M/S IDEB BUILDCON PVT. LTD.,,BANGALORE vs. DCIT, BANGALORE

order dt.26.12.2013, and Revenue’s appeal for Assessment Year 2011-12 in respect of order dt.14.07.2014. These three appeals were heard together and we deem it appropriate to dispose them by way of this combined order.

Revenue’s Appeal in and Assessee's Appeal in A.Y. 2010-11. 2. Briefly stated the facts of the case are as under :-

2.1 The assessee company, engaged in business as real estate developer, filed its return of income for Assessment Year 2010-11 on 15.10.2010 declaring a loss of Rs.1,09,86,407. The return was processed under Section 143(1) of the Income Tax Act, 1961 ('the Act') and the case was subsequently taken up for scrutiny. The assessment was concluded under Section 143(3) of the Act vide order dt.24.1.2013, wherein the disallowances :-

(i) Disallowance of operating expenditure : Rs.1,51,39,523.

(ii) Disallowance of other expenditure : Rs.20,04,526.

On appeal, the CIT(Appeals)-1, Bangalore allowed the assessee partial relief vide the impugned order dt.26.12.2013.

3.1 In its appeal, Revenue has raised the following grounds :-

3.2 In its appeal, the assessee has raised the following grounds :-

4. Ground Nos.1, 5 & 6 – Revenue’s appeal and Ground Nos. 1, 2, 4 & 5 of Assessee's appeal are general in nature and therefore, no adjudication is called for thereon.

5. Ground Nos.2 & 3 of Revenue’s appeal, Ground No.3 of Assessee's appeal - Disallowance of operating Expenditure.

5.1 Grounds 2 & 3 of Revenue’s appeal (supra) are in respect of the partial relief of Rs.80,72,950 granted by the CIT(Appeals) to the assessee on account of disallowance of operating expenditure amounting to Rs.1,51,39,523 originally disallowed by the Assessing Officer. Similarly, Ground No.3 of assessee's cross appeal is raised against the CIT(Appeals) action is partially sustaining the aforesaid disallowance on account of operating expenditure. Since the grounds raised by Revenue and assessee are to the extent it is against both parties, we deem it appropriate to adjudicate these grounds together. supporting the Assessing Officer’s order, submitted that the Assessing Officer had disallowed an amount of Rs.1,51,39,523 holding that the miscellaneous expenditure claimed by the assessee under the head ‘operating expenditure’ is the compensation amount paid for the project, which was already shown as work-in-progress and therefore the same cannot be allowed as operating expenditure. It has to be added back to the work-in-progress in the Project Completion Method (POCM).

5.3 Per contra, the learned Authorised Representative for the assessee submitted that the said operating expenditure claimed is a profit and loss item and the said amount is not added to the work-in-progress. This is very evident from Schedule-7 of the financial statements and therefore it is evident that the observations of the Assessing Officer are factually incorrect. According to the learned Authorised Representative, the CIT(Appeals), after considering the submissions and material evidence placed before him, has given the assessee relief to the extent of Rs.80,72,900.

CIT(Appeals) on account of operating expenditure, in respect of which the assessee is in appeal, the learned Authorised Representative submitted that the said amounts are expenditure incurred wholly and exclusively in relation to the assessee's business.

5.3.3 The learned Authorised Representative submits that the entire amount of operating expenditure amounting to Rs.1,51,39,523 under the sub-head ‘Miscellaneous Expenditure’ are in the form of rent, interest paid to persons who had entered into agreement with the assessee for purchase of the units and also compensation paid by the assessee towards cancellation of units. Therefore, the learned Authorised Representative contends that the aforesaid amounts paid by the assessee are revenue in nature and incurred wholly and exclusively for the purposes of the assessee's business and would not have the effect of enhancing work-in-progress or in the assessee deriving any enduring benefit thereof. According to the learned Authorised Representative, Revenue’s ground / contention that since the assessee has not derived any revenue from business, the said expenditure cannot be allowed is the case of CIT Vs. Rajendra Prasad Moody (115 ITR 519) (SC); wherein the Hon'ble Court has held that irrespective of the income, genuine expenditure has to be allowed. The learned Authorised Representative prays that in view of the above, the entire disallowance of Rs.1,51,39,523 made by the Assessing Officer ought to be deleted.

