Expenses incurred by statutory authority was allowable as business expenditure

Indore Development Authority Vs DCIT (Exemption) (ITAT Indore)

Conclusion: Certain expenses incurred by assessee such as IMC Transfer Expenses, City Environment Expenses, Contribution and Aid Expenses, Land Acquisition and Diversion Expenses  was allowable considering expenses must be incurred for assessee’s business purposes, consistent allowance of similar expenses in the past. Once the impugned expenses were included in closing inventory, effectively there was no deduction claimed by assessee and no disallowance was warranted.

Held: Assessee claimed deduction of IMC Transfer Expenses, City Environment Expenses, Contribution and Aid Expenses, Land Acquisition and Diversion Expenses which the AO disallowed the same. On appeal. It was held that regarding IMC Transfer expenses, expenses were primarily for land acquisi-tion and development activities, were incurred for the assessee’s purposes, even after the transfer of schemes. The court emphasized the necessity and genuineness of these expenses, especially considering their consistent allowance in previous scrutiny assessments. Regarding City Environment Expenses, the deduction was allowed considering the direct link between the expenses and the assessee’s business model, as well as the consistent allowance of such expenses in the past. Regarding Contribution and Aid Expenses, the deduction was allowed considering that the expenses were incurred as per the State Government’s directions and served as a form of advertisement, enhancing the assessee’s brand value and indirectly benefiting their business. Regarding expenses related to land acquisition, diversion, and development of schemes, which were included in the closing inventory, the court upheld the deletion of the disallowance, as the inclusion of these expenses in the closing inventory effectively nullified the deduction claim, making it revenue-neutral.

FULL TEXT OF THE ORDER OF ITAT INDORE

This bunch of captioned 13 appeals, 7 by assessee and 6 by revenue, challenges 7 different orders of first-appeal dated 08.11.2023/19.12.2023/ 18.03.2024 passed by Commissioner of Income-tax (Appeal)-NFAC, Delhi [“CIT(A)”] for 7 assessment-years [“AY”] 2013-14 to 2018-19 & 2021-22, which in turn arise out of respective assessment-orders passed by Deputy Commissioner of In-come-tax (Exemption), Bhopal [“AO”] u/s 143(3) of the Income-tax Act, 1961 [“the Act”].

2. The appeal for AY 2013-14 is only by assessee and the appeals for other 6 AYs 2014-15 to 2018-19 & 2021-22 are cross-appeals by both sides. Since these matters involve identical/common issues, they were heard together at the request of parties and are being disposed of by this consoli-dated order for the sake of convenience, brevity and clarity. We first take up assessee’s appeals and thereafter revenue’s appeals.

3. AR for assessee confined his submissions to the undermentioned ground No. 3 only, which is identical in all 7 appeals of assessee, reading as under:

“3. That, the learned CIT(A), grossly erred in law, in not giving a specific finding/direction to the effect that in the event of ultimate grant of registration to the appellant authority under the provisions of section 12A/12AA of the Income-tax Act, 1961, the income of the appellant authority should be computed in accordance with the provi-sions of section 11 & 12 of the Income-tax Act, 1961.”

4. Apropos to this ground, Ld. AR submitted that the assessee is a statutory authority established by State Govt. of Madhya Pradesh. The assessee, claiming to be engaged in “charitable purpose” as de-fined in section 2(15), applied to Income-tax Department for grant of registration u/s 12A/12AA of the Act so as to become eligible for exemption u/s 11/12 of the Act. The application of assessee was, however, rejected by authorities and thereafter the assessee filed appeal No. ITA 366/Ind/2008 to ITAT, Indore whereupon the ITAT, vide order dated 06.07.2010, has upheld the order of authorities and the assessee did not get any relief upto the level of ITAT. Thereafter, the assessee filed next appeal to Hon’ble High Court of Madhya Pradesh which stands pending before Hon’ble High Court as of now, necessary evidences to show this status are filed at Page 143-144 of Paper-Book-1.

5. Having said thus, Ld. AR submitted that the Hon’ble High Court is already seized of the issue of assessee’s registration u/s 12A/12AA and therefore the CIT(A), while deciding quantum-appeals of assessee for AY 2011-12 & 2012-13 against assessment-orders passed by AO u/s 143(3), has given a specific finding/direction as under .

AY 2011-12:

“2.1 I have gone through the assessment order, the written submissions of the appellant as reproduced above and after considering the fact that on the issue raised in this ground, since the appeal of the appellant stands admitted in the Hon’ble M.P. High Court against the order of Hon’ble ITAT, Indore Bench. Therefore, the issue will be decided finally after the decision of Hon’ble M.P. High Court. Meanwhile keeping in view the history of the case, the facts brought out above and respectfully following the decision of Hon’ble ITAT, this ground of appeal is dismissed.”

AY 2012-13:

3.4 I have considered the facts of the case and the written sub-missions of the appellant. There is no infirmity in the order of the A.O. in holding that in view of the absence of registration u/s 12AA and the prevailing order of Hon’ble ITAT, the total income of the assessee is to be treated as taxable. As and when the order of Hon’ble High Court is received, appeal effect to the same will be given accordingly. For the moment, no directions to the AO are called for. ”

6. However, the CIT(A) has not given similar finding/direction while passing impugned orders in quantum-appeals of assessee for AYs 2013-14 to 2018-19 & 2021-22. Therefore, the limited prayer of Ld. AR from assessee’s side is such that the CIT(A) should be directed to modify impugned orders so as to include a specific finding/direction on the same lines as made in AY 2011-12/2012-13 re-produced above.

7. DR for revenue did not have any objection to this prayer of Ld. AR.

8. After a careful consideration, we agree to the prayer of Ld. AR. Accordingly, we direct the CIT(A) to modify impugned orders for AYs 2013­14 to 2018-19 & 2021-22 so as to include a specific finding/direction on the same lines as made in AYs 2011-12/2012-13 re-produced above.

9. The assessee’s appeals are allowed accordingly .

10.Ld. AR for assessee taking lead to make submissions in these matters with the consent of Ld. DR for revenue, submitted that there are four issues involved in Revenu appeal with waring figure for different year as under .

