Kadavanthara Builders Pvt Ltd Vs ITO (ITAT Bangalore)
ITAT Bangalore held that legal and professional charges being incurred towards business are allowable as revenue expenditure.
Facts- During the course of assessment proceedings, the AO observed that the main source of income during the impugned assessment year was income from deposits. As per the profit and loss accounts, the assessee had shown interest income of Rs. 17,35,627/- and advance written back of Rs.3 1,99,859/-. The fixed deposits were made out of its capital funds. The AO noted that assessee company has not carried out its main business and not generated any revenue from the main business activities. From the interest income, the assessee company has claimed expenses of Rs. 39,21,033/- which were not connected with the interest income earned since there was no nexus between income admitted and expenditure claimed. According to the AO, the expenditure claimed by the assessee cannot be allowed and the interest income received by the assessee is to be treated as income from other sources and he added the same to the total income of the assessee.
Conclusion- Held that the legal and professional charges has been incurred towards business of the assessee for maintaining the peaceful possession of the land acquired. Therefore, these expenditure would be treated as revenue expenditure. Accordingly, I allow these grounds raised by the assessee on this issue.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These two appeals by the assessee are against the common order passed by the CIT(Appeals)-8, Chennai dated 25/6/2019, filed at Chennai Bench on 27/08/20 19 and later on the case was transferred to Bangalore Benches vide order sheet dated 20/08/2020.
2. The issues involved in these two appeals are identical and arise under identical facts and circumstances & heard together. We deem it convenient to pass a common order for the sake of brevity.
I TA No.2484/CHNY/2019
3. The grounds of appeal filed by the assessee is as under:-
“1. General Ground
1. The learned Income Tax Officer, Corporate Ward 4(3). Chennai [‘AO’J erred in passing the order under section 143(3) of the Income-tax Act, 1961 [‘the Act’] in the manner passed by him and the Commissioner of Income Tax (Appeals)-8, Chennai [‘C1T(A)’ erred in upholding the said order of the learned AO, to the extent prejudicial to the appellant. The order of the CIT(A) being bad in law is liable to be quashed in its entirety.
2. Grounds relating to limited scrutiny
2.1. The learned CIT(A) and learned AO erred in concluding the assessment on issues and matters which are different from the reasons for limited scrutiny communicated during the assessment proceedings.
3. Grounds relating to reclassification of land from ‘stock-in- trade’ to ‘capital asset’
3.1. The learned CIT(A) has erred in concurring with the learned AO in re-characterizing the land held by the Appellant from ‘stock-in-trade’ to ‘capital asset’.
3.2. The learned CIT(A) erred in concluding so, without appreciating that:
(a) the appellant is engaged in the business of development, sale, advisory and other real estate development in the accomplishment of which the impugned land was held by it as stock-in-trade.
(b) the said land was classified/treated as stock-in-trade in books of accounts and the audited financial statements.
4. Grounds relating to addition of interest income amounting to Rs. 17,35,627 as income from other sources
4.1. The learned CIT(A) has erred in concurring with learned AO in assessing the interest income of Rs. 17,35,627 under the head ‘income from other sources’, as opposed to assessing the same under the head ‘profits and gains of business or profession; as claimed by the Appellant.
4.2. Even otherwise, the learned CIT(A) and AO have erred in making an addition of interest income from fixed deposits amounting to Rs. 17,35,627 as income from other sources, without appreciating that the FD interest of Rs. 1 7,35,627 is already included in the returned income and income before adjustment of brought forward loss amounting to Rs. 10, 13,411 as per the assessment order; thereby resulting in double taxation of interest income.
5. Grounds relating to disallowance of expenditure
5.1. The learned CIT(A) has erred in not allowing the entire expenditure incurred and claimed by the appellant amounting to Rs. 39,21,033.
5.2. The learned CIT(A) and AO erred in not appreciating
(a) that the appellant had set-up and commenced its business in the earlier years and that the expenditure incurred after the date of setting up of the business is allowable expenditure;
(b) that the expenditure incurred by the appellant neither relate to acquisition of any asset nor is attributable to any asset and therefore cannot be capitalized to the cost of assets;
(c) that the impugned expenditure is revenue in nature;
(d) the judicial precedents relied by the appellant in this regard.
5.3. Assuming without admitting that the said expenditure is not allowable under the head profit and gains from business or loss’, the same should be allowed as a deduction under the head ‘income from other sources’.
6. Grounds relating to enhancement of income
6.1. The learned CIT(A) erred in enhancing the assessed income by a sum of Rs. 25,46,089 by recharacterizing legal and professional expenditure as capital expenditure.
6.2. On facts and in the circumstances of the case and law applicable, the direction of the learned CIT(A) to enhance the income is contrary to facts, bad in law and liable to be quashed.
7. Ground on set-off and carry forward of business loss
7.1 Without prejudice to the above, the learned AO has erred in not appreciating that the appellant is eligible to set-off brought forward losses as claimed in the return of income.
7.2. Assuming without admitting that the interest income of Rs. 17,35,627 is to be classified as income from other sources, the resultant loss under the head profits and gains of business or profession’ (on account of deduction of interest income) would constitute business loss and would be eligible for set-off against income from other sources’.
8. Grounds relating to levy of interest under section 234B and section 234D).
8.1. The learned AO erred in levying interest under section 234B and section 234D. On facts and circumstances of the case and law applicable, levy of interest tinder section 234B and section 234D is not leviable. The appellant denies its liability to pay any interest.
The grounds mentioned above are independent and without prejudice to the other grounds preferred by the Appellant. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or, at the time of hearing of the appeal, so as to enable Income Tax Appellate Tribunal to decide the appeal according to law.”
ITA No.2485/CHNY/2019
4. The grounds of appeal filed by the assessee is as under:-
“1. General Ground
1.1. The learned Income Tax Officer, Corporate Ward 4(3), Chennai [ ‘AO’] erred in passing the order under section 143(3) of the Income-tax Act, 1961 [‘the Act’] in the manner passed by him and the Commissioner of Income Tax (Appeals)-8, Chennai [ ‘CIT(A)’] erred in upholding the said order of the learned AO, to the extent prejudicial to the appellant. The order of the CIT(A) being bad in law is liable to be quashed in its entirety.
2. Grounds relating to limited scrutiny
2.1. The learned CIT(A) erred in confirming the validity of the limited scrutiny vide notice under section 143(2) dated 04.05.20 16, although the same has been issued without stating the reasons for such limited scrutiny.
2.2. The learned CIT(A) failed to appreciate that the notice under section 143(2) dated 04.05.20 16 is not in consonance with the CBDT Instruction No. 20 of 2015 dated 29.12.2015 which mandates that in ‘Limited Scrutiny’ cases, the reasons/issues for the scrutiny shall be communicated to the assessee concerned in the notice and in the absence of communication of such reasons, the same is invalid and void-ab-initio.
2.3. Without prejudice to the above, the learned CIT(A) and learned AO erred in concluding the assessment on issues and matters which are different from the reasons for limited scrutiny communicated during the assessment proceedings.
3. Grounds relating to reclassification of land from ‘stock-in-trade’ to ‘capital asset’
3.1. The learned CIT(A) has erred in concurring with the learned AO in re-characterizing the land held by the Appellant from ‘stock-in-trade’ to ‘capital asset’.
3.2. The learned CIT(A) erred in concluding so, without appreciating that:
(a) the appellant is engaged in the business of development, sale, advisory and other real estate development in the accomplishment of which the impugned land was held by it as stock-intrade.
(b) the said land was classified/treated as stock-in-trade in books of accounts and the audited financial statements.
4. Grounds relating to capitalization of expenditure to cost of project amounting to Rs.15,73,839
4.1. The learned CIT(A) and AO have erred in capitalizing the revenue expenditures incurred and claimed amounting to Rs. 15,73,839 to the cost of project, without appreciating
(a) that the appellant had set-up and commenced its business in the earlier years and that the expenditure incurred after the date of setting up of the business is allowable expenditure;
(b) that the expenditure incurred by the appellant neither relate to acquisition of any asset nor is attributable to any asset and therefore cannot be capitalized to the cost of assets;
(c) that the impugned expenditure is revenue in nature;
(d) the judicial precedents relied by the appellant in this
4.2. Assuming without admitting that the said expenditure is not allowable under the head profit and gains from business or loss’, the same should be allowed as a deduction under the head ‘income from other sources’.
5. Grounds relating to enhancement of income
5.1. The learned CIT(A) erred in enhancing the assessed income by a sum of Rs. 4,54,400 by recharacterizing legal and professional expenditure as capital expenditure.
5.2. The learned CIT(A) erred in not appreciating that the impugned sum of Rs. 4,54,400 forms part of Rs. 15,73,423 already disallowed by the learned AO in the assessment order, thereby resulting in double disallowance of the same expenditure.
5.3. On facts and in the circumstances of the case and law applicable, the direction of the learned CIT(A) to enhance the income is contrary to facts, bad in law and liable to be quashed.
6. Ground on set-off and carry forward of business loss amounting to Rs. 15,36,408
6.1. On facts and circumstances of the case and law applicable, the learned AO has erred in not appreciating that the loss declared during the year amounting to Rs. 15,36,408 should be allow be carried forward (after set-off of interest income of Rs. 37,431).
7. Grounds relatin2 to levy of interest under section 234B
7.1. The learned AO erred in levying interest under section 23413. On facts and circumstances of the case and law applicable, levy of interest under section 234B is not leviable. The appellant denies its liability to pay any interest.
The grounds mentioned above are independent and without prejudice to the other grounds preferred by the Appellant. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or, at the time of hearing of the appeal, so as to enable Income Tax Appellate Tribunal to decide the appeal according to law.”
ITA No.2484/CHNY/2019
5. The brief facts of the case are that the assessee company filed return of income on 29/11/2014 admitting nil income under the normal provisions of the Act and the income was shown at Rs.9,46,453/- u/s 115JB of the Act. The case was selected for scrutiny under CASS and statutory notices were issued to the assessee. During the course of assessment proceedings, the AO observed that the main source of income during the impugned assessment year was income from deposits. As per the profit and loss accounts, the assessee had shown interest income of Rs. 17,35,627/- and advance written back of Rs.3 1,99,859/-. The fixed deposits were made out of its capital funds. The AO noted that assessee company has not carried out its main business and not generated any revenue from the main business activities. From the interest income, the assessee company has claimed expenses of Rs. 39,21,033/- which were not connected with the interest income earned since there was no nexus between income admitted and expenditure claimed. According to the AO, the expenditure claimed by the assessee cannot be allowed and the interest income received by the assessee is to be treated as income from other sources and he added the same to the total income of the assessee.
6. From the assessment order, it is culled out that reason for selection of scrutiny was “large difference in the closing stock shown in the balance sheet and profit and loss account of the current year as per the return of income”. In this regard, the assessee was asked to reconcile the differences. The assessee submitted reply vide letter dated 15/11/2016, annexed the break-up of W-I-P and also produced the copies of the documents for purchase of lands. The total cost of land was Rs. 184.43 crores and in addition the following other expenses were also included in the W-I-P of Rs. 193.81 crores which has been reproduced by the AO in his assessment order as under:-
7. It was observed by the AO that the company has purchased land to the extent of 74 acres at Siruseri Village in 2007-08 for consideration of Rs. 184.48 crores & it was shown under the head Work-in-Progress. The assessee also incurred certain expenses which were included under the head Work-in-Progress, Accordingly, the entire expenses of Rs.193.81 crore were claimed by the assessee as work-in-progress and has not shown any closing stock in the income-tax Act return.
8. Further, the AO also observed that after purchase of land in 2007-08, the assessee has not carried out any business activities on the said land. The ld.AR of the assessee submitted that the assessee is persuading road connectivity but it has not submitted any proof to show that the land has been used as stock and activities have been carried out. The AO noted that the assessee company has also not got approval from the local authorities after a lapse of 9 years and has not done any activity on the said land. The assessee produced evidence for removal of high tension D/C line which was running on the land, which as per the AO will not go to prove that the land is only stock-in- trade. He also noted that even if the assessee has to sell the land as investment, the assessee company has to remove the high tension electric wire but for which he will not get customer, therefore, the land purchased by the assessee needs to be treated as capital assets and the AO computed the income as under:-
