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Dy. Commissioner of Income Tax, 17(2), Room No.217, 2nd floor, Piramal Chambers, Parel, Mumbai-400012 Vs. Mr.Dilip S Hate, 101, Shree Sai Shraddha CHS, 114, Bhavani Shankar Road, Dadar(W), Mumbai-400028.
August, 06th 2014
                                                       I.T.A. No.5597/Mum/2011& CO 114

                ,                   "          

   .. ,                                              ,                  

                 ./I.T.A. No.5597/Mum/2011
               (   / Assessment Year : 2004-05)

Dy. Commissioner of Income        /            Mr.Dilip S Hate,
Tax,                              Vs.          101, Shree Sai Shraddha CHS,
17(2), Room No.217, 2nd                        114, Bhavani Shankar Road,
floor, Piramal Chambers,                       Dadar(W),
Parel,                                         Mumbai-400028.
      ( /Appellant)               ..           (    / Respondent)

               Cross objection/     No.114/Mum/2012
            In   ./I.T.A. No.5597/Mum/2011
             (   / Assessment Year : 2004-05)

Mr.Dilip S Hate,                  /            Dy. Commissioner of Income Tax,
Mumbai                            Vs.          17(2),

     ( /Appellant)                ..           (    / Respondent)

      . /   . /PAN/GIR No. : AAAPH4943F

            / Revenue by                   :       Shri Vikas Kumar Agarwal
              /Assessee by :                       Shri M P Sharma

              / Date of Hearing
                                                      : 15.7.2014
             /Date of Pronouncement : 31.7.2014
                                                  I.T.A. No.5597/Mum/2011& CO 114

                                / O R D E R

Per B.R.BASKARAN, Accountant Member:

         The appeal filed by the revenue and the cross objection filed by

the assessee are directed against the order dated 13-05-2011 passed by

ld CIT(A)-29, Mumbai and they relate to the assessment year 2004-05.

2.       The revenue is challenging the decision of Ld CIT(A) in deleting the

penalty levied u/s 271(1)(c) of the Act. In cross objection, the assessee is

supporting the order of Ld CIT(A).

3.   The facts that led to levy of penalty u/s 271(1)(c) of the Act is stated

in brief. The assessee had undertaken development of a plot located in

Ghatkopar under the Slum Rehabilitation Scheme.             According to the

assessee, he had spent a sum of Rs.23,63,549/- towards development

expenses by 17.04.2003.        He had also undertaking steps to obtain

necessary permission, formation of tenant association and accordingly

obtained the rights. The AO noticed that the assessee has entered into a

partnership with three other persons namely Shri Mohan Jethalal Singhani,

Shri Chandu Jethalal Singhani and Shri Purushottam Jethalal Singhani.

The partnership was entered on 17.04.2003. The rights acquired by the

assessee was valued by the partnership firm at Rs.30.00 lakhs and the

same was treated as assessee's capital in the firm.             However, the

assessee retired from the partnership firm on 28.04.2003 (within 11 days

of formation of partnership) and received capital amount of Rs.30.00

lakhs.    The partnership firm also reimbursed a sum of Rs.24.25 lakhs
                                                I.T.A. No.5597/Mum/2011& CO 114

towards the development expenses incurred by the assessee.            The AO

noticed from the retirement deed that the assessee was also allotted

10000 Sq. ft. of the construction area at free of cost in the premises going

to be constructed. However, subsequently a supplementary agreement

dated 25.4.2006 was entered between the parties, according to which the

assessee herein was agreed to be given 7707 Sq. ft. in the place of

10,000 Sq. ft. stated earlier.

4.    The assessee did not offer the value relating to 10,000 Sq. ft. or as

the case may be 7707 Sq. ft. as his income. The AO took the view that

the assessee has transferred the development rights, which is a business

asset, through the route of forming partnership and subsequent

retirement therefrom.       When called for explanations, the assessee

submitted that the project being a slum development scheme, he was not

sure as to when the project will be completed.       The assessee further

submitted that since there is no certainty of completion of entire project,

he was not sure of the valuation of the allotted area. The assessee also

pointed out the fact that the allotted area was reduced from 10000 Sq. ft.

to 7707 Sq.ft. However, the assessee came forward to offer the amount

calculated at the rate of Rs.500/- per sq.ft. The AO, however, took the

view that the valuation should be arrived at on the basis of the cost

incurred by the continuing partners. The AO took a statement from one

of the continuing partners named Shri Mohan Singhani and in the answer

to Q. No.8, he stated that they are expecting a booking rate of Rs.2,500/-

per Sq.ft. Taking the same as the basis and after reducing 10% thereof
                                                I.T.A. No.5597/Mum/2011& CO 114

as profit margin, the AO estimated the cost of construction at Rs.2,250/-.

Accordingly, the AO valued the cost of allotted area of 7707 Sq.ft. at

Rs.1,73,45,250/- and assessed the same as the income of the assessee.

Though the said addition was deleted by Ld CIT(A), yet the Tribunal

restored the addition in the appeal preferred by the revenue.

Subsequently, the AO levied a penalty of Rs.57,23,931/-, being 100% of

the tax sought to be evaded against the above said addition.           In the

appeal preferred by the assessee, the Ld CIT(A) deleted the penalty and

hence the revenue has filed this appeal before us.

5.   Ld D.R placed heavy reliance on the order passed by the Tribunal in

the quantum proceedings and submitted that the Tribunal has given a

finding that the assessee has adopted a circuitous route of forming a

partnership and then retired therefrom with a view with the objective of

transferring the development rights.      He further submitted that the

Tribunal has held that the right to receive the consideration on transfer of

development right has accrued to the assessee during the year under

consideration.   Accordingly he submitted that there is concealment of

income on the part of the assessee by not disclosing the transfer value of

development rights. He further submitted that the Ld CIT(A) has deleted

the penalty on the reasoning that there are two views with regard to the

year in which the transfer value of development right is taxable.           He

submitted that the Tribunal has given a clear verdict regarding the year of

taxability and hence the possibility of having two views does not arise.

Accordingly he submitted that the order of Ld CIT(A) should be reversed.
                                               I.T.A. No.5597/Mum/2011& CO 114

6.   On the contrary, the Ld A.R submitted that the assessee started the

development of project in 1994 and he could not complete the same.

Hence he entered into a partnership in 17.4.2003 and obtained a sum of

Rs.54.25 lakhs on transfer of the project. He submitted that the assessee

has duly offered the above said amount for taxation. Referring to the

clause 2 of the Supplementary deed dated 25-04-2006 (Page 45 of paper

book),   he submitted that the assessee was agreed to be allotted

shops/residential units/flats as and when they are completed.              He

submitted that the assessee did not receive any portion of the constructed

area during the year under consideration and hence he did not account

for the same. Referring to the method of "Revenue recognition" adopted

by the assessee (page 27 of paper book), the Ld A.R submitted that the

assessee has been recognizing the revenue in respect of sale of flats only

completion of construction of building. Accordingly, the assessee had

taken the view that the income arising on allotment of construction area

should be offered in the year of receipt of the same. He further submitted

that the impugned project was getting delayed due to various types of

obstacles (including the fact that the plot was fully encumbered by the

slum dwellers) and hence there was uncertainty over the receipt of the

same. He further submitted that the addition made in the assessment

proceedings would not give rise to penalty automatically. He submitted

that the assessee has furnished all the particulars relating thereto and

there is no allegation that the assessee has concealed any particulars of

income. He further submitted that the impugned addition has been made,

since the AO took the view that it is assessable during the instant year,
                                                  I.T.A. No.5597/Mum/2011& CO 114

while the assessee had taken the view that the same is assessable in the

year of receipt of constructed area.       He submitted that the assessee

himself has offered the income in the subsequent years when the said

flats were sold. Accordingly he submitted that the dispute is also related

to the year of assessability. Since there was uncertainty about the year of

receipt and further ultimately, the dispute is with regard to the year of

assessability, the Ld A.R contended that the Ld CIT(A) was justified in

deleting the penalty. The Ld A.R also placed reliance on the following

case law in support of his contentions:-

       (a) CIT Vs. Cholamandalam Investment and Finance Co. Ltd (364
       ITR 680)(Mad), wherein the Hon'ble Madras High Court had held
       that the non-acceptance of explanation given by the assessee
       would not lead to penalty.

       (b) CIT Vs. Excel Industries Ltd (358 ITR 295)(SC), wherein the
       Hon'ble Supreme Court has held that the accrual of income should
       be viewed from practical point of view.

7.      We have heard the rival contentions and carefully perused the

record. We agree with the contentions of the assessee the addition made

in the assessment proceeding would not give rise to penalty automatically.

It is a well settled proposition that the assessing officer, during the course

of penalty proceedings, should examine the nature of addition afresh in

terms of sec. 271(1)(c) of the Act. In the instant case, it is fact that the

assessee was entitled to receive 7707 Sq. ft. land as per the retirement

deed r.w. supplementary deed. According to the assessee, he did not

offer the value of the same for the following reasons:-

       (a)   As per the accounting system followed by it, he was
       recognizing revenue on sale of flats only on completion of building
       construction. Extending the same analogy, the assessee submitted
                                                I.T.A. No.5597/Mum/2011& CO 114

      that he has taken the view that the income relating to 7707 Sq.ft.
      is assessable in the year of completion of construction.

      (b) Even otherwise, there was no uncertainty about the completion
      of construction due to various obstacles faced in the execution of
      the project. It is also a fact that the assessee was originally
      allotted 10000 Sq.ft of constructed area, which was later reduced
      to 7707 Sq.ft. Thus, there was uncertainty about the area also.

It is also an admitted fact that the explanation of the assessee did not

find favour before the Tribunal in the quantum assessment proceedings.

The Tribunal had taken the view that the right to the assessee has

accrued during the year under consideration and accordingly held that the

income arising thereon is assessable in the instant year.

8.    Now the question that arises is whether the said addition would

give rise to penalty u/s 271(1)(c) of the Act. From the examination of the

record, we notice that the dispute was ultimately related to the year of

assessment of the income arising from the right to get constructed area.

In the penalty proceedings, it is required to be seen as to whether the

assessee has concealed any particulars of income or furnished inaccurate

particulars of income. We notice that the Ld CIT(A) has examined the

issue in detail and for the sake of convenience, we extract below the

decision rendered by Ld CIT(A):-

      "5.     I have considered the facts of the case the arguments of the
      assessing AO and submissions made by the appellant. I find that
      penalty under section 271(1)(c ) cannot be imposed in this case for
      the following reasons. This is independent taxability of the income.

             1.     First of all the issue is whether the appellant disclosed
             all the particulars of income. Admittedly appellant had
             offered to tax the amount received of retirement from
             partnership firm. This amount was of Rs.30 lacks. The
                                       I.T.A. No.5597/Mum/2011& CO 114

    appellant had also offered to tax an amount of
    Rs.24,25,000/- received reimbursement of expenses as
    income during the year under consideration. The other part
    of the retirement deed enabling the appellant receive
    constructed area had not accrued as income to the appellant
    and therefore not offered to tax in the return of income.

    2.       Even assuming that the income is to be offered to
    tax, it has been the accepted policy of the appellant to offer
    business income as and when the project is completed. The
    income under examination is business income. Hence
    appellant has offered this income when the project has been
    completed and possession given to him. As per clause 1(B)
    of Notes to accounts of the audit report filed alongwith the
    return of income revenue recognition will be on completion
    of the project or on the completion of the building.

    3.      The most important point is that CIT(A) has already
    deleted the addition in this year. Although tribunal has
    reversed his decision, still it can be seen that clearly two
    views are possible in the matter. The Assessee had not
    concealed the relevant facts. His claim could be an innocent
    one, even if not correct. The word concealment in such a
    case in its ordinary sense cannot be apply to such a
    situation. It was in this context, penalty was cancelled in the
    case of India Cine Agencies V/s DCIT (2005) 275 ITR 430
    (Mad). Where facts are disclosed, but inference is difference,
    thee is no case for penalty as          held in CIT v. Mehta
    Engineers Lt. (2008) 300 ITR 308 (P & H).

    4.     As regards offering the income to tax, the appellant
    has offered the income to tax in the assessment year 2010-
    11. In this assessment year he has received the constructed
    area and accordingly income has finally accrued to him. It is
    not the case of the appellant that income never accrued.
    The dispute is only the year of accrual and taxability. As can
    be seen, even the quantification of income cannot be
    properly made in assessment year 2004-05 The value of the
    constructed area has to be taken on the date of delivery to
    the appellant. The AO has again estimated the cost of
    construction. Where there is dispute as to the year of
    assessment, penalty will not be exigible merely because the
    assessee has offered the income for a different year. It was
    so held in CIT V/s Manilal Tarachancl (2002) 254 ITR
    630(Guj). In such case the inference of concealment, it was
    held, would not lie.

    5.      It can be seen that the income itself was contingent.
    The flats were not at all in existence. The accrual of income
                                                I.T.A. No.5597/Mum/2011& CO 114

             is contingent upon happening of an event i.e , construction
             of the building and completion thereof. The property was
             fully encumbered by the slum dwellers as the project was
             delayed. The area to be received was reduced to 7,700 sq.ft.
             from 10,000 sq.ft. There was no certainty of completion of
             entire project as it was under Slum Development Scheme
             and it takes time to obtain BMC sanctions. Even if it has to
             be treated as a transfer, the income would accrue in the
             year when the construction is completed, project completion
             certificate is obtained and the possession is handed over to
             the assessee. It is not in every where an addition is upheld
             that penalty becomes exigible even in the light of
             Explanation to section 271(1)(c), which infers prima facie
             concealment wherever there is a difference between
             reported and assessed income. In CIT V/s Kerala Spinners
             Ltd. (2001) 247 ITR 541 (Ker), the High Court pointed out
             that the Explanation itself provides, that where all the facts
             relating to the addition had been disclosed by the assessee
             and the Explanation in respect of entries in the books are
             bona fide, it is only a case of assessee's failure to establish
             his case, it is not a case for penalty, following the rationale
             of the decision in CIT V/s Mussadilal Ram Bharose (1987)
             165 ITR 14 (SC) for its conclusion.

      6.     The law regarding penalty is also fairly settled. A wrong or
      patently inadmissible claim cannot lead to penalty as is held by the
      Apex court in the case of CIT V/s Reliance Retroproducts Pvt. Ltd.
      (2010) 322 ITR 158 (SC). Penalty also cannot be levied when
      there were two views possible on the same set of facts. In this
      case CIT(A) and ITAT have held two diametrically opposite views.

      In view of the above, penalty cannot be levied in this case
      irrespective of assessment of the income in this Assessment year.
      Penalty levied u/s 271(1)( c ) amounting to Rs.5723931/- is
      deleted. This ground of appeal is allowed".

9.    Thus it is seen that the assessee furnished all the materials relating

to the addition and also offered explanations as to why he did not offer

the same during the year under consideration. The said explanation was

not found to be not bonafide. Though the Tribunal has expressed the

view that the scheme of entering into a partnership and thereafter

retirement therefrom is a ploy adopted to transfer the development rights,
                                                  I.T.A. No.5597/Mum/2011& CO 114

yet the question is whether the income arising therefrom is assessable in

this year or not.    In that regard, in our view, two views are possible

particularly in view of the accounting system followed by the assessee and

also due to the uncertainty of execution of the project. Hence, in our

view, the explanations furnished by the assessee cannot be found fault

with it. Accordingly, we are of the view that the ld CIT(A) was justified in

deleting the penalty.

10.   The assessee has filed cross-objection only to support the order of

Ld CIT(A). Since we have dismissed the appeal of the revenue, the same

becomes infructuous and hence dismissed.

11.     In the result, the appeal of the revenue and the cross-objection

filed by the assessee are dismissed.

The above order was pronounced in the open court on 31st July, 2014.

                                       31st July, 2014    

            Sd                                        sd

(  /SANJAY GARG)                                (..  / B.R.
BASKARAN)                                       / JUDICIAL MEMBER
  Mumbai: 31st July,2014.

. ../ SRL , Sr. PS
                                    I.T.A. No.5597/Mum/2011& CO 114

        /Copy of the Order forwarded to :
1.  / The Appellant
2.  / The Respondent.
3.     () / The CIT(A)- concerned
4.      / CIT concerned
5.      ,     ,                   /
     DR, ITAT, Mumbai concerned
6.     / Guard file.
                                           / BY ORDER,
          True copy
                                 (Asstt. Registrar)
                          ,   /ITAT, Mumbai
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