APPLEWOODS ESTATE PVT. LTD.,,AHMEDABAD vs. THE DCIT, CIRCLE-1(1)(1),, AHMEDABAD

आदेश/O R D E R

PER PRADIP KUMAR KEDIA - AM:

The captioned cross appeals have been filed by the assessee as well as by Revenue against the order of the Commissioner of Income Tax (Appeals)-1, Ahmedabad (‘CIT(A)’ in short), dated 28.12.2017 emanating from the assessment order dated 30.03.2015 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning assessment year 2012-13.

“1. The ld. CTT (A) erred in law and on facts in confirming addition of Rs. 86,11,74,085/- out of total addition of Rs. 107,17, 79, 584/- made by AO to the closing stock of land. 2. Ld. CIT (A) erred in law and on facts confirming view taken by AO that proportionate land cost allowable on sale to co- developer is to be worked out based upon area of land available and not upon area of FS1 available. 3. Ld. CIT (A) erred in law and on facts in recasting trading a/c of land to confirm addition to closing stock of land on the alleged ground that the appellant changed method of accounting, valuation of closing stock & allocation of cost to Profit & Loss a/c in subsequent year. 4. Ld. CIT (A) erred in law and on facts directing AO to recompute allocation of AUDA charges, FCCD interest & Township infra expenses based upon area of land sold and not as allocated by appellant on the basis of FST area. 5. Without prejudice to the above contention that working of closing stock of land as per appellant be accepted, ld CIT (A) ought to have directed AO that addition to closing stock be allowed as opening stock of the next year. 6. Ld. CIT (A) erred in law and on facts confirming disallowance by AO of Rs.19,48,142/- administrative expenses u/s 14A rwr 8D of the Act. 7. Levy of interest u/s 234A/B/C & D of the Act is not justified.”

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“(1) That the ld. CIT(A) has erred in law and on facts in directing the AO to consider the total area of land at 3,91,261 sq.mtrs as against the actual area of 5,11,707 sq.mtrs adopted by the AO. (2) That the ld. CIT(A) has erred in law and on facts in holding that 1,20,446 [5.11,707 less 3,91,261] sq.mtrs of land has to be excluded for the computation of per sq.mtr land cost even while holding in para 2.7.4 that only 25,587 sq.mtrs of land has been surrendered to local authorities for public amenities. (3) That the ld. CIT(A) has erred in law and on facts by directing exclusion of 1,20,446 sq.mtrs of land in computation of cost of land, which leads 10 inflation in land cost leading to lower profits on sale even while all other associated expenditure continue to be debited and claimed. (4) That the directions of the ld. C1T(A) is contrary in nature to exclude 120,446 sq.mtrs of land even while directing the AO to allow township infra expenses in para 2.7.6 of his order. (5) That the ld. CIT(A) has erred in law and on facts in directing the AO to reduce the addition made on account of excess claim of cost of land from Rs.107,27,79,584/- to Rs.86,11,74,085/-. (6) That the. ld. CIT(A) has erred in law and on facts in directing the AO to adopt the land area as 3,91,261 sq.mtrs instead of 5,11,707 sq.mts in respect of other expenses [AUDA charges, FCCD interest, township infra expenses] (7) That the ld. CIT(A) has erred in law and on facts in directing the AO to examine the claim of assesses that township infra expenditure was Rs.60,00,00,000 instead of Rs.24,74,44,843/-. (8) That the ld. C1T(A) has erred in law and on facts in giving directions to the AO in para 2.7.6(ii) of his order for allocation of certain FSI expenses despite giving a finding that the breakup of such expenditure was not provided in appellate proceedings or assessment proceedings. (9) That the ld. C1T(A) has erred in law and on facts in restricting tin disallowance made n/s 14Afrom Rs.46,81,276/- to Rs.19,48,142/-.”

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(a) The Assessee has provided for 120446 sq. mtr. land for the purpose of park, school, hospital, crossover road etc.' and only balance land area of 391261 sq. mtrs. is available for commercial exploitation. Out of the aforesaid land of 120446 sq mtr., 25,587.47 sq mtr. has already been surrendered by the Assessee to local authorities for public purpose amenities like school, hospital and public amenities as per clause 9.2 of Regulations for Township 2009 and the balance land is to be developed as Cross Over Road and Public Garden.

(b) On the available area of land global FSI of 6542064 sq. ft is granted. Accordingly, the Assessee planned and developed in the way that on some area high-rise buildings are erected and on some area horizontal development is made and the same is under process. In the process, developer has to ensure that total construction on the entire piece of land does not exceed permissible FSI i.e. 6542064 sq. ft.

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5.1 During the year under consideration, the Assessee has sold 2698000 sq. ft of FSI for Rs.250 crores to Co-developer M/s Goyal Safal Developer as per agreement executed on 11.05.2011, out of global FSI available of 6542064 sq. ft. And the land of 82200 sq. mtr in relation thereto was demarcated for co-development by Goyal Safal Developer.

5.2 The Assessee worked out cost of FSI sold at Rs.253,27,75,176/-, which comprises of the following:

(i) Land cost Rs. 175,58,59,666/- (ii) AUDA charges for Co-development sale Rs. 23,45,80,784/- (iii) FCCD interest for Co-development sale Rs. 29,48,89,883/- (iv) Township infra exp. for Co-development sale Rs. 24,74,44,843/- ---------------------- Rs.253,27,75,176/-

The Assessing Officer asked to justify the ‘Cost of Sales’ to which the Assessee vide letter dated 11.03.201.5 submitted detailed reply in respect thereof.

5.2.1 Regarding cost of land of Rs.l75,58,59,666./-. it was explained that the same is worked out in proportion to FSI sold i.e. 26,98,000 sq. ft. to total global FSI available of entire land, which is 65,42,064 Sq. ft., which comes to 41.24% of total FSI. The cost of entire FSI available on land is of Rs.425,75,78,322/- and 41.24% thereof comes to Rs. 175,58,59,666/-, which is the cost of the FSI sold. The attention is invited to clause 3 of co-development agreement which clearly mentions that the Developer i.e. AEPL will ensure availability of

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26,98,000 sq ft of FSI to Co-Developers. Clans 10 (b) of the Co- Development Agreement also mentions that in case Developer could for any reason make lesser FSI available to Co-Developer, then consideration shall stand reduced @ Rs 927 per Sq Ft of such deficiency.

5.2.2 Regarding AUDA charges for Co-development sale of Rs.23,45,80,784/-, the Assessee explained that the said charges is allocated in proportion to the total FSI available to FSI relating to FSI sold on a particular land area. The total AUDA charges incurred are of Rs.56,88,07,450/- and 41.24% thereof comes to Rs.23,45,80,784/-, which pertains to FSI sold.

5.2.3 Similarly, regarding the FCCD interest for Co-development sale of Rs.29,48,89,883/-, the Assessee stated that FCCD interest paid for entire land is also taken in proportion to the FSI sold. The total FCCD interest has been paid on entire FSI available on land is of Rs.71,50.43,918/- till the date of sale of FSI lo co-developers and 41.24% thereof is allocated towards ‘Cost of Sales’ i.e. Rs.29,48,89,883/-.

