TaxTMI 
TaxTMI 
TaxTMI 
2022 (1) TMI 475
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....decided in this appeal of the Revenue is as to whether the ld. CIT(A) was justified in deleting the addition made on account of determination of net profit @8% of turnover as arbitrary in the facts and circumstances of the case. The interconnected issue involved therein is whether the ld. CIT(A) was justified in dismissing the action of the ld. AO rejecting the books of accounts in the facts and circumstances of the instant case. 3. We have heard rival submissions and perused the materials available on record. We find that assessee is a private limited company engaged in the business of construction and re-development of properties. The return of income for the A.Y.2012-13 was filed by the assessee on 30/09/2012 declaring total loss of Rs. 7,59,52,387/-. The assessee is a Private Limited Company engaged in the business of construction and redevelopment of properties. The assessee had undertaken redevelopment of a Slum Rehabilitation Project by entering into agreement with Triveni Sangam SRA CHS Ltd. at village Gundavli, Andheri (E), Mumbai. 3.1. The assessee submitted that it obtained various approvals from Slum Rehabilitation Authority (SRA) for construction of rehab buildings; ....
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.... assessee submitted that this was also agreed as per the same agreement entered into with Vikasak & Sanstha Society. Thus, in terms of the said agreement, the assessee provided a sum of Rs. 7.80 cr. as compensation for delay in project and this amount was to be payable only to eligible slum dwellers totaling to 261. 3.6. The ld. AO observed in his order as under:- 3.5 Out of the expenses claimed of Rs. 52.81 crores the following expenses are significant: Cost of materials consumed Rs. 16.76 crores Other expenses: Apatra expenses Rs. 13.80 crores Compensation for delay in project Rs. 7.80 crores Cost of construction for tenant building Rs. 10 crores Rent expenses Rs. 2.12 crores 3.6 ADMISSIBILITY OF EXPENSES CLAIMED: 3.6.1. Apatra & Compensation for delay in project: The assessee has claimed a sum of Rs. 13.80 crores as apatra expenses. When assessee was asked to explain the details of these expenses, it was stated that they represented payments to be made to certain illegal dwellers residing on the plot who are not eligible for the SRA Scheme but are still required to be paid certain compensation as a onetime settlement for evacuating the premises and that i....
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....llegal dwellers too. Further the agreement also does not specify any time period within which the initial compensation of Rs. 12 lacs is to be paid. The question of payment of additional compensation of Rs. 3 lacs will arise only in the event of delay in payment of the original compensation of Rs. 12 lacs. When the time period for payment of Rs. 12 lacs is not specified in the agreement, it is also not possible to determine or ascertain the year in which the liability to pay the additional compensation arises. In these circumstances, the additional compensation of Rs. 7.80 crores cannot be held to be an ascertained liability for the A.Y 2012-13. During the assessment proceedings the assessee was also asked to give the details of the parties to whom the additional compensation was due. The assessee gave details of only 86 parties amounting to Rs. 2.68 crores. No details were furnished in respect of the balance sum claimed of Rs. 5.12 crores. The submissions of the assessee with regard to the apatra expenses and the compensation for delay have been duly considered. On perusal of the submissions made It is seen that there are certain inconsistencies that arise with respect to th....
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....epartment was thus precluded from examining such parties so as to verify the veracity of the claim made by the assessee. 2 There was no time frame specified in the agreement and no other evidence or material was furnished to show that the additional payment of Rs. 3 lacs per person got accrued to the assessee during the relevant previous year. 3 Mere averment that all the expenses corresponding to the income shown have to be debited on matching concept basis is not acceptable when the legitimacy and genuineness of the same was not proved. 4 A majority of the expenses have been quantified provisionally and debited in the P & L Account on the ground that the entire income had been offered in the A Y under:- consideration without proving that such expenses have indeed accrued or ascertained during the year under consideration. 5. On calling for these relevant details, the assessee vide letter filed on 23-3-2015 itself had interalia offered for a disallowance of 5% of the alleged expenses which amounts to a huge sum. This disclosure by the assessee cannot be made suomoto if it is able to prove the correctness of the results as per the books of account. 3.6.2 Rent expenses: ....
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....herefore, the provisions of S. 1941 of I T Act is clearly attracted. the assessee failed to deduct tax, the amount of rent expenses is liable for disallowance as per provisions of s. 40(a)(ia) of IT Act. 4. Cost of construction for tenant building: During the year the assessee claimed Rs. 10 crores as expenses under the head cost of construction for tenant building. The assessee has furnished only a rough estimate of the expenses to be incurred by him and has passed journal entries by creating a provision for this cost. These expenses have neither been incurred nor have been accrued during the P Y relevant to A Y 2012-13, Therefore, this estimate cannot be called as an ascertained liability for the year under consideration. 5. Cost of materials consumed: During the year the assessee had shown Work In Progress of a sum of Rs. 124392726/-towards cost of materials consumed and had stated to have incurred a further sum of Rs. 4,32,06,621.50 during the year under consideration under this head of expense. This was submitted to have been incurred for construction of the rehabilitation buildings for the tenants. 5.2 Though assessee had furnished breakup of the expenses incurred p....
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....tage of disallowance @ 5% has been given by the assessee. And this offer of disallowance has also been made after having got the accounts audited by a tax auditor u/s 44AB of IT Act who after effecting due diligence in the matter has certified not only the correctness of net profit but also the correctness of the impugned expenses in arriving at it. 6.3 Under these circumstances, it is hereby held that the books of accounts prepared by the assessee in arriving at the loss of Rs. 7,59,52,387/- cannot be relied upon and are thus rejected by invoking the provisions of Section 145(3)(a) of IT Act. 6.4 The provisions of S. 145 of the Act provide as under: "Section 145 (1) Income Chargeable under the head "Profit and Gains of business or profession" or Income From other sources" shall, subject to the provisions of sub section(2), be \ computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) the Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessee or in respect of any class of income. (3) where the Assessing Officer is not satisfied about th....
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....e ld. CIT(A) that the observation made in the assessment order in last para at page 3 and first para at page 4 is factually incorrect as the ld. AO had mixed both the issues i.e. payment of Rs. 12,00,000/- per person to 115 unauthorised slum dwellers (Apartra expenses) with that of 261 eligible slum dwellers to whom additional compensation was to be paid @Rs. 3,00,000/- per person due to delay in construction of rehab buildings. It was submitted that assessee had correctly provided for these liabilities which it has to pay as per the agreement entered into and also as per the consent terms of the Hon'ble Civil Court. Hence, both these amounts i.e. Rs. 13.80 Crores and Rs. 7.80 Crores are to be paid to separate slum dwellers i.e. the former is to be paid to illegal and unauthorised slum dwellers whereas the latter is of Rs. 7.80 Crores is to be paid to legal and eligible slum dwellers. The assessee also submitted that the observation made by the ld. AO in his order at page 4 is also incorrect since the details given by the assessee in respect of 86 parties where the parties to whom the amount was already paid out of the total amount to be paid of Rs. 7.80 Crores and hence, the amoun....
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.....e. eligible slum dwellers is already furnished to the AO and no other details were called for. The AO ought to have specifically called for the same. Further, the copy of agreement and consent terms of Civil Court was filed, which proves the bonafides and genuineness of the transaction. c) As already explained above, the appellant has not provided additional compensation of Rs. 3 lacs to illegal dwellers and hence, the observation is factually incorrect. 14. The appellant submits that the findings given on pages 5 & 6 are based on incorrect appreciation of facts. The appellant submits that when the facts itself are not correctly taken into consideration, the finding arrived at considering incorrect facts would also lead to incorrect conclusions. Hence, all the findings listed out in these pages are factually incorrect and are misplaced. Further, in respect of offering 5% of expenses for disallowance does not mean that the appellant did not have details or that the appellant does not have supporting documents to prove its bonafides and genuineness, but the same was offered to buy peace and avoid protracted litigation, which in any case, the AO has also not accepted and hence, n....
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....antile system of accounting, the provision made for ascertained liability ought to be allowed. Thus, the provision of Rs. 10 cr. cannot be said to be unascertained liability more particularly when in the development agreement, the appellant and the third party has estimated the liability to be about Rs. 15 cr. and therefore this amount was withheld to be paid as and when the construction of rehab buildings are in progress and gets completed. 22. With respect to the cost of material consumed, the appellant submits that it has not claimed any excess material cost and entire details in this regard i.e. party-wise with complete details of invoice and the amount incurred is furnished to the AO and no discrepancy is pointed out. 23. The appellant submits that for the purpose of construction of the rehab buildings, it has appointed third party contractor i.e. M/s. Krishna Enterprise who was also responsible for procurement of material and keeping the same at site with proper safety. The appellant submits that the payment for the procurement of material had to be done by the appellant. Hence, the observation that both the appellant and the contractor is purchasing material simultaneous....
