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Income Tax Appellate Tribunal, “C” BENCH, KOLKATA
The caption appeal filed by the assessee is directed against the order passed by the National Faceless Appeal Centre, Delhi [the learned CIT (A)] dated 10th January, 2024 arising out of the Assessment order dated 31st March, 2015, passed under Section 143(3) of the Income-tax Act, 1961 (the Act).
The brief facts of the case are that assessee is engaged in the business of construction and development of the properties and assessee filed its return of income for the A.Y. 2012-13 by declaring total income of ₹1,15,920/-.
Sr. Name Opening WIP Sale Closing WIP Remarks No. Onkar Society for 1,35,45,400 Nil Nil Out of Books 1. Engineering and sale of Technological Research ₹1,35,45,400/- and Development 2. Camellia Enducarre 1,12,29,000 Nil Nil Out of Books Services (P) Ltd. Sale of ₹1,12,29,000/- ` 3. HCL Nonadanga 1,95,56,853/- Nil 41,41,728 Out of Books Sale of ₹1,54,15,125/- 4. Kalyan Educational 10,99,52,163/- 2,99,50,000/- 2,85,27,700/- Out of books Society sale of ₹5,14,74,463/- 03. Aggrieved by the above order, assessee went in appeal before the learned CIT (A), where assessee filed its written submission. The learned CIT (A) after considering the submission of the assessee passed detail order in following manner:-
“6.2 Ground no. 2, 3 & 4: These pertain to the plea that the AO was not correct in making additions of Rs. 9,16,63,588/- on account of suppressed sales.
The appellant stated that the AO misunderstood the accounts of the appellant. For example, it was explained, that the cost of construction in progress relating to construction works of Onkar Society for Engineering and Technological Research and Development for the immediately preceding year ending 31/03/2011 was Rs.1,35,45,400/- and for the current year ending 31/03/2012 since no cost was incurred in relation to construction works of the said party, the cost as on 31/03/2023 was reported at Rs.0. It was stated that the AO mistook the cost of construction in progress for the year ending 31/03/2011 as Opening WIP and the cost of construction in progress for the year ending 31/03/2012 as Closing WIP and treated the difference of Rs. 1,35,45,400/- in the opening and closing balance as out of books sales which is illogical.
It was explained that similar was the case for Camellia Educare Services (P) Ltd and HCL w.r.t. Kalyan Educational Society, it was submitted that the AO on perusal, of Note 17 -Revenue from Operations, of the Audited Accounts noted that the appellant had reported income from the party of Rs.2,99,50,000/- for the year, treated the same as Sales during the year and computed out of book sales at Rs.5,14,74,463/- being difference of Closing WIP and sum total of Opening WIP and Sales.
In this regard, appellant submitted that the said income of Rs. 2,99,50,000/- related to income from construction activity and not income on account of sales. It was stated, that the appellant is engaged in the business of construction and development of properties and earns income from construction activities and the appellant does not sell properties. It was explained that the same is evident from Note 17- Revenue from Operations, of the Audited Accounts, wherein the Sales were reported at Rs.0 for the current year and also the preceding year and the entire Revenue from Operations relates to 'Income on Construction Activities'.
It was stated that the appellant had not suppressed any sales. It was explained that Schedule 19 contains the details of Cost of Construction in Progress for the current year and the immediately preceding year 6.2.2 Regarding the submissions of the appellant, it is noted that the appellant is not into sales of property as a normal builder does but it is engaged in the business of only the construction of the properties and receives the revenue on this account. The appellant is akin to a contractor who constructs buildings/properties on behalf of the person asking it to construct the properties. Thus, the appellant debits the expenses on construction in the P/L account project-wise under the head 'cost of construction in progress'. This expenditure reflects the cost incurred, during the year, on a given project.
Comparison of sales and cost of construction figures for FY 2011-12 & 2010-11 (as mentioned in P/L account of AY 2012-13) reflect that the appellant has offered sales, during FY 2011-12 & 2010-11, on all properties for which it has debited the 'cost of construction in progress' except the two properties as described below:
(a)For HCL Nonadanga, in FY 2011-12, the cost of construction debited to the P/L account was Rs. 41,41,728/- while sales of Rs. Nil was offered on this property during this year.
(b)Similarly, for Onkar Society for Engineering & Technological Research & Development, though nil cost & nil revenue were offered in FY 2011-12 but in FY 2010- 11, cost was debited Vide this office notice dated 31/10/2023, the appellant was asked to explain such discrepancies in its accounts. The appellant was also asked as to why the addition of Rs. 41,41,728/-on account of HCL Nonadanga be not upheld on this account. The appellant was also asked to produce part-wise cost of construction in progress debited in P/L account with corresponding revenue offered from each party in FY 2010-11 & 2011-12 along with necessary documentary evidences, ledger accounts and full financial statements of FY 2010-11 & 2011-12 with all annexures and notes to accounts.
The appellant, vide submissions filed on 10/11/2023, requested for adjournment but did not file any details. Another notice dated 20/12/2013 was issued to the appellant to file the details as requisite by notice dated 31/10/2023. The appellant asked for adjournment vide its request dated 29/12/2023 which was accepted and vide hearing notice dated 08/01/204, it was asked to file submissions by 11/01/204. In response. appellant filed submissions dated 09/01/2024 wherein earlier submissions 21/12/2022 were reiterated and it was requested that the same may be deemed to be appellant's submissions.
In view of the above, it is apparent that the appellant has not offered any sales on HCL Nonadanga property in FY 2011-12 though it had debited this cost at Rs. On issues of Kalyan Educational Society, it is seen that the appellant has offered income of Rs. 2,99,50,000/- while cost debited to P/L account was Rs. 2,85,27,700/- on this property. Thus, gross profit of 4.75% has been offered on this property.
For Camelia Educare Services Pvt Ltd, neither the revenue nor the cost has been shown in P/L account in FY 2011-12. Even in FY 2010-11, appellant offered income of Rs. 1,14,00,100/- while cost debited to P/L account was Rs. 1,12,29,000/- on this property. Thus, gross profit of 1.5% had been offered on this property in FY 2010-11. In any case, since no cost had been debited and no sales had been offered in FY 2011-12, the addition of Rs. 1,12,29,000/- made by the AO on account of this property is hereby deleted.
For Onkar Society for Engineering & Technological Research & Development also. neither the revenue nor the cost has been shown in P/L account in FY 2011-12. However, in FY 2010-11, appellant had offered income of Rs. nil while cost debited to P/L account was Rs. 1,35,45,400/- on this property. Thus, no profit had been offered on this property in FY 2010-11. In any case, as the issue of cost debited for this property pertained to FY 2010-11, the addition of Rs. 1,35,45,400/- made by the AO on To sum up, addition made by the AO for this AY 2012- 13 is upheld to the extent of Rs. 41,41,728/- being cost debited to P/L account but no matching sales offered. Balance addition made of by the AO, of Rs. 8,75,21,860/-, is hereby deleted.
Ground no. 2 to 4 of appeal are partly allowed.
6.3 Ground no. 5 & 6: These pertain to the claim that the addition of Rs. 4,93,390/- made by the AO under rule 8D rws 14A was not justified.
6.3.1 During the appeal proceedings, on this issue, the appellant submitted that it had not earned any dividend income during the year and as such no expense was incurred by it in earning any exempt income. Hence, it was submitted, that the provisions of section 14A of the Act are not applicable. Appellant also relied upon decision in following cases:
(i) Oil Industry Development Board [20191 103 taxmann.com 326 (SC) (ii) Cheminvest Ltd. [2015] 61 taxmann.com 118 (Delhi) (iii)IL & FS Energy Development Company Ltd. [2017] 84 taxmann.com 186(Delhi) (iv)Era Infrastructure (India) Ltd [2022] 141 taxmann.com 289 (Delhi)
6.3.2 Appellant, both during these appeal proceedings and before the AO, submitted that it had not earned any exempt income in this year. Also, the AO has not brought that the appellant had earned any exempt income in this year.
It is seen that the issue of disallowance u/s 14A read with rule 8D of I.T. rules 1962 is pending before Hon'ble Supreme Court but Hon'ble High Courts have decided this issue against the Department, among others, in following cases:
(i) Delhi International Airport (P.) Ltd. [2022] 144 taxmann.com 80 (Delhi)
(ii) Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka)
(iii) Dipesh Lalchand Shah [2022] 143 taxmann.com 419 (Gujarat)
(iv) Red Chillies Entertainment (P.) Ltd [2020] 116 taxmann.com 770 (Bombay)
Respectfully following the judicial ratio, this issue is decided in favor of appellant. AO is directed to grant relief to appellant accordingly. Ground no. 5 & 6 of appeal are allowed.”
Dissatisfied with the above order, assessee is in appeal before this Tribunal. The first and second grounds of appeal are connected therefore, both are heard together.
