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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’
Before: SHRI VIJAYPAL RAO & SHRI JASON P BOAZ
PER BENCH :
These three appeals by the related assessee are directed against the respective orders dated 20/3/2014 and 28/3/2014 of ITA No.791-793/B/14 2 Commissioner of Income-tax (Appeals), Mysore, for the assessment year 2008-09.
Since the identical issues are involved in these appeals relating to the transactions of development of the property under joint development agreement and subsequent cancellation as well as sale of the property therefore for the purpose of recording the facts we take the appeal in as lead case.
The assessee company was in the business of property development in Bangalore. The assessee along with other two parties namely M/s Triad Resorts & Hotels Ltd., and M/s Noorani Properties Pvt. Ltd., has . entered into master development agreement with classic Infrastructure and Development Ltd., for joint development of the land vide agreement dated 5/12/2000. All these assessee’s purchased the respective lands in the year 1996. As per the agreement, the assessee received a refundable deposit of Rs.11,70,00,000/- and was entitled to receive a specific parts of build up area in the project as its share. However, the agreement did not materialized and the joint agreement was consequently terminated vide settlement dated 29/8/2007 between the parties. Thereafter the ITA No.791-793/B/14 3 assessee vide sale deed dated 29/9/2007 transferred the property to ITC Ltd., for a consideration of Rs.16,62,80,172/- In the meanwhile survey u/s 133A was conducted on 5/6/2008 and subsequent to survey, the assessee filed return of income for the assessment year under consideration declaring capital gain as well as income from other sources. While completing the assessment vide order dated 31/2/2010, the AO made addition on account of full value consideration u/s 50C of the Income-tax Act apart from the addition on account of cost of acquisition and cost of improvement of asset while computing the long term capital gain. The assessee challenged the action of the AO before the CIT(A) who has granted part relief to the assessee by deleting the addition made on account of invoking sec. 50C of the Income-tax Act. However, the CIT(A) has confirmed the addition made by the AO in respect of the cost of acquisition and cost of improvement of the property. The Revenue has not challenged the order of the CIT(A) so far as the relief was granted by deleting the addition made on account of full value consideration u/s 50C. Thus, the assessee has raised the following grounds before us.
ITA No.791-793/B/14 4
1) The order of the learned CIT(A), is so far as it is prejudicial to the interests of the appellant, is against law, weight evidence and probabilities of the case. 2) The learned CIT(A) erred in confirming the disallowance of partial cost of acquisition being delayed payments made to ND Patel of a sum of Rs.3,45,000/-, as she failed to appreciate that the said sum was the amount determined as the share of this appellant payable to ND Patel for perfecting the title. She ought to have allowed the sum as cost of acquisition. 3) a) The learned CIT(A) erred in confirming the disallowance of cost of improvement incurred during F.Y 2007-08 of an aggregate amount of Rs.48,39,367/- being the interest on loans borrowed for purchase of the property and other administrative expenses incurred (in pursuance of the joint development agreement) and included in the work-in-progress (as reflected contemporaneously from year to year in the respective Balance Sheets) because she failed to appreciate that the appellant was incorporated only for that purpose but was forced to sell the property without further development. b) The learned CIT(A) further erred in confirming the disallowance of an additional amount of Rs.6,79,246/- incurred as cost of improvement without appreciating the reasons for payment of such amount. She ought to have allowed the same.
ITA No.791-793/B/14 5
4) a) The learned CIT(A) erred in confirming the disallowance of cost of improvement incurred of an aggregate amount of Rs.1,00,19,294/- between FY 1988-99 and F.Y 2006-07 despite recognizing the fact that the expenses were genuinely incurred for maintaining the property and securing the title from trespassers and to settle with claimants of title. She ought to have allowed the claim fully. b) The learned CIT(A) failed to appreciate that expenses incurred for sale guarding the title of property held by the appellant have to be allowed as capital cost of improvement against sale consideration and consequently erred in confirming the disallowance. c) The learned CIT(A) failed to appreciate that but for safe guarding the title from such claimants and trespassers the appellant would not have got the price for which the property was ultimately sold. Consequently, she erred in confirming the disallowance of the cost of improvement. d) The learned CIT(A) failed to appreciate that when survey was conducted much after the sale of the property, the survey team was handicapped in properly apprising itself on the cost of maintaining the property in the past decade. Consequently, she erred in confirming the cost of improvement incurred over a period of about ten years. 5) For the above grounds and such other grounds that may be urged at the time of hearing, the appellant prays that the appeal be allowed.”
ITA No.791-793/B/14 6
Ground No.1 is general in nature and does not require any specific adjudication.
Ground No.2 is regarding disallowance of cost of improvement of Rs.1,25,78,425/-. The assessee has claimed the cost of acquisition as well as cost of improvement of the property at Rs.1,32,78,425/-. It was aggregated cost incurred under different heads. However the period starting from financial year 1995-96 till 2007-08, the assessee shown these cost under the project investment and are being carry forward every year. During the course of asst. proceedings, the AO asked the assessee to submit complete details of this cost. In reply, the assessee filed a chart showing project investment which adds up to Rs.1,32,78,425/- till the financial year 2007-08. The AO found that except the amount of Rs.1 lakh incurred had shown settlement, the other expenses are shown administrative expenses such as audit fee, professional charges, office rent, telecommunication and other misc. expenses. Thus, the AO was of the view that all these general administrative expenses has nothing to do with the improvement of the land in question. Accordingly, the AO has disallowed the cost of acquisition/improvement of the property amounting to Rs.1,25,78,425/- after allowing Rs.7 lakh paid towards suit
ITA No.791-793/B/14 7 settlement. The assessee challenged the action of the AO before the CIT(A) but could not succeed.
Before us, the learned AR of the assessee referred to the details of expenses at page no.241 of the paper book and submitted that the entire expenditure has been recorded in the books of account and it was not claimed by the assessee being capitalized. Therefore, the learned AR has submitted that the said expenditure which was capitalized to the investment is an allowable cost of acquisition or improvement of the capital asset while computing the capital gain u/s 48 of the Act.
The learned AR has pointed out that the claim of the assessee is comprising of interest paid to ITC for the period prior to the joint development agreement entered into in the year 2000, whereas the land in question was acquired in the financial year 1996-97. He has referred the TDS deduction on the interest payment to the ITC and submitted that the payment of interest is not doubted. The learned AR of the assessee has relied upon the following decisions :
ITA No.791-793/B/14 8 1) CIT Vs. Maithreyi Pai, 152 ITR 247 2) CIT Vs. Abrar Alvi, 247 ITR 312 3) CIT Vs. Sri Hariram Hotels Pvt. Ltd., 325 ITR 136
On the other hand, the learned DR has relied upon the orders of the authorities below and submitted that the assessee failed to prove that the expenditure claimed by the assessee is for improvement of the property or incurred for the purpose of acquisition of property. He has submitted that the AO has already allowed Rs.7 lakh out of the total claim of the assessee which pertains to the payment made by the assessee in settlement of dispute regarding the property. The other expenditure incurred by the assessee has no connection with the cost of acquisition or improvement of property in question.
We have considered the rival submission as well as relevant material on record. The assessee claimed a total expenditure of ITA No.791-793/B/14 9 Rs.1,32,78,425/- incurred from the financial year 1995-96 to 2007-08. It is claimed by the assessee that the said expenditure has been incurred on account of cost of acquisition and improvement of the land in question. The details of the expenses are given at page No.241 of the paper book and for the sake of ready reference we reproduce the details comprising the item of the expenditure and grand total of each expenditure for all the years as under:
Item of Expenditure Grand Total Particulars 23,834.00 Audit Fees 7,274.00 Bank charges 52,993.00 Bank Interest on OD 500.00 Cap in Clsd Part Firm 250,110.00 W/off (TNV Hsg) Construction of Road 58,350.90 Conveyances 1,052,055.00 Depreciation (Fun & Fix) 258,430.00 Director Remuneration 27,984.40 Entertainment Charges 30,410.00 Filing Fees 9,640.00 Finance Charges 13,200.00
ITA No.791-793/B/14 10 Furniture Shifting Charges 86,567.00 Hire Charges 5,421.55 Insurance Charges 69,376.34 Interest Charges 1,948,615.00 Interest on Car Loan 7,981.00 Interest to ITC Ref Ltd 110,000.00 Interest Expenses 750,039.00 Lease Rent 766,621.57 Legal Expenses 175,200.00 Marketing & Sales 12,357.90 Material for construction 12,357 Meeting Expenses 38,470.68 Miscellaneous Expenses 67,392,18 Motor Car Expenses 15,008.00 Newspaper and 65,776.00 Subscription Office Supplies 17,611.00 Postage and Courier 1,676545.00 Preliminary Expenses 846,946.00 W/off Professional Charges 169.994.70 Property Management A/c 261,000.00 Repair and Maintenance 76,172.00 Salary to Staff 700,000.00
ITA No.791-793/B/14 11 Staff Welfare 563.00 Suit Settlement 563,634.00 TDS Penalty 1,310.20 Telephone Charges 24,500.00 Tiffin Allowance 774,348.93 Transfer charges for 10,531.00 electric meter Transfer from SUNCITY 78,231.19 Travelling Expenses Utilities ADD Previous Years B/f LESS Reimbursement of expenses (93,978.00)
It is clear from the details given above that the apart from the interest payment no other expenditure has any connection in relating to the improvement or cost of acquisition of the land in question. The AO has already allowed Rs.7 lakhs towards the suit settlement amount in relation to the dispute of the land title. Therefore, so far as the claim of the assessee pertaining to the expenditure for removing the encumbrance or preserving the asset, the same has already been ITA No.791-793/B/14 12 allowed by the AO. The decision relied upon by the assessee are relevant only to the issue of allowability of the expenditure incurred for removing hurdles of transfer of the property and the interest paid by the assessee on amount borrowed for the purchase of the property.
One of the expenditure has already been allowed by the AO, therefore, we are of the view that the other than the interest expenditure no other expenditure can be allowed either as cost of the acquisition or cost of improvement of the land as per the provision of sec. 48 of the Act. As regards interest expenditure, the same is allowable as cost of acquisition if paid on the amount used for acquisition of the land in question. Further the interest paid for the period prior to the joint development agreement would be allowable as cost of the acquisition. Accordingly, the AO is directed to verify and determine the interest paid on the borrowed funds used for acquisition of the land in question up to the date of Development agreement and allowed the same as cost of acquisition while computing the capital gain on the sale of land. Accordingly, this ground of the assessee is allowed in part.
Ground No.3
Disallowance of the indexed cost of expenses
ITA No.791-793/B/14 13
While computing the capital gain, the assessee reduced the sale consideration by index cost of acquisition and index cost of improvement. The details of the expenditure are reproduced by the AO at page 4 as under:
Financial Year Cost of Indexed cost of acquisition/improvement acquit ion/improvement 1996-97 29556636 53395759 1997-98 2231765 3715113 1998-99 605775 950946 1999-00 929015 1315906 2001-02 660650 854503 2002-03 3250820 4007163 2003-04 549675 654149 2004-05 481670 552917 2005-06 1600000 1773843 2006-07 650000 690077 2007-08 13278425 13278425
The last item of the expenditure of Rs.1,32,78,425/- has already been dealt with by us while deciding in ground No.2 of the assessee’s
ITA No.791-793/B/14 14 appeal. Therefore, while deciding the ground No.3, we are concerned with the expenditure claimed by the assessee of Rs.1,79,85,653/-.
The AO has observed that the assessee has not produced any bill or other independent supporting evidence to prove the claim of the expenditure for improvement of the land or cost of the land. The AO noted that during the course of survey proceedings u/s 133A of the Act, statements of directors of the assessee were recorded who have stated that no development work has been carried out on the said land except the boundary wall which was constructed by the ITC group at its cost and not by the assessee. Accordingly, the AO disallowed the claim of the assessee by rejecting this self made vouchers produced by the assessee after the expiry of 18 days from the date of survey.
The assessee challenged the action of the AO before the CIT(A) but could not succeed. The CIT(A) has confirmed the action of the AO by holding that the assessee has failed to establish that the expenditure was incurred on land and that it has resulted in any improvement of the property.
Before us, the learned AR of the assessee submitted that the vouchers were produced on 24/6/2008 which is after the survey
ITA No.791-793/B/14 15 conducted and much before the assessment proceedings. Therefore genuineness of the expenses cannot be doubted. He has submitted that the entire expenditure was recorded in the books of account and capitalized being part of the work-in progress of the project. The assessee did not claim the said amount of expenditure until the land was sold the other parties to the joint development agreement have corroborated the expenditure incurred by the assessee. The assessee was the owner of the land and all risk and reward belong to assessee. Thus, the learned AR has submitted that the expenditure is an allowable claim. He has referred clause 17 and 18 of Joint Development Agreement at page 187 of the paper book and submitted that the assessee was at receiving end and under the obligation to incur the expenditure to obtain necessary sections and permission as well improvement work.
On the other hand, the learned DR has referred the finding of the AO and CIT(A) and submitted that in the absence of supporting evidence the AO has doubted the genuineness of the expenditure and vouchers which are self made without any bills of details of the work executed by the 3rd party . Further, the voucher were produced after
ITA No.791-793/B/14 16 the gap of 18 days from the date of survey conducted. Therefore, the same are after thought and self serving record produced by the assessee. Even otherwise the expenditure does not result in any improvement of the asset and claim of the assessee is contrary to the statement of the directors of the assessee company recorded during the survey proceedings. The claim of the assessee was also found to be incorrect by the ITO who visited the site.
We have considered the rival submissions as well as relevant material on record. The entire expenditure is claimed to have been incurred in cash. However, the assessee has not produced any bills or details of work as well as parties to whom the payment was made.
What was produced by the assessee were the self made vouchers without any confirmation from the other party. It is pertinent to note that the assessee companies are in the business of development of the properties and the joint development agreement were entered into between the parties in connection with their business activities. The assessee were to get 13% of the developed property and the income from the sale the developed property would be the business income of the assessee. Therefore, any activity under the Joint Development
ITA No.791-793/B/14 17 Agreement was in the nature of business activity of the assessee. The expenditure incurred in pursuant to or as an obligation under the Joint Development Agreement can be claimed as business expenditure despite the fact that the said Joint Development project could not materialize. Therefore, the expenditure incurred subsequent to the Joint Development Agreement cannot be treated as the expenditure incurred for improvement of the capital asset in question.
Accordingly, in the facts and circumstances of the case, we do not find any error or legality in the orders of the authorities below to qua this issue.
This Ground is accordingly, dismissed.
The grounds and issues raised in all three appeals are identical. Therefore, in view of our finding on these two issues all three appeals stands partly allowed.
In the result, the appeals filed by the assessee are partly allowed.
ITA No.791-793/B/14 18
Order pronounced in the open court on 9th Oct, 2015.