SKV INDUSTRIAL PLANT & WASTE TREATMENT PVT. LTD.,MUMBAI vs. ITO WARD -3(3)(3), , MUMBAI

order : 02.08.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal filed by the Appellant has challenged the order, dated 22.10.2018, passed by the Ld. Commissioner of Income Tax (Appeals)-8, Mumbai, [hereinafter referred to as „the CIT(A)‟] appeal No. [CIT(A)-8/IT 812/2016- 17], for the Assessment Year 2014-15, whereby the Ld. CIT(A) had partly allowed the appeal filed by the Appellant against the Assessment Order, dated 29.12.2016, passed under section 143(3) read with Section 254 of the Act. Assessment Year: 2014-15 2. The Appellant has raised the following grounds of appeal read as under: “ i) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in not accepting the method of accounting i.e. Mercantile System as per which certain expenses were claimed by way of deduction in Profit and Loss Account. ii) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in confirming the disallowance of following expenses amounting to Rs 84,00,000/- made by the Assessing Officer on the ground that these expenses are covered by the provisions of section 43B and also being only provisions, ignoring the fact that these expenses were to be recovered from purchasers of Office Premises and shop, and, therefore, provided in the accounts while settling the account with M/s. Athene Construction Pvt. Ltd., as per sole arbitrators award. a) Property tax Provision Rs. 77,00,000/- b) Generator Expenses. Rs. 6,50,000/- c) Audit Fees Rs. 50,000/- Total Rs. 84,00,000 (The Appellant had filed revised Ground No. ii above vide letter dated 09.05.2022) iii) On the facts and in the circumstances of the case and in law, the learned CIT.(A) erred in confirming the disallowance of Rs.34,00,000/- being the provision for Water proofing of the Building as per the award of sale arbitrator Supreme Court Justice (Retired) Dr. B.N. Shreekrishna in the dispute between the appellant and M/s Athene Constructions Pvt. Ltd. and, therefore, provided while settling the account of M/s. Athene Constructions Pvt. Ltd. as per the award of the sole arbitrator. iv) On the facts and in the circumstances of the case and in law, the learned C.I.T.(A) erred in confirming the addition of Rs.1,80,000/- being the amount received by M/s. Athene Construction Pvt. Ltd. But shown in the Form No. 26AS of the appellant

3. The relevant facts, in brief, are that the Appellant filed return of income for the Assessment Year 2014-15 on 17.09.2015 declaring loss of INR 1,65,117/-. The return filed by the Appellant was selected for scrutiny and notices under Section 143(2) and 142(1) of the Act were issued. The Assessing Officer completed assessment vide, order dated 29.12.2016, passed under Section 143(3) read with Section 254 of the Act at total income of INR 1,32,74,883/- after making, inter alia, following addition/disallowances (a) disallowance of INR 84,10,000/- under Section 43B of the Act consisting of provisions for property tax amounting to INR 77,00,000/- and provision for water connection charges amounting to INR 7,10,000/-, (b)

3 Assessment Year: 2014-15 disallowance of provision for waterproofing charge, repair etc. amounting to INR 34,00,000/-, (c) disallowance of provisions for society formation charges amounting to INR 7,50,000/-, (d) disallowance of provisions for back-up generator expenses amounting to INR 6,50,000/-, (e) provision for audit fee expenses amounting to INR 50,000/- and (f) addition of INR 1,80,000/- being amount reflected in Form 26AS as income received from Viom Networks Ltd.

