DCIT, CENTRAL CIRCLE 7(1), MUMBAI vs. SHETH REALTORS, MUMBAI

Ground No. 1 Disallowances under addition made to Work in Progress for the year 2016-2017 of Rs. 55,27,201/-:

1. The Ld. CIT(A) erred in confirming the aisallowance of expenses amounting to Rs. 55,27,201/- solely on the grounds that the parties did not submit a response to the notice issued under section 133(6) of the Income Tax Act.

2. Out of Rs. 55,27,201/-, the Ld. CIT(A) erred in confirming the disallowance at 1/3 of expenses of Rs. 1,30,88,209/- disallowed by AO i.e. 43,19,108/- оп adhoc basis solely on the ground that the parties did not submit a response to notice issued u/s. 133(6) of the Act without-appreciating the fact that during the assessment proceedings assessee discharge its primary onus by submitting complete party wise details of expenses along with PAN and Address of parties and supporting documents pertaining to the major expenses /purchases made from these parties on sample basis.

3. Out of Rs. 55,27,201/-, the Ld. CIT(A) erred in confirming the disallowance at 1/3 of expenses of Rs. 1,30,88,209/- disallowed by AO i.e. 43,19,108/- on adhoc basis solely on the ground that the parties did not submit a response to notice issued u/s. 133(6) of the Act without appreciating the fact that during the assessment proceedings assessee has submitted complete party wise details of expenses along with PAN and Address of parties and supporting documents pertaining to the major expenses / purchases made from these parties on sample basis and out of Rs. 1,30,88,209/-, Ld. AO did not issue any Notice u/s. 133(6) of the Act for Expenses of Rs. 74,97,116/-.

4. The Ld. CIT(A) erred in confirming disallowance made by AO without appreciating the fact that all books of accounts including ledger of parties were impounded during the course of survey and were available with AO.

Ground No. 2- Disallowance on penalty/interest paid on late payment of TDS & Service Tax of Rs. 12,41,941/-: Assessment Year 2017-18

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. 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.

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.

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.

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

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.

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.

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

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.

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.

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

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

The appellant prays that: Assessment Year 2017-18

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.

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: Assessment Year 2017-18

Both these appeals are cross appeals filed by the Assessee and the Revenue. Common facts relating to both the appeals are that assessee is a partnership firm incorporated on 12.03.2012. Initially it was incorporated in the name of ‘ABIL Sheth Realtors’ which was later changed to the present name that is ‘Sheth Realtors’. Assessee is engaged in the business of development and construction of real estate. It had constructed one project at Hill Road, Bandra West, Mumbai in the name of ‘BEAU Pride’. For the year under consideration, return was filed on 30.10.2017, reporting total income at nil. Assessment Year 2017-18

We first take up appeal by the Revenue wherein it has raised as many as nine grounds, however the issues involved are broadly three. Ground nos.1 to 6 taken together deal with change in the method of accounting followed by the assessee. Ld. Assessing Officer had applied percentage completion method instead of project completion method for computing business income from real estate project undertaken by the assessee. Second issue is through ground no.7, whereby interest income of Rs.6,19,911/- on fixed deposits has been treated as income from other sources. Third issue is by ground nos.8 and 9, which is in respect of addition made of Rs. 96,31,381/- by applying provisions of section 69 on account of difference in sale rate of two flats.

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: Assessment Year 2017-18

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.

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 Assessment Year 2017-18

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/-.

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: Assessment Year 2017-18

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 Assessment Year 2017-18

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.

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. 2. Even if section 43CB is applied to the appellant, it would be applicable for projects which commence post 1/4/2017 and not to project Beau, which had commenced in FY 2011-12 3. The CBDT has, vide Circular No 10/2017 dated 24 March 2017, clarified that ICDS III is not applicable to real estate developer. 4. During the year under consideration, it had received part OC which was for the commercial part of the project and the said Commercial building was not saleable as it was constructed to give it to tenants and seller of land inconsideration of relinquishing their right in the land. 5. Even if the Percentage completion method is applied in its case as per the Guidance note issued by the ICAI in May 2016/2012 (revised), the revenue cannot be recognized as two of the four criteria laid down therein are not fulfilled in the year under consideration 6. On application of the percentage completion method of the year as per the Guidance note issued by the ICAI in May 2016/2012 (revised), under consideration, the result is a loss.” Assessment Year 2017-18

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. Assessment Year 2017-18

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. 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.

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: Assessment Year 2017-18

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

We have perused the same and do not find any reason to interfere with the observations and findings so arrived at by ld. CIT(A) to uphold the results reported by the assessee by adopting project completion method for the year under consideration. It is important to note that assessee has been reporting its results in respect of the impugned project since AY 2012-13 by applying project completion method which has been accepted by the Department, while completing assessments u/s.143(3) for the preceding years. Midway, Revenue has changed the method of accounting for reporting of income from the impugned project which in other words tantamount to recasting of the entire accounting and reporting done by the assessee since the inception of the project, which is definitely not the intent of the amendment brought in by the Finance Act, 2018, by introducing section 43CB retrospectively from AY 2017-18. In all fairness, it has to be applied on projects or construction contracts commencing on or from 01.04.2017 applicable for AY 2017- 18, which otherwise would lead to unintended consequences of recasting the financial statements and financial results, reported by the assessee in their audited financial statements as well as returns which have already been filed and taken up for assessments. Accordingly, ground Nos.1 to 6 raised by the Revenue are dismissed.

For ground No. 7 in respect of treatment of interest income of Rs.6,19,911/- on fixed deposits, facts of the matter are that assessee had taken loan of Rs. 25 crores from India Bulls Housing Finance Limited during assessment year 2015-16. Entire loan was disbursed to the assessee on 30.11.2025, which was kept in fixed deposit on the same day to save finance cost, since the entire fund was not Assessment Year 2017-18

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.

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.

For ground nos. 8 and 9, in respect of addition of Rs. 96,31,381/- made u/s.69 on account of difference in sale rate of two flats, ld. Assessing Officer observed that various flats sold in the same month show major fluctuation in the sale rate. Details of the sales related to the two flats is tabulated below for ready reference: Assessment Year 2017-18

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 Assessment Year 2017-18

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.

We have perused the records and submissions in respect of the above and given our thoughtful consideration to the same. We also take note of the factual position that no enquiry whatsoever has been conducted by the ld. Assessing Officer from the purchasers of the two flats to controvert the submissions and claims of the assessee. In the given set of facts and circumstances and elaborate findings given by ld. CIT(A), we have no reason to interfere with the same. Accordingly, ground nos. 8 and 9 raised by the Revenue are dismissed.

In the result, appeal by the Revenue is dismissed.

We now take up appeal by the assessee in ITA No.2712/Mum/2025. Grounds raised by the assessee are dealt seriatim. Vide ground No.1, assessee has contested on the disallowance made towards work in progress amounting to Rs.1,93,91,662/-. In the Assessment Year 2017-18

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: Assessment Year 2017-18 Assessment Year 2017-18

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/-. Assessment Year 2017-18

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).

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.

We have considered the material placed on record as well as detailed submissions supported by corroborative documentary Assessment Year 2017-18

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.

Ground No. 2 is in respect of disallowance of interest on late payment of TDS amounting to Rs.11,00,689/- interest on service tax Rs.89,229/- and interest on delayed payment of WCT of Rs.51,973/-. Ld. Assessing Officer has disallowed these expenses u/s.37 by treating them as penal in nature. Ld. CIT(A) failed to adjudicate this ground raised by the assessee in the first appeal, though submissions were made by the assessee. Owing to non-adjudication of the ground by the ld. CIT(A), we find it appropriate to remit this particular issue back to the file of ld. Assessing Officer for the purpose of verification and its Assessment Year 2017-18

Ground No.3 is in respect of addition made on account of delay in deposit of employee's contribution of ESIC, amounting to Rs.13,761/-. The issue is no longer res integra and settled by the decision of Hon'ble [2022] 448 ITR 518 (SC), which has been held against the assessee. Accordingly, the said ground is dismissed.

Ground No. 4 is in regard to addition of Rs.10,31,540/- u/s.41(1) relating to an outstanding balance as on 31.03.2017 for one of the broker, Shri Vijay Kandhari. Ld. Assessing Officer noted that based on the reply sent by the broker, nothing was payable to him. However, assessee reflected an outstanding payment in its balance sheet. According to the said broker, he had raised two bills dated 14.10.2013 for two different flats, for which he had received the brokerage after deduction of tax on 20.10.2014. 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. Assessment Year 2017-18

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.

Ground no.5 is in respect of disallowance of donation of Rs. 66,000/-, which the ld. Counsel in the course of hearing before us submitted it as not pressed. Accordingly, the said ground is dismissed as not pressed.

In the result, appeal of the assessee is partly allowed. Appeal of the Revenue is dismissed.