EMAAR HILLS TOWNSHIP PRIVATE LIMITED,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE – 2(1), HYDERABAD

The brief facts of the case are that the appellant company, M/s. Emaar Hills Township Private Limited (EHTPL) is engaged in the business of integrated township development, filed its return of income for the A.Y. 2009-10 on 30.09.2009, declaring total income of Rs.3,47,01,037/- and the said return has been subsequently, revised on 31.03.2011, declaring total income of Rs.12,86,09,326/-. The appellant company is a Special Purpose Vehicle (SPV) in the form of Joint Venture between Andhra Pradesh Industrial Infrastructure Company Ltd (APIIC) and Emaar Holding, Mauritius (a fully owned subsidiary of Emaar Properties, PJSC, Dubai). The appellant company was incorporated on 20.08.2003, as a wholly owned subsidiary of Emaar Holding, Mauritius, which in turn is a wholly owned subsidiary of Emaar Properties, PJSC (Dubai). A Collaboration Agreement was entered into on 19.08.2003 between APIIC and Emaar Properties, PJSC for the development and implementation of an integrated project consisting of an International Convention Centre Complex, Business Hotel, 18 Hole Championship Golf Course, Club House, Township consisting of residential development having various plots for villa, town homes and apartments, commercial, office and IT infrastructure and other infrastructure facilities, in terms of Government Order i.e.,

Pursuant to the development agreement, Emaar MGF has been developing both township and golf course projects, which are part of the Integrated Project since November 2006. Further, the development agreement dt.03.11.2006 was later substituted by a Development Agreement cum General Power of Attorney dt.25.07.2007 and an Addendum was also executed to the said DA-cum-GPA. As per the development agreement, Emaar MGF undertook to develop the concerned project component of the Integrated Project at its own cost and expenses by means of its own resources or through debts raised by it. In terms of Collaboration Agreement and subsequent development agreement cum general power of attorney, Emaar MGF has invested substantial amount for development of the project. The developer of the project Emaar MGF has received advances from customers towards sale of villa plots up to 31.03.2009 and the same has been shown as advances from customers under “Schedule 9 of Current Liabilities” in the audited financial statements for the year ended 31.03.2009. Thereafter, the APIIC sent a legal notice

The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that during the financial year relevant to assessment year under consideration, the assessee stated that Emaar MGF, New Delhi received an amount of Rs.45,07,64,461/- from 85 customers for sale of 87 villa plots to an extent of 1,16,748 sq. yds of land. The details of advances collected from various customers have been listed in para 10 of the assessment order. In this regard, vide order sheet noting dt.27.12.2011, the assessee was asked to show cause as to why the amounts received by it from villa plot purchasers should not be treated as its income, as the land agreement between EHTPL (appellant company) and Emaar MGF is not valid, as per the stand taken by the Government of Andhra Pradesh. According to the Assessing Officer, the appellant company by entering into Joint Development Agreement cum General Power of Attorney with Emaar MGF, Delhi has diluted the share of APIIC and therefore, the said Joint Development Agreement cum General Power of Attorney is invalid and illegal. Therefore, action of any person germinating from the said agreement is also have no validity in the eyes of law. The Assessing Officer has also discussed the issue in light of 10 Emaar Hills Township Private Limited, Hyderabad Collaboration Agreement between APIIC and Emaar Properties, PJSC and also subsequent development agreement between the appellant company and Emaar MGF and observed that in order to dilute the stake / share of APIIC, the appellant company has brought in a developer for development of the property and in that process, the appellant’s share to the revenue from the project was being reduced to 11% from 26%. The Assessing Officer had also discussed the subsequent agreement between the appellant company and M/s. SHREPL for marketing and selling the properties and observed that as per the Agency Agreement between the parties, the appellant company has authorized M/s. SHREPL, as a sole selling agent of plots @ Rs.5,000/- per sq. yd for first 100 plots available for sale, in addition to 4% commission on sale value. However, the market rate as per Registration Department was Rs.10,000/- per sq.yd from 2007 onwards. Therefore, the AO observed that the Agency Agreement between the appellant company and M/s. SHREPL is a sham. Therefore, called upon the assessee to show cause as to why the same basis cannot be applied to other villa buyers and also to show cause as to why the amount received by Emaar MGF from customers for sale of villa plots shall not be treated as income of the assessee.

In response, the assessee vide its letter dt.29.12.2011 submitted that the APIIC has issued legal notice for termination of Collaboration Agreement and Joint Development Agreement cum General Power of Attorney. Further, the appellant company

The Assessing Officer after considering the relevant facts and also taking note of various developments, including ongoing litigation between APIIC and the appellant company, observed that although, the appellant claims that there is a pending litigation between APIIC and the appellant company and further, the appellant company has issued a notice for termination of Collaboration Agreement, but as on date of passing the order also, the assessee could not produce any such copy of proposal of APIIC to cancel the agreement made by it through official channels. Even if that happen so, the refund of entire sale consideration as claimed by the assessee may or may not happen. Therefore, the submission of the assessee that the advances received from the customers is a liability and the same needs to be refunded to the customers in the event of cancellation of agreement, is not tenable and cannot be accepted. The Assessing Officer further noted that 12 Emaar Hills Township Private Limited, Hyderabad the assessee has not brought out anything relevant with respect to the treatment of said advances received by Emaar MGF and the treatment it has given in its books of accounts, inspite of several opportunities provided during the course of hearing. The assessee except stating that as per the Joint Development Agreement cum General Power of Attorney, it has only authorized to get only 26% of the revenue recognized by Emaar MGF and that as per Percentage of Completion Method, it is not required to recognize the revenue for the impugned assessment year. Therefore, Assessing Officer opined that since the development agreement between the appellant company and Emaar MGF is disputed by 26% stake holder APIIC, the entire advances received from prospective villa / plot buyers, in whatever form has to be treated as the receipt of the appellant company and therefore, entire advances received at Rs.45,07,64,461/- by Emaar MGF or any other intermediatory, is nothing but the income of the assessee and therefore, treated as income of the assessee and added back to the total income of the assessee.

Relevant findings of the AO arising as under :

Being aggrieved by the assessment order, the assessee preferred appeal before the LD.CIT(A).

Before the LD.CIT(A), the assessee has submitted that it is following Percentage of Completion (PoC) method for recognition of revenue in terms of Accounting Standards – 7 recommended by ICAI, which is applicable for construction contracts and the assessee being in the business of development of integrated housing project and the period of contracts spreads over more than a year, it needs to follow percentage of completion method. Since the progress of construction work has not reached the threshold limit of recognition of revenue as per Accounting Standards - 7, whatever the advances received from customers for sale of villa plots have been treated as advances and shown under the head Current Liabilities for the year ending up to 31-03-2009. Further, after entering into development agreement dt.03.11.2016 with Emaar MGF, the advances were transferred to Emaar MGF account and the same was reflected in the financials of Emaar MGF also. Since the appellant is a party to development agreement cum general power of attorney with Emaar MGF and sharing revenue from the project, it has only awarded 26% of revenue from the project and accordingly, the method of accounting followed by the appellant is in accordance with the accounting standards prescribed for construction contracts. The assessee had also countered the allegations of the Assessing Officer, in light of collaboration agreement and subsequent SPVs formed with APIIC and submitted that the allegation of the AO that because of development agreement-cum general power of attorney with Emaar MGF, the share of APIIC was reduced to 6.5% is only a suspicion and without backed by any evidence. In fact, APIIC is 15 Emaar Hills Township Private Limited, Hyderabad only one of the shareholders in the appellant company and therefore, whatever the revenue received by the appellant company from the JV company, APIIC will get its share of 26%. Therefore, the allegation of Assessing Officer, in light of subsequent development agreement cum general power of attorney, is only an allegation but not a fact borne out from the record. The AO has also exceeded his authority in questioning the legality of arguments between the two commercial entities, even though, the said agreements are entered into after deliberations from the board meeting, and thus, the allegation that the subsequent joint development agreement with Emaar MGF is without the knowledge of APIIC is incorrect. Therefore, submitted that the AO has erred in making addition towards advances received from customers for sale of villa plots, even though the appellant has not recognized revenue because of not satisfying the conditions as per Accounting Standards - 7.

The ld.CIT(A), after considering the relevant submissions of the assessee and taking note of various facts brought on record by the AO, including the arguments between the parties and the development agreement with Emaar MGF, observed that the arguments of the assessee, in light of Accounting Standards 7 and 9 and the method followed for revenue recognition, is not in accordance with Accounting Standard - 7. This is because Accounting Standard - 7 is applicable only to construction contracts and not to real estate developers. Furthermore, Accounting Standard - 9 is also not applicable to the appellant, as it applies only to cases where an enterprise derives revenue from 18 Emaar Hills Township Private Limited, Hyderabad the sale of goods, rendering of services, or other income streams. As such, Accounting Standards 7 and 9 were held to be inapplicable to the appellant's case. The ld.CIT(A) further observed that, in the case of the appellant company, being a developer, revenue recognition should be based on buyer’s agreement and on the transfer of significant risks to the buyers as regards the property in question, along with reasonable certainty that the money received by the developer is not likely to be refunded. In the present case, the appellant entered into agreements with buyers, received 95% of the actual cost of the villa plots, and there is no possibility of a refund of the advances received from the customers. Therefore, it was observed that the conditions for revenue recognition were satisfied in the present case. Consequently, the advances received by the appellant and Emaar MGF are assessable on a receipt basis for the respective assessment years. The ld.CIT(A) also discussed the issue of the appellant's share in the revenue received from the sale of villa plots and held that, as per the development agreement dated 03.11.2006, the appellant agreed to share the revenue in the ratio of 75% for the developer, Emaar MGF, and 25% for the appellant. Further, all development expenses were to be borne by the developer. Therefore, considering the DA-cum-GPA, it was observed that the appellant is liable to offer income on the receipt of 25% of the revenue from the construction of apartments and flats. By taking note of the total advances received by Emaar MGF, amounting to Rs.45,07,64,461, the AO was directed to tax 25% of the total receipts in the hands of the assessee towards the sale of 19 Emaar Hills Township Private Limited, Hyderabad villa plots collected by Emaar MGF for the respective financial years. The relevant findings of LD.CIT(A) are as under.

The Learned Counsel for the assessee, Shri K.C. Devdas, C.A. submitted that the LD.CIT(A) erred in sustaining additions made by the AO towards advances received from customers for sale of villa plots, even though the appellant has not recognized revenue on account of not satisfying the conditions for revenue recognition as per Accounting Standards - 7 and 9 issued by ICAI. The ld. Counsel, further referring to the provisions of Section 145 of the Act, submitted that the appellant, being a company, is required to follow the accounting standards and guidance note issued by ICAI for the method of accounting, etc. As per Accounting Standard - 7, which is applicable for construction contracts, the revenue can be recognized only after satisfying the condition of progress in construction of the project. In the present case, the construction

The learned counsel for the assessee, further referring to various documents and clauses of agreement between the parties, submitted that initially, the appellant has received advances from customers for sale of villa plots. Once the development agreement dt.03.11.2006 was entered into with Emaar MGF, the developer has collected advances from the customers, and the appellant has not received any advances. Therefore, the advances received from a different entity cannot be construed as income of the assessee, even though the said advances do not constitute income for the relevant assessment years. The learned counsel for the assessee, referring to certain judicial precedents on the concept of ‘real income theory,’ submitted that income cannot be assessed on a hypothetical basis, and only real income needs to be assessed, even in a case where the assessee follows the mercantile method of accounting, whether the income assessed forms part of the assessment year or not has to be seen. In the present case, the assessee has been following mercantile system of accounting but 26 Emaar Hills Township Private Limited, Hyderabad recognizing revenue only when the income accruing in the relevant assessment year. Therefore, assessing total advances as income of the appellant, even though the said advances do not accrue to the assessee for the relevant assessment year, is contrary to the settled principles of law by various decisions and also the concept of ‘real income theory’. The learned counsel for the assessee further submitted that the stand of the Assessing Officer, that the development agreement entered into with Emaar MGF is not valid in respect of sale of villa plots, which is otherwise is valid for sale of apartments / villas, cannot be accepted going by the method of accounting standard followed by appellant. Further, it is not a case of the Assessing Officer and LD.CIT(A) that the assessee is not receiving the revenue from the project at all. In fact, the assessee has recognized the revenue in respect of sale of villa and the same has been accepted by the Assessing Officer in the case of the appellant as well as in the case of the developer, Emaar MGF. Therefore, merely because the revenue on account of sale of villa has been recognized, this cannot be ground to say that the revenue on sale of villa plots should also be recognized, as both are not comparable. Since the appellant is developing an integrated project which consists of development of a golf course, commercial projects like hospital, apartments and villa plots, the revenue from different segments has to be recognized on the basis of nature of revenue derived from each segment. In case of sale of apartments / villas, the appellant has to recognize the revenue on the basis of PCM taking into account, the advances received from the customers, in light of accounting standard - 7. However,

The learned counsel for the assessee, further referring to the allegation of the Assessing Officer in light of various documents and also the charge-sheet filed by CBI to support his arguments that the appellant has diluted the share of APIIC by entering into development agreement, submitted that it is totally baseless and devoid of merit for the simple reason that the development agreement entered into with Emaar MGF was in the knowledge of APIIC because the nominated Board of Directors of the APIIC were present in the board meeting of the company held on 21.09.2006 for deciding the issue of entering into development agreement with Emaar MGF. Further, the conducting of the board meeting has also been informed to the Government of Andhra Pradesh through various authorities and also taken their consent. Therefore, the allegation of the Assessing Officer that the appellant has brought in developer only to dilute the shares is totally incorrect and further, the discussion of the Assessing Officer on this issue is totally no longer relevant to decide the assessment of income from the project. The learned counsel for the assessee further, negated the arguments of the Assessing Officer and also 28 Emaar Hills Township Private Limited, Hyderabad distinguished certain case laws relied upon by the Assessing Officer, including the decision of Hon'ble Apex Court in the case of Suraj Lamps and Industries Pvt. Ltd., Vs. State of Haryana in SLP No.13917 of 2009 and submitted that the issue before the Hon'ble Apex Court in the above case pertained to the transfer of title in the property without a valid Conveyance Deed and registration of said deed. Therefore, merely for the reason that agreement between the authorities is not registered, it cannot be said that the development agreement with Emaar MGF is a sham document, and that the assessee is the beneficiary of the advances received by the developer. The learned counsel for the assessee further referring to financial statements of the appellant company and the developer, Emaar MGF, submitted that the amounts collected from customers for sale of villa plots were never accounted for in the books of accounts of the appellant. The appellant is a different corporate entity with its separate legal existence. Further, the show-cause notice issued by APIIC for cancellation of collaboration agreement has been stayed by Hon'ble High Court of Andhra Pradesh. Therefore, till the Development Agreement cum General Power of Attorney is cancelled, its validity cannot be questioned by any one much less the Assessing Officer. Even otherwise, the receipt of one independent legal entity cannot be taxed in the hands of another legal entity. Therefore, he submitted that the addition made by the Assessing Officer towards advances received from customers for sale of villa plots in the hands of the appellant, is totally contrary to the relevant evidence and accounting method followed

Per contra, Shri B. Bala Krishna, CIT-DR, supporting the order of LD.CIT(A) submitted that the appellant company is a Special Purpose Vehicle incorporated in pursuant to collaboration agreement between APIIC, the Government of Andhra Pradesh undertaking, and Emaar Properties, PJSC, Dubai. As per the collaboration agreement, land held by APIIC has been developed through a Special Purpose Vehicle and the appellant company is having 74% shareholding in the Special Purpose Vehicle and APIIC is having 26% shareholding. The APIIC has brought in 258.36 acres of land as capital contribution in the Special Purpose Vehicle. The appellant needs to bring 74% capital in the form of liquid funds for the development of the project. The revenue from the project is shared by 24% for APIIC and 76% for the appellant company. However, in defiance to the collaboration agreement and subsequent correspondence between the Government of Andhra Pradesh and appellant company, the appellant company brought in a developer, Emaar MGF, and has entered into development agreement cum general power of attorney for the integrated housing project and shared revenue in the ratio of 75% for developer and 25% for appellant. From the development agreement, the share of APIIC has reduced from 24% to 6.5% and this was not in the knowledge of APIIC. Therefore, APIIC issued a legal notice for termination of 30 Emaar Hills Township Private Limited, Hyderabad collaboration agreement and the same has been challenged by the appellant and claimed that it has been stayed by the Hon'ble High Court of Andhra Pradesh. Further, based on directions from Hon'ble High Court of Andhra Pradesh, a criminal complaint was filed in the jurisdictional court for CBI cases and CBI has filed a charge-sheet. The Assessing Officer, based on these documents concluded that the development agreement entered into by appellant company with Emaar MGF is a sham transaction for diluting the share of APIIC and therefore, rejected the development agreement and has assessed entire amount of advances received from Emaar MGF as the income of the assessee.

The CIT-DR further submitted that although the appellant claims that the sale transaction is not completed and because of this, advances were still shown as liabilities, but the fact remains that even after the lapse of 10 years, the amount collected from the customers is only enjoyed by the appellant without any refund. From the above, it is very clear that the appellant has received income from sales of villa plots and the Assessing Officer has rightly taxed advances as the income of the assessee. The CIT- DR, further referring to various clauses of sale agreement with prospective buyers submitted that as per the agreement, the appellant has allowed prospective buyers to construct villa in the land. From the above, it is undisputedly clear that the appellant has transferred possession of the land to the villa buyers and conditions recognizing the revenue have been satisfied. The CIT- DR, further referring to the sale agreement with prospective

The learned counsel for the assessee, in the rejoinder to the arguments of the CIT-DR submitted that even going by the collaboration agreement between APIIC and Emaar Properties PJSC, Dubai, the entire land has to be developed as an Integrated Township, which consists of golf course, commercial properties, residential apartments / villas and residential flats. The project must be undertaken as a whole and not as argued by CIT-DR. Further, going by the development agreement between the appellant and Emaar MGF, the entire development work is undertaken by the developer at their cost. The appellant is only sharing the revenue from the project. Further, the entire advances are collected by Emaar MGF. The assessment of the developer’s case was completed by the Income Tax Department, where the advances collected from the customers were shown under the 32 Emaar Hills Township Private Limited, Hyderabad ‘Liability’ and accepted by the Assessing Officer. Further, the APIIC has issued legal notice for termination of collaboration agreement. Although the said legal notice has been stayed by the Hon'ble High Court of Andhra Pradesh, but the litigation between the parties is continuing. Further, the Government of Andhra Pradesh has issued prohibitory orders to the Joint Sub-Registrar for registration of the property in the project. Therefore, unless the prohibitory order is removed by the Government of Andhra Pradesh, the property in the project cannot be registered in the name of the prospective buyers. Unless the property is transferred to the buyers by way of registered deed, it cannot be said that the sale is complete. Therefore, the arguments of the CIT-DR that the revenue from sale of villa plots should be accounted for by the assessee in its entirety, and that the assessee is liable to be accounted for the entire advances received from the customers, are totally contrary to the arrangement between the parties and facts of the case. Therefore, he submitted that there is no merit in the arguments of the CIT-DR and the same needs to be rejected.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have carefully considered the relevant documents relied upon by both sides, in support of their contentions, and also various case laws considered by the learned Assessing Officer, the LD.CIT(A) and also the assessee. There is no dispute with regard to the fact that the appellant company is a Special Purpose Vehicle in the form of a Joint Venture Company between APIIC and Emaar MGF

In light of the above factual position and arguments advanced by the learned counsel for the assessee and the revenue, the sole issue that came up for our consideration is, whether the amount received by the appellant and its developing partner, Emaar MGF, for sale of villa plots is a taxable receipt for the financial year concerned, or it is only an advance pending recognition of revenue, as per the accounting standards, etc. If it is taxable receipt, then how much ought to be brought to tax in the hands of the appellant for the year under consideration. The 35 Emaar Hills Township Private Limited, Hyderabad appellant, right from the beginning, argued that it has followed Percentage of Completion of Method (PoCM) as per Accounting Standard – 7 for revenue recognition for the development of the project and based on percentage of completion method and taking into account the advances received from customers, the revenue has been recognized. In fact, the appellant has followed PoCM method for recognizing the revenue from sale of apartments/ villas, and the same has been accepted by the Assessing Officer. The appellant had also followed PoCM method for recognizing the revenue in respect of sale of villa plots, but the Assessing Officer did not accept the method followed by the assessee and assessed the entire advances received from customers for sale of villa plots by Emaar MGF, as income of the assessee. Therefore, to decide whether it is an advance, as claimed by the assessee, or income, as assessed by the Assessing Officer, it is necessary to examine the applicability of PoCM method and relevant accounting standards, AS-7 and AS-9,- issued by ICAI. Accounting Standard – 7 deals with recognition of revenue from construction contracts and it allowed both Percentage of Completion Method (PoCM) and Project Completion Method (PCM) for revenue recognition in construction contracts. The method of revenue recognition for real estate developers, whether to follow Percentage of Completion Method or Project Completion Method, with significant accounting and far reaching tax implications, the ICAI has also issued a Guidance Note on accounting for real estate transactions and as per the said Guidance Note which suggested application of POCM for all real estate transactions, irrespective of whether the 36 Emaar Hills Township Private Limited, Hyderabad duration of such projects is beyond 12 months and the project commencement and project completion date fall into different accounting periods. This method is applied when the outcome of a real estate project can be estimated reliably, and when total project revenue can be estimated reliably, and further it is probable that the economic benefits associated with the project will flow to the enterprise. The Guidance Note also specifies the timing of the revenue recognition and as per the said Guidance Note, when the stage of completion of a project reaches a reasonable level of development, revenue needs to be recognized. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25% of the total construction and development cost of the project. Further, at least 25% of the saleable project area is secured by contracts or agreements with buyers. Further, at least 10% of the total revenue, as per the agreement of sale or any other legally enforceable documents are realized at the reporting date in respect of each of the contracts. If the above 3 conditions are satisfied, then the percentage of completion method can be followed for revenue recognition. Further, there is another school of thought as per which for real estate projects, Project Completion Method is also suitable where the project involves short term, straightforward transactions, revenue recognition upon transfer of significant risks and rewards and further, the control of the plot typically transfers at the point of sale.

Admittedly, in the present case, the appellant is a real estate developer engaged in the business of developing an integrated housing project, which consists of residential apartments, villas, malls etc. As per the agreement with buyers of the villa plots, the assessee has an option to construct villas for the buyers. From the nature of project undertaken by the assessee, it is exactly in the nature of construction contracts and, therefore, in our considered view, AS-7 is applicable and as recommended by ICAI by way of Guidance Note on accounting of real estate transactions, PoCM method is suitable for recognizing the revenue. Therefore, the findings given by the LD.CIT(A), in light of A.S-7 and AS-9, that these two accounting standards are not applicable to the appellant’s case and further because of two conditions satisfied as per A.S-7 i.e., buyer’s agreement is signed and significant risks have been transferred to the buyers as regards the property in question along with a reasonable certainty that the money received by the developer is not likely to be refunded, revenue must be recognized as and when advances are received from customers, is incorrect because as per the sale agreement with buyers itself, the assessee has allowed possession of the flats for the limited purpose of entering and construction of the villas therein. Even otherwise, the control on entire procession of the property rests with the appellant company till execution of the final sale deed. Further, as noted by the Assessing Officer and LD.CIT(A), the appellant has not received 100% of sale consideration receivable on sale of flats but only advances. Although, the Assessing Officer and LD.CIT(A) noted that the 38 Emaar Hills Township Private Limited, Hyderabad appellant has already received 95% of the sale consideration, but fact remains that even if 5% sale consideration remains unpaid, the title and interest in the property will not pass on to the buyer, unless the entire consideration accrued as per the terms and conditions of the contract is paid and also the title and interest in the property has been transferred to the buyer by way of registered conveyance deed. In the present case, going by the findings of LD.CIT(A) itself, the appellant has only received advances and has not executed sale deed transferring the interest and title in the property to the buyers. Since the title and interest in the property have not been passed to the buyers and further, the physical possession of the property lies with the appellant company or the developer, in our view, the point of sale for recognizing the revenue as per Accounting Standard – 9 and as per Accounting Standard - 7, has not taken place and accordingly, the appellant has rightly treated the advances received from customers for sale of villa plots as ‘liabilities’.

Coming back to various observations of the Assessing Officer while making addition towards advances received from customers for sale of villa plots by developer Emaar MGF. The Assessing Officer has challenged the validity of the agreement between Emaar MGF and the appellant company. The Assessing Officer has also challenged the Development Agreement cum General Power of Attorney dt.25.07.2007 and alleged that as per the legal notice issued by APIIC, the development agreement was nothing but a sham document for depriving the revenue of APIIC.

Coming back to another aspect of the issue considered by the Assessing Officer, admittedly, before entering into development agreement with Emaar MGF on 03.11.2006, the appellant company has collected Rs.5,32,48,250/- as advance from customers towards sale of villa plots up to 31.03.2009 and the same has been shown in Schedule - 9 as Current Liabilities. Subsequent to development agreement, the entire amount received as advances from customers for sale of villa plots has been collected by Emaar MGF and accounted for in their books of accounts as advances pending revenue recognition. As per the development agreement, the appellant’s share of income is only 25% and 75% goes to the developer. Therefore, in our considered view, assessing the total advances received by a third party, although some portion of it belongs to the assessee, as entire income of the assessee for the relevant assessment year, even when the conditions for recognizing the revenue have not been satisfied, is incorrect and against the principles of taxation.

We, further noted that there is no dispute with regard to the fact that appellant is following the Percentage of Completion method for recognizing the revenue for the development of the project. In our considered view, although the Project Completion method is suitable for recognizing the revenue for this kind of project, but yet the Percentage of Completion method is more

Further, the LD.CIT(A) took a view from two clauses of accounting standard - 7 and held that the appellant and developer has entered into agreements with buyers and also received 95% advances from customers and further, significant risks and rewards in the project have been transferred to the buyers and therefore, observed that the conditions for recognizing the revenue have been satisfied. In our considered view, for recognizing the revenue as per accounting standard - 7, all the conditions need to be cumulatively satisfied. In the present case, going by the facts on record and also subsequent legal dispute that arose between the parties, including the show cause notice issued by APIIC for cancellation of collaboration agreement and subsequent stay order from the court clearly show that the litigation on the said property is ongoing and until such litigation is resolved, the question of transferring rights in the property to any person, including the buyer does not arise. Further, as brought out by the learned counsel for the assessee, the State Government has issued prohibitory orders to the Joint Sub-Registrar for registration of the property in the project and from the above, it is very clear that unless the legal dispute between the parties is resolved, the question of transferring of property to any person does not arise. Therefore, it cannot be held that the point of sale has taken place for recognizing the revenue. Insofar as the arguments of the CIT-DR that even after 10 years, the amount

In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that the Assessing Officer has erred in making addition of Rs.45,07,64,461/- towards advance from customers for sale of villa plots by Emaar MGF in hands of the assessee. The LD.CIT(A), without appreciating the relevant facts, simply sustained the addition made by the Assessing Officer to the extent of the assessee’s share of 25% as per development agreement. Thus, we set aside the findings of the LD.CIT(A) on this issue and direct the Assessing Officer to delete the addition made towards advances received from customers for sale of villa plots by Emaar MGF as income of the appellant for all assessment years.

The next issue that came up for our consideration from grounds of appeal of the Revenue for A.Ys. 2009-10 and 2010-11 is addition on account of 'On money’ / additional money / cash receipts over and above the documented value of Rs.5,000/- per sq. yard. received from six buyers and further addition based on extrapolation of average ‘On money' for remaining flats sold in the project. This issue is also the offshoot of the earlier issue discussed and considered by us. In pursuant to collaboration agreement dated 19.08.2003 between APIIC and subsequent development agreement between appellant company and Emaar MGF, the appellant company had entered into Agency Agreement with SHREPL for sale of 100 villa plots @ Rs.5000/- per sq. yard. As per the Agency Agreement, the agent M/s. SHREPL was also allowed to charge a commission of 4% over and above the fixed price in lieu of its services.

During the assessment proceedings, the Assessing Officer noted that the assessee and the developer had sold or entered into agreements with several customers numbering about 134 for sale of villa plots. The Assessing Officer further noted that the assessee or developer has collected advances from about 85 customers towards sales of 87 flats to the extent of 1,16,748 sq. yards during the financial year 2008-09 relevant to assessment year 2009-10. The Department has gathered information from various plot owners by issuing letters u/s 133(6) of the Act and recorded their statements. From the information gathered with regard to additional money received from prospective villa plot buyers, it

Being aggrieved by the assessment order, the appellant preferred appeal before the LD.CIT(A).

Before the LD.CIT(A), the assessee submitted that the agreement between the appellant company and the selling agent is a valid agreement and as per the agreement between the parties and also keeping in mind the total cost incurred for the project, estimated revenue and also marketing of the property at that point of time for the initial 100 flats, the selling rate of Rs.5000/- per sq. yard was fixed and the same has been approved by the Board of Directors. Therefore, the Assessing Officer based on the Agency Agreement and its contents cannot allege that the appellant has collected 'On money' for sale of villa plots and the same has not been accounted for. The appellant further justified the selling rate of Rs.5000/- per sq. yard, keeping in view the prevailing market price at Rs.5,000/- per sq. yard at that time in Jubilee Hills and the prices ranged from Rs.900/- to Rs.400/- per sq. yard in Gachibowli area during the year 2004 to 2006 and also in surrounding areas and further the cost of land and development expenses required to be incurred for developing the project. The assessee further submitted that it has received only sale consideration as per the rate specified in Agency Agreement and whatever excess, if any, collected as alleged by the Assessing

The additional evidence filed by the assessee was forwarded to the Assessing Officer for his comments. At the outset, the Assessing Officer contended that additional evidence does not fit into the circumstances enumerated in Rule 46A of the Income Tax Rules, 1962 and that the additional evidence submitted by the appellant is not tenable and may not be admitted. In the alternative, the Assessing Officer assailing the version of the appellant on the cost of the villa plot fixed at Rs.5000/- per sq. yard, contended that the appellant deprived APIIC their share of revenue by appointing SHREPL and fixing the villa plot rate at Rs.5000/- per sq. yard. Therefore, submitted that the appellant has arranged a transaction in such a way to deprive the revenue to APIIC and in that process, collected excess money from the buyers, which is not accounted for in the books of accounts for 50 Emaar Hills Township Private Limited, Hyderabad the relevant assessment year. Therefore, submitted that the addition made towards 'On money' should be upheld.

The appellant in a rejoinder to the remand report, submitted that the allegation of the AO in light of Agency Agreement, and that SHREPL acted prior to the Conveyance Deed, does not align with the facts on record. The said observations of the AO is neither supported by the acts of APIIC nor substantiated by any valid evidence. Furthermore, the findings of the AO in the remand report are nothing to do with the facts on record in respect of alleged 'On money' received by the appellant. Although the AO refers to charge-sheet filed by CBI, in fact, the report is actually supporting the contention of the assessee because nowhere in the charge sheet is there any reference to the appellant or the developer for collection of 'On money'. The entire charge sheet submitted by the CBI clearly shows that Shri T. Ranga Rao has collected excess money from plot buyers on the instructions of Shri K. Rajendra Prasad and handed over money to him. Further, K. Rajendra Prasad has denied receiving any 'On money’ from the customers and also denied the statement of T. Ranga Rao. Therefore, the conclusion drawn by the Assessing Officer on the basis of the statements of T. Ranga Rao and few plot buyers is incorrect.

The LD.CIT(A,) after considering the submissions of the assessee and also taken note of the remand report by the Assessing Officer and the counter submissions of the assessee on 51 Emaar Hills Township Private Limited, Hyderabad this issue, has observed that the allegation of the Assessing Officer on the basis of Agency Agreement with SHREPL and subsequent statements recorded from Shri T. Ranga Rao, Managing Director of the said company, does not hold good for the simple reason that the allegation of the Assessing Officer on the basis of certain discrepancies in the Agency Agreement and its contents is devoid of merit because, in the subsequent modified agreement, the signature of the authorized person has been obtained and further the agreement between the parties is a commercial document and acted upon by both the parties and therefore, no adverse can be drawn on the genuineness of the Agency Agreement. The LD.CIT(A) further on the issue raised by the Assessing Officer in respect of not informing APIIC about the Agency Agreement with SHREPL, observed that APIIC has become a shareholder in the appellant company after conveying land towards their share of 26% vide Conveyance Deed dt.28.12.2005 which is much after the date of Agency Agreement. Therefore, the question of prior intimation to APIIC with regard to entering into Agency Agreement with SHREPL for marketing 100 villa plots could not possibly arise. However, it is seen from the letter dated 26.12.2005 written to the Vice Chairman and Managing Director of APIIC forwarding the details of Board Meetings and gist of the business transacted, including the appointment of SHREPL on 29.01.2005 and as such it cannot be surmised that APIIC was kept in dark about the Agency Agreement. Further, the fact that there was not even a whisper of the opposition from APIIC for at least 5 years after they were informed of existence of such agreement in December,

The learned CIT(A) had also discussed the information gathered from third parties under Section 133(6) of the Act and observed that, based on a few cases of confessional statements from plot buyers, it cannot be alleged that appellant has received excess money from all plot buyers. Further, as per the information gathered by the Assessing Officer himself, Shri T. Ranga Rao, in his statement recorded during the proceedings, admitted having collected additional money from buyers at the instructions of Shri K. Rajendra Prasad and the same has been handed over to him or 53 Emaar Hills Township Private Limited, Hyderabad his nominee. Further, the charge-sheet filed by CBI also supports the contention of the assessee and in the entire charge-sheet, there is no reference of the appellant or the developer in respect of alleged excess money collected from the plot buyers. In fact, as per the CBI charge-sheet, it is evident that Shri T. Ranga Rao, the Managing Director of the SHREPL handed over the amount to Shri K. Rajendra Prasad, and the majority of the amount has gone to the benefit of Shri N. Sunil Reddy, who is an unconnected person to the appellant and the developer, as mentioned in the report. Therefore, from the above, it is clear that although, there is a possibility of collection of additional money from customers over and above the agreed price as per Agency Agreement, but said 'On money' is not collected on behalf of the assessee or developer and hence, the ultimate benefit cannot be assessed in the hands of the appellant and thus, directed the Assessing Officer to delete the addition made towards 'On money' and further, addition on the basis of extrapolation for the remaining flats sold during the relevant assessment year. The relevant findings of the LD.CIT(A) are as under :

The above finding is limited to the issue of computation of tax liabilities of the appellant under the Income-tax Act, 1961. There may have been a number of violations, and acts of omission/commission committed by the various parties involved in the dispute, including the appellant company, for which requisite action, if deemed fit, can be taken by the appropriate authorities/ law enforcement agencies under the applicable laws. However, for the limited purposes for fastening tax liabilities on the appellant company, based on the material available on record, it is not possible to hold that the on-money is taxable in the hands of the appellant company.

Accordingly, the Assessing Officer is directed to delete the addition on account of on-money made in the hands of the appellant. Ground of appeal no. 4 is Allowed.”

