2016 (3) TMI 679 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - Held that - We have also noted that assessee has worked out disallowance on its own of ₹ 1,87,35,000/-. Therefore, in the end, we reverse the order of CIT (A) and direct the AO to restrict the disallowance u/s 14A of the Act to ₹ 1,87,35,000/-, which disallowance has been made by assessee on its own. - Decided in favour of assessee in part Addition in respect of credit balance in Stale Cheques Account - addition holding that these cheques are outstanding for a very long period and are in the nature of trading receipt - Held that - In view of the decision of CIT v. Shri Vardhman Overseas Ltd. 2011 (12) TMI 77 - DELHI HIGH COURT where in the whole issue of outstanding liability outstanding for many years is discussed and then following the decision of honourable supreme court has held that merely because the liability is outstanding for a long time does not give any benefit to the assessee and same is not chargeable to tax u/s 41(1)or section 28. Therefore we reverse the finding of the CIT (A) and deleted the addition made on account of credit balance in stale cheque account for the only reason that they are outstanding for more than three years. - Decided in favour of assessee Addition of amount received from customers in terms of contractual obligation - Held that - These are the security deposits which would be utilised in performance of the contractual obligation of the assessee towards those buyers. Anyway, it is not the case of the AO that these receipts have been received during the year, it is also not the case that the payers or the depositors are unidentified and it is not the case of the AO that these amounts have been paid by the buyers without any obligation on the assessee to perform by providing the services. In view of this, we confirm the order of CIT (A) in deleting the addition - Decided in favour of assessee Addition made on a/c of Interest free security deposit - Held that - It is a fact that these deposits are received in terms of sale agreement for customers as security deposit till the formation of condominium and society. These deposits are taken as a safeguard to defray the maintenance expenditure of the society and to keep these deposits for insurance premium and maintenance. They are refundable to resident welfare associations. CIT (A) relying on the decision in the case of CIT vs. Goel Gases Pvt. Ltd. (1990 (5) TMI 13 - DELHI High Court ) held that security deposit cannot be charged to tax as an income. In view of this, we do not find any infirmity in the order of the CIT (A) when deposits are with a purpose, the depositors are identified, there is a regular method of accounting adopted in past for treatment of this income which is accepted by the revenue and there is an obligation cast upon the assessee.- Decided in favour of assessee Disallowance of interest expenditure - disallowance of capitalization of interest expenses by holding that there is no direct nexus which can be established to hold that the loans are utilized for specific projects only and adopting a formula that 1/3rd of the advance has been given out of own funds and 2/3rd of the advances have been given out of the borrowed funds - Held that - Presumption is to be assumed in favour of the assesse and not against assesse. Hence, we reject the formulae adopted by CIT (A) of working out proportionate disallowance by adopting artificial formulae. Therefore respectfully following decisions of Honourable Bombay High court in CIT vs. Lokhandwala Constructions Industries Ltd. 2003 (1) TMI 93 - BOMBAY High Court and CIT V Reliance Utilities & Power limited 2009 (1) TMI 4 - BOMBAY HIGH COURT . We reverse the order of the CIT (A) confirming the disallowance of expenditure and direct the AO to allow this interest expenditure u/s 36(1) (iii) of the Act.- Decided in favour of assessee Disallowance on account of brokerage expenses for AMEX Building by holding that the same relating to renting of building - Held that - Section 24 provides deduction of 30% of the actual value of the rent and interest payable on capital borrowed for the purpose of constructing the property. The brokerage paid to the third party has nothing to do with the rent paid by the tenant. For renting of the property brokerage cannot be said to be charged that has been created against property for enjoying the rights and at best, it is application of income earned. For such expenses as brokerage etc. is held to be allowable then there are number of other expenses which also can be held to be allowable which is against the mandate of the law laid down for computation of the income for house property. Therefore, payment of brokerage cannot be allowed as deduction either u/s 23 or u/s 24 of the Act. Hence, we confirm the order of the CIT (A) confirming the disallowance - Decided against assessee Addition on account of revenue recognition in respect of sale of land and plots based on POCM (Percentage Of Completion Method) by changing the appellant s method of accounting - Held that - In absence of demonstration by the AO about the allegedly incorrect method of accounting, we are of the view that exercise of taxing this income in AY 2006-07 as well as in AY 2007-08 it amounted to double taxation which is not permitted under the law. Therefore, relying on the decision of Realest Builders and Services ltd (2008 (5) TMI 6 - SUPREME COURT ), we are of the view that income of the assessee on sale of plot of land cannot be taxed in this year. It becomes a futile exercise when there is no loss of revenue involved. In view of this, we reverse the decision of CIT (A) and delete the addition on account of profits on sale of land and plots which are registered in favour of the buyer in AY 2007-08 and income of the identical amount is offered for taxation in AY 2007-08 and revenue has not reduced that sum from the assessment u/s 143(3) of that year.- Decided in favour of assessee Disallowance of interest expenditure - disallowance of capitalization of interest expenses by holding that there is no direct nexus which can be established to hold that the loans are utilized for specific projects only and adopting a formula that 1/3rd of the advance has been given out of own funds and 2/3rd of the advances have been given out of the borrowed funds - Held that - Presumption is to be assumed in favour of the assesse and not against assesse. Hence, we reject the formulae adopted by CIT (A) of working out proportionate disallowance by adopting artificial formulae. Therefore respectfully following decisions of Honourable Bombay High court in CIT vs. Lokhandwala Constructions Industries Ltd. 2003 (1) TMI 93 - BOMBAY High Court and CIT V Reliance Utilities & Power limited 2009 (1) TMI 4 - BOMBAY HIGH COURT . We reverse the order of the CIT (A) confirming the disallowance of expenditure and direct the AO to allow this interest expenditure u/s 36(1) (iii) of the Act.- Decided in favour of assessee Disallowance on account of brokerage expenses for AMEX Building by holding that the same relating to renting of building - Held that - Section 24 provides deduction of 30% of the actual value of the rent and interest payable on capital borrowed for the purpose of constructing the property. The brokerage paid to the third party has nothing to do with the rent paid by the tenant. For renting of the property brokerage cannot be said to be charged that has been created against property for enjoying the rights and at best, it is application of income earned. For such expenses as brokerage etc. is held to be allowable then there are number of other expenses which also can be held to be allowable which is against the mandate of the law laid down for computation of the income for house property. Therefore, payment of brokerage cannot be allowed as deduction either u/s 23 or u/s 24 of the Act. Hence, we confirm the order of the CIT (A) confirming the disallowance - Decided against assessee Disallowance of expenditure - revenue v/s capital - Held that - Amount paid for registration of trademark - the issue is squarely covered in favour of the assesse See CIT vs. Finlay Mills Ltd. 1951 (10) TMI 1 - SUPREME Court wherein allowed the expenditure as revenue expenditure pertaining to the first time registration of the trademark.- Decided in favour of assessee Disallowance of repairs and maintenance of guest-house at Mussoorie - Held that - In this case the construction expenditure of compound wall has been held to be of capital in nature only on the ground that the expenditure resulted in enduring benefit. We are of the view that this is not the only test for holding that expenditure is capital in nature. Hon. Karnataka High court in Commissioner Of Income-Tax vs. B.V. Ramachandrappa And Sons 1991 (1) TMI 67 - KARNATAKA High Court wherein held disallowance of expenditure on compound wall on repairs and maintenance of guest house only on the sole ground of enduring benefit test cannot be upheld. In view of this we reverse the decision of CIT (A) and delete the disallowance on account of repairs and maintenance of guest house.- Decided in favour of assessee Disallowance of consultancy expenses in connection with purchase of aircraft - Held that - No infirmity in the order of CIT (A) holding that the amount paid for consultancy fees for purchase of aircraft which is a fixed asset cannot be allowed as revenue expenditure. Therefore we confirm the order of CIT (A) on this count. - Decided against assessee Addition of purchase of shares of Edward Keventer (Successors) Pvt. Ltd. - Held that - Assesse has made investments in subsidiaries and is in the business of real estate where in it has invested large sums in those companies. Professional fees paid for due diligence in case of one of the companies is in furtherance of the business of the company. Therefore it cannot be said that expenditure incurred by the assessee for due diligence of investments in furtherance of its business is capital in nature.- Decided against assessee Disallowance of expenditure is expenses relating to proposed merger with wholly owned subsidiary company - Held that - Hon Supreme court has held in Commissioner of Income Tax vs. Bombay Dyeing and Manufacturing Company Ltd 1996 (2) TMI 8 - SUPREME Court that legal and professional expenses in respect of amalgamation were allowable as revenue expenditure. Therefore we reverse the finding of CIT (A) and delete the disallowance - Decided in favour of assessee Disallowance on account of expenditure for bidding for modernization of Mumbai and Delhi Airports - Held that - According to us the expenditure if incurred for the tender fees same is allowable u/s 37(1) of the act. Since the project was abandoned, no new asset also came to be created. The expenditure was deductible. Therefore the facts of the expenditure disallowed are also similar. Hence following the decision of Indo Rama Synthetics India Ltd. v. Commissioner of Income-tax 2009 (9) TMI 635 - Delhi High Court we reverse the order of CIT (A) and delete the disallowance on account of tender fees for modernisation of airports. - Decided in favour of assessee Disallowance as cash payment in excess of ₹ 20,000/-and not allowable u/s 40A(3) - Held that - In view of the agreement between both the parties that correct facts have not come on the record therefore in the interest of justice this ground is set aside to the file of the AO with a direction to verify the contention raised by assessee and decide the issue afresh. In the result this ground is allowed with above directions.- Decided in favour of assessee for statistical purposes. Disallowance on a/c of Non allocation of proportionate overhead expenses - Held that - The CIT (A) relying upon the decision of ITAT, Delhi Bench in the case of Nestle India Ltd. vs. DICT 2007 (4) TMI 299 - ITAT DELHI-F has deleted the addition. We do not find any infirmity in the order of the CIT (A) and revenue could not controvert the fact of any expenditure with instances that these are not incurred by the assesse wholly and exclusively for the purposes of the business of the assessee. - Decided in favour of assessee Addition on a/c of opening balances in construction account - External Development Charges - Held that - Project wise details of the construction expenses showing opening balances as at 01.04.2005 are added as income of the assessee without granting credit for the debit entries. Merely picking up some ledger balances and excluding some ledger balances addition has been made by the AO. Merely because there are some ledgers of the main ledger account, it cannot be said that they are income of the assessee when they have been already considered by adjustment of the main ledger account. Therefore, we do not find any infirmity in the order of the CIT (A) and none has been pointed out by the ld. DR.unsustainable - Decided in favour of assessee Additions on a/c of provision for construction account - Regency Park account no A33P038-000-03 - Held that - We confirm the order of the CIT (A) in deleting the addition on both the counts i.e. one that it is part of the work in progress and already considered by the income computation of the assessee; and secondly, it is a double addition made by the AO. Thirdly AO himself has deleted the addition after satisfying himself on verification of details as directed by CIT (A). Therefore this addition cannot be sustained - Decided in favour of assessee Addition on a/c of not disclosing the credit balance in some sub-ledger accounts (in IDC sub-ledger account) - Held that - This amount has already been included in the stock account shown in the balance sheet of the company at Schedule 8 incorporating the main ledger. Further, the credit balance accounts with respect to the Qutab Enclave plot of two ledgers where there is a credit balance amount has been added. These balances have been taken by the AO from the subledgers and not the main ledger. The main ledger balance already been accounted for on net of basis as stock account. Therefore, the addition is made by AO on ignoring net balance of the main ledger but picking the credit balances of the individual sub ledgers is not acceptable. This is also not excess collection received by the assessee but merely the credit entries of some of the account of WIP account. Therefore, we confirm the order of CIT (A) in deleting the addition - Decided in favour of assessee Addition on unascertained liabilities - Held that - As the assessments of the previous years have already been framed u/s 143 (3) as stated by the parties, this liability did not arise during the year and in any way it is an ascertained liability. In view of this, we confirm the order of the CIT (A) in deleting the addition - Decided in favour of assessee Addition on on a/c of Savitri Cinema as no business activities were carried out during the year - Held that - The expenditure has been incurred on the maintenance, security charges, etc. with respect to a cinema division of the assessee. The AO disallowed this expenditure holding that it is for the maintenance of capital asset and, therefore, they are capital expenditure. The CIT (A) has deleted the disallowance holding that it is not the cessation of the business of the assessee but it is temporarily lull/suspension of the business of the assessee due to litigation. As stated by ld. AR before CIT (A) that various licences are in place and now before us that the cinema division is functioning, therefore, keeping all these facts in mind, we confirm the deletion of disallowance - Decided in favour of assessee Additions on a/c of Grand Mall project u/s 40A(2)(b) - Held that - When the assessee is a company, the person to whom it has to make payment in order to attract the sale provision is any director of the company or any relative of the director. Admittedly, in this case, the payment is made to the subsidiary company and not to any director or any relative of the said direction. As the alleged transaction by the AO is between holding company and subsidiary company, the transactions between the holding company and a subsidiary company are not hit by the provisions of section 40A(2)(b) of the Act. In view of this, we confirm the order of CIT (A) in deleting the additions/disallowances of ₹ 16,95,66,085/- under section 40A(2)(b) of the Act on three counts - (a) there is no determination of AO by the market value of the transaction; and (b) the expenditure determined by the AO is incorrect; and (c) section 40A(2)(b) does not apply to the transactions between the holding and subsidiary company. - Decided in favour of assessee Additions on a/c of capitalization of Interest expenses as per AS-16 - Held that - The part of the disallowance has been deleted by the CIT (A) out of interest expenditure and part of it is confirmed. Against this amount which is confirmed, the assessee is in appeal as per ground no9 of the assessee s appeal and against deletion of ₹ 91,70,13,955/- revenue is in appeal on this ground. We have already given our finding regarding allowability of this interest expenditure while deciding ground no.9 of the assessee s appeal wherein we have directed to delete the disallowance of interest expenditure based on the decision of honourable Bombay high court. Therefore, we confirm the order of the CIT (A) in deleting the addition of ₹ 91,70,13,955/- on account of interest expenditure - Decided in favour of assessee Disallowance of reclassification of Income from House Property - whether the income from house property shown by the assessee after claiming the deduction of 30% u/s 24A of the Act is chargeable to tax as such or is chargeable to tax under the head business income as assessed by AO - Held that - the assessee company is a developer and hence, the decision of Hon ble Supreme Court in the case of Chennai Properties 2015 (5) TMI 46 - SUPREME COURT is rendered in the context of the company which is formed with the main object of renting up of the properties. In view of the above, respectfully following the decision of coordinate Bench of the ITAT in the case of assessee for AY 2005-06, we confirm the order of CIT(A) in taxing the rental income as income from house property Addition on a/c of Reconciliation of rental income with TDS certificates - Held that - According to us the income from house property does not follow any method of accounting but is chargeable to tax on annual letting value basis of the property irrespective of the receipt of the rent or advance receipt of rent. Tax deduction at source is required to be made only at the time of payment or credit in the books of payer of rent as prescribed u/s 194I of the Act. The timing between the taxability of rental income under the head income from house property and timing of tax deduction at source can be different as both the sections have different intentions, objects and purposes. In view of the above facts, we confirm the order of CIT(A) in deleting the addition with a direction to AO for verification of the statement submitted by the assessee. Credit on TDS denied - Held that - As the rental income has been assessed under the head income from other sources and since the TDS relates to the very same income, the credit for the said TDS cannot be logically denied. Addition being project expenses - Held that - The assessee has incurred this expenditure on proportionate and feasibility of various construction projects in which business the assessee is engaged into. Before embarking on to any of the projects, it is a common practice to obtain a feasibility and economic viability of construction projects at different geographical location. These expenses are for facilitating the existing business of the assessee. It is not the case of the revenue that it is altogether a new line of the business or unrelated to the business of the assessee. Therefore, in our view, this expenditure are wholly and exclusively incurred for the purposes of the business of the assessee - Decided in favour of assessee Addition being late construction charges received by the assessee company - Held that - Accounting standard 9 issued by ICAI on revenue Recognition also satisfies the accounting policy of the company that when the revenue is saddled with uncertainties same should not be recognised till the uncertainties are resolved. Therefore we are of the view that assesse has correctly recognised revenue in the year the issue attained certainty. Therefore on perusal of the decision of CIT (A) deleting the addition we are of the view that there is no infirmity in the order - Decided in favour of assessee Disallowance being prior period expenses - Held that - The reliance on CIT vs. Modipan Ltd. - 2010(12) TMI 836 - Delhi High Court is also apt as the expenditure are settled during the year. Further genuineness of these expenditure is not in doubt and allowabaility of these expenditure is also not in question except classifying them as prior period expenses and there is no difference in rate of taxes for respective years. In the result, we confirm the order of the CIT (A) in deleting the addition - Decided in favour of assessee. Addition made on a/c of Interest free security deposit - Held that - CIT (A) relying on the decision of CIT vs. Goel Gases Pvt. Ltd. (1990 (5) TMI 13 - DELHI High Court ) held that security deposit cannot be charged to tax as an income. In view of this, we do not find any infirmity in the order of the CIT (A) when deposits are with a purpose, the depositors are identified, there is a regular method of accounting adopted in past for treatment of this income which is accepted by the revenue and there is an obligation cast upon the assessee.- Decided in favour of assessee Addition of amount received by the assessee company from the customers for execution of conveyance deed - Held that - These receipts cannot partake character of the revenue in the hands of the assessee. It is also not the case of the AO that the depositors are not identified and despite the conveyance deed executed by the assessee, the amount has not been incurred. In absence of this finding, it is not possible to confirm the disallowance. Therefore, we confirm the order of the CIT (A) in deleting the addition - Decided in favour of assessee Addition on loan transaction between DLF Commercial Developers Ltd. (DCDL) has given some loans to the assessee company - Held that - CIT (A) who deleted the addition holding that the amount is for the business purposes of the assessee as the nature of these transaction is receipt of amount from customers of DLF commercials developers limited in respect to sale of property by DLF Commercial developers limited. Ld. AR has further stated that in fact appellant has given loan to this party and balance receivable prior to the amount received on behalf of the customer of that company was ₹ 2046054553/-. Therefore in fact there is debit balance of that party in the books of the assessee and it is not correct that assessee has received any sum as loan from DLF Commercial Developers Limited. Addition on a/c of deemed dividend - Held that - As the assessee is not a shareholders of the lender companies deemed dividend cannot be taxed in the hands of the assessee u/s 2 (22) (e) of the Act on protective basis. Therefore we confirm the order of CIT (A) - Decided in favour of assessee Disallowance of electricity expenses - Held that - Most of these expenses are in the nature of electricity expenses of the property taken on rent by the assessee that was explained to the AO by assessee however same were disallowed. Naturally the electricity bill would be in the name of owner of the property and not tenant in case the property is rented. Therefore we do not find any infirmity in the order of CIT (A) in deleting disallowance - Decided in favour of assessee Disallowance of legal and professional expenses in respect of amalgamation - Held that - Hon Supreme court has held in Commissioner of Income Tax vs. Bombay Dyeing and Manufacturing Company Ltd 1996 (2) TMI 8 - SUPREME Court that legal and professional expenses in respect of amalgamation were allowable as revenue expenditure and are allowable. Therefore we confirm the finding of CIT (A) and delete the disallowance - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Revenue recognition for sale of land and plots.
3. Revenue recognition for projects completed less than 30%.
4. Capitalization of interest expenses.
5. Disallowance of brokerage expenses.
6. Reclassification of income from house property.
7. Disallowance of various expenses as capital expenditure.
8. Deemed dividend under Section 2(22)(e) of the Income Tax Act.
9. Disallowance of prior period expenses.
10. Addition of credit balances in various accounts.
11. Addition of late construction charges.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Tribunal considered whether the Assessing Officer (AO) had recorded satisfaction regarding the correctness of the claim of the assessee about the expenditure incurred in relation to exempt income. The Tribunal found that the AO had not recorded such satisfaction and, therefore, the disallowance under Section 14A was not justified. The Tribunal directed the AO to restrict the disallowance to Rs. 1,87,35,000, which the assessee had already disallowed in its computation.

