ITO 22(3)(4), NAVI MUMBAI vs. VIJAY RAJIV GAJRA, NAVI MUMBAI

O R D E R PER MAHAVIR SINGH, JM: Out of these cross appeals, one by the assessee and one by the Revenue are arising out of the order of the CIT (A)-26, Mumbai passed in appeal No.CIT (A)-26/IT-145/Dy.CIT 15(1)/09-10 dated 16-03-2010. Assessment was framed by the DCIT, Circle-15(1), Mumbai for assessment year 2007-08 vide his order dated 24-12-2009 passed u/s 143(3)(ii) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). The other appeal by the assessee is arising out of the order of the CIT (A)-26, Mumbai dated 26-02-2014 passed in appeal No.CIT (A)-26/IT-21/JCIT.15(1)/12-13 confirming the penalty levied by the JCIT(OSD), Circle-15(1), Mumbai vide his order dated 29-03-2012.

01. On the facts and circumstances of the case as well as in law, the Ld. CIT(A) has erred in deleting the addition made by the AO in respect of construction expenditure of Rs.1,84,32,304/- even though these were incurred after the date of issue of Completion Certificate by the Architect”.

3 & 4621/Mum/2010 ITA No.2558/Mum/2014 4. 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/2010 ITA No.2558/Mum/2014 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.

7. Briefly stated the facts of the case are that during the course of survey operation 133A of the Act on the business premise of the assessee on 16-02-2006 the survey party papers relating to transactions of on money/cash component transactions recorded. The AO made the addition of on money i.e. cash component on account of sale of flats of Rs.2,20,57,111/-. According to the AO, the partner of the assessee firm during the course of survey proceedings admitted the cash component in sale of these flats. The AO referred to Question Nos. 21 & 23 of the statement of the partner, Shri Rajendra Khemchand Kothari. According to the AO the sale price for the flats is at Rs.4,500/, Rs.4,570/ and Rs.5,000/- and Rs.5,500/-. Accordingly, the AO adopted the sale price rate @ Rs.5,000 per sq. ft and worked the sale price of 17 flats at Rs.8,33,46,111/-. The AO reduced the disclosed amount in the return of income i. e. recorded amounts in the agreements. Accordingly, the AO estimated the undisclosed income on account of cash component in respect of 17 flats at Rs.2,20,57,111/- and added the same to the returned income of the assessee. Assessee preferred appeal before the CIT(A), who restricted the addition at Rs.30 lakhs by observing in paras 9, 9.2, 9.3 and 9.4 as under:-

9. I have considered the rival submission of the assessee and has also circumspected the entire spectrum of facts and circumstances of the case with 6 & 4621/Mum/2010 ITA No.2558/Mum/2014 reference to result of survey proceeding and finding of Assessing Officer. It is the very evident from the record itself that assessee has also included 9 out of 17 flats for disclosure of on money receipt in A.Y. 2006-07 with a view to make this point more visible it is considered appropriate to reproduce the details of flats sold and elements of on-money in respect of individual flat which is as under:- SN Flat Area Name Price as Mkt PSF Offered in in sq per sale value rate A.Y. mtr deed 2006-07 A WING 1 103 84 K P JAIN 41,61,000 37,88,400 4603 No 2 203 84 V D SHAH 34,05,000 35,28,000 3768 No 3 303 84 R K 42,00,000 59,22,000 2768 No SANGHAVI 4 403 84 R K 26,40,000 29,11,000 3540 No SANGHAVI 5 503 84 N. SHAH 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 8 803 103.43 S. BHUJBAL 37,50,000 45,26,615 3370 Yes 9 1103 84 A KUMAR 38,75,000 38,80,800 4287 Yes B WING 10 301 82.17 A A MEHTA 33,00,000 37,05,867 3732 No 11 302 103.43 D B 42,00,000 45,26,615 3774 Yes AGARWAL 12 403 84 D D SHAH 34,05,000 36,16,200 3768 No 13 601 82.17 DS B 44,40,000 36,16,200 4912 Yes PRAVESH 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 28,50,000 38,80,000 3153 Yes CHANDALIYA 9.2 As evident from the above evidence that Shri Savla has given a general statement that actual selling price was around Rs. 4,000/- per sq. Ft. but finally during the course of survey authority, the average rate was accepted @ Rs. 3,750/-, which includes selling price as per agreement of Rs. 2,500/- and on money @ 1,250/- this acceptance by the department during the course of survey proceeding strengthen the contention of the Ld. AR that selling price of the flat was not more than Rs. 3,750/- in the normal course and only in cases where sales were executed later on, selling price was more than Rs. 5,000/-. Therefore, the specific evidence referred to during the course of survey proceeding cannot be ignored by the Ld. AO on presumption basis or on the basis of general statement of the partner or any related person. Here in this case it is very visible that an average rate of the property was Rs. 3,750/- hence, general unsupported selling price cannot be applied.

7 & 4621/Mum/2010 ITA No.2558/Mum/2014 Here in this case, it is very visible that following flats were considered in respect for cash components in A.Y. 2006-07, hence one has to consider rest of the 8 flats in this year for addition. These 9 flats are as under:- S No Flat Number Cash Component Offered In AY 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 Further, out of the rest of 8 flats, flat No. 103 was sold out @ Rs.4,603/- hence it was over and above general selling price included in on money receipt, therefore, only following flats are remained to be considered for receipt of on money in this year. The details of the same areas under:- SN FLAT Area Area Price as PSF Offered in AY in sq in sq per sale rate 2006-07 mtr ft. deed A Wing 1 103 84 903.84 42,00,000 2768 No 2 203 84 903.84 34,05,000 3768 No 3 403 69.31 745.77 26,40,000 3540 No 4 503 84 903.84 45,60,000 5045 No 5 603 84 903.84 33,30,000 3684 No B Wing 6 301 82.17 884.15 33,00,000 3732 No 7 403 84 903.84 34,05,000 3768 No Total 28,140 9.3 It is seen from the above and that as compared to the market price of the flats, there is less sale price shown in respect of 7 flats therefore, the difference of the same is worked out to Rs. 30 Lakhs. These 30 Lakhs is worked out from submission of the Ld. AR dated 04.03.2010 itself as mentioned earlier. Therefore, instead of making of double addition, addition is confined to Rs. 30 Lakhs, which is well supported with the finding of the survey authority duly accepted by the assessee. Here it is also relevant to mention that after survey the Ld. Assessing Officer of A.Y. 2006-07 who was none less than Addl. CIT Range 15(1) had admitted the genuineness and sufficiency of the admission of the assessee in the assessment order dated 03.12.2008 in the following words: “The assessee is engaged in the business of construction and had pruchaed land from Raj Kamal Kalamandir Pvt. Ltd. at Lal Baug which was tenanted and occupied by various tenant. The firm has followed the method of accounting as per AS-9 for revenue recognition. During the year, assessee has shown profit from sale of flat in its project “Rajkamal Heights”. In the profit and loss account the assessee has duly incorporated the amount of Rs. 5.16 crores disclosed on this project during survey conducted at assessee’s premises on 02.12.2006, over and above regular profit. The assessee has also furnished all the relevant details called 8 & 4621/Mum/2010 ITA No.2558/Mum/2014 for. After going through the details/documents filed, the returned income of the assessee is accepted.” 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/-.” Aggrieved, against the restriction of addition of Rs.30 lakhs as against the addition made by the AO at Rs.2,20,57,111/-, the assessee as well as the revenue both in cross appeals before the Tribunal.

10 & 4621/Mum/2010 ITA No.2558/Mum/2014 We also find that the survey party has accepted the average sale price rate @ 3750, which includes the sale price as per the sale agreement of Rs.2,500/- and cash component of Rs.1,250/- in the earlier year relevant to assessment year 2006-07. Even otherwise, the average PSF rate of 7 flats @ Rs. 4020/- which is almost corroborating with the statement of Shri Kamlesh Savla admitting the average rate of Rs.4000/- PSF (per sq.feet). Even otherwise, there is no evidence relating to the assessment year 2006-07. This is merely an exploration of rate by the AO without any evidence based on earlier year evidences. In view of the above facts and circumstances of the case, we are of the view that the CIT(A) has wrongly estimated the cash component at Rs.30 lakhs in respect of 7 flats on estimation basis. There is no basis for CIT (A) to estimate cash component in these 7 flats at Rs.30 lakhs by taking the selling price of flat @ Rs.3750/- per sq. ft. Accordingly, we delete the addition confirmed by CIT (A) amounting to Rs. 30 lakhs. The issue of assessee‟s appeal is allowed and that of the Revenue is dismissed.

11. We have heard rival contentions and gone through the facts and circumstances of the case. We find that the AO has disallowed these expenses on the basis of personal element involved in the same. We also find that the assessee has also paid FBT on these expenses @ 20%. We find that the AO has made addition on ad hoc basis without any finding of personal user of these expenses. We also find that these expenses are related to assessee‟s business and there is no element of personal user particularly when the assessee has already paid FBT on such expenses. There is no reason for making disallowance of these expenses. Hence, we confirm the order of the CIT (A) deleting these additions. This issue of Revenue‟s appeal is dismissed.

12. The next issue in the appeal of the assessee is against the order of the CIT (A) confirming the disallowance of salary payments. For this, the assessee has raised the following ground No.2:-

11 & 4621/Mum/2010 ITA No.2558/Mum/2014 “2. The Learned Commissioner of Income Tax Appeals erred in confirming addition of Rs.3,45,000/- payment of Salary on the ground that payment were made on One time basis & not periodically”

15. First of all we have gone through the Order of CIT (A) and noted that the CIT (A) has confirmed the penalty in respect to on money addition of Rs.30 lakhs confirmed by CIT (A) in respect to 7 flats which were sold at a price lower than the sale rate of Rs.3750/- per sq. ft. Accordingly, we will adjudicate the issue arising out of the order of the CIT (A) in respect to on money addition of Rs.30 lakhs only.

12 & 4621/Mum/2010 ITA No.2558/Mum/2014 16. 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)”.