2019 (7) TMI 1075 - AT - Income Tax

Computation of Cost of Sales and closing value of land - transfer of co-development rights - cost on the basis of FSI sold OR geographical area - allocation of AUDA charges for co-development, FCCD interest - HELD THAT - FSI entitled to the assessee and attached to the global land that sold thereafter has to be assigned cost incurred in proportion to the quantity of FSI sold. The doctrine of matching concept for determination of true profits arising from a transaction is one of the rudimentary principles of accountancy. The Cost of Sales has to be determined in the same manner as applicable to the determination of the sale revenue. Where the sale revenue has been recognized on the basis of FSI sold, the costs of FSI also needs to be determined on the same principles. The determination of Cost of Sales in terms of geographical area would give totally distorted picture, if permitted. Viewed differently the assessee has successfully demonstrated that value of consideration of land would be worked out at an astronomically high figure of ₹ 3,04,136/- per sq. mtr. of land vis- -vis ₹ 2750/- per sq. mtr. assigned by the stamp authorities, if the method suggested by the Revenue for allocation of cost on the basis of land area is accepted. This crucial aspect also reinforces the claim of the assessee that the Cost of Sales requires to be determined on the basis of FSI allocated vis- -vis global FSI regardless of lesser area allocated for putting up construction. No hesitation to set aside the order of the CIT(A) and reverse the action of the AO. We find considerable merit in the plea raised by the assessee for computation of Cost of Sales of land and incidental costs towards AUDA charges etc. on the parameters of FSI sold as computed by the assessee. The additions made by the AO towards alleged suppression of profit arising from sale of land and excess claim of incidental expenses attributable to such sale are therefore reversed. Disallowance u/s 14A - utilization of interest free funds for investments yielding tax free income - HELD THAT - CIT(A) has rightly approached the issue and deleted the proportionate disallowance of interest expenditure under Rule 8D(2)(ii) on the ground that investment in shares giving rise to exempt income is far lower than corresponding interest free funds available with the assessee by way of capital and reserves. Therefore, the presumption would naturally arise in favour of the assessee for deemed utilization of interest free funds for investments yielding tax free income in preference to the borrowed funds as laid down in plethora of judicial precedents. Therefore, we do not see any infirmity in the order of the CIT(A). The grievance of the Revenue on this score thus cannot be entertained. Disallowance of administrative expenditure U/R 8D(2)(iii) r.w. Section 14A - based on total investment OR investments which has actually yielded exempt income - HELD THAT - Revenue authorities have rightly invoked formula under Rule 8D(2)(iii) for disallowance of management and general expenses deemed to be attributable to earn the tax free income. However, the disallowance is required to be computed having regard to the investments which has actually yielded exempt income instead of gross investments in consonance with the decision of the special bench in ACIT vs. Vireet Investments Ltd. 2017 (6) TMI 1124 - ITAT DELHI as relied upon on behalf of the assessee. The issue is therefore remitted back to the file of the AO for re-computation of disallowance under Rule 8D(2)(iii) of the Rules with reference to average investments which have actually yielded exempt income to the assessee.

Summary

Issues Involved:
1. Correctness of the claim of 'Cost of Sales' and closing value of land due to transfer of co-development rights.
2. Allocation of AUDA charges, FCCD interest, and Township infra expenses.
3. Disallowance under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Correctness of the Claim of 'Cost of Sales' and Closing Value of Land Due to Transfer of Co-Development Rights:
The primary issue revolves around the method of ascertaining the 'Cost of Sales' and the closing value of land. The assessee, a Private Limited Company engaged in township development, sold 26,98,000 sq. ft. of FSI for ?250 crores to a co-developer. The assessee calculated the 'Cost of Sales' based on the proportion of FSI sold (41.24%) to the total global FSI available, resulting in a cost of ?175,58,59,666/-. The Assessing Officer (AO) disagreed, arguing that the cost should be based on the geographical area of land (16.06%) transferred to the co-developer, leading to a higher closing stock value and an addition of ?1,07,17,79,584/- to the total income.

The CIT(A) partially agreed with the AO but adjusted the calculation by excluding 1,20,446 sq. mtrs. of land reserved for public amenities, reducing the addition to ?86,11,74,085/-. The Tribunal, however, concluded that the 'Cost of Sales' should indeed be based on the FSI sold, not the geographical area, as the value of the land is derived from the permissible construction (FSI). Consequently, the Tribunal reversed the AO's addition and accepted the assessee's method of computing the 'Cost of Sales' based on FSI.

2. Allocation of AUDA Charges, FCCD Interest, and Township Infra Expenses:
The AO allocated these expenses based on the geographical area (16.06%), resulting in disallowances totaling ?53,09,89,339/-. The CIT(A) directed the AO to recompute these allocations considering the total area of land at 3,91,261 sq. mtrs. (after excluding the public amenities area) and applying a ratio of 21%. The Tribunal, aligning with its decision on the 'Cost of Sales', directed that these expenses should also be allocated based on the FSI sold (41.24%), thus reversing the AO's disallowances.

3. Disallowance Under Section 14A of the Income Tax Act:
The AO made a disallowance of ?46,81,276/- under Section 14A, comprising ?27,33,134/- for interest expenditure and ?19,48,142/- for administrative expenses. The CIT(A) deleted the interest expenditure disallowance, finding that the assessee had sufficient interest-free funds to cover the investments. However, the CIT(A) upheld the disallowance of administrative expenses.

The Tribunal upheld the CIT(A)'s deletion of the interest expenditure disallowance, citing the principle that interest-free funds are presumed to be used for investments yielding tax-free income. However, it remitted the issue of administrative expenses back to the AO for re-computation, directing that the disallowance should be based on investments that actually yielded exempt income, in line with the decision in ACIT vs. Vireet Investments Ltd.

Conclusion:
- The Tribunal allowed the assessee's appeal regarding the 'Cost of Sales' and closing value of land, directing that these should be computed based on FSI sold.
- The Tribunal also allowed the assessee's appeal concerning the allocation of AUDA charges, FCCD interest, and Township infra expenses, directing these to be allocated based on FSI sold.
- The Tribunal upheld the CIT(A)'s deletion of the interest expenditure disallowance under Section 14A but remitted the issue of administrative expenses back to the AO for re-computation based on investments that yielded exempt income.
- The Revenue's appeal was dismissed in its entirety.