JT.COMMISSIONER OF INCOME TAX (OSD) - CENTRAL CIRCLE 2(4), MUMBAI vs. M/S KEYSTONE REALTORS PRIVATE LIMITED, MUMBAI

PER : Shri Amarjit Singh (Accountant Member):

These four appeals filed by the Revenue and assessee and two cross objections filed by the assessee are arising from the common order of Ld.CIT(A)-37, Mumbai dated 25/06/2014, based on common issue and on identical facts. Therefore, for the sake of convenience, all these appeals and cross objections are adjudicated together by taking as lead case and its finding will be applied mutatis mutandis to other appeals, wherever these are applicable. ITA No.5631/Mum/2014 (Revenue’s Appeal) & CO No.175/Mum/2018 A.Y. 2010-11

3 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 under section 132(1) of the Act was conducted in the case of Rustomjee – Evershine group on 21/10/2010 and assessee’s case was also covered in the said search action. The assessee was engaged in the business of builders and developers during previous year under consideration. The assessee has filed revised return of income on 26/10/2011 declaring Nil income after claiming set off of brought forward loss amounting to Rs.44,54,72,764/-. A notice under section 153A of the Act was issued on 27/09/2011. Thereafter, notice under section 143(2) of the Act was issued on 11/02/2013. Further facts of the case are discussed while adjudicating the grounds of appeal filed by the Revenue. GROUNDS 1 & 2 OF REVENUE’S APPEL & GROUNDS 1 & 2 & ADDITIONAL GROUND OF CROSS OBJECTION FILED BY THE ASSESSEE.

3. There is a delay of 843 days in filing cross objection by the assessee has been reported. The assessee submitted an affidavit dated 22/01/2020 alongwith application stating that there was delay in filing the cross objection because of wrong advice by the tax advisor. Before us, it is also contended that thereafter, counsel, Shri Naresh Kumar, who represent before the ITAT advised the assessee to file the cross objection against the departmental appeal.

4. Heard both sides. After considering the facts reported by the assessee in the affidavit that there was delay in filing the cross objection because of wrong advice given by the tax advisor. Vide affidavit the assessee submitted that its Tax Advisor at the time when department filed appeal had advised not to file cross objection as it was a departmental appeal. However, its counsel as referred above has advised 4 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 the assessee to file a cross objection, who represent before the ITAT. We have also considered the judgement of Hon’ble Supreme Court in the case of Collector, Land Acquisition vs MST Kattiji & Others – Civil Appeal No.460 of 1987 dated 19/02/1987 wherein it was held “sufficient cause for the purpose of condonation of delay should be interpreted with a view to do even handed justice on merit in preference to the approach which scuttles a decision on merit”. We are of the considered opinion that there is a bonafide reason for not filing the cross objection in time. Accordingly, we condone the delay and admit the cross objection to decide the issues on merit.

5. The facts in brief are that during the course of assessment, the Assessing Officer noticed that assessee has claimed dividend income of Rs.20,19,580/- as exempt income. On query, the assessee explained that it has suo motu disallowed an amount of Rs.2,501/- under section 14A pertaining to expenditure incurred for earning the exempt income. The assessee also submitted that no question arose to make any further disallowance under section 14A of the Act. However, the Assessing Officer has not agreed with the submission of the assessee and he has computed the disallowance under section 14A alongwith provisions of Rule 8D of the I.T. Rules, 1962 to the amount of R.40,25,86,078/- and added to the total income of the assessee. Aggrieved, assessee filed appeal before the Ld.CIT(A). The Ld.CIT(A) has restricted the disallowance to the extent of Rs.4,23,20,580/-. In the additional ground of cross objection filed by the assessee it has contended that the disallowance ought to have been restricted to the extent of exempt income earned during the year.

