TMI Blog2022 (1) TMI 475X X X X Extracts X X X X X X X X Extracts X X X X ..... not required to be deducted on the rent component and hence, no disallowance u/s.40 (a)(ia) of the Act could be made thereon. Cost of materials consumed and cost of construction - Going by the conduct of the assessee, we find that assessee though had not received the sum of ₹ 45 Crores in full even upto 31/03/2016, but the assessee had volunteered to offer the said sum of ₹ 45 Crores in the year under consideration and had claimed the expenses that are to be incurred for the smooth execution of the project in consonance with the matching principle of income and expenditure thereon, and also considering the fact that the very same modus operandi adopted by the assessee in subsequent years i.e. in A.Y₹ 2013-14 and 2014-15 were accepted by the ld. AO in scrutiny assessment proceedings without making any additions thereon or rejecting the books of accounts of the assessee, we are not inclined to accept to the arguments of the ld. DR that atleast 5% of expenses offered by the assessee during the course of assessment proceedings need to be taxed. The ld. CIT(A) had already pointed out that the said offer was made only to buy peace and avoid protracted litigation. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly effective issue to be decided in this appeal of the Revenue is as to whether the ld. CIT(A) was justified in deleting the addition made on account of determination of net profit @8% of turnover as arbitrary in the facts and circumstances of the case. The interconnected issue involved therein is whether the ld. CIT(A) was justified in dismissing the action of the ld. AO rejecting the books of accounts in the facts and circumstances of the instant case. 3. We have heard rival submissions and perused the materials available on record. We find that assessee is a private limited company engaged in the business of construction and re-development of properties. The return of income for the A.Y.2012-13 was filed by the assessee on 30/09/2012 declaring total loss of ₹ 7,59,52,387/-. The assessee is a Private Limited Company engaged in the business of construction and redevelopment of properties. The assessee had undertaken redevelopment of a Slum Rehabilitation Project by entering into agreement with Triveni Sangam SRA CHS Ltd. at village Gundavli, Andheri (E), Mumbai. 3.1. The assessee submitted that it obtained various approvals from Slum Rehabilitation Authority (SRA) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed to be compensated by additional amount of ₹ 3 lacs per slum dweller. The assessee submitted that this was also agreed as per the same agreement entered into with Vikasak Sanstha Society. Thus, in terms of the said agreement, the assessee provided a sum of ₹ 7.80 cr. as compensation for delay in project and this amount was to be payable only to eligible slum dwellers totaling to 261. 3.6. The ld. AO observed in his order as under:- 3.5 Out of the expenses claimed of ₹ 52.81 crores the following expenses are significant: Cost of materials consumed ₹ 16.76 crores Other expenses: Apatra expenses ₹ 13.80 crores Compensation for delay in project ₹ 7.80 crores Cost of construction for tenant building ₹ 10 crores Rent expenses ₹ 2.12 crores 3.6 ADMISSIBILITY OF EXPENSES CLAIMED: 3.6.1. Apatra Compensation for delay in project: The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SRA scheme and for 115 illegal occupants). However,on perusal of the agreement dated22-2-2012 entered into by the assessee with the society M/s Triveni Sangam CHS shows that only 261 beneficiaries under SRA scheme alone are entitled for the additional compensation for delay in handing over the newly constructed units. On the contrary the assessee claimed that the sum of ₹ 3 lacs is also payable for delay in payment of compensation to the illegal dwellers too. Further the agreement also does not specify any time period within which the initial compensation of ₹ 12 lacs is to be paid. The question of payment of additional compensation of ₹ 3 lacs will arise only in the event of delay in payment of the original compensation of ₹ 12 lacs. When the time period for payment of ₹ 12 lacs is not specified in the agreement, it is also not possible to determine or ascertain the year in which the liability to pay the additional compensation arises. In these circumstances, the additional compensation of ₹ 7.80 crores cannot be held to be an ascertained liability for the A.Y 2012-13. During the assessment proceedings the assessee was also asked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acs per person as additional compensation payable for delay irrespective of whether the said party is a legal dweller or an illegal dweller. It is not logical to provide for same amount to both the parties irrespective of their legal status which does not establish the genuineness of the provision for such payments. FINDINGS: In view of the above the conclusions that are drawn from the given set of facts and circumstances are as under: 1 In the absence of providing the list of parties to whom the apatra expenses was claimed to be payable by the assessee, the department was thus precluded from examining such parties so as to verify the veracity of the claim made by the assessee. 2 There was no time frame specified in the agreement and no other evidence or material was furnished to show that the additional payment of ₹ 3 lacs per person got accrued to the assessee during the relevant previous year. 3 Mere averment that all the expenses corresponding to the income shown have to be debited on matching concept basis is not acceptable when the legitimacy and genuineness of the same was not proved. 4 A majority of the expenses have been quan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be applicable on these payments as they are not his rent expenses but are in the nature of reimbursement of rent expenses for the tenants and therefore, TDS is not liable to be deducted. The submissions are not acceptable since the nature of expenses is for providing for accommodation of the tenants which is the responsibility of the assessee till such time the newly constructed accommodation is made available. It is not a case of reimbursement of expenses as claimed since the tenants are not liable to pay the rent and it is the sole responsibility of the assessee. These expenses are also directly liable to be incurred by the assessee and therefore, the provisions of S. 1941 of I T Act is clearly attracted. the assessee failed to deduct tax, the amount of rent expenses is liable for disallowance as per provisions of s. 40(a)(ia) of IT Act. 4. Cost of construction for tenant building: During the year the assessee claimed ₹ 10 crores as expenses under the head cost of construction for tenant building. The assessee has furnished only a rough estimate of the expenses to be incurred by him and has passed journal entries by creating a provision for this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in the earlier paras without proving that the legally enforceable rights or liability of such expenses had matured during the year under consideration. The mercantile system cannot be used for provisional, contingent or notional payments. A contingent and conditional liability cannot be taken cognizance of, as held by the Allahabad High Court in Swadeshi Cotton Mill Co. Ltd. v. O7-[1980] 125 ITR 33 / 3 Taxman 280. 6.2 It is pertinent to mention at this juncture the fact that the assessee itself is not bound by the entries made in it books has been revealed when it itself has agreed to offer a 5% disallowance of the expenses claimed in its books. No plausible explanation or detail or evidence for offering the percentage of disallowance @ 5% has been given by the assessee. And this offer of disallowance has also been made after having got the accounts audited by a tax auditor u/s 44AB of IT Act who after effecting due diligence in the matter has certified not only the correctness of net profit but also the correctness of the impugned expenses in arriving at it. 6.3 Under these circumstances, it is hereby held that the books of accounts prepared by the assessee in arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also provided in section 44AD of I T Act and thus conforms to the standards mentioned in the provisions of section 44AD of IT Act. Though the provisions of section 44AD of IT Act cannot be applied in this case yet the section is referred to for conforming to the standards of 8% adopted in the case of civil construction business merely to prove the reasonableness of the percentage adopted. 6.7 Accordingly the net profit liable to be taxed @ 8% on ₹ 45.04 crores is worked out at ₹ 3,60,34,820/- and this is treated as the total income of the assessee for the A Y under consideration in place of the loss of ₹ 7,59,52,387/- shown in the return. Penalty proceedings u/sec. 271(1)(c) of the IT Act, 1961, are initiated on this issue. 3.7. The assessee submitted before the ld. CIT(A) that the observation made in the assessment order in last para at page 3 and first para at page 4 is factually incorrect as the ld. AO had mixed both the issues i.e. payment of ₹ 12,00,000/- per person to 115 unauthorised slum dwellers (Apartra expenses) with that of 261 eligible slum dwellers to whom additional compensation was to be paid @₹ 3,00,000/- per person due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e slum dwellers and thus, the observation is contrary to facts. b) The appellant submits that the provision is not made on estimation basis but on actual basis ascertaining the actual liability. Further, the spreading over of the payment has no relevance since even the sale consideration is offered to tax in the year itself even though the entire amount is not received. The appellant submits that it has followed mercantile system of accounting and hence, the liability ascertained against the sale consideration has to be provided for even if the actual payment is to be made at a later date. AO - point 3 (a to c) - page 5: a) Again this observation is due to not understanding the facts correctly and hence, has no relevance whatsoever. The additional compensation is paid to eligible slum dwellers and not to encroachers (unauthorized dwellers). b) List of 261 parties, i.e. eligible slum dwellers is already furnished to the AO and no other details were called for. The AO ought to have specifically called for the same. Further, the copy of agreement and consent terms of Civil Court was filed, which proves the bonafides and genuineness of the transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid is towards reimbursement of expenses, the provisions of section 1941 of the Act does not get triggered for the reason that the reimbursement payments made to each of the party does not exceed the limit prescribed u/s.1941 of the Act. Hence, the question of IDS does not arise and therefore applying the provision of sec.40(a)(ia) does not arise. 20. Hence, the appellant submits that the rent claimed in the profit and loss account is not disallowable and the observations of the AO in this respect are factually incorrect. Thus, the amount of ₹ 2.12 cr. is fully allowable as expenses. 21. With respect to the cost of construction of the rehab building, the appellant submits that the estimation made of ₹ 10 cr. toward the same is in fact on lower side and the actual expenses incurred till date exceeds far more and hence, the observation that this cannot be called ascertained liability is contrary to the facts of the case. Further, following mercantile system of accounting, the provision made for ascertained liability ought to be allowed. Thus, the provision of ₹ 10 cr. cannot be said to be unascertained liability more particularly when in the developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at by the AO on various issues as discussed hereinabove are based on incorrect assumption of facts and due to such incorrect facts considered by the AO, the finding arrived at is also incorrect. The appellant submits that it has correctly maintained the books of account and has correctly claimed the liabilities, which are duly proved by third party agreements, consent terms of the Civil Court, legal notices issued, agreements entered, etc. 28. The observation made in para 6.2 is already dealt with above and the offer to disallow ad hoc 5% of the expenses claimed was to buy peace and avoid protracted litigation. However, this does not and cannot lead to inference that the books of accounts are not correctly maintained. The AO has failed to point out discrepancy in the books of account and therefore the AO is not justified to take the offer of the appellant as basis for rejecting the books of account. The appellant submits that in any case, the AO has not accepted the offer of the appellant and therefore the AO was not justified in taking cognizance of the same. 3.9. The assessee pointed out that books of accounts of the assessee are audited by qualified Chartered Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made for 31.03.2012 Actual Payments made / Cost Incurred as at Balance as at 31.03.2016 31.03.2013 31.03.2014 31.03.2015 31.03.2016 a) Apatra Exp. 13,80,00,000 4,84,00,000 60,00,000 60,00,000 25,00,000 7,51,00,000 b) Compensation for delay in project 7,80,00,000 1,50,00,000 1,15,48,000 51,57,000 Nil 4,62,95,000 c) Construction cost 10,00,00,000 5,98,30,359 2,16,83,777 24,16,186 1,33,08,852 27,60,825 Total 31,60,00,000 12,32,30,359 3,92,31,777 1,35,73,186 1,58,08,852 12,41,55,825 3.11. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact, from the charts produced above, the assessee has still to incur the liability and construct one entire Rehab building and thus, the loss claimed in the impugned year is proper and correct and ought to be allowed. The profit thus estimated @8% is without any justification and liable to be deleted. 4. In respect of rent expenses which was disallowed u/s.40(a)(ia) of the Act by the ld. AO, the assessee submitted that the compensation paid for alternate accommodation is not in the nature of rent and hence, the provisions of Section 194I of the Act do not apply. In this regard, the assessee placed reliance on the decision of Mumbai Tribunal in the case of Jatinder Kumar Madan vs. ITO reported in 32 CCH 0059 Mumbai Tribunal dated 25/04/2012 wherein it was held that displacement compensation or compensation received for alternate accommodation in excess of actual rent paid by assessee is taxable as income from other sources and not income from house property in the hands of the recipient. The assessee also placed reliance on the decision of Mumbai Tribunal in the case of Sahana Dwellers Pvt. Ltd., vs. ITO reported in 158 ITD 78 wherein it was held that compensation paid by ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0(a)(ia) of the Act, the ld. CIT(A) agreed with the case law relied upon by the assessee as detailed supra and granted relief to the assessee. 4.4. The ld. CIT(A) with regard to observations made by the ld. AO on the aspect of cost of construction and cost of materials consumed, observed that maintenance of stock records and consumption details in this line of business is difficult and that alone cannot lead to rejection of books of accounts. He agreed with the views of the assessee that the cost of construction of ₹ 10 Crores claimed by the assessee was made on a conservative basis and in fact the assessee had withheld ₹ 4.41 Crores upto 31/03/2016 which shows that actual cost was approximately ₹ 15 Crores. Hence, no excess cost of construction has been claimed by the assessee during the year under consideration. 4.5. Accordingly, he held that no separate addition is warranted in respect of aforesaid items. 4.6. We find that in respect of compensation payable of ₹ 12 lakhs for unauthorised slum dwellers for 115 persons and compensation payable @₹ 3 lakhs to authorised slum dwellers in respect of 261 persons were correctly provided by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor the assessee has in reality paid rent on behalf of them. Only because the assessee was not able to provide alternative accommodation to these tenants the assessee had to pay compensation for enabling the tenants to meet the expenditure to be incurred by them towards rent payable whether they are actually paying rent or not. This is for the simple reason that tenants were displaced from the property where they were staying for construction of new building. On a perusal of section 194I of the Act, it is seen that under clause (i) rent has been defined as under:- 'Explanation.-For the purposes of this section, - (i) rent means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,- (a) land; or (b) building (including factory building); or (c) land appurtenant to a building (including factory building); or (d) machinery; or (e) plant; or (f) equipment; or (g) furniture; or (h) fittings, whether or not any or all of the above are owned by the payee;' 7. On a plain reading of the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the conduct of the assessee, we find that assessee though had not received the sum of ₹ 45 Crores in full even upto 31/03/2016, but the assessee had volunteered to offer the said sum of ₹ 45 Crores in the year under consideration and had claimed the expenses that are to be incurred for the smooth execution of the project in consonance with the matching principle of income and expenditure thereon, and also considering the fact that the very same modus operandi adopted by the assessee in subsequent years i.e. in A.Yrs. 2013-14 and 2014-15 were accepted by the ld. AO in scrutiny assessment proceedings without making any additions thereon or rejecting the books of accounts of the assessee, we are not inclined to accept to the arguments of the ld. DR that atleast 5% of expenses offered by the assessee during the course of assessment proceedings need to be taxed. The ld. CIT(A) had already pointed out that the said offer was made only to buy peace and avoid protracted litigation. We also find that the alleged defects pointed out by the ld. AO had been duly addressed by the assessee and in these peculiar facts and circumstances of the case, we are not inclined to direct the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
