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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI GEORGE MATHAN
आदेश / O R D E R
PER GEORGE MATHAN, JUDICIAL MEMBER:
Order of Commissioner of Income Tax (Appeals)-3, Chennai, in dated 30.11.2016 for the AY 2011-12 and ITA No.539/Mds/2017 is an appeal filed by the Revenue against the Order of Commissioner of Income Tax (Appeals)-3, Chennai, in ITA No.34/2014- 15/CIT(A)-3 dated 30.11.2016 for the AY 2011-12 .
Mrs.S.Vijaya Prabha, JCIT represented on behalf of the Revenue and Mr.B. Ramakrishnan, CA represented on behalf of the assessee.
As the appeals are related to the same assessee and are interconnected, the same are being disposed off by a common order.
At the time of hearing, the Ld.AR on behalf of the assessee submitted that he did not wish to press Ground No.2 of the assessee’s appeal. Consequently, Ground No.2 of the assessee stands dismissed as not pressed.
In regard to Ground No.5 of the assessee’s appeal, it was a submission that the disallowance challenged was to an extent of Rs.60.31 lakhs being the expenditure booked under the head ‘Land Cost’ and the & 539/Mds/2017 :- 3 -:
assessee was only challenging the disallowance to an extent of Rs.40.75 lakhs. Each of the grounds is being disposed off by seriatim.
In regard to Ground No.3 of the assessee’s appeal, the assessee has challenged the action of the Ld.CIT(A) in confirming 75% of the disallowance amounting to Rs.87,90,528/- towards the common expenses shared by the company. This ground is connected to Ground Nos.2, 2.1 & 2.2 of the Revenue’s appeal in ITA No.539/Mds/2017. It was a submission that the assessee is a Special Purpose Vehicle(SPV) which is doing business of property developers. It was a submission that the parent company was M/s.Ozone Propex Pvt. Ltd., which was incorporated in Bangalore. It was a submission that the assessee company was involved in the development of the project called “Metro Zone” at Anna Nagar, Chennai. It was a submission that the assessee is following the “Percentage of Completion” method for the purpose of recognizing the Revenue, being the Revenue represented the aggregate amounts of sale price in respect of agreements entered into and are accrued based on the percentage that the actual construction cost incurred until reporting date bears to the total estimated construction costs of completion. It was a submission that for the relevant AY, the assessee had incurred a total expenditure of Rs.1,242.98 Cr. and the for the relevant AY, the assessee had booked Rs.101.36 Cr. Representing 8.15% of the total expenses incurred for the total project. The Revenue recognized on identical lines was Rs.126.45 Cr. It was a submission that the remaining part of the & 539/Mds/2017 :- 4 -:
expenditure is shown in the balance sheet of the assessee as work in progress. It was a submission that the management of the assessee company had decided to have a core group of management personnel in the holding company such as MD, VP(Finance), etc., being all managerial personnel to be responsible for all the projects undertaken by the group.
Consequently, it was decided that the common expenses of the corporate overhead was to be shared by all the subsidiaries on usage basis. The independent project direct overheads were to be charged to each respective company and the common corporate overhead was to be shared by all the subsidiaries on usage basis. It was a submission that consequently the total expenses in respect of the holding company representing corporate expenses for relevant assessment year was Rs.19,15,703,000/- of which an amount of Rs.14,38,12,322/- was apportioned to the assessee’s account and out of the same 8.15% was claimed by the assessee as an expenditure for the relevant AY and the balance had been transferred to work in progress. It was a submission that this claim of 8.15% was to the extent of Rs.1,17,20,704/-. It was a submission that the AO had disallowed the same. On appeal Ld.CIT(A) had given part relief to an extent of 25% and confirmed the disallowance of 75%. It was a submission that the administrative overheads which were looked after by the holding company had to be apportioned to the assessee company in view of the agreement entered into by the assessee with the holding company vide an employee assigning agreement dated 01.04.2010. It was, however, a submission that in the course of the & 539/Mds/2017 :- 5 -: assessment, the assessee had not been given adequate opportunity to produce the said agreement as also the apportionment details of the indirect expenses claimed and the assessee had no objection if the issue was restored to the file of the AO for re-adjudication.
In reply, the Ld.DR drew our attention to the Assessment Order wherein at Page No.2, show cause notice had been given to the assessee vide letter dated 06.12.2013 and the assessee had given reply dated 12.03.2014. It was a further submission that the assessee has been granted adequate opportunity but the assessee has not provided the details called for. The Ld.DR further drew our attention at Para No.2.3 of the Assessment Order at Page No.4 to submit that the assessee was not in a position to quantify nor prove in realistic terms, the quantum of services rendered by the holding company on the assessee’s behalf. It was a further submission that the assessee could not prove on record with evidences regarding incurring of the expenditure by the holding company on its behalf. The Ld.DR further drew our attention the order of the Ld.CIT(A) at Page Nos.15 & 16 of his order. It was a submission that the Ld.CIT(A) had in principle agreed with the AO that in the absence of the evidence or the basis for quantification, it is left to the whims and fancies of the holding company to pass it on any amount to the appellant company in the name of “common expenses”. It was a further submission that the Ld.CIT(A) had also agreed with the findings of the AO that there was no written agreement documented or mutually accepted with regard & 539/Mds/2017 :- 6 -:
to the sharing of the common expenses. It was a submission that the Ld.CIT(A) had also considered the fact that the assessee had not produced any evidence before the AO regarding incurring the said expenditure. It was a submission that no evidence was also produced before the Ld.CIT(A). However, the Ld.CIT(A) had without given any valid reason had allowed 25% of the said expenditure and confirmed 75% of the disallowance. It was a submission that against the confirmation of 75% of the disallowance, the assessee is on appeal in Ground No.3 of the assessee’s appeal and against the relief of 25% granted by the Ld.CIT(A).
The Revenue is on appeal in Ground Nos.2, 2.1 & 2.2 of the Revenue appeal. It was a submission that the disallowance made by the AO was liable to be restored in its entirety.
We have considered the rival submissions. A perusal of the Assessment Order clearly shows that the assessee had been granted adequate opportunity to substantiate its claim in respect of the common expenses. The assessee did not produce any evidence before the AO neither before the Ld.CIT(A). As the assessee has not produced any evidence, the only argument is that these are expenses apportioned representing the holding company expenses in respect of administrative cost and employee cost. Before us, the assessee has now come with an agreement between the assessee company and the holding company. The assessee has also placed before us a break-up of the various expenses which have been apportioned. The assessee has unable to explain as to & 539/Mds/2017 :- 7 -:
how the holding company expenditure has been apportioned to allot the same to the assessee. The agreement in Clause 2(h) talks of apportionment of the employee cost by applying a formula on man hour basis. No other evidences have been produced before us as to who were the employees of the holding company, who had worked for assessee company? How many hours reported? How the denominator 208 has been determined? A perusal of the break-up of the apportion expenditure shows that it includes mobile phone charges, internet charges, postage and maintenance charges, etc., in short the practicality and necessity of the expenses of holding company being M/s.Ozone Propex Pvt. Ltd., as has been apportioned and claimed in the hands of the assessee company is not shown. Thus, the evidence which have been produced before us is not the evidence which has been called for by the AO and does not given any answer to the questions raised by the AO in so far as the methodology adopted for the apportionment is not available much less supported.
These admittedly are fresh evidences. But not the details called for by the AO. Further what prevented the assessee from producing the evidences before the AO is also not explained. Second round cannot be granted to the assessee, just because, the assessee wants to produce some fresh evidence. If the issue needs to be restored to the file of the AO on the basis of the fresh evidence then admittedly such fresh evidence would have to be produced before the Tribunal and such fresh evidence should have a direct bearing to the issue or queries raised by the AO. This being not available we are not inclined to restore to the file of the AO. A perusal & 539/Mds/2017 :- 8 -: of the order of the AO clearly shows that the AO has disallowed the apportioned expenditure on account of non-availability of evidence.
Nothing has been produced to show as to who are the employees, how the said apportioned expenditure related to the assessee? A perusal of the order of the Ld.CIT(A) shows that the Ld.CIT(A) has agreed with the stand of the AO in regard to the non-availability of evidences. However, he has proceeded to grant of relief to the assesse to the extent of 25%. In the absence of evidence, no adhoc relief can be granted to the assesse. It is the duty of the assessee to produce the evidences in respect of the expenses and claims for deductions or exclusions as made by an assessee.
The Ld.CIT(A) has allowed the 25% on the ground that the said relief would meet justice keeping in view of the nature of assessee’s business.
Just as no adhoc disallowance can be made no adhoc allowances can also be made. In these circumstances, we are of the view that the Ld.CIT(A) has erred in granting 25% relief to the assessee. In these circumstances, the order of the Ld.CIT(A) granting relief to the assessee in respect of 25% of the expenditure disallowed stands reversed and the disallowance made by the AO stands restored.
In the result, Ground No.3 of the assessee’s appeal stands dismissed and Ground Nos.2, 2.1 & 2.2 of the Revenue’s appeal stands allowed.
In respect of Ground No.4, It was submitted by the Ld.AR that the issue was against the action of the Ld.CIT(A) in confirming the & 539/Mds/2017 :- 9 -:
disallowance of Rs.56,79,193/- as provision for “work in progress yet to be billed”. It was a submission that the provision for work in progress yet to be billed was in respect of the piling work, earth excavation work, soil nailing work, civil work, Site Offices expenses and site expenses and road works for which though the work had been completed the bills had not yet been raised by the contractors. It was a submission that as these were completed works for which bills were expected, the assessee had provided by making the provision for the same and had claimed 8.15% of the same as expenses. It was a submission that as and when bills were given, the provision was reversed. It was a submission that these expenditure were relation to the project of the assessee and the works had been completed and consequently the cost in relating to the said work was the expenditure incurred by the assessee and the assessee was entitled to 8.15% of the same.
In reply, the Ld.DR submitted that the AO had disallowed the same.
As the assessee was following the “percentage of completion method”, it was a submission that the disallowance was on account of the fact that the said expenditure was a provision and the bills in respect of the same had not been received as on 31.03.2011. How the assessee had quantified this amount was also not explained. It was a submission that the assessee was following accrual method of accounting and the expenses are considered as incurred when the same become payable. It was a submission that when the contractor himself has not raised the bills & 539/Mds/2017 :- 10 -: on the assessee, the question of the expenditure having even become accrued did not arise. It was a submission that the disallowance as made by the AO and confirmed by the Ld.CIT(A) was liable to be sustained.
We have considered the rival submissions. Admittedly, the said expenditure is only a provision. The bills in respect of the said expenditure are yet to be received by the assessee. In these circumstances, as the assessee is following mercantile system of accounting, it cannot be said that the expenditure has accrued in so far as no bills have been received by the assessee. The disallowance would also had been considered in so far as admittedly, the assessee has contracted these works and there is no evidence even TDS having been deducted for the said expenditure to be liable. However, this is not the issue before us and we do not go into it. Consequently, Ground No.4 of the assessee’s appeal stands dismissed.
In regard to Ground No.5 of the assessee’s appeal, it was submitted by the Ld.AR that the issue was against the order of the Ld.CIT(A) in confirming the disallowance of Rs.60,31,000/- being the expenditure booked under the head ‘Land Cost’. It was a submission that the said disallowance consist of four parts. It was a submission that only in respect of the disallowance in respect of incurring the payment made to Shri G.N.Pandian was being challenged and the assessee was not challenging the disallowance of the expenditure claimed under the head & 539/Mds/2017 :- 11 -:
‘Land Cost’ in respect of the amount paid to M/s.Findel Investments Pvt. Ltd., M/s.Paliath Enterprises and M/.Pelican Estates and Developers. It was a submission that the disallowance in respect of the amounts claimed as ‘Land Cost’ to M/s.Findel Investments Pvt. Ltd., M/s.Paliath Enterprises and M/.Pelican Estates and Developers was on account of non-deduction of TDS and consequential disallowance u/s.40(a)(ia). It was a submission that in respect of the expenditure under the head ‘Land Cost’ in respect of the payments made to Shri G.N.Pandian was only challenged. Thus, the challenge was only against disallowance of Rs.40,75,000/- representing 8.15% on an amount of Rs.5.00 Cr. paid to Shri G.N.Pandian. It was a submission that the assessee had made a payment of Rs.5.00 Cr. to Shri G.N.Pandian who is an agreement holder in respect of the land purchased by the assessee on which the project of the assessee was being done. It was a submission that there was an oral agreement with Shri G.N.Pandian and as per the said agreement the assessee was to give certain built up area to Shri G.N.Pandian. It was a submission that the amount of Rs.5.00 Cr. had been paid to Shri G.N.Pandian towards refundable security deposit to guarantee providing certain super built up area in the super structures of the assessee. It was a submission that the assessee was to supply the built up area to Shri G.N.Pandian within five years from the date of agreement being the date of which the amount of Rs.5.00 Cr. had been paid to Shri G.N.Pandian i.e. on 16.12.2006. It was a submission that as the assessee was unable to provide the super built up area to Shri G.N.Pandian within the stipulated time, the amount of Rs.5.00 Cr. was & 539/Mds/2017 :- 12 -: liable to be forfeited by Shri G.N.Pandian and consequently the assessee had claimed the same as part of the Land Cost. It was a submission that the assessee had claimed 8.15% of the said Rs.5.00 Cr. as expenditure relating to the relevant assessment year. It was a submission that the payment to Shri G.N.Pandian was not in dispute. Shri G.N.Pandian admitted to the receipt of the amount of Rs.5.00 Cr. in his statement given to the AO. It was a submission that the AO disallowed the said expenditure only on the ground that Shri G.N.Pandian had not admitted the forfeiture of the amount. It was a submission that the disallowance may be deleted.
In reply, the Ld.DR submitted that a statement had been recorded from Shri G.N.Pandian and opportunity for cross-examination had also been granted to the assessee. It was a submission that the opportunity of cross-examination has been declined by the assessee. It was a submission that in the statement recorded from Shri G.N.Pandian, he has specifically agreed that he has received an advance of security deposit.
Nowhere in the statement, he admitted to the forfeiture of the amount of Rs.5.00 Cr. In fact, Shri G.N.Pandian claims to be waiting for the assessee to comply with their part of oral agreement for the purpose of refund of the amount of Rs.5.00 Cr. It was a submission that as the said amount of Rs.5.00 Cr. was only a security deposit the same could not be allowed as expenditure. It was a submission that the order of the Ld.CIT(A) on this issue was liable to be confirmed. & 539/Mds/2017 :- 13 -:
We have considered the rival submissions. A perusal of Page No.7 of the Assessment Order shows that the statement of Shri G.N.Pandian had been recorded on 20.03.2014. Shri G.N.Pandian admits to have received as refundable security deposit Rs.5.00 Cr. on 16.12.2006. For what purpose this refundable security deposit has been paid to Shri G.N.Pandian, is not coming out of the statement. All it talks of is for the assessee fulfill conditions stipulated in the agreement. The agreement however is an oral agreement. What were the conditions stipulated are not coming out of the statement. A perusal of the Assessment Order also shows that the AO has granted opportunity to the assessee to cross- examine Shri G.N.Pandian. The assessee seems to have declined the opportunity. Shri G.N.Pandian has not also offered Rs.5.00 Cr. as income, he claims it as an advance. The assessee claims the said amount as expenditure on the ground that the conditions have been specified in the agreement have not complied with by the assessee. This being so, we are in agreement with the finding of the Ld.CIT(A) at Page No.19 in his order wherein Ld.CIT(A) has held “a question rises here as to why a separate amount in the name of security deposit has been paid to Shri G.N.Pandian, when compensation has to be paid for the delay in handing over the built up area ………………. In this regard, it is suffice to say that the amount stated to have been paid to Shri G.N.Pandian might be outside the business activities …………….” & 539/Mds/2017 :- 14 -:
Admittedly, the assessee is unable to show as to how this amount of Rs.5.00 Cr. paid to Shri G.N.Pandian is in the course of the business and wholly and exclusively for the purpose of business of the assessee. This being so, the finding of the Ld.CIT(A) on this issue stands confirmed.
In the result, Ground No.5 of the assessee’s appeal stands dismissed.
In Ground No.6 of the assessee’s appeal, it was submitted by the Ld.AR was against the action of the Ld.CIT(A) in partly confirming the disallowance u/s.14A to the extent of exempt income. It was a submission that the assessee is on appeal in Ground No.6 and the Revenue is on appeal in Ground Nos.3, 3.1 & 3.2 of the appeal against the relief granted by the Ld.CIT(A). It was a submission that as the assessee had substantiate surplus non-interest bearing funds, it had invested nearly Rs.23.10 Cr. in short term mutual funds and earned dividend income of Rs.78,18,542/-. It was a submission that the AO had invoked the provisions of sec.14A and by applying the provisions of Rule 8D arrived at disallowance of Rs.1,01,54,806/-. It was a submission that the interest expenditure claimed by the assesse was towards the specific loans taken for specific purposes and no portion of the borrowed funds had been used by the assessee for making any investment in the short term mutual funds. It was a submission that consequently the interest paid by the assessee was not liable to be considered for disallowance u/s.14A of the & 539/Mds/2017 :- 15 -:
Act. It was a submission that disallowance as made by the AO and as confirmed by the Ld.CIT(A) was liable to be deleted. It was a submission that the Ld.CIT(A) had applied the decision of the Co-ordinate Bench of this Tribunal in the case of M/s.Rayalla Corporation Pvt. Ltd., in to restrict the disallowance u/s.14A to the extent of the exempt income.
In reply, the Ld.DR submitted that there is no provision available for restricting the disallowance u/s.14A to the limit of the exempt income earned. In the event that Sec.14A is invoked the computation of the disallowance would have to be by applying the principles laid down in Rule 8D. It was a submission that in the present case, the assessee has not been able to show as to how the non-interest bearing funds have been used for making the short term investments in mutual funds. It was a submission that the AO has complied with the provisions of Rule 8D. It was a submission that the disallowance made by the AO may be restored.
We have considered the rival submissions. A perusal of the Assessment Order clearly shows that the AO has complied with the provisions of Rule 8D when making the disallowance u/s.14A. In the present case, the assessee has not been able to show as to how the assessee has invested only its non-interest bearing funds for the purpose of making the short term investment in mutual funds. The assesseee has also not been able to show that the interest payments are in relation to & 539/Mds/2017 :- 16 -:
loans which have been taken for any specific purpose. If the assessee did have any interest bearing funds what was the purpose of the assessee to take the loan itself becomes the question. However, as it is noticed that the Ld.CIT(A) has followed the decision of the Co-ordinate Bench of this Tribunal in the case of M/s.Rayalla Corporation Pvt. Ltd., which it is submitted has been approved by the Hon’ble Jurisdictional High Court for the purpose of restricting the disallowance u/s.14A, we are not inclined to interfere with the findings of the Ld.CIT(A) on this issue.
In the result, Ground No.6 of the assessee’s appeal and Ground Nos.3, 3.1 & 3.2 of the Revenue appeal stands dismissed.
Ground Nos.1, 7, 8 of the assesse’s appeal and Ground Nos.1 & 4 of the Revenue’s appeal are general in nature and no specific arguments in respect of the same have been raised. Consequently, the same stands dismissed.
In the result, the appeal filed by the assessee is dismissed and the appeal filed by the Revenue is partly allowed.
Order pronounced in the Open Court on July 27, 2017, at Chennai.