ADDL CIT RG 24(1), MUMBAI vs. ARUN DAMJI GADA, MUMBAI

By the impugned order, CIT(A) partly allowed assessee’s appeal after observing as under:- 5.3 I have gone through the contents of the impugned assessment order, relevant grounds of appeal, statement of facts, arguments and submissions of the Ld. Authorized Representatives of the appellant as well as material available on record. I find that the AO has acted on the perception and given his findings on the basis of a few factors such as the following: i. Revenue recognition based on substantial completion of the project or building in the project. ii. Disregarding probable expenditure of ?3.80 crs on the reason of the said expenditures being provisional in nature and not provided for in the books of accounts and further being violative of Sec. 37(1), and iii. Disregarding income and expenditure and losses of the Gaurav Gagan on the reasons of lack of possession, contingency in nature and the same not being provided for in the books of accounts and further being violative of Sec. 37(1) in his views.

4 & Shri Arun Damji Gada 5.3.1 I also find that the AO has not categorically rejected the book results but has derived the figures and results from the book results as evident from the Balance-sheets filed. Furthermore, there is no mention about any accounting defects or challenge to the accounting system found other than the dispute on the incidence of revenue recognition. The financial results in terms of advances received or development expenditures on the various projects are also not in dispute any where in the impugned assessment order. However, I do find some merits in the Assessing Officer's reasoning for revenue recognition based on substantial completion of the project, which fact is not in dispute, but I also find that in the interests of justice and equity and more so keeping in mind various judicial pronouncements and the concept of matching of costs with revenues and timing issues, that the appellant ought to have his fair share of reasonable, realistic and probable share of expenses, since revenues also have to be recognized, keeping in mind the fact that the dates of possession of certain projects/buildings do not fall in the year in question, the action of Assessing Officer is not justified fully. I have noticed the contents and importance of the concept of completion certificate u/s 80IB(10) but since the same is specific for that section, it cannot be stretched into other sections in the absence of explicit provisions of the IT Act, 1961 and clear legislative intent. However, the logic remains true as argued in the Champion Constructions case (supra) that revenue cannot be indefinitely postponed for lack of occupation or completion certificate from any local authority, for there can be a thousand reasons for the delay in obtaining such certificates. There are many other instances where it is found that in spite of such Occupation Certificate {OC}/Completion Certificate (CC), possession is still handed over to customers and people stay in such buildings. Hence only on the reasons of lack of OC/CC, taxable profits cannot be postponed to the future years. At the same time, I am also inclined to find that the same logic extends to the 5 & Shri Arun Damji Gada date of handing over of possession. In a project completion method, the assessee gets a tax gestation period by postponing the taxable profits till the project (in terms of construction ) is substantially complete , may be 80% or so. However further gestation cannot be allowed under the guise of delay in obtaining OC/CC or delay in handing over possession. Hence, the arguments of the appellant to that extent have no merits and deserve to be brushed aside. However, if taxable revenues have to be recognized then in the same spirit, a fairly realistic and foreseeable expenditures and losses if any, have also to be recognized and the judicial discretion in terms of pick and choose or timing mismatch cannot arbitrarily be resorted to in any quasi-judicial proceedings like the assessment proceedings under the IT Act, 1961 here in the instant case. The Hon'ble Supreme Court in the case of Pannalal Brijlal vs. Union of India (1957) 31 ITR 565 (SC) observed that provisions of IT Act, 1961 should be applied in a humane and considered manner. I appreciate the contentions of the Assessing Officer and rebuttals by the Ld. Authorized Representatives of the appellant on AS-7 and for that matter on AS-9. However, it is also to be realized that mere accounting entries or lack of entries or its presentation cannot solely determinethe timing & incidence of and amount of taxation. To this extent the judgements of the Apex court in cases of Kedamath Jute Mfg Co Ltd vs CIT (1971) 82 ITR 363 (Supreme Court) , Tuticorin Alkalies Chemicals 227 ITR 172 (SC) and Sutlej Cotton Mills 116 ITR 1 (SC) are respected and to be followed without any qualifications to them in spirit and essence both. The appellant has claimed that if his projects are to be taxed on substantial completion then his expenditure of Rs.3.80 crores estimated on the basis of similar activities in other project of the appellant subjected to tax, as furnished to the Assessing Officer, also need to be allowed for OC/CC and such other obligations are as a liability ascertained that are indeed an obligation on the builder, but only that quantification of 6 & Shri Arun Damji Gada the estimated expenditure on the same is a matter of examination. This issue has also been confirmed by the Assessing Officer in para # C-11 of his order. The issue that also needs to be addressed is whether the impugned expenditure of Rs.3.80 crores is violative of sec: 37(1) of the IT Act that was the main ground for the Assessing Officer to reject the appellant's contention in the alternative. I find that the appellant had furnished the estimates for these expenses. Typically all these expenses to incur in relation to the impugned completed projects have a common purpose i.e. Expenses for obtaining OC/CC from BMC and construction of Road and compound wall. In M/s. Divya Developments one of the buildings namely Divya Smruti has some other claims of the future expenses like Covering of Nala, Rehabilitation of existing tenants and some consent terms related expenses. In this context, I agree in principle with the Ld. Authorized Representatives of the appellant that the impugned expenditures of Rs.3.80 crs as described are primarily not in the nature of fine or penalty for any illegal purpose and that Explanation to Sec: 37(1) does not visit them i.e they are not violative of Sec. 37(1) since these kind of expenditures on obtaining OC/CC, making of compound wall, title related Court litigations and compensations arising therefrom are not hit with Sec. 37(1) unless it is in the nature of any fine or penalty for any offence or illegality. I also agree with the fact that determination and declaration of illegality or offence is a civil law process which may or may not culminate in a fine or prosecution. Such fine is visited by Sec. 37(1) and not otherwise. It was surely not the intention of the legislation to put the AO in the Civil laws adjudication domain to decide, what is an illegality or offence under other Civil laws. If that would be so, the object and process as enunciated under the Code of Civil Procedure would get frustrated. Even the provisions of Sec. 293 of the IT Act, 1961 bars the jurisdiction of Civil Courts in interfering with the statutory actions of the IT authorities on almost same philosophy of taxation. Having said all the 7 & Shri Arun Damji Gada above, it is now important to arrive at a fair determination of the profits/losses so as to honour the revenue recognition norms and its timing and to apply the same in the spirit of the Income-tax Act, 1961 and various judicial pronouncements together. The appellant claims to have arrived at the estimated expenditures of Rs.3.80 crores based on comparables. However, on examination I find that the same need to be critically reviewed and there is no harm in having a conservative approach which is needed in the facts and circumstances of the instant case keeping in mind that OC/CC are but a vital obligation of any builder and hence these are ascertained obligations in nature but since, the quantification needs examination. In this backdrop a realistic allowance of such estimated expenditures is worked out to serve the interests of justice and business realities in the facts and circumstances of the instant case as under: Project name Exp claimed by appellant Exp now allowed M/s. Nova Nirman Niqam Rs. 75,00,000/= Rs.47,26,000/- Basis: The total expenditures on the above building are Rs.15,75,61,1187- as per para # C.5.2 of the asst order. The total estimated expenditure claimed by the appellant of Rs.75 lacs forms about 4.76 % of the total exp. A realistic basis would be 3 % hence the said expenditure is restricted to Rs.47,26,000/-.

