2024 (11) TMI 1363 - AT - Income Tax

Disallowance of costs and expenses related to the Kaledonia project while computing the loss incurred by it upon sale of units - HELD THAT - As the observations of the Assessing Officer that the assessee has not filed any details to substantiate its cost of construction is not acceptable, since the AO himself has assessed the Work-in-Progress as mentioned hereinabove. Since the business activities in Kaledonia Project is common from A.Y. 2008-09, therefore, it becomes imperative to determine the cost of construction shown by the assessee in its books of accounts. Therefore, in the interest of justice, we deem it fit to send the matter back to the file of the AO. Since there is no dispute that the assessee is engaged in the business, therefore, the Assessing Officer is directed to decide the impugned quarrel afresh in the light of the fact that the assessee is engaged in business activities. The assessee is directed to justify its claim of cost of construction / Work-in-Progress by submitting necessary documentary evidences and the Assessing Officer is directed to examine / verify the same and decide the issue afresh after affording reasonable and adequate opportunity of being heard to the assessee. The contention that some of the sales are illegal and since no sale consideration has been received the same should be excluded from the business receipts of the assessee need to be verified in the light of the decision of this Tribunal in the case of M/s. Sagar Developer 2014 (8) TMI 1253 - ITAT MUMBAI .The assessee has filed copies of FIR filed with Enforcement Department, CBI etc., as additional evidences, which are admitted and the Assessing Officer is expected to consider the same while deciding the issue afresh. Disallowance of business loss - this essentially comprises of certain expenses debited to the profit and loss account and the major expenses was on account of building maintenance charges - HELD THAT - CIT(A) has erred in as much as it relied upon the provisions brought into statute by Finance Act, 2017 and we are in A.Y.2012-13 and section 23(5) has not been held to have a retrospective effect. Assessing Officer has erred in drawing the support from the decision of the Hon ble Delhi High Court (supra) in as much as the decision of the Hon ble Delhi High Court is for the provisions prior to the year 2001 and after introduction of section 23(1)(c) of the Act the assessee is eligible for vacancy allowance. Therefore, if the rental income has been taxed then the assessee is equally eligible for the vacancy allowance as per section 23(1)(c) of the Act for the vacant commercial units in Kaledonia Project. Considering the facts in the light of the relevant provisions of Act, we direct the Assessing Officer to delete the addition. Addition based upon mismatch of Form 26AS - As we find that the bone of contention is the income inclusive of service tax and the income shown in the TDS Form 26AS is exclusive of service tax. Assessee is directed to file a reconciliation statement and the Assessing Officer is directed to examine and verify the same and give credit to taxes paid as per the provisions of the law. Disallowance of interest under section 36(1)(iii) - The undisputed fact is that the sister concern M/s. Sapphire Land Development Pvt Ltd., is also engaged in the business of real-estate development and has utilized this amount towards development of the real estate business. Therefore, it cannot be said that the assessee has failed to justify the business necessity of these advances. Considering the fact that the assessee has suo-moto disallowed the interest we are of the opinion that this should suffice any necessity for the disallowance. Therefore, the Assessing Officer is directed to delete the addition of the balance amount. This ground is allowed. Disallowance of prior period expenses - It is true that these expenses pertain to period prior to the year under consideration. But it is equally true that these expenses were capitalised in value of capital Work-in-Progress of Kaledonia Project and were never debited to the profit and loss account of earlier assessment years. It appears that the Assessing Officer has never called any documentary evidences to corroborate this claim. Therefore, in the interest of justice and fair play, we set-aside this issue to the file of the Assessing Officer.

Summary

Issues Involved:

1. Disallowance of costs and expenses related to the Kaledonia project.
2. Disallowance of business loss and deemed rent addition.
3. Mismatch of Form 26AS and service tax recovery.
4. Principles of natural justice and lack of personal hearing.
5. Disallowance of interest under Section 36(1)(iii).
6. Disallowance of prior period expenses.

Detailed Analysis:

1. Disallowance of Costs and Expenses Related to Kaledonia Project:

The primary issue revolves around the classification of the Kaledonia project as a business activity rather than an investment. The Assessing Officer (AO) disallowed the short-term capital loss on the sale of office premises, treating it as a business loss. The AO argued that the assessee failed to substantiate the construction costs with evidence. However, the tribunal noted that prior assessments had accepted the project as a business activity, and the costs were treated as work-in-progress. The tribunal directed the AO to reassess the costs and allow expenses incurred in furtherance of business activities.

2. Disallowance of Business Loss and Deemed Rent Addition:

The AO disallowed a business loss of Rs. 3,26,01,606, primarily related to building maintenance charges. The tribunal found that since the Kaledonia project was a business activity, the AO should reassess the expenses and allow legitimate business expenses. Regarding the deemed rent, the AO added Rs. 26,98,74,180 for vacant units, relying on section 23(5) of the IT Act. The tribunal held that section 23(5) was not applicable retrospectively to A.Y. 2012-13 and directed the AO to delete the addition, allowing for vacancy allowance under section 23(1)(c).

3. Mismatch of Form 26AS and Service Tax Recovery:

The assessee contended that the addition based on Form 26AS mismatch was erroneous since it included service tax, which should not be treated as income. The tribunal directed the assessee to provide a reconciliation statement and instructed the AO to verify and adjust the taxes accordingly.

4. Principles of Natural Justice and Lack of Personal Hearing:

The assessee argued that the CIT(A) failed to consider submissions and did not provide a personal hearing, violating principles of natural justice. The tribunal acknowledged this procedural lapse and emphasized the need for a fair hearing, directing the AO to reassess the issues with adequate opportunity for the assessee to present its case.

5. Disallowance of Interest Under Section 36(1)(iii):

The AO disallowed interest of Rs. 3,84,38,821 on loans taken from Yes Bank, arguing that the funds were lent interest-free to a sister concern without commercial justification. The tribunal found that the sister concern was engaged in real estate development, justifying the business necessity of the advances. Since the assessee had already disallowed a portion of the interest suo-moto, the tribunal directed the AO to delete the remaining disallowance.

6. Disallowance of Prior Period Expenses:

The AO disallowed prior period expenses amounting to Rs. 52,35,842, arguing they pertained to earlier periods. The tribunal noted that these expenses were capitalized in the work-in-progress and not previously debited to profit and loss accounts. The tribunal set aside the issue, directing the AO to verify if the expenses crystallized in the current year and decide afresh after allowing the assessee a fair opportunity to present evidence.

Conclusion:

The tribunal allowed the appeals in part for statistical purposes, directing the AO to reassess several issues with instructions to provide the assessee with a fair opportunity to present evidence and arguments. The tribunal emphasized adherence to principles of natural justice and accurate application of tax provisions.