DCIT CEN CIR 8(4), MUMBAI vs. ESKAY CONSTRCTIONS P.LTD, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): These cross appeals in 3466/Mum/2016 & 3465/Mum/2016 for A.Y.2010-11 & 2011-12 arise out of the order by

M/s.Eskay Construction Pvt. Ltd., completed in accordance with Accounting Standard (AS) 7 issued by the Institute of Chartered Accountants of India (ICAI). The ld AO observed from the said details that the assessee had computed the percentage of work completed as under:-

Total Saleable Area - 72500 sq.ft. Sold Area - 36100 sq.ft ( 8000+ 8000 + 8000 +12100) Total Project cost (estimated) Rs in crores Land 65.00 Interest incurred 32.57 Interest expected 12.64 Construction cost 61.87 Other expenses 5.00 ------------- 177.13 crores Project cost incurred (actual) upto March 2010 Rs in crores Opening WIP 78.97 Construction cost 12.62 Interest 8.52 Depreciation 0.32 ----------- 100.43 Add: Construction cost recognized in Earlier year 36.25 ------------ 136.68 crores 3.1. The ld AO observed that as per the above figures, the percentage of work completed should have worked out to 77.16% and proportionate cost should have worked out to Rs 68.05 crores as under:-

Calculation of % of work completed Total Project Cost 177.13 cr Project cost incurred upto 31.3.2010 136.68 cr % of work completed thereon 77.16%

M/s.Eskay Construction Pvt. Ltd., Proportionate cost as per Guidance Note of ICAI on Accounting for Recognition of Revenue by Real Estate Developers on the ground that the said Guidance Note is mandatory for the assessee to follow Sold Area / Total Saleable Area * Cost incurred upto 31.3.2010 36100 / 72500 * 136.68 crores = Rs 68.05 crores 3.2. The ld AO observed that the assessee had sold the following flats during the year under consideration :- Flat No. Name Agreement Amount Date of Saleable Rate value received as agreement area per on sq.ft. 31.03.2010 D/3 Bharat Daftary 27,00,00,000 26,00,00,000 09.08.2007 8000 33750 D/4 Gautam Daftary 27,00,00,000 26,00,00,000 09.08.2007 8000 33750 D/5 Bharat D.Shah & 27,00,00,000 5,00,000 29.12.2009 8000 28750 Ors. Bunglow Parmeshwaridevi 27,00,00,000 27,00,00,000 25.03.2003 12100 22314 Agarwal TOTAL 104,00,00,000 79,05,00,000 36100 3.3. The ld AO based on the above calculation, reworked the revenue to be recognized by the assessee for the year under consideration as under:-

% Revenue to Revenue Revenue should completed be recognized recognized upto be recognized last year 31.03.2010

Agreement 104.00 77.16% 80.24 45.17 Cr 35.07 Cr. Value Cost to be 68.05 68.05 36.25 31.80 Cr recognized Profit for the 12.19 8.92 3.27 Cr. period Assessee 0.88 Cr. recognized profit

M/s.Eskay Construction Pvt. Ltd., as per working 2.39 cr. Difference to be assessed as income 3.4. Accordingly, the ld AO made an addition of Rs 2.39 crores to the total income of the assessee for the year under consideration.

5.1. The ld CITA observed that the assessee had disclosed the profit for the year from the project at Rs 88,46,754/- worked out as under:-

M/s.Eskay Construction Pvt. Ltd.,

Description Unit Value Total area booked / sold A1 Sq.ft. 36,100 Balance saleable area B1 Sq. ft. 36,400 Area for the whole project C1 Sq.ft. 72,500 Total value of area booked / sold D1 Rs. 1,040,000,000 Average sale price of area sold E1=D1/A1 Rs, 28,808 Value of saleable area (as per appellant F1 Rs. 1,019,200,000 Value of whole project(Estimated) G1=D1+F1 Rs. 2,059,200,000 Cost of Land H1 Rs. 650,000,000 Interest cost incurred I1 Rs. 325,756,257 J1 Estimated Interest cost in future Rs. 126,491,929 Construction cost as per the appellant K1 Rs. 618,787,500 Others costs as per the appellant L1 Rs. 50,000,000 Cost of the project as per the appellant M1=H1+I2+J1+K1-L1 Rs. 1,771,035,686 Estimated Profit from the project as per N1=G1- M1 Rs. 2,88,164,313 the appellant Profit from the project as part of O1= N1/ G1 13.99% turnover (as per the appellant) Total expected cost(excluding cost of the P1= I1+J1+K1 Rs. 1,071,035,687 land and 'other expenses') Cost incurred upto March, Q1 721,682,157 2011(excluding cost of the land and 'other expenses') Estimate of work completed, upto S1= Q1/P1 67.38% 31.03.2010 as per the appellant Profit recognized upto 31.03.2010 as per T1 – D1- O1- S1 Rs. 98,065,677 the appellant Profit recognized upto 31.03.2009 U1 Rs. 89,218,923

M/s.Eskay Construction Pvt. Ltd.,

Profit recognized for P.Y. 2009-10 as W1 = T1-U1 Rs. 8,846,754 per the appellant 5.2. The ld CITA observed that the assessee submitted that ICAI issued Guidance Note on ‘Accounting for Real Estate Transactions (revised 2012)’ and in Paragraph 1.5. of the said guidance note, it was mentioned that the Guidance Note should be applied to all projects in real estate which are commenced on or after 1.4.2012 and also for projects which have already commenced but where revenue is being recognized for the first time on or after 1.4.2012. The assessee had pleaded before the ld CITA that the said guidance note is not applicable in the present case as the project was commenced much prior to 1.4.2012 and revenue was also recognized before that date. The ld CITA observed that the Guidance Note is not mandatory for the project under consideration and hence the assessee was not bound to follow the same. The ld CITA however observed that the computation of profits made by the assessee is also not correct in as much as the assessee had underestimated the value of flats which remained unsold as on 31.3.2010. The assessee estimated the value of flats unsold at Rs 28000 per sq.ft whereas the average value of flats sold upto 31.3.2010 was Rs 28808 per sq.ft . Accordingly, the ld CITA computed the profits by taking the value of unsold flats at Rs 28808 per sq.ft as under:-

Description Unit Area (Sq. ft) Total area booked / sold A3 Sq. ft. 36100 B Balance saleable area 3 Sq.ft. 36400 Area for the whole project C3 Sq. ft. 72,500 Total value of area booked / sold D3 Rs. 1,040,000,000

M/s.Eskay Construction Pvt. Ltd.,

Average sale price of area sold E3=D3/A3 Rs. 28,808 Value of saleable area F3=B3*E3 Rs. 1,048,611,200 Value of whole project(Estimated) G3=Ds+P3 Rs. 2,088,611,200 Cost of Land as per the appellant H3 Rs. 650,000,000 Interest cost incurred as per I3 Rs. 325,756,257 the appellant Estimated Interest cost in future as J3 Rs. 126,491,929 per the appellant Construction cost as per K3 Rs. 18,787,500 the appellant Others costs as per the appellant L3 Rs. 50,000,000 Cost of the project as per M3=H3-H3+J3+K3+L3 Rs. 1,771,035,686 the appellant Estimated Profit from the project N3=G3- M3 Rs. 317,575,514 Profit from the project as O3= N3/ O3 15.21% part of turnover' Total expected cost excluding cost P3= I3+J3+K3 Rs. 1,071,035,687 of the land and 'other expenses') Cost incurred upto Q3 Rs. 721,682,157 March, 20 11 (excluding cost of the land and 'other expenses') Estimate of work completed S3= Q3/P3 67.3S% upto 31.03.2010 as per the appellant Profit upto 31. 03. 2010 T3 = D3- O3- S3 Rs. 106,584,379 Profit recognized upto 31.03.2009 U3 Rs. 89,218,923 Profit for P. Y. 2009-10 W3 = T3- U3 Rs. 173,65,456

M/s.Eskay Construction Pvt. Ltd., 5.3. The ld CITA accordingly confirmed the addition of Rs 85,18,702/- (1,73,65,456 -88,46,754) as against Rs 2,39,00,000./- made by the ld AO.

M/s.Eskay Construction Pvt. Ltd., place after the acquisition of land. Generally, cost of land constitutes a very large portion but by the acquisition of land itself, there is no work- in-progress. At the stage where land only is acquired, it cannot be said that the project has commenced but if the cost of land is included in the percentage of the project completion, then it would show that the project has been substantially completed say, to the extent of 50-60% at the beginning itself. Hence, for working out the stage of completion of the project land value should not be included. Hence we hold that the ld CITA is justified in excluding the value of land while working out the percentage of work completed. Moreover, we find that the ld AO had considered the sale area while determining the percentage of completion method as against the cost incurred upto 31.3.2010. Hence we hold that the percentage of work completed upto 31.3.2010 should be considered at 67.38% as determined by the assessee in the return of income.

