DCIT Vs Simplex Realty Limited (ITAT Mumbai)
ITAT Mumbai held that interest cost incurred towards acquisition of the clear title of the property is allowable as cost of acquisition.
Facts- The assessee is a widely held public limited company that earlier owned a textile mill land which was converted into a residential house and the assessee entered into the real estate business. The assessee entered into an agreement with Godrej Properties Limited (GPL) for the development of a residential project in which there was an arrangement to share the surplus from the project at an agreed percentage. There was a substantial delay in the project on account of various changes in the development control rules and litigation relating to the development of mill land which led to increase in the cost of construction.
AO, during the course of assessment proceedings, noticed that as per the agreement entered into with GPL, the cost of construction for Towers I to IV was estimated at Rs.2,315/- per sq.ft. and in respect of Tower V at Rs.3,815/-. AO noticed that in A.Y. 2009-10, there was an addition made in respect of excess claim of cost of construction over and above Rs.2,315/-. AO issued a notice u/s. 133(6) to GPL and GPL in their reply stated that they have accounted on estimate basis of Rs.3,166/- per sq.ft. for the entire project, i.e. Towers I o V. AO, after considering the reply of GPL and the submissions of the assessee made an addition of Rs.10,32,70,436/- being assessee’s share in the differential cost.
CIT(A) confirmed the addition. Being aggrieved, the present appeal is filed.
Further, revenue has contested deletion of addition in respect of interest on loans.
Conclusion- Held that the cost of construction as given by GPL keeps changing from time to time and that what the assessee for the year under consideration has taken as cost is less than the average rate communicated vide letter dated 01/12/2008 submitted by GPL. It is also noticed that the final cost of construction agreed between the assessee and GPL as per the supplementary agreement dated 31.03.2014 as per the agreement is Rs.4,118/-. Considering these facts, we see no infirmity in the cost of construction claimed by the assessee for the year under consideration at Rs.,3438/- per sq.ft. which is below the average rate communicated by GPL and the final rate agreed with GPL. Accordingly, we hold that the disallowance of Rs.10,32,70,436/- be deleted. The appeal of the assessee is allowed.
Held that the interest is claimed as part of development cost since as per the terms of the agreement the assessee is required to given a clear and marketable title of the land to the developer. Further it is a settled position that interest cost incurred towards acquisition of the clear tiltle of the property can be claimed as part of cost of acquisition.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. These cross appeals by the assessee and the revenue are against the order of the Commissioner of Income-tax (Appeals)-40, Mumbai (in short, ‘the CIT(A)’) dated 26/02/2024 for A.Y. 2010-11.
2. The assessee is a widely held public limited company which was earlier owning a textile mill land near Byculla which was converted into residential house and the assessee entered into real estate business. The assessee entered into an agreement with Godrej Properties Limited (GPL) dated 24/09/2004 for the development of a residential project in which there was an arrangement to share the surplus from the project at an agreed percentage. The project comprised of 5 towers having approximately saleable are of 6,50,000 sq.ft. The assessee followed percentage completion method in which the income was offered based on the flats sold during the year and the cost of acquisition against the same was based on the estimated cost as agreed with GPL. There was a substantial delay in the project on account of various changes in the development control rules and litigation relating to the development of mill land which led to increase in the cost of construction. GPL from time to time has been issuing letters regarding the revised cost of construction to the assessee based on which, the assessee has been computing the profit for the relevant assessment years.
3. For the assessment year 2010-11, the assessee filed the return of income declaring an income o Rs.25,73,24,91 8/- on 30/09/2010. The case was selected for scrutiny and the statutory notices were duly served on the assessee. During the year under consideration, the assessee has shown revenue arising from development of land at Rs.20,98,24,657/- in the P&L Account as per the below working:-
