2022 (11) TMI 938 - AT - Income Tax

Disallowance of work in progress in respect of Kirti Chambers - genuineness of the amount of work in progress - Lower authorities rejected the genuineness of the expenditure incurred against payment to tenanted authorized/unauthorized dwellers (i.e. which has been acclaimed as work-in-progress) mainly on the ground that in the registered deed of transfer, purchase value was recorded at nil as compared to the value recorded in unregistered agreements and declaration of seller parties - HELD THAT - The registered or unregistered sale agreement are in the nature of the agreement between the parties and in law those agreements can we challenged by the parties and it is not within the powers or authority of the Income-tax Authority to challenge or dispute the terms and condition mentioned in those agreements. Income-tax authorities are authorized to examine the expenditure incurred from the angle of section 37(1) so as to verify whether the expenditure has been incurred wholly and exclusively for the purpose of the business of the assessee. The onus was on the assessee to establish that expenditure was incurred wholly and exclusively for the purpose of the business of the assessee. In the case, the Assessing Officer was required to verify two things. Firstly, whether the payments has been made by the assessee or on behalf of the assessee to the seller parties. Secondly, the payment has been made for the purpose of the business of the assessee. Since in the case it is claimed by the assessee that payments have been made for purchase of legal or illegal tenanted premises, therefore the assessee was required to substantiate with documentary evidence to the effect that the payment have made to the seller parties and that too for the purpose of purchase of relevant properties. The assessee attempted to substantiate with the help of non-registered agreement and declaration of the seller parties. But in the facts of the case, the assessee was required to produce those parties before the AO for confirmation of the facts stated in their affidavits and to show deposit of said payment in the bank accounts. The seller parties were also required to show from Income-tax Returns filed that payments have been shown as income from sale/transfer/vocation of tenanted premises. In view of additional evidence filed before us, which goes to the root of matter, we feel appropriate to restore the issue in dispute to the file of the Assessing Officer for adjudicating afresh after taking into consideration the evidences, which would be filed by the assessee. It will the responsibility of the assessee to produce the seller parties before the AO and cooperate in disposal of the matter. The AO is at liberty to carry out enquiries as deemed fit for disposal of the issue in dispute. The ground of appeal is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of work-in-progress (WIP) and denial of carry forward claim for AY 2011-12 and 2012-13.
2. Admission of additional evidence under Rule 29 of ITAT Rules, 1963.

Issue-wise Detailed Analysis:

1. Disallowance of Work-in-Progress (WIP) and Denial of Carry Forward Claim for AY 2011-12 and 2012-13:

The main issue revolves around the disallowance of WIP amounting to Rs. 2,99,40,000/- related to the redevelopment of "Kirti Chambers" property. The assessee company, incorporated on 03/02/2011, failed to file its regular return of income for AY 2011-12, prompting the Assessing Officer (AO) to issue a notice under section 148 of the Income-tax Act, 1961. In response, the assessee filed a return declaring Nil income but claimed WIP in respect of Kirti Chambers, which the AO disallowed and denied its carry forward.

The property "Kirti Chambers" was initially owned by M/s Sahib Enterprises and later purchased by the promoters of the assessee company, Mr. Ashwin L. Shah and Mrs. Kalpana Shah, and subsequently transferred to the assessee company. The AO observed discrepancies in the WIP entries, particularly payments made by M/s Vedang Builders LLP on behalf of the assessee, which were not reflected in the registered agreements but in unregistered documents. The AO disallowed the WIP claim, citing the following reasons:
- The unregistered document did not bear any signature/confirmation of the alleged recipient of the proceeds of transfer of tenancy rights, rendering it legally and evidentially void.
- The cost of acquisition of tenancy rights was recorded as nil in the registered documents.
- The entries in the assessee's books were made for a period when the company did not exist.
- Corresponding entries in M/s Vedang Builders LLP's books were not passed on the given dates but were made later by journal entry.
- Discrepancies in payment instruments and lack of evidence of payments in the consent terms agreed before the Court of Small Causes at Mumbai.

The CIT(A) upheld the AO's disallowance, emphasizing that the appellant's claim was unsubstantiated and the practice of not disclosing actual consideration in registered agreements to evade stamp duty was highly unethical.

2. Admission of Additional Evidence under Rule 29 of ITAT Rules, 1963:

Before the Tribunal, the assessee's counsel filed an application for admission of additional evidence, presenting a certified copy of a duly executed and notarized memorandum of understanding dated 14/09/2010 between the landlords and M/s Vedang Builders LLP, detailing payment terms up to Rs. 12 crores to tenants/occupants. The counsel requested the Tribunal to restore the issue to the AO for fresh adjudication, considering this additional evidence.

The Tribunal noted that the issue in dispute was the genuineness of the WIP amount claimed by the assessee. The lower authorities rejected the claim based on discrepancies between registered and unregistered agreements, lack of direct payment evidence, and the timing of entries in the books of accounts. The Tribunal acknowledged that the additional evidence could be crucial for resolving the issue and decided to restore the matter to the AO for fresh adjudication. The AO was directed to verify the payments made and their purpose, with the assessee responsible for producing the seller parties and cooperating in the inquiry.

Conclusion:

The Tribunal allowed the appeals for statistical purposes, directing the AO to re-examine the issue of WIP disallowance and carry forward claims for AY 2011-12 and 2012-13, considering the additional evidence and ensuring thorough verification of payments and their purpose. The order was pronounced on 29/09/2022.