ITAT Directs Re-adjudication on allowbility of property tax paid in earlier years

Rare Townships Private Limited Vs DCIT (ITAT Mumbai)

Whether the adjustment of amount paid in earlier years on behalf of Collected BSD against the property tax liability of the assessee during the year under consideration would make the claim eligible for deduction under section 43B of the Act.

Rare Townships Private Limited contested a decision by the Commissioner of Income Tax (Appeals)-54, Mumbai, regarding the disallowance of property tax payments totaling Rs.1,74,00,780 for AY 2018­19. The crux of the matter revolves around the interpretation of Section 43B of the Income Tax Act, 1961, pertaining to the allowance of deductions for certain payments.

Rare Townships Pvt Ltd, a company engaged in construction projects in Mumbai, filed its income tax return for AY 2018-19, reporting a loss. The Assessing Officer (AO) scrutinized the return and disallowed the claimed deduction of Rs.1,74,00,780 under Section 43B for property tax payments made in previous years. Additionally, the AO questioned the credit for TDS claimed by the company.

The company appealed to the CIT(A), who upheld the disallowance, citing that the property tax payments were not made during the relevant assessment year. The dispute hinges on whether the adjustment of property tax payments against the company’s own liability qualifies for deduction under Section 43B.

The company argued that the payments, made on behalf of the Collector, Bombay Suburban District (BSD), were recoverable and thus eligible for deduction. It contended that the adjustment against its own liability should be allowed, emphasizing correspondence with authorities supporting the claim.

During the appeal before the ITAT, the company sought to introduce additional evidence to substantiate its claim. The ITAT admitted the additional ground for adjudication, highlighting the legal issue involved.

The ITAT analyzed Section 43B, emphasizing the legislative intent to allow deductions only for actual payments, not mere book entries. It noted the company’s argument that the adjustment was made against its own liability, necessitating a fresh examination of the evidence.

The ITAT directed the AO to reconsider the issue, considering the additional evidence and the alternate plea regarding the year of allowance for deduction. Similarly, it remitted the issue of TDS credit to the AO for examination in line with the year of income taxation.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal is against the order of the Commissioner of Income Tax (Appeals)-54, Mumbai [for short ‘the CIT(A)] dated 01.08.2023 for the AY 2018­19. The assessee raised the following grounds:

1. On the facts and circumstances of the case as well as in Law, the Learned Commissioner of Income Tax (Appeals), NFAC has erred in upholding the disallowance of Property tax payments amounting to Rs.1,74,00,780/ claimed in return filed u/s 139(1) of the Income Tax Act, 1961 by the Learned Assessing Officer.

2. The order under appeal is not only bad in law and invalid, but also against the principals of natural law of equity and justice.

3. The appellant craves leave to add, to amend, alter/delete and/or modify the above grounds of appeal on or before the final hearing.

2. The assessee is a limited company engaged in the business of building and constructing projects at Ghatkopar, Mumbai. The assessee filed the return of income for AY 2018-19 on 12.10.2018 declaring a loss of Rs.2,49,11,491/-. The return of income was processed under section 143(1) of the Income Tax Act, 1961 (the Act). The case was subsequently selected for scrutiny through CASS and the statutory notices were duly served on the assessee. On the perusal of the computation of income the Assessing Officer (AO) noticed that assessee has claimed deduction of Rs.1,74,00,780/- under section 43B of the Act towards Property Tax. The AO called on the assessee to furnish proof of payment made during the relevant year along with justification on allowability of the same. From the details furnished by the assessee, the AO noticed that the deduction has been claimed against the payments made during the previous year relevant to AY 2011­-12 and 2012-13 and therefore, concluded that the claim of Property Tax is not justifiable under section 43B of the Act. Accordingly, the AO disallowed the sum of Rs.1,74,00,780/-. The AO also noticed that the assessee has claimed credit for TDS of Rs. 41,88,989/- and called on the assessee to justify the claim having regard to the Revenue Recognition as per the provisions of section 199 r.w.r. 37BA of the Income Tax Rules, 1962 (for short ‘the Rules’). The assessee submitted that the TDS claimed pertains to advances received from the customers and that the revenue is not offered to tax only due to the accounting policy followed by the assessee. Therefore the AO denied the credit towards TDS claimed by the assessee for the reason that TDS credit can be allowed only in the year in which the income has offered to tax as per the provisions of section 199 r.w.r. 37BA of the Rules.

3. Aggrieved the assessee preferred further appeal before the CIT(A) against the disallowance made under section 43B of the Act towards Property Tax. The CIT(A) confirmed the disallowance for the reason that the payments towards the property tax is not made during the year under consideration and therefore, not allowable as per the provisions of section 43B of the Act. Aggrieved the assessee is in appeal before the Tribunal.

4. Before us the assessee raised an additional ground contending the action of the AO in not allowing the credit for TDS claimed by the assessee. In support of the admission of this additional ground, the ld. AR. submitted that it involved only adjudication of substantial question of law and no fresh facts were required to be examined. The ld.DR opposed the admission of additional ground. Keeping into consideration the entire conspectus of the facts and circumstances of the case and the additional ground raised before us we are convinced that its adjudication does not require any fresh investigation of facts and involves a legal issue. Therefore respectfully following the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits.

5. With regard to the disallowance of Property Tax claimed under section 43B of the Act, the ld. AR submitted that the assessee during the AY 2011-12 and 2012-13 made payments towards Property Tax on behalf of Collector, Bombay Suburban District (BSD). The ld. AR further submitted that the amount paid is to be recovered from the Collector, BSD since the assessee is not the owner / occupier but only a facilitator to Government work under standard contract and therefore the amount paid were accounted under the head “Advances” in the balance-sheet of the assessee. During the year under consideration the assessee adjusted the above payments against its own property tax liability and claimed the same as a deduction under section 43B of the Act. The ld AR in this regard drew our attention to correspondence with concerned authorities, requesting for adjustment of the property tax paid on behalf of Collector, BSD against assessee’s property tax liability. The ld. AR also submitted that the provisions of section 43B have to be liberally interpreted and therefore the amount adjusted by the assessee against its own liability towards property tax should be allowed as a deduction.

6. The ld. AR submitted a petition for admission of additional evidence (containing 56 pages) in support of the claim that the property tax paid during AY 2011-12 and 2012-13 were made on behalf of Collector, BSD and that a request has been submitted to adjust the said payments against the property tax demand of the assessee. The ld. AR prayed for admission of the additional evidence which would prove the claim of the assessee that the property tax liability is settled against the earlier payments made on behalf of Collector, BSD and accordingly allowable under section 43B of the Act.

7. The ld. DR on the other hand vehemently opposed the admission of additional evidence stating that the assessee had enough opportunities to submit these evidences before the lower authorities which the assessee failed to do. The ld. DR therefore, argued that the documents not submitted is an afterthought and cannot be admitted. On merits of the issue the ld. DR further submitted that the provisions of section 43B are very clear that certain deductions need to be allowed only on payment basis and that book entries adjusting advances against the property tax liability cannot be treated as actual payment for the purpose of deduction under section 43B of the Act. The ld. DR also submitted that the adjustment of property tax claimed by the assessee was accepted by Collector, BSD in subsequent years only as submitted by the assessee and therefore even if the deduction should be allowed it can be allowed only during the year in which such adjustment was approved for adjustment. Thus, the ld. DR supported the order of the lower authorities.

8. We have heard the parties and perused the material on record. The details of payments made and claimed as a deduction under section 43B during the year under consideration by adjusting against the property tax liability is under –

9. The contention of the assessee for claiming the above sum as deduction is that the said payments which were made on behalf of Collector BSD is adjusted against its own liability since the same is recoverable. In other words, instead of recovering the amount and then making payment of its own liability separately, the assessee has adjusted the payments against own liability and therefore the assessee’s argument is that the property tax is eligible for deduction under section 43B. The revenue’s reason for denying the deduction under section 43B of the Act is that the payments have not been made during the year under consideration but during earlier years and that section 43B allows the claim of deduction only in the year in which such sum is actually paid. In assessee’s case there is no dispute that the payments which the assessee has adjusted against the property tax liability were made during the AY 2011-12 and 2012-13 and that the lower authorities have not disputed the fact that the amount paid is on behalf of Collector BSD. The only issue is that whether the adjustment of amount paid in earlier years on behalf of Collected BSD against the property tax liability of the assessee during the year under consideration would make the claim eligible for deduction under section 43B of the Act.

10. In this regard it is relevant to note that sub-section (a) to section 43B of the Act provides that any sum payable by the assessee by way of tax, duty, cess or fee by whatever name called shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed, only in the previous year in which such sum is actually paid by the assessee. The legislative intent behind the enactment of section 43B was to plug the loophole in the statute which permitted deductions on an accrual basis and to prevent the assessee from claiming the deduction on the basis of mere book entries without actually paying the tax to the State. Therefore in our considered view the harmonious reading of the provision would require that the assessee is entitled for deduction towards actual payments and the same cannot be denied for the reason that the payment precedes the incurrence of liability. From the perusal of the order of the CIT(A) we noticed that the assessee had justified the claim on a different ground that the amount is claimed as a deduction as write off of advance payments made towards property tax. The assessee had submitted before the first appellate authority that there is a direct nexus between the payment made towards property tax and the business of the assessee and therefore the write off should be allowed as a deduction. The assessee has now submitted before us that the deduction under section 43B is made on the basis that the payment of property tax on behalf of Collector BSD in AY 2011-12 & 2012-13 is adjusted against its own liability of property tax during the year under consideration. In this regard the additional evidences have now been submitted by the assessee to substantiate that the property tax paid during the earlier years was paid on behalf of Collector, BSD and that the same is adjusted against the property tax liability of the year under consideration on the basis of the request made to the relevant authorities in this regard. Since the lower authorities did not have opportunity to verify these additional evidences in support of the claim of the assessee, we deem it fit to remit the issue back to the AO with a direction to consider the additional evidences now filed by the assessee and examine the issue afresh to be decided in accordance with law. The AO is further directed to consider the alternate plea of the assessee with regard to the year in which the deduction to be allowed i.e. the year in which the adjustment is made or the year in which the property tax paid was allowed by the concerned authorities to be adjusted against the liability of the assessee. Needless to say that a reasonable opportunity of being heard be given to the assessee.

11. With regard to additional ground raised claiming credit for TDS, we remit the issue to the AO to examine and allow the credit for TDS in the year in which the income is offered to tax.

12. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 03 -04-2024.