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Income Tax Appellate Tribunal, DELHI BENCH “E”, NEW DELHI
Before: SH. N. K. SAINI & SMT. BEENA A. PILLAI
These are two appeals filed by assessee for assessment year 2006-07 and 2008-09 against orders dated 20.04.2012 and 30.09.2011 respectively passed by Ld. CIT (A)-IX, New Delhi. As the issues involved are more or less common, we are disposing of these appeals by way of a common order. Assessment year 2006-07 Grounds raised by assessee in this appeal are as under:
1. The learned Commissioner of Income-Tax (Appeals) has erred both on facts and in law in upholding the action of the learned Assessing Officer in disallowing interest paid amounting to Rs. 9,84,375/-, u/s 40(2) of the Act allegedly on the ground that the same is excessive.
2. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the learned Assessing officer’s action in further disallowing on ad hoc basis expenses amounting to Rs. 68350/- u/s 14A in addition to Rs. 40,194/- disallowed by the appellant company in its return of income. 3. The appellant craves leave to add, alter or amend the ground of appeal at a later stage.
Brief facts of case are as under assessee filed its return of income on 30.11.2006 declaring total income of Rs. 5,67,8,170/-. The said return was processed under section 143(1) of the Act and case was selected for scrutiny. Notices under section 143(2) and 142(1) of the Act were issued alongwith detailed questionnaire. In response to these notices representatives of assessee appeared for assessment proceedings.
It has been observed by Ld. AO that during the year under consideration, assessee applied new guidelines issued by Institute of Chartered Accountants regarding recognition of revenue by real estate developers. It was observed that assessee had shown 39.29% of project completed during year under consideration. Ld. AO observed that in balance sheet for year ending 31.03.2005, there was appearing share application money of Rs.4,37,50,000/-. However, during the year under consideration share application money was shown to be at nil. Accordingly, assessee was asked to explain treatment given to share application money during the year under consideration. 4. Assessee submitted that share application was received from Magnum International Trading Company Pvt. Ltd., during year ending 31.03.2005. It is submitted that as company does not have any new projects in hand therefore, it was decided not to allot shares to Magnum International Trading Co. Ltd., as assessee required temporary funds to meet out running project expenses. Assessee accordingly requested to convert the share application money into loan, which was accepted by Magnum International Trading Company Pvt. Ltd. Assessee submitted that conversion of share application into loan was accepted at an agreed interest rate of 12.25% per annum w.e.f. 01.04.2005. Ld. AO further observed that Magnum International Trading Company Pvt. Ltd., was related to assessee within meaning of section 40A(2)(b) of the Act. Assessing officer also noted that as per tax audit report for the year, interest of Rs.53,59,375/- was paid by assessee to Magnum International Trading Co. Ltd. 5. Assessing officer observed that assessee had given intercoroperate deposits to Big India Mall India Pvt. Ltd., and Grandeur Real Estate Pvt. Ltd., at 10%. Ld. AO accordingly treated interest paid to Magnum International to be excessive thereby reducing liability by 2.25%. Ld. AO made a disallowance of Rs.9,84,375/- being 2.25% on Rs.4,37,50,000/-.
Ld. AO also made disallowance under section 14A amounting to Rs. 68,530/- on dividend income and long term capital gain earned by assessee.
Aggrieved by order of Ld. AO assessee preferred appeal before Ld. CIT(A), who confirmed addition in hands of assessee.
Aggrieved by order of Ld. CIT(A) assessee is in appeal before us now.
Ld. AR submitted that amount of Rs.4,37,50,000/- has been received by assessee in the earlier years which has been converted into loan and has been included in the work in progress in the real estate project. Ld. AR referred to page 50 of the paper book, where monies have been utilized as work in progress. Ld. AR submitted that available surplus funds were used to give short-term loans with main objective to have money available in view of ongoing real estate project. He submitted that interest paid to Magnum International at 12.5% stood utilized, and were different than interest of 10% received on temporary loans advanced to Big India Malls Pvt. Ltd., and 12% compounded quarterly received from Grandeur Real Estate Pvt. Ltd., by assessee. He submitted that these could not be compared to determine the disallowability under section 40A(2)(b) of the Act.
He also submitted that interest received by assessee was more than interest paid including interest of Rs.57,40,201/- earned from two companies, being Big India Malls Pvt. Ltd., and Grandeur Real Estate Pvt. Ltd., details of which are at page 49 of paper book. He submitted that loan taken from Magnum International Trading Company Pvt. Ltd., at 12.25%, was a long-term loan which was invested in the real estate project and assessing officer should have considered interest rates available on borrowings of unsecured loans in the market for the purpose of determining reasonability.
On contrary Ld. DR submitted that it cannot be said that amount of Rs.4,37,50,000/- stood invested in real estate project as assessee advanced loans from this money to Big India Malls Pvt. Ltd., and Grandeur Real Estate Pvt. Ltd. He also submitted that assessee has not demonstrated exigency for conversion of share capital from Magnum International Trading company Pvt. Ltd., to short-term loan. Ld. DR thus relied upon orders of the authorities below.
We have perused submissions advanced by both sides in the light of records placed before us.
It is observed that authorities below have compared borrowing rate with the lending rate. Section 40 A (2) (b) of the act reads as under: Section 40(A) 2(b): Where the assessee incurs any expenditure in respect of which payment has been made to any person referred to in clause B of the section which in the opinion of assessing officer is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business of profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction: …….”
A plain reading of the section reveals that it deals with expenditure incurred in respect of all payments made by assessee to any other person. In the facts of the present case, assessing officer is attempting to disallow interest paid by assessee to another company by holding that rate of interest is excessive in comparison with the rate at which assessee has advanced money to other companies. Such kind of comparison under this section defeats the basic intent of legislature.
It is further observed that assessing officer has to base his opinion of excessiveness or unreasonableness in regard to fair market value of goods, services or facilities for which payment is made. In the present case, assessing officer do not have any materials on record in respect of existing market rate of interest, that would be applicable in similar circumstances that of assessee.
In a nutshell entire onus lies upon assessing officer to establish that expenses incurred by assessee is excessive. In the facts of present case assessing officer has neither done any exercise nor has brought any material/evidences on record based on which an opinion could be formed for disallowance of expenses incurred by assessee. 17. In our considered opinion disallowance made in this manner will not stand test of law. Accordingly, we allow this ground of appeal
raised by assessee.
18. Ground No. 2 is in respect of disallowance of ad hoc expenses under section 14A of the Act.
19. Ld. AR submitted that assessing officer has computed 14A disallowance on dividend income earned and long term capital gain received by assessee amounting to Rs.3,54,048/- and Rs.3,31,281/- respectively. Ld. AR placed reliance upon decision of this Tribunal in the case of Beetel Tech Ltd., in and 5220/Del/2012 passed for assessment year 2006-07 vide order dated 07.03.2014. He submitted that assessing officer computed disallowance at the rate of 10% of expenses incurred, which included capital gains income accrued to assessee during year under consideration. He submitted that for the purposes of disallowance under section 14A, long term capital gain earned by assessee cannot be considered.
20. On the contrary, Ld. DR submitted that issue may be sent back to Ld. AO for computation of disallowance under section 14A.
We have perused submissions advanced by both sides in the light of records placed before us.
As both Ld. AR and Ld. DR agrees for the issue to be set aside to file of Ld. AO, in the interest of justice, we direct Ld. AO to recompute disallowance under section 14A. It is also directed that while computing disallowance under section 14A assessing officer shall not include long term capital gain earned by assessee as it is a deduction available to assessee which cannot be considered for purpose of disallowance under section 14A of the Act. 23. In the light of above discussion, we direct Ld. AO to recompute disallowance under section 14A restricting to exempt income only as per ratio laid down by Hon’ble Delhi High Court, in the case of Cheminvest Ltd versus CIT reported in 378 ITR 33 and Maxop Investment Ltd.Vs. CIT(A) reported in 203 Taxman 364. 24. Accordingly, this ground raised
by assessee stands partly allowed for statistical purposes. In the result appeal filed by assessee for assessment year 2006-07 stands partly allowed. Assessment year 2008-09 The grounds raised by assessee in this appeal are as under:
1. That on the facts and in the circumstances of the appellant company the learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the order of the learned Assessing Officer in disallowing interest paid amounting to Rs.9,84,375/- u/s 40A(2) allegedly on the ground that excessive interest has been paid.
2. That on the facts and in the circumstances of the appellant company the learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the order of the learned Assessing Officer in disallowing consultancy charges amounting to Rs.16,44,711/- allegedly on the ground that the same has not been incurred wholly & exclusively for the purposes of business and therefore not allowable in terms of Section 37(1) of the Act.
3. That on the facts and in the circumstances of the appellant company the learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the order of the learned Assessing Officer in enhancing the disallowance of expenses u/s 14A from Rs.4,90,212/- to Rs.11,12,896/- and thereby making an addition of Rs.6,22,684/- by wrongly invoking Rule 8D of the Income Tax Rules, 1962 and thereby not following the decision of the Hon'ble juris die tional High Court dated 18.11.2011 in Maxopp Investment Ltd. & brothers ITA 687/2009.
The appellant craves leave to add, alter or amend the ground of appeal
at a later stage.
25. Brief facts of case are as under: Assessee filed its return of income for the year under consideration on 30.09.2008 declaring an income of Rs.
8,52,25,538/-. The case was processed under section 143(1) of the Act and was selected for scrutiny. Notices under section 143(2) and 142(1) of the Act were served along with questionnaire. In response to notices issued as representatives of assessee appeared before assessing officer and filed details as called for.
While concluding assessment, Assessing Officer made following disputed additions alongwith other miscellaneous additions which has not been raised before us- disallowance under section 40A (2)(a)(b) Rs.9,84,375/-, consultancy payments Rs. 16,44,711/-, disallowance under section 14A Rs. 6, 22, 684/-.
Aggrieved by addition made by assessing officer assessee preferred appeal before Ld. CIT(A), who confirmed the additions.
Aggrieved by order passed by Ld. CIT(A), assessee is in appeal before us now.
Ground No. 1 and 3 are in respect of disallowance under section 40A(2) and 14 A read with rule 8D of the Act.
As these issues have already been decided by us for assessment year 2006-07, following same, we direct the A.O to adopt the same course for these grounds as discussed above.
Ground No. 2 is in respect of consultancy expenses incurred by assessee. Ld. AR submitted that assessee carrying on business of real estate development requires services of consultants who are specialized in their respective fields. He submitted that overall project undertaken by assessee had to be monitored and supervised by experts in various capacities from time to time. It is in these respects that payments have been made to consultants. Ld. AR submitted that expenses have been apportioned at 75% and 25% between the consultant to whom payment has been made and assessee respectively. He further submitted that assessee has capitalised 75%, by claiming only 25% of expenses as revenue expenses.
Ld. AR submitted that similar expenses has been incurred by assessee in preceding assessment years, more particularly for assessment year 2006-07, wherein no addition has been made by assessing officer. Ld. AR submitted that basis of capitalisation has been followed consistently by assessee, not only in respect of consultancy expenses but also on all other expenses, details of which are placed at page 88 to 109 of paper book. He submitted that assessee has submitted before authorities below entire agreements, income tax details of all consultants and evidence of tax deducted at source in respect of these consultancy payments made for the year under consideration. He thus urged for the addition to be deleted.
Ld. DR relied upon orders of the authorities below.
We have perused submissions advanced by both sides in the light of the records placed before us.
It is observed that consultancy expenses paid by assessee were towards legal and professional charges, project management fees supervisory charges etc. Looking into nature of business carried on, the assessee needs consultants for handling various issues of projects. Assessee is carrying on with business of real estate which requires services of specialised consultants like architects, interior decorators etc.
It is observed that Ld. CIT(A) confirmed the addition as assessee did not explain the nature of services and basis of apportioning the expenses into 75:25. 37. Assessee has incurred similar expenses in the preceding assessment years, which has not been disputed by Ld. AO. In fact for A. Y. 2006-07, which has been argued before us, no such disallowances have been observed to have been made by Ld. AO. Ld. AO has also not disputed the consistent method of allocation of consultancy in the preceeding assessment years. Hon’ble Delhi High Court in the case of CIT vs ARJ securities Printers, reported in 264 ITR 276 has held as under: “Although each assessment year being independent of the other, the principle of res judicata or estoppels by record which applies to Civil Courts, does not apply to Income Tax proceedings, yet for the sake of consistency and for the purpose of finality in all litigations, including litigation arising out of fiscal states, earlier decisions or the same question should not be reopened unless some fresh facts are found in the subsequent year.” 38. In our considered opinion, when there is no change in the business of assessee consultancy expenses incurred towards consultancy charges to an extent of 25% cannot be disallowed. Accordingly, this ground raised by assessee is partly allowed for statistical purposes. In the result appeal filed by assessee for A.Y 2008-09 is allowed. Order pronounced in the open court on 18th May, 2017.