Income Tax Appellate Tribunal - Kolkata
North City Developers, Kolkata vs Department Of Income Tax
आयकर अपीलीय अधीकरण, Ûयायपीठ - "B", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH- B , KOLKATA
[सम¢ ौी बी. आर. िमƣल,् Ûयायीक सदःय एवं ौी अÈबर बाशा,
बी. आर. बाशा, लेखा सदःय ]
Before Shri B.R.Mittal, Judicial Member & Sri Akber Basha, Accountant Member
आयकर अपील संÉया / ITA No. 1307 (Kol) of 2010
िनधॉरण वषॅ/Assessment Year 2007-08
Asstt.Commissioner of Income-tax -वनाम- M/s.North City Developers
Circle-35, Kolkata. -Versus- Kolkata. (PAN-AAEFN7622B)
(अपीलाथȸ/APPELLANT) (ू×यथȸ/RESPONDENT)
अपीलाथȸ कȧ ओर से/ For the Appellant: ौी/Sri S.P. Chowdhury, CIT
ू×यथȸ कȧ ओर से/For the Respondent: ौी/Sri N.K. Poddar
आदे श/ORDER
बी. आर.
बी.
(बी िमƣल),् Ûयायीक सदःय (B.R.Mittal), Judicial Member :
This is the appeal filed by the department for assessment year 2007-08 against the order of ld. C.I.T.(A)-XX, Kolkata dated 23/03/2010. The appeal was late by 03 days for which a petition praying condonation of the said delay has been filed by the department. The ld. Departmental Representative referring the reasons stated in the petition dated 23/6/2010 has requested for condonation of the delay, which is not opposed by the learned A/R. We, therefore, condone the delay of 03 days and proceed to dispose of the appeal on merit.
2. The assessee-firm is a real estate developer. In the course of such business, the assessee undertook development and construction of housing projects on 1.086 acres of land situated at 3, Khelat Babu Lane, Kolkata. The assessee obtained a sanctioned building plan on 06/5/2004, which was later revised on 12/5/2005. In conformity with the said revised building plan, the assessee started construction on 15/8/2005 of 72 individual residential units on the said land, each admeasuring less than 1500 sq. ft. of built-up area, relevant to F.Y. 2005-06. The Architect & Structural Engineers, who supervised the development of the housing project, issued the completion certificate on 1 26/3/2007, relevant to F.Y. 2006-07. The assessee filed application with Kolkata Municipal Corporation (KMC) on 28/3/2007 for issuance of completion certificate and KMC after conducting inspection issued completion certificate on 12/5/2007, which was within four years from the end of the financial year in which the housing project was sanctioned by KMC on 06/5/2004. The assessee thus undertook the development of the housing project in F.Y. 2004-05 and expenses incurred in respect of the said housing project appeared in the books since A.Y. 2005-06. The expenses incurred from year to year were accumulated and accounted under the head "value of work-in- progress". In respect of business of developing and constructing housing project, the assessee regularly followed completion contract method for recognizing the income and this method has since been accepted by the department in the past assessments. Since the Architect and Structural Engineer certified the housing project to be complete on 26/3/2007, the assessee recognized the income from developing of housing project in its books of account for the financial year ending 31/3/2007 and income from sale of constructed spaces with regard to residential units which were sold upto 31/3/2007 in the aggregate sum of Rs.15,54,04,543/-. As per the report of the auditor in Form 10CCB, the gross revenue derived from the said housing project was also for Rs.15,54,04,543/- and the income derived from the said housing project was Rs.5,67,97,128/-, in respect of which the assessee claimed deduction u/s. 80- IB(10) of the Act for the assessment year under consideration, i.e. A.Y. 2007-08. The break-up of sales as credited in the P/L Account of the eligible undertaking of the assessee was as under :-
Sale amount Rs.15,09,28,642
Less: (a) Rebate allowed Rs. 12,565
(b) Nomination charges Rs.4,49,000 Rs. 4,61,565
Rs.15,04,67,077
Add : (a) Extra work Rs. 3,66,763
(b) CESC/Generator charges Rs.45,70,703 Rs. 49,37,466
Rs.15,54,04,543
The A.O. did not accept the assessee's audited financial statement and chose to recast the P/L Account for the year ending 31/3/2007 by invoking provisions of sec. 145(3) 2 of the Act as, in his opinion, the P/L Account prepared by the assessee did not truly and correctly disclose the income of the eligible undertaking. In the recasted P & L account, the A.O. bifurcated the receipts and expenses to determine the profit of the undertaking eligible for deduction and the profit in respect of balance revenue items which, in his opinion, was not eligible for deduction u/s. 80-IB of the Act. The A.O. also observed that there were certain infirmities in the assessee's claim for deduction u/s. 80-IB(10) of the Act and ultimately held that the profit derived by the assessee from the business of development and construction of the housing project at 3, Khelat Babu Lane, Kolkata was not eligible for deduction u/s. 80-IB(10) of the Act. The A.O., accordingly, assessed the total income of the assessee at Rs.6,75,28,680/- as against returned income of Rs.16,10,620/-. The relevant reasons given by the A.O. for recasting the P/L Account and thereby estimating the total income after denying the benefit of deduction u/s. 80-IB of the Act are as under :-
(i) That the exemption/deduction under section 80-IB(10) of the said Act is available only in respect of 'profits derived from undertaking developing and building the housing project', the eligible business. The connotation of the words used in the section 'derived from' is narrower to that of the words 'attributable to' used in other sections of the statute. By using the expression 'derived from', Parliament intended to cover sources not beyond the first degree. Reliance in this respect has been placed by the learned AO, inter alia, on decision of the Hon'ble Supreme Court in Liberty India v. CIT (2009) 317 ITR 218 (SC).
(ii) That incomes having 'direct nexus' with the development and sale of housing units shall be regarded as 'profits from such housing projects' and not profits from some other activities which may be attributable to and not exactly derived from the housing project. If these other income or profits which may be merely attributable to the housing project are included in the Profit & Loss Account and/or the Balance Sheet of the assessee's undertaking, the same would render such accounts legally incorrect. Therefore, it is necessary to separate items of income which have a direct nexus with the development and sale of the housing project from other incomes which are not having such direct nexus.
(iii) That aggregate consideration for sale of flats in the said housing project, as evident from Schedule F of the registered Deed of Conveyances executed in favour of the buyers, is Rs15,04,67,077, which alone can be considered as 'receipt derived from housing project'.
3(iv) That receipts for 'extra work', 'CESC/Generator charges' and 'for common installations and facilities' set out in Schedule C Sections A & B of the registered deed of conveyances, for which proportionate additional separate costs are payable by the purchasers/ buyers of different flats forming part of said housing project, are neither eligible to be included in the separate Profit & Loss Account of the undertaking doing the development of housing project business nor eligible for deduction under section 80-IB(10) of the said Act.
(v) That gross receipts of the assessee Firm under the heading 'CESC, Electricity & Generator', which are claimed by it to be part and parcel of building construction activity, without which the project development cannot be said to be complete, and for which separate charges are realized from the buyers in the very beginning at predetermined rates, are activities for earning income in the capacity of the middleman or agent, and these activities are clearly different and distinguishable from 'profits derived from development of housing project'. Profit element was involved in carrying out these activities and the submission/ claim to the contrary made by the assessee-firm to the effect that there was no profit motive involved in these activities was not correct.
(vi) That assessee firm has claimed that it suffered a net loss of Rs.18,23,639, as per details set out in Table II appearing under paragraph 8.4 of the impugned assessment order. But the expenses in the aggregate sum of Rs.25,28,491 against the heading 'Electrical Goods' and another aggregate sum of Rs.10,99,866 against the heading 'Electrical Works' are not related to the gross receipts of Rs.45,70,703 under the heading 'CESC, Electricity & Generator'. The expenses under the heading 'electrical goods' and under the heading 'electrical works' were actually for items like switch boards, wiring and other electrical works carried out in the building project having no direct nexus with the construction of the buildings in the capacity of Developer, and acted as a facilitator/ middleman/ agent, for which assessee-firm realized separately the said sum of Rs.45,70,703 against 'CESC, Electricity & Generator'.
(vii) That profits of Rs.18,04,718 (gross receipts of Rs.45,70,703 under the heading 'CESC, Electricity & Generator' less the related expenses of Rs.27,65,985 representing payments made to CESC and for Generator etc.) are not profits of the undertaking derived from development of the housing project in the light of principles laid down by the Hon'ble Supreme Court in Liberty India's case (supra). These profits may be attributable to such business activity and are outside purview of deduction admissible under section 80-IB(10) of the said Act.
(viii) That profits for extra work carried out after handing over of possession to the buyers are neither eligible to be included in the separate Profit. & Loss Account of the undertaking doing the development of housing project business nor entitled to deduction under section 80-IB(10). The inclusion of such items 4 of extra work in the separate Profit & Loss Account of the undertaking has made such Profit & Loss Account of the assessee-firm incorrect.
(ix) That it is necessary to examine receipt from such extra work done by the assessee, and to determine the profits earned from such activity. The assessee firm has disclosed receipts of Rs.3,66,763 (wrongly mentioned in assessment order at some places as Rs.3,36,763) for such 'extra work and interestingly claimed Rs.55,00,000 as 'post delivery expenses', which is not acceptable. It is a fact that buyers take and the developers give delivery of flats only after completion of construction as per specification. The 'post delivery works' cannot be part of specifications contracted in the agreements. The expenses on items like air conditioner are for additional work done after delivery of possession of flats, for extra cost to the buyers only.
(x) That assessee firm has itself claimed that there was no element of profit included in carrying out extra works as desired by buyers, which are charged on actual cost basis, but such claim is not acceptable. Further, nobody by human nature would spend Rs.55,00,000 to get merely Rs.3,66,763. The assessee's claim that it received Rs.3,66,763 only for carrying out extra works is not acceptable and is rejected. The disclosure of the said sum of Rs,3,66,763 in the Profit & Loss Account as gross receipts for extra work has made such Profit & Loss Account incorrect. Therefore, it is necessary to estimate the probable receipts from such extra work to the best of one's judgment. The assessee firm has disclosed profits @52.54% (profits of Rs.5,71,49,576 as against the expenses of Rs.10,87,60,766). Applying this very rate, the gross receipts against expenditure of Rs.55,00,000 are estimated at Rs.83,89,700. The estimated profits for carrying out such extra works are accordingly estimated at Rs.28,89,700 (Rs.83,89,700 minus Rs.55,00,000), which amount is not eligible for deduction under section 80-IB(10), as the same are derived from activities other than that of the business of developing and building the said housing project.