Issue No. (i) – Deduction of ‘City Environment Expenses’:

11. The assessee claimed deduction of ‘City Environment Expenses’ which the AO disallowed but in first-appeal, the CIT(A) reversed AO’s action and deleted disallowance. So far this issue is concerned, after hearing learned Representatives of both sides, we find that the same is already decided in as-sessee’s favour by Co-ordinate Bench of ITAT, Indore in ITA No. 870/Ind/2016 order dated 31.10.2019 for earlier AY 2011-12, the relevant portion of order is re-produced below:

“8. As regards Ground No.1 of revenue’s appeal for A.Y. 2011-12 relating to deletion of addition of Rs.15,73,65,419/- made by the Ld. AO on account of disallow-ance of sum expenses being capital in nature. Brief facts are that in the profit and loss account an amount of Rs. 19,67,06,774/- is debited under the head City Environmental Develop-ment and Preservation Expenses. It was contended by the assessee before the Ld. AO that these ex-penses are done for the development of the City Environmental Development and Preservation on the direction of the State Government and thus these are part of the revenue expenditure. Ld. AO however was not satisfied and treated the expenditure as capital in nature and allowed the expenses to the extent of 1/5th of the total expenses, thereby giving benefit of expenditure of Rs.3,93,41,355/- and disallowed the remaining 4/5th amount at Rs.15,73,65,419/-. The assessee succeeded in getting relief from Ld. CIT(A) and the impugned disallowance was deleted.

9. DR vehemently argued supporting the order of the Ld. AO and it was also submitted that the assessee is engaged in development of colonies. None of the al-leged expenses are having any nexus with the projects undertaken by the assessee i.e. Indore Devel-opment Authority (IDA). The claim of expenses is allowed only if they are incurred for earning the revenue. Since the alleged expenses have no correlation with the project undertaken by the as-sessee, the same should have been disallowed.

10. Per Contra Ld. counsel for the assessee vehemently argued referring to the following written submissions:

1.That, the assessee Authority is a Statutory Authority consti-tuted under section 38 of ‘Madhya Pradesh Nagar Tatha Gram Nivesh Adhiniyam, 1973’, under a Notification No. 1688-XXXII-77 issued by the Government of Madhya Pradesh w.e.f. 13-02-1974.

2. That, the prime object of the assessee is to implement devel-opment plan, prepare one or more town development schemes and development of land for the purpose of expansion or improvement of the area specified in the Notification.

3. That, in furtherance of its objects of development and im-plementation of various schemes, the assessee Authority acquires land from public under the provisions of Land Acquisition Act, 1894 for the compensation determined in accordance with such Land Acquisition Act, 1894. After development of the schemes, the assessee Authority part with the land and building so developed in the schemes in accordance with the rules made by the State Government in this behalf by virtue of section 58 of the Madhya Pradesh Nagar Tatha Gram Nivesh Adhiniyam, 1973. The assessee Authority also undertakes to carry out the devel-opment work of general in nature which is utilized by public at large.

4. That, one of the prime objectives of the assessee authority is to ensure preservation of environment and development of the notified area in a planned manner. In pursuance of such objective, the assessee authority had consistently been incur-ring expenditure on building of bridges, development of roads, gardens, street lighting, construction of administrative offices for the government, etc in the notified area.

5. That, during the relevant previous year, the assessee authori-ty incurred and claimed expenses under the head ‘City Environmental Development & Preser-vation Expenses’, aggregating to Rs. 19,67,06,774/- under various sub-heads as per the details given at Schedule-20 of the audited financial statements [kindly refer PB page No. 24].

6. Your Honours, the AO grossly erred in holding that the ex-penses incurred by the assessee Authority under the head ‘City Environmental & Development Expenses’ are of capital nature. The AO further held that such expenditure is not an item of sale or revenue generating item. After giving these findings, the AO disallowed the entire expenditure claimed by the assessee authority under the head ‘City Environmental Expenses’ at Rs.23,10,17,503/- and added to the total income of the assessee authority.

7.Being aggrieved with the addition made by the AO, the as-sessee preferred appeal before the ld. CIT(A). The ld. CIT(A), vide para 4.2 to 4.2.3 at page no. 9 to 11 of his Order, was pleased to delete the entire addition made on this count.

8. The addition so deleted by the ld. CIT(A) deserves to be main-tained in view of the following :

(i) The AO has not disputed that the assessee authority has genuinely incurred these expenditure in pursuance of its objectives for which it has been constituted under an enactment of State Legislation. The AO has also not doubted the genuineness of the incur-rence of expenditure as claimed by the assessee authority.

(ii)The expenses incurred by the assessee Authority under the head City Environmental & Development Expenses do not have any connection with the vari-ous schemes developed by the assessee. In other words, by incurring such expenditure, the stock of the assessee Authority does not get affected. Further, the entire expenditure have been incurred for the development of the notified area without having any accretion to its asset or without creating any benefit of enduring nature.

(iii)The assessee Authority is required to incur these expenses for the general development and maintenance of the city of Indore. For example, the development of roads such as MR-3, MR-10 etc., Central Lighting on various main roads, Plantation on various roads, ROB Juni Indore Railway Crossing, Construction of OPD at M.Y. Hospital, Construction of Col-lectorate Administrative Block etc. Your Honours, by no stretch of imagination, the expenditure in-curred by the assessee Authority on construction of OPD at MYH or construction of Ad-ministrative Building of Collectorate can be considered to be an expenditure giving enduring benefit to the assessee authority. Likewise, after constructing Auditorium and having it handed over to the Municipal Corporation, the assessee Authority was not having vested interest or ownership in the said Auditorium. The assessee Authority is neither eligible nor it is deriving any revenue from such Auditorium.

(iv)It shall be pertinent to note that the expenses under the head ‘City Environmental & Development Expenses’ have been regularly incurred by the as-sessee Authority from the past several years. For such assertion, kind attention of Your Honours is invited to the copies of the relevant Schedule of ‘City Environmental & Development Expenses’ as appearing in the audited financial statements of the assessee Authority for the previous years rel-evant to A.Y. 2009-10, A.Y. 2010-11, A.Y. 2012-13 and A.Y. 2013-14, as placed at Page No. 238 to 241 of our Paper Book.

(v)It shall also be worthwhile to note that the assessee Au-thority is consistently undergoing scrutiny assessments under s.143(3) of the Act for other assess-ment years as well and in all such years, the expenses incurred by the assessee Authority under the head ‘City Environmental & Development Expenses’ have been held as that of revenue in na-ture by the Department and, consequently, the same have fully been allowed without any interfer-ence. It shall be appreciated that even for the subsequent assessment years i.e. A.Y. 2012-13 and A.Y. 2013-14, no disallowance on this count has been made by the concerning AOs. For such assertion, kind attention of Your Honours is invited to the copies of the Assessment Orders for two years be-fore and after the assessment year under consideration i.e. for the A.Y. 2009-10, A.Y. 2010-11, A.Y. 2012-13 and A.Y. 2013-14 which have been placed in our Compilation at Page No. 71 to 117].

(vi)It shall be pertinent to note that there has been no change in the facts and circumstances of the case prevailing in the assessment year under consideration and those prevailing in the aforesaid assessment years. In such a situation, taking an adverse view in the assessment year under consideration by the learned AO is completely unjustified and unwarranted. For such proposition, we place reliance on the decision of the Hon’ble Supreme Court in the case of Radha Soami Satsang Vs. CIT (1992) 193 ITR 321 (SC).

11. Ld. counsel for the assessee also requested for admission of additional evidences under Rule 29 read with Rule 18(4) of the Appellate Tribunal Rules,1963 filed in support of the claim that the expenditure incurred under the City Environmental Development and Preservation Expenses are revenue in nature. The prayer made by the assessee requesting for dele-tion of additional evidences reads as follows:

“In the above context, it is most humbly submitted and prayed as under:

1. That, two separate appeals against the Appellate Orders dated 31­05-2016 and 16-09-2016 passed by the learned Commissioner of Income-Tax (Appeals)-II, Indore, have been preferred by the Revenue before this Hon’ble Bench for the captioned assess-ment years. One of the grounds of appeal raised by the Revenue in both the appeals pertains to the disallowance of City Environmental Development & Preservation Ex-penses deleted b the ld. CIT(A).

2. That, during the course of last hearing this Hon’ble Bench had directed the undersigned to furnish documentary evidences (work orders from State/Central Government etc.) in support of the claim for ‘City Environmental Development & Preservation Expenses’.

3. Accordingly, in compliance of the directions issued by this Hon’ble Bench, the assessee Authority, in order to establish its claim for deduction of the aforesaid expenses, wish to furnish certain documentary evidences. These documentary evidences arc quite relevant for adjudicating the issue in hand by Your Honours and therefore, the appellant wish to file such documents as additional evidences under Rule 29 read with Rule 18(4) of the Appellate Tribu-nal Rules, 1963.

12. From perusal of the additional evidences placed before us, we are inclined to admit then for adjudication since they go to the root cause of the issue which will enable us to adjudicate the facts relevant to the grounds raised before us.

13. We have heard rival contentions and perused the record placed before us. The revenue has challenged the finding of Ld. CIT(A) deleting, the disallowance of Rs. 15,73,65,419/- on account of 4/5th disallowance out of City Environmental Development and Preservation Expenses.

14. We observe that the primary object of the assessee is to implement development plan, prepare one or more town development schemes and develop of land in accordance with Rules made by the State Government, by virtue of section 58 of the Madhya Pradesh Nagar Tatha Gram Nivesh Adhiniyam, 1973. The assessee authority also undertakes to carry out the development work of general in nature which is utilized by the public at large. Such expenses have been consistently incurred by the assessee in the past also and such claim have been allowed by the revenue authorities after conducting scrutiny assessment proceedings u/s 143(3) of the Act for the year under appeal.

15. We observed that Ld. CIT(A) deleted the impugned disal-lowance giving following of facts:

“4.2 I have considered the facts and circumstances of the case, the finding of the AO, the written submissions filed by the appellant and also various documents placed on record. After considering the entirety of facts and circumstances, the AO has not been justified in making the impugned addition. It is found that in the instant case, the AO has not doubted the genuineness of the City Environmental Development and Preservation Ex-penses aggregating to Rs.19,67,06,774/-claimed by the appellant. It is also not the case of the AO that these expenses have not been incurred by the appellant in pursuing its core activities. The AO has only disputed the nature of the expenditure claimed by the appellant as revenue. According to the AO, the expenditure is that of capital in nature. The AO without assessing any basis held that only 1/5th of the, total expenditure of Rs. 19,67,06,774/- claimed by the appellant is allowable for the assessment year under consideration. According to the appellant, the remaining 4/5th part of the expenditure has never been allowed to it in the subsequent years.

4.2.2. I have gone through the audited In-come & Expenditure Account of the appellant for the relevant assess-ment year which is placed on record. I find that in the audited accounts, the appellant has claimed expenditure aggregating to Rs 4,10,97,853/ – and Rs. 82,78,48,077/respectively under the head ‘Land Acquisition and Diversion Expenses for Schemes ‘ and ‘Development and Implementation Ex-penses for chemes’. Besides claiming these expenditure, the appellant has also claimed expenditure aggregating to Rs.19,67,06,774/ – under the head City Environmental Develop-ment & Preservation Expenses’. On going through the details of Devel-opment & Implementation Expenses for Schemes, as given in Schedule 19 of the audited financial statements, it is found that the appellant has claimed expenses under the various sub-heads such as Roads, Culverts, Underground Services, Landscaping and Garden Devel-opment, Construction of Building, Architect Fees etc. The contention of the appellant has been found tenable to the extent that whenever expenditure of development of various schemes pro-moted by the appellant authority are incurred, the same are classified under a different head viz. ‘Development and Implementation Expenses for Schemes’ and while making the valuation of the Inventory, these expenses, being of recoverable nature, are taken into consideration. It is also ob-served that under the head ‘City Environmental Development and Preservation Expenses’ also, the appellant has claimed the expenditure on Roads, Culverts, Street Lighting, Construction of Building, Fees to Architects, etc. It is also observed that the AO himself in the body of the assessment order, has given a finding that the facilities on which such City Environmental Development and Preserva-tion Expenses have been incurred are not an item of sale or revenue generating item. Thus, by giving this finding, the AO has impliedly accepted the claim of the appellant that these ex-penditure are in the nature of sunk cost in the hands of the Appellant. I find force in the contention of the appellant that these expenditure have been incurred by the appellant in pursu-ance of’ its main objective of development of notified area. Further, by in-curring these expenditure, the appellant authority would not be deriving any revenue in future as is the finding of the AO himself. Further, these expenditure cannot be said to be income generating apparatus of the appellant authority and in my view, by incurring these expenditure, the appellant would not be deriving any benefit of enduring nature.

4.2.3 I also find that these expenditure have consistently been claimed by the appellant for the last many years and even in the subsequent ears these expenditure have been claimed by the appellant. It has been claimed that the assessments of the appellant since A. Y. 2003-04 are consistently being framed under s. 143(3) of the I.T. Act,1961 and in none of the assessments, any adverse view on this issue has been taken by any of the AOs. It has further been contended that all these assessment orders were also subject matter of appeals before the appellate authorities. From the copies of the assessment orders of various other assessment years filed by the appellant before me, I found that in none of the other assessment years, any part of these expendi-ture have been disallowed for the reasons has brought down by the AO in the instant case. I find merit in the contention of the appellant that in the income-tax proceedings, the principle of res judi-cata does not apply but certainly the principle of consistency applies. Accordingly, in absence of any change in the facts and circumstances of the case, an Assessing Officer cannot be permitted to take a different view from that consistently taken by his predecessors. In view of the above discussion, I am of the view that there was no justification on the part of AO In making addition of Rs. 15,73,65,419/- in the appellant’s income by making ad-hoc disallowance of 4/5th of City Environmental Development and Preservation Expenses claimed by the appellant. Accordingly, the addition is directed to be deleted and this ground of ap-peal is allowed.

16. From perusal of the finding of the Ld. CIT(A) and the undis-puted fact that in the assessment proceedings completed for the preceding years such claim of ex-penses have been consistently allowed and applying such principle of consistency ought to be al-lowed since there is no change in the facts and circumstances of the case in the year under appeal before us. Ld. Departmental Representative also failed to rebut the finding of Ld. CIT(A) and also could not controvert the fact that the Ld. AO has himself allowed 1/5th of the expenses as revenue in nature without mentioning the provisions of law which al-lows such claim. The alleged expenses are not preoperative expenditure which needs to be allowed @ 1/5th for 5 years. The said expenses can be either termed as non-business expenses or business expenditure. If they are termed as business expenditure then they can be ei-ther termed as revenue or capital expenditure. No such distinction has been made by the Ld. AO about the alleged expenses.

17. Further, it is noteworthy that the assessee company is working under the direction of State Government. It gets the power to acquire the land, develop housing project and other amenities for the public at large. Such land are acquired on concessional rates. Major reason for giving such wide powers and providing of precious land to the assessee au-thority is to develop the City in a well-organized manner keeping the interest of public at large. Con-struction of Flyover, Parks, Central Lighting on various main roads, Plantation on various roads, Con-struction of OPD at M. Y. Hospital are few of such work which are for the overall development of the City and provides facility for the public. Incurring of such expenses increases the ‘brand’ value of IDA and also poses confidence of public at large in the working of IDA.

18. We, therefore, in the given facts and circumstances of the case and also looking to the consistency of such expenses allowed by the revenue authorities in the past as well as in the future assessment proceedings and also because the impugned expenses have direct bearing with the overall business model of the assessee, find no reason to interfere in the find-ing of Ld. CIT(A) who has deleted the impugned disallowance. Ground No.1 of Revenue’s appeal stands dismissed.”

12. Ld. DR for revenue did not show any change in facts or law governing the issue or non-applicability of earlier view of Co-ordinate Bench for any reason. Therefore, keeping the consistency, we uphold the deletion of disallowance made by CIT(A). The revenue’s grounds qua this issue are dismissed.

Issue No. (ii) – Deduction of ‘Contribution & Aid Expenses’:

13. The assessee claimed deduction of ‘Contribution & Aid Expenses” given to other bod-ies/institutions which the AO disallowed but in first-appeal, the CIT(A) reversed AO’s action and de-leted disallowance. For this issue, after hearing learned Representatives of both side, we find that the same is also decided in assessee’s favour by Co-ordinate Bench of ITAT, Indore in the very same ITA No. 870/Ind/2016 order dated 31.10.2019 for earlier AY 2011-12, the relevant por-tion of order is re-produced below:

“38. Apropos to ground no. 2 which relates to disallowance of three expenses at Rs.13,27,208/-, Rs.10,00,000/- & Rs.8,00,000/- incurred towards Jhanki-Pradarshani & Seminar, Devi Ahilya Utsav & Malwa Utsav respectively, Ld. AO treated these amounts as donation and charity and not for business purpose. Ld. CIT(A) also confirmed the view of the Ld. AO observing as follows:

“I have gone through the contents of the assessment order and also the written submissions filed by the appellant. After considering the entire facts and circum-stances of the case, I do not find any merit in contention of the appellant. If find that the status of the appellant has not been taken as that of a charitable organization or institution and its income is assessable as business income. Once this being the position, any charity or donation, made for any purpose, is not allowable under the provisions of section 37(1) of the I.T. Act, 1956. Accordingly, I do not find any infirmity in the action of AO in making disallowance of Rs.31,27,208/-. Therefore, this ground of appeal is dismissed.

39. Ld. counsel for the assessee referred to the following written submissions:

“1. That, during the previous year relevant to the assessment year under consideration, the appellant Authority has incurred a sum of Rs.13,27,208/-, Rs. 8,00,000/- and Rs.1O,00,000/- respectively on account of contribution made towards ‘Aid for Jhanki Pradarshani & Seminars’, ‘Donation for Deui Ahilya Utsav’ and ‘Donation for Malwa Utsav’ under ‘Schedule-21 of Contribu-tion & Grant-in-Aids Made’ of the Income & Expenditure Account for the relevant previous year.

2. The learned AO, without even affording any single opportuni-ty as regard to the aforesaid issue, made an addition of Rs.13,27,208/-, Rs.8,00,000/- and Rs. 10,00,000/– in the hands of the appellant merely on his guess work, surmises and conjectures without even going into merits of the case. The learned AD, while giving his finding on the captioned issue, held that the objects of the appellant Authority does not include fi-nancing or funding of the cultural activities and it is not the statutory obligation of the appellant to incur such expenses. The learned AD finally held that the amount has not been expend-ed to meet the statutory or business interests of the appellant and therefore the same is disal-lowed.

3. Your Honour, in this context, at the outset, it is submitted that the finding of the learned AD that the expenses do not meet the objects of the appellant Au-thority is factually incorrect. It is submitted that the objects of the appellant Authority are that of charitable in nature and the same are covered under the last limb of the expression ‘Chari-table Purpose’ as defined under s.2(1S) of the Act i.e. ‘General Public Utility’. Therefore, it cannot be said that the aforesaid contributions made by the appellant Authority are not in conso-nance with the objects of the appellant

4. Your Honour, it is submitted that the appellant Authority is required to make contributions toward such Pradarshanis and Utsavs in order to main-tain and continue the proud tradition of the city of Indore. Further, every year, the closed mills of Indore make request to the Commissioner, Indore and to the Chairman of the appellant Authority for making contribution towards construction of Jhankis. Therefore, the appellant Authority, being a Statutory Authority constituted under section 38 of ‘Madhya Pradesh Nagar Tatha Gram Nivesh Adhiniyam, 1973~ is also statutorily required to make such contributions on such counts. Xerox copies of note sheets prepared by the appellant Authority before making sanction of such contributions to the concerning Jhankis are being submitted herewith for kind perusal and record of Your Honour, as Annexure A-9. 01 to A-9. 06 [PB Page no. 103 to 108}.

5. Your Honour, it is submitted that the appellant Authority has been making its contributions towards Jhanki Pradar-shani & Seminars, Devi Ahilya Utsav, Malwa Utsav etc. over the last many years and such contributions have duly been accepted and allowed by the Income-T’ax Authorities in the scrutiny assessments of the appellant framed under s.143(3) of the Act and in none of the previous assessment years, the claim of the appellant Authority as regard to the aforesaid contributions have been doubted by the Department. It is submitted that there is no change in the circumstances of the case for the assessment year under consideration and, therefore, considering the decision of the Hon’ble Apex Court in the case of Radha Soami Satsang (supra) the claim of the appellant for the present year too deserves to be allowed fully. In view of the above facts and circumstances of the case, the addition of Rs.31,27,208/- so made by the Ld. AO on account of contribution made to various Jhanki and Utsav deserves to be deleted in toto.

40. Per contra Ld. Departmental Representative (DR) supported the orders of the lower authorities.

41.We have heard rival contentions and perused the record placed before us. The issue relates to disallowance of expenses of Rs.31,27,208/-incurred towards the following:

The only issue which needs to be decided is that whether the alleged amount is liable to be disallowed as donation and charity or whether such amount incurred by the assessee is allowable as business expenditure. The objects of the appellant authority is that of charitable in nature and the same are covered under the last limb of the expression ‘Charitable Pur-pose’ as defined under section 2(15) of the Act i.e. ‘General Public Utility’. The assessee has also claimed exemption u/s 11 & 12 of the Act. However, in view of the decision of the Tribunal in assessee’s own case vide order dated 06.07.2010 in ITA No. 366/Ind/2008 the claim of exemption u/s 11 & 12 of the Act was declined. The matter is pending before the Hon’ble Jurisdictional High Court. Thus, the assessee authority has treated the activities carried out by the assessee in the course of business and not for the purpose of charity.

42 .Now looking to the nature of alleged expenditure which have been incurred towards Jhanki-Pradarshani & Seminar, Devi Ahilya Utsav & Malwa Utsav which primarily are not directly related to the business activity of the assessee but as we dis-cuss earlier in the preceding paras that the assessee authority is working as a quasi-Government Au-thority and works under the directions of the State Government. Against the benefits of getting the premium lands, housing projects, other development project from the Government assessee is also casted with the responsibility of incurring expenditure on the public utility programs. The assessee is able to earn profits because the State Government give the benefit of providing powers to acquire urban and rural land for various projects at concessional rates. Government is able to gets land at concessional rates because it has to work in public interest and also provide various facilities, such as public amenities flyovers, tree plantation, street lights, cultural events, business seminars, etc.

43. It was brought to our notice that the alleged expenses were not incurred by the authority suo moto but it was incurred as per the directions of the State Gov-ernment. The events i.e. Jhanki-Pradarshani & Seminar, Devi Ahilya Utsav & Malwa Utsav are events where public at large participate. It is well evident that for such events the assessee is sponsoror. Such type of expenses are in he nature of advertisement since it gives name and fame to the IDA and increase the ‘Brand’ value which indirectly helps in getting more busi-ness.

44. We observe that similar issue came up before the Hon’ble Delhi High Court in the case of Pr. CIT vs. M/s Indian Farm Forestry Development dated 31st October 2018 wherein Hon’ble Court held as follows:

“13. In the facts of the present case, the object and purpose of the respondent-assessee’ is, to engage and work for social and economic upliftment of the rural poor, construct water reservoirs, etc. It is established for this purpose and receives grants and dona-tions from third parties with the said objective and purpose. M/s Indian Farmers Fertilizer Coopera-tive Ltd. had sold’ and supplied fertilizer that was marketed/sold by the respondent-assessee to earn profit income, because the respondent-assessee was engaged, in social and economic development activities, Association and business relationship with M/s Indian Farmers Fertilizer Cooperative Ltd. was predicated and connected on the respondent-assesse performing and undertaking the social-welfare economic activities. Grants received from government and foreign’ agencies were to be uti-lized for the specific purpose i.e. the object and purpose of social and economic upliftment etc. If the respondent assessee was not engaged in and had not undertaken the aforesaid activities, it would not have received the grants and would not have undertaken sale and marketing of fertilizers. The respondent-assessee was therefore required to incur the said expenditure, in order to run, operate and continue its business.

14. We perceive that there is a degree of contradiction in the plea raised by the Revenue, when they claim that the respondent-assessee was not engaged in ‘business’ or the expenditure incurred was not on account of business expediency. Income earned by the respondent-assessee has been treated and taxed under the head profits and gains of business and profession. In the given facts, it would be incongruous for the Revenue to urge that the purpose and goal behind the activities undertaken by the respondent-assessee was not commercial but chari-ty as the intent and motive behind them was not to earn profit. The expenditure incurred to carry out social and economic development would in this background constitute a ‘business’ or ‘commer-cial’ activity undertaken by the respondent assessee. It would be a, contradiction in terms, if we hold that the expenditure would be non-deductible expenditure or expenditure without business expedi-ency. Under section 37 of the Act it does not matter whether or not the expenditure was in the na-ture of donation or Section 8OG of the Act was not attracted. The conditions stated in Section 37 of the Act matter and constitute the test. Expenditure incurred in furtherance of and connected with the business and commercial activities for which the respondent-assessee was established cannot be disallowed as expenditure not relatable and incurred for ‘business’ purpos-es.

15. On the question of capital expenditure, the assessing officer did not refer to or examine whether the capital assets created, were for third party villag-ers. The respondent-assessee was not the owner of the assets created and develops, The, assets created were not-capital assets in the hands of the respondent-assessee. The respondent – assessee had contributed, developed, financed and created assets which belonged to third persons. The ex-penditure incurred therefore would not be ‘capital’ in nature in the hands of the respondent as-sessee.

16. Accordingly, the appeal filed by the Revenue has no merit and is dismissed, without any order as to costs.”

45. The facts of the above referred judgment and similar to the facts placed before us. We, therefore, respectfully following the judgment of Hon’ble Delhi High Court in the case of Pr. CIT vs. M/s. Indian Farm Forestry Development, are of the considered view that the alleged amount should be allowed as business expenditure as it indirectly help to increase business of the assessee authority. Thus, disallowance of Rs.32,27,208/- stands deleted and the ground no. 2 of the assessee is allowed.”

14. DR for revenue did not show any change in facts or law governing the issue or non-applicability of earlier view of Co-ordinate Bench for any reason. Therefore, keeping the consistency, we adopt the view taken by Co­ordinate Bench and uphold the deletion of disallowance by CIT(A). The reve-nue’s grounds qua this issue are dismissed.

Issue No. (iii) – Deduction of ‘IMC Transfer Expenses’:

15. The assessee debited to its P&L A/c certain expenses incurred by it for the Schemes trans-ferred to Indore Municipal Corporation (IMC) and claimed deduction under the heading “IMC Trans-fer Expenses”. The AO disallowed such expenses but in first-appeal, the CIT(A) reversed AO’s action and deleted disallowance. For this issue, we straightaway refer the order passed by Ld. CIT(A) which vehemently narrates the premise on which the AO made disallowance, the assessee’s submissions and the reasoning for reversing AO’s action as under:

and implementation of various schemes, the appellant Authori-ty acquires land from public under the provisions of Land Acquisition Act, 1894 for the compensa-tion determined in accordance with such Land Acquisition Act, 1894. After development of the schemes, the appellant Authority part with the land and building so developed in the schemes in ac-cordance with the rules made by the State Government in this behalf by virtue of section 58 of the Madhya Pradesh Nagar Tatha Gram NiveshAdhiniyam, 1973. Once the entire plots/constructed properties in the schemes are leased out by the appellant authority, the entire scheme is transferred to the lndore Municipal Corporation (lMC). That, after transferring the schemes to the IMC, the ap-pellant authority is required to ensure the repairs and maintenance of the schemes in accordance with the directions and instructions of IMC. In pursuance of such objective, the appellant authority had consistently been incurring expenditure on development of roads, gardens, street lighting, land-scaping and garden development, patchwork of the constructed roads, underground work, etc. Alt-hough the appellant Authority is not carrying out its activity with the commercial motive but even if it is presumed to be so, then too, in common business parlance, such an activity of the Authority can be equated with the activity of post sales services by a trader. The findings of the learned AO are fac-tually incorrect and patently faulty for the reasons stated as under:

1. The learned AO has not disputed that the appellant authori-ty has genuinely incurred these expenditure in pursuance of its objectives for which it has been con-stituted under an enactment of State Legislation. The learned AO has also not doubted the genuine-ness of the incurrence of expenditure as claimed by the appellant authority.

2. The learned AO has also not disputed that the expenses in-curred by the appellant Authority under the head ‘Expenses for Schemes transferred to lndore Mu-nicipal Corporation’ do not have any connection with the various schemes developed by it. In other words, by incurring such expenditure, the stock of the appellant Authority does not get affected. Further, the entire expenditure have been incurred for the repairs and maintenance of the schemes already transferred to lMC without having any accretion to its asset or without creating any benefit of enduring nature.

3. As regard the finding of the AO to the effect that the ‘Ex-penses for Schemes transferred to lndore Municipal Corporation’ were not incurred wholly and ex-clusively for the purposes of business or for the purposes of earning of income, it is submitted that the appellant Authority is required to incur these expenses which are within the very objects of the appellant Authority for which it has been constituted.

4. It shall be pertinent to note that the expenses under the head ‘Expenses for Schemes transferred to lndore Municipal Corporation’ have been regularly in-curred by the appellant Authority from the past several years. It shall also be worthwhile to note that the appellant Authority is consistently undergoing scrutiny assessments under s.143(3) of the Act for other assessment years as well and in all such years, the expenses incurred by the appellant Authority under the head ‘Expenses for Schemes transferred to lndore Municipal Corporation’ have been fully allowed without any interference. On a perusal of the figures for the previous year ended on 31-03-2013, at page no. 40 of the Paper Book, it shall be observed by Your Honour that in the immediately preceding previous year, the appellant Authority had incurred a sum of Rs.6,81,37,829/- under such head and the entire expenses were duly allowed even in a scrutiny as-sessment made under s. 143(3) of the Act. For our such assertion, a reference may kindly be made to the assessment orders for the earlier assessment years, which are being submitted in this Paper Book.

5. It shall be pertinent to note that there has been no change in the facts and circumstances of the case prevailing in the assessment year under consideration and those prevailing in the aforesaid assessment years. In such a situation, taking an adverse view in the assessment year under consideration by the learned AO is completely unjustified and unwarranted. For such proposition, we place reliance on the decision of the Hon’ble Supreme Court in the case of RadhaSoamiSatsang Vs. CIT (1992) 193 ITR 321 (SC).

5.2 Adjudication of ground nos. 8 to 11; The prime object of the ap-pellant is to implement development plan, prepare town development schemes and development of land for the purpose of expansion or improvement of the area specified in the Notification. It is well established that the appellant undertakes various development and construction activities related to development of town. After completion of various projects they are transferred to the Indore Mu-nicipal Corporation (IMC) and after transferring the schemes to the IMC, the appellant authority is required to ensure the repairs and maintenance of the schemes in accordance with the directions and instructions of IMC. In pursuance of such objective, the appellant authority had consistently been incurring expenditure on development of roads, gardens, street lighting, landscaping and gar-den development, patchwork of the constructed roads, underground work, etc. The entire range of activities corresponds to the main objective of the appellant.

5.3 The assessing officer stated that the expenses incurred on schemes which are transferred or already sold projects of the assessee authority are not allowable as business expenditure. In the case of M/s Indian Farm Forestry Development (ITA No. 215/2017) Delhi High Court held that, it would be incongruous for the Revenue to urge that the purpose and goal behind the activities undertaken by the respondent-assessee was not commercial but chari-ty as the intent and motive behind them was not to earn profit. The expenditure incurred to carry out social and economic development would in this background constitute a ‘business’ or ‘commer-cial’ activity undertaken by the respondent assessee. It would be a, contradiction in terms, if we hold that the expenditure would be non-deductible expenditure or expenditure without business expedi-ency, Under section 37 of the Act it does not matter whether or not the expenditure was in the nature of donation or Section 80G of the Act was not attracted. The conditions stated in Sec-tion 37 of the Act matter and constitute the test. Expenditure incurred in furtherance of and con-nected with the business and commercial activities for which the respondent assessee was estab-lished cannot be disallowed as expenditure not relatable and incurred for ‘business’ purpos-es. Maintenance and upkeep of various completed projects is part of the appellant’s business which is urban development. It is part of appellant’s commitment to its main client that is Indore Municipal Corporation. So there is no incongruity in the claim of expenses incurred by the appellant for Schemes transferred to Indore Municipal Corporation and hence deserve to be allowed. As a re-sult, grounds 8, 9, 10 and 11 are allowed.

16. Before us, Ld. DR for revenue/appellant made following submissions supporting the order of AO:

i. The assessee has transferred schemes to IMC. After transfer, IMC started collecting municipal tax. Therefore, it is the IMC who will incur expenses for those schemes, why the assessee shall incur expenses?

ii. The assessee has neither shown any obligation to incur impugned expenses under any law nor filed any agreement with the IMC creating any such obligation.

iii. The CIT(A) has not verified genuineness of expenses and still delet-ed disallowance made by AO.

17. Per contra, Ld. AR for assessee/respondent made following contentions supporting the order of CIT(A):

(i) He referred Page 293-297 of Paper-Book-2 where tabular charts for different assessment-years are filed. These charts give “Scheme Numbers” transferred to Indore Municipal Corporation (IMC) and schemewise details of expenses incurred by assessee under the headings such as “land acquisition/diversion expenses (with sub­headings as survey, planning, land acquisition, land diversion, land registry)” and “development/implementation expenses (with sub­headings as road, culverts, underground services, street lighting, land scaping, garden develop-ment, external development, civil construction, property tax, etc.)”. Ld. AR submitted that the as-sessee has incurred those expenses, though after transfer of schemes to IMC, but for the schemes floated by it. Taking illustration of first item of expenditure which involves major portion i.e. “land acquisition/ diversion expenses”, Ld. AR explained that even after transfer of schemes to IMC, the assessee had to pay compensation/additional compensation/purchase price to the sellers from whom lands were purchased. So far other items of expenses under the heading “develop-ment/implementation expenses” are concerned, Ld. AR submitted that those are the expenses in-curred for maintenance/ rectification/defective work, etc. in the schemes developed by assessee which the assessee was obligated to incur even after transfer of those schemes to IMC.

(ii) Ld. AR further submitted that the assessee is a wing of State Govt.; it maintains every voucher/document of expenses incurred; its accounts are duly audited by various auditors; there is a system of approval of every penny spent at all levels by authorities; every expenditure is incurred as per pre-set procedure which at times includes inviting bids/tenders. There-fore, there cannot be slightest doubt qua the necessity and genuineness of expenses incurred by as-sessee. He submitted that the AO has nowhere doubted the genuineness of expenses claimed by assessee.

iii. The assessee has claimed such expenses consistently in earlier years and the assessing authority has allowed the same in scrutiny assessments u/s 143(3). Ld. AR has filed a chart at Page No. 37 of Written-Submission showing status of assessee from AY 2008-09 onwards to show that no disallowance was made in earlier years. However, contrary to this, the AO has made disallowance for the first time in AY 2014-15 and thereafter followed the same tune. Ld. AR submitted that he is consciously aware that the principle of res judicata does not ap-ply to tax proceedings yet the principle of consistency very much applies and unless there is change in facts or law, which is not there in present case, the assessing authority must follow the approach adopted in earlier years as per decision in Radha Soami Satsang Vs. CIT (1992) 193 ITR 321 (SC). Ld. AR submitted that the AO has allowed the deduction of very same expenses in earlier years after due scrutiny and there is no change in nature of expendi-ture or the law governing deduction thereof.

iv. That the CIT(A) has rightly reversed action of AO and deleted disal-lowance after due consideration. The order of CIT(A) is very much correct and must be upheld.

18. We have considered rival submissions of both sides and perused the documents held on record including the orders of lower-authorities. Admittedly, the assessee is a development authority estab-lished under statue. The assessee has developed residential/commercial schemes and handed over those schemes time to time to IMC as per the system evolved by Govt. After transfer to IMC, the as-sessee has incurred expenses in connection with those schemes and debited in P&L A/c under a separate heading “IMC Transfer Expenses”. It is this expenditure which the AO has disallowed. The main reasoning which the AO has assigned for disallowance is when the assessee is no longer owner of schemes, why the expenditure would be incurred by assessee? The Ld. AR for assessee has drawn our attention to the charts giving complete details of the schemes and expenses incurred by assessee for those schemes. Ld. AR has also explained that the major item of expenditure is for “land acquisi-tion/diversion” which is basically in the nature of compensation/additional compensation/purchase price paid by asesseee to the vendors from whom the lands (over which the schemes were floated) were purchased. The other expenses incurred for “development/construction activities” were basi-cally for maintenance/ rectification/defective work which the assessee was obligated to carry out even after transfer of schemes to IMC. Therefore, the expenses incurred by assessee are prima facie for its own purpose although they have been incurred after transfer of schemes to IMC. Ld. AR’s submission is also meritorious that the assessee is a wing of State Govt.; the assessee maintains eve-ry voucher/document of expenses incurred; the assessee’s accounts are duly audited by various au-ditors; there is a system of approval of every penny spent at all levels by authorities; every expendi-ture is incurred as per pre-set procedure which includes inviting bids/tenders. Therefore, looking into these aspects, there cannot be any doubt qua the necessity and genuineness of expenses incurred by assessee. Even in assessment-order, the AO has not doubted the genuineness of expenses claimed by assessee. That apart, it is also noteworthy that the assessee has claimed such expenses consistently in earlier years and the assessing authority has allowed the same in scrutiny assess-ments u/s 143(3). The disallowance has been made for the first time in AY 2014-15 without any change in facts. It is an accepted principle that the tax authorities have to be consistent in approach unless there is any change in facts or law. We find that the Ld. CIT(A) has deleted AO’s disallowance by taking a judicious approach having regard to these facts. Therefore, we do not find any reason to interfere in the order of CIT(A), the same is hereby upheld. Consequently, the revenue’s grounds qua this issue are dismissed.

Issue No. (iv) – Deduction of ‘Land acquisition and diversion Expenses’:

19. This issue relates to AY 2016-17 only. The AO has made disallowance by passing following order:

“5.6 Assessee has also claimed expenses under the Land Acqui-sition and Diversion Expenses for Schemes Rs. 22,23,19,442/- and Development and implementa-tion Expenses for Schemes Rs. 50,81,13,027/-. Though these expenses is forming part of WIP/Stock but that include expenses in capital in nature being the part of capital assets as discussed in para no. 5.2 and 5.3. Assessee has failed to submit the details of such expens-es of revenue and capital in nature. Assessee has shown inventory of Rs. 1189,82,01,986/-which includes assets which are capital in nature and assessee enduring benefits from such assets. It is also facts that inventory shown is accumulation from years to years which includes finished properties Rs. 450,93,52,820/- as on 31/03/2015 and Rs. 441,72,74,263/- as on 31.03.2016. Assessee earn income from such part of capital assets in the form of rent, hiring charges and miscel-laneous income etc. Therefore capital assets forming part of inventory of finished property cannot be denied. Therefore, expenses incurred on such capital assets being part of semi-finished properties cannot be denied. During the year expenses incurred on semi­finished properties is Rs. 72,98,11,470/- which forming part of semi-finished properties as on 31.03.2016 Rs. 748,09,27,723/- in which expenses in capital nature cannot be denied. Considering the above facts and circumstances of the case 10% of expenses claimed under the heads Land Acquisition and Diver-sion Expenses for Schemes and Development and implementation Expenses for Schemes amounting to Rs. 7,30,43,247/-) (10% of (Rs. 22,23,19,442/- + Rs. 50,81,13,027/-) treating it as expenses is in capital in nature disallowed and added to the total income of the assessee.”

[Emphasis supplied]

20. In first-appeal, the CIT(A) has deleted disallowance by following order:

“7.2 Adjudication of ground nos. 15 to 18; Assessee claimed Land Acquisition & Diversion Expenses for Schemes at Rs. 22,23,19,442 and Development Im-plementation Expenses for Schemes at Rs. 50,81,13,027 (Total Rs. 73,04,32,469). The expenditure related to developed properties are taken as cost of inventory and the general expenditure incurred for land acquisition, diversion, development and implementation are claimed as revenue expendi-ture. The AO held that such expenses include capital expenditure being part of capital assets earning rent and disallowed 10% of expenses also on the ground that the benefits of such expenses shall be of enduring nature and the appellant shall reap the benefits beyond the current assessment year. Pertinently, the genuineness of the said expenses is not in dispute. These expenses are not a direct cost of any specific project but are indirect costs incurred by the assessee for development of land allotted by government or municipal corporation. The said expenses have been incurred for the main objective of the assessee and these expenses cannot be tagged with any specific project as the ex-penses are indirect expenses of the entire activity. As per accounting standards all direct costs shall be capitalized and the indirect costs are charged to revenue.

7.3 Accounting Standard 2 governs valuation of inventories. ‘Cost’ comprises all of the costs of purchase, cost of completion and other costs incurred “in bring-ing the inventories to their present location and condition”. Non-specific expenditure as well as the selling cost should not be carried forward and capitalized to the project cost but should be expensed. It is also noticed that no tangible asset is being created by treating 10% expenses as capital expendi-ture. Looking from the another angle about the expenditure claimed by the assessee, it would be apparent that if these expenditures are capitalized, then the assessee would be carrying on the cost of the project for the period till the project is sold. Naturally the cost of the project would be in-creased by these amounts and the revenue is duty bound to grant the deduction of this cost of pro-ject at the time of sale. The appellant has given the complete details of expenses and the AO’s action in disallowing 10% is arbitrary and hence not justified. The AO has lost sight of the fact that these expenses in no way were directed to any specific asset as the objective of the appellant is development of land and building. Thus, these expenses cannot be tagged with any of the specific asset as these expenses are indirect expenses of the entire projects. Since the expenses are necessary being incurred for the development objectives of the appellant, these are allowable expenses. This view was upheld by Hon’ble Courts in the case of M/s. Godrej Tea Ltd. V. DCIT (2010) (4) ITR 649 (Mum), Southern Roadways Limited (2008) 220 CTR 298 (Mad), CIT vs. Indian Visit Com (P) Ltd. (2009) 176 Taxman 164 (Del) and Brehan Maharashtra Sugar Syndictate Ltd. Vs. DCIT (2009) 28 DTR) 265 (Bom) and Club Resorts P. Ltd. vs. CIT (2006) 203 CTR 587 (Mad.). On considering the facts and details mentioned hereinabove the AO’s action in treating 10% of Land Acquisition, Diver-sion, Development and Implementation Expenses as capital expenditure is not justified and the same is directed to be deleted. As a result ground nos. 15, 16, 17 and 18 are allowed.”

21. Ld. DR for revenue/appellant supported the order of AO. Per contra, Ld. AR for assessee sup-ported the order of CIT(A). Further, Ld. AR also submitted one important point that the AO has him-self noted in assessment-order that the expenses claimed by assessee are forming part of WIP/stock, therefore when it is so the claim of assessee is revenue-neutral because on one hand the assessee has debited expenditure to P&L A/c and on other hand there is a credit in P&L A/c in the form of WIP/stock. Ld. AR submitted that no disallowance is warranted in such a situation when there is effectively no claim by assessee. After a careful consideration, we find sufficient merit in the submission of Ld. AR. We agree that once the impugned expenses are included in closing inventory, effectively there is no deduction claimed by assessee and no disallowance is warranted. Therefore, the deletion made by CIT(A) is valid. Being so, we dismiss the revenue’s ground qua this issue being devoid of any merit.

22. Resultantly, assessee’s appeals are allowed and revenue’s appeals are dis-missed.

Order pronounced in open court on 01/01/2025