2012 (4) TMI 479 - AT - Income Tax

Addition - principal agent relationship - addition on the ground of surplus in RGCTP account on sale of development rights to M/s Parsvnath Developers Ltd., made by the AO - The assessee-Board and the Chandigarh Administration are not natural persons but juristic entities and hence there cannot be any oral agreement between them to create agency. The admitted position is that there is no written contract between them to create agency. After taking into account all the materials brought on record including the legal position, we confirm the finding of the AO/CIT(A) that the assessee-Board was not an agent of the Chandigarh Administration in so far as the said project is concerned. All the pleas taken by the assessee in this behalf are therefore rejected. . Regarding diversion of income - if the income, before it reaches the assessee, is diverted away by superior title so that the assessee, when he receives the income, has to pass it on to a third party, the portion passed on, or is liable to be passed on, is not the income of the assessee but of the person to whom it is passed on or is liable to be passed on - Held that there is no diversion of income arising from the commercial exploitation of land owned by the assessee by an overriding title in favour of the Chandigarh Administration - it is held that the impugned sums accruing to the assessee in pursuance of the Development Agreement did not stand diverted at source by any over-riding title, which is antecedent in point of time, in favour of the Chandigarh Administration - The application or destination of the income has nothing to do with its accrual or taxability. . Whether the AO is right in holding that the impugned amount has accrued to the assessee in the year under appeal and taxing the same as such in the year under appeal - The case of the AO is that the assessee follows mercantile system of accounting and hence the entire bid price amounting to Rs. 821.21 crores being consideration for granting the leasehold and development rights to the Developer has accrued to the assessee in the year under appeal and therefore is chargeable to tax in the year under appeal - assessee has followed accrual system of accounting, the AO has rightly taxed the impugned sum in the year of accrual, i.e., the year under appeal, and not on the basis of receipt or in the years of actual receipt - Appeal is dismissed

Summary

Issues Involved:
1. Taxability of surplus generated from the sale of development rights in RGCTP project.
2. Taxability of interest income on FDRs related to RGCTP project.
3. Disallowance of interest on overdrafts obtained against FDRs.
4. Taxability of interest income on funds related to conversion fee.
5. Additions on account of discrepancies in stock of houses, booths, and closing stock of material.

Issue-wise Detailed Analysis:

Issue 1: Taxability of Surplus Generated from the Sale of Development Rights in RGCTP Project
The assessee-Board argued that the surplus generated from the sale of development rights to M/s Parsvnath Developers Ltd. belonged to the Chandigarh Administration, as the Board was merely acting as a nodal agency. The AO, however, treated the surplus as taxable income of the assessee-Board, asserting that the Board was not an agent of the Chandigarh Administration. The CIT(A) upheld the AO's decision, and the Tribunal confirmed this, stating that the Haryana Housing Board Act did not designate the Board as an agent of the Chandigarh Administration. The Tribunal emphasized that the Board had acquired the land in its own right and commercially exploited it, thus the income accrued to the Board and not to the Chandigarh Administration.

Issue 2: Taxability of Interest Income on FDRs Related to RGCTP Project
The assessee-Board claimed that the interest income on FDRs, generated from RGCTP project funds, belonged to the Chandigarh Administration. The AO and CIT(A) disagreed, treating the interest income as taxable in the hands of the assessee-Board. The Tribunal upheld this decision, reiterating that the Board was not an agent of the Chandigarh Administration and thus the interest income on FDRs was rightfully taxable as the Board's income.

Issue 3: Disallowance of Interest on Overdrafts Obtained Against FDRs
The assessee-Board contended that the overdrafts were taken against old FDRs to invest in new FDRs with higher interest rates, thereby acting prudently. The AO and CIT(A) found inconsistencies in the Board's explanations and noted that the funds from the overdrafts were likely used for ongoing projects, not new FDRs. The Tribunal upheld the CIT(A)'s decision, confirming the disallowance of interest as the Board failed to substantiate its claims with evidence.

Issue 4: Taxability of Interest Income on Funds Related to Conversion Fee
The AO added interest income from FDRs related to conversion fees, which the assessee-Board argued belonged to the Chandigarh Administration. The CIT(A) accepted the Board's claim, but the Tribunal found no sufficient evidence to establish an agency relationship between the Board and the Chandigarh Administration for this matter. The Tribunal set aside the CIT(A)'s decision and remanded the issue for fresh consideration, emphasizing the need for concrete evidence to support the agency claim.

Issue 5: Additions on Account of Discrepancies in Stock of Houses, Booths, and Closing Stock of Material
The AO made additions based on discrepancies noted by auditors in the stock of houses, booths, and closing stock of material. The CIT(A) deleted these additions, accepting the Board's explanations that the discrepancies were due to higher closing stock values and adjustments made by the auditors. The Tribunal agreed with the CIT(A)'s reasoning and upheld the deletion of these additions.

Conclusion:
The Tribunal confirmed the CIT(A)'s decisions on most issues, except for the interest income on conversion fees, which was remanded for further consideration. The appeals by the assessee-Board were dismissed, while the Department's appeal was partly allowed.