High Court Of Madhya Pradesh
CIT vs. Chandrika Towers
Sections 145, 263
Asst. Year 1992-93
R.V. Raveendran, C.J. & K.K. Lahoti, J.
IT Appeal No. 74 of 2000
2nd September, 2004
Counsel Appeared
Rohit Arya, for the Revenue : L.L. Sharma, for the Assessee
ORDER
R.V. Raveendran, C.J. :
In this appeal by the Revenue under s. 260A of the IT Act, 1961 (for short the Act), the order dt. 15th Nov., 1999 passed by the Tribunal, Jabalpur Bench, in ITA No. 488/Jab/1997 relating to asst. yr. 1992-93, is assailed.
For the assessment year in question, the assessee had returned a total income of Rs. 1,27,000. The AO did not accept the said return and completed the assessment under s. 143(3) of the Act by order dt. 24th Feb., 1995, by taking recourse to s. 145 of the Act.
The assessee was a builder-cum-contractor, engaged in executing construction contracts for others and also constructing flats/shops as a building developer. The method of accounting adopted by the assessee was as follows :
The value of land purchased for putting up the building with flats/shops intended for sale, was treated as a capital expense and debited to the balance sheet. When it commenced construction in the said plot of land, the cost of material and labour (construction cost) was treated as revenue expenditure and debited to the P&L a/c. When the flat or shop in the building was sold with the proportionate share in the plot of land on which the building was constructed, the proportionate actual cost of the land was debited to the P&L a/c; and out of the sale proceeds received by sale of the flat/shop, the actual proportionate cost of land were shown as the sale price of the land component and the balance of sale price as the cost of the flat/shop. According to the assessee, there was no profit in regard to the sale of undivided share of the land. The difference between the actual cost of construction and the amount received as sale price towards construction was shown as the profit of the assessee.
4. During the accounting year, corresponding to asst. yr. 1992-93, the assessee did not sell any flat/shop. The AO was of the view that the method of accounting employed by the assessee led to a fictitious profit being offered to tax and did not permit the correct income to be deduced. The AO, therefore, adopted a different computation of income by exercising power under s. 145 of the Act. The AO determined the gross value of the work executed as Rs. 43,31,253 in the following manner : The AO took the profit from the work as 8 per cent of the gross value of the work executed and consequently determined the profit from construction as Rs. 3,46,500. To this, he added Rs. 75,650 at 10 per cent profit at the job works executed. Thereafter, by adding other income, etc., the total income was arrived at Rs. 4,83,369. After deducting the depreciation of Rs. 2,89,292, the Department determined taxable income at Rs. 1,96,080 as per order dt. 24th Feb., 1995. The assessee accepted the same.
Being of the view that the order of the AO was erroneous and prejudicial to the interest of the Revenue, the CIT, Jabalpur, after issuing a show-cause notice under s. 263 of the Act, passed a revisional order dt. 26th Feb., 1997. He set aside the order of assessment dt. 24th Feb., 1995 for the year 1992-93 on the ground that the AO had failed to take notice of two relevant items while determining the value of the gross work as Rs. 43,31,253. The two items were Rs. 43,780, being the value of opening stock and Rs. 52,19,774, being the cost of land on which the flats/shops were constructed. The revisional authority, therefore, directed the AO to add the two amounts to the gross value of the work for the purpose of calculating 8 per cent profit and redo the assessment accordingly.
The said order of the revisional authority was challenged by the assessee by filing an appeal before the Tribunal in ITA No. 488/Jab/1997. The Tribunal by order dt. 15th Nov., 1999 allowed the appeal and quashed the order of revisional authority. It held that even if the order of assessment was erroneous, it was not prejudicial to the interest of the Revenue and, therefore, the revisional authority was not justified in setting aside the assessment order in exercise of powers under s. 263 of the Act. The Tribunal held as follows : “It is not in dispute that during the year under consideration, the assessee did not sell any of the flats. The AO himself has recorded this finding in p. 1 of the assessment order. The AO has also recorded ‘It is, therefore, fictitious profit which is offered to tax’. However, despite recording this finding, the AO estimated the income of the assessee at a higher figure. The AO estimated the net profit of the assessee at 8 per cent of the expenditure incurred by the assessee in the construction of flats. In my opinion, no income accrues till the flats are sold and, therefore, estimation of income on the basis of expenditure incurred was not the proper basis. Further, the CIT in the order passed under s. 263 is of the opinion that while estimating the income, the AO ought to have included the cost of land as well as the cost of opening stock. As I have already opined that the income cannot be presumed on the basis of expenditure incurred, therefore, in my opinion, even if the assessment order may be erroneous, because AO failed to consider some of the items while estimating the income, it is not prejudicial to the interest of the Revenue because the AO estimated the income in a case, where no income had, in fact, accrued to the assessee……”
The said order is challenged in this appeal. The Revenue contends that the Tribunal erred in holding that the order passed by the AO was not prejudicial to the interest of the Revenue. At all events, it is submitted that the omission to take the opening stock of Rs. 43,780 while calculating the gross value of the work, was clearly an error which was prejudicial to the interest of the Revenue.
It is now well settled that the exercise of revisional jurisdiction under s. 263 of the Act, which is supervisory, is contemplated only where the assessment order is erroneous and also prejudicial to Revenue. It is no doubt true that in the method adopted by the AO for arriving at the gross value of the work for the purpose of calculating the profit, as the AO deducted the value of the closing stock, he ought to have added the value of the opening stock namely, Rs. 43,780. There can be no doubt that failure to add the sum of Rs. 43,780 is both erroneous and prejudicial to the interest of the Revenue and to that extent, the revisional authority was justified in invoking the provisions of s. 263 of the Act.
The position is, however, different in regard to the direction to add the cost of the land, namely, Rs. 52,09,774. Firstly, the AO was calculating the deemed income of value of the work executed and not on the value of flats/shops sold. Therefore, necessarily what has to be taken into account was the value of the work executed and not the value or the cost of the land. Therefore, the AO rightly did not take the value of the land. In the view we have taken, it is unnecessary to consider whether, in the absence of any sale of flats constructed by the builder, estimation of profit on the basis of expenditure incurred for construction and calculating a percentage thereof as deemed profit was permissible in law.
Further, the case of the assessee is that it would derive no profit by selling the undivided share in the land corresponding to the flats/shops; that it is a builder and not dealer in land; that it purchased the land for purposes of development by putting up constructions thereon, consisting of either flats or shops; that the price at which it sold the undivided share of the land was the actual cost price (that is, if the construction was 25 flats and while selling a flat with undivided 1/25th share in the land, the cost would be 1/25th of the actual cost at which the assessee acquired the land) and no profit was earned; and that the entire profit was derived by it out of the business activities, i.e., the cost of construction. This had not been disbelieved by the revisional authority. Even if it is assumed that there was profit in regard to the land, it was included in the cost of construction which was subject to assessment of tax during the relevant year of sale. Therefore, the revisional authority committed a serious error in directing that Rs. 52,19,774, being the cost of the land, should be added to the gross value of the construction for the purpose of calculating 8 per cent profit.
We are, therefore, of the view that the Tribunal has rightly held that there was no error or prejudice to the interest of Revenue insofar as non-inclusion of the cost of land.
We, therefore, allow this appeal in part and modify the order of the revisional authority and restrict the direction for fresh assessment by adding only Rs. 43,780, being the cost of opening stock, to arrive at the gross profit and consequential income during the year in question.
[Citation : 275 ITR 173]
