ADDL CIT RG 24(1), MUMBAI V. ARUN DAMJI GADA, MUMBAI

ITA 105/MUM/2011

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0744 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-08-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 06-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR YADAV
• Keywords: Gift; Business income; Non compliance; Revised return
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI RAVISH SOOD , JM ITA NO. 8167 / MUM/20 10 ( ASSESSMENT YEAR : 2007 - 08 ) SHRI ARUN DAMJI GADA A - 103, GO D GIFT ADARSHA DUGDHALAYA LANE, ADARSH NAGAR, ADARSH DHUG HALA LANE, MALAD (W) MUMBAI 400 064 VS. ACIT 24(1) PRATYSHAKAR BHAWAN BANDRA KURLA COMPLEX BANDRA (E) MUMBAI 400 050 PAN/GIR NO. AABPG3923F APPELLANT ) .. RESPONDENT ) ITA NO. 105/ MUM/20 11 ( ASSESSMENT YEAR : 2007 - 08 ) ACIT 24(1 ) C - 13 R/NOP, 503 PRATYSHAKAR BHAWAN BANDRA KURLA COMPLEX BANDRA (E) MUMBAI 400 050 VS. SHRI ARUN DAMJI GADA A - 103, G O D GIFT ADARSHA DUGDHALAYA LANE, ADARSH NAGAR, ADARSH DHUGHALA LANE, MALAD (W) MUMBAI 400 064 PAN/GIR NO. AABPG39 23F APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI RAJESH SANGHVI & SUBHASH CHHAJED REVENUE BY SHRI RAJESH KUMAR YADAV DATE OF HEARING 21 / 12 /201 7 DATE OF PRONOUNCEME NT 19 / 01 /201 8 ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 2 / O R D E R PER R.C.SHARMA (A.M) : THESE ARE THE CROSS APPEALS FILED BY ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) - 34, MUMBAI DATED 18/10/2010 FOR A.Y.2007 - 08 IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE IT ACT. 2. R IVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 3. FACTS IN BRIEF ARE THAT ASSESSEE IS A N INDIVIDUAL & A BUILDER. PROPRIETOR OF 4 FIRMS OUT OF WHICH 2 FIRMS WERE M/S. DIVYA DEVELOPMENTS & M/S. NOVA NIRMAN NIGAM. ASSESSEE DID NOT DECLARE PROFIT FROM TH ESE 2 FIRMS BECAUSE OF COURT CASES/LITIGATIONS WHICH WAS STATED BY AUDITOR IN HIS AUDIT REPORT. AO DID NOT AGREE & ASSESSED PROFITS AS FOLLOWS : PROJECT NAME ADVANCES RE C D EXPENDITURE WIP NET PROFIT TAKEN BY AO NOVA NIRMAN NIGAM 7 BUILDINGS 16 ,90,64,658 15,75,61,118 1,15,03,540 / - GAURAV GAGAN 4,93,97,725 4,19,88,066 NOT RECOGNISED BY AO ______________ ______________ _______________ TOTAL OF NOVA 21,84,62,383/ - 19,95,49,184/ - 1,15,03,540/ - DIVYA DEVELOPMENTS : 4 BUILD INGS DIVYA VINAYAK 3,17,27,450/ - 2,77,18,769/ - 40,08,681/ - DIVYA SMRUTI 13,67,36,974/ - 9,16,55,368/ - 4,50,81,586/ - ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 3 DIVYA SMIT 4,22,67,448/ - 3,65,54,149/ - 57,13,299/ - DIVYA CHINTA N 3,22,47,290/ - 2,89,48,762/ - 32,98,528/ - ______________ ______ ________ _______________ TOTAL OF DIVYA 24,29,79,162/ - 18,48,77,068/ - 5,81,02,094/ - TOTAL ADDITION BY AO RS. 6,96,05,634/ - 4. BY THE IMPUGNED ORDER, CIT(A) PARTLY ALLOWED ASSESSEES APPEAL AFTER OBSERVING AS UNDER: - 5.3 I HAVE GONE THROUGH THE CO NTENTS OF THE IMPUGNED ASSESSMENT ORDER, RELEVANT GROUNDS OF APPEAL, STATEMENT OF FACTS, ARGUMENTS AND SUBMISSIONS OF THE LD. AUTHORIZED REPRESENTATIVES OF THE APPELLANT AS WELL AS MATERIAL AVAILABLE ON RECORD. I FIND THAT THE AO HAS ACTED ON THE PERCEPTIO N AND GIVEN HIS FINDINGS ON THE BASIS OF A FEW FACTORS SUCH AS THE FOLLOWING: I. REVENUE RECOGNITION BASED ON SUBSTANTIAL COMPLETION OF THE PROJECT OR BUILDING IN THE PROJECT . II. DISREGARDING PROBABLE EXPENDITURE OF ?3.80 CRS ON THE REASON OF THE SAID E XPENDITURES BEING PROVISIONAL IN NATURE AND NOT PROVIDED FOR IN THE BOOKS OF ACCOUNTS AND FURTHER BEING VIOLATIVE OF SEC. 37(1), AND III. DISREGARDING INCOME AND EXPENDITURE AND LOSSES OF THE GAURAV GAGAN ON THE REASONS OF LACK OF POSSESSION, CONTINGENCY IN NATURE AND THE SAME NOT BEING PROVIDED FOR IN THE BOOKS OF ACCOUNTS AND FURTHER BEING VIOLATIVE OF SEC. 37(1) IN HIS VIEWS. ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 4 5.3.1 I ALSO FIND THAT THE AO HAS NOT CATEGORICALLY REJECTED THE BOOK RESULTS BUT HAS DERIVED THE FIGURES AND RESULTS FROM THE B OOK RESULTS AS EVIDENT FROM THE BALANCE - SHEETS FILED. FURTHERMORE, THERE IS NO MENTION ABOUT ANY ACCOUNTING DEFECTS OR CHALLENGE TO THE ACCOUNTING SYSTEM FOUND OTHER THAN THE DISPUTE ON THE INCIDENCE OF REVENUE RECOGNITION. THE FINANCIAL RESULTS IN TERMS O F ADVANCES RECEIVED OR DEVELOPMENT EXPENDITURES ON THE VARIOUS PROJECTS ARE ALSO NOT IN DISPUTE ANY WHERE IN THE IMPUGNED ASSESSMENT ORDER. HOWEVER, I DO FIND SOME MERITS IN THE ASSESSING OFFICER'S REASONING FOR REVENUE RECOGNITION BASED ON SUBSTANTIAL COM PLETION OF THE PROJECT, WHICH FACT IS NOT IN DISPUTE, BUT I ALSO FIND THAT IN THE INTERESTS OF JUSTICE AND EQUITY AND MORE SO KEEPING IN MIND VARIOUS JUDICIAL PRONOUNCEMENTS AND THE CONCEPT OF MATCHING OF COSTS WITH REVENUES AND TIMING ISSUES, THAT THE APP ELLANT OUGHT TO HAVE HIS FAIR SHARE OF REASONABLE, REALISTIC AND PROBABLE SHARE OF EXPENSES, SINCE REVENUES ALSO HAVE TO BE RECOGNIZED, KEEPING IN MIND THE FACT THAT THE DATES OF POSSESSION OF CERTAIN PROJECTS/BUILDINGS DO NOT FALL IN THE YEAR IN QUESTION, THE ACTION OF ASSESSING OFFICER IS NOT JUSTIFIED FULLY. I HAVE NOTICED THE CONTENTS AND IMPORTANCE OF THE CONCEPT OF COMPLETION CERTIFICATE U/S 80IB(10) BUT SINCE THE SAME IS SPECIFIC FOR THAT SECTION, IT CANNOT BE STRETCHED INTO OTHER SECTIONS IN THE ABS ENCE OF EXPLICIT PROVISIONS OF THE IT ACT, 1961 AND CLEAR LEGISLATIVE INTENT. HOWEVER, THE LOGIC REMAINS TRUE AS ARGUED IN THE CHAMPION CONSTRUCTIONS CASE (SUPRA) THAT REVENUE CANNOT BE INDEFINITELY POSTPONED FOR LACK OF OCCUPATION OR COMPLETION CERTIFICAT E FROM ANY LOCAL AUTHORITY, FOR THERE CAN BE A THOUSAND REASONS FOR THE DELAY IN OBTAINING SUCH CERTIFICATES. THERE ARE MANY OTHER INSTANCES WHERE IT IS FOUND THAT IN SPITE OF SUCH OCCUPATION CERTIFICA TE {OC}/COMPLETION CERTIFICATE ( CC ) , POSSESSION IS STIL L HANDED OVER TO CUSTOMERS AND PEOPLE STAY IN SUCH BUILDINGS. HENCE ONLY ON THE REASONS OF LACK OF OC/CC, TAXABLE PROFITS CANNOT BE POSTPONED TO THE FUTURE YEARS. AT THE SAME TIME, I AM ALSO INCLINED TO FIND THAT THE SAME LOGIC EXTENDS TO THE ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 5 DATE OF HANDI NG OVER OF POSSESSION. IN A PROJECT COMPLETION METHOD, THE ASSESSEE GETS A TAX GESTATION PERIOD BY POSTPONING THE