DCIT, NEW DELHI vs. M/S. NARSI IRON & STEEL PVT. LTD., NEW DELHI

(PAN : AAACN3681P) (APPELLANT) (RESPONDENT) ASSESSEE BY : None REVENUE BY : Shri Vijay Verma, CIT DR Date of Hearing : 06.10.2016 Date of Order : 26.10.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : Since common questions of facts and law have been raised in both the aforesaid appeals, the same are being disposed off by way of consolidated order to avoid repetition of discussion.

AY 2007-08 “1. The order of Ld. CIT (A) is not correct in law and facts.

2. Whether on facts and in law the CIT (A) is right in admitting additional evidence which was not produced before the AO?

3. Whether on facts and in law the CIT (A) has not erred in not providing proper opportunity to the AO before admitting the additional evidence?

4. Whether on facts and in law the CIT (A) is right in restricting the disallowance from Rs.51,31,354/- to Rs.5,00,000/-.

5. The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.”

AY 2008-09 “1. The order of Ld. CIT (A) is not correct in law and facts.

2. Whether on facts and in law the CIT (A) is right in admitting additional evidence which was not produced before the AO?

3. Whether on the facts and in law the CIT (A) is right in deleting the addition of Rs.1,00,45,159/- holding that addition is not based on seized material and ignoring the facts of the assessment order.

4. Whether on facts and in law the CIT (A) is right in restricting the disallowance from Rs.34,66,967/- to Rs.5,00,000/-.

5. The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.” BRIEF FACTS FOR AY 2007-08

BRIEF FACTS FOR AY 2008-09

Conversion has been made @ Rs.1600/- per sq.mtr. and substantial notional profit of Rs.17,57,30,499/- has been included in the computation of cost of conversion. Out of converted land, assessee sold land measuring 6534.20 sq.mtr. during the year. AO, after disbelieving contentions raised by assessee, computed the income of the assessee under the head ‘capital gain’ as under :-

“(i) The cost of 11779 square meter land as per assessee's books is 1,27,33,500. Therefore, per square meter cost in books comes to Rs. 108 per sq. meter. Against this cost the assessee has adopted the market value of Rs.1600 per square meter while converting the land into stock in trade. During the year 6534.20 square meter of land has been sold. Therefore, the cost of acquisition of this much of land comes to Rs.7,05,693/- (6534.20 x 108). Further the full value of consideration at the time of conversion into stock in trade comes to Rs.1,04,54,720/- (6534.20x1600).

(ii) It is also seen from the details filed by the assessee for the A.Y.2007-08 that such land was purchased in the year 1993-94. Thus, the benefit of indexation is being allowed to the assessee. The indexed cost of acquisition for the land sold during the year comes to Rs.705693x497/244- = Rs.14,37,415/-

Thus, the long term capital gain chargeable for the A.Y. 2008-09 comes to Rs.90,17,305/- (10454720 – 1437415)."

From the perusal of profit & loss account from the real estate business of the assessee, it is noticed that assessee purchased some more land for Rs.61,42,420/- and has also debited ‘development cost’ amounting to Rs.34,66,967/- in its profit & loss account.

Assessee was called upon to explain. However, AO came to the conclusion that during the year under assessment, the assessee sold 6534.20 sq.mtr. by showing the value at Rs.49,22,000/- i.e. Rs.753.26 per sq.mtr. AO further noticed from the record of the assessee that during AY 2006-07, assessee converted this land into stock-in-trade and at that time, market value was at Rs.1,600/- per sq.mtr. and in the earlier two assessment years i.e. 2006-07 and 2007-08, assessee has sold a part of this land and has earned profit but, during the year under assessment, assessee has shown to have sold land @ Rs.753.26 per sq.mtr. On query, assessee stated that due to a sluggish period for the business of real estate and the rates of the property came down sharply. Finding the explanation given by the assessee not tenable, the AO rejected the trading result of the assessee and computed the profit as under :-

