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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAVISH SOOD
The captioned appeal by the assessee is directed against the order of the CIT(A)-20, Mumbai dated 05/11/2014, pertaining to the Assessment Year 2010-11, which in turn has arisen from the order passed by the Assessing Officer dated 20/03/2013 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
In its appeal, assessee has raised the following Grounds of appeal:-
“1. On the facts of the case and in law, the Learned CIT(A) erred in confirming the addition of net Income of Rs. 3,77,75,460/- by holding that the project 'Moorings' was completed in A.Y. 2010-11 as opposed to A.Y. 2011-12 as claimed by the Appellant. and as the said project was offered to tax in A.Y. 2011-12 upon the completion of the project, the assessment of the same in A.Y. 2010-11 would lead to the double taxation of the same. (Original Grounds of Appeal 1- 7)
2. On facts and circumstances of the case and in law, the Learned CIT(A) failed to appreciate that competent authority i.e BMC allowed the appellant to carry out work even after granting of occupation certificate by BMC. (Original Grounds of Appeal 1- 7)
On facts and circumstances of the case and in law, the Learned CIT(A) failed to appreciate that in case of some of the flat owners in the agreement itself date of possession to be granted in A. Y. 2011-2012 was mentioned and in case of all the flats possession was only given in A Y 2011-2012 as indicated in letters of possession ... (Original Grounds of Appeal 1- 7).
Without prejudice to the above if the project is held to be completed in the relevant assessment year, the expenses incurred on the project in the next assessment year on the said project may be allowed as deduction as per the principle of matching concept. (Original Ground of Appeal 8
On the facts of the case and in law the Learned CIT(A) erred in confirming disallowance of 25% out of labour charges, workers expenses and salary expenses incurred wholly and exclusively for the purposes of the business. (Original Ground of Appeal 9).
6. On the facts of the case and in law the Learned CIT(A) erred in confirming disallowance of Rs. 2,00,000/- being cash payments made to the director on account of salary and rent without appreciating that these payments were urgent payments made outside working hours incurred wholly and exclusively for the purposes of the business. (Original Ground of Appeal 10).
7. On the facts of the case and in law the Learned CIT(A) erred in confirming disallowance of Rs. 8,00,276/- being sales promotion expenses incurred by the director of the company through credit card incurred wholly and exclusively for the purposes of the business. (Original Ground of Appeal 11).
8. On the facts of the case and in law the Learned CIT(A) erred in confirming addition of Rs. 7,36,762/- being the difference in the amount of work in progress as quantified in the Profit and loss account and the balance sheet without appreciating that the difference was due to the Income Tax for prior period paid by the Appellant wrongly included in the Work in progress. (Original Ground of Appeal 12).”
3. Before we proceed to adjudicate the respective Grounds of appeal, the brief background is that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of building and construction. For the assessment year under consideration, it filed a return of income on 15.10.2010 declaring an income of Rs.34,08,340/- which was subject to a scrutiny assessment whereby the total income has been assessed at Rs.3,77,75,460/-, which was carried in appeal before the CIT(A) who has since dismissed the appeal of the assessee.
4. Insofar as the Ground of appeal nos. 1 to 3 are concerned, the same relate to a single issue relating to the manner in which the income from the project is to be assessed. In brief, the relevant facts are that the assessee was engaged in constructing only one project, namely ‘The Moorings’ located on Bandra (West), Mumbai. The construction of the said project started in the previous year relevant to the Assessment Year 2007-08 and as per the assessee, the said project was still under construction stage during the year under construction. On account of the aforesaid stand, the entire amount of expenditure debited in the Profit & Loss Account under various heads amounting to Rs.3,47,68,416/- was taken as work-in-progress. However, in the return of income, the assessee offered an amount of Rs.34,08,343/- as income from the said activity. Before the Assessing Officer, the assessee pointed out that the project was finally completed in the previous year relevant to the Assessment Year 2011-12 and the final profit on the same was declared and offered to tax in the Assessment Year 2011-12. Assessee also explained that since almost 50% of the construction was over during the year under consideration, assessee had offered 2% of the advances received against sale of flats as income, which amounted to Rs.34,08,343/-. The Assessing Officer has not agreed with the assessee on the manner in which the income from the said project is to be declared for taxation. The Assessing Officer noticed that the project comprised of 14 flats as detailed in para 9.12 of his order. The Assessing Officer noted that in almost all the cases, the sale agreements were entered in financial years 2007-08, 2008-09 and 2009-10 corresponding to assessment years 2008-09, 2009-10 and 2010-11. The Assessing Officer also noted that the possession of the flats had also been given by the assessee till the end of the year under consideration. Most importantly, the Assessing Officer noted that the Occupation Certificate has been issued by the Municipal Corporation of Greater Mumbai on 2.3.2010, which according to him, shows that the construction of the project was complete before 2.3.2010. For all the above reasons, the Assessing Officer concluded that the assessee had wrongly not offered to tax the income from the project during the year under consideration. Accordingly, the Assessing Officer treated the amount of Rs.17,24,43,720/- as the sale value and after reducing the closing balance of work-in-progress of Rs.13,46,68,261/-, the total income has been assessed at Rs.3,77,75,460/-. The said position has been affirmed by the CIT(A) also and accordingly, assessee is in appeal before us.
