TMI Blog2020 (9) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... r, viz. Shrenik Siroya by way of overdrawing of his capital, and it is only the excess interest so received by the firm from him, if any, which would be assessed under the head Other sources . Accordingly, we modify the order of the CIT(A) in terms of our aforesaid observations. Valuation of closing stock - only contention of the ld. A.R before the lower authorities as well as before us was that the assessee had consistently been following this method for valuing its closing stock - HELD THAT:- Once the method that was consistently adopted by the assessee for valuation of stock is rejected and the same is substituted by another method by the A.O, therein, in order to deduce the true profits for the year under consideration such an exercise cannot be confined to the valuation of the closing stock alone and has to be extended to the valuation of the opening stock. Our aforesaid view is fortified by the order passed in the case of CIT Vs. Ahmedabad New Cotton Mills Co. Ltd. [ 1929 (11) TMI 1 - PRIVY COUNCIL] - restore the issue to the file of the A.O with a direction that the valuation of the opening stock may also be carried out as per the method substituted by the A.O for v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh adjudication. Before parting, we may herein observe that the A.O while readjudicating the aforesaid issue may inter alia seek necessary verifications from the developer., viz. M/s Omega Investment Properties Ltd. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its aforesaid claim on the basis of fresh documentary evidence. Deduction u/s 80IB(10) on the total income assessed - HELD THAT:- It is the claim of the assessee that the additions made by the A.O qualified for deduction u/s 80IB(10) of the Act. We have given a thoughtful consideration and find no merit in the aforesaid claim of the assessee. Claim for deduction under Sec. 80IB is based on satisfaction of a set of conditions and legal requirements as specified in the Act. One of the important requirement is verification and authentication of the said claim for deduction by the auditor in the statutory Form 10CCB . As the said mandatory requirement would not be satisfied by the assessee insofar additions have been made in its hands in the course of the assessment proceedings, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said income of ₹ 2,01,22,733/-. 7). On the facts and the circumstances of the case and in law, the learned CIT(A) erred in confirming treatment of Interest received from a partner of ₹ 53,73,413/- as Income from Other Sources instead of a part of the receipt under the head Profits Gains from Business . 8). On the facts and the circumstances of the case and in law, the learned CIT(A) erred in not allowing set off of the expenditure incurred in respect of interest paid against the interest income from the partner. 9). The appellant submits that the ld. CIT(A) ought to have taken both these items of Interest paid and Interest income under the head Profits Gains from business . 10). Without prejudice to above, the CIT(A) ought to have given necessary effect by way of adjustment in closing stock. 11). On the facts and the circumstances of the case and in law, the learned CIT(A) erred in not allowing deduction u/s 80IB(10) on income of ₹ 53,73,413/-. 12). On the facts and the circumstances of the case and in law, the learned CIT(A) erred in not considering the estimated expenses to be incurred for the valuation of the closing stock and thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of the case and in law, the learned CIT(A) ought to have allowed deduction u/s 80IB(10) on the total income assessed. 21). On the facts and the circumstances of the case and in law, the learned CIT(A) erred in confirming the interest u/s 234A, 234B 234C of the Act, though the order is in respect of and pursuant to direction u/s 263 of the Act. The appellant denies its liability to chargeability of such interest. 22). The appellant craves leave to add, amend, modify, substitute and/or cancel any of the ground of appeal. 2. Briefly stated, the assessee firm which is a builder and a developer had filed its return of income for A.Y 2009-10 on 04/11/2010, declaring its total income at Rs. Nil. Subsequently, the case of the assessee was selected for scrutiny assessment, and the A.O, after inter alia making an addition of deemed dividend u/s 2(22)(e) of ₹ 63,78,083/- and disallowing the assessee s claim for deduction u/s 80IB(10), vide its order passed u/s 143(3), dated 19/12/2011 assessed its income at ₹ 1,50,48,020/-. On appeal, the CIT(A) vacated the addition made by the A.O u/s 2(22)(e) of the Act, but confirmed the disallowance of the assessee s claim f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 813/-(dr) Shri. Shrenik Siroya Interest received ₹ 53,73,413/-(cr) Net Interest (received) ₹ 41,18,600/-(cr) After netting the interest received/paid, the assessee firm reduced the net balance amount of interest received of ₹ 41,18,600/-(cr) from the total interest of ₹ 2,32,99,308/-(dr) that was paid by it on the interest bearing funds borrowed from third parties. However, the A.O was not persuaded to subscribe to the aforesaid claim of netting of the interest received/paid by the assessee firm from/to its partners, and adjusting of the net balance of interest received against the interest paid on borrowed funds. Observing, that the capital overdrawn by the partner was a personal transaction and not in the nature of a business transaction the interest of ₹ 53,73,413/- that was received on the capital overdrawn by the partner, viz. Shri. Shrenik Siroya, was assessed by the A.O as the income of the assessee firm from Other sources . On appeal, the CIT(A) confirmed the view taken by the A.O in context of the aforesaid issue under consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paid alone has to be taken into consideration for the purpose of disallowance under the said statutory provision. But then, the issue before us is that as to under what head of income the interest received by the assessee firm on the capital overdrawn by a partner is to be assessed. We are of the considered view that as the interest bearing borrowed funds of the assessee firm were channelized for overdrawing of capital by the partner, viz. Shri. Shrenik Siroya, which admittedly as observed by the A.O was for non-business purposes, therefore, the correlating interest expenditure pertaining to the amount of capital overdrawn has to be disallowed u/s 36(1)(iii) of the Act. As for the rate of interest received by the assessee firm from its partner, which is found to be in excess as in comparison to the rate on which the funds were raised/borrowed by the firm from third parties, the same only to the said extent is liable to be assessed as the income of the assessee firm from Other sources . In sum and substance, the interest expenditure correlating to the interest paid by the assessee firm on the funds borrowed is to be disallowed u/s 36(1)(iii), to the extent, the same were advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Cost : ₹ 24,88,78,521.88 COST PER SQ. MTR. Total Cost : ₹ 24,88,78,521.88 Total Area (Sq. Mtr) : 3,249.60 Sq. Mtr Cost per Sq. Mtr. :₹ 76,587.43 Sold Area : 215.04 Sq. Mtr Unsold Area : 3034.56 Sq. Mtr Valuation of Stock : ₹ 23,24,09,160/- Less: Estimated Expenses : ₹ 2,00,00,000/- Closing Stock : ₹ 21,24,09,160/- On being called upon to justify the aforesaid valuation of closing stock, it was the claim of the assesee before the lower authorities that it had correctly worked out the same, i.e as per the method of valuation that was consistently followed by it and accepted by the revenue in the preceding years. It was submitted by the assessee that the valuation of stock at cost included estimated expenses (to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f valuation of its unsold area of 3034.56 Sq. mtr of land had after including on an adhoc basis the estimated expenses of ₹ 2 crore (to be incurred upto the completion of project), therein worked out the cost per square meter at ₹ 76,587.43. Adopting the said rate, the closing stock was initially valued by the assessee at ₹ 23,24,09,160/- [3034.56 Sq. mtr. X ₹ 76,587.43]. But then, the assessee reduced the aforesaid estimated expenses of ₹ 2 crores from the aforesaid value of closing stock, and by so doing, scaled down its value to ₹ 21,24,09,160/-. In the course of the assessment proceeding the A.O rejected the inclusion of the estimated expense (to be incurred upto the completion of project) for the purpose of valuing the closing stock, and thus, spreading the cost of ₹ 22,88,78,521.88 over the total area of 3249.60 Sq. mtr worked out the rate per square meter at ₹ 70,432.83. Accordingly, by applying the aforesaid rate of ₹ 70,432.83 per Sq. mtr to the unsold area of 3034.56 Sq. mtr the A.O worked out the value of the closing stock at ₹ 21,37,32,649/- Observing, that the value of closing stock of ₹ 21,37,32,649/- t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid method for valuation of closing stock, the same we are afraid does not find favour with us. As observed by the Hon ble Supreme Court in the case of CIT Vs. British Paints Ltd. (1991) 188 ITR 44 (SC) , in a case where an assessee was not following the correct system of accounting and the valuation of the stock-in-trade was likely to result in a distorted picture of the true state of business for the purpose of computing the chargeable income, there even if the assessee had adopted a regular system of accounting, it was the duty of the A.O u/s 145 of the Act, to consider whether the correct profits and gains of the assessee could be deduced from the accounts so maintained. It was observed by the Hon ble Apex Court that if the A.O was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to Sec. 145 of the Act. At this stage, we draw support from the judgment of the Hon ble Supreme Court in the case of Sanjeev Woolen Mills Vs. CIT (2005) 279 ITR 434 (SC). In the said case as the profits shown by the assessee were only notional and could not be said to be its correct income chargeable to tax, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the valuation of the opening stock may also be carried out as per the method substituted by the A.O for valuing the closing stock. Accordingly, the issue is set aside to the file of the A.O for giving effect to our aforesaid observations. The Grounds of appeal No. 12 to 15 are partly allowed for statistical purposes in terms of our aforesaid observations. 11. We shall now advert to the claim of the assessee that the CIT(A) had erred in confirming the estimated profit of ₹ 1,05,32,819/- on account of sale of certain flats, which were sold in earlier year and the income of the same was correctly declared and shown accepted by the department u/s 143(3) of the Act in that year. Succinctly stated, the A.O in the course of the assessment proceedings observed, that the assessee had offered income from sale of Flat Nos. 2203 and 2204 in A.Y 2008-09, during which year it had claimed deduction u/s 80IB(10) of the Act. However, on a perusal of the respective agreements to sell , dated 23.05.2008 of the aforesaid properties, it was observed by the A.O that the income arising therefrom should have been offered for tax in the period relevant to A.Y 2009-10. On further verificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the assessee that it was consistently recognizing its revenue from sale of flats as per Accounting Standard-9 (AS-9) issued by ICAI, i.e when consideration against sale of flats was substantially received, construction upto a particular floor was completed and revenue there from could reasonably be determined. However, it was observed by the A.O that the assesee s architect, viz. V.S Vaidya Co. had acknowledged the completion of construction upto 23rd floor vide his letter dated 28.08.2008, which pertained to A.Y 2009-10 and not A.Y 2008-09. Further, it was noticed by the A.O that the aforesaid purchasers had already paid substantial amount of sale consideration which was being shown as advance against flats in the books of the assessee, as under: Flat No. Name of purchase Sale Consideration Date of payments Date of sale A.Y (during which sale was offered) 903 Manish Shialesh Chopra ₹ 37,50,000/- 27.01.2004 24.02.2009 A.Y 2008-09 904 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement to sell the sale of the aforesaid flats pertained to A.Y 2009-10, the A.O holding a conviction that the income of ₹ 1,05,32,819/- relatable to such sale transactions was liable to be assessed in the hands of the assessee in the year in question i.e A.Y 2009-10, therein added the same to its returned income. On appeal, the CIT(A) upheld the aforesaid addition made by the A.O. 12. Aggrieved, the assessee has assailed the assessing of the aforesaid sale transactions in the year in question, which therein had resulted to a consequential addition of ₹ 1,05,32,819/-. It was submitted by the ld. A.R that the assessee by way of a consistent practice was recognizing the revenue from sale of flats as per Accounting Standard-9 (AS-9) issued by the ICAI, i.e when consideration against sale of flats was substantially received, construction upto a particular floor was completed, and revenue there from could reasonably be determined. It was further submitted by the ld. A.R that the said method of accounting was accepted by the department in the preceding and also the succeeding years. Our attention was drawn by the ld. A.R to the computation of income, and also the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said 8 flats) was received by the assessee way back in F.Y 2003-04. Apart from that, we find, that the assessee s architect viz. V.S Vaidya Co. had acknowledged the completion of construction upto 23rd floor only, vide his letter dated 28.08.2008, which pertained to A.Y 2009-10 and not A.Y 2008-09. In other words, the construction upto the 23rd floor was completed only as on 23.08.2008. AS regards the claim of the assessee that it had recognized the revenue from sale of flats as per the Accounting Standard-9 (AS-9) issued by ICAI, weare unable t o persuade ourselves to subscribe to the same. As per the Guidance Note on Recognition of Revenue by Real Estate Developers i.e GN(A)(Issued in the year 2006), for recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9 are satisfied as under : 10. Revenue from sales or service transactions should be recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue from sale of the said properties was to be recognised in A.Y 2009-10 and could not have been accounted for in A.Y 2008-09. At the same time, we may herein observe that pursuant to the shifting of the aforesaid income from A.Y 2008-09 to A.Y 2009-10, the credit for the tax deposited by the assessee corresponding to the income pertaining to the aforesaid sale transactions that were accounted for by it in A.Y 2008-09 is required to be given to it during the year under consideration i.e A.Y 2009-10. The Ground of appeal No. 16 to 19 are dismissed in terms of our aforesaid observations. 14. We shall now take up the claim of the assessee that the CIT(A) had erred in concurring with the A.O and treating the amount of ₹ 2,01,22,773/- recovered by the assessee from M/s Omega Investment and Properties Pvt. Ltd. as its income from Other Sources instead of reducing the same from the cost of construction of the project. Briefly stated, the assessee firm (hereinafter referred to as a Sub-developer ) had entered into a sub-development agreement, dated 19.03.2003 with M/s Omega Investment and Properties Pvt. Ltd. (hereinafter referred to as Developer ) for re-development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saleable area of 1,10,000 sq. ft. was to be shared between the developer and the assessee equally. Further, as per Clause 5 of the sub-development agreement, dated 19.03.2003, the assessee, at the cost of the developer and in their account was to continue the remaining construction work of the tenant building, shops etc. alongwith the required infrastructural facilities to be provided to all the tenants and occupants of the said property. Accordingly, the expenditure required to be incurred for completion of the said construction work alongwith the infrastructural facilities was in the first instance to be paid by the assessee, and the said amount was thereafter to be reimbursed by the developer, including expenses of drainage, sewerage, electrical lines, costs of lift and costs of 5 ft pavement around the buildings at the mutually agreed rate of ₹ 570/- per sq. ft. of the built-up area, with such escalation as may be mutually agreed amongst them. As such, the amount of expenditure incurred by the assessee was to be reimbursed to it by the developer without interest out of the 50% share of the developer in the sale proceeds. 