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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: Ms. Annapurna Gupta & Shri Siddhartha Nautiyal
M/s. Rushabhdev Infra The Principal Project Pvt. Ltd. C/O. M S Commissioner of Chhajed & Co. Chartered Vs Income Tax-3, Accountants, Kamal Ahmedabad Shanti Besides Bank of (Respondent) Baroda Opp. Sardar Patel Colony, Ahmedabad- 380014 PAN: AAFCR2520Q (Appellant) Appellant by : Shri Hem Chhajed, A.R. Respondent by : Shri Samir Tekriwal, CIT/DR Date of hearing : 24-02-2022 Date of pronouncement : 29-04-2022 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:-
The present appeal has been filed by the Assessee against the order passed by the Ld. Pr. Commissioner of Income Tax (Appeals)-3, Ahmedabad, (in short referred to as “PCIT”, dated 05-03-2020, in exercise of his revisionary jurisdiction u/s. 263 of the Income Tax Act, 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2015-16.
Page No 2 Rushabhdev Infra Project P. Ltd. vs. PCIT 2. The Registry has marked the appeal as delayed by 09 days. But it is noted that the appeal was filed on 25/09/2020 when, due to the pandemic of Covid-19, this period was excluded for the purposes of limitation by the Hon’ble Apex court initially vide its order dated 23/03/2020 in Suo Motu Writ Petition (Civil) No.3/20 and lastly vide its order dated10th January 2022 in Miscellaneous Application No.665 of 2021 in Suo Moto Writ Petition © No.3 of 2020, wherein the period from March 15th 2020 to February 2022 was excluded for the purposes of limitation , Therefore, there is no delay as such in the filing of the appeal.
2.1 The challenge to the order passed u/s. 263 by the assessee is on the aforesaid grounds:
1. 1. The Ld. Pr. CIT has erred in law and on facts initiating and passing the order U/S 263 of the Income Tax Act, 1961 as the assessment order sought to be revised is neither erroneous nor prejudicial to the interests of the revenue.
2. The Ld. Pr. CIT has failed to apply his mind in proper perspective of the facts of the case and erred in setting aside tie order passed U/S 143(3) of the Income Tax Act, 1961 by the Ld. A.O.
3. On the fact and circumstances of the case and in law, Ld. Pr. CIT has erred in setting aside the assessment order passed by the Ld. A.O. U/S 143(3) directing to examine and verify again whether expenditure made on account of Interest for Rs. 1 ,47,08, 801/- is included in closing working in progress.
Briefly stated the assessee is in the business of Real Estate Development .For the impugned year the assessee had returned income of Rs.23,02,070/- which was assessed u/s 143(3) at Rs.23,25,991/-.
Page No 3 Rushabhdev Infra Project P. Ltd. vs. PCIT 3.1 Subsequently the Ld. PCIT exercised revisionary power u/s. 263 of the Act on finding the assessment order passed being erroneous and causing prejudice to the Revenue on the following grounds: (i) that the assessee despite following the Project Completion Method for accounting of Revenue and having debited interest of Rs. 1,47,08,801/- to the profit and loss account, however the same was not included in the capital work in progress as at the end of the year. And, (ii) on account of the fact that the A.O. failed to verify whether the assessee had followed the Percentage Completion Method for recognizing revenue as prescribed by the guidance note issued by the Institute of Chartered Accountants of India(ICAI) for accounting income from Real Estate business (revised on 2012).
4. The contents of the show cause notice, which was placed before us at paper book page no 27 & 28, are as under: To, PAN AAFCR2520Q Principal Officer, M/s. Rushabhdev Infra Project Pvt. Ltd. 509, Iscon Elegance, S.G. Highway, Satellite, Ahmedagad-380015 Sir Sub:- Notice u/s. 263 of the I.T. Act 1961 for A.Y. 2015-16 Please refer to the assessment order u/s. 143(3) of the Income –tax Act, 1961 for A.Y. 2015-16. Passed in your case by the ITO Ward 3(1)(3) Ahmedabad on 05/04/2017, assessing the total income of Rs. 23,25,991/- as against returned income of Rs. 23,02,079/- the case was selected for limited scrutiny, which requires examination of the following paints: i) Real estate business with high closing stock (verify whether assessee has adopted percentage completion method).
Page No 4 Rushabhdev Infra Project P. Ltd. vs. PCIT ii) Mismatch in sales turnover reported in Audit Report and ITR iii) Mismatch in amount paid to related parties u/s. 40A(2)(b) reported in Audit Rport and ITR iv) Mismatch in amount paid to related persons u/s. 40A(2)(b) reported in Audit Report and ITR v) Sale of property reported in Form 26QB vi) Purchased of property reported in Form 26QB 2. On verification of the case records, if is observed that during the year under consideration you have followed project completion method for revenue recognition. You have debited an amount of Rs.1,47,08,801 /- towards interest expenses to Profit & Loss account, however, the same was not included in the Capital Work In Progress (C-WiP) even though you were following project completion method, 3. Moreover, the A.O. had inter-alia failed to verify whether percentage .completion-method as per Guidelines Note on accounting for Real Estate business (Revised) 2012 has been followed for revenue recognition and other aspects for selection. Hence, it is apparent that to that extent the order passed u/s. 143(3) dated 05.04.2017 is erroneous in so far as it is prejudicial to the interest of revenue. You are therefore requested to show cause as to why a fresh assessment not be made by invoking the provisions of section 263 of the I.T. Act, 1961, after proper consideration of above issue.
In case you have any objection to the action proposed. You are requested to furnish your reply on the proposed action by 27.01.2020 at my office at Room No. 4II, C-Wing, Pratyakshkar Bhavan, Ambawadi, Ahmedabad or through e-filing portal. You may also avail opportunity of personal hearing or through your Authorized Representative on 27.01.2020 at 11.00 am. However, it is clarified that personal appearance is not compulsory and furnishing of written submission completed in all respect shall be treated as sufficient compliance. Yours Faithfully, (Naresh Kumar Balodia) Pr. Commissioner of Income Tax-3, Ahmedabad
Before the Ld. PCIT, the assessee contended that both the issues had been duly examined during assessment proceedings by the Assessing Officer (A.O.), who was duly satisfied with the reply of the assessee, which Page No 5 Rushabhdev Infra Project P. Ltd. vs. PCIT fact he had noted in his assessment order passed u/s. 143(3) also. Attention of the Ld. PCIT was drawn to the queries raised by the A.O. with respect to the said two issues and the reply filed by the assessee. Ld. PCIT however dismissed the contention of the assessee and held that the assessment order having been made without proper verification of the issue pointed out by him, the order was erroneous in terms of explanation 2A & 2B of Section 263(1) of the Act. Accordingly he set aside the order passed u/s. 143(3) of the Act by the A.O. directing him to pass afresh assessment order after properly ascertaining the genuineness of the claims and after gathering and making suitable enquiries and verification in this regard. He directed the A.O. to make assessment de novo. The relevant findings of the Ld. PCIT at Para 5 to 7 of the order is as under: 5. The facts of the case and the submissions of the assessee have been examined and considered carefully. Whether the Builder Assessee is following the ICAI approved (%) percentage completion method or not for Revenue recognition is one of the reason for scrutiny selection. It was imperative on the Assessing Officer to enquire in to this during assessment. As per records, the AO neither conducted any enquiry nor raised any query in this respect. The assessee admittedly is not following the percentage completion method rather it is following the registration of transfer deed' signifying transfer recognition. This method is not approved. However, during hearing the assessee has briefly submitted that: i) That after discussion, detailed scrutiny and after due application of mind, Assessing Officer passed assessment order under section 143(3) of the Act on 5.4.2017 hence when the requisite details have been furnished with documentary evidence, explanation, etc., and duly scrutiny by Assessing Officer, proceedings u/s. 263 is not justified and even contrary to the material available on record. ii) The assessee had filed complete break up of closing WIP as on the last day of the year and as per the same interest debited in Profit & Loss account of Rs.1,47,08,801/- have been considered and included in Valuation of closing WIP, which has been duly verified by the Assessing Officer.
Page No 6 Rushabhdev Infra Project P. Ltd. vs. PCIT iii) The assessee is consistently following the method of revenue recognition based on significant transfer of risk and reward and the sale is recognized on execution of sale deed. iv) The risk and reward do not get transferred to purchaser on execution of any agreement including agreement to sell. It can only be transferred on execution of sale deed. v) The assessee followed Accounting Standard (AS) 9 for revenue recognition as per guidance note issued by the ICAI and not followed percentage completion method, which has been duly considered by the Assessing Officer while concluding the assessment. 5.1. The submission is not acceptable because i) ICAI has issued revised accounting guidelines for Real Estate Development AS9 for a real estate project and it recommends only one method of accounting in case of a project of duration exceeding 12 month and that commencement of project and completion of project fall in different accounting years. This guideline has been issued in February 2012 and is mandatory for all the assessees being the companies to follow. The assessee has not followed the same and the Assessing Officer has not conducted any enquiry into this while completing the assessment. ii) Various decisions have been stated by the assessee including Motilal C Patel - 176 ITR 666 (Guj.), Shivalik Buildwell Pvt Ltd - 2)13 - 40 Taxman.com 219 (Guj), Ashaland Corporation - 133 ITR 55 (Guj), Madhav Prasad Jatia v. CIT - (1979 ) 118 ITR 200, Dalmia Cement (B) Ltd (2002) 254 ITR 377 but they are all for periods prior to 2012 and hence they cannot be applied to the present case since accounting guidelines have been amended and are mandatory. iii) Regarding the deductibility of interest on borrowed funds, the Assessing Officer has not conducted any enquiry whether it is part of project cost or allowable separately as deduction. The assessing Officer should examine the same also.
6. This is a case where assessment has been made without making proper verification of the cost of improvement claimed by the assessee on account of interest payments on borrowed fund. Reliance is also placed on the decision of Hon'ble Supreme Court in the case of Rajmandir Estate Pvt Ltd Vs Commissioner of Income tax Kolkata-III, reported in 245 taxman 127(SC) (2017): In this case Hon'ble Apex Court has dismissed the Special Leave Petition filed by assessee upholding the order passed by the commissioner passed order u/s 263 and held that on facts this could be a case of money laundering which, went undetected Page No 7 Rushabhdev Infra Project P. Ltd. vs. PCIT due to lack of requisite inquiry into increase of shares capital and non- application of mind by the A.O.
In view of the above, I am of the view that the assessment order passed by the A.O. u/s. 143(3) of the Act on 09/11/2017 is erroneous in so far as it is prejudicial to the interest of the revenue and is squarely covered under the Explanation 2(a) & 2(b) of Section 263(1) of the Act as already discussed. Accordingly, by virtue of the powers vested in me u/s. 263 of the Income Tax Act, I hereby set-aside the order u/s. 143(3) of the Act and direct the Assessing Officer to pass a fresh assessment order after properly ascertaining the genuineness of claims keeping in view the discussions above and also after gathering and examining other suitable evidence / making field enquiries and verification as necessary on facts of the case and make the assessment denovo.
We have gone through the order of the Ld. PCIT and also gone through the documents filed before us in the form of paper book comprising of 64 pages and referred to by the ld. Counsel for the assessee. Before us the ld. Counsel for the assessee has reiterated the submissions made before the Ld. PCIT that all the issues were duly inquired into by A.O. during assessment proceedings, due explanation and reply filed by the assessee and after considering which the A.O. was duly satisfied and therefore there was no error in the order of the A.O. on the said two issues.
7. After considering all of the above, we hold that the findings of the Ld. PCIT that the assessment order was erroneous so as to cause prejudice to the Revenue on the impugned issues, are totally contrary to the facts on record and thus not sustainable.
As noted above the error noted in the assessment order by the Ld. PCIT was:
Page No 8 Rushabhdev Infra Project P. Ltd. vs. PCIT 1) the non-examination of the issue of interest debited to profit and loss account whether included in capital work in progress or not, considering the fact that the assessee was following the project completion method of recognizing revenue and, 2) the A.O. having not conducted any enquiry regarding the method of accounting followed by the assessee for recognizing revenue whether in compliance with the Guidance Note issued by the chartered accountants in this regard (revised in 2012).
However, the order of the Ld. PCIT reproducing the assessee’s submission in this regard on para 4 of the order from page 2 to15 of the order reveals that the assessee had demonstrated to the Ld. PCIT that both the issues had been examined during assessment proceedings to the satisfaction of the A.O and it had been explained to him also that there was no error in the order of the AO on these counts.
With respect to the issue of interest debited to profit and loss account amounting to Rs. 1,47,08,801/- whether included or not in the capital work in progress we find that the assessee had submitted that the AO had asked for working of opening and closing stock which had been duly submitted to him and the detail reflected interest included in the valuation of WIP. We find that this fact of interest being included in the WIP was also pointed out to the Ld.PCIT from the audited Financial Statements of the assessee.
