Income Tax Appellate Tribunal - Mumbai
Haware Constructions Pvt. Ltd., Navi ... vs Assessee on 7 June, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "H", MUMBAI
BEFORE SHRI N. V. VASUDEVAN, J.M. AND SHRI R.K. PANDA, A.M.
ITA No.5601/MUM/2009
Assessment Year : 2005-06
M/s. Haware Constructions Pvt. Ltd. The ITO - 10(3)(3)
413/416 Vardhaman Market, Aayakar Bhavan, M.K. Road,
Sector 17, DBC, Vashi, Mumbai-400 020
Mumbai-400 020 Vs.
PAN NO: AABCH3858F
(Appellant) (Respondent)
&
ITA No.6861/MUM/2010
Assessment Year : 2006-07
M/s. Haware Constructions Pvt. Ltd. The ITO - 10(3)(3)
413/416 Vardhaman Market, Aayakar Bhavan, M.K. Road,
Sector 17, DBC, Vashi, Mumbai-400 020
Mumbai-400 020
PAN NO: AABCH3858F
(Appellant) (Respondent)
&
ITA No.1547/MUM/2011
Assessment Year : 2007-08
M/s. Haware Constructions Pvt. Ltd. The ITO - 10(3)(3)
413/416 Vardhaman Market, Aayakar Bhavan, M.K. Road,
Sector 17, DBC, Vashi, Mumbai-400 020
Mumbai-400 020
PAN NO: AABCH3858F
(Appellant) (Respondent)
Assessee by : Shri J. P. Bairagra
Department by : Shri Goli Sriniwas Rao
Date of hearing : 07.06.2011
Date of Pronouncement : 05.08.2011
ORDER
2
ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
PER R.K. PANDA, A.M.
The above appeals filed by the assessee are directed against the separate orders of the Ld. CIT(A)-22, Mumbai relating to A.Y.'s 2005-06, 2006-07 & 2007-08 respectively. All these appeals were heard together and are being disposed of by this common order for the sake of convenience. ITA No.5601/MUM/2009 (A.Y. : 2005-06)
2. Facts of the case, in brief, are that the assessee is engaged in the business of civil construction and developers and filed its return of income declaring Nil total income. During the course of assessment proceedings, on being asked by the AO to justify the Percentage Completion Method, the assessee replied as under :-
"Earlier, company was following Percentage Completion Method, whereby profits on projects were recognized on a progressive basis in each year depending upon the progress. This method would continue to apply to projects which commenced prior to 1st April, 2003. Now due to the revision in AS 9, for projects commence after 1st April, 2003, revenue is recognized following the principle of Accounting Standard issued by the Institute of Chartered Accountancies of India, whereby the profit is recognized on the completion on the projects when the risk of ownership is transferred to the customer. Sales of flats and shops is booked when the projects is fully complete."
The assessee further submitted that AS 7 is for Accounting for Construction Contracts which has to be distinguished from the activity of a Builder and Developer. The para 1 of AS 7 was brought to the notice of the AO. It was submitted that it does not cover the case of a builder or developer in whose case the general principles of revenue recognition as per AS-9 would become applicable.
3ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
3. However the AO was not satisfied with the explanation given by the assessee. According to him the assessee has taken recourse to AS-9 for recognition of its project, when the risk of ownership is transferred to the customer. This is however incorrect. According to him for income tax purposes every year is a separate and distinct year for the purposes of determination of assessed income. The Guidance Note on Recognition of Revenue by Real Estate Developers, issued by the Council of the Institute of Chartered Accountants of India also states that revenue in case of real estate sales should be recognized when all the following conditions are satisfied :-
"(i) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership.
(ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the real estate sales, and
(iii) it is not unreasonable to expect ultimate collection.
3.1 The AO noted that in the instant case, the fact that the assessee has produced the completion certificate from their Architects itself means that there is no existence of any significant uncertainty regarding consideration derived from the business. Also, there is reasonableness in expecting or estimating the ultimate collection when the said project has got completed. The Architect has certified that the Project has been completed at Plot No.52 and 56, Wing - A, B, C, D & E, at Khargar, Navi Mumbai, on 30.03.2006, and Wing - G, H & L on 26.06.2006. Further, in respect of Project at Airoli node, Navi Mumbai, Wing A, on Plot NO.1, Sector -19-A, the project was 4 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
completed on 10.06.2006. This, therefore, means that the assessee has already recognized the completion of project. He was in a position to submit complete details of sales and cost involved in its business on construction.
4. The AO thereafter, discussed AS 7 to decide as to whether Project Completion Method can be treated as valid for the contracts entered into or the projects undertaken prior to 01.04.2003 for the purpose of computing the total income under the Income Tax Act. The AO asked the assessee to file full details in respect of the Airoli and Khargar projects completed and certified by the Architect. Rejecting the various explanations offered by the assessee and relying on a couple of decisions, the AO came to the conclusion that there is absolutely no question of validity of project completion method in respect of contract entered into or projects undertaken after 01.04.2003. He noted from the Profit & Loss Account in Schedule-13 that the WIP shown for Airoli and Khargar project are as under:-
"a) Airoli : Rs.20503247/-
b) Gulmohar (i) Splender Rs.68905438/-
c) Gulmohar Rs.13625946/-
Total: Rs.10,30,34,631/-
He further noted from the details filed by the assessee along with the return that the following amount has been shown as increase / decrease in WIP:
Opening Rs.4,29,50,093/-
Closing Rs.26,20,43,984/-
Increase Rs.21,90,93,891/-
However, in the Profit and loss account, the assessee has debited an amount of Rs.21,90,93,891/- as cost incurred during the year and further 5 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
reduced Rs.13,08,147/- as indirect expenses from the WIP of Rs.21,90,93,891/- and shown business loss of Rs.10,03,842/- At the same time, the amount received from the customer amounting to Rs.14,54,23,513/- has been shown under the head "Sundry Creditors. 4.1 Since the assessee did not offer any details of cost incurred and details of sales to customers, therefore, the AO treated the WIP shown for the project already completed for determining the income of the assessee. He accordingly, calculated the total income of the assessee at 5% of Rs.10,30,34,631/- which comes to Rs.51,51,731/- as against the returned loss of Rs.10,00,345/- declared by the assessee.
5. In appeal, the Ld. CIT(A) asked the assessee to file sample copies of the agreements which were entered into with the buyers. On perusal of one such sale agreement dated 14.02.2005 between the assessee referred to as the builder and one Ms. Waghmare and Others referred to as purchasers, he noted that the said agreement to sell is a registered agreement according to which the consideration for the property of the residential flat has been fixed at Rs.4,96,176/-. The flat has to be delivered to the purchaser within a specified period. The dates on which the consideration has to be paid have also been prescribed and so has the measurement and specifications of the flat. The only condition for termination of the agreement is if the purchaser fails to pay the consideration within the time specified. He also analyzed Clause 11 of the agreement which lays down that the builder shall not be responsible for any loss/damage/injury etc. for reasons beyond their 6 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
control. In other words, all the risks of the said assets have been transferred to the purchaser vide this agreement. The only obligation of the builder is to complete the flat and handover the possession within 18 months of the agreement. Further according to Clause 19(a) specifically mentions that, other than the particular flat / shop/ car parking space, the builder shall be deemed to be the owner until the property is transferred to the co-operative housing society. In other words, the ownership of the flat / shop / car parking space sold vide this agreement rests with the purchaser.
6. In view of the above, the Ld. CIT(A) was of the opinion that all the risks and rewards of the property sold, vide the agreement to sell, have been transferred to the buyer at that stage itself. Therefore, he was of the opinion that the provisions of AS 7 relating to the percentage completion method would squarely apply to the assessee as stated in the guidance note. 6.1 He noted that the AO has taken the figure of Rs.10.30 crores as the cost incurred during the year on these projects for applying the adhoc rate of 5% and determined the total income at Rs.51,51,731/-. However the assessee has recognized the income of these projects in the A.Y.'s 2006-07 and 2007-08 as per the audited copies filed before him. For the above two years he noted that the total income prior to claiming exemption u/s. 80- IB(10) have been declared at Rs.7.07 crores and Rs.2.04 crores respectively. He noted that for the A.Y. 2006-07, the assessee has declared Net Profit of Rs.7.07 crores as against sales of Rs.15.81 crores and the Net Profit ratio comes to 26.73%. He therefore, directed the AO to apply the net profit ratio 7 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
of 26.74% to the total increase in work-in-progress relating to those projects in whose case sale agreements have been executed prior to or during the F.Y. 2004-05, in order to arrive at the taxable income for the A.Y. 2005-06. According to him this would be in accordance with the percentage completion method prescribed by the accounting standards.
7. Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before us with the following grounds :-
"1. Enhancing the appellant's income without issuing a notice to that effect. The enhancement as made by the Ld. CIT(A), without granting any opportunity to the appellant violates the provisions of section 251 (2) of the income tax act.
2. Rejecting the project completion method of accounting which has been regularly followed by the appellant in the past. The appellant is a Builders and Developer, as per the Revised Accounting Standard -9(which is made mandatory by the Institute of Chartered Accountants to Builders and Developers) the appellant had correctly determined its income at a Loss of Rs.10,00,345/-.
3. Estimating the business profits of the appellants, by adopting the percentage completion method. In doing so the Ld. CIT(A) has erred in applying the provisions of the revised Accounting Standard (AS)-7, which is applicable to construction contractors and not to builders and developers.
4. In estimating a net profit ratio of 26.74% under the percentage completion method as against a net ratio of 5% as adopted by the Assessing Officer. The net profit ratio of 26.74% in any case is excessive.
5. With out prejudice to the above, the CIT(A) has erred in not granting the appellant deduction u/s.80IB (10) of the Income Tax Act (ITA), in respect of the estimated profits."
8. The Ld. Counsel for the assessee submitted that this is the second year of operation. During the A.Y. 2004-05, the assessee company has declared a loss of Rs.5,63,501/-. He submitted that in the preceding year 8 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
five projects were undertaken by the assessee company and all these projects were under construction at the end of the year and the WIP of the projects were shown at Rs.4,29,50,093/- which is as per pg. 15 of the paper book. He submitted that in the preceding assessment year, the assessee in the notes to accounts under the head "revenue recognition" has mentioned that the company is following AS 9 (Revised) Revenue recognition issued by ICAI for income recognition. The revenue has been recognized following the principle of accounting standard issued by the ICAI, whereby the profit is recognized on the completion of the project when the risk of ownership is transferred to the customer. During the impugned assessment year five projects were under construction. Since the assessee is following the project completion method, therefore, no income was declared during the year. He submitted that the assessee company follows the project completion method of accounting for computing the profit / loss from the sale of the project. He submitted that the above method for computing the profit by a builder is very much a recognized method which has been accepted by various benches of the Tribunal and High Court. For this proposition he relied on a series of decisions as mentioned in the paper book. He submitted that the assessee company has declared income on completion of the projects in the subsequent year, which is much more than the small amount estimated by the AO during this year. Even while computing the income on completion of the project, the AO has not allowed the deduction of the income estimated during this year. He submitted that the AO has accepted the completion method for the A.Y.'s 2004-05 and 2006-07, as in those years no income 9 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
has been estimated in respect of incomplete projects. In the A.Y. 2004-05, the return was accepted u/s.143(1) and the method followed by the assessee company in this year stands accepted by the department, since no action u/s. 147 or 263 has been initiated. Similarly during the A.Y. 2006- 07, the assessment has been completed u/s. 143(3) and the AO has not estimated income in respect of incomplete projects, and the project completion method followed by the assessee company has been accepted. Referring to a number of decisions, he submitted that the Revenue Authorities are not justified in rejecting the project completion method followed by the assessee by adopting the percentage completion method.
9. As regards, the observations of the Ld. CIT(A) that all the risk of the assets have been transferred to the purchaser vide agreement with Ms. Waghmare, the Ld. Counsel for the assessee referring to page 189 of the paper book submitted that Clause 11 of the sale agreement which has been referred to by the Ld. CIT(A) mentions loss or damages on account of natural causes i.e. lightning, explosion, flooding, riots and war etc. which are not in the control of the assessee. However the assessee is responsible for all the losses and damages caused during the course of construction activity, and even after these losses/ damages, the assesssee has to complete the project and, therefore, for this losses and damages the assessee is responsible. Referring to the Clause 19 (A) of the said agreement (at page 190 of the paper book) and referred to by the Ld. CIT(A), the Ld. Counsel for the assessee submitted that as per the said clause, the 10 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
purchaser shall have no claim in respect of open spaces, lobbies, stair-case, terraces etc. which shall remain the properties of the Builders until the whole project is transferred to the proposed Co-operative Housing Society and, therefore, there is nothing in the clause by virtue of which it can be referred that the risks and rewards are transferred to the Purchaser, as the Purchaser has the right to occupy only the flat which has been purchased by him. Referring to the Clause 32 of the agreement (which is at page 193 of the paper book) the Ld. Counsel for the assessee submitted that the purchaser shall not let, sub-let transfer/assign or part with possession of the said flat/shop/car parking space without the consent in writing of the Builders and until all the dues payable by him / her to the Builders under this Agreement are fully paid. Therefore, as per this clause the full payment of the purchase price and possession of the constructed flat is must before the purchaser can transfer or assign the flat. He submitted that simply by referring to one sample copy of the sale agreement, the Ld. CIT(A) cannot come to the conclusion that all the risk and rewards of the property shown vide the agreement to sell have been transferred to the buyer at that stage itself. Further without issuing an enhancement notice, the Ld. CIT(A) enhanced the income of the assessee by directing the AO to adopt 26.74% net profit to the total increase in work-in-progress, relating to those projects in whose case sale agreements have been executed prior to or during the FY 2004-05, in order to arrive at the taxable income. He submitted that the Ld. CIT(A) was also not justified in not allowing deduction u/s.80IB(10) in respect of such profit so estimated, when the assessee is otherwise eligible 11 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
to deduction u/s.80IB(10). Referring to a series of decisions he submitted that the Tribunal has power to allow relief to the assessee to which it was otherwise entitled to even though no claim was made by the assessee in the Return of Income. He also relied on the CBDT instruction no.4 of 2009 dated 30.06.2009 wherein the Board have clarified that deduction u/s.80IB(10) can be claimed on a year to year basis where the assessee is showing profit from partial completion of the project in every year.
10. The Ld. DR on the other hand, relied on the order of the AO and the Ld. CIT(A).
11. We have considered the rival arguments made by both the sides, perused the orders of the AO and the Ld. CIT(A) and the paper book filed before us. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee company is engaged in the business of construction and builders and during the A.Y. 2004-05 the project completion method followed by the assessee has been accepted. The submission of the Ld. Counsel for the assessee that the revenue has not taken any remedial measure u/s.263 or 147 for the A.Y. 2004-05 and 2006- 07 even after the order of the AO and Ld. CIT(A) for A.Y. 2005-06 could not be controverted by the Ld. DR. We find the assessee in its notes to accounts for the year ended 31.03.2004 at clause 1(c) of notes has mentioned as under :-
"c. Revenue Recognition:
The Company is following Accounting Standard 9 (Revised) Revenue Recognition issued by the Institute of Chartered 12 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
Accountants of India for income recognition. Revenue is recognized following the principle of accounting Standard issued by the Institute of Chartered Accountants of India, whereby the profit is recognized on the completion of projects when the risk of ownership is transferred to the customer."
12. Similarly we find for the impugned assessment year the assessee company, in the notes to accounts regarding revenue recognition, has mentioned identical notes. We find the AO, during the A.Y. 2006-07 has also accepted the project completion method followed by the assessee and has not disturbed the income by making any estimated income on the work-in- progress. We also find merit in the submission of the Ld. Counsel for the assessee that the assessee has declared huge income in the subsequent year after completion of the said project as against meagre income estimated by the AO.
13. From the various decisions cited by the Ld. Counsel for the assessee, we find project completion method is an accepted method of accounting for builders. The assessee is regularly following this method of accounting which has been accepted by the AO in the preceding as well as in the subsequent assessment year. Further the AS 7 as discussed by the AO and the Ld. CIT(A) are applicable only for contractors engaged in the civil construction business and the same does not apply to builders / developers. It is an established legal proposition that an assessee can follow any recognized method of accounting and the condition is that the same method has to be followed consistently. Since the assessee in the instant case was regularly following the project completion method and has offered the 13 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
income in the year of completion of project, therefore, we do not find any sound reason as to why the same should be rejected and percentage completion method be followed.
13.1 We find the co-ordinate Bench of the Tribunal in the case of AWADESH BUILDERS v. ITO reported in 37 SOT 122 (MUMBAI) has held that project completion method adopted by the assessee builder and real estate developer is justified instead of the percentage completion method as computed by the department. While giving this finding, the Hon. Tribunal relied on the decision of the Hon. Supreme Court in the case of CIT v. BILAHARI INVESTMETN (P) LTD. reported in 299 ITR 1 (SC) and decision of the Hon. Supreme Court in the case of CIT v. REALEST BUILDERS & SERVICES LTD reported in 307 ITR 202. The Hon. Tribunal also considered AS-7 and AS-9 issued by ICAI.
13.2 We find the Bangalore Bench of the Tribunal in the case of PRESTIGE ESTATE PROJECTS (P) LTD. vs. DCIT reported in 129 TTJ (Bang) 680 and relying on the decision of the Hon. Supreme Court in the case of CIT v. BILAHARI INVESTMENT (P) LTD. reported in 299 ITR 1 (SC) and the decision of the Tribunal in the case of H. M. CONSTRUCTIONS v. CIT reported in 90 TTJ (Bang) 510 has held that the assessee developer having regularly employed project completion method, which is an accepted method of accounting and the Central Government having not notified AS-7 u/s.145(2), the AO could not reject the accounts u/s.145(3) on the ground 14 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
that the assessee has not followed percentage completion method of accounting.
13.3 Now coming to the finding of the Ld. CIT(A) that all risks and rewards in the property sold as per the sale agreement has been transferred to the buyer, we find Clause 11 of the sale agreement (Page 189 of the paper book) which is referred to by the Ld. CIT(A) mentions loss or damages on account of natural causes i.e. lightning, earthquake, flooding, riots and war, etc. These are the losses which are not in the control of the assessee. However, the assessee is responsible for all the losses and damages caused during the course of the construction activity and even after these losses and damages, the assessee has to complete the project and therefore, for these losses and damages, the assessee is responsible.
13.4 Similarly we find clause 19(A) of the sale agreement (Page 190 of the paper book) refers that the purchaser has no claim in respect of open spaces, lobby, staircase, terrace, etc. which shall remain the property of the builder until the whole project is transferred to the proposed co-operative housing society and, therefore, there is nothing in the clause by virtue of which it can be inferred that the risks and rewards are transferred to the purchaser as the purchaser has the right to occupy only the flat which has been purchased by him.
13.5 We find Clause 32 of the agreement (page no. 193 of the paper book) has clearly mentioned that the purchaser shall not let, sub-let, 15 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
transfer/assign or part with the possession of the said flat, shop/car parking space without the consent in writing from the builder and until all the dues payable by him/her/them to the builder under this agreement are full paid. Therefore, as per this clause, the full payment of the purchase price and possession of the constructed flat is a must before the purchaser can transfer or assign the flat.
13.6 We find merit in the submission of the Ld. Counsel for the assessee that the assessee has to construct the complete building as per the specifications over a period and receive the purchase consideration from time to time from the purchasers and hand over the possession of the building when the building is fully completed, occupation certificate is received and it is only at that time the risks and rewards are transferred to the purchaser.
13.7 We, therefore, are of the opinion that the Revenue Authorities are not justified in rejecting the project completion method. In our opinion, merely on the basis of one sample agreement, the Ld. CIT(A) cannot come to the conclusion that all the risks and rewards in the property sold as per the sale agreement have been transferred to the buyer.
13.8 We also find merit in the submissions of the Ld. Counsel for the assessee that the Ld. CIT(A) while enhancing the income of the assessee has not issued the enhancement notice which is statutorily required as per the 16 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
provisions of section 251(2) of the I.T. Act, for which also his order has to be set aside.
13.9 In this view of the matter, we hold that the Ld. CIT(A) is not justified in rejecting the project completion method, consistently followed by the assessee. Accordingly, the order of the Ld. CIT(A) is set aside and the grounds of appeal no. 1 to 4 raised by the assessee are allowed. 13.10 Since the project completion method of the assessee has been accepted by us, the without prejudice ground of the assessee challenging non-granting of deduction u/s.80IB(10) becomes academic in nature and hence the same is not being adjudicated.
13.11 The appeal filed by the assessee for the A.Y. 2005-06 is accordingly allowed.
ITA No.6861/MUM/2010 (A.Y. : 2006-07)
14. The grounds of appeal no. 1 i) & 1 ii) by the assessee read as under :-
"1. On facts and in circumstances of the case and in law, the Commissioner of Income-tax (Appeals), (CIT(A)) has erred in :
i) Not granting deduction of Rs.7,21,60,252/- as claimed by the appellant u/s.80IB(10) of the Income Tax Act (ITA), in respect of the projects comprising of Gulmohar & Splendour constructed at Plot No.: 52/20 & 56/20, Sector 20, Kharghar, Navi Mumbai.
ii) Not appreciating that section 80-IB(10) of the ITA is an incentive provision for economic growth and has to be interpreted liberally. In doing so, the AO as well as CIT(A) have not followed the principles in this regard as laid down 17 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
by the apex court in Bajaj Tempo Vs. CIT 196 ITR 188 (SC)."
14.1 Facts of the case, in brief, are that for the impugned assessment year, the assessee filed its return of income showing profit from their project "Gulmohar" and "Splendor" which has been constructed at Plot No.52/20 and 56/20, Sector-20, Khargar, Navi Mumbai. The entire profits earned by the assessee amounting to Rs.7,21,60,252/- on this project has been claimed as exempt u/s.80IB(10) of the I.T. Act, 1961.
15. During the course of assessment proceedings the AO asked the assessee to furnish the details of the project undertaken /completed and explain as to how the conditions laid down u/s. 80IB(10) of the I.T. Act, 1961 were satisfied so as to justify the claim of deduction u/s.80IB. From the various details furnished by the assessee from time to time, the AO noted that the project commenced on 10.10.2003 and the assessee company received approval/commencement certificate on 29.03.2006 from CIDCO. The assessee received part occupancy certificate on 29.09.2006 wherein it has been indicated the Residential constructed area at 4605.208 sq Mtr. (units 126) and Commercial constructed area at 682.216 sq. mtr (units 45). From the approval plan submitted by the assessee, the AO noted the following :-
Total plot area - 15599.98 Sq. Mtr.
Permissible BUA - 23399.97 Sq. Mtr.
Permissible Commercial Area - 460.939 Sq.Mtr.
15.1 From the approval letter given by CIDCO, the AO noted that the assessee was supposed to built the maximum commercial area for 18 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
construction at 15%. However, the assessee in the instant case has constructed total commercial area of 682.216 Sq Mtr. out of 5287.424 sq. Mtr. of project completed as per part occupancy certificate issued by CIDCO vide its letter bearing no. CIDCO/BP/ATPO/1338 dated 29.09.2006. Thus the commercial area constructed by the assessee works out to 6.75%. According to the AO the amendment of the Finance Act, 2004 pegs the maximum permissible commercial area to be at 5% of total project area or 2000 sq. ft. whichever is less. Since the commercial area constructed by the assessee at 682.216 sq. mtrs is more than 2000 sq. ft. and more than 5% of the total project area therefore, the AO was of the opinion that the assessee is not entitled to deduction u/s. 80 IB(10) of the Act.
16. As regards the condition that the residential unit has a maximum built up area of one thousand square feet, the AO noted that some of the purchasers have bought adjacent flats and the sum total of these flats exceed 1000 sq. ft. Relying on a couple of decisions, the AO was of the opinion that the adjacent houses constitute a single house for the purpose of "Income from house property". Since some of the purchasers have purchased two or more such flats which are adjacent to each other and the total area exceeds 1000 sq. ft. the AO was of the opinion that the conditions prescribed u/s.80IB(10) are not fulfilled. Since the assessee failed to comply with the specific conditions laid down in sub-clause (a) and (c) of section 80IB(10), the Assessing Officer, relying on a couple of decisions, held that the assessee is not entitled to claim the deduction u/s. 80IB(10) amounting 19 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
to Rs.7,07,88,251/-. The AO further noted that as per the provision of section 80IB(10), the project should be a housing project only. Since this project is approved by the local authority i.e. CIDCO as residential cum commercial project, the profit of the same is not entitled to deduction u/s. 80IB(10). Rejecting the various explanation given by the assessee and relying on a couple of decisions the AO rejected the claim made u/s. 80IB(10) of the I.T. Act.
17. Before the Ld. CIT(A) it was submitted that when the project was approved on 10.10.2003, the restrictive conditions to commercial area were not there in the statute book and the conditions as spelt by A.O. was brought out by the Finance Act No.2 of 2004. As regards, the objections of the AO that two flats were sold to the same person and hence the area of the two flats combined together exceed 1,000 sq. ft. and, therefore, the assessee is not eligible for deduction u/s. 80 IB(10), it was submitted that the assessee had not sold the two units as one consolidated unit after joining the same, therefore, the benefit of deduction u/s.80IB(10) cannot be denied to the assessee. As regards, the observations of the AO that the area of some flats are exceeding 1000 sq. ft, it was submitted that the same is due to wrong inclusion of open terrace area in the built up area. It was submitted that the definition of "built up" area was brought to the statute book by the Finance Act 2004 w.e.f. 01.04.2005 i.e. A.Y. 2005-06. Before that, open terrace area was not to be included in the "built up" area. It was also submitted that CIDCO authorities approved the project prior to the 20 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
amendment of Finance Act, 2004 which included balconies and terraces. The decision of the Special bench of the Tribunal in the case of Brahma Associates reported in 122 TTJ 443 was also bought to the notice of the Ld. CIT(A). It was accordingly submitted that the assessee is entitled to claim the benefit of deduction u/s. 80IB(10) amounting to Rs.7,07,88,251/-.
18. However the Ld. CIT(A) was not convinced with the arguments advanced before him. He observed that there is no such finding given by the Special Bench of the Tribunal in the case of Brahma Associates (supra) with reference to the projects which were approved on 10.10.2003. The decision in the said case relates to the commercial area before amendment which has been allowed from 5% to 10%. Since the case of the assessee relates to the post amendment period i.e. A.Y. 2006-07, therefore, it is not covered by the decision of the Special Bench of the Tribunal. As regards the objection to the treatment of two flats sold to same person as single unit and, therefore, the area exceeds 1000 sq. ft, he noted that the purchaser of the property is a single person and he has purchased more than 1,000 sq. ft. unit and hence this argument of the assessee cannot be accepted. As regards the submission of the assessee that open terrace are to be excluded from the "built up" area, the Ld. CIT(A) was of the view that the amended provision is applicable for A.Y. 2005-06 and onwards and shall apply to the assessee as well and hence the AO was right in including the terraces in the "built up area" which clearly falls under the definition of built up area as provided u/s. 80IB (14)(a). Relying on a couple of decisions, the Ld. CIT(A) was of the 21 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
opinion that taxing statutes have to be strictly construed and nothing can be read in it. Since the assessee in the instant case has not fulfilled the conditions mentioned in section 80IB(10), the Ld. CIT(A) rejected the various arguments advanced before him and upheld the action of the AO.
19. Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before us.
20. The Ld. Counsel for the assessee submitted that various submissions given before the Ld. CIT(A) along with the copies of agreements were not considered by him properly. He submitted that the provisions of section 80IB(10)(d) restricting the built up area of shops and other commercial establishments included in the housing project at 5% or 2,000 sq. ft. was brought to the statute book by the Finance Act No.2 w.e.f 01.04.2005. Prior to its substitution the section granting 100% deduction of income arising from Housing Projects did not contain any restriction on the area of shopping complex included in the Housing Projects that were approved prior to 31.03.2005. Since in the instant case the Housing Project namely 'Nisarg project" was approved on 10.10.2003 i.e. prior to 31.03.2005, therefore, there is no restriction of area of shopping complex. The Ld. Counsel for the assessee also relied on the decision of the Tribunal in the case of Saroj Sales Organisation vs. ITO reported in 115 TTJ 485, ACIT vs. Sheth Developers reported in 33 SOT 277 and Hirananadani Akruti JV vs. DCIT reported in 39 SOT 498.
22ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
21. As regards the objection of the revenue that two or more flats have been sold to the same person and, therefore the built up area of the unit exceeds 1,000 sq. ft, the Ld. Counsel for the assessee submitted that the area of these flats cannot be combined together since the assessee has sold these two flats in separate agreements. The flats were approved by the CIDCO as two separate flats. He submitted that there is no evidence with the AO that the assessee has sold these two flats as a single flat after combining the total area together. He submitted that the revenue has not verified even till today as to whether these flats are used as one flat or two flats. He submitted that the assessee is not responsible if after purchasing these two flats separately, these are used by the purchaser as one flat. Referring to the various pages of the paper book, the Ld. Counsel for the assessee submitted that in most of the cases the built up area of each flat is less than 1,000 sq. ft. even after including the terrace area. He submitted that area of none of the flats exceeds 1,000 sq.ft, if the terrace area is excluded. He submitted that in the common parlance, terrace is not to be accounted for in the built up area. Even as per CIDCO rules, terrace area is not included in the built up area and thereby, not accounted for in the FSI. He submitted that the definition of "built up area" is introduced by the Finance Act, 2004 by introducing sub-section 14(a) in Section 80-IB w.e.f. 01.04.2005 and, therefore, the same is not applicable to the projects approved and commenced before 01.04.2005. Referring to the decision of the Tribunal in the case of ACIT vs. Sheth Developers reported in 33 SOT 23 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
277, he submitted that it has been held that prior to 01.04.2005, balcony would not form part of the built up area. The definition of "built up area"
introduced by the Finance Act, 2005 was manifestly prospective. It has further been held in the said decision that where, any unit excluding the balcony area, was of more than 1000 sq. ft., the assessee was entitled to the deduction u/s.80IB(10) on pro-rata basis, in respect of the flats of 1000 sq. ft. or less and the deduction cannot be denied.
22. The Ld. DR on the other hand, relied on the order of the Ld. CIT(A).
23. We have considered the rival submissions made by both the sides, perused the orders of the AO and the Ld. CIT(A) and the paper book filed before us. We have also considered the various decisions cited before us.
From the body of the assessment order, we find the assessee during the impugned assessment year has shown the sales details for the year ending 31.03.2006 which is as under :
Kharghar Node
a) Gulmohar Sale of flats/Shops Rs.4,55,67,937/-
Other Charges Rs. 37,54,920/-
Extra Amenities Rs. 33,832/- Rs.4,92,73,211/-
b) Splendor
Sale of flats / Shops Rs.9,78,11,526/-
Other Charges Rs.1,10,21,647/-
Extra Amenities Rs. 1,38,535/- Rs.10,88,28,637/-
TOTAL Rs.15,81,01,848/-
24. We find from the body of the assessment order that the project commenced on 10.10.2003 and the assessee company received 24 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
approval/commencement certificate on 29.03.2006 from CIDCO. We find the AO denied the benefit of deduction u/s.80IB(10) for the following reasons:-
1. The commercial area in the housing project being 682.216 square meters exceeds 5% of the total project area or 2000 sq. ft.
2. Some of the purchasers have purchased adjacent flats, the sum total of these flats exceeds 1000 sq. ft. therefore, the same is not entitled to the benefit of deduction u/s.80IB(10). For this purpose, he took the example of Aleyomana Edicula who has purchased the flat No. G-102 & G-103. Similarly New City Education Trust has purchased the Flat No. H-101, H-102, H-
104, H-105 & H-106, the total of which comes to 4321 sq.ft.
3. Majority of flats sold in project Splendor 52/20 and Splendor 56/20 were exceeding area of 1000 sq. ft. including balcony and terrace, as according to the AO balcony and terrace area has to be excluded for the purpose of calculating the area of 1000 sq. ft.
25. We find the Ld. CIT(A) while deciding the issue rejected the various decisions cited before him had confirmed the action of the AO.
26. It is the submission of the Ld. Counsel for the assessee that balcony and terrace area has to be excluded for the purpose of calculation of the carpet area of 1000 sq. ft. Similarly since the assessee has sold each flat under separate agreements, and the assessee has not sold two flats by combining them together as one flat to one party, therefore, the area of two flats or more than two should not be combined even though these flats were sold to one person. Similarly it is the submission of the Ld. Counsel for the assessee that when the approval is obtained prior to 31.03.2005, the condition of shopping area not exceeding 5% of built up area or 2000 sq. ft whichever is less, as introduced by the subsequent amendment are not 25 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
applicable in respect of projects approved and commenced before 01.04.2005.
27. We find merit in the above submissions of the Ld. Counsel for the assessee. As regards the allegation of the revenue that the commercial area in the project is more than 5%, we find the issue now has been settled in view of the various decisions of the co-ordinate Benches of the Tribunal, including the decision in the case of Brahma Associates (supra) which has been upheld by the Hon'ble Bombay High Court.
28. We find the Co-ordinate Bench of the Tribunal in the case of Shri Girdharilal K. Lulla where one of us (the Accountant Member) is a party vide ITA No : 4207/Mum/2009 order dated 30.05.2011 has held as under :-
"We have considered the rival submission made by both the sides, perused the orders of A.O. and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the A.O. denied the benefit of deduction u/s 80IB(10) of the Act on the ground that the commercial areas in the project is 3399 sq. ft. which is well above 2000 sq. ft. or 5% of the project which is one of the pre- conditions for claiming deduction u/s 80IB (10) of the Act. We find the condition of 2000 sq.ft. or 5% of the project was brought to the statute by the Finance (No.2) Act, 2004 w.e.f. 1.4.2005. Prior to this insertion, there was no such condition. We find the co-ordinate Bench of the Tribunal in the case of Hiranandani Akruti JV (supra) at para No. 26 & 27 has observed as under:-
"26. There is truth in the plea of hardship put forth on behalf of the Assessee. Let us assume an Assessee applies and obtains approval of a local authority for building a housing project in the previous year relevant to AY 02-03. As per the law as it stood in the previous year relevant to AY 02-03 upto 04-05, there was no time limit within which the construction has to be completed or any restriction regarding commercial area that can be built in a housing project. Let us assume that the Assessee complies with all 26 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
the conditions for allowing relief u/s.80-IB(10) i.e., it is approved as a housing project by the local authority but the area of commercial space as approved by the local authority is more than 2000 sq.ft. The Assessee commences the project but is able to complete only in the previous year relevant to AY 05-06. As per the change in law from AY 05-06 with regard to the area of commercial space in a housing project the Assessee would loose his eligibility to claim deduction. In such cases there is definitely grave hardship to the Assessee. The interpretation sought to be canvassed by the learned D.R. will also lead to absurd situation. Let us assume an Assessee obtains approval of a housing project prior to 1-4- 2005 say in previous year relevant to AY 02-03. He builds commercial space in excess of 2000 Sq.ft. in the housing project. He follows percentage completion method of accounting and offers profits in AY 02-03 to 04-05, claims exemption u/s.80-IB(10) and is allowed exemption. On the same project in AY 05-06, the Assessee would not get the benefit of Sec.80-IB(10). We therefore find no grounds to take a view different from the one taken by the co-ordinate bench of the Tribunal in the case of Saroj Sales Organization (Supra).
27. We are of the view that we are not supplying any words to the statute but are only holding that the law as it existed in the A.Y.04-05 when the Assessee submitted its proposal for slum rehabilitation and the permission for carrying out the development was accorded on 17.11.2003 and when the Assessee commenced development is to be applied. Therefore the submissions of the learned D.R. in this regard cannot be accepted. We are of the view that the legislature would not have intended to take away a vested right without clear words to that effect in the provisions of Sec.80-IB(10) as amended by the Finance Act, 2005, w.e.f. 1-4-2005. We therefore hold following the decision in the case of Saroj Sales Organisation (Supra) that the law as it existed in the A.Y.04-05 when the Assessee submitted its proposal for slum rehabilitation and the permission for carrying out the development was accorded on 17.11.2003 and when the Assessee commenced development is to be applied."
29. Since in the instant case, the project undisputedly was approved before 1.4.2005 therefore the provisions of the old law will apply. Therefore,, the order of the ld. CIT(A) on this issue 27 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
being in consonance with the decision of the co-ordinate Bench of the Tribunal is upheld. So far as the order of the ld. CIT(A) restricting the deduction on account of commercial component is concerned, we find the issue now stands decided in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in the case of Brahma Associates (supra) where the decision of Special Bench of the Tribunal in the case of Brahma Associates (supra) has been upheld according to which the project having commercial area upto 10% of the project is eligible for deduction u/s 80IB(10) of the Act. Since admittedly the commercial area in the instant case is less than 10% of the built up area, therefore, the assessee is entitled to the deduction u/s 80IB(10) and the ld. CIT(A) was not justified in restricting the deduction. In this view of the matter, the ground raised by the Revenue is dismissed and the ground raised by the assessee in the C.O. is allowed."
29. Since the approval in the instant case was obtained on 10.10.2003 i.e. prior to 01.04.2005, therefore, in view of the decision cited above and in view of the consistent decisions of the Co-ordinate Benches of the Tribunal in various other cases (copies of which are placed in the paper book) we hold that the amendment as introduced by the Finance Act, 2004 w.e.f. 01.04.2005 i.e. A.Y. 2005-06, is not applicable to assessee's case. Therefore, the assessee cannot be denied the benefit of deduction u/s.80IB(10) for the commercial area exceeding 5% of the built up area or 2000 sq. ft. whichever is less.
30. As regards the second objection of the revenue that the assessee has sold two or more than two flats to one party, the combined area of which is more than 1000 sq. ft, we find merit in the submission of the Ld. Counsel for the assessee that the area of two flats should not be combined even though the two flats were sold to one person because (a) the built up area of each flat as approved by CIDCO is less than 1000 sq. ft as per the approved 28 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
plan and occupancy certificate received. (b) the assessee has sold each flat under separate agreements. (c) the assessee has not sold two flats by combining these together as one flat to one party and d) there is no evidence with the Department that the assessee has sold after combining the two flats together and sold to one party. Further there is no evidence on record to suggest that the assessee itself has advertised that the flats were of more than of 1000 sq. fts and that merely to get the benefit of deduction u/s.80IB(10) he drew the plan in such a manner that each residential unit was shown as not more than 1000 sq. ft of built up area. It is also not the case of the revenue that each flat in the housing project undertaken by the assessee could not have been used as an independent or as a self contained residential unit not exceeding 1000 sq. ft of built up area and there would be a complete habitable residential unit only if two or more flats are joined with each other which would ultimately exceed 1000 sq. ft. of built up area. Therefore, merely because some of the purchasers have purchased more than one flat and combined the same, the same in our opinion, will not disentitle the assessee to claim the deduction u/s. 80IB(10).
31. Further the condition that not more than one residential unit in the housing project is allotted to any person not being an individual has been inserted by the Finance (No.2) Act, 2009 w.e.f. 01.04.2010. Therefore, the allegation of the revenue is also not applicable for the impugned assessment year.
29ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
32. Now coming to the third allegation of the revenue that the built up area of some of the flats is more than 1000 sq. ft, we find the assessee has already submitted the chart which gives the built up area as analyzed by the AO. It is the case of the revenue that if the terrace area is included, the total built up area in some of the cases exceeds 1000 sq. ft. It is the submission of the Ld. Counsel for the assessee that the definition of "built up area" as given in Sub Section 14(a) of Section 80IB is inserted by the Finance (No.2) Act, 2004 w.e.f. 01.04.2005 and, therefore, the same is applicable only in respect of the projects approved after 01.04.2005. We find merit in the above submissions of the Ld. Counsel for the assessee. The Co- ordinate Benches of the Tribunal are taking the consistent view that when the assessee submits the proposal for carrying out the development of a housing project, then whatever law is there on that day, that would regulate the rights of the assessee. In the instant case, undisputedly the project was approved on 10.10.2003 i.e. prior to 01.04.2005, therefore, we are of the opinion, that the revenue authorities are not justified in including the balcony/terrace in the built up area so as to deny the benefit of deduction u/s. 80IB(10). Further the assessee has given the chart, copy of which is placed at pg. no. 165, according to which the AO in some of the cases has adopted the wrong figure, although the built up area including the balcony put together does not exceed 1000 sq. ft.
32.1 It has been held in various decisions that if some of the flats in a housing project exceed the permissible limit, than the benefit of deduction 30 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
u/s.80IB(10) has to be granted on pro-rate basis and the assessee cannot be denied the exemption. However, since the area of none of the flats exceeds 1000 sq. ft. after excluding the balcony/terrace, the assessee, in our opinion, has not violated this condition.
33. Considering the totality of the facts of the case and in view of the decisions cited above, we do not find any reason why the assessee shall not be granted the benefit of deduction u/s. 80IB(10). We therefore, set aside the order of the Ld. CIT(A) and direct the AO to grant the benefit of deduction u/s.80IB(10). The grounds of appeal no. 1(i) and 1(ii) by the assessee are allowed.
34. The grounds of appeal no. 1 iii) reads as under :
"iii) Not reducing the profits computed by the AO on percentage completion method in Assessment Year 2005-06 in respect of the projects - Splendour & Gulmohar from the total profits of Rs.7,07,88,250/- worked out from the said projects for Assessment Year 2006-07. This has led to double taxation of the said profits, as assessed by the AO once in Assessment Year 2005-06 & once again in Assessment Year 2006-07."
35. After hearing both the sides we find the grievance of the assessee is that the AO while computing the profit by rejecting the project completion method for the A.Y. 2005-06 has not reduced the same from the profits of the projects for the A.Y. 2006-07 for which it leads to double taxation of the same profits. We have already allowed the claim of the assessee in A.Y. 2005-06 by accepting the project completion method followed by the assessee. Therefore, this ground raised by the assessee becomes infructuous and accordingly the same is dismissed.
31ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
36. In the result, the appeal filed by the assessee for the A.Y. 2006-07 is partly allowed.
ITA No.1547/MUM/2011 (A.Y. : 2007-08)
37. The grounds of appeal no. 1 and 3 by the assessee read as under :
"1. Rejecting the project completion method of accounting which has been regularly followed by the appellant in the past. The appellant is a Builder and Developer, as per the Revised Accounting Standard-9(which is made mandatory by the Institute of Chartered Accountants to Builders and Developers) the appellant had correctly determined its profit at Rs.2,04,83,103/-.
3. Upholding the profits estimated by the A.O. in respect of uncompleted projects at Rs.3,00,97,024/-, which has been done by the AO by following the percentage completion method."
37.1 Facts of the case, in brief, are that the assessee company which is involved in the business of builder and developer, is involved in developing the following projects :
37.2 Sr. Description of Projects No. 1 Airoli-1/19 Nilambari 2 Kamothe - 49, 57 to 62 / 36 3 Kharghar 184/13 Tiara 4 Kharghar - (i) 52/20 Gulmohar (A,B,C,D,E)
(ii) 56/20 Glory (N & O)
iii) 56/20 Splendor (IJKM)
iv) 56/20 Splendor (GHL) 5 Nerul - 89 to 92 / 19-A Centurian 6 Tilak Nagar - ND 30.32 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
37.3 The AO noted that out of the above projects, revenues have been recogonised for Gulmohar (ABCDE) & Splendor (GHL) in A.Y. 2006-07. The sale of the unsold stock of these buildings is offered in A.Y. 2007-08. As the other projects are not completed, revenue there from has not been recognized. Out of the above projects, according to the assessee, the projects
- Gulmohar, Splendor & Glory are 80IB(10) compliant projects. As far as the other projects are concerned the assessee has not recognized any profits following project completion method.
37.4 So far as the incomplete projects are concerned, the AO asked the assessee to compute the profit @ 25% on the increase of WIP during the year. From the various submissions filed by the assessee, the AO noted the increase of WIP project wise is as under :
Site Opening WIP Closing WIP Difference Estimated profit @ 25% Airoli 4,01,76,202 5,58,11,877 1,56,35,675 39,08,918 Khargar 2,10,53,789 5,37,75,748 3,27,21,959 81,80,489 184/13 Tiara Splendor M 2,90,00,000 1,56,00,000 1,34,00,000 33,50,000 Glory 3,49,99,306 5,48,44,572 1,98,45,266 49,61,316 Nerul 14,56,29,867 18,44,15,071 3,87,85,204 96,96,301 Kamothe 97,50,169 97,50,169 Tilak Nagar 2,79,088 3,52,680 73,592 3,00,97,024 In respect of Kamothe and Tilak nagar project the AO noted that there is no sale yet executed hence he did not estimate the profit on the same.
37.5 He noted that during A.Y. 2005-06 his predecessor AO has rejected the project completion method followed by the assessee and estimated the 33 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
income on the basis of percentage completion method which has been upheld by the Ld. CIT(A). The assessee has filed appeal before the Tribunal which is pending. Following the order of his predecessor, the AO adopted Percentage Completion method by rejecting the Project Completion method followed by the assessee and made addition of Rs.3,00,97,024/- to the total income of the assessee being 'Profit on incomplete projects.' In appeal, the Ld. CIT(A) upheld the action of the AO for which the assessee is in appeal before us.
38. After hearing both the sides, we find the above grounds by the assessee are identical to the grounds of appeal no. 1 to 3 in assesse's appeal for A.Y. 2005-06. We have already decided the issue in favour of the assessee at para 11 to 13.10 of the impugned order upholding the method of accounting followed by the assessee and deleting the estimated addition made. Following the same ratio the order of the Ld. CIT(A) on this issue is set aside and the grounds raised by the assessee are allowed.
39. The grounds of appeal No. 2 by the assessee reads as under :
"2. Upholding the Assessing Officer (A.O.) views in respect of recognizing revenue in respect of I, J & K Wings of the Building Splendour, thereby estimating profits at Rs.6,29,38,999/-, on the grounds that occupation certificate in respect of these wings were received on 26.06.2006 and 29.06.2006. In doing so, both the AO as well as the CIT(A) have further erred in rejecting the appellant's plea that revenue in respect of I, J & K Wings was not recognized following the principles of Accounting Standard - 9, according to which revenue in respect of these Wings was recognized in Assessment Year 2008-09 i.e. Financial Year 2007-
08."34 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
39.1 Facts of the case, in brief, are that the assessee has showed Gulmohar and Splendor as completed in A.Y. 2006-07. These buildings are constructed on Plot no. 52 and 56 at sector 20, Kharghar and are forming part of one commencement certificate. The names of the buildings are Gulmohar, Splendor & Glory. The assessee has accounted the profits of Gulmohar (A,B,C,D & E) and Splendor (G, H & L) in A.Y. 2006-07. From the details of receipt of the part occupation certificate obtained by the assessee, the AO noted the following facts:
Name of the Wing Date of OC Gulmohar (A,B,C,D,E) 26.6.2006 Splendor (G,H & L) 29.9.2006 Splendor (I,J & K) 1.12.2006 Splendor (M) & Glory (N & O) 31.3.2008
The AO noted that the assessee has got the O.C. for Spendor (I,J & K) on 1.12.2006. Therefore, he asked the assessee as to why the profits of the Splendor (I, J & K) should not be offered for taxation in the current year. 39.2 In response to the same, the assessee replied as under :-
"1. The date for completion of the project Glory and Splendor (I,J,K and M) wings as certified by the Architect are enclosed at Annexure H along with the supporting documents thereto. In the architect certificate it has been certified that the I,J and K wings of Splendor were completed on 1st December, 2006, the occupancy certificate dtd. 31.03.2008 mentions that part occupancy of the building was received on 01.12.06, this part OC was of no consequence for giving the possession. As certified by the architect though the part occupancy certificate was issued on 1.12.06 the actual possession of residential flats in these wings could be 35 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
handed over only in the next financial year as certain works on the amenities as provided were not up to the specifications as called for by the purchasers and hence work had to be redone on these to their satisfaction. It is only thereafter in the financial year ending 2008 that possession of these flats were handed over to the purchasers and revenue in respect of these sales was recognized by following the Accounting Standard. Even the occupancy certificate dt. 31.03.2008 certifies that the part OC was given on 01.12.2006.
2. In the certificate issued by the architect which is Annexure to the form 10 CCB it has been stated that I,J and K wings of Splendor have not been completed up to 31 March, 2007. The above clarification has been inadvertently missed in the said certificate as issued by the architect."
39.3 However, the AO was not satisfied with the explanation given by the assessee. He noted from the details furnished by the assessee that in respect of Gulmohar and Splender G & H the occupation certificate was received on 26.06.2006 and 29.09.2006. Despite this, the revenue was recognized in the earlier year. Occupation certificate is generally issued for competed work as mentioned in the commencement certificate. The assessee has obtained part occupancy on the basis of the work completed, building wise. The reference given by the assessee that the occupation certificate is obtained only on 31.03.2008 is only an indication that the entire work as per the commencement certificate of 14 buildings are complete. The assessee has, in case of part O.C. received, recognized the revenue inspite of not receiving the O.C. Thus the assessee is not consistent in following the method of accounting adopted by its. Rejecting the various explanations given by the assessee, the AO made addition of Rs.6,29,38,999/- which was upheld by the Ld. CIT(A). Aggrieved with such order of the Ld. CIT(A) the assessee is in appeal before us.
36ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
40 The Ld. Counsel for the assessee submitted that though occupancy certificate is received on 1.12.2006, but the possession of the flats were handed over to the purchasers in the next year as certain works on the amenities provided by the assessee company were not upto the specifications and therefore, the purchasers have not taken possession and hence, work had to be re-done to meet their specifications. Accordingly, the possession of these flats were handed over to the purchasers in the next year. Referring to the paper book pages 317 to 319 he drew the attention of the Bench to the affidavit made by the Executive Director of the assessee company Mr. Sanjay Kashinath Haware wherein he has stated that the flats were handed over during F.Y. 2007-08 i.e. A.Y. 2008-09. Accordingly, income in respect of I, J&K Wings of splendor project is correctly declared in the assessment year 2008-09.
40.1 He submitted that in the A.Y. 2008-09, income in respect of the completed projects I, J&K Wings has been declared at Rs.15,31,71,399/- and in the A.Y. 2009-10, the same is declared at Rs.3,29,54,873/-. The Ld. Counsel for the assessee submitted that the Assessing Officer has included the income in respect of this project in the A.Y. 2008-09 at Rs.15,31,71,399/- and while doing so, he has not allowed deduction of the estimated profit of Rs.6,29,38,999/- computed by him in the A.Y. 2007-08. This amounts to taxation of the same amount twice.
37ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
40.2 The Ld. Counsel submitted that from the facts mentioned by the Assessing Officer in the order it is clear that the assessee company declared the projects completed in the year when the projects are completed in all respects and possessions were given to the intending purchasers on receipt of the full payment against the agreement value and thereby, risk and rewards are transferred to the purchasers under the sale agreement. Accordingly, the assessee company has taken the two projects completed in the last year when the possessions are given to the intending purchasers though the Occupancy Certificate were received on 26.6.2006 and 29.9.2006 which fall in the A.Y. 2007-08. Following the same analogy in respect of the project I, J&K Wings, though the occupancy certificate is received in this year on 01.12.2006, but possessions were given in the next year after re-doing some amenities as per specifications and income is declared in the next year i.e. A.Y. 2008-09.
40.3 Without prejudice, he submitted that since the assessee company has claimed deduction u/s 80-IB(10) on this project by satisfying all the conditions, it does not affect the computation of income whether project is taken as completed in A.Y. 2007-08 or 2008-09.
41. The Ld. DR on the other hand, relied on the order of the AO and the Ld. CIT(A).
42. We have considered the rival arguments made by both the sides, perused the orders of the AO and Ld. CIT(A) and the paper book filed on 38 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
behalf of the assessee. The only dispute in the impugned ground is regarding taxability of income form "I", "J" and "K" wing of the building "Splendour". According to the AO since O.C. in respect of these wings were received on 26.06.2006 and 29.06.2006, therefore, revenue should have been recognized during this year. It is the submission of the Ld. Counsel for the assessee that since certain works on the amenities were to be redone, the flats were handed over in the next financial year and revenue has been recognized accordingly. Alternatively, it is the submission of the Ld. Counsel that if revenue is recognized during the year, the profit will be exempted u/s.80IB(10) and, therefore, the same is revenue neutral. We find the assessee has submitted before the AO that the flats were handed over only in the next financial year. An affidavit of the Director to this effect has also been filed. However, the AO has not conducted any independent enquiry from any of the purchasers so as to negate the contention of the assessee. Further, the affidavit of the director has also not been rejected or proved to be false or untrue. Under these circumstances we find sufficient force in the submission of the Ld. Counsel for the assesssee that although the O.C. were obtained on 26.06.2007 and 29.06.2006, but the flats were completed in all respects according to the specifications and were handed over only after the end of the F.Y. 2006-07. Therefore, the assessee is right in recognizing the revenue in A.Y> 2008-09. Further, we also find merit in the submission of the Ld. Counsel for the assessee that since the assessee fulfills all the conditions prescribed u/s.80IB(10), the entire profit has to be allowed as deduction u/s.80IB(10) and it does not affect the computation. In 39 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
this view of the matter we set aside the order of the Ld. CIT(A) on this issue and direct the AO to delete the addition. Ground No.2 by the assessee is accordingly allowed.
43. The grounds of appeal no. 4, 5 & 6 by the assessee are as under
"4. Upholding the view of the AO in not granting the appellant deduction claimed u/s.80-IB(10) of the Income Tax Act (ITA) of Rs.2,04,83,103/-, in respect of the projects Gulmohar & Splendour, Wings - A, B, C, D, E, which was constructed at Plot Nos.52/20 & 56/20, Sector 20, Kharghar, Navi Mumbai.
5. Rejecting the appellant's plea that deduction u/s.80-IB(10) of the Income Tax Act should be granted in respect of the profits estimated by the AO, which were added to the total income during the course of the assessment.
6. Not appreciating the section 80-IB(10) is an incentive provision for economic growth and has to be interpreted liberally. In doing so, the AO has not followed the principles in this regard as laid down by the apex court in Bajaj Tempo vs. CIT 196 ITR 188 (SC)."
44. Facts of the case in brief are that the AO during the course of assessment proceedings observed that assessee has shown profits from their projects "Gulmohar" & "Splendor" which have been constructed at Kharghar, Navi Mumbai and earned profits amounting to Rs.2,04,83,103/-. This project has been claimed as exempt u/s.80IB(10) of the I.T. Act. The AO asked the assessee to justify its claim of exemption u/s.80IB(10). He noted that assessee has failed to fulfill the conditions laid down therein being area of flats exceeding BUA 1000 sq. ft. and combined area of flats exceeding 1000 sq.ft., that commercial area exceeds 5% or 2000 sq. ft. whichever is less and that no claim for deduction u/s. 80IB(10) was made for Splendor J,K,L building in the return of income filed. The AO further noted that as per 40 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
amendment by Finance Act, 2004, the maximum permissible commercial area has to be at 5% of total project area or 2000 sq.ft. whichever is less. According to the AO as per section 80IB(10) the projects under reference must necessarily be a housing project and housing project alone whereas the CIDCO has approved the project as a 'residential' cum 'commercial' project. In view of these facts, the AO rejected assessee's claim of deduction u/s.80IB(10) of the I.T. Act.
45. Before the Ld. CIT(A), the assessee submitted that the project was approved on 10.10.2003, during which time the restrictive conditions to commercial area were not there in the statue book and conditions as spelt by AO was brought out by the Finance Act (No.2) of 2004. The assessee submitted that the objection of the AO that two flats were sold to the same person and hence the area of the two flats combined together exceed 1,000 sq.ft., does not mean that the assessee is not eligible for claim u/s.80IB(10). The assessee further submitted that it had not sold the two units as one consolidated unit, so as to deny it any deduction u/s.80IB(10). It was submitted that some of the flats are exceeding 1,000 sq.ft. including terrace and in that areas of open terraces were not to be included in the built up areas and the amendment regarding built-up areas was brought in by the Finance Act, 2004 w.e.f. 01.04.2005 i.e. A.Y. 2005-2006. The assessee further contended that CIDCO authorities approved the project prior to the amendment of Finance Act which excluded balconies and terraces. The assessee relied on the decision of the Special Bench of the Tribunal in 41 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
Brahma Associates, 122 TTJ 443. Accordingly, it was submitted that deduction claimed u/s. 80IB(10) may be allowed.
46. However, the Ld. CIT(A) following his order for A.Y. 2006-07 upheld the action of the AO for which the assessee is in appeal before us.
47. After hearing both the sides we find the grounds raised by the assessee in the impugned appeal are identical to grounds in ITA No.6861/M/2010 for A.Y. 2006-07. We have already decided the issue in favour of the assesee at para 23 to 33 of the impugned order. Following the same ratio, the order of the Ld. CIT(A) on this issue is set aside and the grounds raised by the assessee are allowed.
48. Grounds of appeal No. 7 by the assessee reads as under:-
"Upholding the view of the A.O. for treating a sum of ` 8,01,97,900/- as deemed dividends u/s 2(22)e of the income Tax Act, thereby assessing the said sum as the appellant's income."
48.1 Facts of the case in brief are that during the course of assessment proceedings the A.O. observed that assessee company (HCPL) has taken un- secured loan from Haware Engineers & Builders Pvt. Ltd. (HEBPL) amounting to ` 8,01,97,900/- which was squared up during the year and there existed balance of ` 13,481/- at the end of the year. The Balance sheet of HEBPL shows reserve of ` 50.96 crores as on 31.03.2007. The A.O. further noted that Mrs. Ujjwala Haware holds more than 20% equity capital in both the companies. In view of these facts, A.O. was of the opinion that 42 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
provisions of section 2(22)(e) is attracted and asked the assessee as to why the amount should not be taxed as deemed dividend u/s 2(22)(e) of the I.T. Act. A.O. also reproduced provisions of section 2(22)(e) in the assessment order on page 21 and also noted that M/s HEBPL and the assessee company are not companies in which public are substantially interested. A.O. further noted that amount received in assessee's account for application as desired by the assessee and it is not for the business application of the donor and the same is shown as loan under the head 'loans and advances' from a company. Accounts of assessee nowhere revealed the receipt of ICD in balance sheet. In view of these facts A.O. held that loan received from M/s HEBPL by the assessee company is deemed dividend and assessee must be deemed to have received dividends on the dates on which assessee withdrew the said amounts from the company. According to the A.O. Loan or advance taken from the company may have been ultimately repaid or adjusted but that will not alter the fact that the assessee in the eye of law, had received dividend from the company during the relevant account period. For the above proposition, the A.O. relied on the following decisions:-
1. M/s Extempore Securities & Investments P. Ltd.
Vs. DCIT (2009) 29 SOT 40 Mumbai ITAT.
2. Miss P. Sarada vs. CIT 229 ITR 444(SC)
3. Smt. Tarulata Shyam vs. CIT (1977) 108 ITR 345
4. P.K. Badiani vs. CIT 105 ITR 642 (SC_
5. S. Kumaraswamy vs. ITO 43 ITR 423 43 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
Accordingly the A.O. treated an amount of ` 8,01,97,900/- as receipt of deemed dividend and assessed the same under the head income from other sources.
48.2 Before the ld. CIT(A) it was submitted that the said transaction is of the nature of 'payment by way of loans and advances and it had specifically mentioned that the transactions are in the nature of ICDs paid to HEBPL during the year endings 31.03.2007. It was further submitted that the assessee company had received ICD ` 8.02 crores and ICD of ` 9.55 crores were paid and the said ICD was paid for the purpose of business transactions proposed to be entered into between the two companies i.e Haware Construction P. :Ltd. (HCPL) & HEBPL. It was also stated that the payment made by HEBPL to HCPL and from HCPL to HEBPL are such payments on account of the proposed purchase of the relevant projects. It was submitted that since the terms and other aspects of the project were not finalized to enter into an agreement, therefore, in the intervening period as a commercial expediency, the net balance was worked out and interest on the difference was levied. The assessee also distinguished the provisions of section 2(22)(e) stating that section 2(22)(e) creates a fiction bringing in amounts paid otherwise than as dividends into the net of dividends and as per clause (ii) of section 2(22)(e) the payment by a closely held company to a shareholder or to any concern etc. should be by way of advance or loan. Relying on a couple of decisions, it was submitted that additions made of ` 8,01,97,900/- u/s 2(22)(e) may be deleted.
44ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
48.3 However, the ld. CIT(A) was not convinced with the arguments advanced before him and upheld the action of the A.O. While doing so he noted that the facts on record do not support this contention of the assessee. He observed from the copy of account of HEBPL in the books of the appellant for F.Y. 2006-07 that the funds of ` 7.87 crores have been transferred by HEBPL through different banks regularly from 15th April to 31.03.2007. Regular transfer of funds doesn't prove that these are for a transfer against cost of some plots. Further, the assessee has also produced the copy of agreement dated 23.4.2007 though the land has been transferred. However, there is no link between the two. Further, payment of ` 93 lacs only has been made as per agreement and there is no reference of any advance given. Thus, the claim of the assessee that advance was made for purchase of plot is not supported by any evidence. He distinguished the decision in the case of Bombay Oil Industries Ltd. (supra) by holding that the lender company in that case was engaged in the business of giving loans. The other cases relied upon by the assessee are also based on different set of facts and hence not relevant to the case of the assessee. He accordingly upheld the action of the A.O. 48.4 Aggrieved with such order of the ld. CIT(A) the assessee is in appeal before us.
49. The Ld. Counsel for the assessee referring to the copy of the agreement dated 16.04.2007 entered into between HEBPL and the assessee company (placed at paper book pages 336 to 368) submitted that the same 45 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
is for the purchase of premises and saleable built up area of 1 lakh sq.ft. in the complex Haware City project for consideration of Rs.35 crores. 49.1 Referring to the Copy of the agreement dated 23.04.2007 (placed at paper book pages 369 to 398) entered into between the assessee company and HEBPL he submitted that the same is for purchase of ownership flats and saleable constructed area of 1 lakh sq.ft. in the building to be constructed at Section 36, Phase II, Navi Mumbai for a consideration of Rs.30 crores.
49.2 He submitted that in view of the above agreements the assessee company during the year has received a sum of Rs.8,01,97,900/- from HEBPL towards constructed area agreed to be sold by them and similarly paid a sum of Rs.9,55,44,000/- to HEBPL towards constructed area purchased from them. Since the agreements were not entered during the year (which were entered in the month of April,2007) it was decided to charge interest on that and accordingly, a sum of Rs.2,96,896/- was the interest payable to HEBPL. Therefore, these amounts are paid and received towards business transactions entered between both the companies. 49.3 Relying on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Nagindas M. Kapadia reported in 177 ITR 393 he submitted that as per the provisions of Section 2(22)(e), business transactions are not to be treated as deemed dividend.
46ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
49.4 He submitted that since the agreements were yet to be entered, the transactions were treated as ICDs. Relying on the decision of the co-ordinate bench of the Tribunal in the case of BOMBAY OIL INDUSTRIES LTD v. DCIT CEN. CIR. 35 - 28 STO 383 (BOM), he submitted that ICDs do not come within the purview of deemed dividend u/s.2(22)(e) 49.5 He submitted that the Tribunal in the case of the said decision has held that there is distinction between deposits vis-à-vis loans/advances. Section 2(22)(e) enacts a deeming fiction whereby the scope and ambit of the word 'dividend' has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the said section. Such a deeming fiction would not be given a wider meaning than what it purports to be. The provisions would necessary be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. The requisite condition for invoking Sec.2(22)(e) is that payment must be made by way of loan or advance. Since there is a clear distinction between the inter-corporate deposits vis-à-vis loans/advances, the lower authorities were not right in treating the same as deemed dividend under Sec. 2(22)(e) since it was held that ICDs do not come within the purview of deemed dividend u/s.2(22)(e).
49.6 He submitted that if the transaction between company 'A' and company 'B' was a normal business transaction, it cannot be termed as deemed dividend u/s.2(22)(e) because of the shareholding pattern of two companies. For this preposition he relied on the following decisions:- 47 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
a) CIT vs. Ambassador Travels (P) Ltd. - 318 ITR 376 (Del)
b) NH Securities Ltd. v. DCIT - 11 SOT 302 (Mumbai) 49.7 Referring to the copy of day to day account of HEBPL in the books of the assessee company for the year ended 31.03.2007 including giving each debit and credit and daily balance (Page Nos.230 to 235 of the paper book) he submitted that there was credit balance in their account from 01.04.2006 to 06.05.2006 and thereafter, it was always debit balance. That proves that from 06.05.2006 onwards, the assessee company has first paid money to HEBPL and subsequent credits in their accounts are repayment of the loans given by the assessee company to HEBPL. He submitted that between 01.04.2006 to 06.05.2006, there are only four credit entries in the account of HEBPL which are as under :
15.04.2006 Rs.8,00,000 17.04.2006 Rs.10,00,000 25.04.2006 Rs.10,00,000 25.04.2006 Rs.10,00,000 Total Rs.38,00,000 49.8 He submitted that if the opening credit balance of Rs.1,50,35,750/- is excluded the assessee company always gives money to Haware Engineers Pvt. Ltd. and thereafter, there is a repayment of the same and, therefore, such receipt of money against repayment of loan cannot be treated as deemed dividend. He submitted that the total interest credited to the account of HEBPL of Rs.2,96,869/- for the whole year and after that, the debit balance in the account for HEBPL is of Rs.13,481/-.48 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
49.9 Referring to a number of decision he submitted that no deemed dividend u/s. 2(22)(e) can be taxed in the hands of the company. 49.10 The ld. Counsel for the assessee referring to page 227 to 228 of the paper book drew the attention of the Bench to the list of shareholders of HEBPL and HCPL on 31.3.2007 and submitted that the assessee company is not a registered shareholder of HEBPL. Referring to the certificate issued by the assessee company (paper book page 229), He submitted that there are no transactions with Ujjwala Haware and during the year ended on 31.3.2007 they have paid only remuneration of ` 10,50,000/- to her. Referring to the decision of the Special bench of the tribunal in the case of CIT vs. Bhaumik Colour P. Ltd. reported in 118 ITD 1 (SB), he submitted that the Special Bench in the said decision has held that addition of deemed dividend can be made in the hands of the person who is a registered shareholder as well as a beneficial shareholder. It has been held in the said decision that deeming provision as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax the dividend only in the hands of the shareholder and not in the hands of the concern. He submitted that the above view of the Special Bench of the Tribunal has been upheld by the Hon'ble jurisdictional High Court in the 49 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
case of CIT v. Universal Medicare (P) Ltd. 324 ITR 263 (Bom). Similar view has been held by the Hon'ble Delhi High Court in the case of CIT v. Ankitech Pvt. Ltd. (ITA No. 462 of 2009 order dt. May 11, 2011) wherein the Hon'ble Delhi High Court has followed the decision of the Special Bench of the Tribunal. Since the assessee is not a registered shareholder in Haware Engineers Pvt. Ltd., therefore, it cannot be treated as deemed dividend in the hands of the assessee company.
49.11 He submitted that it is only Mrs, Ujjwala Haware who is the common shareholder of both the companies. As per the Special Bench decision in the case of Bhaumik Colour Pvt. Ltd. (supra) it has to be seen as to whether the loan given by Haware Engineers Pvt. Ltd. to the assessee company is used by Ujjwala Haware for her benefit or not. In this case, the assessee company has no loan or advance transactions with Smt. Ujjwala Haware. Referring to the decision of Hon'ble Supreme Court in the case of CIT vs. Mukundray K. Shah reported in 290 ITR 433 (SC), he drew the attention of the Bench to the observations of the Hon'ble Apex Court which is as under:-
"If it is proved that the loan payment made by company "A" to company "B" was not at all for the benefit of Mr. J, perhaps there will not be any case for addition u/s 2(22)e in the hands of Mr. J. In the identical case of CIT v. Mukundray K. Shah - 290 ITR 433 (SC), the assessee was a shareholder in company MKPTL, a private company, which paid ` 5.99 crores to the two firms MKF and MKI in which assessee was a partner. It was held that addition in respect of deemed dividend is liable to made in the hands of the assessee as the payments made by the company MKPTL though routed through the two firms, were in fact for the benefit of the assessee who had purchased RBI Relief Bonds worth ` 26.35 crores by withdrawing sums from his capital a/c 50 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
with the two firms resulting into the debit balance of ` 8.18 crores."
He accordingly submitted that no addition can be made u/s 2(22)(e)of the Act in the hands of the assessee company.
50. The ld. D.R., on the other hand, heavily relied on the order of A.O. and CIT(A).
51. We have considered the rival arguments made by both the sides, perused the order of A.O. and the ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case, we find the A.O. treated the sum of ` 8,01,97,900/- as deemed dividend u/s 2(22)(e) of the I.T. Act in the hands of the assessee company on the ground that Mrs. Ujjwala Haware holds more than 20% equity capital in HEBPL and HCPL and that the assessee has taken unsecured loan amount of ` 8,01,97,900/- during the year from HEBPL which has got free reserves of ` 50.96 crores. We find the assessee company has furnished a list of share holders of HEBPL and HCPL (placed at paper book page 227 & 228) details of which are as under:
Haware Engineers & Builders Pvt. Ltd.
List of Shareholders
Sr Name of shareholder 31.03.2007 31.03.2006
No.
No. of shares held
Nominal value `. 100/- each
1 Nalini Haware 12,472 12,472
2 Anjali Haware 12,000 12,000
3 Pravin Haware 12,236 12,236
4 Ujjwala Haware 9,750 9,750
5 Satish Haware 169,986 169,986
51
ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
6 Haware Lotus Hotels 56,000 56,000
7 Haware Infotech ltd. 16,400 16,400
8 Haware Publication 4,000 4,000
Pvt. Ltd.
9 Suresh Haware 4,320 4,320
10 Sanjay Haware 2,000 2,000
299,164 299,164
Hare Construction Pvt. Ltd.
List of Shareholders
Sr Name of shareholder 31.03.2007 31.03.2006
No.
No. of shares held
Nominal value `. 100/- each
1 Ujjwala Haware 4,450 4,450
2 Satish Haware 500 500
3 Haware Finance Pvt. 50 50
Ltd.
5,000 5,000
From the above, it is clear that the assessee is not a registered share holder in HEBPL nor HCBPL is a registered shareholder in the assessee company.
It has been held by the Special Bench of the Tribunal in the case of Bhaumik Colour P. Ltd. (supra) that deemed dividend can be assessed only in the hands of the person who is a shareholder of the lender company and not in the hands of a person other than a shareholder and not in the hands of the borrowing concern in which such shareholder is member or partner having substantial interest. Since the assessee company is not a shareholder in HEBPL, therefore, merely because Smt. Ujjwal Haware is a shareholder in both the concerns having 20% equity share no amount can be taxed in the hands of the assessee company u/s 22 (2)(e) of the I.T. Act.
Since the assessee succeeds on this proposition, the various other 52 ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011 M/s. Haware Constructions Pvt. Ltd.
propositions argued by the ld. Counsel in our opinion do not require consideration. In this view of the matter, we set aside the order of the ld.
CIT(A() on this issue and direct the A.O. to delete the addition.
52. In the result, ITA No. 5601/Mum/2009 for A.Y. and ITA No. 1547/Mum/2010 are allowed and ITA No. 6861/Mum/2010 is partly allowed.
Order pronounced on 05.08.2011.
Sd/- sd/-
(N.V. VASUDEVAN) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, dated 05.08.2011.
RK
Copy to...
1. The appellant
2. The Respondent
3. The CIT(A) - I, Mumbai
4. The Director of I.T. (Exemption) Mumbai
5. The DR Bench, "C"
6. Master File
// Tue copy//
BY ORDER
DY/ASSTT. REGISTRAR
ITAT, MUMBAI
PRONOUNCED IN THE OPEN COURT ON 5.8.2011
Sd/- sd/-
(B. Ramakotaih) (N.V. Vasudevan)
AM JM
53
ITA No.5601/M/2009, 6861/M/2010 & 1547/M/2011
M/s. Haware Constructions Pvt. Ltd.
Date Initials
Draft dictated on 07/07/2011,
3.8.2011
Draft placed before the author 02/08/2011,
3.8.2011
Draft proposed and placed before the second
Member AM/JM
Draft discussed/approved by Second Member
AM/JM
Approved Draft comes to the Sr. PS
Kept for pronouncement on.
File sent to the Bench Clerk
Date on which file goes to the Head Clerk
Date on which file goes to the AR
Date of dispatch