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PCIT Vs Swananda Properties Pvt Ltd (Bombay High Court)
We note that the books of accounts of the Respondent were rejected by the CIT(A) under section 145(3) of the Act. However, the Tribunal found in the impugned order that the invocation of section 145(3) of the Act is unjustified as no defect was noted in the books of accounts to disregard the same. We note that CIT(A) in his order while rejecting the Books of Account does not specify the defect in the record. The basis of the rejection appears to be best judgment of assessment done by him. The rejection of books should precede the best judgment assessment. On facts, the Revenue has not been able to show any defect in the Respondent’s records which would warrant rejection of books and making a Best Judgment Assessment. Thus, on facts the view taken by the Tribunal is possible view. Therefore, no substantial question of law arises.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
By this appeal, the Appellant- Revenue challenges the order passed by the Income Tax Appellate Tribunal, Mumbai (Tribunal) dated 4 January 2016. The present appeal relates to the assessment of the respondent- assessee for the assessment year 2005-06.
2. The Revenue has urged the following question for our consideration, which according to the Revenue are substantial questions of law:
(a) Whether on the facts and circumstances of the case and in law was the Tribunal justified in holding that in the absence of any defect being pointed out in the records, the invocation of Section 145(3) of the Act was not proper ?
(b) Whether on the facts and circumstances of the case and in law, the Tribunal is justified in deleting, without any valid and cogent material/ reasons against the findings of suppression of Sales by the CIT(A), the addition of Rs.5,30,80,200/- made by the CIA(A)on account of understatement of sales?
3. The Respondent- assessee is engaged in the business of property development. A property named Joanna Villa at 28th Road, Bandra (West), Mumbai was owned by Ms.Roze Margaret Dorothy Nazareth nee D’Souza and Joseph Peter Francis D’Souza, the D’Souzas. The property had ground and upper floors. D’Souzas intended to develop the property by putting up additional construction above the existing structure on exterior columns on all sides without demolishing the existing structure. On 21 March 2001, the Municipal Corporation sanctioned the plans and granted permission to construct additional floors comprising of four flats. Four separate agreements were entered into by D’Souzas on 28 May 2001 regarding four flats. The agreements were registered with the Sub-Registrar. Certain rate per square feet was fixed regarding these four flats. It was also provided that if any additional area is constructed then it would be given on the same rate as fixed.
4. When the construction of second floor was complete, D’Souzas entered ment with the Responto develop the property were transferred to the Respondent at consideration of Rs.2.7 crore.As per the memorandum, the Respondent was to utilize the balance FSI and put up an additional construction. The Respondent got the building plans duly amended for constructing five additional floors. Further agreement for development was signed on 21 December 2001. The Respondent- assessee entered into modificatory agreements with the original purchasers and certain flats were allotted. On completion of project, besides the above four flats, the Respondent sold two flats to its directors and six flats were sold to the outsiders, the new purchasers.
5. The Assessing Officer in the assessment order for the subject assessment year held that the income on the sale of flats is available to tax in the assessment year 2004-05 and not in the assessment year 2005-06. This on the basis that the project was completed in the previous year relevant to the assessment year 2004-05 and not assessment year 2005-06. However, the income offered by Respondent for the assessment year 2005-06 was assessed on protective basis.
6. In the order for assessment year 2004-05, the Assessing Officer found there was suppression of sales value in respect of six flats. Thus the Assessing Officer made an addition of Rs.2,50,85,904/- because of suppressed sales value in respect of six flats while making the assessment for the assessment year 2004-05.
7. Being aggrieved by the assessment year 2005-06 the Respondent filed an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. On appeal, the CIT(A) by order dated 22 November 2010 partly allowed assessee’s appeal holding that the project was completed in the assessment year 2005-06 and not in the assessment year 2004-05. However, the CIT(A) rejected the Books of Account under Section 145(3) of the Act and completed the assessment on best judgment basis. Moreover, CIT(A) in his order held that there is an understatement of sales value in respect of all twelve flats as there was suppression of value in all the twelve flats of the project, as the market rate then was Rs.8,992/- per sq.ft. for the Assessment Year 2005-06. Thus, the above rate of Rs.8,992/- per sq. ft. was applied to all the twelve flats to enhance the assessment to Rs.5,30,80,200/-.
8. In the appeal filed by the Respondent- Assessee before the Tribunal, the Tribunal set aside the order passed by CIT(A). The Tribunal held that neither the Assessing Officer nor the CIT(A) had any material on record to show that the assessee, Respondent herein received more than what had been shown in the sale-deeds. Moreover the impugned order held that there was no occasion to apply section 145(3) of the Act so as to reject the books in the absence of any defect in the books on account of being found. The Tribunal by the impugned order dated 4 January 2016 allowed the appeal deleting the enhancement of assessment of Rs.5,30,80,200/-.
9. Mr.Sharma, the learned counsel appearing for the Appellant-Revenue contended that there is variance between the rate and value of the flats sold and the stamp duty valuation. It was contended that the rates on which the flats were sold were lower than the stamp duty valuation and the ready reckoner. Thus, the Revenue in absence of any satisfactory explanation by the assessee had correctly enhanced the Mr.Sharma relied upon the decision of this Court in the case of Commissioner of Income Tax v. Associated Builders1.
10. On the other hand, Mr.Rai, the learned counsel for the Respondent submitted that the Revenue, at the relevant time, had no power under the Act to ignore the actual consideration received by the Respondent on sale of its stock in trade and apply a deemed
Re. Question (a)
11. We note that the books of accounts of the Respondent were rejected by the CIT(A) under section 145(3) of the Act. However, the Tribunal found in the impugned order that the invocation of section 145(3) of the Act is unjustified as no defect was noted in the books of accounts to disregard the same. We note that CIT(A) in his order while rejecting the Books of Account does not specify the defect in the record. The basis of the rejection appears to be best judgment of assessment done by him. The rejection of books should precede the best judgment assessment. On facts, the Revenue has not been able to show any defect in the Respondent’s records which would warrant rejection of books and making a Best Judgment Assessment. Thus, on facts the view taken by the Tribunal is possible view. Therefore, no substantial question of law arises. Thus not entertained.
Re. Question (b)
12. The Respondent- Assessee is a Developer. He is in the business of real estate development. The flats sold by the Respondent- assessee are stock-in-trade. The CIT(A) by his order passed the best judgment assessment and noted that the sale consideration of twelve flats in the project has been suppressed. According to him, the market rate nearest to that date is Rs.8,992/- per sq.ft. and, thus, reassessed the sale of each of the twelve flats. This basis of the nearest market rate is not found in his order. Therefore, on this basis itself the assessment is bad. In any case, Mr. Sharma, the learned Counsel for the Revenue submits that the market rate is the stamp duty rate of registration. Therefore, the stamp duty rate is used as a means to consider proper sales value of transfer of the flats. At the relevant time i.e. for the assessment year 2005 -06, the only provision for application of deemed value for consideration was found under Section 50C of the Act relating to capital assets. At the relevant time there was no provision in the Act for deeming the consideration received on sale of goods/assets other than capital assets on the basis of stamp duty valuation. However, this provision in the form of Section 43CA of the Act has been introduced with effect from 1 April 2014. The present case pertains to the assessment year 2005-06. Therefore, Section 43CA of the Act will have no application for the subject Assessment Year.
13. In the case of Commissioner of Income-Tax v. Neelkamal Realtors & Erectors India (P.) Ltd.2, the Division Bench of this Court had an occasion to consider the value of the flat in case of sale by the Developer in the context of section 50C and section 56(2)(vii)(b)(ii) of the Act. The Division Bench observed thus:
“3. Regarding question No. (i):
….. ….. ….. ….. …..
(f) It is self evident from reading of section 50C of the Act it would not have any application while determining ‘Profits and gains of business or profession’. This is so as its application is only limited to computation of income chargeable under the head ‘Capital gains’ as is evident from specific reference in sub-section (1) of section 50 of the Act to section 48 of the Act i.e. mode of computation of capital gains. In fact section 50C of the Act as observed by the impugned order is placed as part of the Chapter IV-E under the head ‘capital gains’, it can only govern the valuation of the property to determine capital gains and cannot govern valuation of transfer of assets (other than a capital asset) i.e. stock in trade. This view is further strengthened by the fact that section 43CA has been introduced into the Act w.e.f. 1st April, 2014 which governs taking of full value of consideration for transfer of assets other than capital assets on the basis of stamp duty valuation. This section 43CA of the Act finds a place as a part of Chapter IV-D – Profits and gains of business or profession. Therefore, with effect from 1st April, 2014 the stamp duty valuation of assets sold could be taken as value of consideration. Our above view that section 50C of the Act has no application to value stock in trade is also a view taken by Allahabad High Court in Commissioner of Income Tax v. Ken Construction and Colonizers (P) Ltd. (2012) 208 Taxman 478/ 20taxman.com 381. Similarly the Madras High Court in CIT v. Thiruvengadam Investments (P) Ltd. (2010) 320 ITR 345 has also held that section 50C of the Act cannot be invoked to arrive at full consideration of sale of business asset. We see no reason not to adopt the views of the above two High Courts to the present facts.”
Therefore, section 43CA cannot be made applicable to the facts of the present case. By the plain language of this provision it is not retrospective. Thus, there is no statutory provision based on which the stamp duty valuation could have been made a basis in the present case.
14. The Division Bench of this Court in the case of M/s.Zain Constructions v. The Income Tax Officer3 has conclusively decided the issue as under:
“8. In our opinion, the entire approach of the Assessing Officer is wholly incorrect. As is well known, Section 50C of the Act would enable the Revenue to bring to tax by way of deemed capital gain difference between the stamp valuation and the sale price of a capital asset. For obvious reasons, this provision would not apply in case of a builder for whom such immovable property is in nature of stock in trade and not capital asset. To overcome this difficulty, the legislature had inserted Section 43CA under Finance Act, 2013 w.e.f. 1.4.2014. This provision would enable the Revenue to tax the income arising out of sale of stock by a deeming fiction where subject to certain conditions, stamp valuation of such stock would substitute the actual receipt thereof. In absence of any such statutory provisions, giving rise to the deeming fiction, the Revenue cannot tax any amount which has not been received by a seller of an immovable property at the time of sale.”
No contrary decision is shown.
15. As regards the decision in the case of Associated Builders relied upon by the Appellant- Revenue, it arose in the context of valuation of assets including stock in trade on dissolution of a partnership firm. This Court was concerned with the issue whether, when the asset was valued on the basis of book value as provided in the contract between the parties, is it open to the Assessing Officer to ignore it and ascertain whether the valuation done does represent the fair value of the asset. This the Court answered in the affirmative by holding that the contract between the parties will not bind the Revenue, while determining the fair market value of the assets of the partnership firm. In the present case, we are not dealing with the valuation of assets on dissolution of a firm. In case of dissolution, there is no sale as in the case of running business. Thus, the decision in the case of Associated Builders is in
different facts and circumstances and would have no application to the present facts.
16. It is to be noted that the Revenue has not made any reference even remotely that the Respondent had received amounts in excess of that shown in the agreements in respect of twelve flats which is not being accepted. The entire case of the Revenue is merely on suspicion. It is not the case of the Revenue that the Respondent made secret profits out of sale of the twelve flats.
17. The Supreme Court has observed in the case of Commissioner of Income Tax v. A.Raman & Company4, that the law does not oblige a trader to make maximum profit, he can make, out of his trading activity. Income on which he can be taxed is only the income he has earned. So also recently, the Supreme Court in the case of A.Builders v. C.I.T.5 has observed that no businessman can be compelled to maximize his profits. Therefore, in view of the above, this question as proposed also does not give rise to any substantial question of law. Thus not entertained.
18. The appeal is dismissed.
1. (2001) 115 Taxman 19 (Bom)
2. (2017) 246 TAXMAN 274
3. WP No.345/2019 decided on 29 March 2019
4. 67 ITR 11
5. 288 ITR 1