2016 (3) TMI 417 - AT - Income Tax

Assessee's Appeal Partially Allowed: Expenses Disallowed, Building Development Remanded for Verification

The Tribunal partly allowed the appeal of the assessee. The disallowance of Rs. 6,73,76,070/- for expenses incurred on license fees, external development ... Allowability of expenditure as part of cost of land - relevance of sale deed and memorandum of understanding for ascertaining purchase consideration - accounting principle of closing stock forming opening stock of next year - remand for factual verification of possession and genuineness of expenditure - levy of interest as consequential reliefAllowability of expenditure as part of cost of land - relevance of sale deed and memorandum of understanding for ascertaining purchase consideration - accounting principle of closing stock forming opening stock of next year - Disallowance of Rs. 6,73,76,070/- by treating licence fees, external development charges and conversion charges as not forming part of cost of land - HELD THAT: - The Tribunal examined the MOU relied upon by the assessee and the sale deed executed between the assessee and the vendor. The sale deed fixed the consideration for the land and did not record any obligation of the vendor to transfer licence fees, conversion charges or development charges to the assessee; it also specified that taxes and charges up to the date of the sale deed were borne by the vendor. Merely recording amounts as work-in-progress or as opening stock in the assessee's books did not, without supporting evidence in the conveyance or in the MOU, establish that those vendor-incurred expenditures formed part of the assessee's cost of acquisition. The Tribunal distinguished the accounting principle that closing stock becomes opening stock of the next year on the facts: the Supreme Court authority relied upon by the assessee did not govern a situation where the written instruments (sale deed/MOU) and the vendor's payments showed the expenditures were incurred by the vendor prior to transfer. In view of the documents on record and the absence of contractual allocation of those charges to the assessee in the sale deed or MOU, the addition made by the AO and confirmed by the CIT(A) was upheld. [Paras 7]Addition of Rs. 6,73,76,070/- confirmed and ground No.1 dismissed.Remand for factual verification of possession and genuineness of expenditure - relevance of contemporaneous vendor certificate and sale deed - Disallowance of Rs. 17,53,000/- claimed as expenditure on development for being incurred prior to purchase - HELD THAT: - The Tribunal noted conflicting documentary material as to the date of possession and the timing and genuineness of the alleged expenditure: the assessee produced a certificate from the vendor asserting possession from 01.04.2007, which conflicted with the sale deed that described delivery of vacant possession upon execution of the deed. Given these material contradictions and the short period (four days) in which the expenditure was said to have been incurred, the Tribunal held that the AO must verify the facts, examine supporting evidence and afford the assessee an opportunity to explain and substantiate the claim. The Tribunal further held that the Supreme Court authority relied upon by the assessee was distinguishable on facts and did not obviate the need for verification. [Paras 9]Issue set aside and remitted to the AO for fresh adjudication after verification; ground No.2 allowed to that extent (remand).Levy of interest as consequential relief - Challenge to levy of interest under the Income-tax provisions - HELD THAT: - The Tribunal treated the challenge to interest as consequential to the substantive tax adjustments. As the appeal was partly decided on substantive grounds and one issue remanded, the appeal against the levy of interest was not entertained separately on merits and was disposed of as consequential. [Paras 10]Ground No.3 dismissed as consequential.Final Conclusion: The appeal is partly allowed: the disallowance of Rs. 6,73,76,070/- is confirmed; the disallowance of Rs. 17,53,000/- is remitted to the AO for fresh verification and decision after affording opportunity to the assessee; the challenge to the levy of interest is dismissed as consequential. Issues Involved:1. Disallowance of Rs. 6,73,76,070/- representing expenditure incurred on license fees, external development charges, and conversion charges of land.2. Disallowance of Rs. 17,53,00,007/- representing expenditure incurred on the development of the building in the financial year 2007-08.3. Confirmation of levy of interest u/s 234B of the Income Tax Act amounting to Rs. 2,15,34,711/-.Issue-wise Detailed Analysis:1. Disallowance of Rs. 6,73,76,070/-:The assessee challenged the disallowance of Rs. 6,73,76,070/- incurred on license fees, external development charges, and conversion charges, arguing these should form part of the cost of land for computing profit on the sale of a commercial block. The Assessing Officer (AO) did not consider these expenses as part of the cost of land since they were incurred prior to the purchase of the land. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the sale deed dated 28.03.2008 included the cost of land at Rs. 8,56,12,280/- inclusive of stamp duty, and the AO meticulously worked out the proportionate cost of land. The CIT(A) found no infirmity in the AO's order, confirming the addition of Rs. 6,73,76,070/-. The Tribunal agreed with the CIT(A), emphasizing that the MOU and sale deed did not support the assessee's claim that these costs should be included in the cost of land. Therefore, the Tribunal upheld the disallowance.2. Disallowance of Rs. 17,53,00,007/-:The assessee contested the disallowance of Rs. 17,53,00,007/- representing expenditure incurred on the development of the building, arguing that this expenditure was incurred in the financial year 2007-08 and should not be disallowed. The AO disallowed the expenditure, noting that it was incurred prior to the purchase of the land and within a short period of four days. The CIT(A) confirmed the AO's decision, stating that the expenditure was incurred before the registration of the sale deed. The Tribunal found that the facts required detailed verification, particularly regarding the possession date and the expenditure incurred. The Tribunal set aside this issue to the AO for fresh consideration, directing the AO to verify the correct date of possession and the genuineness of the expenditure.3. Confirmation of Levy of Interest u/s 234B:The assessee also challenged the confirmation of interest levied under section 234B of the Income Tax Act amounting to Rs. 2,15,34,711/-. The Tribunal noted that this issue was consequential in nature and dismissed the ground.Conclusion:The Tribunal partly allowed the appeal of the assessee. The disallowance of Rs. 6,73,76,070/- was upheld, while the issue of disallowance of Rs. 17,53,00,007/- was remanded back to the AO for fresh consideration. The confirmation of interest under section 234B was dismissed as consequential. The order was pronounced in the open court on 07/03/2016.