TaxTMI 
TaxTMI 
2019 (7) TMI 1075
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....firming view taken by AO that proportionate land cost allowable on sale to co- developer is to be worked out based upon area of land available and not upon area of FS1 available. 3. Ld. CIT (A) erred in law and on facts in recasting trading a/c of land to confirm addition to closing stock of land on the alleged ground that the appellant changed method of accounting, valuation of closing stock & allocation of cost to Profit & Loss a/c in subsequent year. 4. Ld. CIT (A) erred in law and on facts directing AO to recompute allocation of AUDA charges, FCCD interest & Township infra expenses based upon area of land sold and not as allocated by appellant on the basis of FST area. 5. Without prejudice to the above contention that working of closing stock of land as per appellant be accepted, ld CIT (A) ought to have directed AO that addition to closing stock be allowed as opening stock of the next year. 6. Ld. CIT (A) erred in law and on facts confirming disallowance by AO of Rs. 19,48,142/- administrative expenses u/s 14A rwr 8D of the Act. 7. Levy of interest u/s 234A/B/C & D of the Act is not justified." 3. Grounds of appeal raised by Reve....
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....rivate Limited Company, engaged in the development of township known as 'Applewoods'. The return of income for AY 2012-13 was filed on 30.09.2012 showing loss of Rs. 7,01,72,900/-. It was noticed by the AO in the course of scrutiny proceedings that the Assessee has purchased 511707 sq. mtr. of land for the purpose of development of township and also applied for the development of same under Regulation for Residential Township-2009. The authority granted permission vide their letter dated 28.05.2010. The Assessee had prepared the construction plan as per the terms of Regulation for Residential Township 2009 which was approved by the Authority and as per the approved plan which had been prepared in terms of township regulations:- (a) The Assessee has provided for 120446 sq. mtr. land for the purpose of park, school, hospital, crossover road etc.' and only balance land area of 391261 sq. mtrs. is available for commercial exploitation. Out of the aforesaid land of 120446 sq mtr., 25,587.47 sq mtr. has already been surrendered by the Assessee to local authorities for public purpose amenities like school, hospital and public amenities as per clause 9.2 of Regulations for Towns....
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....ion to the total FSI available to FSI relating to FSI sold on a particular land area. The total AUDA charges incurred are of Rs. 56,88,07,450/- and 41.24% thereof comes to Rs. 23,45,80,784/-, which pertains to FSI sold. 5.2.3 Similarly, regarding the FCCD interest for Co-development sale of Rs. 29,48,89,883/-, the Assessee stated that FCCD interest paid for entire land is also taken in proportion to the FSI sold. The total FCCD interest has been paid on entire FSI available on land is of Rs. 71,50.43,918/- till the date of sale of FSI lo co-developers and 41.24% thereof is allocated towards 'Cost of Sales' i.e. Rs. 29,48,89,883/-. 5.2.4 Regarding township Infra Expenses for Co-development sale of Rs. 24,74,44,843/-, the Assessee explained that the Assessee is developing Applewoods Township on the land area of 511707 sq. mtr and for that purpose, Assessee has incurred total expenses of Rs. 60 crores. It was agreed with the purchaser namely-Goyal Safal developers that for FSI sold, the necessary Township Infrastructure will be carried out by Applewoods Estate Pvt Ltd. This is also mentioned in co-development agreement. Accordingly, the expenditure of Rs. 24,74,44.843/- has been....
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....pany purchased the land and not only Floor Space Index (FSI for short). FSI comes to virtue of purchase of land c) The rules governing FSI changes from time to time and therefore, the FSI available on a particular area of land may vary from time so time. The present FSI for the said area may be different from what if was at the time of execution of co-development agreement. d) It was specifically been mentioned in the Co-development agreement that the Co-developer M/s. Goyal Safal Developer, is entitled to develop a part of the land admeasuring 32,200 sq. mtrs. which has further specifically described in the Schedule. 2 of the Co-development agreement and has also been identified vide certain survey numbers and also demarcated in the map annexed at page 7 of the co-development agreement, which apparently shows that the land deemed to be transferred or sold is only 82,200 sq meters and not 2,11,027 sq. ml. Being 41.24% of total land of 5,11,707 sq. mtrs. available with the assessee company. e) The onus is on the assessee company to prove that it has sold land admeasuring 2,11,027 sq. mtrs valued at Rs. 175,58,59,666/- which it has reduced from the opening ....
