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Income Tax Appellate Tribunal, “A”, BENCH MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAM LAL NEGI
Date of Hearing 22/07/2019 Date of Pronouncement 22/07/2019 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):
This appeal filed by the revenue is directed against the order of the Commissioner of Income Tax Appeals–16, Mumbai dated 18/07/2017 and it pertains to the Assessment Year 2013-14. The revenue has raised the following grounds of appeal:-
1. Whether in the facts and circumstances of the case and in law, the ld.CIT(A) was justified in deleting the addition made of Rs.1,06,23,487/- on account of capitalization of interest expenditure under the head Income from other Source, without appreciating the fact that the assesses has already entered JV agreement on 24.03.2011 for development of the said land.
2. Whether in the facts and circumstances of the case and in law, the ld.CIT(A) was justified in holding that the sale was executed during A.Y. 2013-14 and date of JV was also extended by addendum dated 31.03.2012, therefore, relying on the original JV agreement is not fair.
2 M/s. Avruti Mall Management Company Pvt.Ltd. 3. Whether in the facts and circumstances of the case and in law, the Id.CIT(A) was justified in holding that the development agreement by way of JV agreement does not disqualify the assessee from capitalizing the interest expenditure towards the cost of land-WIP.
The brief facts of the case are that the assessee company is engaged in the business of infrastructure development, filed its return of income for AY 2013-14 on 27/09/2013 declaring total income at Rs. “Nil”, under normal provisions of the Act, and book profit of Rs. 17,284/- u/s 115JB of the I.T.Act, 1961. The case was selected for scrutiny and during the course of assessment proceedings, the AO noticed that assesee has shown free hold land and capital working progress in its balance sheet and also corresponding long term borrowings from M/s Artech Realtors Pvt.Ltd. In order to ascertain details of transactions, the AO called upon the assessee to furnish necessary details. In response, the assessee has filed ledger account copy of M/s Artech Realtors Pvt.Ltd. along with confirmation as per, which it was noticed that the assessee has transferred land in pursuance of joint development agreement to M/s Artech Realtors Pvt.Ltd. for a consideration of Rs. 11,08,75,000/- and has received full consideration, but not recognised revenue from the transactions. The Ld. AO further observed that the assessee has debited construction and other expenses to capital working progress including interest paid on loan borrowed from M/s Westex InfoTech Pvt.Ltd. The AO, further noted that when, the assessee has transferred land in pursuance of joint development agreement and possession was handed over to M/s Artech Realtors Pvt.Ltd. on 24/03/2011, there is no reason for the assesee to pay interest on loan borrowed from M/s Westex InfoTech P.Ltd and accordingly, determined income from the project by taking into account sale consideration received from M/s Artech Realtors P.Ltd and after reducing cost of land including allowable capital working progress determined total income from the project at Rs. 1,06,23,487/-. Further, while arriving at profit from the project, disallowed interest paid on loan borrowed from M/s Westx InfoTech Pvt.Ltd. amounting to Rs. 1,02,65,993/-. The relevant findings of the AO are as under:-
However, the shove submission of the assessee is devoid of merit and not relating to facts of the case. Sequence of events for acquisition of land, construction activity and subsequent transfer to M/s. Artech Realtors Pvt. Ltd., may be summarized here as under:- * The land was purchased by assessee during F.Y. 2005-06; * The initial stop work memo was issued to assesses company, which was constructing structures on said land at its own, vide Enquiry Report/Order DO, Mo. Report (RR)/3697/09-10/8 dated 06.04.2009, * The assessee entered into Joint Development (JV) agreement dated 24.03-2011 with M/s. Artech Realtors Pvt. Ltd. * The assessee vide above JV agreement handed over possession of the aforesaid property to M/s. Artech Realtors Pvt, Ltd. (the Developer) for development and construction of a Multi storied apartment complex to be named as "Artech Grandeur & Mall*. * As per JV agreement entire expenses pertaining to development of land/construction of building mall is to be borne by Developer i.e. M/s, Realtors Pvt. Ltd.
As evident, from the above there is no occasion to assesee incurring any construction/ development expenses from/and after date of agreement i.e. 24.03.2011. The expenses capitalized under various groupings (except for interest to Westex Infotech Pvt, Ltd,) are nearly constant from F.Y 2009-10 i.e. year in which first stop-work order was issued to the assessee. The assessee, further, has not furnished any details with respect to need and actual utilization of loon taken from M/s. Westex Infotech Pvt. Ltd. Mere payment of interest to M/s. Westex Infotech Pvt. Ltd. is not sufficient to prove the nexus of same with CWIP Maimed on said land, the assessee has to establish exact nature of expenses /services incurred out of said loan amount and also that said expenses were incurred wholly and exclusively for project work / development work on said land. The assessee, however, has failed to prove nexus of said interest expenses with land/land WIP*
Considering the above facts of the case, it is held that expenses capitalized after F.Y. 2010-11 (i.e. day of entering JV agreement and handing over possession of land to M/s. Artech Realtors Pvt Ltd.) cannot be allowed as part of cost of Land-WIP. Therefore, the cost/ expenses allowed as WIP is Rs, 2,33,57,673/- only ( i.e, expenses capitalized till F.Y, 2010-11).
