ITO 7(3)(1), MUMBAI V. OM METAL CONSORTIUM P.LTD, MUMBAI

ITA 4224/MUM/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3307 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 20-06-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: CHAUDHARY ARUN KUMAR SINGH
• Keywords: Opportunity of being heard; Cost of acquisition; Valuation report
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE SHRI PAWAN SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 4224/MUM/2016 ASSESSMENT YEAR: 2011 - 12 INCOME TAX OFFICER, 7(3)(1), C.G.O. BLDG., 8 TH F LOOR, R OOM . NO. 805, PRATISHTHA BHAVAN M.K. ROAD, MUMBAI - 400020. VS. M/S OM METAL CONSORTIUM PVT. LTD. 63, GR. FLOOR, RAMKRISHNASADAN, POCHKHANWALA ROAD, OPP. WORLI R.T.O., MUMBAI - 400025. PAN NO. AAACO8471E APPELLANT RESPONDENT REVENUE BY : MR. CHAUDHARY ARUN KUMAR SINGH, DR ASSESSEE BY : MR. SATISH MODI , AR DATE OF HEARING : 20 /11/2018 DATE OF PRONOUNCEMENT: 14/02/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE REVENUE . THE RELEVANT ASSESSMENT YEAR IS 2011 - 1 2 . THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 1 3 , MUMBAI [IN SHORT CIT(A)] AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE GROUND OF APPEAL READ S AS UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO TO THE TUNE OF M/S OM METAL ITA NO. 4224/MUM/2016 2 RS.1,16,29,771/ - INCORRECTLY APPLYING THE ACCOUNTING STANDARDS AS - 7 & AS - 9 WITHOUT APPRECIATING THE FACT THAT THE TRANSACTION DONE BY THE ASSESSEE IS A TRANSFER, AS PER THE TRANSFER OF PROPERTY ACT AND HENCE THE PROFITS EARNED ARE IN THE NATURE OF INCOME O F THE ASSESSEE. 3. BRIEFLY STATED, THE FACTS ARE THAT DURING THE FINANCIAL YEAR (FY) 2010 - 11 RELEVANT TO THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE HAD PURCHASED A LAND ALONG WITH 3 BUNGALOWS AT JAIPUR FOR RS.1,58,00,00,000/ - . THE ASSESSEE PAID RS.7,14,85 ,300/ - TOWARDS STAMP DUTY, REGISTRATION CHARGES AND MISCELLANEOUS EXPENSES. THUS THE TOTAL COST OF PURCHASE WAS RS.1,65,14,85,300/ - . 3.1 ON EXAMINATION OF THE FINANCIAL STATEMENTS, THE AO NOTICED THAT THE ASSESSEE HA S SHOWN SALES OF RS. 4,42,00,000/ - AND WI P (WORK - IN - PROGRESS) OF RS. 161,02,03,191/ - . IN RESPONSE TO A QUERY RAISED BY THE AO, THE ASSESSEE SUBMITTED THAT IT HA D PURCHASES LAND AT JAIPUR FOR RS. 1,58,00,00,000/ - ON WHICH STAMP DUTY OF RS. 7,14,30,000/ - , REGISTRATION CHARGES OF RS. 50,300/ - AND MISCEL LANEOUS EXPENSES OF RS. 5000/ - WERE INCURRED. THUS THE AGGREGATE COST OF PURCHASE WAS RS. 1,65,14,85,300/ - . AS THE ASSESSEE INTENDED TO START A CONSTRUCTION PROJECT ON THE LAND, THE COST OF LAND WAS TRANSFERRED TO WIP. DURING THE YEAR, THE ASSESSEE HAD SOLD PART OF THIS LAND FOR RS. 4,42,00,000/ - . THIS SALE CONSIDERATION WAS DEDUCTED FROM THE COST OF PURCHASE, T HEREBY