DISHA CONSTRUCTION ,MUMBAI vs. PR CIT, MUMBAI-17, MUMBAI

This is an appeal preferred by the assessee against the order of the Ld. Principal Commissioner of Income Tax-17, [hereinafter referred to as the “PCIT”], Mumbai dated 14.03.2022 for assessment year 2017-18 passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

The main ground of appeal raised by the assessee is against the action of the Ld. PCIT invoking Section 263 of the Act (revisional jurisdiction) against the assessment order passed by the Assessing Officer (AO) u/s 143(3) of the Act dated 02.12.2019 wherein he accepted the total income as per return of income to the tune of Rs.3,77,29,520/-.

According to the Ld. PCIT from a perusal of the chart, it is prima facie evident that the assessee has violated Section 43CA of the Act which has been inserted w.e.f. 1st Day of April, 2014. According to the Ld. PCIT, the AO did not call for the necessary details in this regard and not co-related or verified the sales receipts and market rate of these properties. Based on the aforesaid faults as mentioned by the Ld. PCIT, he proposed to invoke his jurisdiction u/s 263 of the Act and issued a show cause notice to the assessee vide letter dated 11.02.2022. Pursuant thereto, the assessee responded that the AO had made adequate inquiry into the issues raised by the Ld. PCIT in respect of 4 A.Y. 2017-18 Disha Construction declaring of its income. However, the Ld. PCIT being not satisfied with the reply of the assessee held that the adequate inquiry has not been carried out by the AO on the issues pointed out by him. And he repelled the reply filed by assessee by noting (relevant para only) as under: - “6. 1 have considered the submission of assesse as well as other facts and circumstances of the case. The assessee in his reply has itself accepted that the sale on which TDS was claimed was not offered as income during the year. Moreover his reply on the issue of violation of section 43CA is not accompanied with any supporting evidences. However, in view of the detailed facts and discussion in para 2 and 3 above, it is very clear that the assessment proceedings in this case have been completed without verifying the issues/condition to satisfy the applicability of section 43CA in the assessee’s case, while finalizing the assessment proceedings u/s.143(3) of the Act. At the same time, the assessee was allowed of the TDS claim without verification of the fact as whether the amount on which TDS was deducted has been offered for income during the year. Thus, it is a clear case where the AO has failed to make due verification and inquiries which were required in facts and circumstances of the case in view of this, the provisions of the relevant provisions of Explanation 2(a) to Section 263 of the Act are squarely applicable in this case he same are reproduced as under for the sake of convenience.”

And thereafter, he was pleased to set aside the AO’s order dated 02.12.2019 u/s 143(3) of the Act and directed the AO to conduct denovo assessment proceedings and to frame the assessment after 5 A.Y. 2017-18 Disha Construction making due verification and enquiries in respect of claim of TDS and violation of provision of Section 43CA of the Act. Aggrieved by the aforesaid action of the Ld. PCIT, the assessee is challenging the jurisdiction of the PCIT to have invoked the revisional jurisdiction u/s 263 of the Act.

We have heard both the parties and perused the records. Since the assessee has challenged the jurisdiction of the Ld. PCIT to pass the impugned order, let us first examine the scope of revisional jurisdiction u/s. 263 of the Act. For that, let us take the guidance of judicial precedence laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the ld. CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and(ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed by the without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only the order passed by the Assessing Officer can be termed as erroneous for the purpose of S.263 6 A.Y. 2017-18 Disha Construction of the Act. It has to be borne in mind that even if the Ld. PCIT/CIT finds that the assessment order is erroneous, he cannot invoke the revisional jurisdiction u/s 263 of the Act without satisfying the requirement of second limb [i.e. the Ld. PCIT/CIT has to show that due to the erroneous assessment order, prejudice has been caused to the interest of revenue]. This essential requirement of law to be satisfied by Ld. PCIT/CIT before invoking revisional jurisdiction has been laid down by the Hon'ble Supreme Court in the case of Malabar Industries (supra) wherein their Lordship’s held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. The Hon’ble Supreme Court, held that for invoking powers conferred by S.263; the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue. At this juncture, one has to understand what is prejudicial to the interest of revenue. Their Lordship explaining about this in the said judgment (Malabar supra) held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order 7 A.Y. 2017-18 Disha Construction prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.

