DCIT, New Delhi V. M/s. DLF Ltd., New Delhi

ITA 2749/DEL/2013

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 0067 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 24-07-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 06-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PUNEET RAI ADV SPECIAL
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Charitable institution; Earning of tax free income; Proportionate interest; Additional evidence; Valuation report; Competent authority; Notional interest; Revenue expenditure; Capital expenditure; TDS; Rule 8D; Set aside
• Section: 43B; 2(14); 14A; 40(a)(ia); 80IB; 37(1); 194C; 201(1); 205; 195; 80IA; 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER I.T.A. NO. 2126/DEL/2013 ASSESSMENT YEAR: 2008-09 DLF LIMITED, DLF CENTRE, (9 TH FLOOR), SANSAD MARG, NEW DELHI. V. THE ADDL. COMMISSIONER OF INCOME TAX, RANGE- 10, NEW DELHI. TAN/PAN: AAACD 3494N (APPELLANT) (RESPONDENT) I.T.A. NO. 2749/DEL/2013 ASSESSMENT YEAR: 2008-09 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-0, NEW DELHI. V. DLF LIMITED, DLF CENTRE, (9 TH FLOOR), SANSAD MARG, NEW DELHI. TAN/PAN: AAACD 3494N (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI R.S. SINGHVI & SHRI SATYAJEET GOEL, CA RESPONDENT BY: SHRI PUNEET RAI, ADV. SPECIAL COUNSEL DATE OF HEARING: 28 03 2019 DATE OF PRONOUNCEMENT: 27 05 2019 O R D E R PER AMIT SHUKLA, JM; THE AFORESAID CROSS APPEALS HAVE BEEN FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST IMPUGNED ORDER DATED 12.02.2013 PASSED BY LD. CIT (APPEALS)-XIII, NEW DELHI FOR THE QUANTUM OF ASSESSMENT PASSED U/S.143(3) FOR THE I.T.A. NO.2126 & 2749/DEL/2013 2 ASSESSMENT YEAR 2008-09. WE WILL FIRST TAKE UP THE ASSESSEES APPEAL BEING ITA NO.2126/D/2013, WHEREIN THE ASSESS EE IN VARIOUS GROUNDS OF APPEAL HAS RAISED THE FOLLOWING ISSUES: - GROUND NO. 1: ADDITION ON ACCOUNT OF BROKERAGE AND COMMISSION EXPENSES RELATES TO LEASED OUT PROPERTY 64,51,161/-. GROUND NO. 2.1 TO 2.6: DISALLOWANCE U/S.14A - RS.6,53,00,000/- GROUND NO. 3: DISALLOWANCE U/S.43B ON ACCOUNT OF PROVISION FOR LEAVE SALARY - RS. 1,33,77,910/- GROUND NO. 4: ADDITION ON ACCOUNT OF DISALLOWANCE O F EXPENSES U/S. 40(A)(IA) FOR NON DEDUCTION OF TDS ON PAYMENT TO PETRON CIVIL ENGINEERING LTD.RS. 1,29,52 ,790/- GROUND NOS. 5 TO 5.1: ADDITION ON ACCOUNT OF NOTION AL RENT WHERE SECURITY DEPOSITS RECEIVED BUT NO RENTAL INCO ME- RS.10,91,270/- GROUND NO. 6: ADDITION ON ACCOUNT OF CAPITALIZATION OF INTEREST AND PROCESSING FEES ON LOAN TAKEN FOR PURC HASE OF WINDMILLS: -RS.2,15,51,123/- GROUND NO. 7: ADDITION ON ACCOUNT OF INTEREST ON LA TE OF DEPOSIT TDS RS.28,79,372/- 2. AT THE OUTSET, LEARNED COUNSEL FOR THE ASSESSEE, SHRI R.S. SINGHVI SUBMITTED THAT GROUND NOS.1 AND 3 RELATING TO BROKERAGE AND COMMISSION EXPENSES AND DISALLOWANCE U/S. 43B ARE NOT PRESSED. ACCORDINGLY, GROUNDS NO. 1 AND 3 ARE DISMISSED AS NOT PRESSED. I.T.A. NO.2126 & 2749/DEL/2013 3 3. COMING TO THE ISSUE OF DISALLOWANCE U/S.14A, THE FACTS IN BRIEF ARE THAT THE ASSESSING OFFICER HAS MADE DI SALLOWANCE U/S.14A TO THE EXTENT OF RS.35,40,91,000/- IN ACCOR DANCE WITH RULE 8D. THE ASSESSING OFFICER NOTED THAT THE SPECIAL AUDITORS TO WHOM MATTER WAS REFERRED U/S.142A HAVE POINTED OUT THAT ASSESSEE-COMPANY HAS MADE INVESTMENT FOR A N AMOUNT AGGREGATING TO RS.89.97 CRORE AS ON 31 ST MARCH, 2008 IN 12 PARTNERSHIP FIRMS AS ITS CAPITAL CONTRIBUTION . THESE INVESTMENTS HAVE BEEN MADE OUT OF INTEREST BEARING FUNDS HAVING DIRECT NEXUS BETWEEN THE FUNDS BORROWED AND CAPITAL CONTRIBUTION MADE IN THE PARTNERSHIP FIRM, SINCE SH ARE OF PROFITS EARNED BY THE ASSESSEE COMPANY AGGREGATES T O RS.87.20 LAC WHICH IS EXEMPT U/S. 10(2A). APART FRO M THAT, ASSESSEE HAS ALSO MADE INVESTMENT IN VARIOUS PRIVAT E LIMITED COMPANIES. THE CLOSING BALANCE AS ON 31 ST MARCH, 2008 WAS RS.1,63,342.19 LACS. THE ASSESSEE HAS PAID OVER ALL INTEREST OF RS.425.61 CRORE. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTION THAT NO INTEREST BEARING FUNDS WERE UTIL IZED FOR MAKING THE INVESTMENT FOR EARNING THE EXEMPT INCOME ON THE GROUND THAT THE SAME HAS NOT BEEN SUBSTANTIATED BY THE ASSESSEE FOR DOCUMENTARY EVIDENCES. HE FURTHER REJE CTED THE ASSESSEES CONTENTION THAT IT HAS RECEIVED INTEREST AT RS.426.08 CRORES AGAINST THE INTEREST EXPENDITURE C LAIMED OF RS.425.61 CRORES AND THE BORROWED FUNDS WERE USED F OR GIVING LOAN TO OTHER SUBSIDIARY COMPANIES AT A HIGHER INTE REST RATE, THEREFORE, THE INTEREST ON WHICH SUMS HAVE BEEN BOR ROWED AND ASSESSEE HAS NOT MADE ANY EXPENDITURE ON EARNIN G INTEREST FREE INCOME OR EXEMPT INCOME TO WARRANT AN Y DISALLOWANCE, ON THE GROUND THAT SAME ALSO REMAINED I.T.A. NO.2126 & 2749/DEL/2013 4 UNSUBSTANTIATED. AO FURTHER OBSERVED THAT ASSESSEE- COMPANY HAS NOT BEEN ABLE TO ESTABLISH FLOW OF FUNDS OR ANY NEXUS. THE ASSESSEES CONTENTION IS BASED ON THE PRESUMPTION T HAT ENTIRE INVESTMENTS HAVE BEEN MADE FROM THE INTEREST FREE F UNDS AVAILABLE IN THE BALANCE SHEET AS THE ASSESSEE HAS NOT ESTABLISH ONLY FLOW OF FUNDS FROM ITS BANK ACCOUNT INTO INVESTMENT AND ESTABLISH THAT SAME IS FROM INTEREST FREE FUNDS AVAILABLE ONLY. HE ACCORDINGLY WORKED OUT THE DISAL LOWANCE OF 29.42 CRORE ON ACCOUNT OF INTEREST EXPENDITURE UNDE R RULE 8D(2) AND FURTHER MADE DISALLOWANCE OF ADMINISTRATI VE EXPENDITURE OF RS.5.98 CRORE UNDER RULE 8D(2)(3) AF TER FOLLOWING DECISION OF ITAT SPECIAL BENCH IN THE CAS E OF CHEM INVEST LTD., 121 ITD 318 . HE PROCEEDED TO MAKE THE DISALLOWANCE OF RS.35,40,91,000/- U/S. 14A R.W. RUL E 8D(II). 4. LD. CIT (A) AFTER ANALYZING THE INVESTMENT MADE INTEREST INCOME ON AN INTEREST EXPENDITURE INCURRED AND THE POSITION OF AVAILABILITY OF SURPLUS FUNDS WITH ASSESSEE HELD THAT NO DISALLOWANCE OF INTEREST CAN BE MADE. HOWEVER, HE H AS CONFIRMED THE PART OF THE DISALLOWANCE AFTER OBSERV ING AND HOLDING AS UNDER: 20.10 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT, OBSERVATION OF THE ASSESSING OFFICER, ORDERS OF CIT (A)-XVIII FOR AY 2006-07 AND MY OWN ORDER FOR AY 2007-08 IN APPEL LANT'S OWN CASE AND VARIOUS JUDICIAL PRONOUNCEMENTS RELIED UPO N BY THE APPELLANT ON THIS ISSUE. IT IS SEEN THAT DURING THE YEAR, THE APPELLANT HAS EARNED EXEMPT INCOME OF RS. 87,20,11,847/- AS S HARE OF PROFIT FROM PARTNERSHIP FIRMS AND DIVIDEND INCOME ON MUTUA L FUNDS. IT IS ALSO SEEN THAT APPELLANT HAS MADE AVERAGE INVESTMEN T OF RS. I.T.A. NO.2126 & 2749/DEL/2013 5 1197.30 CRORE IN VARIOUS PARTNERSHIP FIRMS AND IN T HE SHARES OF VARIOUS GROUP COMPANIES AND MUTUAL FUNDS. THE APPEL LANT HAS SHOWN TOTAL AVERAGE ASSETS DURING THE YEAR OF 17319 .40 CRORE IN THE BALANCE SHEET. VIDE MY DECISION ON GROUND NO. 6 AND 7,1 HAVE HELD THAT APPELLANT HAS SHOWN INTEREST INCURRED ON FIXED PERIOD LOAN OF RS. 604.43 CRORE. OUT OF THIS, AN AMOUNT OF RS. 354.89 CRORE HAS BEEN CAPITALIZED OVER THE PROJECT. THE APPELLAN T HAS ALSO PAID INTEREST ON OVER DRAFT ETC. TO THE TUNE OF RS. 176. 06 CRORE. AS SUCH THE TOTAL INTEREST PAYMENT DURING THE YEAR COMES TO RS. 425.60 CRORE. AS AGAINST THIS, THE APPELLANT HAS SHOWN INT EREST RECEIPTS OF RS. 411.99 CRORE IN THE P&L ACCOUNT. IF THE INTERES T PAID ON BANK OVERDRAFT FACILITIES OF RS. 176.06 CRORE IS REDUCED THEN BALANCE INTEREST PAID COMES TO RS. 249.54 CRORE WHICH IS LE SS THAN THE INTEREST RECEIPT FROM SUBSIDIARY COMPANIES AND BANK S. ON THE BASIS OF ABOVE WORKING IT CAN BE SAID THAT INVESTMENT MAD E BY THE APPELLANT COMPANY WAS INTEREST NEUTRAL. THEREFORE, ON THIS BASIS THE DISALLOWANCE OF INTEREST FOR EARNING EXEMPT INC OME WILL BE NOMINAL OR NIL. AT THE SAME TIME THE APPELLANT HAS BEEN SANCTIONED LOAN OF RS. 370 CRORES BY ICICI BANK AND HAS INVEST ED IN THE SHARES OF M/S EDWARD KEVENTOR (SUCCESSORS) PVT. LTD . FOR ACQUIRING SHARES OF SAID COMPANY. THE APPELLANT HAD PAID RS. 7.93 CRORE AS INTEREST ON THE LOAN TAKEN FROM ICICI BANK WHICH HA S BEEN SPECIFICALLY TAKEN FOR MAKING INVESTMENT IN SHARES OF M/S EDWARD KEVENTOR (SUCCESSORS) PVT. LTD. (PAGE 203 OF AOS O RDER). THE OTHER LOANS TAKEN BY THE APPELLANT COMPANY ON WHICH INTER EST IS PAID WERE RELATED TO THE CONSTRUCTION PROJECTS BEING UND ERTAKEN BY THE APPELLANT COMPANY AND ADVANCED TO OTHER GROUP, ENTI TIES. THEREFORE, INTEREST ON SUCH LOAN CANNOT BE CONSIDER ED FOR DISALLOWANCE U/S 14A. THE LOAN TAKEN IN MAKING INVE STMENTS IN THE I.T.A. NO.2126 & 2749/DEL/2013 6 SHARES OF M/S EDWARD KEVENTOR (SUCCESSOR) PVT. LTD CAN BE CONSIDERED FOR MAKING DISALLOWANCE U/S 14A OF THE I T ACT WHICH WORKED OUT AS UNDER:- AMOUNT 1 EXPENDITURE DIRECTLY RELATING TO THE EXEMPTED INCOM E - 2 AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN POINT NO.L. (DIR ECTLY RELATED TO EXEMPTED INCOME) (A X B / C) 0.54 DISALLOWANCE U/S 14A ( 1 + 2 ) 0.54 A AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN POINT NO. 1. (DIRECTLY RELATED TO EXEMPT INCOME) 7.93 B AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF TOTAL INCOME. 1197.30 C THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET 17,419.40 5. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE, MR. R.S. SINGHVI SUBMITTED THAT, THE LD. CIT (A) HAS ALLOWED THE RELIEF TO THE EXTENT OF RS.28,87,91,000/- BY OBSERVING THA T THE ENTIRE INVESTMENT IS OUT OF ASSESSEES OWN FUND, HO WEVER HAS CONFIRMED THE DISALLOWANCE OF RS.6.53 CRORE CONSIST ING OF PROPORTIONATE INTEREST OF RS.54 LAC ON LOAN TAKEN F OR PURCHASE OF SHARES OF M/S. EDWARD KEVENTOR PVT. LTD. AND RS. 5.99 CRORES UNDER RULE 8D(2)(III). HE SUBMITTED THAT INV ESTMENT IN THE SHARE OF M/S. EDWARD KEVENTOR PVT. LTD. WAS PUR ELY A STRATEGIC INVESTMENT, AND THEREFORE, NO DISALLOWANC E CAN BE MADE U/S.14A. APART FROM THAT, HE SUBMITTED THAT AS SESSEE HAS SUBSTANTIAL AMOUNT OF OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AND ENTIRE INVESTMENTS ARE FUL LY MADE I.T.A. NO.2126 & 2749/DEL/2013 7 OUT OF NON INTEREST BEARING FREE FUNDS. THE DETAILS OF SHARE CAPITAL AND RESERVES AS ON 31.03.2008 AND CORRESPON DING INVESTMENT APPEARING IN THE BALANCE SHEET WERE AS U NDER: AMOUNT (RS. IN LACS) A. SHARE CAPITAL 34,095.95 B. RESERVE AND SURPLUS 1,092,818.68 OWN FUNDS 1,126,914.63 TOTAL INVESTMENT IN SHARES/PARTNERSHIP FIRMS AS PER BALANCE SHEET 175,349.69 6. HE FURTHER PROVIDED US THE DETAILS OF INVESTMENT AND THE DETAILS OF EXEMPT INCOME IN THE FOLLOWING MANNER: (A) DETAILS OF INVESTMENT ARE GIVEN HEREUNDER: (RS. IN CRORES) 31.03.08 31.03.07 31.03.06 31.03.05 31.03.04 INVESTMENTS: - QUOTED MUTUAL FUNDS 31 10 - - - - QUOTED SHARES - UNQUOTED SHARES 1633 588 565 133 133 - PARTNERSHIP FIRM 90 84 49 41 45 TOTAL INVESTMENTS 1754 682 614 174 178 (B) DETAILS OF EXEMPT INCOME: PARTICULARS ASSESSMENT YEAR 2008-09 2007-08 20 06-07 SHARE OF PROFIT FROM PARTNERSHIP 1,87,02,005 5,66,24,572 4,88,69,429 FIRMS (NET) EXEMPT INCOME FROM SUBSIDIARY COMPANIES OTHER EXEMPT INCOME (DIVIDEND) 85,33,09,842 (MUTUAL FUNDS) TOTAL 87,20,11,847 5,66,24,572 4,88,69,429 I.T.A. NO.2126 & 2749/DEL/2013 8 7. HE FURTHER SUBMITTED THAT THE SAME WAS ALSO COME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL FOR THE ASSE SSMENT YEARS 2006-07 AND 2007-08, WHEREIN THE TRIBUNAL AFT ER DETAILED DISCUSSION HAS DELETED THE DISALLOWANCE ON THE GROUNDS. FIRSTLY , THERE IS NO SATISFACTION RECORDED BY THE ASSESSIN G OFFICER U/S.14A(2). SECONDLY , INTEREST FREE FUNDS AVAILABLE IN EXCESS OF INVESTMENTS IN EARNING TAX FREE SECURITIES, THIRDLY , INVESTMENTS IN PARTNERSHIP FIRMS AND COMPANIES ARE FOR THE BUSINESS PURPOSES OF THE ASSESSEE AND; LASTLY , NO DIVIDEND WAS EARNED BY THE ASSESSEE ON INVESTMENTS IN UNQUOTED SHARE OF THE PRIVATE LIMITE D COMPANIES. 8. HE FURTHER STRONGLY RELIED UPON THE JUDGMENT OF H ON'BLE DELHI HIGH COURT IN THE CASE OF ACB INDIA LTD. VS. ACIT REPORTED IN (2015) 374 ITR 108, WHEREIN IT HAS BEEN UPHELD THAT WHILE CALCULATING THE DISALLOWANCE UNDER RULE 8D(2)(II) ASSESSING OFFICER HAS TO ADOPT AVERAGE VALUE OF THE INVESTMENT THE INCOME FROM WHICH DOES NOT FORM PART OF THE TOT AL INCOME AND DISALLOWANCE CAN ONLY BE COMPUTED IN RESPECT TO INVESTMENT WHICH HAS YIELDED EXEMPT INCOME DURING T HE YEAR. THE ASSESSEE HAS EARNED EXEMPT INCOME FROM THE INVE STMENTS MADE IN PARTNERSHIP FIRM AND MUTUAL FUND AND NOT FR OM OTHER INVESTMENTS, AND THEREFORE, DISALLOWANCE IF A NY SHOULD BE RESTRICTED TO THE EXTENT OF RS.53.75 LAC, THE WO RKING OF WHICH WAS GIVEN IN THE FOLLOWING MANNER: I.T.A. NO.2126 & 2749/DEL/2013 9 AVERAGE INVESTMENT IN PARTNERSHIP FIRMS AND MUTUAL FUNDS OPENING AS ON 01/04/2007 = RS.84+10 CR. CLOSING AS ON 31/03/2008 = RS.90+31 CR TOTAL RS.215 CR AVERAGE INVESTMENT = RS.107.50 CR. DISALLOWANCE BEING 0.5% OF RS.107.50 CR. = 53.75 LAKHS. 9. BEFORE US, LD. SPECIAL COUNSEL APPEARING ON BEHA LF OF THE REVENUE STRONGLY RELIED UPON THE ORDER OF THE ASSES SING OFFICER AND FURTHER SUBMITTED THAT IN SO FAR AS STR ATEGIC INVESTMENTS ARE CONCERNED, THE SAME CANNOT BE REMOV ED FOR THE PURPOSE OF CALCULATING THE DISALLOWANCE IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD V/S CIT, 402 ITR 640 (SC). HE FURTHER SUBMITTED THAT THE ASSESSEE HAS TO ESTABLISH THE NE XUS AND THE LINK BETWEEN THE BORROWED FUNDS AND ITS UTILIZA TION SO AS TO PROVE THAT ALL THE INVESTMENTS YIELDING INVESTME NT INCOME HAS BEEN MADE OUT OF SURPLUS FUNDS AND INTEREST BEA RING FUND HAS BEEN USED PURELY FOR THE BUSINESS PURPOSES . 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO BEFORE US. THE UNDISPUTED FACT IS THAT ASSESSEE HAS EARNED EXEMPT INCOME OF RS.87,20,11,84 7/- AS SHARE OF PROFIT FROM PARTNERSHIP FIRM AND DIVIDEND INCOME ON MUTUAL FUNDS. THE AVERAGE INVESTMENT AS ON 31 ST MARCH, 2008 STOOD AT RS.1197.30 CRORE IN VARIOUS PARTNERSH IP FIRM AND THE SHARES OF VARIOUS GROUP AND MUTUAL FUNDS. T HE TOTAL I.T.A. NO.2126 & 2749/DEL/2013 10 AVERAGE ASSETS DURING THE YEAR IN THE BALANCE-SHEET WERE RS.1,754 CRORES. THE ASSESSEES CASE HAS BEEN THAT IT HAS HUGE SURPLUS FUND IN THE FORM OF RESERVES AND SURPL US AND SHARE CAPITAL AT RS.1126.91 CRORE OUT OF WHICH INVE STMENTS IN SHARES AND IN PARTNERSHIP FIRM WAS ONLY 175.30 CROR E. FROM A PERUSAL OF THE IMPUGNED APPELLATE ORDER WHICH IS BA SED ON PERUSAL OF MATERIAL PLACED ON RECORD, IT IS SEEN TH AT LD. CIT (A) HAS TAKEN NOTE TO THE FACT THAT ASSESSEE HAS PAID R S.176.06 CRORES INTEREST ON BANK OVERDRAFT FACILITIES AND TH E BALANCE INTEREST OF RS.249.5 CRORE IS MUCH LESS THAN TOTAL INTEREST RECEIVED FROM SUBSIDIARY COMPANIES AND BANKS WHICH WAS MORE THAN 411.99 CRORE. ON THESE FACTS, HE HAS HELD THAT ON INVESTMENT MADE BY THE ASSESSEE-COMPANY NO DISALLOW ANCE OF INTEREST CAN BE MADE. APART FROM THAT, HE HAS NOTED THAT ASSESSEE HAS BEEN SANCTIONED LOAN OF RS.370 CRORES BY ICICI BANK WHICH WAS INVESTED IN SHARES OF M/S. EDWART KE VENTOR P. LTD. FOR ACQUIRING THE SHARES OF A SAID COMPANY FOR WHICH ASSESSEE HAS PAID RS.7.39 CRORE INTEREST. THE OTHER LOANS TAKEN FROM THE ASSESSEE-COMPANY ON WHICH INTEREST H AS BEEN PAID, PURELY RELATED TO BUSINESS UNDERTAKEN BY THE ASSESSEE AND BUSINESS ADVANCE TO THE GROUP COMPANIES. BASED ON SUCH FINDINGS HE HAS HELD THAT INTEREST OF SUCH LOA N CANNOT BE CONSIDERED FOR DISALLOWANCE U/S.14A. HOWEVER, HE HA S CONFIRMED THE DISALLOWANCE OF RS.653 LACS MOSTLY AR ISING OUT OF DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE UNDER RULE 8D(2)(III) AND DISALLOWANCE OF INTEREST ON THE INVE STMENT MADE IN THE SHARES OF M/S. EDWARD KEVENTOR P. LTD. WHICH HAS BEEN STATED TO BE STRATEGIC INVESTMENT. 11. IN SO FAR AS DISALLOWANCE OF INTEREST IS CONCER NED, WE FIND I.T.A. NO.2126 & 2749/DEL/2013 11 THAT, NOT ONLY THE LD. CIT (A) HAS PROPERLY EXAMINE D THE UTILIZATION OF INTEREST BEARING FUNDS FOR THE ASSES SEE WHICH WAS PURELY FOR THE PURPOSE OF BUSINESS BUT ALSO FRO M THE BARE PERUSAL OF THE BALANCE SHEET, IT IS SEEN THAT THE I NTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IN THE FORM OF RE SERVES AND SURPLUS FAR EXCEEDS THE TOTAL INVESTMENT MADE IN SHARES/PARTNERSHIP FIRMS INCLUDING THE INVESTMENT M ADE IN THE SHARES OF M/S. EDWARD KEVENTOR P. LTD. WHICH HA S BEEN STATED TO BE STRATEGIC INVESTMENT. IF THAT IS SO, T HEN NO DISALLOWANCE U/S.14A CAN BE MADE. THIS PROPOSITION HAS NOW BEEN CONFIRMED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. RELIANCE INDUSTRIES LTD. IN CIVIL APPEAL NO .10 TO 13 OF 2019 JUDGMENT AND ORDER DATED 23 RD MARCH, 2019, WHEREIN THE HON'BLE SUPREME COURT HAS UPHELD THE PROPOSITION THAT IF ASSESSEE HAS INTEREST FREE FUND S AVAILABLE SUFFICIENT TO MEET ITS INVESTMENT, THEN IT CAN BE P RESUMED THAT THE INVESTMENT HAVE BEEN MADE FROM INTEREST FR EE FUND AVAILABLE WITH THE ASSESSEE AND NOT FROM THE BORROW ED FUNDS. THUS, NO DISALLOWANCE OF INTEREST CAN BE MADE. 11.1 IN SO FAR AS DISALLOWANCE MADE UNDER RULE 8D 2(III), ONE OF THE PLEA RAISED BY THE LEARNED COUNSEL BEFORE US IS THAT, FOR THE COMPUTATION OF AVERAGE INVESTMENT WHICH HAD NOT YIELDED EXEMPT INCOME SHOULD BE REMOVED FOR WHICH, RELIANCE HAS BEEN PLACED IN THE JUDGMENT OF HON'BLE DELHI COURT IN THE CASE OF ACB INDIA LTD VS. ACIT (SUPRA). IN VIEW OF SUCH A BINDING PRECEDENT, WE DIRECT THE ASSESSING OFFICER ONLY TO INCLUDE THOSE INVESTMENTS WHILE COMPUTING THE AVERA GE INVESTMENTS WHICH HAVE YIELDED EXEMPT INCOME, I.E., INVESTMENT MADE IN THE PARTNERSHIP FIRM AND MUTUAL FUND I.T.A. NO.2126 & 2749/DEL/2013 12 ONLY, BECAUSE INVESTMENT MADE ON UNQUOTED SHARES HA VE NOT YIELDED ANY EXEMPT INCOME. THE CALCULATION OF AVERA GE INVESTMENT IN PARTNERSHIP FIRM AND MUTUAL FUND HAS BEEN GIVEN BY THE LEARNED COUNSEL AS HAS BEEN INCORPORAT ED ABOVE AND ACCORDINGLY WE DIRECT THE ASSESSING OFFICER TO VERIFY THE SAME AND WORK OUT THE DISALLOWANCE OF 0.5%. ACCORDI NGLY, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 12. THE NEXT ISSUE RELATES TO DISALLOWANCE ON AC COUNT OF EXPENSES U/S.40(A)(IA) FOR NON-DEDUCTION OF TDS ON PAYMENT TO PETRON CIVIL ENGINEERING LTD FOR RS.1,29,52,790/ -. 13. THE FACTS IN BRIEF ARE THAT ASSESSEE HAS PAID L EGAL AND PROFESSIONAL EXPENSES TO PETRON CIVIL ENGINEERING P VT. LTD. AGAINST ARBITRATION AWARD OF RS.1,29,52,790/-. SINC E ASSESSEE HAS NOT DEDUCTED TDS ON THE PAYMENT MADE AGAINST ARBITRATION AWARD, THE ASSESSING OFFICER PROPOSED T O MAKE DISALLOWANCE U/S.40(A)(IA). IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED THAT THE ASSESSEE-CO MPANY HAD A DISPUTE WITH THE SAID PARTY AND THE MATTER WA S REFERRED TO ARBITRATOR FOR ARBITRATION AND ASSESSEE-COMPANY HAS NOT RECOGNIZED ANY LIABILITY AGAINST THE CLAIM OF M/S. PETRON CIVIL ENGINEERING IN ITS BOOKS OF ACCOUNT. THE WHOLE AMOU NT OF AWARDED BY THE ARBITRATOR WAS TREATED IN THE NATURE OF COMPENSATION AND THEREFORE, THE SAME DOES NOT FALL UNDER THE CATEGORY OF NORMAL PAYMENT MADE AGAINST ANY CONTRAC TUAL WORK AND ACCORDINGLY, TDS WAS NOT LIABLE TO BE DEDU CTED. LD. ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTIO N AFTER OBSERVING AND HOLDING AS UNDER: 17.4 THE ASSESSEE IN THE REPLY HAS SIMPLY STATED THAT IT HAD A DISPUTE I.T.A. NO.2126 & 2749/DEL/2013 13 WITH PETRON CIVIL ENGG PVT. LTD AND THE MATTER WAS REFERRED TO AN ARBITRATOR. THE COMPANY HAD NOT RECOGNISED ANY LIABILITY AGAINS T THE CLAIMS OF PETRON CIVIL ENGG AND THE WHOLE AMOUNT AWARDED BY THE ARBI TRATOR WAS TREATED IN THE NATURE OF COMPENSATION AND AS SUCH THE SAME DOE S NOT FALL IN THE CATEGORY OF NORMAL PAYMENT MADE AGAINST ANY CONTRAC TUAL WORK AND ACCORDINGLY NOT LIABLE FOR TDS. A PERUSAL OF THE AR BITRATION AWARD SHOWS THAT THE AWARD OF RS. 1,29,52,790/- HAS BEEN DETERMINED AS UNDER: CLAIM NO. 1 45,00,000.00 CLAIM NO. 2 44,54,100.00 INTEREST AMOUNT 39,98,690.00 1,29,52,790.00 CLAIM NO. 1 WAS REFUND OF RS. 45,00,000.00 RETAINED BY DLF LTD. CLAIM NO. 2 OF RS. 44.54.100.0 IS IN RESPECT OF PAYMENT D UE AGAINST 36TH FINAL BILL AND THE INTEREST AMOUNT OF RS. 39.98.690.0 WAS CALCULATED @ 10% PER ANNUM ON RS. 44,54,100.00 FROM 01.03.1998 TILL 28.0 2.2008. THIS CLEARLY SHOWS THAT THE PAYMENT MADE AGAINST CLAIM NO. 1 AND CLAIM NO. 2 WAS AGAINST RUNNING BILLS RAISED BY PETRON CIVIL ENGG W HICH WERE DISPUTED BY DLF LTD. THE PAYMENT MADE AGAINST CLAIM NO. 1 AND C LAIM NO. 2 IS CONTRACTUAL PAYMENT AND COVERED WITH THE AMBIT OF S ECTION 194-C FOR DEDUCTION OF TDS. THE ARBITRATOR HAD ALSO AWARDED I NTEREST FOR DELAY IN PAYMENT OF RUNNING BILLS AS DETERMINED UNDER CLAIM NO. 2 AND THIS PAYMENT IS PURELY IN THE NATURE OF INTEREST COVERED UNDER SECTION 194A FOR DEDUCTION OF TDS. THE ASSESSEE HAS FAILED TO DEDUCT TDS ON PAYMENT OF RS. 1,29,52,790 AS DISCUSSED ABOVE AND THE PLEA OF THE ASSESSEE THAT THE PAYMENT WAS TREATED IN THE NATURE OF COMPENSATION I S NOT ACCEPTABLE IN VIEW OF CLEAR AND DEFINED NATURE OF AWARD AS PER TH E ORDER. THE EXPENSE OF RS. 1,29,52,790 IS ACCORDINGLY DISALLOWED U/S.40 (A)(IA) FOR NON DEDUCTION OF TDS. I.T.A. NO.2126 & 2749/DEL/2013 14 14. LD. CIT (A) TOO HAS CONFIRMED THE SAID DISALLOW ANCE HOLDING THAT PAYMENT AWARDED BY THE ARBITRATOR WAS NOT COMPENSATION BUT SAME WAS CONTRACTUAL PAYMENT FOR W HICH APPELLANT WAS REQUIRED TO WITHHELD TDS FROM RUNNING BILLS AS PENALTY WAS FOR DELAY IN EXECUTING THE WORK AND DIS PUTES WITH REGARD TO THE QUALITY OF THE WORK. 15. BEFORE US, LEARNED COUNSEL SUBMITTED THAT TH E M/S. DLF CEMENT LTD. HAD AWARDED A CONSTRUCTION CONTRACT TO M/S. DLF LTD. (APPELLANT ASSESSEE) ON 24/02/1994. SUBSEQUENTLY, THE ASSESSEE SUB-CONTRACTED THE WORK TO M/S. PETRON CIVIL ENGINEERING P. LTD. AS PER MOU DATED 31/03/1994. THE EFFECTIVE DATE OF SUB-CONTRACT WAS 06/06/1994 AND THE WORK WAS TO BE COMPLETED IN 12 M ONTHS I.E. BY 05/06/1995. THE WORK GOT DELAYED AND DISPUT E AROSE BETWEEN THE PARTIES REGARDING CORRECTNESS OF BILLS AND PAYMENT OF THE SAME. THE ASSESSEE ADJUSTED AN AMOUN T OF RS. 45 LACS TOWARDS DAMAGES FOR DELAY IN COMPLETION OF PROJECT. FURTHER, THE ASSESSEE ALSO DISPUTED THE CORRECTNESS OF FINAL BILL OF RS. 91.87 LACS AS THE SAME WAS HIGHLY INFLA TED. THE DISPUTE COMPRISING CLAIMS AND COUNTER CLAIMS OF BOT H THE PARTIES WAS EVENTUALLY REFERRED TO THE ARBITRATION PROCEEDINGS VIDE ORDER OF HONBLE DELHI HIGH COURT DATED 29/01/ 2002. AFTER DETAILED DISCUSSION ON VARIOUS ISSUES, THE AR BITRAL TRIBUNAL DECIDED THE ISSUE SUBSTANTIALLY IN FAVOUR OF SUB- CONTRACTOR M/S. PETRON CIVIL ENGINEERING P, LTD.; A ND DIRECTED THE ASSESSEE TO PAY FOLLOWING AMOUNTS: CLAIM NO. 1 : RS. 45,00,000 CLAIM NO. 2 : RS. 44,54,100 I.T.A. NO.2126 & 2749/DEL/2013 15 INTEREST : RS. 39,98,690 TOTAL : RS . 1,29,52,790 THE APPELLANT MADE THE PAYMENT OF THE SAID AMOUNT A S PER TERMS OF ARBITRATION AWARD WHICH WAS DECREED BY THE COURT AND ACCEPTED BY BOTH THE PARTIES. THE ASSESSI NG OFFICER HAS CONSIDERED THE DISALLOWANCE U/S 40(A)(IA) ON TH E GROUND THAT APPELLANT SHOULD HAVE DEDUCTED TDS U/S 194C AT THE TIME OF PAYMENT OF AMOUNT MENTIONED IN CLAIM NO.L A ND 2 U/S 194A ON INTEREST COMPONENT. 16. LD. COUNSEL SUBMITTED THAT BOTH THE AUTHORITI ES HAVE FAILED TO CONSIDER THE NATURE AND CHARACTER OF THE PAYMENT BECAUSE, FIRSTLY, ASSESSEE HAS DENIED ITS LIABILITY TOWARDS M/S. PETRON CIVIL ENGINEERING PVT. LTD. AND THERE WAS CL AIM AND COUNTER CLAIM BY BOTH THE PARTIES AND IT COULD NOT BE SAID THAT FINAL PAYMENT OF THE DECREED AMOUNT IS IN THE NATURE OF CONTRACTUAL CHARGES ESPECIALLY WHEN ASSESSEE HAS DI SPUTED THE BILL AND IN RETURN HAS DEMANDED DAMAGES. SUCH ARBITRATION AWARD FOR COMPENSATION CANNOT BE SAID T O BE UNDER A CONTRACT OR IN PURSUANCE OF CONTRACT, AND T HEREFORE, PROVISION OF SECTION 194C ARE NOT APPLICABLE. FURTH ER, THE INTEREST ON THE SAID AMOUNT IS IN THE NATURE OF DAM AGES WHICH FALLS OUTSIDE THE PURVIEW OF SECTION 194A. IN ANY CASE, ONCE AMOUNT DECREED BY ARBITRAL TRIBUNAL, IT IS A K IND OF A JUDGMENT DEBT AND OVERRIDES THE PROVISIONS OF INCOME TAX ACT; AND IN SUPPORT, HE RELIED UPON THE FOLLOWING J UDGMENTS:- 1. ISLAMIC INVESTMENT CO. V. UOI [2004] 265 ITR 254 (BOM.) I.T.A. NO.2126 & 2749/DEL/2013 16 2. MADHUSUDAN SHRIKRISHNA V. EMKAY EXPORTS [2010] 188 TAXMAN 195 (BOM.) 3. GOLD CREST EXPORTS VS. ITO (ITAT MUM) (ITA NO.442/MUM/2009) 17. ALTERNATIVELY, HE SUBMITTED THAT IN VIEW OF PROVISO TO SECTION 201(1) READ WITH PROVISO TO SECTION 40(A)(I A) NO DISALLOWANCE SHOULD BE MADE WITH M/S. PETRON CIVIL ENGINEERING PVT. LTD. ASSESSEE HAS OFFERED THIS AMO UNT FOR TAXATION. 18. ON THE OTHER HAND, LD. SPECIAL COUNSEL HAS STR ONGLY RELIED UPON THE ORDER OF THE LD. CIT(A) AND SUBMITT ED THAT BASICALLY THE PAYMENT WHICH WAS TO BE MADE TO THE S AID PARTY WAS DUE TO THE NATURE OF CONTRACT ENTERED BETWEEN T HE ASSESSEE AND THE M/S. PETRON CIVIL ENGINEERING LTD. THUS, EVEN IF THE PAYMENT HAS BEEN MADE THROUGH ARBITRAL AWARD, IT WILL NOT CHANGE THE CHARACTER OF THE PAYMENT, AND T HEREFORE, ASSESSEE WAS LIABLE TO DEDUCT TDS UNDER THE PROVISI ON OF INCOME TAX ACT. 19. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PE RUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO BEFORE US. AS STATED ABOVE, TH E ASSESSEE HAS GIVEN SAID CONTRACT WORK TO M/S. PETRON CIVIL E NGINEERING PVT. LTD. EFFECTIVE FROM 06.06.1994 AND THE WORK W AS TO BE COMPLETED IN 12 MONTHS, I.E., 05.06.1995. DUE TO DE LAY, DISPUTE HAD ARISEN BETWEEN THE PARTIES REGARDING TH E CORRECTNESS OF THE BILLS AND PAYMENTS OF THE SAME. THE ASSESSEE HAS ADJUSTED AN AMOUNT OF RS.45 LACS TOWAR DS DELAY I.T.A. NO.2126 & 2749/DEL/2013 17 IN COMPLETION OF THE PROJECT AND HAS FURTHER DISPUT ED THE CORRECTNESS OF THE FINAL BILL OF RS.91.87 LACS. THE DISPUTE WAS REFERRED FOR ARBITRATION BY THE HONBLE DELHI HIGH COURT. THE ARBITRAL TRIBUNAL HAS FINALLY DECIDED THE ISSUE, SU BSTANTIALLY IN THE FAVOUR OF THE SUB-CONTRACTOR, M/S. PETRON CI VIL ENGINEERING P. LTD. AND ASSESSEE WAS DIRECTED TO PA Y THE AMOUNT ALONG WITH INTEREST AGGREGATING TO RS.1,29,5 2,790/-. 20. ERGO, IF THERE WAS A DISPUTE BETWEEN THE PARTI ES AND BOTH THE PARTIES HAD MADE CLAIM AND COUNTER CLAIM F ROM EACH OTHER AND THE ARBITRAL TRIBUNAL HAS GIVEN AWARD IN FAVOUR OF THE SUB-CONTRACTOR, THEN SUCH AN AWARD ASSUMES THE CHARACTER OF A JUDGMENT DEBT; AND WHEN AN AMOUNT B ECOMES A PART OF JUDGMENT DEBT, THEN IT LOSES ITS ORIGINAL CHARACTER AND BECOMES A JUDGMENT DEBT. IN SUCH A SITUATION, JUD GMENT DEBTOR IS NOT LIABLE TO DEDUCT TAX AT SOURCE EITHER ON THE AMOUNT OF THE AWARD OR A DECREE INCLUDING THE INTER EST COMPONENT OF THE DECREE/AWARD, BECAUSE IT CANNOT BE SAID TO BE ARISING OUT OF A CONTRACT OR ANY INCOME/INTEREST ACCRUING ANY PROVISION OF THE ACT. THE HON'BLE SUPREME COURT IN THE CASE OF ALL INDIA REPORTED LTD. VS. RAMCHANDRA D. DATAR, AIR 1961 SC 943, HAS HELD THAT, WHERE ANY AMOUNT BECOMES A PART OF THE JUDGMENT DEBT, IT LOSES ITS ORIGINAL C HARACTER AND ASSUMES A CHARACTER OF THE JUDGMENT DEBT AND ONCE SU CH AN AMOUNT ASSUMES A CHARACTER OF THE JUDGMENT DEBT, THE DECREE PASSED BY THE CIVIL COURT MUST BE EXECUTED. THIS PR INCIPLE HAS BEEN FOLLOWED BY THE HON'BLE BOMBAY HIGH COURT IN T HE CASE OF ISLAMIC INVESTMENT CO. VS. UOI (SUPRA) AND MADHUSUDAN SHRIKRISHNA VS. EMKAY EXPORTS (SUPRA) . IN BOTH THE JUDGMENT, IT WAS HELD THAT THE INTEREST PAID IN PURS UANCE OF I.T.A. NO.2126 & 2749/DEL/2013 18 DECREE OF THE COURT WHICH HAS TO BE DISCHARGED UNDE R THE SAID DECREE, THEN IT ASSUMES THE CHARACTER OF THE JUDGME NT DEBT AND HENCE JUDGMENT DEBTOR IS NOT LIABLE TO DEDUCT T AX AT SOURCE ON THE INTEREST COMPONENT OF THE DECREE. THI S PRINCIPLE WILL APPLY NOT ONLY TO THE INTEREST COMPONENT BUT A LSO TO THE OTHER PART. IN SUCH A CASE, THE AWARD GIVEN BY THE ARBITRAL TRIBUNAL CANNOT BE RECKONED AS PAYMENT MADE IN PURS UANCE OF A CONTRACT BUT PAYMENT IN PURSUANCE OF A JUDGMENT DECREE AND IS PART OF A JUDGMENT DEBT, AND THEREFORE, IN SU CH A CASE, ASSESSEE WAS NOT LIABLE TO DEDUCT TDS EITHER U/S.19 4C OR U/S.194A. THUS, ON THIS REASONING, WE HOLD THAT THE RE WAS NO OBLIGATION TO DEDUCT TDS ON THE PAYMENT MADE TO M/S . PETRON ENGINEERING P. LTD. IN ACCORDANCE WITH ARBIT RATION AWARD. ACCORDINGLY, THIS ISSUE IS ALLOWED IN FAVOUR OF THE ASSESSEE. 21. COMING TO THE ISSUE OF ADDITION ON ACCOUNT ON N OTIONAL RENT WHERE SECURITY DEPOSITS WERE RECEIVED BUT NO R ENTAL WAS SHOWN, AMOUNTING TO RS.10,91,270/-. IT HAS BEEN POI NTED OUT BY BOTH THE PARTIES THAT THIS ISSUE NOW STANDS COVE RED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2007-08 VIDE ORDER DATED 01 .11.2017 IN ITA NO.3846/D/2012. 22. THE ADDITION HAS BEEN MADE ON THE GROUND THAT A SSESSEE DESPITE BEING OWNER OF THE KIOSKS HAS NOT DISCLOSE D RENTAL INCOME IN ITS BOOKS AND THE SAME HAS BEEN TRANSFERR ED TO M/S. DLF SERVICES LTD. BY OVER RIDING TITLE. M/S. D LF SERVICES LTD IS PROVIDING MAINTENANCE AND UPKEEP SERVICES OF THE MALL INCLUDING KIOSKS. IN RETURN FOR CONSIDERATION FOR T HESE I.T.A. NO.2126 & 2749/DEL/2013 19 SERVICES, THE APPELLANT VIDE AUTHORITY LETTER DATED 12/12/2005 HAS GRANTED M/S DLF SERVICES LTD., RIGHT TO RECOVER THE RENTAL RECEIPTS FROM THE THIRD PARTIES USING SAID KIOSKS. ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE IN THE NAME OF M/S DLF SERVICES LTD. IN CONNECTION WITH MAINTENANCE SERVIC ES OF THE MALL. IN VIEW OF ABOVE ARRANGEMENT, M/S. DLF SERVIC ES LTD. IS SHOWING THE RECEIPTS FROM THE KIOSK AS A PART OF IT S INCOME WHICH IS DULY SUBJECTED TO TAX IN ITS HANDS AND ACC ORDINGLY THERE IS NO LOSS TO THE REVENUE. 23. THIS PRECISE ISSUE HAD COME UP FOR CONSIDERATIO N BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE EARLIER YEAR, WHEREIN IT HAS BEEN OBSERVED AND HELD AS UNDER: 42. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE GROUND IS REGARDING ADDITION OF RS. 12, 60,000/- AS RENTAL INCOME. THE ASSESSING OFFICER OBSERVED THAT THE ASS ESSEE WAS OWNER OF KIOSKS INSTALLED AT MALLS WHICH WERE LEASED TO V ARIOUS PARTIES AT THE LEASE RENT OF RS. 18,00,000/- PER ANNUM. THE AS SESSING OFFICER AFTER ACCEPTING STATUTORY DEDUCTION OF 30%, CONSIDE RED THE NET RENTAL INCOME AT RS. 12,60,000/-. THE CIT(A) CONFIRMED THE FINDING OF THE ASSESSING OFFICER. 43. THE APPELLANT CONTENDED THAT M/S. DLF SERVICES LTD. WAS APPOINTED AS MAINTENANCE AGENCY FOR UPKEEP AND MAIN TENANCE OF MALL, OWNED AND RUN BY APPELLANT. FOR MAINTENANCE S ERVICES BEING RENDERED BY DLF SERVICES LTD., THE APPELLANT ASSIGN ED THE LEASE RENTAL TO DLF SERVICES LTD. AS PART OF MAINTENANCE COST. T HE APPELLANT CONTENDED THAT THE DIVERSION OF LEASE RENT WAS TOWA RDS REIMBURSEMENT OF MAINTENANCE SERVICES RENDERED BY M /S. DLF SERVICES LTD. AND AS SUCH DIVERSION WAS TOWARDS PRO VISIONS OF I.T.A. NO.2126 & 2749/DEL/2013 20 MAINTENANCE SERVICES. IT WAS FURTHER CONTENDED THAT THE RENTAL INCOME AS DIVERTED TO DLF SERVICES LTD. HAS BEING SUBJECTE D TO TAX IN THE CASE OF M/S. DLF SERVICES LTD. AND THERE IS NO CASE OF S UBJECTING THE SAME INCOME AGAIN IN THE CASE OF APPELLANT. IN THIS CONN ECTION, THE APPELLANT MADE REFERENCE TO DECISION OF SUPREME COURT IN THE CASE OF M/S. ASHISH PLASTIC INDUSTRIES VS. ACIT 373 ITR 45, AS P ER WHICH SAME INCOME CANNOT BE SUBJECTED TO TAX AGAIN IN THE CASE OF THE APPELLANT. 44. THE LD. CIT DR SUPPORTED THE ORDER OF THE ASSES SING OFFICER AND CIT(A). 45. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE V IEW THAT THE APPELLANT ASSIGNED DLF SERVICES LTD. RIGHT TO RECOV ER LEASE RENT FOR MAINTENANCE AND UPKEEP SERVICES OF MALL AND AS SUCH THERE WAS A GENUINE BUSINESS ARRANGEMENT BETWEEN THE PARTIES. I F THE LEASE INCOME IS CONSIDERED AS CHARGEABLE TO TAX IN THE CA SE OF APPELLANT, THE APPELLANT MAY BE ELIGIBLE FOR CLAIM OF EXPENSES ON ACCOUNT OF MAINTENANCE OF MALL WHICH WAS OWNED AND RUN BY THE APPELLANT AND AS SUCH APPELLANT HAS NOT DERIVED ANY TAX BENEFIT O N THE BASIS OF SUCH ARRANGEMENT AND FOR DIVERSION OF LEASE RENT. IT IS FURTHER RELEVANT TO TAKE NOTE OF THE FACT THAT SUCH LEASE RENT HAS BEEN SUBJECTED TO TAX IN CASE OF M/S. DLF SERVICES LTD. 46. AFTER CONSIDERING THE FACTS OF THE CASE, WE AR E OF THE VIEW THAT THERE IS NO JUSTIFICATION FOR ADDITION OF RS. 12,60,000/- AS SAME WAS TOWARDS BUSINESS OBLIGATION AND FOR SPECIFIC SE RVICES RENDERED BY M/S. DLF SERVICES LTD. AND ACCORDINGLY THE IMPUGNED DISALLOWANCE IS DIRECTED TO BE DELETED. 24. THUS, FOLLOWING THE AFORESAID PRECEDENCE IN ASS ESSEES OWN CASE, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASS ESSEE AND THE IMPUGNED ADDITION IS DIRECTED TO BE DELETED. I.T.A. NO.2126 & 2749/DEL/2013 21 25. THE NEXT ISSUE RELATES TO ADDITION ON ACCOUNT O F CAPITALIZATION AND PROCESSING FEES ON LOAN TAKEN FO R PURCHASE OF WINDMILLS OF RS.2,15,51,123/-. 26. LD. ASSESSING OFFICER NOTED THAT ASSESSEE-COMPA NY DURING THE YEAR HAD SHOWN INCOME FROM POWER GENERAT ION THROUGH WINDMILLS AND CORRESPONDING EXPENSES FOR TH E SAME HAS BEEN DEBITED TO THE P&L ACCOUNT. THE SPECIAL AU DITORS HAVE NOTED THAT OUT OF THE TOTAL AMOUNT CAPITALIZED /INVESTED IN THE WINDMILL FOR RS.940.61 CRORE, AN AMOUNT OF R S.561 CRORE HAS BEEN FUNDED OUT OF BORROWED FUNDS AND BAL ANCE RS.379.61 CRORES WERE MET OUT OF OWN FUNDS. 27. AFTER TAKING NOTE OF THE AMOUNT OF LOAN SAN CTIONED, RATE OF INTEREST CHARGED BY THE BANK AND THE DETAIL S PERTAINING TO INTEREST AND FINANCE CHARGES WERE CHARGED IN THE P&L ACCOUNT IN RESPECT OF LOAN TAKEN FOR WINDMILL PROJEC TS, AND ALSO DATE-WISE DETAILS OF LOAN FUND AND OWN FUND US ED IN THE WINDMILL PROJECT, THE LD. ASSESSING OFFICER HELD TH AT CLAIM OF INTEREST AND PROCESSING CHARGES @ 40% NEEDS TO BE CAPITALIZED IN VIEW OF THE PROVISO TO SECTION 36(1)(III) READ WITH EXPLANATION 8 TO SECTION 43(1) OF THE ACT. THE RELEVANT OBSERVATION OF THE ASSESSING OFFICER IN THIS REGARD READS AS UNDER: 24.5 THE REPLY OF THE ASSESSEE HAS BEEN CONSIDERED AND THE ONLY CONTENTION OF THE ASSESSEE IS THAT THE INTEREST EXP ENDITURE HAS BEEN CLAIMED ACCORDING TO THE AS-16. HOWEVER IT IS TO BE OBSERVED THAT A PARTICULAR EXPENDITURE IS ALLOWABLE AS PER THE INCO ME TAX ACT AND THE ALLOWABILITY OF EXPENDITURE IS NOT GOVERNED BY ACCO UNTING STANDARDS. THE ALLOWABILITY OF INTEREST EXPENDITURE IS GOVERNE D BY SECTION 36(L)(III) I.T.A. NO.2126 & 2749/DEL/2013 22 OF THE INCOME TAX ACT AND IT CLEARLY STATES THAT: (III) THE AMOUNT OF THE INTEREST PAID IN RESPECT O F CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION : PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN R ESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALIZED IN THE BOOKS OF ACCOUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOW ED AS DEDUCTION. 24.6 THEREFORE THE AMOUNT OF INTEREST EXPENDITURE ON CAPITAL BORROWED FOR ACQUISITION OF A CAPITAL ASSET TILL TH E DATE ON WHICH CAPITAL ASSET WAS PUT TO USE SHALL NOT BE ALLOWED A S DEDUCTION. THE SPECIAL AUDITORS HAS CALCULATED SUCH INTEREST EXPEN DITURE AT RS. 1,99,18,538/-. THE ASSESSEE IN THE REPLY HAS NOT PU T FORTH ANY OBJECTION TO THE CALCULATION ADOPTED FOR ARRIVING A T THIS AMOUNT AND HAS NOT PUT FORTH ANY ARGUMENT IN TERMS OF PROVISIO NS OF SECTION 36(L)(III) OF THE INCOME TAX ACT. THE ONLY ARGUMENT RAISED BY THE ASSESSEE IS THAT IT HAD FOLLOWED AS-16 WHICH IS NOT ACCEPTABLE. ACCORDINGLY INTEREST EXPENDITURE OF RS. 1,99,18,538 /- IS CAPITALISED. HOWEVER DEPRECIATION @ 40% (FOR HALF YEAR) IS ALLOW ED AND THE TOTAL DISALLOWANCE OF INTEREST EXPENDITURE WOULD BE RS. 1 ,19,51,123/-. 24.7 AS REGARD THE PROCESSING FEES THE ASSESSEE HA S SUBMITTED THAT OUT OF TOTAL PROCESSING FEES OF RS. 1,79,77,60 0/- IT HAD CLAIMED EXPENDITURE OF RS. 1,60,00,000/- AND THE BALANCE AM OUNT OF RS. 19,77,600/- PERTAINED TO SERVICE TAX AND WAS NOT CL AIMED AS EXPENDITURE BUT ADJUSTED AGAINST SERVICE TAX PAYABL E AS INPUT CREDIT. THE ASSESSEE HAS FURTHER ARGUED THAT PROCESSING FEE S IS ALLOWABLE AS DEDUCTION AND IT HAD PAID PROCESSING FEE IN THE MON TH OF DECEMBER, I.T.A. NO.2126 & 2749/DEL/2013 23 2007 OF RS.11,23,600/- AND IN FEBRUARY, 2008 OF RS. 1,68,54,000/-. THE COMPANY HAS STATED THAT UP TO DECEMBER, 2007, 2 7 NUMBERS OF WINDMILLS WERE INSTALLED AND WERE OPERATIONAL, SIMI LARLY TILL FEBRUARY, 2008, 63 NUMBERS OF WINDMILLS WERE INSTALLED AND WE RE OPERATIONAL. HOWEVER AS IN THE CASE OF INTEREST DISALLOWANCE THE PROCESSING FEES PAID FOR AVAILING LOAN IS THE STARTING POINT OF DIS BURSEMENT OF LOAN AND ALL THE PROCESSING FEES PAID WAS PRIOR TO THE INSTA LLATION OF WINDMILLS AND ACCORDINGLY THE PROCESSING FEES OF RS. 1,60,00, 000/- IS CAPITALIZED AND DEPRECIATION @ 40% (FOR HALF YEAR) IS ALLOWED AND THE TOTAL DISALLOWANCE OF PROCESSING FEE WOULD BE RS.96 ,00,000/-. HENCE THE TOTAL DISALLOWANCE IS AS UNDER: INTEREST DISALLOWANCE RS.1,19,51,123 PROCESSING FEES DISALLOWANCE RS.96,00,000 TOTAL RS.2,15,51,123/ - 28. LD. CIT(A) TOO HAS CONFIRMED THE SAID ADDITION. 29. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT THERE IS NO GROUND OR JUSTIFICATION FOR CAPITA LIZING THE CLAIM OF LOAN PROCESSING CHARGES TO THE EXTENT OF R S.96 LAC OUT OF CLAIM OF RS.1,60,00,000/- AS THE SAME IS ALLOWAB LE U/S.37 AND PROVISO TO SECTION 36(1)(III) READ WITH EXPLANATION 8 OF SECTION 43(1) IS ONLY APPLICABLE IN RESPECT OF CLAI M OF INTEREST AND NOT ON LOAN PROCESSING CHARGES. THUS, THIS AMOU NT SHOULD BE ALLOWED OUT OF TOTAL DISALLOWANCE MADE BY THE ASSESSING OFFICER. 30. ON THE OTHER HAND, LD. SPECIAL COUNSEL SUBMITTE D THAT THE PROCESSING CHARGES PAID TO THE BANK IS PART OF THE SAME I.T.A. NO.2126 & 2749/DEL/2013 24 LOAN AGREEMENT AND IF INTEREST IS TO BE CAPITALIZED THEN PROCESSING CHARGES CANNOT BE SEGREGATED TO BE ALLOW ED SEPARATELY. 31. AFTER CONSIDERING THE RIVALS SUBMISSIONS AND ON PERUSAL OF THE RELEVANT FINDINGS PLACED ON RECORD, WE FIND THAT THE ISSUE IS WITH REGARD TO THE CAPITALISATION OF RS.1, 19,51,123/- ON ACCOUNT OF INTEREST PAID ON LOAN FOR WINDMILL PR OJECT AND RS.96 LACS ON ACCOUNT OF LOAN PROCESSING CHARGES. T HE ASSESSING OFFICER HAS CAPITALIZED PROPORTIONATE CLA IM OF INTEREST AND PROCESSING CHARGES AFTER ALLOWING DEPR ECIATION @ 40% BASED ON PROVISO TO SECTION 36(1)(III) R.W. EXPLANATION 8 TO SECTION 43(1). IN SO FAR AS CAPITALISATION OF INTER EST EXPENDITURE IS CONCERNED, THE SAME IS DEFINITELY PA RT OF ACQUISITION OF THE CAPITAL ASSET WHICH NEEDS TO BE CAPITALIZED. THE LOAN PROCESSING CHARGES IS ALSO PART OF THE SAM E LOAN AGREEMENT, AND THEREFORE, IT CANNOT BE GIVEN A DIFF ERENT TREATMENT AS IT ALSO A CHARGE FOR ACQUISITION OF AN ASSET AND SAME TOO HAS TO CAPITALIZATION ONLY. ACCORDINGLY, W E AGREE WITH THE CONTENTION RAISED BY THE LD. SPECIAL COUNS EL THAT THIS CANNOT BE ALLOWED SEPARATELY U/S.37. ACCORDINGLY, G ROUND RAISED BY THE ASSESSEE IS DISMISSED. 32. THE NEXT ISSUE RELATES TO ADDITION ON ACCOUNT O F INTEREST ON LATE DEPOSIT OF TDS. 33. THE FACTS IN BRIEF ARE THAT THE LD. ASSESSING O FFICER ON THE BASIS OF COMMENTS MADE BY THE SPECIAL AUDITOR OBSER VED THAT INTEREST OF RS.28,79,372/- PAID ON LATE DEPOSIT OF TDS HAS BEEN CLAIMED AGAINST INTEREST RECEIVED ON INCOME TA X REFUND AND THE INTEREST PAYMENT ON LATE DEPOSIT OF TDS IS NOT I.T.A. NO.2126 & 2749/DEL/2013 25 ALLOWABLE EXPENDITURE. IN RESPONSE TO THE SHOW CAUS E NOTICE, THE ASSESSEE RELIED UPON THE JUDGMENT OF HON'BLE KA RNATAKA HIGH COURT IN THE CASE OF CIT VS. ORIENTAL INSURANCE COMPANY LTD., (2009) 183 TAXMAN 186 (KAR.) . HOWEVER, THE LD. ASSESSING OFFICER HELD THAT THE ASSESSEE HA S NOT FURNISHED ANY STATEMENT REGARDING LATE DEPOSIT OF T DS. 34. LD. CIT(A) HAS CONFIRMED THE SAID ADDITION AFTE R OBSERVING AND HOLDING AS UNDER: 33.10 I HAVE CONSIDERED THE OBSERVATIONS OF SPECIA L AUDITORS AS WELL AS OF THE ASSESSING OFFICER AND SUBMISSION OF THE APPELLANT. IT IS SEEN THAT THE APPELLANT COMPANY HAS RECEIVED INT EREST ON INCOME TAX REFUND OF RS 30,31,199/-. THIS INTEREST WAS CRE DITED IN THE ACCOUNT INTEREST PAID OTHERS - INCOME TAX AND THI S INTEREST ON REFUND WAS ADJUSTED AGAINST THE INTEREST PAID ON LA TE PAYMENT OF TDS OF RS. 28,79,372/-. THUS, AN AMOUNT OF RS. 28,7 9,372/- WAS ADJUSTED AGAINST THE INTEREST RECEIVED ON INCOME-TA X REFUND AND BALANCE AMOUNT WAS OFFERED AS INTEREST INCOME. THE INTEREST PAID ON LATE PAYMENT OF TDS IS NOT AN ALLOWABLE EXPENDIT URE U/S 37 OF THE IT ACT. THIS IS NOT AN EXPENDITURE WHOLLY AND E XCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE APPELLANT COMPANY, THEREFORE SAME IS NOT AN ALLOWABLE EXPENDITURE. HENCE, THE DISALLO WANCE OF SET OFF OF INTEREST PAYMENT ON LATE DEPOSIT OF TDS AGAINST THE INTEREST RECEIVED ON INCOME TAX REFUND WAS JUSTIFIED AND SAM E IS CONFIRMED. 35. BEFORE US THE LEARNED COUNSEL SUBMITTED THAT IN AN IDENTICAL ISSUE, ITAT KOLKATA BENCH IN THE CASE OF DCIT VS. M/S. NARAYANI ISPAT PVT. LTD., ITA NO.2127/KOL/2014 , ORDER DATED 30.08.2017 WHEREIN IT WAS HELD THAT TDS I.T.A. NO.2126 & 2749/DEL/2013 26 AMOUNT IS IN THE NATURE OF TAX OF THE DEDUCTEE, I.E ., OTHER PARTY AND NOT THAT OF THE ASSESSEE AND AS SUCH THE INTEREST ON LATE DEPOSIT OF TDS IS ALLOWABLE EXPENSES U/S.37 OF THE ACT. IN SUPPORT, FOLLOWING OBSERVATIONS AND FINDINGS OF THE TRIBUNAL IN PARA 7 WAS REFERRED: - ...IN THE CASE BEFORE US THE INTEREST WAS PAID FO R DELAYED PAYMENT OF SERVICE TAX & TDS. THE INTEREST FOR THE DELAY IN MA KING THE PAYMENT OF SERVICE TAX & TDS IS COMPENSATORY IN NATURE. AS SUC H THE INTEREST ON DELAYED PAYMENT IS NOT IN THE NATURE OF PENALTY IN THE INSTANT CASE ON HAND. THE ISSUE OF DELAY IN THE PAYMENT OF SERVICE TAX IS DIRECTLY COVERED BY THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF L ACHMANDAS MATHURA VS. CIT REPORTED IN 254 ITR 799 IN FAVOUR O F ASSESSEE. THE RELEVANT EXTRACT OF THE JUDGMENT IS REPRODUCED BELO W : THE HIGH COURT HAS PROCEEDED ON THE BASIS THAT THE INTEREST ON ARREARS OF SALES TAX IS PENAL IN NATURE AND HAS REJ ECTED THE CONTENTION OF THE ASSESSEE THAT IT IS COMPENSATORY IN NATURE. IN TAKING THE SAID VIEW THE HIGH COURT HAS PLACED RELI ANCE ON ITS FULL BENCH'S DECISION IN SARAYA SUGAR MILLS (P.) LTD. V. CIT [1979] 116 ITR 387 (ALL.) THE LEARNED COUNSEL APPEARING FOR TH E APPELLANT- ASSESSEE STATES THAT THE SAID JUDGMENT OF THE FULL BENCH HAS BEEN REVERSED BY THE LARGER BENCH OF THE HIGH COURT IN T RIVENI ENGG. WORKS LTD. V. CIT [1983] 144 ITR 732 (ALL.) (FB), W HEREIN IT HAS BEEN HELD THAT INTEREST ON ARREARS OF TAX IS COMPENSATOR Y IN NATURE AND NOT PENAL. THIS QUESTION HAS ALSO BEEN CONSIDERED B Y THIS COURT IN CIVIL APPEAL NO. 830 OF 1979 TITLED SARAYA SUGAR MI LLS (P.) LTD. V. CIT DECIDED ON 29-2-1996. IN THAT VIEW OF THE MATTE R, THE APPEAL IS ALLOWED AND QUESTION NOS. 1 AND 2 ARE ANSWERED IN F AVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. I.T.A. NO.2126 & 2749/DEL/2013 27 IN VIEW OF THE ABOVE JUDGMENT, THERE REMAINS NO DOU BT THAT THE INTEREST EXPENSE ON THE DELAYED PAYMENT OF SERVICE TAX IS ALLOWABLE DEDUCTION. THE ABOVE PRINCIPLES CAN BE APPLIED TO THE INTEREST EXPENSES LEVIED ON ACCOUNT OF DELAYED PAYMENT OF TDS AS IT RELATES TO THE EXPENSES CLAIMED BY THE ASSESSEE WHICH ARE SUBJECT TO THE TD S PROVISIONS. THE ASSESSEE CLAIMS THE SPECIFIED EXPENSES OF CERTAIN A MOUNT IN ITS PROFIT & LOSS ACCOUNT AND THEREAFTER THE ASSESSEE FROM THE PAYMENT TO THE PARTY DEDUCTS CERTAIN PERCENTAGE AS SPECIFIED UNDER THE ACT AS TDS AND PAYS TO THE GOVERNMENT EXCHEQUER. THE AMOUNT OF TDS REPRESENTS THE AMOUNT OF INCOME TAX OF THE PARTY ON WHOSE BEHALF THE PAYMENT WAS DEDUCTED & PAID TO THE GOVERNMENT EXCHE QUER. THUS THE TDS AMOUNT DOES NOT REPRESENT THE TAX OF THE AS SESSEE BUT IT IS THE TAX OF THE PARTY WHICH HAS BEEN PAID BY THE ASS ESSEE. THUS ANY DELAY IN THE PAYMENT OF TDS BY THE ASSESSEE CANNOT BE LINKED TO THE INCOME TAX OF THE ASSESSEE AND CONSEQUENTLY THE PRI NCIPLES LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF BHARAT COM MERCE INDUSTRIES LTD. VS. CIT (1998) REPORTED IN 230 ITR 733 CANNOT BE APPLIED TO THE CASE ON HAND. THUS, IN OUR CONSIDERED VIEW, THE PRINCIPLE LAID DO WN BY THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT COMMERCE INDUST RIES LTD. (SUPRA) IS NOT APPLICABLE IN THE INSTANT FACTS OF THE CASE. THUS, WE HOLD THAT THE ASSESSING OFFICER IN THE INSTANT CASE HAS WRONG LY APPLIED THE PRINCIPLE LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT COMMERCE INDUSTRIES LTD.(SUPRA). WE ALSO FIN D THAT THE HON'BLE SUPREME COURT IN THE CASE OF LACHMANDAS MATHURA (SU PRA) HAS ALLOWED THE DEDUCTION ON ACCOUNT OF INTEREST ON LAT E DEPOSIT OF SALES TAX U/S 37(1 OF THE ACT. IN VIEW OF THE ABOVE, WE C ONCLUDE THAT THE INTEREST EXPENSES CLAIMED BY THE ASSESSEE ON ACCOUN T OF DELAYED DEPOSIT OF SERVICE TAX AS WELL AS TDS LIABILITY ARE ALLOWABLE EXPENSES U/S.37(1) OF THE ACT. IN THIS VIEW OF THE MATTER, W E FIND NO REASON TO I.T.A. NO.2126 & 2749/DEL/2013 28 INTERFERE IN THE ORDER OF THE LD. CIT(A) AND WE UPH OLD THE SAME. HENCE, THIS GROUND OF REVENUE IS DISMISSED. 36. BEFORE US, THE LD. SPECIAL COUNSEL FOR THE REVE NUE SUBMITTED THAT THERE IS ONE DIRECT JUDGMENT OF HON' BLE MADRAS HIGH COURT IN THE CASE OF CHENNAI PROPERTIES AND INVESTMENT LTD., 239 ITR 435 ( MAD ) AND SUBMITTED THAT NOW IN VIEW OF THIS ONLY JUDGMENT OF HON'BLE HIGH CO URT, IN THIS ISSUE, THE MATTER SHOULD BE DECIDED AGAINST TH E ASSESSEE. 37. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT THE ASSESSEE-COMPANY HAS RECEIVED AN INTEREST ON IN COME TAX REFUND OF RS.30,31,199/- AND SUCH AN INTEREST WAS C REDITED IN THE ACCOUNT OF INTEREST PAID OTHERS INCOME TAX AND SUCH AN INTEREST OF REFUND WAS ADJUSTED AGAINST THE INTE REST PAID ON LATE PAYMENT OF TDS OF RS.28,79,372/- AND ONLY T HE BALANCE AMOUNT HAS BEEN OFFERED AS INTEREST INCOME. THUS, IN THIS MANNER, INTEREST PAID ON LATE PAYMENT OF TDS H AS BEEN CLAIMED AS EXPENDITURE U/S.37 OF THE ACT. 38. LEARNED COUNSEL FOR THE ASSESSEE HAD CONTENDED THAT THE TDS AMOUNT IS IN THE NATURE OF TAX FOR THE DEDU CTEE AND NOT THAT OF THE ASSESSEE AND SUCH INTEREST ON LATE DEPOSIT OF TDS IS ALLOWABLE EXPENSES U/S. 37 BECAUSE IT HAS BE EN INCURRED DURING THE COURSE OF BUSINESS. UNDER THE P ROVISION OF THE ACT, LEVY OF INTEREST FOR DELAY IN REMITTANC E OF THE TDS HAS BEEN ENVISAGED U/S. 201(1A) WHICH IS NOT IN THE NATURE OF PENALTY ALBEIT IT IS MORE ON ACCOUNT OF DELAYED TAX, DEPOSITED BY THE ASSESSEE ON BEHALF OF THE DEDUCTEE, I.E., OT HER PARTY FOR I.T.A. NO.2126 & 2749/DEL/2013 29 WHICH THE INTEREST IS CHARGED. THE AMOUNT OF TDS RE PRESENTS THE AMOUNT OF INCOME TAX WHICH IS PAYABLE BY THE PA RTY ON WHOSE BEHALF THE DEDUCTOR HAS DEDUCTED THE TAX AND PAYS TO THE GOVERNMENT EXCHEQUER. THE TDS AMOUNT DOES NOT REPRESENT TAX LIABILITY OF THE ASSESSEE ALBEIT IT IS THE TAX OF THE OTHER PARTY, BUT IT HAS TO BE PAID BY THE ASSESSEE. IN CASE THERE IS ANY DELAY IN PAYMENT OF TAX DEDUCTED BY TH E ASSESSEE ON BEHALF OF THE DEDUCTEE, THEN IT CANNOT BE LINKED OR RECKONED AS INCOME TAX OF THE ASSESSEE PAYABLE BY T HE ASSESSEE, AND MOREOVER THE INTEREST HEREIN IS MORE OF COMPENSATORY IN NATURE. THOUGH, CO-ORDINATE BENCH O F ITAT KOLKATA IN THE CASE OF DCIT VS. M/S. NARAYANI ISPAT PVT. LTD. (SUPRA) HAS ALLOWED THE SAID EXPENDITURE. EVEN THOUGH, WE MAY BE PERSUADED BY SUCH A REASONING, HOWEVER, W E FIND THAT HON'BLE MADRAS HIGH COURT AS POINTED OUT BY TH E LD. SPECIAL COUNSEL FOR THE REVENUE, IN THE CONTEXT OF INTEREST U/S. 201(1A) ONLY, HAS HELD THAT THE TDS PARTAKES T HE CHARACTER OF INCOME TAX AND IS NOT ALLOWABLE AS BUS INESS EXPENDITURE. THE RELEVANT OBSERVATION OF THE HON'BL E COURT READS AS UNDER: THE LIABILITY FOR DEDUCTION OF TAX ARISES BY REASO N OF THE PROVISIONS OF THE ACT. UNDER S. 201, THE CONSEQUENCE OF FAILURE T O COMPLY WITH THE SAME RENDERS THAT PERSON LIABLE TO BE DEEMED AS AN ASSESSEE IN DEFAULT WITH ALL THE CONSEQUENCES ATTACHED THERETO. THE LIABILITY TO PAY INTEREST ON THE AMOUNT NOT DEDUCTED OR DEDUCTED BUT NOT PAID IS DIRECTLY RELATED TO THE FAILURE TO DEDUCT OR REMIT THE AMOUNT. THE AMOUNT REQUIRED TO BE DEDUCTED IS THE AMOUNT PAYABL E AS INCOME-TAX. THE INTEREST PAID FOR THE PERIOD OF DELAY TAKES COL OUR FROM THE NATURE I.T.A. NO.2126 & 2749/DEL/2013 30 OF THE PRINCIPAL AMOUNT REQUIRED TO BE PAID, BUT NO T PAID WITHIN TIME. THE PRINCIPAL AMOUNT HERE WOULD BE THE INCOME-TAX A ND THE INTEREST PAYABLE FOR DELAYED PAYMENT IS THE CONSEQUENCE OF F AILURE TO PAY THE TAX AND IN THE CIRCUMSTANCES, IN THE NATURE OF A PE NALTY THOUGH NOT DESCRIBED AS SUCH IN SUB-S. (1A) OF S. 201 OF THE A CT. THE FACT THAT THE INCOME-TAX REQUIRED TO BE REMITTED WAS NOT INCOME-T AX PAYABLE BY THE ASSESSEE, BUT IS ULTIMATELY FOR THE BENEFIT OF AND TO THE CREDIT OF THE RECIPIENT OF THE INCOME ON WHOSE BEHALF THAT TAX IS PAYABLE DOES NOT IN ANY MANNER ALTER THE CHARACTER OF THE PAYMENT, NAME LY, ITS CHARACTER AS INCOME TAX. 6. LEARNED COUNSEL FOR THE REVENUE SUBMITTED PLACI NG STRONG RELIANCE ON THE RECENT DECISION OF THE SUPREME COUR T IN THE CASE OF BHARAT COMMERCE & INDUSTRIES LTD. VS. CIT (1998) 14 5 CTR (SC) 340 : (1998) 230 ITR 733 (SC) : TC S17.1878 THAT PAYMENTS REQUIRED TO BE MADE BY WAY OF INCOME-TAX UNDER THE IT ACT ARE NOT DEDUCTIBLE AS EXPENDITURE AND THE FURTHER AMOUNTS WHICH A PERSON MAY BE REQUIRED TO PAY BY A REASON OF FAILURE TO COMPLY WITH THE PR OVISIONS REQUIRING THE PAYMENTS OF THE TAX ARE ALSO AMOUNTS WHICH CANN OT BE REGARDED AS DEDUCTIBLE EXPENDITURE UNDER S. 37 OF THE ACT. IN THAT CASE THE QUESTION CONSIDERED WAS AS TO WHET HER INTEREST PAID ON DELAYED PAYMENT OF INCOME-TAX AND SURTAX BY WAY OF INSTALMENTS, ON INCOME VOLUNTARILY DISCLOSED UNDER THE VOLUNTARY DISCLOSURE OF INCOME AND WEALTH ACT, 1976, IS NOT IN ANY WAY AN E XPENSE INCURRED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF THE ASSESS EE'S BUSINESS. THE COURT HELD THAT (HEADNOTE) : 'WHEN INTEREST IS PAID FOR COMMITTING A DEFAULT IN RESPECT OF THE STATUTORY LIABILITY TO PA Y ADVANCE TAX, THE AMOUNT PAID AND THE EXPENDITURE INCURRED IN THAT CO NNECTION IS NOT IN ANY WAY CONNECTED WITH PRESERVING OR PROMOTING THE BUSINESS OF THE ASSESSEE. THE LIABILITY IN THE CASE OF PAYMENT OF I NCOME-TAX AND INTEREST FOR DELAYED PAYMENT OF INCOME-TAX OR ADVAN CE TAX ARISES N THE COMPUTATION OF THE PROFITS AND GAINS OF BUSINESS'. THE COURT FURTHER HELD THAT: 'UNDER THE IT ACT, THE PAYMENT OF SUCH I NTEREST IS I.T.A. NO.2126 & 2749/DEL/2013 31 INEXTRICABLY CONNECTED WITH THE ASSESSEE'S TAX LIAB ILITY. IF INCOME-TAX ITSELF IS NOT A PERMISSIBLE DEDUCTION UNDER S. 37, ANY INTEREST PAYABLE FOR DEFAULT COMMITTED BY THE ASSESSEE IN DISCHARGIN G HIS STATUTORY OBLIGATION UNDER THE IT ACT, WHICH IS CALCULATED WI TH REFERENCE TO THE TAX ON INCOME, CANNOT BE ALLOWED AS DEDUCTION'. BEFORE HOLDING SO, THE COURT CONSIDERED THE DECISIO N OF THE APEX COURT IN THE CASE OF MAHALAKSHMI SUGAR MILLS CO. VS. CIT (1980) 16 CTR (SC) 198: (1980) 123 ITR 429 (SC): TC 17R.877 A DECISION RENDERED BY THREE LEARNED JUDGES OF THE APEX COURT AND HELD THA T THE RATIO OF THAT JUDGMENT HAD NO APPLICATION TO THE CASE BEFORE IT I N THE CASE OF BHARAT COMMERCE & INDUSTRIES LTD. VS. CIT (SUPRA). THE ASS ESSEE IN THE CASE OF MAHALAKSHMI SUGAR MILLS CO. (SUPRA), HAD CLAIMED DEDUCTION OF INTEREST PAID ON ARREARS OF SUGARCANE CESS. THE PAY MENT OF SUGARCANE CESS, AS IT WAS OBSERVED BY THE COURT IN THE CASE O F BHARAT COMMERCE & INDUSTRIES (SUPRA), IS VERY MUCH A PART OF THE AS SESSEE'S BUSINESS EXPENSE AND ANY INTEREST ON ARREARS OF CESS WOULD, THEREFORE, TAKE COLOUR FROM THE CESS WHICH IS PAYABLE, THAT IT WAS AN INDIRECT TAX WHICH HAD TO BE PAID IN THE COURSE OF CARRYING ON B USINESS. 7. LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANC E ON THE JUDGMENT OF THE APEX COURT IN THE CASE MAHALAKSHMI SUGAR MILLS CO. (SUPRA). AS POINTED OUT BY THE APEX COURT IN ITS LA TER JUDGMENT IN THE CASE OF BHARAT COMMERCE & INDUSTRIES (SUPRA), THE C ESS WHICH WAS CONSIDERED IN THE CASE OF MAHALAKSHMI SUGAR MILLS C O. (SUPRA) WAS AN INDIRECT TAX PAYABLE IN THE COURSE OF THE BUSINESS OF THE ASSESSEE AND THE INTEREST PAID ON THE ARREARS OF THE CESS TOOK C OLOUR FROM THE CESS WHICH WAS PAID. 8. LEARNED COUNSEL FOR THE REVENUE ALSO REFERRED T O THE DECISIONS OF THE BOMBAY HIGH COURT IN THE CASE OF FERRO ALLOYS CORPN. LTD, VS. CIT (1992) 196 ITR 406 (BOM) : TC 17R.817 AND THE D ECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF MARTIN & HARRIS (P) LTD. VS. CIT (1994) 73 TAXMAN 555 (CAL). IT WAS HELD IN THOSE CA SES THAT THE I.T.A. NO.2126 & 2749/DEL/2013 32 INTEREST PAID UNDER S. 201(1A) OF THE ACT WAS NOT D EDUCTIBLE AS BUSINESS EXPENDITURE UNDER S. 37 OF THE ACT. 9. AS ALREADY NOTICED THE PAYMENT OF INTEREST TAKE S COLOUR FROM THE NATURE OF THE LEVY WITH REFERENCE TO WHICH SUCH INT EREST IS PAID AND THE TAX REQUIRED TO BE BUT NOT PAID IN TIME, WHICH RENDERED THE ASSESSEE LIABLE FOR PAYMENT OF INTEREST WAS IN THE NATURE OF A DIRECT TAX AND SIMILAR TO THE INCOME-TAX PAYABLE UNDER THE IT ACT. THE INTEREST PAID UNDER S. 201(1A) OF THE ACT, THEREFOR E, WOULD NOT ASSUME THE CHARACTER OF BUSINESS EXPENDITURE AND CANNOT BE REGARDED AS A COMPENSATORY PAYMENT AS CONTENDED BY LEARNED COUNSE L FOR THE ASSESSEE. 10. COUNSEL FOR THE ASSESSEE IN SUPPORT OF HIS SUBM ISSION THAT THE INTEREST PAID BY THE ASSESSEE WAS MERELY COMPENSATO RY IN CHARACTER BESIDES RELYING ON THE CASE OF MAHALAKSHMI SUGAR MI LLS CO. (SUPRA) ALSO RELIED ON THE DECISION OF THE APEX COURT IN TH E CASES OF PRAKASH COTTON MILLS (P) LTD. VS. CIT (1993) 111 CTR (SC) 3 89 : (1993) 201 ITR 684 (SC) : TC 17R.746, MALWA VANASPATI & CHEMICAL C O. VS. CIT (1997) 42 CTR (SC) 137 : (1997) 225 ITR 383 (SC) : S17.1860 AND CIT VS. AHMEDABAD COTTON MANUFACTURING CO. LTD. (1993) 115 CTR (SC) 401 (1994) 205 ITR 163 (SC) : TC 17R.848. IN ALL TH ESE CASES, THE COURT WAS CONCERNED WITH AN INDIRECT TAX PAYABLE BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS AND ADMISSIBLE AS BUSINE SS EXPENDITURE. FURTHER LIABILITY FOR INTEREST WHICH HAD BEEN INCUR RED BY THE ASSESSEE THEREIN WAS REGARDED AS COMPENSATORY IN NATURE AND ALLOWABLE AS BUSINESS EXPENDITURE. 11. THE RATIO OF THOSE CASES IS NOT APPLICABLE HER E. INCOME-TAX IS NOT ALLOWABLE AS BUSINESS EXPENDITURE. THE AMOUNT DEDUC TED AS TAX IS NOT AN ITEM OF EXPENDITURE. THE AMOUNT NOT DEDUCTED AND REMITTED HAS THE CHARACTER OF TAX AND HAS TO BE REMITTED TO THE STATE AND CANNOT BE UTILISED BY THE ASSESSEE FOR ITS OWN BUSI NESS. THE SUPREME COURT IN THE CASE OF BHARAT COMMERCE & INDUSTRIES ( SUPRA), REJECTED I.T.A. NO.2126 & 2749/DEL/2013 33 THE ARGUMENT ADVANCED BY THE ASSESSEE THAT RETENTIO N OF MONEY PAYABLE TO THE STATE AS TAX OR INCOME-TAX WOULD AUG MENT THE CAPITAL OF THE ASSESSEE AND THE EXPENDITURE INCURRED, NAMELY, INTEREST- PAID FOR THE PERIOD OF SUCH RETENTION WOULD ASSUME CHARACTER OF BUSINESS EXPENDITURE. THE COURT HELD THAT AN ASSESSEE COULD NOT POSSIBLY CLAIM THAT IT WAS BORROWING FROM THE STATE, THE AMOUNTS P AYABLE BY IT AS INCOME-TAX, AND UTILISING THE SAME AS CAPITAL IN IT S BUSINESS, TO CONTEND THAT THE INTEREST PAID FOR THE PERIOD OF DE LAY IN PAYMENT OF TAX AMOUNTED TO A BUSINESS EXPENDITURE. 39. SINCE, THIS IS THE ONLY JUDGMENT OF THE HON'BLE HIGH COURT BROUGHT TO OUR NOTICE AND NO CONTRARY DECISIO N OF ANY HIGH COURT HAS BEEN CITED BY FROM THE SIDE OF THE A SSESSEE, THEREFORE, AS JUDICIAL PRECEDENCE WE ARE PERSUADED TO FOLLOW THE SAME AND ACCORDINGLY, WE HOLD THAT SUCH AN INTE REST ON LATE PAYMENT OF DEPOSIT OF TDS CANNOT BE ALLOWED AS EXPENDITURE U/S.37. CONSEQUENTLY, THIS ISSUE IS DEC IDED AGAINST THE ASSESSEE. DEPARTMENTS APPEAL: 40. NOW, WE COME TO THE REVENUES APPEAL WHEREIN TH E REVENUE HAS CHALLENGED VARIOUS ADDITIONS. 1. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF PRIOR PERIOD EXPENSES - RS.55,36,471/-; 2. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF SEZ DEDUCTION U/S 80 IAB. - RS.11,19,06,82,702/-; 3. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF REVENUE RECOGNITION AS PER POCM. -RS.42,92,17,872/- I.T.A. NO.2126 & 2749/DEL/2013 34 4. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF INTEREST PERTAINING TO LOAN FOR EDWARD KEVENTER PROJECT BY C APITALISING THEM: RS. 1,10,00,000//; 5. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE ON ACCOUNT OF CAPITALIZATION OF INTEREST -RS.7,93,00,000/-; 6. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF BROKERAGE AND COMMISSION. - RS.2,99,74,610/-; 7. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF LATE CONSTRUCTION CHARGES RECEIVED FROM CUSTOMERS: RS. 1,88,81,388/-; 8. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF NET CONTINGENCY DEPOSIT. - RS.1,14,837 /-; 9. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF NET INTEREST FREE SECURITY DEPOSIT. - RS.3,30,893/-; 10. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF NET REGISTRATION CHARGES. - RS.8,49,20,884/-; 11. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANC E OF CLOSING CREDIT BALANCES IN INDIRECT TAXES. - RS.1,81,15,047 /-; 12 DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF EXPENSES TOWARDS NON-ALLOCATION OF OVERHEADS. - RS.15,02,99 ,365/-; 13. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF EXPENSES U/S 14A - RS.28,87,91,000/-; 14. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE/CAPITALIZATION OF EXPENSES ON SEZ PROJ ECTS NOT COMMENCED. - RS.1,26,11,958/-; 15. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF EXPENSES ON PROJECTS NOT COMMENCED. -RS.1,30,38,853/-; 16. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF EXPENDITURE U/S 40(A)(I)(A) OF THE I.T. ACT FOR NON-DEDUCTION O F TDS ON PAYMENT TO TWO TRUSTS. RS. 7,37,222. I.T.A. NO.2126 & 2749/DEL/2013 35 17. DELETION OF ADDITION ON ACCOUNT OF RECONCILIATI ON OF RENTAL INCOME AS PER TDS CERTIFICATES AND WITHDRAWAL OF TD S CREDIT:- RS.9,94,187/-; AND DELETION OF WITHDRAWAL OF CREDIT OF TDS RS.712257/-; 18. DELETION OF ADDITION ON ACCOUNT OF RECLASSIFICA TION OF INCOME FROM INCOME FROM HOUSE PROPERTY TO INCOME FROM BUSI NESS AND PROFESSION.- RS.9,40,52,455/-; 19. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF NOTIONAL RENT/ADDITIONAL ANNUAL LETTING VALUE IN RESPECT OF THE VACANT PROPERTY. - RS. 12,28,340/-; 20. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF DEPRECIATION CLAIMED ON DLF CENTRE BUILDING. - RS.7,17,794/-; 21. DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF EXPENSES WHERE BILLS ARE NOT IN THE NAME OF COMPANY - RS. 58,50,162. 41. BEFORE US, THE LEARNED COUNSEL AT THE OUTSET PO INTED OUT THAT MOST OF THE ISSUES RAISED IN THE REVENUES APPEAL IS COVERED BY THE EARLIER DECISIONS OF THE TRIBUNAL AN D ALSO CONFIRMED BY THE HON'BLE HIGH COURT. 42. IN SO FAR AS THE FIRST ISSUE IS CONCERNED, THE FACTS IN BRIEF ARE THAT THE SPECIAL AUDITORS HAVE POINTED OU T THAT ASSESSEE HAS CLAIMED PRIOR PERIOD EXPENSES AMOUNTIN G TO RS.70,12,062/- ON THE BASIS OF WHICH, LD. ASSESSING OFFICER ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE. IN RESP ONSE, THE ASSESSEE SUBMITTED THAT FIRST OF ALL, AN AMOUNT OF RS.14,63,017/- WAS ON ACCOUNT OF PURCHASE OF ASSETS BEING THE COST OF OFFICE EQUIPMENT AND COMPUTERS AND WAS NEVER I.T.A. NO.2126 & 2749/DEL/2013 36 CLAIMED AS ADMISSIBLE EXPENSES BUT HAVE BEEN CAPITA LIZED AS FIXED ASSETS. THE BALANCE AMOUNT WAS STATED TO BE O N ACCOUNT OF REIMBURSEMENT TO THEIR EMPLOYEES ON ACCOUNT OF T ELEPHONE EXPENSES, TRAVELLING, PRINTING AND STATIONARY AND T HESE ARE REIMBURSED IF THE EMPLOYEES SUBMIT THE CLAIMS AFTER PROPER VERIFICATION. THE CLAIM THOUGH RELATES TO EARLIER Y EARS, BUT BILLS WERE PRESENTED AND SETTLED DURING THE YEAR UNDER RE FERENCE, THEREFORE, THE SAME IS ALLOWABLE IN THIS YEAR. SIMI LARLY, WITH REGARD TO LEGAL AND PROFESSIONAL CHARGES WHICH WAS PAID TO VARIOUS CONSULTANTS, THESE PAYMENTS WERE MADE AFTER DUE VERIFICATION OF THE SERVICES RENDERED AND THE CLAIM WAS FINALLY SETTLED DURING THE YEAR, HENCE, ALLOWABLE IN THIS Y EAR ONLY. LIKEWISE, REPAIR AND MAINTENANCE EXPENSES, THE SAME WAS ON ACCOUNT OF ANNUAL MAINTENANCE, CONTRACT OVERLAPPING IN THE SUBSEQUENT YEAR OR MISCELLANEOUS REPAIR MAINTENANCE FOR WHICH BILLS WERE RECEIVED AFTER THE CLOSING OF THE YEAR, THEREFORE, ALL THESE EXPENSES WERE CRYSTALLIZED DUR ING THE YEAR. LD. ASSESSING OFFICER, HOWEVER, DISALLOWED THE AMOU NT OF RS.55,36,471/- WHICH WAS ON ACCOUNT REIMBURSEMENT RELATING TO EMPLOYEES; AND LEGAL AND PROFESSIONAL EXPENSES. 43. LD. CIT(A) RELYING UPON THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MODIPON LTD., 334 ITR 102 (DEL) HAS ALLOWED THE APPEAL. 44. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT PRECISELY SIMILAR ISSUE HAS ARISEN IN ASSESSEES OW N CASE FOR ASSESSMENT YEAR 2006-07 WHEREIN THE TRIBUNAL HAS AL LOWED I.T.A. NO.2126 & 2749/DEL/2013 37 THE SAME NATURE OF EXPENDITURES, AFTER OBSERVING AN D HOLDING AS UNDER: 231. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS. RS.18.51 LAKHS WERE REGARDING TO THE LEAVE TRAVEL ASSISTANCE CLAIMS OF THE ASSESSEE AN RS.63 LAKHS WERE ON ACCOUNT OF REIMBURS EMENT AND TELEPHONE AND CONVEYANCE EXPENSES OF THE ASSESSEE. THESE EXPENSES WERE DISALLOWED BY THE AO. THE DETAILS OF THESE EXPENSES ARE ENCLOSED AS PER ANNEXURE A AT PAGE 101 ALONG WITH EXPLANATORY STATEMENT. THESE BILLS ARE PERTAINING TO THE REGULA R STAFF OF THE EMPLOYEES AND ARE PAYABLE AND PAID AT THE TIME OF S ETTLEMENT OF THEIR ENTITLEMENT. IT IS IRRESPECTIVE OF THE TIME W HEN EMPLOYEE HAS ACTUAL TRAVELLED. IN SAME WAY, THE TELEPHONE AND CO NVEYANCE EXPENSES ARE ALSO REIMBURSEMENT OF THE EXPENDITURE WHICH WOULD BE DETERMINING THE CLAIM OF THE EMPLOYEES AND ADMITTED BY THE EMPLOYER. THE SPECIAL AUDITOR HAS HELD SO BECAUSE O F THE REASON THAT THE ACTUAL TRAVELLING HAS TAKEN IN THE PREVIOUS YEA R. NATURALLY, IT IS A MATTER OF COMMON SENSE FOR THE PURPOSE OF LTA CLAIM , THE TRAVELLING OF THE EMPLOYEES IS PRIOR TO THE CLAIMS SUBMITTED B Y THE EMPLOYEES. THE CIT (A) HAS SPECIFICALLY DEALT WITH ONE INSTANC E IN PARA 27.3 OF HIS ORDER. AFTER VERIFICATION OF THE DETAILS, IT WA S RECEIVED BY THE ASSESSEE FROM ITS EMPLOYEES DURING THIS PERIOD AND AFTER FOLLOWING THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT VS. SHRIRAM PISTON 174 TAXMAN 147, THE DISALLOWANCE I S DELETED. THE RELIANCE OF THE LD. AR ON THE DECISION OF HONBLE D ELHI HIGH COURT IN CIT VS. MODIPAN LTD. - 334 ITR 102 IS ALSO APT AS T HE EXPENDITURE ARE SETTLED DURING THE YEAR. FURTHER GENUINENESS OF THE SE EXPENDITURE IS NOT IN DOUBT AND ALLOWABAILITY OF THESE EXPENDITURE IS ALSO NOT IN QUESTION EXCEPT CLASSIFYING THEM AS PRIOR PERIOD EX PENSES AND THERE IS NO DIFFERENCE IN RATE OF TAXES FOR RESPECTIVE YE ARS. IN THE RESULT, WE CONFIRM THE ORDER OF THE CIT (A) IN DELETING THE AD DITION OF RS.22,98,510/- ON ACCOUNT OF PRIOR PERIOD EXPENDITU RE. IN THE RESULT, GROUND NO.26 OF THE REVENUES APPEAL IS DISMISSED. I.T.A. NO.2126 & 2749/DEL/2013 38 45. SINCE, SIMILAR ISSUE HAS BEEN ALLOWED BY THE TR IBUNAL FOLLOWING THE RATIO AND PRINCIPLE LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MO DIPON LTD. (SUPRA), THEREFORE, FOLLOWING THE SAME PRECEDENCE, WE ALLOW THE CLAIM OF THE ASSESSEE AND CONSEQUENTLY THE REVE NUES GROUND IS DISMISSED. DISALLOWANCE OF SEZ DEDUCTION U/S 80IAB. 46. THE NEXT ISSUE RELATES TO DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF SEZ DEDUCTION U/S.80IAB, WHICH IS ONE OF THE CORE ISSUES RAISED BEFORE US. 47. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAS SH OWN GROSS INCOME OF RS.1497.94 CRORE FROM SEZ ACTIVITIE S AND AFTER REDUCING THE COST OF CONSTRUCTION AMOUNTING T O RS.378.78 CRORE AND ALLOCATION OF COMMON EXPENSES H AD DECLARED ELIGIBLE PROFIT AT RS.119.06 CRORES AND CL AIMED THE DEDUCTION U/S.80IAB. 48. LD. ASSESSING OFFICER AFTER CONSIDERING THE ASS ESSEES SUBMISSION IN THIS REGARD AND STRONGLY RELYING UPON THE JUDGMENT AND ORDER DATED 03.02.2011 PASSED BY HON'BL E PUNJAB AND HARYANA HIGH COURT IN RESPECT OF ASSESSE ES LAND, CAME TO THE CONCLUSION THAT THE ACQUISITION OF LAND FOR DEVELOPMENT OF SEZ HAS BEEN HELD BY THE HON'BLE HIG H COURT TO BE ILLEGAL AND THE COURTS ORDER STRIKE TO THE V ERY ROOT OF THE NOTIFICATION ISSUED UNDER THE SEZ ACT, 2005 FOR THE DEVELOPMENT OF SEZ, AND THEREFORE, SEZ ITSELF BECOM ES ILLEGAL I.T.A. NO.2126 & 2749/DEL/2013 39 FROM THE DATE OF INCEPTION. ACCORDING TO THE AO, UN DER SECTION 80IAB, THE DEDUCTION IS AVAILABLE ONLY IN RESPECT O F PROFITS AND GAINS BY AN UNDERTAKING OR ENTERPRISE ENGAGED IN TH E DEVELOPMENT OF SEZ, BUT THE ASSESSEE-COMPANY IS NOT ENTITLED FOR CLAIM OF DEDUCTION U/S.80IAB, BECAUSE LAND ON W HICH SEZ HAS BEEN CONSTRUCTED HAS BEEN FOUND TO BE ACQUIRED BY THE ASSESSEE FRAUDULENTLY. 49. ON THE OTHER HAND, ASSESSEES REPLY WAS THAT TH E APPROVAL GRANTED BY THE BOARD OF APPROVAL FOR SEZ H AS REMAINED UNTOUCHED DESPITE OF THE HIGH COURT ORDER, AND THEREFORE, ASSESSEE UNDER THE LAW WAS ENTITLED FOR CLAIM OF DEDUCTION U/S.80IAB. HOWEVER, THE LD. ASSESSING OFF ICER REJECTED THE SAID CONTENTION AND HELD THAT THE APPR OVALS OF BOARD OF APPROVAL WERE GRANTED AT THE TIME WHEN HIG H COURT ORDER WAS NOT PRONOUNCED, I.E., ON 11.02.2011. APAR T FROM THAT, THE LD. ASSESSING OFFICER ALSO PROCEEDED TO E XAMINE THE CLAIM ON MERITS. THE RELEVANT OBSERVATIONS OF THE A O IN THIS REGARD CAN BE SUMMARISED AS UNDER: - SECTION 80-IAB PROVIDES FOR DEDUCTION FROM THE ACTIVITY OF DEVELOPING, OPERATING AND MAINTAINING SEZ. IN VIEW OF THE SAME, PLEASE EXPLAIN HOW THE ACTIVITY OF CONSTRUCTING BUILDINGS AND SALE THEREOF TO CO-DEVELOPER IS COVERED BY THE PRO VISIONS OF SECTION 80-IAB. AS PER SEZ RULES, 2006, DEVELOPER OF AN SEZ CANNOT S ELL LAND IN THE SPECIAL ECONOMIC ZONE UNDER RULE 11(9). IN VIEW OF THE SAME, YOU ARE REQUIRED TO EXPLAIN HOW THE SALE OF BUI LDINGS CAN TAKE PLACE WITHOUT THE SALE OF LAND. ALSO EXPLAIN THA T HOW ANY I.T.A. NO.2126 & 2749/DEL/2013 40 INCOME ARISING FROM SUCH TRANSFER OF ASSETS IS COVERE D UNDER SECTION 80-IAB AND ELIGIBLE FOR DEDUCTION. THE SEZ ACT NOTIFIES SPECIFIED AUTHORIZED OPERATIONS W HICH ALONE QUALIFY FOR EXEMPTIONS, DEDUCTIONS. PLEASE EX PLAIN HOW SALE OF CONSTRUCTED BUILDINGS CAN BE CLASSIFIED AS AU THORIZED OPERATIONS ELIGIBLE FOR DEDUCTION UNDER SECTION 80-IAB ESPECIALLY WITH REFERENCE TO THE NOTIFICATION NO. SO/18 46(E) DATED 27.10.2006 AND ALSO WITH REFERENCE TO THE APPROV AL DATED 14.02.2007 GRANTED BY GOVERNMENT OF INDIA, MINISTRY O F COMMERCE & INDUSTRY. A MODIFIED APPROVAL DATED 01.06.2009 WAS GRANTED BY B OARD OF APPROVAL, SEZ TO CO-DEVELOPER I.E. DLF ASSETS LTD. AFTER TAKING INTO ACCOUNT THE CO-DEVELOPER AGREEMENT DATED 20.03.2008. IT HAS BEEN STATED IN THE AFORESAID APP ROVAL THAT THE TRANSACTIONS WERE APPROVED SUBJECT TO THE CONDITION THA T AS PER TERMS AND CONDITIONS OF LEASE AGREEMENT BETWEEN D EVELOPER AND CO-DEVELOPER WILL NOT HAVE ANY BEARING ON THE TREA TMENT OF INCOME BY WAY OF LEASE / RENTALS / DOWN PAYMENT / PRE MIUM ETC. FOR THE PURPOSE OF ASSESSMENT UNDER THE PREVALENT I NCOME TAX RULES. THE AO WILL HAVE THE RIGHT TO EXAMINE THE TA XABILITY OF THESE AMOUNTS UNDER THE INCOME TAX ACT. IN VIEW OF THE SAME, THE CLAIM FOR DEDUCTION UNDER SECTION 80 IAB IS NOT DEPENDENT MERELY UPON THE APPROVAL GRANTED BY BOARD OF APPROVAL AND CAN THEREFORE BE INDEPENDENTLY EXAMINED BY THE AO UNDER THE INCOME TAX ACT. THEREFORE, YOU ARE REQU IRED TO EXPLAIN HOW THE PROFITS ARISING FROM THE ACTIVITY OF TRA NSFER/SALE OF CONSTRUCTED BUILDINGS IN THE SEZ NOTIFIED LAND BY DL F LTD. TO DLF ASSETS LTD. WILL QUALIFY FOR DEDUCTION UNDER SECTI ON 80 IAB. TRANSACTIONS UNDERTAKEN BETWEEN DLF LTD. AND DLF ASSETS LTD. AMOUNT TO TRANSFER OF BARE SHELL BUILDINGS BETWEE N THE TWO I.T.A. NO.2126 & 2749/DEL/2013 41 ENTITIES. WHY NATURE OF INCOME DERIVED FROM THE CO-DEV ELOPER AGREEMENT SHOULD NOT BE TREATED AS ONETIME INCOME ARISI NG FROM TRANSFER OF ASSETS AND WHY THE TRANSACTION SHOULD N OT BE TREATED AS SOLD. IN THIS CONNECTION, YOU MAY NOTE THAT TH E ADDENDUM TO CO-DEVELOPER AGREEMENT CLEARLY STATES THAT O N EXPIRY OF TERM OF LEASE, THE CO-DEVELOPER SHALL MAKE BEST EFFORTS TO DISPOSE OFF THE WARM SHELL WHICH FURTHER SHOWS THAT HE HAS COMPLETE AND UNFETTERED RIGHTS OVER THE BUILDINGS THER EBY IMPLYING THAT THE ASSESSEE HAS BASICALLY SOLD THE BARE SHELLS TO THE CO-DEVELOPER AND AS A RESULT OF SUCH SALE GENERAT ED INCOME FROM THE BUSINESS OF DEVELOPMENT AND THEREFORE NOT ELIG IBLE FOR DEDUCTION. FURTHER, THE CO-DEVELOPER I.E. DLF ASSETS LTD. HAS REFLECTED THE SAME AS FIXED ASSETS IN ITS BOOKS OF ACCOUNTS AND NOT AS BUSINESS ASSET. THUS, LOOKING AT IT FROM ANOTHER ANGLE, PLEASE EXPLAIN WHY THE AFORESAID TRANSACTION I NVOLVING TRANSFER/SALE OF CONSTRUCTED BUILDINGS FROM DLF LTD. TO DLF ASSETS LTD. SHOULD NOT BE TREATED AS INCOME/LOSS FROM C APITAL GAINS. YOU MAY ALSO EXPLAIN THAT IF THE TRANSACTION IS TREATED AS CAPITAL GAIN, THEN HOW SUCH INCOME WHICH WOULD BE A NON BUSINESS INCOME CAN BE CLAIMED AS BEING ELIGIBLE FO R DEDUCTION UNDER SECTION 80IAB. IT WAS ALSO OBSERVED BY HIM THAT INCOME TAX DEDUCTION U /S 80IB IS ALLOWABLE FOR A PERIOD OF 10 YEARS ON THE P ROFITS ARISING FROM DEVELOPMENT ON A YEAR TO YEAR BASIS AND THERE IS NO PROVISION FOR CLAIMING THE ENTIRE DEDUCTION OF THE IN COME IN ANY ONE YEAR AND THAT ALSO IN RESPECT OF RECEIPT WHICH ACTUA LLY PERTAINS TO A FURTHER RENT FOR 49 YEARS. IN VIEW OF THI S YOU MAY EXPLAIN WHY THE CLAIM OF DEDUCTION UNDER SECTION 80IA B, MAY NOT BE RESTRICTED TO 1/49 TH OF THE TOTAL DEVELOPMENT INCOME RECEIVED BY THE ASSESSEE COMPANY IN ANY ONE FINANCIA L YEAR. I.T.A. NO.2126 & 2749/DEL/2013 42 50. IN LIGHT OF ABOVE OBSERVATIONS OF THE AO, ASSES SEE MADE DETAIL SUBMISSIONS WITH REGARD TO THE SPECIFIC QUERIES RAISED BY THE ASSESSING OFFICER WHICH HAS BEEN NOTE D AND DEALT BY HIM FROM PARAGRAPH 2.20 TO 2.41 OF THE ASS ESSMENT ORDER. HOWEVER, LD. ASSESSING OFFICER APPARENTLY WI THOUT ADVERTING TO THE VARIOUS POINTS AND ISSUES RAISED B Y THE ASSESSEE, HELD THAT THE CLAIM OF DEDUCTION U/S.80IA B IS NOT ALLOWABLE PREDOMINANTLY IN VIEW OF THE FACT THAT HO N'BLE PUNJAB AND HARYANA HIGH COURT HAS HELD THAT ACQUISI TION OF SEZ LAND WAS ILLEGAL AND ALSO THE SALE OF BUILDING TO A CO- BUILDER IS NEITHER A BUSINESS ACTIVITY NOR ONE OF T HE AUTHORIZED OPERATIONS OF SEZ. ACCORDINGLY, HE DENIED ENTIRE CL AIM OF DEDUCTION AND ADDED THE SAME TO THE INCOME OF THE A SSESSEE. 51. IN THE FIRST APPEAL, LD. CIT (A) AFTER CONSIDER ING THE ENTIRE GAMUT OF MATERIALS PLACED ON RECORD AND AFTE R DETAILED DISCUSSION HAS ALLOWED THE ASSESSEES CLAIM. THE RE LEVANT FINDING AND OBSERVATIONS ARE AS UNDER: - 8.25 FROM THE CLARIFICATIONS DATED 18.01.2011 & 10. 01.2011 ISSUED BY THE MINISTRY AS WELL AS THE CORRESPONDENC E BETWEEN THE MINISTRY OF COMMERCE AND THE CBDT THERE REMAINS NO SCOPE OF DOUBT THAT THE DISCLAIMER REFERRED TO BY THE ASSESSING OF FICER IN APPROVAL LETTER DATED 01.06.2009 IS APPLICABLE ONLY TO A TRA NSACTION OF TRANSFER OF LAND IN THE GUISE OF LONG TERM LEASE BY RECEIVIN G LEASE RENTALS/DOWN PAYMENTS/PREMIUMS COMMENSURATE WITH THE SALE VALUE OF THE LAND AS IS EVIDENCE FROM PARA-4 OF THE LETTER DTD. 26.05.20 09 SENT BY THE DIRECTOR (ITA-1) CBDT TO THE DEPARTMENT OF COMMERCE AND INDUSTRY. THUS, THE DISCLAIMER VIDE POINT 3 (XVII) OF THE CO- DEVELOPER APPROVAL LETTER, ON WHICH THE ASSESSING OFFICER HAS RELIED U PON IS NOT APPLICABLE I.T.A. NO.2126 & 2749/DEL/2013 43 TO THE TRANSFER OF BARE SHELLS AND COLDSHELLS FOR A CONSIDERATION. THE TRANSFER OF BARESHELLS AND COLDSHELLS FOR A CONSIDE RATION WAS APPROVED AS AUTHORIZED OPERATIONS AS PER THE APPROV AL ISSUED BY BOARD OF APPROVALS. THE MINISTRY OF COMMERCE IN TH EIR CLARIFICATION ISSUED ON 18.01.2011 HAS EXPLICITLY CLARIFIED THAT ALL LEASES OF LAND ARE SUBJECTED TO GENERAL CONDITION CONTAINED IN PARA 3( XVII) OF LETTER DATED 01.06.2009 AND THIS GENERAL CONDITION IS APPLICABLE TO THE TERMS AND CONDITIONS OF THE LAND LEASE AGREEMENT ONLY. 8.26 KEEPING IN VIEW, THE DISCUSSIONS ABOVE IT IS C LEAR THAT THE APPELLANT HAS BEEN DULY APPROVED BY THE BOARD OF AP PROVALS AS A DEVELOPER, THE LAND OWNED BY THE APPELLANT IN SECTO R-30 OF GURGAON WAS NOTIFIED BY THE GOVT. OF INDIA FOR ESTABLISHMEN T OF SEZ, THE AUTHORIZED OPERATIONS TO BE UNDERTAKEN IN THE PROPO SED SEZ WERE APPROVED BY THE BOARD OF APPROVALS, THE CO-DEVELOPE R AGREEMENT DATED 20.03.2008 EXECUTED WITH THE CO-DEVELOPER CON TEMPLATING TRANSFER OF BARE SHELLS TO THE CO-DEVELOPER FOR AN AGREED DEVELOPMENT CONSIDERATION HAS BEEN DULY APPROVED BY THE BOARD O F APPROVALS, THE DAPL HAS BEEN APPROVED AS A CO-DEVELOPER. THE TRANS FER OF BARE SHELLS TO THE CO-DEVELOPER HAS BEEN APPROVED AS AN AUTHORIZED OPERATION BY THE BOARD OF APPROVALS AND THE DISCLAI MER CONTAINED IN CLAUSE 3(XVII) OF APPROVAL LETTER DATED 01.06.2009 APPLIES ONLY TO TRANSFER OF LAND OR ONE TIME LEASE RENTAL/ONE TIME DOWN PAYMENT/PREMIUM ETC. AS CLARIFIED BY THE MINISTRY O F COMMERCE IN THE CLARIFICATION DATED 18.01.2011 AND CORRESPONDENCE M ADE BETWEEN THE MINISTRY OF COMMERCE AND DEPARTMENT OF REVENUE AS F ILED BY THE APPELLANT DURING THE COURSE OF APPELLATE PROCEEDING S AS ADDITIONAL EVIDENCE. IN VIEW OF THE FACTS DISCUSSED ABOVE, I AGREE WITH THE SUBMISSION OF THE APPELLANT THAT THE DISCLAIMER CONDITION MENTION ED IN THE CO- DEVELOPER APPROVAL LETTER DATED 01.06.2009 IS PRIMA RILY PUT IN BY THE BOARD OF APPROVALS IN THE APPROVALS TO PUT A CURB O N THE WRONG I.T.A. NO.2126 & 2749/DEL/2013 44 PRACTICES OF LEASING THE LAND FOR LONG PERIODS AND RECEIVING ONETIME PAYMENT IN THE FORM OF LEASE RENTAL/DOWN PAYMENTS/P REMIUMS ETC. WHICH TANTAMOUNT TO SALE OF LAND IN THE GUISE OF LO NG TERM LEASE . THE APPELLANT HAS OBTAINED REQUISITE APPROVAL FROM THE BOARD OF APPROVALS BY DISCLOSING ALL FACTS. THE ENTIRE CONTROVERSY AS TO WHETHER THE TRANSFER OF BARE SHELL BUILDINGS TO THE CO-DEVELOPE R WAS AN AUTHORIZED OPERATION HAS BEEN SET AT REST BY THE CORRESPONDENC E MADE BETWEEN THE MINISTRY OF COMMERCE AND DEPARTMENT OF REVENUE AND ALSO BY CLARIFICATION LETTERS ISSUED, DATED 18.01.2011 & 20 .01.2011 BY MINISTRY OF COMMERCE. I AM SATISFIED THAT ALL THE CONDITIONS AS REQUIRED TO BE SATISFIED UNDER THE SEZ ACT/RULES AR E FULFILLED AND THE APPELLANT IS AN APPROVED DEVELOPER FOR ALL INTENT A ND PURPOSE OF SECTION 80 IAB OF THE ACT. CONSEQUENT UPON APPROVA L GRANTED BY THE BOARD OF APPROVALS FOR THE TRANSFER OF BARE SHELLS TO THE CO-DEVELOPER FOR A CONSIDERATION IS AN AUTHORIZED OPERATION AND INCOME DERIVED FROM SUCH TRANSFER OF COLDSHELL OR BARESHELLS IS EL IGIBLE FOR DEDUCTION U/S 80 IAB OF THE INCOME TAX ACT, 1961. REGARDING THE OBSERVATION OF THE ASSESSING OFFICER THAT THE LAND AND BUILDING ARE ONE COMPOSITE AND CANNOT BE SEPARATED, THE APPELLANT HAS STATED THAT THE INDIAN LAW RECOGNIZES SEPARATE OWNERSHIP OF THE LAND AND BUILDING AND THIS POSITION HAS BEEN RECOGN IZED BY VARIOUS HIGH COURTS INCLUDING THE HONBLE SUPREME COURT WHE REIN IT HAS BEEN HELD THAT THE MAXIM, WHAT IS ANNEXED TO THE SOIL GO ES WITH THE SOIL HAS NOT BEEN ACCEPTED AS AN ABSOLUTE RULE OF LAW OF THIS COUNTRY. IN THE FOLLOWING JUDGMENTS THE HONBLE COURTS HAVE HEL D THAT A PERSON WHO BONAFIDELY PUTS UP CONSTRUCTIONS ON LAND BELONG ING TO OTHERS WITH THEIR PERMISSION WOULD NOT BE A TRESPASSER, NOR WOU LD THE BUILDINGS SO CONSTRUCTED VEST IN THE OWNER OF THE LAND. (I) PARK VIEW ENTERPRISES VS STATE GOVT. OF TAMIL NADU [1991] 189 ITR 192. I.T.A. NO.2126 & 2749/DEL/2013 45 (II) THE PRIVY COUNCIL IN NARAYAN DAS KHETTRY V. JATINDR A NATH ROY CHOWDHRY, AIR 1927 PC 135 , HAS ALSO TAKEN THE VIEW THAT HAVING REGARD TO THE LAW IN INDIA IT IS POSSIBLE TO HAVE SEPARATION OF OWNERSHIP OF THE BUILDING FROM THE OWNERSHIP OF THE LAND. (III) THIS VIEW OF THE PRIVY COUNCIL WAS APPROVED BY THE SUPREME COURT IN BISHAN DAS V. STATE OF PUNJAB, AIR 1961 SC 1570. THEREFORE, IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEM ENTS, LAND IS AN INDEPENDENT, IDENTIFIABLE ASSET, AND CONTINUES TO R EMAIN IDENTIFIABLE EVEN AFTER CONSTRUCTION OF THE BUILDING. 8.27 I HAVE GONE THROUGH THESE JUDGMENTS AND AM OF THE CONSIDERED VIEW THAT THERE IS A FORCE IN THE ARGUME NTS OF THE AR AS THE LAND AND BUILDING ARE INDEPENDENT IDENTIFIABLE ASSE TS. IT IS A COMMON PRACTICE IN INDIA THAT ONE PERSON OWNS A LAND AND T HE OTHER OWNS THE SUPERSTRUCTURE BUILT THEREON. KEEPING IN VIEW THES E FACTS AND CIRCUMSTANCES AND THE LEGAL POSITION, THE APPELLANT HAS NOT VIOLATED ANY OF THE CONDITIONS AS PROVIDED UNDER THE SEZ RUL ES. 8.28 GROUND NOS.4.1.7, 4.1.8, 4.1.9, 4.1.10 & 4.1.11 THESE GROUNDS OF APPEAL PERTAINS TO THE OBSERVATION OF TH E ASSESSING OFFICER WHEREIN THE ASSESSING OFFICER HAS HELD THAT THE PRO FIT ARISING FROM SALE OF BARE SHELL BUILDINGS BY THE APPELLANT TO TH E CO-DEVELOPER CONSTITUTE CAPITAL GAINS AND NOT THE BUSINESS INCOM E SO AS TO BE ELIGIBLE FOR DEDUCTION U/S 80 IAB OF THE ACT. FURT HER, THE ASSESSING OFFICER HAS HELD THAT THE SALE CONSIDERATION RECEIV ED FOR THE SALE OF BARE SHELLS HAD TO BE SPREAD OVER THE PERIOD OF 49 YEARS. THE APPELLANT HAS CONTENDED WITHOUT PREJUDICE TO THE OT HER GROUNDS THAT IF THE CONTENTIONS OF THE ASSESSING OFFICER ARE ACCEPT ED THAT EITHER THE APPELLANT WAS NOT THE LAWFUL OWNER OF THE LAND ON W HICH SEZ HAS BEEN SET UP OR SALE OF BARE SHELL BUILDINGS BY THE APPELLANT WAS IMPERMISSIBLE THEN THE AMOUNT RECEIVED BY THE APPEL LANT HAS TO BE REFUNDED TO THE CO-DEVELOPER. I.T.A. NO.2126 & 2749/DEL/2013 46 THE APPELLANT HAS CONTENDED THAT IT HAD BEEN ENGAGE D IN THE BUSINESS OF REAL ESTATE AND THE DEVELOPMENT OF SUCH COMMERCI AL PROJECTS IS THE MAIN OBJECT OF THE APPELLANT. THE APPELLANT HAD BE EN FOLLOWING THE PERCENTAGE OF COMPLETION METHOD (POCM) FOR RECOGNIZ ING REVENUE OF VARIOUS PROJECTS AS PER THE ACCOUNTING STANDARDS IS SUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND IT HAS BEEN ACCEPTED BY THE DEPARTMENT SINCE INCEPTION. IT IS A MATTER O F RECORD THAT THE ASSESSING OFFICER HERSELF HAS ACCEPTED SUCH INCOMES AS BUSINESS INCOME OF ALL THE PROJECTS DEVELOPED BY THE APPELLA NT EVEN DURING THE YEAR UNDER CONSIDERATION. IT IS SEEN THAT THE APPELLANT HAS BEEN FOLLOWING ME RCANTILE SYSTEM OF ACCOUNTING AND HAS BEEN RECOGNIZING THE REVENUE IN ACCORDANCE WITH THE ACCOUNTING STANDARD AS-7 & AS-19 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. IT IS NOW A JUDICI ALLY RECOGNIZED PREPOSITION THAT IN CASE OF CONTRACTS OR BUSINESS O F CONSTRUCTION, IN ORDER TO ASCERTAIN THE INCOME, ONE NEED NOT WAIT TI LL THE CONTRACT IS COMPLETED. THE ASSESSING OFFICER HOWEVER CANNOT AP PLY ANY OTHER METHOD FOR RECOGNIZING THE REVENUE AND HAS TO ACCEP T THE ACCOUNTING POLICY FOLLOWED BY THE APPELLANT, THEREFORE, WHEN T HE APPELLANT HAS RECOGNIZED THE INCOME FOLLOWING PERCENTAGE OF COMPL ETION METHOD AS PER AS-7 ISSUED BY THE INSTITUTE OF CHARTERED ACCOU NTANTS OF INDIA, THE PROFITS DERIVED ON ACCOUNT OF DEVELOPMENT CONSIDERA TIONS OF BARE SHELLS WOULD CONSTITUTE THE PROFITS AND GAINS DERIV ED FROM BUSINESS OF DEVELOPING ANY SPECIAL ECONOMIC ZONE WITHIN THE MEA NING OF SECTION 80 IAB OF THE ACT. THE CLAIM OF DEDUCTION U/S 80 I AB IS A VALID CLAIM CONSIDERING THE OVERALL FACTS OF THE CASE. THE ACCOUNTING TREATMENT OF WARM SHELLS BY THE CO-D EVELOPER IN ITS BOOKS OF ACCOUNTS AS AN ASSET WOULD NOT MAKE ANY DI FFERENCE AS FAR AS THE APPELLANT IS CONCERNED. THE ADMITTED FACT R EMAINS THAT THE APPELLANT HAS COMPUTED ITS INCOME UNDER THE PERCENT AGE OF COMPLETION METHOD (POCM) WHICH IS PRESCRIBED FOR CA LCULATING PROFITS I.T.A. NO.2126 & 2749/DEL/2013 47 AND GAINS OF BUSINESS OF REAL ESTATE DEVELOPER UNDE R THE MANDATORY ACCOUNTING STANDARD ISSUED BY THE INSTITUTE OF CHAR TERED ACCOUNTANTS OF INDIA. THE ASSESSING OFFICERS OBSERVATIONS BY R EFERRING TO THE CLASSIFICATION OF ASSETS SHOWN BY THE CO-DEVELOPER WAS A SALE OF CAPITAL ASSET SUBJECTED TO CAPITAL GAIN IS AGAINST THE VERY PRINCIPLE OF THE ACT WHEN THE BARE SHELL BUILDINGS WERE NEITHER PART OF CAPITAL WORK IN PROGRESS NOR FIXED ASSETS OF THE APPELLANT. A P ERUSAL OF THE ASSESSMENT ORDER REVEALS THAT THE ASSESSING OFFICER HAS NOT CATEGORICALLY HELD THE INCOME OF THE APPELLANT UNDE R THE HEAD CAPITAL GAINS AS NO SUCH SPECIFIC ADDITION HAS BEEN MADE. THE ASSESSING OFFICER HAS ONLY MADE HER OBSERVATIONS WITHOUT PREJ UDICE TO HER DECISION IN DISALLOWING THE ENTIRE CLAIM OF DEDUCTI ON U/S 80 IAB. 8.29 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT AND OBSERVATION OF THE ASSESSING OFFICER. IT IS SEEN TH AT OBSERVATIONS OF THE ASSESSING OFFICER ARE NOT BASED ON CORRECT APPRECIA TION OF FACTS. THE APPELLANT HAS SHOWN WORK IN PROGRESS IN THE BUSINES S OF CONSTRUCTION AND BY NO STRETCH OF IMAGINATION WORK IN PROGRESS C AN BE TREATED AS CAPITAL ASSET. THE STOCK IN TRADE IS SPECIFICALLY EXCLUDED FROM THE DEFINITION OF CAPITAL ASSET UNDER SECTION 2(14) O F THE ACT. THE DEVELOPMENT OF THE BARE SHELL BUILDINGS IN THE SEZ AND SUBSEQUENT TRANSFER THEREOF CANNOT BE CONSIDERED AS GIVING RIS E TO SHORT TERM CAPITAL GAIN CONSIDERING THE BUSINESS OF THE APPELL ANT AND ACCOUNTING TREATMENT ADOPTED IN THE BOOKS OF ACCOUNT IRRESPECT IVE OF THE TREATMENT BY THE CO-DEVELOPER IN THE BOOKS OF ACCOU NTS AS FIXED ASSETS. THE OBSERVATIONS OF THE ASSESSING OFFICER ON THIS ISSUE ARE ERRONEOUS, LEGALLY UNTENABLE AND MISDIRECTED IN HOL DING THAT THE INCOME CAN BE ASSESSED AS CAPITAL GAINS. I HAVE GO NE THROUGH THE JUDICIAL RULINGS RELIED UPON BY THE APPELLANT IN SU PPORT TO ITS CLAIM. FURTHER, THE APPELLANT HAS DISPUTED THE DECISION OF THE ASSESSING OFFICER IN HOLDING THAT THE DEVELOPMENT INCOME WAS RELATABLE TO 49 YEARS OF LEASE PERIOD AND ONLY 1/49 TH COULD HAVE BEEN EARNED BY THE I.T.A. NO.2126 & 2749/DEL/2013 48 APPELLANT IN ONE YEAR. THE APPELLANT HAS CONTENDED THAT HAVING HELD SO THE ASSESSING OFFICER OUGHT TO HAVE ALLOWED A DE DUCTION OF RS.22,83,81,280/-U/S 80 IAB AND EXCLUDED THE REMAIN ING INCOME PERTAINING TO THE SUBSEQUENT YEARS FOR THE COMPUTAT ION THEREBY RESULTING IN NO ADDITION. IT IS NOTICED FROM THE AS SESSMENT ORDER THAT ASSESSING OFFICER NOTWITHSTANDING WITH HER DECISION HOLDING THE INCOME FROM TRANSFER OF BARE SHELLS AS INCOME FROM CAPITAL GAINS HAS FURTHER HELD THAT EVEN IF THE INCOME FROM TRANSFER OF BARE SHELL WAS TO BE TREATED AS DEVELOPMENT INCOME FROM SEZ, THE ENTI RE INCOME WAS RELATABLE TO 49 YEARS SPREAD OVER THE PERIOD OF 49 YEARS LEASE. FROM THE DISCUSSIONS IN EARLIER PARAGRAPHS IT IS AN ADMITTED FACT THAT THE APPELLANT HAS LEASED OUT ONLY THE LAND. THE BAR E SHELL BUILDINGS HAVE NOT BEEN LEASED OUT BUT TRANSFERRED TO THE CO- DEVELOPER FOR A AGREED CONSIDERATION WHICH HAS BEEN APPROVED BY THE BOARD OF APPROVALS. THEREFORE, TO LINK THE TRANSFER CONSIDER ATION OF BARE SHELLS WITH THE PERIOD OF LEASE OF LAND IS TOTALLY IRRELEV ANT IN THE FACTS OF THE APPELLANTS CASE. IT IS A FACT THAT THE APPELLANT HAS ADOPTED RENT CAPITALIZATION METHOD FOR DETERMINING THE DEVELOPME NT CONSIDERATION OF BARE SHELLS BUT THE PERIOD OF LEASE IS AGAIN IRR ELEVANT IN SUCH DETERMINATION BECAUSE THE RENT CAPITALIZATION METHO D INCLUDES THEORY OF DETERMINATION OF MARKET VALUE OF BUILDING HAVING REGARD TO NET OPERATING INCOME YIELDED BY THE PROPERTY IN A YEAR OR AVERAGE OF MULTIPLE YEARS. SUCH METHOD OF VALUATION IS IN CONF ORMITY WITH THE BASIS ADOPTED FOR CAPITALISATION OF NET MAINTAINABL E RENT AS PER RULE- 3 OF SCHEDULE III OF THE WEALTH TAX ACT. THEREFORE , WHEN THE TRANSFER OF BARE SHELLS HAS BEEN PERMITTED AS AN AUTHORIZED OPERATION BY THE BOARD OF APPROVALS, THE APPLICATION OF LEASE PERIOD BECOMES REDUNDANT. CONSIDERING THE ABOVE, THERE IS NEITHER ANY QUESTION FOR TREATING 1/49 TH OF DEVELOPMENT CONSIDERATION AS INCOME OF ONE YEAR FOR THE PURPOSE OF DEDUCTION U/S 80 IAB NOR FOR THE PUR POSE OF DISREGARDING BALANCE INCOME FILED BY THE APPELLANT DURING THE YEAR. I.T.A. NO.2126 & 2749/DEL/2013 49 THE APPELLANT HAS FURTHER CONTENDED THAT IF THE OBS ERVATIONS OF THE ASSESSING OFFICER ARE ACCEPTED IN AS MUCH AS THE TR ANSFER OF BARE SHELL BUILDINGS IS NOT AN AUTHORIZED OPERATION OR T HE ACQUISITION OF LAND WAS ILLEGAL THEN NOTHING ACCRUES TO THE APPELLANT A ND THE MONIES RECEIVED BY IT FROM THE CO-DEVELOPER OUGHT TO HAVE BEEN REFUNDED. I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT. SINCE IT HAS BEEN HELD THAT THE DEDUCTION U/S 80 IAB IS ADMISSIBLE TO THE APPELLANT, THIS GROUND BECOMES INFRUCTUOUS AND DOES NOT CALL FOR AN Y ADJUDICATION. 8.30 GROUND NO.4.2 THIS GROUNDS PERTAINS TO THE OBSERVATION OF THE ASSESSING OFFICER WHEREIN THE ASSESSING OFFICE R HELD THAT WITHOUT PREJUDICE TO THE DISALLOWANCE MADE U/S 80 IAB, IF A T ANY HIGHER APPELLATE STAGE THE ASSESSEE IS ALLOWED DEDUCTION U /S 80 IAB OF THE IT ACT, THEN THE QUANTUM OF DEDUCTION IS TO BE REDU CED BY RS.24,20,98,512/- ON THE BASIS OF FINDINGS GIVEN BY THE SPECIAL AUDITORS IN PARA 3.15 TO 3.22 AT PAGE NOS.25-29 IN VOLUME-IIIA OF THE SPECIAL AUDIT REPORT. THE APPELLANT HAS CONTENDED THAT THE ASSESSING OFFICER HAS MADE THESE OBSERVATIONS ON THE BASIS OF SPECIAL AUDIT REPORT WHEREIN THE SPECIAL AUDITORS HAVE STATED THA T THERE IS SHORT ALLOCATION OF OVERHEADS TO THE SEZ DIVISION. THE SP ECIAL AUDITORS PROPOSED THAT SOME EXPENSES OUGHT TO HAVE BEEN ALLO CATED TO THE SEZ PROJECT OUT OF THE OTHER NON-SEZ PROJECT. THE AR OF THE APPELLANT HAS DRAWN MY ATTENTION TO T HE DETAILS FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS AS WELL AS BEFORE THE SPECIAL AUDITORS. THESE DETAILS HAVE BEEN FILED IN THE PAPER BOOK AT PAGES 258-271. THE AR OF THE APPELLANT HAS VEHEMENT LY ARGUED THAT THE APPELLANT IS A LISTED COMPANY AND ITS ACCOUNTS ARE SUBJECTED TO VARIOUS CHECKS AND AUDITS. PARTICULARLY FOR CLAIM OF TAX HOLIDAY U/S 80 IAB OF THE INCOME TAX ACT, 1961, THE APPELLANT H AS GOT ITS ACCOUNTS AUDITED FROM AN INDEPENDENT ACCOUNTANT SPECIFICALLY FOR QUANTIFICATION OF THE DEDUCTION ADMISSIBLE TO THE APPELLANT. IT I S A STATUTORY I.T.A. NO.2126 & 2749/DEL/2013 50 REQUIREMENT THAT THE INDEPENDENT AUDITOR HAS TO CER TIFY THE COMPUTATION OF DEDUCTION ADMISSIBLE U/S 80 IAB OF T HE INCOME TAX ACT, 1961. THE APPELLANT HAS BROUGHT TO MY NOTICE T HE STATUTORY REPORT IN FORM NO.10 CCB DATED 29.09.2008 WHICH HAS ALSO B EEN FILED IN THE PAPER BOOK WHEREIN THE DEDUCTION HAS BEEN COMPUTED AT RS.1119,06,82,702/-. THE AR HAS ALSO CONTENDED THAT THE TAX AUDITORS ALS O WHILE FINALIZING THE REPORT U/S 44 AB OF THE ACT HAVE VERIFIED THE D EDUCTION ADMISSIBLE TO THE APPELLANT U/S 80 IAB AND HAS CERTIFIED THE S AME IN THE TAX AUDIT REPORT. IT HAS BEEN CONTENDED THAT THE APPEL LANT IS A PIONEER IN THE REAL ESTATE BUSINESS AND HAD BEEN EXECUTING PRO JECTS FOR MORE THAN SIX DECADES. THE EXPENDITURE UNDER VARIOUS HEA DS PROPOSED TO BE ALLOCATED TO THE SEZ PROJECT BY THE SPECIAL AUDI TORS HAD ALL ALONG BEEN INCURRED BY THE APPELLANT OVER THE YEARS AND H AVE BEEN ALLOWED TO IT UNDER THE PROVISIONS OF THE INCOME TAX ACT, 1 961. IT HAS BEEN STATED THAT DESPITE THE FACT THAT THE SEZ PROJECT W AS NOT IN OPERATION IN EARLIER YEARS BUT STILL THESE ROUTINE EXPENSES H AVE ALL ALONG BEEN ALLOWED TO THE APPELLANT WHILE COMPUTING THE TOTAL INCOME FOR RESPECTIVE YEARS. THE APPELLANT HAS FILED A COMPARA TIVE CHART OF EXPENSES INCURRED AND CLAIMED BY THE APPELLANT DURI NG THE YEAR AS WELL AS IN THE PRECEDING YEAR TO SHOW THAT THE EXPE NSES HAVE BEEN ALL ALONG ALLOWED. THE APPELLANT HAS ALSO CONTENDED THA T SIMILAR ISSUE AROSE IN THE CASE OF M/S DLF COMMERCIAL DEVELOPERS LTD. FOR AY 2008-09 AND THE SAME HAS BEEN DELETED IN APPEAL VID E ORDER DATED 19.12.2012 IN APPEAL NO.71/12-13. 8.31 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPEL LANT AND HAVE PERUSED THE DETAILS FILED BY THE APPELLANT ON THIS ISSUE. IT IS SEEN THAT THE ALLOCATION MADE BY THE ASSESSING OFFICER FROM T HE SALARY EXPENSES OF SENIOR MANAGEMENT AND EXPENSES UNDER THE HEAD O THER EXPENSES HAVE BEEN MADE WITHOUT BRINGING ANY ADVERSE INFORMA TION ON RECORD. THE APPELLANT HAS GIVEN DETAILS OF HEADWISE EXPENSE S INCURRED ON I.T.A. NO.2126 & 2749/DEL/2013 51 SEZ AND NON-SEZ ACTIVITIES AND SUCH INFORMATION CAN NOT BE BRUSHED ASIDE WITHOUT POINTING OUT ANY MISTAKE IN THE ALLOC ATION OF EXPENSES. THE ALLOCATION CANNOT BE MADE ON THE BASIS OF PRESU MPTIONS AND SOME MATERIAL HAS TO BE BROUGHT ON RECORD TO JUSTIFY SUC H REALLOCATION OF EXPENSES FOR WORKING OUT DEDUCTION U/S 80 IAB. IT IS SEEN THAT THIS ISSUE HAS BEEN CONSIDERED BY ME WHILE PASSING THE A PPELLATE ORDER DATED 19.12.2012 IN APPEAL NO.71/12-13 IN THE CASE OF DLF COMMERCIAL DEVELOPERS LTD. WHERE THE SIMILAR DISALL OWANCE HAS BEEN DIRECTED TO BE DELETED. IN VIEW OF THE FACTUAL POSITION, THE ASSESSING OFFI CER IS DIRECTED TO ALLOW THE DEDUCTION U/S 80 IAB AS CLAIMED BY THE AP PELLANT IN THE RETURN OF INCOME WITHOUT MAKING ANY REALLOCATION. 52. THE LD. SPL. COUNSEL APPEARING ON BEHALF OF T HE REVENUE, AFTER REFERRING TO THE FACTS AS NOTED IN T HE ASSESSMENT ORDER, ALSO SUMMARISED THE FINDINGS OF T HE AO GIVEN FROM PAGES 31 TO 81 OF THE ASSESSMENT ORDER, IN HIS WRITTEN SUBMISSIONS. 53. AT THE OUTSET, HE SUBMITTED THAT IN THE ASSESSM ENT YEAR 2009-10, THE HON'BLE HIGH COURT IN THE CASE OF DLF COMMERCIAL DEVELOPERS LTD., (2018) 92 TAXMANN.COM 1 0 HAS REMANDED THE MATTER TO THE TRIBUNAL ANALYZED THE CA SE IN THE LIGHT OF THE PROVISION OF SEZ ACT, 2005 WHICH TRIBU NAL HAS NOT INDEPENDENTLY DONE AND SET ASIDE THE MATTER BAC K TO THE FILE OF THE TRIBUNAL TO DECIDE AFRESH AND IN ACCORD ANCE WITH LAW. THE RELEVANT OBSERVATION OF THE HON'BLE HIGH C OURT READS AS UNDER: I.T.A. NO.2126 & 2749/DEL/2013 52 IN THE PRESENT APPEALS, THE ITAT HAS MERELY FOLLOWE D THE DECISION RENDERED IN A PREVIOUS ORDER. THE EARLIER DECISION IN THIS REGARD IS THE ONE RENDERED IN 2007-08 IN THE CASE OF DLF INFOCITY DEV ELOPERS (CHENNAI) LTD. THERE, THE ASSESSING OFFICERS' (AO) ORDER GRAN TING DEDUCTION U/S 80IAR WAS INTERFERED WITH BY THE CIT(A) U/S 263 OF THE INCOME TAX ACT, 1961'. THE ITAT PROCEEDED TO SET-ASIDE THE ORDER, H OLDING ON MERITS THAT THE ASSESSEE WAS ENTITLED TO THE DEDUCTION CLAIMED. THAT ORDER HAS BEEN FOLLOWED ON MERITS BY THE ITAT IN THE CURRENT A. Y 2009-10 AND 2010-11. THIS COURT IS OF THE OPINION THAT THE ITAT'S DECISI ON MERELY REPRODUCED THAT CIT(A) 'S JUDGEMENT AND HAS NOT ANALYSED INDEP ENDENTLY, IN EITHER OF THE AYS THE APPLICABILITY OF SECTION 80IAB TOWARDS THE EDUCATION CLAIMED IN THE LIGHT OF THE TRANSACTIONS REPORTED AND THE D OCUMENTS DISCLOSED. FURTHERMORE, THOSE FACTS HAVE ALSO TO BE ANALYSED I N THE LIGHT OF THE PROVISIONS OF SEZ ACT, 2005, WHICH THE ITAT HAS NOT INDEPENDENTLY DONE. FOR THESE REASONS, THE IMPUGNED ORDERS OF THE ITAT ARE SET-ASIDE AND ARE REMITTED FOR FRESH CONSIDERATION BY THE ITAT IN ACC ORDANCE WITH THE LAW. ALL RIGHTS AND CONTENTIONS OF THE PARTIES ARE RESER VED. 54. HE FURTHER SUBMITTED THAT IN ORDER TO ASCERTAIN THE NATURE OF INCOME, IT IS NECESSARY TO EXAMINE THE RE LEVANT ISSUES AS PER SEZ ACT AND RULES WHICH ACCORDING TO HIM SHOULD BE ANALYZED AS UNDER: I. IN THE SCHEDULE 13 OF THE AUDIT REPORT UNDER THE HEAD 'RELATED PARTY DISCLOSURES' DLF ASSETS PVT. LTD., THE CO- DEVELOPER, HAS BEEN STATED TO BE ENTITY UNDER THE SUBSID IARY COMPANIES. THE ENTIRE INCOME CLAIMED TO BE EXEMPT UND ER SECTION 80 IAB HAS BEEN SHOWN AS RECEIVED ON ACCOUNT OF SALE OF BUILDINGS TO THIS RELATED PARTY. II. THE COMMERCIAL TERMS FOR SALE TO DLF ASSETS PVT. LTD (DAPL) WERE DECIDED BY THE MEMORANDUM OF UNDERSTANDIN G I.T.A. NO.2126 & 2749/DEL/2013 53 FOR CO-DEVELOPER AGREEMENT, CO- DEVELOPER AGREEMENTS AND ADDENDUMS TO CO-DEVELOPERS AGREEMENTS EXECUTED. IT IS SIGNIFICANT TO NOTE THAT THE INTENTION HERE, FROM THE VERY BEGINNING, WAS TO TRANSFER THE ENTIRE LAND AND BUILDIN GS TO THE CO-DEVELOPER AND THE ASSESSEE COMPANY NEVER ENGA GED ITSELF IN THE BUSINESS OF DEVELOPMENT OF SEZ. SOME OF THESE CLAUSES WERE LATER AMENDED ONLY WITH A PURPOSE TO SHO W THAT IT MIGHT NOT APPEAR TO APPROVING AUTHORITIES THAT THE INTENTION WAS TO TRANSFER BOTH LAND AND BUILDINGS TO THE CO- DEVELOPER, PARTICULARLY WHEN THEY REALIZED THAT SALE OF LAND IN SEZ WAS NOT PERMITTED. THIS FACT CAN BE VOUCHED FROM PO INT 3 OF THE FACTS OF THE CASE MENTIONED ABOVE. COMBINED RE ADING OF ALL THE CLAUSES OF CO-DEVELOPER AGREEMENT AND LEAS E DEED CLEARLY SHOWS THAT THE INTENTION OF THE ASSESSEE COMPANY WAS TO SELL LAND TO THEIR RELATED COMPANY AND THEY HAVE BOOKED BUSINESS INCOME OUT OF THE TRANSACTION. THEREAFTER THE DEDUCTION U/S 80-IAB HAS BEEN CLAIMED OUT OF THE BUSI NESS INCOME WHICH SHOULD NOT BE ALLOWED FOR THE REASON THAT SALE OF LAND IS NOT PERMITTED AS PER SEZ ACT AND RULES. III. WHEN THE BOARD OF APPROVAL (BOA) LATER EXAMINED TH IS ISSUE, THEY WERE OF THE CATEGORICAL VIEW THAT TRANSFER AND HANDOVER OF BUILDINGS ON PAYMENT OF DEVELOPMENT CONSIDERATION WAS AGAINST THE SPIRIT OF SEZ. THIS ISSUE WILL BE DISCUSSED IN DETAIL LATER. THE FACT REMAINS THAT THE ASS ESSEE MERELY BUILT THE STRUCTURE AND SOLD THE SAME TO THE CO- DEVELOPER. IV. IT IS SEEN THAT SECTION 3(8) OF SEZ ACT SPECIFICALLY S TATES THAT THE CENTRAL GOVERNMENT MAY PRESCRIBE THE REQUIREMEN TS FOR ESTABLISHMENT, NAMELY: I.T.A. NO.2126 & 2749/DEL/2013 54 A. THE MINIMUM AREA OF LAND AND OTHER TERMS AND CONDITIONS SUBJECT TO WHICH BOAR D SHALL APPROVE, MODIFY OR REJECT ANY PROPOSAL RECEIVED BY IT UNDER SUB SECTION(2 ) TO (4); AND B. THE TERMS AND CONDITIONS, SUBJECT TO WHICH THE DEVELOPER SHALL UNDERTAKE THE AUTHORIZED OPERATIONS AND ENTITLEMENTS. V. FURTHER SECTION 3(11) OF SEZ ACT WHILE REFERRING TO THE AGREEMENT BETWEEN DEVELOPER AND CO-DEVELOPER STIPULATE S THAT SECTION 3(8) QUOTED ABOVE SHALL APPLY TO THE SAID PROPOSAL. THUS, THE CONDITION REGARDING EXAMINATION O F TAXABILITY OF THE TRANSACTIONS BY ASSESSING OFFICER IS ONE OF THE MAIN REQUIREMENTS SUBJECT TO WHICH THE CO-DEVELOPER AGREEMENT HAS BEEN APPROVED BY COMPETENT AUTHORITY. VI. SECTION 7 OF SEZ ACT FURTHER RESTRICTS THE EXEMPTIONS OF DEVELOPER FROM TAXES, DUTIES OF CESS TO ANY GOODS O R SERVICES EXPORTED OUT OF, OR IMPORTED INTO, OR PROCUR ED FROM THE DOMESTIC TARIFF AREA THUS CLEARLY SPECIFYING THE AC TIVITIES FOR WHICH EXEMPTION FROM TAX WILL BE GRANTED TO THE DEVELOPER. IN THE PRESENT CASE, THE ASSESSEE COMPANY H AS SOLD ASSETS AND INCOME DERIVED THERE FROM DOES NOT FAL L IN THIS CATEGORY. VII. SECTION 9 OF SEZ ACT CLEARLY DEFINE DUTIES, POWERS AN D FUNCTIONS OF BOARD OF APPROVAL (BOA) WHICH INCLUDES GRANTING OF APPROVAL OR REJECTING PROPOSAL OR MODIFYING SUCH PROPOSALS FOR ESTABLISHMENT OF SEZ. VIII. IT IS VERY RELEVANT TO NOTE THAT TRANSFER OF BUILDINGS BY THE DEVELOPER TO THE CO-DEVELOPER WAS CONSIDERED BY THE BOA AS AGAINST THE SPIRIT OF SEZ AS POINTED OUT BY THE DEPARTMENT OF REVENUE AND AGREED TO BY BOA UNANIMOUSLY . I.T.A. NO.2126 & 2749/DEL/2013 55 (I.E. IT IS NOT THE BUSINESS OF DEVELOPMENT OF SEZ.) THIS IS THE REASON THAT BOA HAS PUT THE CONDITION OF EXAMINATION O F THE ISSUE OF TAXABILITY AFTER DETERMINING THE NATURE OF I NCOME BY THE ASSESSING OFFICER. IN THIS RESPECT MINUTES OF 32ND MEETING AND OF 34TH MEETING OF SEZ BOA HELD ON 23RD FEBRUARY 2009 AND 19TH JUNE 2009, WHICH DISCUSSED THE ASSESSEE COMPANY'S CASE AS ONE OF THE CO-DEVELOPER, ARE VERY IMPORTANT AND ARE REPRODUCED AS FOLLOWS: 32 ND MEETING 'THE REPRESENTATIVE OF THE DOR (DEPARTMENT OF REVEN UE I.E REPRESENTATIVE OF CBDT) POINTED OUT THAT THE CO-DEV ELOPMENT AGREEMENT REFERS TO TRANSFER AND HAND OVER DEEDS WH ICH STATES THAT CO-DEVELOPER SHALL BE THE OWNER OF THE SEZ BUILDINGS ON PAYMENT OF DEVELOPMENT CONSIDERATION, WHICH IS AGAINST THE SPIRIT OF SEZ ACT AND RULES. 34 TH MEETING 'THE BOARD NOTED THAT IN THE MEETING HELD ON 23.02. 2009 IT WAS DECIDED TO DEFER THE 4 PROPOSALS OF CO-DEVELOPE RS IN RESPECT OF SAME DEVELOPER, I.E., M/S DLF LIMITED AS THE REPRESENTATIVE OF THE DOR POINTED OUT THAT THE CO-D EVELOPER AGREEMENT REFERS TO TRANSFER AND HAND OVER DEEDS WH ICH STATES THAT CO-DEVELOPER SHALL BE THE OWNER OF THE SEZ BUILDINGS ON PAYMENT OF DEVELOPMENT CONSIDERATION, WHICH IS AGAINST THE SPIRIT OF SEZ ACT AND RULES. FOLLOWING THIS OBSERVATION, THE PROPOSALS WERE DEFERRED AND IT WAS DECIDED TO EXAMINE THE CASE ON FILE. DOC EXAMINED THESE PRO POSALS ON FILE IN CONSULTATION WITH CBDT AND THE AGREEMENTS W ERE REVISED BY THE CO-DEVELOPER. THE PROPOSALS WERE APP ROVED SUBJECT TO THE CONDITION THAT PARTICULAR TERMS AND CONDITIONS OF I.T.A. NO.2126 & 2749/DEL/2013 56 LEASE AGREEMENT WILL NOT HAVE ANY BEARING ON THE TR EATMENT OF INCOME BY WAY OF LEASE RENTALS/DOWN PAYMENT/PREMIUM ETC. FOR THE PURPOSE OF ASSESSMENT UNDER THE PREVALENT I NCOME TAX ACT AND RULES. THE ASSESSING OFFICER, WILL HAVE THE RIGHT TO EXAMINE THE TAXABILITY OF THESE AMOUNTS UNDER THE I NCOME TAX ACT. ' COPY OF MINUTES OF 32 ND MEETING AND 34 TH MEETING OF BOA ARE ENCLOSED WITH THESE SUBMISSIONS . IX. SECTION 27 OF THE SEZ ACT WHICH DEALS WITH PROVISIONS OF INCOME TAX ACT, 1961 TO APPLY WITH CERTAIN MODIFIC ATION IN RELATION TO DEVELOPERS AND ENTREPRENEURS CLEARLY STATES THAT THE PROVISIONS OF THE INCOME TAX ACT, AS IN THE FORCE , FOR THE TIME BEING, SHALL APPLY TO, OR IN RELATION TO, THE DEV ELOPER OR ENTREPRENEUR FOR CARRYING ON THE AUTHORIZED OPERATIONS IN A SEZ. THE NOTIFICATION FOR IT SEZ'S AUTHORIZED OPERATI ONS DOES NOT INCLUDE SALE OF BUILDING FROM WHICH INCOME HAS B EEN SHOWN BY THE ASSESSEE COMPANY ON WHICH DEDUCTION U/ S 80IAB HAS BEEN CLAIMED. X. RULE 11(10) OF SEZ RULES 2006 SPECIFIES THAT THE DEVELOPER SHALL NOT SELL THE LAND IN A SEZ. AS SALE OF LAND IS PROHIBITED AND THE LAND HAS BEEN GIVEN TO CO-DEVELOPER THROUGH AN ARRANGEMENT OF LEASE OF LAND WHICH IS NOTHI NG BUT A PLOY TO OVERCOME THIS PROHIBITION. THIS IS THE REASON THAT BOA SAID SUCH ARRANGEMENT WAS AGAINST THE SPIRIT OF SEZ AND ASKED THE ASSESSING OFFICER TO EXAMINE THE TAX ABILITY OF SUCH INCOME. XI. SEZ ACT NOTIFIES SPECIFIC AUTHORIZED OPERATIONS WHICH ALONE WOULD QUALIFY FOR EXEMPTIONS, CONCESSIONS AND DRAWBACKS. SALE OR TRANSFER OF ASSETS IS NOT AN AUTHOR IZED OPERATION AND THEREFORE INCOME FROM SUCH OPERATION WOU LD I.T.A. NO.2126 & 2749/DEL/2013 57 NOT BE ELIGIBLE FOR EXEMPTION AS PER NOTIFICATION NO. S .O.1846 (E) DATED 27TH OCTOBER 2006. COPY OF THE NOTIFICATION DATED 2TH OCTOBER 2006 IS ENCL OSED WITH THESE SUBMISSIONS. XII. THAT THE COPY OF CBDT LETTER DATED 26TH MAY 2009 IS ON PAGE 210 OF THE PAPER BOOK II FILED BY THE ASSESSEE C OUNSEL. PARA 4 OF THE LETTER CLEARLY STATES THAT APPROVAL WILL HA VE NO BEARING ON TAX TREATMENT OF INCOME ARISING OUT OF SUCH TRANSACTION WHICH WILL BE DECIDED AS PER THE RELEVANT PROVISIONS OF THE INCOME TAX ACT. 55. IF THESE ISSUES ARE EXAMINED IN DETAIL THEN FOL LOWING FACTS ARE ESTABLISHED: A. THAT THE ASSESSEE COMPANY HAS NOT DEVELOPED THE SEZ RATHER ONLY CONSTRUCTED THE BUILDINGS. THE DEDUCTION U/S 80- IAB IS AVAILABLE ONLY IN THE CASE OF DEVELOPMENT OF SEZ. MERE CONSTRUCTION OF BARE SHELL BUILDINGS WILL ALLOW THE AS SESSEE THE DEDUCTION U/S 80-IAB. SECTION 80-IAB STATES THAT PROFI T AND GAINS DERIVED FROM BUSINESS OF DEVELOPING SEZ. THUS, THE DEDUCTION IS ONLY AVAILABLE ONCE THE SEZ IS DEVELO PED AND IT CANNOT BE ALLOWED BEFORE THE STAGE OF DEVELOPMEN T OF SEZ. B . SALE OF BUILDINGS TO THE CO-DEVELOPER IS NEITHER AN ACTIVITY OF DEVELOPMENT OF SEZ NOR ONE OF THE AUTHORIZE D OPERATIONS FOR SEZ NOTIFIED BY THE COMPETENT AUTHORITY. IT IS AN ISOLATED TRANSACTION GIVING ONE TIME INCOME FROM TRAN SFER OF CAPITAL ASSETS. IT IS VERY CLEAR FROM THE CO- DEVEL OPER AGREEMENT AND LEASE DEED THAT THE INTENTION ON THE PART OF THE ASSESSEE COMPANY, FROM THE VERY BEGINNING WAS TO I.T.A. NO.2126 & 2749/DEL/2013 58 CONSTRUCT AND SALE THE BUILDINGS AS A ONETIME ACTIVITY. SUCH ISOLATED TRANSACTION CAN NEVER BE TERMED AS BUSINESS ACTIVITY. CO-DEVELOPER AGREEMENT AND LEASE DEED VERY CLEARLY SHOWS THAT THE DEVELOPER HAS SOLD THE LAND AND BUILDI NG AND LOSES ALL RIGHTS OVER THESE TRANSFERRED CAPITAL ASSETS A ND THE RELINQUISHMENT OF RIGHT IS IRREVOCABLE. C. THOUGH SEZ ACT PROHIBITS FOR SALE OF LAND THEREB Y IMPLICITLY DENYING ANY BENEFIT TO A DEVELOPER WHO IS BASICALLY INTERESTED IN DERIVING INCOME BY TRANSFER OF ASSETS, TH E ASSESSEE HAS FOUND A WAY TO OVERCOME THIS PROHIBITION BY CREATING 49 YEARS LEASE IN FAVOUR OF CO-DEVELOPER. I T IS PERTINENT TO NOTE THAT THE LEASE DEED IS RENEWABLE FURTHER AND THUS EFFECTIVELY TRANSFERRING THE LAND ALSO. PARA 2.3 A ND 5.1 OF THE LEASE DEED CLEARLY ALLOWS THE PARTIES TO RENEW THE LEASE DEED. THUS, THE ASSESSEE COMPANY HAS TRANSFERRED THE LAND IN ACTUAL SENSE AND SUBSTANCE OF THIS PRESENT TRANSACTIO N MEANS SALE OF LAND. IN MOST OF THE CASES, SUBSTANCE OF THE TRANSACTION AND ITS FORM ARE ONE AND THE SAME. HOWEVER, THE SUBSTANCE CAN BE DIFFERENT FROM THE FORM OF THE TRANSAC TION IN MANY CASES. IN THE PRESENT CASE, THE ASSESSING OFF ICER HAS RIGHTLY GONE FOR THE SUBSTANCE OF THE TRANSACTION AND DISALLOWED THE DEDUCTION U/S 80-IAB CLAIMED BY THE AS SESSEE COMPANY AS THE LEASE DEED IS MERE EYE WASH AND ACTUA L TRANSACTION WAS SALE OF LAND WHICH IS CLEARLY NOT PERM ISSIBLE UNDER SEZ ACT. RELEVANT PARAS OF LEASE DEED ARE AT PAG E 135 & 136 OF THE PAPER BOOK II FILED BY THE COUNSEL OF THE ASSESSEE. D. THE TRANSFER OF BUILDING IS ABSOLUTE AND AS PER THE AMENDED AGREEMENT AND LEASE DEED , CO-DEVELOPER SHAL L BE TREATED AS OWNER OF THE BARE SHELL BUILDING AND THE WA RM I.T.A. NO.2126 & 2749/DEL/2013 59 SHELL BUILDING AFTER ADDITIONS ETC AND WILL HAVE EXCLU SIVE RIGHTS TO LET, MORTGAGE, OR ALLOW USE OF ALL OR ANY P ART OF BUILDINGS. E. THAT IF THE DEDUCTION U/S 80-IAB IS ALLOWED TO THE ASSESSEE COMPANY IN THIS CASE AND THE CO-DEVELOPER D OES NOT DEVELOP THE SEZ LATER ON, HOW CAN WE SAY THAT THE SEZ H AS BEEN DEVELOPED AND WHY SHOULD THE DEDUCTION BE ALLOW ED TO THE ASSESSEE COMPANY AT THIS STA GE WHERE THE DEVELOPMENT OF SEZ HAS NOT BEEN DONE. ALLOWING THE DEDUCTION AT THE STA GE OF CONSTRUCTION OF BARE SHELL BUILDING WOULD BE AGAI NST THE PROVISIONS OF SEZ AND INCOME TAX ACT. 56. THUS, HE SUBMITTED THAT ASSESSEES INCOME FRO M SALE OF ASSETS IS NOT ELIGIBLE FOR DEDUCTION U/S.80IAB AND ONCE IT IS ESTABLISHED THAT THE TRANSFER OF BUILDINGS TO CO-DEVELOP ER IS NOT A BUSINESS ACTIVITY AND THE INCOME FROM SUCH TRANSFER I S NOT BUSINESS INCOME, IT IS CLEAR THAT SALE OF SUCH BUILDIN GS, IN THE NATURE OF CAPITAL ASSETS, HAS GENERATED CAPITAL GAINS A ND, THEREFORE, INCOME SHOWN BY THE ASSESSEE ON THIS COUNT HAS TO BE TREATED AS CAPITAL GAINS. IN THIS RESPECT THE MOST IMPORTA NT ASPECT TO BE EXAMINED IS WHETHER BY CO-DEVELOPER AGREEMENT EN TERED IN THE FINANCIAL YEAR 2007-08, THE TRANSFER OF THE BUILDIN G CAN BE DEEMED TO BE TRANSFER FOR THE PURPOSE OF TAXABILITY. 57. THEREAFTER, HE REFERRED TO THE PROVISION OF SEC TION 2(47)(V) R.W.S. 53A OF TRANSFER OF PROPERTY ACT AND SUBMITTE D THAT IN SUCH CASES CAPITAL GAIN SHOULD BE TAXABLE IN THE YE AR IN WHICH SUCH TRANSACTION IS ENTERED INTO EVEN IF THE TRANSF ER OF THE IMMOVABLE PROPERTY IS NOT COMPLETE UNDER THE GENERA L LAW. HE I.T.A. NO.2126 & 2749/DEL/2013 60 FURTHER SUBMITTED THAT IN THE LIGHT OF PROVISIONS O F SECTION 2(47)(V), THIS ISSUE WAS EXAMINED IN GREAT DETAILS BY AAR TRIBUNAL IN THE CASE OF MR. JASBIR SINGH SARKARIA ( 2007) 294 ITR196, IT WAS HELD THAT THE TRANSACTION OF THE NAT URE REFERRED TO IN CLAUSE (V) OF SECTION 2(47) HAD TAKEN PLACE O N A PARTICULAR DATE, THE ACTUAL DATE OF TAKING PHYSICAL POSSESSION NEED NOT BE PROBED INTO. IT IS ENOUGH IF THE TRANSF EREE HAS BY VIRTUE OF THAT TRANSACTION A RIGHT TO ENTER UPON AN D EXERCISE THE ACTS OF POSSESSION EFFECTIVELY. IT WAS FURTHER HELD THAT TO ATTRACT CLAUSE (V) OF SECTION 2(47), IT IS NOT NECE SSARY THAT THE ENTIRE SALE CONSIDERATION UP TO THE LAST INSTALLMEN T SHOULD BE RECEIVED BY THE OWNER. IN THE ABOVE-MENTIONED CASE THE JUDGES HAVE GONE IN TO DETAILED EXAMINATION OF THE ISSUE AND APPLICABILITY OF PROVISIONS SECTION 2(47)(V). TO MAKE THE ISSUE CLEA RER, IT IS RELEVANT TO REPRODUCE SOME RELEVANT PARAGRAPHS AS U NDER: 'THERE IS NO DOUBT THAT THE AGREEMENT TO TRANSFER T HE ENTIRE RIGHT, TITLE AND INTEREST OF THE OWNERS FOR A CONSI DERATION SPECIFIED IN THE AGREEMENT AND IN ACCORDANCE WITH T HE TERMS THEREOF ANSWERS THE DESCRIPTION OF A CONTRACT FALLI NG WITHIN THE SCOPE OF SECTION 53-A OF THE TRANSFER OF PROPERTY A CT. THE CRUCIAL QUESTION THEN ARISES - AT WHAT POINT OF TIM E THE TRANSACTION ALLOWING THE TAKING OF POSSESSION IN PA RT- PERFORMANCE OF SUCH CONTRACT HAD TAKEN PLACE. INCID ENTALLY IT RAISES THE QUESTION AS TO HOW THE EXPRESSION 'TRANS ACTION' IS TO BE UNDERSTOOD. ONE VIEW THAT COULD POSSIBLY BE TAKE N IS THAT THE EXECUTION OF THE AGREEMENT UNDER THE TERMS OF W HICH THE I.T.A. NO.2126 & 2749/DEL/2013 61 PURCHASER IS ENABLED TO TAKE POSSESSION EVEN BEFORE THE EXECUTION OF CONVEYANCE DEED IS ITSELF THE 'TRANSAC TION' CONTEMPLATED BY SECTION 2(47)(V). IT IS ENOUGH IF T HE AGREEMENT/CONTRACT FALLING WITHIN THE DESCRIPTION OF SECTION 53-A PROVIDES FOR TAKING POSSESSION AT SOME STAGE B EFORE THE OWNERSHIP IS TRANSFERRED IN A MANNER KNOWN TO LAW. WHAT IS CONTEMPLATED BY SECTION 2(47)(V) IS A TRANS ACTION WHICH HAS DIRECT AND IMMEDIATE BEARING ON ALLOWING THE POSSESSION TO BE TAKEN IN PART PERFORMANCE OF THE C ONTRACT OF TRANSFER. IT IS AT THAT POINT OF TIME THAT THE DEEM ED TRANSFER TAKES PLACE. IN THIS CONTEXT, THE OBSERVATIONS OF A DIVISION BENCH OF BOMBAY HIGH COURT SPEAKING THROUGH S.H. KA PADIA, J IN CHATURBHUJ DWARKADAS V. CIT ARE APPOSITE: WE QUOTE THE SAME: IF THE CONTRACT, READ AS A WHOLE, INDICATES PASSING OF OR TRANSFERRING OF COMPLETE CONTROL OVER THE PROPERTY IN FAVOUR OF THE DEVELOPER, THEN THE DATE OF THE CONTRACT WOULD BE RELEVANT TO DECIDE THE YEAR OF CHARGEABILITY. FURTHER, IF 'POSSESSION' REFERRED TO IN CLAUSE (V) IS TO BE UNDERSTOOD AS EXCLUSIVE POSSESSION OF THE TRANSFEREE/DEVELOPER, THEN, THE VERY PURPOSE OF THE AMENDMENT EXPANDING THE DEFINITION OF TRANSFER FOR THE PURPOSE OF CAPITAL GAINS MAY BE DEFEATED. THE REASO N IS THIS: THE OWNER OF THE PROPERTY CAN VERY WELL CONTEND, AS IS BEING CONTENDED IN THE PRESENT CASE, THAT THE DEVELOPER W ILL HAVE SUCH EXCLUSIVE POSSESSION IN HIS OWN RIGHT ONLY AFT ER THE ENTIRE AMOUNT IS PAID TO THE OWNER TO THE LAST PIE. THERE IS I.T.A. NO.2126 & 2749/DEL/2013 62 THEN A POSSIBILITY OF STAGGERING THE LAST INSTALLME NT OF A SMALL AMOUNT TO A DISTANT DATE MAY BE, WHEN THE ENTIRE BU ILDING COMPLEX GETS READY . EVEN IF SOME AMOUNT, SAY 10 PER CENT, REMAINS TO BE PAID AND THE DEVELOPER/TRANSFEREE FAI LS TO PAY, LEADING TO A DISPUTE BETWEEN THE PARTIES, THE RIGHT TO EXCLUSIVE AND INDEFEASIBLE POSSESSION MAY BE IN JEOPARDY. IN THIS STATE OF AFFAIRS, THE TRANSACTION WITHIN THE MEANING OF C LAUSE (V) CANNOT BE SAID TO HAVE BEEN EFFECTED AND THE LIABIL ITY TO PAY CAPITAL GAINS MAY BE INDEFINITELY POSTPONED. TRUE, IT MAY NOT BE PROFITABLE FOR THE DEVELOPER TO ALLOW THIS SITUA TION TO LINGER FOR LONG AS THE PROCESS OF TRANSFER OF FLATS TO THE PROSPECTIVE PURCHASERS WILL GET DELAYED. AT THE SAME TIME, THE OTHER SIDE OF THE PICTURE CANNOT BE OVERLOOKED. THERE IS A POS SIBILITY OF THE OWNER WITH THE CONNIVANCE OF THE TRANSFEREE POSTPONING THE PAYMENT OF CAPITAL GAIN TAX ON THE OSTENSIBLE GROUND THA T THE ENTIRE CONSIDERATION HAS NOT BEEN RECEIVED AND SOME BA LANCE IS LEFT. THE MISCHIEF SOUGHT TO BE REMEDIED, WILL THEN PE RPETUATE. WE ARE, THEREFORE OF THE VIEW THAT POSSESSION GIVEN TO THE DEVELOPERS NEED NOT RIPEN ITSELF INTO EXCLUSIVE POS SESSION ON PAYMENT OF ALL THE INSTALLMENTS IN ENTIRETY FOR THE PURPOSE OF DETERMINING THE DATE OF TRANSFER. WHILE ON THE POINT OF POSSESSION, WE WOULD LIKE TO CLARIFY ONE MORE ASPECT. WHAT IS SPOKEN TO IN CLAUSE (V) OF SEC TION 2(47) IS THE 'TRANSACTION' WHICH INVOLVES ALLOWING THE POSSE SSION TO BE TAKEN. BY MEANS OF SUCH TRANSACTION, A TRANSFEREE L IKE A DEVELOPER IS ALLOWED TO UNDERTAKE DEVELOPMENT WORK ON THE LAND BY ASSUMING GENERAL CONTROL OVER THE PROPERTY IN PART PERFORMANCE OF THE CONTRACT. THE DATE OF THAT TRANS ACTION I.T.A. NO.2126 & 2749/DEL/2013 63 DETERMINES THE DATE OF TRANSFER. THE ACTUAL DATE OF TAKING PHYSICAL POSSESSION OR THE INSTANCES OF POSSESSORY ACTS EXERCISED IS NOT VERY RELEVANT. THE ASCERTAINMENT O F SUCH DATE, IF CALLED FOR, LEADS TO COMPLICATED INQUIRIES , WHICH MAY FRUSTRATE THE OBJECTIVE OF THE LEGISLATIVE PROVISIO N. RELYING UPON THE AFORESAID DECISION, HE SUBMITTED THAT INCO ME RECEIVED DURING THE YEAR FROM SALE OF ASSETS TO THE DEVELOPER IS TAXABLE UNDER THE HEAD SHORT TERM CAPITAL GAIN IN ASSESSMENT YEAR 2008-09 DUE TO FOLLOWING REASONS. A) THE CO-DEVELOPER AGREEMENT, GIVING FULL OWNERSHIP R IGHTS OVER BUILDINGS TO CO-DEVELOPERS, WAS SIGNED ON 2010 3/2008 AND SUBSTANTIAL AMOUNT OF SALE CONSIDERATION WAS AL SO RECEIVED DURING THE YEAR 2007-08. B) THERE IS A TRANSFER OF ASSETS IN THE FORM OF LA ND AND BARE SHELL BUILDINGS WHICH IS NOT STOCK-IN-TRADE IN THE BOOKS OF THE ASSESSEE COMPANY, AND HAS BEEN SHOWN AS ADDITION TO FIXED ASSETS IN THE CO-DEVELOPER'S CASE (I.E. THE BUYER). C) THERE IS A SPECIFIC SALES CONSIDERATION, WHICH HAS BEEN FIXED FOR THIS TRANSACTION. D) THE TRANSFER OF BUILDING IS ABSOLUTE AND AS PER CLAUSE 7.1 OF THE CO- DEVELOPER AGREEMENT DATED 20.03.2008 , THE CO- DEVELOPER SHALL HAVE EXCLUSIVE RIGHTS TO LET, SUB-L ET, MORTGAGE, OR TO ALLOW USE OF ALL OR ANY PART OF THE SEZ BUILD INGS IN ACCORDANCE WITH THE SEZ ACT, ON SUCH TERMS AND COND ITIONS AS THE CO-DEVELOPER MAY IMPOSE AND AGREED TO. IN THE A MENDED CLAUSE 2.4 TO THE ADDENDUM TO MOU ALSO IT HAS BEEN MADE CLEAR THAT CO-DEVELOPER SHALL OWN THE BARE SHELL BU ILDINGS AND SHALL CONTINUE TO OWN WARM SHELL BUILDING ALSO. I.T.A. NO.2126 & 2749/DEL/2013 64 E) SALE OF BUILDINGS IS NOT ONE OF AUTHORIZED OPER ATIONS IN THE SEZ AS PER THE NOTIFICATION DATED 27TH OCTOBER, 2006 ISSUED BY THE MINISTRY OF COMMERCE AND INDUSTRY, GO VT, OF INDIA. F) AS THE SALE OF BARE SHELL BUILDINGS TO THE CO-D EVELOPER, I.E. DLF COMMERCIAL DEVELOPERS LTD. IN ACCORDANCE W ITH THE CO- DEVELOPER AGREEMENT, IS AGAINST THE SPIRIT OF SEZ A CT & RULES AND IS NOT ONE OF THE AUTHORIZED OPERATIONS OF SEZ, THE ASSESSEE DID NOT DERIVE INCOME FROM BUSINESS OF DEV ELOPING SEZ. SUCH ISOLATED TRANSACTION OF SALE OF BARE SHEL L BUILDINGS TO THE CO-DEVELOPER IS NOTHING BUT SALE OF CAPITAL ASSETS AS THE ASSESSEE HAS RELINQUISHED ALL RIGHTS OVER THE BUILD INGS. ACCORDINGLY, THE INCOME FROM SALE OF BARE SHELL BUI LDINGS IS CAPITAL GAINS ON SALE OF BUILDINGS. G) SALE OF BUILDINGS TO THE CO-DEVELOPER IS NOT AN ACTIVITY OF DEVELOPMENT OF SEZ. IT IS AN ISOLATED TRANSACTION G IVING ONE TIME INCOME FROM TRANSFER OF CAPITAL ASSETS. IT IS VERY CLEAR FROM THE AGREEMENT THAT THE INTENTION FROM THE VERY BEGINNING WAS TO CONSTRUCT AND SALE THE BUILDINGS AS A ONETIM E ACTIVITY. SUCH ISOLATED TRANSACTION CAN NEVER BE TERMED AS BU SINESS ACTIVITY. CO-DEVELOPER AGREEMENT IS VERY CLEARLY SH OWING THAT THE DEVELOPER LOSES ALL RIGHTS OVER THESE ASSETS AN D THE RELINQUISHMENT OF RIGHT IS IRREVOCABLE. 58. REFERRING TO THE PROVISIONS CONTAINED IN SECTIO N 80IAB, HE SUBMITTED THAT THE WORD DERIVED IS VERY CRUCIAL IN APPRECIATING ANY KIND OF DEDUCTION WHICH WOULD FALL WITHIN THE AMBIT OF THE SAID PROVISION. HERE, IN THIS CASE , THE SOURCE OF INCOME IS A SALE OF BARE SHELL OF THE BUILDING A ND THERE IS I.T.A. NO.2126 & 2749/DEL/2013 65 NO QUESTION OF DEVELOPMENT OF SEZ. THE SAME HAS BEE N DONE BY CO-DEVELOPER. IN SUPPORT, HE HAS ALSO RELIED UPO N THE FOLLOWING DECISIONS. CYBER PEARL INFORMATION TECHNOLOGY PARK P. LTD V. INCOME TAX OFFICER- (2017) 399 ITR 310(MAD) HON'BLE MADRAS HIGH COURT HELD THAT THE CONSISTENT VIEW OF THE COURTS HAS BEEN THAT WHEREVER, IN SUCH LIKE SECTION S, THE EXPRESSION 'DERIVED' IS USED, AS AGAINST 'ATTRIBUTA BLE TO', THE WIDTH AND THE AMPLITUDE IS NARROWER. THEREFORE, COU RTS HAVE HELD CONSISTENTLY THAT IN ORDER TO COME TO A CONCLU SION AS TO WHETHER SUCH PRO FITS OR GAINS, I.E., INCOME, WOULD BE AMENABLE TO DEDUCTION, THE EFFECTIVE SOURCE OF SUCH INCOME IS TO BE LOOKED AT. ONCE, IT IS FOUND THAT THE INCOME IS DERIVED FROM A SECONDARY SOURCE, WHICH IS NOT THE EFFECTIVE SOURCE, IT FALLS OUTSIDE THE PURVIEW OF SUCH LIKE PROVISIONS, WHICH PROVIDE FOR DEDUCTIONS WITH PURPOSE OF GIVING FILLIP TO THE DESIGNATED ACTIVITY, WHICH, IN THE INSTANT CASE, IS THE BUSINE SS OF DEVELOPING A SPECIAL ECONOMIC ZONE. PANDIAN CHEMICALS LTD. V. COMMISSIONER OF INCOME TAX - (2003) 262 ITR 278(SC) HON'BLE SUPREME COURT HELD THAT THE WORDS 'DERIVED FROM' IN SECTION 80HH OF THE INCOME TAX ACT 1961, MUST BE UN DERSTOOD AS SOMETHING WHICH HAS A DIRECT OR IMMEDIATE NEXYS WITH THE ASSESSEE'S INDUSTRIAL UNDERTAKING. ALTHOUGH ELECTRI CITY MAY BE REQUIRED FOR THE PURPOSES OF THE INDUSTRIAL UNDERTA KING, THE DEPOSIT REQUIRED FOR IS SUPPLY IS A STEP REMOVED FR OM THE BUSINESS OF INDUSTRIAL UNDERTAKING. HELD ACCORDINGL Y, THAT INTEREST DERIVED BY THE INDUSTRIAL UNDERTAKING OF T HE ASSESSEE ON THE DEPOSITS MADE WITH THE ELECTRICITY BOARD FOR SUPPLY OF I.T.A. NO.2126 & 2749/DEL/2013 66 ELECTRICITY FOR RUNNING THE INDUSTRIAL UNDERTAKING COULD NOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UNDERTAKI NG ITSELF AND WAS NOT PROFITS OR GAINS DERIVED BY THE UNDERTAKING FOR THE PURPOSE OF THE SPECIAL DEDUCTION UNDER SECTION 80HH . COMMISSIONER OF INCOME TAX V. STERLING FOODS - (1999) 237 ITR 579 (SC) HON'BLE SUPREME COURT HELD THAT THERE MUST BE, FOR THE APPLICATION OF THE WORDS 'DERIVED FROM', A DIRECT N EXUS BETWEEN THE PROFITS AND GAINS AND THE INDUSTRIAL UN DERTAKING. COPIES OF THE JUDGMENTS ARE ENCLOSED WITH THESE SUBMISSIONS. 59. HE FURTHER REFERRED TO THE SUPREME COURTS JUDG MENT IN THE CASE OF COMMISSIONER OF CUSTOM VS. DILEEP KU MAR & CO. (SUPRA) WHEREIN IT WAS HELD THAT TAX EXEMPTION HAS TO BE INTERPRETED WHEREIN THE BENEFIT OF DOUBT SHOULD GO IN FAVOUR OF THE REVENUE AND ALSO REFERRED TO OBSERVATIONS OF THEIR LORDSHIPS IN PARAGRAPH 49 TO 52. THUS, HE SUBMITTED THAT ASSESSEE IS NOT ELIGIBLE FOR CLAIM OF DEDUCTION U/S .80IAB. 60. BY WAY OF COUNTER SUBMISSION, LEARNED COUNSEL F OR THE ASSESSEE SUBMITTED THAT THE REVENUES COUNSEL H AS MERELY REITERATED THE OBSERVATIONS OF THE ASSESSING OFFICER AND NO NEW ARGUMENTS HAVE BEEN TAKEN IN RESPECT OF CLAIM OF DEDUCTION U/S.80IAB. HE HAS TABULATED THE VARIOUS ARGUMENTS AND POINT-WISE REBUTTAL OF LD. SPECIAL CO UNSEL IN HIS WRITTEN SUBMISSIONS. I.T.A. NO.2126 & 2749/DEL/2013 67 61. WE HAVE HEARD THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO BEFORE US. THE MAIN ISSUE IS W ITH REGARD TO ALLOWABILITY OF CLAIM OF DEDUCTION U/S.80IAB IN RESPECT OF PROFIT ARISING FROM SALE OF BARE SHELL BUILDING IN SEZ BY ASSESSEE TO M/S. DLF PVT. LTD. AS A PART OF ITS BUS INESS ACTIVITIES, THE ASSESSEE HAS UNDERTAKEN TO DEVELOP SEZ PROJECT IN A GOVT. DESIGNATE SPECIAL ECONOMIC ZONE AFTER OB TAINING REQUISITE APPROVAL UNDER SEZ ACT AND SEZ RULES IN T ERMS OF PROVISIONS OF SECTION 80IAB OF THE INCOME TAX ACT. AS BROUGHT ON RECORD, ASSESSEE HAD UNDERTAKEN TO DEVELOP SEZ P ROJECT WHICH WAS DULY APPROVED BY GOVERNMENT OF INDIA AND LATER ON HAD ENTERED INTO MOU WITH CO-DEVELOPER, WHEREIN IT WAS AGREED THAT ASSESSEE SHALL DEVELOP THE BARE SHELL B UILDING AND TRANSFER TO M/S. DLF PVT. LTD. (CO-DEVELOPER) FOR F URTHER DEVELOPMENT AND LEASE OF THE SAME TO ELIGIBLE TENAN TS. IT WAS ALSO AGREED THAT LAND ON WHICH BUILDING WAS TO BE C ONSTRUCTED WILL NOT BE SOLD TO THE CO-DEVELOPER, M/S. DLF LTD. BUT WILL BE LEASED OUT FOR A DEFINITE PERIOD. IT WAS THE PROFIT FROM SUCH DEVELOPMENTAL ACTIVITY, AMOUNTING TO RS.11,19,06,82 ,702/- ARISING FROM TRANSFER OF BARE SHELL BUILDING WAS CL AIMED AS DEDUCTION U/S.80IAB, AFTER OBTAINING THE APPROVALS FROM BOARD OF APPROVALS, MINISTRY OF COMMERCE AND INDUS TRY, GOVERNMENT OF INDIA IN RESPECT OF SEZ PROJECT. IN O RDER TO APPRECIATE THE FACTS, IT WOULD BE RELEVANT TO HIGHL IGHT THE SEQUENCE OF EVENT IN THIS REGARD: - I.T.A. NO.2126 & 2749/DEL/2013 68 THE ASSESSEE COMPANY WAS IN POSSESSION OF LAND ADMEASURING 29.8062 ACRES OF LAND LOCATED IN VILLAG E SILOKHERA, TEHSIL AND DISTT. GURGAON. IT FURTHER TOOK ON LEASE ADJACENT PARCEL OF LAND ADMEASURING 7.1875 ACRES FROM M/S. CHANDRAJYOTI EST ATE DEVELOPERS PVT. LTD. THE ASSESSEE WAS GRANTED APPROVAL BY THE MINISTRY O F COMMERCE & INDUSTRY (SEZ SECTION) FOR SETTING UP A SECTOR SPECIFIC SEZ FOR IT/ITES SECTOR AT SECTOR 30, SILOK HERA, GURGAON. AN AREA OF 12.06 HECTARES AND AN ADDITION AL AREA OF 2.96 HECTARES WERE NOTIFIED BY THE MINISTRY OF COMMERCE & INDUSTRY, VIDE NOTIFICATIONS DATED 06.12 .2006 & 19.03.2007. THE AUTHORIZED OPERATIONS TO BE UNDERTAKEN BY THE ASSESSEE WERE ALSO APPROVED BY A SEPARATE APPROVAL BY THE GOVT. OF INDIA, MINISTRY OF COMMERCE & INDUSTRY (SE Z SECTION) VIDE LETTER DATED 14.02.2007. THE ASSESSEE ENTERED INTO A MOU DATED 29.01.2007 WI TH THE CO-DEVELOPER AND FILED THE COPY OF THE MOU FOR THE APPROVAL BEFORE THE BOARD OF APPROVALS. AN ADDENDUM THERETO WAS ALSO ENTERED INTO AMENDING THE TERMS OF THE ORIGINAL MOU ON 23.04.2007. THE AUTHORIZED OPERATIONS TO BE TAKEN UP BY THE CO- DEVELOPER IN THE SAID SILOKHERA SEZ WAS ALSO APPROV ED BY THE MINISTRY OF COMMERCE & INDUSTRY (SEZ SECTION) V IDE I.T.A. NO.2126 & 2749/DEL/2013 69 LETTER DATED 22.05.2007 WHICH INCLUDED DEVELOPMENT OF OFFICE SPACE ALSO (WARM SHELL). IN ORDER TO CONSOLIDATE THE MOU AND ADDENDUMS THERE TO A CO-DEVELOPER AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND DLF ASSETS PVT. LTD. ON 20.03.2008 WHI CH WAS ALSO FILED BEFORE THE BOARD OF APPROVALS AND TH E APPROVAL WAS ALSO GRANTED TO THIS AGREEMENT VIDE LE TTER DATED 01.06.2009 BY THE MINISTRY OF COMMERCE & INDU STRY (SEZ SECTION). 62. THE CASE OF THE ASSESSING OFFICER FOR MAKING TH E DISALLOWANCE ON VARIOUS COUNTS CAN BE SUMMARIZED IN THE FOLLOWING MANNER: - A . THE OWNERSHIP OF LAND ON WHICH SEZ HAS BEEN DEVELOPED IS IN DISPUTE IN VIEW OF THE DECISION OF PUNJAB & HARYANA HIGH COURT AND AS SUCH THE CLAIM OF DEDUCTI ON IS INADMISSIBLE IN ABSENCE EXISTENCE OF SEZ PROJECT. B. TRANSFER OF BUILDING CANNOT BE CONSIDERED AS ACTIVITY OF DEVELOPMENT OF SEZ AND AS SUCH THE PROF IT ARISING FROM SUCH TRANSFER IS NOT ELIGIBLE FOR DEDU CTION U/S 80IAB. THE ACTIVITY OF DEVELOPMENT AND SALE OF BUIL DING IS NEITHER AN AUTHORIZED OPERATION UNDER SEZ ACT NOR APPROVED BY COMPETENT AUTHORITY. FURTHER, LEASE OF LAND FOR 30 YEARS TO M/S. DLF ASSET LTD. TANTAMOUNT TO T RANSFER OF LAND WHICH IS AN IMPERMISSIBLE ACTIVITY IN TERMS OF RULE 11(9) OF SEZ RULES, 2006. (WHICH AO HAS WRONGLY CONSTRUED THE PERIOD OF LEASE AS 49 YEARS) I.T.A. NO.2126 & 2749/DEL/2013 70 C. ISOLATED TRANSACTION OF SALE OF BUILDING IS ASSE SSABLE UNDER THE HEAD INCOME FROM CAPITAL GAIN AND AS SUCH THE PROVISIONS OF SECTION 80IAB ARE NOT APPLICABLE. FUR THER, AS THE PURCHASER M/S. DLF ASSET LTD. HAS SHOWN THE SAI D BARE SHELL BUILDING AS FIXED ASSET IN ITS BALANCE S HEET, THE SAME CONSTITUTE CAPITAL ASSET OF THE APPELLANT AND AS SUCH PROFIT ARISING FROM SALE OF BARE SHELL IS IN THE NA TURE OF SHORT-TERM CAPITAL GAIN. D. ALTERNATIVELY, THE PROFIT FROM THE PROJECT SHOUL D BE APPORTIONED AND SPREAD OVER 49 YEARS (CORRECT FIGUR E 30 YEARS) AND AS SUCH ONLY THE PROPORTIONATE CLAIM OF DEDUCTION U/S 80IAB IS ALLOWABLE. 63. THE SEZ ACT, 2005 DEFINES CO-DEVELOPER AS A PERSON, WHO HAS BEEN GRANTED BY THE CENTRAL GOVERNMENT LETT ER OF APPROVAL U/S. 3(12) AND DEVELOPER U/S. 3(10) OF THE SEZ ACT. FURTHER, THE BOARD OF APPROVAL AUTHORIZES THE DEVELOPER TO UNDERTAKE IN A SEZ SUCH OPERATION AS CENTRAL GOVERN MENT MAY AUTHORIZE AFTER GRANTING THE APPROVAL OF THE AU THORIZED OPERATION TO AN ELIGIBLE ENTITY, WHO IS AUTHORIZED TO CARRY OUT THE OPERATION IN SPECIAL ECONOMIC ZONE. NOW THE REL EVANT PORTION OF SECTION 80IAB ACT READS AS UNDER: 80-IAB. (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE, BE ING A DEVELOPER, INCLUDES ANY PROFITS AND GAINS DERIVED B Y AN UNDERTAKING OR AN ENTERPRISE FROM ANY BUSINESS OF DEVELOPING A SPECIAL ECONOMIC ZONE, NOTIFIED ON OR AFTER THE 1ST DAY OF APRIL, 20 05 UNDER THE SPECIAL ECONOMIC ZONES ACT, 2005, THERE SHALL, IN ACCORDANC E WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOW ED, IN COMPUTING THE I.T.A. NO.2126 & 2749/DEL/2013 71 TOTAL INCOME OF THE ASSESSEE, A DEDUCTION OF AN AMO UNT EQUAL TO ONE HUNDRED PER CENT OF THE PROFITS AND GAINS DERIVED F ROM SUCH BUSINESS FOR TEN CONSECUTIVE ASSESSMENT YEARS. (2) THE DEDUCTION SPECIFIED IN SUB-SECTION (1) MAY, AT THE OPTION OF THE ASSESSEE, BE CLAIMED BY HIM FOR ANY TEN CONSECUTIVE ASSESSMENT YEARS OUT OF FIFTEEN YEARS BEGINNING FROM THE YEAR IN WHICH A SPECIAL ECONOMIC ZONE HAS BEEN NOTIFIED BY THE CENTRAL GOVE RNMENT: PROVIDED THAT WHERE IN COMPUTING THE TOTAL INCOME OF ANY UNDERTAKING, BEING A DEVELOPER FOR ANY ASSESSMENT Y EAR, ITS PROFITS AND GAINS HAD NOT BEEN INCLUDED BY APPLICATION OF T HE PROVISIONS OF SUB-SECTION (13) OF SECTION 80-IA , THE UNDERTAKING BEING THE DEVELOPER SHALL BE ENTITLED TO DEDUCTION REFERRED TO IN THIS SECTION ONLY FOR THE UNEXPIRED PERIOD OF TEN CONSECUTIVE ASSESSMENT YEAR S AND THEREAFTER IT SHALL BE ELIGIBLE FOR DEDUCTION FROM INCOME AS P ROVIDED IN SUB- SECTION (1) OR SUB-SECTION (2), AS THE CASE MAY BE: PROVIDED FURTHER THAT IN A CASE WHERE AN UNDERTAKING, BEING A DEVELOPER WHO DEVELOPS A SPECIAL ECONOMIC ZONE ON O R AFTER THE 1ST DAY OF APRIL, 2005 AND TRANSFERS THE OPERATION AND MAINTENANCE OF SUCH SPECIAL ECONOMIC ZONE TO ANOTHER DEVELOPER (HE REAFTER IN THIS SECTION REFERRED TO AS THE TRANSFEREE DEVELOPER), T HE DEDUCTION UNDER SUB-SECTION (1) SHALL BE ALLOWED TO SUCH TRANSFEREE DEVELOPER FOR THE REMAINING PERIOD IN THE TEN CONSECUTIVE ASSESSMENT YEARS AS IF THE OPERATION AND MAINTENANCE WERE NOT SO TRANSFERRED T O THE TRANSFEREE DEVELOPER. (3) THE PROVISIONS OF SUB-SECTION (5) AND SUB-SECTI ONS (7) TO (12) OF SECTION 80-IA SHALL APPLY TO THE SPECIAL ECONOMIC Z ONES FOR THE PURPOSE OF ALLOWING DEDUCTIONS UNDER SUB-SECTION (1 ). EXPLANATIONFOR THE PURPOSES OF THIS SECTION, 'DEVE LOPER' AND 'SPECIAL ECONOMIC ZONE' SHALL HAVE THE SAME MEANING S RESPECTIVELY I.T.A. NO.2126 & 2749/DEL/2013 72 AS ASSIGNED TO THEM IN CLAUSES (G) AND (ZA) OF SECT ION 2 OF THE SPECIAL ECONOMIC ZONES ACT, 2005. 64. ERGO, THE BENEFIT U/S.80IAB IS ELIGIBLE ONLY IN RESPECT OF PROJECT APPROVED BY BOARD OF APPROVAL UNDER THE AEGIS OF MINISTRY OF COMMERCE AND INDUSTRY AND ONCE THE APPR OVAL IS GRANTED BY BOA, THE STATUTORY BENEFIT HAS TO BE GRA NTED SO AS TO GIVE EFFECT TO SUCH APPROVAL. THE SEZ ACT, 2005 HAS BEEN ENACTED AS A SELF-CONTAINED CODE AND IS A SPECIAL A CT WHICH HAS AN OVERRIDING EFFECT ON ANY OTHER ACT INCLUDING THE INCOME TAX ACT, 1961, IN VIEW OF PROVISION OF SECTI ON 51 AND R.W.S. 27 OF THE SEZ ACT 2005. 65. BEFORE US, THE LEARNED COUNSEL HAS GIVEN THE SE QUENCE OF VARIOUS APPROVALS WHICH ARE QUITE RELEVANT FOR E XAMINING THE CLAIM OF THE ASSESSEE, WHICH ARE AS UNDER: I. THAT SEZ PROJECT UNDERTAKEN BY THE ASSESSEE WAS APPROVED BY GOVERNMENT OF INDIA (BOA) VIDE LETTER D ATED 25/10/2006 WHICH WAS SUBSEQUENTLY NOTIFIED IN OFFIC IAL GAZETTE. II. VIDE LETTER DATED 14/02/2007, APPROVAL WAS GRANTED TO THE ASSESSEE TO CARRY OUT AUTHORIZED OPERATIONS IN SEZ WHICH INCLUDED DEVELOPMENT OF INFRASTRUCTURE FACILI TY. III. THE MOU FILED VIDE LETTER DATED 22/03/2007 BEFORE B OA FOR TREATING M/S. DLF ASSETS P. LTD. AS CO-DEVELOPE R FOR THE PURPOSE OF DEVELOPING OF SEZ PROJECT WAS APPROV ED BY MINISTRY OF COMMERCE AND INDUSTRY, GOVERNMENT OF INDIA (SEZ SECTION) VIDE APPROVAL DATED 07/05/2007. I.T.A. NO.2126 & 2749/DEL/2013 73 IV. VIDE APPROVAL LETTER DATED 22/05/2007, BOA APPROVED AUTHORIZED OPERATIONS THAT COULD BE CARRIED OUT BY M/S. DLF ASSETS P. LTD. WHICH INTER-ALIA INCLUDED DEVELOPMENT OF WARM SHELL. V. THE MOU DATED 29/01/2007 GOT CULMINATED INTO DEFINITIVE AGREEMENT DATED 20/03/2008 WHICH WAS DUL Y CONSIDERED WHILE GRANTING APPROVAL TO M/S. DLF ASSE TS P. LTD. VIDE LETTER DATED 01/06/2009. VI. THAT ASSESSEE FURTHER SOUGHT CLARIFICATIONS VIDE LE TTER DATED 10/01/2011 FROM MINISTRY OF COMMERCE AND INDUSTRY, GOVERNMENT OF INDIA (SEZ SECTION) WHICH W ERE ANSWERED BY LETTER DATED 18/01/2011 WHEREIN IT WAS CATEGORICALLY STATED THAT LEASE OF LAND TO CO-DEVEL OPER IS PERMISSIBLE UNDER RULE 11(9) OF SEZ RULES. IT WAS FURTHER CLARIFIED BY THE MINISTRY THAT CO-DEVELOPER CAN ACQUIRE / PURCHASE BUILDING ON THE LEASED LAND TO PERFORM APPROVED OPERATIONS. MOREOVER, THE TRANSACT ION ENVISAGED IN THE MOU AND AGREEMENT WITH M/S. DLF ASSETS P. LTD. HAS BEEN SPECIFICALLY APPROVED IN RE PLY TO QUERY NO.6 & 7 OF THE SAID LETTER. THIS POSITION WA S ONCE AGAIN CLARIFIED IN REPLY DATED 20/01/2011. VII. THE BOA ALSO SOUGHT CLARIFICATION FROM CBDT REGARD ING ACTIVITY PROPOSED TO BE CARRIED OUT BY THE ASSESSEE AND CO-DEVELOPER AND CBDT DULY APPROVED BY THE SAME VID E LETTER DATED 01.06.2009 WITH DISCLAIMER THAT INCOME TAX DEPARTMENT SHALL HAVE RIGHT TO EXAMINE THE TAXABILI TY OF TRANSACTION INVOLVING LEASE OF LAND. I.T.A. NO.2126 & 2749/DEL/2013 74 66. ONE OF THE MAIN REASONS FOR DENYING THE CLA IM OF BENEFIT U/S.80IAB BY THE ASSESSING OFFICER WAS THAT THE OWNERSHIP OF LAND ON WHICH SEZ HAS BEEN DEVELOPED I S IN DISPUTE IN VIEW OF DECISION OF HON'BLE PUNJAB AND HA RYANA HIGH COURT, AND THEREFORE, SUCH A CLAIM IS INADMISS IBLE. IN THIS CONNECTION, LEARNED COUNSEL BEFORE US HAS CLAR IFIED THAT ASSESSEE WAS A BONA FIDE PURCHASER OF THE PROPERTY IN RESPECT OF WHICH APPROVAL FOR DEVELOPMENT OF SEZ PROJECT WA S DULY GRANTED BY GOVERNMENT OF INDIA. IN ANY CASE, THE HO NBLE P&H HIGH COURT HAS NOT COMMENTED UPON SEZ PROJECT DEVEL OPED ON SAID PIECE OF LAND AND THE DECISION WILL NOT AT ALL AFFECT THE RIGHT OF THE ASSESSEE. IN THESE CIRCUMSTANCES, THE DECISION OF P&H HIGH COURT SHALL HAVE NO BEARING ON THE CLAIM O F DEDUCTION U/S 80IAB OF THE ACT PARTICULARLY WHEN TH E INFRASTRUCTURE PROJECT HAS ALREADY BEEN EXECUTED AN D COMPLETED. IN ANY CASE, THE ORDER OF P&H HIGH COURT PRONOUNCED ON 03/02/2011 WAS CHALLENGED BEFORE SUPR EME COURT BY THE ASSESSEE AND OTHER PARTIES AND NOW THE HONBLE SUPREME COURT VIDE ORDER DATED 20/06/2011 HAS STAYE D THE OPERATION OF JUDGMENT OF P&H HIGH COURT AND THEREFOR E, THE ADVERSE INFERENCE ON THE BASIS OF ORDER OF P&H HIGH COURT IS NOT SUSTAINABLE. HE CLARIFIED THAT ASSESSMENT ORDER WAS PASSED ON 27/04/2011, I.E., BEFORE PASSING OF THE O RDER BY THE HONBLE SUPREME COURT AND THUS, THE OBSERVATION OF THE ASSESSING OFFICER IS NO LONGER RELEVANT AND THIS CO NTROVERSY HAS NO LEGS TO STAND. I.T.A. NO.2126 & 2749/DEL/2013 75 67. WE FIND THAT, EVEN THE LD. CIT (A) HAS CONSIDER ED THIS FACT IN LIGHT OF THE JUDGMENT OF THE HON'BLE SUPREME COURT AND ON THIS BASIS HAS REJECTED THE OBSERVATIONS MAD E BY THE ASSESSING OFFICER. THUS, WHEN THE OPERATION OF THE ORDER OF THE HON'BLE PUNJAB AND HARYANA HIGH COURT HAS BEEN STAYED BY THE HON'BLE SUPREME COURT VIDE JUDGMENT AND ORDE R DATED 20.06.2011, THEN BLINDLY RELYING UPON THE ORDER OF THE HON'BLE HIGH COURT CANNOT BE THE GROUND FOR REJECTING THE C LAIM OF DEDUCTION. EVEN OTHERWISE ALSO, IN CASE THE ACQUISI TION OF LAND BY STATE GOVERNMENT AND CONSEQUENTIAL OWNERSHI P OF THE LAND BY THE ASSESSEE IN FUTURE IS CANCELLED BY THE HON'BLE SUPREME COURT, THEN AS A CONSEQUENCE, ASSESSEE WILL HAVE TO RETURN THE ENTIRE CONSIDERATION TO THE CO-DEVELOPER AND IN SUCH A SITUATION THERE WOULD ARISE NO OCCASION TO C HARGE ANY INCOME TAX OR GIVE ANY CONSEQUENTIAL BENEFIT U/S.80 IAB. THUS, THE REASONING GIVEN BY THE LD. CIT (A) TO REJ ECT THIS GROUND IS AFFIRMED AND IS UPHELD. 68. NOW COMING TO THE ASSESSING OFFICERS REASONING THAT TRANSFER OF A BUILDING CANNOT BE CONSIDERED AS ACTI VITY OF DEVELOPMENT OF SEZ, AND THEREFORE, PROFIT ARISING F ROM SUCH TRANSFER IS NOT ELIGIBLE FOR DEDUCTION U/S.80IAB; A ND LEASE OF LAND FOR FURTHER 30 YEARS TO M/S. DLF ASSET LTD. TA NTAMOUNT TO TRANSFER OF LAND. ALL THESE REASONING OF THE LD. ASSESSING OFFICER AT THE THRESHOLD CANNOT BE ENTERTAINED OR A PPRECIATED, IN VIEW OF SERIES OF APPROVALS FROM BOARD OF APPRO VAL, WHICH IS A BODY AUTHORISED BY THE STATUTE AND BY THE GOVT . OF INDIA. ASSESSING OFFICER HAS MAINLY CONSIDERED/EXAMINED TH E ISSUE I.T.A. NO.2126 & 2749/DEL/2013 76 OF DISALLOWANCE OF CLAIM OF DEDUCTION ON THE GROUND THAT ACTIVITY OF DEVELOPING OF BUILDING AND SUBSEQUENT T RANSFER OF BARE SHELL TO CO-DEVELOPER IS NOT THE AUTHORIZED OP ERATION UNDER SEZ ACT. AS STATED ABOVE, BEFORE UNDERTAKING THE ACTIVITY OF DEVELOPMENT OF SEZ, THE ASSESSEE HAS OB TAINED APPROVALS FROM TIME TO TIME SO AS TO COMPLY STRICTL Y WITHIN THE PROVISIONS OF SEZ ACT R.W.S. 80IAB OF I.T. ACT. THE BOARD HAS GRANTED APPROVAL NOT ONLY TO THE ASSESSEE FOR BUILD ING THE BARE SHELL BUT ALSO TO THE CO-DEVELOPER AFTER EXAMI NING THE VARIOUS CLAUSES OF MOUS DATED 29.01.2007 AND 20.03. 2008, WHEREIN PARTICULARS OF DEVELOPMENT ACTIVITY ARE EXT ENSIVELY LAID DOWN. THE PROVISION OF SECTION 80IAB MANDATES THAT ASSESSEE MUST BE A DEVELOPER UNDER THE SEZ ACT AND INCOME MUST BE DERIVED FROM BUSINESS OF DEVELOPING SEZ NOT IFIED UNDER THE SEZ ACT, 2005. HERE IN THIS CASE, ALL THE CONDITIONS STOOD SATISFIED AND ASSESSING OFFICER HAS ALSO NOT POINTED OUT AS TO WHICH OF THE CONDITIONS HAVE NOT BEEN FULFILL ED. LIKEWISE, IN THE PRESENT CASE, IT IS AN UNDISPUTED FACT THAT, FIRSTLY , THE AREA HAS BEEN NOTIFIED AS SPECIAL ECONOMIC ZONE VID E NOTIFICATION DATED 06.12.2006 AND 19.03.2007; SECONDLY , THE ASSESSEE HAS BEEN APPROVED AS DEVELOPER BY BOA VIDE LETTER DATED 25.10.2006 AND 14.12.2007; AND LASTLY , THE OPERATION OF DEVELOPING OF BUILDING HAS BEEN APPROVED AS AUTH ORIZED OPERATIONS AND AS SUCH THE INCOME HAS BEEN DERIVED FROM DEVELOPING AND SALE OF BARE SHELL BUILDING IN SEZ. THE TERM DEVELOPING A SPECIAL ECONOMIC ZONE HAS TO BE SEEN IN TERMS OF AUTHORIZED OPERATIONS SPECIFIED BY BOA UNDER THE SEZ ACT, I.T.A. NO.2126 & 2749/DEL/2013 77 2005. THOUGH INCOME TAX ACT DOES NOT DEFINE THE TER M DEVELOPING A SPECIAL ECONOMIC ZONE, HOWEVER, THE MEANING OF THE SAME HAS TO BE DEDUCED FROM THE SEZ ACT. HER E, IN THIS CASE, NOT ONLY THE BOA HAS RECOGNIZED THE EXISTENCE OF SEZ BUT HAS ALSO APPROVED THE ACTIVITY OF DEVELOPING AN D TRANSFER OF BARE SHELL AS AUTHORIZED OPERATION OF DEVELOPING OF SEZ AND ASSESSEE HAS BEEN RECOGNIZED AS DEVELOPER. ACCORDIN GLY, ALL THE CONDITIONS SPELT OUT IN SECTION 80IAB STANDS FU LFILLED. 69. THE ASSESSING OFFICER HAS ALSO DRAWN ADVERSE INFERENCE FROM THE FACT THAT SALE OF LAND IS NOT AL LOWED IN SEZ, BECAUSE AS PER SEZ RULES THE ASSESSEE HAS TRANSFERR ED THE LAND FOR 49 YEARS LEASE, WHICH IN FACT IS NOT CORRE CT, BECAUSE THE SAME WAS FOR 30 YEARS, AND ALSO IT IS AGAINST T HE SPIRIT OF RULE 11(9) OF SEZ RULE 2006. IT HAS BEEN BROUGHT ON RECORD AND HAS BEEN CONTENDED AT EVERY STAGE THAT ASSESSEE HAS NOT TRANSFERRED THE OWNERSHIP OF THE LAND TO CO-DEVELOP ER M/S. DLF PVT. LTD. AT ANY POINT OF TIME, AS THE SAME HAS BEEN GIVEN ON LEASE FOR THE PERIOD OF 30 YEARS AND THIS FACT I S CLEARLY BORNE OUT FROM THE CLAUSES OF MOU AND DEFINITIVE AG REEMENTS THAT THE OWNERSHIP OF THE LAND REMAINS WITH THE ASS ESSEE AND THERE IS NO CASE OF TRANSFER OF LAND. RULE 11(9) OF SEZ RULES, 2006 ONLY PROHIBITS SALE OF LAND AND SAME IS NOT AP PLICABLE IN THE CASE OF LEASE. THIS POSITION IS ALSO CORROBORAT ED FROM SPECIFIC REPLY OF BOA IN LETTER DATED 18.01.2011 AN D 20.01.2011. THIS CLARIFICATION ISSUED BY BOA CLEARL Y CLINCHES THE ISSUE IN FAVOUR OF THE ASSESSEE, BECAUSE BOA IN CLEAR WORDS AND TERMS HAS CLARIFIED THE LEGALITY AND PERM ISSIBILITY OF I.T.A. NO.2126 & 2749/DEL/2013 78 TRANSACTION OF BARE SHELL BUILDING TO CO-DEVELOPERS AND LEASE OF LAND IN TERMS OF PROVISION OF SEZ ACT, 2005. THU S, ANY DOUBTS REGARDING AUTHORIZED OPERATION HAVE BEEN SET AT REST BY BOA. HENCE, THE ALLEGATIONS OF THE ASSESSING OFF ICER ARE TOTALLY MISCONCEIVED AND ARE REJECTED. 70. THE LD. CIT(A) VIDE HIS FINDING RECORDED IN PAR AGRAPH 8.17 TO 8.27 HAD SPECIFICALLY REFERRED TO THE MINUT ES OF BOA MEETS AS WELL AS COMMENTS OBTAINED FROM CBDT WITH R EGARD TO THE LEASE OF LAND. THE DIRECTOR CBDT VIDE LETTER DATED 26.05.2009 HAS CONVEYED ITS APPROVAL FOR THE PROJEC T UNDER CONSIDERATION WITH THE RIGHT TO EXAMINE THE TAXABIL ITY OF INCOME ARISING FROM SUCH TRANSACTION UNDER THE INCO ME TAX ACT. THE BOA ONLY AFTER CONSIDERING THE REPLY FROM THE C BDT, GRANTED THE APPROVAL VIDE LETTER DATED 01.06.2009 T O CO- DEVELOPER, M/S. DLF ASSETS P. LTD. ON DEFINITIVE AG REEMENT DATED 20.03.2008 AFTER INSERTING CLAUSE (XVII) OF P ARA 3, WHEREIN IT WAS CLARIFIED THAT APPROVAL TO LEASE AGR EEMENT WILL NOT HAVE ANY BEARING ON TREATMENT OF INCOME BY WAY OF LEASE /RENTAL/DOWN PAYMENT/PREMIUM ETC. UNDER THE INCOME TAX ACT, 1961. IT WAS SPECIFICALLY POINTED OUT BY THE L D. COUNSEL THAT THERE WAS NOTHING IN THE MINUTES OF MEETINGS O F BOARD OF APPROVAL HELD ON 23.02.2009 AND 19.06.2009, INDICAT ING THAT THERE WAS ANY OBJECTION WITH REGARD TO PROPOSED TRA NSFER OF BARE SHELLS BY THE ASSESSEE TO CO-DEVELOPER. THE AS SESSING OFFICER HAS RELIED UPON CLAUSE (XVII) OF PARA 3 OF LETTER DATED 01.06.2009 WHILE REACHING TO THE ERRONEOUS CONCLUSI ON THAT I.T.A. NO.2126 & 2749/DEL/2013 79 TAXABILITY OF ENTIRE TRANSACTION IS OPEN FOR EXAMIN ATION AND ASSESSMENT. HOWEVER, IT IS SEEN THAT THE ASSESSING OFFICER IN FACT HAS FAILED TO APPRECIATE THE ABOVE CLAUSE IN R IGHT PERSPECTIVE AND HAS ATTEMPTED TO MAKE USE OF THE SA ME FOR JUSTIFYING THE DENIAL OF CLAIM OF DEDUCTION U/S 80IA B OF THE ACT. IT IS PERTINENT TO NOTE HERE THAT CLAUSE (XVII ) OF PARA 3 IS ONLY WITH REGARD TO TERMS AND CONDITIONS OF LEASE A GREEMENT AND SAME CANNOT BE INFERRED TO DISPUTE THE TRANSACT ION OF TRANSFER OF BARE SHELL BUILDING AND PROFIT ARISING THEREFROM. IN THE PRESENT CASE, THE ASSESSEE HAS CLAIMED DEDUCTIO N OF PROFIT FROM SALE OF BARE SHELL BUILDING AND AS SUCH THE CL AUSE RELATING TO ISSUE OF TAXABILITY OF LEASE INCOME IS OF NO HELP TO THE REVENUE. THE CIT(A) HAS GIVEN EXPRESS FINDING O N THIS ISSUE VIDE PARA 8.25 OF HIS ORDER WHICH IS QUITE RE LEVANT AND ALLAY THE CHARGE OF THE AO. FURTHER, IT IS SEEN THA T THE DISCLAIMER CLAUSE IN APPROVAL DATED 01.06.2009 GRAN TED TO CO-DEVELOPER HAS BEEN PRIMARILY INSERTED BY THE BOA IN THE APPROVAL TO PUT A CURB ON THE WRONG PRACTICE OF LEA SING THE LAND FOR LONG PERIODS AND RECEIVING ONETIME PAYMENT IN THE FORM OF LEASE RENTALS/DOWN PAYMENTS/PREMIUM ETC. WH ICH TANTAMOUNT TO SALE OF LAND IN THE GUISE OF LONG-TER M LEASE. THUS, THE RELIANCE BY AO ON SUCH DISCLAIMER IS MISP LACED AS THE DISCLAIMER PER SE SHALL HAVE NO BEARING ON TAXABILITY OF DEVELOPMENT OF THE BUILDING AND INCOME BY WAY OF SA LE OF BARE SHELL BUILDINGS IN THE HANDS OF THE ASSESSEE. THE A SSESSEE HAS OBTAINED REQUISITE APPROVALS FROM THE BOARD OF APPR OVAL IN BY I.T.A. NO.2126 & 2749/DEL/2013 80 DISCLOSING NOT ONLY THE DEVELOPMENT CONSIDERATION B UT ALSO THE BASIS FOR DETERMINING THE SAME. 71. THE ENTIRE CONTROVERSY AS TO WHETHER THE TRANSFER OF BARE SHELL BUILDINGS TO THE CO-DEVELOPER WAS AN AUT HORIZED OPERATION OR NOT AS HIGHLIGHTED BY THE LD. COUNSEL BEFORE US, HAS BEEN SET AT REST BY FURTHER CLARIFICATIONS DATE D 18.01.2011 AND 20.01.2011 ISSUED BY THE MINISTRY OF COMMERCE. IN OUR OPINION, THE REVENUE AUTHORITIES DO NOT HAVE JURISDI CTION TO QUESTION THE VALIDITY OR THE LEGALITY OF AUTHORIZE D OPERATIONS ONCE IT HAS BEEN APPROVED BY THE BOARD OF APPROVAL/ CENTRAL GOVERNMENT UNDER A STATUTE AND ANY ATTEMPT TO DISPU TE THE SAME WOULD BE CONTRARY TO THE PROVISIONS OF THE SEZ ACT, WHICH HAS AN OVERRIDING EFFECT. IN THE GARB OF DISC LAIMER, THE AO CANNOT USURP THE FUNCTIONS OF THE BOARD OF APPRO VAL AND SIT OVER THE JUDGEMENT ON WHAT CONSTITUTES AN AUTHOR IZED OPERATION WITHIN THE MEANING OF SEZ ACT/SEZ RULES. MERELY BECAUSE A DEDUCTION IS ALLOWED TO TRANSFEREE DEVELO PER IN RESPECT OF PROFITS DERIVED FROM OPERATION AND MAINT ENANCE WOULD NOT LEAD TO INFERENCE THAT THE DEDUCTION FOR DEVELOPMENT OF A SEZ WOULD NOT BE AVAILABLE TO THE DEVELOPER. THE MANDATE OF SECTION 80IAB IS THAT A DEVELOPER IS ENTITLED TO DEDUCTION IN RESPECT OF PROFITS AND GAINS DERI VED FROM ANY BUSINESS OF DEVELOPING A SPECIAL ECONOMIC ZONE AND FOR WHAT CONSTITUTES DEVELOPING A SPECIAL ECONOMIC ZON E, ONE HAS TO REFER TO THE PROVISIONS OF THE SEZ ACT. WHEN THE ASSESSEE HAS BEEN GRANTED APPROVAL AS A DEVELOPER A ND ALL THE AUTHORIZED OPERATION WERE APPROVED INCLUDING TR ANSFER OF I.T.A. NO.2126 & 2749/DEL/2013 81 BARE SHELLS TO THE CO-DEVELOPER FOR A DEVELOPMENT CONSIDERATION BY THE BOARD OF APPROVAL, THE BUSINES S ACTIVITY CARRIED OUT BY THE ASSESSEE PURSUANT TO SUCH APPROV ALS CONSTITUTE BUSINESS OF DEVELOPING A SPECIAL ECONOM IC ZONE WITHIN THE MEANING OF SECTION 80IAB OF THE ACT. UND ER SECTION 80IAB, THE AOS AUTHORITY IS LIMITED TO EXAMINE WHE THER THE PROVISIONS OF SECTION 80IAB READ ALONG WITH THE REL EVANT RULES HAVE BEEN COMPLIED OR NOT. FOR INSTANCE, SOME OF TH E CONDITIONS AS STIPULATED IN THE SECTION WHICH THE A O MAY EXAMINE MAY INCLUDE: - -WHETHER THE ASSESSEE IS A DEVELOPER UNDER THE SEZ ACT AND IS IN THE BUSINESS OF DEVELOPING A SEZ. -THE SEZ HAS BEEN NOTIFIED ON OR AFTER THE 1ST DAY OF APRIL 2005 UNDER THE SPECIAL ECONOMIC ZONE ACT, 2005. -WHETHER THE PROFITS HAVE BEEN DERIVED FROM THE BUSINES S OF DEVELOPMENT, OPERATION AND MAINTENANCE OF A SEZ. 72. THE CASE OF ASSESSEE HAS BEEN THAT THE LAND HAS BEEN GIVEN ON LEASE FOR A PERIOD OF 30 YEARS AND LEASE R ENTALS PER ANNUM ARE BEING RECEIVED OVER A PERIOD OF LEASE TER M ON ANNUAL BASIS AND NOT UP-FRONT FOR ALL THE YEARS UND ER THE LEASE. THE DISCLAIMER CONDITION MENTIONED IN CLAUSE 3(XVII) OF THE APPROVAL LETTER DATED 01.06.2009 DOES NOT GIVE ANY ADDITIONAL POWER TO THE AO TO EXAMINE THE TAXABILIT Y OF THE TRANSACTION OF HAND OVER AND TRANSFER OF BARE SHELL S BUT HAS TO BE RESTRICTED ONLY TO EXAMINE THE TRANSACTION OF LE ASE OF LAND, AS EXPRESSLY CLARIFIED BY THE MINISTRY OF COMMERCE IN THE CLARIFICATION DATED 18.01.2011 SO THAT THE TRANSACT IONS OF SALE I.T.A. NO.2126 & 2749/DEL/2013 82 OF LAND IN THE GUISE OF LONG TERM LEASE BY RECEIVIN G PREMIUM/DOWN PAYMENTS ETC. DO NOT ESCAPE THE SCRUTI NY UNDER THE INCOME TAX ACT AS THERE IS AN EXPRESS PRO HIBITION ON SALE OF LAND IN THE SEZ. UNDER THESE FACTS AND CIRCUMSTANCES, WE DO NOT FIND THE REASONING GIVEN B Y THE AO TO DISALLOW THE CLAIM IS JUSTIFIED. 73. BEFORE US, LEARNED SPECIAL COUNSEL REFERRING TO THE SAME REASONING GIVEN BY THE ASSESSING OFFICER HAD S UBMITTED THAT TRANSFER OF BUILDING OF CO-DEVELOPER CANNOT BE TREATED AS A BUSINESS ACTIVITY AND THE INCOME FROM SUCH TRANSF ER CANNOT BE TREATED AS BUSINESS INCOME. IN FACT, IT IS A SAL E OF A BUILDING IN THE NATURE OF CAPITAL ASSET. THE CONTEN TION RAISED ON BEHALF OF THE REVENUE IN THE FACTS OF THE PRESEN T CASE CANNOT BE SUSTAINED BECAUSE ALL THE CONDITIONS LAID DOWN UNDER THE SEZ ACT HAVE BEEN EXAMINED MINUTELY BY TH E AUTHORIZED AUTHORITY, I.E., BOARD OF APPROVAL. ONCE ASSESSEE HAS BEEN NOTIFIED AS DEVELOPER UNDER THE SEZ ACT AN D HIS ACTIVITY HAS BEEN APPROVED BY BOA AND THE SEZ IN WH ICH THE ASSESSEE HAS CARRIED OUT ITS BUSINESS ACTIVITY HAS BEEN NOTIFIED UNDER THE SEZ ACT, 2005 THEN PROFITS DERIV ED FROM BUSINESS OF DEVELOPMENT, OPERATION AND MAINTENANCE OF A SEZ HAS TO BE TAKEN FROM SUCH ACTIVITY AND CONSEQUE NTLY IS ENTITLED FOR CLAIM OF DEDUCTION U/S.80IAB. 74. THUS, IN VIEW OF OUR REASONING GIVEN ABOVE, WE HOLD THAT ASSESSING OFFICER WAS NOT JUSTIFIED IN DENYING THE BENEFIT I.T.A. NO.2126 & 2749/DEL/2013 83 OF DEDUCTION U/S.80IAB ARISING FROM SALE OF BARE SH ELL BUILDING TO CO-DEVELOPER. 75. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO POINTED OUT THAT IN A GROUP CONCERN, THIS TRIBUNAL IN THE CASE OF DLF INFO CITY DEVELOPER (CHENNAI) LTD. AND M/S. DLF CYBER CITY DEVELOPERS LTD. ON IDENTICAL CIRCUMSTANCES AND SIMILAR REASONING GIVEN BY THE AO HAS ALLOWED THE CLAIM OF DEDUCTION U/S.80IAB. THE COPY OF THESE JUDGMENTS HAS BEEN PLA CED BEFORE US IN PAPER BOOKS. 76. FROM THE PERUSAL OF THE AFORESAID, WE FIND THAT PRECISELY SAME REASONING WERE GIVEN BY THE ASSESSIN G OFFICER IN THESE CASES WHEREIN THE TRIBUNAL AFTER ANALYZING THE PROVISION OF SEZ ACT, 2005 AND ON EXACTLY SIMILAR S ET OF ACTIVITIES HAVE HELD THAT ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S.80IAB BECAUSE THEY WERE IN CONSONANCE NOT ONLY UNDER THE SEZ BUT ALSO BOA HAS APPROVED SUCH ACTIVITIES. 77. THE ASSESSING OFFICER AS AN ALTERNATIVE HAS ALSO HELD THAT ISOLATED TRANSACTION OF SALE OF BUILDING IS AS SESSABLE UNDER THE HEAD INCOME FROM CAPITAL GAIN, AND THER EFORE, PROVISION OF SECTION 80IAB IS NOT APPLICABLE AND SI NCE THE PURCHASER M/S. DLF LTD. HAS SHOWN THE BARE SHELL BU ILDING AS FIXED ASSETS WITH BALANCE-SHEET, THEREFORE, THE SAME CONSTITUTES THE CAPITAL ASSETS OF THE ASSESSEE AND THUS, THE PROFIT ARISING FROM SALE OF BARE SHELL IS IN THE NA TURE OF SHORT TERM CAPITAL GAIN. THE AFORESAID OBSERVATIONS OF TH E LD. ASSESSING OFFICER CANNOT BE ACCEPTED BECAUSE ASSESS EE IS I.T.A. NO.2126 & 2749/DEL/2013 84 ENGAGED ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE AND THE BUILDING IN SEZ HAS BEEN SHOWN AS STOCK-IN- TRADE ON WHICH REVENUE HAS BEEN RECOGNIZED AS PER PERCENTAGE COMPLETION METHOD (POCM) PRESCRIBED UNDER AS-7. THE SEZ PROJECT WAS PART OF REGULAR BUSINESS ACTIVITY OF TH E ASSESSEE AND AS SUCH THERE IS NO CASE TO TREAT THIS TRANSACT ION IN DIFFERENT CONTEXT SO AS TO RE-CHARACTERIZE INCOME U NDER THE HEAD CAPITAL GAIN MERELY TO DEFEAT THE CLAIM OF DED UCTION BASED ON REQUISITE APPROVAL AND PROVISIONS OF SECTI ON 80IAB. IN FACT, EVEN DURING THE YEAR UNDER REFERENCE, AO H AS CONSIDERED VARIOUS OTHER PROJECTS UNDER THE HEAD BU SINESS INCOME. FURTHER, WHEN THE BOOKS OF ACCOUNT OF THE A SSESSEE WERE SUBJECTED TO SPECIAL AUDIT U/S 142(2A) AND THE SPECIAL AUDITOR HAS ACCEPTED THE TREATMENT OF INCOME FROM S ALE OF BARE SHELL BUILDING AS PART OF BUSINESS PROFITS, TH EN SUCH AN INCOME ARISING FROM SALE OF BARE SHELL BUILDING WOU LD FALL IN THE NATURE OF BUSINESS INCOME ELIGIBLE FOR DEDUCTIO N U/S 80IAB OF THE ACT. APART FROM THAT, IT IS NOTED THAT ASSESSEE- COMPANY WAS FORMED WITH THE OBJECT OF REAL ESTATE DEVELOPMENT AND HAS BEEN ENGAGED IN THIS ACTIVITY S INCE INCEPTION. IT IS THE INTENTION OF THE ASSESSEE WHIC H IS RELEVANT AND DETERMINING FACTOR WHETHER THE ASSET IS HELD AS STOCK OR CAPITAL ASSET. IN THE PRESENT CASE, THE ASSESSEE MO VED AN APPLICATION FOR SETTING UP OF SEZ PROJECT WHICH WAS DULY APPROVED AS DEVELOPER BY BOA. THE COST INCURRED ON DEVELOPMENT OF BARE SHELL BUILDING WAS DISCLOSED AS STOCK AND REVENUE WAS RECOGNIZED AS PER POCM. UNDER THESE I.T.A. NO.2126 & 2749/DEL/2013 85 CIRCUMSTANCES, THE INCOME FROM SALE OF BUILDING IS PURELY IN THE NATURE OF BUSINESS INCOME. THE ASSESSEE IS ENGA GED IN ORGANIZED ACTIVITY OF DEVELOPMENT OF INFRASTRUCTURE FACILITY IN SEZ AND AS SUCH OPERATIONS OSTENSIBLY ARE IN THE NA TURE OF BUSINESS IN TERMS OF SECTION 2(13) OF THE INCOME TA X ACT, 1961. THUS, RE-CHARACTERISING THE INCOME AS SHORT-T ERM CAPITAL GAIN BY THE AO IS REJECTED. 78. COMING TO ANOTHER ALTERNATIVE FINDING OF THE LD . ASSESSING OFFICER THAT, SINCE THE LAND HAS BEEN LEA SED FOR 49 YEARS, THEREFORE, THE INCOME FROM SALE OF BARE SHEL L BUILDING SHOULD ALSO BE BIFURCATED AND PROPORTIONATE RECOGNI ZED OVER A PERIOD OF 49 YEARS. WE FIND THAT THE LD. CIT (A) HA S DISCUSSED THIS ISSUE IN DETAIL AND HAS HELD THAT THE LEASE IS ONLY IN RESPECT OF LAND AND SAME CANNOT BE APPLIED ON TRANS FER OF BUILDING. IN ANY CASE, THE RECOGNITION OF REVENUE R ELATING TO REAL ESTATE PROJECTS IS GOVERNED BY AS-7 AND THE AS SESSEE HAS BEEN CONSISTENTLY FOLLOWING POCM WHICH HAS ACCEPTED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2006-07. HEN CE, SUCH A REASONING OF THE AO TO DISALLOW PROPORTIONATE DED UCTION CANNOT BE SUSTAINED. 79. THUS, IN VIEW OF OUR FINDING GIVEN ABOVE, THE ORDER OF THE LD. CIT (A) IN ALLOWING THE CLAIM OF BENEFIT U/ S.80IAB IS CONFIRMED AND CONSEQUENTLY THE GROUND RAISED BY THE REVENUE IS DISMISSED. 80. LASTLY, IN SO FAR AS THE RELIANCE PLACED BY THE LD. SPL. COUNSEL FOR THE REVENUE THAT THE HONBLE HIGH COURT IN THE I.T.A. NO.2126 & 2749/DEL/2013 86 CASE OF ONE OF THE SISTER CONCERNS, HAS SET-ASIDE T HE ISSUE FOR DECIDING ON MERITS WHILE UPHOLDING THE REVISION US/ S 263 BY THE CIT, IS ALSO SANS ANY MERITS, BECAUSE, NOWHERE THE HONBLE HIGH COURT HAS ADVERSELY COMMENTED ON THE C LAIM OF DEDUCTION U/S 80IAB ON MERITS. IN FACT, MATTER HAS BEEN RESTORED BACK TO THE TRIBUNAL TO DECIDE THE ISSUE O N MERITS AFRESH AFTER CONSIDERING ALL THE FACTS AND THE RELE VANT PROVISIONS OF SEZ ACT, WHICH WE HAVE ALREADY DISCUS SED IN DETAIL. THUS, RELIANCE PLACED BY THE REVENUE TO DRA W ANY ADVERSE INFERENCE ON MERITS CANNOT BE SUSTAINED. 81. THE NEXT ISSUE RELATES TO DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF REVENUE RECOGNITION AS P ER PERCENTAGE OF COMPLETION METHOD (POCM) OF RS.42,92,17,872/-. 82. AT THE OUTSET, LEARNED COUNSEL INFORMED THAT TH IS ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY T HE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006 -07 AND DREW OUR ATTENTION TO PARAGRAPHS 35 AND 42 OF THE S AID ORDER. 83. LD. SPECIAL COUNSEL ALSO ADMITTED THAT THIS ISS UE NOW STANDS COVERED IN FAVOUR OF THE ASSESSEE. 84. LD. ASSESSING OFFICER ON THE BASIS OF REMARKS M ADE BY THE SPECIAL AUDITORS HELD THAT REVENUE TO BE RECOGN IZED FROM VARIOUS PROJECTS AS PER THE POCM METHOD HAVE TO BE WORKED OUT IN THE FOLLOWING MANNER: - I.T.A. NO.2126 & 2749/DEL/2013 87 NAME OF THE PROJECT REVENUE RECOGNITION AS PER POCM FOR F.Y.07-08 GROSS MARGIN RECOGNISED AS PER OUR WORKING DURING F.Y.07- 08 DIFFERENCE ADDITIONAL REVENUE RECOGNIZED AS PER ASSESSMENT ORDER FOR A.Y.2007-08 ADDITIONAL REVENUE RECOGNISED AS PER ASSESSMENT ORDER FOR AY 2006-07 TRINITY (11,58,438) 1,30,93,649 1,42,52,087 2,25,90,443 12,70,13,958 ARALIAS (34,15,34,045) (29,50,49,819) 4,64,84,22 6 10,49,09,048 37,50,19,955 WESTEND HEIGHTS 81,42,828 3,74,00,432 2,92,57,604 6,34,73,181 38,56,76,277 ROYALTON 7,15,12,958 7,97,19,390 82,06,432 1,43,28,160 4,88,79,491 PINNACLE 45,32,46,474 49,38,96,094 4,06,49,620 4,39,97,615 28,41,42,051 ICON 38,56,98,510 41,54,67,530 2,97,69,020 4,05,73,424 93,46,81,602 SUMMIT 67,87,31,045 69,82,35,605 1,95,04,559 1,28,23,779 - MAGNOLIAS 526,66,86,898 5,36,95,65,201 10,28,78,303 2,17,22,670 - THE BELAIRE 322,94,28,422 3,29,92,89,020 6,98,60,598 1,55,03,253 - THE PARK PLACE 250,38,47,408 2,570,346,411 66,499,003 - - WELLINGTON (49,17,634) (4,917,634) - - - PRINCETON (59, 02,013) (5,902,013) - - - CARLTON (38,99,436) (3,899,436) - - - TOTAL PHASE-V (A) 1223,98,82,978 12,66,72,44,430 42,73,61,452 33,99,21,573 2,15,54,13,334 DLF CITY COURT 9,33,58,702 94,652,773 1,294,071 - - COURTYARD OFFICE 6,37,92,669 6,38,23,974 31,305 65,641 - RAJARHAT KOLKATA 59,75,03,936 597,503,936 - - - JALLANDHAR MALL 23,83,66,943 238,366,943 - - - LUDHIANA MALL 28,96,61,350 289,661,350 - - - STAR TOWER 5,11,80,289 18,450 - - I.T.A. NO.2126 & 2749/DEL/2013 88 SILOKHERA 51,198,739 CROSS POINT 6,58,07,790 66,245,928 512,594 - - CORPORATE PARK 33,75,82,954 337,582,954 - - - GRAND MALL - - - - - EXCLUSIVE FLOORS - - - - 6,95,96,807 MOULSARY ARCADE - - - - 6,76,915 TOTAL (B) 173,72,54,633 1,73,90,55,150 18,56,420 65 ,641 7,02,73,722 NET TOTAL (A+B) 13,97,71,37,609 14,40,62,99,580 42,92,17,872 33,99,87,214 2,22,56,87,056 ACCORDINGLY, AO MADE THE ADDITION OF RS.42,92,17,87 2/-. 85. LD. CIT(A) AFTER DETAILED FINDING HAS DELETED T HE SAID ADDITION AFTER OBSERVING AND HOLDING AS UNDER: 9.8 I HAVE CONSIDERED THE SUBMISSION OF APPELLANT, OBSERVATION OF THE ASSESSING OFFICER & SPECIAL AUDITORS COMMENTS, DECISION OF HONBLE ITAT IN APPELLANTS OWN CASE IN A.Y. 1994-9 5 AND TREATMENT GIVEN TO THIS ISSUE IN EARLIER ASSESSMENT YEARS BY ASSESSING OFFICER AS WELL AS APPELLATE AUTHORITIES. IT IS ALS O NOTICED THAT THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT V IDE ORDER DATED 25.03.2011 PASSED BY CIT(A)-XVIII, NEW DELHI, FOR A .Y. 2006-07 (PAGE NOS.122-153 OF THE SAID ORDER) AND IN MY OWN ORDER IN APPELLANTS OWN CASE FOR THE IMMEDIATELY PRECEDING YEAR RELEVAN T TO ASSESSMENT YEAR 2007-08 (PAGE NOS.108-139 OF THE SAID ORDER) . IT IS SEEN THAT WHENEVER APPELLANT COMPANY STARTS A NEW BUILDING/ P ROJECT, IT PREPARES A BUDGETED STATEMENT OF TOTAL COST TO BE I NCURRED FOR COMPLETING THE BUILDING OR PROJECT AND THE TOTAL RE VENUE WHICH CAN BE DERIVED FROM SALE OF SUCH BUILDING OR PROJECT. THE BUDGETED STATEMENT OF REVENUE AND COST GIVES THE BUDGETED MARGIN ON SU CH BUILDING OR PROJECT. WHEN THE ACTUAL CONSTRUCTION OF BUILDING O R PROJECT STARTS, THE ACTUAL COST INCURRED AT THE END OF FINANCIAL YEAR I S COMPARED WITH TOTAL BUDGETED COST TO DETERMINE THE PERCENTAGE OF COMPLE TION OF BUILDING OR PROJECT. I.T.A. NO.2126 & 2749/DEL/2013 89 THE APPELLANT HAS FOLLOWING COMPONENTS OF COST TO B E INCLUDED IN THE BUDGETED COST:- COST OF LAND (INCLUDING LAND UNDER AGREEMENTS TO PU RCHASE) ESTIMATED INTERNAL DEVELOPMENT COST (IDC) , EXTERNAL DEVELOPMENT CHARGES, CONSTRUCTION COSTS AND DEVELOPMENT/ CONSTRUCTION MA TERIALS, INTERNAL DEVELOPMENT CHARGES ARE INCURRED TOWARDS A MOUNT SPENT ON ROADS, PARKS, WATER SUPPLY, ELECTRICITY AND OTHER F ACILITIES REQUIRED FOR HABITATION INSIDE THE PERIPHERAL OF A COLONY. SINCE THE EXPENDITURE IS COMMON FOR TOTAL COLONY AND CANNOT BE DIRECTLY CORR ELATED WITH THE PARTICULAR PROJECT OR BUILDING, THE TOTAL INTERNAL DEVELOPMENT CHARGES (IDC) ARE REQUIRED TO BE APPORTIONED ON SOME SCIENT IFIC BASIS OVER THE PROJECTS. THE AVAILABILITY OF APPROACH ROAD, SEWAGE AND OTHER INFRASTRUCTURE FACILITIES ARE AN ESSENTIAL PART OF SALE TRANSACTION AND THEREFORE, IT IS A LIABILITY COMMITTED BY THE APPEL LANT AT THE VERY INITIAL STAGE OF SALE OF PROPERTY ITSELF. WITHOUT THE PROVI SION OF THESE INFRASTRUCTURE FACILITIES, THE CONSTRUCTED BUILDING CANNOT BE HABITABLE AND NO CUSTOMER MAY EVEN BUY THE PROPERTY OF THE AP PELLANT WITHOUT THESE ESSENTIAL FACILITIES. THUS, THERE IS A DIRECT NEXUS BETWEEN THE SALE PRICE AND THE EXPENDITURE TO BE INCURRED ON TH ESE INFRASTRUCTURE FACILITIES BY THE APPELLANT. THE SALE REVENUE AS WE LL AS EXPENDITURE ON INTERNAL DEVELOPMENT WORKS IS INEXTRICABLY LINKED W ITH EACH OTHER AND, SINCE THE ESTIMATED REVENUE INCLUDES CHARGES FOR IN TERNAL DEVELOPMENT WORK, THE CORRESPONDING ESTIMATED EXPENDITURE ON IN TERNAL DEVELOPMENT WORK ALSO HAS TO BE TAKEN INTO CONSIDER ATION IN THE TOTAL COST TO BE INCURRED. IN OTHER WORDS, INTERNAL DEVE LOPMENT WORK IS INBUILT IN THE TOTAL ESTIMATED REVENUE; THE CORRESP ONDING EXPENDITURE HAS TO BE NECESSARILY INCLUDED IN THE TOTAL COST TO BE INCURRED. THE APPELLANT IS BOUND TO APPLY THE MATCHING PRINCIPLES I.E. MATCHING REVENUE WITH COST TO BE INCURRED TO EARN THE REVENU E. ON THIS PRINCIPLE ALONE AND BY ITSELF THE INCLUSION OF IDC IN THE TOT AL COST TO BE INCURRED I.T.A. NO.2126 & 2749/DEL/2013 90 IS REASONABLE AND JUSTIFIED, AS WITHOUT APPLYING TH E PRINCIPLE OF MATCHING REVENUE WITH COST THERE WOULD BE DISTORTIO N IN THE MATTER OF ARRIVING AT INCOME. THIS DISTORTION NEEDS TO BE AVO IDED FOR THE PURPOSE OF ASCERTAINING THE TRUE PROFIT/LOSS OF THE APPELLA NT. AS PER THE INITIAL ESTIMATE PREPARED BY THE APPELLA NT THE COST ON INTERNAL DEVELOPMENT CHARGES WAS ESTIMATED AT RS.23 0 CRORES FOR ITS PHASE V PROJECTS. THE SAME HAS BEEN PREPARED BY SHR I SUNIL ARORA HAVING DIPLOMA IN CIVIL ENGINEERING WITH AN EXPERIE NCE OF 16 YEARS AND SH. DEVENDER SINGH, B.E. (CIVIL) HAVING AN EXPE RIENCE OF 24 YEARS. THE COST ESTIMATE OF RS.230 CRORES IS FURTHER BACKE D BY INDIVIDUAL ITEMS OF COST, SUCH AS EARTH WORK, ROAD WORK, STORM WATER DRAINAGE WORK, HORTICULTURE WORK, WATER SUPPLY WORK, SEWERAG E WORK, BOUNDARY WALL, ELECTRICAL WORK ETC. IN TURN, THERE IS A COST BREAK DOWN OF ALL THESE BROAD HEADS. 9.9 IN VIEW OF THE DETAILED FACTS DISCUSSED ABOVE, THE IDC IS A PART OF BUDGETED COST PREPARED BY THE APPELLANT. TH E BUDGETED IDC IS PREPARED ON SCIENTIFIC BASIS. THE APPELLANT HAS AN EXPERIENCE OF MORE THAN 30 YEARS IN THIS LINE OF BUSINESS AND OVER THE YEARS THE BUDGETED IDC ESTIMATED BY THE APPELLANT COMPANY HAS BEEN ACC EPTED AS PART OF BUDGETED COST BY THE DEPARTMENT. IN BETWEEN THERE WAS A DIFFERENCE BETWEEN THE BUDGETED COST AND THE COST ESTIMATED BY THE DEPARTMENT WHICH WAS FINALLY SETTLED BEFORE THE ITAT IN A.Y. 1 994-95 WHEREIN THE BUDGETED COST OF IDC AS ESTIMATED BY THE APPELLANT WAS ACCEPTED AS PART OF THE BUDGETED COST AND ISSUE WAS SETTLED IN FAVOUR OF THE APPELLANT. IT IS ALSO SEEN THAT THE BUDGETED IDC HA S BEEN ACCEPTED BY THE DEPARTMENT FROM A.Y. 1988-89 TO 1994-95. FOR A. Y. 1995-96 TO 2000-01, THE DEPARTMENT HAS MADE CERTAIN ADDITIONS WHICH HAVE BEEN DELETED BY CIT (A) AS WELL AS ITAT AND NO FURTHER A PPEAL HAS BEEN FILED BY THE DEPARTMENT. FROM A.Y. 2001-02 TO 2005- 06, NO ADDITIONS HAVE ALSO BEEN MADE ON THIS ISSUE EXCEPT IN A.Y. 20 02-03 WHEREIN AN ADDITION OF RS. 4,43,994/- WAS MADE, WHICH WAS DELE TED BY CIT(A). IT I.T.A. NO.2126 & 2749/DEL/2013 91 IS ALSO SEEN THAT HONBLE ITAT IN THE APPELLANTS O WN CASE HAS HELD THAT APPELLANT CAN CLAIM UPTO 30% AS IDC COST OF TH E BUDGETED SALES. IT MAY BE SEEN THAT REVISED IDC OF RS. 236.05 CRORE CLAIMED BY THE APPELLANT FOR PHASE-V PROJECT IS LESS THAN THE 30% OF BUDGETED SALES AS STATED SUPRA. IT IS ALSO SEEN THAT BUDGETED COST OF THE IDC HAS BEEN ACCEPTED IN A.Y. 2004-05 AND 2005-06 IN THE APPELLA NTS CASE. IT MAY BE SEEN THAT IDC IS AN INTEGRAL PART OF THE COST OF THE PROJECT AND BASED ON THESE ESTIMATES, THE PROJECT HAS BEEN APPROVED BY THE DIRECTOR TOWN AND COUNTRY PLANNING, GOVT. OF HARYAN A. IF THERE IS NO PROVISION FOR IDC IN THE PROJECT THEN, APPELLANTS PROJECT MAY NOT BE APPROVED BY THE DIRECTOR TOWN AND COUNTRY PLANNING, HARYANA. IT IS ALSO AN ACCEPTED FACT THAT WHENEVER PROJECT IS TAKE N FOR DEVELOPMENT, INITIALLY FLATS ARE CONSTRUCTED AND THEREAFTER THE BASIC INFRASTRUCTURE FACILITIES LIKE ROADS, SEWAGE, LIGHTNING, PARK, WAT ER SUPPLY LINE ETC. ARE DEVELOPED. THEREFORE, THE OBSERVATION OF THE ASSESS ING OFFICER THAT ONLY RS. 60.39 (36.07 + 24.32) CRORE HAVE BEEN SPENT ON IDC TILL 31.03.2008 CANNOT BE GIVEN MUCH WEIGHTAGE AND PROVI SION OF SUCH FACILITIES HAS TO BE TAKEN INTO ACCOUNT AS PART OF BUDGETED COST. MERELY BECAUSE THE CONTRACT FOR INTERNAL DEVELOPMENT WORK HAS NOT BEEN AWARDED IN THE CURRENT ASSESSMENT YEAR OR IN THE AB SENCE OF ACTUAL PAYMENT OF IDC, CANNOT LEAD THE REVISION OF THE IDC COST FROM ITS BUDGETED LEVEL TO ACTUAL COST INCURRED. IN MY CONSI DERED VIEW, WHETHER ONE FOLLOW PROJECT COMPLETION METHOD OR PERCENTAGE OF COMPLETION METHOD, THE ELEMENT OF COST CANNOT CHANGE. ONCE ID C IS ACCEPTED TO BE AN ELEMENT OF COST, THEN WHICHEVER METHOD ONE AP PLY, IT HAS TO BE ALLOWED AS A COST OF THE PROJECT FOR WORKING OUT TH E TRUE PROFIT AND LOSS ACCOUNT IN RESPECT THEREOF. 9.10 I AM THEREFORE, OF THE CONSIDERED VIEW THAT AS SESSING OFFICER WAS NOT JUSTIFIED IN REPLACING BUDGETED IDC WITH ACTUAL IDC COST INCURRED FOR RECOGNIZING REVENUE AS PER POCM M ETHOD. THE BUDGETED IDC IS A PART OF COST AND SAME HAS TO BE A CCEPTED FOR I.T.A. NO.2126 & 2749/DEL/2013 92 RECOGNIZING REVENUE AS PER POCM WHICH IS BEING CONS ISTENTLY ACCEPTED BY THE DEPARTMENT. HENCE, THE ADDITION OF RS. 39,5 2,39,897/- MADE BY THE ASSESSING OFFICER ON THIS ISSUE IS UNCALLED FOR AND THE SAME IS, THEREFORE, DELETED. (II) LABOUR COST: 9.11 SPECIAL AUDITORS HAVE INCREASED COST OF CONSTR UCTION ACTUALLY INCURRED BY RS.3,39,77,973/- ON THE GROUND THAT EXP ENDITURE IN RELATION TO CONTRACT WORK PERFORMED DURING FY 2007- 08 HAS BEEN BOOKED IN SUBSEQUENT FINANCIAL YEAR I.E F.Y. 2008-0 9. THEY HAVE BASED THEIR FINDINGS ON THE PERIOD OF MEASUREMENT A S GIVEN BY CONTRACTORS. 9.12 THE AR SUBMITTED THAT THE BALANCE ADDITION OF RS.3,39,77,973/- IS ON ACCOUNT OF INCREASE IN LABOU R COST / MATERIAL COST BY SHIFTING THIS COST FROM F.Y. 2008-09 TO CUR RENT FINANCIAL YEAR I.E. F.Y. 2007-08 BASED ON THE OBSERVATION OF THE S PECIAL AUDITORS. THE SUBMISSIONS FILED BY THE APPELLANT ON THIS POINT IS AS UNDER:- SUMMARY OF ALL THE BILLS, MADE BY THE SPECIAL AUDI TORS IN VOLUME IVA TO IVD OF SPECIAL AUDIT REPORT WAS FURNISHED BE FORE THE ASSESSING OFFICER AT PAGE NOS. 67 OF OUR LETTER DAT ED 24.03.2011 AND ALL THE BILLS MENTIONED THEREIN WERE PRODUCED I N ORIGINAL BEFORE THE ASSESSING OFFICER. A COPY OF THE SAME WAS FURNI SHED BEFORE ME BY THE APPELLANT VIDE ITS SUBMISSION DATED 29.11.20 12 AT PAGE NO.91 OF PAPER BOOK (VOLUME II). IT WAS SUBMITTED THAT NO LIABILITY HAS BEEN ACCRUED OR ARISEN UPTO 31.3.2008. ON PERUS AL OF THIS SUMMARY, IT WILL BE APPRECIATED THAT ALL THESE BILL S WERE FOR OVER LAPPED PERIOD BEGINNING IN THE PREVIOUS YEAR AND CO NTINUING IN THE SUBSEQUENT YEAR. OBVIOUSLY, THE BILLS WERE RECEIVE D AFTER THE CLOSE OF THE YEAR AND AFTER RECEIPT OF SUCH BILLS DUE VER IFICATION OF THE WORK WAS DONE. AFTER VERIFICATION AND MEASUREMENT O F THE WORK DONE, BILLS WERE APPROVED. TILL THAT DATE NO EXPEN DITURE ACCRUES OR ARISES AND THAT DATE FALLS IN THE SUBSEQUENT FINANC IAL YEAR. THE I.T.A. NO.2126 & 2749/DEL/2013 93 COMPANY CONSISTENTLY FOLLOWS THE POLICY OF ACCRUING AND BOOKING COSTS ON THE BASIS OF THE DATE ON WHICH BILLS WERE APPROVED AND VERIFIED WHICH CAN ONLY BE AFTER THE DATE OF RECEIP T OF THE BILL. IN THE OPENING BALANCE ALSO, SIMILAR POLICY HAS BEEN ADOPT ED. THIS IS THE ONLY POSSIBLE WAY FOR ACCOUNTING. THE LAW DOES NOT REQUIRE THE ASSESSEE TO DO THE IMPOSSIBLE. THE HONBLE CHHATTIS GARH HIGH COURT IN THE LATEST JUDGMENT REPORTED IN 323 ITR 25 2 (CHHATTISGARH) IN THE CASE OF BEEKAY ENGINEERING CORPORATION HAS D ECIDED THE SIMILAR ISSUE. HEAD NOTE OF THE SAID JUDGMENT IS RE PRODUCED FOR YOUR READY REFERENCE AS UNDER:- THE ASSESSEE ENTERED INTO A CONTRACT FOR DOING JOB WORKS AND MADE A PAYMENT OF RS.1,36,767 TO B IN RESPECT OF CERTAIN JOBS DONE BY IT FROM DECEMBER 1988 TO JUNE 1989. THE BILLS WERE RA ISED BY THE PARTY IN THE MONTH OF AUGUST 1989. ACCORDING TO TH E ASSESSEE, AS IT WAS NOT AWARE OF THE ACTUAL LIABILITY ON THE LAST D ATE OF THE ACCOUNTING PERIOD, IT CLAIMED THIS DEDUCTION ONLY W HEN THE BILLS WERE SUBMITTED BY THE CORPORATION. THE ASSESSING O FFICER HOWEVER, HELD THAT AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE EXPENDITURE SHOULD HAVE BEEN CLAIME D AS DEDUCTION IN THE EARLIER YEAR AND NOT IN THE SUBSEQUENT YEAR AND ACCORDINGLY, DISALLOWED THE CLAIM. THE COMMISSIONER (APPEALS) CO NFIRMED THE ORDER BUT THE TRIBUNAL HELD THAT THE LIABILITY COUL D BE ASCERTAINED ONLY IN THE ACCOUNTING YEAR RELEVANT TO THE ASSESSM ENT YEAR 1990- 91. ON A REFERENCE: HELD, THAT THE EXPENDITURE WAS DEDUCTIBLE IN THE AS SESSMENT YEAR 1990-91. THUS, BY APPLYING THE SAME PRINCIPLES IT IS REQUEST ED THAT THE ALLOCATION OF EXPENSES BY THE SPECIAL AUDITORS, AGA INST THE BILLS WHICH WERE RECEIVED SUBSEQUENTLY, WAS NOT JUSTIFIED. I.T.A. NO.2126 & 2749/DEL/2013 94 RELIANCE IS PLACED ON THE DECISION IN THE CASE OF CIT VS. MODIPON LTD. [2011] 334 ITR 0102 WHEREIN THE SIMILA R ISSUE WAS DECIDED IN THE FAVOUR OF ASSESSEE. 9.13 THE AR FURTHER SUBMITTED THAT THE FACTS OF SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. VS. CIT (1995) 213 ITR 523 (GUJ.) WERE SIMILAR TO THE FACTS OF THE INSTANT CASE, IN WHICH IT WAS HELD THAT EARLIER YEARS EXPENSES COULD BE ALLOW ED IN THE YEAR IN WHICH THE LIABILITY IS ACCEPTED AND PAID. HONBLE G UJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT AND CHEMICALS INDUSTR IES LTD. VS. CIT (1995) 213 ITR 523 (GUJ.), HAS HELD AS FOLLOWS: . . . MERELY BECAUSE AN EXPENSE RELATES TO A TRANS ACTION OF AN EARLIER YEAR IT DOES NOT BECOME A LIABILITY PAYABLE IN THE EARLIER YEAR UNLESS IT CAN BE SAID THAT THE LIABILITY WAS DETERM INED AND CRYSTALLIZED IN THE YEAR IN QUESTION ON THE BASIS O F MAINTAINING ACCOUNTS ON THE MERCANTILE BASIS. IN EACH CASE WHER E THE ACCOUNTS ARE MAINTAINED ON THE MERCANTILE BASIS IT HAS TO BE FOUND IN RESPECT OF ANY CLAIM, WHETHER SUCH LIABILITY WAS CRYSTALLIZ ED AND QUANTIFIED DURING THE PREVIOUS YEAR SO AS TO BE REQUIRED TO BE ADJUSTED IN THE BOOKS OF ACCOUNT OF THAT PREVIOUS YEAR. IF ANY LIAB ILITY, THOUGH RELATING TO THE EARLIER YEAR, DEPENDS UPON MAKING A DEMAND AND ITS ACCEPTANCE BY THE ASSESSEE AND SUCH LIABILITY HAS B EEN ACTUALLY CLAIMED AND PAID IN THE LATER PREVIOUS YEARS IT CAN NOT BE DISALLOWED AS DEDUCTION MERELY ON THE BASIS THE ACCOUNTS ARE M AINTAINED ON MERCANTILE BASIS AND THAT IT RELATED TO A TRANSACTI ON OF THE PREVIOUS YEAR. . . . (P. 531) FURTHER RELIANCE WAS PLACED ON THE JUDGMENT IN THE CASE OF NATIONAL AGRICULTURAL CO-OPERATIVE FEDERATION OF INDIA LTD. VS. JT. CIT (2008) 304 ITR (AT) 303 (DELHI) WHEREIN IT HAS BEEN HELD THAT THE LIABILITY IS DEDUCTIBLE ONLY WHEN IT CRYSTALLIZES I NTO AN ASCERTAINED LIABILITY. IN THIS CASE AS PER AN ARBITRATION AWAR D INTEREST WAS PAYABLE BY THE ASSESSEE ON THE SUM AWARDED ONLY UP TO THE D ATE OF AWARD OF I.T.A. NO.2126 & 2749/DEL/2013 95 THE ARBITRATOR. THEREAFTER, A DECREE WAS PASSED BY THE HIGH COURT, FOR FURTHER INTEREST ON AMOUNT OF AWARD FROM THE DATE O F THE AWARD BY THE ARBITRATOR TILL THE DATE OF PAYMENT, AFTER THE END OF THE ACCOUNTING YEAR. IN THE CIRCUMSTANCES OF THE CASE IT WAS HELD BY THE HONBLE JURISDICTIONAL TRIBUNAL THAT THERE WAS NO LIABILITY TO PAY INTEREST AFTER THE AWARD OF THE ARBITRATOR AND SUCH LIABILITY AROS E ONLY AFTER THE DECREE OF THE HIGH COURT. THUS, THE LIABILITY TO PA Y FUTURE INTEREST HAD CRYSTALLIZED IN THE NEXT ASSESSMENT YEAR AND NOT IN THE ASSESSMENT YEAR IN QUESTION AND HENCE THE DEDUCTION WAS NOT AL LOWABLE IN THE CURRENT ASSESSMENT YEAR. RELIANCE WAS ALSO PLACED ON THE JUDGMENT IN THE CAS E OF CIT V SHRI RAM PISTONS & RINGS LTD (2008) 174 TAXMAN 147 (DEL) , WHEREIN IT WAS HELD THAT: 4. IN TERMS OF THE SCHEME, AS EXTENDED, THE ASSESSEE INCURRED A LIABILITY OF RS. 1,40,541 AND ACCORDING TO THE ASSE SSEE THIS AMOUNT WAS LIABLE TO BE ADJUSTED IN THE ASSESSMENT YEAR 19 83-84. THE BASIS ON WHICH THE ASSESSEE HAD CLAIMED THIS DEDUCT ION FOR THAT YEAR WAS THAT THE LIABILITY HAD ACCRUED AND CRYSTAL LIZED ONLY ON 30-6-1981 WHEN THE ASSESSEE CAME TO KNOW THE ACTUAL SALES MADE BY ITS DEALERS. AS FAR AS THE PURCHASE OF MATERIAL IS CONCERNED THE ENTRY OF PURCHASES AND STOCKS IS MADE ONLY AFTER RECEIPT OF MATERIAL, INSPECTION OF MATERIAL AND MATERIAL RECEIPT NOTE (MRN). IT IS, TH EREFORE, SUBMITTED THAT LIABILITY ACCRUED ONLY WHEN MATERIAL IS ACCEPT ED AND MRN IS MADE. THEREFORE, THE APPELLANT SUBMITTED THAT THE EFFECT OF THIS PROPOSED ADDITION OF RS.3,39,77,973/- RECOMMENDED BY THE SPE CIAL AUDITORS MAY PLEASE BE DELETED. 