REDUCING IT FROM THE WIP. FURTHER, EXPENSES OF RS. 29,17,891/ - INCURRED FOR DEVELOPMENT OF THE LAND WERE ALSO ADDED TO THE WIP. AFTER THIS, THE W IP WAS RS.161,02,03,191/ - . M/S OM METAL ITA NO. 4224/MUM/2016 3 IN RESPONSE TO A QUERY RAISED BY THE AO, THE ASSESSEE SUBMITTED THAT IT NEEDED IMMEDIATE FUNDS TO MEET URGENT FINANCIAL REQUIREMENT FOR STARTING THE CONSTRUCTION PROJECT. HENCE, IT SOLD A SMALL PORTION OF THE PROPERTY. THE THRE E BUYERS WERE S/SHRI T.C. KOTHARI, BHARAT KOTHARI AND BAHUBALI KOTHARI FROM WHOM SALE CONSIDERATION OF RS.2.11 CRORE, RS.1.20 CRORE AND RS.1.11 CRORE RESPECTIVELY WAS RECEIVED, TOTALLING TO RS.4.42 CRORE. THE TOTAL AREA THUS SOLD FOR RS.4.42 CRORE WAS 451. 33 SQ. YARDS, RESULTING IN A SALE PRICE OF RS.97,933/ - PER SQ. YARD. ON THE OTHER HAND, AS NOTED BY THE AO, THE TOTAL COST OF THE LAND (INCLUSIVE OF STAMP DUTY AND OTHER INCIDENTAL EXPENSES) WAS RS.165.14 CRORE, WHEREBY AN AREA OF 22,885 SQ. YARDS HAD BEEN PURCHASED, LEADING TO A COST OF RS.72,165/ - PER SQ. YARD. THE AO OBSERVED THAT THE ASSESSEE SHOULD HAVE REDUCED FROM THE WIP, THE PROPORTIONATE COST OF LAND OF RS.3.25 CRORE (I.E. RS.72,165/ - PER SQ. YARD X 451.33 SQ. YARDS) AND NOT THE SALE PROCEEDS OF R S.4.42 CRORES. THE AO THUS HELD THAT THIS EFFECTIVELY LED TO AN OVER REDUCTION OF THE DIFFERENTIAL AMOUNT OF RS.1.17 CRORE (OR TO BE PRECISE RS.1,16,29,771/ - , THE MINOR DIFFERENCE ARISING DUE TO THE ROUNDED OFF AMOUNTS AS MENTIONED IN THE EARLIER NARRATION ) FROM THE WIP, WHICH THE AO SOUGHT TO BRING TO TAX. THUS THE AO MADE AN ADDITION OF RS.1,16,29,771/ - . 4. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). THE BASIC ISSUE AGITATED BEFORE HIM WAS REVENUE RECOGNITION. THE LD. CIT(A), HAVING EXAMINED THE DOCUMENTATION RELATING TO SALE OF THE CONCERNED PARCELS OF PROPERTY, FOUND THAT THE FIRST AGREEMENT BETWEEN THE ASSESSEE AND SHRI T.C. KOTHARI HAS STATED THAT M/S OM METAL ITA NO. 4224/MUM/2016 4 THE ASSESSEE WAS THE ABSOLUTE OWNER OF THE PROPERTY SITUATED AT A - 2, PRITHIVRAJ ROAD, C - SCHEME, JAIPUR - 302001 ADMEASURING 199.93 SQ. YARDS AND DESIROUS OF SELLING IT FOR RS.2.11 CRORE. THE AR OF THE ASSESSEE ARGUED BEFORE THE CIT(A) THAT THE ASSESSEE DESIRED TO BUILD A RESIDENTIAL PROJECT ON THE LAND IN QUESTION AND IF DEMOLITION OF THE SAID PROPERTY WAS REQUIRED FOR THE SAID PROJECT, IT WOULD ALLOT 5300 SQ. FT. OF BUILT UP AREA IN THE PROJECT IN EXCHANGE AND WITHOUT ANY FURTHER CONSIDERATION. THUS IT WAS THE ARGUMENT OF THE AR THAT A CONDITIONAL SALE WITH AN OPTION TO RE - ACQUIRE THE PROPERTY WAS BUILT IN THE AGREEMENT. THE LD. CIT(A) FOUND THAT THE OTHER TWO AGREEMENTS FOR THE OTHER TWO PROPERTIES WERE SIMILARLY WORDED. THE AR FURTHER SUBMITTED BEFORE THE LD. CIT(A) THAT THE ASSESSEE WANTED TO CONSTRUCT A MASSIVE RESI DENTIAL PROJECT ON THE 22,885 SQ. YARD PLOT AT JAIPUR AND THE STUMBLING BLOCK WAS THE FUNDING FOR THE PROJECT WHICH WAS GOING TO BE MADE AVAILABLE ONLY AFTER REGISTRATION FOR WHICH THE STAMP DUTY AND LEGAL EXPENSES HAD TO BE INCURRED. IT WAS STATED THAT THE ASSESSEE WAS RUNNING SHORT OF FUNDS. THERE WERE 3 LUXURIOUS BUNGALOWS WITH ADJOINING LAWNS ON THE PLOT WHICH WERE OTHERWISE VACANT. THE ASSESSEE HENCE ENTERED INTO AGREEMENTS WITH THREE PARTIES FOR SELLING FOR USE IN THE INTERIM PERI OD THE SAID BUNGALOWS ALONG WITH LAWNS AND LATER REACQUIRING THEM AT THE TIME OF ACTUAL CONSTRUCTION. THE RE - ACQUISITION OF THE BUNGALOWS WAS TO RESULT IN GRANT OF BUILT - UP SPACE IN THE PROJECT TO THE THREE PARTIES AT SQ UARE FOOTAGE PRE - DETERMINED AS PER T HE AGREEMENTS. IT WAS STATED BEFORE HIM THAT IN THE ABSENCE OF THIS AGREEMENT OF SALE AND REACQUISITION, THE ENTIRE DEAL WOULD HAVE BEEN M/S OM METAL ITA NO. 4224/MUM/2016 5 LOST, AS FUNDING WOULD HAVE NOT BECOME AVAILABLE AND THE PROJECT WOULD NOT HAVE TAKEN OFF . IT WAS FURTHER STATED THAT A S OF TODAY ALL THE 3 BUNGALOWS HAD BEEN RE - ACQUIRED AND DEMOLISHED, THE PROJECT BEING IN AN ADVANCED STAGE OF CONSTRUCTION AND COMPLETION. THE AR FILED A COPY OF THE FEASIBILITY REPORT OF THE PROJECT PREPARED BY M/S CUSHMAN & WA KEFIELD, REAL ESTATE CONSULT ANT, ALREADY FILED BEFORE THE AO. THE LD. CIT(A) OBSERVED THAT THE ENTIRE ARRANGEMENT WAS A FINANCING ARRANGEMENT AS THE PROCEEDS OF THE CONDITIONAL SALE HAVE BEEN UTILIZED FOR PAYMENT OF STAMP DUTY AND ALLIED LEGAL EXPENSES, WITH A CLEAR UNDERSTANDING AS PER THE SIGNED AGREEMENTS THAT CERTAIN PRE - DEFINED BUILT - UP AREA SHALL BE HANDED OVER, IF THE SAID LAND WAS RE - ACQUIRED AND THE BUNGALOWS IN QUESTION DEMOLISHED AND FURTHER CONSTRUCTION COMPLETED ON THE SAID PLOTS. ON THE BASIS OF ABOVE FACTS, THE LD. C IT(A) HELD THAT THE RELEVANT PREVIOUS YEAR IS NOT THE RIGHT TIME FOR RECOGNISING REVENUE ARISING FROM THE SALE OF THE BUNGALOW PLOTS, WHICH WOULD BE APPROPRIATELY RECOGNIZED ONLY WHEN THE CONDITIONS LAID DOWN IN AS - 7 ARE FULFILLED I.E. ONLY AFTER THE RE - AC QUISITION AND DEMOLITION OF THE BUNGALOWS, THE CONSTRUCTION OF THE PROJECT AND THE CEDING OF THE BUILT - UP AREA SPACE IN LIEU OF THE BUNGALOW PLOTS. THUS THE LD. CIT(A) DELETED THE ADDITION OF RS.1,16,29,771/ - MADE BY THE AO. 5. BEFORE US, THE LD. DR SUBMITS THAT THE ASSESSEE HAS REDUCED THE SALE AMOUNT I.E. RS.4,42,00,000/ - OF THE PROPORTIONATE AREA OF LAND I.E. 451.33 SQ. YARDS SOLD FROM THE TOTAL PURCHASE COST OF LAND OF M/S OM METAL ITA NO. 4224/MUM/2016 6 RS.1,65,44,03,191/ - TO ARRIVE AT COST OF CLOSING WIP. THUS RS.1,61,02,03,191/ - HAS BEEN CREDITED TO THE P&L ACCOUNT AND SHOWN AS INVENTORIES IN THE BALANCE SHEET. HOWEVER, THE TOTAL PROJECT EXPENSES OF RS.29,17,891/ - INCURRED DURING THE YEAR HAVE BEEN RIGHTLY INCLUDED BY THE ASSESSEE - COMPANY IN THE WIP. THE LD. DR THUS SUBMITS THAT WIP HAS TO VALUED AS PER THE ACCOUNTING PRINCIPLES AND THE ASSESSEE SHOULD HAVE REDUCED THE PROPORTIONAT E COST OF SALE OF RS.3,25,70,229/ - (RS.72,165/ - PER SQ. YARD X 451.33 AREA) AND NOT THE SALE PRICE. IT IS STATED THAT REDUCING THE SALE PRICE, INSTEAD OF COST OF SALES, REDUCES THE VALUE OF WIP AND THE SAME HAS RESULTED IN LOWERIN G THE PROFITS TO THE EXTEN T OF DIFFERENCE IN THE VALUE OF SALE PRICE AND COST OF SALES. THUS THE LD. DR SUPPO RTS THE ORDER PASSED BY THE AO. 6. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESSEE FILES A PAPER BOOK CONTAINING (I) COPY OF WRITTEN SUBMISSION DATED 08.03.2016 FILED BE FORE THE CIT(A), (II) COPY OF SALE AGREEMENTS DATED 31.03.2011 WITH BHARAT KOTHARI, BABHUBALI KOTHARI AND T.C. KOTHARI AND (III) ANNUAL ACCOUNTS OF THE ASSESSEE FOR THE AY 2010 - 11. FURTHER, THE LD. COUNSEL REITERATES THE SUBMISSION MADE BEFORE THE AO AND CIT(A) AS MENTIONED HEREINBEFORE. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE REASONS FOR OUR DECISIONS ARE GIVEN BELOW. IN THE WRITTEN SUBMISSION DATED 08.03.2016 FILED BEFORE THE LD. CIT(A), THE AR OF THE AS SESSEE HAS SUBMITTED THAT THE ASSESSEE HAD ACQUIRED A LAND ADMEASURING 22885 SQ. YARD AT JAIPUR. THE ASSESSEE M/S OM METAL ITA NO. 4224/MUM/2016 7 INTENDED TO START CONSTRUCTION PROJECT ON THE LAND, THEREFORE, THE COST OF LAND WAS TRANSFERRED TO WIP. THE ASSESSEE ALSO INCURRED VARIOUS EXPENSE S AMOUNTING TO RS.29,17,891/ - DURING THE YEAR FOR DEVELOPMENT OF LAND WHICH WERE ALSO ADDED TO THE WIP. FURTHER IT WAS SUBMITTED THAT TO MEET THE FINANCIAL REQUIREMENT, THE ASSESSEE SOLD A PART OF LAND ALONG WITH BUNGALOWS ADMEASURING 451.33 SQ YARD FOR A CONSIDERATION OF RS.4,42,00,000/ - . THE ASSESSEE RECORDED SUCH TRANSACTION ON PRINCIPLES STIPULATED IN AS - 9 (REVENUE RECOGNITION) AND AS - 7 (CONSTRUCTION CONTRACT), WHEREIN THE SAID REVENUE WAS DEFERRED AND NOT RECOGNIZED. THE SALES PROCEEDS WERE REDUCED FRO M WIP ACCORDINGLY. IT WAS SUBMITTED BEFORE THE CIT(A) THAT THE AO, WITHOUT GIVING OPPORTUNITY TO THE ASSESSEE TO SUPPORT ITS STATEMENT, CALCULATED THE COST OF LAND SOLD ON PROPORTIONATE BASIS AND WO RKED OUT THE PROFIT AS FOLLOWS: CONSIDERATION OF PURCHASE OF LAND 158,00,00,000/ - STAMP DUTY & REGISTRATION CHARGES 7,14,85,300/ - TOTAL COST 165,14,85,300/ - COST/SQ YARD 72,165 CONSIDERATION FOR SALE OF LAND 4,42,00,000/ - TOTAL AREA OF LAND SOLD 451.33 SALE PRICE/SQ YARD 97,933 PROFIT/SQ YARD 25,768 TOTAL PROFIT 1,16,29,771/ - M/S OM METAL ITA NO. 4224/MUM/2016 8 WITHOUT PREJUDICE TO THE ABOVE, IT WAS SUBMITTED BY THE A/R OF THE ASSESSEE BEFORE THE CIT(A) THAT THE AO FAILED TO APPRECIATE THAT THE COST OF THE PART OF THE LAND SOLD WAS MUCH HIGHER THAN THE COST CALCULATED ON PROPORTIONATE BASIS BY THE AO. THE PART OF THE LAND SOLD CONSISTS OF BUNGALOWS, WHICH VALUE IS MUCH HIGHER THAN THE REMAINING PART OF THE LAND PURCHASED, AS SHOWN BELOW. IN OTHER WORDS, THE COST OF THE PROPERTY CAN BE SAID TO BE CONSIDERED AS FOLLOWS: I. COST OF LAND ALONG WITH LUXURIOUS BUNGALOWS WITH LAWNS AROUND IT (A PICTURE DEPICTING THE SAME IS GIVEN IN ANNEXURE 1) 40,506,00 * (451.33 SQ. YARD) II. COST OF VACANT LAND 15,39,494,00 0 (22,433.67SQ YARD) TOTAL 1,580,00,000 (22,885 SQ YARD) [* THE VALUATION OF THE LAND SOLD ALONG WITH LUXURIOUS BUNGALOWS WORKS OUT TO RS.40,506,000/ - AS PER THE VALUATION REPORTS BY A CERTIFIED VALUER OF IMMOVABLE PROPERTY. THE VALUATION REPORTS IS ENCLOSED HEREWITH IN ANNEXURE 2 ] ACCORDINGLY, THE ASSESSEE CALCULATED THE PROFIT ON SALE OF LAND WITH BUNGALOWS WHICH IS AS UNDER: SALE CONSIDERATION 44,200,000 SQ. YAR D 451.33 VALUATION COST AS PER VALUATION REPORT 97,932.78 M/S OM METAL ITA NO. 4224/MUM/2016 9 STAMP DUTY & REGISTRATION CHARGES APPORTIONED TO THE PART OF PLOT SOLD 1,409,808 PROJECT EXP APPORTIONED TO THE PART OF PLOT SOLD 57,546 TOTAL COST 41,973,354 TOTAL COST/SQ YARD 92,999.26 PROFIT/SQ YARD 4,933.52 TOTAL PROFIT 2,226,646 THUS IT WAS SUBMITTED BEFORE THE CIT(A) THAT I N VIEW OF THE ABOVE, THE PROFIT ON SALE OF LAND WOULD BE RS.22 , 26,646/ - . HENCE, THE AO HAS WRONGLY MADE ADDITION OF RS.1,16,29,771/ - AS PROFIT ON SALE OF LAND, WHEREAS THE PROFIT SHOULD WORK OUT BE RS.22 , 26,646/ - AS DI SCUSSED ABOVE. 7.1 A PERUSAL OF AS - 7 (REVISED): ACCOUNTING FOR CONSTRUCTION CONTRACTS INDICATES THAT COST OF WORK - IN - PROGRESS SHOULD INCLUDE ONLY COSTS THAT RELATE DIRECTLY TO A SPECIFIC CONTRACT AND COSTS ATTRIBUTABLE TO CONTRACT ACTIVITY IN GENERAL AN D CAN BE ALLOCATED TO SPECIFIC CONTRACTS. FURTHER, COSTS THAT RELATE TO ACTIVITIES OF THE CONTRACT GENERALLY, OR THAT RELATE TO CONTRACT ACTIVITY BUT CANNOT BE RELATED TO SPECIFIC CONTRACTS ARE NOT TO BE INCLUDED IN WORK - IN - PROGRESS WE ARE OF THE CONSIDE RED VIEW THAT THE WRITTEN SUBMISSION DATED 08.03.2016 FILED BY THE ASSESSEE BEFORE THE CIT(A) DELINEATED AT PARA 7 HEREINBEFORE, STATING THAT THE PROFIT ON SALE OF LAND WOULD WORK OUT TO RS.22,26,646/ - INSTEAD OF RS.1,16,29,771/ - IS RELEVANT IN THE INSTANT CASE. M/S OM METAL ITA NO. 4224/MUM/2016 10 THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE AO TO MAKE AN ORDER AFRESH, AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE DIRECT THE ASSESSEE TO FILE THE RELEVANT DOCUMENTS/EVI DENCE BEFORE THE AO. 8. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14/02/2019. SD/ - SD/ - (PAWAN SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 14/02/2019 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (SR. PRIVATE SECRETARY) ITAT, MUMBAI