Case Law Details
Sudhir Chandra Datt Vs ACIT (ITAT Jabalpur)
It is an admitted fact that the Township project, work-in-progress (WIP) of which it claims as undervalued, is on the outskirts of Jabalpur, as opposed to the other two, located in the midst of the city. Land cost is a substantial part of a real estate project cost. Land prices may vary considerably even within the city, while the Township project is outside of the city limits whereat, on account of underdevelopment of the area and the distance involved (from the main city), the land prices are much lower. It is in fact for this economic reason that the people are tempted or forced to shift to the outer areas of a city, the limits of which, i.e., any developing city, thus, keep getting regularly extended, a common phenomenon of urban India. It is, therefore, wholly presumptuous to say that the said project also costed as much as the other two projects, inferring under-valuation on that basis. That apart, this project was sanctioned on 10.4.2008, while the other two projects were sanctioned much earlier, i.e., on 10.6.2005 (Residency) and 6.7.2006 (Towers), reference to which is found in the assessee’s grounds of appeal (Gd. 6) before the ld. CIT(A) as well as the assessee’s submissions thereto, reproduced at pg. 10 of the impugned order. The same, therefore, cannot be considered as complete to the same extent, i.e., would be at different stages of completion. The comparison fails on this ground as well. No doubt, the date (02.10.2008), as stated in the ‘Grounds of Appeal’ as the date of sanction of the map of the Township project, being a public holiday, is clearly incorrect. It may perhaps be the date of commencement of construction, wrongly mentioned. The question, however, is if there is a valid basis for comparison, and which we find as not. The ld. CIT(A) has, again, misdirected himself, reproducing several case law deliberating section 145A. The said section provides for inclusion of tax, duty, or any other levy on the goods bought and sold, in the valuation of purchases, sales, and inventory thereof. How, we wonder, is the same relevant? Again, sure, the assessee has not clarified the matter properly. The Revenue having raised the issue of valuation of one of his ongoing projects, the assessee ought to have provided the relevant details, i.e., the breakup of cost, justifying the same with reference to his accounts; the cost being purportedly reflected therein. Why, there is even no mention of the difference in the land price between its projects on account of locational difference, which forms the nucleus of the assessee’s case as pleaded before us, (and with, we must admit, merit), in the assessee’s submissions before the ld. CIT(A). In fact, it is not even clear if the assessee is maintaining his books on project-wise basis, in which case all he was required to do to substantiate his case was to advert thereto. It does not, for that reason, seem so, and which would have scotched any query by the Revenue in this regard. In its absence, the question as to the basis for the adoption of the valuation rate/s, which appear to be estimates, arises.
So however, we do not consider it proper to, for that reason, remit the matter back. There is, to begin with, no raising of the issue by the AO, for the assessee to have responded thereto. As Shri Seth would clarify during hearing, no question in this regard was put by the AO, and it was only on the receipt of the assessment order that the assessee came to know of an addition on account of purported under-valuation of stock-in-trade. Such a manner for effecting an addition cannot be countenanced. The assessee’s accounts are audited; the audit report expressly states the basis of valuation i.e., cost or market price, whichever is less. Cost is a matter of fact, and ought to have been required to be justified and, in any case, matched with that reflected in the books of account, and which has not been. That is, at no stage has the assessee been called upon to prove his case. There was thus no occasion for it to furnish the cost details, which rather ought to have been asked by the AO. The deficiency is not made good at the first appellate level as well, whereat the ld. CIT(A) fails to appreciate the issue, purely factual in nature. Even though not specifically mentioned, land cost, without doubt, forms an integral part of a real estate project cost. His conclusion, i.e., on under-valuation, is sans any factual finding, or even reference to the assessee’s accounts and, in fact, completely out of sync with the bulk of his order on this issue, i.e., section 145A, which we have stated as not applicable and to be completely besides the point. Further, there has been no examination of the facts. What, then, is the basis for the Revenue to contend that the assessee had incurred a cost higher than Rs.300/- per sq. ft. for the Township project? We could understand where the Revenue had based its charge of under-valuation w.r.t. the assessee’s accounts, or found them unreliable, which is not so. The stated basis, as afore-noted, is wholly presumptuous. Thus, notwithstanding the fact that the assessee has not furnished the cost details, as it ought to have, we find no reason for remission. We have already observed that at no stage was the assessee called upon to prove his case.
The onus to establish escapement of income is on the Revenue, which it has completely failed to, with there being no charge of the assessee being not cooperative, or having not, on asking, furnished the relevant details. It is a clear case of non-application of mind by the Revenue. It would therefore be unfair to call upon the assessee to, after lapse of a number of years, justify its case. The addition is without any basis, much less valid, as well as sans any factual finding, and deserves to be deleted. We direct so. Needless to add, the opening stock (for the following year) shall be the closing stock as reflected in the assessee’s final accounts for the current year, i.e., as on 31/3/2009.
FULL TEXT OF THE ITAT JUDGEMENT
This is an Appeal by the Assessee agitating the Order by the Commissioner of Income Tax (Appeals)-1, Jabalpur (‘CIT(A)’ for short) dated 23.8.2013, partly allowing the assessee’s appeal contesting his assessment under section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 30.12.2011 for assessment year (AY) 2009-10. The appeal raises three grounds, each of which we shall take up in seriatim.
2. The first issue (Gd.1) is qua disallowance u/s. 36(1)(iii) of the Act at Rs. 15,74,250/-. The basis for the same is the interest-free advances (at Rs.114.02 lacs) by the assessee-proprietor to his close relatives (Rs.98.08 lacs) and to an associate concern (at Rs.15.94 lacs). The assessee having incurred interest expenditure, in the main on bank borrowings (Rs.14.41 lacs), at Rs.21.60 lacs, the Assessing Officer (AO) disallowed interest on borrowed capital u/s. 36(1)(iii) to that extent by inferring the application of the borrowed capital (Rs.156.46 lacs) toward the said interest-free advances. The same was confirmed in first appeal inasmuch as the assessee could not demonstrate commercial expediency, placing reliance on CIT vs. Manglam Plantations India (P.) Ltd. [2010] 190 Taxman 38 (Ker) and CIT vs. Sahu Enterprises (P.) Ltd. [2013] 352 ITR 8 (All), both of which considered the decision by the Apex Court in S.A. Builders Ltd. v. CIT [2007] 288 ITR 1 (SC).
3. We have heard the parties, and perused the material on record.
3.1 The assessee’s case is that it has sufficient interest-free capital, i.e., at Rs.131.03 lacs (as on 31.3.2009), as against interest-free advances at Rs.114.02 lacs. No disallowance, accordingly, is called for. Why, the AO has, in working the amount of disallowance, also included bank charges (Rs.6.68 lacs), for which the ld. counsel for the assessee, Shri Seth, would take us to page-2 of the assessment order. The same is charged by the bank for non-fund based facilities or other banking services provided by it, and has nothing to do with the interest on borrowing/s therefrom. The ld. CIT(A) has confirmed the disallowance on the basis of commercial expediency, misdirecting himself.
3.2 Sure, if that is the assessee’s case, the absence of commercial expediency is irrelevant. But, then, where is the statement of his case by the assessee before any authority? There is no reference thereto either in the assessment or the appellate order. But for Shri Seth submitting so before us, referring to the written submissions dated 30.7.2020 before the Tribunal, we would be equally unaware of the same. The primary burden to prove his return, and the claims prefer thereby, is on the assessee. His case of sufficient interest-free capital to fund the admitted non-business (purpose) advances, made on interest-free basis, has not been stated, much less substantiated before the Revenue’s authorities, who have, we are afraid, also not applied themselves. How could they appreciate, much less counter, the assessee’s case without being informed of the same? The issue under reference is wholly factual, i.e., whether the borrowed funds, on which interest has been claimed as a business expense, has been utilized by the assessee in whole for the purpose/s of his business during the relevant year, and if not, the extent of non-utilization? The Revenue goes off tangent, questioning the commercial expediency of the interest-free advances, without there being any claim by the assessee toward the same. Not only that, it makes part disallowance of bank commission, i.e., on proportionate basis, even as it, being unrelated to the interest on borrowed capital, is deductible u/s. 37(1) and not u/s. 36(1)(iii). There is no examination, much less appreciation of facts. The borrowed capital comprising, as it appears, bank secured loan/s in the main, the availability of secured assets should itself establish the end-use of the borrowed capital to that extent, i.e., allowing for the margin stipulated. A disallowance is not to be made for the sake of it, but based on clear and definite findings of fact based on the evidences on record, which we observe as completely missing.
It is the statement of affairs, i.e., the balance-sheet, both as at the beginning and the end of the period under reference, i.e., f.y. 2008-09, that shall, in a large measure, clarify the various sources and application of funds, demonstrating the utilization of borrowed funds during the relevant year. This is precisely what the assessee was required to do. Why, in a case of variety of sources and application of funds, directed for specific purposes or otherwise, it is the fund flow (or cash flow) statement for the year that may, in addition, be required to throw light on the said utilization. Rather, as afore-noted, the assessee’s principal borrowings are secured loans (at least as on 31.3.2009), so that an adequate asset base comprising the security, would itself exhibit the utilization thereof for the stated purpose. For example, a stock hypothecation borrowing, with a margin of 25% (say), would imply a utilization of bank borrowing and ‘own’ capital in the relevant stock in terms of the borrowing contract. A hypothecated stock of Rs.100/- (say), of course reckoned at net of trade creditors (which are spontaneous liabilities on the purchase of goods), would thus exhibit utilization of bank borrowing and own capital to the extent of Rs.75/- and Rs.25/- respectively. Likewise, for a term loan, with the repayment thereof over time increasing the own capital component to that extent. It is, therefore, incorrect for the assessee to say that the entire interest-free advance of Rs.114.02 lacs is financed by own (or interest free) capital Rs.131.03 lacs, as indeed is the Revenue’s claim to the opposite i.e., of the entire-free advance by bank borrowings. In fact, the stated figures are as at 31.03.2009, while the position could be different, even materially, as at the beginning of the year i.e., as on 31.03.2008, or during the year.
3.3 The matter, accordingly, i.e., in view of the foregoing, is remitted to the file of the AO to allow the assessee opportunity to present his case. Needless to add, the AO shall decide the issue in accordance with law, issuing definite findings of fact based on material on, or to be brought on, record. In view of the matter being factually indeterminate, the reference to case law by either side, made during the hearing, is inapposite and, in any case, of little consequence. We decide accordingly.
4. The second issue (Gd.2) is in respect of under-valuation of closing stock. The assessee, in real estate business, was found to have three ongoing projects as at the year-end, i.e.,:
(a) Datt Towers: Area 93,849.28 sq. feet @ Rs.700/- per sq. ft.
(b) Datt Residency: Area 13,215 sq. feet @ Rs.700/- per sq. ft.
(c) Datt Township: Area 6,850 sq. feet @ Rs.300/- per sq. ft.
The AO found it incomprehensible that three similar projects in the same city (of Jabalpur) could vary so significantly (over 233%) in their cost. He inferred under-valuation for the Township project and, accordingly, an under-statement of income to that extent, i.e., Rs.27,40,000/- (6850 sq. ft. @ Rs.400 per sq. ft.). The assessee’s explanation that the Datt Township was located on a highway (Mandla Road), on the outskirts (Tilheri) of the city, while the other two projects are in the heart of the city (i.e., at Napier Town and YMCA), did not find favour with the ld. CIT(A). How could, he wondered, the locational factor result in an unfathomable increase in cost by over 200%; the location primarily affecting the sale value of a real estate product, and confirmed the addition on that basis.
5. We have heard the parties, and perused the material on record.
We find little merit in the case of the Revenue. It is an admitted fact that the Township project, work-in-progress (WIP) of which it claims as undervalued, is on the outskirts of Jabalpur, as opposed to the other two, located in the midst of the city. Land cost is a substantial part of a real estate project cost. Land prices may vary considerably even within the city, while the Township project is outside of the city limits whereat, on account of underdevelopment of the area and the distance involved (from the main city), the land prices are much lower. It is in fact for this economic reason that the people are tempted or forced to shift to the outer areas of a city, the limits of which, i.e., any developing city, thus, keep getting regularly extended, a common phenomenon of urban India. It is, therefore, wholly presumptuous to say that the said project also costed as much as the other two projects, inferring under-valuation on that basis. That apart, this project was sanctioned on 10.4.2008, while the other two projects were sanctioned much earlier, i.e., on 10.6.2005 (Residency) and 6.7.2006 (Towers), reference to which is found in the assessee’s grounds of appeal (Gd. 6) before the ld. CIT(A) as well as the assessee’s submissions thereto, reproduced at pg. 10 of the impugned order. The same, therefore, cannot be considered as complete to the same extent, i.e., would be at different stages of completion. The comparison fails on this ground as well. No doubt, the date (02.10.2008), as stated in the ‘Grounds of Appeal’ as the date of sanction of the map of the Township project, being a public holiday, is clearly incorrect. It may perhaps be the date of commencement of construction, wrongly mentioned. The question, however, is if there is a valid basis for comparison, and which we find as not. The ld. CIT(A) has, again, misdirected himself, reproducing several case law deliberating section 145A. The said section provides for inclusion of tax, duty, or any other levy on the goods bought and sold, in the valuation of purchases, sales, and inventory thereof. How, we wonder, is the same relevant? Again, sure, the assessee has not clarified the matter properly. The Revenue having raised the issue of valuation of one of his ongoing projects, the assessee ought to have provided the relevant details, i.e., the breakup of cost, justifying the same with reference to his accounts; the cost being purportedly reflected therein. Why, there is even no mention of the difference in the land price between its projects on account of locational difference, which forms the nucleus of the assessee’s case as pleaded before us, (and with, we must admit, merit), in the assessee’s submissions before the ld. CIT(A). In fact, it is not even clear if the assessee is maintaining his books on project-wise basis, in which case all he was required to do to substantiate his case was to advert thereto. It does not, for that reason, seem so, and which would have scotched any query by the Revenue in this regard. In its absence, the question as to the basis for the adoption of the valuation rate/s, which appear to be estimates, arises.
So however, we do not consider it proper to, for that reason, remit the matter back. There is, to begin with, no raising of the issue by the AO, for the assessee to have responded thereto. As Shri Seth would clarify during hearing, no question in this regard was put by the AO, and it was only on the receipt of the assessment order that the assessee came to know of an addition on account of purported under-valuation of stock-in-trade. Such a manner for effecting an addition cannot be countenanced. The assessee’s accounts are audited; the audit report expressly states the basis of valuation i.e., cost or market price, whichever is less. Cost is a matter of fact, and ought to have been required to be justified and, in any case, matched with that reflected in the books of account, and which has not been. That is, at no stage has the assessee been called upon to prove his case. There was thus no occasion for it to furnish the cost details, which rather ought to have been asked by the AO. The deficiency is not made good at the first appellate level as well, whereat the ld. CIT(A) fails to appreciate the issue, purely factual in nature. Even though not specifically mentioned, land cost, without doubt, forms an integral part of a real estate project cost. His conclusion, i.e., on under-valuation, is sans any factual finding, or even reference to the assessee’s accounts and, in fact, completely out of sync with the bulk of his order on this issue, i.e., section 145A, which we have stated as not applicable and to be completely besides the point. Further, there has been no examination of the facts. What, then, is the basis for the Revenue to contend that the assessee had incurred a cost higher than Rs.300/- per sq. ft. for the Township project? We could understand where the Revenue had based its charge of under-valuation w.r.t. the assessee’s accounts, or found them unreliable, which is not so. The stated basis, as afore-noted, is wholly presumptuous. Thus, notwithstanding the fact that the assessee has not furnished the cost details, as it ought to have, we find no reason for remission. We have already observed that at no stage was the assessee called upon to prove his case.
The onus to establish escapement of income is on the Revenue, which it has completely failed to, with there being no charge of the assessee being not cooperative, or having not, on asking, furnished the relevant details. It is a clear case of non-application of mind by the Revenue. It would therefore be unfair to call upon the assessee to, after lapse of a number of years, justify its case. The addition is without any basis, much less valid, as well as sans any factual finding, and deserves to be deleted. We direct so. Needless to add, the opening stock (for the following year) shall be the closing stock as reflected in the assessee’s final accounts for the current year, i.e., as on 31/3/2009.
6. Ground No.3 relates to an addition for Rs.19,484/-, being interest accrued on FDRs, not returned. The same was not pressed by the ld. counsel during hearing. The same is accordingly dismissed as not pressed.
7. In the result, the assessee’s appeal is partly allowed and partly allowed for statistical purposes.
Order pronounced on September 07, 2020 under Rule 34(4) of The Income Tax (Appellate Tribunal) Rules, 1963
