ACIT 15(2), MUMBAI V. KARNANI BUILDERS & DEVELOPERS, MUMBAI

ITA 7695/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3784 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 11-03-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 14-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MUKESH B ADVANI
• Section: 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A, MUMBAI BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER & SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.:7695/MUM/2011 ASSESSMENT YEAR: 2007-08 THE ACIT CIR. 15(2), VS. M/S. KARNANI BUILDERS & DEVELOPERS, MUMBAI. 301, SHALAKA, JUHU ROAD, PLOT NO.32, SANTACRUZ (W), MUMBAI- 400 054 PAN :AAFFK9868F (APPELLANT) (RESPONDENT) APPELLANT BY : MR. MANOJ KUMAR RESPONDENT BY : MR. MUKESH B ADVANI DATE OF HEARING : 12.03.2013 DATE OF PRONOUNCEMENT : 15.05.2013 ORDER PER SANJAY GARG, JM : THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST T HE ORDER OF THE CIT(A) DATED 05.09.2011 PERTAINING TO A.Y 2007-08, AGAINST THE DELETION OF THE ADDITION OF RS.88,59,111/- MADE BY THE AO INTO THE INCOME OF TH E ASSESSEE ON ACCOUNT OF DISALLOWANCE OF EXPENSES CAPITALIZED TO THE WORK-IN -PROGRESS. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E FIRM, ENGAGED IN THE BUSINESS OF CONSTRUCTION AND REAL ESTATE DEVELOPERS, FILED I TS RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR DECLARING INCOME OF RS.1,08,73,760/ - DURING THE ASSESSMENT PROCEEDINGS U/S. 143(3) OF THE I.T.ACT, THE AO OBSE RVED THAT THE ASSESSEE FIRM HAD WORK-IN-PROGRESS IN PROJECTS NAMELY REEMA TERRACE, SUNIL NIWAS AND PARIJAT BUILDING. ANOTHER PROJECT I.E. REEMA RESIDENCY AT BORIVALI, W HICH WAS STARTED IN FY 2003-04 ITA NO. 7695/MUM/2011 AY : 2007-08 2 WAS COMPLETED IN THE YEAR UNDER CONSIDERATION. IN THE SAID PROJECT, THE ASSESSEE HAD CONSTRUCTED 44 FLATS IN REEMA RESIDENCY A BUI LDING AND 48 FLATS IN REEMA RESIDENCY B BUILDING. A TOTAL SALE CONSIDERATION OF RS.10,47,27,122/- WAS SHOWN TO BE RECEIVED BY THE ASSESSEE FROM THE SALE OF FLATS OF REEMA RESIDENCY A & B BUILDINGS. THERE WAS A CLOSING STOCK OF FINISHED F LATS IN REEMA RESIDENCY A & B BUILDINGS OF RS.3,48,64,821/-. THE ASSESSEE HAD SH OWN CLOSING WORK-IN-PROGRESS OF REEMA TERRACE AT RS.2,10,09,631/- AND OF SUNIL NIWA S AT RS.1,40,82,787/-. THUS, THE TOTAL WORK-IN-PROGRESS OF THE ASSESSEES UNDER CONSTRUCTION PROJECTS WAS RS.3,50,92,418/-. THE ASSESSEE HAD CLAIMED TOTAL I NDIRECT EXPENSES OF RS.2,64,37,216 WHICH HAD BEEN DEBITED TO PROFIT AND LOSS ACCOUNT AND THE SAME HAD BEEN CLAIMED AGAINST THE TOTAL PROFIT OF THE ASSESS EE DERIVED FROM THE SALE OF COMPLETED PROJECTS I.E. REEMA RESIDENCY FLATS. IT WAS ALSO NOTICED BY THE AO THAT THE ASSESSEE STILL HAD TWO PROJECTS UNDER CONSTRUCT ION. THE AO FURTHER OBSERVED THAT THE INDIRECT EXPENDITURE SHOULD HAVE BEEN ALLOTTED BY THE ASSESSEE ON PROPORTIONATE BASIS ON ALL THE PROJECTS, WHICH THE ASSESSEE FAILE D TO DO. THE AO FURTHER OBSERVED THAT THE TOTAL WORK-IN-PROGRESS OF THE PROJECTS UND ER CONSTRUCTION AT RS.3,50,92,418/- CAME OUT TO BE 33.51% OF THE SALE CONSIDERATION OF RS.10,47,27,122/- RECEIVED FROM COMPLETED FLATS. THE AO THUS PROPORTIONATELY DISAL LOWED THE EXPENDITURE @33.51% RELATING TO UNCOMPLETED/UNDER CONSTRUCTION PROJECTS . SO AN AMOUNT OF RS.88,59,111/- WAS BEING REDUCED FROM THE TOTAL IND IRECT COST AND THE SAME WAS ADDED TO THE TOTAL WORK-IN-PROGRESS OF THE TWO UNDE R CONSTRUCTION PROJECTS. THUS, THE TOTAL DISALLOWANCE WHICH CAME TO RS.88,59,111/- WAS ADDED BACK TO THE INCOME OF THE ASSESSEE. IN APPEAL, THE LEARNED CIT(A) OBSERVED THAT THE AS SESSEE WAS IN FACT FOLLOWING PERCENTAGE COMPLETION METHOD AND HAD DISCLOSED PROF IT @20% OF WORK-IN-PROGRESS ON THE UNDER CONSTRUCTION PROJECT OF REEMA TERRACES . THE LEARNED CIT(A) FURTHER OBSERVED THAT THE ASSESSEE WAS FOLLOWING THE PERCEN TAGE COMPLETION METHOD ITA NO. 7695/MUM/2011 AY : 2007-08 3 CONSISTENTLY AND THE DEPARTMENT HAD ALSO ACCEPTED I T. IT WAS NOT THE CASE OF THE AO THAT THE 20% OF THE PROFITS DECLARED BY THE ASSESSE E ON INCOMPLETE PROJECT WAS LOW. THE CIT(A) RELYING UPON THE DECISION OF THE ITAT IN THE CASE OF M/S. WALL STREET CONSTRUCTIONS LTD. 102 TTJ 505 (BOM) (SB) AND M/S. LOKHANDWALA CONSTRUCTIONS IND. LTD. 260 OTR 579 (BOM) HELD THAT THE ASSESSEE WAS ENTITLED TO CLAIM INDIRE CT EXPENSES INCURRED ON UNDER CONSTRUCTION PROJECTS AL SO AS IT WAS FOLLOWING PERCENTAGE COMPLETION METHOD AND HAD ALSO SHOWN 20% PROFIT ON WORK-IN-PROGRESS. THE CIT(A) THUS DELETED THE ADDITIONS SO MADE BY THE AO. 3. WE HAVE HEARD THE LEARNED REPRESENTATIVES AND HA VE ALSO GONE THROUGH THE RECORD. IT IS AN ADMITTED FACT ON THE FILE THAT TH E ASSESSEE HAS BEEN FOLLOWING PERCENTAGE COMPLETION METHOD UNDER WHICH THE ASSESS EE WAS OFFERING PROFIT ON PERCENTAGE BASIS OF DIRECT EXPENSES INCURRED DURING THE YEAR AGAINST WHICH IT WAS SETTING OFF ITS INDIRECT EXPENSES. THE DIRECT EXPE NSES PLUS ADHOC PROFIT ON THE PROJECT WAS THEN SHOWN AS CLOSING WORK-IN-PROGRESS. THE PR OFIT/INCOME THUS OFFERED TO TAX IS FINALLY SET OFF ON THE COMPLETION OF PROJECT OUT OF SALE CONSIDERATION. THE AO DISALLOWED THE EXPENSES RELATING TO PROJECTS UNDER CONSTRUCTION APPLYING THE PROJECT COMPLETION METHOD UNDER WHICH THE ENTIRE PROJECT C OST INCLUDING DIRECT AS WELL AS INDIRECT EXPENSES ARE SET OFF IN THE YEAR IN WHICH THE SALE OF FLATS ARE OFFERED FOR TAX. HOWEVER, IN THE CASE IN HAND SINCE THE ASSESSEE HAD BEEN FOLLOWING PERCENTAGE COMPLETION METHOD AND HAD OFFERED PROFITS @20% ON D IRECT EXPENSES, WHICH CAME OUT AT RS.35,01,605/- IN RELATION TO REEMA TERRACES PROJECT DURING THE YEAR UNDER CONSIDERATION. THE AO IN HIS ORDER HAS NOT POINTED OUT AS TO WHETHER THE INDIRECT EXPENSES CLAIMED BY THE ASSESSEE WERE NOT GENUINE O R ACTUALLY NOT INCURRED BY THE ASSESSEE ON THE PROJECTS. THE AO HAS NOT SPECIFICA