TMI Blog2015 (4) TMI 438X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 18,400 but has proceeded to apply the provisions of Rule 8D to arrive at the disallowance of ₹ 1,93,730 as the expenditure deemed to be incurred for earning exempt income. Further, as contended by the learned Authorised Representative, the judicial pronouncements relied on by the assessee i.e. J.M. Financial Ltd (2014 (4) TMI 752 - ITAT MUMBAI), apply to the factual matrix of the case on hand and in this view of the matter, it cannot be said that the assessee was incurring expenditure to maintain and / or monitor its long term investments of ₹ 3,87,00,000 in its sister / associate concern M/s. Trichy Steel Rolling Mills P. Ltd. and ₹ 46,000 invested in the shares of Andhra Bank. Thus we delete the disallowance of ₹ 1,93,730 made by the Assessing Officer under Section 14A r.w. Rule 8D. - Decided in favour of assessee. Addition u/s.41(1) - difference in liability towards Karnataka Breweries & Distilleries Ltd. ('KBDL') - Held that:- It has been submitted by the assessee that the impugned addition of ₹ 5,87,817 can be made only if the liability claimed by the assessee is higher than the dues shown by the creditor viz. KBDL. In the case on ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer has not rejected the books of account maintained by the assessee in the year under consideration. The assessee is basically a landlord simpliciter as far as the JDA between the assessee and PEPL is concerned thus there is no requirement in law that the assessee ought to adopt the percentage completion method of accounting merely because PEPL, the developer in the JDA, in following the said method.In the light of the above facts, it would be incorrect to conclude that the assessee has earned any income out of the JDA in the period relevant to the impugned assessment year 2009-10. As decided in case of R.Gopinath (HUF) V CIT [2009 (7) TMI 1209 - ITAT CHENNAI] when an immovable property is held as stock-in- trade, the same is to be considered as sold only when the sale is conveyed by means of a registered sale deed and not before that. The learned CIT(A) has also expressed the same view in the impugned order in the case on hand and the said view, in our considered opinion, is in order Non-refundable deposit would par take the character of sale consideration only upon the ownership of the undivided interest in land being transferred by a sale deed and not before and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this order, learned CIT (Appeals) deleted the addition of ₹ 29,55,92,202 made in respect of the income of the Shantiniketan Project; deleted the addition made under Section 41(1) of the Act to the extent of ₹ 32,19,299; sustaining the remaining portion of ₹ 5,87,817 under Section 41(1) of the Act and also sustained the entire addition of ₹ 1,93,730 made under Section 14A of the Act. 3. Aggrieved by the order of the CIT (Appeals) - I, Bangalore for Assessment Year 2009-10 dt.21.12.2012, both the assessee and revenue have preferred appeals before this Tribunal to the extent the order of the learned CIT (Appeals) has been unfavourable to each of them. The cross appeals are both taken up together for disposal. ITA No.52/Bang/2013 - Assessee's appeal for A.Y. 2009-10 4. The assessee in its appeal has raised the following grounds :- 1. The order of the authorities below in so far as it is against the appellant, is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the appellant's case. 2. The authorities below are not justified in adding a sum of ₹ 1,93,730 under section 14A of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer in the order of assessment has observed that the assessee, in spite of having huge liabilities by way of Term Loans and Current Liabilities continued to invest in associate companies in the form of shares with the intention of earning interest income and that in order to carry on such investment activity it has directly or indirectly utilized the services of man power, office, etc to earn such income. The Assessing Officer invoking the provisions of section 14A of the Act r.w. Rule 8D(2)(iii) of the IT Rules disallowed an amount of ₹ 1,93,730. 6.2 On appeal, the assessee challenged the disallowance of ₹ 1,93,730 made by the Assessing Officer u/s. 14A r.w. Rule 8D(2)(iii) on three counts. Viz., (i) that the Assessing Officer has invoked section 14A of the Act in a manner contrary to the provisions of law; (ii) that the Assessing Officer has applied the provisions contained in Rule 8D mechanically and automatically, without proper application of mind; (iii) that the addition made is also excessive and unreasonable in the facts and circumstances of the case. The learned CIT (Appeals) held that the Assessing Officer had invoked the provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended by the learned Authorised Representative that these investments are long term investments, which form a part of the record before the IT Department and that no expenditure has been incurred to either maintain or monitor these investments. It is submitted that the assessee has earned exempt income of ₹ 18,400 only, out of the investment of ₹ 46,000 invested in the shares of Andhra Bank and that no dividend income has been earned out of the investment of ₹ 3.87 Crores made in its sister concern M/s. Trichy Steel Rolling Mills P. Ltd.. The learned Authorised Representative contends that it is not only excessive but also absurd that the assessee has had to suffer a disallowance of ₹ 1,93,730 as expenditure incurred on earning the exempt income of ₹ 18,400. 