The ld. CIT-DR submitted that, the LD.CIT(A) has erred in deleting the addition made towards 'On money' received towards sale of villa plots, even though he has clearly admitted that there is a possibility of collecting 'On money' based on evidence and circumstantial evidence collected by the Assessing Officer. The CIT-DR further referring to the Agency Agreement submitted that the appellant company has entered into Agency Agreement and fixed the sale price of the plot at Rs.5,000/- per sq. yard even though the prevailing market value of the land at that point of time in that locality was above Rs.10,000/- per sq. yard. Further, the investigation carried out by the Assessing Officer clearly shows receipt of 'On money' by the appellant company and the developer and the same is further strengthened by an investigation carried out by CBI, wherein they have established 'On money' received from customers. The CIT-DR further submitted that although the 57 Emaar Hills Township Private Limited, Hyderabad appellant stated that they have received consideration as per Agency Agreement and whatever excess, if any, collected as alleged by the Assessing Officer not reached to the appellant company, but the fact remains that Managing Director of SHREPL, Selling Agent, Shri T.Ranga Rao clearly admitted that as per the instructions of Shri K. Rajendra Prasad, Director of the appellant company, has collected additional money and handed over the same to Shri K. Rajendra Prasad or his nominee and this fact has been strengthened by the findings of the CBI where it has been established that out of total money, more than 50% has gone to one Shri N.Sunil Reddy, who is an associate of K. Rajendra Prasad. Since K. Rajendra Prasad is the Director of the appellant company and the 'On money' has been collected in pursuant to Agency Agreement, is nothing, but the amount received from the appellant company and therefore, the same needs to be assessed in the hands of appellant company only. Although the Assessing Officer has given valid reasons for making the addition in the hands of the appellant company, but the LD.CIT(A) has deleted addition by accepting the arguments of the appellant company. Therefore, he submitted that the addition made by the AO should be sustained.

The learned counsel for the assessee, on the other hand, supporting the order of the LD.CIT(A) submitted that the LD.CIT(A) has given valid reasons for deletion of the addition towards 'On money', after considering relevant facts, including the agreement between the appellant company and SHREPL and subsequent

The learned counsel for the assessee further submitted that, if we accept the allegation of the Assessing Officer that the appellant has received 'On money' on the basis of selling price for Rs.5,000/- per sq. yard fixed for selling the initial 100 flats as per

The learned counsel for the assessee further referring to the observations of the Assessing Officer in light of statement of Shri T. Ranga Rao given on 09.01.2012 before the Metropolitan Magistrate submitted that, although shri. T Ranga Rao admitted alleged amount collected from villa buyers at the behest of Shri. K. Rajendra Prasad or his representative, but he never indicated the name of the developer or the appellant. Further, Shri K. Rajendra Prasad has denied receipt of 'On money' and also denied the statement of Shri T. Ranga Rao. This fact has further strengthened by the charge-sheet filed by the C.B.I., where there is no reference to the appellant or the developer or collection of 'On money' on behalf of the Emmar MGF. In fact, the CBI charge- sheet is solely in the name of Shri K. Rajendra Prasad and Shri N.Sunil Reddy and the money trail has been established to an 61 Emaar Hills Township Private Limited, Hyderabad extent of 50% of the alleged money and it has stated that the benefit of the amount went to Shri N. Sunil Reddy and in respect of the remaining 50%, the money trail could not be established. Therefore, the Counsel for the assessee submitted that the Assessing Officer has erred in making the addition on the said basis and extrapolating the said evidence for the entire villa plots sold during two financial years. Therefore, he submitted that LD.CIT(A) after considering relevant facts has rightly deleted addition and the order of the LD.CIT(A) should be upheld.

We have heard both parties, perused the material on record and gone through orders of the authorities below. The Assessing Officer made additions towards the alleged 'On money' received regarding the sale of villa plots on the ground that the appellant was the ultimate beneficiary of 'On money' collected by Shri T. Ranga Rao, Managing Director of SHREPL and therefore, needs to be assessed in the hands of the appellant, as income for the relevant assessment year. The Assessing Officer has extensively discussed the issue at length in light of agency agreement between SHREPL and Emaar, PJSC and its contents, information gathered from a few villa plot buyers u/s 133(6) of the Act, and their confessional statements, the statement recorded from Shri T. Ranga Rao, Managing Director of SHREPL, cross-examination of T. Ranga Rao and Shri K. Rajendra Prasad and also the charge- sheet filed by investigation agencies and came to conclusion that there is sufficient evidence to prove the collection of 'On money' and that the appellant is the ultimate beneficiary of 'On money'

The appellant has become owner of the land in pursuant to collaboration agreement between APIIC and Emaar Properties PJSC. In terms of collaboration agreement, the appellant company had entered into JDA cum GPA with Emaar MGF. As per the development agreement cum general power of attorney, Emaar MGF is developing the project, and the appellant company is sharing the revenue from the project in the ratio of 75% for the developer and 25% for the appellant. In fact, the Assessing Officer never disputed the fact that the entire development of the project has been undertaken by Emaar MGF and also the advances received from customers have been collected by Emaar MGF. Therefore, the alleged 'On money', if any, collected, then the same needs to be discussed in light of development agreement and subsequent receipts accounted by Emaar MGF and also the revenue sharing model of the appellant. In fact, we have decided the issue of taxability of advances received by Emaar MGF and held that since the appellant and the developer are following Percentage of Completion method for recognition of revenue, the point of recognition of revenue does not arise and consequently, income does not accrue to the appellant for these assessment years towards advances received from customers for sale of villa plots. Therefore, assuming for a moment, 'On money', if any,

Be that as it may. Having said so, let us come back whether there is any evidence for collection of 'On money' and further, if at all 'On money' is collected, and in whose name, it should be assessed. The appellant entered into the Agency Agreement with SHREPL for selling 100 villa plots at Rs.5,000/- per sq. yard. As per the agreement, the appellant company has agreed to sell 100 villa plots at the rate of Rs. 5000/- per square yard and in addition, allowed 4% commission to the selling agent over and above the agreed price. In fact, as per the books of accounts of the assessee, the appellant and the developer have accounted advances from the customers as per sale agreement when the agreed price was at Rs.5,000/- per sq. yd. and this fact was not disputed by the Assessing Officer. The only dispute is with regard to the Agency Agreement between the parties in light of certain discrepancies noticed by the Assessing Officer and subsequent confessional statements recorded by Shri T. Ranga Rao, Managing Director of Selling Agent. The Assessing Officer has questioned the authenticity of the Agency Agreement on the issue of the party to the agreement and to the signatures. In fact, these observations

Coming back to another observation by the Assessing Officer in light of selling the price of the flats. Admittedly, the assessee has fixed Rs.5,000/- per sq. yard as per Agency Agreement for initial 100 flats and the agreement was entered into even before the project is commenced its operations. In fact, as observed by Assessing Officer itself, the land itself has been transferred to the assessee subsequent to the date of agency Agreement. Therefore, in the context of the above facts, if we observe the reasons given by the AO, we find that the AO is totally erred in coming to the conclusion that the appellant has received on money for sale of villa plots, because the appellant has fixed the selling rate even

