SHETH REALTORS,MUMBAI vs. ITO-7(1) (ERSTWHILE ITO-23(3)(3), MUMBAI

2. Ground No. 2- Disallowance on penalty/interest paid on late payment of TDS & Service Tax of Rs. 12,41,941/-: and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 2.1. The Ld. CIT(A) erred in not adjudicating the ground of appeal of assessee regarding the disallowance of Rs. 12,41,941/- made by the AO on account of interest for the late payment of TDS and Service Tax.

2.2. The Ld. AO erred in disallowing Rs. 12,41,941/- for interest on late payment of TDS & Service tax without considering the fact that interest has been paid late depositing the TDS & service Tax in account of revenue not on Income Tax.

2.3. The Ld. AO erred in disallowing for interest on late payment of TDS & Service Tax without appreciating the fact that interest on late payment of TDS is compensatory in nature and not penal in Nature.

2.4. The Ld. AO erred in disallowing for interest on late payment of TDS & service Tax without appreciating the fact that Rs. 12,41,941/- is only interest on TDS & service Tax and not Penalty for delay filing of TDS return.

3. Ground No. 3 Disallowance on account of delay in payment of Employee's contribution to Provident Fund & ESIC of Rs. 13,761:

3.1. The Ld. CIT(A) erred in confirming the addition made on account of delay in payment of PF & ESIC of Rs. 13,761/- without appreciating the fact that the appellant has deposited the employees' contribution to PF & ESIC before filing of income tax return due as per Section 139(1) of the I. T. Act.

3.2. The Ld. CIT(A) erred in not appreciating the fact that the Hon'ble Supreme Court in case of Alom Extrusion Ltd. 319 ITR 306 has held that if the employees contribution to PF & ESIC is paid before the filing of IT return than there would not be any disallowance under Section 2(24)(x) r.w.s. 36(1)(va) of 1.T. Act.

4. Ground No. 4 - Addition of Rs. 10,31,540/- under section 41(1) of the Income Tax Act, 1961:-

4.1. The Ld. CIT(A) erred in confirming the addition of Rs. 10,31,540/- u/s 41(1) of the IT Act for outstanding balance of creditor for brokerage.

4.2. The Ld. CIT(A) erred in confirming the addition u/s 41(1) of the IT Act without considering the fact that brokerage amount was in dispute because flat booked through broker was cancelled and therefore brokerage payable to the broker was reversed in FY 2019-20 on getting the confirmation of flat cancelled.

5. Ground No. 5-Disallowance of Donation of Rs. 66,000/-:

5.1. The Ld. CIT(A) erred in confirming the disallowance of donation without considering the details submitted to AO during the course of assessment proceeding

6. The appellant prays that:

a. Disallowances under addition made to Work in Progress for the year 2016- 2017 of Rs. 55,27,201/- may be deleted. b. Disallowance on penalty/interest paid on late payment of TDS & Service Tax of Rs. 12,41,941/- may be deleted. c. Disallowance on account of delay in payment of Employee's contribution to Provident Fund & ESIC of Rs. 13,761 may be deleted. d. Addition of Rs. 10,31,540/- under section 41(1) of the Income Tax Act, 1961 may be deleted, e. Disallowance of Donation of Rs. 66,000/- may be deleted. f. any other relief your honours may deem fit [ Revenue] 1. On facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the project "Beau Pride" had reached a substantial stage of development by 31.03.2017, evidenced by:  Receipt of part Occupation Certificate on 03.03.2017;  Sanction of construction up to 19 floors by 18.05.2016 (representing over 91% of the total built-up area);  Commencement certificates and necessary municipal approvals being obtained;  Actual construction work completed up to significant levels with incurred costs exceeding 65-73% of the estimated total project cost.

2. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that Section 43CB is not applicable merely because the assessee is a real estate developer and not a contractor, without appreciating that as per ICDS and ICAI Guidance Note, the substance of the transaction and method of revenue recognition are applicable to real estate developers under similar principles.

3. On facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the AO's application of PCM was based on clear fulfillment of all the four conditions stipulated in para 5.3 of the ICAI Guidance Note (2012/2016 revised), namely:  All critical approvals were obtained before 31.03.2017;  Construction cost incurred was over 25% of the total cost;  Over 25% of the saleable area was secured by valid agreements/allotments;  More than 10% of the contract value was realized.

4. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the survey findings conducted u/s 133A and sworn statements, which clearly establish: and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18  The fulfillment of conditions for revenue recognition under PCМ;  The assessee's admission of substantial area sold and corresponding consideration received;  Project revenue was suppressed and underreported by not following PCM.

5. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in relying solely on the assessee's historical practice of following project completion method, disregarding the retrospective application of Section 43CB from 01.04.2017, and the fact that revenue recognition principles cannot be static where factual and statutory changes warrant a different treatment.

7. On facts and circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 6,19,911/- towards interest income earned from Fixed Deposits maintained with HDFC Bank, without appreciating that the said interest income was neither disclosed nor offered to tax by the assessee under the head "Income from Other Sources" in the original return of income.

8. On facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 96,31,381/- made by the Assessing Officer on account of unexplained and significant fluctuations in the sale values declared by the assessee for various flats sold within a short interval during the year 2016.

9. On facts and circumstances of the case and in law, the learned CIT(A) has failed to appreciate that the rate per square foot declared by the assessee for flats sold during the same financial year in the same project varied substantially without any reasonable explanation or supporting evidence, indicating suppression of income.

4.1. We take up the first issue contested in ground no.1 to 6. Facts relating to these grounds are that Pride Hill Developers Private Limited was the owner of land aggregating 2499.20 square meters. In order to develop the said land, the owner obtained sanction from Municipal Corporation of Greater Mumbai on 16.01.2012, under the Public Parking Lot Scheme. Assessee entered into an agreement dated 23.03.2012 with the owner of the land for joint development of the said land by demolishing the old structure and loading it with FSI under the project name as ‘BEAU Pride’ for selling units in residential cum commercial project. Assessee had agreed to pay the owner of the land consideration in cash as well as constructed area. From Assessment Year 2012-13, that is inception of the project, assessee had been following project completion method. This project got completed in assessment year 2019-20, wherein it had reported a loss of Rs.93,61,46,145/-. It is important to take note of the returns filed by the Assessee, since AY 2012-13 to AY 2019-20, wherein it had followed the project completion method. The same is tabulated below: and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 Asst Year Date of filing Income declared 2012-2013 28.09.2012 NIL 2013-2014 27.09.2013 NIL 2014-2015 30.09.2014 NIL 2015-2016 10.11.2015 NIL 2016-2017 14.10.2016 NIL 2017-2018 30.10.2017 NIL 2018-2019 08 10.2018 NIL 2019-2020 22.10.2019 Loss of Rs. 93,61,46,145 4.2. From the above table, it is noted that assessee never reported any income in the assessment years from AY 2012-13 to AY 2018-19. However, in AY 2019-20, it had reported loss from the said project. Also, regular assessment u/s.143(3) were carried out for assessment years 2014-15 and 2016-17, wherein the method of accounting followed by the assessee was accepted i.e., project completion method.

4.3. In the year under consideration i.e. AY 2017-18, ld. Assessing Officer applied percentage completion method in terms of provisions of section 43CB which was introduced by Finance Act, 2018 with retrospective effect from 01.04.2017. Ld. Assessing Officer held that assessee is required to follow percentage completion method from AY 2017-18 onwards in view of section 43CB, as well as in terms of Income Computation Disclosure Standards (ICDS-III) for construction contractors. In this respect, it is important to reproduce the provisions contained in section 43CB for ready reference: "Computation of income from construction and service contracts. 43CB (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 computation and disclosure standards notified under sub-section (2) of section 145: Provided that profits and gains arising from a contract for providing services- (i) with duration of not more than ninety days shall be determined on the basis of project completion method: (ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1)- (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest dividends or capital gains.]”

4.4. For applying percentage completion method, ld. Assessing Officer also relied on Guidance Note for real estate transactions issued by Institute of Chartered Accountants of India (ICAI). Accordingly, ld. Assessing Officer re-casted the entire project estimation, he revised the figures of land cost as well as the estimate construction costs and thus, arrived at an addition of Rs. 3,32,47,996/-.

