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Commissioner of Income Tax-XI Versus M/s. DLF Commercial Project Corporation

Transfer of development rights - whether could be treated as sale consideration in the circumstances of the case? - Held that:- In the instant case, since no sale occurred, no income can be said to have accrued to the assessee.The assessee's submission that sale is deemed to have taken place when proper conveyance is executed, in the circumstances is sound. In the absence of any sale, the revenue’s attempt to bring to tax the advances received by the assessee must also fail, given that such adva .....

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dvances received cannot be classified as income.This Court affirms the ITAT’s ruling on the first question of law and holds that the AO had erroneously added the amounts to the assessee’s income on account of sale of development rights for AY 2007-08 and AY 2008-09. - Decided against revenue.

Non-deduction of TDS on the payments made on reimbursement of service charges - Disalllowance u/s 40(a)(ia) - Held that:- in the instant case, it is undisputed that M/s DLF Land Ltd. had deducted .....

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imbursement of expenses, other than what is defined as "income". The law thus obliges only amounts which fulfil the character of "income" to be subject to TDS in such cases; for other payments towards expenses, the deduction to those entitled (to be made by the payeee) the obligation to carry out TDS is upon the recipient or payee of the amounts. See Commissioner of Income Tax-III v. Gujarat Narmada Valley Fertilizers Co. Ltd. (2014 (4) TMI 235 - GUJARAT HIGH COURT ) - Decided against revenue. - .....

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the same assessee, preferred by the Revenue against the orders of the Income Tax Appellate Tribunal ( ITAT ) dated 09.09.2011 and 22.02.2013, for AY 2007-08 (ITA No. 627 of 2012) and AY 2008-09 (ITA No. 507 of 2013) respectively. The common question of law involved in both the appeals is as follows: Whether the amount received by the assessee towards transfer of development rights could be treated as sale consideration in the circumstances of the case? 2. An additional question that arises in IT .....

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Y 2007-08, the assessee filed its return reporting an income of ₹ 1,67,95,360. Scrutiny assessment notice Section 143(2) of the Income Tax Act, 1961 (hereafter referred to as the Act ) was issued on 22.07.08. During assessment proceedings, the Assessing Officer ( AO ) observed that the assessee had in its Balance Sheet shown stock of ₹ 34,55,60,19,667/- and Current Liabilities as ₹ 34,86,09,08,730/-, whereas in the Cash Flow Statement,it had shown stock of ₹ 34,55,54,73,6 .....

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pursuance of the agreement, it had also advanced sums to certain Land Owning Companies (LOCs) which were engaged in acquiring licenses from relevant State authorities as well as land from various land-holders. The AO observed that M/s DLF Ltd., for financial year ending 31.03.2007, treated the advance given to the assessee as stock . Similarly, CBDL had also shown the same treatment in the annual accounts under the head money and advance - advance for land purchased . Based on this, the AO soug .....

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h Flow Statement as compared to the Balance Sheet. After working out the difference between Current Liabilities and Stock, an addition of ₹ 30,37,15,779/- was made to the income of the assessee. 4. Similarly, for AY 2008-09, the AO added ₹ 15,70,196/- on account of undisclosed sale of development rights. Further, the AO added a sum of ₹ 19,09,83,236/- under Section 40(a)(ia) of the Act for non-deduction of TDS on reimbursement expenditure paid to M/s DLF Land Ltd., though the l .....

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ll, the CIT(A) ruled in favour of the assessee and deleted this amount. Thus, the appeals were decided in favour of the assessee for both the assessment years. The Revenue s appeals in both the cases were dismissed by the ITAT, which upheld the findings of CIT(A). Aggrieved, the Revenue is in appeal before this Court. Submissions on Behalf of Revenue: 6. Mr. N.P. Sahni, learned counsel for the Revenue, assails the decisions of the ITAT in respect of the first issue on the ground that the stock a .....

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ement to sell is executed. The AO had rightly concluded that the assessee had not declared the net receipts of sale of development rights in its income-tax return. He submits that by agreement to sell dated 02.08.2006, the assessee agreed to assign or transfer the development rights to M/s DLF Ltd. or its affiliate and the MoU dated 06.12.2006 entered into with CBDL established that the development rights purchased by the assessee till 06.12.2006 were sold to M/s DLF Ltd. The payment received by .....

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ds M/s DLF Land Ltd. s service charge does not suffice. Therefore, the CIT(A) and ITAT were wrong in deleting the addition of ₹ 19,09,83,236/- made by the AO. Submissions on Behalf of Assessee: 9. Mr. Ajay Vohra, learned senior counsel appearing on behalf of the assessee supports the findings of the CIT(A) and ITAT and submits that the AO erroneously added the amounts on account of income arising from sale of development rights in the two assessment years in question. 10. Mr.Vohra contends .....

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ependent on various terms and conditions of such agreements. These agreements contain clauses which give the option to parties to terminate the arrangement if certain conditions are not fulfilled. It was pointed out by the assessee that it mainly received these amounts as advance as per its regular system of accounting and that no income has actually accrued or arisen to the assessee from such agreements. The assessee follows the mercantile system of accounting. The assessee submits that in term .....

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cannot be treated as income in the hands of the assessee. 11. Mr.Vohra further submits that deletion of amount paid to M/s DLF Land Ltd. from the income of the assessee under Section 40(a)(ia) of the Act is justified as the payment was made for the purposes of reimbursement of expenses handled by M/s DLF Land Ltd. on behalf of the assessee, and the assessee had duly deducted TDS on the service charges paid to M/s DLF Land Ltd. by the assessee. The assessee entered into an agreement dated 01.04.2 .....

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he said amount. Since the reimbursement of expenses was not taxable, learned senior counsel submits that the assessee was not required to deduct TDS on the entire amount.Reliance is placed on this Court s rulings in CIT v. Industrial Engineering Projects Pvt. Ltd., 202 ITR 1014 (Delhi) and CIT v. Fortis Health Care Ltd., [2009] 181 Taxman 257 and the Supreme Court s decision in Hindustan Coca Cola Beverage Pvt. Ltd. v. CIT, [2007] 293 ITR 226 (SC). Analysis and Conclusions: Question No. 1 12. Th .....

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l to support a finding of sale of development rights by the assessee to aforesaid two entities. The ITAT observed as follows: …Undeniably, as observed by the ld. CIT(A), the AO has not been able to bring anything on record to show that during the year, the assessee acquired any development rights. Now, in the absence of acquisition of development rights, as to how any development rights could have been transferred or assigned to M/s. DLF is beyond comprehension. The observations/findings .....

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during the year, with the LOCs. There being no such development rights in existence, there arises no question of any such rights being transferred. Moreover, the AO also did not bring on record any details apropos the rights allegedly transferred, the LOCs concerned, the details of licence obtained from the concerned authorities with regard to the development rights. Further, the discrepancy between the figures with respect to current liabilities and stock appearing in the Balance Sheet and Cash .....

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. In such a situation, it is inconceivable as to how the assessee could have acquired such rights from the LOCs, let alone transferring them to M/s DLF Ltd. and CBDL. This Court does not find any basis provided by the Revenue to interfere with ITAT s finding on this aspect. 14. The revenue places reliance on the assessee s accounting policy - mentioned in Schedule 7 of the auditor s report for AY 2007-08 - which states that sale of developed plots is recognised in the financial year in which the .....

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to either M/s DLF Ltd. or CBDL, no income from such sale can be brought to tax by the Revenue. 15. The assessee follows the accrual system of accounting. The accrual system of accounting takes into consideration all gains and losses pertaining to the accounting period for which income is being ascertained, irrespective of whether income has been actually received or whether expenses were paid out. Similarly, every receipt is not treated as an income of the assessee. The assessee s accounting pol .....

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in the circumstances is sound. In the absence of any sale, the revenue s attempt to bring to tax the advances received by the assessee must also fail, given that such advances were not towards any income that the assessee was entitled to receive in the two assessment years. Indeed, the Business Development Agreement dated 02.08.2006 between M/s DLF Ltd. and the assessee and the Memorandum of Understanding dated 06.12.2006 between M/s DLF Ltd., the assessee and CBDL indicate that the advances rec .....

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t of ₹ 19,69,83,236/- as deduction for the reason that the assessee deducted TDS only on the service charges paid by it to M/s DLF Land Ltd. According to the AO, TDS ought to have been deducted under the amount paid by the assessee towards reimbursement expenses to M/s DLF Land Ltd. This Court holds that the CIT(A) and the ITAT rightly set aside the AO s order, ruling that the assessee was not required to deduct TDS on reimbursement expenses paid to M/s DLF Land Ltd. 18. The assessee has c .....

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ed by the agent that would be liable to tax. More recently, this Court in Fortis Health Care Ltd. (supra) has also held that amount received towards reimbursement of expenses is not taxable under the Act. 19. In the instant case, it is undisputed that M/s DLF Land Ltd. had deducted TDS on the payments made by it under various heads on behalf of the assessee. Further, it is also not disputed that the assessee deducted TDS on the service charge paid by it to M/s DLF Land Ltd. on the reimbursement .....

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