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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri Waseem Ahmed & Shri K.Narsimha Chary
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal has been filed by the assessee relating to Assessment Year (AY) 2012-13 is against the order passed by Pr. Commissioner of Income Tax -3, Kolkata dated 20.01.2016 under the provisions of Sec.263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
2. The assessee is challenging the validity of revision order passed by Ld. CIT. The grounds raised
by the assessee are as under : “(1) For that under the facts and circumstances of the case the assessment order passed u/s.143(3) 27-03-2015 by the Assessing Officer was not pre-judicial to the A.Y. 2012
13. M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 2 interest of revenue, as such Ld. Pr. Commissioner of Income Tax had erred in invoking Section 263 of The I. T. Act, 1961 in this case.
(2) For that "future development expenses" claimed by the appellant assessee company were part of the cost of the Units sold in its construction project "Ashiana Aangan" and the revenue considered out of sale proceeds had to be matched with the entire cost of the Units (incurred & to be incurred) and therefore, allowance of such expenditures could not be termed as pre-judicial to the interest of revenue.
(3) For those non-discussions of allowable expenditures in the assessment order does not lead to conclusion that the Assessing Officer had not made any enquiry in the course of assessment proceedings.
(4) For that the Assessing Officer had allowed "further development expenses" as accrued expenses for Units sold in the housing project and such view is permissible in law to which the Pr. Commissioner did not agree with and under these facts the assessment order cannot be treated as erroneous and pre-judicial to the interest of revenue.
(5) For that the assessment order passed u/s.143(3) of the Act passed by the Assessing Officer is not pre-judicial to the interest of revenue as because the tax has been demanded based on book profit u/s.115JB which is much higher than the tax demanded on normal income tax computation even after considering the disallowance of future development expenses for Rs.2,24,85,000/-.
(6) For that under the facts and circumstances of the case the assessment order passed u/s. 143(3) is neither erroneous nor pre-judicial to the interest of revenue and thus invoking of Section 263 by The Pr. CIT is bad in law and order passed is liable to be set aside.
(7) For that your appellant assessee craves leave to add or alter and modify the grounds of appeal before or at the time of appeal hearing.”
2. The brief facts of the case as per the records as culled out before us. The assessee in the present case is a company and engaged in the business of real estate development and hospitality services. The assessee has filed its return of income on 29/09/2012 for the relevant assessment year under consideration disclosing an income of Rs.6,73,68,866/- under the normal provisions of Income Tax Act under the business head and book profit under sec. 115JB of the Act amounting to Rs. 71,29,50,828/-. Thereafter the case was selected for scrutiny under CASS module and accordingly notices were served to the assessee under section 143(2) and 142(1) of the Act. During A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 3 the assessment proceedings various disallowance of expenditures as claimed by the assessee under different head of profit & loss account have been made. In this entire rigmarole of assessment proceedings at the fag-end of the assessment the profit was assessed for Rs. 8,11,75,620/- u/s 143(3) of the Act and for Rs.72,63,25,956/- u/s 115JB of the Act. The assessment u/s 143(3) of the assessee was completed as on 27/03/2015.
3. The grounds raised by assessee from 1 to 6 have common issue and so we decided to adjudicate them together for the sake of convenience. The common issue raised by the assessee in this appeal is that ld. CIT erred in holding the order of the AO as erroneous and prejudicial to the interest of Revenue under section 263 of the Act.