5. The main point of contention by the assessee is that section 43CB does not apply to real estate developers but only to construction contractors. Assessee is in the business of real estate development and is developing the project in its own name and selling the units. It is not acting as a construction contractor for any of the buyers of the units in the said project and has not received fixed price contract as the remuneration for the construction activities which is a typical feature of construction contract. Assessee submitted that for applying percentage completion method, four basic conditions need to be complied with, which are extracted below: and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 “(a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable: (i) Environmental and other clearances. (ii) Approval of plans, designs, etc. (iii) Title to land or other rights to development/construction. (iv) Change in land use. (b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25% of the construction and development costs as defined in paragraph 2.2 read with paragraphs 2.3 to 25. (c) Atleast 25% of the saleable project area is secured by contracts or agreements with buyers. (d) Atleast 10% of the contract consideration as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate - If there are 10 Agreements of sale and 10% of gross amount is realised in case of 8 agreements, revenue can be recognised with respect to these 8 agreements only.”

5.1. From the above conditions so listed, it was submitted that conditions at (a) and (c) were not satisfied in the present case till 31.03.2017. Also, all these approvals listed in (a) are to be taken by the assessee which in itself demonstrates that assessee is developing a real estate project and not acting merely as a construction contractor. Further, commencement certificates (CC) were issued by Municipal Corporation of Greater Mumbai (MCGM) in a phased manner which ld. Assessing Officer himself had taken note of and the details of the same are tabulated below: S. No. Date Approval Status 1 23.03.2012 Development Agreement 2 28.07.2014 CC upto Basement Level and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 3 10.10.2014 CC upto 2nd Upper Floor 4 09.01.2015 CC upto podium parking 5 28.10.2015 CC upto 7th Upper Floor 6 28.03.2016 CC upto 10th Upper Floor 7 29.07.2016 CC upto 14th Upper Floor 8 20.10.2016 CC upto 17th Upper Floor 9 02.08.2017 CC upto 22nd Upper Floor 10 30.05.2018 Full CC Received 5.2. From the above, it was thus submitted that all these approvals and commencement certificates were obtained by the assessee acting as a real estate developer and not a construction contractor.

5.3. Submissions made by the assessee can thus be summarized as under: “1. Section 43CB of the Act applicable to contractors and not to the appellant as it is a real estate developer.

and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 5.4. To buttress its contentions, assessee placed a strong reliance on the decision of Coordinate Bench of ITAT, Ahmedabad in the case of DCIT vs. Aryan Build Space LLB [2025] 172 taxmann.com 806 (Ahd). Relevant paragraphs of the said decision which dealt with provisions of section 43CB to discuss on its applicability on construction contracts and in the case of real estate developers is elaborately discussed, the same is extracted below: "8.1. The AO's reliance on Section 43CB of the Act is misplaced because this provision is applicable only to construction contracts and contracts for providing services, whereas the assessee is a real estate developer engaged in constructing and selling residential units on its own land. The legislative intent behind Section 43CB of the Act and its placement within the framework of the Act clarify that it governs income recognition for contractors undertaking construction projects for clients, not for developers executing real estate projects on their own account. Section 43CB of the Act was introduced through the Finance Act, 2018, with retrospective application from 01.04.2017, to regulate the computation of income from construction contracts and contracts for providing services. The section explicitly mandates that profits and gains from a "construction contract" or "contract for services" must be determined on the basis of the PCM in accordance with the Income Computation and Disclosure Standards (ICDS). The phrase "construction contract" is critical to understanding the section's applicability, as it indicates that the provision applies only to contractors executing projects on behalf of a third party, where a contractual obligation exists. A construction contract, in accounting and legal parlance, refers to an agreement where a contractor undertakes to execute construction work for a specified price under a contract with a customer. These contracts can include fixed-price contracts, cost-plus contracts, and time-and-material contracts, but they inherently require the contractor to perform work for another party. Section 43CB of the Act aligns with this understanding, as it follows the accounting principles established in AS-7 (Construction Contracts), which applies solely to contracts where a contractor undertakes obligations for a third party. The assessee is not a contractor but a real estate developer engaged in constructing and selling units on its own land. The crucial distinction between a contractor and a developer lies in ownership of the land and the nature of contractual obligations. A contractor undertakes construction on behalf of another party under a contract and does not own the land on which construction takes place. The project belongs to the customer, and the contractor merely executes the work as per the terms of the agreement. A developer, in contrast, owns the land, undertakes the project at its own risk, and sells completed units to customers. The buyer does not engage the developer for "construction services" but purchases a completed asset from the developer. The transaction is one of sale of property, not a contractual construction assignment. and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 8.2. Since the assessee does not provide construction services to any third party under a contract, it does not fall within the ambit of Section 43CB of the Act, which is specifically designed to regulate the revenue recognition of contractors executing construction projects for clients rather than developers selling self-constructed properties."