TAXABLE PROFITS TILL THE PROJECT (IN TERMS OF CONSTRUCTION ) IS SUBSTANTIALLY COMPLETE , MAY BE 80% OR SO. HOWEVER FURTHER GESTATION CANNOT BE ALLOWED UNDER THE GUISE OF DELAY IN OBTAINING OC/CC OR DELAY IN HANDING OVER POSSESSION. HENCE, THE ARGUMENTS OF THE APPELLANT TO THAT EXTENT HAVE NO MERITS AND DESERVE TO BE BRUSHED ASIDE. HOWEVER, IF TAXABLE REVENUES HAVE TO BE RECOGNIZED THEN IN THE SA ME SPIRIT, A FAIRLY REALISTIC AND FORESEEABLE EXPENDITURES AND LOSSES IF ANY, HAVE ALSO TO BE RECOGNIZED AND THE JUDICIAL DISCRETION IN TERMS OF PICK AND CHOOSE OR TIMING MISMATCH CANNOT ARBITRARILY BE RESORTED TO IN ANY QUASI - JUDICIAL PROCEEDINGS LIKE THE ASSESSMENT PROCEEDINGS UNDER THE IT ACT, 1961 HERE IN THE INSTANT CASE. THE HON'BLE SUPREME COURT IN THE CASE OF PANNALAL BRIJLAL VS. UNION OF INDIA (1957) 31 ITR 565 (SC) OBSERVED THAT PROVISIONS OF IT ACT, 1961 SHOULD BE APPLIED IN A HUMANE AND CONSIDER ED MANNER. I APPRECIATE THE CONTENTIONS OF THE ASSESSING OFFICER AND REBUTTALS BY THE LD. AUTHORIZED REPRESENTATIVES OF THE APPELLANT ON AS - 7 AND FOR THAT MATTER ON AS - 9. HOWEVER, IT IS ALSO TO BE REALIZED THAT MERE ACCOUNTING ENTRIES OR LACK OF ENTRIES OR ITS PRESENTATION CANNOT SOLELY DETERMINETHE TIMING & INCIDENCE OF AND AMOUNT OF TAXATION. TO THIS EXTENT THE JUDGEMENTS OF THE APEX COURT IN CASES OF KEDAMATH JUTE MFG CO LTD VS CIT (1971) 82 ITR 363 (SUPREME COURT) , TUTICORIN ALKALIES CHEMICALS 227 ITR 172 (SC) AND SUTLEJ COTTON MILLS 116 ITR 1 (SC) ARE RESPECTED AND TO BE FOLLOWED WITHOUT ANY QUALIFICATIONS TO THEM IN SPIRIT AND ESSENCE BOTH. THE APPELLANT HAS CLAIMED THAT IF HIS PROJECTS ARE TO BE TAXED ON SUBSTANTIAL COMPLETION THEN HIS EXPENDITURE OF RS. 3.80 CRORES ESTIMATED ON THE BASIS OF SIMILAR ACTIVITIES IN OTHER PROJECT OF THE APPELLANT SUBJECTED TO TAX, AS FURNISHED TO THE ASSESSING OFFICER, ALSO NEED TO BE ALLOWED FOR OC/CC AND SUCH OTHER OBLIGATIONS ARE AS A LIABILITY ASCERTAINED THAT ARE IND EED AN OBLIGATION ON THE BUILDER, BUT ONLY THAT QUANTIFICATION OF ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 6 THE ESTIMATED EXPENDITURE ON THE SAME IS A MATTER OF EXAMINATION. THIS ISSUE HAS ALSO BEEN CONFIRMED BY THE ASSESSING OFFICER IN PARA # C - 11 OF HIS ORDER. THE ISSUE THAT ALSO NEEDS TO BE ADD RESSED IS WHETHER THE IMPUGNED EXPENDITURE OF RS. 3.80 CRORES IS VIOLATIVE OF SEC: 37(1) OF THE IT ACT THAT WAS THE MAIN GROUND FOR THE ASSESSING OFFICER TO REJECT THE APPELLANT'S CONTENTION IN THE ALTERNATIVE. I FIND THAT THE APPELLANT HAD FURNISHED THE ES TIMATES FOR THESE EXPENSES. TYPICALLY ALL THESE EXPENSES TO INCUR IN RELATION TO THE IMPUGNED COMPLETED PROJECTS HAVE A COMMON PURPOSE I.E. EXPENSES FOR OBTAINING OC/CC FROM BMC AND CONSTRUCTION OF ROAD AND COMPOUND WALL. IN M/S. DIVYA DEVELOPMENTS ONE OF THE BUILDINGS NAMELY DIVYA SMRUTI HAS SOME OTHER CLAIMS OF THE FUTURE EXPENSES LIKE COVERING OF NALA, REHABILITATION OF EXISTING TENANTS AND SOME CONSENT TERMS RELATED EXPENSES. IN THIS CONTEXT, I AGREE IN PRINCIPLE WITH THE LD. AUTHORIZED REPRESENTATIVES OF THE APPELLANT THAT THE IMPUGNED EXPENDITURES OF RS. 3.80 CRS AS DESCRIBED ARE PRIMARILY NOT IN THE NATURE OF FINE OR PENALTY FOR ANY ILLEGAL PURPOSE AND THAT EXPLANATION TO SEC: 37(1) DOES NOT VISIT THEM I.E THEY ARE NOT VIOLATIVE OF SEC. 37(1) SINCE THE SE KIND OF EXPENDITURES ON OBTAINING OC/CC, MAKING OF COMPOUND WALL, TITLE RELATED COURT LITIGATIONS AND COMPENSATIONS ARISING THEREFROM ARE NOT HIT WITH SEC. 37(1) UNLESS IT IS IN THE NATURE OF ANY FINE OR PENALTY FOR ANY OFFENCE OR ILLEGALITY. I ALSO AGR EE WITH THE FACT THAT DETERMINATION AND DECLARATION OF ILLEGALITY OR OFFENCE IS A CIVIL LAW PROCESS WHICH MAY OR MAY NOT CULMINATE IN A FINE OR PROSECUTION. SUCH FINE IS VISITED BY SEC. 37(1) AND NOT OTHERWISE. IT WAS SURELY NOT THE INTENTION OF THE LEGISL ATION TO PUT THE AO IN THE CIVIL LAWS ADJUDICATION DOMAIN TO DECIDE, WHAT IS AN ILLEGALITY OR OFFENCE UNDER OTHER CIVIL LAWS. IF THAT WOULD BE SO, THE OBJECT AND PROCESS AS ENUNCIATED UNDER THE CODE OF CIVIL PROCEDURE WOULD GET FRUSTRATED. EVEN THE PROVISI ONS OF SEC. 293 OF THE IT ACT, 1961 BARS THE JURISDICTION OF CIVIL COURTS IN INTERFERING WITH THE STATUTORY ACTIONS OF THE IT AUTHORITIES ON ALMOST SAME PHILOSOPHY OF TAXATION. HAVING SAID ALL THE ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 7 ABOVE, IT IS NOW IMPORTANT TO ARRIVE AT A FAIR DETERMINATIO N OF THE PROFITS/LOSSES SO AS TO HONOUR THE REVENUE RECOGNITION NORMS AND ITS TIMING AND TO APPLY THE SAME IN THE SPIRIT OF THE INCOME - TAX ACT, 1961 AND VARIOUS JUDICIAL PRONOUNCEMENTS TOGETHER. THE APPELLANT CLAIMS TO HAVE ARRIVED AT THE ESTIMATED EXPENDI TURES OF RS. 3.80 CRORES BASED ON COMPARABLES. HOWEVER, ON EXAMINATION I FIND THAT THE SAME NEED TO BE CRITICALLY REVIEWED AND THERE IS NO HARM IN HAVING A CONSERVATIVE APPROACH WHICH IS NEEDED IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE KEEPING IN M IND THAT OC/CC ARE BUT A VITAL OBLIGATION OF ANY BUILDER AND HENCE THESE ARE ASCERTAINED OBLIGATIONS IN NATURE BUT SINCE, THE QUANTIFICATION NEEDS EXAMINATION. IN THIS BACKDROP A REALISTIC ALLOWANCE OF SUCH ESTIMATED EXPENDITURES IS WORKED OUT TO SERVE THE INTERESTS OF JUSTICE AND BUSINESS REALITIES IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE AS UNDER: PROJECT NAME EXP CLAIMED BY APPELLANT EXP NOW ALLOWED M/S. NOVA NIRMAN NIQAM RS. 75,00,000 / = RS. 47,26,000 / - BASIS : T HE TOTAL EXPENDIT URES ON THE ABOVE BUILDING ARE RS. 15,75,61,1187 - AS PER PARA # C.5.2 OF THE ASST ORDER. THE TOTAL ESTIMATED EXPENDITU RE CLAIMED BY THE APPELLANT OF RS. 75 LACS FORMS ABOUT 4.76 % OF THE TOTAL EXP. A REALISTIC BASIS WOULD BE 3 % H ENCE THE SA ID EXPENDITURE IS RESTRICTED TO RS. 47,26,000 / - . M/S. DIVVA DEVELOPMENTS DIVYA CHINTAN RS. 25,00,000/= 13,86,500 / - + 9,27,000 / - 23,11,500 / - DIVYASMIT 25,00,000 / - 13,86,500 / - +9,27,000 / - 23,11,500/ - DIVYAVINAYAK 25,00,000 / - 13,86,5 00 / - + 9,27,000/ - 23,11,500/ - DIVYASMRUTI{ 25,00,000 / - 13,86,500 / - +9,27,000/ - 23,11,500 / - 205,00,000/ - 1 C R . ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 8 BASIS : OUT OF THE ABOVE , IT IS FOUND THAT RS. 15 LACS PER BUILDING IS CLAIMED IN EACH OF THE 4 BUILDING ON ACCOUNT OF CO STS OF OBTAINING OC/CC , THUS TOTALING RS. 60 LACS. THE TOTAL EXPENDITUR ES ON THE ABOVE 4 BUILDING ARE RS. 18,48,77,0687 - AS PER PARA # C.5.4 OF THE ASST ORDER. THE TOTAL ESTIMATED EXPENDIT URE CLAIMED BY THE APPELLANT OF RS. 60 LACS ON OC/CC FORMS ABOUT 5.25 % - OF THE TOTAL EXP. A REALISTIC BASIS WOULD BE 3 % HENCE THE SAID EXPENDITURE IS RESTRICTED TO RS. 55,46,000 / - I.E RS. 13,86,500 / - PER BUILDING. ANOTHER RS. 10 LACS PER BUILDING IS CLAIMED IN EACH OF THE 4 BUILDING ON ACCOUNT OF COSTS OF DP RO AD AND COMPOUN D WALL, TOTALING RS. 40 LACS. THE TOTAL EXPENDITURES ON THE ABOVE 4 BUILDING ARE RS.18,48,77,068/ - AS PER PARA # C.5.4 OF THE ASST ORDER. THE TOTAL ESTIMATED EXPENDITURE CLAIME D BY THE APPELLANT OF RS. 40 LACS ON DP ROADS & COMPOUND WALL FORMS ABOUT 2.16 % OF THE TOTAL EXP. A REALISTIC BASIS WOULD BE 2 % HENCE THE SAI D EXPENDITURE IS RESTRICTED TO RS. 37 LACS I.E RS. 9,27,000 / - PER BUILDING. IN THE BUILDING DIVYA SMRUTI, SOM E ADDITIONAL EXPENSES OF ABOUT RS. 2 CRORES ARE CLAIMED DUE TO ISSUES LIKE COVERING OF NALLA, REHABILITATION IN SUIT NO. 422 OF 1998 & SUIT NO. 2657 AND CONSENT TERMS IN SUIT NO. 419 5 OF 05. THESE EXPENDITURES OF RS. 2 CRORES COME TO ABOUT 21.82% OF THE PROJECT COST OF RS. 9,16,55,388 / - . A REALISTIC BASIS WOULD BE 10% HENCE THE SAID EXPENDITUR E IS RESTRICTED TO RS. 1 CR. 5.3.2 BASED ON THE REASONING AND DISCUSSION AS ABOVE AND ON A CONSERVATIVE NOTE, I FIND THAT THE COMPLETION EXPENDITURE R EMAINING ONLY TO THE EXTENT OF RS. 2,39,72,0007 - AS AGAINST RS. 3,80,00,000 / - AS CLAIMED BY THE APPELLANT I.E 63% OF THE ESTIMATED EXPENDITURE CLAIMED ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 9 BY THE APPELLANT IS ALLOWABLE AND ALLOWED HEREWITH IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. 5.3.3 NOW COMING TO THE ISSUE OF THE BUILDING GAURAV GAGAN, I F IND THAT THIS 24 STOREY BUILDING, AS OBSERVED BY THE ASSESSING OFFICER, HAS BEEN THE SUBJECT MATTER OF STOP WORK NOTICE AND DEMOLITION NOTICES FROM THE BMC WHICH RESULTED IN COURT LITIGATIONS AND THE SAID DEMOLITION ORDER WAS CONFIRMED BY THE JURISDICTIONA L BOMBAY HIGH COURT. ALL THESE ISSUES AND FACTS ARE MENTIONED IN THE ASSESSMENT ORDER AND STAND UNCONTROVERSIAL. ONCE AGAIN GOING BY THE OBSERVATIONS OF THE HON'BLE ITAT MUMBAI IN THE CASE OF CHAMPION CONSTRUCTIONS CO WHEREIN IT WAS STATED THAT' IN ANY EVE NT THERE WILL BE NO JUSTIFICATION FOR TREATING THE SURPLUS OF RECEIPT AFTER THE ENTIRE COST/EXPENDITURE TO THE ASSESSEE IS RECOUPED AS INCOME OF THE ASSESSEE, UNLESS THE ASSESSEE SHOWS THAT IT IS UNDER AN OBLIGATIONS TO MEET A HEAVY LIABILITY WHICH MIGHT A LTOGETHER CHANGE THE COMPLEXION OF THE RESULTANT PROFIT OR LOSS FROM THE VENTURE ...'AND OTHER CASES AS STATED BY THE LD. AUTHORIZED REPRESENTATIVES OF THE APPELLANT AND GOING BY THE FACT THAT EVEN THIS BUILDING GAURAV GAGAN WAS SUBSTANTIALLY COMPLETE, THO UGH POSSESSION WAS NOT GIVEN LIKE MANY OTHER BUILDINGS OF THE APPELLANT, THE EXERCISE OF UNDERTAKING TAXABLE REVENUE RECOGNITION OF THIS BUILDING ALSO OUGHT TO BE JUDICIOUSLY DONE. IT HAS ALREADY BEEN DISCUSSED THAT RECOGNITION OF REVENUE FOR THE PURPOSE O F TAXATION CANNOT BE POSTPONED FOR WANT OF OCCUPATION CERTIFICATE OR COMPLETION CERTIFICATE TO BE OBTAINED FROM BRIHAN MUMBAI MUNICIPAL CORPORATION {BMC}, OR DUE TO HANDING OVER OF POSSESSION TO THE CUSTOMER, THE RECOGNITION OF ESTIMATED EXPENDITURES OR FO R THAT MATTER, COUPLED WITH VERY MUCH INCURRED LOSSES CANNOT BE INDEFINITELY DEFERRED TOO UNDER ANY PRETEXT SUCH AS THE IMPUGNED COURT LITIGATION. HENCE, THE FIRST ISSUE THAT NEED TO BE ADDRESSED IS WHETHER THE SAID ACTUALLY INCURRED EXPENDITURES OF 4.19 CRORES IS VIOLATIVE OF ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 10 EXPLN TO SEC. 37(1) OF THE IT ACT. THESE EXPENDITURES WHEN INCURRED WERE ON COSTS OF CONSTRUCTION LIKE CEMENT, SAND, STONE, STEEL, HARDWARE, PROFESSIONAL FEES, LABOUR CHARGES ETC. AND NOT ON ANY FINE OR PENALTY OR FOR ANY PURPOSE PRO HIBITED BY LAW AS NO SUCH OBSERVATIONS IS FOUND IN THE IMPUGNED ASSESSMENT ORDER AND THE APPELLANT ALSO CONFIRMS THE SAME. NO FINDING IS MADE TO CONFIRM THAT THE SAID AMOUNT OF ?4.19 CRORES CONTAIN ANY FINE OR PENALTY LEVIED BY BMC OR ANY OTHER STATE OR GO VT. AUTHORITY UNDER ANY LAW. THE FINE OR PENALTY IS ALWAYS PAID/ PAYABLE TO THE GOVT. COFFERS UNDER SOME SPECIFIC ORDER FROM A STATUTORY AUTHORITY MEANT THEREFORE, SUCH PAID FINE CANNOT BE REFUNDED TO THE PAYER IN CASE HE IS FOUND NOT GUILTY IN APPEAL AGAI NST THE FINE SO IMPOSED FOR THE ALLEGED INFRINGEMENT OF LAW. HERE, IN THE INSTANT CASE, THERE IS NO DISPUTE THAT THE APPELLANT AS A PART OF THE BUILDING INDUSTRY PRACTICE STARTED CONSTRUCTION ACTIVITY AT GAURAV GAGAN IN ANTICIPATION OF MAKING THE TDR COMPL IANCES AND GETTING REQUISITE PERMISSIONS LIKE ULC AND OTHER REGULARIZATIONS. IN FACT PERMISSIONS WERE GIVEN AND REGULARIZATIONS TILL THE 7 TH STOREY WERE MADE BY THE MUNICIPAL COMMISSIONER IN CERTAIN CASES OTHER THAN THE APPELLANT. HOWEVER, THEREAFTER DUE T O A WRIT PETITION ( PIL 379 OF 2003 & 2822 OF 07 ) FILED BY AN NGO & ANOTHER THE ISSUE WAS SUBJECT TO HIGH COURT SCRUTINY ALONGWITH 154 OTHER BUILDING CONSTRUCTED IN MUMBAI. THE APPELLANT ALONG WITH OTHERS ( TOTALLING 154 PARTIES IN ALL ) WERE SUBJECTED TO THE SCRUTINY OF A HIGH COURT WRIT PETITION, WHEREIN THE HON'BLE HIGH COURT REFERRED THE MATTER BACK TO THE MUNICIPAL COMMISSIONER OF BMC TO RE - CONSIDER ABOUT 128 BUILDER CASES AND REGULARIZE THEIR CONSTRUCTION, IF POSSIBLE. THE APPELLANT'S CASE COULD NOT BE REGULARIZED DUE TO TDR AND SUCH TECHNICAL OR DOCUMENT BASED DEFICIENCIES INCLUDING ULC AND HENCE REGULARIZATION UNDER THE DEVELOPMENT CONTROL REGULATIONS 1991 OF THE MAHARASHTRA REGIONAL TOWN PLANNING ACT WAS NOT PERMITTED UNDER THE DISCRETIONARY POWERS OF THE MUNICIPAL COMMISSIONER. THIS DECISION OF THE MUNICIPAL COMMISSIONER I.E. ISSUE OF REGULARIZATION WAS ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 11 ANALYZED IN DEPTH BY THE HON'BLE HIGH COURT OF BOMBAY AND THE CONSEQUENTIAL ORDERS AS NARRATED BY THE ASSESSING OFFICER IN HIS ORDER. HENCE, IT IS PERTINENT TO NOTE THAT THE ACT OF CONSTRUCTING DISPUTED STOREYS BY THE APPELLANT WAS