Page No 9 Rushabhdev Infra Project P. Ltd. vs. PCIT 11. The contention of the assessee before the Ld. PCIT at para 4 to 4.4 revealing the aforestated facts are as under: 4. With reference to the aforesaid issue No.(1) as per Point No.3 of this submission regarding claim of interest of Rs. 1,47,08,801/- we herewith submits /allowing factual aspect for your consideration and perusal which are already made available to the Assessing Officer at the time of assessment proceedings and same has been taken on record and considered by him while concluding the assessment. 4.1 It is undisputed that interest is debited in Profit and loss Account, copy of annual accounts is submitted herewith (page No.l to 40). Ours is Private Limited Company and require to get our books of accounts audited by virtue of Companies Act and considering turnover an audit is required to be done under Income Tax Act. We have furnished copy of Audited Annual accounts along with Annexure forming part of Annual Accounts. We invite your kind attention towards Annexure No.22 forming part of Profit and Loss Account pertaining to Finance Cost which shows that we have debited interest and financial expenses of Rs. 1,47,08,8017/- to the profit and loss account. 4.2 We invite your kind attention towards Annexure No. 20 forming part of Profit and Loss Account pertaining to Inventory and more precisely Work In Progress of ongoing project and stock in trade of Land of Rs. 23,75,44,0607=. We have filed complete break up of closing Work in Progress as on the last day of the year before AO, same is filed herewith page No. 41 to 42) for your perusal. AO considered and verified above Work In Progress in depth during assessment proceeding and after due consideration concluded the assessment. The perusal of break- up of Closing Work In Progress clearly shows that Interest debited in Profit and Loss Account of Rs. l,47,Q.t,801/= have been considered and included in valuation of closing Work In Progress. There is no error on the part of AO as far as your finding for non-consideration of interest in valuation of Closing Work In Progress is concerned. We would like to state that since there has been consideration/inclusion of interest of Rs. 1,47,80,8017= debited in Profit and Loss Account in valuation of Closing Work in progress and hence there is no ground to doubt that assessment order passed by AO is erroneous or prejudicial to the interest of revenue. Above issue seems to have arisen without considering this facts on records. The averment on your part that assessment order passed by AO is erroneous as far as debit of interest of Rs.1,47,80,8017/- in Profit and Loss Account is concerned is far from the fact and not justified and based on non- consideration of facts, same may kindly be dropped.
Page No 10 Rushabhdev Infra Project P. Ltd. vs. PCIT 4.3 We would further like to state that the method of evaluating closing work in progress have been consistently followed by us year on year as evident from Audited Annual Accounts and they are admitted by A.O. We followed consistent practice of debiting interest in profit and loss account and including the same in valuation of closing work in progress. This method is rightly followed and there is no deviation. Kindly treat debit of interest to profit and loss account and its inclusion in valuation of closing work in progress as correct and there is no error committed by A.O. whilling concluding assessment. 4.4 AO during assessment proceeding issued notice u/s 142(1) dated (36/02/2017 and ide Point No 12 of notice called working of closing and opening stock same has been provided at the time of assessment proceedings. For ready reference relevant portion of notice and its reply reproduced hereunder: “12. File the detailed working of closing and opening stock (project-wise/ land- wise) so as to ascertain the ongoing projects and upcoming projects undertaking by your company with copies of purchase deeds of lands claimed to have been purchased for the land development”. In reply to the above query we have made detailed submission along with the working of CWIP as under: “12 Reg. Closing and opening Stock:- As asked we enclose herewith a detailed statement of working of pending and closing stock (project wise) along with the copy of land purchase deeds on which projects are being undertaken or to be undertaken. Kindly take the same of your good record (annexure-XI)”. AO has considered submission made and after having satisfied with facts and evidences have concluded assessment, relevant part of Assessment order on page no. 2, para 2 last 12 lines is produced herewith for your ready reference. “2.. During the course of hearing the assessment company has filed various details so as to verify the reasons for which the case has been selected for scrutiny, i.e. examination of high value of closing stock in real estate business, mismatching of sales reported in the Audit Report and figures uploaded in the ITR and verification of payments made to the persons u/s. 40A(2)(b) of the Act. These details have been verified and placed on record. It has been contended that the assessee company is following AS-9 and recognizing the revenue only on sale of flats, constructed properties to the customers in the years when the possession is handed over and the sale deeds are executed. The assesse company has also purchased and sold the land and profit of Rs. 2,25,000/- has been credited and also credited the projects income for which all necessary details have been furnished.
Page No 11 Rushabhdev Infra Project P. Ltd. vs. PCIT We herewith submit copies of relevant notice, submission with Annexure and assessment order for your consideration (page no. 43 to 55). Perusal above will shows that A.O. during assessment proceeding specifically raised this issue and considered submission, explanation and documents furnished and applied his mind. After considering above, A.O. passed order admitting the fact that interest has been added while calculating closing work in progress. Thus, assessment order passed by the A.O. cannot said to be erroneous and prejudicial to the interest of the revenue.
As is evident, the assessee had furnished details of stock/WIP to the AO during assessment proceedings which clearly reflected interest included in the same. Even the Ld.PCIT was pointed out from the audited financial statements of the assessee that the stock/WIP was valued inclusive of interest debited to the Profit and Loss account. Therefore the assessee had clearly demonstrated both to the AO and even the Ld.PCIT that the valuation of closing stock of WIP was in accordance with the method of accounting followed by it, i.e. Project Completion method and that all costs relating to incomplete projects as at the end of the year, including interest cost, was included in the valuation of WIP. No infirmity has been pointed out by the Ld.PCIT in the explanation of the assessee. With the interest debited to the Profit and Loss account being duly demonstrated both to the AO and the Ld.PCIT to be included in the cost of WIP, there surely could not have been any error in the order of the AO on account of non inclusion of the said interest in WIP or for that matter non examination of the said issue by the AO. There is no doubt ,we hold ,that this issue was duly and satisfactorily examined by the AO during assessment proceedings and the valuation of WIP correctly found to be in order by him, calling for no addition to be made to the income of the assessee. There is, we hold, Page No 12 Rushabhdev Infra Project P. Ltd. vs. PCIT therefore no error in the order of the AO with regard to the issue of inclusion of interest cost in the valuation of WIP.
With respect to the issue of the accounting for income followed by the assessee whether in compliance with the guidelines issued by the ICAI in this regard (revisedin2012), we have noted that this issue was also inquired into during assessment proceedings when the AO specifically asked the assessee what method of accounting was followed by the assessee for income. In response to which it had been explained that the assessee was following Project Completion method ,which was in accordance with the Guidance Note issued by the ICAI (Revised2012) for accounting for Real Estate Transactions. We have noted that even the AO noted in the assessment order that the method followed by the assessee for Revenue recognition was correct ,when at para 2 of his order he noted that the Revenue was correctly recognized as per AS-9,where Revenue is recognized on transfer of risks and rewards, as in Project completion method.
Moreover we have noted that the assessee had explained all these facts to the Ld.PCIT also pointing out firstly to him that the assessee had all along been consistently following this method of recognizing Revenue and it had also been demonstrated to him from the Guidance Note of the ICAI(Revised in 2012) on accounting for Real estate transactions, that the project completion method was also recommended in the said Guidance Note in specific circumstances ,which the assessee had demonstrated existed in its case justifying the adoption of even as per the guidance note of the ICAI.
Page No 13 Rushabhdev Infra Project P. Ltd. vs. PCIT The relevant submissions of the assessee in this regard reproduced at para 5—5.5 of the order of the Ld.PCIT is as under:
Page No 14 Rushabhdev Infra Project P. Ltd. vs. PCIT Page No 15 Rushabhdev Infra Project P. Ltd. vs. PCIT Page No 16 Rushabhdev Infra Project P. Ltd. vs. PCIT Page No 17 Rushabhdev Infra Project P. Ltd. vs. PCIT 15. It is evident from the above therefore that this issue too had been duly examined during assessment proceedings and it had duly demonstrated to the Ld.PCIT also that the project completion method of revenue recognition followed by the assessee was in compliance with the accounting guidelines issued by the ICAI for Real Estate revised in 2012 in this regard.
The Ld.PCIT has not pointed out any infirmity in the above explanation, but simply dismissed it by stating that the assessee has not followed the Guidelines issued by the ICAI and the AO has not examined the issue, both observations we find are factually incorrect.
Therefore vis a vis the issue of accounting for income by the assessee whether in accordance with the Guidelines of the ICAI, we find that there is no error in the order of the AO who had accepted the method followed by the assessee, i.e Project Completion, on being demonstrated that it was in accordance with the Guidelines issued by the ICAI, which fact has not been controverted by the Ld.PCIT when demonstrated to him also during revisionary proceedings. Also the uncontroverted fact that the assessee has been consistently following this method of accounting also renders the acceptance of the same by the AO to be correct and in accordance with law.
In view of the above, we hold that there is no error in the order of the AO and the order of the Ld.PCIT holding to the contrary is therefore set aside. The appeal of the assessee is allowed.
Page No 18 Rushabhdev Infra Project P. Ltd. vs. PCIT I9. In effect, appeal of the Assessee is allowed.