as explained earlier) will
have to follow AS7 because ad hoc profit u/s 44AD is not applicable to them. Even cases
below 40 lakh will have to follow AS7 if they want to show profit below specified
percentage.

Oneimportantaspecttorememberisthedifferenceineffectofadditionordisallowanceof
anitemfromP&LA/cinrealestatecasesfollowingpercentageofcompletionmethodfrom
thatdoneinothercases.Thiswillbeillustratedfromthefollowingexamples:

P&LAccountinnormalcases:
To
(inlakhRs.)
By
(inlakhRs.)
Openingstock
10
Sale
80
Purchase
60
Closingstock
5

300
Salary
7

Grossprofit
8

(also,NetProfit)

Computationofincome:
NetProfit(Totalincome)=Rs.8,00,000
Taxpayable=(say,Rs.1,50,000)
Now,ifRs.2lakhisdisallowedfrompurchaseofRs.60lakh,totalincomebecomesRs.10
lakh and tax payable becomes Rs. 2, 10, 000. But that is not the case in real estate cases
becauseoftheirfollowingpercentageofcompletionmethod.Forillustration,Itaketheshort
versionofP&LAccountofthecaseofRoads&RoofsA/cSuryalayafromGuwahati:

Particulars
Totalupto31.3.2004
Fortheyear Totalupto31.3.2004
Materialpurchase
75,36,343
32,39,004
1,07,75,347
Constructionexpenses
12,36,388
8,42,161
20,78,549
Staffsalary
2,09,710
1,68,016
3,77,726
Electricitycharges
63,686
59,485
1,23,171
Machinehirecharges
67,060
12,000
79,060
Partnersremuneration
3,57,000
2,52,000
6,09,000
Conveyancecharges
49,456
24,752
74,208
Otherexpenses
8,90,593
2,60,694
11,51,288

1,04,10,236
48,58,112
1,52,68,349

Thisiswhatassesseehasshown.IfitisconvertedintoaP&Laccount,itwilllooklikethis:
To
By

Opening balance of cost 1,04,10,236 Total cost incurred up to the 1,52,68,349

incurred
endofaccountingyear
Materialpurchase
32,39,004

Constructionexpenses
8,42,161

Staffsalary
1,68,016

Electricitycharges
59,485

Machinehirecharges
12,000

Partnersremuneration
2,52,000

Conveyancecharges
24,752

Otherexpenses
2,60,694

1,52,68,349
1,52,68,349

Now,ifnoadditionismade,profit/incomechargeabletotaxwillbe
CostuptothisyearXtotalestimatedreceiptfromtheproject
Totalcost
=1,52,68,349X100
(Say)2,00,00,000
=76.341745%
Iftotalestimatedreceipt=Rs.2,40,00,000/,totalestimatedprofit=Rs.40,00,000/
Thereforecumulativeprofituptothisyear=Rs.40,00,000X76.341745%
=Rs.30,53,670
Profituptolastyear:
Rs.1,04,10,236X100
Rs.2,00,00,000
=52.05118%
=(Rs.2,40,00,000Rs.2,00,00,000)X52.05118%
=Rs.20,82,047/
So,profit(income)chargeabletotaxforthisyear=(Rs.30,53,670Rs.20,82,047)

301
=Rs.9,71,623/

ButifRs.1lakhonconstructionexpensesandRs.1lakhonmaterialspurchasearefoundto
be false, they will not be straight forward added to Rs. 9, 71, 623. Rather, they will affect
costincurreduptodateandindirectly,theprofit.
SamethingwillhappeninthecaseofBharatConstruction.ItsP&LA/cislikethis:
To
By

Workinprogress
51,21,356 ContractReceiptfromKPT
52,60,529
Purchase
11,23,906 Saleofflats
11,15,000
Labourcharges
43,93,670 Saleofbricks
89,230
Bankinterest
2,99,213 Workinprogress
56,75,586
VATcharges
2,58,886
Otherexpenses
3,53,084
BookProfit(Netprofit)
5,90,230

1,21,40,345
1,21,40,345

Ifanyamountisdisallowed,say,Rs.1lakhonlabourcharges,AOcannotadditdirectlyto
net profit of Rs. 5, 90,230. Rather, this will be applied to find out revised percentage of
completion(whichwillcomedown).
Otherincomesofdevelopers/builders:
i.
SaleofDevelopmentrightstoanotherbuilder/developer
ii.
SaleofFSIorTDRcertificate(againstunexploitedFSI)
iii.
Chargesforpreferentiallocation
iv.
External/Infrastructuredevelopmentcharge
v.
Forfeited amount of earnest money in case of failure to pay balance in time or for
breachofterms&conditionsofallotment
vi.
Administrative charges in case of substitution of original/allottees name with that
ofhis/hernominee
vii.
Interestondelayedpaymentofinstallments
viii.
Saleofoldmaterialsincaseofdemolition
ix.
ServiceTaxsuspensemoney(developersclaimthattheymayhavetopay.Ofcourse
Servicetaxispayableonlywhentwodeedsaremadeoneforland&materialsand
anotherforconstruction.
x.
Reimbursementofalltaxes,leviesorassessmentswheneverlevied
xi.
Charges for upkeep and maintenance of common areas and services (till such
servicesarehandedovertoApartmentownerscooperativesociety)
xii.
ChargesforcommonfacilitieslikecableT.V.,wi.fiinternetfacility,etc.
xiii.
ItemsmentionedinScheduleFofdeedofconveyanceofflate.g.
xiv.
Commercialexploitationofeasementrights
Saleofparkinglots(open&covered)
xv.
xvi.
Rentfromcommunityhall
xvii.
Terracerightsforhoardings
xviii.
Roofrightexploitationlikemobilephonetower
xix.
Rentfromuseofunoccupiedlandforcommercialpurposes
6. InvestigationpointsforA.O.s
6.1. Purchase materials: Get purchase ledger, labour charge ledger and other major
direct expense ledger. In most cases, bill is received after few days of the delivery of
goods. So, the challan gives more correct picture about the date on which a particular
materialwaspurchased.
6.2. Cost of land : Sometimes the developer / builder acquires land through chain of
sister concerns as a result of which when purchase is shown at its hand, it is
substantially higher than original price as a result of which profit stands greatly
reduced.

302
6.3.

Beforeaprojectisstarted,detailedcostestimatesareprepared.Thisissometimes
presented before banks to get loan. AO can obtain this from bank to compare with
actuals. In case of contract works, at the stage of preparation of tender paper, such
estimatesaremade.
6.4. Wages:Irregularpaymentsaresuspiciousbecauselabourwagesarepaidweaklyor
daily.Cashbookshouldbeverifiedtoseeadequacyofcash.
6.5. Incaseofrealestatecontractors,developers/buildersincaseofBOTprojectsetc.
who work in pursuance of a tender, a lot of information can be gathered from tender
document itself (financial document and technical document). A sample tender
document(ofNBCCLtd.)isenclosedasAnnexureNattheendofthischapter.
6.6. Tender document Valuation of workinprogressDetails of closing work in
progress should be matched with costs incurred. Flats not handed over in part
performanceofcontractu/s.53AofTransferofPropertyActcontinuetobedevelopers
property.So,theseshouldbeshownasclosingstock.Again,sometimessoldoutflatsare
shownasclosingstocktosuppressprofit.Theseshouldbeverified.
6.7. Salesshouldbeverifiedfromallpossiblesourceslikeadvertisements,comparisonof
saleprices,undisclosedbankaccounts,financingbanksetc.
6.8. Whetherotherincomesofdifferentnaturehavebeenshown.
6.9. Paymentschedulesareavailablefrombrochuresandagreements.Actualpayments
receivedasshownbyassesseeshouldbecomparedwiththesedocuments
6.10. Schedule B of deed of conveyance of flat shows total price, Super built area,
Constructiondetails(aspersanctionedplan)materialsused(SchedulesC&D),advance
paid,schedulesofmakingpaymentsetc.importantpoints.
6.11. Deedsalsoshowdefectliabilityperiod.So,A.O.smaydisallowclaimsofdeduction
onaccountofexpensesonthisaftersuchperiod.
6.12. Sale/Rental rates contemporary to the relevant year may be collected for
comparison.Thesegivesamepointertopossibleconcealmentofreceipts.
6.13. A new trend has started in which some buyers want readymade flat, i.e. complete
with furniture, interior decoration, ready tocook kitchen etc. in such case, developer
getsextraincome.
6.14. Many a time, developers form a Special Purpose Vehicle (SPV) to finance and
execute the project. It is an entity created for specific purpose. Many developers raise
fund through IPO, AIM (Alternative Investment market of London Stock Exchange),
Greenshowoptionetc.ItmaybethroughRealEstateMutualFunds,InvestmentTrusts
etc.modesalso.AOmaygetalotofinformationfromthefinanceproposalssubmittedby
developer to these organizations (like SEBI in case of IPO) to find out whether
unaccountedmoneyhasbeenintroduced.
6.15. Manydevelopers/buildersletoutspaceduringunsoldperiodwhethersuchincome
hasbeenshown.
6.16. SomedevelopersusecommercialpropertyasBusinessCentreServiceincluding
Virtualofficeconcept.Inthisbypaying,sayRs.5000/permonth,apartymayenjoythe
facilityofanofficeataprimelocationofabigcity.Thesefacilitiesincludepersonalized
phonecallansweringandthenmessageforwardingbySMS,receivingmails,usingoffice
spaceforafewhoursinaweek/monthetc.bydoingthis,thedevelopergetsrentfrom
manypartiesfromthesameproperty.
6.17. Somedevelopers(e.g.Sanjeevanigroup,promoterofVedicVillageinKolkata)sell
cottage/villaandthenlikereversemortgage,takebacksuchproperty(ifnotrequired
byowneralways)@say Rs.1000/ perday,torunaresort.Insuchcasethedeveloper
chargesahigheramount,sayRs.3000/perdayandthusearnincome.
6.18. Developers /Builders sell property on super Built area but may show revenue on
carpetareabasis.Thisshouldbelookedinto.

303
6.19. In case of BOT infrastructure projects developers actually develop the project in

suchwaythattheygetextrareturnstoaugmentincome/offsetlossfrominfrastructure
project:
a. Inlieuofdevelopment:AplotoflandisgiventodeveloperatPlaceBfordeveloping
infrastructureatplaceA.
b. Direct spill over of infrastructure project Development of land along highways/
neartollbridges/airportdevelopment/overrailwaystations.
c. ImprovedcashflowsManyprojectslikeSEZs,IndustrialParksetc.havecareand
noncareactivitieswhilecoreactivitywouldbeindustrialplots,builtupunits,non
core activities comprise of supporting activities till leisure and entertainment,
hospitalityetc.Thereceiptsfromnoncoreactivitieshedge.Theriskofthedeveloper
incoreareas.AOshouldseewhethertheseareshown.Infrastructureprojectsmay
be social infrastructure like schools, hospitals, tourism infrastructure like hotels,
Industrial infrastructure like SEZ, physical infrastructure like sewerage, Transport
infrastructurelikeports,highwaysandairports.
6.20. Regulating departments likeMunicipality,facilitatingdepartmentslikebankmaybe
goodsourceofinformation.
6.21. In case of contractors, percentage completion method is applicable contractor/
buildermayshowlesscompletion.Incaseofcontractor,whoworksaspertendertime
targets, such claim should be examined with tender specifications as well as
measurement books or contractee and running, bill of contractor. A sample tender
documentisgivenbelowwhichwillgivesomeideaaboutthis.
6.22. Incaseofbuilders,suchtimetargetisavailableinhisprojectreportpreparedbefore
commencementofwork.
6.23. Sometimes, developers build up a land bank and sell some of the land at high
premium. In such case question arises whether the land should be treated as capital
assetorbusinessasset?Hence,intentionatthetimeofpurchase[242ITR83(Kerala)]
whetherthelandwasregisteredinthedevelopersname(whichtheygenerallydonot
doincaseofusingthelandfordevelopmentpurpose),functionaltestastowhetherthe
propertywasachattelwhichhetradesincourseofbusiness/apparatusofbusinessto
earnincomeapplyingthesameetc.pointsarerelevant.(74ITR692,57ITR21,107ITR
637,172ITR95etc.judgmentsimportant).
6.24. Generally,costescalationandlateentrancefee/interestistaken fromlatebuyers.
AOshouldseewhethertheseincomesarereported.
6.25. As many verify extent of retention of residual rights by developer/ builder and
disallowproportionatecostofitasnotrelatedtorevenuereported.
6.26. Ifnecessary,surveyu/s.133Ashouldbeconducted.
6.27. SometimesAOsmayfeelthatthesellingpriceofflatasperdeedislessthanactual
price paid and some amount has been paid as, what is called, onmoney, i.e.,
unaccounted.InsuchcasesAOsfeeltemptedtotakeactioninthelineofSection50CofI.
T.Act,1961,i.e.,ignorethesellingpriceshownbydeveloperandtakethesellingpriceas
per comparable market price on the basis of inquiry through Inspector or otherwise
fromStampDutyauthorityorothers.ButitmustbekeptinmindthatSection50Cisfor
Capital Gains and there is no analogous provision for Income from business. On the
contrary,theSupremeCourtheldinCITvs.CalcuttaDiscountCo.Ltd.(1973)91ITR
8(SC),CITvs.GillandersArbuthnot&Co.(1973)87ITR407(SC),Whereatrader
transfershisgoodsatapricelessthanmarketprice,andthetransactionisabonafideone,
taxing authority cannot take into account market price ignoring real price fetched, in
ordertoascertainprofitfromthetransaction.ThereisalsothejudgmentofMadrasHigh
CourtinSriRamalingaChoodambikaiMillsLtd.Vs.CIT(1955)28ITR952(Mad),
Inordertoarriveatafindingthatanysuchsalewasshamandnotbonafide,theremust
besufficientevidenceandmaterialwithtaxingauthorities.

304

12

PracticeStudy

TheBalancesheet,P&Laccountandschedulesofonebigdevelopercompany,viz.Unitech
Ltd is given below to enable readers familiarize with such cases, apply their mind and do
somepracticestudysothattheycanprepareforthetasksofassessmentahead.Thiswillbe
likemockassessmentandwhentheAOwillactuallygetsuchacase,hewillbeconfidentand
capable.

305

306

307

308

309

310

311

312

313

314

315

Deductionu/s80IB(10)

13

Section 80IB (10) of Income tax Act, 1961 is relevant to assessment of builders and
developers because this allows 100% deduction on profit derived from development and
buildingofhousingprojectsubjecttofulfillmentofcertainconditions.Ifassesseeiseligible
togetthisdeduction,itdoesnotmatterevenifahundredcrorerupeesisaddedbackbythe
Assessing Officer because the entire amount will be taxfree and will be beneficial to the
assessee in capital buildup without paying tax. Therefore in such cases, more than
examiningadmissibilityofreceiptsandexpensesandmakingaddition,itismoreimportant
for the Assessing Officer to examine every single condition of 80IB(10) whether these are
fulfilledornot.AndinthisexaminationotherprovisionslikeS.80A,80IA(5)and(7)to(12),
80IB (12), (13), 80IB (14) and Rule 18BBB are important. Therefore these are discussed
here.

S.80IB(10).
The amount of deduction in the case of an undertaking developing and building housing
projectsapprovedbeforethe31stdayofMarch,2008byalocalauthorityshallbehundredper
cent of the profits derived in the previous year relevant to any assessment year from such
housingprojectif,
(a)Such undertaking has commenced or commences development and construction of the
housingprojectonorafterthe1stdayofOctober,1998andcompletessuchconstruction,

(i)Inacasewhereahousingprojecthasbeenapprovedbythelocalauthority beforethe1st
dayofApril,2004,onorbeforethe31stdayofMarch,2008;

(ii)inacasewhereahousingprojecthasbeen,or,isapprovedbythelocalauthorityonorafter
the 1st day of April, 2004, within four years from the end of the financial year in which the
housingprojectisapprovedbythelocalauthority.

Explanation.Forthepurposesofthisclause,
(i)inacasewheretheapprovalinrespectofthehousingprojectisobtainedmorethanonce,
suchhousingprojectshallbedeemedtohavebeenapprovedonthedateonwhichthebuilding
planofsuchhousingprojectisfirstapprovedbythelocalauthority;
(ii)thedateofcompletionofconstructionofthehousingprojectshallbetakentobethedate
on which the completion certificate in respect of such housing project is issued by the local
authority;

(b)theprojectisonthesizeofaplotoflandwhichhasaminimumareaofoneacre:

Provided that nothing contained in clause (a) or clause (b) shall apply to a housing project
carried out in accordance with a scheme framed by the Central Government or a State
Governmentforreconstructionorredevelopmentofexistingbuildingsinareasdeclaredtobe
slumareasunderanylawforthetimebeinginforceandsuchschemeisnotifiedbytheBoard
inthisbehalf;

(c)theresidentialunithasamaximumbuiltupareaofonethousandsquarefeetwheresuch
residentialunitissituatedwithinthecityofDelhiorMumbaiorwithintwentyfivekilometres

316
fromthemunicipallimitsofthesecitiesandonethousandandfivehundredsquarefeetatany
otherplaceand

(d)thebuiltupareaoftheshopsandothercommercialestablishmentsincludedinthehousing
projectdoesnotexceedfivepercentoftheaggregatebuiltupareaofthehousingprojector
twothousandsquarefeet,whicheverisless.

[w.e.f1.4.2010](e)
notmorethanoneresidentialunitinthehousingprojectisallottedto
anypersonnotbeinganindividual;and

[w.e.f1.4.2010](f)
inacasewherearesidentialunitinthehousingprojectisallottedtoa
personbeinganindividual,nootherresidentialunitinsuchhousingprojectisallottedtoany
ofthefollowingpersons,namely:

(i) Theindividualorthespouseortheminorchildrenofsuchindividual,

(ii) TheHinduundividedfamilyinwhichsuchindividualisthekarta,

(iii)Anypersonrepresentingsuchindividual,thespouseortheminorchildrenofsuch
individualortheHinduundividedfamilyinwhichsuchindividualisthekarta.
Explanation.Fortheremovalofdoubts,itisherebydeclaredthatnothingcontainedinthis
subsection shall apply to any undertaking which executes the housing project as a works
contractawardedbyanyperson(includingtheCentralorStateGovernment).

S.80IB(12)
Where any undertaking of an Indian company which is entitled to the deduction under this
sectionistransferred,beforetheexpiryoftheperiodspecifiedinthissection,toanotherIndian
companyinaschemeofamalgamationordemerger
(a)Nodeductionshallbeadmissibleunderthissectiontotheamalgamatingorthedemerged
companyforthepreviousyearinwhichtheamalgamationorthedemergertakesplace;and
(b)the provisions of this section shall, as far as may be, apply to the amalgamated or the
resultingcompanyastheywouldhaveappliedtotheamalgamatingorthedemergedcompany
iftheamalgamationordemergerhadnottakenplace.

S.80IB(13)
Theprovisionscontainedinsubsection(5)andsubsections(7)to(12)ofsection80IAshall,
sofarasmaybe,applytotheeligiblebusinessunderthissection.

S.80IB(14)
Forthepurposesofthissection,
(a)builtup area means the inner measurements of the residential unit at the floor level,
includingtheprojectionsandbalconies,asincreasedbythethicknessofthewallsbutdoesnot
includethecommonareassharedwithotherresidentialunits;

S.80IA(5)
NotwithstandinganythingcontainedinanyotherprovisionofthisAct,theprofitsandgainsof
aneligiblebusinesstowhichtheprovisionsofsubsection(1)applyshall,forthepurposesof
determining the quantum of deduction under that subsection for the assessment year
immediately succeeding the initial assessment year or any subsequent assessment year, be
computedasifsucheligiblebusinessweretheonlysourceofincomeoftheassesseeduringthe
previousyearrelevanttotheinitialassessmentyearandtoeverysubsequentassessmentyear
uptoandincludingtheassessmentyearforwhichthedeterminationistobemade.

S.80IA(7).

317
Thedeductionundersubsection(1)fromprofitsandgainsderivedfromanundertakingshall
notbeadmissibleunlesstheaccountsoftheundertakingforthepreviousyearrelevanttothe
assessment year for which the deduction is claimed have been audited by an accountant, as
defined in the Explanation below subsection (2) of section 288, and the assessee furnishes,
alongwithhisreturnofincome,thereportofsuchauditintheprescribedformdulysignedand
verifiedbysuchaccountant.

S.80IA(8)
Where any goods or services held for the purposes of the eligible business are transferred to
any other business carried on by the assessee, or where any goods or services held for the
purposes of any other business carried on by the assessee are transferred to the eligible
business and, in either case, the consideration, if any, for such transfer as recorded in the
accounts of the eligible business does not correspond to the market value of such goods or
services as on the date of the transfer, then, for the purposes of the deduction under this
section,theprofitsandgainsofsucheligiblebusinessshallbecomputedasifthetransfer,in
eithercase,hadbeenmadeatthemarketvalueofsuchgoodsorservicesasonthatdate:
Providedthatwhere,intheopinionoftheAssessingOfficer,thecomputationoftheprofitsand
gains of the eligible business in the manner hereinbefore specified presents exceptional
difficulties,theAssessingOfficermaycomputesuchprofitsandgainsonsuchreasonablebasis
ashemaydeemfit.
Explanation.Forthepurposesofthissubsection,marketvalue,inrelationtoanygoodsor
services,meansthepricethatsuchgoodsorserviceswouldordinarilyfetchintheopenmarket.

S.80IA(9)
Whereanyamountofprofitsandgainsofanundertakingorofanenterpriseinthecaseofan
assessee is claimed and allowed under this section for any assessment year, deduction to the
extentofsuchprofitsandgainsshallnotbeallowedunderanyotherprovisionsofthisChapter
undertheheadingC.Deductionsinrespectofcertainincomes,andshallinnocaseexceed
theprofitsandgainsofsucheligiblebusinessofundertakingorenterprise,asthecasemaybe.
S.80IA(10)
Where it appears to the Assessing Officer that, owing to the close connection between the
assesseecarryingontheeligiblebusinesstowhichthissectionappliesandanyotherperson,or
for any other reason, the course of business between them is so arranged that the business
transactedbetweenthemproducestotheassesseemorethantheordinaryprofitswhichmight
be expected to arise in such eligible business, the Assessing Officer shall, in computing the
profitsandgainsofsucheligiblebusinessforthepurposesofthedeductionunderthissection,
taketheamountofprofitsasmaybereasonablydeemedtohavebeenderivedtherefrom.

S.80IA(11)
The Central Government may, after making such inquiry as it may think fit, direct, by
notificationintheOfficialGazette,thattheexemptionconferredbythissectionshallnotapply
toanyclassofindustrialundertakingorenterprisewitheffectfromsuchdateasitmayspecify
inthenotification.

S.80IA(12)
Where any undertaking of an Indian company which is entitled to the deduction under this
sectionistransferred,beforetheexpiryoftheperiodspecifiedinthissection,toanotherIndian
companyinaschemeofamalgamationordemerger
(a)Nodeductionshallbeadmissibleunderthissectiontotheamalgamatingorthedemerged
companyforthepreviousyearinwhichtheamalgamationorthedemergertakesplace;and
(b)the provisions of this section shall, as far as may be, apply to the amalgamated or the
resultingcompanyastheywouldhaveappliedtotheamalgamatingorthedemergedcompany
iftheamalgamationordemergerhadnottakenplace.

318
Deductionstobemadeincomputingtotalincome.
80A. (1)Incomputingthetotalincomeofanassessee,thereshallbeallowedfromhisgross
totalincome,inaccordancewithandsubjecttotheprovisionsofthisChapter,thedeductions
specifiedinsections80Cto80U.
(2)TheaggregateamountofthedeductionsunderthisChaptershallnot,inanycase,exceed
thegrosstotalincomeoftheassessee.
(3)Where,incomputingthetotalincomeofanassociationofpersonsorabodyofindividuals,
any deduction is admissible under section 80G or section 80GGA or section 80GGC or section
80HHorsection80HHAorsection80HHBorsection80HHCorsection80HHDorsection80I
orsection80IAorsection80IBorsection80ICorsection80IDorsection80IEorsection
80Jorsection80JJ,nodeductionunderthesamesectionshallbemadeincomputingthetotal
incomeofamemberoftheassociationofpersonsorbodyofindividualsinrelationtotheshare
ofsuchmemberintheincomeoftheassociationofpersonsorbodyofindividuals.
(4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or
section 10B or section 10BA or in any provisions of this Chapter under the heading C
Deductions in respect of certain incomes, where, in the case of an assessee, any amount of
profits and gains of an undertaking or unit or enterprise or eligible business is claimed and
allowed as a deduction under any of those provisions for any assessment year, deduction in
respect of, and to the extent of, such profits and gains shall not be allowed under any other
provisionsofthisActforsuchassessmentyearandshallinnocaseexceedtheprofitsandgains
ofsuchundertakingorunitorenterpriseoreligiblebusiness,asthecasemaybe.
(5)Wheretheassesseefailstomakeaclaiminhisreturnofincomeforanydeductionunder
section 10A or section 10AA or section 10B or section 10BA or under any provision of this
ChapterundertheheadingC.Deductionsinrespectofcertainincomes,nodeductionshall
beallowedtohimthereunder.
(6) Notwithstanding anything to the contrary contained in section 10A or section 10AA or
section 10B or section 10BA or in any provisions of this Chapter under the heading C
Deductionsinrespectofcertainincomes,whereanygoodsorservicesheldforthepurposesof
theundertakingorunitorenterpriseoreligiblebusinessaretransferredtoanyotherbusiness
carriedonbytheassesseeorwhereanygoodsorservicesheldforthepurposesofanyother
businesscarriedonbytheassesseearetransferredtotheundertakingorunitorenterpriseor
eligiblebusinessand,theconsideration,ifany,forsuchtransferasrecordedintheaccountsof
the undertaking or unit or enterprise or eligible business does not correspond to the market
value of such goods or services as on the date of the transfer, then, for the purposes of any
deductionunderthisChapter,theprofitsandgainsofsuchundertakingorunitorenterpriseor
eligible business shall be computed as if the transfer, in either case, had been made at the
marketvalueofsuchgoodsorservicesasonthatdate.
Explanation.Forthepurposesofthissubsection,theexpressionmarketvalue,

(i) inrelationtoanygoodsorservicessoldorsupplied,meansthepricethatsuchgoods
orserviceswouldfetchiftheseweresoldbytheundertakingorunitorenterpriseoreligible
businessintheopenmarket,subjecttostatutoryorregulatoryrestrictions,ifany;

(ii) in relation to any goods or services acquired, means the price that such goods or
serviceswouldcostifthesewereacquiredbytheundertakingorunitorenterpriseoreligible
businessfromtheopenmarket,subjecttostatutoryorregulatoryrestrictions,ifany.

