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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI VIKAS AWASTHY & SHRI GAGAN GOYAL
O R D E R Per: Gagan Goyal (AM): This appeal has been filed by the Revenue against the order dated 30/04/2019 passed by the Commissioner of Income-tax (Appeals)-26, Mumbai for the assessment year 2013-14.
The brief facts of the case are, the assessee is engaged in the business of property developers / builders. Return of income for the assessment year under 2 ITA 4520/Mum/2019 consideration was filed on 22/11/2013 declaring loss at Rs.4,15,480/-. The case was selected for scrutiny and accordingly notices under sections 143(2) and 142(1) were issued and served on the assessee. After hearing the assessee, the Assessing Officer computed total income at Rs.2,81,390 as against claim of loss at Rs.4,15,480/- disallowing business loss claimed and making addition of interest income to the extent of Rs.2,81,385/-. The assessee carried the matter before CIT(A) and challenged the action of the Assessing officer on both the counts. The appeal of the assessee found favour with the learned CIT(A), who allowed the appeal .
Aggrieved by the order of the learned CIT(A), the revenue is in appeal before the Tribunal on the following grounds:-
“1. On the facts and circumstances of the case and in law, the Ld.CIT(A) was erred in deleting the disallowance of loss made by AO by holding that the AO was not able to point out any expenditure incurred was excessive or non-genuine or suppression of sale, without appreciating the fact that the total cost of sale debited (at Rs.33.46 crore) which is more than the sale consideration (Rs.29.33 crore) credited to P &L account and that the same is also against the principle of matching concept.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was erred in deleting the disallowance of loss made by the AO by holding that the AO was not able to point out any expenditure incurred was excessive or non genuine by accepting the closing stock (work-in -progress) of Rs. 210.53 crore as on 31.03.2013, adjusted to arrive at the cost of sale, but omitted to observe that the opening balance was taken at Rs.113.02 crore on amalgamation with a group concern.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was erred in deleting the disallowance of loss made by the AO by appreciating the fact that the assessee follow "percentage completion method' and only 72% of the project was completed as on 31.03.2013, but ignored the fact that the assessee had claimed the entire expenditure, which is excessive, as such the same should have been restricted at 72%.”
The facts governing the issue are that the assessee has declared loss from property development. The cost of sales was shown at Rs.3345.72 lakhs as 3 ITA 4520/Mum/2019 against the sale revenue of Rs.2933.22 lakhs resulting in loss on sales. The Assessing Officer disallowed the claim of loss by observing as under:-
“6.1 The assessee is engaged in Property Development, and shown Cost of Sales at Rs. 3345.72 lakhs against the sale revenue of Rs. 2933.22 lakhs, resulting in gross loss on sales. During hearing on 12.01.2016, a questionnaire was handed over to AR requiring to explain the reasons of incurring such losses, and the basis of valuation of closing stock at Rs. 21053.22 lakhs with complete item-wise details and working of the same. Further, the assessee was asked to specify the total construction cost (excluding land) along with total constructed area and to give the working of per square feet cost, and justify such construction cost per square feet and also to prove that it is not inflated. The assessee was also asked to submit a comparison of sale consideration of identical flats. 6.2 In response, the assessee vide letter dated 16.02.2016 submitted the working of loss as under: "Your Honour has requested our clients to furnish the detailed working of Cost of Sales and Sales Revenue accounted during the year ended March 31, 2013, in respect of the project being developed by the assessee company. The detailed working of Cost of Sales and Sales is as under; i. The total built up area to the developed in the project is 8,09,427 square feet. ii. The total built up area sold up to March 31, 2013 is 2,21,750 square iii. The total booking value for sal3es booked up to March 31, 2013, aggregates to Rs. 113.72 cores, iv. The estimated total cost of the project has been determined at Rs. 404.34 cores. v. The actual cost incurred on the project up to March 31, 2013, aggregates to Rs. 289.96 cores, vi. Hence, the percentage of work completion achieved till March 31, 2013 is 71.71%. vii. Based on the estimated total cost of the project (Rs. 404.34 Crores), the cost of the project in respect of the area sold (2,21,750 square feet) till March 31, 203 to the total area of the project to be developed (8,09,42 7 square feet) is Rs. 110.77 crores. viii. However, only 71.71% of the project has been completed as at March 32, 2013 and hence the cost of sales to be recognized aggregate to Rs. 79.43 crores. ix. Hence the accounting for the year is as under: Particulars Upto March 31, 2013 Upto March 31,2013 Accounted for the year Rs.Crores Rs. Crores Rs. Crores Sales 81.54 52.21 29.33 (Rs.113.72 crores
