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Income Tax Appellate Tribunal, MUMBAI BENCH “H” MUMBAI
Before: SHRI D.T. GARASIA & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Pr. Commissioner of Income Tax (Appeals)-28, Navi Mumbai (hereinafter referred to as ‘PCIT’) u/s 263 of the Income Tax Act 1961, (the ‘Act’) dated 13.03.2015.
The grounds of appeal
filed by the assessee read as under:
1. The learned Pr. CIT has erred in law as well as on facts while passing his order u/s 263 due to the following: a. Non-letable / Non-rentable / In-complete nature of the property has not been considered by him in spite of the clear evidence produced before him. Incomplete property cannot be considered as property capable of being let out u/s 22.
2. The following conclusions / presumptions made by the learned Pr. CIT are misleading and sans application of mind: a. Despite available evidence before him, failed to appreciate that the Closing Stock stated in the Balance Sheet is actually Work in Progress, stated as Finished Goods merely for understanding due to the fact that Sales have been recognized in respect of these projects. Substance over form has not been appreciated by the learned Pr. CIT. b. Contended "after thought" by the Assessee despite submission of evidence to the contrary indicates lack of application of mind by the learned Pr. CIT. Completion Certificates dating post the assessment year submitted before him clearly indicate the in-complete nature of the stocks held by the Assessee. c. Failed to consider his own contention stated in the Order appealed against in its page 8, "Furthermore, application of ALV to determine the tax is regardless of whether actual income is received; it is premised on what constitutes a reasonable letting value, if the property were to be leased out in the marketplace." The property in this case is not capable of being let out, hence cannot be a property as contemplated u/s 22.
3. Your Appellant requests and prays in the circumstance, that the erroneous order made by the learned Pr. CIT be set aside and the Assessment Order set aside by the learned Pr. CIT be directed to be restored to meet the ends of justice.
3. Briefly stated, the facts of the case are that the assessee-firm filed its return of income for the AY 2010-11 on 14.10.2010 declaring total income at Rs.1,08,66,650/-. The assessee-firm is a builder and developer. The Assessing Officer (AO) completed the assessment u/s 143(3) on 06.03.2013 at an income of Rs.1,77,09,235/-. The PCIT observed that the rental income of unsold flats/shops should have been assessed as income from house property as per the provisions of section 22 since these flats cannot be said to have been used by the assessee-firm for its business purpose. Therefore, he held the order passed by the AO as erroneous in so far as it was prejudicial to the interest of the revenue. The PCIT observed that the assessee-firm has itself shown ‘Finished Block’ in its balance sheet. Therefore, he held that the argument of the assessee that the flats were under construction was an afterthought. He relied on the decision in the case of CIT vs. Ansal Housing Finance and Leasing Co. Ltd. (2013) 29 taxmann.com 303 (Del) and the order in the case of Thermal Systems (Hyd) P. Ltd. vs. ACIT (2009) 312 ITR (A.T.) 0187 and held that the annual letting value of the unsold flats/shops have to be brought to tax as per the provisions of section 22. Accordingly, the Ld. CIT(A) set aside the order of the AO with a direction to make the assessment afresh by following his order.
Before us, the counsel of the assessee submits that the assessee- firm is formed for the purpose of and carrying on business as builders and developers by constructing and selling residential and commercial units. There is no other purpose permitted to be undertaken by the firm.
M/s Balaji Homes During the year under consideration, the assessee-firm had in its balance sheet unsold units in their project under consideration for sale in the future years. As at the end of the financial year, three projects undertaken were under construction and yet to be completed. Property under construction is neither property nor land. The said three projects under construction were Balaji Residency, Balaji Galaxy and Balaji Krupa. Reliance is placed by him on the judgment of the Hon’ble Supreme Court in MCGB vs. Polychem Ltd. AIR 1974 SC 1779 stating that the rules of valuation of property cannot be applied for valuation of incomplete building. The Ld. counsel submits that the assessee-firm has regularly employed the project completion method for recognition of income and it has followed the stock valuation method of ‘lower of cost or market value’. Thus it is submitted by him that the order passed by the PCIT be set aside.
On the other hand, the Ld. DR supports the order passed by the PCIT.
We have heard the rival submissions and perused the relevant materials on record. We find that the project under dispute in the present appeal fall under “Schedule-3: Current Assets, Loans and Advances” to the balance sheet of the assessee-firm as on 31.03.2010. Generally speaking, the assets that the company intends to dispose off within a period of one year are referred to as current assets. Generally, M/s Balaji Homes the rule is that if an asset is to be turned into cash or is to be used to pay a current liability within a year or the operating cycle, whichever is longer, it is classified as current. In that context, the position of three units mentioned hereinbefore i.e. Balaji Residency, Balaji Galaxy and Balaji Krupa is to be examined. In that context, the submission made by the assessee-firm before the PCIT during the course of proceedings u/s 263 vide letter dated 18.02.2015 received in the office of PCIT on 19.02.2015 regarding the above three units extracted below is worth mentioning:
Project Name Date of commencement Date of Completion Balaji Residency 23.11.2007 01.03.2012 Balaji Galaxy 21.02.2008 23.06.2011 Balaji Krupa 16.02.2010 Not yet received. A simple verification by the PCIT of the above facts would have clarified the issue. He has not done so. We find from the assessment order dated 06.03.2013 passed by the AO u/s 143(3) that the assessee has claimed both the projects i.e. Balaji Residency and Balaji Galaxy have been completed during the year and has offered both the projects for taxation on project completion method. The assessee has also shown sales from another project i.e. Balaji Complex. The total sales offered during the year is Rs.21,25,67,740/- on which the net profit offered is Rs.12,63,11,555/- The assessee has also submitted before the AO, during the course of assessment proceedings, project-wise profits in respect of Balaji Residency and Balaji Galaxy. The assessee-firm has claimed deduction M/s Balaji Homes 80IB(10) in respect of project Balaji Residency at Rs.11,54,38,807/- for which it has filed the corresponding audit report in Form 10CCB. The assessee was following project completion method for recognition of income. We find from the documents filed before us that the AO has examined all the details and in fact made an addition of Rs.2,75,00,000/- in respect of provisions debited under the head ‘direct expenses’. As the AO has made proper inquiry before making the assessment u/s 143(3) on 06.03.2013, the instant case is distinguishable from the case laws relied on by the PCIT. In the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC), it has been held by the Hon’ble Supreme Court that “the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent – if the order of the Assessing Officer is erroneous but is not prejudicial to the revenue – recourse cannot be had to section 263(1).” In the instant case, the above conditions are missing in the order u/s 263 passed by the PCIT. As the assessee-firms follows project completion method for revenue recognition and as the AO has made proper verification and even made an addition of Rs.2,75,00,000/- towards provisions debited under the head ‘Direct Expenses’, there is no merit in the order u/s 263 dated 13.03.2015 passed by the PCIT. We, therefore, cancel the said order passed by the PCIT.