Champion Dreams Vs PCIT (ITAT Mumbai)
Coming to the view taken by Ld PCIT that the expenses claimed as “Compensation & Tenant Payment” should have been capitalised and should have been included in WIP, we are of the view that the Ld PCIT may not be fully correct in observing so. This is for the reason that, if the assessee has incurred these expenses in common and accordingly, if it is attributable to all the four flats received by the assessee, then what is required to be included in the value of “Closing WIP” is the proportionate cost of “Compensation & Tenant Payment” attributable to the two unsold flats and not the entire cost of “Compensation & Tenant Payment”.
We notice that there is nothing on record to show that the AO has examined this aspect at all. We noticed that the AO had asked for details of sales and expenses, but the assessee has furnished only the Profit and Loss account. It is not shown to us that the AO did make any enquiry in respect of expenses or about the value of “Closing WIP”. We also notice that the AO has not examined the allocation of cost between the “two sold flats” and “two unsold flats”. There should not be any dispute that improper allocation will have effect on the profit computed by the assessee. In our view, the Ld PCIT was driving this point only in his revision order. We notice that the AO has not carried out such verification during the course of assessment proceedings resulting in non-application of mind and, in our view, the same would render the assessment order erroneous and prejudicial to the interests of revenue. In this regard, we derive support from the decision rendered by Hon’ble Supreme Court in the case of Malabar Industrial Co (243 ITR 83)(SC).
We have noticed that the Ld PCIT was not fully correct in holding that the entire expenses claimed as Compensation & Tenant Payment should be capitalised as WIP. Accordingly, we modify the directions given by Ld PCIT and accordingly direct the AO to examine the correctness of computation of “Closing value of WIP” declared by the assessee, as the assessee has already sold two flats out of four flats.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The assessee has filed this appeal challenging the revision order dated 26-03-2021 passed by Ld PCIT-27, Mumbai and it relates to the assessment year 2011-12. In the grounds of appeal, the assessee is challenging the validity of revision order passed by Ld PCIT. The assessee has also raised an additional ground contending that the issue examined by the Ld PCIT, viz., capitalisation of expenses, was not subject matter of re-assessment proceedings and hence the impugned revision order is beyond the scope of provisions of sec.263 of the Act.
2. The facts relating to the case are stated in brief. The assessee did not file its return of income for the year under consideration. It came to the notice of the AO that the assessee has sold two immovable properties for an amount of Rs.81,52,500/- during the year under consideration. Hence the AO reopened the assessment u/s 147 of the Act. In response to the notice issued u/s 148 of the Act, the assessee filed return of income declaring NIL income. The AO completed the assessment accepting the return of income.
However, following observations made by the AO in the assessment order are relevant here:-
“4. The case was re-opened to verify the sale of immovable properties. The assessee furnished details of cost of land and agreement for expenses incurred. The assessee furnished supporting evidences for loss incurred. Since the assessee did not file return of income u/s 139(1), the loss claimed is not allowed to be carried forward and the same is disallowed.”
It is necessary to discuss the nature of income declared by the assessee. The Ld A.R submitted that the assessee is a facilitator. It had entered into an agreement with a builder to facilitate the builder in vacating tenants in certain immovable property. In lieu of providing the services, the assessee got four flats as its service charges. Out of the said four flats, the assessee has sold two flats during the year under consideration. The assessee has treated the sale of flats as its business activity and accordingly, it has prepared a Profit and Loss account for the year under consideration as under:-