4 ITA 4520/Mum/2019 71.71%) Cost of Sales 79.43 45.97 33.46 (Rs.110.77 crores @1.71%) 6.3 Vide further letter dated 19.02.2016, the assessee stated that "The working for cost per square feet forms part of note given on the recognition of revenue vide letter dated February 16, 2016'. 6.4 The assessee also submitted the comparison of sale consideration of identical flats vide letter dated 09.02.2016, which is placed on records. 6.5 The submissions made by the assessee are considered but not found to be acceptable. The assessee is engaged in the development of the project "Godrej Genesis" situated at Bidhannagar, Kolkata, which is an IT Park consisting of basement, ground and eighteen floors. The assessee company is developing the property and will bear the total cost of construction of the proposed development and in return is entitled to 62% of the saleable area of the developed property. The assessee has estimated the total construction cost to be 404.34 crores and the total area to be developed is 809427 sq. feet, which gives per square feet construction cost at Rs. 4995/- per sq. feet. This cost, which does not involve any land cost^is unimaginable since normally the construction cost can be expected to be in range of 1000-1500 per square feet. Even assuming the assessee could be developing luxurious building, the construction cost should not have reached such levels. It is also pertinent to note here that the average sale price of said offices in the building is just around Rs. 5000 per sq. feet, hence if at all the assessee is bearing total cost, and entitled to only 62% of the saleable area, the assessee would land up claiming huge loss over the years. It is also observed that one of the office no. 101 (4895 sq. ft.) is sold by assessee at agreement value of Rs. 3,91,81,985/-on 28.07,2011, which gives per sq. feet sale rate of Rs. 8000/-, however for all other offices the agreement made around same time is in the vicinity of Rs. 5000/- only, the assessee seems to have suppressed its profits, by inflating the cost. The assessee's project was in full swing over past few years, and hence there is no reason of incurring any loss. On the contrary, the assessee must have earned good profit from ihe project of IT park being developed by it. 6.6 In view of the above, the entire business loss claimed by the assessee during the year is disallowed and hence not allowed to be carried forward.”
When the assessee challenged the action of the Assessing Officer before Ld.CIT(A), the Ld.CIT(A), following the judgement of the jurisdictional High Court in the case of Commissioner of Income-Tax v. Lok Holdings (308 ITR 356) (Bom) and also by following his predecessor’s order for assessment year 2012-13, allowed the claim of the assessee, by observing as under:-
5 ITA 4520/Mum/2019
4.3. I have considered the AO's order, appellant's submissions and details filed. I find that the interest income has been earned on margin money/deposit given for the purpose of obtaining the bank guarantee which is inextricably connected with the project/business of the appellant as the guarantee was given for getting the electricity supply for the project at Kolkata. Further, the interest expenditure has nexus with the said interest income as the deposit has been given out of borrowed funds. Therefore, the appellant has correctly declared the said interest income under the head income from business and further, the interest expenditure was rightly claimed against the said income in the profit and loss account, by apportioning part of the total interest expenditure. In this regard, I find that both the issues have been decided in favour of the appellant by the CIT(Appeals)-2 Mumbai in AY2012-13, vide order dated 24.01.2017. Following the said precedent in appellant's own case and the decision of the jurisdictional High Court in the case of Commissioner of Income- Tax v. Lok Holdings (308 ITR 356) (Bom), discussed above in the submission of the appellant, it is held that the interest income of Rs.2,81.385/- is to be assessed under the head income from business and not as income from other sources and the interest expenditure of Rs.281,385/- debited to the profit and loss account is to be allowed as business expenditure. The AO is directed to re- compute the total income accordingly and delete the addition of interest expenditure made to the WIP of the project.
We have considered the rival submissions and perused the materials available on record. The observation of the Ld.CIT(A) that the assessing officer has accepted the percentage completion method of accounting for the project in the earlier assessment years which has been followed during the assessment year under consideration also, stands uncontroverted before us. The Ld. CIT(A) also found that various contentions of the Assessing Officer have been duly met and explained by the assessee and that the estimation of cost of construction at Rs.1000-1500/- per sq.ft. is found to be erroneous and based on conjectures since the Assessing Officer failed to consider the cost of land which had to be borne by the assessee as it was required to bear the cost of construction of the total area to be constructed of which 38% was to be given to the land owner towards the land cost. Further, the contention of the Assessing Officer that the profits have been suppressed as sales of one of the units was @8000/- per sq.ft. whereas
6 ITA 4520/Mum/2019 other units were sold at Rs.5,000/- per sq.ft. is found to be based on conjectures, is also not controverted before us. The explanation of the assessee that the unit which was sold for Rs.8,000/- per sq.ft. was a retail area on the ground floor which had a frontage and was easily accessible to the public, so it commanded a premium sale price also stands uncontroverted before us. The Ld.CIT(A) also observed that the Assessing Officer was not able to point out any of expenses incurred as excessive or non-genuine or any suppression of sales. We agree with these findings of the ld CIT(A). Therefore, we do not find a reason to arrive at a different conclusion than the one arrived at by the Ld.CIT(A). The findings of the Ld.CIT(A) are upheld. Grounds are dismissed.
In the result, appeal filed by the revenue is dismissed.
Order pronounced in the open court on Wednesday, the 08th February, 2022.