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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI S. RIFAUR RAHMAN & SHRI PAVAN KUMAR GADALE
The captioned cross appeals are against the order dated 26th December 2017, passed by the learned Commissioner of Income Tax (Appeals)–54, Mumbai, for the assessment year 2013–14.
The brief facts of the case are, the assessee is engaged in the construction and development of real estate projects. The assessee filed its original return of income for assessment year 2013–14 on 10.12.2014, declaring total loss of ₹ 21,66,664/–. A search and seizure operation under section 132(1) of the Income Tax Act 1961 (in short „the Act‟) was conducted on the assessee’s group on 21.03.2013. Subsequently, notices under section 143(2) and 142(1) of the Act were issued and served on the assessee. Meanwhile, the assessee filed an application to the Settlement Commission on 19.02.2015. The assessee requested the Assessing Officer to abate the ongoing assessment proceedings. However, the Settlement Commission rejected the application filed by the assessee on 4.3.2015 on technical ground.
The facts relevant for grounds no.1 and 2 are, the Assessing Officer observed in the Profit & Loss Account that the assessee has claimed expenditure under the heads advertisement, business
3 Samira Realty Projects Pvt. Ltd. promotion, etc., and claimed loss. He observed that the assessee is following project completion method of accounting and not offered any income during the year, he opined that the loss was incorrectly claimed by the assessee as all such expenditure should have been treated as part of work–in–progress (WIP). The Assessing Officer relied upon the assessee’s own case for assessment year 2010–11 and disallowed the loss claimed by the assessee. Accordingly, he disallowed ₹ 21,66,664/–. Aggrieved with the above order, the assessee preferred an appeal before Commissioner of Income Tax (Appeals)–54, Mumbai.
Before the learned CIT(A), the assessee submitted that the facts of the case under consideration are different from that of assessment year 2010–11. It was submitted that the assessee has not offered any income from operations till assessment year 2012–13 for the reason that the assessee was following project completion method and during this year assessee has not completed any ongoing project. However, it offered revenue from operation to the extent of ₹ 10,50,87,531/– from sale of land and claimed related expenditure. The assessee has claimed expenditure relating to the project „Pavillion‟ towards marketing and administration expenses and other direct expenditures are shown under the head work in progress. It was submitted that the assessee has declared loss of ₹ 21,86,716/– after claiming the 4 Samira Realty Projects Pvt. Ltd. expenditures of marketing and administration. Further it was submitted that it is not the case of the assessing officer that bogus expenses were claimed.
After considering the submissions of the assessee, the learned CIT(A) agreed with the submissions of the assessee that during this year the assessee had offered receipts from the sale of land and claimed the corresponding expenses, therefore, these expenses have to be allowed. Further, he observed that the facts of the case involved in this year are different from those of assessment year 2010–11 on which the Assessing Officer heavily relied upon and made the disallowances.
6. Aggrieved with the above order, the Revenue is in appeal before us raising following grounds of appeal no.1 and 2.
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the additions of Rs.21,66,664/- without appreciating the fact that the assessee had failed to establish nexus between the expenditure incurred to the income declared on sale of land?," 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the assessee had also failed to prove genuineness of expenditure so claimed ?."
7. Before us, the Ld. D.R. brought to our notice Page–8 of the assessment order and submitted relevant facts involved in this case and further brought to our notice Page–10 of the learned CIT(A)’s
5 Samira Realty Projects Pvt. Ltd. order. He supported the findings of the Assessing Officer that consequence to the search findings and as per the assessment made in the assessee’s own case for assessment year 2010–11, the Assessing Officer rightly disallowed the entire loss claimed by the assessee in the current assessment year. He further submitted that assessee has not cooperated with that assessing officer to disclose truly and correct information. The assessee has not submitted any document before the Assessing Officer. Therefore, the Assessing Officer has rightly disallowed the loss claimed by the assessee.
8. On the other hand, the Ld A.R. submitted that the Assessing Officer relying upon the findings in earlier years assessment order and made the disallowance in the current assessment year. He submitted that this is the first year the assessee has shown income which it has earned from the sale of land not from the on–going project. It is important to note that the on–going project was not completed during this year. For the record, he submitted that the project is not completed till date. Therefore, he relied on the findings of Ld CIT(A).
9. Considered the rival submissions and material on record. We notice that search operation under section 132 of the Act was conducted on the group companies on 21.3.2013. Subsequently, the assessee preferred to file application before Income Tax Settlement Commission. The Settlement Commission rejected the application filed
6 Samira Realty Projects Pvt. Ltd. by the assessee on 4.3.2015 under technical ground. It is fact on record that the assessment was completed on 26.03.2015 under section 144 of the Act for the reason that assessee failed to represent before the Assessing Officer and made a plea that the assessment should be abated. The Assessing Officer preferred to complete the assessment under section 144 of the Act. He completed the assessment based on the information available on record. We notice that Ld CIT(A) given opportunity to the Assessing Officer to make a representation and file the report. The Assessing Officer preferred not to submit any report. The assessee submitted all the relevant information before the Ld CIT(A) like financial statements, status of the project and method of accounting regularly followed by the assessee. After considering the above said information, the Ld CIT(A) appreciated the method of accounting followed by the assessee. He also observed that during this year, the assessee has not declared any income from the ongoing project but assessee has declared income from the sale of land. It claimed the expenditure relating to the above sale of land and other marketing and administration expenditures which are period cost not relating to on–going project. After considering the submissions of the assessee, we notice that the Assessing Officer heavily relied on the findings in assessment year 2010–11. In our considered view, the Assessing Officer cannot rely on findings in assessment year 2010–11 to complete the assessment. We
7 Samira Realty Projects Pvt. Ltd. observed that Assessing Officer proceeded to adopt the findings in assessment year 2010–11 due to the fact that he was completing the assessment under section 144 of the Act. We do not see any reason to interfere with the findings of the Ld CIT(A) which is based on the material evidence and facts put forth before him, which the Assessing Officer could not lay hand. Therefore, we are inclined to agree with the findings of the Ld CIT(A) and accordingly grounds no.1 and 2 raised by the Revenue are dismissed.
The facts relating to grounds no.3 and 4 of the Revenue and ground no.1, raised by the assessee are, the Assessing Officer observed that one of the findings of the search operation was, the assessee company had not offered any revenue from its project by the name Project Pavilion even though the same was substantially completed. He observed that key persons of the group including Mr. Venkat Narayanan Ganapathy, Assistant Vice President and Mr. Sameer Nerurkar, Managing Director, of the group, in their statements under section 132(4) admitted that the project was 75% complete and proportionate sales need to be offered to tax. The Ld AO observed in his order that the assessee was given an opportunity to make its submission in this regard. In the notice, it was informed to the assessee that Mr. Venkat Narayan, had agreed in a statement that the Phase–I of the project is approximately 75% complete and, therefore,
8 Samira Realty Projects Pvt. Ltd. revenue to the extent of 75% of the sales value of ₹ 29,71,13,554/– which works out to ₹ 22,28,35,165/– should be recognized as sales in the project. Considering the above submission, the assessee was required to show cause why a sum of ₹ 22,28,35,165/– should not be added to your total income for assessment year 2013–14. Since no representation from the assessee side, the Assessing Officer proceeded to complete the assessment under section 144 of the Act. While completing the assessment, he relied on the statement of Managing Director and proceeded to make the addition of 75% of the value of project which was completed by the assessee during this assessment year.
Aggrieved with the above order, the assessee preferred appeal before Ld. CIT(A) and made a detailed submission before him. For the sake of clarity, it is reproduced below:– “The Ld. AO has erred in making an addition amounting to Rs.22,28,35,165/- without giving the benefit of any expenditure incurred in the course of the project by the assessee.
The Ld. AO observed that during the course of search on the company statement of Mr. Samir Nerurkar, MD of the company, was recorded U/s 132(4) wherein he has admitted that the project "Pavillion" waas substantially i.e., 75% completed as on that day hence revenue to that extent shall be recognized in the hooks of accounts, The A 0 relying on the statement of Managing Director added a sum of Ps, Rs.22,28,35,165/- (being the 75% of sale proceeds of Rs.29,71,13,554/–) as income from the project.
The Ld. AD has made addition only on the basis of statement of managing Director u/s 132'4) of the I T Act, AO has not any material to substantiate the statement of Managing Director recorded u/s 132(4) of the Act, hence, in such case no cognizance 9 Samira Realty Projects Pvt. Ltd. of such statement can be taken as held by the Hon'ble Supreme Court in case of Vinod Solanki Vs. Union of India (92 SCL 157). Therefore no addition can be made merely on the basis of statement during the course of search.
Now the question arises whether actually the project of the company was substantially completed during the year or not to arrive at real income of the company. As per management representation on the completion status of the Pavillion Project as on 31.3.2013, the said project IS completed only upto 30% hence the same cannot be treated as substantially completed and no income can be recognized for the project during the year.
