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Facts
The assessee, a private limited company, owned land and entered into a development agreement. The AO rejected the assessee's books of account due to a fall in gross profit and estimated it at 9.94%, leading to an addition. The CIT(A) upheld this addition.
Held
The Tribunal found that the assessee consistently valued closing stock including interest cost, and the business model was unique (landowner, not developer). The AO's estimation of gross profit was without basis and not legally tenable, especially since a lower GP was accepted in prior years for the same project.
Key Issues
Whether the Assessing Officer was justified in rejecting the assessee's books of accounts and estimating the gross profit at a higher rate, despite consistent accounting methods and explanation for the fall in GP.
Sections Cited
143(3), 145(3), 44AB
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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH
Before: Shri T.R. Senthil Kumar & Shri Makarand Vasant Mahadeokar
Advance Lifespaces The ACIT, Private Limited Circle-1(1)(1), S-202/B/4/205, Vs Ahmedabad City Center Nr. Idgah Gate, Asarva, Ahmedabad-380016 Gujarat PAN: AAJCA2338M (Appellant) (Respondent) Assessee Represented: Shri Prakash D Shah, A.R. Revenue Represented: Shri B.P. Srivastava Sr.D.R. Date of hearing : 02-04-2025 Date of pronouncement : 23-05-2025 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:-
This appeal is filed by the Assessee as against the appellate order dated 28.02.2024 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “CIT(A)”), arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2017-18.
A.Y. 2017-18 Page No 2 Advance Lifespaces Pvt. Ltd. . vs. ACIT
Brief facts of the case the assessee is a Private Limited Company and owner of land at Asarva, Ahmedabad. The land was given for development to M/s. Jas Infra Space Private Limited as a Developer and constructed shops and offices on the said land under a development agreement. The constructed shops and offices were sold jointly, with Sale Deeds executed by the assessee and Developer as confirming party. The sale consideration was appropriated between the assessee and M/s. Jas Infra Space Pvt Ltd. i.e. Developer. The closing stock for the assessee was of land only.
2.1. For the Asst. Year 2017-18, assessee filed its Return of Income on 30.10.2017 declaring loss of Rs.88,83,761/= and a Revised Return on 06.01.2018 showing loss of Rs.88,83,761/= to claim TDS of Rs.884. The Return was selected for scrutiny assessment. The Assessing Officer rejected the books of account under section 145(3) of the Act, citing fall in gross profit to 0.71% from 4.49% in the immediately preceding year and also absence of unit-wise stock details. Therefore, the AO estimated gross profit at 9.94% (average of three years) on turnover of ₹29.02 crores, which has resulted in an addition of Rs.2.88 crores and demanded tax thereon.
Aggrieved against the assessment order, assessee filed an appeal before CIT[A] who upheld the addition made by the AO and dismissed the assessee appeal.
Aggrieved against the appellate order, the assessee is in appeal before us raising the following Grounds of Appeal:
A.Y. 2017-18 Page No 3 Advance Lifespaces Pvt. Ltd. . vs. ACIT 1 That the notice issued under section 143(2) of the Act by the learned AO and all the subsequent proceeding are bad in law and therefore the impugned order passed by Ld.AO is required to be quashed and the addition made therein are to be deleted in full. 2 That the Ld. National Faceless Appeal Centre has erred in law and facts by accepting of the order of the ld.AO wherein the Id.AO has applied section u/s 145(3) of the Act and therefore the books of accounts are required to be rejected and therefore the ld. AO should be directed to accept the returned income. 3 That the Ld. National Faceless Appeal Centre) has erred in law and facts by not deleting the addition of Rs.2,88,49,653/- made by the learned Assessing officer, on account of low Gross Profit for the year under consideration and therefore, your Honor is requested to direct the ld.AO to delete the addition in full, while computing the total income. 4 That your appellant craves a leave to add, alter or amend any grounds at or before the time of hearing.
