Income Tax Appellate Tribunal - Chandigarh
Haryana Urban Development Authority, ... vs Acit, Panchkula on 6 February, 2018
1
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, 'A' CHANDIGARH
BEFORE MS. DI VA SINGH, JUDICIAL MEMBER
AND DR. B.R.R.KUMAR, ACCOUNTANT MEMBER
ITA Nos. 623, 624, 625, 1061, 516, 517, 518, 544/CHD/2011,15 & 17
(Assessment Years. 2004-05, 2006-07 to 2011-12 & 2014-15)
The DCIT, Vs. M/s. Haryana Urban Development Authority,
Circle Sector- 6,
Panchkula. Panchkula
PAN No. : AAAAH0087M
ITA Nos. 255, 256/CHD/2016
(Assessment Years. 2012-13, 2013-14)
The Asst. CIT, Vs. Haryana Urban Development Authority,
Circle Sector- 6,
Panchkula. Panchkula
ITA Nos. 640,414, 641, 642,1075,415, 472, 473, 474, 548/CHD/2011, 12, 15 & 17
( Assessment Years : 2004-05, 2006-07 to 2011-12 & 2014-15)
M/s. Haryana Urban Development Authority Vs. The Addl. CIT
Sector-6 Panchkula Range
Panchkula Panchkula
PAN No. : AAAAH0087M
ITA Nos. 471, 235 & 236/CHD/2015 & 2016
(Assessment Years. 2003-04 & 2012-13 to 2013-14)
M/s. Haryana Urban Development Authority Vs. The DCIT
Sector-6 Panchkula Range
Panchkula Panchkula
(Appellant) (Respondent)
Assessee By : Ms. Rattan Kaur, Shri. A.K. Jindal
Revenue by : Dr. Gulshan Raj, CIT-DR
Date of hearing : 22.11.2017
Date of Pronouncement : 06/02/2018
ORDER
PER BENCH All the above appeals and cross appeals (totaling 23 in number, 10 by the Revenue and 13 by the Assessee) pertaining to 2004-05 to 2014-15 assessment year are being decided by a common order for the sake of convenience.
22. The Haryana Urban Development Authority (HUDA) was constituted under Haryana Urban Development Authority Act, 1977. The functions of HUDA are: (a) To promote and secure development of urban areas with the power to acquire, sell and dispose of property, both movable and immovable, (b) To acquire, develop and dispose of land for residential, industrial, commercial and institutional purposes, (c) To make available developed land to Haryana Housing Board and other bodies for providing houses to Economically Weaker Sections of the society; and (d) To undertake building works and other engineering works. HUDA is developer of urban areas. It develops urban infrastructure. It is doing business of development of large real estate projects.
HUDA is the entity which is acquiring land, developing and finally handing it over to consumers for a price. Lands developed by HUDA is though identified and acquired by the Urban Estate Department, Haryana Government, yet the ownership and possession of land is transferred to HUDA for consideration paid by HUDA. Land to be developed is identified and surveyed by the Director General Town & Country Planning, Haryana. The land so identified and surveyed is ready for acquisition by LAO (Land Acquisition Officer) of the Urban Estate Department, Haryana. LAO requests its superior authority, Director General, Urban Estate Department, Haryana for administrative approval for acquiring the land. The Urban Estate Department, Haryana conveys administrative approval for acquisition of land to Director General Urban Estate Department, Haryana and asks LAO to acquire land in question as per law. HUDA authorizes its bank to disburse payment for award for land to the LAO who further transfers the ownership and possession of land to HUDA.
3The HUDA maintains accounts as per "Old Accounting Standards-7" which prescribes that profit or loss of an organization is to be worked out after the completion of the project. For this HUDA has fixed for it a period of 20 years.
During this period, HUDA receives almost entire payments from the allottees of the plots like [(1) Cost of Land + (2) Development Cost + (3) Administrative Cost].
The receipts under all these three heads have been capitalized. On the other hand, regarding expenditure, the assessee has capitalized first two components for a period of 20 years but third one i.e. Administrative Cost/expenditure has been claimed as revenue expenditure in each year and shown loss year after year.
Rejection of Books
3. Ground No. 1 for the Assessment years 2004-05, 2006-07, 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 of the assessee appeal relates to rejection of books of accounts and method of accounting followed by the assessee.
3.1. The AO while framing the assessment rejected the assessee's method of accounting holding it to be defective and not reflecting correct profits of the year. The estimation of the profits by rejecting the books of accounts has been upheld by the Ld. CIT(A).
3.2 Brief facts and the basis taken by the Assessing Officer and by the Ld. CIT(A) are as under:
The AO while pointing out the various defects in the books of account has observed as under:-
"i) The assessee claims that it follows the cash system of accounting and yet, it is seen from the account of the assessee that the assessee is not showing the recoveries from the plots sold in the 4 income and expenditure account for a period of 20 years. A sector is developed by way of acquisition of land, creation of basic infrastructure and development works and then the sector is plotted for the purpose of sale. Entire plots are sold off in the first 5 to 6 years of the scheme of the sector developed. The commercial and institutional areas in the sector are separately auctioned. In this entire activity which takes place in a span of nearly 10 years, when plots are sold, no profit from such sale of plots made by the assessee is taken to the profit and loss account. In other words, no income is shown by the assessee even after the plots are sold and full amount of installments has been received by it. The entire recoveries from the allotees of sold plots and auctioned areas continue to be shown as Advance from Customers'. Over the years, the assessee has not declared income in its returns filed from several such projects (each sector is taken as a project), but generated huge surplus which is shown from the surplus of cash and bank balance of as on 31.03:2006 among other current assets.
Thus, method of accounting is totally contradictory to normal accounting procedure. Once a sector has been plotted and sold, the receipts from the plots should be a revenue receipt. It is even contradictory to the assessee's own cash system of accounting.
ii) The total payment in the form of installments for the plots auctioned by HUD A by calling for applications through the newspapers etc., are received within three to six years. Once the full installments are given, possession is handed over to the buyer.
Once the plots are handed over, no further work remains with the 5 assessee to complete except maintenance and development of the completed sectors for some time.
iii) The method of arbitrarily taking the period at 20 years before the sale consideration received from customers is recognized as a revenue receipt has no basis at all. This is more so as the assessee begins to debit expenses after a period of 10 years in relation to such "incomplete" sectors to the Income and Expenditure a/c as annual maintenance and development charges. This further establishes the inconsistency in the accounts whereby receipts or recoveries from sectors older than 10 years have been capitalized and kept as liability but the expenses of annual maintenance etc. on the same sectors are charged to the income and expenditure account.
iv) In addition to this, the assessee has staff which is working both for completed sectors and incomplete sectors. Their salaries, allowances, traveling, contingencies and all administrative expenses are being debited to the income and expenditure account. As a result of this inconsistency again, it is clear that the accounts of the assessee do not show a correct picture of the profits actually accruing to the assessee.
Accordingly, a show cause notice was given to the appellant as to why the books of account be not rejected. The assessee however stated that it is following AS-7 and completed contract method. The AO however pointed out that AS-7 does not apply to assessee's case as the same is to be applied in accounting for construction contracts in the financial statements of contractor whereas the 6 assessee is a builder which sells plots after purchasing land)plotting it and developing it with basic infrastructure ad not a construction contractor. The AO further observed that the AS-7 has been revised w.e.f. 01.04.2003 on the recommendation of the Accounting Committee which held that the completed contract method has the effect of deferring/postponing recognition of income. The revised AS-7 lays down that the contract revenue and expenses must be recognized where the outcome of construction contract can be estimate reliably by reference to the stage of completion.
Thus, as per the AO in view of revised AS-7 in the case of a contractor where the outcome cannot be estimated reliably, revenue should be recognized to the extent of contract costs incurred of which recovery is probable. The AO noted that in assessee's case, outcome of contract-even if assessee's claims of being a contractor is considered for a moment though not allowed-
is totally known and predictable with full certainty. It has a clause for even recovering the enhanced cost of acquisition of land from the buyers in case it is so granted by the courts at any future stage.
The AO further referred to the Central Govt, ry /^V1-: notification u/s 145(2) for assessees following mercantile system of accounting to make it compulsory to follow uniformly two standards of accountancy i.e. AS-1 and AS-2. As per the notification, accounting policy followed by the assessee will be deemed to represent a true and fair view of the state of affairs of business only if it is governed by substance and not merely by the legal form. The AO observed that the assessees case is even stronger to fall under These notified guidelines as in assessee's case not only has the income accrued, it 7 has been actually received. There can be no deferment of income thereafter, as done by the assessee.
The AO referred to the decision of Hon'ble ITAT in the appellant's own case for the A.Y. 2003-04 wherein the Hon'ble Bench observed as under :-
"We have heard both the parties and perused the material available on record. In the instant case the assessee was engaged in the business of acquiring the land and after developing the land, residential / commercial plots were allotted / auctioned to the general public . In the instant case the assessee considered the expenses which were incurred during the period of last 10 years after acquisition of the land as capital in nature while the expenses incurred for the subsequent 10 years were considered as revenue in nature. The said period has been adopted for capitalizing on the hypothesis that in the first 10 years, the plots would be occupied and ready for inhabitation. The stand of the assessee with regard to the accounting treatment of expenses is that AS-7 issued by the Institute of Chartered Accountants of India is applicable. The said Accounting Standard deals with accounting for construction contracts in the financial statement of the contractors. The main feature which characterises a construction contract is secured and the date when the contract activities are completed fall into different accounting periods and the specific duration of the contract performance is not issued as a distinguishing feature of the construction contract. According to AS-7 the construction contracts generally fall into two basic types:8
i) Fixed price contracts- The contractor agrees to a fixed contract price or rate in some cases subject to cost escalation clauses.
ii) Cost plus contracts - The contractor is reimbursed for allowable or otherwise defined costs and is also allowed a percentage of these costs or a fixed fee.
In this present case the assessee is not a contractor in true sense because it is not petting any contract from other parties rather the plots of various category e.g. residential, commercial d industrial etc. are developed by the assessee itself. In the instant case, although accounting treatment can be done considering the principles laid down in AS-7 but the assessee in true sense is not folio wing A 5-7 because all the sectors cannot be completed in the first 10 years Moreover the assessee has not supplied specific detail as to when a particular sector can be completed, in such type of cases there should have been some details as regards to the date of completion upto that date the expenses can be capitalized and when the sector is fully developed and plots are allotted/auctioned to the applicant, the expenses incurred thereafter are not capital in nature because the stock i.e. the plot is ready to be disposed off without making any further development in the instant case the assessee is not following the complete contract method and capitalizing certain expenses which were not related to a particular sector e.g. interest etc which might have been for a few sectors and not for all the sectors. In our opinion, the only cost or expenses which are directly attributable to a specific contract can only be 9 capitalized and that too upto the date when the plots are ready to be sold/allotted/auctioned. In AS7 completed contract method has been prescribed in para 10 according to which the principal advantage of the completed contract method is that it is based on the results as determined when the contract is completed or substantially completed rather than on estimated which may require subsequent adjustment as a result of unforeseen costs and possible losses the risk of recognizing profits that may not have been earned is therefore minimized. Therefore, selection of method should have been made by considering the nature of work undertaken by the assessee, however, this exercise has not been done by the Assessing Officer neither any detail has been furnished by the assessee. "
Thus, as per the AO Hon'ble ITAT Chandigarh has concluded as under:-
(a) Assessee is not a contractor in true sense.
(b) The assessee is not following the complete contract method in toto.
(c) Only cost or expenses which are directly attributable to a specific contract can be capitalized, and that too upto the date when plots are ready to be sold/allotted/auctioned."
The AO further referred to the decision of Hon'ble ITAT in the case of appellant itself while deciding the ground of appeal relating forfeiture of security. The Hon'ble ITAT rejected the appellant's arguments that the income from forfeiture of securities will be accounted after 20 years as it accounts for its income only after 20 10 years. The Hon'ble Bench held that the amount received on account of forfeiture of securities is to be taxed during the year in which it had been forfeited. The Hon'ble Bench took note of the fact that the assessee was following cash system of accounting and further that the assessee was not adjusting this amount in the value of closing stock.
The AO after examining the books of account the appellant made the following further observation:-
"i) The assessee has not adopted method of accounting which is notified by the Central Govt, under the provisions of Section 145(2) of the Income tax Act. Rather it has chosen to adopt outdated "Accounting Standard-7', which has since been revised.
ii) The annual profit cannot be deduced from the method applied by the assessee. The assessee has adopted 'Complete Contract Method' and has taken a period of 20 years for charging profit to tax. Thus, as a matter of fact, the accounting year of the assessee is extended to 20 years, whereas section 3 of the Income Tax act prescribe that previous year should be a period of 12 months. The detailed break-up of constituents of opening stock and closing stock is not readily available with the assessee, for verification. Party wise details of creditors and debtors are also not maintained.
iii) Under the scheme of the I. T. Act, 1961. liability to pay Income-tax is attracted the moment the income is received and the profit, if any, in the business is to be taxed, subject to other provisions of Act.
The assessee is postponing its income to after 20 years when the project is taken to be completed while full payment is received in 11 most cases within 6 years of allotment and by charging interest if the payment is made in installment. For Income-tax Act, each previous year is a self contained period. Income-tax is an annual levy. The accounting standards may guide the assessee how to keep accounts but these do not over-ride the provisions of IT Act.
iv) The period of 20 years has been taken arbitrarily & hypothetically without any basis. The assessee receives total payments from the allottees of plots within a period of six years. The project is also completed almost in that period. After receipt of the payment, the assessee deposit this amount in the bank which results in huge accumulation. This postponement of profit without any reason is in contravention to Section 3& 4 of the Income tax Act.
v) During the year under reference assessee has received a sum of from allotees. Against it, the expenses for both the completed sectors and incomplete sectors are being claimed.
vi) The assessee is not maintaining proper accounts and there is no internal control on the accounting process and accounting system. The statutory Auditors in the notes to Accounts at page-36 have made a similar observation in para 3 of their notes as under in the previous year:-
"3.1 The Authority was maintaining its account on cash basis. As such, amount recoverable from/payable to various Government Departments, Colonizers, allotees etc. was neither being worked out nor depicted in accounts. Keeping in view the multifarious activities of HUDA involving development of land, construction of buildings, roads and other public amenities including water supply, sewerage 12 system, parks, electrification, etc., it is desirable that HUDA should maintain its accounts on accrual basis.
3,2 Party wise details of creditors and debtors have not been indicated in Schedule Cpertaining to 'Other liabilities' and Schedule 'J' pertaining to 'Loans and Advances'."
All the basic three contentions of the assessee are held to be incorrect on facts:
i) Assessee is not a construction contractor. iij Assessee does not work on no-profit-no-loss basis. Registration u/s : 12A has been disallowed to it. iiii) Assessee does not follow cash system of accounting. It does
not account for receipts on cash basis, and claims to follow contract completion method (of an arbitrarily chosen period of 20 years).
iv) It does not follow AS-7, as it stands revised since 01.04.2003."
The AO after pointing out the defects as mentioned above rejected the appellant's books of account u/s 145(3) of the Act.
Assessee is following a period of twenty years for treating a sector as a completed sector which is not in consonance with the accepted income tax law and practice.
That the assessee is not a contractor in true sense to whom provisions of Accounting Standard 7 are applicable. And the assessee is not following the revised AS 7. Our arguments in this regard are as under; The procedure for following a period of twenty years for completion of a sector is a scientific and well accepted procedure based upon the past practice and history and accounting postulates followed by the assessee since inception. The assessee is selling plots by allotment and the sectors in which the sectors are sold take about 15 to 20 years to get fully developed and be ready for occupation. Recent examples are sectors 20/21 which were floated almost about 20 years and yet these are not fully developed. Besides the period of twenty years is taken as the period taken for completion of the project and the time frame when the project is treated to be fully completed. As has been stated in the opening paras, the assessee is following the AS7 being a contractor, and as an option following completed contract method. Since in the right state of circumstances, the period when the project is deemed to be completed is twenty years, the period of twenty years is taken by the assessee for treating its sectors to eb complete.
13It is further argued that a bare reference to the AS 7 reveals that the same applies to the contracts of creating composite assets. It is not applicable to building contracts only. It is argued that the contracts which result in creation of an asset or a group of assets also qualifies to be contractor as per AS 7.
Further more in respect of assessment year 2003-2004 to 2006-07, the Income tax department has accepted the applicability of AS 7 to the assessee, but have denied the benefit of the same to the assessee on the ground that the assessee is not a contractor AND/ OR is not following the revised AS 7. In fairness of situation or circumstances, it will be just and appropriate to reject the stance of the Income tax department that the AS 7 is not applicable to the assessee.
Hon'ble ITAT while deciding the appeal for assessment year 2003-04 held in clear words that the although the assessee is not a contractor in real sense, yet applicability of AS 7 should be made in the manner prescribed by the same. PLEASE READ HIGHLIGHTED PORTIONS ABOVE. It is yet another matter that the same was not done by the Income tax department while giving effect to the orders of Hon'ble ITA T, for which an appeal is pending before the office of CIT(A), Panchkula.
By virtue of its objectives, the assessee is engaged in activities of creating assets / combination of assets which are offered to public for sale on allotment basis. The activities are in the same nature as that of a builder, developer and promoter who creates building/ flats, plots and other structures and offer these to public for sale. In case of contractors offering built up flats for sale to potential buyers, there is no contract involved between the contractor and the potential buyers. The following works relating to civil construction outlined hereunder are also carried out by the assessee as well;
Construction of Sewerage, construction of roads, electrical works, civil works in the nature of creating buildings and laying water pipes.
It is a clear fact that the assessee is following a completed contract method for maintaining its accounts, as prescribed by the AS7. The AS7 was revised w.e.f 1.4.2003 and that too in respect of the contracts executed and undertaken after that date. In the instant case there are no contracts which were commenced after that date and hence the assessee's action of following AS 7 (pre revised) and applying completed contract method is in order. Further as per completed contract method, since in assessee's perception, the contract is completed after 20 years, the same is treated to be completed after 20 years and the profit computed in the prescribed manner and accounted for in the books of accounts.
During the year under question, the assessee booked a profit of Rs.846072183 in its books of account, which is in order and was offered for taxation.
It is further submitted that the contentions of the AO are baseless and are not supported by force of law and do not correctly address the submissions made by the assessee. The AO has erred in holding that the accounting standards prescribed under Section 145 of the IT Act have not been followed by the assessee. It needs to be noticed from the statute book that Section 145 of IT Act has not yet prescribed for any accounting standard in respect of construction activities. Only accounting standard prescribed by the said section are AS1 and AS2, which have been followed by the assessee in true letter and spirits.
The appellant also relied upon the decision of (2007) 15 SOT 1 (DELHI) SNC Lavalin/Acres Inc. and(2008) 4 DTR (Mumbai)(Trib) 547ITO Vs. Pratiksha Enterprises ITAT, Mumbai D' Bench in support of its contention in this regard.
144. The Ld. CIT(A) while confirming the action of the Assessing Officer held that it is seen that the appellant's method of keeping its account has been found to be not in order by the Hon'ble ITAT Chandigarh also. The AO has rightly mentioned that the appellant is not a construction contractor but the nature of its activities is akin to that of a builder/developer. The Ld. CIT(A) held that , the assessee can with reasonable accuracy estimate its income from various projects which are at different stages of completion. The assessee has simply deferred the recognition of income by 20 years. Therefore, the appellant's method of keeping accounts by following AS-7 and completed contract method is held to be not reflecting the true profits of the appellant. The Ld. CIT(A) held that the method employed by the assessee is not suitable for the nature of business/activities and the assessee is not following even AS-7 in true sense and upheld the action of the Assessing Officer rejecting the books of accounts.
5. Aggrieved with the order of the Ld. CIT(A) the assessee has appealed before us.
6. During the hearing the assessee has submitted that the books of accounts of the assessee were rejected by the AO for the first time in AY 2004-05. Thereafter, the books of accounts were rejected in AY 2004-05 onwards in all the years.
7. The Ld. AR argued that the assessee since inception is engaged in the activities of acquisition of land, development, and .after selling the plots. The books of accounts of the assessee are maintained on cash system of accounting on double entry system following "Completed Contract Method" as per Accounting Standard 7, prescribed by the Institute of Chartered Accountants of India. The method of accounting has been consistently followed by the assessee for the past more than 30 years. The same has been accepted by the department in the past years.
8. HUDA is carrying out activities only with the sole objective to undertake an overall development of towns by providing suitable & required facilities without any intent to earn profit. The residential plots are offered to the public on "no profit no loss" basis. However, the commercial plots are auctioned on which profit is generated. The Ld. AR further argued that the AO has alleged that the assessee has not adopted method of accounting which is notified by the 15 Central Government under the provisions of Section 145(2) of the Income Tax Act. In this regard it is stated that only accounting standards which have been prescribed till date are AS - 1 & AS - 2 relating to "Disclosure of Accounting Policies" & "Valuation of Inventories", which have been duly adhered to by the assessee.
9. Reliance is placed in the case of Prestige Estate Projects (P) Ltd. (2010) 129 TTJ (Bang) 0680. It was argued that the principal advantage of the completed contract method is that it is based on the results as determined when the contract is complete rather than on estimates which may require subsequent adjustment as a result of unforeseen cost & possible losses. This method minimizes the risk of recognizing profits that may not have been earned. Therefore the contention of the AO that annual profits cannot be deduced is not tenable. As regards the issue that assessee is postponing its income to after 20 years we submit that the applications are invited and after the allotment of residential plots, a total time period of six years is allowed to the allottee to make the payment in installments. Allottee is allowed a period of 2 years for construction from the date of offer of possession which is offered after creating basic infrastructure facilities. To provide basic infrastructure facilities such as roads, water electricity sewerage etc. a period of 6 - 7 years is taken so possession can be offered only after 6-7 years from the date from which a new estate is planned. Further period of thirteen years is allowed on payment of nominal extension fees for construction on the plot. Therefore, normally it takes a time period of twenty years to complete construction on plots developed in any new urban estates. The Sectors are thereby, treated as complete sectors after the expiry of 20 years from the date of its floating. The auction in the commercial sectors is commenced after inhabitation in residential part of the sectors is done. The Ld. AR argued that the assessee had the choice to adopt any method of accounting but it should be adopted consistently according to mandate of Section 145 & department is bound by the assessee's choice of method and it could not be rejected as improper merely because it gives assessee benefit in certain years or merely because another method is preferable by the department. When books are maintained on certain principles or basis there is no reason why the same should be rejected on the ground of postponement of income. As regards the issue that the assessee is claiming expenses relating to both the completed & uncompleted sector from the sum received during the year. In this regard it is stated that the Honorable ITAT in the case of assessee 16 itself for AY 2003-04 has given a finding that "in our opinion cost or expense which are directly attributable to a specific contract can only be capitalized mat too upto the date when the plots are ready to be sold/allotted/auctioned." The assessee is maintaining regular books of accounts.