Keeping the aforesaid judicial precedent in mind, we should examine the facts of the case to see whether the Ld. PCIT could have successfully invoked revisional jurisdiction u/s 263 of the Act. In this regard, we note that the assessee is a partnership firm and is a builder and developer; and is mainly focused on re-development projects. Under the redevelopment agreement which the appellant enters into with the society, the appellant has to provide new flats in the area agreed upon in the redeveloped building free of cost to the existing occupants. If any member is interested in extra area over & above the area, they are entitled to, then the appellant allots the extra area at the then prevailing market rate. In such cases, when the agreement to sale of such flat is registered, the stamp duty is levied on the value comprising of the ‘cost of construction of the area agreed to be given free of cost’ and the ‘cost of land building & the construction cost of the additional area purchased by the society member’ while the consideration as per agreement to sale is only in respect of additional area bought by the society member resulting in stamp duty value being higher than the agreement value though the agreement value in respect of the additional area sold is generally higher than the stamp duty value of the additional area sold.

During the relevant assessment year under consideration, it is noted the appellant was holding inventory of finished stock in respect of its completed projects namely (i) ‘Centre Square’, (ii) ‘D Square’,

During the relevant assessment year under consideration, eighteen (18) agreements to sales were registered. Out of the said 9 A.Y. 2017-18 Disha Construction eighteen (18) agreements, sixteen (16) were in respect of completed projects (comprising of one (1) unit of Centre Sq., eight (8) units of D- Sq., six (6) units of E-Sq. & one (1) unit of Iris) and two (2) were in respect of Sat Anupa project which was at nascent stage, and the Commencement Certificate (CC) whereof was received on 18.04.2017 i.e. after the close of the year i.e. 31.03.2017 (refer PB page 52). It was brought to our notice that the sale value aggregating to Rs.30,16,07,500/- in respect of sixteen (16) completed flats/units sold during the year were fully credited to the profit loss a/c & offered to tax (refer PB page 5). But the aggregate of agreement value of Rs.1,29,85,000/- in respect of additional area sold to two existing occupants of Sat Anupa project (under construction) was shown as liability in the balance sheet (refer PB page 17) as the Commencement Certificate (CC) of the said project was obtained on 18.04.2017 i.e. after the close of the year and, therefore, no revenue was recognizable based on the method of revenue recognition followed by the appellant.

Out of the said eighteen (18) agreements to sale registered during the year, the tax auditors vide item 17 of Form No. 3CD (refer PB page 25) has reported that in respect of seven (7) agreements to sale (two agreements in respect under-construction Sat Anupa project and five (5) agreements in respect of the completed D-Square project}, the stamp duty value was higher than the agreement value.

In response to AO’s said notice, the appellant vide letter e-filed on 23.11.2019 furnished full details with supporting material (refer PB page 48 to 83). The appellant explained that in respect of the five (5) agreements to sale of the D-Square project reported by the tax auditors in clause 17 of Form No. 3CD which was a completed project, the Occupancy Certificate (OC) whereof was received on 21.05.2014, the appellant in the return of income filed has made addition of Rs. 16639600/- u/s 43CA in respect of four (4) agreements the deal whereof were initiated, finalized & executed and the consideration was also realized in the relevant assessment year under consideration only (refer PB page 25, 68, 70 & 71). In respect of the fifth agreement to sale being unit no. 805 of the said D-Square project registered during the year, the appellant submitted that the said unit was allotted on 20.04.2010 against advance received through account payee cheque 11 A.Y. 2017-18 Disha Construction and the same was allotted at the then prevailing market rate which was higher than the then prevailing ready reckoner rate and, therefore, no addition was required to be made u/s 43CA in respect of the said agreement. In respect of agreement to sale flat no. 601 & 701 of the under construction “Sat Anupa project” which was at the nascent stage the Commencement Certificate (CC) was received after the close of the year (i.e. 31.03.2017) and the agreements were in respect of additional area purchased by the members namely Jyotsna Mehta and Vinodrai Trivedi respectively of the said society in addition to the free area they were entitled to and that in such type of agreements the sub-