Formofauditreportforclaimingdeductionundersection80Ior80IAor 80IBor
section80IC
Rule18BBB.
(1) The report of the audit of the accounts of an assessee, which is
requiredtobefurnishedundersubsection(7)ofsection80IAorsubsection(7)ofsection80
I, except in the cases of multiplex theatres as defined in subsection (7A) of section 80IB or
conventioncentresasdefinedinsubsection(7B)ofsection80IBorhospitalsinruralareasas
definedinsubsection(11B)ofsection80IB],shallbeinFormNo.10CCB.
(2) A separate report is to be furnished by each undertaking or enterprise of the assessee
claimingdeductionundersection80Ior80IAor80IBor80ICandshallbeaccompaniedby

319
the Profit and Loss Account and Balance Sheet of the undertaking or enterprise as if the
undertakingortheenterprisewereadistinctentity.
(3) In the case of an enterprise carrying on the business of developing or operating and
maintainingordeveloping,operatingandmaintaininganinfrastructurefacility,theformshall
beaccompaniedbyacopyoftheagreementoftheenterprisewiththeCentralGovernmentor
the State Government or the local authority for carrying on the business of developing or
operating and maintaining or developing, operating and maintaining the infrastructure
facility.
(4)Inanyothercase,theformshallbeaccompaniedbyacopyoftheagreement,approvalor
permission, as the case may be, to carry on the activity signed or issued by the Central
Government or the State Government or the local authority for carrying on the eligible
business.

"FORMNO.10CCB
[Seerule18BBB]

1.Nameoftheassessee:
2.PAN:
3.Status:
4.Ownershipstatusoftheundertaking/enterprises:
(a)Fullyownedbyassessee:Yes/No
(b)Partlyownedbyassessee:Yes/No
5.Address:
6.Nameoftheenterpriseorundertakingeligiblefordeductionundersections80IA,80IB
or80IC:
7.SectionandsubsectionoftheIncometaxAct,1961,underwhichdeductionisbeing
claimed:
8.Dateofcommencementofoperation/activitybytheundertakingorenterprise:
9.Initialassessmentyearfromwhendeductionisbeingclaimed:
10.Address(withDistrictandState)oftheenterprise/undertakingclaimingdeduction:
11.Excise/ServiceTaxregistrationnumberandofficewhereregistered:
12.Salestaxregistrationnumberandofficewhereregistered:
13.Local/Stateauthoritiesfromwhomapprovalistaken(attachcopyofapproval):

ELIGIBLEBUSINESSUNDERSECTION80IA.
14.Development,operation,maintenanceofaninfrastructurefacility:
(a)Withrespecttotheinfrastructurefacility,doestheenterprise(pleasetick):
Develop,
Operateandmaintain,
Develop,operateandmaintain,theinfrastructurefacility.
(b)Pleasespecifythenatureoftheinfrastructurefacility:
[E.g.road,bridge,railsystem,port,etc.[Explanationtosection80IA(4)(i)]
(c)Hastheoperationandmaintenanceoftheinfrastructurefacilitybeenreceivedon
transferfromitsdeveloperinaccordancewiththeagreementwiththeCentral/State
Government/localauthority/anyotherstatutorybody:Yes/No.
(d)Ifyes,pleasespecifythefirstyearofclaimofdeductionundersection80IAbythe
developer(AttachcopyofForm10CCBofdeveloper):

15.Providingtelecommunicationservices:
(a)Pleasespecifythenatureoftelecomservice:
[e.g.basictelecomservice,cellularservice,etc.[Section80IA(4)(ii)]

16.Development,operation,maintenanceofindustrialpark/SEZ
(a)Withrespecttotheindustrialpark/SEZ,doestheundertaking(pleasetick):

320
Develop,
Developandoperate
Maintainandoperateanindustrialpark/SEZ
(b)Nameandaddressoftheindustrialpark/SEZ:
(c)Hastheoperationandmaintenanceoftheindustrialpark/SEZbeenreceivedontransfer
fromitsdeveloper:Yes/No.
(d)Ifyes,firstyearofclaimingdeductionundersection80IAbythedeveloper(Attachcopy
ofForm10CCBofdeveloper):
17.Generation,transmission,distributionofpower
(a)Doestheundertakinggeneratepowerorgenerateanddistributepower:Yes/No
(i)Ifyes,indicatetheyearinwhichtheundertakingshasstartedgeneratingpower
(b)Doestheundertakingtransmitofdistributepower:Yes/No.
(i)Ifyes,indicatetheyearinwhichthenewtransmissionanddistributionlineswerelaid:
(c)Hastherebeensubstantialrenovationandmodernizationoftheexistingnetworkof
transmissionsordistributionlines.Ifyes,pleasespecifyYes/No.
(i)Theyearinwhichthesubstantialrenovationandmodernizationoftheexistingnetwork
oftransmissionordistributionlinestookplace:
(ii)Bookvalueofplant&machineryason1.4.2004:
(iii)Valueofincreaseintheplantandmachineryintheyearofsubstantialrenovationand
modernization

ELIGIBLEBUSINESSUNDERSECTION80IB:
18.Industrialundertakingsengagedinmanufactureorproductionofarticleorthingor
operationofcoldstorageplant
(a)Doestheindustrialundertakingmanufactureorproduceanyarticleorthingspecifiedin
theEleventhSchedule:Yes/No
(b)Ifyes,doesthemanufacturingprocessusepower:Yes/No
(c)Numberofworkersemployedinthemanufacturingprocess:
(d)Doestheindustrialundertakingoperateanycoldstorageplant:Yes/No
(e)Pleasespecifyifthecompanyisasmallscaleindustrialundertaking:Yes/No
(f)IftheindustryislocatedintheNorthEasternRegion,istheindustryanotifiedindustry
aspersecondprovisotosection80IB(4)?:Yes/No
(g)IftheindustryislocatedinJammu&Kashmir,doesitmanufactureorproduceany
articleorthingspecifiedinpart"C"oftheThirteenthSchedule?:Yes/No

19.BUSINESSOFSHIP
(a)IstheshipownedbyanIndiancompanyandwhollyusedforthebusinesscarriedonby
it:Yes/No
(b)Iftheshipwasacquiredontransfer,wastheshipownedorusedinIndiaterritorial
watersbyapersonresidentinIndia:Yes/No

20.BUSINESSOFHOTEL
(a)Isthehotellocatedin
(i)Hillyarea
(ii)Ruralarea
(iii)Placeofpilgrimage
(iv)Othernotifiedarea
(v)Noneoftheabove
(Pleasespecify.........)
(Pleasespecify..........)

(b)Isthehotelapprovedbytheprescribedauthorityunderrule18BBCoftheIncometax
Rules,1962?:Yes/No

321
21.BUSINESSOFSCIENTIFICRESEARCHANDDEVELOPMENT
(a)Isthebusinessapprovedbytheprescribedauthorityunderrule18D?(Pleaseattach
copyofapproval):Yes/No
(b)Doesitfulfilltheconditionsprescribedinrule18DAoftheIncometaxRules?:Yes/No

22.COMMERCIALPRODUCTIONORREFINNINGOFMINERALOIL
(a)Istheundertakingengagedinthecommercialproductionorrefiningofmineraloil?
Yes/No
(b)Ifyes,pleasespecify:
Commercialproductionofmineraloil
Refiningofmineraloil

23.DEVELOPINGANDBUILDINGHOUSINGPROJECTS
(a)Dateofapprovalbylocalauthority(Pleaseattachcopyofapproval/ifapprovalis
obtainedmorethanonce,attachcopyoffirstapprovalofthebuildingplan)
(b)Dateofcompletionofthehousingproject(Pleaseattachcopyofthecompletion
certificateissuedbythelocalauthority)
(c)Sizeofplotoflandoftheproject
(d)IstheprojectsituatedinDelhiorMumbaiorwithin25kilometresfromtheirmunicipal
limits:Yes/No
(e)Builtupareaoftheshopsandothercommercialestablishmentssituatedintheproject
(g)WhethertheprojectiscarriedoutinaccordancewithaschemeframedbyCentral/State
Governmentforreconstruction/redevelopmentofexistingbuildingsinareasdeclaredto
beslumareasunderanylawinforceandnotifiedbytheBoard.:Yes/No
(PleaseattachacopyofCBDT'snotification)
(h)Pleasespecifythemethodofaccountingadopted

24.OTHERBUSINESSACTIVITIES
(a)Istheundertakinginthebusinessofsettingupandoperatingacoldchainfacilityfor
agriculturalproduce:Yes/No
(b)Istheundertakingintheintegratedbusinessofhandling,storageandtransportationof
foodgrains:Yes/No
(c)istheundertakinginthebusinessofprocessing,preservationandpackingoffruitsor
vegetables:Yes/No

25.Eligiblebusinessundersection80IC:
(i)WhethertheundertakingorenterpriseislocatedinanareanotifiedbytheBoardforthe
purposesofsection80IC:Yes/No
(ii)Ifyes,pleaseindicate
(a)nameoftheExportProcessingZone/IntegratedInfrastructureDevelopment
Centre/IndustrialGrowthCentre/IndustrialPark/Estate/SoftwareTechnology
Park/IndustrialArea/ThemeParkandtheDistrict/Stateinwhichlocated
(b)KhasraNo.oftheundertakingorenterprise(AlsoindicatetheBoard'sNotificationNo.)
(c)Iftheeligiblebusinessisnew,pleasegivethedateofcommencementofproductionor
manufactureofarticleorthing
(d)Iftheexistingbusinesshasundertakensubstantialexpansion,pleasespecify,
(i)thedateofsubstantialexpansion
(ii)Thetotalbookvalueofplantandmachinery(beforetakingdepreciationinnayyear)as
onfirstdayofthepreviousyearinwhichsubstantialexpansiontookplace.
(iii)Valueofincreaseintheplantandmachineryintheyearofsubstantialexpansion
(e)Doestheundertakingorenterprisemanufactureorproduceanyarticleorthing
specifiedintheThirteenthSchedule(Ifyes,pleasespecifythearticleorthing):Yes/No
(f)Doestheundertakingorenterprisemanufactureorproduceanyarticleorthingspecified
inthefourteenthschedule(Ifyes,pleasespecifythearticleorthingoroperation):Yes/No

322

26.Forclaimofdeductionu/s80IA(4)(ii)&(IV)/80IB(3)(4),(5),(7)&(11)/80IC,
pleaseindicate:
(a)Whethertheundertakingorenterprisehasbeenformedbythesplittinguporthere
constructionofabusinessalreadyinexistence.:Yes/No
(b)Ifyes,whetherthecircumstancesandtheperiodspecifiedinsection33Bisapplicable.
(Pleasegivedetails)
(c)Hastheundertakingorenterprisereceivedanymachineryorplantontransferwas
previouslyusedforanypurpose:Yes/No
(d)Ifyes,pleasespecifyvalueofmachineryorplantreceivedontransfer:
(e)Totalvalueofmachineryorplantusedinbusiness

27.Totalsalesoftheundertaking:

28.Transactionsbytheundertakingtoarelatedconcernoftheassessee,oranother
undertakingoftheassessee,orthecoowneroftheundertaking,oranotherundertakingof
thecoowner:
(Relatedconcernisapersonwithinthemeaningofsection40A(2)(b)]
NameoftheRelatedConcern
Transaction
(PleasespecifyNatureandAmount)
(a)Rs.
(b)Rs.
(c)Rs.
(d)Rs.

29.ProfitandgainsderivedbytheUndertaking/enterprisefromtheEligiblebusiness#:

30.Deductionundersection80I/80IA/80IB/80IC(Strikeoutwhicheverisnot
applicable).

Declaration
I/We have examined the balance sheet of the above industrial undertaking or enterprise
styled ........and belonging to the assessee M/s. ........... (Permanent Account No. ...........) as at
.............. and the profit and loss account of the said industrialundertaking or enterprise for
theyearendedonthatdatewhichareinagreementwiththebooksofaccountmaintainedat
theheadofficeat..........andbranchesat.........
I/We have obtained all the information and explanations which to the best of my/our
knowledge and belief were necessary for the purpose of the audit, in my/our opinion,
properbooksofaccounthavebeenkeptbytheheadofficeandthebranchesoftheindustrial
undertaking or enterprise aforesaid visited by me/us so far as appears from my/our
examination of books, and proper returns adequate for the purpose of audit have been
receivedfrombranchesnotvisitedbyme/us,subjecttothecommentsgivenbelow:
In my/our opinion the undertaking or enterprise satisfies the conditions stipulated in
section80I/80IA/80IB/80IC(strikeoutwhicheverisnotapplicable)andtheamountof
deductionclaimedunderthissectioninitem30isaspertheprovisionsoftheIncometax
Actandmeetstherequiredconditions.
In my/our opinion and to the best of my/our information and according to explanations
giventome/us,thesaidaccountsgiveatrueandfairview
(i) in the case of the balance sheet, of the state of affairs of the above named industrial
undertakingorenterpriseasat..................;and
(ii) in the case of the profit and loss account, of the profit of loss of the industrial
undertakingorenterprisefortheaccountingyearendingon...................

323

Place...............
Date................

...............Signed
Accountants

Notes:
1.Deletewhicheverisnotapplicable.
2.Heregivenameandaddress.
3.FurnishacopyoftheagreementwiththecentralGovernmentorstategovernmentor
localauthority.
4.Pleaseprovideprofit&lossaccountandbalancesheetoftheundertaking/enterprise.
5.Pleaseprovidethenotificationofapprovaloftheindustrialpark/SEZ.
6.Thisreportistobegivenby
(i)acharteredaccountantwithinthemeaningoftheCharteredAccountantsAct,1949(38of
1949);or
(ii)anypersonwho,inrelationtoanyState,isbyvirtueoftheprovisionsinsubsection(2)
ofsection226oftheCompaniesAct,1956(1of1956),entitledtobeappointedtoactasan
auditorofcompaniesregisteredintheState.
7.Whereanyofthemattersstatedinthisreportisansweredinthenegativeorwitha
qualification,thereportshallstatethereasonstherefor."

Somerelevantcaselaws:
InCITv.CochinRefineriesLtd.[1982]135ITR278(Ker.),CITv.CementDistributors
Ltd. [1994] 208 ITR 355 (Delhi), Sterling Foods Ltd. v. CIT (1999) 237 ITR 539 (SC)
and Pandian Chemicals Ltd v. CIT (2003) 262 ITR 278 (SC) it was held, the words
derived from cannot have a wide import so as to include any income which can in some
mannerbeattributedtothebusiness.Thederivationoftheincomemustbedirectlyconnected
withthebusinessinthesensethattheincomeisgeneratedbythebusiness.
Averyrecentjudgmentdated26thNovember,2009ofITAT,AmritsarBenchhasheldthat
profit out of excise refund, though related to eligible business, shall not be entitled to be
heldasProfitfromeligibleBusinessandso,notentitledtodeductionu/s80IB.
ITATDelhiBenchhasheldinthecasereportedon18.12.2009inthecase2009TIOL(Tax
India Online) 781ITATDEL that when developer assessee earned income by way of
maintenance charges, club subscriptions, electricity charges and interest on FDRs, by no
stretch of imagination such income can be treated to have been derived from business of
developingandbuildinghousingprojects.
InthecaseofLibertyIndiav.CIT(2009)317ITR218(SC)theSupremeCourthasheld
thatsections80IBand80IAarecodesbythemselvesastheycontainbothsubstantiveaswell
as procedural provisions. Section 80IB provides for allowing deduction in respect of profits
and gains derived from the eligible business. The connotation of the words "derived from" is
narrower to that of the words "attributable to". By using the expression "derived from"
Parliamentintendedtocoversourcesnotbeyondthefirstdegree.
Theconsistentratiodecidendiofallthesecaselawsisthatonlytheincomeshavingdirect
nexuswiththedevelopmentandsaleofhousingunitsshallberegardedasprofitfromsuch
housingproject.Otherincomes,thoughhavingsomeorothernexusorrelationshallnotbe
eligible to get such deduction because they are merely attributable to and not derived
fromsuchbusinessofdevelopmentandsaleofhousingproject.
Caselawson theissueofrequirementofresidentialunitstobenotmorethan1000/
1500sq.ft.
InthecaseofACITv.BengalAmbujaHousingDevelopmentLtd,reportedin39DBCAJ
546CalcuttaBenchofITATheldthatevenifsomeoftheconstructedresidentialunitsina
housing project is more than 1500 sq ft, claim for deduction should not be wholly

324
disallowed but only proportionately disallowed, i.e., disallowed on only the profit
proportionate to the flats bigger than prescribed size. Calcutta High Court, in ITA no.
453/2006, dismissed appeal against this saying that no substantial question of law was
involved.ITAT,NagpurBenchfollowedthisinITOv.AIRDevelopers,ITANo.447/2007,
order dated 21/5/2008. In fact, the judgment of the ITAT, Calcutta Bench is the first and
other benches just followed it. Again, Bangalore Bench of ITAT, in DCIT v. Brigade
Enterprises (P) Ltd (2008) 14 DTR 371, held that such proportionate allowance of
deduction is possible only when such bigger flats are independent blocks from all aspects
includingthefactthatallapprovalsandpermissionsweretakenseparatelythoughtheseare
partofabiggerproject.
ButwithduereverenceitmaybesaidthattheCalcuttaHighcourtdidnotaccepttheappeal
at the first instance due to lacking question of law. The High Court commented in the
negative merely on maintainability of the appeal against order of ITAT and subsequently
some other ITAT benches also gave similar ruling citing the judgments of Bengal Ambuja
case. In such situation the order of the Calcutta High Court may be viewed in the light of
principles laid down by the Supreme Court in V. M. Salgaocar & Brothers v. CIT (2000)
243 ITR 383 (SC) interpreting the meaning of different types of dismissal of appeal and
sayingthateverydismissalofappealdoesnotmeanaffirmationofanorder.Inthiscaseit
was stated that when an SLP is dismissed by saying dismissed Supreme Court does not
commentonthecorrectnessorotherwiseoftheorderfromwhichleavetoappealissought.
InthiscasewascitedthecaseofIndianOilLtdv.StateofBihar(1987)167ITR897(SC),
AIR 1986 SC 1780 in which it was held that the dismissal of a special leave petition in
liminebyanonspeakingorderdoesnotjustifyanyinferencethat,bynecessaryimplication,
the contentions raised in the special leave petition on the merits of the case have been
rejected by the Supreme Court. In Union of India v. All India Services Pensioners
Association(1988)AIR1988SC501,2SCC580itwasheld,whennoreasonisgiven,but
a special leave petition is dismissed simpliciter, it cannot be said that there has been a
declarationoflawbythiscourtunderArticle141oftheConstitutionwhichprovidesthatthe
law declared by the Supreme Court shall be binding on all the courts within the territory of
India.
The above judgments of Calcutta and Nagpur Bench of ITAT mean that profit has to be
calculatedseparatelyforresidentialunitsaboveprescribedsizeanduptoprescribedsizeof
an undertakings housing project. But it is interesting to note that S. 80IB (10) read with
Rule18BBB(2)stipulatescomputationofprofitforeachundertakingonlyandnotfurther
subdivisionofit,i.e.,tocalculateprofitflatwise.Thedeductionof80IB(10)isontheprofit
oftheundertakingandnotonprofit froma fewresidentialunits(ofthat housingproject)
segregatedfromotherunits.Thereisnoprovisionforcomputationofprofitonthebasisof
suchsegregationanddivisionofresidentialunits.
ThemaingroundgivenbyITAT,Calcuttabenchwasthatwhenallconditionsof80IB(10)
were fulfilled, the deduction cannot be denied for a few flats being more than prescribed
size. But it is relevant to note that size of each flat is also one of the all conditions and
unlessthatisfulfilled,itcannotbesaidthatallconditionsarefulfilled.
Further, before introduction of S. 80IB (10) by Finance Act, 1999, the same provision was
thereinoldS.80IA(4F)thoughinsimplerform.Saidsubsection(4F)read,Thissection
appliestoanundertakingengagedindevelopingandbuildinghousingprojectsapprovedbya
localauthoritysubjecttotheconditionthatthesizeoftheplotoflandhasaminimumareaof
oneacre,andtheresidentialunithasabuiltupareanotexceedingone thousandsquarefeet.
ThesamewordsarenowpresentinS.80IB(10).
Here the word undertaking is qualified by the condition, namely, engaged in developing
andbuildinghousingprojectsapprovedbyalocalauthoritywhichagain,isqualifiedbytwo
conditions,namely,
1) sizeoftheplotoflandhasaminimumareaofoneacre
2) residentialunithasabuiltupareanotexceedingonethousandsquarefeet

325
Both the conditions are in respect of the one and same thing, namely, the undertakings
housing project approved by local authority and not, by any stretch of imagination, any
segmentofthehousingproject.Itisconsistentprincipleofinterpretationofdirecttaxlaw
thatnothingistobeimportedtoorexportedfromtheprovisionanditistobeinterpreted
as it is as there is no equity about tax. So, size of the plot means size of the plot of the
housing project and similarly residential unit means residential unit of the housing
project and cannot be residential unit of part or full of the housing project. The profit
could probably be computed in such segmented manner as the ITATs order said only if
wordslikeofpartorfullofthehousingprojectappearedintheprovision.

Further, the Memorandum to Finance Bill, 1999 (source: www.indiabudget.nic.in) read,

Under section 80IA of the Incometax Act, profits of approved housing projects where the
development and construction commences on or after 1.10.1998 and is completed by
31.3.2001,arefullydeductible.Theconditionsnecessaryforclaimingthebenefitarethat
theapprovedhousingprojectshouldbeonminimumareaofoneacreandshouldhave
dwellingunitswithamaximumbuiltupareaof1000sq.ft.Itisproposedtomodifythe
existing benefits to provide that in areas other than falling in and within 25 kms from the
municipal limits of Delhi and Mumbai, the built up area of dwelling units may be up to a
maximumlimitof1500sq.ft.insteadof1000sq.ft.atpresenttomakethementitledforthe
benefit. The built up area for areas falling in Delhi and Mumbai and within 25 kms. of the
municipallimitsofboth,however,shallremainthesame.Theproposedamendmentwilltake
effectfrom1stApril,2000andwill,accordinglyapplyinrelationtotheassessmentyear2000
2001andsubsequentyears.[Clause50]

Intheabovementionedboldandunderlinedparthousingprojectisthesubjecttoboth
thepredicates,shouldbeonminimumareaofoneacreandshouldhavedwellingunits
with a maximum built up area of 1000 sq. ft. Therefore this makes the legislative
intentionveryclearandleavenothingtoimaginationorspeculationorinterpretationthatit
is the full housing project and not part of a housing project that must have residential
units each having builtup area of 1000/1500 sq. ft. These points regarding legislative
intentionwereneitherarguedbytherevenuenordiscussedbytheITAT.Thereforeitseems
that there is scope for arguing the issue further before High Court/ Supreme Court. The
judgment s of ITAT and Calcutta High Court in Bengal Ambuja case are available in
www.credaimaharashtra.org/judgmentsincometax.html

Issueofcompletionofconstructionwithinfouryears
Sec.80IB(10)(a)(ii)requirestheassesseetocompleteconstructionofthehousingproject
withinfouryearsfromtheendofthefinancialyearinwhichthehousingprojectisapproved
bythelocalauthority.Sometimesassesseefilescompletioncertificateissuedbyhisarchitect
along with the report in Form 10CCB enclosed with return. But Explanation (ii) below S.
80IB (10) (a) of the Act provides the date of completion of construction of the housing
project shall be taken to be the date on which the completion certificate in respect of such
housingprojectisissuedbythelocalauthority.Thereforethecompletioncertificateissued
bythearchitectisofnorelevanceinthismatter.ItisimportantheretonotethatinPara
23(b)ofFormNo.10CCB(whichisessentiallylinkedtogettingthedeductionu/s80IB(10)
asperS.80IA(7)readwithS.80IB(13)oftheAct)asperRule18BBBoftheRulesreads,
Date of completion of the housing project (please attach copy of the completion certificate
issuedbythelocalauthority).InCITv.JaideepIndustries[1989]180ITR81(P&H)it
was held, there can be no escape from the conclusion that the requirement of audit report
beingfiledalongwiththereturnofincomeismandatory.Iffilingofsuchreportismandatory
for allowing deduction u/s 80IB (10), so is mentioning the particulars in Para 23 (b) of it
andsoisfilingcopyofthecompletioncertificateissuedbylocalauthority.Alltheseareso
mandatoryonlybecausethelawwantsAssessingOfficertoensurethatdeductionu/s80IB
(10)isallowedonlyiftheprojectiscompletedwithinstipulatedfour(4)years.

