SAI BUILDERS AND DEVELOPERS,VASHI vs. PCIT-27, VASHI

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 3 -

complete scrutiny under the E-assessment Scheme 2019 on the issue of “Income From Real Estate Business”. Subsequently notice u/sec 143(2) and u/sec 142(1) of the Act along with questionnaire are issued through ITBA and in compliance to the notice, the assessee has filed the information from time to time. The Assessing Officer (AO) observed that the case was selected for scrutiny to verify “real estate business with high closing stock”. The AO has considered the facts and details in respect of “Sumukha Project” and “Yashaskaram Project” at Para 4 of the order. Finally,the A.O. has considered the information, documentary evidences and examined the details and accepted the returned income filed by the assessee and assessed the total income of Rs.17,87,24,620/- and passed order u/sec 143(3) r.w.s 143(3A) & 143(3B) of the Act dated 04.02.2021. 3. Subsequently, the Pr. CIT on perusal of the records and information found that the order passed by the AO under section 143(3) r.w.s 143(3A) & 143(3B) of the Act dated 04.02.2021 is erroneous and prejudicial of the interest of the revenue and issued revision notice u/sec 263 of the Act as under: “In this regard, a hearing in the matter is fixed on 06/03/2023 at 12:30 PM. You are requested to attend in person or through

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 4 -

an authorized representative to submit your representation, if any alongwith supporting documents/information in support of the issues involved (as mentioned below)If you wish that the Revision proceeding be concluded on the basis of your written submissions/representations filed in this office, on or before the said due date, then your personal attendance is not required. You also have the option to file your submission from the e-filing portal using the link: incometaxindiaefiling.gov.in

Please refer to the above.

On perusal of records it is seen that you have e-filed return of income for A.Y. 2018-19 on 31.10.2018 declaring total income of Rs17,87,24,620/-. The assessment proceeding u/s. 143(3) was completed on 04.02.2021 on total income of Rs. 17,87,24,620/-.

On the basis of details available on record:-

1 It is seen that the assessee is builder/developer and engaged in construction of housing projects. 2. On perusal of Profit & Loss A/c, it is seen that during the year under consideration that assessee is engaged in four projects namely () Project Chaturbhuj, (ii) Project Yashwasin (801B), (iii) Project Yashaskaram and (iv) Project Sumukha.

3The project-wise Profit & Loss A/c. has been submitted by the assessee, the gist of which are as under:

Project Op. Stock & GP Sales Closing WIP stock Chaturbhuj 1,06,86,980 40,19,038 51,55,000 95,51,018 Yashwasin 11,55,964 0 0 11,55,964 Yashaskara 49,28,46,83 15,97,07,08 - - m 5 1 Sumukh 5,62,41,514 1,15,78,728 4,26,18,51 2,52,01,73 0 1

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 5 -

ISSUE NO.1

ISSUE NO.2

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 6 -

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 7 -

proposed revision of the assessment order passed by the Assessing Officer as discussed above”

At the very outset, it may be stated that assessee is engaged in the business of builder and developer of real estate. During the year under consideration, the firm had four ongoing projects. Out of these four projects, the revisionary proceedings relate to project named 'Yashaskaram'.

As the assessee is following "Project Completion method", therefore, the income in respect of this project has been offered for tax in the A.Y. 2019-20 on "Project Completion method" basis. In support of our this contention, financials along with copy of return filed for A.Y.2019-20 are enclosed herewith for your ready reference (Annexure-3).

Perusal of the same, reveal that the assessee firm has offered business income to the tune of Rs. 39,80,70,176/- during this year, out of which profit attributable to project 'Yashaskaram' amounted to Rs. 38,68,58,309/-. Further, it may also be seen that the balance amount of closing stock, as per Profit & Loss Account amounted to Rs.3,40,61,514/- only. Thus, it may be observed that assessee had offered its business income in

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 8 -

respect of project 'Yashaskaram' in the A. Y.2019-20, on the basis of project completion method. It is also very important to note that return of income filed for A. Y.2019-20 clearly show that assessee firm had paid all the due taxes in respect of income of project "Yashaskaram'.

