2017 (11) TMI 381 - AT - Income Tax

Disallowance of claim of Internal development charges (IDC) in respect of project at Greater Kailash Part I & II - Held that - These are business expenses for development of various projects under execution and same could not be related to particular area or apartment and as such the Assessing Officer is not justified in considering the admissibility of part of the expenses on proportionate basis. Further, this disallowance is revenue natural as the appellant has sold the properties in the subsequent years and taking into consideration the principle laid down by Supreme Court in the case of CIT Vs. Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT there is no ground or justification for disallowance of part of expenses relating to IDC and accordingly this ground is allowed. However, if any part of these expenses have been claimed or allowed in subsequent year, the Assessing Officer may take necessary step so as to ensure that no double claim is allowed. Disallowance u/s 14A read with Rule 8D - Held that - The issue is fully covered as per order of the ITAT relating to A.Y. 2006-07. It is further noticed that even though the tribunal worked out disallowance in A.Y. 2006-07 to the extent of ₹ 22,50,000/- but sustained disallowance to the extent of ₹ 1,87,35,000/- on the ground that appellant itself has agreed for such disallowance during assessment proceedings. However, the appellant has clarified that no such admission was made and in clarification of factual mistake in the order of the tribunal, miscellaneous application has been field and same has also been heard, but order is still awaited. Without making any comment on the same, we are of the view that no such issue was raised by the Ld. CIT DR or fact about any such admission was brought on record. In the ultimate analyses, we are of the view that the issue is fully and squarely covered by order of ITAT for A.Y. 2006-07 and accordingly disallowance is confirmed to the extent of ₹ 33.25 lakhs. The Assessing Officer may give necessary effect so as to restrict the disallowance to ₹ 33.25 lakhs. Disallowance and capitalization of amount expanded on repair and maintenance of Generator sets - Held that - We are of the view that claim is in the nature of current repair as AO has not brought on record any evidence in support of allegation of purchase of new generator sets and also failed to make any comments in respect of details submitted by the appellant. There is thus, no justification for treating the same as of capital nature and accordingly the impugned disallowance is deleted and this ground of appeal is allowed Disallowance and capitalization of claim of interest on loan taken for purchase of Aircraft - AO has considered the disallowance u/s 36(1)(iii) on the ground that deduction of interest for acquisition of capital asset would only be available after the asset is put to use for the purpose of business - Held that - The use of aircrafts for trial run and training of pilots is part of the business activities and as such there is merit in the contention of the appellant that air craft was used for the purpose of business. Further, principle laid down by Supreme Court in the case of Core Health Care Ltd.(2008 (2) TMI 8 - SUPREME COURT OF INDIA) also support the claim of the appellant as the Assessing Officer himself has not disputed the fact that the air craft was used for the purpose of business as he accepted the claim of interest for the remaining period relevant to the year under consideration. In the light of above discussions, there is no justification for treating the part of claim of interest as of capital nature and consequential disallowance u/s. 36(1)(iii) of the Act and accordingly the Assessing Officer is directed to accept the claim of interest as permissible deduction. Addition of notional rent from Kiosks - addition on the ground that assessee is the owner of Kiosks and rental income from same is assessable in its hands - Held that - The appellant assigned DLF Services Ltd. right to recover lease rent for maintenance and upkeep services of Mall and as such there was a genuine business arrangement between the parties. If the lease income is considered as chargeable to tax in the case of appellant, the appellant may be eligible for claim of expenses on account of maintenance of Mall which was owned and run by the appellant and as such appellant has not derived any tax benefit on the basis of such arrangement and for diversion of lease rent. It is further relevant to take note of the fact that such lease rent has been subjected to tax in case of M/s. DLF Services Ltd. There is no justification for addition of ₹ 12,60,000/- as same was towards business obligation and for specific services rendered by M/s. DLF Services Ltd. and accordingly the impugned disallowance is directed to be deleted. Disallowance on account of prior period expenses - Held that - Claim of prior period was on the basis of liability crystallised during the year and same is on the basis of regular system of accounting followed by the appellant. In the light of order of ITAT and detailed finding recorded by CIT(A), no interference is called for in the order of the CIT(A) and this ground of the revenue is dismissed. Addition on account of brokerage and commission - Held that - Claim of brokerage and commission is permissible deduction as same is in the nature of sales expenses Addition on account of enhancement of revenue under POCM method - Held that - aking into consideration, the system of accounting being followed by appellant and recognition of revenue on the basis of the said system, the proposed addition by the AO on hypothetical basis is of no relevance unless such adjustments are not in conformity with POCM method. The CIT(A) has appreciated the facts and correctly considered the claim of expenses under POCM method. In our opinion, there is no distortion of claim of income or expenses and accordingly order of the CIT(A) is confirmed and this ground of revenue is dismissed. Disallowance on account of non allocation of expenses incurred on behalf of M/s. Galaxy Mercantiles Ltd. - Held that - CIT(A) was right in observing that the allowability of these expenses in the hands of the appellant cannot be disputed merely on the ground that the appellant has not been able to