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Income Tax Appellate Tribunal, ‘D’ BENCH
Before: SHRI AMIT SHUKLA & SHRI GAGAN GOYAL
आदेश / O R D E R PER AMIT SHUKLA (J.M):
M/s. Mighty Construction Pvt. Ltd. The aforesaid appeals has been filed by the Revenue against separate impugned order passed on 09/01/2017 for A.Y.2011-12 passed by ld. CIT(A)-20, Mumbai; order dated 28/02/2017 for A.Y.2012-13 passed by ld. CIT(A)-20, Mumbai and order dated 05/02/2019 passed by CIT(A)-21, Mumbai for A.Y.2013-14.
2. Since most of the issues are common in all the three years, therefore, the same were heard together and have been disposed of by way of this consolidated order. We will take up the appeal for A.Y.2011-12 in ITA No.3042/Mum/2017. In this appeal, Revenue has challenged the deletion of addition of Rs.46,75,48,737/- on account of suppressed sales of flats; disallowance u/s.36(1)(iii) of Rs.37,98,236/-.
The brief facts qua the first issue raised vide ground No.1(a) to 1(c), where department has challenged deletion of addition of Rs.46,75,48,739/- are that assessee is a builder and developer. For the year under consideration assessee had sold some units and its building constructed by it namely, ‘Universal Majestic’ near Chembur, Mumbai. The Assessing Officer noted that there was a huge variation in the sale price of individual units and found that assessee had sold various units at different rates ranging from Rs.13,513/- per sq. ft to Rs. 27,951/- per sq.ft. He has noted the comparable sale instances at page 2 of the assessment order. In the reply to show-cause notice assessee has given various factors and reasons for the variation in the prices for example, firstly some units had additional flower bed M/s. Mighty Construction Pvt. Ltd. area; secondly due to various Vaastu angles and passage for the flat which commanded different prices; thirdly, certain units had additional areas like store room, flower bed and passage area and lastly, some of the units had no natural ventilation and due to certain market conditions also, the price bookings and rates are varied. Apart from that, it was also submitted that the project was on off-location and no good development and constructions in the surrounding area was there during that period and it was covered with slums all around the building premises.
The ld. Assessing Officer rejected all the contentions after giving his detailed reasoning stating that, firstly, the project was centrally located and directly assessable to Eastern Express Highway and easily accessible from Mumbai International Airport and Domestic Airport, and newly build freeway flyovers have come connecting to various important places. Apart from that, he also rebutted the assessee’s contention of the additional flower bed area and passage area on the grounds that as per the Municipal rules builder can only sell area as per the approved plans and any encroachment done on the flower bed or any alteration without the permission of the Municipal authorities is not permissible and the passage area is only common area property for the society wherein nobody can encroach. Regarding Vaastu factor also, he has given his detailed analysis by bringing in certain comparable instances of the flats sold by the assessee itself. Thus, he held that the justifications and the submissions given by the assessee to prove the variation in the rates is only M/s. Mighty Construction Pvt. Ltd. an afterthought. Accordingly, he held that rate per sq.ft should be Rs.27,951/- as on 31/08/2010 since most of the other bookings were somewhere closure to this date and accordingly, he worked out the sale cost of each unit in the following manner:- Comparable Sr. Name of Buyer Flat Area Area Rate Date of Agreement Addition no No. Sq.mtrs Sq.Ft Booking value 1. Action 605 197.45 2123 17,879 28.04.10 38000000 21382856 Construction Equipment Ltd.
Kumud Mehta 607 86.57 931 14,883 16.04.10 13869000 12166308 3. Bhavika V. 608 83.18 895 14,882 16.04.10 13325000 11696755 Mehta 4 Deonar G-l 550.00 5915 13,513 02.01.10 80000000 85400770 Weight Bridge P. Ltd. Total 130646689 Comparable-II Sr. Name of Buyer Flat Area Area Rate Date of Agreement Addition No. No. Sq. Sq.Ft Booking value mtrs. .
1. Oasis 1101 169.44 1822 27,951 31.8.10 50980000 NIL Infrastructure Pvt. Ltd.
2. Premal 1102 101.18 1088 17,463 31.8.10 19020000 11410944 Thakar/ Darshana P. Thakar 3 Black Stone 1104 207.65 2233 16,650 30.8.10 40000000 25235133 Infra Projects P. Ltd.
M/s. Mighty Construction Pvt. Ltd. 4 Sushil 1103 117.50 1264 16,650 16.6.10 21645500 14284464 Budhia / Suchitra Budhia/ Usha Gopalan 5 Sterling & 1001- 962.50 10352 16,650 26.5.10 17250000 116987952 wilson Powergen 1006 0 P. Ltd. 6 Pratibha Pipes 1301- 962.50 10352 16,650 09.4.10 17250000 116987952 & Structural Ltd. 1306 0 Total 284906445 Comparable - III Sr. Name of Buyer Flat Area Area Rate Date of Agreement Addition no No. Sq. Sq.Ft Booking value mtrs.
SHL 1108 193.25 2078 23,172 23.12.10 48202155 9330762 Property Holdings Ltd.