5.2.4 Regarding township Infra Expenses for Co-development sale of Rs.24,74,44,843/-, the Assessee explained that the Assessee is developing Applewoods Township on the land area of 511707 sq. mtr and for that purpose, Assessee has incurred total expenses of Rs.60 crores. It was agreed with the purchaser namely-Goyal Safal developers that for FSI sold, the necessary Township Infrastructure will be carried out by Applewoods Estate Pvt Ltd. This is also mentioned in co-development agreement. Accordingly, the expenditure of Rs.24,74,44.843/- has been claimed as ‘Cost of Sales’. The attention is invited to clause 10( C ) of the Co- Development

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Agreement which mentions that sale consideration of Rs 250 Crores inter alia includes cost of Township Infrastructure.

5.2.5 The Assessee submitted before the Assessing Officer that from the above. it is established beyond doubt that ‘Cost of Sales’ worked out is directly related to sale of Co-development right amounting to Rs.250 crores, and therefore, the assessee requested not to make any disallowance out of said expenditure. It was further explained that total global FSI available is of 65,42,064 sq. ft on total land of 5,11,707 sq, mtr. In other words, the total permissible construction on the entire land of 5,11,707 sq. mtr. is limited to only 65,42,064 sq. ft. The value of the laud is derived from the permissible constructions only. It may be noted that the value of land differs from its uses and also the permissibility of construction e.g. the value of agricultural land would' be different from the value of non-agricultural land, so also value of equal area of plot opposite to each other falling under different ones like Rl and R2 would be different because the permissible construction in R2 zone is higher than the permissible construction area in R2 zone, and therefore, the value of the land falling in Rl zone would always be higher than the value of the land under R2. The attention is invited to co-development agreement where it has been very clearly mentioned that we have sold 26,98,000 sq. ft of FSI as against the total available FSI of 65,42,064 sq. ft. Thus, on the balance land, Applewoods is not entitled to construct anything more than the balance FSI i.e. 65,42,064 sq. ft less 26,98,000 sq. ft. i.e. 38,44,064 sq. ft. only. Thus, the value of balance land available to Applewoods Estate Pvt. Ltd. accordingly goes down proportionately. In view of this, the working of cost of land taken in proportion to FSI sold vis-a-vis total FSI available is correct.

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5.3 The aforesaid explanation submitted by the assessee in the letter dated 11.03.2015 was not found to be acceptable by the Assessing Officer for the reasons slated by him in the assessment order, which are as under:

"a) The assesses company is engaged in the business of development of integrated township comprising of commercial & residential development. b) The assessee company purchased the land and not only Floor Space Index (FSI for short). FSI comes to virtue of purchase of land c) The rules governing FSI changes from time to time and therefore, the FSI available on a particular area of land may vary from time so time. The present FSI for the said area may be different from what if was at the time of execution of co-development agreement. d) It was specifically been mentioned in the Co-development agreement that the Co-developer M/s. Goyal Safal Developer, is entitled to develop a part of the land admeasuring 32,200 sq. mtrs. which has further specifically described in the Schedule. 2 of the Co-development agreement and has also been identified vide certain survey numbers and also demarcated in the map annexed at page 7 of the co-development agreement, which apparently shows that the land deemed to be transferred or sold is only 82,200 sq meters and not 2,11,027 sq. ml. Being 41.24% of total land of 5,11,707 sq. mtrs. available with the assessee company. e) The onus is on the assessee company to prove that it has sold land admeasuring 2,11,027 sq. mtrs valued at Rs.175,58,59,666/- which it has reduced from the opening WIP of the land without selling/transferring the same. f) The assessee has not produced any material on record to establish that, it has no right on the land admeasuring 2,11,027 sq. mtrs., (more particularly land admeasuring 128828 sq. mt (211027 sq. mt - 8200 sq mt.), which it claimed to be integral part of FSl sold and has reduced from stock of land. None of the document furnished by the assessee company during the course of hearing has established the contention of the assessee company, that if has transferred or deemed to be transferred the land admeasuring 2,11,027 sq. meters in respect of FSI sold. g) The contention of the assessee company that since it has sold FSI of 2698000 sq. ft and hence the company is entitled to reduce the cost of land in proportion to total FSI available and sold to the Co- developer, is without any basis."

In view of the above, the Assessing Officer vide his letter dated 23.03.2015 asked the assessee to furnish further details mentioned in

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the said letter. In response to the same, the assessee vide letter dated 25.03.2015 submitted the details sought for by the Assessing Officer.

5.3.1 In the said letter, the assessee explained that the information asked for F.Y. 2012-13 and 2013-14 is not relevant to the on-going assessment proceedings. The assessee further explained that the nature of the transaction for the Financial Year 2011-12 is not comparable with the transactions carried out during the Financial Years 2012-13 and 2013-14. During the Financial Year 2011-12, the assessee has sold 26,98,000 sq. ft of FSI, in terms of co-development agreement out of total available FSI of 65,42,064 sq. ft. This was the only transaction with regard to sale of FSI by the assessee. The assessee continues to the owner of the land in terms of co-development agreement as well as in land revenue record. After purchase of FSI, M/s. Goyal Safal Developer will co-develop the demarcated area by constructing residential apartments at its own cost and selling to final customers. M/s. Goyal Safal Developers will receive the agreed consideration from the customers. The assessee will not receive any further consideration from these customers however it will join as an owner to sale deed in terms of co-development agreement.

After sale of FSI to Goyal Safal Developers, the company is left out with reduced FSI on remaining land. The company has to construct the villas, residential apartments, affordable housing for economically weaker section, commercial offices and shops as per the approved master plan by AUDA, The company is also required to leave space for public garden, public road, school and hospitals etc as per Township Regulations 2009. During the Financial Years 2012-13 und 2013-14, the company has sold the constructed property along with land directly to its customers. Customers are transferred the built property along with proportionate undivided share in the land i.e.

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Villas, Residential Apartments, commercial shops and offices. From the total cost of land, construction and other WIP the company has reduced the cost attributable to sale of FSI and only reduced cost has been allocated towards sale of properties during subsequent years. Thus, the nature of transactions in subsequent years are totally different from the transaction carried out during the financial year 2011-12. However, without prejudice, the details of sale as called for the Financial Years 2012-13 and 2013-14 were given in the statement enclosed along with copies of sale deeds. The details for F.Y. 2012-13 is as under:

Particu Land Amount Lan Amoun Land Amount Land Amont lars area d t area area (In Sq. area (In (In Mt) (In Sq. Sq. Sq Mt) Mt) Mt) Cost of 309061 2501718656 4271 3320200 30479 246851 land 0 0 6656 Const. 1285816731 11313 3390818 238327 WIP 70056 9 8598 Cost of 29213003 4525542 409547 materia 28 78 l 3816748389 489275 0031

5.3.2 In response to show cause by the Assessing Officer as to why the claim of reduction of value of stock of land in excess of proportionate value of land admeasuring 82,200 sq. meters should not be disallowed, the assessee submitted that M/s. Goyal Safal Developers have been given light to co-develop by to infer that the land admeasuring 82,200 sq. mtrs., demarcated for the purpose of utilization of FSI by co- developer had been sold to M/s. Goyal Safal Developers. It will be appreciated that in terms of matching concept all the related cost for earning the revenue has to be considered to determine the profit / loss from any transaction. Thus the assessee has properly claimed proportionate cost of FSI from sale consideration.

