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TMI Blog2019 (3) TMI 1272X X X X Extracts X X X X X X X X Extracts X X X X ..... added to the value of the stock and trade of the Assessee. AS 2 governs valuation of inventories. Cost comprises all of the costs of purchase, cost of completion and other costs incurred in bringing the inventories to their present location and condition. That which is not relevant to bringing the stock to its present condition or location cannot be a part of its value. In the considered view of the Court, the view expressed by the CIT (A) merits acceptance. The conclusion of the ITAT that the payment was made for extraneous consideration appears to be based on surmises and conjectures. Applying the law explained by the Supreme Court in the CIT v. Nainital Bank Ltd. [1966 (9) TMI 46 - SUPREME COURT] to the case in hand, the plausible conclusion is that the compensation paid by the Assessee to the allottees of the commercial spaces for the surrender of their rights therein cannot be said to be disallowable on the ground of such payment having been made for extraneous considerations. The result of the above discussion is that the Court holds that the payment made by the Assessee to the allottees of the flats for their surrendering the rights therein should be allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue expenditure. Consequently, the question is answered in the affirmative in favour of the Assessee Withdrawal of credit of TDS u/s 154 - Assessee was not the owner - rent received by the Assessee from the tenants was passed on to the respective owners with Tax - HELD THAT:- AO also did not dispute the fact that the Assessee passed on the rent collected to the respective owners. The TDS deducted at the time of such passing on of rental income was also deposited by the Assessee. Further, the owners did disclose the rental income in their returns. Thus on the one hand, there was credit of TDS and on the other hand there was debit of tax paid on behalf of the owners. The Court is of the view that there was no occasion to invoke Section 154 of the Act, since the issue was a debatable one. The decisions of the CIT (A) as affirmed by the ITAT take a plausible view and deserve to be upheld. Interest under Section 201 (1A) - HELD THAT: - Under Section 194-I of the Act, the liability to deduct TDS is on the tenant paying the rent. The amount passed on to the owners by the Assessee was not its capacity as tenant. It is further pointed out that for AY 1998-99 the Revenue accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting Standard ( AS ) 7 issued by the Institute of Chartered Accountants of India ( ICAI ) initially in 1983 which was revised first in 2002 and then in 2016. According to the Assessee, only on completion or substantial completion of the project, revenue is recognised. Payment of compensation to flat/space buyers 3. The Assessee states that the Gopal Das Bhawan Project was completed in the Financial Year ( FY ) 1994-95 relevant to Assessment Year ( AY ) 1995-96. Some of the allottees of the flats refused to take them for completion since the New Delhi Municipal Council ( NDMC ) changed the usage of the Lower Ground Floor ( LGF ). The Assessee then started negotiating with the relevant flat buyers and persuaded them to surrender their ownership and allotment letters. The Assessee decided to repay the advance money received from these flat owners which worked out to ₹ 32,08,271. The Assessee also decided to pay in addition compensation amounting to ₹ 1,18,38,705 in lieu of surrender of their rights in the flat. This expenditure was claimed by the Assessee as revenue in nature and was charged to the Profit and Loss Account ( P L Account ). Proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown the amount received from the Assessee as capital gains in their books of accounts as well as income tax returns after indexation of the cost of acquisition. This was an additional ground for the AO to reject the plea of the Assessee that the payment of compensation was business expenditure. Accordingly, the payment of compensation towards repurchase of the flat was disallowed by holding that it was a capital expenditure. The said amount was added back to the income of the Assessee. Order of the CIT (A) 8. In the appeal filed by the Assessee, the Commissioner of Income Tax Appeals [ CIT (A) ] by order dated 30th October, 1998 came to the following conclusions: (i) There was no dispute that the Assessee was engaged in the business of real estate and the space constructed by it constituted its stock and trade; (ii) The expenditure in relation to stock and trade would be of revenue nature whether incurred on purchase of stock and trade or compensation for retaining of stock and trade. Expenditure on stock and trade did not represent investment of capital nature; (iii) The same transaction can be of capital nature in the hands of one person and of revenue na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the space buyer s agreement. (ii) The compensation amount had no relationship whatsoever either with the area comprising a flat booked or with reference to the total amount paid to the Assessee. There was no material which could justify the quantum of payments stated to be the compensation to various persons. (iii) The opinion given by a lawyer justifying the payment of compensation, stating that since it would ultimately enhance the value of the space which could then be sold at a higher price to another buyer, was a tailor-made opinion . The huge amounts paid by the Assessee as compensation, even when the agreement between the parties did not require it, was not justified event accounting for the cost of litigation that might ensue. (iv) The payment was for extraneous considerations and was not expenditure that was expedient to the Assessee s business. The compensation was not provided for an agreement between the parties and the expenditure towards compensation far outstripped any expenditure whether legal or otherwise, which the Assessee was supposed to incur in the eventuality of some of the persons opting out of the agreement to purchase flats. 13. Cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts . Para 8.1 states that Costs attributable to a contract are identified with reference to the period that commences with the securing of the contract and closes when the contract is completed. 