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TMI Blog2021 (11) TMI 142X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered opinion, was not justified in rejecting the methodology adopted by the assessee and estimating the business profits on sale of land as well as profits from construction activities separately since the land merged into the stock-in-trade and the premises including the undivided share in the land was sold to various buyers during the year. The perusal of chart placed before us would show that finally, the project has been completed in AY 2010-11 and revenue has been recognized from AYs 2005-06 to 2010-11 based on percentage of completion method of accounting. Therefore, finding no infirmity in the impugned order on this issue, we dismiss ground no.1 of revenue s appeal. LTCG on conversion of land into stock-in-trade - computation of LTCG on conversion of land into stock-in-trade - FMV as on 01/04/1981 as well as FMV on 24/12/2003 i.e. the date of conversion - HELD THAT:- Viewed from any angle, the substitution of FMV as on 01/04/1981 by Ld.AO cannot be held to be in accordance with law. Therefore, finding no infirmity in the impugned order, in this respect, we dismiss ground no.2 of revenue s appeal. Disallowance of Professional fees - HELD THAT:- We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credentials. Concurring with the same, we would hold that the allegations of Ld. AO and conclusion drawn there-from has no legs to stand. We also concur that the statutory provisions do not empower Ld. AO to substitute actual consideration received by the assessee with hypothetical sale consideration. The consideration which never accrued or which was never received by the assessee could not be brought to tax as capital gains or business income - similar allegations were leveled by Ld. AO in assessment order for AY 2004-05 and few of these allegations have merely been reproduced in the assessment of this year. However, all such allegations as well as disallowances as made in AY 2004-05 stood settled in assessee s favor by the cited decision of Tribunal for AY 2004-05. We find no reason to deviate from the same. Disallowance of various expenses - disallowance of various expenses, viz. Power and Fuel, Deferred Revenue Expenses, Rent, rates and taxes, Miscellaneous Expenses - CIT-A restricted addition to 25% as against ad-hoc disallowance made by the AO of 75% - HELD THAT:- As rightly observed by Ld. CIT(A), merely on the basis of intention, a valid claim made within the four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad as under: - 1. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the profit estimated by the AO at ₹ 28,01,64,768/- by observing that the percentage completion method followed consistently by the appellant cannot be rejected without appreciating the contention of the AO discussed in detail at para No. 4 of the assessment order. 2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to adopt the cost of acquisition as the fair market value as on 01/04/1981 in respect of the land converted from investment in stock-in-trade at ₹ 240/- per sq.ft. as against ₹ 16.32 which was adopted by the assessee himself while converting the land to stock-in-trade in AY 2004-05 for a similar project. 3. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to adopt fair market value for the sale of land converted into stock-in-trade at ₹ 1,750/- per sq.ft. as against ₹ 3,000/- adopted by the AO for computation of long term capital gain disregarding the contention of the AO at para 6 of the assessment order whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has erred in not appreciating the fact that the intra group series of transaction and shares and application of money suffered from want of transparency and it had obtained the blemish of colorable device and tax avoidance. 7. The appellant prays that the order of CIT(A) on the grounds be set aside and that of the AO restored. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary. 2. The Ld. CIT-DR, drawing attention to the factual matrix of the case, pleaded for restoration of assessment as framed by Ld.AO. The Ld. AR, on the other hand, drawing attention to various documents as placed in the paper book, supported the impugned order. The Ld. AR also contested the disallowance of various expenses. Reliance has been placed on various judicial pronouncements, the copies of which have been placed on record. The decision of Tribunal in assessee s own case for AY 2004-05, ITA Nos.2135,2343/Mum/2009 dated 30/08/2019 has also been referred to. 3. We have carefully heard the rival submissions and perused relevant material on record including the documents placed in the paper book. We have also deliberated on various judicial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Architect. The revenue thus recognized by the assessee amounted to ₹ 56.42 Crores and the same was credited to Profit Loss Account. The aforesaid accounting methodology was stated to be in accordance with Generally Accepted Accounting principles and accounting standards issued by The Institute of Chartered Accountants of India (ICAI). 4.3 However, rejecting the aforesaid accounting methodology, Ld. AO opined that there would be three components of profits viz. (i) Long-term capital gains on sale of land upto the date of conversion; (ii) profit / loss on sale of land subsequent to conversion; (iii) profit / loss on construction of the premises. 4.4 In the above background, Ld. AO proceeded to work out profit / loss on sale of land. It was noted that average sale price of the constructed premises was ₹ 5558/- per square feet and estimated average cost of construction including profit on construction activities would be ₹ 750/- per square feet. The differential of the two i.e. ₹ 4808/- per square feet would be the sale value of 91628 square feet of land sold during the year. The total sale value of the land would thus be ₹ 4405.13 Lac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He has not appreciated that the method followed by the appellant will get automatically substituted by the actual realization of the revenue and the cost incurred would be inclusive of land cost in the year of completion of the project. Moreover, this is a company in which the public are substantially interested and its final accounts are subject to scrutiny and approval by the shareholders in the annual general meeting: calling for full transparency before the public. Therefore ultimately there will be no revenue loss. The undersigned gives due weightage to the appellant's submission that there are only two methods for construction accounting, firstly the 'Project Completion Method' and secondly the 'Percentage Completion method'. The appellant has adopted a recognised method of accounting for offering the revenue for taxation based on the percentage completion method. The AO has not pointed out any defect therein which may warrant the rejection of the method followed. The AO has computed the profit on sale of land separately and the profit on sale of construction separately. Both of these profits are components of the same project as a whole which cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputed the capital gains as provided in Sec. 45(2) of the Act. The land stood converted into stock-in-trade and the assessee constructed premises / buildings on this land. During the year, the assessee entered into agreement for sale of these premises. For the purpose of revenue recognition, the assessee followed percentage completion of method of accounting. Since project was completed to the extent of 11% during the year as certified by the Architect, the assessee recognized projected revenues to that extent in its books of accounts. The said method was recognized method of accounting as per Accounting Standards issued by ICAI and this method was consistently followed in subsequent years to recognize the revenue. This method was accepted in earlier years also. Therefore, Ld. AO, in our considered opinion, was not justified in rejecting the methodology adopted by the assessee and estimating the business profits on sale of land as well as profits from construction activities separately since the land merged into the stock-in-trade and the premises including the undivided share in the land was sold to various buyers during the year. The perusal of chart placed before us would show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice was issued to the assessee before rejecting the valuation report and therefore, reference was not as per law. The rate of ₹ 3000/- as adopted by Ld.AO was without any basis and Ld. AO ought to have accepted the valuation report submitted by the assessee. The FMV rate of ₹ 16.32 per square feet as on 01/04/1981 as taken by Ld.AO was the cost of land in the year 1934-35 and not in the year 1981 and therefore, disturbing the same, was not justified at all. 6.4 However, Ld. CIT(A) justified reference to DVO and directed Ld. AO to adopt the FMV on the date of conversion as declared by the assessee subject to revision of the same on the receipt of DVO report. Regarding valuation as on 01/04/1981, Ld. AO did not form any opinion that the FMV declared by the assessee was less than actual FMV and therefore, the same was to be taken at ₹ 240/- per square feet as directed in first appellate order for AY 2004-05. Aggrieved, the revenue is in further appeal before us. Our findings Adjudication 7. Upon perusal of factual matrix, we find that there are two facets of the dispute i.e. FMV as on 01/04/1981 as well as FMV on 24/12/2003 i.e. the date of con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that FMV was less than value declared by the assessee as held by Hon ble High Court of Bombay in CIT V/s Puja Prints (43 Taxmann.com 247; 15/01/2014). It was held as under: - 7. We find that Section 55A(a) of the Act very clearly at the relevant time provided that a reference could be made to the Departmental Valuation Officer only when the value adopted by the assessee was less then the fair market value. In the present case, it is an undisputed position that the value adopted by the respondent-assessee of the property at ₹ 35.99 lakhs was much more than the fair market value of ₹ 6.68 lakhs even as determined by the Departmental Valuation Officer. In fact, the Assessing Officer referred the issue of valuation to the Departmental Valuation Officer only because in his view the valuation of the property as on 1981 as made by the respondent-assessee was higher then the fair market value. In the aforesaid circumstances, the invocation of Section 55A(a) of the Act is not justified. 8. The contention of the revenue that in view of the amendment to Section 55A(a) of the Act in 2012 by which the words is less then the fair market value is substituted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer is available, there is no occasion for the Assessing Officer to invoke the general powers of enquiry. In view of the above and particularly in view of clear provisions of law as existing during the period relevant to Assessment Year 2006-07, we are of the view that questions (a) and (b) do not raise any substantial question of law. Viewed from any angle, the substitution of FMV as on 01/04/1981 by Ld.AO cannot be held to be in accordance with law. Therefore, finding no infirmity in the impugned order, in this respect, we dismiss ground no.2 of revenue s appeal. Disallowance of Professional fees 8.1 The assessee claimed ₹ 130.52 Lacs as professional fees which was paid to different persons / entities. Upon perusal of assessee s submissions, Ld.AO opined that the submissions do not give any picture as to the fact that the expenses were incurred wholly and exclusively for the purpose of business. Accordingly, 75% of these expenses were disallowed which came to ₹ 97.89 Lacs. 8.2 During appellate proceedings, it was submitted that complete details of professional fees paid by the assessee was furnished. The fees include certification fees for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 Professional Legal Charges 3,82,500 3,82,500 Seagull Services 37,50,514 37,50,514 Wages 17,68,000 41,98,434 59,66,434 Ex-Gratia Wages 20,20,973 80,29,722 1,00,50,695 Ex-Gratia Salaries 2,11,849 75,000 2,86,849 PL Encashment 1.83,413 3,95,363 5,78,776 Gratuity 2,30,53,990 65,84,815 2,96,38,805 DCML-VRS 33,35,916 12,50,13,976 4,19,07,108 17,02,57,000 9.2 During appellate proceedings, the assessee submitted that the claim was in accordance with the provisions of Sec.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cription to the equity share capital / loans against equity. Later on, MVB wanted to quit from this Venture and their stake was acquired by PLL in October 2003. As per Share Purchase Agreement (SPA) dated 23/08/2003 between PLL and MVB, MVB agreed to sell the shares to PLL for an aggregate consideration of US One million Dollars. Thus, MTL turned out to be subsidiary of PLL with 99% holding thereof and one percent was with ESOP Trust. This transaction happened during financial year 2003-04. The assessee also enclosed of valuation of shares determined by M/s Shah Co, Chartered Accountants. 10.3 Subsequently, in FY 2003-04 only, PLL sold part of equity holding and entire preference share holding in MTL to MGM Shareholder Benefit Trust. Due to recession in the textile industry, there was huge accumulated debit balance in Profit Loss Account of MTL as on 31/03/2003 for ₹ 38.02 Crores and the value of assets of MTL diminished. Therefore, MTL formulated a proposal to rationalize the financial structure of the company and to get shares of the company listed on Stock Exchanges. Infusion of funds of ₹ 15.50 Crores by issue of further 100 Lac shares at premium of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted. The rate of ₹ 69.10 per share was nothing but the average of 5 different prices picked by Ld. AO. Finally, as against Short-term Capital Loss (STCL) of ₹ 111.69 Lacs, Ld. AO computed Short-term Capital Gain (STCG) of ₹ 388.75 Lacs whereas as against Long-term Capital Loss (LTCL) of ₹ 366.24 Lacs, Ld. AO computed Long-term Capital Gain (LTCG) of ₹ 8707.94 Lacs. The working of the same has been given on page-27 of the assessment order. Aggrieved, the assessee challenged the aforesaid action of Ld. AO by way of further appeal. 10.5 During appellate proceedings the assessee, inter-alia, submitted that the provisions of Sce.28 or 48 does not empower Ld. AO to substitute actual considerations received by the assessee with sale consideration computed. The consideration which never accrued or which was never received by the assessee could not be brought to tax as capital gains or business income as held by Hon ble Apex Court in K.P.Varghese Co. (131 ITR 597) and in various other decisions. The reliance of Ld. AO on the decision of McDowells and Co.(154 ITR 148) was out of context since the transactions, in the present case, were entered into with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of advances and the same were converted into share capital since MTL was a loss making entity and could not have returned the money. The action of the assessee facilitated financial restructuring and listing of shares of MTL. The entire purpose was to infuse the funds, make the business viable, get the share listed and derive value of investment. Further, the funds were to be utilized as per the scheme of arrangement u/s 391 of the Companies Act, 1956 as approved by Hon ble Bombay High Court. As per the approved scheme, the assessee surrendered the shares and computed capital gains thereon, as applicable. It could be seen that Ld.AO has computed average price per share at ₹ 69.10 per share. The three prices of ₹ 93.81, ₹ 81 ₹ 146 are the rates that were prevailing after the capital restructuring involving reduction of share capital was over which would lend support to assessee s submissions. As rightly observed by Ld. CIT(A), merely on the basis of intention, a valid claim made within the four corner of the Act, could not be disallowed unless established to the contrary. The Ld. AO has not conducted any independent enquiry to prove that the above ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suo-moto disallowance of ₹ 8.59 Lacs, net disallowance worked out to be ₹ 28.35 Lacs. The assessee claimed misc. expenses for ₹ 64.48 Lacs and suo-moto disallowed ₹ 10.40 Lacs being expenses on building /shops /others. In the absence of any evidence that the expenses were incurred for business purposes, 75% of gross expenditure was disallowed which was computed at ₹ 48.37 Lacs. 12.2 During appellate proceedings, the assessee submitted that most of the sister concerns which were using the premises were the subsidiaries of the assessee and therefore, any indirect expenditure incurred by assessee related to such entities would be allowable business expenditure. These subsidiaries were dormant companies and had no substantial business activity. The assessee being the flagship company of the group had its corporate office and therefore, the expenses were allowable. Partly concurring with the same, Ld. CIT(A) directed ld. AO to estimate the disallowance @25%. Similar estimation was made for Rent, rates taxes as well as for miscellaneous expenses. Aggrieved, the assessee is in further appeal before us. 13. So far as the disallowance of power ..... X X X X Extracts X X X X X X X X Extracts X X X X
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