2020 (10) TMI 77 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D(ii) - AO has not recorded the satisfaction stating that why the claim of the assessee that it has incurred on account of in admissible expenditure u/s 14A - HELD THAT - The issue is squarely covered by the decision of the honourable Delhi High Court in case of Eicher Motors 2017 (9) TMI 1043 - DELHI HIGH COURT we direct the learned assessing officer to delete the disallowances u/s 14 A of the act by invoking rule 8D without recording of satisfaction. Addition on account of reclassification of income from income from house property to income from business and profession - HELD THAT - The court has considered that decision that where the main objection the company is buying and developing land and properties and promoting and developing markets and some rent is turned out of that, the character of that income shall be income from house property. Therefore, in this case too, the assessee company is a developer and hence, 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. In the result the ground of the revenue's appeal is dismissed. Addition on account of notional rent/additional annual lighting value in respect of the vacant and leased out properties - HELD THAT - Bonafide lease agreement between the appellant and third parties cannot be disregarded without having any adverse information in this regard and based on conjectures and surmises. Hence, the addition made by the Assessing Officer on this issued is deleted. Notional addition made by the Assessing Officer under the head income from house property on account of notional income u/s 23(1) (a) of the Income Tax Act is deleted. Disallowance on account of depreciation claimed 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. Addition prior period expenditure - HELD THAT - The special auditor has held so because of the reason that the actual travelling has taken in the previous year. Naturally, it is a matter of common sense for the purpose of LTA claim, the travelling of the employees is prior to the claims submitted by the employees. As received by the assessee from its employees during this period and after following the decision in the case of CIT vs. Shriram Piston 2008 (5) TMI 631 - DELHI HIGH COURT the disallowance is deleted. The reliance of the ld. AR on the decision of 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 on account of prior period expenditure Disallowance of SEZ deduction u/s 80IAB - HELD THAT - In the present case, the assessee moved an application for setting up of SEZ project which was duly approved as Developer by BOA. The cost incurred on development of bare shell building was disclosed as stock and revenue was recognized as per POCM. Under these circumstances, the income from sale of building is purely in the nature of business income. The assessee is engaged in organized activity of development of infrastructure facility in SEZ and as such operations ostensibly are in the nature of business in terms of section 2(13) of the Income tax Act, 1961. Thus, re-characterising the income as short-term capital gain by the AO is rejected. Coming to another alternative finding of the ld. AO that, since the land has been leased for 49 years, therefore, the income from sale of bare shell building should also be bifurcated and proportionate recognized over a period of 49 years. We find that the Ld. CIT (A) has discussed this issue in detail and has held that the lease is only in respect of land and same cannot be applied on transfer of building. Recognition of revenue relating to real estate projects is governed by AS-7 and the assessee has been consistently following POCM which has accepted by the Tribunal in assessee s own case for AY 2006-07. Hence, such a reasoning of the AO to disallow proportionate deduction cannot be sustained. Thus, in view of our finding given above, the order of the ld. CIT (A) in allowing the claim of benefit u/s.80IAB is confirmed and consequently the ground raised by the Revenue is dismissed. Disallowance of deduction for short allocation of overheads to SEZ division - HELD THAT - On perusal of the expenditure and the orders of the lower authorities, it is apparent that the director s salary is being paid to the directors of the company including a commission thereof is for the purpose of managing the business of the DLF assessee. For the protection of the interest of the company even if the directors have given their time for looking after other group activities it is merely a shareholders activity. Advertisements, salary and wages, leave encashment expenditure and printing expenses etc. are all pertaining to the business of the company. No evidence / instances have been cited by AO that any of this expenditure has not been incurred by the company and they are not related to the business of the assessee. It may happen that by incurring certain expenditure by the assessee for the purpose of his business may result into some indirect benefit to the group companies but that cannot be the ground for disallowance of that expenditure in the hands of the assessee. CIT (A) relying upon the decision 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 assessee wholly and exclusively for the purposes of the business of the assessee. Hence, we confirm the order of the CIT (A) deleting the addition. Disallowance of expenses not incurred wholly and exclusively for business purposes and operational expenditure - HELD THAT - Expenditure on maintenance and operation of the helicopter and aircraft and chartering of aircraft and other routine expenditure were expended for the purposes of the business. As held by him that assessee is a public limited companies are distinct assessable entity as per the definition of person u/s two (31) of the act therefore it cannot be stated that the expenditure identified as expended by the directors and other employees of the company is personal in nature because of the limited company is an in animated person and there cannot be anything personal about such an entity. As followed the decision in case of Sayaji Iron and engineering Co Ltd 2001 (7) TMI 70 - GUJARAT HIGH COURT and deleted the addition/disallowance. DR could not show us any reason to state that the expenditure incurred by the assessee on such travel expenditure of aircraft and helicopter can be considered as a personal expenditure of a company. There were no contrary decision is pointed out before us. In view of this we do not find any infirmity in the order of the learned CIT A in deleting the above disallowance. Addition on account of short charging of interest from the subsidiaries and further disallowed a sum of on account of not charging of interest on loans given to related parties for business purposes - disallowances that the assessee has given funds borrowed at a higher rates from financial institution and banks to group entities at lower rates which is distorting the correct taxable profits of the company - HELD THAT - Once the genuineness of the borrowing is proved and the interest is paid on the borrowing it is not within the powers of the learned assessing officer disallowed the deduction either on the ground that the rate of interest is unreasonably high of that the assessee had himself charged the lower rate of interest on the money which it has advanced. The learned departmental representative could not controvert the above finding of the learned CIT A. In view of this, we confirm the order of the learned CIT capital and dismiss ground of the appeal. Non-ending back of the disallowance of the items to the competition of total income - HELD THAT - With respect to this the learned CIT A has directed the learned assessing officer to go through the necessary evidences filed during the assessment proceedings and delete the addition if it is found that the assessee has already offered the above amount for the taxation. No reason why the learned assessing officer is aggrieved with the direction of the learned CIT A. The learned that authorised representative further submitted that no such direction has been carried out by the learned assessing officer given by the learned CIT A. We direct the learned assessing officer to carry out the necessary verification is required by the order of the learned CIT A. No reason that how the assessing officer is aggrieved when the matter is set aside to his file for verification. Disallowance of expenses of the rates and taxes and legal and professional expenses which were treated as a capital expenditure - HELD THAT - Application u/s 154 filed by the assessee before the AO pointing out the above double disallowance, we direct the learned assessing officer to consider the above application and if the fact of double disallowance is found to be correct, then to determine the correct income of the assessee, suitably adjust the total income of the assessee by passing an appropriate order. In view of this additional ground raised by the assessee is admitted, adjudicated and set aside to the file of the learned assessing officer allowing it accordingly