2. Thakkar 1105 207.65 2233 15,538 11.10.10 34730000 27718229 Constructions P. Ltd.
3. Techno Force (1) 1107 164.07 1764 19,818 08.02.11 35000000 14346612 P. Ltd. Total 51995603
The ld. CIT(A) after considering the explanations and reasoning given by the assessee wherein assessee has raised various propositions, has deleted the said addition after observing and holding as under:- 5.26 I have gone through the assessment order and submissions made in this regard. It is noted that during the course of assessment proceedings, the AO observed that the M/s. Mighty Construction Pvt. Ltd. assessee was constructing a building and some units were sold during the year. The Assessing Officer had observed that the units sold by the appellant at different rates ranging from Rs.14,882/- per sq.ft to Rs.23,172/- per sq.ft. was not correct and that the appellant had suppressed sale since the units were of capable of being sold at Rs.27,951/- per sq.ft. as they have been sold in and around the same period. He therefore adopted the highest sale rate in respect of unit no 1101 being Rs.27,951/- per sq. ft. during the year and applied the same in respect of all other units sold by the appellant during the Year and made the addition on account of alleged suppressed sale of Rs.46,75,48,737/-. The AR of the assessee has vehemently opposed the addition made and has submitted that the rates adopted by the Assessing Officer, as price of unit no. 1101 as calculated by the Assessing Officer is higher since the calculation is being made on the basis of the consideration as well as the area stated in the agreement only. However, it was contended that the said party was A also allowed exclusive use of additional area of AHU admeasuring 1647.54 Sq. Ft. abutting the location of the said unit and specifically earmarked to the said unit. Thus, if the total benefit of the area under use and occupation by the said unit holder was considered, it would be noticed that the rate per square feet was Rs. 14,691/- ps. Ft. Instead of Rs. 27,952/- ps. Ft. as per the Assessing Officer. The appellant therefore prayed that the comparison has to be done between the sale price of various units after taking into account various factors affecting the said prices. The appellant has submitted details of additional area and benefit provided to each units and the rate of the units ps. Ft after considering such benefits attached to each unit. If the revised rate after taking into the account the additional area is considered, it can be seen that the rate per sq.ft. Is within the permissible range of variation. Further, the appellant also submitted that the pure comparison of the rates is also not possible since every unit has its own peculiarity because of which it can either fetch a better price or has to be subjected to a discounted rate. The appellant has demonstrated various reasons and factors which affected price of various units like shape of various units, location of the units etc.. The appellant further contended that the addition made by the Assessing Officer by estimating the sale rate of unit M/s. Mighty Construction Pvt. Ltd. no.1101 to all the units sold during the year is contrary to the Assessing Officer's own action of preparing comparables in 4 different categories. This itself showed that while the Assessing Officer has initiated the enquiry for different purposes and ended the proceedings in a different manner. The very purpose for which 4 application of comparables were made as evident from the assessment order was that different period of booking were found in respect of 4 groups of comparables. However, while making that addition of a single rate was applied to all the sales instances in the various groups ignoring the different date of booking. On the basis of the above, the appellant submitted that the Assessing Officer was incorrect in comparing and adopting the sale rate of unit 1101 to other units sold during the year. The appellant therefore prayed that the addition of Rs.46,75,48,737/- is unjustified and incorrect and deserved to be deleted. It is noted that the AO had made addition on the basis of comparative rate charts for sale of other properties of the assessee. The AO noted that there was rate difference between different properties. However the explanations filed by the assessee in this regard as to the causes of variation in rates were not considered. The AO has also referred to a survey action u/s 133A on 09.03.2009 which pertained to A.Yr. 2010.11, however it is not established as to how the findings for the A.Yr. 2010- 11 are applicable in the present A.Yr. i.e. 2011- 12. The A.O. has not made any inquiry and has not brought any material or any evidence on record for holding that the appellant had received unaccounted sale consideration of Rs. 46,75,48,737/-. In contrast the books of accounts of the assessee are found to be duly audited without any adverse remark of the auditor. The books of accounts were not rejected during the assessment proceedings. It is a known fact that in a project which is spread over several years, the market price is bound to be different in different years. The mere difference in sale price of agreement is no evidence unless is corroborated by some concrete evidence of unaccounted sale transactions.
Before us, ld. Counsel for the assessee submitted that before the ld. CIT(A) assessee has raised various propositions which can be summarized in the following manner:-
M/s. Mighty Construction Pvt. Ltd. a. It is submitted that there are no evidences with the Ld. AO to presume that assessee has suppressed sales. In absence of any adverse evidence, Ld. AO cannot rewrite the sale consideration on presumption and surmises. Moreover, the Ld. AO has not rejected the books of account. Having accepted the book results, he could not have replaced the sales offered and credited in the books of account. b. The sales made by the assessee are backed by supporting evidences. The figures of sales are duly supported by the registered sale deeds executed by the assessee with the buyers. Once the genuineness of the sales and supporting documents is not doubted, the Assessing Officer has no right to replace the figures adopted on basis of these registered sales deeds with the figures estimated by him without any contrary evidences. c. The Ld. AO has not inquired with the buyers to ascertain the amount paid by them for purchase of units. The Assessing Officer cannot re-write the terms of the agreement arrived at between the parties when there are no evidences of collusion between them. d. The Ld. AO has referred to past survey proceedings conducted on 09.03.2010. However, the same does not have any bearing for the subsequent years which are under consideration. In any case, in proceedings for A.Y. 2010-11 consequent to survey, no addition is made on account of suppressed sales. e. The sale consideration for all the units is above stamp duty value. The details of the same are enclosed at Page 16 of PB. There is no provision under the Income Tax Act except S. 50C and s. 43CA to revise the sale consideration. The provisions of s. 43CA of the Act are applicable from 01.04.2014 and hence not applicable for the years under consideration. Moreover, the M/s. Mighty Construction Pvt. Ltd. provisions of s. 50C of the Act will also not apply to stock in trade in case of assessee builder. f. The difference in sale rate for various units is explained by assessee with justifiable reasons. It was explained that the rate of various units differ due to size of units, location, vastu compliance, need of the buyer etc. Moreover, some units have exclusive access to corridors, terrace area, AHU, balcony etc., which is free of FSI area and not taken into consideration in agreement but factored while negotiating prices. The assessee has filed a revised working of sale rates after considering the aforesaid additional area available with the unitholder at Page 17 of PB. Copy of the approved plans of each Unit highlighting the exclusive benefit to each unitholder is enclosed at Page 1-13 of PB. If the revised rates after considering additional area are considered, it can be seen that there is not much difference in the revised rates. g. The units are of different sizes ranging from 895 sq ft to 10,360 sq ft. The per sq ft rate of unit cannot be same for different size of units. Further, while estimating, even the sales rate for garage is taken at rate at which other self-compliant unit is sold. h. Identical issues decided by Hon'ble judiciary in various decisions wherein it has been held that sale price of a unit cannot be estimated on presumption and surmises without any corroborative evidences.
6.1 He further submitted that from the perusal of the details furnished in the paper book, it can be seen that there were certain units who had access to much larger area like common area, balcony and flower bed where unit alone had an access and therefore, variation in the price is fully justified.
M/s. Mighty Construction Pvt. Ltd.
On the other hand ld. CIT DR in HER counter submissions has stated as under:- (i) The main contention of the assessee, which has been accepted by the Ld. CIT(A), is that some of the units have fetched higher sale price because of the additional area abutted to the said units. This contention of the assessee is incorrect as in none of the agreements, as admitted by the assessee itself, the said additional areas were included Now once, these areas/ amenities ware not included in the agreement, the buyer of the unit shall have no legal rights to exclusively use such areas/ facilities. Moreover, the common areas cannot be sold to some specific customers because they are for the common uses of all the residents/ occupants of the building. Also such areas are demarcated by Municipal Authorities keeping in consideration issues like fire safety, health & hygiene, evacuation in case of natural disasters and providing the residents unhindered civic amenities Therefore, if the assessee argues that such areas can be sold by cutting an informal deal with some specific customers then it is not only a false statement rather it would have been a clear violation of civic/municipal laws of the City.
Also, when the additional area is not exclusive and not mentioned in agreement, can it be charged at the same rate as claimed by the assessee.
Further, during the course of arguments, before the Hon'ble Bench, it was shown from the Paper Book filed by the assessee, that other units also had similar common area as balcony, flower bed etc, yet the rate per sq.ft. was not comparable. For eg. 1101 & 1103 on P.No.3 are similar on P.No.4 of PB 1108 is although comparable with 1105 & 1107 but there is a huge difference in rate.
M/s. Mighty Construction Pvt. Ltd. (ii) A survey action in the case of the assessee u/s.133A of the Act on 09.03.2009 was carried out where it had declared an amount of Rs.6.50 crore to cover discrepancies in the papers found and impounded during the course of survey. Such incriminating documents found, statement made by the assessee u/s. 133A and assessment order for relevant assessment year passed u/s. 143(3) are a strong corroborative evidence that the assessee has been indulging in out of book transactions and therefore, the same can be correlated to the variations appearing in the price per sq. ft. of the different units sold within a year i.e. the year under consideration.
(iii) While it is understandable that some variation in sale price is inevitable, but the variation in the same project can logically be in the range of 5-10%. However, here the variation is of more than or nearly double the rate per sq ft. for eg Rs. 13,525/- for G- 1, Rs. 14,882/- for 607 & 608, while Rs 27,952/- for 1101. With such apparent huge variation in the same project in the same FY., the assessing officer is duty bound to look through the arrangement between the apparent and the real situation. The reasons for such arbitrary pricing of units sold, which were booked in the same period, is best known to the parties concerned viz., the seller and the buyer and the same are within their exclusive knowledge. The Assessing Officer can draw inference only from the surrounding circumstances under the peculiar facts and circumstances of each case. Since the assessee has not brought on record any plausible reason to justify such extreme variation in the sale rates and since there is no uniformity in the sale rates of units sold in the same building in the same period, it is clear that there has been suppression of sale receipts. In the absence of any specific agreement, principle of uniformity in prices shall be followed.
Thus, the onus is on the assessee to establish genuineness of claim of justified discriminatory rates, which he failed to do so.
M/s. Mighty Construction Pvt. Ltd. (iv) In this regard, reliance is placed on the decision of the Hon'ble ITAT, Mumbai in the case of Income-tax Officer 19(3)(1), Mumbai vs. Diamond Investments & Properties (ITA No. 5537/Mum/2009 dated 29.07.2010), wherein the Hon'ble ITAT has upheld the addition made on account of difference in sale rates of units, even when there was no evidence of receipt of 'on money'. Reliance is also placed on the decision in the case of Rohini Ramnath Lele 117 CTR 208 ITAT, Mumbai, wherein it was held that 'prevailing practice of paying on money should be considered even if purchaser denies'.
(v) As the final fact finding authority, the Hon'ble ITAT must see whether the claim by the assessee is correct or not, as there are several discrepancies discussed above. Even if, identical properties have been sold at higher rate there should be a satisfactory explanation from the assessee justifying the difference. However, the assessee here has grossly failed in giving any reasonable and satisfactory explanation. The ld. CIT(A) fails to examine the reason for huge variation and therefore, the department humbly urges the Hon'ble ITAT to decide for preventing miscarriage of justice.