At the outset Ld Counsel Shri Prakash D Shah appearing for the assessee submitted that the assessee is NOT pressing Ground No.1 namely wrong issuance of notice u/s.143(2) of the Act, recording the same Ground No.1 is dismissed.
Regarding merits of the case the Ld Counsel submitted a detailed Written Submission, summery of the same is that during the assessment proceedings the AO called for working of gross profit. The same is as under:
2016-17 2015-16 2014-15 Particulars Sales 290237958 487078592 138811530 Less: 288172664 465204245 104619067 Change in Inventories Gross Profit 2065294 21874347 34192463 GP% 0.71 4.49 24.63 A.Y. 2017-18 Page No 4 Advance Lifespaces Pvt. Ltd. . vs. ACIT 6.1. The assessee had borrowed funds and paid interest thereon. The assessee had valued closing stock with interest. Further the project was delayed and therefore interest burden had increased year after year. The assessee paid interest of Rs.27,79,83,470 from 01.04.2011 to 31.03.2017 as under:
Interest 31.03.2017 1,09,01,455/- Interest 31.03.2016 2,27,89,198/- Interest 31.03.2015 3,37,52,463/- Interest 31.03.2014 4,04,98,247/- Interest 31.03.2013 7,33,41,721/- Interest 31. 03. 2012 9,67,00,386/- Total 27,79,83,470/- 6.2. During the year the sales of offices and shops were at Rs.29,02,37,958/= which came to the share of the assessee and the Profit & Loss account was made up as under:
Sales 29,02,37,958 Closing stock 61,44,11,279 Opening stock 90,25,83,943 Interest 1,09,01,455 Other expenses 47,600 Loss 88,83,761 6.3. During the year the closing stock of land was reduced to Rs.61,44,11,279 on account of sales made. The valuation of closing stock was made which was inclusive of interest cost. The valuation of closing stock was filed before the Assessing Officer at page no 66 with letter no.6. The same is as under:
A.Y. 2017-18 Page No 5 Advance Lifespaces Pvt. Ltd. . vs. ACIT
CLOSING STOCK AS ON 31.03.2017 Total cost incurred till date including interest cost till 1,53,98,72,205 31.03.2017
Total units sold till 31.03.2017 886
Sales Price of units sold 160,56,68,400 Total sales price estimated 267,42,86,500
% of sales price of units sold 60.1
% of unit in stock 39.9
Total value of stock 614409009.8 (39.96*1539872205/100) Say, 614411278 6.4. Thus, the assessee had valued the closing stock which was inclusive of interest. The sales are made at a specific rate while the opening stock included interest capitalized so far. Therefore, the rate of profit had gone down from year after year. Opening stock as on 01.04.2016 was inclusive of interest cost till 31.03.2016. In the sales, such interest cost could not be realized and therefore the gross profit has gone down. It is further submitted that there has not been any purchase of land during the year under appeal and all the sales are recorded in the books of accounts. Therefore, the realization of profit is difference between sales price and proportionate valuation of opening stock. As the opening stock was inclusive of interest incurred till 31.03.2016, the margin between realization and stock has gone down as compared to earlier years.
A.Y. 2017-18 Page No 6 Advance Lifespaces Pvt. Ltd. . vs. ACIT 6.5. The assessee further submitted that it has not purchased any land during the year. The sales price is fixed and is evidenced by registered Sale Deeds. The opening stock is taken as per last year closing stock. The closing stock is valued as per consistent method. Therefore, there was no question for interpolation of any figure which resulted in gross profit. Thus the Ld. AO has no justification of estimation of gross profit and making addition thereof. Further in connection with observation of the AO that there is no proof that the interest expenses are included in closing stock, Ld. Counsel submitted that in the working of valuation of closing stock filed with the A.O. is very clear and its shows total expenditure incurred including interest up to 31.03.2017.
