TaxTMI 
TaxTMI 
2011 (10) TMI 573
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....pany engaged in hotel and construction business. Original assessment for assessment year 2000-01 was completed on 25.3.2003. Regular assessment was later completed after scrutiny under S.143(3) of the Act, determining the total income at Rs. 5,73,911. Subsequently, during the course of assessment proceedings for assessment year 2003-04, the assessing officer made a reference to the valuation cell of the Department for determining the cost of construction of the property namely, MPM Mall at Abids Hyderabad constructed by the assessee. On such reference made by the assessing officer, the Superintending Engineer, Valuation Cell, vide his report dated 22.9.2006 determined the cost of construction of the said property constructed during the financial years 1996-97 to 2004- 05 at Rs. 9,76,28,313 as against Rs. 9,34,20,051 shown by the assessee. On the basis of the said report of the Valuation Report, the assessing officer noticed that during the financial year 1999-2000, relevant for assessment year 2000-01, the assessee has made investment on construction at Rs. 61,99,398 as against Rs. 52,59,406 shown by the assessee. Under these circumstances, the assessing officer reopened the assess....
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....92 (Rs.61,99,398 - Rs. 52,59,406) was added as unexplained investment made by the assessee during the previous year 1999-2000 relevant to assessment year 2000-01. 6. The learned Authorised Representative of the assessee further submitted before the CIT(A) that the investment in the said property was disputed by the assessee in appeals filed by it for assessment year 2003-04, 2004-05 and 2005-06. The learned Authorised Representative filed a detailed working taking into account the decisions of the jurisdictional Tribunal in various cases of similar nature and consistently followed by the Department in the subsequent cases. On the basis of the same, the cost of construction determined by the DVO was modified. Therefore, the AR submitted that since the investment as per the assessee's books was more than the cost of construction worked out by the DVO as modified on the basis of the orders of the jurisdictional Tribunal, request was made for deleting the additions made for assessment years 2003-04 2004-05 and 2005-06. 7. The CIT(A) after elaborate discussion accepted the submissions of the assessee and deleted the additions made for the assessment year 2004-05. The CIT(A) consid....
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.... concession is required to be given in the assessee's case in addition to concession given at 6% towards self-supervision. Hence, this lower percentage for self-supervision should be adopted. 11. The learned counsel for the assessee relied on the order of the CIT(A) and submitted that since the assessee has maintained proper books of account for the cost of construction, the very estimation of the cost of construction by reference to valuation cell is not warranted. He submitted that such a reference to valuation ell is warranted where an assessee has not maintained books of account with regard to cost of construction or such books are not reliable. He also placed reliance on the decision of the Hyderabad Bench of the Tribunal in the case of Vinod Kuamr Agarwal(257 ITR (AT) 65). 12. We heard both the parties. WE find that the facts relevant to assessment year 2000-01 are similar to the facts leading to the addition made by the assessment year towards unexplained investment for the assessment years 2003-04 to 2005-06. We are of the view that it would be judicious and reasonable to allow a deduction of 15% from the estimated cost of construction as determined by the DVO and the....
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....I(A) in deleting the addition of Rs. 25,16,369 made by the assessing officer on the ground of assessee's unexplained investment in the cost of construction. It is also the contention of the Revenue through ground No.5 of this appeal that the CIT(A) has erred both in facts and in law in ignoring the findings given by the DVO and arbitrarily directed deduction of 25% without any basis, as even in the cited case of Pulla Reddy, the total deduction including deductions allowed by the DVO, CIT(A), and ITAT allowed was 22.5% only. 17. We have considered this very issue in the context of the corresponding grounds of the Revenue for the assessment year 2000- 2001, while dealing with its appeal for that year, being ITA No.778/Hyd/2009. For the detailed reasons given in that context in para 12 hereinabove, we uphold the action of the CIT(A) in deleting the addition of Rs. 25,16,369 made by the assessing officer on account of unexplained investment of the assessee in the cost of construction, for the assessment year 2002-03 as well. Consequently, grounds raised by Revenue in this appeal are rejected. 18. In the result, Revenue's appeal for the assessment year 2001-02, being ITA No.1147/....