We have heard both the parties at length and also perused the relevant finding given in the impugned orders. From the perusal of the assessment order as well as the impugned order, we find that the entire controversy revolves around that, assessee had sold its units at a varied prices ranging from Rs.13,513/- per sq. ft to Rs.27,951/- per sq. ft in the same project. Such a huge variation prima facie was not found to be justifiable by the ld. AO who has given a very detailed analysis and the reasons to rebut the explanation of the assessee, whereas the ld. CIT (A) without any much factual analysis has M/s. Mighty Construction Pvt. Ltd. accepted the contention of the assessee. Though there could be some variation in the rates per unit depending upon the various factors which cannot be brushed aside, but to accept that there would be such a huge variation is beyond any prudence and reality. Thus, such a huge difference is certainly not justified and even the action of the ld. AO to take maximum rate of the unit sold is also not justified. Because factors like total area, extra accessible and useable area of particular unit and location and ventilation of the unit etc., does have variation in the price and the premium paid. Therefore, it would be very difficult to apply any kind of logic to accept the version of both assessee as well as ld. AO. Accordingly, we had asked the ld. Counsel to show comparison of agreement rate with the weighted average rate of all the units sold for all the assessment years. In response, assessee had filed following charts as a comparison for all the three assessment years which for the sake of ready reference is reproduced herein below, TO SEE THE WEIGHTED AVERAGE OF ALL THE SALE PRICE AND RATE :- AY 2011-12 Name of Party Unit Agreement Agree Rate rate where value difference (l) (2) No. value ment (6) actual rate (8) [5*7] (9) [8/4] (3) (4) Area [4/51 is less Remarks (5) than weighted average rate 1 Action 605 3,80,00,000 2,123 17,899 This company Construction also M/s. Mighty Construction Pvt. Ltd. Equipment purchased Ltd. unit - 606 admeasuring 2,235sq,.ft. in A.Y, 1213 @ 19,016/- 2 Kumud I 607 1,38,69,000 932 14,883 2,289 21,32,5 15-38 Mehta 68 Purchase of 2 units by the same family 3 Bhavika 608 1,33,25,000 895 14,882 2,290 20,49,9 15-38 Vishal Mehta 61 4 Deonar G-1 8,00,00,000 5,915 13,525 3,647 2,15,72, 26.97 This is a shop Weight Bridge Shop/ 452 cum garage Pv: Ltd Garage and hence cannot be compared with other units. Moreover, booking was made in Jan, 2010 and hence got lower rate. They also bought another premises in A.Y. 2012-13 5 Oasis 1,101 5,09,80,000 1,824 27,952 - - - Premal Infrastucture Thakkar is Pvt Ltd. the director of Oasis 6 Premal 1,102 1,90,20,000 1,089 17,464 - - - Infra Pvt, Ltd. at Sr. No. 4 Thaker/ above Darshans P Tliaker 7 Black Stone 1,104 4,00,00,000 2,235 17,896 - - - , Infra Projects Pvt. Ltd. 8 Sushil 1,103 2,16,45,500 1,265 17,114 58 73,146 0.34 Budhia/ M/s. Mighty Construction Pvt. Ltd. Suchitra Budhia/ Usha Gopalan 9 Sterling and 1001- 17,25,00,000 10,360 16,650 522 54,08,0 3.14 Another Wilson 1006 56 group Powetgen company, Pvt Ltd. Transtel Systems Pvt. Ltd. purchased entire 9th fl. @ 16,650/- 10 Pratibha 1301- 17,25,00,000 10,360 16,650 522 54,08,0 3.14 This company Industries ltd 1306 56 purchased entire i4th Fl 25,026 sq. ft. @ 13.222/-. Further, balance units - 1307-1312 admeasuring 2,508 sq.ft. pur. in A.Y. 1213 @ 16,789/- 11 SHL Property 1,108 4,82,02,155 2,080 23,173 Holdings Ltd 12 D. Thakkar 1,105 3,47,30,000 2,235 15,538 1,634 36,51,8 10.51 This Construction 51 Company also Pvt Ltd purchased entire 106 unit of 1959 sq.ft. @ I7,728/- at the same time 13 Techno Force 1,107 3,50,00,000 1,766 19,818 - - - The said unit (I) Pvt Ltd. was having 4 car parking space TOTAL 73,97,71,655 43,080 4,02,96, 5.45 088 Weighted Average Rate 17, 172 M/s. Mighty Construction Pvt. Ltd. AY 2012-13 Sr. Name of Unit Agreement Agreem Differenc Difference % Remarks No. Party No. value ent Agreeme e in in difference (1) (2) (3) (4) Area nt rate value (9) (5) Rate where (8) [5*7] [8/4] (6) [4/5] actual rate is less than weighted average rate [7] l Deonar F-l 4,00,00,000 2,422 16,515 1,121 27,13,929 6.78 This unit Weight was just Bridge above the Pvt. Ltd. G-1 purchased by them in A.Y. 1112 2 Action 606 4,25,00,000 2,235 19,016 - - - Construc tions Pvt. Ltd. 3 Pratibha 1307 21,00,00,000 12,508 16,789 847 1,05,88,698 5.04 Industrie - s Ltd. 1312 4 Kirti L. 1011 5,84,00,000 2,762 21,144 - - - This unit Lapasia was a shop & Others cum garage at the ground fl. Further, this company is also sold another F-i in A.Y. 1213 @ 16515/- 5 GA 1012 3,64,00,000 2,034 17,896 - - . Design M/s. Mighty Construction Pvt. Ltd. Consulta nts LLP TOTAL 38,73,00,000 21,961 1,33,02,627 3.43 Weighted Average Rate 17,636 AY 2013-14 Sr. Name of Party Unit Agreement Difference Difference % No (2) No. value Agreemen Agreement in in differ . (3) (4) t Rate rate value ence (1) Area (6) [4/51 where (5) actual rate is less than weighted average rate i Lukesh Gupta & 1007 2,68,00,000 1,902 14,090 4,045 76,94,399 28.71 Aarti Gupta 2 Rashmi Jain 1008 to 5,00,00,000 3,212 15,567 2,569 82,52,371 16.50 1010 3 Novels Lines & 1201 & 5,00,00,000 2,655 18,832 - - - Logistics Pvt. 1206 Ltd. 4 Pan Asia 12O2 7,00,00,000 3,380 20,710 - - . Logistics Pvt. Ltd. 5 KL Crescent 12O7 2,21,00,000 1,249 17,694 442 5,51,685 2.50 Infrastructure Pvt. Ltd. 6 Aquatic 12O8 1,89,12,500 1,194 15,840 2,296 27,41,713 14.50 Formulation India Ltd. 7 Aquatic 12O9 to 8,39,72,000 4,151 20,229 - - - Formulation India 1211 M/s. Mighty Construction Pvt. Ltd. Ltd. TOTAL 32,17,84,500 17,743 1,92,40,167 5.98 Weighted Average 18,136
Thus, the weighted average rate for A.Y.2011-12 comes to Rs.17,172/- per sq.ft. However, we find that there is one unit which is a shop cum garage and definitely it cannot be compared with other units where the agreement rate was very low and therefore, the same rate of Rs.17,172/- cannot be applied. Firstly, this was a major area of 5091 sq.ft for agreement value of Rs.8 Crores. Accordingly, in the weighted average this particular unit sold to Deonar Weight Bride Pvt. Ltd. Unit No.G-1 shop / garage is directed to be excluded from while calculating the weighted average and actual price should be taken. Accordingly, for all other 12 units the rate for estimating the sales is taken at Rs.17,172/-. Thus, ld. AO is directed to work out the consequential relief and accordingly, the appeal of the Revenue is partly allowed.