7.1. The next aspect to be decided with regard to the addition of Rs 2.39 crores is with regard to the valuation of unsold flats as on 31.3.2010. The assessee had valued the unsold flats the lower of cost or market value as on 31.3.2010, which is in accordance with generally accepted accounting principles for valuation of inventories. We find that the Hon’ble Supreme Court in the case of Chainrup Sampatram vs CIT reported in 24 ITR 481 (SC) and United Commercial Bank vs CIT reported in 106 Taxman 601 (SC) had accepted the basis of valuation of inventories at lower of cost or market value and had also held that no profit could arise out of valuation of closing stock. Their Lordships held that valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period and can in no sense be regarded as the source of such profits. We find that the ld CITA by valuing unsold flats at the average of sale price

M/s.Eskay Construction Pvt. Ltd., Ld. CIT(A) had assessed profit attributable to unsold flats which is not permissible. Respectfully following the aforesaid decisions of Hon’ble Supreme Court and applying the same to the facts of the instant case before us, we direct the ld AO to accept the valuation of unsold flats as on 31.3.2010 as done by the assessee.

7.2. With regard to the addition made in the sum of Rs 4 crores made by the ld AO which is the subject matter of revenue’s appeal for Asst Year 2010-11, we find that the assessee had sold flat D-5 to Mr. Bharat D. Shah and others on 29.12.2009 at the rate of Rs. 28,750 per sq. ft., whereas approximately 28 months earlier, the assessee had sold 2 flats bearing No. D- 3 & D- 4 to Mr. Bharat Daftary and Gautam Daftary at the rate of Rs. 33,750 per sq. ft. Accordingly, the ld AO observed that the assessee incurred loss of Rs. 5,000 per sq. ft. on the sale made to Bharat D. Shah which he worked out to Rs. 4,00,00,000/-. We find that in response to show cause notice issued by the ld AO, the assessee submitted that after the sale of 2 flats to Mr Bharat and Gautam Daftary on 09.08.2007, there was no sale of not even a single unit from 10.08.2007 to 28.12.2009 for about 28 months. There was a slowdown in the real estate market and the fact that the assessee could sell only one unit after a gap of almost 28 months at a lower price indicated at Rs 28750 per sq.ft. We find that the assessee had further pleaded that even the rate of Rs 28750 per sq.ft. being the agreement value was higher than the stamp duty value of the flat at the prevailing point of time. We find that the ld AO however, proceeded to hold that the assessee had received on money in the sale of flat to Mr. Bharat D. Shah to the extent of the difference between the consideration received from Mr Bharat and Gautam Daftary 28 months earlier and the consideration received from Mr. Bharat D. Shah. Accordingly, he made an addition of Rs.

