B. JEEJEEBHOY VAKAHARIA & ASSOCIATES,MUMBAI vs. ITO 12(3)(4), MUMBAI

O R D E R Manoj Kumar Aggarwal (Accountant Member):- 1.1 Aforesaid appeal by assessee for Assessment Year [AY] 2006-07 contest the order of Ld. Commissioner of Income-Tax (Appeals)-23 Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-23/12(3)(4)/IT- 376/2010-11 dated 22/11/2011 on following grounds of appeal:-

5. On the facts & circumstances of the case the appellant prays that additions made u/s 69 C amounting to Rs.14,34,000/- may be deleted.

6. The Learned CIT(A) has erred in confirming levying of interest u/s. 234A at Rs.3,95,714/-. The appellant denies the liability of payment of interest u/s. 234A. On the facts & circumstances of the case the appellant submit that levy of interest u/s. 234A at Rs. 3,95,7147- is not justified and be deleted.

1.2 The registry has noted a delay of 36 days in filing of the appeal, the condonation of which has been sought by the assessee vide condonation petition dated 19/05/2012 by submitting that the assessee had preferred a rectification application u/s 154 before Ld. Assessing officer against order giving effect and was under a bona-fide belief that the appeal was not be preferred before Tribunal. Keeping in view the period of delay and explanation furnished by the assessee, the bench formed an opinion that in the interest of justice, the delay was to be condoned. Therefore, we 3 B. Jeejeebhoy Vakharia & Associates Assessment Year-2006-07 proceed to dispose-off the appeal on merits as per argument advanced by both the representatives. We have heard and considered the arguments, perused relevant material on record and deliberated on judicial pronouncements as cited before us. As evident from grounds of appeal, the assessee is contesting the addition of Rs.10 Lacs being sale of scarp material, addition of Rs.3 Lacs u/s 40A (3) and an addition of Rs.14.34 Lacs u/s 69C. Ground Nos. 6 & 7 contest levy of interest u/s 234A/234B. The interest being mandatory and consequential, would not require any adjudication on our part. 2.1 Facts on record would reveal that the assessee being resident firm stated to be engaged as Builder was assessed u/s 143(3) r.w.s. 153C on 29/12/2010 wherein the income of the assessee was determined at Rs.27.34 Lacs after certain additions as against Nil return filed by the assessee on 12/03/2010. The partners of the firm consisted of 6 corporate entities. These corporate entities entered into 6 separate development agreement with one concern namely M/s Usha Development Co-operative Housing Society Ltd. (UDCHSL) for development of certain land at Goregaon. Accordingly, these 6 entities formed partnership firm i.e. assessee for development of the plots. The development rights were originally obtained by M/s UDCHSL from M/s Pahadi Goregaon Land Development Pvt. Ltd. vide agreement dated 28/07/1988. Subsequently, the said concern was dissolved and the successors to the concerns were M/s Beeline Impex Pvt. Ltd. (BIPL) and M/s Pearl Cosmetics & Chemicals Pvt. Ltd. (PCPL).

