2018 (3) TMI 1646 - AT - Income Tax

Issue regarding Under estimation of profit - Held that - Assessee was considering employees remuneration, administrative & general overheads as capital expenditure only when such expenditures were specifically attributable to the construction of a project. This means such expenditures were capitalized only till such time, the capital work was in progress and once the capital work has been completed these expenditures have not been capitalized and treated as revenue expenditure. Land premium received by the assessee company liable to be taxed as an income for the year under consideration - Issue regarding exclusion of lease rent, land premium and interest income - Held that - It is clear that one time premium received by the assessee would be income of the year of the receipt. It can be safely inferred that the land premium is nothing but a kind of rent, which is certainly taxable. Lease premium income offered by the assessee was a conscious decision and further Article 289(1) of Constitution of India is not applicable on the facts of the present case. Therefore, the grounds raised relating to this issue regarding exclusion of lease rent, land premium and interest income are devoid of merits and therefore, they are rejected. Addition on account of understatement of profit - Held that - On perusal of the Profit & Loss account it seems that against the credit of receipt of ₹ 7,02,82,708/- expenses of ₹ 5,52,86,310/- only was incurred by the assessee. The expenses as claimed in the Profit & Loss account also having direct nexus of receipt/ income as shown in the Profit & Loss account. Since the expenses as incurred was not for the purpose of addition to the fixed assets, hence, there was no justification for making the addition merely on the basis of remarks in the clause 11 c of the Tax audit report. The remarks of the Tax auditor which is important piece of evidence but the same is not considered as conclusive piece of evidence. Considering the written synopsis of the assessee and on perusal of the Profit & Loss account, we are of the view that expenses as claimed by the assessee were incurred for day to day maintenance and also incurred for day to day administrative work which was not in the capital nature. We hereby direct the assessing officer to delete the addition of ₹ 2,18,75,469/- as made on account of understatement of profit.

Summary

Issues Involved:
1. Taxability of land premium as income.
2. Exclusion of lease rent, land premium, and interest income.
3. Understatement of profit.

Detailed Analysis:

Issue 1: Taxability of Land Premium as Income
The primary issue was whether the land premium received by the assessee should be taxed as income. The assessee argued that the land premium was collected on behalf of the State Government and thus should not be considered its income. The assessee also contended that the land premium should be treated as a capital receipt, not taxable as revenue income.

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the land premium as the assessee's income. They noted that the land was provided by the State Government to the assessee for development, and the premium received was retained by the assessee for further development. The CIT(A) emphasized that the assessee was not merely a custodian but a lawful owner of the land, and the premium received was a revenue receipt, not a capital receipt.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had previously treated 1/99th of the land premium as taxable income, reflecting its intention to treat the premium as business income. The Tribunal found that the land premium was indeed a revenue receipt and taxable in the year of receipt, rejecting the assessee's claim that it was a capital receipt.

Issue 2: Exclusion of Lease Rent, Land Premium, and Interest Income
The assessee sought to exclude lease rent, land premium, and interest on deposits from its total income, arguing that these amounts were collected on behalf of the State Government and should not be taxed as its income. The assessee cited various legal precedents to support its claim that taxes should only be collected as authorized by law, and any over-assessment due to misunderstanding should be rectified.

The Tribunal rejected this claim, noting that the assessee had consciously offered these amounts for tax in previous years. The Tribunal also referenced its earlier finding that the land premium was taxable income, thereby dismissing the grounds for exclusion of lease rent, land premium, and interest income.

Issue 3: Understatement of Profit
The AO added ?2,18,75,469 to the assessee's income, alleging understatement of profit due to the non-capitalization of certain expenses. The AO relied on the auditor's report, which noted a change in the accounting policy where the assessee stopped capitalizing 75% of employee remuneration and administrative expenses.

The assessee argued that the expenses were correctly treated as revenue expenses, as they were not specifically attributable to any project or fixed asset. The CIT(A) upheld the AO's decision, but the Tribunal found that the expenses were indeed for day-to-day maintenance and administrative work, not capital in nature. The Tribunal directed the AO to delete the addition of ?2,18,75,469.

Conclusion:
The Tribunal's judgment covered three main issues: the taxability of land premium as income, the exclusion of lease rent, land premium, and interest income, and the alleged understatement of profit. The Tribunal upheld the taxability of the land premium as income, rejected the exclusion claims, and directed the deletion of the addition for understatement of profit. The appeals were partly allowed, and the departmental appeals were dismissed.