2023 (12) TMI 31 - AT - Income Tax

Revenue's appeal dismissed on construction expenses, deemed dividend timing, derivative transactions, and documentation requirements

ITAT Raipur dismissed revenue's appeal on multiple grounds. The tribunal upheld CIT(A)'s deletion of construction expense provision addition, finding AO ... Addition on account of provision for constructions expenses - addition made by the AO by disallowing the provision made under the head construction expenses on account of renovation job work - HELD THAT:- Admittedly, the fact that the provision for construction expenses was made in the succeeding year i.e., in FY 2014-15, on 31/03/2015, whereas the same was misread by the Ld. AO that the provision was made on 31/03/2014. This fact is evident from the ledger account of provision for construction expenses, which the Ld. CIT(A) has rightly read into and, therefore, has deleted the addition made by the AO against the actual facts on record. Under such facts and circumstances, we do not observe any infirmity in the order of Ld. CIT(A), consequently ground no. 1 of the revenue dismissed. Non-deduction of tax on deemed dividend u/s 2(22)(e) - HELD THAT:- Contentions of the assessee w.r.t. applicability of section 2(22)(e) on the amounts advanced or loans given to the directors of the company holding more than 10% of share capital in the company being the person who is beneficial owner of shares holding not less than 10% of the voting power, that in the present case the amounts given the directors are for the business purpose under the current account, therefore, the same cannot be categorized as loan moreover, the account in case of director which has been squared up in the year under consideration therefore provisions of sec. 2(22)(e) are not applicable, cannot be amicably subscribed to, since the ledger account of the said directors does not reflect any transactions or details where from it can be perceived that the transactions are in the nature of normal business transactions, much less the said transactions were not substantiated with any documentary evidence substantiating that these pertains to or have any nexus with the business of the assessee company, therefore, we are unable to accept such contentions of the assessee, which has been approved by the Ld. CIT(A). Whether provisions of Sec. 40(ai)(a) cannot be invoked in absence of any expenditure ? - As decided in Dedicated Healthcare Services (TPA) India ltd. [2018 (10) TMI 191 - BOMBAY HIGH COURT], has held that if there is no claim of expenses by the assessee which is covered by the provisions of sec. 194J, disallowances u/s 40(a)(ia) is not attracted. Similarly, in the case of CIT Vs. Health India TPA services Pvt. Ltd. [2014 (2) TMI 1153 - ITAT MUMBAI] held that disallowance u/s 40(a)(ia) would not arise where assessee was only facilitating the payments and did not claim such expenditure in its P&L account. Such contention raised by the assessee is worth consideration in the present case, having support of the judgments referred to supra, though the same has been dealt with in the context of sec. 194J, but the analogy drawn therein shall prevail and can be adopted for sec. 194 also, therefore, disallowance u/s 40(a)(ia) would not arise where assessee has not claim such expenditure in its P&L account, thus, addition made by the AO exercising the provisions of section 40(a)(ia) was beyond the mandate of the law and is liable to be deleted. Consequently, ground no. 2 of the revenue is dismissed. Applicability of provisions of section 40(a)(ia) on deemed dividend u/s 2(22)(e) is applicable w.e.f. 01/04/2015 i.e., from AY 2015-16, which is evident from the amendment in section 40(a)(ia) wherein word ‘any sum’, has been substituted by removing words ‘any interest, commission or brokerage, rent, royalty, fee for professional services or fee for technical services’, accordingly, applicability of sec 40(a)(ia) on deemed dividend u/s 2(22)(e) which was not in the list of expenditure incurred and claimed by the assessee, but included by widening the scope of section by placing word ‘any sum’, shall be applicable under the amended provision effective from 01/04/2015. On the basis of literal interpretation of the aforesaid amendment, it can be inferred that the provisions of section 40(a)(ia) cannot be invoked on deemed dividend u/s 2(22)(e) for the period before 01/04/2015. On this argument also the disallowance made u/s 40(a)(ia) in the AY 2014-15, cannot sustain. Resultantly ground 2 of the revenue’s appeal stands rejected. Nature of loss - transactions of F&O carried - Whether commodity transactions claimed being speculative loss and not loss from business activity of the assessee? - HELD THAT:- According to the provisions of sec 43(5)(e), “an eligible transaction in respect of trading in commodity derivatives carried out in a [recognized stock exchange] [which is chargeable to commodity transaction tax under chapter 7 of the Finance Act, 2013 (17 of 2013),]] shall not be deemed to be speculative transaction.” On perusal of copies of contract note issued by Kayan Securities Pvt Ltd, furnished before us, it is apparent that the transactions carried out are through recognized stock exchange, tax on transaction charges are also charged, therefore, the same, as rightly observed by the Ld. CIT(A) are in the nature of business transactions which shall not deemed to be speculative transactions as per provisions of section 43(5)(e). Our observations are duly supported with the various decisions relied upon by the AR, referred to supra. Respectfully following the settled position of law, we are of the considered opinion that the decision of Ld. CIT(A) holding the transaction as business transaction is on right appreciation of facts and the law, which in absence of any adverse finding against the assessee by the AO or any cogent material or contrary decision to dislodge the claim of the assessee, are qualities to be concurred with, and we do so. Consequently, ground of the revenue is rejected. Method of accounting - Addition adopting AS-7 i.e., “Percentage Completion Method” - HELD THAT:- There was no deviation in method of accounting of the assessee company since the inception of the project and that the revenue had also accepted Project Completion Method and Profits shown by the assessee for the earlier AY 2015-16. It is held that the Project Completion Method followed by the appellant company cannot be termed as erroneous, since over the period of project life both the methods will yield same result and, therefore, revenue neutral. Reliance was placed in the case of Varun Developers [2021 (2) TMI 997 - KARNATAKA HIGH COURT] Based on such observations Ld. CIT(A) has concluded that contention of the assessee company qua adopting the Project Completion Method is valid as per AS-7 of the ICAI. In backdrop of aforesaid observations in consonance with the verdict granted under jurisprudence accorded by the Hon’ble Apex Court in the case of Bilahari Investment P. Ltd. [2008 (2) TMI 23 - SUPREME COURT], Ld. CIT(A) has rightly decided the issue in favour of assessee, which in our considered opinion is not subject to any interference, consequently the same is approved. - Decided against revenue. Addition u/s 68 - AO did not find the behaviour of loan provider as creditworthy - HELD THAT:- The assessee has submitted all the required information also has requested the AO to summon the loan creditor so as to examine the facts for satisfaction of the Ld. AO that the impugned transactions are genuine and not liable to be disallowed under the provisions of section 68. Ld. AO reached to a premature opinion, without pursuing the inquiries, on the basis of certain case laws which are distinguishable on the facts with the case of the assessee. We observed that the assessee has discharged the obligation lay upon it when the preliminary documents were submitted before the Assessing Officer. In backdrop of such observations respectfully following the judgments referred to supra the addition made by invoking provisions of section 68 based on assumptions and presumptions by the Ld. AO is liable to be deleted and the decision of Ld. CIT(A) found be maintained. Ground of the revenue is dismissed. Issues Involved:1. Deletion of addition on account of provision for construction expenses.2. Deletion of addition on account of non-deduction of tax on deemed dividend under Section 2(22)(e) of the Income Tax Act.3. Deletion of addition on account of speculative loss from commodity transactions.4. Deletion of addition by adopting AS-7 (Percentage Completion Method) for revenue recognition.5. Deletion of addition under Section 68 of the Income Tax Act for unexplained cash credits.Issue-wise Summary:1. Deletion of Addition on Account of Provision for Construction Expenses:The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 5,00,000/- made by the AO for provision under construction expenses. The provision was made in the subsequent year (FY 2014-15) and not in the year under consideration (FY 2013-14). The AO's disallowance was based on a misreading of the ledger accounts, and the Tribunal found no infirmity in the CIT(A)'s order.2. Deletion of Addition on Account of Non-Deduction of Tax on Deemed Dividend Under Section 2(22)(e):The Tribunal dismissed the Revenue's appeal against the CIT(A)'s deletion of the addition of Rs. 1,34,83,176/- for non-deduction of tax on deemed dividend. The Tribunal noted that the accounts of the directors were in the nature of current accounts, not loans or advances. Additionally, the provisions of Section 40(a)(ia) were not applicable for deemed dividends under Section 2(22)(e) for AY 2014-15, as they were applicable from AY 2015-16.3. Deletion of Addition on Account of Speculative Loss from Commodity Transactions:The Tribunal upheld the CIT(A)'s decision to treat the loss of Rs. 56,15,450/- from trading in currency derivatives as a business loss, not a speculative loss. The transactions were carried out through recognized stock exchanges, and the AO's suspicion of accommodation transactions was not supported by any concrete evidence. The Tribunal found that the CIT(A) had rightly considered the transactions as business transactions under Section 43(5)(e).4. Deletion of Addition by Adopting AS-7 (Percentage Completion Method) for Revenue Recognition:The Tribunal upheld the CIT(A)'s deletion of the addition of Rs. 60,39,610/- made by the AO by adopting AS-7 (Percentage Completion Method). The assessee consistently followed the Project Completion Method, which is recognized by the ICAI and was accepted by the Revenue in earlier years. The Tribunal found that both methods yield the same result over the project life and are revenue-neutral.5. Deletion of Addition Under Section 68 for Unexplained Cash Credits:The Tribunal upheld the CIT(A)'s deletion of the addition of Rs. 2,11,21,389/- under Section 68. The assessee provided sufficient evidence, including ITRs, bank statements, and confirmations, to substantiate the identity, creditworthiness, and genuineness of the transactions. The AO failed to disprove the assessee's claims or conduct further inquiries. The Tribunal found that the AO's addition was based on assumptions and lacked corroborative evidence.Conclusion:The Tribunal dismissed both appeals of the Revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal found that the CIT(A) had correctly interpreted the facts and applied the law, and the AO's additions were not justified based on the evidence and legal standards.