2017 (2) TMI 495 - HC - Income Tax

Deduction towards license fee, external development charges and conversion charges - computation of sale consideration - Held that - Clauses (1) and (2) of MOU clearly state that the transfer of expenses shall include all expenses such as, license fee, external development charges, conversion charges. Instead the expenses made towards conversion and development of the commercial complex were to be transferred to the books of accounts of UHSL the appellant Significantly, it does not stipulate reimbursement of any monies by the appellant to the original allottee. Therefore, the appellant was under no obligation to make any payments to the original allottee. Hence, its payment of ₹ 13.67 crores to the latter on 29.09.2007 is of its free volition and under no legal obligation under any of the documents relied upon by the appellant. The said amount could not be claimed as against the costs etc. for development of the said land. The Sale Deed was executed between the UBPL and the appellant on 25.03.2008, however, in the absence of any obligation under any agreement between the appellant, the UBPL and UDHPL to pay monies of any sort to the original allottee, the appellant could not claim the sum of ₹ 6.75 crores towards deduction from income. The AO had further disallowed and disputed the addition of such costs on the ground that no such expenses had at all been incurred by the assessee and the perusal of the Sale Deed showed that the sale consideration was inclusive of all rights. Hence, the costs of transfer of rights alongwith all developments/constructions thereon were included in the sale consideration - Decided against assessee

Summary

Issues Involved:
1. Disallowance of deduction towards license fee, external development charges, and conversion charges.
2. Examination of the validity of the Memorandum of Understanding (MoU) and Sale Deed.
3. Applicability of Supreme Court and High Court precedents on the valuation of closing stock and incurred costs.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction Towards License Fee, External Development Charges, and Conversion Charges:
The appellant challenged the ITAT's confirmation of the disallowance of ?6,73,76,070/- claimed as deductions. The appellant had capitalized ?22,23,51,205/- in its books for various charges and apportioned a portion of these costs upon the sale of constructed blocks. The Assessing Officer (AO) disallowed this apportionment, and both the CIT(A) and ITAT upheld this disallowance. The ITAT reasoned that the MoU and sale deed did not support the appellant's claim for these costs. The sale deed specified a total consideration of ?7.16 crores without mentioning any additional payments for license fees or development charges. The Tribunal found no evidence of such costs being borne by the appellant, leading to the disallowance.

2. Examination of the Validity of the Memorandum of Understanding (MoU) and Sale Deed:
The Tribunal and the Court examined the MoU dated 01.04.2007 and the sale deed dated 25.03.2008. The MoU indicated that all development expenses were to be transferred to the appellant's books but did not stipulate any reimbursement to the original allottees. The sale deed confirmed the transfer of land for ?7.16 crores, inclusive of all rights and interests, with no reference to additional costs for development charges. The Court noted that any payments made by the original allottees post-sale were voluntary and not enforceable upon the appellant. The appellant's claim for deductions based on these voluntary payments was therefore invalid.

3. Applicability of Supreme Court and High Court Precedents:
The appellant relied on the Supreme Court's decision in V.K. Builders and Contractors Pvt. Ltd. Vs. CIT and other High Court judgments to argue for the deduction of costs as part of the valuation of closing stock. However, the ITAT and the Court distinguished these precedents, stating that the facts of the present case did not support the appellant's claims. The Supreme Court's principle that closing stock figures form the opening stock of the next year was acknowledged but deemed inapplicable here, as the costs claimed were not substantiated by the conveyance deed or MoU. The Court also found no liability transferred to the appellant that would justify the claimed deductions.

Conclusion:
The Court concluded that there was no error in the ITAT's order. The question of law was answered in the negative, and the appeal was dismissed. The appellant's claims for deductions were unsupported by the relevant documents and legal obligations, leading to the upholding of the disallowance by the AO, CIT(A), and ITAT.