(xi) That assessee has received nomination charges in the sum of Rs.4,49,000 from Mr. Sukumar Banerjee, which amount according to the assessee was payable to the original buyer, B.L. Agarwal & Sons (HUF). The assessee could not establish that said sum of Rs.4,49,000 had ever been transferred to B.L. Agarwal & Sons (HUF). The assessee firm has kept the said money with itself. The said sum of Rs,4,49,000 is income of the assessee for allowing the transfer by way of nomination from the original buyer M/s. B.L.Agarwal & Sons (HUF) to the second buyer (nominee of the original buyer) Mr. Sukumar Banerjee and this receipt is not eligible for deduction under section 80-IB(10) of the said Act. The inclusion of said sum of Rs.4,49,000 in the Profit & Loss Account of the undertaking has made such Profit & Loss Account incorrect.
3. The A.O. after invoking provision of sec. 145(3) of the Act rejected the P/L Account of the undertaking and recasted the same as per details in tables III & IV of the 5 assessment order at pages 12 & 13 and assessed the profit from housing project at Rs. 6,08,74,646.88 and profit from other activities attributable to housing project but do not have direct nexus with it at Rs.66,56,508/-. The A.O. has stated that the latter is always outside the purview of deduction u/s. 80-IB(10) of the Act.
4. The A.O. has further stated that the housing project of the assessee was completed on 12/5/2007 as per certificate issued by KMC and, accordingly, deduction u/s.80-IB(10) of the Act cannot be allowed in the assessment year under consideration and placed reliance on Explanation (ii) of sec. 80-IB(10)(a) of the Act. The A.O. has stated that the assessee is entitled to the benefit of deduction in terms of CBDT Instruction No.4 dated 30/6/2009 as the said Instruction applies only where the assessee shows profit from partial completion of the project every year. However, the assessee as per tax audit report followed project completion method and sale of constructed units.
5. The A.O. while rejecting the claim of the assessee u/s. 80-IB(10) of the Act has stated that the assessee created one residential unit of more than 1500 sq. ft. in respect of flat Nos. 7C & 7D in the said housing project. Therefore, there is violation of sec. 80- IB(10)(c) of the said Act. He has further stated that the assessee also admitted that it participated in the process of making one single entry door for the said flats on the request of the buyers. The A.O. further stated that it is not possible to accept the assessee's claim that such conversion was done by the buyers without knowledge or participation of the assessee-firm.
6. Being aggrieved, assessee filed appeal before ld. C.I.T.(A). The assessee made his submissions disputing the action of the A.O. in recasting the P/L Account and thereby rejecting assessee's claim of deduction u/s. 80-IB of the Act. The ld. C.I.T.(A) has summarized the submissions in para-6 of his order as under :-
"6. The Ld. ARs in their oral as well as written submissions vehemently contested and disputed the findings and the observations of the AO, that eventually led to the rejection of the appellant's claim for deduction u/s. 80-IB(10). For the sake of clarity of the issues, the relevant submissions made on behalf of the appellant are extracted hereunder -
(i) It is true that the words used in section 80IB(10) of the said Act are 'derived from' which are narrower than the words 'attributable to' used in other sections of the statute, and as laid down by the Hon'ble Supreme Court in 6 various decisions, there must be a direct nexus between the activity of undertaking developing and building of the housing project, the eligible business, and the profits and gains derived there from in order to claim deduction exemption under section 80-IB(10) of the said Act; and a mere commercial connection between the income and the activity of undertaking developing and building housing project would not be enough since the profits or gains cannot be said to have been derived from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profits in an indirect or remote manner.
(ii) But, it must be appreciated that words used in section 80-IB(10) are 'undertaking developing and building housing projects' and not mere 'construction and sale of housing flats' forming part of the housing project.
The words 'housing projects' are much wider than the words 'housing flats'. The activity of undertaking developing, constructing and building housing projects include within its purview the entire activity of constructing the residential flats, surrounding open space, common areas and facilities, pathways, air conditioned community hall for social gatherings and domestic functions of the flat owners, garages and parking space, mini gym and health corner, walking track, children's play area, water body usable as swimming pool, intercom system, 24 hours drinking water supply, connection for Cable TV facility, electricity installations relating to meter, transformer and substation for receiving electricity from CESC and its transmission to all the flats including the common areas services and facilities, generator and other facilities inside the entire housing complex including inter alia in the common areas and facilities etc, as set out in the published brochure (kindly see copy thereof at pages 56-60 of paper Book, Volume-I).
(iii) In fact, the Agreement for sale in the form of Memorandum signed by each of the flat buyers at the very inception of the booking of the flat clearly specifies the construction, development and sale by the Appellant Assessee Firm, in its capacity of the Owner and Developer of the said housing project, not only of the particular flat being purchased by the concerned buyer, but also of the 'flat unit' defined in clause A15 of the Preamble of the said agreement which includes inter alia the particular flat in the building booked by the particular buyer, the other party to the said agreement, the right to park any car in the parking space, the right of common use of the common portions appurtenant to the concerned flat as well as the common areas installations and facilities more fully set out in Sections A & B under the Third Schedule forming part of and appearing at page 15 of each of the said agreements, which are prepared and drawn on common lines. A copy each of the said two agreements relating to Flat Nos.7C & 7D on the 7th floor of Premises No.3, Khelat Babu Lane, Kolkata 700 037 forming part of the said housing project is included in the Paper Book at pages 61-86 & 87-112 of Volume-I. 7
(iv) The aggregate consideration for sale of 67 flats (out of aggregate 72 flats constructed by the Appellant Assessee Firm as part of undertaking developing and building the said housing project at Premises No.3, Khelat Babu Lane, Kolkata-700037) during the financial year 2006-07 corresponding to the assessment year 2007-08, now under appeal before the learned CIT(A) is actually Rs.15,54,04,543, as rightly credited to the audited Profit & Loss Account drawn by the Appellant Assessee Firm for the said year, and not Rs.15,04,67,077 as arbitrarily and wrongly alleged by the learned AO in paragraph 7.1, at page 5 of the said impugned assessment order dated 2912.2009 passed under section 143(3) of the said Act for the year under appeal.
(v) The mere fact that the agreement for sale described in Section B of Part I of the Sixth Schedule thereof, the additional amounts payable by the purchaser to the owner/ developer, the Appellant Assessee Firm herein calculated at the fixed rate of Rs.55 per square feet of the super built area of the said flat, by way of consideration for installation of generator for the common portions and for providing power to the said flats, formation of the association for the common purposes, obtaining and providing electricity supply and meter, including those on account of and/or for transformer and electrical sub-station etc., it is respectfully submitted, cannot lawfully exclude such consideration from the purview of 'profits derived from the activity of undertaking developing and building housing projects' the expression used and appearing in section 80-IB(10) of the said Act. it may be appreciated that such additional payments calculated @ Rs.55 per square feet of the super built area of each of the said flat constructed and forming part of the said housing project is part and parcel of the aggregate consideration payable by the respective buyers for booking a flat in the housing complex; and that the provision of all common facilities including electricity supply and meter, transformer and electric substation including provision for generator is part and parcel of the entire activity of developing and building housing project, and without which the project development cannot be said to be complete. The provision of such common facilities was not carried out by the Appellant Assessee Firm in its capacity of a middleman/ agent and/or facilitator, and these activities cannot be alleged to be different and distinguishable, as arbitrarily and wrongly alleged by the learned Assessing Officer in paragraphs 8.4 & 8.5 at pages 7 & 8 of the said impugned assessment order dated 29.12.2009 passed under section 143(3) of the said Act, in the instant case, now under appeal Profit element was admittedly involved in carrying out these activities as part and parcel of the entire activity of developing and building the said housing project; and it was never submitted and/or claimed by and/or on behalf of the Appellant Assessee Firm before the learned AO in course of the impugned assessment proceedings that there was no profit motive involved in carrying out these activities, as wrongly and arbitrarily alleged by the learned AO in paragraph 8.5, at page 7 of the said impugned assessment order, or otherwise or at all.
8(vi) The aggregate expenses under the heading 'electrical goods' in the sum of Rs.25,28,491, and under the heading 'electrical works' in the sum of Rs.10,99,866 not only include items like switch boards, wiring and other electrical works carried out inside the respective flats, but also include items like cables, copper wires, distribution boxes, automatic changeovers, underground civil works like digging, preparing and making trench etc. directly connected with the electricity supply and meter including transformer and electrical substations put up by CESC, The expenses on these activities have a direct nexus with the additional payment of Rs.55 per square feet of the super built area of each of the respective flats constructed and sold as part of undertaking developing and building the said housing project. In the circumstances mentioned herein above, it is respectfully submitted that the learned AO was wholly unjustified in law in arbitrarily and wrongly segregating and/or computing the profits of Rs.18,04,718 (gross receipts of Rs.45,70,703 under the heading 'CESC, Electricity & Generator' less the related expenses of Rs.27,65,985 representing payments made to CESC and for Generator etc) and alleging the same to be not profits of the undertaking 'derived from development of the housing project', and also alleging the same to be only profits attributable to such business activity, as wrongly alleged and/or held or otherwise or at all. The Appellant Assessee Firm states and submits that the entire consideration in the aggregate sum of Rs.45,70,703 received from each of the flat buyers by way of additional payments calculated @ Rs.55 per square feet of the super built area of each of the flats is part of the receipt having direct nexus with the activity of undertaking developing and building housing project and therefore part and parcel of the profits derived there from; and that no portion thereof can be either segregated and/or separately computed and/or alleged to be not part of the profits and gains derived from such housing project, as wrongly and arbitrarily alleged by the learned AO in paragraph 8.5 of the said impugned assessment order dated 29.12.2OO9 passed in the instant case now under appeal. The Appellant Assessee Firm further states that the entire expenditure of Rs.63,94,342, details whereof are set out in Table-II appearing under paragraph 8.4 at page 7 of the impugned assessment order are directly connected and have direct nexus with the receipt of Rs.45,70,703 from the flat owners calculated @ Rs.55 per square feet of the super built area of the respective flats in terms of Section B of Part I of the Sixth Schedule forming part of the respective agreements for sale executed in between the Appellant Assessee Firm, as owners and developers on the one hand, and the respective flat buyers.
(vii) The Appellant Assessee Firm states that the aggregate sum of Rs.3,66,763 received from the flat buyers for 'extra work' was strictly in terms of clause
(c) of Section A of Part-I of the Sixth Schedule of each of the respective sale agreements entered into with the flat buyers, and such receipts also have a direct nexus with the activity of undertaking developing and building housing projects and are therefore part of the profits derived from such activity within the meaning of section 80-IB(10) of the said Act. Such 9 receipts were correctly included by the Appellant Assessee Firm in its separate audited Profit & Loss Account of the undertaking drawn for the purposes of section 80-IB(10) of the said Act, and all contrary observations made and/or conclusions drawn by the learned AO in paragraph 9.1 of the said impugned assessment order including inter alia to the effect that receipts/ profits from such extra work are not eligible to be included as part of the profits derived from the activity of undertaking developing and building the said housing project are wholly incorrect, illegal, unreasonable and/or otherwise perverse. The Appellant Assessee Firm also states that the extra work for which it received the said sum of Rs.3,66,763 was carried out by it in its capacity as the Developer, and was in fact carried out long before the handing over of possession to the respective flat buyers, and not after the handing over of the possession, as wrongly and arbitrarily alleged by the learned AO in paragraph 9.1 of his said impugned assessment order dated 29.12.2009, now under appeal before the learned CIT(A).
(viii) The Appellant Assessee Firm states that the aggregate expenditure of Rs.55,00,000 was incurred by it for developing and betterment of the common amenities and facilities in the ground floor, the pathways, the common community hall, mini gym, common lobbies as also landscaping, garden area and beautification of the water body etc. as well as for the drainage facility, which work can be carried out only after obtaining the completion certificate from the KMC, the local authority. The carrying out these activities are part and parcel of the obligations undertaken by the Assessee Firm as owner and developer of the said housing project in terms of the agreements for sale and the printed brochure issued by it in connection with undertaking developing and building the said housing project. The said expenditure of Rs.55,00,000 has no connection, direct or indirect, whatsoever with the receipt of Rs.3,66,763 for extra work carried out inside some of the flats in terms of paragraph (c) of Section A of Part-I of the Sixth Schedule to the respective agreements for sale. It was wholly incorrect, unreasonable and perverse for the learned AO to allege in paragraphs 91 to 96 of the impugned assessment order that the sum of Rs.3,66,763 was received by the Appellant Assessee Firm for post delivery works not forming part of the specifications contracted in the respective agreements and/or that the said sum of Rs.55,00,000 had been incurred for items not forming part of the specifications contracted in the respective agreements. The Appellant Assessee Firm further states that the expenses 'on air conditioner etc. is for items installed inside the common community hall, as clearly evident from the details of such post delivery expenses in the aggregate sum of Rs.55,00,000 submitted by the Appellant Assessee Firm before the learned AO in course of the impugned assessment proceedings for the year under appeal. A copy of the said statement containing such details appear at page 237 of Paper Book, Volume II.
(ix) The Appellant Assessee Firm state; that the post delivery expenditure of Rs.55,00,000 had been incurred by it for purposes already set out in sub 10 paragraph (viii) herein above, and that the same has no connection whatsoever with the receipt of Rs.3,63,763 from the respective flat owners, which was received for carrying out extra work inside the respective flats long before the delivery of possession of the flats to the respective buyers. Since, the said sum of Rs.3,63,763, as already stated earlier, is for carrying out additional work inside the flats in terms of the stipulations already set out in the respective agreements, the said receipt has a direct nexus with the total activity of undertaking developing and building the said housing project, and therefore was correctly credited to the Profit & Loss Account of the undertaking with reference to which the deduction under section 80 IB(10) of the said Act was claimed by the assessee firm, and the same is part and parcel of the aggregate profits derived by it from such housing project within the meaning of the said section, Further, since there is no connection whatsoever in between the receipt of Rs.3,63,763 and the expenditure of Rs.55,00,000 referred to by the learned AO in paragraphs 9.7 to 9.9 of the said impugned assessment order, now under appeal, it is respectfully submitted that the learned AO was wholly unjustified in law in arbitrarily estimating the receipts for extra work in the sum of Rs.83,89,700, and the profits of Rs.28,89,700 from the so called extra works, adding the said amount to the assessable income of the assessee firm for the year under appeal, and also holding that the said alleged income of Rs.28,89,700 is not eligible for deduction under section 80-IB(10) of the said Act. It is respectfully submitted that the entire approach of the learned AO with reference to his observations made and/or conclusions drawn in paragraphs 9.7 to 9.9 of his said impugned order in relation to the alleged estimated profits of Rs.28,89,700 is wholly illegal, against the facts and evidences on record, unreasonable and/or otherwise perverse.
(x) The Appellant Assessee Firm states that the learned AO was wholly unjustified in law in alleging and/or holding that its audited Profit & Loss Account of the undertaking, as prepared for the purposes of section 80 IB(10) of the said Act was incorrect and/or in arbitrarily invoking the provisions of section 145(3) of the said Act and/or in rejecting the Profit & Loss Account of the undertaking and/or in recasting the same in the manner set out in Tables III, IV and V, as stated under paragraphs 12.1, 12.2 & 12.3, at pages 11, 12 & 13 of the impugned assessment order dated 29th December, 2009 and/or in arbitrarily and wrongly computing the business income derived from development of housing project in the sum of Rs.6,08,74,647 and/or in computing the profits from so called other business activities in the sum of Rs.66,56,508. The Appellant Assessee Firm states that the entire approach and working made by the learned AO in Tables III, IV & V appearing under paragraphs 12.1, 12.2 & 12.3 of the said impugned assessment order passed in the instant case for the year under appeal, is wholly illegal, against the facts and evidences on record, unreasonable and/or otherwise perverse.
11(xi) It is true that the Appellant Assessee Firm received a sum of Rs.4,49,000 by way of nomination charges from Mr. Sukumar Banerjee, the second buyer who purchased Flat No. 5H forming part of the said housing project from M/s. B.L. Agarwal & Sons (HUF), the original buyer, who had originally booked the said flat in terms of the agreement for sale dated 24.11.2005 executed by the Appellant Assessee Firm in its favour. The said sum of Rs.4,49,000 was received from Mr. Sukumar Banerjee and was paid back to M/s. B.L. Agarwal & Sons (HUF) by Cheque No.870158 dated 17.7.2006 drawn on Canara Bank, Kolkata in terms of the nomination agreement, a copy whereof appears at pages 249-255 of Paper Book, Volume-II. A copy of the said nomination agreement was duly filed before the learned AO in course of the impugned assessment proceedings, and the bank statement evidencing such payment of Rs.4,49,000 to M/s. B.L. Agarwal & Sons (HUF) including counterfoil of the concerned cheque was duly produced before the learned AO in course of the impugned assessment proceedings. A photocopy of the relevant bank statement as well as of the said cheque counterfoil form part of the Paper Book and appear at pages 243-248 of Volume-II. In the circumstances mentioned herein above, it is respectfully submitted that the learned AO was not justified in adding back over again the said sum of Rs.4,49,000 to the total income of the Appellant Assessee Firm for the year under appeal. Moreover, the learned AO made double addition of the said sum of Rs.4,49,000, once as part of sales of Rs.15,09,16,077 under Table-III, and again, under Table-IV, both at page 12 of the impugned assessment order under paragraphs 12.1 & 12.2 thereof respectively. Since the said sum of Rs.4,49,000 had been actually paid over by the Appellant Assessee Firm to the original buyer, M/s. B.L.Agarwal & Sons (HUF), the same cannot be lawfully added to the total income of the Appellant Assessee Firm.
(xii) In view of the facts and circumstances stated herein above, it is respectfully submitted that the learned AO wholly erred in law as well as in facts in arbitrarily computing the profits from other activities in the sum of Rs.66,56,508, as per calculation given in Table IV, in paragraph 12.2 appearing at page 12 of the impugned assessment order. The profits from other activities should have been limited to income by way of interest in the aggregate sum of Rs.14,58,171, legal fees in the sum of Rs.62,942 and miscellaneous receipts in the aggregate sum of Rs.89,506 as well as income by way of dividends (wholly exempt u/s 10(35) of the said Act) in the sum of Rs.2,471. Further, the learned AO was wholly unjustified in law in arbitrarily computing the profits from the housing project in the sum of Rs.6,08,74,647 as against Rs.5,69,97,128 correctly declared by the Appellant Assessee Firm based on the audit report dated 4th September, 2007 given in Form No.10CCB read with section 80IB(10) of the said Act, as was filed before the learned AO in course of the impugned assessment proceedings for the year under appeal.
12(xiii) It is an admitted fact on record that the said housing project was admittedly completed on 12.5.2007 as per completion certificate dated 12.5.2007, copy whereof was filed in course of the impugned assessment proceedings (kindly see copy thereof at page 242 of Paper Book, Volume-II), that is to say, within the period of four years from the end of the financial year 2004- 05, within which the sanction plan was originally approved by the local authority, KMC on 06.05.2004, as evident from the approval letter dated 6.5.2004, (kindly see copy thereof at pages 238-239 of Paper Book, Volume II).
(xiv) It is respectfully submitted that the mere fact that the completion certificate was issued by the local authority, KMC on 12.5.2007, that is to say, after the end of the previous year corresponding to the assessment year 2007-08, now under appeal, is wholly irrelevant; and for that account alone, the learned AO was wholly unjustified in law in denying to the Appellant Assessee Firm the benefit of deduction lawfully claimed by it in respect of the profits derived by it from undertaking developing and building the said housing project within the meaning of section 80IB(10) of the said Act. The case of the Appellant Assessee Firm is fully covered by CBDT's Instruction No.4 dated 30th June, 2009(kindly see copy thereof at page 255 of Paper Book, Volume4I). It is respectfully submitted that the learned AO was wholly unjustified in law in alleging and/or holding that the Appellant Assessee Firm was required to file partial completion certificate in order to get the benefit of the CBDT's said Instruction No.4 dated 30.6.2009. The Appellant Assessee Firm further submits that profits arising on the sale of 67 flats forming part of the said housing project had been declared by it in its Profit & Loss Account drawn for the financial year ending 31st March, 2007 corresponding to the assessment year 2007-08 as well as in the income tax return filed by it for the said year strictly in accordance with paragraphs 10 & 11 of the Accounting Standard (AS)-9 on 'Revenue Recognition' issued by the Institute of Chartered Accountants of India read with Accounting Standard (AS)-7 dealing with Construction Contracts. The Appellant Assessee Firm states that the construction activity in relation to the said housing project had been commenced by the learned AO in the financial year 2004-05, and during the entire construction period ranging from FY 2004-05 to FY 2006-07, the inventory in the form of work-in- progress as well as the unsold completed flats, had all along been valued by the assessee firm in accordance with the well established method of stock valuation, namely, 'At Cost', as set out in Accounting Standard (AS)-2 on 'Valuation of Inventories' issued by the Institute of Chartered Accountants of India, The said method of stock valuation has been repeatedly recognized by different courts including the Hon'ble Supreme Court for purposes of making assessments under the Income Tax .Act, 1961, and under the said method of stock valuation, the profits would accrue and arise only in the year in which sales of constructed flats by way of handing over physical possession thereof to the respective buyers take place. This principle is also recognized in Accounting Standard (AS)-9 issued by the Institute as well as 13 in section 2(47)(v) of the said Act. The observations made by the learned AO with reference to the decision of the House of Lords in B.S.C. Footwear's case (1972) 83 ITR 269 and the decision of the Hon'ble Supreme Court in CIT v Tuticorin Alkali Chemicals and Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC) in regard to recognized accounting practices, it is respectfully submitted, is wholly irrelevant for deciding the question of eligibility of the Appellant Assessee Firm in lawfully claiming the deduction admissible to it in respect of the profits derived by it from undertaking developing and building the said housing project within the meaning of section 80IB(10) of the said Act, which profits have also been admittedly assessed by the learned AO in the hands of the Appellant Assessee Firm in the year under appeal. The Appellant Assessee Firm further states and submits that the said Instruction No.4 dated 30.6.2009 is not confined to partial completion of the projects only, and that the denial of deduction lawfully admissible to the Appellant Assessee Firm under section 80IB(10) of the said Act for the year under appeal in respect of the profits admittedly derived by it from undertaking developing and building the said housing project is wholly illegal, against the facts and evidences on record, wholly unreasonable and/or otherwise perverse. The Appellant Assessee Firm states that the housing project having been wholly completed during the year under appeal, and the completion certificate dated 12.5.2007 recording the fact that the construction of the housing project was completed on 28.3.2007, as certified by the Architect Sri Malay Kumar Ghosh, and as also mentioned in the notice of completion dated 28.3.2007 given to KMC under rule 26 of the CMC Building Rules, 1990 (such notice is required to be given within one month after completion of the construction of the new building), having been duly filed with the learned AO in course of the assessment proceedings for the year under appeal, the denial of the benefit of deduction under section 80IB(10) of the said Act for the year under appeal is wholly illegal, unreasonable and/or otherwise perverse.
(xv) The Appellant Assessee Firm states that the observations made by the learned AO in paragraphs 14.3.1, 14.3.2, 14.3.3, 14.3.4 and 14.4 of the said impugned assessment order to the effect that the assessee firm violated the requirement of section 80-IB(10)(c) of the said Act in so far as Flat No.7C & 7D of the said housing project are also wholly contrary to the facts and evidences on record, illegal, unreasonable and/or otherwise perverse. It is a fact that both Flat No.7C & 7D are two independent flats and had been sold by the Appellant Assessee Firm jointly to Sri Rupankar Bagchi & Smt. Chaitali Lahiri in terms of two separate agreements for sale executed on 10.5.2006. A copy of the respective floor plans of each of the said two flats had been duly annexed to each of the said two independent agreements. In these floor plans, the position of entrance gates for each of the said two flats bearing Nos. 7C & 7D had been separately shown. Subsequently, the said two buyers requested for acquiring some more area (17 sq. ft. for flat No.7C & 16 sq. ft. for flat No.7D) in front of each of the said two flats in or about 14 February, 2007, After receipt of additional consideration for such additional areas, the Appellant Assessee Firm, at the request of the said two buyers, shifted the entrance gate to each of the said two flats. But, even on such shifting of gates, the identity of each of the said two flats was duly maintained and each of the said two flats continued to be independent to each other, and had separate and independent gates in terms of the floor plan annexed to the separate deeds of conveyances signed, executed and registered with Appellant Assessee Firm on or about 21st May, 2008. A copy of each of the said two deeds of conveyances for flat no.7C & 7D appear at pages 113-137 & 138-163 of Paper Book, Volume II. It is also a fact that the authorized representative of the said two buyers had appeared before the learned AO and had filed a written explanation, which in the last paragraph thereof, recorded inter alia as under:
"One of the co-owner Rupankar Bagchi is a singer artist and the other co-owner Chaitali Lahiri is a Lyricist and song writer. For the said purpose individual spaces were required to do "RIYAZ" and practice and to write lyrics in respective capacities for which a certain degree of seclusion was required from the daily household chores. After using the separate flats for some time, for the purpose of convenience and security, we decided to have common entrance for the said two flats. This we did at our own. As this modification did not affect the structures of the building no permission was required to be taken from outside agency. The cost for the modification was borne by us".
(xvi) The Appellant Assessee Firm states that it never admitted before the learned AO as alleged in paragraphs 14.3.1 to 14.4 of the impugned assessment order, or otherwise or at all, that the assessee firm had participated in the process of making one single entry door for the said two flats bearing Nos.7C & 7D on the request of the buyers. The statement to the aforesaid effect as alleged in the said impugned assessment order is wholly against the facts and evidences on record, wholly unreasonable and/or otherwise perverse. As already set out in the last paragraph of the written explanation filed by the learned A/R of the said two buyers on 18.12.2009 (kindly see copy thereof at pages 23l-236 of Paper Book, Volume II) before the learned AO in course of the impugned assessment proceedings in the case of the Appellant Assessee Firm for the year under appeal that the common entrance for the said two flats was constructed by the said two flat buyers on their own, and that too after using the flat for sometime, and without any permission from the assessee firm. The Appellant Assessee Firm states and submits that it had sold to the said two buyers, two separate and independent flats having two separate independent gates and doors, and that it was not party to the so called creation of one residential flat of more than 1500 sq. ft., as wrongly and arbitrarily alleged by the learned AO in his said impugned assessment order dated 29-12-2009, or otherwise or at all. The Appellant Assessee Firm also states that separate maintenance bills had all 15 along been issued in respect of each of the said two flats and there are two separate electric meters in respect of the said two flats."
7. The ld. C.I.T.(A) sought remand report from the A.O., copy placed at pages 327 to 334 of the paper book, volume-III. In reply to the said remand report, the assessee filed its submission on 23/2/2010, which is placed at pages 335-343 of paper book, volume-III. The A.O.'s comment dated 01/3/2010 on the letter of the assessee dated 23/2/2010 and rejoinder dated 11/3/2010 are placed at pages 344-345 & 346 to 349 respectively of the paper book, volume-III. Ld. C.I.T.(A) has stated that after perusing the assessment order, remand report and submissions of both the parties and material on record, he has summarized the principal issues as under :-
i) Whether the AO was legally and factually justified in re-casting appellant's Profit & Loss Account for the year ending 31-03-2007 by invoking the provisions of section 145(3), and thereby, estimating the gross receipts of the eligible undertaking at Rs.15,09,16,077/ and, estimating receipts from extra work at Rs.83,89,700/-, and thereby, estimating income from the eligible housing project and non-eligible business at Rs.6,08,74,646/- and Rs.66,56,508/-?
ii) Whether in fact, and, in law, the AO was correct in estimating income of Rs.66,56,508/ arising out of Rs.45,70,703/ received in respect of CESC and Generator charges and Rs.83,89,700/- being estimated receipts for extra work, and thereafter, holding that the profit derived from the said two receipts was not eligible for deduction u/s 80IB(10)?
iii) Whether the AO was justified in rejecting appellant's claim u/s 80IB(10) on the ground that the appellant has sold Flats 7C and 7D as a combined unit, and thereby, contravened the condition prescribed in the said section which permitted deduction only to the housing projects where individual unit size does not exceed 1500 sq. ft. of built-up area?
iv) Whether the AO was justified in not allowing deduction u/s 80IB on the ground that the appellant, who followed completion contract method of accounting, has not obtained completion certificate from the local authority, that is, Kolkata Municipal Corporation prior to 31-03-2007, and so, the condition prescribed in clause (a)(ii) of section 80IB(10) was not satisfied?
v) Whether the nomination amount of Rs.4,49,000/- was assessable as income of the appellant; and if so, whether it was eligible for deduction u/s. 80IB(10) as part of profit of the housing project ?
8. In regard to the first issue, viz. rejection of accounts u/s. 145(3) of the Act, the ld. C.I.T.(A) held that the A.O. was not justified in invoking provisions of sec. 145(3) 16 of the Act. The relevant finding of the ld. C.I.T.(A) is contained in paras 16 to 19, 21 & 26 of the impugned order, which is reproduced below :-
"16. On due consideration of the AO's findings, and, the appellant's submissions, I find that the AO was not legally justified or competent to invoke section 145(3) of the Act, In the present case, the assessment order has been passed by the AO u/s 143(3) of the Act, and, not u/s 144. The provisions of section 145(3) read as under-
"Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144"
17. The provisions of section 144 prescribe that, before a best judgment is made, the assessee should be given an opportunity by the AO by serving a show- cause notice, calling upon the assessee to explain as to why the assessment should not be completed to the best of his judgment. Section 145(3) permits the AO to make an assessment in the manner provided in section 144, if the AO is not satisfied about the correctness or completeness of the accounts or where the method of accounting provided u/s 145(1) or accounting standards notified u/s 145(2) have not been followed. In the impugned order, the AO has not spelt out as to how the appellant has not complied with the method of accounting provided u/s 145(1) or accounting standards notified u/s 145(2), or, in what manner the appellant has violated the accepted method of accounting or contravened any particular accounting standard
18. In order to invoke the provisions of section 145(3), issue of show-cause notice was mandatory. From a perusal of the assessment order, it is apparent that prior to invoking section 145(3) and re-casting the Profit & Loss account, the AO has not issued any show-cause notice to the appellant. Even the principles of natural justice, which are squarely applicable in the income tax proceedings, require that, before drawing any adverse inference, the assessee should be given an opportunity for rebuttal. In the present case, it appears that before invoking section 145(3), no opportunity was provided to the appellant. The AO's action of invoking section 145(3) and re-casting the Profit & Loss account thus suffers from fundamental infirmity and therefore, cannot be upheld on this primary ground itself.
19. But, even on merits, I find that the AO was not justified in invoking section 145(3). According to the A0 the appellant has wrongly included the receipt of Rs.3,66,763/- for extra work, and, CESE/generator charges of Rs.45,70,703/- in the Profit & Loss account of the eligible undertaking; and so, the Profit & Loss account suffers from infirmity. In AO's opinion, these receipts had no connection with appellant's business of development of the housing project, and, the appellant wrongly included these receipts in the Profit & Loss account of the eligible undertaking. It is, however, undisputable fact that in the Profit & Loss account, the appellant credited and offered both the receipts as income of the relevant year. It is therefore not the case of the AO that the appellant either suppressed or under stated 17 the income from these sources. Whether or not such receipts were eligible for deduction u/s 80IB may be a debatable issue, but, for that reason, the correctness or completeness of appellant's audited accounts could not be called into question. When the appellant has disclosed these receipts in its Profit & Loss account, its accounts could not be termed as defective or incomplete, even if the AO felt that such receipts were not entitled for deduction u/s 80IB(10). I find that though the appellant has, in its Profit & Loss account, credited income from "Extra work"
amounting to Rs.3,66,763/-, the AO has, in the recasted Profit & Loss accounts titled as Tables III, IV & V, omitted to consider altogether the income of Rs.3,66,763/-. I also find that, neither in Table IV nor in Table V, the AO has included the income by way of extra work amounting to Rs.3,66,763/-, even though the appellant has disclosed such income in its Profit & Loss account. These facts rather show the bona fide, correctness, and, completeness of the appellant's audited accounts.
21. I also find that the sale value of Rs.15,09,16,077/- as credited in the Profit & Loss account includes sale consideration Rs.23,31,200/- in respect of Flat No 5H. The said sale consideration inter alia includes nomination charges of Rs.4,49,000/-, because the original consideration agreed with B.L.Agarwal & Sons (HUF) was Rs.18,82,200/- only. Since the nomination charges were in turn paid to B.L. Agarwal & Sons (HUF), the appellant has rightly claimed deduction of Rs.4,49,000/- in order to arrive at the net consideration for sale of Flat No. 5H. In view of the above, I do not find any infirmity in the appellant's audited accounts on the ground that assessee had claimed rebate of nomination charges of Rs.4,49,000/- from the gross sale proceeds. The appellant's Profit & Loss account could not, therefore, be rejected by the, AO on this ground."
26. In the impugned order, the AO has also failed to prove that the accounts of the appellant are either not in conformity with the recognized method of accounting followed or do not comply with the accounting standards prescribed u/s 145(2). And, in absence of any such finding, the AO was not competent to invoke section 145(3). 1 am of the considered opinion that none of the conditions prescribed in section 145(3) were fulfilled by the AO, before rejecting the audited accounts of the appellant, and, proceeding to estimate the total income. But, even on merits, I find that the appellant's accounts do not suffer from any inaccuracy or infirmity, and therefore, could not be regarded as unreliable. Profit & Loss account as placed before the AO contained, all the transactions carried on by the appellant in its ordinary course of business, from which the total income could be computed by the AO. It may be so that with reference to the transactions disclosed and accounted in the audited books of account, the AO could differ with the appellant's claim for deduction u/s 80IB(10) in respect of certain incomes credited in the Profit & Loss account; but then, merely because the, AO entertained a different legal view with regard to the allowability of a statutory ,deduction, it could not be made the basis to reject the books of account, and, redraw the Profit & Loss account for the purposes of assessment. The first issue is therefore decided in favour of the appellant. The AO is directed to assess the income with reference to accounts furnished by the appellant along with Form 10CCB."
189. In regard to second issue as summarized by ld. C.I.T.(A), i.e. whether the A.O. was correct in estimating the income in respect of the amounts received from the buyers of the flat for CESC & Generator charges amounting to Rs.45,70,703/- and estimated receipt for extra work amounting to Rs.83,89,700/-, ld. C.I.T.(A) has stated that in so far as CESC & Generator charges received from flat buyers was concerned, the A.O. treated the receipt as being not received from the eligible undertaking on the ground that the assessee acted as a mere facilitator for providing electricity connection, for which separate payments were received. The A.O. rejected the loss claimed on the assessee on this account of Rs. 18,23,638/- and held that it had actually incurred Rs.27,65,985/- towards provision of electricity connection, generator etc. and thereby made a profit of Rs.18,04,718/- in its capacity as facilitator for providing electric connection. He, therefore, held that as the assessee did not derive profit from the development of housing project, the profit of Rs.18,04,718/- was not eligible for deduction u/s. 80-IB(10) of the Act. The ld. C.I.T.(A) has observed that the reasoning adopted by the A.O. for denying the benefit of deduction u/s. 80-IB(10) of the Act in respect of electrical installations and connection thereof was not proper inasmuch as the A.O. could not divorce provision of such services from the purview of the housing project. He thereafter referring to several clauses of schedules annexed to the agreement for sale observed that provision of electricity connection through CESC and/or installation of Generator sets and fittings etc. were integral part of the assessee's obligation to be performed under the agreement for sale executed with each flat owner. He has, therefore, held that expenses incurred in relation to provision of various electrical installations, generator, electricity points and connections provided from CESC were expenditure of the eligible project and qualify for deduction u/s. 80- IB(10) of the Act. The relevant observation of ld. C.I.T.(A) at para 33 of his order is as under :-
"33. It is not the case of the AO that the electrical installations and connections were provided to persons other than the flat purchasers, or, persons other than the flat purchasers were entitled to use these facilities. The electrical installations and connections were provided within the housing project, and, only the persons buying residential units in the housing project were entitled to use the facilities and 19 installations, and, only the individual flat owners were liable to pay charges for provision of electricity connections and electrical installation. In the circumstances, the AO was unjustified in treating the amounts received from the individual flat owners towards electrical installations, electrical connections, generator charges, etc, as income derived from non-eligible business. The AO is directed to treat the receipt of Rs.45,70,703/- as integral part of the receipt of the housing project, and, similarly, to treat all expenses incurred in relation to provision of various electrical installations, generator and electricity points and connections provided from CESC as expenditure of the eligible project. Any income derived from such activity will thus form part of the profits of the eligible business qualifying for deduction u/s 80IB (10)."
10. In regard to third issue, i.e. individual unit size exceeding 1,500 sq. ft. of built-up area in respect of combined Flats 7C & 7D sold to Mr. Rupankar Bagchi and Mrs. Chaitali Lahiri, the A.O. on the basis of Inspector's enquiry report found that the aforesaid two flats had only one entrance and the combined area of these flats exceeded 1,500 sq. ft. According to him, therefore, the assessee had sold one single unit admeasuring more than 1,500 sq. ft. of the built-up area and it was not entitled to deduction u/s. 80-IB(10) of the Act. The assessee explained the issue before the ld. C.I.T.(A) as under :-
"One of the co-owner Rupankar Bagchi is a singer artist and the other co-owner Chaitali Lahiri is a Lyricist and song writer. For the said purpose individual space were required to do "RIYAZ' and practice and to write lyrics in respective capacities for which a certain degree of seclusion was required from the daily household chores. After using the separate flats for some time, for the purpose of convenience and security, we decided to have common entrance for the said two flats. This we did at our own. As this modification did not affect the structures of the building no permission was required to be taken from outside agency. The cost for the modification was borne by us."
The ld. C.I.T.(A) opined that the assessee has not violated the conditions prescribed in sec. 80-IB(10) of the Act as none of the individual units exceeded 1,500 sq. ft. of built- up area and, therefore, the A.O. was not justified in denying deduction u/s. 80-IB(10) of the Act. His observation in this regard in para-41 of the order is as under :-
"41. Despite above submissions of the AR for the flat purchasers, the AO did not bring on record any material let alone cogent material to refute categorical assertions of the flat purchasers. In the submission, the AR of the fiat purchasers admitted that, after using two flats separately, the purchasers decided to have common entrance for the purpose of their convenience and security and the modifications were made on their own. The AR also admitted that before carrying out the modifications to the flats, they had not taken any permission from any agency and the cost of modification was borne by them. From the submissions of 20 the appellant and the Ld. AR for the flat purchasers, it is therefore apparent that both the parties agreed that the first modification in the flat layout resulting in change in the positioning of flat entrance was carried out with the consent of the appellant, but, the subsequent change resulting in having one common entrance to both the flats was carried out by the fiat purchasers without taking consent of the appellant or any other authority. These facts therefore negate the AO's hypothesis that the assessee had participated in consolidating two flats into one which exceeded the statutory limit of 1500 sq. ft. per flat. The layout plans annexed to the Agreement for Sale and Registered Conveyances establish that the appellant constructed two independent functional residential units, being flat No 7C & 7D, which were sold and conveyed as two separate and individual flats. As per the sanctioned building plan, there were two separate and independent flats which were also constructed as two independent units. Subsequent to the handing over of the possession and registration of conveyance, if the flat buyers suo moto carried out modifications in the flats at their own cost, then for such subsequent acts carried out by third party without appellant's permission; the appellant's eligibility to claim deduction u/s 80IB(10) can not be questioned. The facts as are brought on record prove that so far as the appellant was concerned, it had constructed and sold two independent functional residential units, and, each unit was having area less than 1500 sq. ft. The appellant could not therefore be said to have violated the conditions of section 80IB(10) with regard to the size of individua1 residential unit. Save and except this lone instance, the AO has not pointed out any other instance where individual flat size has exceeded 1500 sq. ft. I have considered the facts of the case. I am of the opinion that the appellant has not violated the conditions prescribed in section 80IB(10), as none of the individual units exceeded 1500 sq. ft. of built-up area. The AO was therefore not justified in denying deduction u/s 80IB(l0)."
11. Regarding fourth issue as summarized by ld. C.I.T.(A) about completion certificate from KMC to justify the claim of deduction u/s. 80-IB(10) of the Act, the A.O. stated that the method of accounting followed by the assessee was not in conformity with AS-7 issued by ICAI, as per which the assessee was obliged to recognize revenue on year to year basis by following the partial completion of project method. He further stated that the benefit of Instruction No. 4 of 2009 of CBDT could only be availed by an assessee who followed partial completion of project method and who also obtained completion certificate within the time prescribed, i.e. in the same accounting year ending 31/3/2007. According to A.O., in this case the assessee obtained completion certificate from KMC (local authority) on 12/5/2007 and as per Explanation (ii) to sec. 80-IB(10)(a) of the Act, the date of completion of construction of the housing project shall be taken to be the date on which completion certificate in 21 respect of such housing project is issued by the local authority. He, therefore, held that the assessee is not entitled to claim deduction u/s. 80-IB(10) of the Act as the completion certificate from the local authority was not obtained by 31/3/2007. The ld. C.I.T.(A) after analyzing AS-7 prescribed by ICAI, provisions of Explanation (ii) to sec. 80-IB(10)(a) of the Act and after considering the A.O.'s observation and submissions of the assessee in different paragraphs of his appellate order, directed the A.O. to grant deduction u/s. 80-IB(10) of the Act with reference to audited P/L Account as filed along with Form 10CCB. The relevant portion of his finding at para 46 of the order is as under :-
"46. In the present case, it appears from the records that the KMC granted approval to the housing project on 06-05-2004. Copy of the sanction granted to the building plan by KMC on 06-05-2004 is placed at page 238 and 239 of the paper book. In terms of section 80IB(10)(a)(ii), the appellant was obliged to complete the project and obtain the completion certificate within four years from the end of financial year 2004-05. The KMC by its letter dated 12-05-2007 granted the completion certificate to the housing project of the appellant on 12-05-2007. Copy of the completion certificate issued by KMC is at page 242 of the paper book. These facts clearly establish that the housing project was completed much prior to 3l-03-2009, and, the appellant also obtained the completion certificate within the due date contemplated by the Explanation to section 80IB(10)(a). In view of the above, I find that the appellant has complied with the conditions prescribed in section 80IB(10)(a), and therefore, the AO was not justified in denying deduction u/s 80IB(10). I find that the AO has denied the benefit of deduction u/s 80IB(10) for not complying with a condition which is not specifically provided for in that section. In this regard, I am reminded of the case of Bajaj Tempo Ltd. vs.. CIT 196 ITR 188, wherein the Hon'ble Supreme Court had observed that a provision in a taxing statute granting incentive for promoting growth and development should be construed liberally; and, since the provision for promoting economic growth has to be interpreted liberally; the restriction on it has to be construed so as to advance the objective of the provision and not to frustrate it. Applying this maxim, I find that the legislature has prescribed the condition by using express language as per which the only condition which the assessee was obliged to satisfy was to obtain the completion certificate from the local authority at any time till 31-03-2009, so as to qualify for deduction in respect of profits derived from the housing project. The said condition was not linked with the method of accounting or accounting method followed or with the year in which revenue was recognized. Since the appellant has complied with the conditions prescribed in section 80IB(10)(a)(ii) in letter and spirit, the AO was not justified in rejecting the claim for deduction u/s 80IB(10). In the assessment order as well in his report dated 0l-03-2010, the AO has pointed out a procedural irregularity of non-filing of the completion certificate by the auditor along with the audit report in Form 10CCB. According to the AO, para 23(b) of Form 10CCB required the auditor to attach a copy of the completion certificate to 22 his report, which he has failed to do. According to the AO, this has resulted in non- fulfillment of the statutory condition, and therefore, the claim was liable to be rejected. It is not in dispute that the completion certificate was obtained by the appellant from KMC in May, 2007, and, a copy thereof was furnished before the AO much prior to the completion of the assessment. Furnishing of the completion certificate before the AO was a condition precedent, which the assessee had fulfilled. Attaching the completion certificate by the auditors and its submission along with the return was not a statutory condition. Moreover, any lapse on the part of the auditor can be no ground for rejecting the claim for deduction, particularly when the statutory condition of obtaining the completion certificate within four years was satisfied by the appellant. I also do not find force in the AO's objection because of the peculiarity of provisions of section 80IB(10) as per which the assessees who follow progressive completion method are also entitled to claim the said deduction u/s 80IB(10) on prorata basis. The CBDT Instruction No. 4 of 2009 also supports this proposition. In such cases, obviously the auditor will not be able to attach a completion certificate to his report in Form 1OCCB because the completion certificate would be issued only on completion and not on proportionate basis. In my opinion, therefore, non-reference or non-attachment of completion certificate may be considered as a technical default, but, that cannot be construed to be non-compliance of a statutory condition, particularly when the appellant had furnished both the report of the accountant in Form 10CCB and the completion certificate issued by KMC on the first date of hearing at the assessment stage. I do not find substance in the AO's objections for the alleged procedural defaults in not attaching the completion certificate by the auditors. In view of the above, the AO is directed to grant deduction u/s 80IB(l0) with reference to the audited Profit & Loss Account as filed along with Form 10CCB."
12. The only other issue considered by the ld. C.I.T.(A) was whether the nomination amount of Rs.4,49,000/- was assessable as income of the assessee and if so, whether it was eligible for deduction u/s. 80IB(10) of the Act as part of profit of the housing project. The A.O. observed that the assessee received nomination charges of Rs.4,49,000/- from Sri Sukumar Banerjee, which amount according to the assessee was payable to the original buyer B.L. Agarwal & Sons (HUF). The A.O. further stated that the said sum of Rs.4,49,000/- had never been transferred to B.L. Agarwal & Sons (HUF), rather it was kept with the assessee. He, therefore, considered the said nomination charges to be the actual income of the assessee for allowing the transfer by way of nomination from the original buyer B.L. Agarwal & Sons (HUF) to the second buyer Sri Sukumar Banerjee and, accordingly, denied deduction u/s. 80-IB(10) of the Act. The ld. C.I.T.(A) for the reasons discussed in para-47 of his order has held that the nomination charges of Rs.4,49,000/- did not constitute assessee's income and 23 hence question of allowing deduction u/s. 80-IB of the Act is irrelevant. The relevant portion of the observation of ld. C.I.T.(A) on this issue reads as under :-
"47. ............. From the information available from the documents on record, it appears that the appellant had originally entered into an agreement dated the 24th November, 2005 with B.L. Agarwal & Sons (HUF) for sale of Flat No. 5H for Rs.18,82,200/-. Pursuant to the agreement, the appellant had received an amount of Rs.4,70,550/-. B.L. Agarwal & Sons (HUF) thereafter nominated Sri Sukumar Banerjee in its place to purchase the flat 5H for a consideration of Rs.23,31,200/-. In other words, B.L. Agarwal & Sons (HUF) made a nomination profit of Rs.4,49,000/- by appointing Sukumar Banerjee in its place. In the nomination agreement dated 12-12-2006, it was agreed that Sri Sukumar Banerjee would pay the entire consideration of Rs.23,31,200/- to the appellant, and, upon receipt of such consideration, the appellant would refund Rs.4,70,550/- received till then as also the nomination charge of Rs.4,49,000/- to B.L. Agarwal & Sons (HUF). In conformity with the nomination agreement dated 12-12-2006, the appellant refunded the amount of Rs.4,49,000/- to B.L.Agarwal & Sons (HUF) on 20-07- 2006 by cheque no. 870158 drawn on the Canara Bank. The evidence in support of the payment is placed on page 248 of the paper book. The facts on record therefore establish that the assessee ultimately received only sale consideration of Rs.18,82,200/- in respect of sale of Flat 5H, even though Sri Sukumar Banerjee paid aggreagate consideration of Rs.23,31,200/-. The amount paid by Sukumar Banerjee, however, included nomination profit of Rs.4,49,000/-, which was eventually passed on to, and therefore became the income of B.L. Agarwal & Sons (HUF). The appellant has rightly excluded such nomination charges from the sale credited in the Profit & Loss account. The AO is accordingly directed to exclude the nomination charges of Rs.4,49,000/- from the total income of the appellant.
Since I have held that the nomination charges of Rs.4,49,000/- did not constitute appellant's income, the question of allowing deduction u/s 80IB is irrelevant, and therefore, the same is not adjudicated."
13. In view of above, ld. C.I.T.(A) rejected the objections raised by A.O. denying deduction u/s. 80-IB(10) of the Act and allowed the appeal of the assessee on all five issues summarized by him, as stated hereinabove.
14. Hence this appeal by department before the Tribunal on following grounds :-
"1. Ld. CIT(A) erred both in facts and law in allowing the assessee's appeal with a direction to grant deduction u/s 80IB(l0) for A.Y. 2007-08 with reference to the audited P/L account as filed along with Form 10CCB. In Sl. No. 23(b) of the said form, date of completion was claimed by the assessee on the basis of architect's certificate dated 26/03/2007. Ld. CIT(A) while accepting assessee's said contention did not appreciate the arguments put forward during the course of assessment as well as remand report and subsequent letters in proper context. Ld. CIT(A) also failed to address the legal requirement as per Explanation (ii) below section 80IB(10)(a) of the Act to the effect that KMC's certificate dated 12/05/2007 is actually the date of 24 completion which is not an empty formality and thus assessee's claim for deduction u/s. 80IB was not relevant to AY. 2007-08. Ld. CIT(A) also was not justified holding any lapse on the part of the auditor can be no ground for rejecting the claim for deduction and also failed to consider the materials brought on record during the course of assessment along with various judicial pronouncements as referred in the assessment order resulting the appellate order perverse.
2. Ld. CIT(A) erred both in facts and law in deciding the appeal in favour of the assessee with a direction to assess the income with reference to accounts furnished by the assessee along with Form 10CCB without proper appreciation of arguments put forward during the course of assessment as well as remand report and subsequent letters in respect of invoking provisions u/s. 145(3) and thereby estimating the gross receipts of the eligible undertaking at Rs.15,09,16,077/- and estimating receipts from extra work at Rs.83,79,700/- without considering the materials brought on record during the course of assessment along with judicial pronouncements as referred in the assessment order in this regard.
3. Ld. C1T(A) erred both in facts and law in allowing the assessee's appeal with a direction to treat the receipt of Rs.45,70,703/- as integral part of the receipt of the housing project and similarly, to treat all expenses incurred in relation to provision of various electrical installations, generator and electricity points and connections provided from CESC as expenditure of the eligible project and to include the income by way of extra work amounting to Rs.3,66,763/- without proper appreciation of arguments put forward during the course of assessment as well as remand report and subsequent letters and not considering the materials brought on record during the course of assessment along with judicial pronouncements as referred in the assessment order in this regard.
4. Ld. CIT(A) erred both in facts and law in deciding the appeal in assessee's favour in respect of fact nos. 7C & 7D treating both are different on the basis of unsubstantiated submission of the witness as produced by the assessee without proper appreciation of arguments put forward during the course of assessment as well as remand report and subsequent letters and not considering the materials brought on record during the course of assessment along with judicial pronouncements as referred in the assessment order in this regard."
15. At the time of hearing before us, the ld. Departmental Representative submitted that the assessee received completion certificate from KMC dated 12/5/2007. He submitted that the said KMC certificate is mandatory as per Explanation to sec. 80- IB(10) of the Act and date of the certificate is the date of completion of construction of the housing project. He further submitted that the ld. C.I.T.(A) considered the certificate of Architect & Structural Engineers dated 26/3/2007 as the date of completion of the housing project. He submitted that A.O. is justified to state that the project was not completed till the certificate by KMC was issued, which is dated 25 12/5/2007. Hence the project was not completed in the assessment year under consideration and as such the assessee was not entitled to get deduction u/s. 80-IB of the Act.
16. On the other hand, the ld. A/R submitted that the basic issue is as to whether the assessee is entitled to deduction 80-IB of the Act or not. He submitted that in this regard it is to be ascertained as to when the housing project was completed and whether the assessee fulfilled the conditions stipulated in sec. 80-IB(10) of the Act. The ld. A/R submitted that approval for commencement of construction is dated 06/5/2004 and referred pages 283-284 of the paper book, volume-II. He submitted that the plan was revised on 12/5/2005 and referred page 367 of the paper book, volume- IV. He submitted that second revised building permit was granted on 05/3/2007 by KMC and copy is placed at page 287 of the paper book, volume-II. The ld. A/R submitted that for the purpose of sec. 80-IB of the Act, the original approval of the plan is to be considered for computing the period of four years for completing the project and as such the date by which the assessee was required to complete the project was 06/5/2008. He submitted that the project was completed on 26/3/2007, i.e. within the period of four years and referred page 286 of the paper book, volume-II, which is a copy of the certificate of Architect. He submitted that on the basis of the said Architect's certificate, the assessee applied for approval from the competent local authority for getting the completion certificate vide letter dated 28/3/2007 and referred page 285 of the paper book, volume-II. He submitted that KMC issued completion certificate dated 12/5/2007 on the basis of the very certificate of the Architect that the project had been completed. He, therefore, submitted that the assessee has fulfilled all the requisite conditions for getting the benefit u/s. 80-IB of the Act and, accordingly, the ld. C.I.T.(A) has rightly allowed the benefit to the assessee of sec. 80-IB(10) of the Act. He submitted that the provisions of the Act do not state that each year the assessee is required to obtain certificate from local authority. As per provisions of the Act, assessee is only to furnish certificate of completion within four years from the end of the financial year in which the housing project was sanctioned by local authority, i.e. KMC. To substantiate his submitted, the ld. A/R referred CBDT Circular No. 4 of 26 2009 dated 30/6/2009, a copy of which is placed at page 322 of the paper book, volume-III. He submitted that the assessee constructed total 72 flats and out of which 67 flats were sold in the assessment year under consideration. That the flats which remained unsold were valued at cost and the same were sold next year and, accordingly, deduction u/s. 80-IB(10) of the Act was claimed on the profit derived therefrom in the next year and the same was accepted by the department. He referred page 449 of the paper book, volume-V to substantiate his submission. The ld. A/R submitted that the A.O. rejected the book results of the assessee summarily and reconstructed the same by assumptions and presumptions. He, therefore, submitted that the order of the ld. C.I.T.(A) be confirmed.
17. We have considered the submissions of ld. representatives of the parties and carefully perused the orders of the authorities below.
18. Clause (a)(ii) of sec. 80-IB(10) of the Act for the relevant financial year reads as under :-
"(10) The amount of deduction in the case of an undertaking developing and building housing projects approved before the 31st day of March, 2007 by a local authority shall be hundred per cent of the profits derived in any previous year relevant to any assessment year from such housing project if, -
(a) such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998 and complete such construction,-
(i) in a case where a housing project has been approved by the local authority before the 1st day of April, 2004, on or before the 31st day of March, 2008;
(ii) in a case where a housing project has been, or, is approved by the local authority on or after the 1st day of April, 2004, within four years from the end of the financial year in which the housing project is approved by the local authority.
Explanation. - For the purpose of this clause, -
(i) in a case where the approval in respect of the housing project is obtained more than once, such housing project shall be deemed to have been approved on the date on which the building plan of such housing project is first approved by the local authority;27
(ii) the date of completion of construction of the housing project shall be taken to be the date on which the completion certificate in respect of such housing project is issued by the local authority;"
18.1. The facts regarding the above issue have been discussed in detail above. However, to reiterate, the assessee first obtained a sanctioned building plan from KMC on 06/5/2004, which was later revised on 12/5/2005. Second revised building permit was granted by KMC on 05/3/2007. However, in conformity with the first revised building plan dated 12/5/2005, the assessee started construction on 15/8/2005 of 72 individual residential units on the said land, each admeasuring less than 1500 sq. ft. of built-up area, relevant to F.Y. 2005-06. During the financial year 2006-07 relevant to assessment year under consideration, the assessee completed and sold 67 flats out of the aggregate 72 flats in the housing project and, accordingly, credited the sale proceeds to its audited P/L Account for the year under appeal. The Architect & Structural Engineer, who supervised the development of the housing project, vide his certificate dated 26/3/2007 has stated that the housing project was completed as per the sanctioned building plan. A notice dated 28/3/2007 informing completion of the housing project issued by the Architect, as required under Rule 26 of CMC Building Rules, 1990, was also given to KMC. In pursuance of the said certificate of the Architect certifying completion of the housing project as per sanctioned building plan, KMC had issued the formal completion certificate on 12/5/2007, which was admittedly within four years from the end of the financial year in which the original plan was sanctioned on 06/5/2004 by KMC, as enumerated in sub-clause (ii) of clause
(a) of Sec. 80-IB(10) of the Act. Explanation (ii) to sec. 80-IB(10)(a) of the Act provides that the date of completion of construction of the housing project shall be taken to be the date on which completion certificate in respect of such housing project is issued by the local authority. Certificate issued by KMC is only an authentic document that the project has actually been completed. In the case before us, there is no dispute to the fact that KMC has given the certificate of the completion of the project on the basis of Architect's certificate dated 26/3/2007 that the project had been completed. Considering the above facts, it is evident that the project under 28 consideration was completed in the financial year 2006-07 and hence the assessee is entitled for benefit of sec. 80-IB(10) of the Act.
18.2. Without prejudice to what we have stated above, if we go with the contention of the department that the assessee is entitled to get exemption u/s. 80-IB(10) of the Act only after getting the certificate of completion of the project from KMC, in that case, the assessee would not be entitled to get deduction u/s. 80-IB(10) of the Act in spite of the fact that the assessee has claimed the deduction on prorate basis every year, because the certificate of completion is to be given only when the project is fully completed. In view of the above fact also, the certificate of the Architect certifying completion of the project cannot be ignored for considering the benefit of deduction allowable to the assessee u/s. 80-IB(10) of the Act. Obtaining of certificate from KMC is a statutory requirement evidencing that project has been completed as per clause (ii) of Explanation to sec. 80-IB(10)(a) of the Act, but it is not the certificate issued by KMC certifying that the project was completed only on the date on which the certificate of KMC was dated. In view of the above, in our considered opinion, the A.O. went wrong in denying benefit to the assessee u/s. 80-IB(10) of the Act on this ground. The assessee filed the completion certificate issued by KMC on the basis of completion notice given by Architect on 28/3/2007, in the course of assessment proceedings. Therefore, the ld. C.I.T.(A) has validly and justifiably directed him to grant deduction u/s. 80-IB(10) of the Act with reference to the audited P/L Account as filed along with Form 10CCB. We, therefore, uphold the order of ld. C.I.T.(A) and dismiss ground No. 1 of the appeal.
19. In respect of ground No.2 of the appeal, ld. Departmental Representative submitted that the assessee carried out extra work after handing over of possession of flats to the buyers and, therefore, receipts/profits are neither eligible to be included in the P/L Account as separate profit and loss of the undertaking of the housing project business nor entitled to be deducted u/s. 80-IB of the Act. Ld. Departmental Representative submitted that assessee-firm disclosed only Rs.3,66,763/- as receipt for extra work, but claimed Rs.55,00,000/- as cost delivery expenses. He submitted that the A.O. has rightly stated that expenses on items like Air-conditioner are for 29 additional work done after delivery of possession of flats, for extra cost to the buyers only. Ld. Departmental Representative justified the action of A.O. by stating that assessee disclosed profits @ 52.54% and the A.O. by applying the same very rate on the gross receipts against expenditure of Rs.55,00,000/- rightly estimated the receipts at Rs.83,89,700/- (wrongly mentioned in ground of appeal as Rs.83,79,700). He submitted that the A.O. estimated profits for such extra work in a sum of Rs. 28,89,700/- (Rs.83,89,700 - Rs.55,00,000) and the same could not be considered to be eligible for deduction u/s. 80-IB of the Act. Ld. Departmental Representative submitted that the A.O. was justified to invoke provisions of sec. 145(3) of the Act in rejecting the book results of the assessee.
20. On the other hand, ld. A/R referred to pages 294 & 295 of the paper book, volume-II which give the details of Rs.55,00,000/- received by the assessee and submitted that the assessee incurred expenditure for developing and betterment of the common amenities and facilities in the ground floor, pathways, the common community hall, mini gym, common lobbies as also landscaping, garden area and beautification of the water body etc. as well as for the drainage facility, which work can be carried out only after obtaining the completion certificate from the KMC, the local authority. He submitted that carrying out these activities are part and parcel of the obligations undertaken by the assessee-firm as owner and developer of the said housing project in terms of the agreements for sale and the printed brochure issued by it in connection with undertaking developing and building the said housing project. He submitted that said expenditure of Rs.55,00,000 has no connection, direct or indirect, whatsoever with the receipt of Rs.3,66,763/- for extra work carried out inside of some of the flats in terms of paragraph (c) of Section A of Part-I of the Sixth Schedule for the respective agreements for sale. He submitted that the sum of Rs.3,66,763/- was received by the assessee for post delivery works not forming part of the specifications contracted in the respective agreements and/or that the said sum of Rs.55,00,000 had been incurred for items not forming part of the specifications contained in the respective agreements. Ld. A/R submitted that A.O. was wholly unjustified in arbitrarily estimating the receipts for extra work in the sum of Rs.83,89,700/- and to estimate the profit at Rs.28,89,700/- from 30 the so-called extra work and adding it to the assessable income of the assessee for the year under consideration.
21. We have carefully considered the submissions of the learned representatives of the parties and the orders of the authorities below. We have also gone through the relevant pages of the paper book. On perusal of agreement for sale, we observe that the assessee is developing the housing project. The activities of undertaking developing, constructing and building of housing project include not only construction of flats but also include within its purview the activity of constructing the residential flats, developing surrounding open space, common areas and facilities, pathways and also to provide a community hall for social gatherings. It also depends as to whether there is also the facility of providing Gym, garages and parking spaces, swimming pool, intercom system, etc. Not only this, in a housing project drinking water supply, electricity installations, common area services and facilities are also required to be provided by the developer. We observe that in the case before us, as per brochure placed at page 102 of the paper book, Volume-I, the assessee stated the amenities to be provided in the housing project to be set up, viz., Air- conditioner hall for social gatherings, mini Gym & health corner, walking track, children's play area, natural water body, intercom, 24 hour drinking water from Tala Tank, Generator, internal walls with plaster of paris finish, telephone & TV points in master bed-room and living room etc. Therefore, we are of the considered view that the expenditure incurred by the assessee aggregating to Rs.55,00,000/-, the details of which are given at pages 294 to 303 of the paper book, Volume-II, are the expenses incurred for development of common areas which the assessee was obliged to provide and it was nothing to do with the receipt of Rs.3,66,763/-, the details of which are stated at pages 288 to 293 of the paper book, volume-II. We also observe that as per details given at pages 295 to 303 of the paper book, actual expenditure comes to Rs.67,39,610/- as against estimated amount of Rs.55,00,000/-. We also observe from the sale agreement, a copy of which is placed at pages 105 to 130 of the paper book, volume-I, that it also provides the details of the common portions and common facilities to be provided by the assessee as the developer of the project. Considering the above facts, we are of the considered view that the action of the A.O. to estimate the receipt at Rs.83,79,700/- on account of carrying out the above extra work and also taking the ground to invoke 31 provisions of sec. 145(3) of the Act, inter alia, for not showing the said receipt is without any merit and/or is not based on cogent material on record. We are, therefore, of the considered view that ld. C.I.T.(A)'s action in not accepting the said finding of A.O. is justified. Hence ground No.2 of the department disputing the order of ld. C.I.T.(A) on the above issue is also rejected.
22. In respect of 3rd ground of the appeal, ld. Departmental Representative relied on the order of A.O. and further submitted that the receipt of Rs.3,66,763/- is the receipt for extra work and could not be considered as income derived from housing project. Therefore, A.O. was justified to treat the said income as other income.
23. Ld. A/R submitted that as per agreement, the assessee was to provide generator, transformer and electric connection and the additional amounts payable by the purchaser to the assessee as owner/developer calculated at the fixed rate of Rs.55/- per sq.ft. of the super built-up area of the respective flats. He submitted that the payment of such additional amount was described in the agreement for sale in section-B, part-I of Sixth Schedule thereof and it was in consideration for installation of generator for the common portions and for providing power to the said flats, formation of the association for the common purposes, obtaining and providing electricity supply and meter, including those on account of and/or for transformer and electrical sub-station etc. Therefore, the said amount received by the assessee could not be excluded from the purview of profits derived from the activity of undertaking developing and constructing housing project. The said payment @ Rs.55/- per sq. ft. of super built-up area of each of the said flat is part and parcel of the aggregate consideration payable by the respective buyers for booking a flat in the housing complex and providing common facilities and without which the project developed could not be said to be complete. The provision of such common facilities was not carried out by the assessee in its capacity of a middleman/agent and/or facilitator and these activities could not be different and distinguishable as considered by A.O. and also considered one of the reasons for rejecting book results of the assessee and to invoke provisions of sec. 145(3) of the Act. Ld. A/R submitted that receipt against CESC, electricity and generator was Rs.45,70,703/- and whereas the expenses incurred were aggregating to Rs.63,94,341.94 and thus there was a loss of Rs.18,23,638.94. Ld. A/R referred page-60 of the paper book, volume-I, which contains details of the receipts 32 and expenses incurred by the assessee. He submitted that the A.O. did not consider the expenditure on electrical goods/electric works aggregating to Rs.36,28,000/- and, therefore, stated that the assessee made profit which is not factually correct.