5.5. Another very important aspect on which assessee has very strongly contended is that assessee commenced the development of the impugned project in the assessment year 2012-13, i.e., prior to the introduction of section 43CB, which is retrospectively effective from AY 2017-18. Assessee had been reporting details of this project since AY 2012-13 by applying the project completion method which has been accepted by the Revenue in the assessment years completed for the preceding years. Hence, in the midway of the project, section 43CB cannot be applied. This section has to be applied on construction contracts entered into, on or after 01.04.2017. According to the assessee, before the introduction of section 43CB on the statute book, project completion method is an accepted and well recognized method of accounting. Assessee has consistently followed the same over the years and therefore, it is not open for the Department to change the method upon introduction of section 43CB for a project which has commenced much prior to the introduction of the said section.

5.6. Without prejudice, contention of the assessee is that even if the percentage completion method is adopted, then also it results into a loss on the said project for the year and therefore, has no relevance for its applicability. Assessee furnished the working as per the guidance note issued by ICAI, based on which the results for the year under consideration, i.e., AY 2017-18 comes out as a loss. Details of this working are tabulated below:

Net area available for sale with the 55,174 assessee 25,767 Area for which sale agreement entered into (up to 31.03.2017) Agreement Value for the above 139,74,05,530

Total construction cost estimated 443,13,90,553 (adopted as per cost in financial filed for A.Y. 2019-20)

Material Consumed 42,34,34,109 Construction Cost 400,79,56,444 Total Cost 443,13,90,553

Cost incurred till 31.03.2017 286,46,50,158

Percentage completion adopted for 65% estimating income as per guidance note

Revenue to be recognized 90,33,45,784 Less: cost to be recognized as per 133,78,30,149 guidance note

Profit/(Loss) (43,44,84,365)

6. Ld. CIT(A) has elaborately considered all these detailed contentions of the assessee and has given his observations and findings

8.1. Claim of the assessee is that it needed funds as and when payment for construction expenses was to be met. In order to save finance cost, the entire amount disbursed was first kept and parked as fixed deposits and withdrawals were done as and when the need arose, so as to save on the finance cost. Thus, there is a direct nexus between the fixed deposit created by the assessee, for which the source is the secured loan received from the lender. Accordingly, interest earned on fixed deposits has to be reduced from the finance cost and cannot be charged separately as income from other sources.

8.2. Ld. CIT(A) analysed the submission so made by the assessee and gave his fact-based finding to allow the claim of the assessee since direct nexus was demonstrated. In the given set of facts and corroborated by documentary evidence, we do not find any reason to interfere with the findings arrived at by the ld. CIT(A). Accordingly, ground raised by the Revenue is dismissed.

Flat Name Date of Carpet area Sales Rate per Sq. Wrong Wrong rate No. of Agreement as per consideration Ft. area Considered Buyer Agreement as Agreement Consider by AO ed by AO

402 Mr. 02.06.2016 914 Sq. Ft. 5,17,76,440/- 56,648/- 1,096.77 47,208.25 Zafar Ul Islam Abdul Baqva 703 Mr. 19.10.2016 1449 Sq. 7,24,50,000/- 50,000/- 1,738.71 41,668.62 Imran T. Ft. Shaikh and Others 9.1. Assessee explained the discrepancies and pointed out correct factual position in respect of the two flats for which ld. Assessing Officer made the addition. Assessee submitted that area of both the flats was substantially different. Flat no.703 admeasured 1449 sq. ft. whereas flat no.402 admeasured 914 sq. ft. Assessee thus, submitted that flat with larger area was given a better deal. Further, purchaser of the flat no. 703 agreed to pay 77% of consideration within 10 days of the agreement, whereas the purchaser of flat no. 402 agreed to pay total consideration in 13 instalments. It was also pointed out that both the flats were sold for more than the stamp duty valuation and hence are out of the provisions of Section 43CA. According to the assessee, when the sale value of building is higher than the stamp duty value. There cannot be an addition for the difference in sale rate which is the sole prerogative of the businessman to decide as to at what rate it has to sell its flats. Assessing Officer has no authority to step into the shoes of the businessman and to decide on how to conduct the business by the assessee. According to the assessee, the difference can arise on account of several factors which may include negotiation, size of flat, quantum and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 of advance, receipt of consideration, date of agreement, location, etc. It was also strongly submitted that the sale transaction of both the units has been duly recorded in the books of accounts and profits emanating from their transaction has been reported, which forms part of the total income reported by the assessee in its return of income. Thus, it is not a case of unaccounted transaction undertaken by the assessee.