In so far as another argument of the Assessing Officer in light of information gathered u/s 133(6) of the Act from a few villa plot buyers and from their statements, we find that the appellant either sold or entered into agreement with 134 customers. Out of 134 customers, the Assessing Officer himself admitted that he has obtained information from six people and recorded their statements, and they have admitted having paid ‘On money' over and above the agreed consideration as per Agency Agreement. Although the Assessing Officer referred to the statements recorded from these persons, he clearly noted that one person Shri Shyam Prasad had filed revised return for A.Y. 2007-08 to 2010-11 and admitted additional income towards 'On money' for purchase of villa plots. From the above evidence, the AO concluded that the appellant has received 'On money' towards sale of villa plots and based on said evidence made additions for six flats sold to above

The Assessing Officer had also extrapolated the addition of 'On money' by considering the average rate of 'On money' received from six people and computed the alleged 'On money' for the remaining plot sold during the two assessment years based on sale agreements entered into with villa plot buyers. In our considered view, on the basis of untested evidence of six plot buyers statements or evidence, no extrapolation can be made for remaining 95 plots sold during the period, because even in a cases of estimation, there should be a basis for the estimation as held by the Hon'ble Supreme Court in the case of CST Vs. HM Esufali H.M. Abdulali (1973) 90 ITR 271 (SC). In the present case, the Assessing Officer on the basis of untested evidence of six plot buyers, has made extrapolation for remaining 95 flats and made addition of alleged 'On money' without there being any evidence. Further, even if you go by pattern of 'On money' alleged to have been collected by the appellant, as narrated by the Assessing Officer at page 56 and 57 of the order, there is no uniform pattern

Coming back to another reason given by the Assessing Officer and LD.CIT(A) in light of the statement of Shri T. Ranga Rao, Managing Director of SHREPL. Admittedly, the appellant company had entered into an Agency Agreement with SHREPL for marketing initial 100 villa plots and as per the said agreement, fixed the selling price at Rs.5,000/- per sq. yard and in addition to the agreed price of Rs. 5,000/-, commission up to 4% has to be 70 Emaar Hills Township Private Limited, Hyderabad paid to the agent. The appellant claimed that the selling rate of villa plots has been agreed between the parties keeping in view the land cost, the development cost and profit margin of the appellant company. The appellant claimed that it had entered into an agreement for sale with buyers of villa plots as agreed in the Agency Agreement and received consideration of Rs.5,000/- per sq.yd but not more. The allegation of the Assessing Officer is that the appellant has collected 'On money' in excess of the agreed selling price of Rs.5,000/- per sq.yd, which is further supported by the evidences collected from Shri G. Vijay Raghav, Finance Head of Emaar MGF, where the reference of additional money collected was recorded in excel sheet. The Assessing Officer further took support from the statements recorded from Shri T. Ranga Rao, where he has admitted collection of additional amount in excess of Rs.5,000/- per sq.yd at the instructions of Koneru Rajendra Prasad and also handed over the additional amount to Shri K. Rajendra Prasad or his nominee. Therefore, observed that the appellant has received 'On money' for sale of villa plots and the same is not recorded in the books of accounts for the relevant assessment year. We find that there is a marketing agreement between the appellant company and SHREPL for selling initial 100 flats at Rs.5,000/- per sq.yd and the same has been approved by the Board of Directors of the appellant company in their meeting. The appellant had also received sale consideration for selling of plots, which is as per the rate fixed in Agency Agreement. In fact, the Assessing Officer has not disputed these facts. Therefore, in our considered view, once

We further noted that the Assessing Officer has invoked provisions of Section 69B of the Act and made additions towards alleged 'On money'. In our considered view, Section 69B of the Act, can be invoked when the amount of money is specific and, in this regard, the burden is on the Assessing Officer to prove the extent of money not recorded in the books of accounts. When there is a doubt, and the doubt is based on suspicion, the provisions of Section 69B cannot be invoked to make any addition. In our considered view, suspicion, however, strong cannot take the place of proof. It is more so, particularly in the case of scrutiny assessment. Once the assessment is resorted to by applying the principles of extrapolation without any evidences, it leads to distorted assessment, which is not permissible under law. Therefore, in our considered view, the addition made by the Assessing Officer towards alleged 'On money' received towards

In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that the addition made by the Assessing Officer towards alleged 'On money' received towards sale of villa plots in the hands of the appellant company is contrary to evidence on record. The LD.CIT(A) after considering the relevant facts, has rightly denied the addition made by the Assessing Officer. Thus, we are inclined to uphold the findings of LD.CIT(A) on this issue and reject the grounds taken by the Revenue.

In the result, the appeals filed by the assessee in to 253/Hyd/2023 for A.Ys. 2009-10 to 2011-12 are allowed and appeals filed by the Revenue in to 426/Hyd/2023 for A.Ys. 2009-10 and 2010-11 are dismissed.

The ground raised by the assessee read as under :

The additional grounds raised by the assessee reads as under :

The reasons recorded (Pages 489-490 of P.B) do not state that there was any omission or failure on the part of the Appellant to disclose truly and fully all the facts necessary for assessment as the assessment was re-opened after a period of four years from the date of original assessment passed U/s. 143(3) of the Act on 30/12/2008.

The first issue that came up for our consideration from ground no.1 of assessee’s appeal is the addition of Rs.3,01,57,500/- towards advance received for sale of villa plots.

We have considered an identical issue in assessee’s own case for A.Y. 2009-10 in ITA No.252/Hyd/2023. But for figures, the facts and issue are identical to the issue which we had considered for A.Y. 2009-10. The reasons given by us in preceding paragraph Nos 20 to 27 shall mutatis and mutandis apply to this appeal, as well. Therefore, for similar reasons, we set aside the order of LD.CIT(A) on this issue and direct the Assessing Officer to delete the addition made towards advances received from customers on sale of villa plots as income of the appellant company.

The next issue that came up for our consideration from additional ground filed by the assessee is validity of reopening of assessment u/s 147 of the Income Tax Act, 1961.

The appellant has challenged reopening of assessment u/s 147 of the Act on the ground that as per proviso to Section 147 of the Act, unless there is an allegation by the Assessing Officer on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year, the assessment cannot be reopened, if such assessment has been completed u/s 143(3) of the Act, 1961. The assessee has argued the issue in light of certain judicial pronouncements and 76 Emaar Hills Township Private Limited, Hyderabad contended that reopening of assessment u/s 147 of the Act is void abinito and is liable to be quashed.

The CIT-DR, on the other hand, supporting the findings of the LD.CIT(A), submitted that the Assessing Officer has rightly reopened the assessment on the basis of reasons recorded, as per which, there is tangible material came to the possession of the Assessing Officer subsequent to original assessment and thus, the arguments of the assessee in light of proviso to Section 147 of the Act is incorrect and needs to be rejected.

We have heard both the parties, perused materials on record and gone through the orders of the authorities below. We find that since the issue involved in the appeal filed by the assessee has been decided on merits in favour of the assessee and against the revenue, in our considered view, the legal issue taken by the assessee challenging the validity of the reopening of assessment u/s 147 of the Act becomes academic in nature and does not require any specific adjudication. Therefore, the additional ground filed by the assessee challenging the validity of the assessment is dismissed as infructuous.

The grounds raised by the Revenue read as under:

The brief facts of the case are that the appellant company is a Special Purpose Vehicle in the form of JV Company between APIIC and Emaar Holdings, Mauritius, a wholly owned subsidiary of Emaar Properties, PJSC, Dubai. The appellant company is engaged in the business of development of township filed return of income for A.Y. 2007-08 on 29.10.2017 declaring total loss of 78 Emaar Hills Township Private Limited, Hyderabad Rs.4,40,79,625/-. The assessment has been subsequently reopened u/s 147 of the Act for the reasons recorded, as per which the income chargeable to tax has been escaped the assessment on account of under assessment of loss by allowing deduction towards construction expenses and also excess deduction allowed towards expenditure incurred against exempt income u/s 14A of the Act. The assessment has been completed u/s 143(3) r.w.s 147 of the Act dt.31.03.2013 and determined total income of Rs.1,18,69,781/- by making addition towards advances received from customers for sale of villa plots and disallowance of expenditure.

On appeal, the ld. CIT(A) quashed the re-assessment order passed by the Assessing Officer u/s 143(3) r.w.s. 147 of the Act.

Aggrieved by the order of LD.CIT(A), the Revenue is in appeal before the Tribunal.

Shri B. Bala Krishna, CIT-DR submitted that the LD.CIT(A) has erred in quashing the assessment order passed under Section 143(3) r.w.s. 147 of the Act without appreciating the fact that as per Explanation 3 to Section 147 inserted by the Finance (No.2) Act, 2009 with retrospective effect from 01.04.2009, the Assessing Officer is empowered to assess or re-assess the income in respect of any issue which has escaped assessment and such issue come to his notice, subsequently, in the course of the re- assessment proceedings under this section notwithstanding the 79 Emaar Hills Township Private Limited, Hyderabad reason for such issue has not been executed for the reasons recorded under Section 148 of the Act. The CIT-DR submitted that the Assessing Officer has passed the order and rejected the objections raised by the assessee with cogent reasons, wherein he has given various reasons for re-opening the assessment. The LD.CIT(A) without appreciating the relevant facts, simply quashed the re-assessment order passed by the Assessing Officer. Therefore, submitted that the order passed by the LD.CIT(A) should be set aside and addition made by the Assessing Officer towards advances received from customers for sale of villa plots and disallowance of expenditure should be upheld.

The learned counsel for the assessee, Shri K.C. Devadas, on the other hand, supporting the order of LD.CIT(A) submitted that it is well settled principle of law by decision of various Hon'ble High Courts, including the decision of Hon'ble Supreme Court in the case of PCIT Vs. Lark Chemicals Pvt. Ltd. Reported in (2018) 259 Taxmann.com 365, that if the order passed consequent to re- assessment has not confirmed addition attributable to reasonable belief of Assessing Officer while issuing reopening notice, any other additions made in the proceedings cannot be sustained. The learned counsel for the assessee further relying upon the decision of Hon'ble High Court of Andhra Pradesh in the case of CIT Vs. Swarna Andhra IJMII Integrated Township Development Pvt. Ltd. in of 2014 submitted that the jurisdictional High Court has considered the Explanation 3 to Section 147 and held that said explanation does not really diluted

We have heard both parties, perused the material available on record and gone through the orders of the authorities below. Admittedly, the Assessing Officer has reopened the assessment by recording the reasons as per which, income chargeable to tax has escaped from assessment on account of deduction allowed towards construction expenses of Rs.5.36 crores and excess deduction allowed towards expenses related to exempt income under Section 14A of the Act. It is also an admitted fact that during the re-assessment proceedings, the Assessing Officer has not made any additions on these two counts. Further, the Assessing Officer has made addition of Rs.3.75 crores towards disallowance of expenditure debited into profit and loss account for want of bills and vouchers. From the reasons recorded for reopening of the assessment and additions made in the re- assessment order passed by the Assessing Officer, it is abundantly clear that the Assessing Officer has reopened the assessment on different issues and concluded the re-assessment proceedings by making addition towards different issues, which is not at all the basis for forming reasonable belief that income chargeable to tax has escaped assessment. Therefore, we are of the considered view that once the assessment or re-assessment fails on the issue for which the re-assessment proceedings were 81 Emaar Hills Township Private Limited, Hyderabad initiated, then the Assessing Officer cannot consider any other issue which came to his knowledge subsequently in the proceedings. In other words, if the income escaped assessment on the basis of formation of reasonable belief in issuing notice has not assessed or re-assessed, it would not be open to the Assessing Officer to independently assess only that income which comes to his notice subsequently in the course of proceedings under Section 147. If upon the issuance of notice u/s 148, the Assessing Officer accepts the objections of the assessee and does not assess or re-assess the income which was the basis of the notice, it would not be open to him to assess any other income under some other issues independently. This legal position is supported by the decision of Hon'ble Bombay High Court in the case of CIT Vs. Jet Airways (I) Limited reported in (2011) 331 ITR 236. A similar view has been taken by the Hon'ble Delhi High Court in the case of Ranbaxy Laboratories Limited Vs. CIT (2011) 336 ITR 136 (Delhi).

Further, although, the ld. DR took support from the Explanation 3 to Section 147 of the Act and argued that as per the Explanation – 3, the Assessing Officer is empowered to assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently, in the course of the proceedings under this section, notwithstanding the fact that the reasons for such issue on which re-assessment proceedings has been initiated is valid, and no addition is made on this count. We find that there is no merit in 82 Emaar Hills Township Private Limited, Hyderabad the arguments of the CIT-DR for the Revenue for the simple reason that the jurisdictional High Court of Andhra Pradesh in the case of CIT Vs. Swarna Andhra IJMII Integrated Township Development Pvt. Ltd. (supra) had considered the arguments of the Revenue in light of Explanation 3 to Section 147 of the Act, and after considering the relevant arguments and also by following the decision of Hon'ble Delhi High Court in the case of Ranbaxy Laboratories Limited Vs. CIT (supra) and Hon'ble Bombay High Court in the case of CIT Vs. Jet Airways (I) Ltd., (supra) held that Explanation 3 to Section 147 of the Act, will be applicable in the case where live issue which was subsisting at the time of relevant assessment and if such issue has escaped the determination of the Assessing Officer, can be a ground for reopening. Any new issue that has cropped up subsequently on new set of facts, the above explanation has no application. The Hon'ble Court further held that Explanation 3 has not really diluted cardinal objectives of Section 147 of the Act, for reopening of the assessment. Explanation 3 has given a retrospective effect with an idea that there are so many assessment years which were passed earlier without deciding the substituting issue at the time of original assessment. This explanation has held to be reopened in these cases. The sum and substance of the ratios laid down by various Hon'ble High Courts is that if the reasons recorded for reopening of assessment do not survive and no addition is made on that count, then the Assessing Officer does not have any power to assess any other income which has come to his knowledge subsequently in the course of the proceedings under this Section.

In the result, the appeal filed by the Revenue in for A.Y. 2007-08 is dismissed.

To sum up, the appeals of assessee in to 253/Hyd/2023 are allowed and the appeal of assessee in is partly allowed. The appeals of Revenue in and 426 to 428/Hyd/2023 are dismissed.