M/s Vaisakhi Constructions, Visakhapatnam V. The DCIT Circle-1, Visakhapatnam

CO 24/VIZ/2010

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7258 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 10 month(s) 28 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 12-04-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 10-04-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 14-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C V S MURTHY
• Assessee Lawyers: T L PETER
• Keywords: Search and seizure

Judgement Text

ITA NO.144-145; CO 23 & 24 VIZAG-2010 VAISAKHI CO NSTRUCTIONS PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO. 14 4 & 145 / VIZAG/20 10 ASSESSMENT YEAR: 2007 - 08 & 2006 - 07 DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1, VISAKHAPATNAM VS. M/S VAISAKHI CONSTRUCTIONS, VISAKHAPATNAM. (APPELLANT) PAN NO: AAEFV5067E (RESPONDENT) C.O. NO S .2 3 &24 /VIZAG/2010 (ARISING OUT OF ITA NO.144&145/VIZAG/2010) ASSESSMENT YEAR: 200 6 - 0 7 & 2007 - 08 DY.COMMISSIONER OF INCOME TAX, CIRCLE-1, VISAKHAPATNAM VS. M/S VAISAKHI CONSTRUCTIONS, VISAKHAPATNAM. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI TL PETER, CIT - DR RESPONDENT BY: SHRI CVS MURTHY, CA DATE OF HEARING: 10.04.2012 DATE OF PR ONOUNCEMENT: 1 2 .04.2012 ORDER PER BENCH: THE APPEALS OF THE REVENUE AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 31.1. 2006 PASSED BY LEARNED CIT(A), VIJAYAWADA AND IT RELATES TO THE ASSESSMENT YEAR 200607 AND 2007-08. SINCE THE ISSUES URGED IN THESE APPEALS A RE ARISING OUT OF COMMON SET OF FACTS, THEY WERE HEARD TOGETHER AND A RE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.144-145; CO 23 & 24 VIZAG-2010 VAISAKHI CO NSTRUCTIONS PAGE 2 OF 8 2. THE REVENUE IS ASSAILING THE DECISION OF LD CIT (A) IN REDUCING THE INCOME DETERMINED BY THE ASSESSING OFFICER. IN THE CROSS OBJECTIONS, THE ASSESSEE IS SEEKING DEDUCTION U/S 40(A)(IA) OF THE ACT AND ALSO THE DEDUCTION TOWARDS REMUNERATION AND INTEREST PAYABLE TO PARTNERS. 3. THE FACTS RELATING TO THE CASE ARE STATED IN BRIEF. THE ASSESSEE IS A PARTNERSHIP FIRM AND IS ENGAGED IN THE BUSINESS OF CONSTRUCTION OF APARTMENTS. THE DEPARTMENT CARRIED OUT SEARCH AND SEIZURE OPERATIONS IN THE HANDS OF THE ASSESSEE. AT THAT POINT OF TIME, THE ASSESSEE WAS CONSTRUCTING AN APARTMENT COMPLEX NEAR SAMPAT VINAY AGA TEMPLE, VISAKHAPATNAM. THE DISPUTE IN THIS APPEAL IS WITH REGARD TO THE DETERMINATION OF INCOME FROM THE SAID PROJECT. THE TOTAL AREA OF THE LAND OF THE ABOVE SAID PROJECT WAS 4000 SQ. YARDS AND TH E ESTIMATED BUILT UP AREA WAS 90000 SQ. FT. THE LAND WAS OWNED BY ONE OF THE PARTNERS. ACCORDING TO THE AGREEMENT BETWEEN THE LAND OWNER A ND THE