ASST CIT 27(2), NAVI MUMBAI vs. MERIT MAGNUM CONSTRUCTION, MUMBAI

per clause 8 of the JDA. Clause 8 of the JDA mentions as to how the consideration

amount (so-called deposit) was to be paid to the assessee-firm:

i. Total amount Rs. 741.74 crores ii. Paid before execution of agreement Rs. 37.09 crores iii. At the time of execution of agreement Rs. 37.09 crores iv. From time to time as may be required by Assessee to fund the rehabilitation and settlement Rs. 111.26 crores v. From time to time in proportion to the area out of Balance Land for which Commencement Certificate is received Rs. 556.30 crores

consideration amount that has been camouflaged as security deposit and moreover total

amount was to be paid before commencement certificate is received. That it means that

the assessee firm was not required to invest anything in the construction to be made on

the balance land. The entire construction, sale and other incidental activities were to be

carried out by the co-developer and the assessee firm had to simply transfer its

development rights to the co-developer. The entire consideration amount was required to

be paid to the assessee firm before commencement of work on Balance Land.

8 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018

investment to be made in the construction of the building on the balance land. Therefore,

he held that the claim of the assessee that the consideration money in the JDA will be

taxable on completion of the project is not tenable. He held that the income has accrued

to the assessee on transfer of development rights to SRPL on securing of joint agreement

on 16.01.2008. He further rejected the assessee’s contention that JDA has been

terminated as he noted that the copy of the letter dated 22.01.2012 of the Society was also

furnished wherein it was mentioned that the society has terminated the development and

power of Attorney. However, the assessee had not accepted the above termination and

has disputed the termination. In books of account expenses have been booked in respect

of this project even after 22.01.2012 and still being booked in the current financial year

i.e. 2013-14. Further, the subsequent acts occurring after the accrual of income during A

Y 2008-09 are not relevant to determination of income or profit for taxation. He further

rejected the assessee’s contentions that till the balance sheet date, i.e., 31.03.2008 only

Rs.60.97 crores was received as security deposit. He referred to the concept of mercantile

system of accounting and opined that the entire receipt of Rs.741.74 crores becomes

taxable on the date of signing of co-development agreement granting substantial

development as well as other rights. He held that the termination of agreement on

03.11.2012 does not affect the taxability of income on accrual basis in the assessment

year 2008-09. As regards the estimated cost of the project submitted by the assessee, the

A.O. held that the same was exaggerated. In view of the fact that the actual expenditure

incurred upto 31.03.2014 is approximately Rs.41.83 crores only. He held that the claim of

9 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 estimated expenditure is not supported by certificate of any architect. Moreover,

estimated expenditure cannot be higher than the estimate of revenue to be generated from

JDA. That no prudent businessman will enter into such an agreement where estimated

expenditure is higher than revenue to be received. That therefore, the claim of the

estimated expenditure of Rs.819.15 is rejected.

fund required for meeting the rehabilitation expenses in respect of the property is

estimated at Rs.180 crores to Rs.200 crores. The A.O. concluded as under:

14.3 In the instant case, as discussed earlier, the entire consideration of Rs. 741.74 crores arisen and accrued to the assessee firm in A Y 2008-09. However, the assessee has not furnished details of any expense incurred in the same assessment year (i.e. A Y 2008-09), it has furnished the cost incurred in subsequent assessment years. Now let us examine as to whether the expenses incurred by the assessee firm after the assessment year under consideration can be allowed against the income that arose and accrued during A Y 2008-09. In this regard, reference may be made to the decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. vs. CIT 37 ITR 1. In this case the Hon'ble Supreme Court held that the accrued liability to be discharged at future date be allowed in cases where the assessee is following mercantile system of accounting. In this case the assessee and the JDA partner has quantified the estimated expenses at Rs. 180 to Rs. 200 crores. However, the expenditure is found to be excessive as the expenditure incurred up to financial year 2013-14 is approximately Rs. 41.83 crores only. Therefore, only this expenditure can be allowed against the revenue arose and accrued in the financial year 2007-08 relevant to A Y 2008-09 on transfer of development rights to SRPL Accordingly the difference amount (Rs. 741.41crores- Rs. 41.83 crores) i.e. Rs. 699.58 crores is liable to be added to total income of the assessee firm as business profits on transfer of the development rights to the co-developer M/s SRPL.

u/s. 144A of the Act. He referred to the requisition of the assessment records by the Addl.

CIT. He referred to his observations. The Addl. CIT noted the A.O.’s observation that the

10 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 consideration amounts of Rs.741.74 crores were to be taxed in A.Y. 2008-09. He agreed

with the A.O. in rejecting the expected expenditure of Rs.819.15 crores in this regard.

