Income Tax Appellate Tribunal - Pune
J.K.Associates, Nashik vs Department Of Income Tax on 25 August, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
Before Shri Shailendra Kumar Yadav, Judicial Member
and Shri R.K. Panda, Accountant Member
ITA No. 1552/PN/2013
(Assessment Year : 2010-11)
ITO, Ward-1(3), Nashik .. Appellant
Vs.
J.K. Associates,
N-42/JE-2/17/6,
Savtanagar, CIDCO,
Nashik - 422008
PAN No.AADFJ4462G .. Respondent
Assessee by : None (written submission filed)
Revenue by : Shri Rajesh Damor
Date of Hearing : 20-08-2014
Date of Pronouncement : 25-08-2014
ORDER
PER R.K. PANDA, AM :
This appeal filed by the Revenue is directed against the order dated 13-05-2013 of the CIT(A)-I, Nashik relating to Assessment Year 2010-11.
2. Facts of the case, in brief, are that the assessee is a partnership firm carrying on the business of civil construction of flats & row houses. The assessee filed its return of income on 23-09-2010 declaring total income of Rs.3,61,020/-. The Assessing Officer determined the income of the assessee at Rs.41,02,060/- by making disallowance of Rs.37,41,576/-. In the previous year relevant to A.Y. 2010-11 the assessee has continued the construction of project namely 2 "Janak Nagari Row House" and also sold one plot of land during the year under appeal. The project namely "Janak Nagari" is an eligible project for deduction u/s. 80IB(10) of the Act. During the year under consideration, the assessee has disclosed net profit from the eligible project at Rs, 56,65,775/- which comes to 46.93% of gross turnover.
The A.O. after verification of fulfillment of the condition for eligibility of the deduction U/s. 80IB(10) of the Act restricted the deduction claimed U/s. 80IB(10) of the Act at 15%, which has resulted in disallowance of deduction U/s. 80IB(10) of the Act amounting to Rs. 37,41,576/-.
3. In appeal the Ld.CIT(A) deleted the addition by observing as under :
"4.2 I have carefully considered the facts of the case, the assessment order and the position of law on the issue. The A.O. has given the following reasons for impugned disallowance at para No. 07 of his order:-
"07. On perusal of P & L Account for the year under consideration, it is noticed that the assessee has debited various expenses related to its business but the expenses which the eligible business would have mandatorily incurred have not been claimed by assessee in its profit and loss account. The firm has decreased the cost of sales or project considerably and inflating the profits which are eligible for deduction under section 80IB(10) of the I.T.Act. it is interesting to note that the assessee even has not given interest on capital and remuneration to the partners, as these are taxable in the hands of partners. In place of interest and remuneration to the partners, the assessee firm has allowed withdrawal of capital from the firm by the partners, which has been directly credited to their capital account thereby avoiding tax liability in their hands. The place of business of the assessee and the constitution of the firms which partners are interested is the same and also the persons managing and getting benefits from assessee firm are same. Therefore it can be readily inferred that the expenses which were rightly borne by the assessee are not debited in the profit and loss account of assessee and are diverted to different project in which the partners of assessee firm are beneficially interested. This fact is evident from the capital account of the partners in the books of assessee firm, the profit and loss account of the assessee, profit and loss account etc."3
On the basis of above finding, the A.O. restricted the deduction U/s. 80IB(10) at 15%. On careful analysis of the reasoning given by the A.O. for disallowing the part of the deduction, it is seen that the A.O. has doubted the higher net profit rate disclosed by the appellant and he has proceeded on the basis of assumption that either the appellant has not debited certain expenses to its profit and loss account or the same are diverted to different projects in which the partners of the firm are beneficially interested. However, the A.O. has not adduced any iota of evidence or even pointed out any nature of the mandatory expenses which are not debited to profit and loss account. Further, the A.O. has not pointed out any instance of expenses of the appellant which is diverted to any associate concern. The said remarks are put by the A.O. in casual and general manner particularly when the appellant has produced books of account and also all bills and vouchers during the course of assessment proceedings. It is also pertinent that the A.O. has neither pointed out any defect in the books of account of the assessee firm nor the said books of account are rejected by him. The A.O. has also not doubted the reasonability of the expenses shown. The total expenses incurred on the project are also reasonable. The explanation offered by the Id A.R. of the appellant during the assessment proceedings with reference to higher profits in the eligible project is also not rejected by the A.O. In fact, the reasons stated by the appellant for higher rate of net profit of the eligible project are also reasonable. It appears that the A.O. has doubted the higher profit of the eligible project of the appellant mainly because the appellant has not debited the interest on capital to partners as well as also not paid remuneration to the partners. The A.O. is absolutely not justified in drawing such adverse inference when payment of interest on capital as well as remuneration to partners is not mandatory and, further, naturally the profits of the business shall be withdrawn by the partners. Hence, the basis given by A.O. for restricting the net profit of eligible project is arbitrary and based on surmises and has no legs to stand. The decision of Hon. Tribunal in the case of ACIT, vs Mangalmurti Constructions (ITA No. 796/PN/2006), also supports the appellant's case wherein there are instances of similar cases wherein the net profit from the eligible business U/s. 80IB(10) upto 50% disclosed has been accepted. Therefore, considering the above facts and the legal position, the A.O. is directed to allow deduction u/s. 80IB(10) of Rs.56,65,775/- as claimed by the appellant in the return of income. The impugned disallowance of Rs. 37,41,576/- is, thus, deleted. This ground of appeal is allowed,
4. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us with the following grounds :
"1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A)-I, Nashik was justified in deleting the disallowance of Rs. 37,41,576/-, in spite of the fact that assessee has inflated the eligible profit which were deductible u/s 80IB(10) of the Act by not debiting the expenses from Profit and Loss Account.
2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A)-I, Nashik was justified in accepting assessee's claim that eligible profit which is @ 46.93% of turn over as reasonable?4
3. The appellant prays that the order of the Ld. CIT(A)-I, Nashik may please be cancelled and the order of Assessing Officer may please be restored.
4. The appellant prays leave to add, alter, clarify, amend and or withdraw any grounds of appeal as and when the occasion demands."
5. We have heard the rival arguments advanced by the Ld. Departmental Representative, perused the material on record and the written submission filed by the assessee. We find identical issue had come up before the Tribunal in assessee's own case in the immediately 2 preceding assessment years. We find the Tribunal in ITA No.327/PN/2012 order dated 29-07-2013 for A.Y. 2008-09 has dismissed the appeal filed by the Revenue by observing as under ;
"4. After considering the rival submissions and perusal the material on record, we find that the Assessing Officer has made the impugned disallowance vide para 7 and 8 of his order by observing as under:-
"4.2 I have carefully considered the facts of the case, the assessment order, the rival submissions and the position of law on the issue. The A.O. has given the following reasons for impugned disallowance at para No. 07 & 08 of his order:-
07. " Deduction u/s. 80IB(10) of the Act is allowed after the necessary parameters or conditions are satisfied by assessee. While allowing the deduction it is necessary to verify the applicability of section 80IB(13) to the case of assessee. Section 80IB(13) in turn imports the applicability of section 80IA(10) of the Act. Section 0IA(10) of the Act mandates that when the Assessing Officer feels that the course of business between the assessee carrying on eligible business and any other person is so arranged that the assessee produces more than ordinary profits, the Assessing Officer shall take the reasonable profits that would have been derived from eligible business.
08. In the instant case from the facts discussed in above para 04 to
06 it is quite clear that the expenses which the eligible business would have mandatorily incurred have not been claimed by assessee in its profit and loss account. The firm has decreased the cost of sales or project considerably and inflating the profits which negligible for deduction under section 80IB(10) of the Act. It is interesting to note that the assessee even has not given interest on capital and remuneration to partners, as these are taxable in the hands of partners, assessee firm has allowed withdrawal of capital from the firm by the partners, which has been directly credited to their capital account thereby avoiding tax liability in their hands. The place of business of the assessee and the constitution of firms which partners are interested is the same and also partners managing and getting benefits from 5 assessee firm are the same. Therefore it can be readily inferred that the expenses which were rightly borne by assessee are not debited in the profit and loss account of assessee and are diverted to different project in which the partners of assessee firm are beneficiary interested. This fact is evident from the capital account of the partners in the books of accounts of assessee firm, the profit and loss account etc of both the project, the N.P. ratios of assessee's in the same line of business as that of assessee etc. in view of these facts provisions of sec. 80-IB(10) and 80-IA(10) of the Act are applied to the case of the assessee".
5. On the basis of the above findings, the Assessing Officer restricted the deduction u/s 80-IB(10) at 19% i.e. the net profit rate of the assessee in another project namely shiv Parvti Apartment. The reasoning given by the Assessing Officer for disallowing the part of deduction, the Assessing Officer has doubted the higher net profit rate disallowed by the assessee and he has proceeded on the basis of assumption that either the assessee has not debited certain expenses to its profit and loss account and the same are diverted to different projects in which the partners of the firm are beneficially interested. The Assessing Officer has not adduced any iota of evidence or even pointed out any nature of the expenses which are not debited to profit and loss account. Further, the assessing Officer has not pointed out any instance of expenses of the assessee which is diverted to any associate concern. The same remarks are put by the Assessing Officer in casual and general manner when the assessee has produced books of accounts and also bills and vouchers during the course of assessment proceedings. It is worth mentioning that the Assessing Officer has neither pointed out any defect in the books of account of the assessee firm nor the said books of accounts are rejected by him. The assessing Officer has not doubted the reasonability of the expenses shown. The explanation offered on behalf of the assessee during the assessment proceedings with reference to higher profits in the eligible project i.e. janak Nagari row house as compared with the profitability in the case of another project namely Shiv Parvati Apartment was also not rejected by the Assessing Officer. The explanation offered by the assessee in respect of reasons for difference in the net profit rate in both the projects appeared to be reasonable. The Assessing Officer has also made reference to provisions of sec. 80-IB(13) of the Act which in turn has reference to the sub-section (5) and (7) to (12) of sec. 80-IA of the Act. The relevant provisions are enumerated as under:
"80-IA. [Deductions in respect of profits and gains from industrial undertakings enterprises engaged in infrastructure development, etc. (5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that subsection for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
(6).....6
(7) The deduction] under sub-section (1) from profits and gains derived from an undertaking] shall not be admissible unless the accounts of the undertaking] for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub- section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.
(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date :
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
Explanation.--For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.
(9) Where any amount of profits and gains of an undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading "C-- Deductions in respect of certain incomes", and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be.
(10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.
(11) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertaking or enterprise with effect from such date as it may specify in the notification.7
(12) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger--
(a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place."
The Assessing Officer has invoked the provisions of sub-sec. (10) of sec. 80-IA only, the applicability of all the sub-sections 80-IA as referred to in sub-section (13) of section 80-IB examined as under.
"a. The sub-section (5) of section 80IA speaks of computation of Total Income of the undertaking as if the said undertaking was the only source of income of the assessee during the previous year relevant to the initial assessment year and also all subsequent year. In the present case the income of the eligible undertaking is calculated separately as if the said undertaking was the only source of income during the previous year relevant to the initial assessment year and also all subsequent year because in the present case there is no change in the income from the eligible undertaking even after considering sub-section (5) of section 80-IA.
b. The sub-section (7) of section 80IA puts the condition of getting the books of accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and furnishing report of such audit in the prescribed form. In the present case the appellant has got its books of accounts audited as per provisions of aw and also furnished the report of the auditors in prescribed Form No. 10CCB.
c. The sub-section (8) of section 80IA is applicable when there is transfer of goods or services to other business undertaking from eligible undertaking and vice versa, however in the present case, undisputedly, there is no such transfer of any goods or services to or from another business carried on by the assessee.
