PATEL BUILDERS & DEVELOPERS LTD, MUMBAI V. ITO WD 10(2)(4), MUMBAI

ITA 7658/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9553 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 05-11-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 08-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PAKASH MEENA
• Assessee Lawyers: MANOJ ASHRA
• Keywords: Depreciation
• Section: 133A; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 7658/MUM/2010 (ASSESSMENT YEAR: 2005-06) M/S PATEL BUILDERS & DEVELOPERS LTD., 23, KAILAS NAGAR, M.G. ROAD, GHATKOPAR (E), MUMBAI -400 077 PAN AAACP 3406 E VS INCOME-TAX OFFICER 10(2)(4), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MANOJ ASHRA RESPONDENT BY : SHRI PAKASH MEENA DATE OF HEARING: 05.11.2012 DATE OF PRONOUNCEMENT: 30.11.2012 O R D E R PER VIVEK VARMA, JM: THE APPEAL, FILED BY THE ASSESSEE ARISES FROM THE ORDER O F CIT(A) 22, MUMBAI, DATED, 31.08.2010. 2. THE FACTS, AS EXTRACTED FROM THE ASSESSMENT ORDER A RE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION OF B UILDINGS AND DEVELOPING. DURING THE YEAR THE ASSESSEE HAS SHOWN THE FOLLOWING PROJECTS, WHICH ARE AT THE WIP STAGE: KAILAS MANASAROVER PROJECT AT GHATKOPAR 22,86,166 SRA PROJECT AT VIKHROLI 48,77,308 VIKHROLI PROJECT 76,35,170 M/S PATEL BUILDERS & DEVELOPERS LTD. ITA 7658/MUM/2010 2 3. ON AN ENQUIRY BY THE AO, AS TO WHY THE PROFITS ON TH E PROJECT SHOULD NOT BE TAKEN ON PROJECT COMPLETION METHOD, IT WAS SUBMITTED THAT ALL THE THREE PROJECTS ARE STILL AT THE INITIAL STAGES AND DURING THE YEAR UNDER CONSIDERATION, ONLY EXCAVATION WORK WAS BEING CARRIED OUT. EVEN THE INITIAL BOOKINGS HAD NOT BEEN DONE. THIS FACT WAS ASCERTAINED BY THE SURVEY PARTY, WHO CONDUCTED THE SURVEY U/S 133A OF THE IN COME TAX ACT, 1961. 4. IN THE ASSESSMENT PROCEEDINGS, THE AO, ON PERUSAL OF SCHEDULE III OF THE BALANCE SHEET, RELATING TO THE SCHEDULE OF FIXED ASSETS, NOTICED THAT THE ASSESSEE SOLD TWO GALAS FOR A SUM OF R S. 3,19,000/- AT KAILASH INDUSTRIAL COMPLEX AND MADE PROFITS. RELEVANT BLOCK O F ASSETS IS SHOWN AS NIL . ON THE BASIS OF THESE REPLIES, THE AO INFERRED AND HELD THAT THE ASSESSEE WAS NOT A TRADER AND HENCE ITS ACT IVITIES SHOULD BE CONSIDERED AS CAPITAL BASED. HE, THEREFORE, HELD THAT THE E XPENSES CANNOT BE ALLOWED AS REVENUE AND ADDED BACK : TELEPHONE EXPENSES 1,10,292 STAFF SALARY 1,18,190 PRINTING & STATIONERY 29,692 BUSINESS PROMOTION 19,462 DEPRECIATION 1,89,447 TOTAL 4,67,083 5. THE ASSESSEE, APPROACHED THE CIT(A) AGAINST THESE OB SERVATIONS OF THE AO, WHO SUSTAINED THE ADDITIONS MADE BY THE AO BY OBSERVING THAT THE ASSESSEE SHOULD HAVE ALLOCATED THESE EXPENSE S ON PROPORTIONATE BASIS TO THE WIP OF EACH PROJECT, SINCE TH ERE IS NO OTHER ACTIVITY OTHER THEN THE CONSTRUCTION ACTIVITY. 6. AGGRIEVED, THE ASSESSEE IS BEFORE THE ITAT. 7. BEFORE US, THE AR REITERATED THE SUBMISSIONS MADE BEFO RE THE REVENUE AUTHORITIES AND SUBMITTED THAT THE EXPENSES WH ICH ARE OF DIRECT NATURE HAVE BEEN CAPITALIZED AS DEVELOPMENT EXPEN SES UNDER RESPECTIVE WIP ACCOUNTS OF THE ONGOING PROJECTS. THE AR INVITED OUR M/S PATEL BUILDERS & DEVELOPERS LTD. ITA 7658/MUM/2010 3 ATTENTION TO THE ALLOCATION OF DIRECT EXPENSES IN THE THR EE PROJECTS UNDERTAKEN BY THE ASSESSEE (APB 18) AND SUBMITTED THA T ADMINISTRATIVE EXPENSES HAVE BEEN DEBITED AT RS. 3,44,103, OUT OF WHICH, THE AO HAS DISALLOWED RS. 2,77,636 AND DEPRECIATION AT RS. 1,89,447. THE AR PLACED BEFORE US THE COPY OF DECISION OF TH E COORDINATE BENCH AT MUMBAI, IN THE CASE OF ITO VS PANCHV ATI DEVELOPERS, ITA NO. 6393/MUM/2003, REPORTED IN 115 TTJ 1 39(MUM), WHEREIN IN PARA 9, IT HAS BEEN HELD, REGARDING OTHER ADMINISTRATIVE EXPENSES SUCH AS CONVEYANCE, GENERAL CHARGES, LEGAL FEES, PRINTING A ND STATIONERY, SALARY, EMPLOYERS CONTRIBUTION TO PF, TELEPHONE CH ARGES ETC., WE FIND THAT THERE IS NO BASIS ON WHICH THESE EXPENSES CAN BE ALLOCATED BETWEEN THESE TWO PROJECTS OF THE ASSESSE E FIRM AND HENCE, ADVERTISEMENT EXPENSES STAND ON DIFFERENT FO OTING AS COMPARED TO THESE ADMINISTRATIVE EXPENSES BECAUSE T HESE ADMINISTRATIVE EXPENSES CANNOT BE ALLOCATED TO INDI VIDUAL PROJECT ON ANY RATIONAL BASIS. 8. THE AR POINTED OUT THAT THE CIT(A) DID NOT REFER TO T HIS DECISION OF THE JURISDICTIONAL BENCH OF THE ITAT, WHERE THE EXPENS ES HAVE BEEN ALLOWED ON IDENTICAL GROUNDS. 9. THE DR SUBMITTED THAT IN THE YEAR UNDER CONSIDERATIO N, THERE WAS NO BUSINESS AS SUCH, THEREFORE EXPENSES U/S 37 COU LD NOT BE ALLOWED. 10. WE HAVE HEARD THE ARGUMENTS AND PERUSED THE PAP ERS PLACED BEFORE US AND ALSO THE CITED DECISION OF THE ITAT, IN THE C ASE OF PANCHVATI DEVELOPERS. ON PERUSAL OF THE DOCUMENTS, WE FIND THAT THE ASSESSEE HAS ITSELF BIFURCATED DIRECT AND INDIRECT EXPENSES , OF WHICH DIRECT EXPENSES HAVE BEEN ALLOCATED TOWARDS RESPECTIVE WIP. THE ISSUE APPEARS TO BE THE CASE OF FISHING OUT EXPENSES OUT OF THE ADMINISTR ATIVE EXPENSES. NEITHER THE REVENUE AUTHORITIES NOR THE DR HA S BEEN ABLE TO EXPLAIN AS TO HOW THE EXPENSES SUCH AS PRINTING AND STA TIONERY OR TELEPHONE EXPENSES COULD BE ALLOCATED TOWARDS WIP. WE FIND THAT M/S PATEL BUILDERS & DEVELOPERS LTD. ITA 7658/MUM/2010 4 SALARY EXPENSE OF RS. 3,50,447 HAS BEEN TAKEN TO WIP ON THE SRA PROJECT (APB 18) AND STAFF SALARY OF RS. 1,18,190 HAS BEEN TAKEN TO ADMINISTRATIVE EXPENSE. 11. IT IS, THEREFORE, EVIDENT, THAT THE ASSESSEE HAS BEEN CAREFUL AND REASONABLE TO TAKE CARE WITH REGARD TO ALLOCATION OF EXPE NSES. WE ALSO FIND FROM THE PAPERS PLACED BEFORE US, THAT NO SUCH DISALLOW ANCE HAS BEEN MADE IN ASSESSMENT YEAR 2006-07. 12. FROM THE IMPUGNED ORDER, WE FIND THAT THE CIT(A) MENT IONS THAT, THE CASE LAWS RELIED UPON BY THE APPELLANT ARE BASE D ON DIFFERENT SET OF FACTS AND HENCE NOT APPLICABLE TO THE APPELLANTS CASE . BUT WE DO NOT FIND AS TO HOW THE CIT(A) HAS DISTINGUISHED ANY OF THE CASE LAWS CITED BY THE AR IN APB 25 TO 44 WHICH INCLUDES THE CASE OF PAN CHWATI BUILDERS (SUPRA) . 13. TAKING INTO ACCOUNT THE ABOVE FACTS AND RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH AT MUMBAI IN PANCHWA TI BUILDERS, WHERE, COORDINATE BENCH HAS GIVEN A CATEGORICAL FINDING, ..ADMINISTRATIVE EXPENSES SUCH AS CONVEYANCE, GENER AL CHARGES, LEGAL FEES, PRINTING AND STATIONERY, SALARY, EMPLOYERS CONTRI BUTION TO PF, TELEPHONE CHARGES ETC., WE FIND THAT THERE IS NO BASIS ON WHICH THESE EXPENSES CAN BE ALLOCATED BETWEEN THESE TWO PROJECTS OF THE ASSESSEE FIRM AND HENCE, ADVERTISEMENT EXPENSES STAND ON DIFF ERENT FOOTING AS COMPARED TO THESE ADMINISTRATIVE EXPENSES BECAUSE T HESE ADMINISTRATIVE EXPENSES CANNOT BE ALLOCATED TO INDIVI DUAL PROJECT ON ANY RATIONAL BASIS.., WE ALLOW THE GROUND AS THESE EXPENSES ARE GENERAL IN NATURE AND NOT ALLOCABLE TO DIFFERENT PROJECTS. 14. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) ON TH E ISSUE AND DIRECT THE AO TO ALLOW ALL THE EXPENSES, DISALLOWED BY HIM FRO M SCHEDULE 16, I.E. ADMINISTRATIVE EXPENSES. M/S PATEL BUILDERS & DEVELOPERS LTD. ITA 7658/MUM/2010 5 15. GROUND NO. 2 IS DISALLOWANCE OF RS. 14,500, HELD TO BE C APITAL GAIN. 16. IN THE ASSESSMENT PROCEEDINGS, THE AO HAD TREATED THE ASSESSEE TO BE A BUILDER AND NOT A TRADER AND, HE, THEREFORE, DISALLO WED RS. 14,500 CLAIMED AS BUSINESS PROFIT AND TREATED IT AS STCG. THE FACTS ARE THAT THE ASSESSEE PURCHASED AN INDUSTRIAL GALA AT V IKHROLI BEARING NO. E 409 FOR RS. 3,04,500 AND SOLD IT FOR RS. 3,19,000, THERE BY MAKING THE PROFIT OF RS. 14,500. THIS PROFIT, THE ASSESSEE TRE ATED AS BUSINESS PROFIT BUT THE AO TREATED IT TO A CAPITAL GAIN, TH EREFORE, THE AO HAD NOT TREATED THE ASSESSEE TO BE A TRADER. THE CIT(A) ALSO SUSTAINED THE OBSERVATIONS OF THE AO. THE ASSESSEE, IN TH E COURSE OF APPEAL PROCEEDINGS BEFORE THE CIT(A), RELIED ON THE FOLLOWING DECISIONS : I DALHOUSE INVESTMENT TRUST 68 ITR 486 (SC) II LOK SHIKSHAN TRUST 101 ITR 234 (SC) III SEVARAM DUNGARMAL 42 ITR 392 (SC) IV BARENDRA PRASAD RAY 129 ITR 295 (SC) V DISTRIBUTORS (BARODA) P. LTD. 155 ITR 120 (SC) VI NAGRI MILLS 33 ITR 681 VII VISHNU INDUSTRIAL GAS ITA NO. 229/1988 17. AGGRIEVED, THE ASSESSEE IS NOW BEFORE THE ITAT. 18. BEFORE US, THE AR SUBMITTED THAT THE ASSESSEE HAD TREATED THE PURCHASE AND SALE AS A TRADING ACTIVITY IN ITS ACCOUNTS AND CLAIMED IT AS A BUSINESS PROFIT. THE AR SUBMITTED THAT THE TRADING ACTIVITY IS INCLUDED IN ITS MEMORANDUM AND IS APPARENT FROM THE ENABLIN G CLAUSES SHOWS THAT THE ASSESSEE HAS TRADING ACTIVITY IN ITS WINGS. THE AR THEREFORE REITERATED THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES AND THE CASE LAWS CITED BEFORE THEM AND PLEAD ED THAT THE REVENUE AUTHORITIES ERRED IN TREATING THE PURCHASE AND SALE AS STC G. M/S PATEL BUILDERS & DEVELOPERS LTD. ITA 7658/MUM/2010 6 19. THE DR RELIED ON THE ORDERS OF THE REVENUE AUTHORIT IES AND SUBMITTED THAT IT WAS AN ISOLATED TRANSACTION, THEREFORE, T HE AO WAS CORRECT IN TREATING THE SAME TO BE CAPITAL GAINS. 20. WE HAVE HEARD THE ARGUMENTS AND HAVE ALSO SEEN TH E MEMORANDUM, WHICH PERMITS THE ASSESSEE TO GET INTO TRAD ING ACTIVITY AS WELL. 21. IN THE LIGHT OF THE FACTS, AS BORNE OUT FROM THE ACCO UNTS AND AS EMANATING FROM THE ENABLING CLAUSES OF MOA AND THE CITED C ASE LAWS, WE HOLD THAT THE ASSESSEE WAS IN THE BUSINESS OF TRADING IN PROPERTIES AND NOT JUST AN INVESTOR IN PROPERTIES, AS IS EVIDENT FROM ALL THE CLAUSES READ TOGETHER. WE, THEREFORE HOLD THAT THE GAIN OF RS. 14,500 WAS A BUSINESS PROFIT AND NOT A CAPITAL GAIN. IN THIS LIGHT , WE SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO ALLOW THE GA IN ON SALE OF THE INDUSTRIAL AS A BUSINESS PROFIT. 22. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 30/11/2012. SD/- (D. KARUNAKARA RAO) ACCOUTANT MEMBER SD/- (VIVEK VARMA) JUDICIAL MEMBER MUMBAI, DATE: 30/11/2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)- 22 , MUMBAI. 4) THE CIT 10, MUMBAI, 5) THE D.R. C BENCH, MUMBAI. 6) COPY TO GUARD FILE. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN