2019 (4) TMI 562 - AT - Income Tax

Tribunal allows appeal on disallowance, upholds deletion of addition for stagnant liabilities, sets aside compensation payment for verification.

The Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A of the Income Tax Act, directing the AO to delete the disallowance ... Disallowance u/s 14A of the Act read with rule 8D - No exempt income earned - HELD THAT:- Undisputedly during the year, the assessee has not earned any exempt income. In absence of any exempt income earned by the assessee, no disallowance can be made u/s 14 A as held by the honourable Delhi High Court in case of Cheminvest vs CIT [2015 (9) TMI 238 - DELHI HIGH COURT]. Therefore, respectfully following the decision of the honourable Delhi High Court no disallowance can be made u/s 14 A of the income tax act in case of the assessee wherein it has not earned any exempt income. Accordingly the orders of the lower authorities are reversed and the learned assessing officer is directed to delete the above disallowance. Addition account of unchanged S. Creditors u/s 41(1) - unchanged in the creditors for last 3 years - assessee company is a public limited company and - All the amount of the creditors in the financial statement of the company had itself admitted liabilities - HELD THAT:- merely because such creditors are stagnant the liabilities do not ceased to exist. Hence no addition can be made under section 41 (1) as held by the honourable Supreme Court in COMMISSIONER OF INCOME-TAX VERSUS SUGAULI SUGAR WORKS PVT. LIMITED [1999 (2) TMI 5 - SUPREME COURT] and the honourable Delhi High Court in CIT VERSUS HOTLINE ELECTRONICS LTD [2011 (12) TMI 90 - DELHI HIGH COURT]. Disallowance of payment of compensation - debited to the profit and loss account as project expenses - assessee was to launch some plot development and group housing schemes and offered at a very attractive price. However later on it realized that it would not be viable for the company to deliver the project properties at such a low price and that if the company holds the stock the same can give better results in future and paid compensation - as per AO above amount should have been shown as project expenditure and from year to year should have been carried in the project account and not in the profit and loss account as assessee following PCM method - CIT(A) allowed stating project itself was given up is not viable there is no question of the compensation being added to the cost of the project - HELD THAT:- in the present case no such facts have been demonstrated that what the real reasons for cancellation of the bookings are. The assessee has given a very general answer that the property could be used for better options. Therefore, the decision of the honourable Delhi High Court in GOPAL DAS ESTATES AND HOUSING PVT. LTD. VERSUS COMMISSIONER OF INCOME TAX [2019 (3) TMI 1272 - DELHI HIGH COURT] does not help the case of the assessee. learned AO has looked at from the angle that whether the project expenses are required to be loaded in the project cost or not on the basis of method of accounting followed by the assessee. In the present case, it is also not coming out from the facts which method of accounting the assessee has followed as already stated above. In view of the above facts, we set aside whole issue back to the file of the learned assessing officer with a direction to the assessee to show that (a) what is the method of accounting employed by the assessee, (b) what the booking was made for stating the nature of the property, the area booked, the rate at which it is booked, consideration paid by the buyers, the relevant agreements between the buyer and the assessee, (c) reasons for cancellation of such bookings, (d) relevant agreements made at the time of surrender of booking, (e) rate of compensation paid,(f) Whether it is in nature of interest or business expenditure, if the provisions of tax deduction at source applies to it or not. The learned AO may examine the same and then decide the issue about the allowability of such claim in accordance with law after affording proper opportunity of hearing to the assessee. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Addition on account of unchanged sundry creditors under Section 41(1) of the Income Tax Act.3. Addition on account of payment of compensation.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The assessee, a real estate development company, filed its return of income declaring an income of INR 86,348,010, which was later assessed at INR 119,118,713 by the Assessing Officer (AO). The AO made a disallowance of INR 2,304,177 under Section 14A, arguing that the company had investments of INR 145,000,000 and must have incurred expenditure related to these investments. The assessee contended that it had not earned any exempt income, and thus, no disallowance under Section 14A was warranted. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, relying on the Delhi High Court judgment in Maxopp Ltd vs CIT. However, the Tribunal reversed the lower authorities' decisions, citing the Delhi High Court's ruling in Cheminvest vs CIT, which held that no disallowance under Section 14A can be made if no exempt income is earned. Consequently, the Tribunal allowed the assessee's appeal and directed the AO to delete the disallowance of INR 2,304,177.2. Addition on account of unchanged sundry creditors under Section 41(1) of the Income Tax Act:The AO added INR 1,098,998 to the assessee's income, arguing that certain sundry creditors had remained unchanged for over three years, suggesting that these liabilities no longer existed. The assessee argued that these were admitted liabilities and could not be written off without mutual consent from the creditors. The CIT(A) deleted the addition, relying on Supreme Court and Delhi High Court judgments, which held that merely because liabilities are stagnant does not mean they cease to exist. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not provided any material evidence to prove that the liabilities had ceased to exist. The Tribunal dismissed the AO's appeal on this ground.3. Addition on account of payment of compensation:The AO disallowed INR 26,227,500 claimed as compensation payment, arguing that these expenses were related to project expenses and should be capitalized in the work-in-progress account as the assessee was following the percentage completion method. The assessee explained that the compensation was paid to investors who were given an exit after the company decided not to proceed with a project due to viability issues. The CIT(A) allowed the claim, stating that since the project was abandoned, the compensation could not be added to the project cost. However, the Tribunal found inconsistencies in the method of accounting followed by the assessee and the lack of detailed evidence regarding the compensation payments. The Tribunal set aside this issue, directing the AO to verify the method of accounting, the nature of the property booked, reasons for cancellation, and other relevant details before making a final decision. The Tribunal allowed the AO's appeal for statistical purposes on this ground.Conclusion:The Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A and upheld the CIT(A)'s decision to delete the addition on account of unchanged sundry creditors. However, it set aside the issue of compensation payment for further verification by the AO, thereby partly allowing the AO's appeal for statistical purposes.