4 B. Jeejeebhoy Vakharia & Associates Assessment Year-2006-07 2.2 The assessee entered into a MOU on 22/12/2001 with M/s Sahara India Commercial Corporation Ltd. (SICCL) for development of land wherein SICCL was to fund the project and the FSI was to be shared between the assessee and SICCL in certain proportions. Accordingly, SICCL advanced a sum of Rs.25 crores to the assessee. However, the project could not take off due to suspension of permissions by authorities and SICCL filed suit to restrain the assessee from alienating the land or creating a third-party right in the stated property. 2.3 Meanwhile, in another litigation proceedings by M/s BIPL & M/s PCPL against M/s UDCHSL wherein the assessee was also a defendant, in the matter of granting of development rights vide conveyance deed dated 19/07/1988, the said suit was decided out of court whereby the deed of conveyance was cancelled and since the amount payable by M/s UDCHSL could not be paid, only a small portion of the land was allowed to be continued in the possession of M/s UDCHSL. 2.4 The documentary supporting in connection with above transactions were found during the course of search proceedings at the premises of two other entities, which were operating from the same premises as that of the assessee. Consequently, proceedings u/s 153C was initiated for AYs 2003- 04 to 2007-08. It transpired that the assessee obtained loans from various concerns and utilized the same mainly for advancing loans to partners and other group concerns and towards creation of work-in-progress (WIP). During the year, the amount of WIP increased from Rs.12.14 Crores to Rs.12.94 Crores i.e. reflected increase of Rs.0.80 Crores. The assessee 5 B. Jeejeebhoy Vakharia & Associates Assessment Year-2006-07 submitted that since there was no taxable income from projects, no return of income was ever filed for all the years. The last return was stated to be filed for AY 2001-02. 2.5 Upon perusal of cash book, it transpired that the assessee was in receipt of Rs.10 Lacs in cash from sale of scrap. It was submitted that the said amount was reduced from WIP. However, the assessee did not file any supporting to show that amount was reduced from WIP. Moreover, the sale of scrap, in the opinion of Ld. AO, could not be co-related to the WIP and the expenses debited to Profit & Loss Account could not be considered as incurred for earning the income from sale of scarp. Accordingly, the said income of Rs.10 Lacs was brought to tax as Business Income. 2.6 During the course of search proceedings, certain documents pertaining to assessee were found and upon perusal, it transpired that the assessee was shown to have incurred expenses of Rs.23.94 Lacs towards security and guarding including payment to policemen etc. The assessee explained the source to the extent of Rs.18.33 Lacs and for the balance, it was submitted that it did not incur any expenditure. It was also submitted that total expenses were only Rs.20.29 Lacs and not Rs.23.94 Lacs. However, upon perusal of documents, Ld.AO found that the expenses incurred were, in fact, Rs.37.67 Lacs out of which an amount of Rs.5 Lacs was stated to be paid in cash. The details of the same have already been extracted in para-9 of the quantum assessment order. Therefore, it was concluded that the assessee could not explain the source to the extent of Rs.14.34 Lacs which was added u/s 69C. Out of cash payment, 20% of the 6 B. Jeejeebhoy Vakharia & Associates Assessment Year-2006-07 expenditure was disallowed u/s 40A(3) which resulted into an addition of Rs.3 Lacs in the hands of the assessee. Finally, the income was computed at Rs.27.34 Lacs. 3.1 Before learned first appellate authority, the assessee submitted that scrap was in the form of residual construction material, gunny bags, waste pieces of steel bars etc. and generated in the course of development activity and inextricably linked to development activity carried out by the assessee. Therefore, these receipts would go on to reduce the cost of project and therefore, the same has rightly been deducted from WIP account. Reliance was placed on the decision of Hon’ble Supreme Court rendered in Bokaro Steel Ltd. 236 ITR 315. However, the said submissions could not find favor with Ld. CIT(A) who upheld the action of Ld. AO in treating the scrap sale as business income. 3.2 Regarding disallowance of 20% of cash expenditure u/s 40A(3), the assessee submitted that it did not carry out any business activity and no income was computed under the head Profits & Gains of Business and therefore, the disallowance at the most, could be reduced from WIP account. However, disregarding the same, the disallowance made by Ld. AO was confirmed. 3.3 Regarding additions made u/s 69C, the assessee submitted that out of total expenditure of Rs.37.67 Lacs, the amount of Rs.12.73 Lacs was paid by Cheque while amount of Rs.15 Lacs was spent in cash since the disallowance u/s 40A(3) was made by Ld.AO at 20% resulting into addition of Rs.3 Lacs in the hands of the assessee. Therefore, the balance amount 7 B. Jeejeebhoy Vakharia & Associates Assessment Year-2006-07 left would be Rs.9.94 Lacs and not Rs.14.34 Lacs as determined by Ld. AO which may be added with a view to conclude the matter. The Ld. first appellate authority, after appreciation of factual matrix directed Ld. AO to verify the cheque payments and add the differential amount to the income of the assessee. Upon perusal of order giving effect dated 07/02/2012, it is observed that the income has been re-computed at the same figures and no relief has been granted to the assessee. Aggrieved, the assessee is in further appeal before us.

4. We have carefully considered the factual matrix as enumerated by us in the preceding paragraphs. So far as the addition of Rs.10 Lacs representing sale of scrap is concerned, it is observed that the assessee was undertaking development of certain project and sole activity being carried out by the assessee was construction activity. The same is evident from the fact that WIP stood at Rs.12.93 Crores at year-end. It is also undisputed fact that the assessee was following project completion method of accounting to offer income under the project. Therefore, the scrap generated out of construction / development activity, in our considered opinion was inextricably linked with assessee’s main activity and therefore, the same would rightly go on to reduce WIP. Therefore, this addition would not be sustainable in law. The assessee has rightly deducted the same from WIP. On the similar analogy, the disallowance made by Ld. AO u/s 40A(3) @20% of cash expenditure would not be separate item of addition but since no expenditure has been claimed by the assessee during the year, the same would go on to reduce WIP account. Therefore, Ld. AO is 8 B. Jeejeebhoy Vakharia & Associates Assessment Year-2006-07 directed to reduce the said disallowance of Rs.3 Lacs from WIP account. Ground No. 1 stand allowed. Ground No.2 stand partly allowed.