2018 (2) TMI 2013 - AT - Income Tax

Rejection of books of accounts and method of accounting followed by the assessee - AO while framing the assessment rejected the assessee s method of accounting holding it to be defective and not reflecting correct profits of the year - estimation of the profits by rejecting the books of accounts has been upheld by the Ld. CIT(A) - HELD THAT - The matter has been examined by the Coordinate Bench in own case upholding the action of the Assessing Officer rejecting the books of accounts which also finds place in the order of the CIT(A) while adjudicating the issue mentioned above. Hence following the order of the coordinate Bench of ITAT Chandigarh on the similar issue in assessee s own case we decline to interfere in the order of the Ld.CIT(A). - Decided against assessee. Addition on account of In-direct Charges of the Residential Sectors and Commercial Sectors - Addition made by the AO for the first time in AY 2007-08 by estimating the 60% of the total recoveries as income. After rejecting the books of account and method of accounting followed by the appellant the AO proceeded to compute appellant s income keeping in view the past history of the case as well as by adjudicating the new issues which arose during the year - HELD THAT - Both the parties regarding the commercial sector the main contention and ratio resorted by the Ld. CIT(A) to reduce the profits from 50% to 45% are that all the areas are commercial sectors are not equally developed so as to determine average higher profits. Similarly the compensation paid and the expenses incurred for development of commercial sectors and the extent of land utilized and salability thereof have been duly considered. Hence we decline to interfere with the order of the CIT(A) on this aspect. Regarding the sale of residential sectors the remission given by the Ld. CIT(A) has already considered the submission of the assessee that license fee conversion charges scrutiny fee and service charge and reduced the profit by more than 7.68% which has been claimed by the assessee to be payable to the State Government by statute and reduced profit percentage from 30% to 20% hence the 2.04% variation on account of unforeseen circumstances claimed at this juncture cannot be accepted to. The accounting standards resorted by the assessee or not truly reflecting the profits derived and the reason given by the CIT(A) is found to be cogent hence we decline to interfere with the order of the CIT(A) on this aspect. The profits computed pertains to the profits that are ought to have derived by the assessee on claiming all the eligible expenditure and accounting all other income. Hence any expense disallowed or addition made would be treated as income in addition to the profits estimated. Exclusion of profit already declared - During the hearing before us the assessee argued that the profits already declared needs to be excluded while computing the profits estimated on rejection of books of accounts - HELD THAT - The ground of the assessee is technical in nature and the Assessing Officer is directed to exclude the profit already declared by the assessee from the profits computed by rejecting the books of accounts. Disallowance of external development charges - assessee has claimed liability in the Balance Sheet under the head Other Liabilities on account of External Development Charges - AO has estimated that 30% of the EDC as income of the assessee on the grounds that the amounts have never been spent by the assessee for the purpose for which EDC has been collected - CIT(A) held that the EDC charges constitute revenue receipts treating them at par with indirect charges recovered which have been taxed at 20% and restricted the addition also to 20% on the lines of the EDC Charges - HELD THAT - Addition made by the Assessing Officer @ 30% of the charges received and restriction of the addition to 20% by the Ld. CIT (A) have to be revisited in totality as the addition was based on the finding that the EDC Charges have been collected progressively and not much work has been done by the HUDA in meeting the obligation of work to be executed after collection of EDC. The points needs to be examined are the relevant provisions of the HUDA Act empowering the collection of EDC the obligations of the HUDA to utilize the funds the statutory power given by the State Government to levy surcharges whether HUDA is acting as only as a collection agency or whether it has be invested with the full power and control to spend the amounts the modus and guidelines made for utilization of the amounts in a particular geographical area utilization of funds pending execution of the work the intention of the HUDA to utilize and the tangible examination and visible implementation of the intention on the ground over a period of ten years or so needs to be examined to treat the EDC as income or not. In this connection the additional evidences held by the Ld. DR are needed to arrive at a correct decision. Annual Maintenance Charge - addition on account of Annual Maintenance Charges was made for the first time in the AY 2003-04 by disallowing the 50% of the expenses claimed and thereafter the disallowance was made in all the years - For the first ten years of development of sectors the maintenance development charges are capitalized as work in progress. For subsequent 10 years the entire amount of maintenance is charged to P L Account claimed as expenditure - HELD THAT - As decided in own case 2008 (12) TMI 331 - PUNJAB HARYANA HIGH COURT The plots for which the securities were forfeited were not shown at lesser value by adjusting the forfeited amount in the closing stock. Therefore it cannot be said that there was any link of the security forfeited with the plots shown in the closing stock so the contention of the Ld. Counsel for the assessee that the amount of security had been reduced from the value of the closing stock and had been duly accounted for in the profits in the following years which accrued to the assessee at the time of sale of those plots is not acceptable because the amount was not reduced by the assessee in the value of the closing stock rather it was shown as income in the P L Account however while filing the return of income the amount was reduced from the income in the computation of income. We are therefore of the view that the Assessing Officer rightly made the addition and the Ld. CIT(A) was fully justified in confirming the addition - Decided against assessee. Disallowance on account of sale of plants - while framing the assessment noted that the assessee has shown income from sale of plants grass and trees and claimed it as agriculture income - assessee contended that the receipt would be shown when the land from which the income has been derived is sold - CIT(A) also rejected the assessees contention that the income is to be taxable during the year in which the receipt from sale of grass and plants has been received.- HELD THAT - As decided in own case 2008 (12) TMI 331 - PUNJAB HARYANA HIGH COURT upheld the disallowance so made observing that the assessee is not engaged in any agricultural activity and there was no basis or any cogent reason to consider the current income in future. Disallowance of contribution to IAG - amount has been claimed as contribution given to Industrial Assistance Group (IAG) set up by the Govt. of Haryana for improving the industrial environment in the State by providing expeditious and single window service to the entrepreneur desirous of setting up industry in the state - HELD THAT - As decided in own case 2008 (12) TMI 331 - PUNJAB HARYANA HIGH COURT upheld the disallowance so made observing that the assessee is not getting any direct benefit from the IAG and the payment has been made voluntarily. Disallowance of interest paid to NCR Planning Board - HELD THAT - As loan has been received from NCR Planning Board which is meant for acquisition and development of land and as per section 36(1)(iii) the interest on capital borrowed for the purpose of the business has to be allowed. In the absence of any contrary finding by the Revenue that the funds have not been used for the business purpose the disallowance made is liable to be deleted. Disallowance of demarcation / survey expenses - revenue or capital expenditure - HELD THAT - The survey and demarcation is an ongoing continuous exercise being undertaken by the assessee. The plots have to be physically marked before handing over to the allottees which requires proper survey and lining of contours. Since the allotment of plots is a regular and recurring activity so as the expenses incurred hence the expenses are to be allowed as revenue expenditure. Ground of assessee is allowed. Contribution to Delhi Metro - expenditure claimed on account of contribution was disallowed treating the same as not for their business in all the years from AY 2006-07 onwards - CIT(A) held that the provision of Metro or other transport services in Gurgaon is neither the responsibility of the appellant nor one of the objects for which it has been constituted - Revenue or capital expenditure - HELD THAT - The contribution to Delhi Metro can be treated as step in furtherance of the business of the assessee as it improves the accessibility and facilities for the public at large and increases the demand of the land and plots of the assessee. Certainly the connectivity by the metro line will certainly enhanced the business of the assessee and increases the marketability of the plots. The contribution to the metro is akin to construction of the road which will be used by the residents approaching through the road hence the expenditure can be treated as an allowable expenditure laid down for wholly and exclusively for the business purpose. Disallowance of advertisement on buses - HELD THAT - In the instant case whether funding the purchase of busses so that advertisement can be had on this buses purchased doesn t fit on the lines of expenditure incurred fully and exclusively for the purpose of the business. After paying the amounts the assessee has not even got the ownership of the buses which have been purchased totally from the funds provided by the assessee. Hence the expenditure cannot be allowed - As in the case of L.H. Sugar Factory and Oil Mills Pvt. Vs. CIT 1980 (8) TMI 1 - SUPREME COURT held that the expenditure incurred which has been not shown to be wholly and exclusively laid out for the purpose of assessee s business cannot be held to be an allowable expenditure. Value of Closing Stock - CIT(A) confirmed the addition by holding that perusal of the details filed reveal that net of income over expenditure in each completed project is taken to the P L account as income - HELD THAT - We find that there has been error in computation of closing stock which needs to be corrected in the instant year. At the same time the assessee will get the benefit of increased opening balance in the subsequent years - Decided against assessee. Salary of Employees of Department of Urban States - CIT(A) has restricted the amount to 20% on the grounds that the disallowances of various