One of my client is a builder. This is a partnership firm. Up to F.Y. 2007-08, the firm was constructing flats and accordingly there was no any income. Accordingly, we have shown loss through profit and loss account and the same is carried forwarded.
Total construction cost up to 31.03.2008 was Rs. 1 crore. In F.Y. 2008-09, the firm has finished construction of 20 flats and 10 shops. The firm has sold 10 flats and 5 shops through registered deed. In these sale deed, everywhere the firm has written that “This is a sale of only flat without roof”. The firm sold it on a price of Rs. 10 Lac for a flat and Rs. 8 Lac for a shop. My questions are – 1) Will there be any capital gain provisions attract as the firm started construction on 01.07.2005. (Long term or short term) 2) How I have to show the balance in the balance sheet towards finished flats and work-in-progress. 3) When all the flats and shops will be sold then – Will the firm be a owner of that property as the firm is selling all the flats and shops without roof i.e. without selling roof to the owner.
Please guide as the matter is related with audit and it is urgent.
21 September 2009
"we have shown loss through profit and loss account and the same is carried forwarded" it shows that the assessee is carrying on business activity. Question of capital gain does not arise.
WIP and Finished Flats to be shown at cost.
Roof of first floor is floor of second floor. We have to calculate profit of the project. Decide total cost of the project as it is more or less complete. Allocate the construction cost to shops and flats reasonably and logically.
The unti cost of sale thus arrived will be instrumental in deciding the profit.
Deduct the unit cost of sale, from the sale price. Excess to be transferred to P&L A/c.
21 September 2009
Since it is a construction contract and crossing more than one accounting period, the appropriate AS is AS -7 as per AS-7 unbilled revenue may be calculated and show the profit accordingly.
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