IN INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA Before Shri Waseem Ahmed, Accountant Member and Shri K.Narsimha Chary, Judicial Member ITA No.523/Kol/2016 Assessment Years:2012-13 M/s Ashiana Housing Ltd., DCIT, Circle-8(1), 5F, Everest, 46/C, Aayakar Bhawan, P-7, V/s. Chowringhee Road, Chowringhee Square, Kolkata-700 071 Kolkata-700 069 [PAN No.AADCA 9093 P] Appellant..Respondent By Appellant Shri Pawan Kumar Agarwal, FCA By Respondent Shri Niraj Kumar, CIT-DR Date of Hearing 22-08-2016 Date of Pronouncement 21-09-2016 ORDER PER Waseem Ahmed, Accountant Member:- This appeal has been filed by assessee relating to Assessment Year (AY) 2012-13 is against order passed by Pr. Commissioner of Income Tax -3, Kolkata dated 20.01.2016 under provisions of Sec.263 of Income Tax Act, 1961 (hereinafter referred to as Act ). 2. assessee is challenging validity of revision order passed by Ld. CIT. grounds raised by assessee are as under : (1) For that under facts and circumstances of case assessment order passed u/s.143(3) 27-03-2015 by Assessing Officer was not pre-judicial to ITA No.523/Kol/2016 A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 2 interest of revenue, as such Ld. Pr. Commissioner of Income Tax had erred in invoking Section 263 of I. T. Act, 1961 in this case. (2) For that "future development expenses" claimed by appellant assessee company were part of cost of Units sold in its construction project "Ashiana Aangan" and revenue considered out of sale proceeds had to be matched with entire cost of Units (incurred & to be incurred) and therefore, allowance of such expenditures could not be termed as pre-judicial to interest of revenue. (3) For those non-discussions of allowable expenditures in assessment order does not lead to conclusion that Assessing Officer had not made any enquiry in course of assessment proceedings. (4) For that Assessing Officer had allowed "further development expenses" as accrued expenses for Units sold in housing project and such view is permissible in law to which Pr. Commissioner did not agree with and under these facts assessment order cannot be treated as erroneous and pre-judicial to interest of revenue. (5) For that assessment order passed u/s.143(3) of Act passed by Assessing Officer is not pre-judicial to interest of revenue as because tax has been demanded based on book profit u/s.115JB which is much higher than tax demanded on normal income tax computation even after considering disallowance of future development expenses for Rs.2,24,85,000/-. (6) For that under facts and circumstances of case assessment order passed u/s. 143(3) is neither erroneous nor pre-judicial to interest of revenue and thus invoking of Section 263 by Pr. CIT is bad in law and order passed is liable to be set aside. (7) For that your appellant assessee craves leave to add or alter and modify grounds of appeal before or at time of appeal hearing. 2. brief facts of case as per records as culled out before us. assessee in present case is company and engaged in business of real estate development and hospitality services. assessee has filed its return of income on 29/09/2012 for relevant assessment year under consideration disclosing income of Rs.6,73,68,866/- under normal provisions of Income Tax Act under business head and book profit under sec. 115JB of Act amounting to Rs. 71,29,50,828/-. Thereafter case was selected for scrutiny under CASS module and accordingly notices were served to assessee under section 143(2) and 142(1) of Act. During ITA No.523/Kol/2016 A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 3 assessment proceedings various disallowance of expenditures as claimed by assessee under different head of profit & loss account have been made. In this entire rigmarole of assessment proceedings at fag-end of assessment profit was assessed for Rs. 8,11,75,620/- u/s 143(3) of Act and for Rs.72,63,25,956/- u/s 115JB of Act. assessment u/s 143(3) of assessee was completed as on 27/03/2015. 3. grounds raised by assessee from 1 to 6 have common issue and so we decided to adjudicate them together for sake of convenience. common issue raised by assessee in this appeal is that ld. CIT erred in holding order of AO as erroneous and prejudicial to interest of Revenue under section 263 of Act. 4. impugned order passed by ld. CIT u/s 263 of Act observed that assessee has claimed future development expenses amounting to Rs.2,24,85,000/- under head Other Project Related Cost . As per ld. CIT future development expenses were not ascertainable at time of finalization of balance sheet so these are not allowable expenses. Accordingly, ld. CIT u/s 263 of Act issued notice to assessee dated 11/12/2015 for clarification of future development expenses. In compliance to notice assessee submitted that in real estate business it is not possible to incur all possible ascertained cost before handing over possession of units to customers. company follows mercantile accounting method and accordingly we have to follow matching concept i.e. matching cost with revenue. costs to be incurred are properly estimated by way of work orders or purchase orders. expenses claimed as future development expenses were expenses required to be incurred after completion of project. As these projects were completed during relevant AY and non accounting of future cost will not represent true financial picture of assessee. Assessee also submitted that details of future development expenses amounting to Rs. 2,24,85,000/- claimed by assessee are actual cost incurred immediately in succeeding year. In support of his claim assessee has submitted breakup of future cost and actual cost incurred as detailed below : ITA No.523/Kol/2016 A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 4 S.No Particulars Provision made(Future Actually incurred in Expenses)Rs. 000 next year Rs. 000 1 Door Fixing Work 261 261 2 Fabrication Work 102 102 3 Flooring Work 1442 1442 4 Painting Work 2587 2587 5 PHE work 633 633 6 Sundry Material 846 846 7 Wages 5738 5738 8 Incentive 2232 2232 Sub Total- 13841 13841 Direct Project Expenses 9 Modular Kitchen 4283 4283 10 Air Conditioner 4361 4361 Sub Total- B 8644 8644 Total 22485 22485 However ld. CIT rejected assessee submission by observing that AO failed to verify expenses claimed by assessee under head Future Development Expenses with view to check whether these have been crystallized or not. future liability was not ascertained at time of filing Income Tax Return. taxable income of assessee needs to be worked out as per accounting principles and as per provisions of Sec. 145 of Act. Accordingly ld. CIT held order erroneous and prejudicial to interest of revenue. ld. CIT accordingly directed AO to make fresh assessment after making proper enquiry and giving opportunity to assessee as per law. Being aggrieved by order of ld. CIT, assessee is in appeal before us. 5. ld. AR before us reiterated submission made before ld. CIT. (l) assessee company is engaged in real estate development. At time of handing over of possession of Units of housing project few incomplete works ITA No.523/Kol/2016 A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 5 remained to be completed after handover of possession. costs of such works are ascertained and actual costs incurred at future dates are more or less near to ascertained cost. Where entire revenue of Units are considered as income, under mercantile system of accounts, entire costs whether incurred or to be incurred are required to be charged to Profit & Loss Account for ascertaining true income of housing project. cost of incomplete works were based on work orders / purchase orders supported by proper engineering estimates etc. All such expenditures were booked in books of accounts by assessee company as "future development expenses". These are included in Statement of Profit & Loss Accounts under head "other projects related expenses". provisions made in books and actual amount incurred are narrated in impugned assessment order uls.263. (2) Under above facts and circumstances Ld. Assessing Officer had considered it to be allowable expenditure under mercantile system of accounting. It is true that there is no discussion on this issue in assessment order. It is also prevalent practice that all allowable expenditures are not discussed in assessment order, rather expenses which are disallowed or added back are discussed at length in assessment order. Therefore, non- discussion of each and every allowable expenditure in assessment order should not be termed as erroneous assessment order. (3) "Future development expenses" are cost of Unit in housing project. entire income on sale of respective unit had been considered as revenue at time of handing over of possession to buyer. Therefore, under mercantile system of accounting entire cost of unit has been charged to Profit & Loss Accounts. There is no error in doing so. In view of same and under facts of case allowance of future development expenses by AO is not prejudicial to interest of revenue. (4) In assessment order tax has been levied on Book Profit u/s.115JB of Act at Rs.14,47,16,324/- plus interest aggregating to Rs.14,83,19,279/- against assessed income of Rs.8,11,75,620/-. Even if expenditure relating to "future development expenses" for Rs.2,24,85,000/- is added to assessed income tax on normal assessment would be less than tax based on book profit under Section 115JB. In view of same irrespective of consideration of future development expenses allowable or disallowable tax demanded under book profit provision would remain same. This shows that assessment order passed by assessing officer is not prejudicial to interest of revenue. (5) twin conditions of assessment order, that impugned assessment order is erroneous and assessment order is prejudicial to interest of revenue, are required to be satisfied simultaneously for invoking Section 263 by Ld. Commissioner of Income Tax. But in this case such two conditions have not been satisfied. Therefore, Ld. Pr. CIT had erred in setting aside assessment order u/s.263 and therefore order passed u/s.263 is liable to be set aside. ITA No.523/Kol/2016 A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 6 6. On other hand ld. DR submitted that future expenses claimed by assessee represent unascertained cost and same cannot be disallowed as expenses for year under consideration as per accounting principles and provisions of section 145 of Act. AO has not applied his mind on expenses of future cost at time of assessment. ld. DR vehemently supported order of ld. CIT. 7. We have heard rival contentions of both parties and perused materials available on record. From foregoing discussion we find that assessee in instant case has claimed future development expenses for amount of Rs. 2,24,85,000/-. same expenses were not verified by AO at time of assessment, therefore ld. CIT under section 263 of Act held order erroneous and prejudicial to interest of revenue on basis of no enquiry conducted by AO at time of assessment. learned CIT also observed that future development expenses represents cost which will be incurred in future and therefore same has not been crystallised in year under consideration. Now following question arises for our consideration. 1. Whether AO has conducted enquiry at time of assessment with regard to future development expenses. 2. Whether future development expenses represent cost which has been crystallized. 3. Whether order of erroneous and prejudicial to interest of Revenue. From perusal of assessment records we find that necessary enquiry has not been made by AO at time of assessment. In such circumstances various courts have held order of AO as erroneous and prejudicial to interest of Revenue. In this connection we rely in judgement of Honourable High Court of Delhi in case of Gee Vee Enterprises Vs. ACIT & Ors 99 ITR 375 where it was held as under:- position and function of ITO is very different from that of civil Court. statements made in pleading proved by minimum amount of evidence may be accepted by civil Court in absence of any rebuttal. civil Court is neutral. It simply gives decision on basis of pleading and evidence which comes before it. ITO is not only adjudicator but also investigator. He cannot remain passive in face of return which is apparently in order but calls for further inquiry. It is his duty to ascertain ITA No.523/Kol/2016 A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 7 truth of facts stated in return when circumstances of case are such as to provoke inquiry. meaning to be given to word "erroneous'' in s. 263 emerges out of this context. It is because it is incumbent on ITO to further investigate facts stated in return when circumstances would make such inquiry prudent that word "erroneous'' in s. 263 includes failure to make such inquiry. order becomes erroneous because such inquiry has not been made and not because there is anything wrong with order if all facts stated therein are assumed to be correct. company and partnership in this case were formed in same year with many members common in both. fact that company purchased land but handed over construction work to partnership even though object of company was to make such construction should naturally provoke query as to why this was done. partnership was required to be in existence as genuine firm in previous year before it could be registered under s. 185 of Act. Such registration gives substantial advantage to it for purpose of taxation. In very first assessment of company and firm, advantage of registration was given to firm. question would naturally arise whether firm was formed merely for purpose of getting tax advantage. Assessee argued that there is nothing wrong if legitimate advantage is sought by these means. But it was precisely for that reason that ITO had to be satisfied that firm had existed in previous year genuinely. It cannot be said that CIT could not be reasonably of opinion that order of ITO was erroneous because previous inquiries were not made by ITO. Nor can it be said that it was necessary for CIT himself to make such inquiry before cancelling order of assessment. Rampyari Devi Sarogi vs. CIT (1968) 67 ITR 84 (SC) : TC57R.202 and Tara Devi Aggarwal vs. CIT 1973 CTR (SC) 107 : (1973) 88 ITR 323 (SC) : TC57R.206 relied on CIT was justified in exercising his revisional jurisdiction on ground that ITO had not made sufficient enquiries before granting registration to firm and it was not necessary for CIT to have himself made enquiries before cancelling assessment. 7.1 We also find that future cost claimed by assessee represents estimated expenses as these have not been crystallized at time of finalization of books of accounts told these expenses have been estimated in scientific manner. These expenses have been estimated on basis of agreement for such expenses. These agreements have been made in year under consideration for some future activities which will begin after financial year. cost of such activities has already been ascertained on basis of contracts. We concur with view of ITA No.523/Kol/2016 A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 8 ld. AR in so far manner adopted by assessee for determination of future cost. However we find that documents/ contracts made by assessee for future cost have not been verified by AO at time of assessment. argument of ld. AR that assessee has paid tax under section 115JB of Act and even after making disallowance of future development cost assessee shall still be liable for tax under provisions of section 115JB of Act. Therefore there is no loss to Revenue even after making disallowance of future development cost. Accordingly order can be held erroneous but not prejudicial to interest of revenue therefore proceedings under section 263 of Act should be dropped. However we disagree with argument of ld. AR that twin conditions as specified under section 263 of Act have not been satisfied for holding order of AO erroneous and prejudicial to interest of Revenue. In instant case we have already held that AO has failed to make sufficient enquiries at time of assessment with regard to future development cost expenses claimed by assessee. Accordingly in this case where tax is paid under normal provisions of tax or under provisions of MAT under section 115JB of Act, it does not make any difference. It is because Hon ble High Court of Delhi in case of GEE VEE Enterprises (supra) has held order of appeal in aforesaid facts and circumstances as erroneous and prejudicial to interest of revenue. In view of above we do not find any reason to interfere in order of learned CIT passed under section 263 of Act. Hence this ground of appeal of assessee is dismissed. 8. In result, appeal filed by assessee stands dismissed. Order pronounced in open court on 21/09/2016 Sd/- Sd/- (K.Narsimha Chary) (Waseem Ahmed) Judicial Member Accountant Member Dkp - 21/09/2016 Kolkata ITA No.523/Kol/2016 A.Y. 2012-13 M/s Ashiana Housing Ltd. vs. DCIT Cir-8(1), Kol Page 9 Copy of Order Forwarded to:- 1. /Appellant-M/s Ashiana Housing Ltd. 5F, Everest, 46/C Chowringhee Road, Kolkata-700 071 2. Respondent-DCIT, Circle-8(1), Aayakar Bhawan, P-7, Chowringhee Square, Kolkata-69 3. Concerned CIT 4. - CIT (A) 5. DR, ITAT, Kolkata 6. Guard file. By order//True Copy// M/s Ashiana Housing Ltd. v. DCIT, Circle-8(1), Kolkata