ACIT 27(3), NAVI MUMBAI vs. SKYLINE PRASHASTI, MUMBAI

We have heard the parties and perused the record. The assessee has constructed a building named “Sky Line Icon”. During the year under consideration, the assessee has declared leased rental income out of the above said property. The Assessing Officer noticed that he had estimated income from construction activity @ 8% of the work-in-progress in the earlier years. Accordingly he proposed to estimate income @ 8% on the capital work-in- progress. The assessee explained that it had initially intended to sell the property and accordingly collected advances also from the prospective buyers. However, at some point of time, the management decided not to sell any area

The AO, however, did not accept the contentions of the assessee. He noticed that the assessee is undertaken construction in two phases. The AO estimated 8% of work in progress of phase 1 and phase-2, which was worked out to Rs. 20.70 lakhs and Rs. 66.49 lakhs respectively. Accordingly, the AO made addition of Rs. 86.56 lakhs to the total income of the assessee.

Before learned CIT(A) the assessee submitted that identical addition made in assessee’s own case for A.Y. 2007-08 has been deleted by the Tribunal, vide its order dated 31.7.2012 passed in & 21/Mum/2011. It was also submitted that the Tribunal has followed its own decision rendered for A.Y. 2007-08 in A.Y. 2010-11 & 11-12 also. Accordingly, following the orders passed by Tribunal, learned CIT(A) deleted the addition made by the AO. Aggrieved, the Revenue has filed this appeal before us.

Ld DR submitted that the assessee has not offered any income from construction activity and hence the AO was constrained to estimate @ 8% on the capital value of work in progress.

On the contrary, ld AR placed reliance on the order passed by the Tribunal for A.Y. 2007-08 (ITA No. 2124/Mum/2011 and 2422/Mum/2011

When it was pointed out to ld AR that the AO has proceeded to estimate income from construction activity on the basis that the assessee is engaged in the business of construction and sale of flats, ld AR submitted that the AO has not duly considered explanations given by the assessee before him. The Ld AR submitted that the assessee has specifically pointed out to the AO that it has decided not to sell any area of the property and further it has taken decision to give property on long term lease. Since the assessee did not intend to sell any portion of the property, there is no requirement of making any estimate out of construction value of the property. Accordingly the Ld AR submitted that the assessee has held property as its own asset and not as stock in trade. Accordingly he submitted that the AO was not justified in estimating income from the construction activity. The Ld AR also furnished a copy of assessment order passed for A.Y. 2014-15 and submitted that the AO did not make any addition towards construction activity in that year and has assessed lease rental income declared by the assessee.

We have heard the rival contentions and perused the record. We noticed that the Tribunal has deleted the addition relating to estimation of income from construction activities made by the AO in A.Y. 2007-08, on the reasoning that the project was completed only up to 16% and in that case, there was no requirement to estimate any income from project. This order of the Tribunal was followed by other co-ordinate benches in A.Y. 2009-10 to 2011-12.

Before us also, the Ld A.R, initially, placed reliance on the orders passed by the co-ordinate benches. We have earlier noticed that the first order was passed by the co-ordinate bench in AY 2007-08 (ITA No.2422/Mum/2011 dated 31.7.2012), wherein the Tribunal has deleted the income estimated by the AO on the work in progress with the following observations:- “2.10 The fact that project is completed only upto 16% has also not been controverted by the revenue. According to aforementioned decision of Tribunal in the case of Awadesh Builder (supra), the assessee has option to adopt work completion method. If the same is taken into consideration, as project has not been completed during the year and only 16% of the project is completed, the income could not be assessed even with reference to AS-7. Moreover, the other undisputed fact is also not controverted that assessee did not sell any portion of the impugned project and has started earning lease rental from the said project on long term basis. Therefore, keeping in view all these facts, we are of the opinion that Ld CIT(A) has rightly deleted the addition. We decline to interfere and all grounds raised by the revenue in its appeal are dismissed.”

In AY 2009-10 (ITA No.69/M/2013 dated 27-03-2018), the co-ordinate bench has noted down that both the parties have agreed that the issue is covered by the order passed by the Tribunal in AY 2007-08. It was further noted down that the Ld CIT(A) has also allowed the appeal of the assessee by holding that the assessee was not holding the work in progress as stock in trade but as capital work in progress and accepted the contention of the assessee that the assessee has not profit on the said construction which can

Thus we notice that the initial order passed in AY 2007-08 was followed in other years also. As noticed earlier, the Tribunal has passed the order for AY 2007-08 mainly on the reasoning that the construction was completed only upto 16% of the project.

Since the assessee had initially collected the advance from prospective buyers, the AO had made the estimate of income on construction activities in AY 2007-08 and the same has been followed in the subsequent years. The assessee has also represented before the Tribunal that the issue is covered by the order passed by AY 2007-08.

As discussed earlier, the reason cited by the assessee against the estimate of income is totally different, i.e., the assessee has decided not to sell any area of the property and decided to retain it as its own asset. We notice that this reasoning of the assessee has not been examined by the AO in this year. The reasoning cited by the assessee completely changes the fact underlying the case. If the assessee has retained the property as its own asset, then there is no scope of estimating income on the construction activity, since the question of estimating income shall arise only if the assessee has proposed to sell the constructed area. We notice that these facts have not been examined by the AO. Accordingly we are of the view that this claim of the 6 M/s. Skyline Prashasti assessee requires examination by the AO. Hence, for the limited purpose of verifying this claim of the assessee that it has retained the building for its own purposes and did not sell any part of it to any one, we are restoring this issue to the file of the AO. If the assessing officer finds the submissions of the assessee correct, then no addition towards profit from construction is warranted in this case. The AO, in the set aside proceedings, may decide this issue in the light of discussion made supra.

In the result, appeal filed by the Revenue is treated as allowed. Order has been pronounced in the Court on 10.10.2018.