DCIT, Panchkula V. M/s Haryana Urban Development Authority, Panchkula

ITA 623/CHANDI/2011

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 5239 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 28-03-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 03-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR GULSHAN RAJ
• Assessee Lawyers: RATTAN KAUR SHRI A K JINDAL
• Keywords: Rejection of books of accounts; Business income; Depreciation; Business expenditure; Search and seizure; Charitable institution; Opportunity of being heard; Rule of consistency; Earning of tax free income; Retrospective amendment; Additional evidence; question of law; Cost of acquisition; Capital receipt; Revised return; revenue expenditure; capital expenditure
• Section: 43B; 133A; 14A; 37(1); 12A; 145; 56; 154

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, A CHANDIGARH BEFORE MS. DIVA SINGH, JUDICIAL MEMBER AND DR. B.R.R.KUMAR, ACCOUNTANT MEMBER ITA NOS. 623, 624, 625, 1061, 516, 517, 518, 544/CHD/2011,15 & 17 (ASSESSMENT YEARS. 2004-05, 2006-07 TO 2011-12 & 20 14-15) THE DCIT, VS. M/S. HARYANA URBAN DEVELOPMENT AUT HORITY, CIRCLE SECTOR- 6, PANCHKULA. PANCHKULA PAN NO. : AAAAH0087M ITA NOS. 255, 256/CHD/2016 (ASSESSMENT YEARS. 2012-13, 2013-14) THE ASST. CIT, VS. HARYANA URBAN DEVELOPMENT AUT HORITY, CIRCLE SECTOR- 6, PANCHKULA. PANCHKULA ITA NOS. 640,414, 641, 642,1075,415, 472, 473, 474, 548/CHD/2011, 12, 15 & 1 7 ( ASSESSMENT YEARS : 20 04-05, 2006-07 TO 2011-12 & 2014-15) M/S. HARYANA URBAN DEVELOPMENT AUTHORITY VS. THE AD DL. CIT SECTOR-6 PANCHKULA RANGE PANCHKULA PANCHKULA PAN NO. : AAAAH0087M ITA NOS. 471, 235 & 236/CHD/2015 & 2016 (ASSESSMENT YEARS. 2003-04 & 2012-13 TO 2013-14) M/S. HARYANA URBAN DEVELOPMENT AUTHORITY VS. THE DC IT SECTOR-6 PANCHKULA RANGE PANCHKULA PANCHKULA (APPELLANT) (RESPONDENT) ASSESSEE BY : MS. RATTAN KAUR, SHRI. A.K. JINDAL REVENUE BY : DR. GULSHAN RAJ, CIT-DR DATE OF HEARING : 22.11.2017 DATE OF PRONOUNCEMENT : 06/02/2018 ORDER PER BENCH ALL THE ABOVE APPEALS AND CROSS APPEALS (TOTALING 2 3 IN NUMBER, 10 BY THE REVENUE AND 13 BY THE ASSESSEE) PERTAINING TO 2004 05 TO 2014-15 ASSESSMENT YEAR ARE BEING DECIDED BY A COMMON ORDER FOR THE SA KE OF CONVENIENCE. 2 2. THE HARYANA URBAN DEVELOPMENT AUTHORITY (HUDA) WAS CONSTITUTED UNDER HARYANA URBAN DEVELOPMENT AUTHORITY ACT, 1977. THE FUNCTIONS OF HUDA ARE: (A) TO PROMOTE AND SECURE DEVELOPMENT OF URBAN AREAS WI TH THE POWER TO ACQUIRE, SELL AND DISPOSE OF PROPERTY, BOTH MOVABLE AND IMMO VABLE, (B) TO ACQUIRE, DEVELOP AND DISPOSE OF LAND FOR RESIDENTIAL, INDUST RIAL, COMMERCIAL AND INSTITUTIONAL PURPOSES, (C) TO MAKE AVAILABLE DEVEL OPED LAND TO HARYANA HOUSING BOARD AND OTHER BODIES FOR PROVIDING HOUSES TO ECONOMICALLY WEAKER SECTIONS OF THE SOCIETY; AND (D) TO UNDERTAKE BUILD ING WORKS AND OTHER ENGINEERING WORKS. HUDA IS DEVELOPER OF URBAN AREAS . IT DEVELOPS URBAN INFRASTRUCTURE. IT IS DOING BUSINESS OF DEVELOPMENT OF LARGE REAL ESTATE PROJECTS. HUDA IS THE ENTITY WHICH IS ACQUIRING LAND, DEVELOP ING AND FINALLY HANDING IT OVER TO CONSUMERS FOR A PRICE. LANDS DEVELOPED BY HUDA I S THOUGH IDENTIFIED AND ACQUIRED BY THE URBAN ESTATE DEPARTMENT, HARYANA GO VERNMENT, YET THE OWNERSHIP AND POSSESSION OF LAND IS TRANSFERRED TO HUDA FOR CONSIDERATION PAID BY HUDA. LAND TO BE DEVELOPED IS IDENTIFIED AND SUR VEYED BY THE DIRECTOR GENERAL TOWN & COUNTRY PLANNING, HARYANA. THE LAND SO IDENTIFIED AND SURVEYED IS READY FOR ACQUISITION BY LAO (LAND ACQUISITION O FFICER) OF THE URBAN ESTATE DEPARTMENT, HARYANA. LAO REQUESTS ITS SUPERIOR AUTH ORITY, DIRECTOR GENERAL, URBAN ESTATE DEPARTMENT, HARYANA FOR ADMINISTRATIVE APPROVAL FOR ACQUIRING THE LAND. THE URBAN ESTATE DEPARTMENT, HARYANA CONVEYS ADMINISTRATIVE APPROVAL FOR ACQUISITION OF LAND TO DIRECTOR GENERAL URBAN E STATE DEPARTMENT, HARYANA AND ASKS LAO TO ACQUIRE LAND IN QUESTION AS PER LAW . HUDA AUTHORIZES ITS BANK TO DISBURSE PAYMENT FOR AWARD FOR LAND TO THE LAO WHO FURTHER TRANSFERS THE OWNERSHIP AND POSSESSION OF LAND TO HUDA. 3 THE HUDA MAINTAINS ACCOUNTS AS PER 'OLD ACCOUNTING STANDARDS-7' WHICH PRESCRIBES THAT PROFIT OR LOSS OF AN ORGANIZATION I S TO BE WORKED OUT AFTER THE COMPLETION OF THE PROJECT. FOR THIS HUDA HAS FIXED FOR IT A PERIOD OF 20 YEARS. DURING THIS PERIOD, HUDA RECEIVES ALMOST ENTIRE PAY MENTS FROM THE ALLOTTEES OF THE PLOTS LIKE [(1) COST OF LAND + (2) DEVELOPMENT COST + (3) ADMINISTRATIVE COST]. THE RECEIPTS UNDER ALL THESE THREE HEADS HAVE BEEN CAPITALIZED. ON THE OTHER HAND, REGARDING EXPENDITURE, THE ASSESSEE HAS CAPITALIZED FIRST TWO COMPONENTS FOR A PERIOD OF 20 YEARS BUT THIRD ONE I.E. ADMINIS TRATIVE COST/EXPENDITURE HAS BEEN CLAIMED AS REVENUE EXPENDITURE IN EACH YEAR AN D SHOWN LOSS YEAR AFTER YEAR. REJECTION OF BOOKS 3. GROUND NO. 1 FOR THE ASSESSMENT YEARS 2004-05, 2006-07, 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, 2012-13, 2013-14 AND 201 4-15 OF THE ASSESSEE APPEAL RELATES TO REJECTION OF BOOKS OF ACCOUNTS AND METHO D OF ACCOUNTING FOLLOWED BY THE ASSESSEE. 3.1. THE AO WHILE FRAMING THE ASSESSMENT REJECTED T HE ASSESSEE'S METHOD OF ACCOUNTING HOLDING IT TO BE DEFECTIVE AND NOT REFLE CTING CORRECT PROFITS OF THE YEAR. THE ESTIMATION OF THE PROFITS BY REJECTING T HE BOOKS OF ACCOUNTS HAS BEEN UPHELD BY THE LD. CIT(A). 3.2 BRIEF FACTS AND THE BASIS TAKEN BY THE ASSESSIN G OFFICER AND BY THE LD. CIT(A) ARE AS UNDER: THE AO WHILE POINTING OUT THE VARIOUS DEFECTS IN TH E BOOKS OF ACCOUNT HAS OBSERVED AS UNDER:- 'I) THE ASSESSEE CLAIMS THAT IT FOLLOWS THE CASH SY STEM OF ACCOUNTING AND YET, IT IS SEEN FROM THE ACCOUNT OF THE ASSESSE E THAT THE ASSESSEE IS NOT SHOWING THE RECOVERIES FROM THE PLO TS SOLD IN THE 4 INCOME AND EXPENDITURE ACCOUNT FOR A PERIOD OF 20 Y EARS. A SECTOR IS DEVELOPED BY WAY OF ACQUISITION OF LAND, CREATIO N OF BASIC INFRASTRUCTURE AND DEVELOPMENT WORKS AND THEN THE S ECTOR IS PLOTTED FOR THE PURPOSE OF SALE. ENTIRE PLOTS ARE SOLD OFF IN THE FIRST 5 TO 6 YEARS OF THE SCHEME OF THE SECTOR DEVELOPED. THE COMMERCI AL AND INSTITUTIONAL AREAS IN THE SECTOR ARE SEPARATELY AU CTIONED. IN THIS ENTIRE ACTIVITY WHICH TAKES PLACE IN A SPAN OF NEAR LY 10 YEARS, WHEN PLOTS ARE SOLD, NO PROFIT FROM SUCH SALE OF PLOTS M ADE BY THE ASSESSEE IS TAKEN TO THE PROFIT AND LOSS ACCOUNT. I N OTHER WORDS, NO INCOME IS SHOWN BY THE ASSESSEE EVEN AFTER THE PLOT S ARE SOLD AND FULL AMOUNT OF INSTALLMENTS HAS BEEN RECEIVED BY IT . THE ENTIRE RECOVERIES FROM THE ALLOTEES OF SOLD PLOTS AND AUCT IONED AREAS CONTINUE TO BE SHOWN AS ADVANCE FROM CUSTOMERS'. OV ER THE YEARS, THE ASSESSEE HAS NOT DECLARED INCOME IN ITS RETURNS FILED FROM SEVERAL SUCH PROJECTS (EACH SECTOR IS TAKEN AS A PROJECT), BUT GENERATED HUGE SURPLUS WHICH IS SHOWN FROM THE SURPLUS OF CAS H AND BANK BALANCE OF AS ON 31.03:2006 AMONG OTHER CURRENT ASS ETS. THUS, METHOD OF ACCOUNTING IS TOTALLY CONTRADICTORY TO NORMAL ACCOUNTING PROCEDURE. ONCE A SECTOR HAS BEEN PLOTTE D AND SOLD, THE RECEIPTS FROM THE PLOTS SHOULD BE A REVENUE REC EIPT. IT IS EVEN CONTRADICTORY TO THE ASSESSEE'S OWN CASH SYSTEM OF ACCOUNTING. II) THE TOTAL PAYMENT IN THE FORM OF INSTALLMENTS F OR THE PLOTS AUCTIONED BY HUD A BY CALLING FOR APPLICATIONS THRO UGH THE NEWSPAPERS ETC., ARE RECEIVED WITHIN THREE TO SIX Y EARS. ONCE THE FULL INSTALLMENTS ARE GIVEN, POSSESSION IS HANDED O VER TO THE BUYER. ONCE THE PLOTS ARE HANDED OVER, NO FURTHER WORK REM AINS WITH THE 5 ASSESSEE TO COMPLETE EXCEPT MAINTENANCE AND DEVELOP MENT OF THE COMPLETED SECTORS FOR SOME TIME. III) THE METHOD OF ARBITRARILY TAKING THE PERIOD AT 20 YEARS BEFORE THE SALE CONSIDERATION RECEIVED FROM CUSTOMERS IS RECOG NIZED AS A REVENUE RECEIPT HAS NO BASIS AT ALL. THIS IS MORE S O AS THE ASSESSEE BEGINS TO DEBIT EXPENSES AFTER A PERIOD OF 10 YEARS IN RELATION TO SUCH 'INCOMPLETE' SECTORS TO THE INCOME AND EXPENDI TURE A/C AS ANNUAL MAINTENANCE AND DEVELOPMENT CHARGES. THIS FU RTHER ESTABLISHES THE INCONSISTENCY IN THE ACCOUNTS WHERE BY RECEIPTS OR RECOVERIES FROM SECTORS OLDER THAN 10 YEARS HAVE BE EN CAPITALIZED AND KEPT AS LIABILITY BUT THE EXPENSES OF ANNUAL MA INTENANCE ETC. ON THE SAME SECTORS ARE CHARGED TO THE INCOME AND E XPENDITURE ACCOUNT. IV) IN ADDITION TO THIS, THE ASSESSEE HAS STAFF WHI CH IS WORKING BOTH FOR COMPLETED SECTORS AND INCOMPLETE SECTORS. THEIR SAL ARIES, ALLOWANCES, TRAVELING, CONTINGENCIES AND ALL ADMINI STRATIVE EXPENSES ARE BEING DEBITED TO THE INCOME AND EXPEND ITURE ACCOUNT. AS A RESULT OF THIS INCONSISTENCY AGAIN, I T IS CLEAR THAT THE ACCOUNTS OF THE ASSESSEE DO NOT SHOW A CORRECT PICT URE OF THE PROFITS ACTUALLY ACCRUING TO THE ASSESSEE. ACCORDINGLY, A SHOW CAUSE NOTICE WAS GIVEN TO THE APPELLANT AS TO WHY THE BOOKS OF ACCOUNT BE NOT REJECTED. THE ASSES SEE HOWEVER STATED THAT IT IS FOLLOWING AS-7 AND COMPLETED CONT RACT METHOD. THE AO HOWEVER POINTED OUT THAT AS-7 DOES NOT APPLY TO ASSESSEE'S CASE AS THE SAME IS TO BE APPLIED IN ACCOUNTING FOR CONSTRUCTION CONTRACTS IN THE FINANCIAL STATEMENTS OF CONTRACTOR WHEREAS THE 6 ASSESSEE IS A BUILDER WHICH SELLS PLOTS AFTER PURCH ASING LAND ) PLOTTING IT AND DEVELOPING IT WITH BASIC INFRASTRUCTURE AD NOT A CONSTRUCTION CONTRACTOR. THE AO FURTHER OBSERVED THAT THE AS-7 H AS BEEN REVISED W.E.F. 01.04.2003 ON THE RECOMMENDATION OF THE ACCO UNTING COMMITTEE WHICH HELD THAT THE COMPLETED CONTRACT ME THOD HAS THE EFFECT OF DEFERRING/POSTPONING RECOGNITION OF I NCOME. THE REVISED AS-7 LAYS DOWN THAT THE CONTRACT REVENUE AN D EXPENSES MUST BE RECOGNIZED WHERE THE OUTCOME OF CONSTRUCTIO N CONTRACT CAN BE ESTIMATE RELIABLY BY REFERENCE TO THE STAGE OF COMPLETION. THUS, AS PER THE AO IN VIEW OF REVISED AS-7 IN THE CASE OF A CONTRACTOR WHERE THE OUTCOME CANNOT BE ESTIMATED RE LIABLY, REVENUE SHOULD BE RECOGNIZED TO THE EXTENT OF CONTR ACT COSTS INCURRED OF WHICH RECOVERY IS PROBABLE. THE AO NOTE D THAT IN ASSESSEE'S CASE, OUTCOME OF CONTRACT-EVEN IF ASSESS EE'S CLAIMS OF BEING A CONTRACTOR IS CONSIDERED FOR A MOMENT THOUG H NOT ALLOWED- IS TOTALLY KNOWN AND PREDICTABLE WITH FULL CERTAINT Y. IT HAS A CLAUSE FOR EVEN RECOVERING THE ENHANCED COST OF ACQUISITIO N OF LAND FROM THE BUYERS IN CASE IT IS SO GRANTED BY THE COURTS A T ANY FUTURE STAGE. THE AO FURTHER REFERRED TO THE CENTRAL GOVT, RY /V 1- : NOTIFICATION U/S 145(2) FOR ASSESSEES FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING TO MAKE IT COMPULSORY TO FOLLOW UNIFORMLY TWO STANDARD S OF ACCOUNTANCY I.E. AS-1 AND AS-2. AS PER THE NOTIFICA TION, ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE WILL BE DEEMED TO R EPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF BUSINESS O NLY IF IT IS GOVERNED BY SUBSTANCE AND NOT MERELY BY THE LEGAL FORM. THE AO OBSERVED THAT THE ASSESSEES CASE IS EVEN STRONGER TO FALL UN DER THESE NOTIFIED GUIDELINES AS IN ASSESSEE'S CASE NOT ONLY HAS THE I NCOME ACCRUED, IT 7 HAS BEEN ACTUALLY RECEIVED. THERE CAN BE NO DEFERME NT OF INCOME THEREAFTER, AS DONE BY THE ASSESSEE. THE AO REFERRED TO THE DECISION OF HON'BLE ITAT IN THE APPELLANT'S OWN CASE FOR THE A.Y. 2003-04 WHEREIN THE HON'BLE B ENCH OBSERVED AS UNDER :- 'WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MAT ERIAL AVAILABLE ON RECORD. IN THE INSTANT CASE THE ASSESS EE WAS ENGAGED IN THE BUSINESS OF ACQUIRING THE LAND AND AFTER DEV ELOPING THE LAND, RESIDENTIAL / COMMERCIAL PLOTS WERE ALLOTTED / AUCT IONED TO THE GENERAL PUBLIC . IN THE INSTANT CASE THE ASSESSEE C ONSIDERED THE EXPENSES WHICH WERE INCURRED DURING THE PERIOD OF L AST 10 YEARS AFTER ACQUISITION OF THE LAND AS CAPITAL IN NATURE WHILE THE EXPENSES INCURRED FOR THE SUBSEQUENT 10 YEARS WERE CONSIDERE D AS REVENUE IN NATURE. THE SAID PERIOD HAS BEEN ADOPTED FOR CAPITA LIZING ON THE HYPOTHESIS THAT IN THE FIRST 10 YEARS, THE PLOTS WO ULD BE OCCUPIED AND READY FOR INHABITATION. THE STAND OF THE ASSESS EE WITH REGARD TO THE ACCOUNTING TREATMENT OF EXPENSES IS THAT AS-7 I SSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IS APPL ICABLE. THE SAID ACCOUNTING STANDARD DEALS WITH ACCOUNTING FOR CONST RUCTION CONTRACTS IN THE FINANCIAL STATEMENT OF THE CONTRAC TORS. THE MAIN FEATURE WHICH CHARACTERISES A CONSTRUCTION CONTRACT IS SECURED AND THE DATE WHEN THE CONTRACT ACTIVITIES ARE COMPLETED FALL INTO DIFFERENT ACCOUNTING PERIODS AND THE SPECIFIC DURAT ION OF THE CONTRACT PERFORMANCE IS NOT ISSUED AS A DISTINGUISH ING FEATURE OF THE CONSTRUCTION CONTRACT. ACCORDING TO AS-7 THE CONSTR UCTION CONTRACTS GENERALLY FALL INTO TWO BASIC TYPES: 8 I) FIXED PRICE CONTRACTS- THE CONTRACTOR AGREE S TO A FIXED CONTRACT PRICE OR RATE IN SOME CASES SUBJECT TO COS T ESCALATION CLAUSES. II) COST PLUS CONTRACTS - THE CONTRACTOR IS REIMBUR SED FOR ALLOWABLE OR OTHERWISE DEFINED COSTS AND IS ALSO ALLOWED A PERCE NTAGE OF THESE COSTS OR A FIXED FEE. IN THIS PRESENT CASE THE ASSESSEE IS NOT A CONTRACT OR IN TRUE SENSE BECAUSE IT IS NOT PETTING ANY CONTRACT FROM OTHER P ARTIES RATHER THE PLOTS OF VARIOUS CATEGORY E.G. RESIDENTIAL, COMMERC IAL D INDUSTRIAL ETC. ARE DEVELOPED BY THE ASSESSEE ITSELF. IN THE I NSTANT CASE, ALTHOUGH ACCOUNTING TREATMENT CAN BE DONE CONSIDERI NG THE PRINCIPLES LAID DOWN IN AS-7 BUT THE ASSESSEE IN TR UE SENSE IS NOT FOLIO WING A 5-7 BECAUSE ALL THE SECTORS CANNOT BE COMPLE TED IN THE FIRST 10 YEARS MOREOVER THE ASSESSEE HAS NOT SUPPLIED SPE CIFIC DETAIL AS TO WHEN A PARTICULAR SECTOR CAN BE COMPLETED, IN SU CH TYPE OF CASES THERE SHOULD HAVE BEEN SOME DETAILS AS REGARD S TO THE DATE OF COMPLETION UPTO THAT DATE THE EXPENSES CAN BE CA PITALIZED AND WHEN THE SECTOR IS FULLY DEVELOPED AND PLOTS ARE AL LOTTED/AUCTIONED TO THE APPLICANT, THE EXPENSES INCURRED THEREAFTER ARE NOT CAPITAL IN NATURE BECAUSE THE STOCK I.E. THE PLOT IS READY TO BE DISPOSED OFF WITHOUT MAKING ANY FURTHER DEVELOPMENT IN THE INSTA NT CASE THE ASSESSEE IS NOT FOLLOWING THE COMPLETE CONTRACT MET HOD AND CAPITALIZING CERTAIN EXPENSES WHICH WERE NOT RELATE D TO A PARTICULAR SECTOR E.G. INTEREST ETC WHICH MIGHT HAVE BEEN FOR A FEW SECTORS AND NOT FOR ALL THE SECTORS. IN OUR OPINION, THE ON LY COST OR EXPENSES WHICH ARE DIRECTLY ATTRIBUTABLE TO A SPECIFIC CONTR ACT CAN ONLY BE 9 CAPITALIZED AND THAT TOO UPTO THE DATE WHEN THE PLO TS ARE READY TO BE SOLD/ALLOTTED/AUCTIONED. IN AS7 COMPLETED CONTRA CT METHOD HAS BEEN PRESCRIBED IN PARA 10 ACCORDING TO WHICH T HE PRINCIPAL ADVANTAGE OF THE COMPLETED CONTRACT METHOD IS THAT IT IS BASED ON THE RESULTS AS DETERMINED WHEN THE CONTRACT IS COMP LETED OR SUBSTANTIALLY COMPLETED RATHER THAN ON ESTIMATED WH ICH MAY REQUIRE SUBSEQUENT ADJUSTMENT AS A RESULT OF UNFORE SEEN COSTS AND POSSIBLE LOSSES THE RISK OF RECOGNIZING PROFITS THA T MAY NOT HAVE BEEN EARNED IS THEREFORE MINIMIZED. THEREFORE, SELECTION OF METHOD SHOULD HAVE BEEN MADE BY CONSIDERING THE NATURE OF WORK UNDERTAKEN BY THE ASSESSEE, HOWEVER, THIS EXERCISE HAS NOT BEEN DONE BY THE ASSESSING OFFICER NEITHER ANY DETAIL HA S BEEN FURNISHED BY THE ASSESSEE. ' THUS, AS PER THE AO HON'BLE ITAT CHANDIGARH HAS CON CLUDED AS UNDER:- (A) ASSESSEE IS NOT A CONTRACTOR IN TRUE SENSE. (B) THE ASSESSEE IS NOT FOLLOWING THE COMPLETE CONTRACT METHOD IN TOTO. (C) ONLY COST OR EXPENSES WHICH ARE DIRECTLY ATTRIBUTAB LE TO A SPECIFIC CONTRACT CAN BE CAPITALIZED, AND THAT TOO UPTO THE DATE WHEN PLOTS ARE READY TO BE SOLD/ALLOTTED/AUCTIONED. ' THE AO FURTHER REFERRED TO THE DECISION OF HON'BLE ITAT IN THE CASE OF APPELLANT ITSELF WHILE DECIDING THE GROUND OF APPEA L RELATING FORFEITURE OF SECURITY. THE HON'BLE ITAT REJECTED T HE APPELLANT'S ARGUMENTS THAT THE INCOME FROM FORFEITURE OF SECURI TIES WILL BE ACCOUNTED AFTER 20 YEARS AS IT ACCOUNTS FOR ITS INC OME ONLY AFTER 20 10 YEARS. THE HON'BLE BENCH HELD THAT THE AMOUNT RECEI VED ON ACCOUNT OF FORFEITURE OF SECURITIES IS TO BE TAXED DURING THE YEAR IN WHICH IT HAD BEEN FORFEITED. THE HON'BLE BENCH TOOK NOTE OF THE FACT THAT THE ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING AND FURTHER THAT THE ASSESSEE WAS NOT ADJUSTING THIS AM OUNT IN THE VALUE OF CLOSING STOCK. THE AO AFTER EXAMINING THE BOOKS OF ACCOUNT THE APP ELLANT MADE THE FOLLOWING FURTHER OBSERVATION:- 'I) THE ASSESSEE HAS NOT ADOPTED METHOD OF ACCOUNTI NG WHICH IS NOTIFIED BY THE CENTRAL GOVT, UNDER THE PROVISIONS OF SECTION 145(2) OF THE INCOME TAX ACT. RATHER IT HAS CHOSEN TO ADOP T OUTDATED 'ACCOUNTING STANDARD-7', WHICH HAS SINCE BEEN REVIS ED. II) THE ANNUAL PROFIT CANNOT BE DEDUCED FROM THE ME THOD APPLIED BY THE ASSESSEE. THE ASSESSEE HAS ADOPTED 'COMPLETE CONTRACT METHOD' AND HAS TAKEN A PERIOD OF 20 YEARS FOR CHAR GING PROFIT TO TAX. THUS, AS A MATTER OF FACT, THE ACCOUNTING YEAR OF THE ASSESSEE IS EXTENDED TO 20 YEARS, WHEREAS SECTION 3 OF THE INCO ME TAX ACT PRESCRIBE THAT PREVIOUS YEAR SHOULD BE A PERIOD OF 12 MONTHS. THE DETAILED BREAK-UP OF CONSTITUENTS OF OPENING STOCK AND CLOSING STOCK IS NOT READILY AVAILABLE WITH THE ASSESSEE, F OR VERIFICATION. PARTY WISE DETAILS OF CREDITORS AND DEBTORS ARE ALSO NOT MAINTAINED. III) UNDER THE SCHEME OF THE I. T. ACT, 1961. LIABI LITY TO PAY INCOME-TAX IS ATTRACTED THE MOMENT THE INCOME IS RECEIVED AND THE PROFIT, IF ANY, IN THE BUSINESS IS TO BE TAXED, SUBJECT TO OTH ER PROVISIONS OF ACT. THE ASSESSEE IS POSTPONING ITS INCOME TO AFTER 20 Y EARS WHEN THE PROJECT IS TAKEN TO BE COMPLETED WHILE FULL PAYMENT IS RECEIVED IN 11 MOST CASES WITHIN 6 YEARS OF ALLOTMENT AND BY CHARG ING INTEREST IF THE PAYMENT IS MADE IN INSTALLMENT. FOR INCOME-TAX ACT, EACH PREVIOUS YEAR IS A SELF CONTAINED PERIOD. INCOME-TA X IS AN ANNUAL LEVY. THE ACCOUNTING STANDARDS MAY GUIDE THE ASSESS EE HOW TO KEEP ACCOUNTS BUT THESE DO NOT OVER-RIDE THE PROVIS IONS OF IT ACT. IV) THE PERIOD OF 20 YEARS HAS BEEN TAKEN ARBITRARI LY & HYPOTHETICALLY WITHOUT ANY BASIS. THE ASSESSEE RECEIVES TOTAL PAYM ENTS FROM THE ALLOTTEES OF PLOTS WITHIN A PERIOD OF SIX YEARS. TH E PROJECT IS ALSO COMPLETED ALMOST IN THAT PERIOD. AFTER RECEIPT OF T HE PAYMENT, THE ASSESSEE DEPOSIT THIS AMOUNT IN THE BANK WHICH RE SULTS IN HUGE ACCUMULATION. THIS POSTPONEMENT OF PROFIT WITHOUT A NY REASON IS IN CONTRAVENTION TO SECTION 3& 4 OF THE INCOME TAX ACT . V) DURING THE YEAR UNDER REFERENCE ASSESSEE HAS REC EIVED A SUM OF FROM ALLOTEES. AGAINST IT, THE EXPENSES FOR BOTH THE COMPLETED SECTORS AND INCOMPLETE SECTORS ARE BEING CLAIMED. VI) THE ASSESSEE IS NOT MAINTAINING PROPER ACCOUNTS AND THERE IS NO INTERNAL CONTROL ON THE ACCOUNTING PROCESS AND A CCOUNTING SYSTEM. THE STATUTORY AUDITORS IN THE NOTES TO ACCO UNTS AT PAGE-36 HAVE MADE A SIMILAR OBSERVATION IN PARA 3 OF THEIR NOTES AS UNDER IN THE PREVIOUS YEAR:- '3.1 THE AUTHORITY WAS MAINTAINING ITS ACCOUNT ON C ASH BASIS. AS SUCH, AMOUNT RECOVERABLE FROM/PAYABLE TO VARIOUS GO VERNMENT DEPARTMENTS, COLONIZERS, ALLOTEES ETC. WAS NEITHER BEING WORKED OUT NOR DEPICTED IN ACCOUNTS. KEEPING IN VIEW THE MULTI FARIOUS ACTIVITIES OF HUDA INVOLVING DEVELOPMENT OF LAND, CONSTRUCTION OF BUILDINGS, ROADS AND OTHER PUBLIC AMENITIES INCLUDING WATER SU PPLY, SEWERAGE 12 SYSTEM, PARKS, ELECTRIFICATION, ETC., IT IS DESIRAB LE THAT HUDA SHOULD MAINTAIN ITS ACCOUNTS ON ACCRUAL BASIS. 3,2 PARTY WISE DETAILS OF CREDITORS AND DEBTORS HAV E NOT BEEN INDICATED IN SCHEDULE CPERTAINING TO 'OTHER LIABILI TIES' AND SCHEDULE 'J' PERTAINING TO 'LOANS AND ADVANCES'.' ALL THE BASIC THREE CONTENTIONS OF THE ASSESSEE ARE HELD TO BE INCORRECT ON FACTS: I) ASSESSEE IS NOT A CONSTRUCTION CONTRACTOR. IIJ ASSESSEE DOES NOT WORK ON NO-PROFIT-NO-LOSS BASIS. REGISTRATION U/S : 12A HAS BEEN DISALLOWED TO IT. IIII) ASSESSEE DOES NOT FOLLOW CASH SYSTEM OF A CCOUNTING. IT DOES NOT ACCOUNT FOR RECEIPTS ON CASH BASIS, AND CLAIMS TO FOLLOW CONTRACT COMPLETION METHOD (OF AN ARBITRARILY CHOSE N PERIOD OF 20 YEARS). IV) IT DOES NOT FOLLOW AS-7, AS IT STANDS REVISED S INCE 01.04.2003.' THE AO AFTER POINTING OUT THE DEFECTS AS MENTIONED ABOVE REJECTED THE APPELLANT'S BOOKS OF ACCOUNT U/S 145(3) OF THE ACT. ASSESSEE IS FOLLOWING A PERIOD OF TWENTY YEARS FOR TREATING A SECTOR AS A COMPLETED SECTOR WHICH IS NOT IN CONSONANCE WITH TH E ACCEPTED INCOME TAX LAW AND PRACTICE. THAT THE ASSESSEE IS NOT A CONTRACTOR IN TRUE SENSE TO WHOM PROVISIONS OF ACCOUNTING STANDARD 7 ARE APPLICABLE. AND THE ASSES SEE IS NOT FOLLOWING THE REVISED AS 7. OUR ARGUMENTS IN THIS REGARD ARE AS U NDER; THE PROCEDURE FOR FOLLOWING A PERIOD OF TWENTY YEARS FOR COMPLETION O F A SECTOR IS A SCIENTIFIC AND WELL ACCEPTED PROCEDURE BASED UPON THE PAST PRACTIC E AND HISTORY AND ACCOUNTING POSTULATES FOLLOWED BY THE ASSESSEE SINC E INCEPTION. THE ASSESSEE IS SELLING PLOTS BY ALLOTMENT AND THE SECTORS IN WHICH THE SECTORS ARE SOLD TAKE ABOUT 15 TO 20 YEARS TO GET FULLY DEVELOPED AND BE READY FOR OCCUPATION. RECENT EXAMPLES ARE SECTORS 20/21 WHICH WERE FLOATED ALMOS T ABOUT 20 YEARS AND YET THESE ARE NOT FULLY DEVELOPED. BESIDES THE PERIOD O F TWENTY YEARS IS TAKEN AS THE PERIOD TAKEN FOR COMPLETION OF THE PROJECT AND THE TIME FRAME WHEN THE PROJECT IS TREATED TO BE FULLY COMPLETED. AS HAS BEEN STATE D IN THE OPENING PARAS, THE ASSESSEE IS FOLLOWING THE AS7 BEING A CONTRACTOR, A ND AS AN OPTION FOLLOWING COMPLETED CONTRACT METHOD. SINCE IN THE RIGHT STATE OF CIRCUMSTANCES, THE PERIOD WHEN THE PROJECT IS DEEMED TO BE COMPLETED IS TWENT Y YEARS, THE PERIOD OF TWENTY YEARS IS TAKEN BY THE ASSESSEE FOR TREATING ITS SECTORS TO EB COMPLETE. 13 IT IS FURTHER ARGUED THAT A BARE REFERENCE TO THE A S 7 REVEALS THAT THE SAME APPLIES TO THE CONTRACTS OF CREATING COMPOSITE ASSETS. IT I S NOT APPLICABLE TO BUILDING CONTRACTS ONLY. IT IS ARGUED THAT THE CONTRACTS WHI CH RESULT IN CREATION OF AN ASSET OR A GROUP OF ASSETS ALSO QUALIFIES TO BE CONTRACTO R AS PER AS 7. FURTHER MORE IN RESPECT OF ASSESSMENT YEAR 2003-200 4 TO 2006-07, THE INCOME TAX DEPARTMENT HAS ACCEPTED THE APPLICABILITY OF AS 7 T O THE ASSESSEE, BUT HAVE DENIED THE BENEFIT OF THE SAME TO THE ASSESSEE ON T HE GROUND THAT THE ASSESSEE IS NOT A CONTRACTOR AND/ OR IS NOT FOLLOWING THE REVIS ED AS 7. IN FAIRNESS OF SITUATION OR CIRCUMSTANCES, IT WILL BE JUST AND APPROPRIATE T O REJECT THE STANCE OF THE INCOME TAX DEPARTMENT THAT THE AS 7 IS NOT APPLICAB LE TO THE ASSESSEE. HON'BLE ITAT WHILE DECIDING THE APPEAL FOR ASSESSME NT YEAR 2003-04 HELD IN CLEAR WORDS THAT THE ALTHOUGH THE ASSESSEE IS NOT A CONTR ACTOR IN REAL SENSE, YET APPLICABILITY OF AS 7 SHOULD BE MADE IN THE MANNER PRESCRIBED BY THE SAME. PLEASE READ HIGHLIGHTED PORTIONS ABOVE. IT IS YET A NOTHER MATTER THAT THE SAME WAS NOT DONE BY THE INCOME TAX DEPARTMENT WHIL E GIVING EFFECT TO THE ORDERS OF HON'BLE ITA T, FOR WHICH AN APPEAL IS PEN DING BEFORE THE OFFICE OF CIT(A), PANCHKULA. BY VIRTUE OF ITS OBJECTIVES, THE ASSESSEE IS ENGAGE D IN ACTIVITIES OF CREATING ASSETS / COMBINATION OF ASSETS WHICH ARE OFFERED TO PUBLIC F OR SALE ON ALLOTMENT BASIS. THE ACTIVITIES ARE IN THE SAME NATURE AS THAT OF A BUIL DER, DEVELOPER AND PROMOTER WHO CREATES BUILDING/ FLATS, PLOTS AND OTHER STRUCT URES AND OFFER THESE TO PUBLIC FOR SALE. IN CASE OF CONTRACTORS OFFERING BUILT UP FLAT S FOR SALE TO POTENTIAL BUYERS, THERE IS NO CONTRACT INVOLVED BETWEEN THE CONTRACTOR AND THE POTENTIAL BUYERS. THE FOLLOWING WORKS RELATING TO CIVIL CONSTRUCTION OUTL INED HEREUNDER ARE ALSO CARRIED OUT BY THE ASSESSEE AS WELL; CONSTRUCTION OF SEWERAGE, CONSTRUCTION OF ROADS, EL ECTRICAL WORKS, CIVIL WORKS IN THE NATURE OF CREATING BUILDINGS AND LAYING WATER P IPES. IT IS A CLEAR FACT THAT THE ASSESSEE IS FOLLOWING A COMPLETED CONTRACT METHOD FOR MAINTAINING ITS ACCOUNTS, AS PRESCRIBED BY THE AS7. THE AS7 WAS REVISED W.E.F 1.4.2003 AND THAT TOO IN RESPECT OF THE CONTRACTS E XECUTED AND UNDERTAKEN AFTER THAT DATE. IN THE INSTANT CASE THERE ARE NO CONTRAC TS WHICH WERE COMMENCED AFTER THAT DATE AND HENCE THE ASSESSEE'S ACTION OF FOLLOWING AS 7 (PRE REVISED) AND APPLYING COMPLETED CONTRACT METHOD IS IN ORDER. FURTHER AS PER COMPLETED CONTRACT METHOD, SINCE IN ASSESSEE'S PERCEPTION, TH E CONTRACT IS COMPLETED AFTER 20 YEARS, THE SAME IS TREATED TO BE COMPLETED AFTER 20 YEARS AND THE PROFIT COMPUTED IN THE PRESCRIBED MANNER AND ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS. DURING THE YEAR UNDER QUESTION, THE ASSESSEE BOOKED A PROFIT OF RS.846072183 IN ITS BOOKS OF ACCOUNT, WHICH IS IN ORDER AND WAS OFFERED FOR TAXATION. IT IS FURTHER SUBMITTED THAT THE CONTENTIONS OF THE AO ARE BASELESS AND ARE NOT SUPPORTED BY FORCE OF LAW AND DO NOT CORRECTLY ADDR ESS THE SUBMISSIONS MADE BY THE ASSESSEE. THE AO HAS ERRED IN HOLDING THAT TH E ACCOUNTING STANDARDS PRESCRIBED UNDER SECTION 145 OF THE IT ACT HAVE NOT BEEN FOLLOWED BY THE ASSESSEE. IT NEEDS TO BE NOTICED FROM THE STATUTE B OOK THAT SECTION 145 OF IT ACT HAS NOT YET PRESCRIBED FOR ANY ACCOUNTING STANDARD IN RESPECT OF CONSTRUCTION ACTIVITIES. ONLY ACCOUNTING STANDARD PRESCRIBED BY THE SAID SECTION ARE AS1 AND AS2, WHICH HAVE BEEN FOLLOWED BY THE ASSESSEE IN TR UE LETTER AND SPIRITS. THE APPELLANT ALSO RELIED UPON THE DECISION OF (200 7) 15 SOT 1 (DELHI) SNC LAVALIN/ACRES INC. AND(2008) 4 DTR (MUMBAI)(TRIB) 5 47ITO VS. PRATIKSHA ENTERPRISES ITAT, MUMBAI D' BENCH IN SUPPORT OF ITS CONTENTION IN THIS REGARD. 14 4. THE LD. CIT(A) WHILE CONFIRMING THE ACTION OF TH E ASSESSING OFFICER HELD THAT IT IS SEEN THAT THE APPELLANT'S METHOD OF KEEP ING ITS ACCOUNT HAS BEEN FOUND TO BE NOT IN ORDER BY THE HON'BLE ITAT CHANDI GARH ALSO. THE AO HAS RIGHTLY MENTIONED THAT THE APPELLANT IS NOT A CONSTRUCTION CONTRACTOR BUT THE NATURE OF ITS ACTIVITIES IS AKIN TO THAT OF A BUILDER/DEVELOP ER. THE LD. CIT(A) HELD THAT , THE ASSESSEE CAN WITH REASONABLE ACCURACY ESTIMATE ITS INCOME FROM VARIOUS PROJECTS WHICH ARE AT DIFFERENT STAGES OF COMPLETIO N. THE ASSESSEE HAS SIMPLY DEFERRED THE RECOGNITION OF INCOME BY 20 YEARS. THE REFORE, THE APPELLANT'S METHOD OF KEEPING ACCOUNTS BY FOLLOWING AS-7 AND CO MPLETED CONTRACT METHOD IS HELD TO BE NOT REFLECTING THE TRUE PROFIT S OF THE APPELLANT. THE LD. CIT(A) HELD THAT THE METHOD EMPLOYED BY THE ASSESSE E IS NOT SUITABLE FOR THE NATURE OF BUSINESS/ACTIVITIES AND THE ASSESSEE IS N OT FOLLOWING EVEN AS-7 IN TRUE SENSE AND UPHELD THE ACTION OF THE ASSESSING OFFICE R REJECTING THE BOOKS OF ACCOUNTS. 5. AGGRIEVED WITH THE ORDER OF THE LD. CIT(A) THE ASSESSEE HAS APPEALED BEFORE US. 6. DURING THE HEARING THE ASSESSEE HAS SUBMITTED TH AT THE BOOKS OF ACCOUNTS OF THE ASSESSEE WERE REJECTED BY THE AO FOR THE FIR ST TIME IN AY 2004-05. THEREAFTER, THE BOOKS OF ACCOUNTS WERE REJECTED IN AY 2004-05 ONWARDS IN ALL THE YEARS. 7. THE LD. AR ARGUED THAT THE ASSESSEE SINCE INCEPT ION IS ENGAGED IN THE ACTIVITIES OF ACQUISITION OF LAND, DEVELOPMENT, AND .AFTER SELLING THE PLOTS. THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE MAINTAINED ON CASH SYSTEM OF ACCOUNTING ON DOUBLE ENTRY SYSTEM FOLLOWING 'COMPLE TED CONTRACT METHOD' AS PER ACCOUNTING STANDARD 7, PRESCRIBED BY THE INSTIT UTE OF CHARTERED ACCOUNTANTS OF INDIA. THE METHOD OF ACCOUNTING HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE FOR THE PAST MORE THAN 30 YEARS. TH E SAME HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE PAST YEARS. 8. HUDA IS CARRYING OUT ACTIVITIES ONLY WITH THE SO LE OBJECTIVE TO UNDERTAKE AN OVERALL DEVELOPMENT OF TOWNS BY PROVIDING SUITABLE & REQUIRED FACILITIES WITHOUT ANY INTENT TO EARN PROFIT. THE RESIDENTIAL PLOTS AR E OFFERED TO THE PUBLIC ON 'NO PROFIT NO LOSS' BASIS. HOWEVER, THE COMMERCIAL PLOT S ARE AUCTIONED ON WHICH PROFIT IS GENERATED. THE LD. AR FURTHER ARGUED THAT THE AO HAS ALLEGED THAT THE ASSESSEE HAS NOT ADOPTED METHOD OF ACCOUNTING WHICH IS NOTIFIED BY THE 15 CENTRAL GOVERNMENT UNDER THE PROVISIONS OF SECTION 145(2) OF THE INCOME TAX ACT. IN THIS REGARD IT IS STATED THAT ONLY ACCOUNTI NG STANDARDS WHICH HAVE BEEN PRESCRIBED TILL DATE ARE AS - 1 & AS - 2 RELATING T O 'DISCLOSURE OF ACCOUNTING POLICIES' & 'VALUATION OF INVENTORIES', WHICH HAVE BEEN DULY ADHERED TO BY THE ASSESSEE. 