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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI RAM LAL NEGI
Per Rajesh Kumar, Accountant Member:
The above appeal by the Revenue and the cross objection by the assessee have been preferred against the order dated 07.10.2016 of the Commissioner of Income Tax (Appeals)
2 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers [hereinafter referred to as the CIT(A)] relevant to assessment year 2010-11.
The ground raised by the Revenue are as under: “1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs..35,75,000/- made in respect of compensation on account of cancellation of flats ignoring the fact that the compensation was paid over and above the repayment of deposit amount and was not part of agreement and it was default from buyer's side. Ld. CIT(A) also failed to appreciate the fact that buyers never enforced to pay compensation through legal notice or through any other court of law whereas it was paid as per convenience of the assessee.
On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.14,87,OOO/- made on account of interest expenditure ignoring the fact that the said loans/advances were not reflected in Balance Sheet for the year ending on 31.03.2009. The Ld. CIT(A) also ignored the fact that the assessee failed to substantiate that the amounts were taken as advance against booking of flats or it was in the form of loans and assessee failed to submit documentary evidence to prove the booking of flats to prove the transactions as genuine during the course of assessment proceedings.
On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.15,77,794/- as against addition of Rs.17,53,104/- made by the AO on account of suspicious purchases even through the concerned parties are non-existing at their address and it is onus of the assessee to produce parties to prove its transactions are genuine.
On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.39,65,208/- made in respect of cessation of liability ignoring the fact that the notices u/s 133(6) were received back unserved and the assessee failed to establish the existence of liability on account of sundry creditors. The Ld. CIT(A) also erred in admitting the additional evidences in violation to the provisions of rule 46A of the Income Tax Rules, 1962 while deleting the addition made on account of sundry creditors.
On the facts and in circumstances of the case, the Ld. CIT(A) has erred in treating rental income of .3,50,OOO/- as income form House Proeprty as against Income from other sources as assessed by the AO ignoring the fact that assessee was earning two types of income at the time of letting out of shop and providing amenities.
The appellant prays that the order of Ld. CIT(A) on the above grounds be set aside and that of the AO be restored.
The appellant craves leave to amend or alter any ground or add a new ground."
3 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers
The issue raised in ground No.1 is against the deletion of addition of Rs.35,75,000/- by Ld. CIT(A) as made by the AO in respect of compensation on account of cancellation of flat by ignoring the fact that compensation was paid over and above the repayment of deposit and was not part of the agreement.
The facts in brief are that during the course of assessment proceedings, the AO observed that assessee has debited a sum of Rs.35,75,000/- in the P&L account under the head compensation paid on cancellation and accordingly asked the assessee to submit the details of the compensation paid which was filed by the assessee before the AO. The assessee has made payment in respect of three flats as under:
Name of the Buyer Sr. Flat Dt. of original Compensation Dt. of Subsequent , No. Booking and paid sale & sale No. sale value Amount(Rs.) value(Rs.)
404 Bhavik Kapadia 1,47,000 1 30/05/2007 29/04/2009 62,00,000/- 61,00,003/- Atul Savla 6,51,000 6,51,000 Yashwant Patel 6,51,000 Jayant Rasane 702 14,00,000 07/07/2009 40,00,000/- 2 Kirit D. Mehta 19/05/2007 42,00,000/- (HUF) 502 35,00,00p/- 75,000 07/07/2009 40,00,000/- 3 Arvind Kambli
Total Rs.35,75,000/-
The AO observed the said payment of compensation was not as per the agreement with the buyers and accordingly issued
4 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers show cause notice to the assessee as to why the said claim should not be disallowed which was replied by the assessee vide letter dated 21.03.2013 by submitting that the said three flats in Ronit Arcade to buyers in 2006-07 the project was delayed and the buyer refused to make further payment and therefore the allotment was cancelled and buyers were compensating by way of compensation to avoid litigation and loss of reputation. The AO, however, brushed aside the contentions of the assessee and added to the income of the assessee.
In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee by observing and holding as under: “6.2 I have carefully considered the facts and circumstances of the case. In this case, the appellant had allotted three separate flats in "Ronit Arcade" to buyers in 2006-2007. Subsequently, due to delay in completion and other difficulties, the buyer refused to make further payment and therefore, the appellant cancelled the bookings. The buyers had made certain claims and therefore, the appellant paid compensation.
6.3 In this case, it is submitted that the payment was made wholly and exclusively or business. It is noted that the payment for cancellation of flats was a genuine case of refund of installments already paid. The appellant had made the payment to the buyers to avoid initiation of any legal action which would have caused hardship to the appellant. Further, in the same year itself, the flats were resold to final buyers. Although two flats were resold at a marginally lesser price, the total resale value of all the three flats at Rs 1.41 Crores was higher than the original price allotted to the old buyers of Rs 1.39 Crores. The appellant has furnished all the ledger accounts and confirmations of all the buyers.
6.4 It is a common practice among builders to refund allotment money along with compensation even though it may not be specifically mentioned in the allotment letter. Further, the Hon'ble Mumbai IT AT in the case of ACIT vs Ajanta Construction, Mumbai ITA No.144/Mum/2013 on 28 October, 2015, has held that the compensation paid to the original flat buyers by the assessee was an allowable expense since the assessee had offered to tax the sales consideration ultimately received from the cancelled flat sold to fresh buyers. Further, the parties who received the compensation have duly accounted for the same in their books of accounts. The facts of the appellant's case are similar to the Mumbai IT AT ruling.
6.5 Thus, I am of the view that the compensation expenditure of Rs.35,75,000/- was a genuine business expense and is deductible u/s 37(1) of the Act. The addition
5 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers made by the A.O. of Rs. 35,75,000/- on this issue cannot be sustained in appeal and is directed to be deleted. Accordingly, Ground No 2 of the appeal is allowed.” 6. After hearing both the parties and perusing the material on record, we observe that the payment has been made by way of compensation in respect of three flats when the same were not completed within the schedule time and possession could not be given and therefore the said buyers of three flats refused to make further payments and ultimately the amount was refunded to them along with compensation as negotiated between the assessee and the buyers of the flats. The Ld. CIT(A) after considering all the facts of the case allowed the appeal of the assessee by following the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Ajanta Construction, Mumbai ITA No.144/M/2013 AY 2009-10 dated 28.10.2015 wherein it has been held that a compensation paid to original flat buyers by the assessee was an allowable expense since the assessee had offered to tax the sales consideration. We have also examined the cancellation of agreement as filed by the assessee in the paper book page No.42 to 70. The Ld. Counsel of the assessee also relied on the decision of the Hon’ble Supreme Court in the case of Shahzad Nand & Sons Vs CIT (1977)108 ITR 358 (SC) wherein Hon’ble Supreme Court has held that payment made out of commercial expediency is allowable expense. Hence, we find no reason to deviate from the finding of the Ld. CIT(A) who has passed a very reasoned and speaking order on the issue and accordingly we hold that the compensation paid to the flat buyers upon cancellation of the agreement is an admissible expense deductable under section 37 of the Act.
6 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers 7. The issue raised in ground No.2 is against the addition of deletion of Rs.14,87,000/- by Ld. CIT(A) as made by the AO. 8. The facts in brief are that the AO during the course of assessment proceedings observed that assessee has made payment of interest to Dongriwala family at very high rates to the tune of Rs.14,87,000/-. The AO disallowed the said interest on the ground that interest paid was too high and was not shown in the form 3CD. The Ld. CIT(A) deleted the disallowance after considering the reply of the assessee which is reproduced in para 7.1 of the appellate order wherein it was submitted that interest was paid to Dongriwala family upon cancellation of booking of flat No.603 after deduction of tax at source @ 10% the Ld. A.R. submitted before the Ld. CIT(A) that 15G was submitted in those cases where no TDS was deducted. The assessee submitted that the total loan was Rs.45.10 lakhs and interest paid was Rs.14.87 lakhs. The assessee also produced the copy of confirmation from the said party. As regards non depiction of the said repayment in form 3CD, it was submitted that only the repayment of loan under section 269T required to be shown whereas this was not a loan and therefore provision of section 269SS and section 269T were not applicable. Even the notice issued under section 133(6) of the Act dated 08.02.2013 to all the members of the Dongriwala family were duly responded by submitting all the necessary details. The Ld. CIT(A) after considering all these facts allowed the appeal of the assessee.
After hearing the rival submissions and perusing the material on record, we observe that the assessee has paid interest on advance refunded upon cancellation of flat No.603 by
7 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers Dongriwala family. The only reason attributed for disallowance was the high rate of interest whereas recipients have duly confirmed the transaction while responding to notice issued under section 133(6) of the Act. The another plea of the AO for making disallowance is that the said repayment of advance was not shown in the form 3CD as per provisions of section 269T there is no merit in the contentions of the Revenue on this ground as this was just a refund of advance received against booking of flat which was refunded and therefore provisions of section 269SS and section 269T were not applicable. In our view, the Ld. CIT(A) has taken a very reasoned view of the matter by allowing the interest to the tune of Rs.14,87,000/- under section 37, we therefore do not find any reason to interfere in the finding of the Ld. CIT(A). Accordingly, we dismiss the ground raised by the Revenue by upholding the order of Ld. CIT(A) on this issue.
The issue raised in ground No.3 is against the deletion of addition of Rs.15,77,794/- as against the addition of Rs.17,53,104/- made by the AO on suspicious purchases.
During the course of assessment proceedings, the AO observed that assessee has claimed purchases at Rs.2,83,453/-. In respect of items plywood, rods, handles etc. and various other accessories for manufacturing work. In order to verify the genuineness of the purchases, the AO issued notice under section 133(6) of the Act to several parties at the addresses provided by the assessee. The notices were not served and returned unserved by the Postal Authorities with the remark non known in respect of six parties aggregating to
8 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers Rs.16,13,512/- details whereof is given at page No.10 and therefore the AO by referring to hawala racket operated by some suppliers. The AO after observing that the said suppliers were appearing in the list of hawala parties brought out by the Sales Tax Department, Government of Maharashtra issued show cause notices to the assessee to prove the genuineness by furnishing bills, vouchers, payment details, stock details, delivery challan etc. So AO disallowed the purchases from all these parties to the tune of Rs.16,13,512/-. The AO further disallowed Rs.10,39,592/- on account of purchases from M/s. Vaishnavi Enterprises which the assessee could not prove and resultant addition of Rs.17,53,104/- was made.
In the appellate proceedings, Ld. CIT(A) partly allowed the appeal of the assessee by sustaining the addition to the addition of 10% of the bogus purchases by reasoning that it is only the profit element in the bogus purchases which can be brought to tax and not the entire purchase. The Ld. CIT(A) while passing the order relied on the order of CIT vs. Nikunj Enterprises Pvt. Ltd. in ITA No.5604 of 2010 passed by the Jurisdictional Hon’ble Bombay High Court wherein High Court has inter alia observed that where sales are not doubted and assessee has filed the copies of invoices, bank statements etc. with the AO it is only the profit element on such bogus transactions which are to be brought to tax and not the entire purchases. The Ld. CIT(A) thus reversed the addition on account of bogus purchases to the extent of 90% of the amount of bogus purchases.
After hearing both the parties and perusing the material on record, we observe that in this case undisputedly the assessee is
9 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers a beneficiary of hawala purchase transactions to the extent of Rs.16,13,512/- from six parties and also Rs.1,39,592/- purchases from M/s. Vaishnavi Enterprises which the assessee could not prove during the course of assessment proceedings. All these were added to the income of the assessee when the assessee could not produce these parties for verification though the assessee filed the necessary evidences before the AO. The Ld. CIT(A) after passing a very reasoned and detailed order sustained the addition to the extent of 10% of the bogus purchases. Considering the facts of the case and the decision relied by the assessee especially in the case of CIT vs. Nikunj Enterprises Pvt. Ltd. (supra) we do not find any reason to interfere in the order of Ld. CIT(A) on this issue. Accordingly, the ground raised by the Revenue is dismissed.
The issue raised in ground No.4 of appeal is against the deletion of Rs.39,65,208/- by the Ld. CIT(A) as made by the AO in respect of cessation of liability by ignoring the fact that notices issued under section 133(6) were received unserved and assessee could not establish the existence of this liability.
The facts in brief are that during the assessment proceedings, the AO noticed that assessee has shown sundry creditors of Rs.57,09,995/- in the balance sheet out of the said sundry creditors AO issued notices under section 133(6) to various parties aggregating to Rs.39,65,208/- in order to verify the genuineness of these creditors. However, out of the said notices only two notices were served and four were returned unserved. In the two cases whereas the notices were served no reply was received. Accordingly, the OA issued show cause
10 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers notice to the assessee as to why these creditors should not be added to the income of the assessee as seized liability under section 41 and added to the income of the assessee. The Ld. A.R. replied to the said show cause notice vide letter dated 21.03.2013 stating that assessee has purchased material from these parties and out of good relationship with the said parties they have allowed longer credit to the assessee and it is only in case of Shreeji Construction to whom an amount of Rs.17,15,950/- was due which was held due to seepage problem. However, the reply of the assessee did not find favour with the AO and he finally concluded that some of these parties were also shown to be hawala dealer by the Sales Tax Department, Government of Maharashtra and finally treated Rs.39,65,208/- as seized liability and added the same to the income of the assessee under section 41 of the Act.
In appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee by observing and holding as under: “9.2 I have gone through the assessment order very carefully and also perused the paper book and submission of the appellant. In this case certain purchases were made in earlier years. However, due to some or other reason, the payments were not made and the parties are reflected as Sundry Creditors.
9.3 The appellant argued that the due to good relations, the appellant had managed to defer payment. In respect of M/s Shreeji Construction, the payment was withheld due to seepage problem.
9.4 During the course of appellate proceedings, the appellant furnished the past invoices raised by the parties, confirmations, ledger accounts and TDS certificates. A perusal of the invoices shows that the payments were made for purchase of glass, cement, labour charges, hardware items, sand, black rubble/metal etc. I find from the records that the purchases were made in the earlier years in FY 2008-09. In most cases, significant amount has been paid and only a small amount remains outstanding. Only in case of M/s Shreeji Construction, no amount has been paid for which the appellant's explanation was that there was a seepage problem. The ld Assessing Officer has not produced any evidence that the liability has ceased in the subsequent years. The payments were made by account payee cheque and TDS was
11 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers deducted wherever applicable. The signed confirmations of all the parties have been furnished showing that the payments were genuine. The appellant has not suo moto written back the same in its books of accounts. Only the Id Assessing Officer has presumed that the amounts are no longer payable.
9.5 Various courts have held that if there is no unilateral write back of balances by the assessee, the addition cannot be made u/ s 41(1) of the Act: 1. CIT v Shri Vardhman Overseas Ltd. (2012) 343 ITR 408 (Del) 2. CITv Nitin Garg [2012] 22 taxmann.com 59 (Guj.) 3. DSA Engineers (Bombay) v ITO [2009] 30 SOT 31 (MUM.) Further, in this case, the debts are not yet time barred. The Id Assessing Officer has not produced any evidence that the liability has ceased in the subsequent years. Hence, there is no basis for the Id Assessing Officer invoking the provisions of Section 41(1) of the Act. Thus the addition of Rs 39,65,208/- u/s 41 (1) of the Act is found to be without much basis and cannot be sustained in appeal and is directed to be deleted. Accordingly, Ground No 6 is allowed.”
After hearing both the parties and perusing the material on record, we observe that in this case the AO has added the amount of sundry credit to the income of the assessee as seized liability despite the fact that these were not in fact seized and assessee continued to depict these sundry creditor in the balance sheet. The assessee even submitted that due to longer period of credit allowed by the supplier thus are outstanding. However, in respect of Shreeji Construction to whom Rs.17,50,950/- was stated to be held due to seepage problem. We observe from the order of Ld. CIT(A) that Ld. CIT(A) has taken a very balanced and correct view of the matter by reversing the order of AO as it is very clear that the liability to the creditors have not seized and therefore provisions of section 41(1) can not be invoked. The case of the assessee is also supported by a series of decisions as stated by the Ld. CIT(A) in para 9.5 of the appellate order. Accordingly, we are inclined to dismiss the appeal of the Revenue by upholding the order of Ld. CIT(A).
12 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers
The issue raised in 5th ground of appeal is against the order of Ld. CIT(A) in treating the rental income of Rs.3,50,000/- as income from house property as against the income from other sources as assessed by the AO by ignoring the fact that assessee was earning two types of income at the time of letting out of stock and providing amenities.
The facts in brief are that during the year the assessee has entered into agreement to let out of shop No.1 appearing in its closing stock to M/s. Team Associates (India) Pvt. Ltd. The assessee has entered into a separate agreement dated 28.10.2009 with his partner Shri Sushil Mali for providing amenities to these parties. As per the said agreement, the assessee is to provide amenities to the said party in consideration of monthly consideration of Rs.70,000/-. The assessee treated the said income as income from property income. The AO also observed that the details of amenities provided were not mentioned in the agreement. Thus, the AO came to the conclusion that the income received for providing amenities was not either under the head of house property or business income and is in fact in the nature of income from other sources. Accordingly, the compensations amounting to Rs.3,50,000/- received for amenities provided was treated as income from other sources.
In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee by observing and holding as under: “10.2 I have gone through the assessment order very carefully and also perused the paper book and submission of the appellant. In this case a rental agreement was entered into on 28.10.2009 with M/s Team Associate (India) P Ltd. The Id
13 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers Assessing Officer has accepted the appellant's stand that such rental income is taxable as Income From House Property.
10.3 On the very same day, the appellant entered into an amenities agreement with M/s Team Associate (India) P Ltd for looking after day to day maintenance and providing amenities for the same rented premises. The law on this subject is very clear as rendered by the Jurisdictional High Court in the case of CIT v J.K. Investors (Bom.) Ltd [2012] 211 Taxman 383 (Bombay) that so long as the services agreement is part and parcel of the rent agreement, then both the incomes/ought to be taxed as income from house property. 10.4 The amenities agreement in this case is part and parcel of the rent agreement. Both agreements were entered into on the same day with the same party. Thus, the amenities agreement is dependent on the rent agreement. Thus, following the ratio of the Hon'ble Bombay High Court judgement in CIT v JK Investors (Bom) Ltd. (supra), the services income of Rs 3,50,000/- ought to be taxed under the head House Property. The Id AO is directed to tax the same as income from House Property. Accordingly this ground of appeal is allowed.”
After hearing both the parties and perusing the material on record, we observe that the assessee by way of two separate agreements one for letting out of shop No.1 and second for providing amenities. The income from the amenities provided to the tune of Rs.3,50,000/- was treated as income from house property whereas according to the AO the said income is taxable as income from other sources. The Ld. CIT(A) allowed the appeal of the assessee on the ground that by following the decision of the Hon’ble Bombay High Court in the case of CIT vs. JK Investor Bombay Ltd. (2012) 25 taxmann.com 12 (Bom.) wherein it has been held that where the service agreement is part and parcel of the rent agreement then both the incomes ought to be taxed under the head income from house property. We even note that in the subsequent year, the Revenue has accepted the income from amenities as income from the house property even in the assessment framed under section 143(3), the case of the assessee is also supported by Shambhu Investments (P) Ltd vs. CIT (2003) 263 ITR 143 SC wherein the Court has held that it
14 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers was clear from the primary object was to let out the properties with additional right of using furniture and fixture and other facilities for which the rent was being charged on monthly basis, therefore income derived from the said property was income from property which should be assessed as such. Accordingly, we respectfully following the decision of the Hon’ble Bombay High Court and Apex Court held that the income received by the received from amenities which is connected with the letting out of the shop and part and parcel of the main agreement is to be treated as income from property and thus Ld. CIT(A) has rightly allowed the appeal of the assessee. Accordingly, we are inclined to dismiss the ground raised by the Revenue by upholding the order of Ld. CIT(A).
In the result, appeal of the Revenue is dismissed.
CO No.356/M/2017 23. At the time of hearing, the Ld. Counsel did not press the cross objection filed by the assessee and therefore the same is dismissed.
Order pronounced in the open court on 22.04.2019.
Sd/- Sd/- (Ram Lal Negi) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 22.04.2019. * Kishore, Sr. P.S.
Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench
15 ITA No.580/M/2017 CO No.356/M/2017 M/s. Rushi Builders & Developers //True Copy// [ By Order
Dy/Asstt. Registrar, ITAT, Mumbai.