FDI expense, cross-examination rights and project completion accounting: key tax additions were deleted on substance and procedure.

Allowability of FDI-facilitation expenditure was upheld where correspondence showed services rendered for the transaction, the arrangement was not with a related party, and the payment was not shown to be capital in nature. An addition based on alleged cash payments to sellers was deleted because the assessee was not supplied the relied-upon statements and was denied cross-examination, and the bank deposits alone did not establish undisclosed consideration. A development agreement was treated as a development arrangement, not an agreement to sell, so the security deposit was not taxable as sale consideration and section 28(va) did not apply. Rejection of books and substitution of the percentage completion method were also rejected because the project completion method was consistently followed and double taxation could not arise on the same receipt.

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Issues: (i) Whether the payment made for facilitating FDI through Asipac was an allowable business expenditure; (ii) Whether the addition based on alleged cash payments to agriculturist sellers could survive without supplying relied-upon statements and cross-examination; (iii) Whether the development agreement was in substance an agreement to sell so that the security deposit constituted taxable business income; (iv) Whether the books of account could be rejected and percentage completion method applied, and whether the resulting addition amounted to double taxation.

Issue (i): Whether the payment made for facilitating FDI through Asipac was an allowable business expenditure?

Analysis: The payment was supported by correspondence showing that Asipac had liaised with the investor and had rendered services in relation to the FDI transaction. The arrangement was not with a related party, the expenditure was incurred for the assessee's business interest, and the fact that the service agreement did not specifically mention this component did not by itself negate the commercial purpose of the payment. The expenditure was not shown to be capital in nature.

Conclusion: The disallowance was not sustainable and the claim was allowed in favour of the assessee.

Issue (ii): Whether the addition based on alleged cash payments to agriculturist sellers could survive without supplying relied-upon statements and cross-examination?

Analysis: The addition rested mainly on statements of two sellers and on cash deposits found in their bank accounts. The assessee was not supplied the statements in time and was denied an opportunity to cross-examine the deponents. The alleged cash deposits in the sellers' accounts did not, by themselves, establish that the assessee had paid undisclosed consideration. The addition was thus founded on material used behind the assessee's back, contrary to settled procedural fairness.

Conclusion: The addition was unsustainable and was deleted in favour of the assessee.

Issue (iii): Whether the development agreement was in substance an agreement to sell so that the security deposit constituted taxable business income?

Analysis: The agreement had to be read as a whole. It was a development arrangement under which the assessee retained ownership of the land, the developer was given rights only for development, and the payment described as security deposit was contingent and linked to the project structure. The subsequent supplemental arrangement and the partial non-implementation of the project showed that the second tranche never fructified. The security deposit could not be treated as sale consideration, and section 28(va) had no application on these facts.

Conclusion: The security deposit was not taxable as sale consideration and the addition sustained by the first appellate authority was deleted in favour of the assessee.

Issue (iv): Whether the books of account could be rejected and percentage completion method applied, and whether the resulting addition amounted to double taxation?

Analysis: The assessee had consistently followed the project completion method, which is a recognized method of revenue recognition for real estate business. The defects pointed out did not justify rejection of books under section 145(3), and the Assessing Officer could not substitute a different method merely because it was viewed as preferable. Since the profit from the land arrangement had already been taxed as business receipt, again taxing project profit on the same component would amount to double taxation.

Conclusion: The rejection of books and substitution of the percentage completion method were not upheld; the related addition was deleted in favour of the assessee.

Final Conclusion: The Department's appeals failed, while the assessee succeeded on the substantive disputed issues, with the result that the overall relief was granted substantially to the assessee.

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