“1. HCL Nonadanga project:
The learned CIT(A) held that the appellant has not offered any sales on HCL Nonadanga project in FY 2011-12 though it had debited this cost at Rs.41,41,728/- to the P/L account for FY 2011- 12. Accordingly, on this sole ground he sustained the addition of Rs.41,41,728/- In this regard, it is humbly submitted that the assessee did not earn any income from HCL Nonadanga project during the year, that does not mean that further cost incurred by it for the construction work undertaken in respect of the said project of Rs.41,41,728/- is not allowable.
However, a part of the work which could not be completed in the immediately preceding year was completed in the current year. Further, due to increase in cost of construction materials, cost of construction also increased against the agreed receipts. Thus the assessee incurred further construction expense of Rs.41,41,728/- during the year. Expense incurred in the current year was in continuation of the construction works done in the preceding year. The expenses incurred in the current year cannot be disallowed merely because entire income from this project was accounted for in the preceding year, AY 2011-12.
Here, please note if profits earned are assessable to tax then loss incurred should also be treated likewise. Furthermore, it is not compulsory that revenue should be generated from every project in every year. The assessee incurred these expenses for the sole purpose of earning income. It is not uncommon that an assessee can incur losses in some projects and profits in some projects.
Here, please note that the addition was made by the learned AO in respect of this project based on wrong understanding of Schedule 19 of the audited accounts of the assessee as discussed in the preceding paras. Further, as evident from the appellate order, the learned CIT(A) has sustained the addition of Rs.41,41,728/- incurred in this project on the sole premise that no revenue was reported from this project during the year. No defects were pointed out by him in the expenditure so claimed by the assessee. As such, the expense of Rs.41,41,728/- was not doubted by him.
Hence, the addition of Rs.41,41,728/- sustained by the learned CIT(A) w.r.t HCL Nonadanga project is totally unjustified and liable to be deleted.
2. Kalyan Educational Society project.
W.r.t the additions deleted by the learned CIT(A) in respect of Kalyan Educational Society, it is submitted that the said addition was rightly deleted by him on W.r.t the additions deleted by the learned CIT(A) in respect of Camellia Educare Services Pvt Ltd, it is submitted that the said addition was rightly deleted by the learned CIT(A) on the pretext that no cost has been debited for this project during the year in the Profit and Loss A/c and hence there is no question of any disallowance of expense. Furthermore, the learned CIT(A) also correctly noted that gross profit of 1.5% had been offered on this property in FY 2010-11 i.e immediately preceding year.
4. Onkar Society for Engineering & Technological Research & Development Similarly, w.r.t the additions deleted by the learned CIT(A) in respect of Onkar Society for Engineering & Technological Research & Development, it is submitted that the said addition was rightly deleted by the learned CIT(A) on the pretext that no cost has been debited for this project during the year in the
The learned Authorised Representative further stated that sustaining the disallowance made by the learned Assessing Officer in respect of HCL, Nonadanga project of ₹41,41,728/- is not correct. He stated that alleged expenses were incurred by assessee for the business purposes. Therefore, same is allowable under Section 36 of the Act. Further, the assessee reported net income of ₹32,62,103/- from the construction activity during the year which was duly offered to tax. Therefore, alleged addition of ₹41,41,728/- sustained by learned CIT (A) is totally unjustified and liable to be deleted. The learned
We after hearing the rival submissions of the party and perusing the material available on record, we find that assessee has offered revenue in the F.Ys. 2010-11 and 2011-12 along with necessary documentary evidences i.e. ledger account and full financial statement for F.Ys. 2010- 11 and 2011-12 with all necessary details of accounts before the learned Commissioner of Income-tax (Appeals). The learned Assessing Officer so made the addition in respect of HCL Nonadanga, where the difference in opening WIP and Closing WIP was treated as out of book of sales by the learned Assessing Officer due to misunderstanding the accounts of the appellant/ assessee, as the appellant/ assessee is engaged in the business of construction and development of property and earned income from construction activities, assessee does not have any sale properties which is evident from note no.17 of Revenue from audited accounts wherein the sales were reported ₹0 for the current year. Therefore, it is not the nature of opening WIP and Closing WIP as stated by the learned Assessing Officer while framing the assessment order as in the case of the assessee. Therefore, the addition of ₹ 41,41,728/- made by Assessing Officer and sustained by Learned. CIT(A) was based on misunderstanding of the assessee’s accounts. Accordingly,
Ground no.3 is general in nature; therefore, need not require to be adjudicated.
In terms of the above, the appeal of the assessee is allowed.
Order pronounced in the open court on 30.08.2024.