2025 (5) TMI 2049 - AT - Income Tax

Addition under the head income from house property - assessee s claim that this amount represented rent reimbursed to purchasers of property units prior to execution of sale deeds - HELD THAT - As assessee has duly declared the rent pertaining to the areas belonging to it in terms of section 22 of the Act. When certain areas were sold the rent received by the assessee on behalf of the customers who purchased such areas is the income of new owner and accordingly assessee transferred the rent to them for which necessary details alongwith their bills invoices were produced before the authorities below as available. Assessee has also filed the copy of Tri-Party Agreement executed in this regard. It is also seen that the assessee has declared income by following the Percentage of Completion Method ( POCM ) which has not been doubted. No infirmity in the order of the CIT(A) deleting the additions made. Accordingly the same is hereby upheld. Ground No.1 of the Revenue is dismissed. Addition on unrealized debtors - writing off of the unrealized debtors out of gross Revenue - HELD THAT - As seen that the assessee has followed this practice of reducing of unrealized claim from the gross receipts declared on year after year basis which has not been doubted by the Revenue in any subsequent year and for the year under appeal only this amount is added back to the income of the assessee. Thus following the principle of consistency and further looking to the fact that the said amount has already suffered tax in subsequent years when the said sum was realized we find no infirmity in the order of CIT(A) who after considering these facts deleted the additions made by AO. Accordingly the order of CIT(A) on this score is upheld. Ground No.2 raised by the Revenue in this appeal is accordingly dismissed. Disallowance of construction expenses - disallowance made u/s 40(a)(ia) - CIT(A) has deleted the disallowance on the basis of the submissions of the assessee that this relates to the provision towards the material however no opportunity was given to the AO for making verification of this fact - HELD THAT - As seen that the assessee in additional ground claimed that TDS was deducted before filing of return of income therefore no disallowance could be made in view of the provision of section 40(a)(ia) of the Act. This issue needs to be examined afresh by the AO therefore the AO is directed to verify whether the claim of the assessee that relates to the provision for material and further verify whether due TDS was deducted and deposited on the service portion before filing of return of income and decide the issue in accordance with law and also keeping in mind the method of revenue recognition followed by the assessee.

Summary

The core legal questions considered in this judgment are:

1. Whether the addition of INR 3,67,06,904/- made by the Assessing Officer (AO) under the head "income from house property" was justified, given the assessee's claim that this amount represented rent reimbursed to purchasers of property units prior to execution of sale deeds.

2. Whether the addition of INR 2,63,10,771/- on account of unrealized debtors was sustainable, considering the assessee's practice of writing off such amounts after a three-month period and recognizing income upon actual receipt.

3. Whether disallowance of INR 49,41,898/- on account of expenses on which tax was not deducted at source (TDS), particularly the portion of INR 27,81,660/- claimed to relate to material provisions under the Percentage of Completion Method (POCM), was appropriate.

4. Whether the disallowance of INR 21,60,237/- (out of the total disallowance) on construction expenses for non-deduction of TDS was justified, especially when the assessee contended that TDS was deducted and deposited before filing the return of income.

Issue-wise Detailed Analysis

1. Addition of INR 3,67,06,904/- under "Income from House Property"

Legal Framework and Precedents: Section 22 of the Income Tax Act stipulates that income from house property is taxable only if the assessee is the owner of the property and the property is not used for business or profession. Ownership is a key determinant for taxing rental income under this head.

Court's Interpretation and Reasoning: The AO added the amount on the basis that the assessee was the legal owner of the property during the relevant financial year and had not disclosed this rental income. The assessee contended that the amount represented rent received on behalf of purchasers who had made full payment but had not yet executed sale deeds, and that the rent was reimbursed to these purchasers through tri-party agreements involving the assessee, purchasers, and tenants.

The Commissioner of Income Tax (Appeals) [CIT(A)] examined the evidence, including lease agreements, tri-party agreements, invoices, and payment receipts. The CIT(A) found that although legal ownership remained with the assessee until sale deeds were executed, the beneficial ownership for rental income purposes had passed to the purchasers who had made full payment and taken possession. The rent received by the assessee was reimbursed to these beneficial owners after deducting TDS, and therefore, this amount did not constitute the assessee's income.

Key Evidence and Findings: The assessee produced detailed documentation, including copies of lease agreements, space buyer agreements, receipts of payments, and tri-party agreements. The assessee also demonstrated that TDS was deducted on the reimbursed amount, and the tenants had deducted tax at source on rent payments.

Application of Law to Facts: The tribunal agreed with the CIT(A) that the rent reimbursed to purchasers was not income of the assessee under section 22, as the beneficial ownership had passed to the purchasers in terms of section 27(iii) of the Act. The AO's addition was therefore erroneous.

Treatment of Competing Arguments: The Revenue's argument that legal ownership dictated taxability was rejected in light of the beneficial ownership principle and the detailed evidence provided by the assessee. The tribunal upheld the CIT(A)'s deletion of the addition.

Conclusion: The addition of INR 3,67,06,904/- was deleted as it did not constitute income of the assessee.

2. Addition of INR 2,63,10,771/- on Account of Unrealized Debtors

Legal Framework and Precedents: The treatment of unrealized debts in income recognition involves assessing whether amounts are recoverable. The assessee's consistent practice of writing off doubtful debts and recognizing income only upon receipt is relevant.

Court's Interpretation and Reasoning: The AO disallowed the claim, holding that the assessee failed to provide details of the parties and doubted the non-payment of maintenance charges. The assessee argued that the amount related to maintenance charges not received within three months, and such amounts were written off as doubtful debts. The assessee maintained that income was recognized when the amounts were actually received in subsequent years, a practice accepted by the Revenue in prior years.

Key Evidence and Findings: The assessee submitted reconciliation statements, details of amounts pending in court, and evidence of write-offs after verification. The CIT(A) found the assessee's practice consistent and accepted the claim.

Application of Law to Facts: The tribunal emphasized the principle of consistency and the fact that the amount was taxed in subsequent years when realized. It held that adding back the amount in the year under appeal would result in double taxation.

Treatment of Competing Arguments: The Revenue's skepticism about non-payment was outweighed by the assessee's documentary evidence and consistent accounting practice.

Conclusion: The addition was rightly deleted; the assessee's treatment of unrealized debtors was upheld.

3. Disallowance of INR 49,41,898/- on Account of Non-Deduction of TDS on Expenses

Legal Framework and Precedents: Section 40(a)(ia) of the Income Tax Act mandates disallowance of expenses where tax is not deducted at source as required. However, the applicability depends on whether the expenses are actually incurred and whether TDS was subsequently deducted and deposited.

Court's Interpretation and Reasoning: The assessee recognized income using the Percentage of Completion Method (POCM), which involves making provisions for expenses to match revenue recognition. The assessee contended that provisions for future expenses, particularly for materials, did not require TDS at the time of provision, and that TDS was deducted and deposited when actual payments were made in subsequent years.

The CIT(A) deleted the disallowance of INR 27,81,660/- relating to material provisions but upheld the balance disallowance treating it as related to services. The AO had not been given an opportunity to verify the nature of the expenses.

Key Evidence and Findings: The assessee submitted that the expenses were provisions under POCM and that TDS was deducted before filing the return of income. However, the AO was not given a chance to verify the classification of expenses.

Application of Law to Facts: The tribunal found merit in the assessee's contention regarding material provisions and the timing of TDS deduction. It held that the matter required fresh examination by the AO to verify the nature of expenses and compliance with TDS provisions, considering the accounting method adopted.

Treatment of Competing Arguments: The Revenue's insistence on disallowance without verification was balanced against the assessee's submissions and the need for procedural fairness. The tribunal directed reassessment on this issue.

Conclusion: The disallowance relating to material provisions was deleted; the remainder was remanded for fresh verification and decision.

4. Disallowance of INR 21,60,237/- on Construction Expenses for Non-Deduction of TDS

Legal Framework and Precedents: Similar to issue 3, section 40(a)(ia) applies to expenses on which TDS is not deducted. The timing of TDS deduction and deposit is relevant.

Court's Interpretation and Reasoning: The assessee contended that TDS was deducted and deposited before filing the return of income. The CIT(A) upheld the disallowance, but the assessee sought deletion based on subsequent TDS compliance and the method of income recognition.

Key Evidence and Findings: The assessee's additional grounds and submissions indicated TDS compliance before filing returns.

Application of Law to Facts: The tribunal found that this issue was intertwined with issue 3 and required fresh examination by the AO to verify the timing and applicability of TDS provisions.

Treatment of Competing Arguments: The tribunal accepted the assessee's plea for reconsideration in light of TDS compliance and accounting treatment.

Conclusion: The matter was remanded for fresh verification and decision by the AO.

Significant Holdings

"The rent of Rs. 3,67,06,904/-, reimbursed to the purchasers, cannot be taxed in the hands of the appellant and therefore, I agree with the arguments of the appellant. Accordingly, findings of the A.O. are erroneous and addition of Rs. 3,67,06,904/-, is deleted."

"From the above, it is clear that the amount of rent reimbursed to the purchasers at Rs. 3,67,06,904/-, is not the income of the appellant and the reimbursement to the purchasers has been made after TDS."

"Following the principle of consistency and further looking to the fact that the said amount has already suffered tax in subsequent years when the said sum was realized, we find no infirmity in the order of Ld.CIT(A) who after considering these facts, deleted the additions made by AO."

"In our considered opinion this issue needs to be examined afresh by the AO therefore, the AO is directed to verify whether the claim of the assessee that INR 27,81,660/- relates to the provision for material and further verify whether due TDS was deducted and deposited on the service portion before filing of return of income and decide the issue in accordance with law and also keeping in mind the method of revenue recognition followed by the assessee."

Core principles established include:

- Taxability under "income from house property" requires beneficial ownership, not merely legal ownership, for rental income recognition.

- Consistent accounting treatment of unrealized debts, with income recognized on actual receipt, prevents double taxation.

- Provisions for future expenses under POCM require careful examination to determine applicability of TDS provisions and disallowances under section 40(a)(ia).

- Disallowances under section 40(a)(ia) must consider timing of TDS deduction and deposit, and procedural fairness demands opportunity for AO verification before deletion of additions.

Final determinations:

- The addition of INR 3,67,06,904/- under income from house property was deleted.

- The addition of INR 2,63,10,771/- on account of unrealized debtors was deleted.

- The disallowance of INR 27,81,660/- relating to material provisions was deleted.

- The remaining disallowances on expenses for non-deduction of TDS were remanded for fresh verification and decision by the AO.

- The assessee's disallowance of INR 21,60,237/- on construction expenses was remanded for fresh examination considering TDS compliance.