6.3.4 In this context, the learned Authorised Representative placed reliance upon the decision of the Hon'ble ITAT, Mumbai Bench in the case of J.M. Financial Ltd. V Addl. CIT in ITA No.4521/Mum/2012 dt.26.3.2014. The learned Authorised Representative submitted that in this order the Tribunal has held that where the investment is made in sister / associate concerns, it is so made for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by it to earn exempt income, the Assessing Officer has to verify the correctness of the assessee's claim having regard to the accounts of the assessee. In the case on hand, we find that the Assessing Officer has not given any cogent reason in the order of assessment for disbelieving the contention of the assessee that it has incurred no expenditure to earn the exempt income of ₹ 18,400 but has proceeded to apply the provisions of Rule 8D to arrive at the disallowance of ₹ 1,93,730 as the expenditure deemed to be incurred for earning exempt income. 6.5.2 Further, as contended by the learned Authorised Representative, the judicial pronouncements relied on by the assessee i.e. J.M. Financial Ltd (supra), apply to the factual matrix of the case on hand and in this view of the matter, it cannot be said that the assessee was incurring expenditure to maintain and / or monitor its long term investments of ₹ 3,87,00,000 in its sister / associate concern M/s. Trichy Steel Rolling Mills P. Ltd. and ₹ 46,000 invested in the shares of Andhra Bank. In view of the legal and factual circumstances of the case as discussed and for the reasons stated above, we delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the orders of the authorities below were factually indisputable. 7.5.1 We have heard the rival contentions and perused and carefully considered the material on record. It is not disputed that the assessee in its books of accounts has claimed that the liability due to KBDL is ₹ 3,65,92,256 whereas on examination of the books of account of KBDL by the Assessing Officer, it was found that the assessee was shown to be liable to pay KBDL ₹ 3,71,80,073. As there was no satisfactory explanation, the Assessing Officer brought to tax the difference of ₹ 5,87,817 as unexplained payment and cessation of liability under Section 41(1) of the Act and brought the same to tax in the assessee's hands. On appeal, during remand proceedings, the assessee submitted that the difference appearing in this account was offered to tax by KBDL in the year ended 31.3.2008. The learned CIT (Appeals), observing that in respect of the discrepancy of ₹ 5,87,817, no proof was produced by the assessee to establish that this amount was offered to tax by KBDL, sustained this addition as cessation of liability under Section 41(1) of the Act. 7.5.2 We have carefully perused the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng his own findings where he accepted that the capital gains will arise only in the assessment year 2005-06 since the transfer took place during the year on the basis of execution of JDA by the appellant company and further execution of Power of Attorney on 5.2.2005 and 1.3.2005 in favour of M/s. PEPL for transfer of stock for development and finally the CIT (Appeals) is directing the Assessing Officer to take necessary remedial action to tax the capital gains in the appellant's case in the year in which the stock is sold and transferred by the appellant company in accordance with the provisions of section 45(2) and also tax the business profits in the year in which flats / constructed area were sold on registration. 11. Grounds No. 1 to 3 : Income from 'Prestige Shantiniketan' Project. 11.1 The facts of the matter as emanate from the record are, briefly, as follows. The assessee entered into a Joint Development ('JDA') in respect of 94 acres 1.82 gutnas of land with Prestige Estate Projects Ltd. ('PEPL') by agreement dt.5.2.2005, in the period relevant to Assessment Year 2005-06 and the project was named 'Prestige Shantiniketan'. 11.2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from this project on Percentage Completion Method, it is difficult to accept the assessee's proposition that percentage completion method is not applicable to the assessee. The Assessing Officer was also of the view that once the stock of land is given for construction of the apartments, all such contracts would fall within the ambit of Percentage Completion Method for recognition of income and since PEPL, the developer, offers its income on the Percentage Completion Method, the same is also applicable to the assessee and it should offer its income on this basis. The Assessing Officer on the basis of advances collected from customers, on behalf of the assessee by PEPL and the non-refundable deposit paid by the PEPL to the assessee, arrived at a sale consideration of ₹ 260,09,86,890. Applying the Percentage Completion Method thereon, the Assessing Officer arrived at the Gross Income of ₹ 46,81,77,640 and after deducting cost of construction of ₹ 17,25,85,438 from the gross income, determined the income of the assessee at ₹ 29,55,29,202. 