326

InstructionNo.4/2009,dated3062009ofCBDT
Under subsection (10) of section 80IB an undertaking developing and building housing
projects is allowed a deduction of 100% of its profits derived from such projects if it
commencedtheprojectonorafter1.10.1998andcompletestheconstructionwithinfouryears
fromthefinancialyearinwhichthehousingprojectisapprovedbythelocalauthority.
2.ClarificationshavebeensoughtbyvariousCCsITontheissuewhetherthedeductionu/s80
IB(10) would be available on a year to year basis where an assessee is showing profit on
partialcompletionorifitwouldbeavailableonlyintheyearofcompletionoftheprojectu/s
80IB(10).
3.TheaboveissuehasbeenconsideredbytheBoardanditisclarifiedasunder:
(a)Thedeductioncanbeclaimedonayeartoyearbasiswheretheassesseeisshowingprofit
frompartialcompletionoftheprojectineveryyear.
(b)Incaseitislate,foundthattheconditionofcompletingtheprojectwithinthespecifiedtime
limitof4yearsasstartedinsection80IB(10)hasnotbeensatisfied,thedeductiongrantedto
theassesseeintheearlieryearsisshouldbewithdrawn.

4. The above Instruction will override earlier clarification on this issue contained in
Member(R)s D.O. letter No. 58/Misc./2008/CIT(IT&CT) dated 29.04.2008 and Member (IT)s
D.O.letterNo.279/Misc./46/08ITJdated2.5.2008.
5. This may kindly be brought to the notice to the notice of the all Assessing Officers in your
charge.

The above instruction clarified that the deduction will be admissible even when profit is
earned and shown as per partial completion method or % of completion method. This
cleared the cloud of confusion prevailing because there is a condition in 80IB (10) that
construction has to be completed within four years from the end of the F. Y. in which the
housingprojectisapprovedandPara23ofForm10CCBrequiresthatcompletioncertificate
has to be enclosed with the audit report in Form 10CCB. These two things gave the
impressionthatthedeductionisadmissibleonlyaftercompletionofconstruction.Butifone
looks at the section, it is seen that the section provided that the deduction would be
available on profit derived from the housing project. Simply put, if profit is derived,
deduction is available. If the profit is derived even before completion of project, there is
nothinginthesectiontostopthedeductionfrombeingavailable.Theunderlyingcondition
isthattheprofitistobedeterminedandofferedfortaxation.Infact,thisisprobablynota
wholly new idea because old AS 7 also had % of completion method along with project
completion method and there did exist some developers who followed % of completion
method. Accordingly they showed profit before completion of a project and when they
showedprofittheybecameentitledtodeductionalso.Thestipulationthatconstructionhas
tobecompletedwithinfouryearssimplymeanswhatiswrittenandnothingtobeaddedto
it.Itsimplymeansthatiftheprojectisnotcompletedwithinfouryears,thedeductionwill
notbeadmissible.Thismeaningcanbegiveneffectintwoways:one,thedeductionwillnot
beallowedatallbeforethecompletionevenifsomeprofitisearnedbytheeligiblebusiness;
andtheother,thedeductionwillbeallowedinayearifprofitisshownevenifconstruction
isnotcompletedbutdeductionwillbewithdrawnbyrectification/reassessmentiflateritis
found that construction was not completed within stipulated four years. The earlier one
seems unjust because the primary requirement was that there should be a profit and it
shouldbederivedfrom development&building housingprojectandthesetwoconditions
havebeenfulfilled.Itmaysohappenthatadeveloperassesseehasshownsubstantialprofit
beforetheyearofcompletionbecauseheisfollowing%ofcompletionorpartialcompletion
method.Ifheisdeniedthedeductionintheseyears,thespiritandpurposewillbelostand
theschemeoftaxationintheyearofaccrualwillleadtoafarcicalsituation.TheInstruction
bytheCBDTseemstoreinforcethislogicalposition.

327
Casestudy:
In a case, developer did construction in FYs 200405 and 200506 and completed
construction in FY 200607. As per certificate of developers architect, construction was
completed on 28/3/2007. But completion certificate issued by local authority was dated
23/5/2007. Developer did not show any profit on partial completion or percentage of
completionduringyearsofconstruction,i.e.,inAssessmentYears200506and200607but
showedprofitinAY200708,thattooinrespectofonlytheflatsandcommercialspacesold
and then claimed deduction u/s 80IB (10) on the whole of the profit. Assessing Officer
rejectedtheclaimsayingthatwhentheassesseeclaimedtobefollowingprojectcompletion
method,itshouldgetthedeductiononlywhentheprojectiscompletedwithinthemeaning
ofdateofcompletionprovidedinS.80IB(10)whichisthedateonwhichlocalauthority
issuedthecompletioncertificate.Butassesseeclaimedsupportfromtheabovementioned
InstructionNo.4/2009dated30/6/2009.Itseemsthattheclaimisnotcorrect.Thisisso
because at the very beginning it is clear that the Instruction deals with the cases of
developerswhoshowedprofitonthebasisofpartialcompletionorpercentagecompletion
method from year to year during the years of construction. That implies that this is not
applicable in a case where profit was not shown on that basis. Here the developer
admittedly did not do so. On the one hand, revenue department suffered deferment of
taxation several years and on the other hand it will suffer again if the deduction is to be
allowed prematurely. But it seems sure that claim for deduction u/s 80IB (10) cannot be
denied if all conditions are fulfilled. At the same time the AO may examine possibilities of
reopening earlier years two years to tax on percentage completion method or partial
completion method. It is true that even if some profit derived from the housing project is
brought to tax by the AO, the same will bring no tax because assessee will get 100%
deductionontheseifitisotherwiseeligible.Butitmustnotbeforgottenthatthiswillnot
bring any tax only if the project is a housing project with commercial area of less than
stipulatedsize/proportion.Ifitisaprojectotherthanhousingprojectorifitisahousing
project not fulfilling the prescribed conditions, assessee will not get such deduction and
AOs action will bring tax. Further, even in 80IB (10)eligible cases, if there is any income
otherthanprofitderivedfromhousingproject, thesamewillnotgetsuchdeduction and
hencewillbringtax.Butwhoevergains,thiswillbethemostreasonableprocedure.

Investigationpointsregardingclaimfordeductionu/s.80IB(10):
a) Whethertheprojectishousingorcommercial
b) Incaseofcommercialprojectthedeductionisnotadmissibleatall
c) Whetherapprovedbylocalauthoritybefore31.03.08(afterthatnoteligible).
d) Whetherdateofcompletionisasprovidedinlaw.
e) AsperPara23ofForm10CCB(Rule18BBB)thecompletioncertificateattachedwith
auditreportinthatformhastobetheoneissuedbylocalauthorityonlyandnotdevelopers
own architect/ engineer. This gets further support from the Explanation (ii)the date of
completion of construction of the housing project shall be taken to be the date on which the
completioncertificateinrespectofsuchhousingprojectisissuedbythelocalauthoritybelow
Section80IB(10)(a).
f) As per Rule 18BBB of Income tax Rules, 1962, separate P & L account, balance sheet
andauditreporthastobefiledinrespectofeachenterpriseorundertaking(i.e.project)and
acopyofagreement/permission/approvalfromgovernment/localauthorityinrespectof
eachoftheapprovedeligiblebusinesshastobefiledwiththeauditreportinForm10CCBto
getthededuction.
g) As per Rule 18BBB (2), separate accounts have to be maintained for each project for
the purpose of claiming deduction u/s 80IB (10). Such separate accounts of the eligible
undertakingshallconsistonlyofitemsofreceiptandexpenditurehavingdirectnexustothe
housingprojectandnotitemsmerelyattributabletoit.Even AS7requirespreparationof
separate accounts for each project. In fact, if accounts of all projects are consolidated and
notseparate,profit/lossfromindividualproject/undertakingcannotbe calculated andit

328
will not give correct and complete financial result of individual project. Therefore if such
accountsarenotpreparedseparately,itmaybetreatedasincorrectnessfromtheviewpoint
oflawaswellasaccountancywhichmayhelpininvokingSection145(3).
h) Whethertheplotoflandislessthanoneacre(ifitisso,itisnoteligible).
i) Whether each residential unit is up to 1000 sq. ft. (in Delhi/Mumbai)/ 1500 Sq.
ft.(otherplaces)(ifmore,noteligible)
j) Thelimitof1000/1500sq.ft.isforbuiltuparea.Builtupareaisquitedifferentfrom
carpetarea.AOmustremainalertwhetherassesseeisclaimingdeductionmerelyshowing
carpetareasasupto1000/1500sq.ft.
k) Whether built up area of shops/commercial establishments included in that housing
projectisupto5%oftotalbuiltupareaor2000sq.ftwhicheverisless(morethanthatis
noteligible).
l) Whether the deduction is claimed only from the year in which there is profit from
developingandbuildingtheprojectandnotfromsomethingelse.
m) Whethertheprojectwascommencedafter01.10.98(otherwisenoteligible)
n) Thisdeductionisonlyfordevelopingandbuildinghousingprojects.Thereforethisis
available only to developers and builders and not contractors [it is clearer from
ExplanationbelowS.80IB(10)].Obviously,whereadeveloperhasengagedcontractor/(s),
it is only the developer who will get it, even if the contractor has done everything in the
projectonturnkeybasis.
o) Whether Profit deriving from the housing project is from sale of FSI/TDR is to be
considered[237ITR579(SC)relevant]
p) Profit eligible for the deduction has to be derived from the project and not merely
attributabletotheproject(ramificationsofthesetwotermsarediscussedinthecaselaws
givenbelow.
q) If the project is divided into several nearby plots each being less than one acre but
together being more than one acre, projects going on simultaneously (or not
simultaneously),allprojectsbearthesamenamebutPhaseI,PhaseIIetc.anddrawing,
approval etc. all were taken separately, then these should be treated as separate projects
andtheconditionofplottobeoneacreormoreshouldnotbetreatedasfulfilled.
r) Incaseofcompanies,forthepurposeofadjustedbookprofitu/s.115JB,deductionu/s.
80IB (10) is not deductible [some developers form firm with partnership of a few
companies including the flagship realty company to avoid MAT u/s 115JB and dividend
distributiontaxu/s115Oapartfromhigherrateoftaxandexposuretotheriskofattracting
S.2(22)(e);nowthetendencymayturntowardsLLPorLimitedLiabilityPartnershipfor
lowerrateoftaxandlimitedliabilityunlikeunlimitedliabilityofpartnershipfirm].
s) Amount received from flat owners for other facilities can be Profit derived from the
housingprojectonlyifsuchfacilitiesareintegralandinseparablepartofconsiderationof
flatasperagreement.
t) Income from property let out before completion of project is business income, that
after a house property income. If property is converted into a business centre and
consolidatedcompensationischargeditcanbetreatedasbusinessincome[(42ITR49(SC)
relevant].
u) Dateof approvalmeansdateofintimationofdisapprovalbylocalauthorityandnot
thedatementionedincommencementcertificateordateofsanctionofplan.
v) If club house, nursery, community hall (let out for marriage purpose) are used for
commercialpurposewherebydeveloperorapartmentownersassociationgetsrevenueand
not merely convenience purpose of the residents of the project, it attains character of
commercial property. The same has to be included for the purpose of calculating 5% or
2000sq.ftcommercialspacewhicheverislower.
w) Sometimesthedevelopermayselltwoadjacentflatstoallormostofthebuyers,who
afterpurchase,joinedthetwoflatstomorethan1000(Delhi/Mumbai)/1500Sq.ft.(other
places ), then AO should consider this as a device to avoid the conditions of Sec. 80IB. He
should see whether developer had the knowledge and/or active/ passive collusion in the

329
joining. He should see whether there are two electric connections, two mutations, two
memberships of apartment owners association, two independent dwelling units complete
with kitchen, bathroom etc. AO should ask about the names of the contractor/ carpenter/
mason/plumberetcwhoactuallydidthejobofjoiningandaskthemabouttheperiodwhen
thejobwasexecutedandwhosuperviseditwhetherdeveloperdidit.Ifdeveloperdidit,
hemaybedeniedthededuction.
x) Inspectormaybesentu/s142(2)ofIncometaxAct,1961forinquirytoseewhether
there is any evidence to show that joining of smaller flats into one of size bigger than
maximumpermissiblelimitwasdonebythedeveloper.

TaxliabilityofLandowners:
Sourcesofincome:
Saleproceedsofland
Saleproceedsofflats/constructedpropertyoutofownersallocation
Saleofeasementright
Proceedsonrelinquishmentofleaserightinunexpiredperiod/jointshare/
ReceiptsfromsaleofTDRcertificates.InMumbai,manyhousingcooperativesocieties,
have earned crore of rupees on this. As discussed above, this may not be considered
profitfromhousingprojecttoqualifyfor80IB(10).Inthatcase,itistaxablefully.
Dateoftransfermeanswhat?
Landowner entered into agreement (which was later held to be a Development
AgreementbytheHighCourt)forsaleofshareofpropertytoadeveloperon18/8/1994
with a right to develop the same. Pending completion of sale by execution of
conveyance, for the purpose of development, developer obtained various permissions
fromauthorities.Substantialpartofcontractwasperformedandseverallicenceswere
obtainedinFY199596.Asperclauseofagreementdated18/8/1994,sellergranted
irrevocable licence in FY 19992000 to buyer (developer) to enter the premise for
construction. Income tax department and the tribunal held that FY 199596 was the
yearoftransferu/s2(47)forthepurposeofcapitalgainsu/s45.ButBombayHigh
Court, in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491, held that here the relevant
provisionwasS.2(47)(v)asperwhichdateoftransfermeansdateofagreementinFY
199495 and not 19992000 as claimed by assessee or 199596 as claimed by Income
taxdepartment.
Landownermaygetlumpsumcashconsiderationorshareofconstructedareainlieuof
hisland.So,inhiscaseitwillbeacaseofcapitalgains.Again,whenhesellstheflats,it
willagainbecapitalgains.Valueofflatsreceivedwillbethesaleconsiderationreceived.
Sometimes landowner enters into joint venture in which he contributes land and
developer contributes construction capital. In exchange, landowner gets share in
constructedproperty.Insuchcase,itwillbebusinessincome.

Afewotherissues:
Assessee acquired land in 1970. Gave development rights to builder in FY 200405. Gave
possessionoflandaslicenseeforundertakingdevelopmentbyconstructingbuildinginFY
200405.ConstructioncommencedinFY200506.Hisshareofpropertyconveyedtohimin
FY200708.
Considerations:
Cash
5lakhwhenDAexecuted(FY200405)
5lakhwhenconstructioncommenced(FY200506)
5lakhatthetimeofconveyance(FY200708)
Inkind(atthetimeofconveyance)(FY200708)
1000sq.ft.commercialarea
1500sq.ft.residentialarea

330
Whenwilltaxliabilityattract?
TimewhenDAexecuted?
Timewhenpossessionoflandgiven?
Timeofconveyance?
Answer:
Atthetimeofgivingpossessionofland(FY200405).AsperSec.2(47)(v)transferis
complete when possession is given. So entire consideration, not only received amount
butalsoreceivableamount,istaxableintheyearinwhichthetransferiscomplete,i.e.,
FY200405.Sec.45saysshallbedeemedtobetheincomeofthepreviousyearinwhich
thetransfertookplace.Here,transfertookplaceinFY200405asperS.2(47)(v).
If later the deal is frustrated, assessee may probably get remedy from CIT v. Bokaro
SteelLtd.(1999)236ITR315(SC)andGodhraElectricityCo.Ltd. v.CIT([1997]
225 ITR 746) One has to consider subsequent developments to see whether a
transactioniscomplete.

331

14

Conversiontable

100decimal
45Sq.ft.
16Chhatak
20Kathas
1Bigha
1Katha
1Chhatak
1Sq.ft
Bigha
1
2
3
4
5
6
7
8
9
10

Inch
1
2
3
4
5
6
7
8
9
10
11
12(1ft)

=1Acre
=1Chhatak
=1Katha
=1Bigha
=33.05785124decimal
=1.65289256decimal
=0.10330578decimal
=0.002295604decimal
Acre
0
0
0
1
1
1
2
2
2
3

Cm.
2.54
5.08
7.63
10.16
12.70
15.24
17.78
20.32
22.86
25.40
27.94
30.48

Katha
1
2
3
4
5
6
7
8

Decimal
1.6529
3.3058
4.9587
6.6116
8.2645
9.9174
11.5702
13.2231

=3bigha8Chhatak

Decimal
33.0579
66.1157
99.1736
32.2314
65.2893
98.3471
31.4050
64.4628
97.5207
30.5785

332
9
10

14.8760
16.5289

Sq.ft.
1
2
3
4
5
6
7
8
9
10

Decimal
.0023
.0046
.0069
.0092
.0116
.0138
.0161
.0184
.0207
.0203

Chhatak
1
2
3
4
5
6
7
8
9
10

Decimal
.1033
.2066
.3099
.4132
.5165
.6198
.7231
.8264
.9298
1.0331

Decimal
1
2
3
4
5
6
7
8
9
10
40

Bigha

Katha

1
1
2
3
3
4
4
5
6
4

Chhatak
9
3
13
13
0
0
3
13
7
0
3

Sq.ft.
30.6
16.2
1.8
1.8
18
18
34.2
19.8
5.4
36
9

Metre
1
.9144
.3048
.0254
201.168
20.1168
Kilometre
1
.219456
.001829
.000305
1.852
1.609344

Yard
Foot
Inch
Furlong
1.09361
3.28084
39.3701
.004971
1
3
36
.004545
.333333
1
12
.001515
.027778
.083333
1
.000126
220
660
7920
1
22
66
792
.1

1Chain=4Rodds/Poles/Perches=100links.
CableLength
Falhom
Foot
4.5567
546.81
3280.84
.1
120
720
.008333
1
6
.001339
.166667
1
8.439
1012.7
6076.1
7.333333
880
5280

Sq.mtr.

Sq.yard

Sq.ft

1
.83613
.092903
25.2929
4046.86

1.19599
1
.111111
30.25
4840

10.7639
9
1
272.25
43560

Chain
.049710
.045455
.0015152
.001265
10
1
Mile
.62137
.13636
.001136
.000139
1.15078
1

Sq.Rod/
Pole
.039537
.033058
.003679
1
160

Acre
.000247
.000207
.000023
.00625
1

Bigha

.000747
.000625
.000069
.018906
3.025

333
1937.8
1Sq.mile
1are
1Cu.Metre
1Acre
1Hectares

1600

14400
=640acres

52.892562

.330579
1
=256.999Hectares

=100Sq.mtr
=35.315Cubicft.
=10Sq.chains
=2.47105Acres

334

Casescited

Page

ACIT v. Bengal Ambuja Housing Development Ltd (ITAT Calcutta) (2007) 39D 348
BCAJ546(ITAT,CalcuttaBench),appealdismissedinITAno.453/2006forlack
ofpointoflawbyCalcuttaHighCourt
ChintamanRaov.StateofMadhyaPradesh,AIR1958SC388,392
28,
60
CITv.B.M.Kharwar(1969)72ITR603(SC)
62
CITv.BokaroSteelLtd.(1999)236ITR315(SC)
358
CITv.CementDistributorsLtd.[1994]208ITR355(Delhi),
348
CITv.ChaturbhujDwarkadasKapadia260ITR491(Bom)
354
CITv.CochinRefineriesLtd.[1982]135ITR278(Ker.)
348
CITv.JaideepIndustries[1989]180ITR81(P&H)
350
CITv.MeenakshiMillsLtd(1967)63ITR609(SC)
62
CITvs.CalcuttaDiscountCo.Ltd.(1973)91ITR8(SC)
326
CITvs.GillandersArbuthnot&Co.(1973)87ITR407(SC)
326
DCITv.BrigadeEnterprises(P)Ltd(2008)14DTR371,(2009)28SOT7(ITAT 349
Bangalore)
GodhraElectricityCo.Ltd.
v.CIT([1997]225ITR746)
358
IndianOilLtdv.StateofBihar(1987)167ITR897(SC),AIR1986SC1780
349
ITOv.AirDevelopers(2008)ITANo.447/2007(ITATNagpur)
349
JuggilalKamlapatBankerv.CIT(1969)73ITR702(SC)
62
LibertyIndiav.CIT(2009)317ITR218(SC)
348
McDowell&CoLtdv.CTO(1985)154ITR148(SC)
62
PandianChemicalsLtdv.CIT(2003)262ITR278(SC)
348
Smt.AmiyaBalaPaulv.CIT(2003)262ITR407(SC)
184
SriRamalingaChoodambikaiMillsLtd.Vs.CIT(1955)28ITR952(Mad)
326
StateofOrissav.TitaghurPaperMillsCo.Ltd.(1985)TaxLR2948,2984,3006 28,
(SC)
60
SterlingFoodsLtd.v.CIT(1999)237ITR539(SC)
348
TuticorinAlcaliChemicals&FertilizersLtdv.CIT(1997)227ITR172(SC)
28
UnionofIndiav.AllIndiaServicesPensionersAssociation(1988)AIR1988SC 349
501,2SCC580
V.M.Salgaocar&Brothersv.CIT(2000)243ITR383(SC)
349

335

15

RealEstateDictionary

"asis"condition
Thesale,purchase,leaseorconveyanceofapropertyoriteminitsexistingstate,i.e.,
withoutanychange,improvement,addition,alterationorrepair.Alsocalledasis
whereisinsomecountries.
abandonment
Theactofvoluntarilygivinguparight(ofownershiporleaseoranyotherright)
overaproperty.
absolutetitle
Therightofownershipofalegalestateinregisteredland;atitlethatisguaranteed
bythestatethatnoonehasabettertitlethatissubjecttoanyminorinterestsor
overridinginterests.
abut
Adjacentorcontiguousto.Forexample,ifapropertyisadjacentornexttoanother,
theycanbesaidtoabuteachother.
accelerateddepreciation
Anaccountingtermindicatinganymethodofdepreciationwhichallowsownersto
claimdepreciationbenefitsatratesgreaterthanthosecalculatedunderthestraight
linemethod.
accelerationclause
Thisisaclauseinaloandeedormortgageagreementthatallowsthelenderto
demandfullandimmediaterepaymentofaloan.Itisusuallytriggeredbyanevent
suchasdefaultinthepaymentofinstallmentsorachangeintheownership.
accessright
Therighttoenterandexitonespropertyfromapublicroadorlandor
thoroughfare.Thisrightisusuallyimpliedinallpropertytransactionsinalmostall
partsoftheworld,i.e.,anytransactioninvolvingpropertyisdeemedtoincludethe
righttoenterandexitthatproperty.
accessorybuildings
Annexestoabuildingsuchasservantsquarters,sheds,garages,etc.
accumulatedamortization
Adeductionfromintangibleassetstoshowthetotalamountofperiodicchargesto
incomeovertheestimatedusefullivesofthoseassets.AlsocalledReservefor
Depreciation
accumulationindex
Financialindexreflectingtotalreturni.e.,priceappreciationandincomereturn
combined.
acquisitioncosts
Thecostofacquiringaproperty;includespurchasepriceandallotheralliedcosts
likeinsuranceandlegalfees,brokeragecharges,etc.

