PARRY INFRASTRUCTURE CO P LTD. ,CHENNAI vs. DCIT CORPORATE CIRCLE 5(1) , CHENNAI

आदेश /O R D E R

PER MAHAVIR SINGH, VICE PRESIDENT:

2.1 The assessee has raised the following grounds for challenging of enhancement of income by CIT(A):-

2. Enhancement of income 2.a. The Commissioner of Income Tax (Appeals) grossly erred in enhancing the assessment without properly appreciating the peculiar facts of the Appellant’s case.

- 3 - 2.b. The Commissioner of Income Tax (Appeals) ought to have appreciated that in the facts and circumstances of the case, there is no warrant for enhancing the assessment.

4. During the course of appellate proceedings, the CIT(A) noticed that the assessee has disclosed revenue from sale of plots at Rs.62,49,87,730/- (excluding other income) against which disclosed net profit of Rs.4,72,60,511/- which comes to about 7.55%. The - 4 - ABM Avenue, Adyar Club, Chamiers Road, Chennai. The CIT(A) examined the fresh information gathered during appellate proceedings and comparative amount of revenue from sale of flats, operating expenses and profit from sale of flats was gathered for financial years 2011-12, 2012-13 & 2013-14 and tabulated as under:- F.Y. Revenue from Operating Profit from sale of flats Expenses sale of flats 2011-12 55,35,93,544 52,12,23,556 3,23,69,988 2012-13 62,49,87,730 57,77,27,219 4,72,60,511 2013-14 19,46,84,176 17,14,29,065 2,32,55,111 TOTAL 137,32,65,450 127,03,79,840 10,28,85,610 The CIT(A) asked for information and assessee filed the following documents:- S.No. Particulars Date of agreement 1 Power of attorney given by M/s. Tube Investments 22.06.2010 India Ltd. and EID Parry India Ltd., in favour of M/s. Parry Infrastructure Co Pvt Ltd (the appellant) 2 Joint Development Agreement 24.11.2010 3 Supplementary Agreement 04.03.2011 4 Amendment Agreement 16.09.2011 5 Agreement of Sale by and between M/s. 23.01.2010 Cholamandalam MS General Insurance Co. Ltd and Parry Infrastructure Co. P Ltd 6 Agreement of Sale by and between M/s 28.04.2010 Carborandum Universal Ltd and Parry Infrastructure Co.P Ltd

- 5 - 7 Letter issued to M/s.Mahavir Consultancy for 12.05.2011 engagement as consultants 8 Memorandum of Understanding by and between 18.07.2012 M/s.Coromandel International Ltd/Parry Chemicals Ltd/Sheth Corporation Pvt Ltd 9 Agreement for providing infrastructure project 22.07.2009 services by and between Parry Infrastructure Co. P Ltd and Coromandel Fertilizers Ltd 10 Business advisory services agreement by and 04.11.2010 between EID Parry India Ltd and Parry Infrastructure Co. P Ltd and M/s.Silkroad Sugar P Ltd 11 Deed of lease by and between Parry 31.07.2008 Infrastructure Co.P Ltd and M/s.Silkroad Sugar P Ltd 12 Power of attorney given by M/s.Cholamandalam 27.01.2010 MS General Insurance Co. Ltd in favour of Parry Infrastructure Co. P Ltd. 13 Power of attorney given by M/s. Carborandum 21.04.2010 Universal Ltd in favour of Parry Infrastructure Co.P Ltd The CIT(A) noted that these documents are not registered except the power of attorney executed by assessee in favour of Tube Investments India Ltd., and EID Parry (India) Ltd., on 22.06.2010. The CIT(A) examined the breakup of project cost expenses as under:- S.No. Particular Amount (in Rs) 1 Cost of land 26,88,10,045 2 Construction cost 16,72,92,191 3 Material cost-cement 36,61,573 4 Material cost-steel, window, AC Lift 2,18,38,846 5 Borrowing cost 1,67,35,093 6 Other cost 32,32,596 7 Legal/professional/consultancy charges 8,80,21,511

- 6 - 8 Marketing charges 47,75,301 9 Sponsorship & Advt. expenses 18,10,687 10 Directors sitting fees 55,000 11. Audit fees 33,708 12 Tax audit fees 22,472 13 Other expenses 14,38,195

- 8 - Rs.3,00,00,000/- out of which Rs.2,40,00,000/- found to be excessive u/s.40A(2)(b). Payments made to Mahavir Consultancy at Rs.3,03,37,200/- in the guise of consultancy charges remained unsubstantiated. Since the assessing officer has already disallowed an amount of Rs.1,66,86,000/- out of this amount, the balance amount of Rs.1,36,51,200/- is now brought to tax. The appellant also failed to justify the claim of marketing expenses debited at Rs.47,75,301/-. None of the agreements entered into by and between the appellant and the group concerns are registered. No stamp duty is paid on purchase of land from its group concerns.

40.While the grounds taken in respect of additions made at Rs.1,66,86,000/- on account of disallowance of consultancy charges paid to Mahavir consultancy andRs.1,70,00,000/- on account of disallowance of Provision for expenditure u/s. 37stands dismissed, I direct the assessing officer to tax the enhanced income on the following counts.

S.No. Particular of enhancement Amount in rupees 1 On account of disallowance of extra 16,20,96,994 land cost paid to TII 2 On account of disallowance of extra 3,56,06,250 land cost paid to EID Parry 3 On account of understatement of sales 4,31,45,948 by allotting more saleable area to EID Parry 4 On account of disallowance of cost of 15,91,14,399 construction paid to CECL 5 On account of disallowance of 1,36,51,200 consultancy charges paid to Mahavir consultancy 6 On account of disallowance of excessive 2,40,00,000

- 9 - EID Parry 7 On account of disallowance of 47,75,301 marketing fees 8 On account of disallowance of borrowal 1,67,35,093 cost TOTAL 45,91,25,185 41.As can be seen from the above table, the total enhancement of income in this case comes to Rs.45,91,25,185/-, Based on the above discussion, I am satisfied that the appellant has concealed its income and so also furnished inaccurate particulars of income for evading taxes as understood in terms of provisions contained in section 271(1)(c) of the Income Tax Act, 1961 in respect of the additions made to the tune of Rs.45,91,25,185/- by way of enhancement to the income returned. Penalty proceedings u/s.271(1)(c) are therefore, initiated on both counts viz., concealment of income and furnishing of inaccurate particulars of income.”

Aggrieved, now assessee is in appeal before the Tribunal.

6. Before us Ld. Sr.Counsel, Shri Pillip George argued on behalf of assessee and on behalf of revenue Ld. CIT-DR, Shri Nilay Baran Som argued. The ld.counsel for the assessee pointed out that the AO has made addition on the issues (i) Disallowance u/s.14A of the Act (ii) Disallowance of legal, professional and consultancy charges & (iii) Disallowance of provision created by assessee for professional charges. But the CIT(A) enhanced the income in respect of above mentioned eight items. The ld.counsel for the assessee argued that the un-surrendered lands i.e., UDI is not arising from JDA and not - 10 - forming part of the assets from which income is earned cannot be enhanced. He narrated the following three enhancements:- i) Disallowance u/s 14A Rs. 2,87,984/- ii) Disallowance as discussed as in Para No.2 Rs. 1,66,86,000/- iii) Provision as discussed as in Para No. 3 Rs. 1,70,00,000/-.

6.1 The ld.counsel for the assessee argued that the CIT(A) discovered a new source of income on account of above mentioned three items and enhanced the income which is not permitted u/s.251(1)(a) of the Act. He explained that the new source, as sought to be taxed by the CIT(A) is purported income alleged to be earned from lands retained by the owners and JDA has nothing to do with this. According to him, the owners i.e., TII & EID only surrendered the portion of their land to JDA and retained the balance land for themselves. Further, the PICPL has no interest in these retained lands nor any obligation to pay for or receive any income from these retained lands. He explained that the subject matter of assessment is income from JDA and these retained lands do not form part of the JDA. He explained that only income arising from lands surrendered by these parties under JDA can be assessed as income, as only these lands form part of the assets from which income is earned and are therefore the ‘source’ of income earning for the assessee. The ld.counsel for the assessee for this proposition relied on the decision of Hon’ble Supreme Court in the case of CIT - 11 - vs. Shapoorji Pallonji Mistry vs. CIT reported in [1958] 34 ITR 342. The ld.counsel also relied on the Co-ordinate Bench decision in the case of Melongos India P Ltd., vs. ITO in order dated 06.05.2022 and also Delhi Bench in the case of Ginni Gold Ltd., vs. Addl.CIT in ITA No.673/Del/2015, order dated 15.04.2021. The ld.counsel for the assessee further stated that the Hon’ble Delhi High Court in the case of Gurinder Mohan Singh Nindrajog vs. CIT reported in [2012] 348 ITR 170 has laid down certain principles and action to be taken by Revenue under different situations. The ld.counsel in its written submission has given different situations arising out of the various provisions of the Act, which reads as under:- DIFFERENT SITUATIONS APPROPRIATE SECTION 1) The Assessing Officer may accept the Section 148/147 return of income without making any addition or disallowance; 2) The assessment is framed and the Section 251(1)(a) Assessing Officer makes certain additions or disallowances and in making such additions or disallowances, he deals with such item or items of income in the body of the order of assessment but he under- assessed such sums; 3) The Assessing Officer makes no addition Section 263 in respect of some of the items, though in the course of hearing before him, he holds a discussion of such items of income; 4) There can be yet another situation where Section 147 - 12 - Assessing Officer inadvertently omits to tax an amount which ought to have been taxed and in respect of which he does not make any enquiry; 5) Where an item or items of income or Section 263 expenditure, incurred and claimed is not at all considered and an assessment is framed, as a result thereof, a prejudice is caused to the Revenue 6) Where an item of income which ought to Section 147 be taxed remained untaxed, and there is an escapement of income, as a result of the assessee's failure to disclose fully and truly all material facts necessary facts for computation of income 6.2 The ld.Counsel also relied on the decision of Hon’ble Supreme Court in the case of CIT vs. Raj Bahadur Hardutroy Motilala Chamaria reported in [1967] 66 ITR 443 (SC) and decision of Hon’ble Delhi High Court in the case of CIT vs. Sardari Lal and Co., reported in [2001] 251 ITR 864 (Del). The ld. Counsel argued that in view of the above, the CIT(A) has erred in enhancing the assessment on the above three issues because these issues are not arising out of the assessment order or not connected with earning of income because of land retained by the respective owners i.e., TII & EID. He argued that one subject matter of assessment is the income from JDA and these retained lands do not form part of JDA, the only income arising from land surrendered can be assessed as income - 13 - JDA and which form part of assets from which income is earned or they are for source of income earning.

7. On the other hand, the ld.CIT-DR listed out all eight items on those the CIT(A) has exercised power u/s.255(1A) of the Act enhancing the income and he argued that the CIT(A) did not travel beyond matters already disclosed by assessee in its return of income and it is not a case of the assessee that the CIT(A) has gone back to the income of any other year or any other receipt that does not come out of the income returned by assessee or the submissions made before the lower authorities. He tried to distinguish the case law of Shapoorji Pallonji Mistry, supra by stating the fact that the Hon’ble Supreme Court while adjudicating on the appeal for the AY 1947-48, acted upon a note in the file for the AY 1946-47 that a sum of Rs.40,000/- was omitted to be taxed. The omission was brought to the notice of the CIT(A) by the Assessing Officer, and the appellate authority acted upon this information. The ruling in the case of CIT v. Rai Bahadur Hardutory Motilal Chamaria reported in (1967) 66 IR 443 (SC), was also delivered in peculiar facts of the case.

- 14 - 7.1 He further explained the powers conferred upon the CIT(A) u/s.251(3) as inserted by the Finance No.2 Act, 1997, which is quite different in its express wordings from the corresponding provision of section 31 of the Income-tax Act, 1922 i.e., old Act. The ld.CIT-DR gave in writing the difference between the two provisions i.e., between new Act and old Act and provisions are explained in juxtaposed as under:- Text of section 31 of the Indian Income- Text of section 251 of the Income-Act, tax Act, 1961 1961 (As it stood for assessment year 2013-14) Source: Source: https://www.incometax.gov.in https://www.indiacode.nic. In Sec 31 Sec 251. 31(1): The Assistant Commissioner shall 251 (1) In disposing of an appeal, the fix a day and place for hearing of the Commissioner (Appeals) shall have the appeal, and may from time to time following powers- adjourn the hearing. a) in an appeal against an order of (2) The Assistant Commissioner may, assessment, he may confirm, reduce, before disposing of an appeal, make enhance or annul the assessment. further inquiry as he deems fit, or (aa) in an appeal against the order of cause a further inquiry to be made by assessment in respect of which the the Income-tax Officer. proceeding before the Settlement (3) in disposing of an appeal, the Commission abate sunder section 245HA, Assistant Commissioner may, in the he may, after taking into consideration all case of an order of assessment - the material and other information (a) confirm, reduce, or annul the produced by the assessee before, or the assessment, or results of the inquiry held or evidence (b) set aside the assessment and direct recorded by the Settlement Commission, the Income tax Officer to make a fresh in the course of the proceeding before it assessment after making such further and such other material as may be inquiry as the Income-tax Officer brought on his record, confirm, reduce, thinks fit or the Assistant enhance or annul the assessment; Commissioner may direct and the (b) in an appeal against an order income tax Officer shall thereupon imposing penalty, he may confirm or - 15 - proceed to make such fresh cancel such order or vary it so as either to assessment, or, in the cases of an order enhance or to reduce the penalty. under sub-section (2) of section 26 or (c) in any other case, he may pass such section 28, may confirm, cancel or vary orders in the appeal as he thinks fit. such order: Provided that the Assistant Commissioner shall not enhance an assessment unless the appellant has had a 2) The Commissioner (Appeals) shall not reasonable opportunity of showing cause enhance an assessment or a penalty or against such enhancement. reduce the amount of refund unless the appellant has had a real opportunity of showing cause against such enhancement or reduction.

Explanation – In disposing of an appeal, the Commissioner (Appeals), may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Commissioner (Appeals) by the appellant.

7.2 The ld.CIT-DR explained from the above that apparently there is a major difference in between the provisions of the 1922 Act and the 1961 Act, so far as the powers of the Commissioner (Appeals) are concerned, in the form of Explanation below section 251. An immediate fallout of the above decision is that any judicial decision substantially depending on the text of the 1922 Act has to be appreciated with the above limitation of the then prevailing Act. The case law cited by ld.counsel for the assessee, he pointed out Shapoorji Pallonji Mistry, supra and Raj Bahadur Hardutroy Motilal - 16 - Chamaria, supra are based on old act when the above provisions of the statute of 1961 was not existed. According to him, even otherwise the powers of enhancement of CIT(A) is inherent and further buttressed by the several decisions of various courts of law including the Apex court. The ld.CIT-DR took us through the provisions of section 251(1)(a) of the Act and argued that the CIT(A) has given powers not only to confirm, reduce, or annul the assessment, but even for pass an order enhancing the income determined by the AO. The Courts have held that in terms of Section 251 of the Act, the Commissioner (Appeals) has wide powers, which includes the power of enhancement. He further argued that the plain reading of Section 251(1)(a) of the Act, the power of enhancement has not been further qualified. However, under what circumstances the Commissioner (Appeals) should invoke and use such powers, will depend upon his satisfaction upon proper appreciation of facts and materials in cases before him. He is the best and sole judge to decide on application of mind and no hard and fast rule or test or guidelines can be laid down. This view was expressed by the Hon'ble Supreme Court, in a three-judge Bench decision, in the case of PCIT Vs Kanpur Coal Syndicate (1964) 53 ITR 225 (SC). It was held therein that the powers of the appellate authority, namely the Commissioner (Appeals), are plenary, co- - 17 - AO. "The CIT(Appeals) can do what the Assessing Officer can do & can also direct him to do what he failed to do'". The CIT(A) further submitted that over the years, there has been a broad consensus that once an assessment comes before the first appellate authority, his competence is not restricted to examining those aspects of the assessment that are agitated by the assessee. His competence ranges over the whole assessment and it is open to him to correct the AO not only with regard to the matter raised by the assessee but also with regard to a matter which has been considered by the AO and determined in the course of assessment, or which the AO failed to consider.

7.3. In the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria reported in (1967) 66 ITR 443 (SC) another ruling relied on by the ld.counsel, it has in fact been held that the principle that emerges as a result of the authorities of this Court is that the appellate Assistant Commissioner has no jurisdiction, u/s. 31(3) of the Act to assess a source of income which has not been processed by the ITO and which is not disclosed either in the return filed by the assessee or in the assessment order, and therefore, the Appellate Assistant Commissioner cannot travel beyond the subject matter of assessment. In the instant case, the ld. CIT(A) was very much within - 18 - his power to make enhancements on certain items elaborately analysed and discussed by him.

7.4 He also relied on the case law of the Honourable Supreme Court in a later decision in CIT v. Nirbheram Daluram (1991) 224 ITR 610 (SC) held that the High Court was clearly erred in holding that the appellate power conferred on the first appellate Authority was confined to the matter which had been considered by the Income Tax Officer. Hence, of late, the Apex Court's view is that the first appellate authority would have full powers to enhance the income even on an issue, which could constitute a new source of income and which was not the subject matter of assessment before the AO.

7.5 The Hon'ble Madras High Court, in the case of Megatrends Inc. Vs CIT and another (2016) 388 ITR 16 (Mad.), had an occasion to adjudicate on the issue of scope of powers of Commissioner (Appeals) to enhance an assessment u/s.251(1)(a) of the Act. Relying on the Full-Bench decision of the Hon'ble Madras High Court in the case of State of Tamilnadu Vs Arulmurugan & Co. (1982) 51 STC 381 (Mad.), the High Court has held that the CIT(Appeals) has wide powers to enhance the income of the appellant without any limitation placed on such powers, as the statute itself has not placed any embargo on his powers.

- 19 - 7.6 Finally, the ld.CIT-DR argued that in view of the various issues enhanced by CIT(A) vide his order dated 29.03.2009, it is clear that all the enhancement arose out by the income and expenditure disclosed by assessee in its return of income. Therefore, the enhancement is as per law and should be sustained.

- 20 - vi. Disallowance of excess payment on account of business advisory services EID Parry (India) Ltd., amounting to Rs.2,40,00,000/-. vii. Disallowance of marketing fees paid to Coromandel Engineering Company Ltd., amounting to Rs.47,75,301/-. viii. Disallowance of borrowed cost paid to EID Parry (India) Ltd., amounting to Rs.1,67,35,093/-.

8.1 Now the assessee has challenged the power of assessment on the following three issues namely: i. On account of disallowance of extra land cost paid to TII ii. On account of disallowance of extra land cost paid to EID Parry iii. On account of understatement of sales by allotting more saleable area to EID Parry According to assessee the reason for enhancement are that these three items pertains to discovery of new source of income and new source is sought to be taxed by CIT(A) as a purported income to be earned from lands (UDI) retained by the owners. The owners namely TII & EID only surrendered their portion of their land towards GDA and retained the balance land. The assessee has no interest in the retained land by the respective owners or any obligation to pay or for receive any income from these retained lands. The Revenue tried to distinguish the case law of Hon’ble Supreme court in the case of Saboorji Pallonji Mistry, supra but we noted that the Hon’ble - 21 - Supreme court categorically noted this and observed that the question which arises in this appeal may be formulated thus: “whether in an appeal filed by an assessee, the Appellate Assistant Commissioner can find a new source of income not considered by the Income-tax Officer and assess it under his powers granted by section 31 of the Act.” The Hon’ble Supreme Court observed, the controversy in this case is about his discovering new sources, not mentioned in the return and not considered by the Income-tax Officer. The Hon’ble Supreme Court in the case of Shapoorji Pallonji Mistry, supra, considering the decision of Hon’ble Madras High Court in the case of Gajalakshmi Ginning Factory vs. CIT reported in [1952] 22 ITR 502 has considered “ofcourse, it would not be open to the Appellate Assistant Commissioner to introduce into the assessment new sources, as his power of enhancement should be restricted only to the income which was the subject-matter of consideration for the purposes of assessment by the Income-tax Officer” and finally the Hon’ble Supreme Court held that it would not be open for the first appellate authority to introduce into assessment of new source of income as his power of enhancement made is restricted only to income which was subject matter of consideration for the assessment by the AO and the Hon’ble Supreme Court finally held as under:-

- 22 - Court must be held not to have expressed its final opinion on the point arising here, in view of what was stated at pp. 709 and 710 of the Report. This Court, however, gave approval to the opinion of the learned Chief Justice of the Bombay High Court that s. 31 of the Income-tax Act confers not only appellate powers upon the Appellate Assistant Commissioner in so far as he is moved by an assessee but also a revisional jurisdiction to revise the assessment with power to enhance the assessment. So much, of course, follows from the language of the section itself. The only question is whether in enhancing the assessment for any year he can travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the Income-tax Officer with a view of finding out new sources of income, not disclosed in either. It is contended by the Commissioner of Income-tax that the word "assessment" here means the ultimate amount which an assessee must pay, regard being had to the charging section and his total income. In this view, it is said that the words "enhance the assessment" are not confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. There is no doubt that this view is also possible. On the other hand, it must not be overlooked that there are other provisions like s. 34 and 33B which enable escaped income from new sources to be brought to tax after following a special procedure. The assessee contends that the powers of the Appellate Assistant Commissioner extend to matters considered by the Income-tax Officer, and if a new source is to be considered, then the power of remand should be exercised. By the exercise of the power to assess fresh sources of income, the assessee is deprived of a finding by two tribunals and one right of appeal. The question is whether we should accept the interpretation suggested by the Commissioner in preference to the one, which has held the field for nearly 37 years. In view of the provisions of section 34 and 33b which escaped income can be brought to tax, there is reason to think that the view expressed uniformly about the limits of the powers of the Appellate Assistant Commission to enhance the assessment has been accepted by the legislature as the true exposition of the words of the section. If it were not, one would expect that the legislature would have amended section 31 and specified the other intention in express words. The Income-tax Act was amended several times in the last 37 years, but no amendment of section 31(3) was undertaken to nullify the rulings, to which we have referred. In view of this, we do not think that we should interpret section 31 differently from what has been accepted in India as its true import, particularly as that view is also reasonably possible.”

8.2 We noted that the Hon’ble Supreme Court while interpreting the provisions of section 31(3) in the case of Rai Bahadur Hardutroy - 23 - Motilal Chamaria supra, has considered and noted that it is not open to the commissioner (Appeal) to travel outside the record i.e., the return made by the assessee or the assessment order passed by the AO with a view to find out new source of income and the power of enhancement u/s.31(3), which is para materia to section 251(1) of the Act, is restricted to the source of income which has been the subject matter of consideration by the AO from the point of view of taxability. Hon’ble Supreme Court has then considered, in this context, the consideration does not mean “incidental” or “collateral” examination of any matter by the AO in the process of assessment. There must be something in the assessment order to show that the AO has applied his mind to a particular subject matter or the particular source of income with a view to its taxability or to its non- taxability and not to any incidental connection. In the present case, the subject matter of assessment is the income from the JDA but these retained lands, retained by the respective party i.e., TII & EID Parry, do not form part of the JDA and only income arising from UDI surrendered can be assessed as income arising from the JDA as only these lands form part of assets from which income is earned and are therefore, the source of income earning. Even Hon’ble Supreme Court in the case of Shapoorji Pallonji Mistry, supra also considered the contention of the Revenue that the word “assessment” means - 24 - the ultimate amount which an assessee must pay, regard being add to the charging section and his total income. Hon’ble Supreme Court observed that the word ‘enhance the assessment’ are not confined to the assessment reached to a particular process but the amount which ought to have been computed if the true total income had been found. Hon’ble Supreme Court stated that this view is possible but it was observed that the other provisions like revision by CIT or reopening by the AO or the other provisions which enables either erroneous order amounts to prejudice caused to Revenue or escaped income from new source to be brought to tax after following procedure prescribed. Hence as argued by ld.counsel for the assessee, there are many situations where the untaxed income can be brought to tax within the taxing ambit by the machinery provided in the Act.

8.3 Further, as cited by ld.counsel for the assessee, the Hon’ble Delhi High Court in the case of Sardari Lal & Co, reported in 251 ITR 864, wherein the Hon’ble Delhi High Court has considered the case laws cited by the ld.Senior DR and finally held that no new source of income can be introduced by CIT(A) while deciding the appeal and enhancement of income. The Hon’ble Delhi High Court has considered this issue in great detail in para 6, 7 & 8 as under:-

…… The AAC, on an appeal preferred by the assessed, had jurisdiction to invoke, for the first time, the provisions of rule 33 of the Indian Income Tax Rules, 1922 (hereinafter referred to as 'the Rules'), for the purpose of computing the income of a non-resident even if the Income Tax Officer had not done so in the assessment proceedings. But, in Shapoorji Pallonji Mistri [1962] 44 ITR 891, this court, while considering the extent of the power of the Appellate Assistant Commissioner, referred to a number of cases decided by various High Courts including the Bombay High Court judgment in Narrondas Manordass [1957] 31 ITR 909 and also the decision of this court in McMillan & Co. [1958] 33 ITR 182 and held that, in an appeal filed by the assessed, the AAC has no power to enhance the assessment by discovering new sources of income not considered by the Income Tax Officer in the order appealed against. It was urged on behalf of the revenue that the words 'enhance the assessment' occurring in section 31 were not confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. The court observed that there was no doubt that this view was also possible, but having regard to the provisions of sections 34 and 33B, which made provision for assessment of escaped income from new sources, the interpretation suggested on behalf of the revenue would be against - 27 - 37 years….

(p.692) [Emphasis, supplied].

8.4 We noted that in the present case, the CIT(A) enhanced the income in respect of above mentioned eight items. We have gone through these three items of income enhanced by the CIT(A) and are of the view that the un-surrendered lands i.e., UDI is not arising from JDA and not forming part of the assets from which income is earned cannot be enhanced. The following three enhancements:- i. On account of disallowance of extra land cost paid to TII ii. On account of disallowance of extra land cost paid to EID Parry iii. On account of understatement of sales by allotting more saleable area to EID Parry 8.5 We are of the view that the CIT(A) discovered a new source of income on account of above mentioned three items and enhanced the income which is no permitted u/s.251(1)(a) of the Act. We agree with the argument of Ld Counsel that the new source, as sought to be taxed by the CIT(A) is purported income alleged to be earned - 28 - JDA has nothing to do with this. The owners i.e., TII & EID only surrendered the portion of their land to JDA and retained the balance land for themselves. Further, the PICPL has no interest in these retained lands nor any obligation to pay for or receive any income from these retained lands. We noted that the subject matter of assessment is income from JDA and these retained lands do not form part of the JDA. We are of the view that only income arising from lands surrendered by these parties under JDA can be assessed as income, as only these lands form part of the assets from which income is earned and are therefore the ‘source’ of income earning for the assessee.

8.6 In view of the above factual aspect, once the subject matter of assessment is the income from JDA and these retained lands i.e., retained by TII and EID Parry do not form part of JDA cannot be subject matter of enhancement on the following three items:- i. On account of disallowance of extra land cost paid to TII ii. On account of disallowance of extra land cost paid to EID Parry iii. On account of understatement of sales by allotting more saleable area to EID Parry Only income arising from lands i.e., UDI surrendered can be assessed as income arising from the JDA as only these lands form - 29 - part of the assets from which income is earned and are therefore, the source of income earning. In view of the above, we are of the considered view that in respect of the above three items of enhancements, the CIT(A) has exceeded his jurisdiction u/s.251(1) of the Act while enhancing the income and hence, we quash the enhancement on these three items. As regards to balance five items, which are as under, the enhancements is sustained on jurisdictional issue. i. On account of the disallowance of the cost of construction paid to Coromandel Engineering Company Ltd., amounting to Rs.15,91,14,399/-. ii. On account of disallowance of consultancy charges paid to M/s.Mahavir Consultancy amounting to Rs.1,36,51,200/-. iii. On account of disallowance of excessive payment made on account of business advisory services to EID Parry (India) Ltd., amounting to Rs.2,40,00,000/-. iv. On account of disallowance of excessive marketing fees paid to Coromandel Engineering Company Ltd., amounting to Rs.47,75,301/-. v. On account of disallowance of borrowed cost paid to EID Parry (India) Ltd., amounting to Rs.1,67,35,093/-.

- 31 - ‘Chola’ and ‘Cumi’ were not interested in joining in the scheme and therefore entered into agreement of sale to transfer their share of land to the Developer, the assessee herein, or to its nominees. These details are verified from relevant agreements for sale of land which are available at Page Nos. 2 to 8 and 15 to 20 of assessee Paper Book. For this they were paid upfront as follows, based on the market value of Rs.18,750/- per Sq.Ft. of land surrendered : 1) Chola agreed to transfer 3485 Sq.Ft. for a sum of Rs.6,53,43,750/-. This amount was paid on 27.01.2010. 2) CUMI agreed to transfer 12,608 Sq.Ft. for a sum of Rs.23,64,00,000/-. This amount was paid on 28.04.2010.

10.1 The CIT(A) raises the question as to why these payments were being made prior to the signing of the Joint Development Agreement (JDA). It was contended by Ld.Counsel that these parties were not interested in joining the JDA and they wanted their money to be paid before the project was initiated and further the assessee also wanted the safer method as in the event of the market value going up it would end up paying more at a later date. Subsequent to purchase of this land from Chola and Cumi, a JDA was entered into on 24.11.2010 and copy of this JDA is available at Page Nos. 31 to 63 of assessee’s Paper Book. Further, it is to be noted from JDA that - 32 - JDA were TII, EID, Chola, Cumi, PEIL and assessee. It was contended that Chola, CUMI and PEIL had entered as CONFIRMING PARTIES only and they had no financial interest in the JDA and moreover PEIL was included by way of abundant caution as it was previously a joint owner of some of the lands brought within the scope of the JDA. Accordingly, the entire cost of land for the project was debited at Rs.54,42,00,000/-. The break up for the same as follows :

Sl. No. Name of the Party Amount in Rs.

Cheque paid on 05.07.2010 Rs. 10,00,00,000/- Cheque paid on 04.10.2010 Rs. 2,00,00,000/- Total cheque component Rs. 12,00,00,000/- Add : Value of 4 flats and 8 garages of Saleable area Rs. 7,87,31,250/- 10,721 Sq.Ft. at Rs.7343.64 per Sq.Ft. Add : Amount payable but not paid as it was adjusted Rs. 81,18,750/- towards govt. levies Total paid to TII by the Appellant Rs. 20,68,50,000/- 10.3 We noted that the CIT(A) computed the amount paid/payable to TII as follows :

Value of 4 flats allotted to TII at Rs.26,414/- per sq.ft Rs. 28,31,84,494/- Cheque payments made on 05.07.2010 & 04.10.2010 Rs. 12,00,00,000/- Consideration paid in exchange of UDS (flat value) Rs. 7,87,31,250/- Total paid to TII Rs. 48,19,15,744/- This works out to Rs.44,951/- per Sq.Ft. The CIT(A) then computed the value of the entire land holding of TII at Rs.31,98,18,750/-, being 17,057 Sq.Ft. at Rs.18,750/- per Sq.Ft. and then held that the value of land had been inflated by Rs.16,20,96,994/-. In paragraph 40 of his order, the CIT(A) directs that this amount be added and taxed as enhanced income as “On account of disallowance of extra land cost paid to TII”. According to us, this finding of the CIT(A) is absolutely wrong as it is neither based on facts nor on any principle of law. The amount of Rs.28,31,84,494/- computed by the CIT(A), as the value of the four flats allotted to TII, is computed by him by multiplying the built-up area of the four flats which was 10,721 - 34 - Sq.Ft. into the average selling price at which the assessee had sold the flats to outsiders (10721 sq.ft x Rs.26,414/- = Rs.28,31,84,494/-). This is a total misconception by the CIT(A). The selling price of Rs.26,414/- is the price paid inclusive of the UDS and the built-up area and other amenities granted to a buyer of the flat. TII has got in its possession an area of 6045 Sq.Ft. of undivided share of land in the complex and the built up area handed over to it is relatable to this holding and so TII does not have to be paid for any UDS they already hold in their own name and right and which had never been surrendered or contemplated to be surrendered. It is for the purpose of getting the four flats plus the amenities, mentioned hereafter, that TII surrendered 11,012 Sq.Ft. of UDS and was paid and was entitled to receive only Rs.20,68,50,000/- at the rate of Rs.18,750/- per Sq.Ft.

10.4 As regards to the amenities mentioned and includable in the package, we noted that these are : UPVC windows, complete Teak flush doors, marble, granite, wooden flooring and other superior finishes, stilt parking with paving stone flooring, 2 numbers Mitsubishi lifts, Wood work for wardrobes and modular kitchen, AC- VR system in the apartment and split AC in the common area, Furniture in the party hall (sofas) and in the lounge, gym equipment - 35 - LED 55 Samsung TV, OHP and screen in the party hall, spa with jacuzzi and steam chamber, roof garden, gas bank with gas piping, meter and controls, compound wall with two motor operated gates, paving in the driveway, landscaping and pathway on the rear side, Swimming pool, water body, deck floor et cetera, Wi-Fi and security camera systems, play area equipment, 2 numbers 320 KV generators in addition to superior quality civil work and finish.

11.1 We further noted from facts that the CIT(A) further goes on to state that the assessee has not “substantiated the rational and basis for payment of cash of Rs.12,00,00,000/- before signing the JDA on 24.11.2010. Further, PICPL failed to explain as to why a further sum of Rs.7,87,31,250/- has been paid towards exchange of land, when undivided share of land (UDS) cannot be sold separately without corresponding sales of flats. The UDS is inseparable, meaning thereby, the UDS goes along with the sale of flats. In other words, the land cost debited to P&L account has been inflated by an amount of Rs.16,20,96,994/-”. This entire paragraph is based on a wrong comprehension by the CIT(A). The payments mentioned in the paragraph are the actual payments due to be made by the assessee as per the JDA and which have actually been made. These are the only payments made to TII and no other payments have been made. When the CIT(A) questions the payment made towards “exchange of land” he fails to understand that this is the value of the flats that have been allotted to and handed over to TII by the assessee as per - 38 - JDA. This is only the accounting and balancing entry made by the assessee being the value of the flats handed over to TII and is not an actual payment. What the CIT(A) says about the transfer of UDS is not legally correct. In law, UDS of land can be sold and transferred on its own. It is the property of the person having an undivided interest held along with others. It is not necessary that it can only be transferred along with a flat or building. If no flat or building is existing on the land and the land is owned by a number of persons in specified shares, they are said to hold the corresponding UDS or undivided interest. It is only if a flat or building is standing on the piece of land that UDS and share in the flat or building is transferred together. So the thesis that the CIT(A) seeks to propound is totally wrong and legally untenable. In the assessee’s case what is being sold by TII and paid for is the UDS in the land only and which was formerly owned by TII and now is being transferred to the assessee or its nominees under the JDA. TII retains and holds UDS of 6045 Sq.Ft. in the property, to which the flats now handed over are relatable.

Therefore, the assessee is liable and had paid the consideration for the value of the undivided share of land surrendered of 11,012 Sq.Ft. at Rs.18,750/- per Sq.Ft. being as mentioned earlier and reiterated for easy reference :

- 39 - Cheque paid on 05.07.2010 Rs. 10,00,00,000/- Cheque paid on 04.10.2010 Rs. 2,00,00,000/- Total cheque component Rs. 12,00,00,000/- Add : Value of 4 flats and 8 garages of Saleable Rs. 7,87,31,250/- area 10,721 Sq.Ft. at Rs.7343.64 per Sq.Ft. Add : Amount payable but not paid as it was Rs. 81,18,750/- adjusted towards govt. levies Total paid to TII by the Appellant Rs. 20,68,50,000/- The total cost of construction per Flat, including the garages and all other amenities and facilities were estimated at Rs.7343.64 per Sq.Ft. We have also noted the fact that the assessee has also obtained a Valuation Report dated 02.12.2019 from Registered Valuer for the purpose of ascertaining the approximate value of construction and the same is in the vicinity of the assessee’s claim. A copy of the said Valuation Report is enclosed at Page Nos. 77 to 102 of assessee’s Paper Book. Therefore the CIT(A) is completely off the mark and totally wrong, both legally and factually, while he holds that a sum of Rs.16,20,96,994/- has to be added to the income of the assessee by way of enhancement. Hence, we delete the enhancement on merits and allow this issue of assessee’s appeal.

- 41 - 1) Alleged extra land cost paid Rs.3,56,06,250/- 2) Alleged understatement of sales by allotting more saleable area Rs.4,31,45,948/- The first premise of the CIT(A) was that the value of the two flats of 4952 Sq.Ft. allotted to EID was to be valued at Rs.13,08,02,128/- (4952 Sq.Ft. x Rs.26,414/-). The second premise on which the CIT(A) proceeded was that EID was entitled to saleable area in respect of its entire holding of land of 4675 Sq.Ft., which he valued at Rs.8,76,58,200/- (4675 Sq.Ft. x Rs.18,750/-). On this basis the CIT(A) firstly held that as EID was entitled to a saleable area of only 3318.55 Sq.Ft. (8,76,56,200 / 26,414). This computation of the CIT(A) is wrong because EID is not entitled to compensation of Rs.8,76,58,200/- as assumed by the CIT(A). EID has surrendered only 1883 Sq.Ft. of land and has to be compensated only for this i.e. Rs.3,53,06,250/- (1883 sq.ft x Rs.18,750/-)(wrongly typed as 3,56,06,250/-). Therefore the flat area or saleable area has to correspond to this amount only. The price of Rs.26,414/- as explained earlier is the average price for the constructed area, amenities and the UDS of land. When the assessee had conceived the project, it had estimated the selling price of the flats at Rs.26,414/- on the basis that the selling price of the constructed area, amenities, garages and other facilities would be fixed in the range of Rs.7,000/- to Rs.7,500/- and the balance relatable to the - 42 - (UDS) would be somewhere in the vicinity of Rs.19,000. The original pricing was only an estimate and it went up or down a little bit. Since valuation and pricing is only an estimate, there are bound to be fluctuations and variations. On this basis, EID was entitled only to get a built-up area of 4952 Sq.Ft. as has been given to them and the CIT(A) is totally wrong, both legally and factually, in his findings and directions in this regard. As stated earlier, the value of construction of the flats and garages were estimated at Rs.7343.64 Sq.Ft. and EID was entitled only to get a built-up area of 4952 Sq.Ft. as has been given to them. Copy of the Valuation Report enclosed at Page Nos. 77 to 102 of assessee’s Paper Book is relied on to show that the claim of cost of construction of the assessee is more or less the same. But the CIT(A) on the basis of the above assumptions has held that EID would be entitled only to a built-up area of 3318.55 Sq.Ft. (87656200/26414) and as it had been allotted 4952 Sq.Ft., it had been allotted an extra 1633.45 Sq.Ft. (4952 - 3318.55). On this basis he has held that the assessee had allotted extra built-up area of a value of Rs.4,31,45,948/- and he has held that this amounted to an understatement of income and directed that this should be assessed as undisclosed sale consideration.

- 43 - 13.1 Secondly, the CIT(A) has stated that the assessee had not substantiated as to why a sum of Rs.3,56,06,250/- was paid to EID for exchange of land. The figure should be Rs.3,53,06,250/- (not Rs.3,56,06,250/-). This sum of Rs.3,53,06,250/- is the amount due and payable to EID for the undivided share of land surrendered by it being 1883 Sq.Ft. at Rs.18,750/- per Sq.Ft. This is a legitimate payment due to EID and that explanation was tendered to the CIT(A). The CIT(A) has held that the land cost has been inflated to the extent of Rs.3,56,06,200/- (sic) and that this amount has to be disallowed under section 40A(2)(b) of the Act.

13.2 The CIT(A) has, both in the case of TII and EID, kept on repeating the words “when undivided share of land (UDS) cannot be sold separately without corresponding sale of flats. The UDS is inseparable, meaning thereby, UDS goes along with the sale of flats“. There is no law or rule that states that the UDS cannot be sold separately. It all depends on the context and the facts of each individual case. An UDS in a piece of vacant land can be sold on its own with the owner divesting himself of the ownership in a defined proportion or share and retaining and holding his right in the balance. In the case of the assessee itself the very sale of 11,012 Sq.Ft. and 1,883 Sq.Ft. respectively by TII and EID is only in the - 44 - UDS in the property, being just land, in favour of the assessee or its nominees. The flats that are handed over both to TII and EID would have corresponding UDS with respect to the balance of the UDS retained and held by them. These portions of the UDS belonging to both these parties were never transferred to the assessee and it was never contemplated that the assessee should compensate or pay for these portions of the UDS retained by TII and EID. This is a crucial and basic mistake made by the CIT(A) in his coming to the above adverse conclusions. He has misunderstood the very concept of the mechanics of a JDA, UDS and the legal rights accruing and/or arising from the above. Therefore, we are of the view that the enhancements of following are to be deleted:

1) Rs.3,56,06,250/- (sic) on account of disallowance of extra land cost paid to EID and 2) Rs.4,31,45,948/- on account of understatement of sales by allotting more saleable area to EID:

Hence, we delete these two enhancements on merits.

Ground No. 2.4 – Disallowance of cost of construction paid to Coromandel Engineering Company Ltd. [in short “CECL ] – Rs.15,91,14,399/- :

2.4. Disallowance of cost of construction paid to M/s. Coromandel Engineering Company Ltd. [CECL] – Rs.15,91,14,399/- [Original Grounds of Appeal Nos. 2.4.to 2.4.j.]: 2.4.a. The Commissioner of Income Tax (Appeals) grossly erred in making an addition of Rs.15,91,14,399/- by observing that the construction cost paid to CECL is inflated. 2.4.b. The Commissioner of Income Tax (Appeals) grossly erred in estimating the construction cost per square feet of built up area at Rs.2,000/- 2.4.c. The Commissioner of Income Tax (Appeals) grossly erred in holding that Rs.81,77,792/- is sufficient to cover the balance construction cost. 2.4.d. The Commissioner of Income Tax (Appeals) ought to have appreciated that there in no inflation of construction cost paid to CECL and hence addition is not warranted in the facts and circumstances of the Appellant's case.”

15. The brief facts relating to this issue are that in order to execute the construction of the project “CENTRALIS” the assessee engaged the services of Coromandel Engineering Co. Ltd. (in short “CECL”) and entered into a work order agreement dated 29.09.2010 enclosed at Page Nos. 103 to 128 of assessee’s Paper Book. The terms of the agreement was that CECL would take on the work of constructing the residential complex as per plan and that they would be paid at the rate of Rs.4540/- per Sq.Ft. The total area to be constructed was - 46 - 68,150 Sq.Ft. Therefore the presumptive cost of construction was estimated at Rs.30,94,01,000/-. The assessee had agreed to supply/meet the cost of cement, steel, windows, air-conditioners and lifts estimated to amount to Rs.4,72,46,487/-. However, due to various factors, the amount finally paid to CECL was Rs.40,80,76,960/-. Therefore, the total cost of construction of the project amounted to Rs.45,53,23,447/- for the development and construction of total saleable area of 68,150 Sq.Ft., which worked out to a rate of Rs.6,681/- per Sq.Ft. Out of this, an amount of Rs.5,988/- per Sq.Ft. was paid to CECL. The CIT(A) held that “available information on technical aspects of cost of construction when examined reveal that the cost of construction for the construction of premium buildings with superior specifications such as marble flooring, branded fittings for sanitary and electrical works, shall not exceed Rs.2,000/- per Sq.Ft. after excluding the cost incurred by PICPL at Rs.4,72,46,487/- separately towards cement/steel/windows/AC’s and lifts”. Before the CIT(A) the assessee produced the work order dated 29.09.2010 and also details of the running bills submitted by CECL and subsequent correspondences between the assessee and CECL for additional works. The CIT(A) however held that the assessee had failed to substantiate the huge amount debited on account of cost of - 47 - construction. The CIT(A) has not made available to the assessee ‘the technical information available’ on which he relied on to hold that the cost of construction of premium buildings of the nature constructed by the assessee could not exceed Rs.2,000/- per Sq.Ft. after excluding the cost of the material supplied by the assessee itself. On this basis, he held that the cost of construction payable to CECL would not exceed Rs.13,63,00,000/- (i.e. 2000 x 68150) and concluded that the assessee had paid an extra cost of Rs.27,17,76,962/- to it’s sister (sic) concern CECL. We noted the fact that CECL is not a sister concern of the assessee and is only a company in the same group of the industrial house of the Murugappa group.

15.1 Further, the CIT(A) held that in the assessment year 2012- 2013, a sum of Rs.12,81,22,208/- had already been debited and claimed and therefore only a further sum of Rs.81,77,792/- was allowable towards the total cost of construction and only that was allowable in this year. The balance of Rs.15,91,14,399/- has to be disallowed. It was explained by Ld.Counsel that despite the assessee producing the running bills submitted by CECL, the CIT(A) held that the onus was not discharged and the residential complex has been constructed in the poshest and most exclusive area of Chennai i.e. - 48 - Adyar Gate. The residents of this area are all persons holding the highest positions in the industrial, business and social fields and therefore their expectations are of the level of the first world standards. Therefore this complex has been constructed keeping in mind this high level of expectations of the clientele and the construction was of the highest quality and only the best fittings have been used. As has been mentioned earlier, the facilities and amenities provided are exceptional and of the highest quality such as UPVC windows, complete Teak flush doors, marble, granite, wooden flooring and other superior finishes, stilt parking with paving stone flooring, 2 numbers Mitsubishi lifts, Wood work for wardrobes and modular kitchen, AC-VR system in the apartment and split AC in the common area, Furniture in the party hall (sofas) and in the lounge, gym equipment and LED 55 Samsung TV, OHP and screen in the party hall, spa with jacuzzi and steam chamber, roof garden, gas bank with gas piping meter and controls, compound wall with two motor operated gates, paving in the driveway, landscaping and pathway on the rear side, Swimming pool, water body, deck floor et cetera, Wi-Fi and security camera systems, play area equipment, 2 numbers 320 KV generators in addition to superior quality civil work and finish.

- 49 - 15.2 We noted that the CIT(A) held that it would be impossible to construct a complex with all these mentioned facilities and of this quality on a budget of Rs.2,000/- per Sq.Ft. The estimation made by the CIT(A) is totally unrealistic and has no basis to stand on. The CIT(A) has not produced or informed the assessee of the material on which he has arrived at this erroneous conclusion. In addition to the amenities mentioned earlier it may be noted that this construction required installation of 192 RCC piles of 26 to 28.5 feet depth of 20 inches diameter. The structure is an RCC framed one with brick walls with cement plastering and with Plastic emulsion paint both on the exterior and interior, lift and staircase headroom, security and pump room, two underground sumps and two overhead tanks, all of 18,000 litres capacity each, along with water filtration facilities and pumps, along with all the internal and external sanitary, water and service connections, internal electrification and external lighting. The CIT(A) has not taken into consideration any of the above factors while arriving at his decision. The CIT(A) has mentioned only marble floors, branded fittings for sanitary and electrical fittings and ignored all the other fittings and amenities provided which would not be provided in the type of construction, the CIT(A) is comparing with. What the CIT(A) is presumably referring to is his personal knowledge of what it would cost to construct a home for the affluent middle - 50 - class family and not one with all these amenities and facilities mentioned earlier.

15.3 We noted the fact that assessee had agreed to a cost of construction of Rs.4,540/- per Sq.Ft. but ultimately had incurred a cost of approximately Rs.5,988/- per Sq.Ft. due to additional works as communicated vide letters dated 07.02.2011, 06.08.2012 and email dated 03.10.2012 and communication received from CECL dated 22.03.2013 are enclosed at Page Nos. 129 to 133 of assessee’s Paper Book. The crucial fact is that the project itself took four years to complete and that it is obvious that there would be cost escalation and inflation during this period. Therefore it was inevitable that the costing made before the project had commenced would be liable to change over the years. The original agreement to pay Rs.4,540/- was based on an estimate and the facts that arose in the intervening period of construction must be kept in mind and realty appreciated. The estimate made by the CIT(A) is totally unrealistic and without any basis and it should be rejected and the assessee’s claim be accepted. The assesseen had enclosed a valuation report dated 02.12.2019 from Value Assessors & Surveyors P. Ltd. at Page Nos. 77 to 102 of assessee’s Paper Book to establish by way of corroborative evidence that the cost incurred was reasonable. In - 51 - CIT(A) is totally unrealistic and without any basis and it should be rejected and the enhancement of Rs.15,91,14,399/- by CIT(A) is deleted and the CIT(A) order reversed.

Ground No. 2.5 – Enhancement / Disallowance of consultancy charges paid to M/s. Mahavir Consultancy – Rs.1,36,51,200/- 2.5.Disallowance of consultancy charges paid to Mahavir Consultancy- Rs.1,36,51,200/- [Original Grounds of Appeal Nos. 2.5. to 2.5g] 2.5.a.The Commissioner of Income Tax (Appeals) grossly erred in disallowing the consultancy chargespaid to M/s. Mahavir Consultancy to the tune o Rs.1,36,51,200/-. 2.5.b. The Commissioner of Income Tax (Appeals) ought to have appreciated that the payment is genuine and allowable as business expenditure since incurred for and in the course of business. 2.5.c. The Commissioner of Income Tax (Appeals) grossly erred in observing the transaction to be sham.

Ground No. 4 – Disallowance of consultancy charges paid to M/s. Mahavir Consultancy – Rs.1,66,86,000/-. 4.Disallowance of consultancy charges paid to Mahavir Consultancy - Rs.1,66,86,000/- [Original Grounds of Appeal Nos. 4. to 4.4.] :

- 52 - 4.1. The Commissioner of Income Tax (Appeals) grossly erred in upholding the disallowance of consultancy charges paid to M/s. Mahavir Consultancy Rs.1,66,86,000/-. 4.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that no disallowance can be made on the basis of non receipt of corresponding income.

As these two grounds relate to the same party, same issue and 17. same facts, they are taken up together. Brief facts are that before the Assessing Officer the assessee claimed a sum of Rs.3,03,37,200/- as commission payable to M/s. Mahavir Consultancy ( hereinafter the firm). This amount was inclusive of all government levies. The assessee on 22.07.2009 entered into an Agreement with M/s. Coromandel Fertilisers Ltd (in short “CFL”) in order to help CFL to sell or transfer by way of lease, property belonging to CFL located in Ambattur, Chennai as well as some property in Navi Mumbai, copy of agreement is enclosed at Page Nos. 134 to 137 of assessee’s Paper Book. In order to carry out its obligations, the assessee appointed the firm to render services in this regard vide engagement letter dated 12.05.2011, copy enclosed at Page Nos. 138 to 140 of assessee’s Paper Book and had agreed to pay the firm a brokerage commission of 1% on the sale consideration on finalisation of an MOU with a prospective buyer. The firm identified one M/s. Sheth Corporation P. Ltd.. In the meanwhile another group company, M/s Parry Chemicals Ltd. (PCL)

- 53 - also approached the assessee to help it sell two properties belonging to it. The assessee therefore orally requested the firm to help them out in this case also on the same terms as earlier agreed to. An MOU was signed on 18.07.2012 between CFL, PCL and M/s. Sheth Corporation P. Ltd. in respect of the three properties, copy of MOU is enclosed at Page Nos. 141 to 171 of assessee’s Paper Book. On the signing of the above MOU, the firm raised two bills for a total consideration of Rs.2,70,00,000/- copy of which are enclosed at Page Nos. 172 & 173 of assessee’s Paper Book. The assessing officer held that since the assessee had entered into an MOU only with CFL the commission payable on the sale consideration agreed between CFL and M/s. Sheth Corporation P. Ltd. was allowable and allowed a proportionate sum of Rs.1,03,14,000/- and disallowed the balance of Rs.1,66,86,000/-, which was relatable to the properties of PCL, with whom the assessee had not entered into any written agreement. The assessee filed an appeal before the CIT(A) on the ground of disallowance of Rs.1,66,86,000/-. The CIT(A) while he took up this ground has held that the assessing officer was wrong in having allowed Rs.1,03,14,000/-, thereby enhancing the income assessed by this amount and further confirmed the disallowance of the balance amount of Rs.1,66,86,000/-.

Ground No. 2.6 – Disallowance of excess payment on account of business advisory services to EID – Rs.2,40,00,000/- : 2.6 Disallowance of excess payment on account of business advisory services to M/s. E.I.D. Parry (India) Ltd. - Rs.2,40.00,000/- [Original Grounds of Appeal Nos.2.6. to 2.6.i.] : 2.6.a. The Commissioner of Income Tax (Appeals) grossly erred in disallowing a sum of Rs.2,40,00,000/- being the payment on account of business advisory services by observing the same to be excessive. 2.6.b. The Commissioner of Income Tax (Appeals) ought to have appreciated that the payment was made pursuant to the agreement entered into between the Appellant and EID Parry. 2.6.c. The Commissioner of Income Tax (Appeals) erred in making an observation that for sale of 18 flats, one accounts person and staff will be sufficient to look after the maintenance of accounts, undertake banking operations and day to day administration. 2.6.d. The Commissioner of Income Tax (Appeals) grossly erred in applying Section 40A(2)(b) since the payment made was based on arm's length principle. 2.6.e. The Commissioner of Income Tax (Appeals) ought to have therefore appreciated that the expenditure is genuine and incurred in the course of and for the purpose of business to be allowed as a revenue expenditure u/s. 37 of the Income Tax Act 1961.

- 59 - On the above basis, the CIT(A) has held that the payments made on account of business advisory services was not a genuine payment and he then holds that it would be sufficient if a payment of Rs.5 lakhs per month was allowed. He therefore directed the allowance of Rs.60 lakhs and held that the balance of Rs.2,40,00,000/- was to be treated as excessive payment in terms of the provisions contained under section 40A(2)(b) of the Act. Now it was argued that the agreement for the earlier year was filed before the CIT(A) in order to substantiate the fact that payments for similar services from EID had been made in earlier years also. The agreement relevant to the present assessment year enclosed at Page Nos. 177 to 182 of assessee’s Paper Book was also filed personally before the CIT(A) during the course of appeal hearing proceedings. Unfortunately the CIT(A) has ignored the existence of the agreement on his files. In respect of second ground, it is submitted that the assessee had filed submissions before the CIT(A) detailing the services rendered by EID in its letter dated 27.12.2018 filed at Page Nos. 189 to 193 of assessee’s Paper Book which has also been referred to by the CIT(A), the services have been very elaborately explained. According to the CIT(A), the nature of business of the assessee would require just two people to run the entire show, ignoring the fact that it would be necessary to comply - 60 - Statutory requirements and for which it did not have the necessary infrastructure.

20.2 It was argued that the assessee is a company which is run by the Board of Directors and does not have any employees on its rolls. In fact, the CIT(A) has himself mentioned that it does not have an office premises of its own and is working from a work station in its holding company’s premises. In the circumstances, it was absolutely necessary for it to get the services of an outside agency to help it comply with all the requirements under the various statutes governing the running of a company. In its letter dated 27.12.2018, it has clearly laid out the various services rendered to it under the various heads that it has enumerated therein. The CIT(A) has picked up just the headings that have been given but ignored the various items of work that have been referred to and explained therein. It should be appreciated that these items of work which have been mentioned in its letter are all very complex issues and time consuming. It would be relevant to highlight that in addition to other major services availed, one of the major service availed that had been highlighted was the use of the SAP/ERP software for the system management that belonged to EID that was used for most of the services above-mentioned. The SAP system consists of a - 61 - number of fully integrated modules, which covers virtually every aspect of business management. In addition to the initial cost of hardware, which is very high, it would require it to employ persons trained in the software. Further, in addition to the heavy onetime purchase cost it would entail a recurring subscription cost and license cost for each user. It is estimated that the total expenditure that would be necessary to install, set up, maintain and operate the SAP system alone would be in the range of about Rupees one Crore initially. Further separate staff would have to be engaged and trained to use such a system, if installed by it. In addition, the services of the experienced employees of EID were deputed to it. These employees took care of and represented it before the various different statutory governmental authorities. EID is a very large industrial organisation and has on its rolls employees having expertise in the various fields being legal, accountancy, business management, marketing, science and technology.

20.3 The assessee obtained legal support services from EID. Legal services included the drafting of the JDA, sales agreements and sale deeds, power of attorneys, consultation with advocates, registration of sale deeds, obtaining valuation reports of property held by the company, maintaining the legal documents of the assessee, - 62 - resolution of legal disputes, filing of appeals before various forums in cases for and against the assessee. The assessee also utilised the services of the employees of EID in the nature of CFO services, secretarial services, accounting services, taxation services and treasury related services. Since the assessee did not have any employees on its rolls, by opting for entering into this agreement, it had saved itself a lot of capital and recurring expenditure and the necessity of having a huge number of employees on its rolls, thereby saving a huge sum by way of employee costs like salaries, bonus, gratuity and other incidental expenses.

20.4 The CIT(A) has mentioned that it had incurred some other expenditure by way of professional charges, legal and consultancy paid to various persons and these payments were made for specific services sought for and rendered directly and for which the assessee was liable to make payment. We noted that the CIT(A) has himself accepted and agreed to the fact that services had been rendered to the assessee by EID and he was therefore not right in holding that only Rs.60,00,000/- was allowable. The CIT(A) ought to have appreciated that having conceded that services had actually been rendered it was not proper to restrict the payment for the said services, especially having regard to the fact that he has proceeded - 63 - purely on suspicion and surmises. In view of the above facts and circumstances of the case, we are of the view that the amount of Rs.3,00,00,000/- paid under the agreement for the business advisory services was a reasonable amount having regard to the type and quantum of services rendered and the potential savings that have accrued to the assessee. Hence, we delete the enhancement and allow this issue of assessee’s appeal.

2.7. Disallowance of marketing fees paid to M/s. Coromandel Engineering Company Ltd. (CECL]- Rs.47,75,301/- [Original Grounds of Appeal Nos. 2.7. to 2.7.e.]: 2.7.a. The Commissioner of Income Tax (Appeals) grossly erred in making the disallowance of marketing fees paid purely on suspicion and surmises. 2.7.b. The Commissioner of Income Tax (Appeals) ought to have appreciated that the addition is not warranted as the payment was genuine and TDS was also made on the payment. 2.7.c. The Commissioner of Income Tax (Appeals) ought to have appreciated that the marketing fees was incurred wholly and exclusively for the purpose of business.

- 64 - Brief facts relating to this issue are that the CIT(A) made the 22. enhancement on the basis that majority of the flats were sold in the preceding assessment year itself and the assessee had failed to justify / substantiate its claims by way of documentary evidence. It was argued that the targeted customers for purchase of flats promoted by the assessee are high net worth individuals and for that it availed the marketing services of CECL, who was having domain expertise from a very long term in respect of marketing services. The correspondence is enclosed at Page No. 194 of assessee Paper Book. The payments were made as per the letter of engagement dated 30.08.2010 enclosed at Page Nos. 195 & 196 of assessee’s Paper Book, wherein it was explicitly agreed to between the assessee and CECL that the first installment of the marketing fees will be paid at the time of allotment advise and receipt of allotment money from prospective buyers and secondly at the time of signing of sale cum construction agreement. During the impugned assessment year, the assessee had received consideration to the tune of Rs.20,60,95,200/- for flat bookings from the customers referred by CECL as per Table below :

Amount received Total Sale Flat Rate of Commission Customer during year [in value no commission [in Rs.] Rs.] [in Rs.] Sudarsanam 1A 7,20,00,000 8,09,41,350 2% 16,18,827 Dr Sumantran 1B 7,70,95,200 8,82,72,850 2% 17,65,457 Krishnamurthy 4C 5,70,00,000 6,95,50,850 2% 13,91,017 - 65 - (Minica Services Pvt. Ltd.) Total 20,60,95,200 23,87,65,050 47,75,301 Therefore, as per the total consideration received from customers referred by CECL, the marketing fees was paid to CECL. This is a genuine payment. TDS was also deducted from the marketing fees paid to CECL and the balance fees were also paid through banking channels, which will prove without doubt the genuineness of the payments. There is no warrant for CIT(A) to enhance the assessed income merely on suspicions and surmises without any valid reasons or materials. Hence, we are of the view that the enhancement on this account by the CIT(A) be deleted. Hence, we delete the addition.

- 66 - 2.8.b. The Commissioner of Income Tax (Appeals) ought to have appreciated that the payment of interest at 13% is reasonable as the loan is unsecured and out of business expediency. 2.8.c. The Commissioner of Income Tax (Appeals) grossly erred in applying Section 40A(2)(b) since the payment made was based on arm's length principle. 28.d. The Commissioner of Income Tax (Appeals) ought to have therefore appreciated that the expenditure is genuine and incurred in the course of and for the sole purpose of business to be allowed as a revenue expenditure u/s. 37 of the Income Tax Act,1961.

In this year, the loan amount received was Rs.8,78,00,000/- and the assessee had to pay a sum of Rs.6,53,43,750/- to Chola - 67 - JDA. The payment was made from out of this borrowals and there is direct nexus. This was the first year in which the JDA was in place.

F.Y. 2010-11 (Y.E. 31.03.2011)

In this year, the assessee had a number of commitments to meet, in addition to the works relating to the JDA and it had to pay a sum of Rs.23,64,00,000/- to CUMI also for the purchase of land for the JDA. A sum of Rs.23,64,00,000/- was received from EID as a loan on 28.04.2010 and it was transferred to CUMI in discharge of this obligation. In this year, the assessee also borrowed a further sum of Rs.10,00,00,000/- and paid the same to TII in terms of the JDA. It also paid TII a further sum of Rs.2,00,00,000/- and this was paid out of the amount received on redemption of Mutual Fund. Therefore, the total loan borrowed during the year was Rs.33,64,00,000/- over and above the amount of Rs.8,78,00,000/- outstanding as on 01.04.2010, being brought forward from the earlier year, the total amount of loan outstanding was Rs.42,42,00,000/-. During this year, the assessee also paid back part of the loan amounting to Rs.11,78,00,000/-. The source for this amount paid towards loan repayment was the receipts from redemption of Mutual Funds. Further we noted the source during the - 68 - Rs.18,90,00,000/- as advance from the purchasers of the apartments.

F.Y. 2011-12 (Y.E. 31.03.2012)

In this year, no borrowals were made and in fact the assessee paid back a sum of Rs.6,14,00,000/-. During this year, the assessee had received a further amount of Rs.40,82,00,000/- as advances from the apartment purchasers. The amount of Rs.59,72,60,805/- mentioned by the CIT(A) is the total of these two receipts received in F.Y. 2010-11 [Rs.18,90,00,000/-] and F.Y. 2011-12 [Rs.40,82,00,000/-].

F.Y. 2012-13 (Y.E. 31.03.2013)

In this year, the year under appeal before Tribunal, the assessee had repaid the entire amount of Rs.24,50,00,000/- being the outstanding of the loan taken from EID and closed the loan account. The above facts narrated are exhibited in the table below :

BORROWINGS FROM EID PARRY INDIA LIMITED F.Y. 2010-11 (A.Y. 2011-12) Rs. Balance as on 01.04.2010 8,78,00,000 Add: Additional borrowing during F.Y. 2010-11 33,64,00,000 Less: Repayment during FY 2010-11 11,78,00,000 Closing balance as on 31.03.2011 30,64,00,000 F.Y. 2011-12 (A.Y. 2012-13) Balance as on 01.04.2011 30,64,00,000 Add: Additional borrowing during F.Y. 2011-12 - Less: Repayment during F.Y. 2011-12 6,14,00,000 Closing balance as on 31.03.2012 24,50,00,000 F.Y. 2012-13 (A.Y. 2013-14) Balance as on 01.04.2012 24,50,00,000 Add: Additional borrowing during F.Y. 2012-13 - Less: Repayment during F.Y. 2012-13 24,50,00,000 Closing balance as on 31.03.2013 -

Ground No. 3 – Disallowance under section 14A – Rs.2,87,984/- :

3. Disallowance u/s.14A – Rs.2,87,984/- [Original Grounds of Appeal Nos.3 to 3.5] 3.1 The Commissioner of Income Tax (Appeals) grossly erred in upholding the disallowance u/s.14A read with Rule 8D. 3.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that the Appellant itself worked out the disallowance at Rs.90,032/- on the basis of actuals.

Ground No. 5 - Disallowance of Provision of Rs.1,70,00,000/- : 5.1 The Commissioner of Income Tax (Appeals) grossly erred in upholding the disallowance of provision of Rs.1.7 Crores.

- 73 - 5.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that the payment was made subsequently to CECL and therefore is an allowable expenditure u/s.37.

5.3 The Commissioner of Income Tax (Appeals) ought to have appreciated that the same was wholly and exclusively for the purpose of the business of the Appellant and is hence allowable u/s.37.

30.1 The assessee accepted the claim of CECL that some amount was payable due to escalation but the same was to be quantified, subject to negotiations. The debit to the accounts was made as the liability was acknowledged in the year. It was only the exact quantification that was postponed. Since the liability had arisen in this year, the amount was claimed in this year. The nomenclature - 74 - “Provisions” was used only because the need to quantify the exact amount due even though the claim was an ascertained liability.

Order pronounced in the open court on 3rd July, 2024 at Chennai.