11.3.1 On appeal, the learned CIT (Appeals) in his order has upheld the basic contention of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o those immovable properties which are held as Capital Assets as provided under Section 2(47) of the Act and not to those held by way of stock-in-trade. In both paras 5.15 and 5.17 of the impugned order, the learned CIT(A) has held that since no stock (land/flats or apartments) are sold in the impugned Assessment Year 2009-10, no Capital Gains or Business Profits would arise for Assessment Year 2009-10 to the assessee in the case on hand. 11.3.6 In para 5.16 of the impugned order, the learned CIT(A) has concluded that in view of the fact that the Assessing Officer has neither rejected the books of account nor found any discrepancy in the same, the Assessing Officer's action is resorting to estimation of profits is not correct. The learned CIT(A) has also observed that the Assessing Officer has not rendered any finding of sale of land / flat, held as stock-in-trade, by the assessee in the impugned Assessment Year 2009-10 in order to warrant estimation of income by rejection of books of account. The learned CIT(A), in the impugned order, however directed the Assessing Officer to take necessary remedial action to tax the capital gains in the assessee's case in the year i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby permits the Second Party (PEPL) to enter the schedule 'D' property for development thereof in terms of this Development Agreement. ii. Clause 1.3 (Page 51 of Paper Book) specifies that such permission to enter upon the schedule 'D' property shall however not be construed as delivery of possession under section 53 A of the Transfer of Property Act read with section 2(47) (v) of the Income Tax Act, 1961. The legal possession of Schedule 'D' Party shall continue to vest in the First Party. The Second Party shall only be permitted to enter upon the Schedule 'D' Property by way of license to develop the same. iii. The JDA is a contract between the Assessee and PEPL and the covenants contained therein should be read understood in the manner it was agreed to between the parties. Further it is correct to give it a meaning which runs contrary to the understanding between the parties. iv. Keeping the above parameters in mind if one were to analyse the covenants agreed to and contained in clauses 1.1 1.3, it is clear that they should be read together it is clearly understood between the parties that the Assessee continues to be in legal poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to the Developer. 8.7 OBLIGATIONS OF THE ASSESSEE: i. Page 5, sub para IV of the preamble in the JDA (Page 44 of paper book) states that the Assessee has received possession of 14 acres 12 guntas of land from KIADB is yet to receive the absolute sale deed in its name. ii. Page 4, sub para III of the preamble in the JDA (page 43 of paper book) states that the Assessee is required to take conveyance of 10 acres of land from Vicon Ltd. iii. Page 4, sub para IV of the preamble in the JDA (page 44 of paper book) states that the Assessee is required to take conveyance of 7acres 9 guntas of land from Vicon Ltd. iv. Clause No.13(1) of the JDA (page 75 of paper book) stipulates that the Assessee shall complete the purchase of land from KIADB within 12 months from the date of the JDA (05/02/2005), perfect title to the same by obtaining a Sale deed for 14 acres 12 guntas of land in its favour from KIADB. The final sale deed from KIADB was obtained on 23/01/2006 the same is evidenced by the recital to this effect in the agreement dated 24/03/2011(in page 156 of the paper book). v. Clause No.13(2) of the JDA (page 76 of paper book) stipulates that the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enter into agreements for sale, lease of PEPL's share of the constructed area. iv. Clause 13.6 (page 76 of paper book) states that the Assessee has executed a separate POA, on 05/02/2005, other than the ones mentioned in Clause 13.4 13.5 authorising the PEPL to convey sale deeds, lease deeds etc in respect of PEPL's share of the constructed area that the said POA is kept in escrow in terms of Cl.13.9 of the JDA. v. Clause 13.9 of the JDA (page 77 of paper book) states that the POA mentioned in Clause 13.6 shall be kept in Escrow with Mr.Kusuma Muniraju, Advocate having his office at Eden Park, No.20, Vittal Mallya Road, Bangalore and that the said POA is available to PEPL to exercise its rights thereunder in proportion to the delivery of the Owner's Constructed Area to execute conveyances , lease deeds, mortgages for such undivided share in the Schedule 'D' Property corresponding to the delivery of the Owners Constructed Area ( eg. If 100 sft of super built area is delivered to the Assessee being 31.77% , PEPL will be entitled to convey the undivided share for 214.76 sft of super built area).That on completion of the construction of the Owners Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plete and whether for that phase there are independent title deeds. Further in the event of termination of the agreement the Original Title Deeds shall be returned to the Assessee. In the event of dispute the same shall be handed over to the forum which is presiding over the dispute. ii. The above covenant also demonstrates that ownership shall get transferred only upon the developer completing the development of the Owners share of the Constructed Area agreed upon not before that. iii. Further it is evident from the Agreement entered into dated 24/03/2011, between the Assessee PEPL that the Documents of title which is kept in Escrow is handed over by the Escrow to the Developer for the benefit of all owners only on 24/03/2011, which fact is evidenced in page 15 of the said agreement of 24/03/2011(paper book page no.168) under the head Documents of Title . 8.10 RECEIPT OF NON REFUNDABLE DEPOSIT: i. The assessing officer also mentions the fact that the Assessee is in receipt on non refundable deposit which is to be treated as part of the sale consideration received towards transfer of stock. ii. The conclusion drawn by the assessing officer that Non Refundable Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in such years in which it is so transferred. The sale of undivided interest in land has two components of income. The first is Income from Capital Gains which is to be worked out as per the provisions of sub section (2) of section 45 the other component being Income from Business, which is to be computed on the basis of the value attributed to the building in the office of the sub - registrar for purposes of stamp duty at the time of registration of the sale deed of an apartment. The Sale deed for an apartment will consist of two components namely Value of the undivided interest in land Value of building. The purchaser of the apartment will pay a composite price which will be split up into the above two components for purpose of registration. If one were to study the Sale deeds executed by PEPL transferring ownership of the apartment to the purchasers, one can find out the value per sft of land and the value per sft of building. Both these components are to be taxed in the assessment year relevant to the previous year in which the undivided interest in land is actually conveyed and to the limited extent of the land actually conveyed. 8.15 The Hon'ble Chennai Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is on account of booking of share, documentation etc. In case the share of the assessee has been determined and it has accrued, the income of the same has to be declared for tax purpose. This has not been done by the assessee company. It stated that the income would be declared when the project is completed. Presumably the assessee is following the project completion method for recognizing the income. This method of revenue recognition has been examined in detail in A.Y. 2005-06. There the assessing officer held that since the corresponding income is not declared for taxation, the corresponding expenses should not be booked as expenditure. The expenditure should be recognised as project expenditure incurred towards Prestige Shantiniketan and should be accounted to increase the value of Work in Progress. I find merit in the argument of the assessing officer in the assessment order for the A.Y. 2005-06 on 31/12/2007 . 8.18 The fact that the Department has all along been accepting the Assessee following the Completed Contract Method of Accounting offering its income to tax accordingly, the assessing officer is precluded from now taking a stand that the Assessee has to offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding of fact that the assessee had converted the lands held as Capital Assets into stock-in-trade and the same was held as stock-in-trade at the time of entering into that JDA on 5.2.2005 and that the point in time when the tax will arise in the year in which the stock-in-trade is sold. It is submitted that the co-ordinate bench has also observed that the Assessing Officer was aware of all these facts when he passed the original order of assessment for Assessment Year 2005-06 under Section 143(3) of the Act. 11.5.3 The learned Authorised Representative also contended that it was actually convenient for the assessee to sail with Revenue's contention that the lands were never converted into stock-in-trade but was all along held as capital assets and that the ownership stood transferred to PEPL on 5.2.2005. The learned Authorised Representative contends that in these circumstances, in view of and accordance with the decisions of the Hon'ble High Court of Karnataka in the case of CIT V T.K. Dayalu 202 Taxman 531 and of the Hon'ble Bombay High Court in Chaturbhuj Dwarkadas Kapadia (260 ITR 491) (2001), revenue would be precluded from taxing the income from the said transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law that the assessee ought to adopt the percentage completion method of accounting merely because PEPL, the developer in the JDA, in following the said method. In the light of the above facts, it would be incorrect to conclude that the assessee has earned any income out of the JDA in the period relevant to the impugned assessment year 2009-10. 11.6.2 On a careful perusal, we find that the judicial pronouncement rendered by the Chennai Bench of the ITAT in the case of R.Gopinath (HUF) V CIT in ITA Nos.29 30/Mad/2008 dt.24.7.2009 and relied on by the assessee, does apply to the facts of the case ITA Nos.52 125/Bang/2013 S.P. No.148/Bang/2014 of the assessee in the case on hand. We concur with the above said decision of the Chennai Bench of the ITAT (supra) in holding that when an immovable property is held as stock-in- trade, the same is to be considered as sold only when the sale is conveyed by means of a registered sale deed and not before that. The learned CIT(A) has also expressed the same view in the impugned order in the case on hand and the said view, in our considered opinion, is in order. No interference is therefore called for with the finding of the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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