KGK HOMES,JAIPUR vs. PRINCIPAL COMMISSIONER OF INCOME TAX -1, JAIPUR

ORDER PER: SANDEEP GOSAIN, JM This appeal filed by the assessee is directed against order of the ld. PCIT, Jaipur- 1, Jaipur, dated 27-03-2023 for the assessment year 2018-19 wherein the assessee has raised the solitary ground as under:-. ‘’In the facts and circumstances of the case and in law, the ld. PCIT has erred in assuming jurisdiction u/s 263 when the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue. The action of the ld. PCIT is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the order passed u/s 263.’’

1. 1. Income from Real Estate Business.

2. Unsecured Loans It is noted that the assessee firm had e-filed its original return of income on 29-09- 2018 declaring total income at Rs.87,79,510/-. The case was selected for complete scrutiny under CASS. Notice u/s 143(2) was issued on 22-09-2019 and e-mailed to the assessee. Further, notice u/s 142(1) with detailed questionnaire dated 9-12- 2020 and 10-02-2021 was issued to the assessee for which compliance was made by the assessee on 08-01-2021, 22-01-2021 and 23-02-2021. It is pertinent to mention that the assessee firm is engaged in the business of construction and development of residential building. During the year under consideration, the assessee has declared revenue from operation at Rs.16,60,84,000/- and other income as rent received at Rs.26,60,000/-. After examination of the reply submitted by the assessee with regard to books of accounts and audit report, disallowances/ additions were made by the AO. Regarding the issue of income from real estate business, the reason for high closing stock was due to the reason that during the year under consideration, the assessee firm constructed 8 storey residential building comprising of 24 flats and out of total 24 flats, the assessee

3 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR firm could sold 19 flats only till the end of the relevant financial year and remaining 5 flats were shown as closing stock as on 31-03-2018 by the assessee. Regarding the issue of unsecured loan, the assessee has submitted list of loan providers alongwith copy of ITR, confirmation and bank accounts of the loan providers and the details of squared up of loans during the year. It is also noted from the assessment order where in connection with above main issues the explanation offered and details submitted by the assessee had been examined and found acceptable by the AO. 2.2 On examination of the assessment order, the ld. PCIT observed that the AO failed to apply his mind on the material available on record and failed to invoke the applicable provisions of law. Thus the ld. PCIT observed that order passed by the AO is erroneous in so far as it is prejudicial to the interest of Revenue for the purpose of Section 263 of the Income Tax Act. The ld. PCIT noted that the said assessment order passed by the AO is in a routine and casual manner and it is without verification of the issue. The relevant paras of the ld. PCIT as to passing of order u/s 263 of the Act is as under:-

‘’7. The reply of the assessee has been considered and perused carefully but the same was not found tenable for the following reasons.

4 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR 7.1 On perusal of assessment records, it was noticed that in the financial statement for the financial year 2017-18, the assesse has shown closing stock of Rs.8,11,67,724/- whereas it was to be shown Rs.8,28,26,764/- as mentioned in para 3 above. Thus,inventoriesofRs.16,59,040/-[Rs.8,28,26,764/-minus Rs.8,11,67,724/-] were under stated in the financial statement which reduced the profit for the financial year 2017-18 by Rs.16,59,040/-. 7.2 Further, in schedule PL (Profit & Loss) and BS (Balance sheet) of the Income Tax Return, the land valuing Rs.56,82,707/- was shown as closing stock and in the schedule BS of the ITR, no investment was shown by the assessee. Also, in the form 3CD certified by the Tax Auditor, value of the above land was included with the inventory. Thus, stock of land valuing Rs.56,82,7071-shown as investment was to be treated as stock-in-trade (closing stock) for the assessment year 2018- 19. The above issues as not verified by the AO during the course of assessment proceedings.