charges have been restricted at 20% of expenses pertaining to recoveries from allotees hence the salary expenses reimbursed are also restricted at 20% - HELD THAT - The employees of the Department of Estates have been working owing to the reasons of transfer of functions overtaken by the HUDA. Since these employees are certainly working for HUDA fully and wholly it cannot be said that the salaries paid to the employees is not for business purpose. In the absence of diversion of employees from Department of Estates HUDA would have to hire outside manpower and also require to pay them accordingly. Keeping in view the functions performed by the employees for HUDA the expenses out of salary cannot be treated as non business expenditure. The principle whether to allow these expenditure are not when the profits are estimated and the arguments taken by both the parties on this aspect are found to be not applicable in the peculiarities of the facts emerging out of the issue of drafting of employees of Department of Estates to work for HUDA. The addition confirmed by the Ld. CIT(A) is hereby directed to be deleted. Disallowance of Town Planning Expenses - AO treating the expenditure as capital in nature - HELD THAT - This issue has been dealt while dealing with Office maintenance and office expenses. Hence the entire issue relating is remanded back to the file of Assessing Officer for the limited purpose of verification of type of expenses. It is hereby directed that the Assessing Officer would allow as Revenue expenses on the amount is spent for software purchases and due depreciation would be allowed in the case of hardware purchases. Disallowance under section 40(a)(ia) - interest payment made to different people as per the Court order - HELD THAT - Regarding the deductability of the TDS on the amounts paid to various allottees we find that the interest has been paid by the assessee to allottees for payment of compensation due to delaying offer of the possession after allotment has been squarely covered by judgment in case of Ghaziabad Development Authority vs. Dr. NK. Gupta ( NCDRC) 2002 (9) TMI 292 - NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION and Delhi Development Authority vs Income-Tax Officer 1995 (1) TMI 126 - ITAT DELHI the amount of compensation do not fall under the meaning of 2(24) of Income Tax Act. Hence assessee is not liable to the provisions of TDS on these payments. Since assessee has not borrowed any funds and no interest has been paid the Assessing Officer s alternate observation also stands dismissed. Disallowance u/s 14A - HELD THAT - Where no exempt income is received or receivable during the relevant previous year provisions of Section 14A shall not apply. Further it is also well settled that the disallowance cannot exceed the exempt income. The window for disallowance is indicated in Section 14A of the Act and is only to the extent of disallowance of expenditure incurred by the assessee in relation to tax exempt income . Accordingly the tax exempt income cannot be disallowed entirely. Thus following this logic also where the exempt income is zero the disallowance cannot exceed the exempt income which is zero - See M/S LAKHANI MARKETING INCL 2014 (7) TMI 44 - PUNJAB AND HARYANA HIGH COURT - Decided in favour of assessee. Correct head of income - rental income earned by the assessee - Income from house property v/s business income - HELD THAT - As decided in HARYANA URBAN DEVELOPMENT AUTHORITY 2008 (12) TMI 331 - PUNJAB HARYANA HIGH COURT main business of the assessee is not renting of property but of development and sale of the property. In such a situation no fault can be found with the view of the Tribunal that the assessee could claim the head to be income from property instead of income from business. Dividend income - whether dividend received by the assessee is not dividend and thus not exempt from tax - HELD THAT - Investments made for earning dividend and which has been duly shown as income from other sources is eligible for exemption under section 10(34) facts of which are squarely applicable to the instant case. Hence we decline to interfere in the order of the Ld. CIT(A). Regarding the disallowances under section 14A the issue is being remanded back to the file of Assessing Officer for the limited purpose of determining the disallowances keeping in view the expenses incurred by the assessee to earn the dividend income. As a result the grounds of the Revenue may be treated as partly allowed. Office maintenance and office expenses - HELD THAT - From the records it is not clear that the computation expenses involved are for software up gradation or for up gradation of hardware and purchase of new computers or augmenting the capability of the existing computers. Hence this issues is remanded back to the file of Assessing Officer for the limited purpose of verification of type of expenses. It is hereby directed that the Assessing Officer would allow as Revenue expenses on the amount is spent for software purchases and due depreciation would be allowed in the case of hardware purchases. Disallowance of Sales Tax paid - Nature of expenses - HELD THAT - Irrespective of the reasons the amount paid as taxes (in this particular instance sales tax) is undisputedly eligible for deduction. There is neither any factual nor legal in congruency. By no stretch of imagination the sales tax paid can be treated as capital expenditure in the facts of this case. Hence we decline to interfere in the well reasoned order of the Ld. CIT(A) in deleting the addition.

Summary

Issues Involved:
1. Rejection of Books
2. Addition on account of Indirect Charges of Residential and Commercial Sectors
3. External Development Charges (EDC)
4. Annual Maintenance Charges
5. Forfeiture of Security
6. Sale of Plants
7. Contribution to Industrial Assistance Group (IAG)
8. Payment to Pension and Gratuity Fund
9. Interest to NCR Planning Board
10. Demarcation/Survey Expenses
11. Contribution to Delhi Metro
12. Salary to PF Staff
13. Disallowance of Advertisement on Buses
14. Valuation of Closing Stock
15. Salary of Employees of Department of Urban Estates
16. Town Planning Expenses
17. Disallowance under Section 40(a)(ia)
18. Income from House Property vs. Business Income
19. Dividend Income
20. Office Maintenance and Office Expenses
21. Sales Tax

Detailed Analysis:

1. Rejection of Books
The Assessing Officer (AO) rejected the books of accounts and the method of accounting followed by the assessee, citing defects such as non-recognition of revenue receipts from sold plots and inconsistent application of the accounting method. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] and subsequently by the Income Tax Appellate Tribunal (ITAT), which found that the assessee was not following the complete contract method in toto and was not a contractor in the true sense.

2. Addition on account of Indirect Charges of Residential and Commercial Sectors
The AO estimated 30% of the total recoveries from residential sectors and 60% from commercial sectors as income, based on indirect charges. The CIT(A) reduced this to 20% for residential and 45% for commercial sectors, considering that certain charges are statutory and not retained by the assessee. ITAT upheld this decision, noting that the method followed by the assessee did not reflect true profits.

3. External Development Charges (EDC)
The AO treated 30% of EDC as income, arguing that these charges were not spent and were accumulating. The CIT(A) reduced this to 20%, stating that EDC is a statutory fee and must be spent on development. ITAT remanded the issue back to the CIT(A) for a detailed examination, including the statutory provisions and utilization of funds.

4. Annual Maintenance Charges
The AO disallowed 50% of the annual maintenance charges, arguing that these expenses relate to incomplete sectors. The CIT(A) upheld this decision, and ITAT directed the AO to re-examine the issue, emphasizing the need for the assessee to provide a detailed breakup of expenses for completed and incomplete sectors.

5. Forfeiture of Security
The AO added the forfeited security amount to the income, which was upheld by the CIT(A) and ITAT. ITAT noted that the amount was not adjusted in the value of closing stock and was rightly treated as income.

6. Sale of Plants
The AO added income from the sale of plants, grass, and trees, treating it as revenue income. The CIT(A) and ITAT upheld this addition, rejecting the assessee's argument that the income should be considered when the land is sold.

7. Contribution to Industrial Assistance Group (IAG)
The AO disallowed the contribution to IAG, treating it as a non-business expense. The CIT(A) and ITAT upheld this disallowance, noting that the payment was voluntary and did not provide a direct benefit to the assessee.

8. Payment to Pension and Gratuity Fund
The AO disallowed the payment to the Gratuity Fund as it was not recognized during the assessment year. The CIT(A) directed the AO to verify the approval of the fund and allow it accordingly.

9. Interest to NCR Planning Board
The AO disallowed interest paid to NCR Planning Board, treating it as capital expenditure. The CIT(A) upheld this, but ITAT allowed the interest as a revenue expenditure, noting that it was for working capital.

10. Demarcation/Survey Expenses
The AO treated demarcation/survey expenses as capital expenditure. The CIT(A) upheld this decision. ITAT allowed these expenses as revenue expenditure, noting that they are routine and recurring.

11. Contribution to Delhi Metro
The AO disallowed the contribution to Delhi Metro, treating it as a non-business expense. The CIT(A) upheld this decision. ITAT allowed the expenditure, recognizing it as enhancing the business by improving accessibility and facilities.

12. Salary to PF Staff
The AO disallowed the salary paid to PF staff, treating it as non-business expenditure. The CIT(A) upheld this decision. ITAT allowed the expenditure, noting that the staff was working for HUDA.

13. Disallowance of Advertisement on Buses
The AO disallowed the advertisement expenses on buses, treating it as a non-business expense. The CIT(A) upheld this decision. ITAT confirmed the disallowance, noting that the expenditure did not fit the criteria of being wholly and exclusively for business purposes.

14. Valuation of Closing Stock
The AO added an amount to the income, citing an error in closing stock valuation. The CIT(A) upheld this addition. ITAT dismissed the assessee's appeal, noting that the error needed correction in the instant year.

15. Salary of Employees of Department of Urban Estates
The AO disallowed the salary paid to employees of the Department of Urban Estates, treating it as non-business expenditure. The CIT(A) restricted the disallowance to 20%. ITAT allowed the expenditure, noting that the employees were working for HUDA.

16. Town Planning Expenses
The AO treated town planning expenses as capital expenditure. The CIT(A) allowed part of the expenses as revenue and part as capital. ITAT remanded the issue back to the AO for verification of the nature of expenses.

17. Disallowance under Section 40(a)(ia)
The AO disallowed interest payments due to non-deduction of TDS. The CIT(A) confirmed this disallowance. ITAT allowed the appeal, noting that the interest was in the nature of compensation and not subject to TDS.

18. Income from House Property vs. Business Income
The AO treated rental income as business income. The CIT(A) and ITAT upheld the assessee's treatment of rental income as income from house property, following the decision of the Punjab & Haryana High Court.

19. Dividend Income
The AO treated dividend income as business income. The CIT(A) and ITAT upheld the assessee's treatment of dividend income as exempt under Section 10(34), directing the AO to determine the disallowance under Section 14A.

20. Office Maintenance and Office Expenses
The AO disallowed office maintenance expenses, treating them as capital expenditure. The CIT(A) allowed these as revenue expenses. ITAT remanded the issue back to the AO for verification of the nature of expenses.

21. Sales Tax
The AO disallowed 50% of sales tax paid, treating it as capital expenditure. The CIT(A) deleted the addition, noting that sales tax is allowable on a payment basis under Section 43B. ITAT upheld the CIT(A)'s decision.