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The Asst. CIT, Circle-12, Ahmedabad Versus Shri Gordhan Becharbhai Patel and Vica-Versa

2015 (11) TMI 1210 - ITAT AHMEDABAD

Addition u/s. 40A(2)(b) - whether in view of the specific instances pointed out by the AO in the assessment order, the interest paid by the assessee @ 15% to four related persons was excessive - Held that:- We are unable to accept the contention of the ld.counsel for the assessee that on short-term deposits, the assessee had paid at a lower rate of interest. The ld.CIT(A) deleted the addition on the basis that the Tribunal has allowed the interest even @18% and @ 24% respectively. We are of the .....

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ies for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. In the given case, the AO has not given any finding in respect of fair market rate of interest paid by the assessee. Under these facts, we do not see any reason to interfere with the order of the ld.CIT(A), same is he .....

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hout appreciating the difference in the quality of raw material used in the manufacture of submersible pumps which was changed from gun metal to stainless steel. It shows that the Assessing Officer has not taken into consideration the full facts with regard to valuation of stock. Under the circumstances, the addition made by the AO towards under-valuation of two items of water pumps is hereby deleted. - Decided against revenue.

Development agreement addition - Held that:- The appellan .....

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.192/Ahd/2010 - Dated:- 9-10-2015 - SHRI KUL BHARAT, JUDICIAL MEMBER And SHRI MANISH BORAD, ACCOUNTANT MEMBER For The Revenue by : Shri Albinus Tirkey, Sr.DR For The Assessee by : Shri S.N. Divatia, AR ORDER PER SHRI KUL BHARAT, JUDICIAL MEMBER : This appeal by the Revenue and the Cross Objection by the Assessee are directed against the order of the Ld.Commissioner of Income Tax(Appeals)-XX, Ahmedabad ( CIT(A) in short) dated 15/03/2010 pertaining to Assessment Year (AY) 2007-08. The appeal and .....

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on record by the AO. 1.2 In doing so, the Ld. CIT(A) has erred in law and on facts in not appreciating that, in view of the specific instances pointed out by the AO in the assessment order, the interest paid by the assessee @ 15% to four related persons was excessive. 2. The Ld.ClT(A)-XX, Ahmedabad has erred in law and on facts in deleting the addition of ₹ 4,92,000/- made by the AO on account of under valuation of the closing stock, without properly appreciating the facts of the case and .....

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account of profit from Suryarath scheme, without property appreciating the facts of the case and the material brought on record by the AO. 3.2 In doing so, the Ld. C1T(A) has erred in law and on facts in not appreciating that as per the agreement, M/s. Maniar Developers had exercised full supervisory and financial control as far as the development and construction of Suryarath bungalows scheme was concerned and therefore the AO had rightly held that M/s. Maniar Developers was not only a contract .....

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facts of the case and the material brought on record by the AO. 4.2 In doing so, the Ld. C!T(A) has erred in law and on facts in not appreciating the terms of the development agreement entered into by the assessee with Suryarath Bungalows Co-operative Housing Society. 5. On the facts and in the circumstances of the case, the Ld. CIT (A) ought to have upheld the order of the A.O. 6. It is, therefore, prayed that the order of the CIT (A) beset aside and that of A.O. be restored to the above exten .....

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of ₹ 61,33,566/- on account the profit from Suryarath Scheme. Against the said assessment order, assessee preferred an appeal before the ld.CIT(A), who after considering the submissions of the assessee partly allowed the appeal. While allowing the assessee s appeal, the ld.CIT(A) deleted the addition(s) of ₹ 3,19,859/-, ₹ 4,92,000/- and ₹ 61,33,566/-. Aggrieved by the order of the ld.CIT(A), the Revenue is now in appeal before us. 3. Ground Nos.1 & 1.2 are inter-conne .....

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not justified in making the addition. He submitted that the AO failed to appreciate the fact that from the related parties the assessee had obtained long term basis and, on the contrary, the deposits from the nonrelated parties were accepted as short term basis. 4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We are unable to accept the contention of the ld.counsel for the assessee that on short-term deposits .....

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ferred to in clause (b) of this subsection, and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. In the given case, the AO .....

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supported the order of the ld.CIT(A) and submitted that the AO was not justified in making the addition. 6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. During the course of assessment proceedings, the AO noticed that there was vast difference in valuation of opening stock and closing stock of V- 6 Type SB/12-5 Water Pump and V-6 Type SB/12-6 Water Pump. The contention of the assessee is that the difference in .....

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on account of change in the product mix. Earlier the appellant used to manufacture submersible pumps with impellers made from high quality bronze metals whereas in this year, it has shifted to impellers and neck-ring made from S.S. The perusal of the costing sheets submitted by the appellant both for opening and closing stock (P.32 to P.39), there is a vast difference in the value of neck-ring and impeller inasmuch as it has gone down to ₹ 35.10 ps. per item in the closing stock as agains .....

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ive market and to satisfy the needs of the customers, it has to reduce its cost by changing the quality of the rawmaterial to a cheaper one. I am also inclined to accept the contention of the appellant that the valuation of items of stock would not be the same in both the years and the G.P. Rate is not an indicator of the increase in cost price because it may be offset by corresponding increase in the sale price. The appellant has supported the valuation of stock by submitting the xerox copies o .....

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re of submersible pumps which was changed from gun metal to stainless steel. It shows that the Assessing Officer has not taken into consideration the full facts with regard to valuation of stock. Under the circumstances, the addition of ₹ 4,92,000/- made by the AO towards under-valuation of two items of water pumps is hereby deleted. This ground of appeal, thus stands allowed. 6.1. The above finding on fact of the ld.CIT(A) is not controverted by the Revenue by placing any contrary materia .....

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assessment order on the issue. 7.1. On the contrary, ld.counsel for the assessee submitted that the finding of the AO has been duly considered by the ld.CIT(A) and arrived at the conclusion that the AO was not justified in making the addition. 8. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the AO has made the said addition by observing as under:- 4.2 The reply of the assessee has been considered .....

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rat. The- salient features of important clauses of the development agreement dated 2/9/2009 are as under : Clause-B -The society does not intend to develop the land into the plots and therefore the work of development of the plots- and construction is given to M/s Maniar Developers. Caluse-1 - For completion of the scheme, M/s Maniar Developers is given the task of raising necessary finances, preparation of plans and its approval, plotting of the land and construction of flat / unit /shops . Cla .....

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e conducted by M/s Maniar Developer and it will be entitled to use the money received from the member as per its will and discretion. Suryarath Bunglows Co-op. Housing Socty. Ltd. will not have any share he money so received from the members and society will not ask for any accounts of money so received. Clause -8 - For building construction, M/s Maniar Developers can give contract or sub-contract to any person or contractor at its discretion and all the financial transactions with contractor or .....

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r all the financial transaction of the scheme. Clause-11- M/s Maniar Developers has full authority to give possession to the members on receipt of full payment from the members. Clause-14- M/s Maniar Developers can make addition/alterations in the scheme and construct the building as per'the revised scheme. From the clauses of the development agreement it is apparent that M/s Maniar Developers has been given full authority and control regarding development of land, plotting- on the said land .....

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perative Society Ltd will not ask for any accounts of receipts and payments of the scheme. Thus, M/s Maniar Developers' 'has exercised full managerial and financial control as far as the development and construction of Suryarath Bunglows scheme is concerned. M/s Maniar Developers has developed the land into the plots, taken necessary statutory approvals, arranged for finances for construction of bunglows, carried out construction work of bunglows, allotted bunglows to new members, collec .....

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of Suryarath Bunglows Co-operative Society Ltd. However, the assessee has not offered any profit earned from the scheme for taxation. Instead of showing profit from the Suryarath Bunglows scheme, the assessee has shown development charges @ 10%. In the development agreement, there is no mention of paying development fees @ 10% to M/s Maniar Developers by Suryarath Bunglows Co-operative Housing Society Ltd.It is not explained of what is 10% received as development fees. On perusal of P & L A .....

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members to whom bunglows/shops have been sold. M/s Maniar Developers has made payment to Suryarath Bunglows Co-operative Housing Society Ltd. as under : A.Y. Payments 2093-04 98,30,000 2004-05 2,64,50,000 2005-06 81,55,000 2006-07 2,00,000 4,46,35,000 M/s Maniar Developers has received ₹ 6,99,39,404/- from the members of the Suryarath Co-operative Housing Society Ltd. for sale of bun glows/shops and it has paid ₹ 4,46,35,000/- to Suryarath Co-operative Hosing Society Ltd. The assess .....

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s regarding name and addresses of the contractor/sub-contractor and payments made to them. The development agreement do not contain any clause that shows M/s Maniar Developers will pay any amount to Suryarath Co-operative Housing Society Ltd. in relation to construction and sale of bunglows/shops. In fact it is agreed upon by both these parties that all the finances for development and construction of the scheme will be arranged by M/s Maniar Developers only and Suryarath Co-operative Housing So .....

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Maniar Developers . Therefore any profit arising out of the sale of bun glows/shops belong to M/s Maniar Developers. However, M/s Maniar Developers has shown development fees @10% in its books of account and has not disclosed the profit earned in this scheme. The assessee has not provided the year wise details of receipts from various members but it has provided the year wise payments made to Suryarath Cooperative Hosing Society Ltd.. In absence of the year wise details of receipts, it is diffic .....

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r M/-s Maniar Developers has received ₹ 1,21,59,335/- ( ₹ 1,90,01,439 + ₹ 2,00,000 - ₹ 70,42,104) from various members on sale of bunglows/shops. It is submitted by the assessee that upto 31/3/2007 M/s Maniar Developers has paid ₹ 4,46,35,000/- to Suryarath Cooperative Hosing Society Ltd. and there is liability of ₹ 1,90,01,439/- as on 31/3/2007. Thus the total liability of M/s Maniar Developers to Suryarath Cooperative Hosing Society Ltd. will be ₹ 6,36 .....

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92,227/- for A.Y 2007-08 . Thus M/s Maniar Developers has shown total profit of ₹ 1,69,399/- only for the A.Y. 2005- 06,2006-07 & 2007-08. Therefore, profit of ₹ 61,33,566/- ( ₹ 63,02,965 - ₹ 1,69,399) is earned by M/s. Maniar Developers on construction and sale of Suryarath bunglows/shops, however the same has not been shown in the books of account . The profit of ₹ 61,33,566/- is added to the total income of the assessee. Without prejudice to the ongoing disc .....

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t charges the assessee has debited various expenses and shown the N.P. of ₹ 55,990/- for A.Y 2005-06 and ₹ 21,182/- for A.Y 2006-07. During A.Y 2007-08, M/s Maniar Developers.has not shown any development charges from Suryarath Co-operative Hosing Society Ltd. During the year M/s Maniar Developers has collected ₹ 1,12,59,335/- from various members. So it is entitled for development charges of ₹ 12,15,933/- i.e. 10% of ₹ 1,21,59,335/-. The same is added to total inco .....

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s noticed that the AO has included the so-called profit from the said Scheme in the hands of the appellant mainly for the reason that the appellant exercised full managerial and financial control as regards the development and construction of the Scheme. However, the AO has failed to appreciate that the appellant was entrusted such control by virtue of a development agreement and unless the said arrangement is found to be sham or bogus, the appellant is nothing more than an agent of the Society .....

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id activities, he was given various powers but no title in the property i.e. land or bunglows/shops constructed by the appellant was to vest in him. The AO is not correct in holding that the appellant had sold bunglows/shops constructed in the Scheme because neither the land nor the super-structure thereon by way of bunglows/shops belonged to the appellant and therefore, the appellant could not have given a better title than what he himself has. It was only an authority or power delegated to the .....

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en the copy of B.U. Permission given by Ahmedabad Municipal Corporation also shows that the Scheme was completed latest by 27-06-05. It is further noticed that different bunglows/shops were completed from September, 2004 to June, 2005 as per the said B.U. Permissions which are on Page-69 to 73 of the Paper Book. Thus, when there was admittedly no development work carried out by the appellant for .the year under appeal, there was no question of estimating any income therefrom in this year. Theref .....

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development agreement. Therefore, the contribution received from the Members other than building construction could not be considered for the purpose of working out any income by the AO. It is noticed from the details given by the AO on page 17 of the order that he has considered the aggregate receipts from the Members of ₹ 6,99,39,404/- for the purpose of working out income but it is not correct in view of the payments made by the Members towards various other items like, land, infrastruc .....

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to 2006-07 is not justified. 6.4 In my view of the matter, even the development charges worked out by the AO at ₹ 12,59,933/- being 10% of this year's collection of ₹ 1,21,59,335/- is not correct because the said amount represents collection from various Members transferred by journal entry to the .account of the Society and thus, it has no relevance or bearing to the development activity carried out by the appellant so as to estimate profit out of it. The perusal of ledger acco .....

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nt, the receipts from the Members. cannot be considered for working out income by way of development charges in this year. 6.5 Even \f the contention of AO that profit from construction activity is to be taken at 10% of the receipts is accepted, it has to be applied to the construction expenses debited in the books of the said society during F.Y. 2002-03 to 2005-06. The audited annual accounts of the said society for the aforesaid years and as per chart given at P.125 of the paper book shows tha .....

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ary of P&L A/c. for these years given by the appellant. On the other hand, it is noticed from the last para of the asstt. order that AO has not taken into consideration the development charges received by the appellant for A.Y.2005-06 and 2006-07, aggregating to ₹ 25,39,577 whereas he has failed to take into consideration development charges for A.Y.2003-04 and 2004-05 aggregating to ₹ 7,91,599/- received by the appellant. Thus, the appellant has already offered more development .....

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he appellant was entitled to development charges only on the construction cost as per the resolution of the society from time to time, it has no relevance with the collections from the members. This year, no construction was carried out by the appellant, 6.6 In view of the aforesaid facts and circumstances of the case, I hold that the AO was not justified in holding the development charges at 10% of the total receipts from the Members as well as making addition of the entire difference of ₹ .....

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