Further, the Ld. AO has not given any other reason for disturbing the project completion method consistently followed by the company, which is one of the accepted method of maintaining books of accounts and also accepted by the AD in the earlier assessment year. Therefore action of the AO should not be accepted by the higher appellate authorities. Reliance can be placed in the case of CIT Vs. Manish Build Well (P) Ltd.( 245 CR 397)(Delhi) and CIT Vs. S I Property Development Ltd. (255 ITR 601)(Madras) wherein the Hon'ble Courts Held that the Department has accepted the assessee's method of accounting namely, the project completion method and therefore there was no justification fcr adopting the percentage completion method for one year on selective basis. It is well-settled that the project completion method is one of the recognized .methods of account/rig. It cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually wider the IT Act.
10. Further and without prejudice to anything else, the Ld. AO has considered gross receipt as income of the company without reducing the related expenses debited to WIP of the project. The Ld. AO grossly erred in not considering the WIP of the assessee as appearing in it's balance sheet of the assessee while computing the income of the assessee. (Copy of financials has been attached herewith for your ready reference) Gross receipt from the project cannot be income of the applicant. What can be taxed is only the net income after reducing the expenses. In the Income Tax assessment tax can be levied only on the real income of the assessee as held by the Hon'ble Supreme Court in case of Sanjeev Woolen Mills Vs. CIT ( 279 ITR 434). This proposition was also enunciated In IT vs. Bind Gwalior (P) Ltd. 89 ITR 265 (SC) and In CIT vs. Shoorfi Vallabhdas & Co. (1962) 46 ITR 144 (SC). Recently Hon‟ble Bombay High Court in case of CIT vs. Shri Hariram Bhambhani (ITA No. 313 of 2013) held that the entire sale cannot be subject to tax and only net income out of the sales
10 Samira Realty Projects Pvt. Ltd. can be taxed under the provisions of IT Act.”
After considering the submissions of the assessee, the Ld CIT(A) observed from the submissions of the learned counsel that the project is still not complete and, therefore, no income was offered, and relying on various case law to claim that it is only the net income which can be taxed and not the gross income. It was submitted that following the project completion method and project is yet to be completed, the assessee has not declared any income. The Ld CIT(A) observed that the assessee approach the Settlement Commission which had rejected assessee’s application on a technical ground. In the above application before Settlement Commission, the assessee had admitted profit of 21% of the advances received. It is assessee’s own admission during the search that 75% of the sales would be recognised for the assessment year 2013–14. He observed that the assessee did not recognise the sale and on the other hand it had shown loss in the Profit & Loss Account. He further observed that the project was complete by 75% by March 2013 but it is assessee’s own contention that even in the year 2017, the project was still not complete. The assessee cannot differ payment of tax endlessly. He observed that moreover, the Managing Director admitted to recognise 75% of the sales worked out to ₹ 22,28,35,165/–. The Ld CIT(A) opined that the issue in hand is the profit element out of these sales. He observed that 11 Samira Realty Projects Pvt. Ltd. assessee had contended that there is no profit earned during this year but assessee itself offered 21% of the advances received before the Settlement Commission. Based on the above observation, the Ld CIT(A) proceeded to estimate the income of the assessee at 25% of the advances received. Therefore, he sustained the additions to the extent of ₹ 5,57,08,791/–.
Aggrieved with the above order, both the Revenue as well as the assessee are in appeal before us raising following grounds of appeal:– Revenue 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that only 25% of the total sales were to be offered o tax as against 75% of total sales as admitted by the directors, during the course of search?."
4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition to Rs.5.57 Cr. From Rs.22.28 Cr. thereby giving relief of Rs.16.71 crore, without appreciating the fact that the directors of the assessee had admitted that the project was substantially complete.” Assessee 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in restricting the action of the Assessing Officer in adding an amount of ` 5,57,08,791 to the income of the appellant.”
14. Before us, the learned DR brought to our notice Pages–11 and 15 of the order passed by learned CIT(A) and submitted that the assessee has not filed any information before the Assessing Officer. Moreover, the assessee itself, by the Managing Director and Assistant Vice
12 Samira Realty Projects Pvt. Ltd. President in their statements subsequent to search operation under section 132 of the Act to disclose the income relating to the on–going project. But the assessee did not disclose any income in the return of income filed by the assessee for this assessment year. Since there is no cooperation from the assessee during assessment proceedings and consequent to the statements of the key employees of the company, he vehemently argued and supported the findings of the Assessing Officer and prayed that the findings of the Assessing Officer may be sustained.
On the other hand, the Ld AR submitted that assessee followed its revenue recognition method regularly over the years and it follows the project completion method of accounting. He also brought to our notice findings of the Assessing Officer in Para–9.3 and 9.4 and further he brought to our notice findings of Ld CIT(A) at Page–11 of the order. He submitted that no doubt Managing Director of the company had agreed to disclose 75% of the project completion by end of this year and never agreed to disclose it as income of the assessee. The income cannot be estimated whereas it has to be based on actual profit earned by the assessee. He relied on the submissions made before the Ld CIT(A) and submitted that the income if at all has to be estimated considering the fact that the project under consideration is not 13 Samira Realty Projects Pvt. Ltd. completed until date, it may be estimated at the rate of 8%. He prayed accordingly.
Considered the rival submissions and material on record. We notice that the assessee is carrying on the project namely Pavillion which according to assessee is not complete until date. However, we notice that subsequent to search operation carried on in the group concerns, the Managing Director of the company agreed by way of statement under section 132(4) of the Act to disclose 75% of the project which according to the revenue, which was completed by the year end 31.3.2013. The Managing Director agreed to disclose the same in the books of account in assessment year 2013–14. However, the assessee has not disclose the same in the return of income filed in response to notice under section 153A of the Act. It is the contention of the assessee that the project under consideration is not complete even though the managing director had disclosed that he will disclose 75% of the advances received in the statement u/s 132(4) of the Act. It was submitted by the assessee that at the time of search only 30% of the project was complete not 75% of the project. We notice that the tax authorities proceeded to complete the assessment based on the statement given by the Managing Director and the Ld CIT(A) also proceeded to estimate the income at the rate of 25% of the advances
14 Samira Realty Projects Pvt. Ltd. received by the assessee, relying on the declaration made by the assessee before Income Tax Settlement Commission @21%.
After considering the submissions of both the parties, in our considered view, we agree with the submissions of Learned counsel that income has to be taxed based on the real income not based on assumptions. It is fact on record that assessee discloses the income based on project completion method. No doubt there is no record on the file on the certification of percentage of completion by any certified valuer or internal certification by the assessee. We have to acknowledge that in the search proceedings, the Managing Director had agreed that the project was completed about 75% and agreed to disclose the revenue to that extent. Since the project was not completed and the assessee submits that the project is not completed until date for the reason known best to the assessee. It is normal practice in construction business that the income will be declared based on the percentage of completion of the project in the respective years until the project is completed. In the intervening assessment years, the profits are estimated based on the percentage of completion of the project and finally the profits are evaluated at the completion of the project.
No doubt, as per the accounting method followed by the assessee to disclose the income based on the percentage completion
15 Samira Realty Projects Pvt. Ltd. method. Therefore, up to the end of this assessment year, as per the statement of the Managing Director the assessee had completed 75% of the project. Therefore, it is obligated to disclose the income based on the expected profit of the project. We notice that assessee itself disclosed before settlement commission that it will disclose at the rate of 21% of the profit in the case of the group concerns. We are not clear or sure on what basis assessee had agreed before Settlement Commission and it is fact that the offer before Settlement Commission are on different footing, may be on the basis of compromise and settle the issue at once, which invariably on ad–hoc estimation. No doubt, the application was rejected by the Settlement Commission on technical grounds, however, we cannot take the submissions made before Settlement Commission as final. The assessment of return of income can only be based on real income and it should be correlated with the actual income either based on income declared by the assessee over the years or estimations based on the projected revenue/income of the ongoing project. We notice that assessee was undertaking only one project during this assessment year which was not completed during this assessment year. Just because there is a search operation and managing director of the assessee agreed to disclose income, it does not mean that the income has to be estimated either based on information disclosed before settlement commission or otherwise. We notice that the managing director has agreed to disclose
16 Samira Realty Projects Pvt. Ltd. revenue to the extent of 75% of the project completion. Therefore, it has to be the actual profit or the projected profit expected to earn by the assessee from the ongoing project. In our considered view, the Ld CIT(A) relying on the disclosure in the application before settlement commission, he has estimated the income at the rate of 25% of the advance received. In our view, the estimation of income made by the Ld CIT(A) is not practical and not based on actual. Therefore, in our view, considering the fact that the project under consideration is not completed until date, therefore, the cost involved in completing the project may be escalated. What is relevant is the actual realisation of the profit from the project. Therefore, to meet the ends of justice, in our view the proper profit to be estimated must be 10% of the advances received by the assessee. Before us, the Ld AR prayed for estimation of profit at the rate of 8%. Since the assessee has not submitted any projected sales and relevant cost of the project and estimated profit which is expected to earn in this project, we are not in a position to agree with the prayer of the learned Counsel. Therefore, in our considered view it is proper and fair to estimate the income of the assessee @10% of the advances received in the ongoing project. Accordingly, the grounds raised by the Revenue are dismissed and ground raised by the assessee is partly allowed.
17 Samira Realty Projects Pvt. Ltd. In the result, assessee’s appeal is partly allowed and 19. Revenue’s appeal is dismissed. Order pronounced in the open court on 29.06.2021