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5.3.3 It was further submitted that the agreement with M/s. Goyal Safal Developer is for co-development and accordingly stamp duty applicable for co-development @ 1% has been paid and accepted by stamp-authorities whereas in case of sale of land stamp duty @ 4.9% is to be paid. The observation of the Assessing Officer regarding allowing proportionate cost to the area of land under co-development is not correct. It was also pointed out that the prevailing jantri value of the land (Value adopted by stamp authorities) is Rs.2750 per sq mtrs. only. This itself proves that the sale consideration has been received on the basis of FSI only. The co-developer, otherwise, would have been eligible to develop 10,50,753 sq. ft. of FSI only on 82.200 sq. mtr. of land whereas the company has permitted 26,98,000 sq. ft. of FSI. Thus the consideration paid by the co-developer is towards utilization of FSI only and consequently cost in relation thereto is to be worked out in proportion to FSI and not with reference to area of land.

5.4 After the above referred submission, the Assessing Officer vide letter dated 26.03.2015 finally show caused as to why the claim of reduction of stock as well us value of land at the rate of 41.24% of total land value without selling, and allocating to co-developer be not disallowed. In response to the said notice, the assessee vide letter dated 27.03.2015 submitted detailed explanation.

5.4.1 The assessee explained that the assessee has purchased 511707 sq. mtrs. of land and as per the Township Policy, the copy of which has been furnished to the Assessing Officer vide our letter dated 20.03.2015, the assessee is required to reserve areas for schools, hospitals, public garden, public road etc. In terms of the guideline the company, has deducted 120446 sq. mtr. of kind for the said purposes. On the balance land of 391261 sq. mtr. available for commercial

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development FSI of 6542064 was approved by AUDA. The company vide its agreement dated 11.05.2011 has sold 2698000 sq. ft. of FSI to Goyal Safal Developer during the F.Y. 2011-12. At the cost of repetition the Assessee is once again reiterating that the value of the land is derived from the permissible construction only. Though the information for the F.Y. 2012-13 and 2013-14 is not relevant lo the on-going assessment, however, as desired by the Assessing Officer and without prejudice, it was submitted that the opening land and FSI available as on 01.04.2012 is 309061 sq. mtr and 3844064 sq. ft of FSI respectively. The quantitative reconciliation was also given as hereunder:

Particulars Land in Sq.Mtr FSI in Sq. ft.

Balance as on 01.04.2011 511707 6542064 Less: Area for cross over 120446 -- infrastructure, roads/school, hospital, public amenities and public garden as per township regulations.

Area available for 391261 6542064 commercial exploitation

Less :Area transferred to co- 82200 2698000 developer

Balance as on 31.03.2012 309061 3844064 Area of Villa sold during F.Y.2012- 4271 28370 13

Balance as on 31.03.2013 304790 3815694 Area of Villa sold during F.Y.20 13- 366 2976 14

Balance as on 31.03.2013 304424 3812718

Further, Assessee explained that the value of stock of land of Rs.250.17 crores as on 31.03.2012 is worked out as under:

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Value of opening stock of FS1 as on 01.04.201 Rs.425.76 crores Less: Cost of FSI sold Rs.175.59 crores Closing stock of FSI as on 31.03.2012 Rs.250.17 crores

Thus, from the above it will be appreciated that the value of closing stock is correctly worked out by the company on matching concept in accordance with the accounting policy regularly employed, and therefore, it is in compliance with sec.145(3) of the I.T. Act, 1961.

5.4.2 The Assessee explained that the area and value of land as opening stock for F.Y. 2012-13, relevant to Asst. Year 2013-14, has been arrived at after deducting the area of FSI sold during F.Y. 2011- 12, and therefore, the question of disallowance of claim of reduction of stock as well as value of land does not arise.

5.5 In the assessment order, the Assessing Officer has stated that the Assessee has reduced area of 120446 sq. mtrs. from stock of land being area for crossover road, school, hospital, public garden, public road etc. and according to him, this is an afterthought story where, in fact from the beginning of the assessment proceedings, the Assessee submitted that as per the township regulation, certain land is to be reserved out of total area and this cannot be afterthought story. The chart of stock of land was submitted for better understanding of physical area of land available year wise and in such project land which is reserved for the particular purposes, the cost of which has to be loaded on the balance land available for exploitation.

5.6 The Assessing Officer has further observed as under:

"* Further, in the said table, the assessee company is reducing the land admeasuring 82,200 sq. ml. under nomenclature "area transferred to co-developer", which shows that the area of land transferred to co-developer is only 82,200 sq. mtr. Therefore, it cannot reduce the cost of land @ 41.24% of the total land. More interestingly, as can be seen from the table of the assessee's

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submission that, in the subsequent periods i.e. F.Y.2012-13 and 2013-14, the assessee company has stated to have sold area of Villa. * The assessee's submission dtd.27.03.2015 wherein it has reduced land admeasuring 120446 sq. mt in an attempt to reconcile the apparent inconsistencies in valuation of closing stock of land, is also contradictory 10 its earlier stand wherein the assessee company has claimed total cost of land admeasuring 211027.96 sq. mtr. Against sale of FSI wherein the land component transferred was only 82200 sq. mt. In this backdrop, the assessee's submission is again found contradictory and lopsided. By averaging the cost of FSI and land and by way of inaccurate-representation of fact, the assessee company has tried to defer the revenue. Neither the valuation of FSI nor of land has been found correct and consistent to the accounting method followed by it. This issue has discussed in detail under head "Rebuttal of Assessee Company's Contention'.”

5.7 The Assessing Officer also issued notice u/s. 133(6) to co- developer viz. Goyal Safal Developer and the co-developer has also confirmed that as per the agreement dated 11.05.2011 they have been allowed to develop and construct residential building, apartment etc. by utilizing maximum FSI of 2698000 sq. ft. in compliance of regulatory provision on the part of land admeasuring 82,200 sq.mtrs. This has been interpreted by the Assessing Officer otherwise stating that Assessee has claimed to have sold FSI of 2698000 would be utilized at a given plot of land admeasuring 82.200 sq. mtr and in view of this also, the Assessee's contention that it has sold/transferred 41.24% of total land is misguiding and not found correct, and accordingly, also claim of the Assessee of cost of sale of land amounting to Rs. 175.58 crores is not found allowable.

5.8 Similarly, the AO has restricted the claim of other expenses at 16.06% which has resulted in following disallowances;

AUDA charges Rs.14,32,30,308/- FCCD interest for co-development sale Rs.18,00,53,830/- Township Infra Exp for Co-development sale Rs.20,77,05,201/- -------------------- Rs.53,09,89,339/-

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5.9 While calculating excess claim of expenses, the Assessing Officer has taken Township Infra Expenses for co-development sale as Rs.24,74,44,843/- and the total expenses incurred is mentioned at Rs.24,74,44,843/-. The Assessee vide letter dated 13.03.2015 and 20.03.2015 submitted that the total expenditure under this head- incurred is of Rs.60 crores and 41.24% comes to Rs.24,74,44,843/-. The Assessing Officer has allowed 16.06%. and therefore, allowable expenses comes to Rs.9,63,60,000/-; whereas allowable expenditure worked out by the Assessing Officer is 3,97,39,642/-, which is 16.06% of Rs.24,74,44,843/-. Thus, the Assessing Officer has made excess disallowance out of such expenditure by Rs.5,66,20,358/- (Rs,9,63,60,000/- -Rs.3,97,39,642/-).

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7.1 The AO re-computed the ‘Cost of Sales’ and other incidental expenses on the basis of geographical area. The working of closing WIP of the assessee as per its books is reproduced hereunder for ready reference:

Particulars Amt Rs Amt Rs opening WIP LAND 4257578322 Construction 1257290289 5514868611

ADD: Construction expenses during the year 834654955 (as per Schedule 18)

Less: Cost of Sates Land 1755859666 Auda charges for Co development sale 234580784 FCCD interest for co development sale 294889883 Township Infra Expenses for co 247444843 2532775176 development sale

Closing WP LAND 2501718656 Construction 1315029734 3816748390

Amount As per Balance sheet Schedule 3816748389 12

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7.2 The aggregate amount of Rs.53,09,89,339/- added to the ‘Cost of Sale’ in excess of 16.06% was thus found not allowable. The AO accordingly added the same also to the total income of the assessee.

8.1 The CIT(A) re-visited the detailed submissions made by the assessee in this regard and reduced the addition on account of under valuation of closing stock computed by AO at Rs.1,07,17,79,584/- to Rs.86,11,74,085/-. The relevant operative para of the order of the CIT(A) is reproduced hereunder:

2.7 I have gone through the facts and submissions of the appellant carefully. The brief facts of the case are that Appellant is owner of land of 5,11,707 sq. mtrs., which is situated in the village Sarkhej Sanathal and falls within the limits of Ahmedabad Urban Development Authority (AUDA). During the year under consideration, Appellant has shown revenue from operation for Rs.250 crores under the head "co-development rights" in Schedule - 16 of profit & loss account. During the course of assessment proceedings Appellant has submitted co-development agreement dated 11th May, 2011 executed with Goyal-Safal Developers. During the course of assessment proceedings, Appellant has submitted working of dosing WIP as under:-

Particulars Amt Rs Amt Rs opening WIP:- Land 4257578322 Construction 1257290289 5514868611

Construction expenses during 834654955 Add: the year (as per Schedule 18)

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Less: Cost of Sales Land 1755859666 Auda charges for Co- 234580784 development sale FCCD interest for co- 294889883 development sale Township Infra Expenses for 247444843 2532775176 co-development sale

Closing WIP LAND 2501718656 Construction 1315029734 3816748390

Amount As per Balance sheet 3816748389 Schedule 12

As can be seen from the table above, as submitted by the assessee company, the assessee company has shown opening value of land to the tune of Rs.425.75 crores and cost of construction of Rs.125.72 crores totaling to Rs.551.48 crores. Further, the assessee has claimed construction expenses of Rs.83.46 crores. As per the P&L account, as against the revenue of Rs.250 crores, the assessee company has claimed cost of sale of land amounting to Rs.175.58 crores, AUDA charges for co-development sale Rs.23.45 crores, FCCD interest for co-development sale Rs.29.48 crores and further Township infra expenses for co-development sale Rs.24.74 crores. After deducting of the said expenses on account of cost of sales, the closing WIP of land has been reduced to Rs.250,17 crores and construction cost of Rs.131.50 crores. Thus, the closing WIP comes totaling to Rs.381.67 crores.

2.7.1 During the course of Assessment Proceedings as well as Appellate Proceedings, Appellant has claimed that total global FSI available on above land is 65,42,075 sq. ft., out of which it has sold FSI of 26,98,000 Sq. ft. (land of 82,200 sq. mtr) to Goyal-Safal Developers by agreement referred supra. As FSI sold to said company represents 41.24% of total FSI available with Appellant (26,98,000 / 65,42,075), proportionate land cost and other expenditure were claimed in profit & loss account. It can be seen from above chart that total land cost was 425.76 crores as on 1st April, 2011 and land cost transferred to profit & loss account is Rs. 175.58 crores which is 41.24% of total FSI sold by Appellant. The Appellant has similarly claimed interest expenses, AUDA charges and township infra expenses in profit & loss account.

2.7.2 While passing the assessment order, the AO has referred to co- development agreement entered with Goyal-Safat Developer, wherein it is stated that land admeasuring 82,200 sq. mtr., is sold to said

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party- The AO has referred to various clauses of the Agreement including clause No. 6, 8, 9, 10, 26 and 51 and contended that assesses company, though, has claimed to have sold FSI of 26,98,000 sq. ft., it is specifically stated that co-development land to utilize such FSI is 82,200 sq. mtr., of land hence Appellant is not justified in claiming expenditure in proportion to FSI sold to Global FSt available with it.

During the course of Assessment Proceedings, Appellant has also claimed that out of total land of 5,11,707 sq. mtr., land of 1,20,446 sq. mtr., is for areas for schools, hospital, public garden, etc. The AO has also asked Appellant to submit the valuation of closing stock for subsequent assessment year, wherein Appellant has shown cost of land at Rs.250-17 crores which is similar to value shown in closing WIP as on 31st March, 2012 and said chart is already reproduced herein above. The Appellant has also stated that total available land as on 1sl April, 2013 is 3.09,061 sq. mtr. (5,11707 - 1,20446 being common area for development - 82,200 being land sold to co-developer). In subsequent Assessment Year Appellant has valued closing stock as well as amount to be charged in Profit & Loss Account in ratio of area of land sold in proportion to balance area of land as on 1st April, 2013 and such ratio is different in comparison with current Assessment Year wherein expenditure is claimed in P&L Account based on FSI sold. As Appellant has valued closing stock on different basis, AO has held that closing stock is required to be valued based upon area of land remaining with assessee and not based upon available FSI, The AO has also rejected Appellant's claim for area of land being 1,20,446 sq. mtr., required for cross-over infrastructure, roads, schools, etc. On this basis, he has valued the closing stock of land as under-

TRADING ACCOUNT OF LAND AS A PART OF INVENTORY Particulars Sq. mtrs. Value (Rs.) Cost worked out per Sq. mtr. Opening Stock of land (A) 511707 4257578322 8320 Purchase of Land(B) 0 0 0 Co-development land allocated 82200 1755859666 N.A. to sale of Co-development right (FSI) as per agreement (C) The closing stock of Land (should 429507 3573498240 8320 be valued at original cost Rs. 8320/- per sq. mtr. as per the method regularly employed by the assesses or as per consistent accounting policy and AS-2)(D)

Closing stock of Land as valued by 429507 2501718656 5825 the assesses in Valuation of Closing stock as per books Addition in closing stock 107,17,79,584

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 20 -

On this basis AO has made addition of Rs.107,17,79,584/- while computing total income. The AO has a/so made separate addition of Rs.53,09,89,339/- with respect to allocation of AUDA charges, FCCD interest and township infra expenses, as under:

Sr. Nature of Total Expenses Allowable Excess No. expenses Expenses claimed by expenses expenses the assessee ©16.06% claimed by ©41.24% the assessee 1 AUDA charges 568807450 234580784 91350476 143230308 for Co- development sale 2 FCCD interest 715043918 294889883 114836053 180053830 for co- development sale 3 Township Infra 247444843 247444843 39739642 207705201 Expenses for (Claimed co-development @100%) sate Total in Rs. 530989339

2.7.3 During the course of appellate proceedings, Appellant has argued that it has purchased the land for the purpose of township development and authority granted permission on 28th May, 2010, The Appellant has prepared the construction plan as per terms of regulation for residential township - 2009, which is approved by authority as per which Appellant has provided 1,20,446 sq. mtr., of land for the purpose of park, school, hospital, etc., hence available land for commercial exploitation is 3,91,261 sq. mtr. It was also submitted by Appellant that total global FSI of above land is Rs. 65,42,064 sq. ft., out of which it has sold 26,98,000 sq. ft. FSI to Goyal-Safal Developer The Appellant has referred to various clauses of development agreement wherein he has referred to clause No. 3 of the agreement which states that Appellant has transferred 26,98,000 Sq. Ft., FSI to co-developer and in Clause - 10(b) it is stated that if developer could not transfer agreed FSI to co-developer, consideration would be reduced by Rs.927 per sq. ft., FSI.

The Appellant has argued that purpose of acquiring land and development of township is to utilize FSI embedded in the land and development cannot exceed total global FSI sanctioned by the plan. When assesses has sold part of such FSI, cost attributable to such FSI passes on to the co-developer as Appellant can develop or sell remaining FSI only irrespective of the area of the land. The Appellant has also claimed that in view of such facts it was correct in claiming cost of land and other expenditure in the ratio of FSI sold to global FSI available with it. The Appellant has also argued that once FSI is sold, sale proceed is received, Appellant is left with balance FSI hence what is determined is profit on FSI and not profit

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 21 -

on land. In its alternate argument, Appellant has a/so contended that while making disallowance out of township and infra expenditure, AO has allowed expenditure of 16.06 % of Rs.24,74,44,843 i.e. Rs.3,97,39,642 and balance expenditure is disallowed. It was submitted that total township infra expenditure is Rupees sixty crores and Appellant has claimed expenditure of Rs.24.74 crores in P&L Account i.e. 41.24 % being area of FSI sold and even if working of AO is accepted, allocation works out to Rs. 9.63 crores I.e. 16.06% of Rs. 60,00,00,000.

2.7.4 On careful consideration of entire facts it is observed that Appellant has acquired the land for development of a township. It is observed that Appellant has acquired total land of 5,11,707 sq.mtr., and as per township policy, copy of which is furnished to AO vide letter dated 20th March, 2015, company was required to reserve areas for school, hospital, public garden, public road, etc., end as per said guidelines, Assessee has to keep land for such reservation at 1,20,446 sq. mtr. These details are already on record of AO and cannot be termed as afterthought as same is supported by township policy and Appellant has already surrendered 25,587 sq. mtr. of land to local authorities for public amenities. Considering these facts available land area for any development and commercial exploitation is 3,91,261 sq. mtr., and not 5,11,707 sq. mtr., considered by AO. Thus, land cost of 3,91,261 sq. mtr., isforRs.425. 76 crores.

The Appellant has not acquired FSI on acquisition of the land. Once the land is purchased, Appellant obtains FSI which is equivalent to land area. However, Assessee can acquire additional FSI by paying premium rates to concerned Authorities and maximum FSI available on plot of land is 1.5. Thus, land cost paid by Appellant is for area of land and not for obtaining global FSI of 65,42,064 sq. ft., being maximum FSI available as per Township Planning Scheme. The Appellant has obtained such FSI only by making payment which is over and above land cost. These expenditure are separately debited by Appellant and same is not forming part of land cost of Rs.425.75 crores Even Rules governing FSI change from time to time and FSI available may be different when land was purchased and when township plan scheme is placed on record hence land cost as on particular date cannot be measured on the basis of average FSI cost but is required to be measured on the basis of average rate for square metre of land.

The major dispute between AO and Appellant is regarding allocation of cost of land and other expenditure against area of land sold to co-developer during the year. The Appellant has claimed cost based upon area of FSI sold in proportion to total FSI available with it whereas the AO has allocated such cost based upon area of land sold in proportion to total area of land available. The AO has considered the total area of land at 5,11,707 sq. mtr, but as discussed herein above, area for crossover infrastructure and public

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 22 -

amenities as per township planning scheme is 1,20,446 sq. mtr., and Appellant is left with area for commercial exploitation of 3,91,261 sq. mtr. (5,11,707- 1,20,446).

It is observed that, as discussed in preceding para, Appellant has purchased the land and not the FSI. FSI and additional FSI obtained by Appellant is consequent to land purchase by it and as such normal FSI does not have any cost. It is observed that even if any Assessee does not use maximum available FSI with it, such FSI lapses hence sale consideration received by any Assessee is towards land and only proportionate land cost is available as expenditure against such sale value. If Assessee has 1,00,000 sq. Mtr of land, on which global FSI available is 1,50,000 sq. ft., and Assessee transfers 60,000 sq. mtr., of land with FSI of 1,00,000, proportionate land cost allowable would be worked out, based upon area of land and not based upon area of FSI sold.

The Appellant has argued that by entering into co-development agreement Appellant remained with balance FSI only hence cost of land to be debited in Profit & Loss account is to be worked out based upon area of FSI sold cannot be accepted as after entering into co- development agreement, Appellant is remained with remaining area of land wherein it can utilize remaining FSI available with it which means that FSI goes with land. As per development agreement executed with co-developer it has been specifically stated that co- developer has approached the developer with offer co-development of part of township land admeasuring 82,200 sq. mtr., (refer to clause - 6) which supports the contention of AO that cost to be allocated in profit & loss account should be based upon area of land sold. Though, as per development agreement sale consideration is fixed upon area of FSI sold, but such land consideration in fact represents area of land sold as co-developer as per clause - 6 has approached the Appellant for development of land of 82,200 sq. mtr. The computation of sale consideration based upon FSI is one of the methods of arriving at total sale value but the fact remains that Appellant has received Rs.250 crores for sale of area of 82,200 sq. mtr. of land. Even in Clause - 26 of the development agreement, it is specifically stated that developer is entitled and expected to develop the balance land in terms of regulatory provisions and nowhere is it stated that same is based upon remaining FSI. Even Clause - 51 of the agreement bears the title as "rights in perpetuity of developer on co-development land" wherein it has been mentioned that developer shall have a right to inspect, maintain, operate, repair, replace or substitute any infrastructure facility on the co-development land without affecting adversely co-developer's FSI which means that FSI sold to co-developer is only limited to co-development land on which FSI is to be utilized. Even Clause-12(d)(ii) states that no co- development land will be used, sacrificed or provided for township infrastructure which means that land pertaining to FSI of 26,98,000

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 23 -

sq ft., is only 82,200 sq. mtr., hence reducing land cost based upon area of FSI sold cannot be accepted.

During the course of appellate hearing the Appellant has referred to Clause - 7 and Clause - 20 of development agreement wherein it is stated that co-development land shall continue to vest with developer i.e. Appellant. However, when entire agreement as a whole is considered it is very clear that co-developer is developing area of land of 82,200 sq. mtr. and developer is entitled and expected to develop balance land only. Once the Appellant has handed over the possession of land of 82,200 sq. mtr., for agreed consideration of Rs, 250 crores. Appellant is not entitled for any further consideration and had Appellant continued to be owner of the land, as argued by Appellant, Appellant would have been entitled to further consideration as and when area developed by co-owners are sold. It is settled legal law that entire agreement need to be read as a whole and cannot be read in parts.

It is observed that during the course of Assessment Proceedings, AO has asked Appellant to submit the valuation of closing stock as adopted in two subsequent financial years i.e. FY 2012-13 and 2013-14. It is observed that while arriving at opening stock of land, Appellant has adopted land value at Rs.250,18 crores which is same value as on 31st March, 2012 arrived at after reducing proportionate FSI attributable to FSI sold to co developer out total FSI available with appellant. However, appellant has shown land area as on 01/4/2012 at 3,09,061 Sq Meter as against remaining FSI available with it for 3,09,061 Sqmeter. Both Land in Sq meter and FSI are as under:

Particulars Land in FSI in Sq. Sq. Mtr ft.

Balance as on 01.04.2011 511707 6542064 Less: Area for cross over infrastructure, 120446 roads/school, hospital, public amenities and public garden as per township regulations. Area available for commercial 391261 6542064 exploitation Less :Area transferred to co-developer 82200 2698000 Balance as on 31.03.2012 309061 3844064 Area of Villa sold during F.Y 2012-13 4271 28370 Balance as on 31 .03.2013 304790 3815694 Area of Villa sold during F.Y.2013-14 366 2976 Balance as on 31.03.2014 304424 3612718

It is also observed that in FY 2012-13, appellant has sold Villa of 4271 Sq meters (28370 Sq Ft FSI). However, while charging cost of

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 24 -

land in Profit & loss account, appellant has not debited propionate cost of FSI but charged cost based upon area of land sold. Had appellant debited cost of land as per FSI sold, land cost to be charged to profit & loss account would have been Rs. 1,08,48,752/- (2501718656/ 6542064*28370) as against Rs 3,32,02,000/- charged by appellant which shows that appellant has changed the method of accounting, valuation of closing stock and allocation of cost to Profit & loss account in subsequent year. The appellant is not consistent in its method of account. When cost to be charged in Profit & loss account based upon FSI method resulting in to lower cost and increase in Profit, appellant has charged the cost based upon area of land sod. The appellant has claimed that it has claimed the cost as per matching cost concept but fact is that appellant has not purchased FSI and sold it directly, it has acquired the land and matching cost need to be based upon proportionate area of land sold and even methodology adopted by appellant in subsequent year clearly shows that barring current assessment year, it itself has approached for allocating cost on the basis of area sold.

2.7.5 Considering the facts discussed herein above, it is observed that Appellant was having 3,91,261 sq. mtr., of land for Rs.425.76 crores which means that average cost of land was Rs.10,881 persq. mtr. Considering the facts discussed herein above, cost to be charged to Profit & loss account would be based upon area of land sold as worked out below:-

TRADING ACCOUNT OF LAND AS A PART OF INVENTORY

Particulars Sq. mtrs. Value (Rs.) Cost worked out per Sq. Mt. Opening Stock of land(A) 511707 4257578322 8320 Less: Less: Area for cross over 120446 0 0 infrastructure, roads/school, hospital, public amenities and public garden as per township regulations. Area available for 391261 4257578322 10881 commercial exploitation Co-development land 82200 1755859666 N.A. allocated to sale of Co- development right /FS/J as per agreement (C) The closing stock of Land 309061 3362892741 10881 (should be valued at original cost Rs. 8320/- per sq. mt. as per the method regularly

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 25 -

employed by the assesses or as per consistent accounting policy and AS-2)(D)

Closing stock of Land as valued 429507 2501718656 5825 by the assessee in Valuation of Closing stock as per books Addition in closing stock 88,11,74,08 5

Thus, addition in closing stock of land made by AO for Rs 107,17,79,584/- is reduced to Rs. 86,11,74,085/-.

2.7.6 So far as allocation of other expenditure being AUDA Charges, FCCD interest and township infra expenses, appellant has allocated expenditure in Profit & loss account based upon FSI area sold which is similar to allocation of land cost whereas AO has allocated the expenditure based upon area of land sold. Considering the facts discussed herein above and methodology adopted in preceding para, AO is directed to re compute allocation considering total area of land at 3,91.261 sq. mtr as against 5,11,707 sq. mtr and as appellant has sold area of 82,200 Sq meter during the year, proportionate cost wouid be in ratio of 21.00% (82.200/3,91,261) and not 16.06% adopted by AO subject to following observations:-

(i) While allocating Township Infra expenditure, AO has considered total expenditure incurred by appellant at Rs 24,74,44,843/- whereas appellant has claimed such expenditure at Rs 60,00,00,000/- hence AO is directed to verify correct amount of expenditure incurred by appellant and allocate 21% of such expenditure in Profit & loss account.

(ii) The appellant has obtained additional FSI by making payment to AUDA and exact break up of such expenditure has not been provided in appellate proceedings or assessment proceedings. As appellant has obtained additional FSI based upon payment made by it, expenditure incurred on obtaining global FSI is linked with FS! obtained by appellant and such payment has no link with land area hence AO is directed to allocate such expenditure in ratio of FS! sold during the year in proportion of total FSI available with it and recompute closing WIP in case of appellant.

Thus, all the related grounds of appeal regarding allocation of land & other cost to Profit & loss account and valuation of closing stock is partly allowed.”

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 26 -

8.2 The CIT(A) thus while upholding the additions made by the AO in principle reduced the quantum of addition from 1,07,27,79,584/- to Rs.86,11,74,085/- on the ground that an area of 120446 sq. mtrs. of land requires to be excluded for the computation of per sq.mtrs. of land cost since such area is attributable to cross over infrastructure, roads, schools, hospitals, public garden and other public amenities as per Township planning scheme concerning the total land area. The CIT(A) thus accepted the plea of the assessee that the assessee was left with the area admeasuring 391261 sq. mtr. (511707 – 120446) only for commercial exploitation. The CIT(A), however, sustained the adjustments made by AO towards ‘Cost of Sales’ and ‘closing value’ of land adopting the geographical basis save and except allowance given for land utilized for common infra facilities. The allocation of costs incurred and capitalized to ‘Cost of Sales’ was similarly approved as per net geographical area available for development of project.

Statement of Working of Opening and Closing Stock for F.Y. 2011-12

Pa rt ic ula rs Cost o f Cost o f To ta l Cost o f Cost o f FCC D Co ns t r uc t io n Are a La nd AUD A int e rest La nd FS I (sq A mo u nt i n A mo u nt in A mo u nt in A mo u nt in A mo u nt in (sq ft ) Rs. Rs. Rs. Rs. Rs.

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 27 -

mt r s )

Ope ni ng 51 17 07 65 42 06 4 42 57 57 83 22 56 88 07 45 0 64 28 35 05 2 45 64 77 87 55 14 86 86 11 St oc k (G ro ss) Are a 12 04 46 - - Less : att r ib uta b le to PG / PP I Ope ni ng 39 12 61 65 42 06 4 42 57 57 83 22 56 88 07 45 0 64 28 35 05 2 45 64 77 87 55 14 86 86 11 St oc k ( Net )

Expe nd it ur e 20 59 16 43 32 32 37 10 7 49 08 26 20 5 83 46 54 95 5 inc ur r ed Add : d ur ing t he Yea r Tra ns fe r re d 82 20 0 26 98 00 0 17 55 85 96 66 23 45 80 78 4 29 48 89 88 3 24 74 44 84 3 25 32 77 51 77 Less : to C o De ve lo pe r Re ma i ni ng 30 90 61 38 44 06 4 25 01 71 86 56 35 48 18 30 9 67 11 82 27 6 28 90 29 14 9 38 16 74 83 89 st oc k f or Ap p le wood s

Note: The cost transferred to co developer is at 41.24% because FSI transferred to them (2698000 sq.ft.) is 41.24% of the total FSI Available (6542064 sq. ft.)

