ITO 12(3)(3), MUMBAI vs. GOODWILL BUILDERS, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद"य लेखा लेखा सद"य सद"य राजे"" सद"य राजे"" राजे"" केकेकेके अनुसार राजे"" अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dated 25.8.14 of CIT(A)-23 Mumbai, the AO. has filed the present appeal and the assessee has filed cross objection for the AY.200. Assessee - firm is a developer and contractor.It filed its return of income on 26.9.2011, declaring total income at Rs.4,480/-, the AO completed assessment u/s. 143 on 23.1.2014 determining its income at Rs.2.65 crores.

2.First effective ground of appeal (GOA1-4) deals with deletion of the addition of Rs. 2.65 crores on account of deemed income. During the assessment proceedings the AO observed that the assessee had completed the construction work of Police quarters on the 40% of the de-reserved plot of land and had received 60% of land free of cost in lieu of the expenditure incurred on construction of 40% of plot, that it had not offered any income from the project, that it had purchased a plot of land admeasuring 37,430 Sq.mts., that out of the said an area of 5398.90 Sq.mts. was reserve land, that no construction activity could be carried out on the said portion of the plot, that it completed the construction work in the remaining area of the plot of land and sold the same, that it offered the profit for taxation in the respective years of completion of the project,that it had capitalised the cost of reserve land of 5398.90 Sq.mts. in the completed project, that after completion of project it approached the government of 6967 &73(C.O.)/M/Goodwill Maharashtra for de-reservation of the plot of 5398.90 Sq.mts.,that vide its notification dated 03/12/2003 the government de-reserved the said plot subject to the condition that 40% of the plot of land should be utilised for construction of Police quarters, Police station etc., free of cost to the government, that the assessee entered into an agreement, dated 30/06/2008, with the Police department for development of the plot of 5398.90 Sq.mts.,that as per the said agreement the assessee was required to constructed Police-quarters and Police station on 2159.56 Sq.mts.,that as per the agreement it agreed to provide the Police department on ownership basis free of charge the Police station and Police quarters with required amenities and fittings on the plot area of 159.56 Sq.mts.. Considering these facts,the AO held that as per the terms of agreement on completion of the project and handing over possession of the building/flat the assessee was entitled to receive the balance 3239.34 Sq.mts. plot of land, that it was entitled to plot of 3239.34 Sq.mts. in lieu of the expenditure incurred for construction of the Police quarters and station, that it had completed the construction in the month of September, 2009 and had offered the possesion of the property to the Police department in the month of October, 2009, that at that point of time assessee became the owner of the balance plot of 3239.34 Sq.mts.(5398.90 Sq.mts. -2159.56 Sq.mts. ). He directed the assessee to explain as to why profit should not be worked out on transaction completed in respect of the plot of land. It was argued by the assessee that no profit had arisen to it,that the entire expenditure incurred for construction of PS quarters and station of Rs. 4.59 crores was taken as part of work in progress of 60% of the plot,that the quarters and station was constructed on no-profit no-loss basis. However, the AO did not agree with the submissions of the assessee and held that the assessee was following Mercantile system of accounting, that it had purchased a plot, that out of the said plot 5398.90 Sq.mts. plot of land was reserve, that no development was permitted on that portion of land, that while developing the plot it had capitalised the entire cost of the plot of land, that it had recovered the cost of reserve land from the project completed on the other portion of the land, that the cost of 37,430 Sq.mts. land was recovered by the assessee and the cost of 5398.90 Sq.mts of land had become nil on completion of the project on the other portion of the land, that it had offered the profit for taxation from the construction business in the return of income past years and reduction of expenses incurred for purchasing the plot of 5398.90 Sq.mts.,that it had utilised to 1590.56 Sq.mts. of land for construction of Police quarter and Police station,that it had already availed the original cost of the plot is expenditure in the earlier projects, that the expenditure incurred by it for construction of the quarters and station was for gaining the possession of the balance plot, that the cost of plot of land of 3239.34 Sq.mts. 2 6967 &73(C.O.)