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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the Revenue against the order dated 10.11.2009 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2006-07.
The Revenue has taken the following grounds of appeal: “1. The order of the CIT(A) is opposed to law and facts of the case.
(2) On the facts and the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs.83,73,284/- being estimated profit rate of 10% of the receipts of the assessee, without appreciating the fact that the project was 60% complete and the agreements made with the buyers were registered with the stamp registration authority.
(3)On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs.2,22,35,000/- made on account of unexplained investment u/s69B, as the assessee had not accounted for the difference in the market value of the completely constructed 29 shops surrendered by M/s Darshan Enterprises and for which the assessee did not furnish any evidence or explanation for not accounting the same in the books of accounts.
(4) On the facts and circumstances of the case and in law, the CIT(A) erred in
2 ITA No.937/M/2010 M/s. Ashapura Habitats P. Ltd. deleting the addition of Rs.8,37,829/- being advertisement expenses incurred by the assessee on behalf of other group concerns, the profits of which were not accounted for in the assessee’s total income.
(5) On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs.13,08,360/- being stamp duty expenses paid by the assessee which were to be borne by the purchasers.
(6)(a) Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in deleting the addition of Rs.32,33,995/- in respect of deemed dividend within the meaning of sec.2(22)(e) of the I.T. Act to the extent of accumulated profits without considering the provisions of said clause (e) of sec2(22) which provides that any payment to any concern in which the shareholder is a member shall be considered as deemed dividend.
(6)(b) Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in following the decision of the Special Bench of the Tribunal in the case of ACIT vs Bhaumil Colours Pvt. Ltd. ignoring the fact that further appeal U/s260A in that case was not filed only due to low tax effect.
For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside and that of the AO restored.”
The brief facts of the case are that the assessee is a developer. The company has undertaken to develop a project "Sanghvi Hills", Kavesar Near Suraj Water Park, Ghodbunder road, Thane (W). This project has been of around 300 flats. The assessee capitalized all the expenditure incurred towards the project in the Work-in-progress (WIP) account. Assessee has been following project completion method and therefore filed only balance sheet and no profit and loss account had been drawn. The P & L appropriation account had been filed only debiting fringe benefit tax. During the assessment proceedings, the Assessing Officer (hereinafter referred to as the AO) noted the following facts: "The assessee has entered into a development agreement dated 18.5.2004 with four joint owners viz. (1) Yashodha Devi Co-op Housing Society (2) M/s. Shree Sai Enterprises (3) M/s. Shiv Sai Developers & (4) M/ s. Darshan Enterprises for development of property situated at Kavesar Near Suraj Water Park, Ghodbunder Road, Thane West. As per the said development agreement, the owners have agreed to entrust the development rights in respect of a portion of common land admeasuring 11740 sq. mtrs. Together with right to consume thereon sanctioned FSI of 14675 sq. mtrs. of Plot B plus 330 sq. mtrs. TDS. As per the said development agreement assessee has to pay Rs.25 Lacs
3 ITA No.937/M/2010 M/s. Ashapura Habitats P. Ltd. and allot 27% of the constructed premises to the owners. Such constructed premises includes 18 residential flats and 29 commercial shops. Subsequent to the said development agreement during the current financial year vide letter dt.15.3.2005, M/s. Darshan Enterprises have entered into an agreement for surrender of the above referred constructed area which was surrendered to the assessee on 25.03.2005. The value of such surrendered premises was stated at Rs.1,15,55,000/- which was subsequently paid to M/s. Darshan Enterprises by the assessee.”
The A.O. further noted that the assessee company has sold residential premises @ 1,300 per sq. ft. However, no commercial premises has been sold. The AO further noted that market rate for the commercial premises in the locality has been around Rs.2000 per sq. ft. The A.O. further noted that the area surrendered by Darshan Enterprises in respect of 18 residential premises has been about 13,500 sq.ft., for 29 shops the area has been stated to be at 8120 sq.ft. Accordingly, he computed the value of the constructed premises surrendered by M/s Darshan Enterprises as under: “Cost of 18 flats 13500 sft x Rs.1300 = Rs.1,75,50,000 Cost of 29 shops 8120 sft x Rs.2000 = Rs.1,62,40,000 ------------------- Total Rs.3,37,90,000/- ============”
According to the A.O., the assessee has paid only a sum of Rs.1,15,55,000/- towards the surrender of the above premises. Therefore, he taxed the difference of these two i.e. Rs.2,22,35,000 (3,37,90,000 - 1,15,55,000) in the hands of the assessee as unexplained investments u/s.69B. The AO also held that the project completion accounting method adopted by the assessee was wrong. He applied percentage completion method of accounting and estimated the income from the project for the year under consideration on accrual basis at the rate of 10% of the receipts at Rs. 8,37,32,840/- and added the same into the assessable income of the assessee. The AO also added a sum of Rs. 3,86,98,448/- on account of undisclosed debtors. The A.O. further disallowed advertisement expenses amounting to Rs.8,37,829/- and stamp duty expenses of Rs.13,08,360/-. Aggrieved by this order the assessee preferred appeal before the Ld. CIT(A).
