AJAY PRATAP ASHAR, MUMBAI V. ACIT CIR 1, MUMBAI

ITA 4728/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78705 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-04-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 16-07-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M L PERUMAL
• Keywords: Capital asset
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUM BAI . . , , BEFORE SHRI I. P. BANSAL, JM AND SHRI SANJAY ARORA , AM ./ I.T.A. NO. 4728/MUM/2012 ( / ASSESSMENT YEAR: 2008-09) AJAY PRATAP ASHAR GROUND FLOOR, GREAT INDIA NET INDIA COMPOUND, SHREE NAGAR, WAGLE ESTATE, THANE (W) - 400 610 / VS. ASST. CIT, CIRCLE-1, THANE ./ ./PAN/GIR NO. ADBPA 3939 J ( /APPELLANT ) : ( !' / RESPONDENT ) # $ / APPELLANT BY : NONE !' # $ / RESPONDENT BY : SHRI M. L. PERUMAL % &'( # )* / DATE OF HEARING : 17.02.2014 +,- # )* / DATE OF PRONOUNCEMENT : 16.04.2014 . / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-II, THANE (CIT(A) FOR SHO RT) DATED 20.04.2012, DISMISSING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT U/S.143 (3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (A.Y.) 20 08-09 VIDE ORDER DATED 30.12.2010. 2. NONE APPEARED FOR AND ON BEHALF OF THE ASSESSEE WHEN ITS APPEAL WAS CALLED OUT FOR HEARING NOR ANY ADJOURNMENT APPLICATION STANDS RECEIVED. THIS IS DESPITE THE SERVICE OF 2 ITA NO. 4728/MUM/2012 (A.Y. 2008-09) AJAY PRATAP ASHAR VS. ASST. CIT NOTICE THROUGH RPAD (THE SAME HAVING NOT BEEN RETUR NED BACK UN-SERVED), AS DIRECTED BY THE BENCH ON THE PRECEDING DATE ON WHICH THE APPEAL WAS LISTED FOR HEARING, I.E., 22.08.2013, OBSERVING NON-APPEARANCE BY THE ASSESSE E ON THAT DATE. WE, THEREFORE, PROCEED TO HEAR THE PARTY BEFORE US, AND DECIDE THE ASSESSEES APPEAL, I.E., ON MERITS. 3.1 THE APPEAL RAISES A SINGLE ISSUE, I.E., THE MAI NTAINABILITY IN LAW OF THE ADDITION IN THE SUM OF RS.23,92,259/-, SINCE CONFIRMED BY THE L D. CIT(A). 3.2 THE FACTS OF THE CASE AS ARE RELEVANT ARE THAT THE ASSESSEE, A BUILDER AND DEVELOPER, WAS DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS OBSERVED TO HAVE REVERSED BANK ENTRIES IN RESPECT OF PAYMENTS (PER CHEQUES AGGREGA TING TO THE IMPUGNED SUM) TO TWO PARTIES, NAMELY M/S. B. A. TRADING COMPANY PVT. LTD . (AT RS.11,49,636/-) AND M/S. EXPANTION PVT. LTD. (AT RS.12,42,623/-) DURING THE RELEVANT YEAR, I.E., IN JULY, 2007. ON BEING QUERIED QUA THE SAME, THE ASSESSEE EXPLAINED THE PAYMENT/S TO HAVE BEEN MADE DURING THE FINANCIAL YEAR (F.Y.) 2006-07 IN RESPECT OF BUILDING MATERIALS SUPPLIED BY THE SAID PARTIES DURING F.Y. 2005-06. HOWEVER, AS THE G OODS WERE OF INFERIOR QUALITY, THE SAME WERE REJECTED. THIS EXPLAINS THE ULTIMATE NON-PAYME NT. FURTHER, THE MATERIAL WAS PURCHASED TOWARD CONSTRUCTION OF THE FIRST PHASE OF A SCHOOL BUILDING (ADMEASURING 36,750 SQ. FT.). THE ASSESSEE HAD, HOWEVER, SUBSEQU ENTLY CONVERTED A PART THEREOF, I.E., CORRESPONDING TO 28,750 SQ. FT., FROM STOCK-IN-TRAD E TO A CAPITAL ASSET, TREATING IT AS LONG TERM INVESTMENT, DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08, SELLING THE BALANCE CONSTRUCTION OF 8000 SQ. FT. IN THE