2019 (5) TMI 1120 - AT - Income Tax

Accrual of income - amount of sale consideration treated as advance money receipt in the hands of assessee in respect of lease of land in the notified and approved SEZ - HELD THAT - Conclusion drawn by the CIT(A) for non taxability of consideration from the impugned lease agreement in the absence of accrual thereof and in the absence of any liability of the lessee to pay the same to the assessee as successfully demonstrated on behalf of the assessee. An income from the MOU/lease agreement cannot be said to have accrued or arisen or become legally due to assessee till the time the underlying integral conditions of MOU are fulfilled. We also take note of the crucial fact that the advance received from the lessee was ultimately returned to them owing to continued non-fulfillment of terms and the conditions of the proposed lease. Section 145 also recognizes only accrual or cash method of accounting. Therefore, the corporate body is required to maintain its account on accrual method. As per the accrual basis of accounting, the income should belong to the period in which it accrues. Therefore case clearly justified the alternative case of the assessee that the assessee was merely a custodian of the advances received till the key features of MOU are met and consequently income from lease agreement had never factually accrued or arose in the hands of the assessee. The surrounding facts and circumstances cannot be brushed aside while entrusted with this task. Book entries may, at times, are only subservient to actual facts. We thus do not see any infirmity in the action of the CIT(A) for non-chargeability of the fictional and unaccrued income in the hands of the assessee. The case sought to be propounded on behalf of the Revenue for taxability of income from proposed lease merely based on book entries de hors its accrual in favour of assessee is not sustainable in law when tested on the touchstone of realistic parameters and well established judicial principles. Disallowance of deduction u/s 80IB(10) - HELD THAT - On appraisal of the development agreements, various approvals granted by the Municipal Corporation for the relevant projects, the CIT(A) came to a justifiable conclusion that the assessee has exercised dominant control over the ownership of the land and has carried out construction and development at its own risks and liabilities. The CIT(A) has taken into account the detailed submissions made on behalf of the assessee while adjudicating the issue in favour of the assessee applying the judicial interpretations available in this regard. The objection towards excessive built up area has also been addressed by the CIT(A) based on documentary evidences. Documentary evidences revealed that built up area was within the permissible limit. The Revenue before us could not point out any deficiency in the order of the CIT(A). We also take note of the significant plea on behalf of the assessee that the claim of deduction u/s 80IB(10) was duly allowed by the AO in subsequent year 2010-11 and 2011-12 in the assessment framed u/s 143(3). Also, in the absence of rebuttal of observations made by the CIT(A), we do not see any justification to interfere with the order of the CIT(A). Disallowance u/s 36(1)(iii) on account of proportionate interest expenditure - HELD THAT - The assessee has clearly demonstrated its own funds to be in excess of corresponding interest free advances. Secondly, the assessee has earned substantial interest netting of which has not been given by the AO at all. CIT(A) further noted that the AO has adopted inconsistent stand and disallowed the interest expenditure on proportionate basis in this year whereas accepted the interest claim in the earlier years. Before us, the Revenue could not support the case of the AO for disallowance. The issue in the context of the facts is no longer res integra and covered in favour of the assessee by several judicial precedents as rightly recorded by the CIT(A). In these circumstances, we are of the view that the CIT(A) has approached the issue in proper perspective and reversed the wrongful disallowance made by the AO. We thus see no perceptible reason to interfere with the order of the CIT(A). Whether the consideration arising from the MOU/lease deed with AIPL recognized as revenue income despite it being a contingent liability and admittedly not accrued or earned by the assessee is liable for taxation under s.115JB? - HELD THAT - The CIT(A) having arrived at a finding that the receipt from AIPL are contingent in nature and liable to be returned in the event of non fulfillment of conditions of the agreement, could not have arrived at a finding adverse to the assessee for the purposes of determination of book profit u/s115JB merely because of it being recognized in the P L account by the assessee. Unaccrued income from SEZ project amounting to ₹ 97,72,11,000/- cannot be taken into account for the purposes of determination of book profit u/s115JB and tax liability cannot be fastened on the assessee on this score. Therefore, we find merit in the appeal of the assessee. Deduction under s.80IB(10) - objection has been raised by the Revenue that the terms and the conditions of eligibility of deduction has been breached in as much as the built up area of the residential units exceeded 1500 sq.ft. - Revenue could not rebut the specific finding of the CIT(A) in para 5.3.8 of its order wherein it was concluded by the CIT(A) that the built up area is below 1500 sq.ft. on the basis of documentary evidences. Disallowance u/s 14A - HELD THAT - We observe that the assessee has not declared any exempt income and consequently the provisions of Section 14A is not attracted in view of CIT vs. Corrtech Energy (P.) Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT and other several decisions in this regard. Secondly, the CIT(A) has also recorded a finding to the effect that interest free funds available at the disposal of assessee is in excess of amount of investments which give rise to potential exempt income. Thus disallowance of proportionate interest is not permissible in such circumstances. Hence, we do not see any infirmity in the action of CIT(A) in deleting the disallowance of interest expenditure for the purposes of section 14A

2020 (9) TMI 243 - HC

Issues Involved:
1. Treatment of advance receipt as accrued income.
2. Eligibility of deduction under Section 80IB(10) of the Income Tax Act.
3. Disallowance of proportionate interest expenditure under Section 36(1)(iii).
4. Taxability of advance receipt under Section 115JB.

Issue-Wise Detailed Analysis:

1. Treatment of Advance Receipt as Accrued Income:
The primary issue revolves around whether the advance received from M/s. Abir Investments Pvt. Ltd. (AIPL) should be treated as accrued income. The CIT(A) held that the amount paid by AIPL was merely an advance receipt in respect of the lease of land in a notified and approved SEZ. This advance receipt could not be equated with accrued income because it was contingent upon several obligations being fulfilled by both the assessee and AIPL. The Tribunal upheld the CIT(A)’s decision, noting that the income had not accrued as the conditions precedent for the lease agreement were not met. The Tribunal emphasized that income tax cannot be levied on hypothetical income and only real income that has actually accrued is chargeable to tax.

2. Eligibility of Deduction under Section 80IB(10):
The AO disallowed the deduction under Section 80IB(10) on various grounds, including the assessee not being the owner of the land, the layout plans being approved in the name of the landowners, and the built-up area exceeding the prescribed limit. However, the CIT(A) allowed the deduction, referencing the decision in Radhe Developers, which held that the developer need not be the owner of the land to claim the deduction. The Tribunal upheld the CIT(A)’s decision, noting that the assessee had dominant control over the land and incurred all expenses and risks associated with the development. The Tribunal also found that the built-up area was within the permissible limit based on documentary evidence.

3. Disallowance of Proportionate Interest Expenditure under Section 36(1)(iii):
The AO disallowed proportionate interest expenditure on the grounds that the assessee had advanced substantial interest-free loans to related companies. The CIT(A) reversed this disallowance, noting that the assessee had sufficient interest-free funds to cover the advances and had earned substantial interest income, resulting in a net interest income. The Tribunal upheld the CIT(A)’s decision, referencing the judgment in Reliance Utilities and Power Ltd., which established that if the assessee has sufficient interest-free funds, the presumption is that investments are made from those funds.

4. Taxability of Advance Receipt under Section 115JB:
The assessee contended that the advance receipt should not be included in the book profit under Section 115JB as it was contingent and not accrued income. The CIT(A) found that the receipt was contingent and not liable to tax under normal provisions but included it in the book profit under Section 115JB. The Tribunal disagreed with this dual treatment, holding that the contingent receipt should not be included in the book profit. The Tribunal emphasized that what is not income under normal provisions cannot be taxed under Section 115JB, referencing the decision in Indo Rama Synthetics and other judicial precedents.

Conclusion:
The Tribunal dismissed the Revenue’s appeals and allowed the assessee’s appeals, holding that the advance receipt was not accrued income and thus not taxable under normal provisions or Section 115JB. The Tribunal also upheld the CIT(A)’s decisions on the eligibility of deduction under Section 80IB(10) and the disallowance of proportionate interest expenditure.

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