M/s.Eskay Construction Pvt. Ltd., 4,00,00,000/- to the declared income by way of understatement of sale price of the flat to Mr. Bharat D. Shah. We find that the assessee had pleaded that the flats were sold to Mr Bharat and Gautam Daftary during the period of boom in the real estate market which was later followed by a crash in the property market. Moreover, the reliance placed by the ld AO on the co-ordinate bench decision of this tribunal in the case of Diamond Investments & Properties supra would not advance the case of the revenue as no one had appeared on behalf of the assessee before the tribunal and the decision was rendered based on the facts available in the assessment order in that case. Moreover, the said decision cannot be made applicable to the instant case as it is factually distinguishable. We hold that the ld AO had merely assumed that the price at which the flats were sold to Mr Bharat and Gautam Daftary was always available to the assessee and this assumption is based on no material at all. Apart from his suspicion, the ld AO has not brought an iota of material on record in support of the addition made by him. Furthermore, it is settled position in law that the addition on the ground of suppression of sale price or charging on money cannot be made without there being an evidence other than estimate of market value to show that the assessee had actually received more money from the buyer than as disclosed in his return of income. For this proposition, we find that the ld AR had rightly placed reliance on the decision of Hon’ble Supreme Court in the case of K. P. Varghese v. ITO reported in 131 ITR 597(SC) wherein it was held as under:- 13. Thus, it is not enough to attract the applicability of sub-section (2) that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeds the full value of the consideration declared in respect of the transfer by not less than 15 per cent of the value so declared, but it is furthermore necessary that the full value of the consideration in respect of the transfer is understated or, in other words, shown at a lesser figure than that actually received by the assessee. Sub-section (2) has no application in case of an honest and bonafide transaction where the consideration in respect of the transfer has been correctly declared or disclosed by the assessee, even if the M/s.Eskay Construction Pvt. Ltd., condition of 15 per cent difference between the fair market value of the capital asset as on the date of the transfer and die full value of the consideration declared by the assessee is satisfied. If, therefore, the revenue seeks to bring a case within sub-section (2), it must show not only that the fair market value of the capital asset as on the date of the transfer exceeds the full value of the consideration declared by the assessee by not less than 15 per cent of the value so declared, but also that the consideration has been understated and the assessee has actually received more than what is declared by him. There are two distinct conditions which have to be satisfied before sub-section (2) can be invoked by the revenue and the burden of showing that these two conditions are satisfied rests on the revenue. It is for the revenue to show that each of these two conditions is satisfied and the revenue cannot claim to have discharged this burden which lies upon it, by merely establishing that the fair market value of the capital asset as on the date of the transfer exceeds by 15 per cent or more the full value of the consideration declared in respect of the transfer and the first condition is therefore satisfied. The revenue must go further and prove that the second condition is also satisfied. Merely by showing that the first condition is satisfied, the revenue cannot ask the Court to presume that the second condition too is fulfilled, because even in a case where the first condition of 15 per cent difference is satisfied, the transaction may be a perfectly honest and bona fide transaction and there may be no understatement of the consideration. The fulfilment of the second condition has, therefore, to be established independently of the first condition and merely because the first condition is satisfied, no inference can necessarily follow that the second condition is also fulfilled. Each condition has got to be viewed and established independently before sub-section (2) can be invoked and the burden of doing so is clearly on the revenue. It is a well-settled rule of law that the onus of establishing that the conditions of taxability are fulfilled is always on the revenue and the second condition being as much a condition of taxability as the first, the burden lies on the revenue to show that there is understatement of the consideration and the second condition is fulfilled. Moreover, to throw the burden of showing that there is no under statement of the consideration on the assessee would be to cast an almost impossible burden upon him to establish a negative, namely, that he did not receive any consideration beyond that declared by him.

7.2.1. Similarly, in yet another decision of Hon’ble Supreme Court in the case of CIT v. Sati Oil Udyog reported in 56 taxmann.com 285(SC), it was held as under:- 22. Taking a cue from the Varghese case, we therefore, hold that Section 143 (1A) can only be invoked where it is found on facts that the lesser amount stated in the return filed by the assessee is a result of an attempt to evade tax lawfully payable by the assessee. The burden of proving that the assessee has so attempted to evade tax is on the revenue which may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has, in fact, attempted to evade tax lawfully payable by it. Subject to the aforesaid construction of Section 143 (1A),

M/s.Eskay Construction Pvt. Ltd., we uphold the retrospective clarificatory amendment of the said Section and allow the appeals. The judgments of the Division Bench of the Gauhati High Court are set aside. There will be no order as to costs.

7.3. The aforesaid ratio decidendi laid down by the Hon’ble Supreme Court would be squarely applicable to the facts of the instant case before us, as the ld AO had not brought any material on record to prove that the assessee had indeed received onmoney to the exten of Rs 4 crores from Mr Bharat D Shah and others. Infact the ld AO had not even bothered to make any examination of Mr Bharat D Shah by summoning him to understand the truth in the matter. Hence it could be safely concluded that the entire addition of Rs 4 crores has been made merely on suspicion , surmise and conjecture and not backed by any material evidences and accordingly, the addition cannot be sustained in the eyes of law. Hence we hold tha the ld CITA had rightly deleted the addition in the sum of Rs 4 crores in the facts and circumstances of the instant case, which in our considered opinion, does not call for any interference.

7.4. Accordingly, the Ground No. 1 raised by the revenue for Asst Year 2010-11 is dismissed and Ground No. 1 raised by the assessee for Asst Year 2010-11 is allowed. In view of our decision for Ground No.1 raised by the assessee, the adjudication of Ground No. 2 in assessee’s appeal becomes academic in nature and does not require any adjudication at this stage.

M/s.Eskay Construction Pvt. Ltd., was no appeal preferred by the revenue for the Asst Year 2011-12 before this tribunal. Accordingly, the Ground No.1 raised by the assessee for Asst Year 2011-12 is allowed. In view of our decision for Ground No.1 for Asst Year 2011-12, the adjudication of Grounds 2 and 3 thereon becomes academic in nature and does not require any adjudication at this stage.

Order pronounced in the open court on this 10/07/2019