ASSESSEE, THE UNDIVIDED SHARE IN THE LAND WOULD BE SOLD BY THE LA ND OWNER DIRECTLY TO THE PROSPECTIVE BUYERS. THE ASSESSEE HEREIN WOULD ENTER INTO A CONSTRUCTION AGREEMENT WITH THE PROSPECTIVE BUYERS. THUS THE TO TAL CONSIDERATION RECEIVED ON SALE OF FLAT WOULD BE DIVIDED INTO TWO PARTS, VIZ., CONSIDERATION TOWARDS UNDIVIDED SHARE OF LAND AND CONSIDERATION T OWARDS CONSTRUCTION COST. THE CONSIDERATION TOWARDS UNDIVIDED SHARE O F LAND WAS GIVEN TO THE LAND OWNER AND THE ASSESSEE DID NOT HAVE ANY SHARE IN IT. THE CONSIDERATION TOWARDS CONSTRUCTION COST WAS DECLARE D BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. FOR INCOME TAX PURPOSES, THE ASS ESSEE HAD BEEN DECLARING INCOME AT THE ESTIMATED RATE OF 8% ON THE CONSTRUCTION RECEIPTS AND IT WAS STATED THAT THE ASSESSEE WOULD OFFER THE BALANCE AMOUNT OF PROFIT IN THE YEAR OF COMPLETION OF PROJECT. 4. DURING THE COURSE OF SEARCH, THE DEPARTMENT SEIZED A LOOSE PAPER WHICH SHOWED THAT THE ASSESSEE IS SELLING THE FLATS @ RS.1,350/- PER SQ. FT. ITA NO.144-145; CO 23 & 24 VIZAG-2010 VAISAKHI CO NSTRUCTIONS PAGE 3 OF 8 THE TOTAL CONSTRUCTED AREA STOOD AT RS.91,025/-. A CCORDINGLY THE AO COMPUTED THE GROSS RECEIPTS FROM THE PROJECT AT RS. 12.28 CRORES (91025 SQ. FT. X RS.1,350/-). FROM THE GROSS RECEIPTS, THE AO DEDUCTED THE LAND COST OF RS.3.30 CRORES, AS THE ASSESSEE WAS NOT THE OWNE R OF THE LAND. THE AO PRESUMED THAT THE PROJECT WAS COMPLETED IN THREE YE ARS PERIOD AND ACCORDINGLY ALLOCATED THE GROSS RECEIPTS IN THE RAT IO OF 25%, 45% AND 30% BETWEEN THE ASSESSMENT YEARS 2006-07, 2007-08 AND 2 008-09 RESPECTIVELY. ON THE GROSS RECEIPTS SO ALLOCATED, THE AO ESTIMATE D THE INCOME @ 17.5% AND ALLOWED DEDUCTION TOWARDS PARTNERS SALARY ONLY AT THE AMOUNT CLAIMED BY THE ASSESSEE IN ITS RETURN OF INCOME. 5. THE ASSESSEE CARRIED THE MATTER IN APPEAL BE FORE LD CIT(A) DISPUTING THE GROSS RECEIPTS; THE PROFIT ESTIMATED BY THE AO AND ALSO THE PERIOD OF ALLOCATION. SINCE THE ASSESSEE HAD AGREED FOR ADOP TION OF THE RATE OF RS.1,350/- PER SQ.FT., THE LD CIT(A) DID NOT DISTUR B THE SAME. THE LD CIT(A) RECOGNIZED THE FACT THAT THE OWNER OF THE LA ND HAS BEEN ALLOTTED 7420 SQ.FT. OF THE CONSTRUCTED AREA AND HENCE THE R ATE OF RS.1350/- CANNOT BE APPLIED ON IT. BEFORE LD CIT(A), THE ASSESSEE S UBMITTED A STATEMENT SHOWING THE AGGREGATE GROSS RECEIPTS AT RS.8.36 CRO RES AND ALSO THE ADDITIONAL RECEIPTS AT RS.1.95 CRORES, I.E. UNACCOU NTED RECEIPTS. THE LD CIT(A) ACCEPTED THE SAID WORKINGS SUBMITTED BY THE ASSESSEE. BEFORE THE AO, THE ASSESSEE HAD AGREED FOR ESTIMATING THE PROF IT ON THE ADDITIONAL RECEIPTS AT !5% FOR THE FIRST TWO YEARS AND AT 12.5 % ON THE REMAINING THREE YEARS. THE ASSESSEE ALSO