IN THE ITAT MUMBAI BENCH ‘F’
Fortaleza Developers
Versus
Commissioner of Income-tax-15, Mumbai
IT APPEAL NO. 2648 (MUM.) OF 2012
[ASSESSMENT YEAR 2007-08]
OCTOBER 12, 2012
ORDER
I.P. Bansal, Judicial Member
This is an appeal filed by the assessee against order dated 27/3/12 for assessment year 2007-08 passed under section 263 of the Income Tax Act,1961 (the Act) by the Ld. CIT-15, Mumbai. The grounds of appeal read as under:
“Being aggrieved by the order of the Commissioner of Income Tax- 15, this appeal petition is submitted on the following grounds which may considered without prejudice to one another:
1. On the facts and in the circumstances of the case and in law, the Id. CIT has erred in passing the order u/s. 263 of the Act which is bad in law and without jurisdiction.
2. On the facts and in the circumstances of the case and in law, the Id. CIT has erred in holding the assessment order to be erroneous and also prejudicial to the interests of the revenue and erred in directing the LD.AO to recompute the income of the appellant on the basis of provisions contained in clause 7 of the AOP agreement dated 29.04.2003.
3. On the facts and circumstances of the case and in law, the LD.CIT erred in passing order u/s.263 without appreciating the appellant’s submission that in view of matter regarding deduction under Section 801B(10) being subject matter of appeal before the learned CIT(A), the order of the LD.AO on the issue of deduction under Section 8OlB(1O) as a whole had merged with that of the order of the learned CIT(A) and in view of the statutory bar in Explanation to s. 263(1) , revisionary power u/s.263 cannot be invoked.
4. On the facts and circumstances of the case and in law, the learned CIT has erred, while holding that the assessment order is prejudicial to the interest of the revenue, in observing that the entire amount of Rs. 15.11 crore would be assessable in the hands of M/s Sanand Properties Pvt. Ltd. The learned CIT failed to appreciate that he can not decide the taxability of any amount in the hands of third party while adjudicating the case of the appellant”
2. The assessee is an AOP earlier assessed vide assessment order dated 18/12/2009 passed under section 143(3)(ii) of the Act. The constitution of the AOP is as under:
(1) M/s Ravi Raj Kothari and Company.
(2) M/s. Sananand Properties Pvt. Ltd.
2.1 The return of income was filed at an income of Rs.4,13,610/- after claiming deduction under section 80 IB(10) of the Act amounting to Rs.14,54,47,283/-. Noting the fact that assessee did not fulfill the conditions laid out under section 80 IB(10) the AO had disallowed the claim made under section 80 IB(10) and had assessed the assessee at an income of Rs.14,63,04,860/-. The denial of claim vide aforementioned assessment order was agitated in appeal filed before the Ld. CIT(A) and the said appeal of the assessee was decided by Ld. CIT(A) vide order dated 25/3/2010, a copy of this order has been filed by the assessee in its paper book at pages 38 to 62. The main ground raised by the assessee in the said appeal was regarding disallowance of deduction under section 80 IB(10). It was contended that the assessee has fulfilled all the conditions laid down in section 80 IB(10), therefore, the claim of 80 IB(10) has wrongly been denied. In para 8.6 Ld. CIT(A) has recorded a finding that assessee has fulfilled all the conditions laid down in section 80 IB(10) and assessee is entitled to claim the same. He directed the AO to allow the claim of the deduction of Rs.14,54,47,283/-. The aforementioned order of Ld. CIT(A) was challenged by revenue by way of an appeal which has been decided by this Tribunal vide its order dated 25/4/2012 in ITA No.4327/M/10, a copy of which has been placed on record. The Tribunal after deliberating the contentions of both the parties has come to a conclusion that the assessee has fulfilled the conditions laid down in section 80 IB(10), therefore, the deduction cannot be denied and there was no reason to interfere with the order of Ld. CIT(A). In this manner the appeal filed by the revenue was dismissed by the Tribunal.
