DCIT, NEW DELHI vs. M/S DLF LTD.,, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI ‘B’ BENCH, NEW DELHI BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI K.N. CHARY, JUDICIAL MEMBER. ITA No. 3846/DEL/2012 [A.Y. 2007-08] DLF Limited Vs. The Additional C.I.T DLF Centre (9th Floor) Range - 10 Sansad Marg, New Delhi New Delhi PAN : AAACD 3494 N ITA No. 4342/DEL/2012 [A.Y. 2007-08] The Additional C.I.T Vs. DLF Limited DLF Centre (9th Floor) Range – 10 New Delhi Sansad Marg, New Delhi PAN : AAACD 3494 N [Appellant] [Respondent] Date of Hearing : 03.08.2017 Date of Pronouncement : 01.11.2017 Assessee by : Shri R.S. Singhvi, CA Revenue by : Ms. Renu Amitabh, CIT-DR ORDER PER B.P. JAIN, ACCOUNTANT MEMBER:

The above two cross appeals have been filed by the Assessee company [assessee] and assessing officer [‘AO’] against order u/s 250 of the Income tax Act, 1961 [hereinafter referred to as ‘Act’] dated

2 ITA Nos. 3846 & 4342/DEL/2012 29.05.2012 passed by CIT(A)-XIII, New Delhi for assessment year 2007- 08.

3 ITA Nos. 3846 & 4342/DEL/2012 3. Subsequently, the assessment was completed on the basis of special audit report vide order dated 07.10.2010 passed u/s 143(3) of the Act. The AO computed total income at Rs. 750,38,90,009/- as against returned income of Rs. 568,54,69,980/- by making various additions and disallowance to the extent of Rs. 181,84,20,029/-. The issue wise additions to the returned income are tabulated as under :

S. Terms of Head of Addition / Page No. Amount No. reference Disallowance From To (Rs.) 1 Form 6B Cash Payments 27 34 19,100.00 2 Form 6B Prior Period Expenses 34 44 2,20,25,324.00 3 TOR-1 Interest on earnest money 44 55 4,19,00,000.00 advanced to group concerns 4 TOR-1 Interest on debentures not 55 64 7,53,00,000.00 charged from group concerns 5 TOR-1 Interest pertaining to loan for 64 73 7,05,00,000.00 Edward Keventer Project 6 TOR-6 Interest capitalization in 104 106 45,92,000.00 respect of project Star Tower- Silokhara 7 TOR-6 Interest capitalization in 73 106 25,92,00,000.00 respect of project Star Tower- Silokhara 8 TOR-6 Brokerage & Commission 111 128 17,12,33,363.00 9 TOR-18 POCM 128 202 33,99,87,214.00 10 TOR-8 IDC-Greater Kailash-II 202 215 2,01,07,405.00 11 TOR-9 Late Construction Charges 215 229 1,61,38,767.00 12 TOR-10 Contingency Deposit 229 233 44,566.00 13 TOR-10 Interest Free Security Deposit 233 238 24,064.00 14 TOR-10 Registration Charges 238 246 2,03,00,000.00 15 TOR-10 Iniial Deposit 246 255 3,66,56,071.00 16 TOR-19 Non Allocation of Overheads 255 288 20,70,28,248.00 17 TOR-19 Allocation of Expenses Galaxy 288 293 3,66,66,458.00 Mercantile 18 TOR-19 Allocation of expenses not 293 310 61,90,518.00 allocated at all 19 TOR-21 Disallowance u/s. 14A read 310 333 27,22,75,000.00 with Rule 8D

4 ITA Nos. 3846 & 4342/DEL/2012 20 TOR-22 Non deposit of Punjab VAT 333 337 1,60,000.00 21 TOR-23 Pre Operative expenses 337 342 1,81,95,513.00 22 TOR-23 Expenses on projects not 342 352 1,79,83,814.00 commenced 23 TOR-23 Cost of DG Sets claimed as 352 356 26,05,808.00 revenue to be capitalized 24 TOR-23 Expenses for increase in 356 366 1,04,32,923.00 authorized capital to be capitalized 25 TOR-23 Interest Expenses on Aircraft 366 387 51,51,360.00 to be capitalized 26 TOR-24 Disallowance u/s. 40(a)(ia) 387 399 1,89,05,487.00 Foreign Payments 27 TOR-24 Disallowance u/s. 40(a)(ia) 399 410 49,34,000.00 Domestic Payments 28 TOR-24 Disallowance u/s. 40(a)(ia) 410 411 27,08,664.00 Domestic Payments 29 TOR-24 Disallowance u/s. 40(a)(ia) 411 411 4,20,000.00 Domestic Payments 30 TOR-24 Withdrawal of TDS credit Rs. 411 418 *** 11,07,190 31 TOR-28 Reclassification of income 418 430 7,87,31,326.00 from House property 32 TOR-28 Notional rental income 431 452 3,28,52,595.00 33 TOR-28 Reconciliation of TDS with 452 456 5,41,734.00 rental income. 34 Withdrawal of TDS on rental income Rs. 41,764/- 35 TOR-28 Withdrawal of TDS credit Rs 456 457 *** 41,764 36 TOR-28 Notional Rent where security 457 464 12,60,000.00 deposit received 37 TOR-32 Sale price of shares 464 475 1,36,81,610.00 38 TOR-33 Interest on Income Tax Refund 476 479 23,48,996.00 39 TOR-33 Bills not in the name of the 479 483 65,08,264.00 company 40 TOR-3 Recalculation of depreciation 484 485 8,09,837.00 as last year excess deprecition was disallowed. TOTAL 1,81,84,20,029.00

5 ITA Nos. 3846 & 4342/DEL/2012 submissions and supporting documents were filed. The appeal was disposed off by CIT(A) vide its order dated 29.05.2012 in which the appeal was partly allowed. Against the order of CIT(A), both assessee and AO are in appeal before us.

6 ITA Nos. 3846 & 4342/DEL/2012 2.5 Without prejudice to above, the learned CIT(A) has erred in law, on facts and in circumstances of the case in not appreciating that for the purpose of making disallowance u/s. 14A of the Act the assessing officer, having regard to accounts of the assessee for previous year, has to be not satisfied with (a) the correctness of the claim of the expenditure made by the assessee or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act, for such previous year, as mandated by section 14A of the Act. 2.6 That the learned CIT(A) has not appreciated that no such finding on satisfaction, as amended by law has been recorded by the Assessing Officer and as such provisions of section 14A of the Act cannot be invoked. 3. That learned CIT(A) has grossly erred in law and on the facts and in the circumstances of the appellant’s case in confirming the net disallowance of Rs. 26,05,808/- (i.e. after allowing depreciation @ 15% on gross disallowance of Rs. 28,17,090/- which works out to Rs. 2,11,282/-) made by the Assessing Officer on account of capitalisation of cost of replacement of some parts of two DG sets ( such as fuel tank, batteries with lead and common base material etc.) charged as revenue expenditure. [ Page 237-239 of CIT(A)’s order]. 4. That learned CIT(A) has grossly erred in law and on the facts and in the circumstances of the appellant’s case in confirming the net disallowance of Rs. 51,51,360/- (i.e. after allowing depreciation @ 40% on gross disallowance of Rs. 85,85,599/- which works out to Rs. 34,34,239/-) made by the Assessing Officer on account of interest expenses on Aircraft to be capitalized. [Page 246-250 of CIT(A)’s order. 5. That learned CIT(A) has grossly erred in law and on the facts and in the circumstances of the appellant’s case in

7 ITA Nos. 3846 & 4342/DEL/2012 confirming the net addition of Rs. 12,60,000/- (i.e. after allowing standard deduction @ 30% on gross addition of Rs. 18,00,000/- which works out to Rs. 5,40,000/-) made by the Assessing Officer on account of notional rent where security deposits were received from the tenants but no rental income has been shown by the appellant, whereas in fact the appellant has not received any rental income from these tenants [ Page 317-321 of CIT(A)’s order]. 5.1 That learned CIT(A) has grossly erred in law and on the facts and in the circumstances of the appellant’s case in appreciating the fact that the taxable income means real income and not a fictional income. 6. That the order passed by the learned CIT(A) is bad in law as well as wrong on facts and erroneous in points of law and right is reserved to assail the same on such other ground or grounds as may be advanced at the time of hearing for which the appellant raves leave to amend, vary or add to the grounds hereinbefore appearing.”

“1. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 20000/- made by the AO on a/c of disallowance u/s. 40A(3) of the IT Act, 1961. 2. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 22025324/- made by the AO on a/c of disallowance of prior period expenses. 3. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 41900000/- made by the AO on a/c of disallowance of proportionate interest.

8 ITA Nos. 3846 & 4342/DEL/2012 4. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 75300000/- made by the AO on a/c of addition of notional income on account of interest on debentures not charged from group companies. 5. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 70500000/- made by the AO on a/c of capitalization of Revenue expenditure. 6. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 4592000/- made by the AO on a/c of disallowance on a/c of interest capitalization i.r.o. project-Star Tower Silokhera. 7. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 259200000/- made by the AO on a/c of disallowance on account of Capitalization of interest. 8. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 171233363/- made by the AO on a/c of disallowance of brokerage & commission. 9. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 339987217/- made by the AO on a/c of disallowance of revenue recognition as per POCM. 10. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 16138767/- made by the AO on a/c of disallowance on account of late construction chargers revenue recognition as per POCM. 11. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs.

9 ITA Nos. 3846 & 4342/DEL/2012 44566/- made by the AO on a/c of disallowance on Net contingency deposit. 12. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 24064/- made by the AO on a/c of disallowance of net interest free security deposit. 13. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 20300000/- made by the AO on a/c of disallowance of net registration charges. 14. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 36656071/- made by the AO on a/c of disallowance of closing credit balances initial deposit. 15 Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 207028248/- made by the AO on a/c of disallowance of expenses on account of Non Allocation of Overheads. 16. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 36666458/- made by the AO on a/c of Non Allocation of expenses to Galaxy Mercantiles. 17. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 6190518/- made by the AO on a/c of disallowance of expenses on a/c of Allocation of expenses not allocated at all. 18. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 272275000/- made by the AO on a/c of disallowance of expenditure u/s 14A of the Act, 1961. 19. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs.

10 ITA Nos. 3846 & 4342/DEL/2012 1600000/- made by the AO on a/c of disallowance of outstanding balance in Punjab VAT a/c u/s. 43B of the I.T. Act, 1961. 20. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 18195513/- made by the AO on a/c of disallowance of pre-operative expenses. 21. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 17983814/- made by the AO on a/c of disallowance of expenses on project not commenced. 22. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 10432923/- made by the AO on a/c of disallowance of expenses for increase in authorized capital capitalized. 23. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 18905487/- made by the AO on a/c of disallowance of expenditure u/s 40(a)(ia) of the Act, 1961. 24. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 4934000/- made by the AO on a/c of disallowance of expenditure u/s 40(a)(ia) of the Act, 1961 for non deduction of TDS on Domestic payments on amount received from Shriram School land subsequently reimbursed to DLF Qutub Enclave Complex Edu. Charitable Trust. 25 Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 2708664/- made by the AO on a/c of disallowance of expenditure u/s 40(a)(ia) of the Act, 1961 for non deduction of TDS on payments to M/s. DLF Qutub Enclave Complex Medical Charitable Trust.

11 ITA Nos. 3846 & 4342/DEL/2012 26. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 4200000/- made by the AO on a/c of disallowance of expenditure u/s 40(a)(ia) of the Act, 1961 for non deduction of Domestic payments towards consultancy fees paid for soil investigation at Goa Site. 27. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 1107190/- made by the AO on a/c of withdrawn of TDS credit on income received from Shri ram Scholl, after verification. 28. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 78731326/- made by the AO on a/c of disallowance of reclassification of income from ‘Income from house property’ to ‘Income from business & profession’. 29. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 32852595/- made by the AO on a/c of disallowance of notional rent/Additional annual letting value (ALV) i.r.o. vacant property. 30. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 514734/- made by the AO on a/c of disallowance of reconciliation of rental income as per TDS certificates and withdrawal of TDS credit. 31. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 41674/- made by the AO on a/c of withdrawn of TDS credit on advance rent received from Bank of America. 32. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 13681610/- made by the AO on a/c of disallowance of

12 ITA Nos. 3846 & 4342/DEL/2012 Sale prices of shares based on (NAV) of shares of Diwakar Estate Ltd. & Monishka Builders & Dev Pvt.Ltd. 33. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 6508264/- made by the AO on a/c of disallowance of expenditure where bills were not in the name of assessee company. 34. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 809837/- made by the AO on a/c of disallowance on a/c of depreciation claimed on DLF Centre Building Sansad Marg, New Delhi 35. The assessee craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”

13 ITA Nos. 3846 & 4342/DEL/2012 8. Now we first take up the appeal of the assessee.

8.1 Ground No. 1 is against disallowance of Rs. 2,01,07,405/- being claim of Internal development charges (IDC) in respect of project at Greater Kailash Part I & II. The assessing officer has considered the disallowance on proportionate basis as per actual sales effected during the year. The disallowance made by AO was upheld by the CIT(A).

8.2 The relevant observations and finding of AO from Pages 212 to 215 are as under:

“On this issue the special auditor has specifically observed the assessee is holding some land in Greater Kailash which are clearly identifiable separately and total area of land held is 18.10 acres. The details of land held has been given in the special audit report. The assessee has shown total amount of IDC expenditure aggregating Rs.7,95,35,569/- out of this Rs.2,84,68,129/- pertains to security charges incurred in respect of all the lands aggregating 18.10 acres as tabulated in Para 8.24 above. The remaining amount of Rs. 5,10,67,440/- have been incurred for payment of “shelter fees” to the Government against specific lands as tabulated herein under :

S.No. Description of Area in IDC Paid (Rs) land Acres

14 ITA Nos. 3846 & 4342/DEL/2012 1 “E" Block, GK-II. 1.15 4,92,27,360.00 2 “W" Block, GK-II. 2.47 3 “W" Block, GK-II. 2.47 18,21,000.00 4 “E" Block, GK-II. 1.15 19,080.00 Total 5,10,67,440.00

Copies of relevant documents evidencing the fact that shelter fees paid pertains to other lands were enclosed as a part of the Special Audit report. The assessee company has incorrectly presumed the entire amount of Rs.7,95,35,569/- as having been incurred for all lands measuring in total at 18.10 acres. Based on this presumption, an amount of Rs.3,51,20,018/- has been claimed as expenditure on a pro-rata basis in respect of land (N Block GK) which was sold during the assessment year 2007-08. However, on the basis of facts discussed above, it is evident that apart from common security expenses of Rs.2,84,68,129/-, the remaining expenditure is related to specific lands. Particularly shelter fees of Rs.5,10,67,440/- is in respect of E and W block land at Greater Kailash whereas the land sold is located at N Block. As such the shelter fees paid to Government of Rs.5,10,67,440/- comprised in the total figure of Rs.7,95,35,569/- are only allowable against sale of the lands for which shelter fees was paid. The letter of shelter fees clearly gives description of the land against which shelter fees was paid. During A.Y. 2007-08 the assessee company has sold/transferred three land at N-Block, G.K. – I measuring 2.045 acres, 5 acres

15 ITA Nos. 3846 & 4342/DEL/2012 and 2.50 acres measuring in all at 9.545 acres. The assessee company has claimed pro rata deduction of Rs. 3,51,20,018/- against the sale of land. However out of this deduction claimed the pro rata deduction is allowable only in respect of security expenses of Rs. 2,84,68,129/- and not in respect of shelter fees of Rs.5,10,67,440/-. The shelter fees shall be allowable in the year in which concerned lands are sold/transferred by the assessee company. The assessee in its reply has just stated that it is treating the various lands located at Greater Kailash as a common pool of land and therefore shelter fees was also claimed as expenditure on sale of land even though the shelter fees was not pertaining to the land sold. The argument of the assessee is not acceptable since the lands located at Greater Kailash – I are clearly and separately identifiable and accordingly the expenses which are pertaining to specific lands are not allowable against other lands. The assessee has not disputed the fact that shelter fees claimed on pro rata basis was pertaining to E and W block lands and not N block land which was sold. Accordingly, the cumulated security expenses aggregating Rs.2,84,68,129/- are allowable on a pro- rata basis, to the extent to which they relate to the lands sold/transferred during A.Y. 2007-08. The total area of land sold/transferred during the year is 9.545 acres out of total area of 18.10 acres. In percentage terms the area sold/transferred during A.Y. 2007-08 comes to 52.73% (9.545 acres/18.10 acres x 100). Hence, 52.73% of Rs.2,84,68,129/- which comes to Rs.1,50,12,613/- is allowable during A.Y. 2007-08 against the claim of Rs.3,51,20,018/- made by the assessee company and the

16 ITA Nos. 3846 & 4342/DEL/2012 balance amount of Rs.2,01,07,405/- is being disallowed since these expenses are not pertaining to the land sold during the relevant financial year. 8.3 Relevant finding and conclusion of ld CIT(A) order’s at para 12.10 on Page 144-146 reads as under:

“12.10 I have considered the observation of the ASSESSING OFFICER and submission of the appellant and material available on record it is seen that the Assessing Officer has held that the land located at Greater Kailash–I and II are clearly and separately identifiable and accordingly the expenses which are pertaining to specific lands are not allowable against the other lands. From the details filed before the Special Auditors and Before ASSESSING OFFICER it is observed that amount of Rs. 5,10,67,440/- was pertaining to the following lands:- S.No. Description of land Area in Acres IDC Paid (Rs) 1 “E" Block, GK-II. 1.15 4,92,27,360.00 2 “W" Block, GK-II. 2.47 3 “W" Block, GK-II. 2.47 18,21,000.00 4 “E" Block, GK-II. 1.15 19,080.00 Total 5,10,67,440.00

It is seen that during the year appellant has sold land other than the land situated at E & W Block of GK-II. It is also seen that appellant has not incurred any expenditure relating to the plot of land sold during the year. As discussed above, the amount of

17 ITA Nos. 3846 & 4342/DEL/2012 Rs. 5,10,67,440/- has been incurred on land situated at E & W Block of GK-II and no amount has been spent on other land situated at GK-I and GK-II. Therefore, no expenditure can be attributed/allocated to the land sold during the year. The expenditure incurred of Rs. 5,10,67,440/- can be claimed against the sale of land situated at E & W Block at GK-II as the appellant has paid shelter fees of Rs. 4.92 crores and Rs. 18,21,000/- for E & W Block in earlier years and during the year. In view of the above, the amount of Rs.3,51,20,018/- claimed as IDC expenditure is not allowable against the sale of the land made during the year in A.Y. 2007-08. The expenditure of Rs. 5,10,67,440/- shall be allowable in the year in which E & W Block lands are sold /transferred by the appellant company. Therefore, the proportionate expenses towards IDC claimed to the extent of Rs. 2,01,07,405/- disallowed by the ASSESSING OFFICER, is not related to lands sold during the year. Hence, the same is confirmed. It is also claimed by the AR of the appellant this issue is covered in favour of the appellant by CIT(A) order for A.Y. 2006-07. It is seen that facts of the last year’s case are completely different with that of this issue, therefore, the same is not covered with the last year’s CIT(A) Order. As such the contention of the appellant’s AR is rejected.

8.4 The arguments forwarded by the Ld. Counsel appearing on behalf of the assessee are summarized as under :

a. It was contended that the appellant has incurred internal development cost in respect of various projects including project at Greater Kailash Part I and II. The total cost

18 ITA Nos. 3846 & 4342/DEL/2012 incurred in respect of Greater Kailash project as on 31.03.2007 is Rs. 7,95,35,569/-. b. There is no dispute about genuineness and admissibility of claim of Internal Development Cost (IDC). However, the AO has disallowed proportionate claim of IDC relating to Greater Kailash project with reference to actual sale effected during the year. c. It was explained that the revenue from sale of these lands is recognized as per matching concept in which the cost of land sold is determined by computing per acre cost of the land and adjusting the same against the proportionate land sold. d. Similarly, the claim of IDC is also proportionately recognized on the basis of actual sale of land during the year and such claim is not on the basis of specified land or area. The claim of expenses is fully matching with the sale of land. e. In the books of account, the entire land is treated as common pool of stock and there is no further classification in terms of blocks. The Greater Kailash project is one of the various projects and accordingly the claim of the assessee is based on sound accounting policy being consistently followed for several years. f. The limited issue for consideration is whether IDC cost incurred on the entire project of Greater Kailash is to be allowed on proportionate basis or in respect of specified land or area. g. It was argued that AO has not properly appreciated the facts of the case, nature of the claim, past history and accounting principles. h. it was further argued that if the claim of IDC is restricted in respect of sale of particular property, the same has to be allowed in connection with sale of other property belonging to common pool and as such the disallowance is merely of academic nature. i. The ld. counsel vehemently submitted that the disallowance is only on account of timing difference and there is no adverse revenue implication as the appellants is

19 ITA Nos. 3846 & 4342/DEL/2012 entitled to claim the benefit of deduction of development cost in subsequent years and as such claim is revenue neutral and covered by the decision of Hon’ble Apex court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295(SC). It was further contended that issue of timing difference and revenue neutrality has already been considered by Hon’ble tribunal in AY 2006-07.”

8.5 The ld. CIT DR relied upon the order of AO and CIT(A) and opposed the method adopted by the assessee.

20 ITA Nos. 3846 & 4342/DEL/2012 revenue nature and permissible deduction under the law as Assessing Officer himself has allowed part of the expenses which are attributable to property sold during the year.

21 ITA Nos. 3846 & 4342/DEL/2012 13. Ground No. 2 is against disallowance u/s 14A read with Rule 8D to the extent of Rs. 4,66,00,000/-. The assessing officer made disallowance of Rs. 27,22,75,000/- out of which CIT(A) deleted disallowance to the extent of Rs. 22,6,75,000/- and confirmed the remaining disallowance.

[Page 331 of the Assessment Order]:

“The submission of the assessee has been considered. However, it is noticed that the assessee has invested an amount of Rs.83.75 crores in the partnership firms as its share capital and Rs.589 crores in various Pvt. Ltd. companies. The details of investments are enclosed with the Special Auditors’ Report. These investments have been made out of interest bearing funds of the assessee and therefore, there is direct nexus between the funds borrowed and investments. The income from these investments is exempt. On the other hand, interest expenses on such loans availed to fund the investments has been claimed as expenditure. The issue of section 14A has been settled by the order of the Hon’ble ITAT Special Bench in the case of ITO vs. Daga Capital Investments Pvt. Ltd. [2009] 312 ITR (AT) 1. As per the observations made in Volume X of the Special Audit Report the assessee has earned exempt income as profit from partnership firms in which M/s DLF Ltd. is a partner, however, no proportionate disallowance on the expenditure has been made for earning such exempt income. Upon examination of assessee’s reply, it is seen that assessee’s contention is that no interest bearing funds were utilized for making investment for earning exempt income. Since no deduction on account of interest was claimed, therefore, no disallowance can be made under section 14A of the Income Tax Act. In this regard assessee has tabulated certain data on page 22 and 33 of reply dated

22 ITA Nos. 3846 & 4342/DEL/2012 2.7.2010. Certain legal citations as discussed in the reply have also been relied upon. The sum and substance of assessee’s contention is that since no borrowed funds were utilized for making investment for earning exempt income, no disallowance under section 14A is warranted. However it needs to be noted that after the insertion of Rule 8D, not much choice is left as regards the computation of proportionate expenses incurred for earning the exempt income. From the return of Income filed by the assessee it is evident that no such working has been carried out. But such a situation cannot exist. In other words there is bound to be some expenditure pertaining to earning of exempt income. Since the assessee has failed to carry out the computation exercise, provisions of section 14A are attracted. The said section provides that the where the assessing officer is not satisfied with the correctness of the claim of the assessee, he may work out the same on his own. For carrying out such working Rule 8D has been introduced in the Income Tax Rules. Therefore, it is held that computation of proportionate disallowance of expenses will have to be made as per the formulae prescribed in Rule 8D. It has been discussed in the Special Audit Report that part of Interest expenditure has been capitalised and the balance interest expenditure should be reckoned for doing the calculations as per Rule 8D. However, no such option is available under Rule 8D. Once the calculation is computed as per Rule 8D the entire interest expenditure forming part of the P&L Account will have to be taken for the purpose of computing the disallowance. Hence, the table furnished in para21.8, page 8 of the Special Audit Report , Volume X is being applied for computing the proportionate disallowance. It may also be pointed out that apart from the disallowance of interest expenditure aggregating Rs.2401.31 lacs, there is also disallowance of administrative expenditure aggregating Rs.321.44 lacs comprised in the total disallowance of Rs.2722.75 lacs under section 14A. The reply furnished by the assessee does not address the disallowance of administrative expenses aggregating Rs.321.44 lacs. Further, it is pointed out that the provisions of section 14A read with rule 8D are deeming provisions and have to be applied as provided in law. In other words, all expenses connected with exempt income

23 ITA Nos. 3846 & 4342/DEL/2012 are to be disallowed under section 14A regardless of whether they were direct or indirect, fixed or variable and managerial or financial in accordance with law. Attention may be drawn to the decision of Delhi ITAT Special Bench in the case of Chem Invest Ltd. 121 ITD 318, where it has been held that a disallowance under section 14A is warranted even in a year in which no exempt income has been earned or received by the assessee. With these remarks, the addition of Rs.27,22,75,000/- is made U/s.14A read with rule 8D (ii).” The working of disallowance u/s 14A read with Rule 8D is as under :

Working of disallowance u/s 14A of the Income Tax Act, 1961 (Rule – 8D)

Amount (Lacs/Rs.) 1 Expenditure directly - relating to the exempted income 2 Amount of expenditure by 2401.31 way of interest other than the amount of interest included in point No.1. (directly related to exempted income) (A x B/C) 3 An amount equal to one- 321.44 half percent of (B) given below Disallowance u/s 14A 2722.75 (1+2+3) A Amount of expenditure by 30,299.24 way of interest other than the amount of interest included in point No. 1.

24 ITA Nos. 3846 & 4342/DEL/2012 (directly related to exempted income)

B Average of value of 64,287.62 investment, income from which does not form part of total income. C The average of total assets 8,11,166.72 as appearing in the balance sheet Total Assets: As on As on 31.03.2007 31.03.2006

Fixed Assts 99,360.24 53,639.65 Investments 76,917.35 139,728.29 Current Assets, Loans & 9,43,844.94 308,842.97 Advances

11,20,122.53 5,02,210.91 Total Assets Average (Total Assets as on 31.03.2007 + Total 8,11,166.72 Assets as on 31.03.2006)/2) Value of investment, income As on As on from which does not form part 31.03.2007 31.03.2006 of total income. Value of Value of investment investment as on as on 31.03.2007 31.03.2006 Value of Shares 58,826.20 56,513.64 Debentures 0 78,355.17

25 ITA Nos. 3846 & 4342/DEL/2012 Partnership firm 8,375.92 4,859.48 Other (Belaire receivable trust 9,715.23 0 and Reliance Liquid Fund) Total 76,917.35 139,728.29 Less: Value of investment, 9,715.23 78,355.17 income of which form part of total income Value of Investment income of 67,202.12 61,373.12 which does not form part of total income Average Investment (67,202.12 64,287.62 + 61,373.12)/2

As per this working the total disallowance as per Sec 14A r.w. Rule 8D would be Rs.27,22,75,000/.

“21.6 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and various judicial pronouncements available on this issue. It is seen that during the year the appellant has earned exempt income of Rs. 5,94,63,674/- as share of profit from partnership firms and dividend income. It is also seen that appellant has made average investment of Rs. 642.87 crore in various partnership firms and in the shares of various group companies and mutual funds. The appellant has shown total average assets during the year of 8111.66 crore in the balance sheet. Vide my decision on ground No. 5, 6, 8 and 9, I have held that appellant has shown interest incurred on fixed period loan of Rs. 463.86 crore. Out of this an amount of Rs. 196.02 crore has been capitalized over the project. The appellant has also paid interest on over draft etc. to the tune of Rs. 35.15 crore. As such the total interest payment during the year comes to Rs. 302.99 crore. As against

26 ITA Nos. 3846 & 4342/DEL/2012 this, the appellant has shown interest receipts of Rs. 284.51 crore in the P&L account. If the interest paid on bank overdraft facilities of Rs. 34.49 crore is reduced then balance interest paid comes to Rs. 267.84 crore which is less than the interest receipt from subsidiary companies and banks. On the basis of above working it can be said that investment made by the appellant company was interest neutral. Therefore, on this basis the disallowance of interest for earning exempt income will be nominal or nil. At the same time the appellant has been sanctioned loan of Rs. 370 crore by ICICI Bank and has invested in the shares of M/s Edward Keventor (Successors) Pvt. Ltd. for acquiring shares of said company. The appellant had paid Rs. 26.76 crore as interest on the loan taken from ICICI Bank which has been specifically taken for making investment in shares of M/s Edward Keventor (Successors) Pvt. Ltd. The other loans taken by the appellant company on which interest is paid were related to the construction projects being undertaken by the appellant company and advanced to other group entities. Therefore, interest on such loan cannot be considered for disallowance u/s 14A. The loan taken in making investments in the shares of M/s Edward Keventor (Successor) Pvt. Ltd can be considered for making disallowance u/s 14A of the IT Act which worked out as under:-

Amount(Crore/Rs.) Expenditure directly relating to the 1 - exempted income Amount of expenditure by way of interest other than the amount of interest included 2 1.45 in point No.1. (directly related to exempted income) (A x B / C)

Disallowance u/s 14A ( 1 + 2 ) 1.45

Amount of expenditure by way of interest A other than the amount of interest included 26.76 in point No.1. (directly related to exempted

27 ITA Nos. 3846 & 4342/DEL/2012 income)

Average of value of investment, income B from which does not form part of total 438.92 income. The average of total assets as appearing in C 8,111.66 the balance sheet It is observed that earning of exempt income is not a passive activity. In the present age of making of investment, maintaining or continuing with investment and time of exit from the investment are well informed and well coordinated management decision involving not only inputs from various sources but also acumen of senior management functionaries. Therefore, cost is inbuilt even in so called passive investment. There are incidental expenditure of collection, telephone and follow up etc. Therefore, expenses related to earning of exempt income are embedded in the expenses debited to profit and loss account. The expenditure on administration and management of investment is embedded in the expenditure debited to the profit and loss account. The indirect expenditure incurred on the administration and management of investment is also substantial, considering the total expenditure debited by the appellant in profit and loss account. Therefore, some expenses has to be apportioned on the investment made on which exempt income is earned by the appellant. The appellant has invested Rs. 642.87 crore for earning exempt income, therefore, 0.5% of such investments are taken as expenses incurred on administration and management of such investments and earning exempt income. The disallowable expenses on this count comes to Rs. 3.21 crore. Besides, an amount of Rs. 1.45 crore has been worked out as interest relating to investment made in the shares of Edward Keventor (Successor) Pvt. Ltd. for earning exempt income as discussed above. Thus, the total disallowance of interest and expenditure relating to earning exempt income comes to Rs. 4.66 crore. In the assessment order ASSESSING OFFICER has disallowed Rs.27,22,75,000/- u/s 14A of the IT Act on account of earning exempt income. This disallowance has

28 ITA Nos. 3846 & 4342/DEL/2012 been worked out by the ASSESSING OFFICER on the basis of section 14A read with Rule 8D of the IT Act. The Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. vs. DCIT (2010) 194 Taxman 203 (BOM) has held that provisions of Rule 8D are applicable prospectively w.e.f A.Y. 2008-09 and not retrospectively. However, the court has held that ASSESSING OFFICER has to work out the disallowance on the basis of facts of each case. In view of this the disallowance worked out as per Rule 8D cannot be sustained. However, considering the facts of the case and investment made by the appellant for earning exempt income out of borrowed fund, and payment of interest, the disallowance has been worked to the tune of Rs. 4.66 crore. Therefore, addition on this issue, made by the ASSESSING OFFICER u/s 14A is restricted to Rs. 4.66 crore. As a result, the appellant gets a relief of Rs. 22,56,75,000/-”

Average investment in Partnership Firms Opening as on 01/04/2006 = Rs. 49 cr Closing as on 31/03/2007 = Rs. 84 cr Total Rs. 133 cr Average investment = Rs. 66.50 cr

29 ITA Nos. 3846 & 4342/DEL/2012 Disallowance being 0.5% of Rs. 66.50 cr = 33.25 lakhs

Average investment in Partnership Firms Opening as on 01/04/2006 = Rs. 49 cr Closing as on 31/03/2007 = Rs. 84 cr Total Rs. 133 cr Average investment = Rs. 66.50 cr Disallowance being 0.5% of Rs. 66.50 cr = 33.25 lakhs 19. Whereas, Ld. CIT DR relied on the order of the Assessing Officer and submitted that disallowance made by the Assessing Officer which is in accordance with Rule 8D should be sustained. However, both the

30 ITA Nos. 3846 & 4342/DEL/2012 parties have agreed that all the issues arising out of order of the ITAT have been addressed by the tribunal and issue is covered by the order of the ITAT in the immediately preceding year.

31 ITA Nos. 3846 & 4342/DEL/2012 21. In the ultimate analyses, we are of the view that the issue is fully and squarely covered by order of ITAT for A.Y. 2006-07 and accordingly disallowance is confirmed to the extent of Rs. 33.25 lakhs. The Assessing Officer may give necessary effect so as to restrict the disallowance to Rs. 33.25 lakhs.

Observation and Conclusion of AO’s Order (Page 352-356 of the Assessment Order) “The Special Auditors have reported that : “23.11 The Assessee Company has incurred Rs. 28,17,090/- vide 1st RA bill dated 17.02.2007 WC 10 of M/s HI TECH ENGINEERS & CONSULTANTS on account of purchase of 2 No.’s D.G. sets installed at Shopping Mall – Office. The aforesaid expenditure incurred on account of purchase of 2 No.’s D.G. sets has been charged as revenue expenditure under the head Repair & Maintenance – Others. As this expenditure is of capital nature hence, it can not be claimed as revenue expenditure and needs to be capitalized under the head Plant & Machinery. Copies of relevant documents like voucher, invoice, Challan etc. are annexed

32 ITA Nos. 3846 & 4342/DEL/2012 herewith and marked as Annexure “F” from page no.183 to 189.”

I have considered the reply of the assessee and unable to accept the contention that replacement of complete DG sets are revenue expenditure as claimed by the assessee. Repair and maintenance of an asset in order to keep in working condition is revenue expenditure but replacement of complete asset by another asset is capital expenditure. This proposition of law now settled by the apex court in the case of Sarvana Spg. Mills Ltd. 293 ITR 201. The relevant portion of this citation is reproduced below: ………………. Therefore, the claim of the assessee to be extent to Rs.28,17,090/- during the course of purchase of two DG Sets is disallowed. This expenditure is simultaneously held to be capital expenditure and depreciation for half year (date of purchase 17.02.2007) @ 15% p.a. is being allowed which comes to Rs.2,11,282/-. Thus the addition on this account is of Rs.26,05,808/-.

33 ITA Nos. 3846 & 4342/DEL/2012 DG Sets with new ones is a capital assets and same has to be capitalized in the hands of the appellant. Even otherwise, if the contention of the appellant is to believe that the parts like fuel tank, batteries and common base frame was changed, these replacements cannot be considered under current repairs and such replacement of worn out parts are not current repairs and has to be considered as capital expenditure. In this regard the ASSESSING OFFICER has placed reliance on the judgment of Hon’ble Supreme Court in the case of CIT vs. Sarvana Spinning Mills Pvt. Ltd. 293 ITR 201 (SC). The judgment is squarely applicable on the facts of the appellant’s case. Hence, the expenditure incurred on DG Sets of Rs. 28,17,090/- is held as capital expenditure and the decision of the ASSESSING OFFICER is confirmed.

a. CIT vs Mahalakshmi Textile Mills Limited 66 ITR 710 (SC) b. CIT v. Modi Industries Ltd. 197 Taxman 76 (Delhi HC) c. CIT vs. Chowgule And Co.Pvt. Ltd. 214 / ITR / 523 (Bom) d. CIT v. Gitanjali Mills Ltd. 265 ITR 681 (Mad) e. Nathmal Bankatlal Works Co. Ltd. v CIT 122 ITR 168 (AP HC) f. CIT v. Janakram Mills Ltd 275 ITR 403 (Mad) 26. On the other hand, ld. DR relied upon the orders of lower authorities. It was contended that the expense under dispute are in

34 ITA Nos. 3846 & 4342/DEL/2012 the nature capital expenses and same are rightly capitalized by the AO. In support of her contention, she relied upon following decisions :

a. Bharat Gears ltd. v. CIT 12 taxmann.com 256 b. Madras Industrial investment Corp Ltd. v. CIT 91 Taxman 340 (SC) c. CIT v. Shri Ram Pistons and Rings Ltd. 174 taxman 147 (Delhi)

35 ITA Nos. 3846 & 4342/DEL/2012 28. After going through details of expenses and various judgments referred to by the Ld. AR and extracted in the synopsis, we are of the view that claim is in the nature of current repair as AO has not brought on record any evidence in support of allegation of purchase of new generator sets and also failed to make any comments in respect of details submitted by the appellant. There is thus, no justification for treating the same as of capital nature and accordingly the impugned disallowance is deleted and this ground of appeal is allowed

Observation and Conclusion of AO (page 366-387 of the Assessment Order)

36 ITA Nos. 3846 & 4342/DEL/2012 “The Special Auditors vide point no.’s 23.2 to 23.9 on page no.’s 64 to 189 of Vol. No. X of their Special Audit Report have reported that interest on loan taken for acquiring the Aircraft upto the date of Aircraft being actually put to use needs to be capitalised. The relevant extracts in this regard from the Special Audit Report are reproduced below: “23.2 As per the terms of reference, the scope of audit can be divided into two broad categories – (I) whether the asset capitalized is correct with reference to the date for the purpose of claiming depreciation; and (ii) Whether any capital expenditure is claimed as revenue expenditure. One of the major items capitalized during the year is in relation to purchase of an aircraft. The aircraft is stated to be purchased on 3rd July 2006. The company has claimed depreciation for whole of the year, on the cost of Aircraft and 50 % in respect of Customs duty paid. It is stated that the aircraft was purchased from M/s Trans Meridian Aviation LLC. The model is “Gulf Stream”. The delivery of the said aircraft is stated to be received on 3rd July, 2006. The aircraft purchased is an old aircraft manufactured in November 1993. However, the customs duty in this regard was paid vide Bill of Entry dated 01.03.2007. Therefore, in order to verify whether the aircraft was to put to use for a period of 180 days or more during the relevant financial year, a clarification was sought from the assessee vide our letter dated 6th April 2010, copy of which is annexed hereto as Annexure ‘A’.

Page 386 The reply of the assessee was considered and from the reply and substantiating documents filed by the assessee it emerges that the aircraft purchased by the assessee was put to use from 18.08.2006. The assessee in its reply dated 23.07.2010 as mentioned above has himself stated “From the above receipts, it is amply clear that the aircraft was in India from 16.08.2006 to 03.09.2006 and was in regular use from that date.” This clearly establishes that the aircraft was in use from 18.08.2006. The other contention of the assessee is that since the delivery of

37 ITA Nos. 3846 & 4342/DEL/2012 the aircraft was taken on 3rd July in USA and since then it has been used for business purposes regularly. However to substantiate this point the assessee has not furnished any documentary evidence. Therefore the date of put to use of aircraft is taken as 16.08.2010. The assessee has claimed deduction of interest paid to GE capital Services Ltd on loan taken for purchase of aircraft. The interest deduction has been claimed from July 2006. As per section 36(1)(iii) “the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.]”

On a plain reading of section 36(1)(iii) it emerges that interest paid in respect of capital borrowed for acquisition of an asset for any period from the date of acquisition of an asset till the date on which such asset was first put to use will not be allowable as deduction. In this case as per the assessee’s own admission the aircraft was first put to use on 16.08.2006. Therefore the deduction of interest is allowable only from 16.08.2006 i.e. the date from which aircraft was first put to use. The assessee has claimed deduction on loan taken from GE capital Services from July 06 and consequently the deduction of interest for the period 01.07.2006 to 15.08.2006 is disallowed. The same is calculated as under : Interest for July 06 58,08,496/- Interest till 15.08.2006 Calculated Proportionately (Total Interest for Aug Rs. 55,54,207/-) 27,77,103/- 85,85,599/- The interest of Rs. 85,85,599 till 15.08.2006 is disallowed and capitalised since the aircraft was put to use from 16.08.2006. The assessee would be entitled to depreciation on this amount on the rate applicable to aircraft. The rate of depreciation of

38 ITA Nos. 3846 & 4342/DEL/2012 aircraft is 40% and depreciation allowable comes to Rs. 34,34,239/-. The interest disallowed is Rs.88,54,351/- and depreciation allowable is Rs. 35,41,740/-, the net disallowance would come to Rs. 51,51,360/-.

Finding and conclusion of CIT(A) [ Para 27.7, page 249-250 of CIT(A)’s Order] : 27.7 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and the material available on record. It is seen that the aircraft was purchased vide invoice dated 19.06.2006 from a USA Company and the appellant claimed to have taken delivery of the aircraft on 3rd July 2006 at USA. It is claimed by the appellant that the appellant has become owner of the air craft in July 2006. It is seen that the Air craft was first time landed in India at New Delhi on 18.08.2006 and appellant has paid landing charges for the same to the Airport Authority of India. The aircraft remained at Delhi from 18.08.2006 to 03.09.2006. Since the aircraft was brought into India on 18.08.2006 and was put to use on this date. The contention of the appellant that delivery of the Air Craft was taken on 3rd July 2006 in USA and since then it was used for business purposes regularly is not based on any material evidence. Therefore, the date of put to use is to be taken as 18.08.2006. The appellant has claimed deduction of interest paid GE Capital Services Ltd. on loan taken for purchase of air craft. The deduction of interest on such loan has been claimed from July 2006. However, the provision of section 36(1)(iii) has been amended w.e.f 01.04.2004 and as per amended provision any interest paid in respect of capital borrowed for acquisition of an assets for any period from the date of acquisition of an asset, till the date on which such asset was put to use will not be allowable as deduction. In the case of appellant, the air craft was brought to India on 18.08.2006 and was put to use from that day, therefore, deduction of interest is allowable from the date on which air craft was put to use i.e. 18.08.2006. The appellant has claimed interest on loan for July and part of August at Rs. 85,85,599/-. Therefore, the interest component of Rs. 85,85,599/- is not an allowable expenditure and same is to be capitalized since the air craft put to use on 18.08.2006. The ASSESSING OFFICER after capitalizing this interest has allowed

39 ITA Nos. 3846 & 4342/DEL/2012 depreciation @ 40% which was worked out at Rs. 34,34,239/- and same was allowed out of the disallowance of interest of Rs. 85,85,599/- and the balance amount of interest of Rs. 51,51,360/- has been disallowed. The disallowance/addition of Rs.51,51,360/- made by the Assessing Officer on this ground is rightly made and same is confirmed.”

40 ITA Nos. 3846 & 4342/DEL/2012 acquisition of capital asset is an allowable deduction u/s 36(1)(iii) of the Act.

41 ITA Nos. 3846 & 4342/DEL/2012 36. The Ld. DR supported the order of Assessing Officer and CIT(A). 37. We have gone through facts of the case, contention of the parties and details placed in the paper book. In our considered opinion, the use of aircrafts for trial run and training of pilots is part of the business activities and as such there is merit in the contention of the appellant that air craft was used for the purpose of business. Further, principle laid down by Supreme Court in the case of Core Health Care Ltd.(supra) also support the claim of the appellant as the Assessing Officer himself has not disputed the fact that the air craft was used for the purpose of business as he accepted the claim of interest for the remaining period relevant to the year under consideration. In the light of above discussions, there is no justification for treating the part of claim of interest as of capital nature and consequential disallowance u/s. 36(1)(iii) of the Act and accordingly the Assessing Officer is directed to accept the claim of interest as permissible deduction.

42 ITA Nos. 3846 & 4342/DEL/2012 39. The observation and finding of AO and CIT(A) are as under :

Observations and Conclusion of AO at Pages 463-464 of the Assessment Order.

“From the reply filed by the assessee it emerges that in four cases in DLF City Centre Mall kiosks have given on rent, the rental agreements for the same filed by the assessee are between DLF Ltd and tenants. The rent received against these agreements has not been reflected in the taxable income of the company even though the security deposit received from these tenants has been shown by the company in their books. The assessee in their reply have stated that the rental income from these tenants have been shown by DLF Services Ltd. a subsidiary of the assessee. The reason for income being shown by DLF Services Ltd as given by the assessee is that DLF Services Ltd being the agency responsible to maintain the building were authorised to received rent to meet its cost of maintenance of building even though the security deposit was received by the assessee company. This contention of the assessee is not acceptable since the place is owned by DLF Ltd, the rental agreement with the tenants for kiosks is entered into with DLF Ltd. and security deposit against this rental agreement has been received by DLF Ltd. However rent from these kiosks has been received by DLF Services Ltd. The assessee has further stated that rent was received by DLF Services Ltd to meet cost of maintenance services being provided by them in the Mall. In this respect the contention of the assessee is not acceptable since the shop owners have to pay hefty maintenance charges to the service providing agency in the mall. In this case DLF Services Ltd being the service providing agency must have received maintenance charges from the various shopkeepers in the mall. The assessee has not furnished any agreement under which it had authorised DLF Services Ltd to collect rent from kiosks. The assessee had only filed a letter dated 12.12.2005 wherein it has been mentioned that DLF Services Ltd are authorised to keep money recovered from third parties using the kiosks to meet as a part of cost of promotional activities. The letter submitted by the assessee is a self servicing document. In the reply the assessee

43 ITA Nos. 3846 & 4342/DEL/2012 has mentioned that DLF Services were authorised to receive rent so as to meet out cost of maintenance but as per the letter filed it says that DLF Services were authorised to receive rent as a part of cost of promotional activities. It is surprising that no formal agreement was entered into with DLF Services in this regard. The assessee has also not filed any substantiating evidence to show that the rental income received against these kiosks have been included in the taxable income of DLF Services Ltd. In view of the same the rental income from these four tenants is to be included in the taxable income of the assessee as per the following details :

NAME OF THE RENT / LICENSE FEE AMOUNT TENANT P.M. (RS.) (RS.) BELGIQUE 50,000/- 6,00,000/- CHOCOLATIERS SWASTIK FOOD 45,000/- 5,40,000/- SOLUTIONS ROYAL TOUCH 15,000/- 1,80,000/- VRINIKA OVERSEAS 40,000/- 4,80,000/- PVT. LTD. TOTAL (RS.) 18,00,000/-

Accordingly amount of Rs. 18,00,000/- is to be treated as rental income of the assessee and after allowing 30% deduction amounting to Rs. 5,40,000/- for repairs the balance amount of Rs.12,60,000/- added to the income of the assessee.”

Finding and conclusion of CIT(A) (Para 37.10 on Page 320-321 of the CIT(A)’s Order) “37.10 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and various cases relied upon by the appellant in this regard. It is seen that properties given on rent to Belgique Chocolatiers, Swastik Food Solutions, Royal Touch, Vrinka Overseas Pvt. Ltd, owned by the appellant company. It is also seen that lease agreements for giving these properties on rent have been entered into between the

44 ITA Nos. 3846 & 4342/DEL/2012 appellant and said parties. The deposit received from such parties of Rs. 18,40,260/- has been credited by the appellant in its books of accounts. It is claimed by the appellant that the rent receivable from such parties was assigned to DLF Services Ltd., a company who has been assigned with the responsibility of building to meet the cost of maintenance of building. It is seen that no agreement in this regard has been furnished by the appellant and the income has been diverted through overriding titles which is not allowable in law. Therefore, the rental income pertaining to the appellant of Rs. 18,00,000/- received from four parties is to be taxed in the hands of the appellant. As a result the addition made by the ASSESSING OFFICER of Rs. 12,60,000/- after allowing 30% deduction from the rent income is confirmed.”

45 ITA Nos. 3846 & 4342/DEL/2012 Hon’ble Apex court in the case of Ashish Plastics Industries v. ACIT[2015] 373 ITR 45 (SC). Reference was also made to another decision of Hon’ble Supreme Court in the case of Excel Industries Ltd. 358 ITR 295 (SC).

46 ITA Nos. 3846 & 4342/DEL/2012 Services Ltd. as part of maintenance cost. The appellant contended that the diversion of lease rent was towards reimbursement of maintenance services rendered by M/s. DLF Services Ltd. and as such diversion was towards provisions of maintenance services. It was further contended that the rental income as diverted to DLF Services Ltd. has being subjected to tax in the case of M/s. DLF Services Ltd. and there is no case of subjecting the same income again in the case of appellant. In this connection, the appellant made reference to decision of Supreme Court in the case of M/s. Ashish Plastic Industries Vs. ACIT 373 ITR 45, as per which same income cannot be subjected to tax again in the case of the appellant.

47 ITA Nos. 3846 & 4342/DEL/2012 arrangement and for diversion of lease rent. It is further relevant to take note of the fact that such lease rent has been subjected to tax in case of M/s. DLF Services Ltd.

48 Now we take up the appeal filed by the revenue.

48 ITA Nos. 3846 & 4342/DEL/2012 50. Ground No. 1 is against deletion of disallowance u/s 40A(3) to the extent of Rs. 19,100/- being 20% of Rs. 95,504/-. The assessing officer has considered the addition on the ground that assessee has made cash payment in contravention to provisions of section 40A(3) of the Act. The CIT(A) deleted the addition by taking into account relevant facts and provisions of Rule 6DD(I) read with section 40A(3) of the Act.

49 ITA Nos. 3846 & 4342/DEL/2012 54. The ld. CIT DR relied on the order of AO and on the other hand the ld. Counsel for the assessee submitted that the issue is covered in favour of assessee by the order of Tribunal in immediately preceding AY 2006-07.

50 ITA Nos. 3846 & 4342/DEL/2012 expense claimed and as such there could be no case of any proportionate disallowance.

AO’s Observations - page 50-55 of the assessment order The reply of the assessee was considered and it emerges that the assessee had given advance of Rs. 743.72 crores to 27 group entities on 31st August for purchase of land and the same was refunded without interest on 14th and 15th November. The assessee is in the process of executing various projects for which the land is acquired through these land owning companies for which the requisite advance was given to these companies as an earnest money which is to be adjusted upon conveyancing of purchase of land. The assessee later on decided that the land owning process be assigned to an intermediary namely, DLF Commercial Projects Corporation (DCPC), since the number of land owning companies kept on growing with the increased requirement of land. The assessee therefore, decided that hitherto, DCPC should be responsible for purchase of development rights from the land owning companies and will in turn provided these rights of contiguous and the licensed land to the assessee, M/s. DLF Limited. The assessee therefore later on entered into an agreement with DLF Commercial Project, a partnership firm for purchase of development rights and accordingly cancelled MOU with the individual LOC’s to whom advance was given by the assessee company. The amount of Rs. 743.72 crores received back from LOC’s was given to DCPC. The assessee in its reply on this point has stated that the amount advance to DCPC, is out of refund of advance received from the various LOC’s (Rs. 743.73 cr.) and the balance amount paid to DCPC was out of the utilization of bank limits etc. In the background of the above stated facts in response to non charging of interest on these advances the assessee has mentioned that no interest was chargeable on the same as it was a business advance given for procuring land. The assessee in its accounts has capitalised interest in respect of advance given to DCPC for purchase of land. The total interest capitalised in respect of

51 ITA Nos. 3846 & 4342/DEL/2012 advance to DCPC is Rs.124,47,01,773/-. The assessee has admitted that the advance of Rs. 743.73 crores received back from LOC was given to DCPC for purchase land since the assessee later on decided that the land owning process be assigned to an intermediary namely, DLF Commercial Projects Corporation (DCPC), since the number of land owning companies kept on growing with the increased requirement of land. The nature of advance of Rs. 743.77 crores is similar in character to advance given to DCPC. The assessee has capitalised interest on advance given to DCPC in the financial statements as mentioned above and accordingly the interest on advance of Rs. 743.73 crores from 31st August 2006 to 15 November 2006 is to be capitalised and disallowed accordingly. The interest amount calculated comes to Rs.15,88,17,344/-. The rate of interest has been taken at 10.25% which is the same rate as being paid on loans taken from banks by the company. It is further noted that the amount of Rs. 15.88 crores is included in the total interest expenditure of Rs. 267.84 crores claimed in the P&L Account in respect of fixed period loans. The case of the assessee is peculiar where mixed funds in the form of interest bearing and interest free funds are available. The funds available in business have been utilised for twin purposes- firstly for carrying out the activity of real estate development and secondly for giving interest bearing advances to sister concerns and earning interest income of Rs. 270.09 crores. The assessee is stated to have borrowed for the purpose of business and in almost all cases for the specific construction projects. The assessee while utilizing such borrowed funds has given advance to its subsidiary companies. The assessee has charged interest on such advance also. The amount borrowed is all mixed up with own funds and interest free funds by way of advances received from customers. The amount received by assessee in respect of various construction projects by way of advance from customers are also interest free funds available. These amounts are also utilized either for construction projects or for giving advance to subsidiaries. Thus, there is no direct nexus which can be established to hold that the loans for specific projects were utilized for such projects only. The own funds or other funds available to the assessee by way of interest free funds are mixed up with the borrowed funds and the utilization of such funds for uncompleted residential projects or for the commercial projects

52 ITA Nos. 3846 & 4342/DEL/2012 or for granting loan / advances to group concerns cannot be correlated. On the basis of above discussion, a proposition/formula can be laid down that if an assessee is having interest-free funds, in the form of capital, reserves and other funds without interest bearing related to business on one side and interest bearing borrowed funds on other side, the loans/advances given to group entities have come from both types of funds i.e. interest bearing funds and interest free funds in the same proportion. There are various issues on which disallowance of interest expenditure and capitalization thereof is called for. These issues are as under: Proportionate Interest on Earnest Money advanced interest free  Proportionate Disallowance of Interest for non charging of interest on debentures issued to group entities.  Disallowance of Interest on loan for Project- Keventer Lane  Disallowance of proportionate interest on fixed period loan where only part of revenue recognized However, all such disallowance are comprised within the overall figure of Rs. 267.84 crores claimed in the P&L Account. As discussed above in the case of mixed use funds the disallowance of gross interest is required to be carried out after carrying out proportionate netting against the interest income earned and credited in the P&L Account. Such an exercise in respect of all the above issues has been collectively carried out later in page Nos 106 to 111 and the quantum of disallowance has been worked out separately for each issue. In respect of this issue the disallowance works out to Rs. 4,19,00,000/- .

Observation and finding of CIT(A [Para 5.10 at Page 55 to 58 of CIT(A)’s Order] 5.10 I have considered the submission of the appellant, observation of the Special Auditors & ASSESSING OFFICER and various judicial pronouncements cited by the appellant on this

53 ITA Nos. 3846 & 4342/DEL/2012 issue. It is seen that the appellant company is engaged in the business of real estate and it is normal practice of the appellant company to buy the land through its associate concerns. The appellant company was regularly advancing money to its associate companies to enable them to purchase the land for appellant company. In this particular case, the 27 land owning companies were not able to purchase land for the appellant company, therefore, the amount was refunded after 2 ½ months from the date of receipt of the money. It is seen from the documents filed by the appellant of 27 land owning companies that money given to them was not utilized by them for any other purposes. It is also seen that they have not claimed any expenditure in the form of interest for above advances received by them. The appellant has also filed copies of MOUs entered with the land owning companies, which is filed at page 618 to 726 of the submission made before ASSESSING OFFICER and page 32 to 140 of volume-II dated 19.04.2012 filed before me. These MOUs were made for purchase of land by land owning companies and thereafter, these LOC’s will transfer the development rights to the appellant company. It is mentioned in these MOUs that appellant shall pay to these land owning companies, such sum as interest free advance from time to time for purchase of land for appellant company. It is also seen that while giving advances there was no intention to charge interest on such advances as the same were given wholly and exclusively for business purposes of the appellant company. The money was advanced for purchase of land by the land owning companies and same was given in normal course of business. Simply because the transactions did not fructify, the same cannot be held as non business advance. Therefore, the interest cannot be charge/ disallowed for the money advanced in the normal course of business to the 27 land owning companies. Otherwise also from the details filed by the appellant, it is seen that appellant has paid total interest of Rs. 463.86 crore during the year. Out of this an interest to the extent of Rs. 196.02 crore has been capitalized over the projects. As a result, the total interest claimed in the profit & loss account on fixed termed loans comes to Rs. 267.84 crore. The appellant has also paid over draft interest and interest paid to others of Rs. 35.15 crore. Thus, the total interest claimed in the profit & loss account is at Rs. 302.99 crores. As against this the appellant has shown receipt of interest from bank deposits, customers and

54 ITA Nos. 3846 & 4342/DEL/2012 subsidiary and associates to the extent of Rs. 284.51 crore. If the interest payment on over drafts is taken out from the total interest claimed in the profit and loss account, then the total interest claimed in profit and loss account is Rs. 267.84 crore which is less than the interest receipts offered by the appellant from bank deposits and interest received from subsidiary and associates of Rs. 284.51 crores. As such the interest received is much more than the interest claimed in the profit and loss account by the appellant. Therefore, it cannot be said that appellant has diverted interest bearing funds to reduce its tax liability. The formula devised by the ASSESSING OFFICER of mixed funds to work out proportionate notional disallowance of interest is not based on any scientific method. When interest payment claimed by the appellant is less than the interest income offered in the profit and loss account, there was no justification to work out any formula of mixed funds theory which is based on permutation and computation. Hence, the notional interest cannot be estimated and cannot be disallowed on such advances. Therefore, the disallowance of Rs. 4.19 crore is deleted. Commissioner of Income-tax,Madurai v. J. Chelladurai 17 taxmann.com 73 (MAD) IT: Since there is no provision of law to charge notional income, any addition made by Assessing Officer on account of notional interest on amount advanced to charitable trust is not sustainable Section 4 of the Income-tax Act, 1961 - Income - Chargeable as - Assessment year 1995-96 - During relevant previous year, appellant lent substantial amounts to 'J' Trust as interest- free advances - Assessing Officer was of view that appellant used to deposit huge amount in bank out of surplus money available with him - He further noted that appellant all of a sudden resorted to shifting of deposit standing in his name and other surplus to 'J' Trust, wherein he and his wife were trustees and hence, Assessing Officer was of view that since said trust was enjoying benefit of exemption, appellant for purpose of reducing tax liability, invested amount with Trust without charging any interest which was only a device for evading tax - Thus, Assessing Officer estimated notional

55 ITA Nos. 3846 & 4342/DEL/2012 interest on money advanced by appellant to Trust and made certain addition as notional income from Trust - Commissioner (Appeals) deleted addition on ground that Assessing Officer was wrong in including notional interest as assessable income of appellant - Tribunal upheld order passed by Commissioner (Appeals) - Whether in a taxing statute, one has to look merely at what is said in relevant provision and there is no presumption as to a tax - Held, yes - Whether since revenue had not shown any provision of law to charge notional income, Tribunal was justified in deleting impugned addition made by Assessing Officer - Held, yes [In favour of appellant]

Reliance is also placed on the judgment of Hon’ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT 288 ITR 1 (SC) wherein Hon’ble Court has held as under: “In order to decide whether interest on funds borrowed by the appellant to give an interest free loan to a sister concern (e.g., a subsidiary of the appellant) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the appellant as a measure of commercial expediency. The expression “commercial expediency” is one of wide important and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is “for the purpose of the business”. “For the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the appellant on amount borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the appellant advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the

56 ITA Nos. 3846 & 4342/DEL/2012 appellant in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”

The facts of the appellant’s case are identical with the facts of the above cited judicial pronouncements. Therefore, ratio of the said judgments is squarely applicable to the appellant’s case. Hence, the proportionate notional disallowance of interest of Rs. 4.19 crore made by the ASSESSING OFFICER is deleted.

57 ITA Nos. 3846 & 4342/DEL/2012 on investment in debentures of various group companies. The reasoning given by the AO is same as in Ground No. 3 of the revenue above. The CIT(A) has deleted the disallowance by observing that it was due to express condition for premature withdrawal that no interest was paid by the companies while redeeming the debentures. Further, the CIT(A) also held that mixed fund theory adopted by AO is not applicable to the facts of the case as the interest receipts of the assessee is much higher than interest payments.

a. CIT v. DLF Universal ltd. [2017] 79 taxmann.com 382 b. Shivnandan Buildcon P Ltd. v. CIT [2015] 60 taxmann.com 347 62. The issue of notional interest was considered by Delhi High Court in the case of CIT Vs. DLF Universal Ltd. and Shivanandan Buildcon Pvt.Ltd. as referred to above. The decision of CIT(A) being based on

58 ITA Nos. 3846 & 4342/DEL/2012 principle laid down by Delhi High Court and in the absence of specific provision for any addition on notional basis, the order of the CIT(A) is confirmed and this ground of revenue is dismissed.

Observation of assessing officer Pages 70 to 73 of the Assessment Order) “The observations and findings in the Special Audit Report and the reply furnished by the assessee have been considered by me. The undisputed fact which emerges is that the Assessee Company has taken Rupee Term Loan of Rs. 370 crores from ICICI Bank for re-financing the acquisition cost & part financing the development cost of the Project – Keventor Lane at Sardar Patel Marg, New Delhi. (Copy of facility agreement is enclosed at Annexure 9 at Page No 180 of the Special Audit Report Volume- IV). The interest cost on the said loan is Rs. 26.76 crores which is included under the finance charges and claimed in the profit & loss Account during the financial year 2006-07. However, the revenue from the Keventor Lane project has not been recognized so far till financial Year ending 2007. The reply of the assessee is that according to AS-16 issued by ICAI, and with reference to para 14 and 16 of the said Accounting Standard interest cost for this project could not be capitalized. No discrepancy was noted regarding capitalization of interest in line with the provisions of AS- 16 issued by ICAI, purely from the accounting perspective. It was found that as the issue of conversion of the said land is still pending before Hon’ble High Court of Delhi, therefore the construction activities could not be

59 ITA Nos. 3846 & 4342/DEL/2012 started. Hence, as per condition laid down under AS- 16, interest can be capitalized only when activities that are necessary to prepare the Asset for its intended use or sale are in progress. However, the fact of the matter remains that the income of an assessee is required to be computed and assessed in accordance with provisions of the Income Tax Act, 1961. Under the Income Tax Act there is no such requirement that interest cost in respect of a project where construction activities could not commence should be claimed as revenue. It is seen that in respect of advances given to land owning companies for acquiring land the assessee has himself capitalized the interest cost. Therefore, there is no reason why a different treatment should be given in respect of the loan of Rs. 370 crores availed from ICICI Bank for the project- Keventer Lane. Since no activity on the project has started the interest cost of Rs. 26.76 crores is required to be capitalized and the same shall only be allowable under the matching concept when proportionate revenue from the project is offered for taxation. It is further noted that the amount of Rs. 26.76 crores is included in the total interest expenditure of Rs. 267.84 crores claimed in the P&L Account in respect of fixed period loans. The case of the assessee is peculiar where mixed funds in the form of interest bearing and interest free funds are available. The funds available in business have been utilised for twin purposes- firstly for carrying out the activity of real estate development and secondly for giving interest bearing advances to sister concerns and earning interest income of Rs. 270.09 crores. The assessee is stated to have borrowed for the purpose of business and in almost all cases for the specific construction projects. The assessee while utilizing such borrowal has given advance to its subsidiary companies. The assessee has charged interest on such advance also. The amount borrowed is all mixed up with own funds and interest free funds by way of advances received from customers. The amount received by assessee in respect of various construction projects by way of advance from customers are also interest free funds available. These amounts are also utilized either for construction projects or for giving advance to subsidiaries. Thus, there is no direct nexus which can be established to hold that the loans for specific projects were utilized for such projects only. The own funds or other funds available to the assessee by way of interest free funds are mixed up with the borrowed funds and the utilization of such funds for

60 ITA Nos. 3846 & 4342/DEL/2012 uncompleted residential projects or for the commercial projects or for granting loan / advances to group concerns cannot be correlated. On the basis of above discussion, a proposition/formula can be laid down that if an assessee is having interest-free funds, in the form of capital, reserves and other funds without interest bearing related to business on one side and interest bearing borrowed funds on other side, the loans/advances given to group entities have come from both types of funds i.e. interest bearing funds and interest free funds in the same proportion. There are various issues on which disallowance of interest expenditure and capitalization thereof is called for. These issue are as under :-  Proportionate Interest on Earnest Money advanced interest free  Proportionate Disallowance of Interest for non charging of interest on debentures issued to group entities.  Disallowance of Interest on loan for Project- Keventer Lane  Disallowance of proportionate interest on fixed period lane where only part of revenue recognized

However, all such disallowance are comprised within the overall figure of Rs. 267.84 crores claimed in the P&L Account. As discussed above in the case of mixed use funds the disallowance of gross interest is required to carried out after carrying out proportionate netting against the interest income earned and credited in the P&L Account. Such an exercise in respect of all the above issues has been collectively carried out later in page Nos 106 to 111 and the quantum of disallowance has been worked out separately for each issue. In respect of this issue the disallowance works out to Rs. 7,05,00,000/-.

Observation and finding of CIT(A):[ Para 7.6 at Page 75 to 77 of CIT(A)’s Order]

61 ITA Nos. 3846 & 4342/DEL/2012 7.6 I have considered the submission of the appellant and observations of the ASSESSING OFFICER as well as observation of the Special Auditors. It is seen that appellant had purchased shares of Edward Keventor (Successors) Pvt. Ltd. during the F.Y. 2005-06 for Rs. 438.92 crores. Out of this an amount of Rs. 370 crore was sanctioned by the ICICI Bank as loan to finance the acquisition of Edward Keventor (Successors) Pvt. Ltd. The appellant is in the business of real estate and following Percentage Of Completion Method for recognition of its revenue. If the project has commenced than interest related to such project is capitalized over the project. However, if project has not commenced, no interest can be capitalized in terms of para- 14 and 16 of accounting standard AS-16. In the case of appellant, the Land and Development Officer has not sanctioned the conversion of this land use from ‘dairy farming’ to ‘residential’. The Writ Petition filed against the order of Land & Development Officer, Ministry of Urban Development, Union of India, is pending before Hon’ble High Court. Therefore, no development activity could be started on this land. In view of the accounting para 14 and 16 of AS-16, the interest pertaining to this project cannot be capitalized and has to be debited to the P&L a/c, as the interest expenditure pertaining to this project is wholly and exclusively for the business purposes of the appellant. It is also seen that shares of M/s Edward Keventor (Successor) Pvt. Ltd. were purchased in F.Y. 2005-06 related to A.Y. 2006-07 and loan was sanctioned by ICICI Bank for Rs. 370 crore for acquiring the shares of this company. This issue was examined by the Special Auditor as well as ASSESSING OFFICER in assessment year 2006-07 and considering the business module of the appellant and para 14 and 16 of AS-16, no interest was capitalized on this issue in that year. There is no change in the facts and circumstances of this issue in the year under consideration. Hence, interest cannot be capitalized. Further, the appellant has made investment of Rs. 438.92 crore for acquiring shares of Edward Keventor (Successor) Pvt. Ltd. The investment has already been considered by the ASSESSING OFFICER while working out the disallowance of interest u/s 14A. Therefore, further capitalization of interest on this issue will amount to double addition.

62 ITA Nos. 3846 & 4342/DEL/2012 Otherwise also from the details filed by the appellant, it is seen that appellant has paid total interest of Rs. 463.86 crore during the year. Out of this interest to the extent of Rs. 196.02 crore has been capitalized over the projects. As a result, the total interest claimed in the profit & loss account on fixed termed loans comes to Rs. 267.84 crore. The appellant has also paid over draft interest and interest paid to others of Rs. 35.15 crore. Thus, the total interest claimed in the profit & loss account is at Rs. 302.99 crores. As against this the appellant has shown receipt of interest from bank deposits, customers and subsidiary and associates to the extent of Rs. 284.51 crore. If the interest payment on over drafts is taken out from the total interest claimed in the profit and loss account, then the total interest claimed in profit and loss account is Rs. 267.84 crore which is less than the interest receipts offered by the appellant from bank deposits and interest received from subsidiary and associates of Rs. 284.51 crores. As such the interest received is much more than the interest claimed in the profit and loss account by the appellant. Therefore, it cannot be said that appellant has used interest bearing funds for making investments in Edward Keventor project. The formula devised by the ASSESSING OFFICER of mixed funds to work out proportionate notional disallowance of interest is not based on any scientific method. When interest payment claimed by the appellant is less than the interest income offered in the profit and loss account, there was no justification to work out any formula based on mixed funds theory which is based on permutation and computation. The case of the appellant is interest neutral, therefore, notional interest cannot be capitalized on Edward Keventor Project. Hence the capitalization of interest of Rs. 7.05 crore is deleted.

63 ITA Nos. 3846 & 4342/DEL/2012 immediately preceding AY 2006-07 wherein the tribunal on the basis of principle laid down by Hon’ble Supreme Court in the case of Core Health Care ltd. (Supra) deleted the disallowance.

64 ITA Nos. 3846 & 4342/DEL/2012 68. The ld.CIT DR relied upon the order of AO whereas the ld. Counsel for the assessee stated that this issue is identical to that involved in Ground no. 5 of the revenue’s appeal and argument made in that ground are relevant for this as well. The facts and basis of disallowance is same as considered in ground No. 5. In the light of finding recording in respect of ground No. 5, the order of the CIT(A) is confirmed and this ground of revenue is dismissed.

65 ITA Nos. 3846 & 4342/DEL/2012 method of recognition of revenue from real estate projects, the brokerage and commission should also be recognised on the same basis. The CIT(A) has deleted the disallowance by following the order of ITAT for AY 1983-84 in which this issue has been decided in favour of assessee.

66 ITA Nos. 3846 & 4342/DEL/2012 addition is further bifurcated into two parts, the first part of addition is of Rs. 26.79 crores which is computed by substituting budgeted Internal Development Cost (IDC) with actual IDC and the second part if Rs. 7.21 crores on account of expenses not reckoned for computing the actual IDC. The AO has relied upon observations of special auditor in reaching the conclusion that budgeted IDC declared by the assessee in computing revenue under POCM is inflated. The CIT(A) deleted the addition by observing that POCM system of accounting followed by the assessee is a recognised method as per which budgeted IDC forms part of overall cost of the project.

67 ITA Nos. 3846 & 4342/DEL/2012 merely increasing academic work load of shifting expenses from one year to another is very significant. In this connection, reference to decision of Supreme Court in the case of Excel Industries Ltd. Vs. CIT 358 ITR 295 is relevant as per which if any claim has no adverse revenue implication and dispute is merely year specific, no useful purpose would be served by perpetuating such controversy. It is noticed that even under POCM method ultimately the claim is to be on the basis of actual expenses and merely because in a particular year under the POCM method, adjustments are made in respect of budgeted cost with reference to actual revenue, no adverse inference could be drawn. Taking into consideration, the system of accounting being followed by appellant and recognition of revenue on the basis of the said system, the proposed addition by the AO on hypothetical basis is of no relevance unless such adjustments are not in conformity with POCM method. The CIT(A) has appreciated the facts and correctly considered the claim of expenses under POCM method. In our opinion, there is no distortion of claim of income or expenses and accordingly order of the CIT(A) is confirmed and this ground of revenue is dismissed.

68 ITA Nos. 3846 & 4342/DEL/2012 the ground that late construction charges recovered by the assessee from the customers and shown as liability is assessable as income of the assessee since the same are being collected in contravention to decision of Hon’ble Punjab and Haryana High Court. The CIT(A) deleted the addition on the ground that Hon’ble Supreme Court has decided the issue of recovery of late construction in favour of assessee and the assessee has duly offered this amount as income chargeable to tax in FY 2010-11.

69 ITA Nos. 3846 & 4342/DEL/2012 of security deposit and same remaining unspent is assessable as income of the assessee. The CIT(A) has deleted the addition on the ground that the contingency deposit is collected for specific purpose and under contractual obligation and same cannot be treated as income of the assessee.

70 ITA Nos. 3846 & 4342/DEL/2012 collected are refundable to customers/resident associations as soon as they are formed. Further the assessee is maintained a separate account for such deposits and as such the same are not assessable as income of the assessee.

71 ITA Nos. 3846 & 4342/DEL/2012 correct and the same should have been forfeited and shown as income. The CIT(A) deleted the addition by observing that charges so collected are towards expenses incurred for registration of property. Further the assessee is maintained a separate account for such charges in which there is regular movement and as such the same are not assessable as income of the assessee.

72 ITA Nos. 3846 & 4342/DEL/2012 The AO has relied upon the observation of Special Auditor and has held that the accounting treatment by the assesse in showing this amount as liability is not correct and as the amount is outstanding for number of years, the same has become barred by limitation. The CIT(A) deleted the addition by observing that amount collected from prospective buyers is genuine and the observation of Special auditor and AO are factually incorrect. Further the assesse is maintained a separate account for such deposits in which there is regular movement and as such the same are not assessable as income of the assessee.

73 ITA Nos. 3846 & 4342/DEL/2012 91. Ground no. 15 is against deletion of disallowance of Rs. 20,70,28,248/- on account of non allocation of overhead expenses to sister concerns. The AO has relied upon observation of Special Auditor and has held that assessee has incurred certain overhead expenses on behalf of its sister concerns which have not been allocated and same have been claimed by the assessee. The CIT(A) has deleted the disallowance by holding that the expenses incurred were exclusively for the purpose of business of assessee company and same are not subject matter of allocation. Further, the CIT(A) has given a categorical finding that no expenses has been incurred by the assessee for its sister concerns after October 2006 and as such the disallowance made by AO is merely on the basis presumption in absence of any material.

74 ITA Nos. 3846 & 4342/DEL/2012 DR was fair enough to accept that this issue is covered in favour of the assessee vide order of ITAT for A.Y. 2006-07. In view of the above position, no interference is called for in the order of CIT(A) and accordingly this ground of revenue is dismissed.

“19.12 I have considered the submission of the appellant, observation of the Assessing Officer and various judicial pronouncement available on the issue. It is seen that M/s. Galaxy Mercantiles Limited was a joint venture between the appellant and other companies which had its own separate management. The appellant company raised a debit note on the said company for the common expenses like electricity and water, repair and maintenance, ground rent, house tax, insurance paid, conveyance expenses, travelling expenses, business promotion, printing and stationary, communication expenses, legal & professional expenses, recruitment & training expenses and sanitation expenses. M/s Galaxy Mercantiles Limited disowned the debit note and refused to pay such

75 ITA Nos. 3846 & 4342/DEL/2012 expenses to the appellant company. Therefore, the debit note raised in the name of M/s Galaxy Mercantiles Limited was reversed by the appellant company and expenses mentioned in the debit note were claimed by the appellant company as these expenses were incurred for the bonafide business requirement of the appellant company, though these expenses also facilitate the business requirement of M/s Galaxy Mercantiles Limited. It is matter of fact that these expenses were incurred for a set up established by the appellant for its own requirement. It so happen that M/s Galaxy Mercantiles Limited also took advantage of the set up established by the appellant. This does not mean that expenses incurred on the above set up were not incurred wholly and exclusively for the business purposes of the appellant company. Therefore, reversal of the debit note raised in the name of M/s Galaxy Mercantiles Limited does not affect allowbility of these expenditure in the hands of the appellant. This exercise is also revenue neutral, if the common expenses are disallowed in the hands of the appellant then such expenses has to allowed in the hands of M/s Galaxy Mercantiles Limited. The appellant had incurred all the expenses for its own set up and business and allocation of these expenses was not made under any legal obligation or under any contractual obligation. In view of the above facts and circumstances as well as judicial pronouncements available on the issue, the addition made by the Assessing Officer of Rs.3,66,66,498/- is deleted.

76 ITA Nos. 3846 & 4342/DEL/2012 also placed on decision of Tribunal in immediately preceding AY 2006- 07 in which while deciding the issue of allocation of expenses the court held that genuine business expenses are allowable inspite of the fact that certain indirect benefit has accrued to sister concern.

77 ITA Nos. 3846 & 4342/DEL/2012 the ground that the appellant has not been able to recover the same from the other party. Even if these expenses were incurred on behalf of M/s. Galaxy Mercantile Ltd., non recovery of same shall be in the nature of business loss. In view of the above position, there is no infirmity in the order of the CIT(A). However, as and when any recovery is made by the appellant in respect of these expenses, the same should be considered as its income in terms of provisions of section 41(1) of the Act. Subjected to these observation, the order of the CIT(A) is confirmed.

78 ITA Nos. 3846 & 4342/DEL/2012 favour of assessee by the order of tribunal in immediately preceding AY 2006-07 wherein the addition has been deleted by the tribunal.

79 ITA Nos. 3846 & 4342/DEL/2012 102. The ld. CIT DR relied upon the order of AO. On the other hand, the ld. Counsel for the assessee supported the order of CIT(A) and submitted that there is no case of any unpaid liability in terms of provisions of section 43B of the Act. In the light of finding of CIT(A) that claim is in accordance with provisions of sec. 43B of the Act, no interference is called for in the order of CIT(A) and this ground of revenue is dismissed.

“23.10 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, and various judicial pronouncements relied upon by the appellant. It is seen that the appellant is engaged in the business of developing real estate like development of plots, multi storey buildings, commercial complexes etc. During the year, the appellant has incurred certain expenditure on market study, feasibility report and viability report on possibility of developing SEZ projects at various locations like Gurgaon, Ambala, Ludhiana, Amritsar,

80 ITA Nos. 3846 & 4342/DEL/2012 Dankuni, Jaipur and Bhuvneshwar etc. On these studies, the appellant has incurred an expenditure of Rs. 1,81,95,513/-. In the assessment proceedings these expenses have been treated as pre-operative expenses by the ASSESSING OFFICER. It is claimed by the appellant that conducting feasibility and viability study for developing SEZ was not a new line of business but it was expansion/extension of the same line of business. Development of SEZ is very akin development of commercial projects which falls within the objectives of the MOA of the appellant company. Any expenditure incurred for expansion or extension of same line of business with complete unity of control, common fund and with the common management is a revenue expenditure and same cannot be held as capital expenditure. The feasibility and viability study was to extend the business of the appellant in same line, therefore, the expenditure incurred on such study is revenue expenditure and by exploring the possibility of obtaining / developing or extension of the existing business at various stations identified, the appellant was only planning to expand its business and no new asset much less capital asset have been created. Therefore, respectfully following the decisions of jurisdictional High Court, the disallowance of Rs.1,81,95,513/- made by the Assessing Officer on this account is deleted.”

81 ITA Nos. 3846 & 4342/DEL/2012 AO are principally wrong and not based on correct appreciation of facts of the case.

“23.11 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, and various judicial pronouncements relied upon by the appellant. It is seen that

82 ITA Nos. 3846 & 4342/DEL/2012 the appellant is engaged in the business of developing real estate like development of plots, multi storey buildings, commercial complexes etc. During the year, the appellant has incurred certain expenditure on Soil Investigation, Environment impact assessment, examination of title expenses, lay out expenses, designing, site planning, interior design services, site identity, consultation expenses etc. for developing commercial projects at various locations like Noida, Karnataka etc. On these studies as well as other services, the appellant has incurred an expenditure of Rs. 1,79,83,814/-. In the assessment proceedings these expenses have been treated as capital expenditure by the ASSESSING OFFICER. It is claimed by the appellant that expenses incurred on soil investigation, planning, identification of sites, inspection of titles and other expenses on feasibility and viability of the commercial projects were not a new line of business but it was same line of business. The development of commercial projects is main business of the appellant and any expenses incurred relating to such projects before their commencement like identification of sites, examination of title deed, soil investigation, environment impact assessment, interior-exterior designs, lay out etc. are expenses incurred for bonafide business requirement of the appellant and such expenses falls within the objectives of the MOA of the appellant company. Any expenditure incurred for the projects is to be undertaken in future and viability of such projects are business expenditure and same has to be allowed as revenue expenditure. The question of capitalization of such expenses arises only when such projects actually commences and are in existence, but there are certain projects for which various expenses were incurred before their intended commencement but due to some reasons such projects could not commenced, therefore, expenses relating to such projects cannot be capitalize and has to be allowed as revenue expenditure as these expenses have been incurred wholly and exclusively for the business requirement of the appellant company. In view of the above, the disallowance made by the ASSESSING OFFICER of such expenses cannot be sustained.

83 ITA Nos. 3846 & 4342/DEL/2012 Therefore, respectfully following the decisions of jurisdictional High Court, the disallowance of Rs. 1,79,83,814/- made by the Assessing Officer on this account is deleted.

84 ITA Nos. 3846 & 4342/DEL/2012 disallowance on the basis of decision of Apex Court in the case of CIT vs. General Insurance Corp. 156 Taxman 96 (SC) and decisions of various high courts. The finding of CIT(A) is as under :

“26.16 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and various judicial pronouncements available on this issue. It is seen that appellant has incurred Rs. 1,78, 94,000/- on fees paid to ROC for increase in authorized share capital of the appellant company which was as under:- (i) For issue of bonus shares Rs. 1,04,32,923.00 (ii) For issue of equity shares Rs. 74,61,077.00 ------------------------- Total Rs. 1,78,94,000.00 ------------------------- Out of Rs. 1,78,94,000/-, a sum of Rs. 74,61,077/- was related to issue of fresh share capital, therefore, the same was treated as capital expenditure by the appellant company and disallowed in the computation of income. The remaining amount of Rs. 1,04,32,923/- was claimed as revenue expenditure, as it was pertaining to issue of bonus shares and conversion of debentures into equity shares. In the assessment proceedings, the ASSESSING OFFICER treated the expenditure of Rs. 1,04,32,923/- relating to issue of bonus shares and conversion of debentures in equity shares as capital expenditure following the judgment of Hon’ble Bombay High Court in the case of CIT vs. Sessa Goa Ltd. 282 ITR 197 (BOM) wherein expenditure incurred on issue of bonus shares was treated as capital expenditure. During the course of assessment proceedings as well as in the appellate proceedings appellant submitted that expenditure incurred on issue of bonus shares and conversion of debentures in equity shares is revenue expenditure in view of the Hon’ble Supreme Court judgment in the case of CIT vs. General Insurance Corp. 156 Taxman 96 (SC) wherein the expenditure incurred in connection with issuance of bonus shares is held as revenue expenditure. It was contended by the appellant that judgment of Hon’ble Bombay High Court in the

85 ITA Nos. 3846 & 4342/DEL/2012 case of CIT vs. Sessa Goa Ltd. stands overruled in view of the fact that, Hon’ble Supreme Court has approved the judgment of Hon’ble Bombay High Court in the case of Bombay Burmah Trading Corp. Ltd. Vs. CIT 145 ITR 793 (BOM) wherein the expenses relating to issue of bonus shares was treated as revenue expenditure. In the case of Sessa Goa Ltd., the earlier decision of Bombay High Court was overruled by the same High Court. However, subsequent to the Sessa Goa judgment of Bombay High Court which was delivered in the Month of August, 2005, the Hon’ble Supreme Court in the case of CIT vs. General Insurance Corp. which was delivered in September 2006 has held that expenses relating to issuance of bonus shares is a revenue expenditure. Therefore, the judgment of Hon’ble Bombay High Court in the case of Sessa Goa Ltd. is no more a good judgment and judgment of Hon’ble Supreme Court which was delivered on later date will prevail. Subsequent to Hon’ble Supreme Court judgment in the case of CIT vs. General Insurance Corp., the Hon’ble Rajasthan High Court in the case of CIT Vs. Secure Meters Ltd. 221 CTR 405 has held that even if debentures were to be converted into shares at a later date, the expenditure incurred on such convertible debentures has to be treated as revenue expenditure. Subsequent to this judgment, the Hon’ble Karnataka High Court in the case of CIT vs. ITC Hotels Ltd. 190 Taxmann 430 has decided that expenses relating to convertible debentures is a revenue expenditure. In view of the above, the expenditure incurred of Rs. 1,04,32,923/- with respect to issuance of bonus shares and conversion of debentures into equity shares is held to be revenue expenditure and not a capital expenditure. Therefore, the addition made by the ASSESSING OFFICER on this issue is deleted.”

86 ITA Nos. 3846 & 4342/DEL/2012 Reliance was also placed on decision of Hon’ble Rajasthan High Court in the case of CIT Vs. Secure Meters Ltd. 221 CTR 405 in support of contention that expenses on conversion of debentures into equity are admissible as revenue in nature.

Page no. 395 to 399 of the assessment order “On going through the reply filed by the assessee it emerges that the assessee has raised two main grounds for non deduction of TDS on these payments. The assessee has stated that with regard to the legal fees of Rs.1,46,03,295/- paid to Paul, Hastings, Janofsky & Walker LLP for assisting in the contemplated joint

87 ITA Nos. 3846 & 4342/DEL/2012 venture agreement with Hilton International, the said services though utilized in India have not been performed in India. The assessee has further relied on Article 15 of DTAA with USA and stated that on reading of the Article 15 it emerged that services rendered by a resident of USA shall be taxable in India only if such non-resident has a fixed base regularly available to him in India and such person’s stay in India exceeds 90 days in the relevant taxable year. It is emphatically stated that none of the partners/employees of Paul, Hastings, Janofsky & Walker LLP were in India for more than 90 days during the relevant taxable year nor did they have any fixed base in India regularly available to them. Thus, the DTAA exempts such legal services from being taxed in the other contracting State which is India in this case. Based on this the assessee has concluded that the income of the non-resident though chargeable to tax under the domestic Indian law is exempt from tax as per the Indo-US DTAA. On this argument of the assessee on reading of DTAA with USA it emerges that the payment made by the assessee to Paul, Hastings, Janofsky & Walker LLP for assisting in the contemplated joint venture agreement with Hilton International is covered by Article 12 of the treaty and not Article 15 as stated by the assessee in its reply. The contents of Article 12 of the DTAA are as under : ………… As per Article 12 the Fees for technical services is defined as payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel). The consultancy services rendered by Paul Hastings are covered within definition of Technical Services as per Article 12 and therefore are taxable in the India since the services are received for use in India as admitted by the assessee himself in its reply the relevant text of assessee’s reply in this regard is quoted as under. “With regard to the show cause query, it is respectfully submitted that in the case of legal fees paid to Paul, Hastings, Janofsky & Walker LLP for assisting in the contemplated joint venture agreement with Hilton International, the said services though utilized in India have not been performed in India.

88 ITA Nos. 3846 & 4342/DEL/2012 Therefore the assessee was liable to deduct TDS on payment to Paul Hastings which it had failed to do so. Regarding the other payment of Rs.43,02,192/- made to Control Risks Group (S) Pte. Ltd. The assessee has stated that Control Risk group has merely issued a report and it therefore would not fall within the definition of technical and consultancy services. The assessee has further stated that even if the payments fall within the ambit of technical and consultancy services as per section 9(1)(vii) then the non-resident company being a resident of Singapore, the Singapore DTAA with India will need to be seen for any exemption available. Article 12 of the Indo-Singapore Treaty is the relevant Article under which such payments are covered. This definition as per clause (b) of section 4 of Article 12 states that technical services are such that, they make available to the recipient knowledge or skill such that it enables the person acquiring the services to apply the technology contained therein, themselves. In the present case, the non- resident company has conducted this assessment exercise and issued a report after assessing the personal and corporate risk for DLF. The non-resident has in no way made available to the assessee any skill/knowledge such that the assessee may be able to carry out such risk assessments in the future itself. Thus, the non-resident has made available no knowledge or technology or skill to the assessee as such that it would fall within the definition of ‘fees for technical services’ as per the Indo- Singapore DTAA. The assessee’s argument on this ground is not acceptable since control risk has through their expert knowledge carried out a risk assessment in India and based on their work issued a report and provided consultancy services to the assessee. The report issued by them is property of the assessee company and can be used by them any manner. Control Rick Group by issuing report has made available to the assessee company their knowledge and technical skill through the contents of their report. The services rendered by them is therefore covered in the definition of technical and consultancy services as contemplated in Article 12 of DTAA with Singapore. It is further observed that U/S 195(1) and obligations on the part of the persons that responsible for paying to non-residence arises on payment of non-residence recipient in respect of other goods/services supplied by the non-residence which the residence payer is making use of any running office business in

89 ITA Nos. 3846 & 4342/DEL/2012 India. In such situation, the payments to non-residence recipient Prima Facie bears a character of Income of recipient and, therefore, tax of payments is deducted U/S 195(1). The assessee, who has not obtained the determination of the Income by the Assessing Officer U/S 195(2) and, therefore, the contention of the assessee that no part of the payment has resulted in any taxable Income in the hands of non-residence recipient is not sustainable, therefore, disallowance of Rs. 1,89,05,487/- is made U/S 40(a)(i) of the Act for non deduction of TDS on these payments. Correspondingly this amount is being added with Income of the Assessee.”

[Para 28.24 at Page 261 to 268 of CIT(A)’s Order] “28.24 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, and various judicial pronouncements relied upon by the appellant in this regard. During the year appellant had made payment without deduction of withholding tax thereon to two Non Residents namely M/s. Paul, Hastings, Janofsky & Walker LLP and Controlled Risk Groups (S) Pte. Ltd of Rs. 1,46,03,295/- and Rs. 43,02,192/- respectively for assisting in the contemplated join venture with Hilton International Ltd. and for obtaining report on the personal and corporate risks assessment of the appellant company. The appellant claims that chargeability of income as per domestic Indian Income Tax Act is to be seen in relation to section 4 read with section 5(2) and section 9 of the IT Act. The section 5(2) brings to tax income that accrues or arise in India or received or deemed to be received in India or deemed to accrue & arise in India. The said legal services obtained from M/s Paul Hastings, Janofsky and Walker LLP does not fall with the earlier part of the definition i.e. neither it has accrue or arise in India nor it was received or deemed to be received in India. The section 9 is a deeming section as per which income which do not accrue and arise in India is deemed to accrue or arise in India.

90 ITA Nos. 3846 & 4342/DEL/2012 The said section seeks to tax income of the nature of technical services earned by Non Resident, even though such income does not accrue or arise in India. Therefore, the services rendered by Paul Hastings, Janofsky and Walker LLP to the appellant company shall fall within the ambit of section 9(1)(vii) of the Act. It is seen that once a particular income of non-resident is chargeable to tax in India, it is to be seen whether double taxation avoidance agreement between the country of residence of the non resident and India allowed any relief from such double taxation. M/s Paul Hastings, Janofsky and Walker LLP is a resident of USA and thus the provision Indo-US DTAA shall apply. The legal services rendered to the appellant were rendered by the firm of individuals and not a company as is evident from the copies of invoice, which is a limited liability partnership firm, which is covered by Article 15 of Indo-US DTAA. The provision of article 15 are reproduced hereunder:- “ARTICLE 15 – Independent Personal Services 1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State : (a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities, in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) if the persons’ stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year. 2. The term, “professional services” includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.”

91 ITA Nos. 3846 & 4342/DEL/2012 The reading of the Article 15 shows that services rendered by a resident of USA shall be taxable in India only if such non resident has a fixed place of business in India and such person stay in India exceeding 90 days or more than 90 days in the relevant taxable year. In the assessment order the ASSESSING OFFICER has not brought any information which can establish that M/s Paul Hastings, Janofsky and Walker LLP has a permanent place of business and has state more than 90 or more days with the relevant taxable year in India. In the absence of such information it can be concluded that Indo-US DTAA exempts such legal services from taxed in other contracting state i.e. India in this case. The provisions of the Indo-US DTAA override the provisions of Indian Income Tax Law, therefore, the payment made to M/s Paul Hastings, Janofsky and Walker LLP cannot be taxed in India in view of Article 15 of Indo-US DTAA which prevails over the provisions of section 9 of the IT Act. Hence, the withholding tax was not required to be deducted in this case and provisions of section 40(a)(i) are not applicable. Reliance in this regard is placed on the judgment of Hon’ble Supreme Court in the case of Azadi Bachao Andolan vs. UOI 263 ITR 706 (SC) As regards the remittance of Rs. 43,02,192/- made to M/s Controlled Risk Group (S) Pte. Ltd. for personal and corporate risk assessment of the appellant company done by them. It was submitted by the appellant that in this payment charging section i.e. section 4 itself is not applicable since there is a difference between the rendering of services and furnishing of services as envisaged by section 9(1)(vii). It is submitted by the appellant that mere issue of a report does not lead to any technical/consultancy services being rendered by a non resident to the appellant. In this regard, the appellant has relied upon the Bombay High Court judgment in the case of Diamond Services International Pvt. Ltd. vs. UOI 304 ITR 201 [2008]. It is submitted by the appellant that even if the said remittance is treated as technical services as per section 9(1)(vii), the chargebility of such services needs to be examine with reference to Indo-Singapore-DTAA. As per the said DTAA the fees payable for technical services is covered by Article 12 of the Indo- Singapore-DTAA. The provision of Article-12 of said DTAA are reproduced hereunder:-

92 ITA Nos. 3846 & 4342/DEL/2012 “4. The term “fees for technical services” as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature [including the provisions of such services through technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.” It is observed that definition of “fees for technical services” as per clause (b) of section 4 of Article 12 states that technical services are of such nature which enables the person acquiring such services to apply the technology contained therein, themselves. In the present case, the non-resident company has conducted an assessment and thereafter issued a report after assessing the personal and corporate risk for appellant company. The non-resident has in no way “made available” to the appellant any skill/knowledge in a way which enables the appellant company to carry out such risk assessments in the future itself. Thus, the non-resident has not made available any knowledge or technology or skill to the appellant, which falls within the definition of ‘fees for technical services’ as per the Indo-Singapore DTAA. Therefore, the remittance made to M/s Controlled Risk Group (S) Pte. Ltd. for personal and corporate assessment of the appellant does not fall under the term “fee for technical services” as per Article 12 of Indo-Singapore-DTAA. The M/s Controlled Risk Group (S) Pte. Ltd has not made available technical knowledge, experience, skill, know how or processors, which enables the person acquiring the services to apply the technology contained therein. Since the condition of

93 ITA Nos. 3846 & 4342/DEL/2012 “make available” of technical knowledge is not satisfied. Therefore, the provision of the Article-12 of Indo-Singapore- DTAA is not fulfilled. Therefore, the remittance made is not covered under “fee for technical services” and same is not taxable in other contracting states i.e. India in the present case. In view of the above, the provision of section 40(a)(i) are not applicable and the remittance made of Rs. 43,02,190/- cannot be disallowed.

94 ITA Nos. 3846 & 4342/DEL/2012 116. With respect to disallowance of Rs. 43,02,192/ being payment made to Control Risks Group (S) Pte Ltd, a Singapore based company, the ld counsel submitted that the payments are for issuance of risk assessment report which is not made available to assessee in India. It was stressed that article 12 of Indo-Singapore DTAA essentially requires the satisfaction of make available clause in order to make a payment fall within the definition of fee for technical services. It was argued that the M/s. Control Risks Group (S) Pte Ltd neither have any PE in India nor the service was made available to the assessee. The ld. Counsel submitted that the case is covered by the decision of Delhi bench of ITAT in the case of Romer Labs Singapore Pte. Ltd. v. ADIT [2013] 22 ITR 224.

95 ITA Nos. 3846 & 4342/DEL/2012 15 are not satisfied and as such there is no question of any disallowance u/s 40(a)(i) of the Act.

96 ITA Nos. 3846 & 4342/DEL/2012 the disallowance u/s 40(a)(ia) of the Act. The CIT(A) has deleted the disallowance on the ground that the said entry is merely a pass through entry and assessee has not claimed any deduction in profit and loss a/c. The relevant finding of CIT(A) is as under :

“29.12 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and provisions of section 40(a)(ia) of the IT Act. It is seen that appellant was owner of property on which school building was constructed. This school building alongwith land was given on rent to M/s Shriram School, Gurgaon vide lease deed dated 27.12.2000. There was some dispute about the holdings of the property within the group companies. Therefore, the said property was the subject matter of an arbitration. As per arbitration award dated 29.10.2001, copy of which is filed at page 73 to 129 of the appellant’s submission dated 08.05.2012, the said property was awarded in favour of DLF Qutub Enclave Complex Educational Charitable Trust. Therefore, the rent received from the Shri Ram School was the income of the above said trust. However, since the lease deed was between appellant company and the tenant, therefore, such rent was received by the appellant company and shown the same as liability payable to the Trust. Such rent receipts were passed on to DLF Qutub Enclave Complex Educational Charitable Trust in entirety. The ASSESSING OFFICER has held that such payments are covered u/s 40(a)(ia) of the IT Act as no TDS was deducted on such payments. It is observed from the facts discussed above that the income received from Shriram School was pertaining to DLF Qutub Enclave Complex Educational Charitable Trust and same was transferred by the appellant in its entirety. It is also seen that appellant has neither credited this rent as income nor claimed any expenditure on account payment made to DLF Qutub Enclave Complex Educational Charitable Trust. Since no expenditure on account of this payment of Rs. 49,34,000/- has been claimed, therefore, provisions of section 40(a)(ia) are not applicable. Hence, the disallowance of Rs.49,34,000/- made by the Assessing Officer is deleted.

97 ITA Nos. 3846 & 4342/DEL/2012 120. The ld. CIT DR relied upon order of AO. On the other hand the ld counsel for the assessee reiterated the submissions made before CIT(A) and argued that the impugned entry is merely a pass through entry as DLF Qutub Enclave Complex Educational Charitable Trust is the rightful recipient of the said amount. Further, it was submitted no entry has been passed through profit and loss account and there being no case of any claim of deduction, the disallowance u/s 40(a)(ia) is without any basis.

98 ITA Nos. 3846 & 4342/DEL/2012 “30.9 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and the certificates issued by ITO TDS Ward 49(4), New Delhi. It is seen from the certificates which were issued on 06.11.2006 that amount which were to be paid by the appellant during the year of Rs. 28,70,484 + Rs. 6,75,408 and Rs. 590976/- + Rs. 506556/- in respect of M/s DLF Qutub Enclave Complex Educational Charitable Trust and M/s DLF Qutub Enclave Complex Medical Charitable Trust respectively was clearly mentioned in the column “amount of rent expected to be realized during F.Y. 2006-07”. These certificates were signed by ITO TDS Ward 49(4), New Delhi and same are filed before me from page 170 to 175 of the appellant’s submission dated 08.05.2012. In view of the above it is established that the certificates issued by the ITO were meant for the entire amount mentioned in the certificates and not for the amount payable/paid for the months November 2006 to March, 2007. The ASSESSING OFFICER has not appreciated the certificates issued by the ITO TDS Ward 49(4), New Delhi, in its proper prospective and disallowance of Rs. 27,08,664/- made on account of Non Deduction of TDS was not justified. Hence, the same is deleted.”

99 ITA Nos. 3846 & 4342/DEL/2012 125. Ground no. 26 is against deletion of disallowance of Rs. 4,20,000/- u/s 40(a)(ia) of the act. The AO has considered the disallowance merely on the ground that assessee did not deposit TDS on or before 31/05/2007. The CIT(A) deleted the disallowance on the ground that TDS was duly deposited on 07/06/07 i.e. before the due date of filing of return of income u/s 139(1) of the Act and as such the claim is allowable as per proviso to section 40(a)(ia).

100 ITA Nos. 3846 & 4342/DEL/2012 128. Ground no. 27 is against deletion of disallowance of Rs. 11,07,190/- on account of rejection of claim of TDS on rent received from Shri Ram School. The AO has withdrawn the TDS benefit on the ground that since rent received from Shri Ram School has not been offered to tax by the assessee, the claim of TDS in respect of same amount is not allowable. The CIT(A) allowed the relief by observing that as the TDS has been deducted and deposited with government and M/s DLF Qutub Enclave Complex Educational Charitable Trust to whom the amount has been transferred has not claimed the benefit of TDS, the claim of the assessee is legally sustainable.

101 ITA Nos. 3846 & 4342/DEL/2012 Educational Charitable Trust, but as TDS is in the name of appellant, benefit of same is to be allowed to appellant. We are not impressed with the finding of the CIT(A). The appellant having transferred the rent to DLF Qutub Enclave Complex Educational Charitable Trust, the TDS is also required to be transferred. The claim of TDS is directly related to the issue of rent. If the rent belongs to another entity, the TDS is also to be transferred and to be claimed by the recipient of rent. In the light of above position, finding of the CIT(A) is reversed and this ground of revenue is accepted.

102 ITA Nos. 3846 & 4342/DEL/2012 2006-07 in which the court has held that rental income from property is to be assessed under head income from house property.

103 ITA Nos. 3846 & 4342/DEL/2012 135. The ld. CIT DR relied upon order of AO. On the other hand, ld. Counsel for the assessee argued that this issue is covered in the favour of assessee by the order of tribunal for immediately preceding AY 2006-07 in which the tribunal has deleted the addition on account of notional rent.

“35.13 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and various judicial pronouncement relied upon by the appellant. It is seen that as per the reconciliation submitted by the appellant, the difference in income as per books of account and TDS

104 ITA Nos. 3846 & 4342/DEL/2012 certificates is on account of either the payee deducted the excess TDS or part of the income on account of increase in rent has been booked and offered for taxation in the F.Y. 2007-08 relevant to A.Y. 2008-09. It is noted that, that all incomes have been recorded by the appellant either in this year or has been offered in the subsequent year. In view of the above, the addition of Rs. 5,41,734/- made by the Assessing Officer is deleted as no rental income has escaped from the taxation. The increased rental income has been offered in subsequent years. The addition made by the ASSESSING OFFICER is revenue neutral, therefore, no cognizance of the same is taken.”

105 ITA Nos. 3846 & 4342/DEL/2012 140. Ground No. 31 is against deletion of disallowance of 41,674/- by way of rejection of claim of TDS on advance rent on the ground that since rent has not been offered for taxation in the year under consideration, the claim of corresponding TDS cannot be allowed. The CIT(A) allowed relief to the assessee by holding the assesee has duly offered the advance rent as income in subsequent AY 2008-09 in which no TDS has been claimed and as such the claim of TDS in present AY 2007-08 is in accordance with law.

106 ITA Nos. 3846 & 4342/DEL/2012 assessee vide order of ITAT for A.Y. 2006-07. In view of the above position, no interference is called for in the order of CIT(A) and accordingly this ground of revenue is dismissed.

The relevant observation and finding of AO and CIT(A) are extracted hereunder :

Observation and finding of AO (Page 474 to 475 of the assessment order) “I have considered the reply of the assessee and find that the argument of company for justification in sale price of Diwaker Estates of Rs 10/- per share as against NAV of Rs. 6359.53. per share is not sound acceptable just because it has purchased something 3 years back at Rs.10/- against NAV of Rs 5959.74, it does not mean that it is under compulsion to sell the same also at Rs. 10/- when the NAV per share is Rs.6359.53, more so when the persons from whom the shares were purchased is different from the person to whom the shares were sold. The company has not given any other business need for sale at Rs. 10/-. Therefore for the purpose of taking the fair market value of shares of Diwakar Estates Ltd, it should be taken at Rs. 6359.53 per share. In the case of Monishka Builders and Developers P Ltd, the company has stated that it was the original subscriber to the shares of the company. This company was formed on 25.08.05 and the shares were sold on 30.11.06. After the company was formed the net worth of the company has increased due to the profits and the net worth of the company as on 31.03.2006 was Rs 185.56 which had fallen to Rs.184.47 per share as on 31.03.2007. These shares were sold during the financial year 2006-07 and therefore the NAV of Rs. 184.47 per share as on

107 ITA Nos. 3846 & 4342/DEL/2012 31.03.2007 is to be taken as fair market value of these shares to arrive at the gain on sale of shares. After taking the fair market value of shares in place of sale price accounted by the assessee, the amount to be added is as under:

S. Name of Net Asset Sale Addition No. of Amount of No. company Value as Price as al Shares Addition (Rs.) on per consider 31.3.2007 Books ation (Rs.) of (Rs.) Account (Rs.) 1 Diwakar 6359.53 10.11 6349.42 1880 1,19,36,910 Estates Limited 2 Monishka 184.47 10.00 174.47 10000 17,44,700 Builkders & Developers Pvt. Ltd. 1,36,81,610

Accordingly, addition of Rs.1,36,81,610/- is made to the income of the assessee for the current assessment year 2007-08.

Observation and finding of CIT(A): [ Para 38.11 at Page 325 to 331 of CIT(A)’s Order] 38.11 I have considered the submission of the appellant, observation of the assessing officer. It is seen that Diwakar Estates Pvt. Ltd. and Monishka Builders and Developers Pvt. Ltd. were subsidiaries of the appellant company. The appellant company had acquired shares of Monishka Builders and Developers Pvt. Ltd. in F.Y. 2005-06 at the face value of Rs. 10 each. Similary the shares of Diwakar Estates Pvt. Ltd. were purchased in F.Y. 2003-04 of Rs. 10 per share. The appellant has sold shares of these companies to DLF Home Developers Ltd

108 ITA Nos. 3846 & 4342/DEL/2012 another subsidiary of the company at par. In the assessment proceedings, the ASSESSING OFFICER has held that NAV of the shares of Monishka Builders and Developers Pvt. Ltd. as on 31.03.2007 was Rs. 184.47/- similarly the NAV of the shares of Diwakar Estates Pvt. Ltd. was Rs. 6359.53/- as on 31.03.2007. Therefore, for calculating the capital gain ASSESSING OFFICER adopted the NAV as fair market value of the shares transferred during the F.Y. 2006-07 and added capital gain of Rs. 1,36,81,610/- to the appellant’s income. It is claimed by the appellant that shares have been sold to the group company at Rs. 10/- per share and there was no income on account of sale of these shares. It is also claimed by the appellant that it is not the case that any underhand payment has been received by the appellant. The appellant has also contended that actual sales consideration cannot be replaced by the Fair Market Value.

In the appellate proceedings it was submitted by the AR of the appellant that value of the sale of the shares was substituted by the ASSESSING OFFICER without appreciating the facts and correct position of law. The value of the shares of Diwakar Estates Pvt. Ltd. and Monishka Builders and Developers Pvt. Ltd. was determined on the basis of Net Asset Value Method (NAV) which is not applicable in the case of appellant.

The sale considered of the shares was received by cheque and the price of the sale of Rs.10/- per share was mutually agreed between seller and purchaser. It is seen that actual transaction has taken place between appellant and DLF Home Developers Ltd. They are sister concerns but in the eyes of law they are distinct entity. The ASSESSING OFFICER has not brought any information on record that shares were sold at a price other than actual price of Rs. 10/- per share. The transaction is not in doubt and same has been confirmed by both the parties. The ASSESSING OFFICER has not brought any positive evidence which could suggest that transaction of sale of shares had actually taken place at a price higher than apparent sales consideration. Section 48 of the IT Act provides the mode of computation which read as under:-

109 ITA Nos. 3846 & 4342/DEL/2012 “The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely- (i) Expenditure incurred wholly and exclusively in connection with such transfer; (ii) The cost of acquisition of the asset and the cost of any improvement thereto:” As per the provision of section 48 the capital gains from transfer of capital assets are to be computed by reducing cost of acquisition/index cost of acquisition from full value of consideration received or accrued from such transfer. There is no provision in the Act which empowers the ASSESSING Assessing Officer to substitute the sale consideration at which transaction actually takes place with fair market value of such assets unless the Assessing Officer bring some positive information about such transactions that the value of the transactions was more than what actually has been declared by the appellant. In the case of appellant the Assessing Officer has not brought such information on record, therefore, Assessing Officer is not empowered to substitute the sale consideration received from sale of transactions. Hence, the Assessing Officer was not justified in substituting the sale price of shares of Diwakar Estates Pvt. Ltd. and Monishka Builders and Developers Pvt. Ltd. at Rs. 6359. 53 and Rs. 184.47/- respectively per share as against Rs. 10/- per share received by the appellant. Hence the estimation of long term capital gain of Rs. 1,36,81,610/- was not justified and deleted.

In support of my above decision reliance is placed on following judicial pronouncements. K.P. Varghese vs. Income-tax Officer [1981] 7 TAXMAN 13 (SC) Commissioner of Income-tax vs. Shivakami Co. (P.) Ltd. [1986] 25 TAXMAN 80K (SC) Commissioner of Income-tax v. Smt. Nandini Nopany [1998] 230 ITR 679 (CAL.)

110 ITA Nos. 3846 & 4342/DEL/2012 The facts of the above cited judicial pronouncements are identical with the facts of the appellant’s case. Therefore the ratio of the said judgments is squarely applicable to the appellant’s case. Hence the long term capital gain estimated by the ASSESSING OFFICER by substituting the sale price with NAV as against the actual sale price of Rs. 10/- per share of Diwakar Estates Pvt. Ltd. and Monishka Builders and Developers Pvt. Ltd. was not correct, therefore addition on account of long term capital gain estimated at Rs. 1,36,81,610/- is deleted.”

111 ITA Nos. 3846 & 4342/DEL/2012 consideration. The principle laid down by Supreme Court in the case of K.P. Verghese 131 ITR 597 has been considered by Delhi High Court in number of cases and it may be appropriate to make reference to decision of Delhi High Court in the case of CIT v. Gulshan Kumar[2002] 257 ITR 703. In view of the settled legal position and in the absence of any evidence regarding non-disclosure of full value of consideration, there is no infirmity in the order of CIT(A) and same is confirmed.

“40.8 I have considered the facts available on records and the contention of the appellant and it is observed that the impugned disallowance of expenditure of Rs.65,08,264/- have been made on the ground that the bills are not in the name of appellant. It is observed from pages 479 to 483 of the assessment order that the appellant has explained each and every item of expenditure in detail. It is seen that these expenses are in the nature of electricity bill and water charges pertaining to Jhandewalan Office of the appellant, reimbursement made to the employees and other group companies. As explained by the appellant that Jhandewalan Property belong to the appellant since so many years but same was given on rent to M/s DCM Ltd. and Nestle India Pvt. Ltd. When the said property was given on rent those companies took electricity connection and water connection on their name. Though the property has been vacated by those

112 ITA Nos. 3846 & 4342/DEL/2012 tenants and being used by the appellant but the electricity and water connection is still running in their names. These expenses have been incurred wholly and exclusively for the business purposes of the appellant as these premises are being used by the appellant for its office purposes. Merely because the water and electricity bills are in the name of earlier tenants the same cannot be disallowed. It is also submitted by the appellant that water and electricity bill in the name of Raisina Cold Storage are also being utilized by the appellant for its business purposes. This company has been merged with the appellant, therefore, these expenses also pertains to the appellant’s business purposes. The reimbursement made to the employees and group companies for the expenses incurred by them on behalf of the appellant is also pertains to the appellant as these expenses were incurred wholly and exclusively for the business purposes of the appellant. Considering the facts it is established that these expenses were pertaining to appellant company and services or utilization thereof were for the purposes of the business of appellant company. Hence, the same are allowable. This issue has been decided by learned CIT(A)-XVIII, New Delhi, vide his order dated 25.03.2011 in appeal No.35/2010-11, in favour of the appellant company in the immediately preceding assessment year relevant to assessment year 2006-07 (page Nos.243-254 of the said order). Therefore, the disallowance of Rs. 65,08,264/- is deleted. “

147 The ld. CIT DR relied upon finding of AO. On the other hand, the ld. Counsel for the assessee submitted that this issue is covered in favour of assessee by the order of Tribunal for immediately preceding AY 2006-07 wherein the disallowance made on identical ground was deleted by Tribunal.

113 ITA Nos. 3846 & 4342/DEL/2012 148. Both the parties have agreed that these issue is covered in favour of the assessee vide order of ITAT vide para 273-276 for A.Y. 2006-07. In the light of above position, order of the CIT(A) is confirmed as covered by order of ITAT and this ground of revenue is dismissed.

“41.6 I have considered the submission of the appellant and observation of the ASSESSING OFFICER. It is seen that the AO has recalculated written down value as on 01.04.2005 by notionally deducting depreciation from the WDV as on 01.04.1999. The amount of notional depreciation for the period 01.04.1999 01.04.2005 during which period the property had been leased and the income taxed under the head “Income from House Property” after allowing deductions permissible under Section 24 of the Income Tax Act. Deductions by way of depreciation allowance are dealt in section 32 of the Income Tax Act which provides for allowing depreciation on the basis of Written Down Value of the assets under section 32(1)(ii). The definition of the word written down value is in section 43(6)(b) of the Income Tax Act which provides that in the case of assets acquired before the previous year written down value means the actual cost to the appellant less all depreciation actually allowed under the Act. From the facts and the judgment of Hon’ble Supreme Court in the case of CIT vs. Doomdooma India Limited (2009) 178 Taxman 261 (SC), it is clear that the

114 ITA Nos. 3846 & 4342/DEL/2012 depreciation is to be allowed on the basis of actual WDV and same cannot be reduced on notional basis for the period for which property was not used for business purposes and no depreciation was claimed on such part of the property. From the facts as narrated above and respectfully following the judgment of Hon’ble Supreme Court in the case of CIT vs. Doomdooma India Limited (2009) 178 Taxman 261 (SC) and the judgment of the CIT(A)-XVIII in the case of the appellant for A.Y. 2006-07, the disallowance of depreciation of Rs.8,09,837/- made by the ASSESSING OFFICER is deleted.”

115 ITA Nos. 3846 & 4342/DEL/2012 could not be permitted to agitate the very same issue in the year under reference. Accordingly, the order of CIT(A) is confirmed.

The order is pronounced in the open court on 01.11.2017.

Sd/- Sd/- [K.N. CHARY] [B.P. JAIN] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 01st November, 2017

VL/ Copy forwarded to:

Asst. Registrar, ITAT, New Delhi