2021 (11) TMI 413 - AT - Income Tax

Disallowance of interest u/s.36(1)(iii) - interest bearing funds had been utilised for acquiring the shares of subsidiary company - Proof of self owned funds - HELD THAT - As the assessee had sufficient self-owned funds to make investments in the shares of its subsidiary company, viz. CCPL, therefore, as held in the case of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT that in case of mixed funds i.e interest bearing borrowed funds and the self-owned funds/interest free funds available with an assessee, the presumption would be that the investment was made by the assessee out of its self-owned funds. As pursuant to the availability of sufficient interest free funds with the assessee to justify the investment made towards purchase of shares of its subsidiary company, viz. CCPL, no part of the assessee s claim for deduction of the interest expenditure u/s 36(1)(iii) could have been disallowed - Decided in favour of assessee. Disallowance of the assessee s claim for deduction of brokerage commission expenses - no corresponding sales were recognized as revenue/income by the assessee company during the year under consideration - HELD THAT - Admittedly, it is a matter of fact borne from the record that the assessee had shown the brokerage and commission expenses as prepaid expense in its audited accounts. However, the assessee had claimed the aforesaid expenses as a deduction while computing its income for the year under consideration. Insofar the claim of the revenue that the assessee s claim for deduction was liable to be rejected, for the reason, that it had itself reflected the same as prepaid expenses, the same does not find favor with us. Hon ble Supreme Court in the case of CIT Vs. British Paints Limited 1990 (12) TMI 2 - SUPREME COURT has held, that it is not only the right but the duty of the Assessing Officer to act in exercise of his statutory power and reject the accounting system adopted by the assessee for determining what, in his opinion, is the correct taxable income - we are unable to persuade ourselves to accept the aforesaid claim of the revenue that as the assessee had reflected the aforesaid expenses as prepaid expenses and had not debited the same in its Profit and loss account for the year under consideration, thus, for the said standalone reason its claim for deduction of the same was not to be accepted. As decided in GOPAL DAS ESTATES AND HOUSING PVT. LTD. 2019 (3) TMI 1272 - DELHI HIGH COURT in case of an assessee engaged in real estate business, the expenditure incurred on advertising and publicity being necessary for promotion of business was to be allowed as business expenditure. We, thus, in terms of our aforesaid observations are of the considered view that as the commission and brokerage expense incurred by the assessee company are in the nature of finance/selling expenses, therefore, the same were allowable as a revenue expenditure during the year under consideration. Accordingly, we herein vacate the disallowance of the assessee s claim for deduction of brokerage and commission expenses - Decided in favour of assessee Surplus earned on sale of Transferable Development Rights (TDR) - whether or not the surplus/profit on the sale of TDR s by the assessee was liable to be brought to tax in its hands, as claimed by the revenue; or was to be reduced from the project cost i.e WIP cost, as claimed by the assessee? - HELD THAT - We find substantial force in the view taken by the lower authorities that as the transaction of sale of TDR s that were purchased by the assessee from market in prior years was nothing but sale of its stock-in-trade, therefore, the profit/surplus arising therefrom was liable to be brought to tax in its hands as its business income. Admittedly, the TDR s in question were purchased by the assessee for loading onto its residential project at Thane and the same formed part of its stock-in-trade. Also, it is an undisputed fact that the assessee was following mercantile system of accounting on project percentage completion method for its residential project at Thane. In a case where the TDR is earned by an assessee i.e a builder and developer in the course of execution of its project, then, undeniably the said TDR would be inextricably linked or in fact interwoven and intertwined with the project, and the sale of the same cannot be divorced and therein considered on a standalone basis i.e separately from the project. Alternative claim of the ld. A.R that if the profit/surplus from sale of TDR's is held to be taxable as business income of the assessee, then, the Closing WIP be increased by the amount of the sale proceeds of the TDR's - As the view taken by the lower authorities that the profit/surplus on the sale of TDR s is to be assessed as the business income of the assessee has been approved by us, therefore, we herein direct the A.O to increase the value of the Closing WIP to the extent of the cost of the TDR s whose corresponding sale consideration was reduced by the assessee from the WIP cost i.e the project cost. 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. Depreciation on office equipments, vehicles etc. - As assessee who was engaged in the business of a builder developer had not recognized any income from such development activity during the year under consideration, the A.O declined his claim for depreciation - HELD THAT - As observed by the CIT(A), and rightly so, unlike the depreciation on assets which are directly linked to the project and are to be included in the project cost i.e WIP cost; depreciation on office equipments, computers, fixtures and furniture and vehicles which are used for administrative work will not form part of such project cost and would be separately allowed as a deduction. Accordingly, finding no infirmity in the view taken by the CIT(A) we uphold the same. - Decided against revenue. Disallowance of deduction of administrative expenses - as argued CIT-A deleted the addition simply relying on the guidance note of ICAI issued for real estate developers, failing to appreciate that there was no such activity to incur such expenses - HELD THAT - We find substantial force in the claim of the ld. A.R that as the aforesaid expenses in question do not form part of the project cost i.e WIP cost, therefore, the same for the purpose of computing the income of the assessee are to be allowed as a deduction in the year in which they were incurred. We find no infirmity in the reliance placed by the CIT(A) on the Guidance Note for Accounting for Real Estate transactions (Revised 2012) , wherein Para 2.4 of the same, inter alia, provides that the general administrative costs, research and development costs, depreciation on idle plant equipment etc. are not to be considered as part of construction costs and development costs. Apart from that, we are of the considered view that the CIT(A) had rightly observed that the expenses which form part of the project cost i.e WIP cost are specifically listed in Para Nos. 2.3 Para No. 2.5 of the Guidance Note on Real Estate Transactions (Revised 2012) . - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance of brokerage and commission expenses.
3. Addition of surplus earned on the sale of Transferable Development Rights (TDR).
4. Deletion of disallowance of interest expenses attributable to interest-free loans.
5. Treatment of brokerage and commission expenses as part of Work-in-Progress (WIP).
6. Deletion of disallowance of depreciation on office equipment, vehicles, etc.
7. Deletion of disallowance of various administrative expenses.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The assessee claimed a deduction of interest expenses of ?1,23,87,552 incurred on borrowed funds used to acquire shares of a subsidiary company. The Assessing Officer (A.O.) disallowed the claim, stating that the interest should be capitalized as part of the cost of shares. The CIT(A) upheld the disallowance, distinguishing the case from S.A. Builders Ltd. The Tribunal found that the assessee had sufficient self-owned funds to justify the investment in shares and thus vacated the disallowance, allowing the interest deduction.

2. Disallowance of Brokerage and Commission Expenses:
The assessee claimed brokerage and commission expenses of ?1,24,64,408 as a deduction, which the A.O. disallowed due to the absence of corresponding sales revenue. The CIT(A) accepted the alternative claim to treat these expenses as part of the WIP, subject to verification. The Tribunal, relying on the "Guidance Note on Accounting for Real Estate Transactions" and relevant judicial precedents, allowed the brokerage and commission expenses as revenue expenditure.

3. Addition of Surplus Earned on Sale of TDR:
The A.O. added a profit of ?3,25,71,195 from the sale of TDRs, estimating the profit at 25% of the sale value. The CIT(A) enhanced the addition to ?5,56,12,975, rejecting the assessee's claim to reduce the surplus from the WIP. The Tribunal upheld the CIT(A)'s decision, stating that the TDRs were not inextricably linked to the project and should be treated as business income. However, the Tribunal directed the A.O. to increase the closing WIP by the cost of the TDRs sold.

4. Deletion of Disallowance of Interest Expenses Attributable to Interest-Free Loans:
The A.O. disallowed an interest expense of ?59,00,000, attributing it to interest-free loans given to the subsidiary. The CIT(A) vacated the disallowance, citing that the subsidiary used the loan for business purposes and relying on the Supreme Court's decision in S.A. Builders Ltd. The Tribunal upheld the CIT(A)'s decision.

5. Treatment of Brokerage and Commission Expenses as Part of WIP:
The CIT(A) directed that brokerage and commission expenses be added to the WIP, subject to verification. Since the Tribunal allowed these expenses as revenue expenditure, the revenue's grounds on this issue were rendered infructuous.

6. Deletion of Disallowance of Depreciation on Office Equipment, Vehicles, etc.:
The A.O. disallowed depreciation of ?70,09,252 due to the absence of income recognition from the project. The CIT(A) allowed the depreciation, stating that assets used for administrative work should not form part of the WIP. The Tribunal upheld this view.

7. Deletion of Disallowance of Various Administrative Expenses:
The A.O. disallowed administrative expenses of ?4,82,51,174, citing no income recognition. The CIT(A) vacated the disallowance, relying on the "Guidance Note for Accounting for Real Estate Transactions," which states that general administrative costs should not form part of the project costs. The Tribunal upheld the CIT(A)'s decision.

Conclusion:
The Tribunal allowed the assessee's appeal in part, vacating the disallowance of interest and brokerage expenses, and directed adjustments to the closing WIP. The revenue's appeal was dismissed, upholding the CIT(A)'s decisions on interest expenses, depreciation, and administrative expenses. The cross-objections filed by the assessee were dismissed as not pressed.