In this case, it is pertinent to mention that Ld. PCIT has raised issue relating to Occupancy Certificate obtained by assessee from CIDCO and the fact that the same is dated 20.05.2016. In this regard, assessee may very humbly point out that in our case although an application was made to Maharashtra State Electricity Board on 15.09.2015, almost 8 months before the Occupancy Certificate is issued but Maharashtra State Electricity Board issued electricity line related deposit letter on 03.06.2016 and ultimately the connection was provided much later in the month of July'2016 ie on 04.07.2016.

Similarly, it may be seen that water connection to the building was provided by the CIDCO vide its letter dated 08.06.2016 ie after the issue of Occupancy certificate. Needless to mention, it is a very important fact to note that none of the purchaser of flats could occupy a flat without water or electricity connection, which were ultimately provided in the month of 01.08.2016. Therefore, it is pertinent to mention that actual occupancy of flats started much later than the date of issue of Occupancy Certificate issued by the CIDCO.

Another issue relates to your honor's observation to treat the Project Complete in the F.Y.2016-17 in the light of Occupancy Certificate issued by CIDCO on 20.05.2016 as Certificate of completion of construction of property. May I very humbly point out that in the light of the fact described in the above para, it is apparent that water connection and electricity connection, which were provided by CIDCO and MSEB respectively, were provided after the date of issue of Occupancy Certificate.

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 9 -

Therefore, it is crystal clear that Occupancy Certificate cannot be equated with the Certificate of completion of construction of property, as mentioned in section 23(5) of Income Tax Act.

In support of our this contention, apart from documents relating to water and electricity connection, we are also enclosing herewith the profit and loss account for A.Y.2019-20 i.e. next assessment year, in which the assessee has incurred construction expenses of Rs. 4,44,52, 157/- and paid commission and brokerage of Rs. 41,56,616/- (please ref Annexure-3). The mere fact that even in the next financial year assessee firm has incurred construction expenses of Rs. 4,44,52, 157/clearly show that construction of property was completed only in A. Y.2019-20. Even in A. Y.2018-19, assessee has incurred construction expenses of Rs. 1,56,52,885/- and Adm, expenses of Rs. 1,01,83,496/-

Another issue relating the Occupancy Certificate is related to the provision of Deemed House Property income under the provisions of section 23(5) of Income Tax Act, which was introduced in the statue from A.Y.2018-19 through the Finance Act, 2017, which has amended Section 23 of the Act to insert sub-section (5), which provides:

"(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil."

A bare perusal of the aforementioned provision would reveal that even if for the sake of argument, it is presumed that the

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 10 -

Occupancy Certificate issued by the CIDCO 20.05.2016 is treated as Certificate of completion of construction of the property, as envisaged in the section 23(5) of Income Tax Act (This sub-section was introduced in the wake of Delhi High Court judgment in the case of Ansal Housing referred to in your letter dated 01.03.2023), even then for F..2017-18 i.e. year under consideration income under provision has be treated as Nil as the Occupancy Certificate was issued in the F. Y.2016- 17. Therefore, even the law does not provide for taxation of Deemed House Property income in respect of stock-in-trade during A.Y.2018-19 corresponding to F.Y.2017-18 as this year does not fall within the ambit of the provisions of section 23(5) of Income Tax Act.

Factually speaking in this case, assessee has offered income in various assessment years, as under: A.Y Profits Offered to Sales % of Net tax on estimated recognized Profits basis 2014-15 3,002,400 2015-16 14,891,293 2016-17 12,702,262 2017-18 12,702,262 2018-19 159,707,081 Total 26,71,84,586 2019-20 38,68,58,309 123,11,57,349 Total 65,40,42,895 123,11,57,349 53.12% profit/sales of the project

Bare perusal of the details of income offered for various assessment years beginning from A.Y.2014-15 till A. Y.2019- 20, show that assessee is constantly offering income on some estimated basis, while following the "Project Completion method". It is very important to note that in none of the year, revenue objected to this method of accounting followed by

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 11 -

assessee consistently since A. Y.2014-15 onwards for so many years. Besides, it is also pertinent to mention that when project was actually complete in A. Y.2019-20, the assessee firm did offer income on "Project Completion method" to the tune of Rs. 38,68,58,309/- in A. Y.2019-20.

Now, let us see the legal position of this case in law vis-a-vis the facts mentioned in the above para's, regarding issue of rule of consistency. In this regard, assessee reply on the Supreme Court judgment in the case of Commissioner of Income Tax Vs. Realest Builders & Services Ltd. 307 IT 202 (SC) Copy enclosed (Annexure-4). In this case, Hon'ble Supreme Court observed as under.

"Before concluding, we may state that the High Court has proceeded on the basis of 'rule of consistency. We do not agree with the view taken by the High Court on that count. In cases where the Department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being under estimated under the impugned method of accounting. If the A comes to the conclusion that there is under estimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in under estimation of profits and is therefore rejected. Otherwise, the presumption would be that the entire exercise is Revenue neutral. In this case, that exercise has never been undertaken. The A was required to demonstrate both the methods, one adopted by the assessee and the other by the Department. In the circumstances, we see no reason to interfere with the conclusion given by the High Court and the Tribunal."

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 12 -

Needless to mention that no such exercise was ever undertaken by the Assessing Officer in any of the assessment year since A.Y.2014-15. Lastly, assessee is also relying on another judgment of Hon'ble Supreme Court passed in the case of CIT (Central) Vs. Excel Industries Ltd. in Civil Appeal No. 125 of 2013 (Annexure- 5), wherein the Hon'ble Court observed as under:

"32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers."

Ratio-decidendi of the aforementioned judgment of Hon'ble Supreme Court is fully applicable in the light of the fact that assessee has paid the tax on its income of entire project in the next year i.e. A.Y.2019-20, which is evident from the copy of Return of Income filed with this submission. Similarly, it is not a case where revenue has been deprived of any tax. Needless to mention the rate of tax is same for both the years i.e. in A. Y.2018-19 and A. Y.2019-20, rendering entire exercise academic, as is termed by Apex Court's judgment (Supra).

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 13 -

It is, therefore, prayed that your honour may kindly consider our above submisations and drop the proceedings initiated under sec. 263 of Income Tax Act.”

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 14 -

Further, assessee submitted that though it obtained the occupancy Certificate from CIDCO on 20.05.2016, electricity connection was provided on 04.07.2016 and water connection was provided on01.08.2023, therefore, actual occupancy of flats started much later than the date of issue of occupancy certificate issued by the CIDCO Contention of the assessee does not appear acceptable as without stable electricity connection as well as water supply, it is difficult to believe that an OC would have been issued. Furthermore, even if the assessee's contention is accepted, these connections were provided merely a month or two later, and therefore the building was complete and ready for occupation much before the end of the financial year.

It is seen that Auditor has reported that in respect of Project Yashaskaram, though the OC is received on 20.05.2016, the firm has been incurring various construction and finishing expenses to make the units ready for sale. This argument of the assessee is not tenable since even after 2 years of getting OC, assessee has not booked any sales and offering estimated income, which is not as per Act. On verification of the Balance Sheet as on 31st March, 2018, assessee has shown Advances Received amounting to Rs.86,67,24,458/-, but till date assessee has not recognized any sales from this project. These facts have not been examined during the course of assessment procedures.

4.1 Assessee has shown closing stock of Rs.3,59,08,713/-. The issue for selection for scrutiny is "Real Estate Business With High Closing Stock andassessee has not offered any income under the head 'income from house property'

This case is covered-up by provision laid down under section 23(5) wherein it is defined that-

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 15 -

As per section 22 the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner is chargeable to income tax under the head "Income from House Property". Only exception to this is the property which is occupied by the assesse for the purpose of any business or profession carried on by the assessee, the profit of which is chargeable to Income Tax. The building or land appurtenant thereto forming part of closing stock has not been excluded from the taxability of annual value under the head "Income from House Property".

a. Annual value for the purpose of section 22as per the section 23(1)(a) shall be deemed to be the sum for which the property might reasonably be expected to let from year to year.

b. Since there is no dispute about the fact that the assessee was owner of the flats which constitute property within the meaning of section 22 of the Act, therefore, I am of the considered view that the annual value of the flats owned by the assessee, forming part of the closing stock is taxable under the Head "Income from House Property". While making the assessment of the AY 2017-18, the AO has not taxed the annual value of the flats forming part of the closing stock under the head "Income from House Property".

C The Delhi HC in the case of Commissioner of Income Tax vs. Ansal Housing Finance and Leasing Company Ltd. (354ITR180) has in para 13 a& 14, held as under

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 16 -

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 17 -

the levy of income tax on unoccupied houses and flats would be impermissible - which is clearly not the case.

The assesse has relied upon section 23(5) which is quoted as under:

"Deemed rent even in such a case, would definitely be applicable for the period beyond that specified in the section".

Since the above mentioned issues have not been fully considered during the course of assessment proceedings and remained to be properly examined, the order passed u/s 143(3)

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 18 -

dated 04.02.2021is erroneous in so far as it is prejudicial to the interest of revenue……………

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 19 -

verified and examined the facts has accepted the returned income. The Ld.AR submitted that the assessee is following project completion method and has filed the return of income as in earlier years and was accepted and the method cannot be changed and the assessee has offered the income in the subsequent year on total completion of project cost method. Further the Pr.CIT has overlooked the facts that the occupation certificate in respect of Yashaskaram project was received on 20.05.2016 and the asssessee is incurring finishing expenses to make the flats ready for sale and the asssessee is not liable offer the deemed rental income on such unsold flats as it has complied with the stipulated conditions under section 23(5) of the Act. Therefore the observations of the Pr.CIT is without merits and the AO has applied the mind and taken the view. The Ld. AR has substantiated the submissions with the paper book and judicial decisions and prayed for allowing the assessee appeal. Per Contra, the Ld.DR submitted that the AO has not verified nor conducted inquiry on the facts of applicability of methodology of revenue recognition for the projects and also no rental income from house property was determined on the closing

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 20 -

stock of unsold flats in the completed projects and the Ld. DR relied on the order of the Pr.CIT. 8. We heard the rival submissions and perused the material available on record. The Ld.AR envisaged that the order passed by the Pr.CIT is bad in law as the order revised under revision proceedings passed by the Pr. CIT is not erroneous and prejudicial to the interest of the revenue. Prima-facie the Pr.CIT has passed the revision order with a directions to assessing officer to examine and verify on two aspects (i) annual rental value of unsold flats in respect of completed projects determined under the provisions of section 23(5) of the Act and (ii) method of accounting adopted for revenue recognition of the project. On the first disputed issue, it was submitted that the Pr.CIT has erred in directing the assessing officer in computing the deemed rental value of the flats disclosed under the stock in trade, though finishing expenses are being incurred and the assessee has made sincere efforts to sell the flats in as it is conditions in the financial year but due to market conditions, the stock in trade consisting the flats could not be sold. The assessee firm is holding the flats for the purpose of business and not for rental income and the unsold flats were held by the assessee with an intention to

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 21 -

sell as stock-in-trade. Whereas the amendment in Finance Act 2017 in respect of provisions of Sec. 23(5) of the Act is applicable to unsold flats disclosed under the stock-in- trade is effective from A.Y 2018-19. At this juncture we considered it appropriate to refer to the provisions of Sec. 23(5) of the Act as under:

(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to 47[two years] from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil] Whereas the main basis for introducing the Section that, the assessee after construction of the property should take efforts to sell the flats and the assessee has received occupation certificate on 25.05.2016 in the F.Y 2016-17 and as per the above provisions, the time limit of one year as stipulated u/s 23(5) of the Act expires on 31.03.2018 i.e F.Y 2018-19 and no income was offered in the A.Y 2018- 19. The Ld. AR submitted that in the earlier year similar issue has been considered in the assessee’s own case where the assessment order under 143(3) r.w.s 263 r.w.s

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 22 -

144 of the Act dated 15.03.2023 was passed and made addition pertaining to earlier projects. 9. We on perusal of the information and correspondence of the assessee in the assessement proceedings, found that there is no discussion on the provisions of section 23(5) of the Act. Whereas the AO has called for the information with respect to various inventories and the details of flats as referred in the order U/sec 143(3) of the order but there is no specific query raised or dealt on the applicability of provisions U/sec23(5) of the Act in the proceedings. The provisions are applicable from A.Y 2018-19 and the AO should have made enquiries on these facts and in the correspondence of the asssesee there is a general information with respect to unsold flats but not on determination of deemed rent on the flats as per the provisions of section 23(5) of the Act. Whereas in the A.Y 2017-18, the A.O has made addition of the notional rent on the projects of Chaturbhuj and Yashvawin aggregating to Rs.6,63,204/- and passed order u/sec143(3) r.w.s 263 r.w.s 144B of the Act and the appeal is pending before the CIT(A). Further the assessee has not challenged the revision order u/s 263 of the Act and the AO has passed the order u/sec 143(3) r.w.s 263 of the Act. The Ld.DR

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 23 -

submissions are that the Pr.CIT has dealt on these facts which proves that the A.O. has not applied his mind and the A.O has not made enquiries on the specific issue. We find the A.O has called for the information, but there is no examination and verification of the facts or findings by the A.O on the determination of deemed rental income. We considering the facts, circumstances and are of the opinion that the matter needs to be verified and reasons for claim should be justified by the asssessee as discussed above . Accordingly, we do not find infirmity in the order of the Pr.CIT on the directions to A.O. on the determination of deemed rental value U/sec23(5) of the Act and we up hold the same and dismiss this ground of appeal of the assessee. 10. On the second disputed issue, in respect of method of accounting adopted for revenue recognition of the project, the Ld. AR submitted that the assessee has offered the income in the A.Y 2019-20 and whereas for the A.Y 2014- 15 to A.Y 2018-19 profit has been estimated and the requisite conditions are complied.The Ld. AR has submitted the audited financial statements for F.Y 2018-19 i.e A.Y 2019-20 where the assessee has offered the income of projects in the profit and loss account in particular “Project

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 24 -

Yashaskaram” placed at Page 19 of the paper book submitted. The assessee has applied the method of accounting consistently from earlier years and was accepted by the revenue authorities and the assessee has offered the income on adopting project completion method and the income was offered in the A.Y 2019-20 which is not disputed. We find the assessee has filed the information incompliance to the notices issued and clarifications are filed over a period of time in the assesseement proceedings. The Ld. AR emphasized that the assessee has been fallowing project completion method from the earlier years and was being accepted by the revenue and it cannot be disturbed. The AO has applied the mind and has accepted the assessee’s project completion method, were the assessee has been consistently fallowing the policy of revenue recognition as per Accounting Standards. Whereas the assessee has diligently complied with the provisions of Act, and maintained the facts /details in the books of accounts and fallowed the method of accounting. Accordingly we find that the AO has applied his mind on method of accounting and the information and took a possible view considering the information of offering of income for the A.Y 2019-20. Therefore we are of the opinion

ITA No. 1916/Mum/2023 Sai Builders and Developers, Mumbai. - 25 -

that the directions of the Pr.CIT order in respect method of accounting of revenue recognition cannot be sustained and we set aside the order of the Pr. CIT on this directions and allow this ground of appeal in favour of the assessee. 11. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 12.03.2024.

Sd/- Sd/- (GAGAN GOYAL ) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated 12.03.2024

KRK, PS Copy of the Order forwarded to : The Appellant 1. 2. The Respondent The CIT (Judicial) 3. 4. The PCIT 5. DR, ITAT, Mumbai Guard File 6. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// 1.

( Asst. Registrar) ITAT, Mumbai