336
acre
Anareaoflandofanyshapecontaining43,560squarefeetor4,840squareyardsor
approximately4,047squaremeters.
acrefoot
Avolumeofspacecoveringoneacreandwithadepthofonefoot(43,560cubicfeet
or1,233cubicmeters).
acreage
Vacantland.Alsoreferstoanyplotoflandthatismeasuredinacresoranyplotof
landthathasnosubdivisions.
actofgod
Damagecausedbynature.Example:floods,hurricanes,tsunamis,etc.Alsoknownas
forcemajeure.Anunexpectedeventthatpreventsonefromcomplyingwithcertain
termsandconditionsinacontract.
actiontoquiettitle
Legalproceedingsthatconclusivelyestablishownershipoveraproperty.
actualcashvalue
Thepriceatwhichapropertycanbesoldatagivenpointoftime.
advalorem
Literally,accordingtothevalue.Applied,forinstance,toascaleofstampduty,
inheritancetaxorfees.
ADR(AdditionaldevelopmentRight)
Thesearegiventorehabilitateslumsorredevelopoldbuildingswithanintention
thatfromtheprofitthatgetsgeneratedoftheadditionalright,theredevelopment/
rehabilitationworkcanbeundertaken.
AdjustableMortgageLoans(AMLS)
Alsocalledfloatingrateloans,flexiblerateloans,variablerateloansandadjustable
rateloans.Here,therateofinterestvariesandisadjustedfromtimetotimeto
coincidewiththerateprevailingintheeconomyortoapredeterminedpeg.
adversegearing
Wherethetotalannualcostofborrowedmoneyonapropertyorprojectexceedsthe
netrentalincome.
airrights
Thisistherighttousethespaceaboveaproperty.Itdoesnotincludetherightto
usethelandsurfaceonwhichthepropertyislocated.
alienation
Totransfertheownershipofapropertyfromonepersontoanother.
Allodialtenure
Absoluterightofownershipoverrealestateassetswhichcanbebequeathed/sold/
giftedorotherwisedisposedofbytheowneraccordingtohiswishes.
alternativeuservalue
Thevalueoflandandbuildingswhichreflectsaprospectiveusewhichisdifferent
fromthatofthecurrentuse.
amortization
1)Theconceptofwritingoffthecapitalcostofawastingphysicalassetbymeansof
asinkingfund.2)Paymentofadebtinequalinstallmentsofprincipalandinterest,
asopposedtointerestonlypayments.

337
amortizationrate
Therateofinterestusedforpurposesofamortization.Thepercentageofaperiodic
paymentthatisappliedtothereductionoftheprincipal;inalevelpayment
mortgagethiscorrespondstothesinkingfundfactor
amortizationterm
Theperiod,usuallyexpressedasanumberofyearscoincidingwiththeusefullifeof
anasset,overwhichthevalueoftheassetiswrittenoff.
anchortenant
Oneormoredepartmentorvarietychainstores,supermarketsorhypermarkets,
introducedintoashoppingcenterinkeypositionstoattracttheshoppingpublic
intothecenterforthepurposeofencouragingotherretailerstoleaseshopsen
route.Thelargerthedevelopmentthemoreanchorsrequired.
ancillaryuse
Aplanningtermdescribingtheuseofapropertyinamannerdifferentfrom,but
functionallyrelatedto,itsmainuse.
annexure
Awrittenorvisualaddendumwhichisattachedtoalegaldocument(notnecessarily
anagreement),e.g.,floorplan,structuralcertificate,etc.
annualdebtservice
Amountsofprincipalanddebtrepaymentsdueperyear.
annualsinkingfund
Asinkingfundwherepaymentsandinterestaccumulatedarecalculatedyearly.
annuitymethod
Methodforappraisingthepresentvalueofapropertywhichtakesintoaccount
expectedfutureincomesbeforedepreciation.
antefix
Anuprightornamentalongtheeavesofatiledroof,whichconcealsthejoints
betweentherowsofthetiles.
apartment
Aformofpropertyownershipinwhicheachownerholdstitletohis/herindividual
unit,similartowesterndefinitionofcondominium.
appraisal
Alternativetermforvaluation.
appraiser
Onewhocarriesoutappraisals(valuations).ThetermisusedintheUSAforavaluer
arbitration
Amethodofresolvingadisagreementbetweentwopartiesbypresentingtheir
differentviewstoanindependentarbitrator.Theawardisbindingonthepartiesbut
anarbitratorsdecisioncanbechallengedinacourtoflawundercertain
circumstances.
assetallocation
Allocationofaportfoliobetweenrealestate,equities,bondsandcashbasedona
fundmanagersriskreturnpreferences.
assetmanagement
Activeapproachtoassetacquisition/disposalandpropertymanagementwiththe
objectiveofoptimizingassetperformance.
assetvaluation
Inthepropertymarket,thisexpressionisappliedtothevaluationoflandand
buildingsorplantandmachinery.

338
assign
Transferanyinterestortherightofownershipoverapropertyoranyotherasset.
assignee
Onewhoreceivestherightofownershipoverapropertyoranyotherasset.
assignment
Theactoftransferringownershipofsomethingfromonepersontoanother.
assignmentoflease
Thetransferbyalesseeofallhisrightsoveraleasedproperty.Insuchacase,the
assigneebecomesalesseeundertheoriginallessee.Someleasescontainclauses
specifyingtheconditionsunderwhichleasescanbeassigned.Assignmentofleaseis
differentfromsubleaseandthetwoshouldnotbeusedassynonyms.
assignor
Thepersonwhoassignsanagreementtoanother.
assumptionfee
Thefeechargedbyalenderforprocessingthepaperworkrequiredfortransferring
anexistingloantoanotherperson.
assumptionofdeedoftrust
Agreementbywhichabuyeragreestotakeovertheliabilitiesforthepaymentofan
existingmortgageordeedoftrust.Thelenderusuallyhastoapprovethebuyer
beforesuchatransactioncangothrough.
atrium
Alarge,centrallylocatedhallinabuildingwhichisopenallthewaythroughtothe
roof,whichisusuallymadeofglassorothertransparentmaterial.Thisallowslight
tostreamin.
attic
Thespacebetweentheceilingandroofofastructure.
AverageDailyRate(ADR)
Roomrevenuedividedbyroomssold.
backfill
Torefillgroundthathadbeendugupforconstructionordevelopmentpurposes.
backupoffer
Secondaryoffermadetoprotectonesinterestsincasethefirstofferfails.
balloonpayment
Arepaymentofaloanorbond,usuallybutnotnecessarilythefinalrepayment,
whichislargerinamountthantheprecedingorearlierinstallments.Thiskindof
arrangementisreferredtoasballooningaloan.
bareshell
Propertythatisdeliveredtobuyerwithoutdecoration.
baserent
Theminimumrentforacommercialpropertywithouttakingintoaccountanyadd
onslikepercentageofsales/profitthatmakeupthetotalleasepackage.
baserentabatement
Duringanyperiodofreconstructionorrepairafteramajorcasualty,ifthelessees
abilitytoconductbusinessinthedemisedpremisesismateriallyhinderedor
impaired,thebaserentandanymaintenancechargesduefromthelesseewillabate
duringtheperiodinwhichthedemisedpremisesisunusable.
basement
Anundergroundorpartiallyundergroundlevel,belowthegroundfloorofa
building.

339
bedrock
Solidrockbelowtheearth.
beneficialestate
Estateorpropertytheownershiporenjoymentofwhichwillvestintheintended
beneficiaryafteraperiodoftime,usuallyintermsofawilloratrustdeed.
beneficialinterest
Aninterestinpropertyheldbyabeneficiarywhoisnotnecessarilytheownerofthe
legalinterest,eg.,wherealegalestateisownedbyatrustee(trustees)underatrust
entitlingthebeneficiarytothefinancialrewardsavailableaftermeetingalldue
obligations.
beneficialowner
Apersonenjoyingorentitledtopropertyforhisownbenefit,not,forinstance,asa
trusteewhoholdsthelegalestateinlandforthebenefitofanother.Theownerofthe
legalestateisusuallythebeneficialowner,butifthelegalestateisvestedin
trustees,thebeneficialownerhasonlyanequitableinterest.Heisthenknownasthe
beneficiaryorcestuiquetrust.
BillofQuantities(BoQ)
Ascheduleofalllabourandmaterialitemsrequiredtoconstructafacilitythatis
pricedonanitemizedbasis.
billofsale
Adocumenttransferringpropertytoanother.
bridgefinancing
Aloanwhichisgenerallygiventoallowtheborrowertotideoversomeimmediate
requirementwhileheawaitsamorepermanentorlongtermsolutiontohis
financialneeds.
brownfield
Alandthatispreviouslyusedforindustrialpurposesorcertaincommercialuses,
whichmaybecontaminatedbylowconcentrationsofhazardouswasteorpollution.
Ithasthepotentialtobereusedonceitiscleanedup.
bufferstrip(bufferzone)
Portionorstripoflandbetweentwoareas.
builder
Onewhobuildsbuildings.
builderbond
Abondissuedbyabuildertoensurethecompletionofabuilding(seebank
guarantee).
BuildingApplication(BA)
Anapplicationtothelocalauthorityrelatingtothedetaileddesignandconstruction
ofaproposedbuilding.
buildingcode
Alistoflaws,conventionsandpracticesthatgoverntheconstructionand
maintenanceofrealestateassets.
buildingcompletiondate
Thedateprovidedbythelandlordbywhichdatethebuildingismadeoperationalin
allaspectsincludingallonsiteandoffsiteworks(describedindetailinthe
agreement),obtainingthenecessaryapprovalsincludingOccupationCertificate,for
thedemisedpremisestobeoccupied.
buildinginsurancereplacementcost

340
Theestimatedconstructioncostsofareplacementbuilding.Itistobecoveredbythe
insurancepolicyagainstlossesduetostructuraldamagecausedbyfireonlyand
doesnotincludeanyconsequentiallossandliabilitiestothirdparties.
buildinglifecycle
Aconceptcomposedoffourstagesformingacontinuousloop:
design/refurbishment,construction,management,andreview.
buildingline
Thelineonastreetorareabeyondwhichnoconstructioncantakeplace.Itspurpose
istoensurethatbuildingsarenotbuilttooclosetoeachotherortothestreet.
buildingresidualtechnique
Amethodofdisaggregatingthevalueoflandfromthetotalvalueofapropertyto
arriveatthevalueofthebuilding.
builtins
Utilitarianitemslikecupboards,bathtubs,stoves,ovens,etc.,thatarebuiltintothe
buildingsoastomakethemimmovable.
Builtuparea(BUA)
Builtupareaincludestheareaoccupiedbythewallsofaproperty
businesspark
Anintegrateddevelopmentwherebybusinessesareprovidedwithcommon
infrastructure,facilitiesandservices.Thisresultsinlowercostsand,therefore,
greatercompetitivenessforindividualbusinesses.
buyersmarket
Inthepropertymarket,aconditionofsupplyanddemandinwhichthoseseekingto
purchaseareinarelativelystrongnegotiatingpositionbecauseofadegreeof
oversupply.
bylaws
Internalrulesthatgoverntheactivitiesofacompany,associationorsociety.
loan.InIndiaandsomeothercountries,italsoreferstoaninformalshortterm
intercorporateloanmarket,wheremoneyislentandborrowedbylargecompanies
basedonverbalagreementsbetweentheparties.
call
Ademandforrepaymentofacalldate
calloption
Acontractwherebyonepartyhastheoptiontopurchasetheotherpartysinterest
inaproperty,usuallywithinaspecifiedtime,atastatedorcalculablepriceand/or
indefinedcircumstances.Itisbindingagainstathirdpartyonlyifregisteredasan
estatecontract.
capitalimprovement
Workcarriedoutonanassetwithaviewtoenhancingitsvalue,butnotincluding
repairsormaintenance
capitalvalue
Theoverallvalueofapropertyasdistinctfromitsannualperiodicreturn.Capital
valuemaybeestablishedinanumberofdifferentways.Inthesimplestcaseitis
calculatedbymultiplyingtheannualreturn(netrent)bytheinverseoftheyield.
capitalization
Theestimationofapropertysvalueonthebasisofitsearningcapacity.
capitalizationapproach
Referstoamethodofcomputingthecapitalvalueofapropertybymultiplyingits

341
netannualincomebytheinverseofthecapitalizationrate.Alsoknownasthe
InvestmentMethodofValuation.
capitalizationrate
Theyieldatwhichthenetincomefromaninvestmentisdiscountedtoascertainits
capitalvalueatagivendate.
capitalizationratio
Therelationshipthateachsecurity(debtorequity)bearstototaldebtandequity,
lessintangibleassets,expressedasaratio.
capitalizedvalue
Thepresentvalueofapropertyasdeterminedbycapitalizingitsfutureestimated
income.
carpetarea
Carpetareaofapropertyisdefinedasthenetusablearea,fromtheinnersidesof
onewalltoanother.Theexpressioncarpetareashallmeanandcompriseofthe
following:thecarpetareaofthedemisedpremise,toiletareaswithinthedemised
premises,AHUroom/swithinthedemisedpremisesanddedicatedserviceareasfor
thedemisedpremises.
carryingcharges
Thecostofmaintaininganincomeproducingpropertyduringperiodswhenitisnot
doingso,eg.,maintenancecostsofanewhousethathasnotyetbeenleased,orthe
costofmaintainingahousebetweentwoleases.
cashaccounting
Asystemofaccountingwhichtakesintoaccountincomesandexpendituresonly
whenmoneyexchangeshandsandnotwhentheyaretransacted.
cashback
Apaymentmadebyapropertyownertoaprospectivetenanttosecurealettingin
timesofoversupplyontermswhichwouldotherwisebeunacceptable.Inessenceit
canberegardedastheoppositeofapremiumand,assuch,isaformofreverseor
negativepremium.
cashflows
Theactualorestimatedmovementofmoneybywayofincomeandoutgoingsduring
thelifeofaproject.
cashflowsanalysis/statement
Cashflowportrayedasatableofsuccessiveperiods,eg.,monthly,quarterlyor
yearly.Ithasmanyapplicationsrelatingtofinancialviability,eg.,forecastingloss,
breakevenorprofit;discountedcashflowexercises;orasabasisforbudgetcontrol.
catchmentarea
Areaservedbyacommercialpropertysuchasamallormarket,oranareaserviced
byaschoolorahospital.Alsomeanstheareadrainedbyariver.
causeway
Raisedroadusuallyacrosslowlyinglands.
caveatemptor
Latinforbuyersbeware.Legaltermmeaningthequalityriskinatransactionvests
withthebuyer,unlessspecificallystatedotherwiseorunlessfraudordeceptioncan
beproved.
cavitywall
Twobrickwallsjoinedatthetopandhollowinside.
cc&rs(covenants,conditionsandrestrictions)
Limitsandrestrictionsplacedonproperties.

342
centralbusinessdistrict(cbd)
Thefunctionalcenteraroundwhichtherestofacityisstructured.Characterizedby
thepresenceofcomparisonshopping,officeaccommodation,leisurefacilities,
buildingsforrecreationaluse,publicmuseums,artgalleriesandgovernmental
functions.
centralcity
Maincityofaclusterofcities.Alsomeansthedowntownareaofacity.
certificateofoccupancy
Certificateissuedbyalocalauthoritystatingthatabuildingisfitforoccupation.
certificateofpracticalcompletion
Underabuildingcontract,acertificateissuedbythearchitect,surveyoror
supervisingofficerstatingthattheworkshavebeensubstantiallycompletedandthe
buildingisreadyforoccupation.Thiscertificatewill:a)releaseanagreed
percentageofanyretentionmoney;b)beginthedefectsliabilityperiod;andc)
transferresponsibilityforinsurancefromthecontractortotheemployer.
certificateofpurchase
Certificateissuedtoabuyer,usuallyfollowingacourtorderedsale,statingthathe
haspurchasedacertainproperty.Thebuyerwillbeentitledtotransferthetitleto
thepropertytohisownnameiftheoriginalownerdoesnotredeemtheproperty
withinaspecifieddate.
chainoftitle
Thechronologicallistofownersofapropertysincetheearliestrecordstothe
presenttimes.
channel
Apassagewayforthepassageofwiring,sewage,waterorgas.Achannelmaybe
openorcovered,onthegroundorunderground.Alsomeansalong,openended
depressionthroughwhichwaterflows.
charge
Actsasanencumbranceontitleandinvolvesnotransferoftitleto,orofpossession
of,thepropertyassecurityfortheloan.Thepropertyisdesignatedasthatwhichcan
betakeninexecutionofthedebtondefault.
chattel
Apropertyotherthananinterestinland.Property,otherthanrealestate,ownedby
anindividual.Alsocalledpersonalproperty.
classaction
Legalactionbroughtbyagroupofpeoplewhohavesimilarclaimsagainsta
commonparty.
clearheight
Theverticaldimensionfromthefinishedfloorleveltothelowestundersidepointof
therafterorfiresprinklers.
cleartitle
Unencumberedtitletorealproperty,againstwhichtherearenoclaims,mortgages,
voluntaryliens,etc.
clearinghouse
Aplacewhere,atagreeddates,transactionsofacommercialnaturearesettledby
financialpaymentswhichequalthenetresultofanytransactionscarriedoutby
partiesconcernedsincethelastdate.Inparticular,thatpartofafinancialmarketfor
commodities,securitiesorotherassetswhicharrangesforsettlementsof
transactionsatregularintervals.

343
collateral(security)
Traditionallyusedtomeansomesecurityinadditiontothepersonalobligationof
theborrowerbutcommonlyusedtorefertoasecurityprovidedinadditiontothe
principalone.
commercialmortgagebackedsecurity(CMBS)
Securityissuedonaportfolioofloans,eachofwhichissecuredbycommercial
property.
commission
Thepaymentofapercentageofthedealvalueascompensationtoabrokerfor
servicesrendered.
CommitmenttoInsure
Apromisebyatitleinsurancecompanytoinsureanybuyerataspecificpremium
uponpurchase.
commonarea
Thespacewithinashoppingcenterorotherestateorcampustypedevelopment
whichisnotintendedtobelet.Itmayincludelandscapedareas,pedestrian
precinctsandservicefacilities.
commonwall
Wallseparatingtwopropertiesownedbydifferentpeople.
communityproperty
propertiesownedcollectivelybytheresidentswhereindividualmembersofthat
communityhavetherighttousethatpropertybutnorightofindividualownership
orsale.Thetransferofsuchpropertiesisnotallowed.
comortgagor
Whenmorethanonepersonsignamortgage,theyaresaidtobecomortgagors.
Alsomeansthepersonwhoguaranteestherepaymentoftheamountsdue,who
signsthemortgagedeedalongwiththepersonreceivingthemoney.
completioncertificate/statement
Certificatefromalocalauthoritystatingthatabuildingunderconstructionisready
andcomplete.
computerlisting
Alisting(ofrealestate,amongotherthings)doneontheinternetthatallowsany
usertozeroinontheirrequirements(areaofapartment,numberofrooms,etc.).
concealedheating
Heatingsystemwhichpasseshotair,steamorhotwaterthroughanetworkofpipes
orcoilsconcealedinwalls,ceilingsorfloors.
conditionprecedent
Aconditiontobeperformedbeforeanagreementbecomeseffectiveorsomeright
vestsoraccrues.
conditionalsaleofrealproperty
Landsalewheretheconsiderationamountispaidininstallments.Thetitlevests
withtheselleruntilthefullamountispaid.Thebuyerhasonlyequitabletitleuntil
hepaystheagreedamountinfull.
conditionalsalescontract
Saleofrealestatewherethetitleremainswiththeselleruntilthebuyerfulfills
certainconditions.
condominium
Agroupingofapartmentblocksorotherbuildingswithseveraldwellingunits,
usuallywitharangeofsharedfacilitiessuchasswimmingpools,tenniscourts,

344
healthclubandlandscapedgardens,etc.Eachunitisownedbyadifferentperson;
andthecommonareasarejointlyownedbyallsuchindividualowners.
condominiummap(plan)
Mapshowingthecommonandprivateareasinacondominium.
condominiumownersassociation
Abodyformedbytheownersofindividualdwellingunitsinacondominiumthat
looksafterandmaintainsthecommonservicesessentialfortheuseofthe
condominium.Italsorepresentsthecommoninterestsofindividualdwellingunit
ownerswithoutsiders.
conduit
Channelthroughwhichsomethingelsepasses.
consideration
Strictlythepayment,promise,object,orforbearancegivenbyonepartytoacontract
inreturnforapromiseorpledgegivenbytheotherparty.Inpropertylaw,theterm
isappliedparticularlytothepriceofferedbythepurchaserinacontracttoacquire
aninterestinland.
consolidation
Themergeroftwoormorepropertiesintoone.
constructioncost
Thetotalcostofbuildingastructureorhouse.
constructionloan
Loantakentofinancethecostofconstruction.
constructionmanagement
Whereacontractorisengagedtomanagetheconstructionofaprojectforanagreed
feeandthetradecontractorsareengagedeitherdirectlybytheclientoronanopen
bookbasis.
consumerpriceindex
Officialindicatorofpriceindexofitemsusedbyapersoninhisdailylife.
contemporaryarchitecture
Modernarchitecturaldesign.
contiguous
Borderingon.
contingency
Somethingthatdependsonsomethingelsetohappen.
contingentfees
Feesthatarepaidonlyifsomeeventtakesplaceinfuture.
contract
Legallybindingagreement.
contractforsale
Ofland:Anagreementwherebytheseller(vendor)agreestotransferaninterestin
landtoapurchaserforaconsideration.Theagreementiseffectedbytheexchangeof
copiesoftheagreementdocumentbetweentheparties.Rightstopossessionarenot
conferreduponthepurchaseruntilthepurchaseiscompleted,butthepurchaserhas
aninsurableinterestinthepropertyfromexchangeofcontracts.Anonreturnable
depositisusuallypaidbythepurchaseronexchange.
Ofgoods:Thetransferofownershipofchattelsfromasellertoabuyerforamoney
pricewhereownershipistransferredimmediately.
contractrent
Theamountofrentstipulatedintheleasecontract.

345
contractionrights
Acollectivenameforanyclauseinaleaseallowingatenanttoreduceinsizeeither
temporarilyorpermanently(eg.,sublease,surrender,etc.).
contractor
Onewhoundertakestobuildabuildingorotherstructureinreturnforafee.
contractorsoverhead
Overheadexpenseslikecostofoffice,interestcosts,etc.,thatacontractorhasto
incur.
convey
Totransfertitle.
conveyance
Theactoftransferringtitle.
conveyancetax
Taxleviedbythe(usuallylocalorstate)governmentonthevalueofapropertysale.
conveyancing
Thelegalproceduresemployedinthecreation,transferandextinguishmentof
ownershipofinterestsinland,includingpreparationofcontracts,enquiries,
searches,landregistration(whereappropriate)andcompletionofthetransaction.
cooperativeapartment
Aformofapartmentownershipwherethepropertyitselfisnotsold;onlysharesin
thecompanywhichowestheapartmentaresold;oneshareentitlestheownertoan
apartment.
cornerlot
Apropertylocatedatthecrossingoftwostreetsandhavingafrontageonboth.
CorporateRealEstate(CRE)
Concernedwithpropertyrelatedinfrastructurewhichisintegraltotherunningofa
business.
corridor
Alongpassageinabuildingusuallywithroomsoneitherside.
cosignatory
Someone,usuallytheguarantor,whosignsamortgagedeedalongwiththeperson
takingaloan.Theliabilityfortheloanfallsuponthecosignatoryincasetheloanee
defaults.
costreport
Aregularreportthatmonitorsthecommitmentandexpenditureagainstthebudget
andmayforecasttheanticipatedfinalcost.
costbenefitanalysis
Amethodortechniquetoassistindecisionmaking,involvingtheconsiderationand
measurementinfinancialtermsofallcostsandbenefits,includingsocialaspects,
whencomparingalternativeprojectsorcoursesofaction.
costoflivingclause
Aclauseinacontract,eg.aleaseprovidingforadjustmentinprice,rentorother
financialitembaseduponanindexsuchastheRetailPriceIndex.
costpluscontract
Abuildingcontractwherethepriceisbasedupontheestimatedoractualcostofthe
workstogetherwith(i.e.,plus)aproportionoragreedamounttorepresentthe
contractorsprofit.
cotenancy
Tenancytakenonbytwoormoreparties.

346
cotrustee
Jointtrustee.
counteroffer
Arivaloffermadeinresponsetoaninitialoffer.
covenant
Anyagreementwhetherwrittenorimpliedbetweentwoparties.
covenantofquietenjoyment
Clauseinaleasewhichguaranteespeacefulpossessiontoatenant.
covenantsrunningwiththeland
Easementsthatpasswiththetitletotheland.
criticalpathanalysis
Amanagementtechnique(especiallyinprojectmanagement)wherebyaprojectis
analyzed,anditsactivitiesandevents(anactivitytakingplacebetweentwoevents)
areportrayedasanetwork.Thenetworkmaybeusedtodemonstratetheprojects
duration.
crosssection
Graphicrepresentationofasectionformedbyaplanethatcutsanobject,usuallyat
rightanglestoitsaxis.
crossdocking
Apracticeinthelogisticsofunloadingmaterialsfromanincomingsemitrailertruck
orrailcarandloadingthesematerialsinoutboundtrailersorrailcars,withlittleor
nostorageinbetween.Thismaybedonetochangethetypeofconveyance,tosort
materialsintendedfordifferentdestinations,ortocombinematerialsfromvarious
origins.
crosseasements
Mutualeasementsannexedtotwoadjoiningtenements,eg.,mutualrightsofsupport
betweentwocontiguousbuildingsindifferentownership.
cubiccontent
Thetotalvolumeincubicfeetofabuilding.
cubicfoot
Thetotalvolumeenclosedbyacubethatis1footlongx1footwidex1footdeep.
35.3cubicfeetisequivalenttoonecubicmeter.Ametricunitofvolume,commonly
usedinexpressingconcentrationsofachemicalinavolumeofair.
cubicyard
Thetotalvolumeenclosedbyacubethatis1yardlongx1yardwidex1yarddeep.
1.3cubicyardequalsonecubicmeter.
culdesac
Astreetthatisopenatoneendonly.
culvert
Drainageditchwhichpassesunderaramporroad.
curabledepreciation
Buildingrepairswhicharenecessaryformaintainingthevalueofapropertybut
whichhaventbeenmade..
curbline
Thelineseparatingthesidewalkorfootpathfromtheroad.Alsocalledkerbline.
currentassets
Accountingtermforcashinhand,checksinclearance,shorttermdebtorsandother
assetswhichareeasilyencashable.