Similarly, for A.Y.2012-13 and 2013-14 also the weighted average rate is Rs.17,636 and Rs.18,136/- respectively. Thus, ld. AO is directed to give consequential relief by applying this weighted average rate and our finding given will apply mutatis mutandis for these two years also. Accordingly, the appeal of the Revenue on this issue is partly allowed.
Coming to the issue of disallowance of Rs.21,65,79,666/- in respect of construction expenditure, the Assessing Officer in his M/s. Mighty Construction Pvt. Ltd. assessment order has observed that the expenses have been incurred by the assessee after the issue of occupation certificate (OC) i.e., after 16/02/2010 and hence, these expenses cannot be allowed. According to the AO, once the OC has been issued, the construction of the building is said to be completed and that after the said date, there cannot be any expenditure. For this purpose, the AO has relied upon the inquiries made with BMC seeking information with respect to the completion of the building. Referring to the nature of expenses incurred, the Assessing Officer has stated that the finishing work refers to the finishing work of all core areas, lift, lobby, passage and toilet. The AO stated that the Dy. Chief Engineer (Building Proposal) would not have given the OC if the said work was pending. Therefore, the claim of the assessee that the said work was completed during the year under appeal cannot be accepted. He has further observed that after receiving the OC, the expenditure incurred by the assessee would be hit by Explanation to s. 37(1) of the Act. The AO has also stated that the assessee's claim with respect to the expenditure incurred in the earlier year, i.e. AY. 2010-11 but claimed in the year under appeal is also not acceptable. Moreover, he also observed that the quantum of construction expenses is high. Based on the above observation and findings, the ld. AO concluded that the expenses to the tune of Rs. 21,65,79.966/- are not allowable.
As against various contentions of the ld. AO, the assessee had filed their detailed explanations and evidences before ld. CIT (A). On appraisal of the submissions and the evidences filed and M/s. Mighty Construction Pvt. Ltd. after considering all the averments of the ld. AO, the ld. CIT(A) held that the expenditure incurred is allowable to the assessee and thereby deleted the additions. The various reasons considered by ld. CIT (A) while deleting the disallowances can be summarised as under:- a. The details and evidences of all the expenses incurred by the assessee were filed. These details have not been doubted or disputed. The only objection of the Ld. AO was that the expenditure was incurred after the date of OC, i.e., 16.02.2010 and hence the expenditure incurred after the said date are not eligible for deduction. b. The assessee submitted that the incurrence of the expenditure has no connection with the OC issued by the Commissioner. Reference was drawn to the provisions of s. 353A of the Mumbai Municipal Corporation Act and the DCR Regulations applicable to the Mumbai region under which OC is issued by the Commissioner. As per the provisions, the OC issued by the Commissioner after inspecting the work and satisfying himself that the work has been done as per the sanctioned plans. The assessee also referred to the letter issued by the Dy. Chief Engineer (Building Proposal) to the Assessing Officer (reproduced in the order of Ld. AO) which shows that OC is issued on compliance of conditions mentioned in IOD/Amended plan approval letter which refers to 'major works' which are required to be carried out to receive such OC. However, it is not necessary that the entire building should be ready and constructed and that no work would be M/s. Mighty Construction Pvt. Ltd. pending on the receipt of occupancy certificate. The details of expenditure carried out were enclosed. It can be seen that these expenses are for maintaining the building. During the course of defect liability period, the assessee builder is responsible to replace any damages in the building construction work. Moreover, if some work is completed but it is not of proper quality or specifications, then the assessee builder is responsible to again make it. The expenses are also in the nature of butler services, housekeeping and cleaning services which are in the nature of maintenance expenses. It can be seen that the nature of work which was incurred by the assessee during the year are not of such type which can affect the occupancy of the building by the occupants. c. As regards claim of expenditure of the earlier year, i.e. A.Y. 2010-11, the assessee submitted that although the bills and evidences for claim of expenditure would show that while the bills are dated and related to the earlier year, the expenditure was booked and incurred in the year under consideration since the bills were belatedly received. Further, the assessee also submitted that some bills could have been received on a later date for which the work would have commenced and completed and which are subject to defect liability period. In such cases, the expense are not accounted and booked till such time the defect liability period is not completed. Thus, the expenses were accrued in the current year only and hence were claimed in the current year. Moreover, once the genuineness of the expenditure is not in doubt, the Assessing M/s. Mighty Construction Pvt. Ltd. Officer ought to have allowed these expenditure incurred by the assessee as the same were in relation to the construction activity of the assessee. The details of work carried out in earlier year but bills booked in year under consideration were enclosed. d. As regards the applicability of explanation to s. 37(1) of the Act, the assessee submitted that the same would be attracted only if the expenditure is incurred by the assessee for any purpose which is an offence or which is prohibited by law. In the present case, the nature of work done and purpose for which the expenditure is incurred is not an offence of an Act which is prohibited by law. It was submitted that incurrence and the genuineness of expenditure has not been doubted by the Assessing Officer Under these circumstances it is incorrect on part of the Assessing Officer to invoke the provisions of Explanation to s. 37(1) of the Act. e. As regards the contention of the Assessing Officer that the construction cost was on a higher side, the assessee has submitted the working of construction cost and contended that construction cost is reasonable and commensurate with the nature of construction, various types of amenities and the facilities provided within the building for a commercial building. The details of construction cost are enclosed at Page 159 of PB. The assessee has stated that it has earned reasonable profits from such activity and thus it cannot be presumed without any basis that the construction expenses M/s. Mighty Construction Pvt. Ltd. are on a higher side. The allegations of the Ld. AO are general in nature without any corroborative evidences.
