2014 (7) TMI 717 - AT - Income Tax

Disallowance of expenditure u/s 37(1) of the Act Expenses incurred on advertisement, training, business promotion, architectural consultancy, land scraping, professional charges, printing and stationery, travelling and purchase of materials - Held that - The assessee brought on record confirmation letter from Maytas Estate Pvt. Ltd. issued to the Maytas Properties Ltd. stating that Maytas Properties Ltd., whose name formerly was Maytas Estate Pvt. Ltd. neither bills are raised for the expenditure nor accounted for the same in their books of account - If there is no evidence with the department that there is a double claim of this expenditure one by Maytas Properties Pvt. Ltd. and another by Maytas Properties Ltd., the assessee company, revenue cannot disallow the expenditure because it is a clerical error in the bills produced by the assessee towards expenditure - If the expenditure is not claimed by Maytas Properties Pvt. Ltd. thus, it is fair to grant deduction towards business expenditure thus, the matter is remitted back to the AO to cause enquiry whether M/s Maytas Properties Pvt. Ltd. claimed any expenditure towards the impugned bills and if there is no double claim, the claim of the assessee has to be allowed Decided in favour of Assessee. Expenses incurred u/s 37(1) of the Act Supporting evidences not filed Short deduction of TDS Expenses not related to business Held that - Assessee contended that the issue may be remitted back to the file of the AO as the requisite evidence available with the assessee - since the office of the assessee has been shifted to another premises, the required information was misplaced, now it is available, which is material for deciding this issue thus, the matter is remitted back to the AO for fresh consideration Decided in favour of Assessee. Reimbursement of service tax to sub-contractor Expenses on Misplaced pending bills Held that - The reason for disallowing the expenditure is that the special auditor made an observation that no supporting evidence for these payments for establishing genuineness of the payment has been filed assessee contended that the payments were made through cheques and out of total payment of ₹ 1,75,70,005/-, the DRP accepted the payment of ₹ 26,72,773/- as genuine and there is no reason for disallowing of ₹ 1,48,97,232 - The payment has been by way of cheque and being so the expenditure is to be allowed thus, the AO is directed not to disallow the payments which are made by way of cheque and to disallow 10% of cash expenses and in respect of cash expenses there is every chance of inflating Decided partly in favour of Assessee. Landscaping charges paid to farmers Held that - The reason for disallowance is regarding genuineness of expenditure - according to the lower authorities most of the payments are self-generated, which have high bill value and being so it was disallowed - Incurring of expenditure was not doubted by the Department, but, only quantum of expenditure is doubted - expenditure is wholly and exclusively laid out for the purpose of business thus, the entire expenditure cannot be disallowed - the bills are self-generated, there is no conclusive proof that 100% of the expenditure is genuine thus, the AO is directed to disallow 10% of cash expenditure incurred by the assessee and there could be no disallowance if the assessee incurred the expenditure by cheque Decided partly in favour of assessee. Notional interest applied on business advances @ 10.50% to group and other associates Held that - Before disallowance of notional interest it is incumbent upon AO to establish that there is a nexus between the amount diverted and interest incurred by the assessee - Even if assessee has diverted interest bearing funds to the sister concern, then it is business decision taken by the assessee to make such an investment and even if it has resulted no income to the assessee, notional interest cannot be disallowed on the reason that assessee should have used its non-interest bearing funds for the purpose of business instead of using borrowed funds - AO cannot sit in the arm chair of businessman and decide what the assessee has to do to maximize its profit Relying upon SA BUILDERS LTD. Versus COMMISSIONER OF INCOME-TAX 2006 (12) TMI 82 - SUPREME COURT Decided in favour of Assessee. Depreciation as asset bills not in the name of the MPL and drawn on MPPL Held that - The assets are appearing in the balance sheet of the assessee company and there is only a mistake in the bill with regard to name of the company - the matter is remitted back to the AO and after verification, due depreciation, may be allowed Decided in favour of Assessee. Expenses incurred on a/c of M/s. Chourasya Construction u/s 37(1) of the Act Held that - Assessee has fulfilled requirement of the provisions of section 37 of the IT Act - The claim of payment to subcontractor by the assessee is not disqualified for deduction under the Act - the expenditure is not a capital expenditure since the assessee did not acquire any capital asset and the payment is also not in the nature of personal expenditure and not brought any personal benefit to any employees or contractor of the assessee company - The expenditure incurred wholly and exclusively for the purpose of business Relying upon Sassoon J. David And Co. Pvt. Limited Versus Commissioner of Income-Tax, Bombay 1979 (5) TMI 3 - SUPREME Court - the entire payment to sub- contractor shall not be disallowed as there is evidence on record for such payment - the assessee has produced payment details and it has been subjected to tax deduction Decided in favour of Assessee. Taxation ignoring revised estimates Held that - Unless and until the department has proved that agreement executed by the assessee with M/s Maytas Infra Ltd., is collusive agreement, the agreement cannot be rejected as both are different assessees and it is to be followed in true spirit - the method followed by the AO is not correct Relying upon The Deputy CIT Central Circle) 6 Hyderabad Versus M/s. SP. Real Estate Developers Pvt. Ltd. 2014 (7) TMI 501 - ITAT HYDERABAD - real income to be taxed and not notional income Decided in favour of Assessee. Statutory and consultancy charges Held that - The assessee contended that it is a revenue expenditure or otherwise if the expenditure is reduced to that extent, proportionate income to be reduced from P&L Account as the income generated from that expenditure is offered to tax - If this income related to the expenditure has gone to the P&L A/c, the AO is directed to allow proportionate expenditure Decided partly in favour of Assessee. Disallowance u/s 40(a)(ia) of the Act Held that - The decision in CIT vs. Rajinder Kumar 2013 (7) TMI 454 - DELHI HIGH COURT followed - amendment to section 40(a)(ia) permits remittance of TDS to the Central Government account on or before the due date of filing return of income u/s. 139(1) of the Act is retrospective in nature thus, the AO is directed to see whether the recipient has paid tax or not on this payment and decide the issue in accordance with law - short deduction of TDS and remittance cannot be a reason for disallowance u/s 40(a)(ia) as decided in COMMISSIONER OF INCOME TAX, KOLKATA-XI Versus M/s SK. TEKRIWAL 2012 (12) TMI 873 - CALCUTTA HIGH COURT - Decided partly in favour of Assessee. Addition u/s 92CA of the Act Held that - The decision in M/s Vijai Electricals Ltd. Versus Addl. Commissioner of Income-tax 2013 (7) TMI 804 - ITAT HYDERABAD - The amount is towards investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pricing provisions are not applicable as there is no income thus, transaction cannot be considered u/s 92CA of the Act Decided in favour of Assessee. Payment made to contractors u/s 40(a)(ia) of the Act Held that - The decision in COMMISSIONER OF INCOME TAX, KOLKATA-XI Versus M/s SK. TEKRIWAL 2012 (12) TMI 873 - CALCUTTA HIGH COURT - the disallowance u/s 40(a)(ia) is not applicable in the case of short deduction of TDS - if there is a shortfall due to a difference of opinion, the tax payer may be treated as a defaulter u/s 201 but no disallowance can be mode u/s 40(a)(ia) thus, there was no infirmity in the order of the DRP Decided against Revenue.