/M/Goodwill had to be taken as profit of the assessee from the said project, that the assessee had not carried out any construction activity in the balance 60% of the plot, that it had become owner of the balance plot on completion of certain contractual liabilities, that assessee got the title only after the plot was declared de-reserved by the government of Maharashtra,that the assessee was not correct in stating that it had constructed the project on no profit no loss basis,that it had incurred expenditure of 4.59 crores for construction of the quarters and station,that the cost of the plot of 3239.34 Sq.mts.was the consideration received for completing the quarters and station,that expenditure incurred on Police quarters and station was to be reduced from the value of the plot as on that date and balance was to be offered as income for the said transaction.He worked out the profit from the transaction in question on the basis of Stamp Duty Valuation as per the Ready Reckoner. The working of the AO read as under: Area of plot received by the assessee on completion of 3239.34 sq.mtrs. the police quarters/station Rate of plot of land as per Stamp Duty Ready Reckoner 22,400 per sq.meter land stipulated at 96/E, Wadhvan, Kandivali, Mumbai. Cost of Plot 22,400 x 3239.34 Rs.7,25,61,216/- Cost incurred for construction of Police Quarters and Police Station as per Rs.4,59,95,471/- assessee’s statement. Profit from the Project/transaction Rs.2,65,65,745/- 2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).After considering the elaborate submissions made by the assessee and the assessment order, he held that as per the Articles of Agreement dated 06/09/1979 the assessee had purchased a plot of land including the reserved plot of 5398 Sq.mts., that as per the clause five of the agreement on certain conditions assessee was entitled to get further FSI, that land was earmarked for a reserve purposes, that de-reservation meant that owner of the land could not carry out any development activity on that portion of land,that the land was to be released only for the purpose for which it was earmarked,that if the government would acquire the plot of land the owner of the said plot would cease to be the owner thereof, that in the case under consideration the plot of land was not acquired by the government,that the assessee continued to be the owner of the reserve land, that it was not entitled to develop the said plot of land. He referred to the clause (d) of the agreement, dated 30/06/2008, entered into between the Police department and the assessee and held that the assessee had to construct quarters and station and had to hand over 40% of the property to the government, that the clause clearly proved that it was the owner of the land. He further referred to the clauses one and nine of the agreement and held that lease of 99 years of land in question,on which the building of Police Department was to be constructed,had to be executed by the 6967 &73(C.O.)/M/Goodwill assessee in favour of the Police Commissioner, Mumbai at the yearly rent of Rs. 1/-,that government was not the owner of the land, that had it been so there was no requirement of executing a lease deed by the assessee in favour of the Police department,that assessee was restrained from carrying out work on its own building marked for reservation,that the assessee as the owner of the plot construced building free of cost for the Police department, that it earned the benefit of developing the remaining 60% of the property owned by it,that after parting with 40% of the reserve land and constricting the building free of cost for the Police department the assessee gained the benefit of the developing the 60% of the land, that by its act the assessee only improved upon the right of the land owned by it, that no income had accrued to it at that stage,that same would accrue to it only after it had developed the property/sold the property,that it had parted with 40% of the land and expenses were incurred for improving upon its rights to develop the balance 60% of the plot of land to earn income,that it was not a case where the land was acquired by the government in lieu of the assessee providing free of cost consent to the Police Department,that the government had compensated the assessee by giving 60% of the land free of cost, that what had happened in reality was that as per the government of Maharashtra resolution the balance 60% of the plot of land which was earlier earmarked for reservation was de-reserved for development,that it was factually and legally incorrect to hold that the assessee received balance 60% of the said plot of land in question as a consideration for constructing the quarter/station free of cost, that by incurring the expenditure on construction of Police quarters/building it merely obtained the rights to develop the balance 60% of the reserve land owned by it, that the cost incurred by it on construction of 40% of the land of Police building would be the cost towards obtaining the benefit of developing the 60% of the said land for earning income, that land was always owned by it (though earmarked for reservation), that the government had not acquired the plot of land, that the government had released the benefit of development to the assessee by reserving the 60% of the land, that it could not be held that Governmnet gave the plot of land to the assessee in lieu of the construction of the Police-building free of cost, that the AO had himself held that assessee became the owner of the 60% of the plot of land in November 2009, if that was to be correct than the income would accrued to the assessee in the assessment year 2010-11. Finally, he deleted the addition made by the AO.