5 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 6. Heard both the sides and perused the material on record on this issue. It is undisputed fact that as per para 4.1 of the order of the Assessing Officer passed under section 143(3) read with section 153A of the Act on 31/03/2013 that assessee company itself had made only disallowance of Rs.2,501/- under section 14A of the Act. However, the Assessing Officer, after taking into consideration the revaluation made in the investments, computed the disallowance under section 14A as per provisions of Rule 8D to the amount of Rs.40,25,86,078/-. The Ld.CIT(A) after excluding the revaluation of the investment re-worked the disallowance to the extent of Rs.4,23,20,580/-. However, the material fact in the case of the assessee is that it had suo motu only made disallowance under section 14A of the Act to the extent of Rs.2,501/-. However, the assessee had earned exempt income during the year under consideration to the amount of R.20,19,580/- only. Under the circumstances, the assessee itself had only made disallowance of Rs.2,501/- and it had earned exempt income of R.20,19,580/-, after following the decision of Hon’ble Supreme Court in the case of State Bank of Patiala (2018) 99 Taxmann 286 (SC) and the decision of the Hon’ble Delhi High Court in the case of CIT vs Joint Investments Pvt Ltd (2015) 372 ITR 69 (Del). It is settled that the disallowance is to be restricted to the extent of exempt income earned by the assessee. Following the decision of the Hon’ble Apex Court and High Court (supra), we direct the Assessing Officer to restrict the disallowance to the extent of exempt income earned by the assessee, since assessee itself had not made disallowance more than the exempt income earned by it. Therefore, the ground of appeal of the Revenue stands dismissed and the cross objection filed by the assessee is partly allowed. GROUND 3 &

4. OF THE REVENUE

6 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 7. The fact in brief are that during the course of assessment, the Assessing Officer noticed that assessee has claimed deduction under section 80IB(10) amounting to Rs.24,11,13,795/-. The Assessing Officer observed that assessee had claimed this deduction in respect of profit earned by it from the project ‘Rustomjee Elanza Project’ located at Malad, Mumbai. However, the Assessing Officer considered that the area of the flat was exceeding more than 1000 sq.ft., therefore, the assessee was not entitled to claim deduction under section 80IB(10) of the Act. The assessee, in its computation has shown built up area of the 2.5 BHK flat at 978.67 sq.ft. and for 2BHK flat it was shown at 840.67 sq.ft. In this regard, the Assessing Officer noticed that assessee had not included the area of the balconies as falling within the definition of ‘built up’ area. On query, the assessee explained that the area of the balcony were excluded from the built up area as per the Development Control Rules of the BMC and also taking into consideration the fact that the floor level of the balcony was 0.3 metres which is one feet below the level of the floor of the room in the flat were not at the same level as stipulated in the definition of built up area under section 80IB(10) of the Act. The assessee further submitted that only if the floor level of the balconies was same as with the flat, then it can be considered as part of the built up area. However, the Assessing Officer has not agreed with the submission of the assessee and determined the area of the flats after including the built up area of the balconies as under:- Flat Built up area of flat Built up area Total built up of balconies / area Projections 2BHK 840.67 sq.ft. 125 sq.ft. 965.67 sq.ft. 2.5 BHK 978.23 sq.ft. 122 sq.ft. 1100.23 sq.ft.

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8. The Assessing Officer considered that built up are as per section 80IB(10) means the inner measurements of the residential units at the floor level including the projections and balconies as increased by the thickness of the walls, but does not include the common area shared with other residential units. The Assessing Officer has also not accepted the submission of the assessee that since the level of balconies was slightly lesser than the floor level, than the rest of the flat, the same should not be considered in computing the built up area. In view of the above facts and circumstances, the Assessing Officer observed that assessee has violated the condition for claiming deduction under section 80IB(10) of the Act in respect of the said project since built up area of the flat was exceeding 1000 sq.ft. However, the Assessing Officer has disallowed he claim of deduction under section 80IB(10) of the Act on the ground that all the conditions of the said section were not fulfilled. Aggrieved, assessee filed appeal before the Ld.CIT(A). In its alternative contention, the assessee submitted that since the area of 2BHK flats even after including the built up area of the balconies was less than 1000 sq.ft., therefore, 80IB(10) deduction should be allowed on prorate basis.