EXPLAINED HOW THE COMPLET ION OF PROJECT GOT DELAYED, WHICH HAD IMPACTED ON ITS PROFITABILITY. CONSIDERING THE EXPLANATIONS OF THE ASSESSEE, THE LD CIT(A) DETERMI NED THE RATE OF PROFIT AT THE RATE OF 10% ON THE ENTIRE GROSS RECEIPTS. HE A LSO ACCEPTED THE CONTENTION OF THE ASSESSEE THAT THE PROFIT SHOULD B E SPREAD OVER A PERIOD OF FIVE YEARS. AGGRIEVED BY THE ORDER OF LD CIT(A), T HE REVENUE IS IN APPEAL BEFORE US. ITA NO.144-145; CO 23 & 24 VIZAG-2010 VAISAKHI CO NSTRUCTIONS PAGE 4 OF 8 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. THE AO HAD DETERMINED THE GROSS RECEIPTS AT RS.8.99 CRORES, WHICH WAS REDUCED TO RS.8.36 CRORES BY THE LD CIT(A). THE DE PARTMENT IS DISPUTING THE SAID REDUCTION. THE ASSESSEE HAD GIVEN FOLLOWI NG COMPUTATION BEFORE LD CIT(A):- TOTAL CONSTRUCTED AREA 91025 SQ. F T. (-) GIVEN TO LAND OWNER 7 420 SQ.FT. ---------- 83605 SQ.FT. ====== A) NOTIONAL RECEIPTS 83605 @ RS.1350/- 11,28,66,75 0 ADD:- SOLD TO LAND OWNER 68,44,000 ----------------- 11,97,10,750 LESS:- LAND COST PERTAINING TO:- A) FLAT OWNERS 3,29,39,500 B) LAND OWNERS 31,67,288 ----------------- 3,61,06,788 ------------------ TOTAL RECEIPTS AS PER NOTIONAL RATE 8,36,03,963 ========= IT CAN BE NOTICED THAT THE VALUE OF FLATS SOLD TO T HE LAND OWNER HAS NOT BEEN ADOPTED AT THE RATE OF RS.1,350/- PER SQ.FT., OBVIOUSLY FOR THE REASON THAT THERE IS NO NECESSITY TO COLLECT THE COST OF L AND FROM HIM. HAVING SO ADOPTED LESSER SELLING RATE, IN OUR VIEW, THERE IS NO NECESSITY TO FURTHER REDUCE THE LAND COST PERTAINING TO THE LAND OWNER A MOUNTING TO RS.31,67,288/- FROM THE AGGREGATE SALES VALUE. ACC ORDINGLY, IN OUR VIEW, THE TOTAL RECEIPTS COMPUTED ABOVE SHOULD BE INCREAS ED BY A SUM OF RS.31,67,288/- AND WE ORDER ACCORDINGLY. 7. THE NEXT ISSUE PERTAINS TO THE DETERMINATION OF RATE OF PROFIT. THE AO HAD ESTIMATED THE PROFIT @ 17.5%, WHERE AS THE LD C IT(A) HAD REDUCED THE SAME TO 10%. AS PER THE RECORD, THE ASSESSEE H AD BEEN OFFERING THE PROFIT AT THE ESTIMATED RATE OF 8% WITH THE PLEA TH AT THE DIFFERENCE BETWEEN THE ACTUAL PROFIT AND THE ESTIMATED PROFIT SO OFFERED SHALL BE ITA NO.144-145; CO 23 & 24 VIZAG-2010 VAISAKHI CO NSTRUCTIONS PAGE 5 OF 8 DECLARED IN THE YEAR OF COMPLETION OF THE PROJECT. SINCE THE PROJECT WAS NOT COMPLETE BY THE DATE OF SEARCH, THE ACTUAL RATE OF PROFIT EARNED BY THE ASSESSEE IS NOT DISCERNIBLE FROM THE ASSESSMENT REC ORD. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE AO PROPOSED TO ESTIMA TE THE PROFIT @ 20%. IT IS SEEN THAT THE LD A.R HAD AGREED FOR ADOPTION OF RATE OF 15.5% ON THE ADDITIONAL RECEIPTS FOR FIRST TWO YEARS AND AT THE RATE OF 12.5% ON THE ADDITIONAL RECEIPTS IN THE REMAINING YEARS. HOWEVER , THE AO DETERMINED THE RATE OF PROFIT AT 17.5% ON THE ENTIRE RECEIPTS AND DEDUCTED ONLY THE PARTNERS SALARY FROM IT. 8. BEFORE THE LD CIT(A), THE ASSESSEE GAVE DETA ILED EXPLANATIONS WITH REGARD TO THE HURDLES FACED BY IT AND ALSO ITS EFFE CT ON THE PROFITABILITY OF THE PROJECT. THE LD CIT(A) ALSO OBSERVED THAT THE A O DID NOT BRING ON RECORD ANY COMPARABLE INSTANCES TO SUPPORT THE RATE OF PROFIT OF 17.5% ESTIMATED BY HER. THE RATE OF PROFIT PROPOSED BY T HE ASSESSEE ON THE ADDITIONAL RECEIPTS AND THE RATE OF PROFIT ALREADY DECLARED BY IT ON THE RETURN OF INCOME GAVE AN AVERAGE RATE OF 9.4%. HEN CE, ON A CONSPECTUS OF THE MATTER, THE LD CIT(A) DETERMINED THE RATE OF PR OFIT AT 10%. 9. WE NOTICE THAT THERE IS NO BASIS BOTH WITH T HE AO AS WELL AS THE ASSESSEE TO SUPPORT THE RATE OF PROFIT CLAIMED BY E ACH OF THEM. IN PARAGRAPH 6.2 OF THE ORDER OF LD CIT(A), THE FIRST APPELLATE AUTHORITY HAD DISCUSSED THE DETAILS OF HURDLES FACED BY THE ASSES SEE IN COMPLETION OF THE PROJECT, WHICH GOT DELAYED BY ABOUT 2 YEARS. IT IS IN THE COMMON KNOWLEDGE OF EVERY BODY THAT THE PROJECT OVER RUN W ILL HAVE IMPACT ON THE COST AS WELL AS THE PROFITABILITY. HOWEVER, AS DIS CUSSED IN THE PRECEDING PARAGRAPH, BOTH THE PARTIES HAVE FAILED TO SUBSTANT IATE THE RATE OF PROFIT CLAIMED BY EACH OF THEM. HENCE, IN ORDER TO SETTLE THIS ISSUE, WE ARE ALSO CONSTRAINED TO DETERMINE THE RATE OF PROFIT ON ESTI MATED BASIS. ON A CONSPECTUS OF THE MATTER, WE ARE OF THE VIEW THAT T HE RATE OF PROFIT MAY BE ITA NO.144-145; CO 23 & 24 VIZAG-2010 VAISAKHI CO NSTRUCTIONS PAGE 6 OF 8 TAKEN @ 12% AND IN OUR VIEW THE SAID RATE WOULD MEE T THE ENDS OF JUSTICE. WE ORDER ACCORDINGLY. THE ORDER OF LD CIT(A) STAND S MODIFIED ACCORDINGLY. 10. THE NEXT ISSUE RELATES TO THE DISPUTE WITH REGARD TO THE PERIOD OF PROJECT. THE AO ALLOCATED THE GROSS RECEIPTS OVER A PERIOD OF THREE YEARS IN THE RATIO OF 25%, 45% AND 30% RESPECTIVELY FOR THE ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09. FROM THE ASSESSMENT ORDER, WE NOTICE THAT THE AO DID NOT BRING ANY MATERIAL TO SUBSTANTI ATE HER STAND. THERE CANNOT BE ANY DISPUTE THAT THE PROFIT ON THE PROJEC T OF CONSTRUCTION OF APARTMENT COULD BE RECOGNIZED ONLY IN THE YEARS IN WHICH THE FLATS ARE SOLD. IN THE INSTANT CASE, THE ASSESSEE HAD BEEN SHOWING THE RECEIPTS ON THE BASIS OF ACTUAL SALES AND ACCORDING TO THE ASSESSEE , ALL THE FLATS WERE SOLD DURING A PERIOD OF FIVE YEARS. ACCORDINGLY, IN OUR VIEW, THERE IS NO REASON TO DISTURB THE SPAN OF THE PERIOD AS DECLARED BY TH E ASSESSEE, MORE PARTICULARLY IN VIEW OF THE FACT THAT THERE IS NO M ATERIAL TO DISPROVE THE SAID CLAIM OF THE ASSESSEE. ACCORDINGLY, WE UPHOLD THE VIEW OF THE LD CIT(A) ON THIS ISSUE. 