2019 (6) TMI 1288 - ITAT DELHI

Disallowance u/s.14A r.w.r. 8D - investment in partnership firms as its capital contribution - HELD THAT:- Not only the CIT (A) has properly examined the utilization of interest bearing funds for the assessee which was purely for the purpose of business but also from the bare perusal of the balance sheet, it is seen that the interest free funds available with the assessee in the form of reserves and surplus far exceeds the total investment made in shares/partnership firms including the investment made in the shares of M/s. Edward Keventor P. Ltd. which has been stated to be strategic investment. If that is so, then no disallowance u/s.14A can be made.

This proposition has now been confirmed in the case of CIT vs. Reliance Industries Ltd. [2019 (1) TMI 757 - SUPREME COURT] wherein upheld the proposition that if assessee has interest free funds available sufficient to meet its investment, then it can be presumed that the investment have been made from interest free fund available with the assessee and not from the borrowed funds. Thus, no disallowance of interest can be made.

Disallowance made under Rule 8D(2)(iii) as relying on ACB India Ltd vs. ACIT [2015 (4) TMI 224 - DELHI HIGH COURT] we direct AO only to include those investments while computing the average investments which have yielded exempt income, i.e., investment made in the partnership firm and mutual fund only, because investment made on unquoted shares have not yielded any exempt income. The calculation of average investment in partnership firm and mutual fund has been given by the learned counsel as has been incorporated above and accordingly we direct the AO to verify the same and work out the disallowance of 0.5%. Accordingly, appeal of the assessee is partly allowed.

TDS u/s 194C - Disallowance u/s.40(a)(ia) for non-deduction of TDS on payment to Petron Civil Engineering Ltd - HELD THAT:- As decided in ISLAMIC INVESTMENT CO. VERSUS UNION OF INDIA AND ANOTHER. [2002 (3) TMI 3 - BOMBAY HIGH COURT] Interest paid in pursuance of decree of the Court which has to be discharged under the said decree, then it assumes the character of the judgment debt and hence judgment debtor is not liable to deduct tax at source on the interest component of the decree - award given by the Arbitral Tribunal cannot be reckoned as payment made in pursuance of a contract but payment in pursuance of a judgment decree and is part of a judgment debt, and therefore, in such a case, assessee was not liable to deduct TDS either u/s.194C or u/s.194A. Thus no obligation to deduct TDS on the payment made to M/s. Petron Engineering P. Ltd. in accordance with arbitration award. Accordingly, this issue is allowed in favour of the assessee.

Notional rent where security deposits were received but no rental was shown - HELD THAT:- The addition has been made on the ground that assessee despite being owner of the Kiosks has not disclosed rental income in its books and the same has been transferred to M/s. DLF Services Ltd. by over riding title. M/s. DLF Services Ltd is providing maintenance and upkeep services of the mall including Kiosks. In return for consideration for these services, the appellant vide authority letter dated 12/12/2005 has granted M/s DLF Services Ltd., right to recover the rental receipts from the third parties using said Kiosks. Assessee has not claimed any expenditure in the name of M/s DLF Services Ltd. in connection with maintenance services of the mall. In view of above arrangement, M/s. DLF Services Ltd. is showing the receipts from the Kiosk as a part of its income which is duly subjected to tax in its hands and accordingly there is no loss to the revenue - As relying on assessee’s own case [2017 (11) TMI 381 - ITAT DELHI] , we decide this issue in favour of the assessee.

Addition on account of capitalization and processing fees on loan taken for purchase of windmills - HELD THAT:- We find that the issue is with regard to the capitalisation on account of interest paid on loan for windmill project and ₹ 96 lacs on account of loan processing charges. AO has capitalized proportionate claim of interest and processing charges after allowing depreciation @ 40% based on proviso to Section 36(1)(iii) r.w. Explanation 8 to Section 43(1). In so far as capitalisation of interest expenditure is concerned, the same is definitely part of acquisition of the capital asset which needs to be capitalized. The loan processing charges is also part of the same loan agreement, and therefore, it cannot be given a different treatment as it also a charge for acquisition of an asset and same too has to capitalization only. Accordingly, we agree with the contention raised by the ld. Special Counsel that this cannot be allowed separately u/s.37. Accordingly, ground raised by the assessee is dismissed.

Addition on account of interest on late deposit of TDS - HELD THAT:- As decided in NARAYANI ISPAT PVT. LTD. [2017 (10) TMI 67 - ITAT KOLKATA] TDS amount is in the nature of tax of the deductee, i.e., other party and not that of the assessee and as such the interest on late deposit of TDS is allowable expenses u/s.37 of the Act.

Disallowance of prior period expenses - HELD THAT:- Similar issue has arisen in assessee’s own case for assessment year 2006-07 wherein the Tribunal has allowed the same nature of expenditures, after observing case of MODIPON LTD. (NO. 1) [2010 (12) TMI 836 - DELHI HIGH COURT]

Disallowance of SEZ deduction u/s 80IAB - ownership of land on which SEZ has been developed is in dispute in view of decision of Hon'ble Punjab and Haryana High Court, and therefore, such a claim is inadmissible - HELD THAT:- The case of assessee has been that the land has been given on lease for a period of 30 years and lease rentals per annum are being received over a period of lease term on annual basis and not up-front for all the years under the lease. The disclaimer condition mentioned in clause 3(xvii) of the approval letter dated 01.06.2009 does not give any additional power to the AO to examine the taxability of the transaction of hand over and transfer of bare shells but has to be restricted only to examine the transaction of lease of Land, as expressly clarified by the Ministry of Commerce in the clarification dated 18.01.2011 so that the transactions of sale of land in the guise of long term lease by receiving premium/down payments etc. do not escape the scrutiny under the Income Tax Act as there is an express prohibition on sale of Land in the SEZ. Under these facts and circumstances, we do not find the reasoning given by the AO to disallow the claim is justified.

Once assessee has been notified as developer under the SEZ Act and his activity has been approved by BOA and the SEZ in which the assessee has carried out its business activity has been notified under the SEZ Act, 2005 then profits derived from business of development, operation and maintenance of a SEZ has to be taken from such activity and consequently is entitled for claim of deduction u/s.80IAB. AO was not justified in denying the benefit of deduction u/s.80IAB arising from sale of bare shell building to co-developer.

Deduction u/s 80IAB - isolated transaction of sale of building is assessable under the head ‘income from capital gain’ - HELD THAT:- When the books of account of the assessee were subjected to Special Audit u/s 142(2A) and the Special Auditor has accepted the treatment of income from sale of bare shell building as part of business profits, then such an income arising from sale of bare shell building would fall in the nature of business income eligible for deduction u/s 80IAB of the Act. Apart from that, it is noted that assessee-company was formed with the object of real estate development and has been engaged in this activity since inception - 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. 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). Thus, re-characterising the income as short-term capital gain by the AO is rejected.

Disallowance of proportionate deduction - alternative finding 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 - 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. In any case, the 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.

Disallowance of Revenue recognition as per percentage of completion method (POCM) - HELD THAT:- This issue stands covered in favour of the assessee by the Tribunal in assessee’s own case for the Assessment Year 2006-07 .

Disallowance of interest pertaining to loan for M/s. Edward Keventer Project by capitalizing the same - HELD THAT:- As decided in assessee’s own case for Assessment Year 2006-07 the principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments.

Therefore, we are of the view that presumption is to be assumed in favour of the assessee and not against assessee. Hence, we reject the formulae adopted by CIT (A) of working out proportionate disallowance by adopting artificial formulae - order of the CIT (A) confirming the disallowance of expenditure and direct the AO to allow this interest expenditure u/s 36(1) (iii)

Disallowance of capitalization of interest - AO on the basis of Special Auditor’s comment observed that interest capitalization is also required on interest paid on loan taken for M/s. Edward Keventer Project, and therefore, net interest eligible for capitalization is to be bifurcated into interest capitalization on Keventer loan and interest capitalization on project under execution - HELD THAT:- Issue decided in decided in favour of the assessee by the Tribunal in assessee’s own case for Assessment Year 2006-07 Expenditure towards brokerage and commission paid to brokers for booking and sale of certain properties is allowable firstly in view f the facts that assessee’s treatment of such expenditure has been decided in favour of the assessee and revenue has not challenged it and secondly such expenditure are allowable. In view of the above facts and following the decision of coordinate Bench as facts are not distinguished by revenue, we confirm the order of CIT (A) in deleting the addition.

Disallowance of brokerage and commission - HELD THAT:- This issue has been decided in favour of the assessee by the Tribunal in assessee’s own case for Assessment Year 2006-07. - decided in favour of the assessee

Addition on account of late construction charges - as per AO receipt of late construction charges is income on the basis of such late construction charges were collected during the year - HELD THAT:- As decided in favour of assessee Assessee as following a prudent and consistent accounting policy which was necessitated by the order of Honourable Punjab And Haryana High court. The assessee offered the entire amount as its income on settlement of disputes by the Honourable Supreme Court. Therefore, we hold that the assessee was acting on prudent and consistent accounting policy. Accounting standard 9 issued by ICAI on revenue Recognition also satisfies the accounting policy of the company that when the revenue is saddled with uncertainties same should not be recognised till the uncertainties are resolved. Therefore following the decision of coordinate bench as well as the accounting standard 9 of ICAI we are of the view that assessee has correctly recognised revenue in the year the issue attained certainty. Therefore on perusal of the decision of CIT (A) we are of the view that there is no infirmity in the order.

Addition on account of net contingency deposit received - HELD THAT:- As decided in assessee's own case these are the security deposits which would be utilised in performance of the contractual obligation of the assessee towards those buyers. Anyway, it is not the case of the AO that these receipts have been received during the year, it is also not the case that the payers or the depositors are unidentified and it is not the case of the AO that these amounts have been paid by the buyers without any obligation on the assessee to perform by providing the services. In view of this, we confirm the order of CIT (A) in deleting the addition

Net interest fee security deposits receipt - revenue or capital receipt - HELD THAT:- a separate account is maintained and as and when the buildings or the complex is handed over to the resident association or condominium association such deposits are handed over to them for maintaining the building and payment of insurance premium of building out of interest received from such deposits. Such deposits are not forming part of sale proceeds, therefore, the same cannot be treated as trading receipts in the hands of the appellant. There is a regular movement of funds for utilization of the same for maintenance and payment of insurance premium from this account. Hence, the addition made by the AO on account of interest free deposits is deleted.

Addition on account of net registration charges - HELD THAT:- The total receipt of registration charges is identified with respect to each of the buyer and there are movement in respective accounts. In fact, it is a past through cost collected by the assessee from the buyer to be incurred by assessee on behalf of the buyer. These receipts cannot partake character of the revenue in the hands of the assessee. It is also not the case of the AO that the depositors are not identified and despite the conveyance deed executed by the assessee, the amount has not been incurred. In absence of this finding, it is not possible to confirm the disallowance. Therefore, we confirm the order of the CIT (A) in deleting the addition being credit balance of registration charges received from the customers

Addition on account of closing credit balances in indirect taxes account - HELD THAT:- This issue is fully covered in favour of the assessee by the order of the ld. CIT(A) in assessee’s case for AY2006-07 and Department has not preferred any second appeal in ITAT. Otherwise also, we are of the view that, the indirect tax collected from the customer on behalf of the Revenue authorities, which the assessee is liable to pay to the government, then such an action of the Assessing Officer in treating the indirect taxes as income of the assessee is highly misconceived and unjustified. In any case, this amount has been subsequently paid and therefore, it cannot be treated as income in this year. Accordingly, the order of the ld. CIT (A) is affirmed.

Disallowance /capitalization of preoperative expenses (on SEZ projects not commenced) - HELD THAT:- As decided in assessee own case the assessee has incurred this expenditure on proportionate and feasibility of various construction projects in which business the assessee is engaged into. Before embarking on to any of the projects, it is a common practice to obtain a feasibility and economic viability of construction projects at different geographical location. These expenses are for facilitating the existing business of the assessee. It is not the case of the revenue that it is altogether a new line of the business or unrelated to the business of the assessee. Therefore, in our view, this expenditure are wholly and exclusively incurred for the purposes of the business of the assessee. Hence, we confirm the order of CIT (A) and delete this ground of revenue’s appeal

Disallowance of expenses on projects not commenced - HELD THAT:- The assessee has incurred this expenditure on proportionate and feasibility of various construction projects in which business the assessee is engaged into. Before embarking on to any of the projects, it is a common practice to obtain a feasibility and economic viability of construction projects at different geographical location. These expenses are for facilitating the existing business of the assessee. It is not the case of the revenue that it is altogether a new line of the business or unrelated to the business of the assessee. Therefore, in our view, this expenditure are wholly and exclusively incurred for the purposes of the business of the assessee.

Disallowance of expenditure u/s.40(a)(ia) for non deduction of TDS on payment to two trusts - HELD THAT:- CIT(A) after taking into consideration certificate issued by ITO, TDS Ward-49(4), New Delhi and as such there is no default on the part of the assessee in not deducting TDS on such payment. The order of the CIT (A) is based on proper appreciation of facts and there is thus no justification for any interference and this ground of revenue is dismissed

Addition on account of reconciliation of rental income as per TDS certificates and withdrawal of TDS credit - HELD THAT:- Rental income has been assessed under the head “income from other sources” and since the TDS relates to the very same income, the credit for the said TDS cannot be logically denied. Therefore, the AO is directed to allow credit of TDS

Reclassification of income from house property to income from business and profession - HELD THAT:- As relying on case of assessee for AY 2005-06, we confirm the order of CIT(A) in taxing the rental income as income from house property

Disallowance of notional rent/additional annual letting value in respect of the vacant property - HELD THAT:- The 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.

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

Disallowance of expenses where bills are not in the name of the company - HELD THAT:- The bulk of expenses are in the nature of electricity and water expenses for which the name of erstwhile tenant has been mentioned. Similar issue was involved in the earlier year also, therefore, respectfully following the precedence this issue is decided in favour of the assessee and against the Revenue. Accordingly, the Revenue’s grounds are dismissed.