2024 (11) TMI 1523 - AT - Income Tax

Assessee wins on IDC disallowance, Section 14A, income reclassification; unverified purchases, summons under Section 133(6) required

DLF LIMITED, Versus NATIONAL FACELESS ASSESSMENT CENTRE, NEW DELHI And DCIT, CIRCLE 7 (1), NEW DELHI Versus DLF LIMITED

ITAT upheld the CIT(A)'s deletions and rulings in favour of the assessee on multiple grounds: disallowance of IDC under the POCM method, disallowance ... Disallowance of revenue recognition as per POCM method of recording - AO has categorically held that the Internal Development Charges (IDC) incurred by the assessee cannot be loaded/ apportioned against un-launched area - CIT(A) deleted addition - HELD THAT:- We find that Ld. CIT(A) has given a correct finding and as submitted by the assessee that the instant issue is squarely covered in favour of the assessee vide ITAT order [2016 (3) TMI 679 - ITAT DELHI] which has been followed in all the subsequent years upto AY 2016-17, hence, respectfully following the said precedent in assessee’s own case, we uphold the action of the Ld. CIT(A) and reject the Ground No. 2 raised by the Revenue. Disallowance u/s 14A - Mandation of recording satisfaction - HELD THAT:- ITAT order for AY 2010-11 to 2016-17 [2020 (10) TMI 77 - ITAT DELHI], [2021 (9) TMI 1409 - ITAT DELHI] and [2023 (7) TMI 1572 - ITAT DELHI] wherein the disallowance was deleted on the ground of non-recording of satisfaction in terms of section 14(2), hence, respectfully following the said precedent in assessee’s own case, we uphold the action of the Ld. CIT(A) and reject the Ground No. 3 raised by the Revenue. Correct head of income - addition on account of reclassification of Income from house property to income from business and profession made by the AO - We find that Ld. CIT(A) has given a correct finding and as submitted by assessee that the instant issue is squarely covered in favour of the assessee vide ITAT order dated 11.3.2016 for AY 2006-07 which has been followed in all the subsequent years upto 2016-17, to hold no hesitation in holding that the AO was not justified in reclassifying ‘income from house property’ to ‘income from business or profession’ and thereby making addition. Nature of expenditure - disallowance on account of Helicopter and Aircraft expenses made by the AO, treating them as not incurred wholly and exclusively for business purchase holding them personal in nature - As decided in own case [2020 (10) TMI 77 - ITAT DELHI] CIT(A) taking into account the nature of business activity of the assessee considered the observations of Ld. AO not sustainable and further holding that if any expenditure is identified as personal expenditure incurred on the directors and other employees it would fall within the meaning perquisite and is taxed accordingly. In asssessee’s own case for A. Y. 2010-11 (supra) the issue has been considered and decided in favour of the assessee. Addition on account of alleged unverified/ un-reconciled purchase transaction - AR for the assessee pleaded that if the parties do not respond to notice issued u/s 133(6) of the Act, assessee cannot be held responsible for it - HELD THAT:- We agree that merely issue of notice u/s. 133(6) to the parties will not suffice, AO need to issue summons in this regard. Moreover, the prayer of the Assessee’s AR for not providing adequate time by the AO is also relevant. Opening balance cannot be added without specifying the section under which the same is being done. Unverified and un-reconciled purchase transactions for a particular year cannot be the opening balances in this regard, which the AO has to bear in mind. Accordingly, in the interest of justice, we deem it fit and proper to remit back the issues to the file of the AO for fresh adjudication, after giving adequate opportunity of being heard to the assessee. We hold and direct accordingly. In the result, the appeal filed by the assessee stand allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether revenue recognition under Percentage of Completion Method (POCM) adopted by the taxpayer is permissible where Internal Development Charges (IDC) are apportioned on total project area rather than only on launched area. 2. Whether interest expenditure is to be disallowed/capitalized by applying an ad hoc or notional formula when borrowed funds are used in construction business and related inter-company advances, or whether interest is allowable under section 36(1)(iii) and as per accounting norms (AS-16). 3. Whether disallowance under section 14A read with Rule 8D can be sustained where the Assessing Officer made an estimate without recording satisfaction under section 14(2) and where the taxpayer's factual position is consistent with earlier years. 4. Whether rental receipts from properties held as stock-in-trade should be reclassified from 'income from house property' to 'income from business or profession' given unchanged facts and applicable precedents. 5. Whether expenses for helicopter and aircraft can be disallowed as not wholly and exclusively for business where similar claim has been repeatedly allowed in earlier years and identified personal components, if any, have been taxed as perquisites. 6. Whether an alternate POCM claim (as fallback) requires adjudication where primary POCM claim is sustained (infructuous issue). 7. Whether additions for unverified/unreconciled purchase/creditor ledger balances can be sustained where third parties did not respond to notices under section 133(6), where opportunity/reconciliation and question of opening balances arise, and whether remand is appropriate. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Revenue recognition under POCM and apportionment of IDC Legal framework: Recognition of revenue for real estate projects by POCM requires consistent treatment of budgeted and actual costs, including allocation of Internal Development Charges (IDC), to compute percentage completion and revenue recognised accordingly. Precedent Treatment: The tribunal's prior orders in the taxpayer's own cases for AY 2006-07 through AY 2016-17 (and consolidated orders up to AY 2016-17) upheld the taxpayer's method of apportioning actual IDC over total project area and applying it against launched area; appellate authorities deleted similar AO additions. Interpretation and reasoning: The Court found it inconsistent for AO/Special Auditor to apportion budgeted IDC across total project area but to apportion actual IDC only over launched area - applying different parameters for budgeted vs actual costs. Given identical facts to earlier adjudicated years and that the POCM working had stood appeal scrutiny repeatedly, the tribunal followed its prior reasoning that charging actual IDC based on total project area and applying the same to launched area is correct. Ratio vs. Obiter: Ratio - consistent application of parameters in POCM (budgeted and actual IDC must use same base) and acceptance of the taxpayer's IDC apportionment methodology is binding in the facts of this case; obiter - none additional. Conclusion: AO's addition on account of disallowance of revenue recognition under POCM (Rs. 703,21,82,434) was deleted; Revenue ground rejected, POCM treatment sustained following precedents in taxpayer's own case. Issue 2 - Capitalization/disallowance of interest expenditure Legal framework: Section 36(1)(iii) (allowability of interest) and accounting standard AS-16 on capitalization of borrowing costs govern treatment of interest; AO cannot make arbitrary/notional disallowance without identifying diversion of funds or breach of accounting treatment. Precedent Treatment: Earlier tribunal orders in the taxpayer's own cases (AY 2006-07 onwards) rejected the AO's artificial formula for notional capitalization/disallowance of interest and upheld deletion of similar additions; consolidated tribunal decisions for later years affirmed these findings. Interpretation and reasoning: Facts showed borrowed funds used in construction business and as loans/advances to subsidiaries for business purposes, with interest income offered to tax and no demonstrated diversion for non-business purposes. A substantial portion of interest had been debited to P&L and some capitalized in WIP/CWIP as per AS-16. Given identity of facts with prior years and absence of specific misapplication of funds, notional disallowance was unwarranted. Ratio vs. Obiter: Ratio - interest cannot be disallowed on a notional/ad hoc basis where records show use of interest-bearing funds for business and capitalization per AS-16; obiter - emphasis on need to identify specific diversion if AO seeks disallowance. Conclusion: Addition of Rs. 20,19,62,000 for capitalization of interest was deleted; interest claim under section 36(1)(iii) allowed, Revenue ground rejected. Issue 3 - Disallowance under section 14A read with Rule 8D Legal framework: Section 14A read with Rule 8D prescribes procedure for computing disallowance of expenses attributable to exempt income; AO must record requisite satisfaction and follow procedural requirements for making disallowance. Precedent Treatment: Tribunal and CIT(A) in taxpayer's own earlier years (AY 2010-11 to 2016-17) decided in favour of the taxpayer where AO had not recorded the necessary satisfaction under section 14(2) and where the taxpayer had made own disallowance; reference to High Court authority (Maxopp) noted. Interpretation and reasoning: No change in relevant facts; AO made estimate-based disallowance without recording formal satisfaction as required. Prior appellate decisions in the taxpayer's own case had deleted similar additions. Therefore, AO's estimate-based addition failed procedural and substantive scrutiny. Ratio vs. Obiter: Ratio - disallowance under section 14A/Rule 8D cannot be sustained where AO has not recorded mandatory satisfaction and where prior consistent appellate findings favor taxpayer; obiter - reliance on family of precedents including High Court decisions. Conclusion: Addition of Rs. 87,56,26,373 under section 14A/Rule 8D deleted; Revenue ground rejected. Issue 4 - Reclassification of income from house property to business Legal framework: Classification of income requires examination of facts: whether property was held as stock-in-trade, whether letting included machinery/plant/furniture or other amenities for separate consideration; tax treatment differs between 'income from house property' and 'income from business'. Precedent Treatment: Prior ITAT and appellate orders in the taxpayer's own case (AY 1996-97 and subsequent years) held rental income from properties shown as stock-in-trade to be assessable as 'income from house property' where no letting of machinery/plant/furniture occurred and facts remained unchanged; High Court dismissed department appeals in those years. Interpretation and reasoning: The facts for the year under consideration were identical to earlier years where the head of income had been held to be 'house property.' AO's reliance on other judgments (e.g., Neha Builders) did not change factual matrix. Given consistent prior treatment and no change in facts, reclassification by AO was unjustified. Ratio vs. Obiter: Ratio - where property is stock-in-trade and letting does not include additional assets or separate charges, income may properly be assessed under 'house property'; obiter - analysis of negligible practical difference if taxed under alternate heads. Conclusion: Addition of Rs. 21,27,10,118 for reclassification was deleted; Revenue ground rejected and prior precedents followed. Issue 5 - Disallowance of helicopter and aircraft expenses Legal framework: Expenditure must be 'wholly and exclusively' for business to be deductible; personal components, if identified, are taxed as perquisites. Recurrent factual adjudication of similar expenses across years is relevant. Precedent Treatment: CIT(A) and ITAT in the taxpayer's own earlier years had deleted similar disallowances; consolidated ITAT order for later years followed those decisions and dismissed departmental appeals. Interpretation and reasoning: Facts for the year were identical to earlier years where expenses were allowed. Where personal expenditure is identified, taxation as perquisites is the correct route rather than wholesale disallowance. Given identical facts and established appellate positions, AO's estimated disallowance was unsustainable. Ratio vs. Obiter: Ratio - recurring allowance of such expenses where business nexus is established and personal elements are taxed as perquisites; obiter - procedural remark that specific personal use should be separately identified and taxed. Conclusion: Addition of Rs. 3,98,74,706 was deleted; Revenue ground rejected. Issue 6 - Alternate POCM claim (fallback) following disallowance in prior year Legal framework & reasoning: Alternate/fallback claims become moot where primary POCM claim is sustained on merits. Ratio vs. Obiter: Obiter - no adjudication required once primary issue resolved. Conclusion: Alternate claim issue rendered infructuous and not adjudicated. Issue 7 - Additions for unverified/unreconciled purchases and creditor balances (Assessee's appeal) Legal framework: AO may require verification of ledger balances; notices under section 133(6) and summons are procedural tools. Burden on taxpayer to substantiate purchases is moderated where third-party non-response occurs but corroborative documentary evidence (confirmations, delivery challans, sales tax returns) can discharge the burden. Opening balances require specification of statutory basis for addition. Precedent Treatment: Not explicitly relied on; tribunal acknowledged established principle that taxpayer should not be penalised solely for third-party non-response where sufficient corroborative evidence is produced. Interpretation and reasoning: AO made additions where some parties did not respond to s.133(6) notices and where ledgers were unreconciled. CIT(A) upheld part of the addition, deleting arithmetical errors and upholding balance where reconciliation/opportunity appeared lacking. Tribunal found that merely issuing s.133(6) notices is insufficient - AO should issue summons and provide adequate opportunity; opening balances cannot be added without specifying statutory basis; unreconciled items may not properly be treated as opening balances. In the interest of justice and because adequate procedural steps/opportunity were disputable, the tribunal remitted the matter to AO for fresh adjudication with direction to give adequate opportunity to the assessee. Ratio vs. Obiter: Ratio - AO must follow proper procedure (including issuance of summons where required and specifying statutory basis for additions) and give adequate opportunity to reconcile balances; additions based solely on non-response to s.133(6) without corroborative evidence or procedural fairness are not sustainable. Obiter - guidance that unreconciled purchases cannot be treated as opening balances without basis. Conclusion: Matter remitted to AO for fresh adjudication after affording adequate opportunity; assessee's appeal allowed for statistical purposes; part of CIT(A) additions were previously corrected for arithmetical error but final quantification deferred to AO on remand.