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(ii).
2. Addition on account of notional rent.
3. Disallowance of registration fees for windmills.
4. Deduction under Section 80IAB.
5. Allocation of overhead expenses.
6. Capitalization of interest.
7. Disallowance of brokerage and commission.
8. Contingency deposits.
9. Interest-free security deposits.
10. Net registration charges.
11. Non-allocation of overheads to group companies.
12. Reclassification of income from house property to business income.
13. Notional rent on vacant properties.
14. Depreciation on DLF Centre building.
15. Prior period expenses.
16. Capital expenditure.
17. Personal nature of expenses.
18. Interest on loans to subsidiaries and related parties.
19. Verification of disallowance items.
20. Interest on loans to Saket Courtyard Hospitality.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(ii):
The Tribunal found that the Assessing Officer (AO) did not record proper satisfaction about the correctness of the assessee’s claim of ?1,815,695 as disallowable under Section 14A. The AO’s general remarks were deemed insufficient. The Tribunal cited the Delhi High Court's decision in Eicher Motors Ltd. v. CIT, emphasizing the need for specific satisfaction based on the assessee's accounts. Consequently, the disallowance was deleted.

2. Addition on account of notional rent:
The Tribunal noted that the issue of notional rent where security deposits were received but no rental income was shown had been settled in favor of the assessee in previous years. The Tribunal followed its earlier decision, which held that the rental income was transferred to DLF Services Ltd. for maintenance services, and thus, the addition was not justified.

3. Disallowance of registration fees for windmills:
The Tribunal referred to its earlier decision for AY 2008-09, where it had allowed the registration fees as revenue expenditure. The same principle was applied, and the disallowance of ?2,042,053 was deleted.