AMENABLE TO REGULARIZATION BUT COULD NOT BE REGULARIZED DUE TO SOME NON COMPLIANCE OF DOCUMENTS AND ACTS BY THE APPELLANT. IT IS FURTHER IMPORTANT TO NOTE THAT IRREGULARIT Y CAN BE CURED BUT NOT AN ILLEGALITY. AGAIN, IT IS OF PARAMOUNT IMPORTANCE TO NOTE THAT IF AT ALL THE 17 STOREYS OF THIS CONSTRUCTION (FROM FLOOR 8 TH TO 24 TH } WERE NOT REGULARIZED LEADING TO CONSEQUENTIAL DEMOLITION, THE SAME WAS ALSO DUE TO NON COMPLIANCE OF THE TERMS OF THE BMC CONTAINED IN THEIR LETTER DT: 5 - 8 - 06 WHICH WAS A COMMERCIAL ISSUE LIKE PROVIDING TDR AND MAKING SEVERAL COMPLIANCES ETC. IN ADDITION TO THIS, NO PART OF THIS EXPENDITURE OF RS. 4.19 CRORES IS STATED TO BE TOWARDS ANY FINE OR PENALTY LEVIED BY ANY LOCAL OR GOVERNMENTAL AUTHORITY, NOR ANY SUCH SPECIFIC FINDING OF FACT BY THE ASSESSING OFFICER IN HIS IMPUGNED ORDER IS GIVEN. HENCE, IT IS HELD THAT THE SAID CONSTRUCTION EXPENDITURE OF RS. 4.19 CRS IS NOT VIOLATIVE OF SEC: 37(1) IN THE FAC TS AND CIRCUMSTANCES OF THE INSTANT CASE. HAVING SAID THAT, THE FACTS AND FIGURES AS DERIVED FROM THE FIGURES AS DETERMINED BY THE ASSESSING OFFICER, AGAIN NEED RE CONSIDERATION TO HAVE A PROPER FOUNDATION FOR THE ASSESSMENT OF INCOME OR ALLOWANCE OF EXPEN DITURE/LOSS. IT IS PERTINENT TO NOTE THAT THE TOTAL ADVANCES RECEIVED FOR THIS 24 STOREY BUILDING GAURAV GAGAN, WAS RS. 4,93,97,725 AND THE TOTAL EXPENDITURE FOR CONSTRUCTING THIS 24 STOREYED TOWER WAS RS. 4,19,88,066 / - AS PER THE AO. IT IS ALSO IMPORTANT TO NOTE THAT THE DEMOLITION ORDER IS FOR 17 STOREYS FROM 8 TH FLOOR TO 24 TH FLOOR I.E. ALMOST FOR 2/3 RD OF THE BUILDING. THIS EFFECTIVELY TRANSLATES INTO THE STATISTICAL FACT THAT 2/3 RD OF THE PRO RATE ADVANCES OF THIS BUILDING THUS CANNOT BE RECOGNIZED AS TA XABLE REVENUE FOR THE MOMENT AND ONLY 1/3 RD CAN BE RECOGNIZED AS TAXABLE REVENUE. AT THIS STAGE ANY ISSUE OF INTEREST COMPENSATION TO THE CUSTOMERS CANNOT BE FINALIZED OR FREEZED IN THE ABSENCE OF ANY CLAIM SINCE IT IS NOT FORSEEBALE NOR HIGHLY PROBABLE. ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 12 H ENCE THE CLAIM OF THE LD. AUTHORIZED REPRESENTATIVES OF THE APPELLANT ON THE INTEREST OR COMPENSATION ISSUE DOES NOT STAND THE LITMUS TEST AT THIS STAGE. HOWEVER THE ENTIRE CONSTRUCTION COSTS RS. 4,19,88,066 / - HAS TO BE TREATED AS EXPENDITURE BECAUSE THE 1/ 3RD STRUCTURE WOULD REMAIN IN PLACE, ALBEIT EVEN THIS 1/ 3 RD STRUCTURE WOULD PERHAPS FACE DAMAGE DUE TO ANY DEMOLITION AND THE BALANCE 2 / 3 RD STANDS TO BE D EMOLISHED. SO THE COST OF THE 2/ 3 RD PART ALSO FALLS OR DISTRIBUTED ON THE 1 / 3 RD PART AND HENCE THE ENT IRE COSTS OF RS. 4.19 CRS HAS TO BE ALLOWED BEING ACTUALLY & FACTUALLY INCURRED AT SOME POINT OF TIME. THE TOTAL ADVANCES RECEIVED IS RS.4,93,97,725/ - OF WHICH 1/3RD IS RS.1,44,07,000/ - . HENCE, REVENUE OF RS. 44,07,000 / - SHOULD BE MATCHED AGAINST EXPENDITURE RS.4,19,88,066/ - AND THIS TRANSLATES INTO A RESULTANT LOSS OF RS. 2,75,81,066/ - ROUNDED OFF TO RS. 2,75,81,000 / - AS THIS EXERCISE IS REASONABLY AND REALISTICALLY MATCHES THE COSTS WITH THE REVENUES IN A PRACTICAL AND REALISTIC TIMING FRAME AND ALSO SERVES THE PURPOSE OF JUSTICE AND ASCERTAINMENT OF REAL INCOME OF THE ASSESSES IN TAXATION. THIS IS MORE SO THAT THIS LOSS NEEDS TO BE ALLOWED AT THIS STAGE OF RECOGNIZING REVENUE IRRESPECTIVE OF THE EVENTUALITY THAT THE APPELLANT OR ANYONE ELSE MAY CHALLENGE THE DEMOLITION ORDER BEFORE THE HON'BLE SUPREME COURT AS IN THE ABSENCE OF ANY SPECIFIC ORDERS OR DIRECTIONS FROM SUPERIOR COURTS, ONE CANNOT INDEFINITELY POSTPONE TAXATION RESPONSES. HAVING SAID SO, THAT JUST AS A CASE'S PENDENCY IN A COURT DOES NOT JUSTIFY PROFITS TO BE POSTPONED FOR TAXATION PURPOSES, SO ALSO IT DOES NOT JUSTIFY LOSSES TO BE POSTPONED, UNLESS SPECIFICALLY MENTIONED BY THE SUPERIOR COURT TO THE EFFECT 'TILL THE OUTCOME OF THE CASE'. THE LOSSES SUCH AS HERE IN THE INSTANT CASE ARE CERTAINLY A LLOWABLE IN VIEW OF THE RATIO OF HON'BLE APEX COURT IN THE FAMOUS CASE OF CIT V PIARA SINGH 120 ITR 40 (SC) WHEREIN IT WAS HELD THAT THE LOSSES INCURRED BY AN ASSESSEE CARRYING HIS PECULIAR TYPE OF BUSINESS IN A REGULAR WAY HAS TO BE ALLOWED. THERE IS NO D OUBT THAT APPELLANT AS A BUILDER HAS NOT DONE ANYTHING WHICH IS NOT BEING DONE BY ANY BODY ELSE IN HIS TRADE OR BUSINESS REGULARLY. CERTAINLY THIS IS A ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 13 LOSS INCURRED BY THE APPELLANT DURING HIS REGULAR COURSE OF BUSINESS. OTHERWISE ALSO, SHOULD THAT NOT BE THE CASE, I FIND THAT IN THE APPELLANT'S CASE HEREIN, ALMOST ALL HIS PROJECTS ARE FACING COURT LITIGATIONS, THEN THERE WOULD VIRTUALLY BE NO LOSS NOR ANY PROFIT RECOGNITION. THAT IS SURELY NOT THE INTENTION OF THE LEGISLATION AND HENCE IF PROFITS ARE RECO GNIZED DESPITE ONGOING COURT LITIGATIONS, SO SHOULD LOSSES BE ALSO RECOGNIZED DES P ITE ONGOING COURT LITIGATIONS. HENCE THE LOSSES ON A/C OF THE BUILDING GAURAV GAGAN I N M/ S. NOVA NIRMAN NIGAM , ALBEIT TO A LESSER EXTENT NEED TO BE APPRECIATED AND ALLOWED. THIS ALSO TAKES CARE OF THE FACT THAT SHOULD THE DEMOLITION ORDER BE WAIVED OR QUASHED BY THE HON'BLE SUPREME COURT, THEN IN THAT EVENT, THE REVENUE GENERATED FROM THE SALE OF THE REMAINING RETAINED FLOORS WILL HAVE TO BE OFFERED FOR TAX THEN AND NO HARM O R LOSS TO THE EXCHEQUER IS CAUSED AS IT WOULD TANTAMOUNT TO A FRESH BREATH TO THE DEAD OR FINISHED PROJECT. 5.3.4 SUMMING UP THE ABOVE THE FOLLOWING RESULTS ARE ARRIVED AT OUT OF MY FINDINGS OF FACTS IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE: SUR PLUS (PROFIT) FROM 7 BUILDINGS OF M/S. NOVA NIRMAN NIGAM LEAVING RS. 1,15,03,540 / - ASIDE GAURAV GAGAN BLDG RS. 5,81,02,094 / - SURPLUS (PROFIT) FROM 4 BUILDINGS OF M/S. DIVYA DEVELOPMENTS TOTAL RS. 6,96,05,634 / - LESS : OUT OF CLAIMED COMPLETION EXPENDITURE RS. 2,39,72,000 / - LOSS ON GAURAV GAGAN RS. 2,75,81,000 / - NET PROFIT RS.1,80,52,634/ - HENCE THE ADDITION OF RS. 6,96,05,634/ - STANDS REDUCED TO RS.1, 80,52,634 / - . TO THAT EXTENT GROUND 1,3,4,5 STANDS' DISPOSED OF. THE APPELLANT GETS REL IEF OF RS. 5,15,53,000 / - . ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 14 (RELIEF :RS. 5,15,53,000/ - .) 6. THE APPELLANT HAS SOUGHT RELIEF IN GROUND NO.2 WHICH READS AS FOLLOWS : 'GROUND NO: 2 WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. AO ERRED IN ESTIMATING THE PROFIT OF M/S. NOVA ESTATE AT RS. 9,38,7717 - BASED ON AD - HOC AMOUNT OF 15% OF THE ADVANCES RECEIVED { OF RS.62,58,474/ - } IN RESPECT OF WING - A OF THE BUILDING KNOWN AS DIVYA SHIVANGAN.' 6.1 THE ASSESSING OFFICER HAS OBSERVED THAT IN THE CAS E OF THE PROPRIETARY FIRM M/S. NOVA ESTATE, THE APPELLANT WAS CONSTRUCTING SOME BUILDINGS BY THE NAME OF DIVYA SHIVANGAN AND OUT OF THE 3 WINGS, THE WORK OF WING - A (ONE OF THE WINGS) WAS COMPLETE TO THE EXTENT OF 79%. THE ADVANCE S RECEIVED FOR THIS WING - A WAS RS. 62.58 LACS. HENCE THE AO PROCEEDED TO DETERMINE THE TAXABLE PROFIT AT 15% OF THE ADVANCES I.E 15% OF RS. 62.58 LACS = RS. 9,38,771 / - . 6.2 THE AUTHORIZED REPRESENTATIVES OF THE APPELLANT CONTENDED THAT THE BASIS OF THE ASSESSING OFFICER TO ARRIVE AT ANY ARBITRARY PERCENTAGE OF 15% WAS IRRATIONAL AND UNFOUNDED AND DEVOID OF ANY LOGIC. HENCE THE APPELLANT OBJECTED TO THE SAME BESIDES RELYING ON HIS OTHER ARGUMENTS AS PER THE 2 PAPER BOOK FILED. 6.3 I HAVE GONE THROUGH THE CONTENTS OF THE IMPUGNED ASSE SSMENT ORDER, STATEMENT OF FACTS, SUBMISSIONS OF THE APPELLANT AS WELL AS MATERIAL AVAILABLE ON RECORD. I FIND THAT THE WORKING OF THE ASSESSING OFFICER IS BASED ON THE PROFIT WORKING AS DERIVED FROM THE BALANCE - SHEETS AND HENCE THE SAME HAS A LOGICAL BASI S. SO ALSO SINCE THE SAID WING - A IS COMPLETED TO THE EXTENT OF 79%, IT TANTAMOUNT TO SUBSTANTIAL COMPLETION AND HENCE TAXABLE REVENUE SHOULD BE RECOGNIZED THEREIN. HENCE, I DO ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 15 NOT FIND ANY LEGAL INFIRMITY IN THE ACTION OF LD. ASSESSING OFFICER. ACCORDINGLY , THE ADDITION OF RS. 9,38,771/ - IS UPHELD AS ANY INTERFERENCE IS UNWARRANTED IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. IN THE RESULT GROUND NO. 2 IS DISMISSED. (ADDITION CONFIRMED: RS. 9 , 38 , 771/ - ) 7. THE APPELLANT HAS SOUGHT RELIEF IN GROUN D NO.6 AND 6A WHICH READ AS UNDER: 'GROUND NO : 6 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. AO ERRED IN DISALLOWING THE EXPENDITURE OF RS. 11,82,0817 - U/S 40(A)(IA) IN RESPECT OF DIVYA VAISHNAVI PROJECT UNDERTAKEN IN THE PROPRIETARY CON CERN M/S. DIVYA DEVELOPMENT NOTWITHSTANDING THE FACT THAT YOUR APPELLANT HAS NOT CLAIMED THESE EXPENSES AGAINST ANY PROFITS IN ANY P & L A/C. GROUND NO. 6A ' IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. ACIT HAS ERRED IN DISALLOW ING THE E XPENDITURE OF RS. 7,90,197/ - U/S 40(A)(IA) IN THE PROPRIETORY FIRM M/S. DIVYA DEVELOPMENT , M/S. NOVA SPACE AND M/S. NOVA ESTATE, NOTWITHSTANDING THE FACT THAT YOUR APPELLANT HAS NOT CLAIMED THESE EXPENSES AGAINST ANY PROFITS IN ANY P & L A/C.' . SINCE BOTH THESE GROUNDS HAVE COMMON ISSUES, THE SAME ARE DISPOSED OFF JOINTLY. 7.1 THE ASSESSING OFFICER HAD OBSERVED THAT IN THE CASE OF M/S. DIVYA DEVELOPMENT S CERTAIN EXPENSES/PAYMENTS OF RS. 11,82,0817 - IN VIOLATION OF THE PROVISIONS OF THE SEC. 40(A)(IA) OF THE IT ACT, 1961, HAVE BEEN MADE AND HENCE THE SAME WERE DISALLOWED U/S 40(A)(IA). HENCE THE ADDITION OF RS. 11,82,0817 - . SO ALSO IN THE CASE OF NOVA NIRMAN NIGAN AND M/S. DIVYA DEVELOPMENTS , M/S. NOVA SPACE AND M/S. NOVA ESTAT E CERTAIN EXPENSES PAYMENTS OF R S. 790,197/ - IN VIOLATION OF SEC: 40(A)(IA) ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 16 HAVE BEEN MADE AND HENCE THE SAME WERE DISALLOWED U/S 40(A)(IA). HENCE THE ADDITION OF RS. 790,197/ - 7.2 THE APPELLANT SUBMITTED THAT NONE OF THESE EXPENSES WERE CLAIMED IN THE P & L A/C AS NO P & L A/C ITSELF WAS DRAWN UP BY THE APPELLANT AS HE HAD NOT RECOGNIZED ANY REVENUES AS PER HIS NOTES TO ACCOUNTS. THE APPELLANT STATES THAT THESE EXPENSES WERE NOT CLAIMED U/S 30 TO 38. THE APPELLANT ALSO STATED THAT SEC: 40(A)(IA) STATES THAT' NOTWITHSTANDING ANYTHING TO TH E CONTRARY IN SECTIONS 30 TO 38 ...' AND THAT SINCE THESE EXPENSES WERE NOT CLAIMED IN ANY P & L TO DETERMINE ANY TAXABLE PROFIT, THE SAME CANNOT BE DIS - ALLOWED U/S 40(A)(IA). 7.3 I HAVE GONE THROUGH THE CONTENTS OF THE IMPUGNED ASSESSMENT ORDER, STATEMEN T OF FACTS, SUBMISSIONS OF THE APPELLANT AS WELL AS MATERIAL AVAILABLE ON RECORD ON THIS GROUND. I FIND THAT ONCE AGAIN THE FACTS STAND UN - CONTROVERTED. THERE IS NO DISPUTE TO THE FACT THAT TDS HAS NOT BEEN DEDUCTED AND ALSO TO THE FACT THAT THE SAID EXPEN SES STAND COVERED U/S 30 TO 38. HOWEVER, IT IS ALSO TO BE NOTED THAT DISALLOWANCE OF AN EXPENSE CAN BE UPHELD ONLY IF THAT EXPENSE IS CLAIMED AGAINST TAXABLE PROFITS IN ANY PROFIT/LOSS A/C AS CLEAR FROM THE OPENING LINES OF THE SEC. 40 ITSELF. THE SAME HAS NOT BEEN DONE HERE. WHEN AN EXPENSE HAS NOT BEEN CLAIMED OR CHARGED IN THE PROFIT & LOSS A/C, THE SAME CANNOT BE DISALLOWED. H ENCE, THE SAID DISALLOWANCE OF RS.11,82,081/ - AND RS. 790,197/ - U/S 40(A)(IA) STAND UNWARRANTED AND NOT IN ACCORDANCE WITH LAW. TO THAT EXTENT THE SAID ADDITIONS ARE DELETED IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE AND BOTH THE SAID GROUNDS ARE ALLOWED. 5 . AGAINST THE ABOVE ORDER OF C IT(A) BOTH ASSESSEE AND REVENUE ARE IN FURTHER APPEAL BEFORE US. ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 17 6. WE HAVE CONSIDER ED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS CITED BY LEARNED AR AND DR DURING THE COURSE OF HEARING BEFORE US IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE. FROM THE RECORD WE FOUND THAT ASSESSEE IS IN THE BUSINESS OF CONSTRUCTION. DURING THE COURSE OF SCRUTINY ASSESSMENT BOOKS OF ACCOUNTS WERE NOT REJECTED NOR ANY DEFECT IN THE ACCOU N TING SYST EM FOUND BY THE AO. THE AO HAS RELIED ON THE BALANCE - SHEET FIGURES DRAWN FROM THE AUDITED BOOKS OF ACCOUNTS AND HAS NOT CHALLENGED THEM. IF THE BOOKS RESULTS ARE NOT REJECTED BY THE AO AND NO CHALLENGE TO THE ACCOUNTS IS FOUND NOR ANY WHISPER OF ANY DEFEC T IN THE ACCOUNTING SYSTEM OR UNDER - ESTIMATION OF PROFITS, THE ISSUE HERE IS TIMING OF RECOGNITION OF REVENUE AND NOR UNDERESTIMATION . 