5 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR 9. Considering all the facts and circumstances of the case and for the reasons discussed above, the assessment order dated 15.03.2021 for A.Y, 2018-19 passed by the AO is held erroneous in so far as it is prejudicial to the interests of the revenue for the purpose of section 263 of the Income Tax Act, 1961. The said order has been passed by the Assessing Officer in a routine and casual manner without verification of the issues discussed above. The Assessing Officer was required to make the disallowances discussed in the paras above which he failed to do. The order of the Assessing Officer is, therefore, liable to revision under the explanation (2) clause (b) and clause (a) of section 263 of the Income Tax Act, 1961. The assessment order is set aside to be made afresh in the light of the observations made in this order. The AO is required to make necessary verification and finalize the assessment in accordance with the prevailing low to determine the correct income of the assessee liable to tax for the A.Y.2018-19 after allowing reasonable opportunity to the assessee.’’ 2.3 During the course of hearing, the ld. AR of the assessee argued that NFAC has exercised the quasi judicial power vested in it in accordance with law and arrived at a conclusion which cannot be considered as erroneous as the ld. PCIT is not satisfied with the conclusion arrived at by the AO. To this effect, the ld. AR of the assessee filed the following written submission with the prayer that the ld. PCIT has grossly erred in assuming jurisdiction u/s 263 of the Act and such proceedings initiated by the ld. PCIT needs to be quashed.

‘’Ground No. 1: Ld PCIT erred in assuming jurisdiction u/s 263 SUBMISSIONS

1. Case of the assessee firm, was selected for “complete scrutiny”, for the year under consideration, by the National Faceless Assessment Centre (“NFAC”) and order dated 15.03.2021, was passed, under Section 143(3) of the Income Tax Act, 1961 (“ITA”). In the said order, passed by NFAC, the returned income of the assessee firm was accepted, without any additions made. [PB: 13 to 15].

3.1 At the outset it is submitted that the assessee firm is in the business of Real Estate Development. During earlier year, i.e. during FY 2012-13, assessee firm started construction of a Residential Project, by the name of THE ADDRESS, in Jaipur (“the project”). Construction of the project was fully completed after the relevant previous year. During such period, as an when different units in the project got completed, they were sold.

3.2 During the year under consideration also, some units of the project were sold, with some units of the project remaining unsold. Unsold area on the project, as at the end of the year formed part of the closing inventory of the assessee firm. Apart from the closing inventory pertaining to the project, assessee firm also had a standalone land, situated at D-45, C-Scheme, Jaipur, which formed part of its Stock in Trade, however, during the year under consideration, the same was converted into Investment. 3.3 In the order, at Page 1-2, calculation has been provided of the Closing Stock of Inventory, for the year under consideration. As per the calculation, the Closing Stock of the assessee firm, should have been Rs 8,28,26,764. Whereas, the assessee firm has shown Closing Stock of Rs. 8,11,67,724, as per the Audited Financial Statements, filed for the year under consideration [PB: 16-

7 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR 24]. Accordingly, it has been stated that there has been an undervaluation Accordingly, it has been stated that there has been an undervaluation Accordingly, it has been stated that there has been an undervaluation of Closing Stock, to the extent of Rs.16,59,040 [Rs of Closing Stock, to the extent of Rs.16,59,040 [Rs 8,28,26,764 Minus Rs. 8,28,26,764 Minus Rs. 8,11,67,724] 3.4 In the working so provided, ld. PCIT considered the Opening Stock of the In the working so provided, ld. PCIT considered the Opening Stock of the In the working so provided, ld. PCIT considered the Opening Stock of the assessee firm, for the year under consideration to be Rs. 21,98,06,480. assessee firm, for the year under consideration to be assessee firm, for the year under consideration to be Whereas, the Opening Stock as per Financial Statements of the assessee firm Whereas, the Opening Stock as per Financial Statements of the assessee Whereas, the Opening Stock as per Financial Statements of the assessee was Rs. 22,10,00,000 was Rs. 22,10,00,000 [PB : 16], breakup of which is as under: breakup of which is as under:-

