Downside on Sale of Flats expenses allowed as genuine business deductions under underwriting agreements with developers

ITAT Mumbai upheld CIT(A)'s deletion of disallowance u/s 69C regarding 'Downside on Sale of Flats' expenses. The assessee entered underwriting agreements with developer for flat purchases, bearing risks/rewards. When flats sold to end customers at lower prices, resulting losses were genuine business deductions. ITAT found arrangement was not actual property sale but underwriting agreement. Assessee consistently treated similar transactions, offered profits in previous years which were accepted. All supporting documents including MOUs and bank statements were provided. ITAT also deleted addition u/s 68 for unsecured loans, finding AO's rejection based solely on bank's non-response to notices was insufficient when assessee provided adequate documentation establishing transaction genuineness.

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The core legal questions considered by the Tribunal in this appeal relate primarily to the validity and correctness of disallowances made by the Assessing Officer under Sections 68 and 69C of the Income Tax Act, 1961, and the subsequent deletion of these disallowances by the Commissioner of Income Tax (Appeals) [CIT(A)]. Specifically, the issues are:

1. Whether the CIT(A) was justified in deleting the disallowance of INR 19.10 crores made under Section 69C on account of 'Downside on Sale of Flats' claimed as business expenditure by the Assessee, despite the Revenue's contention that the Assessee failed to produce complete details of final purchasers and payment through banking channels to verify the genuineness of the loss.

2. Whether the CIT(A) was justified in deleting the disallowance of INR 19.10 crores without appreciating that the Assessee could not prove the genuineness of the losses claimed, particularly due to non-furnishing of payment details through banking transactions.

3. Whether the CIT(A) erred in deleting the disallowance made under Section 68 of the Act in respect of unsecured loans amounting to INR 534.80 crores, despite the Assessing Officer's observation that confirmation of the loan in the bank account of the Assessee remained unverified.

4. Whether the CIT(A) erred in deleting the disallowance under Section 68 without appreciating that the Assessee failed to furnish corroborating evidence during remand proceedings, rendering the additional evidence liable to rejection.

Issue-Wise Detailed Analysis

Issues 1 and 2: Disallowance under Section 69C on 'Downside on Sale of Flats' (INR 19.10 crores)

Relevant Legal Framework and Precedents: Section 69C pertains to unexplained expenditure. The Assessing Officer disallowed the claimed deduction on the ground that the Assessee failed to furnish relevant details and documents to explain the expenditure. The Revenue relied on the judgment of the Supreme Court in Suraj Lamp & Industries Pvt. Ltd. vs. State of Haryana, which deals with the validity of transactions involving immovable property without registered documents.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessee had entered into Memoranda of Understanding (MoUs) with Bombay Dyeing & Manufacturing Company Ltd. (BDMC) for the purchase of flats. The MoUs explicitly transferred all risk and rewards related to the flats to the Assessee from the date of execution, although the flats were yet to be constructed. The Assessee was entitled to profit or loss arising from the subsequent sale of flats by BDMC to final customers, with BDMC reimbursed for brokerage expenses.

The Tribunal rejected the Revenue's reliance on the Suraj Lamp judgment, emphasizing that the Assessee never claimed ownership of immovable property through the MoUs but contractual rights involving risk and reward sharing. The arrangement was akin to an underwriting agreement, not a sale/purchase of immovable property.

Key Evidence and Findings: The Assessee furnished MoUs, price sheets, brokerage vouchers, financial statements, and ledger accounts supporting the claimed loss. The CIT(A) admitted additional evidence including copies of MoUs, payment vouchers, audited financial statements, and previous assessment orders. BDMC also filed a reply under Section 133(6) confirming details of the flats, purchasers, and banking transactions.

The Assessing Officer's remand report acknowledged the genuineness of brokerage expenses but disallowed the loss on flats due to lack of details of final customers and banking transactions. However, the Tribunal found that such details were available through BDMC's reply and additional evidence filed by the Assessee, which corroborated the genuineness of the transactions.

Application of Law to Facts: The Tribunal held that since the Assessee consistently offered similar income from upside on sale of flats in earlier years and the Revenue accepted the genuineness of those transactions, the corresponding losses on downside should also be allowed. The contractual terms established the Assessee's entitlement to bear losses, and the evidence on record sufficiently explained the expenditure.

Treatment of Competing Arguments: The Revenue's argument centered on non-furnishing of details and non-registration/stamping of MoUs. The Tribunal found these arguments unpersuasive given the nature of the arrangement and the substantial documentary evidence, including third-party confirmations, bank statements, and previous acceptance of similar income.

Conclusions: The CIT(A)'s deletion of the addition under Section 69C was upheld as justified and based on material evidence. Grounds 1 and 2 were dismissed.

Issues 3 and 4: Disallowance under Section 68 on Unsecured Loans (INR 534.80 crores)

Relevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits. The Assessing Officer disallowed the loan amount on the ground of non-verification of the lender's identity, creditworthiness, and genuineness of the transaction.

Court's Interpretation and Reasoning: The Assessee submitted detailed evidence before the CIT(A), including loan agreements, sanction letters, bank statements showing disbursements, loan confirmation statements, audited financial statements, board meeting minutes, and Form 3CD disclosures. The loan was from Dewan Housing Finance Corporation Ltd. (DHFL), a well-known housing finance company.

The Assessing Officer's remand report acknowledged receipt of documents but rejected them solely because the notices issued under Section 133(6) to IDBI Bank Ltd. for verification of bank statements remained unanswered. The CIT(A) found that the Assessee had adequately explained the source and nature of the loans, and the Assessing Officer did not point out any specific discrepancies in the documents.

Key Evidence and Findings: The Assessee's bank statements, loan agreements, sanction letters, and audited financials showed the loan transactions were genuine and reflected in the books. The loan was secured by hypothecation of receivables related to flats allotted by BDMC. The cash flow statements detailed utilization of the loan proceeds. The Assessee also demonstrated that the loan was disclosed in statutory audit reports and tax audit forms.

Application of Law to Facts: The Tribunal noted that the Assessing Officer's inability to verify bank statements due to non-response from the bank did not justify disallowance when the Assessee had furnished comprehensive corroborative evidence. The CIT(A)'s discretion to admit additional evidence was not challenged by the Revenue.

Treatment of Competing Arguments: The Revenue contended that the Assessee failed to furnish corroborative evidence during assessment and remand proceedings. The Tribunal rejected this, noting the Assessee's explanation regarding short time for response and technical difficulties in procuring documents. The Tribunal also observed that the Assessing Officer did not identify any specific infirmity in the documents submitted.

Conclusions: The CIT(A)'s deletion of the addition under Section 68 was upheld. The Revenue failed to show any perversity or error in the order. Grounds 3 and 4 were dismissed.

Significant Holdings

On the issue of disallowance under Section 69C, the Tribunal held:

"The arrangement between the Assessee and BDMC was in the nature of an underwriting agreement whereby the Assessee had agreed to purchase specified number of flats from BDMC. While the MoUs use the term 'purchase', 'sale', 'purchaser' and 'new purchaser', there was no sale of immovable property affected by way of the said MoUs. Therefore, the judgment of the Hon'ble Supreme Court in the case of Suraj Lamp & Industries Pvt. Ltd. would not apply to the facts of the present case."

Further,

"The Assessee has followed a consistent approach in recognizing income/losses arising on account of variation in the amount of consideration the Assessee was contractually bound to pay to BDMC and the final selling price at which the flat was sold to new purchasers/end customers."

On the issue of disallowance under Section 68, the Tribunal observed:

"On perusal of the audited balance sheet as on 31.03.2018 it is seen that the appellant has shown long-term borrowing of Rs. 534,80,09,589/-. The appellant has provided relevant documents to substantiate its claim of long-term loan from DHFL. The appellant has also furnished the details of interest paid on the said loan alongwith details of TDS made thereon. Further, the AO during the assessment proceedings and remand proceedings has not pointed out any specific discrepancy with respect to the said loan from the DHFL. Hence, the source of amount of Rs. 534,80,09,589/- in the books of the appellant stands explained."

Core principles established include the recognition that consistent treatment of income and losses under contractual arrangements, supported by documentary evidence and third-party confirmations, is crucial for determining genuineness of transactions. The Tribunal also emphasized that non-response from third parties to verification notices cannot be the sole basis for disallowance if the Assessee furnishes comprehensive corroborative evidence.

Final determinations on each issue were that the CIT(A)'s orders deleting the additions under Sections 69C and 68 were correct and did not suffer from any infirmity. The appeal by the Revenue was dismissed in its entirety.

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