2020 (9) TMI 534 - AT - Income Tax

Revision u/s 263 - assessing the interest received by the assessee firm on the capital overdrawn by one of its partner as its income under the head Other sources - HELD THAT - As the interest bearing borrowed funds of the assessee firm were channelized for overdrawing of capital by the partner, viz. Shri. Shrenik Siroya, which admittedly as observed by the A.O was for non-business purposes, therefore, the correlating interest expenditure pertaining to the amount of capital overdrawn has to be disallowed u/s 36(1)(iii). As for the rate of interest received by the assessee firm from its partner, which is found to be in excess as in comparison to the rate on which the funds were raised/borrowed by the firm from third parties, the same only to the said extent is liable to be assessed as the income of the assessee firm from Other sources . In sum and substance, the interest expenditure correlating to the interest paid by the assessee firm on the funds borrowed is to be disallowed u/s 36(1)(iii), to the extent, the same were advanced to the partner, viz. Shrenik Siroya by way of overdrawing of his capital, and it is only the excess interest so received by the firm from him, if any, which would be assessed under the head Other sources . Accordingly, we modify the order of the CIT(A) in terms of our aforesaid observations. Valuation of closing stock - only contention of the ld. A.R before the lower authorities as well as before us was that the assessee had consistently been following this method for valuing its closing stock - HELD THAT - Once the method that was consistently adopted by the assessee for valuation of stock is rejected and the same is substituted by another method by the A.O, therein, in order to deduce the true profits for the year under consideration such an exercise cannot be confined to the valuation of the closing stock alone and has to be extended to the valuation of the opening stock. Our aforesaid view is fortified by the order passed in the case of CIT Vs. Ahmedabad New Cotton Mills Co. Ltd. 1929 (11) TMI 1 - PRIVY COUNCIL - restore the issue to the file of the A.O with a direction that the valuation of the opening stock may also be carried out as per the method substituted by the A.O for valuing the closing stock. Accordingly, the issue is set aside to the file of the A.O for giving effect to our aforesaid observations. Estimated profit on account of sale of certain flats - HELD THAT - Assessee in the immediately succeeding year i.e A.Y 2010-11, had accounted for the sale on the basis of the date of the agreement to sell , Page 188 of APB. Even the claim of the assessee as regards consistency in the method of accounting for the sale transactions fails. Be that as it may, in the backdrop of our aforesaid observations, now when the agreements to sell were executed during the year under consideration, viz. A.Y 2009-10, and the construction of the said properties was also completed during the year in question, we therefore concur with the view taken by the lower authorities that the revenue from sale of the said properties was to be recognised in A.Y 2009-10 and could not have been accounted for in A.Y 2008-09. At the same time, we may herein observe that pursuant to the shifting of the aforesaid income from A.Y 2008-09 to A.Y 2009-10, the credit for the tax deposited by the assessee corresponding to the income pertaining to the aforesaid sale transactions that were accounted for by it in A.Y 2008-09 is required to be given to it during the year under consideration i.e A.Y 2009-10. Treating the amount recovered by the assessee as its income from Other Sources instead of reducing the same from the cost of construction of the project - HELD THAT - Labour account for building was credited and the account of the developer, viz. M/s Omega Investment Properties Ltd. was debited by the aforesaid amount in the books of the assessee. As such, it is the claim of the assessee that the cost of goods sold for A.Y 2012- 13 was computed under identical facts by crediting an amount to its Labour A/c for building , and debiting the account of the developer, viz. M/s Omega Investment Properties Ltd., which was accepted by the department while framing the assessment for the said year. On the basis of our aforesaid observations, we are of the considered view that as the matter had neither been properly looked into by the loer authorities, nor the assessee had been able to substantiate its claim on the basis of irrefutable documentary evidence, therefore, the same in our considered view in all fairness requires to be revisited by the A.O for fresh adjudication. Before parting, we may herein observe that the A.O while readjudicating the aforesaid issue may inter alia seek necessary verifications from the developer., viz. M/s Omega Investment Properties Ltd. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its aforesaid claim on the basis of fresh documentary evidence. Deduction u/s 80IB(10) on the total income assessed - HELD THAT - It is the claim of the assessee that the additions made by the A.O qualified for deduction u/s 80IB(10) of the Act. We have given a thoughtful consideration and find no merit in the aforesaid claim of the assessee. Claim for deduction under Sec. 80IB is based on satisfaction of a set of conditions and legal requirements as specified in the Act. One of the important requirement is verification and authentication of the said claim for deduction by the auditor in the statutory Form 10CCB . As the said mandatory requirement would not be satisfied by the assessee insofar additions have been made in its hands in the course of the assessment proceedings, we therefore are of the considered view that the CIT(A) had rightly rejected the said claim of the assessee.

Summary

Issues Involved:
1. Assessment of income by CIT(A).
2. Treatment of reimbursement of expenses from Omega Investment and Properties Pvt. Ltd.
3. Matching concept of accounting.
4. Deduction u/s 80IB(10).
5. Treatment of interest received from a partner.
6. Set off of expenditure incurred in respect of interest paid.
7. Valuation of closing stock.
8. Estimation of profit on sale of flats.
9. Consistency in valuation of stock.
10. Deduction u/s 80IB(10) on total income assessed.
11. Levy of interest u/s 234A, 234B & 234C.

Detailed Analysis:

1. Assessment of Income by CIT(A):
The assessee contested the CIT(A)'s assessment of income at ?2,05,29,283/-. The CIT(A) had made additions on points not directed in the order passed u/s 263 of the Act.

2. Treatment of Reimbursement of Expenses from Omega Investment and Properties Pvt. Ltd.:
The assessee argued that the amount of ?2,01,22,773/- recovered from Omega Investment should be reduced from the cost of construction of the project. The CIT(A) treated this amount as "Income from Other Sources." The Tribunal found that the reimbursement of expenses was justified and should not be treated as income. The issue was set aside for fresh adjudication by the A.O., directing verification from Omega Investment & Properties Ltd.

3. Matching Concept of Accounting:
The assessee claimed that the amount received from Omega Investment should be adjusted against the expenditure incurred. The Tribunal agreed with the assessee's contention and directed the A.O. to reconsider the matching concept during fresh adjudication.

4. Deduction u/s 80IB(10):
The assessee's claim for deduction u/s 80IB(10) on the income of ?2,01,22,733/- was rejected by the CIT(A). The Tribunal upheld this decision, stating that the mandatory requirement of verification and authentication by the auditor in Form 10CCB was not satisfied.

5. Treatment of Interest Received from a Partner:
The interest received from a partner amounting to ?53,73,413/- was treated as "Income from Other Sources" by the CIT(A). The Tribunal modified this decision, stating that the interest expenditure correlating to the interest paid on borrowed funds should be disallowed u/s 36(1)(iii) to the extent advanced to the partner. The excess interest received, if any, should be assessed under "Other Sources."

6. Set Off of Expenditure Incurred in Respect of Interest Paid:
The assessee argued for the set-off of interest paid against interest income. The Tribunal allowed partial relief, directing the netting of interest received/paid and adjustment against the interest paid on borrowed funds.

7. Valuation of Closing Stock:
The assessee's method of including estimated expenses for valuing the closing stock was rejected by the A.O. The Tribunal upheld this rejection, stating that the method gave a distorted picture of profits. The issue was set aside to the A.O. for revaluation of both opening and closing stock using the substituted method.

8. Estimation of Profit on Sale of Flats:
The CIT(A) confirmed the estimated profit of ?1,05,32,819/- on the sale of flats, which the assessee claimed was sold in the earlier year. The Tribunal upheld this decision, stating that the revenue from the sale of flats should be recognized in A.Y. 2009-10 as per AS-9, given the agreements to sell were executed and construction completed in that year.

9. Consistency in Valuation of Stock:
The CIT(A) was found to have taken inconsistent views on stock valuation. The Tribunal directed the A.O. to ensure consistency in valuation for both opening and closing stock.

10. Deduction u/s 80IB(10) on Total Income Assessed:
The Tribunal rejected the assessee's claim for deduction u/s 80IB(10) on the total income assessed, reiterating the need for verification and authentication by the auditor in Form 10CCB.

11. Levy of Interest u/s 234A, 234B & 234C:
The Tribunal upheld the levy of interest u/s 234A, 234B, and 234C, citing the mandatory nature of these provisions as per the judgment of the Hon’ble Supreme Court in CIT Vs. M.H Ghaswala.

Conclusion:
The appeal of the assessee was partly allowed, with several issues set aside for fresh adjudication by the A.O. and others upheld as decided by the CIT(A). The Tribunal provided detailed directions for reconsideration and verification of specific claims.