2025 (5) TMI 740 - AT - Income Tax

ITAT allows Internal Development Charges under POCM method and interest deduction under section 36(1)(iii)

DCIT Circle – 7 (1), New Delhi Versus DLF Limited, New Delhi. And (Vice-Versa)

ITAT Delhi upheld CIT(A)'s decisions on multiple issues. Court allowed Internal Development Charges recognition under POCM method and interest deduction ... 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 unlaunched area - NFAC deleted addition - HELD THAT:- As considered order passed by the Co-ordinate Bench [2023 (7) TMI 1572 - ITAT DELHI] allowed the findings in favour of the assessee by its predecessor by A.Y. 2009-10. Disallowance on account of capitalization of interest made - As submitted that the company had sufficient interest-free funds available in the form of share capital, reserves and surplus and hence, deduction u/s 36(1)(iii) was allowable - HELD THAT:- For A.Y. 2006-07 in assessee's own case, the order of the CIT(A) deleting the disallowance made by the AO on account of capitalization of interest has been upheld by the ITAT [2023 (7) TMI 1572 - ITAT DELHI] we find that the issue is covered in favour of the assessee. In that view of the matter, the order passed by the Learned CIT(A) in deleting the addition in regard to the claim of interest u/s 36(1)(iii) of the Act on the identical facts and circumstances of the matter is found to be just and proper so as not to warrant interfere. Disallowance of expenses u/s 14A read with Rule 8D(2)(ii) & (iii) - Since the issue is found to be covered in assessee's own case on the identical facts, the order passed by the CIT(A) in allowing the said ground by deleting the addition made by the AO is found to be correct and thus, ground of appeal preferred by the Revenue is rejected. Re-classification of income form 'Income declared under the head income form house property' to 'Income from business and profession' - HELD THAT:- As in assessee's own case for A.Y. 1996-97 the issue was decided in favour of the assessee. Disallowance on account of Helicopter and Aircraft expenses treating them as not incurred wholly & exclusively for the business purpose holding them personal in nature - The issue is squarely covered in assessee's own case [2020 (10) TMI 77 - ITAT DELHI] 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. Addition on account of one time Ind-AS claim under the head 'Large any other amount claimed as deduction' on account of adoption of Ind-AS - HELD THAT:- Difference between the revenue to be recognized as per the Ind-AS POCM and the revenue already recognized in the books of account till 31.03.2016 as per IGAAP POCM, was adjusted by the appellant in the opening 'other equity' for the F.Y. 2016-17. Further that, from F.Y. 2016-17 onwards, revenue for all the projects was recognized based on the working as per the changed method of accounting i.e, Ind-AS POCM. During the year under consideration, the appellant claimed an amount in the return of income representing the amount on account of statutory transition from IGAAP to IND-AS The claim of the appellant being bona-fide in view of the mandatory adoption of the Ind-AS for F.Y. 2016-17 onwards and consistent with the method of accounting as per the provision of section 145 of the Act and being revenue neutral should be allowed. We have further taken into consideration that out of the claim of Rs. 5,77,409.11 lakhs in the year under consideration on account of change in the method of accounting, excess revenue as per the change method had been booked to the extent of Rs. 444,160.95 lakhs in the A.Ys. 2017-18 to 2023- 24. The observation made by CIT(A) that the excess revenue recognized in the earlier years in respect of the projects which were under the implementation and yet to be completed needs to be reversed is therefore, found to be correct. Further that, deduction for adjustment in the A.Y. 2017-18 should be allowed otherwise the same would amount to double taxation of income as the gross margins already booked would be again booked by the appellant in the future years is, therefore, acceptable. Thus,entire aspect of the matter, we do not find any reason to interfere with the order passed by the Learned CIT(A) in allowing the principal claim to the appellant which is found to be just and proper so as not to warrant interference. Thus, this ground of appeal filed by revenue is dismissed. TDS u/s 194C - Disallowance u/s 40(a)(ia) - non deduction of TDS on payments of Internal Development Charges ('IDC'), Infrastructure Augmentation Charges ('IAC') to the Director, Town & Country Planning ('DTCP'), Haryana Urban Development Authority ('HUDA') - HELD THAT:- The judgment passed in the case M/s. Sukham Infrastructure Pvt. Ltd. [2018 (6) TMI 1847 - ITAT CHANDIGARH] wherein it was held that TDS provision under Section 194C of the Act are not attracted on EDC payments made by the assessee to GMADA which is statutory authority under the Govt. of Punjab similar to HUDA of Haryana were also duly considered and relying upon the same disallowance of 30% of these payments u/s 40(a)(ia) of the Act made by the AO, in our considered opinion has rightly been found to be not justified and addition made therefore, rightly found to be deleted by the CIT(A) so as not to warrant interference. Hence, this ground of appeal is found to be devoid of any merit and thus, dismissed. Unverified purchase transactions - CIT(A) upheld the addition only on this count that the appellant could have produced this party once non-compliance of notices u/s 133(6) of the Act by the said party was made known to assessee in order to proof the genuineness of this purchases - assessee submitted before us that the assessee may be given further opportunity to submit the entire set of requisite documents in support of the genuineness of the purchase made with M/s. SMS Interiors Pvt. Ltd. before the AO which has not been objected by the DR - HELD THAT:- Asessee's appeal is disposed of by remitting the issue to the file of the AO to consider the same afresh upon granting opportunity of being heard to the assessee and upon considering the evidence on record and any other evidence which the assessee choose to file in order to prove the genuineness of the transactions i.e. the purchase made with SMS Interiors Pvt. Ltd. The core legal questions considered in this judgment pertain to the assessment of income and disallowances under the Income Tax Act, 1961, specifically for Assessment Year 2017-18, involving issues of revenue recognition, capitalization of interest, disallowance under section 14A, reclassification of income, disallowance of certain expenses, change in method of accounting due to adoption of Ind-AS, and applicability of TDS provisions on payments made to government authorities. The key issues are:1. Whether the deletion of addition of Rs. 319.01 crores on account of revenue recognition under the Percentage of Completion Method (POCM) was justified, especially regarding the loading of Internal Development Charges (IDC) only on launched areas.2. Whether the deletion of addition of Rs. 61.34 crores on account of disallowance of interest capitalization was proper, considering the method of accounting and the nature of interest expenses.3. Whether the deletion of disallowance of expenses relating to exempt income under section 14A read with Rule 8D was justified.4. Whether the deletion of addition on account of reclassification of income from house property to business income was appropriate.5. Whether deletion of disallowance of helicopter and aircraft expenses, alleged as personal and not business-related, was correct.6-12. Legality and propriety of deletion of addition relating to a one-time claim of deduction amounting to Rs. 58,269.59 crores arising from the mandatory adoption of Indian Accounting Standards (Ind-AS), specifically Ind-AS 18 and Ind-AS 109, and the change in method of accounting from IGAAP POCM to Ind-AS POCM.13. Whether deletion of addition under section 40(a)(ia) on account of non-deduction of tax at source (TDS) on payments to government authorities was justified.Additionally, the assessee's appeal challenges the confirmation of addition on account of unverified purchase transactions.Issue 1: Revenue Recognition under POCM and Loading of IDCThe legal framework involves the method of accounting for real estate revenue recognition under the Income Tax Act and applicable accounting standards. The Assessing Officer (AO) disallowed revenue recognition of Rs. 319.01 crores by loading IDC only on launched areas, disallowing IDC for unlaunched areas.The Court relied on precedents from the assessee's own case for earlier years (AY 2006-07 to AY 2016-17) where the Tribunal had upheld the adoption of POCM and rejected Revenue's contention on IDC loading. The AO's addition was thus found inconsistent with earlier coordinate bench decisions.The Court emphasized that the CIT(A) correctly followed the coordinate bench rulings, and no new facts justified interference. The deletion of addition was upheld.Issue 2: Capitalization of Interest ExpensesUnder section 36(1)(iii), interest paid on capital borrowed for business purposes is deductible. The AO disallowed Rs. 61.34 crores on the ground that under POCM, interest related to projects under construction must be capitalized proportionately.The assessee contended that interest was incurred wholly and exclusively for business, supported by earlier Tribunal decisions in its favor. The AO's mechanical application of capitalization was rejected by CIT(A) and the Tribunal.The Court extensively analyzed judicial precedents, including the Supreme Court and High Courts, which establish that interest on loans for stock-in-trade (real estate projects) is allowable as deduction and is not capital expenditure. It was noted that accounting standards (AS-16) do not override the Act's provisions.The Court held that the AO's addition was unjustified and the CIT(A)'s deletion was proper, following coordinate bench decisions.Issue 3: Disallowance under Section 14A read with Rule 8DThe AO made disallowance of Rs. 54.63 crores on an estimate basis without proper working. The CIT(A) restricted the disallowance to a nominal amount relying on the assessee's own disallowance and judicial precedents, including the Hon'ble Delhi High Court's ruling in Maxopp Investment Ltd.The Tribunal found the issue covered by coordinate bench decisions in favor of the assessee and upheld the deletion of the addition.Issue 4: Reclassification of Income from House Property to Business IncomeThe AO treated income as income from house property, whereas the assessee claimed it as business income. The CIT(A) and the Tribunal relied on earlier decisions in the assessee's case, which held in favor of the assessee on similar facts.The Court found no reason to interfere with the deletion of addition and upheld the CIT(A)'s order.Issue 5: Disallowance of Helicopter and Aircraft ExpensesThe AO disallowed Rs. 9.03 crores as personal expenses. The CIT(A) and the Tribunal accepted the assessee's submission that such expenses were incurred wholly and exclusively for business, given the nature of real estate development requiring frequent travel of directors and consultants.Reliance was placed on the decision in Sayaji Iron and Engineering Co Ltd and earlier Tribunal orders in the assessee's case.The Court upheld the deletion of the addition.Issues 6-12: One-Time Claim on Account of Change in Accounting Method due to Ind-AS AdoptionThe assessee transitioned from IGAAP POCM to Ind-AS POCM as mandated by the Ministry of Corporate Affairs (MCA) notification dated 16.02.2015, effective from 01.04.2016. The change involved recognition of revenue and amortization of upfront fees on loans and debentures, resulting in a one-time claim of Rs. 5,82,695.93 lakhs (Rs. 5,774.09 crores plus Rs. 52.87 crores) as deduction.The AO disallowed the claim primarily on the grounds that Ind-AS adjustments are for book purposes only and not for income computation under the Act, and that the claim was not supported by details. The AO also relied on the Supreme Court decision in Southern Technologies Ltd, which dealt with provisions on provisions for non-performing assets, not revenue recognition.The assessee submitted detailed working, auditor certificates, and explained that the change was mandatory, bona fide, and revenue-neutral, preventing double taxation. It was argued that section 145 mandates computation of income according to the method regularly employed, and the change was consistent with mandatory accounting standards notified under the Companies Act.The CIT(A) allowed the claim, relying on judicial precedents including the Supreme Court ruling in CIT v. Virtual Soft Systems Ltd, which upholds the primacy of accounting standards prescribed by statutory authorities in computing income where no specific method is prescribed under the Act.The Tribunal extensively analyzed the MCA notification, Ind-AS 18 and 109, the ICAI Guidance Note, and judicial precedents from various High Courts and the Supreme Court. It held that the change in accounting method was mandatory, bona fide, and consistently followed. The one-time adjustment was revenue-neutral and necessary to avoid double taxation.The Tribunal rejected the AO's reliance on Southern Technologies Ltd, clarifying that it was inapplicable to the facts. It also rejected Revenue's contention that Ind-AS were not applicable before 01.04.2018, noting the MCA notification mandating Ind-AS from 01.04.2016 for listed companies with turnover over Rs. 500 crores.The Tribunal further held that no specific ICDS applies to real estate developers for revenue recognition and that the assessee complied with section 145(1) of the Act.On clarifications sought by the Bench, the assessee furnished detailed written submissions explaining the basis of transition, applicability of the MCA notification, distinction between construction contracts and real estate development, and compliance with statutory requirements. It also demonstrated that the income reversed in the year under consideration had been offered to tax in subsequent years as per Ind-AS POCM, thus avoiding double taxation.The Tribunal accepted these clarifications and upheld the CIT(A)'s order allowing the one-time claim.Issue 13: Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Payments to Government AuthoritiesThe AO disallowed Rs. 6.30 crores on account of non-deduction of TDS on payments of Internal Development Charges (IDC), Infrastructure Augmentation Charges (IAC), and External Development Charges (EDC) made to the Director, Town & Country Planning (DTCP), Haryana Urban Development Authority (HUDA), and others.The assessee contended that these payments were statutory fees paid to government authorities and thus exempt from TDS deduction under section 196 of the Act.The CIT(A) relied on judicial precedents including the Hon'ble Delhi High Court's decision in BPTP Ltd. v. PCIT and ITAT decisions, which held that such payments are not subject to TDS as they are statutory in nature and paid to government entities or authorities acting on behalf of the government.The Tribunal concurred, finding that the AO's disallowance was unjustified and deletion of addition was proper.Assessee's Appeal: Disallowance of Unverified Purchase TransactionsThe assessee challenged the CIT(A)'s confirmation of addition of Rs. 95.12 lakhs on account of alleged unverified purchases from a party that failed to respond to notices under section 133(6) of the Act.The assessee submitted ledger accounts, reconciliation, and supporting documents but the party did not reply to the AO's notice. The CIT(A) upheld the addition, noting the assessee could have produced the party for verification.The Tribunal granted the assessee an opportunity to produce requisite evidence before the AO and remitted the matter for fresh consideration with directions to pass a reasoned order in accordance with law.Significant Holdings and Core Principles'The adoption of POCM cannot be interfered with' where coordinate bench decisions have upheld the method and loading of IDC only on launched areas.'The provisions of Accounting Standards and provisions of the Act are two different sets of regulations and while deciding this issue, it is well settled judicial precedent that if there is a contradiction between the two, the provisions of the Act shall prevail.''Interest paid on capital borrowed for stock-in-trade is allowable as deduction under section 36(1)(iii) of the Act, irrespective of capitalization under accounting standards.''The change in accounting policy mandated by statutory notification and consistently followed thereafter is bona fide and permissible under section 145 of the Act.''Ind-AS being issued by expert statutory body are valid and required to be followed in absence of specific method prescribed under the Act or ICDS.''The one-time claim arising from transition from IGAAP POCM to Ind-AS POCM is revenue-neutral and necessary to avoid double taxation.''Payments made to government authorities in the nature of statutory fees are not subject to TDS deduction under section 196 of the Act.''An assessee must be given opportunity to prove genuineness of transactions before making addition on account of unverified purchases.'Final determinations:- Revenue's appeals challenging deletion of additions on revenue recognition, interest capitalization, section 14A disallowance, reclassification of income, helicopter expenses, one-time Ind-AS claims, and TDS disallowance were dismissed.- Assessee's appeal against addition for unverified purchases was allowed for statistical purposes and remitted for fresh adjudication.