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2017 (2) TMI 503 - ITAT KOLKATA

2017 (2) TMI 503 - ITAT KOLKATA - TMI - Disallowance of fee paid to Registrar of Companies for increase in authorized capital of the company - Held that:- Hon’ble Supreme Court in the case of Punjab State Industrial Development Corporation Limited vs CIT [1996 (12) TMI 6 - SUPREME Court ] and Brooke Bond India Limited vs CI (1997 (2) TMI 11 - SUPREME Court ) held that fees paid to ROC for increase in authorised share capital is a capital expenditure. - As far as the question of allowing dedu .....

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s and therefore the expenses in question does not fall within the ambit of aforesaid clause. We are therefore of the view that order of CIT(A) on this issue does not call for any interference. - Decided against assessee - Disallowance of prior period expenses - Held that:- The said maintenance expenses relate to March, 2008 for which a bill dated 04.04.2008 was received by the assessee only in the month of April, 2008 and was booked as expenses pertaining to A.Y.2009-10. It has been claimed .....

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deserves to be accepted. - Accrual of income - Assessee in the present case follows mercantile system of accounting - Held that:- The parties by an agreement cannot alter the time of accrual of income under the mercantile system of accounting. Income under the mercantile system will accrue and arise when the right to receive the sum in question is determined. Such right to receive the sum in question and its accrual under the mercantile system cannot get postponed by agreement between the p .....

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basis of completion of construction, is again irrelevant when it comes to determining income of the Assessee. The fact that the Assessee was offering to tax income as and when bare construction was completed is again not relevant. It was argued by the learned counsel for the Assessee that the revenue has taxed income offered in the subsequent years by the Assessee and taxing the same income in the present AY would amount to double taxation of the same income. We are of the view that these factor .....

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0.2012 of CIT(A)-VIII, Kolkata, relating to AY 2009-10. 2. Ground No.1 raised by the assessee reads as follows :- 1. That the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of ₹ 25,00,000 representing fee paid to Registrar of Companies for increase in authorized capital of the company. 3. The assessee is a company. It is engaged in the business of development, execution of real estate projects along with township and infrastructural development works in u .....

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hare capital. The amount so paid was claimed as revenue expenditure and deductible while computing the income under the head income from business. 5. The AO made a reference to the decision of the Hon ble Supreme Court in the case of Punjab State Industrial Development Corporation Limited vs CIT and Brooke Bond India Limited vs CIT 225 ITR 792 (SC) and 225 ITR 798(SC). In the aforesaid decisions, the Hon ble Supreme Court held that fees paid to ROC for increase in authorised share capital is a c .....

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ee did not bring on record any material to show that the conditions precedent for allowing deduction u/s 35D of the Act are fulfilled. The CIT(A) also held that the authorised share capital of the assessee was increased for meeting growing business needs of working capital. Hence expenses incurred were not covered by the provision of section 35D(1) of the Act. The CIT(A) thus rejected the alternative plea of the assessee. Aggrieved by the order of CIUT(A) the assessee has raised ground no.1 befo .....

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u/s 35D of the Act is concerned, the list of expenses allowable for deduction u/s 35D(1) of the Act are set out in section 35D (2) of the Act. The list of expenses set out in section 35D(2) of the Act does not include fees paid to ROC for increase in the authorised share capital. Under section 35(2)(c)(iv) of the Act expenses in connection with the issue of shares to the public is allowable as deduction. Admittedly in this case there was no public issue of shares and therefore the expenses in q .....

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oceedings the AO observed that the assessee in arriving at its income from business claimed a sum of ₹ 3,81,851/- which was prior period expenses. The details of prior period expenses are given in page-2 of the assessee s paper book. The same has been given as Annexure to this order. The AO was of the view that the assessee follows mercantile system of accounting and therefore the expenditure relatable to the previous year relevant to A.Y.2009-10 alone can be allowed as deduction. He there .....

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of the view that the reasons advanced by the assessee were not convincing and therefore the prior period expenses cannot be allowed as deduction. 12. Before us the ld.counsel for the assessee reiterated the submissions made before CIT(A). He drew our attention to one of the items of the expenses given as annexure to this order namely Maintenance Expenses of ₹ 1,21,817/- which was a sum paid to M/s. Tenacity Security who had raised the bill only on 04.04.2008. Though the security charges w .....

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es the expenses could be booked in the year in which bills or information and details are received. The ld.DR relied on the order of CIT(A). 13. We have given a very careful consideration to the rival submissions. Ordinarily under the mercantile system of accounting, which is the system of accounting followed by the assessee in the present case, only expenses which have accrued or arisen to the assessed during the relevant previous year will be allowed as deduction. In the present case the claim .....

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t page 3 of the assessee s paper book evidencing the maintenance charges paid as security charges. The said maintenance expenses relate to March, 2008 for which a bill dated 04.04.2008 was received by the assessee only in the month of April, 2008 and was booked as expenses pertaining to A.Y.2009-10. It has been claimed by the assessee that all the other expenses given in the annexure are of similar nature. Keeping in view the submissions of the ld. Counsel for the assessee and also the ratio lai .....

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d in confirming the addition of ₹ 44,42,85,000 representing consideration of unconstructed portion of 15% lease rights agreed to be transferred in five years of construction period of College Street Market Complex. 4. That the learned Commissioner of Income Tax (Appeals) erred in confirming the assessment of total amount of advance of ₹ 63, 12,00,000 received by the Appellant on account of transfer of 15% leasehold rights in College Street Market Complex agreed to be transferred on c .....

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ebruary 2006. 6. That the conclusion drawn by the learned Commissioner of Income Tax (Appeals), that the Appellant had transferred all its rights in respect of 15% share in College Street Market Complex to its subsidiary M/s Barnaparichay Book Mall Pvt. Ltd., during the financial year relevant to the Assessment Year 2009-10 for ₹ 63,12,00,000 and therefore the whole of such amount is liable to tax, is against facts on record and therefore perverse. 7. That the Appellant having transferred .....

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projects. Kolkata Municipal Corporation a statutory body established and governed under the Kolkata Municipal Corporation Act, 1980 hereinafter referred to as KMC owns a municipal market at College street, popularly known as college street market . KMC wanted to improve the college street market as a comprehensive market complex with all necessary infrastructural amenities with the object of providing both domestic and international book publishers and book sellers space and other allied infras .....

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f a comprehensive market complex. The assessee had to pay a sum of ₹ 2 crores as premium and was also to pay ₹ 36 lakhs for meeting the cost of arranging alternative accommodation for KMC labourers who lived in college street market premises. The important terms and conditions relevant for the present appeal are clause-4 of the agreement which provides that after development of the new comprehensive market complex by the assessee, 70% of the built up area will be reserved for the ass .....

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nce of the aforesaid agreement with KMC, the assessee demolished the old structure after making suitable arrangements for shifting the existing occupants to the temporary accommodation. The assessee also made a final survey and prepared the building plan which was duly sanctioned by KMC. As per the terms of the agreement, the assessee could either carry out the development work itself or could appoint a contractor to carry out the development work. There was another subsidiary company of the ass .....

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he assessee. Clause 3 to 7 of the aforesaid agreement provides that SFFPL will be entitled to deal with 70% share of leasehold right over the built up area in the new market to be constructed. These clauses read as follows: 3. SFFPL will retain/rental/sub-lease to the intending Lessee s, as the case may be and the considerations thereof, for the portion stipulated within 70% as the BSHDL s share in the project. 4. SFFPL will be entitled to take premium from nominee or nominees market to be const .....

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ex as per terms of the Development Agreement and Supplemental Agreement made between Kolkata Municipal Corporation and BSHDL .without however creating any financial liability for the Kolkata Municipal Corporation. 6. SFFPL shall be entitled to negotiate for lease and/or transfer for shop/space or portions thereof save and except the area to be allotted to the Kolkata Municipal Corporation or its nominee or nominees together with the undivided proportionate share in the land and the rights appurt .....

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nt dated 31.03.2009 between the assessee and SFFPL/BBMPL. This agreement refers to the earlier agreement dated 6.3.2008 and further states that subsequent to the agreement dated 6.3.2008 the Assessee had decided to relinquish 1,23,600 Sq.ft. out its 70% share of leasehold rights in the built up area in the new market to be constructed in favour of SFFPL/BBMPL for a consideration of ₹ 63,12,00,000. SFFPL/BBMPL paid a sum of ₹ 57,16,68,000 to the Assessee. This agreement contains a sch .....

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ted only on completion of the bare construction and in respect of portions referred to above which remains incomplete, such area will be transferred only in the year of completion of construction. 18. It is not in dispute that during the previous year bare construction was completed only in respect of 2nd floors of the new market complex of 25,000/- sq.ft., the value of the same was ₹ 18,69,15,000. We have already seen that the total value of the built up area that SFFPL/BBMPL has to get a .....

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en the books of accounts and the advance taken from FFPL namely ₹ 38,37,53,000/- (57166800 - 8869,15,000) was shown in the current liabilities in the balance sheet i.e. as advance against development rights. It is the case of the assessee that it is only after completion of the construction by SFFPL that income would accrue to the assessee and therefore the income to the extent of construction that was complete of the value of ₹ 18,69,15,000/- alone was recognised as income. The case .....

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the contingencies mentioned in the agreement dated 31.3.2008 cannot defer the accrual of income. He held that the transfer of rights cannot be linked to the stage of completion of development works carried on by BBMPL. He therefore held that the assessee was not correct in recognizing its income on transfer of lease rights transfer in proportion to the stage of completion of development works by BBMPL. The AO accordingly held that the entire sum of ₹ 63,12,00,000/- has to be assessed as bu .....

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leasehold rights to its subsidiary company, the BBMPL is assessable in its hands on project completion method cannot be accepted because what is transferred is not the right to share profit, but the leasehold rights vested in the Assessee. 2. There was no logic in distributing the amount received on transfer of lease-hold rights on the basis of project completion method. The disclosure of part of the income in the subsequent years on the project completion method or the treatment of the amount .....

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: In the light of the above discussion and observation, after perusing the facts of the case and other materials brought on record and also for the under mentioned brief reasons, this ground of the appeal regarding the addition of ₹ 44,42,85,000/- is decided against the appellant : i) The appellant is engaged in the business of development and execution of real estate projects. It has entered into development agreement for College Square Market Complex. As per the agreement, upon the devel .....

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pellant has transferred all its right in respect of 15% share to its subsidiary for ₹ 63,12,00,000/- and hence, irrespective of the treatment of this transaction in the books of BBMPL, the full consideration received by the appellant during the year has accrued in the previous year relevant to assessment year in appeal to the appellant. Thus, this amount of ₹ 63,12,00,000/- is liable to tax in the previous year relevant assessment year 2009-10 and accordingly the AO was justified in .....

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dismissed. 22. Aggrieved by the orders of CIT(A) the assessee has raised ground nos. 3 to 7 before the Tribunal. 23. We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The ld. Counsel for the assessee submitted that the Assessee does not dispute assessment of the sum of ₹ 18,69,15,000 in the assessment year 2009-10. However, the assessee company disputes the addition of the balance sum of ₹ 44,42,85,000 (Rs,63,12,00,000 - ₹ 18,69, 15,000). It was .....

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-09 corresponding to the Assessment Year 2009-10. The audited accounts are at pages 78 to 94 of PB. The balance amount of 3,847.53 lacs was treated as advance against purchase of development rights. Our attention was drawn to Note No. 2(c) at Page 89 of the paper Book and also Schedule 6 (Details of Loans and Advances) appearing at Page 85 of the paper Book. It was submitted that in accordance with the agreement dated 31.3.2008, Assessee booked income from transfer of leasehold rights to BBMPL f .....

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detailed herein below. 31st March, 2010 ₹ 2,97,52,500 - page 130 of PB 31st March, 2011 ₹ 13,09,40,000 - Page 169 of PB In view of the aforesaid facts, it was submitted that income accrued to the assessee only when the respective right were transferred. It was argued that the agreement clearly spelt that the leasehold right would be transferred on bare completion of the area specified in the agreement. It is also a fact that the whole of the construction was not completed in the firs .....

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ompleted by BBMPL. It was submitted that the Assessee gets title to lease hold rights only on completion of construction of the new market and therefore it cannot give something which it does not have. It was argued that the maxim "Nemo dat quod non habet" which means - no one can transfer something which he does not possess, will be applicable in the present case. Income would accrue to the assessee only with reference to consideration of the area for which the actual transfer was eff .....

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, 2010 ₹ 2,97,52,500 - page 105 of PB 31st March, 2011 ₹ 13,09,40,000 - Page 148 of PB M/s BBMPL also capitalized the aforesaid amounts in their Balance Sheet as detailed herein below. 31st March, 2010 ₹ 2,97,52,500 - page 130 of PB 31st March, 2011 ₹ 13,09,40,000 - Page 169 of PB It was argued that the assessment of the aforesaid sums have been accepted by the AO to be taxed in respective assessment years. In these facts and circumstances of the case it was submitted tha .....

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st of carrying out the construction, development etc. The Assessee was entitled to leasehold rights in respect of 70% of the built up area of the new construction and KMC was entitled to 30% of the built up area of newly constructed market. 25. The Assessee by an agreement dated 6.3.2008 entered into with SFFPL/BBMPL assigned all its rights and obligations under the Agreement with KMC to and in favour of SFFPL/BBMPL. We have already set out the terms of this agreement in the earlier part of this .....

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tates that subsequent to the agreement dated 6.3.2008 the Assessee had decided to relinquish 1,23,600 Sq.ft. out its 70% share of leasehold rights in the built up area in the new market to be constructed in favour of SFFPL/BBMPL for a consideration of ₹ 63,12,00,000. SFFPL/BBMPL paid a sum of ₹ 57,16,68,000 to the Assessee. This agreement contains a schedule which identifies the location of the built up area to be allotted to SFFPL/BBMPL and its value. As we have already observed whe .....

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etween the Assessee and SFFPL/BBMPL it was specifically mentioned after referring to the agreement dated 31.3.2009 that the area that has to be allotted to it will be so allotted only on completion of the bare construction and in respect of portions which remains incomplete, such area will be transferred only in the year of completion of construction. This letter is the basis on which the Assessee claims that accrual of income will be based on the completion of structure which is referred to as .....

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.e., amount paid and payable or received or receivable in business for a period are recorded. The question is whether the sum of ₹ 44,42,85,000/- can be considered as having accrued to the Assessee. 28. Under the mercantile system of accounting there would be an accrual of the entire consideration agreed between the parties viz., ₹ 63,12,00,000/- as on 31.3.2009.. In fact the Assessee agrees that there has been accrual of income to the extent of ₹ 18,69,15,000/-. The reason for .....

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ting of legal title in favour of BBMPL will not decide the accrual of income in the hands of the Assessee. In other words the entire sum of ₹ 63,12,00,000 should be deemed to have accrued or arisen to the Assessee on 31.3.2009 when the Agreement was signed between the Assessee and BBMPL. In this regard it is also pertinent to note that the Assessee received a sum of ₹ 57,16,68,000 out of the agreed value of ₹ 63,12,00,000 during the previous year. This again goes to show that c .....

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