15. In the backdrop of its aforesaid terms of ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut then, it was observed by the A.O that the assessee despite specific directions had failed to furnish the requisite details as were called for (i.e mode of payment, sales relatable to the expenses, supporting vouchers for labour charges) with respect to labour charges for extra FSI, sale of material and job work. Apart from that, the assessee on being called upon to produce the clause in the sub-development agreement which would substantiate its claim that cost incurred for extra FSI was to be shared equally, therein stated that the same was orally agreed upon. Further, as observed by the A.O, the assessee also could not substantiate as to how the impugned amount of reimbursement of labour charges of ₹ 1,98,41,458/- was determined. Also, no details were furnished by the assessee as regards the constructed area with respect to extra FSI, in respect of which cost was to be shared with the developer. In the backdrop of the aforesaid facts the A.O did not find favour with the claim of the assessee that the amount of ₹ 2,01,22,773/-received from the developer, viz. M/s Omega Investment Properties Ltd. was towards reimbursement of expenses, and thus assessed the said amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le area (or as approved by SRA) was to be shared between the developer and the assessee equally. On a similar footing the area in excess of the saleable area of 1,10,000 sq. ft. was to be shared between the developer and the assessee equally. At this stage, we find that the aforesaid facts are duly substantiated by the terms and conditions provided for in the sub-development agreement, dated 19.03.2003. On a perusal of the various clauses of the sub-development agreement, we find that is therein clearly provided at Clause 3 viz. (a). that the sub-developers (i.e assessee firm) at the cost of the developers and in account of the Developers, shall construct the tenants/occupants buildings as also complete the incomplete construction work thereof as recited above; and; (b). the sub-developers shall, at their own cost, construct the Tower building of approximately 1,10,000 sq. ft of FSI or additional area as specified by SRA as per the potential of the sale plot nos. 183 and 185 with all car parking, common spaces etc. as per the present sanctioned plan and also as per the amended plan/s which may hereafter be sanctioned from time to time in respect of the said Tower building and with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e find similar clauses viz. clause 6, clause 7, clause 8, clause 14, clause 16 etc., which clearly provide that the assessee was obligated to construct at the cost of the developer the tenants/occupants buildings, and also complete the incomplete construction work. Also, all cost of future development in excess of 1,10,000 sq. ft. of saleable area (or as approved by SRA) was to be shared between the developer and the assessee equally. In the backdrop of the aforesaid facts, we are unable to persuade ourselves to accept the summarily rejection of the assessee s claim that the amount of ₹ 2,01,22,773/- received by it from the developer, viz. M/s Omega Investment Properties Ltd was towards reimbursement of labour charges aggregating to ₹ 1,98,41,458/- and other such miscellaneous expense of ₹ 2,81,315/- that were incurred on behalf of the developer. In fact, we find substantial force in the claim of the assessee that the aforesaid amount so received from the developer, viz. M/s Omega Investment Properties Ltd. was towards reimbursement of the expenses which were incurred by the assessee for and on its behalf. Although the assessee had failed to substantiate its a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 17. We shall now advert to the claim of the assessee that the lower authorities were in error in not allowing deduction u/s 80IB(10) on the total income assessed. As such, it is the claim of the assessee that the additions made by the A.O qualified for deduction u/s 80IB(10) of the Act. We have given a thoughtful consideration and find no merit in the aforesaid claim of the assessee. Claim for deduction under Sec. 80IB is based on satisfaction of a set of conditions and legal requirements as specified in the Act. One of the important requirement is verification and authentication of the said claim for deduction by the auditor in the statutory Form 10CCB . As the said mandatory requirement would not be satisfied by the assessee insofar additions have been made in its hands in the course of the assessment proceedings, we therefore are of the considered view that the CIT(A) had rightly rejected the said claim of the assessee. The Grounds of appeal Nos. 6, 11 20 are dismissed. 18. The Grounds of appeal Nos. 1 22 being general are dismissed as not pressed. 19. The Ground of appeal No. 2 as per the concession of the ld. A.R is dismissed as not pressed. 20. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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