KAMAL ASSOCIATES,MUMBAI vs. DCIT 15(1), MUMBAI

The first issue in the Revenue‟s appeal in is as regards to the order of the CIT (A) deleting the addition of construction expenditure incurred by 2 ITA No.4326 & 4621/Mum/2 assessee after the date of issue of completion certificate. For this, the Revenue has raised following ground No.1:-

Briefly stated the facts are that the assessee is a builder and property developer. The assessee firm acquired land at Parel and constructed a building project known as „Raj kamal Heights‟. This project constructed two residential wings. A survey u/s. 133A of the Act was carried out on the said construction site on 16-02-2006. During the course of survey, the department found that the completion certificate obtained from local authority showing the project has been completed on 06-12-2006. According to the AO, the assessee has incurred construction expenses to the tune of Rs.1,84,32,204/- after obtaining of the completion certificate. Accordingly, the same is not allowable. For this finding, the AO recorded the reasons that once the completion certificate was issued, there was no need for purchase of any material under the head „steel, tiles, plumbing‟ etc. Further, he noted that the assessee does not maintain stock register/consumption register. According to the AO, the rate given by the assessee to the contractor for construction @900/sq. ft. was more than the market rate. According to him, another firm, Build Well Developer has shown rate per sq. ft @ Rs.300. M/s Darshan Construction has also shown the cost of construction at Rs.799 per sq. ft. The AO has not accepted the architect‟s certificate submitted with the executive engineer on 16-12-2006. Accordingly, the AO rejected the book results by invoking the provisions of section 145(3) of the Act and made disallowance on the followings being construction related expenses:- Sr.No Head of exp. Expenses claimed/disallowed Rs. 1) Payment to Contractors 1,26,99,717/- 2) Aluminium window work 10,61,904/- 3) Plumbing work 3,04,480/- 4) Garden development 3,71,900/- 5) BMC Water Connection Charges 1,69,421/- 6) Other cost of construction 38,24,782/- Total 1,84,32,204/- Aggrieved, against rejection of book results and disallowance of expenses, the assessee preferred appeal before the CIT (A), who deleted the addition after considering the explanation of the assessee. Aggrieved, now the revenue is in appeal before the Tribunal.

We have heard the rival contentions and gone through the facts of the case. The CIT (A) vide Para 7 of his order deleted the disallowance of expenses by observing as under:- “7. I have considered the rival submissions of the Assessee and findings of the Assessing Officer, with reference to the background of the case carefully. While considering the findings of the Assessing Officer in respect of disallowances of all the expenditure, I find that Ld. AO has disallowed all these expenses in a very general and routine way without giving proper attention and credence to the genuineness of the expenditure. In fact, builder is at liberty to sell all flats once intimation of disapproval known as IOD or commencement certificate is received. The completion of the building does not necessarily mean that project is completed in all respects. In reality obtaining of an occupation certificate only means that building is fit to be occupied subject to the condition laid down by MCGM granting such certificate. It can be seen from the nature of the expenditure itself that all the expenses are related with the project itself and none of the expenditure can be presumed to be non-related one. One can see that payment to contractor is related with project under consideration, which is, neither estrange nor irrelevant expenditure. The bill raised by the contractor and details available in the ledger account of the assessee proves the fact of genuineness of the expenditure related with this project known as Rajkamal Heights. It is also relevant to mention that aluminium window work is also related to the project, which cannot be presumed to be unrelated element or expenditure. Similar is the position in respect of the plumbing work, which is on going work even required to be done after obtainment of occupation certificate. Further, even after obtainment of occupation certificate, garden can be developed or process of garden would be made in progress. There is no bar of any such project under consideration. It appears from the finding of the Assessing Officer that vital issue of the matter has not been appreciated properly by him as there is payment to BMC for Water Connection charges which cannot be disallowed merely on the ground that occupation certificate was obtained much earlier. Similar is the fact in respect of other cost of construction which correctness has not been doubted by the Assessing Officer but has been disallowed only on the basis of occupation certificate. This cost of construction includes site expenses as under:- Nature of Amount (Rs) Expenses 1. Site Expenses Rs. 6,050/- 2. Refund for not Rs.8,25,000/- carrying work 3. CR Sheets Rs.6,44,994/- 4. Cement Rs.3,26,250/- 5. Electrical Rs. 75,000/- Works 6. Rabbit Rs. 37,400/- removing 7. Intercom Rs.1,12,000/- 8. Pipes Rs.5,40,042/- 9. Tiles Rs.9,30,803/- 10. Sand Rs.2,17,818/- 11.Laminated Rs. 19,425/- Glass Total Rs.38,24,782/- 7.2 All these expenses cannot be presumed to be irrelevant to the cost of project as even after receipt of occupation certificate, various work related with amenities, beautification, repair, minor reconstruction, redevelopment, 4 & 4621/Mum/2 replacement of various items, re-modification, miscellaneous repairs of completed work, etc. can be done. Due to all these factors even after occupation of the property, either building or contactor used to do various works to the fullest satisfaction of the customers, occupants, and builder or to the satisfaction of the monitoring agencies like Fire-brigade, BMC. Therefore, such expenses of the project cannot be denied and disallowed summarily on presumption or technical basis without bringing on record cogent evidences and demonstrating the evidences proving that these expenditure are not related to the project and has been diverted to any other project. Here in this case it is argued by the Ld. AR that assessee has got any other project and there is no diversion of material to any other site. As regards cost of construction @ Rs. 900/-, I find substance and fairness in the argument of the Ld. AR that the rate of construction of the project is a real-one and the contractor is not at all a related person and all the payments are made as per the terms and conditions of the contract which has duly been accepted by the department in earlier years even during the course of survey proceeding at the premise of the assessee. It is a matter of record that Ld. AO has not found out anything wrong in the regular payment to the contractor. It is worthwhile to mention that Ld. AO has not disputed the genuineness of the receipt of the contractor on which proper TDS is made by the assessee, hence there is no propriety to disbelieve the genuineness of contractual payment made by the assessee. The arguments of the Ld. AO about the expenditure of construction of the building as it was complete and there was no reason whatsoever with the assessee to incur such expenditure, is not convincing or tenable argument. The work carried out by the contractor was mainly related with the finishing work, segmental work and other works and further the plan of construction of Clun-House was approved in May, 2007 which is after receipt of occupation certificate. Similar is the situation in respect of construction of compound wall. It is a normal practice of the builder and developers to continue the work of various nature including the miscellaneous work, beautification, modification of various looks of the project without altering the main structure of the building. Therefore, only on the basis of presumption no such expenditure can be disallowed. Therefore, I do not see any convincing arguments whatsoever with the AO to discard the genuine expenditure incurred by the assessee and proved the same before him. The points raised by Ld. AO may be relevant for further investigation but certainly not the ground for rejecting the genuine expenditure. Hence disallowance of such expenses of Rs. 1,84,32,204/- is directed to be deleted from the assessment.

We have heard the rival contentions and gone through the facts & circumstances of the case. From the very nature of expenditure it makes clear that all the expenses are related to project itself and none of the expenditures can be presumed to be non-related one. The assessee before us produced bills and vouchers which include bills raised by the contractor and details are available in the ledger account which proves the genuineness of the expenditure related to the project “Rajkamal Heights”. We also find from the bills and vouchers that the expenditure is related to project which was incurred after taking completion certificate. It appears that the plumbing work, gardening expenses, BMC water connection charges, work related to amenities, beautification, repair, minor reconstruction, redevelopment, replacement of various items, remodeling, misc. repair of completed works incurred by assessee after completion of the building, which is very much allowable. We have seen that the assessee is able to produce bills and vouchers to the extent of 5 & 4621/Mum/2 Rs.1,67,48,172/- out of total expenditure claimed by assessee at Rs.1,84,32,204/-. To this extent the assessee‟s expenditure can be allowed and the balance sum of Rs.16,84,032/- can be disallowed. Accordingly, we allow the claim of the assessee to the extent of Rs.1,67,48,172/- and retain the addition in respect to disallowance of expenses in the absence of the vouchers at Rs.16,84,032/-. This issue of Revenue‟s appeal is partly allowed.

The next common issue in these cross appeals is as regards to the order of the CIT (A) restricting addition of unexplained cash component receipt to Rs.30,00,000/- as against Rs.2,20,57,111/- made by the AO. For this, the Revenue has raised the following ground No.2:- “02. On the facts and circumstances of the case as well as in law, the Ld. CIT (A) has directed to restrict the addition on account “Alleged Cash Component” to Rs.30,00,000/- as against Rs.2,20,57,111/- made by the AO. After having accepted the factum of receiving on money on one side and ignoring evidence of statement of Broker and assessee recorded at the time of survey confirming the rate charged ranging in between Rs.4,500/- to Rs.5,500/- (Copy of Statement on oath recorded is enclosed Question and Ans. No.22 and 25 especially and other related documents.)”. And for this, the assessee has raised the following ground No.1:- “1. The Learned Commissioner of Income Tax Appeals erred in confirming the addition of Rs.30,00,000/- alleged income as cash component”.

