2021 (8) TMI 35 - AT - Income Tax

ITAT dismisses department's appeals; assessee's appeal allowed on ground rent disallowance. Legal principles upheld.

The ITAT dismissed the department's appeals on all issues except for the ground rent disallowance, where the assessee's appeal was allowed. The decisions ... Addition on account of cessation of Liability u/s 41(1)/28 - addition made on the ground that certain trade creditors/liabilities were appearing in the Balance Sheet for more than 3 years and have ceased to exist and represented remission of liability liable to be taxed u/s 41(1) - HELD THAT:- Admittedly, the liabilities/creditors continue to appear in the audited accounts of the assessee as on 31.03.2008 and assessee has not written back these amounts. Hon’ble Supreme Court in the case of CIT Vs. Singauli Sugar Works [1999 (2) TMI 5 - SUPREME COURT] have explained the provisions of section 41(1) and has held that so long liabilities are continuously shown and admitted in the audited accounts, the same do not cease to exist. CIT (A) has taken a correct legal view of the matter and has correctly deleted the addition. We uphold the action of CIT (A) on this issue and dismiss this ground of appeal of the department. Depreciation of account of computer peripherals such as printers and UPS etc. - HELD THAT:- Both the parties fairly agreed that this issue is now settled by the judgments of CIT v. BSES Yamuna Power Ltd. [2010 (8) TMI 58 - DELHI HIGH COURT] and in the case of Birla Soft Ltd. [2014 (2) TMI 1343 - SC ORDER] - Respectfully, following these judgments, it is held that CIT (A)’s order on this issue does not need any interference and is hereby upheld. The Ground No. 3 raised by the department is accordingly dismissed. Disallowance of Foreign Tour Expenses of wife of one of the Directors of the company - HELD THAT:- As decided in judgment of Hon’ble Gujarat High Court in the case of Sayaji Iron & Engineering Ltd. [2001 (7) TMI 70 - GUJARAT HIGH COURT] to claim that there cannot be any personal element in the hands of the corporate entity and disallowance made by the AO was wholly unjustified - Decided against revenue. Losses claimed in respect of Dwaraka Project - According to the Department, these losses had been worked out by the assessee on estimated basis and in an unscientific manner - main reason given by the Assessing Officer was that very small amount of expenditure had been incurred by the assessee on the project till Assessment Year 2008-09 and only 30% of the area in respect of that project had actually been booked by the assessee and necessary revenue had been recognized in respect of the same - HELD THAT:- Transaction between the related parties is genuine is not in dispute. The Ld. AO has also accepted this aspect and the only reason for restricting the cumulative loss of ₹ 44 Crores in A. Y. 2008- 09 and A. Y. 2009-10 as noted from assessment order for A. Y. 2009-10 is the reduction of discount actually allowed by assessee @ 31.5% to 5%. Therefore, so long as transactions between the transacting parties are genuine, no challenge can be thrown to the prices decided between the parties. The AO has subsequently in A. Y. 2010-11, 2011-12 and 2012-13 accepted both the cost of the project and the sales actually realized in line with the previous year’s estimation. A cumulative appreciation of all the facts and legal position as gathered and applicable to the facts of this case on this ground would lead to a natural conclusion that AO was not justified in disallowing losses in A. Y. 2008-09 and also in A. Y. 2009-10. Whether the order of Ld. CIT (A) requires any change visà- vis total losses of this project having been allocated in the manner indicated by him in his order? - Since the assessee as well as department has already acted upon the order of Ld. CIT (A) by filling appeals and cross-appeals and keeping in view the fact that tax rates in each of these years was the same as also admitted by the Ld. AR, we feel that no useful purpose will be served to accept this settled assessment history of the assessee. We, therefore, are of the view that allocation done by Ld. CIT(A) for the total losses of ₹ 45.72 Crores incurred by the assessee over the period of project running into 5 years started from A. Y. 2008-09 to A. Y. 2012-13, which allocation as already clarified has been acted upon both by the assessee as well by the department, there is no reason for us to give any directions on this submission of the assessee and action of Ld. CIT(A) on this issue of allocating the losses to various years is found justified and is hereby upheld. Accordingly, in view of our aforesaid reasoning, grounds of appeal raised by the department. Addition of sale promotion expenses - disallowance was made by the AO on the reasoning that directors of the company had incurred these expenses through their personal credit cards and the element of personal nature in such expenses cannot be ruled out - AO disallowed 20% of the total expenses debited under the head ‘Sale Promotion’ on that reasoning on an estimated and adhoc basis - HELD THAT:- CIT (A) correctly observed that company is an artificial legal entity and incapable of incurring any personal expenses. For this legal proposition, the Ld. CIT (A) followed the judgment of Hon’ble Gujarat high Court in the case of Sayaji Iron & Engineering Co. . [2001 (7) TMI 70 - GUJARAT HIGH COURT] - Decided against revenue. Addition of bad debts written off - AO disallowed on account of bad debts written off, which mainly represented the advances given to various parties who were suppliers of the assessee in the ordinary course of its business - AO disallowed this amount on the plea that the amount written off are not covered u/s 36(1)(vii) - CIT (A) deleted this disallowance by holding that if the advances given to the supplier and the expected goods and services are not received against such advances and become irrecoverable, the same represent business loss u/s 28 and are allowable u/s 37 even if the same are not allowable u/s 36(1)(vii) of the Income Tax Act - HELD THAT:- At the time of hearing both the parties fairly agreed that the order of CIT (A) does not need any inference. We also find support on this issue from the judgment of Hon’ble Supreme Court in the case of Badridas Daga [1958 (4) TMI 2 - SUPREME COURT] wherein it has been held that amounts advanced in the ordinary course of business which become irrecoverable are allowable as business losses. The order of Ld. CIT(A), therefore, on this issue is upheld and this ground of appeal of the department is dismissed. Disallowance of rent on lease hold properties to L& DO - according to the AO this amount is not allowable u/s 43B and shall be allowed only in the year in which this is actually paid by the assessee - HELD THAT:- The nature of such amount, i.e., amount payable towards misuse of premises and illegal construction was held to be in the nature of ground rent by following the judgment of Hon’ble Delhi High Court in the case of Gulab Singh & Sons (P) Ltd.[1973 (3) TMI 26 - DELHI HIGH COURT]. It was amongst others held that ground rent does not come under any items mentioned in the various clauses of section 43B. Although the main issue in that case was of allowability of such amount u/s 24 of the Income Tax Act but still the issue of allowability of ground rent from the perspective of section 43B was also considered and it was held that ground rent is not disallowable by applying the provision of section 43B. As relying on case of K. Narendra [2001 (4) TMI 185 - ITAT DELHI-D] we hold that the provision of section 43B are not applicable to the ground rent and disallowance made by the AO and upheld by Ld. CIT(A) is hereby directed to be deleted. Issues Involved:1. Disallowance of Rs. 7,90,230/- on account of replacement fund.2. Deletion of addition of Rs. 93,040/- on account of cessation of liability u/s 41(1)/28.3. Deletion of disallowance of Rs. 72,199/- on account of excessive depreciation on printers/UPS.4. Restriction of disallowance of foreign traveling expenses to Rs. 2,00,000/-.5. Allowance of losses amounting to Rs. 18.52 crores in the Dwarka Project.6. Disallowance of Rs. 1,32,355/- u/s 41(1)/28 for A.Y. 2009-10.7. Deletion of disallowance on account of excessive depreciation on printers/UPS for A.Y. 2009-10.8. Disallowance of Rs. 1,38,740/- on account of sale promotion expenses.9. Disallowance of Rs. 15,11,300/- on account of bad debts written off.10. Disallowance of Rs. 10,47,025/- incurred as ground rent on leasehold properties to L&DO.Issue-Wise Detailed Analysis:1. Disallowance of Rs. 7,90,230/- on account of replacement fund:The assessee opted not to press the solitary ground raised in its appeal pertaining to the disallowance of Rs. 7,90,230/- on account of replacement fund. Consequently, the appeal filed by the assessee was treated as dismissed.2. Deletion of addition of Rs. 93,040/- on account of cessation of liability u/s 41(1)/28:The department's appeal challenged the deletion of an addition of Rs. 93,040/- made by the AO on account of cessation of liability. The AO relied on the judgment of the Hon’ble Supreme Court in the case of CIT v/s T. V. Sundram Iyenger & Sons Ltd., asserting that the liability had ceased to exist. The CIT(A) deleted the addition, referencing the Supreme Court's judgment in CIT Vs. Singauli Sugar Works, which clarified that liabilities shown in audited accounts do not cease to exist merely due to the expiry of the limitation period. The ITAT upheld the CIT(A)'s decision, dismissing the department's ground of appeal.3. Deletion of disallowance of Rs. 72,199/- on account of excessive depreciation on printers/UPS:The AO reduced the depreciation claim on computer peripherals such as printers and UPS, treating them as ordinary plant and machinery items. The CIT(A) allowed the higher depreciation rate as claimed by the assessee, following judgments from the Delhi High Court and the Supreme Court. The ITAT upheld the CIT(A)'s decision, dismissing the department's ground of appeal.4. Restriction of disallowance of foreign traveling expenses to Rs. 2,00,000/-:The AO disallowed foreign travel expenses incurred by the wife of one of the directors, considering them personal. The CIT(A) restricted the disallowance to Rs. 2,00,000/-, acknowledging some personal element but recognizing the business purpose. The ITAT upheld the CIT(A)'s decision, dismissing the department's ground of appeal.5. Allowance of losses amounting to Rs. 18.52 crores in the Dwarka Project:The AO disallowed the loss claimed by the assessee, deeming it unscientific and estimated. The CIT(A) allowed the loss based on the Percentage of Completion Method (POCM) and Accounting Standard-7. The ITAT upheld the CIT(A)'s decision, recognizing the validity of the accounting method and the business rationale. The department's appeal on this issue was dismissed.6. Disallowance of Rs. 1,32,355/- u/s 41(1)/28 for A.Y. 2009-10:The department's appeal for A.Y. 2009-10 on the issue of disallowance u/s 41(1)/28 was dismissed by the ITAT, following the same reasoning as in A.Y. 2008-09.7. Deletion of disallowance on account of excessive depreciation on printers/UPS for A.Y. 2009-10:The ITAT dismissed the department's appeal for A.Y. 2009-10 on the issue of excessive depreciation on printers/UPS, following the same reasoning as in A.Y. 2008-09.8. Disallowance of Rs. 1,38,740/- on account of sale promotion expenses:The AO disallowed 20% of the sale promotion expenses incurred through directors' personal credit cards, suspecting personal use. The CIT(A) deleted the disallowance, citing that a company, being an artificial legal entity, cannot incur personal expenses. The ITAT upheld the CIT(A)'s decision, dismissing the department's appeal.9. Disallowance of Rs. 15,11,300/- on account of bad debts written off:The AO disallowed the write-off of advances given to suppliers, not considering them as bad debts u/s 36(1)(vii). The CIT(A) allowed the write-off as a business loss u/s 28. The ITAT upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in Badridas Daga v/s CIT, dismissing the department's appeal.10. Disallowance of Rs. 10,47,025/- incurred as ground rent on leasehold properties to L&DO:The AO disallowed the ground rent, applying section 43B. The CIT(A) upheld the disallowance. The ITAT, referencing the ITAT's judgment in K. Narendra v/s ACIT, held that section 43B does not apply to ground rent, directing the deletion of the disallowance. The assessee's appeal was allowed.Decision:The ITAT dismissed the department's appeals on all issues and upheld the CIT(A)'s decisions, except for the ground rent issue, where the ITAT allowed the assessee's appeal. The detailed analysis provided comprehensive reasoning for each issue, ensuring adherence to legal principles and accounting standards.