MAHANAGAR REALTY,PUNE V. PCIT(CENTRAL), PUNE, PUNE

ITA 1004/PUN/2024

AI Insights

The case involves Mahanagar Realty, which appealed against the order of the PCIT (Central), Pune, revising the assessment order for the assessment year 2019-20 under section 263 of the Income Tax Act, 1961. The PCIT had set aside the original assessment order, which had not disallowed certain expenses added to the work-in-progress (WIP) of the company. The Tribunal examined whether the PCIT was justified in revising the assessment order. The Tribunal found that the PCIT had not conducted any minimal inquiry and that the revision was not in accordance with the law, as the conditions for invoking section 263 were not met.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 46957 (ITAT-PUNE)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: misc
• Other Referred Cases: Malabar Industrial Co. Ltd. vs. CIT, PCIT vs. Delhi Airport Metro Express Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMOL KHAIRNAR
• Assessee Lawyers: KRISHNA GUJARATHI
• Keywords: Set aside; Opportunity of being heard; Business expenditure; Depreciation; Assessment record; Revision of order
• Section: 143(3); 142(1); 143(2); 263

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE BEFORE SHRI R. K. PANDA, VICE PRESIDENT AND MS ASTHA CHANDRA, JUDICIAL MEMBER ITA No.1004/PUN/2024 Assessment Year : 2019-20 Mahanagar Realty S.No.19A/3A, Pune Satara Road, Near Shankar Maharaj Math, Pune – 411043 Vs. PCIT (Central), Pune PAN : AARFM7354C (Appellant) (Respondent) Assessee by : Shri Krishna Gujarathi Department by : Shri Amol Khairnar, CIT-DR Date of hearing : 06-02-2025 Date of pronouncement : 07-04-2025 O R D E R PER R. K. PANDA, VP : This appeal filed by the assessee is directed against the order dated 12.03.2024 passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Ld. PCIT (Central), Pune, relating to assessment year 2019-20. 2. Although a number of grounds have been raised by the assessee, however, these all relate to the order of the Ld. PCIT in assuming jurisdiction u/s 263 and thereby setting aside the order passed by the Assessing Officer with a direction to examine the issue in detail and pass a fresh order. 2 ITA No.1004/PUN/2024 3. Facts of the case, in brief, are that the assessee firm is engaged in the business of constructing residential units around Pune. It filed its original return of income on 26.10.2019 declaring total income at Rs.1,27,31,840/-. The return was selected for scrutiny as per CASS and statutory notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee, in response to which the assessee filed various details from time to time. The Assessing Officer completed the assessment u/s 143(3) of the Act on 29.09.2021 determining the total income of the assessee at Rs.9,34,44,658/- wherein he made the addition of Rs.8,07,12,818/- on account of receipt of on-money. 4. Subsequently, the Ld. PCIT on examination of assessment records noted that the assessee firm had claimed closing WIP of Rs.252,43,02,336/-. The opening WIP for the year under consideration was of Rs.298,73,05,649/-. The sales executed during the year is of Rs.99,7035,201/- with gross profit of Rs. 9,96,4,403/-. Further, he noted that the assessee had debited prior period expenses of Rs.1,94,62,062/- and liasoning charges of Rs.1,28,500/- while computing the closing WIP for the year under consideration. However, no justification for addition of these expenses to the WIP has been submitted by the assessee firm. Further, on perusal of the assessment records, he observed that no justification for the allowability of these expenses to be added to the WIP has been called by the Assessing Officer. Therefore, he was of the opinion that the closing WIP of the assessee firm should have been reduced by the corresponding amount in order to arrive at the actual figure of the closing WIP. These expenses should have been 3 ITA No.1004/PUN/2024 disallowed during the course of assessment proceedings which was not done by the Assessing Officer. Since the Assessing Officer has not examined this issue of disallowance after calling for relevant details, the Ld. PCIT was of the opinion that the order has become erroneous and prejudicial to the interest of Revenue. He, therefore, issued a show cause notice u/s 263 of the Act to the assessee, the relevant part of which reads as under: “3….. The relevant part of the notice is reproduced as under: 02. In the above mentioned case, on verification of case records for A.Y. 2019-20 it has been observed that the assessee company had filed return of income for AY 2019-20 on 26.10.2019 declaring total income at Rs.1,27,31,840/-. The case was selected under Complete Scrutiny through CASS and the scrutiny assessment was completed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as the Act) on 29.09.2021 by assessing the total income at Rs.9,34,44,658 03. On perusal of the assessment records it is seen that the assessee had claimed closing WIP of Rs.252,43,02,336/-. The opening WIP for the year under consideration was of Rs.298,73,05,649/-. The sales executed during the year are of Rs.99,7035,201/- with gross profit of Rs.9,96,4,403/-. Further, assessee it is seen that the assessee had debited prior period expenses of Rs.1,94,62,062/- and liasoning charges of Rs.1,28,500/- while computing the closing WIP for the year under consideration. However, these expenses should have been disallowed during the course of assessment proceedings which was not done by the Assessing Officer (AO). Further, on perusal of the assessment records, it is seen that no justification for the allowability of these expenses to be added to the WIP has been called by the AO. Therefore, the closing WIP of the assessee firm should have reduced by the corresponding amount in order to arrive at the actual figure of the closing WIP. However, the Assessing Officer (AO) had not disallowed the same in the assessment order. 3.1 In view of the above, it is seen that the assessee had debited Rs. 1,94,62,062/- as prior period expenses and Rs. 1,28,500/- as liasoning expenses and the same should have been disallowed for A.Y. 2019-20. The AO failed to do the same during the assessment proceedings for the year under consideration and no verification on the aforesaid issue has been done in the assessment proceedings by the AO. As per explanation (2) to section 263(1) of the Act an order without making inquiries or verification which should have been made is deemed to be erroneous in so far as it is prejudicial to the interest of revenue. 4 ITA No.1004/PUN/2024 04. Considering the above facts of the case it is seen that the AO has not examined and verified the above issues and therefore income has been under assessed. Therefore, assessment order u/s 143(3) of the Act dated 29.09.2021 passed by the AO for A.Y. 2019-20 appears to be erroneous in so far as it is prejudicial to the interest of revenue. 05. In view of the facts and circumstances mentioned above, the assessment order passed u/s 143(3) of the Act in the case of M/s Mahanagar Realty for A.Y, 2019-20 prima facie appears to be erroneous in so far as it is prejudicial to the interest of revenue in terms of the provisions of Explanation-(2)(a) to Section 263(1) of the Income Tax Act. I, therefore, intend to set aside/ modify the assessment order within the meaning of section 263 of the I.T. Act, 1961. An opportunity of being heard is therefore, given to you. You are requested to attend in person or through your authorized representative on 29.01.2024 at 11:30 AM in my office. 06. If you have authorized any representative to attend on your behalf, please ensure that the Power of Attorney with proper court fee stamp is filed on or before the date of hearing. If you do not wish to attend in person or through your authorized representative, you may file written submission along with necessary evidence in support of your contention before the due date of hearing. Further, it may be noted that no adjournment will be provided and in case on non appearance/non submission of reply, order will be passed on merits.” 5. The assessee in response to the same apart from challenging the validity of 263 proceedings, has also filed detailed explanation on merit. The explanation on merit furnished before the Ld. PCIT reads as under: “3. Submission on Merit: 3.1 The assessee has undertaken a real estate project named \"Ganga Ishanya\". The assessee would like to state that the assessee has recognized revenue from the project on handing over of the possession of the completed units when all significant risk and rewards of ownership are transferred to the buyer of the unit. Also as stated above in para 2.1, since the start of the project till 31-03-2018 all Direct, Indirect excluding interest attributable to interest income earned is carried in work in progress (WIP) from year to year. During the year under consideration. the assessee has recognized revenue from Its real estate units for the first time. The total revenue recognized during the year under consideration is 99,70,35,201/- and claimed cost proportionate to the revenue recognized. The assessee has submitted audited financial statement for AY 2018-19 and AY 2019-20 during the course of assessment proceedings. The same are appearing on page no 92 to 193 of the 5 ITA No.1004/PUN/2024 paper book. The details are already explained in para 2.1 above. During the year under consideration, the assessee has debited Rs. 1,94,62,062/- to the cost of WIP under the nomenclature \"Prior Period Expenses and Rs. 1,28,500/- as liasoning charges. Your honour has stated that the learned assessing officer should have disallowed the said expenses 3.2 The assessee wishes to state that out of the total expense debited to prior period expense of Rs. 1.94 crores, Rs. 1.76 are in the nature of Lifts erection, installation and commissioning charges charged by Otis Elevator Company (India) Ltd and balance expenditure are in the nature of labour charges for brick work and plastering works etc. A copy of ledger extract of amounts debited to ledger \"Prior Period expense\" is appearing on page no 212 to 213 of the paper book. The assessee wishes to state that the material and service for the above mentioned expense were received in earlier assessment years, however the invoices were received by the assessee during the year under consideration and hence, the same are recorded in the year under consideration. 3.3 The assessee also wishes to state that the assessment year under consideration is the first year where revenue is recognized from the real estate project undertaken by the assessee. Hence, the cost equivalent to the revenue recognized has to be allowed as expense. Your honour will appreciate that matching concept i.e. matching cost with revenue is the basic accounting concept. Hence, the cost pertaining to units sold during the year under consideration has to be allowed as cost of sale. Since, no revenue was recognized in the earlier assessment years, this being the first year, the proportionate prior period expense forming part of cost of the sale does not result in violation of matching principle of accounting. Hence, your honour will appreciate that the amount debited to prior period expense is an allowable expenditure and not disallowable. 3.4 With respect to your honour's contention that the Ilasoning expenditure of Rs. 1,28,500/- should have been disallowed, the assessee wishes to submit that the said expenditure is in the nature of STP NOC charges and PMC water connection charges and allied expenses. The said expenditure are incurred wholly and exclusively for the purpose of business. Hence, the liasoning charges are allowable business expenditure. 3.5 Hence, your honour will appreciate that the order passed by the leamed AO is not erroneous and prejudicial to the interest of the revenue. Hence, the assessee requests your honour not to exercise jurisdiction of the revision of order u/s 263 of the Act. 4. Prayer Hence the assessee request your honour not to exercise jurisdiction of revision of order u/s 263 of the Income Tax Act as the order u/s 143(3) is passed after making due enquiries and application of mind. Hence, the order u/s 143(3) of the act is neither error nor is it prejudicial to the Interest of revenue.” 6 ITA No.1004/PUN/2024 6. It was accordingly argued that the 263 proceedings may be dropped. However, the Ld. PCIT was not satisfied with the arguments advanced by the assessee. Relying on various decisions, he held that the assessment order passed u/s 143(3) dated 29.09.2021 is erroneous as well as prejudicial to the interest of Revenue since the Assessing Officer passed the order without making necessary examination / verification / enquiries on the issue related to the computation of closing WIP. 7. Aggrieved with such order of the PCIT, the assessee is in appeal before the Tribunal. 8. The Ld. Counsel for the assessee at the outset submitted that although full details were given before the Ld. PCIT regarding the prior period expenses, however, the Ld. PCIT without conducting minimal enquiry has set aside the order passed by the Assessing Officer. Further, there is zero tax implication meaning thereby the order may be erroneous but it is not prejudicial to the interest of Revenue. 9. Referring to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC), he submitted that for invoking the jurisdiction u/s 263 of the Act, the twin conditions namely, the order is erroneous and the order is prejudicial to the interests of Revenue must be satisfied. However, in the instant case, although the order may be erroneous 7 ITA No.1004/PUN/2024 because of non-enquiry / verification by the Assessing Officer on the issue of work-in-progress, however, it is not prejudicial to the interest of Revenue since there is no loss to the Revenue by decreasing the work-in-progress. Rather by increasing the work-in-progress, there is more income meaning thereby, there is no loss to the Revenue. 10. Referring to the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Delhi Airport Metro Express Pvt. Ltd. vide ITA No.705/2017, order dated 05.09.2017, the Ld. Counsel for the assessee drew the attention of the Bench to paras 10 and 11 of the order of the Hon’ble High Court and submitted that the Hon’ble High Court in the said decision has held that if the PCIT is of the view that the Assessing Officer did not undertake any enquiry, it becomes incumbent on the PCIT to conduct such inquiry. He accordingly submitted that the order passed by the Ld. PCIT being not in accordance with law has to be quashed and the grounds raised by the assessee be allowed. 11. The Ld. DR on the other hand heavily relied on the order of the Ld. PCIT. 12. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. PCIT and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Ld. PCIT in the instant case invoked jurisdiction u/s 263 of the Act on the ground that the Assessing Officer, while completing the assessment, has not 8 ITA No.1004/PUN/2024 considered the prior period expenses of Rs.1,94,62,062/- debited to the Profit and Loss Account and liosoning charges of Rs.1,28,500/- while computing the closing work-in-progress for the year under consideration. Further, no justification for the allowability of these expenses to be added to the work-in-progress has been called by the Assessing Officer for which work-in-progress is shown at higher figure and therefore, the order has become erroneous and prejudicial to the interest of Revenue within the meaning of section 263 of the Act. It is the submission of the Ld. Counsel for the assessee that although the Assessing Officer has not called for any explanation on this issue, however, when the full details were given before the Ld. PCIT, he should have conducted some minimal enquiry. However, without doing that he has set aside the order of the Assessing Officer with a direction to re- frame the same. It is also his submission that there is no tax implication since by showing the higher work-in-progress, the assessee has in fact shown higher profit and therefore, there is no loss to the Revenue. It is his submission that since the twin conditions are not satisfied for invoking the jurisdiction u/s 263 of the Act i.e. the order is erroneous and the order is prejudicial to the interests of Revenue, therefore, such order passed by the Ld. PCIT setting aside the order is not in accordance with law. 13. We find some force in the arguments of the Ld. Counsel for the assessee. A perusal of the details furnished by the assessee in the paper book shows that he has filed various details substantiating the work-in-progress and the Ld. PCIT has neither gone through those details nor made any minimal enquiry and has simply 9 ITA No.1004/PUN/2024 set aside the order passed by the Assessing Officer. Further, by showing the work- in-progress at a higher figure, the assessee has shown more profit and paid more taxes meaning thereby there is no loss to the Revenue. Therefore, we find merit in the arguments of the Ld. Counsel for the assessee that although the order may be erroneous but it is definitely not prejudicial to the interest of Revenue. We find the Hon’ble Delhi High Court in the case of PCIT vs. Delhi Airport Metro Express Pvt. Ltd. (supra) has observed as under: “10. For the purposes of exercising jurisdiction under Section 263 of the Act, the conclusion that the order of the AO is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the PCIT is of the view that the AO did not undertake any inquiry, it becomes incumbent on the PCIT to conduct such inquiry. All that PCIT has done in the impugned order is to refer to the Circular of the CBDT and conclude that \"in the case of the Assessee company, the AO was duty bound to calculate and allow depreciation on the BOT in conformity of the CBDT Circular 9/2014 but the AO failed to do so. Therefore, the order of the AO is erroneous insofar as prejudicial to the interest of revenue\". 11. In the considered view of the Court, this can hardly constitute the reasons required to be given by the PCIT to justify the exercise of jurisdiction under Section 263 of the Act. In the context of the present case if, as urged by the Revenue, the Assessee has wrongly claimed depreciation on assets like land and building, it was incumbent upon the PCIT to undertake an inquiry as regards which of the assets were purchased and installed by the Assessee out of its own funds during the AY in question and, which were those assets that were handed over to it by the DMRC. That basic exercise of determining to what extent the depreciation was claimed in excess has not been undertaken by the PCIT.” 14. It is the settled proposition of law that for invoking the jurisdiction u/s 263 of the Act, the twin conditions namely, the order is erroneous and the order is prejudicial to the interests of Revenue must be satisfied. In the instant case, although the order may be erroneous because of non-verification on the part of the Assessing Officer of work-in-progress, however, the order is not prejudicial to the interest of Revenue because by showing higher WIP the assessee has shown more 10 ITA No.1004/PUN/2024 profit and paid more taxes. Therefore, the twin conditions are not satisfied as laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (supra). Therefore, the order passed by the Ld. PCIT invoking the jurisdiction u/s 263 of the Act is not in accordance with law. We, therefore, set aside the order passed by the Ld. PCIT u/s 263 of the Act. The grounds raised by the assessee are accordingly allowed. 15. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on 7th April, 2025. Sd/- Sd/- (ASHTA CHANDRA) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 7th April, 2025 GCVSR आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपीलार्थी / The Appellant; 2. प्रत्यर्थी / The Respondent 3. 4. DR, ITAT, ‘A’ Bench, Pune गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune 11 ITA No.1004/PUN/2024 S.No. Details Date Initials Designation 1 Draft dictated on 25.02.2025 Sr. PS/PS 2 Draft placed before author 27.02.2025 Sr. PS/PS 3 Draft proposed & placed before the Second Member JM/AM 4 Draft discussed/approved by Second Member AM/AM 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order "