2017 (12) TMI 1519 - AT - Income Tax

Addition on accounts difference in sale rate - some flats were sold out below average selling price and below cost price by the assessee builder - Held that - The addition of ₹ 30,00,000/- is a case of ad-hoc addition. It shot up the gross profit rate to the levels which is not there in this line of business. With this addition, the GP of the assessee records extremely high. As such, the assessee offered the additional income of ₹ 6,00,000/- vide his letter dated 20-12-2011 and the same is never retracted till date. The assessee granted discounts to various customers both for business as well as personal reasons. In absence of any direct evidence to demonstrate the concealment of sale price, rejecting the assessee s explanation which is general in nature, rejecting the offer of additional income of ₹ 6,00,000/- given by the assessee vide his letter dated 28-12-2011, is not appropriate. Further, we are of the view that said addition of ₹ 30,00,000/- could not be sustained in full as the AO failed to consider the average sale price of the flats, while working out the variation in it. Hence, we approve the assessee s variation of ₹ 18.88 lakhs say 19 lakhs rounded off). Therefore, we direct the AO to restrict the addition to the said assessee s offer of ₹ 6 lakhs, which constitutes around 31.50% of the variation of ₹ 18.88 lakhs for this year. In effect, the basis, which is considered prudent by the assessee, while offering the said additional income of ₹ 6,00,000/- is approved. Accordingly ground No. 1 and 2 raised by the assessee in appeal are partly allowed. Disallowance of interest u/s.36(1)(iii) and disallowance u/s. 14A r.w.r 8D - Held that - On facts, we find the provisions of section 36(1)(iii) of the Act and its proviso and explanation are inapplicable to the facts of this case. Similarly, AO has not properly made out if the provisions of section 14A r.w.r 8D (2) of the I.T Rule apply to facts discussed in his order. Further, the applicability of the provisions of section 37 of the Act is completely given a miss. Further, we find the claim of payment of interest to the co-owners of the land is a matter to be decided after comprehensively discussing the relevant facts needed for applying provisions of section 37 of the Act or as per provisions of section 36(1) (iii) of the Act or 14A of the Act, as the case may be. There is no clarity in AO s order as to why the said provisions were invoked. The interest claim mentioned in section 36 of the Act relates to the claim of interest linked to the capital borrowed by the assessee. In this case there is no capital borrowed by the assessee. More facts are needed for adjudication of this issue. Matter is remanded to the file of AO for fresh examination. Addition on discount sale of shops below market price to the partner of the assessee (Smt. Taradevi Ratanlal Bafna) - Held that - he discussion of granting discount to Smt. Taradevi Ratanlal Bafna constitutes a case of commercial expediency. Merely rejecting the assessee submissions by the AO without disapproving the assessee s claim when documentary evidence, is not sustainable. Therefore, the provision of section 28(iv) is not relevant to this issue. The said provisions are relevant, when the benefit is accrued to the assessee and not in a case like the present one where the assessee is a seller and the discount is allowed to the partner of the firm. Accordingly, we are of the view that the decision of CIT(A) is plausible view taken by him and it does not require any interference. - Decided against revenue Unexplained investment in plot - addition u/s 69B r.w.s 50C - CIT(A) deleted the addition concluding that Section 50C of the Act is applicable by 01-04-2003 and that provision of Section 50C of the Act is applied only to the seller of the property and not to the assessee, who is purchaser - Held that - The above reasoning of the CIT(A) is fair and reasonable and it does not call for any interference on this issue. Thus, ground raised by the Revenue in appeal are dismissed. Addition on account of unsupported expenses - AO held the said expenditure relates to the subcontracted works and therefore, the claims are not allowable - Held that - CIT(A) found reasons on the necessity of such expenses when the works were already given on contract the same were incurred in the commercial interest of the business. He also mentioned that the expenditure was required to be incurred as a business expenditure to maintain the goodwill of the assessee. Considering the fact that the AO failed to bring any evidence on record to demonstrate the bogus nature of the expenditure, in our view, the CIT(A) fairly restricted the disallowance to ₹ 46,475/-. Therefore, we are of the view that decision of CIT(A) is fair and reasonable Difference in sale price of the flats - Held that - We approved the working of assessee in arriving at the variation of ₹ 18.88 lakhs. For the same reasons, in principle, we find it is appropriate to uphold the decision of the AO in making additions. However, we have considered the fact that on the addition of ₹ 39,48,000/-, the profit rate of assessee for this year is phenomenonally high which is not there in this line of business. Therefore, there is requirement for downward revision of the said adhoc addition. In our view, the principle laid down by us for A.Y. 2009-10 is relevant to this year too. Therefore, we direct the AO to restrict the addition in this year too to 31.50% of the variation calculated adopting the average sale price of the flats sold in this year. AO shall adopt the manner of working the variation in sale price as done by the assessee in the A.Y. 2009-10 for arriving the figure of ₹ 18.88 lakhs. AO is directed to give opportunity to the assessee in this exercise. With this direction, we partly allow the ground raised in this regard Disallowance u/s.14A r.w. Rule 8D - Held that - This issue should be remanded to the file of AO for fresh adjudication. AO is directed to apply binding judgments on this issue relating to investment of the excess funds qua the applicability of the provisions of section 14A of the Act

Summary

Issues Involved:
1. Ad-hoc addition on account of difference in sale rate.
2. Disallowance of interest under Section 36(1)(iii) and Section 14A r.w.r 8D.
3. Addition on discount sale of shops below market price to the partner.
4. Addition of unexplained investment in plot under Section 69B.
5. Addition on account of unsupported expenses.
6. Addition under Section 40A(3).
7. Disallowance under Section 14A r.w. Rule 8D.

Issue-wise Detailed Analysis:

1. Ad-hoc Addition on Account of Difference in Sale Rate:
The assessee, a builder, sold flats at varying rates per sq. ft. The AO made an ad-hoc addition of ?30,00,000/- citing discrepancies between the construction cost and sale price. The CIT(A) confirmed this addition, suspecting unaccounted cash transactions. The Tribunal found the AO's addition unsustainable without direct evidence and reduced the addition to ?6,00,000/-, aligning with the assessee's offer to resolve the dispute. Similarly, for A.Y. 2011-12, the Tribunal directed the AO to restrict the addition to 31.50% of the variation calculated using the average sale price.

2. Disallowance of Interest under Section 36(1)(iii) and Section 14A r.w.r 8D:
The AO disallowed ?44,50,212/- paid as interest for delayed payment for development rights, invoking Section 36(1)(iii) and Section 14A. The CIT(A) confirmed the disallowance. The Tribunal found the AO's application of Section 36(1)(iii) inappropriate as there was no capital borrowing. The matter was remanded to the AO for fresh examination under the correct provisions, ensuring a comprehensive review.

3. Addition on Discount Sale of Shops Below Market Price to the Partner:
The AO added ?2,44,62,169/- for selling commercial property below market price to a partner. The CIT(A) deleted the addition, noting the commercial expediency and the partner's significant advance payment. The Tribunal upheld the CIT(A)'s decision, recognizing the business rationale behind the discount and rejecting the application of Section 28(iv).

4. Addition of Unexplained Investment in Plot under Section 69B:
The AO added ?8,37,72,550/- based on the stamp duty valuation of a plot, invoking Section 69B. The CIT(A) deleted the addition, stating Section 50C applies to sellers, not buyers, and no evidence of unaccounted transactions was presented. The Tribunal agreed with the CIT(A), affirming the deletion of the addition.

5. Addition on Account of Unsupported Expenses:
The AO disallowed ?1,46,475/- for expenses deemed unsupported. The CIT(A) restricted the disallowance to ?46,475/-, acknowledging some expenses might be necessary for business goodwill. The Tribunal found the CIT(A)'s decision reasonable and upheld the partial disallowance.

6. Addition under Section 40A(3):
For A.Y. 2011-12, the AO disallowed ?1,50,000/- for cash payments exceeding the limit under Section 40A(3). The CIT(A) confirmed this addition. The assessee did not press this ground before the Tribunal, leading to its dismissal.

7. Disallowance under Section 14A r.w. Rule 8D:
The AO disallowed ?70,118/- under Section 14A r.w. Rule 8D. The CIT(A) upheld the disallowance. The Tribunal remanded the issue to the AO for fresh adjudication, directing the application of binding judgments and consideration of excess interest-free funds.

Conclusion:
The Tribunal partly allowed the appeals of the assessee for statistical purposes and dismissed the Revenue's appeal. The Tribunal emphasized the need for proper evidence and rationale in making additions and disallowances, ensuring fair and reasonable adjudication.