2022 (7) TMI 1049 - AT - Income Tax

Tribunal: Appeal partially allowed, deletion under Section 40(b) ITA, addition upheld under Section 43CA

The Tribunal partially allowed the appeal, deleting the addition under Section 40(b) of the Income Tax Act, 1961, while upholding the addition under ... Disallowance of interest to partners under section 40(b) - capitalization of interest in inventory under percentage completion method - application of section 43CA read with section 50C(2) - valuation adopted by stamp authority and referral to Valuation Officer - principles of natural justice and adequacy of opportunity to be heard in assessment proceedingsDisallowance of interest to partners under section 40(b) - capitalization of interest in inventory under percentage completion method - Whether the addition on account of excess interest paid to partners should be sustained where the assessee has adjusted the excess interest by reducing the cost of construction/closing stock. - HELD THAT: - The Tribunal accepted the factual finding recorded by the CIT(A) that the assessee, following percentage completion method, had reflected the effect of excess interest by reducing the cost of construction/closing stock. That finding was not challenged by the Revenue. The Tribunal held that sustaining a separate disallowance in respect of interest paid to partners, notwithstanding the corresponding reduction in inventory valuation, would result in double disallowance and no loss to revenue had been shown. On this basis the Tribunal held the addition unsustainable and allowed the ground raised by the assessee.Addition on account of excess interest to partners under section 40(b) deleted.Application of section 43CA read with section 50C(2) - valuation adopted by stamp authority and referral to Valuation Officer - principles of natural justice and adequacy of opportunity to be heard in assessment proceedings - Whether the addition under section 43CA (by adopting stamp duty valuation) could be sustained where the assessee contends that the valuation exceeds fair market value and alleges denial of opportunity and non-referral to Valuation Officer. - HELD THAT: - The Tribunal examined the assessment record and the show cause issued by the AO. It noted that the proviso to section 50C(2) applies only when the assessee claims before the AO that the stamp valuation exceeds fair market value. The AO had raised a specific query by show cause dated 17.12.2018; the assessee filed a reply but did not assert that the stamp value exceeded fair market value or request reference to a Valuation Officer. The CIT(A) had recorded the same facts and sustained the addition. In the absence of any claim by the assessee before the AO invoking section 50C(2) or evidence that the AO denied a specific and timely opportunity on this point, the Tribunal found no reason to interfere with the concurrent conclusion of the lower authorities and dismissed the ground.Addition under section 43CA upheld.Final Conclusion: The appeal is partly allowed: the addition made by disallowing excess interest to partners under section 40(b) is deleted, while the addition under section 43CA (stamp valuation adoption) is sustained. Issues Involved:1. Addition of Rs. 1,60,18,918/- under Section 40(b) of the Income Tax Act, 1961.2. Addition of Rs. 10,72,932/- under Section 43CA of the Income Tax Act, 1961.3. Other grounds not pressed by the assessee.Detailed Analysis:1. Addition of Rs. 1,60,18,918/- under Section 40(b) of the Income Tax Act, 1961:The assessee, a limited liability partnership engaged in real estate development, filed its return of income for the assessment year 2016-17. The Assessing Officer (AO) made an addition of Rs. 2,73,79,564/- for interest payments to partners, which was later reduced to Rs. 1,60,18,917/- after considering the assessee's application under Section 154 of the Act. The CIT(A) confirmed this addition, noting discrepancies in the profit and loss account and the interest claimed.The assessee contended that it had debited only 12% interest in the cost calculated for computing profits and had adjusted the excess interest in the closing stock. The CIT(A) acknowledged that the excess interest was adjusted in the closing stock but maintained that it was not reflected in the total expenditure claimed in the profit and loss account, resulting in an excess interest claim of Rs. 1,60,18,918/-.The Tribunal found that the assessee had consistently followed the method of capitalizing interest in the cost of construction, which was not disputed in earlier years. The CIT(A) confirmed that the excess interest was adjusted in the closing stock, and this adjustment was also reflected in the tax audit report. The Tribunal concluded that sustaining the addition would result in double disallowance, as the excess interest was already adjusted in the closing inventory. Therefore, the ground raised by the assessee was allowed.2. Addition of Rs. 10,72,932/- under Section 43CA of the Income Tax Act, 1961:The AO made an addition of Rs. 10,72,932/- under Section 43CA, as the sale consideration of a property was less than the value adopted by the stamp duty authority. The CIT(A) upheld this addition, stating that the assessee did not raise any objection or claim that the stamp duty value exceeded the fair market value during the assessment proceedings.The assessee argued that the AO did not provide an opportunity to contest the valuation and did not refer the matter to the DVO as required under Section 50C(2). The Tribunal noted that the assessee failed to claim before the AO that the stamp duty value exceeded the fair market value. The Tribunal upheld the CIT(A)'s findings, stating that the assessee did not provide any evidence to substantiate its claim and did not raise the issue during the assessment proceedings. Consequently, this ground was dismissed.3. Other Grounds:The assessee did not press grounds 3 to 6, which included additions under Section 37 for disallowance of various expenditures, VAT composition provision, and foreign traveling expenses. These grounds were dismissed as not contested.Conclusion:The appeal was partly allowed, with the Tribunal deleting the addition under Section 40(b) but upholding the addition under Section 43CA. The other grounds were dismissed as not pressed. The order was pronounced in the open court on 12/07/2022.