2014 (9) TMI 627 - AT - Income Tax

Genuineness of expenditure Whether construction can be continued even after date of completion certificate Held that - CIT(A) while deleting the addition has given a finding that AO has not doubted the source of payments and further the payments have been made through bank and TDS has also been deducted wherever applicable - AO has failed to appreciate that the occupancy certificate does not bar the Assessee to carry out certain works which does not allow structural changes - for disallowing the expenses - AO has to bring on record evidence to prove that the expenses were not for the business purpose or were bogus in nature, which has not been done by AO - Revenue has not brought any material on record to controvert the findings of CIT(A) the order of the CIT(A) is upheld decided against revenue. Proportionate interest expenses Whether the expenses was utilized for the business purpose or not Held that - CIT(A) after considering the submissions of the Assessee and perusing the ledger account and the loan account has given a finding borrowed amount was used for the business purposes and therefore the interest was allowable - CIT(A) has also accepted the submission of Assessee that the deposits were carried forward from earlier years and in earlier years no disallowance on account of business purpose was made - Revenue has not brought any contrary material in its support to contradict the findings of CIT(A) the order of the CIT(A) upheld Decided against revenue. Confirmation of long term gain on sale of land - Held that - Assessee contended that it has incurred loss on sale of land and at the same time has earned gains on the sale of building (which is a depreciable asset) - During the course of hearing a specific query was put to the assessee and he was asked about the basis of bifurcation of the value of land and building - assessee could not satisfactorily explain the basis of bifurcation and thus the basis of bifurcation appears to the arbitrary - AO has arrived at a conclusion that by adopting a most consecutive approach the annual appreciation of land was 20% on year to year basis - AO has not brought any material on record to support its conclusion - an estimated addition to cover the revenue loss due to arbitrary bifurcation in the valuation of land and building by the Assessee will meet the ends of justice the addition is restricted to ₹ 10 lacs Decided partly in favour of assessee.

Summary

Issues Involved:

1. Deletion of addition of Rs. 38,21,394/- related to construction expenses.
2. Deletion of disallowance of proportionate interest expenses of Rs. 2,10,739/-.
3. Confirmation of long-term capital gain on the sale of land.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 38,21,394/- Related to Construction Expenses:

During the assessment proceedings, the Assessing Officer (A.O) noticed that the Assessee had claimed construction expenses for a new factory building, including Rs. 38,21,394/- incurred after the issuance of the Occupancy Certificate on 07.07.2006. The A.O suspected that the Assessee inflated the cost by procuring bogus bills. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the A.O had not doubted the source of payments, which were made through banks with applicable TDS deductions. The CIT(A) emphasized that the Occupancy Certificate does not preclude further non-structural work. The Tribunal upheld the CIT(A)'s decision, agreeing that the A.O failed to provide evidence that the expenses were not for business purposes or were bogus.

2. Deletion of Disallowance of Proportionate Interest Expenses of Rs. 2,10,739/-:

The A.O disallowed Rs. 2,10,739/- of interest expenses, asserting that the Assessee could not prove the full utilization of borrowed funds for business purposes. The CIT(A) reversed this disallowance, stating that the borrowed funds were indeed used for business purposes, as evidenced by the ledger and loan accounts. The Tribunal supported the CIT(A)'s findings, noting that the Revenue did not provide contrary evidence to challenge the CIT(A)'s conclusion.

3. Confirmation of Long-Term Capital Gain on Sale of Land:

The A.O recalculated the capital gain on the sale of land, asserting that the Assessee had undervalued the land to avoid tax. The A.O used an annual appreciation rate of 20% to estimate the fair market value, resulting in a capital gain of Rs. 27,32,211/-. The CIT(A) upheld this recalculation, agreeing with the A.O that the Assessee's valuation was arbitrary and aimed at tax avoidance. However, the Tribunal found the A.O's appreciation rate unsupported by evidence and deemed it arbitrary. To balance the interests of justice, the Tribunal directed an estimated addition of Rs. 10 lacs instead of the A.O's calculation.

Conclusion:

The Tribunal dismissed the Revenue's appeal regarding the deletion of construction expenses and interest disallowance, affirming the CIT(A)'s decisions. For the Assessee's appeal on the capital gain issue, the Tribunal partly allowed it by reducing the addition to Rs. 10 lacs. This comprehensive judgment addresses the nuances of construction expenses, interest disallowance, and capital gains, ensuring a balanced approach in each case.