9. The Ld.CIT(A), however, has allowed the alternative contention of the assessee and allowed deduction under section 80IB(10) in respect of eligible units comprising of 2BHK units, whose area was less than 1,000 sq.ft. even after including the area of balconies. The relevant part of the decision of Ld.CIT(A) is as under:- “19.5.9. I have examined this alternative argument and judicial decisions relevant to this contention. In the case of Viswas Promoters P Ltd vs ACIT (2013) 259 CTR (Mad) 149, the Hon'ble High Court reversed the decision of the ITAT and allowed the appeal of the appellant. The 8 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 appellant had claimed deduction in respect of profits of residential units which did not exceed 1500 sq ft, which the AO rejected. Appellant succeeded before the CIT(A) but the ITAT held that if area of some residential units exceed 1500 sq ft, the project is no longer eligible for any deduction under 80IB(10). This decision was reversed by the High Court and pro rata claim was allowed.

19.5.10. In CIT vs Arun Excello Foundations P Ltd. (2013) 259 CTR (Mad) 362, in a slightly different context of a project, with a part of the project comprising of commercial area and balance residential area, the Hon'ble court allowed pro rata deduction in respect of profits from residential units out of the profits earned from the project 19.5.11. In ITO vs AIR Developers (2010) 122 ITD 125 (Nag), the Hon'ble ITAT held that the profits pertaining to residential units whose built up area exceeded 1500 sq ft will be excluded for the quantification of deduction u/s 80IB(10) and thereby allowed pro rata deduction for profits from eligible residential units. Similar view was taken by ITAT in the case of S J R Builder vs ACIT (2010) 3 ITR (Trib) 569 (Bang).

19.5.12. The alternative argument of the AR is supported by the decisions referred above. I therefore direct the assessing officer to allow deduction u/s 80IB(10) in respect of eligible units comprising of 2 BHK units whose area is less than 1000 sq ft even after including the area of balconies. The quantum of deduction allowable on prorata basis as per appellant's computation is Rs 12,08,36,323/- The assessing officer is directed to allow the deduction after verifying the computation.”

10. During the course of appellate proceedings before us, the Ld.DR has supported the order of Assessing Officer and also referred to the decision of Hon’ble Supreme Court in the case of Mettur Chemical & Industrial Corporation Ltd vs CIT (1996) 86 Taxmann 157 (SC).

11. On the other hand, the Ld.Counsel supported the order of Ld.CIT(A) and relied on the order of jurisdictional High Court in the case of Models Construction Pvt Ltd vs DCIT 429 ITR 605 (Bom). 12. Heard both sides and perused the materials on record. Without reiterating the facts elaborated above, the Ld.CIT(A) has allowed the claim of deduction under section 80IB(10) on prorate basis after following the decision of Hon’ble Madras High Court in the case of CIT vs Arun Excello Foundations P Ltd (2013) 259 CTR (Mad) 362 and after following the decision of various ITAT as elaborated in his

9 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 finding (supra). In this regard, we further notice that the judicial pronouncements referred by the Ld.DR in the case of Mettur Chemical & Industrial Corporation Ltd vs CIT (supra). However, we find that the aforesaid decision was pertaining to the issue of allowing the relief for arriving at the business income of the new industrial unit and we consider that that case law is not applicable to the facts and circumstances of the case as para materia contained in that case is different from the para material contained in the case of the assessee. In this regard, we have perused the decision of Hon’ble jurisdictional High Court in the case of Models Construction Pvt Ltd (supra) wherein allowing of deduction under section 80IB(10) on prorate basis was upheld. The relevant part of the decision is reproduced as under:- “4. By Order dated 31.03.2014 the Assessing Officer (AO) disallowed deductions to the assessee in respect of its housing project "Models Legacy" inter alia on the ground of breach of the provisions of Section 80IB(10)(e) of the Income Tax Act, 1961 (said Act) in respect of 5 of the residential units in the said project, which otherwise comprised of a total of 352 residential units.