“10. For the purpose of computing the profits, it is estimated that such land was sold at least with the profit margin of 10%. Therefore, the sale price is being taken as Rs. 1760/- per sq. meter. Thus, the sale value of 6534.20 sq. meter of land sold during the year comes to Rs.1,15,00,192/-(6534.20x1760). Thus, the trading account of the assessee is recasted as below» Opening Stock 2,02,23,824 Sale of Plots 1,15,00,192/- Land purchased 61,42,420 Closing stock 19,97,80,303/- To Gross Profit 29,07,251 21,12,80,495 21,12,80,495/- AO assessed the total income of the assessee at Rs.1,20,29,437/- (Rs.1,00,45,159/- + Rs.90,17,305/- = 1,90,62,464 minus Rs.70,33,027/- = Rs.1,20,29,437/-)

“3.2 Ground No.2 3.2.1 As mentioned in the previous paragraphs, the AO has noted that the appellant had converted capital asset – Land into stock-in- trade in the year 2005-06 and the conversion rate adopted was Rs.1600/- per sq. metre. As against this he found that the sale consideration in respect of part of the land sold during the previous year relevant to current assessment year was only at Rs. 753 per sq. metre. He held that the appellant's trading results are not reliable and he rejected the same. Thereafter he has added Rs. 1,00,45,159/- as trading profit computed at the rate of 10% of the price at which the Land- capital asset was converted into stock-in- trade during the F.Y. 2005-06. 3.2.2 In his submissions the AR has stated that the accounts of the company are duly audited and Company maintains all the bills and vouchers. The AO had merely asked as to' how there was a loss from the real estate business and that the appellant had given the break-up of the trading results vide their reply to AO's letter dated 23.08.2010. The AO did not seek any further information from the appellant and he has proceeded to estimate the profits from the real estate business on the suspicion that the appellants must not have disclosed the correct profits. In this regard he has submitted that all the sales are verifiable, all the purchases are verifiable and that the accounts have been duly audited. In view of the matter, the AO's action in making addition without giving any opportunity during the appeal proceedings was bad in law. 3.2.3 The AR has also stressed that in a search and seizure assessment being framed u/s 153A of I.T. Act, 1961, the AO had a duty to base all his additions or disallowances only on the documents if any seized during the search. In the instant case no incriminating documents w-ire-seized to show that the appellant's trading results are not reliable. On the contrary the AO himself has based all his addition on the Balance sheet and P&L Account which were filed along with his return and the details furnished in course of assessment proceedings u/s 153A. This amounts to change of opinion. The AO cannot sit in judgment over on the completed assessments without any fresh evidences recovered during the search. Further the AR also stated that the AO has doubted the loss from the real estate business only on account of the value adopted by the assessee at the time of conversion of capital asset into stock-in-trade. He has pointed out that the cost of land as per assessment records itself was only Rs. 108.10 per sq. metre. The AO has not taken note that the appellant really made almost 750% profit on the land which he acquired few years ago. Thus this is not a case of any suppression of profits from sale of land. Further the AR also drew the attention to the provisions of section 50C where the AO can make addition on suppression of sale only if there is variation in the sale price as compared to the prevailing rates. In the instant case the appellant has always charged the rates prevailing at the given point of time and there was no allegation that land or houses were sold below the circle rates. The AR, therefore, submitted that the action of the AO in rejecting the trading results and computing profits at the rate of 10% on estimate basis was arbitrary and against all the prevailing business practices.

