DY CIT, CC-2(4), MUMBAI vs. M/S KAPSTONE CONSTRUCTION P. LTD., MUMBAI

Before us, the Ld.Counsel for the assessee submitted that re- purchase of the area previously sold was done at fair market price, at an arm’s length price, therefore, same should not have been questioned by the Assessing Officer. The Ld.Counsel further submitted that once project was approved by the CRZ authorities, its prices get appreciated in market. The Ld.Counsel also submitted that assessee has not actually debited the purchase price of Rs.74,81,25,000/- to the P & L Account, but the same has been shown in the closing work-in-progress, therefore, the Ld.CIT(A) held that since expenditure has not been debited to the P&L Account, but taken to closing work-in-progress, therefore, addition of Rs.27,81,25,000/- was not warranted in the hands of the assessee. The Ld.Counsel further contended that the decision of the Ld.CIT(A) that closing WIP is to be reduced by this amount is not justified looking to the facts of the case. On 5 Kapstone Construction Pvt Ltd the other hand, the Ld.DR has supported the order of the Assessing Officer.

Heard both sides and perused the materials on record. Without reiterating the facts as elaborated above in this order, the assessee had disputed the decision of the Assessing Officer in adding the difference in the sale and purchase price at Rs.27,81,25,000/-. The assessee also submitted that repurchase of the area after granting approval by the CRZ authorities was done by the assessee at fair market price. The assessee had bought back the entire area of 85,500 sq.ft. for a sum of Rs.70,81,25,000/- which worked out about Rs.8,700/- per sq.ft. of residential saleable area in its proposed residential building known as ‘Rumtomjee Urbania’ project at Thane from Keystone Realtors Ltd for a consideration of Rs.74 crores.

We have also perused the copy of letter of allotment placed in the paper book wherein as per clause 10(B) both the parties had agreed that in the event the company gets CRZ approval in respect of ‘Rumtomjee Urbania’ project at Thane, then the company reserves its right to acquire the said area from the allottee at the price mutually agreed between the parties. The assessee company has also explained before the lower authorities alongwith relevant supporting documents that assessee company was also developing another project Azzaino which was situated at ‘Rumtomjee Urbania’ project at Thane wherein the assessee company had sold 19 flats in December, 2001 with the average sale rate of Rs.8,997 per sq.ft. Similarly, in the month of December, on 15/12/2012, the assessee company has re-purchased the residential saleable area from 6 Kapstone Construction Pvt Ltd Keystone Realtors Pvt Ltd @ Rs.8,750/- per sq.ft. From these facts assessee company has demonstrated that it has repurchased the residential saleable area at the rate which were prevailing in the market for purchase of residential saleable area in the open market to the customers. The assessee company has also submitted the rate of apartments over a period of time. The assessee has also provided the sale rate of different apartments over a period of time which are as under:-

After referring to the registered agreement of sales made in the project ‘Azzaino’ which was also situated at ‘Rumtomjee Urbania’. The assessee has demonstrated that assessee has re-purchased the residential saleable area at the rate which was prevailing in the market for purchase of residential saleable area in the open market to the customer.

In the light of above facts and circumstances, we consider that decision of Assessing Officer to add the difference in sale price of repurchase price is not justified inspite of the fact that assessee has not debited the purchase amount in the P&L Account is not justified. Even the decision of Ld.CIT(A) in reducing the difference amount in the WIP is not justified without contrary disproving the facts and material brought on record by the assessee as discussed supra in this order. In view of the above, the decision of the Ld.CIT(A) to reduce the difference amount of Rs.27,81,25,000/- is a not justified as the Ld.CIT(A) neither controverted the relevant supporting material furnished by the assessee as referred above nor considered that Assessing Officer has not referred the case to the DVO for valuation. Therefore, the ground of the Revenue is dismissed and that of the assessee is allowed. GROUND 2 OF REVENUE’S APPEAL – DELETION OF ADDITION ON ACCOUNT OF INTEREST COST OF Rs.10,65,59,776/- TO BE BOOKED IN WORK-IN-PROGRESS OUT OF TOTAL DISALLOWANCE OF RS.13,83,39,728/-.

The assessee filed appeal before the Ld.CIT(A). After perusal of the submission of the assessee, as reproduced at pages 35 to 53 in the order of the Ld.CIT(A), the Ld.CIT(A) observed that assessee had not apportioned the Finance Cost in accordance with its submission and percentage completion method followed by it. The Ld.CIT(A) has reproduced the interest cost apportionment made by the assessee project-wise at page 54 of his order. The assessee climed that it had 9 Kapstone Construction Pvt Ltd debited interest expenses to P&L Account only Rs.7,07,53,253/- after considering interest income of Rs.6,78,80,170/-. Therefore, the assessee submitted before the Ld.CIT(A) to restrict the disallowance of interest expenses to the amount of Rs.3,12,36,515/-. Therefore, the Ld.CIT(A) has agreed with the working of the assessee except in respect of project ‘Landward’, ‘AzzianoD’, etc. as per the Table shown at page 56 in the order of Ld.CIT(A) since work on these projects was not started and no Revenue offered in respect of these projects. Accordingly, after apportioning the interest in the ratio of percentage of projects completed, the Ld.CIT(A) has disallowed the interest to the amount of Rs.3,17,79,952/-. The Ld.CIT(A) held that expenditure in the nature of interest should be apportioned in the ratio of revenue recognized or the progress of the project which would give a true and correct picture of project, which has been offered over several years like in the case of the assessee. Therefore, out of disallowance of Rs.13,83,39,728/- as interest made by the Assessing Officer, an amount of Rs.31,77,99,952/- was confirmed and balance was directed to be deleted.

Heard both sides and perused the materials on record. The assessee had incurred total financial expenses of Rs.22,20,73,136/- and debited an amount of Rs.13,83,39,725/- as revenue expenditure in the P&L Account. The balance amount of Rs.8,37,33,408/- has been taken to capital work in progress. The assessee has been following ‘project completion method of account’ in accordance with the “Accounting Standard-7” and revenue were shown n the account on the basis of percentage of project completed as on 31st March of the year.

During the course of assessment, the Assessing Officer noticed that assessee has debited selling cost of Rs.10,65,80,572/- to the P&L Account. On query, the assessee explained that selling and marketing expenses are incurred by the assessee company irrespective of whether a project is completed or not. It was also explained that these expenses were not associated with any particular project. Therefore, capitalizing 11 Kapstone Construction Pvt Ltd the same under the project and treating the same as a part of the project is not justified. However, the Assessing Officer has not agreed with the submission of the assessee and disallowed an amount of Rs.7,61,97,384/- on account of selling cost stating that these expenses were attributable to the future income. Therefore, the same was to be capitalised. Assessee filed appeal before Ld.CIT(A). The Ld.CIT(A) has allowed the ground of the assessee.

Heard both the sides and perused the material on record. ”. It is noticed from the break up of selling cost that an amount of Rs.6,56,07,562/- pertained to advertisement and publicity expenses and the remaining expenses are pertained to Brouchers and Pamphlets, commission and brokerage, fair and exhibitions, etc. The assessee also submitted that as per Accounting Standard-7, the selling cost does not form part of the construction cost and development cost, i.e. work in progress for the year under consideration. Therefore, following and complying with AS-7, the selling cost should not form part of work in progress. During the course of assessment and appellate proceedings, the assessee explained that the expenditure incurred were in the nature of advertisement, pamphlets, fares and exhibition, sales promotion, etc. which cannot be linked with the progress of the project and anyway it was also submitted that the expenditure has actually been incurred during the year. Therefore, this expenditure was allowable under section 37 of the Act. The Assessing Officer has not explained that how this expenditure can be apportioned as per the progress of the project without considering the fact that most of the selling and marketing expenses were incurred by 12 Kapstone Construction Pvt Ltd the assessee company irrespective of whether a project was ongoing or otherwise. In the light of above facts, we do not find any error in the decision of Ld.CIT(A). Therefore, this ground of appeal

At the outset, a delay of 158 days in filing cross objection by the assessee has been reported. The assessee submitted an affidavit alongwith application stating that there was delay in filing the cross objection because because of wrong advice by the tax advisor. Thereafter, his counsel, Shri Naresh Kumar, who represent before the ITAT advised the assessee to file the cross objection against the departmental appeal.

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 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 13 Kapstone Construction Pvt Ltd 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.

This ground has been decided by us in favour of the assessee in ITA No.119/Mum/2021. The facts and circumstances being identical, the decision already arrived at for A.Y. 2013-14 shall apply mutatis mutandis to this year also. The ground of the Revenue and cross objection filed by the assessee are dismissed. REVENUE’S GROUND 2 : DELETION OF DISALLOWANCE OF ADVERTISEMENT EXPENDITURE

This ground has been decided by us in favour of the assessee in ITA No.119/Mum/2021. The facts and circumstances being identical, the decision already arrived at for A.Y. 2013-14 shall apply mutatis mutandis to this year also. The ground of the Revenue is dismissed. GROUND 3 IN REVENUE’S APPEAL & GROUND 2 IN CROSS OBJECTION FILED BY ASSESSEE.

Ground 2 of assessee’s cross objection that Ld.CIT(A) has erred in not restricting the disallowance under section 14A to the extent of exempt 14 Kapstone Construction Pvt Ltd income whereas the Revenue challenged the deletion of disallowance under section 14A to the tune of Rs.16,06,92,062/-.

During the course of assessment proceedings, the Assessing Officer noticed that assessee company has earned dividend income of Rs.38/- which was claimed as exempt. The Assessing Officer further noticed that assessee company has debited an amount of Rs.67,45,09,046/- as interest on loan debited to the P&L Account as finance cost. Further, the assessee company has shown total investment at Rs.4,56,61,80,450/- in the balance-sheet. Therefore, the Assessing Officer has computed disallowance under section 14A read with rule 8D to the tune of Rs.18,35,22,966/-. The assessee filed appeal before the Ld.CIT(A). The Ld.CIT(A) restricted the disallowance to Rs.1,14,15,452/- holding that same was offered by the assessee before him.

The assessee filed the Cross Objection mainly countering that the Ld.CIT(A) has erred in not restricting the disallowance under section 14A to the extent of exempt income. The Cross Objection was grossly delayed to the extent of 158 days.

After going through the material on record, it is observed that the assessee is seeking to rake up the issue for which they have accepted the findings as regards their tax liability. The assessee had declared the income in the return of income after making suo motu disallowance under section 14A read with rule 8D(2)(iii) to the amount of Rs.1,14,15,452/-. The Assessing Officer has further made disallowance under section 14A as per Rule 8D(2)(ii) of Rs.17,21,07,541/-. Before the Ld.CIT(A) in its grounds of appeal vide Form No.35 assessee had filed appeal against disallowance 15 Kapstone Construction Pvt Ltd of Rs.17,21,07,541/- under section 14A made by the Assessing Officer. The total disallowance under section 14A after including suo motu disallowance of Rs.1,14,15,452/- and Rs.18,35,22,966/- as per para 8.9 of the assessment order. Before the Ld.CIT(A), the assessee submitted that it had voluntarily disallowed an amount of Rs. 1,14,15,542/- which was more than the exempt income, therefore, no further disallowance should have been made.

In the result, appeal filed by the Revenue is dismissed. (Assessee’s Appeal)- A.Y. 2011-12 & ITA NO.1525/MUM/2021 (REVENUE’S APPEAL)

These grounds pertain to issue of notice under section 148 of the Act that original assessment was completed under section 143(3) of the Act and assessment under section 143(3) read with section 147 of the Act was completed merely on the basis of change of opinion.

Regarding challenging the reopening under section 147 of the Act, the Ld.CIT(A) has dismissed the appeal of the assessee holding that Assessing Officer was fully justified in forming a broad opinion that some income relating to the assessee had escaped assessment. The Ld.CIT(A) held that Assessing Officer has followed the due process of law in respect of issue of notice under section 148 of the Act. The Ld.CIT(A) also held that it was not a case of change of opinion as no opinion was formed in original assessment under section 143(3) in respect of interest on borrowed funds for projects carried on by the assessee company and the borrowed funds were nothing but project funds, have direct nexus with the projects carried out by the assessee. The Ld.CIT(A) also stated that it was not a case of definite and specific opinion made by the Assessing Officer regarding interest on borrowed funds for projects in the assessment made under section 143(3) of the Act.

The Ld.Counsel has referred the following judicial pronouncements:- 1. Jashan Textile Mills (P) Ltd vs DCIT & Ors 284 ITR 0542 (Bom) 2. Precilion Holdings Ltd vs DCIT (Bom) Writ Petition No.3342 of 2018 3. Idea Cellular vs DCIT & Ors (Bom) 301 ITR 0407 4. CIT vs Kelvinator of India Ltd (SC) 320 ITR 0561

We have perused the aforesaid judicial decisions referred by the Ld.Counsel. In the case of Jashan Textiles Mills the issue in the reopening was that of transfer price shown by the assessee whereas the assessee had already disclosed the basis on which the market price had been arrived at since 1994-95.

In the case of Precilion Holdings Ltd during the scrutiny assessment under section 143(3) the Assessing Officer had already examined the entire issue after raising multiple queries as elaborated at para 8 of the judgement. 35. In the case of Idea Cellular Ltd the Assessing Officer had raised several queries on several occasions and all the queries were answered in the original assessment. 36. In the case of CIT vs Kelvinator of India Ltd, the Hon’ble Supreme Court held that Assessing Officer has power to reopen the assessment

In this regard, it is noticed that neither before the Ld.CIT(A) nor before us the assessee has furnished copies of details of any letter or notice under section 142(1) issued by the Assessing Officer calling for any details regarding apportionment of interest expenses in accordance with the Accounting Standards 7 & 16 (AS 7 & 16). Even the assessee has not submitted any details / letter filed before the Assessing Officer in respect of allocation of interest expenses incurred for the loan taken for the construction of the project. The assessee has referred only the financial statements together with the auditor’s report for the year ended 31/03/2021 wherein under Schedule 16 simply construction cost mentioned and further details of finance cost was mentioned under Schedule 19 in the form of interest and bank charges in a general manner. Nowhere any details has been submitted at the time of original assessment in the context of AS-7 & 16 so that it can demonstrate apportionment of interest cost in the ratio of revenue recognized on project completion basis. We observe, simply, the copy of audit report in the form of financial statements furnished before the Assessing Officer is not sufficient to form the requisite belief. The Hon’ble Delhi High Court in the case of Consolidated Photo & Finvest vs ACIT (2006) 281 ITR 394 (Del) held that Explanation 1 to the Proviso of section 147 makes it clear that production of account books or other evidence from which the Assessing Officer can with due diligence discover material evidence would not 19 Kapstone Construction Pvt Ltd necessarily amount to disclosure within the meaning of the Proviso that stipulates an extended period of limitation for action in the cases where the escapement arises out of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

We have also considered the case law as cited by the Ld.Counsel but they are not applicable to the facts and circumstances of the present case as the para materia content in those cases are different from the para materia content in the present case. Therefore, we do not find any merit in the legal ground raised by the assessee and, therefore, dismissed.

Ground 2 of the assessee is that no notice under section 143(2) was issued.

We have heard both sides on this issue and perused the materials on record. Regarding no notice under section 143(2) of the Act was served after filing of return of income on 18/04/2018 pursuant to notice issued under section 148 of the Act, the assessee contended that in this regard it had filed additional ground of appeal before the Ld.CIT(A). On perusal of the assessment order, it is found that Assessing Officer has categorically mentioned at para 3 of the assessment order passed under section 143(3) r.w.s. 147 that notice under section 143(3) dated 31/03/2018 was issued to the assessee alongwith a letter dated

The assessee has also not filed any rectification application before the Ld.CIT(A) for not adjudicating this ground of appeal. We further notice that looking to the fact that Assessing Officer has categorically incorporated in the assessment order that notice under section 143(2) has been issued. Therefore, it is required to verify the evidence of serving of this notice upon the assessee which has not been called upon by the Ld.CIT(A) in the remand report.

In view of the above facts and circumstances we restore this ground of appeal to the file of the Ld.CIT(A) for adjudication which was remained to be adjudicated as discusses supra in this order.. This ground of appeal is allowed for statistical purpose.

In the result, appeal of the assessee is partly allowed.

This ground has been decided by us in favour of the assessee in ITA No.119/Mum/2021. The facts and circumstances being identical, following decision already arrived at shall apply mutatis mutandis to this ground also.

In the result, the appeal filed by the Revenue is dismissed. 46. Resultantly, appeals filed by the assessee are partly allowed; cross objection filed by the assessee is partly allowed and the appeals filed by the Revenue are dismissed. Order pronounced in the open court on 23rd February, 2023