347
currentliabilities
Shorttermdebts.
currentratio
Therelationshipofcurrentassetstocurrentliabilities,expressedasaratio.
currentyield
Theactualannualreturnsinpercentagetermsfromaninvestment.Forexample,ifa
bondwithamarketvalueof$1,000givesanannualreturnof$75,itscurrentyieldis
7.5percent.
curtainwall
Exteriorwallwhichlendsnostructuralsupporttoabuilding,butactsmerelyto
enclose.
damages
Moneythatcourtsorderpartiestopayascompensationforsomelosstheyhave
causedtoothers.Alsomeansadeclineinthequalityofmaterialduetobreakage,
leakage,etc.
datum
Referencepointagainstwhichpositionsareplottedormeasured.
datumline
Lineusedtomeasureheight.
deadload
Weightofatruckorbuilding,includingallpermanentlyaffixedstructureor
appliancesbutnotincludingtheweightofthingsthatareplacedonorinit.
deadendstreet
Roadorstreetthatendsabruptlyatapermanentobstacle.Streetwheretheentry
andexitpointisthesame.
decibel
Ameasureoftheloudnessofsound.
decliningbalancemethodofdepreciation
AlsoknownasthewrittendownvalueorWDmethodofdepreciation.Inthis,afixed
percentageoftheresidualvalueofanassetiswrittenoffeveryyear.
dedicated
Thegiftofprivatepropertyforpublicuse.Alsomeansstructureorequipmentthatis
usedforasinglepurposeonly.
deed
Legaldocument,usuallypertainingtotheownershipofaproperty.
deedoftrust
Documentrecordingthetermsofatrust.
defectivetitle
Titlethatisflawed.
defectsliabilityperiod
Aspecifiedterm(normally12months)followingpracticalcompletionofafacility
whenthecontractorremainsresponsibletorectifyanydefectivework.
deferredmaintenance
Repairsthatarerequiredtorestoreapropertytogoodcondition.
demise
Oldexpressionforalifelonglease.
demisedpremises
Definedintheagreementastheactualareabeingtakenonleaseorlicenseor
outrightpurchase.

348
departmentstore
Usuallyamultilevelretailpropertyvaryinginsizefromonesellinganextensive,
butnotcomprehensive,varietyofgoodsinatleast6,500squaremeters(70,000
squarefeet)grossfloorspacetoonesellingafullrangeofdifferentlinesrequiring
about23,000squaremeters(250,000squarefeet)ofgrossfloorspace.Adistinctive
featureofadepartmentstoreisthatitstocksasignificantamountofclothingand
householdgoods.
Design&Construct(D&C)contract
Anagreementwithapartytoprovidethedesignandconstructionnecessaryto
createafacilityforafeebasedonadetailedbrief.
designandbuild(D&B)
Atypeofprocurementmethodwherebytheownerentersintoasinglecontractwith
oneentitywhoisresponsibleforboththearchitectural/engineeringdesignand
constructionworksoftheproject.
deskvaluation
Atermindicatingavaluationofapropertybysomeonewhohasnotmadeaphysical
inspectionofapropertyforthatpurpose.Manybelievethatnopropertycanbe
valuedunlessithasbeenphysicallyinspectedatthetimeofvaluation.
developer
Anentrepreneurwhohasaninterestinaproperty,initiatesitsdevelopmentand
ensuresthatthisiscarriedout(foroccupation,investmentordealing)andfromthe
outsetacceptstheultimateresponsibilityforprovidingorprocuringthefunds
neededtofinancethewholeproject.
developersprofit(orloss)
Theamountbywhich,oncompletionorpartialcompletionofadevelopment,the
estimatedvalueorthepricerealizedonsaleofadevelopersinterestexceeds(oris
lessthan)thetotaloutlay,includingsuchfigureforthelandasisconsidered
appropriateinthecircumstances(includingaccruedinterest).
developersriskandprofit
Inaresidualvaluationtheamountwhichisallowedtocoverboth:a)anestimateof
thesumneededtoreflecttheriskelementbetweenthevaluationdateandthe
completionofthedevelopmentprogram;andb)anamounttomeetthedevelopers
requirementforprofitontheventure.
DevelopmentAgreement
Agreementwithlandownerfordevelopmentoflandpropertywhichincludes
constructionactivity
DevelopmentApplication(DA)
Anapplicationtothelocalauthorityforanydevelopmentconcernedwith
establishingtheprincipleofaproposedlanduseasopposedtothedetailsofa
particularbuildingwhichisthesubjectofthebuildingapplication.
directproperty
Directownershipand/orcontrolofphysicalproperty.
directvacancy
Vacantspacewhichisavailableforleasedirectlyfromthepropertyowner.
disclaimer
Therenunciationof:1)arightorclaim;2)aninterestinproperty,eg.,theliquidator
ofacompanymaydisclaimanonerousleaseheldbythecompany;3)apossible
obligationorresponsibility,eg.,inasurveyreporttherenunciationofresponsibility
fortheconsequencesofnonnotificationofdefectsininaccessiblepartsofabuilding.

349
discoveryofdocuments
Thecompulsorydisclosureofrelevantdocumentsheldbyonepartytotheopposing
partyinacivilactionorarbitration.
distresssale
Saleofpropertyinordertoraiseacutelyneededcash.
distributedload
Weightthatisdistributedoveragivenarea.
divisionwall
Wallthatseparatestwobuildingsorrooms.
dockleveler
Avariablegrade(mechanicalorhydraulic)rampthatisusedasabridgebetween
theraisedloadingdockinthefinishedfloorlevelandavehiclesloadingbed.Adock
levelermustbeabletosupportextremelyheavyloads,mustbeabletoservicea
widerangeoftrailerbedheights,andaccommodateunevenlydistributedloads.
domicile
Legaltermindicatingtheplaceorcountryinwhichoneispermanentlyresident.
dominantestate
Landwhichdoesnothaveaccesstoapublicroadwhichisgivenarightofway
throughanadjoiningland.
doubleglazing
Windowhavingtwoglasspaneswithairinbetweenforimprovedthermaland
soundinsulation.
downpayment
Asumofmoney,whichispartofthepurchaseprice,paidimmediatelywhenthe
optiontoapropertypurchaseisexercised.
downtown
Themainbusinesshubofacity.
draftcurtains
Fireproofmaterialattachedtotherooforwallsofabuildingthatstopfiresinone
sectionspreadingtoothers.
drainage
Systemforcarryingliquidwastesawayfromanarea.
drawdown
Partofaconstructionloanthatisreleasedontheachievementofpredetermined
milestones.
driveway
Privateroadleadingfromaroadorpublicplaceuptoahouse.
drymortgage
Amortgageinwhichthemortgagorhasnopersonalliability.Themortgaged
propertyistheonlysecurity.
drywallconstruction
Constructiontechniqueinwhichlittleornowaterisusedintheerectionofthewalls
insideabuilding.Prefabricatedorothersheetsareusedforthesewalls.
dualagency
Anagentwhorepresentsandispaidcommissionsorconsiderationbybothbuyer
andseller.
dualuseapartment
Apartmentthatcanbeusedasbothresidentialandsmallofficeorshop.

350
ducts
Aconduitforthepassageofelectricwires,liquidsorgasfromonepartofabuilding
toanother.
duplex
Buildingwithtworesidentialunits,orahouseorapartmentspanningtwofloors.
dutchauction
Anauctionatwhichtheproceedingscommencewiththeauctioneerquotinga
higherpricethanhemightreasonablyexpecttoreceive.Ifheisunabletosecurean
acceptanceatthatfigurehewillreducethefigurebystagesuntilsomeoneaccepts.
Theacceptoristhenlegallyobligedtoproceedwiththepurchase.
dwellingunit(dwellinghouse)
Houseorapartmentwhereoneresides.
E.B.I.T.D.A
Earningsbeforeinterest,tax,depreciationandamortization.
earnestmoney
Asumdeposited,beforeanagreementisbindinginlaw,byoneofthepartieswith
theotherasanindicationofhisgoodfaithandhisintentiontohonorthetermsof
theagreement,eg.,aprecontractdeposit.
easement
Theright,eitherexpressedorimplied,thatonehasoveranotherpersonsproperty.
eaves
Thatpartofaroofthatextendsbeyondthewallsofabuilding.
ecologicalfootprint
Ameasureofhowmuchoftheearth'sproductivelandandwaterisrequiredto
supportaneconomyorpopulationataspecifiedstandardofliving.
EcologicallySustainableDevelopment(ESD)
Thedesignanddevelopmentofabuiltenvironmentthatwillhaveareduced
negativeimpactonthenaturalenvironment.
economiclife
Thetimeduringwhichanassetcontinuestogivefinancialreturns.
economicobsolescence
Thedeclineinvalueofapropertyduetoitscondition.
economicrent
Marketvalueofrentatagivenpointoftime.
effectiverent
Actualrentplusotherexpenseslikemaintenanceandotherservicechargesthat
increasethetotaloutgoingforthetenant.
effectiverental
Rentalpaidbyatenantaftertakingintoaccountincentivesofferedintheleasingof
space.
effluent
Liquidindustrial,urbanorhumanwastethatflowsthroughsewers.
egress
Theactionofleavingorexitingaproperty.Alsomeanstherighttouseanother
personslandorproperty.
elevation
Theviewofthefrontalfaadeofabuilding,ortheheightofaplaceabovesealevel.

351
emergencywarningandintercommunicationsystem
Acombinationofemergencywarningandintercommunicationsystemthat
facilitatestwowaycommunicationsandcontrolinanemergency.
eminentdomain
Rightofthestateoranyofitsinstrumentalitiestotakeprivatepropertyforpublic
useuponpaymentofjustcompensation.
encroachment
Unauthorizedextensionoftheboundariesofapieceoflandoveradjoiningland
whichbelongstoanother.
encumbrance
Claimsorliensonabuildingorproperty.
endloan
Thepostcompletionloanonaproperty.
endorsement
Thetransferofanoteorcheckbytheholderofthesametoanotherbytheactof
signingonthebackofthesaidinstrument.
energyreduction
Improvingtheefficiencyofbuildingoperationswillreducetheamountofenergy
thatisconsumed.
equitylinkedmortgage
Atitledeedofapropertythatisheldasamortgagewithoutanytransferoftitle.
equivalentyield
Itisaweightedaverageoftheinitialyieldandreversionaryyieldandrepresentsthe
returnapropertywillproducebaseduponthetimingoftheincomereceived.In
accordancewithusualpractice,theequivalentyields(asdeterminedbythegroups
externalvaluers)assumerentreceivedannuallyinarrearsandongrossvalues
includingprospectivepurchasers,cost.
escalationclause
Aclauseinaleaseagreementoranagreementforsaleprovidingforanincreasein
rentoranincreaseinthepriceofanapartmentorbuildingintheeventofcertain
eventoreventshappening.
escrow
Adeedwhichissigned,sealedandconditionallydeliveredbutdoesnotbecome
operativeuntiltheconditionhasbeenfulfilled.Inthemeantimeitisusuallyheldby
athirdparty.
estate
1)Aninterestheldinland.Suchinterestisgenerallyclassifiedaseitherfreeholdor
leasehold.2)Incommonusage,synonymouswithlande.g.estateagent.
estateagent
Onewhoactsfor,andusuallyadvises,aprincipalinrespectoftransactionsinvolving
realestate,eg.,salespurchases,lettings,etc.
estimatedusefullife
Theperiodoftimeoverwhichtheownerofanassetestimatesthatthatassetwill
continuetobeofproductiveuseorhavecontinuingvalue.
exchangeofcontracts
Thefirstformalandlegallyenforceablestepinthedisposalofrealproperty,i.e.,
whenthepartiesdulysignandexchangecopiesofadocumentembodyingtheterms
ofthedeal.

352
exclusiveagencyagreement
Anagreementthatprohibitsaprincipalfromappointingmorethanoneagent.An
agreementthatgivesanagentexclusiverightstodealonbehalfofaprincipal.
exclusivelisting
Contractbetweenprincipalandbrokerwhereintheformeragreestopaythelattera
certainsumofmoneyregardlessofwhetherthelatterplaysaroleintheexecution
ofthetransaction.
execute
Tocompleteatransaction.
execution
Theactofsigningadocumentinsuchawayastomakeitlegallyenforceable.Inthe
caseofadeedthisisachievedinthetimehonoredwayofsigning(inthepresenceof
witnesses),sealinganddelivering.
executor
Thepersonappointedbyatestator(makerofawill)tocarryoutinstructions
containedtherein.
expansionoption
Lesseesrighttotakeadditionalspacewithinthebuilding.
exportprocessingzones
Establishedspecificallyforthemanufactureandexportoffinishedproductdesigned
forexport.
expropriation
Eminentdomainornationalization.
extendedcoverage
Insurancetermmeaningcoveragethatextendsbeyondthatprovidedbyastandard
policy.
externalvaluer
Forthepurposeofassetvaluations,aqualifiedvaluerwhoisnotaninternalvaluer
andwhereneithertheynoranyoftheirpartnersorcodirectorsaredirectorsor
employeesofthecompanyoranothercompanywithinagroupofcompaniesorhave
asignificantfinancialinterestinthecompanyorgroup,orwhereneitherthe
companynorthegrouphasasignificantfinancialinterestinthevaluersfirmor
company.
F.I.P.
FireIndicatorPanelthatidentifiestobuildingmanagementandfirebrigadewhere
alarmshaveoccurred.
F.O.C.
AnacronymforFreeofCharge.Includesanygoodsorservicesprovidedgratis.
faade
Thefrontfaceofabuilding.
facerent
Thequotedrentwithouttakingouttheeffectofrentfreeperiods,rebatesor
incentives,ifany.
facerental
Nominalgrossmarketrentalasrepresentedonalease.
facilitiesmanagement
Themanagementofownedandoccupiedcorporaterealestateandtheservices
providedfortheoccupants.

353
fairmarketvalue
Theamountatwhichanitemcouldbeexchangedbetweenwillingunrelatedparties,
otherthaninaforcedliquidation.Itisusuallythequotedmarketpricewhena
marketexistsfortheitem.
fairrent
Themarketrentofaproperty.
fee
Remunerationpaidtoaprofessionaladviserorrealestateagent.
feesimple
1)ThehighestformoffreeholdlandtenureunderEnglishlaw,inwhichfee
signifiesheritabilityofthetenancyandsimplethatthereisnoqualificationasto
theheirswhomaysucceedtodoit.2)Commonly,thoughwrongly,usedasa
synonymforfreeholdtenure,whichhasawidermeaninginlaw.
fengshui
FengShuiorfengshuiistheancientChinesepracticeofplacementandarrangement
ofspacetoachieveharmonywiththeenvironment.Thepracticeisestimatedtobe
morethan3,000yearsold.ItisalsoknownasGeomancyandisstillactively
practicedandobservedbyindividualsandcompaniesinmanypartsofAsia,
especiallyinHongKongandChina.
FF&E
FurnitureFittingsandEquipmentnotfixedtothestructurethatarerequiredinthe
fitoutofafacility(commonlyusedinhotelconstructioni.e.,beds,lamps,desk,etc.).
finalcompletion
Thedatefollowingthedefectsliabilityperiodwhenaprojectisdeemedcomplete
andallfinalpaymentshavebeenpaid.
findersfee
Afeepaidtoanunlicensedbrokerforanintroduction.
firesprinklersystem
Asysteminstalledintheceilingofbuildingsthatautomaticallysprinklewater(in
ordertodouseflames)iftheambienttemperaturecrossesagiventhreshold.
firewall
Wallthatpreventsfirefromspreadingtootherpartsofabuilding.
firmcommitment
Anirrevocableandlegallybindingstatementagreeingtodoornotdosomething.
firstmortgage
Themortgagethathaspriorityoverallotherswhenthereisasecondchargeonthe
mortgagedasset.
firstpartialmonthspayment
Iftherentcommencementdateforthefirstmonthoftheinitialtermisotherthan
thefirstdayofacalendarmonth,thentherentforsuchpartialmonthisproratedon
dailybasis,basedontheactualnumberofdaysinsuchcalendarmonth.
firstrefusalright
Arightgivenbyonepartytoanotherwherebythefirstpartyisobligedtogivethe
secondpartyachancetoacquireanassetbeforeheoffersittoanyoneelse.
firstlevelmarket
Thelandmarketwheredevelopersobtainlandfromthegovernmentviaauctionor
bid.

354
fitout
Thephysicalcomponentsincludedinafacilityconstructedtoenabletheoccupierto
utilizethespace.
fitoutcosts
Expensesincurredinfittingoutpremisespriortooccupancy.
fitoutperiod
Periodwhereinlesseemayperformfitoutworks.
fittings
Itemswhichareaffixedtolandorbuildingsandwhichareeasilyremoved.
fixedassets
Assetsofapermanentnaturethebenefitofwhichisexpectedtobeenjoyedbeyond
thecurrentfinancialyear.
fixedpricecontract
Abuildingcontractinwhichthetotalpriceisfixedattheoutsetusuallysubjectonly
tochangesduetosubsequentvariationsinstatutoryundertakerscharges.
fixedratemortgage
Amortgagewheretherateofinterestremainsconstantthroughout.
fixedrent
Arentwhichcannotbechangedduringtheentireperiodofaleaseor,atthedate
whentheleaseisbeingvalued,willbeunalteredforsuchalengthoftimethatno
changeincapitalvaluewouldbeattributedtotheprospectofadifferentrentduring
theremainderofthelease.
fixtures
Itemsthatarefixedtopropertyandtreatedaspartofthatproperty.Unless
specificallyexcluded,saleofpropertyincludesthesaleoffixturesaswell.
flagshipstore
Alarge,signaturestorethatshowcasesthebestandwidestvarietyofmerchandise
foraparticularbrand.Itmayserveasaminianchorinashoppingmallormaytake
theformofaniconicstandalonebuilding.
flat
Aseparatesetofpremises,normallyallonthesamefloor,formingpartofabuilding,
dividedhorizontallyfromsomeotherpartofthebuilding,constructedoradapted
forthepurposesofaprivatedwellingandoccupiedwhollyormainlyasaprivate
dwelling.
flatlease
Anagreementwherethesameamountofrenthastobepaidthroughoutthelifeofa
lease.
flattedfactory
Ahighriseindustrialbuildingthataccommodateslightindustrythatisnon
pollutive.Itmaybelocatedclosetoresidentialareasbecauseofitsnonpollutive
nature.
flexibleinterestrate
Sameasvariableinterestrateandflexibleinterestrate.Aratethatcanmoveupand
downbetweenduepayment,asopposedtoafixedinterestratethatissetforthelife
oftheloanorapredeterminedperiod.
floatingcharge
Achargewherethelenderhassecurityforaloanspreadoverall,oradefinedclass
of,theborrowersassets.

355
floorarea
Theaggregatesuperficialareaofabuilding,takingeachfloorintoaccount.
floorload
Theliveorsuperimposedloadonafloor,usuallyexpressedinpoundspersquare
foot(lb/sq.ft.)orkiloNewtonspersquaremeter(kN/m_).
floorplan
Anarchitecturalsketchofvariousrooms,balconies,bathrooms,etc.
floorspace
Thetotalareacoveredbyabuilding.Itincludesexternalwalls,partitions,stairwells,
plantroomsandenclosedcarparkingareas.
FloorSpaceIndex(FSI)orFAR(FloorAreaRatio)
FloorSpaceIndexistheratiobetweenthebuiltupareaallowedandplotarea
available.IfFSIis1thenonaplotof100sqmts,onecanbuild100sqmtsofbuiltup
areaandwithsetbacksandopenspaces,thebuildingcanbehigherthanonefloor.
SimplyitmeansthathighertheFSI,higherbuiltupareaispossible...ormoresimply:
higherfloors.InMumbai,theIslandcityhasanFSIof1.33,thesuburbshaveanFSI
of1andotherdistantsuburbshaveanFSIof0.7.
flowageeasement
Aneasementbyconventionthatallowswaterfromlandsathigherlevelstoflowinto
andthroughlandslocatedatlowerlevelseventhoughtheremaybenoagreements
tosucheffect.
Flyingfreehold
Apartofbuildingownedfreeholdwherethestructurebelowisindifferent
ownership.
forcemajeure
Anactofgod(naturalcalamities),oranactofman(war,riots)beyondthecontrolof
thepartiestoacontractwhichmakesitimpossibleforoneofthepartiestofulfillthe
termsofthatcontract.Manycontractshaveaforcemajeureclause.
forcedsale
Sale,whichismadewithoutthevoluntaryconsentoftheowner,suchaswhen
propertiesaresoldfordefaultsonloans.
foreclosure
Theactoftakingawaytheright,titleandinterestoftheownerofapropertyorasset
indefaultofduepayments.
foreclosuresale
Thesaleofapropertyfollowingforeclosure.
Franchise
Asystemofbusinessinwhichacompanyisownedbyoneormorepersons,but
otherpeopleareallowedtouseitsnameandgoodwilltosellsomecentrally
approvedproductsandservicesinreturnforafranchisefee.Franchiseagreements
oftenmakeitmandatoryforfranchisees(personstakingafranchise)tobuycertain
itemsfromthefranchisors.
freeandclear
Propertythatisnotencumbered.
freestandingbuilding
Astandalonebuildingwhichisnotattachedtoanyotherbuilding.
freehold
Atenureinperpetuity.

356
frontelevation
Height.Alsomeansfrontalfaceofabuilding.
fullhouse
Ahundredpercentoccupancyinacommercialorresidentialpropertyorhotel.
FullRentalValue(FRV)
Thebestpossiblerentalthatmightreasonablybeexpectedintheopenmarketfora
particularpropertyatagiventime,havingregardtothetermsoftheactualor
notionallease,e.g.,responsibilityforrepairsrightsofassignmentorsubletting,or
basisofreview.
functionalobsolescence
Somethingthatisnolongerusefulbecauseitisoutdated,thoughitmaystillhave
someresidualeconomiclife.
gapfinancing
Temporaryfinancingtobridgethedifferencebetweentheconstructionloanandthe
permanentloan.
garage
1)Abuildingorindoorareaforparkingorstoringmotorvehicles.2)Acommercial
establishmentforrepairingandservicingmotorvehicles.
gardenapartments
Alowriseapartmentbuildingorbuildingcomplexsurroundedbylawnsandtrees,
shrubbery,orgardens.
gazebo
1)Astructure,asanopenorlatticeworkpavilionorsummerhouse,builtonasite
thatprovidesanattractiveview.2)Asmallroofedstructurethatisscreenedonall
sides,usedforoutdoorentertaininganddining.
gazumping
Asituationinwhichavendor,havingagreedtosellpropertyatacertainprice
subjecttocontract,breakshiswordandeitherseeksahigherpricefromthe
purchaseronthegroundsofhavingreceivedahigherofferfromanotheroraccepts
ahigherofferfromanother.
gearing
1)Theuseofborrowedmoneytogenerateahigheryieldthroughinvestmentinreal
estate.2)Therelationshipbetweenacompanysloancapitalandtheirequitycapital.
Thisisusuallyexpressedastheratioofloancapitaltonetassetvalue.
generallien
Alienthatincludesallpropertyofthedebtorratherthanaspecificproperty.
generalmortgage
Amortgagethatincludesallrealpropertyofthemortgagor,bothwhathehasand
thathemayacquireinfuture.
geomancer
Onewhopracticesgeomancy,fengshui.
gerrymander
Tomakemanmadeboundariesthatgoagainstthenaturalschemeofthings.For
example:tocreateanewgeographicalconstituencyagainsttraditionandnatural
subdivisionstoexcludecertaincastes,classesorcategoriesofpeopleinorderto
createanelectoratethathelpsaparticularcandidateorpoliticalparty.
goingconcernvalue
Thetotalvalueofabusinessascarriedon,withallitsassetsandliabilities,goodwill

357
andpotentialities.Ifthepremisesusedareownedbythebusiness,theyformpartof
thegoingconcernvalueonthebasisoftheirvaluetothebusiness.
graceperiod
Aperiodoftimeafterapaymentsuchasaloanorinsurancepremium,becomesdue,
beforeoneissubjecttopenalties,latecharges,forfeitureorcancellation.
grade
1)Thedegreeorriseofaslopingsurface.2)Tochangetheoriginalslopeofground
toprepareforpavingorfordrainagepurposes.3)Classificationofbuildingquality.
InAsiaPacificpropertymarkets,toptierpropertyistermedPremiumorAGrade.
gradient
Thedegreeofinclination,ortherateofascentordescentofasurface.
graduatedlease
Aleasewheretherentalisnotfixedandmayvaryaccordingtovaluearrivedon
periodicappraisal.
grandfatherclause
Aclauseinthelegislationthatallowsthecontinuationofabusiness,practice,
activity,etc.,thatwaspermittedbylegislationbutcurrentlyconsiderednot
permissiblebyachangeinthelegislation.
grant
Atermthatreferstoatransferofpropertybydeedorthepropertysotransferred.
grantdeed
Adeed,conveyingpropertyownedbyanindividualoracompany,toanother
individualoracompany.Containsclausesthatsecureitagainstanyprior
conveyancesorencumbrances.
greenbuilding
Acommontermusedtodescribeabuildingthatisdesigned,built,oroperatedina
waythatismoresustainable,minimizingitsnegativeimpactonthenatural
environment.
greenfieldsite
Asite,separatefromexistingdevelopments,whichistobedevelopedforthefirst
time.
greenleases
Aleasethatincludesconditionsaroundenvironmentalcriteria.Thismayinclude
requirementstoachievecertainenvironmentaltargetsandrestrictionsonhowa
buildingcanbeusedtoensurethatthesetargetsaremet.
greenhouseeffect
Thewarmingoftheearth'satmospherebythetrappingoflongwaveradiationbeing
radiatedtospace.Thegasesmostresponsibleforthiseffectarewatervaporand
carbondioxide.
grid
1)Apatternoflineslaidoutatrightanglestoeachother.2)Aseriesofintersecting
linesdividingamaporchartintoequalsections.3)Theintersectingbars,wires,or
supportsasinagratingorsupportsinadroppedceiling.4)Anetworkofpipesfor
thedistributionofwaterorgas.5)Achartusedbyinsurancecompaniesandlenders
forratingproperty,riskoftheborrower,neighborhood,etc.
grossarea
Thetotalfloorareaofastructure,insquarefeetorsquaremeters,measuredfrom
theoutside.

