Transferable Development Rights (TDR) inventory cost timing dispute; inconsistent "prior period" disallowance rejected, cost allowed; penalties deleted.

Where the dominant issue was the year of allowability of expenditure on Transferable Development Rights (TDR) treated as inventory cost, the ITAT held that the Revenue could not adopt mutually inconsistent stands by disallowing the claim as "prior period" in one AY and then rejecting it in the earlier AY as belonging to the later year; since incurrence and business nexus were undisputed, the AO was directed to allow the TDR cost in the relevant AY. On penalty under s. 270A for disallowance of keyman insurance premium, the ITAT held that absence of a recorded finding specifying whether the case involved under-reporting or misreporting, and the debatable nature of the disallowance, barred penalty; the penalty was deleted. On s. 36(1)(iii) interest disallowance, availability of sufficient interest-free funds rebutted diversion; the proportionate disallowance was deleted.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the cost of Transferable Development Rights (TDR) claimed as business expenditure for the relevant year could be disallowed when the Revenue had taken an inconsistent stand across years, resulting in denial of the same deduction in both years.

(ii) Whether penalty under section 270A for "under-reporting in consequence to misreporting" could be sustained where (a) the underlying disallowance related to a debatable issue with divergent judicial views, and (b) the assessment/penalty proceedings did not specify the applicable limb/sub-clause attracting section 270A(9).

(iii) Whether proportionate disallowance of interest under section 36(1)(iii) on advances for purchase of assets was sustainable when interest-free funds (share capital and reserves) exceeded the amount of such advances.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Allowability of TDR cost in the relevant year in view of contradictory Revenue stand

Legal framework (as discussed): The Court examined allowability of TDR cost as business expenditure/inventory-related cost, and addressed the Revenue's inconsistent treatment across years while deciding the correct year of allowance.

Interpretation and reasoning: The Court noted that the TDR cost had been denied in the relevant year on the ground that there were no flat sales and therefore the cost should be carried to closing inventory, while in another year the same cost was denied as "prior period" on the premise that it pertained to the relevant year. The Court found that the Revenue had adopted mutually contradictory positions leading to denial of deduction in both years, which could not be permitted. Since it was undisputed that the expenditure was incurred and was a business expense, the Court held that the Revenue could not "blow hot and cold" and must adhere to its earlier stand identifying the relevant year for allowance.

Conclusion: The Court directed the assessing authority to follow the stand taken in the later-year assessment that the expenditure pertained to the relevant year, and accordingly allowed the TDR cost as a deduction for that year.

Issue (ii): Sustainability of penalty under section 270A for misreporting/under-reporting

Legal framework (as discussed): The Court considered section 270A principles, including the requirement to identify whether penalty proceedings are for under-reporting or misreporting, and the necessity of recording/identifying the specific basis under section 270A(9) for misreporting.

Interpretation and reasoning: The Court found that the underlying disallowance involved a claim where "divergent views are available" and the deductibility was treated as highly debatable; therefore, penalty could not be levied merely because the claim was disallowed. Independently, the Court held that the assessing authority had not specified in the assessment order (or otherwise) the precise limb/sub-clause under which section 270A was attracted, nor recorded the requisite finding establishing misreporting under section 270A(9). On this combined reasoning-debatable nature of the issue and failure to identify/record the statutory basis-the penalty was held unsustainable.

Conclusion: The Court deleted the penalty imposed under section 270A.

Issue (iii): Disallowance of interest under section 36(1)(iii) where interest-free funds exceed advances

Legal framework (as discussed): The Court applied the principle that where sufficient interest-free funds are available to cover non-interest-bearing advances/investments, proportionate disallowance of interest on borrowings is not warranted.

Interpretation and reasoning: The Court recorded that interest-free funds in the form of share capital and reserves exceeded the amount of advances on which proportionate interest was disallowed, and this sufficiency was undisputed. On those facts, the Court held that it must be presumed that the advances were made out of interest-free funds, making the proportionate disallowance unsustainable.

Conclusion: The Court directed deletion of the proportionate interest disallowance under section 36(1)(iii).

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