Case Law Details

Case Name : DLF Ltd. Vs. JCIT (ITAT Delhi)
Appeal Number : ITA No. 4187/DEL/2015
Date of Judgement/Order : 29/09/2020
Related Assessment Year : 2010-2011
Courts : All ITAT (7323) ITAT Delhi (1715)

DLF Ltd. Vs. JCIT (ITAT Delhi)

Conclusion: Deduction of Rs. 1.78 Billion in respect of profits derived on account of development considerations of bare shells would constitute profits and gains derived from business of developing any Special Economic Zone within the meaning of Section 80 IAB and was allowable to DLF Limited.

Held: Assessee-company was engaged in the business of realistic development. The main issue was with regard to allowability of claim of deduction u/s.80IAB in respect of profit arising from sale of bare shell building in SEZ by assessee to M/s. DLF Pvt. Ltd. As a part of its business activities, assessee had undertaken to develop SEZ project in a Govt. designate Special Economic Zone after obtaining requisite approval under SEZ Act and SEZ Rules in terms of provisions of Section 80IAB. Assessee had undertaken to develop SEZ project which was duly approved by Government of India and later on had entered into MOU with co-­developer, wherein it was agreed that assessee shall develop the bare shell building and transfer to M/s. DLF Pvt. Ltd. (co-developer) for further development and lease of the same to eligible tenants. It was also agreed that land on which building was to be constructed will not be sold to the co-developer, M/s. DLF Ltd. but will be leased out for a definite period. It was the profit from such developmental activity, amounting to ₹ 11,19,06,82,702/- arising from transfer of bare shell building was claimed as deduction u/s.80IAB, after obtaining the approvals from ‘Board of Approvals, Ministry of Commerce and Industry’, Government of India in respect of SEZ Project. AO had submitted that transfer of building of co-developer could not be treated as a business activity and the income from such transfer could not be treated as business income. In fact, it was a sale of a building in the nature of capital asset. It was held that the lease was only in respect of land and same could not be applied on transfer of building. In any case, the recognition of revenue relating to real estate projects was governed by AS-7 and assessee had been consistently following POCM which had accepted by the Tribunal in assessee’s own case for AY 2006-07. Hence, such a reasoning of AO to disallow proportionate deduction could not be sustained. Assessee was eligible for deduction under Section 80IAB because they were in consonance not only under the SEZ but also Board of Approval for SEZ had approved such activities.

FULL TEXT OF THE ITAT JUDGEMENT

1. These are the cross appeals filed by the assessee as well as The Deputy Commissioner Of Income Tax, Circle 7 (1)), New Delhi (the Learned Assessing Officer/AO) against the order of Commissioner Of Income Tax (Appeals) – 3, New Delhi (the learned that CIT A) dated 14 May 2015 for assessment year 2010 – 11.

2. The assessee in its appeal in ITA number 4187/del/2015 has raised following grounds of appeal. That the learned CIT(A) has grossly erred in law and on the facts in restricting the disallowance made by Assessing Officer u/s 14A read with Rule 8D(ii) of the Income-tax Act, 1961, to Rs.37,97,74,00/- when no disallowance u/s 14A read with Rule 8D(ii) is warranted as the appellant had itself disallowed / added back Rs. 19,15,695/- u/s 14A. [Page 101-115 of CIT(A)’s Order]

2.1 That learned CIT(A) has grossly erred in law and on the facts in confirming the net addition of Rs.7,69,038/- [i.e. after allowing standard deduction @ 30% on gross addition of Rs. 10,98,626/- which works out to Rs.3,29,588/-] made by the Assessing Officer on account of notional rent, whereas in fact the appellant has not received any rental income from these tenants. [Page 136-140 CIT(A)’s Order]

2.2 That learned CIT(A) has grossly erred in law and on the facts in not appreciating the fact that the taxable income means real income and not a fictional income.

3. That learned CIT(A) has grossly erred on the facts and in law in confirming the disallowance made by the Assessing Officer to the Rs.20,42,053/- on account of registration fee for the Gujarat and Karnataka windmills by treating the same as capital in nature. [Page 151-177 of CIT(A)’s Order]

4. That the appellant reserves its right to assail the same on such other ground or grounds as may be advanced at the time of hearing for which the appellant craves leave to amend, vary or add to the grounds hereinbefore appearing.

3. The learned AO in ITA number 4793/del/2015 has raised following grounds of appeal.

ITA No. 4793/DEL/2015 AY 2010-11

1. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in allowing deduction of Rs. 178,61,73,799/- u/s 80IAB of the Act.

2. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting in disallowances made by Assessing Officer of Rs. 93,02,00,000/- on account expenses to be allocated from non SEZ projects to SEZ projects.

3. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting disallowance of Rs 68,59,59,202/- on account of revenue recognition as per POCM.

4. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the disallowance of Rs. 2,35,037,000/- on account of interest capitalization.

5. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the disallowance of Rs. 145,10,655/- on account of brokerage and commission.

6. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 3,39,112/- on account of contingency deposits received from customers during the year.

7. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 70,62,529/- on account interest free security deposit.

8. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 6,34,45,144/- on account of registration charges.

9. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 6,24,52,456/- on account of non allocation of proportionate overheads expenditure to group companies.

10. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in restricting the disallowance u/s 14A of the I.T. Act, 1961 read with Rule 8D of the Income Tax Rule, 1962 to Rs. 18,15,695/-as against the disallowance of Rs. 132,66,81,000/- made by the Assessing Officer.

11. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 8,87,48,896/- on account of reclassification of income from house property to income from business or profession.

12. The Commissioner of Income T-ax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 6,29,430/- on account of notional rental income on vacant properties.

13. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 5,64,961/- on account of recalculation of depreciation in respect of earlier let out DLF Centre Building, now converted to self occupied property.

14. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 4,75,95,830/- made by the AO on account of disallowance of prior period expenses.

15. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in restricting the disallowance to Rs. 20,42,053/- as against the disallowance of Rs. 735,03,187/- made by the Assessing Officer on account of disallowance of capital expenses.

16. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 4,96,29,551/- on account of expenses not incurred wholly and exclusively for the business purposes under different heads by holding them being personal in nature.

17. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 38,74,49,073/- on account of disallowance of expenses for operation and maintenance of helicopter and air craft not being wholly and exclusively for business.

18. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 69,31,00,000/- on account of notional interest under charged.

19. The Commissioner of Income Tax(Appeals) has erred in law and on the fact of the case in deleting the addition of Rs. 455,15,030/- on account of non charging of interest on loans given to related parties.

20. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case for not adjudicating the issue of disallowance of Rs. Rs.2,04,98,125/- on account of non adding back of disallowance of the items to computation of income and in directing the Assessing Officer to verify the evidences filed by the assessee during the assessment proceedings and to delete the additions if it were already offered to taxation by the assessee.

21. The Commissioner of Income Tax(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs. 13,87,00,000/- on account of non charging of interest on loan given to Saket Courtyard Hospitality.

22. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.

4. Brief facts of the case shows that assessee is a company which is engaged in the business of realistic development. It filed its return of income on 29/9/2011 declaring an income of ₹ 4,743,424,620. The assessment was completed by the learned assessing officer u/s 143 (3) of the act white order of assessment dated 24/9/2014. The total income of the assessee was assessed at ₹ 1,473,850,810/–. Aggrieved by the order of the learned assessing officer, the appellant preferred an appeal before the learned CIT – A passed an order partly allowing the appeal of the assessee on 14th of May 2015. Therefore with respect to the additions deleted by the learned CIT – A, the learned AO is aggrieved and with respect to the addition is confirmed by him, the assessee is aggrieved and therefore both are in appeal before us.

