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2019 (3) TMI 1272 - HC - Income TaxRecognition of income under constriction contract - Completed Contract Method ( CCM ) vs. Percentage Completion Method ( PCM ) - Payment of compensation to flat/space buyers - some allottees of the flats refused to take them for completion since the New Delhi Municipal Council ( NDMC ) changed the usage of the Lower Ground Floor ( LGF ) - compensation paid in lieu of surrender of rights in flats/space shown in work and progress in balance-sheet and enhance the value of work and progress? - HELD THAT - A fact which has not been addressed by either the AO or the ITAT is that the Assessee follows the CCM and not the PCM. - as far as the case in hand is concerned, since there is no dispute that the Gopal Das Bhawan Project was completed in FY 1994-95, it is AS 7, pre-revised, which would apply. There is merit in the contention of the Assessee, based on AS 2 that compensation paid subsequent to the completion of the project is an extraordinary item. It was not cost of completion of the project and, therefore, such compensation could not be added to the value of the stock and trade of the Assessee. AS 2 governs valuation of inventories. Cost comprises all of the costs of purchase, cost of completion and other costs incurred in bringing the inventories to their present location and condition. That which is not relevant to bringing the stock to its present condition or location cannot be a part of its value. In the considered view of the Court, the view expressed by the CIT (A) merits acceptance. The conclusion of the ITAT that the payment was made for extraneous consideration appears to be based on surmises and conjectures. Applying the law explained by the Supreme Court in the CIT v. Nainital Bank Ltd. 1966 (9) TMI 46 - SUPREME COURT to the case in hand, the plausible conclusion is that the compensation paid by the Assessee to the allottees of the commercial spaces for the surrender of their rights therein cannot be said to be disallowable on the ground of such payment having been made for extraneous considerations. The result of the above discussion is that the Court holds that the payment made by the Assessee to the allottees of the flats for their surrendering the rights therein should be allowed as business expenditure of the Assessee. Rental income earned from its stock and trade - business income or income from house property - ITAT held the same from income from house property except in one year - HELD THAT - The Court finds that barring this one year i.e. AY 1996-97, in all the other AYs, the consistent view of the ITAT that rental income is to be assessed as IHP and not business income has been accepted by the Revenue. Following the rule of consistency as explained in the above decisions, this Court declines to entertain the plea of the Revenue which appears to be confined to AY 1996-97, with none of the earlier or subsequent AYs being challenged by the Revenue. Accordingly, the issue is decided in favour of the Assessee and against the Revenue by answering the question in the affirmative and holding that the rental income of the Assessee from the properties forming part of its stock-in-trade would be IHP and not business income. Allowabilty of brokerage and commission - HELD THAT - For AY 1995-96, the Revenue filed ITA No.69 of 2003 in this Court raising a question on this issue but it was not admitted by this Court by the order dated 8th January 2004. Likewise, for AY 1997-98, when the ITAT followed its earlier order the Revenue filed ITA 772 of 2005. This Court did not frame any question on this issue following its earlier order dated 8th January 2004 in ITA 69 of 2003. Following the rule of consistency, this Court finds no merit in the contention of the Revenue and this question is accordingly answered in favour of the Assessee Allowabilty of Expenditure on foreign travel - HELD THAT - this issue is similar to the issue of brokerage and commission which was held allowable and accepted by the Revenue for all of the AYs in question except for AY 1996-97. Again, following the rule of consistency, this Court answers this issue in favour of the Assessee Allowabilty of Interest and guarantee commission - interest was capitalised only up to the stage of completion of the project under capital work and progress. and subsequent period, after completion of project, claimed and as a revenue expense - HELD THAT - as rightly pointed out, AS 2 would apply in terms of which, with the Assessee following the CCM, the expenditure incurred subsequent to the completion of the project cannot be attributed to work and had to be allowed only as revenue expenditure. Consequently, the question is answered in the affirmative in favour of the Assessee Withdrawal of credit of TDS u/s 154 - Assessee was not the owner - rent received by the Assessee from the tenants was passed on to the respective owners with Tax - HELD THAT - AO also did not dispute the fact that the Assessee passed on the rent collected to the respective owners. The TDS deducted at the time of such passing on of rental income was also deposited by the Assessee. Further, the owners did disclose the rental income in their returns. Thus on the one hand, there was credit of TDS and on the other hand there was debit of tax paid on behalf of the owners. The Court is of the view that there was no occasion to invoke Section 154 of the Act, since the issue was a debatable one. The decisions of the CIT (A) as affirmed by the ITAT take a plausible view and deserve to be upheld. Interest under Section 201 (1A) - HELD THAT - Under Section 194-I of the Act, the liability to deduct TDS is on the tenant paying the rent. The amount passed on to the owners by the Assessee was not its capacity as tenant. It is further pointed out that for AY 1998-99 the Revenue accepted the order of the CIT (A) by not filing any further appeal. This issue is also, therefore, accordingly answered in favour of the Assessee Disallowance of Advertisement expenses - HELD THAT - Further in AYs 1995-96 and 1996-97 a similar expenditure was allowed and no question was framed by this Court. The Assessee being in the real estate business cannot carry on its business without publicity. The expenditure was necessary for the promotion of the business. The question is accordingly answered in favour of the Assessee and against the Revenue. Disallwance of Service charges - revenue expenditure - HELD THAT - The Assessee is admittedly following the CCM. Service charges were incurred after the completion of the project and would not be part of the capital work in progress. Having been incurred at a stage subsequent to the completion of the project it had to be shown as revenue expenditure and was rightly allowed as such by the ITAT. This question is also therefore answered in favour of the Assessee
Issues Involved:
1. Nature of compensation paid to flat/space buyers: capital or revenue expenditure. 2. Classification of rental income: business income or income from house property. 3. Deductibility of brokerage and commission expenses. 4. Deductibility of foreign travel expenses. 5. Treatment of interest and guarantee commission. 6. Credit of TDS on rent received from tenants. 7. Imposition of interest under Section 201(1A). 8. Deductibility of advertisement expenses. 9. Deductibility of service charges. 10. Scope of Section 154 for rectification of mistakes. Detailed Analysis: 1. Nature of Compensation Paid to Flat/Space Buyers: The Assessee, engaged in the construction and sale of commercial space, follows the Completed Contract Method (CCM). The Assessee claimed compensation paid to flat buyers who surrendered their rights due to changes in the usage of the Lower Ground Floor (LGF) as revenue expenditure. The AO disallowed this, treating it as capital expenditure. The CIT(A) reversed this, considering it business expenditure. The ITAT initially sided with the AO but later, for subsequent years, accepted the Assessee’s claim. The High Court upheld the CIT(A)’s view, emphasizing that the Assessee follows CCM and the compensation paid was to protect business interests, thus should be treated as revenue expenditure. 2. Classification of Rental Income: The Assessee claimed rental income from its stock and trade as income from house property (IHP). The AO assessed it as business income. The CIT(A) and ITAT ruled in favor of the Assessee, treating it as IHP. The High Court upheld this, noting the consistent view of the ITAT and previous acceptance by the Revenue. 3. Deductibility of Brokerage and Commission Expenses: The Assessee claimed brokerage and commission expenses for services rendered in selling and leasing commercial spaces. The AO disallowed part of this as unreasonable. The CIT(A) reversed this, and the ITAT upheld the CIT(A)’s decision. The High Court supported this view, emphasizing the rule of consistency as the Revenue had accepted similar claims in other years. 4. Deductibility of Foreign Travel Expenses: The Assessee incurred foreign travel expenses to promote leasing of commercial space. The AO disallowed this, but the CIT(A) allowed it, considering it necessary for business. The ITAT partially upheld the AO’s view. The High Court, following the rule of consistency, ruled in favor of the Assessee, allowing the expenses as business expenditure. 5. Treatment of Interest and Guarantee Commission: The AO added interest and guarantee commission to the Assessee’s income, claiming it was not incurred for business purposes. The ITAT deleted this addition, and the High Court upheld the ITAT’s decision, noting that the Assessee had a consistent accounting policy and the expenses were related to business activities. 6. Credit of TDS on Rent Received from Tenants: The AO withdrew the credit of TDS on rent received, stating the Assessee was not the owner of the property. The CIT(A) and ITAT reversed this, noting that the Assessee had passed on the rent to the owners and deposited the tax. The High Court upheld this, stating the issue was debatable and not suitable for rectification under Section 154. 7. Imposition of Interest Under Section 201(1A): The AO imposed interest under Section 201(1A) for not deducting TDS on rent passed to owners. The CIT(A) and ITAT canceled this, noting the Assessee was not liable to deduct TDS. The High Court upheld this, emphasizing the liability to deduct TDS is on the tenant. 8. Deductibility of Advertisement Expenses: The AO disallowed advertisement expenses, claiming they should be capitalized. The CIT(A) and ITAT allowed these as revenue expenses. The High Court upheld this, noting the Assessee’s business required publicity and the expenses were necessary for business promotion. 9. Deductibility of Service Charges: The Assessee claimed service charges as revenue expenditure. The AO disallowed this, but the CIT(A) and ITAT allowed it. The High Court upheld this, noting the Assessee followed CCM and the charges were incurred after project completion. 10. Scope of Section 154: The AO invoked Section 154 to rectify the credit of TDS. The CIT(A) and ITAT held this was a debatable issue and not suitable for rectification under Section 154. The High Court upheld this view, emphasizing the issue’s debatable nature. Conclusion: The High Court ruled in favor of the Assessee on all issues, allowing ITA 210 of 2003 and dismissing the Revenue’s appeals. Separate consequential orders were to be passed for each appeal.
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