RONUK INDUSTRIES LTD,MUMBAI vs. DCIT 7(2), MUMBAI

The assessee has filed this appeal challenging the order dated 20- 10-2011 passed by Ld CIT(A)-13, Mumbai and it relates to the assessment year 2005-06. The assessee is aggrieved by the decision of Ld CIT(A) in directing the AO to make an addition of Rs.1,67,82,200/- relating to alleged undisclosed receipts from sale of flats.

We heard the parties and perused the record. The assessee has given its property for development to M/s Bhaveshwar Properties. As per the development agreement, the assessee is entitled to 45% of the sales realization. It is stated that the assessee is responsible for settling the claims of tenants . The assessee claimed a sum of Rs.97.00 lakhs as deduction towards payment made to tenants. The AO noticed that the assessee had also deducted a sum of Rs.2,04,73,760/- from the Sales realization as the cost of five flats given free of cost as under:- Gross sales realization 13,45,47,167 Less:- Against five flats 2,04,73,760 Net 11,40,73,407 Accordingly, assessee’s share of 45% on the above said amount of Rs.11,40,73,407, being Rs.5,13,33,033/- was shown in the profit and loss account.

The AO noticed that the development agreement dated 23.01.2003 does not contain the name of tenants. Accordingly, the AO took the view that the parties to the agreement have introduced the liability towards free flats, even though the assessee has separately claimed a sum of Rs.97.00 lakhs. Accordingly the AO rejected the claim for deduction of Rs.2,04,73,750/- from the gross receipts. Accordingly he computed the assessee’s share of 45% on the amount of RS.13,45,47,167/- at Rs.6,05,46,225/-. Since the assessee has already declared a sum of Rs.5,13,33,033/-, the assessing officer added the difference between two, viz., Rs.92,13,192/- to the total income of the assessee.

During the appellate proceedings, the Ld CIT(A) asked the assessing officer to furnish a remand report after examining the claim of the assessee that free flats were given to the following persons:- (a) Preeti H Shah (3 flats) - 66,50,000 (b) Alka C Shah (3 flats) - 67,00,000 (c) Harsh C Shah (one flat) - 29,32,200 Parking 5,00,000 ------------------ 1,67,82,200 ========== In the remand proceeds, the tenants could not furnish any evidence to show that they were occupying the premises and hence holding tenancy rights. Hence the Ld CIT(A) directed the assessing officer to make the addition of Rs.1,67,82,200/- as undisclosed receipts. However, the Ld CIT(A) did not adjudicate the issue of addition of Rs.92,13,192/- made by the AO or to link/reconcile the same with the addition made by him.

Hence the assessee is contesting the addition of Rs.92,13,192/- made by the AO as well as the enhancement of Rs.1,67,82,200/- made by Ld CIT(A).

We have noticed that the assessing officer has held that the assessee is not entitled to reduce the sum of Rs.2,04,73,760/- from the Gross sales receipts, since the AO held that the liability to give free flats is not available in the development agreement. Accordingly, the AO held that the same represents application of income. Hence, the AO has reduced the above said sum of Rs.2,04,73,760/- as representing value of free flats. The addition of Rs.1,67,82,200/- was also made by Ld CIT(A), being the value of free flats given to the alleged tenants, since the tenancy was not proved. Thus we notice that the additions made by both AO and Ld CIT(A) relate to the value of free flats given to the tenants only. Only there is a change in the methodology adopted for computing the value of free flats, i.e., while the AO rejected the claim of liability towards free flats by rejecting the claim for deduction from the gross sales realization, the Ld CIT(A) has proposed separate addition. Accordingly we are unable to agree with contentions of the assessee that the addition made by Ld CIT(A) represents new source of income. However, the Ld CIT(A) has committed an error in not considering the methodology adopted by the assessing officer.

However, according to Ld A.R, both the tax authorities have not properly understood the facts of the case as well as the methodology. According to Ld A,R, the gross receipts of Rs.13.41 crores represents the actual sales realization obtained on sale of flats, i.e., it does not include the value of seven free flats (Rs.1,67,82,200/-) given to the tenants. According to the agreement, the value of free flats is required to be borne by the assessee. Since the sum of Rs.1,67,82,200/- was not included in the gross sales realization and since the assessee holds 45% share, it is required to exclude developers share equivalent to 55% from the gross realization, which work out as under:- 1,67,82,200/45 x 55 = 2,05,11,577/-. When the value of free flats was not included in the Gross sales realization, the developer should also get his proportionate share from the divisible gross sales realization. The other method is to include the value of free flats in the gross sales collection and divide the same in the ratio of 45% : 55%. Thus, according to Ld A.R, the value of Rs.2,05,11,577/- represents the share of developer equivalent to the assessee’s share of 45%. Thus, according to Ld A.R, the assessing officer has not properly understood the deduction of Rs.2,05,11,577/-.

With regard to the liability of the assessee to give free flats, the assessee’s contention is that the assessee was not given opportunity of cross examination and hence the tax authorities are not justified in taking adverse view without providing opportunity to the assessee. 9. There should not be any dispute that the responsibility to substantiate the claim of liability towards tenants lies upon the assessee. During the remand proceedings, the tenants have failed to prove that they had tenancy rights in the property. However, it appears that the tax authorities have taken adverse decision without confronting the evidences/explanations furnished by the tenants or without considering the reply given by the assessee. Hence, the assessee is aggrieved in respect of violation of natural justice. Hence, in our view, the assessee should be given an opportunity to substantiate its claim. Further, the claim of the assessee that the amount of Rs.2,04,73,760/- deducted from the Gross sales realization does not represent the value of free flats given to the tenants, but it represents the share of developer equivalent to the value of free flats given by the assessee also needs examination.