4 ITA No.937/M/2010 M/s. Ashapura Habitats P. Ltd.
The Ld. CIT(A), after considering the submissions of the Ld. Representative of the assessee deleted the additions so made by the AO and allowed the appeal of the assessee. Being aggrieved by the order of the Ld. CIT(A), the Revenue has come in appeal before us with the above reproduced grounds of appeal which we take up one by one.
Ground No.1 6. Ground No.1 is general in nature and does not require any adjudication.
Ground No.2 7. Vide ground No.2, the Revenue has agitated the action of the Ld. CIT(A) in deleting the addition of Rs.83,73,284/- being estimated profit at the rate of 10% of the receipts of the assessee.
The Ld. D.R., in this respect, has submitted that the project was 60% completed and that the agreements to sale were made by the assessee with the buyers which were duly registered and stamp duty paid thereupon. He, therefore, has contended that the AO had rightly estimated the profit for the year under consideration on percentage completion method.
On the other hand, the Ld. A.R. of the assessee has relied upon the finding of the Ld. CIT(A). The Ld. CIT(A), in his detailed order, has mentioned that the assessee has been following the project completion method which has been one of the recognized methods of accounting. The said method has been consistently adopted by the assessee and there was no justification on the part of the AO to disturb the method of accounting followed by the assessee for the year under consideration. He has also considered the submissions of the assessee that in fact the consideration was not received during the year. The project was incomplete. The possession was not transferred to the buyers. Only the advances collected. The agreements were registered so as to enable the respective buyers to obtain loan
5 ITA No.937/M/2010 M/s. Ashapura Habitats P. Ltd. from the banks on the basis of said agreements. Under such circumstances, there was no justification on the part of the AO to assess the income of the assessee at the rate of 10% of the receipts on accrual basis for the year under consideration.
We do not find any infirmity in the well reasoned order of the Ld. CIT(A) in this respect. This issue is accordingly decided against the Revenue and in favour of the assessee.
Ground No.3 11. Vide ground No.3, the Revenue has agitated the action of the Ld. CIT(A) in deleting the addition of Rs.2,22,35,000/- made on account of unexplained investment under section 69B on account of difference in the market value of the constructed 29 shops and 18 flats surrendered by M/s. Darshan Enterprises. The Ld. CIT(A) has elaborately discussed this issue in paras 12 to 14 of the impugned order. It is not the case of the AO that any extra money has exchanged hands other than Rs.1,15,55,000/-. The AO estimated the market price of the flats and shops in question and added the difference as unexplained investment of the assessee under section 69B of the Act. Such an action of the AO is against the provisions of the law. It is not a case where the assessee has been found to have incurred any unexplained investment. The case of the assessee is that only 18 flats were surrendered by M/s. Darshan Enterprises and that there was not any surrender of 29 shops as has been alleged by the AO. The deal has been finalized for 18 flats only for which a sum of Rs.1,15,55,000/- has been paid by the assessee to M/s. Darshan Enterprises. It is the case of the assessee that being the builder, he is not supposed to purchase the flats or the land etc. at the market rate. He is supposed to purchase the flats or the land etc. at a lower rate and sell at a higher rate to earn the profits. Hence, the estimation of the market rate of the shops and flats by the AO and thereby calculating the difference and treating the same as unexplained investment of the assessee was not justified. Even
6 ITA No.937/M/2010 M/s. Ashapura Habitats P. Ltd. the assessee has given the sale instances where the assessee has sold the flats at a lesser rate. It is the case of the assessee that the price offered by the assessee was for 18 flats and that there was no surrender of 29 shops. The Ld. CIT(A), under the circumstances, has held that no additions on this account are warranted under section 69B of the Act.
We do not find any infirmity in the order of the Ld. CIT(A) on this issue also and the same is accordingly upheld.
Ground No.4 13. Vide ground No.4, the Revenue has agitated the action of the Ld. CIT(A) in deleting the addition of Rs.8,37,829/- being advertisement expenses incurred by the assessee on behalf of other group concerns, the profit of which was not accounted for in the assessee’s total income. The Ld. CIT(A) has discussed this issue in paras 15 to 17 of his order. The AO noted that the assessee had shown expenses on account of advertisement at Rs.8,37,829/-. The assessee had not claimed any expenditure in the P & L Account as the assessee has been following project completion method of accounting. The AO, however, observed that along with the advertisement of the project in question, the assessee had also mentioned about four other projects, accordingly, the corresponding advertisement expenses at the rate of 1/4th of the expenses was disallowed by him. The Ld. A.R. explained that the advertisement issued by the assessee was in respect of project in question and only in the lower part of the advertisement, it was mentioned that the assessee’s group companies were also having other projects at Dombivali, Kalyan and Mira Road.
The Ld. CIT(A), considering the submissions of the assessee, observed that the assessee had not claimed any expenditure in P & L Account and has debited the same to the work in progress and that there was no specific advertisement of the other projects. Mere mentioning in the advertisement
7 ITA No.937/M/2010 M/s. Ashapura Habitats P. Ltd. that the assessee’s group company was having other projects at other places did not mean that the assessee had advertised those projects.
We do not find any infirmity in the order of the Ld. CIT(A) in deleting the addition made by the AO on this issue also.
Ground No.5 16. Vide ground No.5, the Revenue has agitated the action of the Ld. CIT(A) in deleting the addition of Rs.13,08,360/- being stamp duty expenses paid by the assessee which were to be borne by the purchasers. The Ld. A.R. of the assessee has explained that to promote the sale during the festive season, a scheme was offered by the assessee wherein the assessee had agreed to bear the stamp duty expenses etc. The said scheme was part of the business activity of the assessee and hence the expenditure in relation to the stamp duty charges etc. was rightly debited to the work in progress.
We do not find any infirmity in the order of the Ld. CIT(A) on this issue in deleting the addition made by the AO on this account also.
Ground Nos.6(a) & 6(b) 18. Vide ground Nos.6(a) & 6(b), the Revenue has agitated the action of the Ld. CIT(A) in deleting the addition of Rs.32,33,995/- in respect of deemed dividend under section 2(22)(e) of the Act. The AO during the assessment proceedings noted that the assessee had borrowed unsecured loans of Rs.32,33,995/- from M/s. Sanghvi Premises Pvt. Ltd. He noted that there were common shareholders in both the companies and their shareholding pattern was more than 20%. He, therefore, held that the common shareholders were having more than 10% of voting power and therefore the loan would fall within the ambit of section 2(22)(e) of the Act and he accordingly taxed the amount Rs.32,33,995/- in the hands of the assessee as deemed dividend.
Before the Ld. CIT(A), the assessee explained the shareholding pattern
8 ITA No.937/M/2010 M/s. Ashapura Habitats P. Ltd. and submitted that M/s. Sanghvi Premises Pvt. Ltd. was holding only 0.39% shares of assessee company and the loan given by the lender was for the company and not for the benefit of shareholder. The Ld. CIT(A), considering the submissions of the assessee, observed that M/s. Sanghvi Premises Pvt. Ltd. was having less than 10% shareholding in the assessee company and that the provisions of section 2(22)(e) of the Act were not applicable to the case of the assessee. The loan was not used for the benefit of shareholders but for the business of the company. Considering the above facts, he deleted the impugned additions.
After hearing the Ld. Representatives of the parties, we do not find any infirmity in the order of the Ld. CIT(A) on this issue and the same is accordingly upheld.
Ground No.7 is general and does not require any adjudication.
In view of our above findings, there is no merit in the appeal of the Revenue and the same is accordingly dismissed. Order pronounced in the open court on 03.02.2016.
Sd/- Sd/- (N.K. Billaiya) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 03.02.2016. * Kishore, Sr. P.S.
Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order
Dy/Asstt. Registrar, ITAT, Mumbai.