5. Coming to the appeal of the learned assessing officer, the learned departmental representative vehemently supported the order of the learned assessing officer. The learned authorised representative submitted a detailed chart and submitted that except ground number 16 of the appeal all other grounds are covered by the decision of the coordinate bench dated 27th of May 2019 ITA number 2749/del/2013 for assessment year 2008 – 09 in favour of the assessee. He therefore submitted that the coordinate bench order needs to be followed. We have carefully considered the rival arguments and also considered the decision of the coordinate bench for assessment year 2008 – 09 in case of the assessee. We also found that most of the issues are squarely covered by the decision of that assessment year of the coordinate bench.

6. Ground number one of the appeal is with respect to allowing the deduction of Rs 1 78,61,73,799/– u/s 80 IA B of the income tax act. Both the parties agreed that same is covered by the decision of the coordinate bench in assessee’s own case for assessment year 2008 – 09 wherein ground number two of that appeal covers this issue. The coordinate bench has decided this issue as Under:-

“Disallowance of SEZ deduction u/s 80IAB.

46. The next issue relates to deletion of addition on account of disallowance of SEZ deduction u/s.80IAB, which is one of the core issues raised before us.

47. The facts in brief are that the assessee has shown gross income of ₹ 1497.94 crore from SEZ activities and after reducing the cost of construction amounting to ₹ 378.78 crore and allocation of common expenses had declared eligible profit at ₹ 119.06 crores and claimed the deduction u/s.80IAB.

48. Assessing Officer after considering the assessee’s submission in this regard and strongly relying upon the judgment and order dated 03.02.2011 passed by Hon’ble Punjab and Haryana High Court in respect of assessee’s land, came to the conclusion that the acquisition of land for development of SEZ has been held by the Hon’ble High Court to be illegal and the Court’s order strike to the very root of the notification issued under the SEZ Act, 2005 for the development of SEZ, and therefore, SEZ itself becomes illegal from the date of inception. According to the AO, under section 80IAB, the deduction is available only in respect of profits and gains by an undertaking or enterprise engaged in the development of SEZ, but the assessee-company is not entitled for claim of deduction u/s.80IAB, because land on which SEZ has been constructed has been found to be acquired by the assessee fraudulently.

49. On the other hand, assessee’s reply was that the approval granted by the Board of approval for SEZ has remained untouched despite of the High Court order, and therefore, assessee under the law was entitled for claim of deduction u/s.80IAB. However, the ld. Assessing Officer rejected the said contention and held that the approvals of Board of Approval were granted at the time when High Court order was not pronounced, i.e., on 11.02.2011. Apart from that, the ld. Assessing Officer also proceeded to examine the claim on merits. The relevant observations of the AO in this regard can be summarised as under: –

* Section 80-IAB provides for deduction from the activity of developing, operating and maintaining SEZ. In view of the same, please explain how the activity of constructing buildings and sale thereof to Co-Developer is covered by the provisions of section 80-IAB.

* As per SEZ Rules, 2006, developer of an SEZ cannot sell land in the Special Economic Zone under rule 11(9). In view of the same, you are required to explain how the sale of buildings can take place without the sale of land. Also explain that how any income arising from such transfer of assets is covered under section 80-IAB and eligible for deduction.

* The SEZ Act notifies specified authorized operations which alone qualify for exemptions, deductions. Please explain how sale of constructed buildings can be classified as authorized operations eligible for deduction under section 80-IAB especially with reference to the Notification No. SO/1846(E) dated 27.10.2006 and also with reference to the approval dated 14.02.2007 granted by Government of India, Ministry of Commerce & Industry.

* A modified approval dated 01.06.2009 was granted by Board of Approval, SEZ to co­developer i.e. DLF Assets Ltd. after taking into account the Co-developer agreement dated 20.03.2008. It has been stated in the aforesaid approval that the transactions were approved subject to the condition that as per terms and conditions of lease agreement between developer and co-developer will not have any bearing on the treatment of income by way of lease / rentals / down payment / premium etc. for the purpose of assessment under the prevalent Income Tax Rules. The AO will have the right to examine the taxability of these amounts under the Income Tax Act. In view of the same, the claim for deduction under section 80 IAB is not dependent merely upon the approval granted by Board of Approval and can therefore be independently examined by the AO under the Income Tax Act. Therefore, you are required to explain how the profits arising from the activity of transfer/sale of constructed buildings in the SEZ notified land by DLF Ltd. to DLF Assets Ltd. will qualify for deduction under section 80 IAB.

* Transactions undertaken between DLF Ltd. and DLF Assets Ltd. amount to transfer of bare shell buildings between the two entities. Why nature of income derived from the co-developer agreement should not be treated as onetime income arising from transfer of assets and why the transaction should not be treated as sold. In this connection, you may note that the Addendum to co-developer agreement clearly states that on expiry of term of lease, the co-developer shall make best efforts to dispose off the warm shell which further shows that he has complete and unfettered rights over the buildings thereby implying that the assessee has basically sold the bare shells to the co-developer and as a result of such sale generated income from the business of development and therefore not eligible for deduction. Further, the Co­developer i.e. DLF Assets Ltd. has reflected the same as “Fixed Assets” in its books of accounts and not as “Business Asset”. Thus, looking at it from another angle, please explain why the aforesaid transaction involving transfer/sale of constructed buildings from DLF Ltd. to DLF Assets Ltd. should not be treated as income/loss from capital gains. You may also explain that if the transaction is treated as capital gain, then how such income which would be a non business income can be claimed as being eligible for deduction under section 80IAB.

* It was also observed by him that income tax deduction U/s 80IB is allowable for a period of 10 years on the profits arising from development on a year to year basis and there is no provision for claiming the entire deduction of the income in any one year and that also in respect of receipt which actually pertains to a further rent for 49 years. In view of this you may explain why the claim of deduction under section 80IAB, may not be restricted to 1/49th of the total development income received by the assessee company in any one financial year.

50. In light of above observations of the AO, assessee made detail submissions with regard to the specific queries raised by the Assessing Officer which has been noted and dealt by him from paragraph 2.20 to 2.41 of the assessment order. However, ld. Assessing Officer apparently without adverting to the various points and issues raised by the assessee, held that the claim of deduction u/s.80IAB is not allowable predominantly in view of the fact that Hon’ble Punjab and Haryana High Court has held that acquisition of SEZ land was illegal and also the sale of building to a cobuilder is neither a business activity nor one of the authorized operations of SEZ. Accordingly, he denied entire claim of deduction and added the same to the income of the assessee.

51. In the first appeal, Ld. CIT (A) after considering the entire gamut of materials placed on record and after detailed discussion has allowed the assessee’s claim. The relevant finding and observations are as under: –

8.25 From the clarifications dated 18.01.2011 & 10.01.2011 issued by the Ministry as well as the correspondence between the Ministry of Commerce and the CBDT there remains no scope of doubt that the disclaimer referred to by the Assessing Officer in approval letter dated 01.06.2009 is applicable only to a transaction of transfer of land in the guise of long term lease by receiving lease rentals/down payments/premiums commensurate with the sale value of the land as is evidence from para-4 of the letter dtd. 26.05.2009 sent by the Director (ITA-1) CBDT to the Department of Commerce and Industry. Thus, the disclaimer vide point 3 (XVII) of the co-developer approval letter, on which the Assessing Officer has relied upon is not applicable to the transfer of bare shells and coldshells for a consideration. The transfer of bareshells and coldshells for a consideration was approved as authorized operations as per the approval issued by Board of Approvals. The Ministry of Commerce in their clarification issued on 18.01.2011 has explicitly clarified that all leases of land are subjected to general condition contained in para 3(xvii) of letter dated 01.06.2009 and this general condition is applicable to the terms and conditions of the land lease agreement only.

8.26 Keeping in view, the discussions above it is clear that the appellant has been duly approved by the Board of Approvals as a developer, the land owned by the appellant in Sector-30 of Gurgaon was notified by the Govt. of India for establishment of SEZ, the authorized operations to be undertaken in the proposed SEZ were approved by the Board of approvals, the co-developer agreement dated 20.03.2008 executed with the co-developer contemplating transfer of bare shells to the co-developer for an agreed development consideration has been duly approved by the Board of approvals, the DAPL has been approved as a co-developer. The transfer of bare shells to the co­developer has been approved as an authorized operation by the Board of Approvals and the disclaimer contained in clause 3(xvii) of approval letter dated 01.06.2009 applies only to transfer of land or one time lease rental/one time down payment/premium etc. as clarified by the Ministry of Commerce in the clarification dated 18.01.2011 and correspondence made between the Ministry of Commerce and Department of Revenue as filed by the appellant during the course of appellate proceedings as additional evidence.

In view of the facts discussed above, I agree with the submission of the appellant that the disclaimer condition mentioned in the codeveloper approval letter dated 01.06.2009 is primarily put in by the Board of approvals in the approvals to put a curb on the wrong practices of leasing the land for long periods and receiving onetime payment in the form of lease rental/down payments/premiums etc. which tantamount to sale of land in the guise of long term lease. The appellant has obtained requisite approval from the Board of Approvals by disclosing all facts. The entire controversy as to whether the transfer of bare shell buildings to the co-developer was an authorized operation has been set at rest by the correspondence made between the Ministry of Commerce and Department of Revenue and also by clarification letters issued, dated 18.01.2011 & 20.01.2011 by Ministry of Commerce. I am satisfied that all the conditions as required to be satisfied under the SEZ Act/Rules are fulfilled and the appellant is an approved developer for all intent and purpose of Section 80 IAB of the Act. Consequent upon approval granted by the Board of Approvals for the transfer of bare shells to the co-developer for a consideration is an authorized operation and income derived from such transfer of coldshell or bareshells is eligible for deduction U/s 80 IAB of the Income Tax Act, 1961.

Regarding the observation of the Assessing Officer that the land and building are one composite and cannot be separated, the appellant has stated that the Indian Law recognizes separate ownership of the land and building and this position has been recognized by various High Courts including the Hon’ble Supreme Court wherein it has been held that the maxim, what is annexed to the soil goes with the soil has not been accepted as an absolute rule of law of this country. In the following judgments the Hon’ble Courts have held that a person who bonafidely puts up constructions on land belonging to others with their permission would not be a trespasser, nor would the buildings so constructed vest in the owner of the land.

(i) Park View Enterprises Vs State Govt. of Tamil Nadu [1991] 189 ITR 192.

(ii) The Privy Council in Narayan Das Khettry v. Jatindra Nath Roy Chowdhry, AIR 1927 PC 135, has also taken the view that having regard to the law in India it is possible to have separation of ownership of the building from the ownership of the land.

(iii) This view of the Privy Council was approved by the Supreme Court in Bishan Das v. State of Punjab, AIR 1961 SC 1570.

Therefore, in view of the above judicial pronouncements, land is an independent, identifiable asset, and continues to remain identifiable even after construction of the building.

8.27 I have gone through these judgments and am of the considered view that there is a force in the arguments of the AR as the land and building are independent identifiable assets. It is a common practice in India that one person owns a land and the other owns the superstructure built thereon. Keeping in view these facts and circumstances and the legal position, the appellant has not violated any of the conditions as provided under the SEZ Rules.

