Income Tax Appellate Tribunal - Mumbai
Lakewood Construction Co.P. Ltd, ... vs Department Of Income Tax on 13 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "A", MUMBAI
BEFORE SHRI SANJAY ARORA, A. M. AND SHRI SANJAY GARG, J. M.
ITA No. 8341/Mum/2010
Assessment Year: 2007-08
I.T.O. - 9(2)(2), R. No. 225, Lakewood Construction Co. Pvt.
Aayakar Bhavan, M. K. Road, Ltd.
Mumbai-400 020 361/363, Vedanand, 21st Road,
3 TPS Road, Bandra (W),
Vs.
Mumbai-400 050
[ PAN: AAACL 1210 G ]
(Appellant) (Respondent)
Appellant by : Shri Manoj Kumar
Respondent by : Shri N. M. Porwal
Date of hearing : 13.03.2013
Date of Pronouncement : 15.05.2013
ORDER
Per Sanjay Arora, A.M. :
This is an Appeal by the Revenue agitating the Order by the Commissioner of Income Tax (Appeals)-20, Mumbai ('CIT(A)' for short) dated 22.09.2010, allowing the assessee's appeal contesting its assessment for the assessment year (A.Y.) 2007-08 u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) vide order dated 30.11.2009.
2. The only issue in appeal is the valuation of the flats sold by the assessee, a company in the business of construction of property, to its directors and principal shareholders.
2 ITA No. 8341/Mum/2010 (A.Y. 2007-08)ITO vs. Lakewood Construction Co. Pvt. Ltd.
3.1 It would be relevant to recount the background facts of the case. The assesse- company develops the properties and follows, for the purpose of accounting, project completion method. It took the project of development of land at 21, TPS - 3, Bandra, Mumbai, constructing a single building consisting of stilt plus 5 upper floors, with one flat each on each floor with a carpet area of 740 sq. ft. The completion of the project stood signified by the completion certificate dated 24.11.2994, i.e., during the year relevant to the A.Y. 1995-96. No profit was declared on the said building, which was let to the directors at an extremely low rent of Rs.1.44 lakhs p. a. The reason for the same was stated to be the heavy deposits by the directors/shareholders, who had financed the project. This continued up to A.Y. 2002-03. In April, 2001, development rights (TDRs) were purchased vide an agreement dated 04.04.2001, and the contract for construction of the three additional floors as well as alteration to the existing building (at a cost of Rs.21 lakhs) was given to one, M/s. Shree Viraj Construction Pvt. Ltd. The dates of commencement and the completion of construction as per the agreement are 01.03.2001 and 31.03.2002. However, the construction was completed much later, with the company obtaining the occupancy certificate (issued by BMC) on 16.01.2006, i.e., during the relevant assessment year. Each of the three flats was with a carpet area of 740 sq. ft. Besides, additional facilities like car parking, lift, compound wall and gate, were also added. The total cost incurred by the assessee toward the same, inclusive of the earlier construction, as reflected in its accounts, stood at Rs.190.08 lakhs as on 31.03.2006. A detailed questionnaire was issued by the Assessing Officer (A.O.) vide his office letter dated 06.08.2009, requiring the complete details of the transactions, including the physical details, viz. the number of flats; their area; cost of construction; etc., some of which were submitted. With regard to the sale consideration, it was stated that the total sale consideration for the entire building consisting of stilt plus 8 floors, with a carpet area of 740 sq. ft. each, along with the additional facilities and amenities, was at Rs.1.78 crores, which was booked by passing a journal entry in the accounts. The copy of the project account for the period 01.04.1998 to 31.03.2008 was also submitted along with the entries pertaining to the current year, being as under:
3 ITA No. 8341/Mum/2010 (A.Y. 2007-08)ITO vs. Lakewood Construction Co. Pvt. Ltd.
01.12.06 Opening balance 1,90,07,970
19.12.06 By Sales being amt of sales 1,78,00,000
considered
31.03.07 To surplus 92,029
By Vedwanti N. Murpana 13,00,000
............... ...............