19. Under para 8.4, the costs incurred by a contractor are stated to be divided into i. Costs that relate directly to a specific contract; ii. Costs that can be attributed to the contract activity in general and can be allocated to specific contracts; iii. Costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts. 20. Para 8.7 of AS 7 elaborates what 8.4 (iii) talks of, viz., examples of costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts. These include: i. general administration and selling costs; ii. finance costs; iii. research and development costs; iv. depreciation of plant and equipment that cannot be allocated to a particular contract. 21. The pros and cons of the CCM are discussed in para 10. Para 11.2 of AS 7 states that when a contractor uses a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al use. However, in terms of the completion certificate issued by the NDMC, the LGF was sanctioned as storage. It was for this reason that the buyers lost interest. The Assessee then decided to return the advance received and also compensate the buyers since the buyers funds had remained with the Assessee for some time. The Assessee had sought to explain that this compensation corresponded to the increase in the resale value. 26. There is merit in the contention of the Assessee, based on AS 2 that compensation paid subsequent to the completion of the project is an extraordinary item. It was not cost of completion of the project and, therefore, such compensation could not be added to the value of the stock and trade of the Assessee. AS 2 governs valuation of inventories. Cost comprises all of the costs of purchase, cost of completion and other costs incurred in bringing the inventories to their present location and condition. That which is not relevant to bringing the stock to its present condition or location cannot be a part of its value. 27. Under AS 2, not everything that relates to stock can be added to its value. The following have to be excluded from cost a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the work as remain the same, commercial expediency may require payment of commission to an employee. The payment was allowed as business expenditure. 31. In Commissioner of Income Tax, U.P. v. Nainital Bank Ltd. (1966) 62ITR 638 (SC) the Assessee bank had settled the claims of those who had pledged their jewellery with the Bank which was stolen by dacoits. The question was whether such payments could be allowed as business expenditure under Section 10(2)(xv) of the Indian Income Tax Act, 1922? It was acknowledged that In choosing to compensate its constituents for the loss of their jewellery and maintain its business connections and goodwill, the bank laid out expenditure for the purpose of its business. 32. It was further explained that The sole question is whether the bank in incurring the expenditure acted in the interest of and for the purpose of its business. The bank is carrying on banking business and advances loans on the security of jewellery. The credit of a banking business is very sensitive: it largely thrives upon the confidence which its constituents have in its management. To maintain that confidence the management has often to make concessions an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Meenakshi Mills Ltd. v. CIT 63 ITR 207. The expression for the purposes of business is wider than the expression for the purpose of earning income. The former would include within its scope expenditure incurred on grounds of commercial expediency. 35. In the present case, the Assessee has a plausible explanation for making such payment of compensation to protect its business interests. While it is true that there was no contractual obligation to make the payment, it is plain that the Assessee was also looking to build its own reputation in the real estate market. 36. Further the mere fact that the recipients treated the said payment as capital gains in their hands in their returns would not be relevant in deciding the issue whether the payment by the Assessee should be treated as business expenditure. As explained by the Madras High Court in CIT v. Sarda Binding Works 102 ITR 187 (Mad), it is the point of view of the payer which is relevant. 37. The decision in CIT v. Mangal Tirth Estates Ltd. 303 ITR 366 (Mad) was a case where the Assessee therein had also followed the CCM. It was engaged in the business of construction and sale of a multi- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The Assessee also claimed deduction of 1/5th of the repairs amounting to ₹ 41,29,837 under Section 24 of the Act. 43. During the assessment proceedings, in its reply dated 15th December 1997 to the query raised by the AO, the Assessee pointed out that there is nothing in law which prohibited the leasing out of stock and trade. It relied on the decision in CIT v. Chagan Das and Company 54 ITR 17 where the Supreme Court held that where a person buys and sells property, the income from that activity should be assessed as business income whereas the rental income from such property is assessed as income from house property. 44. For AY 1995-96, the CIT (A) in the order dated 30th October 1998 agreed with the Assessee and held that as the Assessee was the owner of the property which had been let out otherwise than in the course of business of letting and subletting, the rental income had to be assessed as IHP. It was noted that The appellant had entered into an agreement with the co-owners of the leasehold land for construction of the property at the cost of the appellant. On completion of the building, the co-owners were entitled to the specific share and the balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng their respective cases. A careful perusal of the said judgment shows that the point in fact is answered in favour of the Assessee and not against it. 51.1 Ms. Malhotra sought to rely on the decision in Chennai Properties and Investments Ltd. v. CIT [2015] 373 ITR 673 (SC) as supporting the case of the Revenue. However, this Court is not able to agree with the above submission. In the said case, the object of the Appellant Assessee company was to acquire and let out properties in the city. The rental income received therefrom was shown as income from business in the return filed by the Assessee. 51.2 The AO, however, held that since the income was received from the letting out of properties, it was in the nature of rental income, and accordingly taxed the same accordingly under that head. The CIT(A) allowed the appeal of the Assessee by holding that income was from business and directed that it should be treated and taxed as such. The ITAT resultantly confirmed the order. 51.3 The High Court allowed the appeal of the Revenue by holding that the income derived by letting out of properties would not be income from business but instead could only be assessed as income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 78 of 2010 being the appeal of the Revenue for AY 1996-97 is accordingly dismissed. Brokerage and Commission 54. The next major issue concerns the expenditure on brokerage and commission. The issue arose in AY 1995-96 when the Assessee debited ₹ 1,45,25,708 to the P L account as brokerage and commission towards service rendered by brokers for sale of flats and leasing out commercial spaces/flats. 55. According to the AO, the amount so paid appeared to be extraordinary. The Assessee s plea was that the brokers were demanding higher amounts as they were not being compensated with income which may accrue to the owners in future because of the interest free element of the huge amount comprising security deposit, advance rent etc. Further the payments had been made through account payee checks purely on commercial consideration. 56. The AO, however, did not agree and disallowed ₹ 41,84,947 as being in excess and unreasonable and valued back for the income of Assessee. In appeal, the CIT(A) reversed the AO on the ground that it is not for the AO to determine the reasonableness or otherwise of the expenditure. In the further appeal by the Revenue for AY 1995 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question except for AY 1996-97. Again, following the rule of consistency, this Court answers this issue in favour of the Assessee and against the Revenue. Interest and guarantee commission 63. The next issue is the treatment of the amount paid by the Assessee on account of interest and guarantee commission. The AO sought to add this amount for AY 1996-97 to the Assessee s income on the ground that the loan raised from the Bank by the Assessee was given to its sister concern without charging interest. The ITAT, however, deleted the addition. 64. The facts in brief for AY 1997-98 were that the interest amount of ₹ 32225676 comprised the following Rs.1,07,91,828/- on CC limit, paid to IndusInd Bank Ltd. Rs.2,14,33,848/- on loan of ₹ 9 Cr. taken from Citi Bank. 65. The AO disallowed the interest paid to IndusInd Bank on the ground that the interest was required to be capitalized under the head of capital work and progress. In fact in AYs 1992-93, 1993-94 and 1994-95, the Assessee itself had capitalised interest in the capital work and progress. The cash credit limit available to the Assessee was used by it to give a loan to its sister co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tio of the decision of the Bombay High Court in CIT v. Lokhandwala Constructions Industries Ltd. [2003] 260 ITR 579 (Bom) was rightly relied upon by the ITAT to allow the plea of the Assessee and treat the said interest payments as revenue expenditure. As explained in CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom) and this Court in Regal Theatre v. CIT [1997] 225 ITR 205 (Del) and CIT v. Gautam Motors [2011] 334 ITR 326 (Del) merely because the Assessee was a cash rich company, the payment of interest cannot be disallowed as business expenditure. 71. Further as rightly pointed out, AS 2 would apply in terms of which, with the Assessee following the CCM, the expenditure incurred subsequent to the completion of the project cannot be attributed to work and had to be allowed only as revenue expenditure. Consequently, the question is answered in the affirmative in favour of the Assessee and against the Revenue. Withdrawal of credit of TDS 72. The next issue to be considered is whether the Assessee was liable to deduct tax at source (TDS) on the rent received from tenants of properties of which the Assessee was not the owner. This issue arises in two AYs i.e. 1995-96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, the question is answered in favour of the Assessee and against the Revenue. Interest under Section 201 (1A) 80. The next question is about charging of interest under Section 201(1A). The view that while passing on the rents collected to the respective owners the Assessee should have deducted TDS. Further, that interest thereon under Section 201 (1A) of the Act was also liable to be paid. 81. While the AO levied interest, the CIT (A) following the order in AY 1995-96 where it held that the Assessee was not liable to deduct TDS in respect of rent received on behalf of others, cancelled the interest. The ITAT agreed with the CIT (A). 82. Under Section 194-I of the Act, the liability to deduct TDS is on the tenant paying the rent. The amount passed on to the owners by the Assessee was not its capacity as tenant. It is further pointed out that for AY 1998-99 the Revenue accepted the order of the CIT (A) by not filing any further appeal. This issue is also, therefore, accordingly answered in favour of the Assessee and against the Revenue. 83. The issue is answered in the negative i.e. in favour of the Assessee and against the Revenue. Advertisement expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng note of the overall facts and the nature of business, we confirm the order of the Tribunal on this expenditure. 86. Further in AYs 1995-96 and 1996-97 a similar expenditure was allowed and no question was framed by this Court. The Assessee being in the real estate business cannot carry on its business without publicity. The expenditure was necessary for the promotion of the business. The question is accordingly answered in favour of the Assessee and against the Revenue. Service charges 87. The question whether service charges are allowable as revenue expenditure arises for AYs 2001-02 and 2003-04. 88. The Assessee is admittedly following the CCM. Service charges were incurred after the completion of the project and would not be part of the capital work in progress. Having been incurred at a stage subsequent to the completion of the project it had to be shown as revenue expenditure and was rightly allowed as such by the ITAT. This question is also therefore answered in favour of the Assessee and against the Revenue. Scope of Section 154 89. The last issue concerns the scope of Section 154 and whether the ITAT was right in holding that it could no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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