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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI G. PAVAN KUMAR
आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:
The assessee filed an appeal against order of Commissioner of Income-tax (Appeals)-1, Chennai in dt. 29.05.2015 for the assessment year 2008-
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2009 passed u/s.143(3) and 250 of the Income Tax Act, 1961 (herein after referred to as ‘the Act’).
The assessee has raised three substantive grounds (i) 2. disallowance invoking provisions u/s. 14A r.w.r.8D (ii) Commissioner of Income Tax (Appeals) erred in confirming the findings of the Assessing Officer as Director personal expenditure in disallowing �54,33,987/- (iii) Commissioner of Income Tax (Appeals) erred in confirming the difference in the cost of allotment of the flat to the Directors �16,30,050/- u/sec. 37(1) of the Act.
The Brief facts of the case, the assessee is in the business 3. of construction of real estate and commercial buildings filed return of income on 05.01.2009 with total income of �19,36,819/-.
Subsequently, the case was taken up for scrutiny. In compliance to notice, the assessee furnished statements, Audited report, copy of the income tax return filed and ld. Assessing Officer issued questionnaire alongwith notice u/s.143(2) of the Act. The ld. Authorised Representative of the assessee appeared from time to time and submitted relevant documents alongwith books of accounts and records for verification. The Assessing Officer on verification of the financial statement found that assessee company has received �25,72,756/- as dividend and claimed exemption u/s.10(34) of the Act
ITA No.1595/Mds/2015 :- 3 -: and also received share of profit from the firm �85,98,768/- and claimed exempt u/s.10(2A) of the Act. The Assessing Officer noticed that assessee company has loan bearing funds of �3,86,38,759/- and made investments �17,63,52,362/-. The funds of the company have been utilized for making investments since major portion of the source being loan bearings funds. The Assessing Officer found interest expenditure was incurred for earning exempted income and proportionate cost of interest is to be treated as indirect expenditure and relied on the decision of Delhi Tribunal in Escorts Ltd. vs. ACIT 102 TTJ 522 and also Kerala High Court decision of Smt. Leena Ramachandran and concluded that provisions of Section 14A shall apply and further on perusal of the profit and loss account , the Assessing Officer found an interest of �95,75,865/- attributable and applied Rule 8D provisions with three limbs and calculated disallowance of �15,21,944/-. The Assessing Officer has not considered the contentions of the assessee that Rule 8D has come into effect from 23.03.2008 and applicable from assessment year 2009- 2010 and ld. Assessing Officer relied on decision of Mumbai High Court in the case of M/s. Godrej & Boyce Ltd where the provisions are enforceable from assessment year 2008-09. Aggrieved by the above addition, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).
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In the appellate proceedings, the ld. Authorised 4.
Representative reiterated submissions made before the Assessing Officer. The assessee has challenged the validity of application of Rule 8D as the amendment of Rules effective from 24.03.2008 and shall not be applicable for the assessment year and disallowance under Sec. 14A r.w. Rule 8D is incorrect and excessive on comparison with the actual receipt of dividend income. The ld. Commissioner of Income Tax (Appeals) based on the observations of the Assessing Officer and written submissions and explanations on investments and liabilities as per balance sheet found that the Assessing Officer has made disallowance by invoking Rule 8D(2) and relied on the decision of Jurisdictional High Court and compared the share capital, reserve and surplus and current liabilities and secured loans. The Commissioner of Income Tax (Appeals) assumed that assessee is not having sufficient funds generated from own source and also relied on the judicial decisions and distinguished facts and confirmed the addition. Aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee has assailed an appeal before Tribunal
Before us, the ld. Authorised Representative reiterated his 5. submissions made before Assessing Officer and Commissioner of Income Tax (Appeals) in the appellate proceedings supporting his
ITA No.1595/Mds/2015 :- 5 -: arguments with the grounds and judicial decisions. The ld. Authorised Representative argued that Commissioner of Income Tax (Appeals) has taken a different view, as the entire investment are from interest free funds and no expenditure was incurred in relation to investments for applicability of provisions of Sec. 14A. The provisions of Rule 8D are notified from 24.03.2008 and does not apply for previous year 01.04.2007 to 23.03.2008 and supported his submissions with the decision of Delhi High Court in the case of Maxopp Investments Ltd vs. CIT (2012) 347 ITR 272 and Co-ordinate Bench decision in the case of TVS Investments Ltd vs. ACIT, in applicable for assessment year 2008-09. The ld. Commissioner of Income Tax (Appeals) relied on the jurisdictional High Court decision in the case of Beach Minerals Company Pvt. Ltd in T.C.(Appeal) No.681 of 2013, dated 02.12.2013 on different set of facts. The ld. Authorised Representative distinguished the findings of the Commissioner of Income Tax (Appeals) and does not have impact on financial statements of the company and prayed for deletion of disallowance u/s.14A of the Act.