5.4.1 We have heard the rival contentions and perused and carefully considered the material on record. The first contention of revenue is that the compensation paid by the assessee is already shown in the work-in-progress (‘WIP’) and therefore the same cannot be again allowed as Miscellaneous expenditure under the head ‘Operating Expenses’. In this regard, the learned Authorised Representative drew our attention to Schedule – 7 of the profit and loss account of the assessee for the year under consideration to demonstrate that the said expenditure has been claimed under the sub-head ‘Miscellaneous Expenses’ under the head ‘Operating Expenditure’. We have perused the assessee's financial statements and observe that the assessee has claimed the said expenditure of Rs.1,51,39,523 in its profit and loss of Rs.80,72,900, it is seen that the CIT(Appeals) has discussed and rendered findings on each of the payments made by the assessee to each of the persons with whom it had entered into agreement for purchase of units as listed out at para 3.5 at pages 6 to 13 of the CIT(Appeals) order.

In respect of the amount of Rs.70,66,563, out of disallowance of operating expenditure, which was sustained by the CIT(Appeals), the learned Authorised Representative has repeatedly emphasised that these amounts were actually incurred wholly and exclusively for the purposes of the assessee's business, through regular banking channels and had also made TDS of most of the payments and therefore these expenses claimed by assessee need to be allowed. On the face of the financial statements it is not clear whether the assessee has claimed the same under the head WIP amounting to Rs.121,56,56,113 as reflected in Schedule - 4 thereof. We, therefore, remand this issue to the file of the Assessing Officer for examination and verification as to whether the said amount of Rs.151,39,523; apart from being claimed in the P & L Account has also been shown as part of WIP or not. If the same is found to be included in WIP as contended by Revenue, then the claim of the assessee deduction in the profit and loss account cannot be allowed. Needless to add that the Assessing Officer shall afford the assessee adequate opportunity of being heard and to file submissions / details required which shall be duly considered by the Assessing Officer before deciding the issue by way of a reasoned and speaking order.

5.4.2 The other contention of revenue is that the assessee has not derived any income from business activities and only showed income from parking receipts, rentals and miscellaneous income and thereof the expenditure claimed cannot be allowed as a deduction. According to the learned Authorised Representative, the assessee's profit and loss account (at page 8 of paper book) shows that apart from miscellaneous income of Rs.1.82 Crores, the assessee has shown parking receipts of Rs.79,35,481 and therefore Revenue’s averment that the assessee has not derived any business income in the year under consideration just because there was no sale of units. It was submitted that the assessee's business activity is still being carried on and it is not revenue’s case that the assessee is not a going concern. Just because the assessee has not derived any profit, genuine business expenditure incurred wholly and have carefully considered the views of Revenue and the submissions put forth by the assessee. We are not inclined to agree with the proposition canvassed by the Assessing Officer/learned Departmental Representative that for allowing any expenditure incurred in the course of business, there should necessarily be business receipt during the year. In the case on hand, the assessee had earned business income of Rs.55.30 lakhs on sale of units in the earlier year ending 31.3.2009 as can be seen from the financial statements Profit & Loss Account (placed at page 8 of paper book) which is not disputed by the authorities below. Therefore, any expenditure incurred by the assessee wholly and exclusively for the purposes of its business has to be allowed and is not dependent on the business income earned by it. In coming to this view, we drew support from the decision of the Hon'ble Apex Court in the case of CIT Vs. Rajendra Prasad Moody (1978) (115 ITR 519) (SC); wherein the Hon'ble Court at pages 522 & 523 has held as under :-

“ It is also interesting to note that, according to the Revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs. 1,000, if there is income of even Re. 1, the expenditure would be deductible and there would be resulting loss of Rs. 999

12 517 & 1390/Bang/2014 under the head "Income from other sources". But if there is no income, then, on the argument of the Revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of s. 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income.”

5.4.3 In the light of the discussion of the facts and circumstances of the case on this issue, as discussed above in para 5.4.1 (supra), we hereby set aside the issue of disallowance made by the Assessing Officer amounting to Rs.1,51,39,523 to the file of the Assessing Officer to examine and verify the same in the light of our observations on this issue (supra) and the grounds raised by both the Revenue as well as by the assessee. We hold and direct the Assessing Officer accordingly.

Consequently, the grounds raised by Revenue and the assessee on this issue are allowed for statistical purposes.

CIT (Appeals) in deleting the disallowance of Rs.20,04,526 in respect of ‘other expenditure’ debited to the profit and loss account without showing any business income for the year under consideration.

According to the learned Departmental Representative, since there are no business receipts in this year, the assessee cannot claim any expenditure.

6.2.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. Similar arguments have been advanced by both parties in para 5.4.2 of this order while deciding the issue raised in Ground Nos.2 & 3 of Revenue’s appeal and Ground No.3 of the assessee's appeal (supra). In support of the proposition that, where the business activity of the assessee is still being carried on, just because the assessee has not earned income in the year under consideration genuine business expenditure incurred wholly and exclusively for the purposes of the as business cannot be disallowed, as was done by the Assessing Officer in the case on hand, the assessee placed reliance on the decision (supra). The learned Authorised Representative further submitted that fact the expenditure claimed by the assessee all relate to the assessee's business has not been disputed by Revenue and the details thereof are extracted at para 4.3 at page 2 of the order of assessment; but have been disputed only for non-receipt of any business income. In support of the proposition that even in the event of closure of business genuine business expenditure incurred cannot be disallowed, the assessee placed reliance on the decisions of the Hon'ble Karnataka High Court in the case of CIT Vs. Lawrence D’Souza 23 Taxman 200 (Kar) and Karnataka Instrade Corporation Ltd. [ITA No.339/2009 (IT)] dt.9.10.2015.

6.2.2 In the case on hand, it is an undisputed fact that the assessee had earned business income of Rs.55.30 lakhs on sale of units in the earlier Assessment Year 2009-10 as can be seen from copy of financial statements / profit and loss account 9placed at page 8 of the paper book). This fact has not been disputed by the authorities below and evidences that the assessee is a going concern. In the factual and legal matrix of this case as discussed above, and drawing support from the Prasad Moody (supra) and of the Hon'ble Karnataka High Court in the case of CIT Vs. Lawrence D’Souza (supra) and Karnataka Instrade Corporation Ltd. (supra) and Karnataka Institute Corporation Ltd. (supra), we find no reason to interfere with on deviate from the decision of the CIT (Appeals) on this issue and, therefore, uphold the same.

Consequently, ground No.4 raised by Revenue is dismissed. Therefore only expenditure incurred by the assessee wholly and exclusively for the purposes of business has to be allowed and is not necessary dependent on business income earned / revenue receipts generated by it. Merely because the assessee could not generate income in the year under consideration, does not preclude the assessee from incurring and claiming genuine business expenditure. The learned CIT (Appeals) in the impugned order has allowed the assessee's claim for being allowed the claim of ‘other expenditure’ amounting to Rs.20,04,526 holding as under in paras 4.1 to 4.3 of the impugned order :- the appellant’s business, therefore eligible deduction against the income earned during the year under consideration. The disallowance of Rs.20,40,526 is therefore deleted.” while deleting the disallowance made by the Assessing Officer. Before us, Revenue has not been able to controvert the factual finding rendered by the CIT (Appeals) nor have the authorities below disputed that the expenditure claimed by the assessee are not genuine.

Revenue’s Appeal in for A.Y. 2011-12.

10. Ground No.2 : Disallowance of Operating Expenditure.

10.1 In this ground (supra), Revenue assails the action of the CIT (Appeals) in deleting the disallowance of operating expenditure amounting to Rs.3,15,74,105; without appreciating that the assessee has made this claim of expenditure without having any business receipts / income in the year under consideration and that the only income the assessee had from rentals and income from other sources. Both the learned Departmental Representative for revenue and learned Authorised Representative for the assessee reiterated their arguments put forth in Assessment Year 2010-11.

10.2 We have heard the rival contentions, perused and carefully considered the material on record. Similar issue was considered by us in the assessee's case for Assessment Year 2010-11 in 5 to 5.4.3 of this order (supra) and we have set aside this issue to the file of the Assessing Officer for examination and verification in the light of our observations therein. Therefore, in this year also we similarly set aside this issue of the assessee's claim of operating expenditure to the file of the Assessing Officer for examination and verification in line with our observations in our order for Assessment Year 2010-11 at paras 5.1 to 5.4.3 of this order. Needless to add, the assessee shall be afforded adequate opportunity of being heard and to file details / submissions in this regard which shall be considered 21 517 & 1390/Bang/2014 before deciding the issue. The Assessing Officer is accordingly ordered. Consequently, Ground No.2 of Revenue’s appeal is allowed for statistical purposes.