6.6. It was expected that the sales of whole project of all the shops and offices will be made within 2 to 3 years. However, sales could not be achieved at a faster rate. This has caused interest cost to the company which has increased the cost of valuation of land. The assessee further submits that the books of accounts are accepted by Assessing Officer and no defect in the books of account is found out by the AO. No comparable case is given by AO while making estimation, therefore there is no justification of estimation of gross profit and addition thereof.
6.7. The Ld. Counsel further submitted that gross profit in the previous Asst Year 2016-17 was 4.49% which is accepted by the department while passing the scrutiny assessment order u/s 143(3) of the Act on 24.12.2018. Whereas for the present asst. year the AO has estimated gross profit of 9.94% which is even more then A.Y. 2017-18 Page No 7 Advance Lifespaces Pvt. Ltd. . vs. ACIT two times of gross profit of earlier year. This estimation of gross profit is without any base. Therefore, the addition of Rs.2,88,49,653 made on account of estimation of gross profit is liable to be deleted.
Per contra Ld. Sr. DR Shri B.P. Srivastava appearing for the Revenue supported the orders passed by the lower authorities and requested to uphold the same.
We have heard the rival submissions and perused the orders passed by the authorities below, as well as the material placed on record and Paper Book filed by the assessee. It is undisputed fact that the same project was sold during the present assessment year with interest cost. Thus the margin between the realization and stock has gone down as compared to earlier years. The assessee furnished the details of interest paid year-wise and also demonstrated valuation of closing stock which inclusive of interest cost before the Assessing Officer. However the same was not considered by the Ld AO and rejected the books of accounts only on the ground that the gross profit declared during this year is lesser than the preceding year. However, we note the following:
The assessee’s books of account are duly audited under both the Companies Act and Section 44AB of the Income Tax Act. The assessee has maintained a consistent method of valuation, including capitalization of interest into cost of land, which is corroborated by its submissions and valuation working filed during assessment.
A.Y. 2017-18 Page No 8 Advance Lifespaces Pvt. Ltd. . vs. ACIT
The business model is unique — the assessee is a landowner and not a developer. Thus, expecting unit-wise inventory details is misplaced, as land does not undergo typical trading or manufacturing transformation.
8.1. We find neither specific or material defect in the books of account nor any instance of sales suppression or unrecorded transactions. Further there is no purchase of new land by the assessee. Thus the Assessing Officer is not correct in rejecting the books of accounts as maintained by the assessee.
Next issue is Estimation of Gross Profit. The Ld AO adopted an average GP rate of 9.94% based on earlier years’ data. However for the Asst. Year 2016–17, the GP of 4.49% was accepted by the department in the scrutiny assessment u/s.143(3) of the Act for the very same project. Further the fall in GP was adequately explained by the assessee namely delayed project sales, fixed sale prices due to early bookings and increased interest burden capitalized into cost of land. The valuation working of closing stock (₹61.44 crore) was submitted by the assessee and includes proportionate interest cost based on sold verses unsold unit ratio. The Ld AO could not find any discrepancy in the above reports and information furnished by the assessee.
9.1. There is no comparable industry data or market survey to justify the arbitrary estimation at 9.94% arrived by the Ld AO. Hence, such estimation, in the absence of any suppression of income or defects in accounting, is unwarranted and such addition is liable to be deleted.
A.Y. 2017-18 Page No 9 Advance Lifespaces Pvt. Ltd. . vs. ACIT 9.2. Further perusal of the scrutiny assessment orders passed by the department in assessee’s own case for the Assessment Year 2015-16 dated 22-12-2017 and for Asst. Year 2016-17 dated 24- 12-2018 wherein no discrepancy in GP ratio was found by the Assessing Officer and the returned income were accepted by making some small addition on other disallowances. More particularly, when the same commercial project of shops and offices were sold by the assessee. Thus gross profit estimation made by the Assessing Officer is not legally tenable and the additions made thereon are liable to be deleted. Thus the Ground Nos. 2 & 3 raised by the assessee are hereby allowed.
In the result, the appeal filed by the Assessee is partly allowed.