SHREEJI ASSOCIATES,VADODARA vs. THE PR. CIT-1, VADODARA

The brief facts of the case are that the assessee is engaged in the business of real estate business and construction of residential bungalows. On perusal of Profit & Loss Account, the PCIT observed that the assessee had only one project namely Shree Hari Residency relating to construction of bungalows. The assessee is following percentage completion method for recognizing revenue and valuation of closing work-in-progress. The PCIT observed that during the course of assessment, the assessee had submitted working of Revenue recognition of closing WIP and as per the said working submitted by the assessee, the estimated total revenue of the project was Rs. 17,83,06,286/-. The estimated total cost of the project was Rs. 15,51,00,000/- against which the assessee had incurred cost of only Rs. 13,50,69,538/- as on 31.03.2017. Since, the project was completed and entirely sold during the year, therefore, the revenue realized of Rs. 17,83,06,286/- and total expenditure of Rs. 13,50,69,538/- were required to be treated as final revenue realized and final cost of the project. However, PCIT observed that as against the revenue realized of Rs. 17,83,06,286/-, the assessee has offered revenue only of Rs. 15,52,60,818/- till 31.03.2017. Accordingly, the difference of Rs. 2,30,43,468/- (Rs. 17,83,06,286 – Rs. 15,52,60,868/-) should have been offered for taxation by the assessee as Revenue for the impugned assessment year. Since, the total expenditure incurred on the project was Rs. 13,50,69,538/- which was already claimed by the assessee by offering revenue of Rs. 15,52,60,818/- and since the project was fully completed and sold, therefore, the differential revenue of Rs. 2,30,45,468/- was required to be offered for taxation by the assessee during the impugned year under Shreeji Associates vs. PCIT Asst.Year –2017-18 - 3– consideration. However, while finalizing the assessment, Assessing Officer has neither made addition on this issue nor made any verification or enquiry on this issue which should have been making during the course of assessment proceedings, thereby making the assessment order as being erroneous, in so far as prejudicial to the interest of the Revenue.

Before us, the Counsel for the assessee submitted that during the course of assessment proceedings, the Assessing Officer had inquired in detail regarding the method of revenue recognition and the same is evident from notice issued under Section 142(1) of the Act dated 07.01.2019, and notice dated 25.04.2019, in which due enquiries were made by the Assessing Officer regarding the methodology of revenue recognition adopted by the assessee. In response to the above notices, the assessee had submitted reply (reproduced at Pages 46-53 of the Paper Book) in which complete working of revenue recognition was submitted before the Assessing Officer. Further, the assessee also submitted another reply to the Assessing Officer (reproduced at Page 62 of the Paper Book) in which the assessee gave clarification with regards to the revenue recognized by the assessee for the impugned assessment year. Therefore, it was submitted that the Assessing Officer had made due enquiries with respect to revenue recognition policy of the assessee. Further, the Counsel for the assessee also submitted that the balance amount income of Rs. 2,30,45,468/- has also been offered to tax by the assessee in subsequent assessment years and details thereof were also furnished before the Ld. PCIT, as well. The Counsel for the assessee submitted that the fact that the balance amount of Rs. 2,30,45,468/- has been recognized as revenue in the subsequent years has also not been disputed by Shreeji Associates vs. PCIT Asst.Year –2017-18 - 4– the Tax Authorities. Further, the Counsel for the assessee submitted that this basis of revenue recognition has been consistently followed by the assessee for various years, which have also been duly accepted by the Tax Authorities and it is only for this year that proceedings under Section 263 of the Act were initiated.

In response, Ld. D.R. placed reliance on the observations of Ld. PCIT in the 263 order.

On going through the contents of the order passed under Section 263 of the Act and the submissions of the assessee, we observe that the assessee has specifically submitted that the balance revenue had been recognized by the assessee in subsequent years and hence no prejudice was caused to the Revenue. However, while passing the 263 order, the Ld. PCIT has not dealt with this aspect submitted by the assessee while holding the order to be erroneous and prejudicial to the interest of the Revenue. Further, we observe from the records placed before us that the Assessing Officer had made due enquiries with regards to the methodology of revenue recognition adopted by the assessee and there is apparently no lack of the enquiry on part of the Assessing Officer, on this aspect. Accordingly, looking into the facts of the instant case, we are of the considered view that so far as this issue is concerned, the assessment order cannot be held to be erroneous, in so far as prejudicial to the interest of the Revenue.

In the result, Ground No. 1 of the assessee’s appeal is allowed.

During the course of 263 proceedings, PCIT observed that the Assessing Officer had made addition of Rs. 6,20,506/- on account of depreciation on building, out of total depreciation of Rs. 20,68,353/- claimed by the assessee. The Assessing Officer noted that assessee had let out some portion of the building and offered the income received as “income from house property” after claiming deduction @30% under Section 24 of the Act. The Assessing Officer also noted the assessee had also claimed depreciation on his property, but he was of the view that 30% of depreciation was to be disallowed on building since 30% of the area (which was 1100 sq. feet out of a total of 37,000 sq. feet) was let out by the assessee. On going through the case records, the PCIT observed that the Assessing Officer had made disallowance of depreciation only in respect of the ground floor banquet hall. However, on perusal of the “rent agreement”, it is evident that assessee has rented 11 fully furnished guest rooms on first floor and had also rented out Pearl hall at second floor, along with furnitures and fixtures. Accordingly, depreciation on the remaining assets which were let out by the assessee was also required to be disallowed by the Assessing Officer. On going through the case records, PCIT observed that the Assessing Officer neither made disallowance of depreciation with respect to the further portion let out by the assessee as per rent agreement nor any inquiry on this issue was made during the course of assessment proceedings. During the course of 263 proceedings, the assessee submitted that the lease agreement was primarily for ground floor banquet hall. The Pearl hall on the second floor as well as other rooms Shreeji Associates vs. PCIT Asst.Year –2017-18 - 6– were just to act subservient to the main banquet, when needed. Otherwise, these were reserved for club activities. The assessee submitted that it was entitled to use the banquet hall when there were no functions booked by Shree Events and Decorators i.e. the assessee. In fact, when the rooms were not being utilized for marriage seasons, these rooms were being used for the club activity of the assessee, so as to facilitate the club members. Therefore, basically there was no need for disallowance of depreciation, as the assessee itself had actually used the entire facilities throughout the year on different dates.

However, PCIT was of the view that as per the assessment order, description of the property let out was mentioned as banquet hall on “ground floor”. However, on perusal of “rent agreement” furnished by the assessee during the course of assessment proceedings, it was observed that the assessee had rented 11 fully furnished guest rooms at first floor and Pearl hall at second floor, along with furniture and fixture. Accordingly, depreciation on the remaining let out assets is not allowable, since assessee earned rental income thereon and accordingly, depreciation was required to be disallowed thereon. However, on perusal of the case records, PCIT noticed that while finalizing the assessment, the Assessing Officer has not made any verification or enquiry on the above issue, which should have been made during the course of assessment proceedings. Accordingly, the assessment order was held to be erroneous and prejudicial to the interest of the Revenue.

Before us, the Counsel for the assessee primarily reiterated the submissions made before the PCIT. The Counsel for the assessee drew our attention to the fact that the assessee had earned a sum of Rs. 39.92 lakhs as Shreeji Associates vs. PCIT Asst.Year –2017-18 - 7– Revenue from club activities. The Counsel for the assessee drew our attention to notice dated 26.12.2019 by the Assessing Officer asking the assessee to justify as to how the assessee has claimed deduction under Section 24 of the Act as well as depreciation with respect to the same property. In response, the assessee replied to the same, in which the assessee submitted that the assessee has let out only the banquet hall on the ground floor for earning rental income whereas rest of the areas were being utilized by the assessee for the purpose of club related activities. Therefore, the assessee was entitled for claiming deduction both under Section 24 of the Act with respect to premises let out by the assessee and was entitled for claiming depreciation with regards to the portion of property which was being utilized by the assessee for running club activities. Further, it was submitted that even the depreciation which was disallowed by the Assessing Officer was not warranted, since during the period when the functions were not being conducted by the lessee, the assessee was effectively using this premises for it’s business activities. However, in order to avoid litigation, the assessee did not file appeal before Ld. CIT(A). The Counsel for the assessee also placed reliance on various cases including the case of Shreeji Prints Pvt. Ltd. 282 taxman 464 (SC) on the proposition that once Assessing Officer had made detailed enquiries and taken a legally plausible view, the assessment order could not be held to be erroneous and prejudicial to the interest of the Revenue.

In response, Ld. D.R. placed reliance on the observations made by PCIT and stated that the Assessing Officer has incorrectly computed the area which has been let out by the assessee and has also, therefore, incorrectly Shreeji Associates vs. PCIT Asst.Year –2017-18 - 8– computed the depreciation on the same. Therefore, there was an evident lack of enquiry by the Assessing Officer as to the correct amount of depreciation which was to be disallowed, thereby rendering the assessment order as being prejudicial to the interest of the Revenue.

We have heard the rival contentions and perused the material on record.

We observe that the assessee has stated before us that since effectively the entire area was being used by the assessee, therefore, the Assessing Officer erred in even disallowance of part of the depreciation claimed by the assessee. However, this is not the subject matter before us, since the assessee has not filed any appeal against this issue of partial disallowance of depreciation. Further, the fact that the with respect to the same property, the assessee can both claim deduction under Section 24 of the Act (with respect to part property which was let out) and depreciation for the balance part which was used by the assessee as it’s business is also not the issue for consideration before us, since the same is not emanating from the directions / observations made by the PCIT in the 263 order. The limited issue for consideration before us is that whether the Assessing Officer has correctly computed the quantum of disallowance of depreciation. The Assessing Officer was of the view that since the ground floor area had been let out, which constituted about 30% of the total constructed area, the assessee is not eligible for claim of depreciation with respect to this portion which had been let out. However, PCIT observed that on a bare perusal of the rent agreement, it is evident that the assessee had not only let out the ground floor, but also the pearl hall at second floor, eleven guest rooms at first floor, open terrace adjoining the Pearl hall and other Shreeji Associates vs. PCIT Asst.Year –2017-18 - 9– furnitures and fixtures as per Annexure-A to the “rent agreement”. However, while disallowing the claim of the assessee with regard to claim of depreciation, this part of the area which had been let out, was not taken into consideration by the Ld. AO while disallowing depreciation. The claim of depreciation has been disallowed on the basis that only the ground floor premises had been let out by the assessee. The assessee has contended before us that as per terms of rent agreement, when the guest rooms were not in use, the assessee was entitled to use the same for facilitating it’s club members. The guest rooms were being used for only a small part of the year by the lessee during the marriage season and for the rest of the year it was the assessee who was effectively using the guest rooms. However, on going through the case records, we observe that this aspect was not discussed by the Ld. Assessing Officer while disallowing the claim of depreciation, in part. The Assessing Officer was of the view that only the ground floor had been let out, which is clearly contrary to the terms of the Rent agreement. Further, from the assessment records, there is no discussion on this aspect as well that it was the assessee who was effectively using the rooms for it’s business purposes for the entire part of the year. Therefore, in our view, the PCIT has correctly observed that the very basis of disallowance was on an incorrect understanding of facts by the Assessing Officer, which resulted from evident of lack of enquiry on this aspect, during the course of assessment proceedings. The Counsel for the assessee cited various judicial precedents in it’s support. However, it is a well-established principle that each case is rendered on it’s own set of facts and cannot have general applicability to other cases, unless there is an absolute parity of facts. In our considered view, judicial precedents cited by the assessee have no applicability to the above set of facts, which are peculiar to the assesse only. Accordingly, the judicial precedents relied upon by the assessee would be of no assistance, looking into the assessee’s set of facts. In our considered view, PCIT has correctly observed that the assessment order was framed on an incorrect presumption of facts and also there was a lack of enquiry on the correct amount of area which was let out and therefore, we find no infirmity in the observations made by Ld. PCIT on this issue, so as to call for any interference.

In the result, Ground No. 2 of the assessee’s appeal is dismissed.

In the result, the appeal of the assesse is partly allowed. This Order is pronounced in the Open Court on 17/01/2025