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.... the AO was not justified in taking cognizance of the same. 3.9. The assessee pointed out that books of accounts of the assessee are audited by qualified Chartered Accountant and no discrepancy was pointed out in the tax audit report. The audited books of accounts clearly give correct and complete picture of the accounts and income derived therefrom. The observation of the ld. AO in para 6.5, the slum rehabilitation projects are usually more profitable is again general observation without any evidence to this fact and more particularly when the assessee has sold out the development of the said plot at a lumpsum consideration without constructing the same and hence, the observation has no bearing on the case, even otherwise. It was also submitted that the ld. AO having stated that, provisions of Section 44AD of the Act are not applicable in the instant case, ought not to have estimated the profit element @8% by applying the very same provisions of Section 44AD of the Act. In support of the various contentions of the assessee, the assessee also placed reliance on the following decisions before the ld. CIT(A):- a) The decision of Hon'ble Supreme Court in the case of Bharat Earth Mo....
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.....2012 at Rs. 10 cr. was at lower side. In any case, the assessee submitted that the provisions made were in respect of ascertained and accrued liabilities, which has been discharged to a certain extent and thus, the provision made could not be disallowed. 3.12. The assessee also gave chart of the amounts actually received against the sale consideration of Rs. 45 cr as under:- Asst. Year Amount Received Balance receivable 2012-13 15,60,00,000 29,40,00,000 2013-14 20,06,00,000 9,34,00,000 2014-15 3,62,00,000 5,72,00,000 2015-16 33,00,000 5,39,00,000 2016-17 98,00,000 4,41,00,000 3.13. The assessee submitted that as per the above chart, the sale consideration is also received in piecemeal and still receivable as at 31.03.2016 is Rs. 4.41 cr. However, the assessee submitted that on the basis of accrual system of accounting, it has offered the entire amount of Rs. 45 Crore in the profit and loss account as income. The assessee submitted that as per the agreement, the assessee is required to vacate the slum dwellers - both illegal and legal and also construct the Rehab buildings. The assessee submitted that as and when the Rehab buildings are constructed, ....
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.... observed that the same was done only to avoid protracted litigation and to buy peace and does not in any way tantamount to acceptance by the assessee that there are some defects in the books of accounts. Since, no disallowances were made by the ld. AO in the scrutiny assessment proceedings for subsequent two years for the very same genuine project and the assessee's method of accounting has been fully accepted by the ld. AO in the subsequent years, there is no need to reject the books of accounts of the assessee and estimate the net profit at 8% thereon. With these observations, the ld. CIT(A) held that the rejection of books by the ld. AO is without any basis and estimation of net profit at 8% as arbitrary and accordingly, deleted the same. 4.2. Later on, the ld. CIT(A) proceeded to examine the allowability of various expenses on merits. He accepted to the fact that a sum of Rs. 13.80 Crores provided by the assessee represents compensation payable to unauthorised slum dwellers @12 lakhs per dweller for 115 persons and similarly the compensation of Rs. 3 lakhs per slum dweller payable to various slum dwellers in respect of 261 people were made on a scientific basis, based on an a....
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....s owned by the Brihan Mumbai Mahanagar Palika and the tenants were paying rent to the Municipal Corporation. It is also a fact on record that the subject building having become old and in a dilapidated condition the authorities concerned decided to demolish the said building and construct a new building in its place under the SRA Project and the construction of the new building was entrusted to the assessee. It is also a fact that since the entire building had to be demolished for the purpose of constructing the new building, the tenants had to vacate the said premise and alternative accommodation was required to be provided to them. On a perusal of the agreement entered into between the assessee and the society formed by the tenants, it is relevant to note that since the assessee was not able to provide alternative accommodation to the tenants, it was provided under the agreement that assessee would pay them compensation towards expenditure to be incurred by them on account of rent payable by them for alternative accommodation and in accordance with such terms assessee initially paid compensation of Rs. 5,000 per month to each tenant which was subsequently revised from time-to-tim....
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....y not be incurring any expenditure on account of rent. In any case of the matter, payments made by assessee under no circumstances can be construed to be coming within the meaning of "Rent" as provided under section 194I. Thus, after considering the totality of the facts and circumstances of the case, we are of the considered opinion that compensation paid by the assessee to the tenants towards alternative accommodation not being in the nature of rent as defined in section 194I, there is no requirement for deduction of tax under the said provisions. Therefore, the disallowance made under section 40(a)(ia) of the Act cannot be sustained. Consequently, we delete the addition made on that account. Grounds raised by the assessee are allowed. 4.7.1. Respectfully following the aforesaid decision, we hold that tax is not required to be deducted on the rent component of Rs. 2.12 Crores and hence, no disallowance u/s.40 (a)(ia) of the Act could be made thereon. 4.8. With regard to cost of materials consumed and cost of construction, we find that the ld. CIT(A) had categorically observed that the cost claimed by the assessee in the sum of Rs. 10 Crores is very conservative and on the lower....