2025 (12) TMI 1700 - AT - Income Tax

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 ... Allowability of the cost of TDR expenditure/Transferable Development Rights - expense under the head business and profession - HELD THAT:- The assessee in its books of accounts and for the tax purposes the TDR expenses were considered as part of inventory cost. Such expenses were accounted and claimed in assessment year 2020 – 21 based on invoices raised on the company by the builder. For assessment year 2020 – 21 deduction was claimed only in respect of that portion of TDR cost which pertained to inventory sold during that year. In the assessment order for assessment year 2020 – 21 it was concluded that the transferable development right cost pertain to the assessment year 2018 – 19 and therefore same was disallowed for that assessment year holding it to be a prior period expenditure. Thus, in the return filed u/s. 148 of the Act the cost of the transferable development right which was disallowed in the assessment year 2020 – 21 has been claimed as a deduction for assessment year 2018 – 19. Even during this year, the claim of the assessee was not accepted. Therefore, AO has taken a contradictory stand which was his stand for assessment year 2020 – 21 that the cost belongs to the assessment year 2018 – 19 and while framing the assessment order for assessment year 2018 – 19 when such cost was claimed by the assessee for assessment year 2018 – 19 it was disallowed holding that it is pertaining to the assessment year 2020 – 21. Thus, the revenue could not be allowed to blow hot and cold denying the deduction to the assessee of the cost of development right. When the assessing officer has already taken a stand that the above amount is a deduction allowable to the assessee in assessment year 2018 – 19, while framing the assessment order for assessment year 2020 – 21, he cannot disallow the same deduction to the assessee while framing the reassessment order passed for assessment year 2018 – 19 holding that such expenditure is allowable to the assessee only in assessment year 2020 – 21. It is undisputed that assessee has incurred the cost of this TDRs. and it is business expenses. Accordingly, we direct the learned assessing officer to allow the claim of the assessee for assessment year 2018 – 19. Penalty u/s 270A - assessee has claimed deduction towards the Keyman insurance premium paid which is allowed to the extent of the insurance content and to the extent of the investment was disallowed - HELD THAT:- We find that when the disallowance itself is a debatable issue, no penalty could have been levied. Similarly, it is also the claim before us that penalty proceedings are initiated for under-reporting of income in consequence to misreporting of income. Penalty can be levied on 6 types of acts on behalf of the assessee. It is also true that ld. AO, neither in the assessment order nor even otherwise has stated that under which subclause of 270A of the Act penalty is levied. As in GE Capital US Holdings Inc. [2024 (6) TMI 155 - DELHI HIGH COURT] has categorically held that it is incumbent upon the AO to ascertain the provisions of section 270A stood attracted either on account of under-reporting or misreporting of the income. A finding misrepresentation is required to be written and recorded in the assessment order. In the absence of the same, penalty deserves to be deleted. Accordingly, we allow the appeal of the assessee and direct the AO to delete the penalty levied being 200% of tax on disallowance of keyman insurance premium expenditure in the hands of the assessee. Disallowance of interest expenditure u/s. 36(1)(iii) - only contention raised before us is that in this case the assessee has shareholders fund to the tune of Rs. 43.78 crores and therefore the disallowance of advances of Rs. 4 crores being proportionate interest expenditure could not have been made - HELD THAT:- CIT(A) has confirmed the disallowance of advances of Rs. 4 crores being advances for purchase of asset. We find that assessee has interest in free funds available in the form of share capital and reserve & surplus of more than Rs. 43.78 crores. It is undisputed that assessee has more interest free funds available than the advances on which interest is disallowed. The fact clearly shows that interest free funds are available to the assessee which are sufficient to meet its investments in non-interest bearing advances, no disallowance can be made in the hands of the assessee. Such is the mandate of the decision of Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] Therefore disallowance of interest is not sustainable. AO is directed to delete the proportionate disallowance on interest expenditure in view of huge interest free funds available to the assessee. 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).