9. RELIANCE IS PLACED IN THE CASE OF PRESTIGE ESTAT E PROJECTS (P) LTD. (2010) 129 TTJ (BANG) 0680. IT WAS ARGUED THAT THE PRINCIPAL A DVANTAGE OF THE COMPLETED CONTRACT METHOD IS THAT IT IS BASED ON THE RESULTS AS DETERMINED WHEN THE CONTRACT IS COMPLETE RATHER THAN ON ESTIMATES WHICH MAY REQUIRE SUBSEQUENT ADJUSTMENT AS A RESULT OF UNFORESEEN COST & POSSIBL E LOSSES. THIS METHOD MINIMIZES THE RISK OF RECOGNIZING PROFITS THAT MAY NOT HAVE BEEN EARNED. THEREFORE THE CONTENTION OF THE AO THAT ANNUAL PROF ITS CANNOT BE DEDUCED IS NOT TENABLE. AS REGARDS THE ISSUE THAT ASSESSEE IS POSTPONING ITS INCOME TO AFTER 20 YEARS WE SUBMIT THAT THE APPLICATIONS ARE INVITE D AND AFTER THE ALLOTMENT OF RESIDENTIAL PLOTS, A TOTAL TIME PERIOD OF SIX YEARS IS ALLOWED TO THE ALLOTTEE TO MAKE THE PAYMENT IN INSTALLMENTS. ALLOTTEE IS ALLOWED A PERIOD OF 2 YEARS FOR CONSTRUCTION FROM THE DATE OF OFFER OF POSSESSION W HICH IS OFFERED AFTER CREATING BASIC INFRASTRUCTURE FACILITIES. TO PROVIDE BASIC I NFRASTRUCTURE FACILITIES SUCH AS ROADS, WATER ELECTRICITY SEWERAGE ETC. A PERIOD OF 6 - 7 YEARS IS TAKEN SO POSSESSION CAN BE OFFERED ONLY AFTER 6-7 YEARS FROM THE DATE FROM WHICH A NEW ESTATE IS PLANNED. FURTHER PERIOD OF THIRTEEN YEARS IS ALLOWED ON PAYMENT OF NOMINAL EXTENSION FEES FOR CONSTRUCTION ON THE PLOT . THEREFORE, NORMALLY IT TAKES A TIME PERIOD OF TWENTY YEARS TO COMPLETE CONSTRUCTIO N ON PLOTS DEVELOPED IN ANY NEW URBAN ESTATES. THE SECTORS ARE THEREBY, TREATED AS COMPLETE SECTORS AFTER THE EXPIRY OF 20 YEARS FROM THE DATE OF ITS FLOATIN G. THE AUCTION IN THE COMMERCIAL SECTORS IS COMMENCED AFTER INHABITATION IN RESIDENT IAL PART OF THE SECTORS IS DONE. THE LD. AR ARGUED THAT THE ASSESSEE HAD THE CHOICE TO ADOPT ANY METHOD OF ACCOUNTING BUT IT SHOULD BE ADOPTED CONSISTENTLY AC CORDING TO MANDATE OF SECTION 145 & DEPARTMENT IS BOUND BY THE ASSESSEE'S CHOICE OF METHOD AND IT COULD NOT BE REJECTED AS IMPROPER MERELY BECAUSE IT GIVES ASSESSEE BENEFIT IN CERTAIN YEARS OR MERELY BECAUSE ANOTHER METHOD IS P REFERABLE BY THE DEPARTMENT. WHEN BOOKS ARE MAINTAINED ON CERTAIN PR INCIPLES OR BASIS THERE IS NO REASON WHY THE SAME SHOULD BE REJECTED ON THE GR OUND OF POSTPONEMENT OF INCOME. AS REGARDS THE ISSUE THAT THE ASSESSEE IS C LAIMING EXPENSES RELATING TO BOTH THE COMPLETED & UNCOMPLETED SECTOR FROM THE SU M RECEIVED DURING THE YEAR. IN THIS REGARD IT IS STATED THAT THE HONORABL E ITAT IN THE CASE OF ASSESSEE 16 ITSELF FOR AY 2003-04 HAS GIVEN A FINDING THAT 'IN OUR OPINION COST OR EXPENSE WHICH ARE DIRECTLY ATTRIBUTABLE TO A SPECIFIC CONTR ACT CAN ONLY BE CAPITALIZED MAT TOO UPTO THE DATE WHEN THE PLOTS ARE READY TO B E SOLD/ALLOTTED/AUCTIONED.' THE ASSESSEE IS MAINTAINING REGULAR BOOKS OF ACCOUN TS. 10. IT WAS ARGUED THAT THE METHOD OF ACCOUNTING HAS BEEN CONSISTENTLY FOLLOWED & HAS BEEN ACCEPTED IN THE PAST AND THE AO SHOULD NOT DISTURB & DEPART FROM THE SAME WHEN THERE IS NO CHANGE IN CIR CUMSTANCES FROM THE PREVIOUS YEARS. RELIANCE IN THIS REGARD IS PLACED O N THE FOLLOWING JUDICIAL PRONOUNCEMENTS:- COMMISSIONER OF INCOME TAX VS. HARYANA STATE INDUST RIAL DEVELOPMENT CORPORATION LTD. (2010) 326 ITR 640 (P&H) COMMISSIONER OF INCOME TAX VS. HARYANA TOURISM CORP ORATION LTD. (2010) 327 ITR 26 (P&H) CIT VS. INDO NIPPON CHEMICALS CO. LTD. (2003) 261 I TR (SC) 275 SC HAS AFFIRMED THE ORDER OF BOMBAY HIGH COURT CIT VS. INDO NIPPON CHEMICALS CO. LTD (2000) 164 CTR 78 11. IT IS ESTABLISHED LEGAL POSITION THAT AN ASSESS EE CAN FOLLOW ANY RECOGNIZED METHOD OF ACCOUNTING I.E. IT IS ENTIRELY WITHIN THE DISCRETION OF THE ASSESSEE TO ADOPT ANY METHOD OF ACCOUNTING MAY BE CASH OR MERCA NTILE BUT THE CONDITION IS THAT THE SAME METHOD HAS TO FOLLOW CONSISTENTLY. RELIANCE ON KRISH INFRASTRUCTURE (P.) LTD. VS. ASSI STANT COMMISSIONER OF INCOME TAX, IT AT JAIPUR BENCH (2013) 58 SOT 127 (JAIPUR) (URO) 12. THE LD. AR FURTHER ARGUED THAT THE METHOD FOLLO WED BY THE TAXPAYER CANNOT BE CALLED AS AN UNREASONABLE METHOD WHERE AN Y CHANGE IN THE METHOD IS REVENUE NEUTRAL. THE ASSESSEE IS FOLLOWIN G COMPLETED CONTRACT METHOD & ACCORDINGLY ON COMPLETION I.E. 20 YEARS, T HE ASSESSEE TRANSFERS THE PROFIT FROM THE PROJECT TO THE PROFIT & LOSS ACCOUN T. TILL THAT TIME THE RECEIPTS & EXPENDITURE ARE CAPITALIZED IN THE UNCOMPLETED SECT OR ACCOUNT. THUS, THERE IS NO CONCEALMENT OR UNDERSTATEMENT OF PROFIT, BUT THE DIFFERENCE IS ONLY ABOUT THE YEAR IN WHICH THE INCOME IS TO BE ASSESSED. IN NUTSHELL, THERE IS NO LOSS OF REVENUE TO THE DEPARTMENT. INDEED, THE METHOD ADOPT ED BY AO IS LEADING TO DOUBLE TAXATION AS THE DEPARTMENT IS ASSESSING INCO ME PRIOR TO BEING SHOWN BY ASSESSEE AND ALSO IN THE YEARS IN WHICH IT HAS BEEN DISCLOSED BY THE ASSESSEE. 17 13. THE LD. DR VIDE HIS SUBMISSION DT. 17/11/2017 A RGUED THAT THE ASSESSEE CLAIMS THAT IT IS FOLLOWING CASH SYSTEM OF ACCOUNTI NG. I. THE ASSESSEE HAS NOT ADOPTED METHOD OF ACCOUNTI NG WHICH IS NOTIFIED BY THE CENTRAL GOVERNMENT U/S 145(2) OF THE ACT IN THE FINANCE ACT 1995. RATHER IT HAS CHOSEN TO ADOPT OUTDATED 'ACCOUNTING STANDARD-7 '. THE SAME HAS SINCE BEEN REVISED AS 'REVISED ACCOUNTING STANDARD- 7' W.E.F. 01.04.2003 WHICH HAS BEEN FORMULATED ON THE LINES OF INDIAN AC COUNTING STANDARAD-11. II. THE ANNUAL PROFIT CANNOT BE DEDUCED FROM THE ME THOD ADOPTED BY ASSESSEE AS ASSESSEE HAS TAKEN A PERIOD OF 20 YEARS FOR CHARGING PROFIT TO TAX WHEREAS SECTION 3 OF THE IT ACT PRESCRIBES PREVIOUS YEAR SHOULD BE A PERIOD OF 12 MONTHS ONLY. AO RELIED ON CIT V. K.SIRINIVASAN AND K. GOPALAN, (1953) 23 ITR 87,99 (SC). THE ASSESSEE IS POSTPONING ITS' INC OME TO 'AFTER 20 YEARS WHEN THE PROJECT IS TAKEN TO BE COMPLETED' WHILE FU LL PAYMENT IS RECEIVED IN MOST CASES WITHIN 6 YEARS OF ALLOTMENT AND BY CHARG ING INTEREST IF THE PAYMENT IS MADE IN INSTALLMENT. UNDER THE SCHEME OF IT ACT 1961, IMMEDIATELY AFTER RECEIPT OF THE INCOME BY THE ASSE SSEE, THE ASSESSEE IS SUBJECT TO AN AMBULATORY CHARGE. AO RELIED ON CHOWG ULE & CO LTD V. CIT (1992) 195 810,818-19 (ITR) BOM. III. THE PERIOD OF 20 YEARS HAS BEEN TAKEN ARBITRAR ILY & HYPOTHETICALLY BECAUSE THE ASSESSEE RECEIVED TOTAL PAYMENTS FROM THE ALLOT TEES WITHIN PERIOD OF 6 TO 7 YEARS. EACH YEAR IS A SELF CONTAINED SEPARATE PER IOD. INCOME TAX IS AN ANNUAL LEVY. EACH 'PREVIOUS YEAR' IS DISTINCT UNIT OF TIME FOR THE PURPOSE OF ASSESSMENT YEAR AND THE PROFITS MADE OR LIABILITIES OR LOSSES INCURRED BEFORE OR AFTER THE RELEVANT PREVIOUS YEAR ARE IMMATERIAL IN ASSESSING THE LIABILITIES IN PARTICULAR YEAR AS HELD IN S.M.ZIADDIN V. CIT (1993 ) 203 ITR 136,140 (MAD). IV. THE ASSESSEE HIMSELF ADMITTED HUGE OMISSIONS BO TH IN INCOME AS WELL AS ASSETS IN HIS ACCOUNTS BY FILING REVISED RETURN IN AY 2004-05. V. DURING THE ASSESSMENT YEAR 2007-08, ASSESSEE HAS RECEIVED A SUM OF RS. 1368.20 CRORES FROM ALLOTTEES. AGAINST IT, THE EXPE NSES FOR BOTH THE COMPLETED SECTORS AND INCOMPLETE SECTORS ARE BEING CLAIMED. VI. THE ASSESSEE IS NOT MAINTAINING PROPER ACCOUNTS AND THERE IS NO INTERNAL CONTROL ON THE ACCOUNTING PROCESS AND ACCOUNTING SY STEM. THE AUTHORITY IS MAINTAINING ITS ACCOUNT ON CASH BASIS. AS SUCH, AMO UNT RECOVERABLE FROM/PAYABLE TO VARIOUS GOVERNMENT DEPARTMENTS, COL ONIZERS, ALLOTTEES ETC. ARE NEITHER BEING WORKED OUT NOR DEPICTED IN ACCOUN TS. PARTY WISE DETAILS OF CREDITORS AND DEBTORS HAVE NOT BEEN INDICATED. VII. EVEN STATUTORY AUDITORS IN THE NOTES TO ACCOUN TS AT PAGE 36 HAVE MADE OBSERVATION IN PARA 3 IN AY 2007-08 IN THEIR NOTES THAT AUTHORITY IS MAINTAINING ITS ACCOUNTS ON CASH BASIS. IT IS DESIR ABLE THAT HUDA SHOULD MAINTAIN ITS ACCOUNTS ON ACCRUAL BASIS. VIII. IN VIEW OF THE DETAILED FACTS MENTIONED ABOVE , BOOKS OF ACCOUNTS OF THE ASSESSEE WERE REJECTED U/S 145(3) OF THE IT. ACT, 1 961. THE HON'BLE ITAT CHANDIGARH IN APPELLANT'S OWN CASE FOR AY 2003-04 H AS CONCLUDED THAT (A) ASSESSEE IS NOT A CONTRACTOR, (B ) THE ASSESSEE IS NOT FOLLOWING THE COMPLETE CONTRACT METHOD IN TOTO, AND (C) ONLY COST OR EXPENSES WHICH ARE DIRECTLY ATTRIBUTABLE TO A SPECIFIC CONTRACT CAN BE CAPITALIZED, AND THAT TOO UPTO THE DATE WHEN PLOTS ARE READY TO BE SOLD/ALLOTTED/A UCTIONED'. THE CIT (A) HELD THAT THE APPELLANT'S METHOD OF ACCOUNTING HAS NOT B EEN FOUND IN ORDER BY THE HON'BLE ITAT CHANDIGARH ALSO. HE FURTHER HELD THAT THE AO HAS RIGHTLY MENTIONED THAT THE APPELLANT IS NOT A 'CONSTRUCTION CONTRACTO R' BUT THE NATURE OF ITS ACTIVITIES IS AKIN TO THAT OF A BUILDER/DEVELOPER. HE AGREES W ITH THE AO THAT IF ASSESSEE DESIRES, IT CAN WITH REASONABLE ACCURACY, ESTIMATE ITS INCOME FROM VARIOUS PROJECTS WHICH ARE AT DIFFERENT STAGES OF COMPLETIO N. THE APPELLANT HAS SIMPLY DEFERRED THE RECOGNITION OF INCOME BY 20 YEARS. THE REFORE THE APPELLANT'S METHOD OF KEEPING ACCOUNTS BY FOLLOWING 'AS-7' AND 'COMPLE TED CONTRACT METHOD' IS HELD TO BE NOT REFLECTING THE TRUE PROFITS OF THE A PPELLANT. MOREOVER, THERE IS MERIT IN AO'S OBSERVATIONS THAT THE ASSESSEE IS NOT FOLLO WING EVEN 'AS-7' IN TRUE SENSE. THE SAID ORDER WAS FOLLOWED BY CIT (A) IN ALL THE Y EARS. 18 EVERY ASSESSMENT YEAR IS A SEPARATE ASSESSMENT YEAR AND PRINCIPLE OF RES-JUDICATA IS NOT APPLICABLE IN THE INCOME TAX PROCEEDINGS. RE LIANCE IS PLACED ON (A) H.A. SHAH & CO. VS. COMMISSIONER OF INCOME-TAX (30 ITR 6 18, BOM.), (B) THE AMALGAMATED COALFIELDS LTD. VS. THE JANAPADA SABHA CHHINDWARA (AIR 1964 SC 1013), (C) CIT VS. BRIJ LAI LOHIA AND MAHABIR PRASA D KHEMKA (84 ITR 273, SC), (D) C.L.TVS. MICRO LAND LTD. (347 ITR 613, KARN.), AND (E) DHARMESH R. SHAH VS. JCIT (60 SOT 182, MUM.). AO IS FREE TO FORM AN INDEPENDENT O PINION AS PER INCOME TAX PROVISIONS ESPECIALLY WHEN THERE IS NOTIFICATION IS SUED BY THE CENTRAL GOVERNMENT U/S 145(2) OF THE ACT IN THE FINANCE ACT 1995 AND T HE OUTDATED 'ACCOUNTING STANDARD-7' HAS BEEN REVISED AS 'REVISED ACCOUNTING STANDARD-7' W.E.F. 01.04.2003 EVEN IF A WRONG METHOD OF ACCOUNTING IS FOLLOWED FOR THE LAST 30 YEARS. WHEN HUDA IS PROVIDING RESIDENTIAL AND COMMERCIAL P LOTS ON MARKET RATE, THE CONTENTION OF THE ASSESSEE THAT IT UNDERTAKES AN OV ERALL DEVELOPMENT OF TOWNS BY PROVIDING SUITABLE & REQUIRED FACILITIES WITHOUT AN Y INTENT TO EARN PROFIT AND THE RESIDENTIAL PLOTS ARE OFFERED TO THE PUBLIC ON 'NO PROFIT NO LOSS' BASIS IS DEVOID OF TRUTH. IT HAS ITSELF ACCEPTED THAT THE COMMERCIAL P LOTS ARE AUCTIONED ON WHICH PROFIT IS GENERATED. THE AUCTION IN THE COMMERCIAL SECTORS IS COMMENCED AFTER INHABITATION IN RESIDENTIAL PART OF THE SECTORS IS DONE HAS NOT BEEN DEMONSTRATED WITH ANY EVIDENCE. 3.2. THE AO HAS STATED THAT THE PROBLEMS WITH 'COMPLETED CONTRACT METHOD' AS PER ACCOUNTING RESEARCH BUILLETIN (ARP NO.46 IN THE USA) ARE THAT (I) THIS METHOD WILL DEFER THE PROFIT TILL THE COMPLETION OF WORK AND SO THE INCOME FLOW WOULD BE ERRATIC, AND (II) THIS METHOD HAS THE EFFE CT OF POSTPONEMENT OF INCOME. ON THE BASIS OF THE RECOMMENDATIONS OF THE ACCOUNTI NG COMMITTEE 'COMPLETED CONTRACT METHOD' WAS REVISED AND REPLACED BY 'REVIS ED ACCOUNTING STANDARD- 7'. THE REVISED STANDARD HAS BEEN FORMULATED ON THE LINE OF 'INDIAN ACCOUNTING STANDARD-11' AND SHALL COME INTO EFFECT FROM THE AC COUNTING PERIOD COMMENCING ON OR AFTER 01.04.2003. IN THE REVISED A CCOUNTING STANDARD, IT IS NOT PERMISSIBLE TO CAPITALIZE THE RECEIPT AND CLAIM EXP ENDITURE IN THE REVENUE SIDE. HENCE, ASSESSEE'S CONTENTION IS NOT ACCEPTABLE THAT HE HAS THE CHOICE TO ADOPT ANY METHOD OF ACCOUNTING. ASSESSEE IS NOT A CONTRAC TOR IN TRUE SENSE. [AO'S ORDER PAGE 7 818 FOR AY 2004-05]. CHANGE IN THE METHOD OF ACCOUNTING WILL NOT BE REVENUE NEUTRAL AS IT WILL REFLECT TRUE NATURE OF I NCOME IN EACH RELEVANT PREVIOUS YEAR AS PER THE INTENT OF THE LEGISLATION AND PROVI SIONS OF THE INCOME TAX ACT. 3.4. ASSESSEE HAS PLACED RELIANCE ON THE FOLLOWING CASES WHICH ARE DISTINGUISHABLE ON FACTS WITH REFERENCE TO THE INST ANT CASE: > PRESTIGE ESTATE PROJECTS (P) LTD. (2010) 129 TTJ (B ANG) 0680 IS DISTINGUISHABLE AS UNDER: THIS CASE IS DISTINGUISHABLE ON THE FACTS FR OM THE FACTS OF THE PRESENT CASE. IN THAT CASE ASSESSEE COMPANY WAS A REAL ESTATE DEV ELOPER WHICH MAINTAINED ITS ACCOUNTS BY ADOPTING COMPLETED CONTRACT METHOD. THE AO ASSESSED THE CASE BY FOLLOWING PERCENTAGE COMPLETION METHOD. THE BANG ALORE BENCH DECIDED IN FAVOUR OF THE ASSESSEE BY APPLICATION OF SECTION 21 1(3A) OF THE COMPANIES ACT. FURTHER THE CHANGE IN THE YEAR WAS FOUND TO BE REVE NUE NEUTRAL. IN THE INSTANT CASE, THE APPELLANT IS NEITHER A CONSTRUCTION CONTR ACTOR NOR IN TRUE SENSE A REAL ESTATE DEVELOPER. IT IS ALSO NOT FOLLOWING EITHER T HE COMPLETE CONTRACT METHOD OR THE PERCENTAGE COMPLETION METHOD. THE REVENUE RECOG NITION IS BEING DEFERRED FOR A PERIOD OF 20 YEARS. THEREFORE, THE DECISION I S NOT APPLICABLE IN THE INSTANT CASE. > THE COMMISSIONER OF INCOME TAX VS. HARYANA STATE IN DUSTRIAL DEVELOPMENT CORPORATION LTD. (2010) 326 ITR 640 (P&H) IS ALSO D ISTINGUISHABLE ON THE FACTS THAT IN THAT CASE THE TRIBUNAL FOUND THAT THE ASSESSEE'S ST AND WAS NOT CONTROVERTED WHEN IT HAD CLAIMED THAT METHODOLOGY ADOPTED IN THE ASSE SSMENT YEAR IN QUESTION WAS CONSISTENT WITH THE PAST WHEREAS, IN THE INSTAN T CASE, THE METHODOLOGY ADOPTED BY THE APPELLANT HAS BEEN FOUND BY THE AO T O BE INCONSISTENT WITH THE REVENUE RECOGNITION FOR EACH YEAR. FURTHER, IN THE INSTANT CASE, IN THE PAST THE APPELLANT HAS BEEN CLAIMING EXEMPTION FOR ITS ACTIV ITIES AS FOR CHARITABLE PURPOSES WHICH HAS SUBSEQUENTLY FOUND TO BE NOT AVAILABLE. > COMMISSIONER OF INCOME TAX VS. HARYANA TOURISM CORP ORATION LTD. (2010) 327 ITR 26 (P&H), IS DISTINGUISHABLE ON THE FACTS OF TH E INSTANT CASE. IN THAT CASE, THE ISSUE FOR DECISION WAS THAT WHETHER THE INCOME FROM LETTING OUT OF SHOPS WOULD BE 19 INCOME FROM HOUSE PROPERTY OR THE BUSINESS INCOME. HERE, IN THE INSTANT CASE ISSUE AT HAND IS ENTIRELY DIFFERENT. > CIT VS. INDO NIPPON CHEMICALS CO. LTD. (2003) 261 I TR (SC) 275 WHERE THE SC HAS AFFIRMED THE ORDER OF BOMBAY HIGH COURT CIT VS. INDO NIPPON CHEMICALS CO. LTD (2000) 164 CTR 78 IS DISTINGUISHABLE ON THE FAC TS OF THE INSTANT CASE. IN THAT CASE THE ISSUE WAS VALUATION OF EXCISE DUTY PAID AT RAW MATERIAL WHEN PURCHASED AND UNCONSUMED RAW MATERIAL. HIGH COURT HELD THAT T HE METHOD ADAPTED TO VALUE RAW MATERIAL PURCHASED MUST BE ADOPTED WHILE VALUING UNCONSUMED STOCK AT THE END OF THE YEAR. HERE, IN THE INSTANT CASE I SSUE AT HAND IS ENTIRELY DIFFERENT. > KRISH INFRASTRUCTURE (P.) LTD. VS. ASSISTANT COMMIS SIONER OF INCOME TAX, ITAT JAIPUR BENCH (2013) 58 SOT 127 (JAIPUR) (URO). THIS CASE IS DISTINGUISHABLE ON THE FACTS FROM THE FACTS OF THE PRESENT CASE. IN THAT C ASE ASSESSEE COMPANY WAS A REAL ESTATE DEVELOPER WHICH MAINTAINED ITS ACCOUNTS BY ADOPTING COMPLETED CONTRACT METHOD. THE AO ASSESSED THE CASE BY FOLLOW ING PERCENTAGE COMPLETION METHOD. THE JAIPUR BENCH DECIDED IN FAVO UR OF THE ASSESSEE BY SAYING THAT SAME RESULTS CAN BE ATTAINED BY ANY ONE OF THE METHOD OF ACCOUNTING. IN THE INSTANT CASE, THE APPELLANT IS N EITHER A CONSTRUCTION CONTRACTOR NOR IN TRUE SENSE A REAL ESTATE DEVELOPE R. IT IS ALSO NOT FOLLOWING EITHER THE COMPLETE CONTRACT METHOD OR THE PERCENTAGE COMP LETION METHOD. THE REVENUE RECOGNITION IS BEING DEFERRED FOR A PERIOD OF 20 YEARS. THEREFORE, THE DECISION IS NOT APPLICABLE IN THE INSTANT CASE. 3.5. ON THE OTHER HAND THE RELIANCE IS PLACED ON TH E FOLLOWING DECISIONS BY THE REVENUE. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS BRI TISH PAINTS INDIA LTD 188 ITR 44 WHEREIN IT IS HELD AS UNDER: 'IT IS NOT ONLY THE RI GHT BUT THE DUTY OF THE ASSESSING OFFICER TO CONSIDER WHETHER OR NOT THE BOOKS DISCLO SE THE TRUE STATE OF ACCOUNTS AND THE CORRECT INCOME CAN BE DEDUCED THEREFROM. IT IS INCORRECT TO SAY THAT THE OFFICER IS BOUND TO ACCEPT THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. THE CORRECTNESS OF WHICH HAD NOT BEEN QUE STIONED IN THE PAST. THERE IS NO ESTOPPEL IN THESE MATTERS, AND THE OFFICER IS NO T BOUND BY THE METHOD FOLLOWED IN THE EARLIER YEARS. SECTION 145 CONFERS SUFFICIENT POWER UPON THE OFFIC ER - NAY, IT IMPOSES A DUTY UPON HIM - TO MAKE SUCH COMPUTATION IN SUCH MANNER AS HE DETERMINES FOR DEDUCING THE CORRECT PROFITS AND GAINS. THIS MEANS THAT WHERE ACCOUNTS ARE PREPARED WITHOUT DISCLOSING THE REAL COST OF THE ST OCK-IN-TRADE, ALBEIT ON SOUND EXPERT ADVICE IN THE INTEREST OF EFFICIENT ADMINIST RATION OF THE COMPANY, IT IS THE DUTY OF THE ITO TO DETERMINE THE TAXABLE INCOME BY MAKING SUCH COMPUTATION AS HE THINKS FIT. ANY SYSTEM OF ACCOUNTING WHICH EXCLU DES, FOR THE VALUATION OF THE STOCK-IN-TRADE, ALL COSTS OTHER THAN THE COST OF RA W MATERIAL FOR THE GOODS IN PROCESS AND FINISHED PRODUCTS, IS LIKELY TO RESULT IN A DISTORTED PICTURE OF THE TRUE STATE OF THE BUSINESS FOR THE PURPOSE OF COMPUTING THE CHARGEABLE INCOME. SUCH A SYSTEM MAY PRODUCE A COMPARATIVELY LOWER VALUATIO N OF THE OPENING STOCK AND THE CLOSING STOCK, THUS SHOWING A COMPARATIVELY LOW DIFFERENCE BETWEEN THE TWO. IN A PERIOD OF RISING TURNOVER AND RISING PRIC ES, THE SYSTEM ADOPTED BY THE ASSESSEE, AS FOUND BY THE TRIBUNAL, IS APT TO DIMIN ISH THE ASSESSMENT OF THE TAXABLE PROFIT OF A YEAR. THE PROFIT OF ONE YEAR IS LIKELY TO BE SHIFTED TO ANOTHER YEAR WHICH IS AN INCORRECT METHOD OF COMPUTING PROFITS AND GAI NS FOR THE PURPOSE OF ASSESSMENT. EACH YEAR BEING A SELF-CONTAINED UNIT, AND THE TAXES OF A PARTICULAR YEAR BEING PAYABLE WITH REFERENCE TO THE INCOME OF THAT YEAR, AS COMPUTED IN TERMS OF THE ACT, THE METHOD ADOPTED BY THE ASSESSE E HAD BEEN FOUND TO BE SUCH THAT INCOME COULD NOT PROPERLY BE DEDUCED THER EFROM. IT WAS, THEREFORE, NOT ONLY THE RIGHT BUT THE DUTY OF THE ASSESSING OF FICER TO ACT IN EXERCISE OF HIS STATUTORY POWER, AS HE HAD DONE IN THE INSTANT CASE , FOR DETERMINING WHAT, IN HIS OPINION, WAS THE CORRECT TAXABLE INCOME. THE TRIBUN AL'S ORDER, AFFIRMING THAT OF THE ASSESSING OFFICER, WAS BASED ON FINDINGS OF FACT MA DE ON COGENT EVIDENCE AND IN ACCORDANCE WITH CORRECT PRINCIPLES. THE HIGH COU RT WAS CLEARLY WRONG IN INTERFERING WITH THOSE FINDINGS. ACCORDINGLY, THE J UDGMENT OF THE HIGH COURT WAS TO BE SET ASIDE.' SUTLEJ COTTON MILLS LTD VS CIT 116 ITR 1 WHEREIN IT IS HELD THAT 'IT IS NOW WELL SETTLED THAT THE WAY IN WHICH ENTRIES ARE MADE BY AN ASSESS EE IN HIS BOOKS OF ACCOUNT IS 20 NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSES SEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSS. THE ASSESSEE MAY, BY MAKING ENTR IES WHICH ARE NOT IN CONFORMITY WITH THE PROPER ACCOUNTANCY PRINCIPLES, CONCEAL PROFIT OR SHOW LOSS AND THE ENTRIES MADE BY HIM CANNOT, THEREFORE, BE R EGARDED AS CONCLUSIVE .ONE WAY OR THE OTHER....' TUTICORIN ALKALI CHEMICALS & FERTILIZER LTD VS CIT 93 TAXMANN.COM 502 WHEREIN IT IS HELD THAT 'IT IS TRUE THAT THE SUPREM E COURT HAS VERY OFTEN REFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MAD E BY A COMPANY OR VALUE OF THE ASSETS OF A COMPANY. BUT WHEN THE QUESTION IS W HETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FROM T HAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIPLES OF LAW AND NOT IN ACCORDANCE WITH ACCOUNTANCY PRACTICE . ACCOUNTING PRACTICE CANNOT OVERRIDE SECTION 56 OR ANY OTHER PROVISION OF THE A CT. ....WHETHER A PARTICULAR RECEIPT IS OF THE NATURE OF INCOME AND FALLS WITHIN THE CHARGE OF SECTION 4 IS A QUESTION OF LAW WHICH HAS TO BE DECIDED BY THE COUR T ON THE BASIS OF THE PROVISIONS OF THE ACT AND THE INTERPRETATION OF THE TERM 'INCOME' GIVEN IN A LARGE NUMBER OF DECISIONS OF THE HIGH COURTS, THE PRIVY C OUNCIL AND ALSO THIS COURT. IT IS WELL-SETTLED THAT INCOME ATTRACTS TAX AS SOON AS IT ACCRUES. THE APPLICATION OR DESTINATION OF THE INCOME HAS NOTHING TO DO WITH IT S ACCRUAL OR TAXABILITY. IT IS ALSO WELL-SETTLED THAT INTEREST INCOME IS ALWAYS OF A RE VENUE NATURE UNLESS IT IS RECEIVED BY WAY OF DAMAGES OR COMPENSATION.' ACIT VS. ALCON DEVELOPERS (2015) 54 TAXMANN.COM 54 WHEREIN IT IS HELD THAT 'THE ASSESSING OFFICER HAS NOTICED THAT THE ASSESSEE HAS ACCOUNTED THE ACCRUAL OF THE SALE PROCEEDS ON THE BASIS OF REGISTRATION OF SALE DEED IN FAVOUR OF THE INTENDED BUYER. THIS METHOD ADOPTED BY THE ASSESSEE, CANNOT BE REGARDED TO BE IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING . THE ASSESSEE IS ENGAGED IN CONSTRUCTION BUSINESS. AS OBSERVED BY THE COMMIS SIONER (APPEALS), AS-9 IS NOT APPLICABLE TO A PERSON WHO IS ENGAGED IN CONSTRUCTI ON BUSINESS. EVEN THIS ACCOUNTING STANDARD DOES NOT LAY DOWN THAT THE SALE PROCEEDS SHOULD BE ACCOUNTED FOR WHEN THE SALE DEED IS REGISTERED. IN THE CASE OF THE ASSESSEE IT IS NOT DISPUTED THAT THE ASSESSEE IS FOLLOWING MERCANT ILE SYSTEM OF ACCOUNTING AS WELL AS PROJECT COMPLETION METHOD. THE ASSESSING OF FICER IN THIS CASE NOTED THAT THE DEVELOPMENT OF THE PLOTS HAS BEEN CARRIED OUT F ULLY BY THE ASSESSEE AS ON 31- 3-2009 BUT AGAINST THIS THE ASSESSEE HAS RECEIVED C ONSIDERATION TO THE EXTENT OF 70-90 PER CENT AND BALANCE CONSIDERATION HAS TO BE RECEIVED. AS PER THE PROJECT COMPLETION METHOD THE REVENUE HAS TO BE RECOGNIZED WHEN THE PROJECT HAS BEEN COMPLETED. THE ASSESSEE CONTENDED BEFORE COMMI SSIONER (APPEALS) THAT IT WAS FOLLOWING THE PROJECT COMPLETION METHOD BUT IT WAS NOTED THAT THE ASSESSEE HAS NOT RECOGNIZED THE REVENUE ON THE BASIS OF THE PROJECT COMPLETION METHOD. IT IS AN UNDISPUTED FACT THAT THE DEVELOPMENT WORK ON THE PLOTS HAS BEEN COMPLETED. REGISTRATION OF THE SALE DEED REPRESENTS ONLY THE TRANSFER OF THE TITLE IN FAVOUR OF THE BUYER FROM THE ASSESSEE. IT HAS NOTHI NG TO DO WITH THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. THE ASSESSEE, CONTENDS AND AS UNDERSTOOD BY THE COMMISSIONER (APPEALS), WAS NOT FOLLOWING PE RCENTAGE OF COMPLETION METHOD. UNDER THE PERCENTAGE OF COMPLETION METHOD R EVENUE IS RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT IN THE ACCOUNTING PERIO D TO THE EXTENT THE WORK IS COMPLETED. IN CASE THE REVENUE HAS TO BE RECOGNIZED ON THE BASIS OF RECEIPT OF PAYMENT FROM THE PLOT-HOLDERS, THAT WILL ALSO NOT B E REGARDED TO BE PERCENTAGE COMPLETION METHOD. IT IS NOT A CASE WHERE THE ASSES SING OFFICER HAS REJECTED THE ACCOUNTS OF ' THE ASSESSEE ON THE GROUND THAT IT HA D NOT FOLLOWED AS-7 FOR RECOGNITION OF REVENUE ON THE BASIS OF PERCENTAGE C OMPLETION METHOD. THE METHOD AS HAS BEEN FOLLOWED BY THE ASSESSEE, IS NEI THER PROJECT COMPLETION METHOD NOR PERCENTAGE COMPLETION METHOD. PERCENTAGE COMPLETION METHOD IS NOT LINKED WITH THE CONSIDERATION RECEIVED BY THE A SSESSEE FROM THE INTENDED BUYER. THE ASSESSEE HAS RECOGNIZED THE REVENUE ONLY WHEN THE REGISTRATION OF THE SALE DEED HAS BEEN DONE IN FAVOUR OF THE BUYER. UND ER AS-7 THIS IS NOT A RECOGNIZED METHOD OF RECOGNIZING THE REVENUE. THIS METHOD IS NEITHER PROJECT COMPLETION METHOD NOR PERCENTAGE OF COMPLETION METH OD. THE METHOD ADOPTED BY THE ASSESSEE, THEREFORE, CANNOT BE REGAR DED TO COMPLY WITH THE INGREDIENTS AS LAID DOWN UNDER SECTION 145. SECTION 145 MAKES IT MANDATORY ON THE PART OF THE ASSESSEE TO FOLLOW EITHER CASH OR M ERCANTILE SYSTEM OF ACCOUNTING REGULARLY. RECOGNIZING THE REVENUE WHEN THE SALE DE ED HAD BEEN REGISTERED BY 21 THE ASSESSEE IN FAVOUR OF THE BUYER COULD NOT BE RE GARDED TO BE EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING. THEREFORE, THE ORD ER OF COMMISSIONER (APPEALS) IS SET ASIDE AND THE ORDER OF THE ASSESSING OFFICER IS RESTORED.' 14. THE LD. DR HAS THUS DISTINGUISHED THE CASE LAWS RELIED UPON BY THE LD. AR. 15. WE HAVE GONE THROUGH THE ARGUMENTS IN DETAIL AN D ALSO THE OBSERVATION OF THE ASSESSING OFFICER AND THE LD. CIT(A). WE FIN D THAT THE MATTER HAS BEEN EXAMINED BY THE COORDINATE BENCH OF ITAT CHANDIGARH VIDE ORDER DT. 31/03/2008 IN ITA NO. 742/CHD/2007 UPHOLDING THE AC TION OF THE ASSESSING OFFICER REJECTING THE BOOKS OF ACCOUNTS WHICH ALSO FINDS PLACE IN THE ORDER OF THE CIT(A) WHILE ADJUDICATING THE ISSUE MENTIONED ABOVE . HENCE FOLLOWING THE ORDER OF THE COORDINATE BENCH OF ITAT CHANDIGARH ON THE S IMILAR ISSUE IN ASSESSEES OWN CASE, WE DECLINE TO INTERFERE IN THE ORDER OF T HE LD.CIT(A). 16. AS A RESULT THIS GROUND OF APPEAL OF THE ASSESS EE IS DISMISSED. ADDITION ON ACCOUNT OF IN-DIRECT CHARGES OF THE RESIDENTIAL S ECTORS AND COMMERCIAL SECTORS: 17. GROUND NO. 2 FOR THE ASSESSMENT YEARS 2004-05, 2006-07, 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, AND GROUND NO. 2 &3 FOR THE ASSESSMENT YEARS 2012- 13, 2013-14, 2014-15, OF THE ASSESSEE APPEAL AND GR OUND NO. 1 FOR THE ASSESSMENT YEARS 2006-07, 2007-08, 2008-09, 2009-1 0, 2010-11, 2011-12, 2012-13 AND 2013-14 OF THE REVENUE APPEAL PERTAINS TO THE I SSUE OF INDIRECT CHARGES OF THE RESIDENTIAL COMMERCIAL SECTOR. 18. THE ADDITION ON ACCOUNT OF INDIRECT CHARGES CLA IMED BY THE ASSESSEE IN INCOME & EXPENDITURE ACCOUNT OF THE COMMERCIAL SECTORS WAS MADE BY THE AO FOR THE FIRST TIME IN AY 2007-08 BY ESTIMATING T HE 60% OF THE TOTAL RECOVERIES AS INCOME. AFTER REJECTING THE BOOKS OF ACCOUNT AND ME THOD OF ACCOUNTING FOLLOWED BY THE APPELLANT, THE AO PROCEEDED TO COMP UTE APPELLANT'S INCOME KEEPING IN VIEW THE PAST HISTORY OF THE CASE AS WEL L AS BY ADJUDICATING THE NEW ISSUES WHICH AROSE DURING THE YEAR. THE AO OBSERVED THAT A PORTION OF RECOVERIES MADE BY THE ASSESSEE DURING THE YEAR IS RELATABLE T O INDIRECT CHARGES RECEIVED BY THE ASSESSEE. THE AO OBSERVED THAT THE ASSESSEE IS DEBITING ALL THE INDIRECT CHARGES I.E. CHARGES IN THE NATURE OF ADMINISTRATIV E CHARGES, INTEREST CHARGES TO THE INCOME & EXPENDITURE ACCOUNT. AS PER THE AO THE AMOUNT RECEIVED BY WAY OF INDIRECT CHARGES SHOULD BE INCLUDED IN THE INCOM E OF THE APPELLANT. THE AO AFTER GOING THROUGH THE DETAILS/COSTS SHEET OF JAGA DHRI URBAN ESTATE NOTED THAT 22 29.79% OF THE TOTAL RECEIPTS TO BE ATTRIBUTABLE TO INDIRECT CHARGES AND PROPOSED TO TAX THE SAME ON RECEIPTS BASIS. THE AO ASKED THE ASSESSEE TO FURNISH THE COSTS SHEETS OF OTHER URBAN ESTATES. THE ASSESSEE HOWEVER INFORMED THAT THE COST RATIOS ARE THE SAME FOR ALL THE COSTS SHEETS FOR VA RIOUS ESTATES AS WORKED OUT IN THE EARLIER YEAR I.E. 2005-06 & 2006-07. THE AO NOTED T HAT ADDITION ON THESE LINES HAS BEEN MADE BY THE AO IN THE EARLIER YEARS ALSO BY TA KING THE RATIO OF INDIRECT CHARGES RECEIVED @ 30% OF TOTAL RECOVERIES. THE APP ELLANT HOWEVER CONTESTED THE PROPOSED ADDITION AND SUBMITTED AS UNDER :- ' THE AO HAS BIFURCATED THE SUMS RECEIVED BY HUDA F ROM PLOTS AS UNDER:- A) LAND COST- 14.02% B) DEVELOPMENT COST- 44.61% C) INDIRECT CHARGES- 29.79% D) OTHERS- 11.30% OUT OF INDIRECT CHARGE AT 29.79%, COMMERCIAL INTERE ST ESCALATION CHARGES, LICENSE FEES, CONVERSION CHARGES, SECURITY FEES AND SERVICES CHARGES TOTALING TO 22.2% ARE NOT RETAINED BY THE ASSESSEE AT ALL AND A RE PARTED BY IT EITHER WITH THE GOVERNMENT OR WITH THE PLOT OWNER UNDER DIRECTIONS OF THE COURT. 18.1 THE AO HOWEVER REJECTED THE APPELLANT'S CONTEN TION OBSERVING THAT THE SAME CANNOT BE ACCEPTED BECAUSE THE INDIRECT CHARGE S COMPRISES OF COMMERCIAL INTEREST, WHICH IS NOTHING BUT NOTIONAL COMMERCIAL INTEREST CALCULATED ON DEVELOPMENT COST, WHICH COMPRISES OF NEARLY L/3 RD OF THE TOTAL DEVELOPMENT COST. FURTHER, PRICE ESCALATION AND UNF ORESEEN CHARGES WHICH COMPRISES OF NEARLY L/4 TH OF THE TOTAL INDIRECT CHARGES ARE ALSO PURELY ON ES TIMATE BASIS. THUS THE CONTENTION OF THE ASSESSEE THAT 22. 2% OF THE TOTAL INDIRECT CHARGES OF 29.79 % ARE NOT RETAINED BY IT IS FACTUALLY INCO RRECT. FURTHER, AS PER THE AO OTHER CHARGES AT 11.36% ARE ALSO ADHOC AND HAVE NOT HING TO DO WITH ACTUAL EXPENSES INCURRED. 18.2 THE AO FURTHER OBSERVED THAT THE TOTAL LAND DE VELOPED AND SOLD BY THE APPELLANT CONSIST OF BOTH RESIDENTIAL AND COMMERCIA L AREA. THE INDIRECT CHARGES RECEIVED ON ACCOUNT OF THE SAME VARY ON RESIDENTIAL AND COMMERCIAL PROPERTIES. THE AO NOTED THAT THE COST SHEET OF THE ASSESSEE JUST TAKES THE SALEABLE AREA UNDER RESIDENTIAL SECTORS INTO CONSID ERATION AND THE COST OF PLOT IS 23 WORKED OUT ON THE SAME. WHEN CONFRONTED DURING THE ASSESSMENT PROCEEDINGS, THE AR OF THE ASSESSEE ACCEPTED THAT COST OF COMMER CIAL SITES ARE NOT INCLUDED WHILE PREPARING COST SHEET IN RESPECT OF RESIDENT IAL SECTORS. THE AO COMPUTED THE FOLLOWING CALCULATIONS WITH REGARD TO ALLOCATIO N OF LAND TO COMMERCIAL AND RESIDENTIAL AREA AND ITS COSTING BY REFERRING TO CO ST SHEET IN RESPECT OF RESIDENTIAL AREA IN SECTOR-33 PART KARNAL. PLANNED AREA 240.00 ACRES LESS: RELEASED LAND 30.54 ACRES BALANCE AREA 209.46 ACRES AREA UNDER SHOPPING CENTRE 46.75 ACRES HUDA LAND AREA 1.10 ACRES INSTITUTION 2.86 ACRES 50.71 ACRES BALANCE AREA SALEABLE PLOT AREA 158.75 ACRES UNDER PLOTS 51.88 ACRES NURSING HOME/CLINIC 1.70 ACRES 53.59 ACRES SALEABLE AREA = 53.58/158.75 = 33.75% OR 1634 SQ. Y DS RATE PER SQ YD = 7585660/1634 = 4642 PER SQ. YD. ADD LOSS OF EWS PLOTS = 590 ADD INFRASTRUCTURAL COST = 50 5282 PER SQ. YD. (RS. 6317 PER SQ. MTR.) APPROVED RATE = 6317 PER SQ. MTR 18.3 AS PER THE AO THE ASSESSEE IN ITS COMPUTATION SHEET HAS EXCLUDED THE COMMERCIAL AREA FROM SALEABLE AREA AND THEN COMPUTI NG THE RATE OF SALEABLE AREA FOR RESIDENTIAL PLOTS. IT HAS EVEN ABSORBED LO SS OF EWS PLOTS GENUINENESS OF WHICH ARE TO BE ASCERTAINED. THE AO ALSO NOTED THAT THE LAND CARVED OUT FOR COMMERCIAL PURPOSE LIKE SHOPPING CENTRE AND INSTITU TIONS IS NOT EVEN TAKEN IN TO CONSIDERATION BY THE ASSESSEE WHO CLAIMS TO BE RUNN ING ITS BUSINESS ON 'NO PROFIT NO LOSS' BASIS. IN THE ABOVE COMPUTATION, THE AO NO TED LAND FOR COMMERCIAL PURPOSES IS EQUIVALENT TO RESIDENTIAL LAND WHICH MA Y VARY IN OTHER CASES. THE LAND COST OF THE COMMERCIAL PART OF THE SECTOR COME S TO RS.5500/- PER SQ. MTR (APPROX) AS LOSS OF EWS PLOTS IS ALREADY ABSORBED I N RESIDENTIAL PLOTS. HOWEVER, THE COMMERCIAL PLOTS ARE NOT SOLD AT THE COST PRICE , BUT INSTEAD AUCTIONED. THE SELLING PRICE OF THE COMMERCIAL PLOTS IS HIGHER THA N THE RESIDENTIAL PLOTS BY IN THE 24 RANGE OF 5 TO 40 TIMES. THE APPELLANT WAS ASKED TO SUBMIT THE DETAILS WITH REGARD TO DETAIL OF AUCTION OF COMMERCIAL PROPERTY DURING THE YEAR. THOUGH, COMPLETE DETAILS WERE NOT FILED BY THE APPELLANT. THE AO OBS ERVED THAT THE AUCTION PRICE OF COMMERCIAL PROPERTY INVARIABLY IS DOUBLE THE RES ERVE PRICE IN MOST OF THE CASES. THE AO NOTED THAT IN GURGAON THE RESERVE PRI CE AS HIGH AS RS.1.25 LACS PER SQ. MT. AND THE ACTUAL AUCTION PRICE IN CASE OF SINGLE STORY BOOTH WITHOUT BASEMENT FOR SECTOR- 21 WORKED OUT TO BE MORE THEN RS.2 LACS PER SQ. MT. AS DETAILED BELOW :- SECTOR PARTICULAR SITE NO. AREA RESERVE PRICE AUCTION PRICE SALE PRICE / METER A 21 SINGLE STOREY BOOTH 32 22.68 MTS 14.95 LAKH 46 LAKH RS. 2,02,82222 B 21 -DO- 33 22.68 MTS 14.95 LAKH 47 LAKH RS. 2,07, 231 C 21 -DO- 34 22.6 MTS 14.95 LAKH 45.50 LAKH RS. 2,0 0,617 18.4 AS PER THE AO THE MARGINS IN COMMERCIAL PROPER TY ARE VERY HIGH KEEPING IN VIEW THE RATES OF RESIDENTIAL AREA WHICH WAS IN THE RANGE OF RS.6,000/- TO RS.8,000/- PER SQ.MT. THE AO ALSO REFERRED TO AN AU CTION IN F.Y 2008-029 IN WHICH A COMMERCIAL SITE FETCHED RS.5 LACS PER SQ.MT. 18.5 THE AO ALSO OBSERVED THAT THAT IN GURGOAN, A F EW SECTORS HAVE BEEN CARVED OUT FOR COMMERCIAL PURPOSES ONLY WHICH ARE N OT REFLECTED IN THE ACCOUNTS OF THE ASSESSEE. FURTHER, THE COMPLETED SE CTOR ACCOUNTING FOR THE FY 2006-07 DRAWN OUT FOR DIFFERENT SECTORS BY THE ASSE SSEE FROM WHICH EXCESS OF RECOVERY OVER DEVELOPMENT IS DRAWN OUT AND SHOWN IN INCOME AND EXPENDITURE ACCOUNT, DOES NOT TAKE INTO CONSIDERATI ON THE SALE OF COMMERCIAL SITE AS WELL AS THE CLOSING STOCK OF COMMERCIAL SIT ES, TO GROSSLY UNDERSTATE ITS INCOME. 19. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO GIVE DETAILS OF 'TOTAL RECOVERIES FROM ALLOTTEES WITH BR EAK UP REGARDING NEW SALE PROCEEDS FROM COMMERCIAL AND RESIDENTIAL SECTORS AN D OLD RECOVERY. THE APPELLANT FILE DETAILS GIVING THE BREAK UP AS DESIR ED. HOWEVER, DETAILS WITH REGARD TO RECOVERY FROM ALLOTTEES WITH REGARD TO IN STALLMENT OF PLOTS AMOUNTING RS.889.70 CRORES HAS NOT BEEN GIVEN. AS PER THE DET AILS FILED NEW SALES FROM RESIDENTIAL PLOTS HAS BEEN WAS SHOWN AT RS.273.33 C RORES AND NEW SALES FROM COMMERCIAL PLOTS WERE SHOWN AT RS.289.53 CRORES. HO WEVER, NO BREAK UP OF RECOVERY FROM ALLOTTEES WITH REGARD TO OLD SALES WA S FURNISHED. IN ABSENCE OF 25 DETAILS REGARDING RECOVERY FROM ALLOTTEES, WITH REG ARD TO OLD SALES BY THE ASSESSEE, THE AO MADE AN ESTIMATE OF COMPONENT OF S ALE OF THE COMMERCIAL SITES AT 50%, AS THE BUYERS ARE ALLOWED TO PAY THE BALANCE AMOUNT IN COMMERCIAL SITES OVER NEARLY THE SAME TIME FRAME AS DONE IN THE RESIDENTIAL SECTOR. 20. IN VIEW OF THE FACTS AS MENTIONED ABOVE THE AO REFERRING TO THE EARLIER ASSESSMENT YEAR HELD THAT 30% OF THE RECOVERIES FRO M SALE OF PROJECTS WHICH CORRESPOND TO THE HEADS OF EXPENDITURE WHICH ARE BO OKED BY THE ASSESSEE DIRECTLY TO HIS INCOME AND EXPENDITURE IS TO BE TAK EN AS INCOME FROM RESIDENTIAL SECTORS. HOWEVER, WITH REGARD TO THE RECOVERIES FRO M SALE OF COMMERCIAL PLOTS, 60% OF THESE RECEIPTS WERE PROPOSED TO BE TAKEN AS INCOME OF THE ASSESSEE DURING THE YEAR. THE HIGHER RATE WAS ESTIMATED FAR COMMERCIAL PROPERTIES KEEPING IN VIEW THE FACT THAT THE INCOME FROM SALE OF COMMERCIAL PLOTS FOR EXCEEDS THE INCOME FROM SALE OF RESIDENTIAL PLOTS. 20.1. THE AO WORKED OUT THE INCOME FROM RECEIPTS AS UNDER: RECOVERIES FROM COMMERCIAL SITES FROM NEW SALES RS. 289.53 CR. FROM OLD SALES (50% OF RS. 805.96) RS. 402.98 CR TOTAL RS. 692.51 RECOVERIES FROM RESIDENTIAL SITES RS. 676.30 CR. INCOME OF THE ASSESSEE DURING THE YEAR RESIDENTIAL SITES - 30% OF RS. 676.30 CR = RS. 202. 89 CR COMMERCIAL SITES - 60% OF RS. 692.51 CR = RS. 415.5 0 CR TOTAL INCOME = RS. 618.39 CR 20.2 THE AO THUS WORKED OUT A TOTAL ADDITION OF RS. 618,39,00,0008/- ON ACCOUNT OF REVENUE GENERATED FROM RESIDENTIAL SITE AND COMM ERCIAL SITE APPLYING A RATE OF 30% & 60% RESPECTIVELY. 21. THE ASSESSEE HAS CHALLENGED THE ADDITION BEFORE HE LD.CIT(A) AND HAS SUBMITTED THAT THE ADDITION IS TOTALLY UNCALLED FOR . 'THE ADDITION WAS MADE TAKING OFF THE ADDITION ON S AME PREMISE MADE IN RESPECT OF ASSESSMENT YEAR 2004-05, WHERE IT WAS HELD AS UNDER WHILE MAKI NG THE ADDITION AS THE ASSESSEE HAS CLAIMED INDIRECT CHARGES INCLUD ING ADMINISTRATIVE EXPENDITURE, WHICH WORKS OUT TO RS.29.90%, OF THE TOTAL COST OF THE PROJECT AS REVENUE EXPENDITURE THE CORRESPONDING 26 PROPORTION OF THE RECEIPT OF RECOVERY FROM ALLOTTEE ALSO NEEDS TO BE TAKEN. THE SAME IS CALCULATED HEREUNDER: TOTAL RECOVERIES FROM ALLOTTEES ON ACCOUNT OF SALE OF PLOTS (RECOVERIES ALSO INCLUDE COMMERCIAL SALES) RS. 6,84,30,62,676/- ON ACCOUNT OF ADMINISTRATIVE RECEIPT AS FURNISHED BY THE ASSESSEE 29.79% OF RS. 684.31 CRORES = RS. 203.86 21.1 THE ABOVE AMOUNT IS TAKEN AS REVENUE RECEIPT O F THE ASSESSEE-WHICH THE ASSESSEE HAS WRONGLY CAPITALIZED IN THE BALANCE SHE ET. FROM THE ABOVE DETAILS, IT IS CLEAR THAT THERE ARE THREE COMPONENTS OF THE TOTAL COST. OUT OF THESE THREE COMPONENTS, THE ASSESSEE I S CAPITALIZING THE TWO COMPONENTS IN THE BALANCE SHEET I.E. COST OF LAND, DEVELOPMENT, CHARGES AND OTHER INCIDENTAL CHARGES. HOWEVER, IT IS CLAIMING THE ADMINISTRATIVE CHARGES WHICH WORKS OUT TO 29.79% IN THE P&L ACCOUNT AS REV ENUE EXPENDITURE. BUT IT IS NOTICED THAT WHEN THE ASSESSEE IS RECEIVING PAYMENT S FROM THE ALLOTTEES ON ACCOUNT OF THESE THREE COMPONENTS, HE IS CAPITALIZI NG THE ENTIRE RECEIPTS IN THE BALANCE SHEET. AS A RESULT OF THIS CAPITALIZATION, THERE IS A LOSS IN THE P&L ACCOUNT. AT THE VERY OUTSET IT IS STATED THAT THERE IS AN AR ITHMETICAL ERROR IN THE PERCENT AGE OF 29.79 APPLIED BY THE AO. THE CORRECT TOTAL WORKS TO 27.3 % AS AGAINST WHICH THE AO AHS APPLIED RATE OF 29.79PERCENT AS ROUNDED OFF TO 30%. IT HAS BEEN UNDERSTOOD AND BELIEVED BY THE AO THAT COSTS APPEARING AT A, B AND D ABOVE ARE PARTED BY HUD A TOWARDS COST OF THE PLO T WHICH IS SOLD BY IT TO THE PLOT ALLOTTEE. THE PERCENT AGE OF THE AMOUNT PARTED BY HUDA HAS BEEN ASSUMED TO BE AN OUT GO AND THE REMAINING PERCENT AGE AMOUN T OF THE TOTAL AMOUNT RECEIVED DURING THE YEAR FROM ALLOTTEES IS TREATED AS INCOME BY THE AO. FURTHER, IT IS REITERATED THAT THE COST SHEET WHICH WAS TAKEN AS THE BASIS FOR ADOPTING AN ASSUMPTIVE NP RATE IS A PROJECTION OF T HE COST EXPECTED TO BE 27 INCURRED FOR DEVELOPING A SECTOR. THIS COST WAS BAS ED UPON THE HISTORICAL DATA AND THE PAST FIGURES AND AS PER PWD ESTIMATES, WHIC H ARE BASED IN SCIENTIFIC POSTULATES AND CALCULATIONS. THE INDIRECT CHARGES INCLUDE SOME AMOUNTS WHICH ARE COMPULSORILY PAYABLE BY THE ASSESSEE TO OTHER DEPARTMENTS/PERSONS AND ARE N OT RETAINED BY THE ASSESSEE AT ALL. FOR THE PURPOSE OF MAKING THESE CHARGES, TH E ASSESSEE IS TREATED AT PAR WITH PRIVATE COLONIZERS AND ARE TO BE PAID TO VARIO US DEPARTMENTS. THUS, EVEN IF THE PRESUMPTION OF THE AO THAT INDIRECT CHARGES ARE TO BE TAXED AS INCOME, EXPENDITURE INCURRED UNDER THE HEAD COMMERCIAL INTE REST, ESCALATION CHARGES, LICENSE FEES, CONVERSION CHARGES, SECURITY FEE AND SERVICE CHARGES (TOTALING TO 21.17%) IS NOT RETAINED BY THE ASSESSEE AND IS PAID TO VARIOUS DEPARTMENTS AND ONLY 6.13 %, WHICH IS ADMINISTRATIVE CHARGES CAN ON LY BE CONSIDERED (THOUGH INCORRECTLY) FOR THE PURPOSE OF CALCULATION OF PROF IT IN THIS MANNER. FIFTEEN PERCENT OF DEVELOPMENT COST IS INCLUDED IN THE COST OF PLOTS TOWARDS ADMINISTRATIVE CHARGES WHICH ARE THE CHARGES DESIGN ATED TO MEET DAY TO DAY COST OF ADMINISTRATION, MAINTENANCE, ESTABLISHMENT AND OTHER RELATED COSTS. HUDA MEETS ITS DAY TO EXPENDITURE FROM THE ELEMENT CONTAINED THE EXPENDITURE AGAINST THE HEAD ADMINISTRATIVE CHARGES (15% OF O.C .) AND UNFORESEEN CHARGES 5% OF D.C EXTERNAL DEVELOPMENT CHARGES ARE PAID UNDER STATUTE TO STATE GOVT, OF HARYANA. COPY OF THE STATUTORY NOTIFICATION HAS ALREADY BEEN BROUGHT ON RECORD, WHICH PRESCRIBE THE RATE PER ACRE TO BE PAID BY HUDA TO T HE STATE GOVERNMENT. THESE EXTERNAL DEVELOPMENT CHARGES ARE PAID TO THE STATE GOVT, OF HARYANA AND IS A STATUTORY LEVY AND CANNOT BY ANY STRETCH OF IMAGINA TION BE INCLUDED OR DEEMED TO CONTAIN ANY ELEMENT OF PROFIT AND CONTRIBUTING T O THE SURPLUS OF ORGANIZATION, AS HAS BEEN HELD BY THE AO. LICENSE FEES ARE PAID UNDER STATUTE TO STATE GOVT, OF HARYANA. COPY OF THE STATUTORY NOTIFICATION HAS ALREADY BEEN BROUGHT ON RECORD, WHICH PRESCRIBE THE RATE PER ACRE TO BE PAID BY HUDA TO THE STATE GOVER NMENT. THESE LICENSE FEES ARE PAID TO THE STATE GOVT, OF HARYANA AND IS A STA TUTORY LEVY AND CANNOT BY ANY STRETCH OF IMAGINATION BE INCLUDED OR DEEMED TO CON TAIN ANY ELEMENT OF PROFIT AND CONTRIBUTING TO THE SURPLUS OF THE ORGANIZATION AS HAS BEEN HELD BY ASSESSING OFFICER. ANY ELEMENT OF PROFIT AND CONTRIBUTING TO THE SURPLUS OF ORGANIZATION, AS HAS BEEN HELD BY THE AO. CONVERSION CHARGES ARE PAID UNDER STATUTE TO STATE GOVT, OF HARYANA. COPY OF THE STATUTORY NOTIFICATION HAS ALREADY BEEN BROUGHT ON RECORD, WHICH PRESCRIBE THE RATE PER ACRE TO BE PAID BY HUDA TO THE STATE G OVERNMENT. THESE EXTERNAL DEVELOPMENT CHARGES ARE PAID TO THE STATE GOVT, OF HARYANA AND IS A STATUTORY LEVY AND CANNOT BY ANY STRETCH OF IMAGINATION BE IN CLUDED OR DEEMED TO CONTAIN ANY ELEMENT OF PROF IT AND CONTRIBUTING TO THE SURPLUS OF ORGANIZATION, AS HAS BEEN HELD BY THE AO. SCRUTINY FEES AND SERVICE CHARGES ARE PAID UNDER ST ATUTE TO STATE GOVT, OF HARYANA. COPY OF THE STATUTORY NOTIFICATION HAS ALR EADY BEEN BROUGHT ON RECORD, WHICH PRESCRIBE THE RATE PER ACRE TO BE PAID BY HUD A TO THE STATE GOVERNMENT. THESE CHARGES ARE ALSO PAID TO THE STATE GOVT., OF HARYANA AND IS A STATUTORY LEVY AND CANNOT BY ANY STRETCH OF IMAGINATION BE INCLUDE D OR DEEMED TO CONTAIN ANY ELEMENT OF PROFIT AND CONTRIBUTING TO THE SURPLUS O F ORGANIZATION, AS HAS BEEN HELD BY THE AO. OUT OF INDIRECT CHARGES TAKEN AS 29.79%, COMMERCIAL INTEREST, ESCALATION CHARGES, LICENSE FEES, CONVERSION CHARGES, SECURITY FEES AND SERVICE CHARGES TOTALING TO 21.17 % ARE NOT RETAINED BY THE ASSESSEE AT ALL AN D ARE PARTED BY IT EITHER WITH THE GOVERNMENT OR WITH THE PLOT OWNERS UNDER DIRECT IONS OF THE COURT. 28 IN RESPECT OF THE YEAR UNDER QUESTION, THE ASSESSEE HAS PAID A SUM OF RS.50 CORES TO THE STATE GOVERNMENT OF HARYANA ON ACCOUNT OF LI CENSE FEE, CONVERSION CHARGES AND INFRASTRUCTURE DEVELOPMENT CHARGES. THE AMOUNT HAS PAID TO THE STATE GOVERNMENT ON ACCO UNT OF LICENSE FEE, CONVERSION CHARGES, INFRASTRUCTURE DEVELOPMENT CHA RGES AND SCRUTINY FEE AS PER THE CIRCULAR OF THE STATE GOVERNMENT APPLICABLE AT THAT TIME. THE AMOUNT OF RS.5000.00 LACS WAS PAID ON THIS ACCOUNT DURING THE FINANCIAL YEAR 2006-07, THE DETAILS OF WHICH IS GIVEN AS UNDER:- LICENSE FEE RS. 968.16 CON VERSION CHARGES RS. 1231.84 INFRASTRUCTURE DEV.CHARGES RS.2699.52 SCRUTINY FEE RS. 100.48 TOTAL RS.5000.00 FURTHER, WHILE COMPLETING THE ASSESSMENT, THE ASSES SING OFFICER APPLIED A G.P. RATE WHICH WAS ESTIMATED BY THE ASSESSING OFFICER F ROM THE COST SHEET PRODUCED BEFORE AO FOR VERIFICATION ON THE TOTAL SUMS RECIVE D BY THE ASSESSEE DURING THE YEAR UNDER QUESTION. IT IS ARGUED THAT THE SAID ASSUMPTIVE NP RATE OF 29 .93 PC WAS APPLIED ON THE TOTAL AMOUNT RECEIVED FROM THE ALLOTTEES DURING THE YEAR UNDER QUESTION AND WAS TREATED TO BE INCOME OF THE ASSESSEE FROM SALE OF P LOTS. IT IS FURTHER BROUGHT OUT THAT WHILE ARRIVING AT AN ASSUMED INCOME ELEMENT OF RS.42.88 CRORES COMPRISED IN THE SUMS RECEIVED FROM THE ALLOTTEES, THE ASSESSING OFFICER FAILED TO CONSIDER A VERY PERTINENT FACT INTO CONSIDERATION THAT THE SUM S RECEIVED FROM THE ASSESSEE ALSO INCLUDED AN AMOUNT OF RS.42.88 RECEIVED FROM T HE ALLOTTEES TOWARDS ENHANCED COMPENSATION WHICH WERE IN THE NATURE OF C ROSS / TRANSFER ENTRY AND DID NOT PARTAKE OR CONTAIN ANY ELEMENT OF OWNERSHIP OR RETENTION BY HUDA. AS A RESULT OF ADOPTING THIS POSTULATE / POSTURE, THE AS SESSING OFFICER HAS ARRIVED AT AN EXCESSIVE INCOME OF RS.12.864 CRORES.' AS REGARD THE ADDITION ON ACCOUNT OF COMMERCIAL PR OPERTY IT HAS BEEN SUBMITTED AS UNDER :- 'A CONJOINT READING OF THE FINDINGS IN THE ORDER OF ASSESSMENT REVEALS THAT NOTIONAL PROFIT RATE OF 60% APPLIED ON RECOVERIES IN RESPECT OF COMMERCIAL PROPERTIES AS AGAINST 30%, PROFIT ON RECOVERIES FROM RESIDENTIAL PROPERTIES HAS BEEN MADE ON THE UNDERSTANDING THAT THE COST OF DEVELOPING COMME RCIAL PROPERTIES IS INCLUDED IN COSTING OF RESIDENTIAL PLOTS AND HENCE THE COMME RCIAL PROPERTIES YIELD HIGHER PROFIT. APPLICATION OF PROFIT @60% WAS ACTUALLY A MISTAKE W HICH IS APPARENT FROM RECORD, FOR WHICH APPLICATION FOR RECTIFICATION UNDER SECTI ON 154 OF THE ACT WAS FILED, WHEREIN IT WAS STATED ASUNDER; AT PAGES 15 AND 16 OF THE ORDER OF ASSESSMENT A CAL CULATION HAS BEEN MADE (REPRODUCED ABOVE), IN WHICH COSTING SHEET IN RESPE CT OF SECTOR 33 KAMA I HAS BEEN TAKEN AS A BASIS FOR ASSUMING THAT THE PROFITS EARNED BY COMMERCIAL SECTORS ARE HIGHER THAN THE PROFIT EMBEDDED IN THE RECOVERI ES MADE IN RESPECT OF RESIDENTIAL AREA. A BARE READING OF THE COST SHEET REVEALS AS UNDER; IN THE SAMPLE TAKEN FOR CONSIDERING THE MATTER AND ARRIVING AT THE CONCLUSION IT HAS BEEN OBSERVED THAT TOTAL AREAS DEDICATED FOR DE VELOPING SECTOR 33 KARNAL WAS 240 ACRES. OUT OF THIS AREA, 30.54 ACRES, WAS R ELEASED FROM THE TOTAL OCCUPATION. IN THE SAMPLE COST SHEET TAKEN INTO ACCOUNT WHILE C OMPLETING THE ASSESSMENT, THE LAND IN POSSESSION OF HUDA TO BE DEVELOPED FOR THE WHOLE SECTOR WAS 209.46 ACRES. OUT OF THE TOTAL LAND EARMARKED FOR THE SECT OR, 46.75 ACRES OF LAND WAS EARMARKED FOR AREA UNDER SHOPPING AND 1.10 ACRES WA S RESERVED FOR INSTITUTIONS. ACCORDINGLY, BALANCE AREA AVAILABLE FOR DEVELOPMENT AND SALE TOWARDS RESIDENTIAL PLOTS WAS 158.75 ACRES. THIS FACT CLEAR LY APPEARS IN THE COST SHEET. IT IS ALSO EVIDENT FROM A READING OF THE COST SHEET THAT OUT OF THE TOTAL 158.75 ACRES OF 29 LAND PROPOSED TO BE DEVELOPED FOR RESIDENTIAL PLOTS , LAND MEASURING 105.17 ACRES WAS TO BE LEFT AS COMMON UTILITY AREA VIZ. PARKS, R OADS, RAIN WATER DISPOSAL AND OTHER SUCH FACILITIES. THEREFORE ONLY 51.88 ACRES W AS LEFT TO BE OFFERED FOR SALE BY WAY OF RESIDENTIAL PLOTS. THUS, OUT OF THE TOTAL SA LEABLE AREA OF 158.75 ACRES, EARMARKED TOWARDS RESIDENTIAL AREAS, ONLY 33.75 %> WAS TO BE RECOVERED FROM THE RESIDENTIAL PLOTS TO BE SOLD BY THE ASSESSEE. RESUL TANTLY THE COST OF DEVELOPING 158.75 ACRES OF LAND IN THE RESIDENTIAL AREA WAS TO BE CHARGED TO THE PLOTS CARVED OUT OF 51.88 ACRES OF LAND. TECHNICALLY TALK ING, THE YIELD OUT OF THE TOTAL LAND PROPOSED DEVELOPED FOR RESIDENTIAL COLONY WAS THEREFORE 33.75 %>, I.E. 51.88 ACRES DIVIDED BY 158.75 ACRES. THUS OUT OF PER ACRE OR 4840 SQ YDS OF LAND DEVELOPED, THE NET AREA AVAILABLE WAS ONLY 1634 SQ YARDS (YIELDPER ACRE & 33.75%). THE TOTAL COST OF DEVELOPING PER ACRE OF R ESIDENTIAL LAND I.E. RS. 7585660 WAS DIVIDED BY NET YIELD IN SQ YDS PER ACRE TO ARRI VE AT THE COST OF LAND AND DEVELOPING LAND, PER SQUARE YARD. IT IS REITERATED THAT RS.7585660 IS COST OF DEVELOPING ONLY ONE CARE OF RESIDENTIAL LAND AND DO ES NOT AT ALL INCLUDE COST FACTOR OR ELEMENT OF COMMERCIAL AREA AT ALL, F OR WHICH A SEPARATE COS T SHEET IS PREPARED. IT IS CLEAR FROM A BARE READING OF THE COST SHEET T HAT THE TOTAL COST OF DEVELOPING ONE ACRE OF RESIDENTIAL LAND HAS BEEN DIVIDED BY TH E YIELD IN SQUARE YARDS TO ARRIVE AT THE PER SQUARE YARD COST OF RESIDENTIAL P LOT. IT IS VERY CLEAR FROM THE COST SHEET THAT THIS DOES NOT INCLUDE ANY ELEMENT OF COS T OR AREA OF COMMERCIAL PROPERTY/ PLOT IN IT. IT IS REITERATED THAT THE ARE A OF 46.75 ACRES HAS BEEN SET APART IN THE LOCALITY FOR COMMERCIAL PURPOSES HAS GOT NOT HING WITH THE CALCULATION, AS IS CLEAR FROM THE CALCULATION APPEARING IN THE ORDER I TSELF. IT IS EVIDENT FROM THE CALCULATIONS MADE IN THE ORD ER OF ASSESSMENT, WHICH HAS REPRODUCED THE COST SHEET OF SECTOR 33, KARNAL AND TAKEN THIS AS THE BASIS OF APPLYING 60% PROFIT ON RECEIPTS FROM ALLOTTEES, ON THE GROUND THAT THE COST OF COMMERCIAL SECTOR HAS BEEN CHARGED TO RESIDENTIAL P LOTS AND HENCE THE SAME IS YIELDING HIGHER PROFIT. IN THE ORDER OF ASSESSMENT, IT HAS BEEN NOTED THAT THE TOTAL COST IN RESPECT OF ONE ACRE LAND DEVELOPED IN THE A REA I.E. RS. 7585660 WHICH WAS COST PER ACRE AND 158.75 ACRES OF LAND WAS DEVELOPE D OUT OF WHICH ONLY PLOTS ON 53.58 ACRES WERE CARVED OUT AND REMAINING PARTS WER E LEFT FOR COMMON UTILITIES AND FOR GREEN PATCHES ONLY. IT IS FACT THAT THE COMMERCIAL AREAS FETCH BETTER P RICE THAN THE RESIDENTIAL PLOTS. BUT THE COST OF DEVELOPING THE COMMERCIAL PROPERTIE S IS VERY HIGH AND THERE IS NOT SUCH A HUGE PROFIT ELEMENT AS ENVISAGED BY THE 'AO IN THIS TRANSACTION. IT IS SUBMITTED AS UNDER 2. ADDITION @ 60% ON COMMERCIAL PROPERTIES IS ON A VERY HIGH SIDE DUE TO THE FOLLOWING REASONS:- I) THE DEVELOPMENT COST OF COMMERCIAL SECTORS IS 3 TO 4 TIMES HIGHER THAN THE DEVELOPMENT COST OF THE RESIDENTIAL SECTOR S. II) THE SALEABLE AREA IN THE COMMERCIAL SECTORS IS ONLY 25% TO 30%, AS AGAINST THE SALEABLE AREA OF 50 TO 55%, IN THE RESI DENTIAL SECTORS. III) THE ENHANCED COMPENSATION AWARDED BY THE COURT S IN RESPECT OF COMMERCIAL SECTORS IS NOT RECOVERED FROM THE ALLOTT EES OF COMMERCIAL SECTORS UNLIKE THE RESIDENTIAL SECTORS AS THE COMMERCIAL SI TES ARE SOLD BY WAY OF AUCTION. IV) THE LICENSE FEE, CONVERSION CHARGES, INFRASTRUC TURE DEVELOPMENT CHARGES ARE MUCH HIGHER IN THE CASE OF COMMERCIAL SECTORS THAN THE RESIDENTIAL SECTORS. THE CHART SHOWING THESE CHARGES IS ENCLOSED AT ANNEXURE A'. THEREFORE, THE COMMERCIAL SITES HAVE A HUGE COST AND ADDITION @ 60 % ON THE COMMERCIAL SITES IS NOT JUSTIFIED. 21.2 THE APPELLANT FURTHER REFERRED TO THE ASSESSME NT ORDER FOR THE YEAR 2008-09 WHEREIN THE AO HIMSELF HAS COMPUTED THE INCOME FROM SALE OF COMMERCIAL PLOTS BY APPLYING A RATE OF 50% AS COMPARE TO 60% T AKEN DURING THE YEAR UNDER APPEAL. 30 22. THE LD. CIT(A) ADJUDICATED ON THIS ISSUE WHICH IS AS UNDER: I HAVE CAREFULLY CONSIDERED THE SUBMISSION MADE BY THE APPELLANT. IT IS SEEN THAT THE APPELLANT HAS CHALLENGED THE AO'S ACTION OF TRE ATING 30% & 50% OF ITS RECEIPTS AS TAXABLE ON ACCOUNT OF INDIRECT CHARGES RECEIVED MAINLY BY RELYING ON THE AS-7 METHOD BEING FOLLOWED BY THE APPELLANT. IT IS MENTI ONED THAT THE AS-7 METHOD FOLLOWED BY THE APPELLANT HAS BEEN REJECTED BY THE AO AND THE AO'S ACTION IN THIS REGARD HAS BEEN UPHELD IN THE PRECEDING PARA. THE APPELLANT HAS, FIRST OF ALL CHALLENGED THE WORKING OF 29.79% AS, AS PER THE APP ELLANT THE SAME IS ACTUALLY 27.3%. AS REGARDS, THE OTHER ARGUMENTS TAKEN BY THE APPELLANT, IT HAS BEEN STATED THAT THE INDIRECT CHARGES RECEIVED BY THE APPELLANT ARE ON VARIOUS ACCOUNTS AND 22.177O OUT OF 27.3% IS PASSED ON AND IS NOT RETAIN ED BY THE ASSESSEE AT ALL. THE ASSESSEE HAS ELABORATED ON THE VARIOUS COMPONENTS O F INDIRECT CHARGES TO SUBSTANTIATE ITS CONTENTION THAT MOST OF THE SUMS C HARGED BY THE APPELLANT FROM PLOT HOLDERS ARE SPENT ON THE ACTIVITY OF DEVELOPIN G PLOTS AND OR COMPLETING THE SECTORS. IT IS SEEN FROM THE SUBMISSION OF THE APPE LLANT THAT THE FOLLOWING EXPENSES ARE DIRECTLY PARTED/GIVEN TO THE STATE GOVT, AND CA NNOT CONSTITUTE INCOME OF THE APPELLANT . I) LICENSE FEE 3% II) CONVERSION CHARGES 3.87% III) SCRUTINY FEE AND SERVICE CHARGES .81% THUS, THERE IS MERIT IN APPELLANT'S SUBMISSION THAT THE ABOVE CHARGES CANNOT BE TAKEN TO BE INCOME OF THE APPELLANT. SIMILARLY, THE APPELLANT IS CORRECT IN STATING THAT THE ACTUAL AMOUNT ON ACCOUNT OF INDIRECT CHARG ES WORKS OUT TO 27.3% AS AGAINST 29.79% TAKEN BY THE AO. THEREFORE, GIVING A PPROPRIATE RELIEF TO THE APPELLANT WITH REGARD TO THE ABOVE CHARGES AND THE DIFFERENCE IN PERCENTAGE CALCULATED BY THE AO, THE PERCENTAGE OF RECOVERIES TAKEN TO BE THE INCOME OF THE APPELLANT FROM SALE OF RESIDENTIAL PLOTS IS TAK EN AS 20% AS AGAINST 30% ADOPTED BY THE AO (3% + 3.87% + .81% + 2.49%). THE APPELLANT GETS CONSEQUENTIAL RELIEF IN THIS REGARD. THE APPELLANT HAS FURTHER CONTENDED THAT THE AMOUNT OF RECOVERIES INCLUDE THE AMOUNT RECEIVED FROM THE ALLOTTEES ON A CCOUNT OF ENHANCED COMPENSATION GRANTED BY THE COURTS. THEREFORE SUCH RECEIPTS CANNOT HAVE ANY ELEMENT OF INCOME AND THE SAME NEEDS TO BE EXCLUDED FROM THE TAXABLE INCOME. THE APPELLANT'S CONTENTION IS FOUND TO BE V ALID. THEREFORE, THE AO IS DIRECTED TO RE-COMPUTE THE ADDITION AFTER EXCLUDING THE RECEIPTS ON ACCOUNT OF ENHANCED COMPENSATION AFTER DULY VERIFYING THE DETA ILS AS REGARDS, THE APPELLANT'S CONTENTION WITH REGARD TO APPLICATION OF RATE OF 60% WITH REGARD TO COMMERCIAL PROPERTY, IT IS HELD THAT THE SAME IS ON THE HIGHER SIDE. FIRST OF ALL THE APPLICATION OF HIGHER RATE I S APPROVED IN PRINCIPLE AS ONE DOES NOT NEED TO GO INTO THE DETAILS OF THE RATES OF COM MERCIAL PROPERTY AND RESIDENTIAL PROPERTY. THERE IS NO DENYING THE FACT THAT THE COMMERCIAL PROPERTIES FETCH MORE PRICE WHILE THE COST OF ACQUISITION IS T HE SAME. THEREFORE PROFIT MARGIN IS DEFINITELY HIGH IN CASE OF COMMERCIAL PROPERTIES . THERE IS MERIT IN APPELLANT'S SUBMISSION THAT ALL THESE TOWNS OF HARYANA ARE NOT COMMERCIALLY AS ADVANCED AS FARIDABAD & GURGAON WHEREIN THE PROPORTION MIGHT BE JUSTIFIED FURTHER, THERE IS ALSO SUBSTANCE IN AP PELLANT'S SUBMISSION THAT THE COST OF DEVELOPING COMMERCIAL AREA IS MORE THAN THAT OF RESIDENTIAL AREA AS PROPORTION OF LAND UTILIZATION IN CASE OF COMMERCIA L PROPERTY IS LESS. IT HAS ALSO BEEN MENTIONED THAT THE ENHANCED COMPENSATION BY TH E COURT IN RESPECT OF COMMERCIAL SECTORS IS NOT RECOVERED FROM THE ALLOTT EES AS DONE IN THE CASE OF RESIDENTIAL SECTORS. IT IS SEEN THAT THE AO HIMSELF HAS TAKEN THE PROPORTION OF PROFIT AS 50% DURING THE YEAR 2008-09. THEREFORE, IT IS HE LD REASONABLE TO APPLY A RATE OF 31 45% IN THE CASE OF COMMERCIAL PROPERTY FOR ESTIMATI NG THE INCOME DERIVED FROM SALE OF COMMERCIAL PROPERTY. 6.12 THE APPELLANT HAS MADE AN ALTERNATE SUBMISSION THAT THE AMOUNT OF RS.84,60,72,183/- AS INCOME FROM COMPLETED SECTOR A S SHOWN IN THE P&L ACCOUNT SHOULD BE REDUCED WHILE COMPUTING THE TAXABLE INCOM E OF THE APPELLANT AS THE AO HAS APPLIED A NET PROFIT RATE OF 30% WITH REGARD TO RECEIPTS FROM RESIDENTIAL AREA AND 60% WITH REGARD TO RECEIPTS COMMERCIAL ARE A. AS PER THE APPELLANT AS THE AO HAS REJECTED THE BOOK RESULTS WITH REGARD TO INCOME BY WAY OF DEVELOPMENT OF SECTORS & PLOTS AND HAS APPLIED A NE T PROFIT RATE AS MENTIONED ABOVE. THE PROFIT DERIVED BY THE APPELLANT FROM THE SAME ACTIVITIES AS REFLECTED IN THE BOOKS OF ACCOUNT SHOULD BE REDUCED FROM THE TAX ABLE INCOME SO COMPUTED BY THE AO. IT IS SEEN THAT A SIMILAR CONTENTION WAS RAISED BEFORE THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE AO HAD HOWEVE R REJECTED THE APPELLANT'S CONTENTION STATING THAT THE PERCENTAGE METHOD HAS B EEN ADOPTED ONLY DURING THE YEAR 2003-04, 2004-05 & 2005-06 AND THE YEAR UN DER APPEAL. THE ENTIRE RECOVERIES OF MORE THAN RS.4364 CRORES I.E. THE BAL ANCE AS ON 31.03.2003 HAVE NOT BEEN DISTURBED ON PROPORTIONATE BASIS. THEREFORE, T HERE IS NO MERIT IN APPELLANT'S SUBMISSION THAT THERE IS DOUBLE TAXATION. THE AO HA S MENTIONED THAT IN CASE THE ASSESSEE ACCEPTS THE DEPARTMENT'S WORKING THEN IN T HE SUBSEQUENT YEARS IT MAY SHIFT ONLY THE EXCESS RECEIPTS TO THE INCOME AND EX PENDITURE ACCOUNT FOR COMPLETED SECTORS. I AGREE WITH THE OBSERVATIONS OF THE AO IN THIS REGARD. THE RECEIPTS SHOWN BY THE APPELLANT ARE WITH REGARD TO THE COMPLETED SECTORS WHICH AS PER THE ACCOUNTING PRACTICE FOLLOWED BY THE APPE LLANT ARE SHOWN AFTER 20 YEARS. THEREFORE, THE AO'S ACTION OF APPLYING A NET PROFIT RATE DOES NOT HAVE MUCH IMPACT ON THE RECEIPTS SO SHOWN. THE APPELLANT MAY HOWEVER WORK OUT THE DETAILS OF THE RECEIPTS RELATABLE TO THE COMPLETED PROJECTS THE INCOME FROM WHICH HAS BEEN SHOWN IN THE PAL ACCOUNT AND WHICH HAVE BE EN INCLUDED BY THE AO ALSO FOR NET PROFIT RATE PURPOSES AND CLAIM APPROPR IATE RELIEF. THE AO IS DIRECTED TO ALLOW THE RELIEF IN THIS REGARD AFTER DUE VERIFI CATION. 6.13 IN CONCLUSION, IT IS HELD THAT THE INCOME OF T HE APPELLANT BE DETERMINED BY APPLYING A NET RATE OF 20% IN THE CASE OF RESIDENTI AL PROPERTY AND KI% IN CASE OF COMMERCIAL PROPERTY. THE AMOUNT RECOVERED BY THE AP PELLANT ON ACCOUNT OF ENHANCED COMPENSATION WITH REGARD TO RESIDENTIAL PR OPERTY ALSO BE REDUCED FROM THE TOTAL RECEIPTS FOR WORKING OUT THE NET PRO FIT WITH REGARD TO RESIDENTIAL PROPERTIES AFTER DUE VERIFICATION BY THE AO. THE AP PELLANT' GETS APPROPRIATE RELIEF IN THIS REGARD. THE GROUND OF APPEAL IS PARTLY ALLO WED. 23. BEFORE US THE LD. AR STRONGLY RELIED ON THE ARG UMENTS TAKEN BEFORE THE LD. CIT(A). IT WAS FURTHER ARGUED THAT ON PERUSAL OF CO ST SHEET IT WILL BE OBSERVED THAT OUT OF THE LAND EARMARKED FOR THE SECTOR 46.75 ACRE S OF LAND WAS EARMARKED FOR AREA UNDER SHOPPING & 1.10 ACRES WAS RESERVED FOR I NSTITUTION. ACCORDINGLY, THE BALANCE AREA WAS AVAILABLE FOR DEVELOPMENT AND SALE TOWARDS RESIDENTIAL PLOTS WAS 158.75 ACRES. THE COMMERCIAL AREA HAS BEEN RIGH TLY EXCLUDED FROM THE TOTAL AREA FOR EARMARKING SPECIFIED AREAS FOR RESIDENTIAL PURPOSES BECAUSE THE COST OF COMMERCIAL AREA IS CALCULATED SEPARATELY. THE COST OF DEVELOPING THE COMMERCIAL SECTOR IS DIFFERENT FROM COST ARRIVED AT IN THE COST SHEET OF RESIDENTIAL PROPERTY AS THE DEVELOPMENT OF COMMERCIAL AREA IS M UCH HIGHER & COSTLIER THAN THE DEVELOPMENT OF RESIDENTIAL AREA. THEREFORE, THE DEVELOPMENT COST OF THE COMMERCIAL AREA CANNOT BE LOADED ON TO THE RESIDENT IAL AREA. THEREFORE, IT WAS 32 ARGUED THAT THE CONTENTION OF THE AO IN THIS REGARD THAT ASSESSEE IS SMARTLY EXCLUDING COMMERCIAL AREA FROM THE SALEABLE AREA IS WITHOUT ANY BASIS. 24. THE LD. AR ARGUED THAT THE COMMERCIAL PLOTS ARE SOLD BY WAY OF AUCTION AFTER DETERMINATION OF THE RESERVE PRICE. THE ASSES SEE EARNS PROFIT FROM THE SALE OF COMMERCIAL PLOTS. THEREFORE, WHEN THE ASSESSEE H IMSELF ACCEPTS THAT PROFIT IS EARNED ON COMMERCIAL PLOTS, THE CONTENTION OF THE A O THAT IT IS CLAIMED BY THE ASSESSEE THAT IT IS RUNNING ITS ACTIVITIES ON 'NO P ROFIT NO LOSS' IS WITHOUT ANY BASIS IN RESPECT OF SHOPPING CENTRE & INSTITUTIONAL AREA. 25. THE AO HAS CONTENDED THAT ASSESSEE IS MAKING HU GE PROFITS FROM COMMERCIAL SECTORS. IN THIS REGARD, THE ASSESSEE HA S NEVER DENIED THE FACT THE COMMERCIAL PLOTS ARE AUCTIONED AT HIGHER PRICES. AL L THE RECEIPTS FROM THE SALE FROM PLOTS ARE DULY ACCOUNTED IN THE BOOKS OF ACCOU NTS OF THE ASSESSEE. THE RECEIPTS ARE ACCOUNTED FOR AS INCOME AND CREDITED T O SECTOR WISE PROFIT & LOSS ACCOUNT OF THE ASSESSEE AS PER THE METHOD OF ACCOUN TING FOLLOWED BY THE ASSESSEE. THERE IS NO CONCEALMENT OF INCOME BY THE ASSESSEE & NOT EVEN A SINGLE CASE HAS BEEN POINTED OUT WHERE IT CAN BE PR OVED THAT ASSESSEE HAS NOT ACCOUNTED FOR THE RECEIPTS FROM SALE OF PLOTS IN TH E BOOKS OF ACCOUNTS. THE DIFFERENCE IS ONLY ON ACCOUNT OF THE YEAR OF TAXATI ON OF PROFIT. THEREFORE, ADDITION MADE IS CAUSING DOUBLE TAXATION ON THE ASSESSEE. TH E AUCTION IS ALMOST AFTER 15- 20 YEARS OF DEVELOPMENT WHICH IS AFTER 5-6 YEARS OF INCEPTION. THUS AUCTION IS AFTER 20YEARS. MOREOVER A PERIOD OF 4 YEARS IS ALLO WED TO MAKE THE PAYMENT AFTER WHICH SUBSTANTIAL RISK & REWARD IS TRANSFERRE D. FROM THE ABOVE, IT IS CLEAR THAT MAINLY RISKS ARE TRANSFERRED AFTER 20 YEARS. SINCE AFTER 20 YEARS ASSESSING IS SHOWING INCOME ON ITS OWN, ESTIMATING INCOME @ 60 & 45 % OF THE RECOVERIES IS HIGHLY UNJUSTIFIED. 26. THE LD. AR HAS ALSO PUT FORTH ALTERNATE ARGUMEN T WITHOUT PREJUDICE TO THE ABOVE, THAT IT IS A FACT BEYOND DOUBT THAT THE COMM ERCIAL AREAS FETCH BETTER PRICE THAN THE RESIDENTIAL PLOTS. BUT AT THE SAME T IME ANOTHER FACT CANNOT BE IGNORED THAT COST OF DEVELOPING THE COMMERCIAL PROP ERTIES IS VERY HIGH AS COMPARED TO RESIDENTIAL PROPERTIES AND THERE IS NO SUCH HUGE PROFIT ELEMENT OF 60% AS ENVISAGED BY THE AO DUE TO THE FOLLOWING REA SONS; 33 - THE SITE DEVELOPMENT COST VARIES DEPENDING ON V ARIOUS FACTORS SUCH AS SITE, DEVELOPMENT PLAN, LOCAL FEES, PERMITTING COSTS ETC. O THE DEVELOPMENT COST OF COMMERCIAL SECTORS IS MUCH HIGHER THAN DEVELOPMENT COST OF THE RESIDENTIAL AREA. - THE SALEABLE AREA IN THE COMMERCIAL SECTORS IS O NLY 25% TO 30% AS AGAINST THE SALEABLE AREA OF50% TO 55% IN THE RESIDENTIAL SECTO RS - THE ENHANCED COMPENSATION AWARDED BY THE COURTS IN RESPECT OF COMMERCIAL SECTORS IS NOT RECOVERED FROM THE ALLOTTEES OF COMM ERCIAL SECTORS UNLIKE THE RESIDENTIAL SECTORS. - THE LICENSE FEE, CONVERSION CHARGES INFRASTRUCTU RE DEVELOPMENT CHARGES ARE MUCH HIGHER IN THE CASE OF COMMERCIAL SECTORS THAN THE R ESIDENTIAL SECTORS. - THE AUCTION IN THE COMMERCIAL SECTORS IS COMMENCE D ONLY AFTER INHABITATION IN RESIDENTIAL PART OF THE SECTORS IS DONE THEREFORE, THE COST OF DEVELOPMENT OF COMMERCIAL SECTORS IS VERY HIGH, -HUDA DOES NOT ONLY OFFERS COMMERCIAL PROPERTIES AT GURGOAN. IT HAS MAJOR TRANSACTIONS ARISING FROM OTHER AREAS AS WELL & THE RE ARE CERTAIN PLACES WHERE THE AUCTION DOES NOT TAKE PLACE AT ALL OR AT SUCH LOW P RICES THAT SOMETIMES IT RESULTS IN LOSSES ALSO. ALL THE TOWNS OF HARYANA ARE NOT COMME RCIALLY AS ADVANCED AS GURGOAN OR PANCHKULA. THEREFORE, THE COST OF DEVELOPMENT OF COMMERCIAL SITES IS MUCH HIGHER AND ADDITION @ 60% ON THE COMMERCIAL SITES I S NOT JUSTIFIED. MOREOVER, IT IS PERTINENT TO MENTION THAT THE CIT (A) IN AY 2007-08 HAS ACCEPTED THE CONTENTION OF THE ASSESSEE THAT THE COST OF DEVELOPING COMMERCIAL AREA IS MORE THAN THAT OF THE RESIDENTIAL PLOTS REDUCED THE PERCENTAGE OF PROFIT TO 45%. 26.1 LD. AR FURTHER ARGUED TO REDUCE THE PERCENTAGE OF PROFIT TO 20% BASED ON THE ABOVE FACTS. 26.2 REGARDING THE RESIDENTIAL SECTORS THE LD. AR A RGUED THAT THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING AS - 7 ISSUED BY ICAI W HICH PROVIDES FOR AN EXCEPTION IN RESPECT OF EXPENDITURE WHICH ARE GENERAL IN NATU RE & CANNOT BE ATTRIBUTABLE TO SPECIFIC ACTIVITY CARRIED ON BY THE ASSESSEE. RE FERENCE IS DRAWN TO PARA 8.7 OF AS - 7. 