2021 (9) TMI 1409 - AT - Income Tax

Addition on account of revenue recognition from construction project as per Percentage of Completion Method (POCM) - AO has considered the addition on the basis of observation of Special Auditor in AY 2009-10 wherein it was pointed out that appellant company has changed the method for apportionment of internal development charges from FY 2008-09 - HELD THAT - As the basis of addition in the year under reference is identical to that in preceding years. In fact, the assessing officer himself has followed the observation of Special Auditor in AY 2009-10 and finding recorded in the assessment order for AY 2011-12. As the issue of reworking of profit under POCM on the basis of re-apportionment of IDC has been decided by the Coordinate bench in preceding years, the same is decided as per the table given. Disallowance of interest expenses on account of capitalization - AO capitalized part claim of interest on the reasoning that interest expenses on fixed period loans cannot be fully allowed and is allowable in proportion to revenue recognized from various projects - disallowance and capitalization of interest was computed as per formula suggested by Special Auditor in preceding years - HELD THAT - It is noted that the issue of capitalization of interest is a recurring issue and has been extensively dealt with first appellate authority and Coordinate bench in favour of assessee in preceding years wherein it has been held that notional capitalization of interest is not permissible particularly when the assessee has already capitalized interest pertaining to projects under execution. There is nothing on record to show that facts and the basis of disallowance in the year under consideration is different from that in preceding years. As the issue of capitalization of interest has been decided by the Coordinate bench in preceding years. Disallowance of brokerage expense - HELD THAT - The action of assessing officer in treating brokerage as part of cost under POCM method has been deprecated by the Coordinate bench in orders passed for AY 2006-07 to 2011-12 wherein it has been held that brokerage expenses are allowable in the year of incurring and same cannot be associated with construction cost. It has been stated by Ld. AR that the deletion of disallowance in AY 2006-07 by Coordinate Bench has been accepted by the revenue and no further appeal has been filed before High Court on this issue. In fact, the assessing officer has accepted the claim in AY 2016-17. Addition on account of net interest free maintenance security deposits - AO was of the opinion that maintenance charges collected by the assessee is in the nature of income - HELD THAT - It is noted that the assessee is collecting interest free maintenance security deposit from customers for meeting out future liabilities such as insurance premium and maintenance charges of the buildings. The amount so collected is handed over to resident association/Condominium association upon formation and are shown as liability in the books of account. Further, it is noted that the issue of maintenance and security deposit is a recurring issue where the assessing officer is making addition year after year and the matter has travelled before Coordinate bench in successive preceding years wherein the addition stood deleted. It has been stated by Ld. AR that the deletion of identical disallowance in AY 2006-07 by Coordinate Bench has been accepted by the revenue and no further appeal has been filed before High Court on this issue. In fact, the assessing officer has accepted the claim in AY 2016-17. As this issue is covered in favour of assessee by orders of Coordinate bench, the same is decided as per the table given. Disallowance of expenses towards allocation of overheads to other group entities - HELD THAT - As we find that the basis adopted by the assessing office while making disallowance of expenses in the hands of the assessee on account of allocation of overheads to group concerns is static and borrowed from earlier years assessment orders. Further, as this issue has already been decided by Coordinate bench in AY 2006-07 to 2011-12 wherein the disallowance was deleted. On parity of facts, this ground is also decided as per table given Reclassifying income offered to tax under the head Income from House Property to Income under head Business and Profession - HELD THAT - We find that this issue has been dealt with by Coordinate bench in AY 2005-06 to 2011-12 wherein the addition was deleted by holding that lease income from asset lying under current asset is also assessable under the head Income from House Property. Addition on account of rent on properties lying vacant during the year under reference - HELD THAT - It is not in dispute that addition in the year under reference is based on assessment order for AY 2006-07 to 2011-12 and has come up for consideration before Coordinate bench. Further, the Ld. Counsel for the assessee has submitted that that the deletion of identical addition in AY 2006-07 by Coordinate Bench has been accepted by the revenue and no further appeal has been filed before High Court on this issue. In fact, the assessing officer has not made any addition on this issue in AY 2016-17. Disallowance of depreciation of building DLF Centre - HELD THAT - As the issue of depreciation is recurring issue based on recalculated WDV and same having been decided by Coordinate bench in preceding years, disallowance of depreciation was deleted as per finding recorded . Disallowance of expense on ground of prior period expenses - HELD THAT - On perusal of assessment order, it is observed that expenses disallowed are of routine nature for example advertisement, insurance, travelling and conveyance, legal professional, sales promotion, repair and maintenance etc.. The genuineness of these expenses is not in dispute. Further, the CIT(A) has given a clear finding that liability to pay expenses has accrued/arose during the year and as such the same are allowable. Moreover, these expenses are settled in the year under consideration. In these circumstances, we find no convincing reasons to interfere with the order of CIT(A) setting-aside the disallowance. In fact, on similar facts, the coordinate bench has considered similar issue and deleted the disallowance in AY 2006-07 to 2011-12. Expenses towards running and maintenance of Helicopter and aircraft - AO made disallowance on the ground that aircraft and helicopter have been used for personal purposes and accordingly estimated ad-hoc disallowance @ 66.67% of the total expenses relating to aircraft and helicopter including depreciation - HELD THAT - We find that this issue came for up consideration before Coordinate bench in AY 2010-11 and 2011-12 wherein the disallowance of expenses relating to aircraft and helicopter on the ground of personal expense was deleted. Addition of interest - interest short charged - rate of interest charged by the assessee company on loans advanced to group concerns is less than that paid to financial institutions and banks - AO worked out the interest short charged from the group concerns on proportionate basis and accordingly made addition in the hands of the assessee - HELD THAT - We find that there is no provision in the Income tax Act which warrants addition of interest on notional basis and as such the order of CIT(A) deleting the addition is well reasoned. In fact, it is not the case of the assessing office that money borrowed from the banks and its subsequent utilization is not for the purpose of business and as such we see no rationale behind charging of additional interest on notional basis on money advanced to group concerns. Thus we uphold the order of CIT(A) deleting the addition. Nature of receipts - addition on account of income from sale of carbon credits by treating the same is revenue receipt - HELD THAT - CIT(A) deleted the addition coorectly by placing reliance on the decision of Hon ble Andhra Pradesh High Court in the case of CIT v. My Home Power Ltd. 2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT wherein it was held the income from sale of carbon credits is a capital receipt. Addition of notional rent in respect of kiosks let out to tenants - assessee is not recognizing the rental in its hand on the basis of mutual arrangement with maintenance company M/s. DLF Services ltd. which is providing maintenance and upkeep services in the Mall - HELD THAT - We find that this very issue came up before the Coordinate bench while deciding the appeal for AY 2007-08 2017 (11) TMI 381 - ITAT DELHI wherein it was held that mutual arrangement created an overriding title resulting in diversion of rental income in favour of M/s. DLF Services Ltd. and as such the same cannot be taxed again in the hands of the assessee. Disallowance u/s 14A r.w.r. 8D - assessee has made suo moto disallowance being salary to an employee looking after the work of investment which are mainly continuing from earlier years - HELD THAT - As decided in own case 2020 (10) TMI 77 - ITAT DELHI AO has nowhere recorded its dissatisfaction regarding suo moto disallowance made by the assessee and the entire discussion revolves around quantum of investment appearing in the balance sheet. Moreover, the assessing officer has overlooked the availability of interest free own funds and so-called observation regarding claim of interest expenses is unsubstantiated and not based on books of account of the assessee. The CIT(A) has given a specific finding that no part of interest bearing funds were used for making investment yielding exempt income. In these circumstances, we are constrained to observe the satisfaction recorded by the assessing officer fails to pass the test laid down by Supreme Court and does not provide valid basis for invocation of rule 8D. Disallowance was deleted by observing that satisfaction recorded by the assessing officer is invalid. The satisfaction recorded in present case is ad-verbatim that in AY 2010-11 and 2011-12 - we find no reasons to interfere with order of CIT(A) deleting the disallowance u/s 14A r.w.r 8D . Exemption u/s 80IA - Disallowance of expenditure on account of short/non-allocation of proportionate overhead expenditure to windmill unit in Gujarat and Karnataka - HELD THAT - We find that assessing officer has not given any basis for making impugned disallowance and the only reasoning behind the allocation of expense is that windmill units have not claimed any expenses on account of finance, establishment or general admin cost. The Ld. AR has drawn our attention to form 10CCB which contained complete working of profit and claim of various expenses incurred for running these units. It is self evident that separate set of books of account are maintained for respective windmill unit at Gujarat and Karnataka. In these circumstances, unless there is some material or conclusive finding on record that books of account of these units are not correct or expenses pertaining to these units have not been claimed, there could be no case of any notional allocation of expenses in the ratio of income. The assessment order is silent on this aspect and merely contains working of disallowance by allocation expenses in the ratio of income which in our view is not sustainable. At this juncture, it is pertinent to make reference to decision of CIT v. Translam Ltd. 2014 (10) TMI 544 - ALLAHABAD HIGH COURT wherein it was held that assessing officer is bound to point out defect in separate books of account of units before disputing the correctness of income/loss declared therein. TP adjustment u/s 92C on account of Corporate Guarantee fee - HELD THAT - As it is unclear whether the assessee has provide corporate guarantee or letter of comfort. Ostensible both the terms are used in the said letter issued by the bank which is creating doubt over the real nature of the transaction. In fact, the order of TPO is silent on this aspect and TPO has proceeded on the ground that assessee has provided corporate guarantee. We are of the considered view that the issue requires reconsideration at the level of TPO. Accordingly the adjustment made by the assessing officer is set-aside and the matter is restored to the file of TPO with the direction to examine the nature is assistance given to AE i.e. letter of comfort or corporate guarantee. Also, as noted above, in case the arrangement is in the nature of corporate guarantee, ALP, if any should be determined on the basis of FAR analysis and employing CUP method. Needless to say, that assessee should be afforded opportunity to furnish necessary explanation/clarification.

Summary

Issues Involved:

1. Deletion of addition on account of revenue recognition as per POCM.
2. Deletion of disallowance of interest expenses on account of capitalization.
3. Deletion of disallowance of brokerage and commission expenses.
4. Deletion of addition on account of net interest-free security deposits.
5. Deletion of disallowance of expenses towards allocation of overheads to other group entities.
6. Deletion of disallowance u/s 14A read with Rule 8D.
7. Deletion of addition by reclassifying income from house property to business income.
8. Deletion of addition on account of notional rent on vacant properties.
9. Deletion of disallowance of depreciation on DLF Centre building.
10. Deletion of disallowance on account of prior period expenses.
11. Deletion of disallowance of expenses for operation and maintenance of helicopter and aircraft.
12. Deletion of addition on account of notional interest income from subsidiaries.
13. Deletion of disallowance on account of short/non-allocation of proportionate overhead expenditure to windmill units.
14. Deletion of addition on account of carbon credits.
15. Deletion of transfer pricing adjustment on account of corporate guarantee fee.
16. Addition of notional rent in respect of kiosks let out to tenants.

Detailed Analysis:

1. Deletion of Addition on Account of Revenue Recognition as per POCM:
The assessing officer added ?204,73,12,536 based on the Special Auditor's observation in AY 2009-10, alleging understatement of profit due to a change in the method of apportionment of internal development charges (IDC). The CIT(A) deleted the addition, noting that the issue had been decided in favor of the assessee in preceding years (AY 2006-07 to 2011-12). The ITAT upheld this deletion, finding the basis of addition identical to preceding years.

2. Deletion of Disallowance of Interest Expenses on Account of Capitalization:
The assessing officer capitalized part of the interest expenses, following the Special Auditor's formula from preceding years. The CIT(A) deleted the addition, referencing decisions from AY 2006-07 and 2009-10. The ITAT upheld this deletion, noting the recurring nature of the issue and the lack of new facts.

3. Deletion of Disallowance of Brokerage and Commission Expenses:
The assessing officer disallowed brokerage expenses, arguing they should be linked to each project and transferred to WIP. The CIT(A) deleted the addition based on decisions from AY 2006-07 and 2009-10. The ITAT upheld this deletion, noting that brokerage expenses are allowable in the year incurred and cannot be associated with construction costs.

4. Deletion of Addition on Account of Net Interest-Free Security Deposits:
The assessing officer added ?38,08,624, treating maintenance charges collected by the assessee as income. The CIT(A) deleted the addition, following the decision from AY 2009-10. The ITAT upheld this deletion, noting that the issue had been decided in favor of the assessee in preceding years.

5. Deletion of Disallowance of Expenses Towards Allocation of Overheads to Other Group Entities:
The assessing officer disallowed ?6,78,81,157, allocating overhead expenses to group concerns. The CIT(A) deleted the addition, referencing decisions from AY 2006-07 to 2011-12. The ITAT upheld this deletion, noting the recurring nature of the issue and the lack of new facts.

6. Deletion of Disallowance u/s 14A Read with Rule 8D:
The assessing officer enhanced the disallowance u/s 14A without recording dissatisfaction with the assessee's suo moto disallowance of ?6,61,871. The CIT(A) deleted the enhanced disallowance, citing the lack of recorded satisfaction. The ITAT upheld this deletion, referencing the Supreme Court's emphasis on recording valid satisfaction in Maxopp Investment Ltd. v. CIT.

7. Deletion of Addition by Reclassifying Income from House Property to Business Income:
The assessing officer reclassified rental income as business income, following decisions from AY 2006-07 to 2011-12. The CIT(A) deleted the addition, and the ITAT upheld this deletion, noting that the issue had been decided in favor of the assessee in preceding years.

8. Deletion of Addition on Account of Notional Rent on Vacant Properties:
The assessing officer added notional rent for vacant properties, following decisions from AY 2006-07 to 2011-12. The CIT(A) deleted the addition, and the ITAT upheld this deletion, noting that the issue had been decided in favor of the assessee in preceding years.

9. Deletion of Disallowance of Depreciation on DLF Centre Building:
The assessing officer disallowed depreciation based on a recalculated WDV from AY 2006-07. The CIT(A) deleted the disallowance, and the ITAT upheld this deletion, noting that the issue had been decided in favor of the assessee in preceding years.

10. Deletion of Disallowance on Account of Prior Period Expenses:
The assessing officer disallowed prior period expenses based on the tax audit report. The CIT(A) deleted the disallowance, noting that the liability for these expenses crystallized during the year. The ITAT upheld this deletion, referencing similar decisions from preceding years.

11. Deletion of Disallowance of Expenses for Operation and Maintenance of Helicopter and Aircraft:
The assessing officer disallowed 66.67% of expenses for personal use. The CIT(A) deleted the disallowance, citing the distinct legal entity status of the company. The ITAT upheld this deletion, referencing similar decisions from preceding years.

12. Deletion of Addition on Account of Notional Interest Income from Subsidiaries:
The assessing officer added notional interest for loans to group concerns. The CIT(A) deleted the addition, referencing Supreme Court decisions in S.A. Builders and M/s. Taparia Tools. The ITAT upheld this deletion, noting the lack of a provision for notional interest in the Income Tax Act.

13. Deletion of Disallowance on Account of Short/Non-Allocation of Proportionate Overhead Expenditure to Windmill Units:
The assessing officer disallowed ?14,64,00,000, allocating overhead expenses to windmill units. The CIT(A) deleted the disallowance, noting that separate books of account were maintained for the windmill units. The ITAT upheld this deletion, referencing the lack of material or conclusive findings to support the allocation.

14. Deletion of Addition on Account of Carbon Credits:
The assessing officer added income from carbon credits, treating it as revenue receipt. The CIT(A) deleted the addition, referencing the Andhra Pradesh High Court decision in CIT v. My Home Power Ltd. The ITAT upheld this deletion, noting that carbon credits are capital receipts.

15. Deletion of Transfer Pricing Adjustment on Account of Corporate Guarantee Fee:
The assessing officer made a transfer pricing adjustment for a corporate guarantee fee. The CIT(A) deleted the adjustment, arguing that corporate guarantees are not international transactions. The ITAT remanded the issue to the TPO to determine the nature of the assistance (corporate guarantee or letter of comfort) and to reassess the adjustment if necessary.

16. Addition of Notional Rent in Respect of Kiosks Let Out to Tenants:
The assessing officer added notional rent for kiosks let out to tenants. The CIT(A) upheld the addition, but the ITAT deleted it, referencing a decision from AY 2007-08 that recognized a mutual arrangement creating an overriding title in favor of M/s. DLF Services Ltd.

Conclusion:
The ITAT largely upheld the CIT(A)'s deletions of various additions and disallowances, referencing decisions from preceding years and emphasizing the need for valid satisfaction and proper allocation of expenses. The issue of transfer pricing adjustment for corporate guarantee fee was remanded to the TPO for reconsideration.