SAID YEAR. ACCO RDINGLY, ONLY THE CREDIT/S CORRESPONDING TO THAT PART OF THE CONSTRUCTION, I.E., 8000 SQ. FT ., OR FOR RS.5,20,764/-, IS TO BE CONSIDERED AS INCOME ON ACCOUNT OF CESSATION OF LIABILITY U/S. 41(1) OF THE ACT, I.E., ON A PROPORTIONATE BASIS. THE SAME DID NOT FIND FAVOUR WITH THE REVENU E IN-AS-MUCH AS THE ASSESSEE HAD ON INCURRING THE EXPENDITURE CLAIMED DEDUCTION FOR THE FULL AMOUNT OF RS.23.92 LACS FOR A.Y 2006-07 AND, CONSEQUENTLY, UPON REVERSAL OF THE PAY MENT/S OBTAINED CREDIT FOR THE ENTIRE AMOUNT. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL . 4. WE HAVE HEARD THE PARTY BEFORE US, AND PERUSED T HE MATERIAL ON RECORD. 3 ITA NO. 4728/MUM/2012 (A.Y. 2008-09) AJAY PRATAP ASHAR VS. ASST. CIT 4.1 OUR FIRST OBSERVATION IN THE MATTER IS THAT THE ASSESSEE STATING OF HAVING REJECTED THE GOODS UNDER REFERENCE, IS STATING SO NOT ONLY WITHO UT ANY BASIS BUT ALSO ONLY CASUALLY AND EUPHEMISTICALLY; THE SAID CONTENTION BEING CONTRARY TO THE ASSESSEES OWN STAND. IF THE BUILDING MATERIAL WAS REJECTED AND, CONSEQUENTLY, R ETURNED, THERE IS NO QUESTION OF IT BEING PURCHASED AND, THEREFORE, OF THE CHEQUES BE ING ISSUED THERE-AGAINST, WHICH IS IN FACT SEVERAL MONTHS AFTER THE SUPPLIES. THE RETURN OF CHEQUES, WHERE ISSUED, UNDER SUCH CIRCUMSTANCES, WOULD BE OF NO CONSEQUENCE, SIGNIFYI NG ONLY A RECEIPT BACK OF AN ADVANCE PAYMENT/S AGAINST SUPPLY. IT IS ONLY WHERE THE PURC HASES ARE MADE, I.E., GOODS RECEIVED AND ACCEPTED, THAT A BENEFIT DUE TO THE REVERSAL OF THE PAYMENT, SINCE MADE, WOULD ARISE. IN FACT, THAT THE BENEFIT ARISES TO THE ASSESSEE ON ACCOUNT OF CESSATION OF LIABILITY TO THE EXTENT OF RS.23.92 LACS AND, FURTHER, DURING THE CU RRENT YEAR, IS NOT IN DISPUTE. THE ASSESSEE, IN FACT, ADMITS TO BEING BENEFITED, THOUG H CONTENDS OF BEING LIABLE TO TAX ONLY ON THE INCOME/BENEFIT RELATABLE TO CONSTRUCTION OF 800 0 SQ. FT. SOLD UPTO THE CURRENT YEAR. THIS IS AS ACCORDING TO HIM THE MATERIAL WAS UTILIZED IN CONSTRUCTION (DURING F.Y. 2005-06), WHICH WAS FOR 36,750 SQ. FT., OF WHICH 28,750 SQ. F T. HAD THOUGH BEEN CAPITALIZED BY TREATING IT AS A CAPITAL ASSET, GIVING THAT PART OF THE BUILDING ON RENT. IN FACT, PENALTY (AT RS.6,39,099/-) WAS ALSO LEVIED BY THE MUNICIPAL COR PORATION DURING THE CURRENT YEAR. ON THE SAME PLEA BEING RAISED, THE ASSESSING OFFICER ( A.O.) RESTRICTED THE DISALLOWANCE UNDER EXPLANATION TO SECTION 37 TO THE PROPORTIONATE EXTENT, I.E., TO RS.1,39,124/-. FURTHER, IRRESPECTIVE OF THE EXTENT OF THE BUILDIN G SOLD, THE BENEFIT ARISING ON ACCOUNT OF CESSATION OF LIABILITY IS TO THE EXTENT OF DEDUCTION CLAIMED FOR A.Y. 2006-07, WHICH IS ADMITTEDLY FOR RS.23,92,259/-. THUS, TO BE GIN WITH, THE SAME CANNOT BE ARTIFICIALLY SEGREGATED INTO COMPONENTS, DEPENDING UPON THE EXTENT OF CONSTRUCTION MADE SUBSEQUENTLY OUT OF THE SAID MATERIALS, MUCH LESS T HAT SOLD. 4.2 AT THE SAME TIME, HOWEVER, IF A PART OF THE CON STRUCTION FOR WHICH SOME MATERIAL STANDS PURCHASED AND UTILIZED, HAS SINCE BEEN CONVE RTED INTO A CAPITAL ASSET, I.E., NO LONGER REPRESENTS THE ASSESSEES TRADING STOCK, IT IS ONLY THE COST OF THE CAPITAL ASSET WHICH WOULD STAND TO BE PROPORTIONATELY REDUCED. THOUGH WITHOUT DOUBT THE DEDUCTION CAN ONLY BE 4 ITA NO. 4728/MUM/2012 (A.Y. 2008-09) AJAY PRATAP ASHAR VS. ASST. CIT CONSIDERED TO HAVE BEEN ALLOWED FOR THE FULL AMOUNT OF THE RELEVANT PURCHASE/S, WHICH IS STATED TO BE DURING FY 2005-06, AND ON WHICH BASIS ONLY THE COST IS TO BE DETERMINED, THE SAME GETS NEUTRALIZED BY THE CARRY-OVER OF THE COST OF THE UNSOLD GOODS (CONSTRUCTION) IN ACCOUNTS AS WIP. ACCORDINGLY, THOUGH CREDIT/S ARISI NG ON THE CESSATION OF THE LIABILITY IS FOR THE FULL AMOUNT, THAT ATTRIBUTABLE TO THE TRADI NG STOCK CAN ALONE BE ADDED U/S.41(1); THE BALANCE BEING ON CAPITAL ACCOUNT. THE CAPITAL ASSET , WHICH STANDS ACQUIRED THROUGH CONVERSION IN THE IMMEDIATELY PRECEDING YEAR, I.E., A.Y. 2007-08, IS U/S.43(1) OF THE ACT REQUIRED TO BE VALUED AT ACTUAL COST, I.E., AS BORN E BY THE ASSESSEE. AS SUCH, THE CREDIT CORRESPONDING TO A CAPITAL ASSET IS TO BE SIMILARLY CAPITALIZED, I.E., BY REDUCING THE COST TO THE PROPORTIONATE EXTENT, OR BY RS.18,71,495/-. THE A.O. HAVING ACCEPTED LIKE PLEA RAISED IN RESPECT OF ANOTHER EXPENSE INCURRED QUA THE SAME CONSTRUCTION, THE ASSESSEES CONTENTION QUA CONVERSION TO THE STATED EXTENT STANDS ACCEPTED BY THE REVENUE. THE A.O. OR THE LD. CIT(A), HOWEVER, HAVE NOT RECORDED ANY F INDING AS TO THE SAID CONVERSION BY THE ASSESSEE IN ITS BOOK OF ACCOUNT AND, FURTHER, A S TO THE BOOK VALUE OF THE CAPITAL ASSET HAVING BEEN REDUCED TO THAT EXTENT, SO AS TO BRING IT IN AGREEMENT WITH THE COST AS ACTUALLY INCURRED. THIS IS ALSO RELEVANT AS TO WE DO NO OBSE RVE ANY RENTAL INCOME AND, FURTHER, EVEN THE STOCK-IN-TRADE MAY REMAIN UNSOLD, AND COULD ALS O BE GIVEN ON RENT, THOUGH WOULD RESULT IN INCOME FRUCTIFYING ONLY ON SALE. SUBJECT TO THE SAID CONFIRMATION BY THE A.O., WE THEREFORE ACCEPT THE ASSESSEES CASE. FURTHER, THOU GH PERHAPS OF LITTLE CONSEQUENCE IN THE ADMITTED FACTS OF THE CASE, IN OUR VIEW, THE BENEFI T, WHERE THE CONSTRUCTION IS NOT CONVERTED INTO A CAPITAL ASSET TO (SAY) ANY EXTENT, BEING QUA AN EXPENDITURE REPRESENTING DIRECT COST, WOULD YET TRANSLATE INTO INCOME U/S.41 (1) ONLY ON THE SALE OF THE CONSTRUCTION. THIS IS AS THE SAME HAS A DIRECT BEARING ON THE COS T OF THE GOODS SOLD, WHICH ONLY IS TO BE SET OFF AGAINST THE SALE TO COMPUTE THE INCOME FOR ANY YEAR; THE BALANCE CONSTRUCTION BEING CARRIED OVER AT REDUCED COST, WHICH WOULD THU S TRANSLATE/MATERIALIZE INTO INCOME IN THE YEAR OF ITS SALE. WE DECIDE ACCORDINGLY. 5 ITA NO. 4728/MUM/2012 (A.Y. 2008-09) AJAY PRATAP ASHAR VS. ASST. CIT 5. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. /-)0 &12/) # 3. ' 4 ) # ) 56 ORDER PRONOUNCED IN THE OPEN COURT ON APRIL 16, 201 4 SD/- SD/- (I. P. BANSAL) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER % ( MUMBAI; 7& DATED : 16.04.2014 '.&../ ROSHANI , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !' / THE RESPONDENT 3. % 8) ( ) / THE CIT(A) 4. % 8) / CIT - CONCERNED 5. ;'<= !)&>1 , * >1- , % ( / DR, ITAT, MUMBAI 6. =?2 @( / GUARD FILE ! ( / BY ORDER, ) / (* + (DY./ASSTT. REGISTRAR) , % ( / ITAT, MUMBAI