M/s. Divva Developments Divya Chintan Rs.25,00,000/= 13,86,500/- + 9,27,000/- 23,11,500/- DivyaSmit 25,00,000/- 13,86,500/-+9,27,000/- 23,11,500/- DivyaVinayak 25,00,000/- 13,86,500/-+ 9,27,000/- 23,11,500/- DivyaSmruti{ 25,00,000/- 13,86,500/- +9,27,000/- 23,11,500/- 205,00,000/- 1 Cr.

8 & Shri Arun Damji Gada Basis : Out of the above , it is found that Rs.15 lacs per building is claimed in each of the 4 building on account of costs of obtaining OC/CC , thus totaling Rs.60 lacs.

The total expenditures on the above 4 building are Rs.18,48,77,0687- as per para # C.5.4 of the asst order. The total estimated expenditure claimed by the appellant of Rs.60 lacs on OC/CC forms about 5.25 %- of the total exp. A realistic basis would be 3 % hence the said expenditure is restricted to Rs.55,46,000/- i.e Rs.13,86,500/- per building.

Another Rs.10 lacs per building is claimed in each of the 4 building on account of costs of DP road and compound wall, totaling Rs. 40 lacs. The total expenditures on the above 4 building are Rs.18,48,77,068/- as per para # C.5.4 of the asst order. The total estimated expenditure claimed by the appellant of Rs.40 lacs on DP roads & compound wall forms about 2.16 % of the total exp. A realistic basis would be 2 % hence the said expenditure is restricted to Rs.37 lacs i.e Rs.9,27,000/- per building.

