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2019 (3) TMI 1272
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.... Bhawan in Connaught Place in New Delhi. The Assessee follows the Completed Contract Method ('CCM') as compared to the Percentage Completion Method ('PCM'). The case of the Assessee is that since it follows the CCM, income is not recognised till the completion of the project. All receipts are treated as 'advance' and all direct expenses are accounted for as 'capital work and progress.' A reference is made to the Accounting Standard ('AS') 7 issued by the Institute of Chartered Accountants of India ('ICAI ') initially in 1983 which was revised first in 2002 and then in 2016. According to the Assessee, only on completion or substantial completion of the project, revenue is recognised. Payment of compensation to flat/space buyers 3. The Assessee states that the Gopal Das Bhawan Project was completed in the Financial Year ('FY') 1994-95 relevant to Assessment Year ('AY') 1995-96. Some of the allottees of the flats refused to take them for completion since the New Delhi Municipal Council ('NDMC') changed the usage of the Lower Ground Floor ('LGF'). The Assessee then started negotiating with the relevant flat buyers and persuaded them to surrender their ownership and allotment lett....
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....d paid compensation amount "once and for all to repurchase the property" and this was "in fact a sale consideration and cannot be allowed as business expenditure." 7. The AO further observed that enquiries had been made with some of flat owners to ascertain the treatment they had given to the said receipt of compensation in their books of accounts and income tax returns. All of them had shown the amount received from the Assessee as capital gains in their books of accounts as well as income tax returns after indexation of the cost of acquisition. This was an additional ground for the AO to reject the plea of the Assessee that the payment of compensation was business expenditure. Accordingly, the payment of compensation towards "repurchase of the flat" was disallowed by holding that it was "a capital expenditure." The said amount was added back to the income of the Assessee. Order of the CIT (A) 8. In the appeal filed by the Assessee, the Commissioner of Income Tax Appeals ['CIT (A)'] by order dated 30th October, 1998 came to the following conclusions: (i) There was no dispute that the Assessee was engaged in the business of real estate and the space constructed by....
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....en placed before the ITAT by the Assessee which it analysed. In the impugned order, the ITAT arrived at the following conclusions: (i) Although in the space buyer's agreement, the amount given for booking of the flat is to be refunded along with the interest in certain eventualities, "nothing over and above" the said sum was payable and the term 'compensation' does not appear in either the letter of allotment or in the space buyer's agreement. (ii) The compensation amount had no relationship whatsoever either with the area comprising a flat booked or with reference to the total amount paid to the Assessee. There was no material which could justify the "quantum of payments stated to be the compensation to various persons." (iii) The opinion given by a lawyer justifying the payment of compensation, stating that since it would ultimately enhance the value of the space which could then be sold at a higher price to another buyer, was "a tailor-made opinion". The huge amounts paid by the Assessee as compensation, even when the agreement between the parties did not require it, was not justified event accounting for the cost of litigation that might ensue. ....
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....s that under the CCM, "revenue is recognised only when the contract is completed or substantially completed; that is, when only minor work is expected other than warranty obligation. Costs and progress payments received are accumulated during the course of the contract but revenue is not recognised until the contract activity is substantially completed." 18. Para 8 of AS 7 talks of "Costs to be Accumulated for Construction Contracts". Para 8.1 states that "Costs attributable to a contract are identified with reference to the period that commences with the securing of the contract and closes when the contract is completed." 19. Under para 8.4, the costs incurred by a contractor are stated to be divided into "i. Costs that relate directly to a specific contract; ii. Costs that can be attributed to the contract activity in general and can be allocated to specific contracts; iii. Costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts." 20. Para 8.7 of AS 7 elaborates what 8.4 (iii) talks of, viz., examples of costs that relate to the acti....
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.... It was contended by Ms. Malhotra that even if the compensation paid for the surrender of the flats is not treated as capital expenditure, it should form part of the valuation of stock. In reply, Mr. Syali pointed out that the Assessee has explained that the reason for payment of compensation was that the LGF initially was approved by NDMC as 'airconditioned space' and, therefore, while booking that space, prospective buyers proceeded on the basis that it would be for commercial use. However, in terms of the completion certificate issued by the NDMC, the LGF was sanctioned as 'storage.' It was for this reason that the buyers lost interest. The Assessee then decided to return the advance received and also compensate the buyers since the buyers' funds had remained with the Assessee for some time. The Assessee had sought to explain that this compensation corresponded to the increase in the resale value. 26. There is merit in the contention of the Assessee, based on AS 2 that compensation paid subsequent to the completion of the project is an 'extraordinary item.' It was not 'cost' of completion of the project and, therefore, such compensation could not be added to the value of the ....
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....30. In the said case the Supreme Court was considering whether payment for the extra services rendered by an employee could be allowed as business expenditure. It was held that for the purposes of allowing commercial pay to an employee as expenditure under Section 36 (1) (ii) of the Act, it had to necessarily be paid pursuant to a contractual obligation. The mere fact that the commission was paid 'ex gratia' would not necessarily mean it is unreasonable. It was observed "even where the nature of the work as remain the same, commercial expediency may require payment of commission to an employee." The payment was allowed as business expenditure. 31. In Commissioner of Income Tax, U.P. v. Nainital Bank Ltd. (1966) 62ITR 638 (SC) the Assessee bank had settled the claims of those who had pledged their jewellery with the Bank which was stolen by dacoits. The question was whether such payments could be allowed as business expenditure under Section 10(2)(xv) of the Indian Income Tax Act, 1922? It was acknowledged that "In choosing to compensate its constituents for the loss of their jewellery and maintain its business connections and goodwill, the bank laid out expenditure for ....
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....ed in 1939, allowance was given in respect of any non-capital expenditure 'incurred solely for the purpose of earning such profits or gains.' Under the present law, the expenditure should be laid out 'wholly and exclusively for the purposes of the business.' The two expressions are not synonymous; the latter is wider than the former. Expenditure may be for the purpose of the business although it may not be incurred for the purpose of earning the profits of the business. This is established by the decision of the Supreme Court in Meenakshi Mills Ltd. v. CIT 63 ITR 207. The expression "for the purposes of business" is wider than the expression "for the purpose of earning income." The former would include within its scope expenditure incurred on grounds of commercial expediency." 35. In the present case, the Assessee has a plausible explanation for making such payment of compensation to protect its 'business interests.' While it is true that there was no 'contractual obligation' to make the payment, it is plain that the Assessee was also looking to build its own reputation in the real estate market. 36. Further the mere fact that the recipients treated the said payment as 'capit....
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....de should be treated as income from house property (IHP), as claimed by the Assessee, or as business income? 42. The question arose even in AY 1995-96 where the AO by order dated 27th March 1998 assessed the said rental income as 'income from business.' During AY 1995-96 the Assessee had shown a sum of Rs. 2,09,40,492 as a rental income from the flat/space given on rent to various parties. These spaces/flats were part of the stock and trade and the rental income was claimed as income from house property. The Assessee also claimed deduction of 1/5th of the repairs amounting to Rs. 41,29,837 under Section 24 of the Act. 43. During the assessment proceedings, in its reply dated 15th December 1997 to the query raised by the AO, the Assessee pointed out that there is nothing in law which prohibited the leasing out of stock and trade. It relied on the decision in CIT v. Chagan Das and Company 54 ITR 17 where the Supreme Court held that where a person buys and sells property, the income from that activity should be assessed as business income whereas the rental income from such property is assessed as income from house property. 44. For AY 1995-96, the CIT (A) in the order dated ....
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..... The Court finds that barring this one year i.e. AY 1996-97, in all the other AYs, the consistent view of the ITAT that rental income is to be assessed as IHP and not business income has been accepted by the Revenue. 50. Ms. Malhotra was unable to point out why only for AY 1996-97 a different view should be taken. Both Ms. Malhotra for the Revenue and Mr. Syali for the Assessee have placed reliance on the decision of this Court in Ansal Housing Finance Company Ltd. [2013] 354 ITR 180 (Del) as supporting their respective cases. A careful perusal of the said judgment shows that the point in fact is answered in favour of the Assessee and not against it. 51.1 Ms. Malhotra sought to rely on the decision in Chennai Properties and Investments Ltd. v. CIT [2015] 373 ITR 673 (SC) as supporting the case of the Revenue. However, this Court is not able to agree with the above submission. In the said case, the object of the Appellant Assessee company was to acquire and let out properties in the city. The rental income received therefrom was shown as income from business in the return filed by the Assessee. 51.2 The AO, however, held that since the income was received from the letting ....
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.... rule of consistency as explained in the above decisions, this Court declines to entertain the plea of the Revenue which appears to be confined to AY 1996-97, with none of the earlier or subsequent AYs being challenged by the Revenue. Accordingly, the issue is decided in favour of the Assessee and against the Revenue by answering the question in the affirmative and holding that the rental income of the Assessee from the properties forming part of its stock-in-trade would be IHP and not business income. ITA 2078 of 2010 being the appeal of the Revenue for AY 1996-97 is accordingly dismissed. Brokerage and Commission 54. The next major issue concerns the expenditure on brokerage and commission. The issue arose in AY 1995-96 when the Assessee debited Rs. 1,45,25,708 to the P&L account as brokerage and commission towards service rendered by brokers for sale of flats and leasing out commercial spaces/flats. 55. According to the AO, the amount so paid appeared to be extraordinary. The Assessee's plea was that the brokers were demanding higher amounts as they were not being compensated with income which may accrue to the owners in future because of the interest free element of th....
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.... part of the Assessee's business and such expenditure incurred on the lease is a part of the business and such expenditure and exploitation of the stock in trade is admissible as business expenditure. 62. The ITAT reversed the ruling of the CIT (A) and upheld the decision of the AO to the extent of disallowing 50% of the foreign travel expenditure. This issue is similar to the issue of brokerage and commission which was held allowable and accepted by the Revenue for all of the AYs in question except for AY 1996-97. Again, following the rule of consistency, this Court answers this issue in favour of the Assessee and against the Revenue. Interest and guarantee commission 63. The next issue is the treatment of the amount paid by the Assessee on account of interest and guarantee commission. The AO sought to add this amount for AY 1996-97 to the Assessee's income on the ground that the loan raised from the Bank by the Assessee was given to its sister concern without charging interest. The ITAT, however, deleted the addition. 64. The facts in brief for AY 1997-98 were that the interest amount of Rs. 32225676 comprised the following "Rs.1,07,91,828/- on CC limit, paid....
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....charge for providing interest free finance. Since the Assessee was not eligible to seek licence to develop by itself a housing project without acquiring 100 acres of contiguous land interest, free advances were given to the associate companies for the purposes of Assessee's business. 70. The Assessee's case appears to be supported by the decisions in SA Builders v. CIT [2007] 288 ITR 1 (SC) which has been followed in Hero Cycles v. CIT [2015] 379 ITR 347. The ratio of the decision of the Bombay High Court in CIT v. Lokhandwala Constructions Industries Ltd. [2003] 260 ITR 579 (Bom) was rightly relied upon by the ITAT to allow the plea of the Assessee and treat the said interest payments as revenue expenditure. As explained in CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom) and this Court in Regal Theatre v. CIT [1997] 225 ITR 205 (Del) and CIT v. Gautam Motors [2011] 334 ITR 326 (Del) merely because the Assessee was a cash rich company, the payment of interest cannot be disallowed as business expenditure. 71. Further as rightly pointed out, AS 2 would apply in terms of which, with the Assessee following the CCM, the expenditure incurred subsequent to the completion of the ....
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....dit of TDS and on the other hand there was debit of tax paid on behalf of the owners. 78. The Court is of the view that there was no occasion to invoke Section 154 of the Act, since the issue was a debatable one. The decisions of the CIT (A) as affirmed by the ITAT take a plausible view and deserve to be upheld. 79. For the aforementioned reasons, the Court is of the view that the plea of the Assessee should succeed. Accordingly, the question is answered in favour of the Assessee and against the Revenue. Interest under Section 201 (1A) 80. The next question is about charging of interest under Section 201(1A). The view that while passing on the rents collected to the respective owners the Assessee should have deducted TDS. Further, that interest thereon under Section 201 (1A) of the Act was also liable to be paid. 81. While the AO levied interest, the CIT (A) following the order in AY 1995-96 where it held that the Assessee was not liable to deduct TDS in respect of rent received on behalf of others, cancelled the interest. The ITAT agreed with the CIT (A). 82. Under Section 194-I of the Act, the liability to deduct TDS is on the tenant paying the rent. The amount ....
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....er of the Tribunal in so far as legal expenses and advertisement are concerned. In the circumstances, we hold that the assessee is entitled to have the deduction of the expenditure on advertisement and legal expenses in full in the year in which it was incurred. On the question of sales promotion charges, the Tribunal remanded the matter back to the Assessing Officer to consider the claim to the extent law permitted. Taking note of the overall facts and the nature of business, we confirm the order of the Tribunal on this expenditure." 86. Further in AYs 1995-96 and 1996-97 a similar expenditure was allowed and no question was framed by this Court. The Assessee being in the real estate business cannot carry on its business without publicity. The expenditure was necessary for the promotion of the business. The question is accordingly answered in favour of the Assessee and against the Revenue. Service charges 87. The question whether service charges are allowable as revenue expenditure arises for AYs 2001-02 and 2003-04. 88. The Assessee is admittedly following the CCM. Service charges were incurred after the completion of the project and would not be part of the capital w....