2024 (1) TMI 796 - AT - Income Tax

ITAT Delhi upholds CIT(A) deletion of section 50C capital gains addition on lease premiums, remands traveling expenses for fresh consideration

ITAT Delhi dismissed revenue's appeal regarding capital gains addition under section 50C for leased property, following coordinate bench precedent that ... Capital gain - addition of differential amount u/s 50C on the ground that sale consideration is less than circle rate - assessee has objected to the same by stating that fair market value is less than circle rate - AO made the reference u/s 50C(2) to the Ld. DVO on 12/11/2018 who did not send the valuation report till the finalization of assessment order - AO was not convinced with the claim of the assessee that section 50C is not applicable in case of leased properties and made the addition HELD THAT:- As considered the order of the Hon’ble Supreme Court in the case of R.K. Palshikar (HUF)’s case [1988 (5) TMI 3 - SUPREME COURT] and observe that was case primarily for determination as to if capital gains tax is payable by the assessee on amounts of premium received by the assessee in respect of lease granted by the assessee. In those circumstances, the 99 year lease was considered to be transfer of capital asset generating capital gains. However, with regard to applicability of section 50C, the capital asset is to be of the nature of ‘land or building or both’ and, on that basis, the coordinate Bench has given relief to the assessee which has been followed by CIT(A) and we see no reason to deviate from and interfere in the order of the ld.CIT(A). Ground No.1 to 3 are not sustainable. Disallowance u/s 36(1)(iii) - borrowed funds have been advanced to subsidiary by the assessee - AO questioned the loans given to related parties and, finding no commercial expediency or business interest in giving such loans, made the addition which was deleted by the CIT(A) by accepting the plea of the assessee that the amounts were given to the subsidiary for the purpose of development of projects in which the assessee also had substantial interest - HELD THAT:- It came up during the argument that presently the project is going on and loan is standing. We find no merit in the argument of the ld. DR that unless some revenue is shown from the project, the assessee cannot justify the loan and the interest expenditure was rightly disallowed. We are of the considered view that when business expediency in regard to the expenditure is established how far it fetches revenue in the relevant assessment year is not of much consideration unless there is specific evidence of wasteful or excessive expenditure, which is not the case here. Thus, we find no substance in the grounds. Disallowance of travelling expenses - CIT(A) has restricted the disallowance on ad hoc basis to 25% - HELD THAT:- CIT(A) has self contradicted himself by recording satisfaction on basis of audited financial and also while considering the plea of assessee, that the AO has not made any specific requisition in respect of such travelling expenses, the ld.CIT(A) concluded that the assessee had also failed to establish any link of such expenses with the business of the assessee. If Ld. CIT(A) was satisfied with audited financial then ad hoc disallowance should not have been made. At the same time while considering the plea of assessee that AO had not called for specific information Ld. CIT(A) concluded that assessee had not provided any live link then Ld. CIT(A) should have exercised his powers to enquire the matter himself or given opportunity to assessee to provide the link of such expenses with the business of the assessee. In the light of the aforesaid, we are of the considered view that the ad hoc disallowance by the ld. CIT(A) was not justified and the issue is required to be restored to the file of the AO to give an opportunity to the assessee to provide necessary evidences of procuring business by the visits of its employees/directors and, thereupon, the ld. AO shall decide the issue afresh. Disallowance arises out of the examination of loans and advances related party - HELD THAT:- AR has pointed out that this advance was not given in the present year and that this was also a business advance. We are of the considered view that as without giving assessee an opportunity of hearing this variation in the order of AO is made by the Ld. CIT(A) the matter needs to be restored to the files of Ld. CIT(A) to consider the same again after giving opportunity of hearing to the assessee. The ground no. 1 in cross-objections of assessee are accordingly allowed for statistical purposes. Disallowance on account of excessive remuneration paid to Shakti Nath - HELD THAT:- We are of the considered view that ad hoc disallowance cannot be made u/s 40A(2)(a) without a finding of the A.O as to what as per him, is the fair market value. Even if it is assumed that the payment made is excessive and unreasonable, such arbitrary and baseless, adhoc disallowances cannot be upheld. The ld. AO was supposed to give a factual analysis of the evidences to establish that the expenditure is excessive or unreasonable having regard to the fair market value of the services of Shri Shakti Nath. On the one hand, the ld. AO observed that the assessee has not filed any evidences justifying the payment and, on the other hand, he allowed 70% of the remuneration. This itself is arbitrary and the CIT(A) has rightly deleted the same. Thus, this ground of the Revenue has no substance. Issues Involved:1. Applicability of Section 50C on leased properties.2. Disallowance of loans given to related parties.3. Disallowance of travelling expenses.4. Disallowance under Section 36(1)(iii).5. Excessive remuneration paid to a director.Summary:1. Applicability of Section 50C on Leased Properties:The primary issue was whether Section 50C of the Income Tax Act, 1961, applies to the sale of leased properties. The Assessee sold certain floors for Rs. 40,89,55,000/-, while the circle rate was Rs. 63,41,22,000/-. The Assessing Officer (AO) made an addition of the differential amount under Section 50C. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, following the Tribunal's decision in the Assessee's own case for AY 2015-16. The Tribunal upheld this deletion, stating that Section 50C applies to 'land or building or both' and not to leased properties.2. Disallowance of Loans Given to Related Parties:The AO questioned the commercial expediency of loans given to related parties and made an addition. CIT(A) deleted this addition, accepting that the loans were for the development of projects in which the Assessee had substantial interest. The Tribunal upheld this decision, noting that investment in a subsidiary is considered a business expediency unless proven otherwise.3. Disallowance of Travelling Expenses:The AO disallowed a portion of the travelling expenses, concluding they were not wholly and exclusively for business purposes. CIT(A) restricted this disallowance to 25%. The Tribunal found that CIT(A) had self-contradicted by both accepting the audited financials and noting the lack of a business link for the expenses. The issue was restored to the AO to give the Assessee an opportunity to provide necessary evidence linking the expenses to the business.4. Disallowance under Section 36(1)(iii):CIT(A) on his own made a disallowance under Section 36(1)(iii) for an advance to a key managerial personnel, which the AO had missed. The Tribunal restored this issue to CIT(A) for reconsideration after giving the Assessee an opportunity to be heard.5. Excessive Remuneration Paid to a Director:The AO disallowed part of the remuneration paid to a director, deeming it excessive and unreasonable under Section 40A(2)(a). CIT(A) deleted this disallowance, noting the lack of material evidence to support the AO's claim. The Tribunal upheld CIT(A)'s decision, emphasizing that ad hoc disallowances cannot be made without a factual basis.Conclusion:The appeals of the Revenue were dismissed except for the issue of travelling expenses, which was restored to the AO. The Cross Objections of the Assessee were partly allowed.