9911796707
TMI Blog2019 (7) TMI 1075X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable on sale to co- developer is to be worked out based upon area of land available and not upon area of FS1 available. 3. Ld. CIT (A) erred in law and on facts in recasting trading a/c of land to confirm addition to closing stock of land on the alleged ground that the appellant changed method of accounting, valuation of closing stock & allocation of cost to Profit & Loss a/c in subsequent year. 4. Ld. CIT (A) erred in law and on facts directing AO to recompute allocation of AUDA charges, FCCD interest & Township infra expenses based upon area of land sold and not as allocated by appellant on the basis of FST area. 5. Without prejudice to the above contention that working of closing stock of land as per appellant be accepted, ld CIT (A) ought to have directed AO that addition to closing stock be allowed as opening stock of the next year. 6. Ld. CIT (A) erred in law and on facts confirming disallowance by AO of Rs. 19,48,142/- administrative expenses u/s 14A rwr 8D of the Act. 7. Levy of interest u/s 234A/B/C & D of the Act is not justified." 3. Grounds of appeal raised by Revenue are also reproduced hereunder: "(1) That the ld. CIT(A) has erred in law and on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09.2012 showing loss of Rs. 7,01,72,900/-. It was noticed by the AO in the course of scrutiny proceedings that the Assessee has purchased 511707 sq. mtr. of land for the purpose of development of township and also applied for the development of same under Regulation for Residential Township-2009. The authority granted permission vide their letter dated 28.05.2010. The Assessee had prepared the construction plan as per the terms of Regulation for Residential Township 2009 which was approved by the Authority and as per the approved plan which had been prepared in terms of township regulations:- (a) The Assessee has provided for 120446 sq. mtr. land for the purpose of park, school, hospital, crossover road etc.' and only balance land area of 391261 sq. mtrs. is available for commercial exploitation. Out of the aforesaid land of 120446 sq mtr., 25,587.47 sq mtr. has already been surrendered by the Assessee to local authorities for public purpose amenities like school, hospital and public amenities as per clause 9.2 of Regulations for Township 2009 and the balance land is to be developed as Cross Over Road and Public Garden. (b) On the available area of land global FSI of 654206 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes to Rs. 23,45,80,784/-, which pertains to FSI sold. 5.2.3 Similarly, regarding the FCCD interest for Co-development sale of Rs. 29,48,89,883/-, the Assessee stated that FCCD interest paid for entire land is also taken in proportion to the FSI sold. The total FCCD interest has been paid on entire FSI available on land is of Rs. 71,50.43,918/- till the date of sale of FSI lo co-developers and 41.24% thereof is allocated towards 'Cost of Sales' i.e. Rs. 29,48,89,883/-. 5.2.4 Regarding township Infra Expenses for Co-development sale of Rs. 24,74,44,843/-, the Assessee explained that the Assessee is developing Applewoods Township on the land area of 511707 sq. mtr and for that purpose, Assessee has incurred total expenses of Rs. 60 crores. It was agreed with the purchaser namely-Goyal Safal developers that for FSI sold, the necessary Township Infrastructure will be carried out by Applewoods Estate Pvt Ltd. This is also mentioned in co-development agreement. Accordingly, the expenditure of Rs. 24,74,44.843/- has been claimed as 'Cost of Sales'. The attention is invited to clause 10(C) of the Co- Development Agreement which mentions that sale consideration of Rs. 250 Crores inter a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the FSI available on a particular area of land may vary from time so time. The present FSI for the said area may be different from what if was at the time of execution of co-development agreement. d) It was specifically been mentioned in the Co-development agreement that the Co-developer M/s. Goyal Safal Developer, is entitled to develop a part of the land admeasuring 32,200 sq. mtrs. which has further specifically described in the Schedule. 2 of the Co-development agreement and has also been identified vide certain survey numbers and also demarcated in the map annexed at page 7 of the co-development agreement, which apparently shows that the land deemed to be transferred or sold is only 82,200 sq meters and not 2,11,027 sq. ml. Being 41.24% of total land of 5,11,707 sq. mtrs. available with the assessee company. e) The onus is on the assessee company to prove that it has sold land admeasuring 2,11,027 sq. mtrs valued at Rs. 175,58,59,666/- which it has reduced from the opening WIP of the land without selling/transferring the same. f) The assessee has not produced any material on record to establish that, it has no right on the land admeasuring 2,11,027 sq. mtrs., (more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to leave space for public garden, public road, school and hospitals etc as per Township Regulations 2009. During the Financial Years 2012-13 und 2013-14, the company has sold the constructed property along with land directly to its customers. Customers are transferred the built property along with proportionate undivided share in the land i.e. Villas, Residential Apartments, commercial shops and offices. From the total cost of land, construction and other WIP the company has reduced the cost attributable to sale of FSI and only reduced cost has been allocated towards sale of properties during subsequent years. Thus, the nature of transactions in subsequent years are totally different from the transaction carried out during the financial year 2011-12. However, without prejudice, the details of sale as called for the Financial Years 2012-13 and 2013-14 were given in the statement enclosed along with copies of sale deeds. The details for F.Y. 2012-13 is as under: Particulars Land area (In Sq. Mt) Amount Land area (In Sq Mt) Amount Land area (In Sq. Mt) Amount Land area (In Sq. Mt) Amount Cost of land 309061 2501718656 4271 33202000 304790 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etter dated 27.03.2015 submitted detailed explanation. 5.4.1 The assessee explained that the assessee has purchased 511707 sq. mtrs. of land and as per the Township Policy, the copy of which has been furnished to the Assessing Officer vide our letter dated 20.03.2015, the assessee is required to reserve areas for schools, hospitals, public garden, public road etc. In terms of the guideline the company, has deducted 120446 sq. mtr. of kind for the said purposes. On the balance land of 391261 sq. mtr. available for commercial development FSI of 6542064 was approved by AUDA. The company vide its agreement dated 11.05.2011 has sold 2698000 sq. ft. of FSI to Goyal Safal Developer during the F.Y. 2011-12. At the cost of repetition the Assessee is once again reiterating that the value of the land is derived from the permissible construction only. Though the information for the F.Y. 2012-13 and 2013-14 is not relevant lo the on-going assessment, however, as desired by the Assessing Officer and without prejudice, it was submitted that the opening land and FSI available as on 01.04.2012 is 309061 sq. mtr and 3844064 sq. ft of FSI respectively. The quantitative reconciliation was also given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admeasuring 82,200 sq. ml. under nomenclature "area transferred to co-developer", which shows that the area of land transferred to co-developer is only 82,200 sq. mtr. Therefore, it cannot reduce the cost of land @ 41.24% of the total land. More interestingly, as can be seen from the table of the assessee's submission that, in the subsequent periods i.e. F.Y.2012-13 and 2013-14, the assessee company has stated to have sold area of Villa. * The assessee's submission dtd.27.03.2015 wherein it has reduced land admeasuring 120446 sq. mt in an attempt to reconcile the apparent inconsistencies in valuation of closing stock of land, is also contradictory 10 its earlier stand wherein the assessee company has claimed total cost of land admeasuring 211027.96 sq. mtr. Against sale of FSI wherein the land component transferred was only 82200 sq. mt. In this backdrop, the assessee's submission is again found contradictory and lopsided. By averaging the cost of FSI and land and by way of inaccurate-representation of fact, the assessee company has tried to defer the revenue. Neither the valuation of FSI nor of land has been found correct and consistent to the accounting method fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d without selling the same and such method is not in tune with the provisions of the Act. The books of the assessee company do not reflect the value of the FSI to show the value of land. The value of land has been arrived at by including cost of purchase of land plus cost of development incurred and not by the value of FSI. The claim of assessee company towards reduced value of land cost held as closing stock was not found justified. The AO accordingly re-valued the closing value of land in proportion to 16.06% of area of land parted alongwith transfer of co-development right. The value of closing stock of land was thus found to be undervalued by Rs. 1,07,17,79,584/- when reworked having regard to proportion to area transferred as against proportion of FSI transfer. The AO accordingly added the same of Rs. 1,07,17,79,584/- to the total income of the assessee on this score. 7. As noted above, the assessee similarly allocated the 'AUDA charges' @ 41.24% in proportion of FSI claimed to have sold. Likewise, the 'FCCD interest sale' was found to be allocated towards 'Cost of Sale' @ 41.24% in proportion to area of FSI claimed to have been sold. The 'Township Infra expenses' was also f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: 2.7 I have gone through the facts and submissions of the appellant carefully. The brief facts of the case are that Appellant is owner of land of 5,11,707 sq. mtrs., which is situated in the village Sarkhej Sanathal and falls within the limits of Ahmedabad Urban Development Authority (AUDA). During the year under consideration, Appellant has shown revenue from operation for Rs. 250 crores under the head "co-development rights" in Schedule 16 of profit & loss account. During the course of assessment proceedings Appellant has submitted co-development agreement dated 11th May, 2011 executed with Goyal-Safal Developers. During the course of assessment proceedings, Appellant has submitted working of dosing WIP as under:- Particulars Amt Rs Amt Rs opening WIP:- Land 4257578322 Construction 1257290289 5514868611 Add: Construction expenses during the year 834654955 (as per Schedule 18) Less: Cost of Sales Land 1755859666 Auda charges for Co-development sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of the Agreement including clause No. 6, 8, 9, 10, 26 and 51 and contended that assesses company, though, has claimed to have sold FSI of 26,98,000 sq. ft., it is specifically stated that co-development land to utilize such FSI is 82,200 sq. mtr., of land hence Appellant is not justified in claiming expenditure in proportion to FSI sold to Global FSt available with it. During the course of Assessment Proceedings, Appellant has also claimed that out of total land of 5,11,707 sq. mtr., land of 1,20,446 sq. mtr., is for areas for schools, hospital, public garden, etc. The AO has also asked Appellant to submit the valuation of closing stock for subsequent assessment year, wherein Appellant has shown cost of land at Rs. 250-17 crores which is similar to value shown in closing WIP as on 31st March, 2012 and said chart is already reproduced herein above. The Appellant has also stated that total available land as on 1sl April, 2013 is 3.09,061 sq. mtr. (5,11707 - 1,20446 being common area for development - 82,200 being land sold to co-developer). In subsequent Assessment Year Appellant has valued closing stock as well as amount to be charged in Profit & Loss Account in ratio of area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the land for the purpose of township development and authority granted permission on 28th May, 2010, The Appellant has prepared the construction plan as per terms of regulation for residential township - 2009, which is approved by authority as per which Appellant has provided 1,20,446 sq. mtr., of land for the purpose of park, school, hospital, etc., hence available land for commercial exploitation is 3,91,261 sq. mtr. It was also submitted by Appellant that total global FSI of above land is Rs. 65,42,064 sq. ft., out of which it has sold 26,98,000 sq. ft. FSI to Goyal-Safal Developer The Appellant has referred to various clauses of development agreement wherein he has referred to clause No. 3 of the agreement which states that Appellant has transferred 26,98,000 Sq. Ft., FSI to co-developer and in Clause - 10(b) it is stated that if developer could not transfer agreed FSI to co-developer, consideration would be reduced by Rs. 927 per sq. ft., FSI. The Appellant has argued that purpose of acquiring land and development of township is to utilize FSI embedded in the land and development cannot exceed total global FSI sanctioned by the plan. When assesses has sold part of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing maximum FSI available as per Township Planning Scheme. The Appellant has obtained such FSI only by making payment which is over and above land cost. These expenditure are separately debited by Appellant and same is not forming part of land cost of Rs. 425.75 crores Even Rules governing FSI change from time to time and FSI available may be different when land was purchased and when township plan scheme is placed on record hence land cost as on particular date cannot be measured on the basis of average FSI cost but is required to be measured on the basis of average rate for square metre of land. The major dispute between AO and Appellant is regarding allocation of cost of land and other expenditure against area of land sold to co-developer during the year. The Appellant has claimed cost based upon area of FSI sold in proportion to total FSI available with it whereas the AO has allocated such cost based upon area of land sold in proportion to total area of land available. The AO has considered the total area of land at 5,11,707 sq. mtr, but as discussed herein above, area for crossover infrastructure and public amenities as per township planning scheme is 1,20,446 sq. mtr., an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement bears the title as "rights in perpetuity of developer on co-development land" wherein it has been mentioned that developer shall have a right to inspect, maintain, operate, repair, replace or substitute any infrastructure facility on the co-development land without affecting adversely co-developer's FSI which means that FSI sold to co-developer is only limited to co-development land on which FSI is to be utilized. Even Clause-12(d)(ii) states that no co-development land will be used, sacrificed or provided for township infrastructure which means that land pertaining to FSI of 26,98,000 sq ft., is only 82,200 sq. mtr., hence reducing land cost based upon area of FSI sold cannot be accepted. During the course of appellate hearing the Appellant has referred to Clause - 7 and Clause - 20 of development agreement wherein it is stated that co-development land shall continue to vest with developer i.e. Appellant. However, when entire agreement as a whole is considered it is very clear that co-developer is developing area of land of 82,200 sq. mtr. and developer is entitled and expected to develop balance land only. Once the Appellant has handed over the possession of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. When cost to be charged in Profit & loss account based upon FSI method resulting in to lower cost and increase in Profit, appellant has charged the cost based upon area of land sod. The appellant has claimed that it has claimed the cost as per matching cost concept but fact is that appellant has not purchased FSI and sold it directly, it has acquired the land and matching cost need to be based upon proportionate area of land sold and even methodology adopted by appellant in subsequent year clearly shows that barring current assessment year, it itself has approached for allocating cost on the basis of area sold. 2.7.5 Considering the facts discussed herein above, it is observed that Appellant was having 3,91,261 sq. mtr., of land for Rs. 425.76 crores which means that average cost of land was Rs. 10,881 persq. mtr. Considering the facts discussed herein above, cost to be charged to Profit & loss account would be based upon area of land sold as worked out below:- TRADING ACCOUNT OF LAND AS A PART OF INVENTORY Particulars Sq. mtrs. Value (Rs.) Cost worked out per Sq. Mt. Opening Stock of land(A) 511707 4257578322 8320 Less: Less: Area for cross over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed to allocate such expenditure in ratio of FS! sold during the year in proportion of total FSI available with it and recompute closing WIP in case of appellant. Thus, all the related grounds of appeal regarding allocation of land & other cost to Profit & loss account and valuation of closing stock is partly allowed." 8.2 The CIT(A) thus while upholding the additions made by the AO in principle reduced the quantum of addition from 1,07,27,79,584/- to Rs. 86,11,74,085/- on the ground that an area of 120446 sq. mtrs. of land requires to be excluded for the computation of per sq.mtrs. of land cost since such area is attributable to cross over infrastructure, roads, schools, hospitals, public garden and other public amenities as per Township planning scheme concerning the total land area. The CIT(A) thus accepted the plea of the assessee that the assessee was left with the area admeasuring 391261 sq. mtr. (511707 - 120446) only for commercial exploitation. The CIT(A), however, sustained the adjustments made by AO towards 'Cost of Sales' and 'closing value' of land adopting the geographical basis save and except allowance given for land utilized for common infra facilities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 511707 6542064 4257578322 568807450 642835052 45647787 5514868611 Less: Area attributable to PG/PPI - - Opening Stock (Net) 511707 6542064 4257578322 568807450 642835052 45647787 5514868611 Add: Expenditure incurred during the Year 20591643 323237107 490826205 834654955 Less: Transferred to Co Developer 82200 2698000 683932286 91372548 114863799 103716088 993884720 Remaining stock for Applewoods 429507 3844064 3573646036 498026545 851208360 432757904 5355638846 Note: The cost transferred to co developer is at 16.06% because land transferred to them (82200 sq.ft.) is 16.06% of the total land Available (511707 sq. ft.) Value of closing stock on the basis of Land 8320.34 1159.53 1981.83 1007.57 12469.27 9000 The market price as per valuation report per sq mtr 10.1 Explaining of rational for sale of 26,98,000 sq.ft. of FSI at a consideration of Rs. 250 Crores to co-developer, the learned senior counsel for the assessee pointed out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own costs and selling to final customers. The co-developer would be entitled to receive agreed consideration from the customers without any share of the assessee therein. However, the assessee would be required to join as an owner of the sale deed in terms of co-development agreement. In terms of the co-development agreement, the assessee is left with reduced FSI on the remaining land after sale of stipulated FSI. On the remaining land at disposal, the assessee was left with the limited option to construct the Villas, affordable housing for economically weaker section, commercial offices and shops within the residual FSI left as per the approved master plan by AUDA. In the given set of arrangement, the total cost of remaining land, and construction WIP was suitably reduced having regard to the cost attributable to sale of FSI and only reduced cost has been allocated towards sale of properties by the assessee in the subsequent years. The learned senior counsel thus submitted that the assessee has received consideration of Rs. 250 Crores from the co-developer for the purpose of sale of co-development right alone. The assessee has incurred Rs. 2,53,27,75,176/- towards 'Costs of Sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2698000 sq.ft. area of land. It is thus obvious that the consideration paid by co-developer is towards utilization of FSI only and consequently, costs in relation thereto has to be necessarily worked out in proportion to FSI and not with reference to geographical area of land. It was thus contended that the cost of FSI sold has been correctly worked out and there was no case whatsoever for the Revenue to embark upon the additions based on geographical area. 11. The learned DR for the Revenue, on the other hand, relied upon the orders of the AO and CIT(A) and contended in furtherance that the tangible area parted with the co-developer is ascertainable and therefore, the cost of land and cost of closing stock requires to be valued in proportion to the geographical area of township/entire land. It was contended that area of land transferred to co-developer is only 16.06% of total area and therefore 'Cost of Sales' of such area cannot be determined in proportion to FSI @ 41.24%. The accounting of value of costs of land has to be done on the basis of area transferred rather than FSI transferred. The learned DR also contended that CIT(A) has wrongly given partial relief to assessee by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject of development and construction of project, the assessee entered into a co-development agreement dated 11.05.2011 with co-developer namely 'Goyal Safal Developers' whereby a part of township land admeasuring approximately 82200 sq.mtr. was demarcated for the purpose of development and construction of residential apartments' buildings by the co-developer utilizing maximum FSI of 26,98,000 sq.ft. as sanctioned by the local authority. It is thus the case of the assessee that while only 16.06% of land area has been demarcated for the purpose of development by co-developer, the FSI to the tune of 41.24% of the total FSI has been utilized by codeveloper for construction in the township area. The assessee has received an agreed consideration of Rs. 250 Crores from the codeveloper in lieu of partial surrender of its development rights in favour of the co-developer. It is also the case of the assessee that apart from 16.06% of geographical land area demarcated for development and construction by the co-developer, the assessee was also under obligation to create infrastructure facilities in the form of roads, hospitals, schools, garden etc. as per the sanctioned master plan which would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be 16.06% of the total opening value of township land of Rs. 425.75 Crores instead of 41.24% applied by the assessee having regard to the FSI alienated. This would result in difference of Rs. 1,07,17,79,584/- in the value of 'Cost of Sales'. According to the AO, the cost of the sale of land transferred to codeveloper has been overstated to this extent and consequently closing value of remaining land in possession of the assessee has been understated to the same extent. The business income deduced by the assessee on sale of co-development rights is thus alleged to be understated by Rs. 107.17 Crores. 12.5 Applying the same analogy, the AO has reduced the allocation of AUDA charges for co-development, FCCD interest, township infra expenses from 41.24% to 16.06% alleging excess expenses claimed by the assessee to the tune of Rs. 53,09,89,339/- for determination of aggregate 'Cost of Sales'. The AO thus has increased the assessed income by Rs. 1,07,17,79,584/- on account of alleged overstatement of value of 'Cost of Sales' of land assigned by the assessee and also made another disallowance on account of excess claim of incidental expenses clubbed to the 'Cost of Sales' amounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration received is towards sale of FSI per se and not towards demarcation and sale of land. This being so the 'Cost of Sales' attributable to land requires to be assigned in terms of global FSI available in the total township area in proportion to FSI sold. It is not in dispute that FSI of 65,42,075 sq.ft. was stated to be available at the disposal of the assessee for the purposes of construction and development on the total township area of 511707 sq.mtr. Out of the aforesaid FSI 65,42,075 sq.ft., the assessee has sold FSI of 26,98,000 sq. ft. (41.24% of global FSI) to the co-development by way of co-development agreement which fetched the revenue of Rs. 250 crores. Thus, when the 'Cost of Sales' computed for deduction in terms of FSI in the same manner as the sales revenue fetched in terms of FSI, we do not see any error in the cost assigned as per FSI vis-à-vis FSI sold. 15. Significantly, as per clause 10(b) of the co-development agreement, it was the contractual obligation of the developer assessee to enable the co-developer to utilize FSI of 26,98,000 sq.ft. and in the event of any regulatory hurdle in this regard resulting in lesser utilizing of FSI by the co-develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. assigned by the stamp authorities, if the method suggested by the Revenue for allocation of cost on the basis of land area is accepted. This crucial aspect also reinforces the claim of the assessee that the 'Cost of Sales' requires to be determined on the basis of FSI allocated vis-à-vis global FSI regardless of lesser area allocated for putting up construction. 18. In the light of forgoing discussion, we have no hesitation to set aside the order of the CIT(A) and reverse the action of the AO. We find considerable merit in the plea raised by the assessee for computation of 'Cost of Sales' of land and incidental costs towards AUDA charges etc. on the parameters of FSI sold as computed by the assessee. The additions made by the AO towards alleged suppression of profit arising from sale of land and excess claim of incidental expenses attributable to such sale are therefore reversed. 19. Ground No.1 to 5 of the assessee's appeal concerning the aforesaid grievances are therefore allowed. 20. As a corollary and in the converse, the Revenue's Ground Nos. 1 to 8 assailing the action of the CIT(A) in granting partial relief is also found to be without merit and accordingly d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of capital and reserves. Therefore, the presumption would naturally arise in favour of the assessee for deemed utilization of interest free funds for investments yielding tax free income in preference to the borrowed funds as laid down in plethora of judicial precedents. Therefore, we do not see any infirmity in the order of the CIT(A). The grievance of the Revenue on this score thus cannot be entertained. 26. Ground No.9 of the Revenue's appeal is dismissed. 27. Turning to the cross grievance of the assessee towards sustenance of disallowance of administrative expenditure computed under Rule 8D(2)(iii) r.w. Section 14A of the Act, we observe that the revenue authorities have rightly invoked formula under Rule 8D(2)(iii) for disallowance of management and general expenses deemed to be attributable to earn the tax free income. However, the disallowance is required to be computed having regard to the investments which has actually yielded exempt income instead of gross investments in consonance with the decision of the special bench in ACIT vs. Vireet Investments Ltd. 165 ITD 27 (Delhi-Trib.) (SB) as relied upon on behalf of the assessee. The issue is therefore remitted back t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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