1,91,00,000 1,91,00,000
Being not satisfied with the explanation with regard to the sales, a separate enquiry was caused by the A.O. through his Ward Inspector. Copies of some of the sale agreements, per which the flats were sold by the assesse-company to the three brother-
directors, who as it appears were sold 2 flats each (while two flats were retained by their father and mother), were provided. The sale values of the flats varied from as low as Rs.18 lakhs to a maximum of Rs.27 lakhs. The market valuation as per the stamp duty authorities of the said flats was found by him to be at Rs.78,90,816/-. The A.O., accordingly, adopted the said value for the sale of the additional 3 floors constructed subsequently. The sale value for the flats at the first to the fifth floor was taken by him at a uniform rate of Rs.22 lakhs, i.e., at the disclosed sale for flat at the 5th floor (No.501; being the maximum value of the flats at the first five floors). Adopting this as the sale consideration, he worked out the gross profit by deducting the entire cost of consideration as per the assessee's accounts, i.e., Rs.190.08 lakhs, assessing the income at the gross profit so arrived, i.e., Rs.1,56,64,478/-, in the absence of any details with regard to the administration or other expenses, i.e., as against the returned income of Rs.86,813/-.
3.2 In appeal, the assessee found favour with the first appellate authority on the basis that there was no material on record to show that any excess consideration had passed, i.e., over and above the declared sale consideration, placing reliance on the decision on the apex court in the case of K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC). It stands clarified by the hon'ble apex court that not only is the A.O. obliged to show that the fair market value of any asset as on the date of its transfer exceeded the full value of the consideration declared by the appellant, but also that the said consideration has been understated, and that the appellant had actually received more than what was declared by 4 ITA No. 8341/Mum/2010 (A.Y. 2007-08) ITO vs. Lakewood Construction Co. Pvt. Ltd.
it. This is as despite being lower than the fair market value, the transaction might be a perfectly bona fide one, and there may be no understatement of consideration. The onus to establish under-statement had not been discharged by the A.O. in any manner, who had merely proceeded by adopting the stamp duty valuation for the sale consideration for the 6th, 7th & 8th floors of the building. The impugned addition was accordingly deleted. Aggrieved, the Revenue is in appeal.
4. Before us, while the ld. DR would underline the non-furnishing of the requisite details or the supporting evidences by the assessee during the course of the assessment proceedings, compelling the A.O. to adopt the recourse as made by him, i.e., assume the stamp valuation as the sale consideration, the ld. AR would submit that the transaction had in fact been carried out at the market value, i.e., as per the rates prevailing in the neighbourhood at the relevant time for similar properties. The A.O. has not brought any material to exhibit under-statement of consideration with reference to the obtaining market rate. In any case, there is no provision in law whereby even a lower consideration could be inflated and the difference brought to tax.
5. We have heard the parties, and perused the material on record, as also the case law cited.
5.1 The primary facts of the case are clear. The issue, therefore, centres around the legal competence of the assessing authority to disturb the sale consideration as reflected in the assessee's regular books of account maintained in respect of the transactions of the business carried on by him during the relevant year. The second aspect of the matter concerns this issue in the circumstances where the sale is to a related party.
5.2 The AO has adopted the sale consideration of the three flats on the last three floors (numbered as 601,701 and 801), which were constructed during the period 01/3/2001 to some time in f.y. 2005-06 (the occupancy certificated being dated 16/1/2006), at Rs.78,90,816/- each, i.e., the valuation as per the Stamp Act, as against the average sale 5 ITA No. 8341/Mum/2010 (A.Y. 2007-08) ITO vs. Lakewood Construction Co. Pvt. Ltd.
consideration of Rs.26 lacs disclosed by the assessee. For the flats on the first five floors (also sold during the year), he adopted a uniform sale consideration of Rs. 22 lacs, as against the declared consideration of Rs. 18 lacs (for Flat # 101) to Rs. 22 lacs (for Flat #
501), i.e., at an increase of Rs. 1 lac per floor. The declared and the adopted values are tabulated as under for ready reference (refer page 3 of the impugned order):
Flat No. Sale Value Value as per AO Market Value (?)
101 Rs. 18,00,000 Rs. 22,00,000 Rs. 18,00,000
210 Rs. 19,00,000 Rs. 22,00,000 Rs. 19,00,000
301 Rs. 20,00,000 Rs. 22,00,000 Rs. 20,00,000
401 Rs. 21,00,000 Rs. 22,00,000 Rs. 21,00,000
501 Rs. 22,00,000 Rs. 22,00,000 Rs. 22,00,000
601 Rs. 25,00,000 Rs. 78,90,816 Rs. 78,90,816
701 Rs. 26,00,000 Rs. 78,90,816 Rs. 78,90,816
801 Rs. 27,00,000 Rs. 78,90,816 Rs. 78,90,816
Total Rs. 1,78,00,000 Rs. 3,46,72,448 Rs. 3,36,72,448
[(?) The figure of market value is as per the listed table, though the basis thereof is not clear; the stamp value of all the flats being at Rs. 78.91 lacs.] In the view of ld. CIT(A), there is nothing on record to show of the assessee having actually transferred the flats at an amount/s higher than that recorded in their respect by it. The apex court in the case of K P Varghese vs. ITO (supra), has clarified that the burden to show that there is no understatement of consideration would be putting an impossible burden on the assessee, i.e., to establish a negative, namely, that he did not receive any consideration beyond that declared by him. The assessing authority is required to show not only that the fair market value (FMV) of any asset as on the date of its transfer exceeds the full value of the consideration declared in its respect, but also that the consideration had been understated, and that it had in fact received more than that declared by him. The facts as brought on record do not show either any mala fides having 6 ITA No. 8341/Mum/2010 (A.Y. 2007-08) ITO vs. Lakewood Construction Co. Pvt. Ltd.
been alleged or of the assessee having received any consideration beyond the apparent consideration. The addition was, accordingly, deleted.
5.3 The respective cases of the parties are abundantly clear. While the Revenue insists that the assessee had not declared true profits, understating the sale consideration, imputing the same with reference to FMV, the assessee's case, relying on the decision in the case of K.P.Varghese (supra), is that the concept of FMV has no place in law. As long as the assessee has not actually received anything beyond the stated consideration, the burden to show which is squarely on the Revenue, the charge of understatement of consideration - made with reference to FMV- fails. In fact, not so doing would amount to casting an impossible obligation on the assessee, i.e., to establish that he did not receive any thing over and above that declared. Section 50C has no application in the facts of the case, citing the decision in the case of Inderlok Hotels (P.) Ltd. v. CIT (2009) 32 SOT 419 (Mum.) (copy on record).
The Law 5.4 It would be relevant to, therefore, proceed by examining the position of law in the matter. The apex court in CIT vs. A. Raman and Co. [1968] 67 ITR 11 (SC), which decision precedes that by it in the case of K.P.Varghese (supra) by over a decade and, more importantly, is in the context of determination of business income, as against 'capital gains', which is the subject matter of the latter, and which is in any case subject to sec. 50C of the Act (incorporated on the statute since), has held that there is no law which obliges a trader or a businessman to make the maximum profit that he can. It is the income that accrues to a trader that is taxable in his hands, and not income that he could have, but has not earned. Effectiveness of the device adopted depends not on the considerations of morality, but on the operation of the Act. Legislative injunctions in taxing statues may not, except on the peril of penalty, be violated, but may be lawfully circumvented. The decision represents the well-settled law, being followed across the country, including by the jurisdictional high court, as in the case of India Finance & Construction Co. Pvt. Ltd vs. Dy. CIT [1993] 200 ITR 710 (Bom).