11. NOW WE SHALL TURN TO THE CROSS OBJECTION FI LED BY THE ASSESSEE, IN WHICH FOLLOWING ISSUES HAVE BEEN RAISED. (A) DEDUCTION OF INTEREST ON CAPITAL OF PARTNERS A ND REMUNERATION TO PARTNERS AS PER PROVISIONS OF SEC. 40(B) OF THE ACT. (B) DEDUCTION OF AMOUNT ALLOWABLE U/S 40(A)(IA) OF THE ACT ON LATE REMITTANCE OF TDS. WITH REGARD TO THE DEDUCTION CLAIMED U/S 40(A)(IA) OF THE ACT, WE NOTICE THAT THE ASSESSEE HAD CLAIMED THE SAME BEFORE LD CI T(A) DURING THE COURSE OF HEARING, BUT THE LD CIT(A) FAILED TO ADDRESS THE SAME. THE ASSESSEE IS CLAIMING DEDUCTION U/S 40(A)(IA) IN THE YEARS UNDER CONSIDERATION, AS THE SAME WAS DISALLOWED IN THE EARLIER YEARS ON THE GRO UND OF NON-PAYMENT OF TDS. WE FIND MERIT IN THE SAID CLAIM OF THE ASSESS EE, AS IT IS A STATUTORY DEDUCTION ALLOWABLE U/S 40(A)(IA) OF THE ACT. ACCO RDINGLY, WE DIRECT THE AO ITA NO.144-145; CO 23 & 24 VIZAG-2010 VAISAKHI CO NSTRUCTIONS PAGE 7 OF 8 TO EXAMINE THE SAID CLAIM OF THE ASSESSEE AND DECID E THE SAME IN ACCORDANCE WITH LAW. 12. THOUGH THE AO HAS ALLOWED DEDUCTION OF REMUN ERATION PAID TO THE PARTNERS, THE CLAIM OF THE ASSESSEE IS THAT THE SAM E IS NOT IN ACCORDANCE WITH THE PROVISIONS OF SEC. 40(B) OF THE ACT. UNDE R THE PROVISIONS OF SEC. 40(B), THE QUANTUM OF DEDUCTION OF REMUNERATION PAY ABLE TO THE PARTNERS WOULD DEPEND UPON THE TERMS OF THE PARTNERSHIP DEED AND ALSO THE PROFITABILITY. ACCORDINGLY, WE DIRECT THE AO TO EX AMINE THE SAID CLAIM OF THE ASSESSEE IN ACCORDANCE WITH LAW. 13. THE AO DID NOT DISCUSS ABOUT THE ALLOWABILI TY OF INTEREST PAYABLE ON THE CAPITAL OF PARTNERS. THE CONTENTION OF THE ASS ESSEE IS THAT IT IS A STATUTORY DEDUCTION ALLOWABLE U/S 40(B) OF THE ACT. IT IS TO BE NOTED THAT THE REMUNERATION PAYABLE TO PARTNERS IS ALSO ALLOWA BLE U/S 40(B) OF THE ACT, WHICH HAS BEEN ALLOWED BY THE AO. THUS THE AO HAS CONSIDERED THE PROVISIONS OF SEC. 40(B) IN PART. ACCORDINGLY, WE DIRECT THE AO TO EXAMINE THE CLAIM OF THE ASSESSEE BY GIVING A REASONED ORDE R. 14. IN THE RESULT, THE APPEALS OF THE REVENUE A RE PARTLY ALLOWED AND THE CROSS OBJECTIONS OF THE ASSESSEE ARE TREATED AS ALL OWED. PRONOUNCED IN THE OPEN COURT ON 12.04.2012. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER VISAKHAPATNAM, DATE: 12 TH APR12 ITA NO.144-145; CO 23 & 24 VIZAG-2010 VAISAKHI CO NSTRUCTIONS PAGE 8 OF 8 COPY TO 1 DY.COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE - 1, PRATHAKSHAKAR BHAVAN, MVP DOUBLE ROAD, OPP: RYTU BAZAR, VISAKHAPA TNAM. 2 M/S VAISAKHI CONSTR UCTIONS, DR NO.50 - 1219, BALAJI HILLS, SEETHAMMADHARA, VISAKHAPATNAM. 3 4. THE CIT (CENTRAL), HYDERABAD, THE CIT(A), VISAKHAPATNAM. 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM