Enkay Homes Ltd`, Navi Mumbai vs Assessee

This appeal has been filed by the Assessee against order dated 16.08.2010 passed by Ld. CIT (Appeal) -22, Mumbai for the quantum of assessment passed u/s 143(3) for the A.Y. 2003-04, vide which following ground have been raised:-

"1. The learned CIT(A) erred in confirming the estimate made by the AO profit @ 8% on Morbe Project and adding the same during the year.

2. The learned CIT(A) erred in confirming an amount of Rs.29965/- u/s 40A(3) of the I.T. Act 1961.

3. The learned CIT(A) erred in confirming disallowance of an amount of Rs.30500/- out of donations, not claimed by the assessee and wrongly adding the same to the assessee's income.

ITA No. 7902/Mum/2010 2 Assessment Year: 2003-04

4. The learned CIT(A) erred in confirming the estimate of Net Profit @ 8% from the sale of development rights when all the details were submitted to the CIT(A)."

2. At the outset learned counsel, Dr. P. Daniel submitted that ground no. 1 is not pressed and accordingly, the same is dismissed as not pressed.

3. In Ground no. 2 the assessee has challenged the disallowance of Rs.29,965/- made u/s 40A(3). The Assessing Officer noted that assessee has made cash payment exceeding Rs. 20,000/- for sums aggregating Rs.3,16,666/-, relating to payment made to labourers, telephone charges, purchase of steel, gardening and plantation, vehicle expenses, etc. Accordingly, he disallowed 20% of the said amount which worked out to Rs.63,333/-. Before the Ld. CIT(A), the assessee submitted that so far as payment made to the labourers are concerned, none of the payments exceeded the permissible limit of Rs.20,000/- per labour. Regarding payment of purchase of steel, telephone charges etc. the same were made through cheques or DDs. Ld CIT(A) asked for the remand report from the AO who after examining nature of payment, quantified the disallowance in the following manner:-

Nature & Date of Amt. paid 20% of such Particulars of payment otherwise than expenditure expenditure by account Rs. payee cheque/draft Purchase 13.06.02 22,000 4,400 steel Panvel Imprest ITA No. 7902/Mum/2010 3 Assessment Year: 2003-04

Telephone 14.06.02 23,161 4,632 charges Gardening 20.07.02 35,300 7,060 Plantation Vehicle 24.12.03 20,206 4,041 Expenses Purchase 27.02.03 24,572 4,914 steel Morbe Purchase 07.01.03 24,590 4,918 steel Panvel Total 29,965

Accordingly, the Ld. CIT(A) confirmed the disallowance of Rs.29,965/- .

4. Before us, Mr. Daniel, submitted that as regard the payment relating to gardening and plantation, the payment was made to Kerala Forest Department for the purchase of seedlings. In support, he referred to bills and vouchers along with the letter of the Forest Range Officer which was filed before the authorities below. Accordingly, he submitted that the payment is made to the Government Department and therefore, no disallowance u/s 40A(3) should be made as per Rule 6DD. Regarding telephone charges, the submitted that the same pertained to telephone bill of Director and has not been claimed as expenditure by the assessee, therefore, no disallowance is called for. Regarding purchase of steel from Panvel office, he submitted that the same was on account of imprest account and in support, vouchers were submitted before the authorities below that there was no cash purchase but transfer from one office to other. Regarding other payments, he submitted the provisions of 40A(3) are attracted and therefore, disallowance can be confirmed.

ITA No. 7902/Mum/2010 4 Assessment Year: 2003-04

5. After hearing both the parties, we are of the opinion that following expenses are to be disallowed u/s 40A(3), as admitted by the Ld. Counsel:-

Vehicle 24.12.03 20,206 4,041 Expenses Purchase 27.02.03 24,572 4,914 steel Morbe Purchase 07.01.03 24,590 4,918 steel Panvel

However, so far as disallowance on account of purchase of steel from Panvel office imprest account, telephone charges of direction and gardening and plantation, the same cannot be disallowed u/s 40A(3) as per the reasons given by the learned counsel. Accordingly, the assessee gets relief of Rs.16,092/- and balance amount of Rs.13,873/- is confirmed. Thus ground no. 2 is partly allowed.

6. Regarding Ground no. 3, relating to disallowance of Rs.30,500/- out of donations, the learned counsel submitted that the assessee has not claimed any such claim of donation in the computation of income, rather it appears in the ledger account of Managing Director. It is the payment made by the individual and not by the assessee, therefore, no disallowance should be made in the hands of the assessee. Accordingly, we direct the AO to delete the said disallowance after verifying the contention of the assessee that the amount of donation has not been claimed by the assessee.

7. In Ground no. 4 the assessee has challenged the estimate of net profit rate of 8% from the sale of development rights. The brief facts are ITA No. 7902/Mum/2010 5 Assessment Year: 2003-04

that, the assessee is engaged in the business of construction and during the year it has sold its development rights to another person for Rs. 70 lakhs. On the said project, the assessee had incurred cost/expenses of Rs.68 lakhs and therefore, the assessee had only gained Rs. 2 lakhs from the said project. The assessing officer held that the expenditure of Rs.68 lakhs is not fully supported by evidences and therefore, the profit disclosed by the assessee cannot be accepted, accordingly, he estimated the profit @ 8% of the sale proceeds of Rs.70 lakhs.

8. After hearing both the parties and on perusal of finding given in the impugned orders, it is noted that assessee has disclosed receipt of Rs. 70 lakhs against sale of development rights to M/s. Shelter Builder and Developer. The assessee has acquired the said project after making the payment of Rs. 68 lakhs to CIDCO and 16 members of the Trimurti Co-op. Hsg. Society. The Assessing Officer held that, assessee could not prove the genuineness of the payment to these parties and accordingly, he estimated the net profit of 8%. In the first appellate proceedings, the Ld. CIT(A) had called for the remand report, contents of which are as under:-

"As far as the sale of development rights are concerned the assessee has enclosed copies of development agreement of Rs. 70 lakhs and details of expenses of Rs. 68 lakhs. However, the details of expense enclosed are in respect of the amount paid to list of member of Trimurti Co-op Hsg. Society and CIDCO in the year 1994-95 and 1995-96. However, the said expenses have not bee paid by the assessee company viz. Enkay Homes Ltd. Moreover, development rights agreement purchased by the assessee company is in Jan. 2003. Therefore, if at all the expenses would have been incurred, it would have been incurred only after the purchase of development rights after January 2003. While the bills attached are all pertaining to year 94-95 and not paid by the assessee company. Therefore, disallowance made in ITA No. 7902/Mum/2010 6 Assessment Year: 2003-04

the assessment order u/s 143(3) amounting to Rs.3,60,000/- has been rightly made."

The Ld. CIT(A) has confirmed the order action of the AO based on the remand report. The sole ground for rejecting the assessee's contention by the AO is that, the development rights and agreement has been executed by the assessee in January 2003, whereas the bills for payments attached are pertaining to year 1994-95 and 1995-96, which mainly consisted of amount paid to the list of the member of the Trimurti Cooperative Housing Society and CIDCO and that the said payment was not made by the assessee company itself. If the assessee has sold the rights to different developer for Rs.70 lakhs and has also incurred expenditure in the form of payment for acquiring the right earlier, then such a cost or expenditure has to be allowed from the sale proceeds. There is no allegation that the payment made by the assessee in the earlier years have been claimed by the assessee. These costs are always taken to work-in-progress. The assessee had spent money to made the payments to the members of co-operative housing to the CIDCO to acquire the rights to develop, then such a payment has to be allowed as cost. No proper basis has been given either by the AO or by the Ld. CIT(A), to estimate the profit on sale of rights. If the cost has been incurred in the earlier year for the acquisition of development rights and if the same has been sold in this year, then, the same has to be allowed. It is not the case of the department that the assessee has claimed the cost/expenditure in the earlier years, therefore, the profit has to be taken at Rs.2,00,000 as shown by the assessee and addition confirmed by the Ld. CIT(A) on estimate of net profit of 8% is deleted. Accordingly, the Ground No. 4 is treated as allowed.

ITA No. 7902/Mum/2010 7 Assessment Year: 2003-04

9. In the result, the appeal filed by the Assessee is partly allowed. Order pronounced in the open court on this 25th day of March, 2015.

Sd/- Sd/- (D.KARUNAKAR RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 25.03.2015 *Srivastava Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR "E" Bench

//True Copy//

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.