2020 (1) TMI 1112 - AT - Income Tax

ITAT decision: Appeal partially allowed, remand for reconsideration on estimated gross profit addition.

The ITAT partially allowed the Department's appeal, remanding one issue back to the CIT(A) for reconsideration regarding the addition of estimated gross ... Characterisation of receipts and timing of sale for revenue recognition - treatment of fitment/renovation charges as revenue expenditure because costs are part of stock-in-trade - disallowance under Section 36(1)(iii) for interest on borrowed funds applied to interest-free advances - treatment of advances to sister concern and requirement of nexus with borrowed funds - remand for fresh consideration by appellate authority where lower appellate order does not record specific factual findingsCharacterisation of receipts and timing of sale for revenue recognition - remand for fresh consideration by appellate authority where lower appellate order does not record specific factual findings - Deletion of addition on estimated gross profit for alleged anti-dated sale to M/s. Bansal Corporation Ltd. was set aside and remanded to Ld. CIT(A) for fresh decision. - HELD THAT: - The Assessing Officer treated an agreement dated 31.03.2007 as an anti-dated arrangement and made an addition by estimating gross profit at 15% on deemed sales, observing that the alleged transfer had not occurred in substance and had the effect of avoiding MAT. The Ld. CIT(A) deleted the addition by relying on the preceding year's assessment which treated the transaction as sale. The Tribunal found that the assessment order for A.Y. 2007-2008 placed on record is silent on the disputed matter and that the AO in the impugned assessment had recorded specific factual findings distinguishing the present year from the preceding year. Because the CIT(A) did not address those factual findings and gave no specific reasons while simply following the earlier order, the Tribunal concluded that the matter requires reconsideration. The Tribunal therefore set aside the CIT(A)'s decision and restored the issue to the CIT(A) to decide afresh after giving the assessee reasonable opportunity of being heard and after recording specific findings of fact and reasons for decision. [Paras 6]Issue remanded to Ld. CIT(A) for fresh adjudication with directions to consider the AO's factual findings and to record reasons while deciding the deletion of the addition.Treatment of fitment/renovation charges as revenue expenditure because costs are part of stock-in-trade - Deletion of addition disallowing fitment and project/construction expenses incurred for developed commercial shops, held to be revenue in nature and not capital. - HELD THAT: - The assessee, a developer of commercial complexes, incurred fitment charges and payments for renovation, civil work and interior to facilitate leasing. The AO characterised these payments as capital and disallowed them. The CIT(A) accepted the assessee's explanation that the costs form part of stock-in-trade of the commercial project, that no new capital asset came into existence, and that such expenditures are incurred to secure and maintain occupancy (revenue purpose). The Tribunal agreed that in the context of the assessee's business and accounting treatment (costs included in inventory and charged to profit and loss), the expenditures pertained to business income and were therefore revenue in nature. The AO had given no finding of creation of a new capital asset to justify capitalisation. [Paras 10]Addition deleted; fitment and related construction expenses treated as revenue expenditure and allowable.Disallowance under Section 36(1)(iii) for interest on borrowed funds applied to interest-free advances - treatment of advances to sister concern and requirement of nexus with borrowed funds - Deletion of addition disallowing proportionate interest on account of interest-free advances to sister concern upheld. - HELD THAT: - The AO proportionately disallowed interest invoking Section 36(1)(iii), treating advances as made out of borrowed funds. The assessee produced details showing that borrowed funds had decreased during the year and advances to sister concern had substantially reduced; further, the assessee had sufficient own funds (share capital and reserves) to account for the advances. The CIT(A) deleted the addition and the Tribunal found no reason to interfere: the facts showed reduction of advances and availability of own funds, the AO did not establish any nexus showing utilisation of interest-bearing borrowed funds for the advances, and the approach is in line with the principle that interest-free advances out of own funds are not hit by Section 36(1)(iii). The Tribunal treated the matter as covered by Supreme Court authority permitting allowance where own funds suffice. [Paras 15]Addition deleted; no disallowance of interest justified in absence of proof that interest-bearing borrowed funds were used for interest-free advances.Final Conclusion: The Department's appeal is allowed in part for statistical purposes by remanding the issue of estimated gross profit on the alleged sale to M/s. Bansal Corporation Ltd. to the Ld. CIT(A) for fresh consideration; the challenges to the deletions relating to fitment/construction expenses and the disallowance of interest are dismissed and the additions deleted. Issues:1. Addition of estimated gross profit on deemed sales of commercial space.2. Disallowance of expenses incurred on project and construction expenses.3. Disallowance of interest paid.Issue 1: Addition of Estimated Gross Profit on Deemed SalesThe Revenue challenged the deletion of an addition of Rs. 2,18,61,518 made by the Assessing Officer (A.O.) on account of estimated gross profit at 15% of deemed sales of commercial space. The A.O. added this amount based on an agreement dated 31.03.2007, considering it as an anti-dated document. The assessee argued that the sale to M/s. Bansal Corporation Ltd. was genuine and had been accepted in the previous assessment year. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, but the Income Tax Appellate Tribunal (ITAT) found that the matter needed reconsideration at the CIT(A) level due to lack of discussion on relevant facts. The ITAT remanded the issue back to the CIT(A) for a fresh decision, emphasizing the need for specific factual findings.Issue 2: Disallowance of Expenses on Project and ConstructionThe Revenue contested the deletion of an addition of Rs. 47 lakhs made by the A.O. for disallowance of expenses on project and construction. The A.O. treated these expenses as capital in nature, but the assessee argued that they were revenue expenses related to the business of developing commercial complexes. The CIT(A) accepted the assessee's contention, highlighting that the expenses were revenue in nature as they were related to the stock-in-trade of the business. The ITAT upheld the CIT(A)'s decision, emphasizing that the nature of the business justified treating the expenses as revenue expenditure.Issue 3: Disallowance of InterestThe Revenue challenged the deletion of an addition of Rs. 86,92,045 on account of disallowance of interest. The A.O. disallowed a proportionate amount of interest paid by the assessee, citing Section 36(1)(iii) of the Income Tax Act. The assessee demonstrated that the borrowed funds were not used for interest-free advances to sister concerns, and the CIT(A) deleted the addition. The ITAT upheld the CIT(A)'s decision, noting that the assessee had sufficient funds and no nexus was established between interest-free advances and borrowed funds. The ITAT dismissed the Revenue's appeal, citing the precedent set by the Supreme Court in similar cases.In conclusion, the ITAT partially allowed the Department's appeal for statistical purposes, remanding one issue back to the CIT(A) for reconsideration while upholding the CIT(A)'s decisions on the other issues based on the facts and circumstances presented.