TMI Blog2015 (5) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of assesse. Disallowance of expenditure incurred on staff welfare and others - DRP allowed the claim - Held that:- Similar issue was involved in the case of the assessee for the assessment year 2008-09 wherein held that the department cannot disallow the expenditure merely because there is a clerical error in the bills produced by the assessee towards the expenditure.It was held that if the expenditure is not claimed by M/s. Maytas Properties Ltd., it is fair to allow deduction towards business expenditure in the hands of the assessee. Accordingly, the issue was restored by the Tribunal to the file of the Assessing Officer to verify whether the same expenditure was claimed by M/s. Maytas Properties P. Ltd. and if it is found, on such verification that there is no such double claim, the Assessing Officer was directed by the Tribunal to allow the claim of the assessee of such expenditure - Respectfully following the said decision of the coordinate bench of this Tribunal in assessee’s own case,we uphold the impugned order of the Dispute Resolution Panel - Decided against revenue. Disallowance of expenditure for which payments were made in cash - DRP directing the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. Respectfully following the said decision of the Tribunal in assessee’s own case for assessment year 2008-09, relevant portion of which is extracted hereinabove, we uphold the impugned order of the DRP on this aspect of the matter. As regards the second aspect of the issue relating to the change in the method of recognition of income adopted by the assessee company, In the present case, as a result of extra-ordinary events witnessed by the Satyam group of companies to which the assessee company belonged in the month of January, 2009, there was uncertainty with regard to the completion of project by the assessee company and delivery of units booked. Keeping in view this uncertainty, some of the agreement holders tendered applications for cancellation of the units booked and demanded refund of the advances paid. Some of the agreement holders also filed cases against the assessee company for cancellation the agreements and refund of the amounts paid by them. The ultimate collection from these agreement holders thus became uncertain and the assessee company, in our opinion, rightly decided to postpone the revenue recognition to the extent of such uncertainty, by adopting the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer was directed by the Tribunal that if it is found on such verification that tax has already been paid by the payee, on the interest income, the disallowance under S.40(a)(ia) need not be made. As the learned DRP vide its impugned order has remitted this matter involved in assessment year 2009-10 to the file of the Assessing Officer for deciding the same as per the same directions as given by the Tribunal in assessee’s own case for assessment year 2008-09, we find no justifiable reason to interfere with the order of the DRP on this issue. - Decided against revenue. - ITA No.1644/Hyd/2014 - - - Dated:- 22-5-2015 - SHRI P.M.JAGTAP AND AND SHRI SAKTIJIT DEY, JJ. For The Appellant : Shri D.Sudhakar Rao CIT-DR For The Respondent : Shri S.Rama Rao ORDER Per P.M.Jagtap, Accountant Member : This appeal is preferred by the revenue against the order dated 30.7.2014 passed by the Dispute Resolution Panel(DRP) under S.144C(5) read with S.144C(8) of the Income Tax Act,1961. 2. In ground No.1, Revenue has challenged the action of the learned Dispute Resolution Panel in directing the ing Officer to delete the disallowance of ₹ 8,79,77,255 made on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee s own case for assessment year 2008-09 (supra), wherein it was held by the Tribunal relying on its earlier decision in the case of Vijay Electricals Ltd. V/s. Addl. CIT (2013)36.taxmann.com.396(Hyd-Trib)), that the amount representing investment made by the assessee company in share capital of its subsidiary outside India was not in the nature of international transaction, as referred to in S.92B of the Act, and therefore, Transfer Pricing provisions were not applicable to such transactions. Respectfully following the said decision of the coordinate bench of this Tribunal in assessee s own case for the immediately preceding year, i.e. Assessment year 2008-09, we uphold the impugned order of the Dispute Resolution Panel directing the Assessing Officer not to make any addition on account of transfer pricing adjustment in respect of the transactions of the assessee company with its AE, involving payment of share application money. Ground No.1 of Revenue s appeal is accordingly dismissed. 5. In ground no.2, Revenue has challenged the action of the DRP in directing the Assessing Officer to allow the expenditure incurred by the assessee on staff welfare and others amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2008-09. Ground No.2 of the Revenue s appeal is accordingly dismissed. 8. In ground no.3, Revenue has challenged the action of the DRP in directing the Assessing Officer to restrict the disallowance of expenditure of ₹ 1,03,32,278 only to the extent of 10% of the expenditure for which payments were made in cash. 9. As noticed by the Assessing Officer from the report of the Special Auditor, the assessee company had made payment of certain expenditure in excess of ₹ 20,000 otherwise than by crossed cheque or bank draft. As these payments aggregating to ₹ 1,03,32,278 were clearly hit by the provisions of S.40A(3), the assessee was called upon by the Assessing Officer to offer its explanation in the mater. The explanation offered by the assessee in this matter, however, was not found acceptable by the Assessing Officer. Accordingly, he proposed to disallow the expenditure of ₹ 1,03,32,278 by invoking the provisions of S.40A(3). He also observed that the said expenditure was not supported by any documentary evidence and the same was, therefore, liable to be disallowed alternatively as per the provisions of S.37(1). On the objection raised by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, worked out the interest which the assessee company ought to have charged to its subsidiaries on such advances on notional basis at ₹ 4,08,33,638 and disallowance to that extent was proposed to be made by him out of the interest expenditure claimed by the assessee. It was also noticed by the Assessing Officer that the assessee has given loans and advances to seven other companies, and no interest thereon was charged. He therefore, worked out the interest chargeable on the said loans and advances at the rate of 10.5% at ₹ 3,61,91,988 and further disallowance out of interest expenditure claimed by the assessee to that extent was proposed to be made by him. Accordingly, a total disallowance of ₹ 7,70,33,626 was proposed by the Assessing Officer out of interest expenditure claimed by the assessee. 13. When objection was raised by the assessee before the DRP disputing the disallowance proposed to be made by the Assessing Officer out of the interest expenditure, the DRP found that a similar disallowance made out of interest in assessee s own case for assessment year 2008-09 was deleted by the Tribunal vide its order dated 6.6.2014 (supra) involving similar fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is incumbent upon AO to establish that there is a nexus between the amount diverted and interest incurred by the assessee. Even if assessee has diverted interest bearing funds to the sister concern, then it is business decision taken by e assessee to make such an investment and even if it has resulted no income to the assessee, notional interest cannot be disallowed on the reason that assessee should have d its non-interest bearing funds for the purpose of business instead of using borrowed funds. The AO cannot sit in the arm chair of businessman and decide what the assessee has to do to maximize its profit. In our opinion, the judgment relied upon by the learned AR of the assessee in the case of A Builders (supra) and also coordinate bench decision in the case of SSPDL Ltd. Vs. DCIT, 24 ITR(Trib.)(Hyd.) 290 also support the case of the assessee. Accordingly, this ground is allowed. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of assessment year 2008-09, we find no infirmity in the impugned order of the learned Dispute Resolution Panel in deleting the disallowance proposed by the Assessing Officer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration, as per the same directions as given by the Tribunal in assessment year 2008-09. The same is therefore, upheld on this issue, dismissing ground No.5 of the Revenue s appeal. 19. In ground no.6, the Revenue has challenged the action of the DRP in directing the Assessing Officer to allow expenditure of ₹ 6,67,03,479 incurred by the assessee on payments made to M/s. Chourasia Construction Co. 20. During the year under consideration, the expenditure incurred by the assessee on account of payment made to M/s. Chourasia Construction for construction work amounting to ₹ 6,67,03,479 was claimed as deduction. According to the Assessing Officer, since the entire construction work was entrusted by the assessee company to M/s. Maytas Infra P. Ltd., there was no requirement for entrusting any construction work to M/s. Chourasia Construction. He therefore, held that the payment claimed to be made by the assessee to M/s. Chourasia Construction was not a genuine payment and the same did not represent the expenditure wholly and exclusively incurred by the assessee company for the purpose of its business. Accordingly, the amount of ₹ 6,67,03,479 claimed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and it should not be a personal expenditure. 3. Expenditure has been laid out for wholly and exclusively for the purpose of business or profession. In the present case, assessee has fulfilled requirement of the provisions of section 37 of the IT Act. The claim of payment to subcontractor by the assessee is not disqualified for deduction under the Act. Now coming to the next question as to whether the expenditure is capital or not, we are of the opinion that the expenditure is not a capital expenditure since the assessee did not acquire any capital asset and the payment is also not in the nature of personal expenditure and not brought any personal benefit to any employees or contractor of the assessee company. The expenditure incurred wholly and exclusively for the purpose of business. It was held in the case of Sassoon J. David, 118 ITR 261 (SC) by the Apex Court as under: In the instant case it is necessary to bear in mind that the company was neither dissolved nor was its business undertaking sold. It continued to exist as a juristic entity even after the transfer of its shares. On account of such transfer of shares, the transferees no doubt gained control of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company had undertaken to pay as assets of the company became reduced to that extent. It cannot, therefore, be said that T were in any way bene d financially by reason of the reduction in the consideration payable by them for the shares. The High Court was, therefore, in error in holding that the amount involved in the case did not satisfy the test applicable to the expenditure allowable under s. 10(2). The expression wholly and exclusively used in s. 10(2)(xv) does not mean necessarily . Ordinarily it is for the e to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and it s incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by e expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 10(2)(xv) if it satisfies otherwise the tests laid down by law. In the instant case, it was the case of the company that many of the employees were old and superfluou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2008-09 and 2009-10 respectively. As a result of increase in the budgeted cost of construction, the percentage of work completion was reduced in assessment year 2008-09 and as well as in the year under consideration i.e. 2009-10. Consequently, there was reversal of revenue. The previous year relevant to assessment year 2009-10 also witnessed some extraordinary events creating uncertainty in the progress of work of the project undertaken by the assessee company, as a result of which, some of the agreement holders sought cancellation of the booking of flats and bungalows. Some agreement holders also filed cases against the assessee company. Keeping in view these uncertainties, the assessee company changed its method of recognition of income and adopted registration of agreements for sale or handing over of the possession of the flats and bungalows, as the basis of recognition of income as against execution of agreements for sale adopted in the earlier years. The revenue recognised in the earlier years on the basis of execution of agreements for sale was also reversed by the assessee company in the year under consideration on the basis of cancellation of agreements for sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as reversal of income made by it on the basis of cancellation/legal cases and computed the income of the assessee for assessment year 2009-10 on the basis of percentage of completion method at ₹ 228.17 crores (as against negative income of ₹ 41.61 cores), on the basis of budgeted cost of construction as estimated originally at ₹ 437.33 crores. 27. The income computed by the Assessing Officer at ₹ 228.17 crores as against its declared income at a negative figure of ₹ 41.67 crores was challenged by the assessee by way of an objection raised before the Dispute Resolution Panel. The learned DRP found that a similar issue involved in assessee s own case was already decided by the Tribunal in assessment year 2008-09 vide its order dated 6.6.2014 (supra), wherein the method of accounting followed by the assessee and income recognised by following the said method was accepted by the Tribunal. Accordingly, following the said order of the Tribunal in assessee s own case for assessment year 2008-09, the learned DRP directed the Assessing Officer to accept the income, as recognized by the assessee for assessment year 2009-10. 28. We have heard the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee entered into, revenue authorities cannot disturb the same. AO cannot substitute the assessment to say that assessee has postponed the tax liability. There is no ic deviation in the method of accounting followed by the assessee regarding recognition of income. Being so, the AO cannot dispute the profit of the assessee by observing there is a flaw in the method followed by the assessee. Further, merely because assessee was following mercantile system of accounting, it could not be held that income had accrued to it as estimated by AO. Earning of the income, whether actual or notional, has to be seen from the viewpoint of a prudent assessee. If in given facts and circumstances the assessee decides to change the budget in order to safeguard the business, it cannot be said that it has acted in a manner in which no reasonable person can act. The guidance note accrual of income on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicate. The assessee neither received substantial consideration or assets to be sold are ready for handing over the possession to the concerned parties so as to transfer the title in the property. Till such time, it cannot be said that the parties involved in are ready to perform the contract. In the t case, neither possession of the property has been given to the ultimate buyer or the assessee has received any substantial consideration. When the property is to be sold is not readily available or constructed, the assessee cannot recognise income with certainty. The agreement entered into by the assessee herein is only for sale of piece of property and sale will take place only after completion of construction and after assessee's share of property is identified. The proposed sale agreement cannot be put into action due various litigations pending with various courts. Nobody can transfer title in a property when the property is not in existence. More so, when there is litigation pending on the same property and no profit can be anticipated when the agreement itself is subject matter of litigation. It is not possible to bring the same to tax. We have to see all surrounding circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer of Property Act does not provide the conditions for transfer but it provides protection to the transferee any immovable property by a written contract, the terms of which constitute the transfer and can be ascertained with reasonable certainty and the transferee as part performance of the contract has taken the possession of the property and has performed or willing to perform his part of contract, then even the said contract though required to be registered has not been registered and the transfer has not been completed in the manner prescribed therefore by law, the transferor is barred from enforcing against the transferee any right in respect of the property other than the right expressly provided by the terms of the contract. Under the IT Act, 1961 by inserting cls. (v) and (vi) of s. 2(47), the definition of the term transfer includes the transaction which fulfils the conditions provided under s. 53A of Transfer of Property Act. Therefore, s. 53A of the IT Act, 1961 (sic-Transfer of Property Act) is borrowed only with respect to the transfer of capital asset as provided under s. 2(47) of the IT Act, 1961 and the same is not applicable in other cases which do not fal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded over for carrying out the construction work by the developer and there is no other document except th development agreement which transfers the title of the property to the developer. In the absence of the transfer of the title of the property and any consideration at the time of development agreement, the handing over of the possession was merely a temporary measure for carrying out the construction work by the developer and the exclusive possession of the property in legal sense remains with the assessee which was finally handed over at the time of execution of the sale deed of the constructed flats by the assessee. One cannot presume any intention in executing the documents between the parties other than what was stated or can be inferred reasonably from the documents itself. A regard must be given to the words used in the documents. The nature of the transaction between the parties by way of development agreement cannot be said to be a sale of immovable property which is stock-in- trade or otherwise transfer as provided in the Transfer of Property Act. We agree with the contentions of the learned Authorized Representative of the assessee that the meaning of the words, othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, then there is no question of transfer of the entire land to the developer. In view of the above discussion, we hold that the orders of the lower authorities, qua this issue are not sustainable the facts as well as on law. We set aside the orders of the lower authorities, qua this issue and direct the AO to tax the capital gain arising from the conversion of the land and building into stock-in-trade proportionately into the previous years in which the constructed property was sold by the assessee or retained for self-use and corresponding business income was offered. (b) B.L. Subbaraya vs. DCIT, 9 SOT 297 (Bang) wherein the Bangalore Bench of the Tribunal held as under: 8. The fact which is undisputed is that the entire settlement is still a subject-matter of dispute being sub judice and there is no finality attained even during the year under consideration. This is clear from the following facts. Subsequent to the deed of settlement between the assessee and Smt. Sundari Ramachandran on 9th Aug., 1997, the disputes arose on its implementation. The assessee filed a company petition against M/s Electronics Controls Power Systems (P) Ltd., under s. 433 of the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised, but the project could not be completed. Therefore, at the cost of this hardship no interest was paid by the owner to the assessee company on its deposit at the rate of 12 per cent per annum of the same amount. It is undisputed fact that the assessee had paid the amount ₹ 99.90 lakhs as on 31st March., 2003, but no interest was paid to the assessee because the project was legally not feasible and due to legal restriction the whole amount invested might not have been realized in the said project. Accordingly, the owner did not make any payment to the assessee. Under facts and circumstances, the assessee cannot be subjected to be taxed on notional income. There is nothing on record, to suggest that any such interest income was materialized. The assessee has pointed out that because of non-availability of FSI on the said plot of land for which the assessee had entered into development agreement with M/s Arora Builders (Sukhmani Construction), the assessee company could not develop the said property in view of the statutory restrictions and, therefore, the whole project has become unviable to continue. Hence, no interest had accrued to the assessee in the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nably certain that ultimate collection will be made. D) Non-recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of accounting, when the same is in accordance with AS-I notified by the Government E) It is one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. F) The provisions of section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that 'Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies'. In the name of compliance with section 145(1), it cannot be open to anyone to force ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has contended that this issue has arisen for the first time in year under consideration, i.e. assessment year 2009-10, although the learned counsel for the assessee has not disputed this position, he has contended that the ratio of the decision of the Tribunal rendered for assessment year 2008-09 on the first aspect is equally applicable to the second aspect, as both the methods followed by the assessee company are based on prudential norm of recognition of revenue and the same are duly supported by the Accounting Standards issued by the Institute of Chartered Accountants of India(ICAI). The learned Departmental Representative, however, has not agreed with this contention of tedhe learned counsel for the assessee and proceed to make submissions to support the view as taken by the Assessing Officer initially in the draft assessment order while rejecting the change adopted by the assessee company to recognise the income for assessment year 2009-10. 30. The Learned Departmental Representative has submitted that the assessee company having entered into agreements for sale with the concerned buyers of the flats and bungalows in the project and having received substantial amounts from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly justified in changing the method of recognition of revenue as well as reversing the revenue recognized earlier on the basis of execution of agreement for sale, which were sought to be cancelled by some of the agreement holders during the year under consideration. He has contended that such reversal of income in any case cannot be construed as a loss to the assessee company, as there is bound to be a corresponding increase in the closing work in progress, since when the sale is cancelled, the cost of such sale is taken to the work in progress. 32. After considering the rival submissions and perusing the relevant material on records, we find that in so far as the first aspect of the issue involved in ground no.7 is concerned, relating to the estimation of budgeted cost for the purpose of determining percentage of completion of project, the same is squarely covered by the decision of the Tribunal in assessee s own case for assessment year 2008-09, wherein it was held that the percentage of completion is required to be worked out on the basis of budgeted cost of construction, as revised from time to time, depending on the facts of the case. Respectfully following the said decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides to change the budget in order to safeguard the business, it cannot be said that it has acted in a manner in which no reasonable person can act. The guidance note on accrual of income on accounting issued by the ICAI lays down that where the ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. In terms of the guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made. Nonrecognition of income on the ground that the income had not really accrued is legally correct under the mercantile system of accounting, when the same is in accordance with AS-I notified by the Government. It is one of the fundamental principles of accounting that, as a measur of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred. The provisions of section 145(1) are subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement holders is also based on prudential norms of revenue recognition and the same is supported by Accounting Standard 9, which clearly states that the key criterion for determining when to recognize the revenue from a transaction involving sale is that the seller has transferred the property in the goods to the buyer for a consideration. It is clarified that the transfer of property in goods results in or connotes the transfer of significant risks and rewards of ownership to the buyers. Further, there may be situations, where transfer of property in fact does not coincide with the transfer of significant risks and rewards of ownership. Cases may arise where delivery has been delayed due to the fault of the seller and the goods are at the risk of the parties at default. 36. As per AS-9, recognition of revenue requires that revenue is measurable and that at the time of sale, it would not be unreasonable to expect ultimate collection. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, Revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed by the assessee company. It is pertinent to note here that the AP State Consumer Dispute Redressal Commission, Hyderabad (vide its order at pages 38 to 55 of the paper book) as well as National Consumer Disputes Redressal Commission, New Delhi (vide order at pages 56 to 87 of the assessee s paper-book) subsequently allowed the claim of the agreement holders seeking cancellation of the agreements for sale and also directed the assessee company to refund the amounts paid by them along with interest, and even the SLP filed by the assessee against the order of the National Consumer Dispute Redressal Commission was dismissed by the Hon ble Supreme Court. These subsequent events clearly show that there was an uncertainty in assessing the ultimate collection and revenue recognition was rightly postponed by the assessee company to the extent of such uncertainty involved by changing the method of recognition of income as well as providing for reversal of revenue already recognised earlier on the basis of cancellations/legal cases. 38. As such, considering all the facts of the case, we are of the view that the learned DRP was fully justified in directing the Assessing Officer to acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T V/s. S.K.Tekriwal (ITA No.183 of l2012 dated 10.12.2012) wherein it was held that the provisions of S.40(a)(ia) are applicable for non-deduction of tax and not for short deduction of tax, and no disallowance under the said provision could be made in a case where there is only a short deduction of tax at source. Respectfully following the said decision of the Hon'ble Calcutta High Court in the case of S.K.Tekriwal (supra), we uphold the impugned order of the learned DRP directing the Assessing Officer not to make disallowance on this issue under S.40(a)(ia). Additional ground No.2 of the Revenue s appeal is accordingly dismissed. 42. As regards the issue involved in additional ground No3 of the Revenue s appeal relating to disallowance of ₹ 6,17,27,356 proposed to be made by the Assessing Officer under S.40(a)(ia) for the failure of the assessee to deduct tax at source from the payment of interest made to MIL ICD, as required under S.194C of the Act, it is observed that a similar issue was involved in assessee s own case for assessment year 2008-09 and the Tribunal vide its order dated 6.6.2014 (supra), restored this matter to the file of the Assessing Officer with a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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