Sec. 43CA was not applicable if transfer was only rights in under-construction flats instead of property per se

Conclusion: Since assessee had transferred pursuant to registration of the agreement was only the rights in the flat/ office (which was under construction) and not the property per se hence, there was no transfer of any land or building or both by the assessee in favour of the flat buyers pursuant to registration of the agreement in the year under appeal, therefore, the provisions of section 43CA could not be made applicable to the same.

Held: Assessee developed a commercial project called ‘Orchid Plaza’ at Borivali adopting Project Completion Method for the same. AO noticed that in respect of certain units, there were huge discrepancies between agreement value and stamp duty value. He asked assessee to explain the differences.  Assessee stated that the entire project was completed in Asst Year 2015-16 and the sales of all the 14 properties were duly offered to tax in Asst Year 2015-16 following project completion method. Assessee alternatively also pleaded that any difference in value between agreement value and stamp duty value need to be considered in the year of completion of project and not otherwise. AO applied the provisions of section 43CA in all the 14 properties registered inspite of the fact that out of 14 properties, 7 were allotted prior to Asst Year 2014-15.  AO observed that as all the transactions were executed in the year under appeal, the difference between agreement value and the stamp duty value was to be treated as suppressed sales by assessee and the same was to be brought to tax in Asst Year 2014-15. It was held  provisions of section 43CA are applicable only when there is transfer of land or building or both. In the instant case, neither of those had happened pursuant to registration of agreement with the stamp duty valuation authorities. In respect of allotment of offices made prior to 31.3.2013, it was found from the documents enclosed in the paper book that assessee and the prospective buyer of flats had specifically agreed that till such time the agreement of sale was executed and registered , no right was being created in favour of the flat buyer and that the allotment letter was just a confirmation of booking subject to the execution of the agreement which was to be drafted at a later point of time. Accordingly, the flat buyer was bound to accept unconditionally and confirm that any kind of increase or decrease in the area of the said office or shift in the position of the said office, if arises, due to amendment in the plan etc and in case of variation of the area, the value of the office should be proportionately adjusted. All these documentary evidences clearly go to prove that assessee had not completed the construction of the office during the relevant year. It could also be inferred that pursuant to registration of agreement with the stamp duty valuation authorities, a right was created in favour of the flat buyer. Hence what the assessee had transferred pursuant to registration of the agreement was only the rights in the flat/ office (which was under construction) and not the property per se. Hence, there was no transfer of any land or building or both by the assessee in favour of the flat buyers pursuant to registration of the agreement in the year under appeal, therefore, the provisions of section 43CA could not be made applicable to the same.

This appeal in ITA No.798/Mum/2016 for A.Y.2014-15 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-24, Mumbai in appeal No.CIT(A)-24/ITO-15(3)(3)/IT-223/2016-17 dated 26/12/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 20/12/2016 by the ld. Income Tax Officer – 15(3)(3), Mumbai (hereinafter referred to as ld. AO).

2. The Ground Nos.1 and 6 raised by the assessee are general in nature and does not require any specific adjudication.

3. The Ground No. 2 raised by the assessee is with regard to disallowance of interest paid to M/s Nayan Gems in the sum of Rs 2,85,041/-. The Ground No. 3 raised by the assessee is with regard to disallowance of interest paid to M/s Casper Entertainment Pvt Ltd , Pragati Gems Pvt Ltd and Duke Business Pvt Ltd in the sums of Rs 1,64,384/- ; Rs 1,57,151/-and Rs 82,191/- respectively totaling to Rs 4,03,726/-.

3.1. We have heard the rival submissions. The ld AO observed that the loans borrowed from aforesaid parties in Asst Year 2013-14 were treated to be ingenuine and hence the interest paid to those parties are not allowable. Accordingly, the ld AO disallowed the interest paid on loans to aforesaid parties in the sums of Rs 2,85,041/- and Rs 4,03,726/-. This action of the ld AO was upheld by the ld CITA. We find that this tribunal in assessee’s own case for the Asst Year 2013-14 in ITA No. 6557/Mum/2017 dated 3.5.2019 had held the loans received from aforesaid parties to be genuine and deleted the additions made u/s 68 of the Act. We hold that once the loans were held to be genuine, the interest paid on such loans are also allowable expenditure. It is not the case of the revenue that the borrowed funds from aforesaid parties were diverted by the assessee for non-business purposes. The assessee is a builder and developer and deriving business income from such projects. The borrowings were utilized only for the purpose of business which fact remain undisputed by the revenue and hence the interest paid on such loans, which were treated as genuine in Asst Year 2013-14 by the order of this tribunal dated 3.5.2019 supra, becomes an allowable deduction. Hence we direct the ld AO to grant deduction of interest paid on such loans in the sums of Rs 2,85,041/- and Rs 4,03,726/- . Accordingly, the Ground Nos. 2 and 3 raised by the assessee are allowed.

4. The Ground No.4 raised by the assessee is with regard to the disallowance of depreciation claimed on motor car in the sum of Rs 10,80,912/-.

4.1. We have heard the rival submissions. It is not in dispute that the motor car bearing registration number MH04- FZ-6299 was purchased in the name of the Director of the assessee company and not in the name of the assessee company , for which the assessee had explained that the same was done in order to reduce the incidence of indirect taxes leviable thereon. It is not in dispute that the assessee company had borrowed vehicle loan of Rs 34,00,000/- from M/s Daimler Financial Services (I) Pvt Ltd for purchase of motor car. This loan borrowed was duly disclosed under the head ‘Secured Loan’ in the balance sheet of the assessee company. It is not in dispute that the motor car was registered on 25.3.2013. Once the vehicle is registered, the fact of the vehicle being put to use cannot be doubted. Infact even before the registration of the vehicle, the vehicle could be used by an assessee subject to the maximum limits of kilometers permitted under the Motor Vehicles Act. Hence the fact of motor car being put to use before 31.3.2013 cannot be doubted in the instant case. It is not in dispute that the motor car was duly reflected as a fixed asset in the balance sheet of the assessee company as at 31.3.2013 and depreciation claimed accordingly. It is not in dispute that the assessee company had claimed only 50% of eligible rate of depreciation on motor car since the car was used for less than 180 days in Asst Year 2013-14 as per the provisions of section 32 of the Act as it is being used for its business. The only reason for disallowance of depreciation on motor car is that the assessee company is not the owner of the said motor car as it was in the name of director of assessee company. We find that the assessee company had given reasonable explanation for registering the vehicle in the name of the individual director to reduce the incidence of indirect taxes , levies etc. This does not hinder in any way to allow the claim of depreciation in the hands of the assessee company, as the motor car was reflected in the balance sheet of the assessee company and that the vehicle loan was also borrowed for the same by the assessee company. We find that the similar issue had been addressed by the co-ordinate bench of this tribunal in the case of ITO vs Banglore Shirt Company Pvt Ltd in ITA No. 6042/Mum/2016 for Asst Year 2012-13 dated 8.8.2018 .

4.2. We find that this tribunal in Asst Year 2013-14 in assessee’s own case in ITA No. 6557/Mum/2017 dated 3.5.2019 had adjudicated this issue and directed the ld AO to allow the depreciation on motor car. Respectfully following the said decision, we direct the ld AO to allow depreciation for Asst Year 2014-15 also in the sum of Rs 10,80,912/-. Accordingly, the Ground No. 4 raised by the assessee is allowed.

5. The Ground No. 5 raised by the assessee is with regard to the action of the ld CITA in confirming the addition made u/s 43CA of the Act in the sum of Rs 3,41,41,270/- on account of suppression of sales. The inter connected issue involved therein is that the ld CITA erred in not considering the additional evidences filed by the assessee before him while deciding the appeal.

5.1. The brief facts of this issue are that the assessee developed a commercial project called ‘Orchid Plaza’ at Borivali. The assessee adopted Project Completion Method on this ‘Orchid Plaza’ project. This method is consistently followed by the assessee. All the queries raised by the ld AO during the course of assessment proceedings were duly replied by the assessee. The ld AO asked the assessee to produce copy of Index II. On going through those documents, the ld AO noticed that in respect of the following units, there were huge discrepancies between Agreement value and stamp duty value:-