2017 (9) TMI 806 - AT - Income Tax

Deduction not granted in respect of the Collector s liability - Held that - As found that the collector had determined the provisional liability to be paid by the assessee on the assessee getting the reversionary right from Mema Engineers by deed dated 17.2.2000, pending final determination by the Assistant Director, Department of Town Planning on behalf of the Collector. This letter shows that though the event which occasioned the payment of a portion of the unearned income accrued in the year 2000 it was only in the year 2003 that the Collector was aware of the event and the occasion was assessee s request to the Collector to allow it use to property commercially. (This is clear from the opening sentence of the letter which refers to the assessee‟s request for commercial use). The assessee has not stated further whether the final determination for the unearned income‟ for the transfer in 2000 has been intimated by the Government and whether it had made further payments. The assessee had not stated as to how many flats or floors were developed and how many sold or to whom. The liability would crystallize only when the Collector Mumbai Suburban District considers the matter and determines the amount to be paid by the assessee as Government‟s share of unearned income. This is supported by the fact that the assessee itself has not made any provision in its accounts for the liability. The Auditor has stated that the assessee has not made the provision in the absence of a specific demand from the Collector. It is clear from the above that the liability neither accrued nor crystallised nor paid nor accounted by the assessee during the year under consideration. The Bench specifically asked the assessee to furnish any documentary evidence indicating the actual accrual and/or payment of liability till today, however, the assessee was unable to produce any evidence to this fact. Thus the deduction of expenditure cannot be allowed. In the interest of justice, we restore this matter back to the file of the A.O. with a direction to communicate directly to the Collector of Mumbai so as to find out if any liability is payable by the assessee towards this project and to decide the same afresh as per law. Disallowance made u/s. 14A as per Rule 8D - Held that - In view of the decision of Hon‟ble Bombay High Court in case of Godrej and Boyce 2010 (8) TMI 77 - BOMBAY HIGH COURT Rule 8D is applicable w.e.f. A.Y. 2008-09. However, the assessment year under consideration is A.Y. 2007-08 wherein Rule 8D is not applicable. As per the facts and figures placed on record we direct the A.O. to restrict the disallowance u/s.14A to the extent of ₹ 3,77,065/- being amount of PMS charges paid to Enam Securities P. Ltd. We direct accordingly.

Summary

Issues Involved:
1. Deduction of Collector's liability ?2,41,15,599.
2. Disallowance under Section 43B of the IT Act, 1961 for Collector's liability.
3. Disallowance under Section 14A of the IT Act, 1961 amounting to ?5,39,175.

Issue-wise Detailed Analysis:

1. Deduction of Collector's liability ?2,41,15,599:
The assessee contested the CIT(A)'s decision to confirm the disallowance of the Collector's liability of ?2,41,15,599. The assessee argued that this liability arose from the development of property and should be considered part of the cost of development. It was claimed that since substantial revenue from the sale of the property was offered for taxation, the corresponding cost should be allowable based on the principle of matching cost and revenue. The assessee further contended that the liability should be deductible under Section 37(1) of the IT Act. However, the Assessing Officer (A.O.) observed that in the absence of a specific demand letter from the Collector, the liability was not provided in the books of accounts. Consequently, the A.O. added ?2,41,15,599 to the assessee's income. The Tribunal noted that the liability would crystallize only when the Collector determined the amount payable by the assessee. Since the liability neither accrued nor crystallized nor was paid or accounted for during the year under consideration, the deduction of expenditure could not be allowed. The matter was restored to the A.O. to directly communicate with the Collector of Mumbai to ascertain any payable liability and decide afresh as per law.

2. Disallowance under Section 43B of the IT Act, 1961 for Collector's liability:
The assessee argued that the Collector's liability was not a sum payable by way of tax, duty, cess, or fee under any law but was a contractual liability arising from the agreement for purchasing rights in the land. The assessee relied on the jurisdictional Tribunal's decision in the case of Mema Engineers & Contractors Pvt. Ltd. v. ACIT, which held that 50% of the unearned increase is a contractual liability and not covered by Section 43B of the Act. The Tribunal considered the facts and found that the liability neither accrued nor crystallized during the year under consideration. Therefore, the addition made by the A.O. under Section 43B was not justified, and the matter was remanded to the A.O. for fresh consideration based on communication with the Collector.

3. Disallowance under Section 14A of the IT Act, 1961 amounting to ?5,39,175:
The assessee contested the CIT(A)'s direction to adopt the disallowance under Section 14A at ?5,39,175, arguing that only direct expenses in the form of PMS charges of ?3,77,605 should be considered. The A.O. had computed the disallowance as per Rule 8D, which was applicable from A.Y. 2008-09 onwards. Since the assessment year under consideration was A.Y. 2007-08, Rule 8D was not applicable. The Tribunal directed the A.O. to restrict the disallowance under Section 14A to ?3,77,065, being the amount of PMS charges paid to Enam Securities P. Ltd.

Conclusion:
The appeal was allowed in part. The matter regarding the Collector's liability was remanded to the A.O. for fresh consideration after direct communication with the Collector of Mumbai. The disallowance under Section 14A was restricted to ?3,77,065. The order was pronounced in the open court on 26/07/2017.