Summary

Issues Involved:
1. Determination of total income.
2. Disallowance under Section 37(1) and 40A(3).
3. Notional interest on interest-free advances.
4. Disallowance of depreciation.
5. Disallowance of payments to sub-contractors.
6. Short recognition of revenue.
7. Apportionment of statutory and consultant charges.
8. Disallowance under Section 40(a)(ia).
9. Disallowance under Section 14A.
10. Disallowance under Section 37(1)/40(a)(ia).
11. Transfer pricing adjustment under Section 92CA.

Detailed Analysis:

1. Determination of Total Income:
The assessee challenged the determination of total income at Rs. 1,51,38,85,432/-. The Tribunal remitted the issue back to the Assessing Officer (AO) for verification and appropriate action.

2. Disallowance under Section 37(1) and 40A(3):
The AO disallowed Rs. 4,44,53,544/- under Section 37(1) due to discrepancies in the names on bills. The Tribunal directed the AO to verify if there was any double claim of expenditure and allow the claim if no double claim was found. For the disallowance of Rs. 2,04,08,005/- under Section 40A(3) related to landscaping charges, the Tribunal directed the AO to disallow 10% of cash expenses and allow the rest.

3. Notional Interest on Interest-Free Advances:
The AO added Rs. 5,36,98,655/- as notional interest on interest-free advances. The Tribunal held that the assessee had sufficient interest-free funds and allowed the appeal, relying on the principle that the AO cannot question the business decisions of the assessee.

4. Disallowance of Depreciation:
The AO disallowed Rs. 10,10,475/- on the grounds that the bills were not in the name of the assessee. The Tribunal remitted the issue back to the AO to verify the details and allow the claim if the assets were used for business purposes.

5. Disallowance of Payments to Sub-Contractors:
The AO disallowed Rs. 4,05,83,808/- paid to M/s Chourasia Construction Co. The Tribunal held that the expenditure was genuine and allowed the claim, noting that there was a valid agreement and the payments were subjected to tax deduction.

6. Short Recognition of Revenue:
The AO added Rs. 111,68,96,593/- for short recognition of revenue. The Tribunal held that the assessee followed the percentage completion method and revised the project cost due to increased construction costs. The Tribunal allowed the appeal, stating that the revenue authorities cannot disturb the method of accounting followed by the assessee.

7. Apportionment of Statutory and Consultant Charges:
The AO disallowed Rs. 77,00,485/- as capital expenditure. The Tribunal directed the AO to allow the expenditure proportionate to the income generated from it and offered to tax.

8. Disallowance under Section 40(a)(ia):
The AO disallowed Rs. 91,25,431/- for non-deduction of TDS. The Tribunal directed the AO to verify if the recipients had paid tax on these payments and decide accordingly. The Tribunal also held that short deduction of TDS cannot be a reason for disallowance.

9. Disallowance under Section 14A:
The AO disallowed Rs. 87,62,176/- under Section 14A for interest expenditure on loans used for investments in mutual funds. The Tribunal allowed the appeal, noting that the assessee had sufficient interest-free funds.

10. Disallowance under Section 37(1)/40(a)(ia):
The AO disallowed Rs. 1,58,20,475/- for non-deduction of TDS on bonus provision payable to employees. The Tribunal allowed the appeal, stating that Section 40(a)(ia) does not include bonus to employees.

11. Transfer Pricing Adjustment under Section 92CA:
The AO added Rs. 95,73,740/- as notional interest on funds advanced to a subsidiary. The Tribunal allowed the appeal, holding that the transaction was an investment in share capital and not a loan, thus not subject to transfer pricing adjustments.

Separate Judgments:
The Tribunal delivered a consolidated judgment without separate opinions from different judges.

Conclusion:
The Tribunal allowed the assessee's appeal on several grounds, remitted certain issues back to the AO for verification, and dismissed the revenue's appeal.