(i) Viswas Promoters Pvt. Ltd. v. Assistant CIT, Circle I, Madras- (2013) 29 TaxMan.Com 19 (Madras); (II) CIT Chennai v. Arun Excello Foundations Pvt.Ltd.- (2013) 29 TaxMan.Com 149 (Madras); (Hi) CIT v. S.G. Estates Pvt. Ltd.- (2015) ITMI 1302 (Delhi); and (iv) CIT & Anr. v. M/s. Brigade Enterprises Limited- of 2012 decided on 22.09.2020 by the Karnataka High Court.

Whether, in the facts and circumstances of the present case and given the law laid down by various High Courts, the ITAT was justified in denying even pro-rata deductions to the assessee under Section 80IB(10) of the said Act?

14. It is necessary to note that in the appeal memo, grounds to the aforesaid effect were raised by the assessee as ground Nos. (M), (N) and (0). However, such a question was not framed at the time of admission of this appeal. Such a question undoubtedly arises in this matter and therefore, taking into consideration the provisions in Section 260A(4) read with the provisions in 11 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 Section 260A(7) of the said Act, we frame the aforesaid additional substantial question of law which is involved in this appeal.

(a) The appeal is partly allowed and the additional substantial question of law referred to in para 13 above, is answered in favour of the assessee and against the Revenue; (b) As a consequence, the impugned Order dated 20.01.2016 made by the ITAT is set aside to the extent it denies the benefit of pro-rata deductions to the assessee and the order of the Commissioner (Appeals) dated 26.08.2015 to the extent it grants pro-rata deductions under Section 80IB(10) of the said Act to the assessee, is hereby restored; (c) The other substantial questions of law involved in this appeal are not answered since, the same are not pressed by the assessee without prejudjce to the right of the assessee to raise "all such issues in any collateral proceedings i.e. penalty proceedings, etc.”

13. Respectfully following the decision of the Hon’ble jurisdictional High Court referred (supra), we do not find any infirmity in the decision of Ld.CIT(a). Accordingly, grounds 3 & 4 of the Revenue are dismissed.

12 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 Officer to allow the deduction on pro-rata basis against which the Revenue is in appeal before us. This issue has been decided by us in favour of the assessee by affirming the order of the Ld.CIT(A) in for A.Y. 2010-11. Therefore, since the facts and issue involved in the grounds raised by the Revenue are akin to ground 3 & 4 of Revenue’s appeal in ITA No.5631/Mum/2014, applying the findings therein, the grounds raised by the Revenue are dismissed.

16. In the result, appeal filed by the Revenue is dismissed. ITA No.3003/Mum/2019 (Assessee’s appeal)

17. Grounds 1 raised by the assessee in this appeal pertains to disallowance under section 14A. The facts and issue are identical to the facts and issue agitated in CO No.175/Mum/2018 & CO No.175/Mum/2018, which we have decided in favour of the assessee. Here, the assessee itself has made suo motu disallowance under section 14A to the amount of Rs.1,98,998/- only whereas the assessee has earned exempt income of Rs.3,11,152/-. Therefore, applying the finding of No.5631/Mum/2014 & CO No.175/Mum/2018, these grounds of appeal of the assessee are partly allowed by directing the Assessing Officer to restrict the disallowance to the extent of exempt income earned by the assessee.

