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Income Tax Appellate Tribunal, DELHI B BENCH: NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
The captioned cross-appeals filed by the Revenue and the assessee against the order dated 29.07.2016 passed by Ld. Commissioner of Income Tax (A)-30, New Delhi [“Ld.CIT(A)”] in Appeal No.289/11-12/974 passed u/s 250(6) of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 30.12.2011 passed u/s 143(3) of the Act pertaining to assessment year 2009-10. Brief facts of the case are that the assessee is a Private Ltd.
2. Company and filed its return of income on 30.09.2009, declaring total income at INR 16,34,58,520/-. The case was taken up for scrutiny by way of issue of notice u/s 143(2) dated 14.09.2010. The assessee was engaged in the business of real estate and declared income from “house property” and “business in profession”. The assessment was completed vide order dated 30.12.2011 at a total income of INR 22,04,06,021/- by making addition of INR 3,67,06,904/- under the head “income from house property” and further addition of INR 2,63,10,771/- towards unrealized debtors and disallowance of INR 49,41,898/- was made out of expenses on which no TDS was deducted. In appeal, the Ld.CIT(A) has deleted the addition made under the head “income from house property” and on account of unrealized debtors and sustained the addition of INR 21,60,237/- out of total disallowances of INR 49,41,898/- made by AO on account of non-deduction of tax at source.
3. Against the order of Ld.CIT(A) deleting the disallowances/additions, the Revenue is in appeal and the assessee is also in appeal against the confirmation of disallowances made by Ld.CIT(A).
4. The Revenue has taken following grounds of appeal:- 1. “On the facts and in the circumstances of the case, CIT(A) has erred in law and on facts in deleting addition of Rs. 3,67,06,904/- made by AO which was deducted by the assessee from the total rental receipts of Rs. 5,02,99,028/- received by it during the F.Y. 2008-09 whereas TDS was claimed in respect of total rental receipts.
2. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,63,10,771/- made by AO on account of Page | 2 unrealized debtors in absence of any justification and any supporting Documentary Evidence.
That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 27,81,660/- made by AO on account of expenses debited in P&L account on which tax was not deducted at source.
That the order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law.
The grounds of appeal are without prejudice to each other.
7. The appellant craves to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of the appeal.”
5. And the assessee has also taken following grounds of appeal:- 1. “That the order passed by the Assessing Officer and Commissioner of Income Tax (Appeals)-30, New Delhi are bad in law and void ab initio.
2. That on the facts and circumstances of the case and in law, the CIT(A)-30, New Delhi erred in disallowing the sum of Rs.21,60,237/- (inadvertently written by CIT(A) as Rs.22,42,948/-) out of total disallowance of Rs.49,41,898/- on the ground that tax in respect of such expenditure was not deducted at source during the Financial Year 2008-09.
3. The appellant craves permission to add, amend, alter or vary all or any grounds of appeal on or before the date of hearing of the appeal.”
6. Further during the course of hearing, the assessee has taken additional grounds of appeal which are as under:- 1. “Without prejudice to Original Ground of Appeal No.2, the Assessing Officer and CIT-A erred in confirming disallowance of Construction expenses of Rs.21,60,238/- for non-deduction of Tax at Source despite the fact that TDS on certain Construction Expenses was deducted and deposited before filing of return of Income.
Without prejudice to original Ground of Appeal
No.2, the Assessing Officer and CIT-A erred in not considering plea of appellant to reduce income in proportion to disallowance made u/s 40 (a)(ia) on the basis of offering of income under Percentage of Completion method.
3. Without prejudice to original Ground of Appeal
No.2 and in case disallowance u/s 40. (a)(ia) is to be sustained for any reason, deduction in respect of such expenses may be allowed in later year as TDS stands deducted and deposited.
4. The above grounds which are legal and emanating from records and it can be taken before the Hon'ble Appellate Tribunal, as held by the Hon'ble Supreme Court in the case of NTPC vs. DCIT 229 ITR 383 (SC).
5. It is prayed that the additional ground of appeal may kindly be admitted and adjudicated upon alongwith the original ground of Appeal no.2, of which these are only a supplementary grounds in nature.”
7. In the application for additional grounds, the assessee has requested that these grounds are legal in nature and therefore, deserves to be admitted for. He placed reliance on the judgement of Hon’ble Supreme Court in the case of NTPC vs DCIT 229 ITR 383 (SC). After considering the grounds of appeal taken and the prayer of the assessee, in the interest of justice, the additional grounds taken by the assessee are admitted for adjudication.
8. Since both the appeals have common issues, both are taken together. First, we take up the grounds of appeal taken by the Revenue. In Ground No.1, the Revenue has challenged the deletion of 9. addition of INR 3,67,06,904/- made by the AO.
10. Before us, Ld.Sr.DR for the Revenue vehemently supported the order of the AO and submits that the assessee has claimed TDS on the amount of rental receipts of INR 5,02,99,028/- but disclosed income of INR 1,35,92,124/- as a gross rental income under the head “income from house property” which is evident from the computation of income placed at Paper Book page 2. Ld. Sr. DR has argued that assessee had claimed TDS on the gross amount of rent thus, the AO was of the view that the assessee has not disclosed the rental income to the extent of INR 3,67,06,904/-. He submitted that the assessee claimed that the differential amount of INR 3,67,06,904/- pertained to the portion of complex which was not owned by the assessee company and therefore, this amount was reimbursed to the customers who were the actual beneficiaries of such rent. Ld. Sr. DR submitted that as per section 22 of the Act, three conditions are necessary for taxing the income under the head “income from house property” i.e. firstly, property consist of any building or land pertaining thereto; secondly, the assessee should be owner of the property; and thirdly, the property should not be used by the owner for the purpose of any business or profession. He submits that the claim of the assessee is that it is engaged in the business of real estate and the certain areas were sold to various customers however, the full and final payments were not received therefore, the rent received till the date of transfer of title and execution of Tri-Party Agreement between the parties, the rental income received which was actually belong to the customers to whom the property was sold but according to Ld. Sr. DR, since the title during the period was with the assessee therefore, the rent of such period deserves to be held as income of the assessee and therefore, he requested for the confirmation of the order of AO.
11. On the other hand, Ld.AR for the assessee submits that the assessee is a real estate developer and when the construction was completed, areas were rented out to various parties. Thereafter, when any person approached to the assessee company for purchase of the said area till the receipt of the full and final payment and execution of the Sale Deed, the rent received by the assessee was its own income. However, assessee executed Title Deed and also execute Tri-Party Agreement to transfer the Lease Agreement earlier executed between the assessee and the tenant to the new owner and the tenant. The rent received during this intermittent period was since actually belonged to the new owner, therefore, such rent was not included in the total income of the assessee company and ultimately, was transferred to the real owner of the property. Since the TDS was deducted in the name of the assessee company and there was no occasion for the assessee to transfer such TDS to the real estate owner. Therefore, the same is claimed against the total tax liability which is in accordance with law. In view of these facts, Ld.AR requested for the confirmation of the order of Ld.CIT(A) deleting the addition so made.
We have heard the rival submissions and perused the material available on record. Before commenting upon the assessee, we first gone through the findings of Ld.CIT(A) which are contained in para 4.4 of the order. For ready-reference, the same is reproduced as under:- 4.4. “I have carefully considered assessment order, written submissions, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant are discussed as under:-
(i) In the assessment order, the A.O. has stated that the assessee has shown rental income under the head Income from house property at Rs. 1,35,92,565/-. The assessee has constructed a commercial property known as Park Centre at sector-30, Gurgaon. Most of the units were sold out, but none of them was registered during the previous year. (ii) In the case of units, for which only part payments, were received by the assessee and such units were given on rent, the rent was received by the assessee, in respect of such units and not paid to the customers/purchasers, as full payment was not made by them, as assessee was the legal owner. Accordingly, rent received in respect of these units at Rs.1,35,92,124/-, was offered by the assessee as its Income from house property. The lease agreements were entered between assessee and the tenants. (iii) The assessee has obtained the occupancy certificate on 16.6.2008. However, some of the customers, who have already made full payment but not executed the sale deed, has given letters of intent for giving their units on rent through the assessee and rent received by the assessee in respect of such units, at Rs. 3,67,06,904/-, was subsequently paid to the owners. The tripartite lease agreements were entered by the assessee and purchaser with the tenants. (iv) During the assessment proceedings, the A.O. asked the assessee to furnish supporting evidence to establish that amount of Rs. 3,67,06,904/-, is paid to the owners of the property in the form of sale deed, agreement to sale, tripartite, evidence of receipt of full payment. However, the A.O. was of the view that, as assessee was the legal owner of the property during F.Y. 2008-09 and therefore, total rent of as Rs. 3,67,06,904/-, is the income of the assessee. Accordingly, the A.O. was of the view that payment of Rs. 3,67,06,904/-, made to the purchasers, who have made the full payment, but sale deeds are not executed, cannot be reduced from the total rent. Therefore, the A.O. treated rent of Rs. 3,67,06,904/-, as Income from house property of assessee.
However, above submission of the assessee did not find favour with the A.O. and accordingly, made the addition. (v) During the appellate proceedings, the appellant reiterated the submissions made before the A.O. and has also stated that the details as required by the A.O. during the assessment proceedings, were filed vide letter dated 04.12.2011, a copy of which is filed in the appellate proceedings in the form of paper book. These details include the copy of lease agreements, space buyers agreements, receipt of payments on sample basis, since these copies were in huge volume. It is also submitted that copies of invoice were also issued by the customers, to whom reimbursement of rent was given. (vi) During the appellate proceedings, the AR has submitted that the appellant became party to these lease agreements, since the buyers have not become legal owner at the time of renting out these units, but full payments have been made. In this way the appellant safeguarded the interest of its customers. It has also been submitted by the AR that in respect of units, for which sale deed have been subsequently executed, in such cases, the rent was directly received by the purchasers from the tenants. (vii) It is also submitted by the appellant that as the purchasers have made full payment and possession of units is offered and taken by customers and therefore, as per section 27(iiia) of the Act, these purchasers have become owners for the purpose of rental income from such units. It is further submitted by the AR that the reimbursement of rent was paid to the purchasers after TDS @ 10% and therefore, the same income has been taxed twice by the A.O. It is further submitted by the AR that even the tenant has made the payment of rent after deducting tax at source. From the above, the following facts emerged:- ➤ the purchasers were not the legal owners, where full payments have been made for want of non execution of sale deed, ➤ the purchasers with respect to lease rent, has become beneficial owner as per provisions section 27(iii) of the Act, and ➤ the rent received by the appellant from the tenants, is reimbursed to the purchaser/beneficial owners. From the above, it is clear that the amount of rent reimbursed to the purchasers at Rs. 3,67,06,904/-, is not the income of the appellant and the reimbursement to the purchasers has been made after TDS. In view of the above, I am of the considered opinion that the rent of Rs. 3,67,06,904/-, reimbursed to the purchasers, cannot be taxed in the hands of the appellant and therefore, I agree with the arguments of the appellant. Accordingly, findings of the A.O. are erroneous and addition of Rs. 3,67,06,904/-, is deleted. Accordingly, ground no. 1, is hereby allowed.”
From the perusal of the observations of Ld.CIT(A), we find that Ld.CIT(A) has threadbare discussed the issue and further seen that the assessee has duly declared the rent pertaining to the areas belonging to it in terms of section 22 of the Act. However, when certain areas were sold, the rent received by the assessee on behalf of the customers who purchased such areas is the income of new owner and accordingly, assessee transferred the rent to them for which necessary details alongwith their bills, invoices were produced before the authorities below as available at pages 92 to 135 of the Paper Book. Further, the assessee has also filed the copy of Tri-Party Agreement executed in this regard. It is also seen that the assessee has declared income by following the Percentage of Completion Method (“POCM”) which has not been doubted. Therefore, we find no infirmity in the order of the Ld.CIT(A) deleting the additions made. Accordingly, the same is hereby upheld. Ground No.1 of the Revenue is dismissed. Page | 9
Ground No.2 raised by the Revenue is with regard to the deletion of addition of INR 2,36,10,771/- made by the AO on account of unrealized debtors which was deleted by Ld.CIT(A).
Brief facts pertaining to this ground of appeal
are that the assessee out of total receipts has deducted a sum of INR 2,63,10,771/- on account of unrealized debtors by claiming that this amount pertained to the maintenance charges which was not received after the expiry of three months from the date of bill and therefore, recovery of such amount is doubtful. The AO however, had not accepted this contention and made the addition of the said amount.
16. Before us, Ld. Sr. DR submits that the assessee has failed to file the details of such parties and it is not acceptable that the occupant has not paid the maintenance charges for such long period and therefore, he requested for the restoration of the addition made by the AO.
17. On the other hand, Ld.AR supported the order of Ld.CIT(A) and submits that where the assessee had not received the charges within the period of three months from the date of raising the bills to the customers towards maintenance charges and thus, their realization was doubtful. Accordingly, the said amount was reduced from the gross receipts. This practice was consistently followed by the assessee on regular basis and the income on such unrealized debtors were offered for tax as and when the amount was received in subsequent years and the same was accepted by the Revenue without any doubts in subsequent assessment years. Therefore, again making addition of the said amount in the year under appeal is double taxation. The Ld.CIT(A) after appreciating these facts has deleted the addition and the Ld.AR prayed for the confirmation of the order of Ld.CIT(A).
We have heard the rival contentions and perused the material available on record. The issue in this ground is with respect to the writing off of the unrealized debtors out of gross Revenue. The claim of the assessee was that the amount was not recoverable at the end of the year and therefore, claim of deduction was made out of gross receipts. The assessee has also filed the reconciliation of the gross amount of INR 2,63,10,771/- claimed as deduction according to which INR 2,02,436/- recoverable from Sinha Shipping Pvt. Ltd. is pending before the Competent Court and the remaining amount of INR 56,27,647/- was written off after verification of various claims made by the respective customers. It is also seen that the assessee has followed this practice of reducing of unrealized claim from the gross receipts declared on year after year basis which has not been doubted by the Revenue in any subsequent year and for the year under appeal only, this amount is added back to the income of the assessee. Thus, following the principle of consistency and further looking to the fact that the said amount has already suffered tax in subsequent years when the said sum was realized, we find no infirmity in the order of Ld.CIT(A) who after considering these facts, deleted the additions made by AO. Accordingly, the order of Ld.CIT(A) on this score is upheld. Ground No.2 raised by the Revenue in this appeal is accordingly, dismissed.
Ground No.3 of the Revenue’s appeal is against the deletion of addition of INR 27,81,660/- made out of total disallowance of INR 49,41,898/- whereas the assessee in all the grounds of its appeal Page | 11 has challenged the confirmation of disallowance of INR 21,60,237/- (wrongly taken by Ld.CIT(A) at INR 22,42,948/-) out of construction expenses.
Before us, Ld.AR for the assessee submits that the assessee is recognized its income by following POCM according to which the expenses which are to be incurred in subsequent years, a provision is made and claimed against the receipts which is accepted method of revenue recognition. In POCM, revenue is recognized when substantial amount of sale is realized and corresponding construction is yet to be completed and physical possession was not given to buyer. Thus in order to provide parity between revenue and expenses, a provision is made for the expenses which are going to be incurred in future. Since it was a provision made for future expenditure therefore, there is no question of making TDS out of the same. The Ld.AR for the assessee further submits that in subsequent years when the said expenses was incurred and paid, necessary TDS was made in accordance with law and all the details were submitted before the AO in this regard. He further submits that out of the total provision of INR 49,41,898/-, a sum of INR 27,81,660/- related to the cost of material to be incurred in subsequent year therefore, no TDS is required to be made on such amounts. Ld.CIT(A) after considering the said facts, has deleted the amount of pertaining to the material however, has uphold the balance disallowance by treating the same as related to services by ignoring the fact that neither the services to such extent were obtained during the year nor the payments were made by the assessee. Therefore, no disallowance could be made u/s 40(a)(ia) of the Act. It is alternatively submitted by Ld. AR that in subsequent Page | 12 year, the TDS was deducted and deposited before filing of the return of income and therefore, no disallowance should be made to the extent of the addition confirmed by the Ld.CIT(A) and therefore, he prayed for the deletion of the disallowance uphold by Ld.CIT(A).
On the other hand, Ld. Sr. DR vehemently supported the order of the AO and submits that the assessee has failed to deduct the tax at source on the expenses claimed in the P&L Account. He further submits that Ld.CIT(A) wrongly deleted the addition of INR 27,81,660/- by treating the same as pertaining to material without there being any evidences filed by the assessee nor any opportunity was given to the AO to make his submissions on this issue. He therefore, prayed that Ld.CIT(A) has rightly confirmed the disallowance and with respect to the deletion made by the Ld.CIT(A), the Ld. Sr.DR requested that the matter may be sent back to the AO for making verification whether the same pertain to material. He prayed accordingly.
We have heard the rival submissions and perused the material available on record. From the perusal of the order of Ld.CIT(A), we find that Ld.CIT(A) has deleted the disallowance of INR 27,81,660/- on the basis of the submissions of the assessee that this relates to the provision towards the material however, no opportunity was given to the AO for making verification of this fact. It is further seen that the remaining amount was uphold by treating the same as services by ignoring the facts that this amount was not paid during the year and only provision is made for future expenses in terms of POCM method. It is also seen that the assessee in additional ground claimed that TDS was deducted before filing of return of income therefore, no disallowance could be made in view of the Page | 13 provision of section 40(a)(ia) of the Act. In view of these facts, in our considered opinion this issue needs to be examined afresh by the AO therefore, the AO is directed to verify whether the claim of the assessee that INR 27,81,660/- relates to the provision for material and further verify whether due TDS was deducted and deposited on the service portion before filing of return of income and decide the issue in accordance with law and also keeping in mind the method of revenue recognition followed by the assessee.
As a result, Ground No.3 of the Revenue’s appeal and all the grounds of the assessee’s appeal are partly allowed for statistical purposes.