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Facts
The assessee, engaged in buying and selling properties, sold six flats out of seventeen constructed. The AO, disagreeing with the assessee's calculation of profit and cost of acquisition, referred the matter to the DVO. The AO then made an addition to the taxable profit by re-allocating the cost of construction.
Held
The Tribunal held that the cost of common areas (corridors, parking, etc.) should be included in the cost of flats sold as they are incidental to the business. The AO's method of calculating profit by excluding common areas was found to be incorrect.
Key Issues
Whether the cost of common areas in a building should be included in the cost of saleable flats for calculating taxable profit.
Sections Cited
250, 143(3), 144C(3), 142A
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Income Tax Appellate Tribunal, LUCKNOW ‘B’ BENCH, LUCKNOW
A.Y. 2019-20 Dev Anand Bhatt, Dev Towers, vs. DDIT/ADIT, 1/251, Joshi Garden Nawabi INTL, Lucknow Road, Haldwani PAN:ANOPB1987A (Appellant) (Respondent) Assessee by: Sh. Prashant Kacker, C.A. Revenue by: Sh. Amit Kumar, DR Date of hearing: 16.07.2025 Date of pronouncement: 28.08.2025 O R D E R PER NIKHIL CHOUDHARY, A.M.: [ This is an appeal filed by the assessee against the orders of the ld. CIT(A)-2, Noida under section 250 of the Income Tax Act, 1961, dated 29.11.2024, dismissing the appeal of the assessee against the order passed by the ld. AO, under section 143(3) r.w.s. 144C(3) of the Income Tax Act on 28.04.2022. The grounds of appeal are as under:- “I. On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals), erred in confirming the addition in order U/s 143(3) read with section 144C(3) of the Act amounting to 42,50,737.00 against facts and law. II The Appellant respectfully, submits as under:-
1. The Learned Commissioner of Income Tax Appeals (CIT-A) has without going into the facts and not relying on the practicality of the case has not observed that the appellant had rightly offered income for tax.
2. That the order is bad in law, not in agreement with facts and is against the principles of natural justice. III. The Appellant craves to leave to add, alter, amend, and/or to modify any Grounds of Appeal, if necessary.”
Dev Anand Bhatt A.Y. 2019-20 2. The facts of the case are that the assessee filed a return of income for the assessment year 2019-20, declaring a total income of Rs.74,02,660/- . The case was selected for complete scrutiny on account of substantial refund claimed by the assessee. During the course of assessment proceedings, the ld. AO found that the assessee was in the business of buying and selling immovable properties. He observed that during the year, the assessee had sold six flats out of seventeen, situated at Nawabi Road, Haldwani (Dev Tower) which had been constructed between 2012 to 2017. These flats had been shown as stock in trade in the profit and loss account. The six flats were sold for a total amount of Rs.2,15,05,000/-. To determine the cost of seventeen flats for the purpose of calculating the taxable profit, the ld. AO referred the same to the DVO under section 142A of the Income Tax Act, vide letter dated 24.09.2021. While the assessee calculated the profit on the sale of the above six flats at Rs.10,88,020/-, by considering the total cost of acquisition at Rs.4,87,52,746/-, the DVO estimated the cost of acquisition at Rs.4,86,64,500/-. Thus, there was little difference in the details provided by the assessee and that determined by the DVO. However, the ld. AO held that the DVO had only estimated the cost of acquisition of the seventeen flats, whereas the assessee had tried to suppress taxable income, by considering the cost of entire building against the sale of six flats, which was factually incorrect and not allowable. He was of the view that proportionate cost had to be considered while calculating the profit on sale of the part of the building hence, he reduced the cost of acquisition of the flats to the actual area of the flats and as a result of this, he calculated the taxable profit at Rs.53,38,758/-. The said view point was confronted to the assessee vide a draft assessment order. The assessee was allowed time of 30 days to accept / file objections/ prefer an appeal to the DRP and vide his reply dated 29.03.2022, the assessee objected to the valuation done by the ld. AO. He pointed out that only six of the flats had been sold during the relevant previous year, but the purchases and development expenses had effect on all the sold and unsold flats at the end of the relevant previous year, as closing stock aggregating to Rs.2,85,32,665/-. Only the input cost of Rs. 6,00,000/- had 2 Dev Anand Bhatt A.Y. 2019-20 been taken into consideration for arriving at a profit of Rs.10,88,020/- and this profit had been arrived at by not considering the acquisition of Rs.4,87,52,746/-, but this cost needed to be reduced, by the closing stock appearing in the trading and profit and loss account at Rs.2,85,32,665.63/-, which was the cost of unsold flats which has been considered as opening stock in subsequent year when the remaining flats were sold. The proposal given in the draft assessment order was against accounting principles and it was also pointed out that there was a discrepancy in measurement as taken by the ld. AO and as pointed out by the assessee. The ld. AO considered the objections of the assessee but rejected it. He held that the cost of purchase taken by the assessee pertain to the entire building, having a basement plus five floors, with seventeen numbers of flats. He stated that the assessee had tried to reduce the taxable income by considering the cost of the entire building against the sale of six flats which was factually incorrect and not allowable. Therefore, he said that proportional cost had to be considered while calculating the profit on sale of part of the building. He computed this profit at Rs.53,38,758/- and after allowing for the profit already claimed by the assessee, made an addition Rs.42,50,737/-.
Aggrieved by the said assessment order, the assessee went in appeal to the first appellate authority. The ld. CIT(A) considered the submissions of the assessee that the corridors, basement parking, lift and stairs were common areas in a residential building which could not be sold and to arrive at the cost of the salable part, the cost incurred on the said amenities must be included because these were incidental to the cost in the business of the assessee. The ld. CIT(A) held that as per common knowledge and widely followed practices, when a buyer purchases a property, the amount paid by him covers all the costs incurred by the builder in the construction of the property, which incudes cost incurred and common facilities. It includes not only the cost of materials used in the construction of the flat that he buys, but also includes a cost incurred by the builder in the purchase of land as well as the cost incurred in building Dev Anand Bhatt A.Y. 2019-20 the foundation, parking space, lift, stairs, corridors and recreation areas (if any). The ld. CIT(A) held that if a builder was providing certain facilities to the buyer that came along-with the flat, it was logical for him to expect payment in return for the same. He, therefore, held that the assessee’s claim that the cost incurred for constructing the common areas was incidental to the cost of business, was absurd and without any merit. While it was true that the common areas could not be sold separately, it was equally true that the buyer had to pay for his share of facilities that come along-with the flat that he purchases. In view of the same, the ld. CIT(A) held that the ld. AO had rightly calculated the cost incurred in the construction of the flats sold by the assessee by considering the cost incurred on total constructed area of the building. Accordingly, the addition made by the ld. AO was sustained.
Aggrieved with the said orders, the assessee came has come in appeal before us. Sh. Prashant Kacker, C.A. (hereinafter referred to as the ld. AR) appearing on behalf of the assessee submitted that the assessee was an NRI, who during the relevant previous year and earlier years, had constructed a residential building. To ascertain the cost of construction, the matter was referred to the Departmental Valuation Officer and the Departmental Valuation Officer did not draw any adverse inference. The said building had seventeen residential flats, out of which six were sold during the relevant previous year for total consideration of Rs.2,15,05,500/- and the cost of the remaining eleven flats was disclosed at Rs.2,85,32,665.63/- in the final audited accounts that were submitted along with a return of income, in which a taxable profit of Rs.10,88,020/- was disclosed. The ld. AO included the common area in arriving at the cost of six flats sold and had made an addition of Rs.43,50,737/- which had been sustained by the ld. CIT(A). It was submitted that the ld. AO in his order has considered the total area in the building at 21,845.66 Sq Ft. and, after considering the area of six flats being 7171.3450 Sq Ft., had arrived at a cost of six flats to be Rs.1,59,69,343/-. The assessee submitted that the common areas could not be sold and to arrive at the Dev Anand Bhatt A.Y. 2019-20 cost of the saleable part, the cost on these common areas has to necessarily be included, which is an incidental cost in the business of the assessee. After removing such common areas, the salable part comes to 18,932 Sq. Ft. It was further submitted that:- i. The salable area in the building after excluding common area was Rs.18,932 Sq Ft. instead of 21,845.66 Sq Ft., as determined by the ld. AO. ii. The area of six flats sold was 7852 Sq. Ft. and not 7171.3450 Sq. Ft. as stated in the assessment order. iii. The cost of construction of total building should be Rs.4,87,52,746/- and not Rs. 4,86,64,500/- as no adverse view was taken by the DVO while making the valuation. It was, therefore, submitted that right calculation would have been the total cost incurred by the appellant, into area of six flats sold divided by total area of saleable building being 18,932 Sq. Ft. Thus, the cost of flats sold, came to Rs.2,02,20,080.37/-. The above cost of flats sold, as reduced by the total cost of building, came to Rs.2,85,32,665.63/- and it was submitted that when this figure was compared with the audited final accounts submitted by the assessee, there was no variation. The ld. AR placed reliance on the judgment of the Delhi Bench of the ITAT in the case of Trehan Promoters and Builders Private Limited vs. ACIT, 25(2), New Delhi, where in para 10 of its order, the ld. Bench had held that the non-saleable areas were necessary requirements for real estate projects. He assailed the findings of the ld. CIT(A) and submitted that the amount spent on the common areas had to be included in the cost of the flats because it was not the case that the common areas would be purchased separately by the flat buyers and nor was it the case that the common areas would not be sold at all, because there could no residential building without common areas. Thus, it was submitted that the cost of the common areas was included in the cost price of the flat and by not including the same, the ld. AO had artificially increased the profits Dev Anand Bhatt A.Y. 2019-20 in respect of the project. It was, therefore, prayed that the common areas should be considered within the flats that were being sold and the cost of these should be proportionately allowed in respect of the flats sold so as to arrive at the profit.
On the other hand, Sh. Amit Kumar, DR (hereinafter referred to as the ld. DR) submitted that the assessee was attempting to suppress the amount of profit derived from the sale of each flat by including the entire cost of construction of the building including common areas into the cost of the flats being sold. In his view, the calculation should be made by dividing the total cost of the building by the total area of the building including common areas and then multiplying by the area of the flat sold.
We have duly considered the facts and circumstances of the case. The common areas are intrinsic to any part of the building and their cost is almost always loaded on to the cost of the flats being sold, as the purchasers are common owners of the common area. The question that arises is how the profit on the sale of a flat is to be determined. The ld. AO is of the opinion that the total cost of the building has to be divided by the total area (including the common areas) and then multiplied by the area being sold. The assessee, on the other hand, is of the view that the total cost of the building (including the cost of the common areas) has to be divided into the area of the flats actually being sold and then multiplied by the area of the individual flat. This would allow for the common areas to be included in the cost of the flat whereas if the formula adopted by the ld. AO was taken, then the common areas would not be included in the cost of the flat and since there was no evidence to indicate that the common buyers had purchased them separately or that they had not been sold, that valuation could not be accepted. For the same, the assessee has placed reliance on the judgment of the ITAT in the case of Trehan Promoters and Builders Private Limited vs. ACIT in and CO No.9/Del/2020 dated 19.10.2022. After considering the issues, we are in agreement with the assessee. The cost of constructing the entire 21,845.66 Sq. Ft., has to be loaded onto the overall area of the seventeen flats i.e. 18,932