Lastly, it was submitted that the aforesaid expenses were required to be incurred by the assessee on the basis of the agreement entered by the assessee with the parties. These facts can be seen from recital no. 25 and 33 of the agreement entered with the parties. Further, as per recital 1(xvii) of the agreement and annexure to the agreement, the assessee was required to construct common amenities. The impugned expenses disallowed by the Ld. AO include expenses incurred for developing such common amenities which was required by the assessee to be provided to the customers.
Further, it was submitted that out of expenses disallowed by Ld. AO, part of the expenses were in the nature of maintenance of building which were incurred by the assessee on behalf of the their customers. It is submitted that the society was formed in 2017. Till such time, the assessee was incurring common maintenance cost for running and maintaining the building and thereafter recovering such costs from the tenants in the proportion of area. These facts are reflected at Recital no. 16 of the agreement entered by the assessee with the purchasers. Further, even in subsequent years, the assessee had incurred cost on behalf of all tenants and raised bills on the parties for such common maintenance expenses. These expenses were debited to profit and loss account and claimed as expenditure M/s. Mighty Construction Pvt. Ltd. and the receipts from the parties is credited to profit and loss account and offered as income in the return of income.
On this issue, Ld. CIT DR stated as under:- (i) Enquiry u/s.133(6) of the Act was carried out with Dy. Chief Engineer (Building Proposal), ES-I, BMC, which revealed that architect had submitted building completion certificate along with compliance of conditions of OD and subsequent amended plan conditions and regarding completion of major works such as fire fighting work, NOC for occupation from Chief Fire Officer was submitted Therefore, it is evident that the construction of the building was completed by 16.02.2010 ie, the date of occupation. (ii) The expenses claimed by the assessee include parking relates expenses, construction expenses related to roofing, electric work, water proofing, frame & glass fixing, road resurfacing etc., expenses on security system, fire system, boom barrier/loop defector, air conditioning work, LED track lightening of etc. Out of the total estimated cost of the project of Rs.188.20 crore, assessee claimed that a sum of Rs.21.65 crore was incurred in FY 2010-11 and Rs.5.71 crore in FY.2011-12, Rs 1.84 crore in FY.2012-13 & Rs, 0.32 crore in FY 2013-14, post receipt of occupancy certificate. (ii) Once the building has been completed and sold, the expense cannot be business expenses, unless the assessee proves the rationale and the business connection. Some of these expenses a evidently in the nature of prior period M/s. Mighty Construction Pvt. Ltd. expenses. The assessee h failed to establish that they were actually quantified and crystallized during the relevant assessment year. (iv) The assessee has failed to show that it was incumbent upon it to make these expenses and there was no society in existence. It has also failed to show that why it is claiming the same as expenses and whether no deposit/charges have been collected from the occupants for the repairs and maintenance of the project post occupation; and also, if so, whether the deposit and charges collected are being reflected as taxable revenue by the assessee
After hearing both the parties and on perusal of the impugned order as well as material placed on record, we find from the perusal of the nature of expenditure incurred that it has no connection with the Occupation Certificate issued by the ld. Commissioner. The OC issued after the work has been done as per the sanction plan and assessee has also produced letter by Dy. Chief Engineer to the ld. AO to show that OC has been issued on compliance of conditions mentioned in IOD/Amended plan approval letter which refers to 'major works' which are required to be carried out to receive such OC. However, it is not necessary that the entire building should be ready and constructed and that no work would be pending on the receipt of occupancy certificate. The expenses are mostly for maintaining building and during the course of defect liability period assessee was responsible to replace any damages in the building construction work. Moreover, if some work is completed but it is M/s. Mighty Construction Pvt. Ltd. not of proper quality or specifications, then the assessee builder is responsible to again make it. Further it is seen that most of the expenses are also in the nature of butler services, housekeeping and cleaning services which are in the nature of maintenance expenses. It is seen that the nature of work which was incurred by the assessee during the year are not of such type which can affect the occupancy of the building by the occupants. There are certain expenditures which assessee had stated that although bills and evidences and bills related to earlier date, however, the expenditure has been booked and incurred in the year under consideration since the bills were belatedly received and some of the bills were received on a later date where the work had completed which was subject to defect liability period. Thus, it cannot be held that since these expenses have been incurred after the OC and therefore, same cannot be allowed.