Thereafter the Addl. CIT gave the following directions:

11 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 13. After reproducing the above, the A.O. held that in view of the aforesaid binding

direction of the Ld. Joint CIT the total income is computed as under:

Income as per order under section 143(3) dt 15.12.2010 19,17,410/- Add: as per para 14.3 699,58,00,000 699,77,17,410 Gross Total Income 699,77,17,410 Less: Deduction under Chapter VIA Nil - Total Income 699,77,17,410 14. Before proceeding further we may gainfully refer to the provision of section 144A

of the Act. The said section reads as under: Power of Joint Commissioner to issue directions in certain cases. 144A. A Joint Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and such directions shall be binding on the Assessing Officer : Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard. Explanation.—For the purposes of this section no direction as to the lines on which an investigation connected with the assessment should be made, shall be deemed to be a direction prejudicial to the assessee.

CIT giving direction to the assessee for the guidance of the A.O. to enable him to

complete the assessment. We find that on the premise of section 144A in the present

case, the Addl. CIT has not provided any guidance to the A.O., rather he has vitiated the

assessment order. Firstly, we note that in one part of his order, he has accepted the

assessee’s contention that the security deposit is a camouflaged receipt of income. While

in another part he has directed that the JDA has been terminated on 03.11.2012. Hence,

12 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 the security deposit of Rs.88.52 crores is liable to be taxed in the A.Y. 2013-14 as the

benefit derived from the business u/s. 28 of the Act. We note that A.Y. 2013-14 was

never an issue in consideration in this case by giving such a direction, the Addl. CIT has

clearly equivocated on this point. He further directed that the assessee’s income from

transfer of the development right to be assessed in A.Y. 2008-09 on protective bases. It is

very strange that without any substantive assessment, how can there be a protective

assessment. By making certain observations in this regard, the Addl. CIT has clearly

referred to the uncertainty in the projects. In doing so, he is inferring that the addition of

income done by the A.O. is not sustainable on substantive basis. In our considered

opinion, this is very peculiar direction by the Addl. CIT. The A.O. despite noting that the

direction of the Addl. CIT was binding on him has made the assessment only with

reference to his observation in his para 14.3 of the order, which only speaks of clear

addition in the hands of the assessee and not a protective assessment.

upheld the validity of reopening. Referring to certain case laws, the ld. CIT(A) held that

since the security deposits as on 31.03.2008 was reflected in the current liability and

provision, there was no real account of the income from the assessee. Here we note that

the ld. CIT(A) has completely ignored the A.O.’s observation that the security deposits

was a camouflage and a structure of the income receipt. Just merely because the same

have been reflected in the balance sheet under the current liability and provision, the

same cannot be a conclusive proof of the substance thereof. It is settled law that it is the

13 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 substance of the transaction and not the nomenclature that ignores. When the A.O. has

clearly given a finding that this was a camouflaged income, the ld. CIT(A) should have

unambiguously given a finding rejecting the same instead of getting under the shelter of

nomenclature in the balance sheet to reject the A.O.’s finding. Thereafter, the ld. CIT(A)

noted the observations of the Addl. CIT which we have already observed that which

infact has vitiated the assessment order. He found fault in the Addl. CIT’s directions that

the amount should be added protectively without any substantive assessment. He

proceeded to hold that mere receipt of security deposit does not accrue any income to the

assessee. As the assessee has reflected the said security deposit under the head current

liabilities and the other company has reflected the same under the head loans and

advance in the balance sheet, therefore, he found the intention of the assessee to be clear.

Accordingly, he directed that the addition of Rs.6,99,58,00,000/- should be deleted.

the addition and the assessee has challenged the reopening as well as the ld. CIT(A)’s not

passing a speaking order on the issue that there could be any protective assessment

without any substantive assessment. As noted earlier, the issue relating to reopening has

not been pressed by the ld. Counsel of the assessee.

assessee has made elaborate submissions in support of the deletion of the addition. He

gave various propositions and referred to the several case laws.

14 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 19. The ld. Counsel of the assessee inter alia submitted that as per the joint

development agreement balance land is to be made vacant and demarcated along with

title and is to be handed over to SRPL along with the Commencement Certificate. That

all the expenses in relation to development of the balance land is to be borne by the co-

developer. That income/revenue for the developer and the co-developer is from the sale

of the building on balance land/free sale building. That joint development agreement has

neither been registered nor any stamp duty have been paid till date. That the said JDA

dated 16.01.2008 is on a Rs.100 Non Judicial stamp paper. That there was termination of

the developer agreement by the Wadala Village Welfare Co-op. Housing Society Ltd. on

22.01.2011. That as regards the current status of JDA, there are various pendency at

various forums. That security deposit cannot be treated as income. That the real income

has accrued to the assessee. That the assessee is availing project completion method. The

ld. Counsel of the assessee has further referred to the Hon'ble Jurisdictional High Court

decision in the case of CIT vs. Chemosyn Ltd. [TS-73-HC-2015 (Bom)]. That in the

present case, the assessee has merely received security deposit which is to be refunded.

The ld. Counsel of the assessee further referred to the accounting standard 9. The ld.

Counsel of the assessee further extensively referred to the direction of the JCIT u/s.

144A. He further placed reliance upon the decision of the Hon'ble Bombay High Court

in the case of Pr. CIT vs. Mr. Fardeen Khan (in ITA No.162 of 2016 (Bom). He further

referred to the assessment in other years, i.e., A.Y. 2009-10 where after the verification,

the A.O. held that the refundable security deposit cannot be taxed. He further referred to

the assessment order of the assessee M/s. Money Magnum Nest Pvt. Ltd. (sister concern

15 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 of the assessee), wherein the security deposit upon entering into a JDA has rightly not

been treated as income.

that income has accrued to the assessee upon entering into the joint development

agreement. The A.O. has given a finding that the joint development agreement was

signed between the assessee and another concern where the person representing the

assessee and the other concern was same person. The A.O. has given a finding that the

JDA was so structured that the security deposit should be considered as part of the

income. Accordingly, the A.O. has assessed the same as assessee’s income. Thereafter, it

is noted that the JCIT u/s. 144A has given an ambiguous direction wherein he has

directed that the addition should be treated as protective assessment without specifying

as to in which hand substantive assessment should be done. The ld. CIT(A) has

elaborately dealt with this issue and referred to several case laws that there cannot be any

protective assessment without any substantive assessment. Despite that he has not

quashed the assessment on this account. In this regard, the assessee is aggrieved and in

the cross objection it has been urged that the ld. CIT(A) has erred in not giving a

speaking order on the issue of protective assessment. We find that in our considered

opinion, this grievance of the assessee is well founded. It may be that being aware of the

vitiation caused by the direction of the JCIT, the ld. CIT(A) has not given a speaking

order on this issue. Be as it may, it was incumbent upon the ld. CIT(A) to give a

speaking order on the validity of this assessment which has been directed by the JCIT to

16 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 be made a protective assessment without any substantive assessment anywhere or in any

hand. It may not be out of place here to note that as held by the Hon'ble Apex Court in

the case of Kapoorchand Shrimal [1981] 131 ITR 451 (SC) in connection with the

appeal before the ld. CIT(A) that it is the duty of appellate authority to remove the errors

in the order of authorities below and remit the issue with or without direction for

reconsideration unless prohibited by law. Accordingly, since the ld. CIT(A) has not

given a speaking order on this issue, we are of the considered opinion that the interest of

the justice will be served if this issue is remitted to the file of the ld. CIT(A) to pass a

speaking order on this issue as to whether he is sustaining or quashing the assessment on

this issue.

speaking order on the assessee’s challenge to the issue of protective assessment. In this

connection, we note that the ld. CIT(A) has not addressed the A.O.’s view that the

security deposit was income and JDA was so structured as to camouflage income as

security deposit. That the person who signed the agreement on behalf of both the

company was same person. The A.O. had also referred to the decision of the Hon'ble

Jurisdictional High Court in the case of Chatarbhuj Dwarkadas Kapadia vs CIT 129

Taxman 497 (Bom). The ld. CIT(A) without dislodging A.O.’s finding has taken shelter

under the headings in which this amount is reflected in the balance sheet. As already

pointed out by us above it is the substance of the transaction which counts. If the ld.

CIT(A) was of the opinion that the A.O.’s finding and observations regarding the

17 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 security deposits being a camouflage for income was incorrect, he should have clearly

stated the same instead of simply referring to the nomenclature in the balance sheet. This

line of the ld. CIT(A)’s reasoning is admittedly not sustainable in view of the settled law

that it is the substance that counts and not the nomenclature.

cancellation of JDA happened much later in subsequent year after the income has

accrued during the year. Further, the A.O. has also noted that the assessee has not

accepted the cancellation of JDA. It is nowhere emanating from the finding of the ld.

CIT(A) that merely upon forfeiture of the said security deposit, the assessee has given up

all its right pursuant to the agreement. The ld. Counsel of the assessee has himself

admitted that various matters in this regard are pending before the various forums.

Hence, we are of the considered opinion that the ld. CIT(A) should give a finding on the

factual aspects raised by the Assessing Officer. Then only the issue of application of case

laws will arise.

merits of the deletion of the addition also to the file of the ld. CIT(A). While considering

the merits of the addition, the ld. CIT(A) shall bear in mind the various case laws on this

subject referred by the A.O. and the ld. Counsel of the assessee.

18 ITA No. 6656/Mum/2016 & CO No. 61/Mum/2018 24. In the result, the Revenue’s appeal as well as assessee’s cross objection stands

allowed for statistical purpose.

Order pronounced in the open court on 25.10.2018

Sd/- Sd/- (Ram Lal Negi) (Shamim Yahya) Judicial Member Accountant Member Mumbai; Dated : 25.10.2018 Roshani, Sr. PS

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai