ESSAE SUHAGRAJA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(1), BANGALORE

The brief fact of the case shows that assessee is a company engaged in the business of real estate, filed its return of income u/s. 139 of the Act on 30 September 2018 at a total income of ₹ 693,860/–. In response to a notice u/s. 148 of the Act the assessee filed its return of income declaring a total income of Rs.1,53,04,240. The assessee has claimed the cost of Transferable Development Rights (TDER) allowable in assessment year 2018 – 19 of ₹ 54,538,780/– as expense under the head business and profession. The case of the assessee was reopened by issue of notice u/s. 148 of the Act stating that assessee failed to declare proportionate capital gain on the transfer of capital gains during the financial year 2017 – 18. Based on this, after taking the approval of the Principal Commissioner of Income Tax, Bangalore on 22 March 2022, a show cause notice u/s. 148A (b) of the Act was issued on 23 March 2022. The same was replied on 29th of March 2022 and accordingly notice u/s. 148A (b) was issued to the assessee on 31st of March 2022 disposing off the objections. Notice u/s. 148 was issued on 31st of March 2022 which was responded to by filing the return in response to that on 11 May 2022.

The issue in the appeal is that assessee has purchased the land to the extent of ₹ 1,96,020 sq.ft. and building to the extent of 21,350 sq.ft. in the financial year 2005 – 06. This asset was rented out by the assessee and income from house property was declared in the return of income. The capital asset was converted into stock in trade in the financial year 2011 – 12 upon conversion of land it was held as a capital asset converted into stock in trade and the capital gain of ₹ 191,622,660/– was computed u/s. 45 (2) of the Act which was liable to be subjected to tax in the year of sale or otherwise transfer of the stock in trade. Assessee entered into a joint development agreement with a builder in financial year 2013 – 14 as per agreement dated 2 August 2013 registered as document with Sub- Registrar Bangalore. As per the joint development agreement the assessee was entitled to receive super built up area of constructed area of 1,49,640 sq.ft. for giving up 1,40,670 sq.ft. of land. Thus, the assessee was entitled to receive 34% of total built up area with proportionate common amenities, car parking slots, and garden area by way of consideration in view of giving up 66% of land. The assessee received the constructed area in two tranches (1)

Thus, as per the assessee the income u/s. 45 (2) is chargeable to tax only in the years when the flats are sold to the ultimate buyers whereas as per the opinion of the learned AO income is also chargeable to tax in the year of receipt of possession of constructed flats from the builder in view of the stock of land.

Thus, in the reassessment proceedings, the assessee updated the income tax return as per the approach of the revenue, but assessee has claimed cost of transferable development right allowable to the assessee of ₹ 54,538,780 as expense.

The assessee has claimed the cost of transferable development right allowable to it in assessment year 2018-19 to the extent of ₹ 54,538,780/– as expense under the head business. This is the assessee's share of cost of TDR incurred by the developer. The learned assessing officer has disallowed the above cost. The claim of the learned assessing officer is that the entire cost of transferable development right was purchased over the period 14 January 2011 to 2 January 2017 before transfer of super built up area to the assessee in financial year 2017 – 18. As per the joint development agreement the assessee was required to pay the amount within 90 days to the developer. The fact of purchase of transferable development right is intimated to the assessee in the supplementary joint development agreement dated 2 May 2018 hence the assessee was required to pay the amount within the financial year 2018 – 19. Further this expenditure should be appropriated as cost in respect of all the sales of specified super built up area made by the assessee. During the current year the assessee has not sold any super built up area, hence the cost incurred towards the super built up area will have to be added to the closing work in progress. Thus, as per ld. AO as no super built up area was sold in the current year, no deduction will be allowed under the head income from business payment of transferable development right. Hence the same should have been included in the closing stock of super built up area in financial year 2018 – 19. Thus, the claim of the assessing officer is that that during the assessment year 2018 – 19 the assessee was handed over the possession of 76,865 ft²/sq.ft. of built up area of 449 flats by the builder which has resulted in transfer of ₹ 72,154 .68 sq.ft. of undivided area to the builder. The assessee has offered capital gain of ₹ 70,536,027 to tax in the return of income for assessment year 2018 – 19. This amount is determined based on total land area proportionate to the area of the land handed over to the builder during this year.

However, the learned assessing officer noted that during financial year 2017 – 18 relevant to this assessment year, the assessee has entered into seven agreements to sell seven flats to different prospective buyers however the occupancy certificate was received by the assessee on 6 June 2018 therefore during the financial year 2017 – 18 the sale of flats were not finalized. It was further held that as assessee is following mercantile system of accounting, the corresponding expenditure will have to be accounted in the year in which the liability arises. On joint reading of the joint development agreement and the dates of purchase of the transferable development right provides that the same is expenditure pertaining to financial year 2018 – 19 and subsequent years provided the fact that the corresponding sale of the flats also happens in the relevant year. According to him, allowing the accounting expenditure in the year of payment will lead to accounting the same as per cash system of accounting and therefore it will result in a mixed system of accounting which is not permitted. Accordingly, as no sales have been made during the relevant financial year in assessment year 2018 – 19 no cost of transferable development right expenses of ₹ 54,538,780/– is allowable hence same was disallowed.

Correspondingly assessment order was passed u/s. 143(3) r.w.s. 147 of the Act on 3 March 2023 determining the total income of the assessee at ₹ 69,843,018/–.

The assessee aggrieved with the same preferred an appeal before the learned CIT – A challenging the reopening of the assessment as well as the addition on the merits of the case of disallowing the cost of transferable development right. The learned CIT – A dismissed the appeal of the assessee on reopening of the assessment. Further with respect to the allowability of the cost of TDR expenditure wherein it was held that that the cost of TDR as deduction for the assessment year 2020 – 21 is disallowable and same is to be claimed in assessment year 2018 – 19. The learned CIT – A dismissed the appeal of the assessee holding as under: -

The learned departmental representative vehemently supported the orders of the learned lower authorities.

We have carefully considered the rival contention and perused the orders of the learned lower authorities. The fact clearly shows that the cost of purchase of transferable development rights by invoice No. 31st of March 2020 amounting to ₹ 54,538,780/– has been denied to the assessee either in the assessment year 2018 – 19 or for assessment year 2020 – 21. For the assessment year 2018 – 19 the assessee is denied the deduction because there is no sale of flats during the assessment year 2018 – 19. For the assessment year 2020 – 21 the deduction is denied

No other grounds are pressed before us and therefore the appeal of the assessee in for assessment year 2018 – 19 is partly allowed. is filed by the assessee for assessment year 2021 – 22 against the appellate order passed by the Commissioner of income tax (appeals) – 15, Bangalore on 31st of January 2025 wherein the appeal filed by the assessee against the penalty order passed on 22nd of June 2023 was dismissed.

The fact of the case shows that that the assessee has filed its return of income u/s. 139 of the Act on 13 February 2022 declaring a total income of ₹ 146,167,590/–. The assessee revised its return of income u/s. 139 (5) of the Act on 30 March 2022 declaring total income of ₹ 111,105,048. The case of the assessee was picked up for the scrutiny which has resulted into the assessment order passed u/s. 143 (3) of the Act on 20 December 2022 wherein a sum of ₹ 4,646,000/– was added to the returned of income of the assessee out of the total expenses of ₹ 50 lakhs on account of the keyman life insurance premium paid under employee benefit expenses. Under the terms of insurance premium paid u/s. 37 (1) of the Act a sum of ₹ 4,646,000 was regarded as the investment fund in the various portfolio for the sole purpose of the wealth appreciation which is held to be not an allowable business expenditure.

The assessee preferred an appeal before the learned CIT – A against the assessment order. The assessee has also filed form No. 68 seeking immunity from levy of penalty as per the provisions of section 270AJ of the Act on 22 December 2022. However, as the penalty proceedings have been initiated under the circumstances referred to under subsection (9) of section 270 A of the Act the order rejecting the said application is not required to be passed in pursuance to the provisions of section 270 AA (3) of the Act. Therefore, notice u/s. 270A (2) (A) was also issued to the assessee, the assessee explained that that its claim of deduction u/s. 37 (1) of the Act of keyman insurance premium is bona fide and no penalty could have been levied on the same. The learned assessing officer rejected the claim of the assessee and held that the disallowance of ₹ 4,646,000/– has resulted into the underreporting of income in consequence to misreporting thereof and therefore liable for penalty at the rate of 100% of ₹ 1,169,305/–, the learned AO levied the penalty at the rate of 200% amounting to ₹ 2,338,610 by passing an order u/s. 270A of the Act on 22 June 2023.

The assessee aggrieved with the same preferred an appeal before the learned CIT – A wherein the appeal of the assessee was dismissed. The learned CIT – A held that assessee has failed to establish that it has not resorted to misrepresenting of income by claiming the premium paid of the directors who are brothers in the appellant company. In view of the fact, it was held that it clearly established that the said insurance scheme is wealth maximization scheme and not claim of any insurance scheme. The assessee has resorted to underreporting in consequence to misreporting income u/s. 270A (9) of the Act, accordingly, appeal of the assessee was dismissed.

The assessee is in appeal before us stating that the claim of the assessee is with respect to the keyman premium insurance policy which is allowable to the assessee as a deduction u/s. 37 (1) of the Act in view of the decision of the Coordinate Bench in 151 ITD 470 (Mumbai) in case of Shri Nidhi Corporation v. Addl. CIT. It was further stated that there are several judicial precedents including the decision of the honourable Punjab and Haryana High Court wherein the claim of the assessee is allowable u/s. 37 (1) of the Act. Thus, the disallowance of the expenditure of the keyman insurance policy made by the learned assessing officer itself is not in accordance with those judicial precedents and therefore there cannot be any issue of levy of the penalty resulting in misreporting or underreporting of the income.

She further submitted that in the absence of details as to which limb of section 270 A was attracted and how the ingredient of section 270 A (9) was satisfied such notice is bad in law. For this proposition she relied on the decision of the honourable Delhi High Court in case of GE Capital US Holdings Inc. v. DCIT(International taxation) (2024) 163 taxmann.com 146 (Delhi) dated 31st of May 2024 wherein in paragraph No. 27 – 28 it has been held that the show cause notice in terms of which the action u/s. 270 A came to be initiated failed to specify whether the petitioner was being tried on allegation of underreporting of misreporting makes the penalty order invalid. She further referred to the several judicial precedents of the coordinate benches to support her contention. She further referred to the assessment order wherein it did not specify as to under which subclause of section 270 A the penalty is initiated, further the penalty order levying penalty also fails to identify the specific laws of section 270 (9) under which the appellant is guilty of misreporting.

The learned departmental representative vehemently supported the orders of the learned lower authorities and submitted that assessee has claimed an investment as an expenditure holding that the Keyman insurance expenses are the insurance charges but in fact they were held

We have carefully considered the rival contention and perused the orders of the learned lower authorities. Briefly stated the fact shows that the assessee has claimed deduction of ₹ 50 lakhs towards the Keyman insurance premium paid which is allowed to the extent of the insurance content and to the extent of the investment sum of ₹ 4,646,000 was disallowed. The assessment order also speaks about the initiation of penalty u/s. 270 A of the Act. Accordingly, penalty at the rate of 200% of the tax was charged at ₹ 2,338,610. In fact, we find that Keyman insurance premium payable by the assessee with respect to the life of its director is held to be allowable u/s. 37 (1) of the Act by several judicial precedents. The expenses itself are held to be allowable by some of the Benches of the Tribunal, the issue becomes highly debatable and divergent views are available that where the keyman insurance policy is allowable as deduction or not. The penalty has been levied on such disallowance. However, as the issue of disallowance has already been concluded and not at all before us, it is only a matter that on such disallowance whether the penalty can be levied under the provisions of section 270A of the Act or not? We find that when the disallowance itself is a debatable issue, no penalty could have been levied. Similarly, it is also the claim before us that penalty proceedings are initiated for under-reporting of income in consequence to misreporting of income. Penalty can be levied on 6 types of acts on behalf of the assessee. It is also true that ld. AO, neither in the assessment order nor even otherwise has stated that under which sub- clause of 270A of the Act penalty is levied. The Hon’ble Delhi High Court in GE Capital US Holdings Inc. [2024] 163 taxmann.com 146 (Del) has categorically held that it is incumbent upon the AO to ascertain the provisions of section 270A stood attracted either on account of under-reporting or misreporting of the income. A finding misrepresentation is required to be written and recorded in the assessment order. In the absence of the same, penalty deserves to be deleted. Accordingly, we allow the appeal of the assessee and direct the ld. Ao to delete the penalty levied of Rs.23,38,610 being 200% of tax of Rs.11,69,305 on disallowance of keyman insurance premium expenditure of Rs.46,46,000 in the hands of the assessee. filed by the assessee is allowed.

The assessee is aggrieved with the disallowance of interest expenditure to the extent of Rs.39,87,000 u/s. 36(1)(iii) of the Act confirmed by the ld. CIT(A).

The brief facts show that assessee filed its return of income on 31.10.2022 at a taxable income of Rs.16,10,24,817. The assessee has paid interest expenditure of Rs.107,67,048 on the funds borrowed of Rs.10,80,21,694 for its business of real estate. The ld. AO found that most of the assets is other than the inventories such as non-current investment, long term loans & advances and advances to vendors. The amount of inventory was Rs.5,37,57,135, accordingly he held that part of the interest is not allowable as deduction to the assessee. The AO was of the view that borrowed funds were utilized for the non-current investment of Rs.34.74 crores and other advances. The income from these assets is chargeable to tax under the head capital gains. The assessee explained that it had incurred interest on borrowings of Rs.1.21 crores out of which Rs.13.98 lakhs has been capitalized and the balance sum of Rs.1.07 crores is charged to P&L a/c as business expenditure. The ld. AO disbelieved the explanation of the assessee and disallowed the above interest expenditure holding it to be relatable to other non-current investments. Assessment order u/s. 143(3) of the Act was passed on 20.3.2024 determining the total income of assessee at Rs.77,17,91,915.

The assessee aggrieved with the same preferred an appeal before the ld. CIT(A) wherein the ld. CIT(A) held that interest on the advances paid for purchase of assets is held to be not an allowable expenditure, he therefore held that assessee has paid interest of Rs.107,67,048 on total borrowings of Rs.10.80 crores and therefore with respect to advances paid of Rs.4 crores proportionate disallowance of Rs.39,87,000 is to be made. Accordingly, assessee was granted a relief of Rs.67,80,000. The assessee is in appeal against the confirmation of disallowance of Rs.39,87,000.

The only contention raised before us is that in this case the assessee has shareholders fund to the tune of Rs.43.78 crores and therefore the disallowance of advances of Rs.4 crores being proportionate interest expenditure could not have been made.

The ld. DR vehemently supported the order of the ld. lower authorities.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. Here the ld. CIT(A) has confirmed the disallowance of advances of Rs.4 crores being advances for purchase of asset. We find that assessee has interest in free funds available in the form of share capital and reserve & surplus of more than Rs.43.78 crores. It is undisputed that assessee has more interest free funds available than the advances on which interest is disallowed. The fact clearly shows that interest free funds are available to the assessee which are sufficient to meet its investments in non-interest bearing advances, no disallowance can be made in the hands of the assessee. Such is the mandate of the decision of the Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd., 178 Taxman 135 (Bom). Therefore disallowance of interest is not sustainable.

In the result, the solitary ground raised in the appeal of the assessee is allowed and the ld. AO is directed to delete the proportionate disallowance on interest expenditure to the tune of Rs.39,87,000 in view of huge interest free funds available to the assessee. The appeal of the assessee is allowed.

In view of the above, all the 3 appeals filed by the assessee are allowed as indicated above.