Apart from that, one of the issues raised by the ld. AO that construction cost was on a higher side which has no base because assessee had submitted the working of the construction cost for which entire details were filed before us in the paper book. That apart, assessee had also earned huge profit from such activity and thus, it cannot be presumed that the construction expenses are on higher side. Thus, the finding and observation of the ld. CIT (A) in deleting the addition is confirmed and accordingly, this ground raised by the Revenue is dismissed.
M/s. Mighty Construction Pvt. Ltd.
Lastly, with regard to disallowance of interest expenditure of Rs.37,98,236/-, the ld. AO in his assessment order has stated that the assessee had taken secured loans from various parties at the interest rate ranging from 14.50% to 23% p.a. and unsecured loans taken at the interest rate ranging from 12% to 15% pa. As against the same, the assessee had given ICDs to its sister concern, i.e., M/s Tulip Shares & Structures Pvt. Ltd. at interest rate of 9% p.a. The total quantum of loans taken from various parties is Rs. 60,27,55,727/- whereas the quantum of loans given to sister concern is Rs. 7,40,39,682/- The ld. AO observed that the interest-bearing funds were diverted by the assessee to its sister concern at a lower interest rate. Accordingly, the Assessing Officer disallowed the entire interest expenditure paid to various 10 parties on which interest was paid at a higher 9% resulting in addition of Rs. 2,05,40,403/- u/s 36(1)(iii) of the Act.
The ld. CIT (A) has restricted the disallowance of expenditure to the extent of loans given to the sister concern instead of disallowance of entire loan taken from various parties.
The ld. CIT DR submitted that the ld. CIT (A) has directed to adopt the average borrowing cost, i.e. 17.15% for working out the proportionate interest disallowance. However, the ld. CIT (A) has not examined the fact that whether the funds diverted to the sister concern were out of secured loans or unsecured loans and if the loans diverted to sister concern were out of secured loans, on which the assessee paid interest @23%, then the ld. CIT (A)
M/s. Mighty Construction Pvt. Ltd. cannot come to the conclusion that the average interest rate has to be considered for working out the disallowance u/s.36(1)(ii) of the Act.
Ld. CIT (A) had deleted the addition after observing as under:- “7.7 I have perused the assessment order of the A.O. and the submissions of the appellant in this regard. The Assessing Officer in his assessment order had noted that the appellant had taken secured loans from various parties at the Interest rate ranging from 14.50% to 23% pa and unsecured loans taken at the interest rate ranging from 12% to 15% pa. As against the same, the appellant had given ICDs to its sister concern, i.e. Tulip Shares & Structures Pvt. Ltd. at interest rate of 9% pa. The Assessing Officer observed that the interest-bearing funds were diverted by the appellant to its sister concern at a lower interest rate and hence excess interest on the amount advanced is required to be disallowed. Accordingly, the Assessing Officer determined the interest paid to the 10 parties at higher interest rate and disallowed the interest in excess of 9% which was charged by the said parties! The AR of the appellant has submitted that no disallowance can be made in the present case it can be seen that the advances were in the nature of commercial expediency. The appellant has further contended that it had sufficient own funds for giving such advances. Thus, where own funds are more than the amount of advances given, it can be presumed that the funds were advanced out of own funds. The appellant has relied on the decision in case of CIT v. Reliance Utilities & Power Ltd [313 ITR 340(Bom)] to support this contention. Alternatively, the appellant also submitted that the loans given to Tulip Shares & Structures Pvt. Ltd, was to the tune of Rs. 7,40,39,682/- whereas the interest paid by the appellant to various parties and considered by the Assessing Officer in his assessment order is in respect of loans aggregating to Rs. 60,27,55,727/- The Assessing Officer has disallowed interest on all the loans where the interest was charged more than 9% ignoring the fact that the advances made to the sister concern were only to the tune of Rs. 7,40,39,682/-. This is M/s. Mighty Construction Pvt. Ltd. factually and legally Incorrect in as much as the interest on all these loans to the tune of Rs. 60,27,55,727/- cannot be disallowed merely because some loan to the tune of Rs. 7,40,39,682/- was given by the appellant to a sister concern at a lower rate of interest. The appellant therefore prayed that the disallowance of interest of Rs.2,05,40,403/- made by the Assessing Officer is untenable and unjustified and hence deserves to be deleted. It is noted that on the unsecured loans taken by the appellant of a sum of Rs. 3,05,85,730/- was paid as interest and claimed as expenditure. The average cost of borrowing of the appellant for these loans has been submitted to be 14.13% during the year. As against this the assessee had given advance to Tulip Shares & Structures Pvt. Ltd. a sister concern to the tune of Rs. 7,40,39,682/- & 9% which means the assessee has made advances to the tune Rs. 7,40,39,682 out of the borrowed fund taken @14.13% and advanced to M/s Tulip Shares & Structures Pvt. Ltd. a sister concern @9%. From the analysis of these figures, it is worked out that the assessee has paid excess interest which is worked out as 45,82,964/- on the amount advanced of Rs. 7,40,39,682 out of the borrowed fund taken @14.13% and advanced to M/s Tulip Shares & Structures Pvt. Ltd. a sister concern. This view is supported by the decision of the Income Tax Appellate Tribunal - Mumbai "F" BENCH, MUMBAI in the case of Vinca Developers P. Ltd, Mumbai vs Assessee on 2 March, 2016 wherein the Hon'ble tribunal has upheld the disallowance of interest by holding that disallowance of interest, if any, is to be restricted to the amount of advance actually given by the assessee to sister concern. Having regards to the facts and circumstances of the case it is held that the assessee has given advances to its sister Concern out of unsecured loans on which interest has been debited to the Profit & loss account therefore, the addition made by the AO on this issue is directed to be restricted to Rs. 37,98,236/- and the balance addition is deleted. Accordingly this ground of appeal is partly allowed.
22. From the perusal of the impugned order, we find that differential interest rate on loans to the extent of advances to M/s Tulip Shares & Structures Pvt. Ltd. cannot be disallowed M/s. Mighty Construction Pvt. Ltd. because the loan given to the said party was to the tune of Rs.7.40 Crores, whereas interest rate by the assessee to various parties in respect of loan aggregating to Rs.50.27 Crores which has been considered by the ld. AO. The ld. AO has disallowed interest of all the loans where interest was charged more than 9% ignoring that advances made to the sister concerns were only to the tune of Rs.7,40,39,682/- in the interest of other loan to the tune of Rs.60,27,55,727/- cannot be disallowed. Thus, disallowance in such a case at the most can be made in respect of differential interest rates of loans given to sister concern of Rs.7.40 Crores. Thus, the action of the ld. CIT (A) in restricting the disallowance is justified which does not warrant any interference. Accordingly, this ground raised
by the Revenue is dismissed.
23. In so far as the appeal for A.Y.2012-13 is concerned the ground No. 1(a) to 1(c) in respect of suppressed sales, we have already dealt this issue in A.Y.2011-12, wherein we have directed to take weighted sale rate as incorporated above. Similarly ground No.2 with respect to disallowance of construction expenses which we have already dealt and decided in favour of the assessee and therefore, ground No.2 raised by the Revenue is dismissed. Similarly, disallowance of interest expenditure of Rs.22,33,183/- is identical to the ground No.3 in A.Y. 2011-12 and same facts and reasoning have been given by the ld. CIT(A) and therefore, in view of the finding given above wherein we have confirmed the order of the ld. CIT(A), the ground raised by the Revenue is dismissed.
M/s. Mighty Construction Pvt. Ltd.
Lastly, another issue which has been raised is disallowance of interest made u/s.14A of Rs.2,76,32,741/- which was made on account of interest expenditure by the ld. AO. We find that the ld. CIT (A) has deleted the disallowance on the ground that assessee has sufficient own funds to make the investment which were to the extent of 53.61 Crores as against value of investment of Rs.33.5 Crores. This issue now stands covered by the decision of the Hon’ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT reported in 438 ITR 1(SC). Accordingly, the action of the ld. CIT(A) deleting the said disallowance is upheld. Accordingly, this ground raised by the Revenue is also dismissed.
In so far as appeal for A.Y.2013-14 is concerned, again the most of the issues are similar. With regard to ground No.1(a) to 1(c) in respect of suppressed sales, we have already dealt this issue in A.Y.2011-12. Similarly ground No.2 with respect to disallowance of construction expenses of Rs.1,84,07,447/- which we have already dealt and decided in favour of the assessee and therefore, ground No.2 raised by the Revenue is dismissed. Likewise, disallowance of interest expenditure of Rs.51,71,922/- is identical to the ground No.3 in A.Y.2011-12 and same facts and reasoning have been given by the ld. CIT(A) and therefore, in view of the finding given above wherein we have confirmed the order of the ld. CIT(A), the ground raised by the Revenue is dismissed.
M/s. Mighty Construction Pvt. Ltd.
Lastly, in ground No.4 department has challenged the action of the ld. CIT (A) in restricting the disallowance u/s.40(a)(ia) to the tune of Rs.8,45,106/- applying the proviso to Section 40(a)(ia) in restricting the disallowance to 30%. The ld. AO has stated in his assessment order that assessee had not deducted TDS on interest paid to Kotak Mahindra Prime Ltd. and hence the claim of expenditure of Rs.8,45,106/- has been disallowed u/s.40(a)(ia).
However, the order of the ld. CIT(A) while confirming the disallowance by restricting to 30% of the expenditure u/s.40(a)(ia) is not correct, because the said amendment was brought in the statute w.e.f. 01/04/2015 and is applicable prospectively. This has been held so by the Hon’ble Supreme Court in the case of Shree Choudhary Transport Co. vs. ITO reported in 426 ITR 289. Hence, the action of the ld. CIT(A) in restricting the disallowance to 30% is not correct. Thus, this ground raised by the Revenue is allowed.
In the result, all the appeals raised by the Revenue are partly allowed. Order pronounced on 25th August, 2023.