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....The company has to construct the villas, residential apartments, affordable housing for economically weaker section, commercial offices and shops as per the approved master plan by AUDA. The company is also required to leave space for public garden, public road, school and hospitals etc as per Township Regulations 2009. During the Financial Years 2012-13 und 2013-14, the company has sold the constructed property along with land directly to its customers. Customers are transferred the built property along with proportionate undivided share in the land i.e. Villas, Residential Apartments, commercial shops and offices. From the total cost of land, construction and other WIP the company has reduced the cost attributable to sale of FSI and only reduced cost has been allocated towards sale of properties during subsequent years. Thus, the nature of transactions in subsequent years are totally different from the transaction carried out during the financial year 2011-12. However, without prejudice, the details of sale as called for the Financial Years 2012-13 and 2013-14 were given in the statement enclosed along with copies of sale deeds. The details for F.Y. 2012-13 is as under: Partic....
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....fficer vide letter dated 26.03.2015 finally show caused as to why the claim of reduction of stock as well us value of land at the rate of 41.24% of total land value without selling, and allocating to co-developer be not disallowed. In response to the said notice, the assessee vide letter dated 27.03.2015 submitted detailed explanation. 5.4.1 The assessee explained that the assessee has purchased 511707 sq. mtrs. of land and as per the Township Policy, the copy of which has been furnished to the Assessing Officer vide our letter dated 20.03.2015, the assessee is required to reserve areas for schools, hospitals, public garden, public road etc. In terms of the guideline the company, has deducted 120446 sq. mtr. of kind for the said purposes. On the balance land of 391261 sq. mtr. available for commercial development FSI of 6542064 was approved by AUDA. The company vide its agreement dated 11.05.2011 has sold 2698000 sq. ft. of FSI to Goyal Safal Developer during the F.Y. 2011-12. At the cost of repetition the Assessee is once again reiterating that the value of the land is derived from the permissible construction only. Though the information for the F.Y. 2012-13 and 2013-14 is not....
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....ical area of land available year wise and in such project land which is reserved for the particular purposes, the cost of which has to be loaded on the balance land available for exploitation. 5.6 The Assessing Officer has further observed as under: "* Further, in the said table, the assessee company is reducing the land admeasuring 82,200 sq. ml. under nomenclature "area transferred to co-developer", which shows that the area of land transferred to co-developer is only 82,200 sq. mtr. Therefore, it cannot reduce the cost of land @ 41.24% of the total land. More interestingly, as can be seen from the table of the assessee's submission that, in the subsequent periods i.e. F.Y.2012-13 and 2013-14, the assessee company has stated to have sold area of Villa. * The assessee's submission dtd.27.03.2015 wherein it has reduced land admeasuring 120446 sq. mt in an attempt to reconcile the apparent inconsistencies in valuation of closing stock of land, is also contradictory 10 its earlier stand wherein the assessee company has claimed total cost of land admeasuring 211027.96 sq. mtr. Against sale of FSI wherein the land component transferred was only 82200 sq. mt....
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....358/- (Rs,9,63,60,000/- -Rs. 3,97,39,642/-). 6. The AO thus essentially challenged the method of accounting adopted by the assessee and held that reduction of the land cost in proportion to the FSI is not tenable because the change in the rules of FSI would never alter the cost of the land in the books of the assessee company to reduce the cost of land without selling the same and such method is not in tune with the provisions of the Act. The books of the assessee company do not reflect the value of the FSI to show the value of land. The value of land has been arrived at by including cost of purchase of land plus cost of development incurred and not by the value of FSI. The claim of assessee company towards reduced value of land cost held as closing stock was not found justified. The AO accordingly re-valued the closing value of land in proportion to 16.06% of area of land parted alongwith transfer of co-development right. The value of closing stock of land was thus found to be undervalued by Rs. 1,07,17,79,584/- when reworked having regard to proportion to area transferred as against proportion of FSI transfer. The AO accordingly added the same of Rs. 1,07,17,79,584/- to the to....
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....enses towards AUDA charges, FCD interest expenses and Township Infra expenses for co-development sale amounting to Rs. 53,09,89,339/-, the assessee preferred appeal before the CIT(A). 8.1 The CIT(A) re-visited the detailed submissions made by the assessee in this regard and reduced the addition on account of under valuation of closing stock computed by AO at Rs. 1,07,17,79,584/- to Rs. 86,11,74,085/-. The relevant operative para of the order of the CIT(A) is reproduced hereunder: 2.7 I have gone through the facts and submissions of the appellant carefully. The brief facts of the case are that Appellant is owner of land of 5,11,707 sq. mtrs., which is situated in the village Sarkhej Sanathal and falls within the limits of Ahmedabad Urban Development Authority (AUDA). During the year under consideration, Appellant has shown revenue from operation for Rs. 250 crores under the head "co-development rights" in Schedule 16 of profit & loss account. During the course of assessment proceedings Appellant has submitted co-development agreement dated 11th May, 2011 executed with Goyal-Safal Developers. During the course of assessment proceedings, Appellant has submitted working of ....
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....were claimed in profit & loss account. It can be seen from above chart that total land cost was 425.76 crores as on 1st April, 2011 and land cost transferred to profit & loss account is Rs. 175.58 crores which is 41.24% of total FSI sold by Appellant. The Appellant has similarly claimed interest expenses, AUDA charges and township infra expenses in profit & loss account. 2.7.2 While passing the assessment order, the AO has referred to codevelopment agreement entered with Goyal-Safat Developer, wherein it is stated that land admeasuring 82,200 sq. mtr., is sold to said party- The AO has referred to various clauses of the Agreement including clause No. 6, 8, 9, 10, 26 and 51 and contended that assesses company, though, has claimed to have sold FSI of 26,98,000 sq. ft., it is specifically stated that co-development land to utilize such FSI is 82,200 sq. mtr., of land hence Appellant is not justified in claiming expenditure in proportion to FSI sold to Global FSt available with it. During the course of Assessment Proceedings, Appellant has also claimed that out of total land of 5,11,707 sq. mtr., land of 1,20,446 sq. mtr., is for areas for schools, hospital, public ga....
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.... under: Sr. No. Nature of expenses Total Expenses Expenses claimed by the assessee (c)41.24% Allowable expezznses (c)16.06% Excess expenses claimed by the assessee 1 AUDA charges for Co-development sale 568807450 234580784 91350476 143230308 2 FCCD interest for co-development sale 715043918 294889883 114836053 180053830 3 Township Infra Expenses for co-development sate 247444843 247444843 (Claimed @100%) 39739642 207705201 Total in Rs. 530989339 2.7.3 During the course of appellate proceedings, Appellant has argued that it has purchased the land for the purpose of township development and authority granted permission on 28th May, 2010, The Appellant has prepared the construction plan as per terms of regulation for residential township - 2009, which is approved by authority as per which Appellant has provided 1,20,446 sq. mtr., of land for the purpose of park, school, hospital, etc., hence available land for commercial exploit....
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....f AO and cannot be termed as afterthought as same is supported by township policy and Appellant has already surrendered 25,587 sq. mtr. of land to local authorities for public amenities. Considering these facts available land area for any development and commercial exploitation is 3,91,261 sq. mtr., and not 5,11,707 sq. mtr., considered by AO. Thus, land cost of 3,91,261 sq. mtr., isforRs. 425.76 crores. The Appellant has not acquired FSI on acquisition of the land. Once the land is purchased, Appellant obtains FSI which is equivalent to land area. However, Assessee can acquire additional FSI by paying premium rates to concerned Authorities and maximum FSI available on plot of land is 1.5. Thus, land cost paid by Appellant is for area of land and not for obtaining global FSI of 65,42,064 sq. ft., being maximum FSI available as per Township Planning Scheme. The Appellant has obtained such FSI only by making payment which is over and above land cost. These expenditure are separately debited by Appellant and same is not forming part of land cost of Rs. 425.75 crores Even Rules governing FSI change from time to time and FSI available may be different when land was purchased an....
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....on of AO that cost to be allocated in profit & loss account should be based upon area of land sold. Though, as per development agreement sale consideration is fixed upon area of FSI sold, but such land consideration in fact represents area of land sold as co-developer as per clause - 6 has approached the Appellant for development of land of 82,200 sq. mtr. The computation of sale consideration based upon FSI is one of the methods of arriving at total sale value but the fact remains that Appellant has received Rs. 250 crores for sale of area of 82,200 sq. mtr. of land. Even in Clause - 26 of the development agreement, it is specifically stated that developer is entitled and expected to develop the balance land in terms of regulatory provisions and nowhere is it stated that same is based upon remaining FSI. Even Clause - 51 of the agreement bears the title as "rights in perpetuity of developer on co-development land" wherein it has been mentioned that developer shall have a right to inspect, maintain, operate, repair, replace or substitute any infrastructure facility on the co-development land without affecting adversely co-developer's FSI which means that FSI sold to co-develope....
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....4 Area of Villa sold during F.Y 2012-13 4271 28370 Balance as on 31 .03.2013 304790 3815694 Area of Villa sold during F.Y.2013-14 366 2976 Balance as on 31.03.2014 304424 3612718 It is also observed that in FY 2012-13, appellant has sold Villa of 4271 Sq meters (28370 Sq Ft FSI). However, while charging cost of land in Profit & loss account, appellant has not debited propionate cost of FSI but charged cost based upon area of land sold. Had appellant debited cost of land as per FSI sold, land cost to be charged to profit & loss account would have been Rs. 1,08,48,752/- (2501718656/ 6542064*28370) as against Rs. 3,32,02,000/- charged by appellant which shows that appellant has changed the method of accounting, valuation of closing stock and allocation of cost to Profit & loss account in subsequent year. The appellant is not consistent in its method of account. When cost to be charged in Profit & loss account based upon FSI method resulting in to lower cost and increase in Profit, appellant has charged the cost based upon area of land sod. The appellant has claimed that it has claimed the cost as per matching cost concept but fact is that a....
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....llocation considering total area of land at 3,91.261 sq. mtr as against 5,11,707 sq. mtr and as appellant has sold area of 82,200 Sq meter during the year, proportionate cost would be in ratio of 21.00% (82.200/3,91,261) and not 16.06% adopted by AO subject to following observations:- (i) While allocating Township Infra expenditure, AO has considered total expenditure incurred by appellant at Rs. 24,74,44,843/- whereas appellant has claimed such expenditure at Rs. 60,00,00,000/- hence AO is directed to verify correct amount of expenditure incurred by appellant and allocate 21% of such expenditure in Profit & loss account. (ii) The appellant has obtained additional FSI by making payment to AUDA and exact break up of such expenditure has not been provided in appellate proceedings or assessment proceedings. As appellant has obtained additional FSI based upon payment made by it, expenditure incurred on obtaining global FSI is linked with FS! obtained by appellant and such payment has no link with land area hence AO is directed to allocate such expenditure in ratio of FS! sold during the year in proportion of total FSI available with it and recompute closing WIP in cas....
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.... Stock (Net) 391261 6542064 4257578322 568807450 642835052 45647787 5514868611 Add: Expenditure incurred during the Year 20591643 323237107 490826205 834654955 Less: Transferred to Co Developer 82200 2698000 1755859666 234580784 294889883 247444843 2532775177 Remaining stock for Applewoods 309061 3844064 2501718656 354818309 671182276 289029149 3816748389 Note: The cost transferred to co developer is at 41.24% because FSI transferred to them (2698000 sq.ft.) is 41.24% of the total FSI Available (6542064 sq. ft.) Value of closing sq.ft. per sq. ft of FSI 650.80 92.30 174.60 75.19 992.89 833.3 The market price as per valuation report per sq ft of FSI Particulars Area Cost of Land Cost of AUDA Cost of FCCD interest Cost of Construction Total Land (sq mtrs) FSI (sq ft) Amount in Rs. Amount in Rs. Amount in Rs. Amount in Rs. Amount in Rs. ....
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....ty including road of prescribed width open space, amenities in the form of school, hospital, park and gardens catering to the township and many other obligations. Referring to clause no.3.9 of the township regulations, the learned senior counsel pointed out that the assessee or codeveloper could not have used the whole of the land area and was under statutory obligation to keep aside a portion of the land towards various infrastructure facilities and therefore, the CIT(A) has rightly taken cognizance of such facts, however, in limited manner. The learned senior counsel emphasized that it is the permissible construction gathered in the name of FSI available to the township which will determine the cost of land and in absence of FSI, the land is effectively worthless. 10.3 The learned AR next contended that the AO committed serious error in appreciating the contents of the development agreement. It was strenuously pointed out that the assessee has only sold 26,98,000 sq.ft. of FSI in terms of co-development agreement out of total available FSI of 65,42,064 sq.ft. without any sale of land per se. The assessee continues to be owner of land in terms of co-development agreement as wel....
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....ale consideration determined on the basis of FSI sold and not area sold. In elaboration, the learned counsel submitted that the co-development agreement has attracted concessional stamp duty of 1% as against applicable stamp duty of 4.9% payable on sale of land. It was thus argued that the cost of sale of land cannot be valued in proportion to area but will have to be computed in proportion to the FSI. It was thereafter canvassed that the total consideration of Rs. 250 Crore received, if calculated on the basis of area of land of 82,200 sq.mtr., would result in value of consideration of land at Rs. 3,04,136/- per sq. mtr. as against the circle rate/jantri rate of land (value adopted by stamp duty) which is Rs. 2750/- per sq. mtr. only. This itself proves that the sale consideration has been received on the basis of FSI only. The learned senior counsel also pointed out that if the sale value of Rs. 3,04,136/- per sq.mtr. of land is applied to the entire area of township of 5,11,707 sq.mtr., the total value of land of township would come to a whopping figure of Rs. 1556.29 Crores which is prima facie unrealistic to the hilt. Coupled with this, if the FSI is to be allocated on the bas....
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.... Less: Cost of Sales Land (Rs. 425.75 Cr x 41.24%) 1755859666 82200 (16.06%) 2698000 (41.24%) Auda charges for Co development sale 234580784 FCCD interest for co development sale 294889883 Township Infra Expenses for co development sale 247444843 2532775176 Closing WP LAND (Rs. 425.75-175.58) 2501718656 4,29,507 38,44,075 Construction 1315029734 3816748390 Amount As per Balance sheet Schedule 12 3816748389 12.1 As can be seen from the tabulated statement, the assessee during the assessment year in question has recognized revenue operation income to the tune of Rs. 250 Crores in respect of sale of co-development rights on a portion....
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....stock of land' in terms of monetary value requires to be recognized on the basis of FSI inbuilt and embedded to the total township land and not on the basis of geographical area as what is intrinsic to the land value is the entitlement of FSI available for construction and the land would be nearly worthless in the absence of any right to development and construction thereon. 12.2 The essential controversy between the assessee and Revenue revolves toward method of ascertainment of value of 'Cost of Sales' to be deducted from sale consideration received and consequent value of closing land area. 12.3 The total value of land area of the township stands at Rs. 425.75 Crores (admeasuring 511707 sq.mtrs.; 6542075 sq. ft. in terms of FSI). The assessee has assigned 'Cost of Sales' of the land at Rs. 175.58 Crores (and other incidental charges to be dealt with separately) which represents 41.24% of the total cost of township land (425.75 Crores x 41.24% = 175.58 Crores). As a consequence, the closing value of land determined by the assessee stands at Rs. 250.17 Crores (sale consideration Rs. 425.75 Crores Less - 'Cost of Sales' Rs. 175.58 Crores). 12.4 The Revenue, on the other ha....
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.....mtr.). It was thus observed by the CIT(A) that proportionate 'Cost of Sales' should be worked out at the adjusted ratio of 21% (having regard to the net area available after consumption towards infra facilities for commercial exploitation) as against 16.06% adopted by the AO having regard to the gross area of 511707 sq.mtr. The CIT(A) also directed the AO to grant relief on similar lines in respect of incidental expenditure to be allocated to 'Cost of Sales' by applying ratio of 21% to the total costs incurred instead of 16.06% applied by AO. The aforesaid action of the CIT(A) has invited the dissatisfaction to both assessee and Revenue. 14. To address controversy, we first refer to the state policy on town planning in the State of Gujarat dated 28.05.2010. As per the township policy, certain prescribed area is required to be utilized by way of open space and infrastructure facility to carry out development work. The assessee has entered into co-development agreement subsequent to such policy on 11.05.2011. On a reading of the agreement, it is also evident that what has been permitted by the developer assessee to the co-developer is putting up construction of apartment towers o....
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....g stock should be recognized on the basis of geographical area regardless of FSI. We also take note of the decision of the co-ordinate bench in the case of ITO vs. State Bank of India Staff Vaibhav Co-op Hsg. Ltd. ITA No. 5324/Mum/2016 dated 19.06.2019 for the proposition that no allocation of cost is involved in acquiring the FSI rights which is under transfer and consequently, the 'Cost of Sales' cannot be recognized in proportion to FSI. We see inherent fallacy in such line of argument. The decision rendered by the co-ordinate bench was in altogether different context for determination of chargeable capital gains and quantification thereof. The FSI entitled to the assessee and attached to the global land that sold thereafter has to be assigned cost incurred in proportion to the quantity of FSI sold. The doctrine of matching concept for determination of true profits arising from a transaction is one of the rudimentary principles of accountancy. The 'Cost of Sales' has to be determined in the same manner as applicable to the determination of the sale revenue. Where the sale revenue has been recognized on the basis of FSI sold, the costs of FSI also needs to be determined on the sa....
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....rds administrative and general expenses under Rule 8D(2)(iii) by applying 0.5% of average value of investments giving rise to the exempt income. An aggregate disallowance of Rs. 46,81,276/- was thus made by the AO under s.14A of the Act. 23. In the first appeal, the CIT(A) found that the assessee has huge own funds and interest free capital/reserves (Rs. 161.83 Crores) far in excess to cover up corresponding investments of Rs. 12.87Crores. Thus, applying the principles laid down in the CIT vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom.); CIT vs. Gujarat State Fertilizers & Chemicals Ltd. Tax Appeal No. 126 of 2013 judgment dated 25.06.2013 (Gujarat), the CIT(A) deleted the disallowance made towards proportionate interest expenditure amounting to Rs. 27,33,134/- computed under Rule 8D(2)(ii) but however retained the disallowance towards administrative expenditure of Rs. 19,48,142/- computed under Rule 8D(2)(iii). 24. The Revenue has challenged the action of the CIT(A) for deleting the disallowance of interest carried out under Rule 8D(2)(ii) whereas the assessee has also challenged the retention of disallowance of administrative expenditure under Rule 8D(2)(iii) ....