SWASTIK BUILD SOLUTIONS P.LTD,NEW DELHI vs. ITO, WARD-22(4), NEW DELHI

Before us, the ld. counsel for the assessee, Mr. Manoj Patwari submitted that for the property located at W-54 (both front and rear portion), huge interest was paid on said loan which was capitalized by the assessee to the value of the stock. A sum amounting to Rs.1,99,13,104/- was added to the cost of the impugned property (i.e. the rear portion of W- 54) in earlier years. This led to overvaluation of the said property making its book value at Rs.4,37,63,104/-. After considering the market viability and in compliance with Accounting Standard-2 to give true and fair view of financial statement, the management of the assessee-company mutually decided to revalue the said property at market value, and therefore, the cost of said property was valued as on 31/03/2013 at Rs.3,37,63,104/-. The reason for such revaluation was that the cost of the impugned property was very high compared to the market value due to capitalization of interest paid on the loan for the purchase the said property. He further gave the calculation of analysis on market value and the circle rate of the said property at the time of revaluation as on 31.03.2013 which was as under: Total area of land covered by the rear portion = 827.75 /10 =82.775 sq. mt. -- (a) Circle rate of Per Sq. Mtrs. Land (Category B) = Rs.2,04,600- (b) Circle rate of proportionate land occupied (rear portion) = Rs. 1,69,35,765/- --[(c)=(a)X(b)] Circle rate of Per Sq. Mtrs. Construction^ per PB page 26) = 17,400 -- (d) Area of constructed property = 418 sq. mts.-- (e) Circle rate of proportionate constructed area (rear portion) = 418.06/2 X 17400 = Rs.36,37,122/- -[(f) = (d)X(e)/2] Circle rate of impugned property as on 31/03/2013 = Rs.2,05,72,887/- --[(f)+ (c)] Book value of the impugned property after revaluation as on 31/03/2013 = Rs.3,37,63,104/- Further, even after revaluing the impugned property, its market value (or the revalued book value) is more than its circle rate. This fact proves that the appellant company was justified in revaluing the said property to come to terms with the market conditions and valued its stock at the lower of its cost or net realizable value.

He further submitted that profit earned on sale of the impugned property has been offered to tax in the year of sale, and therefore, addition of Rs.1 crore made to the income of the assessee during the year under consideration will cause undue hardship in the hands of the assessee because tax has already been applied to the Revenue on the same amount in the financial year 2015-16.

On the other hand, ld. DR strongly relied upon the reasoning of the Assessing Officer and ld. CIT (A) and submitted that Assessing Officer has given a very categorical finding to the revaluation done by the assessee of the said property in closing stock was not justifiable for the reason that even the circle rate was higher and the property which was sold was at a much higher rate, therefore, undervaluation was done to suppress the property during the year. Accordingly, the order of the Assessing Officer and ld. CIT(A) should be confirmed.

We have heard the rival submissions and perused the relevant findings given in the impugned orders. The Assessing Officer has disturbed the revaluation of the closing stock of the inventory of the rear portion of the property situated at W- 54, 1st floor, Greater Kailash, which was valued at Rs.1 crore less than previous year, i.e., it was reduced from Rs.4,37,63,104/- to 3,37,63,104/-. The reasoning given by the Assessing Officer has already been discussed above. The assessee’s main contention has been that it has taken a bank loan of Rs.7.56 crores to purchase the property for both, front and rear portion of property, W-54, 1st Floor, Greater Kailash and the interest paid in the said loan has been capitalized to the value of the stock. The sum amounting to Rs.1,99,13,104/- was added to the cost of the said property being rear portion of W-54, 1st Floor, Greater Kailash in the earlier years, because of this reason there was an overvaluation of the said property and the book value get enhanced of the said amount. After considering the market viability and to give true and fair view of the financial statement, the assessee had revalued the said property and the valuation was reduced by Rs.1 crore, because as compared to the market value due to capitalization of interest shown in the affiliated figure. One of the core reasons of the Assessing Officer was that the circle rate of the impugned property was higher.

Now before us, the ld. counsel for the assessee has demonstrated that circle rate of per sq. meter of category B classified for Greater Kailash was Rs.2,04,600/- per sq. meter. The circle rate of the proportionate land occupied for the rear portion will work out to Rs.1,69,35,765/-. Further, circle rate of per sq. mtr for the construction would be Rs. 17,400 per sq. mtr which worked out to Rs.36,37,122/- and accordingly, the actual circle rate as per the Government Notification as on 31.03.2013 would be at Rs.2,05,72,887/- as compared to the book value of the impugned property which has been taken at a much higher figure, i.e., Rs. 3,37,63,104/-. Accordingly, it has been established by the assessee that market value of the revalued book value was more than its circle rate. Apart from that, one important fact is that in the subsequent year, the assessee had sold the property and has offered tax on the profit and if any such enhancement in the valuation of the closing stock is made then it will lead to double addition which will cause undue hardship to the assessee and that is the reason why the Ld. CIT (A) has directed the Assessing Officer to give consequential relief in the subsequent year in which property was sold. Further, it was noticed that Assessing Officer while determining the circle rate has considered, the covered area of the impugned property wrongly at 827.8 sq. mtr and valued the cost of the property as per circle rate at Rs.5,25,65,300/-, whereas the total covered area of the impugned property is 185.80 sq. mtr. which is evident from the purchase deed of the property placed at pages 55 to 77 of the paper book; and if the correct value is determined as per the rate used by the Assessing Officer, then it would be only Rs.1,17,98,300/-. This also points out the flaw/error and the working given by the Assessing Officer. Thus, the reasoning given by the Assessing Officer to disturb the revaluation of the property is not based on correct premise. Moreover, if the assessee has demonstrated that the revaluation of the closing stock has been done as per cost or market rate whichever is lower, which is an acceptable method of accounting for the closing stock, then no interference is called for. Accordingly, the addition made by the Assessing Officer and sustained by the ld. CIT (A) is directed to be deleted.

As regards the addition on account of notional rent of Rs.20,59,417/-, the Assessing Officer noted that there were certain properties which were shown as part of closing stock and one property was taken from stock-in-trade to capital asset and was shown as part of fixed asset as on 31.03.2011. AO held that provision of Section 23(1)(a) is clearly applicable and no notional rent has been offered to tax even for the flats held as stock-in-trade. In support, he relied upon the judgment of Hon’ble Delhi High Court in the case of CIT vs. Ansal Housing Financial and Leasing Co. Ltd. (2013) 354 ITR 180. In response to the show cause notice, the assessee’s submission as under: “2. The property C-35, First Floor and second Floor, have been given on rent for 2 months and 3 months respectively for relevant financial year because the above mentioned property was under construction and not ready for let-out during the remaining period of relevant financial year, hence there is no rental income has been earned during that period.

However, the Assessing Officer rejected the assessee’s contention and worked out the notional rent in the following manner:

The said finding of the Assessing Officer has also been confirmed by the Ld. CIT (A).

Before us, ld. counsel submitted that there are three properties involved in which addition on account of notional rent has been made by the Assessing Officer as under.

With regard to each property his submission are as under:

Contention in the case of W-54, rear and front portion In the case of property ‘W-54’, the same was under construction and not ready for use. This fact can be verified from the first electricity bill of the said property dated 11-12-2014 which also discloses the date of installation or Energisation Date as 01-11- 2014, which is after the relevant previous year. Therefore, the addition on account of deemed rent of Rs. 8,75,000/- (rear portion) and Rs.4,81,000/- (front portion) in this case is baseless and liable to be deleted.

Contention in the case of B-100 In the case of property ‘B-100’, the same was also not ready for use. The facts in this case can be verified from the Mutation Certificate dated 19-07-20l2 issued by the Municipal Corporation of Delhi which shows that the said property was not ready to let out until the above date.(Copy of Mutation Certificate at PB Page.79). It is further submitted that the said property was used for business purposes right after it was ready for use and it was only later that it was occupied by the Director of the appellant company. Hence, the deemed rent for such property cannot be assumed for the full year.

Thus, he submitted that there are arbitrary assumption and calculation of deemed rent with the impugned property, i.e., 2% of the cost and the entire addition should be deleted.

Ld. DR strongly relied upon the order of the Assessing Officer.

After considering the rival submission and perusal of the relevant finding given in the impugned orders, we find that, first of all, in the case of property, W-54, 1st Floor, Greater Kailash, the same has been under consideration and was not ready for use and this is evident from the first electricity bill and the date of installment, which was installed in the month of December, 2014. Once the property itself was under construction stage with no electricity connection then there cannot be any deemed or notional rent which can be added u/s. 23(1)(a). Accordingly, the addition of Rs.8.75 lac for the rear portion of the property and Rs.4.81 lac for the front portion of the property is directed to be deleted.

Regarding other property of B-100, Sarvodaya Enclave, First Floor, same was also not ready to use which has been proved by way of Mutation Certificate dated 19.07.2012 issued by MCD which shows that it was not ready to let out. Further, the said property has been used for the business purpose of the assessee when it was ready for use which was much later and had occupied by the Director of the company. Hence on this property also, there cannot be any addition on account of deemed rent. Lastly, with regard to the property at C-75, 1st and 2nd Floor, Shivalik, again it has been brought on record that the said property was completed after 01.04.2014 for which ld. counsel has filed copy of the assessment order passed by Deputy Assessor & Collector of South Delhi Municipal Corporation. Once, this property was not ready for use, there is no question of any deemed rent. Accordingly, no addition on account of notional deemed rent u/s.23(1)(a) can be made, once the property itself was either in the stage of construction or was not ready for use. On the facts of the present case, as discussed above, the ratio of the principle of Hon’ble Delhi High court in the case of CIT vs. Ansal Housing Financial and Leasing Co. Ltd. (supra) cannot be applied.

In the result, the appeal of the assessee is allowed.