2021 (11) TMI 142 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on business profits, LTCG, professional fees, and capital losses.

M/s Peninsula Land Limited (previously known as Morarjee Realties Ltd.) Versus DCIT – 7 (1), Mumbai And (Vice-Versa)

The Tribunal dismissed the revenue's appeal on all grounds, upholding the CIT(A)'s decisions on issues related to estimation of business profits, LTCG on ... Estimation of business profits of sale of land - profits from construction activities - Conversion of land into stock-in-trade - recognized method of accounting - HELD THAT:- Assessee converted its land into stock-in-trade and thus computed the capital gains as provided in Sec. 45(2) of the Act. The land stood converted into stock-in-trade and the assessee constructed premises / buildings on this land. During the year, the assessee entered into agreement for sale of these premises. For the purpose of revenue recognition, the assessee followed percentage completion of method of accounting. Since project was completed to the extent of 11% during the year as certified by the Architect, the assessee recognized projected revenues to that extent in its books of accounts. The said method was recognized method of accounting as per Accounting Standards issued by ICAI and this method was consistently followed in subsequent years to recognize the revenue. This method was accepted in earlier years also. Therefore, Ld. AO, in our considered opinion, was not justified in rejecting the methodology adopted by the assessee and estimating the business profits on sale of land as well as profits from construction activities separately since the land merged into the stock-in-trade and the premises including the undivided share in the land was sold to various buyers during the year. The perusal of chart placed before us would show that finally, the project has been completed in AY 2010-11 and revenue has been recognized from AYs 2005-06 to 2010-11 based on percentage of completion method of accounting. Therefore, finding no infirmity in the impugned order on this issue, we dismiss ground no.1 of revenue’s appeal. LTCG on conversion of land into stock-in-trade - computation of LTCG on conversion of land into stock-in-trade - FMV as on 01/04/1981 as well as FMV on 24/12/2003 i.e. the date of conversion - HELD THAT:- Viewed from any angle, the substitution of FMV as on 01/04/1981 by Ld.AO cannot be held to be in accordance with law. Therefore, finding no infirmity in the impugned order, in this respect, we dismiss ground no.2 of revenue’s appeal. Disallowance of Professional fees - HELD THAT:- We find that the assessee has furnished name of payees, nature of expenses and the amount paid to each of them - No defect has been pointed out in these details. The expenses are in the nature of certification work, management consultancy, fees for appearance before Tax Authorities, company secretarial work and these expenses are incurred for business purposes of the assessee. Therefore, no fault could be found in the impugned order deleting the estimated disallowance as made by Ld.AO. Deferred revenue expenditure u/s 35DDA - assessee disallowed VRS expenses amortized in books for ₹ 1143.92 Lacs but claimed VRS expenses of ₹ 1866.34 Lacs u/s 35DDA - HELD THAT:- Provisions of Sec.35DDA entitle the assessee to amortize the expenses incurred on voluntary retirement scheme and allow 1/5th of such expenditure starting from the year in which the expenditure has been incurred by the assessee. The perusal of computation of income would show that VRS expenditure has been incurred by the assessee during FYs 2000-01 to 2003-04 and the same are claimed as per the mandate of Sec.35DDA. The same has been claimed to the extent of 1/5th of expenditure incurred in earlier years. The deduction of the same has been allowed to the assessee in past assessments. Therefore, there could be no occasion to disallow the same in this year. Hence, the disallowance of ₹ 1866.34 Lacs has rightly been deleted in the impugned order. So far as the balance expenditure of ₹ 558.65 Lacs is concerned, the perusal of above table would show that majority of these payments are in the nature of wages, ex-gratia payment, leave encashment, gratuity, VRS expenses etc. paid by the assessee. Upon perusal of the same, it could be seen that these are normal business liability of the assessee paid during normal conduct of the business. Therefore, these are incurred wholly and exclusively for the purpose of business and thus qualify for deduction u/s 37(1). This being so, we confirm the stand of Ld. CIT(A) in deleting the same. Computation of Capital Losses - HELD THAT:- As rightly observed by Ld. CIT(A), merely on the basis of intention, a valid claim made within the four corner of the Act, could not be disallowed unless established to the contrary. AO has not conducted any independent enquiry to prove that the above mentioned claims of capital losses were not bona-fide or lacked credentials. Concurring with the same, we would hold that the allegations of Ld. AO and conclusion drawn there-from has no legs to stand. We also concur that the statutory provisions do not empower Ld. AO to substitute actual consideration received by the assessee with hypothetical sale consideration. The consideration which never accrued or which was never received by the assessee could not be brought to tax as capital gains or business income - similar allegations were leveled by Ld. AO in assessment order for AY 2004-05 and few of these allegations have merely been reproduced in the assessment of this year. However, all such allegations as well as disallowances as made in AY 2004-05 stood settled in assessee’s favor by the cited decision of Tribunal for AY 2004-05. We find no reason to deviate from the same. Disallowance of various expenses - disallowance of various expenses, viz. Power and Fuel, Deferred Revenue Expenses, Rent, rates and taxes, Miscellaneous Expenses - CIT-A restricted addition to 25% as against ad-hoc disallowance made by the AO of 75% - HELD THAT:- As rightly observed by Ld. CIT(A), merely on the basis of intention, a valid claim made within the four corner of the Act, could not be disallowed unless established to the contrary. The Ld. AO has not conducted any independent enquiry to prove that the above mentioned claims of capital losses were not bona-fide or lacked credentials. Concurring with the same, we would hold that the allegations of Ld. AO and conclusion drawn there-from has no legs to stand. We also concur that the statutory provisions do not empower Ld. AO to substitute actual consideration received by the assessee with hypothetical sale consideration. The consideration which never accrued or which was never received by the assessee could not be brought to tax as capital gains or business income. It could further be seen that similar allegations were leveled by Ld. AO in assessment order for AY 2004-05 and few of these allegations have merely been reproduced in the assessment of this year. However, all such allegations as well as disallowances as made in AY 2004-05 stood settled in assessee’s favor by the cited decision of Tribunal for AY 2004-05. We find no reason to deviate from the same. Issues Involved:1. Estimation of Business Profits2. Long-Term Capital Gains (LTCG) on Conversion of Land into Stock-in-Trade3. Disallowance of Professional Fees4. Deferred Revenue Expenditure under Section 35DDA5. Computation of Capital Losses on Sale of Shares6. Disallowance of Various ExpensesDetailed Analysis:Estimation of Business Profits:The assessee converted 950,000 square feet of factory land into stock-in-trade in AY 2004-05 and sold 91,628 square feet during AY 2005-06. The assessee computed LTCG at Rs. 585.31 Lacs and followed the percentage completion method for recognizing business profits. The Assessing Officer (AO) rejected this method and estimated business profits separately, resulting in a higher profit estimation of Rs. 2,801.64 Lacs. The CIT(A) accepted the percentage completion method, noting that it was consistently followed and accepted in earlier years. The Tribunal upheld CIT(A)'s decision, dismissing the revenue's appeal on this issue.Long-Term Capital Gains (LTCG) on Conversion of Land into Stock-in-Trade:The AO doubted the valuation of the land and made a reference to the Departmental Valuation Officer (DVO), resulting in a higher FMV and increased LTCG. The CIT(A) directed the AO to adopt the FMV as determined by the DVO and accepted the FMV as on 01/04/1981 at Rs. 240 per square feet, as supported by the registered valuer's report. The Tribunal found no infirmity in CIT(A)'s order and dismissed the revenue's appeal on this issue.Disallowance of Professional Fees:The AO disallowed 75% of professional fees claimed by the assessee, amounting to Rs. 97.89 Lacs, on the grounds that the expenses were not substantiated. The CIT(A) allowed the expenses, noting that the assessee provided detailed information about the nature and payees of the expenses. The Tribunal upheld CIT(A)'s decision, dismissing the revenue's appeal on this issue.Deferred Revenue Expenditure under Section 35DDA:The AO disallowed Rs. 2,424.98 Lacs claimed as deferred revenue expenditure, including VRS expenses, on the grounds that the assessee sold its textile division under a slump sale. The CIT(A) allowed the deduction, noting that Section 35DDA does not prevent the assessee from claiming such expenses. The Tribunal upheld CIT(A)'s decision, dismissing the revenue's appeal on this issue.Computation of Capital Losses on Sale of Shares:The AO disallowed the short-term capital loss (STCL) and long-term capital loss (LTCL) claimed by the assessee on the sale of shares, alleging that the transactions were structured to evade taxes. The CIT(A) allowed the losses, noting that the AO did not conduct any independent enquiry to prove that the transactions were not bona fide. The Tribunal upheld CIT(A)'s decision, dismissing the revenue's appeal on this issue.Disallowance of Various Expenses:The AO disallowed 75% of power & fuel, rent, rates & taxes, and miscellaneous expenses claimed by the assessee. The CIT(A) reduced the disallowance to 25%. The Tribunal further reduced the disallowance for rent, rates & taxes, and miscellaneous expenses to 10%, and deleted the disallowance for power & fuel expenses, partly allowing the assessee's appeal.Conclusion:The Tribunal dismissed the revenue's appeal on all grounds and partly allowed the assessee's appeal, reducing the disallowance of various expenses. The Tribunal upheld the CIT(A)'s decisions on all other issues.