10. It was argued that the method of accounting has been consistently followed & has been accepted in the past and the AO should not disturb & depart from the same when there is no change in circumstances from the previous years. Reliance in this regard is placed on the following judicial pronouncements:-
Commissioner of Income Tax vs. Haryana State Industrial Development Corporation Ltd.
(2010) 326 ITR 640 (P&H) Commissioner of Income Tax vs. Haryana Tourism Corporation Ltd. (2010) 327 ITR 26 (P&H) CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 261 ITR (SC) 275 SC has affirmed the order of Bombay High Court CIT vs. Indo Nippon Chemicals Co. Ltd (2000) 164 CTR 78
11. It is established legal position that an assessee can follow any recognized method of accounting i.e. it is entirely within the discretion of the assessee to adopt any method of accounting may be cash or mercantile but the condition is that the same method has to follow consistently.
Reliance on Krish Infrastructure (P.) Ltd. vs. Assistant Commissioner of Income Tax, IT AT Jaipur Bench (2013) 58 SOT 127 (Jaipur) (URO)
12. The Ld. AR further argued that the method followed by the taxpayer cannot be called as an unreasonable method where any change in the method is revenue neutral. The assessee is following completed contract method & accordingly on completion i.e. 20 years, the assessee transfers the profit from the project to the Profit & Loss Account. Till that time the receipts & expenditure are capitalized in the uncompleted sector account. Thus, there is no concealment or understatement of profit, but the difference is only about the year in which the income is to be assessed. In nutshell, there is no loss of revenue to the department. Indeed, the method adopted by AO is leading to double taxation as the department is assessing income prior to being shown by assessee and also in the years in which it has been disclosed by the assessee.
1713. The Ld. DR vide his submission dt. 17/11/2017 argued that the assessee claims that it is following cash system of accounting.
"i. The assessee has not adopted method of accounting which is notified by the Central Government u/s 145(2) of the Act in the Finance Act 1995. Rather it has chosen to adopt outdated "Accounting Standard-7". The same has since been revised as "Revised Accounting Standard-7" w.e.f. 01.04.2003 which has been formulated on the lines of Indian Accounting Standarad-11.
ii. The annual profit cannot be deduced from the method adopted by assessee as assessee has taken a period of 20 years for charging profit to tax whereas section 3 of the IT Act prescribes previous year should be a period of 12 months only. AO relied on CIT v. K.Sirinivasan and K. Gopalan, (1953) 23 ITR 87,99 (SC). The assessee is postponing its' income to "after 20 years when the project is taken to be completed" while full payment is received in most cases within 6 years of allotment and by charging interest if the payment is made in installment. Under the Scheme of IT Act 1961, immediately after receipt of the income by the assessee, the assessee is subject to an ambulatory charge. AO relied on Chowgule & Co Ltd V. CIT (1992) 195 810,818-19 (ITR) Bom.
iii. The period of 20 years has been taken arbitrarily & hypothetically because the assessee received total payments from the allottees within period of 6 to 7 years. Each year is a self contained separate period. Income Tax is an annual levy. Each "Previous Year" is distinct unit of time for the purpose of assessment year and the profits made or liabilities or losses incurred before or after the relevant previous year are immaterial in assessing the liabilities in particular year as held in S.M.Ziaddin v. CIT (1993) 203 ITR 136,140 (Mad).
iv. The assessee himself admitted huge omissions both in income as well as assets in his accounts by filing revised return in AY 2004-05. v. During the Assessment Year 2007-08, assessee has received a sum of Rs. 1368.20 Crores from allottees. Against it, the expenses for both the completed sectors and incomplete sectors are being claimed. vi. The assessee is not maintaining proper accounts and there is no internal control on the accounting process and accounting system. The Authority is maintaining its account on cash basis. As such, amount recoverable from/payable to various Government Departments, Colonizers, allottees etc. are neither being worked out nor depicted in accounts. Party wise details of creditors and debtors have not been indicated.
vii. Even Statutory Auditors in the notes to accounts at page 36 have made observation in para 3 in AY 2007-08 in their Notes that Authority is maintaining its accounts on cash basis. It is desirable that HUDA should maintain its accounts on accrual basis.
viii. In view of the detailed facts mentioned above, books of accounts of the assessee were rejected u/s 145(3) of the IT. Act, 1961.
The Hon'ble ITAT Chandigarh in appellant's own case for AY 2003-04 has concluded that (a) Assessee is not a contractor, (b) the assessee is not following the complete contract method in toto, and (c) Only cost or expenses which are directly attributable to a specific contract can be capitalized, and that too upto the date when plots are ready to be sold/allotted/auctioned'. The CIT (A) held that the appellant's method of accounting has not been found in order by the Hon'ble ITAT Chandigarh also. He further held that the AO has rightly mentioned that the appellant is not a "Construction Contractor" but the nature of its activities is akin to that of a Builder/Developer. He agrees with the AO that if assessee desires, it can with reasonable accuracy, estimate its income from various projects which are at different stages of completion. The appellant has simply deferred the recognition of income by 20 years. Therefore the appellant's method of keeping accounts by following 'AS-7' and "Completed Contract Method" is held to be not reflecting the true profits of the appellant. Moreover, there is merit in AO's observations that the assessee is not following even 'AS-7' in true sense. The said order was followed by CIT (A) in all the years.
18Every assessment year is a separate assessment year and principle of res-judicata is not applicable in the Income Tax proceedings. Reliance is placed on (a) H.A. Shah & Co. vs. Commissioner of Income-tax (30 ITR 618, Bom.), (b) The Amalgamated Coalfields Ltd. vs. The Janapada Sabha Chhindwara (AIR 1964 SC 1013), (c) CIT vs. Brij Lai Lohia and Mahabir Prasad Khemka (84 ITR 273, SC), (d) C.l.Tvs. Micro Land Ltd. (347 ITR 613, Karn.), and (e) Dharmesh R. Shah vs. JCIT (60 SOT 182, Mum.). AO is free to form an independent opinion as per Income Tax provisions especially when there is notification issued by the Central Government u/s 145(2) of the Act in the Finance Act 1995 and the outdated "Accounting Standard-7" has been revised as "Revised Accounting Standard-7" w.e.f. 01.04.2003 even if a wrong method of accounting is followed for the last 30 years. When HUDA is providing residential and commercial plots on market rate, the contention of the assessee that it undertakes an overall development of towns by providing suitable & required facilities without any intent to earn profit and the residential plots are offered to the public on "no profit no loss" basis is devoid of truth. It has itself accepted that the commercial plots are auctioned on which profit is generated. The auction in the commercial sectors is commenced after inhabitation in residential part of the sectors is done has not been demonstrated with any evidence.
3.2. The AO has stated that the problems with "Completed Contract Method"
as per Accounting Research Builletin (ARP No.46 in the USA) are that (i) this method will defer the profit till the completion of work and so the income flow would be erratic, and (ii) this method has the effect of postponement of income. On the basis of the recommendations of the Accounting Committee "Completed Contract Method" was revised and replaced by "Revised Accounting Standard- 7". The revised Standard has been formulated on the line of "Indian Accounting Standard-11" and shall come into effect from the accounting period commencing on or after 01.04.2003. In the revised Accounting Standard, it is not permissible to capitalize the receipt and claim expenditure in the revenue side. Hence, assessee's contention is not acceptable that he has the choice to adopt any method of accounting. Assessee is not a contractor in true sense. [AO's Order page 7 818 for AY 2004-05]. Change in the method of accounting will not be revenue neutral as it will reflect true nature of income in each relevant Previous Year as per the intent of the legislation and provisions of the Income Tax Act. 3.4. Assessee has placed reliance on the following cases which are distinguishable on facts with reference to the instant case:
> Prestige Estate Projects (P) Ltd. (2010) 129 TTJ (Bang) 0680 is distinguishable as under: This case is distinguishable on the facts from the facts of the present case. In that case Assessee Company was a real estate developer which maintained its accounts by adopting Completed Contract Method. The AO assessed the case by following Percentage Completion Method. The Bangalore Bench decided in favour of the assessee by application of section 211(3A) of the Companies Act. Further the change in the year was found to be revenue neutral. In the instant case, the appellant is neither a Construction Contractor nor in true sense a Real Estate Developer. It is also not following either the Complete Contract Method or the Percentage Completion Method. The Revenue recognition is being deferred for a period of 20 years. Therefore, the decision is not applicable in the instant case.
> The Commissioner of Income Tax vs. Haryana State Industrial Development Corporation Ltd. (2010) 326 ITR 640 (P&H) is also distinguishable on the facts that in that case the Tribunal found that the assessee's stand was not controverted when it had claimed that methodology adopted in the assessment year in question was consistent with the past whereas, in the instant case, the methodology adopted by the appellant has been found by the AO to be inconsistent with the revenue recognition for each year. Further, in the instant case, in the past the appellant has been claiming exemption for its activities as for charitable purposes which has subsequently found to be not available.
> Commissioner of Income Tax vs. Haryana Tourism Corporation Ltd. (2010) 327 ITR 26 (P&H), is distinguishable on the facts of the instant case. In that case, the issue for decision was that whether the income from letting out of shops would be 19 income from house property or the business income. Here, in the instant case issue at hand is entirely different.
> CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 261 ITR (SC) 275 where the SC has affirmed the order of Bombay High Court CIT vs. Indo Nippon Chemicals Co. Ltd (2000) 164 CTR 78 is distinguishable on the facts of the instant case. In that case the issue was valuation of excise duty paid at raw material when purchased and unconsumed raw material. High Court held that the method adapted to value raw material purchased must be adopted while valuing unconsumed stock at the end of the year. Here, in the instant case issue at hand is entirely different. > Krish Infrastructure (P.) Ltd. vs. Assistant Commissioner of Income Tax, ITAT Jaipur Bench (2013) 58 SOT 127 (Jaipur) (URO). This case is distinguishable on the facts from the facts of the present case. In that case Assessee Company was a real estate developer which maintained its accounts by adopting Completed Contract Method. The AO assessed the case by following Percentage Completion Method. The Jaipur Bench decided in favour of the assessee by saying that same results can be attained by any one of the method of accounting. In the instant case, the appellant is neither a Construction Contractor nor in true sense a Real Estate Developer. It is also not following either the Complete Contract Method or the Percentage Completion Method. The Revenue recognition is being deferred for a period of 20 years. Therefore, the decision is not applicable in the instant case.
3.5. On the other hand the reliance is placed on the following decisions by the Revenue.
The Hon'ble Supreme Court in the case of CIT Vs British Paints India Ltd 188 ITR 44 wherein it is held as under: "It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee. the correctness of which had not been Questioned in the past. There is no estoppel in these matters, and the officer is not bound by the method followed in the earlier years.
Section 145 confers sufficient power upon the officer - nay, it imposes a duty upon him - to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient administration of the company, it is the duty of the ITO to determine the taxable income by making such computation as he thinks fit. Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw material for the goods in process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessment. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee had been found to be such that income could not properly be deduced therefrom. It was, therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he had done in the instant case, for determining what, in his opinion, was the correct taxable income. The Tribunal's order, affirming that of the Assessing Officer, was based on findings of fact made on cogent evidence and in accordance with correct principles. The High Court was clearly wrong in interfering with those findings. Accordingly, the judgment of the High Court was to be set aside."
Sutlej Cotton Mills Ltd Vs CIT 116 ITR 1 wherein it is held that "It is now well settled that the way in which entries are made by an assessee in his books of account is 20 not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive .one way or the other...."
Tuticorin Alkali Chemicals & Fertilizer Ltd vs CIT 93 Taxmann.com 502 wherein it is held that "It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. ....Whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation."
ACIT Vs. Alcon Developers (2015) 54 Taxmann.com 54 wherein it is held that 'The Assessing Officer has noticed that the assessee has accounted the accrual of the sale proceeds on the basis of registration of sale deed in favour of the intended buyer. This method adopted by the assessee, cannot be regarded to be in accordance with the mercantile system of accounting. The assessee is engaged in construction business. As observed by the Commissioner (Appeals), AS-9 is not applicable to a person who is engaged in construction business. Even this accounting standard does not lay down that the sale proceeds should be accounted for when the sale deed is registered. In the case of the assessee it is not disputed that the assessee is following mercantile system of accounting as well as project completion method. The Assessing Officer in this case noted that the development of the plots has been carried out fully by the assessee as on 31- 3-2009 but against this the assessee has received consideration to the extent of 70-90 per cent and balance consideration has to be received. As per the project completion method the revenue has to be recognized when the project has been completed. The assessee contended before Commissioner (Appeals) that it was following the project completion method but it was noted that the assessee has not recognized the revenue on the basis of the project completion method. It is an undisputed fact that the development work on the plots has been completed. Registration of the sale deed represents only the transfer of the title in favour of the buyer from the assessee. It has nothing to do with the method of accounting followed by the assessee. The assessee, contends and as understood by the Commissioner (Appeals), was not following percentage of completion method. Under the percentage of completion method revenue is recognized in the profit and loss account in the accounting period to the extent the work is completed. In case the revenue has to be recognized on the basis of receipt of payment from the plot-holders, that will also not be regarded to be percentage completion method. It is not a case where the Assessing Officer has rejected the accounts of ' the assessee on the ground that it had not followed AS-7 for recognition of revenue on the basis of percentage completion method. The method as has been followed by the assessee, is neither project completion method nor percentage completion method. Percentage completion method is not linked with the consideration received by the assessee from the intended buyer. The assessee has recognized the revenue only when the registration of the sale deed has been done in favour of the buyer. Under AS-7 this is not a recognized method of recognizing the revenue. This method is neither project completion method nor percentage of completion method. The method adopted by the assessee, therefore, cannot be regarded to comply with the ingredients as laid down under section 145. Section 145 makes it mandatory on the part of the assessee to follow either cash or mercantile system of accounting regularly. Recognizing the revenue when the sale deed had been registered by 21 the assessee in favour of the buyer could not be regarded to be either cash or mercantile system of accounting. Therefore, the order of Commissioner (Appeals) is set aside and the order of the Assessing Officer is restored.'
14. The Ld. DR has thus distinguished the case laws relied upon by the Ld. AR.
15. We have gone through the arguments in detail and also the observation of the Assessing Officer and the Ld. CIT(A). We find that the matter has been examined by the Coordinate Bench of ITAT Chandigarh vide order dt. 31/03/2008 in ITA No. 742/CHD/2007 upholding the action of the Assessing Officer rejecting the books of accounts which also finds place in the order of the CIT(A) while adjudicating the issue mentioned above. Hence following the order of the coordinate Bench of ITAT Chandigarh on the similar issue in assessee's own case, we decline to interfere in the order of the Ld.CIT(A).
16. As a result this ground of appeal of the assessee is dismissed.
Addition on account of In-direct Charges of the Residential Sectors and Commercial Sectors:
17. Ground No. 2 for the Assessment years 2004-05, 2006-07, 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, and ground No. 2 &3 for the Assessment years 2012- 13, 2013-14, 2014-15, of the assessee appeal and Ground No. 1 for the Assessment years 2006-07, 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14 of the Revenue appeal pertains to the issue of Indirect Charges of the residential commercial sector.
18. The addition on account of indirect charges claimed by the assessee in Income & Expenditure Account of the Commercial Sectors was made by the AO for the first time in AY 2007-08 by estimating the 60% of the total recoveries as income. After rejecting the books of account and method of accounting followed by the appellant, the AO proceeded to compute appellant's income keeping in view the past history of the case as well as by adjudicating the new issues which arose during the year. The AO observed that a portion of recoveries made by the assessee during the year is relatable to indirect charges received by the assessee. The AO observed that the assessee is debiting all the indirect charges i.e. charges in the nature of administrative charges, interest charges to the income & expenditure account. As per the AO the amount received by way of indirect charges should be included in the income of the appellant. The AO after going through the details/costs sheet of Jagadhri Urban Estate noted that 22 29.79% of the total receipts to be attributable to indirect charges and proposed to tax the same on receipts basis. The AO asked the assessee to furnish the costs sheets of other Urban Estates. The assessee however informed that the cost ratios are the same for all the costs sheets for various Estates as worked out in the earlier year i.e. 2005-06 & 2006-07. The AO noted that addition on these lines has been made by the AO in the earlier years also by taking the ratio of indirect charges received @ 30% of total recoveries. The appellant however contested the proposed addition and submitted as under :-
" The AO has bifurcated the sums received by HUDA from plots as under:-
a) Land Cost- 14.02%
b) Development Cost- 44.61%
c) Indirect charges- 29.79%
d) Others- 11.30%
Out of indirect charge at 29.79%, commercial interest escalation charges, license fees, conversion charges, security fees and services charges totaling to 22.2% are not retained by the assessee at all and are parted by it either with the government or with the plot owner under directions of the court.
18.1 The AO however rejected the appellant's contention observing that the same cannot be accepted because the indirect charges comprises of commercial interest, which is nothing but notional commercial interest calculated on development cost, which comprises of nearly l/3rd of the total development cost. Further, price escalation and unforeseen charges which comprises of nearly l/4th of the total indirect charges are also purely on estimate basis. Thus the contention of the assessee that 22.2% of the total indirect charges of 29.79 % are not retained by it is factually incorrect. Further, as per the AO other charges at 11.36% are also adhoc and have nothing to do with actual expenses incurred.
18.2 The AO further observed that the total land developed and sold by the appellant consist of both residential and commercial area. The indirect charges received on account of the same vary on residential and commercial properties. The AO noted that the cost sheet of the assessee just takes the saleable area under residential sectors into consideration and the cost of plot is 23 worked out on the same. When confronted during the assessment proceedings, the AR of the assessee accepted that cost of commercial sites are not included while preparing » cost sheet in respect of residential sectors. The AO computed the following calculations with regard to allocation of land to commercial and residential area and its costing by referring to cost sheet in respect of residential area in sector-33 Part Karnal.
Planned Area 240.00 Acres
Less:
Released Land 30.54 Acres
Balance Area 209.46 Acres
Area under shopping Centre 46.75 Acres
HUDA land Area 1.10 Acres
institution 2.86 Acres
50.71 Acres
Balance Area Saleable plot area 158.75 Acres
Under Plots 51.88 Acres
Nursing Home/Clinic 1.70 Acres
53.59 Acres
Saleable Area = 53.58/158.75 = 33.75% or 1634 Sq. yds
Rate per Sq Yd = 7585660/1634 = 4642 per Sq. yd.
Add Loss of EWS Plots = 590
Add infrastructural cost = 50
5282 per Sq. yd. (Rs. 6317 per Sq. mtr.)
Approved Rate = 6317 per Sq. mtr
18.3 As per the AO the assessee in its computation sheet has excluded the commercial Area from saleable Area and then computing the rate of saleable area for residential plots. It has even absorbed loss of EWS plots genuineness of which are to be ascertained. The AO also noted that the land carved out for commercial purpose like shopping centre and institutions is not even taken in to consideration by the assessee who claims to be running its business on 'No profit No Loss' basis. In the above computation, the AO noted land for commercial purposes is equivalent to residential land which may vary in other cases. The land cost of the commercial part of the sector comes to Rs.5500/- per sq. mtr (approx) as loss of EWS plots is already absorbed in residential plots. However, the commercial plots are not sold at the cost price, but instead auctioned. The selling price of the commercial plots is higher than the residential plots by in the 24 range of 5 to 40 times. The appellant was asked to submit the details with regard to detail of auction of commercial property during the year. Though, complete details were not filed by the appellant. The AO observed that the auction price of commercial property invariably is double the reserve price in most of the cases. The AO noted that in Gurgaon the reserve price as high as Rs.1.25 lacs per sq. mt. and the actual auction price in case of single story booth without basement for Sector- 21 worked out to be more then Rs.2 lacs per sq. mt. as detailed below :-
Sector Particular Site No. Area Reserve Price Auction Sale price / Price meter A 21 Single Storey 32 22.68 mts 14.95 Lakh 46 Lakh Rs. 2,02,82222 Booth B 21 -do- 33 22.68 mts 14.95 Lakh 47 Lakh Rs. 2,07,231 C 21 -do- 34 22.6 mts 14.95 Lakh 45.50 Lakh Rs. 2,00,617 18.4 As per the AO the margins in commercial property are very high keeping in view the rates of residential area which was in the range of Rs.6,000/- to Rs.8,000/- per sq.mt. The AO also referred to an auction in F.Y 2008-029 in which a commercial site fetched Rs.5 lacs per sq.mt.
18.5 The AO also observed that that in Gurgoan, a few sectors have been carved out for commercial purposes only which are not reflected in the accounts of the assessee. Further, the completed sector accounting for the FY 2006-07 drawn out for different sectors by the assessee from which excess of Recovery over development is drawn out and shown in income and Expenditure account, does not take into consideration the sale of commercial site as well as the closing stock of commercial sites, to grossly understate its income.
19. During the assessment proceedings, the assessee was asked to give details of 'Total Recoveries from allottees with break up regarding new sale proceeds from commercial and residential sectors and old recovery. The appellant file details giving the break up as desired. However, details with regard to recovery from allottees with regard to installment of plots amounting Rs.889.70 crores has not been given. As per the details filed new sales from residential plots has been was shown at Rs.273.33 crores and new sales from commercial plots were shown at Rs.289.53 crores. However, no break up of recovery from allottees with regard to old sales was furnished. In absence of 25 details regarding recovery from allottees, with regard to old sales by the assessee, the AO made an estimate of component of sale of the commercial sites at 50%, as the buyers are allowed to pay the balance amount in commercial sites over nearly the same time frame as done in the residential sector.
20. In view of the facts as mentioned above the AO referring to the earlier assessment year held that 30% of the recoveries from sale of projects which correspond to the heads of expenditure which are booked by the assessee directly to his income and expenditure is to be taken as income from residential sectors. However, with regard to the recoveries from sale of commercial plots, 60% of these receipts were proposed to be taken as income of the assessee during the year. The higher rate was estimated far commercial properties keeping in view the fact that the income from sale of commercial plots for exceeds the income from sale of residential plots.
20.1. The AO worked out the income from receipts as under:
Recoveries from commercial sites From New Sales Rs. 289.53 Cr.
From Old Sales (50% of Rs. 805.96) Rs. 402.98 Cr
Total Rs. 692.51
Recoveries from residential sites Rs. 676.30 Cr.
Income of the assessee during the year
Residential Sites - 30% of Rs. 676.30 Cr = Rs. 202.89 Cr
Commercial Sites - 60% of Rs. 692.51 Cr = Rs. 415.50 Cr
Total Income = Rs. 618.39 Cr
20.2 The AO thus worked out a total addition of Rs.618,39,00,0008/- on account of revenue generated from residential site and commercial site applying a rate of 30% & 60% respectively.
21. The assessee has challenged the addition before he Ld.CIT(A) and has submitted that the addition is totally uncalled for.
""The addition was made taking off the addition on same premise made in respect of assessment year 2004-05, where it was held as under while making the addition As the assessee has claimed Indirect Charges including administrative expenditure, which works out to Rs.29.90%, of the total cost of the project as revenue expenditure the corresponding 26 proportion of the receipt of recovery from allottee also needs to be taken. The same is calculated hereunder:"
Total recoveries from allottees on account of Rs. 6,84,30,62,676/-
sale of plots (Recoveries also include
commercial sales)
On account of administrative receipt as 29.79% of Rs. 684.31 crores = Rs. 203.86
furnished by the assessee
21.1 The above amount is taken as revenue receipt of the assessee-which the assessee has wrongly capitalized in the balance sheet.
From the above details, it is clear that there are three components of the total cost. Out of these three components, the assessee is capitalizing the two components in the balance sheet i.e. cost of land, development, charges and other incidental charges. However, it is claiming the administrative charges which works out to 29.79% in the P&L Account as revenue expenditure. But it is noticed that when the assessee is receiving payments from the allottees on account of these three components, he is capitalizing the entire receipts in the balance sheet. As a result of this capitalization, there is a loss in the P&L Account.
At the very outset it is stated that there is an arithmetical error in the percent age of 29.79 applied by the AO. The correct total works to 27.3 % as against which the AO ahs applied rate of 29.79percent as rounded off to 30%.
It has been understood and believed by the AO that costs appearing at a, b and d above are parted by HUD A towards cost of the plot which is sold by it to the plot allottee. The percent age of the amount parted by HUDA has been assumed to be an out go and the remaining percent age amount of the total amount received during the year from allottees is treated as income by the AO.
Further, it is reiterated that the cost sheet which was taken as the basis for adopting an assumptive NP rate is a projection of the cost expected to be 27 incurred for developing a sector. This cost was based upon the historical data and the past figures and as per PWD estimates, which are based in scientific postulates and calculations.
The Indirect Charges include some amounts which are compulsorily payable by the assessee to other departments/persons and are not retained by the assessee at all. For the purpose of making these charges, the assessee is treated at par with private colonizers and are to be paid to various departments. Thus, even if the presumption of the AO that Indirect charges are to be taxed as income, expenditure incurred under the head commercial interest, escalation charges, License Fees, Conversion Charges, Security fee and service charges (totaling to 21.17%) is not retained by the assessee and is paid to various departments and only 6.13 %, which is administrative charges can only be considered (though incorrectly) for the purpose of calculation of profit in this manner.
Fifteen percent of development cost is included in the cost of plots towards administrative charges which are the charges designated to meet day to day cost of administration, maintenance, establishment and other related costs. HUDA meets its day to expenditure from the element contained the expenditure against the head administrative charges (15% of O.C.) and unforeseen charges 5% of D.C External development charges are paid under statute to State Govt, of Haryana. Copy of the statutory notification has already been brought on record, which prescribe the rate per acre to be paid by HUDA to the state Government. These external development charges are paid to the State Govt, of Haryana and is a statutory levy and cannot by any stretch of imagination be included or deemed to contain any element of profit and contributing to the surplus of organization, as has been held by the AO.
License Fees are paid under statute to State Govt, of Haryana. Copy of the statutory notification has already been brought on record, which prescribe the rate per acre to be paid by HUDA to the state Government. These License Fees are paid to the State Govt, of Haryana and is a statutory levy and cannot by any stretch of imagination be included or deemed to contain any element of profit and contributing to the surplus of the organization as has been held by Assessing Officer. Any element of profit and contributing to the surplus of organization, as has been held by the AO.
Conversion charges are paid under statute to State Govt, of Haryana. Copy of the statutory notification has already been brought on record, which prescribe the rate per acre to be paid by HUDA to the state Government. These external development charges are paid to the State Govt, of Haryana and is a statutory levy and cannot by any stretch of imagination be included or deemed to contain any element of prof it and contributing to the surplus of organization, as has been held by the AO.
Scrutiny fees and service charges are paid under statute to State Govt, of Haryana. Copy of the statutory notification has already been brought on record, which prescribe the rate per acre to be paid by HUD A to the state Government. These charges are also paid to the State Govt., of Haryana and is a statutory levy and cannot by any stretch of imagination be included or deemed to contain any element of profit and contributing to the surplus of organization, as has been held by the AO.
Out of indirect charges taken as 29.79%, commercial interest, escalation charges, license fees, conversion charges, security fees and service charges totaling to 21.17 % are not retained by the assessee at all and are parted by it either with the government or with the plot owners under directions of the Court.
28In respect of the year under question, the assessee has paid a sum of Rs.50 cores to the State Government of Haryana on account of license fee, conversion charges and infrastructure development charges.
The amount has paid to the State Government on account of License Fee, Conversion Charges, Infrastructure Development Charges and Scrutiny Fee as per the circular of the State Government applicable at that time. The amount of Rs.5000.00 lacs was paid on this account during the financial year 2006-07, the details of which is given as under:-
License Fee Rs. 968.16 Con version Charges Rs. 1231.84 Infrastructure Dev.Charges Rs.2699.52 Scrutiny Fee Rs. 100.48 Total Rs.5000.00
Further, while completing the assessment, the Assessing Officer applied a G.P. Rate which was estimated by the Assessing Officer from the cost sheet produced before AO for verification on the total sums recived by the assessee during the year under question.
It is argued that the said assumptive NP rate of 29.93 pc was applied on the total amount received from the allottees during the year under question and was treated to be income of the assessee from sale of plots. It is further brought out that while arriving at an assumed income element of Rs.42.88 crores comprised in the sums received from the allottees, the Assessing officer failed to consider a very pertinent fact into consideration that the sums received from the assessee also included an amount of Rs.42.88 received from the allottees towards enhanced compensation which were in the nature of cross / transfer entry and did not partake or contain any element of ownership or retention by HUDA. As a result of adopting this postulate / posture, the Assessing Officer has arrived at an excessive income of Rs.12.864 crores."
As regard the addition on account of commercial property it has been submitted as under :-
"A conjoint reading of the findings in the order of assessment reveals that notional profit rate of 60% applied on recoveries in respect of commercial properties as against 30%, profit on recoveries from residential properties has been made on the understanding that the cost of developing commercial properties is included in costing of residential plots and hence the commercial properties yield higher profit.
Application of profit @60% was actually a mistake which is apparent from record, for which application for rectification under section 154 of the Act was filed, wherein it was stated asunder;
At pages 15 and 16 of the order of assessment a calculation has been made (reproduced above), in which costing sheet in respect of Sector 33 Kama I has been taken as a basis for assuming that the profits earned by commercial sectors are higher than the profit embedded in the recoveries made in respect of residential area. A bare reading of the cost sheet reveals as under;
In the sample taken for considering the matter and arriving at the conclusion it has been observed that total areas dedicated for developing sector 33 Karnal was 240 acres. Out of this area, 30.54 acres, was released from the total occupation.
In the sample cost sheet taken into account while completing the assessment, the land in possession of HUDA to be developed for the whole sector was 209.46 acres. Out of the total land earmarked for the sector, 46.75 acres of land was earmarked for area under shopping and 1.10 acres was reserved for institutions. Accordingly, balance area available for development and sale towards residential plots was 158.75 acres. This fact clearly appears in the cost sheet. It is also evident from a reading of the cost sheet that out of the total 158.75 acres of 29 land proposed to be developed for residential plots, land measuring 105.17 acres was to be left as common utility area viz. parks, roads, rain water disposal and other such facilities. Therefore only 51.88 acres was left to be offered for sale by way of residential plots. Thus, out of the total saleable area of 158.75 acres, earmarked towards residential areas, only 33.75 %> was to be recovered from the residential plots to be sold by the assessee. Resultantly the cost of developing 158.75 acres of land in the RESIDENTIAL AREA was to be charged to the plots carved out of 51.88 acres of land. Technically talking, the yield out of the total land proposed developed for residential colony was therefore 33.75 %>, i.e. 51.88 acres divided by 158.75 acres. Thus out of per acre or 4840 sq yds of land developed, the net area available was only 1634 sq yards (yieldper acre & 33.75%). The total cost of developing per acre of RESIDENTIAL land i.e. Rs. 7585660 was divided by NET yield in sq yds per acre to arrive at the cost of land and developing land, per square yard. It is reiterated that Rs.7585660 is cost of developing only one care of RESIDENTIAL LAND AND DOES NOT AT ALL INCLUDE COST FACTOR OR ELEMENT OF COMMERCIAL AREA AT ALL, FOR WHICH A SEPARATE COS T SHEET IS PREPARED.
It is clear from a bare reading of the cost sheet that the total cost of developing one acre of RESIDENTIAL land has been divided by the yield in square yards to arrive at the per square yard cost of residential plot. It is very clear from the cost sheet that this does not include any element of cost or area of commercial property/ plot in it. It is reiterated that the area of 46.75 acres has been set apart in the locality for commercial purposes has got nothing with the calculation, as is clear from the calculation appearing in the order itself.
It is evident from the calculations made in the order of assessment, which has reproduced the cost sheet of sector 33, Karnal and taken this as the basis of applying 60% profit on receipts from allottees, on the ground that the cost of commercial sector has been charged to residential plots and hence the same is yielding higher profit. In the order of assessment, it has been noted that the total cost in respect of one acre land developed in the area i.e. Rs. 7585660 which was cost per acre and 158.75 acres of land was developed out of which only plots on 53.58 acres were carved out and remaining parts were left for common utilities and for green patches only.
It is fact that the commercial areas fetch better price than the residential plots. But the cost of developing the commercial properties is very high and there is not such a huge profit element as envisaged by the 'AO in this transaction. It is submitted as under
2. Addition @ 60% on commercial properties is on a very high side due to the following reasons:-
i) The development cost of commercial sectors is 3 to 4 times higher than the development cost of the residential sectors.
ii) The saleable area in the commercial sectors is only 25% to 30%, as against the saleable area of 50 to 55%, in the residential sectors.
iii) The enhanced compensation awarded by the Courts in respect of commercial sectors is not recovered from the allottees of commercial sectors unlike the residential sectors as the commercial sites are sold by way of auction.
iv) The license fee, conversion charges, infrastructure development charges are much higher in the case of commercial sectors than the residential sectors. The Chart showing these charges is enclosed at Annexure A'. Therefore, the commercial sites have a huge cost and addition @ 60% on the commercial sites is not justified.
21.2 The appellant further referred to the assessment order for the year 2008-09 wherein the AO himself has computed the income from sale of commercial plots by applying a rate of 50% as compare to 60% taken during the year under appeal.
3022. The Ld. CIT(A) adjudicated on this issue which is as under:
I have carefully considered the submission made by the appellant. It is seen that the appellant has challenged the AO's action of treating 30% & 50% of its receipts as taxable on account of indirect charges received mainly by relying on the AS-7 method being followed by the appellant. It is mentioned that the AS-7 method followed by the appellant has been rejected by the AO and the AO's action in this regard has been upheld in the preceding para. The appellant has, first of all challenged the working of 29.79% as, as per the appellant the same is actually 27.3%. As regards, the other arguments taken by the appellant, it has been stated that the indirect charges received by the appellant are on various accounts and 22.177o out of 27.3% is passed on and is not retained by the assessee at all. The assessee has elaborated on the various components of indirect charges to substantiate its contention that most of the sums charged by the appellant from plot holders are spent on the activity of developing plots and or completing the sectors. It is seen from the submission of the appellant that the following expenses are directly parted/given to the State Govt, and cannot constitute income of the appellant.
i) License fee 3%
ii) Conversion Charges 3.87%
iii) Scrutiny fee and service charges .81%
Thus, there is merit in appellant's submission that the above charges cannot be taken to be income of the appellant. Similarly, the appellant is correct in stating that the actual amount on account of indirect charges works out to 27.3% as against 29.79% taken by the AO. Therefore, giving appropriate relief to the appellant with regard to the above charges and the difference in percentage calculated by the AO, the percentage of recoveries taken to be the income of the appellant from sale of residential plots is taken as 20% as against 30% adopted by the AO (3% + 3.87% + .81% + 2.49%). The appellant gets consequential relief in this regard.
6.10 The appellant has further contended that the amount of recoveries include the amount received from the allottees on account of enhanced compensation granted by the Courts. Therefore such receipts cannot have any element of income and the same needs to be excluded from the taxable income. The appellant's contention is found to be valid. Therefore, the AO is directed to re-compute the addition after excluding the receipts on account of enhanced compensation after duly verifying the details 6.11 As regards, the appellant's contention with regard to application of rate of 60% with regard to commercial property, it is held that the same is on the higher side. First of all the application of higher rate is approved in principle as one does not need to go into the details of the rates of commercial property and residential property. There is no denying the fact that the commercial properties fetch more price while the cost of acquisition is the same. Therefore profit margin is definitely high in case of commercial properties. There is merit in appellant's submission that all these towns of Haryana are not commercially as advanced as Faridabad & Gurgaon wherein the proportion might be justified Further, there is also substance in appellant's submission that the cost of developing commercial area is more than that of residential area as proportion of land utilization in case of commercial property is less. It has also been mentioned that the enhanced compensation by the Court in respect of commercial sectors is not recovered from the allottees as done in the case of residential sectors. It is seen that the AO himself has taken the proportion of profit as 50% during the year 2008-09. Therefore, it is held reasonable to apply a rate of 31 45% in the case of commercial property for estimating the income derived from sale of commercial property.
6.12 The appellant has made an alternate submission that the amount of Rs.84,60,72,183/- as income from completed sector as shown in the P&L account should be reduced while computing the taxable income of the appellant as the AO has applied a net profit rate of 30% with regard to receipts from residential area and 60% with regard to receipts commercial area. As per the appellant as the AO has rejected the book results with regard to income by way of development of sectors & plots and has applied a net profit rate as mentioned above. The profit derived by the appellant from the same activities as reflected in the books of account should be reduced from the taxable income so computed by the AO. It is seen that a similar contention was raised before the AO during the course of assessment proceedings. The AO had however rejected the appellant's contention stating that the percentage method has been adopted only during the year 2003-04, 2004-05 & 2005-06 and the year under appeal. The entire recoveries of more than Rs.4364 Crores i.e. the balance as on 31.03.2003 have not been disturbed on proportionate basis. Therefore, there is no merit in appellant's submission that there is double taxation. The AO has mentioned that in case the assessee accepts the department's working then in the subsequent years it may shift only the excess receipts to the income and expenditure account for completed sectors. I agree with the observations of the AO in this regard. The receipts shown by the appellant are with regard to the completed sectors which as per the accounting practice followed by the appellant are shown after 20 years. Therefore, the AO's action of applying a net profit rate does not have much impact on the receipts so shown. The appellant may however work out the details of the receipts relatable to the completed projects the income from which has been shown in the PAL account and which have been included by the AO also for net profit rate purposes and claim appropriate relief. The AO is directed to allow the relief in this regard after due verification.
6.13 In conclusion, it is held that the income of the appellant be determined by applying a net rate of 20% in the case of residential property and ki% in case of commercial property. The amount recovered by the appellant on account of enhanced compensation with regard to residential property also be reduced from the total receipts for working out the net profit with regard to residential properties after due verification by the AO. The appellant' gets appropriate relief in this regard. The ground of appeal is partly allowed.
23. Before us the Ld. AR strongly relied on the arguments taken before the Ld. CIT(A). It was further argued that on perusal of cost sheet it will be observed that out of the land earmarked for the sector 46.75 acres of land was earmarked for area under shopping & 1.10 acres was reserved for institution. Accordingly, the balance area was available for development and sale towards residential plots was 158.75 acres. The commercial area has been rightly excluded from the total area for earmarking specified areas for residential purposes because the cost of commercial area is calculated separately. The cost of developing the commercial sector is different from cost arrived at in the cost sheet of residential property as the development of commercial area is much higher & costlier than the development of residential area. Therefore, the development cost of the commercial area cannot be loaded on to the residential area. Therefore, it was 32 argued that the contention of the AO in this regard that assessee is smartly excluding commercial area from the saleable area is without any basis.
24. The Ld. AR argued that the commercial plots are sold by way of auction after determination of the Reserve Price. The assessee earns profit from the sale of commercial plots. Therefore, when the assessee himself accepts that profit is earned on commercial plots, the contention of the AO that it is claimed by the assessee that it is running its activities on "No Profit No loss" is without any basis in respect of shopping centre & institutional area.
25. The AO has contended that assessee is making huge profits from commercial sectors. In this regard, the assessee has never denied the fact the commercial plots are auctioned at higher prices. All the receipts from the sale from plots are duly accounted in the books of accounts of the assessee. The receipts are accounted for as income and credited to sector wise profit & loss account of the assessee as per the method of accounting followed by the assessee. There is no concealment of income by the assessee & not even a single case has been pointed out where it can be proved that assessee has not accounted for the receipts from sale of plots in the books of accounts. The difference is only on account of the year of taxation of profit. Therefore, addition made is causing double taxation on the assessee. The auction is almost after 15- 20 years of development which is after 5-6 years of inception. Thus auction is after 20years. Moreover a period of 4 years is allowed to make the payment after which substantial risk & reward is transferred. From the above, it is clear that mainly risks are transferred after 20 years. Since after 20 years assessing is showing income on its own, estimating income @ 60 & 45 % of the recoveries is highly unjustified.
26. The Ld. AR has also put forth alternate argument without prejudice to the above, that it is a fact beyond doubt that the commercial areas fetch better price than the residential plots. But at the same time another fact cannot be ignored that cost of developing the commercial properties is very high as compared to residential properties and there is no such huge profit element of 60% as envisaged by the AO due to the following reasons;
33- The site development cost varies depending on various factors such as site, development plan, local fees, permitting costs etc. o The development cost of commercial sectors is much higher than development cost of the residential area.
- The saleable area in the commercial sectors is only 25% to 30% as against the saleable area of50% to 55% in the residential sectors
- The enhanced compensation awarded by the Courts in respect of commercial sectors is not recovered from the allottees of commercial sectors unlike the residential sectors.
- The license fee, conversion charges infrastructure development charges are much higher in the case of commercial sectors than the residential sectors.
- The auction in the commercial sectors is commenced only after inhabitation in residential part of the sectors is done therefore, the cost of development of commercial sectors is very high,
-HUDA does not only offers commercial properties at Gurgoan. It has major transactions arising from other areas as well & there are certain places where the auction does not take place at all or at such low prices that sometimes it results in losses also. All the towns of Haryana are not commercially as advanced as Gurgoan or Panchkula. Therefore, the cost of development of commercial sites is much higher and addition @ 60% on the commercial sites is not justified. Moreover, it is pertinent to mention that the CIT (A) in AY 2007-08 has accepted the contention of the assessee that the cost of developing commercial area is more than that of the residential plots reduced the percentage of profit to 45%.
26.1 Ld. AR further argued to reduce the percentage of profit to 20% based on the above facts.
26.2 Regarding the residential sectors the Ld. AR argued that the assessee has been consistently following AS - 7 issued by ICAI which provides for an exception in respect of expenditure which are general in nature & cannot be attributable to specific activity carried on by the assessee. Reference is drawn to Para 8.7 of AS - 7.
26.3 Administrative expenditure claimed by the assessee are in respect of the expenditure incurred on running day to day activities and other managerial functioning of HUD A. There is common staff which is indulged in carrying out activities relating to both the completed & the uncompleted contracts. These expenses cannot be segregated contract wise.
Reliance is placed in the case of Joint Commissioner of Income Tax vs. K. Raheja (P.) Ltd. (2005) 102 ITD 414 (Mum.)
27. The Ld. AR has argued that the assessee has been consistently following the same system of accounting and dispute is only regarding the year of accounting of income. It was argued that the dispute is only regarding the year of accounting of income and there is no dispute on the point of admissibility of the expense in books of accounts as revenue in nature and it is established legal position that an assessee can follow any recognized method of accounting but the condition is that the same method has to be followed consistently. Reliance 34 in this regard is placed on Daikin Airconditioning India Private Ltd. vs. Deputy Commissioner of Income Tax (2014) 146 ITD 335 (Delhi), Nandi Housing (P) Ltd. vs. Deputy Commissioner of Income Tax (2003) 80 TTJ (Bang) 750 : (2004) 2 SOT 395 (Bang), R. Natarajan vs. Assistant Commissioner of Income Tax (2012) 135 ITD (Chennai) (TM) (Trib) 0055
28. The assessee has taken an alternate argument that there would be unforeseen charges and also estimated expenses of 2.04% of the total cost to meet the variations and 6.13% can be treated as cost of administration maintenance and establishment expenses. It was argued that Commercial interest/ escalation charges are part of development cost, the outflows of which are compulsorily required to be incurred for the purpose of developing & selling a sector and are not claimed in Income & Expenditure. Therefore it is requested that since commercial interest & escalation charges are to cover the contingencies of the development cost, the same should be clubbed with the Development Cost. Therefore in view of the above, it was pleaded that the Development Cost be taken as 56.06% ( 44.61%+7.36%+4.09%) as against 44.61% taken by AO and addition if any should only be made in respect of administrative & unforeseen charges. Our prayer is that the addition made @ 30% be reduced to 8.17 % (6.13%+2.04%).
29. Ld. DR has relied on the rationale of the CIT(A), however strongly contested against the reduction of profits from 30% to 20% in residential sector and reduction from 60% /50% to 45% in commercial sectors. These submissions of the Ld. CIT(DR) are as under:
4. ADDITION ON ACCOUNT OF INDIRECT CHARGES OF RESIDENTIAL SECTORS: After rejection of books of accounts, AO in order to ascertain the basis of calculation of the correct profit asked assessee to elaborate the method of calculation of Cost of Plots and working of distribution of the same to the allottees over a period of 20 years. In response, assessee furnished a Cost Sheet with respect to the Sectors of Jagadhari and explained how HUDA calculated the cost of plots for fixing sale price. AO asked cost sheets for other Urban estates for which assessee submitted that cost ratios are the same for all the cost sheets for various estates. It explained that there are three components of the total cost (1) Cost of Land + (2) Development Cost + (3) Indirect Charges including Administrative Expenses. On the basis of this the sale price to be fixed on the principle of "No Profit No Loss" which is collected from the allottees in installments. The cost sheet crystallizes that the assessee is capitalizing Cost of Land, Development Charges and Other Incidental Charges but claiming the administrative charges amounting to 29.79% in the P&L Account as revenue expenditure. AO observed that when HUDA receives payments from the allottees on account of these three components, it is capitalizing the entire receipts in the balance sheet. AO held that when administrative charges are considered as revenue expenditure then why the receipt of these administrative charges is not taken as revenue receipts. Assessee just stated that it is following accounting system of Completed Project meaning thereby that it has failed to 35 rebut AO's contention. By following the reasons of rejection of books of accounts supra at para 3, AO has held that as the assessee has claimed Indirect Charges including administrative expenditure which works out to 29.90% of the total cost of the project as revenue expenditure the corresponding proportion of the receipt of recovery from allottees also needs to be taken. The addition on account of administrative charges claimed by the assessee in Income & Expenditure Account was made by the AO for the first time in AY 2004-05 by estimating the 30% of the total recoveries as income.
Thereafter from AY 2004-05 onwards, the income was estimated @ 30% of the total recoveries from residential sector on account of indirect charges claimed by the assessee in all the years.
4.1. AO has also discussed that HUDA is not an organization working on a "No Profit No Loss" as it is generating following profits:
i. Total Sector is divided into plots and the value is fixed after including all development and administrative expenditure. Residential plots are allotted at cost price but commercial plots are sold on auction, which generated profits in several hundred crores.
ii. HUDA receives the entire charges on account of future developments and the maintenance of sectors from its allottees within a period of 5/6 years, but development is carried out in a period of 20 years meaning thereby that it is receiving maintenance/development charges from allottees in advance. These charges are deposited in the bank as FDRs and earned Interest Income.
iii HUDA is not including Forfeiture of Security while working out the cost of each sector. This is also generating several crores of rupees. [The issue of Forfeiture of Security has been settled in favour of revenue by the IT AT in assessee's own case for AY 2003-04] iv. HUDA does not include sale of Trees and Malbas in costing of plots. v. HUDA receives several lakhs of applications with earnest money which is interest free deposit for six months and in turn earns interest of several crores of rupees on this earnest money.
vi. HUDA has worked out various administrative charges on estimate basis whereas actual expenditure is much less that again generates profit. Commercial properties, Malls, School sites etc are put to auction which are sold above reserve price. There is clear intention to earn profit.
4.2 The CIT(A) order for AY 2007-08 was adjudicated first & the rate was reduced from 30% to 20% on the following reasons: (a) There is a merit in assessee's submission that license fee, conversion charges, scrutiny fee and service charges [10.17%] cannot be taken to be income of the assessee as same are directly parted/given to the State Govt., (b) Similarly, the appellant is correct in stating that actual amount on account of indirect charges is 27.3% as against 29.79% computed by AO, accordingly giving relief, the percentage is taken as 20% as against 30% adopted by AO, and (c) The receipts on account of enhancement compensation granted by the courts does not have any element of income. Therefore he directed the AO to exclude enhancement compensation from the amount of receipts. The CIT(A) order for AY 2007-08 was followed by CIT(A) in all the years.
4.3 A portion of the recoveries made by the assessee during the year is relatable to indirect charges by the assessee. Since the assessee is debiting all the indirect charges i.e. charges in the nature of administrative charges, interest charges etc. to the Income & Expenditure a/c the amount of receipt on account of such charges is liable to be included to the income of the assessee. During the assessment proceedings, the assessee was asked to give details of 'Total Recoveries from allottees with break up regarding new sale proceeds from commercial and residential sectors and old recovery to be given separately'. The AR of the assessee has given breakup of the same. As discussed in the preceding paras, the profit generated and therefore, the income from sale of commercial plots far exceeds the income from the sale of residential plots. Hence, 30% recoveries from sale of projects which correspond to the heads of expenditure which are booked by the assessee directly to his income and expenditure is taken with regard to income from residential sector. Thus adopting a consistent view of accounting, it is seen that receipts for the same heads ought to be income of the assessee. The CIT(A) has accepted assessee's contention on indirect charges claimed compulsorily payable to other departments without calling for comments from the AO and properly appreciating the reasoning given by the Assessing Officer.36
4.4 Every assessment year is a separate assessment year and principle of res-
judicata is not applicable in the Income Tax proceedings. Reliance is placed on (a) H.A. Shah & Co. vs. Commissioner of Income-tax (30 ITR 618, Bom.), (b) The Amalgamated Coalfields Ltd. vs. The Janapada Sabha Chhindwara (AIR 1964 SC 1013), (c) C.l.T vs. Brij Lai Lohia and Mahabir Prasad Khemka (84 ITR 273, SC), (d) C.l.T vs. Micro Land Ltd. (347 ITR 613, Karn.), and (e) Dharmesh R. Shah vs. JCIT 60 SOT 182, Mum.). AO is free to form an independent opinion as per Income Tax provisions especially when there is notification issued by the Central Government u/s 145(2) of the Act in the Finance Act 1995 and the outdated "Accounting Standard-7" has oeen revised as "Revised Accounting Standard-7" w.e.f. 01.04.2003 even if a wrong method of accounting is followed for the last 30 years. When HUDA is providing residential and commercial plots on market rate, the contention of the assessee that it undertakes an overall development of towns by providing suitable & required facilities without any intent to earn profit and the residential plots are offered to the public on "no profit no loss" basis is devoid of truth. It has itself accepted that the commercial plots are auctioned on which profit is generated. The auction in the commercial sectors is commenced after inhabitation in residential part of the sectors is done has not been demonstrated with any evidence. Reliance placed by the assessee in the case of Joint Commissioner of Income Tax vs. K. Raheja (P.) Ltd. (2005) 102 ITD 414 (Mum.), Nandi Housing (P) Ltd. vs. Deputy Commissioner of Income Tax (2003) 80 TTJ (Bang) 750 : (2004) 2 SOT 395 (Bang), Nandi Housing (P) Ltd. vs. Deputy Commissioner of Income Tax (2003) 80 TTJ (Bang) 750 : (2004) 2 SOT 395 (Bang) is misplaced. In the instant case, the methodology adopted by the appellant has been found by the AO to be inconsistent with the revenue recognition for each year. Further, in the instant case, in the past the appellant has been claiming exemption for its activities as for charitable purposes which has subsequently found to be not available. The appellant is neither a Construction Contractor nor in true sense a Real Estate Developer. It is also not following either the complete Contract Method or the Percentage Completion Method. The Revenue recognition is being deferred for a period of 20 years. Therefore, the case laws relied upon by the assessee is not applicable in the instant case. In view of above discussion and discussion, the CIT(A) has erred in applying a net rate of 20% and AO's rate of 30% is requested to be restored. Assessee's alternative pleas have no basis, hence not acceptable.
5. ADDITION ON ACCOUNT OF INDIRECT CHARGES OF COMMERCIAL SECTORS: The addition on account of indirect charges claimed by the assessee in Income & Expenditure Account of Commercial Sectors was made by the AO for the first time in AY 2007-08 by estimating the 60% of the total recoveries as income. AO points out that the cost sheet of the assessee takes into the saleable area of residential plots in any sector into consideration and the cost of residential plot is worked out on the same. Assessee has submitted that the cost of commercial sites is not included while preparing in cost sheet in respect of residential sectors. Thus, what the assessee is doing smartly in its computation sheet is excluding the commercial Area from saleable Area and the computing the rate of saleable area for residential plots. Thereafter, land carved out for commercial purpose like shopping centre and Institutions is not even taken into consideration by the assessee in its' computation sheet for sector, though it claims to be running its' activities on "No Profit No Loss". The selling price of the commercial plots are higher than the residential plots within the range of 5 to 40 times the cost of residential plot in the sectors developed by HUDA. The profit generated and the income from sale of commercial plots far exceeds the income from sale of residential plots. However, with regard to the recoveries from sale of commercial plots, 60% of these receipts are taken as income of the assessee during the year. This figure is taken as higher than 30% taken for sale of residential plots.
5.1 The CIT(A) reduced the rate to 45% in AY 2007-08 on the reasons that (i) There is merit in appellant's submission that all these towns of Haryana are not commercially as advanced as Faridabad & Gurgaon, (ii) The cost of developing commercial area is more than residential area, and (iii) Enhanced compensation is not recovered in case of commercial sectors from allottees. This order was followed by CIT(A) in all the years. 5.2 A portion of the recoveries made by the assessee during the year is relatable to indirect charges by the assessee. Since the assessee is debiting all the indirect charges i.e. charges in the nature of administrative charges, interest charges etc. to the Income & Expenditure a/c the amount of receipt on account of such charges is liable to be included to the income of the assessee. During the assessment proceedings, the assessee was asked to give details of Total Recoveries from allottees with break up regarding new sale proceeds from commercial and residential sectors and old recovery to be given separately'. The AR of the assessee has given breakup of the same. As discussed in the preceding paras, the profit generated and therefore, the income from sale of commercial plots far exceeds the income from the sale of residential plots. Hence, 30% recoveries 37 from sale of projects which correspond to the heads of expenditure which are booked by the assessee directly to his income and expenditure is taken with regard to income from residential sector. Thus adopting a consistent view of accounting, it is seen that receipts for the same heads ought to be income of the assessee. However, with regard to the recoveries from sale of commercial plots, 50% of these receipts are taken as income of the assessee during the year. The CIT(A) has accepted assessee's contention on indirect charges on commercial sectors on the basis that (i) There is merit in appellant's submission that all these towns of Haryana are not commercially as advanced as Faridabad & Gurgaon, (ii) The cost of developing commercial area is more than residential area, and (iii) Enhanced compensation is not recovered in case of commercial sectors from allottees without calling for comments from the AO and appreciating the reasons recorded by the AO.
5.3 Even if for the sake of argument's sake it is accepted that saleable area of commercial sectors is 25% to 30% as against the saleable area of residential sectors about 50% to 55% and development cost for commercial sectors is 3 to 4 times higher than the development of residential sectors, the contention of the assessee's is not acceptable as commercial plots are put to auction to the highest bidder fetching 5 to 40 times more profit corresponding to the residential sector. No evidence was placed before the AO regarding enhanced compensation awarded by the courts. Assessee's contention that the CIT (A) in AY 2007-08 has accepted the contention of the assessee that the cost of developing commercial area is more than that of the residential plots reduced the percentage of profit to 45% and it requests the Hon'ble ITAT to kindly further reduce the percentage of profit to 20% considering the submissions of the assessee, in turn further strengthens AO's point of view. The CIT (A) failed to appreciate the reasoning given by the AO. In view of above discussion, the CIT(A) has erred in applying a net rate of 45% without giving definite findings, hence AO's rate of 50% requested to be restored.
30. The Ld. DR has also submitted that the Grounds of Appeal in the RECTIFICATION appeal in ITA No.415/Chd/2012 and 414/Chd/2012 for AY 2008- 09 & 2004-05 respectively will be taken care on adjudication of above issue.
31. We have perused the material before us and the arguments taken by both the parties regarding the commercial sector the main contention and ratio resorted by the Ld. CIT(A) to reduce the profits from 50% to 45% are that all the areas are commercial sectors are not equally developed so as to determine average higher profits. Similarly the compensation paid and the expenses incurred for development of commercial sectors and the extent of land utilized and salability thereof have been duly considered. Hence we decline to interfere with the order of the CIT(A) on this aspect.
Regarding the sale of residential sectors the remission given by the Ld. CIT(A) has already considered the submission of the assessee that license fee, conversion charges ,scrutiny fee and service charge and reduced the profit by more than 7.68% which has been claimed by the assessee to be payable to the State Government by statute and reduced profit percentage from 30% to 20% hence, the 2.04% variation on account of unforeseen circumstances claimed at this juncture cannot be accepted to. The accounting standards resorted by the assessee or not truly reflecting the profits derived and the reason given by the 38 CIT(A) is found to be cogent hence we decline to interfere with the order of the CIT(A) on this aspect. The profits computed pertains to the profits that are ought to have derived by the assessee on claiming all the eligible expenditure and accounting all other income. Hence, any expense disallowed or addition made would be treated as income in addition to the profits estimated.
32. As a result both the grounds of appeal are treated as dismissed. Exclusion of profit already declared
33. Ground No. 4 for the Assessment years 2004-05, 2006-07, 2007-08, 2008-09, of the assessee appeal relates to exclusion of profit already declared.
34. During the hearing before us the assessee argued that the profits already declared needs to be excluded while computing the profits estimated on rejection of books of accounts. The ground of the assessee is technical in nature and the Assessing Officer is directed to exclude the profit already declared by the assessee from the profits computed by rejecting the books of accounts.
35. As a result this ground of appeal of the assessee is allowed. External Development Charges
36. Ground No. 5 for the Assessment years 2004-05, 2006-07, 2007-08, 2008-09, and ground No. 3 for the Assessment years 2009-10, 2010-11, 2011-12 and Ground No. 4 for A.Y. 2012-13, 2013-14 and 2014-15 of the assessee appeal and Ground No. 2 for the Assessment years 2006-07, 2007-08, 2008-09, 2009-10, 2010- 11, 2011-12, 2012-13 and 2013-14 of the Revenue appeal pertains to the issue of external development charges.
37. The assessee has claimed liability in the Balance Sheet under the head "Other Liabilities' on account of External Development Charges. It is seen that the liability shown is increasing year after year and is constantly progressing. The assessee did not show any details regarding the utilization of the amounts received over the years. However, it is seen that very little of it has been actually spent. The basic fact which remains is that this fee in the nature of EDC is collected by the assessee from the colonizers, is statutory fee which is to be paid by the purchaser of plots sold through colonizers. This statutory payment has been received by the assessee and has been shown as a liability in the Balance Sheet. It needs to be noted that the said amount is chargeable at a rate which is revised periodically and is non refundable in any event. Consequently, it can 39 never be classified as liability. The Assessing Officer on examination found that the assessee is hardly spending the amount received on account of EDC. Moreover the receipt of EDC is basically being utilized by depositing the same into banks in the form of FDRs or other investments made by the assessee.
38. The Assessing Officer has estimated that 30% of the EDC as income of the assessee on the grounds that the amounts have never been spent by the assessee for the purpose for which EDC has been collected.
39. The Ld. CIT(A) held that the EDC charges constitute revenue receipts treating them at par with indirect charges recovered which have been taxed at 20% and restricted the addition also to 20% on the lines of the EDC Charges. The verbatim of the Ld. CIT(A) is as under:
" The AO while framing the assessment noted that the appellant has been recovering EDC charges from the builders/colonizers and the un-spent amount is being shown as liability in the balance sheet under the head other liabilities. The AO noted that the liability so shown is increasing year after year as mentioned below :-
Opening balance as on 01.04.2006 (As per Balance Sheet): 17,24,85,96,593/-
Add: During the year : 6,02,23,48,336/-
Closing balance as on 31.3.2007 (As per Balance Sheet) : 23,27,09.44,929/-
The AO noted that EDC charges are revised periodically and are not refundable in any event. Therefore, as per the AO the same cannot be termed as liability. The appellant was accordingly primarily keeping the money so collected in the bank and earning interest thereon. The appellant was asked to file the details with regard to nature of liability, the schedule of EDC applicable for different cities and the basis of working out the same. The appellant justified the treatment given to the EDC charges by making the following submissions:-
"1. EDC are charges recovered from colonizers proposing to develop residential and other colonies is the state of Haryana.
1. EDC is charged solely with the intent to provide external service to the colonizers who develop colonies in private land acquired by them. The services proposed to be provided are wide area varied and cover from sewerages, roads, electricity, horticulture, rain water disposal and other such services. The amount received from colonizes is solely and purely with a view to provide services over a period of time depending on there such and status of the colony developed by HUDA. Although, EDC is charged from the initial date when the colonizer begins to undertake colonization, these are spent at later stage. In the meantime, or during the period the amount is not spent, the amount is retained b HUDA in liability account to be discharged at a later date. The amount of EDC is thus purely in the nature of liability and cannot be said to be income of from any stretch of imagination.
2. During the course of competing assessment for AY 2005-06 and 2006-
07, the AO had assumed that the EDC contained an element of prof it to the extent of 30 °A> amount. The basis for holding this requires to be clarified. We may like to point out that all assessment year are independent assessment year and framing of any basis or adoption of any rate of any particulars year cannot be blindly applied to the subsequent years"
7.1 The AO however rejected the appellant 'submissions observing as under :-40
a) The assessee has not given the details of how the EDC is worked out though specifically asked for. In absence of any details, it is assumed that there is no basis and it is imposed on adhoc basis.
b) EDC is charged from colonizers who are developing residential colonies and other colonies, but has hardly been spent till date, as reflected from books of accounts of the assessee.
c) Further as per submission given by the assessee, the EDC charges are not uniform in the state but are charged at different rates from the 4 categories of Urban Estate.
The high potential Zone(s) are charged at a far higher rate than others, which its self proves that a premium amount is charged from some areas from where maximum EDC is realized by the assessee. This itself proves that there is no basis on which EDC charged can be linked with actual amount spent.
d) Lastly, the accumulation of EDC receipts in the Balance sheet over the years proves the points of revenue."
7.2 After having rejected the appellant's submission, the AO held that the EDC charges received are in fact a part of total recoveries for bigger plots from colonizers. The AO further held that 30% of the amounts so received is liable tobe treated as recovery on account of indirect charges and brought them to tax as the income of the appellant. The AO worked out the disallowance at Rs.1806704501/-@ 30% of Rs.6022348336/-.
7.3 The appellant has challenged the AO's action stating that the treatment given to EDC charges is correct as per the accounting policy followed by the appellant. The detailed submission made by the appellant in this regard is reproduced as under :-
"External development works" include water supply, sewerage, drains, necessary provisions of treatment and disposal of sewage, sullage and storm water, roads, electrical works, solid waste management and disposal, slaughter houses, colleges, hospitals, stadium/ sports complex, fire station, grid sub stations etc. and any other work which the Directory may specify to be executed in the periphery of or outside colony/area for the benefit of the colony/area;
HUDA has been assigned the responsibility of executing the external development works in the Urban Estate of Haryna. Again HUDA works out the EDC for a particular Urban Estate on 'No profit no loss basis'. The cost of external development services such as Master Water Supply, Master sewage, Master roads, Master storm water drainage, Master horticulture, Master community buildings and other services on the basis of a price index of a particular year in respect of a particular Urban Estate. The cost is worked out by the Engineering Wing of HUDA keeping in view the requirement of the Development Plan of the Urban Estate. In the development cost worked out by the Engineering Wing, the direct and indirect charges are added on the same pattern as explained in Para- 1 above. Since these are the common services for the sectors/colony for whole of the Development Plan, the cost of these services including the direct/indirect charges are spreaded over the total area of the Development Plan and the cost of EDC per gross acre is worked out. The same EDC is charged from the sectors floated by HUDA or the license granted by the Town & Country Planning Department to the developers. As stated above no element of profit is added in the working of EDC. The expenditure on EDC by HUDA is met out of the recovery of EDC from the allotters of HUDA or from the private developers to whom the licenses granted by the Town d Country Planning Department. The EDC will vary from Urban Estate to Urban Estate as the requirement of development in respect of each Urban Estate will vary. In some Urban Estate the ground water is available, therefore, the cost of tube well is taken into account while working out the EDC. In other Urban Estate no ground water is available and water is arranged through Canal based system, the cost of which is much higher than the tube well. Similarly, the width of the road may vary from Urban Estate to Urban Estate. The requirement of water per person may also vary from 41 Urban Estate to Urban Estate. Therefore, the EDC for different Urban Estate will be different.
The very basis of the levy of profit on an assumed rate of 30% is misunderstood by the AO. In the quotes reproduced above from order of assessment, it is noticed that the AO has stated that no documents were produced. This is incorrect. Addition on account of NP on EDC was made for the first time in the assessment year 2005-06, All relevant details were furnished before the AO and it was emphatically argued that EDC are in the nature of liabilities and have been charged from colonizers for the purpose of developing UE in which the colonizer proposes to establish his sets up. The amount is being spent on periodical basis and is subject matter of surveillance by Hon'ble Punjab and Haryana High Court. The Hon'ble court is seeking production of annual accounts of the amounts spent on EDC as collected from the colonizers. There is thus no legal sanctity of charging any kind of profit on such kinds of receipts which are in the nature of liabilities. In case the Income tax Department did not consider this to be a liability, then it should have subjected the whole amount to tax in the year of receipt.
Finding of the AO that there is no element of EDC in receipts from plot allottess is factually incorrect as is apparent from record itself.
4. Further to submissions made on the last date of hearing in which the concept of EDC was elaborated, it is brought out that EDC is collected from colonizers with a view to undertake development in the area proposed to be colonized. Although the EDC are being collected from the colonizers since a long time, the State of Haryana underwent a spate of colonization in recent years and prior to that there was no such activity incurred on the development of area. Hence the same resulted in accumulation of funds at the disposal of the assessee. These funds were kept as earmarked funds and were retained for the purposes of undertaking external development. There has been a major change in the thrust on developing the colonies in the state and in recent past, on account of colonization undergoing at a fast pace, the expenditure is being incurred heavily on the external development works/ activities etc. Furthermore the issue of spending EDC on areas under control of HUDA has been under surveillance of High Court, who is constantly monitoring the deployment of EDC in various Urban Estates.
We are placing hereunder relevant data evidencing the above submissions and which also proves that in the recent times the expenditure on EDC has gone up in last few years to meet the requirement.
Since the EDC is in the nature of liability and is being spent on need based activity depending on the nature of colonization and extent of colonization, the same cannot be treated as income just because the assessee is receiving money from EDC and continues to receive the same. The other objection of the AO for treating the income is that the EDCamount is varying from area to area and also no details were furnished during course of assessment proceedings, is incorrect and in any case the same cannot be basis for making addition of such huge amount to income of the assessee. Furthermore, there is no basis of arriving at 30 pc as profit element in the EDC receipts.
Necessary details have been furnished during course of appellate proceedings with a copy marked to Assessing Officer for seeking their comments thereon.
It is thus summed up that the expenditure on EDCwas not incurred in the initial years but is now being incurred and is under constant surveillance of High Court and who is constantly monitoring the expenditure incurred on EbC. The enclosed statement also evidences the fact that the expenditure, in the subsequent years on EDCmuch more than the past years. The addition on account of 30% on EDCwhich is without any basis is unjust unfair and illegal deserves to be deleted.
"7.4 It has been further stated that there is no element of profit/income in these charges as the amounts so received is spent on external development of the areas which is the responsibility of the appellant. It has been submitted that the AO has treated 30% of the EDC so received as income of the appellant 42 observing that the appellant is not spending the EDC charges so recovered. The appellant filed the details of the expenditure incurred out of the EDC charges as on 31.12.2009 with regard to different urban estates being developed by the appellant, like Panipat, Sonipat, Rohtak, Gurgaon etc. reflecting that the amount is being spent regularly as the projects are being developed. It has been mentioned that the expenditure under the head EDC charges is more in case of certain Urban Estate while in other cases expenditure is progressive.
40. The determination of the Ld. CIT(A) on the issue of EDC is as under:
"7.5 I have carefully considered the submission made by the appellant and have also gone through the reason given by the AO forr making the additions. It is gathered from the details submitted that the EDC is basically a statutory fee which is chargeable by HUDA from Colonizers. The fee is supposed to be for the development works carried out by HUDA. However, it is seen that very little of it has been actually spent. The basic fact which remains is that this fee in the nature of EDC is collected by the assessee from the colonizers. It is statutory fee which is to be paid by the purchaser of plots sold through colonizers. This statutory payment has been received by the assessee and has been kept as a liability. It needs to be noted that the said amount is not refundable in any event. It is further seen that the amount is subject to upward revision. Therefore, if the actual expenditure is more than the recoveries, the same is recoverable from the developers and if the expenditure is less then the recoveries the same constitute the income of the appellant as by very nature the amount is not refundable. It is seen that the appellant has kept complete record of EDC charges received and spent with regard to each Urban Estate. As per the details filed the expenditure is progressive. There is merit in appellant's submission that the amount has accumulated in the initial years mainly because the development work was slow but currently the amount is being spent as the areas are being developed. It is noted that the appellant is under legal obligation to provide external development like treatment and disposal of sewerage, drains, necessary provisions of treatment and disposal of sewage, sullage and storm water, roads, electrical works, solid waste management and disposal, slaughter houses, colleges, hospitals, stadium/ sports complex, fire station, grid sub stations etc with regard to the areas being developed by it. Therefore, the amounts so recovered has to be spent. The EDC charges are fixed keeping in view the likely expenditure. Therefore, the possibility of actual expenditure being less or more then the amount spent is always there. By the very scheme the excess expenditure is recoverable from the developer/plot holders while the surplus is not refundable. Therefore, the proportion of amount which remains un-spent definitely forms in the income of the appellant which needs to be accounted for. As the appellant is not transferring the surplus, if any to the receipts and also because the projects are on going, the AO is justified to make an estimate of the income element in the same. The AO has treated 30% of the EDC charges as constituting the revenue receipts treating them at PAR with indirect charges recovered. As the income element in the indirect charges has been held to be 20% of the charges so recovered, it is considered fair if the same percentage is applied to the EDC charges also. The addition made by the AO is therefore restricted to 20% of the EDC recovered during the year. The appellant gets consequential relief. The ground of appeal is partly allowed.
41. Before us the Ld. AR argued that • The EDC has been defined under section 2(g) of the Haryana Development and Regulation of Urban Areas Act, 1975.
• HUDA has only been assigned the responsibility of executing the external development works in the Urban Estates of Haryana.
• HUDA is simply an executing agency. The EDC is levied by the Town & Country Planning Department, Haryana of State Government & is collected by HUDA for execution of external development works.43
• Reference is drawn to Section 38 of the HUDA Act, 1977, which is as under:-
"Where, in the opinion of the State Government, it is necessary that the amenties provided by the Authority in an urban estate should be extended to any land or building situated within the said area or within such distance front the said area it may deem expedient, such amenities shall be extended to such land or building and the owner of such land or building shall be liable to pay to the Authority, in the manner prescribed, such development charges therefore, as may be fixed by the State Government having regard to the expenses to be incurred for providing such amenities and the benefits to be extended to the land or building.
42. The Ld. AR argued that the above clearly shows that EDC is fixed by the State Government for amenties extended as per the directions of state government. In order to involve the private sectors in the process of urban development, the Department of Town & Planning Department, Haryana grants licenses to the private colonizers for the development of Residential, Commercial, Industrial & IT Park/ Cyber Park Colonizers, in accordance with the provisions of the Haryana Development and Regulation of Urban Areas Act, 1975, and rules framed there under.
43. The Ld. AR argued that on granting the license the Directorate under Section 3(3)(ii) of the Haryana Urban Development and Regulation of Urban Areas Act, 1975 takes an undertaking from the colonizer to pay proportionate development charges, if the External Development works are to be carried out by the government or any local authority, in this case by-the HUDA.Even HUDA is required to pay EDC at the same rate as any other developer. This in itself proves that the contention of the AO/CIT(A) is wrong. HUDA cannot have any element of profit in the amount being paid by it.
44. The Ld. AR summed up that since HUDA being an executing agency carries out all external development works throughout the licensed areas granted to the colonizers, as per the master plans prepared by Department Town & Country Planning, Haryana, treats the amount of EDC collected as liabilities in the books of accounts.EDC are in the nature of liabilities and have been charged from colonizers for the purpose of developing Urban Estate in which the colonizers proposes to establish their sets up. The Amount is being spent on periodical basis and is subject matter of surveillance by Honorable Punjab and Haryana High court. The Hon'ble Court is seeking production of annual accounts of the amounts spent on EDC as collected from the colonizers. There is no justification in holding any element of profit in receipts which are in the nature of liabilities. Under the provisions of the Act itself, it is embedded that 44 as per the direction of the state government, HUDA has to undertake development in the estates of Haryana. The amount received by HUDA is in the nature of liabilities as the amount of EDC is being levied by Town & Planning Department of State Government and HUDA is working under the direct control of State Government for execution only, it is thus requested that no addition be made on this issue.
45. Ld. DR strongly supported the order of the Ld. CIT(A). Further in the written submissions made by the Ld. DR the details of the survey/ inspection conducted under section 133A have been enumerated.
46. The submissions of the Ld. DR are as under:
The basic rationale for charging of EDC by HUDA External Development Work (hereafter EDW) is defined in the Haryana Development and Regulation of Urban Area Act, 1975 (hereafter HDRUA). Definition of EDW is given in Section 2(g) of this Act. It is as follows:
'External Development Works include water supply, sewerage, drains, necessary provisions of treatment and disposal of sewage, sullage and storm water, roads, electrical works, solid waste management and disposal, slaughter houses, colleges, hospitals, stadium/sports complex, fire stations, grid sub-stations etc. and any other work which the Directory may specify to the executed in the periphery of or outside colony/area for the benefit of the colony/area'.
6.2. HUDA charges EDC as per Section 3(3)(a)(ii) of HDRUA, which reads as under:
' To pay proportionate development charges if the external development works as defined in clause (g) of Section 2 are to be carried out by the Government or any other local authority. The proportion in which and the time within which, such payment is to be made, shall be determined by the Director."
6.3. HUDA charges EDC for EDWs by issuing letters/ circulars. The content of these letters/ circulars is that EDC are levied as per Section 2(g) for EDW on the beneficiaries to whom the change of land use permission is granted for various purposes in the Agricultural/ Rural Zone and who are also availing the benefits of the EDW like the town level facilities of major circulation roads, stadiums, hospitals, colleges, crematoriums town parks etc. being provided by HUDA in the nearby urbanisable areas. Since the change of land use holders avail the parts of the EDW, they should also proportionately contribute towards the expenditure incurred on EDW by HUDA. This proportionate contribution is called EDC. Determination of EDC to be paid by participating private persons/ builders, colonizers etc. A participating private builder is required to pay EDC as provided in the license for setting up a commercial colony on urbanisable land held by it in vicinity of land owned and developed (EDWs) by HUDA. The license is issued by the Directorate of Town and Country Planning, Haryana, subject to the undertaking as per the relevant conditions like- To submit an undertaking to the effect that it shall make arrangement for water supply, sewerage, drainage etc. to the satisfaction of 45 DGTCP till these services are made available from external infrastructure to be laid by HUDA.
A sample license in the case of M/s Sky High Land Con Pvt Ltd dated 03.06.2011 regarding External Development Charges (EDC) is enclosed and discussed hereunder:
A) Charges for Commercial area = Rs. 334.333 Lac
(@ Rs. 162.14 lac/acre)
B) Total cost of Development = Rs. 334.333 Lac
C) 25% bank guarantee required = Rs. 83.58325 Lac
6.4. The license dated 03.06.2011 containing these details is enclosed as ANNEXURE-A. The demand drafts of EDC amounts are generally drawn in favour of the Chief Administrator, HUDA though routed through the Director General Town and Country Planning, Haryana. This state of affairs as far as the EDC is concerned is stated by HUDA when it states that other liabilities also include external developmental charges received through DGTCP Department Haryana for execution of various EDC works. The expenditure against which have been booked in Development Work in Progress, Enhancement Compensation and Land Cost. This establishes the fact that the land is owned and developed by HUDA which receives EDC as return/ income on the money invested in the EDWs. There is specific quid pro quo for EDC. The EDC would never be returnable and would never be returned because it is a consideration paid by EDW users. EDC is worked out for a particular urban estate on the basis of the cost of External Development Services such as Master Water Supply, Master Sewage, Master Roads, Master Storm Water Drainage, Master Horticulture, Master Community building and other services is determined on the basis of a price index of a particular year in respect of a particular urban estate. The cost is determined by the Engineering Wing of HUDA keeping in view the requirement of development plan of an urban estate. EDC is charged from sectors floated by HUDA or the license granted by the Town & Country Planning Department to the developers. To say that there is no element of profit in EDC because EDC varies depending upon requirement of development in each urban estate, therefore, it is in the nature of liabilities is incorrect, because the pavers of EDC are allowed to use EDWs for payment of fees worked out on the basis of investments in EDWs. EDC is charged from colonizers for using the developed urban infrastructure in urban estates wherein they are allowed to establish their commercial set ups. The EDC is a user fee charged by HUDA from colonizers. The income nature of EDC would not change even though it is received through DGTCP Department, Haryana. The method of accounting of payment EDC by private colonizer in its books of accounts as current assets would also not change the income nature of EDC in the hands of HUDA. Showing EDC as "Current Liability" by HUDA is incorrect for the reasons narrated above, based on specific nature and flow of transactions. Therefore, EDC is a revenue receipt having character of income of HUDA. This is also a finding of assessing officer of HUDA, which stands confirmed by CIT (A) too.
6.5. It is to submit that a survey/inspection u/s 133A of the I.T. Act, 1961 was carried out on 09.02.2017, 10.02.2017 & 14.02.2017 by the DCIT (TDS), Panchkula at the business/office premises of Haryana Urban Development Authority, Panchkula. A Survey report dated 27.02.2017 has been received from the DCIT (TDS), Panchkula. HUDA is primarily a new urban area development instrumentality. It undertakes large green field urban area development projects. It develops urban infrastructure. It also maintains such developed urban infrastructure. The books of accounts and relevant documents were examined by the DCIT (TDS). It was found that HUDA is receiving money for External Development Charges (EDC). In the Survey Report, it is concluded that the EDC is a user fee charged by HUDA from colonizers. Therefore, showing EDC as current liability by HUDA is incorrect for the reasons narrated in the survey report at paras 1 & 2 page no 1 to 23 based on specific nature and flow of transactions, supported by specific evidences in form of sample letters/ documents. Therefore, EDC is a revenue receipt having character of income of HUDA. The Survey Report goes to the root of the issue of determining EDC as income of the assesse in all the years under appeal before the Hon'ble Bench. The Department is in 46 the process of filing application to admit the said Survey Report as additional evidence under Rule-29 of the ITAT Rules.
47. The ld. DR further argued that in the light of above facts and circumstances, the AO has held that
(i) It was seen during the current year that the assessee was claiming a liability in the Balance Sheet under the head "Other Liabilities" on account of External Development Charges. It is seen that the liability shown is increasing year after year,
(ii) It can never be classified as liability. The assessee is hardly spending this receipt but put in the banks as FDRs or other investments,
(iii) EDC charges are not uniform in the state but are charged at different rates depending on the location i.e Zonal basis, hence there is no basis on which EDC charges can be linked with actual amount spent,
(iv) A proportion of the total cost recovered in the financial year is to be taken for the purpose of indirect charges. The assessee here has received EDC as a part of the total recoveries. Further, in the absence of any basis for determining the EDC charged by colonizers, an estimation has to be done with regard to the addition made on this account,
(v) Thus it is logical to include the total received EDC of Rs. 602,23,48,336/- in the recoveries from allottees. In doing so a percentage of 30% is liable to be treated as recovery on account of indirect charges from this receipt, as has been done in the past.
It was further argued by the Ld. DR that the CIT (A) in his order for AY 2007-08 was adjudicated first & the rate was reduced from 30% to 20% on the reasons that there is merit in appellant's submission that the amount has accumulated in the initial years mainly because the development work was slow but currently the amount is being spent as the areas are being developed. It is noted that the appellant is under legal obligation to provide external development facilities with regard to the areas being developed by it. Therefore, the amount so recovered has to be spent. The EDC charges are fixed keeping in view the likely expenditure. Therefore, the possibility of actual expenditure being less or more than the amount spent is always there. By the very scheme, the excess expenditure is recoverable from the developer / plot holders while the surplus is 47 not refundable. Therefore, the proportion of amount which remains un-spent definitely forms the income of the appellant which needs to be accounted for. As the appellant is not transferring the surplus, if any, to the receipts and also because the projects are ongoing, the AO is justified to make an estimate of the income element in the same. The AO has treated 30% of the EDC charges as constituting the revenue receipts treating them at PAR with indirect charges recovered. As the income element in the indirect charges has been held to be 20% of the charges so recovered, it is considered fair if the same percentage is applied to the EDC charges also. The addition made by the AO is therefore, restricted to 20% of the EDC recovered during the year.
48. The Ld. DR argued that
(i) HUDA has full control or dominion on the EDC as defined under section 2(g) of the Haryana Development and Regulation of Urban Areas Act, 1975 and charges EDC as per Section 3(3)(a)(ii) of HDRUA. Assessee is misinterpreting the above said provisions,
(ii) Even for the sake of argument the HUDA is required to pay EDC at the same rate as any other developer but the same does not go out of his kitty but remains parked under the head EDC. It is never a liability but application of income,
(iii) As per the above Act, EDC has to be collected and used by the HUDA Authority for external development works and not for accumulation. The accumulation of EDC establishes that HUDA has absolute title on the fund. That is why HUDA was in a position to ignore so called directions of the State Govt, and accumulated EDC.
(iv) lf the EDC is subject matter of surveillance by Honorable Punjab and Harye court, it is because of non application of income under the head EDC for the pi is collected,
(v) EDC has never been part of State Govt. Revenue,
(vi) The claim that HUDA is required to pay back the EDC to the State Govt, is misrepresentation actual facts.
48.1 The Ld. DR argued that the truth is that EDC is charged on the facilities of use of External Development Works provided by the developers/builders. This fact does not establish that HUDA does not have absolute title on EDC. The CIT 48 (A) has reduced the addition of 30% on the basis that income on indirect charges has been reduced to 20%. The CIT(A) has accepted assessee's contention on indirect charges claimed compulsorily payable to other departments without calling for comments from the AO and appreciation of the facts and circumstances discussed by the AO, the reduction of addition on account of EDC from 30% to 20% is also without any definite basis.
48.2 The Ld. DR argued that the Ld. CIT(A) has erred in applying a net rate of 20% and AO's rate of 30% is requested to be restored. Further, The Ld. DR vide letter dt. 17/11/2017 has filed the details of the survey report and other relevant details (total pages 1 to 149), For the sake of convenience Rule 29 reproduced hereunder:
"29. Production of additional evidence before the Tribunal.- The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them, or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced".
49. Ld. AR has been given a copy of the additional evidences and did not contest on the admission of additional evidences. The additional evidences have been admitted by us under Rule 29 of the ITAT Rules being the evidences necessary to adjudicate the issue and the requirements stipulated for admission have been met.
50. We have gone through the entire gamut of the issue the addition made by the Assessing Officer @ 30% of the charges received and restriction of the addition to 20% by the Ld. CIT (A) have to be revisited in totality as the addition was based on the finding that the EDC Charges have been collected progressively and not much work has been done by the HUDA in meeting the obligation of work to be executed after collection of EDC. The points needs to be examined are the relevant provisions of the HUDA Act empowering the collection of EDC, the obligations of the HUDA to utilize the funds, the statutory power given by the State Government to levy surcharges, whether HUDA is acting as only as a collection agency or whether it has be invested with the full power and control to spend the amounts, the modus and guidelines made for utilization of the amounts in a particular geographical area, utilization of funds 49 pending execution of the work, whether the funds can be allowed to be unutilized for an indefinite period, whether the failure on the part of HUDA to execute the work gives revenue a right to treat this liability as income or is it a valid accounting procedure to treat the EDC as receipts of the HUDA and allow the expenses incurred for development as business expenditure as and when as used and treating the surplus as income, the intention of the HUDA to utilize and the tangible examination and visible implementation of the intention on the ground over a period of ten years or so needs to be examined to treat the EDC as income or not. In this connection the additional evidences held by the Ld. DR are needed to arrive at a correct decision. Since these facts were not before the first appellate authority, it is hereby directed that the issues may be examined in the light of the directions and guidelines issued above in tandem, examination of the additional evidences filed and to pass a speaking order by the Ld. CIT(A).
51. This ground of appeal of both the parties are treated as allowed for statistical purposes.
Annual Maintenance Charge
52. Ground No. 6 for the Assessment years 2004-05, Ground No. 7 for AY 2006- 07, 2007-08, 2008-09, and ground No. 4 for the Assessment years 2009-10, 2010- 11, 2011-12 Ground No. 5 for A.Y. 2012-13, 2013-14 and 2014-15 pertains to disallowance of Annual Maintenance Charges.
53. Brief facts are that HUDA is engaged in the work of developing Urban Estates which involves acquisition of land, its development into plots, laying down basic infrastructure such as sewerage system and inner roads and disposing of plots by sale on auction etc. HUDA maintains the infrastructure in these sectors for 20 years after this the developed sectors are handed over to the municipal counsel/corporation etc. For the first ten years of development of sectors the maintenance & development charges are capitalized as work in progress. For subsequent 10 years, the entire amount of maintenance is charged to P & L Account & claimed as expenditure. There is no logic by which the expenses can be allowed for sectors which are still incomplete and income from which is not shown in P & L Account. Hence, the AO disallowed 50% of the AMC expenditure.
5054. The addition on account of Annual Maintenance Charges was made for the first time in the AY 2003-04 by disallowing the 50% of the expenses claimed and thereafter the disallowance was made in all the years and taken up in the grounds as above . The ITAT in AY 2003-04 had restored the issue back to the file of AO for fresh adjudication. Amongst other years, the order of CIT(A) for AY 2007-08 was passed upholding the addition which was followed in all the years by CIT(A) from AY 2004-05 onwards.
55. While confirming the addition the Ld.CIT(A) has observed that for the first ten years of development of sectors the maintenance & development charges are capitalized as work in progress. For subsequent 10 years, the entire amount of maintenance is charged to P & L Account & claimed as expenditure. Hence, there is no logic by which the expenses can be allowed for sectors which are still incomplete and income from which is not shown in P & L Account. Ld. CIT(A) held that the AO while taxing 20% indirect charges has kept in view only the receipts which are relatable to indirect expenses being debited to the P & L Account. The income which has been generated by way of services & maintenance automatically gets accounted for as AO is justified in restricting these expenses relatable to completed sectors only. Ld. CIT(A) held that the appellant was not able to give the breakup of the development & maintenance expenditure with regard to completed & non completed sectors, the AO's estimate of 50% of the expenses as attributable to completed sectors is justified.
56. Before us Ld. AR argued that the AO has estimated the income applying the profit rate of 30 %which now stand at 20% in respect of residential properties & 50% in respect of commercial properties and it is a well settled principle that where income has been estimated by applying profit rate, no separate additions / disallowances can be made by the AO. In this regard reliance is placed on the ratio of the following cases, • Assistant Commissioner of Income Tax vs. Lakshmi Industries (2011) 135 TTJ (Chennai) 112 : 7 ITR 0495 • Commissioner of Income Tax vs. Aggarwal Engg. Co. (Jal.) (2006) 302 ITR (P&H) 0246 • Commissioner of Income Tax vs. Smt. Santosh Jain (2008) 296 ITR 324 (P&H) 51 • Assistant Commissioner of Income Tax vs. Sarv Prakash Kapoor* (2009) 119 ITD (Agra)(TM) 197 56.1. The Ld. AR further argued that there has been justification for the period of ten years as major chunk of development expenditure is incurred during the initial stage of the project itself. The development of the projects is completed in most of the cases in the minimum time frame of 6 -7 years i.e. before the possession of the plot is handed over to the assessee. In some cases, depending on situational factors it takes 2 - 3 years more for the development. Accordingly, the assessee treats the period of 10 years as a reasonable period by which it expects all the development cost to have been incurred & capitalizes the development cost incurred upto the period of 10 years.
56.2 The Ld. AR argued that CLAIMING EXPENSES of Annual Maintenance Charges AS REVENUE is justified for the reasons that once the development work is over, the assessee incurs only routine maintenance expenditure on the projects. Accordingly the maintenance expenses incurred are claimed as revenue expenditure in the Profit & Loss Account in the year in which they are incurred and added that the AO had made the addition ignoring the fact that the expenses claimed under the head "Annual Maintenance of various sectors"
pertains only to maintenance expenses. This does not include expenditure incurred on development. It was further argued that rule of consistency is also applicable as the method of accounting has been accepted by the department in the past.
56.3 The Ld. AR further argued that once the AO has estimated the income on account of recoveries from allottees, thereby treating all the sectors as completed sectors, therefore there is no justification for disallowance of maintenance sectors.
57. Ld. DR has argued that the assessee could not provide any justification for claim of maintenance and development of sectors which are in purview of development and do not form part of the P&L A/c (between 10-20 years). Similarly, there is no justification for claiming the amount of maintenance and development relatable to sectors which are deemed to be completed but have not been handed over to Municipal Corporation. It can be an application of profit, but it is definitely not an expenditure incurred for business purpose.52
Therefore the addition of an estimated amount of 50% of the maintenance charges regarded as relatable to incomplete sectors is capitalized. Assessee's contention that no separate addition is called for when income has been estimated is not acceptable. Assessee has not followed appropriate method of accounting hence these expenses cannot be colored as revenue expenses.
57.1 The Ld. DR argued that every assessment year is a separate assessment year and principle of res-judicata is not applicable in the Income Tax proceedings. Further, reliance placed by the assessee i.e. HUDA on the following cases is not applicable as discussed hereafter:
(i) Assistant Commissioner of Income Tax vs. Lakshmi Industries (2011) 135 TTJ Chennai) 112 : 7 ITR 0495 facts are different in that case as compared to the instant case as that case belongs to search and seizure assessment. Hence this case is not applicable,
(ii) Commissioner of Income Tax vs. Aggarwal Engg. Co. (Jal.) (2006) 302 ITR (P&H) 0246 facts are different in that case as compared to the instant case as in that case after addition on the basis of net profit rate other additions were made on account purchase and introduction of cash. Hence this case is also not applicable;
(iii) Commissioner of Income Tax vs. Smt. Santosh Jain (2008) 296 ITR 324 (P&H) facts are different in that case as compared to the instant case as that case belongs to search and seizure assessment. Hence this case too is not applicable, and
(iv) Assistant Commissioner of Income Tax vs. Sarv Prakash Kapoor (2009) 119 ITD (Agra)(TM) 197 facts are different in that case as compared to the instant case as in that case assessee is in Civil Construction Business, whereas in the instant case the assessee is not in construction business in true sense. Hence this case is not applicable. In view of the above, the Ld. DR argued that the order of the CIT (A) is needs to be upheld.
57.2 In the backdrop of this issue the order of the coordinate Bench of ITAT Chandigarh in the case of the assessee for the AY 2003-04 is perused wherein it was held that :
9. After considering the submissions of both the parties, it is noticed that the assessee accounted for the amount of forfeited security in the P & L Account by following the cash system of accounting. The amount was forfeited when the allottees or the. applicants did not fulfill the relevant conditions. It is not the case of the assessee that the forfeiture was not made during the year under consideration. It is also not the case that the amount so forfeited was utilized to develop the sectors or to make improvement in other plots. The plots for which the securities were forfeited were not shown at lesser value by adjusting the forfeited amount in the closing stock. Therefore it cannot be said that there was any link of the "security forfeited" with the plots shown inthe closing stock so the contention of the Ld. Counsel for the assessee that the amount of security had been reduced from the value of the closing stock and had been duly accounted for in the profits in the following years which accrued to the assessee at the time of sale of those plots, is not acceptable because the amount was not reduced by the assessee in the value of the closing stock rather it was shown as income in the P & L Account, however, while filing the return of income, the amount was 53 reduced from the income in the computation of income. We are, therefore, of the view that the Assessing Officer rightly made the addition and the Ld. CIT(A) was fully justified in confirming the addition made by the Assessing Officer.
10 The next issue vide Grounds No. 3 & 4 relates to addition on account of maintenance / administrative charge pertaining to incomplete sectors and the administrative charges in both developed and developing sectors. The nature of the additions is similar, so. these two grounds are taken together.
11. The facts related to this issue in brief are that the work of the assessee involved development of urban estates in various cities of Haryana e.g. Faridabad, Gurgaon, Karnal, Panipat and Panchkula etc. Those estates were further divided into Sectors. The assessee acquired the land then developed itself according to its specific plan. Subsequently the plots of various sizes both commercial and residential were allotted sold or auctioned. Subsequent to this sale / allotment, the assessee maintained sectors for a period of 20 years, for that period all expenses in relation and maintenance were made by the assessee.
After the period of 20 years, the developed sectors wore handed over to the Municipal Council / Corp etc. The Assesse was not snowing any profit on those projects of sectors for a period of 20 years staring from the cquisition to the date of handing over the sector to the Municipal Council / Corp etc. Further for the first 10 years of any development of a sector, the maintenance and development charges were capitalized as work in progress and for the period subsequent to 10 years, the entire amount of maintenance and development was charged to the P & L Account and being claimed as expenditure. The Assessing Officer observed that the assessee was declaring profit in the P & L Account only on completion of" 10 years and the: expenses related to some incomplete projects were debited to P &L Account as expenditure in the period between 10 years and 20 years of acquisition . The Assessing Officer asked the assessee to explain as to why this was done. The explanation of the assessee was that the same practice was regularly followed and any change would disturb the profits of the latter years. According to Assessing Officer, the assessee could not provide any justification for claiming maintenance and development of sectors which were the process of development and did not form part of P & L Account therefore the amount of maintenance and development relatable the sectors which had not been handed over to Municipal Officer after considering the submissions of the assessee held that the total amount of development charges debited to P&L Account for both complete and incomplete sectors was at Rs. 51,49,24,656. He therefore, asked- the assessee -vide letter dated 26.10.2005 to furnish the bi-furcation of the expenses claimed in respect of complete and incomplete sectors. In response to the above the assessee submitted that while calculating and preparing cost of sectors, the cost expected to be incurred for next 10 years was debited to the capital cost which included cost like maintenance, administration cost and finance cost. It was further submitted that the cost incurred after a period of 10 years was to be considered to be revenue in nature and that the period of 10 years was taken as basis, on the hypothesis that the sector would be ready for inhabitation and would start generating revenue / yield revenue income. It was also submitted that the receipts yielded after 10 years would be treated as revenue income and credited to P & L Account. It was further submitted that for the year under consideration, a sum of Rs. 65.49 crores was incurred on maintenance of essential services like water supply, maintenance of roads, sewerage, horticulture, storm water drainage and electricity. Out of the said expenses, a sum of Rs. 14.04 crores was incurred in respect of sectors in existence for less than 10 years and balance sum of Rs. 51.45 crores was incurred in respect of sectors in existence for more than 10 years, the . same being revenue in nature has been charged to expenditure account. It was also submitted that the assessee has received a sum of Rs.20.00 crores from sewerage, water charges and supply of other essential services and the said amount had been accounted or as income in the income and expenditure account. It was explained that the assessee was a contractor engaged in construction since its inception and for the purpose of maintaining its accounts the assessee was following contract accounting system under which the accounts were maintained as per prescription laid down in the Accounting Standard (in short AS) 7, as per the said Standard in general administrative 54 cost. selling cost research an development, depreciation cost of idle plant & equipment, cost incurred in securing contract and por-contract cost if it was not probable that the contract will be obtained are not the part of the contract cost. However, the cost which related directly to the contract and were incurred in securing contract if they could be separately identified and it was probable that contract would be obtained such costs are also included in the contract cost. After considering the submissions of the assessee, the Assessing Officer observed that the assessee bi-furcated the expenses in the sector which were more than 10 years, or less than 10 years old. However the recoveries / enhancements etc, or the profit from sectors which were more than 20 years old were being reflected in the P&L Account, therefore, the expense for the sectors whose receipt were not entirely forming a part of the P & L account could not be considered entirely allowable. According to the Assessing Officer the submission of the assessee was that there were certain receipts in the Profit & Loss Account which were partly attribute to sectors which were not handed over to the municipal Council Corporation and the recoveries from sale / instalments which were main source of income of those sectors, were not accounted for the P & L Account. The Assessing Officer added 50% of the expenditure of Rs 51,49,24,650 amounting to Rs. 25,74,62,328/- to the total income of the assessee. The Assessing Officer also observed that the administration and administrative cost were pertaining to expenditure incurred for administrative development in both developed as well as developing sectors and the assessee had debited the entire cost towards administration in the P & L Account as revenue expenditure. The Assessing Officer asked the assessee to establish-as to why the administrative cost not be bifurcated in two parts and only the part pertaining to developed sectors be allowed as revenue expenditure. The assessee. in its reply, submitted that as per contract. Accounting Standard for Contract AS-7. general administrative cost and finance cost was tobe allowed as a revenue expenditure and it did not form part of the contract cost According to the Assessing Officer the assessee was following the cash system of accounting and it was also following the project completion method wherein the project completion period was 20 years. He further observed that the AS 7 (New) clearly says that a contract accounting has to be accrual system of accounting and AS-7 (revised) does not allow the project completion method of accounting and only allows part completion of method So. the assessee could not selectively claim the benefit of AS which it was not following The Assessing Officer held that me amount relatable to administering development in incomplete sectors was clearly not a revenue expenditure and should have been capitalized and that the developing sectors were incomplete prompts and the cost related to execute or complete a project should have been added to the project cost. The Assessing Officer worked out the net administrative expenditure debited in the P & L Account at Rs 75,45,72,832/-. The calculation has been given by the Assessing Officer at page No. 9 of assessment order dated 30.11.2005. The Assessing Officer asked the assessee to furnish bifurcation of expenses. According to the Assessing Officer the assessee was unable to furnish the bifurcation of expenses but only submitted that the expenses were of general administrative nature. The Assessing Officer held that since the entire expenditure related to completed / incomplete sectors, besides administrative expenditure of the Head Office in Panchkula the one and half of the entire expenditure being equally allocatable to the developed and undeveloped parts of the activity of the assessee at Rs. 75,45,72,832/- was added in the total income being of capital nature i.e. relating to the projects not completed. He accordingly made a disallowance of Rs. 37,72,86,416/-.
12 When the matter was taken to the Ld. CIT(A), the assesse submitted that it. i.e the Haryana Urban Development Authority (HUDA) was constituted in 1977 for ensuring speedy and economical development of urban areas in the State of Haryana. It was further stated that the assessee provided planned and fully developed residential, commercial, institutional and industrial plots in various urban estates of Haryana and that after providing basic amenities along with commercial, institutional and public facilities areas were offered to public by inviting applications through leading Newspapers. It was stated that the assessee engaged itself in the planned development of the urban areas in the State and all sectors are planned with complete infrastructure & facilities like water supply 55 road, sewerage, parks, street lighting with public facilities buildings. It was further stated that the assessee is the principle agency which develops and disposes off the plots of land for various uses like residential / commercial institutional and industrial etc in all cities o Haryana. It was pointed out that the assessee formulated different procedure for allotment of plots which all under the category of residential plots, commercial sites for charitable bodies / societies & hospitals etc and the procedure has been described adequately in the guide book. The procedure for allotment of residential sites commercial sites industrial plots / religious & social/ Charitable/ institutional sites schools and nursing homes etc has been discussed by the Ld CIT(A) in the para 2.0 of the impugned order under the head main objects of HUDA It was submitted before the Ld CIT(A) that the assessee is working on no profit no loss" basis and carrying out its activities by circulation of funds which were generated out of sale of residential / industrial / commercial and institutional plot and the investment had been made in acquisition of new areas which enabled the assessee to generate more plots for the public and more funds for the development works and new acquisitions, the price fixed on no profit no loss" basis was charged from the plot Holders with the stipulation that any enhanced compensation in the land cost awarded by the courts shall be recovered in addition as and when such eventuality happens. It was further state a that the assessee consistently was following the cash system for maintaining its accounts since its inception and that procedure had been duly examined and accepted by the Income tax department in e past. It was reiterated that after expiry of period of 10 years from the date of completion of sector, the receipt as well as the payment was deemed to be revenue for the purpose or maintaining cost / preparing Profit & Loss Account and prior to the said period of 10 years all payments / receipt were capitalized and treated either as an asset or as a liability. It was submitted that the years in which the receipts are high the profit o the sector would be high and on the other hand where in a year refunds are in excess than the amount received there would be losses for the sector and this position has been duly accepted by the Income tax department. It was contended that the assessee is a contractor engaged in the construction contract and contract accounting standard has been followed since its inception. It was 'emphasized that the account were maintained by the assessee as per prescription laid down. Accounting Standard 7 (in short AS-7'). The said AS-7. defines and prescribes the mode of calculation of the contract revenue and contract cost it was pointed out that AS-7 further lays down the manner of arriving at the contract cost which is not written off on year to year basis. It was explained that the AS-7 lays down two methods for accounting, one method is percent of completion method and another one is completed contract method. It, was submitted that the assessee is following the policy of treating the sector as a complete sector after a period of 20 years or handing over to Municipal Corp whichever is earlier. It was further stated that handing over the sector to Municipal Corp is only a arrangement for maintenance and upkeep of the area like sewerag water etc and there are certain areas for which Municipal Corp is not well equipped for undertaking maintenance / upkeep like providing additional infrastructure, like water work, community center horticulture etc. It was further stated that the handing over to sector to Municipal Corp does not mean that the assessee has absolved itself from the responsibility of maintenance of sector since the sectors are primary responsibility of the assessee who has to maintain the areas where other authorities cannot do needful.
The assessee with reference to the procedure /policy regarding costing of sectors, recovery of money from allottees amortization of expenditure and treatment of the expenditure as revenue and capital etc., submitted that the cost expected to be incurred for next 10 years are added to the capital cost which included maintenance, administrative and financial cost and that the cost incurred after a period of 10 years, are considered as revenue in nature. The period of 10 years is taken as basis on the hypothesis that the sector would be ready for inhabitation and would start generating revenue and yield revenue income therefore the receipts yielded after 10 years are treated as revenue income and credited to the Profit & Loss Account. It was stated that the administrative expenditure / financial expenditure are general expenditure and not specific expenditure for a project and accordingly those were to be claimed 56 and allowed as revenue expenditure. It was explained that the administrative expenditure was incurred on running day to day activities and other managerial functions o the assessee those expenditure are purely revenue expenditure which have been charged to the revenue account as per the AS followed by the assessee since its inception because there was no element of capital outlay involved in administrative expenditure and that policy / procedure had been duly examined by the Income Tax Department while completing assessment proceedings for the past years. Reliance was placed on the following case laws:
DCIT Vs. Otis Elevator Co. (I) Ltd. (2006)99 ITD 73 (Mum) JCIT Vs. K. Raheja (P) Ltd. (2005) 3 SOT 617 (Mum) CIT Vs. Lokhandwala Construction Inds Ltd. (2003) 180 CTR (Bom) CIT Vs. V. S. Dempo & Co. Pvt. Ltd. (1996) 131 CTR (Bom) 203 CIT Vs. Advance Construction Co. (P) Ltd. (2005) 193 CTR (Guj) 127 Wall Street Construction Ltd. Vs. JCIT S.R. 12(2006) 5 SOT 103 (MUM) (SB) DCIT Circle 8(1) V. Ranka Developers (2006) 6 SOT 815 (Bang) 13 Ld CIT(A) after considering the Submissions of the assesses observed that AS 7 (New) clearly says that a contract accounting has to be accrual system of accounting and only allows part completion of method, so. the assessee cannot selectively claim the benefit of AS-7 which it was not following. He distinguished the case relied on by the assessee in the case of Raheja Builders stating that the said case was relating to finance cost and not administration cost and that case was for a period prior to revision of Accounting Standard. He further pointed out that the assessee was asked to furnish the bifurcation of expenses which the assessee was unable to do but only submitted that the expenses were of the nature of general administrative nature. According t him the revised AS 7 did not allow any person to follow the project completion method because during the year under considerate pre-revised AS 7 was in force and not revised AS 7 which came in{ force w.e.f. 1.4.2003 and to be applicable from 1.4.2003 Assessment year 2004-05. Ld. CIT(A) pointed out that various Courts have held that - where contractor is following completed contract method, the costs which, are not attributable to a particular project have to be treated as revenue expenditure in terms of AS7even if the end result is a loss and that where the method has been followed consistently by an assessee and accepted by the income tax department the same cannot be altered to change the nature of expenditure from revenue to capital just because there is no profit inspite of the high level of activities.
The Ld. CIT(A) pointed out that AS7 was prescribed initially in December , 1983 since then the assessee was following this method consistently and that the assessee had charged expenditure as revenue without bifurcating the same between the period of years to which those were related, therefore. the Assessing Officer rightly made the addition to the extent of 50% of the amount c h a r g e d to the revenue account as expenditure Accordingly the addition made by the Assessing Officer was sustained. Now the assessee is in appeal.
14 Ld. Counsel-tor the assessee reiterated the submissions made before the authorities below. He further submitted that the assessee was following the method prescribed in AS 7 consistently and showing the receipt from the allottees / applicants in the first 10 years 'The expenditure incurred were treated as revenue in nature and the income earned from the a allottees is treated as revenue income from the very beginning, thereto. T h e Assessi n g Officer written submissions of the not justified in allowing only 50% of the expenses incurred by the assessee on account or Maintenance / administration charges. Reliance was placed on the following case laws:
DCIT v. Otis Elevator Co (I) Ltd (2006)99 ITD 73 (Mum) JCIT V K Raheja (P) Ltd (2005) 3 SOT 617 (Mum)
15 In his rival submissions. Ld. D.R. for the revenue strongly supported the orders of authorities below and further submitted that the method adopted vide 57 which the assessee capitalized the expenditure in the earlier 10 years while in next 10 years, those were treated as revenue expenditure, was faulty. He pointed out that in the earlier 10 years, there was no direct relation of the expenditure incurred with the development of sector a reference was made to para 2 of assessment order in support of his contention. He further submitted that the Assessing Officer asked the assessee to give detail bifurcation of the expenses claimed in respect of complete and incomplete sectors but no such data was furnished by the assessee. He pointed out that the assessee not a contractor and also not following the project complete method and that in the preceding year no expenses were claim since total income was claimed exempt u/s 10(20A) of income Tax Act, 1961. He also stated that certain project might have been completed and some remained incomplete in the first 10 year:
however. the expenses were capitalized in the completed sectors as well as for incomplete sectors, it was submitted that only the cost attributable to the contract activity could have been allocated to the specific contract and since the assessee has not given the bifurcation, the Assessing Officer rightly estimated the capital expenditure and made the disallowance @ 50% of the claim made by the assessee considering that 50% of the sectors were completed and remaining were incomplete.
46 We have heard both the parties and perused the material available on record In the instant case the assessee was engaged in the business of acquiring the land and after developing the land residential / commercial plots were allotted/auctioned to the general public. In the instant case, the assessee considered the expense which were incurred during the period of first 10 years a acquisition of the land as capital in nature while the expenses incurred for the subsequent 10 years, were considered as revenue in nature. The said period has been adopted for capitalizing on the hypothesis that in the first 10 years the plots would be occupied and ready for inhabitation. The stand of the assessee with regard to the accounting treatment of expenses is that AS-7 is issued by the Institute of Chartered Accountants of India is applicable. The said Accounting Standard deals with accounting for construction contracts in the financial statement of the contractors The main feature which characterises a construction contract dealt with in the statement is the fact that the date on which the contact is secured and the date when the contract activities are completed fail into different accounting periods and the specific duration of the contract performance is not used as a distinguishing feature of the construction contract. According to AS 7 the construction contract generally fall into two basic types:
(i) Fixed price contracts - The contractor agrees to a fixed contract price or rate in some cases subject to cost escalation clauses
(ii) Cost plus contracts - The contractor is reimbursed for allowable or otherwise defined costs and is also allowed a percentage of these costs or a fixed fee In the present case, the assessee is not a contractor in true sense because it is not getting any contract from Other parties rather the plots of various category e.g. residential, commercial & industrial etc. are developed by the assessee itself.
In the instant case, though accounting treatment can be done considering the principles laid down in AS 7 but the assessee in true sense is not allowing AS-7 because all the sectors cannot be Completed in the 10 years Moreover, the assessee has not supplied specific detail as to when a particular sector can be completed, in such type of cases there should have been some details as regards to the date of completion upto that date the expenses can be capitalized and when the sector is fully developed and plots are allotted / auctioned to the applicant, the expenses incurred thereafter are not capital in nature because the stock i.e. the plot is ready to be disposed off without making any further development. In the instant case the assessee is not following the complete contract method and capitalizing certain expenses which were not related to particular sector e.g. interest etc which might have been for a sectors and not for all the sectors. In our opinion, the only cost of expenses which are directly attributable to a specific contract carried only be capitalized and that too upto the date when the plots are ready to be sold / allotted / auctioned. In AS 7, completed contract method has been prescribed in Para 10 according to 58 which the principle advantage of the completed contract method is that it is based on the results as determined when the contract is completed or substantially completed rather than on estimated which may require subsequent adjustment as a result of unforeseen costs and possible losses, the risk of recognizing profits that may not have been earned is therefore, minimized. Therefore, selection-method should have been made by considering the nature of work undertaken by the assessee. however, this exercise has not be done by the Assessing Officer neither any detail has been done by the Assessing Officer neither any detail has been furnished by the assessee. Therefore the estimate made by the Assessing Officer in fact, has not given any reason while disallowing % of the expenses incurred on account of maintenance / administration charges. Ld. CIT(A) has also not given any cogent reason while confirming the action of the Assessing Officer. In fact he has passed the order in a slip shod manner and without giving any cogent reason.
16.1 It is well settled that the reason must be given while deciding the matter. In this regard judgment passed by the Hon'ble Jurisdiction High Court in the case of CIT Vs. Vikas Chemi Gum India (2005) 276 ITR 32 can be referred wherein it has been held that-
The requirement of recording of reasons and communication thereof has been read as an integral part of .the concept of fair procedure. The necessity of giving reasons flows from the concept of rule of Iaw which constitutes one of the corner stones of our constitutional set up. The administrative authorities changed with the duty to act judicially cannot decide the matters on considerations of policy or expediency The requirement of recording of reasons by such authorities is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision making process Another reason which makes it imperative for the quasi judicial authorities to give reasons is that their orders are no: only subject to the right of the aggrieved persons to challenge the same by filing statutory appeal and revision but also by filing writ petition under articles 226 of the Constitution. Such decisions can also be challenged way of appeal under article 136 of the Constitution of India. The High Courts have the power to issue writ of certiorari to quash the orders passed by a quasi judic authority / Tribunal Likewise in appeal the Supreme Court can nullify such order / decision Tnese powers can be effectively exercised by the superior courts only if the oraer under challenge contains reasons."
16.2 A similar view has been taken by the Hon'ble Jurisdictional High Court in the case of CIT Vs Patwal Co-operative Sugar Mills Ltd (2006) 284 ITR 153 wherein it has been held that -
"Every judicial / quasi judicial body / authority must pass a reasoned order which should reflect the application of mind of the concerned authority to the issues / points raised before it. The requirement of recording reasons is an important safeguard to ensure observance of the rule Of law. It introduces clarify, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision making process. Another reason which makes it imperative or quasi judicial authorities to give reasons is that their orders are not only subject to the right of the aggrieved persons to challenge them by filing statutory appeal and revision but also by filing writ petition under article 226 of the Constitution. Such decisions can also be challenged by way of appeal under article 136 of the Constitution of India. The High Courts have the power to issue writs of certiorari to quash the orders passed by quasi judicial authorities / Tribunals. Likewise in appeal the Supreme;* Court can nullify such order / decision. The power of judicial review can be effectively exercised by the superior courts only if the order under challenge contains reasons. If such order is cryptic and devoid of reasons, the courts cannot effectively exercise the power of judicial review.
16.3 In the present case as we have already pointed out that the La CIT(A) passed the impugned order in a slip shod manner and the Assessing Officer had 59 also not given any reason in support of his estimate while disallowing 50% of the expenses claimed by the assessee, at the same time, the assessee has also not furnished the details asked for by the Assessing Officer We therefore, considering the totality of the facts of the present case. are of the opinion mat the present issue requires a fresh adjudication at the level of Assessing Officer, in that view of the matter, we set aside the order of Ld. CIT(A) on this issue and remand the same back to the file of Assessing Officer for fresh adjudication in accordance with law after providing due and reasonableopportunity of being heard to the assessee
58. We have gone through the arguments put before us. The directions given by the ITAT after detailed reasoning to the Assessing Officer was to support the estimate while disallowing 50% of the claim of the assessee and also to the assessee to file the details of completed sectors and uncompleted sectors which it is observed have not been followed by both the parties.
59. The main contention of the Assessing Officer is that the maintenance is being claimed in cases where sectors are more than 20 years but have not been handed over to local authorities need not be maintained by the assessee which the assessee could not explained cogently. Similarly no explanation has been given rather rational to claim expenditure regarding the sectors which are incomplete and there is no rationale to claim the expenditure pertaining to incomplete sectors as each sector is considered as a project by itself. The assessee has grossly failed to give a breakup of the development and maintenance expenditure with regard to completed and non completed sectors which goes to determine the maintenance charges. Hence it is directed to the assessee to furnish the details of completed and incomplete sectors, expenses incurred for development, expenses incurred in maintenance separately in detail to the Assessing Officer to determine the allowable expenditure, failing which the assessee would be allowed the expenditure of maintenance expenses only on pro -rata basis.
60. The appeal of the assessee on this ground is treated as allowed for statistical purposes.
Forfeiture of security
61. Ground No. 7 for the Assessment years 2004-05 and ground no. 8 for assessment year 2006-07 of the assessee relates to forfeiture of security.
62. The assessee has shown an amount of Rs. 8,67,58,348/- (for AY 2006-07) on account of receipt from forfeiture of security. However in the computation of 60 income the security forfeited was reduced from the income returned. The Assessing Officer made addition of the amount forfeited which was upheld by the Ld.CIT(A).
63. Before us the Ld. AR argued that while floating the sector, 10% of the total amount of a particular plot offered for draw is received as earnest money and after draw of that particular sector whole of the 10% amount taken as earned money is refunded to unsuccessful applicants and from successful applicants/allottee 15% more amount s demanded which is required to be deposited in HUDA office within 30days of allotment letter. If the allottee fails to deposit the next instalment of 15% with in time, the 10% of the earnest money forfeited by the HUDA. The amount shows in Estate Offices comprises of as security forfeited include 10% earnest money forfeited of successful allottee on default. Office wise detail of security forfeited is enclosed at Annexure B. In case the plot is resumed due to non payment of cost of the plot or due to non construction of plot, 10% of the onsidertion money is forfeited which is booked under this head. Similarly if the plot is surrendered by the allottee, 10% of the amount is forfeited and balane amount is refunded to the allottee. This amount is also booked under this head. The 10% amount so forfeited is a part of project/sector and is to be deducted out of the total cost of the project. Therefore, it is not an revenue income and is to be treated as capital receipt.
64. The Ld. AR relied on the orders of Ld. CIT(A) and the order of ITAT for the AY 2003-04.
65. It is noted that the Coordinate Bench of ITAT Chandigarh while adjudicating a similar disallowance for the A.Y. 2003-04 in appellant's own case has upheld the disallowance so made observing that the assessee is not engaged in any agricultural activity and there was no basis or any cogent reason to consider the current income in future.
66. While adjudicating the issue the Coordinate Bench of ITAT Chandigarh observed as under:
"9. After considering the submissions of both the parties it is noticed that the assessee accounted for the amount of forfeited security in the P&L Account by following the cash system of accounting. The amount was forfeited when the allottees or the applicants did not fulfill the relevant conditions. It is not the case of the assessee that the forfeiture was not made during the year under consideration. It is also not the case that the amount so forfeited was utilized to develop the sectors or to make improvement in other plots. The plots for which the securities were forfeited were not shown at lesser value by adjusting the 61 forfeited amount in the closing stock. Therefore it cannot be said that there was any link of the security forfeited with the plots shown in the closing stock so the contention of the Ld. Counsel for the assessee that the amount of security had been reduced from the value of the closing stock and had been duly accounted for in the profits in the following years which accrued to the assessee at the time of sale of those plots is not acceptable because the amount was not reduced by the assessee in the value of the closing stock rather it was shown as income in the P&L Account however while filing the return of income the amount was reduced from the income in the computation of income. We are therefore of the view that the Assessing Officer rightly made the addition and the Ld. CIT(A) was fully justified in confirming the addition made by the Assessing Officer."
67. On careful consideration of the facts of the case and keeping in view the decision of Coordinate Bench of ITAT in appellant's own case in ITA No. 742/CHD/2007 for A.Y. 2003-04, the addition made by the Assessing Officer is hereby upheld.
Sale of Plants
68. Ground No. 8 for the Assessment years 2004-05 and 2007-08 and ground no. 9 for the Assessment Year 2006-07of the assessee , relates to disallowance on account of sale of plants.
69. The Assessing Officer while framing the assessment noted that the assessee has shown income from sale of plants grass and trees and claimed it as agriculture income. The assessee contended that the receipt would be shown when the land from which the income has been derived is sold. The Ld. CIT(A) also rejected the assessees contention that the income is to be taxable during the year in which the receipt from sale of grass and plants has been received.
70. Before us the AR argued that the plants grass and trees were standing on bare undeveloped land on which the Sectors yet to be carried were to be sold and since the bare land related to incomplete sector the income from those could not be shown as Revenue income as per the policy followed by the assessee consistently since its inception instead the realization made from sale of plants grass and trees was reduced from the cost of acquisition of plot. It was further stated that since the cost of acquisition of land got reduced resulting in profit element getting build in immediately but it was realized only when the land was to be sold in the form of complete sectors i.e. after a period of 20years this addition was unjustified, illegal and has no basis.
71. It is noted that the Coordinate Bench of ITAT Chandigarh while adjudicating a similar disallowance for the A.Y. 2003-04 in appellant's own case 62 has upheld the disallowance so made observing that the assessee is not engaged in any agricultural activity and there was no basis or any cogent reason to consider the current income in future. On careful consideration of the facts of the case and keeping in view the decision of Coordinate Bench of ITAT in appellant's own case in ITA No. 742/CHD/2007 for A.Y. 2003-04, the disallowance made by the Assessing Officer is hereby upheld.
72. The ground of appeal is dismissed.
Contribution to IAG
73. Ground No. 9 for the Assessment years 2004-05, 2006-07, 2007-08 of the assessee relates to disallowance of contribution to IAG.
74. The Assessing Officer made an addition of Rs. 9,50,000/- under the head IAG expenses. The amount has been claimed as contribution given to Industrial Assistance Group (IAG) set up by the Govt. of Haryana for improving the industrial environment in the State by providing expeditious and single window service to the entrepreneur desirous of setting up industry in the state.
75. The assessee has justified the expenditure stating that the same has been spent for the promotion of the business of the appellant. It has been stated that the contribution to the IAG is in the nature of publicity expenditure incurred with a view to show case the activities of the assessee and is thus attributable to the business activities of the appellant.
76. It is noted that the Coordinate Bench of ITAT Chandigarh while adjudicating a similar disallowance for the A.Y. 2003-04 in appellant's own case has upheld the disallowance so made observing that the assessee is not getting any direct benefit from the IAG and the payment has been made voluntarily. On careful consideration of the facts of the case and keeping in view the decision of Coordinate Bench of ITAT in appellant's own case in ITA No. 742/CHD/2007 for A.Y. 2003-04, the disallowance made by the Assessing Officer is hereby upheld.
77. The ground of appeal is dismissed.
Payment to Pension and Gratuity Fund
78. The application for registration of the Gratuity fund has been made on 03/08/2004. Since the fund was not recognized during the assessment year the 63 Assessing Officer has disallowed the amount claimed and the same addition has been confirmed by the Ld. CIT(A). Since the fund was recognized with effect from 20/01/2004 the Assessing Officer has directed to verify the bare facts of approval of the fund and allow accordingly if found that the retrospective effect has been allowed by the CIT(A).
Donation
79. Ground No. 11 of the Assessment Year 2004-05 not pressed.
Interest to NCR Planning Board
80. Ground No. 6 for the Assessment years 2006-07, 2007-08, 2008-09 and ground No. 5 for the Assessment years 2009-10, 2010-11 and 2011-12 of the assessee relates to disallowance of interest paid to NCR Planning Board.
81. The assessee has shown a payment of interest on loans paid to NCR planning Board which was disallowed. The Ld. CIT(A) upheld the addition on the grounds that the statutory auditors have observed against the claim of debiting interest to P&L account. The Ld. CIT(A) held that since the loan has been taken for development work the interest should have been capitalized.
82. Before us the Ld. AR argued that the loan from NCR Planning Board was taken for purchase of land and for propagating the business of the assessee. The loan is in the nature of working capital loan to procure stock and deal in stock. Since the interest is an working capital loan it is an allowable expenditure as per provisions of Section 36 of the Income Tax Act. The AR further argued that the NCR Planning Board is financing projects in the region through Central & State Plan Funds and the loan is utilized by the assessee for the purposes of business carried on by the assessee on the activities of acquisition and development of land.
83. The Ld. DR strongly relied on the order of Ld. CIT(A).
84. We have heard the rival contention and find that the loan has been received from NCR Planning Board which is meant for acquisition and development of land and as per section 36(1)(iii) the interest on capital borrowed for the purpose of the business has to be allowed. In the absence of any contrary finding by the Revenue that the funds have not been used for the business purpose, the disallowance made is liable to be deleted.
64Demarcation / Survey expenses
85. Ground No. 11 for the Assessment years 2006-07, ground No. 10 for the Assessment year 2007-08, ground No. 8 for the Assessment years 2008-09, ground no. 7 for the Assessment Years 2009-10, 2010-11, 2011-12, 2012-13 and Ground No. 06 for the Assessment Year 2013-14 and 2014-15 of the assessee relates to disallowance of demarcation / survey expenses.
86. The assessee has claimed expenditure on account of demarcation / survey, this amount was incurred for marking of the plots and mapping of the area while and before handing over of the plots. The Assessing Officer has treated this expenditure as capital expenditure.
87. The Ld. CIT(A) has confirmed the addition.
88. Before us the Ld. AR argued that at the time of allotment of plot demarcation is not done physically on the ground but based on the survey maps and land records. At the time of handing over the possession of the plot the demarcation measuring the size of plot as per the allotment is done. Accordingly the expenditure incurred on such activities are debited under demarcation / survey expenditure. It was argued that these are purely incidental to the business and this expenditure is routine expenditure and should be allowed as Revenue expenditure. Once the demarcation is completed then only the allottee would be able to start the construction on the plot.
89. Ld. DR argued that this expenditure is to be relatable to completed sectors but the same does not appear to be correct as per the accounting policy followed by the appellant. A project is treated completed only after 20 years of its launch. The plots are handed over to the allottees soon after allotment and in any case not more than 5 years after the allotment. Therefore, the appellant's contention that the expenditure relates to completed projects is not prima facie acceptable. Therefore the same needs to be rejected.
90. We have heard the rival contention and perused the material available on record. The survey and demarcation is an ongoing, continuous exercise being undertaken by the assessee. The plots have to be physically marked before handing over to the allottees which requires proper survey and lining of contours. Since the allotment of plots is a regular and recurring activity so as the 65 expenses incurred hence the expenses are to be allowed as revenue expenditure.
91. As a result this ground of assessee is allowed.
Contribution to Delhi Metro
92. Ground No. 12 for the Assessment years 2006-07, ground No. 11 for the Assessment year 2007-08, ground No. 9 for the Assessment years 2008-09, ground no. 6 for the Assessment Years 2009-10, 2010-11, 2011-12, 2012-13 and Ground No. 10 for the Assessment Year 2014-15 of the assessee relates to Contribution to Delhi Metro
93. The expenditure claimed on account of contribution was disallowed treating the same as not for their business in all the years from AY 2006-07 onwards. The order of CIT(A) for 2007-08 --holding the addition was adjudicated first and was followed by CIT(A) in all the years.
94. Brief facts During the year, the assessee has claimed an expenditure of Rs, 71,17,55,000/- under the head "Grant for extension of Delhi Metro to Gurgaon". This amount has been paid to Delhi Metro Railway Corp. for the Metro Project at Gurgaon. The assessee was asked to give details regarding Grant for extension of Delhi Metro to Gurgaon and the basis on which it has been claimed as an expenditure during the year. No reply was furnished by the assessee in this regard. Before the AO In absence of any justification regarding claim of the Assessing Officer treated this expenditure as non-business expense and disallowed.
95. Ld. CIT(A) held that the provision of Metro or other transport services in Gurgaon is neither the responsibility of the appellant nor one of the objects for which it has been constituted.
96. Before us the Ld. AR argued that making of the access to roads to the areas being developed by HUDA within the city is definitely the function of HUDA, the expense for which is to be booked under the head EDC. It was argued that HUDA has been constituted by the government of Haryana as per Section 3 of the Haryana Urban Development Authority Act, 1977 66 • The Objects & functions of the authority are envisaged u/s 13 of the Act which provides that the objects of the Authority shall be to promote and secure the Objects and development of all or any of the areas comprised in the urban area and for that purposes to provide other services and amenities and generally to do anything, with the prior approval, or on direction, of the State Government for carrying out the purposes of this Act.
• Amenties has been defined in Section 2(a)as under:-
"amenties" includes roads, water-supply, street-lighting, drainage, [sewerage, treatment and disposal of sewerage, sullage and storm water] public works, tourist spots, open spaces, parks, landscaping and play fields, and such other conveniences as the State Government may, by notification, specify to be an amenity for the purposes of this Act;
• Section 21 of the HUDA Act provides that the funds of the authority shall be applied towards meeting expenditure for such other purposes which the state government may direct or permit.
97 The Ld. AR argued that The expenditure on Metro project has been incurred by HUDA on the directions of the State Govt, and the assessee has not acquired any property.The expenditure on the project has been shared by State Government of Haryana, HUDA & FISIIDC. Thus, the assessee has incurred only a part of the total expenditure.The expenditure was incurred for the purpose of providing better infrastructure facilities, better '& faster approach to the sectors developed by HUDA i.e. for facilitating the transportation for the people living in the areas developed by HUDA.The expenditure incurred is directly in relation to the benefit being drawn by the assessee considering the fact same would assist the movement of people living in the area, upgrading the quality and facilitate the trade & profession of the people and thus is directly related to the object of considering the business expediency. The assessee is involved in activities of purchasing land, developing it i.e. erecting certain basic infrastructure such as roads etc. carving out plots and delivering them to public at large. Therefore the expenditure incurred being directly related to the business of the assessee is an allowable expenditure. Moreover, since the assessee is not acquiring any assets, the expenditure incurred cannot be held as capital expenditure.
97.1 The Ld. AR relied on the ratio of the following cases:
• GLADA vs. Addl. CIT 39 ITR 100 (Chd Tri) • L. H. Sugar Factory Mills (P) Ltd. Vs. CIT 125 ITR 293 (S.C.) • Panipat Coop. Sugar Mills Ltd. Vs. CIT 108 ITR 111 (P&H) • CIT Vs. Dart Manufacturing India (P) Ltd. 175 Taxmann 6 (Del.) • INCOME TAX OFFICER vs. VELUMANICKAM LODGE (2010) 123 ITD 25 Chennai • National Aluminum Co Ltd. Vs DCIT101 TTJ 948 (Cuttuck) • SRI VENKATA SATYANARAYNA RICE MILL CONTRACTORS CO. vs. COMMISSIONER OF INCOME TAX
98. Ld. DR strongly relied on the order of the CIT(A).
6799. The facts of the case have been perused. The contribution to Delhi Metro can be treated as step in furtherance of the business of the assessee as it improves the accessibility and facilities for the public at large and increases the demand of the land and plots of the assessee. Certainly the connectivity by the metro line will certainly enhanced the business of the assessee and increases the marketability of the plots. The contribution to the metro is akin to construction of the road which will be used by the residents approaching through the road hence the expenditure can be treated as an allowable expenditure laid down for wholly and exclusively for the business purpose.
100. The appeal of the assessee on this ground is treated as allowed.
Salary to PF Staff
101. Ground No. 12 of the appeal of the Assessee for the Assessment years 2007-08 relates to disallowance on account of Rs. 50,00,000/-.
102. The assessee has not pressed this ground before us therefore need no adjudication on this ground.
Disallowance of advertisement on buses:
103. Ground No. 13 of the appeal of the Assessee for the Assessment years 2007-08 relates to disallowance on account of advertisement expenses on buses of Rs. 6,000,0000/-.
104 Brief facts are that the assessee has paid Rs. 6 crores to Transport department Haryana for the purchase of CNG Buses and the same was debited to P&L Account under the head Advertisement expenses. It has been submitted by the assessee that this amount was given to the Transport Department for the purchase of buses with the condition that busses will carry messages and advertisement of HUDA. No document of contract with the Transport Department has been made available to the Assessing Officer leading to disallowance of the amount of Rs. 6 Crores.
105. Ld. CIT(A) has upheld the disallowance on the grounds that i. The provision of transport facility within the cities carved out by the appellant is not the responsibility of the appellant but of the concerned department, ii. It is also not one of the activities for which the appellant is constituted, iii. Making of access roads to the areas being developed by HUDA within the city is definitely the responsibility of HUDA, the expense for which is to be booked under the head EDC. But the provision of buses to be run as part of local transport system can by no stretch of imagination be treated as responsibility of HUDA. The 68 expenditure incurred on buses therefore cannot be termed as incidental to the business of the assessee. Reliance placed by the assessee on following cases is misplaced:
(i) Adani Export Ltd. Vs JCIT(2014) 39CCH 140 Ahd Trib facts of that case are entirely different as expenses were made on Cricket Pavillion,
(ii) DCIT Vs. Cooperative Sugars Ltd. (2003) 84 ITD237 (Coch) facts of that case are entirely different as expenses were made on cement lining of Right Bank Canal, and (iii) Honda Siel Power products Ltd. Vs DCIT(2007) 112 TTJ 0702 facts of that case are entirely different as expenses were made on vendors who will supply the assessee mould and dies.
106. Before us the assessee has argued that the amount of Rs. 6 crores has been paid so that the busses will carry advertisement of HUDA. It was also approved by the Chief Minister of Haryana to charge this amount to advertisement expenses. The Ld. AR argued that no asset was created nor any benefit of lasting nature was brought into existence. It was argued that though HUDA did not have any ownership right on the busses the fact cannot be denied that the busses had to be run in the areas created by HUDA and the benefits have been drawn by HUDA itself. Thus, it becomes an infrastructure support for the people living in the area which is clearly covered under the scope and objects for which the organization has been created.
107. The Ld. DR supported the order of the Ld. CIT(A) and submitted written submissions reiterating the ratio laid down by the Ld. CIT(A).
108. We have perused the matter and also the order sheet and the approval placed before us.
69From the perusal of the above it is observed that the busses have been purchased by Transport Department of Haryana and it was allowed to be charged to advertisement expenses. One time funds to be provided by HUDA after which the facility may be extended through private operators.
109. On going through the above events it can be said that while spending is the prerogative of the assessee, whether it makes the expenditure elligible under the head of allowable expenditure or not, is to be decided on the facts of the case as there is no clear cut test on the base of expenditure which may be distinguished from revenue expenditure or otherwise. The question has to be decided from the practical and business point of view. In the instant case whether funding the purchase of busses so that advertisement can be had on this buses purchased doesn't fit on the lines of expenditure incurred fully and exclusively for the purpose of the business. After paying the amounts the assessee has not even got the ownership of the buses which have been purchased totally from the funds provided by the assessee. Hence the 70 expenditure cannot be allowed. In view of the judgment of Hon'ble Punjab & Haryana High Court in the case of Panipat Sugar Mills Ltd Vs. CIT, 108 ITR 111 (P&H). Further in the case of L.H. Sugar Factory and Oil Mills Pvt. Vs. CIT 125 ITR 293 Ltd. the Hon'ble Supreme Court held that the expenditure incurred which has been not shown to be wholly and exclusively laid out for the purpose of assessee's business cannot be held to be an allowable expenditure.
110. Keeping in view the facts of the case the disallowance is hereby confirmed.
Value of Closing Stock
111. Ground No. 14 of the appeal of the Assessee for the Assessment years 2007-08 relates to addition on account of valuation of Closing Stock of Rs. 3,25,00,000/-.
112. The Assessing Officer took note of the comments of the statutory auditors that the closing stock of Rs. 3,25,00,000/- has been taken as excess of expenditure of over receipts in Sector-14 Sonepat which has resulted in under statement of income to that extent. The assessee however informed the Assessing Officer that there was an error in the closing stock which has been corrected in the subsequent financial year. However the same did not have any impact on the income of the appellant. The Assessing Officer however rejected the assessee's contention in this regard and made on addition of Rs. 3.25 Crores.
113. Ld. CIT(A)confirmed the addition by holding that perusal of the details filed reveal that net of income over expenditure in each completed project is taken to the P&L account as income. Therefore by treating the closing stock as excess of expenditure over income, the income shown in the P&L account at Rs. 84,60,72,183/- has thus got reduced. Therefore, the income of the assessee is understand by Rs. 3,25,00,000/- on account of treating the closing stock as excess of expenditure over income.
114. Before us the Ld. AR argued that the addition has been made on the grounds that the closing stock has not been taken into final accounts of completed sectors of Sector 14 Sonepat. It was submitted that the opening stock was to the tune of Rs. 2,66,38,000/- and during the year under consideration the assessee has spent another amount of Rs. 59,06,841/- and the closing stock should have been Rs. 2,66,38,000/-. It was further argued that the 71 same has been corrected in the subsequent years by taking opening stock at zero and closing stock at Rs. 2,66,38,000/-.
115. Ld. DR has relied on the order of the lower authorities.
116. We have perused the facts before us and find that there has been error in computation of closing stock which needs to be corrected in the instant year. At the same time the assesee will get the benefit of increased opening balance in the subsequent years.
117. Hence the appeal of the assessee on this ground is dismissed.
Salary of Employees of Department of Urban States
118. Ground No. 4 of the appeal of the Revenue for the Assessment years 2012-13 & 2013-14 and 2014-15 and Ground No. 8 of the Assessee appeal for the Assessment Years 2012-13, 2014-15 and Ground No. 7of the Assessee appeal for the Assessment Year 2013-14 deals with disallowance of Rs. 3,96,79,223/- and confirming of Rs. 82,19,472/- by the Ld. CIT(A) out of the total amount claimed in P&L Account of Rs. 4,10,97,364/-. Thus this issue is involved in Revenue as well as Assessee's appeal.
119. During the assessment the Assessing Officer has held that the administrative expenses were paid to various employees of Department of Urban Estates operating at Head Office. The Assessing Officer held that since Department of Urban Estates is a separate department of State Government hence any justification of payment to those employees cannot be accepted to.
120. Ld.CIT(A) has restricted the amount to 20% on the grounds that the disallowances of various charges have been restricted at 20% of expenses pertaining to recoveries from allotees hence the salary expenses reimbursed are also restricted at 20%.
121. Before us the Ld. AR argued that the amount pertains to salary of various employees & other contingent expenditure of Department of Urban Estate (DUE) operating at Head Office and the employees of Urban Estate Department had to work only for HUDA. Further, during the year 1977 , the various functions of the Urban Estate Department were taken over by HUDA, for which it was decided that HUDA will incur expenditure on salary & allowances & other contingent expenditure of the Urban Estate. The Ld. AR further argued that it is 72 not out to place to mention that the HUDA is bearing such expenses since past so many years & claiming the same as such in the Income & Expenditure Account and the same have been accepted as such by the Income Tax Department. It was also argued that moreover it is an expenditure on salary, allowances and other contingent expenditure on staff which is allowable as office & administrative expenditure. The genuineness of expenditure, quantum of expenditure is not in doubt nor it has been held to be expenditure for non business purpose. The Ld.AR further argued that having estimated the profits on account of indirect charges no separate addition or disallowances can be made by the Revenue.
122. The Ld. CIT DR argued that the Assessee's contention that no separate addition is called for when income has been estimated is not acceptable. Assessee has not followed appropriate method of accounting hence these expenses cannot be colored as revenue expenses. He argued that every assessment year is a separate assessment year and principle of res-judicata is not applicable in the Income Tax proceedings. Further, reliance placed by the assessee i.e. HUDA on the following cases is not applicable as in the case of Assistant Commissioner of Income Tax vs. Lakshmi Industries (2011) 135 TTJ (Chennai) facts are different in that case as compared to the instant case as that case belongs to search and seizure assessment. Hence this case is not applicable, similarly in the case of Commissioner of Income Tax vs. Aggarwal Engg. Co. (Jal.) (2006) 302 ITR (P&H) 0246 facts are different in that case as compared to the instant case as in that case after addition on the basis of net profit rate other additions were made on account of purchase and introduction of cash. Hence this case also is not applicable; In the case of Commissioner of Income Tax vs. Smt. Santosh Jain (2008) 296 ITR 324 (P&H) facts are different in that case as compared to the instant case as that case belongs to search and seizure assessment. Hence this case too is not applicable, and in the case of Assistant Commissioner of Income Tax vs. Sarv Prakash Kapoor (2009) 119 ITD (Agra)(TM) 197 facts are different in that case as compared to the instant case as in that case assessee is in Civil Construction Business, whereas in the instant case the assessee is not in construction business in true sense. Hence this case is not applicable. The Department of Urban Estate is a separate department of State Government workings under the administrative control of Director General Town and Country Planning. AO is right that the entire expense claimed on 73 account of salary paid to employees of Department of Urban Estates by holding that the Department of Urban Estate is a separate Department of State Government working under the administrative control of Director General Town and Country Planning. Therefore the Ld. DR argued that the order of the AO is requested to be restored.
123. We have gone through the facts of the case and material on the record. The employees of the Department of Estates have been working owing to the reasons of transfer of functions overtaken by the HUDA. Since these employees are certainly working for HUDA fully and wholly it cannot be said that the salaries paid to the employees is not for business purpose. In the absence of diversion of employees from Department of Estates, HUDA would have to hire outside manpower and also require to pay them accordingly. Keeping in view the functions performed by the employees for HUDA the expenses out of salary cannot be treated as non business expenditure. The principle whether to allow these expenditure are not when the profits are estimated and the arguments taken by both the parties on this aspect are found to be not applicable in the peculiarities of the facts emerging out of the issue of drafting of employees of Department of Estates to work for HUDA. The addition confirmed by the Ld. CIT(A) is hereby directed to be deleted.
Town Planning Expenses
124. Ground No. 7 of the appeal of the Assessee for the Assessment years 2014-15 relates to disallowance of Town Planning Expenses of Rs. 78,42,338/-out of Rs. 1,79,11,266/-.
125. The Assessing Officer has disallowed Rs. 1,79,11,266/- claimed by the assessee by treating the expenditure as capital in nature.
126. The Ld. AR argued that these expenses related to day to day expenses of routine nature and similar expenses had been accepted by the department in earlier years. It was submitted that the expenses relates to completed projects in Haryana and therefore should be treated as Revenue. The Ld. AR further argued that these expenses include Rs. 42.00 lacs paid for computerization which was treated by the Assessing Officer as capital expenditure. It was submitted that an amount of Rs. 58,68,927/- had been spent on purchase of computer systems and allied items.
74127. The Ld. CIT(A) has allowed Rs. 42.00 Lacs as Revenue expenditure which was paid to Rolta India Ltd. and allowed depreciation on Rs. 58,68,928/- being the computer items purchased from M/s Hartron.
128. This issue has been dealt while dealing with Office maintenance and office expenses. Hence the entire issue relating to Rs. 1,79,11,266/- is remanded back to the file of Assessing Officer for the limited purpose of verification of type of expenses. It is hereby directed that the Assessing Officer would allow as Revenue expenses on the amount is spent for software purchases and due depreciation would be allowed in the case of hardware purchases.
Disallowance under section 40(a)(ia)
129. Ground No. 9 of the appeal of the Assessee for the Assessment years 2014-15 relates to disallowance U/s 40(a)(ia) due to default of TDS on the interest payment made to different people as per the Court order. The assessee has paid interest of Rs. 1,97,29,877/- without observing the provisions of TDS. The Assessing Officer has disallowed this amount under section 40(a)(ia).
130. The Assessing Officer has also given alternate finding that this interest paid should be capitalized. The Assessing Officer observed that if at any stage the addition on account of non deduction of TDS gets reduced then this amount of interest on account of work in progress will be disallowed separately.
131. The Ld. CIT(A) has deleted the addition of Rs. 2,40,658/- which is the interest paid on gratuity, leave encashment, GPF on which, the provisions of TDS are not applicable. The Ld.CIT (A) has confirmed the addition of Rs.1,94,89,219/-.
132. Before us the Ld. AR argued that the interest has been paid to allottees on the directions of Court who have succeeded in getting relief from the Court for payment of compensation due to delay in offer of position after the allotment. Reliance placed on Ghaziabad Development Authority vs. Dr. NK.Gupta ( NCDRC) 258 ITR 0337 which is reproduced as under:-
"Deduction of tax at source-Interest-Development Authority-Sclieme by Authority for flats with specific provisions- Delay in handing over flat- purchase of flat- Finding Facilities Not provided - Refusing to take possession and demanding refund of amounts paid- State Consumer Dispute Redressal Commission-Directing Authority to refund amounts paid by complainant with interest at 18%- Interest ordered to be paid- is in the nature of damages though for convenient standardization specified as interest - deduction of TDS not Permissible - Income Tax Act, 1961, Section 2(28A), 194A."75
• Thus in view of the above, there was no requirement for deduction of TDS on the amounts being awarded by the court. Therefore where no TDS was required to be deducted, no disallowance u/s 40a(ia) be made. Thus addition made is liable to be deducted.
• Further the AO has taken an alternative plea that since there is huge amount of capital work in progress, the interest paid is disallowable u/s 36(l)(iii). In this regard we submit that the provisions provide that the only the interest paid in respect of capital borrowed for acquisition of an asset shall not be allowed as deduction. • In the case at hand, firstly the assessee has not borrowed any funds, secondly has not paid any interest on amount borrowed. Thus the assessee is not covered under the proviso to Section 36(l)(iii).
• The amount paid is in the nature of compensation though the nomenclature has been given as interest, the same is not the interest paid on any borrowed capital. Thus the AO has erred in misplacing facts and invoking provisions of Section 36(l)(iii).
133. The Ld. DR argued that since the interest has been paid to the allottees TDS needs to be deducted and failure of which will attract provisions of 40(a)(ia). He further argued that Assessing Officer made addition on account of 32.35 lacs under section 14A too.
134. Regarding the deductability of the TDS on the amounts paid to various allottees, we find that the interest has been paid by the assessee to allottees for payment of compensation due to delaying offer of the possession after allotment has been squarely covered by judgment in case of Ghaziabad Development Authority vs. Dr. NK. Gupta ( NCDRC) 258 ITR 0337 and Delhi Development Authority vs Income-Tax Officer (1995) 53 ITD 19 Delhi the amount of compensation do not fall under the meaning of 2(24) of Income Tax Act. Hence assessee is not liable to the provisions of TDS on these payments. Since assessee has not borrowed any funds and no interest has been paid the Assessing Officer's alternate observation also stands dismissed.
135. The ground of the assessee is allowed.
136. Regarding the addition made under section 14A of Rs. 32,35,885/- by the assessee we find that the provisions of Section 14A are not applicable based on the legal position narrated below:
The provisions of Section 14 A provides that :-
a) That there must be income taxable under the Act, and
b) That this income must not form part of the total income under the Act, an d.,
c) That there must be an expenditure incurred by the assessee, and
d) That the expenditure must have a relation to the income w not form part of the total income under the Act.76
The provisions of Section 14A provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under this Act. Thus from the reading section 14A of the Act, it is clear that before making any disallowance the basic condition precedent for invoking the provisions of Section 14A is that there should be income which does not form part of the total income undsr this act. Thus, where the assessee earns any tax free income, the corresponding expenditure incurred in earning that income is to be disallowed and where there is no exempt income, there cannot be any disallowance as no corresponding expenditure were incurred to. earn a particular tax free income. It is well settled that that where there is no exempt income, no disallowance u/s 14A be worked out. Reliance is placed on the following:-
CIT Vs. Lakhani Marketing Incl 111 DTR 149 (P&H) "We do not find any merit in this submission. Judgment of this Court 'n Abhishek Industries (supra) was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application.'"
CIT Vs. Winsome Textile Industries Limited 319ITR 204 (P&H) Business expenditure-Disallowance under s. 14A-Investment in shares-Interest on borrowed funds-Disallowance under s. 14A by the AO relating to interest on borrowed funds presuming that the investment in shares had been made out of borrowed funds-Assessee had made written submission to the AO that the investment was out of own funds-Said claim not refuted by the AO--Revenue contending that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty-Said contention not acceptable-In the present base} 'the assessee did not make any claim for exemption-In such a situation s. 14 A could have no application.
CITvs. Corrtech Energy (P.) Ltd 223 Taxman 130(Guj) Income--Expenditure Incurred In Relation To Income Not Includible in Total Income-- AO made disallowance of expenditure of specified amount under section 14A--Disallowance was confirmed by CIT (Appeals)-- Tribunal held that Assessee did not make any claim for exemption and in such situation, Section 14A could have no application--Held, S. 14A(1) provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the Assessee in relation to income which does not form part of the total income--Assessee did not make any claim for exemption and> in such a situation, S. 14A could have no application and Revenue's Appeci was dismissed.
Principal CIT Vs. India Gelatine And Chemicals Ltd., (2015) 93 CCH 253 GUJHC Where the Assessee was having interest free funds out of which investmentin shares and mutual funds was made no disallowance was warranted-u/s 14A.
CIT Vs. Holcim India P Ld. 90 CCH 0081 Where no dividend income was earned by assessee, disallowance u/s 14A is not warranted.
CIT Vs. Shivam Motors (P) Ltd. 230 Taxman 63 (All) 77 Deduction u/s. 14A-Allow ability-Tribunal upheld decision of CIT(A) deleting disallowance u/s 14A-Held, in absence of any tax free income corresponding expenditure could not be worked out for disallowance u/s 14A Further the AO has placed reliance in the case of Abhishek Industries which provide that "Where AO is able to refer to relevant material while recording satisfaction that borrowed funds were used to earn interest free income as opposed to assessee's own funds, only such amount Can be legitimately disallowed u/s. 14A.
In the case of the assessee, there are no borrowed funds and the investment are made out of surplus funds.
Thus the AO has erred in invoking provisions of Section 14A misplacing the reliance on Abhishek Industries (Supra) which also provides that only such amount can be disallowed for which the AO has relevant material on record for satisfaction that borrowed funds were used to earn interest free income. Thus where there are no borrowed funds, n o disallowance is called for.
When there is no exempt income and no claim for exemption, s. 14A and Rule 8D have no application and no disallowance can be made. It is pertinent to mention further that it may be noted that Rule 8D is only a machinery/ mechanism to compute the disallowance. The Rules can never prevail over the provisions of the Act. If the facts of the case demand no disallowance, the computational provision does not come into picture atall. Also, the reliance placed by the Ld.DR on the circular issued by the CBDT which do not have binding force on the assessee. Accordingly it is well settled that where no exempt income is received or receivable during the relevant previous year, provisions of Section 14A shall not apply.
Further it is also well settled that the disallowance cannot exceed the exem p t income. The Delhi High Court in Joint Investments Pvt Ltd v CIT held that Section 14A or Rule 8D cannot be interpreted so as to mean that t h e entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A of the Act, and is only to the extent of disallowance of expenditure 'incurred by the assessee in relation to tax exempt income'. Accordingly, the tax exempt income cannot be disallowed entirely. Thus following this logic also, where the exempt income is zero, the disallowance cannot exceed the exempt income which is zero.
137. In a nutshell, going through the facts and submissions and various judicial pronouncements on the issue, it is clearly observed that the issue is to be decided in favour of the assessee as in the case of CIT Vs. Lakhani Marketing (P&H) (supra), CIT Vs. Winsome Textile Industries Ltd. (P&H) (supra), CIT Vs. Holcim India Pvt. Ltd. (Del.) ITA No. 486 & 299/2014 dated 05.09.2014 , Cheminvest India Ltd. Vs. CIT (Del) ITA No. 749/2014 dated 02.09.2015.
138. Thus the addition made under section 14A stands deleted (ground of Disallowance under section 40(a)(ia) and 14A together ).
INCOME FROM HOUSE PROPERTY VS. BUSINESS INCOME
139. Ground No. 2 of the appeal of the Revenue deals with addition of Rs. 58,42,157/- for the AY 2004-05 and similar ground is involved in the appeals filed by the Revenue for the Assessment Years 2004-05, 2006-07,2007-08, 2008-09, 78 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14 with the varying amounts under this ground.
140. During the assessment proceeding the Assessing Officer held that since the assessee is dealing in sale and purchase, rental properties, the rental income earned by the assessee is treated as business income and repair expenditure @ 30% as claimed by the assessee has been disallowed.
141. The Ld. CIT(A) has deleted the addition on the grounds that similar issue has been dealt by the coordinate Bench of the ITAT in the case of the assessee for the AY 2003-04. The decision of the ITAT has been upheld by the Hon'ble Punjab & Haryana High Court vide their order dt. 23/12/2008 in the ITA No. 748 of 2008 (322 ITR 61).
142. While dealing with the issue the Hon'ble Punjab & Haryana High Court held as under:
"As per the finding of the Tribunal, the main business of the assessee is not renting of property, but of development and sale of the property. In such a situation, no fault can be found with the view of the Tribunal that the assessee could claim the head to be income from property instead of income from business. The view of the Tribunal is consistent with the view taken by the Supreme Court in East India Housing & Land Development Trust Ltd. Vs. CIT(1961) 42 ITR 49 (Supreme Court)."
143. Keeping in view the judgment of the Hon'ble High Court the decision of the CIT(A) is acceptable and we decline to interfere in the order of the Ld. CIT(A).
Dividend Income
144. Ground No. 4 of the appeal of the Revenue deals with disallowance of Rs. 2,32,80,000/ for the AY 2006-07:
" Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in giving relief in respect of Dividend income despite the fact that the dividend received by the assessee is not dividend and thus not exempt from tax ?"
145. Brief facts relevant to the case are that the assessee has claimed dividend income of Rs. 2,32,80,000/- as exempt. The Assessing Officer has held that in the case of Brook Bond & Co. Ltd. Vs. CIT 162 ITR 373 (Supreme Court) the Hon'ble Supreme Court laid down that if the ownership of the shares is incidental to carrying on the business or if the shares are held as business assets dividend income should be treated as income from business and based on the judgment the income received by the assessee cannot be treated as dividend 79 but only as business income. The Assessing Officer further held that in case the income is treated as exempt, the provisions of Section 14 would be applicable.
146. The Ld. CIT(A) held that the investments were made in the equity shares of Gurgaon Technology Park Ltd. and these investments(shares) were or held as capital investment and not as stock in trade and hence the amount received would be treated as dividend.
147. Before us the Ld. DR relied on the order of the Assessing Officer.
148. The Ld. AR argued that these investments are made to earn dividend and also that the assessee does not have any business relationship with M/s. Gurgaon Technology Park Ltd. or the investments made in this company is not incidental to carrying out the business of the assessee and hence argued that the dividend received is eligible for exemption under section 10(34) of the Income Tax Act.
149. We have gone through the records and perused the material before us.
150. In the case of M/s Brooke Bond & Co. Ltd. the issue was regarding the holding of shares in subsidiary Tea Companies wherein the assessee is having 100% holding. The factum in the case is totally different on the facts and the observation of the Assessing Officer is misplaced regarding the taxability of the dividend. The special Bench of ITAT in the case of PSIDC Ltd. Vs. DCIT 103 TTJ CHD SB 364 and also based on the judgment of ITAT Delhi Bench in the case of DLF Ltd. Vs. CIT (27 SOT 22) wherein it is held that the investments made for earning dividend and which has been duly shown as income from other sources is eligible for exemption under section 10(34), facts of which are squarely applicable to the instant case. Hence we decline to interfere in the order of the Ld. CIT(A). Regarding the disallowances under section 14A the issue is being remanded back to the file of Assessing Officer for the limited purpose of determining the disallowances, keeping in view the expenses incurred by the assessee to earn the dividend income. As a result the grounds of the Revenue may be treated as partly allowed.
Office maintenance and office expenses
151. Ground No. 4 of the appeal of the Revenue deals with disallowance of Rs. 85,00,000/ for the AY 2007-08 on account of Office maintenance and office expenses.
80152. Based on the observation of the Accountant General Audit the Assessing Officer has enquired the assessee about the allowability office contingencies and maintenance claimed at Rs. 2.67 Crores which includes Rs. 85,00,000/- given to M/s Rolta India Ltd. for computerization of Department of Town and Country Planning to prepare layout plan of HUDA. The assessee has explained before the Assessing Officer that the payment made to M/s Rolta India Ltd. has not been claimed as expenditure. It was submitted before the Assessing Officer that it is factual incorrect and the amount paid to M/s Rolta India Ltd. has been treated as capital expenditure.
153. The Ld. CIT(A) has deleted the addition on the grounds that the Assessing Officer has not doubted the genuineness of the expenditure and the fact of having it been incurred for the purposes of business. The Assessing Officer has disallowed the expenditure treating it to be a capital expenditure. The Ld. CIT(A) held that the expenditure incurred for the purposes of computerization of record is an admissible business expenditure of revenue nature.
154. Before us the Ld. CIT,DR argued that the Computer expenses have to be capitalized whereas the Ld. AR relied on the order of the Ld. CIT(A). computerization of Department of Town and Country Planning to prepare layout plan of HUDA.
155. From the records it is not clear that the computation expenses involved are for software up gradation or for up gradation of hardware and purchase of new computers or augmenting the capability of the existing computers. Hence this issues is remanded back to the file of Assessing Officer for the limited purpose of verification of type of expenses. It is hereby directed that the Assessing Officer would allow as Revenue expenses on the amount is spent for software purchases and due depreciation would be allowed in the case of hardware purchases.
Sales Tax
156. Ground No. 5 of the appeal of the Revenue for the Assessment years 2012-13 & 2013-14 and 2014-15 relates to disallowance of Sales Tax paid.
157. During the year the assessee has claimed sales tax (Haryana VAT) of Rs. 7,98, 36,527/- the assessee explained that the amount has been paid against the sales tax assessment made by the Sales Tax Department in the past. The 81 Assessing Officer held that the assessment must be relating to cost of supply of materials against the cost to contractors for both completed and uncompleted sectors. Holding that the Assessing Officer has disallowed 50% of the sales tax paid treating it being a capital expenditure.
158. The Ld. CIT(A) has deleted the addition on the grounds that the specific provisions governing the allowability of taxes as per section 43B clearly stipulates that it overwrites any other provision in any other section of the Act and such payment is allowable on the actual payment basis. The Ld. CIT(A) held that since the appellant has claimed sales tax expenditure on payment basis during the year considering the provisions of section 43B the disallowance made on sales tax payment on estimate basis needs to be deleted.
159. Before us Ld. CIT DR argued that disallowance on account of Sales Tax Payment the Assessing Officer disallowed 50% of such payments u/s 37(1) of the Act being Capital in nature and the CIT(A) has not appreciated the AO's reasoning, hence it was argued to restore the AO' Order.
160. Ld. AR relied on the order of the Ld. CIT(A).
161. Having gone through the facts we are really surprised by the action of the Assessing Officer and also by the decision of the authorities referring this issue for further appeal. Irrespective of the reasons the amount paid as taxes (in this particular instance sales tax) is undisputedly eligible for deduction. There is neither any factual nor legal in congruency. By no stretch of imagination the sales tax paid can be treated as capital expenditure in the facts of this case. Hence we decline to interfere in the well reasoned order of the Ld. CIT(A) in deleting the addition.
Order pronounced in the Open Court on 06/02/2018.
Sd/- Sd/-
(DIVA SINGH) (DR. B.R.R. KUMAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date: 06/02/2018
AG
Copy to: 1.The Appellant,
2. The Respondent,
3.The CI T,
4.The CI T(A),
5. The DR