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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI AMIT SHUKLA
आदेश ORDER अिमत शु�ला, �या. स.: PER AMIT SHUKLA, JM:
The aforesaid appeal has been filed by the assessee against impugned order dated 30.11.2010 passed by CIT(A)-1, Thane, for the quantum of assessment passed u/s 143(3) for the assessment year 2007-08 on the following grounds :- “1 On the facts of the case, and in law, the learned CIT(A) has erred in deleting addition of Rs. 39,75,125/- without properly considering the findings of the AO and the facts of the case”.
The brief facts as culled out from the impugned order is that, assessee is a builder and developer. The assessee had filed its return of income on 30.10.2007 u/s 139(1) showing total income of 2 M/s Castle Enterprises Rs. 1,60,808/- which was later on revised u/s 139(5) thereby enhancing the income at Rs. 20,90,103/-, which mainly included profit of Rs. 18,58,295/- derived from ‘Vedant Project’ which was not shown earlier in the original return. In the revised return, the assessee has given detailed reasons for revising the return which has been incorporated by the AO at page 2 of the assessment order. The relevant facts relating to declaration of profit from ‘Vedant Project’ is that assessee had entered into a development agreement with one, Shri Mangal Nago Wayale and Others for development of land admeasuring 4913.74 Sq. Meters for a Housing project. According to the said agreement, the owner of the plot of the land, that is, Wayale & Family were to receive 20% of the constructed area and assessee being builder and developer undertook the entire responsibility of developing the said land for which the assessee got the ‘development rights’. Due to certain reasons, the assessee could not develop the said Project and in turn entered into an agreement with another Developer named as Smt. Anjana Chavan, Prop. of Om Sai Construction. As per the said agreement, the assessee was now to receive more of the constructed area beside a sum of Rs. 5 lakhs of cash as advance. In pursuance of this agreement by the assessee with another developer, the assessee made an agreement with Wayale Family, according to which the Members of the Wayale Family were now entitled for 30% of the constructed area instead of 20% agreed earlier and the assessee was now to get 15% of the constructed area. In other words, the assessee was now entitled to receive 10,445 sq. ft. of constructed area.
Before the AO, the assessee contended that a sum of Rs. 28,48,470/- was an amount spent by the assessee in the said project in connection with the acquiring of the development rights including the payment made to the land owners etc. In other words, Rs. 28,44,470/- was the cost for acquiring 10,445 sq. ft. area. In this regard, the assessee furnished profit and loss account
3 M/s Castle Enterprises Rs. 18,58,295/- and closing stock valued at Rs. 7,31,640/- :- Particulars Rs. Particulars Rs. To Cost of Devl Rights 24,48,470 By sale of Flats(7765 Sqft) i.e. @ 511/- 39,75,125
To Net Profit 18,58,295 By Closing Stock (2689 x 273) 7,31,640 47,06,765 47,06,765 When required to explain the valuation of closing stock, the assessee submitted that total sum of Rs. 28,44,470/- was spent for acquiring 10,424 sq. ft. of constructed area from second developer out of which 7765 sq. ft. of the constructed area was sold for a consideration of Rs. 39,75,125/- @ Rs. 511/- per sq. ft and remaining 2689 was valued at Rs. 275/- per sq. ft that is, at the cost of Rs. 275/-, divided from the amount spent of Rs. 28,48,470/- by 10,445 sq.ft. The AO conducted an enquiry with the second developer, i.e., Smt. Anjana Chavan who stated, she has spent Rs. 6,66,80,143/- on the construction of 95,266 sq. ft over a period of 3 years from AY 2004-05 to AY 2006-07 and she has constructed and incurred a construction cost of Rs. 699.93 per sq. ft. She also provided a copy of registered sale document of a flat @ Rs. 811/- per sq. ft. Post enquiry, the AO required the assessee as why not value the cost of construction at Rs. 699.93 per sq. ft and sale price of 811/- per sq. ft. to work out the profit and closing stock. In response, the assessee submitted that after acquiring a development rights, it has not done any development work, i.e., no construction work was undertaken. The amount of Rs. 28,48,470/- was spent in the project only for getting the approvals etc. and payment to the land owners. However, the AO rejected the contention of the assessee and proceeded to estimate the sales @ 814/- per sq. ft. and closing stock @ 699.93 per sq. ft. and are estimated the profit from this project in the following manner :-
Construction Account Particulars Rs Particulars Rs. To development expenses 24,48,470 By consideration received 73,10,768 in kind transferred to WIP (699.93X10445 sq. ft) To Gross Profit 44,62,298
73,10,768 73,10,768
Profit & Loss Account Particulars Rs Particulars Rs. To WIP 73,10,768 By Gross Profit 44,62,298 By sale of flats (6951 sft x 811 56,37,261 By sale of flat @ 901 (805 sq ft x 901) 7,25,305 To Net Profit By closing stock (2689 (balancing figure) 53,96,208 sft x 699.93) 18,82,112
1,27,06,976 1,27,06,976
Before the CIT(A), the assessee made very exhaustive submissions which have been incorporated form pages 5 to 8 of the appellate order of the CIT(A). According to the assessee, the cost of acquisition of 1044.5 sq. ft of constructed area was actually Rs. 24,24,470/- which worked out to Rs. 273/- per sq. ft, which alone should have been taken for the valuation of the closing stock. Further, the assessee had sold 12 flats i.e. booked by the customers prior to approval from KDMC at Rs. 511 per sq. ft. This value at the best was the highest sale price at then and hence market value for the closing stock. Thus, the valuation of the closing stock at a ‘cost’ or ‘market price’, whichever is less should have been adopted, which assessee has done at cost. There is no infirmity.
The Ld. CIT(A) after considering the entire submissions of the assessee, as well as reasoning of the AO deleted the said addition after observing and holding as under :- I find from the contents of the assessment order that, the AO without conducing any inquiry with the investors
5 M/s Castle Enterprises Smt Anjana Chavan. The appellant had booked 12 no. of flats @ Rs 511 per sq ft in advance. I also find that the AO has failed to establish that, the appellant received any on-money consideration, over and above what he has admitted. The AO has not contested the booking by 12 investors much before getting plan approved. No doubt, the construction cost to the builder, Smt Anjana Chavan, is higher at Rs 699.93 psf but to the appellant, the cost is only Rs 273 psf, i.e. Rs 28,48,470/- , which he has paid in connection with acquiring constructed area admeasuring 10245 sqft. The AO has not proved that, the appellant has paid more money to the land owners or spent more money in getting plan sanctioned than the above sum of Rs 28,48,470/-. Moreover, the booking of 12 flats has taken place much prior to getting plan sanctioned. The AR has also argued that, the profit in the case of the appellant works out to Rs 238 per sq ft , whereas in the case of Smt Anjana Chavan, it is much less at Rs 212 per sq ft. The statement filed with the return for the AY 08-09 reveals that , the appellant has sold 2040 sq ft of flat @ 1,264 per sq ft.
4.3 According to me, the AO has quantified the income purely based on presumptions and assumptions. In my view, the AO cannot step into the shoes of the appellant and redraft the P&L A/c to suit his requirement. According to the accounting principles, closing stock would be valued at cost price or market price whichever is less. The Hon Supreme Court held in the case of ALA Firm Vs CIT held that, valuation of closing stock higher than the cost would result in taxation of notional profits that the appellant has not realized. In view of the 6 M/s Castle Enterprises I hold that, the estimation of income at Rs 53,96,208/- and the addition of Rs 37,31,147/- - (57,50,250 – 20,19,103) are erroneous and accordingly, I direct the AO to delete the addition. The ground, therefore, stands allowed.”
After hearing both the parties and on perusal of the relevant finding given in the relevant orders and material placed on record, we find that so far as facts, which have been discussed above, there is no dispute. The AO has made the addition; firstly, on account of suppression of sales of Rs. 23,87,441/- after estimating the sale value at Rs. 811/- per sq. ft and enhancing of valuation of closing stock of Rs.11,50,472/- by estimating stock value @ 660.99 per sq. ft. based on enquiry made from the second developer ‘Om Sai Construction’. At the time of transfer of Development rights by the assessee to second Developer, Om Shri Sai Construction, assessee by that time had incurred total expenditure of Rs. 28,44,470/-, which was mainly incurred on account of acquisition of Development Rights and for getting all the approvals which was the prerequisite before the commencement of the construction of the said Project. The average cost of acquisition of 10,445 sq.ft to which the assessee was entitled to after the second agreement, worked out to Rs. 273/- per sq. ft. The assessee had also sold some flats to group investors and allotted 12 flats covering an area of 6951 sq. ft for Rs. 32,49,820/- at an average consideration of Rs. 511/- per sq. ft. It has been contended by the assessee that on the date of the said sale, before getting plan sanctioned / approvals were not sought from the local authority for commencement of construction of the said project, thus the average cost of acquisition of 10,445 sq.ft was at Rs. 273 per sq.ft. and the profit was arrived at Rs. 238/- per sq. ft. (that is, Rs. 511 (-) Rs. 273). Without there being any actual material on record that the assessee has suppressed the sale, such an estimation of sale value cannot be allowed and accordingly, finding of the CIT(A) on 7 M/s Castle Enterprises this score is confirmed. Regarding under-valuation of closing stock also, the assessee had shown that cost per sq. ft. was worked out at Rs. 275/- per sq. ft. as on 31.02.2007 that will work out at Rs. 7,34,097/- i.e. 2,689 sq. ft. x Rs. 273/- per sq. ft.. Thus, there could not be any enhancement of valuation of closing stock simply based on value of Second Developer who had actually constructed the project. Therefore, on this score also, the order of the CIT(A) is affirmed and accordingly the issue raised by the revenue is dismissed.
In the result, appeal of the revenue stands dismissed. Order pronounced in the open court on 30th October, 2015.