ADDL CIT RG 22(2), NAVI MUMBAI V. SKY STAR, MUMBAI

ITA 2422/MUM/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62712 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 25-07-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 28-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M RAJAN
• Keywords: Capital asset; Depreciation; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI I.P.BANSAL,JUDICIAL MEMBER & SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER ITA NO.2124/MUM/2011(A.Y.2007-08) M/S. SKY STAR, SKYLINE OASIS, PREMIER ROAD, NR. VIDYAVIHAR STATION, GHATKOPAR (W), MUMBAI - 86. PAN: ABCFS0618 (APPELLANT) VS. THE DCIT/ADDL. CIT, CIRCLE- 22(2), 4 TH FLOOR, TOWER NO.6, VASHI RLY. STN BLDG., VASHI, NAVI MUMBAI. (RESPONDENT) ITA NO.2422/MUM/2011(A.Y. 2007-08) THE DCIT/ADDL. CIT, CIRCLE-22(2), 4 TH FLOOR, TOWER NO.6, VASHI RLY. STN BLDG., VASHI, NAVI MUMBAI. (APPELLANT) VS. M/S. SKY STAR, SKYLINE OASIS, PREMIER ROAD, NR. VIDYAVIHAR STATION, GHATKOPAR (W), MUMBAI - 86. PAN: ABCFS0618 (RESPONDENT) ASSESSEE BY : SHRI NARESH JAIN REVENUE BY : SHRI M.RAJAN DATE OF HEARING : 25/07/2012 DATE OF PRONOUNCEMENT : 3 1/07/2012 ORDER PER I.P.BANSAL, J.M THESE ARE CROSS APPEALS. THEY ARE DIRECTED AGAINS T THE ORDER PASSED BY LD. CIT(A)-33, MUMBAI DATED 23/12/2010 FOR THE ASSESSMENT YEAR 2007- 08. THE GROUNDS OF APPEAL RAISED BY ASSESSEE AS WELL AS REVENUE ARE AS FOLLOWS: ITA NO.2124&21/MUM/2011(A.Y. 2007-08) 2 REVENUESS GROUNDS OF APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSES SEE TO THE EXTENT IMPUGNED IN THE GROUNDS ENUMERATED BELOW :- 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN ACCEPTING THE CONTENTION OF THE ASSESSEE T HAT SINCE HE IS A REAL ESTATE DEVELOPER THE REVISED AS-7 PRESCRIBING PERCE NTAGE COMPLETION METHOD IS NOT APPLICABLE AND THE AS-9 WHICH PROVIDE S FOR PROJECT COMPLETION METHOD IS APPLICABLE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD.CIT(A) ERRED IN ACCEPTING THE CONTENTION OF THE ASSESSEE THAT STOCK IN TRADE NAMELY, THE PROJECT UNDER CONSIDERATION HA S BEEN CONVERTED TO CAPITAL ASSET FOR GIVING ON LONG TERM LEASE AND THE EVENTUAL LEASE INCOME SHOULD BE TAKEN AS RENTAL INCOME. 3. ACCORDINGLY, ON THE FACTS AND CIRCUMSTANCE OF TH E CASE AND IN LAW THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS. 1,58,08,518/- MADE BY THE ASSESSING OFFICER APPLYING PERCENTAGE COMPLE TION METHOD(REVISED AS-7) BY TAKING NET PROFIT PERCENTAG E AFTER DEPRECIATION @ 8% OF THE WORK IN PROGRESS. 4. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS BE REVERSED AND THAT OF THE ASSESSING OFFIC ER BE RESTORED. ASSESSEES GROUND OF APPEAL: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LE ARNED COMMISSIONER OF INCOME TAX (A) ERRED IN AFFIRMING T HE DECISION OF ASSESSING OFFICER FOR ASSESSING INTEREST INCOME OF RS. 9,53,936/- SEPARATELY UNDER THE HEAD INCOME FROM OTHER SOURCES INSTEAD OF NETTING WITH INTEREST PAYABLE AMOUNTING TO RS.20,40 ,618/-. AS DONE BY YOUR APPELLANT. ITA NO.2422/MUM/2011- ASSESSEES APPEAL: 2. THE ASSESSEE IS CARRYING ON BUSINESS OF REAL ES TATE DEVELOPER AND BUILDERS AND FILED ITS RETURN OF INCOME DECLARIN G INCOME OF RS. 8,83,40,711/-. THE PROFIT SHOWN WAS ON ACCOUNT O F SALE OF PLOT OF LAND AND NOT FROM BUILDING ACTIVITY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTED BY THE AO THAT CONSTRUCTION WORK IN PROGR ESS AS AT THE END OF THE RELEVANT YEAR WAS SHOWN BY THE ASSESSEE AT RS.19,76 ,06,480/-. IT WAS ITA NO.2124&21/MUM/2011(A.Y. 2007-08) 3 CLAIMED THAT THE PROFIT FROM THE PROJECT SHALL BE DETERMINED ONLY WHEN THE PROJECT WILL BE COMPLETED. ACCORDING TO AO THE A CCOUNTING STANDARD -7 FRAMED BY ICAI, THE BUILDER SHOULD DECLARE PROFIT O N THE BASIS OF PERCENTAGE OF WORK COMPLETED. THE AO NOTED THAT ASSESSEE WAS MAINTAINING ITS ACCOUNTS ON MERCANTILE SYSTEM BASIS. THEREFORE, HE OBSERVED THAT ACCORDING TO SUCH SYSTEM PROFIT IS REQUIRED TO BE COMPUTED FOR EACH YEAR. TAKING INTO CONSIDERATION SUCH FACT AO DETERMINED THE INCOME OF THE ASSESSEE FROM BUILDING ACTIVITY @8% OF THE WIP AND THUS AN ADDIT ION OF RS. 1,58,08,518/- WAS MADE. THE SECOND ADDITION MADE BY THE AO IS W ITH REGARD TO INTEREST EARNED BY THE ASSESSEE ON FDR AMOUNTING TO RS. 9,53 ,936/-. THE AO NOTED THAT THE ASSESSEE DID NOT PAY ANY INTEREST ON LOAN FOR MAKING SUCH FDR AND THEREFORE, HE TREATED THE SAID AMOUNT AS SEPARATELY ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES 2.1 BOTH THE ABOVE MENTIONED ADDITIONS WERE CHALLEN GED IN THE APPEAL FILED BEFORE LD. CIT(A). IT WAS SUBMITTED THAT AS- 7 COULD NOT BE APPLIED TO THE CASE OF THE ASSESSEE AS IT WAS APPLICABLE TO CO NSTRUCTION CONTRACT. IT WAS SUBMITTED THAT ASSESSEE IS NOT A CONTRACTOR FO R ANYBODY ELSE AND CONSTRUCTING BUILDING ON ITS OWN. IT WAS SUBMITTED THAT ACCORDING TO THE DECISION OF THE TRIBUNAL IN THE CASE OF AWADEHESH B UILDER (37 SOT 122), ON THE VERY ASSESSMENT YEAR IT WAS HELD THAT EVEN IN T ERMS OF REVISED GUIDELINES DESCRIBED IN AS-7, THE INCOME COULD BE ACCOUNTED ON LY ON COMPLETION OF THE PROJECT WHEN THE FLATS WERE SOLD. IT WAS OBSERVED THAT SINCE THE ASSESSEE HAD FOLLOWED ONE OF THE PRESCRIBED METHODS AND THE SAM E METHOD HAD BEEN ACCEPTED IN THE EARLIER YEARS, THE METHOD COULD NOT BE CHANGED BY THE AO IN THE SUBSEQUENT YEAR. IT WAS HELD THAT THE ASSESSE E WAS RIGHT IN COMPUTING ITS INCOME ON THE BASIS OF COMPLETED CON TRACT METHOD. 2.2 IT WAS ALSO SUBMITTED THAT IT WAS THE SECOND YE AR OF CONSTRUCTION IN THE CASE OF THE ASSESSEE. THE OFFICES SO CONSTRUCT ED BY THE ASSESSEE WERE NOT SOLD BUT ASSESSEE HAS ENTERED INTO A LONG TERM LEA SE ON 16/12/2008 WITH ITA NO.2124&21/MUM/2011(A.Y. 2007-08) 4 VODAFONE AND INDUS TOWER ON 30/12/2008. WHATEVER A DVANCES WERE RECEIVED FROM THE PARTIES AT THE TIME OF BOOKING IN ITIALLY HAVE BEEN RETURNED. THE ASSESSEE HAS SHOWN INCOME FROM HOUSE PROPERTY FOR ASSESSMENT YEAR 2009-10 FOR LETTING OUT THE PREMISES ON COMPLETION OF ONE PHASE OF THE PROJECT IN THE FINANCIAL YEAR 2008-09. IT WAS ALSO SUBMITTED THAT THE ASSESSEE IS A PARTNERSHIP FIRM AND BUILDING THE PR OJECT AND LETTING IT OUT IS WITHIN THE MAIN OBJECT OF THE BUSINESS OF THE ASSES SEE. THE CLAUSE IS REPRODUCED AS UNDER:- THE MAIN BUSINESS OF THE FIRM SHALL BE THAT OF DEV ELOPMENT OF IMMOVABLE PROPERTIES BY CONSTRUCTING BUILDING OR BU ILDINGS FOR RESIDENTIAL, COMMERCIAL AND F OF FOR OTHER PURPOSES AS MAY BE PERMITTED BY THE MUNICIPAL CORPORATION OF GREATER B OMBAY AND OTHER CONCERN AUTHORITIES AND SELLING LETTING OUT OR OTHE RWISE DISPOSING OF PREMISES THEREIN ON OWNERSHIP, TENANCY OR OTHER BAS IS OR TO TRANSFER THE SAID PROPERTY WITH BUILDING OR BUILDINGS THERE ON IN FAVOUR OF COMMON ORGANIZATION FORMED BY THE PARTIES FROM TIME TO TIME AND OR SUCH OTHER BUSINESS OR BUSINESSES AS PARTNERS MAY D ECIDE FROM TIME TO TIME. 2.3 IT WAS SUBMITTED THAT STOCK IN TRADE WAS CONVE RTED BY THE ASSESSEE INTO CAPITAL ASSET AND AGAINST THIS NO ISSUE HAS B EEN RAISED BY THE AO AND ON THE BASIS OF DECISION OF HONBLE SUPREME COURT I N THE CASE OF EAST INDIA HOUSING AND LAND DEVELOPMENT TRUST VS. CIT, 42 ITR 49 (SC) IT WAS PLEADED THAT THE LEASE INCOME DECLARED BY THE ASSESSEE HAS TO BE ASSESSED AS RENTAL INCOME AND IN THIS VIEW OF THE SITUATION AFTER CO NSIDERING THE AFOREMENTIONED SUBMISSIONS OF THE ASSESSEE LD. CIT( A) HAS DELETED THE ADDITION OF RS.1,58,08,518/-. 2.4 ON THE SECOND ISSUE LD. CIT(A) HAS UPHELD THE A DDITION REGARDING ASSESSABILITY OF INTEREST RECEIVED ON FDR ON THE GR OUND THAT THE ASSESSEE HAS ACCEPTED THAT IT HAS CREATED CAPITAL ASSET IN THE F ORM OF COMPLETED PROJECT WHICH HAS BEEN LEASED OUT TO TENANTS FOR EARNING RENTAL INCOME, THE INTEREST RECEIVED BY THE ASSESSEE CANNOT BE SET OFF AGAINST THE INTEREST PAID ON BORROWED AMOUNT. THE INTEREST PAID ON BORROWED AMOUNT CANNOT BE AN ITA NO.2124&21/MUM/2011(A.Y. 2007-08) 5 EXPENDITURE AGAINST INTEREST RECEIVED ON FDRS AS TH E FDRS HAVE BEEN MADE OUT OF ASSESSEES OWN SURPLUS FUNDS. IT IS FURTHER OBSERVED BY LD. CIT(A) THAT IT IS TO BE APPRECIATED THAT NOW THE RENT BEIN G EARNED FROM HOUSE PROPERTY INCOME, INTEREST IF PAID ON LOANS FOR CRE ATING THOSE ASSETS WILL NO LONGER BE REVENUE EXPENDITURE, THEREFORE, EVEN NETT ING IS NOT PERMISSIBLE. 