TMI Blog2012 (12) TMI 693X X X X Extracts X X X X X X X X Extracts X X X X ..... and if such interpretation is adopted it will tantamount to denial of existence of AOP which is not even the case of CIT. The assessee AOP in the present case has been assessed as AOP and found to have fulfilled the condition laid down in section 80 IB(10) and has been held to be eligible for such deduction. The quantum of deduction under section 80 IB (10) will depend on the income earned from eligible project. The quantum of deduction will not depend upon the mode of distribution of shares amongst the members of AOP as income of AOP is taxable at maximum marginal rate. Therefore, manner in which the AOP distribute its project has no bearing over eligible quantum of deduction under section u/s. 80IB (10) as the eligible quantum will be gross receipts from the project reduced by expenses incurred on the project. Distribution of revenue in the account of the assessee is inappropriate and has been benefited by larger deduction - Held that:- Such observations of CIT are incorrect, firstly, on the ground that even distribution of revenue in the books of account of the assessee cannot be said to be contrary to the purpose and intent described in clause-7 of the agreement. Secondl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the circumstances of the case and in law, the Id. CIT has erred in passing the order u/s. 263 of the Act which is bad in law and without jurisdiction. 2. On the facts and in the circumstances of the case and in law, the Id. CIT has erred in holding the assessment order to be erroneous and also prejudicial to the interests of the revenue and erred in directing the LD.AO to recompute the income of the appellant on the basis of provisions contained in clause 7 of the AOP agreement dated 29.04.2003. 3. On the facts and circumstances of the case and in law, the LD.CIT erred in passing order u/s.263 without appreciating the appellant s submission that in view of matter regarding deduction under Section 801B(10) being subject matter of appeal before the learned CIT(A), the order of the LD.AO on the issue of deduction under Section 8OlB(1O) as a whole had merged with that of the order of the learned CIT(A) and in view of the statutory bar in Explanation to s. 263(1) , revisionary power u/s.263 cannot be invoked. 4. On the facts and circumstances of the case and in law, the learned CIT has erred, while holding that the assessment order is prejudicial to the interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency of the appeal before the ITAT, asked the assessee to show cause as to why the assessment order passed by the AO should not be set aside as the order passed by the AO is prima facie erroneous and prejudicial to the interest of revenue. The reason for initiation of such proceedings have been enumerated in para 2 of the impugned order. Ld. CIT noted from the terms and conditions of AOP agreement, which was dated 29/4/2003 and reference was made to clause(7) of the said agreement. According to Ld. CIT the said clause stated that M/s. Sananand Properties Pvt. Ltd. (SPPL) was to receive 35% of the sale proceeds of the project and out of the balance 65% of the receipts, all the expenditure for the purpose of AOP was to be met with and the net balance remaining thereafter was the share of income of M/s.Ravi Raj Kothari Company(RRKC). According to Ld. CIT, the manner of allocation of revenue has provided the assessee undue benefit in the shape of higher claim of deduction u/s. 80 IB (10). In contradiction of clause - 7 of the agreement dated 29/04/2003, the assessee instead of first reducing 35% of revenue and claiming deduction under section 80 IB(10) on the balance amount has claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 3009 ITR 67 (J K) v) Rank Jewellers vs. Addl. CIT Anr. (2010) 328 ITR 148 (Bom) etc. 2.4 It was further submitted that proposed action will reduce the deduction undersection 80 IB(10), however, the assessable income will be much less than the income assessed by the AO. Thus the assessment order cannot be said to be prejudicial to the interest of revenue. Reference in this regard was made to the decision of Hon ble Supreme Court in the case of Malabar Industrial Company Ltd. Vs. CIT, 243 ITR 83 (SC) to contend that unless the order passed by the AO is erroneous as well as prejudicial to the interest of revenue, powers under section 263 cannot be exercised. Reliance was also placed on the decision of Hon ble Delhi High Court in the case of CIT vs. Honda Siel Power Product Ltd., wherein it has been held that in a case where AO adopts one of the courses admissible in law and where there two views are possible, CIT cannot exercise power under section 263 of the Act. 2.5 Ld. CIT after considering the submissions of the assessee and referring to clause(7) of the aforementioned agreement has come to a conclusion that assessee has wrongly distributed the profits which are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take corrective action in the case of SPPL. 2.7 The assessee is aggrieved with the aforementioned directions of Ld. CIT and has filed aforementioned grounds. 3. After narrating the facts Ld. AR took us through clause(7) of the aforementioned agreement which has also been reproduced in para-6 of the order passed by Ld. CIT. Copy of this agreement is placed by the assessee in the paper book at pages 26 to 35. For the sake of completeness clause (7) of the agreement is also reproduced below. SHARING OF REVENUE AND INCOME: All agreements for sale of residential units in the housing project under taken by the AOP shall be entered into only between the authorized signatories of the A OP and the respective purchasers of the housing units. The members of the AOP hereby agree that neither of them, will during the validity of this Agreement execute any independent or separate agreement on their own with any prospective purchaser. All the payments receivable from the purchasers towards the above shall be received only in the name of the AOP, i.e., FORTALEZA DEVELOPERS and the said amounts received from the purchasers of the housing units as aforesaid shall be deposited only in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.R referred to page 16 of the paper book, where the working of profit distribution has been submitted. The said working is reproduced below: 1. Sanand Properties Private Limited(SSPPL) Basic Flat cost 431,768,917.00 35% of above to SPPL 151,119,120.95 113,106,696.00 Less : Capital Investment 3,093,838.00 116,200,534.00 Profit for the financial year 2006-07 34,918,586.95 2. Raviraj Kothari Co Basic Flat Cost 431,768,917.00 65% of above 280,649,796.05 Add. MSEB Incidental Charges 11,826,666,00 Profit for the financial year 06-07 292,476,462.05 Less : Development Charges 184,850,281.83 107,626,180.22 3.2 Referring to the aforementioned working it was submitted by him that the total revenue was a sum of Rs.43,17,68,917/-, 35% of the total revenue amounting to Rs.15,11,19,120.95 was allocated to SPPL. A sum of Rs. 11,62,00,534/- was already credited to the account of SPPL on account of land which is specifically stated in clause(7) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order in respect of which these powers are sought to be invoked should not only be erroneous but also prejudicial to the interest of revenue. 3.5 Ld. A.R further submitted that if the method suggested by Ld. CIT is adopted then the assessee will be liable for lesser income being 100% eligible for deduction under section 80 IB (10) which would mean that the assessee will be entitled for lesser assessable income and lesser deduction ultimately to be assessed at nil income. Therefore, Ld. AR pleaded that there is no prejudice to the interest of revenue. He submitted that Ld. CIT is considering the order of AO prejudicial to the revenue for the reason that it is prejudicial to the interest of revenue in the case of SPPL. He submitted that loss, if any, to the revenue in the case of SPPL cannot be a ground for invoking section 263 in the case of the assessee being a distinct and separate assessable entity. 3.6 Ld. A.R further submitted that the assessment order passed by the AO also cannot be said to be prejudicial to the interest of revenue for the reason that AO disallowed the deduction under section 80 IB (10) in its entirety . The deduction was allowed to the assessee in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be left in export business, therefore, deduction under section 80 HHC was erroneously allowed by the AO. It was the contention of the assessee that the issue regarding deduction under section 80 HHC was considered by CIT(A), therefore, the assessment order had merged with the order of CIT(A). On the other side it was the contention of the revenue that the issue regarding depreciation and export incentive having not considered by CIT(A), the assessment order cannot be said to have merged with the appellate order. The Tribunal held that the matter as appearing in Explanation (c) to section 263 is certainly a word of wide import and represents a subject or situation that one needs to think about, discuss or deal with. A matter might have many aspect and the above mentioned two factors might be the aspects of the matter but not the entire matter itself. The matter in the instant case was deduction under section 80 HHC, therefore, the assessment order, so far as it relates to deduction under section 80 HHC had merged with the order of Ld. CIT(A). Thus it was held that order passed by CIT under section 263 was not a valid order in the eyes of law. 3.7.2 Reliance was also pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 282 ITR 457 (Bom) he submitted that this decision was not considered in the aforementioned decisions of the ITAT. Ld. DR submitted that Hon ble Bombay High Court in that decision has held that effect of amendment in section 263 by the finance Act, 1989 is that there will be no merger on the part of the order which was not subject matter of appeal. Therefore, he submitted that the decisions relied upon by Ld. AR being contrary to the aforementioned decision of Bombay High Court should be ignored. 4.1 It was submitted by Ld. CIT, DR that 35% of the gross receipts payable to SPPL were in the nature of overriding title and hence, they are required to be deducted at threshold before computing the profits and in this manner the deduction claimed by the assessee would come down to Rs. 10.58 crores and thus assesse has claimed more deduction against what was available to the assessee. He submitted that this was a unique case and invocation of power under section 263 of the Act was necessary as no other remedy was available with the revenue against the action of the assessee in the manner of calculating the divisible amount so that it had reduced the assessable income in the hands of one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90 sq.mts. as capital and the said land was to be developed as a project for residential building under the name Fortaleza comprising of 354 residential flats in three phases of 153,145 and 56 flats. It has filed its return of income at a sum of Rs. 4,13,610/- on 29/10/07 after claiming deduction of Rs.14,54,47,283/- under section 80 IB (10) of the Act, which was completely disallowed by the AO on the ground that assessee did not fulfill the conditions laid down in section 80 IB(10). The disallowance of deduction under section 80 IB(10) was subject matter of appeal filed by the assessee before Ld. CIT(A) and the issue was decided in favour of the assessee. The said order of the Ld. CIT(A) has been confirmed by ITAT. Ld. CIT has exercised his power under section 263 in respect of assessment order dated 18/12/2009 vide which deduction under section 80 IB(10) was completely denied. The main reasons stated by Ld. CIT for invoking section 263 can be summarized as follows: (1) During the course of subsequent assessment proceedings in respect of assessment year 2008-09 and 2009-10 it was observed that account of the assessee AOP were not prepared in accordance with terms and condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount comprising of 35% of such receipts. SPPL was also authorized to withdraw such share of revenue from time to time. Out of balance of 65% of the aforesaid receipts all required and relevant expenditure for the purpose of business of AOP were to be met and whatever net balance remains thereafter shall be determined as the share of revenue/income of RRKC which is also at liberty to actually withdraw such share. Such arrangement was applicable only to the land admeasuring 31,026.90 Sq.Meters contributed by SPPL. Against the above clause the distribution of the assessee amongst its members is as under:- Total proceeds of the flats are Rs.43,17,68,917/-, 35% of which comes to Rs.15,11,19,120.95. After deducting cost of land of Rs.11,62,00,534/-, which was credited to the account of SPPL the balance of Rs.3,49,18,586.95 was considered as profit of SPPL. Similarly 65% of the gross proceeds of flats comes to Rs.28,06,49,796.05 to which a sum of Rs.1,18,26,666/- added on account of receipts of MSEB and incidental charges and the amount available after deducting profit payable to M/s. SPPL remained at Rs. 29,24,76,462.05. From this amount the expenses incurred as development charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It has already been pointed out that AOP is a separate and distinct assessable entity and is also entitled to claim the deductions permitted under the Income Tax Act provided it fulfill the conditions laid down in the section governing that deduction. The assessee AOP in the present case has been assessed as AOP and found to have fulfilled the condition laid down in section 80 IB(10) and has been held to be eligible for such deduction. The quantum of deduction under section 80 IB (10) will depend on the income earned from eligible project. The quantum of deduction will not depend upon the mode of distribution of shares amongst the members of AOP as income of AOP is taxable at maximum marginal rate. Therefore, manner in which the AOP distribute its project has no bearing over eligible quantum of deduction under section u/s. 80IB (10) as the eligible quantum will be gross receipts from the project reduced by expenses incurred on the project. It is not even the case of Ld. CIT that assessee AOP is not entitled to get the benefit of deduction under section 80 IB (10). The only objection of Ld. CIT is that distribution of revenue in the account of the assessee is inappropriate and by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he allowance of deduction under section 80 IB(10) after the appeal effect is given to the assessment order. It is not even the case of Ld. CIT that he is invoking power under section 263 of the Act in respect of order giving the effect to the appeal. Thus, the application of section 263 to the impugned assessment order is against the provisions of law. Therefore, also order under section 263 has to be set aside. 6.1 Now coming to the issue of merger. For this purpose reliance has been placed by the Ld. A.R of the assessee on the aforementioned three decisions of co-ordinate benches of Mumbai ITAT which have been discussed in details in paras 3.7.1 to 3.7.3 of this order. The basis of these decisions is the decision of Hon ble Calcutta High Court in the case of Oil India Ltd. vs. CIT, 138 ITR 836. In the aforementioned case following the decision of Hon ble Calcutta High Court in the case of Oil India Ltd. vs. CIT (supra), it has been held that the word matter is word of wide import and represents a subject or situation that need to be think about, discussed or deal with. It was held by Hon ble Calcutta High Court that if an assessment is subject matter of appeal then any ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudication by him even though not taken by the assessee. Then, on that, he could have allowed 5 per cent or 2 per cent depreciation and should have directed the ITO to compute the same on such basis as he considered fit and proper, namely, 11 months or 12 months on the view that the employee of the assessee was on leave for one month and as such could not be said to be entitled to this accommodation, If that is the position, then, in our opinion, once the appeal has been preferred before the AAC on any aspect of the quantum of depreciation, the Commissioner cannot assume jurisdiction, otherwise an anomalous position would arise. The Income-tax Officer has been directed by the AAC to fix depreciation at a certain percentage, indicated by the AAC, without any further direction that it should be confined to 11 months or 12 months. But, now, if further consideration is superimposed by the Commissioner by rectification made by the Income-tax Officer as a result of the order passed by the Commissioner under section 263 then that would be in conflict with the direction given by the AAC, then that order, in our opinion, cannot be the subject- matter before the AAC, then that order, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,90,676/- claimed by the assessee. The assessee filed an appeal against the said assessment order on the issues other than weighted deduction and the appeal was decided by Ld. CIT(A) vide order dated 25/11/1981 and order of AO was upheld. Ld. CIT invoked section 263 in respect of assessment order dated 23/2/1981. According to Ld. CIT assessee was not entitled to deduction under section 35B which was claimed on reassortment charges and AO without going into the details of these charges and enquiry had allowed weighted deduction under section 35B. The assessee filed an appeal against the order passed by Ld. CIT under section 263. It was submitted that section 263 could not be invoked since the assessment order was the subject matter of appeal before Ld. CIT(A) and thus the assessment order had merged with the order of Appellate Authority. The Tribunal came to the conclusion that CIT(A) having expressed his views impliedly applied his mind to the question of grant of allowance under section 35B, therefore, order had merged with the order of CIT(A). On these facts, it was found by Hon ble High Court that since assessee did not prefer any appeal against the issue of weighted deduction, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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