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2017 (1) TMI 933 - AT - Income TaxAddition on account of deemed income - accrual of profit in lieu of expenditure incurred for development of plot - AO held that assessee had become the owner of the plot of land after handing over the possession of the quarters and station to the Police department that he made an addition to the income of the assessee - FAA reversed the order of the AO - Held that - The order of the FAA does not suffer from any legal or factual infirmity,that he had given a finding of fact that assessee was the owner of the plot of land from the very beginning, that it had executed a lease for 99 years at the rent of ₹ 1 per year in favour of the Police department,that if the assessee was not the owner of the plot of land there was no need for the government to enter in to a lease. Reserving or de-reserving of the plot of land cannot decide the issue of ownership of the plot of land. By constructing the plot of land the assessee had improved upon the right in land. If any taxable income was to accrue or arise it would not be at this stage but at the stage of sale of the constructed portion on the balance plot i.e.60% of the plot. The AO was not justified in applying ready reckoner rate on the stamp duty valuation and that also for the year under consideration.As the order of the FAA needs no interference from our side, so, confirming the same we decide the first ground of appeal against revenue Addition on incurred expenditure toward building number two of the police station building under various heads - Held that - AO had not doubted the genuineness of the expenditure.His only objection was that at the time of spot visit by the inspector it was found that the assessee was not carrying out any construction activities.In our opinion,in the case of a contractor or a developer time gap in starting a new project after completing the first project is not an abnormal practice. But he has to maintain the office and the staff for starting the second project. Expenditure incurred for the intervening period cannot be disallowed. The assessee had started the construction of Police station and quarters after the plot of land was de-reserved. The FAA had scrutinized all the expenses incurred by the assessee and had held that certain expenses were not allowable. Expenses incurred under the heads salary of staff or electricity bills cannot be disallowed, especially when incurring of expenses is not in doubt. - Decided against revenue
Issues Involved:
1. Deletion of the addition of ?2.65 crores on account of deemed income. 2. Deletion of addition of ?9.50 lakhs towards building number two of the police station building. Issue-wise Detailed Analysis: 1. Deletion of the addition of ?2.65 crores on account of deemed income: The primary issue revolves around the addition of ?2.65 crores made by the AO as deemed income. The assessee, a developer and contractor, had completed construction work on a reserved plot and received a portion of the land free of cost. The AO observed that the assessee did not offer any income from this project and capitalized the cost of the reserved land in the completed project. The AO contended that the assessee became the owner of the balance plot upon completing the construction and handing over the police quarters and station, and thus, the profit should be calculated based on the stamp duty valuation. The FAA, however, held that the assessee was the owner of the land from the beginning and that the expenditure incurred for construction was to improve the right to develop the remaining land. The FAA concluded that no income had accrued at the stage of construction and handing over the police quarters, as the income would only accrue upon the sale of the developed property. The ITAT upheld the FAA's decision, stating that the AO was not justified in applying the ready reckoner rate for the year under consideration and that any taxable income would accrue at the stage of sale of the constructed portion. 2. Deletion of addition of ?9.50 lakhs towards building number two of the police station building: The AO found that the assessee had incurred an expenditure of ?9.50 lakhs towards the construction of building number two of the police station. However, a spot visit revealed no construction activity, leading the AO to disallow the expenditure and reduce the work in progress by the same amount. The FAA, upon review, noted that the AO did not provide evidence that the business had ceased to exist or that the expenses were not genuine. The FAA allowed the expenditure as part of the work in progress, except for specific disallowed amounts related to income tax and TDS. The ITAT agreed with the FAA, emphasizing that expenses incurred during a lull in business activities are common for developers and contractors, and such expenses cannot be disallowed if their genuineness is not in doubt. Conclusion: The appeal filed by the AO was dismissed, and the cross-objection filed by the assessee was deemed infructuous. The ITAT upheld the FAA's decisions on both counts, confirming that the additions made by the AO were not justified. The order was pronounced in the open court on 04th January 2017.
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