4. Deduction under Section 80IAB:
The Tribunal upheld the CIT(A)’s decision allowing the deduction under Section 80IAB, following its earlier decisions in the assessee's own case. The AO’s objections were found to be without merit, as the SEZ activities were duly approved by the Board of Approval and the Ministry of Commerce.

5. Allocation of overhead expenses:
The Tribunal confirmed the CIT(A)’s deletion of the disallowance related to the allocation of overhead expenses to SEZ projects, following its earlier decisions which established that the expenses were properly allocated and the AO’s reallocation was based on presumptions.

6. Capitalization of interest:
The Tribunal followed its earlier decision, which allowed the interest expenditure as revenue expenditure under Section 36(1)(iii), rejecting the AO’s capitalization of interest. The Tribunal emphasized that the interest was for the purpose of business and not for acquiring a capital asset.

7. Disallowance of brokerage and commission:
The Tribunal upheld the CIT(A)’s decision to allow brokerage and commission expenses as revenue expenditure, consistent with its earlier decisions. The brokerage was related to the sale of properties and not to the construction cost.

8. Contingency deposits:
The Tribunal confirmed the CIT(A)’s deletion of the addition related to contingency deposits, following its earlier decision that such deposits were not trading receipts but were collected to meet future liabilities.

9. Interest-free security deposits:
The Tribunal upheld the CIT(A)’s deletion of the addition related to interest-free security deposits, following its earlier decision that these deposits were collected for specific purposes and were not trading receipts.

10. Net registration charges:
The Tribunal confirmed the CIT(A)’s deletion of the addition related to net registration charges, following its earlier decision that these charges were collected for specific purposes and were not the assessee’s income.

11. Non-allocation of overheads to group companies:
The Tribunal upheld the CIT(A)’s deletion of the disallowance related to non-allocation of overheads to group companies, following its earlier decisions which established that the expenses were properly allocated and the AO’s reallocation was based on presumptions.

12. Reclassification of income from house property to business income:
The Tribunal followed its earlier decisions and upheld the CIT(A)’s classification of income from certain properties as income from house property, rejecting the AO’s reclassification to business income.

13. Notional rent on vacant properties:
The Tribunal upheld the CIT(A)’s deletion of the addition related to notional rent on vacant properties, following its earlier decisions which held that the actual rent received or receivable should be considered as the annual value.

14. Depreciation on DLF Centre building:
The Tribunal upheld the CIT(A)’s deletion of the disallowance related to depreciation on DLF Centre building, following its earlier decisions which held that depreciation should be allowed based on the actual WDV and not on a notional basis.

15. Prior period expenses:
The Tribunal upheld the CIT(A)’s deletion of the disallowance related to prior period expenses, following its earlier decisions which allowed such expenses if they were crystallized during the year.

16. Capital expenditure:
The Tribunal upheld the CIT(A)’s deletion of the disallowance related to capital expenditure, following its earlier decisions which allowed such expenses as revenue expenditure if they were for the purpose of business.

17. Personal nature of expenses:
The Tribunal upheld the CIT(A)’s deletion of the disallowance related to expenses considered personal in nature, following its earlier decisions which held that expenses incurred by a company cannot be personal in nature.

18. Interest on loans to subsidiaries and related parties:
The Tribunal upheld the CIT(A)’s deletion of the disallowance related to interest on loans to subsidiaries and related parties, following the Supreme Court’s decision in SA Builders and the principle that the AO cannot disallow interest based on the rate of interest charged by the assessee.

19. Verification of disallowance items:
The Tribunal upheld the CIT(A)’s direction to the AO to verify the evidence filed by the assessee and delete the addition if the amount was already offered for taxation.

20. Interest on loans to Saket Courtyard Hospitality:
The Tribunal followed its decision on ground 18 and 19, upholding the CIT(A)’s deletion of the disallowance related to interest on loans to Saket Courtyard Hospitality.

21. Additional Ground - Disallowance of expenses of ?116,31,062:
The Tribunal admitted the additional ground raised by the assessee and directed the AO to verify the claim that ?5,181,585 was already disallowed by the assessee in its computation of total income. The Tribunal directed the AO to adjust the total income accordingly if the double disallowance was found to be correct.