26.3 ADMINISTRATIVE EXPENDITURE CLAIMED BY THE ASSE SSEE ARE IN RESPECT OF THE EXPENDITURE INCURRED ON RUNNING DAY TO DAY ACTIVITI ES AND OTHER MANAGERIAL FUNCTIONING OF HUD A. THERE IS COMMON STAFF WHICH I S INDULGED IN CARRYING OUT ACTIVITIES RELATING TO BOTH THE COMPLETED & THE UNC OMPLETED CONTRACTS. THESE EXPENSES CANNOT BE SEGREGATED CONTRACT WISE. RELIANCE IS PLACED IN THE CASE OF JOINT COMMISSIONE R OF INCOME TAX VS. K . RAHEJA (P.) LTD. (2005) 102 ITD 414 (MUM.) 27. THE LD. AR HAS ARGUED THAT THE ASSESSEE HAS BEE N CONSISTENTLY FOLLOWING THE SAME SYSTEM OF ACCOUNTING AND DISPUTE IS ONLY R EGARDING THE YEAR OF ACCOUNTING OF INCOME. IT WAS ARGUED THAT THE DISPUT E IS ONLY REGARDING THE YEAR OF ACCOUNTING OF INCOME AND THERE IS NO DISPUTE ON THE POINT OF ADMISSIBILITY OF THE EXPENSE IN BOOKS OF ACCOUNTS AS REVENUE IN NATU RE AND IT IS ESTABLISHED LEGAL POSITION THAT AN ASSESSEE CAN FOLLOW ANY RECOGNIZED METHOD OF ACCOUNTING BUT THE CONDITION IS THAT THE SAME METHOD HAS TO BE FOL LOWED CONSISTENTLY. RELIANCE 34 IN THIS REGARD IS PLACED ON DAIKIN AIRCONDITIONING INDIA PRIVATE LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX (2014) 146 ITD 335 (DELH I ), NANDI HOUSING (P) LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX (2003) 80 TTJ (BANG) 750 : (2004) 2 SOT 395 (BANG), R. NATARAJAN VS. ASSISTANT COMMISSIONER OF INCOME TAX (2012) 135 ITD (CHENNAI) (TM) (TRIB) 0055 28. THE ASSESSEE HAS TAKEN AN ALTERNATE ARGUMENT TH AT THERE WOULD BE UNFORESEEN CHARGES AND ALSO ESTIMATED EXPENSES OF 2 .04% OF THE TOTAL COST TO MEET THE VARIATIONS AND 6.13% CAN BE TREATED AS COS T OF ADMINISTRATION MAINTENANCE AND ESTABLISHMENT EXPENSES. IT WAS ARGU ED THAT COMMERCIAL INTEREST/ ESCALATION CHARGES ARE PART OF DEVELOPMEN T COST, THE OUTFLOWS OF WHICH ARE COMPULSORILY REQUIRED TO BE INCURRED FOR THE PU RPOSE OF DEVELOPING & SELLING A SECTOR AND ARE NOT CLAIMED IN INCOME & EXPENDITUR E. THEREFORE IT IS REQUESTED THAT SINCE COMMERCIAL INTEREST & ESCALATION CHARGES ARE TO COVER THE CONTINGENCIES OF THE DEVELOPMENT COST, THE SAME SHO ULD BE CLUBBED WITH THE DEVELOPMENT COST. THEREFORE IN VIEW OF THE ABOVE, I T WAS PLEADED THAT THE DEVELOPMENT COST BE TAKEN AS 56.06% ( 44.61%+7.36%+ 4.09%) AS AGAINST 44.61% TAKEN BY AO AND ADDITION IF ANY SHOULD ONLY BE MADE IN RESPECT OF ADMINISTRATIVE & UNFORESEEN CHARGES. OUR PRAYER IS THAT THE ADDITION MADE @ 30% BE REDUCED TO 8.17 % (6.13%+2.04%). 29. LD. DR HAS RELIED ON THE RATIONALE OF THE CIT(A ), HOWEVER STRONGLY CONTESTED AGAINST THE REDUCTION OF PROFITS FROM 30% TO 20% IN RESIDENTIAL SECTOR AND REDUCTION FROM 60% /50% TO 45% IN COMMERCIAL SE CTORS. THESE SUBMISSIONS OF THE LD. CIT(DR) ARE AS UNDER: 4. ADDITION ON ACCOUNT OF INDIRECT CHARGES OF RESIDENT IAL SECTORS : AFTER REJECTION OF BOOKS OF ACCOUNTS, AO IN ORDER T O ASCERTAIN THE BASIS OF CALCULATION OF THE CORRECT PROFIT ASKED ASSESSEE TO ELABORATE THE METHOD OF CALCULATION OF COST OF PLOTS AND WORKING OF DISTRIBUTION OF THE SA ME TO THE ALLOTTEES OVER A PERIOD OF 20 YEARS. IN RESPONSE, ASSESSEE FURNISHED A COST SHEET WITH RESPECT TO THE SECTORS OF JAGADHARI AND EXPLAINED HOW HUDA CALCULATED THE COS T OF PLOTS FOR FIXING SALE PRICE. AO ASKED COST SHEETS FOR OTHER URBAN ESTATES FOR WHICH ASSESSEE SUBMITTED THAT COST RATIOS ARE THE SAME FOR ALL THE COST SHEETS FOR VARIOUS ES TATES. IT EXPLAINED THAT THERE ARE THREE COMPONENTS OF THE TOTAL COST (1) COST OF LAND + (2) DEVELOPMENT COST + (3) INDIRECT CHARGES INCLUDING ADMINISTRATIVE EXPENSES. ON THE B ASIS OF THIS THE SALE PRICE TO BE FIXED ON THE PRINCIPLE OF 'NO PROFIT NO LOSS' WHICH IS CO LLECTED FROM THE ALLOTTEES IN INSTALLMENTS. THE COST SHEET CRYSTALLIZES THAT THE ASSESSEE IS CAPITALIZING COST OF LAND, DEVELOPMENT CHARGES AND OTHER INCIDENTAL CHARGES BU T CLAIMING THE ADMINISTRATIVE CHARGES AMOUNTING TO 29.79% IN THE P&L ACCOUNT AS R EVENUE EXPENDITURE. AO OBSERVED THAT WHEN HUDA RECEIVES PAYMENTS FROM THE ALLOTTEES ON ACCOUNT OF THESE THREE COMPONENTS, IT IS CAPITALIZING THE ENTIRE RECEIPTS IN THE BALANCE SHEET. AO HELD THAT WHEN ADMINISTRATIVE CHARGES ARE CONSIDERED AS REVENUE EX PENDITURE THEN WHY THE RECEIPT OF THESE ADMINISTRATIVE CHARGES IS NOT TAKEN AS REVENU E RECEIPTS . ASSESSEE JUST STATED THAT IT IS FOLLOWING ACCOUNTING SYSTEM OF COMPLETED PROJECT MEANING THEREBY THAT IT HAS FAILED TO 35 REBUT AO'S CONTENTION. BY FOLLOWING THE REASONS OF REJECTION OF BOOKS OF ACCOUNTS SUPRA AT PARA 3, AO HAS HELD THAT AS THE ASSESSEE HAS CLAIME D INDIRECT CHARGES INCLUDING ADMINISTRATIVE EXPENDITURE WHICH WORKS OUT TO 29.90 % OF THE TOTAL COST OF THE PROJECT AS REVENUE EXPENDITURE THE CORRESPONDING PROPORTION OF THE RECEIPT OF RECOVERY FROM ALLOTTEES ALSO NEEDS TO BE TAKEN. THE ADDITION ON A CCOUNT OF ADMINISTRATIVE CHARGES CLAIMED BY THE ASSESSEE IN INCOME & EXPENDITURE ACC OUNT WAS MADE BY THE AO FOR THE FIRST TIME IN AY 2004-05 BY ESTIMATING THE 30% OF T HE TOTAL RECOVERIES AS INCOME. THEREAFTER FROM AY 2004-05 ONWARDS, THE INCOME WAS ESTIMATED @ 30% OF THE TOTAL RECOVERIES FROM RESIDENTIAL SECTOR ON ACCOUNT OF IN DIRECT CHARGES CLAIMED BY THE ASSESSEE IN ALL THE YEARS. 4.1. AO HAS ALSO DISCUSSED THAT HUDA IS NOT AN ORGA NIZATION WORKING ON A 'NO PROFIT NO LOSS' AS IT IS GENERATING FOLLOWING PROFITS: I. TOTAL SECTOR IS DIVIDED INTO PLOTS AND THE VALUE IS FIXED AFTER INCLUDING ALL DEVELOPMENT AND ADMINISTRATIVE EXPENDITURE. RESIDEN TIAL PLOTS ARE ALLOTTED AT COST PRICE BUT COMMERCIAL PLOTS ARE SOLD ON AUCT ION, WHICH GENERATED PROFITS IN SEVERAL HUNDRED CRORES. II. HUDA RECEIVES THE ENTIRE CHARGES ON ACCOUNT OF FUTURE DEVELOPMENTS AND THE MAINTENANCE OF SECTORS FROM ITS ALLOTTEES WITHI N A PERIOD OF 5/6 YEARS, BUT DEVELOPMENT IS CARRIED OUT IN A PERIOD OF 20 YE ARS MEANING THEREBY THAT IT IS RECEIVING MAINTENANCE/DEVELOPMENT CHARGE S FROM ALLOTTEES IN ADVANCE. THESE CHARGES ARE DEPOSITED IN THE BANK AS FDRS AND EARNED INTEREST INCOME. III HUDA IS NOT INCLUDING FORFEITURE OF SECURITY WH ILE WORKING OUT THE COST OF EACH SECTOR. THIS IS ALSO GENERATING SEVERAL CRORES OF R UPEES. [THE ISSUE OF FORFEITURE OF SECURITY HAS BEEN SETTLED IN FAVOUR OF REVENUE BY T HE IT AT IN ASSESSEE'S OWN CASE FOR AY 2003-04] IV. HUDA DOES NOT INCLUDE SALE OF TREES AND MALBAS IN COSTING OF PLOTS. V. HUDA RECEIVES SEVERAL LAKHS OF APPLICATIONS WITH EARNEST MONEY WHICH IS INTEREST FREE DEPOSIT FOR SIX MONTHS AND IN TURN EA RNS INTEREST OF SEVERAL CRORES OF RUPEES ON THIS EARNEST MONEY. VI. HUDA HAS WORKED OUT VARIOUS ADMINISTRATIVE CHAR GES ON ESTIMATE BASIS WHEREAS ACTUAL EXPENDITURE IS MUCH LESS THAT AGAIN GENERATES PROFIT. COMMERCIAL PROPERTIES, MALLS, SCHOOL SITES ETC ARE PUT TO AUCTION WHICH ARE SOLD ABOVE RESERVE PRICE. THERE IS CLEAR INTENTION TO EARN PRO FIT. 4.2 THE CIT(A) ORDER FOR AY 2007-08 WAS ADJUDICATED FIR ST & THE RATE WAS REDUCED FROM 30% TO 20% ON THE FOLLOWING REASONS: (A) THERE IS A MERIT IN ASSESSEE'S SUBMISSION THAT LICENSE FEE, CONVERSION CHARGES, SC RUTINY FEE AND SERVICE CHARGES [10.17%] CANNOT BE TAKEN TO BE INCOME OF THE ASSESS EE AS SAME ARE DIRECTLY PARTED/GIVEN TO THE STATE GOVT., (B) SIMILARLY, THE APPELLANT IS CORRECT IN STATING THAT ACTUAL AMOUNT ON ACCOUNT OF INDIRECT CHARGES IS 27. 3% AS AGAINST 29.79% COMPUTED BY AO, ACCORDINGLY GIVING RELIEF, THE PERCENTAGE IS TA KEN AS 20% AS AGAINST 30% ADOPTED BY AO, AND (C) THE RECEIPTS ON ACCOUNT OF ENHANCEME NT COMPENSATION GRANTED BY THE COURTS DOES NOT HAVE ANY ELEMENT OF INCOME. THEREFO RE HE DIRECTED THE AO TO EXCLUDE ENHANCEMENT COMPENSATION FROM THE AMOUNT OF RECEIPT S. THE CIT(A) ORDER FOR AY 2007-08 WAS FOLLOWED BY CIT(A) IN ALL THE YEARS. 4.3 A PORTION OF THE RECOVERIES MADE BY THE ASSESSE E DURING THE YEAR IS RELATABLE TO INDIRECT CHARGES BY THE ASSESSEE. SINCE THE ASSESSE E IS DEBITING ALL THE INDIRECT CHARGES I.E. CHARGES IN THE NATURE OF ADMINISTRATIVE CHARGE S, INTEREST CHARGES ETC. TO THE INCOME & EXPENDITURE A/C THE AMOUNT OF RECEIPT ON ACCOUNT OF SUCH CHARGES IS LIABLE TO BE INCLUDED TO THE INCOME OF THE ASSESSEE. DURING THE ASSESSMEN T PROCEEDINGS, THE ASSESSEE WAS ASKED TO GIVE DETAILS OF 'TOTAL RECOVERIES FROM ALL OTTEES WITH BREAK UP REGARDING NEW SALE PROCEEDS FROM COMMERCIAL AND RESIDENTIAL SECTORS AN D OLD RECOVERY TO BE GIVEN SEPARATELY'. THE AR OF THE ASSESSEE HAS GIVEN BREAK UP OF THE SAME. AS DISCUSSED IN THE PRECEDING PARAS, THE PROFIT GENERATED AND THEREFORE , THE INCOME FROM SALE OF COMMERCIAL PLOTS FAR EXCEEDS THE INCOME FROM THE SALE OF RESID ENTIAL PLOTS. HENCE, 30% RECOVERIES FROM SALE OF PROJECTS WHICH CORRESPOND TO THE HEADS OF EXPENDITURE WHICH ARE BOOKED BY THE ASSESSEE DIRECTLY TO HIS INCOME AND EXPENDITURE IS TAKEN WITH REGARD TO INCOME FROM RESIDENTIAL SECTOR. THUS ADOPTING A CONSISTENT VIEW OF ACCOUNTING, IT IS SEEN THAT RECEIPTS FOR THE SAME HEADS OUGHT TO BE INCOME OF THE ASSESS EE. THE CIT(A) HAS ACCEPTED ASSESSEE'S CONTENTION ON INDIRECT CHARGES CLAIMED C OMPULSORILY PAYABLE TO OTHER DEPARTMENTS WITHOUT CALLING FOR COMMENTS FROM THE A O AND PROPERLY APPRECIATING THE REASONING GIVEN BY THE ASSESSING OFFICER. 36 4.4 EVERY ASSESSMENT YEAR IS A SEPARATE ASSESSMENT YEAR AND PRINCIPLE OF RES- JUDICATA IS NOT APPLICABLE IN THE INCOME TAX PROCEE DINGS. RELIANCE IS PLACED ON (A) H.A. SHAH & CO. VS. COMMISSIONER OF INCOME-TAX (30 ITR 618, BOM.), (B) THE AMALGAMATED COALFIELDS LTD. VS. THE JANAPADA SABHA CHHINDWARA (AIR 1964 SC 1013), (C) C.L.T VS. BRIJ LAI LOHIA AND MAHABIR PRASAD KHE MKA (84 ITR 273, SC), (D) C.L.T VS. MICRO LAND LTD. (347 ITR 613, KARN.), AND (E) DHARMESH R. SHAH VS. JCIT 60 SOT 182, MUM.). AO IS FREE TO FORM AN INDEPENDENT OPINION AS PER IN COME TAX PROVISIONS ESPECIALLY WHEN THERE IS NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT U/S 145(2) OF THE ACT IN THE FINANCE ACT 1995 AND THE OUTDATED 'ACCOUNTING STANDARD -7' HAS OEEN REVISED AS 'REVISED ACCOUNTING STANDARD -7' W .E .F. 01.04.2003 EVEN IF A WRONG METHOD OF ACCOUNTING IS FOLLOWED FOR THE LAST 30 YEARS. WHEN HUDA IS PROVIDING RESIDENTIAL AND COMMERCIAL PLOTS ON MARKET RATE, THE CONTENTION OF THE ASSESSEE THAT IT UNDERTAKES AN OVERALL DEVELOPMENT OF TOWNS BY PROVIDING SUITABLE & REQUIRED FACILITIES WITHOUT ANY INTENT TO EARN PROFIT AND THE RESIDENTIAL PLOTS ARE OFFERE D TO THE PUBLIC ON 'NO PROFIT NO LOSS' BASIS IS DEVOID OF TRUTH. IT HAS ITSELF ACCEPTED THAT THE COMMERCIAL PLOTS ARE AUCTIONED ON WHICH PROFIT IS GENERATED. THE AUCTION IN THE COMMERCIAL SECTORS IS COMMENCED AFTER INHABITATION IN RESIDENTIAL PART OF THE SECTORS IS DONE HAS NOT BEEN DEMONSTRATED WITH ANY EVIDENCE. RELIANCE PLACED BY THE ASSESSEE IN THE CA SE OF JOINT COMMISSIONER OF INCOME TAX VS. K. RAHEJA (P.) LTD. (2005) 102 ITD 414 (MUM .), NANDI HOUSING (P) LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX (2003) 80 TTJ (BA NG) 750 : (2004) 2 SOT 395 (BANG), NANDI HOUSING (P) LTD. VS. DEPUTY COMMISSIO NER OF INCOME TAX (2003) 80 TTJ (BANG) 750 : (2004) 2 SOT 395 (BANG) IS MISPLACED. IN THE INSTANT CASE, THE METHODOLOGY ADOPTED BY THE APPELLANT HAS BEEN FOUND BY THE AO TO BE INCONSISTENT WITH THE REVENUE RECOGNITION FOR EACH YEAR. FURTHER, IN THE INSTANT CASE, IN THE PAST THE APPELLANT HAS BEEN CLAIMING EXEMPTION FOR ITS ACTIV ITIES AS FOR CHARITABLE PURPOSES WHICH HAS SUBSEQUENTLY FOUND TO BE NOT AVAILABLE. THE APP ELLANT IS NEITHER A CONSTRUCTION CONTRACTOR NOR IN TRUE SENSE A REAL ESTATE DEVELOPE R. IT IS ALSO NOT FOLLOWING EITHER THE COMPLETE CONTRACT METHOD OR THE PERCENTAGE COMPLETI ON METHOD. THE REVENUE RECOGNITION IS BEING DEFERRED FOR A PERIOD OF 20 YEARS. THEREFORE, THE CASE LAWS RELIED UPON BY THE ASSESSEE IS NOT APPLICABLE IN THE INSTA NT CASE. IN VIEW OF ABOVE DISCUSSION AND DISCUSSION, THE CIT(A) HAS ERRED IN APPLYING A NET RATE OF 20% AND AO'S RATE OF 30% IS REQUESTED TO BE RESTORED. ASSESSEE'S ALTERNATIVE PLEAS HAVE NO BASIS, HENCE NOT ACCEPTABLE. 5. ADDITION ON ACCOUNT OF INDIRECT CHARGES OF COMMERCI AL SECTORS: THE ADDITION ON ACCOUNT OF INDIRECT CHARGES CLAIMED BY THE ASSESSEE IN INCOME & EXPENDITURE ACCOUNT OF COMMERCIAL SECTORS WAS MADE BY THE AO FOR THE FIRST TIME IN AY 2007-08 BY ESTIMATING THE 60% OF THE TOTAL RECOVERIES AS INCOME. AO POINTS OUT THAT THE COST SHEET OF THE ASSESSEE TAKES INTO THE SALEABLE AREA OF RESIDENTIAL PLOTS IN ANY SECTOR INTO CONSIDERATION AND THE COST OF RESID ENTIAL PLOT IS WORKED OUT ON THE SAME. ASSESSEE HAS SUBMITTED THAT THE COST OF COMMERCIAL SITES IS NOT INCLUDED WHILE PREPARING IN COST SHEET IN RESPECT OF RESIDENTIAL SECTORS . THUS, WHAT THE ASSESSEE IS DOING SMARTLY IN ITS COMPUTATION SHEET IS EXCLUDING THE COMMERCIAL A REA FROM SALEABLE AREA AND THE COMPUTING THE RATE OF SALEABLE AREA FOR RESIDENTIAL PLOTS. THEREAFTER, LAND CARVED OUT FOR COMMERCIAL PURPOSE LIKE SHOPPING CENTRE AND INSTITU TIONS IS NOT EVEN TAKEN INTO CONSIDERATION BY THE ASSESSEE IN ITS' COMPUTATION S HEET FOR SECTOR, THOUGH IT CLAIMS TO BE RUNNING ITS' ACTIVITIES ON 'NO PROFIT NO LOSS'. THE SELLING PRICE OF THE COMMERCIAL PLOTS ARE HIGHER THAN THE RESIDENTIAL PLOTS WITHIN THE RANGE OF 5 TO 40 TIMES THE COST OF RESIDENTIAL PLOT IN THE SECTORS DEVELOPED BY HUDA. THE PROFIT G ENERATED AND THE INCOME FROM SALE OF COMMERCIAL PLOTS FAR EXCEEDS THE INCOME FROM SALE O F RESIDENTIAL PLOTS. HOWEVER, WITH REGARD TO THE RECOVERIES FROM SALE OF COMMERCIAL PL OTS, 60% OF THESE RECEIPTS ARE TAKEN AS INCOME OF THE ASSESSEE DURING THE YEAR. THIS FIG URE IS TAKEN AS HIGHER THAN 30% TAKEN FOR SALE OF RESIDENTIAL PLOTS. 5.1 THE CIT (A) REDUCED THE RATE TO 45% IN AY 2007-08 ON THE REASONS THAT (I) THERE IS MERIT IN APPELLANT'S SUBMISSION THAT ALL THESE T OWNS OF HARYANA ARE NOT COMMERCIALLY AS ADVANCED AS FARIDABAD & GURGAON, (II) THE COST OF D EVELOPING COMMERCIAL AREA IS MORE THAN RESIDENTIAL AREA, AND (III) ENHANCED COMPENSAT ION IS NOT RECOVERED IN CASE OF COMMERCIAL SECTORS FROM ALLOTTEES. THIS ORDER WAS F OLLOWED BY CIT (A) IN ALL THE YEARS. 5.2 A PORTION OF THE RECOVERIES MADE BY THE ASSESSE E DURING THE YEAR IS RELATABLE TO INDIRECT CHARGES BY THE ASSESSEE. SINCE THE ASSESSE E IS DEBITING ALL THE INDIRECT CHARGES I.E. CHARGES IN THE NATURE OF ADMINISTRATIVE CHARGE S, INTEREST CHARGES ETC. TO THE INCOME & EXPENDITURE A/C THE AMOUNT OF RECEIPT ON ACCOUNT OF SUCH CHARGES IS LIABLE TO BE INCLUDED TO THE INCOME OF THE ASSESSEE. DURING THE ASSESSMEN T PROCEEDINGS, THE ASSESSEE WAS ASKED TO GIVE DETAILS OF TOTAL RECOVERIES FROM ALLO TTEES WITH BREAK UP REGARDING NEW SALE PROCEEDS FROM COMMERCIAL AND RESIDENTIAL SECTORS AN D OLD RECOVERY TO BE GIVEN SEPARATELY'. THE AR OF THE ASSESSEE HAS GIVEN BREAK UP OF THE SAME. AS DISCUSSED IN THE PRECEDING PARAS, THE PROFIT GENERATED AND THEREFORE , THE INCOME FROM SALE OF COMMERCIAL PLOTS FAR EXCEEDS THE INCOME FROM THE SALE OF RESID ENTIAL PLOTS. HENCE, 30% RECOVERIES 37 FROM SALE OF PROJECTS WHICH CORRESPOND TO THE HEADS OF EXPENDITURE WHICH ARE BOOKED BY THE ASSESSEE DIRECTLY TO HIS INCOME AND EXPENDITURE IS TAKEN WITH REGARD TO INCOME FROM RESIDENTIAL SECTOR. THUS ADOPTING A CONSISTENT VIEW OF ACCOUNTING, IT IS SEEN THAT RECEIPTS FOR THE SAME HEADS OUGHT TO BE INCOME OF THE ASSESS EE. HOWEVER, WITH REGARD TO THE RECOVERIES FROM SALE OF COMMERCIAL PLOTS, 50% OF TH ESE RECEIPTS ARE TAKEN AS INCOME OF THE ASSESSEE DURING THE YEAR. THE CIT(A) HAS ACCEPT ED ASSESSEE'S CONTENTION ON INDIRECT CHARGES ON COMMERCIAL SECTORS ON THE BASIS THAT (I) THERE IS MERIT IN APPELLANT'S SUBMISSION THAT ALL THESE TOWNS OF HARYANA ARE NOT COMMERCIALLY AS ADVANCED AS FARIDABAD & GURGAON, (II) THE COST OF DEVELOPING CO MMERCIAL AREA IS MORE THAN RESIDENTIAL AREA, AND (III) ENHANCED COMPENSATION I S NOT RECOVERED IN CASE OF COMMERCIAL SECTORS FROM ALLOTTEES WITHOUT CALLING FOR COMMENTS FROM THE AO AND APPRECIATING THE REASONS RECORDED BY THE AO. 5.3 EVEN IF FOR THE SAKE OF ARGUMENT'S SAKE IT IS A CCEPTED THAT SALEABLE AREA OF COMMERCIAL SECTORS IS 25% TO 30% AS AGAINST THE SAL EABLE AREA OF RESIDENTIAL SECTORS ABOUT 50% TO 55% AND DEVELOPMENT COST FOR COMMERCIA L SECTORS IS 3 TO 4 TIMES HIGHER THAN THE DEVELOPMENT OF RESIDENTIAL SECTORS, THE CO NTENTION OF THE ASSESSEE'S IS NOT ACCEPTABLE AS COMMERCIAL PLOTS ARE PUT TO AUCTION T O THE HIGHEST BIDDER FETCHING 5 TO 40 TIMES MORE PROFIT CORRESPONDING TO THE RESIDENTIAL SECTOR. NO EVIDENCE WAS PLACED BEFORE THE AO REGARDING ENHANCED COMPENSATION AWARDED BY T HE COURTS. ASSESSEE'S CONTENTION THAT THE CIT (A) IN AY 2007-08 HAS ACCEPTED THE CON TENTION OF THE ASSESSEE THAT THE COST OF DEVELOPING COMMERCIAL AREA IS MORE THAN THAT OF THE RESIDENTIAL PLOTS REDUCED THE PERCENTAGE OF PROFIT TO 45% AND IT REQUESTS THE HON 'BLE ITAT TO KINDLY FURTHER REDUCE THE PERCENTAGE OF PROFIT TO 20% CONSIDERING THE SUBMISS IONS OF THE ASSESSEE, IN TURN FURTHER STRENGTHENS AO'S POINT OF VIEW. THE CIT (A) FAILED TO APPRECIATE THE REASONING GIVEN BY THE AO. IN VIEW OF ABOVE DISCUSSION, THE CIT (A) HAS ERRED IN APPLYING A NET RATE OF 45% WITHOUT GIVING DEFINITE FINDINGS, HENCE AO'S RATE O F 50% REQUESTED TO BE RESTORED. 30. THE LD. DR HAS ALSO SUBMITTED THAT THE GROUNDS OF APPEAL IN THE RECTIFICATION APPEAL IN ITA NO . 415/CHD / 2012 AND 414/CHD / 2012 FOR AY 2008- 09 & 2004-05 RESPECTIVELY WILL BE TAKEN CARE ON ADJUDICATION OF ABOVE ISSUE. 31. WE HAVE PERUSED THE MATERIAL BEFORE US AND THE ARGUMENTS TAKEN BY BOTH THE PARTIES REGARDING THE COMMERCIAL SECTOR TH E MAIN CONTENTION AND RATIO RESORTED BY THE LD. CIT(A) TO REDUCE THE PROFITS FR OM 50% TO 45% ARE THAT ALL THE AREAS ARE COMMERCIAL SECTORS ARE NOT EQUALLY DEVEL OPED SO AS TO DETERMINE AVERAGE HIGHER PROFITS. SIMILARLY THE COMPENSATION PAID AND THE EXPENSES INCURRED FOR DEVELOPMENT OF COMMERCIAL SECTORS AND THE EXTENT OF LAND UTILIZED AND SALABILITY THEREOF HAVE BEEN DULY CONSIDERED. H ENCE WE DECLINE TO INTERFERE WITH THE ORDER OF THE CIT(A) ON THIS ASPECT. REGARDING THE SALE OF RESIDENTIAL SECTORS THE REMI SSION GIVEN BY THE LD. CIT(A) HAS ALREADY CONSIDERED THE SUBMISSION OF THE ASSESSEE THAT LICENSE FEE, CONVERSION CHARGES ,SCRUTINY FEE AND SERVICE CHARGE AND REDUCED THE PROFIT BY MORE THAN 7.68% WHICH HAS BEEN CLAIMED BY THE ASSES SEE TO BE PAYABLE TO THE STATE GOVERNMENT BY STATUTE AND REDUCED PROFIT PERC ENTAGE FROM 30% TO 20% HENCE, THE 2.04% VARIATION ON ACCOUNT OF UNFORESEE N CIRCUMSTANCES CLAIMED AT THIS JUNCTURE CANNOT BE ACCEPTED TO. THE ACCOUNTING STANDARDS RESORTED BY THE ASSESSEE OR NOT TRULY REFLECTING THE PROFITS DERIVE D AND THE REASON GIVEN BY THE 38 CIT(A) IS FOUND TO BE COGENT HENCE WE DECLINE TO IN TERFERE WITH THE ORDER OF THE CIT(A) ON THIS ASPECT. THE PROFITS COMPUTED PERTAIN S TO THE PROFITS THAT ARE OUGHT TO HAVE DERIVED BY THE ASSESSEE ON CLAIMING ALL THE ELIGIBLE EXPENDITURE AND ACCOUNTING ALL OTHER INCOME. HENCE, ANY EXPENSE DIS ALLOWED OR ADDITION MADE WOULD BE TREATED AS INCOME IN ADDITION TO THE PROFI TS ESTIMATED. 32. AS A RESULT BOTH THE GROUNDS OF APPEAL ARE TREA TED AS DISMISSED. EXCLUSION OF PROFIT ALREADY DECLARED 33. GROUND NO. 4 FOR THE ASSESSMENT YEARS 2004-05, 2006-07, 2007-08, 2008-09, OF THE ASSESSEE APPEAL RELATES TO EXCLUSION OF PROF IT ALREADY DECLARED. 34. DURING THE HEARING BEFORE US THE ASSESSEE ARGUE D THAT THE PROFITS ALREADY DECLARED NEEDS TO BE EXCLUDED WHILE COMPUTING THE P ROFITS ESTIMATED ON REJECTION OF BOOKS OF ACCOUNTS. THE GROUND OF THE A SSESSEE IS TECHNICAL IN NATURE AND THE ASSESSING OFFICER IS DIRECTED TO EXCLUDE TH E PROFIT ALREADY DECLARED BY THE ASSESSEE FROM THE PROFITS COMPUTED BY REJECTIN G THE BOOKS OF ACCOUNTS. 35. AS A RESULT THIS GROUND OF APPEAL OF THE ASSESS EE IS ALLOWED. EXTERNAL DEVELOPMENT CHARGES 36. GROUND NO. 5 FOR THE ASSESSMENT YEARS 2004-05, 2006-07, 2007-08, 2008-09, AND GROUND NO. 3 FOR THE ASSESSMENT YEARS 2009-10, 2010-11, 2011-12 AND GROUND NO. 4 FOR A.Y. 2012-13, 2013-14 AND 2014-15 OF THE ASSESSEE APPEAL AND GROUND NO. 2 FOR THE ASSESSMENT YEARS 2006-07, 200 7-08, 2008-09, 2009-10, 2010- 11, 2011-12, 2012-13 AND 2013-14 OF THE REVENUE APP EAL PERTAINS TO THE ISSUE OF EXTERNAL DEVELOPMENT CHARGES. 37. THE ASSESSEE HAS CLAIMED LIABILITY IN THE BALAN CE SHEET UNDER THE HEAD 'OTHER LIABILITIES' ON ACCOUNT OF EXTERNAL DEVELOPM ENT CHARGES. IT IS SEEN THAT THE LIABILITY SHOWN IS INCREASING YEAR AFTER YEAR A ND IS CONSTANTLY PROGRESSING. THE ASSESSEE DID NOT SHOW ANY DETAILS REGARDING THE UTI LIZATION OF THE AMOUNTS RECEIVED OVER THE YEARS. HOWEVER, IT IS SEEN THAT V ERY LITTLE OF IT HAS BEEN ACTUALLY SPENT. THE BASIC FACT WHICH REMAINS IS THAT THIS FE E IN THE NATURE OF EDC IS COLLECTED BY THE ASSESSEE FROM THE COLONIZERS, IS S TATUTORY FEE WHICH IS TO BE PAID BY THE PURCHASER OF PLOTS SOLD THROUGH COLONIZERS. THIS STATUTORY PAYMENT HAS BEEN RECEIVED BY THE ASSESSEE AND HAS BEEN SHOWN AS A LIABILITY IN THE BALANCE SHEET. IT NEEDS TO BE NOTED THAT THE SAID AMOUNT IS CHARGEABLE AT A RATE WHICH IS REVISED PERIODICALLY AND IS NON REFUNDABLE IN AN Y EVENT. CONSEQUENTLY, IT CAN 39 NEVER BE CLASSIFIED AS LIABILITY. THE ASSESSING OFF ICER ON EXAMINATION FOUND THAT THE ASSESSEE IS HARDLY SPENDING THE AMOUNT RECEIVED ON ACCOUNT OF EDC. MOREOVER THE RECEIPT OF EDC IS BASICALLY BEING UTIL IZED BY DEPOSITING THE SAME INTO BANKS IN THE FORM OF FDRS OR OTHER INVESTMENTS MADE BY THE ASSESSEE. 38. THE ASSESSING OFFICER HAS ESTIMATED THAT 30% OF THE EDC AS INCOME OF THE ASSESSEE ON THE GROUNDS THAT THE AMOUNTS HAVE NEVER BEEN SPENT BY THE ASSESSEE FOR THE PURPOSE FOR WHICH EDC HAS BEEN COL LECTED. 39. THE LD. CIT(A) HELD THAT THE EDC CHARGES CONSTI TUTE REVENUE RECEIPTS TREATING THEM AT PAR WITH INDIRECT CHARGES RECOVERE D WHICH HAVE BEEN TAXED AT 20% AND RESTRICTED THE ADDITION ALSO TO 20% ON THE LINES OF THE EDC CHARGES. THE VERBATIM OF THE LD. CIT(A) IS AS UNDER: THE AO WHILE FRAMING THE ASSESSMENT NOTED THAT TH E APPELLANT HAS BEEN RECOVERING EDC CHARGES FROM THE BUILDERS/COLONIZERS AND THE UN-SPENT AMOUNT IS BEING SHOWN AS LIABILITY IN THE BALANCE SHEET UNDER THE HEAD OTHER LIABILITIES. THE AO NOTED THAT THE LIABILITY SO SHOWN IS INCREASING YEAR AFTER YEAR AS MENTIONED BELOW :- OPENING BALANCE AS ON 01.04.2006 (AS PER BALANCE SH EET): 17,24,85,96,593/- ADD: DURING THE YEAR : 6,02,23,48,336/- CLOSING BALANCE AS ON 31.3.2007 (AS PER BALANCE SHE ET) : 23,27,09.44,929/- THE AO NOTED THAT EDC CHARGES ARE REVISED PERIODICA LLY AND ARE NOT REFUNDABLE IN ANY EVENT. THEREFORE, AS PER THE AO THE SAME CAN NOT BE TERMED AS LIABILITY. THE APPELLANT WAS ACCORDINGLY PRIMARILY KEEPING THE MON EY SO COLLECTED IN THE BANK AND EARNING INTEREST THEREON. THE APPELLANT WAS ASK ED TO FILE THE DETAILS WITH REGARD TO NATURE OF LIABILITY, THE SCHEDULE OF EDC APPLICABLE FOR DIFFERENT CITIES AND THE BASIS OF WORKING OUT THE SAME. THE APPELLAN T JUSTIFIED THE TREATMENT GIVEN TO THE EDC CHARGES BY MAKING THE FOLLOWING SUBMISSI ONS:- '1. EDC ARE CHARGES RECOVERED FROM COLONIZERS PROPO SING TO DEVELOP RESIDENTIAL AND OTHER COLONIES IS THE STATE OF HARYANA. 1. EDC IS CHARGED SOLELY WITH THE INTENT TO PROVIDE EXTERNAL SERVICE TO THE COLONIZERS WHO DEVELOP COLONIES IN PRIVATE LAND ACQ UIRED BY THEM. THE SERVICES PROPOSED TO BE PROVIDED ARE WIDE AREA VARIED AND CO VER FROM SEWERAGES, ROADS, ELECTRICITY, HORTICULTURE, RAIN WATER DISPOS AL AND OTHER SUCH SERVICES. THE AMOUNT RECEIVED FROM COLONIZES IS SOLELY AND PURELY WITH A VIEW TO PROVIDE SERVICES OVER A PERIOD OF TIME DEPENDING ON THERE SUCH AND STATUS OF THE COLONY DEVELOPED BY HUDA. AL THOUGH, EDC IS CHARGED FROM THE INITIAL DATE WHEN THE COLONIZER BEGINS TO UNDERTAKE COLONIZATION, THESE ARE SPENT AT LATER STAGE. IN THE MEANTIME, OR DURIN G THE PERIOD THE AMOUNT IS NOT SPENT, THE AMOUNT IS RETAINED B HUDA IN LIABILITY A CCOUNT TO BE DISCHARGED AT A LATER DATE. THE AMOUNT OF EDC IS THUS PURELY IN TH E NATURE OF LIABILITY AND CANNOT BE SAID TO BE INCOME OF FROM ANY STRETCH OF IMAGINA TION. 2. DURING THE COURSE OF COMPETING ASSESSMENT FOR AY 2005-06 AND 2006- 07, THE AO HAD ASSUMED THAT THE EDC CONTAINED AN EL EMENT OF PROF IT TO THE EXTENT OF 30 A> AMOUNT. THE BASIS FOR HOLDING THIS REQUIRES TO BE CLARIFIED. WE MAY LIKE TO POINT OUT THAT ALL ASSESS MENT YEAR ARE INDEPENDENT ASSESSMENT YEAR AND FRAMING OF ANY BASI S OR ADOPTION OF ANY RATE OF ANY PARTICULARS YEAR CANNOT BE BLINDLY APPL IED TO THE SUBSEQUENT YEARS' 7.1 THE AO HOWEVER REJECTED THE APPELLANT 'SUBM ISSIONS OBSERVING AS UNDER :- 40 THE ASSESSEE HAS NOT GIVEN THE DETAILS OF HOW THE E DC IS WORKED OUT THOUGH SPECIFICALLY ASKED FOR. IN ABSENCE OF ANY DE TAILS, IT IS ASSUMED THAT THERE IS NO BASIS AND IT IS IMPOSED ON ADHOC BASIS. EDC IS CHARGED FROM COLONIZERS WHO ARE DEVELOPING R ESIDENTIAL COLONIES AND OTHER COLONIES, BUT HAS HARDLY BEEN SPENT TILL DATE, AS REFLECTED FROM BOOKS OF ACCOUNTS OF THE ASSESSEE. FURTHER AS PER SUBMISSION GIVEN BY THE ASSESSEE, TH E EDC CHARGES ARE NOT UNIFORM IN THE STATE BUT ARE CHARGED AT DIFFERENT R ATES FROM THE 4 CATEGORIES OF URBAN ESTATE. THE HIGH POTENTIAL ZONE(S) ARE CHARGED AT A FAR HIG HER RATE THAN OTHERS, WHICH ITS SELF PROVES THAT A PREMIUM AMOUNT IS CHARGED FROM S OME AREAS FROM WHERE MAXIMUM EDC IS REALIZED BY THE ASSESSEE. THIS ITSEL F PROVES THAT THERE IS NO BASIS ON WHICH EDC CHARGED CAN BE LINKED WITH ACTUAL AMOU NT SPENT. D) LASTLY, THE ACCUMULATION OF EDC RECEIPTS IN THE BALANCE SHEET OVER THE YEARS PROVES THE POINTS OF REVENUE.' AFTER HAVING REJECTED THE APPELLANT'S SUBMISSION, T HE AO HELD THAT THE EDC CHARGES RECEIVED ARE IN FACT A PART OF TOTAL RECOVE RIES FOR BIGGER PLOTS FROM COLONIZERS. THE AO FURTHER HELD THAT 30% OF THE AMO UNTS SO RECEIVED IS LIABLE TOBE TREATED AS RECOVERY ON ACCOUNT OF INDIRECT CHARGES AND BROUGHT THEM TO TAX AS THE INCOME OF THE APPELLANT. THE AO WORKED OUT THE DISALLOWANCE AT RS.1806704501/-@ 30% OF RS.6022348336/-. THE APPELLANT HAS CHALLENGED THE AO'S ACTION STATIN G THAT THE TREATMENT GIVEN TO EDC CHARGES IS CORRECT AS PER THE ACCOUNTI NG POLICY FOLLOWED BY THE APPELLANT. THE DETAILED SUBMISSION MADE BY THE APPE LLANT IN THIS REGARD IS REPRODUCED AS UNDER :- 'EXTERNAL DEVELOPMENT WORKS' INCLUDE WATER SUPPLY, SEWERAGE, DRAINS, NECESSARY PROVISIONS OF TREATMENT AND DISPOSAL OF S EWAGE, SULLAGE AND STORM WATER, ROADS, ELECTRICAL WORKS, SOLID WASTE MANAGEM ENT AND DISPOSAL, SLAUGHTER HOUSES, COLLEGES, HOSPITALS, STADIUM/ SPORTS COMPLE X, FIRE STATION, GRID SUB STATIONS ETC. AND ANY OTHER WORK WHICH THE DIRECTORY MAY SPE CIFY TO BE EXECUTED IN THE PERIPHERY OF OR OUTSIDE COLONY/AREA FOR THE BENEFIT OF THE COLONY/AREA; HUDA HAS BEEN ASSIGNED THE RESPONSIBILITY OF EXECUT ING THE EXTERNAL DEVELOPMENT WORKS IN THE URBAN ESTATE OF HARYNA. AG AIN HUDA WORKS OUT THE EDC FOR A PARTICULAR URBAN ESTATE ON 'NO PROFIT NO LOSS BASIS'. THE COST OF EXTERNAL DEVELOPMENT SERVICES SUCH AS MASTER WATER SUPPLY, M ASTER SEWAGE, MASTER ROADS, MASTER STORM WATER DRAINAGE, MASTER HORTICUL TURE, MASTER COMMUNITY BUILDINGS AND OTHER SERVICES ON THE BASIS OF A PRIC E INDEX OF A PARTICULAR YEAR IN RESPECT OF A PARTICULAR URBAN ESTATE. THE COST IS W ORKED OUT BY THE ENGINEERING WING OF HUDA KEEPING IN VIEW THE REQUIREMENT OF THE DEVELOPMENT PLAN OF THE URBAN ESTATE. IN THE DEVELOPMENT COST WORKED OUT BY THE ENGINEERING WING, THE DIRECT AND INDIRECT CHARGES ARE ADDED ON THE SAME P ATTERN AS EXPLAINED IN PARA- 1 ABOVE. SINCE THESE ARE THE COMMON SERVICES FOR TH E SECTORS/COLONY FOR WHOLE OF THE DEVELOPMENT PLAN, THE COST OF THESE S ERVICES INCLUDING THE DIRECT/INDIRECT CHARGES ARE SPREADED OVER THE T OTAL AREA OF THE DEVELOPMENT PLAN AND THE COST OF EDC PER GROSS ACRE IS WORKED O UT. THE SAME EDC IS CHARGED FROM THE SECTORS FLOATED BY HUDA OR THE LICENSE GRA NTED BY THE TOWN & COUNTRY PLANNING DEPARTMENT TO THE DEVELOPERS. AS STATED AB OVE NO ELEMENT OF PROFIT IS ADDED IN THE WORKING OF EDC. THE EXPENDITURE ON E DC BY HUDA IS MET OUT OF THE RECOVERY OF EDC FROM THE ALLOTTERS OF HUDA OR FROM THE PRIVATE DEVELOPERS TO WHOM THE LICENSES GRANTED BY THE TOWN D COUNTRY PLA NNING DEPARTMENT. THE EDC WILL VARY FROM URBAN ESTATE TO URBAN ESTATE AS THE REQUIREMENT OF DEVELOPMENT IN RESPECT OF EACH URBAN ESTATE WILL VA RY. IN SOME URBAN ESTATE THE GROUND WATER IS AVAILABLE, THEREFORE, THE COST OF T UBE WELL IS TAKEN INTO ACCOUNT WHILE WORKING OUT THE EDC. IN OTHER URBAN ESTATE NO GROUND WATER IS AVAILABLE AND WATER IS ARRANGED THROUGH CANAL BASED SYSTEM, T HE COST OF WHICH IS MUCH HIGHER THAN THE TUBE WELL. SIMILARLY, THE WIDTH OF THE ROAD MAY VARY FROM URBAN ESTATE TO URBAN ESTATE. THE REQUIREMENT OF WATER PER PERSON MAY ALSO VARY FROM 41 URBAN ESTATE TO URBAN ESTATE. THEREFORE, THE EDC FOR DIFFERENT URBAN ESTATE WILL BE DIFFERENT. THE VERY BASIS OF THE LEVY OF PROFIT ON AN ASSUMED RATE OF 30% IS MISUNDERSTOOD BY THE AO. IN THE QUOTES REPRODUCED A BOVE FROM ORDER OF ASSESSMENT, IT IS NOTICED THAT THE AO HAS STATED TH AT NO DOCUMENTS WERE PRODUCED. THIS IS INCORRECT. ADDITION ON ACCOUNT OF NP ON EDC WAS MADE FOR THE FIRST TIME IN THE ASSESSMENT YEAR 2005-06, ALL RELE VANT DETAILS WERE FURNISHED BEFORE THE AO AND IT WAS EMPHATICALLY ARGUED THAT EDC ARE IN THE NATURE OF LIABILITIES AND HAVE BEEN CHARGED FROM COLONIZERS FOR THE PURPO SE OF DEVELOPING UE IN WHICH THE COLONIZER PROPOSES TO ESTABLISH HIS SETS UP. THE AMOUNT IS BEING SPENT ON PERIODICAL BASIS AND IS SUBJECT MATTER OF SURVEI LLANCE BY HON'BLE PUNJAB AND HARYANA HIGH COURT. THE HON'BLE COURT IS SEEKING PR ODUCTION OF ANNUAL ACCOUNTS OF THE AMOUNTS SPENT ON EDC AS COLLECTED FROM THE C OLONIZERS. THERE IS THUS NO LEGAL SANCTITY OF CHARGING ANY KIND OF PROFIT ON SU CH KINDS OF RECEIPTS WHICH ARE IN THE NATURE OF LIABILITIES. IN CASE THE INCOME TAX D EPARTMENT DID NOT CONSIDER THIS TO BE A LIABILITY, THEN IT SHOULD HAVE SUBJECTED TH E WHOLE AMOUNT TO TAX IN THE YEAR OF RECEIPT. FINDING OF THE AO THAT THERE IS NO ELEMENT OF EDC I N RECEIPTS FROM PLOT ALLOTTESS IS FACTUALLY INCORRECT AS IS APPARENT FRO M RECORD ITSELF. 4. FURTHER TO SUBMISSIONS MADE ON THE LAST DATE OF HEARING IN WHICH THE CONCEPT OF EDC WAS ELABORATED, IT IS BROUGHT OUT TH AT EDC IS COLLECTED FROM COLONIZERS WITH A VIEW TO UNDERTAKE DEVELOPMENT IN THE AREA PROPOSED TO BE COLONIZED. ALTHOUGH THE EDC ARE BEING COLLECTED FRO M THE COLONIZERS SINCE A LONG TIME, THE STATE OF HARYANA UNDERWENT A SPATE OF COL ONIZATION IN RECENT YEARS AND PRIOR TO THAT THERE WAS NO SUCH ACTIVITY INCURRED O N THE DEVELOPMENT OF AREA. HENCE THE SAME RESULTED IN ACCUMULATION OF FUNDS AT THE DISPOSAL OF THE ASSESSEE. THESE FUNDS WERE KEPT AS EARMARKED FUNDS AND WERE RETAINED FOR THE PURPOSES OF UNDERTAKING EXTERNAL DEVELOPMENT. THERE HAS BEEN A MAJOR CHANGE IN THE THRUST ON DEVELOPING THE COLONIES IN THE STA TE AND IN RECENT PAST, ON ACCOUNT OF COLONIZATION UNDERGOING AT A FAST PACE, THE EXPENDITURE IS BEING INCURRED HEAVILY ON THE EXTERNAL DEVELOPMENT WORKS/ ACTIVITIES ETC. FURTHERMORE THE ISSUE OF SPENDING EDC ON AREAS UNDE R CONTROL OF HUDA HAS BEEN UNDER SURVEILLANCE OF HIGH COURT, WHO IS CONST ANTLY MONITORING THE DEPLOYMENT OF EDC IN VARIOUS URBAN ESTATES. WE ARE PLACING HEREUNDER RELEVANT DATA EVIDENCING T HE ABOVE SUBMISSIONS AND WHICH ALSO PROVES THAT IN THE RECENT TIMES THE EXPENDITURE ON EDC HAS GONE UP IN LAST FEW YEARS TO MEET THE REQUIREMENT. SINCE THE EDC IS IN THE NATURE OF LIABILITY AND IS BEING SPENT ON NEED BASED ACTIVITY DEPENDING ON THE NATURE OF COLONIZATION AN D EXTENT OF COLONIZATION, THE SAME CANNOT BE TREATED AS INCOME JUST BECAUSE THE A SSESSEE IS RECEIVING MONEY FROM EDC AND CONTINUES TO RECEIVE THE SAME. THE OTH ER OBJECTION OF THE AO FOR TREATING THE INCOME IS THAT THE EDCAMOUNT IS VARYIN G FROM AREA TO AREA AND ALSO NO DETAILS WERE FURNISHED DURING COURSE OF ASSESSME NT PROCEEDINGS, IS INCORRECT AND IN ANY CASE THE SAME CANNOT BE BASIS FOR MAKING ADDITION OF SUCH HUGE AMOUNT TO INCOME OF THE ASSESSEE. FURTHERMORE, THER E IS NO BASIS OF ARRIVING AT 30 PC AS PROFIT ELEMENT IN THE EDC RECEIPTS. NECESSARY DETAILS HAVE BEEN FURNISHED DURING COURSE OF APPELLATE PROCEEDINGS WITH A COPY MARKED TO ASSESSING OFFICER FOR SEEKING THEIR COMMENTS THEREON. IT IS THUS SUMMED UP THAT THE EXPENDITURE ON EDCWAS NOT INCURRED IN THE INITIAL YEARS BUT IS NOW BEING INCURRED AND IS UNDE R CONSTANT SURVEILLANCE OF HIGH COURT AND WHO IS CONSTANTLY MONITORING THE EXPENDIT URE INCURRED ON EBC. THE ENCLOSED STATEMENT ALSO EVIDENCES THE FACT THAT THE EXPENDITURE, IN THE SUBSEQUENT YEARS ON EDCMUCH MORE THAN THE PAST YEAR S. THE ADDITION ON ACCOUNT OF 30% ON EDCWHICH IS WITHOUT ANY BASIS IS UNJUST UNFAIR AND ILLEGAL DESERVES TO BE DELETED. '7.4 IT HAS BEEN FURTHER STATED THAT THERE IS NO ELEMENT OF PROFIT/INCOME IN THESE CHARGES AS THE AMOUNTS SO RECEIVED IS SPENT O N EXTERNAL DEVELOPMENT OF THE AREAS WHICH IS THE RESPONSIBILITY OF THE APPELLANT. IT HAS BEEN SUBMITTED THAT THE AO HAS TREATED 30% OF THE EDC SO RECEIVED AS IN COME OF THE APPELLANT 42 OBSERVING THAT THE APPELLANT IS NOT SPENDING THE ED C CHARGES SO RECOVERED. THE APPELLANT FILED THE DETAILS OF THE EXPENDITURE INCU RRED OUT OF THE EDC CHARGES AS ON 31.12.2009 WITH REGARD TO DIFFERENT URBAN ESTATE S BEING DEVELOPED BY THE APPELLANT, LIKE PANIPAT, SONIPAT, ROHTAK, GURGAON E TC. REFLECTING THAT THE AMOUNT IS BEING SPENT REGULARLY AS THE PROJECTS ARE BEING DEVELOPED. IT HAS BEEN MENTIONED THAT THE EXPENDITURE UNDER THE HEAD EDC C HARGES IS MORE IN CASE OF CERTAIN URBAN ESTATE WHILE IN OTHER CASES EXPENDITU RE IS PROGRESSIVE. 40. THE DETERMINATION OF THE LD. CIT(A) ON THE ISSU E OF EDC IS AS UNDER: 7.5 I HAVE CAREFULLY CONSIDERED THE SUBMISSION MAD E BY THE APPELLANT AND HAVE ALSO GONE THROUGH THE REASON GIVEN BY THE AO FORR MAKING THE ADDITIONS. IT IS GATHERED FROM THE DETAILS SUBMITTED THAT THE EDC IS BASICALLY A STATU TORY FEE WHICH IS CHARGEABLE BY HUDA FROM COLONIZERS. THE FEE IS SUPPOSED TO BE FOR THE DEVEL OPMENT WORKS CARRIED OUT BY HUDA. HOWEVER, IT IS SEEN THAT VERY LITTLE OF IT HAS BEEN ACTUALLY SPENT. THE BASIC FACT WHICH REMAINS IS THAT THIS F EE IN THE NATURE OF EDC IS COLLECTED BY THE ASSESSEE F ROM THE COLONIZERS. IT IS STATUTORY FEE WHICH IS TO BE PAID BY THE PURCHASER OF PLOTS SOLD THROUGH COLO NIZERS. THIS STATUTORY PAYMENT HAS BEEN RECEIVED BY THE ASSESSEE AND HAS BEEN KEPT AS A LIA BILITY. IT NEEDS TO BE NOTED THAT THE SAID AMOUNT IS NOT REFUNDABLE IN ANY EVENT. IT IS FURTHE R SEEN THAT THE AMOUNT IS SUBJECT TO UPWARD REVISION. THEREFORE, IF THE ACTUAL EXPENDITURE IS M ORE THAN THE RECOVERIES, THE SAME IS RECOVERABLE FROM THE DEVELOPERS AND IF THE EXPENDITURE IS LESS THEN THE RECOVERIES THE SAME CONSTITUTE THE INCOME OF THE APPELLANT AS BY VERY NATURE THE AMOUN T IS NOT REFUNDABLE. IT IS SEEN THAT THE APPELLANT HAS KEPT COMPLETE RECORD OF EDC CHARGES R ECEIVED AND SPENT WITH REGARD TO EACH URBAN ESTATE. AS PER THE DETAILS FILED THE EXPENDIT URE IS PROGRESSIVE. THERE IS MERIT IN APPELLANT 'S SUBMISSION THAT THE AMOUNT HAS ACCUMULATED IN TH E INITIAL YEARS MAINLY BECAUSE THE DEVELOPMENT WORK WAS SLOW BUT CURRENTLY THE AMOUNT IS BEING SPENT AS THE AREAS ARE BEING DEVELOPED. IT IS NOTED THAT THE APPELLANT IS UNDER LEGAL OBLIGATION TO PROVIDE EXTERNAL DEVELOPMENT LIKE TREATMENT AND DISPOSAL OF SEWERAGE , DRAINS, NECESSARY PROVISIONS OF TREATMENT AND DISPOSAL OF SEWAGE, SULLAGE AND STORM WATER, RO ADS, ELECTRICAL WORKS, SOLID WASTE MANAGEMENT AND DISPOSAL, SLAUGHTER HOUSES, COLLEGES , HOSPITALS, STADIUM/ SPORTS COMPLEX, FIRE STATION, GRID SUB STATIONS ETC WITH REGARD TO THE A REAS BEING DEVELOPED BY IT. THEREFORE, THE AMOUNTS SO RECOVERED HAS TO BE SPENT. THE EDC CHARG ES ARE FIXED KEEPING IN VIEW THE LIKELY EXPENDITURE. THEREFORE, THE POSSIBILITY OF ACTUAL E XPENDITURE BEING LESS OR MORE THEN THE AMOUNT SPENT IS ALWAYS THERE. BY THE VERY SCHEME THE EXCES S EXPENDITURE IS RECOVERABLE FROM THE DEVELOPER/PLOT HOLDERS WHILE THE SURPLUS IS NOT REF UNDABLE. THEREFORE, THE PROPORTION OF AMOUNT WHICH REMAINS UN-SPENT DEFINITELY FORMS IN THE INCO ME OF THE APPELLANT WHICH NEEDS TO BE ACCOUNTED FOR. AS THE APPELLANT IS NOT TRANSFERRING THE SURPLUS, IF ANY TO THE RECEIPTS AND ALSO BECAUSE THE PROJECTS ARE ON GOING, THE AO IS JUSTIF IED TO MAKE AN ESTIMATE OF THE INCOME ELEMENT IN THE SAME. THE AO HAS TREATED 30% OF THE EDC CHARGES AS CONSTITUTING THE REVENUE RECEIPTS TREATING THEM AT PAR WITH INDIRECT CHARGES RECOVERED. AS THE INCOME ELEMENT IN THE INDIRECT CHARGES HAS BEEN HELD TO BE 20% OF THE CHA RGES SO RECOVERED, IT IS CONSIDERED FAIR IF THE SAME PERCENTAGE IS APPLIED TO THE EDC CHARGES ALSO. THE ADDITION MADE BY THE AO IS THEREFORE RESTRICTED TO 20% OF THE EDC RECOVERED DURING THE Y EAR. THE APPELLANT GETS CONSEQUENTIAL RELIEF. THE GROUND OF APPEAL IS PARTLY ALLOWED. 41. BEFORE US THE LD. AR ARGUED THAT THE EDC HAS BEEN DEFINED UNDER SECTION 2(G) OF THE HARYANA DEVELOPMENT AND REGULATION OF URBAN AREAS ACT, 1975 . HUDA HAS ONLY BEEN ASSIGNED THE RESPONSIBILITY OF E XECUTING THE EXTERNAL DEVELOPMENT WORKS IN THE URBAN ESTATES OF HARYANA. HUDA IS SIMPLY AN EXECUTING AGENCY. THE EDC IS LEVI ED BY THE TOWN & COUNTRY PLANNING DEPARTMENT, HARYANA OF STATE GOVER NMENT & IS COLLECTED BY HUDA FOR EXECUTION OF EXTERNAL DEVELOPMENT WORKS. 43 REFERENCE IS DRAWN TO SECTION 38 OF THE HUDA ACT, 1 977, WHICH IS AS UNDER:- 'WHERE, IN THE OPINION OF THE STATE GOVERNMENT, IT IS NECESSARY THAT THE AMENTIES PROVIDED BY THE AUTHORITY IN AN URBAN ESTATE SHOULD BE EXTENDED TO ANY LAND OR BUILDING SITUATED WITHIN THE SAID AREA OR WITHIN SU CH DISTANCE FRONT THE SAID AREA IT MAY DEEM EXPEDIENT, SUCH AMENITIES SHALL BE EXTENDED TO SUCH LAND OR BUILDING AND THE OWNER OF SUCH LAND OR BUILDING SHALL BE LIABLE TO P AY TO THE AUTHORITY, IN THE MANNER PRESCRIBED, SUCH DEVELOPMENT CHARGES THEREFORE, AS MAY BE FIXED BY THE STATE GOVERNMENT HAVING REGARD TO THE EXPENSES TO BE INCU RRED FOR PROVIDING SUCH AMENITIES AND THE BENEFITS TO BE EXTENDED TO THE LAND OR BUIL DING. 42. THE LD. AR ARGUED THAT THE ABOVE CLEARLY SHOWS THAT EDC IS FIXED BY THE STATE GOVERNMENT FOR AMENTIES EXTENDED AS PER THE D IRECTIONS OF STATE GOVERNMENT. IN ORDER TO INVOLVE THE PRIVATE SECTORS IN THE PROCESS OF URBAN DEVELOPMENT, THE DEPARTMENT OF TOWN & PLANNING DEPA RTMENT, HARYANA GRANTS LICENSES TO THE PRIVATE COLONIZERS FOR THE DEVELOPM ENT OF RESIDENTIAL, COMMERCIAL, INDUSTRIAL & IT PARK/ CYBER PARK COLONI ZERS, IN ACCORDANCE WITH THE PROVISIONS OF THE HARYANA DEVELOPMENT AND REGULATIO N OF URBAN AREAS ACT, 1975, AND RULES FRAMED THERE UNDER. 43. THE LD. AR ARGUED THAT ON GRANTING THE LICENSE THE DIRECTORATE UNDER SECTION 3(3)(II) OF THE HARYANA URBAN DEVELOPMENT A ND REGULATION OF URBAN AREAS ACT, 1975 TAKES AN UNDERTAKING FROM THE COLON IZER TO PAY PROPORTIONATE DEVELOPMENT CHARGES, IF THE EXTERNAL DEVELOPMENT WO RKS ARE TO BE CARRIED OUT BY THE GOVERNMENT OR ANY LOCAL AUTHORITY, IN THIS C ASE BY-THE HUDA.EVEN HUDA IS REQUIRED TO PAY EDC AT THE SAME RATE AS ANY OTHER D EVELOPER. THIS IN ITSELF PROVES THAT THE CONTENTION OF THE AO/CIT(A) IS WRONG. HUDA CANNOT HAVE ANY ELEMENT OF PROFIT IN THE AMOUNT BEING PAID BY IT. 44. THE LD. AR SUMMED UP THAT SINCE HUDA BEING AN E XECUTING AGENCY CARRIES OUT ALL EXTERNAL DEVELOPMENT WORKS THROUGHO UT THE LICENSED AREAS GRANTED TO THE COLONIZERS, AS PER THE MASTER PLANS PREPARED BY DEPARTMENT TOWN & COUNTRY PLANNING, HARYANA, TREATS THE AMOUNT OF EDC COLLECTED AS LIABILITIES IN THE BOOKS OF ACCOUNTS.EDC ARE IN THE NATURE OF LIABILITIES AND HAVE BEEN CHARGED FROM COLONIZERS FOR THE PURPOSE OF DEV ELOPING URBAN ESTATE IN WHICH THE COLONIZERS PROPOSES TO ESTABLISH THEIR SE TS UP. THE AMOUNT IS BEING SPENT ON PERIODICAL BASIS AND IS SUBJECT MATTER OF SURVEILLANCE BY HONORABLE PUNJAB AND HARYANA HIGH COURT. THE HON'BLE COURT IS SEEKING PRODUCTION OF ANNUAL ACCOUNTS OF THE AMOUNTS SPENT ON EDC AS COLL ECTED FROM THE COLONIZERS. THERE IS NO JUSTIFICATION IN HOLDING ANY ELEMENT OF PROFIT IN RECEIPTS WHICH ARE IN THE NATURE OF LIABILITIES. UNDER THE PROVISIONS OF THE ACT ITSELF, IT IS EMBEDDED THAT 44 AS PER THE DIRECTION OF THE STATE GOVERNMENT, HUDA HAS TO UNDERTAKE DEVELOPMENT IN THE ESTATES OF HARYANA. THE AMOUNT R ECEIVED BY HUDA IS IN THE NATURE OF LIABILITIES AS THE AMOUNT OF EDC IS BEING LEVIED BY TOWN & PLANNING DEPARTMENT OF STATE GOVERNMENT AND HUDA IS WORKING UNDER THE DIRECT CONTROL OF STATE GOVERNMENT FOR EXECUTION ONLY, IT IS THUS REQUESTED THAT NO ADDITION BE MADE ON THIS ISSUE. 45. LD. DR STRONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). FURTHER IN THE WRITTEN SUBMISSIONS MADE BY THE LD. DR THE DETAILS OF THE S URVEY/ INSPECTION CONDUCTED UNDER SECTION 133A HAVE BEEN ENUMERATED. 46. THE SUBMISSIONS OF THE LD. DR ARE AS UNDER: THE BASIC RATIONALE FOR CHARGING OF EDC BY HUDA EXT ERNAL DEVELOPMENT WORK (HEREAFTER EDW) IS DEFINED IN THE HARYANA DEVELOPMENT AND REGULATION OF URBAN AREA ACT, 1975 (HEREAFTER HDRUA). DEFINITION OF EDW IS GIVEN IN SECTION 2 (G) OF THIS ACT. IT IS AS FOLLOWS: 'EXTERNAL DEVELOPMENT WORKS INCLUDE WATER SUPPLY, S EWERAGE, DRAINS, NECESSARY PROVISIONS OF TREATMENT AND DISPOSAL OF SEWAGE, SUL LAGE AND STORM WATER, ROADS, ELECTRICAL WORKS, SOLID WASTE MANAGEMENT AND DISPOS AL, SLAUGHTER HOUSES, COLLEGES, HOSPITALS, STADIUM/SPORTS COMPLEX, FIRE STATIONS, G RID SUB-STATIONS ETC. AND ANY OTHER WORK WHICH THE DIRECTORY MAY SPECIFY TO THE EXECUTE D IN THE PERIPHERY OF OR OUTSIDE COLONY/AREA FOR THE BENEFIT OF THE COLONY/AREA'. 6.2. HUDA CHARGES EDC AS PER SECTION 3(3)(A)(II) OF HDRUA, WHICH READS AS UNDER: ' TO PAY PROPORTIONATE DEVELOPMENT CHARGES IF THE E XTERNAL DEVELOPMENT WORKS AS DEFINED IN CLAUSE (G) OF SECTION 2 ARE TO BE CAR RIED OUT BY THE GOVERNMENT OR ANY OTHER LOCAL AUTHORITY. THE PROPORTION IN WHICH AND THE TIME WITHIN WHICH, SUCH PAYMENT IS TO BE MADE, SHALL BE DETERMINED BY THE D IRECTOR.' 6.3. HUDA CHARGES EDC FOR EDWS BY ISSUING LETTERS/ CIRCULARS. THE CONTENT OF THESE LETTERS/ CIRCULARS IS THAT EDC ARE LEVIED AS PER SE CTION 2(G) FOR EDW ON THE BENEFICIARIES TO WHOM THE CHANGE OF LAND USE PERMIS SION IS GRANTED FOR VARIOUS PURPOSES IN THE AGRICULTURAL/ RURAL ZONE AND WHO AR E ALSO AVAILING THE BENEFITS OF THE EDW LIKE THE TOWN LEVEL FACILITIES OF MAJOR CIRCULA TION ROADS, STADIUMS, HOSPITALS, COLLEGES, CREMATORIUMS TOWN PARKS ETC. BEING PROVID ED BY HUDA IN THE NEARBY URBANISABLE AREAS. SINCE THE CHANGE OF LAND USE HOL DERS AVAIL THE PARTS OF THE EDW, THEY SHOULD ALSO PROPORTIONATELY CONTRIBUTE TOWARDS THE EXPENDITURE INCURRED ON EDW BY HUDA. THIS PROPORTIONATE CONTRIB UTION IS CALLED EDC. DETERMINATION OF EDC TO BE PAID BY PARTICIPATING PR IVATE PERSONS/ BUILDERS, COLONIZERS ETC. A PARTICIPATING PRIVATE BUILDER IS REQUIRED TO PAY EDC AS PROVIDED IN THE LICENSE FOR SETTING UP A COMMERCIAL COLONY ON U RBANISABLE LAND HELD BY IT IN VICINITY OF LAND OWNED AND DEVELOPED (EDWS) BY HUDA . THE LICENSE IS ISSUED BY THE DIRECTORATE OF TOWN AND COUNTRY PLANNING, HARYANA, SUBJECT TO THE UNDERTAKING AS PER THE RELEVANT CONDITIONS LIKE- TO SUBMIT AN UNDE RTAKING TO THE EFFECT THAT IT SHALL MAKE ARRANGEMENT FOR WATER SUPPLY, SEWERAGE, DRAINA GE ETC. TO THE SATISFACTION OF 45 DGTCP TILL THESE SERVICES ARE MADE AVAILABLE FROM E XTERNAL INFRASTRUCTURE TO BE LAID BY HUDA . A SAMPLE LICENSE IN THE CASE OF M/S SKY HIGH LAND C ON PVT LTD DATED 03.06.2011 REGARDING EXTERNAL DEVELOPMENT CHARGES ( EDC) IS ENCLOSED AND DISCUSSED HEREUNDER: A) CHARGES FOR COMMERCIAL AREA = RS. 334.333 LAC (@ RS. 162.14 LAC/ACRE) B) TOTAL COST OF DEVELOPMENT = RS. 334.333 LAC C) 25% BANK GUARANTEE REQUIRED = RS. 83.58325 LAC 6.4. THE LICENSE DATED 03.06.2011 CONTAINING THESE DETAILS IS ENCLOSED AS ANNEXURE-A. THE DEMAND DRAFTS OF EDC AMOUNTS ARE GE NERALLY DRAWN IN FAVOUR OF THE CHIEF ADMINISTRATOR, HUDA THOUGH ROUTED THROUGH THE DIRECTOR GENERAL TOWN AND COUNTRY PLANNING, HARYANA. THIS STATE OF AFFAIR S AS FAR AS THE EDC IS CONCERNED IS STATED BY HUDA WHEN IT STATES THAT OTHER LIABILITIE S ALSO INCLUDE EXTERNAL DEVELOPMENTAL CHARGES RECEIVED THROUGH DGTCP DEPART MENT HARYANA FOR EXECUTION OF VARIOUS EDC WORKS. THE EXPENDITURE AGA INST WHICH HAVE BEEN BOOKED IN DEVELOPMENT WORK IN PROGRESS, ENHANCEMENT COMPEN SATION AND LAND COST. THIS ESTABLISHES THE FACT THAT THE LAND IS OWNED AND DEV ELOPED BY HUDA WHICH RECEIVES EDC AS RETURN/ INCOME ON THE MONEY INVESTED IN THE EDWS. THERE IS SPECIFIC QUID PRO QUO FOR EDC. THE EDC WOULD NEVER BE RETURNABLE AND WOULD NEVER BE RETURNED BECAUSE IT IS A CONSIDERATION PAID BY EDW USERS. EDC IS WORKED OUT FOR A PARTICULAR URBAN EST ATE ON THE BASIS OF THE COST OF EXTERNAL DEVELOPMENT SERVICES SUCH AS MASTER WATER SUPPLY, MASTER SEWAGE, MASTER ROADS, MASTER STORM WATER DRAINAGE, MASTER H ORTICULTURE, MASTER COMMUNITY BUILDING AND OTHER SERVICES IS DETERMINED ON THE BA SIS OF A PRICE INDEX OF A PARTICULAR YEAR IN RESPECT OF A PARTICULAR URBAN ES TATE. THE COST IS DETERMINED BY THE ENGINEERING WING OF HUDA KEEPING IN VIEW THE REQUIR EMENT OF DEVELOPMENT PLAN OF AN URBAN ESTATE. EDC IS CHARGED FROM SECTORS FLOATE D BY HUDA OR THE LICENSE GRANTED BY THE TOWN & COUNTRY PLANNING DEPARTMENT T O THE DEVELOPERS. TO SAY THAT THERE IS NO ELEMENT OF PROFIT IN EDC BECAUSE EDC VA RIES DEPENDING UPON REQUIREMENT OF DEVELOPMENT IN EACH URBAN ESTATE, TH EREFORE, IT IS IN THE NATURE OF LIABILITIES IS INCORRECT, BECAUSE THE PAVERS OF EDC ARE ALLOWED TO USE EDWS FOR PAYMENT OF FEES WORKED OUT ON THE BASIS OF INVESTME NTS IN EDWS. EDC IS CHARGED FROM COLONIZERS FOR USING THE DEVELOPED URBAN INFRA STRUCTURE IN URBAN ESTATES WHEREIN THEY ARE ALLOWED TO ESTABLISH THEIR COMMERC IAL SET UPS. THE EDC IS A USER FEE CHARGED BY HUDA FROM COLONIZERS. THE INCOME NATURE OF EDC WOULD NOT CHANGE EVEN THOUGH IT IS RECEIVED THROUGH DGTCP DEPARTMENT , HARYANA . THE METHOD OF ACCOUNTING OF PAYMENT EDC BY PRIVATE COLONIZER IN I TS BOOKS OF ACCOUNTS AS CURRENT ASSETS WOULD ALSO NOT CHANGE THE INCOME NATURE OF E DC IN THE HANDS OF HUDA. SHOWING EDC AS 'CURRENT LIABILITY' BY HUDA IS INCOR RECT FOR THE REASONS NARRATED ABOVE, BASED ON SPECIFIC NATURE AND FLOW OF TRANSAC TIONS. THEREFORE, EDC IS A REVENUE RECEIPT HAVING CHARACTER OF INCOME OF HUDA. THIS IS ALSO A FINDING OF ASSESSING OFFICER OF HUDA, WHICH STANDS CONFIRMED B Y CIT (A) TOO. 6.5. IT IS TO SUBMIT THAT A SURVEY/INSPECTION U/S 1 33A OF THE I.T. ACT, 1961 WAS CARRIED OUT ON 09.02.2017, 10.02.2017 & 14.02.2017 BY THE D CIT (TDS), PANCHKULA AT THE BUSINESS/OFFICE PREMISES OF HARYANA URBAN DEVELOPME NT AUTHORITY, PANCHKULA. A SURVEY REPORT DATED 27.02.2017 HAS BEEN RECEIVED FR OM THE DCIT (TDS), PANCHKULA. HUDA IS PRIMARILY A NEW URBAN AREA DEVELOPMENT INST RUMENTALITY. IT UNDERTAKES LARGE GREEN FIELD URBAN AREA DEVELOPMENT PROJECTS. IT DEV ELOPS URBAN INFRASTRUCTURE. IT ALSO MAINTAINS SUCH DEVELOPED URBAN INFRASTRUCTURE. THE BOOKS OF ACCOUNTS AND RELEVANT DOCUMENTS WERE EXAMINED BY THE DCIT (TDS). IT WAS FOUND THAT HUDA IS RECEIVING MONEY FOR EXTERNAL DEVELOPMENT CHARGES (E DC). IN THE SURVEY REPORT, IT IS CONCLUDED THAT THE EDC IS A USER FEE CHARGED BY HUD A FROM COLONIZERS. THEREFORE, SHOWING EDC AS CURRENT LIABILITY BY HUDA IS INCORRE CT FOR THE REASONS NARRATED IN THE SURVEY REPORT AT PARAS 1 & 2 PAGE NO 1 TO 23 BASED ON SPECIFIC NATURE AND FLOW OF TRANSACTIONS, SUPPORTED BY SPECIFIC EVIDENCES IN FO RM OF SAMPLE LETTERS/ DOCUMENTS. THEREFORE, EDC IS A REVENUE RECEIPT HAVING CHARACTE R OF INCOME OF HUDA. THE SURVEY REPORT GOES TO THE ROOT OF THE ISSUE OF DETE RMINING EDC AS INCOME OF THE ASSESSE IN ALL THE YEARS UNDER APPEAL BEFORE THE HO N'BLE BENCH. THE DEPARTMENT IS IN 46 THE PROCESS OF FILING APPLICATION TO ADMIT THE SAID SURVEY REPORT AS ADDITIONAL EVIDENCE UNDER RULE-29 OF THE ITAT RULES. 47. THE LD. DR FURTHER ARGUED THAT I N THE LIGHT OF ABOVE FACTS AND CIRCUMSTANCES, THE AO HAS HELD THAT (I) IT WAS SEEN DURING THE CURRENT YEAR THAT THE ASSESS EE WAS CLAIMING A LIABILITY IN THE BALANCE SHEET UNDER THE HEAD 'OTHE R LIABILITIES' ON ACCOUNT OF EXTERNAL DEVELOPMENT CHARGES. IT IS SEEN THAT THE L IABILITY SHOWN IS INCREASING YEAR AFTER YEAR, (II) IT CAN NEVER BE CLASSIFIED AS LIABILITY. THE ASSES SEE IS HARDLY SPENDING THIS RECEIPT BUT PUT IN THE BANKS AS FDRS OR OTHER INVES TMENTS, (III) EDC CHARGES ARE NOT UNIFORM IN THE STATE BUT ARE CH ARGED AT DIFFERENT RATES DEPENDING ON THE LOCATION I.E ZONAL BASIS, HE NCE THERE IS NO BASIS ON WHICH EDC CHARGES CAN BE LINKED WITH ACTUAL AMOUNT SPENT, (IV) A PROPORTION OF THE TOTAL COST RECOVERED IN THE FI NANCIAL YEAR IS TO BE TAKEN FOR THE PURPOSE OF INDIRECT CHARGES. THE ASSE SSEE HERE HAS RECEIVED EDC AS A PART OF THE TOTAL RECOVERIES. FURTHER, IN THE ABSENCE OF ANY BASIS FOR DETERMINING THE EDC CHARGED BY COLONIZERS, AN ESTIM ATION HAS TO BE DONE WITH REGARD TO THE ADDITION MADE ON THIS ACCOUNT, (V) THUS IT IS LOGICAL TO INCLUDE THE TOTAL RECEIVED ED C OF RS. 602,23,48,336/- IN THE RECOVERIES FROM ALLOTTEES. IN DOING SO A PERCEN TAGE OF 30% IS LIABLE TO BE TREATED AS RECOVERY ON ACCOUNT OF INDIRECT CHARGES FROM THIS RECEIPT, AS HAS BEEN DONE IN THE PAST . IT WAS FURTHER ARGUED BY THE LD. DR THAT THE CIT (A ) IN HIS ORDER FOR AY 2007-08 WAS ADJUDICATED FIRST & THE RATE WAS REDUCED FROM 3 0% TO 20% ON THE REASONS THAT THERE IS MERIT IN APPELLANT'S SUBMISSION THAT THE AMOUNT HAS ACCUMULATED IN THE INITIAL YEARS MAINLY BECAUSE THE DEVELOPMENT WO RK WAS SLOW BUT CURRENTLY THE AMOUNT IS BEING SPENT AS THE AREAS ARE BEING DE VELOPED. IT IS NOTED THAT THE APPELLANT IS UNDER LEGAL OBLIGATION TO PROVIDE EXTE RNAL DEVELOPMENT FACILITIES WITH REGARD TO THE AREAS BEING DEVELOPED BY IT. THE REFORE, THE AMOUNT SO RECOVERED HAS TO BE SPENT. THE EDC CHARGES ARE FIXE D KEEPING IN VIEW THE LIKELY EXPENDITURE. THEREFORE, THE POSSIBILITY OF ACTUAL E XPENDITURE BEING LESS OR MORE THAN THE AMOUNT SPENT IS ALWAYS THERE. BY THE VERY SCHEME, THE EXCESS EXPENDITURE IS RECOVERABLE FROM THE DEVELOPER / PLO T HOLDERS WHILE THE SURPLUS IS 47 NOT REFUNDABLE. THEREFORE, THE PROPORTION OF AMOUNT WHICH REMAINS UN-SPENT DEFINITELY FORMS THE INCOME OF THE APPELLANT WHICH NEEDS TO BE ACCOUNTED FOR. AS THE APPELLANT IS NOT TRANSFERRING THE SURPLUS, I F ANY, TO THE RECEIPTS AND ALSO BECAUSE THE PROJECTS ARE ONGOING, THE AO IS JUSTIFI ED TO MAKE AN ESTIMATE OF THE INCOME ELEMENT IN THE SAME. THE AO HAS TREATED 30% OF THE EDC CHARGES AS CONSTITUTING THE REVENUE RECEIPTS TREATING THEM AT PAR WITH INDIRECT CHARGES RECOVERED. AS THE INCOME ELEMENT IN THE INDIRECT CH ARGES HAS BEEN HELD TO BE 20% OF THE CHARGES SO RECOVERED, IT IS CONSIDERED F AIR IF THE SAME PERCENTAGE IS APPLIED TO THE EDC CHARGES ALSO. THE ADDITION MADE BY THE AO IS THEREFORE, RESTRICTED TO 20% OF THE EDC RECOVERED DURING THE Y EAR. 48. THE LD. DR ARGUED THAT (I) HUDA HAS FULL CONTROL OR DOMINION ON THE EDC AS DEF INED UNDER SECTION 2(G) OF THE HARYANA DEVELOPMENT AND REGULATION OF U RBAN AREAS ACT, 1975 AND CHARGES EDC AS PER SECTION 3(3 ) (A)(II) OF HDRUA. ASSESSEE IS MISINTERPRETING THE ABOVE SAID PROVISIONS, (II) EVEN FOR THE SAKE OF ARGUMENT THE HUDA IS REQUIRED TO PAY EDC AT THE SAME RATE AS ANY OTHER DEVELOPER BUT THE SAME DOES NOT GO OUT OF HIS KITTY BUT REMAINS PARKED UNDER THE HEAD EDC. IT IS NEVER A LI ABILITY BUT APPLICATION OF INCOME, (III) AS PER THE ABOVE ACT, EDC HAS TO BE COLLECTED AND USED BY THE HUDA AUTHORITY FOR EXTERNAL DEVELOPMENT WORKS AND NOT FO R ACCUMULATION. THE ACCUMULATION OF EDC ESTABLISHES THAT HUDA HAS ABSOL UTE TITLE ON THE FUND. THAT IS WHY HUDA WAS IN A POSITION TO IGNORE SO CALLED D IRECTIONS OF THE STATE GOVT, AND ACCUMULATED EDC. (IV) LF THE EDC IS SUBJECT MATTER OF SURVEILLANCE BY HON ORABLE PUNJAB AND HARYE COURT, IT IS BECAUSE OF NON APPLICATION OF IN COME UNDER THE HEAD EDC FOR THE PI IS COLLECTED, (V) EDC HAS NEVER BEEN PART OF STATE GOVT. REVENUE, (VI) THE CLAIM THAT HUDA IS REQUIRED TO PAY BACK THE EDC TO THE STATE GOVT, IS MISREPRESENTATION ACTUAL FACTS. 48.1 THE LD. DR ARGUED THAT THE TRUTH IS THAT EDC I S CHARGED ON THE FACILITIES OF USE OF EXTERNAL DEVELOPMENT WORKS PROVIDED BY THE D EVELOPERS/BUILDERS. THIS FACT DOES NOT ESTABLISH THAT HUDA DOES NOT HAVE ABS OLUTE TITLE ON EDC. THE CIT 48 (A) HAS REDUCED THE ADDITION OF 30% ON THE BASIS TH AT INCOME ON INDIRECT CHARGES HAS BEEN REDUCED TO 20%. THE CIT(A) HAS ACC EPTED ASSESSEE'S CONTENTION ON INDIRECT CHARGES CLAIMED COMPULSORILY PAYABLE TO OTHER DEPARTMENTS WITHOUT CALLING FOR COMMENTS FROM THE A O AND APPRECIATION OF THE FACTS AND CIRCUMSTANCES DISCUSSED BY THE AO, TH E REDUCTION OF ADDITION ON ACCOUNT OF EDC FROM 30% TO 20% IS ALSO WITHOUT ANY DEFINITE BASIS. 48.2 THE LD. DR ARGUED THAT THE LD. CIT(A) HAS ERRE D IN APPLYING A NET RATE OF 20% AND AO'S RATE OF 30% IS REQUESTED TO BE RESTORED. FURTHER, THE LD. DR VIDE LETTER DT. 17/11/2017 HAS FILED THE DETAILS OF THE SURVEY REPORT AND OTHER RELEVANT DETAILS (TOTAL PAGES 1 TO 149), FOR THE SAKE OF CON VENIENCE RULE 29 REPRODUCED HEREUNDER: 29. PRODUCTION OF ADDITIONAL EVIDENCE BEFORE THE T RIBUNAL.- THE PARTIES TO THE APPEAL SHALL NOT BE ENTITLED TO PRODUCE ADDITIONAL EVIDENCE EITHER ORAL OR DOCUMENTARY BEFORE THE TRIBUNAL, BUT IF THE TRIBUNA L REQUIRES ANY DOCUMENTS TO BE PRODUCED OR ANY WITNESS TO BE EXAMINED OR ANY AF FIDAVIT TO BE FILED TO ENABLE IT TO PASS ORDERS OR FOR ANY OTHER SUBSTANTIAL CAUS E, OR, IF THE INCOME-TAX AUTHORITIES HAVE DECIDED THE CASE WITHOUT GIVING SUFFICIENT OPP ORTUNITY TO THE ASSESSEE TO ADDUCE EVIDENCE EITHER ON POINTS SPECIFIED BY THEM, OR NOT SPECIFIED BY THEM, THE TRIBUNAL, FOR REASONS TO BE RECORDED, MAY ALLOW SUCH DOCUMENT TO BE PRODUCED OR WITNESS TO BE EXAMINED OR AFFIDAVIT TO BE FILED OR MAY ALLOW SUCH EVIDENCE TO BE ADDUCED. 49. LD. AR HAS BEEN GIVEN A COPY OF THE ADDITIONAL EVIDENCES AND DID NOT CONTEST ON THE ADMISSION OF ADDITIONAL EVIDENCES. T HE ADDITIONAL EVIDENCES HAVE BEEN ADMITTED BY US UNDER RULE 29 OF THE ITAT RULES BEING THE EVIDENCES NECESSARY TO ADJUDICATE THE ISSUE AND THE REQUIREME NTS STIPULATED FOR ADMISSION HAVE BEEN MET. 50. WE HAVE GONE THROUGH THE ENTIRE GAMUT OF THE IS SUE THE ADDITION MADE BY THE ASSESSING OFFICER @ 30% OF THE CHARGES RECEI VED AND RESTRICTION OF THE ADDITION TO 20% BY THE LD. CIT (A) HAVE TO BE REVIS ITED IN TOTALITY AS THE ADDITION WAS BASED ON THE FINDING THAT THE EDC CHARGES HAVE BEEN COLLECTED PROGRESSIVELY AND NOT MUCH WORK HAS BEEN DONE BY TH E HUDA IN MEETING THE OBLIGATION OF WORK TO BE EXECUTED AFTER COLLECTION OF EDC. THE POINTS NEEDS TO BE EXAMINED ARE THE RELEVANT PROVISIONS OF THE HUD A ACT EMPOWERING THE COLLECTION OF EDC, THE OBLIGATIONS OF THE HUDA TO U TILIZE THE FUNDS, THE STATUTORY POWER GIVEN BY THE STATE GOVERNMENT TO LEVY SURCHAR GES, WHETHER HUDA IS ACTING AS ONLY AS A COLLECTION AGENCY OR WHETHER IT HAS BE INVESTED WITH THE FULL POWER AND CONTROL TO SPEND THE AMOUNTS, THE MODUS A ND GUIDELINES MADE FOR UTILIZATION OF THE AMOUNTS IN A PARTICULAR GEOGRAPH ICAL AREA, UTILIZATION OF FUNDS 49 PENDING EXECUTION OF THE WORK, WHETHER THE FUNDS CA N BE ALLOWED TO BE UNUTILIZED FOR AN INDEFINITE PERIOD, WHETHER THE FA ILURE ON THE PART OF HUDA TO EXECUTE THE WORK GIVES REVENUE A RIGHT TO TREAT THI S LIABILITY AS INCOME OR IS IT A VALID ACCOUNTING PROCEDURE TO TREAT THE EDC AS RECE IPTS OF THE HUDA AND ALLOW THE EXPENSES INCURRED FOR DEVELOPMENT AS BUSINESS E XPENDITURE AS AND WHEN AS USED AND TREATING THE SURPLUS AS INCOME, THE INTENT ION OF THE HUDA TO UTILIZE AND THE TANGIBLE EXAMINATION AND VISIBLE IMPLEMENTATION OF THE INTENTION ON THE GROUND OVER A PERIOD OF TEN YEARS OR SO NEEDS TO BE EXAMINED TO TREAT THE EDC AS INCOME OR NOT. IN THIS CONNECTION THE ADDITIONAL EVIDENCES HELD BY THE LD. DR ARE NEEDED TO ARRIVE AT A CORRECT DECISION. SINCE T HESE FACTS WERE NOT BEFORE THE FIRST APPELLATE AUTHORITY, IT IS HEREBY DIRECTE D THAT THE ISSUES MAY BE EXAMINED IN THE LIGHT OF THE DIRECTIONS AND GUIDELI NES ISSUED ABOVE IN TANDEM, EXAMINATION OF THE ADDITIONAL EVIDENCES FILED AND TO PASS A SPEAKING ORDER BY THE LD. CIT(A). 51. THIS GROUND OF APPEAL OF BOTH THE PARTIES ARE T REATED AS ALLOWED FOR STATISTICAL PURPOSES. ANNUAL MAINTENANCE CHARGE 52. GROUND NO. 6 FOR THE ASSESSMENT YEARS 2004-05, GROUND NO. 7 FOR AY 2006- 07, 2007-08, 2008-09, AND GROUND NO. 4 FOR THE ASSE SSMENT YEARS 2009-10, 2010- 11, 2011-12 GROUND NO. 5 FOR A.Y. 2012-13, 2013-14 AND 2014-15 PERTAINS TO DISALLOWANCE OF ANNUAL MAINTENANCE CHARGES. 53. BRIEF FACTS ARE THAT HUDA IS ENGAGED IN THE WO RK OF DEVELOPING URBAN ESTATES WHICH INVOLVES ACQUISITION OF LAND, ITS DEV ELOPMENT INTO PLOTS, LAYING DOWN BASIC INFRASTRUCTURE SUCH AS SEWERAGE SYSTEM A ND INNER ROADS AND DISPOSING OF PLOTS BY SALE ON AUCTION ETC. HUDA MAI NTAINS THE INFRASTRUCTURE IN THESE SECTORS FOR 20 YEARS AFTER THIS THE DEVELOPED SECTORS ARE HANDED OVER TO THE MUNICIPAL COUNSEL/CORPORATION ETC. FOR THE FIRS T TEN YEARS OF DEVELOPMENT OF SECTORS THE MAINTENANCE & DEVELOPMENT CHARGES ARE C APITALIZED AS WORK IN PROGRESS. FOR SUBSEQUENT 10 YEARS, THE ENTIRE AMOUN T OF MAINTENANCE IS CHARGED TO P & L ACCOUNT & CLAIMED AS EXPENDITURE. THERE IS NO LOGIC BY WHICH THE EXPENSES CAN BE ALLOWED FOR SECTORS WHICH ARE STILL INCOMPLETE AND INCOME FROM WHICH IS NOT SHOWN IN P & L ACCOUNT. HENCE, THE AO DISALLOWED 50% OF THE AMC EXPENDITURE. 50 54. THE ADDITION ON ACCOUNT OF ANNUAL MAINTENANCE C HARGES WAS MADE FOR THE FIRST TIME IN THE AY 2003-04 BY DISALLOWING THE 50% OF THE EXPENSES CLAIMED AND THEREAFTER THE DISALLOWANCE WAS MADE IN ALL THE YEARS AND TAKEN UP IN THE GROUNDS AS ABOVE . THE ITAT IN AY 2003-04 HAD RESTO RED THE ISSUE BACK TO THE FILE OF AO FOR FRESH ADJUDICATION. AMONGST OTHER YEARS, THE ORDER OF CIT(A) FOR AY 2007-08 WAS PASSED UPHOLDING THE ADDITION WHICH WAS FOLLOWED IN ALL THE YEARS BY CIT(A) FROM AY 2004-05 ONWARDS. 55. WHILE CONFIRMING THE ADDITION THE LD.CIT(A) HAS OBSERVED THAT FOR THE FIRST TEN YEARS OF DEVELOPMENT OF SECTORS THE MAINTENANCE & DEVELOPMENT CHARGES ARE CAPITALIZED AS WORK IN PROGRESS. FOR SUBSEQUENT 10 YEARS, THE ENTIRE AMOUNT OF MAINTENANCE IS CHARGED TO P & L ACCOUNT & CLAIM ED AS EXPENDITURE. HENCE, THERE IS NO LOGIC BY WHICH THE EXPENSES CAN BE ALLO WED FOR SECTORS WHICH ARE STILL INCOMPLETE AND INCOME FROM WHICH IS NOT SHOWN IN P & L ACCOUNT. LD. CIT(A) HELD THAT THE AO WHILE TAXING 20% INDIRECT CHARGES HAS KEPT IN VIEW ONLY THE RECEIPTS WHICH ARE RELATABLE TO INDIRECT EXPENSES B EING DEBITED TO THE P & L ACCOUNT. THE INCOME WHICH HAS BEEN GENERATED BY WAY OF SERVICES & MAINTENANCE AUTOMATICALLY GETS ACCOUNTED FOR AS AO IS JUSTIFIED IN RESTRICTING THESE EXPENSES RELATABLE TO COMPLETED SECTORS ONLY. LD. CIT(A) HELD THAT THE APPELLANT WAS NOT ABLE TO GIVE THE BREAKUP OF THE D EVELOPMENT & MAINTENANCE EXPENDITURE WITH REGARD TO COMPLETED & NON COMPLETED SECTORS, THE AO'S ESTIMATE OF 50% OF THE EXPENSES AS ATTRIBU TABLE TO COMPLETED SECTORS IS JUSTIFIED. 56. BEFORE US LD. AR ARGUED THAT THE AO HAS ESTIMAT ED THE INCOME APPLYING THE PROFIT RATE OF 30 %WHICH NOW STAND AT 20% IN R ESPECT OF RESIDENTIAL PROPERTIES & 50% IN RESPECT OF COMMERCIAL PROPERTIES AND IT IS A WELL SETTLED PRINCIPLE THAT WHERE INCOME HAS BEEN ESTIMATED BY APPLYING PROFIT RATE, NO SEPARATE ADDITIONS / DISALLOWANCES CAN BE MADE BY THE AO. IN THIS REGARD RELIANCE IS PLACED ON THE RATIO OF THE FOLLOWING CASES, ASSISTANT COMMISSIONER OF INCOME TAX VS. LAKSHMI IN DUSTRIES (2011) 135 TTJ (CHENNAI) 112 : 7 ITR 0495 COMMISSIONER OF INCOME TAX VS. AGGARWAL ENGG. CO. ( JAL.) (2006) 302 ITR (P&H) 0246 COMMISSIONER OF INCOME TAX VS. SMT. SANTOSH JAIN (2 008) 296 ITR 324 (P&H) 51 ASSISTANT COMMISSIONER OF INCOME TAX VS. SARV PRAKA SH KAPOOR* (2009) 119 ITD (AGRA)(TM) 197 56.1. THE LD. AR FURTHER ARGUED THAT THERE HAS BEE N JUSTIFICATION FOR THE PERIOD OF TEN YEARS AS MAJOR CHUNK OF DEVELOPMENT EXPENDI TURE IS INCURRED DURING THE INITIAL STAGE OF THE PROJECT ITSELF. THE DEVELOPMEN T OF THE PROJECTS IS COMPLETED IN MOST OF THE CASES IN THE MINIMUM TIME FRAME OF 6 -7 YEARS I.E. BEFORE THE POSSESSION OF THE PLOT IS HANDED OVER TO THE ASSESS EE. IN SOME CASES, DEPENDING ON SITUATIONAL FACTORS IT TAKES 2 -3 YEARS MORE FOR THE DEVELOPMENT. ACCORDINGLY, THE ASSESSEE TREATS THE PERIOD OF 10 YEARS AS A REA SONABLE PERIOD BY WHICH IT EXPECTS ALL THE DEVELOPMENT COST TO HAVE BEEN INCUR RED & CAPITALIZES THE DEVELOPMENT COST INCURRED UPTO THE PERIOD OF 10 YEA RS. 56.2 THE LD. AR ARGUED THAT CLAIMING EXPENSES OF ANNUAL MAINTENANCE CHARGES AS REVENUE IS JUSTIFIED FOR THE REASONS THA T ONCE THE DEVELOPMENT WORK IS OVER, THE ASSESSEE INCURS ONLY ROUTINE MAINTENAN CE EXPENDITURE ON THE PROJECTS. ACCORDINGLY THE MAINTENANCE EXPENSES INCU RRED ARE CLAIMED AS REVENUE EXPENDITURE IN THE PROFIT & LOSS ACCOUNT IN THE YEAR IN WHICH THEY ARE INCURRED AND ADDED THAT THE AO HAD MADE THE ADDITIO N IGNORING THE FACT THAT THE EXPENSES CLAIMED UNDER THE HEAD 'ANNUAL MAINTEN ANCE OF VARIOUS SECTORS' PERTAINS ONLY TO MAINTENANCE EXPENSES. THIS DOES NO T INCLUDE EXPENDITURE INCURRED ON DEVELOPMENT. IT WAS FURTHER ARGUED THAT RULE OF CONSISTENCY IS ALSO APPLICABLE AS THE METHOD OF ACCOUNTING HAS BEEN A CCEPTED BY THE DEPARTMENT IN THE PAST. 56.3 THE LD. AR FURTHER ARGUED THAT ONCE THE AO HA S ESTIMATED THE INCOME ON ACCOUNT OF RECOVERIES FROM ALLOTTEES, THEREBY TREAT ING ALL THE SECTORS AS COMPLETED SECTORS, THEREFORE THERE IS NO JUSTIFICAT ION FOR DISALLOWANCE OF MAINTENANCE SECTORS. 57. LD. DR HAS ARGUED THAT THE ASSESSEE COULD NOT P ROVIDE ANY JUSTIFICATION FOR CLAIM OF MAINTENANCE AND DEVELOPMENT OF SECTORS WHI CH ARE IN PURVIEW OF DEVELOPMENT AND DO NOT FORM PART OF THE P&L A/C (BE TWEEN 10-20 YEARS). SIMILARLY, THERE IS NO JUSTIFICATION FOR CLAIMING T HE AMOUNT OF MAINTENANCE AND DEVELOPMENT RELATABLE TO SECTORS WHICH ARE DEEMED T O BE COMPLETED BUT HAVE NOT BEEN HANDED OVER TO MUNICIPAL CORPORATION. IT CAN BE AN APPLICATION OF PROFIT, BUT IT IS DEFINITELY NOT AN EXPENDITURE INCURRED FOR BUSINESS PURPOSE. 52 THEREFORE THE ADDITION OF AN ESTIMATED AMOUNT OF 50 % OF THE MAINTENANCE CHARGES REGARDED AS RELATABLE TO INCOMPLETE SECTORS IS CAPITALIZED. ASSESSEE'S CONTENTION THAT NO SEPARATE ADDITION IS CALLED FOR WHEN INCOME HAS BEEN ESTIMATED IS NOT ACCEPTABLE. ASSESSEE HAS NOT FOLLO WED APPROPRIATE METHOD OF ACCOUNTING HENCE THESE EXPENSES CANNOT BE COLORED A S REVENUE EXPENSES. 57.1 THE LD. DR ARGUED THAT EVERY ASSESSMENT YEAR I S A SEPARATE ASSESSMENT YEAR AND PRINCIPLE OF RES-JUDICATA IS NOT APPLICABL E IN THE INCOME TAX PROCEEDINGS. FURTHER, RELIANCE PLACED BY THE ASSESS EE I.E. HUDA ON THE FOLLOWING CASES IS NOT APPLICABLE AS DISCUSSED HEREAFTER: (I) ASSISTANT COMMISSIONER OF INCOME TAX VS. LAKSHMI IN DUSTRIES (2011) 135 TTJ CHENNAI) 112 : 7 ITR 0495 FACTS ARE DIFFERENT IN TH AT CASE AS COMPARED TO THE INSTANT CASE AS THAT CASE BELONGS TO SEARCH AND SEI ZURE ASSESSMENT. HENCE THIS CASE IS NOT APPLICABLE, (II) COMMISSIONER OF INCOME TAX VS. AGGARWAL ENGG. CO. ( JAL.) (2006) 302 ITR (P&H) 0246 FACTS ARE DIFFERENT IN THAT CASE AS COMP ARED TO THE INSTANT CASE AS IN THAT CASE AFTER ADDITION ON THE BASIS OF NET PROFIT RATE OTHER ADDITIONS WERE MADE ON ACCOUNT PURCHASE AND INTRODUCTION OF CASH. HENCE THIS CASE IS ALSO NOT APPLICABLE; (III) COMMISSIONER OF INCOME TAX VS. SMT. SANTOSH JAIN (2008) 296 ITR 324 (P&H) FACTS ARE DIFFERENT IN THAT CASE AS COMPARED TO THE INSTANT CASE AS THAT CASE BELONGS TO SEARCH AND SEIZURE ASSESSMENT. HENC E THIS CASE TOO IS NOT APPLICABLE, AND (IV) ASSISTANT COMMISSIONER OF INCOME TAX VS. SARV PRAKA SH KAPOOR (2009) 119 ITD (AGRA)(TM) 197 FACTS ARE DIFFERENT IN THAT CASE AS COMPARED TO THE INSTANT CASE AS IN THAT CASE ASSESSEE IS IN CIVIL CONSTRUCT ION BUSINESS, WHEREAS IN THE INSTANT CASE THE ASSESSEE IS NOT IN CONSTRUCTION BU SINESS IN TRUE SENSE. HENCE THIS CASE IS NOT APPLICABLE. IN VIEW OF THE ABOVE, THE L D. DR ARGUED THAT THE ORDER OF THE CIT (A) IS NEEDS TO BE UPHELD. 57.2 IN THE BACKDROP OF THIS ISSUE THE ORDER OF THE COORDINATE BENCH OF ITAT CHANDIGARH IN THE CASE OF THE ASSESSEE FOR THE AY 2 003-04 IS PERUSED WHEREIN IT WAS HELD THAT : 9. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTI ES, IT IS NOTICED THAT THE ASSESSEE ACCOUNTED FOR THE AMOUNT OF FORFEITED SECU RITY IN THE P & L ACCOUNT BY FOLLOWING THE CASH SYSTEM OF ACCOUNTING. TH E AMOUNT WAS FORFEITED WHEN THE ALLOTTEES OR THE. APPLICANTS DID NOT FULFILL TH E RELEVANT CONDITIONS. IT IS NOT THE CASE OF THE ASSESSEE THAT THE FORFEITURE WAS NOT MA DE DURING THE YEAR UNDER CONSIDERATION. IT IS ALSO NOT THE CASE THAT THE AMOUNT SO FORFEITED WAS UTILIZED TO DEVELOP THE SECTORS OR TO MAKE IMPROVEMENT IN OTHER PLOTS. THE PLOTS FOR WHICH THE SECURITIES WERE FORFEITED WERE NOT SHOWN AT LES SER VALUE BY ADJUSTING THE FORFEITED AMOUNT IN THE CLOSING STOCK. THEREFORE IT CANNOT BE SAID THAT THERE WAS ANY LINK OF THE 'SECURITY FORFEITED' WITH THE PLOTS SHOWN INTHE CLOSING STOCK SO THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE AMOUNT OF SECURITY HAD BEEN REDUCED FROM THE VALUE OF THE CLOSING STOCK AN D HAD BEEN DULY ACCOUNTED FOR IN THE PROFITS IN THE FOLLOWING YEARS WHICH ACC RUED TO THE ASSESSEE AT THE TIME OF SALE OF THOSE PLOTS, IS NOT ACCEPTABLE BECAUSE T HE AMOUNT WAS NOT REDUCED BY THE ASSESSEE IN THE VALUE OF THE CLOSING STOCK R ATHER IT WAS SHOWN AS INCOME IN THE P & L ACCOUNT, HOWEVER, WHILE FILING THE RETURN OF INCOME, THE AMOUNT WAS 53 REDUCED FROM THE INCOME IN THE COMPUTATION OF INCOM E. WE ARE, THEREFORE, OF THE VIEW THAT THE ASSESSING OFFICER RIGHTLY MADE TH E ADDITION AND THE LD . CIT(A) WAS FULLY JUSTIFIED IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER. 10 THE NEXT ISSUE VIDE GROUNDS NO. 3 & 4 RELATES TO ADDITION ON ACCOUNT OF MAINTENANCE / ADMINISTRATIVE CHARGE PERTAINING TO I NCOMPLETE SECTORS AND THE ADMINISTRATIVE CHARGES IN BOTH DEVELOPED AND DEVELO PING SECTORS. THE NATURE OF THE ADDITIONS IS SIMILAR, SO. THESE TWO GROUNDS ARE TAKEN TOGETHER. 11. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT T HE WORK OF THE ASSESSEE INVOLVED DEVELOPMENT OF URBAN ESTATES IN VARIOUS CI TIES OF HARYANA E.G. FARIDABAD, GURGAON, KARNAL, PANIPAT AND PANCHKULA E TC. THOSE ESTATES WERE FURTHER DIVIDED INTO SECTORS. THE ASSESSEE ACQUIRED THE LAND THEN DEVELOPED ITSELF ACCORDING TO ITS SPECIFIC PLAN. SUBSEQUENTLY THE PL OTS OF VARIOUS SIZES BOTH COMMERCIAL AND RESIDENTIAL WERE ALLOTTED SOLD OR AU CTIONED. SUBSEQUENT TO THIS SALE / ALLOTMENT, THE ASSESSEE MAINTAINED SECTORS F OR A PERIOD OF 20 YEARS, FOR THAT PERIOD ALL EXPENSES IN RELATION AND MAINTENANCE WER E MADE BY THE ASSESSEE. AFTER THE PERIOD OF 20 YEARS, THE DEVELOPED SECTORS WORE HANDED OVER TO THE MUNICIPAL COUNCIL / CORP ETC. THE ASSESSE WAS N OT SNOWING ANY PROFIT ON THOSE PROJECTS OF SECTORS FOR A PERIOD OF 20 YEARS STARIN G FROM THE CQUISITION TO THE DATE OF HANDING OVER THE SECTOR TO THE MUNICIPAL COUNCIL / CORP ETC. FURTHER FOR THE FIRST 10 YEARS OF ANY DEVELOPMENT OF A SECT OR, THE MAINTENANCE AND DEVELOPMENT CHARGES WERE CAPITALIZED AS WORK IN PRO GRESS AND FOR THE PERIOD SUBSEQUENT TO 10 YEARS, THE ENTIRE AMOUNT OF MAINTE NANCE AND DEVELOPMENT WAS CHARGED TO THE P & L ACCOUNT AND BEING CLAIMED AS EXPENDITURE. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE WAS DE CLARING PROFIT IN THE P & L ACCOUNT ONLY ON COMPLETION OF' 10 YEARS AND THE: EX PENSES RELATED TO SOME INCOMPLETE PROJECTS WERE DEBITED TO P &L ACCOUNT AS EXPENDITURE IN THE PERIOD BETWEEN 10 YEARS AND 20 YEARS OF ACQUISITION . TH E ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THIS WAS DONE. TH E EXPLANATION OF THE ASSESSEE WAS THAT THE SAME PRACTICE WAS REGULARLY FOLLOWED A ND ANY CHANGE WOULD DISTURB THE PROFITS OF THE LATTER YEARS. ACCORDI NG TO ASSESSING OFFICER, THE ASSESSEE COULD NOT PROVIDE ANY JUSTIFICATION FOR CLAIMING MAINTENANCE AND DEVELOPMENT OF SECTORS WHICH WERE THE PROCESS OF DE VELOPMENT AND DID NOT FORM PART OF P & L ACCOUNT THEREFORE THE AMOUNT O F MAINTENANCE AND DEVELOPMENT RELATABLE THE SECTORS WHICH HAD NOT BEE N HANDED OVER TO MUNICIPAL OFFICER AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT THE TOTAL AMOUNT OF DEVELOPMENT CHARGES DEBITED TO P&L ACCOUNT FOR BOTH COMPLETE AND INCOMPLETE SECTORS WAS AT RS. 51,49,24 ,656. HE THEREFORE, ASKED- THE ASSESSEE -VIDE LETTER DATED 26.10.2005 TO FURNI SH THE BI-FURCATION OF THE EXPENSES CLAIMED IN RESPECT OF COMPLETE AND INCOMPL ETE SECTORS. IN RESPONSE TO THE ABOVE THE ASSESSEE SUBMITTED THAT WHILE CALCULA TING AND PREPARING COST OF SECTORS, THE COST EXPECTED TO BE INCURRED FOR NEXT 10 YEARS WAS DEBITED TO THE CAPITAL COST WHICH INCLUDED COST LIKE MAINTENANCE, ADMINISTRATION COST AND FINANCE COST. IT WAS FURTHER SUBMITTED THAT THE COS T INCURRED AFTER A PERIOD OF 10 YEARS WAS TO BE CONSIDERED TO BE REVENUE IN NATURE AND THAT THE PERIOD OF 10 YEARS WAS TAKEN AS BASIS, ON THE HYPOTHESIS THAT TH E SECTOR WOULD BE READY FOR INHABITATION AND WOULD START GENERATING REVENUE / Y IELD REVENUE INCOME. IT WAS ALSO SUBMITTED THAT THE RECEIPTS YIELDED AFTER 10 Y EARS WOULD BE TREATED AS REVENUE INCOME AND CREDITED TO P & L ACCOUNT. IT WA S FURTHER SUBMITTED THAT FOR THE YEAR UNDER CONSIDERATION, A SUM OF RS. 65.49 CR ORES WAS INCURRED ON MAINTENANCE OF ESSENTIAL SERVICES LIKE WATER SUPPLY , MAINTENANCE OF ROADS, SEWERAGE, HORTICULTURE, STORM WATER DRAINAGE AND EL ECTRICITY. OUT OF THE SAID EXPENSES, A SUM OF RS. 14.04 CRORES WAS INCURRED IN RESPECT OF SECTORS IN EXISTENCE FOR LESS THAN 10 YEARS AND BALANCE SUM OF RS. 51.4 5 CRORES WAS INCURRED IN RESPECT OF SECTORS IN EXISTENCE FOR MORE THAN 10 Y EARS, THE . SAME BEING REVENUE IN NATURE HAS BEEN CHARGED TO EXPENDITURE ACCOUNT. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAS RECEIVED A SUM OF R S.20.00 CRORES FROM SEWERAGE, WATER CHARGES AND SUPPLY OF OTHER ESSENTIAL SERVICES AND THE SAID AMOUNT HAD BEEN ACCOUNTED OR AS INCOME IN THE INCOM E AND EXPENDITURE ACCOUNT. IT WAS EXPLAINED THAT THE ASSESSEE WAS A C ONTRACTOR ENGAGED IN CONSTRUCTION SINCE ITS INCEPTION AND FOR THE PURPOS E OF MAINTAINING ITS ACCOUNTS THE ASSESSEE WAS FOLLOWING CONTRACT ACCOUNTING SYST EM UNDER WHICH THE ACCOUNTS WERE MAINTAINED AS PER PRESCRIPTION LA ID DOWN IN THE ACCOUNTING STANDARD (IN SHORT AS) 7, AS PER THE SAID STANDARD IN GENERAL ADMINISTRATIVE 54 COST. SELLING COST RESEARCH AN DEVELOPMENT, DEPRECIATION COST OF IDLE PLANT & EQUIPMENT, COST INCURRED IN SECURING CONTRACT AND POR-CONTRACT COST IF IT WAS NOT PROBABLE THAT THE CONTRACT WILL BE OBTAINED A RE NOT THE PART OF THE CONTRACT COST. HOWEVER, THE COST WHICH RELATED DIRECT LY TO THE CONTRACT AND WERE INCURRED IN SECURING CONTRACT IF THEY COULD BE SEPARATELY IDENTIFIED AND IT WAS PROBABLE THAT CONTRACT WOULD BE OBTAINED SUCH COSTS ARE ALSO INCLUDED IN THE CONTRACT COST. AFTER CONSIDERING THE SUBMISSIONS O F THE ASSESSEE, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE BI-FURCATED THE EXPENSES IN THE SECTOR WHICH WERE MORE THAN 10 YEARS, OR LESS THAN 10 YEARS OLD. HOWEVER THE RECOVERIES / ENHANCEMENTS ETC, OR THE PROFIT FROM SECTORS WHICH WERE MORE THAN 20 YEARS OLD WERE BEING REFLECTED IN THE P&L ACCOUNT, THEREFORE, THE EXPENSE FOR THE SECTORS WHOSE RECEIPT WERE NOT ENTIRELY FORMING A PART OF T HE P & L ACCOUNT COULD NOT BE CONSIDERED ENTIRELY ALLOWABLE. ACCORDING TO THE ASSESSING O FFICER THE SUBMISSION OF THE ASSESSEE WAS THAT THERE WERE CERT AIN RECEIPTS IN THE PROFIT & LOSS ACCOUNT WHICH WERE PARTLY ATTRIBUTE TO SECTORS WHI CH WERE NOT HANDED OVER TO THE MUNICIPAL COUNCIL CORPORATION AND THE RECOVERIE S FROM SALE / INSTALMENTS WHICH WERE MAIN SOURCE OF INCOME OF THOSE SECTORS, WERE NOT ACCOUNTED FOR THE P & L ACCOUNT. THE ASSESSING OFFICER ADDED 50 % OF THE EXPENDITURE OF RS 51,49,24,650 AMOUNTING TO RS. 25,74,62,328/- TO THE TOTAL INCOME OF THE ASSESSEE. THE ASSESSING OFFICER ALSO OBSERVED THAT THE ADMINI STRATION AND ADMINISTRATIVE COST WERE PERTAINING TO EXPENDITURE INCURRED FOR AD MINISTRATIVE DEVELOPMENT IN BOTH DEVELOPED AS WELL AS DEVELOPING SECTORS AND TH E ASSESSEE HAD DEBITED THE ENTIRE COST TOWARDS ADMINISTRATION IN THE P & L ACC OUNT AS REVENUE EXPENDITURE. THE ASSESSING OFFICER ASKED THE ASSESSEE TO ESTABLI SH-AS TO WHY THE ADMINISTRATIVE COST NOT BE BIFURCATED IN TWO PARTS AND ONLY THE PA RT PERTAINING TO DEVELOPED SECTORS BE ALLOWED AS REVENUE EXPENDITURE. THE ASSE SSEE. IN ITS REPLY, SUBMITTED THAT AS PER CONTRACT. ACCOUNTING STANDARD FOR CONTR ACT AS-7. GENERAL ADMINISTRATIVE COST AND FINANCE COST WAS TOBE ALLOW ED AS A REVENUE EXPENDITURE AND IT DID NOT FORM PART OF THE CONTRACT COST ACCOR DING TO THE ASSESSING OFFICER THE ASSESSEE WAS FOLLOWING THE CASH SYSTEM OF ACCOU NTING AND IT WAS ALSO FOLLOWING THE PROJECT COMPLETION METHOD WHEREIN THE PROJECT COMPLETION PERIOD WAS 20 YEARS. HE FURTHER OBSERVED THAT THE AS 7 (NE W) CLEARLY SAYS THAT A CONTRACT ACCOUNTING HAS TO BE ACCRUAL SYSTEM OF ACCOUNTING A ND AS-7 (REVISED) DOES NOT ALLOW THE PROJECT COMPLETION METHOD OF ACCOUNTING A ND ONLY ALLOWS PART COMPLETION OF METHOD SO. THE ASSESSEE COULD NOT SEL ECTIVELY CLAIM THE BENEFIT OF AS WHICH IT WAS NOT FOLLOWING THE ASSESSING OFFICER HELD THAT ME AMOUNT RELATABLE TO ADMINISTERING DEVELOPMENT IN INCOMPLETE SECTORS WAS CLEARLY NOT A REVENUE EXPENDITURE AND SHOULD HAVE BEEN CAPITALIZED AND TH AT THE DEVELOPING SECTORS WERE INCOMPLETE PROMPTS AND THE COST RELATED TO EXE CUTE OR COMPLETE A PROJECT SHOULD HAVE BEEN ADDED TO THE PROJECT COST. THE ASS ESSING OFFICER WORKED OUT THE NET ADMINISTRATIVE EXPENDITURE DEBITED IN THE P & L ACCOUNT AT RS 75,45,72,832/-. THE CALCULATION HAS BEEN GIVEN BY THE ASSESSING OFFICER AT PAGE NO. 9 OF ASSESSMENT ORDER DATED 30.11.2005. THE ASS ESSING OFFICER ASKED THE ASSESSEE TO FURNISH BIFURCATION OF EXPENSES. ACCORD ING TO THE ASSESSING OFFICER THE ASSESSEE WAS UNABLE TO FURNISH THE BIFURCATION OF E XPENSES BUT ONLY SUBMITTED THAT THE EXPENSES WERE OF GENERAL ADMINISTRATIVE NA TURE. THE ASSESSING OFFICER HELD THAT SINCE THE ENTIRE EXPEND ITURE RELATED TO COMPLETED / INCOMPLETE SECTORS, BESIDES ADMINISTRATIVE EXPEND ITURE OF THE HEAD OFFICE IN PANCHKULA THE ONE AND HALF OF THE ENTIRE EXPENDITURE BEING EQUALLY ALLOCATABLE TO THE DEVELOPED AND UNDEVELOPED PARTS OF THE ACTIVITY OF THE ASSESSEE AT RS. 75,45,72,832/- WAS ADDED IN THE TOT AL INCOME BEING OF CAPITAL NATURE I.E. RELATING TO THE PROJECTS NOT COMPLETED. HE ACCORDINGLY MADE A DISALLOWANCE OF RS. 37,72,86,416/-. 12 WHEN THE MATTER WAS TAKEN TO THE LD. CIT(A), THE ASSESSE SUBMITTED THAT IT. I.E THE HARYANA URBAN DEVELOPMENT AUTHORITY (H UDA) WAS CONSTITUTED IN 1977 FOR ENSURING SPEEDY AND ECONOMICAL DEVEL OPMENT OF URBAN AREAS IN THE STATE OF HARYANA. IT WAS FURTHER STATED THAT THE AS SESSEE PROVIDED PLANNED AND FULLY DEVELOPED RESIDENTIAL, COMMERCIAL, INSTITUTIO NAL AND INDUSTRIAL PLOTS IN VARIOUS URBAN ESTATES OF HARYANA AND THAT AFTER PROVIDING B ASIC AMENITIES ALONG WITH COMMERCIAL, INSTITUTIONAL AND PUBLIC FACILITIES AR EAS WERE OFFERED TO PUBLIC BY INVITING APPLICATIONS THROUGH LEADING NEWSPAPERS. IT WAS STATED THAT THE ASSESSEE ENGAGED ITSELF IN THE PLANNED DEVELOPMENT OF THE URBAN AREAS IN THE STATE AND ALL SECTORS ARE PLANNED WITH COMPLETE INFRASTRUCTURE & FACILITIES L IKE WATER SUPPLY 55 ROAD, SEWERAGE, PARKS, STREET LIGHTING W ITH PUBLIC FACILITIES BUILDINGS. IT WAS FURTHER STATED THAT THE ASSESSEE IS THE PRINCIP LE AGENCY WHICH DEVELOPS AND DISPOSES OFF THE PLOTS OF LAND FOR VARIOUS USES LIKE RESIDENTIAL / COMMERCIAL INSTITUTIONAL AND INDUSTRIAL ETC IN ALL CITIES O HARYANA. IT WAS POINTED OUT THAT THE ASSESSEE FORMULATED DIFFERENT PROCEDUR E FOR ALLOTMENT OF PLOTS WHICH ALL UNDER THE CATEGORY OF RESIDENTIAL PLOTS, COMMER CIAL SITES FOR CHARITABLE BODIES / SOCIETIES & HOSPITALS ETC AND THE PROCEDURE HAS BEE N DESCRIBED ADEQUATELY IN THE GUIDE BOOK. THE PROCEDURE FOR ALLOTMENT OF RESI DENTIAL SITES COMMERCIAL SITES INDUSTRIAL PLOTS / RELIGIOUS & SOCIAL/ CHARITABLE/ INSTITUTIONAL SITES SCHOOLS AND NURSING HOMES ETC HAS BEEN DISCUSSED BY THE LD CIT(A) IN THE PARA 2.0 OF THE IMPUGNED ORDER UNDER THE HEAD MAIN OBJECTS OF HUDA IT WAS SUBMITTED BEFORE THE LD CIT(A) THAT THE ASSESSEE IS WORKING ON NO PR OFIT NO LOSS' BASIS AND CARRYING OUT ITS ACTIVITIES BY CIRCULATION OF FUNDS WHICH WE RE GENERATED OUT OF SALE OF RESIDENTIAL / INDUSTRIAL / COMMERCIAL AND INSTITUTI ONAL PLOT AND THE INVESTMENT HAD BEEN MADE IN ACQUISITION OF NEW AREAS WHICH ENABLED THE ASSESSEE TO GENERATE MORE PLOTS FOR THE PUBLIC AND MORE FUNDS FOR THE DE VELOPMENT WORKS AND NEW ACQUISITIONS, THE PRICE FIXED ON NO PROFIT NO LOSS' BASIS WAS CHARGED FROM THE PLOT HOLDERS WITH THE STIPULATION THAT ANY ENHANCED COMP ENSATION IN THE LAND COST AWARDED BY THE COURTS SHALL BE RECOVERED IN ADDITIO N AS AND WHEN SUCH EVENTUALITY HAPPENS. IT WAS FURTHER STATE A THAT TH E ASSESSEE CONSISTENTLY WAS FOLLOWING THE CASH SYSTEM FOR MAINTAINING ITS ACCOU NTS SINCE ITS INCEPTION AND THAT PROCEDURE HAD BEEN DULY EXAMINED AND ACCEPTED BY TH E INCOME TAX DEPARTMENT IN E PAST. IT WAS REITERATED THAT AFTER EXPIRY OF PERIOD OF 10 YEARS FROM THE DATE OF COMPLETION OF SECTOR, THE RECEIPT AS WE LL AS THE PAYMENT WAS DEEMED TO BE REVENUE FOR THE PURPOSE OR MAINTAINING COST / PREPARING PROFIT & LOSS ACCOUNT AND PRIOR TO THE SAID PERIOD OF 10 YEA RS ALL PAYMENTS / RECEIPT WERE CAPITALIZED AND TREATED EITHER AS AN ASSET OR AS A LIABILITY. IT WAS SUBMITTED THAT THE YEARS IN WHICH THE RECEIPTS ARE HIGH THE PROFIT O THE SECTOR WOULD BE HIGH AND ON THE OTHER HAND WHERE IN A YEAR REFUNDS ARE IN EX CESS THAN THE AMOUNT RECEIVED THERE WOULD BE LOSSES FOR THE SECTOR AND T HIS POSITION HAS BEEN DULY ACCEPTED BY THE INCOME TAX DEPARTMENT. IT WAS CONTE NDED THAT THE ASSESSEE IS A CONTRACTOR ENGAGED IN THE CONSTRUCTION CONTRACT A ND CONTRACT ACCOUNTING STANDARD HAS BEEN FOLLOWED SINCE ITS INCEPTION. IT WAS 'EMPHASIZED THAT THE ACCOUNT WERE MAINTAINED BY THE ASSESSEE AS PER PRES CRIPTION LAID DOWN. ACCOUNTING STANDARD 7 (IN SHORT AS-7'). THE SAID AS -7. DEFINES AND PRESCRIBES THE MODE OF CALCULATION OF THE CONTRACT REVENUE AND CON TRACT COST IT WAS POINTED OUT THAT AS-7 FURTHER LAYS DOWN THE MANNER OF ARRIV ING AT THE CONTRACT COST WHICH IS NOT WRITTEN OFF ON YEAR TO YEAR BASIS. IT WAS EX PLAINED THAT THE AS-7 LAYS DOWN TWO METHODS FOR ACCOUNTING, ONE METHOD IS PERCENT O F COMPLETION METHOD AND ANOTHER ONE IS COMPLETED CONTRACT METHOD. IT, WAS S UBMITTED THAT THE ASSESSEE IS FOLLOWING THE POLICY OF TREATING THE SECTOR AS A CO MPLETE SECTOR AFTER A PERIOD OF 20 YEARS OR HANDING OVER TO MUNICIPAL CORP WHICHEVE R IS EARLIER. IT WAS FURTHER STATED THAT HANDING OVER THE SECTOR TO MUNICIPAL CO RP IS ONLY A ARRANGEMENT FOR MAINTENANCE AND UPKEEP OF THE AREA LIKE SEWERAG WAT ER ETC AND THERE ARE CERTAIN AREAS FOR WHICH MUNICIPAL CORP IS NOT WEL L EQUIPPED FOR UNDERTAKING MAINTENANCE / UPKEEP LIKE PROVIDING ADDITIONAL INFRASTRUCTURE, LIKE WATER WORK, COMMUNITY CENTER HORTICULTURE ETC. IT WAS FURTHER STATED THAT THE HANDING OVER TO SECTOR TO MUNICIPAL CORP DOES NOT MEAN THAT THE ASSESSEE HAS ABSOLVED ITSELF FROM THE RESPONSIBILITY OF MAINTENANCE OF SE CTOR SINCE THE SECTORS ARE PRIMARY RESPONSIBILITY OF THE ASSESSEE WHO HAS TO MAINTAIN THE AREAS WHERE OTHER AUTHORITIES CANNOT DO NEEDFUL. THE ASSESSEE WITH REFERENCE TO THE PROCEDURE /POLIC Y REGARDING COSTING OF SECTORS, RECOVERY OF MONEY FROM ALLOTTEES AMORTIZAT ION OF EXPENDITURE AND TREATMENT OF THE EXPENDITURE AS REVENUE AND CAPITAL ETC., SUBMITTED THAT THE COST EXPECTED TO BE INCURRED FOR NEXT 10 YEARS ARE ADDED TO THE CAPITAL COST WHICH INCLUDED MAINTENANCE, ADMINISTRATIVE AND FINA NCIAL COST AND THAT THE COST INCURRED AFTER A PERIOD OF 10 YEARS, ARE CONSIDERED AS REVENUE IN NATURE. THE PERIOD OF 10 YEARS IS TAKEN AS BASIS ON THE HYPOTHE SIS THAT THE SECTOR WOULD BE READY FOR INHABITATION AND WOULD START GENERATING REVENUE AND YIELD REVENUE INCOME THEREFORE THE RECEIPTS YIELDED AFTER 10 YEAR S ARE TREATED AS REVENUE INCOME AND CREDITED TO THE PROFIT & LOSS ACCOUNT. I T WAS STATED THAT THE ADMINISTRATIVE EXPENDITURE / FINANCIAL EXPENDITURE ARE GENERAL EXPENDITURE AND NOT SPECIFIC EXPENDITURE FOR A PROJECT AND ACCORDIN GLY THOSE WERE TO BE CLAIMED 56 AND ALLOWED AS REVENUE EXPENDITURE. IT WAS EXPLAINE D THAT THE ADMINISTRATIVE EXPENDITURE WAS INCURRED ON RUNNING DAY TO DAY ACTI VITIES AND OTHER MANAGERIAL FUNCTIONS O THE ASSESSEE THOSE EXPENDITURE ARE PURE LY REVENUE EXPENDITURE WHICH HAVE BEEN CHARGED TO THE REVENUE ACCOUNT AS PER THE AS FOLLOWED BY THE ASSESSEE SINCE ITS INCEPTION BECAUSE THERE WAS NO E LEMENT OF CAPITAL OUTLAY INVOLVED IN ADMINISTRATIVE EXPENDITURE AND THAT POL ICY / PROCEDURE HAD BEEN DULY EXAMINED BY THE INCOME TAX DEPARTMENT WHILE CO MPLETING ASSESSMENT PROCEEDINGS FOR THE PAST YEARS. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: DCIT VS. OTIS ELEVATOR CO. (I) LTD. (2006)99 ITD 73 (MUM) JCIT VS. K. RAHEJA (P) LTD. (2005) 3 SOT 617 (MUM) CIT VS. LOKHANDWALA CONSTRUCTION INDS LTD. (2003) 1 80 CTR (BOM) CIT VS. V. S. DEMPO & CO. PVT. LTD. (1996) 131 CTR (BOM) 203 CIT VS. ADVANCE CONSTRUCTION CO. (P) LTD. (2005) 19 3 CTR (GUJ) 127 WALL STREET CONSTRUCTION LTD. VS. JCIT S.R. 12(2006 ) 5 SOT 103 (MUM) (SB) DCIT CIRCLE 8(1) V. RANKA DEVELOPERS (2006) 6 SOT 8 15 (BANG) 13 L D CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSES OBSERVED THAT AS 7 (NEW) CLEARLY SAYS THAT A CONTRACT ACCOUNTING HAS TO BE ACCRUAL SYSTEM OF ACCOUNTING AND ONLY ALLOWS PART COMPLETI ON OF METHOD, SO. THE ASSESSEE CANNOT SELECTIVELY CLAIM THE BENEFIT OF AS-7 WHICH IT WAS NOT FOLLOWING. HE DISTINGUISHED THE CASE RELIED ON BY THE ASSESSEE IN THE CASE OF RAHEJA BUILDERS STATING THAT THE SAID CASE WAS RELATING TO FINANCE COST AND NOT ADMINISTRATION COST AND THAT CASE WAS FOR A PERIOD PRIOR TO REVISI ON OF ACCOUNTING STANDARD. HE FURTHER POINTED OUT THAT THE ASSESSEE WAS ASKED TO FURNISH THE BIFURCATION OF EXPENSES WHICH THE ASSESSEE WAS UNABLE TO DO B UT ONLY SUBMITTED THAT THE EXPENSES WERE OF THE NATURE OF GENERAL ADMINISTRA TIVE NATURE. ACCORDING T HIM THE REVISED AS 7 DID NOT ALLOW ANY PERSON TO FOLLOW THE PROJECT COMPLETION METHOD BECAUSE DURING THE YEAR UNDER CONSIDERATE PR E-REVISED AS 7 WAS IN FORCE AND NOT REVISED AS 7 WHICH CAME IN{ FORCE W.E.F. 1.4.2003 AND TO BE APPLICABLE FROM 1.4.2003 ASSESSMENT YEAR 2004 -05. LD. CIT(A) POINTED OUT THAT VARIOUS COURTS HAVE HELD THAT - WHERE CONT RACTOR IS FOLLOWING COMPLETED CONTRACT METHOD, THE COSTS WHICH, ARE NO T ATTRIBUTABLE TO A PARTICULAR PROJECT HAVE TO BE TREATED AS REVENUE EXPENDITURE I N TERMS OF AS7EVEN IF THE END RESULT IS A LOSS AND THAT WHERE THE METHOD HAS BEEN FOLLOWED CONSISTENTLY BY AN ASSESSEE AND ACCEPTED BY THE INCOME TAX DEPARTMENT THE SAME CANN OT BE ALTERED TO CHANGE THE NATURE OF EXPENDITURE FROM REVENUE TO CAPITAL JUST BECAUSE THERE IS NO PROFIT INSPITE OF THE HIGH LEVE L OF ACTIVITIES. THE LD. CIT(A) POINTED OUT THAT AS7 WAS PRESCRIBED INITIALLY IN DECEMBER , 1983 SINCE THEN THE ASSESSEE WAS FOLLOWING THIS METHOD CONSISTENTLY AND THAT THE ASSESSEE HAD CHARGED EXPENDITURE AS REVENUE WITHOUT BIFURCATING THE SAME BETWEEN THE PERIOD OF YEARS TO WHICH THOSE WERE REL ATED, THEREFORE. THE ASSESSING OFFICER RIGHTLY MADE THE ADDITION TO THE EXTENT OF 50% OF THE AMOUNT C H A R G E D TO THE REVENUE ACCOUNT AS EXPENDITURE ACCORDINGLY T HE ADDITION MADE BY THE ASSESSING OFFICER WAS SUSTAINED. NOW THE ASSESSE E IS IN APPEAL. 14 LD. COUNSEL-TOR THE ASSESSEE REITERATED THE SUBM ISSIONS MADE BEFORE THE AUTHORITIES BELOW. HE FURTHER SUBMITTED THAT THE ASSESSEE WAS FOLLOWING THE METHOD PRESCRIBED IN AS 7 CONSISTENTLY AND SHOWING THE RECEIPT FROM THE ALLOTTEES / APPLICANTS IN THE FIRST 10 YEARS 'THE E XPENDITURE INCURRED WERE TREATED AS REVENUE IN NATURE AND THE INCOME EARNED FROM THE A ALLOTTEES I S TREATED AS REVENUE INCOME FROM THE VERY BEGINNING, THERETO. TH E ASSESS ING OFFICER WRITTEN SUBMISSIONS OF THE NOT JUSTIFIED IN ALLOWING ONLY 5 0% OF THE EXPENSES INCURRED BY THE ASSESSEE ON ACCOUNT OR MAINTENANCE / ADMINISTRATION CHARGES. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: DCIT V. OTIS ELEVATOR CO (I) LTD (2006)99 ITD 73 (M UM) JCIT V K RAHEJA (P) LTD (2005) 3 SOT 617 (MUM) 15 IN HIS RIVAL SUBMISSIONS. LD. D.R. FOR THE REVENUE STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND FURTHER SUBMITTED T HAT THE METHOD ADOPTED VIDE 57 WHICH THE ASSESSEE CAPITALIZED THE EXPENDITURE IN THE EARLIER 10 YEARS WHILE IN NEXT 10 YEARS, THOSE WERE TREATED AS REVENUE EXPEND ITURE, WAS FAULTY. HE POINTED OUT THAT IN THE EARLIER 10 YEARS, THERE WAS NO DIRE CT RELATION OF THE EXPENDITURE INCURRED WITH THE DEVELOPMENT OF SECTOR A REFERENCE WAS MADE TO PARA 2 OF ASSESSMENT ORDER IN SUPPORT OF HIS CONTENTION. HE F URTHER SUBMITTED THAT THE ASSESSING OFFICER ASKED THE ASSESSEE TO GIVE DETAIL BIFURCATION OF THE EXPENSES CLAIMED IN RESPECT OF COMPLETE AND INCOMPLETE SECTORS BUT N O SUCH DATA WAS FURNISHED BY THE ASSESSEE. HE POINTED OUT THAT TH E ASSESSEE NOT A CONTRACTOR AND ALSO NOT FOLLOWING THE PROJECT COMPLETE METHOD AND THAT IN THE PRECEDING YEAR NO EXPENSES WERE CLAIM SINCE TOTAL I NCOME WAS CLAIMED EXEMPT U/S 10(20A) OF INCOME TAX ACT, 1961. HE ALSO ST ATED THAT CERTAIN PROJECT MIGHT HAVE BEEN COMPLETED AND SOME REMAINED INCOMPLETE IN THE FIRST 10 YEAR: HOWEVER. THE EXPENSES WERE CAPITALIZED IN THE COMPL ETED SECTORS AS WELL AS FOR INCOMPLETE SECTORS, IT WAS SUBMITTED THAT ONLY T HE COST ATTRIBUTABLE TO THE CONTRACT ACTIVITY COULD HAVE BEEN ALLOCATED TO THE SPECIFIC CONTRACT AND SINCE THE ASSESSEE HAS NOT GIVEN THE BIFU RCATION, THE ASSESSING OFFICER RIGHTLY ESTIMATED THE CAPITAL EXPENDITURE AND MAD E THE DISALLOWANCE @ 50% OF THE CLAIM MADE BY THE ASSESSEE CONSIDERING THAT 50% OF THE SECTORS WERE COMPLETED AND REMAINING WERE INCOMPLETE. 46 WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL AVAILABLE ON RECORD IN THE INSTANT CASE THE ASSESSEE WAS ENG AGED IN THE BUSINESS OF ACQUIRING THE LAND AND AFTER DEVELOPING THE LAND RE SIDENTIAL / COMMERCIAL PLOTS WERE ALLOTTED/AUCTIONED TO THE GENERAL PUBLIC. IN THE INSTANT CASE, THE ASSESSEE CONSIDERED THE EXPENSE WHICH WERE INCURRED DURI NG THE PERIOD OF FIRST 10 YEARS A ACQUISITION OF THE LAND AS CAPITAL IN NA TURE WHILE THE EXPENSES INCURRED FOR THE SUBSEQUENT 10 YEARS, WERE CONSIDERED AS R EVENUE IN NATURE. THE SAID PERIOD HAS BEEN ADOPTED FOR CAPITALIZING ON THE HYP OTHESIS THAT IN THE FIRST 10 YEARS THE PLOTS WOULD BE OCCUPIED AND READY FOR INH ABITATION. THE STAND OF THE ASSESSEE WITH REGARD TO THE ACCOUNTING TREATMENT OF EXPENSES IS THAT AS-7 IS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS O F INDIA IS APPLICABLE. THE SAID ACCOUNTING STANDARD DEALS WITH ACCOUNTIN G FOR CONSTRUCTION CONTRACTS IN THE FINANCIAL STATEMENT OF THE CONTRACTORS TH E MAIN FEATURE WHICH CHARACTERISES A CONSTRUCTION CONTRACT DEALT WITH IN THE STATEMENT IS THE FACT THAT THE DATE ON WHICH THE CONTACT IS SECURED AND THE DATE WHEN THE CONTRACT ACTIVITIES ARE COMPLETED FAIL INTO DIFFERENT ACCOUNTING PERIODS AND THE SPECIFIC DURATION OF THE CONTRACT PERFORMANCE IS NOT USED AS A DISTINGUISHIN G FEATURE OF THE CONSTRUCTION CONTRACT. ACCORDING TO AS 7 THE CONS TRUCTION CONTRACT GENERALLY FALL INTO TWO BASIC TYPES: (I) FIXED PRICE CONTRACTS - THE CONTRACTOR AGREES T O A FIXED CONTRACT PRICE OR RATE IN SOME CASES SUBJECT TO COST ESCALATION CLAUSES (II) COST PLUS CONTRACTS - THE CONTRACTOR IS REIMBU RSED FOR ALLOWABLE OR OTHERWISE DEFINED COSTS AND IS ALSO ALLOWED A PERCENTAGE OF T HESE COSTS OR A FIXED FEE IN THE PRESENT CASE, THE ASSESSEE IS NOT A CONTRA CTOR IN TRUE SENSE BECAUSE IT IS NOT GETTING ANY CONTRACT FROM OTHER PARTIES RATHER THE PLOTS OF VARIOUS CATEGORY E.G. RESIDENTIAL, COMMERCIAL & INDUSTRIAL ETC. ARE DEVELOPED BY THE ASSESSEE ITSELF. IN THE INSTANT CASE, THOUGH ACCOUNTING TREATMENT CAN BE DONE CONSIDERING THE PRINCIPLES LAID DOWN IN AS 7 BUT THE ASSESSEE IN TR UE SENSE IS NOT ALLOWING AS-7 BECAUSE ALL THE SECTORS CANNOT BE COM PLETED IN THE 10 YEARS MOREOVER, THE ASSESSEE HAS NOT SUPPLIED SPECIFIC DE TAIL AS TO WHEN A PARTICULAR SECTOR CAN BE COMPLETED, IN SUCH TYPE OF CASES THER E SHOULD HAVE BEEN SOME DETAILS AS REGARDS TO THE DATE OF COMPLETION UPTO THAT DATE THE EXPENSES CAN BE CAPITALIZED AND WHEN THE SECTOR IS FULLY DEVELOPED AND PLOTS ARE ALLOTTED / AUCTIONED TO THE APPLICANT, THE EXPENSES INCURRED T HEREAFTER ARE NOT CAPITAL IN NATURE BECAUSE THE STOCK I.E. THE PLOT IS READY TO BE DISPOSED OFF WITHOUT MAKING ANY FURTHER DEVELOPMENT. IN THE INSTANT CASE THE AS SESSEE IS NOT FOLLOWING THE COMPLETE CONTRACT METHOD AND CAPITALIZING CERTAIN EXPENSES WHICH WERE NOT RELATED TO PARTICULAR SECTOR E.G. INTEREST ETC WHIC H MIGHT HAVE BEEN FOR A SECTORS AND NOT FOR ALL THE SECTORS. IN OUR OPINION, THE ON LY COST OF EXPENSES WHICH ARE DIRECTLY ATTRIBUTABLE TO A SPECIFIC CONTRACT CARR IED ONLY BE CAPITALIZED AND THAT TOO UPTO THE DATE WHEN THE PLOTS ARE READY TO BE SO LD / ALLOTTED / AUCTIONED. IN AS 7, COMPLETED CONTRACT METHOD HAS BEEN PRESCRIBED IN PARA 10 ACCORDING TO 58 WHICH THE PRINCIPLE ADVANTAGE OF THE COMPLETED CONT RACT METHOD IS THAT IT IS BASED ON THE RESULTS AS DETERMINED WHEN THE CONTRAC T IS COMPLETED OR SUBSTANTIALLY COMPLETED RATHER THAN ON ESTIMATE D WHICH MAY REQUIRE SUBSEQUENT ADJUSTMENT AS A RESULT OF UNFORESEEN COS TS AND POSSIBLE LOSSES, THE RISK OF RECOGNIZING PROFITS THAT MAY NOT HAVE BEEN EARN ED IS THEREFORE, MINIMIZED. THEREFORE, SELECTION-METHOD SHOULD HAVE BEEN MA DE BY CONSIDERING THE NATURE OF WORK UNDERTAKEN BY THE ASSESSEE. HOWEVER, THIS EXERCISE HAS NOT BE DONE BY THE ASSESSING OFFICER NEITHER ANY DETAIL HA S BEEN DONE BY THE ASSESSING OFFICER NEITHER ANY DETAIL HAS BEEN FURNISHED BY TH E ASSESSEE. THEREFORE THE ESTIMATE MADE BY THE ASSESSING OFFICER IN FACT, HAS NOT GIVEN ANY REASON WHILE DISALLOWING % OF THE EXPENSES INCURRED ON ACCOUNT O F MAINTENANCE / ADMINISTRATION CHARGES. LD. CIT(A) HAS ALSO NOT GIV EN ANY COGENT REASON WHILE CONFIRMING THE ACTION OF THE ASSESSING OFFICER. IN FACT HE HAS PASSED THE ORDER IN A SLIP SHOD MANNER AND WITHOUT GIVING ANY COGENT REAS ON. 16.1 IT IS WELL SETTLED THAT THE REASON MUST BE GIV EN WHILE DECIDING THE MATTER. IN THIS REGARD JUDGMENT PASSED BY THE HONBLE JURIS DICTION HIGH COURT IN THE CASE OF CIT VS. VIKAS CHEMI GUM INDIA (2005) 276 ITR 32 CAN BE REFERRED WHEREIN IT HAS BEEN HELD THAT- THE REQUIREMENT OF RECORDING OF REASONS AND COMMUNI CATION THEREOF HAS BEEN READ AS AN INTEGRAL PART OF .THE CONCEPT OF FAIR PR OCEDURE. THE NECESSITY OF GIVING REASONS FLOWS FROM THE CONCEPT OF RULE OF IAW WHICH CONSTITUTES ONE OF THE CORNER STONES OF OUR CONSTITUTIONAL SET UP. THE ADMINISTRA TIVE AUTHORITIES CHANGED WITH THE DUTY TO ACT JUDICIALLY CANNOT DECIDE THE MATTERS ON CONSIDERATIONS OF POLICY OR EXPEDIENCY THE REQUIREMENT OF RECORDING OF REASONS BY SUCH AUTHORITIES IS AN IMPORTANT SAFEGUARD TO ENSURE OBSERVANCE OF THE RUL E OF LAW. IT INTRODUCES CLARITY, CHECKS THE INTRODUCTION OF EXTRANEOUS OR IRRELEVANT CONSIDERATIONS AND MINIMIZES ARBITRARINESS IN THE DECISION MAKING PROCESS ANOTHE R REASON WHICH MAKES IT IMPERATIVE FOR THE QUASI JUDICIAL AUTHORITIES TO GI VE REASONS IS THAT THEIR ORDERS ARE NO: ONLY SUBJECT TO THE RIGHT OF THE AGGRIEVED PERS ONS TO CHALLENGE THE SAME BY FILING STATUTORY APPEAL AND REVISION BUT ALSO BY FI LING WRIT PETITION UNDER ARTICLES 226 OF THE CONSTITUTION. SUCH DECISIONS CAN ALSO BE CHA LLENGED WAY OF APPEAL UNDER ARTICLE 136 OF THE CONSTITUTION OF INDIA. THE HIGH COURTS HAVE THE POWER TO ISSUE WRIT OF CERTIORARI TO QUASH THE ORDERS PASSED BY A QUASI JUDIC AUTHORITY / TRIBUNAL LIKEWISE IN APPEAL THE SUPREME COURT CAN NULLIFY SU CH ORDER / DECISION TNESE POWERS CAN BE EFFECTIVELY EXERCISED BY THE SUPERIOR COURTS ONLY IF THE ORAER UNDER CHALLENGE CONTAINS REASONS.' 16.2 A SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS PATWAL CO-OPERATIV E SUGAR MILLS LTD (2006) 284 ITR 153 WHEREIN IT HAS BEEN HELD THAT - 'EVERY JUDICIAL / QUASI JUDICIAL BODY / AUTHORITY M UST PASS A REASONED ORDER WHICH SHOULD REFLECT THE APPLICATION OF MIND OF THE CONCE RNED AUTHORITY TO THE ISSUES / POINTS RAISED BEFORE IT. THE REQUIREMENT OF RECORDI NG REASONS IS AN IMPORTANT SAFEGUARD TO ENSURE OBSERVANCE OF THE RULE OF LAW. IT INTRODUCES CLARIFY, CHECKS THE INTRODUCTION OF EXTRANEOUS OR IRRELEVANT CONSID ERATIONS AND MINIMIZES ARBITRARINESS IN THE DECISION MAKING PROCESS. ANOTH ER REASON WHICH MAKES IT IMPERATIVE OR QUASI JUDICIAL AUTHORITIES TO GIVE RE ASONS IS THAT THEIR ORDERS ARE NOT ONLY SUBJECT TO THE RIGHT OF THE AGGRIEVED PERSONS TO CHALLENGE THEM BY FILING STATUTORY APPEAL AND REVISION BUT ALSO BY FILING WR IT PETITION UNDER ARTICLE 226 OF THE CONSTITUTION. SUCH DECISIONS CAN ALSO BE CHALLE NGED BY WAY OF APPEAL UNDER ARTICLE 136 OF THE CONSTITUTION OF INDIA. THE HIGH COURTS HAVE THE POWER TO ISSUE WRITS OF CERTIORARI TO QUASH THE ORDERS PASSED BY Q UASI JUDICIAL AUTHORITIES / TRIBUNALS. LIKEWISE IN APPEAL THE SUPREME;* COURT C AN NULLIFY SUCH ORDER / DECISION. THE POWER OF JUDICIAL REVIEW CAN BE EFFECTIVELY EXE RCISED BY THE SUPERIOR COURTS ONLY IF THE ORDER UNDER CHALLENGE CONTAINS REASONS. IF SUCH ORDER IS CRYPTIC AND DEVOID OF REASONS, THE COURTS CANNOT EFFECTIVELY EX ERCISE THE POWER OF JUDICIAL REVIEW. 16.3 IN THE PRESENT CASE AS WE HAVE ALREADY POINT ED OUT THAT THE LA CIT(A) PASSED THE IMPUGNED ORDER IN A SLIP SHOD MANNER AND THE ASSESSING OFFICER HAD 59 ALSO NOT GIVEN ANY REASON IN SUPPORT OF HIS ESTIMAT E WHILE DISALLOWING 50% OF THE EXPENSES CLAIMED BY THE ASSESSEE, AT THE SAME TIME, THE ASSESSEE HAS ALSO NOT FURNISHED THE DETAILS ASKED FOR BY THE ASSESSING OF FICER WE THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS OF THE PRESENT CASE. ARE OF THE OPINION MAT THE PRESENT ISSUE REQUIRES A FRESH ADJUDICATION AT THE LEVEL OF ASSESSING OFFICER, IN THAT VIEW OF THE MATTER, WE SET ASIDE THE ORDER OF LD. CIT(A) ON THIS ISSUE AND REMAND THE SAME BACK TO THE FILE OF ASSESSING OFFICER FOR FRES H ADJUDICATION IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASON ABLEOPPORTUNITY OF BEING HEARD TO THE ASSESSEE 58. WE HAVE GONE THROUGH THE ARGUMENTS PUT BEFORE U S. THE DIRECTIONS GIVEN BY THE ITAT AFTER DETAILED REASONING TO THE ASSESSI NG OFFICER WAS TO SUPPORT THE ESTIMATE WHILE DISALLOWING 50% OF THE CLAIM OF THE ASSESSEE AND ALSO TO THE ASSESSEE TO FILE THE DETAILS OF COMPLETED SECTORS A ND UNCOMPLETED SECTORS WHICH IT IS OBSERVED HAVE NOT BEEN FOLLOWED BY BOTH THE PARTIES. 59. THE MAIN CONTENTION OF THE ASSESSING OFFICER IS THAT THE MAINTENANCE IS BEING CLAIMED IN CASES WHERE SECTORS ARE MORE THAN 20 YEARS BUT HAVE NOT BEEN HANDED OVER TO LOCAL AUTHORITIES NEED NOT BE M AINTAINED BY THE ASSESSEE WHICH THE ASSESSEE COULD NOT EXPLAINED COGENTLY. SI MILARLY NO EXPLANATION HAS BEEN GIVEN RATHER RATIONAL TO CLAIM EXPENDITURE REG ARDING THE SECTORS WHICH ARE INCOMPLETE AND THERE IS NO RATIONALE TO CLAIM THE E XPENDITURE PERTAINING TO INCOMPLETE SECTORS AS EACH SECTOR IS CONSIDERED AS A PROJECT BY ITSELF. THE ASSESSEE HAS GROSSLY FAILED TO GIVE A BREAKUP OF TH E DEVELOPMENT AND MAINTENANCE EXPENDITURE WITH REGARD TO COMPLETED AN D NON COMPLETED SECTORS WHICH GOES TO DETERMINE THE MAINTENANCE CHA RGES. HENCE IT IS DIRECTED TO THE ASSESSEE TO FURNISH THE DETAILS OF COMPLETED AND INCOMPLETE SECTORS, EXPENSES INCURRED FOR DEVELOPMENT, EXPENSES INCURRE D IN MAINTENANCE SEPARATELY IN DETAIL TO THE ASSESSING OFFICER TO D ETERMINE THE ALLOWABLE EXPENDITURE, FAILING WHICH THE ASSESSEE WOULD BE A LLOWED THE EXPENDITURE OF MAINTENANCE EXPENSES ONLY ON PRO -RATA BASIS. 60. THE APPEAL OF THE ASSESSEE ON THIS GROUND IS TR EATED AS ALLOWED FOR STATISTICAL PURPOSES. FORFEITURE OF SECURITY 61. GROUND NO. 7 FOR THE ASSESSMENT YEARS 2004-05 AND GROUND NO. 8 FOR ASSESSMENT YEAR 2006-07 OF THE ASSESSEE RELATES TO FORFEITURE OF SECURITY. 62. THE ASSESSEE HAS SHOWN AN AMOUNT OF RS. 8,67,58 ,348/- (FOR AY 2006-07) ON ACCOUNT OF RECEIPT FROM FORFEITURE OF SECURITY. HOW EVER IN THE COMPUTATION OF 60 INCOME THE SECURITY FORFEITED WAS REDUCED FROM THE INCOME RETURNED. THE ASSESSING OFFICER MADE ADDITION OF THE AMOUNT FORFE ITED WHICH WAS UPHELD BY THE LD.CIT(A). 63. BEFORE US THE LD. AR ARGUED THAT WHILE FLOATIN G THE SECTOR, 10% OF THE TOTAL AMOUNT OF A PARTICULAR PLOT OFFERED FOR DRAW IS REC EIVED AS EARNEST MONEY AND AFTER DRAW OF THAT PARTICULAR SECTOR WHOLE OF THE 1 0% AMOUNT TAKEN AS EARNED MONEY IS REFUNDED TO UNSUCCESSFUL APPLICANTS AND FR OM SUCCESSFUL APPLICANTS/ALLOTTEE 15% MORE AMOUNT S DEMANDED WHIC H IS REQUIRED TO BE DEPOSITED IN HUDA OFFICE WITHIN 30DAYS OF ALLOTMENT LETTER. IF THE ALLOTTEE FAILS TO DEPOSIT THE NEXT INSTALMENT OF 15% WITH IN TIME, TH E 10% OF THE EARNEST MONEY FORFEITED BY THE HUDA. THE AMOUNT SHOWS IN ESTATE O FFICES COMPRISES OF AS SECURITY FORFEITED INCLUDE 10% EARNEST MONEY FORFEI TED OF SUCCESSFUL ALLOTTEE ON DEFAULT. OFFICE WISE DETAIL OF SECURITY FORFEITED I S ENCLOSED AT ANNEXURE B. IN CASE THE PLOT IS RESUMED DUE TO NON PAYMENT OF COST OF T HE PLOT OR DUE TO NON CONSTRUCTION OF PLOT, 10% OF THE ONSIDERTION MONEY IS FORFEITED WHICH IS BOOKED UNDER THIS HEAD. SIMILARLY IF THE PLOT IS SURRENDER ED BY THE ALLOTTEE, 10% OF THE AMOUNT IS FORFEITED AND BALANE AMOUNT IS REFUNDED T O THE ALLOTTEE. THIS AMOUNT IS ALSO BOOKED UNDER THIS HEAD. THE 10% AMOUNT SO F ORFEITED IS A PART OF PROJECT/SECTOR AND IS TO BE DEDUCTED OUT OF THE TOT AL COST OF THE PROJECT. THEREFORE, IT IS NOT AN REVENUE INCOME AND IS TO BE TREATED AS CAPITAL RECEIPT. 64. THE LD. AR RELIED ON THE ORDERS OF LD. CIT(A) A ND THE ORDER OF ITAT FOR THE AY 2003-04. 65. IT IS NOTED THAT THE COORDINATE BENCH OF ITAT C HANDIGARH WHILE ADJUDICATING A SIMILAR DISALLOWANCE FOR THE A.Y. 20 03-04 IN APPELLANTS OWN CASE HAS UPHELD THE DISALLOWANCE SO MADE OBSERVING THAT THE ASSESSEE IS NOT ENGAGED IN ANY AGRICULTURAL ACTIVITY AND THERE WAS NO BASIS OR ANY COGENT REASON TO CONSIDER THE CURRENT INCOME IN FUTURE. 66. WHILE ADJUDICATING THE ISSUE THE COORDINATE BEN CH OF ITAT CHANDIGARH OBSERVED AS UNDER: 9. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES IT IS NOTICED THAT THE ASSESSEE ACCOUNTED FOR THE AMOUNT OF FORFEITED SECU RITY IN THE P&L ACCOUNT BY FOLLOWING THE CASH SYSTEM OF ACCOUNTING. THE AMOUNT WAS FORFEITED WHEN THE ALLOTTEES OR THE APPLICANTS DID NOT FULFILL THE REL EVANT CONDITIONS. IT IS NOT THE CASE OF THE ASSESSEE THAT THE FORFEITURE WAS NOT MADE DU RING THE YEAR UNDER CONSIDERATION. IT IS ALSO NOT THE CASE THAT THE AMO UNT SO FORFEITED WAS UTILIZED TO DEVELOP THE SECTORS OR TO MAKE IMPROVEMENT IN OTHER PLOTS. THE PLOTS FOR WHICH THE SECURITIES WERE FORFEITED WERE NOT SHOWN AT LES SER VALUE BY ADJUSTING THE 61 FORFEITED AMOUNT IN THE CLOSING STOCK. THEREFORE IT CANNOT BE SAID THAT THERE WAS ANY LINK OF THE SECURITY FORFEITED WITH THE PLOTS S HOWN IN THE CLOSING STOCK SO THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE AMOUNT OF SECURITY HAD BEEN REDUCED FROM THE VALUE OF THE CLOSING STOCK AN D HAD BEEN DULY ACCOUNTED FOR IN THE PROFITS IN THE FOLLOWING YEARS WHICH ACC RUED TO THE ASSESSEE AT THE TIME OF SALE OF THOSE PLOTS IS NOT ACCEPTABLE BECAUSE TH E AMOUNT WAS NOT REDUCED BY THE ASSESSEE IN THE VALUE OF THE CLOSING STOCK RATH ER IT WAS SHOWN AS INCOME IN THE P&L ACCOUNT HOWEVER WHILE FILING THE RETURN OF INCO ME THE AMOUNT WAS REDUCED FROM THE INCOME IN THE COMPUTATION OF INCOME. WE AR E THEREFORE OF THE VIEW THAT THE ASSESSING OFFICER RIGHTLY MADE THE ADDITION AND THE LD. CIT(A) WAS FULLY JUSTIFIED IN CONFIRMING THE ADDITION MADE BY THE AS SESSING OFFICER. 67. ON CAREFUL CONSIDERATION OF THE FACTS OF THE CA SE AND KEEPING IN VIEW THE DECISION OF COORDINATE BENCH OF ITAT IN APPELLANTS OWN CASE IN ITA NO. 742/CHD/2007 FOR A.Y. 2003-04, THE ADDITION MADE BY THE ASSESSING OFFICER IS HEREBY UPHELD. SALE OF PLANTS 68. GROUND NO. 8 FOR THE ASSESSMENT YEARS 2004-05 AND 2007-08 AND GROUND NO. 9 FOR THE ASSESSMENT YEAR 2006-07OF THE ASSESSE E , RELATES TO DISALLOWANCE ON ACCOUNT OF SALE OF PLANTS. 69. THE ASSESSING OFFICER WHILE FRAMING THE ASSESSM ENT NOTED THAT THE ASSESSEE HAS SHOWN INCOME FROM SALE OF PLANTS GRASS AND TREES AND CLAIMED IT AS AGRICULTURE INCOME. THE ASSESSEE CONTENDED THAT THE RECEIPT WOULD BE SHOWN WHEN THE LAND FROM WHICH THE INCOME HAS BEEN DERIVE D IS SOLD. THE LD. CIT(A) ALSO REJECTED THE ASSESSEES CONTENTION THAT THE INC OME IS TO BE TAXABLE DURING THE YEAR IN WHICH THE RECEIPT FROM SALE OF GRASS AN D PLANTS HAS BEEN RECEIVED. 70. BEFORE US THE AR ARGUED THAT THE PLANTS GRASS A ND TREES WERE STANDING ON BARE UNDEVELOPED LAND ON WHICH THE SECTORS YET TO B E CARRIED WERE TO BE SOLD AND SINCE THE BARE LAND RELATED TO INCOMPLETE SECTO R THE INCOME FROM THOSE COULD NOT BE SHOWN AS REVENUE INCOME AS PER THE POL ICY FOLLOWED BY THE ASSESSEE CONSISTENTLY SINCE ITS INCEPTION INSTEAD T HE REALIZATION MADE FROM SALE OF PLANTS GRASS AND TREES WAS REDUCED FROM THE COST OF ACQUISITION OF PLOT. IT WAS FURTHER STATED THAT SINCE THE COST OF ACQUISITION O F LAND GOT REDUCED RESULTING IN PROFIT ELEMENT GETTING BUILD IN IMMEDIATELY BUT IT WAS REALIZED ONLY WHEN THE LAND WAS TO BE SOLD IN THE FORM OF COMPLETE SECTORS I.E. AFTER A PERIOD OF 20YEARS THIS ADDITION WAS UNJUSTIFIED, ILLEGAL AND HAS NO B ASIS. 71. IT IS NOTED THAT THE COORDINATE BENCH OF ITAT C HANDIGARH WHILE ADJUDICATING A SIMILAR DISALLOWANCE FOR THE A.Y. 20 03-04 IN APPELLANTS OWN CASE 62 HAS UPHELD THE DISALLOWANCE SO MADE OBSERVING THAT THE ASSESSEE IS NOT ENGAGED IN ANY AGRICULTURAL ACTIVITY AND THERE WAS NO BASIS OR ANY COGENT REASON TO CONSIDER THE CURRENT INCOME IN FUTURE. ON CAREFUL CONSIDERATION OF THE FACTS OF THE CASE AND KEEPING IN VIEW THE DECISION OF COORDINATE BENCH OF ITAT IN APPELLANTS OWN CASE IN ITA NO. 742/CHD/2007 FOR A.Y. 2003-04, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS HEREB Y UPHELD. 72. THE GROUND OF APPEAL IS DISMISSED. CONTRIBUTION TO IAG 73. GROUND NO. 9 FOR THE ASSESSMENT YEARS 2004-05, 2006-07, 2007-08 OF THE ASSESSEE RELATES TO DISALLOWANCE OF CONTRIBUTION TO IAG. 74. THE ASSESSING OFFICER MADE AN ADDITION OF RS. 9 ,50,000/- UNDER THE HEAD IAG EXPENSES. THE AMOUNT HAS BEEN CLAIMED AS CONTRI BUTION GIVEN TO INDUSTRIAL ASSISTANCE GROUP (IAG) SET UP BY THE GOVT. OF HARYA NA FOR IMPROVING THE INDUSTRIAL ENVIRONMENT IN THE STATE BY PROVIDING EX PEDITIOUS AND SINGLE WINDOW SERVICE TO THE ENTREPRENEUR DESIROUS OF SETTING UP INDUSTRY IN THE STATE. 75. THE ASSESSEE HAS JUSTIFIED THE EXPENDITURE STAT ING THAT THE SAME HAS BEEN SPENT FOR THE PROMOTION OF THE BUSINESS OF THE APPE LLANT. IT HAS BEEN STATED THAT THE CONTRIBUTION TO THE IAG IS IN THE NATURE OF PUB LICITY EXPENDITURE INCURRED WITH A VIEW TO SHOW CASE THE ACTIVITIES OF THE ASSESSEE AND IS THUS ATTRIBUTABLE TO THE BUSINESS ACTIVITIES OF THE APPELLANT. 76. IT IS NOTED THAT THE COORDINATE BENCH OF ITAT C HANDIGARH WHILE ADJUDICATING A SIMILAR DISALLOWANCE FOR THE A.Y. 20 03-04 IN APPELLANTS OWN CASE HAS UPHELD THE DISALLOWANCE SO MADE OBSERVING THAT THE ASSESSEE IS NOT GETTING ANY DIRECT BENEFIT FROM THE IAG AND THE PAYMENT HAS BEEN MADE VOLUNTARILY. ON CAREFUL CONSIDERATION OF THE FACTS OF THE CASE A ND KEEPING IN VIEW THE DECISION OF COORDINATE BENCH OF ITAT IN APPELLANTS OWN CASE IN ITA NO. 742/CHD/2007 FOR A.Y. 2003-04, THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER IS HEREBY UPHELD. 77. THE GROUND OF APPEAL IS DISMISSED. PAYMENT TO PENSION AND GRATUITY FUND 78. THE APPLICATION FOR REGISTRATION OF THE GRATUIT Y FUND HAS BEEN MADE ON 03/08/2004. SINCE THE FUND WAS NOT RECOGNIZED DURIN G THE ASSESSMENT YEAR THE 63 ASSESSING OFFICER HAS DISALLOWED THE AMOUNT CLAIMED AND THE SAME ADDITION HAS BEEN CONFIRMED BY THE LD. CIT(A). SINCE THE FUN D WAS RECOGNIZED WITH EFFECT FROM 20/01/2004 THE ASSESSING OFFICER HAS DI RECTED TO VERIFY THE BARE FACTS OF APPROVAL OF THE FUND AND ALLOW ACCORDINGLY IF FO UND THAT THE RETROSPECTIVE EFFECT HAS BEEN ALLOWED BY THE CIT(A). DONATION 79. GROUND NO. 11 OF THE ASSESSMENT YEAR 2004-05 NO T PRESSED. INTEREST TO NCR PLANNING BOARD 80. GROUND NO. 6 FOR THE ASSESSMENT YEARS 2006-07, 2007-08, 2008-09 AND GROUND NO. 5 FOR THE ASSESSMENT YEARS 2009-10, 201 0-11 AND 2011-12 OF THE ASSESSEE RELATES TO DISALLOWANCE OF INTEREST PAID T O NCR PLANNING BOARD. 81. THE ASSESSEE HAS SHOWN A PAYMENT OF INTEREST ON LOANS PAID TO NCR PLANNING BOARD WHICH WAS DISALLOWED. THE LD. CIT(A) UPHELD THE ADDITION ON THE GROUNDS THAT THE STATUTORY AUDITORS HAVE OBSERVED A GAINST THE CLAIM OF DEBITING INTEREST TO P&L ACCOUNT. THE LD. CIT(A) HELD THAT S INCE THE LOAN HAS BEEN TAKEN FOR DEVELOPMENT WORK THE INTEREST SHOULD HAVE BEEN CAPITALIZED. 82. BEFORE US THE LD. AR ARGUED THAT THE LOAN FROM NCR PLANNING BOARD WAS TAKEN FOR PURCHASE OF LAND AND FOR PROPAGATING THE BUSINESS OF THE ASSESSEE. THE LOAN IS IN THE NATURE OF WORKING CAPITAL LOAN T O PROCURE STOCK AND DEAL IN STOCK. SINCE THE INTEREST IS AN WORKING CAPITAL LOA N IT IS AN ALLOWABLE EXPENDITURE AS PER PROVISIONS OF SECTION 36 OF THE INCOME TAX A CT. THE AR FURTHER ARGUED THAT THE NCR PLANNING BOARD IS FINANCING PROJECTS IN THE REGION THROUGH CENTRAL & STATE PLAN FUNDS AND THE LOAN IS UTILIZED BY THE AS SESSEE FOR THE PURPOSES OF BUSINESS CARRIED ON BY THE ASSESSEE ON THE ACTIVITI ES OF ACQUISITION AND DEVELOPMENT OF LAND. 83. THE LD. DR STRONGLY RELIED ON THE ORDER OF LD. CIT(A). 84. WE HAVE HEARD THE RIVAL CONTENTION AND FIND THA T THE LOAN HAS BEEN RECEIVED FROM NCR PLANNING BOARD WHICH IS MEANT FOR ACQUISITION AND DEVELOPMENT OF LAND AND AS PER SECTION 36(1)(III) T HE INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF THE BUSINESS HAS TO BE ALLOWED. IN THE ABSENCE OF ANY CONTRARY FINDING BY THE REVENUE THAT THE FUNDS HAVE NOT BEEN USED FOR THE BUSINESS PURPOSE, THE DISALLOWANCE MADE IS LIABLE T O BE DELETED. 64 DEMARCATION / SURVEY EXPENSES 85. GROUND NO. 11 FOR THE ASSESSMENT YEARS 2006-07 , GROUND NO. 10 FOR THE ASSESSMENT YEAR 2007-08, GROUND NO. 8 FOR THE ASSE SSMENT YEARS 2008-09, GROUND NO. 7 FOR THE ASSESSMENT YEARS 2009-10, 2010 -11, 2011-12, 2012-13 AND GROUND NO. 06 FOR THE ASSESSMENT YEAR 2013-14 AND 2 014-15 OF THE ASSESSEE RELATES TO DISALLOWANCE OF DEMARCATION / SURVEY EXP ENSES. 86. THE ASSESSEE HAS CLAIMED EXPENDITURE ON ACCOUNT OF DEMARCATION / SURVEY, THIS AMOUNT WAS INCURRED FOR MARKING OF THE PLOTS AND MAPPING OF THE AREA WHILE AND BEFORE HANDING OVER OF THE PLOTS. TH E ASSESSING OFFICER HAS TREATED THIS EXPENDITURE AS CAPITAL EXPENDITURE. 87. THE LD. CIT(A) HAS CONFIRMED THE ADDITION. 88. BEFORE US THE LD. AR ARGUED THAT AT THE TIME OF ALLOTMENT OF PLOT DEMARCATION IS NOT DONE PHYSICALLY ON THE GROUND BU T BASED ON THE SURVEY MAPS AND LAND RECORDS. AT THE TIME OF HANDING OVER THE POSSESSION OF THE PLOT THE DEMARCATION MEASURING THE SIZE OF PLOT AS PER T HE ALLOTMENT IS DONE. ACCORDINGLY THE EXPENDITURE INCURRED ON SUCH ACTIVI TIES ARE DEBITED UNDER DEMARCATION / SURVEY EXPENDITURE. IT WAS ARGUED THA T THESE ARE PURELY INCIDENTAL TO THE BUSINESS AND THIS EXPENDITURE IS ROUTINE EXPENDITURE AND SHOULD BE ALLOWED AS REVENUE EXPENDITURE. ONCE THE DEMARCA TION IS COMPLETED THEN ONLY THE ALLOTTEE WOULD BE ABLE TO START THE CONSTR UCTION ON THE PLOT. 89. LD. DR ARGUED THAT THIS EXPENDITURE IS TO BE RE LATABLE TO COMPLETED SECTORS BUT THE SAME DOES NOT APPEAR TO BE CORRECT AS PER THE ACCOUNTING POLICY FOLLOWED BY THE APPELLANT. A PROJECT IS TREA TED COMPLETED ONLY AFTER 20 YEARS OF ITS LAUNCH. THE PLOTS ARE HANDED OVER TO T HE ALLOTTEES SOON AFTER ALLOTMENT AND IN ANY CASE NOT MORE THAN 5 YEARS AFT ER THE ALLOTMENT. THEREFORE, THE APPELLANTS CONTENTION THAT THE EXPENDITURE REL ATES TO COMPLETED PROJECTS IS NOT PRIMA FACIE ACCEPTABLE. THEREFORE THE SAME NEED S TO BE REJECTED. 90. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE SURVEY AND DEMARCATION IS AN ONGOING , CONTINUOUS EXERCISE BEING UNDERTAKEN BY THE ASSESSEE. THE PLOTS HAVE TO BE PHYSICALLY MARKED BEFORE HANDING OVER TO THE ALLOTTEES WHICH REQUIRES PROPER SURVEY AND LINING OF CONTOURS. SINCE THE ALLOTMENT OF PLOTS IS A REGULAR AND RECURRING ACTIVITY SO AS THE 65 EXPENSES INCURRED HENCE THE EXPENSES ARE TO BE ALLO WED AS REVENUE EXPENDITURE. 91. AS A RESULT THIS GROUND OF ASSESSEE IS ALLOWED. CONTRIBUTION TO DELHI METRO 92. GROUND NO. 12 FOR THE ASSESSMENT YEARS 2006-07 , GROUND NO. 11 FOR THE ASSESSMENT YEAR 2007-08, GROUND NO. 9 FOR THE ASSE SSMENT YEARS 2008-09, GROUND NO. 6 FOR THE ASSESSMENT YEARS 2009-10, 2010 -11, 2011-12, 2012-13 AND GROUND NO. 10 FOR THE ASSESSMENT YEAR 2014-15 OF TH E ASSESSEE RELATES TO CONTRIBUTION TO DELHI METRO 93. THE EXPENDITURE CLAIMED ON ACCOUNT OF CONTRIBUT ION WAS DISALLOWED TREATING THE SAME AS NOT FOR THEIR BUSINESS IN ALL THE YEARS FROM AY 2006-07 ONWARDS. THE ORDER OF CIT(A) FOR 2007-08 --HOLDING THE ADDITION WAS ADJUDICATED FIRST AND WAS FOLLOWED BY CIT(A) IN ALL THE YEARS. 94. BRIEF FACTS DURING THE YEAR, THE ASSESSEE HAS C LAIMED AN EXPENDITURE OF RS, 71,17,55,000/- UNDER THE HEAD 'GRANT FOR EXTENSION OF DELHI METRO TO GURGAON'. THIS AMOUNT HAS BEEN PAID TO DELHI METRO RAILWAY CO RP. FOR THE METRO PROJECT AT GURGAON. THE ASSESSEE WAS ASKED TO GIVE DETAILS REG ARDING GRANT FOR EXTENSION OF DELHI METRO TO GURGAON AND THE BASIS ON WHICH IT HAS BEEN CLAIMED AS AN EXPENDITURE DURING THE YEAR. NO REPLY WAS FURNISHED BY THE ASSESSEE IN THIS REGARD. BEFORE THE AO IN ABSENCE OF ANY JUSTIFICATI ON REGARDING CLAIM OF THE ASSESSING OFFICER TREATED THIS EXPENDITURE AS NON-B USINESS EXPENSE AND DISALLOWED. 95. LD. CIT(A) HELD THAT THE PROVISION OF METRO OR OTHER TRANSPORT SERVICES IN GURGAON IS NEITHER THE RESPONSIBILITY OF THE APPELL ANT NOR ONE OF THE OBJECTS FOR WHICH IT HAS BEEN CONSTITUTED. 96. BEFORE US THE LD. AR ARGUED THAT MAKING OF THE ACCESS TO ROADS TO THE AREAS BEING DEVELOPED BY HUDA WITHIN THE CITY IS DE FINITELY THE FUNCTION OF HUDA, THE EXPENSE FOR WHICH IS TO BE BOOKED UNDER T HE HEAD EDC. IT WAS ARGUED THAT HUDA HAS BEEN CONSTITUTED BY THE GOVERN MENT OF HARYANA AS PER SECTION 3 OF THE HARYANA URBAN DEVELOPMENT AUTHORIT Y ACT, 1977 66 THE OBJECTS & FUNCTIONS OF THE AUTHORITY ARE ENVISA GED U/S 13 OF THE ACT WHICH PROVIDES THAT THE OBJECTS OF THE AUTHORITY SHALL BE TO PROMOTE AND SECURE THE OBJECTS AND DEVELOPMENT OF ALL OR ANY OF THE AREAS COMPRISED IN THE URBAN AREA AND FOR THAT PURPOSES TO PROVIDE OTHER SERVICES AND AMENITIES AND GENERALLY TO DO ANYTHING, WITH THE PRIOR APPROVAL, OR ON DIRECTI ON, OF THE STATE GOVERNMENT FOR CARRYING OUT THE PURPOSES OF THIS ACT. AMENTIES HAS BEEN DEFINED IN SECTION 2(A)AS UNDER:- 'AMENTIES' INCLUDES ROADS, WATER-SUPPLY, STREET-LIG HTING, DRAINAGE, [SEWERAGE, TREATMENT AND DISPOSAL OF SEWERAGE, SULLAGE AND STO RM WATER] PUBLIC WORKS, TOURIST SPOTS, OPEN SPACES, PARKS, LANDSCAPING AND PLAY FIELDS, AND SUCH OTHER CONVENIENCES AS THE STATE GOVERNMENT MAY, BY NOTIFI CATION, SPECIFY TO BE AN AMENITY FOR THE PURPOSES OF THIS ACT; SECTION 21 OF THE HUDA ACT PROVIDES THAT THE FUNDS OF THE AUTHORITY SHALL BE APPLIED TOWARDS MEETING EXPENDITURE FOR SUCH OTH ER PURPOSES WHICH THE STATE GOVERNMENT MAY DIRECT OR PERMIT. 97 THE LD. AR ARGUED THAT THE EXPENDITURE ON METRO PROJECT HAS BEEN INCURRED BY HUDA ON THE DIRECTIONS OF THE STATE GOV T, AND THE ASSESSEE HAS NOT ACQUIRED ANY PROPERTY.THE EXPENDITURE ON THE PROJEC T HAS BEEN SHARED BY STATE GOVERNMENT OF HARYANA, HUDA & FISIIDC. THUS, THE AS SESSEE HAS INCURRED ONLY A PART OF THE TOTAL EXPENDITURE.THE EXPENDITURE WAS I NCURRED FOR THE PURPOSE OF PROVIDING BETTER INFRASTRUCTURE FACILITIES, BETTER '& FASTER APPROACH TO THE SECTORS DEVELOPED BY HUDA I.E. FOR FACILITATING THE TRANSPO RTATION FOR THE PEOPLE LIVING IN THE AREAS DEVELOPED BY HUDA.THE EXPENDITURE INCURRE D IS DIRECTLY IN RELATION TO THE BENEFIT BEING DRAWN BY THE ASSESSEE CONSIDERING THE FACT SAME WOULD ASSIST THE MOVEMENT OF PEOPLE LIVING IN THE AREA, UPGRADIN G THE QUALITY AND FACILITATE THE TRADE & PROFESSION OF THE PEOPLE AND THUS IS DI RECTLY RELATED TO THE OBJECT OF CONSIDERING THE BUSINESS EXPEDIENCY. THE ASSESSEE I S INVOLVED IN ACTIVITIES OF PURCHASING LAND, DEVELOPING IT I.E. ERECTING CERTAI N BASIC INFRASTRUCTURE SUCH AS ROADS ETC. CARVING OUT PLOTS AND DELIVERING THEM TO PUBLIC AT LARGE. THEREFORE THE EXPENDITURE INCURRED BEING DIRECTLY RELATED TO THE BUSINESS OF THE ASSESSEE IS AN ALLOWABLE EXPENDITURE. MOREOVER, SINCE THE ASSESSE E IS NOT ACQUIRING ANY ASSETS, THE EXPENDITURE INCURRED CANNOT BE HELD AS CAPITAL EXPENDITURE. 97.1 THE LD. AR RELIED ON THE RATIO OF THE FOLLOWIN G CASES: GLADA VS. ADDL. CIT 39 ITR 100 (CHD TRI) L. H. SUGAR FACTORY MILLS (P) LTD. VS. CIT 125 ITR 293 (S.C.) PANIPAT COOP. SUGAR MILLS LTD. VS. CIT 108 ITR 111 (P&H) CIT VS. DART MANUFACTURING INDIA (P) LTD. 175 TAXMA NN 6 (DEL.) INCOME TAX OFFICER VS. VELUMANICKAM LODGE (2010) 12 3 ITD 25 CHENNAI NATIONAL ALUMINUM CO LTD. VS DCIT101 TTJ 948 (CUTTU CK) SRI VENKATA SATYANARAYNA RICE MILL CONTRACTORS CO. VS. COMMISSIONER OF INCOME TAX 98. LD. DR STRONGLY RELIED ON THE ORDER OF THE CI T(A). 67 99. THE FACTS OF THE CASE HAVE BEEN PERUSED. THE CO NTRIBUTION TO DELHI METRO CAN BE TREATED AS STEP IN FURTHERANCE OF THE BUSINE SS OF THE ASSESSEE AS IT IMPROVES THE ACCESSIBILITY AND FACILITIES FOR THE P UBLIC AT LARGE AND INCREASES THE DEMAND OF THE LAND AND PLOTS OF THE ASSESSEE. CERTA INLY THE CONNECTIVITY BY THE METRO LINE WILL CERTAINLY ENHANCED THE BUSINESS OF THE ASSESSEE AND INCREASES THE MARKETABILITY OF THE PLOTS. THE CONTRIBUTION TO THE METRO IS AKIN TO CONSTRUCTION OF THE ROAD WHICH WILL BE USED BY THE RESIDENTS APPROA CHING THROUGH THE ROAD HENCE THE EXPENDITURE CAN BE TREATED AS AN ALLOWABL E EXPENDITURE LAID DOWN FOR WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE . 100. THE APPEAL OF THE ASSESSEE ON THIS GROUND IS T REATED AS ALLOWED. SALARY TO PF STAFF 101. GROUND NO. 12 OF THE APPEAL OF THE ASSESSEE FO R THE ASSESSMENT YEARS 2007-08 RELATES TO DISALLOWANCE ON ACCOUNT OF RS. 50,00,000/-. 102. THE ASSESSEE HAS NOT PRESSED THIS GROUND BEFOR E US THEREFORE NEED NO ADJUDICATION ON THIS GROUND. DISALLOWANCE OF ADVERTISEMENT ON BUSES: 103. GROUND NO. 13 OF THE APPEAL OF THE ASSESSEE FO R THE ASSESSMENT YEARS 2007-08 RELATES TO DISALLOWANCE ON ACCOUNT OF ADVE RTISEMENT EXPENSES ON BUSES OF RS. 6,000,0000/-. 104 BRIEF FACTS ARE THAT THE ASSESSEE HAS PAID RS. 6 CRORES TO TRANSPORT DEPARTMENT HARYANA FOR THE PURCHASE OF CNG BUSES AN D THE SAME WAS DEBITED TO P&L ACCOUNT UNDER THE HEAD ADVERTISEMENT EXPENSE S. IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT THIS AMOUNT WAS GIVEN TO THE T RANSPORT DEPARTMENT FOR THE PURCHASE OF BUSES WITH THE CONDITION THAT BUSSES WI LL CARRY MESSAGES AND ADVERTISEMENT OF HUDA. NO DOCUMENT OF CONTRACT WITH THE TRANSPORT DEPARTMENT HAS BEEN MADE AVAILABLE TO THE ASSESSING OFFICER LEADING TO DISALLOWANCE OF THE AMOUNT OF RS. 6 CRORES. 105. LD. CIT(A) HAS UPHELD THE DISALLOWANCE ON THE GROUNDS THAT I. THE PROVISION OF TRANSPORT FACILITY WITHIN THE CITI ES CARVED OUT BY THE APPELLANT IS NOT THE RESPONSIBILITY OF THE APPELLAN T BUT OF THE CONCERNED DEPARTMENT, II. IT IS ALSO NOT ONE OF THE ACTIVITIES FOR WHICH THE APPELLANT IS CONSTITUTED, III. MAKING OF ACCESS ROADS TO THE AREAS BEING DEVELOPED BY HUDA WITHIN THE CITY IS DEFINITELY THE RESPONSIBILITY OF HUDA, THE EXPENSE FOR WHICH IS TO BE BOOKED UNDER THE HEAD EDC. BUT THE PROVISION OF BUSES TO B E RUN AS PART OF LOCAL TRANSPORT SYSTEM CAN BY NO STRETCH OF IMAGINATION BE TREATED AS RESPONSIBILITY OF HUDA. THE 68 EXPENDITURE INCURRED ON BUSES THEREFORE CANNOT BE T ERMED AS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. RELIANCE PLACED BY THE AS SESSEE ON FOLLOWING CASES IS MISPLACED: (I) ADANI EXPORT LTD. VS JCIT(2014) 39CCH 140 AHD TRIB FACTS OF THAT CASE ARE ENTIRELY DIFFERENT AS EXPENSES WERE MADE ON CRICKET PAVILLION, (II) DCIT VS. COOPERATIVE SUGARS LTD. (2003) 84 ITD237 ( COCH) FACTS OF THAT CASE ARE ENTIRELY DIFFERENT AS EXPENSES WERE MADE O N CEMENT LINING OF RIGHT BANK CANAL, AND (III) HONDA SIEL POWER PRODUCTS LTD. VS DCIT(2007) 112 TTJ 0702 FACTS OF THAT CASE ARE ENTIRELY DIFFERENT AS EXPENSES WERE M ADE ON VENDORS WHO WILL SUPPLY THE ASSESSEE MOULD AND DIES. 106. BEFORE US THE ASSESSEE HAS ARGUED THAT THE AMO UNT OF RS. 6 CRORES HAS BEEN PAID SO THAT THE BUSSES WILL CARRY ADVERTISEME NT OF HUDA. IT WAS ALSO APPROVED BY THE CHIEF MINISTER OF HARYANA TO CHARGE THIS AMOUNT TO ADVERTISEMENT EXPENSES. THE LD. AR ARGUED THAT NO A SSET WAS CREATED NOR ANY BENEFIT OF LASTING NATURE WAS BROUGHT INTO EXISTENC E. IT WAS ARGUED THAT THOUGH HUDA DID NOT HAVE ANY OWNERSHIP RIGHT ON THE BUSSES THE FACT CANNOT BE DENIED THAT THE BUSSES HAD TO BE RUN IN THE AREAS C REATED BY HUDA AND THE BENEFITS HAVE BEEN DRAWN BY HUDA ITSELF. THUS, IT B ECOMES AN INFRASTRUCTURE SUPPORT FOR THE PEOPLE LIVING IN THE AREA WHICH IS CLEARLY COVERED UNDER THE SCOPE AND OBJECTS FOR WHICH THE ORGANIZATION HAS BE EN CREATED. 107. THE LD. DR SUPPORTED THE ORDER OF THE LD. CIT( A) AND SUBMITTED WRITTEN SUBMISSIONS REITERATING THE RATIO LAID DOWN BY THE LD. CIT(A). 108. WE HAVE PERUSED THE MATTER AND ALSO THE ORDER SHEET AND THE APPROVAL PLACED BEFORE US. 69 FROM THE PERUSAL OF THE ABOVE IT IS OBSERVED THAT T HE BUSSES HAVE BEEN PURCHASED BY TRANSPORT DEPARTMENT OF HARYANA AND IT WAS ALLOWED TO BE CHARGED TO ADVERTISEMENT EXPENSES. ONE TIME FUNDS T O BE PROVIDED BY HUDA AFTER WHICH THE FACILITY MAY BE EXTENDED THROUGH PR IVATE OPERATORS. 109. ON GOING THROUGH THE ABOVE EVENTS IT CAN BE SA ID THAT WHILE SPENDING IS THE PREROGATIVE OF THE ASSESSEE, WHETHER IT MAKES T HE EXPENDITURE ELLIGIBLE UNDER THE HEAD OF ALLOWABLE EXPENDITURE OR NOT, IS TO BE DECIDED ON THE FACTS OF THE CASE AS THERE IS NO CLEAR CUT TEST ON THE BASE OF EXPENDITURE WHICH MAY BE DISTINGUISHED FROM REVENUE EXPENDITURE OR OTHERWISE . THE QUESTION HAS TO BE DECIDED FROM THE PRACTICAL AND BUSINESS POINT OF VI EW. IN THE INSTANT CASE WHETHER FUNDING THE PURCHASE OF BUSSES SO THAT ADVE RTISEMENT CAN BE HAD ON THIS BUSES PURCHASED DOESNT FIT ON THE LINES OF EX PENDITURE INCURRED FULLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. AFTER PAYING THE AMOUNTS THE ASSESSEE HAS NOT EVEN GOT THE OWNERSHIP OF THE BUSE S WHICH HAVE BEEN PURCHASED TOTALLY FROM THE FUNDS PROVIDED BY THE AS SESSEE. HENCE THE 70 EXPENDITURE CANNOT BE ALLOWED. IN VIEW OF THE JUDGM ENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PANIPAT SUGAR MIL LS LTD VS. CIT, 108 ITR 111 (P&H). FURTHER IN THE CASE OF L.H. SUGAR FACTORY AN D OIL MILLS PVT. VS. CIT 125 ITR 293 LTD. THE HONBLE SUPREME COURT HELD THAT THE EX PENDITURE INCURRED WHICH HAS BEEN NOT SHOWN TO BE WHOLLY AND EXCLUSIVELY LAI D OUT FOR THE PURPOSE OF ASSESSEES BUSINESS CANNOT BE HELD TO BE AN ALLOWAB LE EXPENDITURE. 110. KEEPING IN VIEW THE FACTS OF THE CASE THE DISA LLOWANCE IS HEREBY CONFIRMED. VALUE OF CLOSING STOCK 111. GROUND NO. 14 OF THE APPEAL OF THE ASSESSEE FO R THE ASSESSMENT YEARS 2007-08 RELATES TO ADDITION ON ACCOUNT OF VALUATIO N OF CLOSING STOCK OF RS. 3,25,00,000/-. 112. THE ASSESSING OFFICER TOOK NOTE OF THE COMMENT S OF THE STATUTORY AUDITORS THAT THE CLOSING STOCK OF RS. 3,25,00,000/- HAS BEE N TAKEN AS EXCESS OF EXPENDITURE OF OVER RECEIPTS IN SECTOR-14 SONEPAT W HICH HAS RESULTED IN UNDER STATEMENT OF INCOME TO THAT EXTENT. THE ASSESSEE HO WEVER INFORMED THE ASSESSING OFFICER THAT THERE WAS AN ERROR IN THE CL OSING STOCK WHICH HAS BEEN CORRECTED IN THE SUBSEQUENT FINANCIAL YEAR. HOWEVER THE SAME DID NOT HAVE ANY IMPACT ON THE INCOME OF THE APPELLANT. THE ASSESSIN G OFFICER HOWEVER REJECTED THE ASSESSEES CONTENTION IN THIS REGARD AND MADE O N ADDITION OF RS. 3.25 CRORES. 113. LD. CIT(A)CONFIRMED THE ADDITION BY HOLDING TH AT PERUSAL OF THE DETAILS FILED REVEAL THAT NET OF INCOME OVER EXPENDITURE IN EACH COMPLETED PROJECT IS TAKEN TO THE P&L ACCOUNT AS INCOME. THEREFORE BY TR EATING THE CLOSING STOCK AS EXCESS OF EXPENDITURE OVER INCOME, THE INCOME SHOWN IN THE P&L ACCOUNT AT RS. 84,60,72,183/- HAS THUS GOT REDUCED. THEREFORE, THE INCOME OF THE ASSESSEE IS UNDERSTAND BY RS. 3,25,00,000/- ON ACCOUNT OF TREAT ING THE CLOSING STOCK AS EXCESS OF EXPENDITURE OVER INCOME. 114. BEFORE US THE LD. AR ARGUED THAT THE ADDITION HAS BEEN MADE ON THE GROUNDS THAT THE CLOSING STOCK HAS NOT BEEN TAKEN I NTO FINAL ACCOUNTS OF COMPLETED SECTORS OF SECTOR 14 SONEPAT. IT WAS SUBM ITTED THAT THE OPENING STOCK WAS TO THE TUNE OF RS. 2,66,38,000/- AND DURI NG THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS SPENT ANOTHER AMOUNT OF RS. 59,06,841/- AND THE CLOSING STOCK SHOULD HAVE BEEN RS. 2,66,38,000/-. I T WAS FURTHER ARGUED THAT THE 71 SAME HAS BEEN CORRECTED IN THE SUBSEQUENT YEARS BY TAKING OPENING STOCK AT ZERO AND CLOSING STOCK AT RS. 2,66,38,000/-. 115. LD. DR HAS RELIED ON THE ORDER OF THE LOWER AU THORITIES. 116. WE HAVE PERUSED THE FACTS BEFORE US AND FIND T HAT THERE HAS BEEN ERROR IN COMPUTATION OF CLOSING STOCK WHICH NEEDS TO BE CORR ECTED IN THE INSTANT YEAR. AT THE SAME TIME THE ASSESEE WILL GET THE BENEFIT O F INCREASED OPENING BALANCE IN THE SUBSEQUENT YEARS. 117. HENCE THE APPEAL OF THE ASSESSEE ON THIS GROUN D IS DISMISSED. SALARY OF EMPLOYEES OF DEPARTMENT OF URBAN STATES 118. GROUND NO. 4 OF THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEARS 2012-13 & 2013-14 AND 2014-15 AND GROUND NO. 8 OF T HE ASSESSEE APPEAL FOR THE ASSESSMENT YEARS 2012-13, 2014-15 AND GROUND NO. 7O F THE ASSESSEE APPEAL FOR THE ASSESSMENT YEAR 2013-14 DEALS WITH DISALLOWANCE OF RS. 3,96,79,223/- AND CONFIRMING OF RS. 82,19,472/- BY THE LD. CIT(A) OUT OF THE TOTAL AMOUNT CLAIMED IN P&L ACCOUNT OF RS. 4,10,97,364/-. THUS THIS ISSUE IS INVOLVED IN REVENUE AS WELL AS ASSESSEES APPEAL. 119. DURING THE ASSESSMENT THE ASSESSING OFFICER HA S HELD THAT THE ADMINISTRATIVE EXPENSES WERE PAID TO VARIOUS EMPLOY EES OF DEPARTMENT OF URBAN ESTATES OPERATING AT HEAD OFFICE. THE ASSESSI NG OFFICER HELD THAT SINCE DEPARTMENT OF URBAN ESTATES IS A SEPARATE DEPARTMEN T OF STATE GOVERNMENT HENCE ANY JUSTIFICATION OF PAYMENT TO THOSE EMPLOYE ES CANNOT BE ACCEPTED TO. 120. LD.CIT(A) HAS RESTRICTED THE AMOUNT TO 20% ON THE GROUNDS THAT THE DISALLOWANCES OF VARIOUS CHARGES HAVE BEEN RESTRICT ED AT 20% OF EXPENSES PERTAINING TO RECOVERIES FROM ALLOTEES HENCE THE S ALARY EXPENSES REIMBURSED ARE ALSO RESTRICTED AT 20%. 121. BEFORE US THE LD. AR ARGUED THAT THE AMOUNT PE RTAINS TO SALARY OF VARIOUS EMPLOYEES & OTHER CONTINGENT EXPENDITURE OF DEPARTM ENT OF URBAN ESTATE (DUE) OPERATING AT HEAD OFFICE AND THE EMPLOYEES OF URBAN ESTATE DEPARTMENT HAD TO WORK ONLY FOR HUDA. FURTHER, DURING THE YEAR 1977 , THE VARIOUS FUNCTIONS OF THE URBAN ESTATE DEPARTMENT WERE TAKEN OVER BY H UDA, FOR WHICH IT WAS DECIDED THAT HUDA WILL INCUR EXPENDITURE ON SALARY & ALLOWANCES & OTHER CONTINGENT EXPENDITURE OF THE URBAN ESTATE. THE LD. AR FURTHER ARGUED THAT IT IS 72 NOT OUT TO PLACE TO MENTION THAT THE HUDA IS BEARIN G SUCH EXPENSES SINCE PAST SO MANY YEARS & CLAIMING THE SAME AS SUCH IN THE IN COME & EXPENDITURE ACCOUNT AND THE SAME HAVE BEEN ACCEPTED AS SUCH BY THE INCOME TAX DEPARTMENT. IT WAS ALSO ARGUED THAT MOREOVER IT IS AN EXPENDITURE ON SALARY, ALLOWANCES AND OTHER CONTINGENT EXPENDITURE ON STAF F WHICH IS ALLOWABLE AS OFFICE & ADMINISTRATIVE EXPENDITURE. THE GENUINENES S OF EXPENDITURE, QUANTUM OF EXPENDITURE IS NOT IN DOUBT NOR IT HAS BEEN HELD TO BE EXPENDITURE FOR NON BUSINESS PURPOSE. THE LD.AR FURTHER ARGUED THAT HAV ING ESTIMATED THE PROFITS ON ACCOUNT OF INDIRECT CHARGES NO SEPARATE ADDITION OR DISALLOWANCES CAN BE MADE BY THE REVENUE. 122. THE LD. CIT DR ARGUED THAT THE ASSESSEE'S CONT ENTION THAT NO SEPARATE ADDITION IS CALLED FOR WHEN INCOME HAS BEEN ESTIMAT ED IS NOT ACCEPTABLE. ASSESSEE HAS NOT FOLLOWED APPROPRIATE METHOD OF ACC OUNTING HENCE THESE EXPENSES CANNOT BE COLORED AS REVENUE EXPENSES. HE ARGUED THAT EVERY ASSESSMENT YEAR IS A SEPARATE ASSESSMENT YEAR AND P RINCIPLE OF RES-JUDICATA IS NOT APPLICABLE IN THE INCOME TAX PROCEEDINGS. FURTH ER, RELIANCE PLACED BY THE ASSESSEE I.E. HUDA ON THE FOLLOWING CASES IS NOT AP PLICABLE AS IN THE CASE OF ASSISTANT COMMISSIONER OF INCOME TAX VS. LAKSHMI IN DUSTRIES (2011) 135 TTJ (CHENNAI) FACTS ARE DIFFERENT IN THAT CASE AS COMPARED TO THE INSTANT CASE AS THAT CASE BELONGS TO SEARCH AND SEIZURE ASSESSMENT. HENCE THIS CASE IS NOT APPLICABLE, SIMILARLY IN THE CASE OF COMMISSIONER O F INCOME TAX VS. AGGARWAL ENGG. CO. (JAL.) (2006) 302 ITR (P&H) 0246 FACTS ARE DIFFERENT IN TH AT CASE AS COMPARED TO THE INSTANT CASE AS IN THAT CASE AFTER ADDITION ON THE BASIS OF NET PROFIT RATE OTHER ADDITIONS WERE MADE ON ACCOUNT OF PURCHASE AND INTRODUCTION OF CASH. HENCE THIS CASE ALSO IS NOT APPLICABLE; IN THE CASE OF COMMISSIONER OF INCOME TAX VS. SMT. SANTOSH JAIN (2008) 296 ITR 324 (P&H) FACTS ARE DIFFERENT IN THAT CASE AS COMPARED TO THE INSTANT CASE AS THAT C ASE BELONGS TO SEARCH AND SEIZURE ASSESSMENT. HENCE THIS CASE TOO IS NOT APPL ICABLE, AND IN THE CASE OF ASSISTANT COMMISSIONER OF INCOME TAX VS. SARV PRAKA SH KAPOOR (2009) 119 ITD (AGRA)(TM) 197 FACTS ARE DIFFERENT IN THAT CASE AS COMPARED TO THE INSTANT CASE AS IN THAT CASE ASSESSEE IS IN CIVIL CONSTRUCTION B USINESS, WHEREAS IN THE INSTANT CASE THE ASSESSEE IS NOT IN CONSTRUCTION BUSINESS I N TRUE SENSE. HENCE THIS CASE IS NOT APPLICABLE. THE DEPARTMENT OF URBAN ESTATE IS A SEPARATE DEPARTMENT OF STATE GOVERNMENT WORKINGS UNDER THE ADMINISTRATIVE CONTROL OF DIRECTOR GENERAL TOWN AND COUNTRY PLANNING. AO IS RIGHT THAT THE ENT IRE EXPENSE CLAIMED ON 73 ACCOUNT OF SALARY PAID TO EMPLOYEES OF DEPARTMENT O F URBAN ESTATES BY HOLDING THAT THE DEPARTMENT OF URBAN ESTATE IS A SEPARATE D EPARTMENT OF STATE GOVERNMENT WORKING UNDER THE ADMINISTRATIVE CONTROL OF DIRECTOR GENERAL TOWN AND COUNTRY PLANNING. THEREFORE THE LD. DR ARGUED T HAT THE ORDER OF THE AO IS REQUESTED TO BE RESTORED. 123. WE HAVE GONE THROUGH THE FACTS OF THE CASE AND MATERIAL ON THE RECORD. THE EMPLOYEES OF THE DEPARTMENT OF ESTATES HAVE BEE N WORKING OWING TO THE REASONS OF TRANSFER OF FUNCTIONS OVERTAKEN BY THE H UDA. SINCE THESE EMPLOYEES ARE CERTAINLY WORKING FOR HUDA FULLY AND WHOLLY IT CANNOT BE SAID THAT THE SALARIES PAID TO THE EMPLOYEES IS NOT FOR BUSINESS PURPOSE. IN THE ABSENCE OF DIVERSION OF EMPLOYEES FROM DEPARTMENT OF ESTATES, HUDA WOULD HA VE TO HIRE OUTSIDE MANPOWER AND ALSO REQUIRE TO PAY THEM ACCORDINGLY. KEEPING IN VIEW THE FUNCTIONS PERFORMED BY THE EMPLOYEES FOR HUDA THE E XPENSES OUT OF SALARY CANNOT BE TREATED AS NON BUSINESS EXPENDITURE. THE PRINCIPLE WHETHER TO ALLOW THESE EXPENDITURE ARE NOT WHEN THE PROFITS ARE ESTI MATED AND THE ARGUMENTS TAKEN BY BOTH THE PARTIES ON THIS ASPECT ARE FOUND TO BE NOT APPLICABLE IN THE PECULIARITIES OF THE FACTS EMERGING OUT OF THE ISSU E OF DRAFTING OF EMPLOYEES OF DEPARTMENT OF ESTATES TO WORK FOR HUDA. THE ADDITIO N CONFIRMED BY THE LD. CIT(A) IS HEREBY DIRECTED TO BE DELETED. TOWN PLANNING EXPENSES 124. GROUND NO. 7 OF THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2014-15 RELATES TO DISALLOWANCE OF TOWN PLANNING E XPENSES OF RS. 78,42,338/-OUT OF RS. 1,79,11,266/-. 125. THE ASSESSING OFFICER HAS DISALLOWED RS. 1,79, 11,266/- CLAIMED BY THE ASSESSEE BY TREATING THE EXPENDITURE AS CAPITAL IN NATURE. 126. THE LD. AR ARGUED THAT THESE EXPENSES RELATED TO DAY TO DAY EXPENSES OF ROUTINE NATURE AND SIMILAR EXPENSES HAD BEEN ACCEPT ED BY THE DEPARTMENT IN EARLIER YEARS. IT WAS SUBMITTED THAT THE EXPENSES R ELATES TO COMPLETED PROJECTS IN HARYANA AND THEREFORE SHOULD BE TREATED AS REVENUE. THE LD. AR FURTHER ARGUED THAT THESE EXPENSES INCLUDE RS. 42.00 LACS PAID FOR COMPUTERIZATION WHICH WAS TREATED BY THE ASSESSING OFFICER AS CAPITAL EXPENDI TURE. IT WAS SUBMITTED THAT AN AMOUNT OF RS. 58,68,927/- HAD BEEN SPENT ON PURCHAS E OF COMPUTER SYSTEMS AND ALLIED ITEMS. 74 127. THE LD. CIT(A) HAS ALLOWED RS. 42.00 LACS AS R EVENUE EXPENDITURE WHICH WAS PAID TO ROLTA INDIA LTD. AND ALLOWED DEPRECIATI ON ON RS. 58,68,928/- BEING THE COMPUTER ITEMS PURCHASED FROM M/S HARTRON. 128. THIS ISSUE HAS BEEN DEALT WHILE DEALING WITH O FFICE MAINTENANCE AND OFFICE EXPENSES. HENCE THE ENTIRE ISSUE RELATING T O RS. 1,79,11,266/- IS REMANDED BACK TO THE FILE OF ASSESSING OFFICER FOR THE LIMIT ED PURPOSE OF VERIFICATION OF TYPE OF EXPENSES. IT IS HEREBY DIRECTED THAT THE ASSESSI NG OFFICER WOULD ALLOW AS REVENUE EXPENSES ON THE AMOUNT IS SPENT FOR SOFTWAR E PURCHASES AND DUE DEPRECIATION WOULD BE ALLOWED IN THE CASE OF HARDWA RE PURCHASES. DISALLOWANCE UNDER SECTION 40(A)(IA) 129. GROUND NO. 9 OF THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2014-15 RELATES TO DISALLOWANCE U/S 40(A)(IA) DUE TO DEFAULT OF TDS ON THE INTEREST PAYMENT MADE TO DIFFERENT PEOPLE AS PER TH E COURT ORDER. THE ASSESSEE HAS PAID INTEREST OF RS. 1,97,29,877/- WITHOUT OBSE RVING THE PROVISIONS OF TDS. THE ASSESSING OFFICER HAS DISALLOWED THIS AMOUNT UNDER SECTION 40(A)(IA). 130. THE ASSESSING OFFICER HAS ALSO GIVEN ALTERNATE FINDING THAT THIS INTEREST PAID SHOULD BE CAPITALIZED. THE ASSESSING OFFICER OBSERV ED THAT IF AT ANY STAGE THE ADDITION ON ACCOUNT OF NON DEDUCTION OF TDS GETS RE DUCED THEN THIS AMOUNT OF INTEREST ON ACCOUNT OF WORK IN PROGRESS WILL BE DIS ALLOWED SEPARATELY. 131. THE LD. CIT(A) HAS DELETED THE ADDITION OF RS. 2,40,658/- WHICH IS THE INTEREST PAID ON GRATUITY, LEAVE ENCASHMENT, GPF ON WHICH, THE PROVISIONS OF TDS ARE NOT APPLICABLE. THE LD.CIT (A) HAS CONFIRMED TH E ADDITION OF RS.1,94,89,219/-. 132. BEFORE US THE LD. AR ARGUED THAT THE INTEREST HAS BEEN PAID TO ALLOTTEES ON THE DIRECTIONS OF COURT WHO HAVE SUCCEEDED IN GETTI NG RELIEF FROM THE COURT FOR PAYMENT OF COMPENSATION DUE TO DELAY IN OFFER OF PO SITION AFTER THE ALLOTMENT. RELIANCE PLACED ON GHAZIABAD DEVELOPMENT AUTHORITY VS. DR. NK.GUPTA ( NCDRC) 258 ITR 0337 WHICH IS REPRODUCED AS UNDER: - 'DEDUCTION OF TAX AT SOURCE-INTEREST-DEVELOPMENT AU THORITY-SCLIEME BY AUTHORITY FOR FLATS WITH SPECIFIC PROVISIONS- DELAY IN HANDIN G OVER FLAT- PURCHASE OF FLAT- FINDING FACILITIES NOT PROVIDED - REFUSING TO TAKE POSSESSION AND DEMANDING REFUND OF AMOUNTS PAID- STATE CONSUMER DISPUTE REDR ESSAL COMMISSION-DIRECTING AUTHORITY TO REFUND AMOUNTS PAID BY COMPLAINANT WIT H INTEREST AT 18%- INTEREST ORDERED TO BE PAID- IS IN THE NATURE OF DAMAGES THO UGH FOR CONVENIENT STANDARDIZATION SPECIFIED AS INTEREST - DEDUCTION O F TDS NOT PERMISSIBLE - INCOME TAX ACT, 1961, SECTION 2(28A), 194A.' 75 THUS IN VIEW OF THE ABOVE, THERE WAS NO REQUIREMENT FOR DEDUCTION OF TDS ON THE AMOUNTS BEING AWARDED BY THE COURT. THEREFORE WHERE NO TDS WAS REQUIRED TO BE DEDUCTED, NO DISALLOWANCE U/S 40A(IA) BE MADE. T HUS ADDITION MADE IS LIABLE TO BE DEDUCTED. FURTHER THE AO HAS TAKEN AN ALTERNATIVE PLEA THAT S INCE THERE IS HUGE AMOUNT OF CAPITAL WORK IN PROGRESS, THE INTEREST PAID IS DISA LLOWABLE U/S 36(L)(III). IN THIS REGARD WE SUBMIT THAT THE PROVISIONS PROVIDE THAT THE ONLY THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET SHALL NOT BE ALLOWED AS DEDUCTION. IN THE CASE AT HAND, FIRSTLY THE ASSESSEE HAS NOT B ORROWED ANY FUNDS, SECONDLY HAS NOT PAID ANY INTEREST ON AMOUNT BORROWED. THUS THE ASSESSEE IS NOT COVERED UNDER THE PROVISO TO SECTION 36(L)(III). THE AMOUNT PAID IS IN THE NATURE OF COMPENSATION TH OUGH THE NOMENCLATURE HAS BEEN GIVEN AS INTEREST, THE SAME IS NOT THE INTERES T PAID ON ANY BORROWED CAPITAL. THUS THE AO HAS ERRED IN MISPLACING FACTS AND INVOK ING PROVISIONS OF SECTION 36(L)(III). 133. THE LD. DR ARGUED THAT SINCE THE INTEREST HAS BEEN PAID TO THE ALLOTTEES TDS NEEDS TO BE DEDUCTED AND FAILURE OF WHICH WILL ATTRACT PROVISIONS OF 40(A)(IA). HE FURTHER ARGUED THAT ASSESSING OFFICER MADE ADDITION ON ACCOUNT OF 32.35 LACS UNDER SECTION 14A TOO. 134. REGARDING THE DEDUCTABILITY OF THE TDS ON THE AMOUNTS PAID TO VARIOUS ALLOTTEES, WE FIND THAT THE INTEREST HAS BEEN PAID BY THE ASSESSEE TO ALLOTTEES FOR PAYMENT OF COMPENSATION DUE TO DELAYING OFFER OF TH E POSSESSION AFTER ALLOTMENT HAS BEEN SQUARELY COVERED BY JUDGMENT IN CASE OF GHAZIABAD DEVELOPMENT AUTHORITY VS. DR. NK. GUPTA ( NCDRC) 25 8 ITR 0337 AND DELHI DEVELOPMENT AUTHORITY VS INCOME-TAX OFFICER (1995) 53 ITD 19 DELHI THE AMOUNT OF COMPENSATION DO NOT FALL UNDER THE MEANING OF 2( 24) OF INCOME TAX ACT. HENCE ASSESSEE IS NOT LIABLE TO THE PROVISIONS OF T DS ON THESE PAYMENTS. SINCE ASSESSEE HAS NOT BORROWED ANY FUNDS AND NO INTEREST HAS BEEN PAID THE ASSESSING OFFICERS ALTERNATE OBSERVATION ALSO STAN DS DISMISSED. 135. THE GROUND OF THE ASSESSEE IS ALLOWED. 136. REGARDING THE ADDITION MADE UNDER SECTION 14A OF RS . 32,35,885/- BY THE ASSESSEE WE FIND THAT THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE BASED ON THE LEGAL POSITION NARRATED BELOW: THE PROVISIONS OF SECTION 14 A PROVIDES THAT :- A) THAT THERE MUST BE INCOME TAXABLE UNDER THE ACT, AN D B) THAT THIS INCOME MUST NOT FORM PART OF THE TOTAL IN COME UNDER THE ACT, AND., C) THAT THERE MUST BE AN EXPENDITURE INCURRED BY THE A SSESSEE, AND D) THAT THE EXPENDITURE MUST HAVE A RELATION TO TH E INCOME W NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 76 THE PROVISIONS OF SECTION 14A PROVIDES THAT NO DEDU CTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT. THUS FROM THE READING SECTION 14A OF THE ACT, IT IS CLEAR THAT BEFORE MAKING ANY DISALLO WANCE THE BASIC CONDITION PRECEDENT FOR INVOKING THE PROVISIONS OF SECTION 14 A IS THAT THERE SHOULD BE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDSR THIS ACT. THUS, WHERE THE ASSESSEE EARNS ANY TAX FREE INCOME, THE CORRESPONDING EXPENDITURE INCURRED IN EARNING THAT INCOME IS TO BE DISALLOWED AND WHERE THERE IS NO EXEMPT INCOME, THERE CANNOT BE ANY DISALLOWANCE AS NO CORRESPONDIN G EXPENDITURE WERE INCURRED TO. EARN A PARTICULAR TAX FREE INCOME. IT IS WELL SETTLED THAT THAT WHERE THERE IS NO EXEMPT INCOME, NO DISALLOWANCE U/S 14A BE WORKED OUT. RELIANCE IS PLACED ON THE FOLLOWING:- CIT VS. LAKHANI MARKETING INCL 111 DTR 149 (P&H) 'WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. JUDGM ENT OF THIS COURT 'N ABHISHEK INDUSTRIES (SUPRA) WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCTION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PURPOS E AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOUT HAVING NEXUS WITH TH E BUSINESS. OBSERVATIONS MADE THEREIN HAVE TO BE READ IN THAT CONTEXT. IN TH E PRESENT CASE, ADMITTEDLY, THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SITUATION, SECTION 14A COULD HAVE NO APPLICATION.'' CIT VS. WINSOME TEXTILE INDUSTRIES LIMITED 319ITR 2 04 (P&H) BUSINESS EXPENDITURE-DISALLOWANCE UNDER S. 14A-INVE STMENT IN SHARES-INTEREST ON BORROWED FUNDS-DISALLOWANCE UNDER S. 14A BY THE AO RELATING TO INTEREST ON BORROWED FUNDS PRESUMING THAT THE INVESTMENT IN SHA RES HAD BEEN MADE OUT OF BORROWED FUNDS-ASSESSEE HAD MADE WRITTEN SUBMISSION TO THE AO THAT THE INVESTMENT WAS OUT OF OWN FUNDS-SAID CLAIM NOT REFU TED BY THE AO REVENUE CONTENDING THAT EVEN IF THE ASSESSEE HAD MADE INVES TMENT IN SHARES OUT OF ITS OWN FUNDS, THE ASSESSEE HAD TAKEN LOANS ON WHICH IN TEREST WAS PAID AND ALL THE MONEY AVAILABLE WITH THE ASSESSEE WAS IN COMMON KIT TY-SAID CONTENTION NOT ACCEPTABLE-IN THE PRESENT BASE} 'THE ASSESSEE DID N OT MAKE ANY CLAIM FOR EXEMPTION-IN SUCH A SITUATION S. 14A COULD HAVE NO APPLICATION. CITVS. CORRTECH ENERGY (P.) LTD 223 TAXMAN 130(GUJ) INCOMEEXPENDITURE INCURRED IN RELATION TO INCOME N OT INCLUDIBLE IN TOTAL INCOME AO MADE DISALLOWANCE OF EXPENDITURE OF SPEC IFIED AMOUNT UNDER SECTION 14ADISALLOWANCE WAS CONFIRMED BY CIT (APPE ALS) TRIBUNAL HELD THAT ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION AND I N SUCH SITUATION, SECTION 14A COULD HAVE NO APPLICATIONHELD, S. 14A(1) PROVIDES THAT FOR THE PURPOSE OF COMPUTING TOTAL INCOME UNDER CHAPTER IV OF THE ACT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOMEASSESS EE DID NOT MAKE ANY CLAIM FOR EXEMPTION AND> IN SUCH A SITUATION, S. 14A COUL D HAVE NO APPLICATION AND REVENUE'S APPECI WAS DISMISSED. PRINCIPAL CIT VS. INDIA GELATINE AND CHEMICALS LTD. , (2015) 93 CCH 253 GUJHC WHERE THE ASSESSEE WAS HAVING INTEREST FREE FUNDS O UT OF WHICH INVESTMENTIN SHARES AND MUTUAL FUNDS WAS MADE NO DISALLOWANCE WA S WARRANTED-U/S 14A. CIT VS. HOLCIM INDIA P LD. 90 CCH 0081 WHERE NO DIVIDEND INCOME WAS EARNED BY ASSESSEE, DI SALLOWANCE U/S 14A IS NOT WARRANTED. CIT VS. SHIVAM MOTORS (P) LTD. 230 TAXMAN 63 (ALL) 77 DEDUCTION U/S. 14A-ALLOW ABILITY-TRIBUNAL UPHELD DE CISION OF CIT(A) DELETING DISALLOWANCE U/S 14A-HELD, IN ABSENCE OF ANY TAX FR EE INCOME CORRESPONDING EXPENDITURE COULD NOT BE WORKED OUT FOR DISALLOWANC E U/S 14A FURTHER THE AO HAS PLACED RELIANCE IN THE CASE OF A BHISHEK INDUSTRIES WHICH PROVIDE THAT 'WHERE AO IS ABLE TO REFER TO RELEVANT MATERIAL WHILE RECORDING SATISFACTION THAT BORROWED FUNDS WERE USED TO EARN INTEREST FREE INCOME AS OPPOSED TO ASSESSEE'S OWN FUNDS, ONLY SUCH AMOUNT C AN BE LEGITIMATELY DISALLOWED U/S. 14A. IN THE CASE OF THE ASSESSEE, THERE ARE NO BORROWED FUNDS AND THE INVESTMENT ARE MADE OUT OF SURPLUS FUNDS. THUS THE AO HAS ERRED IN INVOKING PROVISIONS OF SE CTION 14A MISPLACING THE RELIANCE ON ABHISHEK INDUSTRIES (SUPRA) WHICH ALSO PROVIDES THAT ONLY SUCH AMOUNT CAN BE DISALLOWED FOR WHICH THE AO HAS RELEVANT MAT ERIAL ON RECORD FOR SATISFACTION THAT BORROWED FUNDS WERE USED TO EARN INTEREST FREE INCOME. THUS WHERE THERE ARE NO BORROWED FUNDS, NO DISALLOWANCE IS CALLED FOR. WHEN THERE IS NO EXEMPT INCOME AND NO CLAIM FOR EXE MPTION, S. 14A AND RULE 8D HAVE NO APPLICATION AND NO DISALLOWANCE CAN BE MADE . IT IS PERTINENT TO MENTION FURTHER THAT IT MAY BE NOTED THAT RULE 8D I S ONLY A MACHINERY/ MECHANISM TO COMPUTE THE DISALLOWANCE. THE RULES CA N NEVER PREVAIL OVER THE PROVISIONS OF THE ACT. IF THE FACTS OF THE CASE DEM AND NO DISALLOWANCE, THE COMPUTATIONAL PROVISION DOES NOT COME INTO PICTURE ATALL. ALSO, THE RELIANCE PLACED BY THE LD.DR ON THE CIRCULAR ISSUED BY THE CBDT WHICH DO NOT HAVE BINDING FORCE ON THE ASSESSEE. ACCORDINGLY IT IS W ELL SETTLED THAT WHERE NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVAN T PREVIOUS YEAR, PROVISIONS OF SECTION 14A SHALL NOT APPLY. FURTHER IT IS ALSO WELL SETTLED THAT THE DISALLOWAN CE CANNOT EXCEED THE EXEMPT INCOME. THE DELHI HIGH COURT IN JOINT INVESTMENTS P VT LTD V CIT HELD THAT SECTION 14A OR RULE 8D CANNOT BE INTERPRETED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR DISALLOW ANCE IS INDICATED IN SECTION 14A OF THE ACT, AND IS ONLY TO THE EXTENT OF DISALL OWANCE OF EXPENDITURE 'INCURRED BY THE ASSESSEE IN RELATION TO TAX EXEMPT INCOME'. ACCORDINGLY, THE TAX EXEMPT INCOME CANNOT BE DISALLOWED ENTIRELY. THUS FOLLOWI NG THIS LOGIC ALSO, WHERE THE EXEMPT INCOME IS ZERO, THE DISALLOWANCE CANNOT EXCE ED THE EXEMPT INCOME WHICH IS ZERO. 137. IN A NUTSHELL, GOING THROUGH THE FACTS AND SU BMISSIONS AND VARIOUS JUDICIAL PRONOUNCEMENTS ON THE ISSUE, IT IS CLEARLY OBSERVED THAT THE ISSUE IS TO BE DECIDED IN FAVOUR OF THE ASSESSEE AS IN THE CASE OF CIT VS. LAKHANI MARKETING (P&H) (SUPRA), CIT VS. WINSOME TEXTILE INDUSTRIES L TD. (P&H) (SUPRA), CIT VS. HOLCIM INDIA PVT. LTD. (DEL.) ITA NO. 486 & 299/2014 DATED 05.09.2014 , CHEMINVEST INDIA LTD. VS. CIT (DEL) ITA NO. 749/2014 DATED 02.09.201 5. 138. THUS THE ADDITION MADE UNDER SECTION 14A STAND S DELETED (GROUND OF DISALLOWANCE UNDER SECTION 40(A)(IA) AND 14A TOGETH ER ). INCOME FROM HOUSE PROPERTY VS. BUSINESS INCOME 139. GROUND NO. 2 OF THE APPEAL OF THE REVENUE DEAL S WITH ADDITION OF RS. 58,42,157/- FOR THE AY 2004-05 AND SIMILAR GROUND I S INVOLVED IN THE APPEALS FILED BY THE REVENUE FOR THE ASSESSMENT YEARS 2004-05, 20 06-07,2007-08, 2008-09, 78 2009-10, 2010-11, 2011-12, 2012-13 AND 2013-14 WITH THE VARYING AMOUNTS UNDER THIS GROUND. 140. DURING THE ASSESSMENT PROCEEDING THE ASSESSING OFFICER HELD THAT SINCE THE ASSESSEE IS DEALING IN SALE AND PURCHASE, RENTA L PROPERTIES, THE RENTAL INCOME EARNED BY THE ASSESSEE IS TREATED AS BUSINESS INCOM E AND REPAIR EXPENDITURE @ 30% AS CLAIMED BY THE ASSESSEE HAS BEEN DISALLOWED. 141. THE LD. CIT(A) HAS DELETED THE ADDITION ON THE GROUNDS THAT SIMILAR ISSUE HAS BEEN DEALT BY THE COORDINATE BENCH OF THE ITAT IN THE CASE OF THE ASSESSEE FOR THE AY 2003-04. THE DECISION OF THE ITAT HAS BE EN UPHELD BY THE HONBLE PUNJAB & HARYANA HIGH COURT VIDE THEIR ORDER DT. 23 /12/2008 IN THE ITA NO. 748 OF 2008 (322 ITR 61). 142. WHILE DEALING WITH THE ISSUE THE HONBLE PUNJA B & HARYANA HIGH COURT HELD AS UNDER: AS PER THE FINDING OF THE TRIBUNAL, THE MAIN BUSIN ESS OF THE ASSESSEE IS NOT RENTING OF PROPERTY, BUT OF DEVELOPMENT AND SALE OF THE PRO PERTY. IN SUCH A SITUATION, NO FAULT CAN BE FOUND WITH THE VIEW OF THE TRIBUNAL TH AT THE ASSESSEE COULD CLAIM THE HEAD TO BE INCOME FROM PROPERTY INSTEAD OF INCOME F ROM BUSINESS. THE VIEW OF THE TRIBUNAL IS CONSISTENT WITH THE VIEW TAKEN BY T HE SUPREME COURT IN EAST INDIA HOUSING & LAND DEVELOPMENT TRUST LTD. VS. CIT(1961) 42 ITR 49 (SUPREME COURT). 143. KEEPING IN VIEW THE JUDGMENT OF THE HONBLE HI GH COURT THE DECISION OF THE CIT(A) IS ACCEPTABLE AND WE DECLINE TO INTERFER E IN THE ORDER OF THE LD. CIT(A). DIVIDEND INCOME 144. GROUND NO. 4 OF THE APPEAL OF THE REVENUE DEAL S WITH DISALLOWANCE OF RS. 2,32,80,000/ FOR THE AY 2006-07: WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN GIVING RELIEF IN RESPECT OF DIVIDEND INCOME DESPITE THE FACT THAT THE DIVIDEND RECEIVED BY THE ASSESSEE IS NOT DIVIDEND AND THUS N OT EXEMPT FROM TAX ? 145. BRIEF FACTS RELEVANT TO THE CASE ARE THAT THE ASSESSEE HAS CLAIMED DIVIDEND INCOME OF RS. 2,32,80,000/- AS EXEMPT. THE ASSESSING OFFICER HAS HELD THAT IN THE CASE OF BROOK BOND & CO. LTD. VS. CIT 1 62 ITR 373 (SUPREME COURT) THE HONBLE SUPREME COURT LAID DOWN THAT IF THE OWNERSH IP OF THE SHARES IS INCIDENTAL TO CARRYING ON THE BUSINESS OR IF THE SH ARES ARE HELD AS BUSINESS ASSETS DIVIDEND INCOME SHOULD BE TREATED AS INCOME FROM BU SINESS AND BASED ON THE JUDGMENT THE INCOME RECEIVED BY THE ASSESSEE CANNOT BE TREATED AS DIVIDEND 79 BUT ONLY AS BUSINESS INCOME. THE ASSESSING OFFICER FURTHER HELD THAT IN CASE THE INCOME IS TREATED AS EXEMPT, THE PROVISIONS OF SECT ION 14 WOULD BE APPLICABLE. 146. THE LD. CIT(A) HELD THAT THE INVESTMENTS WERE MADE IN THE EQUITY SHARES OF GURGAON TECHNOLOGY PARK LTD. AND THESE INVESTMENTS( SHARES) WERE OR HELD AS CAPITAL INVESTMENT AND NOT AS STOCK IN TRADE AND HE NCE THE AMOUNT RECEIVED WOULD BE TREATED AS DIVIDEND. 147. BEFORE US THE LD. DR RELIED ON THE ORDER OF TH E ASSESSING OFFICER. 148. THE LD. AR ARGUED THAT THESE INVESTMENTS ARE MADE TO EARN DIVIDEND AND ALSO THAT THE ASSESSEE DOES NOT HAVE ANY BUSINE SS RELATIONSHIP WITH M/S. GURGAON TECHNOLOGY PARK LTD. OR THE INVESTMENTS MAD E IN THIS COMPANY IS NOT INCIDENTAL TO CARRYING OUT THE BUSINESS OF THE ASSE SSEE AND HENCE ARGUED THAT THE DIVIDEND RECEIVED IS ELIGIBLE FOR EXEMPTION UND ER SECTION 10(34) OF THE INCOME TAX ACT. 149. WE HAVE GONE THROUGH THE RECORDS AND PERUSED T HE MATERIAL BEFORE US. 150. IN THE CASE OF M/S BROOKE BOND & CO. LTD. THE ISSUE WAS REGARDING THE HOLDING OF SHARES IN SUBSIDIARY TEA COMPANIES WHER EIN THE ASSESSEE IS HAVING 100% HOLDING. THE FACTUM IN THE CASE IS TOTALLY DIF FERENT ON THE FACTS AND THE OBSERVATION OF THE ASSESSING OFFICER IS MISPLACED R EGARDING THE TAXABILITY OF THE DIVIDEND. THE SPECIAL BENCH OF ITAT IN THE CASE OF PSIDC LTD. VS. DCIT 103 TTJ CHD SB 364 AND ALSO BASED ON THE JUDGMENT OF ITAT D ELHI BENCH IN THE CASE OF DLF LTD. VS. CIT (27 SOT 22) WHEREIN IT IS HELD THA T THE INVESTMENTS MADE FOR EARNING DIVIDEND AND WHICH HAS BEEN DULY SHOWN AS I NCOME FROM OTHER SOURCES IS ELIGIBLE FOR EXEMPTION UNDER SECTION 10(34), FAC TS OF WHICH ARE SQUARELY APPLICABLE TO THE INSTANT CASE. HENCE WE DECLINE TO INTERFERE IN THE ORDER OF THE LD. CIT(A). REGARDING THE DISALLOWANCES UNDER SECTI ON 14A THE ISSUE IS BEING REMANDED BACK TO THE FILE OF ASSESSING OFFICER FOR THE LIMITED PURPOSE OF DETERMINING THE DISALLOWANCES, KEEPING IN VIEW THE EXPENSES INCURRED BY THE ASSESSEE TO EARN THE DIVIDEND INCOME. AS A RESULT T HE GROUNDS OF THE REVENUE MAY BE TREATED AS PARTLY ALLOWED. OFFICE MAINTENANCE AND OFFICE EXPENSES 151. GROUND NO. 4 OF THE APPEAL OF THE REVENUE DEAL S WITH DISALLOWANCE OF RS. 85,00,000/ FOR THE AY 2007-08 ON ACCOUNT OF OFFICE MAINTENANCE AND OFFICE EXPENSES. 80 152. BASED ON THE OBSERVATION OF THE ACCOUNTANT GEN ERAL AUDIT THE ASSESSING OFFICER HAS ENQUIRED THE ASSESSEE ABOUT THE ALLOWAB ILITY OFFICE CONTINGENCIES AND MAINTENANCE CLAIMED AT RS. 2.67 CRORES WHICH IN CLUDES RS. 85,00,000/- GIVEN TO M/S ROLTA INDIA LTD. FOR COMPUTERIZATION O F DEPARTMENT OF TOWN AND COUNTRY PLANNING TO PREPARE LAYOUT PLAN OF HUDA. TH E ASSESSEE HAS EXPLAINED BEFORE THE ASSESSING OFFICER THAT THE PAYMENT MADE TO M/S ROLTA INDIA LTD. HAS NOT BEEN CLAIMED AS EXPENDITURE. IT WAS SUBMITTED B EFORE THE ASSESSING OFFICER THAT IT IS FACTUAL INCORRECT AND THE AMOUNT PAID TO M/S ROLTA INDIA LTD. HAS BEEN TREATED AS CAPITAL EXPENDITURE. 153. THE LD. CIT(A) HAS DELETED THE ADDITION ON THE GROUNDS THAT THE ASSESSING OFFICER HAS NOT DOUBTED THE GENUINENESS OF THE EXPE NDITURE AND THE FACT OF HAVING IT BEEN INCURRED FOR THE PURPOSES OF BUSINES S. THE ASSESSING OFFICER HAS DISALLOWED THE EXPENDITURE TREATING IT TO BE A CAPI TAL EXPENDITURE. THE LD. CIT(A) HELD THAT THE EXPENDITURE INCURRED FOR THE PURPOSES OF COMPUTERIZATION OF RECORD IS AN ADMISSIBLE BUSINESS EXPENDITURE OF REVENUE NA TURE. 154. BEFORE US THE LD. CIT,DR ARGUED THAT THE COMPU TER EXPENSES HAVE TO BE CAPITALIZED WHEREAS THE LD. AR RELIED ON THE ORDER OF THE LD. CIT(A). COMPUTERIZATION OF DEPARTMENT OF TOWN AND COUNTRY P LANNING TO PREPARE LAYOUT PLAN OF HUDA. 155. FROM THE RECORDS IT IS NOT CLEAR THAT THE COMP UTATION EXPENSES INVOLVED ARE FOR SOFTWARE UP GRADATION OR FOR UP GRADATION OF HARDWARE AND PURCHASE OF NEW COMPUTERS OR AUGMENTING THE CAPABILITY OF THE E XISTING COMPUTERS. HENCE THIS ISSUES IS REMANDED BACK TO THE FILE OF ASSESSI NG OFFICER FOR THE LIMITED PURPOSE OF VERIFICATION OF TYPE OF EXPENSES. IT IS HEREBY DIRECTED THAT THE ASSESSING OFFICER WOULD ALLOW AS REVENUE EXPENSES O N THE AMOUNT IS SPENT FOR SOFTWARE PURCHASES AND DUE DEPRECIATION WOULD BE AL LOWED IN THE CASE OF HARDWARE PURCHASES. SALES TAX 156. GROUND NO. 5 OF THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEARS 2012-13 & 2013-14 AND 2014-15 RELATES TO DISALLOWAN CE OF SALES TAX PAID. 157. DURING THE YEAR THE ASSESSEE HAS CLAIMED SALES TAX (HARYANA VAT) OF RS. 7,98, 36,527/- THE ASSESSEE EXPLAINED THAT THE AMOU NT HAS BEEN PAID AGAINST THE SALES TAX ASSESSMENT MADE BY THE SALES TAX DEPA RTMENT IN THE PAST. THE 81 ASSESSING OFFICER HELD THAT THE ASSESSMENT MUST BE RELATING TO COST OF SUPPLY OF MATERIALS AGAINST THE COST TO CONTRACTORS FOR BOTH COMPLETED AND UNCOMPLETED SECTORS. HOLDING THAT THE ASSESSING OFFICER HAS DIS ALLOWED 50% OF THE SALES TAX PAID TREATING IT BEING A CAPITAL EXPENDITURE. 158. THE LD. CIT(A) HAS DELETED THE ADDITION ON THE GROUNDS THAT THE SPECIFIC PROVISIONS GOVERNING THE ALLOWABILITY OF TAXES AS P ER SECTION 43B CLEARLY STIPULATES THAT IT OVERWRITES ANY OTHER PROVISION IN ANY OTHER SECTION OF THE ACT AND SUCH PAYMENT IS ALLOWABLE ON THE ACTUAL PAYMENT BASIS. T HE LD. CIT(A) HELD THAT SINCE THE APPELLANT HAS CLAIMED SALES TAX EXPENDITU RE ON PAYMENT BASIS DURING THE YEAR CONSIDERING THE PROVISIONS OF SECTION 43B THE DISALLOWANCE MADE ON SALES TAX PAYMENT ON ESTIMATE BASIS NEEDS TO BE DEL ETED. 159. BEFORE US LD. CIT DR ARGUED THAT DISALLOWANCE ON ACCOUNT OF SALES TAX PAYMENT THE ASSESSING OFFICER DISALLOWED 50% OF SUC H PAYMENTS U/S 37(1) OF THE ACT BEING CAPITAL IN NATURE AND THE CIT(A) HAS NOT APPRECIATED THE AO'S REASONING, HENCE IT WAS ARGUED TO RESTORE THE AO' O RDER. 160. LD. AR RELIED ON THE ORDER OF THE LD. CIT(A). 161. HAVING GONE THROUGH THE FACTS WE ARE REALLY SU RPRISED BY THE ACTION OF THE ASSESSING OFFICER AND ALSO BY THE DECISION OF THE A UTHORITIES REFERRING THIS ISSUE FOR FURTHER APPEAL. IRRESPECTIVE OF THE REASONS THE AMO UNT PAID AS TAXES (IN THIS PARTICULAR INSTANCE SALES TAX) IS UNDISPUTEDLY ELIG IBLE FOR DEDUCTION. THERE IS NEITHER ANY FACTUAL NOR LEGAL IN CONGRUENCY. BY NO STRETCH OF IMAGINATION THE SALES TAX PAID CAN BE TREATED AS CAPITAL EXPENDITUR E IN THE FACTS OF THIS CASE. HENCE WE DECLINE TO INTERFERE IN THE WELL REASONED ORDER OF THE LD. CIT(A) IN DELETING THE ADDITION. ORDER PRONOUNCED IN THE OPEN COURT ON 06/02/2018. SD/- SD/- (DIVA SINGH) (DR . B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 06/02/2018 AG COPY TO: 1.THE APPELLANT, 2. THE RESPONDENT, 3.THE CIT, 4.THE CIT(A), 5. THE DR