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2021 (11) TMI 94 - AT - Income TaxRevenue recognition - recognized method of accounting - Estimation of business profits on sale of land as well as profits from construction activities separately - Computation of capital gain on land converted into stock in trade - HELD THAT - Assessee converted its land into stock-in-trade and thus computed the capital gains as provided in Sec. 45(2) of the Act. The land stood converted into stock-in-trade and the assessee constructed premises / buildings on this land. During the year, the assessee entered into agreement for sale of these premises. For the purpose of revenue recognition, the assessee followed percentage completion of method of accounting. Since project was completed to the extent of 11% during the year as certified by the Architect, the assessee recognized projected revenues to that extent in its books of accounts. The said method was recognized method of accounting as per Accounting Standards issued by ICAI and this method was consistently followed in subsequent years to recognize the revenue. This method was accepted in earlier years also. Therefore, Ld. AO, in our considered opinion, was not justified in rejecting the methodology adopted by the assessee and estimating the business profits on sale of land as well as profits from construction activities separately since the land merged into the stock-in-trade and the premises including the undivided share in the land was sold to various buyers during the year. The perusal of chart placed before us would show that finally, the project has been completed in AY 2010-11 and revenue has been recognized from AYs 2005-06 to 2010-11 based on percentage of completion method of accounting. Therefore, finding no infirmity in the impugned order on this issue, we dismiss ground no.1 of revenue s appeal. LTCG on conversion of land into stock-in-trade - FMV as on 01/04/1981 as well as FMV on 24/12/2003 i.e. the date of conversion - HELD THAT - Viewed from any angle, the substitution of FMV as on 01/04/1981 by Ld.AO cannot be held to be in accordance with law. Therefore, finding no infirmity in the impugned order, in this respect, we dismiss ground no.2 of revenue s appeal. Disallowance of Professional fees - ad-hoc disallowance made by the AO of 75% - HELD THAT - We find that the assessee has furnished name of payees, nature of expenses and the amount paid to each of them (Page no. 83 of the Paper Book). No defect has been pointed out in these details. The expenses are in the nature of certification work, management consultancy, fees for appearance before Tax Authorities, company secretarial work and these expenses are incurred for business purposes of the assessee. Therefore, no fault could be found in the impugned order deleting the estimated disallowance as made by Ld.AO. Deferred revenue expenditure u/s 35DDA - assessee disallowed VRS expenses amortized in books for ₹ 1143.92 Lacs but claimed VRS expenses of ₹ 1866.34 Lacs u/s 35DDA - deduction was claimed @1/5th of expenditure paid in FYs 2000-01 to 2003-04 - HELD THAT - As the provisions of Sec.35DDA entitle the assessee to amortize the expenses incurred on voluntary retirement scheme and allow 1/5th of such expenditure starting from the year in which the expenditure has been incurred by the assessee. The perusal of computation of income would show that VRS expenditure has been incurred by the assessee during FYs 2000-01 to 2003-04 and the same are claimed as per the mandate of Sec.35DDA. The same has been claimed to the extent of 1/5th of expenditure incurred in earlier years. The deduction of the same has been allowed to the assessee in past assessments. Therefore, there could be no occasion to disallow the same in this year. Hence, the disallowance of ₹ 1866.34 Lacs has rightly been deleted in the impugned order. So far as the balance expenditure of ₹ 558.65 Lacs is concerned, the perusal of above table would show that majority of these payments are in the nature of wages, ex-gratia payment, leave encashment, gratuity, VRS expenses etc. paid by the assessee. Upon perusal of the same, it could be seen that these are normal business liability of the assessee paid during normal conduct of the business. Therefore, these are incurred wholly and exclusively for the purpose of business and thus qualify for deduction u/s 37(1). This being so, we confirm the stand of Ld. CIT(A) in deleting the same. Computation of Capital Losses - assessee claimed short-term capital loss (STCL) on sale of equity shares - HELD THAT - AO has computed average price per share at ₹ 69.10 per share. The three prices of ₹ 93.81, ₹ 81 ₹ 146 are the rates that were prevailing after the capital restructuring involving reduction of share capital was over which would lend support to assessee s submissions. As rightly observed by Ld. CIT(A), merely on the basis of intention, a valid claim made within the four corner of the Act, could not be disallowed unless established to the contrary. The Ld. AO has not conducted any independent enquiry to prove that the above mentioned claims of capital losses were not bona-fide or lacked credentials. Concurring with the same, we would hold that the allegations of Ld. AO and conclusion drawn there-from has no legs to stand. We also concur that the statutory provisions do not empower Ld. AO to substitute actual consideration received by the assessee with hypothetical sale consideration. The consideration which never accrued or which was never received by the assessee could not be brought to tax as capital gains or business income. It could further be seen that similar allegations were leveled by Ld. AO in assessment order for AY 2004-05 and few of these allegations have merely been reproduced in the assessment of this year. However, all such allegations as well as disallowances as made in AY 2004-05 stood settled in assessee s favor by the cited decision of Tribunal for AY 2004-05. We find no reason to deviate from the same - no error could be found out in the order of Ld. CIT(A) reversing the stand of Ld.AO, in this regard. This ground as well as the revenue s appeal stand dismissed. Disallowance of power fuel expenses - HELD THAT - It is undisputed fact that the assessee is flagship company of the group and the premises was being used by various other group entities which were subsidiary of the assessee company. However, these entities were dormant entities and had no substantial business activity. Therefore, the disallowance of 25% as confirmed by Ld. CIT(A) is without any sound basis. We direct Ld. AO to delete the same. Addition of rent, rates and taxes are concerned, the assessee has incurred expenditure of ₹ 49.25 Lacs and already disallowed ₹ 11.77 Lacs in the computation of income. Out of balance, Ld. CIT(A) has confirmed disallowance of 25%. Similar estimation has been made for miscellaneous expenses. Considering the nature of expenses as placed on record, the disallowance, under both the heads, is on the higher side and therefore, we reduce the same to 10%. The ground raised by the assessee stand partly allowed.
Issues Involved:
1. Estimation of business profit 2. Long-Term Capital Gains (LTCG) on conversion of land into stock-in-trade 3. Disallowance of professional fees 4. Deferred revenue expenditure under Section 35DDA 5. Computation of capital losses on sale of shares 6. Disallowance of various expenses (Power & Fuel, Rates, Taxes & Water Charges, Miscellaneous Expenses) Issue-Wise Detailed Analysis: Estimation of Business Profits: The assessee converted factory land into stock-in-trade and sold a portion of it, recognizing revenue using the percentage completion method. The AO rejected this method, estimating profits separately for land sale and construction activities, resulting in a higher profit estimation. The CIT(A) upheld the assessee's method, noting it was consistently applied and accepted in previous years, and rejecting the AO's estimation. The Tribunal found no infirmity in the CIT(A)'s order, dismissing the revenue's appeal on this issue. LTCG on Conversion of Land into Stock-in-Trade: The assessee computed LTCG based on fair market values (FMV) as of 01/04/1981 and the conversion date, supported by a valuer's report. The AO disputed these values, referring the matter to the DVO and adopting different FMVs, resulting in higher LTCG. The CIT(A) directed the AO to adopt the FMV as declared by the assessee, subject to DVO's report. The Tribunal upheld the CIT(A)'s directions, finding no basis for the AO's FMV substitution and dismissing the revenue's appeal. Disallowance of Professional Fees: The AO disallowed 75% of the professional fees claimed by the assessee, questioning their business purpose. The CIT(A) allowed the expenses, noting the details provided by the assessee. The Tribunal upheld the CIT(A)'s decision, finding no defects in the provided details and confirming the expenses were for business purposes, dismissing the revenue's appeal. Deferred Revenue Expenditure under Section 35DDA: The AO disallowed the amortized VRS expenses claimed by the assessee, questioning their validity post-slump sale. The CIT(A) allowed the expenses, noting Section 35DDA does not prevent claims in case of slump sale. The Tribunal upheld this view, confirming the expenses were in line with Section 35DDA and incurred for business purposes, dismissing the revenue's appeal. Computation of Capital Losses on Sale of Shares: The AO disallowed the capital losses claimed by the assessee on share transactions, alleging they were structured to evade taxes. The CIT(A) reversed this, noting the transactions were within legal bounds and the AO had not proven them non-bona fide. The Tribunal upheld the CIT(A)'s decision, finding no basis for the AO's hypothetical valuations and confirming the assessee's claims, dismissing the revenue's appeal. Disallowance of Various Expenses: The AO disallowed 75% of the power & fuel, rates, taxes, and miscellaneous expenses, questioning their business purpose. The CIT(A) reduced the disallowance to 25%. The Tribunal further reduced the disallowance for power & fuel expenses to zero, noting the premises were used by dormant subsidiaries, and reduced the disallowance for other expenses to 10%, finding the initial disallowance excessive. The assessee's appeal was thus partly allowed. Conclusion: The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The Tribunal upheld the CIT(A)'s findings on various issues, confirming the assessee's methods and claims, and reducing disallowances where applicable.
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