8.28 Ground Nos.4.1.7, 4.1.8, 4.1.9, 4.1.10 & 4.1.11 – These grounds of appeal pertains to the observation of the Assessing Officer wherein the Assessing Officer has held that the profit arising from sale of bare shell buildings by the appellant to the co­developer constitute capital gains and not the business income so as to be eligible for deduction U/s 80 IAB of the Act. Further, the Assessing Officer has held that the sale consideration received for the sale of bare shells had to be spread over the period of 49 years. The appellant has contended without prejudice to the other grounds that if the contentions of the Assessing Officer are accepted that either the appellant was not the lawful owner of the land on which SEZ has been set up or sale of bare shell buildings by the appellant was impermissible then the amount received by the appellant has to be refunded to the co-developer.

The appellant has contended that it had been engaged in the business of real estate and the development of such commercial projects is the main object of the appellant. The appellant had been following the Percentage of Completion Method (POCM) for recognizing revenue of various projects as per the Accounting Standards issued by the Institute of Chartered Accountants of India and it has been accepted by the department since inception. It is a matter of record that the Assessing Officer herself has accepted such incomes as business income of all the projects developed by the appellant even during the year under consideration.

It is seen that the appellant has been following mercantile system of accounting and has been recognizing the revenue in accordance with the Accounting Standard AS-7 & AS-19 issued by the Institute of Chartered Accountants of India. It is now a judicially recognized preposition that in case of contracts or business of construction, in order to ascertain the income, one need not wait till the contract is completed. The Assessing Officer however cannot apply any other method for recognizing the revenue and has to accept the accounting policy followed by the appellant, therefore, when the appellant has recognized the income following percentage of completion method as per AS-7 issued by the Institute of Chartered Accountants of India, the profits derived on account of development considerations of bare shells would constitute the profits and gains derived from business of developing any Special Economic Zone within the meaning of Section 80 IAB of the Act. The claim of deduction U/s 80 IAB is a valid claim considering the overall facts of the case.

The accounting treatment of warm shells by the co-developer in its books of accounts as an asset would not make any difference as far as the appellant is concerned. The admitted fact remains that the appellant has computed its income under the Percentage of Completion Method (POCM) which is prescribed for calculating profits and gains of business of real estate developer under the mandatory accounting standard issued by the Institute of Chartered Accountants of India. The Assessing Officer’s observations by referring to the classification of assets shown by the co­developer was a sale of capital asset subjected to capital gain is against the very principle of the Act when the bare shell buildings were neither part of capital work in progress nor fixed assets of the appellant. A perusal of the assessment order reveals that the Assessing Officer has not categorically held the income of the appellant under the head ‘Capital Gains’ as no such specific addition has been made. The Assessing Officer has only made her observations without prejudice to her decision in disallowing the entire claim of deduction U/s 80 IAB.

8.29 I have considered the submission of the appellant and observation of the Assessing Officer. It is seen that observations of the Assessing Officer are not based on correct appreciation of facts. The appellant has shown work in progress in the business of construction and by no stretch of imagination work in progress can be treated as capital asset. The stock in trade is specifically excluded from the definition of ‘Capital Asset’ Under section 2(14) of the Act. The development of the bare shell buildings in the SEZ and subsequent transfer thereof cannot be considered as giving rise to short term capital gain considering the business of the appellant and accounting treatment adopted in the books of account irrespective of the treatment by the co­developer in the books of accounts as fixed assets. The observations of the Assessing Officer on this issue are erroneous, legally untenable and misdirected in holding that the income can be assessed as capital gains. I have gone through the judicial rulings relied upon by the appellant in support to its claim.

Further, the appellant has disputed the decision of the Assessing Officer in holding that the development income was relatable to 49 years of lease period and only 1/49th could have been earned by the appellant in one year. The appellant has contended that having held so the Assessing Officer ought to have allowed a deduction of ₹ 22,83,81,280/-U/s 80 IAB and excluded the remaining income pertaining to the subsequent years for the computation thereby resulting in no addition. It is noticed from the assessment order that Assessing Officer notwithstanding with her decision holding the income from transfer of bare shells as income from capital gains has further held that even if the income from transfer of bare shell was to be treated as development income from SEZ, the entire income was relatable to 49 years spread over the period of 49 years lease.

