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2011 (7) TMI 1203 - AT - Income TaxDisallowance u/s 40(a)(ia) - non deduction of TDS - Expenditure paid to Advocate - The assessee said that the amount paid to the advocate is towards reimbursement of expenses for publishing public notices - Such amount was disallowed by CIT(A) - HELD THAT - No bills issued by such newspapers or of any agent has been filed either before the AO or before the Ld. CIT(A) or even before us. The AO had already given a finding that the public notices issued in three separate news papers were issued by Advocate on behalf of her client. Under these circumstances the payment made to advocate towards reimbursement of expenses appears doubtful. We therefore concur with the findings of the lower authorities that the same is towards professional fees paid to the advocate. The bill issued by advocate in our opinion is merely a self securing document. Since the payment made to advocate is liable for deduction of tax therefore the lower authorities are justified in disallowing the same u/s.40(a)(ia) of the Act. Accordingly the order of the Ld. CIT(A) on this issue is upheld - Decision against Assessee. Advertisement Expediture - Expenditure was made on advertisements and TDS was not deducted for the same - HELD THAT - On the basis of facts and emails the said expenditure is clearly towards advertisement of the product. Since the assessee has violated the provisions of law by not deducting tax the same is liable for disallowance u/s.40(a)(ia). Further apart from an email no other document has been filed. Even otherwise also the same is towards keeping the goods of the company in the display box which in our opinion amounts to advertisement. We therefore uphold the order of the Ld. CIT(A) on this issue - Decision against Assessee. Capitalizing the Expenses to Work-in-Progress - CIT(A) confirmed the addition by disallowing the expenses and treating the same as work in progress - Assessee contended that he entered into Joint venture Agreement and according to the joint venture he was not to do any construction activity but was to only finance the project. As such there was not work in progress with him - HELD THAT - The clauses in the Development agreement Supplementary agreement and the Cancellation agreement supports the contention of the Ld. Counsel for the assessee that the assessee is only a Financer and not a Developer. Further from the details of expenses furnished in the paper book we find force in the submission of the Ld. Counsel for the assessee that these are nothing to do with the development of property. We also find force in the submission of the Ld. Counsel for the assessee that even if the expenditure has to be capitalized the same has to be capitalized in the books of the Joint venture account and not in the books of the assessee. We therefore concur with the submission of the Ld. Counsel for the assessee that the lower authorities were not justified in capitalizing the various expenses to work- in- progress - Decision in favour of Assessee. Interest on Presumed Accrual Basis - Assessee has credited an amount as interest income which the assesses has actually received during the year. CIT(A) held that the interest has been received on the advance made and this is prior to commencement of business of construction. Since the project has not yet commenced the action of the AO in treating the expenses as capital in nature is correct - HELD THAT - Following the decisions in the judgement of SUSHILA SHANTILAL JHAVERI VERSUS UNION OF INDIA AND ANOTHER. 2006 (7) TMI 136 - BOMBAY HIGH COURT and COMMISSIONER OF INCOME-TAX VERSUS BALARAMPUR COMMERCIAL ENTERPRISES LTD. 2003 (3) TMI 83 - CALCUTTA HIGH COURT when the assessee is aware that it is not going to receive anything over and above what has already been received and credited in the book of accounts and when the agreements and correspondences between the parties do indicate such things although after the balance sheet date therefore income on notional basis in our opinion cannot be brought to tax. In this view of the matter we set aside the order of the Ld. CIT(A) and direct the AO to allow the various expenses in the question claimed by the assessee.
Issues Involved:
1. Addition of Rs. 2,83,561/- under section 40(a)(ia) for non-deduction of TDS. 2. Addition of Rs. 60,13,660/- by disallowing expenses and treating them as work-in-progress. 3. Addition of Rs. 1,77,19,081/- on account of interest on presumed accrual basis. Issue-wise Detailed Analysis: 1. Addition of Rs. 2,83,561/- under Section 40(a)(ia) for Non-Deduction of TDS: The assessee claimed expenses in the Profit and Loss Account without deducting TDS, including Rs. 1,33,561/- for import freight, Rs. 1,00,000/- paid to Shri A.V. Menon for newspaper advertisements, and Rs. 65,000/- as listing fees. The AO disallowed the expenses under section 40(a)(ia), citing non-deduction of TDS. The CIT(A) upheld the AO's decision, noting that the payment to Shri A.V. Menon was not supported by proper documentation and was deemed professional fees. The listing fee was considered an advertisement expense requiring TDS under section 194C. The Tribunal concurred with the lower authorities, confirming the disallowance of Rs. 1,00,000/- and Rs. 65,000/- under section 40(a)(ia). 2. Addition of Rs. 60,13,660/- by Disallowing Expenses and Treating Them as Work-in-Progress: The assessee entered into a development agreement with M/s. Kuber Developers, advancing Rs. 7,01,00,000/- and incurring expenses like advertisement, interest, listing fees, printing, and stamp duty. The AO treated these as pre-commencement expenses and capitalized them to work-in-progress. The CIT(A) upheld this view, considering the expenses as capital in nature since the project had not commenced. The Tribunal, however, found that the assessee was primarily a financer, not a developer, and the expenses were not related to property development. It ruled that such expenses should not be capitalized in the assessee's books but in the joint venture's books, thus allowing the expenses as business losses. 3. Addition of Rs. 1,77,19,081/- on Account of Interest on Presumed Accrual Basis: The AO added Rs. 1,77,19,081/- as accrued interest income based on the development agreement, despite the assessee offering only Rs. 52,04,267/- as received interest. The CIT(A) upheld this, emphasizing the mercantile system of accounting and the right to receive interest. The Tribunal, referencing the real income theory and subsequent events, noted that the agreement's termination indicated no further interest was receivable. It cited judicial precedents supporting the non-recognition of income on a notional basis if subsequent events implied non-receipt. Consequently, the Tribunal directed the AO to consider only the actual interest received, setting aside the CIT(A)'s order. Conclusion: The Tribunal partly allowed the assessee's appeal, confirming the disallowance of Rs. 2,83,561/- under section 40(a)(ia) but allowing the claimed business expenses and recognizing only the actual interest received. The decision underscores the importance of real income theory and proper documentation in tax assessments.
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