9.2. Assessee further contended that provisions of Section69 applies where an assessee has made investments which are not recorded in the books of accounts. Such is not a case of the assessee and therefore there is no occasion for the ld. Assessing Officer to apply Section 69 to make an addition for difference in sale rate of two flats. All these submissions have been elaborately considered by ld. CIT(A) and discussed in his order.

12.1. In the course of first appellate proceedings, assessee had made detailed submissions explaining each transaction of expense party- wise. The same is elaborately reproduced in the first appellate order. Ld. CIT(A) has considered all the submissions along with corroborative documentary evidences and tabulated the entire submission made by the assessee for all the expenses by dividing the same into six different scenarios. The tabulation by the ld. CIT(A) is reproduced for ready reference:

12.2. From the above table, relating to total expenditure of Rs.4,94,91,159/-, ld. Assessing Officer had sustained addition to the extent of Rs.1,93,91,662/-. and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 12.3. After considering detailed submissions along with corroborative documentary evidences, for each of the line items in the table above, ld. CIT(A) gave partial relief for items at serial No. 9 to 10. Since parties did not respond to the notices issued by ld. Assessing Officer nor any submissions were made by the assessee by providing bills and invoices for the purchases, entire amount was sustained as disallowance, totalling to Rs.12,08,093/-. For items at serial Nos. 5 to 8 and serial Nos. 12 to 19, total of which comes to Rs.1,30,88,209/-, in order to meet the end of justice, ld. CIT(A) restricted the disallowance by applying a percentage of 33%, which comes to Rs.43,19,108/-. Thus, he upheld disallowance out of the WIP to Rs.55,27,201/- and gave relief for the balance amount of Rs.1,38,64,461/-. Revenue is not in appeal for the partial relief given by the ld. CIT(A).

12.4. In respect of the additions sustained by ld. CIT(A), assessee contented that all the expenses incurred by it are paid through proper banking channel and have been duly accounted for in the books of accounts. The source of for incurring such expenses is borrowings and advances received by it from the customers for the booking of the flats and thus, the source is adequately explained. Further, contention of the assessee is that it has furnished copies of ledger accounts, PAN details of the suppliers and their addresses and therefore, has discharged its burden. Also, these expenses have not been found to be bogus or in the nature of accommodation entries. Actual construction undertaken by the assessee is not in dispute and sales made in the subsequent years are also not in dispute.

13.1. We find in the given set of facts that these are expenses which are legitimately incurred by the assessee in carrying out its business. These are not held to be bogus and the payments made by the assessee are through proper banking channel. Further the activities for which these in expenses have been incurred are not doubted since construction and the sales thereafter are not in dispute. It is more a case where the adhoc percentage applied by ld. CIT(A) is to be considered whether it is rational and justifiable. We find that in the given set of facts and circumstances and the material on record, it would be appropriate to restrict the addition by applying a percentage of 15% instead of 33% on the entire amount covered by serial Nos. 9 to 11 as well as 5 to 8 and 12 to 19. Thus, the items of expenditure at serial Nos. 9 to 11 which have been disallowed to an extent of 100% also will get subjected to disallowance to the extent of 15%. Accordingly, ground No.1 raised by the assessee is partly allowed.

16.1. Assessee submitted that by following project completion method, the brokerage on the two flats was reversed, since the sale of flat was cancelled. It was submitted that the said brokerage amount was part of WIP and claimed as deduction in Assessment Year 2019-20 was reversed in Assessment Year 2020-21. In the first appeal, it was held that this amount had to be reduced from WIP as assessee could not provide proof of reversal. and 4008/MUM/2025 Sheth Realtors Assessment Year 2017-18 16.2. The issue is in respect of proof of reversal not brought on record by the assessee and therefore needs a verification to this effect. Considering this fact, we find it appropriate to remit this particular issue back to the file of ld. Assessing Officer for the limited purpose of verification and consider the claim of the assessee in accordance with the provisions of law. Accordingly, ground no. 4 is allowed for statistical purposes.