358
GrossExternalArea(GEA)
Formerlyreferredtoasreducedcoverareaorgrossfloorspace.Theaggregate
superficialareaofabuildingtakingeachfloorintoaccount.Thisincludes:external
wallsandprojections;internalwallandpartitions;columnsandpiers.
grossfloorarea(GFA)
TheareatobeleasedisusuallyquotedonthebasisofGrossFloorArea(GFA),which
includesnotonlythegrossareaoftheleasedfloorbutalsoportionsofcommon
areas.TheratioofnetlettableareatoGFAvaries,naturallydependingonthe
efficiencyofthesuperstructureandtheareaofthebasementlevelsincludedinGFA
calculations.
grosslease
Aleaseinwhichthelessorpaysallcostsofoperation.Agrossleaseisaleaseata
fixedamountallowingthelesseetoknowexactlyhowmuchrentwillbedueand
payableeachperiodduringthetermofthelease.Thelessorpaysalltaxes,
insurance,andmaintenanceontheproperty.
groundbeam
Ahorizontalreinforcedconcretebeamforsupportingwalls,joists,etc.,atornear
groundlevel,itselfeitherrestingdirectlyuponthegroundorsupportedatbothends
bypiers.
groundlease
Aleaseofland,asopposedtoaleaseofabuilding.
groundlevel
Atsurfacelevel.
groundrent
Therentpaidbyalesseefortheuseofland.
groundwater
Waterbeneaththeearthssurface,oftenbetweensaturatedsoilandrockthat
supplieswellsandsprings.
grounds
Largenaturalgroundleveladjoiningoraroundastructure.
guarantor
Apersonwhomakesorgivesaguarantee.
guarantee
Anagreementbywhichonepersonassumesresponsibilityforpayinganothers
debtsorfulfillinganothersresponsibilities.
gutter
Manmadeditch,usuallypaved,whichcarriesrainwaterandotherwastewateroutof
anarea.
habitableroom
Roomthatisfitforlivingin.thebuildinginwhichtheroomislocatedconformsto
thebuildingcodeandhasacertificateofoccupancy.Usableforallpurposes,but
doesnotincludefacilityroomssuchasabathroom,closets,orstoragerooms.
handovercondition
Conditionoftheofficeunit/premisesuponturnovertothelessee.
hardoption
Optiononacertainareaofpremises(i.e.,100sq.ft.or1,000sq.ft.or100,000sq.ft.)
offeredbythelessortothelesseeoverafixeddurationoftimewhereinthelessor
willnotmarkettheareatoanothertenant/partyforthatspecifictimeframe.A

359
hardoptioncaneitherbefreeofcostorcouldhaveaholdingcostofabearminimum
value.
hardware
Themetalaccessoriesusedinconstructionsuchasdoorknobs,hinges,locks,etc.
headlinerent
Seefacerent.
headsofterms
Adocumentsignedbetweenthelessorandlesseeorthebuyerandsellerwhich
outlinesthecommercialtermsagreeduponandusuallyprovidesadateand
durationbywhichthefinalagreementistobeexecuted.Suchadocumentdoesnot
createanylegalobligationoneitherpartyuntilandunlesssomemonetaryvaluehas
beenpaidtothesellerorlessor.
hectare
Ameasurement,equaling2.471acresorabout107,637squarefeetor10,000square
meters.
highendapartment
Anapartmentthatismoreluxuriousthanastandardapartment,butdoesnothave
alloftheamenitiesandfacilitiestobealuxuryapartment.
highriseapartmentbuilding
Anapartmentbuildinghavingacomparativelylargenumberofstories,considered
highintheareawhereitisbuiltandequippedwithelevators.
hotelling
Aspaceusageterm.Employeeshavenodesignateddeskandselectavailabledesks
onadailyusebasis.
housingstarts
Ameasureofactualcommencementofconstructionofhouses,condominiums,and
apartmentconstruction.Permitsareconsideredaleadingindicatorofhousing
starts.
hypermarket
Alarge(50,000to200,000sq.ft.)lowriseretailcentrewhichsellsawiderangeof
foodandgeneralmerchandiseatlowprices.Typicallylocatedonalargetractofland
offhighwaysormajorroadsorinsuburbanlocations.Howeverincertainland
scarcecities(suchasSingaporeorpartsofChina),theymaybelocatedwithina
shoppingmallandfunctionasananchortenantofthemall.
improvedland
Landthathasbeendevelopedforuseandhashadinstallationofsuchutilitiesas
water,sewer,roadsandbuildingstructures.Theseimprovementsmaketheraw
landincreaseitsusability,therebyincreasingthemarketvalue.
improvedvalue
Anassessmenttermthatcomprisesofthetotalvalueoflandalongwith
improvements,insteadoftheseparatevaluesofeach.
inperpetuity
Ofendlessduration;forever.
increment
1)Thesmallquantitybywhichavariableincreasesorisincreased.2)Anegative
incrementisadecrease.3)Thefactofbecominggreaterorlarger.
incubationspace
Fullyfittedoutinterimspaceofferedbythelessor/developerstothelessee/tenant
forashortdurationofthreeto12monthstillthepermanentspace/buildingisready

360
andoperational.SometimesavailableinScienceParksandBusinessParkstoassist
orencourageResearch&Developmentstartupsortonurturesmallbusinesses.
indemnityagreement
1)Anagreementwherebyonepartyagreestosecureanotheragainstananticipated
lossordamage.Forexample,someonemayagreetoturnabusinessovertoanother
personforareducedpriceiftheypaythedebtsandotherobligationsofthe
business.Inabroadsense,insurancepoliciesareindemnitycontracts.2)A
provisioninaleasethatrequiresatenanttopay(indemnify)alandlordfor
damages.
indenture
Writtenagreementbetweentwoormorepersonshavingdifferentinterests.
indexlease
Arentalcontractinwhichthetenantsrentalistiedtoachangeinapriceindex.
indexing
Toaltermortgageterm,payment,orrateaccordingtoinflationand/orasuitable
mortgagerateindex.
indirectproperty
Indirectownershipofproperty,themostcommonformbeingsharesinaREIT(real
estateinvestmenttrust)whoseunderlyingassetsarephysicalproperty.
industrialpark
Anareazonedandplannedforthepurposeofindustrialdevelopment.Usually
locatedoutsidethemainresidentialareaofacityandnormallyprovidedwith
adequatetransportationaccess,includingroadsandrail.
ingressandegress
Accessfromalandparceltoapublicroadorothermeansofexit.Righttoenterand
exitthroughlandownedbyanother.
inheritancetax
Statetaxbasedonthevalueofpropertyandotherassetsreceivedthrough
inheritance.
installmentcontract/sale
Purchaseagreementwherethebuyerdoesnotreceivetitletothepropertyuntilall
installmentsarepaid.Transactioninwhichthesalepriceispaidininstallments.The
taxiscalculatedonthesesalesonthebasisofprofitmadebythesellerper
installmentreceivedandmaybepaidovertheinstallmentperiod.
insulate
Toprotectfromheat,cold,ornoisebysurroundingwithnonconductingmaterialto
preventenergyloss.
intangibleassets
Nonphysicalassetswithcontinuingvalue,suchasgoodwill,copyrights,trademarks
andfranchises.
intangibleproperty
Nonphysicalvaluables,suchascontractsormortgages,employeeloyaltyor
customergoodwill,whicharedistinguishedfromphysicalpropertysuchas
buildingsandland.
interestcoverage
Thenumberoftimestheannualinterestondebtobligationsiscoveredbyincome
fortheyearbeforeconsideringinterestonthedebtobligationsandincometaxes.

361
interestonlymortgage
Amortgageunderwhichtheprincipalamountborrowedisrepaidinonepayment
whileinterestpaymentsaremadeperiodically.
interestratecap
Aninstrumentthatprotectstheholderfromrisesinvariable(usually)shortterm
interestrates.Thecounterpartymakesapaymenttotheholderwhenanunderlying
interestrate(theindexorreferenceinterestrate)exceedsaspecifiedstrikerate.
InternationalGradeA
OfficedevelopmentwhichmeetsalistofGradeAcriteriaandiswhollyowned,
managedtointernationalstandardsandhasasuperiorsetoftenantamenities.
Intimationofdisapproval
Itisactuallyamisnomer.Itactuallymeansintimationthatlocalauthoritydoesnot
haveanydisapproval.IODissetofinstructiongivenbyrespectiveauthoritiesfor
builderstoconstructthebuilding.Normallyitisvalidforaperiodofoneyearandif
thebuildingisnotconstructedwithinoneyearstime,IODhastobereissued.
intrinsicvalue
Thevalueofthethingitself,ratherthananyspecialfeaturesthatmakeitsmarket
valuedifferent.
inventory
Propertyheldforsaleortobeusedinthemanufactureofgoodsheldforsale.
investmentproperty
Realestate,suchasrentalproperties,whichgenerateincome.
investmentyield
Theannualpercentagereturnwhichisconsideredtobeappropriateforaspecific
valuationoraninvestment,beingexpressedastheratioofannualnetincome
(actualorestimated)tothecapitalvalue.
janitor
Caretakerofabuilding.Generallyassociatedwiththemaintenanceofcleaning,
lockingupafterclosing,andminorrepairwork.
jerrybuilt
Aconstructionbuiltofinferiorandcheapmaterials.Poorquality.
jointandseveral
Situationwhereineachborrower,onthesamenote,isheldfullyliablefortheentire
amountofthedebt,notjustaportion.Thecreditormaydemandfullrepayment
fromanyindividual.
jointsoleagent
Oneoftwoormoreagentsjointlyinstructedastheonlyagentsentitledtorepresent
theprincipal.Itiscustomaryforthejointagentstoshareanycommissionearnedon
anagreedbasis,irrespectiveofwhichagenteffectsthesaleorletting.
jointtenancy
Equalownership,bytwoormorepeople,eachofwhomhasanundividedinterest,
withtherightofsurvivorship.
judicialforeclosure
Propertyofadefaultedborrowerissoldundercourtorderandthecourtratifiesthe
amountreceived.
judicialsale
Thesaleofapropertymadeundertheorderofthecourtthrougharepresentative
appointedbythecourtandnottheowner.

362
landgrant
Agiftofgovernmentlandtoanindividualorcorporation.
landreclamation
Creationofhabitablelandbyfillinguplowlyinglands,wetlands,lakesorportionsof
theseashore.
landuseplanning
Thedrawingupoflongtermplansfortheuseoflandinaparticularareaorregion.
landing
Aflatplatformatthetop,bottomorinthemiddleofaflightofsteps.
landlockedparcel
Aplotoflandentirelysurroundedbyotherprivatelyownedlands.
landlord
Theownerofapropertythathasbeenleased.
landlordsimprovements
Anyworkofacapitalnature,i.e.,otherthanmaintenanceorrepair,undertakenby
thelandlord,orbythetenantatthelandlordsexpense,whichincreasesthevalueof
thelandlordsinterestinaproperty.
landscape
Thesettingofthelandsurroundingabuildingorstructure.Nowadays,thisisoften
doneartificiallytoincreasethevalueoftheproperty.
landscapearchitect
Apersonwhoplansanddesignsthedecorationofthelandsurroundingabuildingor
structure.Thiscanbedonebyaddingfeaturessuchaswaterbodies,pavements,
gardens,etc.
landuseplanningcertificate
Documentstatingzoningandlandplanningparameters.
landuserightcertificate
Documentstatingrighttopossessaspecificplotoflandforastatedperiodoftime.
latentdefect
Ahiddenorconcealeddefectinherentinthedesignorconstructionofabuilding,
whichcouldnotbediscoveredbyinspection,despitereasonablecare.
lateralsupport
Therightofalandownertothenaturalsupportofhislandbyadjoiningland.The
adjoiningownerhasthedutynottochangehisland(suchasloweringit)soasto
causethissupporttobeweakenedorremoved.
layout
Design,planorarrangementofanygivenspace,suchastheroomsorapartment,etc.
leanto
Ashedbuiltagainstanadjoiningthewallofanotherbuilding,withthreewallsanda
slopingroof.
leasablearea
Areabywhichrentalisbasedon,usuallyequivalenttogrossarea.
lease
Acontractbywhichanownerofaproperty(knownaslessor)givestherightof
possessionandusetoanotherperson(lessee),foraspecifiedtermandagainsta
specifiedconsideration.
leaseagreement
Anagreementrecordingaleasebetweenalessorandalessee.

363
leaserestructure
Wherebyanexistingleaseisterminated/surrenderedearlyandanewleaseis
signedonthesametermsandconditionssaveforrent,incentivesandtermdates.
leasewithoptiontopurchase
Aleaseagreementwhichgivesthelesseetheoptionofpurchasingtheproperty
withinoronorafteraspecifieddate.Thepriceandconditionsunderwhichsuch
purchasewilltakeplaceareusuallymentionedintheagreement.
leaseback
Anarrangementwhereapropertyissoldbyasellertoabuyerandthenleasedto
theformer.Chronologically,theleasetakeseffectonlyafterthesale,buttheyare
consideredpartofthesametransaction.
leasehold
Apropertythatisheldunderalease.Thetitleofthepropertyremainswiththe
ownerwhoreceivesaleaserentwhichmaybepaidmonthly,quarterly,annuallyor
inlumpsumfortheentireperiodofthelease.Thepropertyrevertsbacktothe
owneraftertheperiodofthelease.
leaseholdimprovements
Additions,alterationsandimprovementsmadetoaleaseholdpropertybythelessee.
leaseholdvalue
Totalvalueofaleaseholdright.
Leave&License
Anagreementrecordingalicensebetweenalicensorandlicensee.Thetermofthe
licenseshouldnotexceed60months.ThiskindofagreementisspecifictoBombay
(Mumbai)wherecorporateswouldenterintoaLeave&LicenseAgreementinstead
ofaLeaseAgreementtosaveontheStampdutyandregistrationcharges.ALeave&
Licenseagreementisusuallyforaperiodof36months.
legaldescription
Adescription(ofland,oranyotherthing)thatisacceptableinacourtoflaw.
legalowner
Apersonorcorporationortrustwithalegaltitleoveraproperty.
legaltitle
Titlerecognizedbylawastherootofmostothersubordinateformsoftitle,eg.,lease
ormortgage.However,legaltitlecanbeencumberedbyaleaseormortgage,such
thattransferoftitlewillnotaffecttherightsofthosewithotherformsofinterest
overtheproperty.
lemon
Apropertythathasconsiderablyunderperformedonitsproformaorhaslittle
likelihoodtoperformasexpected.
lessee
Thepersonorcorporatebodythattakesapropertyonlease.
lesseeimprovements
Toenhancethedemisedpremisesforthetenantsbusinessoperations,thetenantis
entitledtocarryoutinteriorworkswithpriorintimationtothelandlordandsubject
tonecessaryapprovalsfromthelocalauthorities.
lesseesindemnification
Thelesseewillindemnifythelessor/landlordagainstallandanylossordamage
whichthelessor/landlordmaysustainbyreasonofclaimsbroughtagainstthe
lessorallegingbodilyharm,injuryanddeathtoanypersonordamagetoproperty
whichhasbeenmutuallydiscussed,describedandagreedintheagreement.

364
lessor
Thepersonorbodycorporatethatleasesoutaproperty.
lessorsindemnification
Thelessor/landlordwillindemnifythelesseeagainstallandanylossordamage
whichthelesseemaysustainbyreasonofclaimsbroughtagainstthelesseealleging
bodilyharm,injuryanddeathtoanypersonordamagetopropertythathasbeen
mutuallydiscussed,describedandagreedintheagreement.
lettablearea
Floorareaallocatedtoaunitorspaceandquotedforleasingpurpose.Theareais
usuallymeasuredfromtheexterioroftheenclosingwallsoftheunitsandincludes
theunitsshareinthecommonarea.
letterofcomfort
Aletterfromathirdpartytooneofthepartiestoacontractgivinganassurancethat
therecipientmayexpecttheotherpartyto,forexample,honorsomespecified
undertakinggiveninthecontract,behaveinamannerconsistentwiththe
understandingbetweentheparties,beinapositiontofinancethedealorcontinue
inexistenceasasubsidiaryoftheauthor.Inpropertyterms,inparticular,sucha
lettermaybewrittenbyabankorotherfinancialinstitutiononbehalfofa
prospectivedeveloper,purchaserorlessee.
letterofintent
Aletterwrittenbyapartyorjointventurerexpressinganintentiontoproceedwith
thetransactioninthefuture.Aletterofintentisnotusuallylegallybinding.
lien
Thesecurityprovidedwhenmoneyisadvancedagainstproperty.
life
Thetimeperiodduringwhichacontractisvalid.
lifetenant
Apersonwhoseleaserightsarevalidonlyduringhisorsomeoneelseslifetime.
lightandaireasement
Arightrestrictingneighboringbuildingsfromobstructingtheflowoflightandair.
Forexample:theownerofapropertymayobtainlightandaireasementfromhis
neighbortoensurethanhisgardencontinuestogetunrestrictedsunlightatall
times.
lightindustry
Industriesthatdonotcausepollution.
lightwell
Ashaftthatlightsupandventilatestheinsideroomsofabuilding.
limitedrecourseloan
Alenderwhooffersalimitedrecourseloanwillintheeventoftheborrower
defaultingonlyhaverecoursetopropertysecuredundertheloanagreementandnot
totheunsecuredpropertyoftheborrower.
lineofcredit
Asumofmoneythatissanctionedbyabankoralendinginstitutionforusebya
borrower.Anyamountuptothevalueofthesanctionedamountisthenavailableon
callforagivenperiodoftime.
lineal
Ameasureofdistanceratherthanameasureofarea.
liquidateddamages
Apredeterminedamountthathastobepaidbyapartywhobreachesacontract.

365
Theamount,oramethodtoarriveatthefigure,ismentionedinthecontract.Such
amounthastobeacloseapproximationofthelossesincurred.
liquidation
Thesaleofallfinancialassetstosettledebtsorclaimsfollowingtheclosureofa
business.
liquidity
Thestateofhavingreadycashoreasilyencashableassets.
listing
1)Theactofgettingthesharesofacompanyregisteredonastockexchange,
followingwhichthegeneralpubliccanbuyandsellsuchshares.2)Thelistingor
recordingofapropertythatisforsaleorlease.
littoralrights
Therightsofpersonsorcountrieswithlandsalongtheshoresofoceansorlakes.
livability
Theminimumstandardsprescribedbygovernmentsfordwellingunits.
loadingdock
Anarchitecturalfixturewheretrucksmaybeloadedandunloaded.Theyare
commonlyfoundonlargecommercialandindustrialbuildings.
lobby
Areajustinsideanapartment,building,hotel,theaterorhousethatleadsontothe
morefunctionalareas.
lockinperiod
Aperiodmentionedintheagreementduringwhichneitherpartycanterminatethe
agreement.
logistics
Aspecialtywithinthesupplychainprocessthatplans,implementsandcontrolsthe
efficientflowandstorageofgoods,servicesandrelatedinformationbetweenthe
pointoforiginandPointofconsumptioninordertomeetcustomersrequirements.
longtermlease
Aleaseagreementthatisvalidforalongperiodoftime.Thelegaldefinitionoflong
termvariesfromcountrytocountry.
lossofaccess
Thetakingawayoftherighttoenterorexitaproperty.
lot
Aportionorpartofaproperty.
lumpsum(building)contract
Acontractplacedwithabuilderatafixedprice.
madeland/reclaimed
Alandartificiallycreatedbyfillingordredging.
maintenancebroker
Anobjectivethirdpartywhoputstogetheramaintenancepackageforinvestment
properties.Itkeepsanobjectiveeyetoensurethatthemaintenanceofthecompany
wouldkeepcostsataminimumandcausenoharmandlongtermcostoverruns.
maintenancefee
Monthlyassessmentbyassociationofownersandusedformaintenanceandrepair
ofcommonareas.Usuallyamonthlyfeepaid.
majorcasualty
Thedestructionofordamagebyreasonsbeyondthecontrolofeitherpartytoallor

366
anypartofthedemisedpremisesorthebuildingandsuchdestructionordamage
cannotberebuiltorrepairedasreasonablydeterminedbythearchitect.
makegood
Theactofreturningavacatedfacilitybacktoitsoriginalstatepriortothefitout.
mall
Apublicareaconnectingindividualstoresinashoppingcenter.Modernmallsare
oftenenclosed,enablingallweatheraccess.Alsoreferstoanentireregional
shoppingcenter.
management
1)Personorpersonsresponsibleformanagingapropertyoroverseeingajob.2)
Theactofmanaging,controllingordirectingandcarryingonabusiness.
managementagreement
Acontractbetweentheownerofapropertyandthepartywhoagreestomanageit.
Feesarebasedonapercentageofincomebutcanbeaflatincentivefeebasis.
marginalland
Propertythatisbarelyprofitableandwhichhaspoorincomepotential.
marketcapitalization
Numberofsharesissuedbyalistedentitymultipliedbytheunitpriceonthestock
exchange.
marketdataapproach
Methodofvaluingapropertythroughexaminationandcomparisonofrecentsalesof
comparableproperties.
marketability
Theprospectofsellinggoodsataspecifictime,valueandconditions.
marketabletitle
Titlethatcanbemarketedorsoldreadily.Anycourtcanenforcethistitle.
marriagevalue
Latentvaluewhichisorwouldbereleasedbythemergeroftwoormoreinterestsin
land.Forexample,twoadjoiningparcelsmaybeworthmoreasonepropertythan
theaggregateoftheirseparatevalues.Similarly,twointerestsinthesameproperty
mayhaveagreatervaluewhenmergedthanthesumoftheirindividualvalues.
masterlease
Acontrollingleaseinanapartmentorofficebuildingthatcontrolssubleases.
masterplan
Documentthatdescribes,innarrativeandwithmaps,anoveralldevelopment
conceptincludingbothpresentpropertyusesaswellasfuturelanddevelopment
plans.Theplanmaybepreparedbyalocalgovernmenttoguideprivateandpublic
developmentorbyadeveloperonaspecificproject.
medianstrip
Stripoflandthatseparatesthelanesofopposingtraffic.
mezzanine
Balconyorlowceilingoverhangjustabovethemainfloorandbelowthenextstorey.
Inatheater,amezzanineisthefirstbalconyabovethestage.
mezzanineloan
Amezzanineloanisarelativelylarge,unsecuredloanandnormallynotbackedbya
pledgingofassets.Theloancancarryadetachablewarrant(therighttopurchasea
certainnumberofsharesorstockorbondsatagivenpriceforaperiodoftime)ora
similarmechanismtoallowthelendertoshareinthefuturesuccessofthebusiness.
Mezzanineloansaredependentoncashflowforrepayment.

367
mineralrights
Ownershiprightstothemineralsorotherpreciousresources,inonesproperty.The
privilegeofgainingincomefromthesaleofoil,gas,andothervaluableresources
foundonland.
minimumlot
Thesmallestlotarearequiredorallowedforbuildingunderthemunicipalzoning
code.
mininglease
Aleasethat,foraconsideration,providesthelesseetherighttomineminerals,such
asgold,iron,coal,silver,etc.,onthepropertyofthelessorandsellthesame.
mixedusedevelopment
Projectwhichincorporatestwoormorepropertyuses,forexample,anoffice
buildingwitharetailofferingonthelowerlevels.
monument
Afixedobjectandpointestablishedbysurveyorstodeterminelandlocations.
mortgagebanker
Companythatusesitsownmoneytoprovideloansandthenusuallysellsthemto
investorssuchasinsurancecompanies.
mortgagebond
Bondscollateralizedbyrealestate.
mortgagee
Financialinstitutionthatlendsmoneytoaborrower,takingalienonthatparticular
propertyassecurity.
mortgagor
Personorentitythatborrowsmoneytopurchaseaproperty,grantingamortgage
onthepropertytothelenderassecurityfortheloan.
motel
Originallyabuildingonornearamajorhighway,providingfoodand
accommodationtotravelerswithcommonparkingfortheirvehicles.Nowmost
motelsoffermostofthefeaturesofhotels,suchasrestaurants,recreation,etc.
multifamilydwelling
Residentialpropertycontainingindividualunitsforseveralhouseholdswithinthe
samestructure.Abuildingtohouseseveralfamilies.
multiplelisting
Arrangementwheretherealestatelistingsofmanylocalagentsareprovided.
municipallevelindustrialpark
Industrialzonesthataresponsoredlocallyattheprovincial/municipallevelof
government,prefecturelevelandcountylevel.
negativeamortization
Aloanrepaymentscheduleinwhichtheoutstandingprincipalbalanceoftheloan
increases,ratherthanamortizing,becausethescheduledmonthlypaymentsdonot
coverthefullamountrequiredtoamortizetheloan.Theunpaidinterestisaddedto
theoutstandingprincipal,toberepaidlater.
negativecashflow
Asituationwhereincomeislessthanexpenses.
netabsorption
Changeinoccupiedrealestatestockbetweentwopointsintime.
neteffectiverate
Therentafterallowingrentfreeperiods,rebates,incentivesorconcessions,ifany.

368
netfloorarea
Referstotheuseablefloorareainabuilding.Forexamplethenetfloorareaofan
officeflooristhegrossfloorarealessareasoccupiedbycolumns,walls,common
passageways,liftlobbiesandtoilets.
NetInternalArea(NIA)
(Formerlysometimesreferredtoaseffectivefloorarea.)Theusablespacewithina
buildingmeasuredtotheinternalfinishofstructural,externalorpartywalls,but
excludingtoilets,liftandplantrooms,stairsandliftwells,commonentrancehalls,
lobbiesandcorridors,internalstructuralwallsandcarparkingareas.
NetPresentValuemethod(NPV)
Amethodusedindiscountedcashflowanalysistofindthesumofmoney
representingthedifferencebetweenthepresentvalueofallinflowsandalloutflows
ofcashassociatedwiththeprojectbydiscountingeachatatargetyield.
netrentablearea
Theactualareaforwhichrentcanbecharged.
nonbearingwall
Awallthatdoesnotprovideanysupporttothestructureinwhichitislocatedorthe
floorsaboveit.Itcarriesonlyitsownweightandisusedtoseparateanarea.
nonconforminguse
Propertyuse,violatingthecurrentzoningordinance.
nonexclusivelisting
Alistinggiventoanumberofbrokerswithoutlegalresponsibilitytocompensate
anyexcepttheonewhofirstgetsholdofabuyerwhoisready,willingandableto
meetthetermsofthelistingorsecuresthesellersacceptance.
nonfreeholdestate
Propertythatisnotownedbytheoccupantbutisheldunderleaseorlicense.
nonperformingloan
Abankloanwheretheborrowerhasbothceasedtomakefullinterestpayments,
suchthatthelenderhasstoppedearninginterestandonewheretheborroweris
likelytodefaultontheprincipal.
nonrecourseloan
Atypeofloanwherethelendersmaytakethepropertypledgedascollateralto
satisfyadebtbuthavenoabilitytotaketheotherassetsoftheborrower.
novation
Substitutionofanotherborrowerinplaceoftheoriginalborrowerorlessee,
releasingthelatterfromallobligations.Thisisdonewiththeconsentofthelender
orlandlord.
obsolescence
Alossintheutilityofanassetduetothedevelopmentofimprovedorsuperior
equipment,butnotduetophysicaldeterioration.
occupancy
Occupancyratesrepresentroomsnightsoccupiedexpressedasapercentageof
roomnightsavailable,duringanygivenperiod.Forotherproperties(otherthana
hotel),itisthemeasureofthepercentageoffloorspaceoccupiedbytenantsas
comparedtothetotallettableareaofthebuilding.
OccupancyCertificate(OC)
Adocumentissuedbythelocalmunicipalauthoritybuildingproposaldepartment
thatprovidesnoobjectiontooccupythebuildingunderreferenceforitsspecified
use.TheOCisissuedonlyoncethebuildinghasbeencompletedinallrespectsand

369
canbeoccupied.Acorporatecancarryoutitscommercialactivityonlyoncethe
premises/buildinghasreceiveditsOC.
occupancycost
Costfacedbyatenantassociatedwiththeoccupancyofpremises.Thisincludes
chargessuchasrent,taxes,ratesandinsurance.
occupiedstock
Totalamountofstockwhichisleasedorowneroccupied.
offsite
Improvementsoractivitiestakingplaceawayfromthesiteorlocatedawayfromthe
site.
offsiteimprovements
Developmentoflandadjacenttothepropertytomakeithabitablesuchasside
walks,pavedaccessroad,sewers,etc.
onsiteimprovements
Directlyenhancingthephysicalnatureofthepropertysuchasrenovatingabuilding,
installinganewdrivewayandparkinglotandgardening.
openbook
Whereacontractorisrequiredtoprovideandverifytotheclienttheactualcostof
theworkscarriedoutbyothers(normallyassociatedwithconstruction
management).
openhouse
Atermreferringtoahousethatisleftopenforprospectivebuyerstoseeorinspect.
Thisnormallydoesnotinvolveaformalappointmentasthetimeanddayswhenthe
houseremainsopenisspecifiedorfixed.
openlisting
Anagreementpermittingarealestateagenttosellthepropertywhilealsoallowing
thehomeownerorotheragentstoattempttomakethesale.
openmarketvalue
Theamountthatasellermayexpecttoobtainforproperty,services,orsecuritiesin
theopenmarket.
openendmortgage
Amortgageortrustdeedinwhichtheamountborrowablecanbeincreasedbythe
mortgagor,thatis,themortgageemaysecureadditionalmoneyfromthemortgagee
(lender)throughanagreementwhichtypicallystipulatesamaximumamountthat
canbeborrowed.
operablewall
Anopenablewalloftenusedbetweenmeetingroomsthatcanbemovedtooneside
tocreatealargerspace.
operatingexpenses
Expensesincurredinmanaginganinvestmentproperty,includingrepairsand
maintenance,legalandmanagementfees.
option
Therighttobuyorsellanitemataspecifiedpricewithinagivenperiodoftime.The
right,ifnotexercisedafteraspecifiedtime,expires.Forexample,aleaseofa
propertywiththeoptiontobuy.
oralcontract
Thetermreferstoaverbalcontractmadebetweenpartieswherethereispartialor
nowrittenagreement.Thesetypesofcontractshaveaveryweaklegalstandingand
aredependentonwitnessestothesaidcontract.

370
ordinaryasset
Propertywhichincludesinventoryforsale,orpropertyusedinconnectionwith
trade,business,orsourceofincome.
overageincome
Rentalbasedonapercentageofsalesorprofitthatisoverandabovetheconstant
rentalamount.
overbook
Toacceptreservationsinexcessofthenumberthatcanbeaccommodated.
overhead
Fixedorindirectexpensesofabusinessorproperty.Overheadincludesitemssuch
assalaries,officerent,andothersuchadministrativeandmarketingcosts.
pallet
Aflattransportstructureusuallymadeofwood,whichcansupportavarietyof
goodsinastablefashionwhilebeingliftedbyanymobileforkliftorotherjacking
device.Itissometimescolloquiallycalledaskid.Astandardpalletmeasures100cm
x120cmx12cm(slightlylessthan40inx48inx5in).Itweighs1521kgwhen
emptyandcaneasilycarry1,000kg(about2,000lbs)ofload.
parapet
Alow,protectivewallorrailingalongtheedgeofaroof,balcony,orsimilar
structure.
parkingratio
Therelationshipbetweenthenumberofcarparkingspacesandtheamountof
accommodationavailableforotheruseswithinabuildingorgroupofbuildings.
Parkway
Abroadlandscapedhighway,oftendividedbyaplantedmedianstrip.
partoccupationcertificate(OC)
Adocumentissuedbythebuildingproposaldepartmentofthelocalmunicipal
authoritythatprovidesanoobjectiontooccupythespecificfloorinthebuilding
underreferenceforitsspecifieduse.ThePartOCisissuedonlyoncethe
premises/buildinghasbeencompletedinallrespectsandcanbeoccupied.A
corporatecanoccupyandcarryonitsoperationsonlyoncethedemisedpremises
hasreceiveditsOC.
partywall
Awallthatseparatestwoormorepropertiesonthesameparceloflandunder
differentownership.
passingrent
Theamountofrentasatcurrentdateorthedateofvaluation.
patentdefect
Visibledefectinaproduct,propertyordocument.Inlegalmatters,thetermrefersto
adefect,whichcannotbecorrectedonthedocumentitself,andafreshdocument
rectifyingtheflawhastobeobtained.
patio
Anareaadjoiningthehousethatispavedwithconcrete,flagstone,brick,etc.andis
usedforrelaxationorrecreationpurposes.
pedestrianoverpass
Bridgeconstructedoverahighway,railway,roads,etc.fortheuseofpedestrians.
penthouse
Aluxurydwellingunitlocatedonthetopfloororroofofahighrisebuilding.

371
percapita
ALatintermthattranslatesintobyhead,perunitofpopulation;perperson.In
legaltermsitmeansequallytoeachindividual.Percapitadistributionofanestate
provideseachdescendantwithanequalshareoftheestatesassetsregardlessofthe
degreeofhisorherkinship.Children,grandchildren,greatgrandchildren,etc.,all
receiveequalshares.
percentagelease(turnoverrent)
Aleaseofpropertyinwhichtherentalisbasedonapercentageofthevolumeof
salesmadeupontheleasedpremises.Itusuallystipulatesaminimumrentalandis
regularlyusedforretailerswhoaretenants.Usuallydoesnotfallbelowabaserent.
performancebond
Abond,givenbyacontractorandissuedbyaninsurancecompanytoguaranteethe
completionofcontractedwork.
perimeter
Theboundarylinesofapropertyexpressedintermsofmeasurementinlength.
perpetuity
Theconditionofbeingneverending.Inlegaltermsitreferstoaninterestunder
whichpropertyislessthancompletelyalienableforlongerthanthelawallows.
physicaldepreciation
Declineinvalueofpropertyduetophysicaldamagetothepropertysuchaswear
andtearorlackofmaintenance.
pile
Perpendicularsupportpieceofastructure,drivenintotheground,whichsupports
thefoundation.
pitch
Slopeofaroof.Pitchistheratioofverticalrisetohorizontalrun.
plans
Drawings(madetoscale)whicharerequiredforaconstructionprojectandincludes
thesubcontractorsdrawingsalso.
plat(platmap)
Amapofaparceloflandshowingtheboundariesofindividualpropertiesthathas
beendividedintolots.
platbook
Publicrecordofmapsshowingthedivisionofstreets,blocksandlotsandproviding
themeasurementsoftheindividualparcels.
pledge
Thepawningofpropertyasasecurityagainstaloan.
pledgedaccountloan
Asavingsbankaccountthatisusedasacollateralsecurityagainstaloan.
pledgee
Entitytowhomamortgageorpropertyispledged.
pledgor
Entitywhoisresponsibleformakingthepaymentsonamortgageonpropertythat
hasbeenpledged.
plinth
Floorbuiltarea
plotplan
Planrepresentedintheformofascalediagramthatshowstheproposedorexisting

372
useofaspecificparceloflandsuchasthelocationofthestructureswithinthe
boundariesoftheproperty,utilityservices,compassdirections,etc.
plotratio
Plotratiodeterminesthemaximumgrossfloorarea(GFA)allowableonaplotof
land.AplotratiooftwomeansthattheGFAallowableistwotimesthesitesarea.
plottage
Theacquisitionofseveralsmallercontiguouslandstomakealarger,moreuseful
andvaluablepropertyorforputtingthesametospecificuse.
plottageincrement
Atermthatreferstotheincreaseinthevalueoflandbyplottage.
plumbing
Thesystemofpipesandotherapparatusforconveyingwater,liquidwastes,etc.,as
inabuilding.
PMI
AnacronymforPrivateMortgageInsurance.
PMIpassthroughcertificates
Conventionalmortgagesecuritiesthataresupportedbymortgagesthatareinsured
byprivatemortgageinsurancecompanies.
portfolio
Acollectionofpropertyorotherinvestmentsheldinoneownership.
possibilityofreverter
Legaltermtodescribeasituationwhereapersonhavingrelinquishedhisright(by
sale,gift,etc.)overaproperty,retainstherighttoreasserthisclaimsoveritifthe
propertyisnotusedforthepurposeforwhichitwassold,gifted,etc.Example:A
personsellsapropertyonconditionthatitwillbeusedforanorphanage.Ifitisused
foranyotherpurposethesellerhastherighttodemandareversaloftheoriginal
transaction.
postdated
Incorporatingalaterdateonaninstrumentsuchasacheckoradeedthanthedate
onwhichitwassigned.
potable
Anyliquidespeciallywaterthatisfitfordrinking.
powercenter
Aformofspecialtystorewhichmerchandisesthewidestrangeofmerchandiseofa
particularkind.Forexample,HomeDepotisapowercenterforDoItYourself(DIY)
homeimprovementmerchandise.
powerofattorney
Alegalinstrumentauthorizingonetoactasanothersattorneyoragent.
powerofsale
Apowergranted(asinawill,trust,ormortgage)tosellthepropertytowhichthe
powerrelatesoftenunderspecifiedcircumstances(asuponthedefaultofa
mortgage).
practicalcompletion
Whenafacilityiscompletedtoastagewhereitisfitforoccupation(minordefects
mayremainatthistime).
precommitment
Spacedirectlypreleasedinbuildingspriortotheircompletionorrefurbishment.
preemptionright
Therightoffirstrefusalortomakeanofferbeforeothers.

373
prefabricatedhouse
Amodularstructurebuiltofblocksmanufacturedelsewhereandassembledatthe
site.
prefabrication
Atechniquewherebylargeunitsofabuildingorapartofitareproducedinfactories
tobeassembled,readymade,onthebuildingsite.
preliminarytitlereport
Areportfiledbyalawyerwhohasconductedapreliminarysearchofapropertys
title.Preliminarytitlereportsarefollowedbyfinaltitlereportsthatmayconfirmthe
findingsoftheearlierreportorprovidedataonadditionalfactswhichcometolight
followingamoredetailedsearch.
premises
1)Thepreliminaryorexplanatorystatementsorfactsofadocument,asinadeed.2)
Landandthebuildingsonit.
premium
1)Asumofmoneyorbonuspaidinadditiontoaregularprice,salary,orother
amount.2)Theamountpaid,ofteninadditiontotheinterest,toobtainaloan.3)
Theamountpaidorpayable,oftenininstallments,foraninsurancepolicy.4)The
amountatwhichsomethingisvaluedaboveitsparornominalvalue,asmoneyor
securities.5)Theamountatwhichasecuritiesoptionisboughtorsold.
premiumrent
1)Arentabovethelevelwhichapropertycouldreasonablybeexpectedto
commandintheopenmarketonnormalterms.
2)Arentwhichishigherthanwouldreasonablybeexpectedbecausethetenantis
particularlyanxioustosecuretheproperty.
primetenant
Thekeytenantnecessarytoobtainconstructionfinancing.Thetenantmaybe
deemedprimebecauseofitsfinancialstrength,ratherthanbytheamountofspace
itoccupies.
primeyield
Descriptiveofthecurrentyieldusedinthevaluationofpropertyletatfullmarket
valueandwhichfortheclassofpropertyconcernedisofthebestphysical
quality,inthebestlocation,andwiththebesttenantscovenantandcontemporary
leaseterms.
principal
Borrowedamountofmoneyminusanypaymentssubsequentlymade(doesnot
includetheinterestcomponent).Alternately,thetermreferstoanentitygiving
authoritytoanattorneyoranagent.
principalcontractor
Thecontractorresponsibleforthesiteandallactivitiesthatarecarriedoutonit
whilstunderconstruction(hasamajorimplicationregardingsafety).
priorityclause
Aclauseinaloanagreementthatacknowledgesthatapriorloanenjoysfirstcharge
overamortgagedasset.
privatelandgrant
Thetransferoflandownedbythegovernmenttoaprivateparty.Suchtransfermay
beinlieuofmoneyorforcharitableorotherpurposes.
professionalnegligence
Atermoftenappliedtothefailuretomeetthehigherstandardofcareowedby

374
professionaladvisersorotherskilledpersonstotheirclientsorthirdpartiesby
virtueofthespecialskillandexperiencewhichtheyholdthemselvesouttopossess.
profitsmethod
Methodofvaluationthroughwhichthevaluerlooksattheoperatingcostsofthe
businessandassessestheamountofrentthattheoccupiercanaffordbywayofrent.
Itisgenerallyusedwherethereissomedegreeofmonopolyattachedtothe
property.
program(schedule)
Agroupofactivitiessetoutinsequencetoprovideaplanofhowaprojectwillbe
executed.
project
Apieceofplannedworkoranactivitywhichiscompletedoveraperiodoftimeand
intendedtoachieveaparticularaim,normallytheconstructionofafacility.
projectmanagement
Theprocessofplanning,organizing,staffing,directingandcontrollingaproject.
propertyassetmanagement
Acomprehensiveformofmanagement,similartopropertyportfoliomanagement
exceptthatthemanagershaveawiderdegreeofdiscretion.Theprimaryobjectiveis
tomaximizeoverallfinancialperformance.
propertybrief
Anabridgedorconcisedescriptionofthepropertyforsale,issuedbythesellerand
approvedbythesellerandgiventothebuyer.
propertyinvestmenttrust
Afinancialorganizationonthelinesofamutualfundthatcollectsmoneyfroma
largebodyofinvestorsanddeploysthesameinproperties.Itderivesitsincome
streamfromrentalandfromthesaleofpropertiesthatappreciateabovetheir
purchaseprice.
propertyline
Officialdividinglinebetweentwoproperties.Legalboundaryofproperty.
propertymanagement
Therangeoffunctionsconcernedwithlookingafterabuilding,includingcollection
ofrents,paymentofoutgoings,maintenanceincludingrepair,provisionofservices,
insuranceandsupervisionofstaffemployedforservices,togetherwithnegotiations
withtenantsorprospectivetenants.Theextentofandresponsibilityfor
managementbetweenlandlordandtenantdependonthetermsofthelease(s).The
landlordmaydelegatesomeorallofthesefunctionstomanagingagents.
propertymanagementagreement
Anagreementbetweenanownerofapropertyandthemanagerhiredtomanagethe
same.Theagreementlaysdownindetailthescopeofactivitiesentailedinthe
servicealongwiththetermsandconditionsofpaymentfortheservicesrendered.
PropertyOperation,MaintenanceandEnergyCosts(POMEC)
Allexpensesincurredbytheownerofaproperty,usuallyahotel,resort,commercial
propertyorshoppingmall,onmaintainingandrunningtheproperty.Includes
expensesincurredonelectricity,gasandfuels.Thetermoriginatedinthehospitality
industry,butisnowusedacrossalmostalltypesofproperties.
propertyportfoliomanagement
Theunifiedmanagementofagroupofpropertieswhichareheldinoneownership.
Decisionstakeninrespectofanyissuearereachedonthebasisofachievingthe

375
maximumbenefitfortheowners,havingregardtotheeffectontheportfolioasa
wholeratherthanonanindividualproperty.
propertysector
Classificationofpropertyassetsbytype,includingoffice,retail,residential,
industrialandhotel.
publichousing
Housingunitsbuiltbygovernmentorstatutoryboards,whicharesoldorrentedto
individualsandfamilies,usuallyfromlowerincomegroupsatsubsidizedsaleprices
orlowrentalrates.
publicland
Acreageheldbythegovernmentforconservationpurposes.Publiclandsare
generallyundeveloped,withlimitedactivitiessuchasgrazing,wildlifemanagement,
recreation,timbering,mineraldevelopment,waterdevelopmentandhunting.
publictender(opentender)
Atenderopentoanymemberofthepublicwhoisabletofulfilltherequirements
specifiedinthetenderdocument,thetenderbeingadvertisedforthispurpose.
purchaseagreement
Acontractdocumentingthetermsandconditionswhichgovernthepurchaseofa
property.
purchaseandleaseback
Apurchaseofapropertyandsubsequentleasefromthebuyerbacktotheseller.
Althoughtheleaseactuallyfollowsthesale,bothareagreedtoaspartofthesame
transaction.
quantitysurveymethod
Estimateditemizationofallcostsinconstructingastructureincludingsite
acquisitionandpreparationandadetailedcostestimateofallmaterials,labourand
overheadrequiredtoreproduceastructure.Contractorsinpreparingaprojectsbid
priceusequantitysurveys.Also,anappraisalestimateofthereplacementcostofa
structureincludingcurrentcostsofmaterialsandlabour.
quantumallowance
Inavaluationofarelativelylargepropertywhenappropriateinmarketterms,an
enddeductionfromtherentalorcapitalvalue,whichhasbeencalculatedby
referencetocomparablesmallerproperties;itspurposeistoreflectthegreatersize
ofthesubjectofthevaluation.
rackrate
Theratealodgingestablishmentchargesforaroombeforeanydiscounthasbeen
takenintoaccount.Itisthepublishedrateforaguestroom.Arackrateisoftenthe
ratealodgingestablishmentwouldofferaguestifhe/sheapproachesthe
establishmentdirectly.
ratableestate
Propertyonwhichtaxislevied.
ratchetclause
Amechanisminaleaseagreementwhichpreventstherentalpayablefrom
decreasingatarentreview.
rateofoccupancy
Thepercentageofallrentalunits(i.e.,hotelguestrooms)areoccupiedorrentedata
giventimeexpressedasapercentage.
rateofreturn
Theannualpercentagereturnfromaninvestment.

376
rateablevalue
Anestimateofitsannualopenmarketrentalvalueatadesignatedvaluation
referencedatemadeontheassumptionthatthepropertywasthenvacantandtolet.
realestate
Oforrelatingtolandandproperty.
realestatebroker
Apersonwhobringsbuyersandsellersorlessorsandlesseesortenantsand
landlordstogetherandreceivesapercentageofthedealvalueascompensation.
realestatelicense
Alicenseissuedbyacompetentauthorityforcarryingonthebusinessofareal
estatebrokerordeveloper.
realty
Sameasrealestate.
recisionofacontract
Theabrogationofanagreement.
recital
Explanationoffactsinadeedoragreement.
reclamation
Theprocessofincreasingthevalueoflandbyimproving(usually)wastelandor
swamplandandmakingiteconomicallyuseful.
reconditioning
Renovation.
Reconveyance
Thetransfersoftitletoamortgagedpropertyfromatrusteetotheequitableowner
afterallsumsdueplusinteresthavebeenrepaid.
rectificationofboundaries
Thecorrectionoradjustmentoftheline(s)separatingtwopropertiesinorderto
correctlyreflectthetitleoflands.
reddendum
Legaltermforanownerretainingsomerightsinasaleorleasedeed.
redemption
Theactofpayingoffamountsdueonmortgagedpropertiesfollowingwhichthe
ownersunencumberedtitletoapropertyisrestored.
registration
EveryLeave&LicenseAgreement/LeaseAgreementinIndiahastoberegistered
withtheofficeofthesubregistrarofassurances(localauthority)forittobe
enforceablebylaw.Thisistheobligationofthelicensor/lessor/landlord.However,
thecosttowardsregistrationoftheagreementisusuallypaidbythelicensee/lessee.
reinstatement
1)Paymentsthatrestoreacontractfromdefaultandmakeitliveoncemore.2)The
actofputtingapartorthewholeofabuildingorstructurebackintothecondition
whichexistedatsomerelevantpreviousdate.
relocation
Referstotheprocessofrelocatingpeoplelivingonafuturedevelopmentsiteto
anotherarea
remediation
Theremovalfromtheenvironmentofpollutionorcontaminants,suchassoil,
groundwater,sediment,orsurfacewater,forthegeneralprotectionofhumanhealth
andtheenvironment.Itcanalsobetheremovalofcontaminantsfromabrownfield

377
sitethatisintendedforredevelopment.Remediationisgenerallysubjecttoanarray
ofregulatoryrequirements.
remise
Togiveupaclaim.
remnant
Nonacquiredportionofalargerpropertythathasbeentakenoverbythe
governmentineminentdomainproceedings,suchthatthisremainingportionis
practicallyofnovalue.
remodeling
Theimprovementofastructurebychangingitsplansorfunctions.
rendering
Thedrawingofaplanorsketchofabuilding.
rentcontrols
Lawsinsomecountriesthatsetupperlimitsontheamountofrentsthatcanbe
chargedbylandlords.
rentfreeperiod
Periodduringwhichthelandlorddoesnotchargerentsfromthelessee.Thisis
usuallyatthebeginningofthecontractperiodwhenthelesseeneedstimetofurnish
thepropertytomakeitfitforuse.
rentablearea
Theareainsquarefeetorsquaremetersthatalandlordcanchargerentfor.
rental
Aperiodicpaymentfortheuseoflandorpropertymadebyatenanttoalandlord
underaleaseortenancyagreement.Rentisthereforebothachargeonoccupation
andalsoareturntoownersofproperty.
rentalvalue
Themarketrentofaproperty.
rescind
Tocancelacontract.
reservation
Arightthathasbeenretainedbyanoriginalownerofland.Alsoreferstolandthat
hasbeensetasidebythegovernmentforaparticularpurposeorgroupofpeople.
reserve
Thesettingasideoffundsforanypurpose.Suchpurposemayormaynotbe
specified,eg.,reserveforrenewaloffixturesfittingsandequipment(FFE).
reservoir
Adesignatedareawherewaterisstored.
residence
Dwellingplace.
residentialbuilding
Abuildinginwhichpeoplelive.
residualmethod(residualvaluation)
Amethodofdeterminingthevalueofapropertywhichhaspotentialfor
development,redevelopmentorrefurbishment.Theestimatedtotalcostofthework,
includingfeesandotherassociatedexpenditure,plusanallowanceforinterest,
developersriskandprofit,isdeductedfromthegrossvalueofthecompleted
project.Theresultantfigureisthenadjustedbacktothedateofvaluation.
residuaryestate
Thepropertyofadeceasedthatremainsafteralltaxesandbequestshavebeenmet.