7 ITA No. 8341/Mum/2010 (A.Y. 2007-08)ITO vs. Lakewood Construction Co. Pvt. Ltd.
Clearly, therefore, neither is the assessee required to show that he has made the maximum profit out of a commercial transaction, nor to show that he had not earned anything beyond that stated and declared by him. In fact, on both counts, it would amount to placing a burden incapable of being discharged, on either practical or even theoretical considerations. This also agrees with the jurisprudence on evidence, that the onus to establish that the apparent is not real is on the person who so alleges. Further, where a device is adopted by the assessee, it must fall within the four corners of law, i.e., has to have its sanction.
Speaking in the context of business, no doubt it is only the real income qua which the liability to tax under the Act inures. However, at the same time, it cannot be said that the law sanctions an artificial depression or deflation or in fact even inflation of profit or income. That is, the concept of real income is circumscribed and hedged by the consideration of it being truly so, and not as a result of a manipulation or an artifice. As long as, therefore, the assessee has a reasonable economic explanation/s for his actions or decisions, the Revenue cannot interfere therewith or sit in judgement thereon. This emanates from a holistic consideration of the various provisions of the Act, which must be read as a whole. Sec. 37(1), which is the residuary provision for the claim of any expenditure, prescribes the condition of the same having been expended 'wholly' and 'exclusively' for the purposes of business/profession. The word 'wholly', as explained by the hon'ble courts, extends to the quantum of the expenditure, so that implicit therein is the consideration of the reasonableness of the expenditure stated to have been incurred (and being claimed as a deduction in the computation of the business income), with reference to the value of the corresponding goods/services for which the same stands incurred. Section 40A(2)(a) brings the expenditure involving related persons in special focus, so that these transactions are required to meet the test of commercial and business prudence. No doubt, the initial onus in respect thereof is on the Revenue, but once that is met, so that a prima facie case is made out, as where the goods (or services) purchased are at rates in excess of their FMV, the burden of proof shifts to the assessee (CIT vs. Shatrunjay Diamonds [2003] 261 ITR 258 (Bom)). Why, this concept stands expanded to 8 ITA No. 8341/Mum/2010 (A.Y. 2007-08) ITO vs. Lakewood Construction Co. Pvt. Ltd.
an entire set of provisions (Chapter X of the Act), where the transaction involved is an international transaction. Accounting Standard 18 issued by the ICAI provides for the reporting standard and disclosure norms for transactions with related parties. The deduction provisions of ss. 80-H, 80-HH, 80-I, 80-IA, etc. contain clauses targeting transactions with related parties, to ascertain if they involve any under or over-reporting of profits for tax consideration, authorizing the assessing authority to make suitable adjustment/s in case he so finds. Sec. 43(1), stipulating the actual cost of a depreciable asset, provides for adjustment to its apparent cost, inter alia, where the AO is satisfied that the main purpose of the transfer of the asset directly or indirectly to the assessee is the reduction in the tax liability through the claim of depreciation with reference to an enhanced cost. Sections 45(4) and 50C again represent interventions by law, tempering the concept of real income in situations where there is no plausible explanation or economic justification for not following the dictum of fair price, as evidenced or signified by the FMV. The apex court, as far back as in the case of ALA Firm v. CIT [1991] 189 ITR 285 (SC), approved the same, ruling that it saw no reason as to why businessmen, being commercial men, would not value the assets only on a real basis but at cost or some other value appearing in the books. The real rights of the partners could not be mutually adjusted on any other basis. Putting it in more broad terms, i.e., on business and commercial considerations, validating the arm's length principle. We may, again, reiterate that the businessman could, taking market value as the guide, state his reason/s for having not adopted the same in the facts and circumstances of his case. The qualification is that the reason/s, to be accepted, must be qua business and not extraneous or irrelevant thereto. Though the nature of the obligation on the assessee would remain essentially the same, it would get more accentuated where the transaction/s is with a related party. This is for the simple reason that the premise of an arm's length transaction, that otherwise obtains, no longer holds in such a case.