We have heard the rival contentions and gone through the facts and circumstances of the case. First of all the assessee submitted that out of 17 flats 9 flats have been already considered while disclosing the money receipts at Rs.5.16 crores in the assessment year 2006-07 and the same has been assessed u/s. 143(3) of the Act. He explained that out of 17 flats 9 flats which were part of the flats on which cash component was already taken and declared. The details of which are as under:- S No Flat Number Cash Component in A.Y 2006-07 A wing Amount (Rs) 1 703 7,98,000 2 802 9,00,000 3 1103 7,98,000 B wing 4 302 9,80,000 5 601 7,77,000 6. 802 17,50,000 7. 1001 13,87,500 8. 1102 17,50,000 9. 1103 14,25,000 The learned Counsel for the assessee also explained the entire flats in both „A Wing and „B Wing. The details of which are as under:- SN Flat Area in Name Price as Mkt value PSF Offered sq mtr per sale Rate deed A WING 1 103 84 KP Jain 41,61,000 37,88,400 4603 No 2 203 84 VD SHAH 34,05,000 35,28,000 3768 No 3 303 84 R K SANGHAVI 42,00,000 59,22,000 2768 No 4 403 84 R K SANGHAVI 26,40,000 29,11,000 3540 No 5 503 84 N sHN 45,60,000 36,16,000 5045 No 6 603 84 V.SHAH 33,30,000 36,16,000 3684 No 7 703 84 R M JOGANI 42,18,000 36,16,000 4667 Yes 8 802 103.43 S.BHUJBAL 37,50,000 45,26,615 3370 Yes 9. 1103 84 A KUMAR 38,75,000 38,80,800 4287 Yes 9 ITA No.4326 & 4621/Mum/2 B WING 10 301 82.17 A A MEHTA 33,00,000 37,05,867 3732 No 11 302 103.43 D B AGARWAL 42,00,000 45,26,615 3774 Yes 12 403 84 D D SHAH 34,05,000 36,16,200 3768 No 13 601 82.17 DSB PRAVESH 44,40,000 36,16,200 4912 Yes 14 802 103.43 P KURNAVAT 30,80,000 36,16,200 2768 Yes 15 1001 82.17 S SIROYA 27,75,000 37,96,254 3139 Yes 16 1002 103.43 M K SIROYA 31,00,000 45,26,615 2785 Yes 17 1103 84 S CHANDALIYA 28,50,000 38,80,000 3153 Yes When a query was raised by the bench to the learned CIT/Sr. DR whether 9 flats out of 17 flats were only flats, which were part of which cash component was already taken and already disclosed in the declaration made by the assessee. The learned CIT/Sr. DR stated that loose sheets found during the survey are part of survey reports. These loose sheets indicate that in some cases sale of flats Rajkamal Heights there was a receipt of cash component, besides cheque payment. He only referred to statement of Rajendra Khemchand Kothari and Kamlesh Salwa, a real estate broker recorded u/s. 133A of the Act relating to some transactions pertaining to the assessee firm with the said broker. It is to be mentioned that these loose sheets were found from the premise of a real estate broker Shri Kamlesh Savla. In view of these, learned CIT/Sr. DR supported the order of the AO and argued that the addition made by the AO is based on evidences. We find that a survey action on the business premise of the assessee u/s. 133A of the Act and consequent action on a real estate broker, Shri Kamlesh Savla was conducted during the FY 2005-06 relevant to Asst. Year 2006-07. It is fact that out of these 17 flats 9 flats were sold during the assessment year 2006-07 and cash component was offered in that very year, which is included in the declaration made for Rs.5,16,00,000/- and assessment made therein u/s. 143(3) of the Act.

As regards to remaining 8 flats, one flat no. 103 was sold out @ Rs.4603 per sq. ft. Hence, it is over and above general selling price including cash component. In regard to other 7 flats, we find that Shri Kamlesh Savla has given a general statement admitting the sale price at Rs.4,000/- per sq. ft in his statement vide Question No. 24, which reads as under:- “Question 24: From the above page No.125 it is seen that the sale value for 9th floor and 10th floor is Rs.5400 square feet. What is the cash component involved in this quotation? Ans: At that time the cash component was between 15 to 20%. However, the flats were not sold at this price but the actual price was around 4000 per square feet”.