Contra, the ld. Departmental Representative relied on the orders of the lower authorities and vehemently argued that the provisions are applicable for this assessment year and decisions relied
ITA No.1595/Mds/2015 :- 6 -: by the Commissioner of Income Tax (Appeals) are directly on the issue and appeal of the assessee be dismissed.
We heard the rival submissions, perused the material on 7. record, judicial decisions and provisions of Finance Act. The ld. Authorised Representative reiterated his submissions non applicability of provisions of Rule 8D and was implemented on from 24.03.2008.
The assessee company is having adequate funds generated through own sources and no expenditure was incurred for earning exempted income. The Assessing Officer applied the provisions of Rule 8D (2) and calculated the disallowance. As per Finance Act 2008, disallowance under rule 8D has to be considered from 24.03.2008 to 31.03.2008 and was held by the High Courts and Co-ordinate Bench of the Tribunal in TVS Investments Ltd (supra) were the same shall not apply. We found there is a nexus of the expenditure and dividend income earned and the disallowance u/s.14A of the Act shall be applicable. We rely on the jurisdictional High Court decision of Simpson and Co. Ltd vs. DCIT in Tax T.C.(A) No.2621 of 2006 dated 15.10.2012 were held to disallow 2% of exempted income as disallowance u/s.14A of the Act. Accordingly by applying ratio, we direct the Assessing Officer to disallow 2% of exempted income as ITA No.1595/Mds/2015 :- 7 -: disallowance u/s. 14 r.w.r.8D and partly allow the ground of the assessee.
The second ground being the assessee entered into project 8.
“Exotica” for development on Venkatanarayana Road, Chennai. The directors of the company Shri. Vasantha Kumar Reddy, Suresh Kumar Reddy, Hari Kumar Reddy have brought fifth and sixth floors of the proposed building @ �3,300/- per. sq.ft, while seventh floor is similar area was sold for �5,000 per sq.ft. The ld. Assessing Officer found that customers of the project have paid substantial amount as consideration. But the Directors have paid only meagre amount towards purchase of properties and found fall in profits during the year are due to Directors holding the flats at cost much less than actual cost. Subsequently two Directors Shri. Suresh Kumar Reddy and Hari Kumar Reddy have cancelled their purchase in the project were as Director Shri Vasantha Kumar Reddy continued with the project of flat. The ld. Assessing Officer on perusal of statement of project cost of ‘Exotica’ found the total project cost worked out be �12,37,27,052/- for construction of built up area of 37,646 sq.ft and the cost of construction worked out to �3,120/- per sq.ft and also found that area allotted to director Shri. Vasantha Kumar Reddy being built up area of 3656 sq.ft amounting �59,72,733/- and cost per sq.ft being �1,633/-.
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The ld. Assessing Officer calculated that company has spent additional �1486 per sq.ft towards area allotted to the Director and such extra expenditure is of personal nature for the area allotted to Shri.
Vasantha Kumar Reddy and calculated �54,33,987/- as such expenditure cannot be allowed u/s.37(1) of the Act. The assessee company due to fall in real estate market was not in a position to absorb losses and entered into additional supplementary agreement on 16.11.2009 with director Shri. Vasantha Kumar Reddy towards additional amount of �67,02,000/- for allotment of commercial space in ‘Exotica’. The amount is in addition to the earlier amount of �59,72,733/- allotted to the Director on construction agreement dated 23.11.2006. The disputed issue before Assessing Officer that additional expenditure was incurred by the company on allotment area of Director was compensated and offered to tax in the assessment year 2010-2011. The supplementary agreement was entered on 23.11.2009 and recognised as Revenue. The contention of ld. Assessing Officer as consideration paid in supplementary agreement has to be considered as income in the assessment year 2008-09 and as the assessee is following percentage method of construction and accounting standards of ICAI. The Assessing Officer on submissions of the assessee on the revenue recognition has not accepted the explanations of offering income in assessment year 2010-2011 and ITA No.1595/Mds/2015 :- 9 -: disallowed a sum of �54,33,987/- pertaining to differential cost in construction incurred by the assessee company. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).
In the appellate proceedings, the Commissioner of Income 9.
Tax (Appeals) on perusal of the grounds and findings of the Assessing Officer dealt in detail on the applicability of provisions of Sec. 40A(2) and Sec. 37(1) of the Act. The ld. Authorised Representative of assessee submitted letter dated 10.08.2010, explaining transaction could not be brought to tax under the provisions of Sec.40A(2) of the Act. The ld Assessing Officer has misconceived the facts as the assessee company entered into supplementary agreement on 16.11.2009 with Shri. Vasantha Kumar Reddy who agreed to pay additional amount of �67,00,200/- towards allotment of commercial space measuring 3633 sq.ft on the 6th floor instead of 3656 sq.ft on the 5th floor as per the builders agreement dated 23.11.2006 in building and assessee company has offered �67,00,200/- in the assessment year 2010-2011 and total consideration received from Shri.
Vasantha Kumar Reddy aggregating to �1,26,72,933/-. The contention of the Assessing Officer being the amount paid as per supplementary agreement should be brought to tax in the assessment year 2008-09.
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The ld. Commissioner of Income Tax (Appeals) observed the findings and explanations and dismissed the ground as under:-
‘’I have gone through the facts and circumstances of the case. From the facts it is noticed that the appellant has sold the property to one of its directors Shri Vasantha Kumar Reddy @ Rs.3,300 per sft in 5th floor when similar area in 7th floor was sold at RS.5,000 per sft to outsiders. When the cost of construction to the appellant is Rs.3,120/- as per its own accounts, the area of 3,656 sft sold to Shri Reddy should fetch atleast Rs.1,14,06,720, whereas the amount paid by Shri Reddy is only Rs.59,22,733/-. Therefore, the difference of amount of Rs.54,33,987 is an additional cost which was incurred by the company on behalf of Shri. Reddy. In other words, the flat was sold by the appellant to Shri. Reddy, the director for the price which is less than fair market value thereby attracting the provisions of Se.40A(2). I fully agree with the conclusions arrived at by the Assessing Officer and confirm the addition. The ground is dismissed’’.
Aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee assailed an appeal before the Tribunal.
Before us, the ld. Authorised Representative reiterated the 10. submissions made in assessment proceedings and Commissioner of Income Tax (Appeals) on the action of the Assessing Officer disallowing �54,33,987/- as personal expenditure of the Director. The difference amount is only notional amount calculated by the Assessing Officer without considering basic facts of agreement entered in 2006 and a supplementary agreement dated 16.11.2009. The ld.CIT(A) has ITA No.1595/Mds/2015 :- 11 -: not disputed the director Shri. Vasantha Kumar Reddy allotment who entered into agreement on 23.11.206 for the built up area 3656 sq.ft on the fifth floor ‘’Exotica’’ for agreed consideration of �59,72,733/- but due to change of floor supplementary agreement dated 16.11.2009 was entered by the Director for area 3633 sq.ft in the sixth floor and paid additional sum of �67,00,200/- which was offered to tax in assessment year 2010-2011. The additional consideration paid by the Director is higher than the disallowance proposed by the Assessing Officer. The facts are that the agreement was entered in the year 2006 for the consideration and due to change in real estate market another supplementary agreement was entered for additional space on sixth floor and the amount paid towards the 5th floor area is treated as advance. The alternative contention being since the supplementary agreement was entered for different area in the same building and income should be offered in totality in assessment year 2010-2011. The ld. Authorised Representative drew attention to the paper book with agreements entered with Shri. Vasantha Kumar Reddy on 23.11.2006 and supplementary agreement dated 16.11.2009 and prayed for deleting the addition as income has been reconciled and offered to tax.
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Contra, the ld. Departmental Representative relied on the 11. findings of Assessing Officer and order of the Commissioner of Income Tax (Appeals) and opposed the grounds.
We heard the rival submissions, perused the material on 12. record, judicial decisions and agreements submitted in the course of hearing. The ld. Authorised Representative contention being due to change of allotment space the amount received by agreement dated 23.11.2006 is supplemented by second agreement dated 16.11.2009 and total consideration paid by the Director is �1,26,72,933/-, which is in continuation of agreement entered with the company though the allotment of space of 5th floor was cancelled and additional amount received for allotment in 6th floor was offered to tax in assessment year 2010-2011. The contention of the Assessing Officer that the assessee company has provided concessional construction cost to the Directors and treated the difference of �54,33,987/- as personal expenditure incurred on behalf of the director but the same cannot be considered in lieu of change in terms of agreement and additional amount paid is more than the addition proposed by the Assessing Officer. The ld. Authorised Representative demonstrated on terms of agreement entered on both the dates and we found at page 49 & 50 of paper book the amount paid by the Director in addition to the ITA No.1595/Mds/2015 :- 13 -: amount stipulated in builders agreement on 23.11.2006 and also as
per clause 06 at page 50 as under:-
‘’06. Except the aforesaid changes, all the other terms and conditions in the aforesaid Builders Agreement dated 23.11.2006 stand unaltered .‘’ We are of the opinion that matter has to be re-examined by the Assessing Officer taking into consideration the term of agreement entered in two different financial years and the assessee company could not explain actual receipt of consideration from director as per agreement in the relevant assessment year. Therefore, we remit the issue in dispute to the file of the Assessing Officer and Assessing Officer shall provide adequate opportunity of being heard before passing the orders. The ground of the assessee is partly allowed for statistical purpose.
The last ground raised by the assessee being disallowance 13. u/s.37(1) of the Act. The ld. Assessing Officer on verification of agreement executed by the assessee company joint venture project at Royapettah High Road to construct 12,498 sq.ft, he found that Directors of the company are allotted apartment nos.40S-1 and 40S-2 each measuring 3,003 sq.ft and the balance area of the project of 6,492 sq.ft was sold to Marine Container Services South P. Ltd for a consideration of �.3,73,29,000/- and per sq.ft worked out �5,750/- whereas the directors were allotted at �3,150/- per sq.ft. The ld.
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Authorised Representative submitted that the director were allotted space on 23.11.2006 whereas the outside party purchased on 5.10.2007. The increase in rate is due to efflux of time. The ld. Assessing Officer calculated the additional cost and worked out �1261
per sq.ft in respect of allotment of flats to the Directors and the total constructed area 6006 sq.ft worked out to �75,73,566/-. The ld. Assessing Officer found that company has not borne in direct cost of construction on behalf of directors and calculated on the basis of operative and indirect expenses incurred towards employee cost, administrative expenses, interest and finance charges and depreciation. The Assessing Officer has calculated direct and indirect expenses of the construction and on comparison of value of cost of construction allotted to the director differential construction cost worked out to �16,30,050/- and was treated as personal expenditure incurred by the company. The Assessing Officer gave finding on calculation of allocation of indirect expenses is not taken up in the case of Shri. Vasantha Kumar Reddy referred in earlier issue were he has compensated the company by way of supplementary agreement dated 16.11.2009 towards enhanced cost of construction. With these findings, the Assessing Officer made addition of �16,30,050/- to the returned income. Aggrieved by the order of the Assessing Officer, the
ITA No.1595/Mds/2015 :- 15 -: assessee filed an appeal before the Commissioner of Income Tax (Appeals).
In the appellate proceedings, the ld. Commissioner of Income Tax (Appeals) on perusal of the observations of the Assessing Officer in assessment order found the allocation of expenditure and differential dates of allotment to the outside parties and price being �3150sq.ft to the Director and outside party offered at �5,750/- sq.ft.
The ld. Authorised Representative argued that the Assessing Officer has erred inincluding indirect cost on allotment area to the Director and Commissioner of Income Tax (Appeals)observed at pare 6.2 as under:-
‘’I have gone through the facts and circumstances of the case. As seen from the facts of the case like in the case of the project named 'Exotica' at Venkatnarayanan Road, the appellant has allowed in the project at Royapettah High Road two apartments to two of its directors Shri Suresh Kumar Reddy and Shri Jaya Kumar Reddy at a price lower than the price at which it was sold to the outsiders. The AO has worked out the cost, both direct and indirect, of the flats sold to these directors and made the addition since to that extent there is a loss to the appellant. The AO has noticed that the two flats measuring 3003 sft. each was sold by the appellant @ RS.38,93,1 08 to the directors, amounting to Rs.77,86,216 (Rs.1 ,296 X 6006 sft.). The AO has also worked out cost of the flats sold to these directors including indirect cost at Rs.94,16,266. The difference of amount Rs.16,30,050 (Rs.94, 16,266 - Rs.77,86,216) was brought to tax by the AO u/s 37(1) holding that the appellant cannot sell the property to its directors at a price lesser than the cost incurred by the appellant. The logic of the AO in making the disallowance is in order. I, therefore, confirm the disallowance made by the AO. The ground is dismissed.’’
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Aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee has assailed an appeal before Tribunal.
Before us, the ld. Authorised Representative reiterated his submissions made before the Assessing Officer and Commissioner of Income Tax (Appeals). The ld. Assessing Officer has made an addition of �16,30,050/- on the ground of allotment of space to the Director at the lower rate compared to outsiders. The assessee company has not favoured the Director by selling the built up area below cost price but the Assessing Officer calculated indirect cost in the assessment order and arrived at higher cost per sq.ft. and the difference in rate on comparison with Director and outside party is due to change of time.
The real estate trend during the period 2006 and 2007 globally was downward and delay in projects due to financial crisis and also due to less demand or booking of flats by customers and prayed for the deletion of addition.
Contra, the ld. Departmental Representative opposed the ground and argued that the time difference is less than one year from the allotment dates of the Director and outside parties and also no positive trend in real estate sector in the year 2007 due to global recession in real estate business.
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We heard the rival submissions and perused the material on 17. record. Considering the apparent facts and market conditions the allotment of building space to director at lower rate compared to outsiders is not proper and the directors are allotted space on 23.11.2006 at the rate of �3,150/- per sq.ft. wereas Marine Container Services South P. Ltd purchased from the company on 5.10.2007 at the rate of �5,750/- per sq.ft. Considering the real estate market trend in the year 2006 and 2007 and the ld. Assessing Officer has worked out the costing based on financial statements. Hence, we are not inclined to interfere with the findings of the Commissioner of Income Tax (Appeals) who has examined the issue and uphold the order of the Commissioner of Income Tax (Appeals) on this ground.
This ground of the assessee is dismissed.
In the result, the appeal of the assessee is partly allowed for statistical purpose. Order pronounced on Tuesday, the 8th day of March, 2016, at Chennai.