DY.CIT CENTRAL CIR-6(4) , MUMBAI vs. M/S. CITRA PROPERTIES LTD, MUMBAI

O R D E R

Per : Kuldip Singh, Judicial Member:

without appreciating the fact that no income from the stated business activity of real estate development was offered by the assessee during the year under consideration and, the said business expenses cannot be allowed against any other source of income.

4. On the facts and in the circumstances of the case, whether the learned CIT(A) was right in restricting the receipts from on-money to 35% of the total receipts, relying upon the order of the Hon'ble Income Tax Settlement Commission under section 245D(4) of the Income tax Act, 1961, dated 30.04.2019, without considering that the 16 entities of the Indiabulls Group had not made true and full disclosure before the Hon'ble Commission.

4. The appellant craves to leave, to add, to amend and / or to alter any of the ground of appeal, if need be."

2. Briefly stated facts necessary for adjudication of the controversy at hand are: the assessee company is into the business of real estate project and other related auxiliary activities. Initially the return filed by the assessee declaring net loss of Rs.4,96,32,441/- and book loss under section 115JB of the Income Tax Act, 1961 (for short ‘the Act’) at Rs.4,95,59,244/- which was revised on 03.09.2016 declaring loss under section 115JB at Rs.4,95,59,244/- under section 143(1) of the Act. Subsequently, on 3 M/s. Citra Properties Ltd. the basis of search action carried out in case of Indiabulls group on 13.07.2016 the case of the assessee company was centralized and notice under section 153 dated 09.08.2017 was served upon the assessee and in response to which the assessee filed the return of income declaring loss of Rs.4,39,76,595/- and book loss under section 115JB of the Act at Rs.4,95,59,244/-. Then notice under section 143(2) and 142(1) of the Act along with questionnaire was served upon the assessee. Assessing Officer (AO) noticed that the assessee has not offered any income from project sale but in the Profit & Loss account assessee claimed advertising, sales and marketing expenses to the tune of Rs.5,13,68,651/- under the head “other expenses”. On failure of the assessee to file any detail or explanation and any income recognition from the project AO proceeded to disallow expenses of Rs.5,13,68,651/-. AO also disallowed the expenses claimed by the assessee against “on money” and treated the entire amount of Rs.2,92,36,175/- as unaccounted income of the assessee under section 68 of the Act and added the same to the income of the assessee and taxed under section 115JB of the Act @ 30%. AO accordingly framed the assessment under section 143(3) read with section 147 of the Act.

3. Assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has partly allowed the same. Feeling aggrieved with the impugned order the Revenue has come up before the Tribunal by way of filing present appeal.

of the facts and circumstances of the case and law applicable thereto.

Ground Nos.1 & 2 5. Undisputedly the assessee has claimed advertising sales and marketing expenses to the tune of Rs.5,13,68,651/- under the head “other expenses”. AO disallowed the same on the ground that the assessee has failed to justify its allowability as revenue expenses. However, the Ld. CIT(A) deleted the disallowance made by the AO by returning following findings: “7.3 The findings of the AO in the assessment order and the submission made by the appellant has been considered. During the year, the appellant has incurred expenses of Rs.5,13,68,6517- on advertisement, marketing and sales activity. The appellant has submitted that the AO has not doubted the genuineness of these expenses and merely disallowed the expenses in the absence of any revenue earned by the appellant. It is also submitted that the advertisement, marketing and sales expenses are linked with sales and they do not part of the cost of the project. The appellant has further relied upon (CDS Rules, which has been notified by CBDT.The appellant has further submitted that the advertisement expenses are allowable as expenditure in section 37 of the Income-tax Act, 1961 for which the appellant has relied upon the decision in the case of Citi Financial Consumer Finance Ltd. vs. Commissioner of Income-tax, New Delhi, B.K.Khanna& Co. (P) Ltd. vs. CIT(2001), Commissioner of Income-tax vs. Monto Motors Ltd, (ITA No.978/2011) and /TO vs. Selene Construction Limited [ITA No.3385/Del/2014]. The AO has not given any specific reason for disallowance of advertisement, sales and marketing expenses. The only reason for making such disallowance is that no income has been earned by the appellant during the year. The finding of the AO is based on wrong interpretation of the facts of the case. Any expenditure which is incurred for the business purpose is allowable as business expenditure u/s.37 of the Income-tax Act, 1961. The AO has not doubted the genuineness of the expenses incurred. Even though no income is earned from the business during the year, the business expenditure which is otherwise allowable has to be allowed. In the case of the appellant, the business of the appellant has started and the expenses have been incurred in relation to the normal course of the business. 5 M/s. Citra Properties Ltd.

In the case of CIT v. New Savan Sugar &Gur Refining Co. Ltd. [1990] 185 ITR 564 (Cal.), the Hon'ble court has held that it is for the Tribunal to decide whether the expenditure is wholly incurred for the purpose of keeping the assessee company in operation and earning income in as much as the concept 'wholly' pertains to quantum of the money expended. Even if a particular expenditure is un-remunerative, such expenditure is nonetheless a proper deduction, if such expenditure is made wholly and exclusively for the purposes of earning such income. [Para 2.5] The High Court of Gujarat, in the case of Smt. VrrmatiRamkrishnav. CIT [1981] 131 ITR 659 (GUJ.) has analyzed the statutory language and laid down various principles, in various decided cases and made propositions about allowability of the expenditure.

The Hon'ble Gujarat High Court has held as under:

". . . In view of the decision of the same High Court in Smt. PadmavatiJaikrishna v. CIT [1975] 101 ITR 153, the interest on loan taken by the assessee to meet her personal expenses and tax liability was not deductible in computing the assessee's income under the head 'Other sources". On a comparison of the language of section 37(1) and section 57( Hi), it becomes clear that the scope of the former section is essentially wider than that of the latter. The word 'business used in section 37(1) in association with the expression "for the purposes of" is a word of wide connotation.

In the context of a taxing statute, the word 'business' would signify an organised and continuous course of commercial activity, which is carried on with the end in view of making or earning profits. Under section 37(1), therefore, the connection has to be established between the expenditure incurred and the activity undertaken by the assessee with such object. As against this, section 57(7/7) uses the expression "for the purpose of in conjunction with the words "making or earning of income" from "other sources". The nexus thereunder must, therefore, be between the expenditure incurred and the income earned and not between the expenditure incurred and the activity which is the source of the income.

It is thus clear that whereas any expenditure which is incurred in order indirectly to facilitate the carrying on of a systematic activity which qualifies as business may be deductible under section 37(1), similar expenditure incurred in order indirectly to facilitate the carrying on of the activity producing income would not be allowable under section 57(iii). The implication of section 57(iii) is, therefore, on its plain terms narrower than that of section 37(1). It is for this reason that the decisions 6 M/s. Citra Properties Ltd. given in the context of section 37(1) cannot be straightaway applied to cases falling under section 57(iii).

On an analysis of the statutory language and principles laid down in the decided cases referred to above, the following propositions clearly emerge:

(i)in order to decide whether an expenditure is a permissible deduction under section 57(iii), the nature of the expenditure must be examined; (ii)the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee; (iii)the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning "income from other sources"; (iv)the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say the expenditure should not have been incurred for such purpose as , also for another purpose, or for a mixed purpose; (v)the distinction between purpose and motive must a/ways be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee in incurring the expenditure; (vi)if the assessee has no option except to incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expense for preserving and maintaining the source of income, then, undoubtedly, such expenditure would be an allowable deduction; however, where the assessee has an option and the option which he exercises has no connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an allowable deduction; (vii)it is not necessary, however, that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income; (viii)if, therefore, it is found on application of the principles of ordinary commercial trading that there is some connection, 7 M/s. Citra Properties Ltd. direct or indirect, but not remote, between the expenditure incurred and the income earned, the expenditure must be treated as an allowable deduction; (ix)it would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carrying on of the activity which is the source of the income; the nexus must necessarily be between the expenditure incurred and the income earned; (x)it is not necessary to show that the expenditure was a profitable one or that in fact income was earned; (xi)the test is not whether the assesses benefited thereby or whether it was a prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bona fide for making or earning the income; (xii)the question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being one of law..." In view of the above, the disallowance of advertisement, sales and marketing expenses and its capitalization in WIP by the AO is not accordance with law. Accordingly, the disallowance of advertisement, sales and marketing expenses made by the AO is deleted. The AO is directed not to add the advertisement, sales and marketing expenses to WIP.”

Ground Nos.3, 4 & 5

Rs.830.90 Crore, considering the offer in original petition of Rs.494.53 crores and additional offer made of Rs.405 crores (excluding the on-money on sale of plot of land of Rs.50.27 crores and TP adjustment of Rs.18.36 crores - totaling to Rs.68.63 crores). Thus, the net profit percentage comes to almost 55% of cash so generated / received. Thus, 35% of total on-money has been fianlised by the Settlement Commission to determine the unaccounted income from on-money. Further, the Hon'ble Settlement Commission in the order u/s.245D(4) dated 30.04.2019 has also discussed the issue regarding extrapolation of on-money. In respect of extrapolation of on-money, in para 11.2.2 of the order, the Hon'ble Settlement Commission has held that no case has been made by the department for extrapolation of on-money. Therefore, extrapolation of on-money in the settlement application for various years is reasonable on the basis of evidences seized during the search and subsequent enquiries made by the department. 8.3.4 The facts of the case of the appellant are similar to the facts of the case of the other applicants of the group before the Hon'ble Settlement Commission. In view of the above discussion and the findings of the Hon'ble Settlement Commission in the order u/s.245D(4) dated 30.04.2019,the quantum of unaccounted money from On-money would also be 35% of the total On-money. Thus, the addition of total on-money of Rs.2,92,36,175/- is restricted to 35% of total on-money, which comes to Rs.1,02.32,661/- and the balance addition of Rs.1,90,03,513/- is deleted. Further, respectfully following the order of the Hon’ble Settlement Commission in other group cases of the Indiabulls group, the addition of Rs.10,80,55,464/- in respect of extrapolation of on- money is deleted. ”