2. Revenue recognition for sale of land and plots:
The Tribunal held that the assessee had consistently followed the method of recognizing revenue from the sale of land and plots on the execution of the sale deed. This method had been accepted by the revenue in past years. The Tribunal found that the revenue had not demonstrated how the method employed by the assessee was incorrect. Therefore, the addition of Rs. 5,41,75,304 was deleted.

3. Revenue recognition for projects completed less than 30%:
The Tribunal set aside the issue to the AO to determine whether the actual cost of expenditure incurred up to 31.03.2006 was less than 30% of the total project cost. If the threshold limit of 30% was crossed, the income should be determined on a percentage completion method. The AO was directed to give appropriate relief in subsequent years if any income was taxed on these projects in those years.

4. Capitalization of interest expenses:
The Tribunal held that the interest expenditure incurred by the assessee was for the purpose of its business and allowed the deduction under Section 36(1)(iii) of the Act. The Tribunal rejected the formula adopted by the CIT (A) for working out proportionate disallowance and confirmed the deletion of the addition of Rs. 91,70,13,955.

5. Disallowance of brokerage expenses:
The Tribunal followed the decision of the Hon'ble Delhi High Court in the case of the assessee for AY 1993-94, where it was held that brokerage expenses were allowable as revenue expenditure. The addition of Rs. 20,87,70,567 was deleted.

6. Reclassification of income from house property:
The Tribunal confirmed the order of the CIT (A) in taxing the rental income as income from house property, following the decision of the coordinate Bench of the ITAT in the case of the assessee for AY 2005-06.

7. Disallowance of various expenses as capital expenditure:
The Tribunal allowed the expenditure for registration of trademark, repair and maintenance of guest house, consultancy expenses for purchase of aircraft, and expenses for due diligence of investments as revenue expenditure. The Tribunal confirmed the disallowance of Rs. 1,50,000 for consultancy expenses for purchase of aircraft.

8. Deemed dividend under Section 2(22)(e) of the Income Tax Act:
The Tribunal held that the advances received by the assessee were business advances and not loans or advances covered under Section 2(22)(e). The Tribunal confirmed the deletion of the addition of Rs. 12,60,00,000.

9. Disallowance of prior period expenses:
The Tribunal confirmed the deletion of the disallowance of Rs. 20,99,510 for prior period expenses, holding that the expenses were settled during the year and were not prior period expenses.

10. Addition of credit balances in various accounts:
The Tribunal confirmed the deletion of the addition of Rs. 7,00,67,242, holding that the debit balance in the account was erroneously considered as a credit balance by the AO.

11. Addition of late construction charges:
The Tribunal confirmed the deletion of the addition of Rs. 1,88,81,388, holding that the amount was collected as late construction charges which were under litigation and, therefore, could not be treated as income of the assessee.

Conclusion:
The Tribunal provided a detailed analysis of each issue, confirming the deletion of several additions made by the AO and allowing the appeals of the assessee on various grounds. The Tribunal emphasized the need for proper satisfaction by the AO before making disallowances and the consistent method of accounting followed by the assessee.