378
retainedearnings
Thetotalprofitorlossofthecompanylessthetotalofalldividendspaid,sincethe
companysstartup.
retainingwall
Wallthatrestrainswaterorsoilfromflowingintoaninappropriatearea.
retention
Anagreedsumheldfromthecontractorspaymentsuntilcompletionincaseofnon
performanceofthecontractor.
retrofitting
Theextensiverenovationtoabuildingofteninvolvingmajorchangestoitslayout,
servicesandstructure,toenhanceitsfunctionalityandupdateorimproveitsappeal
andmarketabilitywithaviewtoachievebetterinvestmentreturnsandcapital
appreciation.
returnforriskandprofit
Apercentageofcoststoallowforthedevelopersannualriskandprofitina
valuationtodetermineagroundrentbydeductionsfromactualorestimated
occupationrent(s).
returnonequity(roe)
Netincomefortheperiodexpressedaspercentageofaverageshareholdersequity
fortheperiod.
revenueperavailableroom(RevPAR)
TheproductofAverageDailyRate(ADR)andaverageoccupancy.
reversion
Therighttoreclaimtitletoapropertyattheendofatemporaryestate.
reversionaryyield
Thepercentagereturnontodayspriceorvaluethatwillbederivedwhenthe
currentmarketrentsbecomepayable.Thisyieldrelatesthefuturegrowthinnet
incometothehistoriccostorvalueoftheproperty.
rightoffirstrefusal
Arightgivenbyonepartytoanotherwherebythefirstpartyisobligedtogivethe
secondpartyachancetoacquireanassetbeforeheoffersittoanyoneelse.
rightoflastrefusal
Arightgivenbyonepartytoanotherwherebythefirstpartyisobligedtogivethe
secondpartythelastchancetobidonaproperty.
rightofsurvivorship
Therightofasurvivortothepropertyofadeceasedperson.Usuallyfoundinlease
orrentalagreements.
rightofway
Therighttopassoverlandnotlegallyorspecificallybelongingtotheuser.
rise
Theheightofaslope.
riskaverse
Inrealestate,generallyreferstoaninvestorsaversiontovolatilereturns.
riskmanagement
Theidentification,assessmentandmanagementofissuesthatmaycauseanadverse
effectontheprojectorthestakeholders.
ROFR
RightofFirstRefusal(ROFR)isprovidedbythelessortothelesseeonanadditional
areawhichhasnotbeencommittedbythelessee.Thelessoronfindinganother

379
interestedtenantfortheareawillprovidethelesseewithanopportunitytotakeup
theareawithinaspecifiednumberofdays,ifthelesseedoesnottakeupthearea
withinthespecifiednumberofdays,thelessorwillgoaheadwiththeinterested
tenant.
rollingrefurbishment
Thestagedupgradingofpremiseswhichavoidsthecompleteremovaloftenantsbut
whichdoesnotresultinasubstantialupgradeofabuildingsfabricandservices.
roomcount
Thenumberofroomsinabuildingorapartment.
rootoftitle
Documentthatestablishesbeyonddisputethetitleofanunregisteredland.Ittraces
thetitletothepropertybackintime,sometimesuptoahundredyearsormore,and
fromthatpointtothepresent,leavingnoscopeforanydisputeovertherightand
titleofthecurrentowner.
rowhouses
Residentialhouseswithinahousingestatehavingtwoorthreefloors,constructed
nexttoeachother,havingcommonwalls,foundationsandfacilities.
royalty
Afeepaidtotheowneroflandforextractingnaturalresources(oil,coal,etc.)from
it.
saleablearea
Thefloorareaexclusivelyallocatedtotheunitincludingbalconiesandverandahs
butexcludingcommonareassuchasstairs,liftshafts,lobbies,etc.Thesaleablearea
ismeasuredfromtheexterioroftheenclosingwallsoftheunitsandtothecenter
lineofthepartywallbetweentwounits.
salvagevalue
Therealizablevalueofgoodsorconstructionmaterialthatcanberecoveredand
soldfromabuildingthatisbeingdemolished.Example:doors,windows,marble
slabs,steelrods,etc.premises,andthebasicfeaturesofthe
satellitecities
Urbansettlementsthatcomeuparoundabigcity,thatreplicateonasmallerscale
mostoftheamenitiesandfacilitiesthatareavailableinthebigcity.Themain
purposeofsatellitecitiesistodecongestthemaincityaroundwhichtheygrow.
scale
1)Modeldepictingwhatastructurephysicallylookslike.Thedimensionsaredrawn
onaproportionatebasistotherealthing,suchas1:100scale,whichequalsone
centimetertoonemeter.2)Aseriesofmarksusedinmeasuringorregisteringor
comparingweights.3)Peelingorflakingofasurfacemarkedbydiscoloration.
sciencepark
Adevelopmentofanindustrialnaturesuitedtoaccommodatehightechnology,with
supportingamenities,whichisoftenassociatedonsitewithorisclosetoahigher
educationalresearchestablishmenttoprovidecrossfertilizationofideasbetween
entrepreneursandresearchersforthepurposeofenablingacademicknowledgeto
beappliedtoeffectivecommercialuse.
scissorlifts
Workplatformsthatareraisedonlinked,foldingsupportsthatdrawtogethertolift.
Scissorliftsareusedwherethereislessreachandheight,andmoreworkspaceand
liftingcapacityarerequired.Theyaredesignedtoprovidelargerplatformwork
areasandtoallowforheavierloadsthanboomlifts.

380
sealedbid
Anoffer,usuallyintheformofatender,submittedinasealedpackageonthe
understandingthatitwillbeopenedsimultaneouslywithothercompetitiveoffersat
astatedtimeandplace.Insomecircumstancestenderersarepermittedtobe
presentwhenthebidsareopened.
secondmortgage
Mortgagethathassecondcharge.Thismeansthatholdersofasecondmortgagewill
receivepaymentonlyafterthefirstmortgagehasbeenpaid.
secondary
Propertywhichisbelowthatofprimeinrelationtorentals,location,etc.
secondarylocation
Locationthatislessadvantageousthandesired.
secondarymortgagemarket
Thesaleofamortgageesinteresttothirdparties,usuallybanksandfinancial
institutions.
section
Aparceloflandwhoseboundariesareshownonasurveyplan.
securedparty
Alenderoramortgageewhoseinterestissecuredbyachargeagainstaproperty.
securitization
Afinancialtechniquewherebyvarioustypesofobligations,typicallymortgagesbut
alsocarloans,creditcarddebtandothersare,ineffect,gatheredintopackages.This
turnsthemintoatradablesecurity,suchasbonds,passthroughsecurities,REITsor
collateralizedmortgageobligations(CMOs),whicharesoldtoinvestors.
securityagreement
Anyloanagreementthatincludesachargeonafixedasset.
securitydeposit
Adepositbyatenantkeptwithalandlord.
securityinterest
Theinterestofasecuredcreditor.
servicecharge
Thecollectivenameforthecostofairconditioningandotherservicesand
managementchargespassedontothetenant.
servicedaccommodation
Fullyfurnishedapartmentwheretenantsareprovidedservicessuchas
housekeeping,securityandconciergeorreceptionorfrontoffice.Serviced
apartmentscombinethefeaturesofahotelandanapartment.
servientestate
Landthroughwhicharightofwayisgiveninfavorofanotherland.
settlementstatement
Acompleteandcomprehensivestatementonthetotalcostofarealestatedeal.
shoppingcenter/mall
Alargebuilding,comprisingseveralfloors,housingseveralretailstores,food
outlets,moviehalls,etc.,havingacommonparkingareaandunderthesame
management.
shortformdocument
Adocumentwhichreferstoanotherdocumentthatcontainsallthedetailsofan
agreement.
sideletter

381
Adocumentwhichreferstocommercialterm/sagreedbetweentheparties,which
cannotformpartoftheLeave&LicenseAgreement/LeaseAgreementasthere
wouldbeimplicationofadditionalstampdutyorrequirementsbythelicensorsand
hisbanks.Sideletterisexecutedeitheronthelandlordsortenantsletterheadoron
astamppaper.
signage
Referstoanythingthatfunctionslikeasign.Thetenantandthelandlord,onmutual
discussion,willagreeonthelocationforthetenanttoerecttheirsignage.Usually
signageisprovidedbythelandlordinthebuildingdirectoryandonthecommon
lobbyofthedemisedpremises.
signed,sealedanddelivered
Legalphrasemeaningthatallrequirementsandformalitiesofadealhavebeen
completed.Thesealisnormallyusedonlybygovernments,corporatebodies,legal
entitiesandnotaries.Individualsonlysignanddeliver.
singlefamilyhouse
Ahousethatisdesignedforoccupationbyonefamilyonly,asopposedtoan
apartmentblockthatisdesignedforoccupationbyseveralfamilies.
singlepurposeproperty
Abuildingwhosedesignprecludesitsuseforanypurposeotherthantheonefor
whichitwasoriginallybuilt.
sinkingfund
Asumofmoneysetasideatregularintervaltoearninterestonacompoundbasis
either:1)tobesetoffagainstthediminutioninvalueofawastingasset,eg.,alease;
or2)tomeetsomefuturecashliability.Inpropertyvaluations,itisusuallyassumed
thatthemoneywillbeinvestedatariskfreeratewhichisregardedasappropriate
accordingtomarketconditions.Thetotalamountcalculatedtoaccumulatebythe
sinkingfundmaybethesameastheoriginalinvestmentorliabilitybutpossibly
withanadjustmenttoreflecttheviewtakenonfuturefluctuationsinthevalueof
money.
siteanalysis
Anexaminationofapropertytodecideifitissuitableforaparticularuse.Oran
examinationofapropertywiththepurposeofdecidingitsmostappropriateuse.
sitedevelopment
Improvementsmadetoaplotoflandtomakeitsuitableforbuilding,suchas
levelingunevenground,layingofsewerandundergroundutilitylines,etc.
siteplans
Diagrams,sketchesormapsshowingtheoutlineandlocationofaparticularplot
alongwithallfeaturesinit.
skin
Theexteriorsurfaceofabuilding.
skylease
Alease,securingexclusiveusebyalesseeanditsnominees,oftheairspaceabovea
plotofland.Example:nowadays,airportoperatorsdemandskyleasesabovethe
airportstheydevelopormanage.
soilbearingcapacity
Thevalueoftheaveragecontactpressureorweightthatthesoilcanwithstandwith
directorindirectloading.
soleagency
Asoleagencyprecludesallotheragentsfromworkingonthesaleoftheproperty,

382
althoughanotheragentmayapproachthesoleagentiftheyhaveasuitableparty.
Thesoleagentwouldhandletheapprovaltotheprincipal.
soleselling/lettingrights
Therightsexercisablebyanagentwheretheprincipalhascontractedtoconvey
whollyexclusiverightstosell/lettheproperty,entitlingtheagenttocommission
eveniftheprincipalactsonhisownbehalf.
spacedesign
Layoutplanfortheinteriorofabuilding.Involvesbothconstructionaswellas
interiordesigns.
span
Thedistancebetweentwopillars,wallsorotherloadbearingstructures.
splayed
Anobliqueslopeonthesidesofawallopeningthatmakestheopeningatoneside
widerthantheother.
square
1)Expressedinunitsofmeasuringarea:squarefeet.2)Anopen,usuallyfoursided
areaattheintersectionoftwoormorestreets,oftenplantedwithgrassandtreesfor
useasapark.3)Arectangularspaceenclosedbystreetsandoccupiedbybuildings;
ablock.4)Somethinghavinganequalsidedrectangularform.
squarefoot
Theareacontainedbyasquarethatis1footlongonallsides.Thecalculationis1
footx1foot=1squarefoot.
squarefootcost
Thetotalcostofconstructingabuildingdividedbythetotalareainsquarefeet.
squareyard
Theareacontainedbyasquarethatis1yardlongonallsides.Thecalculationis1
yardx1yard=1squareyard,or,3feetx3feet=9squarefeet.
stabilitycertificate
Issuedbythegovernmentrecognizedconsultantwhichstatesthatthestructural
workofthebuildinghasbeencarriedoutinaccordancewiththestructural
consultantsdesignsanddrawingsandthesaidstructureissafeandstableforthe
purposeforwhichitisintended.
statuteoflimitations
Lawthatstipulatesthatlegalactiontoredressawrongdoinghastobebrought
beforeajudicialforumwithinasettime,afterwhichnolegalremedywillbe
available.
statutorylien
Alienorrestrictioncreatedontheoperationofland.Example:outstandingproperty
taxesmaycreatealienagainsttheproperty.
stormsewer
Sewerthatdrainsrainwater.
stratatitle
Titletoahorizontalpartofabuildingwithotherfreeholdtitlesaboveand/orbelow.
Satisfactoryarrangementsformanagementusuallyinvolveastatutoryobligationfor
thesettingupofamanagementcorporationwithresponsibilityforthemaintenance
ofcommonfacilitiesandareas.
stripcenter
Ashoppingarea,usuallynotenclosedandlocatedoffamajorthoroughfareor

383
highwaywithrowsofretailoutletsandcommonparking.Itmayormaynotbe
underasinglemanagement.
subcontractor
Acontractorengagedbyageneralcontractortoexecutespecificjobs.Theoverall
buildingcontractisgiventothegeneralcontractor,whothenappointselectrical
contractors,plumbingcontractors,etc.,todospecializedjobs.
sublease
Aleasegrantedbyapersonwhohimselfenjoysonlyaleaseinterestoverthat
property.Here,thesublessorcannotgrantrightsthathedoesnothave.Example:A
leasesaplotoflandtoBfor25years.IfallowedinhiscontractwithA,Bcansub
leasethelandtoCfortheremainingperiodofhisleaseterm,butcannotsubleaseit
for26years.
subleasespace
Vacantspacewhichisavailableforleasefromthecontractedtenantofthepremises.
Superbuiltuparea
Superbuiltupareaiswhatbuildersoftentalkabout.Itisanallinclusivetermand
takesintoaccountcarpetarea,builtupareaandtheproportionateareaunderthe
commonspaces.
tacking
1)Addingaperiodoftimeontoanother.Forexample:Addingperiodsofpossession
toadduptoenoughtimeforsuccessfuladversepossession.2)Attachingalientoa
superiorlieninordertogainthepriorityoveranintermediatelien.
takeoutcommitment
Agreementbyalendertoprovidepermanentfinancingfollowingconstructionofa
plannedproject.
takeoutloan
Thelongtermfinancingofarealestateaftercompletionoftheproject.
technologypark
Alandscapeddevelopmentusuallycomprisinghighspecificationofficespace,
labouratories,hightechnologyengineeringservicesandresearchanddevelopment
facilities.Itmayincluderesidentialandretaildevelopments,designedtoencourage
localizationofhightechnologycompaniessuchasinformationtechnology,software
developmentetc.,therebygivingeachthebenefitofeconomiesofscale.Usually,
technologyparksarelocatedoutsidetheinnercityareasasthesearequiteland
intensiveinnature.
tender
1)Anofferofmoneyorserviceinpaymentofanobligation.2)Awrittenofferto
contractgoodsorservicesataspecifiedcostorrate;abid.
tenure
Thelengthoftimeorconditionunderwhichsomething,suchasapieceofproperty,
isheld.Thedurationofownershiprights.
thirdparty
Onewhoisnotdirectlyinvolvedinatransactionorcontractbutmaybeinvolvedor
affectedbyit.
thirdpartylogisticsprovider(3PL)
Afirmthatprovidesoutsourcedorthirdpartylogisticsservices,suchasintegrated
warehousingandtransportation,tocompaniesforapartoralloftheirsupplychain
managementfunction.

384
timeistheessence
LegaltermwhichsetsthetimeperiodwithinwhichacontractorcertainActs
specifiedunderacontracthavetobeexecuted.
timesharing
Ownershipforaspecificperiodoftime,ofaproperty,byseveralpersons.Applicable
tocondominiumsandresorts.Forexampleaunitorapartmentinaresortmaybe
soldto12personsorentitieswhereeachisgiventherighttotheunitforaperiodof
onemontheveryyear.Weeklyownershipisthemostcommonperiodoftimeshare.
title
Thelegalrightofanownershipinterestinaproperty.Legaldocumentwhichshows
ownershipofapieceofrealestate.
titlecompany
Firmthatprovidesinsuranceofacleartitleonceitcompletesitssearchforliens.
titleinsurance
Thepolicythatisissuedtoprotectagainstlossduetoadisputeinproperty
ownership.
titlesearch
Thereviewing,ofallrecordedtransactionsinthepublicrecord,todiscoveranytitle
defects,whichcouldinterferewiththetransferofownershipofaproperty.
tojoinwithanother
Mostlyusedtodescribesituationswheretwoormorecompaniesjointogetherto
formalargerentity.Usually,theidentityofthesmallerortheweakercompanyis
absorbedbythelargerordominantone.
topographicalsurvey
Asurveyofanareabymappingthephysicalfeaturesoftheregion.
topography
Artofmappingthephysicalfeaturesofaregion.Thetopographydescribesthe
characteristicsofanarea,suchasitscontours,flatness,mountains,etc.
totaloccupancycost
Atenantstotalexpenditureonitspremises.
townhouse
Adwellingunit,generallyhavingtwoormorefloorsplusagarageandisattachedto
othersimilarunitsviapartywalls.Suchdwellingsaretypicallyfoundin
condominiumsandcooperativesoraspartofaplannedunitdevelopment.
tract
Aparceloflandgenerallyheldforsubdividinganddevelopmentintoresidential
units.
tradefixtures
Articlesofpersonalpropertyinstalledinrentedbuildingsbythetenanttohelpcarry
outatradeorbusiness.Tradefixturesareremovablebythetenantbeforethelease
expiresandarenottruefixtures.
transfertax
Anassessmentandimpositionoftaxbystateorlocalgovernmentwhenapieceof
propertychangeshands.
TransferofDevelopmentRights(TDR)
TransferofDevelopmentRightsistheRighttodevelopoveroneplotthatcanbe
transferredoveranotherplot.Forexample,theislandcityofMumbaihasanFSIof
1.33andforsomereasons,theownerisnotallowedtoconsumethewholeFSIon
his/herplot,thentheremainingFSIcanbeusedonanotherplot(ofcoursethereare

385
severalconditions).ThisremainingFSIcanalsobesoldintheopenmarket.
transparency(market)
Degreeofclarityregardingtheoperationoffinancial,legal,taxandothersystemsin
amarket
tripleagrade
Thehighestspecificationofbuildingavailableinthemarket.
triplebottomlinereporting
Thetermusedasaframeworkformeasuringandreportingcorporateperformance
againsteconomic,social,andenvironmentalparameters.Thus,itisanexpansionof
thescopeoftraditionalcorporatereporting.
triplenet
Aleasewherethelesseehastopayallexpensesofthepropertyleasedincluding
maintenance,inadditiontoafixedrent.
trusteessale
Aforeclosuresaleconductedbyatrusteeunderthestipulationsofadeedoftrust.
turnkey
Adevelopmentinwhichadevelopercompletestheentireprojectonbehalfofa
buyer.Allthenewtenantorownerhastodoisturnthekeytotheapartmentor
officeinanewlyconstructedbuildingbecauseeverythingiscompletedandreadyfor
occupancy.
turnoverrent
Arentthatiscalculatedasapercentageoftheturnoverofthelesseesbusiness.
Oftenusedinleasesofshopspaceformajorchainstoresinashoppingmall.Usually,
theturnoverrentisappliedinadditiontoabaserentorisstructuredtotakeeffect
whenthelesseesturnoverreachesacertainfiguremutuallyagreedbetweenthe
landlordandthelessee.
underlease
Aleasegrantedbyatenantorlessee;especially,aleasegrantedbyonewhois
himselfalesseeforyears,foranyfewerorlessnumberofyearsthanhehimself
holds;asublease.
underpass
Anundergroundtunnelorpassageenablingpedestrianstocrossaroadorrailway.
underpinning
Reinforcementofabuildingwithsupportsortheuseofbeamstemporarilywhilethe
structureisbeingbuilt.
underwriter
Onewhosignsapolicyofinsurance,bywhichhebecomesaninsurer.Bythisacthe
placeshimselfastohisresponsibility,intheplaceoftheinsured.Hemaycauseare
insurancetobemadeforhisbenefit;anditishisdutytoactwithgoodfaith,and,
withoutquibbling,topayalljustdemandsagainsthimforlosses.
unit
Segregatedpartofastructure,i.e.,oneapartmentinanapartmentbuildingoran
officeinacommercialbuilding.
unitcost
Thecostofasingleitemonaconstructionbudget.Theunitcostismultipliedbythe
numberofunitsrequiredforthejobtodeterminethetotalcost.Mayalsorefertothe
costexpressedonaperunitbasiseg.$xpersquarefoot.

386
unittitle
Individualownershipformultiownerpropertiessuchashighriseofficeblocks,
apartmentbuildingsandindustrialunits.
unityofinterest
Jointtenantshavetoacquiretheirinterestbythesameconveyanceandthesaid
interestmustremainthesame.
usedensity
Theratioofthenumberofbuildingsorfloorareaofbuiltupspaceofaparticular
usetoagivenarea.
usevalue
Thevalueofapropertyintermsofaspecificuse.
utilities
Servicessuchaswater,gas,electricity,etc.,providedtolandorhousesbypublicor
privateutilitycompanies.
utilitycharges
Utilitiessuchaswaterandpowerforthedemisedpremisesisseparately
charged/meteredtothetenant.Thetenantisusuallyresponsibletopaytothe
concernedutilitycompanythechargeforsuchutilitiesasperthebillsraisedbythe
utilitycompany.
utilityroom
Roomthatcontainstheappliancesnecessaryforthemaintenanceofthat
establishmentsuchasaroomusedforlaundry,heatingequipmenttelephonewiring,
janitorialpurposes,etc.
VaastuShastra
Anancientsciencethathelpstogetthenaturalbenefitsfreelyofferedbythefive
basicelementsoftheuniversewherewealllive.ThesebasicelementsareAkash
(sky),Prithvi(earth),Paani(water),Agni(fire),andVayu(wind).VastuShastracan
beappliedbykeepinginharmonywiththeseelementsofnature.
vacancy
Ahouseorapartmentorshopspaceorofficespacethatisavailableforrentorsale.
vacancyfactor
Theratioofvacantspace,expressedasapercentage,inabuildingorproject.
vacancyrate
Ratioofvacantspacetototalstockinthemarket.
valuableconsideration
Legaltermmeaningmoneyhasbeenpaidaspartofacontract.Thetermvaluable
doesnotimplyanyparticularvalue.
valueforsaleunderrepossession
Thepricethatmightreasonablybeexpectedtorealizewithin90daysfromthesale
ofthepropertyinthemarketunderrepossessionbythelenderorreceiver,onanas
isbasis,takingintoaccounttheuniquequalityofthepropertyandtheexistenceof
anyspecificdemandaswellasfactorswhichmightadverselyaffectthe
marketabilityofthepropertyduetomarketperceptionofincreasedriskorstigma,
justifiedorotherwise.Thetermreplacedforcedsalevalueandestimated
restrictedrealizationprice.
vendee
Oppositeofvendor,buyer.
vendor
Seller.

387
warrantedpricecontract
Anagreementbetweenpartiestodesignandconstructafacilityforamaximum
pricetoanagreedbriefwhereanysavingsmaybesharedbetweentheparties.
warranty
Legallybindingagreementgivenatthetimeofasale,bythesellertothebuyer,
containingcertainassurancesastothetermsandconditionofthepropertybeing
sold.
workingdrawing
Adrawingmadetoscalewithdetailsandmarkingstofacilitateusebybuildersand
engineersduringconstruction.