LLY POINTED OUT AS TO WHICH EXPENSES HAVE BEEN WRONGLY CLAIMED BY THE ASSESSEE UNDER THE HEAD INDIRECT EXPENSES. REGARDING CLOSING WORK-IN-PROGRESS AT RS .1,40,82,787/- RELATING TO SUNIL NIWAS PROJECT, THE LEARNED AR HAS SUBMITTED THAT TH E SAID EXPENDITURE HAS NOT BEEN ITA NO. 7695/MUM/2011 AY : 2007-08 4 INCLUDED IN WORK-IN-PROGRESS IN PROFIT & LOSS ACC OUNT THOUGH THE SAME WAS INADVERTENTLY SHOWN IN THE BALANCE SHEET. HE HAS G IVEN A REASON FOR THE SAME TO THE EFFECT THAT, IN FACT, THE SAID SUM OF RS. 1,40,82,7 87/- RELATING TO SUNIL NIWAS WAS AN ADVANCE PAID TO THE MEMBERS OF SUNIL NIWAS FOR THE PURPOSE OF REDEVELOPMENT. IN FACT, COMMENCEMENT CERTIFICATE WAS NOT RECEIVED FRO M THE LOCAL AUTHORITIES AND, HENCE, THE PROJECT WAS NOT STARTED AND AS SUCH THE SAID SUM WAS NOT DEBITED TO PROFIT AND LOSS ACCOUNT. THE SAID SUM HAS NOT BEEN CLAIMED AS EXPENDITURE AS SUNIL NIWAS PROJECT HAD NOT THEN COMMENCED. SO THE ENTIR E AMOUNT OF RS.1,40,82,787/- WAS CAPITALIZED AND SHOWN UNDER THE HEAD WORK-IN-P ROGRESS IN THE BALANCE SHEET UNDER THE HEAD CURRENT ASSETS LOANS & ADVANCES. HE FURTHER SUBMITTED THAT SINCE THE SAID AMOUNT HAD NOT BEEN CLAIMED AS EXPENDITURE THE SAME CANNOT BE TREATED AS CLOSING STOCK OF WORK-IN-PROGRESS. THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS RELATING TO COMPLETED PROJECT OF REEMA RESIDENCY AN D UNDER CONSTRUCTION PROJECT OF REEMA TERRACE AGAINST WHICH THE ASSESSEE HAD ALSO S HOWN INCOME FOLLOWING PERCENTAGE COMPLETION METHOD. THE LEARNED AR ALS O INVITED OUR ATTENTION TO THE NOTICE DATED 24.05.2010 ISSUED TO THE ASSESSEE BY T HE CIT U/S. 263 OF THE I.T ACT AND FURTHER THE ASSESSEES REPLY TO THE SAID NOTICE DATED 01.07.2010, VIDE WHICH THE ASSESSEE HAD MADE ALMOST SIMILAR SUBMISSIONS WHICH WERE ACCEPTED BY THE CIT AND THE PROCEEDINGS INITIATED AGAINST HIM U/S. 263 OF T HE IT ACT WERE DROPPED VIDE ORDER DATED 18.01.2012. IN VIEW OF THE SUBMISSIONS MADE BY THE LEARNED AR AND IN VIEW OF THE FACTS ON FILE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). IN OUR VIEW, THE LEARNED CIT(A) HAS RIGHTLY DELETED THE ADDITION MADE BY THE AO. THE AO HAD WRONGLY DISALLOWED THE 33.51% OF T HE INDIRECT EXPENSES BY PROPORTIONATELY ALLOCATING THE SAME FOR THE UNDER C ONSTRUCTION PROJECT IGNORING THE FACT THAT THE ASSESSEE WAS FOLLOWING PERCENTAGE COM PLETION METHOD AND HAD ALSO SHOWN ADHOC PROFITS @20% OF DIRECT EXPENSES AND THU S HAD RIGHTLY SET OFF INDIRECT EXPENSES. ITA NO. 7695/MUM/2011 AY : 2007-08 5 4. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S HEREBY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH MAY 2013. SD/- SD/- (SANJAY ARORA) (SANJAY GA RG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT : 15 TH MAY, 2013 SA COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE C.I.T. CONCERNED MUMBAI 4. THE CIT (A) CONCERNED MUMBAI 5. THE DR, A - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI