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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”: HYDERABAD
Before: SHRI SATBEER SINGH GODARA & SHRI LAXMI PRASAD SAHU
O R D E R PER L.P. SAHU, A.M.: This appeal filed by the Assessee is directed against CIT(A) - 5, Hyderabad’s order dated 26/10/2016 for AY 2009-10 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act, on the following grounds of appeal: “1 The order of the learned Commissioner of Income-tax ( Appeals) is erroneous in law and on the facts of the case.
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2 The learned Commissioner of Income-tax ( Appeals) ought to have concluded that the appellant who is in the business of real estate development, having invested sufficient funds in the projects and disclosing the same as inventories in the balance sheet, had set-up and also commenced the business operations as soon as purchase of inventory being land was made in earlier years. 3 The learned Commissioner of Income-tax ( Appeals) erred in holding that the concept of setting up and commencement is different for manufacturing, trading and real estate businesses. 4 The learned Commissioner of Income-tax ( Appeals) erred in considering that the routine business expenses which does not result in, any enduring benefit are capital expenditure. The learned Commissioner of Income-tax ( Appeals) ought to have considered that entering into joint development agreements evidences the setting up as well as commencement of real estate business, in which the assessee is operating.
5. The learned Commissioner of Income-tax ( Appeals ) erred in sustaining disallowance u/s 14A r.w.r 8D made by the learned Assessing officer.
Any other ground of appeal that may be pleaded with the prior approval by the Hon'ble Tribunal during the course of appellate proceedings. The appellant craves leave to add to, amend or modify the above grounds of appeal either before or at the time of hearing of the appeal, if considered necessary.
2. Ground Nos. 1 & 7 are general in nature, hence, need no adjudication. Ground No. 6 regarding disallowance u/s :- 3 -: Varapradha Real Estates Pvt. Ltd., Hyd.
14A rwr 8D, was not pressed by the ld. AR of the assessee at the time of hearing, therefore, the same is dismissed as not pressed. Therefore, ground Nos. 2 to 5 are pertaining to one issue relating to the disallowance of expenses, which is required for our adjudication as under:
Briefly the facts of the case are that the assessee company engaged in the business of purchasing, acquiring, taking on lease or exchanging, developing, selling, giving on lease or otherwise disposing of lands, buildings, flats for residential and other purposes, filed its return of oncome for the AY 2009-10 on 30/09/2009 declaring a total income of Rs. 58,85,469/- before set-off of brought forward losses. Subsequently, the case was selected for scrutiny and accordingly, statutory notices were issued to the assessee, against which the assessee produced books of account and other information called for.
3.1 During the course of assessment proceedings, the AO observed that the assessee had debited an amount of Rs. 69,19,950/- to the profit & loss account towards legal, professional and consultancy charges under the head “Administrative Expenses”. When the details were called for by the AO, the assessee furnished the same. On examination of the details furnished by the assessee, the AO observed that an amount of Rs. 43,18,262/- was incurred towards employees services rendered from M/s NCC Urban
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Infrastructure Ltd. for day-to-day administrative activities and that the company had deducted tax at source thereon and the balance amount of Rs. 26,01,688/- was spent towards due diligence and legal opinion obtained from various consultants for purchase of land and drafting of agreements. The assessee submitted that since the said expenditures was treated as revenue in nature, debited to the Profit & Loss account.
3.2 After considering the submissions of the assessee, the AO treated the said expenditures as capital expenditure on the ground that the same were incurred before the commencement of business.
When the assessee preferred an appeal before the CIT(A), the CIT(A) confirmed the order of AO.
Aggrieved by the order of CIT(A), the assessee is in appeal before the ITAT.
Before us, the ld. AR of the assessee submitted paper book containing pages 1 to 149 and submitted that the assessee has entered into development agreement-cum-GPA on 18/01/2008, which is placed at pages 16 to 127 of the paper book. Further, he submitted that while completing assessment, the AO has accepted all the expenses except legal, professional and consultancy charges as revenue
:- 5 -: Varapradha Real Estates Pvt. Ltd., Hyd. expenditure. The details of expenditures debited to P&L Account, which could be allowed, are as under: Rates and taxes 7,983/- Office maintenance 17,834/- Travelling and conveyance 2,87,477/- Telephones and stationery expenses 30,496/- Insurance 49,184/- Legal, professional and 69,19,950/- consultancy charges Auditors remuneration – statutory audit fee 3,00,000/- Watch and ward expenses 1,64,645/- 6.1 He submitted that out of the said expenditures, the AO did not allow the legal, professional and consultancy charges of Rs. 69,19,950/- as revenue expenditure, which is not justified. In support of his arguments he relied on the following judgments: 1. HMS Real Estate Pvt. Ltd., dated 27/12/2018 2. Dhoomketu Builders & Development (P) Ltd., [2013] 34 Taxmann.com 18 (Delhi) 3. Sardar Sarovar Narmada Nigam Ltd., [2012] 25 Taxmann.com 198 (Ahd. – Special Bench) 4. Swire Holdings (P) ltd. (2006) 6 SOT 621 (Bangalore – SMC) 5. Arcane Developers (P) ltd. {2014} 42 Taxmann.com 10 ( Delhi – HC) 6. Arkaaye Builders & Developers (P) Ltd. [2018] 96 Taxmann.com 152 (Delhi Tribunal) 7. Carefour WC & C India (P) Ltd. [2015] 52 taxmann.com 289 (Delhi – HC) 8. Hagwood Commercial Developers (P) Ltd. [2017] 82 Taxmann.com 475 ( Mumbai Tribunal)
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Omniglobe Information Tech India (P) ltd. [2016] 68 Taxmann.com 112 ( Delhi HC) 7. The ld. DR, on the other hand, relied on the orders of revenue authorities.
After hearing both the parties and perusing the material on record as well as the orders of revenue authorities, we observe from the expenditures debited to P&L Account cited supra, the AO allowed some of the expenditures by treating the same as revenue expenditure where as only legal, professional and consultancy charges of Rs. 69,19,950/- was not allowed by treating the same as capital expenditure. Whereas the CIT(A) observed that this expenditure may be allowed u/s 35D, but not u/s 37(1) of the Act. We observe that the assessee has entered joint development agreement on 18/01/2008 for the development of the land, which means, the commencement of the business was started in case of real estate business, which the assessee is doing. Therefore, there is no confusion in this regard that the assessee has not started its business. JDA was entered for development of the property which is to be treated as assessee started its business in the line of real estate business. The case law relied upon by the ld. AR support the assessee’s case. Therefore, the expenditure incurred by the assessee towards legal, professional and consultancy charges of Rs. 69,19,950/- is hereby allowed as revenue expenditure. Our
:- 7 -: Varapradha Real Estates Pvt. Ltd., Hyd. decision is support by the judgment of the Hon’ble High Court of Delhi in the case of Indian Railway Stations Development Corporation Ltd. Vs. Pr. CIT, [2019] 107 Taxmann.com 79 (Delhi), wherein the Hon’ble Court has held as under: “The commercial activity the assessee is, undoubtedly, engaged in is setting up as an SPY providing services. These services are of specific kind, i.e., preparation of development plans and projects for the development of railway stations. The Indian Railways apparently conceived the idea of setting up the assessee as a special purpose vehicle to re-develop its railway stations. Each of the railway stations. therefore, as part of its plan needs to be bid for separately and each station needs to be presented with a development plan. Not only was the SPY/assessee required to draw a development plan but also engaged itself in the entire project. • It is well settled that there is no bright line that can be determinative as to when business commences. In case of the service sector, where the entity has involved itself in various kinds of steps, some of which are preliminary to setting up the main substantial commercial venture, the linkage between these preliminary steps and nature of the ultimate activity maybe a relevant factor to be taken into account. Therefore, even certain kinds of preliminary steps, such as engaging in negotiation or employment of personnel, could be relevant even though actual activity might not be involved. • Keeping this principle in mind, it is opined that the assessee's activity, which it claims to be preliminary steps towards the fulfilment of the purpose, which is embodied in the MoU clearly indicates that it had set up its business and that these steps were for the ultimate
:- 8 -: Varapradha Real Estates Pvt. Ltd., Hyd. fulfilment of its purposes, which was the preparation of development plans leading to the projects. • The Principal Commissioner in the impugned order, was plainly wrong in holding otherwise. For the aforesaid reasons, this writ petition is to succeed. The impugned order of the Commissioner, as well as the Assessing Officer are set aside.”
8.1 Accordingly, the grounds raised by the assessee on this issue are allowed. Pronounced in the open court on October, 2021.