recover the same from the other party. Even if these expenses were incurred on behalf of M/s. Galaxy Mercantile Ltd., non recovery of same shall be in the nature of business loss. In view of the above position, there is no infirmity in the order of the CIT(A). However, as and when any recovery is made by the appellant in respect of these expenses, the same should be considered as its income in terms of provisions of section 41(1) of the Act. Subjected to these observation, the order of the CIT(A) is confirmed. TDS u/s 195 - Disallowance u/s 40(a)(i) - consultancy services provided by M/s. M/s. Paul, Hastings, Janofsky & Walker LLP - Held that - We find that payment of legal and professional charges to a firm is covered under Article 15 of Indo-US DTAA. There is also no dispute to the factual position that the service provider does not have any PE in India or any of its personnel stayed for more than 90 days in India during the relevant AY. In the light of these factual findings, we are of the opinion that payment made to M/s. Paul, Hastings, Janofsky & Walker LLP (USA) falls outside the purview of section 195 as the conditions specified in Article 15 are not satisfied and as such there is no question of any disallowance u/s 40(a)(i) of the Act. In respect of second issue of payment to Control Risks Group (S) Pte Ltd. for obtaining assessment report. The AO has held the payment to be in the nature of Fees for technical service as per Article 12 of Indo-Singapore DTAA. We find that satisfaction of Make Available clause is sine qua non for a payment to be considered as Fees for technical Services in terms of Article 12 of Indo-Singapore DTAA. Further, the CIT(A) has categorically held that mere issuance of report does not tantamount to making technology available in India. The ITAT Delhi bench decision in the case of Romer Labs Singapore Pte.Ltd. vs. ADIT 2013 (10) TMI 751 - ITAT DELHI as referred to above is also relevant and support the claim of the appellant. The ld. CIT DR has not disputed the factual finding recorded by CIT(A), there is thus no case for any interference in the order of the CIT(A) and this ground of revenue is dismissed. Disallowance u/s 40(a)(ia) - assessee has collected rent from Shri Ram School on behalf of DLF Qutub Enclave Complex Educational Charitable Trust and same has been paid to the trust without deduction of TDS - Held that - the appellant has neither credited this rental income nor claimed any expenditure on account of payment made to DLF Qutub Enclave Complex Educational Charitable Trust. The entries recorded by appellant were merely pass through entries and as such there is no case of any adverse revenue implication. The order of CIT(A) is confirmed. Addition u/s 40(a)(ia) on account of non deduction of TDS on payments made to two trusts - Held that - here is no default on the part of the assessee in not deducting TDS on such payment. The order of the CIT(A) is based on proper appreciation of facts and there is thus no justification for any interference and this ground of revenue is dismissed. Disallowance u/s. 40(a)(ia) on the ground that there was delay in deposit of TDS - Held that - The CIT(A) has taken note of the fact that TDS was deposited before due date of filing of return u/s. 139(1) of the Act and also made reference to order of Delhi High Court in the case of CIT Vs. Rajendra Kumar 2013 (7) TMI 454 - DELHI HIGH COURT . In view of the above position, the order of the CIT(A) is confirmed. Disallowance on account of rejection of claim of TDS on rent received from Shri Ram School - Held that - Assessing Officer has not allowed the benefit of claim of TDS which is in respect of rental income from Shri Ram School. The Assessing Officer observed that as the rent has not been offered as income by the appellant, it is not entitle to claim of TDS. The CIT(A) has allowed relief on the ground that rent has been transferred to DLF Qutub Enclave Complex Educational Charitable Trust, but as TDS is in the name of appellant, benefit of same is to be allowed to appellant. We are not impressed with the finding of the CIT(A). The appellant having transferred the rent to DLF Qutub Enclave Complex Educational Charitable Trust, the TDS is also required to be transferred. The claim of TDS is directly related to the issue of rent. If the rent belongs to another entity, the TDS is also to be transferred and to be claimed by the recipient of rent. In the light of above position, finding of the CIT(A) is reversed and this ground of revenue is accepted. Mismatch in TDS certificates - Held that - No addition can be considered merely on the basis of TDS certificates especially in the case of income from house property. It was also argued that the addition is revenue neutral in nature as the excess has been offered for taxation in subsequent year. Capital gain computation - substitution of sale price of shares by NAV of the shares of Diwakar Estates Ltd. and Monishka Builders & Developers Pvt. Ltd. - Held that - For the purpose of computation of capital gain, provisions of sec. 45 make reference to full value of consideration and it is not open to consider any notional or hypothetical value unless there is a case of understatement and non disclosure of full value of consideration. The principle laid down by Supreme Court in the case of K.P. Verghese 1981 (9) TMI 1 - SUPREME Court has been considered by Delhi High Court in number of cases and it may be appropriate to make reference to decision of Delhi High Court in the case of CIT v. Gulshan Kumar 2002 (5) TMI 35 - DELHI High Court . In view of the settled legal position and in the absence of any evidence regarding non-disclosure of full value of consideration, there is no infirmity in the order of CIT(A) and same is confirmed. Disallowance of claim of depreciation on DLF Centre Building - Held that - CIT(A) has observed that this very issue arose in the preceding year and relief allowed at the first appellate stage was accepted by the revenue as no appeal was filed against the same before ITAT. In the light of above position and as per the decision of Hon ble Supreme Court in the case of CIT v. J K Charitable Trust 2008 (11) TMI 8 - SUPREME COURT the revenue could not be permitted to agitate the very same issue in the year under reference. Accordingly, the order of CIT(A) is confirmed.

Summary

Issues Involved:
1. Disallowance of Internal Development Charges (IDC).
2. Disallowance under Section 14A read with Rule 8D.
3. Disallowance and capitalization of repair and maintenance expenses.
4. Disallowance and capitalization of interest expenses.
5. Addition of notional rent.
6. Disallowance under Section 40A(3).
7. Disallowance of prior period expenses.
8. Disallowance of interest under Section 36(1)(iii).
9. Addition of notional interest on debentures.
10. Capitalization of interest for specific projects.
11. Disallowance of brokerage and commission.
12. Enhancement of revenue under POCM method.
13. Addition of late construction charges.
14. Addition of contingency deposit.
15. Addition of interest-free security deposit.
16. Addition of registration charges.
17. Addition of initial deposits.
18. Non-allocation of overhead expenses.
19. Disallowance under Section 14A.
20. Disallowance under Section 43B.
21. Disallowance of pre-operative expenses.
22. Disallowance of expenses on projects not commenced.
23. Disallowance of expenses for increase in authorized capital.
24. Disallowance under Section 40(a)(i).
25. Disallowance under Section 40(a)(ia).
26. Disallowance of TDS credit.
27. Reclassification of income from house property.
28. Addition of notional rent on vacant properties.
29. Addition due to mismatch in TDS certificates.
30. Disallowance of depreciation on DLF Centre Building.