7. FROM THE RECORD, WE ALSO FOUND THAT ASSESSEE WAS FOLLOWING PROJECT COMPLETION METHOD IN RESPECT OF BOTH THE FIRMS. AS SESSEE HAD TWO FIRMS NAMELY DIVYA DEVELOPMENTS CONSISTING OF 4 BUILDINGS NAMELY DIVYA VINAYAK, DIVYA SMRUTI, DIVYA SMIT & DIVYA CHINTAN. THE TOTAL ADVANCES RECEIVE D FROM CUSTOMERS FOR ALL THESE 4 BUILDINGS WAS RS. 24,29,79,162/ - AND EXPENSES ON WIP WAS RS. 18,48,77,068/ - AS PER TOTALS OF TABLE - 2 PG: 3 OF THE IMPUGNED ASSESSMENT ORDER AND CHART GIVEN IN THE COURSE OF HEARING. THE ASSESSEE DID NOT RECOGNISE THE INCOME FROM THESE 4 BUILDINGS BECAUSE OF PENDING COURT MATTERS / L ITIGATIONS IN THESE PROJECTS. T HIS LITIGATION IS CLEAR FROM THE AUDITORS NOTES ON PB: 187/188 AND DETAILS ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 18 OF LITIGATIONS PB : 41 TO 43 & ALSO IN THE IMPUGNED ASST ORDER PG:7 . FROM THE RECORD, WE ALSO FOUND THAT POSSESSION OF 3 BUILDINGS NAMELY DIVYA VINAYAK, DIVYA SMRUTI, DIVYA SMIT WER E GIVEN IN FY 07 - 08 I.E ASST YEAR : 08 - 09. AO MISTAKENLY TREATED IN PARA#5 OF IMPUGNED ASST. ORDER, THAT POSSESSION WAS GIVEN IN F.Y.2006 - 07 I.E., A.Y 2007 - 08 . THE AO TOOK DIFFERENCE OF ADVANCES & EXP AS TAXABLE PROFIT I.E 24,29,79,162 MINUS 18,48,77,068 = RS. 5,81,02,094/ - (NET PROFIT). 8. IT WAS PLEADED BY ASSESSEE BEFORE THE AO THAT IF SUCH PROFITS BEING TAKEN THAN ESTIMATED PROJECTED EXPENDITURE OF RS.3.05 CRORES IN RESPECT OF G ETTING OCCUPATION CERTIFICATE (OC) FROM MUNICIP AL CORPORATION OF GREATER MUMBAI MCGM, BUILDING COMPOUND WALLS, COVERING NALA, REHABILITATING EXISTING TENANTS ETC SHOULD BE ALLOWED EVEN IF NO PROVISION MADE IN BOOKS OF ACCOUNTS. REASON FOR NOT MAKING PROVISION IN BOOKS OF RS. 3.05 CRS WAS NON RECOGNITION OF PROFIT BY ASSESSEE . THESE ESTIMATED EXPENDITURES WERE ESSENTIAL TO COMPLETE THE PROJECT AND WERE NOT IN THE NATURE OF FINES OR PENALTIES VIOLATIVE OF SEC. 37(1). ' 9. IN RESPECT OF M/S.NOVA NIRMAN NIGAM, WE FOUND THAT IT IS CONSISTING OF 7 BUILDINGS ON PG: 5 OF ASST ORDER + 8 TH BLDG GAURAV GAGAN. THE TOTAL EXPENDITURE ON THESE BUILDINGS WERE AS FOLLOWS ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 19 DETAILS ADVANCES EXP NET PROFIT RECOGNISED BY AO 7 BUILDINGS 16,90,64,658/ - 15,75,61,1I8/ - 1,15,03,540/ - GAURAV GAGAN 4,93,97,725/ - 4,19,88,066/ - NOT RECOGNISED BY AO TOTAL 21,84,62,383/ - 19,95,49,184/ - 10. THE ASSESSEE DID NOT RECOGNISE THE INCOME FROM THESE 7 BUILDINGS BECAUSE OF PENDING COURT MATTERS/LITIGATIONS IN THESE PROJECTS ESP GAURAV GAGAN DEMOLITION ORDER OF 8 TH TO 24 FLOOR (2/3 RD OF THE BLDG) BY MCGM . IT IS CLEAR FROM PAGE 20 OF THE ASSESSMENT ORDER. AUDITORS HAVE ALSO MENTIONED THE DETAILS OF LITIGATION. ALL THESE 8 BLDGS WERE IN A COMMON LAYOUT AT KANDIVLI. POSSESSION OF THESE 7 BUILDINGS GIVEN IN FY 06 - 07 . 11. DURING THE COURSE OF SCRUTINY ASSESSMENT , T HE AO TOOK PROFIT OF RS. 1,15,03,540/ - OF THE 7 BUILD INGS , ON PICK & CHOOSE METHOD B ECAUSE THE AO DID NOT COMPUTE PROFIT OR LOSSES OF THE 8 TH BUILDING GAURAV GAGAN DUE TO DEMOLITION ORDER AND BECAUSE POSSESSION NOT GIVEN. IF AS PER AO POSSE SSION IS TO BE THE BASIS OF RECOGNISING PROFITS, THEN FOR 3 BUILDINGS OF DIVYA DEVELOPMENTS NAMELY DIVYA VINAYAK, DIVYA SMRUTI, DIVYA SMIT, POSSESSION WAS GIVEN IN FY: 0 7 - 08 I.E ASST YEAR: 08 - 09. HENCE THEIR PROFITS ALSO SHOULD NOT BE RECOGNISED IN THIS YE AR. IT WAS CONTENTION OF ASSESSEE BEFORE THE AO THAT IF SUCH PROFITS ARE BEING TAKEN, THEN ESTIMATED PROJECTED EXPENDITURE OF RS. 75 ON GETTING OCCUPATION CERTIFICATE (OC) FROM MUNICIPAL CORPORATION OF GREATER MUMBAI, MCGM , BUILDING COMPOUND WALLS FOR THE 7 BUILDINGS SHOULD ALSO BE ALLOWED , EVEN IF NO ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 20 PROVISION MADE IN BOOKS OF ACCOUNTS. REASON FOR NOT MAKING PROVISION OF RS. 75 LAKHS WAS NON RECOGNITION OF PROFIT. THESE ESTIMATED EXPENDITURES WERE ESSENTIAL TO COMPLETE THE PROJECT AND WERE NOT IN THE NAT URE OF FINES OR PENALTIES VIOLATIVE OF SEC. 37(L). ASSESSEE ALSO CLAIMED TO COMPUTE PROFITS/LOSSES OF GAURAV GAGAN BECAUSE THAT BUILDING WAS ALMOST COMPLETE AND AO WAS DOING A PICK & SHOOSE IN NOT TAKING THIS PROJECTS PROFIT, RATHER LOSSES, ONLY DUE TO POS SESSION ISSUE OR DUE TO DEMOLITION ORDER. 12. AS PER OUR CONSIDERED VIEW , DUE TO COURT LITIGATION SIGNIFICANT RISK AND REWARD WERE NOT PASSED TO THE CUSTOMER. HENCE TECHNICALLY THE BUILDING SERVICES WERE NOT COMPLETE. ONLY ON THE SUBSTANTIAL COMPLETION OF CONSTRUCTION, TAXABLE INCOME HAS TO BE RECOGNIZED BY THE AO, THEN JUSTICE AND EQUITY ALSO DEMANDS THAT THE FAIR SHARE OF PROBABLE EXPENSES ( OF 3.05 CRS + 75 LAKHS I.E RS. 3.80 CRS ) , DIRECTLY RELATED TO THE PROJECT, BE ALSO ALLOWED AGAINST THE REVENUE S SO AS TO ALLOW MATCHING OF COSTS WITH REVENUES, THOUGH NO PROVISION WAS MADE IN THE ACCOUNTS. BESIDES THESE EXPENDITURES PENDING ON THE VARIOUS PROJECTS ( RS. 3.80 CRORES ) COMES TO HARDLY ABOUT 6 % TO 9% OF THE RELATED PROJECT EXPENDITURE, WHICH ARE REA LISTIC. IF THE EXPENDITURE OF RS. 3.80 CRS WOULD NOT BE ALLOWED TO CLAIM THIS EXPENDITURE LATER BECAUSE THE RELATED PROJECT ( DIVYA DEVELOPMENT OR NOVA NIRMAN ) WOULD HAVE ALREADY BEEN TAXED BY THEN (AS IN AY: 07 - 08 NOW) AND LATER AO WOULD SAY NO INCOME SO WHY THIS EXPENDITURE ?? EVEN IF THE ASSESSEE MAKES NO PROVISION, STILL EXPENDITURE CAN BE ALLOWED ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 21 KEEPING IN VIEW THE FACTS & CIRCUMSTANCES OF ASSESSEES CASE AND NATURE OF ITS BUSINESS . ANY BUILDER HAS TO OBTAIN OCCUPATION CERTIFICATE (OC) FROM MCGM AND BUI LD A COMPOUND WALL. THESE ARE NOT INCURRED TO CORRECT ILLEGALITIES NOR ARE IN VIOLATION OF THE LAW. ALL THIS WAS NOT APPRECIATED BY THE AO. 13. IN THIS REGARD RELIANCE CAN BE PLACED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF KEDARNATH J UTE MFG CO LTD VS CIT [ (1971) 82 ITR 363 IN THIS CASE ASSESSEE FILED REVISED RETURN CLAIMING SALES TAX DEMAND AS PROVISION EXPENDITURE EVEN THOUGH ASSESSEE HAD FILED SALES TAX APPEAL AO DID NOT ALLOW SUCH EXP BECAUSE NO PROVISION WAS MADE IN THE ASSEESSE E S BOOKS OF ACCOUNTS AND BESIDES SALES TAX APPEAL WAS PENDING ~ SC ALLOWED. SC SAID ' WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING THERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN THE BOOKS OF ACCOUNTS BE DECISIVE OR CONCLUISVE IN THE MATTER. 14. RELIANCE CAN ALSO BE PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT LTD V/S CIT ( 2009) 223 CTR 425 (SC) WHICH SPEAKS OF PROVISIONING COMES TO THE RESCUE OF THE ASSESSEE IN SPIRITS AND ESSENCE. DESCRIBES HOW PROVISIONS CAN BE ALLOWED AS EXPENDITURE . ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 22 15. IN THE CASE OF METAL BOX CO. 73 ITR 0053, HONBLE SUPREME COURT HELD THAT PROVISION S MADE AGAINST ANTICIPATED LOSSES AND CONTINGENCIES ARE CHARGES AGAINST PROFITS AND THEREFORE TO BE TAKEN INTO ACCOUNT AGAINST GROSS RECEIPTS IN THE P & L A/'C & B/SHEET . 16. IN THE CASE OF BHARAT EARTH MOVERS 245 ITR 0428, HONBLE SUPREME COURT HELD TH AT IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALHTOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE . 17. AFTER CONSIDERING VARIOUS JUDICIAL PRONOUNCEMENTS, ITAT MUMBAI BENCH IN THE CASE OF SURESH WADHWA VIDE ORDER DATED 02/08/2013 OBSERVED THAT C ONSERVATISM & PRUDENCE WHICH ARE FUNDAMENTAL ACCOUNTING ASSUMPTIONS WOULD SUGGEST PROVID ING FOR ALL KNOWN LIABILITIES. FURTHER IN CASE OF A MULTI YEAR PROJECT , REASONABLE & INFOR MED PROVISIONS QUA ESCALATION AND CONTINGENCIES MAY BE REQUIRED . THE COST OF PROJECT REMAINING TO BE EXECUTED IS TO BE ESTIMATED BASED ON TH E BEST JUDGEMENT IN LIGHT OF THE INFORMATION AVAILABLE. FURTHER AS AFORESTATED A PROVISION FOR CONTINGENCIES OF SA Y 5% TO 10% FOR COSTS YET TO INCURRED, COULD BE PROVIDED. 18. C BDT NOTIFICATION NO. 9969 DT. 25 - 1 - 1996 ON ACCOUNTING - STANDARDS STATES THAT PRUDENCE - PROVISIONS SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMIN ED WITH CERTAINTY & REPRESENTS ONLY AT BEST ESTIMATE IN THE LIGHT OF AVAI L ABLE INFORMATION . FURTHERMORE, HONBLE ITAT IN THE CASE OF MANISH BUILDERS VIDE ORDER DATED 30/12/2011 IN ITA NO.4421/MUM/2008 OBSERVED THAT ONCE THE INCOME FROM THE PROJECT IS TAXE D, THE ASSESSEE WILL HAVE NO OCCASION TO CLAIM EXPENSES RELATING TO THAT PROJECT IN A LATER ASSESSMENT YEAR. ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 23 19. IN VIEW OF THE ABOVE PROPOSITION OF LAW IF TAXABLE PROFITS HAS TO BE RECOGNISED BY AO, THEN SIMULTANEOUSLY THE PROVISION OF ESTIMATED EXPENDIT URE FOR COMPLETING THE SAME PROJECTS SHOULD ALSO BE RECOGNISED EVEN IF NO PROVISION MADE IN BOOKS BECAUSE THE ASSESSEE HAD AT THE TIME OF AUDIT NOT TAKEN TAXABLE PROFITS AS PER ITS VIEW, HENCE NOT MADE PROVISIONS THEN. CONCEPT OF MATCHING COSTS WITH REVENU E IS STRESSED UPON. HOWEVER, DURING COURSE OF ASSESSMENT THE AO RELIED ON ACCOUNTING STANDARD AS - 7 FOR REVENUE RECOGNITION. HOWEVER AS - 7 IS APPLICABLE FOR CONTRACTORS AND HAS NO APPLICATION FOR BUILDERS. FURTHER AS - 7 IS NOT NOTIFIED U/S 145(2) AND NEITHER IS AS - 4 & 29 WHICH WAS RELIED BY AO. EVEN OTHERWISE AS PER PARA # 21 AND 31 OF AS - 7, AN EXPECTED LOSS ON THE CONSTRUCTION CONTRACT SHOULD BE RECOGNIZED AS AN EXPENSE IMMEDIATELY IN ACCORDANCE WITH PARA # 35. FURTHER AS PER PARA # 35 OF AS - 7 (PB: 27 ) WHEN IT IS PROBABLE THAT TOTAL CONTRACT COST WILL EXCEED TOTAL CONTRACT REVENUE, THE EXPECTED LOSS SHOULD BE RECOGNIZED AS AN EXPENSE IMMEDIATELY . 20. WE FOUND THAT AO HAS ALSO RELIED ON AS - 9. BUT IN PARA # 12 OF AS - 9 IT IS STATED THAT PERFORMANCE SHOULD BE REGARDED AS BEING ACHIEVED WHEN NO SIGNIFICANT UNCERTAINTY EXISTS REGARDING THE AMOUNT OF THE CONSIDERATION THAT WILL BE DERIVED FROM RENDERING TH E SERVICE. AO ALSO RELIED ON AS - 4 : CONTINGENCIES & EVENTS OCCURRING AFTER THE B/SHEET DATE AND AS - 29 PROVISI ONS , CONTINGENT LIABILITIES AND CONTINGENT ASSETS. 21. THE AO STATES IN PARA C.10 THAT NO SUCH PROVISION OF RS. 3.80 CRS OF EXPENDITURE WAS MADE IN THE BOOKS OF ACCOUNTS. FURTHER AO STATES IN PARA # C.LL THAT EVEN IF SUCH EXPENDITURE OF 3.80 CRS TO BE ALL OWED THE SAME ARE VIOLATIVE OF SEC 37(1) EXP LANATION AND HENCE NEEDS TO BE DISALLOWED . ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 24 22. IN THE INSTANT CASE BEFORE US SINCE THE INCOME WAS NOT RECOGNIZED DUE TO SITUATION DISCUSSED ABOVE, QUESTION OF CREATING ANY PROVISION FOR ANY EXPENDITURE OF RS.3 .50 CRORES DID NOT ARISE. HOWEVER, IF THE LD. ACIT PROPOSED TO CONSTRUCT A P & L A/C DUE TO VIRTUAL COMPLETION OF THE BLDGS, THEN IT WOULD ONLY BE FAIR AND JUST TO ALSO ALLOW THE EXPENDITURES OF RS. 3.80 CRS PENDING TOWARDS THE SAID PROJECTS. IT IS PERTINE NT TO NOTE THAT NONE OF THESE EXPENDITURES ON OBTAINING OC, CONSTRUCTING COMPOUND WALLS, CONSTRUCTING NALLAHS OR REHABILITATING TENANTS ETC WAS VIOLATIVE OF EXPLANATION TO SEC - 37(L), SINCE THEY WERE ROUTINE FINALIZATION EXPENSES LIKE DP ROAD, COVERING THE NALLAHS, REHABILITATING THE TENANTS ETC. THE DETAILED LIST OF SUCH EXPENDITURE WAS FILED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AND ALSO PLACED BEFORE US IN THE PAPER BOOK. HOWEVER THE AO GROSSLY MISINTERPRETED THEIR JUSTIFICATION AS VIOLATION OF DE VELOPMENT CONSTRUCTIONS (DC) REGULATIONS OR MAHARASHTRA REGIONAL TOWN PLANNING ACT (MRTP). THE AO HAS NOT DOUBTED THE VERACITY OR GENUINENESS OF THESE EXPENDITURES OF RS. 3.80 CRS BUT HAS ONLY TREATED THEM AS VIOLATIVE OF EXPLANATION TO SEC - 37(1) AND THE SAME STANDS REBUTTED BY ASSESSEE . IN FACT THE AO HAS IN A WAY ACCEPTED THIS PROPOSITION IN PARA # C.6 ON PG : 14 OF THE ORDER. THE AO HAS NOT CONTESTED OR REBUTTED THE QUANTUM OF THE PROBABLE PENDING EXPENDITURE OF RS. 3.80 CRORES BUT HAS ONLY DENIED THEM B Y APPLYING EXPLANATION TO SEC. 37(L) AND THE LACK OF BOOK ENTRIES. HENCE ON THE QUANTUM FRONT THE SAID EXPENSES GO UNCHALLENGED. 23. WE ALSO FOUND THAT THERE IS NO VIOLATION OF EXPLANATION TO SECTION 37(1) AS THEY ARE NEITHER ANY FINE NOR PENALTY. IN THE CASE OF JAI SURGICALS, ITAT DELHI BENCH VIDE ORDER DATED 26/06/2014 HELD THAT A LINE OF DISTINCTION NEEDS TO BE DRAWN BETWEEN THE CASES WHERE THE PURPOSE OF THE EXPE NDITURE INCURRED ITSELF IS UNLAWFUL ON ONE HAND AND THE CASES WHERE THE PURPOSE OF EXPENDIT URE IS LAWFUL BUT THERE IS SOME LA PSE IN COMPLYING WITH THE PROCED URAL PROVISIONS FOR INCURRING SU CH EXPENDITURE ON THE OTHER. ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 25 THE CRUX OF THE MATTER IS THAT THE PURPOSE OF THE EXPENDITURE INCURRED SHOULD BE VIEWED IN ISOLATION UNBOTHERED BY ANYTHING ELSE FOR DETERMINING WHETHER OR NOT THE EXPLANATION IS ATTRACTED . OUT OF THIS EXPENDITURE, CIT(A) HAS ALLOWED RS.2,39,72,000/ - ON RS.3.80 CRORES WHICH WORKS OUT TO BE RS.63% OF CLAIM EXPENDITURE. AFTER CONSIDERI NG NATURE OF EXPENDITURE WHICH ARE ESSENTIAL LY REQ UIRED TO BE INCURRED TO EARN REVENUE FROM SALE OF FLAT VIS - - VIS NATURE OF ASSESSEES BUSINESS BEING A BUILDER, W E MODIFY THE ORDER OF CIT(A) AND DIRECT AO TO ALLOW 80% OF TH ESE EXPENDITURE WHICH WORKS OUT TO RS. 2,92,50,000/ - . THUS, IN PLACE OF EXPENDITURE ALLOWED BY CIT(A) AT RS.2,39,72,000/ - , WE DIRECT THE AO TO ALLOW EXPENDITURE OF RS.2,92,50,000/ - WHICH WORKS OUT TO BE 80% OF THE EXPENDITURE SO CLAIMED. WE DIRECT ACCORDINGLY. 24. WITH REGARD TO THE EXPENDITURE INCURRED IN RESPECT OF DEMOLITION OF GAURA V GAGAN BUILDING, THE AO DID NOT RECOGNIZE THE PROFITS HERE AS PER HIS LOGIC IN PARA C.14 INTERNAL PG. 20 OF ASSESSMENT ORDER, IF POSSESSION IS THE BASIS , THEN IN DIVYA DEVELOPMENTS IN 3 BUILDINGS NO POSSESSION WAS GIVEN IN APPEAL YEAR (FY: 06 - 07) THEN W H Y PROFITS WAS TAKEN BY AO??. IN IT ACT, PROFITS INCLUDES LOSSES AND THE ASSESSEE CAN CLAIM LOSSES GAURAV GAGAN (8 TH BLDG OF NOVA NIRMNN NIGNM) ON THE SAME LOGIC BY WHICH THE AO RECOGNISED PROFITS IN OTHER PROJECTS OF DIVYA DEVELOPMENTS (4 BUILDIN GS) & NOVA NIRMARI NIGAM (7 BUILDINGS). AO CANNOT DO PICK & CHOSE TO SUIT HIS LOGIC JUST BECAUSE LOSSES WILL HAVE TO RECOGNISED IN GAURAV GAGAN. EVEN OTHERWISE AS PER AS - 7 AND CBDT NOTIFICATION LOSSES HAVE TO - BE RECOGNIZED. 25. AS PER OUR CONSID ERED VIEW IN THE IMPUGNED ORDER, CIT(A) APPRECIATED ALL THE FACTS AND CIRCUMSTANCES AND THEREAFTER CALCULATED PROFITS / LOSSES I.E., LOSSES OF RS.2,75,81,000/ - . AS PER FINDING GIVEN AT PAGE 15 TO 18 OF HIS APPELLATE ORDER, THE WORKING OF CIT(A) WAS AS UNDER: - ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 26 TO E XPENDITURE 4,19,88,000 BY SALES REVENUE TO BE TAKEN ONLY TO THE EXTENT OF L/3 RD OF THE BLDG FOR FULL BLDG INCL THE 2/3 RD PART OF DEMOLITION L/3 RD OF 4 : 93,97,725 RS. 1,44,07,000 BECAUSE 2/3 RD BLDG FOR DEMOLITION BY NET LOSS RS. 2,75 ,81,000 26. SINCE 2/3 RD OF THE GAURAV GAGAN ATTRACTED DEMOLITION , REVENUES COULD NOT BE RECOGNISED FOR THE 2/3 RD PART ON THE SAME DOCTRINE OF UNCERTAINTY (AS - 9) ALSO. AO FURTHER STATES THAT CONSTRUCTION OF GAURAV GAGAN WAS VIOLATIVE OF THE LAW BECAUSE OF DEMOLITION O RDER FROM 8 TH TO 24 TH FLOORS (I.E 2/3 RD OF THE BUILDING ) WAS GIVEN BY MCGM & HENCE ALSO EXPENDITURE OF RS. 4,19.88,000/ - SHOULD NOT BE ALLOWED U/S 37(L). AO STATES THAT EVEN BOMBAY HIGH COURT CONFIRMED DEMOLITION , HENCE EXPENDITURE OF RS. 4.19 WAS VIOLAT IVE OF LAW. 27. IN THIS REGARD WE OBSERVE THAT IN CONSTRUCTION INDUSTRY, IN ANTICIPATION OF CONSTRUCTION PERMISSIONS AND TDK ETC , ACTUAL CONSTRUCTION WORK COMMENCES. IF AT ALL IRREGULARITIES ARE FOUND THEY CAN BE REGULARISED. IN ASSESSEE S CASE, IRREGUL ARITIES OF TDR ETC WERE FOUND BUT MCGM ORDERED DEMOLITION FOR 8 TH TO 24 FLOORS ( 2/3 RD OF THE BUILDING ). IN FACT BOMBAY HIGH COURT ORDER IN WP 379 OF 2003, ALONG WITH 154 OTHER BUILDINGS IN .MUMBAI REFERRED THESE BLDG (INCL GAURAV GAGAN) TO MUNICIPAL CO MMISSIONER FOR REGULARIZATIONS IF POSSIBLE. BUT MCGM COULD NOT REGULARISE DUE TO SOME DOCUMENTS RELATED DEFICIENCIES DOCUMENTS. MATTERS TRAVELLED TO SC AND SC VIDE ORDER DT : 17 - 11 - 15 ACCEPTED REGULARISATION OF GAURAV G AGAN BY MCGM VIDE MCGM ORDER DT. 12 - 10 - 15. HENCE GAURAV GAGAN WAS A CASE OF REGULARISATION & NOT OF ILLEGALITY. BUT JUST AS TAXABLE PROFITS RECOGNITION IN INCOME - TAX DOES NOT WAIT TILL FINAL OUTCOME OF ANY COURT CASE (LIKE IN OTHER BLDG OF DIVYA DEVELOPMENT & NOVA NIRMAN ), LOSSES RECOGNITION AS FOR ASST YEAR: 07 - 08 ( SUB J ECT YEAR) CANNOT BE POSTPONED OR NOT BE RECOGNSIED, JUST BECAUSE OF HIGH COURT OR SC CASES OR ITS OUTCOME. EVEN OTHERWISE, IF LOSSES OF GAURAV GAGAN IS ALLOWED IN ASST YEAR: 07 - 08, LATER ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 27 ON AS AND WHEN IT IS REGULARISED (IF DON E), THE PROFITS WILL BE OFFERED FOR TAX IN THAT YEAR AND HENCE NO LOSS TO THE IT DEPT/REVENUE WILL BE CAUSED. 28. AFTER VERIFYING THE NATURE OF EXPENDITURE SO INCURRED ON CONSTR UCTION COSTS OF RS. 4,19,88,000/ - WE OBSERVE THAT THESE EXPENDITURE ARE NOT I N THE NAT URE OF FINE OR PENALTY OR PROHIB ITED BY LAW SINCE THIS EXPENDITURE OF RS. 4.19 CRS WAS INCURRED ON PURCHASE OF CEMENT, STEEL, SAND, ST ONE AND SUCH OTHER CONSTRUCTION MATERIAL, LABOUR CHARGES, VARIOUS KINDS OF CONSTRUCTION HARDWARE LIKE WOOD ETC, V ARIOUS TYPES OF EQUIPMENT RENTALS ETC. AT THE POINT OF TIME WHEN THIS EXPENDITURE WAS ACTUALLY INCURRED THERE WAS NO OFFENCE OR ILLEGALITY DONE. NO SUCH OBSERVATIONS BY AO. HENCE IT IS NOT VIOLATIVE OF EXPLANATION TO SEC. 37(1). RELY ON JAI SURGICALS CASE. AT THE POINT OF TIME WHEN THIS EXPENDITURE WAS ACTUALLY INCURRED THERE WAS NO OFFENCE OR ILLEGALITY DONE. 29. FOR THIS PURPOSE, RELIANCE CAN BE PLACED ON THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF JACOBS ENGINEERING ( ITA NO. 3357MUM72007 DT : ( 26 - 5 - 09 ) WHEREIN IT WAS DECIDED THAT FORESEEABLE LOSSES HAVE TO BE ALLOWED. THE ITAT RELIED ON DELHI HC CASE OF WOODWARD! GOVERNORS (2007) 294 ITR 0451 - WHILE COMPUTING BUSINESS INCOME, MERCANTILE SYSTEM OF ACCOUNTING HAS TO BE FOLLOWED AND PROVIS ION FOR ANTICIPATED LOSSES AND FOR E SEEABLE LIABILITIE S HAS TO BE TAKEN INTO ACCOUNT PROVISIONS SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT THEREOF CANNOT BE DETERMINED WITH CERTAINTY. IN VIEW OF THE A BOVE DISCUSSION, WE CONC LUDE THAT FINDINGS GIVEN BY THE CIT(A) ARE AS PER MATERIAL ON RECORD , HOWEVER WE MODIFY THE ORDER OF CIT(A) JUST TO QUANTIFY THE EXPENDITURE REQUIRED TO BE ALLOWED AGAINST THE REVENUE FROM SALE OF FLAT, WHICH AS PER THE CIT(A) WAS 63% OF THE CLAIM OF EXPE NDITURE, WE DIRECT THE AO TO ALLOW 80% OF SUCH EXPENSES AS DISCUSSED BY US AT PARA 23 OF OUR ORDER HEREINABOVE. WE DIRECT ACCORDINGLY. ITA NO.8167/MUM/2010 & ITA NO.105/MUM/2011 SHRI ARUN DAMJI GADA 28 3 0 . IN THE RESULT, APPEAL FILED BY THE REVENUE IS DISMISSED WHEREAS APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART IN TERMS INDICATED HEREINABOVE. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 19 / 01 /201 8 SD/ - ( RAVISH SOOD ) SD/ - ( R.C.SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 19 / 01 /201 8 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//