Cost of Land/Land WIP to be allowed against sale price is accordingly worked out as under: Land: Rs. 7,68,93,840 CWIP:Rs.2,33,57,673 Rs.10,02,51,513 31. As regards the head of income, there is no dispute that sale transactions is to be assessed as business income. Considering the facts of the case, the AR agreed with same taxing treatment. The taxable business income for said land/land-WIP sale/transfer is accordingly worked out as under: Sale Consideration: Rs.11,08,75,000 Less: Cost of land including of allowable CWIP: Rs.10,02,51,513 Rs.1,06,23,487 32. Thus, an addition of Rs. 1,06,23,487/- is made to total income of the assessee under head business Income. Penalty proceedings u/s.271(1)(c) of the Act, are being initiated separately for furnishing of inaccurate particulars of income and concealing of income.
Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee contended that the development agreement does not ‘ipso facto’ amount to transfer of immovable property, unless the conditions prescribed u/s 2(24)(v) r.w.s. 53A of the Transfer of property Act, is fulfilled. The assessee further contended that although, development agreement was entered between the parties, but it was found that the property was under litigation and work was stopped by the Government authorities because of this no sale deed could be registered. Due to this litigation, the sale deed could not be registered. But, fact remains that money borrowed from M/s Westex Infotech Pvt.Ltd. was utilized for construction of project was capitalized to the capital working progress.
The Ld. CIT(A) after considering relevant submissions of the assessee and also relied upon certain judicial precedents, came to the conclusion that in order to determine income from the project, the provisions of section 2(24)(v) r.w.s. 53A of the Transfer of Property Act should be fulfilled. However, in this case the ownership and control over the property still rest with the assessee. Therefore, merely for the reason that there was a development agreement, it cannot be considered that transfer within the meaning of section 2(47) of the Act was happened.
The Ld. CIT(A) further observed that the AO never disputed fact that loan borrowed from M/s. Westex Infotech Pvt.Ltd. was utilized for construction and also interest payment on such loan has been made through proper banking channel. It was further observed that when the assessee was developing a single project, it is incorrect on the part of the AO to come to the conclusion that interest cannot be allowed as deduction as part of capital working progress, unless he demonstrate that loan proceeds were not utilized for construction of property. Therefore, he opined that on the basis of evidences filed by the assessee including JV agreement and addendum to such agreement, it is very clear that the assessee has utilized borrowed fund from the project and accordingly, interest payment on such loan was rightly capitalized to capital working progress.
Accordingly, he deleted additions made by the AO towards computation of profit from the project. The relevant findings of the CIT(A) are as under:-
6.1.7. A Development Agreement does not, ipso facto, amount to transfer of immovable property. The signing of Development Agreement does ot mean a ‘transfer’ in general law, but can be considered as such if the conditions in section 2(24(v) of the Act are satisfied. In other words, it is possible to contemplate a situation where even though a Development Agreement is signed between two parties, but yet the same may not amount to 'transfer’. The relevant and surrounding facts have to be seen before arriving at the conclusion that the effective ownership and enjoyment over the property has been " irrevocably alienated by the property holder to the buyer by virtue of the said Development agreement. This is also mandated by section 53A of the Transfer of Property act, 19**, on which section 2(47)(v) of the Act is based on. Thus, if an assessee were to successfully demonstrate on the basis of hard, tangible and acceptable facts that the ownership and control over the property still resets with him, then no inference of there being a 'transfer' within the meaning of section 2(47) of the Act can be reached. If this be so, then ail eligible expenses will be available to the property owner to avail of - if they are legitimately available. Only the fact of overall control in hands of developer and not exclusive control needs to be established to invoke 2(47)(v). 6.1.8 Keeping in view the above facts, the JV agreement was replaced by mutual consent through an addendum to JV agreement and as a result it was extended up to 31st March 2012. The copy of the addendum was furnished during the course of appellate proceedings. It is not a new evidence as same is acknowledged by the Ld.AO.in para 21 of the assessment order wherein the Ld.AO. had mentioned that due to stop work and litigation on property sale consideration was mutually agreed and paid during KY. 2012-13 and therefore said JV agreement had no force. In para 14 of the assessment order also Id. A.O, had mentioned that the sale price fixed was paid to the appellant only during FY.2G12- 13. The entire interest paid to M/s, Westex Infotech P, Ltd. was through banking transactions after deducting tax. The appellant was having only one project. Therefore, there was no question of spending the loan amount on any other business of the appellant. There was no doubt about application of the loan amount solely to the only project of the company. The loan was taken during F.Y.2010-11 for which interest was also allowed to be capitalized by the Id.A.O. in its order. While disallowing capitalization in subsequent year, the Ld.A.O. had merely relied upon signing of JV agreement but he ignored the fact that there was litigation on the property and as a result project work was stopped. Just to overcome these difficulties an addendum to the JV development agreement was signed between the appellant company and M/ s. Artech Realtors. Since the date of JV agreement was extended by addendum, therefore it is not fair to disallow the capitalization of interest : depending upon the first agreement. The A.O. had himself admitted that the sale consideration was paid only during FY.2012-13 and date was also extended by addendum, In para 22 of the assessment order, the Id.A.O has himself admitted that all the conditions for recognizing revenue for above land transaction fulfilled during EY.2012-13 relevant to AY 2013-14 and appellant ought to have computed income on said sale transaction
7 M/s. Avruti Mall Management Company Pvt.Ltd. during A.Y. 2013-14. Since sale was executed during A.Y. 2013-14 and date was also extended by addendum dated 31.03.2012, therefore, it was not fair on the part of the A.O. to rely on the original JV agreement. In view of above discussion, appeal of the appellant is allowed and appellant is allowed to capitalize the interest expenditure claimed by the appellant. 5. The Ld. DR submitted that the Ld.CIT(A) was erred in deleting the additions made of Rs. 1,06,23,487/- on account of capitalization of interest expenditure without appreciating the fact that the assessee has already entered JV Agreement on 24/03/2011 for development of the said land and also as per the terms of JV Agreement, all expenses of development shall be borne by the developer. The Ld. DR further submitted that when the development agreement was in force, the Ld. CIT(A) was erred in holding that sale was executed during the AY 2013- 14 and date of JV agreement was also extended by addendum dated 31/03/2012, ignoring the fact that the assessee was handover the possession of the land as on the date of the JV Agreement consequently, the question of capitalization of interest for subsequent period is incorrect.
The Ld.AR for the assessee strongly supporting order of the CIT(A) submitted that although, JV agreement was signed, because of litigation in the property the work was stopped by the Government authorities and sale deed could not be registered. The Ld. AR, further submitted that the assessee has filed necessary evidences including copy of Joint Development agreement and also addendum to the Joint Development agreement as per which, the JD agreement tenure was extended by way of agreement dated 31/03/2012 due to litigation and encroachment of profit from the project on the basis of JV Agreement dated 24/03/2011.
The Ld.AR, further submitted that when the work was stopped, the possession of the land was till with the assessee and assesee continue to pay interest on loan borrowed from M/s Westex InfoTech Pvt.Ltd. and such interest has been capitalized to working progress. Therefore, the Ld. CIT(A) after considering relevant facts has rightly deleted additions made by the AO towards disallowances of interest payment on loan borrowed from Westex InfoTech Pvt.Ltd. and his order should be upheld.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that the Ld.CIT(A) has recorded categorical findings in light of evidences brought on record by the assessee that transfer as defined u/s 2(47)(v) of the Act, is not happen for the year under consideration and accordingly, the question of determination of income on the basis of development agreement even though, there is no transfer is not correct. We further noted that the Ld.CIT(A) has recorded categorical findings in light of JV agreement and an addendum to JV agreement dated 31/03/2012 that due to litigation of property the work was stopped and the sale consideration was mutually agreed and paid during the FY 2012-13 relevant AY 2013- 14, accordingly, interest paid on loan borrowed from M/s Westx InfoTech Pvt.Ltd. was rightly capitalized to capital working progress, because the AO never disputed the fact that such loan has been borrowed and utilized for the purpose of construction of project. We further noted that the AO FY 2012-13 and date was also extended by an addendum. When the date of JV agreement was extended and also payment of sale consideration is received in AY 2013-14, then obviously any expenditure incurred in relation to such project including interest paid on loan borrowed from M/s Westex Infotech Pvt.Ltd. needs to be capitalized to working progress till the date of the transfer actually taken place, accordingly, there is no reason to disallow interest paid on loan borrowed from M/s Westex Infotech Pvt.Ltd. Facts remain unchanged. The revenue failed to bring on record any evidences to counter findings of facts recorded by the Ld.CIT(A). Hence, we are inclined to uphold findings of the CIT(A) and dismissed appeal filed by the revenue.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court on this 22/ 07/2019