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2015 (6) TMI 5 - ITAT MUMBAI

2015 (6) TMI 5 - ITAT MUMBAI - TMI - Additional income offered voluntarily - return of income filed in response to notice u/s 153A - at the time of search the assessee had offered to disclose the income on the basis of percentage completion method which has been retracted later on - Held that:- There is no finding that the assessee has been following percentage completion method regularly since beginning or in any other project. There is no such evidence or documents which have been found during .....

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pletion of the project in A.Y. 2012-13, the Revenue itself has accepted the project completion method for recognition of revenue and accordingly, has assessed the income of the project on the same method. Thus, a contrary view cannot be taken for this year. - Decided against revenue.

Disallowance of interest u/s. 36(1 )(iii) on loans - Held that:- So far as the advance of ₹ 50 lakhs, it is seen from the record that the said amount was given for purchase of plot of land pertainin .....

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ers are common. The said firm too is engaged in the business of developer. Further, from the perusal of the balance sheet as pointed out by the ld. Counsel, it is seen that interest free funds in the form of capital is more than ₹ 2.85 crores, whereas the advance/loan given is only ₹ 82 lakhs and once the assessee had interest free funds, then presumption can be drawn that the same has been given from interest free funds. Also as the assessee has been following ‘project completion me .....

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the WIP. It cannot be added to the total income of the assessee during the year. On this ground alone, we do not find any reason to uphold such disallowance - Decided in favour of assesse.

Disallowance of professional fees for registration of trademark with logo - revenue v/s capital expenditure - Held that:- As the assessee had contended that this expense has been debited to WIP and, therefore, in view of the reasoning given above, the same cannot be disallowed and added to the incom .....

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, J.M. The aforesaid cross appeals have been filed by the Revenue as well as assessee against separate impugned orders dated 29-11-2012, passed by the ld. CIT(A) - 1, Thane for the quantum of assessment passed u/s 153A r.w.s. 143(3) of the Income Tax Act, 1961 ( the Act ) for the assessment years 2008- 09 and 2009-10. 2. First, we shall take up Revenue s appeal in ITA No. 2174/Mum/2013 for A.Y. 2008-09, vide which the following ground has been raised:- Whether on facts and in the circumstances o .....

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tence, w.e.f. 1-1-2007. The assessee firm is engaged in the business of builder and developer and had undertaken the development of a project, namely, Ellora Fiesta in Navi Mumbai. A search and seizure action u/s 132(1) of the Act was carried out in the case of Gajra Group on 19-2-2009. During the course of search proceeding, a sum of ₹ 15 crores was voluntarily admitted and offered for whole as a Gajra Group. Out of the said declaration of ₹ 15 crores, sum of ₹ 63 lakhs pertai .....

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the assessee during the course of search proceeding, in the statement recorded u/s 132(4). In response, the assessee submitted that its housing project commenced from 29-9-2007 and during the year under consideration it was an ongoing project. For the period under consideration, the Profit & Loss Account indicate net profit of ₹ 6,48,882/-, indirect income of ₹ 7,93,984/- and Work in Progress (WIP) at ₹ 8,03,75,941/-. The cost of the land shown in the current assets was at .....

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s prescribed in the case of builder. Reliance was also placed on several decisions that project completion method is an well accepted method of accounting for the builders and developers. The assessee s submission in this regard have been incorporated by the A.O. from pages 2 to 4 of his assessment order. However, the A.O. rejected the assessee s contention merely on the ground that during the course of search proceeding, the assessee itself has offered the income on estimated basis for the asse .....

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on of facts regarding the applicability of the accounting standards by the search party to the assessee during the course of search proceeding. The builders and developers are governed by revised AS -9 which prescribe revenue recognition on the completion of the project and there are various decisions which have also endorsed the same proposition. Further, the assessee submitted that it is not a contractor but real estate developer and the project completion method is also one of the revised met .....

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ct for revenue recognition in the case of builder or real estate developer. It is the discretion of the developer/builder to adopt any of the two method of revenue recognition which is best suited. Thereafter, he noted down the entire facts and the statement recorded during the course of search & survey operation, and deleted the addition after observing and holding as under:- 5. In the instant case, the project of the appellant "Ellora Fiesta" at Sanpada, Navi Mumbai, has commence .....

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by the ICAI, the percentage completion method has been made compulsory in the case of developers w.e.f. 01/04/2004. After being told so, Shri Ramesh Gajra agreed to offer the additional income of ₹ 63,00,0001- as on 31/03/2008 on behalf of the appellant firm for taxation on the basis of the percentage completion method, even though the project was completed upto 13% only, the fact which has been recorded by the AD also in the assessment order for the year under consideration. Since the pro .....

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orrect. The appellant had made the offer of additional income for the year under consideration in a letter of offer filed by the Gajra group before the Addl. DIT (Inv.) Kalyan on 12/04/2009. The perusal of the above letter filed before the Addl. DIT (Inv.) Kalyan, clearly shows that the appellant had offered the additional income for the A.Y. 2008-09 and 2009-10 after the direction of the search party to the effect that the declaration of the income on percentage completion method has been made .....

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jurisdiction of the search/survey party. On such an advice, the appellant offered the estimated additional income for the period under consideration which is an estimated figure without any real working of the profits. From the facts mentioned above, it can be observed that the act of offering the additional income was not voluntary but under a misbelief inculcated by the search party that the declaration of the profits on percentage completion method is mandatory as per AS-15 and section 145 o .....

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e of the assessee for an assessment year shall be computed based on the method of accounting consistently followed by the assessee and in the instant case the method being regularly followed is the project completion method, which cannot be disturbed unless there are strong reasons for the same to do so. The AO has not given any reason for adopting the percentage completion method in the instant case and therefore his action of doing the same cannot be justified. 4.7. Further, the AO while apply .....

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ect the method of calculating the profits of the appellant and substituting it with percentage completion method. The AO should have examined the books of accounts for the period under consideration, which are admittedly properly maintained, and pointed out the defects in such books of accounts and then proceed to reject the regular method of accounting being followed by them applying the provisions of section 145. After rejection of the books of accounts, the AO should have worked out the sales .....

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T. Act, the AO cannot reject the method of accounting regularly being followed by the appellant and arbitrarily substituting the same with any alternative method. 4.8. There is a merit in the contention of the appellant that the methods of revenue recognition as prescribed under AS-7 are for the contractors and in the case of builders or the real estate developers the revised AS-9 is the prescribed method for revenue recognition. The accounting standards have been revised from 01/04/2003 and as .....

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ciated with the ownership; ii) At the time of the transfer of all significant risks and rewards of ownership, it is not unreasonable to expect the ultimate collections; and iii) No significant uncertainty exists regarding the amount of consideration that will be derived. 4.9. If the above prescribed revised accounting standards AS-9 for the real estate developers are applied to the project of the appellant, can it be definitely concluded that the appellant has transferred to the buyer all signif .....

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ed to a level where the seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the shops/ flats transferred. The project of the appellant is at initial stage and it would be totally unrealistic to assess the profits from this project during the period under consideration because the revenue cannot be recognized at this stage as there can be subsequent cancellation of the sales made during the period or even increase in th .....

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accounting the assessee has been generally following in the other projects. However, the A.O. did not responded to the same and accordingly, the ld. CIT(A) held that the project completion method followed by the assessee is an accepted method and there is no reason to deviate from such method without any strong reason and finally he deleted the addition made on account of profit after applying the percentage completion method. 7. Before us, the ld. CIT-DR strongly relied upon the order of the A. .....

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mitted that the A.O. himself in the assessment year 2012-13 had completed the assessment on the basis of project completion method when the said project was completed. Now, the Revenue is taking different stand, that in the earlier year the revenue should be recognized as per percentage completion method and in the subsequent year it should be on the basis of project completion method. This, she submitted cannot be upheld. In support, she filed a copy of assessment order dated 25-2-2015 for the .....

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nce or documents which have been found during the course of search indicating that the assessee had been following percentage completion method regularly. If the assessee has been following one of the recognized methods as prescribed by AS-9, then it cannot be held that the Revenue can impose a different method upon the assessee unless there is a finding of fact that such a method is not reflecting the true profits of the assessee. Now it has also been brought on record by the ld. Counsel that i .....

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of the ld. CIT(A) is affirmed and the grounds raised by the Revenue is dismissed. 10. Since similar ground has been raised by the Revenue in the A.Y. 2009- 10 and similar finding has been given by the A.O. and the ld. CIT(A), therefore, the finding given upon will mutatis-mutandis and accordingly, the grounds raised by the Revenue in A.Y. 2009-10 is also dismissed. 11. In the result, appeal of the Revenue for assessment years 2008-09 & 2009-10 are dismissed. 12. Now, we shall take up the app .....

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addition of ₹ 433,348/- paid to NMMC on account of statutory deposits, to the total income. 3. BECAUSE, ld. CIT(A) has erred in law and on facts in upholding the addition of ₹ 16,292/- paid towards professional fees for registration of trademark with logo on the ground that the same is in the nature of capital expenditure. WITHOUT PREJUDICE TO THE ABOVE BECAUSE, ld. CIT(A) has erred in not appreciating that even if the above expenses we disallowable, the same ought to be reduced from .....

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nsecured loan for which it has debited interest cost of ₹ 45,33,852/- in work-in-progress account. In response to the show cause as to why interest should not be disallowed on interest free loan, the assessee submitted and stated as under:- In this respect we have to state that the advances given to M/s Gahlot Construction are for a short term basis. With respect to the advances given to M/s Konark Enterprises we have to state that the said advances are given for plot of land. Secondly our .....

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he argument of the assessee for reducing the allowable interest from work-in-progress. Accordingly, he disallowed the proportionate interest of ₹ 6,80,853/- u/s 36(1)(iii) of the Act after taking the average rate of interest at 8%. 15. Before the ld. CIT(A), the assessee stated that the advance to M/s Konark Enterprises was given to acquire a plot of land for the purpose of business only, however, such transaction could not take place and as the land in question had become subject matter o .....

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Similarly, the loan amounting to ₹ 32 lakhs was given to M/s Gahlot Construction which is for non-business purposes. Accordingly, he confirmed the disallowance. 16. Before us, Ms. Ritika Agarwal submitted that, first of all, the assessee had huge interest free funds in the form of capital which was ₹ 2,85,45,093/-, whereas the advance given was only ₹ 82 lakhs. In support of her contention, she drew our attention to the balance sheet as on 31-3- 2008 and also the copy of ledger .....

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purchase of plot of land which is evident from the copy of confirmation given by the said party, which was filed before the A.O. as well as before the ld. CIT(A). In the said confirmation it has been clearly stated that the amount of ₹ 50 lakhs was in the nature of advance for the purchase of plot of land. However, the said plot had become subject matter of litigation and therefore, the transaction has not yet taken place. There is no material on record to show that this was not for purcha .....

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s for its business purpose and, therefore, such an advance given for the purposes of business, no disallowance of interest is called for. Lastly, she submitted that the interest has been capitalized by the assessee as the assessee has been following project completion method, where all the expenses have been debited to WIP account and if any disallowance is called for, the same should be reduced from the WIP account and no addition should be made on this account. Regarding loan of ₹ 32 lak .....

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e the co-relation between the advance given and the interest free advance. Such a plea cannot be entertained and if the same is admitted then the matter should be restored back to the file of the A.O. Regarding the second plea, he submitted that the finding of the ld. CIT(A) should be upheld which based on appreciation of facts. 18. We have heard the rival contentions and also perused the relevant material placed on record. The assessee had given advance of ₹ 50 lakhs to M/s Konark Enterpr .....

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ansaction could not be materialized as there was litigation between M/s Konark Enterprises and the State of Maharashtra. This is evident from the copy of Petition filed before the authorities below. Once the advance has been given for the purchase of plot of land which is for business purposes then no adverse inference can be drawn so as to disallow the interest on the ground that the same is for non-business purpose. Similarly, the loan to the partnership firm has been in which the partners are .....

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Court in the case of Reliance Utilities and Power Ltd. (supra) wherein the Hon ble High Court observed and held as under:- If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interestfree funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta .....

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t that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woocombers of India Ltd. s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the busi .....

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d considering the finding of fact both by the CIT (Appeals) and ITAT. Thus, on this count also no disallowance is called for. Lastly, we agree with the alternative contention of the ld. Counsel that the assessee has been following project completion method and such interest cost have been capitalized in the account, then no disallowance can be made in this year. Accordingly the disallowance of interest for a sum of ₹ 6,80,853/- stands deleted and the assessee s ground on this score is allo .....

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ds mosquito deposit and ₹ 25,000/- is towards tree plantation deposits which aggregates to ₹ 4,33,348/-. He held that such deposit cannot be allowed. The assessee, however, submitted that such expenses are incurred for procuring the Commencement Certificate of the project and these are not refundable and not received even after completion of the project. Further, since the assessee has been following project completion method, wherein all the expenses have been debited to WIP, theref .....

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nd any reason to uphold such disallowance. Accordingly, ground No. 2 raised by the assessee is treated as allowed. 22. In ground No. 3, the assessee has challenged the addition of ₹ 16,292/- paid towards professional fees for registration of trademark with logo on the ground that the same is capital expenditure. 23. In this regard, the assessee had contended that this expense has been debited to WIP and, therefore, in view of the reasoning given above, the same cannot be disallowed and add .....

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ds have been raised by the assessee:- BECAUSE, ld. CIT(A) has erred in law and on facts in upholding the estimated disallowance of interest u/s.36(l)(iii) on loans amounting to ₹ 2,67,00,OOOI- and directing the AO to recalculate the same ignoring the fact that the advances were made for business purpose and should not be considered for interest disallowance. WITHOUT PREJUDICE TO THE ABOVE 2. BECAUSE, ld. CIT(A) has erred in not appreciating that even if the above expense is disallowable, t .....

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00/- 2 Konark Enterprises 14/08/2007 50,00,000/- 3 Raja Mirani 05/08/2008 30/08/2008 03/08/2008 11/10/2008 29/10/2008 Total 50,00,000/- 25,00,000/- 15,00,000/- 15,00,000/- 15,00,000/- 1,20,00,000/- 4 Ramesh L. Bhanushali 16/12/2008 23/01/2009 63,00,000/- 2,00,000/- As regards the loan/advance given to M/s Konark Enterprises and M/s Gahlot Constructions, the same is coming from earlier years, therefore, the finding given therein will apply mutatis-mutandis in this year also. As regards the advanc .....

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