3.5 Opening stock of the year under consideration, was nothing but the Opening stock of the year under consideration, was nothing but the Opening stock of the year under consideration, was nothing but the closing stock of the immediately preceding year, i.e. FY 2016-17. Case of the closing stock of the immediately preceding year, i.e. FY 2016 closing stock of the immediately preceding year, i.e. FY 2016 assessee firm for the immediatel assessee firm for the immediately preceding previous year was selected for y preceding previous year was selected for scrutiny assessment and order, dated 23.12.2019, was passed under Section scrutiny assessment and order, dated 23.12.2019, was passed under Section scrutiny assessment and order, dated 23.12.2019, was passed under Section 143(3) [PB:25-28]. There was no addition made to the income of assessee There was no addition made to the income of assessee There was no addition made to the income of assessee firm on the account of value of such Closing Stock. firm on the account of value of such Closing Stock. 3.6 Screenshot of the table as provided in the order under Section 263 is as t of the table as provided in the order under Section 263 is as t of the table as provided in the order under Section 263 is as under (ld. PCIT Order Page 1 and 2) (ld. PCIT Order Page 1 and 2): - Note: S.No. 1 to 8 pertains to prior years Note: S.No. 1 to 8 pertains to prior years 3.7 1Comparative 1Comparative working of the opening and closing stock considered working of the opening and closing stock considered the assessee firm for the year under consideration the assessee firm for the year under consideration vis- -à-vis the working as provided in the order of ld. PCIT is as under: provided in the order of ld. PCIT is as under: - 3.8 Even the case of the assessee firm, for FY 2016 Even the case of the assessee firm, for FY 2016-17, was not taken 17, was not taken up under Section 263 of the ITA. Thus, Closing Stock as at the end of such year has under Section 263 of the ITA. Thus, Closing Stock as at the end of such year has under Section 263 of the ITA. Thus, Closing Stock as at the end of such year has been accepted by the Department. Thus, there cannot be any modification, which been accepted by the Department. Thus, there cannot be any modification, which been accepted by the Department. Thus, there cannot be any modification, which is possible to Closing Stock of immediately preceding previous year. is possible to Closing Stock of immediately preceding previous year. is possible to Closing Stock of immediately preceding previous year.

3.9 The Closing Stock of the immediately preceding previous year is then to Stock of the immediately preceding previous year is then to Stock of the immediately preceding previous year is then to be considered as Opening stock for the year under consideration. If such value of be considered as Opening stock for the year under consideration. If such value of be considered as Opening stock for the year under consideration. If such value of Opening Stock as taken by assessee is substituted with what has been taken in Opening Stock as taken by assessee is substituted with what has been taken in Opening Stock as taken by assessee is substituted with what has been taken in working, then there would not have b working, then there would not have been any difference in value of closing stock een any difference in value of closing stock for the year under consideration. Working in this regard, through modification of for the year under consideration. Working in this regard, through modification of for the year under consideration. Working in this regard, through modification of the table at Para 3.7 is as under: the table at Para 3.7 is as under: - 3.10 Accordingly, there would not be any difference considering the value of Accordingly, there would not be any difference considering the value of Accordingly, there would not be any difference considering the value of stock and the additions made, for the year under consideration. Thus, no and the additions made, for the year under consideration. Thus, no and the additions made, for the year under consideration. Thus, no variation in the income can be attributed for the year under consideration. Any variation in the income can be attributed for the year under consideration. Any variation in the income can be attributed for the year under consideration. Any difference in the preceding year would not have any impact for the working of difference in the preceding year would not have any impact for the working of difference in the preceding year would not have any impact for the working of the year under consideration. the year under consideration. 3.11 Without prejudice to above, reason for the difference in the opening Without prejudice to above, reason for the difference in the opening Without prejudice to above, reason for the difference in the opening stock for the year under consideration following working may please be stock for the year under consideration following working may please be stock for the year under consideration following working may please be considered.

3.11.i The difference in the opening stock as per the working in the order The difference in the opening stock as per the working in the order The difference in the opening stock as per the working in the order vis-à-vis the actual opening stock as taken by the assessee firm is Rs. the actual opening stock as taken by the assessee firm is Rs. the actual opening stock as taken by the assessee firm is Rs. 45,16,213. Working in this regard is as under: 45,16,213. Working in this regard is as under:-

3.11.ii During the FY 2016 During the FY 2016-17, the assessee firm had incurred expenses 17, the assessee firm had incurred expenses of Rs. 3,53,07,306, breakup of which is as under: Rs. 3,53,07,306, breakup of which is as under: - - 3.ii.iii For the purpose of bifurcating the For the purpose of bifurcating the “Expenses incurred, other than “Expenses incurred, other than Finance Expenses”, of Rs. 1,75,57,557 and forming it as part of Closing Finance Expenses”, and forming it as part of Closing Stock of Inventory, for FY 2016-17, following methodology was adopted by Stock of Inventory, for FY 2016 17, following methodology was adopted by the assessee firm:- the assessee firm 3.11.iv For the purpose of bifurcating the the purpose of bifurcating the “Expenses incurred, other than “Expenses incurred, other than Finance Expenses”, of Rs. 1,75,57,557 and forming it as part of Closing Finance Expenses”, and forming it as part of Closing Stock of Inventory, for FY 2016-17, following methodology has been Stock of Inventory, for FY 2016 17, following methodology has been adopted by the Department:- adopted by the Department 3.11.v The difference between the two methodology is The difference between the two methodology is Rs. 45,16,213 [Rs. The difference between the two methodology is 1,39,38,150 Minus Rs. 94,21,937]. The said figure can even be matched 1,39,38,150 Minus Rs. 94,21,937]. figure can even be matched with difference in the opening stock figure as set out in Para 3.11.i above. with difference in the opening stock figure as set out in Para 3.11.i above. with difference in the opening stock figure as set out in Para 3.11.i above.

3.11.vi As per the methodology adopted by the assessee firm, in adding the value of expenses incurred, except Finance Expenses, such expenses have been added to the Closing Stock in the ratio of the unsold area as at the end of the year and the total project area. However, as per the methodology adopted by the Department, such expenses have been added to the closing stock in the ratio of unsold area as at the end of the year and the unsold area as at the end of the immediately preceding year. The reason of the assessee firm for considering the total area of the project as the base is that the residential project during the immediately preceding year was at the final stage. The expenses were incurred in relation the entire project. Accordingly, the base for the expenses incurred, being other than Finance cost, were bifurcated on the total project, as were incurred for the project as a whole. Out of such expenses, the expenses incurred in relation to the unsold area was added to the closing stock.

3.11.vii THIS CAN BE EXPLAINED WITH A SMALL EXAMPLE: For instance, Total Project Area is 1000 sq. ft. Out of such Project Area, 400 sq. ft of Project Area is unsold and is forming part of the Closing Inventory, with the remaining 600 sq. ft being sold. If any expense is incurred by the Real Estate Developer which has the effect on the entire project, such as carrying out paint work on the entire building, doing landscaping in common area, working on the boundary wall etc., then such expenses would have a bearing on the entire project. Accordingly, expenses incurred in this regard is to be attributed to the entire project area and not just the unsold project area. Now if the entity incurs Rs. 1,00,000 as expenses. Rs. 40,000 would have to be added to the inventory. Thus, for expenses of such nature, the base would be of the total project area and not just of the unsold inventory at any point of time.

3.11.viii Such methodology was consistently followed by the assessee firm and was accepted by the Department. It is reiterated that for such year, i.e. AY 2017-18, case of the assessee firm was completed under Section 143(3), without any additions being made. Accordingly, such methodology was accepted by the Department, after due verification of the factual position and the methodology consistently adopted by the assessee firm in valuing its closing stock.

3.11.ix The methodology already accepted cannot be disregarded/ignored during the year under consideration. Accordingly, the opening stock has to be considered in the working as has been considered by the assessee firm, as per the Audited Financial Statements.

3.12 prejudice to above, even if there is difference of Rs. 16,59,040 in value of closing stock then also there is no loss to the revenue. This is for the reason that the closing stock for the year under consideration would be considered as Opening stock for the subsequent year. Also, the project was completed during the subsequent financial year. Thus, the entire income generated by the assessee firm has already been offered for tax.

15 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR 6. Where the assessee firm has furnished the requisite information and the NFAC completed the assessment after considering all the facts, the order cannot be termed as erroneous. Reliance is placed on the following judicial pronouncements:

1.

8. Provision of section 263 no-where allows to challenge the judicial wisdom of Id. AO/NFAC or to replace it/his wisdom in the guise of revision unless the view taken by NFAC/Id. AO is not at all sustainable in law. Extent of enquiry can be stretched to any level by forcing the NFAC/AO to go through the assessment process again and again this proposition is not authorised by the law. Reliance is placed on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Ganpat Ram Vishnoi, 296 ITR 292 (Raj.) wherein at para 11 of the Hon'ble Court held as under: "Jurisdiction under section 263 cannot be invoked for making short enquiries or to go into the process of assessment again and again merely on the basis that more enquiry ought to have been conducted to find something."

9. Above factual and legal position was submitted before ld. PCIT, during the course of proceedings before her [PB: 1 to 12]. However, the same has been ignored by her in her order passed under Section 263. 9.1 Ld. PCIT simply mentioned at Page 13, of her order that NFAC/Assessing Officer, did not apply his mind on the material available on record and failed to invoke the applicable provisions of law. It has been further stated that the order was passed by the NFAC/Assessing Officer in a routine and casual manner, without verification of the issues discussed in the order under Section 263. 9.2 It is here by submitted that ld. PCIT failed to bring out any evidence to prove that there was non-application of mind by the NFAC. Ld. PCIT has not been able to point out, based on the submissions made by the assessee firm before her, as to how the orders passed by the NFAC was erroneous.

16 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR 9.3 As submitted above, the order passed by NFAC cannot be said to be erroneous. On the contrary, the factual position has been wrongly considered by ld PCIT, resulting into drawing erroneous conclusions. In view of the above factual and legal position, ld. PCIT has grossly erred in assuming jurisdiction under Section 263. Thus, the entire such proceedings initiated by the ld. PCIT deserves to the quashed.’’ 2.4 On the other hand, the ld. DR supported the order of the ld. PCIT. 2.5 We have heard the rival contentions and carefully perused the facts of the case, material on record, including the impugned order of the ld. PCIT, passed under Section 263, and also the order of the National Faceless Appeal Centre (NFAC). It is noted that there were two issues which were raked up by ld. PCIT, for assuming jurisdiction under Section 263, against the order dated 15.03.2021, passed by NFAC. First issue is regarding the difference in the value of closing stock, of Rs. 16,59,040, for the year under consideration, shown by the assessee firm vis-a-vis the working, as carried out by ld. PCIT, in the order under Section 263. Second issue is in relation to the disclosure made in the Income Tax Return Form of Investment in land of Rs. 56,82,707, converted from stock in trade, during the year under consideration.

2.5.1 As regards the first issue of difference in the value of the closing stock, during the course of hearing before us, ld. AR stated that the assessee firm is engaged in the business of Real Estate Development. During the year under consideration, the assessee firm was undertaking construction of a Residential 17 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR Project in Jaipur, which got completed in the subsequent years. Before us ld. AR relied upon the working, as also submitted during the course of proceedings before the ld. PCIT, to state that the difference in the working of the assessee firm and that considered by ld. PCIT, to arrive at the figure of closing stock, is nothing but on account of the apportionment of certain expenses between the area sold and unsold in the project. It has been stated that such methodology adopted for apportionment of the expenses, for the year under consideration, has been consistently followed by the assessee firm during the past years, which have been also accepted by Income Tax Department for the immediately preceding year, in which order was passed under Section 143(3), without any additions being made. As per the methodology adopted by the assessee firm, expenses incurred, except finance cost, have been added to the closing stock in the ratio of the unsold area, as at the end of the year, taking the total project area as the base whereas, ld. PCIT has apportioned the expenses, considering the unsold area in the project at the beginning and at the end of the year under consideration. The reason for adopting such methodology, by the assessee firm, has also been elaborately submitted before us by the assessee firm. It was further stated by ld. AR that the difference in the closing stock for the year under consideration was nothing but on account of the difference in the opening stock. Accordingly, it was submitted that the difference in the value of the stock was on account of the working/methodology so adopted 18 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR by the assessee firm in the preceding years and not on account of the working for the year under consideration. Emphasizing on the fact that in the preceding years, such working was already accepted, it was stated that the difference should not be considered for the year under consideration. In this regard, elaborate working was also submitted before us as mentioned in the written submission. After having gone through the working and the factual position put forth by the ld. AR, we note that the difference in the closing stock of Rs. 16,59,040/- is emanating from the difference in the working for the preceding years and that such difference cannot be attributed for the year under consideration. Moreover, assessee firm has been consistently following the same methodology for appropriating the expenses which has also been accepted by the Income Tax Department in the past. Considering such factual position, we note that the NFAC accepted the difference and did not make any addition in this regard. NFAC had taken a conscious decision of accepting the working of the assessee firm and the order passed by NFAC cannot be said to be without due application of mind as has been set out by ld. PCIT. Considering the factual and the legal position involved, we do not find that the order of the NFAC, as regards issue number one, is erroneous. 2.5.2 Now, we take up the second issue. From the facts placed on record, along with the relevant documentary evidences, we note that the assessee firm had a land, as part of Stock in Trade, of the value of Rs. 56,82,707/-. The said land, 19 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR thereafter, during the year under consideration, had been converted from stock in trade into investment. In this regard, the assessee firm had made appropriate disclosure in the Audited Financial Statements, wherein, such factual position was duly disclosed. However, while filing the return of income, in the Income Tax Return Form the land was continued to be shown as part of stock in trade. Audited Financial Statement of the assessee firm was duly submitted to the NFAC, which duly accepted the factual position of such conversion of stock in trade to investment, even though inadvertently, the disclosure in this regard was not made in the Income Tax Return Form by the assessee firm. Ld. AR of the assessee firm, before us, submitted that as per the law in force, during the year under consideration, any conversion from stock in trade into investment was not taxable. Ld. AR, further submitted that even though the appropriate disclosure was not made in the return form, however, the same was made in the Audited Financial Statement which after due application of mind was accepted by NFAC. Considering the factual and legal position involved, we are of the view that that we do not find any error in the order of the NFAC. Also, since the conversion from stock in trade into investment, was not taxable, during the year under consideration, there is no prejudice which has been caused to the Income Tax Department. Since, the conversion has taken place during the year under consideration, ld. PCIT was not correct in treating this conversion to be falling in 20 ITA NO. 223/JP/2023 KGK HOMES VS PR. CIT, JAIPUR -1, JAIPUR the subsequent year. Accordingly, for both the issues we hereby set aside the order of the ld. PCIT, passed under Section 263 and sustain the order dated 15.03.2021, passed by NFAC. Thus the appeal of the assessee is allowed as indicated hereinabove In the result, the appeal filed by the assessee is allowed as indicated 3.0 hereinabove. Order pronounced in the open court on 5/07/2023.

Sd/- Sd/- ¼ jkBksM deys'k t;UrHkkbZ ½ ¼lanhi xkslkbZ½ (Rathod Kamlesh Jayantbhai) (Sandeep Gosain) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 05/07/2023 *Mishra आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- M/s. KGK Homes, Jaipur 2. izR;FkhZ@ The Respondent- The PCIT, Jaipur-1, Jaipir 3. vk;dj vk;qDr@ The ld CIT 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File (ITA No. 223/JP/2023) vkns'kkuqlkj@ By order,