2015 (7) TMI 576 - HC - Income Tax

Transfer of development rights - whether could be treated as sale consideration in the circumstances of the case? - Held that - In the instant case, since no sale occurred, no income can be said to have accrued to the assessee.The assessee s submission that sale is deemed to have taken place when proper conveyance is executed, in the circumstances is sound. In the absence of any sale, the revenue s attempt to bring to tax the advances received by the assessee must also fail, given that such advances were not towards any income that the assessee was entitled to receive in the two assessment years. Indeed, the Business Development Agreement dated 02.08.2006 between M/s DLF Ltd. and the assessee and the Memorandum of Understanding dated 06.12.2006 between M/s DLF Ltd., the assessee and CBDL indicate that the advances received by the assessee from M/s DLF Ltd. and CBDL were for sale of development rights. Since the assessee failed to sell any such rights in the two years in question, the advances received cannot be classified as income.This Court affirms the ITAT s ruling on the first question of law and holds that the AO had erroneously added the amounts to the assessee s income on account of sale of development rights for AY 2007-08 and AY 2008-09. - Decided against revenue. Non-deduction of TDS on the payments made on reimbursement of service charges - Disalllowance u/s 40(a)(ia) - Held that - in the instant case, it is undisputed that M/s DLF Land Ltd. had deducted TDS on the payments made by it under various heads on behalf of the assessee. Further, it is also not disputed that the assessee deducted TDS on the service charge paid by it to M/s DLF Land Ltd. on the reimbursement expenses. In such circumstances, this Court holds that the entire amount paid by the assessee to M/s DLF Land Ltd. is entitled to deduction as expenditure. Neither provision obliges the person making the payment to deduct anything from contractual payments such as those made for reimbursement of expenses, other than what is defined as income . The law thus obliges only amounts which fulfil the character of income to be subject to TDS in such cases; for other payments towards expenses, the deduction to those entitled (to be made by the payeee) the obligation to carry out TDS is upon the recipient or payee of the amounts. See Commissioner of Income Tax-III v. Gujarat Narmada Valley Fertilizers Co. Ltd. (2014 (4) TMI 235 - GUJARAT HIGH COURT ) - Decided against revenue.

Summary

Issues Involved:
1. Whether the amount received by the assessee towards transfer of development rights could be treated as sale consideration.
2. Whether the ITAT erred in its findings regarding the addition on account of reimbursement of interest within Section 40(a)(ia) due to non-deduction of TDS on payments made for reimbursement of service charges.

Issue-wise Detailed Analysis:

1. Treatment of Amount Received Towards Transfer of Development Rights as Sale Consideration:
The Revenue contended that the assessee had sold development rights to M/s DLF Ltd. and CBDL, and the income from such sales was not disclosed. The AO inferred that the decreased stock in the cash flow statement implied actual sale of development rights, while the decreased amount under current liabilities represented receipt against the decrease in stock. The AO added Rs. 30,37,15,779/- and Rs. 15,70,196/- to the income of the assessee for AY 2007-08 and AY 2008-09, respectively.

The CIT(A) and ITAT rejected this contention, holding that there was no material evidence to support the finding of sale of development rights. The ITAT observed that the AO failed to provide details of the rights allegedly transferred, the LOCs concerned, or the necessary approvals/licenses obtained. The CIT(A) explained the discrepancy between figures in the balance sheet and cash flow statement, noting that the cash flow statement only reflects cash transactions.

The court upheld the ITAT's findings, affirming that no development rights were acquired or sold by the assessee during the relevant assessment years. The court noted that the assessee follows the accrual system of accounting, and no income can be said to have accrued without an actual sale. The advances received from M/s DLF Ltd. and CBDL were not classified as income since no sale of development rights occurred.

2. Non-Deduction of TDS on Reimbursement of Service Charges:
The AO disallowed Rs. 19,69,83,236/- as deduction, arguing that the assessee should have deducted TDS on the total amount reimbursed to M/s DLF Land Ltd., not just on the service charges. The CIT(A) and ITAT set aside this disallowance, ruling that the assessee was not required to deduct TDS on reimbursement expenses.

The court supported this ruling, citing precedents such as the Delhi High Court's decision in Industrial Engineering Projects Pvt. Ltd., which held that reimbursement of expenses is not a revenue receipt and thus not taxable. The court also referenced the Gujarat High Court's decision in Commissioner of Income Tax-III v. Gujarat Narmada Valley Fertilizers Co. Ltd., which held that no TDS is required on reimbursement expenses when the payee has already deducted tax on payments made to third parties.

The court concluded that the assessee correctly deducted TDS on the service charges paid to M/s DLF Land Ltd. and that the reimbursement of expenses was not taxable. The ITAT's decision to allow the deduction of the entire amount paid to M/s DLF Land Ltd. was upheld.

Conclusion:
Both questions of law were answered in favor of the assessee and against the Revenue. The ITAT's decisions in ITA Nos. 627 of 2012 and 507 of 2013 were upheld, and the appeals were dismissed with no order as to costs.