In the building Divya Smruti, some additional expenses of about Rs.2 crores are claimed due to issues like covering of nalla, Rehabilitation in Suit No. 422 of 1998 & Suit No. 2657 and consent terms in Suit No. 4195 of 05. These expenditures of Rs.2 crores come to about 21.82% of the project cost of Rs.9,16,55,388/-. A realistic basis would be 10% hence the said expenditure is restricted to Rs.1 cr.

5.3.2 Based on the reasoning and discussion as above and on a conservative note, I find that the completion expenditure remaining only to the extent of Rs.2,39,72,0007-as against Rs.3,80,00,000/- as claimed by the appellant i.e 63% of the estimated expenditure claimed 5.3.3 Now coming to the issue of the building Gaurav Gagan, I find that this 24 storey building, as observed by the Assessing Officer, has been the subject matter of stop work notice and demolition notices from the BMC which resulted in court litigations and the said demolition order was confirmed by the jurisdictional Bombay High court. All these issues and facts are mentioned in the assessment order and stand uncontroversial. Once again going by the observations of the Hon'ble ITAT Mumbai in the case of Champion Constructions Co wherein it was stated that" In any event there will be no justification for treating the surplus of receipt after the entire cost/expenditure to the assessee is recouped as income of the assessee, unless the assessee shows that it is under an obligations to meet a heavy liability which might altogether change the complexion of the resultant profit or loss from the venture ..."and other cases as stated by the Ld. Authorized Representatives of the appellant and going by the fact that even this building Gaurav Gagan was substantially complete, though possession was not given like many other buildings of the appellant, the exercise of undertaking taxable revenue recognition of this building also ought to be judiciously done. It has already been discussed that recognition of revenue for the purpose of taxation cannot be postponed for want of Occupation Certificate or Completion Certificate to be obtained from Brihan Mumbai Municipal Corporation {BMC}, or due to handing over of possession to the customer, the recognition of estimated expenditures or for that matter, coupled with very much incurred losses cannot be indefinitely deferred too under any pretext such as the impugned Court litigation. Hence, the first issue that need to be addressed is whether the said actually incurred expenditures of ^4.19 crores is violative of 10 & Shri Arun Damji Gada Expln to Sec. 37(1) of the IT Act. These expenditures when incurred were on costs of construction like cement, sand, stone, steel, hardware, professional fees, labour charges etc. and not on any fine or penalty or for any purpose prohibited by law as no such observations is found in the impugned assessment order and the appellant also confirms the same. No finding is made to confirm that the said amount of ?4.19 crores contain any fine or penalty levied by BMC or any other State or Govt. authority under any law. The fine or penalty is always paid/ payable to the Govt. coffers under some specific order from a statutory authority meant therefore, such paid fine cannot be refunded to the payer in case he is found not guilty in appeal against the fine so imposed for the alleged infringement of law. Here, in the instant case, there is no dispute that the appellant as a part of the building industry practice started construction activity at Gaurav Gagan in anticipation of making the TDR compliances and getting requisite permissions like ULC and other regularizations. In fact permissions were given and regularizations till the 7th storey were made by the Municipal Commissioner in certain cases other than the appellant. However, thereafter due to a Writ Petition ( PIL 379 of 2003 & 2822 of 07 ) filed by an NGO & another the issue was subject to High court scrutiny alongwith 154 other building constructed in Mumbai. The appellant along with others ( totalling 154 parties in all ) were subjected to the scrutiny of a High court Writ Petition, wherein the Hon'ble High court referred the matter back to the Municipal commissioner of BMC to re- consider about 128 builder cases and regularize their construction, if possible. The appellant's case could not be regularized due to TDR and such technical or document based deficiencies including ULC and hence regularization under the Development Control Regulations 1991 of the Maharashtra Regional Town Planning Act was not permitted under the discretionary powers of the Municipal Commissioner. This decision of the Municipal Commissioner i.e. issue of regularization was 11 & Shri Arun Damji Gada analyzed in depth by the Hon'ble High court of Bombay and the consequential orders as narrated by the Assessing Officer in his order. Hence, it is pertinent to note that the act of constructing disputed storeys by the appellant was amenable to regularization but could not be regularized due to some non compliance of documents and acts by the appellant. It is further important to note that irregularity can be cured but not an illegality. Again, it is of paramount importance to note that if at all the 17 storeys of this construction (from floor 8th to 24th} were not regularized leading to consequential demolition, the same was also due to non compliance of the terms of the BMC contained in their letter dt: 5-8-06 which was a commercial issue like providing TDR and making several compliances etc. in addition to this, no part of this expenditure of Rs.4.19 crores is stated to be towards any fine or penalty levied by any local or Governmental authority, nor any such specific finding of fact by the Assessing Officer in his impugned order is given. Hence, it is held that the said construction expenditure of Rs.4.19 crs is not violative of sec: 37(1) in the facts and circumstances of the instant case. Having said that, the facts and figures as derived from the figures as determined by the Assessing Officer, again need reconsideration to have a proper foundation for the assessment of income or allowance of expenditure/loss. It is pertinent to note that the total advances received for this 24 storey building Gaurav Gagan, was Rs.4,93,97,725 and the total expenditure for constructing this 24 storeyed tower was Rs.4,19,88,066/- as per the AO. It is also important to note that the demolition order is for 17 storeys from 8th floor to 24th floor i.e. almost for 2/3rd of the building. This effectively translates into the statistical fact that 2/3rd of the pro rate advances of this building thus cannot be recognized as taxable revenue for the moment and only 1/3rd can be recognized as taxable revenue. At this stage any issue of interest compensation to the customers cannot be finalized or freezed in the absence of any claim since it is not forseebale nor highly probable.

12 & Shri Arun Damji Gada Hence the claim of the Ld. Authorized Representatives of the appellant on the interest or compensation issue does not stand the litmus test at this stage. However the entire construction costs Rs.4,19,88,066/- has to be treated as expenditure because the 1/3rd structure would remain in place, albeit even this 1/3rd structure would perhaps face damage due to any demolition and the balance 2/3rd stands to be demolished. So the cost of the 2/3rd part also falls or distributed on the 1/3rd part and hence the entire costs of Rs.4.19 crs has to be allowed being actually & factually incurred at some point of time. The total advances received is Rs.4,93,97,725/- of which 1/3rd is Rs.1,44,07,000/-. Hence, revenue of Rs.44,07,000/- should be matched against expenditure Rs.4,19,88,066/- and this translates into a resultant loss of Rs. 2,75,81,066/- rounded off to Rs.2,75,81,000/- as this exercise is reasonably and realistically matches the costs with the revenues in a practical and realistic timing frame and also serves the purpose of justice and ascertainment of real income of the assesses in taxation. This is more so that this loss needs to be allowed at this stage of recognizing revenue irrespective of the eventuality that the appellant or anyone else may challenge the demolition order before the Hon'ble Supreme court as in the absence of any specific orders or directions from superior courts, one cannot indefinitely postpone taxation responses. Having said so, that just as a case's pendency in a court does not justify profits to be postponed for taxation purposes, so also it does not justify losses to be postponed, unless specifically mentioned by the superior court to the effect "till the outcome of the case". The losses such as here in the instant case are certainly allowable in view of the ratio of Hon'ble Apex Court in the famous case of CIT v Piara Singh 120 ITR 40 (SC) wherein it was held that the losses incurred by an assessee carrying his peculiar type of business in a regular way has to be allowed. There is no doubt that appellant as a builder has not done anything which is not being done by any body else in his trade or business regularly. Certainly this is a 13 & Shri Arun Damji Gada loss incurred by the appellant during his regular course of business. Otherwise also, should that not be the case, I find that in the appellant's case herein, almost all his projects are facing court litigations, then there would virtually be no loss nor any profit recognition. That is surely not the intention of the legislation and hence if profits are recognized despite ongoing court litigations, so should losses be also recognized despite ongoing court litigations. Hence the losses on a/c of the building Gaurav Gagan in M/s. Nova Nirman Nigam , albeit to a lesser extent need to be appreciated and allowed. This also takes care of the fact that should the demolition order be waived or quashed by the Hon'ble supreme court, then in that event, the revenue generated from the sale of the remaining retained floors will have to be offered for tax then and no harm or loss to the exchequer is caused as it would tantamount to a fresh breath to the dead or finished project. 5.3.4 Summing up the above the following results are arrived at out of my findings of facts in the facts and circumstances of the instant case: Surplus (profit) from 7 buildings of M/s. Nova Nirman Nigam leaving Rs. 1,15,03,540/- aside Gaurav Gagan bldg Rs. 5,81,02,094/- Surplus (profit) from 4 buildings of M/s. Divya Developments Total Rs.6,96,05,634/- Less : Out of claimed Completion expenditure Rs.2,39,72,000/- Loss on Gaurav Gagan Rs.2,75,81,000/- Net Profit Rs.1,80,52,634/- Hence the addition of Rs.6,96,05,634/- stands reduced to Rs.1,80,52,634/-. To that extent Ground 1,3,4,5 stands' disposed of. The appellant gets relief of Rs.5,15,53,000/-.

