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TMI Blog2011 (7) TMI 1203X X X X Extracts X X X X X X X X Extracts X X X X ..... a)(ia) of the Act. Accordingly the order of the Ld. CIT(A) on this issue is upheld - Decision against Assessee. Advertisement Expediture - Expenditure was made on advertisements and TDS was not deducted for the same - HELD THAT:- On the basis of facts and emails, the said expenditure is clearly towards advertisement of the product. Since the assessee has violated the provisions of law by not deducting tax, the same is liable for disallowance u/s.40(a)(ia). Further, apart from an email no other document has been filed. Even otherwise also the same is towards keeping the goods of the company in the display box which in our opinion amounts to advertisement. We, therefore, uphold the order of the Ld. CIT(A) on this issue - Decision against Assessee. Capitalizing the Expenses to Work-in-Progress - CIT(A) confirmed the addition by disallowing the expenses and treating the same as work in progress - Assessee contended that he entered into Joint venture Agreement and according to the joint venture, he was not to do any construction activity but was to only finance the project. As such there was not work in progress with him - HELD THAT:- The clauses in the Development agreement, Supplement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in confirming addition of ₹ 2,83,561/- u/s.40(a)(ia) on account of non deduction of TDS." 2.1 Facts of the case, in brief, are that the assessee had claimed the following expenses in the Profit and Loss Account, on which no TDS has been made:- a) Import Freight Paid to M/s. Freight Systems (I) Pvt. Ltd. 133561 b) A. V. Menon Through M/s. Dorftel Chemicals (I) P. Ltd. 100000 c) Listing fees Through M/s. Dorflsated Chemicals (I) P. Ltd. 65000 298561 2.2 On being asked by the AO to explain as to why the above expenses should not be disallowed within the meaning of provision of section 40(a)(ia) of the Act, the assessee vide letter dated 30.10.2009 made the following submission:- "1) a. As regards, deduction of TDS of Freight System (I) Pvt. Ltd. of ₹ 1,33,561/- this is freight payment for import of goods paid on account of Foreign Shipping Line on which TDS is not deducted. b. Sum of ₹ 1,00,000/- is paid to Shri A. V. Menon for advertisements in newspapers and not towards his professional fees. Therefore, no TDS is to be paid. c. The listing fees of ₹ 65,000/- is paid as under:- Sr. No. Name of the party Amount 1 Radha Krishna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, it was submitted that the assessee wanted its products to be displayed at prominent shelf in the mall and the amount was paid towards non refundable listing fees. Therefore, no TDS was deductible from the said payment. 4. However, the Ld. CIT(A) was not convinced with the explanation given by the assessee. He noted that the assessee could only produce the document copy of the bill from AV Menon, which is self service document and does not in any manner hold brief for the assessee. 4.1 As regards payment made to Hypercity Mall, though termed as product listing fees, it is only in the nature of advertisement as held by the AO and therefore, needs no interference. He accordingly, upheld the action of the AO. 4.2 Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before us. 4.3 The Ld. Counsel for the assessee referring to page no.113 of the paper book drew the attention of the Bench to the bill issued by Shri A. V. Menon, Advocate which clearly shows that the same is towards expenses and costs incurred for Publishing Public Notices Translation work in respect of Orlem property of M/s. Kuber Developers. Referring to the paper book pg. no. 114 to 120, she drew ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of ₹ 50,000/- has been paid to Hpercity Mall for display of the products of the company at prominent places in the Mall. The same, in our opinion, is clearly towards advertisement of the product. Since the assessee has violated the provisions of law by not deducting tax, the same is liable for disallowance u/s.40(a)(ia) of the Act. Further, apart from an email no other document has been filed. No details for the payment of ₹ 15,000/- to M/s. Radha Krishna Food is also available. Even otherwise also the same is towards keeping the goods of the company in the display box which in our opinion amounts to advertisement. We, therefore, uphold the order of the Ld. CIT(A) on this issue. The ground raised by the assessee is accordingly dismissed. 6. The grounds of appeal no. 2 and 3 raised by the assessee, which are inter related, are as under:- "2. The CIT(A) has grossly erred in confirming the addition on account of ₹ 6013660/- by disallowing the following expenses and trading the same as work in progress:- Advertisement Expenses 166000 Interest paid on loan 4550000 Listing fees 65000 Printing and stationery 96706 Stamp duty and registration charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) The said amount paid towards development should not be treated as project expenses and capitalized to Work-In- Progress account of project. ii) The expenses related to the said development such as Advertisement, Interest, Stamp Duty and Registration Charges should not be capitalized to Work-in-Progress account." 6.2 In response to the same, the assessee's representative vide letter dated 30.10.2009 made the following submission which is reproduced as under:- "2. As regards paragraph 2 of your letter, we have to submit that the assessee had entered into the joint venture agreement with M/s. Kuber Developers on 25.01.07. But the same was terminated on 17.08.07. In view of this the amount paid to them is treated as advance and expenses have been treated as business loss and debited to Profit and Loss account." 6.3 The AO noted from the above reply that the assessee did not want to comment on the accounting of the expenses as capital or revenue expenses. Merely canceling an agreement does not absolve assessee from following the prescribed accounting standard for recognizing the income and expenditure or revenue and capital expenditure in its books. The AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was to receive interest at the rate of 12% which works out to ₹ 1,87,21,822/- as worked out by your honour. But the assessee has received ₹ 54,04,267/- only, which has been offered by the assessee. Because of this only the assessee had to terminate the agreement with them. Your honour may verify the same by issuing summons to M/s. Kuber Developers." 6.6 Rejecting the various explanations given by the assessee and holding that the assessee failed to recognize interest income on accrual basis, the AO invoked provisions of section 145 and calculated interest income of ₹ 1,77,19,081/- as income from other sources for the year ending 31.03.2007. So far as the interest income for the F.Y. 2005-06 is concerned, which was not offered to tax, the AO initiated remedial measures u/s.148 of the Act. 6.7 Before the Ld. CIT(A), it was submitted that since the development agreement was terminated, the expenses were treated as business loss and debited to the profit and loss account. It was submitted that on the date of finalization of the accounts it was within the knowledge of the assessee that the business venture has been discontinued and therefore, as per AS-4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has a charge/lien upon the impugned properties. In the cancellation agreement, there is no mention at all of the withdrawal, if any, of the charge/lien on the said properties. There was neither any agreement for giving up the interest nor was the same given up before the right to get the interest had accrued in the relevant year. There is no evidence to substantiate that the interest of ₹ 52,04,267/- is in full and final settlement of the claim. According to the Ld. CIT(A) it is at best an unilateral assertion made by the assessee. 6.11 The Ld. CIT(A) observed that as per the terms of the agreement the incidence of interest arises in the event of failure of assessee to advance further installments as contracted upon. The question whether the future installment would be made or not is within the special knowledge of the assessee himself. When the assessee was aware that the project was not taking off in the manner agreed upon, it had in fact stopped making further installments. At this point, the assessee acquired the right to receive interest as agreed upon. According to him income may accrue to an assessee without actual receipt of the same, if the assessee acquires a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest payments from the interest income brought to tax under Other Sources. 6.14 Aggrieved with order of the Ld. CIT(A), the assessee is in appeal before us. 7. The Ld. Counsel for the assessee submitted that the nature of business of the assessee is that of trading and financial transaction. The assessee had nothing to do with construction activity. Referring to the agreement of Joint Development (paper book pages 1-26), dated 13.02.2006, she submitted that Mr. Mahindra Arora of M/s. Kuber Developers is "The Developer" whereas the assessee M/s. Fobeoz India is "The Joint Developers". She submitted that an agreement for development of the property situated at Malad was entered into between M/s. Kuber Developers and the owners of the land on 29.12.2005. Referring to pg.no.5 of the Joint Development agreement, she submitted that the developers agreed to procure the co-operation and co-ordination from the assessee, so that the appropriate technical knowhow, finance management skill to be successfully completed. She submitted that as per clause 4 of the Joint Development agreement, the assessee was supposed to give aggregate finance of ₹ 20,00,00,000/- to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopers. Referring to page. 32 of the paper book, she submitted that the Confirming Party i.e. M/s. Kuber Developers had agreed to pay the interest @ 12% on the said amount of ₹ 7 crores. She submitted that the assessee is neither a Developer nor construction was its business activities. Referring to the pg. no. 59 of the paper book, she drew the attention of the bench to the Deed of Cancelation made on 17.08.2007. Referring to the pg. no. 4 of the Deed of Cancelation (pg. 62 of the paper book) she drew the attention of the Bench in view of the cancelation deed dated 17.08.2007, the agreement for development dated 07.08.2006 has been cancelled/revoked/terminated. Accordingly, the assessee has received back the amount of ₹ 7 crores and the interest amounting to ₹ 52,04,267/- from M/s. Kuber Devlopers. Under these circumstances, she submitted that the question of capitalization of interest in the books of accounts of the assessee does not arise. It can only be capitalized in the books of the joint venture. She submitted that since the assessee is not a Contractor, the Accounting Standards referred to by the AO are also not applicable. 7.2 Referring to the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/-. He submitted that now the Ld. Counsel for the assessee is telling that they are only Financer but not Developers. But this fact was never brought to the notice of the AO. The various clauses of the joint development agreement show that the assessee was in possession of the said property for full development along with M/s. Kuber Developers. Therefore, the assessee cannot say that it is only a Financer and not for Joint Development. Even if the contention of the Ld. Counsel for the assessee is accepted, then there was no need for the assessee to incur various expenses. He submitted that till the cancellation of the agreement on 17.08.2007, the development right of the property was with the assessee. Therefore, there was absolutely no error on the part of the AO or the Ld. CIT(A) in capitalizing the various expenses. The Ld. DR further submitted that the assessee by showing interest income at ₹ 52 Lakhs has given an impression that it is following cash system of accounting or atleast the interest income is being offered on receipt basis which cannot be accepted. Further the confirmation letter issued by M/s. Kuber Developers is dated 02.11.2009. He accordingly, submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isputed. The only dispute is whether the same has to be allowed as normal business expenses or to be capitalized as work-in-progress treating the assessee as a developer. It is the submission of the Ld. Counsel for the assessee that the assessee is engaged in the business of trading and financial transactions. It has nothing to do with construction activity. As per the agreement, if the construction does not start within a certain period, the amount so advanced has to be returned to the assessee. 10.2 We find the clause no. 4 of the Joint Development agreement reads as under:- "4. The Joint Developers have agreed to give aggregate finance of ₹ 20,00,00,000/- (Rupees Twenty Crore Only) to the Developers by installments as set out in the SCHEDULE III herein from time to time. The Joint Developer agrees to pay a sum of ₹ 7 Crores (Rupees Seven Crores Only) to the Developer against the developers producing a confirmation letter from M/s. Keshvi Developers. All the documents executed earlier which are not registered as stated in the letter dt. 06.02.06 by M/s. M. Dhruva and Co. (Advocates and Solicitors) will be registered as per the compliance requirements contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails of expenses furnished in the paper book, we find force in the submission of the Ld. Counsel for the assessee that these are nothing to do with the development of property. We also find force in the submission of the Ld. Counsel for the assessee that even if the expenditure has to be capitalized, the same has to be capitalized in the books of the Joint venture account and not in the books of the assessee. We, therefore, concur with thee submission of the Ld. Counsel for the assessee that the lower authorities were not justified in capitalizing the various expenses to workin- progress. 10.6 Now coming to the question as to how much interest has to be considered as income during the year, we find the assessee has credited an amount of ₹ 52,04,267/- as interest income which the assesses has actually received during the year. It is the case of the Revenue that the assessee being a company which follows mercantile system of accounting, should have accounted the interest for the whole year. It is the submission of the Ld. Counsel for the assessee that in view of the subsequent termination of the agreement, the assessee was justified in accounting for only the actual interest r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The accounting is finalized at the end of the previous year. Therefore, even if a decision is taken after the end of the previous year, but within a reasonable proximity pursuant to a consideration, which weighed with the assessee during the course of the previous year fructifying into a formal resolution after the close of the previous year, the decision cannot be said to be inapplicable in respect of the relevant previous year for which the decision was taken. .................. ................... ................... Held that the decision to waive interest was taken on August 1, 1981, yet it would be applicable in respect of the previous year beginning from July 1, 1986. The assessee had omitted to enter the accrual of the income in the books of account and, therefore, its conduct had supported its case. There was no allegation that there were any mala fides on the part of the assessee in postponing or shifting the income to subsequent years for the purpose of taxation. In fact, the suit was still pending and was yet to be decided. On the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the addition of ₹ 2,04, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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