2021 (1) TMI 325 - AT - Income Tax

Tribunal: Assessee's appeal partially allowed, on-money taxed at 10%, interest expenditure allowed.

The Tribunal partially allowed the assessee's appeal by permitting the claim of application of income, restricting the taxability of on-money to 10% in ... Denial of application of income to the Assessee in respect of on-money declared by the Assessee and its sister concern - assessee submitted that the Assessing Officer as well as the Ld.CIT(A) erred in rejecting the claim of the Assessee since no disallowance could at all have been made in the absence of a specific show cause notice regarding the same to enable the assessee a reasonable opportunity to set out its case - HELD THAT:- Claim of the assessee as regards application of income could not be denied. We also find that the Ld.CIT(A) erred in sustaining the disallowance of application simply on the ground that the project of the Assessee was substantially completed and no further expenditure was required to be incurred is also baseless since the Assessing Officer himself in Para No.2 of the assessment order observed that the project is under construction. The observation of the Ld.CIT(A) is not based on any evidence on record. We further observe that even in the assessment orders for subsequent years the same position is accepted by the Revenue. Thus, the Ld.CIT(A) is not justified in rejecting the claim on such a ground which is clearly contrary to the facts on record. As regards the apprehension of the Ld. DR, that if the claim for application of income is allowed it would nullify the effect of disclosure made by the Assessee, is concerned, we find that once the income has been offered by the Assessee then the application thereof could not be denied because essentially what has been claimed by the Assessee is merely telescoping of the said income into the increase in its WIP of the project from where such receipts were generated. See S. NELLIAPPAN [1967 (5) TMI 6 - SUPREME COURT]. Even in the absence of direct evidence it could be inferred that cash credits reflected incomes kept out of the books by the Assessee and therefore no additions could be made in this . Claim of telescoping/application of income offered by the Assessee we observe that before the Ld.CIT(A), the Assessee has claimed that 10% of the said receipts is liable to be taxed in this year and the balance will be carried forward till the completion of the project. Only the differential amount is allowed to be telescoped i.e. the claim of application is restricted to ₹.42.44 Cr (₹.47.16 Crore (-) 10%) since to the own admission of the Assessee, 10% is the estimated profit element and the balance is on account of expenditure incurred. Accordingly, Grounds Nos. 1(a) to (c) and Additional Grounds 2 to 2.1 are partly allowed. Taxability of on-money declared by the Assessee in its return of income - HELD THAT:- AO has himself accepted that the Assessee is following the project completion method and has accepted the method of offering income at 10% of the incremental receipts in the project and the balance is carried forward to the year of completion of the project. This method has been consistently followed by the Assessee and has been accepted by the Department in earlier as well as subsequent years. Further, it needs specific mention that what has been claimed by the assessee is nothing but postponing the recognition of income to the year in which the project gets completed pursuant to the method regularly followed and even accepted by the Department every year. Not in dispute that the on-money is nothing but part of sale consideration of the flats and parking were sold by the assessee. When once it is part of sale consideration only 10% of such on money is liable to be taxed in this assessment year as per consistent method of accounting followed by the assesse. Thus, the grounds on this issue deserve to be allowed merely on the principle of consistency as laid down by the Hon'ble Supreme Court in the case of Radhasoami Satsang [1991 (11) TMI 2 - SUPREME COURT] - on-money receipts are in the nature of undisclosed receipts and not income per-se and therefore only profit element embedded therein be liable to be taxed and not the entire on-money receipts Year of taxability of on-money - Only 10% of the on-money receipts are liable to be taxed in the relevant assessment year and the balance at the time of completion of the project based on the project completion method regularly followed by the Assessee which has been approved even by the Department consistently every year in the earlier as well as subsequent years. Non-filing of revised return to make this claim - grievance of the Ld. DR that allowing this ground will amount to retraction of the returns and statement of the Assessee are concerned, we find that the same stands addressed by the judgements in the case of Nirmal L Mehta[2004 (4) TMI 43 - BOMBAY HIGH COURT] holding there is no estoppel against statute and the assessee could claim that its income is not taxable even if the same is offered in the return of income. In the cases of Abdul Qayumme [1989 (12) TMI 37 - ALLAHABAD HIGH COURT] and SAIL DSP [2003 (2) TMI 46 - CALCUTTA HIGH COURT] it has been held that no amount of admission could lead to taxing an item if it is not otherwise taxable under the Act. In view of the above facts and judicial precedents, we find in favour of the Assessee and Grounds Nos. 2,3 and 4 are allowed. Disallowance of interest expenditure - HELD THAT:- DR has not controverted the fact that the assessee had sufficient amount of interest free funds available with it in order to advance the same to its sister concerns.Assessee as well as its sister concerns were in the same line of business. In view of the said facts and the law as laid down the disallowance made by the Assessing Officer and as affirmed by the Ld.CIT(A) deserves to be deleted. So far as the Department's appeal is concerned, admittedly the same is agitating against the relief granted by the Ld.CIT(A) relying upon the Remand Report of the Assessing Officer himself. In our view, when the Assessing Officer has himself held that the borrowing is for the purpose of business and after considering the same the Ld.CIT(A) has deleted proportionate disallowance, then the same must be affirmed. In view of the above we reject the grounds raised by the Department. Issues Involved:1. Disallowance of expenditure from work-in-progress (WIP) account.2. Taxability of on-money received by the assessee.3. Disallowance of interest expenditure on borrowed funds.4. Admissibility of additional grounds and evidence.Detailed Analysis:1. Disallowance of Expenditure from Work-in-Progress (WIP) Account:The assessee claimed an addition of Rs. 57.16 crores to the WIP account, representing on-money received in cash. The Assessing Officer (AO) disallowed this claim due to lack of evidence of expenditure. The Ld. Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, stating the expenditure might violate Section 37(1) of the Income Tax Act. The Tribunal observed that the AO did not issue a specific show-cause notice regarding the disallowance, and the Ld. CIT(A) made incorrect assumptions about the project’s completion status. The Tribunal admitted additional evidence showing the project was still under construction and allowed the claim of application of income, emphasizing that the statement of Mr. Ramesh Shah, which was used to tax the on-money, should be considered in its entirety.2. Taxability of On-Money Received by the Assessee:The assessee argued that only 10% of the on-money should be taxed in the current year, with the balance taxable upon project completion, as per the project completion method consistently followed and accepted by the department. The Tribunal agreed, noting that taxing the entire on-money in the year of receipt contradicted the accepted accounting method. The Tribunal cited several judgments supporting the view that only the profit element in on-money should be taxed, not the entire receipt, and allowed the assessee’s claim to tax only 10% of the on-money in the current year.3. Disallowance of Interest Expenditure on Borrowed Funds:The AO disallowed Rs. 14.94 crores of interest expenditure, claiming the borrowed funds were diverted to sister concerns for non-business purposes. The Ld. CIT(A) partly allowed the interest expenditure after remand, accepting that Rs. 49 crores were used for business purposes. The Tribunal noted that the assessee had sufficient interest-free funds to cover advances to sister concerns and that such advances were for commercial expediency. The Tribunal relied on judgments from higher courts supporting the allowance of interest expenditure under such circumstances and deleted the disallowance.4. Admissibility of Additional Grounds and Evidence:The Tribunal admitted additional evidence showing the project was still under construction, countering the Ld. CIT(A)’s incorrect observation that the project was substantially completed. The Tribunal emphasized that additional evidence is admissible if the lower authorities did not grant sufficient opportunity to present it. The Tribunal also admitted additional grounds raised by the assessee, noting that legal claims can be raised at any stage of the proceedings.Conclusion:The Tribunal partly allowed the assessee’s appeal, permitting the claim of application of income and restricting the taxability of on-money to 10% in the current year. The Tribunal also deleted the disallowance of interest expenditure and admitted the additional evidence and grounds. The revenue’s appeal was dismissed.