The nest issue in the Revenue‟s appeal is against the order of the CIT (A) deleting the disallowance of expenses of telephone, vehicle expenses and conveyance expenses. For this, the Revenue has raised the following ground No.3:- “03. On the facts and circumstances of the case as well as in law, the Ld. CIT (A) erred to delete the addition made by the AO out of Telephone Expenses (Rs.25,327/), Vehicle Expenses (Rs.50,342/-) and Conveyance Expenses (Rs.10,000/-) without considering the factum addition made for non fulfillment of conditions of 37(1) towards the above expenses cannot be restricted especially on the pretext of payment of FBT, which is not supported by law”.

We have heard the rival contentions and gone through the facts and circumstances. We find that the AO disallowed salary of Rs.3,45,000/- claimed by assessee to paid to four employees for supervision work. According to AO the assessee has not paid the salary on monthly basis but it was one time yearly payment. Accordingly, the AO disallowed the salary paid to the four persons mentioned in Assessment Order at page 13. Accordingly, he made disallowance of Rs.3,45,000/-. The CIT (A) sustained the addition on the basis that salary expenditure was debited as on 31st March, 2007, i. e. at the end of the year. The assessee before CIT (A) claimed that these persons were hired to supervise the project during the year, since the work of the garden as well as club house was under progress. The CIT (A) observed that, “had any such truth been there, there would have been regular debit and receipt of the salary by these persons whereas, Appellant has only shown debit by voucher dated 22.03,2007, which is apparently unbelievable. Therefore, disallowance of salary of Rs.3,45,000/- out of the total claim of Rs.7,64,975/- is sustained”. We are of the view that the assessee is unable to prove the genuineness of the salary paid to these employees and CIT (A) has confirmed the disallowance with reasons. We also confirm the orders of the lower authorities. This issue of assessee‟s appeal is dismissed.

Coming to the assessee‟s penalty appeal in the only issue in this appeal of the assessee is against the order of the CIT (A) confirming the penalty levied by the AO u/s 271 (1) (c) of the Act on alleged receipt of on-money and disallowance of salary payment. For this the assessee has raised the following ground No.1:- “1. The learned Commissioner of Income Tax Appeals has grossly erred in confirming Penalty u/s 271 (1) (c) r. w. s. 274 of the Income Tax Act, 1961 amounting Rs.11,25,927/- on account of alleged receipt of on money and salary payment amounting Rs.33,45,000/-.”

This issue relates to levy of penalty u/s 271 (1) (c) in respect to estimated addition made by the AO and confirmed by the CIT (A) at Rs.30 lakhs. The CIT (A) confirmed the addition by observing as under:- “9.4 thus selling rate, on the basis of which disclosure of income was accepted by the department was Rs. 3,750/- per sq. ft. This material facts, evidences and background of the case gives basis for selling price of the flats is to be taken @ 3750/- which booking were made in earlier years, accordingly, on money element or more selling price of flats worked at Rs. 30,00,000/- in respect of 7 flats as narrated above is sustained against the addition of Rs. 2,20,57,111/-. Therefore, assessee gets relief of Rs. 1,90,57,111/-.” On these observations, the AO levied the penalty on the following reasons:- “4. I have considered the facts of the case and also the submissions made by the Assessee carefully. The submission filed by the assessee is not found satisfactory due to the following reasons:- Thus, it is clear that on one hand the assessee has inflated its expenses at his own will, whereas on the other hand suppressed the sales. The assessee failed to justify its claim towards salaries before the AO and the CIT (A). The fact of receipt of on money in cash was admitted by the assessee during the survey proceedings relevant to F. Y. 2005-06. In the current year, the sale rate of some flats was even less than the sale rate submitted by the assessee before the survey proceedings. When these queries were raised before the A. R. of the assessee, the A. R. failed to furnish a proper justification. Accordingly, the additions made on these grounds made by the assessee were confirmed by the CIT (A)”.

We have heard rival contentions on this issue and gone through the facts and circumstances of the case. We find from the orders of the lower authorities that both the authorities below have assumed concealment in respect to on money received for the post survey period. The on money was received by the assessee for the assessment year 2006-07, being the date of survey on 21-02-2006, for the reason that some papers for the financial year 2005-06 were found. But, no paper relating to financial year 2006-07 relevant to this assessment year 2007-08 was found. On this basis only the Tribunal has deleted the addition of on money addition and once addition is deleted, penalty will not survive. Accordingly, we delete the penalty and allow the appeal of the assessee.