TMI Blog2013 (11) TMI 1647X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of finance charges - Held that:- As per the provisions of S.40(ba) of the Income-tax Act, any payment by a joint venture to member-constituent under the head interest, salary, bonus, commission and remuneration is not allowable as deduction. Being so, the learned Authorised Representative is not able to controvert the findings of the CIT(A) with regard to applicability of provisions of S.40(ba) of the Act to the facts of the present case. Since the assessee itself has not availed the loan, and it is the constituent of the assessee’s JV which availed the loan, assessee is not eligible for deduction in respect of interest on such loan, even if it was paid by the assessee directly to the AP Statee Finance Corporation. We therefore, find no infirmity in the impugned order of the CIT(A) on this issue. We accordingly uphold the order of the CIT(A), and reject the grounds of the assessee on this issue. Disallowance of direct and indirect expenditure - Held that:- Considering the quantum and nature of expenditure claimed, which is not verifiable, we agree with the CIT(A) that certain element of inflation and personal nature of expenditure cannot be ruled out. Consequently, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloping industrial park and letting out the same, income from letting out is assessable under the head ’business’. Hence, the income derived from such letting out should be considered as income from business income only, and not otherwise, as envisaged in S.80IA(4)(iv) of the Act. Accordingly, we set aside the impugned order of the CIT(A) on this issue and direct the Assessing Officer to re-examine the claim of the assessee for relief under S.80IA(4)(iv) of the Act, and allow the same, if the assessee is otherwise eligible for the same. He shall of course, re-decide this issue in accordance with law and after giving reasonable opportunity of hearing to the assessee. The grounds of the assessee on this aspect are treated as allowed. Addition u/s 14A - Held that:- While the Assessing Officer has disallowed only part of the finance charges claimed, in terms of S.14A of the Act, as attributable to the income claimed by the assessee as exempt, the CIT(A) observing that the assessee has diverted its entire borrowed funds to the group entities of the assessee, and not utilised the same in its own business activities. This finding of the CIT(A) could not be controverted by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Facts relating to this issue are that assessee has claimed deduction under S.80IB of the Act for the assessment years 2005-06 to 2008-09. The Assessing Officer observed that the assessee has not furnished the requisite information with regard to fulfilment of conditions laid down under S.80IB and also not furnished the certificate in prescribed form, viz. Form No.10CCB for claiming the deduction under S.80IB. The Assessing Officer further observed that the assessee joint venture is not doing any housing project, and on the contrary, the housing project was carried in the name and style of Janapriya Utopia which was promoted by Shri T.K.Purushotam Reddy, M/s. Engineers Reddy Homes Private Limited represented by Shri K.Kranthi Reddy and M/s. Janapriya Engineers Syndicate represented by Shri K.Ravinder Reddy. The Assessing Officer, after examining the sale deeds seized from the office premises of the assessee during the search observed on the basis of seized material, marked as A/JES/PO-4/1 , and also information gathered from the Municipal Commissioner, Rajendranagar Municipality, that the assessee is not entitled for deduction under S.80IB of the Act for these assessment years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially completed project. 8. On the other hand, the learned Departmental Representative placed strong reliance on the orders of the lower authorities. 9. We have heard both sides and perused the material on record. In this case, the plan was approved on 30.7.2003 for construction of residential flats in Survey Nos.2, 193A, 193AA, 194A, 194AA, 195/1, 195/2, 196, 197, 198A, 198AA, 203 and 207, situated at Hyderguda Village, Rajendranagar Mandal, Ranga Reddy District, belonging to Shri K.Purushotam Reddy, Engineer Reddy Homes P. Ltd. represented by Shri K.Kranthikiran Reddy, and M/s. Jana Priya Engineers Syndicate represented by Shri K.Ravinder Reddy. It is further evident from the record that HUDA, vide letter No.2332/PIV/HYDA/2002 dated 31.1.2003 has communicated technical approval for the project. Further, Municipal Commissioner, Rajendranagar Municipality approved the lay out plan vide No.G/270/MCR/976/2002-03 dated 30.7.2003. Being so, the assessee company, a joint venture, which came into existence only on 29.3.2004 cannot be said to have got the requisite approvals from the concerned authorities in its name. Further, the total number of residential units to be built as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to disallowance of finance charges. The Assessing Officer observed that the assessee has shown a liability of ₹ 4.18 crores in the name of Engineer Reddy Homes P. Ltd. and ₹ 7.13 crores as advance from customers. On examination of the accounts of M/s. Reddy Homes Ltd., it was noticed that no interest was paid by the assessee to that company. However, it was observed that the interest amount paid by the assessee was to AP State Finance Corporation on the loans availed by that company, viz. M/s. Engineers Reddy Homes Limited and the same was passed on to the assessee, and therefore, the assessee in turn, made the interest payment to AP State Finance Corporation directly and claimed the deduction towards this interest. The Assessing Officer further observed that as per S.40(ba) of the Act, any payment made by an AOP to any member of such association under the head interest, salary, bonus, commission and remuneration is not allowable as deduction in the hands of the AOP. In this view of the matter, the Assessing Officer held that in view of application of provisions of S.40(ba) of the Act, the payment in the present case, being to constituent of the joint venture, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehemently argued that all expenses are meant for business, it cannot be ruled out that some element of inflation and personal nature of expenses embedded in the expenditure incurred by cash cannot be ruled out. On overall appreciation of facts and quantum involved in each item, the CIT(A) was of the view that disallowance of 10% of cash expenditure of ₹ 3,59,97,869, working out to ₹ 35,99,786 would be reasonable. He accordingly sustained disallowance to that extent, deleting the balance disallowance made by the Assessing Officer. Similarly, for assessment year 2008-09, the Assessing Officer disallowed direct and indirect expenses amounting to ₹ 3,24,76,233, and on appeal, the CIT(A), as in preceding year, has sustained 10% of cash component of the direct and indirect expenses, working out to ₹ 23,87,770, deleting rest of the disallowance made by the Assessing Officer. 16. Aggrieved by the disallowance sustained by the CIT(A), assessee is in second appeal before us for these two years. 17. We heard both sides and perused the material on record. Considering the quantum and nature of expenditure claimed, which is not verifiable, we agree with the CIT(A) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted before us that this amount was offered to tax in the succeeding assessment year and taxing the same in the year under consideration, amounts to double taxation. He drew our attention to page 146 and 147 of the paper-books, which gives the ledger account of L.Rambramham. He also drew our attention to copy of sale deed dated 5th February, 2008, which is at page 148 of the paper-book to suggest that the payment was outstanding on the date of registration of sale deed. 23. The Learned Departmental Representative on the other hand, submitted that the sale deed was registered on 5th February, 2008, and therefore, as per the method of accounting followed by the assessee, the amount has to be offered to tax in the year under appeal only, and consequently, the addition made by the Revenue authorities is justified. 24. We heard both sides and perused the material on record. It is an admitted fact that the sale deed was registered in February, 2008. It is also an admitted fact that the assessee has been following mercantile system of accounting. That being so, irrespective of actual receipt or otherwise of an amount, income has to be recognised in the year in relation to whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and reject the grounds of the Revenue in these appeals on this issue. 29. As for the assessment years 2005-06 and 2006-07, the Assessing Officer has made an ad-hoc disallowance out of direct and indirect expenses worked out at 10% of the amounts claimed by the assessee, on account of unverifiable nature of such expenditure. The CIT(A), on appeal, took note of the fact that the assessment for these years was framed under S.143(3) of the Act. He further observed that additions in an assessment made under S.153A of the Act have to be only on the basis of credible evidences especially in a case where original assessments were completed under S.143(3) of the Act. The CIT(A) accordingly deleted the ad-hoc disallowance made by the Assessing Officer. Following the principle of consistency, considering the view taken with regard to disallowance out of direct and indirect expenses made for assessment years 2007-09 and 2008-09, in para 17 in the context of assessee s appeals and in preceding para in the context of Revenue s appeals, we set aside the impugned order of the CIT(A) on this issue for the assessment years 2005-06 and 2006-07, and direct the Assessing Officer to make ad hoc dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture except stating official and unofficial on each project, and they denote only an estimation and not actual figures dealt by the assessee. We agree with the CIT(A) that before fastening any liability on the assessee, it is necessary for the Assessing Officer to establish some nexus to the contents of the document relied upon and unless the so called unofficial payments or receipts are linked to any land or construction of the project under taken by the assessee, it is difficult to assume that the entries in those documents indicate unexplained expenditure or investment, liable for addition under S.69C of the Act. We do not find any infirmity in the reasoning given by the CIT(A) for deleting this addition in para 29.1 of the impugned order. We accordingly uphold the order of the CIT(A) and reject the ground of the Revenue in this behalf, in the appeal for assessment year 2008-09. 34. In the result, while appeals of the Revenue for the assessment year 2005-06 and 2006-07 are partly allowed, appeals of the Revenue for assessment years 2007-08 to 2008-09 are dismissed. M/s. Janapriya Engineers Syndicate, Hyderabad Assessee s Appeal : ITA No.1577/Hyd/2012 : Assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk is September, 2005. Assessee submitted that it has fulfilled the conditions. Copies of lease deeds with the tenants are also filed and the assessee claimed that the agreements have been entered into in the financial year 2005-o6 itself, and the Industrial Park has been operational since then. However, since the project has been approved by the Ministry of Commerce, Government of India in September, 2006 and the Notification has come from the CBDT in Novemebr,2006, i.e. in the year 2006-07 relevant to assessment year 2007-08, the claim has been made under S.80IA(4)(iii) for the first time in assessment year 2007-08, Assessee has also furnished the details of break up of investment made in the building and the income from which it calmed deduction udnerS.80IA(4)(iii). Assessee has also filed the lay out copy and other particulars with respect to the ownership and the construction of the industrial park. While the Assessing Officer not convinced with the contentions fo the assessee, disallowed the clam of the assessee for deduction under S.80IA(4)(iii) of the Act, on appeal, the CIT(A) too upheld the disallowance made by the Assessing Officer. In the first place, the CIT(A) dealt w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oped the structure of the building. 07.2. One of the tenants ion this building is Engineers Syndicate International, which is a part of the assessee group, and as admitted by the appellant, they are in the business of providing engineering services. Beyond such submission, the appellant could not substantiate the nature of profession carried by the above tenant with any independent material or evidences to prove such contention. In order to get relief u/s.80IA(4), the tenants are supposed to carry out limited professional activity such as engineering services, software service provider, data processing, business processing, outsourcing etc. Unless the tenant is solely engaged in such activity from this industrial unit, the assessee cannot avail the benefit of sec.80IA( 4) as claimed. Therefore, in view of the above discussion, the claim of deduction u/s.80IA( 4 )(iii) is not allowable to the assessee on more than one count on the lease income generated from letting out of the building 'Fusion-9'. Accordingly, the claim of the assessee is rejected and the lease income is required to be assessed .as income from house property and the action of the AO is sustained. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves the assessee's project under Industrial Park Scheme framed by the Central Government, the conditions under sec. 80IA(4)(iii) are satisfied. It is clear that while the assessee has received such approval and notification, the same has not been withdrawn till date for contravention of any of the conditions, even though there is a specific provision for withdrawal, in case the Central Government finds that the conditions prescribed therein have not been adhered to. However, it is also clear that such withdrawal has to be done by the Central Government only and as long as this is not done, the assessee having such approval and notification cannot be denied the deduction. Under the circumstances, I am of the view that since the assessee had developed the industrial park duly approved and notified by the Central Government and the same has not been withdrawn for any reasons, the assessee would be entitled to the benefit of deduction u/s 80IA(4)(iii). 28. Further, in the case of Ganesh Housing Corporation Ltd., vs. Padam Singh, Under Secretary Ors. (2011) 61 DTR (Guj.) 1, the Gujarat High Court held that what was required to be done by the assessee was to provide for infras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the CIT(A), and direct the Assessing Officer to restrict the disallowance to 10% of the direct and indirect expenses incurred by the assessee in cash. Consequently, assessee s grounds on this issue are treated as partly allowed. 42. Next common ground that arises for consideration is in the appeals of M/s. Janapriya Properties (Formerly Janapriya Engineers Syndicate) for assessment years 2006-07 and 2007-08, being ITA Nos.1577 and 1594/Hyd/2012, and it is with regard to disallowance under S.40A(3) made by the Assessing Officer, which has been confirmed by the CIT(A). 43. We have considered the rival submissions on this issue and perused the orders of the lower authorities and other material on record. We find that the assessee has not offered any explanation before the lower authorities justifying the payments made in cash in violation of provisions of S.40A(3) of the Act. Even before us, the position remains the same and the assessee has not explained the circumstances, which constrained it to make the payments in question in cash. That being so, we find no infirmity in the action of the lower authorities. We accordingly uphold the disallowance made by the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le any reply, under the circumstances, the Assessing Officer made an addition of ₹ 63.75 lakhs, under S.69C of the Act, treating the following payments as representing unexplained expenditure. Page No. Annexure Description Quantum Rs. 86-89 A/JES/18 Agreement of sale dt.07.03.07 entered between the assessee-firm and Sri D.E.Nagaraj and Sri J.Srinivas (landlords) for purchase of Ac.1.38 Gt. Situated at Kothapeet (V) for a consideration of ₹ 1.55 crores. Out of this, a sum of ₹ 38,75,000/- was paid on10.03.2007 38,75,000 96-97 A/JES/18 A sum of ₹ 50,000/- and ₹ 1,50,000 were paid in cash to Sri T.Rajasekhar Reddy for purchase of land on 03.11.2006 and 01.11.2006, totaling to ₹ 2,00,000/- 3,00,000 133 A/JES/18 Receipt dated 29.12.2006 given by Sri T.Madan Mohan Reddy towards sale of his land situate at Badangpet (V). As per this receipt, a sum of ₹ 30,00,00./ was paid by the assessee, which inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vysya Bank to Mr. D.E.Nagraj and ₹ 2 lakhs vide cheque No.7o'4125.drawn on ING Vysya Bank to J.Srinivasa Yadav. Similarly on 17-102007 the assessee claimed to have paid ₹ 6,62,500/- vide cheque No.394471 drawn on ING Vysya Bank to D.E. Nagaraj and ₹ 6,62,000/- vide cheque No.394470 drawn on ING Vysya Bank to J.Srinivasa Yadav. Thus in total the assessee paid a sum of ₹ 62,OO,OOO/- vide cheques to these two persons from March, 2007 onwards. The said submission of the appellant requires consideration in view of the payments made by cheques. Accordingly, the AO is directed to verify once again the payment details vis-a-vis books of ale and bank. a/c and if on verification found correct, the same is to be given credit while computing the addition under this head. Out of 1,16,25,000/- (balance of consideration after payment of ₹ 38,75,000/-), only ₹ 23,25,OOO/- is to be allowed if the AO finds that the payments are reflected in the books of a/c. For the balance of ₹ 93,00,000/- the assessee has no explanation to offer about the sources for the payments, etc. The only submission of the appellant on this ground is that no further payments hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of hearing, this ground is not pressed. It is accordingly rejected. 52. Next ground to be considered is also in the appeal for assessment year 2008-09, being ITA No.1595./Hyd/2012, and it relates to disallowance of finance charges amounting to ₹ 3,19,55,149. 53. Facts of the case in brief are that the assessee claimed a sum of ₹ 3,19,55,148 as finance charges, paid to banks and financial institutions and debited the same to direct expenses. As against this, since assessee has claimed deduction under S.80IA(4) of the Act, the Assessing Officer arrived at a figure of ₹ 2,85,94,351 as attributable to such exempt income claimed by the assessee, and disallowed the same in terms of S.14A of the Act. On appeal before the CIT(A), assessee made elaborate arguments against the addition made as above, and contended inter-alia that a claim for deduction under various provisions of the Act, such as S.80IA is distinct from the claim of exemption of any income from the very tax net. The CIT(A) was not convinced with the arguments of the assessee on this issue, and taking note of the various contentions of the assessee against the disallowance made by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first effective grievance of the Revenue, common in these appeals, is that the CIT(A) was not justified in deleting the addition made on account of disallowance under S.40(a)(ia) of the I.T. Act., 57. We heard both sides and perused the impugned orders of the lower authorities. We find that the decision of the CIT(A) while deleting the disallowance made by the Assessing Officer under S.40(a)(ia) of the Act, is based on the Special bench decision of the Visakhapatnam Tribunal in the case of Merilyn Shipping Transport in ITA No.477/Viz/2008 dated 29.3.2012. We find that the said decision of the Special Bench has been stayed by the Hon ble High Court of Andhra Pradesh vide its interim order dated 8th October, 2012. That being so, in the interests of justice, we set aside the impugned order of the CIT(A) on this issue and restored this aspect of the matter to the file of the Assessing Officer, with a direction to redecide the disallowance if any that maybe warranted in terms of S.40a(ia) of the Act, in consonance with the view that the Hon ble High Court may take on the above decision of the Special Bench of the Tribunal. The Assessing Officer is directed to redecide this issue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s Appeals: ITA No.580/Hyd/2011 : Assessment year 2002-03 ITA No.581/Hyd/2011 : Assessment year 2003-04 ITA No.582/Hyd/2011 : Assessment year 2004-05 ITA No.583/Hyd/2011 : Assessment year 2005-06 62. The only grievance of the assessee, common in the appeals for assessment years 2002-03 to 2004-05, viz. ITA No.580 to 582/Hyd/2011, directed against a common order of the CIT(A) I, Hyderabad 31.1.2011, is with regard to additions relating to opening work in progress. 63. Brief facts of the case are that the assessee commenced construction of the project at Attapur and spent amounts on the project during the years under consideration. The amounts so spent were accounted for as work-in-progress in the Balance Sheet of the relevant years, as no sales were affected. The Assessing Officer however, considered a percentage of 15% as profit on work-in-progress and taxed the same accordingly, which resulted in the impugned additions of ₹ 21,51,276 for assessment year 2002-03; ₹ 24,11,619 for assessment year 2003-04; and ₹ 18,12,501 for assessment year 2004-05. 64. On appeal before the CIT(A), it was submitted that in the year ending 31.3.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been stated that the company recognizes income and expenditure on accrual basis. He also noted that nowhere it has been stated that the assessee has been following project completion method. The CIT(A) ultimately confirmed the additions made by the Assessing Officer by estimating the profit on the work-in-progress disclosed for the years under appeal, in the following manner- 04.3. I find from the Auditor s Report that the appellant is following mercantile system of accounting but no income has been recognized in the assessment years under consideration though in schedule attached to the report it has been stated that the company recognises income and expenditure on accrual basis. No where in the accounts the appellant has specifically mentioned that it is following Project Completion method. It is a fact on record that at the time when the construction activities have been undertaken by the appellant company the JV was not at all in existence. It is also a fact on record that the appellant company has incurred substantial expenditure against its project and has started receiving advance towards sale of flat. Since the appellant has not specifically adopted project completion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual basis, and nowhere mentions that the assessee follows project completion method for recognition of revenue. We are in agreement with the elaborate reasons discussed by the CIT(A) in para 4.3 of the impugned order, relevant portion of which has been extracted hereinabove. We accordingly uphold the order of the CIT(A), and reject the grounds of the assessee on this issue. 66. In the result, these three appeals of the assessee for assessment year 2002-03 to 2004-05, ITA nos.580 to 582/Hyd/2011, are dismissed. 67. First effective ground of the assessee in its appeal for assessment year 2005-06, viz. ITA No.583/Hyd/2011, directed against the order of the CIT(A) I, Hyderabad dated 31.1.2011, is with regard to the addition towards unproved liabilities. 68. Brief facts of the case in relation to this issue are that the Assessing Officer observed that during the year under consideration, there were advances appearing in the Balance Sheet of the assessee company of ₹ 4,61,800 in respect of Janapriya South City Projects. These advances, he noted were wrongly transferred to the Janapriya Engineers Syndicate JV during the year under consideration, and the entry was reserved i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to the group company Janapriya Engineers Syndicate JV, the Assessing Officer observed that the loan in question was not utilized by the assessee for its business purpose. He accordingly held that the loan processing charges cannot be treated as allowable expenditure under S.37(1) of the Act, and made consequent disallowance of ₹ 11,02,000. 73. On appeal, the CIT(A) sustained the said disallowance made by the Assessing Officer. Hence, assessee is in second appeal on this issue. 74. We have considered the rival submissions on this issue and perused the orders of the lower authorities and other material on record. It is an undisputed fact that the loan of ₹ 5 crores taken by the assessee from APSFC has been transferred to its joint venture partner, Janapriya Engineers Syndicate JV. Since the loan amount has not been utilized by the assessee for its own business purpose, it cannot be said that the expenditure incurred by way of processing charges for securing such a loan, is an expenditure incurred for the pupose of the business of the assessee. That being so, the disallowance made by the Assessing Officer is in order and the CIT(A) in our opinion, was justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erations only, rejected the plea of the assessee in that behalf, and sustained the disallowance made by the Assessing Officer. We find no infirmity in the actions of the Revenue authorities. We accordingly uphold the addition made and reject the grounds of the assessee on this issue. 78. This appeal of the assessee for the assessment year 2005-06, being ITA Ns.583/Hyd/2011 is partly allowed. Department s Appeals: ITA No.547/Hyd/2011 : Assessment year 2002-03 ITA No.548/Hyd/2011 : Assessment year 2003-04 79. The only issue involved in these appeals relates to deletion of additions made by the Assessing Officer for the years under appeal, on account of deemed dividends. 80. Facts of the case in brief are that during the assessment proceedings, the Assessing Officer noted that the share holders of the assessee company, viz. K.Ravinder Reddy, K.Kranti Kiran Reddy and Smt.Piriyamvada Reddy, who were having more than 10% share holding in the assessee company are also holding shares working out to more than 10% in M/s. Engineers Syndicate India Pvt. Ltd. Since Engineer Syndicate Ltd., was having sufficient reserve, the assessee was requested to explain as to why ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pradip Kumar Malhotra V/s. CIT(338 ITR 538), wherein it has been held, vide head-note of the Reports(338 ITR), as follows- The phrase by way of advance or loan appearing in sub-clause (e) of section 2(22) of the Income-tax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent, of the voting power; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred wit upon the company by such a shareholder. Since the CIT(A) in the impugned order has followed the decision of the Special Bench in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