4. The impugned order passed by ld. CIT u/s 263 of the Act observed that the assessee has claimed “future development expenses” amounting to Rs.2,24,85,000/- under the head “Other Project Related Cost”. As per the ld. CIT the future development expenses were not ascertainable at the time of finalization of balance sheet so these are not allowable expenses. Accordingly, ld. CIT u/s 263 of the Act issued notice to the assessee dated 11/12/2015 for clarification of the future development expenses. In compliance to the notice the assessee submitted that in real estate business it is not possible to incur all the possible ascertained cost before the handing over the possession of units to the customers. The company follows mercantile accounting method and accordingly we have to follow the matching concept i.e. matching the cost with the revenue. The costs to be incurred are properly estimated by way of work orders or purchase orders. The expenses claimed as “future development expenses” were the expenses required to be incurred after the completion of the project. As these projects were completed during the relevant AY and non accounting of the future cost will not represent the true financial picture of the assessee. Assessee also submitted that the details of “future development expenses” amounting to Rs. 2,24,85,000/- claimed by the assessee are the actual cost incurred immediately in the succeeding the year. In support of his claim the assessee has submitted the breakup of the future cost and the actual cost incurred as detailed below : A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 4 S.No Particulars Provision made(Future Actually incurred in Expenses)Rs.’’000 next year Rs.’’000 1 Door Fixing Work 261 261 2 Fabrication Work 102 102 3 Flooring Work 1442 1442 4 Painting Work 2587 2587 5 PHE work 633 633 6 Sundry Material 846 846 7 Wages 5738 5738 8 Incentive 2232 2232 Sub Total- A 13841 13841 Direct Project Expenses 9 Modular Kitchen 4283 4283 10 Air Conditioner 4361 4361 Sub Total- B 8644 8644 Total 22485 22485 However the ld. CIT rejected the assessee submission by observing that AO failed to verify the expenses claimed by the assessee under the head “Future Development Expenses” with a view to check whether these have been crystallized or not. The future liability was not ascertained at the time of filing the Income Tax Return. The taxable income of the assessee needs to be worked out as per accounting principles and as per the provisions of Sec. 145 of the Act. Accordingly the ld. CIT held the order erroneous and prejudicial to the interest of revenue. The ld. CIT accordingly directed the AO to make fresh assessment after making proper enquiry and giving opportunity to the assessee as per law.
Being aggrieved by the order of the ld. CIT, the assessee is in appeal before us.
The ld. AR before us reiterated the submission made before the ld. CIT. (l) The assessee company is engaged in real estate development. At the time of handing over of possession of Units of housing project few incomplete works A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 5 remained to be completed after handover of possession. The costs of such works are ascertained and actual costs incurred at future dates are more or less near to the ascertained cost. Where the entire revenue of the Units are considered as income, under the mercantile system of accounts, the entire costs whether incurred or to be incurred are required to be charged to Profit & Loss Account for ascertaining the true income of the housing project. The cost of incomplete works were based on work orders / purchase orders supported by proper engineering estimates etc. All such expenditures were booked in the books of accounts by the assessee company as "future development expenses". These are included in the Statement of Profit & Loss Accounts under the head "other projects related expenses". The provisions made in the books and actual amount incurred are narrated in the impugned assessment order uls.263.
(2) Under the above facts and circumstances Ld. Assessing Officer had considered it to be an allowable expenditure under mercantile system of accounting. It is true that there is no discussion on this issue in the assessment order. It is also prevalent practice that all the allowable expenditures are not discussed in the assessment order, rather the expenses which are disallowed or added back are discussed at length in the assessment order. Therefore, non- discussion of each and every allowable expenditure in the assessment order should not be termed as erroneous assessment order.
(3) "Future development expenses" are a cost of the Unit in the housing project. The entire income on sale of respective unit had been considered as revenue at the time of handing over of possession to the buyer. Therefore, under the mercantile system of accounting the entire cost of the unit has been charged to the Profit & Loss Accounts. There is no error in doing so. In view of the same and under the facts of the case the allowance of future development expenses by the AO is not prejudicial to the interest of revenue.
(4) In the assessment order tax has been levied on Book Profit u/s.115JB of the Act at Rs.14,47,16,324/- plus interest aggregating to Rs.14,83,19,279/- against assessed income of Rs.8,11,75,620/-. Even if the expenditure relating to "future development expenses" for Rs.2,24,85,000/- is added to assessed income the tax on normal assessment would be less than tax based on book profit under Section 115JB. In view of the same irrespective of the consideration of future development expenses allowable or disallowable tax demanded under book profit provision would remain same. This shows that the assessment order passed by the assessing officer is not prejudicial to the interest of revenue.
(5) The twin conditions of the assessment order, that impugned assessment order is erroneous and the assessment order is prejudicial to the interest of revenue, are required to be satisfied simultaneously for invoking Section 263 by Ld. Commissioner of Income Tax. But in this case such two conditions have not been satisfied. Therefore, Ld. Pr. CIT had erred in setting aside the assessment order u/s.263 and therefore the order passed u/s.263 is liable to be set aside.
A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 6 6. On the other hand the ld. DR submitted that the future expenses claimed by the assessee represent the unascertained cost and the same cannot be disallowed as expenses for the year under consideration as per accounting principles and provisions of section 145 of the Act. The AO has not applied his mind on the expenses of future cost at the time of assessment. The ld. DR vehemently supported the order of the ld. CIT.
We have heard the rival contentions of both the parties and perused the materials available on record. From the foregoing discussion we find that the assessee in the instant case has claimed future development expenses for an amount of Rs. 2,24,85,000/-. The same expenses were not verified by the AO at the time of assessment, therefore the ld. CIT under section 263 of the Act held the order erroneous and prejudicial to the interest of revenue on the basis of no enquiry conducted by the AO at the time of assessment. The learned CIT also observed that the future development expenses represents the cost which will be incurred in future and the therefore the same has not been crystallised in the year under consideration. Now the following question arises for our consideration.
Whether the AO has conducted the enquiry at the time of assessment with the regard to the future development expenses.
Whether the future development expenses represent the cost which has been crystallized.
Whether the order of the erroneous and prejudicial to the interest of Revenue.
From the perusal of the assessment records we find that the necessary enquiry has not been made by the AO at the time of assessment. In such circumstances various courts have held the order of the AO as erroneous and prejudicial to the interest of Revenue. In this connection we rely in the judgement of Honourable High Court of Delhi in the case of Gee Vee Enterprises Vs. ACIT & Ors 99 ITR 375 where it was held as under:- “The position and function of the ITO is very different from that of a civil Court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil Court in the absence of any rebuttal. The civil Court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 7 truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous'' in s. 263 emerges out of this context. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous'' in s. 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. The company and the partnership in this case were formed in the same year with many members common in both. The fact that the company purchased the land but handed over construction work to the partnership even though the object of the company was to make such construction should naturally provoke a query as to why this was done. The partnership was required to be in existence as a genuine firm in the previous year before it could be registered under s. 185 of the Act. Such registration gives a substantial advantage to it for the purpose of taxation. In the very first assessment of the company and the firm, the advantage of the registration was given to the firm. The question would naturally arise whether the firm was formed merely for the purpose of getting a tax advantage. Assessee argued that there is nothing wrong if a legitimate advantage is sought by these means. But it was precisely for that reason that the ITO had to be satisfied that the firm had existed in the previous year genuinely. It cannot be said that the CIT could not be reasonably of the opinion that the order of the ITO was erroneous because previous inquiries were not made by the ITO. Nor can it be said that it was necessary for the CIT himself to make such inquiry before cancelling the order of assessment.— Rampyari Devi Sarogi vs. CIT (1968) 67 ITR 84 (SC) : TC57R.202 and Tara Devi Aggarwal vs. CIT 1973 CTR (SC) 107 : (1973) 88 ITR 323 (SC) : TC57R.206 relied on CIT was justified in exercising his revisional jurisdiction on the ground that the ITO had not made sufficient enquiries before granting registration to the firm and it was not necessary for the CIT to have himself made enquiries before cancelling the assessment.” 7.1 We also find that the future cost claimed by the assessee represents the estimated expenses as these have not been crystallized at the time of finalization of books of the accounts told these expenses have been estimated in scientific manner. These expenses have been estimated on the basis of the agreement for such expenses. These agreements have been made in the year under consideration for some future activities which will begin after the financial year. The cost of such activities has already been ascertained on the basis of the contracts. We concur with the view of the A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 8 ld. AR in so far the manner adopted by the assessee for the determination of the future cost. However we find that the documents/ contracts made by the assessee for the future cost have not been verified by the AO at the time of assessment.
The argument of the ld. AR that the assessee has paid the tax under section 115JB of the Act and even after making the disallowance of the future development cost the assessee shall still be liable for tax under the provisions of section 115JB of the Act. Therefore there is no loss to Revenue even after making the disallowance of the future development cost. Accordingly the order can be held erroneous but not prejudicial to the interest of revenue therefore the proceedings under section 263 of the Act should be dropped.
However we disagree with the argument of the ld. AR that the twin conditions as specified under section 263 of the Act have not been satisfied for holding the order of the AO erroneous and prejudicial to the interest of Revenue. In the instant case we have already held that the AO has failed to make sufficient enquiries at the time of assessment with regard to the future development cost expenses claimed by the assessee. Accordingly in this case where the tax is paid under normal provisions of tax or under the provisions of MAT under section 115JB of the Act, it does not make any difference. It is because the Hon’ble High Court of Delhi in the case of GEE VEE Enterprises (supra) has held the order of the appeal in the aforesaid facts and circumstances as erroneous and prejudicial to the interest of revenue. In view of above we do not find any reason to interfere in the order of learned CIT passed under section 263 of the Act. Hence this ground of appeal of the assessee is dismissed.
In the result, appeal filed by assessee stands dismissed. 8. Order pronounced in open court on 21/09/2016