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Income Tax Appellate Tribunal, DELHI ‘G’ BENCH,
Before: SHRI N.K. BILLAIYA, & MS. ASTHA CHANDRA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
The above cross appeals by the assessee and Revenue are preferred against the order of the ld. CIT(A)-1, Gurgaon dated 19.03.2018 pertaining to Assessment Year 2014-15.
These cross appeals were heard together and are disposed of by this common order for the sake of convenience and brevity.
The representatives of both the sides were heard at length, the case records carefully perused. We have considered the documentary evidences brought on record in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides.
4. We will first address to the appeal of the assessee. The grievances of the assessee read as under:
“1. On the facts and in circumstances of the case, the learned Commissioner of Income Tax (Appeal) grossly erred in confirming disallowance of Corporate Social Responsibility ('CSR') expenditure of Rs. 9,26,3401- u/s. 37 of the Income Tax Act, 1961 ('ITA") for A Y
2014-15 without appreciating that Explanation 2 to section 3 7( I) of the ITA disallowing CSR expenses was inserted w.e..f.01.04.2015.
2a) The learned Commissioner of Income Tax (Appeal) grossly erred in confirming disallowance of interest @ 3.45% (18% - 14.55%) u/s. 40A(2) of the ITA paid to the Shareholders i.e. M/s. Tata Housing Development Company Ltd ('THDC') and M/s. CSN Estates Pvt. Ltd. on the unsecured loans availed from them. b) In doing so he erred in adopting the Arm's Length Price (,ALP') of 14.55% calculated by Transfer Pricing Officer in A Y 2013-14 with respect to interest paid to the Shareholders, as fair market value for working out disallowance u/s. 40A(2) of the ITA for A Y 2014-15.
3. The learned Commissioner of Income Tax (Appeal) grossly erred in confirming disallowance of marketing fees (branding fees) ofRs. 4,21,70,0051- u/s. 40A(2) of the ITA paid to M/s THDC.
4. The learned Commissioner of Income Tax (Appeal) grossly erred in confirming the percentage of work completed to be 59.20% instead of 54.60% calculated by the appellant. In doing so, he excluded External Development Charges ('EDC') paid to Haryana Urban Development Authority ('HUOA') and project management consultancy (,PMC') paid to M/s. THDC from the estimated cost of construction.
5. The learned Commissioner of Income Tax (Appeal) grossly erred in confirming the re-calculation of revenues under the percentage completion method followed by the appellant in' accordance with the Guidance Note on Accounting for Real Estate Transactions (Revised) issued by the Institute of Chartered
Accountants of India ('lCAI') thereby making an addition of Rs. 148,73,18,759/-. In doing so he erred in taxing revenues for the unsold area of the project.
6. The learned Commissioner of Income Tax (Appeal) grossly erred in passing an enhancement order and disallowing interest u/s. 36( 1) (iii) of the ITA of Rs. 1,96,45,7881- (26,835 + 82,43,682 + 1,13,75,271) even when no borrowed funds were directed for non- business purposes.
The appellant craves leave to add, alter, amend or delete any of the above referred ground of appeal.”
The underlying facts in the first grievance are that during the course of assessment proceedings and on perusal of the details of costs of ongoing projects, the Assessing Officer noticed that the assessee has claimed contract costs of some road constructed for some school and claimed to have incurred on Corporate Social Responsibility [CSR] total payable amount of Rs. 9,26,340/-.
Invoking provisions of section 37 of the Income-tax Act, 1961 [the Act, for short], the Assessing Officer was of the opinion that any expenditure incurred by the assessee on CSR activities is not an allowable expenditure.
7. When the matter was agitated before the ld. CIT(A), the ld. CIT(A) was convinced that Explanation 2 to section 37(1) of the Act has been inserted w.e.f. 1.4.2015, but was also of the opinion that this by itself does not imply that such expenses were allowable and confirmed the disallowance made the Assessing Officer.
We have carefully perused the reasoning given by the authorities below. In our considered opinion, this quarrel is no more res integra, in light of the decision of the Hon'ble Jurisdictional High Court of Delhi in the case of PEC Limited 451 ITR 436. The relevant findings of the Hon'ble High Court read as under:
“3. The expenses incurred by the respondents/assessees in the aforementioned Assessment Years (A Y s), which were disallowed by the assessing officer in each of the assessment years are detailed out hereafter: Ite Asses Amount of Title of the case I m sment CSR PCIT-7 VPEC Limited 2013-2014 Rs.3,79,19,732 . 2 PCIT-7 Vs RITES Limited 2014-2015 Rs.5,322,92,06 . 3 3 PCIT-7 Vs RITES Limited 2013-2014 Rs. 6,4,00,000 .
The argument advanced on behalf of the appellant/revenue is, that the respondent/assessees could have claimed a deduction under section 37 of the Act only if all the conditions prescribed in the said provision were fulfilled:
4.1 According to Mr. Puneet Rai, who appears on behalf of the appellant/revenue, the expenditure qua which deduction is claimed was not incurred wholly and exclusively for the purposes of carrying on business or profession.
4.2 To put it more specifically, it is Mr. Rai's contention, that the funds utilized by the respondent/assessee to effectuate its CSR obligation involved application of income and not an expense which had been incurred wholly and exclusively for the purposes of carrying on business.
~ 4.3 In support of this plea, Mr. Rai relies upon the amendment brought about in section 37(1) of the Act by way of insertion of Explanation 2. The contention is that Explanation 2 appended to sub-section (I) of Section 37 of the Act is clarificatory in nature, and therefore would be applicable qua the assessment years in issue, concerning each of the respondents/assessees.”
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8:'" In the instant case, the respondent/assessee has sought to seek deduction of amounts spent to progress its CSR obligation, and sought deduction against the income chargeable under the head "profits and gains of business or profession."
8.1 The deduction claimed was disallowed by the assessing officer. 9. The matter, consequently, travelled to the Tribunal. 9.1 The Tribunal, as noted above, ruled in favour of the respondent/ assessee.
9.2 The Tribunal has opined, that Explanation 2 inserted in section 37(1) was prospective in nature, and therefore was not applicable in the assessment years in issue.
It is required to be noticed, that Explanation 2 was inserted in section 37 via Finance (No.2) Act, 2004 w.e.f. 1-4-2015. Furthermore, what emerged during the course of the hearing was, that the memorandum ~which was published along with Finance (No.2) Bill 2014 clearly indicated that the amendment would take effect from 1-4-2015 and, accordingly, would apply in relation to assessment year 2015-2016 and the subsequent years.
10.1 This is plainly evident upon perusal of the following extract from the memorandum:
"The existing provisions of section 37( I) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfillment of conditions, if any, specified therein.
This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years."
Respectfully following the decision of the Hon'ble Delhi High Court [supra] we direct the Assessing Officer to delete the impugned disallowance. Ground No. 1 is, accordingly, allowed.
10. The underlying facts in the issue raised vide Ground No. 2 are that during the assessment proceedings, the Assessing Officer noticed that the assessee has taken loan from the following parties:
A) Tata Housing Development Co, Ltd B) CSN Estates Pvt Ltd C) State Bank of India
The Assessing Officer noticed that in so far as A and B above are concerned, the assessee has paid Interest @ 18%, whereas in the case of C, the assessee has paid interest @ 11%.
The assessee was asked to justify the higher rate of interest paid to the related parties but no plausible reply was received. The Assessing Officer was left with no choice but to disallow the excess interest paid over and above the SBI rate and disallowed 7% making addition of Rs. 22,40,74,574/- u/s 40A(2) of the Act.
The assessee carried the matter before the ld. CIT(A) and reiterated its claim of deduction.
After considering the facts and submissions, the ld. CIT(A) was of the opinion that what has to be seen is whether the expenditure is excessive or unreasonable having regard to the fair market value of the facilities for these payments made. The ld. CIT(A) found that there is no dispute that the persons to whom interest has been paid are covered u/s 40A(2)(b) of the Act. The ld. CIT(A) also found that the assessee has paid interest @ 11% on borrowings from SBI but was also of the opinion that the rate of interest payable to bank is not exactly comparable to the rate of interest payable to unsecured creditors in the open market.
Taking a leaf out of the Transfer Pricing assessment order of the immediately preceding A.Y 2013-14, the ld. CIT(A) held that the market rate to be taken should be 14.55% and directed the Assessing Officer accordingly.
Before us, the ld. counsel for the assessee had drawn our attention to the respective agreements with the two parties, namely, Tata Housing Development Co. Ltd and CSN Estates Pvt Ltd and pointed out that in both the cases, the agreed rate of interest was 18%.
It is the say of the ld. counsel for the assessee that u/s 40A(2) of the Act the onus is on the Assessing Officer to bring comparables on record to show that the payments made by the assessee to the related parties is excessive or unreasonable, which the Assessing Officer has not brought on record. The ld. counsel for the assessee reiterated that the borrowings from bank cannot be compared with the borrowings from open market where the rate of interest is always higher.
The ld. counsel for the assessee further stated that there is no revenue leakage, as both Tata Housing Development Co. Ltd and CSN Estates Pvt Ltd are taxed at highest rate of taxation as the assessee.
Per contra, the ld. DR strongly supported the findings of the Assessing Officer. It is the say of the ld. DR that it would be incorrect to say that the Assessing Officer has not brought any comparables as SBI rate was very much there on record which has been used as a comparable.
We have given thoughtful consideration to the orders of the authorities below. There is no dispute that the assessee has paid interest @ 18% to its two related parties. It is also not in dispute that the interest has been paid as per agreements placed on record. In our considered opinion, merely because the interest has been paid as per contractual obligation would not justify that the rate of interest is as
per prevailing market rate or reasonable and not excessive.
It is also an undisputed fact that the assessee has paid interest @ 11% from the borrowings from SBI. Though the borrowings from the banks cannot be said to be on the same level playing field with that of the borrowings from the open market, but, at the same time, prime lending rate of SBI is a bench mark to determine the market rate of interest. We, therefore, direct the Assessing Officer to decide the issue afresh after taking the prime lending rate of SBI during the F.Y. under consideration after affording reasonable opportunity of being heard to the assessee. Accordingly, Ground No. 2 is allowed for statistical purposes.
The underlying facts of Ground No. 3 are that the Assessing Officer noticed that the assessee has debited marketing fees of Rs. 4,21,70,005/- to Tata Housing Development Co. Ltd.
The assessee was asked to explain the nature of such services and what kind of brand has been promoted by the assessee with the amount of Rs. 1,61,96,199/-. The assessee was asked to furnish the agreement entered into. The assessee was also asked to explain the expenditure of branding fees amounting to Rs. 2,59,73,807/- paid to
In its reply, the assessee stated that marketing fees of Rs. 4,21,70,005/- has been paid to Tata Housing Development Co. Ltd for marketing and sales activities carried out by them on behalf of the assessee.
This submission of the assessee was dismissed by the Assessing Officer who was of the opinion that the assessee has not provided any description of services being availed from Tata Housing Development Co. Ltd for which the assessee paid Rs. 4.21 crores. The Assessing Officer was of the further opinion that the assessee has shifted the profit to Tata Housing Development Co. Ltd who is a related party u/s 40A(2)(b) of the Act and since no details were furnished, the Assessing Officer made addition of Rs. 4,21,70,005/-.
The assessee carried the matter before the ld. CIT(A) and referred to the agreement with Tata Housing Development Co. Ltd for the claim of deduction of the expenditure but could not convince the first appellate authority in respect of claim of deduction of the expenditure.
Before us, the ld. counsel for the assessee once again referred to the agreement with Tata Housing Development Co. Ltd and vehemently stated that the payment has been made pursuant to the agreement and it would be incorrect to say that the assessee has shifted the profit because Tata Housing Development Co. Ltd is also in the same tax bracket of the assessee and there is no profit shifting.
Per contra, the ld. DR supported the findings of the authorities below and read the operative part.
We have carefully perused the orders of the authorities below.
The relevant clauses of the agreement read as under:
"In consideration of Providing the services as contemplated in this agreement (including as set out in clause 5.5.1) the subscriber shall be separately entitled to receive the following as and by way of compensation for services rendered a) 6% of construction cost of the project as project management fees ("PMC Fees"). All taxes and levies on the PMC Fees shall be charged. extra as applicable from time to time: The PMC Fees shall not include' the 'site expenses including directly allocable staff for execution of project.
"Construction Cost" for the purpose of this clause means and includes entire cost of development, design construction and handing over of the project (excluding cost of land, financing cost, selling and marketing cost). b) 3% of Total Sales. Value of the Project (hereinafter referred to as "Marketing Fees '') towards marketing, sales activities carried out by the subscriber on behalf the company for the project. All taxes and levies on the marketing fees shall be charged extra as applicable from time to time. The marketing Fee excludes the cost of all manpower, administrative overhead, incentive, and brokerage, for the sales and marketing of the project.
"Total Sales Value" for the purposes of this clause shall mean the gross sales proceeds received from all revenue streams of the project excluding the statutory charges/taxes recovered as reimbursement. c) Marketing Fees and PMC Fees shall be paid by the company to the subscriber in following manner:
(i) The subscriber shall raise a debit note/invoice, on the company for the marketing fees. and Pl,..1C fees and applicable service tax on quarterly basis.
(ii) company shall make payments of the marketing fees within J 5 (Fifteen) days the date of the said debit note/invoice.
Iii) The company shall be solely responsible for paying TDS on marketing fees and PMC Fees and shall provide the subscriber with the necessary certificates to this effect.. .
All aforesaid fees mentioned in clause 5.5.2 (a) and (b) above shall be reconciled on annual basis from the agreement date and any excess payment received by the subscriber shall be adjusted in the subsequent debit notes. "
A perusal of the aforementioned relevant clauses shows that the marketing fees paid by the assessee does not include cost of manpower, administrative overheads, incentive and brokerage for the sale and marketing of the project. Even before us, no evidence has been furnished to demonstrate that any such services were rendered by Tata Housing Development Co. Ltd. The claim that Tata Housing Development Co. Ltd has given brand image to the project of the assessee by lending its name does not hold any water, in as much as, Tata Housing Development Co. Ltd is in joint venture in the project and is already associated and connected with the project and, therefore, it cannot justify the marketing fees for brand building.
Considering the fact that no demonstrative evidences have been brought on record, neither before the lower authorities nor before us, we do not find any reason to interfere with the findings of the ld. CIT(A). Ground No. 3 is, accordingly, dismissed.
The underlying facts in Ground Nos. 4 and 5 are same.
Therefore, both these grounds are taken up together for adjudication.
Both the representatives were heard at length.
The root cause for the quarrel is how the revenue needs to be recognized in the case of the assessee, whether it is Accounting Standard 7 [AS 7] or Accounting Standard - 9 of the Institute of Chartered Accountants of India. Interestingly, throughout the assessment proceedings, and even at the initial stage of appellate proceedings, the assessee has been consistently harping upon the applicability of AS-7.
In fact, in one of its submissions before the Assessing Officer, the assessee emphatically claimed that he was following AS-7 Construction Contract Method for the purpose of recognizing revenue. It was only during the appellate proceedings the assessee changed his stand and claimed that AS-9 should be followed for recognizing revenue. Even before us, the ld. counsel for the assessee consistently argued for applicability of AS-9 and Guidance Note and vehemently stated that financial statement of the assessee clearly explains the revenue recognition method in the Notes of Accounts and, therefore, the same should be followed.
We are of the considered view that the assessee cannot be allowed to keep changing its stand for applicability of Accounting Standard. Moreover, the revenue can be recognized by several methods of accounting as long as the same result is obtained by any one of the Accounting methods. For this proposition, we derive strong support from the ratio laid down by the Hon'ble Supreme Court in the case of Bilahari investment Pvt Ltd 299 ITR 1.
Most commonly used methods of accounting are:
i) Percentage of Completion Method [POCM], and ii) POCM which tries to attain periodic recognition of income in order to reflect current performances
The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract.
The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract.
Second popular method is completed contract method in which the revenue is not recognized until the contract is complete. In this method, the costs are accumulated during the course of contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. This method determines the results only when the contract is completed.
In this background, accepting that the assessee has been following the POCM, we find that the assessee has computed the costs of sales and quantum of revenue recognized for the year under consideration as under:
Budget Construction/sol % total d Saleable Area 680495 323210 (A) 680495 323210 47.50 Sale order book 3672351285 3672351285 (B)
Construction 626936787 2223575970 cost Land 1072079297 1072079297 development Interest cost 487096248.2 366553476.8 .3782751515 2065569560 (C) 54.60 Revenue (B) X% I 2005285570 01 (C) Cost of sale (C) X% 981069277 • o/(A)
The first error committed by the Assessing Officer in his computation is that instead of construction area sold 323210, he took the budgeted area of 680495, which resulted into percentage of completion achieved at 59.20 instead of 54.60. In our considered opinion, the Assessing Officer ought to have taken area which has been sold by the assessee and not the budgeted total area.
The second quarrel is in relation to the addition of EDC Rs. 19,63,68,720/- and Project management consultancy charges. Rs. 13,60,00,000/-. The reason for not accepting these costs given by the Assessing Officer is that these were not included in the budgeted costs and, therefore, were not approved while determining the budgeted construction cost.
According to the Assessing Officer, budgeted construction cost was only Rs. 192,62,40,037/-, whereas the assessee has computed the profit by taking cost at Rs. 222,35,75,970/-, which resulted into percentage of completion at 59.20 instead of 54.60 computed by the assessee. The same can be understood from the following chart:
Budget total Construction/sol % d Saleable Area 680495 323210 (A) 680495 323210 47.50 Sale order book 3672351285 (B) 3672351285
Construction 626936787 2223575970 cost Land 1072079297 1072079297 development Interest cost 366553476.8 487096248.2 .3782751515 2065569560 (C) 54.60 I Revenue (B) X% 2005285570 01 (C) Cost of sale (C) X% 981069277 • o/(A)
The ld. counsel for the assessee vehemently argued for inclusion of these two costs saying that even if they were not included in the budgeted cost, still they were part of the construction and cannot be excluded.
The ld. DR vehemently stated that in so far as project management consultancy charges is concerned, no evidence has been furnished by the assessee for rendition of these services and therefore, the same cannot be included and for EDC, the ld. DR relied upon the findings of the Assessing Officer.
In our considered opinion, in so far as Project Management Consultancy charges are concerned, there is no dispute that there is no evidence on record to suggest that these services were actually rendered to the assessee. Therefore, the Assessing Officer has rightly excluded this cost.
However, in so far as EDC is concerned, even if the same were not included in the budgeted cost, but were actually paid to HUDA and, therefore, has to be included in the project cost. We, accordingly, direct the assessee Assessing Officer to exclude only Rs. 13,60,00,000/- from the computation. To sum up, the Assessing Officer is directed to recompute the revenue for the year after taking into consideration the saleable area 323210 and including the EDC of Rs. 19,63,68,720/-. With the above directions, Ground Nos. 4 and 5 are partly allowed.
The underlying facts in Ground No. 6 are that during the course of appellate proceedings, the ld. CIT(A) noticed that there were related party transactions made by the assessee. Invoking the powers of enhancement, the ld. CIT(A) issued a notice of enhancement as under:
"Regarding the disallowance of Rs. 19,63,68,720/- on account of external development charges, you have contended that the charges were incurred by you for the project. However, as per the documents filed by you it is seen that in note 17 of the balance sheet under the head other non-current assets, you have shown the following amount: Rs. 1,78,37,798/-
Further as per note 17.2 it has been mentioned as under: -
“Long term receivables pertain to the amount recoverable from shareholder M/s. CSN estates private limited for external development charges paid by the company in respect of land belonging to CSN.
Apparently, the total payments made on account of the EDC include payments made on behalf of a related party, M/s. CSN estates private limited You are accordingly requested to furnish the following details : -
Date wise details of EDC/IDC charges paid by you (i) pertaining to the land for which development rights were acquired by you .
-/(ii}::- Date wise details of payments of EDC/IDC charges and interest with regard to land belonging to M/s CSN Estate Pvt. Ltd (iii) Was any interest charge from M/is CSN Estate Pvt. Ltd with regard to the aforesaid payments of EDJ/IDC.
(iv) In case no interest was charged please explain why proportionate interest on these payments may not be disallowed u/s 36(1)(ii) Income Tax Act and your income may not be enhanced accordingly”
The assessee filed detailed reply which reads as under:
"The appellant company has paid EDC and .ioc to Department of Town and Country Planning, Haryana (hereinafter referred to as (DTCP,) by opting for installment system of payments. Licence bearing no. 85, 86 and 105 has been obtained for undertaking construction for its project in the area and against each of these licences, appellant company has paid EDCI IDC in installments to DTCP.
Your honor has asked to furnish the following details:
Date wise detail of EDC paid to HUDA pertaining to land for which development rights were acquired The same is attached at annexure
19 at page 351 to 358 of the paper book. --
Date wise detail of payments of EDC charges with regard to land belonging to M/s CSN Estate Pvt. Ltd. It is submitted that the payments detail submitted against point (i) above is valid here. The payments are not made separately but as one for the complete parcel of land. It is then recovered from CSN through adjustment of the outstanding loan. The amount is calculated on the basis of the area of the owners share.
Detail of interest charged from M/s CSN on payments of EDC. It is submitted that the amounts recovered from CSN is the complete installment amount which includes principal and interest. There is no separate interest charged from CSN
Explain why proportional interest 017 these payments may not be disallowed. It is hereby submitted that complete amount of proportionate installment (principal & Interest) is recovered from CSN as and when payment is made. There is no lag in the payment and recovery of proportionate amount from CSN and, therefore, no disallowance of interest is called for.”
Reply of the assessee did not find any favour with the ld. CIT(A) who was of the opinion that the assessee has given huge amount of advance to Tata Housing Development Co. Ltd which is a related party without charging any interest and has also incurred expenditure on behalf of CSN Estates Pvt Ltd, which is also a related party without any business requirement/commercial expediency and without charging any interest and computed proportionate interest on such interest free advances and enhanced the income by disallowing Rs. 1,96,45,788/-
Before us, the ld. counsel for the assessee vehemently stated that the ld. CIT(A) has travelled beyond the assessment and has made enhancement for new source which was never considered by the Assessing Officer while framing the assessment u/s 143(3) of the Act.
Strong reliance was placed on the decision of the Hon'ble Supreme Court in the case of Rai Bahadur Hardutroy Chamaria 66 ITR 443 and the Hon'ble Delhi High Court decision in the case of Sardari Lal & Co.251 ITR 864.
Per contra, the ld. DR strongly supported the findings of the ld. CIT(A) and stated that the powers of the ld. CIT(A) are co-terminus to that of the Assessing Officer, therefore, the ld. CIT(A) can do what the Assessing Officer can do.
We have carefully perused the orders of the authorities below. It is true that the Assessing Officer has not considered the issue which has been the basis of enhancement done by the ld. CIT(A). The Hon'ble Supreme Court in the case of Rai Bahadur [supra] had the occasion to consider the decision of the Hon'ble Supreme Court in the case of Shapoorji Pallonji Mistry 44 ITR 891 wherein the following question was adjudicated:
"The only question is whether in enhancing the assessment for any year lie 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 to 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 would it 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 sections 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 tri- bunals 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 sections 34 and 33B by 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 Commissioner to enhance the assessment has been accepted by the legislature as the true exposition of the words of the section."
The Hon'ble Supreme Court observed as under:
“The principle that emerges as a result of the authorities of this Court is that the Appellate Assistant Commissioner has no jurisdiction, under s. 31(3) of the Act, to assess a source of income which has not been processed by the Income- tax Officer and which is not disclosed either in the returns filed by the assessee or in the assessment order, and therefore. the Appellate Assistant Commissioner cannot travel beyond the subject- matter of the assessment. In other words, the power of enhancement under s. 31 (3) of the Act is restricted to the subject-matter of assessment or the sources of income which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of die assessee. It was argued by Mr. Vishwanath lyer on behalf of the appellant that by applying the principle to the present case, the Appellate Assistant Commissioner had jurisdiction to enhance the quantum of income of the assessee. It was pointed out that the fact of alleged transfer of Rs. 5,85,000 to Forbesganj branch was noted by the Income-tax Officer and also the fact that it did not reach Forbesganj on the same day. So, it was argued that in the appeal the Appellate Assistant Commissioner had jurisdiction to deal with the question of the taxability of the amount of Rs. 5,85,000 and to hold that it was taxable as undisclosed profits in the hands of the assessee. We are unable to accept the argument put forward on behalf of the appellant as correct. It is true that the Income-tax Officer has referred to the remittance of Rs. 5,85,000 from the Calcutta branch, but the Income-tax Officer considered the despatch of this amount only with a view to test the Genuineness of the entries relating to Rs. 4,30,000 in the books of the Forbesganj branch. It is manifest that the Income-tax Officer did not consider the remittance of Rs. 5,85,000 in the process of assessment from the point of view of its taxability. It is also manifest that the Appellate Assistant Commissioner has considered the, amount of remittance of Rs. 5,85,000 from a different aspect, namely, the point of view of its taxability. But since the Income-tax Officer has not applied his mind to the question of the taxability or non- taxability of the amount of Rs. 5,85,000, the Appellate Assistant Commissioner had no jurisdiction, in the circumstances of the present case, to enhance the taxable income of the assessee on the basis of this amount of Rs. 5,85,000 or of any portion thereof. As we have already stated. it is not open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income- tax Officer with a view to find out new sources of income and the power of enhancement under s. 31(3) of the Act is restricted to the sources of income which have been the subject-matter of consideration by the Income-tax Officer from the point of view of taxability. In this context "consideration" does not mean "incidental" or "collateral" examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied Ms mind to the 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 it is manifest that the Income-tax Officer has not considered the entry of Rs. 5,85,000 from the point of view of its taxability and therefore the Appellate Assistant
Commissioner had no jurisdiction, in an appeal under s.31 of the Act, to enhance the assessment.”
The Hon'ble Delhi High Court 251 ITR 864 again considered the two decisions of the Hon'ble Supreme Court [supra] as under:
A similar question has been examined by the Apex Court as noted above, on several occasions. We do not think it necessary and appropriate to proliferate this judgment by making reference to all the decisions. A few of the important ones need to be noticed. One of the earliest decisions on the point was in CIT v. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC). The matter related to the corresponding provisions of the Indian Income Tax Act, 1922 (hereinafter referred to as "the old Act"). It was held, inter alia, that in an appeal filed by the assessed, the Appellate Assistant Commissioner has no power to enhance the assessment by discovering a new source of income not considered by the Income Tax Officer in the order appealed against. A similar view was expressed in CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC). That also related to a case under section 31(3) of the old Act. It was held that the power of enhancement under section 31(3) of the old Act was restricted to the subject- matter of the assessment or the source of income, which had been considered expressly or by clear implication by the assessing officer from the point of view of taxability and that the Appellate Assistant Commissioner had no power to assess the source of income, which had not been taken into consideration by the assessing officer. It is to be noted that strong reliance was placed by learned counsel for the revenue on the decision of the Apex Court in CIT v. Nirbheram Daluram (1997) 224 ITR 610. It was submitted that a different view was expressed about the scope and ambit of the power of the first appellate authority vis-a-vis the sources considered by the assessing officer and even if the action of the first appellate authority related to a new source of income not considered by the assessing officer, it was not impermissible. It is to be noted that in Union Tyres' case (supra), this decision was also considered by this court in the background of what had been stated in Daluram's case (supra) and it was observed that there was really no difference from the view expressed earlier in Shapoorji's case (supra) and Chamaria's case (supra).”
The gist of the aforementioned decisions is that whenever the question of taxability of income from new source of income is concerned, which had not been considered by the Assessing Officer, jurisdiction to deal with the same in appropriate cases may be dealt with u/s 147/148 of the Act and u/s 263. It is unconceivable that in the presence of such specific provisions a similar power is available to the first appellate authority.
56. Respectfully following the ratio laid down by the Hon'ble Supreme Court /High Court we do not find any merit in the addition made by the ld. CIT(A) and the same is directed to be deleted. Ground No. 6 is allowed.
In the result, the appeal of the assessee is partly allowed.
Coming to Revenue’s appeal, the grounds raised by the Revenue read as under;
“i) . Ld. CIT(A) has erred in deleting the addition of RS.108.44 Crores out of total addition of Rs. 257.19 Crores made by the Assessing Officer on account of difference of revenue as computed budgeted cost and as per Percentage of Completion method.
(ii) Ld. CIT(A) has erred in deleting the addition of RS.11.36 Crores out of total addition of RS.22.40 Crores made by the Assessing Officer by invoking the provisions of Section uls 40A(2)(a) of the Act, restricting the rate of interest to 14.55% as against 18% applied by the Assessing Officer.
(iii) That the appellant craves for the permission to add, delete or amend grounds of appeal before or at the time of hearing of appeal.”
59. Issue raised vide Ground No. (1) has been considered by us while deciding the appeal of the assessee at Ground Nos. 4 and 5 of that appeal. For our detailed discussion therein, This ground is partly allowed.
60. Grievance raised vide Ground No. (ii) is identical to the grievance considered by us while deciding the appeal of the assessee at Ground No. 2 of that appeal. For our detailed discussion therein, this ground is allowed for statistical purposes.
In the result, the appeal of the Revenue is partly allowed.
To sum up, in the result the appeal of the assessee in Revenue in are partly allowed
The order is pronounced in the open court on 12.05.2023.