24. We have carefully considered the orders of the authorities below and submissions of learned representative of the parties. We agree with ld. A/R that in the construction of a housing project, the assessee was under an obligation, as per agreement/memorandum entered into, to provide all common facilities including electricity supply & meter, transformer & electric sub-station including provision for generator. It is a part and parcel of the entire activity of developing and building a housing project and without which the project developed could not be said to be complete. We observe that as per agreement, it is provided that each of the purchasers is required to pay an additional amount @ Rs.55/- per sq. ft. of super built-up area of the said flat by way of consideration for installation of generator for the common portions and for providing power to the said flats and also for providing electricity supply & meter etc. for common purposes. We agree that charging of extra amount for providing the above essential common facilities as per the agreement is in the capacity of developing and constructing the housing project by the assessee and not to act as a middleman/agent, as alleged by A.O. These activities, we are of the considered view, are part and parcel of the entire activity of developing and completing the housing project. Hence we hold that charging of the said additional amount, i.e. @ Rs.55/- per sq. ft. of super built-up area from flat owners/purchasers is having direct nexus with the activity of developing and building housing project. We also observe on perusal of details at page 60 of the paper book that the total receipts against CESC, electricity and generator was of Rs.45,70,703/- and whereas the expenses incurred by the assessee was of Rs.63,94,341.94 and thus there was a loss of Rs.18,23,638.94. Besides above, in respect of Rs.3,66,763/-, which is also mentioned in ground No.3 of the appeal, received by the assessee from flat owners for extra work, we observe that the said work was carried out before handing over of possession of the respective flats to the buyers and not after handing over of the possession. The department has disputed the position but there was no cogent material brought 33 on record to dislodge the fact that the said extra work was carried out by the assessee in terms of clause (c) of Section-A of Sixth Schedule of the Sale Agreements entered into with the flat buyers. Therefore, we hold that ld. C.I.T.(A) has rightly held that the said receipt of Rs.3,66,763/- has a direct nexus with the activity of undertaking developing and building housing project and is eligible to be included while computing deduction u/s. 80-IB(10) of the Act. In view of above facts, we hold that there is no reason to interfere with the order of ld. C.I.T.(A). Ground No.3 of the appeal taken by the department is also rejected.
25. In respect of ground No.4 of the department's appeal, the A.O. has stated that flat No. 7C & 7D is one residential unit of more than 1500 sq.ft. and, therefore, it violates sec. 80-IB(10)(c) of the Act. This is one of the grounds taken by the A.O. to deny deduction to the assessee u/s. 80-IB(1) of the Act.
26. At the time of hearing, ld. Departmental Representative relied on the order of A.O. On the other hand, ld. A/R of the assessee referred to pages 280 & 281 of the paper book, volume-II, which are map/plan of the above two flats. Ld. A/R referred pages 157 to 181 of the paper book, volume-II, which is a copy of conveyance deed in respect of flat No. 7C and also referred pages 182 to 206 of the said paper book, which is a copy of conveyance deed of flat No. 7D, and submitted that these were two separate flats for which conveyance deeds were executed by the assessee with the concerned buyers of the flats. He further submitted that two separate agreements for sale/memorandum were also entered into with the buyers and referred pages 105 to 130 in respect of flat No. 7C and pages 131 to 156 of the paper book, volume-I in respect of flat No. 7D. Ld. A/R referred pages 274 & 275 of the paper book, volume- II and submitted that the buyers confirmed that they purchased two separate flats being Flat Nos. 7C & 7D in the concerned housing project. He submitted that there were two electricity connections from CESC for the respective flats and the assessee was also raising separate maintenance bills and receiving from the buyers separately. Ld. A/R submitted that the said two buyers later on requested for acquiring some more area, i.e. 17 sq. ft. for flat No. 7C and 16 sq. ft. for flat No. 7D in front of each of the 34 said two flats in or about February, 2007 and after receipt of additional consideration for such additional areas, the said two buyers shifted their entrance gate, but the identity of each of two flats was duly maintained and each of the said two flats continued to be independent to each other. He submitted that each of the flats had separate and independent gates in terms of floor plan annexed to the separate deeds of conveyance, executed, signed and registered by the assessee-firm with the two buyers. He further submitted that the said two buyers also confirmed that when they carried out modification, it did not affect structure of the building and no permission was required to be taken from outside agency and the cost of such modification was borne by them. At the time of hearing, in response to a query from the Bench as to whether two flats could be sold to a single person in the same housing project, ld. A/R submitted that at the relevant time there was no such restriction, but there is an amendment by Finance (No.2) Act, 2009 w.e.f. 01/4/2010 by inserting clause (e) to sec. 80-IB(10) of the Act and now not more than one residential unit in the housing project could be allotted to any person not being an individual. Ld. A/R submitted that the A.O. was not justified to deny deduction to the assessee u/s. 80-IB of the Act on the ground that there was one residential unit of more than 1500 sq. ft., which is not factually correct.
27. We have carefully considered the submissions of learned representatives of the parties and the orders of authorities below. We have also considered the copies of the conveyance deeds as well as copies of agreements entered into and also the copy of floor plans in respect of flat Nos. 7C & 7D (supra). On perusal of the same, we agree with the finding of ld. C.I.T.(A) that these were two independent flats being flat Nos. 7C & 7D, which were sold by the assessee by way of two separate conveyance deeds. Subsequently it is observed that the said two purchasers decided to have common entrance for the purpose of their convenience and security and they carried out modification at their own cost. The department has not brought any material on record that before carrying out the modifications to the said flats, they had taken consent from the assessee and/or cost of modification was borne by the assessee. On the other hand, a confirmation is placed at page 274 of the paper book that the said modification was 35 carried out by the purchasers of the flats at their own cost and no permission was required to be taken from outside agency. We also observe that there were two separate electricity connections and separate maintenance bills were raised. The conveyance deeds were also entered into, executed and registered separately for the above two flats. It is evident from the above documents that each of the flats, i.e. Flat Nos. 7C & 7D, was two independent flats and, therefore, the area of individual flat did not exceed 1500 sq. ft. of the super built-up area. We also observe that prior to the amendment carried out by Finance (No.2) Act, 2009 w.e.f. 01/4/2010, there was no such restriction that an individual could not purchase more than one flat in the same housing project. Considering the above facts, we hold that the ld. C.I.T.(A) has rightly held that A.O. was not justified to deny deduction to the assessee u/s. 80-IB(10) of the Act on the ground that the assessee violated one of the conditions that an individual flat size exceeded 1500 sq.ft., which is factually incorrect. Accordingly, ground No.4 of the appeal taken by the department is also rejected.
28. Before we conclude this appeal, we observe that A.O. has also rejected the book results of the assessee on the ground that the method of accounting followed by the assessee is not in conformity with AS-7 issued by ICAI. According to this method, the assessee shall be obliged to recognize revenue on year to year basis by following the partial completion of project method. As rightly stated by ld. A/R, AS-7 is applicable only for construction contracts, i.e. enterprises carrying on business as contractors and not to any other enterprise. In this case, we observe that the assessee was not acting as a mere contractor, but it was engaged in the business of developing housing project on the land belonging to it. Further, the A.O. himself has admitted that the assessee's nature of business was "real estate development" and in para-3 of the assessment order, the A.O. has stated that the disclosed business of the assessee was in the nature of development of housing projects. Therefore, the contention of A.O. that assessee's method of accounting was not in conformity with AS-7 is incorrect in view of the fact that the assessee was not in the business of executing construction contracts, rather it was engaged in the business of developing housing projects.
3628.1. The second objection of A.O. was that benefit under Instruction No. 4 of 2009 of C.B.D.T. could only be availed by an assessee who followed partial completion of project method and obtained completion certificate within the time prescribed, i.e. in the same accounting year ending 31/3/2007. We observe that the said Instruction No. 4 indicates that an assessee could follow either partial completion project method or project completion method. The said Instruction nowhere indicates/provides that the assessees were obliged to follow partial completion of project method as provided in AS-7. In our opinion, therefore, the said Instruction was issued by C.B.D.T. in the background where it was an admitted position that the assessees could follow either partial completion of contract method or completed contract method in respect of business of developing a housing project. By this Instruction, the doubts were clarified only with regard to the eligibility of the assessees to claim deduction u/s. 80-IB(10) of the Act where the assessees followed partial completion of project method. As per tax audit report, the system of accounting and the method of revenue recognition regularly followed by the assessee are only of completion of project. In that view of the matter, the objection of the A.O. about violation of AS-7 vis-à-vis Instruction No. 4 of 2009 of C.B.D.T. is not found to be at par with the activities of the assessee and method of accounting regularly followed by it. Hence the action of the A.O. to reject book results of the assessee even on the ground that the method of accounting followed by the assessee is not in conformity with AS-7 is not justified. We, therefore, uphold the order of ld. C.I.T.(A) by dismissing the appeal of the department.
29. Considering the above facts and the fact that the assessee was a developer of the project and not merely a contractor, we hold that the ld. C.I.T.(A) has rightly held, for the reasons mentioned hereinabove in para-8 of this order, that the A.O. was not justified in denying deduction claimed by the assessee u/s. 80-IB(10) of the Act. We, therefore, uphold the order of ld. C.I.T.(A) and dismiss the appeal of the department.
37 ITA No.1307/K/2010Assessment year 2007-08
30. In the result, the appeal of the department is dismissed.
यह आदे श खुले Ûयायालय मɅ सुनाया गया है
This order is pronounced in the open Court on 14.07.2011
Sd/- Sd/-
(अÈबर बाशा) लेखा सदःय ौी बी.
(ौी बी. आर.
आर. िमƣल)् Ûयायीक सदःय
(Akber Basha), Accountant Member (B.R.Mittal), Judicial Member
(तारȣख)
तारȣख) Date: 14-07-2011
Order pronounced by
Sd/- 14/07/11 Sd/-
AM(S.V.Mehrotra) J.M.(B.R.Mittal)
आदे श कȧ ूितिलǒप अमेǒषतः-
Copy of the order forwarded to:
1. अपीलाथȸ / The Appellant : A.C.I.T., Circle-35, Kolkata.
2 ू×यथȸ / The Respondent : M/s. North City Developers, Orbit, 1, Garstin Place,
Kolkata-700 001.
3. आयकर किमशनर (अपील) : The CIT(A)-XX, Kolkata.
4. आयकर किमशनर/The CIT, Kol-
5 वभािगय ूितनीधी / DR, ITAT, Kolkata Benches, Kolkata
6 Guard file.
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
(dkp)
उप पंजीकार/Dy/Asstt. Registrar.
38