18. Ground 2 raised by the assessee pertains to disallowance of Work-in- Progress (WIP) of Rs.5,51,637/-. During the course of assessment, the assessee was asked to furnish details of expenses claimed in respect of payments made to M/s Jitnat Infrastructure Pvt Ltd. In response, the assessee submitted that during the year under consideration, it has paid total professional fees of Rs.20,36,691/- to M/s Jitnat Infrastructure Pvt Ltd and submitted that out of it, 13 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 an amount of Rs.11,18,442/- was related to the assessee company. The assessee further explained that out of the aforesaid amount, an amount of Rs.5,66,637/- was transferred to WIP of the relevant project and the balance amount of Rs.5,51,805/- was claimed as expenses in the P&L Account. However, the Assessing Officer has stated that assessee has not furnished any documentary evidence of project management consultancy services provided by M/s Jitnat Infrastructure Pvt Ltd. Further, the assessee has also not furnished any details regarding the exact nature / quantum of services provided by the said party. Therefore, claim of deduction of Rs.5,51,637/- was disallowed. The Ld.CIT(A) has dismissed the ground of the assessee. Aggrieved, the assessee is in appeal before the Tribunal.

of the assessee stands dismissed.

20. With regard to ground No.3 which pertains to disallowance under section 40(a)(ia), the assessee has raised this ground before the Ld.CIT(A) by way of an 14 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 additional ground and submitted before him that it has already disallowed the said amount under section 40(a)(ia) for non compliance with the TDS provisions for the assessment year 2011-12 and the same is now allowable in the assessment year 2012-13 as per the First Proviso to section 40(a)(ia) as the TDS was deducted and paid. The assessee also submitted before the Ld.CIT(A) that in the original return of income for A.Y.2012-13, it has duly made this claim. However, while filing the revised return of income, the same remained to be claimed. The Ld.CIT(A) has, however, dismissed the claim of the assessee.

15 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 Therefore, this ground of appeal of the assessee is allowed for statistical purpose. (REVENUE’S APPEAL) & CO NO.17/MUM/2023 (ASSESSEE

24. Both the appeal of the Revenue and Cross Objection filed by the assessee are pertaining to the common issue of levying penalty under section 271(1)(c) of the Act.

filed by the assessee against levying the penalty by the Assessing Officer without mentioning the limb under which the penalty was initiated.

26. During the course of appellate proceedings before us, the Ld.Counsel also submitted copy of notice issued under section 274 read with section 271(1)(c) of the Act.

27. Heard both the sides and perused the materials on record. The Ld.CIT(A) has restricted the penalty levied under section 271(1)(c) of the act to the extent of quantum addition on account of sale of scrap which was confirmed in appeal. During the course of appellate proceedings before us, the assessee has also raised cross objection that in the notice under section 274 read with section 271(1)(c) of the Act dated 31/03/2013 that the Assessing Officer has not specified whether the penalty is levied for concealment of income or furnishing of inaccurate particulars of income.

28. The Ld.Counsel has also referred the decision of Hon’ble jurisdictional High Court in the case of Mohd Farhan A Shaikh vs DCIT 434 ITR 1 (Bom) wherein it was held that if there is a defect in notice by not striking off the irrelevant matter, the penalty cannot be levied.

29. On the other hand, the Ld.DR supported the order of Assessing Officer.

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19 Kapstone Construction Pvt Ltd ITA 5631/Mum/2014 ITA 2822/Mum/2019 ITA 3003/Mum/2019 ITA 1946/Mum/2022 CO 175/Mum/2018 CO 17/Mum/2023 33. Since we have deleted the penalty on account of invalid notice issued under section 274 read with section 271(1)(c) of the Act dated 31/03/2013, therefore, other ground on merit are not adjudicated upon. Therefore, ground of appeal of the Revenue stands dismissed and cross objection filed by the assessee is allowed.

34. In the result, appeal of the Revenue is dismissed and the Cross Objection of the assessee is allowed.

35. As a result, the appeals filed by the Revenue are dismissed and the appeal of the assessee is partly allowed and the cross objection for A.Y. 2010- 11 is partly allowed and cross objection for A.Y. 2007-08 is allowed. Order pronounced in the open court on 27 March, 2023