CAPRICON REALTY LTD.,MUMBAI vs. ACIT CIR 2(1), MUMBAI

The aforesaid expenses were debited to the Profit and Loss Account which were disallowed by the A.O as the real estate development project was not completed during the year under consideration and the assessee was following Project Completion method. The AO however allowed the said expenses to be carried forward to Real Estate Development Work-in-Progress Account which shall be allowed in the year in which project stood completed by the assessee. The assessee did not challenge these additions before the learned CIT(A) against quantum assessment. The A.O observed that the assessee wrongly claimed expenses leading to higher losses to be carried forward and set off against future business profits, wherein it was not entitled to claim said expenses as the assessee was following project completion method and no project was completed during the year under consideration, thus leading to furnishing of inaccurate particulars of income by the assessee as per AO. The said disallowance of expenses was accepted by the assessee as the assessee was following project completion method and no challenge was made by the assessee on the above issues before learned CIT(A) against quantum assessment. The A.O levied the penalty u/s 271(1)(c) of Rs.5,24,37,851/- being 100% of the tax sought to be evaded by the assessee , vide penalty order dated 08-03-2010 passed by the AO u/s 271(1)(c) which was later confirmed by learned CIT(A). The assessee has suo- 10 motu voluntarily of its own revised its financial accounts for the financial year 2004-05 wherein the said losses were debited to Real Estate Development Work-in-Progress instead of Profit and loss account vide audited revised accounts for financial year 2005-06 which were signed by Directors and auditors on 21-08-2006 which were later approved by Shareholders in Annual General Meeting held on 29-09-2006. The AO issued first notice u/s 143(2) selecting assessee‟s case for scrutiny only on 28-10- 2006 while the assessee revised its financial accounts prior to that on 21-08- 2006. In any case it is not the case of Revenue that these are false/bogus claim of loss or some false expenses were claimed, the case of Revenue is that the assessee has claimed expenses and consequently business losses to be carried forward in the previous year relevant to the assessment year while the project was not completed in the previous year under consideration and since the assessee is following project completion method , these expenses could not have been claimed in the year under consideration rather the same ought to have been debited to Real Estate Development WIP which would have been carried forward and set off against revenue in the year when project stood completed. In-fact , the assessee by claiming business losses in the impugned year has put itself in to the disadvantageous position as the business losses are allowed to be carried forward only for eight years and in case project stood completed after eight years, the assessee will not get benefit of set off of business loss while if the assessee would have debited the said expenses to Real Estate Development WIP , then it could have carried forward the said WIP indefinitely till the project stood completed which could have been set off in the year when the project stood completed even if it is beyond eight years.Thus, there could not be any advantage to the assessee in claiming business losses/expenses in the year under consideration and it was a bonafide belief which led assessee to claim those expenses in the instant year which was later suo motu voluntarily rectified by the assessee itself. Thus , no malafide or an intent to defraud Revenue can be attributed to the assessee but it is a case of bonafide belief in claiming expenses/losses in the year of incurring of said expenses/losses . Thus, the issue is covered in favour of the assessee by the decision of Hon‟ble Supreme Court in the case of Reliance Petroproducts Private Ltd (supra) and no penalty is exigible u/s. 271(1)(c) and no penalty is exigible on the assessee under the given facts and circumstances of the case.

Further we have observed that the tribunal has deleted penalty levied u/s 271(1)(c) in the case of Chaitra Reality Ltd. v. DCIT in for assessment year 2005-06 under identical/similar circumstances, wherein the tribunal deleted the penalty vide order dated 18.03.2011 by holding as under:

“6. We have perused the records and considered the rival contentions carefully. The assessee is a developer who was executing a property development project and method of accounting followed was project completion method. The assessee had however claimed expenses amounting to Rs.33,11,617/- consisting interest of Rs.25,22,797/- and other day to day expenses in the profit and loss account. This has been disallowed by the AO on the ground that the expenditure could be claimed only in the year of completion. The disallowance had been accepted by the assessee. However the AO had also imposed penalty under section 271(1)(c) @ 200% of tax sought to be evaded which in appeal was reduced to 100% of tax sought to be evaded. The issue is whether on the facts of the case penalty under section 271(1)(c) can be levied.

6.1 A penalty under section 271(1)(c) is only a civil liability as held by the Hon’ble Supreme Court in case of Dharmendra Textiles and Processors (supra) and willful concealment is not required to be proved by the revenue. However each and every addition in the assessment cannot automatically lead to penalty under section 271(1)(c). A case for penalty has to be evaluated in terms of the Explanation 1 to section 271(1)(c) as per which in case of any addition made in assessment even if the assessee is not able to substantiate the explanation but is able to prove that the explanation is bonafide and all necessary details have been submitted penalty under section 271(1)(c) cannot be levied. In this case there is no dispute that details of expenses had been given. The case of the assessee is that the claim had been made under the bonafide belief that such expenses were allowable from year to year basis. We also note that allowability of expenses such as interest etc on year to year basis or in the year of completion of project has been a debatable issue. There have been contrary decisions of the various benches of the tribunal. The special bench of the tribunal in case of Wall Street Construction Pvt. Ltd. Vs JCIT (supra) had rendered decision only vide order dated 22.9.2005 in which it was held that the interest has to be allowed in the year of completion of the project. The said decision it has been pointed out was published in the ITD only in the year 2006. Moreover the decision of the special bench has been disputed before the High Court where the appeal is pending. Under such circumstances in our view it is possible to form a bonafide belief on the date of filing return of income i.e. on 31.10.2005 that the expenses could be allowed from year to year basis. The Learned AR has also submitted that the assessee had no other income even till today and therefore there was no advantage to the assessee in claiming expenses and declare losses from year to year as the losses could be carried forward only for a limited number of years. In such a situation claiming the expenses in the year of completion would have been advantages to the assessee as in that case all the expenses could have been allowed. Considering the entirety of facts and circumstances, in our view, explanation of the assessee that the claim had been made under bonafide belief has to be accepted and it will not be appropriate to levy penalty under section 271(1)(c) in this case. Accordingly we set aside the order of CIT(A) and delete the penalty levied.” It is also observed that the tribunal has on the identical/similar grounds deleted penalty levied u/s 271(1)(c) in the case of M/s. Bhishma Reality Ltd. v. ACIT in for AY 2005-06 vide orders dated 30.09.2016, wherein the tribunal deleted the penalty by holding as under: “6. In the aforesaid background, we have perused the decision of our coordinate Bench in the case of M/s. Chaitra Realty Ltd. (supra), which is a sister concern of the assessee and is also one of the three SPVs (apart from the assessee) which has been tasked with the implementation of the rehabilitation scheme dated 1.4.2004 sanctioned by the BIFR in the case of ‘The Hindoostan Spinning & Weaving Mills Ltd.’. In the case of M/s. Chaitra Realty Ltd. also, similar additions were made and penalty was imposed u/s 271(1)(c) of the Act. In fact, in the impugned order passed by the Assessing Officer levying the penalty, a reference has also been made to the penalty imposed by him in the case of M/s. Chaitra Realty Ltd. In the case of M/s. Chaitra Realty Ltd. (supra), the Tribunal deleted the penalty by making the following discussion :-

“6. We have perused the records and considered the rival contentions carefully. The assessee is a developer who was executing a property development project and method of accounting followed was project completion method. The assessee had however claimed expenses amounting to Rs.33,11,617/- consisting interest of Rs.25,22,797/- and other day to day expenses in the profit and loss account. This has been disallowed by the AO on the ground that the expenditure could be claimed only in the year of completion. The disallowance had been accepted by the assessee. However the AO had also imposed penalty under section 271(1)(c) @ 200% of tax sought to be evaded which in appeal was reduced to 100% of tax sought to be evaded. The issue is whether on the facts of the case penalty under section 271(1)(c) can be levied.

6.1 A penalty under section 271(1)(c) is only a civil liability as held by the Hon’ble Supreme Court in case of Dharmendra Textiles and Processors (supra) and willful concealment is not required to be proved by the revenue. However each and every addition in the assessment cannot automatically lead to penalty under section 271(1)(c). A case for penalty has to be evaluated in terms of the Explanation 1 to section 271(1)(c) as per which in case of any addition made in assessment even if the assessee is not able to substantiate the explanation but is able to prove that the explanation is bonafide and all necessary details have been submitted penalty under section 271(1)(c) cannot be levied. In this case there is no dispute that details of expenses had been given. The case of the assessee is that the claim had been made under the bonafide belief that such expenses were allowable from year to year basis. We also note that allowability of expenses such as interest etc on year to year basis or in the year of completion of project has been a debatable issue. There have been contrary decisions of the various benches of the tribunal. The special bench of the tribunal in case of Wall Street Construction Pvt. Ltd. Vs JCIT (supra) had rendered decision only vide order dated 22.9.2005 in which it was held that the interest has to be allowed in the year of completion of the project. The said decision it has been pointed out was published in the ITD only in the year 2006. Moreover the decision of the special bench has been disputed before the High Court where the appeal is pending. Under such circumstances in our view it is possible to form a bonafide belief on the date of filing return of income i.e. on 31.10.2005 that the expenses could be allowed from year to year basis. The Learned AR has also submitted that the assessee had no other income even till today and therefore there was no advantage to the assessee in claiming expenses and declare losses from year to year as the losses could be carried forward only for a limited number of years. In such a situation claiming the expenses in the year of completion would have been advantages to the assessee as in that case all the expenses could have been allowed. Considering the entirety of facts and circumstances, in our view, explanation of the assessee that the claim had been made under bonafide belief has to be accepted and it will not be appropriate to levy penalty under section 271(1)(c) in this case. Accordingly we set aside the order of CIT(A) and delete the penalty levied.”

7. Following the aforesaid precedent, which has been rendered under identical circumstances, we set-aside the order of CIT(A) and direct the Assessing Officer to delete the penalty imposed u/s 271(1)(c) of the Act.

Order pronounced in the open court on 28.11.2017

आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 28.11.2017 को की गई ।