2.5 AGAINST THE ABOVE DECISION OF THE LD. CIT(A), R EVENUE IS AGGRIEVED WITH DELETION OF A SUM OF RS. 1,58,08,518/- AND THE AS SESSEE IS AGGRIEVED WITH THE SUSTENANCE OF ADDITION OF RS. 9,53,936/-. 2.6 THOUGH THE REVENUE HAS RAISED AS MANY AS THREE EFFECTIVE GROUNDS BUT THE ISSUE RAISED IS ONLY WITH REGARD TO DELETION OF AN ADDITION OF RS. 1,58,08,518/-. 2.7 LD. D.R AFTER NARRATING THE FACTS RELIED UPON T HE ASSESSMENT ORDER AND PLEADED THAT AO WAS RIGHT IN ASSESSING THE INCOME O F THE ASSESSEE WITH REGARD TO PROJECT @8% AND LD. CIT(A) HAS WRONGLY DE LETED THE SAME. 2.8 ON THE OTHER HAND, IT WAS SUBMITTED BY LD. A.R THAT ACCORDING TO THE DOCUMENTS SUBMITTED BEFORE AO AND LD. CIT(A), THE PROJECT DURING THE YEAR WAS ONLY COMPLETED UPTO 16% AND HE REFERRED TO PAGE 208 OF THE PAPER BOOK, WHERE SUCH FACT HAS BEEN MENTIONED BY THE ARCHITECT URE AND CERTIFICATE HAS BEEN GIVEN THAT WORK HAS BEEN COMPLETED IN THE SHA PE OF RCC WORK UPTO 3 RD FLOOR AND PERCENTAGE OF TOTAL WORK COMPLETED IS 16 %. HE SUBMITTED THAT THE ASSESSEE DID NOT SELL ANY PART OF THE ABOVE MENTION ED PROJECT AND HAD GIVEN THE ONE PHASE OF THE PROJECT AFTER ITS COMPLETION T O VARIOUS ENTITIES ON LONG TERM LEASE, THE DETAILS OF WHICH WAS ALSO FILED AT PAGE -2 OF THE SUPPLEMENTARY PAPER BOOK SHOWING THE DETAILS OF THE PARTIES TO WHOM THE PREMISES FROM THE COMPLETED PROJECT WERE LEASED OUT . ALL THE LEASE AGREEMENTS ARE VARYING BETWEEN 5 YEARS TO 15 YEARS AND ASSESSEE HAS RECEIVED MONTHLY LEASE RENT OF RS. 1,47,65,013/- AP ART FROM DEPOSITS OF RS. ITA NO.2124&21/MUM/2011(A.Y. 2007-08) 6 21,76,04,136/-. IT WAS FURTHER SUBMITTED THAT ASSE SSEE HAD ALSO RETURNED THE ADVANCES RECEIVED BY IT FROM SOME OF THE PARTIE S AND THIS FACT HAS ALSO BEEN NOTED BY THE LD. CIT(A). THUS IT WAS PLEADED BY LD. A.R THAT IN ANY CASE THE INCOME AS ASSESSED BY THE AO COULD NOT BE ASSESSED AS THE ASSESSEE WAS HAVING OPTION TO SHOW THE INCOME ON CO MPLETION OF ITS PROJECT WHICH WAS COMPLETED ONLY UPTO 16% DURING THE YEAR A ND ALSO ON THE GROUND THAT ASSESSEE DID NOT SELL ANY PORTION OF THE IMPUG NED PROJECT AND IT WAS DEPLOYED FOR EARNING LEASE RENTAL. HE ALSO RELIED UPON THE DECISIONS MENTIONED IN THE ORDER OF LD. CIT(A) AND PLEADED TH AT LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION OF RS. 1,58,08,518/-. 2.9 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS IN THE LIGHT OF THE MATERIAL PLACED BEFORE US. ON THE VERIFICATION OF DOCUMENTS AND SUBMISSIONS OF THE ASSESSEE LD. CIT(A) DETERMINED T HE UNDISPUTED FACTS VIDE PARA 5.6 OF HER ORDER AND IT WILL BE RELEVANT TO R EPRODUCE THE SAME. 5.6. BESIDES THIS THE UNDISPUTED FACTS IN THE CAS E REMAIN THAT.: (I) IT IS SECOND YEAR OF CONSTRUCTION IN THE CASE O F THE APPELLANT. THE OFFICES SO CONSTRUCTED BY BUILDER HAVE NOT BEEN SOLD RATHER AP PELLANT HAS ENTERED INTO A LONG TERM LEASE ON 16TH DECEMBER, 2008 WITH VODAFON E AND INDUS TOWER ON 30.12.2008. (II) WHATEVER ADVANCES WERE RECEIVED FROM THE PARTI ES AT THE TIME OF BOOKING INITIALLY, THEY HAVE BEEN RETURNED. (III) ALL THE EXPENSES INCURRED HAVE BEEN CAPITALIZ ED AND CONSEQUENTLY THE APPELLANT HAS SHOWN IN THE P&L ACCOUNT FILED ALONG WITH RETURN OF INCOME THE CAPITAL WORK IN PROGRESS AT RS. 19,76,06,480/-, THE ADVANCES RECEIVED FROM CUSTOMERS HAVE BEEN SHOWN AT RS.4,77,00,000/- AS ON 3 1.03.2007. (IV) THE APPELLANT HAS SHOWN INCOME FROM HOUSE PROP ERTY FOR A.Y. 2009-10 FROM LET OUT PREMISES ON COMPLETION OF ONE PHASE OF PROJECT IN THE F.Y. 2008-09. (V) IN THE COMPUTATION OF INCOME FOR A.Y. 2007-08 A PPELLANT HAS SHOWN PROFIT AND GAINS FROM BUSINESS FROM SALE OF PLOT OF LAND A T RS.8,83,40,711/- AND HAS PAID TAXES ACCORDINGLY. ITA NO.2124&21/MUM/2011(A.Y. 2007-08) 7 2.10 THE FACT THAT PROJECT IS COMPLETED ONLY UPTO 1 6% HAS ALSO NOT BEEN CONTROVERTED BY THE REVENUE. ACCORDING TO AFOREMEN TIONED DECISION OF TRIBUNAL IN THE CASE OF AWADHESH BUILDER (SUPRA), T HE ASSESSEE HAS OPTION TO ADOPT WORK COMPLETION METHOD. IF THE SAME IS TA KEN INTO CONSIDERATION, AS PROJECT HAS NOT BEEN COMPLETED DURING THE YEAR A ND ONLY 16% OF THE PROJECT IS COMPLETED, THE INCOME COULD NOT BE ASSES SED EVEN WITH REFERENCE TO AS-7. MOREOVER, THE OTHER UNDISPUTED FACT IS AL SO NOT CONTROVERTED THAT ASSESSEE DID NOT SELL ANY PORTION OF THE IMPUGNED P ROJECT AND HAS STARTED EARNING LEASE RENTAL FROM THE SAID PROJECT ON LONG TERM BASIS. THEREFORE, KEEPING IN VIEW ALL THESE FACTS, WE ARE OF THE OPIN ION THAT LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION. WE DECLINE TO INTERF ERE AND ALL GROUNDS RAISED BY THE REVENUE IN ITS APPEAL ARE DISMISSED. ITA NO.2124/M/2011- ASSESSEES APPEAL: 3. SO FAR AS IT RELATES TO ASSESSEES APPEAL WE FIN D THAT LD. CIT(A) HAS RIGHTLY DECIDED THAT SINCE THE ASSESSEE HAS CAPITAL IZED ALL THE COST OF THE PROJECT, THE INTEREST EARNED BY IT FROM FDR CANNOT BE SET OFF AGAINST INTEREST PAID. WE FIND NO INFIRMITY IN THE ORDER OF LD. CIT (A) WHILE SUCH ADDITION HAS BEEN UPHELD. THEREFORE, THE APPEAL OF THE ASSESSEE IS ALSO DISMISSED. 4. IN THE RESULT, CROSS APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 31 ST DAY OF JULY, 2012 SD/- SD/- ( N.K.BILLAIYA ) (I.P.BANSAL) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 31 ST JULY, 2012 ITA NO.2124&21/MUM/2011(A.Y. 2007-08) 8 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM.