Case Law Details
ACIT Vs Chalet Hotels Ltd (ITAT Mumbai)
ITAT Mumbai held that the assessee had furnished sufficient evidences to justify the genuineness of the payments and therefore their mere non-attendance of summons, cannot be reason enough to disbelieve the genuineness of the transactions with them. Accordingly, addition u/s. 69C deleted.
Facts- Revenue has preferred the present appeal contesting against action of Ld. CIT(A) in deleting the addition made towards unexplained expenditure u/s. 69C of the Income Tax Act.
Revenue is contesting against the action of the Ld. CIT(A) in deleting the disallowance made by the AO under Section 14A of the Act in accordance with Rule 8D both while computing income under normal provisions and book profit u/s 11 5JB of the Act.
Conclusion- Hon’ble Bombay High Court in CIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. has held that, merely because the suppliers had not appeared before the Assessing Officer or the CIT(A), one could not conclude that the purchases were not genuine. The assessee has brought on record sufficient evidences to substantiate the genuineness of the purchases and therefore nonattendance of summons cannot be the sole reason to disallow the purchases.
Held that the assessee/vendors had furnished sufficient evidences to justify the genuineness of the payments and therefore their mere non-attendance of summons, cannot be reason enough to disbelieve the genuineness of the transactions with them.
Held that the assessee did not earn any exempt income during the relevant year, we uphold the action of Ld. CIT(A) deleting the disallowance made by the AO under Section 14A of the Act, both while computing income under normal provisions and book profit u/s 11 5JB of the Act. Accordingly these grounds of the Revenue are dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These are cross appeals preferred by the assessee and the Revenue against the following orders of the Ld. Commissioner of Income Tax (Appeals)-52, Mumbai [in short ‘CIT(A)’].
|
Name of Assessee |
AY | Date of order of Ld. CIT(A) | ITA No. |
| M/s Magna Warehousing & Distribution Pvt Ltd [since merged with M/s Chalet Hotels Ltd (in short ‘assessee’)] | 2012-13 | 26.03.2021 | 928/Mum/2021 (Assessee) |
| 2012-13 | 26.03.2021 | 2511/Mum/2021 (Dept) | |
| 2013-14 | 26.03.2021 | 930/Mum/2021 (Assessee) | |
| 2013-14 | 26.03.2021 | 2510/Mum/2021 (Dept) | |
| 2014-15 | 26.03.2021 | 2513/Mum/2021 (Dept) | |
| 2016-17 | 17.06.2021 | 2507/Mum/2021 (Dept) | |
| M/s Genext Hardware & Parks Pvt Ltd [since merged with assessee] | 2014-15 | 06.08.2021 | 1756/Mum/2021 (Assessee) |
| 2015-16 | 06.08.2021 | 1755/Mum/2021 (Assessee) | |
| 2016-17 | 06.08.2021 | 1754/Mum/2021 (Assessee) | |
| M/s Chalet Hotels Ltd | 2017-18 | 17.06.2021 | 1401/Mum/2021 [Assessee] |
| 2017-18 | 17.06.2021 | 2505/Mum/2021 [Dept] | |
| 2018-19 | 17.06.2021 | 1400/Mum/2021 [Assessee] |
Since the issues involved across these appeals are common, all of them were heard together. Both the parties also argued them together raising similar arguments on the common issues. Accordingly, for the sake of brevity, we dispose all these appeals together.
2. Before we advert to the grounds taken in the appeals, it would first be relevant to cull out the basic facts of the case. Search u/s 132 of the Income Tax Act [in short ‘the Act’] was conducted against the K Rahej a Group on 30.11.2017. Having regard to the date of search, the Assessing Officer [in short ‘AO’] had reopened the six assessment years immediately preceding the searched assessment year, i.e. AY 2018-19 and those AYs were AYs 2012-13 to 2017-18. The summary of the additions/disallowances, in Rupees, made by the AO which are in dispute in the cross appeals enumerated above for AYs 2012-13 to 2018-19, are as follows:
Issue |
2012-13 |
2013-14 |
2014-15 |
2015-
|
2016-17 |
2017-18 |
2018-
|
Unexplained expenditure u/s 69C [in the hands of Magna Warehousing & Distribution Pvt. Ltd. since merged with Chalet Hotels
|
5,92,69,560 |
8,71,87,346 |
1,52,49,750 |
– |
4,00,214 |
– |
– |
Unexplained expenditure u/s 69C [in the
|
– |
– |
31,622 |
– |
– |
– |
– |
Depreciation on CWIP |
Consequential to the above issue |
||||||
Disallowance u/s 14A |
– |
– |
16,04,12,564 |
– |
31,62,06,295 |
6,51,53,018 |
– |
Deemed rent on vacant properties |
– |
– |
2,64,03,585 |
– |
2,11,75,927 |
1,81,09,740 |
– |
Carry forward of STCL |
– |
– |
– |
– |
– |
57,22,815 |
– |
3. We first take up the appeals of the assessee (successor to M/s Magma Warehousing and Distribution Pvt Ltd), and the Revenue for AY 2012-13 in ITA(SS) Nos. 928 & 2511/Mum/2021. Ground No. 1 raised by the assessee in their appeal was not pressed and is therefore dismissed.
4. Ground No. 2 of the assessee’s appeal and Ground No. 1 of the appeal of the Revenue relates to the addition made by the AO by way of unexplained expenditure u/s 69C of the Act. For AY 20 12-13, the assessee had filed original return of income on 25.09.2012 declaring total loss of Rs.2,01,61,655/-. The income tax scrutiny assessment u/s 143(3) of the Act for AY 2012-13 was completed on 03.03.2015 at a total income of Rs. NIL. As the search was conducted on 30.11.2017, this AY 2012-13 is, therefore, an unabated assessment. After the search was conducted, the assessee filed a return in response to notice u/s 153A of the Act and thereafter statutory notices u/s 143(2) and 142(1) of the Act were issued calling for several information/details. The AO noted that in the course of search, the statement of Mr. N Krishnamohan, Vice President, Engineering of M/s K Raheja group was recorded u/s 132(4) of the Act. In the course of recording of statement and at Question Nos. 19 & 20, Mr. N Krishnamohan was required to provide the details of purchases and contractual payments made towards various projects undertaken by the Group at Bangalore. In his reply, the AO noted that, Mr. N Krishnamohan had provided the details of both purchases and contractual payments along with sample bills, which were executed by the assessee i.e. M/s Chalet Hotels Ltd. and M/s Magna Warehousing and Distribution Pvt Ltd & M/s Genext Hardware & Parks Pvt. Ltd. (both of which have since merged with the assessee). The AO noted that the Investigating Officer had brought to the notice of Mr. N Krishnamohan that eight vendors were not found at their given Bangalore addresses. The Investigating Officer had therefore required him to give his comments regarding the same, provide the year-wise details of the payments made to these parties, and also explain as to why the transactions with these parties should not be treated as non-genuine. The relevant extracts of the questions posed to Mr. N Krishnamohan and his answers in response thereto, as extracted at Pages 3 & 4 of the assessment order, are reproduced here‑ under:
“Q19 Please provide details of purchases and contract payments made for various projects undertaken by K Raheja Corp group companies in Bangalore.
Ans. Sir, I am providing the purchase and contract payment details of project completed/in progress at whitefield. These projects are executed by M/s Magna Distribution and Warehousing put ltd. I am also providing the purchase and contract details for the Koramangala project which is executed by M/s Chalet Hotel Pvt Ltd. (purchase/ contract details of whitefield project and koramangla project provided by deponent is annexed as Annexure A-2 and AnnexureA-3 respectively to this statement)
Q20: Please provide copy of bill of all purchase / contract party for whom payment has been made above Rs. 1 Crore for both Koramangala and Whitfield project.
Ans. Sir, I am providing copy of bills of all parties/ contractors for whom payment has been made more than Rs. 1 Crore.
Q25 Income tax Inspector Shri Abhay Singh Yadav was deputed to the address of the following purchase/contract parties of Whitefield project and Viverea project on 02.12.2017 to verify if the following parties really exist on the given address and conduct business in the normal course. The name and address of certain companies as per b I provided by you in Annexure A-2 and the date of last balance sheet filed as per MCA website information is as below.
1> Ms Saket Interiors Put Ltd, No.849, 4th Main, 12thCross, Indira Nagar, 1st Stage, Bangalore. Last balance sheet filed on 3 1.03.2015
2> Total Environment Wood Work Put Ltd, Survey No. 6/2, 2nd floor, Sarjapur Road, Kasavanahalli, Kalkondarhalli, Carmelaram Post, Bangalore 560035. Last balance sheet filed on 3 1.03.2014
3>Ceetech System (A unit of Kalappa Group), # 190, Kalappa House, Domlur Village, Bangalore-560071
4>Vistar Construction Pvt Ltd. Thimha Reddy Industrial Area, Basavanagar Road, Bangalore-560048. Last balance sheet filed on 3 1.03.2015
5> Tec Works Interiors India Put. Ltd, No.6, Dharmanna Garden, Near HMT layout, Dinnur, RTNagar, Banglore 560032.
Last balance sheet filedon 3 1.03.2015.
6>Kokal Interior Contracts Put. Ltd, No 615, A-9, 1st Block, Selvi Arcade, 3rd Floor, Rajajt Nagar, Banglore-560010. Last balance sheet filed on 31.03.2015
7> Sri Ranga Enterprises, No. 17, 15th Main Road, 6th Cross, J C Nagar, Mahalakshmipuram, Banglore-5 60086
8> Nina Concrete System Put Ltd No: 485, 1st Floor, 10th Main, 8th Cross, HAL 3rd Stage, Bangalore. 560075. Last balance sheet filed on 3 1.03.2015
On Inspection it was found that no company/concern with the above names were present at the above mentioned address.
Please offer your comments regarding the same.
Ans. Sir, When we did transaction with these companies these companies existed at the above location. Our payments to these companies are genuine and we have taken genuine services from these companies. I do not know why these companies are not available at the above addresses. I will provide detailed explanation in 7 days’ time.
Q.26 Please provide the year wise payment made to the above parties. Ans. Sir, I am providing year wise payment made to the above parties under various projects.
(Details of year wise payment to the suspicious parties provided by deponent is annexed as Annexure A-6)
Q.27 Please explain as to why your transaction with the parties mentioned in question no:25 should not be treated as non-genuine as these parties seem to be non-genuine as they were not found to be in operation in the addresses provided by you. Also as mentioned in question no: 25 above many parties have not filed return in the last two years.
Ans. Sir, I shall provide my reply in 7 days time.
Q28 TIN numbers of some of the parties with which you have had transactions were verified. It is sound that the TIN has been cancelled for Chourasia Interiors Put Ltd, Crystal Marble Put Ltd, Powerica limited DOU Division. The copy of TIN cancellation as downloaded from government website is shown to you which is annexed as Annexure A•7 to this statement.
Please offer your comments.’
Ans. Sir, I do not know why the TIN of the abovementioned parties are cancelled.
029 Please explain why the purchase/payment made to the parties as mentioned in above question should not be considered as bogus as these are parties whose TIN registration are cancelled.
Ans. Sir, these parties had valid TIN when we did our transaction. I don’t know why it is cancelled now. I will provide detailed reply in this regard in 7 days time.
Q30 Please provide the total year wise payment made to the parties mentioned in question 28 above.
Ans. Sir, I am providing the details of payment made to the following parties.
(Payment details provided by the deponent is annexed as Annexure A- 8 to this statement)”
5. The AO noted that in the post search proceedings, the assessee had provided explanations and details for these parties under the cover of letter dated 08.01.2018. The assessee had provided, (i) details of their new address/closure, (ii) status and PAN, (iii) company master data, (iv) relevant extracts from party’s websites, (v) copy of ledger and (vi) copies of invoices and work orders. In light of these findings noted by the Investigation Authorities, the AO is noted to have issued summons u/s 131 to all the eight parties identified by the Investigation Authorities at Question No. 25 in the statement of Mr. N Krishnamohan. According to the AO, only two (2) parties had responded to the summons and the following six (6) parties either did not reply or the summons were returned unserved.
i. M/s Saket Interiors
ii. Total Environment Woodwork Pvt Ltd
iii. Ceetech Systems
iv. Vistar Constructions Pvt Ltd
v. Tec Workshop Interiors (I) Pvt Ltd
vi. Nina Concrete Systems Pvt Ltd
6. Therefore, to ascertain the genuineness of the payments to the above-mentioned six parties, the AO made enquiries u/s 133(6) of the Act. According to the AO, however, either these notices remained un‑ served or the replies received from them were not satisfactory. The AO further noted that these parties had cancelled their TINs after few years. The AO thus held that the payments made to these six parties by the assessee in various years remained unverifiable. The AO observed that, mere filing of supporting bills/invoices and payment details, was not sufficient to justify the genuineness of the transactions and that the assessee failed to discharge its onus to establish such claim by producing relevant evidence/material in support thereof. The AO accordingly disallowed the payments made to these parties by way of unexplained expenditure u/s 69C of the Act across various years. While disallowing this amount, the AO noted that these expenses had been capitalized under the head ‘Work in Progress’ [in short ‘WIP’] and therefore reduced the same from the closing balances of the WIP in the respective years. Aggrieved by this action of the AO, the assessee preferred appeal before the Ld. CIT(A).
7. On appeal, the Ld. CIT(A) noted that although the AO had observed that the vendors did not respond to the notices, but the documents furnished by the assessee showed that most of these parties had directly responded to the AO’s letter and in some cases the vendors had filed their replies before the AO through the assessee. According to the Ld. CIT(A), the AO, for reasons best known to him, did not discuss these facts in the assessment order. Taking cognizance of the replies filed by these vendors before the AO, the Ld. CIT(A) analysed the documents & evidences furnished by each of them. The Ld. CIT(A) thereafter concluded that the transactions with five parties viz., (i) M/s Saket Interiors, (ii) Total Environment Wood Works Pvt Ltd, (iii) Tech Workshop Interiors Pvt Ltd, (iv) M/s Nina Concrete Systems Pvt Ltd & (v) Ceetech Systems were genuine and suitably evidenced. The Ld. CIT(A) therefore held that the payments made to them cannot be treated as unexplained expenditure. The Ld. CIT(A) however confirmed the disallowance in relation to the payments made to one party viz., M/s Vistar Constructions Pvt Ltd holding it to be not genuine. Aggrieved by this order of the Ld. CIT(A), both the assessee and the Revenue are in appeal before us.
8. We have heard both the parties and perused the material placed before us. It is noted that case of the Revenue hinges on the premise that the AO in the course of assessment had made enquiries from the vendors u/s 133(6) of the Act and since none of them responded to the same, that raised suspicion on the genuineness of the transactions. From the material placed before us, it is noted that, at the time of search, Mr. N Krishnamohan, Vice President, Engineering of the Group, was enquired regarding the vendors involved in execution of the real estate project. From the details obtained from him, the Investigating Officer had made spot enquiries at the respective Bangalore addresses of the vendors. According to the Investigating Officer, the Inspector did not find the eight (8) vendors at their respective addresses and thus confronted Mr. N Krishnamohan again with these field enquiries. To this, he is noted to have reiterated that they had indeed conducted transactions with these vendors and sought time to explain the same. We thus note that Mr. N Krishnamohan had neither admitted to any wrong-doing nor had he averred that these expenses were not genuine. In fact, the AO noted that, in the post search enquiries, the assessee had furnished the relevant contemporaneous evidences in support of the transactions with these eight (8) vendors. In this background, the AO again made enquiries u/s 131 of the Act from the eight (8) vendors, to which two (2) vendors responded. The AO accordingly accepted the genuineness of the transactions conducted with the two (2) vendors. The AO thereafter made enquiries u/s 133(6) of the Act from the remaining six (6) parties, which according to him, either went unserved or had not been properly complied with. The AO therefore held that the genuineness of the payments made to these vendors remained un-discharged, and hence disallowed the same u/s 69C of the Act, which is now impugned before us.
9. The Ld. CIT(A), on the other hand, is noted to have observed that, the AO’s findings regarding non-compliance of notices issued u/s 131/133(6) by the six (6) vendors was factually incorrect. After verifying the case records, the Ld. CIT(A) is noted to have tabulated the details of responses furnished by these six (6) vendors before the AO, which is as follows :-
| SL No | Name of The party | Details of information filed |
| 1 | Saket Interiors | i. Information filed before the AO on 13.12.2019 in compliance to notice u/s 133(6) dated 30.9.2019 received in the office of the DCIT on 26.12.2019
ii. Ledger account of assessee with the vendor filed. iii. Copy of Bank account statements filed |
| 2 | Total Environment Woodworks Pvt Ltd. | i. Reply filed by the Resolution Professional of the company to DIT (Investigation) on 20.2.2018 itself.
ii. The company has confirmed having worked for the assessee company. It has also informed that due to financial problems, the company was under liquidation at NCLT. Copy of newspaper advertisements declaring the insolvency of the company and its taking over by Resolution Professional provided. Being in liquidation, the company could not provide any further information |
| 3 | Ceetech Systems | i. Information filed before the AO on 14.10.2019 in compliance to notice u/s 133(6) dated 30.9.2019.
ii. PAN card, aadhar card and income tax returns for the concerned year filed. iii. Bank statement for the year April 2011 to iv. Before the AO, it was submitted that the vendor had discontinued their operations since over 4 years. Most of the staff were no longer working with the vendor. The vendor confirmed that they had carried out HVAC work for the assessee under various work orders. It was also submitted that in absence of staff and demise of their CA. the compliance was not complete. |
| 4 | Vistar Constructions Pvt Ltd | No response to notice u/s 133(6) issued by the AO. Assessee has filed an email correspondence with the vendor indicating their office address.
Before CIT(A), the assessee has provided a copy of letter addressed by Vistar Construction to the DDIT(Investigation) and is dated 9th March 2018. The letter does not bear any receipt stamp nor the signature of the authorized signatory matches with the enclosed documents. Further, this letter does not have any evidence related to actual work carried out by the company and hence, it is not found reliable as an evidence. |
| 5 | Tech Workshop Interiors (I) Pvt Ltd | i. Information filed before the AO on 13.12.2019 in compliance to notice u/s 133(6) dated 30.9.2019 received in the office of the DCIT on 26.12.2019.
ii. Ledger account of assessee with the vendor filed. iii. Copy of Bank account statements filed |
|
6 |
Nina Concrete Systems Pvt Ltd |
i. Information filed before the AO on 2.12.2019 in compliance to notice u/s 133(6) dated 30.9.2019 received in the office of the DCIT on 12.12.2019.
ii. Following documents filed before AO: 1. Ledger account of asses see with the vendor filed for FY 2013-14 and 2014-15. 2. Income tax audit report. 3. Income tax computation 4. IT Return acknowledgement. 5. Audited annual report and financial statements. 6. List of vendor’s business connection with company. 7. List of client’s business connection. 8. Copy of bank statements. 9. Details of main business – being water proofing services, repair and maintenance, trading of waterproofing material, labour work and supply. |
10. The Ld. DR appearing on behalf of the Revenue was unable to controvert the above findings of the Ld. CIT(A) regarding the fact that the vendors had indeed responded to the enquiries made by the AO, either directly or through the assessee. We therefore countenance the CIT(A)’s findings that the AO’s observations regarding noncompliance of his letters/notices by these six (6) vendors was factually untenable.
11. We now proceed to examine the genuineness of the transactions with these six (6) parties. The Ld. DR has argued that, irrespective of whether the vendors or the assessee, had filed the details/evidences in relation to these payments, the fact remained that none of these six (6) vendors attended the summons personally. He argued that the AO was unable to examine these vendors to ascertain the veracity of the transactions and thus contended that the AO had rightly disallowed these expenses for want of proper verification. Per contra, the Ld. AR contended that the assessee was engaged in the real estate business and was constructing a five-star hotel i.e. JW Marriot, Whitefield at Bangalore. According to him, such a large-scale project required the assistance and employment of several hundred vendors, material suppliers, labour contractors, service providers etc. The Ld. AR vociferously submitted that, out of the several hundred different vendors, which were engaged in the construction of the hotel, genuineness of only six vendors had been doubted by the AO. He pointed out that, these vendors had been engaged for specified tasks to be undertaken at the site at Bangalore across a period of three to four years for which they had setup local offices at or near the site of the project. The Ld. AR submitted that, expectedly after completion of the project, these vendors would have closed down their site/branch offices at Bangalore and cancelled their local TINs taken to discharge the state levies/taxes in Karnataka. He pointed out that, the search action had taken place 4-5 years after completion of the project and that in the course of search, Mr. N Krishnamohan, had provided the local site addresses of Bangalore of these vendors, which were available with him. The Ld. AR submitted that, understandably since these vendors had closed their site offices upon completion of the tasks/sites, it was natural for the Department to not finding them at their local addresses in Bangalore and that they had also cancelled their TINs. He pointed out that, when the AO confronted the assessee with the results of these field enquiries, the addresses of their corporate/ registered offices were provided. The Ld. AR showed us that, most of these vendors were based outside the city of Bangalore, i.e., in cities such as Mumbai, Delhi, etc. He therefore submitted that, the non-availability of these vendors at their erstwhile addresses or the non-service of summons at their local/site addresses of Bangalore, ought not to be viewed adversely. He illustrated the same by showing us that, the registered office of M/s Vistar Constructions Pvt Ltd. had always been C-23, Greater Kailash Enclave, Part-I, New Delhi – 110048 and therefore this vendor was not based out of Bangalore. The Ld. AR explained that they had only set-up a temporary shop/site at Bangalore for carrying out the project / contract obtained from the assessee and after completion of the hotel, they had shut down the same. Similarly, from the documents available on record, the Ld. AR showed us that, one of the vendors, M/s Total Environment Woodworks Pvt Ltd. was undergoing Corporate Insolvency Resolution Proceedings and therefore the Board of this company had remitted their office. The Ld. AR thus submitted that the non-compliance by this particular vendor also could not have been viewed adversely.
12. He further showed us that, these vendors were amongst the several vendors engaged by the assessee for the hotel project and for all practical purposes, the assessee cannot be expected to have a continuing relationship with each one of them or know their exact whereabouts, that too three to four years after completion of business with them. He also submitted that, since the project was complete, work orders had been executed, payments had already been made, the assessee no longer held influence over them to ensure proper and timely compliance to the summons issued by the AO. He pointed out that, when the AO informed the assessee regarding their noncompliance, the assessee had followed up with these vendors and had ensured that complete details and evidences were submitted before the AO. He showed us that, each of the vendors had submitted all relevant contemporaneous evidences in support of their transactions with the assessee and therefore mere non-compliance of summons cannot be reason enough to disbelieve the genuineness of these expenses. To corroborate his submission, the Ld. AR took us through the work orders and showed us that these vendors had been engaged for works/materials such as supply of furniture items like coffee, reception, console tables, credenza armchairs, decorative pieces of furniture, interior work etc. He argued that, it was not the case of the Investigating Officer that no such work was performed or that the materials claimed to have been supplied by these vendors was not found or was missing from the premises of the hotel. He thus submitted that when the complete details in support of the transactions with these vendors had been submitted and the same was also evidenced by the full-fledged hotel constructed at Whitefield, Bangalore, the AO was unjustified to doubt the genuineness of the expenditure paid to these vendors.
13. Having considered the submissions of both the parties, we are unable to subscribe to the primary contention raised of the Revenue regarding non-attendance of summons by these six vendors. For this, we gainfully refer to the judgement of the Hon’ble Bombay High Court in CIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. 372 ITR 619. The Hon’ble Court, while upholding the decision of this Tribunal, had held that, merely because the suppliers had not appeared before the Assessing Officer or the CIT(A), one could not conclude that the purchases were not genuine. The Hon’ble High Court, in that case, noted that the assessee has brought on record sufficient evidences to substantiate the genuineness of the purchases and therefore nonattendance of summons cannot be the sole reason to disallow the purchases.
14. In light of the ratio decidendi laid down by the jurisdictional High Court (supra), it is necessary for us to examine as to whether the documents/evidences furnished by the assessee/vendor were sufficient to substantiate the genuineness of the payments. We first take up the payments made to those five (5) parties, which were deleted by the Ld. CIT(A). Having perused the documents placed before us and the order of the ld. CIT(A), it is noted that both the assessee as well as the vendors had furnished relevant evidences in support of the payments / transactions. We find that the AO vide notice u/s 142(1) dated 23.01.2019 [Page 48 to 51 of Paper Book] had required the appellant to furnish details / documents in relation to the transactions with these six (6) vendors inter alia including nature and type of purchases, purchase order, agreements, details of loading/unloading, transport details, delivery challans, stock register, bank statement, excise invoice, order number, latest address of these parties etc. It is noted that the assessee under the cover of letters dated 14.10.2019 and 22.10.2019 had furnished the relevant evidences as sought for by the AO. On perusal of the same, it is observed as under:
i. M/s Saket Interiors : The assessee had explained that this vendor was rendering interior services and executing civil & structural work. Accordingly it was a composite contract with this vendor involving both material and labour and the work order dated 04.2013 is noted to have been furnished by the assessee. Perusal of the same shows that this vendor was engaged to render extra works in the King Room, Twin Room, Corridor and Junior Suite at the Hotel. Some of the works to be performed by them are noted to involve removal of tough-end glass to refixation of bathtub window glass, repainting of ceiling, repolishing of marble etc. and complete break-up of the pricing of each task has been set out corresponding thereto. Since it was a works contract, understandably there was no loading/unloading, maintenance of stock register, storekeeper certificate, delivery / transportation challan etc. involved. The assessee had also furnished their bank statement which demonstrated that the payments were made to this vendor depending upon the progress of work. The copies of the corresponding tax invoice was also placed on record by the assessee which shows that both VAT @ 14.5% and service tax @ 4.80% was levied and paid by the assessee. The said invoice also revealed that the registered-corporate office of the vendor was in Mumbai and that they had set-up a local office at Bangalore.
ii. Total Environment Woodwork Pvt Ltd :- It is noted that this vendor was a supplier of loose luxury furniture which were purchased by the assessee to enhance the interiors of their five‑star hotel project. The name of this vendor is noted to have been changed to M/s Quetzel Furniture Systems Pvt Ltd with effect 19.10.2015. The assessee is found to have submitted evidence that this vendor had complied with the enquiries made in the course of post-search proceedings. The assessee is also noted to have filed copy of the work order dated 03.02.2011 before the AO, perusal of which shows that they were required to supply loose furniture as specified in the Bills of Quantities (‘BOQ’) accompanying the work order. The vendor was first required to make mock-up furniture and upon obtaining approval from the assessee that the finished goods were required to be completed and supplied to the assessee. It is noted that the BOQ inter alia included supply of bed side tables, coffee tables, lounge chairs etc. The work order also laid down the payment terms to the vendor. The supporting tax invoices were also submitted by the assessee which also included the details of transportation, vehicle details etc. The bank statement evidencing payment of the tax invoices along with certificate of payments are also found to have been submitted by the assessee. All these documents are found placed at Pages 171 to 369 of paper book. The Ld. AR rightly explained that these loose furniture did not constitute any stockin-trade or stores and therefore there was no requirement of maintenance of any stock register or obtaining any certificate from store keeper. The assessee is also noted to have specifically pointed out to the AO that this vendor was undergoing IBC proceedings and therefore required the AO to address the IRP appointed by NCLT for future communications with this vendor. The relevant supportings in this regard as filed before the AO, are found placed at Pages 165 to 167 of Paper Book.
iii. Tec Workshop Interiors India Pvt Ltd :- This vendor was engaged to provide materials and also render interior services at the hotel project of the assessee. It is noted that the assessee had detailed work order which is found placed at Pages 370 to 439 of the Paper Book giving detailed description of each of the sub-tasks required to be performed by the vendor.
iv. Nina Concrete Systems Pvt Ltd :- It is noted that this vendor was engaged to provide waterproofing services and hence the nature of transaction was that of a works contract. Understandably therefore was no loading/unloading, maintenance of stock register, storekeeper certificate, delivery / transportation challan involved. The work order dated 19.03.20 13 is found placed at Pages 8 to 26 of the Paper Book filed for AY 2014-15 to 2016-17. It is noted to contain complete detailed description of the tasks to be performed and the items to be supplied along with the same which is noted to have been specified in the BOQ of the same work order. The sample copy of tax invoice was also placed on record by the assessee which shows that both VAT @ 14.5% and service tax @ 4.80% was levied and paid by the assessee. The said invoice also revealed that the registered-corporate office of the vendor was at Delhi and that they had set-up a local office at Bangalore. The assessee had also furnished their bank statement which demonstrated that the payments were made to this vendor after completion of the work order placed with them.
v. M/s Ceetech Systems :- It is noted that this vendor was engaged to HVAC (air conditioning) work for an apartment in Phase-I of the real estate project. The vendor is noted to be one of the authorized sales and service dealer for Samsung air conditioner. The work order dated 11.12.2012 shows that the vendor was required to place bank guarantee for contract performance and mobilization advance as well in relation to this contract. The technical specifications along with the approved make of materials were also set out in the work order. The BOQ is also noted to have formed part of the said work order. The tax invoice was also placed on record which shows that both VAT and service tax was levied by the vendor and paid by the assessee. The assessee had also provided the summary statement of each of the work order, corresponding invoices, details of payments etc. along with copy of bank statement to the AO.
15. Having taken note of the above, we find that the AO has not pointed out any specific infirmity or defect in these details furnished by the assessee. It is not the Revenue’s case that the above tasks/orders were not performed by them or that the search team did not find these items, furniture, tasks etc. installed or placed at the hotel premises. The AO has also noted disputed the central levies viz., excise duty / service tax by each of these vendors. It is not the case that these indirect central levies collected by them were found to be unpaid to the Central Government. Instead, the AO is noted to have simply emphasised on (a) the field enquiries conducted by search team which stated that there were not found at their given addresses and (b) that their local TINs were found to be subsequently cancelled, to justify the impugned addition. In this regard, as noted by us, from the documents! evidences placed before the AO, that three (3) out of these five (5) vendors were located outside Bangalore i.e. Chennai, Mumbai, Delhi etc. These vendors are noted to have set-up temporary branch!site offices at Bangalore to execute their work orders obtained from the assessee. The assessee and!or the vendor are noted to have brought this material fact to the attention of the Investigating Officer and!or the Assessing Officer. We thus find merit in the submission of the Ld. AR that the non-availability of these three (3) vendors at their local!branch addresses at Bangalore in the course of field enquiries which were conducted more than 4-5 years after completion of the hotel project cannot be viewed suspiciously. Similarly, it is not unreasonable for these vendors to have cancelled their local TIN ! VAT after completion of the works contract and!or closure of their branch office at Bangalore.
16. In respect of remaining two (2) vendors, it is noted that though M!s Total Environment Woodwork Pvt Ltd was based out of Bangalore, but it was undergoing CIRP proceedings before the NCLT and the fact that their business was under suspension along with the details of their IRP was brought to the notice of the AO. Hence, understandably their premises would have been found to be under temporary shut-down at the time of field enquiry and similarly their TIN ! VAT would have been cancelled or been under suspension as well. As far as M!s Ceetech Systems is concerned, it is noted that this was a proprietorship firm of a person named Mr Shinath, who in his submission before the AO had clearly averred that they had ceased operation since last four years and therefore he had left his premises and cancelled their TIN but still offered to personally appear before him. Overall therefore, it is noted that both the reasons for nonavailibility of these five (5) vendors at their Bangalore addresses and cancellation of their TINs are found to have been sufficiently explained by the assessee.
17. The Ld. CIT(A) is also noted to have elaborately examined the details/evidences furnished by each these five (5) vendors and therefore, for the sake of convenience, the relevant findings are extracted below :-
“(i) Saket Interiors – The AO has noted that the assessee did not respond to the notice u/s 133(6) of the Act issued by him. He also observed that TIN of the parties had been cancelled. He has inferred that since the parties are not in existence, the payments made to these parties are presumed not to be genuine. The assessee has produced the office copy of the reply filed by Saket Interiors before the AO in response to the notice u/s 133(6) of the Act. It is noted that the reply confirms the transactions with Magna / Chalet and the ledger account of the assessee and necessary bank details have been provided. The Letter of the vendor is dated 13th December, 2019 but has been filed in the office of the AO on 26th December, 2019 (being the date mentioned on the receipt stamp). Perusal of the bank account as well as the ledger account clearly reveals that the transactions noted in these accounts are not accommodation entries. There are no Cheque deposits and immediate withdrawals or vice versa. Further, the AO has not commented on the reply filed. The vendor has rendered a service which includes supply of materials and necessary work orders have been provided. There is no evidence of Saket Interiors being a bogus entity and its office address is in Mumbai while the site address was in Bangalore which was wound after completion of the contract. A search on the internet reveals website in the name of the vendor and various places where it is carrying on its activities. The vendor has a significant presence in Mumbai and offers services related to Hotels and commercial spaces. The website even refers to the work done by the vendor for Raheja Group at Whitefield, Bangalore. Clearly, the AO’s inference that the vendor is non-existent or that the vendor has not worked for the assessee is not based on sound evidences.
The amount paid to this party for work done by the party is found to be genuine and explained and the addition of the amount under section 69C is not found correct. The addition made is directed to be deleted
(ii) Total Environment Woodworks Pvt Ltd. -The AO has held that no reply has been received from the Vendor in response to notice /s 133(6) issued by him. He has also observed that TIN of the parties had been cancelled. He has inferred that since the parties are not in existence, the payments made to these parties are presumed not to be genuine. It is noted that the company has responded to the summons issued by the Investigation Unit by addressing a letter to the Director of Income Tax Investigation Unit 5(3), Mumbai. The letter has been written by one Sandeep Mukherjee, Director of M/s Quetzel Furniture Systems Pvt Ltd. It has been clarified in the letter that the company has changed its name from earlier name to Quetzel Furniture Systems Pvt Ltd. Copy of the necessary ROC documents have been provided. The RP has confirmed that they had worked on the Hotel Project of the appellant which had been invoiced and delivered as per plan. However, in light of the company landing up at NCLT being placed under corporate insolvency resolution process, the Board has been suspended and a Resolution Professional has been appointed for handling company affairs. The Director has submitted that necessary documentation would be available with the RP. He has also attached various newspaper advertisements related to insolvency proceedings as well as order of the NCLT Hence, it is not correct to say that the company has not replied to the department inquiries In light of the fact that the company is before NCLT and under corporate insolvency resolution process, it is clear that the Directors could not have produced the requisite documents. However, the genuineness of the company as well as the factum of work carried out by them has been amply demonstrated. The assessee has provided other requisite details. As such, the AO is incorrect in inferring that the expenditure made by the assessee was unexplained. The amount paid to this party for work done by the party is found to be genuine and explained and the addition of the amount under section 69C is not found correct. The addition made is directed to be deleted.
(iii) Ceetech Systems -The AO has noted that the assessee made a partial reply to the notice u/s 133(6) of the Act issued by him. He has also observed that TIN of the parties had been cancelled. He has refused to consider the reply as the vendor has failed to provide all the details sought in the notice u/s 133(6) of the Act. He has inferred that since the parties are not in existence, the payment made to these parties are presumed not to be genuine.
The documents filed by the assessee reveal that the reply to notice u/s 133(6) of the Act has been filed by the vendor on 14th October, 2019. In the reply, the proprietor of the firm Mr Shinath has offered to appear personally if so desired by the AO. The vendor works in the area of air conditioning and has rendered services relating to HVAC. It is also submitted by the vendor that they have ceased operation since last four years, most employees have left and the CA of the firm passed away recently and thus the firm has provided sufficient reason for part furnishing of information which is credible and acceptable. The reply reveals that the vendor was existing and has actually rendered services to the appellant. As such, the inference drawn by the AO that the party is a bogus or non-existing party is not found correct. The amount paid to this party for work done by the party is found to be genuine and explained and the addition of the amount under section 69C is not found correct. The addition made is directed to be deleted.
………….
(v) Tech Workshop Interiors (I) Pvt Ltd. – The AO has held that no reply has been received from the Vendor in response to notice is 133(6) issued by him. He has also observed that TIN of the parties had been cancelled. He has inferred that since the parties are not in existence, the payment made to these parties are presumed not to be genuine.
The assessee has produced the office copy of the reply filed by Saket Interiors before the AO in response to the notice u/s 133(6) of the Act The Letter of the vendor is dated 13th December, 2019 but has been filed in the office of the AO on 26th December, 2019 (being the date mentioned on the receipt stamp). It is noted that the reply confirms the transactions with Magna / Chalet and the ledger account of the assessee and necessary bank details have been provided. Perusal of the bank account as well as the ledger account clearly reveals that the transactions noted in these accounts are not accommodation entries. There are no deposits and immediate withdrawals or vice versa. Further, the AO has not commented on the reply filed. A search on the internet leads us to the website of the vendor wherein the work done for Chalet Hotels is prominently mentioned. It is clear that while the head office of the company is in Chennai, the letters were sent to temporary office in Bangalore. As such, neither the existence nor the genuineness of transaction are doubtful. The amount paid to this party for work done by the party is found to be genuine and explained and the addition of the amount under section 69C is not found correct. The addition made is directed to be deleted.
(vi) Nina Concrete Systems Pvt Ltd. -The AO has held that only partial reply has been received from the Vendor in response to notice /s 133(6) issued by him. He has also observed that TIN of the parties had been cancelled. He has inferred that since the parties are not in existence, the payment made to these parties are presumed not to be genuine
The details filed by the assessee reveal that the vendor has filed a detailed reply on 12 12 2019 (filed with the AO on the same day) which is enumerated above and which includes the annual financial statements, details of work done for the assessee, other customers with the company is working etc. The company is a genuine company having a turnover of Rs 136.45 crore and employee expenses of Rs 18 crore in FY 2014-15. The company has responded with various details as already listed above. The vendor is a works contractor which includes supply of material too. The vendor has filed its reply well in advance and the receipt stamp of the AO is clear on the office copy but the reason for not discussing this reply in the assessment order is not understood. Necessary documents have been filed by the vendor in addition to the basic documents line contract copy and work order which has already been filed by the assessee before the AO The AO has neither discussed the deficiencies in the documents filed by the assessee or the unacceptability of the documents filed by the vendor. Perusal of these documents clearly reveals genuineness of the services rendered. There is no evidence of the water proofing services having been rendered by any other party. As such, the inference drawn by the AO that the party is a bogus or non-existing party is not found correct. The amount paid to this party for work done by the party is found to be explained and the addition of the amount under section 69C is not found correct. The addition made is directed to be deleted.”
18. Having carefully perused the above analysis undertaken by the CIT(A) and upon examination of the documents/evidences pertaining to these five (5) parties, we see no reason to interfere with his findings. Even the Ld. DR for the Revenue appearing before us was unable to point out any factual infirmity or defect in the above findings given by the Ld. CIT(A). Hence, in light of the decision of Hon’ble Bombay High Court (supra), we hold that the assessee/vendors had furnished sufficient evidences to justify the genuineness of the payments and therefore their mere non-attendance of summons, cannot be reason enough to disbelieve the genuineness of the transactions with them. Accordingly, the Ld. CIT(A)’s order deleting the disallowance of expenses paid to these five (5) vendors is upheld.
19. Now we come to the vendor viz., M/s Vistar Constructions Pvt Ltd, whose genuineness of payments were held to be unproven by the AO and the same was confirmed by the Ld. CIT(A) as well. The reasons given by the Ld. CIT(A) upholding the action of the AO in this regard are noted to be as follows : –
“(iv) Vistar Constructions Pvt Ltd. -The AO has held that no reply has been received from the Vendor in response to notice is 133(6) issued by him. He has also observed that TIN of the parties had been cancelled. He has inferred that since the parties are not in existence, the payment made to these parties are presumed not to be genuine.
The assessee has submitted that an email response from the Vendor indicating that their main office at Greater Kailash, New Delhi remains the same. The communication received from the Vendor has been provided to the AO by the assessee along with the details of the company at MCA site which also has the same address. These documents have been provided to the AO by the assessee vide submission dated 14.10.2019 making him aware of change in address. Before me, the assessee has filed copy of a letter filed by the assessee before AO on 16th October, 2019. The letter does not carry any receipt stamp of the DCIT as visible in other documents filed before me and hence, it cannot be accepted as an evidence. It is also seen that the assessee has enclosed a letter from Vistar Constructions Private Limited dated 9th March 2018 addressed to DDIT (Investigation) Unit 5(3), Mumbai. Again, this letter does not have any receipt stamp of the receiving authority and the signature on this letter does not match the signature in the documents enclosed. As such, this letter cannot be accepted as valid evidence. Without prejudice to this fact, even the contents of this letter are found to be irrelevant to the matter. The three running invoices contained with this letter do not provide any evidence with respect to the actual work done. The part period bank account (only for one months ie, from 27.9.2013 to 15.10.2013) does not throw any light on the work done by the vendor. The income tax returns submitted in support of the activity do not indicate significant activity done by this vendor. The vendor is a works contractor but the labor payments are insignificant in the P&L account while huge administrative expenses are shown which do not support the factum of service.
In light of the above discussion, the submission made by the assessee in support of the service are not found sufficient. It is also noted that inspite of notice issued by the AO at address provided by the assessee, the vendor has not filed any reply to the AO and the email correspondence with respect to the new address is also made to the assessee. The documents filed in the letter purported to be written to the DDIT are not sufficient to prove the genuineness of the transaction. In absence of a proper response from Vistar Constructions, the AO has rightly held that either the Vendor is not existing or that the Vendor has not rendered any service to the assessee, In absence of any response from the Vendor, the action of the AO is upheld. The addition made by the AO under section 69C with respect to the transactions with Vistar Constructions Private Limited are upheld.”
20. Perusal of the above shows that, the Ld. CIT(A) did not point out any specific defect or infirmity in the contemporaneous evidences/ documents etc. furnished in support of the transaction. Rather, the Ld. CIT(A) is noted to have cited irrelevant considerations to dispute its genuineness. The first observation made by the Ld. CIT(A) is noted to be that, the letter which was filed by the assessee before the AO submitting the documents of this vendor did not bear any stamp. The Ld. CIT(A) therefore doubted as to whether these documents were actually filed in the course of assessment or not. To this, the Ld. AR explained that it is a common practice that the submissions/ documents are handed over the counter to the AO during the course of physical hearing/proceedings and therefore it is a common occurrence that such letters/documents would not bear any receipt stamp. He showed us that, it was not the case of the Ld. CIT(A) that these documents were not available in the assessment records, when the verification was conducted by him. We also note that, the index to the paper book bore certification that these documents were filed before both the lower authorities and that this certification has not been uncontroverted by the Revenue. Hence, this particular reasoning given by the Ld. CIT(A) to doubt the correctness of the expenses is held to be untenable.
21. The next observation of the Ld. CIT(A) was that, the signature on the letter submitted by the vendor was different that the signature found in the documents annexed to the letter. In this regard, the Ld. AR showed us that, this vendor had executed the works contract nearly five years ago from the date of search and therefore there was every possibility that the authorised signatory/accountant etc. of the vendor who had signed the documents back then, could have changed in the interim. The Ld. AR also rightly pointed out that, every entity has different persons in charge of different departments viz., purchases, sales, finance, marketing, taxation, etc. and therefore the persons who signed the works contract/invoices could be different from the person who was in charge of the taxation affairs of the company who has drafted and submitted the letter addressed to the AO. We thus do not find any merit in this particular finding of the Ld. CIT(A) as well.
22. Furthermore, from the material placed before us, it is noted that the vendor, M/s Vistar Construction Pvt Ltd was a regular income-tax assessee having PAN – AAACV1033H. Their financial statements for FY 2011-12, which was placed at Pages 591 to 614 of Paper Book, shows that the vendor had reported gross turnover of Rs.2376.49 lacs in the accounts for the year ended 3 1st March 2012. The vendor had filed income-tax return for AY 2012-13 declaring a total income of 255 lacs on which it had paid taxes in excess of Rs.75.89 lacs [Pg 590 of Paper Book]. Similarly, in AY 2013-14, this vendor had reported turnover in excess of Rs. 1066.45 lacs [Pg 571 of Paper Book] and had reported taxable income of Rs.5 1.54 lacs [Pg 562 of Paper Book]. It is also noted that, the transactions between the assessee and M/s Vistar Construction Pvt Ltd are supported by work orders and tax invoices. All the invoices raised by the vendor were subject to both State VAT and Service tax. It is not the case of the lower authorities that these tax invoices were found to be ingenuine or that these indirect taxes were not discharged by the vendor. The vendor is noted to have also filed their bank statement [Page 639 of Paper Book] which evidences the receipt of monies from the assessee. A perusal of the same shows that there were no immediate cash withdrawals from the bank account, which would otherwise raise suspicion. As far as noncompliance of summons is concerned, we note that, the documents furnished by the vendor clearly showed that their registered office was at Delhi and that they did not have any corporate/branch office in Bangalore. We thus find force in the Ld. AR’s contention that the AO/DDIT had erred in sending notices / conducting field enquiry at their erstwhile site office at Bangalore, which had since been shut down after completion of the hotel project. On these given facts therefore, we find that the reasons for non-service of notice issued to the vendor’s Bangalore site office stood explained. For the reasons as discussed in the foregoing, we accordingly hold that the lower authorities were unjustified in doubting the genuineness of the payments made by the assessee to M/s Vistar Construction Pvt Ltd. and thereby disallowing the same.
23. For the above reasons, therefore, we hold that the payments made by the assessee to the six (6) vendors in question were genuine and the disallowances u/s 69C made by the AO in this regard is held to be unsustainable. Accordingly Ground No. 2 of the assessee raised in AY 2012-13 is allowed and Ground No. 1 of the Revenue for AY 2012-13 is dismissed.
24. Overall therefore, the appeal of the assessee in IT(SS) No. 928/Mum/2021 for AY 2012-13 stands partly allowed and the appeal of the Revenue in IT(SS) No. 251 1/Mum/2021 stands dismissed.
25. We now take up IT(SS) Nos. 930/Mum/2021 (Assessee’s Appeal) and 2510/Mum/2021 (Department’s Appeal) for AY 2013-14. Ground No. 1 taken by the assessee in their appeal was not pressed and is therefore dismissed.
26. Ground No. 2 of the appeal of the assessee and Ground No. 1of the appeal of the Revenue relates to disallowance of Rs.8,71 ,87,346/- under the head CWIP by way of unexplained expenditure u/s 69C of the Act in relation to payments made to M/s Saket Interiors, M/s Total Environment Woodworks Pvt Ltd, Vistar Constructions Pvt Ltd & Tech Workshop Interiors Pvt Ltd. After considering the rival submissions, it is observed that, except variation in figures, the reasoning adopted both by the AO to justify this addition and the Ld. CIT(A) to allow partial relief is verbatim same as in AY 2012-13.
27. Following our reasons and conclusions recorded in Paras 13 to 23 above, we hold that the disallowance of Rs.8,71,87,346/- made by the AO u/s 69C of the Act was unsustainable both on facts and in law. We therefore direct the AO to delete the impugned addition made u/s 69C of the Act for AY 2013-14. Accordingly Ground No. 2 of the assessee’s appeal is allowed and Ground No. 1 raised by the Revenue in their appeal is dismissed.
28. Ground No. 2 taken by the Revenue is against the Ld. CIT(A)’s action of allowing the consequential depreciation on the Capital Workin-Progress (‘CWIP’). The facts concerning this ground are that, upon making the disallowance/s u/s 69C of the Act in relation to the expenses paid towards the real estate project to the above discussed six (6) vendors, the AO had adjusted / reduced the same from the cost of CWIP across the years. Consequent thereto the depreciation allowable was re-computed by the AO with reference to the reduced value of this capital asset each year and to that extent the depreciation claimed by the assessee was disallowed. This action of the AO was challenged in appeal before the Ld. CIT(A). Since the Ld. CIT(A) had partially deleted the disallowance/s made by the AO u/s 69C of the Act, he consequently directed the AO to re-compute the cost of CWIP and allow the depreciation thereon in accordance with law. Being aggrieved by this direction, the Revenue is now before us.
29. Both the parties fairly agreed that this ground is consequential to the preceding Grounds relating to addition/s made by the AO u/s 69C of the Act. Since we have already held that the addition/s made by the AO u/s 69C of the Act was unjustified, consequently the value of CWIP stands restored to the value as declared by the assessee in the return of income. As a corollary, the depreciation has to be allowed as claimed in the return of income. In light of the aforesaid observations, the AO is accordingly directed to re-work and allow the depreciation u/s 32 of the Act. Ground No. 2 of the Revenue therefore stands dismissed.
30. Overall therefore, the appeal of the assessee in IT(SS) Nos. 930/Mum/2021 for AY 2013-14 stands partly allowed and the appeal of the Revenue in IT(SS) No. 251 0/Mum/202 1 stands dismissed
31. We now take up the appeals in IT(SS) No. 2513/Mum/2021 filed by the Revenue for AY 20 14-15.
32. Ground No. 1 of this appeal relates to disallowance of Rs.1,52,49,750/- made u/s 69C of the Act by the AO in respect of payments made to M/s Nina Concrete Systems Pvt Ltd and M/s Ceetech Systems. After considering the rival submissions, it is observed that, except variation in figures, the reasoning adopted both by the AO to justify this addition and the Ld. CIT(A) to allow relief is verbatim same as in AY 20 12-13.
33. Following our reasons and conclusions recorded in Paras 13 to 23 above, we hold that the Ld. CIT(A) had rightly deleted the disallowance of Rs.1,52,49,750/- made by the AO u/s 69C of the Act. Accordingly Ground No. 1 raised by the Revenue in their appeal is dismissed.
34. Ground Nos. 2 to 4 raised by the Revenue is against the action of the Ld. CIT(A) deleting the disallowance made by the AO under Section 14A of the Act in accordance with Rule 8D both while computing income under normal provisions and book profit u/s 11 5JB of the Act. Facts in brief are that the assessee held investments in shares of various associate companies, none of which yielded any exempt income during the year. The AO however had applied the provisions of Section 14A read with Rule 8D to make disallowance to the tune of Rs.16,04,12,564/-. On appeal, the Ld. CIT(A) relying on the decision of the Hon’ble Bombay High Court in the case of Nirved Traders Pvt. Ltd. (ITA No. 149 of 2017) held that, in absence of exempt income, no disallowance u/s 14A was warranted. The Ld. CIT(A) therefore deleted the disallowance made by the AO. Aggrieved by this action of the Ld. CIT(A), the Revenue is now in appeal before us.
35. Heard both the parties. It is noted that similar issue had come up for consideration in assessee’s own case for AY 2015-16 in ITA No. 3747/Mum/2019. In that case, this Tribunal had held that the disallowance cannot exceed the exempt income. The relevant findings of the Tribunal are noted to be as follows :-
“We noted that the short point of dispute is whether the disallowance under Rule 8D(2)(iii) is to be restricted to the extent of exempt income i.e. dividend income earned by assessee at Rs. 13,17,233/- or the disallowance as suo-moto computed by assessee at Rs. 5,86,52,973/-. Here, we have gone through the decision of Hon’ble Supreme Court in the case of Maxopp Investments Ltd. (supra), wherein the Hon’ble Supreme Court has categorically held that the disallowance cannot exceed the exempt income. Hence, we delete the suo-moto disallowance made by assessee at Rs. 5,86,52,973/- and restricted the disallowance to the extent of exempt income claimed by assessee at Rs. 13,17,233/-. We direct the Assessing Officer accordingly.”
36. Applying the ratio decidendi laid down in the above decision (supra), since the assessee did not earn any exempt income during the relevant year, we do not see any infirmity in the action of the Ld. CIT(A) in having deleted the disallowance of Rs.16,04,12,564/- made under Section 14A read with Rule 8D(2).
37. The Ld. DR appearing for the Revenue however had cited the Explanation inserted in Section 14A by the Finance Act, 2022 by which even if an assessee did not earn any exempt income, the provisions of Section 14A would still apply. The Ld. AR has rightly pointed out that the amendment to Section 14A introduced by the Finance Act 2022 has been made applicable by the Legislature from Assessment Year 2022-23 and onwards and therefore did not have any application in the relevant AY 2014-15. We note that the Revenue had raised similar contention in the case of ACIT vs K Raheja Corporate Services Pvt. Ltd. (ITA No. 2521/Mum/2021). Rejecting the same, this Tribunal had held that the Explanation introduced in Section 14A of the Act by the Finance Act 2022 had prospective application. Accordingly, it was held that, if during the relevant year, the assessee has not earned any tax-free income, disallowance of expenditure u/s 14A of the Act was not permissible. The relevant findings in this regard are noted to be as follows:
“45. Having held so, the next question for our consideration is whether the following Explanation inserted by the Finance Act, 2022 in Section 14A of the Act is required to be retrospectively applied and fastened on the assessee or not.
“Explanation.–For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.”
46. In this regard, useful reference can be made to the decision of the Hon’ble Supreme Court in the case of M/s M.M. Aqua Technologies Ltd. vs. CIT (supra), in particular Para 22 thereof, wherein the Hon’ble Supreme Court has held that if the retrospectivity of a taxing statute is urged due to the use of the expression “for the removal of doubts” in the Statute, it cannot be presumed to be retrospective, if it alters or changes the law as it stood earlier. The relevant extracts of the decision of the Hon’ble Apex Court is as under:
“22. Second, a retrospective provision in a tax act which is ‘for the removal of doubts’ cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill. Inc. vs. CIT (2005) 12 SCC 717 as follows:
17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.
18. There was and is no ambiguity in the main provision of Section 9(1 )(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India . The word “earned” had been judicially defined in S.G. Pgnatale [(1980) 124ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income “arising or accruing in India”. The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, “income payable for service rendered in India”.
19. When the Explanation seeks to give an artificial meaning to “earned in India” and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively. This being the case, Explanation 3C is clarificatory – it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court.
24. Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate v. Inland Revenue Commissioner (supra) as followed by judgments of this Court – See Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 at paras 60 to 70 per Kapadia, C.J. and para 333, 334 per Radhakrishnan, J .”
47. According to Ld. AR, therefore the amendment brought in by Finance Act, 2022 cannot be said to be retrospective and for that proposition he cited the Constitution Bench decision of the Hon’ble Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. (supra) wherein it was held as under:
“42.1. “Notes on Clauses” appended to the Finance Bill, 2002 while proposing insertion of proviso categorically states that ‘this amendment will take effect from 1 .6.2002.’ These become epigraphic 1 words, when seen in contradistinction to other amendments specifically stating those to be clarificatory or retrospectively depicting clear intention of the legislature. It can be seen from the same notes that a few other amendments in the Income tax Act made by the same Finance Act specifically making those amendments retrospective. For example, clause 40 seeks to amend S. 92-F. Clause (iii-a) of S. 92-F is amended “so as to clarify that the activities mentioned in the said clause include the carrying out of any work in pursuance of a contract “. (emphasis supplied). This amendment takes effect retrospectively from 01.04.2002. Various other amendments also take place retrospectively. The Notes on Clauses show that the legislature is fully aware of three concepts :
i) prospective amendment with effect from a fixed date;
ii) retrospective amendment with effect from a fixed anterior date; and
iii) clarificatory amendments which are retrospective in nature.”
48. The above judgement of the Hon’ble Supreme Court was also taken note of by the Hon’ble Supreme Court in the case of M/s Snowtex Investment Ltd. vs. PCIT dated 30.04.2019 [Civil Appeal No(s). 4483 of 2019, Special Leave to appeal (c) No. 20017/2017] wherein the Hon’ble Supreme Court has explained the test to be applied to find out whether the intent of the Legislature/Parliament is to give retrospective operation of law and accordingly held as under:
“The Test to be applied is essentially one of the intent of the legislature .
28. In a more recent decision in Commissioner of Income Tax vs. Vatika Township Pvt. Ltd. (2015) 1 SCC 1, a Constitution Bench of this Court held thus:
29. In M/s. Vijay Industries (supra), decided on 1 March 2019, a three judge Bench of this Court held that the provisions of Section 80AB which were introduced by the Finance (No.2) Act, 1980 with effect from 1 April 1981 could not be regarded as clarificatory in The Court held that the provision was made with prospective effect and the amendment would not apply to assessment year 1979-1980 and 1980-1981 because the amended provision was brought on the statute book after the assessment years in question.
30. In conclusion, we therefore, hold that the amendment which was brought by Parliament to the Explanation to Section 73 by the Finance (No 2) Act 2014 was with effect from 1 April 2015 . In its legislative wisdom, the Parliament amended Section 43 (5) with effect from 1 April 2006 in relation to the business of trading in derivatives, Parliament brought about a specific amendment in the Explanation to Section 73, insofar as trading in shares is concerned, with effect from 1 April 2015 . The latter amendment was intended to take effect from the date stipulated by Parliament and we see no reason to hold either that it was clarificatory or that the intent of Parliament was to give it retrospective effect.
31. The consequence is that in A.Y. 2008-2009, the loss which occurred to the assessee as a result of its activity of trading in shares (a loss arising from the business of speculation) was not capable of being set off against the profits which it had earned against the business of futures and options since the latter did not constitute profits and gains of a speculative business.”
49. In view of the above therefore, in order to test whether the amendment brought in Section 14A of the Act, is retrospective or not, one has to apply the test as laid by the Hon’ble Supreme Court in the case of M/s Snowtex Investment Ltd.(supra) wherein the Hon’ble Supreme Court took note of the law laid down on this issue by the Constitution Bench in M/s Vatika Township Ltd. (supra) and held that the intent of the Parliament/Legislature needs to be looked into for ascertaining whether the amendment should be retrospective or not. In the case of Vatika Township Ltd. (supra), the Hon’ble Supreme Court held that the notes on clauses appended to the Finance Bill will throw light as to the legislative intent; because it has to be borne in mind that Parliament/Legislature is aware of three concepts before an amendment is brought in, which can be discerned from reading of the “Notes on Clauses” to the Bill which are (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature.
50. On the above touchstones, we note that the Memorandum explaining the Notes on Clauses of Finance Act, 2022 read as under:
“Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income as per the provisions of the Act (exempt income).
2.Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year.
3.CBDT issued Circular No. 5/2014, dated 11/02/2014, clarifying that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. However, still some courts have taken a view that if there is no exempt income during a year, no disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year, an assessee incurs an expense of Rs .1 lakh to earn non-exempt income of Rs.1.5 lakh and also incurs an expense of 20,000 /-to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued /received during the year, it amounts to holding that Rs.20,000/-would be allowed as deduction against non-exempt income of Rs.1.5 Lakh even though this expense was not incurred wholly and exclusively for the purpose of earning non-exempt income. Such an interpretation defeats the legislative intent of both section 14A as well as section 37 of the Act.
4.In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income .
5. This amendment will take effect from 1 st April, 2022.
6.It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income -tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.
7.This amendment will take effect from 1 st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.”
51. It is further noted the Notes of Clauses of Finance Act, 2022, is explicitly clear that the new Explanation will take effect from 1 st April, 2022 and therefore will accordingly apply to the Assessment Year 2022-23 and subsequent years. The relevant Notes to Clauses are as under:
“Clause 9 seeks to amend section 14A of the Income-tax Act relating to expenditure incurred in relation to income not includible in total income. The said section, inter-alia, provides that no deduction shall be allowed in relation to income which does not form part of the total income under the Income-tax Act. It is proposed to amend sub-section (1) of the said section to provide that notwithstanding anything to the contrary contained in this Act, for the purpose of computing the total income, no deduction shall be allowable in respect of expenditure incurred in relation to income which does not form part of the total income.
This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to have been always applied in a case where the income, not forming part of the total income, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not form part of the total income.
This amendment will take effect from 1st April, 2022.”
52. From the above, the legislative intent is clear, the amendment brought in by the Finance Act, 2022 on this issue as discussed, will take effect from First April 2022 and not before as contended by the Ld DR. In our considered view, therefore, the new Explanation inserted in Section 14A of the Act with effect from 01-04- 2022 cannot be applied in the assessment years under consideration for the present case as it is for AYs 2016-17 to 2018-19, and therefore according to us, the decisions cited in Paras 33 to 37 above continue to hold good and are binding upon us.”
38. We note that, following the above and the later judgment of the Hon’ble Delhi High Court in the case of PCIT Vs M/s Era Infrastructure India Ltd (ITA No. 204 of 2022), similar view has been expressed by the coordinate Bench of this Tribunal in the case of DCIT Vs Welspun Steel Ltd (ITA No. 2137/Mum/2021). The relevant findings are noted to be as under :-
“6. We have considered the rival submissions and perused the material on record. It is admitted position that the Hon’ble Bombay High Court and the Hon’ble Supreme Court have clearly held that disallowance under Section 14A of the Act cannot exceed the amount of exempt income earned by the Assessee during the relevant previous year. The stand of the Revenue is that amendments to Section 14A introduced by the Finance Act 2022 apply retrospectively and therefore, the aforesaid judgments no longer hold good. Whereas the contention of the Assessee is that the said amendments to Section 14A of the Act are prospective in nature and therefore, the order of CIT(A), passed by following the binding judgments of the Hon’ble Jurisdictional High Court, cannot be set aside by the applying the amended provisions of Section 14A of the Act.
7. We note that the Mumbai Bench of the Tribunal has, in the case of Assistant Commissioner of Income Tax- Circle 3(1)(1) Vs ITA No. 2137/Mum/2021 Assessment Year: 2015-16 Bajaj Capital Ventures (P.) Ltd.: [2022] 140 taxmann.com 1 (Mumbai – Trib.)[29-06-2022] and also in the case of Assistant Commissioner Of Income Tax Vs. K Raheja Corporate Services Private Limited [ITA No. 2521 to 2527], held that the amendments to Section 14A introduced by the Finance Act 2022 shall apply from Assessment Year 2022-23 and onwards. Further, Hon’ble Delhi High Court in the case of Principal Commissioner of Income-Tax (Central) -2 Vs. M/s Era Infrastructure India Ltd: [ITA No. 204 of 2022, decided on 20.07.2022] has rejected the contention of the Revenue that amendments to Section 14A introduced by the Finance Act 2022 shall have retrospective effect. Accordingly, Ground No.1 raised by the Revenue is dismissed.”
39. Respectfully following the above decisions (supra) and having taken note of the fact that the assessee did not earn any exempt income during the relevant year, we uphold the action of Ld. CIT(A) deleting the disallowance made by the AO under Section 14A of the Act, both while computing income under normal provisions and book profit u/s 11 5JB of the Act. Accordingly these grounds of the Revenue are dismissed.
40. Ground No. 5 taken in the appeal by the Revenue is against the CIT(A)’s action of deleting the deemed rental income of Rs.2,64,03,585/- taxed by the AO under the head ‘Income from House Property’ in relation to the unsold units held by the assessee at the end of the relevant year. The facts as noted are that, the assessee is engaged in the business of Real Estate development. The AO, in the course of the assessment, had noted that the appellant had a stock of completed units valuing Rs.44,37,57,735/- which were lying vacant and unsold. Referring to the decision of the Hon’ble Delhi High Court in the case of Ansal Housing Finance and Leasing Company (354 ITR 180), the AO held that the vacant units in the possession of the assessee are liable to be assessed at their notional rental income under the head ‘Income from house property’. Since the assessee failed to provide the Annual Lettable Value (ALV) of these vacant units, the AO estimated 8.5% of the value of inventory by way of notional rent income on these properties. The AO, accordingly, computed income of Rs.2,64,03,585/- under the head income from house property after allowing standard deduction for 30% u/s 24(b) of the Act. Being aggrieved by the order of the AO, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) relying on the decisions of this Tribunal in the cases of M/s Harware Construction Pvt Ltd (101 taxmann.com 168) & M/s Runwal Constructions (ITA No. 5408/Mum/2016) deleted the aforesaid addition made by the AO. Hence, the Revenue is now in appeal before us.
41. We have heard the rival submissions and perused the material placed before us. It is a fact on record that the assessee had unsold closing stock, which was lying vacant during the relevant AY 20 14-15. The AO is noted to have estimated the notional income by relying on the decision of the CIT vs Ansal Housing Finance and Leasing Company Limited (supra). We note that the coordinate Bench in the case of DCIT v. M/s. Inorbit Malls Pvt. Ltd. in ITA No. 2220/Mum/2021 dated 11.10.2022 has recently examined this particular issue and after considering the jurisprudence available on this subject [which was also relied upon by the Ld. CIT(A) and the assessee before us], has departed from the earlier position and answered the same in favour of the Revenue. The relevant findings of this Tribunal are reproduced hereunder : –
“7. We have heard the rival submissions and perused the relevant finding given in the impugned orders. The main controversy as raised in ground No.1 is, whether notional income from unsold units held as stock-in-trade can be assessed under the head, “income from house property”. It has been canvassed before us that, there are divergent views on this issue, one view proposed by the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Neha Builders (Supra) which is in the favour of the Assessee, whereas the other view has been proposed in the decision of the Hon’ble Delhi High Court in the case of the CIT Vs. Ansal Housing Financial Leasing Ltd. (Supra) which is in favor of the revenue. Therefore, judgment favorable the Assessee should be followed.
8. We have gone through the judgment in the case of CIT vs. Neha Builders, wherein following question of law was referred to the Hon’ble High Court: -.
“Whether, on the facts and in the circumstances of the case the rental income received from any property in the construction business can be claimed under the head of ‘Income from property even though they said property was included in the closing stock and expenses on maintenance were debited to the profit and loss account?”
The facts in that case was that the Assessee Company was engaged in the business of construction of property and one of the building property was included the closing stock in the balance sheet drawn for the business. The Assessee has filed the revised returned submitting that a part of its property was given on rent and the income derived on that basis should be computed under the head income from house property and not business income. The Hon’ble High Court, had noted the following facts:
“Assessee Company is engaged in the business of construction of property, one of the building properties was included in the closing stock in the balance-sheet drawn for the business. The assessee filed a revised return submitting that a part of its property was given on rent and the income derived on that basis should be computed under the head “Income from house property and not as business income. The Assessing Officer, during the course of the assessment proceedings, observed that the expenses on maintenance of the property were debited to the profit and loss account and so also the building was shown as stock-in- trade, therefore, the prop would partake the character of the stock and any income derived from the stock cannot be taken to be income from the property. The Tribunal allowed the appeal observing inter alia, that any dividend received on the shares or any interest received from the bank would be taken to be income from other sources, therefore, any income derived under the head of “rent” would also become income from the property, it accordingly allowed the appeal and directed reconsideration of the matter.”
8.1. The Hon’ble High Court, then observed and held as under;
“9. From the order passed by the learned Commissioner of Income-tax 7 (Appeals), it would clearly appear that the case of the assessee was that the company was incorporated with the main object of purchase, take on lease, or acquire by sale, or let-out the buildings constructed by the assessee. The development of land or property would also be one of the businesses for which the company was incorporated”.
10. True it is, that income derived from the property would always be termed as “income from the property”, but if the property is used as “stock-in-trade”, then they said property would become or par take the character of the stock, and any income, derived from the stock, would be “income” from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let-out the same, then that would be the “business” and the business stocks, which may include movable and immovable, would be taken to be “stock-in-trade”, and any income derived from such stocks cannot be termed as “income from property”. Even otherwise, it is to be seen that there was distinction between the “income from business” and “income from property” on one side, and “any income from other sources” The Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy.
From the statement of the assessee, it would clearly appear that it was treating the property as “stock-in- trade”. Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a “stock in-trade”.
Agreeing with the submissions made by Mr. Naik, learned counsel for the Revenue, we hold that the Tribunal was not correct in granting the appeal of the assessee.
For the reasons aforesaid, the reference deserves to be answered in favor of the Revenue. It is accordingly answered and stands disposed of No costs.”
9. Thus, there was no occasion by the Hon’ble High Court to deal and decide the case were the property shown in the closing stock was not rented and income was to be computed on the basis of some notional rent. Albeit there was actual rent received from the property which was included in the closing stock and the controversy was, whether the rental income derived from letting out the flat is assessable under the head income from house property or business income, which Hon’ble High Court held that it should be assessed as business income.
10 On the contrary, on this point, Hon’ble Jurisdictional High Court in the case of Mangla Homes Pvt. Ltd. Vs. ITO, reported in (2010) 325 ITR 281(Bombay) wherein, the Hon’ble Bombay High Court on the facts where the Assessee Company was incorporated with the object of dealing in properties and the main object of the company as contained in the memorandum of association was to carry on business of dealing and investment in properties, flats, warehouses, shops, commercial and residential houses. The ancillary object was to carry on business of leasing, hire purchase, renting, selling, re-selling or otherwise dispose of all forms of movable or immovable properties and assets including buildings, godowns, warehouses and real estate of any kind. The Assessee claimed by the assessee that the flat could not be sold because of recession in the market and hence it let out the flats on license basis for temporary period and earned monthly rental income as license fees. The assessee treated the said rental income as income from the business. The authorities below have concurrently found in favor of the revenue that the rental income cannot be treated as income from business and treated it as “income from house property” under section 22 of the Income-tax Act. The question thus raised was whether the Tribunal is right in so concluding that the rental income is an income from house property. Hon’ble High Court after referring to various decisions of the Hon’ble Supreme Court held that rental income owned by the Assessee was assessable as income from house property.
11. Then, again in the case of CIT Vs. Sane & Doshi Enterprises reported in (2015) 377 165 (Bombay), Hon’ble High Court held that rental income received from unsold portion of the property constructed by the Assessee Real Estate Developer is assessable as income from house property. The Hon’ble Jurisdictional High Court again after analyzing the entire jurisprudence and various judgments of Hon’ble Supreme Court, finally held that rental income received from unsold portion of property constructed by Assessee, Real Estate Developers is assessable as income from house property and not business income. The Hon’ble High Court had further observed that the treatment given in the books of account as stock-in-trade would not therefore, alter the character or nature of the income.
12. In another case of CIT Vs. Gundecha Builders reported in (2019) 102 taxmann.com 27 (Bombay), where the Assessee was engaged in the business of development of “Real Estate Project” rental income received from unsold portion of property constructed by it was assessable tax as income from house property.
13. Thus, in all these cases there was actual receipt rental income from the unsold stock of property and the controversy of whether income is to be assets under the head income from house property or business income. Hon’ble Bombay High Court in all the aforesaid decisions has taken a contrary view to judgment of Hon’ble Gujarat High Court in the case of Neha Builders and held that the rent received from property held as stock-in-trade and any rent received on such unsold closing stock, then income is assessable as „income from house property‟ and not as a “business income”.
14. The aforesaid ratio and principle, either of the Hon’ble Gujarat High Court or the Hon’ble Bombay High Court is not applicable on the facts of the present case, because, here in this case the Assessee had unsold units which were lying vacant and were in the possession of the Assessee Company. Assessing Officer held that these properties are liable to be taxed on notional rental income under the head „income from house property‟ on the basis of ALV. It is not a case that there is any actual receiving of rent as was the case before the Hon’ble Gujarat High Court and Hon’ble Bombay High Court. Had it been a case were Assessee have fetched rental income from the unsold stock, then following the principle laid down by the Hon’ble Bombay High Court same would have been assessed under the head income from house property.
15. Now, coming to the decision of Hon’ble Delhi High Court in the case of CIT Vs. Ansal Housing Finance & Leasing Company Ltd (Supra), one of the question of law referred before the Hon’ble High Court was as under;
“Whether the assessee was liable to pay income tax on the annual letting value of unsold flats owned by it under the head “income from house property”?
15.1 There the facts relevant to the issue raised relate to the addition on account of annual letting value (ALV) of flats, added on notional basis are that the assessee-company engages itself in the business of development of mini-townships, construction of house property, commercial and shop complexes etc. In the assessment completed for the year under consideration, the AO assessed the ALV of flats which the assessee had constructed, but were lying unsold under the head “Income from house property”. The assessee however, contended that the said flats were its stock-in trade and therefore the ALV of the flats could not be brought to tax under the head “Income from house property”. The AO however did not accept the stand of the assessee and therefore, added the notional value of unsold flats to the total income of the assessee. On appeal by the assessee, the CIT(A) however set aside the addition made by the AO. The revenue’s appeal to the Tribunal was unsuccessful.
16. Hon’ble Delhi High Court after referring to various judgments of Hon’ble Supreme Court, finally observed as held in under:
“In the present case, the assessee is engaged in building activities. It argues that flats are held as part of its inventory of stock-intrade, and are not let out. The further argument is that unlike in the other instances, where such builders let out flats, here there is no letting out and that deemed income which is the basis for assessment under the ALV method, should not be attributed. This Court is of the opinion that the argument, though attractive cannot be accepted. As repeatedly held, in East India, Housing & Land Development Trust’s case (supra) Sultan Bros’s case (supra) and Karan Pura Development Co. Ltd.’s case (supra) the levy of income tax in the case of one holding house property is premised not on whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership. Undoubtedly, the decision in Vikram Cotton Mills Ltd. case (supra) indicates that in every case, the Court has to discern the intention of the assessee; in this case the intention of the assessee was to hold the properties till they were sold. The capacity of being an owner was not diminished one whit, because the assessee carried on business of developing, building and selling flats in housing estates. The argument that income tax is levied not on the actual receipt (which never arose in this case) but on a notional basis, i.e. ALV and that it is therefore not sanctioned by law, in the opinion of the Court is meritless. ALV is a method to arrive at a figure on the basis of which the impost is to be effectuated. The existence of an artificial method itself would not mean that levy is impermissible. Parliament has resorted to several other presumptive methods, for the purpose of calculation of income and collection of tax. Furthermore, application of ALV to determine the tax is regardless of whether actual income is received; it is premised on what constitutes a reasonable letting value, if the property were to be leased out in the marketplace. If the Assessee’s contention were to be accepted, the levy of income tax on unoccupied houses and flats would be impermissible which clearly not the case is”.
17. Though, the judgment which has been referred by the Hon’ble Delhi High Court in the case in “East India Housing & Land Development Trust (Supra)”, “Sultan Bros” and “Karan Pura Development Company Ltd”. (Supra) wherein, in all the cases the issue whether the rental income received from the property is to be assessed as business income or income of house property. No where, the Hon’ble Supreme Court in any of the cases which has been referred by the Hon’ble Delhi High Court dealt with issue of notional rental income when the property held as stock-in-trade or closing stock which has not been actually let out, is liable to be taxed as income from house property. However, be that as maybe, there is no contrary decision of any other High Court and therefore, this decision Hon’ble Delhi High Court will have both binding and persuasive value. No direct contrary decision has been brought to our knowledge of any other High Court and we have already noted above that the decision of Hon’ble Gujarat High Court in the case of Neha Builder (supra) was not on the issue on notional rent from unsold stock. Therefore, it cannot be held that on this issue the judgment of Hon’ble Gujarat High Court is in favor of the Assessee and therefore, the judgment of Delhi High Court in the case of Ansal Housing Finance Leasing Company Ltd (Supra) should not be followed. Thus, in our opinion this Tribunal in the case of Dimple Enterprises vs. DCIT (Supra) as cited and relied upon by the Ld. DR has correctly appreciated this distinction.
18. One very important development took place post these judgments, that an amendment has been brought in the statute in section 23(5) which is applicable from AY 2018-2019 which reads as under:
“Where the property consisting of any building or land appurtenant there to is held as stock-in trade and the property of any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year form the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.”
It is trite that the said amendment has to be given effect prospectively from 01.04.2018 as mentioned in the Explanatory Notes to the provisions of the Finance Act, 2017. It is a cardinal principle of the interpretation that the normal presumption which respect to an amendment is that is applicable prospectively unless and until specifically stated otherwise. The logic behind such as interpretation is that the law should govern current ITA NO. 420, 263 to 266/MUM/2022 (A.Y: 2012-13) Moraj Building Concepts Pvt Ltd activities; i.e. to say “lex prospicit non respicit”, which means that “The Law looks forward and not backward.”
19. Now, that specific provision has been brought in the statute which provides that, if building or land held as stock in trade and the property has not been let out during the whole or any part of the previous year, then annual value of such property after the period of one year (which was increased 2 years), shall be computed as income from house property and up to period of one year/two years income shall be taken to be ‘nil’. Thus, when specific provision has been brought with the effect from 01.04.2018 which cannot be applied retrospectively, then in our humble opinion it cannot be imputed that ALV of the flats held as stock in trade should be taxed on notional basis prior to AY 2018-19. Without any legislative intent or specific provision under the Act, such notional or deeming income should not be taxed as cardinal principle, because assessee is not aware that any hypothetical income is to be shown when he has not received any real or actual income. In our view of Hon’ble Delhi High Court is too harsh an interpretation.
20. Since, even prior to the amendment, there is one High Court judgment of Hon’ble Delhi High Court which is directly on this issue and against the Assessee, therefore same needs to be followed. Accordingly, we hold that Assessing Officer is correct in computing ALV on notional rent on unsold stock, but with following riders and directions to the AO as discussed herein after.”
42. Following the above decision, we, in principle, uphold the action of the AO seeking to tax the notional rental income in relation to the vacant unsold units lying as stock-in-trade with the assessee at the end of the relevant AY. Hence, the order of the Ld. CIT(A) to that extent is reversed.
43. The next question before us is the manner of computation of ALV for arriving at the notional rental income assessable u/s 22 & 23 of the Act. It is noted that the AO had relied upon the decisions of ITO Vs Chem Mech (P) Ltd (83 ITD 427) and ACIT Vs Om Prakash & (2 SOT 1) to justify the estimation at 8.5% of value of inventory. The Ld. AR contended that the AO’s action of estimating rent at 8.5% of the value of inventory was arbitrary, without any basis and highly excessive. The Ld. AR brought to our notice the judgment of Hon’ble Bombay High Court in the case CIT Vs. Tip top Typography (368 ITR 330), wherein, it has been held that the municipal annual lettable value is definitely a safe-guide and can be considered to be bona fide rental value of the property. The Court however also held that, even the market rate in the locality is an approved method for determining the fair rental value. The High Court however caveated the same by observing that it can be applied only when the AO can bring reliable material and evidence to show that the annual municipal value does not represent the fair rental value, and only then can he resort to enquire about the prevailing market rate in the locality. Upon query from the Bench, the Ld. AR submitted that the municipal annual lettable value of the property in question was not available. He, however, submitted that, the estimation of rental value at 8.5% of value of inventory was highly excessive. He explained that in the decisions in the cases of ITO Vs Chem Mech (P) Ltd (supra) and ACIT Vs Om Prakash & Co. (supra) relied upon by the AO, the years in question were the 1990s which was prior to liberalization of the economy and that the demography, economic scenario, real estate prices, rental yields etc. were completely different and distinguishable. He pointed out that it was in the 2000s that the real estate sector in India saw a dramatic upswing and that the property prices were at an all-time high post 2000. Even the demography, lifestyle needs in metro cities underwent a complete change and that the property prices vis-à-vis the rental yields had changed drastically. The Ld. AR invited our attention to the rental yield analysis research report published by Knight Frank in the year 2018, a globally recognized real estate consultant, which is available in public domain. The Ld. AR showed us that the rental yields of properties in Indian metro-cities are generally 2%-3% p.a. He also referred to the recent report published by research website, www.moneycontrol.com in which, a survey conducted across India revealed that the rental yields in real-estate projects in metro cities was 2% p.a. The Ld. AR also explained that the reason for the lower rental yields was that, any real estate property yielded return primarily in two modes viz., (a) rent & (b) price appreciation. According to him, the return of 8.5% estimated by the AO was inclusive of both rental yield and price appreciation of the property. He demonstrated that out of the 8.5%, only 1%-2% generally comprised of rental yield and 6.5%-7.5% represented the price appreciation over a year. According to him, as the municipal value of the vacant units was not available, the notional fair rental value could otherwise be estimated at 1 .5%-2% of the value of the unsold inventory.
44. To further buttress his contention, the Ld. AR placed before us a copy of rent agreement entered into by one of their investors, Mr. S Pasupuleti with a tenant in the same premises. It is noted that the investor had leased out their premises being Flat No. 703 admeasuring 3260 sq ft for rent of Rs.4,80,000/- per annum in the FY 2017-18 which worked out to Rs. 147.24 per square feet. Reading of the rental agreement revealed that the flat was fully furnished and equipped with all fixtures, fittings and amenities and was ready to be occupied by the tenant. The relevant description of the premises, as noted from the said agreement, is set out below :-
“That the Lessor hat the LESSOR hereby grants to the LESSEE, lease to enter into and use and remain in the said premises along with the existing fixtures and fittings. As such the premises is provided with Six AC’s 8 No’s ceiling fans (all bed rooms, kitchen, maid room), 4 No’s Geysers in attached toilet, The premise is provided with 4 Ward robes in Bed rooms & kitchen with modular kitchen. All the rooms are provided with ample light fittings (29). Kitchen is provided with Hub and four burner stove. Master and Children bedrooms have wooden flooring. All four bathrooms have wall to wall mirrors and other fittings, in master bedroom toilet there is a glass partition separating the shower area. Kitchen is provided with fridge. All the bedrooms are provided with imported window blinds and living room is provided with double curtain rods. it is agreed that Lessee restores the scheduled premises to its proper condition except for normal wear and tear arising from day to day use.”
45. The Ld. AR has further brought to our notice that even the appellant had similarly let out a fully-furnished flat admeasuring 4375 sq ft with luxurious amenities and modern furniture, fittings etc. for annual rent of Rs.9,00,000/- which worked out to Rs.205.71 per square Referring to these two sample rent agreements, the Ld. AR argued that the rental value of the property nowadays was highly influenced by the quality of the amenities, fixtures, fittings, furniture etc. vis-à-vis a bare shell flat. The Ld. AR placed before us a comparative description of the furniture & fixtures made available in a luxuriously furnished flat (which was let out by them for Rs.205.71 / sq ft), fully furnished flat (which was let out by investor for Rs.142.74 / sq ft) and a bare-shell flat (which represented the stock of unsold flats lying with the assessee) to demonstrate the difference in amenities and consequently the variation in the rental rates.
46. The Ld. AR pointed out that, the rental agreements showed that the difference in rental yield between luxuriously furnished flat and fully furnished flat was almost 40%. Referring to comparative statement placed before us, he thus urged that, the rental rate of the fully furnished flat ought to be further discounted by 50% to arrive at the comparable rental yield of a bare-shell flat for AY 2018-19. The Ld. AR explained that, a bare-shell flat (unsold inventory) which did not even have basic amenities cannot be expected to earn equivalent rental yield of a furnished flat. According to him, therefore a reasonable expected return/rent of a bare-shell flat (unsold inventory) for AY 2018-19 would work out to Rs.73.62 per sq ft. The Ld. AR submitted that, this rental rate would require further inflation / escalation adjustment of 10% per year to arrive at the fair market value rates for AYs 2014-15, 2016-17 & 2017-18. The Ld. AR accordingly worked out the estimated fair rental value, in line with the aforementioned calculations, which is noted to be as follows :-
| Assessment Year | Rate per sq ft |
| 2014-15 | 48.30 |
| 2016-17 | 59.63 |
| 2017-18 | 66.26 |
47. The Ld. AR accordingly pleaded that the annual lettable value of the unsold inventories ought to be estimated in the range of 1.5% to 2%, as set out in the Table above. Per contra, the Ld. DR supported the action of the AO.
48. Having considered the rival submissions and the decision of the Hon’ble Bombay High Court (supra), we note that the annual municipal value of the property in question, which is otherwise the safe-guide for estimating of annual value, is not available. Accordingly, the prevailing market rate of the property in question has to be taken into account to ascertain the annual value of the unsold units for the purposes of Section 22 & 23 of the Act. Having perused the decisions relied upon by the AO to estimate annual value at 8.5%, we note that the years involved in these cases were 1988-89 & 1991- 92. We agree with the Ld. AR that the economics of real-estate sector, demography, people’s lifestyle, infrastructure in urban areas, overall economic scenario was vastly different and hence the estimation exercise undertaken in these decisions cannot be considered as a comparable barometer for the years in question before us. Instead, having regard to the research / survey reports cited by the Ld. AR, we find force in the assessee’s plea that the rental yield of 8.5% estimated by the AO on the value of the vacant inventory was excessive in today’s scenario. As noted from these market research reports, the rental yield of immovable properties in metro cities are generally in the range of 2-3% of the value of investment. We note that, this Tribunal in the case of DCIT Vs Rustomjee Evershine Joint Venture in ITA No. 1349/Mum/2022 dated 31.07.2023 has also countenanced the Revenue’s action of estimating rental yield at 2% of the value of unsold inventory.
49. It is also noted that the assessee and another unrelated party had let out premises in the same building at varied rates of Rs.205 per sq ft and Rs. 147 per sq ft respectively. The variation in the rental rates in the same premises is noted to be attributable to the quality and extent of amenities, fixtures, fittings, furniture etc. provided by the respective lessors. Having regard to the comparative details of a luxuriously furnished flat, fully furnished flat and bare-shell flat (unsold inventory), we find sufficient force in the Ld. AR’s plea that the fair rental rate of the unsold inventories, which were bare-shell accommodation, would indeed be lower than the rental rate of a fully furnished flat i.e. Rs.147 per sq ft. We find it fit to allow further discount of 40% to the comparative rental rate of a fully furnished flat. According to us, therefore, the fair annual lettable value of the unsold properties for FY 2017-18 would work out to Rs.88.20 per sq ft [147 X 60%]. We agree with the Ld. AR that this rate has to be further adjusted for inflation/escalation. For this, we take cue from the Cost Inflation Index (‘CII’), and the adjusted fair rental rate for the year in question before us is worked out as under :-
| Asst Year | CII | Rental Rate per sq ft per annum* |
| AY 2014-15 | 220 | Rs.71.33 / sq ft |
*Base Year – AY 2018-19 [CII-2 72] : Rental Rate – Rs.88.20/sq ft
50. In view of the above, the assessable deemed annual lettable value of the unsold inventory held by the assessee is calculated as follows :-
| Asst Year | Rental Rate per sq ft p.a. |
Unsold space (in sq ft) |
Gross Annual Lettable Value |
| AY 2014-15 | Rs.71.33 | 1,24,435 | Rs.88,75,949/- |
51. The AO is thus directed to re-compute and assess the gross annual lettable value of the unsold inventory as laid down in the table Needless to say, the same shall be further subjected to standard deduction u/s 24(b) of the Act. With these directions, this ground of appeal stands disposed. Accordingly, ground raised by the Revenue is partly allowed.
52. In the result, the appeal of the Revenue in IT (SS) No. 251 3/Mum/202 1 stands partly allowed.
53. We now take up the appeals in IT(SS) No. 2507/Mum/2021 filed by the Revenue for AY 2016-17.
54. Ground No. 1 of this appeal relates to disallowance of 4,00,214/- made u/s 69C of the Act by the AO in respect of payments made to M/s Nina Concrete Systems Pvt Ltd. After considering the rival submissions, it is observed that, except variation in figures, the reasoning adopted both by the AO to justify this addition and the Ld. CIT(A) to allow relief is verbatim same as in AY 2012-13.
55. Following our reasons and conclusions recorded while deciding the appeals for AY 2012-13, we hold that the Ld. CIT(A) had rightly deleted the disallowance of Rs.4,004,214/- made by the AO u/s 69C of the Act. Accordingly Ground No. 1 raised by the Revenue in their appeal is dismissed.
56. Ground Nos. 2 to 4 taken by the Revenue is against the Ld. CIT(A)’s action of deleting the further disallowance made by the AO u/s 14A of the Act in terms of Rule 8D. It is noted that the issue & facts relating to this ground is akin to Ground Nos. 2 to 4 taken by the Revenue in the appeal for AY 2014-15. Following our reasonings given while deciding the appeal for AY 2014-15, we uphold the Ld. CIT(A)’s action of deleting the disallowance u/s 14A of the Act both while computing income under normal provisions as well as book profit u/s 11 5JB of the Act. This ground therefore stands dismissed.
57. Ground No. 5 taken by the Revenue relates to the addition of Rs.2,1 1,75,927/- made by the AO by way of notional rental income under the head ‘House Property’ with reference to the vacant & unsold units held by the assessee at the year-end in its stock-in-trade. After considering the rival submissions, it is observed that, except variation in the number of units lying unsold and the relevant figures, the reasoning adopted both by the AO to justify this addition and the Ld. CIT(A) to allow relief is verbatim same as involved in the appeal in ITA No. 2513/Mum/2021 for AY 2014-15.
58. Following our reasons and conclusions recorded at Paras 41 & 42 above while deciding the appeals for AY 2014-15, we uphold in principle the order of the holding that the provisions of Section 22 & 23 of the Act was applicable in the relation to the vacant & unsold units held by the assessee at the year-end. Also, following the methodology as discussed and laid down in Paras 43 to 51 above, the fair annual lettable value of the unsold inventory is worked out as under :-
| Asst Year | CII | Rental Rate per sq ft per annum* |
| AY 2016-17 | 254 | Rs.82.36 / sq ft |
*Base Year – AY 2018-19 [CII-2 72] : Rental Rate – Rs.88.20/sq ft
59. In view of the above, the assessable deemed annual lettable value of the unsold inventory held by the assessee stands re-computed as follows :-
| Asst Year | Rental Rate per sq ft p.a. |
Unsold space (in sq ft) |
Gross Annual Lettable Value |
| AY 2016-17 | Rs.82.36 | 1,05,385 | Rs.86,79,509/- |
60. The AO is accordingly directed to re-compute and assess the gross annual lettable value of the unsold inventory, in the manner as laid down in the table above. The same shall also be subjected to standard deduction u/s 24(b) of the Act. Hence, this ground raised by the Revenue is partly allowed.
61. Overall therefore, the appeal of the Revenue in ITA (SS) No. 2507/Mum/2021 stands partly allowed.
62. We now take up the appeals in IT(SS) Nos. 1756/Mum/2021 filed by M/s Gentex Hardware & Parks Pvt Ltd for AY 2014-15. Before adverting to the grounds taken in this appeal, it is relevant to take note that, with effect from AY 2014-15, the Hotel Division of M/s Magma Warehousing & Distribution Pvt Ltd stood demerged into this assessee. The AO is therefore noted to have made addition/s u/s 69C in relation to the payments made by the transferor company, M/s Magma Warehousing & Distribution Pvt Ltd towards the hotel project and has made consequential disallowance of depreciation, basis the disallowance / reduction made to the cost of CWIP in the earlier assessments of M/s Magma Warehousing & Distribution Pvt Ltd, in the hands of the resulting company, M/s Gentex Hardware & Parks Pvt Ltd from AY 20 14-15 and onwards.
63. Ground No. 1 of the appeal relates to disallowance of 3 1,622/- made u/s 69C of the Act in respect of payments made to M/s Vistar Constructions Pvt Ltd. during the year. After considering the rival submissions, it is observed that, except variation in figures, the reasoning adopted both by the AO & Ld. CIT(A) to justify this addition is verbatim same as in the matters of M/s Magma Warehousing and Distribution Pvt Ltd (since merged with M/s Chalet Hotels Ltd) in AY 2012-13.
64. Following our reasons and conclusions recorded while deciding the appeals of M/s Chalet Hotels Ltd (successor to M/s Magma Warehousing & Distribution Pvt Ltd) for AY 2012-13 [Paras 13 to 23 above], we hold that the disallowance of Rs.3 1,622/- made by the AO u/s 69C of the Act was unsustainable both on facts and in law. We therefore direct the AO to delete the impugned addition made u/s 69C of the Act for AY 2014-15. Accordingly Ground No. 1 of the assessee’s appeal is allowed.
65. Ground No. 2 taken by the assessee is against the action of lower authorities denying the consequential depreciation claimed on the Capital Work-in-Progress (‘CWIP’). The issue and facts involved are noted to be analogous to Ground No. 2 of the Revenue’s appeal in the matters of M/s Magma Warehousing and Distribution Pvt Ltd (since merged with M/s Chalet Hotels Ltd) for AY 2013-14.
66. We accordingly follow our reasons and conclusions recorded while deciding the Revenue’s appeal for AY 2013-14 in the matters of M/s Magma Warehousing and Distribution Pvt Ltd (since merged with M/s Chalet Hotels Ltd) wherein we have held that the addition/s made by the AO u/s 69C of the Act was unjustified. We thus direct the AO to restore the WDV of the CWIP back to the value as declared by the assessee in the return of income. Consequentially, the reduction to the current year’s depreciation as well as the unabsorbed depreciation brought forward from the transferor company, made by the AO, stands This ground therefore stands allowed.
67. In the result, the appeal of the assessee in IT(SS) Nos. 1 756/Mum/202 1 stands allowed.
68. We now take up the appeals in IT(SS) Nos. 1755/Mum/2021 & 1 754/Kol/202 1 filed by assessee, M/s Gentex Hardware & Parks Pvt Ltd for AYs 2015-16 & 2016-17. The first ground taken in both these appeals relates to denial of consequential depreciation claimed on It is noted that this ground is akin to Ground No. 2 taken by this assessee in the appeal for earlier AY 2014-15. Following our reasonings given while deciding the appeal for AY 2014-15, the AO is directed to delete the disallowance made in relation to depreciation claimed by the assessee u/s 32 of the Act in the respective assessment orders for AYs 2015-16 & 2016-17. Hence, these grounds stands allowed.
69. Ground No. 2 taken in both these appeals relates to claim for deduction of education cess paid on income-tax, which has not been pressed by the assessee and therefore the same stands dismissed. Hence, both these appeals of the assessee in IT(SS) Nos. 1754 & 1755 /Mum/2021 stands partly allowed.
70. We now take up the appeal in IT(SS) Nos. 1401/Mum/2021 & 1400/Mum/2021 (Assessee’s Appeal) for AYs 2017-18 & 2018-19 respectively along with the appeal in IT(SS) No. 2505/Mum/2021 (Department’s Appeal) for AY 2017-18 . It is relevant to take note that, the Hotel Division of M/s Magma Warehousing & Distribution Pvt Ltd, which was demerged into M/s Genext Hardware and Parks Pvt Ltd with effect AY 2014-15, was subsequently again demerged & transferred to M/s Chalet Hotels Ltd with effect from AY 20 17-18 and The AO is therefore noted to have considered the reduced cost / WDV of CWIP, after adjusting for the disallowances made u/s 69C of the Act, in the earlier assessments of M/s Magma Warehousing & Distribution Pvt Ltd & M/s Gentex Hardware & Parks Pvt Ltd across AYs 2012-13 to 2016-17 and has accordingly re-computed and allowed reduced depreciation u/s 32 of the Act with reference to the aforesaid revised CWIP in the hands of the transferee company, M/s Chalet Hotels Ltd from AY 2017-18 and onwards.
71. Ground No. 2 of the assessee’s appeal for AY 2017-18 & sole Ground No. 1 of the assessee’s appeal for AY 2018-19 relates to denial of consequential depreciation claimed on CWIP. It is noted that this ground is akin to Ground No. 2 taken by the demerged company, M/s Genext Hardware & Parks Pvt Ltd in AY 2014-15. Following our reasonings given while deciding that appeal for AY 2014-15, the AO is directed to delete the disallowance made in relation to depreciation claimed by the assessee u/s 32 of the Act in the respective assessment orders for AYs 2017-18 & 2018-19. Hence, these grounds stands allowed.
72. Ground No. 1 of the assessee’s appeal for AY 2017-18 and Ground Nos. 1 & 2 of revenue’s appeal for AY 2017-18 relates to revised claim made by the assessee in the return filed u/s 153A of the Act for the relevant AY 2017-18 claiming brought forward short term capital loss of Rs.57,22,815/- from AY 2016-17 as opposed to long term capital loss of Rs.8,89,01,133/- as originally claimed by the assessee in the return filed u/s 139 of the Act. The assessee had explained that it had incurred short term capital loss of Rs.57,22,815/- on sale of shares of M/s Intime Properties Pvt Ltd which was erroneously regarded as long term in nature in the return of income filed for AY 2016-17 and consequently the assessee had erroneously claimed and carried forward long term capital loss of Rs. 8,89,01,133/- instead of short-term capital loss of Rs.57,22,815/- incurred on sale of shares to the relevant AY 2017-18. The appellant had revised this mistake in the return of income filed u/s 153A of the Act for AY 2017- 18 and accordingly claimed brought forward short-term capital loss of Rs.57,22,815/- from AY 2016-17. The AO in the assessment order passed u/s 143(3)/153A of the Act had denied this revised claim holding that new deduction or allowance cannot be claimed in the assessments framed u/s 153A of the Act. On appeal the Ld. CIT(A) is noted to have directed the AO to allow set-off for correct brought forward losses by observing as under :-
5.9 The case of the assessee represents an abated assessment. In such an assessment, the normal assessment and the assessment pursuant to search action merge into one. Hence, the normal scope of assessment is retained by the AO/assessee, in addition to further reliance on the findings of the search. Hence, it is wrong on the part of the AO to claim that no further valid claims can be made by an assessee through a revised return, In an abated case, the AO is free to conduct any type of inquiries and made any such addition which he deems fit irrespective of its connection with the search cases. Such freedom is to be allowed on either side. The assessee is also free to file revised return to make a valid claim before the AO within the specified time which the AO is duty bound to look into.
5.10 In the present case, the issue related to section 1 4A and set off of brought forward losses from current year income. The issue of disallowance u/s 14A will be taken up for discussion later. However, section 153A does not prohibit application of various provisions of the Act related to computation of taxable income of an assessee. This also includes set off of validly brought forward losses from income of the assessee. There is no provision in section 153A of the Act prohibiting such set offs or carry forwards. As such, the AO was not right in computing the income of the assessee ignoring the correctly brought forward losses, if any. As such, the AO was not correct in holding that such set off could not be allowed while computing income us 153A of the Act in case of an abated assessment. The AO is directed to allow set off of correctly brought forward losses. Ground no.1 is decided accordingly and is treated as allowed.”
73. Being aggrieved by the above order of the Ld. CIT(A), both the parties are now before us. It is not in dispute that AY 2017-18 is an abated assessment. According to Ld. AR once the year under consideration is held as “abated year”, it becomes open for an assessee to make a fresh claim which needs to be considered on merits and therefore he contended that the Ld. CIT(A) was well within his jurisdiction directing the AO to allow the correct claim for brought forward capital loss. According to him however, the AO had not allowed the claim for brought forward STCL of Rs.57,22,8 15/- of AY 20 16-17 since the said claim originally not allowed by this Tribunal in assessee’s case for AY 2016-17 vide their order in ITA No.1402/Mum/2021 dated 14.06.2022. The Ld. AR brought to our notice that the assessee had preferred Miscellaneous Application before this Tribunal in MA No.358/Mum/2022 pursuant to which the order dated 14.06.2022 was recalled and thereafter this Tribunal vide order dated 11.05.2023 directed the AO to verify and allow the claim for short term capital loss. He thus urged that the AO be directed to take cognizance of the same and accordingly allow the set-off for the STCL of AY 2016-17 while computing the taxable income for AY 2017-18. Per contra, the Ld. DR supported the action of the AO.
74. It is noted that identical issue has been considered by this Bench in the case of ACIT Vs Gigaplex Estate Pvt Ltd (ITA No. 2506/Mum/2021) dated 31.01.2023 and it was held that assessee had raise fresh/modified claim in the returns filed u/s 153A of the Act in relation to the abated assessment years. The relevant findings are noted to be as follows :-
“Considered the rival submissions and material placed on record. We observe that the assessee is earning income from the let of out of the premises situated in the SEZs and offered to tax in the original return of income filed by the assessee under the head income from House property. However, subsequent to the Search, while filing the return u/s 153A, it changed the head of income to declare the income from let out of premises under the head Income from Business and Profession. This action of the assessee was rejected by the Assessing Officer that the assessee cannot claim new benefit in the revised proceedings u/s 153A of the Act. However, Ld CIT(A) decided the issue in favour of the assessee considering the fact on record that the assessment years under consideration are abated, therefore, the assessee can claim fresh or modified claim. After considering the submissions of both counsels, we observe that this issue is well settled and the Hon’ble Bombay High Court held in the case of B.G. Shirke Construction Technology P Ltd (supra) that in the case of abated assessments the return filed u/s 153A replaces the return filed u/s 139 of the Act, for the sake of clarity, it is reproduced below:
“10. The reliance on the decision of the Apex Court in Sun Engineering Works (P.) Ltd. (supra) by the Revenue is misplaced. The above case dealt with re-opening of an assessment under Section 147 of the Act. It was in that context that the Apex Court observed that the Order passed under Section 147/148 and the Assessing Officer is primarily restricted to such income which has escaped assessment and does not permit reconsideration of issue which are concluded in the earlier assessment years in favour of the Revenue.
11. In the present facts for the subject assessment years it is an undisputed position that the pending assessment before the Assessing Officer consequent to return filed under Section 139(1) of the Act for the subject Assessment years had abated. This was on account of the search and as provided in second proviso to Section 153A(1) of the Act. The consequence of notice under Section 153A(1) of the Act is that assessee is required to furnish fresh return of income for each of the six assessment years in regard to which a notice has been issued. It is this return which is filed consequent to the notice which would be subject of assessment by the Revenue for the first time in the case of abated assessment proceedings. Consequent to notice under Section 153A of the Act the earlier return filed for the purpose of assessment which is pending, would be treated as non est in law. Further, Section 153A(1) of the Act itself provides on filing of the return consequent to notice, the provision of the Act will apply to the return of income so filed. Consequently, the return filed under Section 153A(1) of the Act is a return furnished under Section 139 of the Act. Consequently, the assessee-assessee is being assessed in respect of abated assessment for the first time under the Act. Therefore the provisions of the Act which would be otherwise applicable in case of return filed in the regular course under Section 13 9(1) of the Act would also continue to apply in case of return filed under Section 153A of the Act and the case laws on the provision of the Act would equally apply.
22. We observe that similar view was expressed by Hon’ble Bombay High Court while adjudicating similar issues in the case of JSW Steel Ltd (supra) and held as under: –
“13. In the present case, search was conducted on the assessee on 30-11-2010. At that point of time assessment in the case of assessee for the assessment year 2008-09 was pending scrutiny since notice under section 143(2) of the Act was issued and assessment was not completed. Therefore, in view of the second proviso to section 153A of the said Act, once assessment got abated, it meant that it was open for both the parties, i.e. the assessee as well as revenue to make claims for allowance or to make disallowance, as the case may be, etc. That apart, assessee could lodge a new claim for deduction etc. which remained to be claimed in his earlier/regular return of income. This is so because assessment was never made in the case of the assessee in such a situation. It is fortified that once the assessment gets abated, the original return which had been filed looses its originality and the subsequent return filed under section 153A of the said Act (which is in consequence to the search action under section 132) takes the place of the original return. In such a case, the return of income filed under section 153A(1) of the said Act, would be construed to be one filed under section 139(1) of the Act and the provisions of the said Act shall apply to the same accordingly. If that be the position, all legitimate claims would be open to the assessee to raise in the return of income filed under section 153A(1).
…..
16. From the above we conclude that in view of the second proviso to section 153A(1) of the said Act, once assessment gets abated, it is open for the assessee to lodge a new claim in a proceeding under section 153A(1) which was not claimed in his regular return of income, because assessment was never made/finalised in the case of the assessee in such a situation.
23. With regard to submissions made by the Ld DR that the Ld CIT(A) has ignored the decision of Sun Engineering Works (P) Ltd decision, we observe that the Hon’ble Bombay High Court already considered the above decision in the case of B.G Shirke Construction (supra) in the Para No.10 of the decision (refer para no 22 above). It held that the stand of the revenue is misplaced as the issue is relating to the assessment u/s. 147/148 of the Act, the same cannot be applied for the issue under consideration. Therefore, the submissions made by the Ld.DR are substantially answered.
24. Considering the above discussion, we are inclined to dismiss the grounds raised by the revenue in the appeal filed for the AY 2015-16. The issues raised in the appeal for the AY 2016-17 are mutandis mutatis, we are inclined to dismiss the grounds raised in that appeal as well.
25. In the result, appeals filed by the Revenue are dismissed.”
8. Moreover it has been brought to our notice that the revenue had challenged similar issue before the Hon’ble Bombay High Court in the case of CIT-II, Pune Vs. Magarpatta Township Development and Construction Co. Ltd., (ITA. No. 318 of 2015) wherein the Hon’ble High Court by order dated 19.11.2017 framed the relevant question of law as under: –
“(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that income derived from letting out of the premises of the I. T. Park was to be assessed as ‘Business Income’ when the true character of the income derived is income from property?”
9. And the Hon’ble High Court noted as under: –
“4. Reg. Question No.2
(a) Mr. Tejveer Sing, learned Counsel appearing for the revenue states that he is not pressing this question in view of the CBDT Circular No. 16 of 2017 dated 25th April, 2017. The above circular has clarified that income arising form the letting out of the premises in an Industrial Park/SEZ, are to be charged under the head “Profits and gains of business” and not under the head “Income from House Property”. It further directs the department to withdraw/not press any appeal, filed, seeking to tax income from letting out of the premises in an Industrial Park under the head “income from house property”.
(b) In view of the above, as the question is not being pressed, no occasion to consider the same arises.”
10. Since the Ld. CIT-DR could not point out any change in facts or law, respectfully following the order of this Tribunal in assessee’s own case DCIT Vs. Mindspace Business Park Pvt. Ltd. (supra) and the Hon’ble Bombay High Court in the case of CIT-II Pune Vs. Magarpatta Township Development and Construction Co. Ltd. (supra), we uphold the action of the Ld. CIT(A).”
75. Following the above decision (supra), we uphold the order of the Ld. CIT(A) allowing the revised/modified claim raised by the assessee regarding claim for set-off of brought forward correct losses from AY 2016-17. Coming to the issue of quantification of the brought forward short term capital loss of AY 2016-17 eligible for set-off in AY 2017-18, the AO is directed to re-compute and allow the loss, as finally quantified and allowed to be carried forward in AY 2016-17 upon giving effect to the appellate order/s, in accordance with law. Accordingly, Ground Nos. 1 & 2 of the Revenue’s appeal stands dismissed and Ground No. 1 of the assessee stands allowed for statistical purposes.
76. Ground Nos. 3 to 5 taken by the Revenue in AY 2017-18 is against the Ld. CIT(A)’s action of deleting the further disallowance made by the AO u/s 14A of the Act in terms of Rule 8D. It is noted that the issue & facts relating to this ground is akin to Ground Nos. 2 to 4 taken by the Revenue in the appeal in ITA No. 2513/Mum/2021 for AY 2014-15. Following our reasonings given while deciding the appeal for AY 2014-15, we uphold the Ld. CIT(A)’s action of deleting the disallowance u/s 14A of the Act both while computing income under normal provisions as well as book profit u/s 1 15JB of the Act. This ground therefore stands dismissed.
77. Ground No. 6 taken by the Revenue relates to the addition of 1,81,09,740/- made by the AO by way of notional rental income under the head ‘House Property’ with reference to the vacant & unsold units held by the assessee at the year-end in its stock-in-trade. After considering the rival submissions, it is observed that, except variation in the number of units lying unsold and the relevant figures, the reasoning adopted both by the AO to justify this addition and the Ld. CIT(A) to allow relief is verbatim same as involved in the appeal in ITA No. 2513/Mum/2021 for AY 2014-15.
78. Following our reasons and conclusions recorded at Paras 41 & 42 above while deciding the appeals for AY 2014-15, we uphold in principle the order of the holding that the provisions of Section 22 & 23 of the Act was applicable in the relation to the vacant & unsold units held by the assessee at the year-end. Also, following the methodology as discussed and laid down in Paras 43 to 51 above, the fair annual lettable value of the unsold inventory is worked out as under :-
| Asst Year | CII | Rental Rate per sq ft per annum* |
| AY 2017-18 | 264 | Rs.85.60 / sq ft |
*Base Year – AY 2018-19 [CII-2 72] : Rental Rate – Rs.88.20/sq ft
79. In view of the above, the assessable deemed annual lettable value of the unsold inventory held by the assessee stands re-computed as follows :-
| Asst Year | Rental Rate per sq ft p.a. |
Unsold space (in sq ft) |
Gross Annual Lettable Value |
| AY 2017-18 | Rs.85.60 | 82,465 | Rs.70,59,004/- |
80. The AO is accordingly directed to re-compute and assess the gross annual lettable value of the unsold inventory, in the manner as laid down in the table above. The same shall also be subjected to standard deduction u/s 24(b) of the Act. Hence, this ground raised by the Revenue is partly allowed.
81. Overall therefore, the appeals of the assessee in ITA No. 1400/Mum/2021 stands allowed, and the appeal in ITA No. 1401/Mum/2021 is allowed for statistical purposes and the appeal of the Revenue in ITA No. 2505/Mum/2021 stands partly allowed.
Order pronounced in the open court on this 30/08/2023.
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