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.... the actual cost and therefore, no deduction was claimed for this amount, as revenue expenditure. The portion of the interest which only pertained to the period after commencement of the business was only claimed as revenue expenditure. He submitted that the Mall generating revenue during the year, as would be evident from the financial statements. The treatment of interest accords with the general principles laid down in the matter of claim of interest, and also with the principles laid down by the Calcutta Bench of the Tribunal in the case of JCT Limited (supra) relied upon by the assessing officer. It was further claimed that there was no reversal of position in the return and nowhere in the said decision of the Calcutta Bench of the Tribunal, the Tribunal laid down a straight jacket principle that the interest on borrowed capital utilized in acquisition of a capital asset would be treated as capital expenditure till perpetuality, even if the same related to period after commencement of business. Hence, the reliance placed by the assessing officer on the above decision appears to be not correct and the disallowance of interest of Rs. 2,25,002 pertaining to period after commencem....
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.... of Revenue in this appeal is that the CIT(A) erred in holding that Miscellaneous Income should be taken into account for the purpose of allowing deduction under S.80IB. On this very issue there is a ground in the appeals of the assessee, being ITA No.1190/Hyd/2007, for this year although the items of miscellaneous income involved therein are different. Hence, in the context of this common ground, we may dispose of both the appeals of the Revenue and the assessee together. 26. Assessee had claimed deduction under S.80IB of Rs. 28,85,300 in respect of which form No.10CCB dated 26.3.2003 was filed alongwith the return of income. The assessing officer held that the miscellaneous income of Rs. 43,39,955 has not been derived from the undertaking, and as such it requires to be reduced from the profits and gains of the undertaking for the purpose of computing deduction under S.80IB. 27. Aggrieved, assessee preferred appeal before the CIT(A) and submitted that the disallowance of deduction under S.80IB in relation to various items included under the miscellaneous income is not correct. It was submitted that most of the items of miscellaneous receipts are essential for the subsistence....
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....intrinsically linked with the hospitality business of the assessee and the assessee is entitled to relief under S.80IB on such miscellaneous income as well . 31. We heard both sides. With respect to receipt from PAS system, since this is installed in the banquet hall and used by the assessee's guests for the conferences conducted by them, it is essentially part of the hotel to provide this system. It is inevitable that the hotel should have well equipped banquet hall in order to profitably run the business. Hence, the PAS system forms integral part of the assessee's business and income from that asset is inextricably linked with the running of the hotel business. In the circumstances, income from PAS system can be said to have been derived from the hotel business of the assessee for the purpose of allowing deduction under S.80IB. Hence, order of the CIT(A) is confirmed on this aspect. 32. With respect to scrap sales relating to sale of empty liquor bottles, empty cartons, we appreciate that large value of such scrap has to be disposed of, periodically by the hotel and hence these receipts are also directly linked with the business of the assessee and hence, the same are also ....
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.... by the assessee forming part of its miscellaneous income, are not eligible for relief under S.80IB of the Act. 37. We heard both sides. We find that income by way of lease rentals, has been derived by the assessee from letting out a portion of the building. We do not find any link between the hotel business of the assessee and the letting out of the building. Analysing the provisions of S.80-I, 80IA and 80IB of the Act., Apex Court in the case of Liberty India V/s. CIT(317 ITR 218) held as follows- "Sections 80-I, 80-IA and 80IB provide for incentives in the form of deductions which are linked to profits and not investment. On analysis of sections 80-IA and 80IB it becomes clear that any industrial undertaking which becomes eligible on satisfying sub-section (2) would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after the specified date. Apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of the profits. This is the importance of the words "derived from an industrial undertaking" as against "prof....
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....L, interest subsidy received from TFCI, etc. should be considered as part of assessee's business income, eligible for relief under S.80IB of the Act. 42. We heard both the sides. The claim of the assessee with regard to relief under S.80IB was on the basis that deposits with the bank and APCPDCL are for the purpose of securing credit facilities and various bank guarantee and for securing power supply for the assessee's undertaking. The CIT(A) confirmed the action of the assessing officer in rejecting the claim of the assessee with regard to interest income and subsidy, observing that they have been received by the assessee from banks and TFCI respectively, i.e. from external sources, and as such they cannot be considered as part of the profits derived by the assessee from the undertaking. We find no infirmity in the order of the CIT(A) in not allowing this claim of the assessee, as it has nothing to do with the activity of the assessee's industrial undertaking and in the light of the decision of the Apex Court in the case of Pandian Chemicals V/s. CIT(262 ITR 278), these receipts cannot be said to have been derived form the industrial undertaking. 43. The alternate ground of ....
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....e in this appeal relates to assessee's entitlement to the relief under S.80IB of the Income-tax Act, with reference to miscellaneous income derived from telephone and fax sales, laundry revenue , receipts from PAS systems, scrap sales, etc. We have dealt with this very issue, in the context of corresponding grounds of the Revenue in its appeal for assessment year 20003-04. For the reasons discussed in that context in paras 31 to 35 of this order in that context, grounds of the Revenue in this appeal on this issue are rejected. 46. The next effective grievance of the Revenue in this appeal relates to the addition made under S.69A of the Act, on account of unexplained investment in the cost of construction. We have considered this very issue in the context of the corresponding grounds of the Revenue for the assessment year 2000-2001, while dealing with its appeal for that year, being ITA No.778/Hyd/2009. For the detailed reasons given in that context in para 12 hereinabove, we uphold the action of the CIT(A) in deleting the addition of Rs. 14,43,991 made by the assessing officer on account of unexplained investment of the assessee in the cost of construction, for the assessment ye....
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....ng profit on the basis of the work in progress method or project completion method. The assessee company not offering any profit on work in progress basis. And the project completion method does not mean that income to be postponed till registration is complete or 100% advances is received irrespective of the stage of construction. If the project is completed more than 95%, the assessee company cannot postpone the profits to the subsequent years taking the sale receipt as advance. The total cost of construction per sft including the expenditure incurred in the subsequent year comes to only Rs. 757 per sft. The land cost per sft. comes to Rs. 324 per sft. which is based on the built up area to be given to the land lord towards land cost i.e. the total amount paid to land lord comes to 757 of construction per sft X 45,000 sft. i.e. Rs. 3,40,65,000. The salable area to the developer is 105000 sft. Accordingly, the land cost per sft of salable area come to Rs. 324 per sft (Rs.3,40,65,000/1,05,000 sft. Accordingly, the total cost of construction including land cost to the builder come to Rs. 1081 per sft (Rs.324 + 757). The total advances received and receivable for the 13500 sft area s....
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....axed the entire amount of part advances received as on 31.3.2005 and the amount receivable. This was over and above the declared turnover from MPM Mall. By adopting the revenue on the basis of part advances received/receivable, the assessing officer has ignored the consistent method followed by the assessee. By making separate addition on advances, the assessing officer taxed the regular income form this venture and also the income on advances involving hypothetical income, which is not correct. It was further submitted that by taking the advances receivable in case of part payments, into account, the assessing officer not only departed from the regular method of accounting, but also subjected the advance amount to tax, thereby disturbing the revenue recognized in the assessment year 2006-07. It was stated that the reason why the assessee was not recognizing the advance receivable as revenue was that there was a possibility of cancellation in relation to the area sold as full amount was not received. Once the part payment of the advance is recognised as revenue, it will pose difficulty, if later the deal is cancelled. It was stated that in fact during the year amount involved in ca....
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....open to the ITO to intervene and substitute a system of accounting different form the one which is followed by the assessee, on the ground that the system which commends to the ITO is better." 53. The learned Authorised Representative further submitted before the CIT(A) that the Hon'ble Supreme Court in the case of United Commercial Bank V/s. CIT(240 ITR 355) laid down general principles in the matter of discarding the books. Referring to the principles laid down by the Hon'ble Supreme Court and the Hon'ble jurisdictional High Court in the above cases, the authorised representative further submitted that it would be found that the assessing officer has not made out a case as to why he has substituted the method as suitable to him, except making some general observations that the assessee ought to have followed work-in-progress method or project completion method. It was further submitted that it may be seen from the computation of income that the assessing officer while working out the profit, has not followed either of the methods, which was the reason for making a departure from the method followed by the assessee. Secondly in his attempt to change the method and tax advances ....
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....sessee and accepted by the department for last several years. In this context, the learned Authorised Representative also referred to the assessment orders passed for the assessment years 2002-03, 2003-04 and 2004- 05. 54. The CIT(A) held that having perused the assessment orders for the assessment years 2002-03, 2003-04 and 2004-05, which were made under S.143(3) of l.T. Act, the assessing officer was not justified in disturbing the consistent method of accounting followed by the assessee and accepted by the department even in the scrutiny assessments made for earlier years. 55. Aggrieved, Revenue preferred appeal 56. The Learned Departmental Representative relied on the order of the assessing officer and contended that the addition of Rs. 66,56,500 made on account of profits attributable to the advances received by the assessee is justifiable. 57. Learned counsel for the assessee Shri C.P.Ramaswamy submitted that the total built up area is 1,50,000 sq. ft out of which 45.000 sq.ft. is the share of the land lord. Thus, total constructed area of 1,05,000 sq. ft belonged to the assessee. Assessee was showing the Revenue from this project. Assessee was recognizing revenue....
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.... regularly followed by the assessee and has been accepted by the department as representing the correct profits. There is no change in circumstances to hold that this method of accounting will not reflect the true profits. The CIT(A) has followed the ratio of the decision of the Andhra Pradesh High Court in the case of CIT V/s. Margadarshi Chit Fund Pvt. Ltd. (155 ITR 442), wherein it has been held that it is not open to the ITO to intervene and substitute a system of accounting, different from the one followed by the assessee, on the ground that the system which commends to the ITO is better. We accordingly uphold the order of the CIT(A) and reject the grounds of the Revenue on this issue. Assessee's Appeal: ITA No.1607/Hyd/2008 60. First issue involved in this appeal of the assessee relates to an addition of Rs. 30,000 made on account of lodge rent receipts. 61. Facts of the case in brief are that the assessee company is having two divisions, namely, Construction Division and Hotel Division. The assessee company accounted for receipts of hotel division on receipt basis, whereas it was following mercantile system of accounting for the construction division. Therefore, ....
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....ster concerns, namely, Reliance Builders, Maheshwari Retreats, Maheshwari Builders and Ashish Builders. Since the assessee has not charged interest on advances given to the sister concerns, and since the assessee has failed to adduce any evidence to prove that borrowed funds were exclusively used for business purposes, the assessing officer was of the view that the amount of Rs. 59,51,375 claimed towards interest on borrowed funds cannot be allowed as deduction. The assessing officer further noted that Maheshwari Builders and Ashish Builders have merged and formed a new company by name, Maheshwari Mega Ventures Ltd. The interest free advances given to these concerns were to the tune of Rs. 8.37 crores. The assessing officer further noted that out of this amount, about Rs. 4 crores have been paid for purchase of land for a new project which is yet to commence and the balance amount was for share application money paid to Maheshwari Mega Ventures Ltd. Since dividend income is exempt from tax, the assessing officer observed that interest paid on share application money cannot be allowed as deduction as per the provisions of S.14A of the Act and the assessing officer disallowed the ent....
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....d.(225 ITR 560). 69. Referring to the reasons for disallowance made by the assessing officer, it was pointed out that one of the reasons was that the interest receivable on a notional working from the interest free advances is more than the interest debited in the profit and loss account. The assessing officer worked out the interest that would have been received by the assessee on the interest free advances at Rs. 61,28,578(notional) as against interest debited in the profit and loss account of Rs. 59,51,375, and it is on that account disallowance was made. According to the learned counsel for the assessee, the assessing officer completely lost sight of the fact that the interest debited in the Profit and Loss Account for the purposes of business is allowable under S.36(1)(iii) and the same has no connection with the notional amount of interest that would have been earned and the same could not be reason for disallowance. Secondly, it is submitted, this observation of the assessing officer has no relevance for disallowance of interest under S.36(1)(iii), since what is required for disallowance of interest as a primary condition is that the assessing officer has to establish tha....
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....ed that the principles enunciated by the Apex Court in the context of disallowance of interest in the case of SA Builders V/s. CIT (288 ITR 1) have to be considered. 73. The learned counsel for the assessee submitted that the amounts have been borrowed from disclosed sources, which is easily verifiable from its accounts and it is for the assessing officer to establish that there was direct nexus between the amount of borrowed fund and the amount advanced interest free and there is no commercial expediency involved in the transaction. This nexus is not established by the assessing officer before making disallowance of interest. 74. The Learned Departmental Representative on the other hand, opposed the above submissions of the learned counsel for the assessee, and strongly supported the disallowance out of interest made, relying on the orders of the lower authorities. He also placed reliance on the following decisions- (a) CIT V/s. Globe Theatres P. Ltd.(122 ITR 240)-Bom. (b) Assam Pesticides & Agro Chemicals V/s. CIT(227 ITR 846)- Gau (c) CIT V/s. Rajendra Prasad Modi and Anr (115 ITR 519)-SC 75. We heard both parties and perused the material on record. We find tha....