Detailed Analysis:

1. Disallowance of Internal Development Charges (IDC):
- Findings: The AO disallowed proportionate IDC expenses, which were upheld by CIT(A). The ITAT allowed the expenses as they were business expenses for development of various projects and not specific to the property sold.
- Conclusion: The disallowance was deleted as the expenses were considered part of ongoing business activities.

2. Disallowance under Section 14A read with Rule 8D:
- Findings: The AO made a disallowance of ?27,22,75,000/-, which was reduced by CIT(A) to ?4,66,00,000/-. ITAT further reduced it to ?33.25 lakhs based on the order for AY 2006-07.
- Conclusion: The disallowance was restricted to ?33.25 lakhs following the precedent set by the previous year's order.

3. Disallowance and capitalization of repair and maintenance expenses:
- Findings: The AO treated the expenses as capital in nature. CIT(A) upheld this. ITAT found the expenses to be current repairs and deleted the disallowance.
- Conclusion: The disallowance was deleted as the expenses were for repair and maintenance, not capital expenditure.

4. Disallowance and capitalization of interest expenses:
- Findings: The AO disallowed interest expenses related to the acquisition of an aircraft and other projects. CIT(A) and ITAT found the interest expenses to be allowable as they were for business purposes.
- Conclusion: The disallowance was deleted as the interest expenses were considered part of business activities.

5. Addition of notional rent:
- Findings: The AO added notional rent for kiosks, which was upheld by CIT(A). ITAT deleted the addition, stating the rental income was already taxed in the hands of the sister concern.
- Conclusion: The addition was deleted as the rental income was already taxed elsewhere.

6. Disallowance under Section 40A(3):
- Findings: The AO disallowed ?19,100/- for cash payments. CIT(A) deleted the disallowance, which was upheld by ITAT.
- Conclusion: The disallowance was deleted as the payments were covered under Rule 6DD.

7. Disallowance of prior period expenses:
- Findings: The AO disallowed ?2,20,25,324/- as prior period expenses. CIT(A) and ITAT found the expenses to be allowable as they crystallized during the year.
- Conclusion: The disallowance was deleted as the expenses were considered part of the current year's liabilities.

8. Disallowance of interest under Section 36(1)(iii):
- Findings: The AO disallowed ?4,19,00,000/- for interest-free advances to sister concerns. CIT(A) and ITAT found the interest expenses to be allowable as they were for business purposes.
- Conclusion: The disallowance was deleted as the advances were for business purposes.

9. Addition of notional interest on debentures:
- Findings: The AO added notional interest on debentures. CIT(A) and ITAT deleted the addition as there is no provision for notional income.
- Conclusion: The addition was deleted as notional income is not taxable.

10. Capitalization of interest for specific projects:
- Findings: The AO capitalized interest for projects like Keventor Lane and Star Tower Silokhera. CIT(A) and ITAT found the interest expenses to be allowable as they were for business purposes.
- Conclusion: The disallowance was deleted as the interest expenses were considered part of business activities.

11. Disallowance of brokerage and commission:
- Findings: The AO disallowed brokerage and commission expenses. CIT(A) and ITAT allowed the expenses as they were part of sales expenses.
- Conclusion: The disallowance was deleted as the expenses were considered part of sales activities.

12. Enhancement of revenue under POCM method:
- Findings: The AO enhanced revenue by substituting budgeted IDC with actual IDC. CIT(A) and ITAT found the enhancement to be revenue-neutral.
- Conclusion: The enhancement was deleted as it was revenue-neutral.

13. Addition of late construction charges:
- Findings: The AO added late construction charges. CIT(A) and ITAT deleted the addition as the charges were offered in a subsequent year.
- Conclusion: The addition was deleted as the charges were offered in a subsequent year.

14. Addition of contingency deposit:
- Findings: The AO added contingency deposits as income. CIT(A) and ITAT deleted the addition as the deposits were for specific purposes.
- Conclusion: The addition was deleted as the deposits were for specific purposes.

15. Addition of interest-free security deposit:
- Findings: The AO added interest-free security deposits as income. CIT(A) and ITAT deleted the addition as the deposits were refundable.
- Conclusion: The addition was deleted as the deposits were refundable.

16. Addition of registration charges:
- Findings: The AO added registration charges as income. CIT(A) and ITAT deleted the addition as the charges were for specific purposes.
- Conclusion: The addition was deleted as the charges were for specific purposes.

17. Addition of initial deposits:
- Findings: The AO added initial deposits as income. CIT(A) and ITAT deleted the addition as the deposits were for specific purposes.
- Conclusion: The addition was deleted as the deposits were for specific purposes.

18. Non-allocation of overhead expenses:
- Findings: The AO disallowed overhead expenses not allocated to sister concerns. CIT(A) and ITAT found the expenses to be for the assessee's business.
- Conclusion: The disallowance was deleted as the expenses were for the assessee's business.

19. Disallowance under Section 14A:
- Findings: The AO disallowed ?27,22,75,000/- under Section 14A. CIT(A) reduced it to ?4,66,00,000/-. ITAT further reduced it to ?33.25 lakhs.
- Conclusion: The disallowance was restricted to ?33.25 lakhs.

20. Disallowance under Section 43B:
- Findings: The AO disallowed ?1,60,000/- for unpaid VAT. CIT(A) and ITAT deleted the disallowance as the VAT was paid.
- Conclusion: The disallowance was deleted as the VAT was paid.

21. Disallowance of pre-operative expenses:
- Findings: The AO disallowed pre-operative expenses. CIT(A) and ITAT allowed the expenses as they were for business expansion.
- Conclusion: The disallowance was deleted as the expenses were for business expansion.

22. Disallowance of expenses on projects not commenced:
- Findings: The AO disallowed expenses on projects not commenced. CIT(A) and ITAT allowed the expenses as they were for business purposes.
- Conclusion: The disallowance was deleted as the expenses were for business purposes.

23. Disallowance of expenses for increase in authorized capital:
- Findings: The AO disallowed expenses for increasing authorized capital. CIT(A) and ITAT allowed the expenses as they were for business purposes.
- Conclusion: The disallowance was deleted as the expenses were for business purposes.

24. Disallowance under Section 40(a)(i):
- Findings: The AO disallowed payments to non-residents without TDS. CIT(A) and ITAT found the payments not liable for TDS under DTAA.
- Conclusion: The disallowance was deleted as the payments were not liable for TDS under DTAA.

25. Disallowance under Section 40(a)(ia):
- Findings: The AO disallowed payments without TDS. CIT(A) and ITAT found the payments not liable for TDS under certificates issued by ITO.
- Conclusion: The disallowance was deleted as the payments were not liable for TDS under certificates issued by ITO.

26. Disallowance of TDS credit:
- Findings: The AO disallowed TDS credit on rent not offered for taxation. CIT(A) allowed the credit as the rent was transferred to a trust.
- Conclusion: The disallowance was deleted as the rent was transferred to a trust.

27. Reclassification of income from house property:
- Findings: The AO reclassified rental income as business income. CIT(A) and ITAT found the income to be assessable under house property.
- Conclusion: The reclassification was deleted as the income was assessable under house property.

28. Addition of notional rent on vacant properties:
- Findings: The AO added notional rent on vacant properties. CIT(A) and ITAT deleted the addition as only actual rent is assessable.
- Conclusion: The addition was deleted as only actual rent is assessable.

29. Addition due to mismatch in TDS certificates:
- Findings: The AO added income due to mismatch in TDS certificates. CIT(A) and ITAT deleted the addition as the income was offered in subsequent years.
- Conclusion: The addition was deleted as the income was offered in subsequent years.

30. Disallowance of depreciation on DLF Centre Building:
- Findings: The AO disallowed depreciation on notional basis. CIT(A) and ITAT allowed the depreciation based on actual WDV.
- Conclusion: The disallowance was deleted as depreciation was allowed based on actual WDV.

Summary:
The ITAT's judgment comprehensively addressed multiple issues raised by both the assessee and the revenue. The tribunal largely sided with the assessee, deleting most disallowances and additions made by the AO, emphasizing the