2.2 However, Ld. CIT vide notice dated 21/3/2012 i.e. during the pendency of the appeal before the ITAT, asked the assessee to show cause as to why the assessment order passed by the AO should not be set aside as the order passed by the AO is prima facie erroneous and prejudicial to the interest of revenue. The reason for initiation of such proceedings have been enumerated in para 2 of the impugned order. Ld. CIT noted from the terms and conditions of AOP agreement, which was dated 29/4/2003 and reference was made to clause(7) of the said agreement. According to Ld. CIT the said clause stated that M/s. Sananand Properties Pvt. Ltd. (SPPL) was to receive 35% of the sale proceeds of the project and out of the balance 65% of the receipts, all the expenditure for the purpose of AOP was to be met with and the net balance remaining thereafter was the share of income of M/s.Ravi Raj Kothari & Company(RRKC). According to Ld. CIT, the manner of allocation of revenue has provided the assessee undue benefit in the shape of higher claim of deduction u/s. 80 IB (10). In contradiction of clause – 7 of the agreement dated 29/04/2003, the assessee instead of first reducing 35% of revenue and claiming deduction under section 80 IB(10) on the balance amount has claimed deduction on the entire revenue. In other words, the share of 35% of the gross revenue pertaining to SPPL was not eligible for deduction under section 80 IB(10). The same was taxable in the hands of SPPL without having the benefit of deduction under section 80 IB(10). By granting deduction in respect of entire revenue, the AO has committed an error by accepting the method of allocation adopted by the assessee in its accounts which made the assessment order erroneous as well as prejudicial to the interest of revenue.
2.3 In response to aforementioned show cause notice the assessee has filed a written submission which is dated 27/3/2012. It was submitted that according to section 167B(2) and section 86 of the Act, the share of profit received by the members of AOP are not liable to be taxed instead the profit earned AOP is liable to be taxed at the maximum margin rate. Reference was made to the decision of Hon’ble Supreme Court in the case of ITO v. Ch. Atchaiah [1996] 218 ITR 239, wherein it has been held that if a particular income is income of the AOP in law, only the AOP is to be assessed in respect of such income. It was submitted that while framing the assessment under section 143(3) the AO had properly scrutinized the agreement and after applying the mind on clause (7) he has framed the assessment. The claim of assessee under section 80 IB(10) was rejected by the AO. The appeal was filed by the assessee and the issue has been decided in favour of the assessee. Reference was made to Explanation -(c) to section 263 of the Act according to which, where any order passed by the AO was made subject matter of any appeal, the powers of Ld. CIT under section 263 of the Act is extended only to the matters which had not been considered and decided in the appeal. It was submitted that quantification of deduction under section 80 IB(10) was the subject matter of appeal before Ld. CIT(A), therefore, the impugned assessment order could not be subjected to proceedings under section 263 as the assessment order had merged with the appellate order. Reference was made to the following decision.
(i) Remex Constructions v. First ITO [1987] 166 ITR 18
(ii) CIT v. Goodricke Group Ltd. [1993] 71 Taxman 30 (Cal.)
(iii) CIT v. Method Trading Investment Ltd. [2000] 109 Taxman 414 (Cal.)
(iv) CIT v. Nirma Chemicals Works (P) Ltd. [2009] 309 ITR 67
(v) Ranka Jewellers v. Addl. CIT [2010] 328 ITR 148
2.4 It was further submitted that proposed action will reduce the deduction undersection 80 IB(10), however, the assessable income will be much less than the income assessed by the AO. Thus the assessment order cannot be said to be prejudicial to the interest of revenue. Reference in this regard was made to the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT 243 ITR 83 to contend that unless the order passed by the AO is erroneous as well as prejudicial to the interest of revenue, powers under section 263 cannot be exercised. Reliance was also placed on the decision of Hon’ble Delhi High Court in the case of CIT v. Honda Siel Power Product Ltd. [2010] 194 Taxmann 175 wherein it has been held that in a case where AO adopts one of the courses admissible in law and where there two views are possible, CIT cannot exercise power under section 263 of the Act.
2.5 Ld. CIT after considering the submissions of the assessee and referring to clause(7) of the aforementioned agreement has come to a conclusion that assessee has wrongly distributed the profits which are not in accordance with clause (7) of the agreement. According to agreement, before computing the income of AOP, 35% of the gross receipts were required to be paid to SPPL. However, in the books of accounts, the assessee has first adjusted all the expenditure incurred by the AOP against the gross receipts and thereafter net balance has been transferred to the members and this action of the assessee is not in accordance with clause(7) of the agreement. Therefore, Ld. CIT held that the order passed by the AO is erroneous. He refuted the claim of the assessee that according to the proposed action, to be taken under section 263 the assessable income will be substantially lower than income computed by the AO. He observed that by adopting this method the assessee did not pay any tax as it claimed under section 80 IB(10). The members of the AOP also did not pay any tax as allocable income is only after claim of deduction under section 80 IB (10). According to Ld. CIT the amount to be received by SPPL, if distributed according to clause(7) of the agreement, will not enjoy any exemption as the same is not in the shape of share out of the income of AOP but it is out of the sale proceeds. Therefore, Ld. CIT is of the view that the entire amount of Rs.15.11 crores received by SPPL will be assessable to tax in its hand which will be beneficial to the revenue, therefore, assessment order passed by AO becomes prejudicial to the interest of revenue.
2.6 So far as it relates to the contention of the assessee that assessment order had merged with the appellate order, therefore, section 263 could not be invoked, Ld. CIT has also rejected this claim on the ground that subject matter of order passed under section 263 of the Act is entirely different from the subject matter of appeal filed by the assessee before CIT(A). The issue of allocation of 35% of sale proceeds of the assessee AOP to its member SPPL was not subject matter of appeal, therefore, such contention of the assessee is not acceptable. In this manner Ld. CIT has set aside the assessment order with a direction to the AO to recomputed the income of the assessee on the basis of clause (7) of the AOP agreement dated 29/4/2003. He also directed the AO that after completion of the reassessment proceedings in the case of the assessee, the AO holding jurisdiction over the case of SPPL should also be intimated to enable him to take corrective action in the case of SPPL.
2.7 The assessee is aggrieved with the aforementioned directions of Ld. CIT and has filed aforementioned grounds.
3. After narrating the facts Ld. AR took us through clause(7) of the aforementioned agreement which has also been reproduced in para-6 of the order passed by Ld. CIT. Copy of this agreement is placed by the assessee in the paper book at pages 26 to 35. For the sake of completeness clause (7) of the agreement is also reproduced below.
“SHARING OF REVENUE AND INCOME: All agreements for sale of residential units in the housing project under taken by the AOP shall be entered into only between the authorized signatories of the A OP and the respective purchasers of the housing units. The members of the AOP hereby agree that neither of them, will during the validity of this Agreement execute any independent or separate agreement on their own with any prospective purchaser. All the payments receivable from the purchasers towards the above shall be received only in the name of the AOP, i.e., FORTALEZA DEVELOPERS and the said amounts received from the purchasers of the housing units as aforesaid shall be deposited only in the bank account in the name of the A OP i.e., FOR TALEZA DEVELOPERS.
Out of the aforesaid amounts received from the purchasers of the housing units ( representing the gross sale proceeds of the units inclusive of the value of land) SPPL shall be entitled to, as its share of revenue/income, an amounting comprising of 35% of such receipts. It is hereby agreed and understood between the parties hereto, that SPPL may actually withdraw such share of revenue/income to which it is entitled as per the understanding between the parties from time to time.
Out of the balance 65% of the aforesaid receipts representing the gross sale proceeds), all required and relevant expenditure for the purposes of the business of the AOP shall be met with and whatever net balance remains thereafter, shall be determined as the share of revenue/income of RKC. RKC will be at liberty to actually withdraw its share of revenue/income as worked out herein above from time to time.
The above arrangement of sharing of revenue and income is restricted to the present housing project developed by AOP on land admeasuring 31026.90 sq. metrs ( approx. 7.76 acres) on final plot No. 72, Yerawad TPS and bearing S.No.210 (Part) situated at village Yerawads, Taluka Haveli, Dist. Pune. However, for any other project to be developed by this AOP in future the sharing of revenue and income shall be decided mutually by the parties hereto from time to time.”
3.1 Reading from the above clause it was submitted by Ld. A.R that according to aforementioned term SPPL was entitled to receive 35% of the gross sales proceeds of the units to be sold by the AOP inclusive of the value of the land. He submitted that it is a manner of sharing of the profit. The land upon which the project was to be developed was owned by SPPL and the assessee had expertise in construction and development activity, therefore, out of the balance of 65%, after excluding expenses incurred for the project, the balance profit was to be retained by the other member of the AOP namely Ravi Raj Kothari & Company (RRKC). He submitted that Ld. CIT has wrongly observed in para-7 that in the books of account the assessee has first adjusted all expenditure of the AOP against the gross receipts and thereafter net balance is transferred to two members. Ld. A.R submitted that this finding of Ld. CIT is factually incorrect. To substantiate Ld. A.R referred to page 16 of the paper book, where the working of profit distribution has been submitted. The said working is reproduced below:
