ITO-41(3)(2), MUMBAI, MUMBAI vs. K S CHAMANKAR ENTERPRISES, MALAD (E),MUMBAI

Brief facts are that the assessee is engaged in business in real estate as Developer. It entered into an agreement with the Maharashtra Government for integrated development of a slum area alongwith some other projects in Mumbai. Total cost of the project was Rs 100 cr. and P a g e | 3 A.Y. 2012-13 K S Chamankar Enterprises, Mumbai the assessee was eligible to certain FSI in lieu of construction of as per terms of contract with the Government. On the basis of certain communication from the Executive Engineer, PWD Department, the AO noticed that the assessee had incurred an expenditure of Rs 60 cr. and was eligible for FSI worth Rs 81.05 cr. which was however, not released to the assessee. As per the AO, the difference amount of Rs 21 cr. had already accrued to the assessee which was liable to be taxed. It is stated as per Executive Engineer communication dated 07.07.2012,the work of RTO office was already completed as also of Maharashtra Sadan and possession was also handed over. Thus, the assessee was eligible to FSI of 121450 sq.mt area. Based on stamp duty value, the AO worked out the FSI of 71840 sq. metre worth Rs 81.05 cr. Accordingly, the assessment was reopened to tax the escaped income of Rs 21.05 cr. for which notice u/s 147 of the Act was issued.

1 During assessment proceedings, the assessee based on another communication reiterated that no FSI was released to the assessee. Accordingly, no income had accrued to it. It was also stated that in fact, the assessee had incurred a sum of Rs 121.66 cr. as expenditure. Therefore, there was in fact a resultant loss. The assessee was stated to be following Project Completion method of accounting. In P a g e | 4 A.Y. 2012-13 K S Chamankar Enterprises, Mumbai this regard, reliance was also placed on the decision of hon’ble Apex P a g e | 5 A.Y. 2012-13 K S Chamankar Enterprises, Mumbai decided on the ready reckoner rates of 2006 (agreement year), which renders the whole calculation incorrect. It is further contented that the cost incurred for construction of the project along with RTO Office were to be considered for the purpose of calculation true profits in this case. The cost total to 121,66,75,443/- substantiated by valid documents and disclosed proofs. Just because the work was referred by the Engineer in his letter at Rs 60 cr., it does not imply that the costs incurred actually were limited to Rs. 60 cr. The FSI whenever received by the assessee will be utilized by it in construction of its own projects which would further generate an income. Such income, a part of which received against the FSI component, shall be subjected to tax at that point in future.

1 The ld.CIT(A) observed that the letter issued by the Executive Engineer of PWD department expresses merely the possibility of the FSI claim, has weight in it. The letter in itself does not imply that the assessee is entitled to the said FSI. Further, from the perusal of the assessment order it was seen that the addition has been made strongly relying upon the letter dated 12.01.2012 which states a possibility of assessee having an FSI claim. However, during assessment proceedings, the assessee had submitted another letter dated 07.07.2012 issued by the Executive Engineer of the PWD Department of the Government of Maharashtra which also mentioned that no such P a g e | 6 A.Y. 2012-13 K S Chamankar Enterprises, Mumbai FSI was so released to the assessee. Without actual release of FSI and its utilisation by the assessee, he pointed out that it would not be appropriate to treat it as its income and bring it to tax. The assessee had further contended that the cost incurred for construction of the project, totalling Rs. 121,66,75,443/-, was to be considered for the purpose of calculation true profits in this case, and merely because the work was referred by the Engineer at Rs 60 cr. worth, it did not imply that the costs incurred actually were limited to Rs. 60 cr. He agreed with the contention of the assessee that the AO failed to bring on record any document, except the letter of PWD department, to show that the expense of Rs. 121,66,75,443/- had not been incurred. No discrepancy had been observed in respect of expenses booked by the assessee. Accordingly, he allowed the appeal deleting the addition.

Before us, the ld.DR has placed reliance on the grounds of appeal and the assessment order. On the other hand, ld.AR has made a detailed oral and written submission. It is contented that the amount treated as income by the AO is derived from the calculation based on deemed eligible area of FSI (Floor Space Index) and the rate applied to such eligible FSI. In the instant case, the rate of FSI is taken to be the value as considered by the stamp duty authority. However, the value as agreed in the agreement is the Ready Reckoner Rate of 2006. This, in P a g e | 7 A.Y. 2012-13 K S Chamankar Enterprises, Mumbai turn, makes the calculation invalid. Further, the taxability has been considered on the basis of eligibility of FSI to be released by the Government and based on letter written to the assessee by the Executive Engineer, Building Construction Division, Mumbai. However, the said letter talks about eligibility alone. Based on future eligibility, which never materialized, no income can be said to have accrued to the respondent. He submitted that vide letter dated 07.07.2012 supra, addressed to the respondent by the Executive Engineer, Building Construction Division, Mumbai, it was made clear that no FSI has been released to the respondent. In the absence of release of any FSI, no income can be said to have accrued to the respondent. Thus, the expenditure provided by the Executive Engineer, PWD, Mumbai is merely an estimation and does not reflect the actually expense incurred on the projects, thus, rendering the calculation for addition of Rs 21,05,69,396/-incorrect.

1 It was further stated that the ld.CIT(A) has rightly observed that the Executive Engineer has simply stated that, the financial progress of the work is ascertained by the department and the same works out to be to the tune of Rs. 60 cr. out of estimated Rs 100 cr. worth project. The intention behind such statement was to highlight the status of progress of work done and not the cost of the work done.

3 It is argued that onus of proof lies on the department to prove that the respondent had incurred the expense to the tune of Rs 60 cr. only. This onus has not been discharged in the present case. It is the department which is alleging that the respondent had incurred less expenditure. Therefore, it is for it to adduce tangible evidence to show that the respondent had not incurred expenses to the tune of 121,66,75,443/. However, no evidence has been produced on record by the department in the present case except the letter dated of PWD

4 Besides, the rate of FSI adopted by the assessment order is the rate taken by the stamp duty authority, wherein there is a major discrepancy considering the time elapse from the date of agreement to the relevant period. However, the fact that the cost estimated at Rs. 100 cr. on the date of the agreement, has not been adjusted with the time factor, and the proportionate of the same as expressed by the letter dated 07.07.2012 has been considered as it is. Therefore, there is no consistency/matching principle followed while arriving at the addition to income.

5 It is argued that even when the accrual of income is considered to be the point of taxation but in the end, the foundation of the tax is the P a g e | 10 A.Y. 2012-13 K S Chamankar Enterprises, Mumbai income. Moreover, there is no liability established on the part of the Government Department to pay/compensate such FSI considered to be the income of the firm. Thus, in the instant case, the income so assessed is ‘hypothetical income’. If no income is generated from the activity undertaken, there cannot be any tax on such hypothetical income. Reliance is placed on the following cases as decided by the hon’ble Supreme Court in Jamshri Ranjit Singh ji Spg. & Wvg. Mills v. Inspecting Asstt. Commissioner [1992] 41 ITD 142 (Bom.), CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) and CIT v. Excel Industries Ltd. (Civil Appeal No. 125 of 2013). 5.6 In an alternative argument, it is contented without prejudice, that assuming whilst vehemently denying that the tax was leviable on the accrual of the FSI, the FSI so held to be accrued to the firm is a sum total of the work undertaken for almost six years i.e., from the period of 2006 to 2012. Thus, even in this case, the FSI of 11,282.98 sq. mtrs. cannot be said to be accrued in the A.Y. 2012-13 alone. Therefore, the entire FSI cannot be subjected to tax on an accrual basis for the A.Y. 2012-13 alone. The calculation of the income is flawed on this count as well. It is argued that the department cannot adopt the accounting policy to suit their allegations. The choice of method of accounting lies with assessee, provided it is consistently followed and it accurately

We have carefully considered all the relevant facts of the case including rival submissions .We find that the AO has made the addition without bringing on record any contrary material fact on record and without pointing out any defect in the books of account. He has also not appreciated the facts brought on record especially the subsequent report of the Executive Engineer wherein it is categorically stated that no FSI was released in the case. No comments or findings have been brought on record to suggest that the method of accounting followed by the assessee was flawed in any manner. Apparently, the addition has been made mainly on conjectures and surmises rather than on concrete material fact.

1 From the subsequent communication date 07.07.2012 wherein it is emphatically stated that no FSI was released, it can be safely concluded that no income had accrued to the assessee during the year under consideration. We may refer to the decision of hon’ble

The Apex Court in Godhra Electricity Co. Ltd. ((1997) 225 ITR 746has laid down the test to assessee income in the hands of an assessee. The assesses therein was also following the mercantile system of accounting and had made entries in the books regarding electrical charges for the supply made to the consumers, however, no real income had accrued to the assessee company. The Tribunal had held that it represented hypothetical income and the A.O was not right in assessing it to tax. Before the Supreme Court it was urged that even in case of mercantile system of accounting, tax can only be imposed if there is real income income-tax cannot be imposed on hypothetical. The Court held even in mercantile system what has to be seen is whether income can be said to have really accrued to the assessee company. The Court referred to the judgement of the income can be said to have really accrued to the assessee company. The Court referred to the judgment of the Court in H.M. Kashiparekh & Co. Ltd. vs. CIT (1960) 39 ITR 706 (Bom) which view was approved by the Supreme Court in CIT vs. Birla Gwalior (P) Ltd. 1973 CTR (SC) 349 : (1973) 89 ITR 266 (SC). What can therefore, be assessed is real income as income-tax is a tax on income, The test therefore, before income can be taxed is whether there is real accrual of income. In our opinion, the ratio of that judgement fully applied to the facts of the present case.

In the instant case, there is no accrual of income. There is dispute between the parties for the relevant assessment year which was pending in arbitration. It is only on the arbitral proceedings coming to an end and award being passed and income received by the assessee, will it be liable to be assessed.”

2 We find that the ld. CIT(A)has duly examined all relevant aspects of the matter and given a well-reasoned finding in support of the decision. Accordingly, we do not find any reason to interfere in the appellate order which is therefore, upheld.

In the result, appeal of the Revenue is dismissed.