6.1. Referring to the submission dated 13.12.2021 and 09.05.2022 filed during the course of appellate proceedings before the 4 Assessment Year: 2014-15 Tribunal, as well as letters/submissions filed before the Assessing Officer and CIT(A) forming part of the paper book [filed on 07.12.2021], the Learned Authorised Representative for the Appellant submitted that the Appellant has entered on 24.05.2006 into Joint Venture Agreement with Athene Construction Pvt. Ltd. (ACPL) for the development of the incomplete project namely „SKYLARK‟ situated at Plot No.63, Sector 12. Belapur, Navi Mumbai. Dispute arose between the Company and ACPL which was referred to the Sole Arbitrator appointed by the Hon‟ble Bombay High Court. The aforesaid arbitration proceedings culminated into an arbitration award which was received in October, 2013. The inter-se accounts between the Appellant and ACPL were not settled but the accounts of the Appellant were closed to be closed as on 31.03.2014. Since major construction work for the construction of the project was completed, the Appellant recognized profits arising from the projects by following completed contract method. While closing the accounts the Appellant had to make provisions for expenses which were required to be incurred by the Appellant for maintenance and upkeep of the project building after ACPL had handed over possession to the Appellant. Accordingly, the Appellant made following provisions for expenses Particulars Amount (INR) a) Property tax 77,00,000/- b) Water Connection Charges 7,10,000/- c) Water Proofing Charges 34,00,000/- d) Society Formation Charges 7,50,000/- e) Generator Expenses 6,50,000/- f) Audit Fee Expenses 50,000/- 5 Assessment Year: 2014-15 Since the above expenses were to be recovered from the purchasers, the Appellant recognized revenue which included Development Charges recoverable from the purchasers amounting to INR 2,41,92,208/-. Relying upon the decision of Kolkata Bench of the Tribunal In the case of M/s Bengal Peerless Housing Devt. Co. Ltd. vs. DCIT, Circle-7(1), Kolkata : and 2459/Kol/2017, decided on 31.12.2018, the Ld. Authorised Representative for the Appellant submitted that for the purpose of computing profits pertaining to the real estate project the Appellant had to take into account both the estimated revenue and costs. Accordingly, the Appellant had created provisions for expenses which were expected to be incurred in relation to the project in the future. The Assessing Officer/CIT(A) have failed to appreciate that the Appellant has been consistently following project completion method and have made disallowances primarily on the ground that either expenses were not incurred during the relevant previous year or no tax was withheld from such expenses attracting disallowance under Section 40(a)(ia) of the Act. He placed reliance on the written submissions dated 13.12.2021, and 09.05.2022 filed during the course of the hearings. He further submitted that most of the expenses in respect of which provisions were made by the Appellant were to be recovered from the purchaser and therefore, the amounts credited to the Profit & Loss Account as Development Charges and offered to tax by the Appellant during the relevant previous year as project revenues were in the nature of re-imbursement of expenses and not income. In this regard, he relied upon the computation of development charges reproduced at page 7 of 18 of the order passed by the CIT(A). He submitted that only 6 Assessment Year: 2014-15 part of the Development Charges have been received by the Appellant till date. Highlighting the above facts and circumstances, the Learned Authorised Representative for the Appellant submitted that the disallowances made by the Assessing Officer pertain to the provisions created for waterproofing, repair & maintenance expenses (INR 34,00,000/- ), back-up generator expenses (INR 6,50,000/-), audit fee expenses (INR 50,000/-), society formation charges (INR 7,50,000/-) by following completed contract method be allowed and corresponding disallowance made by the Assessing Officer and CIT(A) be deleted.

6.2. As regards, the disallowance of provisions for property tax of INR 77,00,000/-, the Learned Authorised Representative of the Appellant submitted that the Appellant had already credited Profit & Loss Account by equivalent amount by way of Development Charges and thus, the Appellant has not claimed any deduction in respect of provisions of property tax and therefore, the provisions of Section 43B of the Act are not attracted. He further submitted that the Appellant is not liable as the liability to pay property tax rests upon the buyers. The Appellant would only be collecting the taxes and making payment to authority on behalf of the buyers. In this regard, he referred to statement showing the details of Development Charges and Property Tax allocated to 49 purchasers filed during the course of arguments.

6.3. In relation to the addition of INR 1,80,000/- the Appellant submitted that though the same is reflected in form 26AS it was not received by ACPL and should be taxed in the hands of ACPL.

7 Assessment Year: 2014-15 7. In response, the Ld. Departmental Representative relied upon the order passed by the Assessing Officer and CIT(A). He submitted that the disallowances provisions made by the Appellant have been made by the Assessing Officer as the Appellant has not incurred any expenses during the relevant previous year. The provisions have been created without any basis in respect of expenses which are contingent in nature. Neither was any contract executed nor was any invoice raised to exhibit any work or payment during the relevant previous year. In this regard, he referred to the observations made by the Assessing Officer in relation to each disallowance made by the Assessing Officer. As regards, the disallowance of INR 77,00,000/- the Learned Departmental Representative referred to the order of CIT(A) on this issue and submitted that the CIT(A) has rightly held that the provision for property tax has been debited to Profit & Loss Account and thereby, has been set off against the revenue/income. The contention of the Appellant that no deduction has been claimed by the Appellant is incorrect. In relation to addition of INR 1,80,000/- pertaining to income reflected 26AS disputed by the Appellant as not being his income, the Learned Departmental representative relied upon the order passed by the Assessing Officer and CIT(A).

Completed Contract Method followed by the Appellant 9. The sum and substance of the submissions advanced by the Ld. Authorised Representative for the Appellant is that major construction work for the project was completed during the 8 Assessment Year: 2014-15 relevant previous year and therefore, the Appellant had computed income/loss from the project during the relevant previous year by adopting completion contract method. Accordingly, the accounts for the relevant previous year were finalized after taking into consideration estimated income/revenues and the estimated costs likely to be incurred in relation to the project. The estimated costs were in the nature of provisions for expenses created by the Appellant whereas the estimated Revenue was the amount corresponding to the aforesaid estimated expenses to be recovered from the purchasers plus ad-hoc additional income.

Disallowance of Provisions for Expenses 10. On perusal of the order passed by the Assessing Officer and CIT(A) it becomes clear that disallowance of provisions for waterproofing, cleaning and other expenses (INR 34,00,000/-), society formation charges (INR 7,50,000/-), back-up generator expenses (INR 6,50,000/-) and audit fee expenses (INR 50,000/- ) has been made for the reason that Appellant had not incurred the expenses during the relevant previous year and/or tax has not been deducted at source. The fact that the Appellant was following completed contract method for determining profits which necessitated estimation of future expenses was not taken into consideration by the Assessing Officer and the CIT(A). We note that the Appellant had computed the development charges to be recovered from the purchasers on the basis of the aforesaid estimates for expenses made by the Appellant. While the development charges offered to tax has been accepted by the Revenue, the estimated expenses which formed the basis of determining the quantum of development 9 Assessment Year: 2014-15 charges to be recovered from purchasers has been disallowed. In view of the above, the order of CIT(A) confirming the order passed by the Assessing Officer making disallowance of provisions for waterproofing, cleaning and other expenses (INR 34,00,000/-), society formation charges (INR 7,50,000/-), back- up generator expenses (INR 6,50,000/-) and audit fee expenses (INR 50,000/-) is set aside with the direction for fresh adjudication after taking into account project completion method being followed by the Appellant and the decision of the Tribunal in the case of Apollo Tyres Ltd. vs. Deputy Commissioner of Income Tax, TDS Circle, Gurgaon : 163 ITD 177 (Delhi Trib.) wherein it has been held that when the tax deductor cannot ascertain the payee who is the beneficiary of a credit of tax deducted at source, the mechanism of Chapter XVII-B cannot be put into service. If on verification it is found that the payee is identifiable and the amount payable to him is ascertainable, then the Appellant would be considered as being in default of provisions of Section 40(a)(ia) of the Act.

Disallowance under Section 43B of the Act 11. On perusal of the assessment order, it becomes clear that the Assessing Officer has made disallowances on account of property tax by invoking provisions of Section 43B of the Act as the Appellant has debited a provision for property tax amounting to INR 77,00,000/- to the Profit & Loss Account for which, admittedly, no payment has been made by the Appellant during the relevant previous year. We concur with the Assessing Officer and the CIT(A) that in the facts and circumstances of the present case it cannot be said that no deduction has been claimed by the Appellant in respect of the 10 Assessment Year: 2014-15 provisions for property tax for INR 77,00,000/- since the same has been debited to the Profit & Loss Account. The facts that equal amount has been included in revenue as development charges recoverable from purchasers would only show that the provision for expenses has been set off against the revenues.

11.1. We note that the Assessing Officer has, while making disallowance under Section 43B of the Act has referred to paragraph 15 and 17 of the abovesaid consent terms to concluded that the liability of the Appellant to pay property tax was restricted to 24% of the constructed area without appreciating that paragraph 15/17 referred to the property tax liability for the building from 01.06.2006 to 02.02.2010 only.

11.2. However, we note that the consent terms recorded on 07.08.2013 by the Ld. Sole Arbitrator during the arbitration proceedings between the Appellant and ACPL provide that the liability to pay property tax belongs to the purchaser. The Appellant would discharged the same on behalf of the purchasers. The relevant extract of the aforesaid consent term read as under: “16. The parties agree that the property tax for the building for the period after the OC (i.e. on 2nd February 2010) shall be paid by the Respondent on behalf of its purchasers for the Respondent's Premises and similarly, the Claimant's on behalf of its purchasers shall pay the property tax in respect of the Claimant's Premises and the Claimant's Additional Premises. The Respondent also agrees, assures and undertakes that it shall be liable and responsible to ensure that the property tax for the Respondent's Premises shall be duly paid by the Respondent within 15 days of the Claimant submitting the NMMC bill to the Respondent and similarly the Claimant assures, that it will pay property tax for the Claimant's Premises 11 Assessment Year: 2014-15 and the Claimant's Additional Premises within 15 days from receipt of property tax bill from NMMC.” 11.3. We are of the view that in case the Appellant is not under statutory obligation to pay property tax provisions of Section 43B of the Act would not be attracted. The authorities below have invoked provision of Section 43B of the Act without examining whether the Appellant was under statutory obligation to pay property tax in respect of the project units and to what extent. From the material on record, it is not possible to determine/appropriate the liability to pay property tax between the Appellant and the purchasers. In view of aforesaid, this issue is also remanded to the file of CIT(A) for with the direction to delete the disallowance on account of provision for property tax under Section 43B of the Act to the extent is pertains to statutory liability of the purchasers.

11.4. In terms of paragraph 9, 10 and 11.3 above, Ground No. i, ii, iii and v are partly allowed.

Addition of INR 1,80,000/- being income from Viom Networks Ltd. reflected in Form 26AS