2.2.In the course of hearing before us, the Departmental Representative (DR) contended that the assessee was not the owner of the plot of the land ,that it got possession of the plot after it constructed the Police staff quarters and Station,that the AO had rightly determined the value 4 6967 &73(C.O.)/M/Goodwill of the plot of land.The Authorised Representative (AR) supported the order of the FAA and argued that the plot was purchased long back along with the reserved portion of the plot,that there was no justification of making any addition.

2.3.We have heard the rival submissions and perused the material before us. We find that the assessee had purchased a plot of land measuring 37,430 Sq.mts. which included a portion that was reserved for a particular purpose,that leaving apart the said portion the assessee completed the construction work and offered the income arising out of the said construction activities in earlier assessment years,that it was prevented from developing the plot of land measuring 5398.9 Sq.mts.,that in the Year 2003 the Government of Maharashtra de-reserved the said portion of land i.e. 5398.90 Sq.mts., that assessee was to build Police quarters and Police station on the 40% of the said plot of land without charging any money from the Police department,that it was allowed to utilize the remaining 60% of plot of land for commercial purposes,that the assessee completed the construction of quarters/ station by the end of September, 2009,that the buildings were handed over to the Police department for free,that it had incurred an expenditure of Rs.4.59 crores for constructing the quarters and stations,that the AO held that assessee had become the owner of the plot of land after handing over the possession of the quarters and station to the Police department, that he made an addition of Rs.2.65 crores to the income of the assessee,that the FAA reversed the order of the AO.In our opinion, the order of the FAA does not suffer from any legal or factual infirmity,that he had given a finding of fact that assessee was the owner of the plot of land from the very beginning, that it had executed a lease for 99 years at the rent of Rs. 1 per year in favour of the Police department,that if the assessee was not the owner of the plot of land there was no need for the government to enter in to a lease.Reserving or de-reserving of the plot of land cannot decide the issue of ownership of the plot of land.By constructing the plot of land the assessee had improved upon the right in land. If any taxable income was to accrue or arise it would not be at this stage but at the stage of sale of the constructed portion on the balance plot i.e.60% of the plot. The AO was not justified in applying ready reckoner rate on the stamp duty valuation and that also for the year under consideration.As the order of the FAA needs no interference from our side,so,confirming the same we decide the first ground of appeal against him.

3.Next ground of appeal(GOA-5)deals with deletion of addition of Rs.9.50 lakhs.During the assessment proceedings,the AO found that the assessee had incurred expenditure of Rs. 9.50 5 6967 &73(C.O.)/M/Goodwill lakhs toward building number two of the police station building under various heads. However, on spot visit by the Board Inspector it was reported that no construction activities were carried out on the plot and it was lying vacant. The AO issued a show cause notice to the assessee and asked to explain as to why the expenditure of Rs.9, 50, 543/- should not be disallowed and the work in progress should not be reduced by the same amount.Vide its letter dated 07/01/2014 the assessee filed its reply in that regard. After considering the same, he observed that during the year under consideration the profit and loss account showed nil transaction, that neither any expenditure and been incurred nor any receipt was shown by the assessee, that it had claimed expenditure of Rs.9.50 lakhs under various heads without actually incurring the expenditure, that the expenses claimed under the various heads were not incurred for construction of the project, that the expenses were not related to the working projects of the project.Finally, he disallowed the amount in question and reduced the work in progress by Rs. 9.50 lakhs.

3.1.During the proceedings before the FAA,the assessee made certain submissions. After considering the submission of the assessee and the assessment order, he held that the AO had not brought any material on record that business of the assessee had ceased to exist during the year or that the expenses incurred by the assessee were not genuine,that there could be lull and business activities and the construction activity may not have been carried out during the year to its potential, that certain expenses like staff salary,electricity expenses were required to be incurred,that the project relating to the construction of buildings on the de-reserved plot of land was containing, that AO had not brought on record to suggest that expenses of any other project/business had been debited in the work in progress, the expenditure other than the expenditure on account of Income tax and TDS had to be allowed to be part of the WIP.He held that expenditure of Rs.7,413/- on account of income tax and expenditure of Rs.2,767/- and Rs.1,300/-on account of tax deducted at source had to be disallowed out of the total expenditure of Rs. 9.50 lakhs.

3.2.Before us,the DR supported the order of the AO and the AR relied upon the order of the FAA.We find that the AO had not doubted the genuineness of the expenditure.His only objection was that at the time of spot visit by the inspector it was found that the assessee was not carrying out any construction activities.In our opinion,in the case of a contractor or a developer time gap in starting a new project after completing the first project is not an abnormal practice.But he has to maintain the office and the staff for starting the second 6 6967 &73(C.O.)/M/Goodwill project.Expenditure incurred for the intervening period cannot be disallowed.In the case under consideration the assessee had started the construction of Police station and quarters after the plot of land was de-reserved. The FAA had scrutinized all the expenses incurred by the assessee and had held that certain expenses were not allowable.Expenses incurred under the heads salary of staff or electricity bills cannot be disallowed,especially when incurring of expenses is not in doubt.Therefore,in our opinion,the order of the FAA does not suffer from any legal or factual infirmity.Upholding his order,we decide the effective ground of appeal no.2 against the AO. CO No.73/Mum/2016 In the first objection the assessee has supported the order of the FAA on both the counts i.e., deletion of additionn of Rs.2.65 crores and incurring of expenditure of Rs.9.50 lakhs (- Rs.476). While deciding the appeal filed by the AO, we have decided both the issues against him, therefore, CO becomes infructuous.

As a result, appeal filed by the AO stands dismissed and the CO filed by the assessee is treated infructuous. फलतः िनधा"रती अिधकारी "ारा दािखल क" गई अपील नामंजूर क" जाती है और िनधा"रती का ""या!ेप िन#"भावी माना जाता है । Order pronounced in the open court on 04th January, 2017. आदेश क" घोषणा खुले &यायालय म' (दनांक 04 जनवरी, 2017 को क" गई । ( ( ( ( पवन "सह /Pawan Singh) (राजे"" / RAJENDRA) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई Mumbai; "दनांकDated : 04.01.2017 Jv.Sr.PS.