9.14 I HAVE CAREFULLY CONSIDERED SUBMISSION OF T HE APPELLANT, OBSERVATION OF ASSESSING OFFICER AND VARIOUS JUDICI AL PRONOUNCEMENTS RELIED UPON BY THE APPELLANT. IT IS ALSO NOTICED THAT I.T.A. NO.2126 & 2749/DEL/2013 96 THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELL ANT VIDE ORDER DATED 25.03.2011 PASSED BY LEARNED CIT(A)-XVIII, NE W DELHI, FOR A.Y. 2006-07 (PAGE NOS.122-153 OF THE SAID ORDER) A ND MY OWN ORDER IN APPELLANTS OWN CASE FOR THE IMMEDIATELY P RECEDING YEAR RELEVANT TO ASSESSMENT YEAR 2007-08 (PAGE NOS.108-1 39 OF THE SAID ORDER) . AS DISCUSSED ABOVE, IN LARGE CONSTRUCTION CONTRACTS , IT IS NATURAL THAT CONTRACTORS SUBMITS RUNNING BILLS WHIC H MAY SOMETIME OVERLAP THE ACCOUNTING YEAR. THESE BILLS PER SE DID NOT ACCRUE AND BECOME PAYABLE MERELY ON THEIR RAISING. THE MEASURE MENTS ETC DONE BY THE INSPECTION STAFF HAVE TO BE CHECKED AND VERI FIED BY THE CONCERNED PERSON AND ONLY AFTER DUE VERIFICATION AN D EXAMINATION OF THE MEASUREMENTS AND QUALITY OF THE WORK DONE, THE CONTRACT BILLS ARE APPROVED AND LIABILITY OF SUCH WORK IS CRYSTALL IZED. THE APPELLANT HAS ACCOUNTED FOR THE BILLS OF CONTRACT WORK, MATER IAL AND LABOUR WORK ONLY AFTER PROPER VERIFICATION OF RECEIPT OF M ATERIAL, WORK DONE BY THE LABOURS AND MEASUREMENT OF THE WORK DONE BY THE CONCERNED PERSON. ONCE IT IS CERTIFIED OF HAVING MATERIAL REC EIVED UPTO THE DESIRED STANDARD AND QUANTITY, AND WORK DONE BY THE LABOUR AND CONTRACTOR UPTO PROPER SATISFACTION, THEN ONLY THE LIABILITY IS CRYSTALLIZED AND ENTERED INTO THE BOOKS OF ACCOUNT. THE VARIOUS BILLS OF MATERIAL, LABOUR AND CONTRACT MENTIONED BY THE S PECIAL AUDITORS AND ASSESSING OFFICER, AS PERTAINING TO THE F.Y. 20 07-08 WERE, IN FACT, CRYSTALLIZED DURING THE F.Y. 2008-09 AND O N THE BASIS OF SAME RIGHTLY ACCOUNTED FOR IN F.Y. 2008-09. THE COS T OF RS.3,39,77,973/- PERTAINING TO LABOUR CHARGES, CONT RACT AND MATERIAL WHICH WAS ACCOUNTED FOR IN F.Y. 2008-09 ON THE BASI S OF CRYSTALLIZATION OF LIABILITY CANNOT BE PREPONED FR OM ASSESSMENT YEAR 2009-10 TO THE CURRENT ASSESSMENT YEAR 2008-09. AGA IN, THIS ATTEMPT AND EXERCISE MADE BY THE SPECIAL AUDITORS A ND THE ASSESSING OFFICER IS REVENUE NEUTRAL AND IT WOULD M AKE NO DIFFERENCE TO THE REVENUE EXCEPT RESULTING IN INCRE ASED ADMINISTRATIVE WORK LOAD OF SHIFTING EXPENSES FROM ONE YEAR TO I.T.A. NO.2126 & 2749/DEL/2013 97 ANOTHER. IN MY VIEW, IT IS ONLY A FUTILE EXERCISE A ND CONSEQUENTLY, THE ADDITION BASED ON THE SAID INCREASE OF COST OF CONS TRUCTION IS DELETED. IN THIS REGARD, RELIANCE IS PLACED ON THE JUDGMENT OF HONBLE CHATTISGARH HIGH COURT IN THE CASE OF BEEKAY ENGINEERING CORPORATION INDIA 323 ITR 252 (CHATTISGARH). THE HEAD NOTE OF THE SAME IS REPRODUCED AS UNDER:- BUSINESS EXPENDITURE--YEAR IN WHICH DEDUCTIBLE-- ASSESSEE DOING JOB WORK FOR ENGINEERING CORPORATION FROM DECEMBER 1988 TO JUNE 1989--BILLS SUBMITTED BY CORPORATION IN AUGUST 1989-- EXPENDITURE DEDUCTIBLE IN ASSESSMENT YEAR 1990-91-- INCOME-TAX ACT, 1961, S. 37. THE ASSESSEE ENTERED INTO A CONTRACT FOR DOING JOB WORKS AND MADE A PAYMENT OF RS. 1,36,767/- TO B IN RESPECT OF CERT AIN JOBS DONE BY IT FROM DECEMBER 1988 TO JUNE 1989. THE BILLS WERE RAISED BY THE PARTY IN THE MONTH OF AUGUST 1989. ACCORDING TO THE ASSESSEE, AS IT WAS NOT AWARE OF THE ACTUAL LIABILITY ON THE LAST D ATE OF THE ACCOUNTING PERIOD, IT CLAIMED THIS DEDUCTION ONLY W HEN THE BILLS WERE SUBMITTED BY THE CORPORATION. THE ASSESSING OF FICER HOWEVER, HELD THAT AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE EXPENDITURE SHOULD HAVE BEEN CLAIME D AS DEDUCTION IN THE EARLIER YEAR AND NOT IN THE SUBSEQUENT YEAR AND ACCORDINGLY, DISALLOWED THE CLAIM. THE COMMISSIONER (APPEALS) CO NFIRMED THE ORDER BUT THE TRIBUNAL HELD THAT THE LIABILITY COUL D BE ASCERTAINED ONLY IN THE ACCOUNTING YEAR RELEVANT TO THE ASSESSM ENT YEAR 1990- 91. ON A REFERENCE HELD, THAT THE EXPENDITURE WAS DEDUCTIBLE IN THE AS SESSMENT YEAR 1990-91. COMMISSIONER OF INCOME-TAX V. MODIPON LTD. (NO. 1) [2011] 334 ITR 0102- I.T.A. NO.2126 & 2749/DEL/2013 98 BUSINESS EXPENDITURE--DEDUCTION ONLY ON ACTUAL PAYMENT--DISALLOWANCE ON GROUND THAT EXPENSES RELATED TO PRIOR PERIOD AND NOT PRESENT ASSESSMENT YEAR--TRIBUNAL FINDING ALL EXPENSES SETTLED IN CURRENT YEAR AND COVERED UNDER SECTION 43B(D)-- JUSTIFIED--INCOME-TAX ACT, 1961, S. 43B(D). THE ASSESSEE FOR THE ASSESSMENT YEAR 2004-05 FILED THE RETURN CLAIMING CERTAIN EXPENSES ALLOWABLE AS BUSINESS EXP ENDITURE. THE ASSESSING OFFICER WAS OF THE VIEW THAT OUT OF THOSE , EXPENSES TO THE TUNE OF RS. 41,95,719 RELATED TO THE PRIOR PERIOD A ND DID NOT PERTAIN TO THE FINANCIAL YEAR 2003-04 RELEVANT TO THE ASSESSME NT YEAR 2004-05, AS THE ASSESSEE-COMPANY WAS FOLLOWING THE MERCANTIL E SYSTEM OF ACCOUNTING AND THEREFORE, THESE EXPENSES SHOULD HAV E BEEN CLAIMED IN THE PREVIOUS YEAR. THE COMMISSIONER (APPEALS) CO NFIRMED THIS VIEW WHEREAS THE TRIBUNAL REVERSED THE ORDER AND ALLOWED THOSE EXPENSES. ON APPEAL : HELD, DISMISSING THE APPEAL, THAT EVEN WHEN THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, THE EXPLANATION FURNISHED BY THE ASSESSEE WAS THAT THE EXPENSES WER E NOT BOOKED DUE TO NON-RECEIPT OF DETAILS, INFORMATION THEREOF ON TIME, WHICH WAS BEYOND THE CONTROL OF THE ASSESSEE. IT WAS ALSO EXP LAINED THAT THESE EXPENSES TO THE TUNE OF RS. 41.95 LAKHS WERE MARGIN AL AS COMPARED TO THE ENORMOUS SIZE OF THE ASSESSEE-COMPANY. IT WAS A LSO EXPLAINED THAT AS PER THE ACCOUNTING POLICY FOLLOWED BY THE A SSESSEE, SUCH EXPENSES WERE BOOKED IN THE YEAR IN WHICH THEY WERE SETTLED FOR PAYMENT. THE TRIBUNAL WENT INTO THE DETAILS OF EACH AND EVERY SUCH EXPENSE AND RECORDED THE FINDING OF FACT THAT ALL T HESE EXPENSES WERE SETTLED DURING THIS YEAR. IT WAS ALSO RECORDED THAT MORE THAN 50 PER CENT. OF EXPENSES COULD BE CLAIMED ONLY ON ACTUAL P AYMENT, AS THEY WERE COVERED UNDER SECTION 43B(D) OF THE INCOME-TAX ACT, 1961. THE ASSESSEE ALSO INFORMED THAT EVEN IN THE EARLIER YEA R, THE ASSESSEE HAD I.T.A. NO.2126 & 2749/DEL/2013 99 SHOWN POSITIVE INCOME AND PAID TAX THEREON. THEREFO RE THERE WAS NO LOSS OF REVENUE. HAD THIS EXPENSE BEEN ALLOWED IN T HE PREVIOUS YEAR, THE ASSESSEE WOULD HAVE PAID LESS TAX. THERE WAS NO NECESSITY TO INTERFERE WITH THE ORDER OF THE TRIBUNAL. THE FACTS OF THE ABOVE CITED JUDICIAL PRONOUNCEMENT ARE IDENTICAL WITH THE FACTS OF APPELLANTS CASE. THEREFORE, RATIO OF THE SAID JUDGMENTS IS SQUARELY APPLICABLE TO THE APPELLANTS CASE. HENCE, THE ADDITION OF RS.3,39,77,973/- BASED ON PRE-PONEMENT OF CERTAIN E XPENSES IS DELETED. AS A RESULT, THE APPELLANT GETS A RELIEF OF RS. 42, 92,17,870/ (RS. 39,52,39,897/- + RS. 3,39,77,973/-) 86. WE FIND THAT THE SIMILAR ISSUE WAS ALSO INVOLVE D BEFORE THIS TRIBUNAL IN THE APPEAL FOR THE ASSESSMENT YEAR 2006-07, WHEREIN THE TRIBUNAL HAS DECIDED THIS ISSUE IN FAVO UR THE ASSESSEE IN THE FOLLOWING MANNER: 42. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTEN TIONS AND ALSO GIVEN A CAREFUL THOUGHT TO THE OFFER OF LD. DR FOR SETTING ASIDE THIS GROUND OF APPEAL TO THE FILE OF THE AO FOR DETERMIN ATION OF THRESHOLD LIMIT OF 30% OF THE TOTAL PROJECT COST INCURRED UP TO THIS YEAR OR NOT. BEFORE THAT WE WOULD LIKE TO ADDRESS THE ISSUE OF T HRESHOLD PERCENTAGES DETERMINED BY THE ASSESSEE OF 30% INSTE AD OF 25 % PROVIDED IN THE GUIDANCE NOTE ON ACCOUNTING FOR REA L ESTATE TRANSACTIONS ISSUED BY ICAI IN 2012. FIRSTLY ASSESS EE HAS SUBMITTED THE INSTANCES WHERE IN THE IDENTICAL FACTS AND CIRC UMSTANCES THERE IS TRADE PRACTICE OF ADOPTING THRESHOLD OF 30 % OF THE ACHIEVEMENT OF TOTAL PROJECT COST FOR COMMENCEMENT OF RECOGNISING OF REV ENUE. ACCORDING TO THAT GUIDANCE NOTE IT IS PROVIDED THAT 5.3 FURTHER TO THE CONDITIONS IN PARAGRAPH 5.2 THERE IS A REBUTTABLE PRESUMPTION THA T THE OUTCOME OF A REAL ESTATE PROJECT CAN BE ESTIMATED RELIABLY AND T HAT REVENUE SHOULD I.T.A. NO.2126 & 2749/DEL/2013 100 BE RECOGNISED UNDER THE PERCENTAGE COMPLETION METHO D ONLY WHEN THE EVENTS IN (A) TO (D) BELOW ARE COMPLETED. (A) ALL CRITICAL APPROVALS NECESSARY FOR COMMENCEME NT OF THE PROJECT HAVE BEEN OBTAINED. THESE INCLUDE, WHEREVER APPLICA BLE: (I) ENVIRONMENTAL AND OTHER CLEARANCES. (II) APPROVAL OF PLANS, DESIGNS, ETC. (III) TITLE TO LAND OR OTHER RIGHTS TO DEVELOPMENT/ CONSTRUCTION. (IV) CHANGE IN LAND USE (B) WHEN THE STAGE OF COMPLETION OF THE PROJECT REA CHES A REASONABLE LEVEL OF DEVELOPMENT. A REASONABLE LEVEL OF DEVELOP MENT IS NOT ACHIEVED IF THE EXPENDITURE INCURRED ON CONSTRUCTIO N AND DEVELOPMENT COSTS IS LESS THAN 25 % OF THE CONSTRUCTION AND DEV ELOPMENT COSTS AS DEFINED IN PARAGRAPH 2.2 (C) READ WITH PARAGRAPHS 2 .3 TO 2.5. (C) AT LEAST 25% OF THE SALEABLE PROJECT AREA IS SE CURED BY CONTRACTS OR AGREEMENTS WITH BUYERS. (D) AT LEAST 10 % OF THE TOTAL REVENUE AS PER THE A GREEMENTS OF SALE OR ANY OTHER LEGALLY ENFORCEABLE DOCUMENTS ARE REALISE D AT THE REPORTING DATE IN RESPECT OF EACH OF THE CONTRACTS AND IT IS REASONABLE TO EXPECT THAT THE PARTIES TO SUCH CONTRACTS WILL COMPLY WITH THE PAYMENT TERMS AS DEFINED IN THE CONTRACTS. TO ILLUSTRATE - IF THE RE ARE 10 AGREEMENTS OF SALE AND 10 % OF GROSS AMOUNT IS REALISED IN CAS E OF 8 AGREEMENTS, REVENUE CAN BE RECOGNISED WITH RESPECT TO THESE 8 A GREEMENTS. ACCORDING TO THE ABOVE GUIDANCE NOTE THE REVENUE OF THE PROJECT CAN BE RECOGNISED ONLY WHEN THE ABOVE CONDITIONS SPECIFIED THEREIN. ACCORDING TO ONE OF THE CONDITIONS SPECIFIED THERE IN IS REASONABLE LEVEL OF DEVELOPMENT IS NOT ACHIEVED IF THE EXPENDITURE I NCURRED ON CONSTRUCTION AND DEVELOPMENT COSTS IS LESS THAN 25 % OF THE CONSTRUCTION AND DEVELOPMENT COSTS AS DEFINED IN PARAGRAPH 2.2 (C) READ WITH PARAGRAPHS 2.3 TO 2.5. THEREFORE THE THRE SHOLD SUGGESTED BY ICAI IS THE MINIMUM THRESHOLD AND IT IS NOT PROHIBI TED THAT LOOKING TO THE BUSINESS CONDITIONS ASSESSEE CANNOT FIX UP HIGH ER THRESHOLD. MORE SO WHEN THE ASSESSEE HAS STATED THAT MANY IDENTICAL COMPANIES ARE I.T.A. NO.2126 & 2749/DEL/2013 101 ALSO FOLLOWING SIMILAR THRESHOLD OF 30 % OF THE TOT AL PROJECT COST, NO FAULT CAN BE FOUND WITH THE ESTIMATE MADE BY THE AS SESSEE. IT IS ALSO UNDISPUTED THAT IN SUBSEQUENT YEARS THE SPECIAL AUD ITOR APPOINTED BY REVENUE HAS ACCEPTED THE THRESHOLD OF 30 % ADOPTED BY ASSESSEE AND AO HAS ACCEPTED THE SAME. IN VIEW OF ABOVE WE ARE O F THE OPINION THAT ASSESSEE HAS RIGHTLY ACCEPTED THE THRESHOLD OF 30 % OF ACHIEVEMENT OF TOTAL PROJECT COST FOR COMMENCEMENT OF REVENUE RECO GNITION. FURTHER THE WORKING OF THE TOTAL PROJECT SHOULD ALSO INCLUDE AL L TYPES OF DEVELOPMENT CHARGES REQUIRED TO BE INCLUDED IN THE SAME. LD. AR HAS STATED THAT THE DETAILS OF PERCENTAGE OF COMPLETION OF PROJECT ARE AVAILABLE IN THE ASSESSMENT ORDER ITSELF. HOWEVER A FTER CAREFUL CONSIDERATION AND AGREED BY BOTH THE PARTIES, WE SE T ASIDE THIS ISSUE TO THE FILE OF THE AO TO DETERMINE WITH RESPECT TO MAGNOLIA PROJECT AND SUMMIT PROJECT FOLLOWING :- (I) TO DETERMINE THE TOTAL PROJECT COST OF BOTH THE SE PROJECTS INCLUDING THE COST OF INTERNAL AND EXTERNAL DEVELOP MENT CHARGES OF THE PROJECT (II) TO DETERMINE WHETHER THE ACTUAL COST OF EXPEN DITURE INCURRED UP TO 31.03.2006 IS LESS THAN 30% OF THE TOTAL PROJ ECT COST ESTIMATED BY THE ASSESSEE; (III) IF THE THRESHOLD LIMIT OF 30% IS CROSSED THE N TO DETERMINE THE INCOME OF BOTH THESE PROJECTS ON PERCENTAGE COMPLE TION METHOD IN THIS YEAR; (IV) TO GIVE APPROPRIATE RELIEF IN SUBSEQUENT YEAR S, IF ANY INCOME IS TAXED ON THESE PROJECTS IN THOSE YEARS; (V) IF THE PROJECT COST INCURRED UP TO THIS YEAR H AS NOT CROSSED THRESHOLD OF 30% LIMIT OF THE TOTAL PROJECT COST ES TIMATED THEN TO DELETE THE ADDITION OF RS.1,02,84,93,509/-. WHILE DECIDING THIS ISSUE AO MAY HOWEVER KEEP IN MI ND THE PRINCIPLE LAID DOWN BY HONORABLE SUPREME COURT IN CASE OF CIT V. EXCEL INDUSTRIES LTD. [2013] 358 ITR 295, IF AO IS SATISF IED THAT ISSUE IS REVENUE NEUTRAL THE MATTER MAY BE SET AT REST. I.T.A. NO.2126 & 2749/DEL/2013 102 THEREFORE, GROUND NO.8 OF THE APPEAL IS ALLOWED WIT H ABOVE DIRECTION. 87. THUS, FOLLOWING THE EARLIER YEAR PRECEDENCE , WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AND REVENUES A PPEAL IS CONSEQUENTLY, DISMISSED. 88. THE NEXT ISSUE RELATES THE DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF INTEREST PERTAINING TO L OAN FOR M/S. EDWARD KEVENTER PROJECT BY CAPITALIZING THE SAME. T HIS ISSUE TOO STANDS COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07. 89. LD. ASSESSING OFFICER NOTED THAT THE ASSESSEE H AD 52% OF THE FUNDS IN THE BUSINESS WERE BORROWED FUND AND 48% WERE NON-INTEREST-BEARING FUND. HE HELD THAT, ON TH E ADVANCES GIVEN TO SISTER CONCERNS, THE PRESUMPTION CAN BE DRAWN THAT THE 52% OF THE FUNDS COULD HAVE BEEN GIV EN FOR ADVANCES TO THE SISTER CONCERN FOR EARNING INTEREST INCOME. IN OTHER WORDS, AS PER THE AO NETTING OF INTEREST TO T HE EXTENT OF 52% OF RS.412.84 CRORE CAN BE ALLOWED. THE RESULTAN T FIGURE OF RS.34.86 CRORE, I.E., RS. 249.54 CRORES (-) RS 214. 68 CRORES BEING 52% OF RS. 412.84 CRORES HAVE TO BE APPORTION ED IN THE FOLLOWING MANNER: (RS. IN CRORES) PARTICULARS GROSS INTT INTT. TO BE NETTED OFF NET INTEREST TO BE DISALLOWED REMARKS PROJECT KEVENTER 7.93 6.83 1.10 NO REVENUE RECOGNISED HENCE ENTIRE AMOUNT TO BE DISALLOWED I.T.A. NO.2126 & 2749/DEL/2013 103 90. AFTER DETAILED DISCUSSION, AO HELD THAT NO DIRE CT NEXUS CAN BE ESTABLISHED TO HOLD THAT THE LOANS FOR SPECIFIC PROJECTS WERE UTILIZED FOR SUCH PROJECTS ONLY. THE OWN FUNDS OR OTHER FUNDS AVAILABLE TO THE ASSESSEE BY WAY OF INT EREST FREE FUNDS ARE MIXED UP WITH THE BORROWED FUNDS AND THE UTILIZATION OF SUCH FUNDS FOR UNCOMPLETED RESIDENTI AL PROJECTS OR FOR THE COMMERCIAL PROJECTS OR FOR GRANTING LOAN / ADVANCES TO GROUP CONCERNS CANNOT BE CORRELATED. ACCORDINGLY , BASED ON DISALLOWANCE CALCULATED BY THE SPECIAL AUDITOR F OR RS.1,10,00,000/-, HE HAS MADE THE ADDITION AFTER MA KING THE FOLLOWING CALCULATION: - INTEREST BEARING FUNDS INTEREST FREE FUNDS PARTICULARS BANK LOANS ADVANCE FROM CUSTOMERS EQUITY (+) RESERVES TOTAL TOTAL FUNDS (1) (2) (3) (2)+(3)=(4) (1)+(4) = 5 AS ON 1.4.07 6,76,929 1,34,822 65,280 2,00,102 8,77,031 AS ON 31.3.08 8,38,640 91,961 11,26,915 12,18,876 20,57,516 TOTAL A 15,15,569 2,26,783 11,92,195 14,18,9 78 29,34,547 AVERAGE FUNDS A/2 7,57,784 7,09,489 14,67,273 PROPORTION OF FUNDS (ROUNDED OFF) 52% 48% 100% AMOUNT (RS. IN CRORES) TOTAL FIXED PERIOD LOAN INTEREST DEBITED TO P & L ACCOUNT FOR THE YEAR ENDED 31.3. 2007. 249.54 LESS: - 52% OF INTEREST EARNED ON LOAN S/ADVANCES TO GROUP ENTITIES I.E. RS. 412.84 LACS 214.68 NET INTEREST EXPENDITURE ELIGIBLE FOR CAPITALIZAT ION 34.86 I.T.A. NO.2126 & 2749/DEL/2013 104 ACCORDINGLY, INTEREST OF RS. 1,10,00,000 FROM THE I NTEREST PAID ON LOAN TAKEN FOR KEVENTER LAND PROJECT WAS CA PITALISED BY THE AO WAS DISALLOWED. 91. LD. CIT(A) HAS DELETED THE SAID ADDITION IN THE FOLLOWING MANNER: 10.10 I HAVE CONSIDERED THE SUBMISSION OF THE APP ELLANT AND OBSERVATIONS OF THE ASSESSING OFFICER AS WELL AS OB SERVATION OF THE SPECIAL AUDITORS AND MY ORDER FOR A.Y. 2007-08 IN THE CASE OF APPELLANT IN WHICH THIS ISSUE WAS DECIDED IN FAVOUR OF THE APPELLANT. IT IS SEEN THAT APPELLANT HAD PURCHASED SHARES OF EDWA RD KEVENTOR (SUCCESSORS) PVT. LTD. DURING THE F.Y. 2005-06 FOR RS. 438.92 CRORES. OUT OF THIS AN AMOUNT OF RS. 370 CRORE WAS SANCTION ED BY THE ICICI BANK AS LOAN TO FINANCE THE ACQUISITION OF EDWARD K EVENTOR (SUCCESSORS) PVT. LTD. THE APPELLANT IS IN THE BUSI NESS OF REAL ESTATE AND FOLLOWING PERCENTAGE OF COMPLETION METHOD FOR R ECOGNITION OF ITS REVENUE. IF THE PROJECT HAS COMMENCED, THEN INTERES T RELATED TO SUCH PROJECT IS CAPITALIZED OVER THE PROJECT. HOWEVER, I F PROJECT HAS NOT COMMENCED, NO INTEREST CAN BE CAPITALIZED IN TERMS OF PARA-14 AND 16 OF ACCOUNTING STANDARD AS-16. IN THE INSTANT CASE, THE LAND AND DEVELOPMENT OFFICER HAS NOT SANCTIONED THE CONVERSI ON OF THIS LAND S.NO ISSUE/PARTICULARS AMOUNT (RS.) (CRORES) INTER-SE % 1. INTEREST ON PROJECT - KEVENTER LANE 7.93 3.18 2. INTEREST PERTAINING TO PROJECTS UNDER EXECUTION 241.61 96.82 TOTAL 249.54 100 I.T.A. NO.2126 & 2749/DEL/2013 105 USE FROM DAIRY FARMING TO RESIDENTIAL. THE WRIT PETITION FILED AGAINST THE ORDER OF LAND & DEVELOPMENT OFFICER, MINISTRY O F URBAN DEVELOPMENT, UNION OF INDIA, IS PENDING BEFORE HON BLE DELHI HIGH COURT. THEREFORE, NO DEVELOPMENT ACTIVITY COULD BE CARRIED OUT ON THIS LAND. IN VIEW OF THE ACCOUNTING PARA 14 AND 16 OF A S-16, THE INTEREST PERTAINING TO THIS PROJECT CANNOT BE CAPITALIZED AN D HAS TO BE DEBITED TO THE P&L A/C, AS THE INTEREST EXPENDITURE PERTAIN ING TO THIS PROJECT IS WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSES OF THE APPELLANT. IT IS ALSO SEEN THAT SHARES OF M/S EDWARD KEVENTOR (SUCCESSOR) PVT. LTD. WERE PURCHASED IN F.Y. 2005-06 RELATED TO A.Y. 2006-07 AND LOAN WAS SANCTIONED BY ICICI BANK FOR RS. 370 CRORE FOR ACQUIRING THE SHARES OF THIS COMPANY. THIS ISSUE WAS EXAMINED BY THE SPECIAL AUDITOR AS WELL AS ASSESSING OFFICER IN ASSESSMENT YEAR 2006-07 AND CONSIDERING THE BUSINESS MODULE OF THE APPELLAN T AND PARA 14 AND 16 OF AS-16, NO INTEREST WAS CAPITALIZED ON THI S ISSUE IN THAT YEAR. THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTA NCES OF THIS ISSUE IN THE YEAR UNDER CONSIDERATION. HENCE, INTEREST CA NNOT BE CAPITALIZED. FURTHER, THE APPELLANT HAS MADE INVESTMENT OF RS. 4 38.92 CRORE FOR ACQUIRING SHARES OF EDWARD KEVENTOR (SUCCESSOR) PVT . LTD. THE INVESTMENT HAS ALREADY BEEN CONSIDERED BY THE ASSES SING OFFICER WHILE WORKING OUT THE DISALLOWANCE OF INTEREST U/S 14A. THEREFORE, FURTHER CAPITALIZATION OF INTEREST ON THIS ISSUE WI LL AMOUNT TO DOUBLE ADDITION. 10.11 OTHERWISE ALSO FROM THE DETAILS FILED BY THE APPELLANT, IT IS SEEN THAT APPELLANT HAS PAID TOTAL INTEREST OF RS.6 04.43 CRORES ON FIXED PERIOD LOANS DURING THE YEAR. OUT OF THIS, IN TEREST TO THE EXTENT OF RS. 354.89 CRORES HAVE BEEN CAPITALIZED OVER THE PR OJECTS. AS A RESULT, THE TOTAL INTEREST CLAIMED IN THE PROFIT & LOSS ACC OUNT ON FIXED TERMED LOANS COMES TO RS. 249.54 CRORES. THE APPELLANT HAS ALSO PAID BANK OVER DRAFT INTEREST OF RS. 176.06 CRORES. THUS, THE TOTAL INTEREST CLAIMED IN THE PROFIT & LOSS ACCOUNT IS AT RS. 425. 60 CRORES. AS AGAINST I.T.A. NO.2126 & 2749/DEL/2013 106 THIS THE APPELLANT HAS SHOWN RECEIPT OF INTEREST FR OM BANK DEPOSITS, CUSTOMERS AND SUBSIDIARY AND ASSOCIATE COMPANIES TO THE EXTENT OF RS. 411.99 CRORES. IF THE INTEREST PAYMENT ON OVER DRAFTS IS TAKEN OUT FROM THE TOTAL INTEREST CLAIMED IN THE PROFIT AND L OSS ACCOUNT, THEN THE TOTAL INTEREST CLAIMED IN PROFIT AND LOSS ACCOUNT I S RS. 249.54 CRORES WHICH IS LESS THAN THE INTEREST RECEIPTS OFFERED BY THE APPELLANT FROM BANK DEPOSITS AND INTEREST RECEIVED FROM SUBSIDIARY AND ASSOCIATES OF RS. 411.99 CRORES. AS SUCH THE INTEREST RECEIVED IS MUCH MORE THAN THE INTEREST CLAIMED IN THE PROFIT AND LOSS ACCOUNT BY THE APPELLANT. THEREFORE, IT CANNOT BE SAID THAT APPELLANT HAS USE D INTEREST BEARING FUNDS FOR MAKING INVESTMENTS IN EDWARD KEVENTOR PRO JECT. THE FORMULA DEVISED BY THE ASSESSING OFFICER OF MIXED F UNDS TO WORK OUT PROPORTIONATE NOTIONAL DISALLOWANCE OF INTEREST IS NOT BASED ON ANY SCIENTIFIC METHOD. WHEN INTEREST PAYMENT CLAIMED BY THE APPELLANT IS LESS THAN THE INTEREST INCOME OFFERED IN THE PROFIT AND LOSS ACCOUNT, THERE WAS NO JUSTIFICATION TO WORK OUT ANY FORMULA BASED ON MIXED FUNDS THEORY WHICH IS BASED ON PERMUTATION AND COMP UTATION. THE CASE OF THE APPELLANT IS INTEREST NEUTRAL; THEREFOR E, NOTIONAL INTEREST CANNOT BE CAPITALIZED ON EDWARD KEVENTOR PROJECT. FURTHER, IT IS ALSO NOTED THAT THIS ISSUE IS COVERED IN FAVOUR OF APPEL LANT VIDE MY ORDER DATED 29.05.2012 IN APPEAL NO.66/2010-11 IN APPELLA NTS OWN CASE FOR A.Y. 2006-07 (AT PAGE NOS.69-77). HENCE THE D ISALLOWANCE OF INTEREST EXPENSES AND CAPITALIZATION OF INTEREST OF RS.1,10,00,000/- IS DELETED. 92. THE TRIBUNAL HAS DELETED THE SAID ADDITION AFTE R OBSERVING AND HOLDING AS UNDER: 49. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS. IT APPEARS THAT THE AO HAS MADE THIS ADDITION MAINLY BECAUSE O F NOTE MENTIONED BY ASSESSEE IN ITS ACCOUNTING POLICIES WITH RESPECT TO BORROWING COSTS ACCORDING TO ACCOUNTING STANDARD 16 ISSUES BY ICAI. WE HAVE PERUSED NOTES ATTACHED TO FINANCIAL STATEMENTS AND WE ARE OF OPINION I.T.A. NO.2126 & 2749/DEL/2013 107 THAT THESE NOTES HAVE ARISEN IN THE FINANCIAL STATE MENT OF THE ASSESSEE BECAUSE OF THE ISSUE OF APPLICABILITY OF ACCOUNTING STANDARD 16 ISSUED BY THE ICAI. ACCORDING TO ACCOUNTING STANDARD 1 I.E . DISCLOSURE OF ACCOUNTING POLICIES, EACH AND EVERY COMPANY IS REQU IRED TO DISCLOSE THE ACCOUNTING POLICY WITH RESPECT TO VARIOUS SIGNI FICANT INCOME, EXPENDITURE AND ASSETS AND LIABILITIES ETC. APPLICA BLE TO IT. BORROWING COST IS ALSO ONE OF THEM. ICAI HAS ISSUED ACCOUNTIN G STANDARD 16 ACCOUNTING FOR BORROWING COST WHEREIN IT IS PROVIDE D THAT IN CASE OF INTEREST EXPENDITURE INCURRED BY THE COMPANY, IT IS REQUIRED TO BE CAPITALIZED IF THE BORROWING IS RELATED TO THE QUAL IFYING ASSETS. IN THIS CASE THE INVENTORY IS A QUALIFYING ASSETS AS IT IS HELD FOR MORE THAN 12 MONTHS AND THEREFORE INTEREST ATTRIBUTABLE TO IT IS REQUIRED TO BE CAPITALISED IN THE BOOKS OF ACCOUNTS AS PER AS -16. THEREFORE, WE DO NOT AGREE WITH THE ARGUMENTS OF AR THAT AS -16 DOES NOT APPLY TO INVENTORY. HOWEVER, THOSE ARE THE PROVISIONS WHICH ARE APPLICABLE FOR THE MAINTENANCE OF THE ACCOUNTS OF THE COMPANY AND INTEREST IS ALLOWABLE ACCORDING TO PROVISIONS OF SECTION 36(1) (III) OF THE ACT. FURTHER ACCORDING TO US, THE PROVISIONS OF ACCOUNTI NG STANDARDS AND PROVISIONS OF THE ACT ARE TWO DIFFERENT SET OF REGU LATIONS AND WHILE DECIDING THIS ISSUE, IT IS WELL SETTLED JUDICIAL PR ECEDENT THAT IS IF THERE IS A CONTRADICTION BETWEEN THE TWO, THE PROVISIONS OF THE ACT SHALL PREVAIL. PROVISIONS OF SECTION 36(1)(III) PROVIDES THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR TH E PURPOSES OF THE BUSINESS OR PROFESSION DEDUCTION IS REQUIRED TO BE ALLOWED. PROVISO INSERTED W.E.F. 01.04.2004 IS THE ONLY RESTRICTION IF CONDITION LAID DOWN U/S 36(1) (III) ARE SATISFIED BY THE ASSESSEE. THE PROVISO SAYS THAT ANY AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL B ORROWED FOR ACQUISITION OF AN ASSET WHETHER CAPITALIZED IN BOOK S OF ACCOUNTS OR NOT FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL ASSET WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS PUT TO USE SHALL NOT BE ALLOWED AS DEDUCTION. T HE DEDUCTION IS TO BE DISALLOWED EVEN IF THE INTEREST IS CAPITALIZED I N THE BOOKS OF I.T.A. NO.2126 & 2749/DEL/2013 108 ACCOUNTS OR NOT. HONBLE SUPREME COURT IN THE CASE OF CORE HEALTHCARE [298 ITR 194] HAS HELD THAT PROVISIONS OF SECTION 3 6(1)(III) IS A CODE IN ITSELF. IN THE PRESENT CASE, THE INTEREST PAID BY T HE ASSESSEE IS NOT FOR THE PURPOSE OF ACQUISITION OF ANY CAPITAL ASSET BUT FOR ITS INVENTORY. WE DO NOT FIND ANY RESTRICTION IN PROVISIONS CONTAINED U/S 36(1)(III) WHICH PROVIDES THAT THE INTEREST CAN BE DISALLOWED IF INC URRED FOR THE PURPOSE OF INVENTORY AS PROVIDED UNDER ACCOUNTING STANDARD 16. APPARENTLY, IN THIS CASE, THERE IS NO ALLEGATION THAT INTEREST IS NOT PAID ON CAPITAL BORROWED FOR THE PURPOSE OF THE BUSINESS. HONBLE M UMBAI HIGH COURT IN THE CASE OF CIT VS. LOKHANDWALA CONSTRUCTIONS IN DUSTRIES LTD. [ 131 TAXMAN 810] HAS HELD AS UNDER: - 4. FROM THE FACTS FOUND BY THE TRIBUNAL ON RECORD, IT IS CLEAR THAT ASSESSEE UNDERTOOK TWO-FOLD ACTIVITIES. IT BOUGHT A ND SOLD FLATS. SECONDLY, THE ASSESSEE WAS ALSO ENGAGED IN THE BUSI NESS OF CONSTRUCTION OF BUILDINGS. THE PROFITS FROM BOTH TH E ACTIVITIES WERE ASSESSED UNDER SECTION 28 OF THE INCOME-TAX ACT. IN THIS CASE, WE ARE CONCERNED WITH THE SECOND ACTIVITY (HEREINAFTER REFERRED TO, FOR THE SAKE OF BREVITY, AS 'KANDIVALI PROJECT'). ACCOR DING TO THE COMMISSIONER, LOAN WAS RAISED FOR SECURING LAND/DEV ELOPMENT RIGHTS FROM THE MANDAL. THAT, THE LOAN WAS UTILISED FOR PURCHASING THE DEVELOPMENT RIGHTS, WHICH, ACCORDING TO THE COM MISSIONER, CONSTITUTED A CAPITAL ASSET. ACCORDING TO THE COMMI SSIONER, SINCE THE LOAN WAS RAISED FOR SECURING CAPITAL ASSET, THE INTEREST INCURRED THEREON CONSTITUTED PART OF CAPITAL EXPENDITURE. TH IS FINDING OF THE COMMISSIONER WAS ERRONEOUS. IN THE CASE OF INDIA CE MENTS LTD. V. CIT [1966] 60 ITR 52, IT WAS HELD BY THE SUPREME CO URT THAT IN CASES WHERE THE ACT OF BORROWING WAS INCIDENTAL TO CARRYING ON OF BUSINESS, THE LOAN OBTAINED WAS NOT AN ASSET. THAT, FOR THE PURPOSES OF DECIDING THE CLAIM OF DEDUCTION UNDER S ECTION 10(2)(III) OF THE INCOME-TAX ACT, 1922 [SECTION 36(1)(III) OF THE PRESENT INCOME- TAX ACT], IT WAS IRRELEVANT TO CONSIDER THE PURPOSE FOR WHICH THE LOAN WAS OBTAINED. IN THE PRESENT CASE, THE ASSESSEE WAS A BUILDER. IN I.T.A. NO.2126 & 2749/DEL/2013 109 THE PRESENT CASE, THE ASSESSEE HAD UNDERTAKEN THE P ROJECT OF CONSTRUCTION OF FLATS UNDER THE KANDIVALI PROJECT. THEREFORE, THE LOAN WAS FOR OBTAINING STOCK-IN-TRADE. THAT, THE KANDIVA LI PROJECT CONSTITUTED THE STOCK-IN-TRADE OF THE ASSESSEE. THA T, THE PROJECT DID NOT CONSTITUTE A FIXED ASSET OF THE ASSESSEE. IN TH IS CASE, WE ARE CONCERNED WITH DEDUCTION UNDER SECTION 36(1)(III). SINCE THE ASSESSEE HAD RECEIVED LOAN FOR OBTAINING STOCK-IN-T RADE (KANDIVALI PROJECT), THE ASSESSEE WAS ENTITLED TO DEDUCTION UN DER SECTION 36(1)(III) OF THE ACT. THAT, WHILE ADJUDICATING THE CLAIM FOR DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT, THE NATURE OF THE EXPENSE - WHETHER THE EXPENSE WAS ON CAPITAL ACCOUNT OR REVEN UE ACCOUNT - WAS IRRELEVANT AS THE SECTION ITSELF SAYS THAT INTE REST PAID BY THE ASSESSEE ON THE CAPITAL BORROWED BY THE ASSESSEE WA S AN ITEM OF DEDUCTION. THAT, THE UTILIZATION OF THE CAPITAL WAS IRRELEVANT FOR THE PURPOSES OF ADJUDICATING THE CLAIM FOR DEDUCTION UN DER SECTION 36(1)(III) OF THE ACT - CALICO DYEING & PRINTING WO RKS V. CIT [1958] 34 ITR 265 (BOM.). IN THAT JUDGMENT, IT HAS BEEN LAID DOWN THAT WHERE AN ASSESSEE CLAIMS DEDUCTION OF INTEREST PAID ON CA PITAL BORROWED, ALL THAT THE ASSESSEE HAD TO SHOW WAS THAT THE CAPI TAL WHICH WAS BORROWED WAS USED FOR BUSINESS PURPOSE IN THE RELEV ANT YEAR OF ACCOUNT AND IT DID NOT MATTER WHETHER THE CAPITAL W AS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL ASSET . THE SAID JUDGMENT OF THE BOMBAY HIGH COURT APPLIES TO THE FA CTS OF THIS CASE. FURTHER, IN THE FOLLOWING DECISIONS OF VARIOUS COOR DINATE BENCHES, THE DEDUCTION OF INTEREST HAS BEEN ALLOWED U/S 36(1)(II I) EVEN WHERE THE ASSESSEE HAS FOLLOWED THE PROJECTION COMPLETION MET HOD:- (I) ACIT VS. TATA HOUSING DEVELOPMENT COMPANY LTD. 45 SOT 9 (BOM.); (II) DCIT VS. THAKAR DEVELOPERS 115 TTJ 841 (PUNE ); (III) DCIT VS. K. RAHEJA PVT. LTD. (2006) TIOL 22 0 ITAT-MUM.; I.T.A. NO.2126 & 2749/DEL/2013 110 (IV) K. RAHEJA DEVELOPMENT CORPORATION VS. DCIT IN ITA NO.240/BANG./97 DATED 22.09.1997 - IN THIS CASE, RE FERENCE APPLICATION FILED BY THE DEPARTMENT HAS ALSO BEEN R EJECTED BY THE HONBLE KARNATAKA HIGH COURT VIDE ITS ORDER DATED 0 8.11.2000 IN CIVIL PETITION NO.832/2000 (IT). BEFORE US, LD. DR COULD NOT CITE ANY DECISION AGAIN ST THE CLAIM OF THE ASSESSEE, THEREFORE, RESPECTFULLY FOLLOWING THE DEC ISION OF HONBLE BOMBAY HIGH COURT AND AS WELL AS VARIOUS COORDINATE BENCHES, CITED ABOVE, WE DO NOT CONCUR WITH THE VIEW OF CIT (A) ON DISALLOWANCE OF INTEREST OF RS.24.75 CRORES U/S 36(1) (III) OF THE ACT. THE ALTERNATIVE ARGUMENT OF THE ASSESSEE REGARDING ADOPTION OF ANY ARTIFICIAL FORMULA FOR THE PURPOSE OF COMPUTING INTEREST DISALLOWANCE. LD. CIT (A) HAS PRESUMED PROPORTION OF UTILISATION OF FUNDS IN ABSE NCE OF THE NEXUS HOLDING THAT ASSESSEE HAS USED MIXED FUNDS. HONORAB LE BOMBAY HIGH COURT IN CASE OF CIT V RELIANCE UTILITIES & POWER L IMITED 313 ITR 340 HAS HELD THAT: THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN , THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE O UT OF THE INTEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INV ESTMENTS. THEREFORE, WE ARE OF THE VIEW THAT PRESUMPTION IS T O BE ASSUMED IN FAVOUR OF THE ASSESSEE AND NOT AGAINST ASSESSEE. HE NCE, WE REJECT THE FORMULAE ADOPTED BY CIT (A) OF WORKING OUT PROPORTI ONATE DISALLOWANCE BY ADOPTING ARTIFICIAL FORMULAE. THERE FORE, RESPECTFULLY FOLLOWING DECISIONS OF HONORABLE BOMBAY HIGH COURT IN CIT VS. LOKHANDWALA CONSTRUCTIONS INDUSTRIES LTD. [ 131 TAX MAN 810] AND CIT V RELIANCE UTILITIES & POWER LIMITED [313 ITR 3 40] WE REVERSE THE ORDER OF THE CIT (A) CONFIRMING THE DISALLOWANCE OF EXPENDITURE OF RS.27.40 CRORES AND DIRECT THE AO TO ALLOW THIS INT EREST EXPENDITURE U/S 36(1) (III) OF THE ACT. I.T.A. NO.2126 & 2749/DEL/2013 111 93. SINCE, SIMILAR FACTS AND REASONS FOR DISALLOWAN CE IS PERMEATING IN THIS YEAR ALSO, THEREFORE, RESPECTFUL LY FOLLOWING THE EARLIER YEAR PRECEDENCE, WE DECIDE THIS ISSUE I N FAVOUR OF THE ASSESSEE. 94. THE NEXT ISSUE PERTAINS TO DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF CAPITALIZATION OF INTERE ST OF RS.7,93,00,000/-. LD. ASSESSING OFFICER ON THE BASI S OF SPECIAL AUDITORS COMMENT OBSERVED THAT INTEREST CAPITALIZATION IS ALSO REQUIRED ON INTEREST PAID ON LOAN TAKEN FOR M/S. EDWARD KEVENTER PROJECT, AND THEREFORE, NE T INTEREST ELIGIBLE FOR CAPITALIZATION IS TO BE BIFURCATED INT O INTEREST CAPITALIZATION ON KEVENTER LOAN AND INTEREST CAPITA LIZATION ON PROJECT UNDER EXECUTION. THE SPECIAL AUDITOR HAS RECOMMENDED THAT OUT OF NET INTEREST OF RS. 34.86 C RORE REQUIRING CAPITALIZATION, RS.1.10 CRORE IS TO BE CA PITALIZED TOWARDS INTEREST PAID ON LOAN TAKEN FOR M/S. EDWARD KEVENTER PROJECT AND RS.33.76 CRORE OF INTEREST IS ELIGIBLE FOR CAPITALIZATION ON ACCOUNT OF PROJECTS UNDER EXECUTI ON ON THE LEVEL OF COMPLETION ACHIEVED TILL 31 ST MARCH, 2008 AND ACCORDINGLY, THE INTEREST TO BE CAPITALIZED ON PROJ ECTS UNDER EXECUTION IS TO BE COMPLETED IN THE FOLLOWING MANNE R: (RS. IN CRORES) PARTICULARS COST OF TOTAL PROJECT AS ON 31.03.2008 % VALUE OF PROJECTS NET INTEREST EXPENDITURE % OF REVENUE RECOGNISED FOR A.Y. 08- 09 INTEREST EXPENDITURE ALLOWABLE IN THE PROPORTION OF REVENUE RECOGNISED INTEREST EXPENDITURE TO BE CAPITALIZED TOWARDS NON- RECOGNITION OF PROPORTIONATE REVENUE FROM PROJECTS PHASE - V GURGAON PROJECT 1,529.55 100.00 33.76 76.50 25.83 7.93 I.T.A. NO.2126 & 2749/DEL/2013 112 95. AFTER DETAILED DISCUSSION, AO HELD THAT THE INT EREST TO THE EXTENT OF RS.7.39 CRORE IS IN THE NATURE OF BOR ROWING COST ATTRIBUTABLE TO THE ACQUISITION OR CONSTRUCTION OF QUALIFYING ASSETS AND HENCE THESE EXPENSES NEEDS TO BE CAPITAL IZED AND IS NOT ALLOWABLE AS REVENUE EXPENDITURE. 96. LD. CIT(A) HAS DELETED THE ADDITION AFTER OBSER VING AS UNDER: 11.12 I HAVE CONSIDERED THE SUBMISSION OF THE APP ELLANT AND OBSERVATION OF THE SPECIAL AUDITORS AS WELL AS ASSE SSING OFFICER AND ORDER OF CIT (A)-XVIII FOR AY 2006-07 AND MY OW N ORDER FOR AY 2007-08 IN APPELLANTS OWN CASE WHEREIN THIS ISSUE WAS DECIDED IN FAVOUR OF APPELLANT. IT IS SEEN THAT ASSESSING OFFI CER HAS FURTHER CAPITALIZED AN AMOUNT OF RS. 7,93,00,000/- TOWARDS ONGOING PROJECTS. THIS CAPITALIZATION IS OVER AND ABOVE THE AMOUNT AL READY CAPITALIZED BY THE APPELLANT TO THE EXTENT OF RS.354.43 CRORES WHICH RELATES TO THE LOAN TAKEN FOR FIXED PERIOD TERM LOAN. IT IS SEEN T HAT APPELLANT HAS CLAIMED TOTAL INTEREST EXPENDITURE OF RS.604.43 CRO RES ON FIXED PERIOD TERM LOAN, OUT OF WHICH IT HAS CAPITALIZED RS.354.4 3 CRORES OVER THE ONGOING PROJECTS AND HAS CLAIMED INTEREST OF RS. 24 9.54 CRORES ON FIXED PERIOD TERM LOAN. THE APPELLANT HAS ALSO CLAI MED RS. 176.06 CRORES AS INTEREST ON BANK OVERDRAFT. THUS, THE TOT AL INTEREST PAYMENT CLAIMED IN THE P&L A/C COMES TO RS.425.60 CRORES. A S AGAINST THIS APPELLANT HAS OFFERED INTEREST RECEIVED FROM BANKS, CUSTOMERS, LOANS TO SUBSIDIARIES AND ASSOCIATES TO THE TUNE OF RS. 4 11.99 CRORE IN THE PROFIT AND LOSS ACCOUNT. IF THE INTEREST PERTAINING TO BANK OVERDRAFT AND INTEREST PAID TO OTHERS IS EXCLUDED FROM THE TOTAL INTEREST CHARGED TO THE PROFIT AND LOSS ACCOUNT, THEN THE REMAINING INT EREST DEBITED TO P&L A/C COMES TO RS. 249.54 CRORES, WHICH IS LESS THAN THE INTEREST INCOME OF RS. 411.99 CRORES AS OFFERED IN THE P&L A/C. SIN CE, THE INTEREST I.T.A. NO.2126 & 2749/DEL/2013 113 PAYABLE IS LESS THAN THE INTEREST RECEIVED FROM DIF FERENT SOURCES. NO FURTHER NOTIONAL INTEREST CAN BE CAPITALIZED OVER T HE PROJECTS. THE INTEREST PERTAINING TO PROJECTS HAS ALREADY BEEN CA PITALIZED BY THE APPELLANT TO THE EXTENT TO RS. 354.89 CRORES, WHICH IS SPECIFIC TO THE PROJECTS UNDER EXECUTION. THE FURTHER CAPITALIZATIO N OF RS. 7.93 CRORES IS BASED ON PRESUMPTIONS, THERE IS NO SCIENTIFIC ME THOD WORKED OUT BY THE ASSESSING OFFICER FOR CAPITALIZING THE FURTHER INTEREST OF RS. 7.93 CRORES. THE NET IMPACT OF THE INTEREST IN PROF IT & LOSS A/C IS POSITIVE INCOME AFTER EXCLUDING THE OVERDRAFT INTER EST EXPENSES. ONCE THE INTEREST INCOME IS POSITIVE IN THE P&L A/C, THE FURTHER CAPITALIZATION OF INTEREST CANNOT BE ESTIMATED ON PRESUMPTION BASI S AS DONE BY THE ASSESSING OFFICER. IT IS ALSO SEEN THAT ASSESSING O FFICER HAS NOT POINTED OUT ANY DIVERSION OF FUNDS WHICH WAS NO T UTILIZED FOR BUSINESS PURPOSES. THE FUNDS TAKEN BY THE APPELLANT FROM BANKS OR OTHERWISE GENERATED FROM OWN SOURCES HAVE EITHER BE EN UTILIZED IN CONSTRUCTION BUSINESS OR ADVANCED TO THE SUBSIDIARI ES AND ASSOCIATE COMPANIES AT AN APPROPRIATE INTEREST RATES. IT IS A LSO OBSERVED THAT:- THERE IS NO DIVERSION OF MONEY FOR NON-BUSINESS PUR POSE. LOANS TO SUBSIDIARIES ARE ON INTEREST AT RATES MORE THAN THE RATE OF INTEREST PAID ON BORROWINGS. THE PROVISO TO SECTION 36(1)(III) IS NOT APPLICABLE AS: 1. THE BUILDING UNDER CONSTRUCTION ARE NOT CAPITAL ASS ET 2. THESE ARE STOCK IN TRADE 3. ANY BORROWING FOR STOCK IN TRADE CAN NEVER BE CAPIT ALIZED. ACCOUNTING STANDARD AS-(16) HAS NO APPLICATION. ACCOUNTING STANDARDS CANNOT OVERRIDE THE PROVISIONS OF INCOME TAX ACT. IN VIEW OF THE ABOVE, IT IS HELD THAT CAPITALIZATIO N OF INTEREST OF RS. 7,93,00,000/- ON NOTIONAL BASIS DONE BY THE ASSESSI NG OFFICER BASED ON VARIOUS PERMUTATION AND COMPUTATION WAS NOT JUST IFIED AND SAME IS DELETED. I.T.A. NO.2126 & 2749/DEL/2013 114 97. THIS ISSUE TOO HAS BEEN DECIDED IN FAVOUR OF TH E ASSESSEE AFTER DETAILED DISCUSSION BY THE TRIBUNAL AND THE RELEVANT OBSERVATION OF THE TRIBUNAL READS AS UNDER : 49. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS. IT APPEARS THAT THE AO HAS MADE THIS ADDITION MAINLY BECAUSE O F NOTE MENTIONED BY ASSESSEE IN ITS ACCOUNTING POLICIES WITH RESPECT TO BORROWING COSTS ACCORDING TO ACCOUNTING STANDARD 16 ISSUES BY ICAI. WE HAVE PERUSED NOTES ATTACHED TO FINANCIAL STATEMENTS AND WE ARE OF OPINION THAT THESE NOTES HAVE ARISEN IN THE FINANCIAL STATE MENT OF THE ASSESSEE BECAUSE OF THE ISSUE OF APPLICABILITY OF ACCOUNTING STANDARD 16 ISSUED BY THE ICAI. ACCORDING TO ACCOUNTING STANDARD 1 I.E . DISCLOSURE OF ACCOUNTING POLICIES, EACH AND EVERY COMPANY IS REQU IRED TO DISCLOSE THE ACCOUNTING POLICY WITH RESPECT TO VARIOUS SIGNI FICANT INCOME, EXPENDITURE AND ASSETS AND LIABILITIES ETC. APPLICA BLE TO IT. BORROWING COST IS ALSO ONE OF THEM. ICAI HAS ISSUED ACCOUNTIN G STANDARD 16 ACCOUNTING FOR BORROWING COST WHEREIN IT IS PROVIDE D THAT IN CASE OF INTEREST EXPENDITURE INCURRED BY THE COMPANY, IT IS REQUIRED TO BE CAPITALIZED IF THE BORROWING IS RELATED TO THE QUAL IFYING ASSETS. IN THIS CASE THE INVENTORY IS A QUALIFYING ASSETS AS IT IS HELD FOR MORE THAN 12 MONTHS AND THEREFORE INTEREST ATTRIBUTABLE TO IT IS REQUIRED TO BE CAPITALIZED IN THE BOOKS OF ACCOUNTS AS PER AS -16. THEREFORE WE DO NOT AGREE WITH THE ARGUMENTS OF AR THAT AS -16 DOES NOT APPLY TO INVENTORY. HOWEVER, THOSE ARE THE PROVISIONS WHICH ARE APPLICABLE FOR THE MAINTENANCE OF THE ACCOUNTS OF THE COMPANY AND INTEREST IS ALLOWABLE ACCORDING TO PROVISIONS OF SECTION 36(1) (III) OF THE ACT. FURTHER ACCORDING TO US, THE PROVISIONS OF ACCOUNTI NG STANDARDS AND PROVISIONS OF THE ACT ARE TWO DIFFERENT SET OF REGU LATIONS AND WHILE DECIDING THIS ISSUE, IT IS WELL SETTLED JUDICIAL PR ECEDENT THAT IS IF THERE IS A CONTRADICTION BETWEEN THE TWO, THE PROVISIONS OF THE ACT SHALL PREVAIL. PROVISIONS OF SECTION 36(1)(III) PROVIDES THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR TH E PURPOSES OF THE I.T.A. NO.2126 & 2749/DEL/2013 115 BUSINESS OR PROFESSION DEDUCTION IS REQUIRED TO BE ALLOWED. PROVISO INSERTED W.E.F. 01.04.2004 IS THE ONLY RESTRICTION IF CONDITION LAID DOWN U/S 36(1) (III) ARE SATISFIED BY THE ASSESSEE. THE PROVISO SAYS THAT ANY AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL B ORROWED FOR ACQUISITION OF AN ASSET WHETHER CAPITALIZED IN BOOK S OF ACCOUNTS OR NOT FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL ASSET WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS PUT TO USE SHALL NOT BE ALLOWED AS DEDUCTION. T HE DEDUCTION IS TO BE DISALLOWED EVEN IF THE INTEREST IS CAPITALIZED I N THE BOOKS OF ACCOUNTS OR NOT. HONBLE SUPREME COURT IN THE CASE OF CORE HEALTHCARE [298 ITR 194] HAS HELD THAT PROVISIONS OF SECTION 3 6(1)(III) IS A CODE IN ITSELF. IN THE PRESENT CASE, THE INTEREST PAID BY T HE ASSESSEE IS NOT FOR THE PURPOSE OF ACQUISITION OF ANY CAPITAL ASSET BUT FOR ITS INVENTORY. WE DO NOT FIND ANY RESTRICTION IN PROVISIONS CONTAINED U/S 36(1)(III) WHICH PROVIDES THAT THE INTEREST CAN BE DISALLOWED IF INC URRED FOR THE PURPOSE OF INVENTORY AS PROVIDED UNDER ACCOUNTING STANDARD 16. APPARENTLY, IN THIS CASE, THERE IS NO ALLEGATION THAT INTEREST IS NOT PAID ON CAPITAL BORROWED FOR THE PURPOSE OF THE BUSINESS. HONBLE M UMBAI HIGH COURT IN THE CASE OF CIT VS. LOKHANDWALA CONSTRUCTIONS IN DUSTRIES LTD. [ 131 TAXMAN 810] HAS HELD AS UNDER :- 4. FROM THE FACTS FOUND BY THE TRIBUNAL ON RECORD, IT IS CLEAR THAT ASSESSEE UNDERTOOK TWO-FOLD ACTIVITIES. IT BOUGHT A ND SOLD FLATS. SECONDLY, THE ASSESSEE WAS ALSO ENGAGED IN THE BUSI NESS OF CONSTRUCTION OF BUILDINGS. THE PROFITS FROM BOTH TH E ACTIVITIES WERE ASSESSED UNDER SECTION 28 OF THE INCOME-TAX ACT. IN THIS CASE, WE ARE CONCERNED WITH THE SECOND ACTIVITY (HEREINAFTER REF ERRED TO, FOR THE SAKE OF BREVITY, AS 'KANDIVALI PROJECT'). ACCORDING TO THE COMMISSIONER, LOAN WAS RAISED FOR SECURING LAND/DEV ELOPMENT RIGHTS FROM THE MANDAL. THAT, THE LOAN WAS UTILISED FOR PU RCHASING THE DEVELOPMENT RIGHTS, WHICH, ACCORDING TO THE COMMISS IONER, CONSTITUTED A CAPITAL ASSET. ACCORDING TO THE COMMISSIONER, SIN CE THE LOAN WAS RAISED FOR SECURING CAPITAL ASSET, THE INTEREST INC URRED THEREON I.T.A. NO.2126 & 2749/DEL/2013 116 CONSTITUTED PART OF CAPITAL EXPENDITURE. THIS FINDI NG OF THE COMMISSIONER WAS ERRONEOUS. IN THE CASE OF INDIA CE MENTS LTD. V. CIT [1966] 60 ITR 52 , IT WAS HELD BY THE SUPREME COURT THAT IN CASES WHERE THE ACT OF BORROWING WAS INCIDENTAL TO CARRYI NG ON OF BUSINESS, THE LOAN OBTAINED WAS NOT AN ASSET. THAT, FOR THE P URPOSES OF DECIDING THE CLAIM OF DEDUCTION UNDER SECTION 10(2)(III) OF THE INCOME-TAX ACT, 1922 [SECTION 36(1)(III) OF THE PRESENT INCOME-TAX ACT], IT WAS IRRELEVANT TO CONSIDER THE PURPOSE FOR WHICH THE LOAN WAS OBTA INED. IN THE PRESENT CASE, THE ASSESSEE WAS A BUILDER. IN THE PR ESENT CASE, THE ASSESSEE HAD UNDERTAKEN THE PROJECT OF CONSTRUCTION OF FLATS UNDER THE KANDIVALI PROJECT. THEREFORE, THE LOAN WAS FOR OBTA INING STOCK-IN-TRADE. THAT, THE KANDIVALI PROJECT CONSTITUTED THE STOCK-I N-TRADE OF THE ASSESSEE. THAT, THE PROJECT DID NOT CONSTITUTE A FI XED ASSET OF THE ASSESSEE. IN THIS CASE, WE ARE CONCERNED WITH DEDUC TION UNDER SECTION 36(1)(III). SINCE THE ASSESSEE HAD RECEIVED LOAN FO R OBTAINING STOCK-IN- TRADE (KANDIVALI PROJECT), THE ASSESSEE WAS ENTITLE D TO DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT. THAT, WHILE ADJUDICA TING THE CLAIM FOR DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT, THE NATURE OF THE EXPENSE - WHETHER THE EXPENSE WAS ON CAPITAL ACCOUNT OR REVEN UE ACCOUNT - WAS IRRELEVANT AS THE SECTION ITSELF SAYS THAT INTEREST PAID BY THE ASSESSEE ON THE CAPITAL BORROWED BY THE ASSESSEE WAS AN ITEM OF DEDUCTION. THAT, THE UTILIZATION OF THE CAPITAL WAS IRRELEVANT FOR THE PURPOSES OF ADJUDICATING THE CLAIM FOR DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT - CALICO DYEING & PRINTING WORKS V. CIT [1958] 34 ITR 265 (BOM.). IN THAT JUDGMENT, IT HAS BEEN LAID DOWN THAT WHERE AN ASSESSEE CLAIMS DEDUCTION OF INTEREST PAID ON CAPITAL BORROWED, ALL THAT THE ASSESSEE HAD TO SHOW WAS THAT THE CAPITAL WHICH WAS BORROWED WAS USED FOR BUSINESS PURPOSE IN THE RELEVANT YEAR OF ACCOUNT AN D IT DID NOT MATTER WHETHER THE CAPITAL WAS BORROWED IN ORDER TO ACQUIR E A REVENUE ASSET OR A CAPITAL ASSET. THE SAID JUDGMENT OF THE BOMBAY HIGH COURT APPLIES TO THE FACTS OF THIS CASE. I.T.A. NO.2126 & 2749/DEL/2013 117 FURTHER, IN THE FOLLOWING DECISIONS OF VARIOUS COOR DINATE BENCHES, THE DEDUCTION OF INTEREST HAS BEEN ALLOWED U/S 36(1)(II I) EVEN WHERE THE ASSESSE HAS FOLLOWED THE PROJECTION COMPLETION METH OD :- (I) ACIT VS. TATA HOUSING DEVELOPMENT COMPANY LTD. 45 SOT 9 (BOM.); (II) DCIT VS. THAKAR DEVELOPERS 115 TTJ 841 (PUNE ); (III) DCIT VS. K. RAHEJA PVT. LTD. (2006) TIOL 22 0 ITAT-MUM.; (IV) K. RAHEJA DEVELOPMENT CORPORATION VS. DCIT IN ITA NO.240/BANG./97 DATED 22.09.1997 - IN THIS CASE, RE FERENCE APPLICATION FILED BY THE DEPARTMENT HAS ALSO BEEN R EJECTED BY THE HONBLE KARNATAKA HIGH COURT VIDE ITS ORDER DATED 0 8.11.2000 IN CIVIL PETITION NO.832/2000 (IT). BEFORE US, LD. DR COULD NOT CITE ANY DECISION AGAIN ST THE CLAIM OF THE ASSESSE, THEREFORE, RESPECTFULLY FOLLOWING THE DECI SION OF HONBLE BOMBAY HIGH COURT AND AS WELL AS VARIOUS COORDINATE BENCHES, CITED ABOVE, WE DO NOT CONCUR WITH THE VIEW OF CIT (A) ON DISALLOWANCE OF INTEREST OF RS.24.75 CRORES U/S 36(1) (III) OF THE ACT. THE ALTERNATIVE ARGUMENT OF THE ASSESSE REGARDING ADOPTION OF ANY A RTIFICIAL FORMULA FOR THE PURPOSE OF COMPUTING INTEREST DISALLOWANCE. LD. CIT (A) HAS PRESUMED PROPORTION OF UTILISATION OF FUNDS IN ABSE NCE OF THE NEXUS HOLDING THAT ASSESSE HAS USED MIXED FUNDS. HONOURAB LE BOMBAY HIGH COURT IN CASE OF CIT V RELIANCE UTILITIES & PO WER LIMITED 313 ITR 340 HAS HELD THAT THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THE N A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE IN TEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. THEREFORE WE ARE OF THE VIEW THAT PRESUMPTION IS TO BE ASSUMED IN FAVOUR OF THE ASSESSE AND NOT AGAINST ASSESSE. HENC E, WE REJECT THE FORMULAE ADOPTED BY CIT (A) OF WORKING OUT PROPORTI ONATE DISALLOWANCE BY ADOPTING ARTIFICIAL FORMULAE. THERE FORE RESPECTFULLY I.T.A. NO.2126 & 2749/DEL/2013 118 FOLLOWING DECISIONS OF HONOURABLE BOMBAY HIGH COURT IN CIT VS. LOKHANDWALA CONSTRUCTIONS INDUSTRIES LTD. [ 131 TAX MAN 810] AND CIT V RELIANCE UTILITIES & POWER LIMITED [313 ITR 3 40] WE REVERSE THE ORDER OF THE CIT (A) CONFIRMING THE DISALLOWANCE OF EXPENDITURE OF RS.27.40 CRORES AND DIRECT THE AO TO ALLOW THIS INT EREST EXPENDITURE U/S 36(1) (III) OF THE ACT. 98. ACCORDINGLY, RESPECTFULLY FOLLOWING THE AFORESA ID PRECEDENCE WHICH IS APPLICABLE ON THE FACTS OF THE PRESENT YEAR ALSO, WE DECIDE THIS ISSUE IN FAVOUR OF THE AS SESSEE. 99. IN GROUND NO.6, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF BROKERAGE AND COMMISSION OF RS.2,99,74,610/-. 100. LD. ASSESSING OFFICER ON THE BASIS OF COMMENTS OF SPECIAL AUDITORS OBSERVED THAT CERTAIN EXPENSES SUC H AS BROKERAGE AND COMMISSION ARE BEING CLAIMED IN THE P &L ACCOUNT WHILE THE MATCHING REVENUES ARE NOT CREDITE D TO THE P&L ACCOUNT. HE HAS DISCUSSED IN DETAIL VARIOUS OBS ERVATIONS AND NOTE OF THE SPECIAL AUDITORS AND OBSERVED THAT ASSESSEES RELIANCE ON ACCOUNTING STANDARD-7 IS NOT MISPLACED AS IT APPLIES TO CONSTRUCTION CONTRACT AND NOT TO DEVELOP MENT PROJECT UNDERTAKEN BY THE ASSESSEE HIMSELF. FURTHER , THE RELIANCE PLACED BY THE ASSESSEE UPON THE ORDER OF T HE LD. CIT(A) FOR THE ASSESSMENT YEAR 1983-84 IS ALSO MISP LACED AS ACCOUNTING POLICY IS FOLLOWED FOR RECOGNITION OF RE VENUE IN ASSESSMENT YEAR 1983-84 IS TO BE FROM THE ACCOUNTIN G POLICY FOLLOWED FOR THE YEAR UNDER ASSESSMENT. THE ASSESSE E HAS NOT PAID THIS BROKERAGE AS A SELLING COST FOR PROCURING ANY I.T.A. NO.2126 & 2749/DEL/2013 119 CONSTRUCTION CONTRACT. HE HAS PAID THIS MONEY FOR S ELLING OF THIS VARIOUS PROJECT EVEN BEFORE THE CONSTRUCTION P ROJECT WAS STARTED. HE FURTHER HELD LIABILITY OF EXPENDITURE F OR THE PURPOSE OF DETERMINING THE TAXABLE INCOME IS DETERM INED BY THE INCOME TAX ACT AND NOT BY THE ACCOUNTING STANDA RD. HE ALSO MADE REFERENCE TO THE JUDGMENT OF HON'BLE SUPRE ME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT, (1997) 225 ITR 0802 (SC) AND OUT OF TOTAL CLAIM OF RS.10,63,46,742/-, HE MAD E DISALLOWANCE OF RS.3,64,25,771/-. 101. LD. CIT(A) HAS DISCUSSED THE ISSUE IN DETAIL A ND HAS ALLOWED PART RELIEF AFTER OBSERVING AND HOLDING AS UNDER: 13.20 I HAVE CONSIDERED THE SUBMISSION OF THE AP PELLANT, OBSERVATION OF THE ASSESSING OFFICER, ACCOUNTING ST ANDARD AS-2 & AS-7 AND JUDGMENT OF ITAT IN EARLIER YEARS AND CIT (APPEALS) IN APPELLANTS OWN CASE FOR A.YRS. 2006-07 AND 2007-08 . IT IS SEEN THAT AS PER PARA-19 OF AS-7, IT IS MENTIONED THAT THE SE LLING COST CANNOT BE ATTRIBUTED TO CONTRACT ACTIVITY OR CANNOT BE ALLOCA TED TO A CONTRACT UNDER CONSTRUCTION. EVEN AS PER AS-2 VALUATION OF INVENTORY ISSUED BY ICAI, IT IS SEEN THAT SELLING AND DISTRIBUTION C OST CANNOT BE CONSIDERED AS PART OF THE COST OF INVENTORY AND SUC H EXPENSE HAS TO RECOGNIZED IN THE PERIOD IN WHICH THEY ARE INCURRED . THE COST WHICH CAN BE ATTRIBUTED /ALLOCATED OVER THE INVENTORY SHO ULD COMPRISE ALL THE COST OF PURCHASE, COST OF CONVERSION AND OTHER COST INCURRED IN BRINGING THE INVENTORY TO THEIR PRESENT LOCATION AND CONDITI ON. IN THE CASE OF CONSTRUCTION ACTIVITIES THE COST OF PURCHASE OF LAN D AND CONSTRUCTION COST CAN ONLY BE ATTRIBUTED OVER THE PROJECT. THE B ROKERAGE EXPENSES ARE PURELY A SELLING COST AND CANNOT FORM A PART OF INVENTORY. IN VIEW OF THE ACCOUNTING STANDARD, THE BROKERAGE EXPENSES BEING A SELLING I.T.A. NO.2126 & 2749/DEL/2013 120 COST CANNOT BE CAPITALIZED WITH THE COST OF INVENTO RY AND CANNOT BE ALLOCATED TO THE CONSTRUCTION ACTIVITY. DURING THE YEAR THE APPELLANT HAS PAID BROKERAGE OF RS.10,63,46,742/- FOR SELLING OF THE FLATS AND OTHER PROPERTIES AND PROPERTIES GIVEN ON LEASE TO V ARIOUS BROKERS. THE BROKERAGE EXPENSES TO THE EXTENT OF RS.9,98,95,581/ - PERTAINS TO SELLING OF FLATS AND OTHER PROPERTY. THEREFORE, SUC H EXPENSES HAS TO BE ALLOWED AS SELLING COST IN THE YEAR IN WHICH SUCH E XPENDITURE IS INCURRED. THE SELLING COST CANNOT BE CAPITALIZED WI TH THE INVENTORY AS PER AS-2 AND AS-7 ISSUED BY ICAI. HENCE, THE BROKER AGE PAID FOR SELLING OF FLATS AND PROPERTY TO THE EXTENT OF RS.9 ,98,95,581/- IS AN ALLOWABLE EXPENDITURE DURING THE YEAR AND DISALLOWA NCE TO THAT EXTENT OF RS.2,99,74,644/- IS DELETED. IT IS ALSO SEEN THAT THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT BY HONBLE ITAT IN ITS ORDER FOR A.Y. 198 4-85. HOWEVER, THE ASSESSING OFFICER HAS OBSERVED THAT THE ACCOUNTING POLICY FOLLOWED BY THE APPELLANT COMPANY FOR RECOGNITION O F REVENUE IN THE A.Y. 1983-84 WERE DIFFERENT FROM THE ACCOUNTING POL ICY FOLLOWED DURING THE YEAR UNDER CONSIDERATION. IT IS SEEN THA T IN A.Y. 1983-84 ALSO THE SELLING COST I.E. BROKERAGE AND COMMISSION WERE CLAIMED IN THE YEAR IN WHICH THEY ARE INCURRED AND SAME WERE N OT RECOGNIZED ON THE BASIS OF REVENUE RECOGNITION. THEREFORE, THE RA TIO OF THE SAID JUDGMENT IS STILL APPLICABLE IN THE CASE OF APPELLA NT AND THE BROKERAGE AND COMMISSION HAS TO BE ALLOWED IN THE YEAR IN WHI CH THEY ARE INCURRED AND CANNOT BE ASSOCIATED WITH CONSTRUCTION COST. THE CONTENTION OF THE ASSESSING OFFICER THAT THE BROKER AGE EXPENDITURE TO BE POSTPONED TO SUBSEQUENT YEAR AS PER AS-9 CANN OT BE ACCEPTED, AS BROKERAGE AND COMMISSION ARE RELATED TO THE SALE OF FLATS AND PROPERTIES. BY INCURRING THE SAME THE APPELLANT HAS NOT DERIVED ANY ENDURING ADVANTAGE IN SUBSEQUENT YEARS. THE ASSESSING OFFICER HAS RELIED UPON THE SUPREME C OURT JUDGMENT IN THE CASE OF MADRAS INDUSTRIAL INVESTMEN T CORP. 225 ITR I.T.A. NO.2126 & 2749/DEL/2013 121 802. (SC), AND HAS HELD THAT THE EXPENSES HAVE TO B E SPREAD OVER IN SEVERAL YEARS IF THE BENEFIT OF SUCH EXPENDITURE IS CONTINUED IN THE ENSUING YEARS. THE FACTS OF THIS JUDGMENT CANNOT BE APPLIED TO THE APPELLANTS CASE AS BROKERAGE AND COMMISSION LINKED WITH THE SERVICES RENDERED BY THE BROKERS TO THE APPELLANT F OR SELLING THE FLATS AND OTHER PROPERTIES. THERE IS A NEXUS BETWEEN THE EXPENSES AND SERVICES RENDERED WHICH CANNOT BE SPREAD TO SEVERAL YEARS. THE BENEFIT OF THE BROKERAGE AND COMMISSION IS RELATED TO A PARTICULAR PROPERTY OR FLAT SOLD AND IT CANNOT BE EXTENDED TO OTHER PROPERTIES. THEREFORE, BROKERAGE EXPENSES CANNOT BE POSTPONED F OR THE FUTURE YEARS. THEREFORE, RATIO OF THE SAID JUDGMENT IS NOT APPLICABLE IN THE CASE OF APPELLANT. 13.21 THE APPELLANT HAS PLACED RELIANCE ON THE DECI SION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF NOKIA CORP ORATION VS. DIT, DELHI, 2007, 162 TAXMAN 369 (DELHI), WHEREIN IT IS HELD THAT EVEN IF THE DEPARTMENT HAS FILED FURTHER APPEAL AGAINST THE LAST ORDER, WHICH IS IN FAVOUR OF THE APPELLANT, THE LAST ORDER IS JU DICIALLY BINDING ON THE SUBORDINATE AUTHORITY. HENCE, RESPECTFULLY FOLLOWIN G THE ORDER OF THE HONBLE INCOME TAX APPELLATE TRIBUNAL FOR AY 1984-8 5 AND THE ORDER OF CIT(APPEALS) FOR THE IMMEDIATELY PRECEDING YEARS RELEVANT TO THE ASSESSMENT YEARS 2006-07 AND 2007-08 IN APPELLANTS OWN CASE. IN VIEW OF THE ABOVE, THE ADDITION TO THE EXTENT OF RS .2,99,74,600/-(RS. 2,82,93,983 + RS. 16,80,717) PERTAINING TO PAYMENT OF BROKERAGE AND COMMISSION IS DELETED. 13.22 HOWEVER, EXPENSES OF RS.64,51,161/- PERTAINS TO BROKERAGE PAID FOR GIVING PROPERTY ON LEASE. THESE BROKERAGE EXPENSES HAVE BEEN INCURRED FOR GIVING THE GRAND MALL AND TOWN SQ UARE MALL ON RENT. THIS EXPENDITURE DOES NOT PERTAIN TO SELLING OF THE INVENTORY OR STOCK IN TRADE, THEREFORE, SUCH EXPENSES CANNOT BE COVERED UNDER AS-2 AND AS-7. THIS BROKERAGE EXPENDITURE OF RS.64,51,16 1/-IS INEXTRICABLY LINKED WITH THE GIVING GRAND MALL AND TOWN SQUARE M ALL ON RENT. THE I.T.A. NO.2126 & 2749/DEL/2013 122 INCOME OF THE GRAND MALL AND TOWN SQUARE MALL RECEI VED OR RECEIVABLE FROM RENT IS ASSESSABLE UNDER THE HEAD HOUSE PROPE RTY. AS PER THE PROVISIONS OF IT ACT NO EXPENDITURE IS ALLOWABLE AG AINST THE INCOME FROM HOUSE PROPERTY EXCEPT DEDUCTION @30% AND INTER EST PAYMENT ON THE LOAN FOR CONSTRUCTION OF HOUSE U/S 24 OF THE IT ACT. THERE IS NO PROVISION OF DEDUCTION OF BROKERAGE PAID FOR GIVING THE PROPERTY ON RENT, THEREFORE, THE EXPENDITURE INCURRED BY THE AP PELLANT OF RS.64,51,161/-( FOR GRAND MALL RS. 3,65,378/- + TOW N SQUARE MALL RS. 60,85,783/-) IS NOT AN ALLOWABLE EXPENDITURE. IN THE RESULT, THIS GROUND OF APPEAL IS PARTLY ALLO WED AND APPELLANT GETS A RELIEF OF RS. 2,99,74,600/-. 102. AGAIN, THIS ISSUE HAS BEEN DECIDED IN FAVOUR O F THE ASSESSEE BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 IN THE FOLLOWING MANNER: 69. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTEN TIONS. WE HAVE ALSO PERUSED THE ORDER OF ITAT IN ASSESSEES OWN CA SE FOR AY 1984-85 SUBMITTED BEFORE US BY THE LD. AR. THIS DECISION HA S ALSO BEEN CONSIDERED BY THE AO AT PAGE 188 OF THE ASSESSMENT ORDER. THE AO HAS NOT FOLLOWED THIS DECISION AS IT COULD NOT BE V ERIFIED WHETHER THE ISSUE HAS BEEN TAKEN UP BY THE DEPARTMENT BEFORE TH E HONBLE DELHI HIGH COURT OR NOT. BEFORE US, LD. DR ALSO COULD NOT POINT OUT THAT WHY THIS DECISION CANNOT BE FOLLOWED NOR WE COULD FIND ANY REASON FOR NOT FOLLOWING THE SAME BY AO EXCEPT THAT WHETHER IT IS ACCEPTED BY THE DEPARTMENT OR NOT IS NOT VERIFIED. LD. CIT (A) HAS ALSO DELETED THE ADDITION FOLLOWING THE ORDER OF COORDINATE BENCH OF ITAT FOR AY 1984- 85 IN THE CASE OF THE ASSESSEE. MERELY BECAUSE THE DECISION IS NOT ACCEPTED BY REVENUE DISALLOWANCE HAS BEEN MADE. AS OBSERVED BY THE CIT (A), THESE EXPENSES RELATED TO BROKERAGE OF FLATS AS PART OF SELLING EXPENSES AND, THEREFORE, CANNOT BE INCLUDED IN THE COST OF CONSTRUCTION FOR THE PURPOSE OF VALUE OF CLOSING ST OCK OF WIP AND IN I.T.A. NO.2126 & 2749/DEL/2013 123 VIEW OF ACCOUNTING STANDARDS ISSUED BY THE ICAI. RE SPECTFULLY FOLLOWING THE DECISION OF HONOURABLE HIGH COURT IN CASE OF CIT V DLF UNIVERSAL LIMITED IN ITA NO 1136/2009 DATED 16.04.2 015 WHILE DECIDING GROUND NO 4 OF THE APPEAL OF THE REVENUE H ONOURABLE HIGH COURT HAS HELD THAT EXPENDITURE TOWARDS BROKERAGE A ND COMMISSION PAID TO BROKERS FOR BOOKING AND SALE OF CERTAIN PRO PERTIES IS ALLOWABLE FIRSTLY IN VIEW F THE FACTS THAT ASSESSEES TREATME NT OF SUCH EXPENDITURE HAS BEEN DECIDED IN FAVOUR OF THE ASSES SEE AND REVENUE HAS NOT CHALLENGED IT AND SECONDLY SUCH EXPENDITURE ARE ALLOWABLE. IN VIEW OF THE ABOVE FACTS AND FOLLOWING THE DECISION OF COORDINATE BENCH AS FACTS ARE NOT DISTINGUISHED BY REVENUE, WE CONFI RM THE ORDER OF CIT (A) IN DELETING THE ADDITION OF RS.20,87,70,567/- O N ACCOUNT OF BROKERAGE EXPENSES FOR SALE OF VARIOUS PROPERTIES. THEREFORE, GROUND NO.14 IS DISMISSED. 103. THUS, IN VIEW OF THE AFORESAID PRECEDENCE OF T HE EARLIER YEAR THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSE E. 104. IN GROUND NO.7, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION ON ACCOUNT OF LATE CONSTRUCTIO N CHARGES OF RS.1,88,81,388/-. LD. ASSESSING OFFICER FOLLOWING T HE ASSESSMENT ORDER FOR ASSESSMENT YEARS 2006-07 AND 2 007-08 HELD THAT RECEIPT OF LATE CONSTRUCTION CHARGES IS I NCOME ON THE BASIS OF SUCH LATE CONSTRUCTION CHARGES WERE COLLEC TED DURING THE YEAR. THOUGH, HE OBSERVED THAT ASSESSEE HAS CLA IMED THAT IT HAS RECOGNIZED ALL THE CREDIT BALANCE LYING IN T HE CONSTRUCTION CHARGES TILL 31 ST MARCH, 2010 AS INCOME IN ITS BOOKS OF ACCOUNT YET IN VIEW OF THE JUDGMENT OF HON' BLE SUPREME COURT IN THE CASE OF DLF UNIVERSAL AND OTHE RS LTD. VS. TOWN COUNTRY PLANNING, THE LATE CONSTRUCTION CH ARGES I.T.A. NO.2126 & 2749/DEL/2013 124 RECEIVED BY THE ASSESSEE-COMPANY IS TO BE TAXED IN THE YEAR OF RECEIPT. 105. LD. CIT(A) HAS DELETED THE SAID COMPANY IN THE FOLLOWING MANNER: 14.9 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT, OBSERVATION OF THE ASSESSING OFFICER AND JUDGMENT O F HONBLE SUPREME COURT IN THIS REGARD. IT IS SEEN THAT HONB LE SUPREME COURT HAS SET ASIDE THE JUDGMENT OF HONBLE PUNJAB & HARY ANA HIGH COURT AND HAS ACCEPTED THE APPELLANTS RIGHT TO COLLECT T HE LATE CONSTRUCTION CHARGES FROM CUSTOMERS, IF THEY FAIL TO COMMENCE TH E CONSTRUCTION ACTIVITIES WITHIN STIPULATED TIME. IT MAY BE SEEN T HAT HONBLE PUNJAB & HARYANA HIGH COURT HAD DECLARED SUCH LEVY AS ILLEGA L, THEREFORE, APPELLANT WAS SHOWING SUCH CHARGES AS ITS LIABILITY INSTEAD OF SHOWING SUCH LATE CONSTRUCTION CHARGES AS ITS INCOM E. BECAUSE OF THAT JUDGMENT THESE CHARGES WERE NOT TREATED AS APPELLAN TS INCOME AND THE AMOUNT OF LATE CONSTRUCTION CHARGES CANNOT BE S AID TO HAVE ACCRUED TO APPELLANT UNLESS THE APPELLANT ACQUIRES A RIGHT TO RECEIVE IT. HAD THE HONBLE SUPREME COURT WOULD HAVE APPROVED T HE JUDGMENT OF PUNJAB & HARYANA HIGH COURT, THE APPELLANT WOULD HA VE REFUNDED SUCH LATE CONSTRUCTION CHARGES TO THE RESPECTIVE PA RTIES. THEREFORE, SUCH AMOUNT WAS KEPT IN A LIABILITY ACCOUNT. AFTER THE SUPREME COURT JUDGMENT WHICH HAS SET ASIDE THE PUNJAB & HARYANA H IGH COURT JUDGMENT A RIGHT TO RECEIVE HAS BEEN CREATED IN FAV OUR OF APPELLANT ON 19.11.2010. THEREFORE, THE ENTIRE AMOUNT HAS BEEN O FFERED AS INCOME IN F.Y. 2010-11 RELEVANT TO A.Y. 2011-12. IN VIEW O F THE ABOVE, THE APPELLANT HAS RIGHTLY NOT OFFERED THE LATE CONSTRUC TION CHARGES AS ITS INCOME IN THE RELEVANT YEAR. IT HAS FURTHER BEEN NO TICED THAT THIS ISSUE OF TREATMENT OF LATE CONSTRUCTION CHARGES HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT VIDE ORDER DATED 25.03.2011 PASSED BY LEARNED CIT(A)- XVIII, NEW DELHI, IN APPEAL NO.35/2010-11 FOR A.Y. 2006-07 (PAGE NOS. 204-218 OF THE SAID ORDER) AND BY ME VIDE ORDE R DATED I.T.A. NO.2126 & 2749/DEL/2013 125 29.05.2012, IN APPEAL NO.66/2010-11 FOR A.Y. 2007-0 8 (PAGE NOS. 146-149 OF THE SAID ORDER) RESPECTIVELY IN APPELLAN TS OWN CASE. ACCORDINGLY, THE ADDITION OF RS.1,88,81,388/- MAD E BY THE AO IS NOT SUSTAINABLE. THE SAME IS, THEREFORE, DELETED. 106. THIS ISSUE HAS BEEN DEALT IN DETAIL BY THE TRI BUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 WHE REIN THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESS EE IN THE FOLLOWING MANNER: 225. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTE NTIONS. IT IS AN ADMITTED FACT THAT THE ASSESSEE IS RECEIVING LATE C ONSTRUCTION CHARGES FROM CUSTOMERS WHICH IS UNDER DISPUTE BEFORE THE HO NBLE PUNJAB & HARYANA HIGH COURT AND THAT LITIGATION WAS SETTLED VIDE ORDER DATED 19.11.2000 OF HONBLE SUPREME COURT. THE LD. CIT (A ) HAS DECIDED THIS ISSUE AFTER CONSIDERING THE JUDGMENT OF HONBLE SUP REME COURT IN THE CASE OF E.D. SASSOON & CO. LTD. V. CIT [1954] 26 IT R 27WHEREIN IT IS HELD THAT IF THE ASSESSEE ACQUIRES A RIGHT TO RECEI VE THE INCOME THE SAID INCOME HAS ACCRUED TO HIM. AS TILL THE DECISIO N OF HONBLE SUPREME COURT ASSESSEE DID NOT HAVE RIGHT TO RECEIV E THAT INCOME AND EVEN THOUGH THAT AMOUNT WAS COLLECTED, IT BECOMES A LIABILITY ON THE ASSESSEE TOWARDS THE CUSTOMERS. THE CIT (A) HAS FUR THER CONSIDERED THIS ISSUE IN ENTIRETY AS UNDER:- 26.10 IT IS OBSERVED THAT UP TO SEPTEMBER 2002, TH E APPELLANT HAS TREATED COLLECTION OF LATE CONSTRUCTION CHARGES AS ITS INCOME AND FROM OCTOBER 2002 ONWARD, THE APPELLANT HAS NOT BEE N TREATED THE RECEIPTS OF LATE CONSTRUCTION CHARGES AS ITS INCOME , IN VIEW OF THE MATTER BEING UNDER LITIGATION. THE ASSESSEE HIMSELF HAS STATED THAT IF THE HONBLE SUPREME COURT DECIDES THAT THE ASSES SEE CANNOT COLLECT LATE CONSTRUCTION CHARGES THEN ONLY CHARGES WILL BE RETURNED TO CONCERNED CUSTOMERS. IT IS NOTED THAT AS PER THE HIGH COURT ORDER, THE ASSESSEE COMPANY HAD NO RIGHT TO COLLECT LATE C ONSTRUCTION I.T.A. NO.2126 & 2749/DEL/2013 126 CHARGES FROM ITS CUSTOMERS. HOWEVER, THE SUPREME CO URT BY ITS ORDER DATED 19.11.2010 HAS SET ASIDE THE ORDER OF T HE HIGH COURT AND THEREFORE, IT CANNOT BE SAID THAT RECEIPTS IN Q UESTION ARE NOT ACCRUED INCOME. AS THE ORDER OF THE HONBLE SUPREME COURT IS DATED 19.11.2010 THE AMOUNT COLLECTED IS THE INCOME FOR F INANCIAL YEAR 2010-11. 26.11 AN AMOUNT CANNOT BE SAID TO ACCRUE UNLESS ENF ORCEABLE DEBT IS CREATED IN FAVOUR OF ASSESSEE. REFERENCE CAN BE MADE TO THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF E. D. SASSOON & CO. LTD. V. CIT [1954] 26 ITR 27. THEIR LORDSHIPS A T PAGE 51 OBSERVED AS UNDER : THAT THE WORDS ARISING OR ACCRUING ARE GENERAL W ORDS DESCRIPTIVE OF A RIGHT TO RECEIVE PROFITS... IF THE ASSESSEE AC QUIRES A RIGHT TO RECEIVE THE INCOME, THE INCOME CAN BE SAID TO HAVE ACCRUED TO HIM. THOUGH IT MAY BE RECEIVED LATER ON IT BEING ASCERTA INED. THE BASIC CONCEPTION IS THAT HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE INCOME. THERE MUST BE A DEBT OWED TO HIM BY SOMEBOD Y... UNLESS AND UNTIL THERE IS CREATED IN FAVOUR OF ASSESSEE A DEBT DUE BY SOMEBODY IT CANNOT BE SAID THAT HE HAS ACQUIRED A R IGHT TO RECEIVE THE INCOME OR THAT INCOME HAS ACCRUED TO HIM. 26.12 IN VIEW OF THE ABOVE BINDING PRINCIPLE, IT HA S TO BE HELD THAT THE AMOUNT OF LATE CONSTRUCTION CHARGES CANNOT BE S AID TO HAVE ACCRUED TO ASSESSEE UNLESS THE ASSESSEE ACQUIRES A RIGHT TO RECEIVE IT. A RIGHT TO RECEIVE CAN BE SAID TO BE CREATED IN FAVOUR OF ASSESSEE ON 19.11.2010 WHEN THE ORDER OF THE HONBLE SUPREME COURT IS PASSED AND TILL THAT DATE REVENUE CANNOT BE LEGALLY RECOGNIZED. DURING THE HEARING, I WAS INFORMED BY THE LD. AR TH AT THIS INCOME HAS BEEN RECOGNIZED IN THE CURRENT FINANCIAL YEAR ( F.Y. 2010-11) AFTER RECEIVING THE JUDGEMENT OF THE SUPREME COURT. 26.13 ACCORDINGLY, THE ADDITION OF RS.1,88,81,388/- MADE BY THE AO IS NOT SUSTAINABLE. THE SAME IS, THEREFORE, DELE TED. I.T.A. NO.2126 & 2749/DEL/2013 127 226. WE HAVE NOTED THAT IDENTICAL ISSUE HAS BEEN DE CIDED BY THE COORDINATE BENCH OF ITAT IN CASE OF NILGIRI CULTIVA TIONS PVT LTD V ACIT FOR AY 2006-07 IN ITA NO 4634 & 4635/DEL/2011 DATED 30.4.2012 WHERE IN WHILE DECIDING THE ISSUE IN GROUND NO 1 OF THE APPEAL ADDITION OF LATE CONSTRUCTION CHARGES RECEIVED FROM CUSTOMERS SHOWN UNDER THE HEAD SUNDRY CREDITORS IS INCOME WHICH HAS ACCRUED TO THE ASSESSEE OR NOT, IT IS HELD THAT 7.1 ASSESSEE AS FOLLOWING A PRUDENT AND CONSISTENT ACCOUNTING POLICY WHICH WAS NECESSITATED BY THE ORDER OF HONOU RABLE PUNJAB AND HARYANA HIGH COURT. THE ASSESSEE OFFERED THE EN TIRE AMOUNT AS ITS INCOME ON SETTLEMENT OF DISPUTES BY THE HONO URABLE SUPREME COURT. THEREFORE, WE HOLD THAT THE ASSESSEE WAS ACT ING ON PRUDENT AND CONSISTENT ACCOUNTING POLICY. GOING BY THIS ACC OUNTING POLICY, THE INCOME CANNOT BE RECOGNISED UNLESS IT IS FREE F ROM IMPENDING AND BINDING LITIGATION WHICH IN THIS CASE WAS CLARI FIED IN A.Y. 2011- 12 ONLY ACCOUNTING STANDARD 9 ISSUED BY ICAI ON REVENUE REC OGNITION ALSO SATISFIES THE ACCOUNTING POLICY OF THE COMPANY THAT WHEN THE REVENUE IS SADDLED WITH UNCERTAINTIES SAME SHOULD NOT BE RE COGNISED TILL THE UNCERTAINTIES ARE RESOLVED. THEREFORE FOLLOWING THE DECISION OF COORDINATE BENCH AS WELL AS THE ACCOUNTING STANDARD 9 OF ICAI WE ARE OF THE VIEW THAT ASSESSEE HAS CORRECTLY RECOGNISED REVENUE IN THE YEAR THE ISSUE ATTAINED CERTAINTY. THEREFORE ON PERUSAL OF THE DECISION OF CIT (A) WE ARE OF THE VIEW THAT THERE IS NO INFIRMI TY IN THE ORDER. HENCE WE CONFIRM THE ORDER OF CIT (A) AND DISMISS GROUND NO 25 OF THE APPEAL. 107. ACCORDINGLY, FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, THIS ISSUE IS DECI DED IN FAVOUR OF THE ASSESSEE. I.T.A. NO.2126 & 2749/DEL/2013 128 108. THE NEXT ISSUE FOR DELETION OF ADDITION ON ACC OUNT OF NET CONTINGENCY DEPOSIT RECEIVED AT RS.1,14,837/-. LD. ASSESSING OFFICER OBSERVED THAT THE DEPOSITS HAVE B EEN RECEIVED FROM THE CUSTOMERS AS PART OF TOTAL SALE P RICE TO MEET OUT VARIOUS CONTINGENCY EXPENSES AND THIS AMOUNT HA S NEITHER PAID BACK TO THE CUSTOMERS NOR WAS INTENDED TO BE PAID BACK. ACCORDINGLY, HE TREATED THE AMOUNT OF RS1,14,837/- AS INCOME OF THE ASSESSEE. 109. LD. CIT(A) HAS DELETED THE ADDITION IN THE FOL LOWING MANNER: 15.6 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT, OBSERVATION OF THE ASSESSING OFFICER, ORDERS OF THE CIT(APPEALS) FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08, WHICH ARE IN FAVOUR OF THE APPELLANT, AND THE OTHER MATERIAL AVAILABLE ON RECORD. IT IS SEEN THAT THESE CONTINGENCY DEPOSITS WERE RECEIVED FROM THE CUSTOMERS AT THE TIME OF SALE OR AGREEMENT TO SALE OF PLOT/FLAT TO MEET OUT THE FUTURE LIABILITY WHICH MAY ARISE ON ACCOUNT OF ENHANCEMENT OF COMPENSATION TO THE LAND OWNERS OR ANY DEMAND FROM GOVT. OF HARY ANA ON ACCOUNT OF DEVELOPMENT OR PROVIDING EXTERNAL SERVICES TO TH E PLOT/FLAT HOLDERS. THEREFORE, SUCH DEPOSITS WERE KEPT IN A SEPARATE AC COUNT AND SHOWN UNDER THE HEAD LIABILITY. THESE RECEIPTS ARE NOT TRADING RECEIPTS OF THE APPELLANT AND SAME HAVE BEEN RECEIVED TO MEET OUT A NY UN- FORESEEABLE LIABILITY WHICH MAY OCCUR IN FUTURE. IN THE EVENT OF NON SPENDING OF THIS AMOUNT ON ANY LIABILITY, SUCH DEPO SITS WERE REQUIRED TO BE REFUNDED TO THE OWNERS OF THE PLOT/FLAT HOLDE RS. SINCE THESE DEPOSITS HAVE BEEN COLLECTED FOR SPECIFIC PURPOSES, THEREFORE, THE SAME CANNOT BE TREATED AS RECEIPTS OF THE APPELLANT AND SAME CANNOT BE TAXED IN THE HEAD OF THE APPELLANT AS TRADING RECE IPTS. IT IS ALSO SEEN FROM THIS DEPOSIT ACCOUNT THAT THERE IS A REGULAR M OVEMENT OF FUNDS AND LARGE AMOUNTS HAVE BEEN INCURRED ON ACCOUNT OF MEETING THE I.T.A. NO.2126 & 2749/DEL/2013 129 CONTINGENT LIABILITIES LIKE FIXING OF TRANSFORMERS, LAYING OF ELECTRIC OF LINE AND OTHER DEMANDS FROM GOVT. OF HARYANA. SINCE THIS DEPOSIT ACCOUNT IS MAINTAINED FOR PERFORMANCE OF CONTRACTUAL OBLIGA TIONS AS PER CLAUSE- 4 OF THE AGREEMENT TO SELL ENTERED WITH THE RESPECT IVE CUSTOMERS, THE SAME CANNOT BE TREATED AS TRADING RECEIPTS OF THE A PPELLANT. HENCE, THE ADDITION ON ACCOUNT OF THESE RECEIPTS AMOUNTING TO RS. 1,14,837/- IS DELETED. 110. THE TRIBUNAL ALSO IN ASSESSMENT YEAR 2006-07 H AS DISMISSED THE REVENUES APPEAL AFTER OBSERVING AND HOLDING AS UNDER: 236. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTE NTIONS. THIS AMOUNT HAS BEEN COLLECTED BY THE ASSESSEE AT PREDET ERMINED RATE FROM THE BUYERS WHICH HAS OBLIGATION TO INCUR EXPEN DITURE ON ACCOUNT OF CONTINGENT NATURE FOR THE PROJECTS. IT IS NOT A FACT THAT THIS AMOUNT HAS NOT BEEN UTILISED AS IT IS EVIDENT THAT IN MARC H 2006, ASSESSEE HAS INCURRED THE COST OF RS.9.87 CRORES. FURTHERMOR E, IN THE PRECEDING TWO YEARS AS WELL AS SUCCEEDING TWO YEARS, THE ASSE SSEE HAS INCURRED EXPENDITURE OUT OF THIS SUM. WE AGREE WITH THE CONT ENTION OF THE LD. AR THAT EACH AND EVERY RECEIPT CANNOT BE CHARGED TO TA X UNLESS IT PARTAKES THE CHARACTER OF REVENUE. FURTHER, WE ALSO AGREE WITH THE OBSERVATION OF THE LD. DR THAT RECEIPTS IF REVENUE IN NATURE AND CAMOUFLAGED AS DEPOSITS CANNOT ESCAPE THE TAXATION. IN BETWEEN THESE TWO USE, FACTS OF THE CASE SHOW THAT THERE IS A REGULAR MOVEMENT IN THIS ACCOUNT AND EXPENDITURE OF RS.9.87 CRORES A S NOTED BY THE CIT (A) HAS BEEN INCURRED. THEREFORE, WE ARE OF THE VIE W THAT THESE ARE THE SECURITY DEPOSITS WHICH WOULD BE UTILISED IN PERFOR MANCE OF THE CONTRACTUAL OBLIGATION OF THE ASSESSEE TOWARDS THOS E BUYERS. ANYWAY, IT IS NOT THE CASE OF THE AO THAT THESE RECEIPTS HA VE BEEN RECEIVED DURING THE YEAR, IT IS ALSO NOT THE CASE THAT THE P AYERS OR THE DEPOSITORS ARE UNIDENTIFIED AND IT IS NOT THE CASE OF THE AO THAT THESE I.T.A. NO.2126 & 2749/DEL/2013 130 AMOUNTS HAVE BEEN PAID BY THE BUYERS WITHOUT ANY OB LIGATION ON THE ASSESSEE TO PERFORM BY PROVIDING THE SERVICES. IN V IEW OF THIS, WE CONFIRM THE ORDER OF CIT (A) IN DELETING THE ADDITI ON OF RS. 4,94,00,550/-. ON ACCOUNT OF SECURITY DEPOSITS. IN THE RESULT, THE GROUND NO.27 OF THE REVENUES APPEAL IS DISMISSED. 111. ACCORDINGLY, FOLLOWING THE SAME PRECEDENCE THI S ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 112. IN GROUND NO.9, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION ON ACCOUNT OF NET INTEREST FEE SECURITY DEPOSITS RECEIPT OF RS.3,30,893/-. THIS AMOUNT HAS BEEN ADDED BY THE ASSESSING OFFICER ON THE GROUND THAT MAINTENANCE CHARGES COLLECTED BY THE ASSESSEE ARE T HE SAME AS HAS BEEN COLLECTED BY THE MAINTENANCE AGENCIES. THERE WAS NO LIABILITY OF THE ASSESSEE TO PAY BACK THIS AMOUN T TO THE BUYERS, AND THEREFORE, THIS AMOUNT IS INCOME GENERA TED BY THE ASSESSEE WHICH SHOULD BE LIABLE TO BE TAXED. 113. LD. CIT(A) HAS DELETED THE ADDITION MADE BY TH E ASSESSING OFFICER IN THE FOLLOWING MANNER: 16.9 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT, OBSERVATION OF THE ASSESSING OFFICER, DECISION OF C IT (APPEALS) FOR A.Y. 2006-07 AND A.Y. 2007-08 WHICH HAVE DECIDED TH IS ISSUE IN FAVOUR OF THE APPELLANT COMPANY AND VARIOUS JUDICIA L PRONOUNCEMENTS AVAILABLE ON THE ISSUE. IT IS SEEN THAT THAT THESE DEPOSITS WERE RECEIVED IN TERMS OF SALE AGREEMENT FROM CUSTOMERS AS INTEREST FREE SECURITY DEPOSITS ON ACCOUNT OF BUYERS OBLIGATION T O REGULARLY PAY TO THE APPELLANT OR ANY OTHER AGENCY APPOINTED BY THE APPELLANT IN RESPECT OF INSURANCE PREMIUM, MAINTENANCE ETC. THES E AMOUNTS ARE REFUNDABLE TO CUSTOMERS/ RESIDENT ASSOCIATIONS, ONC E A SOCIETY OR I.T.A. NO.2126 & 2749/DEL/2013 131 ASSOCIATION IS FORMED. IN THE AGREEMENT TO SELL, IT IS SPECIFICALLY MENTIONED THAT THESE INTEREST FREE DEPOSITS WERE TA KEN FROM THE CUSTOMERS TO MEET CERTAIN FUTURE LIABILITIES LIKE I NSURANCE PREMIUM AND MAINTENANCE CHARGES OF THE BUILDING. FOR THESE RECE IPTS, A SEPARATE ACCOUNT IS MAINTAINED AND AS AND WHEN THE BUILDINGS OR THE COMPLEX IS HANDED OVER TO THE RESIDENT ASSOCIATION OR CONDO MINIUM ASSOCIATION SUCH DEPOSITS ARE HANDED OVER TO THEM FOR MAINTAINI NG THE BUILDING AND PAYMENT OF INSURANCE PREMIUM OF BUILDING OUT OF INTEREST RECEIVED FROM SUCH DEPOSITS. SUCH DEPOSITS ARE NOT FORMING P ART OF SALE PROCEEDS, THEREFORE, THE SAME CANNOT BE TREATED AS TRADING RECEIPTS IN THE HANDS OF THE APPELLANT. THERE IS A REGULAR MOVE MENT OF FUNDS FOR UTILIZATION OF THE SAME FOR MAINTENANCE AND PAYMENT OF INSURANCE PREMIUM FROM THIS ACCOUNT. HENCE, THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST FREE DEPOS ITS IS DELETED. THE RELIANCE IN THIS REGARD IS PLACED TO THE DECISI ON OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. GOYAL GASES PVT. LTD. ( SUPRA) , WHEREIN SECURITY DEPOSITS RECEIVED BY THE SAID COMP ANY WERE NOT HELD AS REVENUE RECEIPT. 114. THE TRIBUNAL ALSO IN ASSESSMENT YEAR 2006-07 H AS DISMISSED THE REVENUES APPEAL AFTER OBSERVING AND HOLDING AS UNDER: 240. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTE NTIONS. IT IS A FACT THAT THESE DEPOSITS ARE RECEIVED IN TERMS OF SALE A GREEMENT FOR CUSTOMERS AS SECURITY DEPOSIT TILL THE FORMATION OF CONDOMINIUM AND SOCIETY. THESE DEPOSITS ARE TAKEN AS A SAFEGUARD TO DEFRAY THE MAINTENANCE EXPENDITURE OF THE SOCIETY AND TO KEEP THESE DEPOSITS FOR INSURANCE PREMIUM AND MAINTENANCE. THEY ARE REFUNDA BLE TO RESIDENT WELFARE ASSOCIATIONS. CIT (A) RELYING ON THE DECISI ON OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. GO EL GASES PVT. LTD. 188 ITR 216 (DEL.) HELD THAT SECURITY DEPOSIT CANNO T BE CHARGED TO TAX I.T.A. NO.2126 & 2749/DEL/2013 132 AS AN INCOME. IN VIEW OF THIS, WE DO NOT FIND ANY I NFIRMITY IN THE ORDER OF THE CIT (A) WHEN DEPOSITS ARE WITH A PURPOSE, TH E DEPOSITORS ARE IDENTIFIED, THERE IS A REGULAR METHOD OF ACCOUNTING ADOPTED IN PAST FOR TREATMENT OF THIS INCOME WHICH IS ACCEPTED BY THE R EVENUE AND THERE IS AN OBLIGATION CAST UPON THE ASSESSEE. HENCE, GROUND NO.28 OF THE REVENUES APPEAL IS DISMISSED. 115. ACCORDINGLY, FOLLOWING THE AFORESAID ORDER, TH IS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND REVENUES GROUND IS DISMISSED. 116. THE NEXT ISSUE RELATES TO DELETION OF ADDITION ON ACCOUNT OF NET REGISTRATION CHARGES RECEIVED AT RS.8,49,20,884/-. 117. LD. ASSESSING OFFICER NOTED THAT AS PER CLAUSE 13 OF THE BUYERS AGREEMENT, IT IS MENTIONED THAT THE C OMPANY ALONG WITH SUBSIDIARY COMPANY WILL PREPARE AND EXEC UTE CONVEYANCE DEED IN FAVOUR OF THE BUYER ONLY AFTER R ECEIVING THE FULL PAYMENT OF THE TOTAL PRICE OF THE PROPERTY , PARKING SPACE, ALL SECURITY DEPOSITS, REGISTRATION CHARGES ETC. IF THE BUYER IS IN DEFAULT OF ANY OF THE PAYMENT, THEN THE COMPANY CAN WITHHOLD THE REGISTRATION OF THE CONVEYANCE DEE D IN FAVOUR OF THE BUYER TILL THE FULL PAYMENT IS MADE B Y THE BUYER. THIS CLAUSE MEANS AN OBLIGATION ON THE BUYER TO UND ERTAKE THE CONVEYANCE DEED WITHIN THE TIME STIPULATED BY T HE COMPANY, FAILING WHICH, IN TERMS OF CLAUSE 12 OF TH E AGREEMENT, THE COMPANY CAN CANCEL THE ALLOTMENT AND FORFEIT THE AMOUNT RECEIVED FROM THE BUYER. THE ASSESSEES CONTENTION BEFORE THE ASSESSING OFFICER WAS THAT RE AL NATURE OF I.T.A. NO.2126 & 2749/DEL/2013 133 THE BALANCE IS THAT BUYERS HAVE PAID ADVANCE BILLS TO THE ASSESSEE AND ACCORDINGLY THIS HAS BEEN SHOWN AS LIA BILITY IN THE BALANCE-SHEET AND THIS METHOD HAS BEEN CONSISTE NTLY FOLLOWED BY THE ASSESSEE IN THE EARLIER ASSESSMENT YEARS. HOWEVER, THE LD. ASSESSING OFFICER HELD THAT THESE ARE NOT CORRECT FACT BECAUSE SIMILARLY ADDITIONS HAVE BEEN MADE IN THE ASSESSMENT YEARS 2006-07 AND 2007-08 BY THE ASS ESSING OFFICER. THE ASSESSING OFFICER HAS ALSO ACCOMPANIED THE ASSESSEE COMPANY HAS FURNISHED COMPANY-WISE, PROPER TY- WISE OF THE PERSONS FROM WHOM REGISTRATION CHARGES WERE RECEIVED DURING THE FINANCIAL YEAR 2007-08 WHICH CA NNOT CONTAINS THE SUBSEQUENT DATES OF PAYMENT OF REGISTR ATION CHARGES TILL 31.12.2010. FROM THESE DETAILS, ASSESS ING OFFICER HELD THAT IT IS DIFFICULT TO ASSESSED THE AMOUNT SP ENT UP TO THE PERIOD ENDING 31.02.2010 WHICH CORRESPONDING TO THE AMOUNT RECEIVED IN THE FINANCIAL YEAR 2007-08 AND WHETHER THE AMOUNT OF RS.8,49,20,884/- RECEIVED IN THE YEAR WAS ACTUALLY SPEND TILL 31.12.12010 ASSESSEE HAS ALSO NOT GIVEN PROOF OF DEPOSIT OF REGISTRATION CHARGES AND HAS ONLY ENCLOS ED THE LIST. HE THUS CONCLUDED ASSESSEE HAS NOT UTILIZED THE AMO UNT RECEIVED IN ACCOUNT FOR MORE THAN TWO YEARS, AND TH EREFORE, IT IS IN THE NATURE OF INCOME AND ASSESSEE MAY CLAIM T HE EXPENDITURE AGAINST SUCH INCOME IN THE YEAR WHEN TH E REGISTRATION CHARGES ARE PAID TO THE CONCERN PARTIE S IN THESE MANNER HE HAS MADE THE ADDITION. 118. LD. CIT (A) HAS DELETED THE ADDITION AFTER OBSERVING AS UNDER: I.T.A. NO.2126 & 2749/DEL/2013 134 17.15 I HAVE CONSIDERED THE SUBMISSION OF THE AP PELLANT, OBSERVATION OF THE ASSESSING OFFICER, DECISION OF C IT (APPEALS) FOR ASSESSMENT YEARS 2006-07 AND 2007-08 IN APPELLANTS OWN CASE WHEREIN THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF TH E APPELLANT AND VARIOUS JUDICIAL PRONOUNCEMENTS ON THE ISSUE. IT IS SEEN THAT REGISTRATION CHARGES ARE RECEIVED FROM THE BUYERS O F THE PLOTS/FLATS ALONGWITH OTHER CHARGES TO GET THE FLATS/PLOTS REGI STERED IN THE NAME OF BUYER. THERE IS TIME GAP BETWEEN THE RECEIPT OF SUC H CHARGES AND ACTUAL REGISTRATION OF THE FLAT/PLOT. BEFORE ACTUAL REGISTRATION TAKES PLACE, THE APPELLANT HAS TO PAY STAMP CHARGES OR IT HAS TO GET THE DOCUMENTS FRANKING FOR THE STAMP CHARGES. THEREFORE , AFTER PAYMENT OF FRANKING/STAMP CHARGES A DATE IS FIXED FOR REGIS TRATION OF THE PROPERTY. THIS PROCEDURE TAKES TIME, THEREFORE, THE AMOUNT RECEIVED ON ACCOUNT OF REGISTRATION CHARGES ARE CREDITED IN THE ACCOUNT MAINTAINED UNDER THE HEAD REGISTRATION CHARGES. THESE REGIST RATION CHARGES HAVE BEEN SHOWN AS LIABILITY IN THE BALANCE SHEET OF THE APPELLANT. IT IS ALSO SEEN THAT SOME TIME REGISTRATION CHARGES ARE RECEIV ED FROM THE CUSTOMERS BUT ACTUAL REGISTRATION COULD NOT TAKES P LACE DUE TO NON AVAILABILITY OF PERSON CONCERNED OR FOR WANT OF OTH ER FORMALITIES OR DOCUMENTS. THEREFORE, THE MONEY RECEIVED IN THIS AC COUNT IS KEPT IN A SEPARATE ACCOUNT UNDER THE HEAD CURRENT LIABILITY AS THE SAME DOES NOT BELONG TO THE APPELLANT. THE APPELLANT IS A CUS TODIAN OF THIS AMOUNT WHICH ULTIMATELY IS TO BE PAID TO THE GOVERN MENT. AS OBSERVED BY THE SPECIAL AUDITORS THAT OUT OF AN AMOUNT OF RS .24.76 CRORE RECEIVED DURING THE YEAR, AN AMOUNT OF RS. 16.29 CR ORE HAS BEEN SPENT ON REGISTRATION CHARGES. THIS SHOWS THAT THERE IS A REGULAR MOVEMENT OF FUNDS BY WAY OF CREDIT OR DEBIT IN THIS ACCOUNT WHICH HAS BEEN UTILIZED FOR REGISTRATION OF CONVEYANCE DEED IN FAV OUR OF THE CUSTOMERS. HENCE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN T REATING THE REGISTRATION CHARGES AS APPELLANTS INCOME. HENCE, THE ADDITION OF RS. 8,49,20,884/- MADE BY THE ASSESSING OFFICER IS DEL ETED. I.T.A. NO.2126 & 2749/DEL/2013 135 119. WE FIND THAT SIMILAR ISSUE WAS DECIDED BY T HE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007-08 HAS DISMISSED THE REVENUES APPEAL AFTER OBSERVING AND HOLDING AS UNDER: 244. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTEN TIONS. IT IS NOTED THAT THIS IS THE AMOUNT WHICH IS COLLECTED BY THE B UYERS WITH SPECIFIC OBJECT OF GETTING EXCLUSION OF CONVEYANCE DEED IN FAVOUR OF THE BUYER. IN FACT, IT IS AN ADVANCE COLLECTED BY T HE ASSESSEE FROM THE BUYER TOWARDS REGISTRATION CHARGES WITH THE OFF ICE OF THE REGISTRAR FOR CONVEYANCE DEED REGISTRATION. AT THE TIME OF REGISTRATION, ASSESSEE INCURS THIS EXPENDITURE BY D EBITING TO THIS ACCOUNT OF THAT PARTICULAR CUSTOMER. THE TOTAL RECE IPT OF REGISTRATION CHARGES IS IDENTIFIED WITH RESPECT TO EACH OF THE B UYER AND THERE ARE MOVEMENT IN RESPECTIVE ACCOUNTS. IN FACT, IT IS A P AST THROUGH COST COLLECTED BY THE ASSESSEE FROM THE BUYER TO BE INCU RRED BY ASSESSEE ON BEHALF OF THE BUYER. IN VIEW OF THESE FACTS, THE SE RECEIPTS CANNOT PARTAKE CHARACTER OF THE REVENUE IN THE HANDS OF TH E ASSESSEE. IT IS ALSO NOT THE CASE OF THE AO THAT THE DEPOSITORS ARE NOT IDENTIFIED AND DESPITE THE CONVEYANCE DEED EXECUTED BY THE ASS ESSEE, THE AMOUNT HAS NOT BEEN INCURRED. IN ABSENCE OF THIS FI NDING, IT IS NOT POSSIBLE TO CONFIRM THE DISALLOWANCE. THEREFORE, WE CONFIRM THE ORDER OF THE CIT (A) IN DELETING THE ADDITION OF RS .18,66,82,603/- BEING CREDIT BALANCE OF REGISTRATION CHARGES RECEIV ED FROM THE CUSTOMERS. GROUND NO.29 OF THE REVENUES APPEAL IS DISMISSED. 2. FURTHER, THE DEPARTMENT HAS ACCEPTED THIS ISSUE AS THE ABOVE FINDING OF HONBLE ITAT IN AY 2006-07 HAS NOT BEEN CHALLENGED BEFORE HIGH COURT. ALSO, THE ASSESSING OFFICER HIMS ELF HAS ACCEPTED THIS CLAIM FROM AY 2012-13 ONWARDS AND NO ADDITION HAS BEEN MADE IN THIS REGARD. I.T.A. NO.2126 & 2749/DEL/2013 136 120. FURTHER, LEARNED COUNSEL HAS INFORMED THAT THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE BY LD. CIT (A) IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 AND THE DEPART MENT HAS NOT PREFERRED ANY SECOND APPEAL AND FURTHER, NO ADDITION HAS BEEN MADE FROM ASSESSMENT YEAR 2012-13 ONWARDS. IN VIEW OF THE TRIBUNAL ORDER AND AS A MATTER OF CONSI STENCY, IN THIS YEAR ALSO WE DELETE THE SAID ADDITION. 121. IN GROUND NO.11, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION ON ACCOUNT OF CLOSING CREDIT B ALANCES IN INDIRECT TAXES ACCOUNT AT RS.1,81,15,047/-. 122. LD. ASSESSING OFFICER AFTER CONSIDERING THE EN TIRE FACTS AND SUBMISSION OF THE ASSESSEE NOTED THAT AS PER AS SESSEES OWN SUBMISSION IN DIRECT TAX AMOUNTS WHICH RECEIVED FROM THE CUSTOMERS AS PER CLAUSE 32(B) OF THE AGREEMENT TO SALE ENTERED INTO WITH DIFFERENT CUSTOMERS. HE OBSERVED THAT THESE RECEIPTS ARE RECEIVED FROM THE CUSTOMERS IN TERMS O F THE CONTRACTUAL OBLIGATION AND TREATED AS PART OF THE S ALE PRICE WHILE WORKING OUT THE POCM SALE REVENUE. ASSESSING OFFICER HELD THAT AS THE ASSESSEE ITSELF HAS STATED THAT TH E AMOUNT IN RESPECT OF INDIRECT TAXES ARE A PART OF SALE PRICE, THEREFORE, IT IS CLEAR THAT THE AMOUNTS ARE IN THE NATURE OF INCOME AND SHOULD BE RECOGNISED AS INCOME OF THE FINANCIAL YEA R IN WHICH THE SAME IS RECEIVED FROM THE CUSTOMERS INSTEAD OF BEING SHOWN UNDER THE HEAD OF LIABILITY IN THE BOOKS OF A CCOUNTS. MOREOVER, THE EXPENDITURE ON TAXES IS ALLOWED ON PA YMENT BASIS AND IN THIS CASE SINCE THE ASSESSEE HAS RECEI VED INDIRECT I.T.A. NO.2126 & 2749/DEL/2013 137 TAXES, THEREFORE, IT IS TO BE TREATED AS INCOME OF THE ASSESSEE. THE ASSESSEE MAY CLAIM THE EXPENDITURE AGAINST THE INDIRECT TAXES RECOGNISED AS INCOME IN THE BOOKS, IN THE YEA R OF DEPOSIT OF THE SAME WITH THE CONCERNED DEPARTMENT. WITH THESE REMARKS, AN AMOUNT OF RS. 1,81,15,047.75 BEIN G THE INDIRECT TAX RECEIVED DURING THE YEAR BUT NOT SHOWN AS INCOME FOR THE ASSESSMENT YEAR 2008-09 WAS ADDED BY THE AS SESSING OFFICER TO THE INCOME OF THE ASSESSEE. 123. LD. CIT (A) HAS DELETED THE ADDITION IN THE FOLLOWING MANNER: 18.9 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT, OBSERVATION OF THE ASSESSING OFFICER, DECISION OF C IT (A)-XVIII FOR A.Y. 2006-07 IN APPELLANTS OWN CASE WHICH HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT AND VARIOUS JUDICIAL PRO NOUNCEMENTS ON THE ISSUE. IT IS SEEN THAT CREDIT BALANCE OF INDIRE CT TAXES I.E. SERVICE TAX WAS RECEIVED FROM THE CUSTOMERS AS PER THE CLAU SE - 32(B) OF THE AGREEMENT TO SELL ENTERED INTO WITH DIFFERENT CUSTO MERS. THESE AMOUNTS WERE RECOVERED FROM THE CUSTOMERS IN TERMS OF THE CONTRACTUAL OBLIGATION AND TREATED AS PART OF SALE PRICE WHILE WORKING OUT THE POCM SALE REVENUE. THESE INDIRECT TAXES HAVE BEEN SHOWN AS LIABILITY IN THE BALANCE SHEET OF THE APPELLANT. THEREFORE, THE MONEY RECEIVED IN THIS ACCOUNT IS KE PT IN A SEPARATE ACCOUNT UNDER THE HEAD CURRENT LIABILITY AS THE S AME DOES NOT BELONG TO THE APPELLANT. THE APPELLANT IS A CUSTODI AN OF THIS AMOUNT WHICH ULTIMATELY IS TO BE PAID TO THE GOVERNMENT. I T IS NOTED THAT THERE IS A REGULAR MOVEMENT OF FUNDS BY WAY OF CRED IT OR DEBIT IN THIS ACCOUNT WHICH HAS BEEN SUBSEQUENTLY UTILIZED/P AID BY THE APPELLANT TO THE GOVT AS PER THE DUE DATE. HENCE, T HE ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING THE SERVICE T AX COLLECTED FROM I.T.A. NO.2126 & 2749/DEL/2013 138 CUSTOMERS AS APPELLANTS INCOME. HENCE, THE ADDITIO N OF RS.1,81,15,047/- MADE BY THE ASSESSING OFFICER IS D ELETED. 124. BEFORE US, IT HAS BEEN BROUGHT ON RECORD BY THE LEARNED COUNSEL THAT THIS ISSUE IS FULLY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE LD. CIT(A) IN ASSESSEE S CASE FOR ASSESSMENT YEAR 2006-07 AND DEPARTMENT HAS NOT PREF ERRED ANY SECOND APPEAL IN ITAT. OTHERWISE ALSO, WE ARE O F THE VIEW THAT, THE INDIRECT TAX COLLECTED FROM THE CUSTOMER ON BEHALF OF THE REVENUE AUTHORITIES, WHICH THE ASSESSEE IS LIAB LE TO PAY TO THE GOVERNMENT, THEN SUCH AN ACTION OF THE ASSESSIN G OFFICER IN TREATING THE INDIRECT TAXES AS INCOME OF THE ASS ESSEE IS HIGHLY MISCONCEIVED AND UNJUSTIFIED. IN ANY CASE, T HIS AMOUNT HAS BEEN SUBSEQUENTLY PAID AND THEREFORE, IT CANNOT BE TREATED AS INCOME IN THIS YEAR. ACCORDINGLY, THE OR DER OF THE LD. CIT (A) IS AFFIRMED. 125. IN GROUND NO.12, THE REVENUE HAS CHALLENGED T HE DELETION OF ADDITION RS. 15,02,99,365/- ON ACCOUNT OF DISALLOWANCE OF EXPENSES TOWARDS NON ALLOCATION OF OVERHEADS. 126. LD. ASSESSING OFFICER BASED ON SPECIAL AUDIT ORS OBSERVATION NOTED THAT THERE WERE CERTAIN DISCREPAN CIES WITH REGARD TO APPORTIONMENT OF COMMON OVERHEAD EXPENSES INCURRED BY THE ASSESSEE COMPANY BUT ATTRIBUTABLE T O GROUP CONCERN WERE BENEFITTING FROM SUCH EXPENDITURE. BAS ED ON THE OBSERVATIONS OF THE SPECIAL AUDITORS, THE ASSESSING OFFICER REQUIRED THE ASSESSEE AS TO WHY THE EXPENDITURE OF RS.15,02,99,365/- BENEFIT OF WHICH HAS ACCRUED TO T HE GROUP I.T.A. NO.2126 & 2749/DEL/2013 139 ENTITIES LIKE, DLF INFOCITY DEVELOPERS (CHENNAI LIM ITED) AND DLF CYBER CITY DEVELOPERS LTD. BE APPORTIONED TO TH EM AND CORRESPONDINGLY THE SAME SHOULD BE DISALLOWED IN TH E HANDS OF THE ASSESSEE. IN RESPONSE, THE ASSESSEE HAS SUBM ITTED THE DETAIL REPLY AND SUBMITTED THAT IF INCOME EXPENDITU RE HAS BEEN INCURRED ON BEHALF OF COMPANY, THE SAME HAVE B EEN DULY RECOVERED FROM THOSE COMPANIES SPECIFICALLY AND ASS ESSEE HAS NOT DEBITED TO THE P&L ACCOUNT. FOR THE SPECIFIC EX PENSES WHICH WERE DEBITED TO THE CONCERN GROUP COMPANIES T HERE IS NO EXPENDITURE WHICH PERTAINS TO OTHER GROUP COMPAN IES AND ALL THE EXPENSES DEBITED IN THE P&L ACCOUNT ARE REL ATED TO THE BUSINESS OF THE ASSESSEE. EVEN THE SPECIAL AUDITORS HAVE NOT BEEN POINTED OUT EVEN A SINGLE VOUCHER PERTAINING T O OTHER GROUP COMPANY WHICH HAS BEEN WRONGLY DEBITED TO THE P & L ACCOUNT OF THE ASSESSEE. REGARDING OVERHEAD ALLOCAT ION THE ASSESSEE HAS SUBMITTED AS UNDER: A. THAT THE ASSESSEE COMPANY HAS NOT DEVELOPED THE SEZ RATHER ONLY CONSTRUCTED THE BUILDINGS. THE DEDUCTION U/S 80-IAB IS AVAILABLE ONLY IN THE CASE OF DEVELOPMENT OF SEZ. MERE CONSTRUCTION O F BARE SHELL BUILDINGS WILL ALLOW THE ASSESSEE THE DEDUCTION U/S 80-IAB. S ECTION 80-IAB STATES THAT PROFIT AND GAINS DERIVED FROM BUSINESS OF DEVE LOPING SEZ. THUS, THE DEDUCTION IS ONLY AVAILABLE ONCE THE SEZ IS DEVELOP ED AND IT CANNOT BE ALLOWED BEFORE THE STAGE OF DEVELOPMENT OF SEZ. B. SALE OF BUILDINGS TO THE CO-DEVELOPER IS NEITHE R AN ACTIVITY OF DEVELOPMENT OF SEZ NOR ONE OF THE AUTHORIZED OPERATIONS FOR SEZ NOTIFIED BY THE COMPETENT AUTHORITY. IT IS AN ISOLATED TRANSACTION GIVING ONE TIME INCOME FROM TRANSFER OF CAPITAL ASSETS. IT IS VERY CLEAR F ROM THE CO- DEVELOPER I.T.A. NO.2126 & 2749/DEL/2013 140 AGREEMENT AND LEASE DEED THAT THE INTENTION ON THE PART OF THE ASSESSEE COMPANY, FROM THE VERY BEGINNING WAS TO CONSTRUCT A ND SALE THE BUILDINGS AS A ONETIME ACTIVITY. SUCH ISOLATED TRANSACTION CA N NEVER BE TERMED AS BUSINESS ACTIVITY. CO-DEVELOPER AGREEMENT AND LEASE DEED VERY CLEARLY SHOWS THAT THE DEVELOPER HAS SOLD THE LAND AND BUIL DING AND LOSES ALL RIGHTS OVER THESE TRANSFERRED CAPITAL ASSETS AND THE RELIN QUISHMENT OF RIGHT IS IRREVOCABLE. C. THOUGH SEZ ACT PROHIBITS FOR SALE OF LAND THERE BY IMPLICITLY DENYING ANY BENEFIT TO A DEVELOPER WHO IS BASICALLY INTERESTED IN DERIVING INCOME BY TRANSFER OF ASSETS, THE ASSESSEE HAS FOUND A WAY TO OVERCOME THIS PROHIBITION BY CREATING 49 YEARS LEASE IN FAVOUR OF CO-DEVELOPER. IT IS PERTINENT TO NOTE THAT THE LEASE DEED IS RENEWABLE FURTHER AND THUS EFFECTIVELY TRANSFERRING THE LAND ALSO. PARA 2.3 AN D 5.1 OF THE LEASE DEED CLEARLY ALLOWS THE PARTIES TO RENEW THE LEASE DEED. THUS, THE ASSESSEE COMPANY HAS TRANSFERRED THE LAND IN ACTUAL SENSE AN D SUBSTANCE OF THIS PRESENT TRANSACTION MEANS SALE OF LAND. IN MOST OF THE CASES, SUBSTANCE OF THE TRANSACTION AND ITS FORM ARE ONE AND THE SAME. HOWEVER, THE SUBSTANCE CAN BE DIFFERENT FROM THE FORM OF THE TRANSACTION I N MANY CASES. IN THE PRESENT CASE, THE ASSESSING OFFICER HAS RIGHTLY GON E FOR THE SUBSTANCE OF THE TRANSACTION AND DISALLOWED THE DEDUCTION U/S 80-IAB CLAIMED BY THE ASSESSEE COMPANY AS THE LEASE DEED IS MERE EYE WASH AND ACTUAL TRANSACTION WAS SALE OF LAND WHICH IS CLEARLY NOT P ERMISSIBLE UNDER SEZ ACT. RELEVANT PARAS OF LEASE DEED ARE AT PAGE 135 & 136 OF THE PAPER BOOK II FILED BY THE COUNSEL OF THE ASSESSEE. D. THE TRANSFER OF BUILDING IS ABSOLUTE AND AS PER THE AMENDED AGREEMENT AND LEASE DEED, CO-DEVELOPER SHALL BE TREATED AS OWNER OF THE BARE SHELL BUILDING AND THE WARM SHELL BUILDING AFTER ADDITION S ETC AND WILL HAVE EXCLUSIVE RIGHTS TO LET, MORTGAGE, OR ALLOW USE OF ALL OR ANY PART OF BUILDINGS. I.T.A. NO.2126 & 2749/DEL/2013 141 E. THAT IF THE DEDUCTION U/S 80-IAB IS ALLOWED TO THE ASSESSEE COMPANY IN THIS CASE AND THE CO-DEVELOPER DOES NOT DEVELOP THE SEZ LATER ON , HOW CAN WE SAY THAT THE SEZ HAS BEEN DEVELOPED AND WHY SHOULD THE DEDUCTION BE ALLOWED TO THE ASSESSEE COMPANY AT THI S STAGE WHERE THE DEVELOPMENT OF SEZ HAS NOT BEEN DONE . ALLOWING THE DEDUCTION AT THE STAGE OF CONSTRUCTION OF BARE SHELL BUILDING WOULD BE AGAINST THE PROVISIONS OF SEZ AND INCOME TAX ACT. 127. LD. ASSESSING OFFICER AFTER CONSIDERING THE AS SESSEES REPLY HAD OBSERVED AS UNDER: 12.5 THE REPLY OF THE ASSESSEE HAS BEEN CONSIDER ED AND FROM THE REPLY IT EMERGES THAT THE ASSESSEE HAS STA TED THAT IT IS A LISTED COMPANY AND NOT INCURRED ANY EXPENDITUR E ON BEHALF OF ITS ASSOCIATED COMPANIES. THE ASSESSEE CO MPANY HAS ARGUED THAT IN CASE OF BOTH THE COMPANIES TO WH ICH THE EXPENSES HAVE BEEN ALLOCATED THE MAIN PROJECT UNDER TAKEN BY THE TWO COMPANIES IS DEVELOPMENT OF SEZ AND HENCE ADMINISTRATIVE ACTIVITIES IN THESE COMPANIES ARE MI NIMAL AND THERE IS NO NEED FOR ALLOCATION OF FURTHER OVERHEAD S. BOTH THESE COMPANIES HAVE INCURRED OVERHEAD EXPENDITURE WHICH FORMED PART OF DEVELOPMENT COST CONSIDERED IN POCM. THIS A RGUMENT OF THE COMPANY IS NOT TENABLE AS THE TWO COMPANIES DLF INFO CITY DEVELOPERS (CHENNAI) LTD AND DLF CYBER CITY DE VELOPER LTD. DURING THE ASSTT. YEAR 2008-09 HAD EARNED DEVE LOPMENT INCOME OF RS. 1,68,686.15 LACS AND RS. 1,63,049.03 LACS RESPECTIVELY AND AGAINST THE SAME THE OVERHEAD EXPE NDITURE SHOWN BY THESE COMPANIES IS RS. 71.58 LACS AND RS. 1,194.51 LACS RESPECTIVELY. IN FACT, IN CASE OF DLF CYBER CITY DEVELOPERS, THE EXPENDITURE OF RS. 1194.51 LACS INC LUDES I.T.A. NO.2126 & 2749/DEL/2013 142 COMMISSION AND BROKERAGE EXPENDITURE OF RS. 1155.79 LACS AND IF THIS IS REDUCED THEN THE OVERHEAD EXPENDITUR E INCURRED WOULD BE JUST RS. 38.72 LACS. IT IS DIFFICULT TO IM AGINE THAT THE TWO COMPANIES EARNING DEVELOPMENT INCOME OF RS. 168 686 LACS AND RS. 163049 LACS WOULD HAVE INCURRED OVERHE AD EXPENDITURE OF RS. 71.58 LAC AND 38.72 LACS ONLY. T HIS CLEARLY POINTS TO THE FACT THAT THESE TWO COMPANIES MUST HA VE BENEFITTED FROM THE OVERHEAD EXPENDITURE INCURRED B Y DLF LTD. IN THE PREVIOUS YEAR'S ALSO DLF LTD HAS ITSELF ALLO CATED OVERHEAD EXPENDITURE TO ITS ASSOCIATED CONCERNS. 12.6 THE ASSESSEE HAS CONTENDED THAT REVENUE IMPACT OF WHOLE OF THIS EXERCISE IS REVENUE NEUTRAL SINCE IF CERTAIN AMOUNT OF EXPENSES IS HELD TO BE ALLOCABLE TO GROUP ENTITIES, THE SAME WILL HAVE TO BE ALLOWED IN THE HANDS OF TH OSE ENTITIES. IN THIS RESPECT THE POINT TO BE OBSERVED IS THAT THE TWO COMPANIES IDENTIFIED BY THE SPECIAL AUDITORS WHICH HAD INCURRED NEGLIGIBLE OVERHEADS HAVE EARNED INCOME FR OM DEVELOPMENT OF SEZ AND CLAIMED DEDUCTION EQUAL TO 1 00% OF PROFIT EARNED ON SEZ DEVELOPMENT U/S 801AB, HENCE T HE ARGUMENT OF THE ASSESSEE THAT THIS EXERCISE WOULD B E REVENUE NEUTRAL IS INCORRECT. 12.7 THE ASSESSEE HAS STATED IN THE REPLY THAT IN T HESE TWO COMPANIES EVEN THOUGH CONSTRUCTION ACTIVITIES WERE GOING ON, THERE WAS NO MARKETING, PLANNING OR ANY OTHER HO LE VEL ADMINISTRATIVE WORK INVOLVED DURING THE YEAR. THE A SSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THIS ARGUMENT WIT H ANY DOCUMENTARY EVIDENCE. 12.8 THE ASSESSEE HAS RELIED ON CERTAIN CITATIONS W HEREIN IT HAS BEEN HELD THAT EXPENSES INCURRED FOR BUSINESS I.T.A. NO.2126 & 2749/DEL/2013 143 REQUIREMENT ARE ALLOWABLE AND ANY INCIDENTAL BENEFI T ARISING TO A THIRD PARTY OUT OF SUCH EXPENDITURE CANNOT BE MADE BASIS FOR DISALLOWING THE SAME. THESE CITATIONS ARE NOT R ELEVANT IN THE PRESENT CASE SINCE THE EXPENSES INCURRED BY THE ASSESSEE HAVE BENEFITTED THE ASSOCIATED COMPANIES OF THE ASS ESSEE WHO ARE IN SIMILAR LINE OF BUSINESS AS THAT OF THE ASSE SSEE AND IN THE PAST ALSO THE ASSESSEE ITSELF HAD ALLOCATED CER TAIN EXPENDITURE TO ITS ASSOCIATED COMPANIES. THE ASSESS EE HAS ALSO MENTIONED CERTAIN CITATIONS REGARDING BUSINESS EXPEDIENCY AND STATED THAT THE EXPENSES MUST BE INC IDENTAL TO THE BUSINESS OF THE ASSESSEE. THE QUESTION HERE IS THAT THE EXPENSES INCURRED BY THE ASSESSEE HAVE BENEFITTED T HE ASSOCIATED CONCERNS AND THEREFORE THE SAME ARE TO B E APPORTIONED TO THE ASSOCIATED CONCERNS. THE ASSOCIA TED CONCERNS DURING THE YEAR HAVE DEVELOPED SEZ AND THE ASSESSEE COMPANY DURING THE YEAR HAD ALSO EARNED I NCOME FROM DEVELOPMENT OF SEZ BUT THERE IS SUBSTANTIAL VA RIANCE IN THE LEVEL OF EXPENSES INCURRED AND ACCORDINGLY SOME EXPENSES ARE TO BE ATTRIBUTABLE FOR THE BENEFIT OF ASSOCIATE D CONCERNS SINCE THERE IS SIMILAR LINE OF BUSINESS. THE ASSOCI ATED CONCERNS HAS CLAIMED 100% DEDUCTION U/S 80IAB AND THEREFORE BY TRANSFERRING THE EXPENSES OF ASSOCIATED CONCERNS TO THE ASSESSEE COMPANY SOME PORTION OF SUCH EXPENSES ARE TO BE ALLOCATED TO THE ASSOCIATED COMPANIES. 12.9THE ASSESSEE HAS ALSO CITED JUDGEMENT IN THE CA SE OF NESTLE INDIA LIMITED VS DCIT (2009) 27 SOT 9(DELHI) . IN THIS CASE IT WAS HELD THAT THE ASSESSEE COMPANY HAD INCU RRED EXPENDITURE ON ACCOUNT OF ADVERTISEMENT AND SALES P ROMOTION IN RESPECT OF ONLY THOSE PRODUCTS IN WHICH THE INDI AN COMPANY I.T.A. NO.2126 & 2749/DEL/2013 144 DEALING IN. THUS, THE EXPENDITURE HAD BEEN INCURRED TO PROMOTE SALES IN INDIA. THEREFORE, THOSE EXPENSES W ERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IN THIS CASE THE ASSOCIATED CONCERNS OF NESTLE INDIA ARE SITUATED OUTSIDE INDIA AND IT WAS EASILY ESTABLISHED BY NESTLE THAT THE ADVERTISEMENT EXPENSES WERE INCURRED IN RESPECT OF PRODUCTS DEALT BY THE INDIAN COMPANY. HO WEVER, IN THE CASE OF THE ASSESSEE THE LINE OF BUSINESS OF TH E ASSESSEE COMPANY AND ITS ASSOCIATED CONCERNS IS IDENTICAL AND THEREFORE THE PERCENTAGE OF OVERHEAD EXPENDITURE IN CURRED BY THE ASSESSEE AND ITS ASSOCIATED CONCERNS WOULD BE S IMILAR. THE SPECIAL AUDITOR IN THEIR REPORT HAVE REPORTED T HAT DLF LTD HAVE INCURRED ADMINISTRATIVE OVERHEADS OF 3.18% OF THE TOTAL TURNOVER BUT IN THE CASE OF DLF INFO CITY DEVELOPER S (CHENNAI) LTD. THE COMPANY HAS INCURRED ADMINISTRATIVE OVERHE ADS OF RS. 71.58 LACS AGAINST DEVELOPMENT INCOME OF RS. 1 68686 LACS WHICH IS JUST 0.042% OF TOTAL TURNOVER AND DLF CYBER CITY DEVELOPERS LTD HAVE INCURRED ADMINISTRATIVE OV ERHEADS OF RS. 38.72 LACS (AFTER REDUCING BROKERAGE AND COMMIS SION) AGAINST DEVELOPMENT INCOME OF RS. 163049 LACS WHICH IS JUST 0.023% OF TOTAL TURNOVER. THE LINE OF BUSINESS OF T HE ASSESSEE COMPANY AND ASSOCIATED CONCERN BEING IDENTICAL, THE PROPORTION OF OVERHEAD EXPENDITURE TO THE LEVEL OF BUSINESS SHOULD ALSO BE SIMILAR BUT AS MENTIONED ABOVE THERE IS SUBSTANTIAL VARIANCE IN THE PROPORTION OF OVERHEAD EXPENDITURE INCURRED BY THE ASSESSEE COMPANY VIS-A-VIS THE TWO ASSOCIATED CONCERNS. THE JUDGMENT OF NESTLE QUOTED BY THE ASSESSEE IS NOT AT ALL RELEVANT IN THE PRESENT CASE SINCE THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT THE OVERHE AD EXPENSES INCURRED WERE WHOLLY AND EXCLUSIVELY FOR I TS BENEFIT I.T.A. NO.2126 & 2749/DEL/2013 145 AND HAD NOT BENEFITTED THE ASSOCIATED CONCERNS. TH E ASSESSEE HAS NOT BEEN ABLE TO CONVINCINGLY EXPLAIN THE EXTRE MELY LOW LEVEL OF ADMINISTRATIVE OVERHEAD EXPENDITURE INCURR ED BY THE TWO ASSOCIATED CONCERNS AS COMPARED TO THE ASSESSEE COMPANY CONSIDERING THE SIMILAR LINE OF BUSINESS. 12.10 IN VIEW OF THE SAME IT CAN BE INFERRED THAT A PART OF OVERHEAD EXPENSES RELATABLE TO THE TWO ENTITIES STAND IN THE BOOKS OF THE ASSESSEE. SINCE THE BENEFIT OF SUCH EXPENDITURE DOE S NOT ACCRUE TO THE ASSESSEE BUT TO THE TWO GROUP ENTITIE S ALSO, THE EXPENDITURE OF RS.15,02,99,365/- AS WORKED OUT BY T HE SPECIAL AUDITORS IS DISALLOWED. 128. LD. CIT(A) HAS DELETED THE ADDITION IN THE F OLLOWING MANNER: 19.22 I HAVE CONSIDERED THE SUBMISSION OF THE APPE LLANT, OBSERVATION OF THE ASSESSING OFFICER, ORDER OF THE CIT (A)-XVIII FOR THE A.Y. 2006-07 AND MY OWN ORDER FOR A.Y. 2007 -08 WHEREIN THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELL ANT, AND VARIOUS CASE LAWS RELIED UPON BY THE APPELLANT ON THIS ISSU E. IT IS SEEN THAT APPELLANT COMPANY WAS ALLOCATING OVER HEAD EXPENSES TO ITS ASSOCIATE COMPANIES TILL OCTOBER 2006. HOWEVER, AF TER OCTOBER 2006, THE APPELLANT COMPANY STOPPED ALLOCATING OVER HEAD EXPENSES TO ITS GROUP COMPANIES AND TRANSFERRED THE CONCERNE D STAFF, WHO WERE PREVIOUSLY LOOKING AFTER THE AFFAIRS OF GROUP ENTITIES, TO THE RESPECTIVE ENTITIES. AFTER OCTOBER 2006, THE GROUP ENTITIES STARTED INCURRING THEIR OWN EXPENSES THEMSELVES AND THIS FA CT HAS BEEN VERIFIED BY THE SPECIAL AUDITORS DURING THE COURSE OF SPECIAL AUDIT. IT IS SEEN THAT THERE ARE CERTAIN HEADS OF EXPENSES WHICH WERE EXCLUSIVELY PERTAINING TO THE APPELLANT COMPANY AND COULD NOT HAVE BEEN ALLOCATED TO THE OTHER GROUP ENTITIES. IT IS A LSO SEEN FROM THE I.T.A. NO.2126 & 2749/DEL/2013 146 SPECIAL AUDIT REPORT THAT THE SPECIAL AUDITORS HAVE NOT BROUGHT OUT ANY INSTANCE OF EXPENDITURE SPECIFICALLY PERTAINING TO OTHER GROUP COMPANIES BUT HAS BEEN CLAIMED IN THE PROFIT AND LO SS ACCOUNT OF APPELLANT COMPANY DURING THE YEAR. THE ALLOCATION M ADE OUT BY THE SPECIAL AUDITORS WAS BASED ON THE PRESUMPTION WITHO UT BRINGING ANY MATERIAL ON RECORD. NO ALLOCATION OF OVERHEADS IS NEEDED IN THE CASE OF M/S. DLF INFO CITY DEVELOPERS (CHENNAI) LTD . AND DLF CYBER CITY DEVELOPERS LTD. BECAUSE THESE SUBSIDIARI ES HAVE THEIR OWN RESOURCES AND ARE MEETING OUT THEIR EXPENSES OW N THEIR OWN. IN THE CASE OF M/S DLF INFO CITY DEVELOPERS (CHENN AI) LTD. IT IS SEEN THAT THIS COMPANY HAS ONLY ONE PROJECT THAT IS THE DEVELOPMENT OF SEZ AT CHENNAI. THE ONLY ACTIVITY IN THIS COMPAN Y IS THE DEVELOPMENT OF SEZ BUILDING AND THE ADMINISTRATIVE ACTIVITY IS BARE MINIMUM AND HENCE THERE WAS NO REQUIREMENT OF THE A LLOCATION OF FURTHER EXPENSES. APART FROM THE ABOVE THE COMPANY HAD INCURRED OVERHEAD EXPENDITURE WHICH FORMED PART OF THE DEVEL OPMENT COST WHICH HAS BEEN CONSIDERED FOR POCM. THE DETAILS OF SUCH EXPENDITURE WAS FURNISHED TO THE ASSESSING OFFICER AT PAGE NO.1 OF APPELLANTS LETTER DATED 31.3.2011. THE AMOUNT OF O VERHEAD EXPENDITURE FORMING PART OF DEVELOPMENT COST COMES TO RS. 13,12,65,162/-. THIS EXPENDITURE INCLUDES THE OVERH EAD EXPENSES INCURRED BY THE DLF INFOCITY DEVELOPER (CHENNAI) LT D. IN THE CASE OF M/S. DLF CYBER CITY DEVELOPERS LTD, IT IS NOTED THAT THE MAIN PROJECT WAS ONLY DEVELOPMENT OF SEZ P ROJECT AT SECTOR 25 GURGAON. BESIDES, THE ABOVE PROJECT THIS COMPAN Y HAS ONLY RENTAL INCOME. THE ADMINISTRATIVE ACTIVITY IN THIS COMPANY IS ALSO MINIMAL AND HENCE THERE IS NO NEED OF ALLOCATION OF ANY FURTHER OVERHEADS. THIS COMPANY IS AGAIN SELF SUFFICIENT A ND HAS ITS OWN RESOURCES TO CARRY OUT THE ACTIVITY AND HENCE NO FU RTHER ALLOCATION IS REQUIRED. APART FROM THE ABOVE, THE COMPANY HAD INC URRED OVERHEAD EXPENDITURE WHICH FORMED PART OF THE DEVELOPMENT CO ST WHICH HAS BEEN CONSIDERED FOR POCM. THE DETAILS OF SUCH EXPEN DITURE WAS I.T.A. NO.2126 & 2749/DEL/2013 147 FURNISHED TO THE ASSESSING OFFICER AT PAGE NO.2 OF APPELLANTS LETTER DATED 31.3.2011. THE TOTAL COST OF THE OVERHEAD EXP ENDITURE FORMING PART OF DEVELOPMENT COST IS RS.9,73,06,213/-. THIS EXPENDITURE INCLUDES THE OVERHEAD EXPENSES INCURRED BY THE DLF CYBERCITY DEVELOPER LTD. 19.23 HENCE, IT IS CLEAR THAT NO BENEFIT HAS ACCRU ED TO GROUP COMPANIES NAMELY DLF INFO CITY DEVELOPERS (CHENNAI) LTD. AND DLF CYBER CITY DEVELOPERS LTD FROM THE EXPENSES OF RS.1 50,299,365/-, AS THESE EXPENSES WERE EXCLUSIVELY FOR THE BUSINESS OF THE APPELLANT COMPANY. THERE WAS NO JUSTIFICATION FOR D ISALLOWING THESE EXPENSES. THE ASSESSING OFFICER AS WELL AS SPECIAL AUDITORS HAVE NOT BROUGHT ANY MATERIAL ON RECORD WHICH CAN P ROVE THAT EXPENDITURE DEBITED IN THE P&L ACCOUNT OF THE APPEL LANT COMPANY WAS NOT INCURRED FOR THE BONAFIDE BUSINESS NEEDS OF THE APPELLANT COMPANY. THE APPELLANT COMPANY IS MAIN GROUP COMPAN Y AND EXPENDITURE INCURRED IN THIS COMPANY ARE BOUND TO B E HIGHER AND IN THE PROCESS OF INCURRING SUCH EXPENDITURE IF OTHER GROUP COMPANIES DERIVED SOME BENEFIT FROM SUCH EXPENSES, THE EXPEND ITURE CANNOT BE ALLOCATED TO THE COMPANIES WHO HAVE ALSO DERIVED SOME BENEFIT. THE GENUINENESS OF THE IMPUGNED EXPENDITURE FOR THE PURPOSE OF BUSINESS HAS NOT BEEN DISPUTED BY THE AO. FURTHER, UNDER THE FACTS AND CIRCUMSTANCES AS DISCUSSED ABOVE, IT CANNOT BE DENIED THAT THE SAID EXPENDITURE WAS NOT INCURRED WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF THE APPELLANTS BUSINESS. FURTHER, AS AR GUED BY THE LEARNED AR THAT ALL THE ABOVE GROUP COMPANIES OF TH E APPELLANT ARE SUBJECT TO TAX AT THE SAME RATE AND HENCE SHIFTING OF SUCH EXPENDITURE FROM APPELLANT COMPANY TO OTHER GROUP C OMPANIES WOULD BE FUTILE AND REVENUE NEUTRAL EXERCISE. CONSI DERING THE ABOVE, THE IMPUGNED DISALLOWANCE OF RS.15,02,99,365 /- MADE BY THE ASSESSING OFFICER CANNOT BE SUSTAINED. THE SAM E IS, THEREFORE, DELETED. I.T.A. NO.2126 & 2749/DEL/2013 148 129. THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 HAS DISMISSED THE REVENUES APPEAL ON THIS ISSUE AFTER OBSERVING AND HOLDING AS UNDER: 121. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTE NTIONS. THE BRIEF FACT IS THAT CERTAIN OVERHEAD EXPENSES INCURR ED BY THE ASSESSEE HAVE BEEN APPORTIONED TO THE OTHER GROUP C OMPANIES FOR THE REASON THAT BY INCURRING THOSE EXPENSES, THE AS SESSEE HAS PASSED ON SOME BENEFIT TO THOSE COMPANIES. THE AMOU NT OF 75% OF THAT EXPENDITURE HAS BEEN TRANSFERRED TO THE GROUP COMPANIES AND 30% OF THAT EXPENDITURE IS BORNE BY THE ASSESSEE CO MPANY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO FOUND THAT AN AMOUNT OF RS.20,79,10,574/- EXPENDITURE PERTAINING TO PAYMENT TO DIRECTORS, ADVERTISEMENTS, PRINTING AND STATIONERY, SECURITY CHARGES, LEAVE ENCASHMENT AND SALARY AND WAGES ARE NOT APPOR TIONED TO GROUP COMPANIES AND, THEREFORE, AO DISALLOWED 70% O F THOSE EXPENDITURE AMOUNTING TO RS.14,55,37,401/-. IT IS N OT THE CASE OF THE AO THAT THESE AMOUNT OF EXPENDITURE ARE NOT INC URRED BY THE ASSESSEE AND FURTHER VERACITY OF THOSE EXPENDITURE HAVE ALSO NOT BEEN DOUBTED. THE ONLY REASON FOR DISALLOWANCE IS T HAT ASSESSEE HAS NOT ALLOCATED THIS EXPENDITURE TO ITS VARIOUS G ROUP COMPANIES AND, THEREFORE, AO WAS OF THE VIEW THAT THIS EXPEND ITURE HAS NOT BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINE SS PURPOSE OF THE COMPANY. ON PERUSAL OF THE EXPENDITURE AND THE ORDERS OF THE LOWER AUTHORITIES, IT IS APPARENT THAT THE DIRECTOR S SALARY IS BEING PAID TO THE DIRECTORS OF THE COMPANY INCLUDING A CO MMISSION THEREOF IS FOR THE PURPOSE OF MANAGING THE BUSINESS OF THE DLF ASSESSEE. FURTHER, FOR THE PROTECTION OF THE INTEREST OF THE COMPANY EVEN IF THE DIRECTORS HAVE GIVEN THEIR TIME FOR LOOKING AFTER O THER GROUP ACTIVITIES IT IS MERELY A SHAREHOLDERS ACTIVITY. FURTHERMORE, THE ADVERTISEMENTS, SALARY AND WAGES, LEAVE ENCASHMENT EXPENDITURE AND PRINTING EXPENSES ETC. ARE ALL PERTAINING TO TH E BUSINESS OF THE I.T.A. NO.2126 & 2749/DEL/2013 149 COMPANY. NO EVIDENCE / INSTANCES HAVE BEEN CITED BY AO THAT ANY OF THIS EXPENDITURE HAS NOT BEEN INCURRED BY THE CO MPANY AND THEY ARE NOT RELATED TO THE BUSINESS OF THE ASSESSEE. IT MAY HAPPEN THAT BY INCURRING CERTAIN EXPENDITURE BY THE ASSESSEE FO R THE PURPOSE OF HIS BUSINESS MAY RESULT INTO SOME INDIRECT BENEFIT TO THE GROUP COMPANIES BUT THAT CANNOT BE THE GROUND FOR DISALLO WANCE OF THAT EXPENDITURE IN THE HANDS OF THE ASSESSEE. THE CIT ( A) RELYING UPON THE DECISION OF ITAT, DELHI BENCH IN THE CASE OF NE STLE INDIA LTD. VS. DICT 27 SOT 9 HAS DELETED THE ADDITION. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT (A) AND REVENUE C OULD NOT CONTROVERT THE FACT OF ANY EXPENDITURE WITH INSTANCES THAT THE SE ARE NOT INCURRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. HENCE, WE CONFIRM THE ORDER OF THE CIT (A) DELETING THE ADDITION OF RS.14,55,37,400/-. GROUND NO.4 OF THE REVENUES APPEAL IS DISMISSED. 130. IN VIEW OF THE AFORESAID OBSERVATION AND THE F INDING OF THE TRIBUNAL WHICH IS APPLICABLE IN THIS YEAR ALSO, THEREFORE, RESPECTFULLY FOLLOWING THE SAME, THE REVENUES GROU ND IS DISMISSED. 131. IN GROUND NO.13, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION ON ACCOUNT OF DISALLOWANCE OF EXPENSES U/S.14A R.W. RULE 8D. 132. ADMITTEDLY, THIS ISSUE IS SIMILAR AND LINKED WITH THE GROUNDS NO. 2 AND 3 OF APPEAL AND IN VIEW OF OUR FI NDING GIVEN THEREIN, THE GROUNDS RAISED BY THE REVENUE IS DISMI SSED. 133. IN GROUND NO.14, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF RS. 1,26,11,958/- ON ACCOUN T OF I.T.A. NO.2126 & 2749/DEL/2013 150 DISALLOWANCE /CAPITALIZATION OF PREOPERATIVE EXPENS ES (ON SEZ PROJECTS NOT COMMENCED). 134. LD. ASSESSING OFFICER HAS TREATED THE VARIO US BUSINESS EXPENSES RELATING TO DEVELOPMENT OF VARIOUS COMMERC IAL PROJECTS TO BE PART OF PROJECT COST, AND THEREFORE, SUCH COST OF THE PROJECT NEEDS TO BE CAPITALIZED. 135. LD. CIT (A) HAS DELETED THE ADDITION IN THE FOLLOWING MANNER: 22.12 I HAVE CONSIDERED THE SUBMISSION OF THE APP ELLANT, OBSERVATION OF THE ASSESSING OFFICER, AND VARIOUS J UDICIAL PRONOUNCEMENTS RELIED UPON BY THE APPELLANT AND MY OWN ORDER FOR AY 2007-08 IN THE CASE OF APPELLANT, WHEREIN THIS I SSUE WAS DECIDED IN FAVOUR OF THE APPELLANT COMPANY. IT IS S EEN THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF DEVELOPING REAL ESTATE LIKE DEVELOPMENT OF PLOTS, MULTI STOREY BUILDINGS, COMME RCIAL COMPLEXES ETC. DURING THE YEAR, THE APPELLANT HAS INCURRED CE RTAIN EXPENDITURE ON MARKET STUDY, FEASIBILITY REPORT AND VIABILITY R EPORT ON POSSIBILITY OF DEVELOPING SEZ PROJECTS AT VARIOUS LOCATIONS LIK E JAIPUR, BHUVANESHWAR, GANDHINAGAR, AMBALA, LUDHIANA, WEST B ENGAL, ETC. ON THESE STUDIES, THE APPELLANT HAS INCURRED A N EXPENDITURE OF RS.1,26,11,958/-. IN THE ASSESSMENT PROCEEDINGS THE SE EXPENSES HAVE BEEN TREATED AS PRE-OPERATIVE EXPENSES BY THE ASSESSING OFFICER. IT IS CLAIMED BY THE APPELLANT THAT CONDUC TING FEASIBILITY AND VIABILITY STUDY FOR DEVELOPING SEZ WAS NOT A NE W LINE OF BUSINESS BUT IT WAS EXPANSION/EXTENSION OF THE SAME LINE OF BUSINESS. DEVELOPMENT OF SEZ IS VERY AKIN DEVELOPME NT OF COMMERCIAL PROJECTS WHICH FALLS WITHIN THE OBJECTIV ES OF THE MOA OF THE APPELLANT COMPANY. ANY EXPENDITURE INCURRED FOR EXPANSION OR EXTENSION OF SAME LINE OF BUSINESS WITH COMPLETE UN ITY OF CONTROL, COMMON FUND AND WITH THE COMMON MANAGEMENT IS A REV ENUE I.T.A. NO.2126 & 2749/DEL/2013 151 EXPENDITURE AND SAME CANNOT BE HELD AS CAPITAL EXPE NDITURE. THE FEASIBILITY AND VIABILITY STUDY WAS TO EXTEND THE B USINESS OF THE APPELLANT IN SAME LINE, THEREFORE, THE EXPENDITURE INCURRED ON SUCH STUDY IS REVENUE EXPENDITURE AND BY EXPLORING THE P OSSIBILITY OF OBTAINING/DEVELOPING OR EXTENSION OF THE EXISTING B USINESS AT VARIOUS STATIONS IDENTIFIED, THE APPELLANT WAS ONLY PLANNING TO EXPAND ITS BUSINESS AND NO NEW ASSET MUCH LESS CAPI TAL ASSET HAVE BEEN CREATED. THE ASSESSING OFFICER WAS NOT JUSTIFI ED IN TREATING THESE EXPENSES AS PRE-OPERATIVE EXPENSES AND SAME I S TO BE CAPITALIZED. THE QUESTION OF CAPITALIZATION DOES NO T ARISE AS THESE EXPENSES WERE INCURRED ON CONDUCTING FEASIBILITY AN D VIABILITY STUDY OF TAKING VARIOUS PROJECTS AT THE STATIONS ME NTIONED ABOVE. HOWEVER, AFTER THE FEASIBILITY AND VIABILITY STUDY THESE PLACES WERE NOT FOUND SUITABLE FOR DEVELOPING SEZ PROJECTS AND SAME WERE ABANDONED. THE EXPENSES WERE INCURRED FOR EXTENSION OF SAME LINE BUSINESS AND SUCH EXPENSES HAVE TO BE ALLOWED AS RE VENUE EXPENDITURE. THEREFORE, RESPECTFULLY FOLLOWING THE DECISIONS OF JURISDICTIONAL HIGH COURT AND MY OWN ORDER FOR AY 2 007-08 IN APPELLANTS OWN CASE (PAGE 222-229), THE DISALLOWAN CE OF RS.1,26,11,958/- MADE BY THE ASSESSING OFFICER ON T HIS ACCOUNT IS DELETED. 136. BEFORE US, THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE DISALLOWANCE OF EXPENSES INCURRE D TOWARDS CONDUCTING FEASIBILITY STUDY, MARKET STUDY AND VIAB ILITY REPORT IN RELATION TO SEZ PROJECTS AT VARIOUS LOCATIONS LI KE JAIPUR, BUVANESHWAR, GANDHINAGAR, AMBALA, LUDHIANA ETC.. TH E ASSESSING OFFICER HAS CAPITALIZED THESE EXPENSES ON THE BASIS OF OBSERVATION OF SPECIAL AUDITOR. HOWEVER, THE GEN UINENESS AND NATURE OF THESE EXPENSES IS NOT IN DISPUTE. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE AND THE C LAIM OF I.T.A. NO.2126 & 2749/DEL/2013 152 EXPENSES TOWARDS FEASIBILITY AND VIABILITY REPORT I S PART OF REGULAR BUSINESS OPERATIONS AND AS SUCH THE ASSESSI NG OFFICER WAS NOT JUSTIFIED IN IDENTIFYING THESE EXPENSES WIT H SPECIFIC PROJECT AND CAPITALIZING THE SAME. IT IS PERTINANT TO NOTE THAT DEVELOPMENT OF SEZ IS PART OF BUSINESS ACTIVITIES O F THE ASSESSEE AND CANNOT BE CONSIDERED AS ALTOGETHER A N EW LINE OF BUSINESS. THE CIT (A) THEREFORE HAS RIGHTLY DELETED THE DISALLOWANCE AFTER EXAMINING THE PURPOSE OF THESE E XPENSES IN THE LIGHT OF PRINCIPLE LAID DOWN BY HONBLE DELHI HIGH COURT. 137. WE FIND THAT THE TRIBUNAL ALSO IN ASSESSMENT YEAR 2006-07 HAS DISMISSED THE REVENUES APPEAL AFTER OB SERVING AND HOLDING AS UNDER: 96. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT ION. ADMITTEDLY ASSESSEE IS IN BUSINESS S OF THE REAL ESTATE DEVELO PMENT. THE TENDER FEES PAID FOR BIDDING OF MODERNIZATION OF AIRPORT C ANNOT BE SAID TO BE THE NEW LINE OF BUSINESS BUT IT IS THE SAME LINE OF BUSINESS I.E. OF DEVELOPMENT OF REAL ESTATE. THEREFORE ACCORDING TO US THE EXPENDITURE IF INCURRED FOR THE TENDER FEES SAME IS ALLOWABLE U/S 37(1) OF THE ACT. THE DECISION CITED BY THE AR OF T HE APPELLANT HAS HELD THAT THE WHEN THE ASSESSEE PROPOSED TO SET UP NEW PROJECT WHICH HAD INEXTRICABLE LINKAGE WITH THE EXISTING BU SINESS OF THE ASSESSEE, THE PROPOSED BUSINESS WAS NOT AN INDIVIDU AL BUSINESS BUT VERTICAL EXPANSION OF THE EXISTING BUSINESS AND THUS, THE TEST OF EXISTING BUSINESS WITH COMMON ADMINISTRATION AND CO MMON FUND WAS MET. SINCE THE PROJECT WAS ABANDONED, NO NEW AS SET ALSO CAME TO BE CREATED. THE EXPENDITURE WAS DEDUCTIBLE. THEREFORE THE FACTS OF THE EXPENDITURE DISALLOWED ARE ALSO SIMILA R. HENCE FOLLOWING THE DECISION OF HONOURABLE DELHI HIGH COU RT IN CASE OF INDO RAMA SYNTHETICS INDIA LTD. V. COMMISSIONER OF INCOM E-TAX [2011] I.T.A. NO.2126 & 2749/DEL/2013 153 333 ITR 18 (DEL) WE REVERSE THE ORDER OF CIT (A) AN D DELETE THE DISALLOWANCE OF RS 1,47,70, ,222/- ON ACCOUNT OF TE NDER FEES FOR MODERNISATION OF AIRPORTS. THEREFORE GROUND NO 16 O F THE APPEAL IS ALLOWED. 216. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS. THE ASSESSEE HAS INCURRED THIS EXPENDITURE ON PROPORTIO NATE AND FEASIBILITY OF VARIOUS CONSTRUCTION PROJECTS IN WHI CH BUSINESS THE ASSESSEE IS ENGAGED INTO. BEFORE EMBARKING ON TO AN Y OF THE PROJECTS, IT IS A COMMON PRACTICE TO OBTAIN A FEASI BILITY AND ECONOMIC VIABILITY OF CONSTRUCTION PROJECTS AT DIFFERENT GEO GRAPHICAL LOCATION. THESE EXPENSES ARE FOR FACILITATING THE EXISTING BU SINESS OF THE ASSESSEE. IT IS NOT THE CASE OF THE REVENUE THAT IT IS ALTOGETHER A NEW LINE OF THE BUSINESS OR UNRELATED TO THE BUSINESS O F THE ASSESSEE. THEREFORE, IN OUR VIEW, THIS EXPENDITURE ARE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE AS SESSEE. HENCE, WE CONFIRM THE ORDER OF CIT (A) AND DELETE THIS GRO UND OF REVENUES APPEAL. 138. SINCE ON THE SIMILAR ISSUE THE TRIBUNAL HAS AC CEPTED THE ASSESSEES CONTENTION, THEREFORE, CONSISTENT WI TH THE SAME VIEW, WE AFFIRM THE ORDER OF THE LD. CIT (A) AND DI SMISSED THE REVENUES GROUND. 139. IN GROUND NO.15, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF RS. 1,30,38,853/- ON ACCOUN T OF DISALLOWANCE OF EXPENSES ON PROJECTS NOT COMMENCED. 140. LD. ASSESSING OFFICER HAS TREATED VARIOUS EXPENSES TO BE CAPITALIZED AS PER THE NOTING OF THE SPECIAL AUD ITOR IN THEIR REPORT WHICH WERE AS UNDER:- I.T.A. NO.2126 & 2749/DEL/2013 154 A/C HEAD AMOUNT NARRATION LEGAL & PROFESSIONAL EXPENSES 2,791,433.00 LANGHAM CAPITAL LTD. - PROF. / TRANSACTIONS FEE FOR JOINT VENTURE WITH WSP GROUP PLC LEGAL & PROFESSIONAL EXPENSES 522,474.00 50% FEE S ON SUBMISSION OF DRAFT REPORT FOR GUJRAL DESIGN PLUS VALUATION LEGAL & PROFESSIONAL EXPENSES 5,000,000.00 PROF FEE FOR SR IN CONNECTION OF PUR . OF CONV. PREF. SHARES BY DAL SINGAPORE FROM LEHMAN BR. & D.E. SHAW LEGAL & PROFESSIONAL EXPENSES 229,500.00 AMOUNT PAID TO AMAR CHAND MANGALDAS TOWARDS DRAFTING OF MEMORANDUM OF CORPORATION WITH FRAPORT AG FRANKFURT AIRPORT SERVICES WORLDWIDE FOR JOINT COLABORATION RELATING TO AIRPORT PROJECTS. LEGAL & PROFESSIONAL EXPENSES 289,250.00 AMOUNT PAID TO AMAR CHAND MANGALDAS TOWARDS DRAFTING OF MEMORANDUM OF CORPORATION WITH FRAPORT AG FRANKFURT AIRPORT SERVICES WORLDWIDE FOR JOINT COLABORATION RELATING TO AIRPORT PROJECTS. LEGAL & PROFESSIONAL 505,620.00 FEES FOR VALUATION OF GUJRAL DESIGN PLUS OVERSEAS PVT LTD. FOR BUYING STAKE IN COMPANY. LEGAL & PROFESSIONAL 1,966,300.00 PROF. FEES IN CONNECTION WITH IMPLEMENTATION AND ACQUISITION OF CYPRUS HOLDING COMPANY, INCLUDING ASSISTANCE IN ACQUISITION & IMPLEMENTATION OF CYPRUS HOLDING COMPANY. LEGAL & PROFESSIONAL 161 ,236.60 OUT OF POCKET EXPENSES FOR TRAVEL TO CYPRUS LEGAL & PROFESSIONAL 1,067,420.00 PROF. FEES IN RESPECT OF CROSS BORDER INVESTMENT STRUCTURING FOR HOSPITALITY BUSINESS EVALUATION FOR SETTING UP AN OFFSHORE COMPANY FOR ACQUIRING OVERSEAS HOTEL COMPANY I.T.A. NO.2126 & 2749/DEL/2013 155 LEGAL & PROFESSIONAL 505,620.00 50% PROF.FEES FOR SUBMISSION OF DRAFT REPORT FOR BUSINESS VALUATION OF GUJRAL DESIGN PLUS OVERSEAS PVT LTD. FOR BUYING STAKE IN COMPANY 141. LD. CIT (A) HAS DELETED THE ADDITION IN THE FOLLOWING MANNER: 23.11 I HAVE CONSIDERED THE SUBMISSION OF THE APP ELLANT, OBSERVATION OF THE ASSESSING OFFICER, AND VARIOUS J UDICIAL PRONOUNCEMENTS RELIED UPON BY THE APPELLANT AND MY OWN ORDER FOR AY 2007-08 IN THE CASE OF THE APPELLANT COMPANY WHE REIN THE ISSUE WAS DECIDED IN FAVOUR OF THE APPELLANT. IT IS SEEN THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF DEVELOPING REAL ESTAT E LIKE DEVELOPMENT OF PLOTS, MULTI STOREY BUILDINGS, COMME RCIAL COMPLEXES ETC. DURING THE YEAR, THE APPELLANT HAS INCURRED CE RTAIN EXPENDITURE ON LEGAL AND PROFESSIONAL FEES PAID FOR DRAFTING TH E JOINT VENTURE AGREEMENTS, PREPARING DRAFT REPORT FOR GUJRAL DESIG N PLUS VALUATION, PURCHASE OF PREFERENTIAL SHARES BY DAL SINGAPORE FR OM LEHMEN BROTHERS, DRAFTING OF MEMORANDUM CORPORATION WITH F RAPORT AG FOR JOINT VENTURE AND AIRPORT PROJECTS, ACQUISITION OF COMPANIES, ADVICE TAKEN FOR CROSS BORDER INVESTMENTS ETC AND OTHER EX PENSES ON FEASIBILITY AND VIABILITY OF THE VARIOUS PROJECTS. IT IS SEEN THAT THE APPELLANT HAS PAID THESE EXPENSES FOR TAKING LEGAL AND PROFESSIONAL ADVICE ON THE ISSUES MENTIONED ABOVE AND HAVE PAID RS.1,30,38,853/- TO THE VARIOUS PARTIES FOR SERVICE S RENDERED BY THEM. IN THE ASSESSMENT PROCEEDINGS THESE EXPENSES HAVE BEEN TREATED AS CAPITAL EXPENDITURE BY THE ASSESSING OFF ICER. IT IS CLAIMED BY THE APPELLANT THAT EXPENSES INCURRED ON LEGAL AND PROFESSIONAL FEES PAID FOR DRAFTING THE JOINT VENTU RE AGREEMENTS, PREPARING DRAFT REPORT FOR GUJRAL DESIGN PLUS VALUA TION, PURCHASE OF PREFERENCIAL SHARES BY DAL SINGAPORE FROM LEHMEN BR OTHERS, DRAFTING OF MEMORANDUM CORPORATION WITH FRAPORT AG FOR JOINT I.T.A. NO.2126 & 2749/DEL/2013 156 VENTURE IN AIRPORT PROJECTS, ACQUISITION OF COMPANI ES, ADVICE TAKEN FOR CROSS BORDER INVESTMENTS ETC WAS NOT NEW LINE O F BUSINESS BUT IT WAS INCURRED TO EXPAND THE BUSINESS IN SAME LINE. O UT OF THE ABOVE PROPOSALS MOST OF THE STUDY OR LEGAL ADVICE OR JOIN T VENTURE AGREEMENTS DID NOT FRUCTIFIED, THEREFORE, THE SAME WERE ABANDONED. MOST OF THESE PROJECTS WERE ONLY WITH CONSULTANCY S TAGE, THEREFORE, TREATING SUCH EXPENSES AS CAPITAL NATURE CANNOT BE JUSTIFIED. THE EXPANSION OF THE APPELLANTS BUSINESS BY ENTERING I NTO JOINT VENTURES AND ACQUISITION OF SHARES AND COMPANY WHIC H ARE ENGAGED IN THE BUSINESS OF REAL ESTATE WAS IN THE S AME LINE OF BUSINESS AND SUCH EXPENSES ARE IN THE REVENUE FIELD . THE EXPENSES LIKE PLANNING, IDENTIFICATION OF SITES, CONSULTATIO N CHARGES, LAY OUT ETC. AND OTHER EXPENSES ON FEASIBILITY AND VIABILIT Y OF THE COMMERCIAL PROJECTS ETC, ARE THE EXPENSES INCURRED FOR BONAFIDE BUSINESS REQUIREMENT OF THE APPELLANT AND SUCH EXPE NSES FALLS WITHIN THE OBJECTIVES OF THE MOA OF THE APPELLANT C OMPANY. ANY EXPENDITURE INCURRED FOR THE PROJECTS TO BE UNDERTA KEN IN FUTURE AND VIABILITY OF SUCH PROJECTS ARE BUSINESS EXPENDITURE AND SAME HAS TO BE ALLOWED AS REVENUE EXPENDITURE. THE QUESTION OF CAPITALIZATION OF SUCH EXPENSES ARISES ONLY WHEN SUCH PROJECTS ACTUAL LY COMMENCE & ARE IN EXISTENCE, BUT THERE ARE CERTAIN PROJECTS FOR WHICH VARIOUS EXPENSES WERE INCURRED BEFORE THEIR INTENDED COMMEN CEMENT BUT DUE TO SOME REASONS, SUCH PROJECTS COULD NOT BE COM MENCED. THEREFORE, EXPENSES RELATING TO SUCH PROJECTS CANNO T BE CAPITALIZED AND HAS TO BE ALLOWED AS REVENUE EXPENDITURE AS THE SE EXPENSES HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE B USINESS REQUIREMENT OF THE APPELLANT COMPANY. THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING THESE EXPENSES AS PRE-OPE RATIVE EXPENSES AND SAME IS TO BE CAPITALIZED. THE QUESTION OF CAPI TALIZATION DOES NOT ARISE AS THESE EXPENSES WERE INCURRED ON LEGAL AND PROFESSIONAL ADVICE AND PREPARING JOINT VENTURE AGREEMENTS. HOWE VER, AFTER THE FEASIBILITY AND VIABILITY STUDY THESE PROPOSED JOIN T VENTURES OR I.T.A. NO.2126 & 2749/DEL/2013 157 VALUATION REPORTS WERE NOT FOUND SUITABLE FOR CARRY ING OUT FURTHER INVESTMENTS AND SAME WERE ABANDONED. THE EXPENSES W ERE INCURRED FOR EXTENSION OF SAME LINE BUSINESS AND SU CH EXPENSES HAS TO BE ALLOWED AS REVENUE EXPENDITURE. IN VIEW O F THE ABOVE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOU NT OF CAPITALISATION OF SUCH EXPENSES CANNOT BE SUSTAINED . THEREFORE, RESPECTFULLY FOLLOWING THE DECISIONS OF JURISDICTIO NAL HIGH COURT AND MY OWN ORDER FOR AY 2007-08 IN APPELLANTS CASE (PA GE 229-237), THE DISALLOWANCE OF RS.1,30,38,853/- MADE BY THE ASSESSING OFFICER ON THIS ACCOUNT IS DELETED. 142. WE FIND THAT THE TRIBUNAL ALSO IN ASSESSMENT YEAR 2006-07 HAS DISMISSED THE REVENUES APPEAL AFTER OB SERVING AND HOLDING AS UNDER: 216. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS. THE ASSESSEE HAS INCURRED THIS EXPENDITURE ON PROPORTIO NATE AND FEASIBILITY OF VARIOUS CONSTRUCTION PROJECTS IN WHI CH BUSINESS THE ASSESSEE IS ENGAGED INTO. BEFORE EMBARKING ON TO AN Y OF THE PROJECTS, IT IS A COMMON PRACTICE TO OBTAIN A FEASI BILITY AND ECONOMIC VIABILITY OF CONSTRUCTION PROJECTS AT DIFFERENT GEO GRAPHICAL LOCATION. THESE EXPENSES ARE FOR FACILITATING THE EXISTING BU SINESS OF THE ASSESSEE. IT IS NOT THE CASE OF THE REVENUE THAT IT IS ALTOGETHER A NEW LINE OF THE BUSINESS OR UNRELATED TO THE BUSINESS O F THE ASSESSEE. THEREFORE, IN OUR VIEW, THIS EXPENDITURE ARE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE AS SESSEE. HENCE, WE CONFIRM THE ORDER OF CIT (A) AND DELETE THIS GRO UND OF REVENUES APPEAL. 143. THUS, WHEN SIMILAR NATURE OF EXPENDITURE HA S BEEN INCURRED FOR THE PURPOSE OF BUSINESS THEN IN THIS Y EAR ALSO WE I.T.A. NO.2126 & 2749/DEL/2013 158 DO NOT FIND ANY REASON TO DEVIATE FROM SUCH A FINDI NG AND ACCORDINGLY GROUND OF THE REVENUE ON THIS SCORE IS DISMISSED. 144. IN GROUND NO.16, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF RS. 7,37,222/- ON ACCOUNT O F DISALLOWANCE OF EXPENDITURE U/S.40(A)(IA) OF THE IT ACT FOR NON DEDUCTION OF TDS ON PAYMENT TO TWO TRUSTS. 145. LD. ASSESSING OFFICER HAS DISALLOWED RENT PAY MENT TO DLF QUTUB ENCLAVE COMPLEX MEDICAL CHARITABLE TRUST AND DLF QUTUB ENCLAVE COMPLEX EDUCATIONAL CHARITABLE TR UST FOR NON DEDUCTION OF TDS THE ASSESSEE COMPANY HAS RECEI VED CERTIFICATE U/S. 197(1) FROM TWO TRUST AND THE SAID CERTIFICATE CLEARLY SPECIFIES AMOUNT OF REND WHICH THE DLF HAS TO PAY TO THEM WITHOUT DEDUCTING TDS DURING THE FINANCIAL YEA R 2007- 08. THE ASSESSING OFFICER HELD THAT ASSESSEE HAS MA DE THE PAYMENT OF AN AMOUNT MORE THAN WHAT HAS BEEN SPECIF IED IN THE CERTIFICATE ISSUED U/S.197 AND EXCESS AMOUNT OF RS.7,37,322/- HAS BEEN DISALLOWED BY HIM U/S.40(IA) . 146. LD. CIT (A) HAS DELETED THE ADDITION IN THE FOLLOWING MANNER: 25.10 I HAVE CONSIDERED THE SUBMISSION OF THE APPE LLANT, OBSERVATION OF THE ASSESSING OFFICER AND THE CERTIF ICATES ISSUED BY ITO, TDS WARD 49(4), NEW DELHI. IT IS NOTED THAT THIS ISSUE IS COVERED IN FAVOUR OF APPELLANT BY MY OWN ORDER FOR AY 2007-08 IN APPELLANTS OWN CASE AS MENTIONED ABOVE. IT IS SEE N FROM THE CERTIFICATES THAT AMOUNTS WHICH WERE TO BE PAID BY THE APPELLANT DURING THE YEAR OF RS. 40,13,838/- + RS. 15,98,984/ - IN RESPECT OF M/S DLF QUTUB ENCLAVE COMPLEX EDUCATIONAL CHARITABL E TRUST AND I.T.A. NO.2126 & 2749/DEL/2013 159 M/S DLF QUTUB ENCLAVE COMPLEX MEDICAL CHARITABLE TR UST RESPECTIVELY WERE CLEARLY MENTIONED IN THE COLUMN AMOUNT OF RENT EXPECTED TO BE REALIZED DURING F.Y. 2007-08. THESE CERTIFICATES WERE SIGNED BY ITO, TDS WARD 49(4), NEW DELHI AND S AME WERE FILED BEFORE ME FROM PAGE 458 TO 461 OF PAPER BOOK VOLUME II OF THE APPELLANTS SUBMISSION DATED 29.11.2012. THE CERTI FICATES ISSUED BY ITO 49(4) COVER THE AMOUNTS TO BE PAID DURING F. Y. 2007-08 AND HE HAS CLEARLY MENTIONED IN THE CERTIFICATE AMOUNT OF RENT EXPECTED TO BE REALIZED DURING F.Y. 2007-08. THE LANGUAGE O F CERTIFICATE IS CLEAR AND IT COVERS THE AMOUNT PAID DURING THE YEAR . IN VIEW OF THE ABOVE, IT IS ESTABLISHED THAT THE CERTIFICATES ISSU ED BY THE ITO WERE MEANT FOR THE ENTIRE AMOUNT MENTIONED IN THE CERTIF ICATES. THE ASSESSING OFFICER HAS NOT APPRECIATED THE CERTIFICA TES ISSUED BY THE ITO, TDS WARD 49(4), NEW DELHI, IN ITS PROPER P ROSPECTIVE AND DISALLOWANCE OF RS.7,37,222/- MADE ON ACCOUNT OF NO N DEDUCTION OF TDS WAS NOT JUSTIFIED. HENCE, THE SAME IS DELETE D. 147. THE TRIBUNAL ALSO IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007-08 HAS DISMISSED THE REVENUES APPEAL AFT ER OBSERVING AND HOLDING AS UNDER: 122. GROUND NO. 25 IS AGAINST DELETION OF DISALLOW ANCE OF RS. 27,08,664/- U/S 40(A)(IA) ON ACCOUNT OF NON DEDUCTI ON OF TDS ON PAYMENTS MADE TO TWO TRUSTS. THE AO HAS MADE THE DI SALLOWANCE ON THE GROUND THAT THE ASSESSEE HAS NOT PRODUCED CERTI FICATE U/S 197 AND AS SUCH THE PAYMENT MADE BY IT WERE LIABLE FOR TDS DEDUCTION. THE CIT(A) DELETE THE DISALLOWANCE BY RECORDING FOL LOWING FINDING : 30.9 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT, OBSERVATION OF THE ASSESSING OFFICER AND THE CERTIF ICATES ISSUED BY ITO TDS WARD 49(4), NEW DELHI. IT IS SEEN FROM T HE CERTIFICATES WHICH WERE ISSUED ON 06.11.2006 THAT AMOUNT WHICH W ERE TO BE PAID BY THE APPELLANT DURING THE YEAR OF RS. 28,70, 484 + RS. I.T.A. NO.2126 & 2749/DEL/2013 160 6,75,408 AND RS. 590976/- + RS. 506556/- IN RESPECT OF M/S DLF QUTUB ENCLAVE COMPLEX EDUCATIONAL CHARITABLE TRUST AND M/S DLF QUTUB ENCLAVE COMPLEX MEDICAL CHARITABLE TRUST RESP ECTIVELY WAS CLEARLY MENTIONED IN THE COLUMN AMOUNT OF RENT EXP ECTED TO BE REALIZED DURING F.Y. 2006-07. THESE CERTIFICATES W ERE SIGNED BY ITO TDS WARD 49(4), NEW DELHI AND SAME ARE FILED BE FORE ME FROM PAGE 170 TO 175 OF THE APPELLANTS SUBMISSION DATED 08.05.2012. IN VIEW OF THE ABOVE IT IS ESTABLISHED THAT THE CER TIFICATES ISSUED BY THE ITO WERE MEANT FOR THE ENTIRE AMOUNT MENTIONED IN THE CERTIFICATES AND NOT FOR THE AMOUNT PAYABLE/PAID FO R THE MONTHS NOVEMBER 2006 TO MARCH, 2007. THE ASSESSING OFFICER HAS NOT APPRECIATED THE CERTIFICATES ISSUED BY THE ITO TDS WARD 49(4), NEW DELHI, IN ITS PROPER PROSPECTIVE AND DISALLOWANCE O F RS. 27,08,664/- MADE ON ACCOUNT OF NON DEDUCTION OF TDS WAS NOT JUS TIFIED. HENCE, THE SAME IS DELETED. 123. THE LD. CIT DR RELIED UPON THE ORDER OF ITO WH EREAS THE LD. COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDER OF CIT (A). 124. WE HAVE GONE THROUGH THE ORDER OF THE CIT(A) A ND NOTICED THAT THE RELIEF WAS ALLOWED BY CIT(A) AFTER TAKING INTO CONSIDERATION CERTIFICATE ISSUED BY ITO, TDS WARD-49(4), NEW DELH I AND AS SUCH THERE IS NO DEFAULT ON THE PART OF THE ASSESSEE IN NOT DEDUCTING TDS ON SUCH PAYMENT. THE ORDER OF THE CIT (A) IS BASED ON PROPER APPRECIATION OF FACTS AND THERE IS THUS NO JUSTIFIC ATION FOR ANY INTERFERENCE AND THIS GROUND OF REVENUE IS DISMISSE D. 148. THUS IN VIEW OF THE ABOVE SIMILAR FINDING G IVEN IN THE EARLIER YEAR ON IDENTICAL SET OF FACTS, AS A MATTER OF CONSISTENCY WE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF THE LD. CIT(A) AS NOTED ABOVE, THEREFORE, GROUND RAISED BY THE REVENUE IS DISMISSED. I.T.A. NO.2126 & 2749/DEL/2013 161 149. IN GROUND NO.17, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF RS. 9,94,187/- ON ACCOUNT O F RECONCILIATION OF RENTAL INCOME AS PER TDS CERTIFIC ATES AND WITHDRAWAL OF TDS CREDIT OF RS.7,12,257/-. 150. LD. ASSESSING OFFICER ON THE BASIS OF COMMEN TS OF THE SPECIAL AUDITORS IF THERE WAS A DIFFERENCE OF R S.984249/- BETWEEN RENTAL INCOMES AS PER THE TDS CERTIFICATE I SSUED BY THE TENANT A RENTAL INCOME OF THE TENANT SHOWN BY T HE COMPANY. THE ASSESSEES CONTENTION WAS THAT THE TEN ANT WHILE ISSUING THE TDS CERTIFICATE FOR THE A.Y. 2008-09 HA D ISSUED TDS CERTIFICATE FOR 13 MONTHS INCLUDING THE PERIOD OF APRIL 2008 AND A CONFIRMATORY LETTER FROM THE TENANT WAS ENCLOSED WITH THE REPLY. THE COMPANY HAS FURTHER STATED THAT THE SAID INCOME OF RS. 9,84,249/- WAS OFFERED BY THEM FOR TA XATION IN THE SUBSEQUENT YEAR RELEVANT TO A.Y. 2009-10. IN TH E SPECIAL AUDIT REPORT IT WAS MENTIONED THAT THE COMPANY IN R EPLY TO THE SPECIAL AUDITORS ON THIS ISSUE HAD MENTIONED TH AT EMIRATES HAD ISSUED A WRONG CERTIFICATE AND A CLARI FICATORY LETTER WAS BEING OBTAINED FROM THEM. BASED ON THE S AME THE SPECIAL AUDITORS HAD IN THE REPORT HAD COMMENTED TH AT THE ASSESSEE COMPANY HAD NOT FURNISHED ANY CLARIFICATOR Y LETTER FROM EMIRATES AND IF THE SAME IS FURNISHED DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE SAME MAY BE CONSIDER ED. THE LETTER FURNISHED BY THE ASSESSEE COMPANY NOW HAS BE EN SEEN AND IN THE LETTER THE TENANT HAS GIVEN DETAILS OF T DS DEDUCTED BY THEM DURING THE FINANCIAL YEAR 2007-08 AND IN TH E END IT I.T.A. NO.2126 & 2749/DEL/2013 162 HAS BEEN MENTIONED IN THE LETTER THAT: 'PLEASE NOTE THAT NO EXCESS TDS HAVE BEEN DEDUCTED AS MENTIONED IN YOUR EMAIL . 151. LD. ASSESSING OFFICER OBSERVED FROM THE DETAIL S OF TDS DEDUCTED BY EMIRATES DURING THE FINANCIAL YEAR 2007 -08 AS PER THE LETTER IS EXACTLY SAME AS THE AMOUNT APPEAR ING IN THE TDS CERTIFICATE ISSUED BY THEM FOR THE F.Y. 2007-08 . THEREFORE, THERE IS NO DISCREPANCY IN THE TDS CERTI FICATE ISSUED BY EMIRATES. THE COMPANY HAS MENTIONED THAT THE INCOME FOR APRIL 2008 APPEARING IN THE TDS CERTIFIC ATE HAS BEEN OFFERED BY THEM FOR TAXATION IN THE A.Y. 2009- 10, HOWEVER NO EVIDENCE FOR THE SAME HAS BEEN FURNISHED AND THE SAME IS NOT ACCEPTABLE. ACCORDINGLY, THE RENT OF RS . 9,84,249/- WAS ADDED TO THE INCOME OF THE ASSESSEE COMPANY AS RENTAL INCOME BASED ON THE DIFFERENCE BETWEEN RE NTAL INCOME AS PER TDS CERTIFICATE AND RENTAL INCOME OFF ERED FOR TAXATION. THE DEDUCTION U/S 24 IN RESPECT OF REPAIR S @ 30% WAS ALLOWED ON THE SAME WHICH COMES TO RS.2,95,275/ - AND THE TOTAL AMOUNT OF ADDITION MADE BY THE ASSESSING OFFICER WAS ARRIVED AT RS.6,88,974/-. ASSESSING OFFICER FUR THER OBSERVED THAT, FROM THE REPLY OF THE ASSESSEE COMPA NY IT IS OBSERVED THAT RS. 2,17,242 IN RESPECT OF ORACLE IND IA PVT. LTD & RS. 2,18,777/- IN RESPECT OF KPMG REPRESENT THE T DS DEDUCTED BY THE PARTY IN RESPECT OF PREVIOUS FINANC IAL YEAR FOR WHICH INCOME HAS ALREADY BEEN DECLARED BY THE ASSES SEE COMPANY IN THE EARLIER YEARS. WHEREAS ACTUALLY THES E AMOUNTS REPRESENT THE DIFFERENCE IN INCOME DECLARED BY THE COMPANY VIS-A-VIS TDS CERTIFICATE ISSUED. FURTHER I T IS ALSO I.T.A. NO.2126 & 2749/DEL/2013 163 WORTHWHILE TO NOTE HERE THAT THE SUBMISSION OF THE ASSESSEE COMPANY IS NOT BACKED BY ANY SUBSTANTIATING DOCUMEN T. IT IS OBSERVED THAT THE REPLY OF THE ASSESSEE IS GENERAL AND VAGUE; THEREFORE, COMPUTATION MADE BY THE SPECIAL AUDITORS IS TREATED TO BE CORRECT IN THE ABSENCE OF ANY CONTRAR Y EVIDENCE BROUGHT ON RECORD OF THE ASSESSEE, THEREBY AN AMOUN T OF RS.4,36,0191- (RS. 2,17,242+ RS. 2,18,777/-) IS TO BE ADDED TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF INCOME FROM HOUSE PROPERTY AND DEDUCTION U/S 24 IN RESPECT OF R EPAIRS @ 30% IS ALLOWABLE ON THE SAME WHICH COMES TO RS.1,30 ,806/-. THE TOTAL AMOUNT OF ADDITION UNDER THIS HEAD COMES TO RS.3,05,213/-. TOTAL ADDITION MADE WAS RS. 9,94,187 /- RS. 6,88,074/- + RS. 3, 05,213/-) 152. LD. CIT(A) HAS DELETED THE ADDITION IN THE F OLLOWING MANNER: 26.5 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT, OBSERVATION OF THE ASSESSING OFFICER, VARIOUS JUDIC IAL PRONOUNCEMENT RELIED UPON BY THE APPELLANT, ORDER O F CIT (A) XVIII FOR AY 2006-07 AND MY OWN ORDER FOR AY 2007-08 IN APPEL LANTS OWN CASE WHEREIN I HAVE DECIDED THIS ISSUE IN FAVOUR OF THE APPELLANT. IT IS SEEN THAT AS PER THE RECONCILIATION SUBMITTED BY THE APPELANT, THE DIFFERENCE IN INCOME AS PER BOOKS OF ACCOUNT AND TD S CERTIFICATES IS ON ACCOUNT OF EITHER THE PAYEE DEDUCTED THE EXCESS TDS OR PART OF THE INCOME HAS BEEN BOOKED IN THE SUBSEQUENT YEAR SINCE THE RENTS WAS INCREASED OR ADJUSTED AGAINST THE FUTURE RENT. IT I S NOTED THAT ALL INCOMES HAVE BEEN RECORDED BY THE APPELLANT EITHER IN THE NEXT YEAR OR IN THE EARLIER YEAR. IT IS OBSERVED THAT THIS IS SUE IS COVERED IN FAVOUR OF THE APPELLANT BY THE JUDICIAL PRONOUNCEME NTS IN THE CASE OF SMT. PUSHPA VIJOY VS. ACIT AND PASHUPATI ACRYLON LI MITED VS. CBDT I.T.A. NO.2126 & 2749/DEL/2013 164 AND ORDERS OF CIT(APPEALS) IN APPELLANTS OWN CASE FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08. IN VIEW OF T HE ABOVE, THE ADDITION OF RS.9,94,187/- MADE BY THE ASSESSING OFF ICER IS DELETED AS NO RENTAL INCOME HAS ESCAPED FROM THE TAXATION. THE ADDITION MADE BY THE ASSESSING OFFICER IS REVENUE NEUTRAL, T HEREFORE, NO COGNIZANCE OF THE SAME IS TAKEN. 26.7 ITEM (C)-GROUND NOS.21.5 -WITHDRAWAL OF CREDIT OF TDS-RS.7,12,257 /- IT WAS SUBMITTED THAT WHILE VERIFYING THE DETAILS O F INCOME VIZ- A-VIZ THE INCOMES SHOWN BY VARIOUS PAYEES ON THE TD S CERTIFICATES, THE SPECIAL AUDITORS RAISED FEW ISSUES DURING THE C OURSE OF SPECIAL AUDIT. IN RESPONSE TO THE QUERIES THE REPLY ALONGW ITH EXPLANATIONS WERE FILED WHICH ARE PLACED AT ANNEXURE F AT PAGE NO.80 TO 89 AND ANNEXURE F AT PAGE NOS.100 TO 104 OF VOL. IX OF S PECIAL AUDIT REPORT. A COPY OF OUR SAID REPLY WAS FILED BEFORE THE ASSESSING OFFICER AT PAGE NOS.27 TO 31 OF ITS LETTER DATED 31 .03.2011. A PERUSAL OF THE SAME SHALL REVEAL THAT EITHER THE PAYEE DEDU CTED THE EXCESS TDS OR PART OF THE INCOME HAS BEEN BOOKED IN THE SU BSEQUENT YEAR SINCE THE RENT WAS INCREASED OR ADJUSTED AGAINST TH E FUTURE RENT. IT IS A MATTER OF RECORD THAT ALL INCOMES HAVE BEEN RE CORDED BY THE APPELLANT EITHER IN THIS YEAR OR HAS BEEN ADJUSTED IN THE SUBSEQUENT YEAR. AS ALREADY REPORTED BY THE SPECIAL AUDITORS ON PAGE 45 TO 48 OF VOLUME IX OF THE SPECIAL AUDITOR, IT IS EVIDENT THAT THE APPELLANT COMPANY HAS OFFERED THE INCOME IN RESPECT OF TDS AM OUNTING TO RS.7,12,257/- DURING THE NEXT FINANCIAL YEAR 2008-0 9 RELEVANT TO A.Y. 2009-10. THE APPELLANT SUBMITTED THAT IT IS A MATT ER OF RECORD THAT ALL INCOMES HAVE BEEN OFFERED FOR TAXATION EITHER I N THIS YEAR OR HAS BEEN ADJUSTED IN THE SUBSEQUENT YEAR. THE APPELLANT WITHOUT PREJUDICE FURTHER SUBMITTED T HAT IF TDS CREDIT AS ABOVE IS NOT ALLOWED DURING THE YEAR UNDE R APPEAL, THE SAME MAY KINDLY BE DIRECTED TO THE ALLOWED IN THE N EXT ASSESSMENT I.T.A. NO.2126 & 2749/DEL/2013 165 YEAR I.E. A.Y. 2009-10 AS HELD BY ASSESSING OFFICER HERSELF IN THE ASSESSMENT ORDER IN PARA NO.19.6 ON PAGE 354. 26.8 AFTER GOING THROUGH THE MATERIAL AVAILABLE ON RECORD AND THE ARGUMENTS OF THE AR, I FIND THAT SO FAR AS THE AOS DENIAL OF THE CREDIT OF TDS OF RS.7,12,257/- ON THE ADVANCED RENT RECEIVED DURING THE YEAR FROM AMERICAN EXPRESS BANK, ACCENTURE SERV ICES PRIVATE LIMITED, SUMITOMO CORPORATION INDIA PVT. LTD. AND BANK OF AMERICA IS CONCERNED, IT IS SEEN THAT INCOME OF ADVANCE REN T HAS BEEN OFFERED IN F.Y. 2008-09. HOWEVER, THE TDS DEDUCTED ON SUCH RENT HAS BEEN CLAIMED DURING THE YEAR IN VIEW OF THE TDS CERTIFIC ATES ISSUED BY THE TENANT. THE APPELLANT IS FOLLOWING MERCANTILE SYSTE M OF ACCOUNTING, THEREFORE, ADVANCE RENT RECEIVED FOR F.Y. 2008-09 C ANNOT BE TAKEN INTO CONSIDERATION THIS YEAR AND SAME WAS RECOGNIZE D AS INCOME IN F.Y. 2008-09. HOWEVER, THE TDS HAS BEEN CLAIMED ON THE BASIS OF INCOME RECOGNIZED IN THE NEXT YEAR SINCE THE TDS CE RTIFICATES PERTAINS TO THE ACCOUNTING YEAR 2007-08. IT IS FURTHER NOTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE APPELLANT BY THE JUDICIAL PRONOUNCEMENTS IN THE CASE OF SMT. PUSHPA VIJOY VS. ACIT AND PASHUPAT I ACRYLON LIMITED VS. CBDT AND ORDERS OF CIT(APPEALS) IN APP ELLANTS OWN CASE FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08. SINCE INCOME HAS BEEN OFFERED FOR THIS TDS CERTIFICATE, THEREFOR E, THE CREDIT FOR THE SAME CANNOT BE DENIED AND THE CREDIT HAS TO BE ALLO WED OF RS. RS.7,12,257/- DURING THE YEAR UNDER CONSIDERATION. THEREFORE, THE ASSESSING OFFICER IS DIRECTED TO ALLOW TDS CREDIT O F RS. RS.7,12,257/- . HENCE, THE APPELLANT GET TOTAL RELIEF OF RS.9,94,1 87/- ON ACCOUNT OF RECONCILIATION OF RENTAL INCOME AS PER TDS CERTIFIC ATES VIZ-A-VIZ BOOKS OF ACCOUNTS FOR AND WITHDRAWAL OF TDS CREDITS OF RS . 7,12,257/- I.T.A. NO.2126 & 2749/DEL/2013 166 153. WE FIND THAT THE TRIBUNAL ALSO IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2006-07 HAS DISMISSED THE REVENUES APPEAL AFTER OBSERVING AND HOLDING AS UNDER: 190. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) AND ALSO NONE HAS BEEN POINTED OUT BY THE LD. DR. WE HAVE CO ME ACROSS THE ARGUMENT OF THE LD. DR THAT ASSESSEE IS REQUIRED TO SHOW INCOME IN THE YEAR IN WHICH TDS IS MADE IS NOT ACCEPTABLE TO US SO FAR AS CHARGEABILITY OF INCOME UNDER THE INCOME FROM HOUSE PROPERTY IS CONCERNED. ACCORDING TO US THE INCOME FROM HOUSE PR OPERTY DOES NOT FOLLOW ANY METHOD OF ACCOUNTING BUT IS CHARGEABLE T O TAX ON ANNUAL LETTING VALUE BASIS OF THE PROPERTY IRRESPECTIVE OF THE RECEIPT OF THE RENT OR ADVANCE RECEIPT OF RENT. TAX DEDUCTION AT S OURCE IS REQUIRED TO BE MADE ONLY AT THE TIME OF PAYMENT OR CREDIT IN TH E BOOKS OF PAYER OF RENT AS PRESCRIBED U/S 194I OF THE ACT. THE TIMI NG BETWEEN THE TAXABILITY OF RENTAL INCOME UNDER THE HEAD INCOME F ROM HOUSE PROPERTY AND TIMING OF TAX DEDUCTION AT SOURCE CAN BE DIFFERENT AS BOTH THE SECTIONS HAVE DIFFERENT INTENTIONS, OBJECT S AND PURPOSES. IN VIEW OF THE ABOVE FACTS, WE CONFIRM THE ORDER OF CI T(A) IN DELETING THE ADDITION OF RS.4,49,85,573/- WITH A DIRECTION TO AO FOR VERIFICATION OF THE STATEMENT SUBMITTED BY THE ASSESSEE. FURTHERMOR E, THE AO VIDE HIS ORDER DATED 20.11.2012 IN ORDER TO GIVE EFFECT TO THE APPEAL OF THE CIT(A)S ORDER HAS ALREADY MADE THE DELETION OF THE AMOUNT AFTER VERIFICATION. HENCE GROUND NO 18 OF THE APPEAL IS D ISMISSED. 2. AS REGARDS WITHDRAWAL OF CREDIT OF TDS, IT IS SU BMITTED THAT THIS ISSUE IS FULLY COVERED IN FAVOUR OF THE A SSESSEE VIDE ITATS ORDER DATED 11.03.2016 IN ASSESSEES OWN CAS E FOR AY 2006-07 IN ITA NO.3061/DEL/2011(PARA 204-208, PAGE 113- 114). THE RELEVANT FINDING IS EXTRACTED HEREUNDER : 207. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS. AS THE INCOME ITSELF HAS BEEN TREATED AS TAXABLE IN THE HA NDS OF THE ASSESSEE U/S 56 OF THE ACT, THEREFORE, THE ASSESSEE IS ELIGIBLE FOR I.T.A. NO.2126 & 2749/DEL/2013 167 CREDIT OF TAX DEDUCTION AT SOURCE. THE LD. CIT (A) HAS DEALT WITH THIS ISSUE IN PARA 22.15 AS UNDER:- 22.15 SO FAR AS THE AOS DENIAL OF THE CREDIT OF T DS OF RS.26,25,369/- ON THE INCOME RECEIVED FROM SHRIRAM SCHOOL IS CONCERNED, I FIND THAT AS THE RENTAL INCOME HAS BEE N ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES AND SINC E THE TDS RELATES TO THE VERY SAME INCOME, THE CREDIT FOR THE SAID TDS CANNOT BE LOGICALLY DENIED. THEREFORE, THE AO IS DI RECTED TO ALLOW CREDIT OF TDS OF RS.26,25,369/-, AFTER DUE VERIFICA TION. 208. FURTHER, THE LD. CIT (A) HAS ASKED THE AO TO M AKE NECESSARY VERIFICATION; THEREFORE, WE CONFIRM THE ORDER OF TH E CIT (A) AND DISMISS GROUND NO.21 OF THE REVENUES APPEAL. 154. THUS IN VIEW OF THE AFORESAID FINDING OF TH E TRIBUNAL, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 155. IN GROUND NO.18, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF RS. 9,4,52,455/- ON ACCOUNT OF RECLASSIFICATION OF INCOME FROM HOUSE PROPERTY TO I NCOME FROM BUSINESS AND PROFESSION. 156. LD. ASSESSING OFFICER HAD NOTED THE FOLLOWI NG OBSERVATION OF THE SPECIAL AUDITOR THAT FOLLOWING P ROPERTIES HAVE BEEN REFLECTED AS FIXED ASSETS IN THE BALANCE SHEET AS ON 31 ST MARCH, 2008 AND ALSO NOTED THEIR COMMENTS IN THE FOLLOWING MANNER: PROPERTIES REFLECTED AS FIXED ASSETS IN THE BALANCE SHEET:- S. NO. NAME OF THE PROPERTY ------------ -------------------------------------- --------------------------------- 1. DLF, CENTRE, SANSAD MARG, NEW DELHI (PARTLY HE LD AS OFFICE). 2. 40F CANNAUGHT PLACE NEW DELHI. 3. SHOPS AT BELVEDERE PARK, GURGAON (CWIP) 4. SHOPS AT BELVEDERE TOWER, GURGAON (CWIP) I.T.A. NO.2126 & 2749/DEL/2013 168 5. SHOPS AT GRAND MALL, GURGAON (CWIP) COPY OF FIXED ASSETS REGISTER IN SUBSTANTIATION OF THE ABOVE IS ENCLOSED AS ANNEXURE 'A' (PAGE 15). B) PROPERTIES SHOWN AS CURRENT ASSETS:- S. NO. NAME OF THE PROPERTY 1. CORPORATE PARK. 2. SHOPS AT CENTRE POINT FARIDABAD. 3. LE MILLENNIA SUPERMART, WINDSOR COURT, PHASE -V, GURGAON. 4. LE MILLENNIA SUPERMART, CARLTON ESTATE, PHASE -V , GURGAON. 5. APARTMENTS AT DLF CITY, GURGAON. 6. SHOP AT DLF CITY CENTRE, GURGAON. 7. SHOPS AT RIDGEWOOD ESTATE. 8. DLF CENTRE, SANSAD MARG, NEW DELHI (PARTLY HELD AS SIT). 9. AMERICAN EXPRESS BANK LTD. PHASE - V, DLF CITY, GURGAON. 10. FELICITE BUILDERS & CONSTRUCTIONS PVT. LTD., I- E, JHANDEWALAN COPY OF THE FINALIZATION SCHEDULE OF BALANCE SHEET IN SUBSTANTIATION OF THE ABOVE IS ENCLOSED AS ANNEXURE 'B' (PAGE NO. 16). OUT OF THE PROPERTIES MENTIONED IN (B) ABOVE THE PR OPERTY MENTIONED AT S1. NO.8 IS NOT TREATED AS OWNED BY THE COMPANY. IN THE CASE OF PROPERTY AT DLF CENTRE SANSAD MARG, IN THE ASSESSMENT ORDER FOR A.Y.2007-08 & A.Y. 2006-07 AND EARLIER YE ARS, IT HAS BEEN HELD THAT THE SAID PROPERTY IS NOT OWNED BY THE ASSESSEE COMPANY. HOWEVER, IT IS EXPLAINED THAT AS PER ITAT ORDER FOR THE A. Y . 1996-97, THE SAID PROPERTY IS CONSIDERED AS OWNED BY THE COMPANY. IN VIEW OF THE ABOVE STATED FINDINGS, THE COMPUTATI ON OF INCOME FROM HOUSE PROPERTY NEEDS TO BE RECALCULATED ACCORDING T O THE NATURE OF INCOME FROM ALL THE 15 DIFFERENT PROPERTIES. WE HAV E THEREFORE RESTATED THE INCOME FROM HOUSE PROPERTY UNDER THE VARIOUS HE ADS OF INCOME WHICH IS TABULATED AS UNDER:- RECLASSIFICATION OF INCOME DECLARED UNDER THE HEAD INCOME FROM HOUSE PROPERTY:- AMOUNT (RS.) 1. INCOME FROM HOUSE PROPERTY A) 40 - F CONNAUGHT PLACE, NEW DELHI 8,56,6 93.00 LESS:- HOUSE TAX PAID 1,07,720.00 ___________ __________ 7,48,973.00 B) SHOPS AT BEVLVEDRE PARK, GURGAON 1,63, 200.00 C) SHOPS AT BEVLVEDRE PARK, TOWER 3, 29,040.00 I.T.A. NO.2126 & 2749/DEL/2013 169 D) SHOPS AT GRAND MALL, GURGAON 1,30,32 ,412.00 E) OTHER RENT 1 9,18,123.00 1,61,91,748.00 LESS: STATUTORY DEDUCTION @ 30 % 48,57,524.00 1,13,34,224.00 _____________ 2. INCOME FROM BUSINESS & PROFESSION A) CORPORATE PARK 8,46,69,205.00 B) SHOPS AT CENTRE POINT, FARIDABAD 7,15,586.00 C) LE MILENNIA SUPERMART, WINDSOR 7,17,876.00 COURT, PH-IV, GURGAON D) LE MILENNIA SUPERMART, CARLTON 1,02,600.00 ESTATE, PH-IV, GURGAON E) RENT / LICENSE FEE FOR APPARTMENTS 16,63,333.00 AT DLF CITY, GURGAON F) SHOPS AT DLF CITY CENTRE, GURGAON 9,49,912.00 G) SHOPS AT RIDGEWOOD ESTATE 7,50,000.00 H) AMERICAN EXPRESS BANK LTD., PHASE-V, DLF CITY GURGAON 5,89,25,991.00 I) FELICITE BUILDERS & CONSTRUCTION 88,000.00 PVT. LTD., I-E, JHANDEWALAN J) DLF CENTRE, SANSAD MARG, 19,39, 85,629.00 NEW DELHI LESS: EXPENSES- HOUSE TAX PAID 2,90,59,948.00 16,49,25,681.00 31,35,08,184.00 _____________ ______________ ______________ TOTAL INCOME _________________ A)INCOME FROM HOUSE PROPERTY SHOWN IN COMPUTATION O F INCOME 32,48,42,408.00 B)INCOME UNDER STATED BY THE COMPANY 23,07,89,953.00 _________________ (A) - (B) 9,40,52,455 IN VIEW OF THE ABOVE A SUM OF RS. 9,40,52,455/- HA S BEEN UNDER STATED BY THE COMPANY BY INCLUDING IT AS INCOME FROM HOUSE PROPERTY INSTEAD OF BUSINESS INCOME/INCOME FROM OTHER SOURCES. 157. LD. ASSESSING OFFICER BASED ON SIMILAR OBSERVA TION AND FOLLOWING THE JUDGMENT OF HON'BLE GUJARAT HIGH CO URT IN I.T.A. NO.2126 & 2749/DEL/2013 170 THE CASE OF CIT VS. NEHA BUILDERS, 296 ITR 661, REI TERATED THE ADDITION AND COMPUTATION MADE BY THE SPECIAL AUDITO R. 158. LD. CIT (A) HAS DELETED THE ADDITION IN THE FOLLOWING MANNER: 27.13 I HAVE CONSIDERED THE SUBMISSION OF THE A PPELLANT AND OBSERVATION OF THE ASSESSING OFFICER AND DECISI ON OF HONBLE ITAT FOR A.Y. 1996-97 IN APPELLANTS OWN CA SE AND DECISION OF THE HONBLE CIT(A)-XVIII FOR A.Y. 2006-07 AND MY OWN DECISION IN APPELLANTS OWN CASE FOR A.Y. 2007-08. IT IS SEEN T HAT THE ISSUE IN THIS GROUND IS COVERED IN FAVOUR OF THE APPELLANT B Y THE ORDER OF HONBLE ITAT IN APPELLANTS OWN CASE FOR AY 1996-97 . THE APPELLANT HAS RECEIVED INCOME FROM THE PROPERTIES O WNED BY IT AND SUCH PROPERTIES ARE REFLECTING IN BALANCE SHEET AS STOCK IN TRADE. THE APPELLANT HAS FURNISHED THE RECEIPT OF HOUSE TA X PAYMENT WITH RESPECT TO ABOVE SAID PROPERTIES DURING THE COURSE OF ASSESSMENT PROCEEDINGS WHICH ESTABLISH THAT SAID PROPERTIES BE LONG TO APPELLANT AND OWNED BY IT. IT IS NOTICED THAT THE A SSESSING OFFICER HAS MADE THE ADDITION BY RECLASSIFYING THE INCOME B Y RELYING UPON THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. NEHA BUILDERS PVT. LTD. (SUPRA). HOWEVER, THERE IS NO DISPUTE ON THE FACTS NOTED ABOVE. TAKING INTO CONSIDERATION THE OR DER OF HONBLE ITAT IN THE APPELLANTS OWN CASE FOR EARLIER YEARS AND THE DECISION IN CIT VS. NATIONAL & GRINDLAYS BANK LIMITED (SUPRA ) AND CIT (A)S ORDER FOR THE IMMEDIATELY PRECEDING YEARS RELEVANT TO AY 2006-07 & 2007-08 IN APPELLANTS OWN CASE, THE INCOME RECEIVE D FROM THE PROPERTIES OWNED BY THE APPELLANT AND SHOWN IN THE BALANCE SHEET HAS TO BE ASSESSED AS INCOME FROM HOUSE PROPERTY. T HEREFORE, THE ASSESSING OFFICER IS DIRECTED TO TREAT THE INCOME F ROM SUCH PROPERTIES AS INCOME FROM HOUSE PROPERTY AND ALLO W DEDUCTION I.T.A. NO.2126 & 2749/DEL/2013 171 U/S 24(A) OF THE IT ACT. HENCE, THE ADDITION MADE B Y THE ASSESSING OFFICER OF RS. 9,40,52,455/- IS DELETED. 159. THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSE SSMENT YEAR 2006-07 HAS DISMISSED THE REVENUES APPEAL AFT ER OBSERVING AND HOLDING AS UNDER: 184. FURTHER, LD. DR HAS RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CHENNAI PROPERTIES AND INVESTMENT LTD. VS. CIT IN CIVIL APPEAL NO.4494/2004 WHEREIN HONBL E SUPREME COURT HAS HELD THAT LETTING OUT OF THE PROPERTIES I S IN FACT THE BUSINESS OF THE ASSESSEE. WE HAVE GONE THROUGH THE DECISION OF HONBLE SUPREME COURT AND WE ARE OF THE VIEW THAT THIS DECI SION FAVOURS THE ARGUMENT OF THE ASSESSEE. AT PAGE 4 OF THE DECISION , THE HONBLE SUPREME COURT HAS CONSIDERED THE JUDGEMENT OF THAT COURT IN EAST INDIA HOUSING AND LAND TRUST LTD. THE COURT HAS CON SIDERED THAT DECISION THAT WHERE THE MAIN OBJECTION THE COMPANY IS BUYING AND DEVELOPING LAND AND PROPERTIES AND PROMOTING AND DE VELOPING MARKETS AND SOME RENT IS TURNED OUT OF THAT, THE CH ARACTER OF THAT INCOME SHALL BE INCOME FROM HOUSE PROPERTY. THEREFO RE, IN THIS CASE TOO, THE ASSESSEE COMPANY IS A DEVELOPER AND HENCE, THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CHENNAI PROPER TIES IS RENDERED IN THE CONTEXT OF THE COMPANY WHICH IS FORMED WITH THE MAIN OBJECT OF RENTING UP OF THE PROPERTIES. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING THE DECISION OF COORDINATE BENCH OF THE I TAT IN THE CASE OF ASSESSEE FOR AY 2005-06, WE CONFIRM THE ORDER OF CI T(A) IN TAXING THE RENTAL INCOME AS INCOME FROM HOUSE PROPERTY. IN THE RESULT THE GROUND NO.17 OF THE REVENUE'S APPEAL IS DISMISSED. 160. SINCE THIS ISSUE HAS BEEN DEALT BY THE TRIBUN AL IN VARIOUS YEARS, THEREFORE, CONSISTENT WITH THE VIEW TAKEN, THE I.T.A. NO.2126 & 2749/DEL/2013 172 ORDER OF THE LD. CIT (A) HAS CONFIRMED AND CONSEQUE NTLY THE REVENUES GROUND IS DISMISSED. 161. IN GROUND NO.19, THE REVENUE HAS CHALLENGED T HE DELETION OF ADDITION OF RS. 12,28,340/- ON ACCOUNT OF DISALLOWANCE OF NOTIONAL RENT/ADDITIONAL ANNUAL LET TING VALUE IN RESPECT OF THE VACANT PROPERTY. 162. LD. ASSESSING OFFICER NOTED THAT SPECIAL AUD ITOR HAS POINTED OUT THAT NUMBER OF IMMOVABLE PROPERTY OWNED BY THE ASSESSEE WERE LYING VACANT AND NOTIONAL RENT IN RES PECT OF SUCH PROPERTIES HAS BEEN WORKED OUT AT RS.12,28,340 /-. 163. LD. CIT (A) HAS DELETED THE ADDITION IN THE FOLLOWING MANNER: 28.13 I HAVE CONSIDERED THE SUBMISSION OF THE APPE LLANT, OBSERVATION OF THE ASSESSING OFFICER AND VARIOUS JU DICIAL PRONOUNCEMENTS AVAILABLE ON THE ISSUE AND ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)- XVIII FOR AY 2006-07 AND M Y OWN ORDER FOR AY 2007-08 IN THE CASE OF APPELLANT WHEREIN THIS IS SUE WAS DECIDED IN FAVOUR OF APPELLANT. IT IS SEEN THAT IMP UGNED ADDITION MADE ON ACCOUNT OF NOTIONAL RENT ON PROPERTIES THAT REMAINED VACANT FOR PART OF THE PREVIOUS YEAR, THE AR REITER ATED SUBMISSIONS MADE BEFORE THE AO AND EMPHASIZED THAT THE MATTER I S COVERED IN FAVOUR OF THE APPELLANT BY JUDGMENT IN THE CASE OF ONE OF THE APPELLANTS GROUP CONCERNS M/S DLF OFFICE DEVELOPER S VS. ACIT REPORTED IN 23 SOT 19 (DEL) AND ORDERS OF CIT (APPE ALS) IN APPELLANTS OWN CASE FOR THE ASSESSMENT YEARS 2006- 07 AND 2007- 08. IT IS OBSERVED THAT WHERE THERE WAS AN INTENTI ON TO LET OUT THE HOUSE PROPERTY AND ASSESSEE TOOK STEPS TO LET IT BU T COULD NOT GET SUITABLE TENANT, IN SUCH CASES THE ANNUAL VALUE WIL L HAVE TO BE I.T.A. NO.2126 & 2749/DEL/2013 173 WORKED OUT UNDER SECTION 23(1)(C) OF THE IT ACT AND ACCORDING TO THIS CLAUSE, IF THE ACTUAL RENT RECEIVED /RECEIVABLE DUR ING THE YEAR IS NIL THEN THAT HAS TO BE TAKEN AS ANNUAL VALUE OF THE PR OPERTY IN ORDER TO COMPUTE THE INCOME FROM PROPERTY. IN THE CASE OF APPELLANT, THE APPELLANT HAD INTENTI ON TO LET SUCH PROPERTIES BUT COULD NOT GET SUITABLE TENANT. IN SUCH A SITUATION, THE ALV WILL BE NIL AS PER PROVISION OF SECTION 23(1)(C) OF THE IT ACT. SECTION 23(1)(A) R.W.S 23(1)(C) CLEARL Y PROVIDES THAT IF THE PROPERTY REMAIN VACANT WHOLLY OR PARTLY DURING THE PARTY, THEN ACTUAL RENT RECEIVED OR RECEIVABLE WILL BE TAKEN AS THE ALV OF SUCH PROPERTIES. IN THE CASE OF APPELLANT THE PROPERTY I S REMAINED VACANT, THEREFORE, THE ALV OF SUCH PROPERTIES WILL BE NIL. HENCE, NO NOTIONAL RENT CAN BE ESTIMATED IN THE CASE OF VACANT PROPERT IES. THE DECISION OF THE ASSESSING OFFICER WAS NOT JUSTIFIED. 164. THE TRIBUNAL ALSO IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 HAS DISMISSED THE REVENUES APPEAL AFTER OBSERVING AND HOLDING AS UNDER: 196. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTEN TIONS. WE HAVE ALSO PERUSED THE ORDER OF THE COORDINATE BENCH OF T HE ITAT IN ITA NO.3561/DEL/2013 WHEREIN GROUND NO.3 HAVE CONSIDERE D THE IDENTICAL ISSUE WHERE IN PARA NO 16 TO 23 ADDITION IS DELETED BY ITAT AS UNDER :- 16. THE ASSESSING OFFICER MADE AN ADDITION OF RS.3 ,02,61,251/- ON ACCOUNT OF NOTIONAL RENT/ ADDITIONAL ANNUAL LETT ING VALUE (ALB) U/S 23(1) (A) OF THE INCOME TAX ACT,1961, IN RESPEC T OF VACANT PROPERTIES. THE DETAILS OF THE ADDITION AS PER THE ASSESSMENT O RDER IS AS UNDER: - DLF CITY CENTRE RS.2,36,01,310/- - DLF COMMERCIAL SHOPPING COMPLEX RS. 27,21,360/- DLF CORPORATE PARK RS.1,69,07,688/- I.T.A. NO.2126 & 2749/DEL/2013 174 RS.4,32,30,358/- LESS: STANDARD DEDUCTION U/S 24(1) RS.1,29,69,107/ - RS.3,02,61,250/- 17. THE LD. CIT (A) HAS DELETED THE ADDITION AFTER DISCUSSING THE CASE OF THE ASSESSEE IN DETAIL AND FOLLOWING THE DE CISION CITED BEFORE HIM IN THIS REGARD INCLUDING DECISION OF D BENCH OF THE TRIBUNAL ON AN IDENTICAL ISSUE IN THE ASSESSEES GR OUP CONCERN M/S DLF OFFICE DEVELOPERS VS. ACIT REPORTED IN 23 SOT 1 9 (DEL) AND FIRST APPELLATE ORDERS IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09. 18. IN SUPPORT OF THE GROUND THE LD. DEPARTMENTAL R EPRESENTATIVE HAS BASICALLY PLACED RELIANCE ON THE ASSESSMENT ORD ER. 19. THE LD. AR ON THE OTHER HAND REITERATED THE SUB MISSIONS MADE BEFORE THE LD. CIT (A) AND THE DECISIONS CITED AND RELIED UPON BEFORE HIM. 20. CONSIDERING THE ABOVE SUBMISSION, WE FIND THAT THE LD. CIT (A) HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE NAR RATING THE OBSERVATION MADE IN THE CITED DECISIONS IN CASE OF M/S DLF OFFICE DEVELOPERS VS. ACIT (SUPRA) AND OTHER THAT WHERE TH ERE WAS AN INTENTION TO LET OUT THE HOUSE PROPERTY AND ASSESSE E TOOK STEPS TO LET IT BUT COULD NOT GET SUITABLE TENANT, IN SUCH CASES THE ANNUAL VALUE HAVE TO BE WORKED OUT U/S 23(1) (C) OF THE IT ACT A ND ACCORDING TO THIS CLAUSE IF THE ACTUAL RENT RECEIVED/ RECEIVABLE DURING THE YEAR IS NIL THEN THAT HAS TO BE TAKEN AS ANNUAL VALUE OF TH E PROPERTY IN ORDER TO COMPUTE THE INCOME FROM PROPERTY. HE HAS A CCORDINGLY HELD THAT IN CASE OF THE ASSESSEE WHERE THE PROPERTY REM AINED VACANT THEN THE ALV OF SUCH PROPERTY WILL BE NIL. HENCE, N O NOTIONAL RENT CAN BE ESTIMATED IN THE CASE OF VACANT PROPERTIES. 21. IN ABSENCE OF REBUTTAL OF ABOVE ASPECT OF THE F ACTS IN THE CASE OF PRESENT ASSESSEE, WE ARE OF THE VIEW, THAT THE LD. CIT (A) HAS RIGHTLY DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE TAKING I.T.A. NO.2126 & 2749/DEL/2013 175 ASSISTANCE OF THE CITED DECISIONS BEFORE HIM. WE FI ND THAT THE LD. CIT (A) HAS DISCUSSED THE ISSUE IN APPEAL AND HAS P ASSED A SPEAKING ORDER, WHICH IS BEING REPRODUCED HEREUNDER : 7.15 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT, OBSERVATION OF THE ASSESSING OFFICER AND VARIOUS JU DICIAL PRONOUNCEMENTS AVAILABLE ON THE ISSUE AND ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-XVIII FOR AY 2 006-07 AND MY OWN ORDERS FOR A Y 2007-08 & 2008-09 IN THE CASE OF APPELLANT WHEREIN THIS ISSUE WAS DECIDED IN FAVOUR OF APPELLANT. IT IS SEEN THAT IMPUGNED ADDITION MADE ON ACCOUNT O F NOTIONAL RENT ON PROPERTIES THAT REMAINED VACANT FOR PART OF THE PREVIOUS YEAR, THE AR REITERATED SUBMISSIONS MADE BEFORE THE AO AND EMPHASIZED THAT THE MATTER IS COVERED IN FAVOUR OF THE APPELLANT BY JUDGMENT IN THE CASE OF ONE OF THE APPELLANT'S G ROUP CONCERNS M/S DLF OFFICE DEVELOPERS VS. ACIT REPORTED IN 23 S OT 19 (DEL) AND ORDERS OF CIT(APPEALS) IN APPELLANT'S OWN CASE FOR THE ASSESSMENT YEARS 2006-07, 2007-08 & 2008-09. IT IS OBSERVED THAT 'WHERE THERE WAS AN INTENTION TO LET OUT THE H OUSE PROPERTY AND ASSESSEE TOOK STEPS TO LET IT BUT COULD NOT GET SUITABLE TENANT, IN SUCH CASES THE ANNUAL VALUE WILL HAVE TO BE WORK ED OUT UNDER SECTION 23(L)(C) OF THE IT ACT AND ACCORDING TO THI S CLAUSE, IF THE ACTUAL RENT RECEIVED / RECEIVABLE DURING THE YEAR I S NIL THEN THAT HAS TO BE TAKEN AS ANNUAL VALUE OF THE PROPERTY IN ORDER TO COMPUTE THE INCOME FROM PROPERTY. ' IN THE CASE OF APPELLANT, THE APPELLANT HAD INTENTI ON TO LET SUCH PROPERTIES BUT COULD NOT GET SUITABLE TENANT. IN SU CH A SITUATION, THE AL V WILL BE NIL AS PER PROVISION OF SECTION 23(1)( C) OF THE IT ACT. SECTION 23(1)(A) R.W.S 23(1)(C) CLEARLY PROVIDES TH AT IF THE PROPERTY REMAIN VACANT WHOLLY OR PARTLY DURING THE YEAR, THE N ACTUAL RENT RECEIVED OR RECEIVABLE WILL BE TAKEN AS THE ALV OF SUCH PROPERTIES. IN THE CASE OF APPELLANT THE PROPERTY IS REMAINED V ACANT, THEREFORE, THE ALV OF SUCH PROPERTIES WILL BE NIL. HENCE, NO N OTIONAL RENT CAN I.T.A. NO.2126 & 2749/DEL/2013 176 BE ESTIMATED IN THE CASE OF VACANT PROPERTIES. THE DECISION OF THE ASSESSING OFFICER WAS NOT JUSTIFIED. AS REGARDS, THE ASSESSING OFFICERS DECISION OF COM PUTING THE NOTIONAL RENT BASED ON HIGHEST RENT IN RESPECT OF E ACH BUILDING, IT IS SEEN THAT THE PROPERTIES HAVE BEEN GIVEN TO VARIOUS PARTIES WHICH ARE NOT RELATED TO THE APPELLANT AND SOME OF THEM A RE OF INTERNATIONAL REPUTE LIKE GE CAPITAL, KPMG. THE REN T HAS BEEN CHARGED BASED ON THE LOCATION OF THE PROPERTY, AREA OF LEASE PROPERTY AND TIMING OF LEASE AGREEMENT. IT IS SEEN THAT APPELLANT HAS FILED COPIES OF THE ALL LEASE AGREEMENT BEFORE ASSESSING OFFICER FOR VERIFICATION AND NO DISCREPANCY IN THE RENTAL I NCOME IN THE BOOKS OF ACCOUNTS, AS COMPARED TO THE LEASE AGREEMENT WAS POINTED OUT BY THE ASSESSING OFFICER. IT IS NOT THE CASE THAT A PPELLANT HAS RECEIVED SOME UNDER HAND RENT FROM THE TENANTS. IN THIS REGARD THE ASSESSING OFFICER HAS NOT BROUGHT ANY EVIDENCE ON R ECORD AND NO ENQUIRY IN THIS DIRECTION WAS CONDUCTED BY HIM. THE REFORE, ASSUMING THE RENT FOR ALL PROPERTIES BASED ON THE H IGHEST LEASE AGREEMENT WAS NOT JUSTIFIABLE. AS REGARDS ASSESSING OFFICERS RELIANCE ON VARIOUS JUDGMENTS IN THE ASSESSMENT ORD ER, IT IS SEEN THAT THE FACTS OF THE SAID JUDGMENTS ARE SQUARELY D IFFERENT WITH THAT OF THE APPELLANTS CASE. IN THE CASE OF APPELLANT, NONE OF THE PROPERTIES HAVE BEEN RENTED OUT/LEASED TO THE RELAT ED PARTIES. THEREFORE, THE RATIO OF THE SAID JUDGMENT CANNOT BE APPLIED IN THE APPELLANT CASE. IN VIEW OF THE ABOVE, THE BONAFIDE LEASE AGREEMENT BETWEEN THE APPELLANT AND THIRD PARTIES CANNOT BE D ISREGARDED WITHOUT HAVING ANY ADVERSE INFORMATION IN THIS REGA RD AND BASED ON CONJECTURES AND SURMISES. HENCE, THE ADDITION MA DE BY THE ASSESSING OFFICER ON THIS ISSUED IS DELETED. FACTS OF THE ABOVE CITED JUDICIAL PRONOUNCEMENTS AR E IDENTICAL WITH THE FACTS OF THE APPELLANTS CASE. THEREFORE, RATIO OF THE SAID JUDGMENT IS SQUARELY APPLICABLE TO THE FACTS OF THE APPELLANTS CASE. HENCE, THE NOTIONAL ADDITION MADE BY THE ASSESSING OFFICER OF RS. I.T.A. NO.2126 & 2749/DEL/2013 177 3,02,61,251/- UNDER THE HEAD INCOME FROM HOUSE PRO PERTY ON ACCOUNT OF NOTIONAL INCOME U/S 23(1) (A) OF THE INC OME TAX ACT IS DELETED. 22. WE FIND THAT THE FIRST APPELLATE ORDER ON THE I SSUE AS DISCUSSED ABOVE IS REASONABLE AND VIEW SUPPORTED WITH THIS DE CISION. HENCE, WE ARE NOT INCLINED TO INTERFERE WITH THE ORDER, TH E SAME IS UPHELD. GROUND NO.3 IS ACCORDINGLY REJECTED. 197. THEREFORE, FOLLOWING THE DECISION OF THE COORD INATE BENCH OF THE ITAT IN THE CASE OF THE ASSESSEE FOR AY 2005-06 , T HE ADDITION OF RS.3,27,52,542/-IS DELETED. IN THE RESULT, GROUND N O.19 IS DISMISSED. 165. ONCE THIS ISSUE HAS BEEN CONSISTENTLY DECIDED IN FAVOUR OF THE ASSESSEE, THEN IN THIS YEAR, WITHOUT ANY CHANGE IN MATERIAL FACTS NO DIFFERENT VIEW CAN BE TAKEN. R ESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, W E DISMISS THE GROUND RAISED BY THE REVENUE. 166. IN GROUND NO.20, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION RS. 7,17,794/- ON ACCOUNT OF D EPRECIATION CLAIMED ON DLF CENTRE BUILDING. 167. THE ASSESSING OFFICER ON THE BASIS OF SPECI AL AUDIT REPORT OBSERVED THAT ASSESSEE COMPANY HAS CHARGED E XCESS DEPRECIATION OF RS.914277/- ON CERTAIN PORTION IN R ESPECT OF BUILDING ON DLF CENTER WHICH WAS EARLIER LET OUT BU T DURING THE ASSESSMENT YEAR THE SAME HAS BEEN CONVERTED INT O SELF OCCUPIED ALREADY THEREFORE EXCESS DEPRECIATION HAS BEEN CHARGED SINCE THE ASSESSEE HAS CLAIMED DEPRECIATION EXISTING ON 01.04.1999 WHEREAS DEPRECIATION IS ALLOWABLE ON WVS ON I.T.A. NO.2126 & 2749/DEL/2013 178 01.04.2005 THE ASSESSING OFFICER WORKED OUT THE EXC ESS DEPRECIATION OF RS.8,03,807/-. 168. LD. CIT(A) HAS DELETED THE ADDITION IN THE FOLLOWING MANNER: 30.7 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT AND OBSERVATION OF THE ASSESSING OFFICER AND ORDER OF C IT (A) XVIII FOR AY 2006-07 AND MY OWN ORDER FOR AY 2007-08 IN A PPELLANTS CASE, WHERE THIS ISSUE WAS DECIDED IN FAVOUR OF THE APPELLANT COMPANY. IT IS SEEN THAT THE AO HAS RECALCULATED WR ITTEN DOWN VALUE AS ON 01.04.2005 BY NOTIONALLY DEDUCTING DEPR ECIATION FROM THE WDV AS ON 01.04.1999. THE AMOUNT OF NOTIONAL DE PRECIATION FOR THE PERIOD 01.04.1999 01.04.2005 DURING WHICH PERIO D THE PROPERTY HAD BEEN LEASED AND THE INCOME TAXED UNDER THE HEAD INCOME FROM HOUSE PROPERTY AFTER ALLOWING DEDUCTIONS PERM ISSIBLE UNDER SECTION 24 OF THE INCOME TAX ACT. DEDUCTIONS BY WAY OF DEPRECIATION ALLOWANCE ARE DEALT IN SECTION 32 OF T HE INCOME TAX ACT WHICH PROVIDES FOR ALLOWING DEPRECIATION ON THE BAS IS OF WRITTEN DOWN VALUE OF THE ASSETS UNDER SECTION 32(1)(II). T HE DEFINITION OF THE WORD WRITTEN DOWN VALUE IS IN SECTION 43(6)(B) OF THE INCOME TAX ACT WHICH PROVIDES THAT IN THE CASE OF ASSETS ACQUI RED BEFORE THE PREVIOUS YEAR WRITTEN DOWN VALUE MEANS THE ACTUAL C OST TO THE APPELLANT LESS ALL DEPRECIATION ACTUALLY ALLOWED UN DER THE ACT. FROM THE FACTS AND THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. DOOMDOOMA INDIA LIMITED (2009) 178 TAXMAN 261 (SC), IT IS CLEAR THAT THE DEPRECIATION IS TO BE AL LOWED ON THE BASIS OF ACTUAL WDV AND SAME CANNOT BE REDUCED ON NOTIONAL B ASIS FOR THE PERIOD FOR WHICH PROPERTY WAS NOT USED FOR BUSINESS PURPOSES AND NO DEPRECIATION WAS CLAIMED ON SUCH PART OF THE PRO PERTY. FROM THE FACTS AS NARRATED ABOVE AND RESPECTFULLY FOLLOWING THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. DOOMDO OMA INDIA LIMITED (2009) 178 TAXMAN 261 (SC) AND THE JUDGMENT OF THE CIT I.T.A. NO.2126 & 2749/DEL/2013 179 (APPEALS) IN THE CASE OF THE APPELLANT FOR A.Y. 200 6-07 AND 2007-08 (SUPRA), THE DISALLOWANCE OF DEPRECIATION OF RS.7,1 7,794/- MADE BY THE ASSESSING OFFICER IS DELETED. 169. THE TRIBUNAL ALSO IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 HAS DISMISSED THE REVENUES APPEAL AFTER OBSERVING AND HOLDING AS UNDER: 151. WE HAVE GONE THROUGH THE SUBMISSION OF THE PA RTIES. THE CIT(A) HAS OBSERVED THAT THIS VERY ISSUE AROSE IN T HE PRECEDING YEAR AND RELIEF ALLOWED AT THE FIRST APPELLATE STAGE WAS ACCEPTED BY THE REVENUE AS NO APPEAL WAS FILED AGAINST THE SAME BEF ORE ITAT. IN THE LIGHT OF ABOVE POSITION AND AS PER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. J K CHARITABLE TRUST [2008] 308 ITR 161 (SC), THE REVENUE COULD NOT BE PERMITTED TO AGITATE THE VERY SAME ISSUE IN THE YEAR UNDER REFERENCE. ACCORDINGLY , THE ORDER OF CIT(A) IS CONFIRMED. 170. IN VIEW OF THE ABOVE, THIS ISSUE IS DECIDED AGAINST THE REVENUE. 171. IN GROUND NO.21, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF RS. 58,50,162/-ON ACCOUNT O F DISALLOWANCE OF EXPENSES WHERE BILLS ARE NOT IN THE NAME OF THE COMPANY. 172. THE ASSESSING OFFICER HAS MADE THE DISALLOW ANCE ON THE GROUND THAT NO DOCUMENTARY EVIDENCES HAVE BEEN FILED IN RESPECT TO CERTAIN EXPENSES AS BILLS DOES NOT CONTA IN THE NAME OF THE ASSESSEE COMPANY. I.T.A. NO.2126 & 2749/DEL/2013 180 173. LD. CIT(A) HAS DELETED THE ADDITION IN THE FOLLOWING MANNER: 32.7 I HAVE CONSIDERED THE FACTS AVAILABLE ON REC ORDS AND THE CONTENTION OF THE APPELLANT AND ORDER OF CIT (A ) XVIII FOR AY 2006-07 AND MY OWN ORDER FOR AY 2007-08 IN APPELLAN TS OWN CASE WHERE THIS ISSUE WAS DECIDED IN FAVOUR OF THE APPEL LANT COMPANY. IT IS OBSERVED THAT THE IMPUGNED DISALLOWANCE OF EXPEN DITURE OF RS.58,50,162/- HAVE BEEN MADE ON THE GROUND THAT TH E BILLS ARE NOT IN THE NAME OF APPELLANT. IT IS OBSERVED FROM PAGES 403 TO 406 OF THE ASSESSMENT ORDER THAT THE APPELLANT HAS EXPLAIN ED EACH AND EVERY ITEM OF EXPENDITURE IN DETAIL. IT IS SEEN THA T THESE EXPENSES ARE IN THE NATURE OF ELECTRICITY BILL AND WATER CHA RGES PERTAINING TO JHANDEWALAN OFFICE OF THE APPELLANT, REIMBURSEMENT MADE TO THE EMPLOYEES AND OTHER GROUP COMPANIES. AS EXPLAINED B Y THE APPELLANT THAT JHANDEWALAN PROPERTY BELONGS TO THE APPELLANT SINCE SO MANY YEARS BUT THE SAME WAS GIVEN ON RENT TO M/S DCM LTD. WHEN THE SAID PROPERTY WAS GIVEN ON RENT THOSE COMP ANIES TOOK ELECTRICITY CONNECTION AND WATER CONNECTION ON THEI R NAME. THOUGH THE PROPERTY HAS BEEN VACATED BY THOSE TENANTS AND BEING USED BY THE APPELLANT BUT THE ELECTRICITY AND WATER CONNECT ION IS STILL RUNNING IN THEIR NAME. THESE EXPENSES HAVE BEEN INCURRED WH OLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSES OF THE APPELL ANT AS THESE PREMISES ARE BEING USED BY THE APPELLANT FOR ITS OF FICE PURPOSES. MERELY BECAUSE THE WATER AND ELECTRICITY BILLS ARE IN THE NAME OF EARLIER TENANTS, THE SAME CANNOT BE DISALLOWED. IT IS ALSO SUBMITTED BY THE APPELLANT THAT WATER AND ELECTRICITY BILL PE RTAINING TO RAISINA COLD STORAGE ARE ALSO BEING UTILIZED BY THE APPELLA NT AS PROPERTY IN THE NAME OF SAID COMPANY IS IN THE POSSESSION OF TH E APPELLANT. THIS COMPANY HAS BEEN MERGED WITH THE APPELLANT, TH EREFORE, THESE EXPENSES ALSO PERTAIN TO THE APPELLANTS AND THEREF ORE, INCURRED ONLY FOR THE BUSINESS PURPOSES OF THE APPELLANT. T HE REIMBURSEMENT I.T.A. NO.2126 & 2749/DEL/2013 181 MADE TO THE GROUP COMPANIES AND EMPLOYEES OF THE AP PELLANT COMPANY FOR THE EXPENSES INCURRED BY THEM ON BEHALF OF THE APPELLANT ALSO PERTAINS TO THE APPELLANT AS THESE E XPENSES WERE INCURRED ON BEHALF OF THE APPELLANT FOR ITS BUSINES S PURPOSES. CONSIDERING THE FACTS IT IS ESTABLISHED THAT THESE EXPENSES WERE PERTAINING TO APPELLANT COMPANY AND SERVICES OR UTI LIZATION THEREOF WERE FOR THE PURPOSES OF THE BUSINESS OF APPELLANT COMPANY. HENCE, THE SAME ARE ALLOWABLE. IN VIEW OF THE ABOVE DISCUS SIONS THE DISALLOWANCE OF RS. 58,50,162/- MADE BY THE ASSESSI NG OFFICER IS DELETED. 174. WE FIND THAT THE TRIBUNAL ALSO IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 HAS DISMISSED THE REVEN UES APPEAL AFTER OBSERVING AND HOLDING AS UNDER:- 276. WE HAVE NOTED THAT MOST OF THESE EXPENSES ARE IN THE NATURE OF ELECTRICITY EXPENSES OF THE PROPERTY TAKEN ON RE NT BY THE ASSESSEE THAT WAS EXPLAINED TO THE AO BY ASSESSEE HOWEVER SA ME WERE DISALLOWED. NATURALLY THE ELECTRICITY BILL WOULD BE IN THE NAME OF OWNER OF THE PROPERTY AND NOT TENANT IN CASE THE PR OPERTY IS RENTED. THEREFORE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT (A) IN DELETING DISALLOWANCE. IN THE RESULT GROUND NO 38 O F THE APPEAL IS DISMISSED. 175. HERE, IN THIS CASE ALSO, THE BULK OF EXPENS ES ARE IN THE NATURE OF ELECTRICITY AND WATER EXPENSES FOR WHICH THE NAME OF ERSTWHILE TENANT HAS BEEN MENTIONED. SIMILAR ISSUE WAS INVOLVED IN THE EARLIER YEAR ALSO, THEREFORE, RESPE CTFULLY FOLLOWING THE PRECEDENCE THIS ISSUE IS DECIDED IN F AVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. ACCORDINGLY, THE REVENUES GROUNDS ARE DISMISSED. I.T.A. NO.2126 & 2749/DEL/2013 182 176. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH MAY, 2019. SD/- SD/- [L.P. SAHU] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 27 TH MAY, 2019 PKK: