2011 (10) TMI 573 - AT - Income Tax

Addition under S.69A - unexplained investment made in the construction - Held that - We are of the view that it would be judicious and reasonable to allow a deduction of 15% from the estimated cost of construction as determined by the DVO and then to allow a further deduction of 10% towards selfsupervision. In the valuation report, the DVO has allowed rebate for self-supervision at 6%. However, as per the decisions of the Tribunal in similar cases, the rebate towards self supervision at 10% would be reasonable. Hence, further deduction on account of self-supervision has to be allowed. If these deductions are allowed, the estimated cost of construction would work out to a figure which is less than what the assessee has shown in its books of account as cost of investment in construction of building. Thus, it is seen that the amount as shown by the assessee as cost of construction in the books, is at a higher amount than the cost of construction estimated by the DVO as modified in accordance with the ratio of the rulings of the jurisdictional Tribunal in similar cases noted above. Under these circumstances, respectfully following the decisions of the coordinate Benches of the Tribunal in similar maters, we hold that no addition is called for towards unexplained investment in the construction of the building for the assessment years 2000-01, 2002-03, 2003-04, 2004-05 and 2005- 06. Disallowance of interest - Held that - Perusing the factual matrix of the matter, we are of the pinion that the CIT(A) has rightly allowed as Revenue expenditure, the amount of interest, which related to the period after commencement of business from the Mall during the previous year. Hence, grounds of the Revenue on this issue are rejected. Entitled to relief under S.80IB - Held that - Income from PAS system can be said to have been derived from the hotel business of the assessee for the purpose of allowing deduction under S.80IB. Hence, order of the CIT(A) is confirmed on this aspect - scrap sales relating to sale of empty liquor bottles, empty cartons, we appreciate that large value of such scrap has to be disposed of, periodically by the hotel and hence these receipts are also directly linked with the business of the assessee and hence, the same are also eligible for deduction under S.80IB - Miscellaneous receipt is from telephone and fax sale are installed in the rooms and are amenities which are required to be provided in a hotel to the guests. These receipts also form part of the assets of the undertaking and income therefrom have a direct nexus with the business/profits of the assessee s business, eligible for deduction under S.80IB - miscellaneous receipt from laundry it is taken for granted that in any hotel, laundry facility would be provided Without this facility, hotel business cannot be successfully conducted. Similarly with respect to miscellaneous from sale of various items like shaving kits, toilet kits, provision of secretarial assistance, these are all amenities having a direct nexus with the running of the hotel intertwined with the business of hospitality and making the guests comfortable and taken care of and therefore, have direct nexus with the which is derived from such undertaking and as such, such miscellaneous income is eligible for relief under S.80IB. Hence, order of the CIT(A) is confirmed on this aspect. Income by way of lease rentals, has been derived by the assessee from letting out a portion of the building. We do not find any link between the hotel business of the assessee and the letting out of the building. Addition on account of profits attributable to the advances received - Held that - No infirmity in the order sf the CIT(A) in holding that the addition of ₹ 66,56,500 made by the assessing officer towards accrued profit on advances, after rejecting the method consistently followed by the assessee is not sustainable in law. We also find that the amounts received by the assessee as advances cannot be cancelled and the advances will then have to be returned. There is no debt created in favour of the assessee to receive these amounts as income till the buyer pays the full amount or the property is registered in the name of the buyer.Therefore even under the mercantile system these advances cannot be considered as income. Addition on account of lodge rent receipts - Held that - As find that under S.145(1) from assessment year 1997-98 onwards, income chargeable under the head profits and gains of business or profession has to be considered either in accordance with cash or mercantile system of accounting regularly employed by the assessee, and therefore, it is not open to the assessee to adopt hybrid method of accounting, i.e. to account for receipts from lodge alone on cash basis. We accordingly uphold the order of the CIT(A) and reject the grounds of the assessee on this aspect. Interest attributable to advances made to sister concerns without interest - Held that - We set aside this issue to the file of the assessing officer insofar as it related to investment in share application money of ₹ 4 crores, we delete the disallowance relatable to balance amount of interest free advances of ₹ 4.37 crores.

Issues Involved:
1. Addition under Section 69A of the Income Tax Act for unexplained investment in construction.
2. Legality of reopening assessment under Section 147 of the Income Tax Act.
3. Deduction under Section 80IB of the Income Tax Act.
4. Disallowance of interest on borrowed funds.
5. Method of recognizing revenue from advances received.

Issue-wise Detailed Analysis:

1. Addition under Section 69A for Unexplained Investment in Construction:
The primary issue in multiple appeals related to the addition under Section 69A for unexplained investment in the construction of MPM Mall. The Assessing Officer (AO) had reopened assessments based on a Valuation Officer's report, which estimated a higher cost of construction than what was recorded in the assessee's books. The CIT(A) deleted these additions, noting that the cost shown by the assessee was higher than the modified cost determined by the DVO, following the jurisdictional Tribunal's rulings. The Tribunal upheld the CIT(A)'s decision, confirming that no addition was warranted as the assessee's recorded cost was higher than the DVO's estimate after appropriate deductions for self-supervision.

2. Legality of Reopening Assessment under Section 147:
The assessee contested the reopening of the assessment under Section 147, arguing it was based solely on the DVO's report. The CIT(A) upheld the legality of the reopening, and the Tribunal did not delve into this issue further, deeming it redundant after confirming the deletion of the unexplained investment addition.

3. Deduction under Section 80IB:
The appeals also involved the assessee's entitlement to deductions under Section 80IB for various miscellaneous incomes. The CIT(A) allowed deductions for incomes directly linked to the hotel business, such as PAS systems, scrap sales, telephone and fax sales, and laundry revenue, but disallowed deductions for lease rentals, sponsorship receipts, and interest income. The Tribunal upheld the CIT(A)'s decision, confirming that only incomes directly derived from the business were eligible for deduction under Section 80IB, following the Supreme Court's ruling in Liberty India V/s. CIT.

4. Disallowance of Interest on Borrowed Funds:
The AO disallowed interest on borrowed funds, arguing that the assessee had given interest-free advances to sister concerns, and part of the borrowed funds was used for non-business purposes. The CIT(A) upheld the disallowance, noting no commercial expediency in the advances. The Tribunal, however, set aside the issue of disallowance related to share application money for de novo consideration by the AO, while deleting the disallowance for advances made to sister concerns, citing commercial expediency and business prudence.

5. Method of Recognizing Revenue from Advances Received:
The AO challenged the assessee's method of recognizing revenue based on full payment or registration, arguing it postponed profits. The CIT(A) upheld the assessee's consistent method, accepted by the department in previous years. The Tribunal confirmed this, emphasizing that the method consistently followed by the assessee and accepted by the department should not be disturbed, aligning with the principles laid down by the Supreme Court in United Commercial Bank V/s. CIT.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upheld the CIT(A)'s deletions of additions under Section 69A, confirmed the deductions under Section 80IB for incomes directly linked to the business, and set aside the issue of interest disallowance related to share application money for reconsideration. The consistent method of recognizing revenue followed by the assessee was upheld, ensuring that hypothetical incomes were not taxed.

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