THE ITO, WARD-1(1)(1),, AHMEDABAD vs. M/S. AARYA REALITIES PVT. LTD.,, AHMEDABAD

आदेश/O R D E R PER P.M. JAGTAP, VICE-PRESIDENT :

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 3 Total revenue from operations as per P & L A/c 6,20,79,312/- Less: Excess sale consideration taken by the assessee in Sales account of 6 properties for calculating the Business income (sale shown in the accounts Rs.5,73,79,467 – Rs.5,43,25,799 Sale value of 5 Properties as per the copy of deed submitted 30,53,668/- 5,90,25,644/- Less : Cost of construction incurred for 13792 sq. ft. 3,26,66,474/- Sold during the year Profit earned after considering other expenses 2,63,59,170/- 3.1 Accordingly, the business income of the assessee was determined by the Assessing Officer at Rs.2,63,59,170/- as against the loss of Rs.1,29,02,944/- claimed by the assessee in the assessment completed under Section 143(3) of the Act vide an order dated 27.03.2015.

3.2 Against the order passed by the Assessing Officer under Section 143(3) of the Act, an appeal was filed by the assessee before the learned CIT(A) and the following submissions in writing were made on behalf of the assessee while challenging the estimation of its business profit as made by the Assessing Officer at Rs.2,63,59,170/-:-

“6.3 The Appellant in Appeal proceedings furnishes following facts and explanations on the estimated addition made by AO before your goodself:

(i) The project was started by the appellant company "Aarya Realities Pvt Ltd" as per Development Agreement dated 21-11-2006, where commercial premises was to be constructed on land of "Advait Realty Pvt. Ltd." (Pg. no. 29 to 63).

(ii) The commercial building was constructed with Ground floor and other four floors. The B.U. (Building usage) permission was given by Ahmedabad Municipal Corporation on 23-06-2007 (Pg. no. 22).

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 4 (iii) The appellant company sold out following units of second floor, third floor and fourth floor in AY 2007-08, AY 2008-09 and AY 2009-10. The sale proceeds was charged for land and building as well as shares contribution pertaining to shares of Advait Realty Pvt. Ltd. The summary of sale of units is as under:

Office Floor Area Date of Construction Share Total Sale Sale rate No. (Sq. ft) sale amount amount Deed Amount per sq. ft. 401 4th Floor 2123 06.12.06 613962 1745578 2359540 1111 301 3rd Floor 6907 03.03.07 5959236 5678064 11637300 1685 402 4th Floor 2392 20.06.07 1122631 1966119 3088750 1291 403 4th Floor 2392 20.06.07 1122631 1966119 3088750 1291 201 2nd Floor 1875 23.04.08 2818185 1541815 4360000 2325 202 2nd Floor 1875 23.04.08 2818184 1541816 4360000 2325 Total 17564 14454829 14439511 28894340 (iv) The construction sale, which includes land and construction sale accounted for in the books of Appellant Company "Aarya" and the share amount is distributed to the shareholders of the company owning land "Advait".

(v) The construction cost including land cost is worked out by AO in the show cause notice amounting to Rs. 749,82,255/-, which include land cost of Rs.337,65,056/-. The sellable area of project is 31356 sq. ft., out of which 17564 sq. ft. was sold out till AY 2009-10 and the remaining area of 13792 sq. ft. sold out in AY 2012-13. The details are as under:

Office Floor Area {Sq. Date of Construction Share Total Sale Sale rate No. Ft.) Sale Amount Amount Deed per sq. ft. Amount GF Ground 5976 28-02-12 23585937 4914063 28500000 4769 Floor 101 First Floor 1875 30-03-12 5428182 1541818 6970000 3717 102 First Floor 1875 28-02-12 5428185 1541815 6970000 3717 103 First Floor 2033 28-03-12 5888266 1671734 7560000 3718 203 Second Floor 2033 30-03-12 2594067 1671733 4265800 2098

13792 429246S7 11341163 54265800 Thus, 13792 sq. ft. area was sold out in AY 2012-13, which mainly consist of ground floor and first floor. The construction sale includes land and construction sale accounted for in the books of Appellant Company "Aarya" and the share amount is distributed to the shareholders of the company owning land "Advait".

(vi) For computing revenue from operations amounting to Rs. 590,25,644/-, the AO has taken following amounts:

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 5 Particulars Amount (Rs) Amount (Rs) Sale proceeds of 5 Offices in AY 2012-1 3 54265800 Rent income from above offices 3950543 Other incomes (forfeiture of rent deposit) 727875 4678418 Maintenance income 21427 Total 58965645 AO has taken at Rs. 590,25,644/-, as in Para no. 4.2, Pg. no. 3 of 58965645 Assessment Order sale consideration of Ground floor taken at Rs. 285,60,000/-1 whereas, the correct amount is of Rs. 285,00,000/-, as mentioned in Chart on Para no. 4.4, Pg. no. 5. (Thus, the revenue is more by Rs. 60,000/-).

(vii) The AO computed cost of construction for 5 offices sold out in AY 2012-13 of 13792 sq. ft, at Rs. 326,66,474/-. The cost worked out by average formula i.e.. total construction cost of Rs. 749,82,256/- (land cost and construction cost) divided by 31658 sq. ft. The total cost worked out by AO is as under:

Particulars Amount (Rs) Amount (Rs) Land cost 33765056 Construction cost - B/f from last year 35503652 Total 69268708 Cost incurred during AY 2012-13: Purchase Expenses 790118 Electric Line Expenses 237390 Labour Expenses 1167080 Finance Expenses 1509170 Other Expenses 2009789 5713547 Total 74982255 Sold out area 13792 sq.ft./ Total Area 31658 sq. ft. Per sq. ft. 2368 (viii) Thus, the cost per sq. ft. comes to Rs.2,368/-. Whereas, the sellable cost per sq. ft. is different on various floors i.e. on ground floor highest, on first floor higher and on other floors lower than these floors. Therefore as per sale value of each floor, the project cost required to be distributed. The allocation of project cost on sale rate / weighted cost for each floor is as under:

SN Floor Unit Name of Members Super Rate of % Allocation of No. Buildup sale Allocation project Cost Sq. Ft. of project Area cost 1 Ground GF Girishbhai B. Patel HUF & 5976 4700 35.07 24295741 Floor Others 2 First 101 Lokesh V. Patel & 3 Others 1875 6201291 Floor 102 Purshottam S. Patel & 4 others 1875 6201291 103 Bharti S, Patel & 5 others 2033 6723853 Total 5783 3700 27.61 19126435

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 6 3 Second 201 Lokesh V. Patel & Others 1875 3687254 Floor 202 Lokesh V. Patel & Others 1875 3687254 203 Ilesh N. Patel & 2 Others 2033 3997967 Total 5783 2200 16.42 11372475 4 Third 301 Kraft Software Pvt. Ltd. 6907 1600 11.94 8270891 Floor 5 Forth 401 Am it Shah / Pratiti Shah 2123 1906664 Floor 402 Mushir Irfan 2392 2148252 403 Irfan Amirkurashi 2392 2148252 Total 6907 1200 8.96 6203168 Grand Total 31356 69268708 (ix) Accordingly, the cost of 5 offices of ground floor, first floor and second floor are as under:

SN Floor Unit Name of Members Super Rate % Allocation of No. Buildup of sale Allocation project Cost Sq. of project Ft. Area cost 1 GF GF Girishbhai B. Pate! HUP & 5976 4700 35.07 24295741 Others 2 FF 101 Lokesh V. Patel & 3 Others 1875 3700 27.61 6201291 102 Purshottam S. Patel & 4 1875 3700 27.61 6201291 others 103 Bharti S. Patel & 5 others 2033 3700 27.61 6723853 3 SF 203 llesh N. Patel & 2 Others 2033 2200 16.42 3997967 Project Cost + Land cost 13792 47420143 Cost incurred in AY 2012-13 5713547 Cost of 5 units as per 53133690 weighted average basis (x) As the properties / commercial units sold out are mainly on ground floor and first floor, therefore, the land cost and construction cost is higher on such floors. These floors also bring higher value in terms of sales and in comparison to other floors. As per genera! practice in the real estate market, these two floors bring 60 to 65% revenue and also the maximum cost attributable to these floors, which is evident from above chart. Hence, the AO has estimated cost per sq. ft. at general basis and not on scientific basis..

In view of the above, the estimated profit on sale of 5 units in AY 2012-13 on total sale price i.e. sale deed price and at the price after reduction of share amount is as under:

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 7 Particulars Amount (Rs) Amount (Rs) Amount (Rs) Total sale Sale price price without shares amount Sale proceeds of 5 Offices in AY 54265800 42924637 2012-13 Rent Income from above offices 3950543 0 0 Other incomes (forfeiture of rent 727875 4678418 4678418 deposit) Maintenance income 21427 21427 Total Revenue 58965643 47624482 AO has taken at Rs. 590,25,6447-, as in Para no. 4.2, 58965645 47624482 Pg. no. 3 of Assessment Order sale consideration of Ground floor taken at Rs. 285,60,000/-, whereas, the correct amount is of Rs. 285,00,0007-, as mentioned in Chart on Para no. 4.4, Pg. no. 5. (Thus, the revenue is more by Rs. 60.000/-). Less: Cost of 5 units as per weighted average basis for -53133690 -53133690 13792 sq.ft. Profit for the year 5831955 -5509208 Thus, there is actual loss to the appellant company of Rs. (-) 55,09,208/-, as the share amount is given to shareholders. However, without prejudice to the workings in P& LA/c, if, the workings of AO are considered, there is profit of Rs. 58,31,955/.

(xi) It is submitted that the project was started as per Development Agreement (Pg. no. 29 to 63). The important conditions of Development Agreement are as under.

"1.1 The Developers to demolish the existing developments and constructions of the Said Land, and to put up construction of commercial complex, consisting of various commercial premises, and to dispose of the same to Company's members and share holders, as prospective acquires in such manner and on payment of such amount and on such other terms and conditions as it may deem fit and proper. The prospective acquirer may be made available the premises as Company's allottee member, or in any other manner whatsoever as the Developer may deem fit.

3.6 To admit and enroll as its members and shareholders as Transferee to acquire eligibility shares all those who may acquire commercial units in the project, as may be recommend by the Developer and / or to enter into or join in such vesting documentation work as may be required depending upon the nature' of transaction.

7.1 The Developer from the gross receipt from the proposed project shall pay to the Company for grant of this Development Rights, the amount equal to as stated in 9.1(b) below, and to be paid as may be received from the project, from time to time.

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 8

9.1 The cost of the project to be worked out by the Developer may include:-

9.1 (a) payment for or towards purchase or acquisition of share capital of the Company

9.1 (b) Amounts equal to or required to meet and pay and discharge all outstanding liabilities of the Company, including referring to meet the capita! cost of the Sale Land / Property, particulars whereof have been separately given by the Company to the Developer.

13.1 The premises in the project to be allotted only to those persons who are already members of the company or who agree to become members of the company, and are eligible for the same, and agree to make such payment towards the allotment or making otherwise available the premises, and to be paid in the manner as may be agreed upon with the Developer."

(xii) The share amount collected from buyers of offices / units against sale of shares by shareholders of Advait Realty Pvt. Ltd was offered for taxation by the shareholders in their hands in AY 2007-08 to AY 2009-10 and AY 2012-13. Summary of share amount collected in AY 2012-13 and capital gain offered in IT Return are as under:

SN Name of Shareholder Share Qty Sale Price Capital Gain 1 Lokesh V Patel 17969 1477591 1196406 2 lleshbhai N Patel 19927 1638597 1328888 3 Prakash B Karia HUF 17971 1477755 1183854 4 Lasti L Patel 5131 421921 340877 5 Priyavandana I Patel 3172 260834 210733 6 Kaushik B Karia HUF 5131 421923 338010 7 Ramubhai N Patel 4400 361812 292315 8 Sejal P. Patel 5500 452265 369164 9 Purvesh R Patel HUF 7709 633911 517312 10 Veenaben R Patel 5498 452101 365262 11 Bharfi S Patel 6898 567222 459729 12 Indira J Patel 15858 1304003 1064147 13 Jalpa K Patel 3334 274155 222953 14 Kamlesh S Patel 3564 293068 236776 15 Sadhana P Patel 15858 1304003 1145423 TOTAL 137920 11341161 9271849 (xiii) It is further submitted that the project was started in the year 2006, the BU permission was received on 23-06-2007 and from that year some offices of third floor and fourth floor were sold out till April 2008 and thereafter there was no sale till February 2012, as it was very difficult for the developer to sell the offices / units due to following reasons:

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 9 (a) In market it was common rumor that the businesses in the left side of road from Mithakhali Six Roads to Mithakhali Railway Crossing are making losses, therefore, there was neither any buyer of properties nor any party to take the same on rent (b) The building "Aarya Arcade" is opposite side of Muslim Society / locality; therefore, no one easily ready to buy and there was maintenance cost of premises, which is increasing cost.

(c) Due to the above reasons, the rates in this area (left side) are very lesser, therefore, there is no recovery of cost + interest, etc. as the project was lying unsold for 5 years.

(d) There was recession in market in this period.

(e) Finally, the units were taken by shareholders of either Aarya Realities or by shareholders of Advait Realty Pvt. Ltd., as there were no buyers and the companies were carrying the offices from long period.

Under the above circumstances, as there were no buyers for offices from last 5 years, finally due to burden of interest and maintenance cost of building, these offices were given on rent and finally transferred to shareholders. Accordingly, the developer company has incurred losses of Rs. 129,02,944/- on account of sale of offices.

6.4 The AO has made various observations in assessment order before estimating profit for the year. Rebuttal to such observations of the AO are furnished as under:

Para AO's observations Rebuttal by Appellant Company No. 4.5 The assessee has not taken the share The amount collected from amount received of Rs.2,57,80,674/- buyers of 5 offices is construction in the P & I Account as appearing in amount and share amount are the Registration Deed of the shown in allotment deed. The properties as sale value. Further, on share amount is transferred to perusal of the Balance Sheet, it is the shareholders of "Advait noticed that the assessee has not Realty Pvt. Ltd" owners of land shown any increase in the share company. Therefore, such capital! or shown any reserve and amount was transferred to the surplus from which it can be seen that shareholders. the assessee has not brought the difference amount of Rs.2,57,80,674/- The construction amount in the books of accounts though it was collected is shown as stated in the Memorandum of construction sale. Allotment of each property that some portion of the sale consideration is towards sale of shares to whom the properties were transferred.

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 10 4.7 It is also pertinent to note here that The land is owned by Advait the assessee is not the owner of the Realty Pvt. Ltd and the land but the land belongs to M/s. development rights were given Advait Realty Pvt Ltd, As per the to Aarya Realty Pvt Ltd, In the Development Agreement, the assessee sale deed / allotment deed, the was given the land for development ownership of the property was purpose only. Therefore, it is not transferred to the buyers by land understandable as to why the land owner and developer i.e. both the cost was transferred to the assessee's parties. The land cost is integral account when the property is being part of cost of building / sold particularly, when the assessee commercial premises was not the owner of the land and constructed by Aarya Realty incurred any expenditure for purchase Pvt. Ltd., which is recovered of land. from buyers at the time of sale. 4.8 .......... Therefore, I proceed to calculate The AO has computed cost of the profit earned by the assessee on the construction by adopting sale of 5 offices taking- the sale value proportionate area of sale to the shown in the sale deed made year the proportionate cost including under' consideration by adopting land value. proportionate area of sale to the proportionate cost including land Whereas, the properties mainly value. Here it is pertinent to mention of ground floor and first floor that the other income shown by the were sold out. Such properties assessee as per P & L account has also fetches higher value in terms of been considered and the total profit sate price and the cost is also earned by it from the business activity attributable to such area in is worked out as under. weighted cost ratio to work out correct profitability. Therefore, the proportionate ratio adopted by AO is incorrect method.

6.5 In view of the above it is submitted that the actual loss as per profit & loss account is of Rs. 129,02,944/-. Whereas, the AO has worked out profit at Rs. 263,59,170/-, where the AO has not given credit of sale proceeds collected for shares of Advait Realty Pvt, Ltd. and also the cost of construction worked out by AO on general basis, whereas, there is scientific basis / weighted cost to be taken for various floors of commercial projects, where highest cost attributable to ground floor and first floor shops / offices and remaining floors are having cost at very lower value. According to this basis, the cost of project attributable to ground floor and first floor is 60 to 65%, which is amounting to Rs. 531,33,690/- and the estimated profit is Rs. 58,31,955/- instead of profit worked out by AO of Rs.263,59,170/-. It is therefore prayed that the profit estimation may kindly be restricted to Rs.58,31,955/- as worked out above.”

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 11 3.3 After considering the submissions as well as the material available on record, the learned CIT(A) decided the issue vide paragraph No.3.4 of his impugned order as under:-

3.4. I have gone through the facts of the case, finding of A.O. in assessment order and submissions of the appellant. The A.O. estimated profit for the year under consideration by taking sale proceeds of 5 offices of Rs.5,42,65,800/-, rent income of Rs. 39,50,543/-, forfeiture of rent deposit of Rs. 7,27,875/-, and maintenance income of Rs. 21,427/-, from such revenue cost of construction incurred for 13,792 sq. ft. (Area sold during the year) was reduced at Rs. 3,26,66,474/- and profit for the year worked out at Rs.2,63,59,170/-. The A.R. of the appellant company stated that the A.O. has not reduced the amount of shares, which is part of sale proceeds as shown in allotment deed executed by land owner as well as developer. Whereas, the A.O. has taken sale amount of offices without reducing share amount, as no reply is given by appellant company regarding share amount received by it, therefore, I do agree with the A.O. to take full value of consideration as sale consideration of 5 offices, which in this case is of Rs. 5,42,65,800/-.

The A. O. from the revenue from operation has reduced cost of construction of Rs. 3,26,66,474/- worked out on proportionate basis for 13792 sq. ft. sold during the year. The A.R. of the appellant company stated that the sale rate as well as cost of construction including land cost is different at all floors of commercial building. He further stated that as per general practice in the real estate market, ground floor and first floor brings 60 to 65% revenue at the same time, the cost allocable / attributable to these floors are also 60 to 65%, for this the A.R. of the appellant company filed workings for computation of cost of 5 offices on weighted basis amounting to Rs. 5,31,33,690/-. After reduction of such weighted cost, the net profit worked out at Rs. 58,31,955/- (Revenue from operations Rs. 5,89,65,645/- less: Cost of 5 offices Rs. 5,31,33,690/-). I have gone through the facts of the case and workings that the sale price of ground floor and first floor is higher than other floors.

Therefore, I am inclined to agree with the appellant that the sale rate of ground floor and first floor is higher than other floors. Similarly, the cost of ground floor and first floor is also higher and same ratio cannot be applied to all floors as applied by AO. Such arbitrary attribution of cost is not giving correct profit for the year, therefore, the cost worked out by AO is not proper as discussed above, therefore, the AO is directed to accept profit after reduction of weighted cost of Rs.5,31,33,690/- as furnished by appellant. Accordingly, the profit estimated by AO Rs.2,63,59,170/- is reduced to Rs.58,31,955/-. This ground of appeal is partly allowed.”

CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 12 3.4 The learned CIT(A) thus restricted the estimation of the business profit of the assessee as made by the Assessing Officer at Rs.2,63,59,170/- to Rs.58,31,955/-. Aggrieved by the relief allowed by the learned CIT(A), the Revenue has raised Ground No.1 in its appeal.

4.1 The other contention raised by the assessee before the learned CIT(A) was that the sale consideration of 5 offices as taken by the Assessing Officer including share amount received towards land cost was not correct and the same should have been taken net of such cost. The learned CIT(A), however, did not accept this stand of the assessee on the ground that the share amount was a part of sale proceeds received by the assessee against 5 offices sold during the year under consideration. We find ourselves in agreement with this view taken by the learned CIT(A). It is observed that the land cost was included by the assessee in the cost of construction claimed as deduction and this being so, we are of the view that the total sale consideration of 5 offices including the share amount received towards land cost should be taken into account for determining profit of the assessee- company. We, therefore, find no infirmity in the impugned order of the learned CIT(A) restricting the estimation of business profit of the assessee- company as made by the Assessing Officer at Rs.2,63,59,170/- to Rs.58,31,955/-; and upholding the same, we dismiss Ground No.1 of the appeal of the Revenue.

4.2 As regards the issue raised by the Revenue in Ground No.2 of its appeal relating to the deletion by the learned CIT(A) of the disallowance of Rs.2,41,365/- made by the Assessing Officer on account of interest expenses, it is observed that an advance of Rs.20,11,378/- was given by the assessee free of interest, while interest expenses of Rs.15,09,170/- was claimed by the assessee as deduction. Since no satisfactory explanation in this regard was CO No. 155/Ahd/2016 ITO Vs. M/s. Aarya Realities Pvt Ltd AY : 2012-13 14 offered by the assessee, interest attributable to the said advance calculated @ 12% amounting to Rs.2,41,365/- was disallowed by the Assessing Officer. On appeal, the learned CIT(A) deleted the said disallowance after having found that the amount of Rs.20,11,378/- was not in the nature of advance given by the assessee but the same was rent deposit which was transferred to the office owners. At the time of hearing before us, the learned Departmental Representative has not been able to bring anything on record to rebut or controvert this finding of fact recorded by the learned CIT(A). We, therefore, find no justifiable reason to interfere with the impugned order of the learned CIT(A) giving relief to the assessee on this issue and upholding the same, we dismiss ground No. 2 of the Revenue’s appeal.

“1. The ld. CIT (Appeals) has erred in law and on facts in partly confirming the addition without appreciating the fact that the project was completed on 23.06.2007, but due to recession in market, the properties were unsold for a long period till February / March 2012. Due to huge losses in cost and interest after 4-1/2 years, all remaining offices / properties were finally distributed amongst shareholders / directors to restrict the losses and accordingly, sale deeds were executed. Therefore, it is prayed that under such circumstances, the assessment may be made at NIL income.

2. The Id. CIT (Appeals) has erred in law and on fact in partly confirming the addition to the extent of Rs. 58,31,955/- without appreciating the fact that there is no profits from such sale, as the properties are merely transferred to shareholders / directors to restrict losses in future. As the current years' return income is at loss of Rs. 129,02,944/-. The same is not considered by AO as well as CIT(A), this also shows that there is no profits. The same may kindly be considered.”

Order pronounced in the open Court on 8th September, 2022 at Ahmedabad.