To capsule, income-tax is a tax on real and not on notional income, so that the income actually earned and not which though could have been, or ought to have been, could be subject to tax. At the same time, the transaction should not be a managed, but an 9 ITA No. 8341/Mum/2010 (A.Y. 2007-08) ITO vs. Lakewood Construction Co. Pvt. Ltd.
arm's length transaction. When the assessee as a trader or as a businessman charges less than what he could possibly have, keeping his business interest in view, there is no occasion to infer or impose a higher consideration; it being also well settled that the tax man cannot sit in the shoes of the businessman, and in any case, the matters have always to be looked at from the view point of the businessman or the tax payer. The foregoing, to our mind, does not contradict, rather proceeds on the basis of the law as explained by the apex court in, inter alia, A. Raman and Co. (supra); K.P.Varghese (supra); and ALA Firm (supra), keeping of course the provisions of law in view. This, we believe, also answers the question listed supra as the legal issue arising in this case.
Factual Analysis & Decision 5.5 Having deliberated on the law in the matter, we may next examine the facts of the case. The first thing that strikes us, on going through the facts of case, which are largely undisputed, is the vast difference between the stamp valuation as per the Stamp Duty Authorities and the price at which the sales have been made. Toward this, the assessee's case is that the assessee-company has not received any amount higher than the disclosed sales consideration, so that a higher value, on the basis of a presumptive market rate could not be imposed, and only the actual, earned income could possibly be subject to tax. The second limb of its argument is that the sale value is in fact in line with the prevailing market rate of similar properties, which again has not been brought on record by the A.O. The basis of the Column 'Market Value' (in Table at para 5.2 above) for the flats on the first five floors (numbering 101 to 501) is not clear; while that on the upper three floors, constructed subsequently, is the stamp valuation rate, i.e., the FMV as adopted for the levy of stamp duty. The flats on the first five floors were completed way back in 1994. More importantly, the same had been given on rent to the directors (of the assessee-company) ever since, so that the possession thereof was with them. Then, again, the construction cost thereof stood financed by them by way of interest-free deposits, which continue to outstand. As such, the sale price realizable for these flats, though having the same carpet area as of the flats constructed subsequently, cannot be compared 10 ITA No. 8341/Mum/2010 (A.Y. 2007-08) ITO vs. Lakewood Construction Co. Pvt. Ltd.
with that of the latter, which has been reckoned by the AO on the basis of their valuation under the Stamp Act inasmuch as the same is based on FMV. The AO has, as apparent from the Table, adopted a uniform value of Rs. 22 lacs for these flats, as against a variable rate, beginning Rs. 18 lacs to Rs. 22 lacs, increasing by Rs.1 lac per floor, by the assessee. The AO has himself not adopted the stamp valuation, but a value far lower, in tune with that by the assessee. In fact, the flats being sold to persons already in possession thereof, with no correspondence with the market value thereof, the marginal difference of Rs. 1 lac per floor is not understood, and neither any explanation in its respect stands furnished by the assessee. All the other facts and circumstances, as we see it, for these flats, are the same. We, therefore, find the AO's estimation of the sale consideration, being the stated consideration for the flat on the fifth floor, and at approximately one-fourth their ostensible FMV, as not unreasonable. We therefore confirm the same.
Coming, next, to the flats on the sixth to the eighth floor. The AO has adopted the FMV as evidenced by the stamp valuation. The same is relevant, particularly considering that the same (stamp valuation) has not been contested by the parties, and the conveyance stands executed paying stamp duty on that value. The AO, it may be appreciated, has not applied sec. 50C, but has only taken cue of the market value from the stamp valuation. In fact, we have found the stamp valuation as relevant only for that reason. Further, we have also clarified that a value far removed from the market value, could be explained as reasonable under the facts and circumstances; the AO himself adopting a value of Rs. 22 lacs for the flats on the first five floors, and which has found our approval. As regards the three flats under reference (numbering 601,701 & 801), the construction cost has again been financed by the directors/promoters by extending, as it appears, interest-free deposits. The construction also has not been carried out by the assessee-company, but contracted to an outside agency, who would have only charged the going rate. These factors, though have a direct bearing on the profit that the company may stand to gain on sale, would yet not operate to eliminate all profit, while, as it appears, the assessee has declared a loss; the stated consideration being at Rs. 1.78 crores, as against the cost of 11 ITA No. 8341/Mum/2010 (A.Y. 2007-08) ITO vs. Lakewood Construction Co. Pvt. Ltd.
construction at Rs.1.90 crores. Firstly, the construction cost of the flats constructed earlier would be much lower, i.e., than that reflected in the differential in their sales prices. Secondly, in respect of the later flats, the company would have presumably carried out the supervisory function, overseeing the construction. In fact, negotiating with a builder, including striking a bargain price, is itself a business transaction with inherent profit potential. Also, as it appears, Rs. 1.90 cr. represents the cost of the total construction, and the assessee has not reported a loss. We say so as it has adjusted another Rs. 13 lacs against the said cost (refer Table at para 5.2 supra). The reported surplus, however, is marginal and, further, all this only shows lack of clarity and absence of full and proper details. In fact, there is no mention of the additional construction, as that for various amenities, also contracted along with, and which would be also either sold or retained by the assessee as at the year-end. The assessee has not furnished any data on the sales values obtaining during the period in the neighbourhood, i.e., toward the second limb of its case, which in fact does not appear to have been also made before the authorities below, and in any case, is not of little value in the absence of any substantiation. In fact, the FSI for the additional construction - and on the basis and utilisation of which the construction of the three upper floors came into being, arose to the assessee-company only. All it needed to do was to sell the FSI to any builder or, if the construction was proposed as an extension to the existing building, and if otherwise permissible, even to the directors themselves. This by itself would ensure it some (reasonable) business profit, even if the assessee was not to engage in any other activity in relation to the said project. As such, though in agreement in principle with the AO that the assessee's declared sale rate is artificial and totally unexplained, so that it cannot find our acceptance, yet cannot, in the absence of complete details, also accede to the AO's estimation thereof, and the matter in our view is indeterminate and requires a composite review.
Decision
6. True, genuine and bona fide transactions, even if made below par, the fair market valuation would not have any tax implication, being only undertaken in the normal course 12 ITA No. 8341/Mum/2010 (A.Y. 2007-08) ITO vs. Lakewood Construction Co. Pvt. Ltd.
of business and in its interest. The caveat in the foregoing proposition, however, is extremely important, and it is this which remains to be satisfied in the facts and circumstances of the case. The transaction is between related parties, being only to the directors and principal share-holders of the assessee-company, and the difference in values is significant. Under the circumstances, therefore, we only consider it fit and proper to, while setting aside the impugned order, restore the assessment back to the file of the AO to make a fresh assessment of the profit qua the three flats constructed from 2001 to (as it appears) 2005, and sold during the relevant previous year, by taking all the relevant facts and circumstances of the case into account, per a speaking order, and after allowing the assessee a proper opportunity of hearing. The assessed sale consideration for the flats on the first five floors, though, stands confirmed. We decide accordingly.
7. In the result, the Revenue's appeal is partly allowed and partly allowed for statistical purposes.
Order pronounced on this 15th day of May, 2013
Sd/- - Sd/-
( SANJAY GARG ) ( SANJAY ARORA )
JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, Dated: 15.05.2013
Copy forwarded to:
1. The Appellant
2. The Respondent
3. The C.I.T. concerned
4. CIT (A)
5. The DR, A- Bench, ITAT, Mumbai
BY ORDER
ASSISTANT REGISTRAR
ITAT, Mumbai Benches, Mumbai
Roshani