5. Before us, the learned representative for the assessee has vehemently argued that the manner in which the assessment has been completed in the instant year, the same results in double taxation inasmuch as assessee has offered the income from the project in the Assessment Year 2011-12. It is also pointed out that when the income has been offered to tax in the subsequent year and in the absence of any change in tax rate, the dispute regarding the year of taxability of income has no tax effect and such a dispute is academic in nature. For the aforesaid proposition, reliance has been placed on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd., 358 ITR 295 (SC) and the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Nagri Mills Co. Ltd., 33 ITR 681 (Bom) respectively. At this point, the learned representative also pointed out that it is not the case of Revenue that the books of account maintained by the assessee are unreliable or that the declared profit from the project is otherwise incorrect, therefore, in such a situation there was no justification for tinkering with the manner in which the profit from the project has been declared by the assessee in the instant year read alongwith the profit declared in the subsequent assessment year.
The learned representative pointed out that much emphasis has been laid by the Assessing Officer on the fact that the Occupancy Certificate was issued by the Municipal Corporation of Greater Mumbai on 2.3.2010 itself so as to justify the conclusion that the project has been completed during the year under consideration. On this aspect, the learned representative referred to the copy of Occupancy Certificate, which is placed at page 8 of the Paper Book, to point out that the said Certificate was a conditional certificate. It is explained that the same was issued subject to the condition that the assessee shall obtain the requisite Certificate u/s 270A of the Bombay Municipal Corporation Act, which was issued by the relevant authority only on 7.9.2010, a copy of which was placed at page 9 of the Paper Book. It was, therefore, contended that even if completion of the project is to be seen on the basis of the Certificate issued by the Municipal Corporation, the same has to be viewed in the context of the final Certificate issued by the Hydraulic Engineers Department dated 7.9.2010. Therefore, according to him, even on this count the completion of project falls in the previous year relevant to the next assessment year, i.e., 2011-12. The learned representative also pointed out that there is no basis for the Assessing Officer to say that the possession of the flats have been handed over during the year under consideration itself. In this context, our attention has been drawn to pages 230-231 of the Paper Book to point out the dates on which the possession has been given to various flat-holders. It was emphasised that even in cases where date of agreement is prior to last date of the year under consideration, the possession has been given only in the subsequent year and, therefore, even on that count, it could not be said that the assessee was liable to treat the project as completed in the year itself so as to declare the final profits therefrom. Justifying the non-completion of the project in the year under consideration, the learned representative also pointed out that in the subsequent year, substantial expenditure has further been incurred by the assessee on the execution of the project and in this context referred to page 16 of the Paper Book wherein the details of such expenditure is enumerated which amounts to Rs.1,36,54,260/-. Our attention was also invited to pages 14-15 of the Paper Book wherein a Tabulation has been prepared showing the break-up of the level of construction expenditure incurred in each of the assessment years starting from Assessment Year 2007-08 to 2011-12. The aforesaid details have been referred to demonstrate that the construction of the project was not complete and, therefore, the Assessing Officer was wrong in subject to tax the profits of the project considering it to be completed during the year under consideration itself.
On the other hand, the ld. DR appearing for the Revenue has defended the case of Revenue by adverting to the stand of Assessing Officer, which we have already noted in the earlier paragraphs and is not being repeated for the sake of brevity. Notably, the ld. DR has reiterated the fact that the Occupancy Certificate has been issued by the Municipal Corporation in the year under consideration, which justifies the premise that the project has been completed in the year itself.
We have carefully considered the rival submissions. It is quite clear that the controversy before us relates to the timing and the manner in which the profit earned by the assessee from the construction of the project ‘The Moorings’ is to be assessed. Though we have noted the facts in the earlier paragraphs, but in order to recapitulate in brief, it is notable that the assessee started construction of the project in the previous year relevant to the Assessment Year 2007-08 and contends that it has been completed during the previous year relevant to Assessment Year 2011-12. The resultant profit on the completion of the project has been offered for taxation in Assessment Year 2011-12. The instant year is one of the interregnum years wherein assessee offered for taxation certain amounts on estimate basis, ostensibly on the ground that 50% of the construction was over and it had also received advances against the sale of flats. Accordingly, the expenses incurred by the assessee on the construction of the project were inventorized as work-in-progress in all the assessment years prior to Assessment Year 2011-12, as the stand of the assessee was that the project stood completed in Assessment Year 2011-12 and at that point of time it prepared the final Profit & Loss Account and declared the profit for taxation. The instant assessment year, being Assessment Year 2010-11, is one of the interregnum years wherein the Assessing Officer has disagreed with the assessee and concluded that the construction of the project was complete and also that the possession of the flats comprised in the project was handed over to the buyers in terms of the agreements with them. Therefore, the Assessing Officer rejected the partial profit declared by the assessee in this year and instead, reduced the entire amount of work-in-progress from the sale proceeds received and determined the balance as income from the project liable to be assessed in this year. At the time of hearing, the factual matrix explained before us revealed that in Assessment Year 2011-12, the profit deduced by the assessee after treating the project as complete is lying assessed. The analysis of the aforesaid fact-situation, which is undisputed, brings out that so far as the aspect of quantification of profit from the execution of the project is concerned, there is no dispute between the assessee and the Revenue if one is to consider the period starting from Assessment Year 2007-08 to 2011-12, being the years in which the project has been executed. The only point of difference is the timing difference inasmuch as, as per the Assessing Officer, the project is completed in the instant year and, therefore, the entire profit is liable to be assessed in the instant assessment year.
In our considered opinion, the approach of the Assessing Officer suffers from infirmities. Firstly, even if we go along with the Assessing Officer and agree that the project is said to be completed in the instant assessment year, yet the determination of profit from the project is erroneous inasmuch as assessee had pointed out that even in the subsequent assessment year of 2011-12 it has incurred substantial expenditure, and such expenditure has been considered on the basis of ‘matching principle’. The aforesaid assertion has been side-stepped by the lower authorities and is, in fact, clearly borne out of the papers placed in the Paper Book, which show incurrence of project expenditure even in Assessment Year 2011-12. Therefore, such expenditure is, in any case, liable to be reduced in order to tax the profit from the said project. Be that as it may, assessee has challenged the inference of Assessing Officer that the project is complete because of the Occupancy Certificate granted by the Municipal Corporation on 2.3.2010. We have carefully examined the said Certificate, a copy of which has been placed in the Paper Book at page 8. The said Certificate has been issued subject to the condition that the Certificate from Hydraulic Engineer’s Department with regard to the provision of adequate water supply should be obtained within the specified time. It has also been explained that the requisite Certificate from the Hydraulic Engineer’s Department was issued on 7.9.2010, a copy of which is placed at page 9 of the Paper Book. It is quite well understood that a building is to be considered as complete once it attains the habitable status, which obviously cannot be said to be complete till provision of water supply is made. Therefore, even if one is to go by the yardstick referred to by the Assessing Officer, the construction of project cannot be said to be completed till the date when the Hydraulic Engineer’s Certificate is obtained, i.e., 7.9.2010, which obviously falls in the previous year relevant to the next Assessment Year of 2011-12.
The second aspect emphasised by the Assessing Officer was the handing over of possession of the flats to the flat-owners. It has been vehemently canvassed that there was no basis for the Assessing Officer to conclude that the possession has been handed over to the flat- owners before the end of the instant year. Rather, the details of possession of various flats culled out at pages 230-231 of the Paper Book clearly establish that the dates of possession fall in the subsequent year. In fact, the learned representative referred to page 231 of the Paper Book to specifically point out that in the case of 5 flats, the dates of possession have been mentioned in the registered Sale agreements, which shows the dates of subsequent year. Even in case of other flats, it is pointed out that the material on record shows the handing over of possession in subsequent year. We find that the assertion of the Assessing Officer to the contrary is not based on any factual support, but is merely a bald assertion. Therefore, we are unable to uphold such a stand of the Assessing Officer which obviously is contrary to the stated position. Considered in the aforesaid light, in our view, it was factually inappropriate for the Assessing Officer to have rejected the manner in which assessee had deduced and declared profit from the project for taxation. It is also abundantly clear that there is no change in tax rates and, therefore, whether the profit is taxed in the instant year or in the subsequent year, it would not have any effect on the ultimate tax liability considered over the years because there is no difference in the quantification of profits from the project. For the aforesaid reasons, we, therefore, uphold the plea of assessee and direct the Assessing Officer to assess the income from the project in this year as computed by the assessee. Thus, on this aspect, assessee succeeds.
Insofar as Ground of appeal no. 4 is concerned, the same is only an alternative plea to the effect that if the project is held to be completed in the instant year itself, the expenditure incurred on the project in the next year be allowed as a deduction. Since we have already affirmed the stand of assessee that the project cannot be said to be completed in the instant year, the aforesaid ground becomes academic. Thus, Ground of appeal no.4 is treated as infructuous.
Ground of appeal no. 5 is with regard to the action of income-tax authorities in disallowing 25% out of labour charges, workers expenses and salary expenses of Rs. 12,61,930/-. The said disallowance has been made by the Assessing Officer on the ground that part of the expenditure is stated to have been incurred in cash. According to the Assessing Officer, assessee had not furnished the source of cash and nor submitted the documentary evidences. The CIT(A) has also affirmed the said addition.
13. On this aspect, after hearing the parties and perusing the orders of the authorities below, it is quite clear that the addition has been made on purely ad-hoc basis without finding any infirmity in the books of account maintained. It is not the case of Revenue that any such expenditure has been incurred outside the books of account. Therefore, in our considered opinion, the addition, as made by the Assessing Officer is unsustainable and is hereby directed to be deleted. Thus, on this ground, assessee succeeds.
By way of Ground of appeal no. 6, the grievance of the assessee is against the action of the lower authorities in disallowing the expenditure of Rs.2,00,000/- being cash payments made to the Director on account of salary and rent by invoking Sec. 40A(3) of the Act. The Assessing Officer has disallowed the expenditure by noticing that the sum was paid in cash in violation of the provisions of Sec. 40A(3) of the Act. The CIT(A) has also affirmed the stand of the Assessing Officer.
Before us, the only plea of assessee is that the expenditure is bona fide and the assessee-company had sufficient cash on hand at the time of making the payments and, therefore, the same should have been allowed by the lower authorities.
On the other hand, the ld. DR has reiterated the reliance on Sec. 40A(3) of the Act in order to justify the disallowance.
We have carefully considered the rival submissions and find that the disallowance is squarely covered by the provisions of Sec. 40A(3) of the Act and accordingly, the same is hereby sustained. Thus, on this aspect, assessee fails.
The next Ground of appeal is in relation to disallowance of Rs.8,00,276/- being sales promotion expenses incurred by the Director of the assessee-company through credit card. In paras 6 to 6.5 of the assessment order, the Assessing Officer has brought out that assessee had claimed expenditure of Rs.8,00,276/- on account of sales promotion, etc. which was incurred through credit card of the Director. The Assessing Officer has further noticed that the material furnished before him did not bring out the details of the expenses and, therefore, it was not verifiable whether such expenditure has been incurred for the purpose of the business of assessee-company or not. For the said reason, he has disallowed the expenditure, which has also been further affirmed by the CIT(A).
Before us, the learned representative for the assessee pointed out that the expenditure has been incurred through credit card by the Director of the company and, therefore, the same should be allowed while computing the total income.
On the other hand, the ld. DR appearing for the Revenue has relied upon the orders of the authorities below in support of the case of Revenue.
We have carefully considered the rival submissions. The orders of the authorities below clearly point out that the disallowance has been made on the ground that assessee failed to substantiate the incurrence of the expenditure as being related to the business. Even before us, there is no material to prove that the expenses in question pertain to the business of the assessee and, therefore, we hereby sustain the disallowance as made by the lower authorities. Thus, on this aspect also, assessee fails.
The last Ground of appeal is with regard to the action of CIT(A) in affirming the addition of Rs.7,36,762/- being the difference in the amount of work-in-progress stated in the Profit & Loss Account and the Balance-sheet. In this context, the Assessing Officer noticed that there was a mismatch in the figure of work-in-progress as stated in the Profit & Loss Account and the Balance-sheet and he added such differential of Rs.7,36,762/- to the returned income. The said action has been sustained by the CIT(A) also.
23. At the time of hearing, the learned representative for the assessee explained that the difference in the two figures was only a clerical error and that such difference does not have any impact on the income and, therefore, the said addition is unsustainable. In this context, the learned representative has referred to page 126 of the Paper Book to point out that in the preceding year, sum of Rs.7,36,762/- was reflected as ‘Income-tax’ under the head ‘Administrative charges’ whereas in the current year, the same has been depicted at Nil. It was pointed out that the amount of Rs.7,36,762/- comprised in the work-in- progress as on the beginning of the current year has since been re- grouped and this has caused the difference. In any case, it was pointed out that the assessee would be in a position to satisfy the Assessing Officer and that the matter may be set-aside to the file of the Assessing Officer for verification afresh.
On the other hand, the ld. DR appearing for the Revenue had no serious objection to the matter being verified again by the Assessing Officer.
Having considered the rival stands, we deem it fit and proper to set-aside the order of CIT(A) on this aspect and restore the matter back to the file of Assessing Officer who shall examine the plea of assessee and pass an appropriate order as per law. Thus, on this aspect, assessee succeeds for statistical purpose.
Resultantly, the appeal of assessee is partly allowed.
Order pronounced in the open court on 31st March, 2017.