2025 (1) TMI 578 - HC - Income Tax

Addition u/s 37 (1) - search action conducted by MHADA, during which 36 tenants were found to be bogus - Addition being proportionate expenses incurred for constructing the area for the said 36 bogus tenants - ITAT deleted addition - HELD THAT - ITAT has held that the construction of the tenements was following the approved plans. There was no dispute about the assessee incurring the construction cost towards such tenements. The ITAT has also noted that since the claim of some of the occupants was found to be untenable, the surplus area was transferred to the assessee for consideration. Subsequently, the surplus area was permitted to be dealt with, and the assessee dealt with it commercially. ITAT has not found that the assessee had committed any offence. No material on record suggests that the assessee had committed any offence concerning these 36 tenements. There was no dispute about the assessee incurring the expenditure towards construction. In such circumstances, there was no question of disallowance of the assessee's impugned expenses. The findings recorded by the Commissioner (Appeals) and confirmed by the ITAT do not suffer from any perversity. The ITAT has also applied the legal principles and followed the decision of the Hon ble Supreme Court in CIT Vs Malayalam Plantations Ltd 1964 (4) TMI 9 - SUPREME COURT We are satisfied that the first question as proposed neither constitutes any question of law nor, in any case, constitutes a substantial question of law. Validity of ITAT order deleting the addition without appreciating the fact that 95% of the project was completed by 31.03.2008 as admitted by Director/Promotor of the assessee company and that many flats had been sold and substantial portion money have been received by the assessee - Assessee was consistently following the project completion method of accounting from the very inception of its business. Further, this method of accounting was consistently accepted by the assessing officers over the past several years. Therefore, there was no reason not to accept this accounting method for AY 2008-09, particularly since no significant change of circumstances was pointed out. This view is consistent with the decision of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT relied upon by the ITAT. There are concurrent findings that the project was not completed by 31 March 2008. According to the accounting method consistently followed by the assessee, the completion of the project would involve the issue of the necessary completion certificates, occupancy certificates, etc. Concurrent findings of fact have been recorded by the Commissioner (Appeals) and the ITAT, and there is no case made out to interfere with these findings on the ground of perversity. No substantial question of law.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the Income Tax Appellate Tribunal (ITAT) was correct in deleting the addition made by the Assessing Officer concerning Rs. 6,67,67,532/- for expenses incurred for constructing tenements for 36 tenants deemed bogus by MHADA, under Section 37(1) of the Income Tax Act, 1961.
Whether the ITAT was justified in deleting the addition of Rs. 25,42,10,217/- without acknowledging that 95% of the project was completed by 31 March 2008, as admitted by the director/promoter of the assessee company.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deletion of Addition for Bogus Tenants

Relevant legal framework and precedents: This issue pertains to the application of Section 37(1) of the Income Tax Act, 1961, which deals with the allowance of business expenditure. The ITAT referenced the decision of the Hon'ble Supreme Court in CIT Vs Malayalam Plantations Ltd.
Court's interpretation and reasoning: The court found that the ITAT had thoroughly examined the facts and legal framework, concluding that the construction of tenements was in accordance with approved plans. There was no evidence of the assessee committing any offense related to the tenements.
Key evidence and findings: The ITAT noted that the claims of some occupants were untenable, leading to the transfer of surplus area to the assessee, which was then commercially utilized. There was no dispute over the expenses incurred by the assessee.
Application of law to facts: Since there was no evidence of an offense and the expenses were legitimately incurred, the court upheld the ITAT's decision to disallow the addition under Section 37(1).
Treatment of competing arguments: The appellant argued that the expenses were related to an offense, while the respondent countered that the expenses were legitimate as the tenements were transferred back to the assessee. The court agreed with the respondent's view.
Conclusions: The court concluded that the first question did not constitute a substantial question of law, affirming the ITAT's decision.

Issue 2: Deletion of Addition for Project Completion

Relevant legal framework and precedents: The issue involves the project completion method of accounting, consistently followed by the assessee. The ITAT relied on the Supreme Court's decision in Radhasoami Satsang Vs CIT.
Court's interpretation and reasoning: The court noted that the assessee consistently used the project completion method, which was accepted by the Revenue in previous years. No significant change in circumstances justified a departure from this method.
Key evidence and findings: The court found concurrent findings that the project was not completed by 31 March 2008, as necessary completion and occupancy certificates were not issued by that date.
Application of law to facts: The court applied the consistent accounting method and found no reason to deviate from it, given the lack of evidence for project completion by the contested date.
Treatment of competing arguments: The appellant contended that the project was substantially complete, while the respondent argued that completion certificates were pending. The court sided with the respondent.
Conclusions: The court determined that the second question did not constitute a substantial question of law, supporting the ITAT's ruling.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The findings recorded by the Commissioner (Appeals) and confirmed by the ITAT do not suffer from any perversity."
Core principles established: The consistent application of the project completion method of accounting is crucial, and legitimate business expenses should not be disallowed without evidence of an offense.
Final determinations on each issue: The court dismissed the appeal, concluding that neither issue raised a substantial question of law.

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