NAHALCHAND LALOOCHAND PVT LTD, MUMBAI V. PRINCIPLE COMMISSIONER OF INCOME TAX-5, MUMBAI

ITA 1143/MUM/2023

AI Insights

The case involves Nahalchand Laloochand Pvt. Ltd., a builder and developer, appealing against an order by the Principal Commissioner of Income Tax, Mumbai-5, which invoked section 263 of the Income Tax Act, 1961. The PCIT's order was based on the grounds that the assessee had not offered income from the sale of flats on a percentage completion method as required under section 43CB, despite having reported significant income from the sale of immovable property. The Tribunal examined whether the PCIT was correct in invoking section 263 and found that the assessee, being a real estate developer and not a construction contractor, was not required to apply the percentage of completion method in the same way, leading to the setting aside of the PCIT's order.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 126974 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 21-06-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 09-04-2023
• Other Referred Cases: Awadhesh Builders Vs. ITO, 37 SOT 122 (Mum)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S V.G.GINDE
• Keywords: Capital Gains; FORM 26AS
• Section: 263; 142(1)

Judgement Text

आयकर य कर म ु ंबई ठ “ब ”, म ु ंबई ठ क , य यक य ए ं गगन गोय , ेख क र य के म$ IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B ”, MUMBAI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER & SHRI GAGAN GOYAL, ACCOUNTANT MEMBER आ ं.1143/म ु ं/ 2023 ( न. .2018-19) ITA NO. 1143/MUM/2023(A.Y. 2018-19) Nahalchand Laloochand Pvt.Ltd. Ground Floor, Kantilal House, 14, Mama Parmanand Marg, Opera House, Mumbai – 400 004. PAN: AAACN-4472-C ...... * /Appellant बन म Vs. Principal Commissioner of Income Tax,Mumbai -5, Room No.515, 5 th Floor, Aaykar Bhavan, MK Road, Mumbai – 400 051. ..... + , /Respondent * - र / Appellant by : S/Shri V.G.Ginde & Kumar Kale + , - र /Respondent by : Shri C.T.Mathews ु न ई क. , / Date of hearing : 22/06/2023 /ो0 क. , / Date of pronouncement : 28/06/2023 आदेश/ ORDER PER VIKAS AWASTHY, JM: This appeal by the assessee is directed against the order of Principal Commissioner of Income Tax, Mumbai-5 [in short ‘the PCIT’] dated 27/03/2023 passed u/s. 263 of the Income Tax Act, 1961 [in short ‘the Act’], for the Assessment Year 2018-19. 2. Shri V.G.Ginde appearing on behalf of the assessee narrating facts of the case submitted that : The assessee is a builder and developer. The PCIT 2 ITA NO. 1143/MUM/2023(A.Y. 2018-19) invoked the provisions of section 263 of the Act on the ground that as per Form 26 AS the assessee has earned income of Rs.66.00 crores from sale of immovable property, but has offered Rs. 3.56 crores in the return of income. The assessee has failed to offer income on sale of flat on percentage completion method as per the provisions of section 43CB of the Act. The Assessing Officer has failed to examine the issue in light of the provisions of section 43CB of the Act, hence, the assessment order is erroneous in so far as it is prejudicial to the interest of Revenue. 2.1 The ld. Authorized Representative of the assessee submitted that the assessee is following project completion method for the purpose of recognizing the profits. The assessee filed its return of income declaring total income Rs.1,40,36,123/-. The case of the assessee was selected for scrutiny under CASS on following issues: (i) Income from Real Estate Business. (ii) Unsecured Loans. (iii) Sales Turnover / Receipts. The Assessing Officer issued notice u/s. 142(1) dated 21/12/2020 to examine the aforesaid issues. A specific query was raised by the Assessing Officer vide aforesaid notice with regard to: (i) details of advance received from customers with respective property number, status of sale till date (Question No.5); (ii) (ii) Reconciliation of income with Form 26AS (Question No.12). The assessee furnished detailed reply to the said notice on 04/07/2021. After having examined the documents furnished by the assessee, no addition was 3 ITA NO. 1143/MUM/2023(A.Y. 2018-19) made by the Assessing Officer in respect of the amounts received by the assessee from customers as advance for purchase of flats. Though the Assessing Officer made addition on other isssues viz. notional rent received on flats held as stock-in-trade. The ld. Authorized Representative of the assessee submitted that the assessee has developed various housing projects. The advances for flats received during the period relevant to the assessment year under appeal were in respect of housing project “N.L.Aryavarta”. The list of all projects carried out by the assessee were furnished to the Assessing Officer during the assessment proceedings and in the submissions made before Assessing Officer, it was specifically pointed that “N.L.Aryavarta” is under construction building. The assessee is following project completion method for recognizing revenue of an under construction project. Hence, all demand notices raised towards sale of under construction flats are shown under the head “advances from customers”. The ld. Authorized Representative of the assessee submitted that a perusal of section 43CB would show that the said section applies to the construction contracts. The assessee is not construction contractor but a developer and builder. There is a difference between construction contractor and developer builder. As per the provisions of section 43CB it is mandatory for the construction contractors to offer income on the basis of percentage completion method, whereas, the builder developers offer income from project on the basis of project completion method. He submitted that prime difference between construction contractors and builder developers is that of the risk. The profit of the contractor depends upon the quantum of work done, whereas the Real Estate developer earns the profit only when the project is complete and flats are 4 ITA NO. 1143/MUM/2023(A.Y. 2018-19) sold. The developer is exposed to the risk of loss incase project is abandoned or the flats remain unsold. On the contrary, contractor has no such risk. The contractor will receive its entire payment on completion of contract of construction. In support of his submissions he placed reliance on the decision in the case of Awadhesh Builders Vs. ITO, 37 SOT 122 (Mum). ”. He finally submitted that entire income from the said project was offered to tax in Assessment Year 2019-20, hence, there is no loss to the Revenue. The PCIT has erred in holding that the assessment order is erroneous. 3, Per contra, Shri C.T.Mathews representing the Department vehemently defended the impugned order and prayed for dismissing appeal of the assessee. The Ld. Departmental Representative submitted that assessment order is erroneous and prejudicial to the interest of Revenue as section 43CB of the Act as well as, ICDS-III require the assessee to offer income on percentage completion method, whereas the assessee is following project completion method, the Assessing Officer has failed to examine the transaction of the assessee with reference to the provisions of section 43CB of the Act. 4. We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee is engaged in the business of construction and development of housing project. The assessee is following project completion method to recognize its revenue. During the period relevant to assessment year under appeal, the assessee has received advances from the customers in respect of one of its housing project “N.L.Aryavarta” . The amounts received by the assessee from the customers in 5 ITA NO. 1143/MUM/2023(A.Y. 2018-19) respect of the aforesaid project has shown by the assessee in its books of account as advances. 5. During the course of scrutiny assessment (limited scrutiny) proceedings, the Assessing Officer vide notice u/s. 142(1) of the Act dated 21/12/2020 has raised a specific query with regard to the details of advances received from the customers. The PCIT invoked the provisions of section 263 and issued notices dated 02/02/2023 stating that the assessee failed to offer the income on sale of flats on percentage completion method in accordance with the provisions of section 43CB of the Act for financial year 2017-18 relevant to Assessment Year 2018-19. Before we proceeding to decide this issue, it would be pertinent to refer to the provisions of section 43CB of the Act. “43CB. (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145: Provided that profits and gains arising from a contract for providing services,— (i) with duration of not more than ninety days shall be determined on the basis of project completion method; ii) involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. (2) For the purposes of percentage of completion method, project completion method or straight line method referred to in sub-section (1)— (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains.” A bare perusal of section 43CB would show that said section would get attracted in respect of profits and gains arising from construction contract or contract for providing services. Before invoking the provisions of section 43CB, 6 ITA NO. 1143/MUM/2023(A.Y. 2018-19) the PCIT has failed to examine whether the assessee is construction contractor or a builder and developer. The Co-ordinate Bench in the case of Awadesh Builders vs. ITO (supra) in an lucid manner has explained the difference between the contractor and a Real Estate developer. The relevant extract of the decision explaining the difference between the two is reproduced herein below: “2.7 However, on careful perusal of the above orders, we find that the same are distinguishable. The case of Tirath Ram Ahuja (supra) and Sri Sukhdeodas Jalan (supra) related to the profit declared by a contractor. The case of a contractor is different from that of the real estate developer. The profit earned by a contractor depends upon the quantum of work done and is not dependent on whether the flats/shops constructed are actually sold by the owner or not. Therefore, in the case of a contractor, profit can be estimated on the basis of work done. In case of real estate developer, he can earn the profit only when the space constructed sold. In case, due to some reasons, the project is terminated or is abandoned the builder has to refund the advances received from the buyers and in that case, there cannot be any profit because the flats/shops could not be sold as the construction remained incomplete. In that case, it will be only a case of investment by the builder profit from which will arise only on sale of flats. Similarly the case of Champion Construction Co. (supra) is also distinguishable as in that case construction was complete and 80 per cent of the flats had been sold.” [Emphasized by us] From the reading of above, it is explicit that the business model of contractors and real estate developers is different. The contractors receive consideration on the basis of percentage of completion of work. The profit earned by the contractors depend on the quantum of work done. The risk element involved in completion of the contract of construction is minimal. Whereas, in the case of real estate developer profit is earned only on completion of a project after sale of the flats/shops, as the case may be. The risk borne by the real estate developer is much higher. Thus, construction contractors and real estate developers cannot be equated. The provisions of 7 ITA NO. 1143/MUM/2023(A.Y. 2018-19) section 43CB requires the construction contractors to report profit on percentage completion method. The said section does not bring in its sweep real estate developers. The PCIT in the impugned order has held the assessment order erroneous only for the reason that the Assessing Officer has failed to apply the provisions of section 43CB to report its profit on percentage completion method. We find that the Assessing Officer has examined the issue regarding advances received by the assessee from its customers in respect of booking of flats and has thereafter, made no addition in the impugned assessment year. The ld. Authorized Representative of the assessee stated at Bar that the profits from housing project “N.L.Aryavarta” have been offered to tax in the subsequent Assessment Year i.e. Assessment Year 2019-20. This fact has not been rebutted by the Revenue. We find no error in the assessment order and the action of Assessing Officer in not examining the provisions of section 43CB of the Act, in the instant case. 6. The sine qua non for invoking provisions of section 263 of the Act is that the order passed by the Assessing Officer “ is erroneous in so far as it is prejudicial to the interest of Revenue”. Thus, the twin condition of order being erroneous and prejudicial to the interest of Revenue have to be fulfilled before entering the arena of revisional jurisdiction. In the instant case, the PCIT has exercised revisional powers on the ground that the Assessing Officer has failed to examine assessee’s claim with reference to Section 43CB of the Act. The PCIT while holding so has failed to appreciate that the assessee is not a construction contractor, hence, the assessee does not fall within the ambit of said section. 8 ITA NO. 1143/MUM/2023(A.Y. 2018-19) 7. In the instant case twin conditions as mandated u/s.263 of the Act are not satisfied. Hence, in our considered view the PCIT erred in exercising revisional power u/s. 263 of the Act. The impugned order is set-aside and appeal of the assessee is allowed. Order pronounced in the open court on Wednesday the 28 th day of June, 2023. Sd/- Sd/- (GAGAN GOYAL) (VIKAS AWASTHY) लेखाकार /ACCOUNTANT MEMBER ा क /JUDICIAL MEMBER म ु ंबई/ Mumbai, 1 ांक/Dated 28/06/2023 Vm, Sr. PS(O/S) त ल प अ े षतCopy of the Order forwarded to : 1. */The Appellant , 2. + , / The Respondent. 3. The PCIT 4.. 2 + , , आ . . ., म ु बंई/DR, ITAT, Mumbai 5. 45 6 7 /Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar), ITAT, Mumbai