3.2.4 I have considered the submissions of the AR and the assessment order. First of all it is noted that the AO has not relied upon any seized documents for making this addition. He has done an estimated addition under the real estate business on the basis of material on record. He has doubted the trading results only because the rate at which the capital asset was converted into stock-in-trade was much higher than the rate at which the land has been ultimately sold. There cannot be any allegation that the appellant did not make profit on sale of land if one takes note of the actual cost of acquisition of land by the company. Thus the presumption that the appellant could not have sold land at below the cost price is fraught with mistake as the cost adopted in the instant case by the AO is the rate at which land has been converted into stock in trade in his books of accounts. In reality the company has made almost 800% profit on the sale of land if we adopt the cost of land as on the date of its acquisition. Due to the treatment given to land at the time of its acquisition, the company had to change its nature in F. Y. 2005-06. Part of the profit is now being taxed as capital gain. Considering these factors I do not deem it fit to accept the AO's view on the issue. The addition not based on any seized material and also without bringing hard facts like evidence of suppression of any sales based on the sale deed etc. the addition cannot be sustained. Therefore, the same is deleted.

3.2.5 Further, AO has held that the development cost of Rs.34,66,967/- debited to trading account of the real estate business cannot be allowed, as the appellant did not file complete details along with evidence. At para 7 of his order, the AO has stated that in response to his letter 23.08.2010 the assessee simply submitted that such amount was incurred on electric expenses, Vikas Pradhikaran charges etc. and Rs. 24,66,2063/- was incurred on brick, cement, sand and other building construction expenses. However the assessee failed to produce any evidence in respect of its claims of these development expenses.

3.2.6 The relevant paragraph of the assessment order on the issue is reproduced below:-

" Vide the questionnaire dated 23.08.2010, the assessee was specifically asked to file complete details along with evidences regarding the development cost incurred by it. In response to this, the assessee has simply submitted that such amount was incurred on electric expenses, Vi/cas Pradhikaran charges. The assessee has further submitted that an amount of Rs.24,66,206/- has been incurred on bricks, cement, sand & other building construction expenses. However, till date, the assessee has not filed even a single evidence in support of its claim of these development expenditure. As per provisions of I.Tax Act, an expenditure can only be allowed if the assessee is able to prove that such expenditure was incurred wholly and exclusively for the purposes of business. In the absence of any evidence, such onus remains undischarged and therefore, this amount of Rs.3466967/- to the income of the assessee. Penalty proceeding u/s 271 (1)(c) are also being initiated for furnishing the Inaccurate particulars of income. "

3.2.7 The AR submitted that the AO did-not ask for- any further details than what was called for by him in questionnaire dated 23.08.2010. He further highlighted that the appellant is maintaining regular books of accounts which are duly audited and all the entries are supported by the Bills and vouchers. The AO only sought details of the development expenses which was duly explained vide their written reply to the questionnaire dated 23.08.2010. In this background the AR submitted ledger A/c and photocopies of the Bills and vouchers of the development cost and sought admission of the same as additional evidences during the appeal proceedings. These documents were forwarded to the AO on 04.02.2013 seeking report both on merit as well as on admissibility of the same. Till date this office has not received any report from the AO. In this background the assessment records were called for and examined. From the order sheet notings of the assessment folder, there is no indication that the AO insisted on seeing bills and vouchers. However, he has disallowed the entire "development cost" for want of evidences. The action of the AO cannot be upheld. There are no evidences that the AO insisted on seeing bills and vouchers or that he was not satisfied with the reply given by the appellant and that he had called upon the appellant to produce further evidences. In that background the additional evidences (bills, vouchers and ledger A/c) are required to be admitted. The AO has not given his report either on admissibility of these evidences or on their merit. In this background, I have perused the photocopies of the bills and vouchers. These relate to purchase of construction material or expenses relating to labour charges. Most of these expenses are incurred in cash and hence their reliability is low. However, it cannot be denied that the appellant had not incurred any development cost being in construction/real estate business. Considering the totality of facts and circumstances of the case, I hold that ends of justice would be met if Rs.5 Lakh out of Rs. 34,66,967/- is disallowed. Hence addition to the total income is restricted to Rs.5 Lakh only and the balance is deleted.”

Consequently, both appeals are allowed for statistical purposes.

Order pronounced in open court on this day 26th of October, 2016.