d. The sub-section (9) of section 80IA is applicable where the deduction in respect of profit from the undertaking is already claimed under section 80IA in any assessment year then the deduction to that extent shall not be allowed under other provisions of Chapter VIA under the heading "C - Deductions in respect of certain incomes", however in the present case the appellant has not claimed any such double deduction in respect of the income of the undertaking.
e. The sub-section (10) of section 80IA is applicable where there is any transaction between the assessee and other concern having close connection with the assessee, whereby the income of the assessee from eligible undertaking is more disclosed, however in the present case it is a matter of fact that there is no any transaction at all entered by the assessee with any associate or close connected concern except payment of interest of Rs. 6,252/- to the person specified in section 40A(2)(b) of the Act.8
f. The sub-section (11) of section 80IA speaks about specific denial of deduction by Central Government by notification in Official Gazette, however in the present .case no any such notification is ever issued by Central Government which would result in such denial of deduction to the appellant."
6. From the above, it is found that the claim of the assessee u/s 80-IB(10) is not hit by any of the specified clause of sec. 80-IA as referred to in section 80-IB(13) of the Act. Hence, the Assessing Officer's action in this regard was contrary to the facts on record. The assessee has fulfilled all the conditions for deduction u/s 80-IB(10) of the Act and its denial to the assessee was not justified. The variation is not justified for making the disallowance of deduction. This reasons finding of the CIT(A) needs no interference from our side who has deleted the disallowance made by the Assessing Officer mainly on the comparison of the net profit. Moreover, the Assessing Officer has not brought on record to negate the claim of the assessee in its facts and circumstances. Accordingly, the order of the CIT(A) is upheld.
7. In the result, the appeal of the Revenue is dismissed."
5.1 Similarly, the Tribunal vide ITA No.990/PN/2012 order dated 12-09-2012 for A.Y. 2009-10 has also dismissed the appeal filed by the Revenue by observing as under :
"5. After going through the rival submissions and perusing the material on record, we find that the Assessing Officer has based his addition mainly on the basis of report of Shri Mahendra C. Shirsat, who has estimated the cost of construction in F.Y. 2008-09 at Rs. 683/- per sq.ft. The second reason stated by the Assessing Officer in support of the disallowance is that the assessee has not maintained the quantity details of sand, steel, cement, murum, tiles, grits, wood, kaddapa, marble, glass fabrication, plumbing material, taps, sinks, wash basin, commodes and boulders. The Assessing Officer was of the view the assessee has to prove the expenditure booked to justify that the said expenditure is sufficient for constructing the row houses. In the absence of the above details, the Assessing Officer was of the opinion that the assessee has understated the expenditure actually required for construction as stated by the Assessing Officer. The Third reason stated by the Assessing Officer is that one Shri Ganesh Sakharam Ahire, who is assessed to tax with ITO Ward 1(1), Nashik, has undertaken project covered by section 80IB(10) of the Act and has declared profit for A.Y.2009-10 at 13.08%.
6. The first reason for disallowance of deduction u/s. 80IB(10) of the Act is based on the report of the consulting engineer. In the absence of provision in the Act for reference, the Assessing Officer was not justified for seeking opinion from said Engineer. The Assessing Officer has not made any reference to the departmental valuer. Therefore, reference made to Shri Mahendra Chandrabhan Shirsat by way of a simple letter dated 25/11/2011 to be unauthorized and was not in accordance with law as found by the CIT(A). Moreover, the Consulting Engineer has submitted general estimate of cost per sq.ft.9
required for construction. The said estimate could not be adopted as the same is not based on actual inspection of the construction carried out by the assessee. According to us, CIT(A) was justified to hold that Assessing Officer was not justified in making disallowance on this reasoning.
7. The second reason stated by the Assessing Officer is that the assessee has not maintained quantitative details of sand, steel, cement etc. required for construction. The Assessing Officer was therefore of the opinion that the assessee has not proved the expenditure actually required for construction was not understated and has shown excessive profit. In this regard the stand of the assessee has been that the material was purchased as and when required on sites and immediately utilized for construction. So, there is no need to maintain such record and it is also not a trade practice to maintain such record. In this regard, it was pointed out on behalf of the assessee that there is no legal requirement to maintain such quantitative record of raw material, which is immediately used in construction after purchase. The assessee has maintained regular books of accounts and the same are audited. The auditor has not pointed out any discrepancy and has certified the book results to be true and fair. Moreover, the Assessing Officer has not rejected the book results and the books of accounts u/s. 145 of the Act, while estimating profit at much lower figure compared to the profit as per audited books of accounts. In view of the above facts the CIT(A) was justified in holding that the Assessing Officer was not justified in disallowing part deduction u/s. 80IB(10) of the Act on this reasoning.
8. The third reason stated by the Assessing Officer is that one Shri Ganesh Sakharam Ahire, who was assessed to tax with ITO Ward 1(1), Nashik, had undertaken project covered by section 80IB(10) of the Act and has declared profit for A.Y.2009-10 at 13.08%. In this regard, it has been pointed out on behalf of the assessee that the department has accepted profit percentage of construction business @ 40% to 50% in the cases where deduction has been claimed u/s. 80IB(10) of the Act and referred to in the decision of Hon'ble ITAT, Pune in the case of ACIT Vs. Mangalmurti Construction (ITA No. 796/PN/2006. The CIT(A) has also observed that the percentage of profit cannot remain identical and is bound to be different in respect of different housing projects depending upon the market conditions, location, cost of the land incurred etc. In the case of Shri Ganesh Sakharam Ahire the net profit was declared @ 13.08% of the total turnover. The Assessing Officer has collected financial details of the third party and used the same against the assessee without affording the assessee to cross examine the said party as well as financial statements and to offer explanation in this regard so as to bring on record, how the facts of the case of the party relied on by the Assessing Officer are different from the facts of the case of the assessee. The result of the third party cannot be used against the assessee adversely without providing due opportunity of hearing to the assessee, which is violation of principles of natural justice. The CIT(A) was justified in rejecting this reason of the Assessing Officer as well. Moreover, various reasons in support of the higher percentage of profit earned by the assessee were brought to the knowledge of the CIT(A). According to the assessee, the land on which the project was constructed was purchased as agricultural land and then converted into non-agriculture and therefore, used for the housing project and hence the land cost is on lower side. The land cost is a major cost of any housing project and the prices of the land have increased rapidly at the relevant point of time which resulted into higher profit percentage of the housing projects of the assessee. Apart from this, the Assessing 10 Officer was not justified as the assessee has fulfilled all the conditions specified in section 80-IB(10) of the Act to avail the deduction under the said section. Further, there is no provision in the income-tax to disallow part of the deduction u/s 80-IB(10) of the Act as done by the Assessing Officer. In the facts and circumstances, the CIT(A) was justified in deleting part disallowance of deduction u/s 80-IB(10) of the Act to the extent of Rs.63,14,430/-. The reasoned finding of the CIT(A) needs no interference from our side. The same is upheld.
9. In the result, the appeal of the Revenue is dismissed."
5.2 Since during the impugned assessment year the assessee has continued the construction of the same project which is otherwise eligible for claiming deduction u/s.80IB(10) of the I.T. Act and since the Tribunal in assessee's own case in the immediately 2 preceding assessment years has upheld the order of the Ld.CIT(A) in deleting the disallowance made by the AO and the Department has not preferred any appeal against the order of the Tribunal (as stated by the assessee in its written submission and not controverted by the Ld. Departmental Representative), therefore, we do not find any infirmity in the order of the CIT(A) deleting the disallowance made by the Assessing Officer for this year also. We accordingly uphold the same and the grounds raised by the Revenue are dismissed.
6. In the result, the appeal filed by the Revenue is dismissed.
Pronounced in the open court on 25-08-2014.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune Dated: 25th August, 2014
Satish
11
Copy of the order forwarded to :
1. Assessee
2. Department
3. The CIT(A)-I, Nashik
4. The CIT-I, Nashik
5. The D.R, "A" Pune Bench
6. Guard File
By order
// True Copy //
Assistant Registrar
ITAT, Pune Benches, Pune