Ground No: 2 Without prejudice to the above and on the facts and circumstances of the case and in law the Ld. AO erred in estimating the profit of M/s. Nova Estate at Rs.9,38,7717-based on ad-hoc amount of 15% of the advances received { of Rs.62,58,474/-} in respect of Wing-A of the Building known as Divya Shivangan.

6.1 The Assessing Officer has observed that in the case of the proprietary firm M/s. Nova Estate, the appellant was constructing some buildings by the name of Divya Shivangan and out of the 3 wings, the work of Wing-A (one of the wings) was complete to the extent of 79%. The advances received for this Wing-A was Rs.62.58 lacs. Hence the AO proceeded to determine the taxable profit at 15% of the advances i.e 15% of Rs. 62.58 lacs = Rs. 9,38,771/-.

6.2 The Authorized Representatives of the appellant contended that the basis of the Assessing Officer to arrive at any arbitrary percentage of 15% was irrational and unfounded and devoid of any logic. Hence the appellant objected to the same besides relying on his other arguments as per the 2 paper book filed.

6.3 I have gone through the contents of the impugned assessment order, statement of facts, submissions of the appellant as well as material available on record. I find that the working of the Assessing Officer is based on the profit working as derived from the Balance-sheets and hence the same has a logical basis. So also since the said Wing-A is completed to the extent of 79%, it tantamount to substantial completion and hence taxable revenue should be recognized therein. Hence, I do 15 & Shri Arun Damji Gada not find any legal infirmity in the action of Ld. Assessing Officer. Accordingly, the addition of Rs.9,38,771/- is upheld as any interference is unwarranted in the facts and circumstances of the instant case. In the result Ground No. 2 is dismissed. (Addition Confirmed: Rs. 9,38,771/-) 7. The appellant has sought relief in Ground No.6 and 6A which read as under: "Ground No : 6 On the facts and circumstances of the case and in law the Ld. AO erred in disallowing the expenditure of Rs.11,82,0817- u/s 40(a)(ia) in respect of Divya Vaishnavi project undertaken in the proprietary concern M/s. Divya Development notwithstanding the fact that your appellant has not claimed these expenses against any profits in any P & L a/c. Ground No. 6A " In the facts and circumstances of the case and in law the Ld. ACIT has erred in disallowing the expenditure of Rs.7,90,197/- u/s 40(a)(ia) in the proprietory firm M/s. Divya Development , M/s. Nova Space and M/s. Nova Estate, notwithstanding the fact that your appellant has not claimed these expenses against any profits in any P & L a/c.". Since both these grounds have common issues, the same are disposed off jointly.

7.1 The Assessing Officer had observed that in the case of M/s. Divya Developments certain expenses/payments of Rs.11,82,0817- in violation of the provisions of the Sec. 40(a)(ia) of the IT Act, 1961, have been made and hence the same were disallowed u/s 40(a)(ia). Hence the addition of Rs.11,82,0817-. So also in the case of Nova Nirman Nigan and M/s. Divya Developments , M/s. Nova Space and M/s. Nova Estate certain expenses payments of Rs.790,197/- in violation of sec: 40(a)(ia)

7.2 The appellant submitted that none of these expenses were claimed in the P & L a/c as no P & L a/c itself was drawn up by the appellant as he had not recognized any revenues as per his notes to accounts. The appellant states that these expenses were not claimed u/s 30 to 38. The appellant also stated that Sec: 40(a)(ia) states that" Notwithstanding anything to the contrary in sections 30 to 38 ..." and that since these expenses were not claimed in any P & L to determine any taxable profit, the same cannot be dis-allowed u/s 40(a)(ia).

7.3 I have gone through the contents of the impugned assessment order, statement of facts, submissions of the appellant as well as material available on record on this ground. I find that Once again the facts stand un-controverted. There is no dispute to the fact that TDS has not been deducted and also to the fact that the said expenses stand covered u/s 30 to 38. However, it is also to be noted that disallowance of an expense can be upheld only if that expense is claimed against taxable profits in any Profit/Loss a/c as clear from the opening lines of the Sec. 40 itself. The same has not been done here. When an expense has not been claimed or charged in the Profit & Loss a/c, the same cannot be disallowed. Hence, the said disallowance of Rs.11,82,081/- and Rs.790,197/- u/s 40(a)(ia) stand unwarranted and not in accordance with law. To that extent the said additions are deleted in the facts and circumstances of the instant case and both the said Grounds are allowed.

17 & Shri Arun Damji Gada 6. We have considered rival contentions and carefully gone through the orders of the authorities below. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. From the record we found that assessee is in the business of construction. During the course of scrutiny assessment books of accounts were not rejected nor any defect in the accounting system found by the AO. The AO has relied on the Balance-sheet figures drawn from the audited books of accounts and has not challenged them. If the books results are not rejected by the AO and no challenge to the accounts is found nor any whisper of any defect in the accounting system or under-estimation of profits, the issue here is timing of recognition of revenue and nor underestimation.

22 & Shri Arun Damji Gada 15. In the case of Metal Box Co. 73 ITR 0053, Hon’ble Supreme Court held that Provisions made against anticipated losses and contingencies are charges against profits and therefore to be taken into account against gross receipts in the P & L a/'c & B/sheet.

23 & Shri Arun Damji Gada 19. In view of the above proposition of law if taxable profits has to be recognised by AO, then simultaneously the provision of estimated expenditure for completing the same projects should also be recognised even if no provision made in books because the assessee had at the time of audit not taken taxable profits as per its view, hence not made provisions then. Concept of matching costs with revenue is stressed upon. However, during course of assessment the AO relied on Accounting Standard AS-7 for revenue recognition. However AS-7 is applicable for contractors and has no application for builders. Further AS-7 is not notified u/s 145(2) and neither is AS-4 & 29 which was relied by AO. Even otherwise as per para # 21 and 31 of AS-7, an expected loss on the construction contract should be recognized as an expense immediately in accordance with para # 35. Further as per para # 35 of AS-7 (PB: 27 ) when it is probable that total contract cost will exceed total contract revenue, the expected loss should be recognized as an expense immediately.

24 & Shri Arun Damji Gada 22. In the instant case before us since the income was not recognized due to situation discussed above, question of creating any provision for any expenditure of Rs.3.50 Crores did not arise. However, if the Ld. ACIT proposed to construct a P & L a/c due to virtual completion of the bldgs, then it would only be fair and just to also allow the expenditures of Rs. 3.80 crs pending towards the said projects. It is pertinent to note that none of these expenditures on obtaining OC, Constructing Compound walls, constructing nallahs or rehabilitating tenants etc was violative of Explanation to sec- 37(l), since they were routine finalization expenses like DP road, covering the nallahs, rehabilitating the tenants etc. The detailed list of such expenditure was filed by the assessee before the lower authorities and also placed before us in the paper book. However the AO grossly misinterpreted their justification as violation of Development Constructions (DC) Regulations or Maharashtra Regional Town Planning Act (MRTP). The AO has NOT doubted the veracity or genuineness of these expenditures of Rs. 3.80 crs but has only treated them as violative of Explanation to sec- 37(1) and the same stands rebutted by assessee. In fact the AO has in a way accepted this proposition in Para # C.6 on Pg: 14 of the order. The AO has not contested or rebutted the quantum of the probable pending expenditure of Rs. 3.80 crores but has only denied them by applying explanation to sec. 37(l) and the lack of book entries. Hence on the quantum front the said expenses go unchallenged.

25 & Shri Arun Damji Gada The crux of the matter is that the purpose of the expenditure incurred should be viewed in isolation unbothered by anything else for determining whether or not the explanation is attracted. Out of this expenditure, CIT(A) has allowed Rs.2,39,72,000/- on Rs.3.80 crores which works out to be Rs.63% of claim expenditure. After considering nature of expenditure which are essentially required to be incurred to earn revenue from sale of flat vis-à-vis nature of assessee’s business being a builder, we modify the order of CIT(A) and direct AO to allow 80% of these expenditure which works out to Rs.2,92,50,000/-. Thus, in place of expenditure allowed by CIT(A) at Rs.2,39,72,000/-, we direct the AO to allow expenditure of Rs.2,92,50,000/- which works out to be 80% of the expenditure so claimed. We direct accordingly.

26 & Shri Arun Damji Gada 4,19,88,000 By Sales revenue to be taken only to the To Expenditure extent of l/3rd of the Bldg For full Bldg incl the 2/3rd part of demolition l/3rd of 4:93,97,725 Rs. 1,44,07,000 because 2/3rd Bldg for demolition By Net Loss Rs. 2,75,81,000