Value of closing sq.ft. per sq. ft of FSI 650.80 92.30 174.60 75.19 992.89 833.3

The market price as per valuation report per sq ft of FSI

Statement of Working of Opening and Closing Stock for F.Y. 2011-12

Pa rt ic ula rs Cost o f Cost o f To ta l Cost o f Cost o f FCC D Co ns t r uc t io n Are a La nd AUD A int e rest La nd FS I (sq A mo u nt i n A mo u nt in A mo u nt in A mo u nt in A mo u nt in (sq ft ) Rs. Rs. Rs. Rs. Rs. mt r s )

Ope ni ng 51 17 07 65 42 06 4 42 57 57 83 22 56 88 07 45 0 64 28 35 05 2 45 64 77 87 55 14 86 86 11 St oc k (G ro ss) Are a - - Less : att r ib uta b le to PG / PP I Ope ni ng 51 17 07 65 42 06 4 42 57 57 83 22 56 88 07 45 0 64 28 35 05 2 45 64 77 87 55 14 86 86 11 St oc k ( Net )

Expe nd it ur e 20 59 16 43 32 32 37 10 7 49 08 26 20 5 83 46 54 95 5 inc ur r ed Add : d ur ing t he Yea r Tra ns fe r re d 82 20 0 26 98 00 0 68 39 32 28 6 91 37 25 48 11 48 63 79 9 10 37 16 08 8 99 38 84 72 0 Less : to C o De ve lo pe r Re ma i ni ng 42 95 07 38 44 06 4 35 73 64 60 36 49 80 26 54 5 85 12 08 36 0 43 27 57 90 4 53 55 63 88 46 st oc k f or Ap p le wood s

Note: The cost transferred to co developer is at 16.06% because land transferred to them (82200 sq.ft.) is 16.06% of the total land Available (511707 sq. ft.)

Value of closing stock on the basis of Land 8320.34 1159.53 1981.83 1007.57 12469.27 9000

The market price as per valuation report per sq mtr

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 28 -

10.1 Explaining of rational for sale of 26,98,000 sq.ft. of FSI at a consideration of Rs.250 Crores to co-developer, the learned senior counsel for the assessee pointed out that the development of entire sanctioned FSI of 65,42,064 sq.ft. which is quite a big area was far challenging and difficult for a new entrant in the field of real estate. The assessee has purchased the area by borrowing huge amount of Rs.418.62 Crores in the form of debenture at a stiff interest rate of 15 to 16% per annum entailing steep financial interest burden in the vicinity of Rs.65 Crores. Thus, in the overall interest in the project, it was found essential to generate liquidity and reduce financial costs even if it has resulted in some losses. The sale of FSI helped in cutting down interest costs.

10.2 The learned senior counsel thereafter referred to the regulation for residential township 2009 issued by the Urban Development & Urban Housing Development Department to appraise its salient features, such as, the obligation associated to the construction of the project in the form of cross over infrastructure and road to be provided as per the specification of the competent authority including road of prescribed width open space, amenities in the form of school, hospital, park and gardens catering to the township and many other obligations. Referring to clause no.3.9 of the township regulations, the learned senior counsel pointed out that the assessee or co- developer could not have used the whole of the land area and was under statutory obligation to keep aside a portion of the land towards various infrastructure facilities and therefore, the CIT(A) has rightly taken cognizance of such facts, however, in limited manner. The learned senior counsel emphasized that it is the permissible construction gathered in the name of FSI available to the township which will determine the cost of land and in absence of FSI, the land is effectively worthless.

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 29 -

10.3 The learned AR next contended that the AO committed serious error in appreciating the contents of the development agreement. It was strenuously pointed out that the assessee has only sold 26,98,000 sq.ft. of FSI in terms of co-development agreement out of total available FSI of 65,42,064 sq.ft. without any sale of land per se. The assessee continues to be owner of land in terms of co-development agreement as well as in land revenue record. It was agreed that after purchase of FSI, the co-developer M/s. Goyal Safal Developers will co-develop the earmarked area by constructing residential apartments at its own costs and selling to final customers. The co-developer would be entitled to receive agreed consideration from the customers without any share of the assessee therein. However, the assessee would be required to join as an owner of the sale deed in terms of co- development agreement. In terms of the co-development agreement, the assessee is left with reduced FSI on the remaining land after sale of stipulated FSI. On the remaining land at disposal, the assessee was left with the limited option to construct the Villas, affordable housing for economically weaker section, commercial offices and shops within the residual FSI left as per the approved master plan by AUDA. In the given set of arrangement, the total cost of remaining land, and construction WIP was suitably reduced having regard to the cost attributable to sale of FSI and only reduced cost has been allocated towards sale of properties by the assessee in the subsequent years. The learned senior counsel thus submitted that the assessee has received consideration of Rs.250 Crores from the co-developer for the purpose of sale of co-development right alone. The assessee has incurred Rs.2,53,27,75,176/- towards ‘Costs of Sales’ to generate such revenue.

10.4 The learned senior counsel submitted that the reduction of value of closing stock of land in proportion to land area to the co-developer

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 30 -

would not fairly yield true profits as the co-developer was given right to co-develop and construct apartments on the basis of approved master plan for utilization of FSI of 26,98,000 sq ft. allocated as against total available FSI of 65,42,064 sq.ft. As further contended, it was incorrect for the Revenue to infer that the land admeasuring 82,200 sq.mtr. demarcated for the purpose of utilization of FSI by co- developer has been sold to Goyal Safal Developers.

10.5 The learned senior counsel next referred to doctrine of ‘matching concept’ and contended that in terms of such doctrine, all the related costs for earning the revenue has to be necessarily considered to determine the profit/loss from any transaction. It was thus befitting for the company to compute the ‘Costs of Sales’ in proportion to the FSI are sold from sale consideration determined on the basis of FSI sold and not area sold. In elaboration, the learned counsel submitted that the co-development agreement has attracted concessional stamp duty of 1% as against applicable stamp duty of 4.9% payable on sale of land. It was thus argued that the cost of sale of land cannot be valued in proportion to area but will have to be computed in proportion to the FSI. It was thereafter canvassed that the total consideration of Rs.250 Crore received, if calculated on the basis of area of land of 82,200 sq.mtr., would result in value of consideration of land at Rs.3,04,136/- per sq. mtr. as against the circle rate/jantri rate of land (value adopted by stamp duty) which is Rs.2750/- per sq. mtr. only. This itself proves that the sale consideration has been received on the basis of FSI only. The learned senior counsel also pointed out that if the sale value of Rs.3,04,136/- per sq.mtr. of land is applied to the entire area of township of 5,11,707 sq.mtr., the total value of land of township would come to a whopping figure of Rs.1556.29 Crores which is prima facie unrealistic to the hilt. Coupled with this, if the FSI is to be allocated on the basis

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 31 -

of geographical area only, a co-developer will be entitled to develop only 10,50,753 sq. ft. of FSI on area of 82,200 sq.mtr. of land earmarked whereas assessee has permitted the utilization of 2698000 sq.ft. area of land. It is thus obvious that the consideration paid by co-developer is towards utilization of FSI only and consequently, costs in relation thereto has to be necessarily worked out in proportion to FSI and not with reference to geographical area of land. It was thus contended that the cost of FSI sold has been correctly worked out and there was no case whatsoever for the Revenue to embark upon the additions based on geographical area.

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 32 -

Particulars Amt Rs Amt Rs Area FSI (Sq.ft.) (sq.mtrs.) opening WIP LAND 4257578322 511707 6542075 Construction 1257290289 5514868611

ADD: Construction expenses during 834654955 the year (as per Schedule 18)

Less: Cost of Sales Land (Rs.425.75 Cr x 41.24%) 1755859666 82200 2698000 (16.06%) (41.24%) Auda charges for Co 234580784 development sale FCCD interest for co 294889883 development sale Township Infra Expenses for co 247444843 2532775176 development sale

Closing WP LAND (Rs.425.75-175.58) 2501718656 4,29,507 38,44,075 Construction 1315029734 3816748390

Amount As per Balance sheet 3816748389 Schedule 12

12.1 As can be seen from the tabulated statement, the assessee during the assessment year in question has recognized revenue operation income to the tune of Rs.250 Crores in respect of sale of co- development rights on a portion of land demarcated for this purpose. It is the case of the assessee that it is in possession of huge chunk of land parcels admeasuring 511707 sq.mtr. in the village of Sarkhej- Sanathal located at Spring Road, Ahmedabad. It is the case of the assessee that it is entitled to FSI of 6542075 sq. ft. thereon for development and construction work on such township area. In keeping with the object of development and construction of project, the assessee entered into a co-development agreement dated 11.05.2011 with co-developer namely ‘Goyal Safal Developers’ whereby a part of township land admeasuring approximately 82200 sq.mtr. was demarcated for the purpose of development and construction of residential apartments’ buildings by the co-developer utilizing

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 33 -

maximum FSI of 26,98,000 sq.ft. as sanctioned by the local authority. It is thus the case of the assessee that while only 16.06% of land area has been demarcated for the purpose of development by co-developer, the FSI to the tune of 41.24% of the total FSI has been utilized by co- developer for construction in the township area. The assessee has received an agreed consideration of Rs.250 Crores from the co- developer in lieu of partial surrender of its development rights in favour of the co-developer. It is also the case of the assessee that apart from 16.06% of geographical land area demarcated for development and construction by the co-developer, the assessee was also under obligation to create infrastructure facilities in the form of roads, hospitals, schools, garden etc. as per the sanctioned master plan which would consume another land area of approx.120446 sq.mtrs. from the gross township area. Thus while recognizing the sale consideration received by the developer assessee from the co- developer, the assessee has apportioned the ‘Cost of Sales’ as attributable to revenue receipt in proportion to FSI sold i.e. 41.24% of the total value of land of the township rather than in proportion to the geographical area of 16.06% demarcated in favour of the developer for this purposes. It is the case of the assessee that the ‘Cost of Sales’ to be recognized and deducted against the revenue generated from sale of co-development land requires to be evaluated in proportion to FSI on the premise that what has been sold is FSI rights and not land area per se. It is canvassed that the ‘Cost of Sales’ and the consequent ‘closing stock of land’ in terms of monetary value requires to be recognized on the basis of FSI inbuilt and embedded to the total township land and not on the basis of geographical area as what is intrinsic to the land value is the entitlement of FSI available for construction and the land would be nearly worthless in the absence of any right to development and construction thereon.

ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 34 -

12.2 The essential controversy between the assessee and Revenue revolves toward method of ascertainment of value of ‘Cost of Sales’ to be deducted from sale consideration received and consequent value of closing land area.

12.3 The total value of land area of the township stands at Rs.425.75 Crores (admeasuring 511707 sq.mtrs.; 6542075 sq. ft. in terms of FSI). The assessee has assigned ‘Cost of Sales’ of the land at Rs.175.58 Crores (and other incidental charges to be dealt with separately) which represents 41.24% of the total cost of township land (425.75 Crores x 41.24% = 175.58 Crores). As a consequence, the closing value of land determined by the assessee stands at Rs.250.17 Crores (sale consideration Rs.425.75 Crores Less – ‘Cost of Sales’ Rs.175.58 Crores).

12.4 The Revenue, on the other hand, is in quarrel for such method of ascertainment of value of ‘Cost of Sales’ in proportion of FSI transferred (41.24%) and consequential value of closing stock of remaining land. The Revenue seeks the ascertainment of ‘Cost of Sales’ of land to be in proportion to geographical area allocated to the co-developer and rather than FSI allocated. The ‘Cost of Sales’according to the Revenue should be 16.06% of the total opening value of township land of Rs.425.75 Crores instead of 41.24% applied by the assessee having regard to the FSI alienated. This would result in difference of Rs.1,07,17,79,584/- in the value of ‘Cost of Sales’. According to the AO, the cost of the sale of land transferred to co- developer has been overstated to this extent and consequently closing value of remaining land in possession of the assessee has been understated to the same extent. The business income deduced by the assessee on sale of co-development rights is thus alleged to be understated by Rs.107.17 Crores.

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12.5 Applying the same analogy, the AO has reduced the allocation of AUDA charges for co-development, FCCD interest, township infra expenses from 41.24% to 16.06% alleging excess expenses claimed by the assessee to the tune of Rs.53,09,89,339/- for determination of aggregate ‘Cost of Sales’. The AO thus has increased the assessed income by Rs.1,07,17,79,584/- on account of alleged overstatement of value of ‘Cost of Sales’ of land assigned by the assessee and also made another disallowance on account of excess claim of incidental expenses clubbed to the ‘Cost of Sales’ amounting to Rs.53,09,89,339/- disputing the apportionment made in terms of FSI available rather than geographical area.

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instead of 16.06% applied by AO. The aforesaid action of the CIT(A) has invited the dissatisfaction to both assessee and Revenue.

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ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 38 -

transaction is one of the rudimentary principles of accountancy. The ‘Cost of Sales’ has to be determined in the same manner as applicable to the determination of the sale revenue. Where the sale revenue has been recognized on the basis of FSI sold, the costs of FSI also needs to be determined on the same principles. The determination of ‘Cost of Sales’ in terms of geographical area would give totally distorted picture, if permitted.

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ITA Nos. 198 & 600/Ahd/18 [Applewood Estate Pvt. Ltd.] A.Y.2012-13 - 40 -

amounting to Rs.27,33,134/- computed under Rule 8D(2)(ii) but however retained the disallowance towards administrative expenditure of Rs.19,48,142/- computed under Rule 8D(2)(iii).

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actually yielded exempt income instead of gross investments in consonance with the decision of the special bench in ACIT vs. Vireet Investments Ltd. 165 ITD 27 (Delhi-Trib.) (SB) as relied upon on behalf of the assessee. The issue is therefore remitted back to the file of the AO for re-computation of disallowance under Rule 8D(2)(iii) of the Rules with reference to average investments which have actually yielded exempt income to the assessee.

This Order pronounced in Open Court on 17/07/2019

Sd/- Sd/- (RAJPAL YADAV) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: Dated 17/07/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।