From the discussions in earlier paragraphs it is an admitted fact that the appellant has leased out only the land. The bare shell buildings have not been leased out but transferred to the co-developer for a agreed consideration which has been approved by the Board of Approvals. Therefore, to link the transfer consideration of bare shells with the period of lease of land is totally irrelevant in the facts of the appellant’s case. It is a fact that the appellant has adopted rent capitalization method for determining the development consideration of bare shells but the period of lease is again irrelevant in such determination because the rent capitalization method includes theory of determination of market value of building having regard to net operating income yielded by the property in a year or average of multiple years. Such method of valuation is in conformity with the basis adopted for capitalisation of net maintainable rent as per Rule- 3 of Schedule III of the Wealth Tax Act. Therefore, when the transfer of bare shells has been permitted as an authorized operation by the Board of Approvals, the application of lease period becomes redundant. Considering the above, there is neither any question for treating 1/49th of development consideration as income of one year for the purpose of deduction U/s 80 IAB nor for the purpose of disregarding balance income filed by the appellant during the year.

The appellant has further contended that if the observations of the Assessing Officer are accepted in as much as the transfer of bare shell buildings is not an authorized operation or the acquisition of land was illegal then nothing accrues to the appellant and the monies received by it from the co-developer ought to have been refunded. I have considered the submissions of the appellant. Since it has been held that the deduction U/s 80 IAB is admissible to the appellant, this ground becomes infructuous and does not call for any adjudication.

8.30 Ground No.4.2 – This grounds pertains to the observation of the Assessing Officer wherein the Assessing Officer held that without prejudice to the disallowance made U/s 80 IAB, if at any higher appellate stage the assessee is allowed deduction U/s 80 IAB of the IT Act, then the quantum of deduction is to be reduced by ₹ 24,20,98,512/- on the basis of findings given by the Special Auditors in para 3.15 to 3.22 at page Nos.25-29 in Volume-IIIA of the Special Audit Report. The appellant has contended that the Assessing Officer has made these observations on the basis of Special Audit Report wherein the Special Auditors have stated that there is short allocation of overheads to the SEZ Division. The Special Auditors proposed that some expenses ought to have been allocated to the SEZ project out of the other non-SEZ project.

The AR of the appellant has drawn my attention to the details filed during the course of assessment proceedings as well as before the Special Auditors. These details have been filed in the paper book at pages 258-271. The AR of the appellant has vehemently argued that the appellant is a listed company and its accounts are subjected to various checks and audits. Particularly for claim of tax holiday U/s 80 IAB of the Income Tax Act, 1961, the appellant has got its accounts audited from an independent accountant specifically for quantification of the deduction admissible to the appellant. It is a statutory requirement that the independent auditor has to certify the computation of deduction admissible U/s 80 IAB of the Income Tax Act, 1961. The appellant has brought to my notice the statutory report in Form No.10 CCB dated 29.09.2008 which has also been filed in the paper book wherein the deduction has been computed at ₹ 1119,06,82,702/-.

The AR has also contended that the tax auditors also while finalizing the report U/s 44 AB of the Act have verified the deduction admissible to the appellant U/s 80 IAB and has certified the same in the Tax Audit Report. It has been contended that the appellant is a pioneer in the real estate business and had been executing projects for more than six decades. The expenditure under various heads proposed to be allocated to the SEZ Project by the Special Auditors had all along been incurred by the appellant over the years and have been allowed to it under the provisions of the Income Tax Act, 1961. It has been stated that despite the fact that the SEZ Project was not in operation in earlier years but still these routine expenses have all along been allowed to the appellant while computing the total income for respective years. The appellant has filed a comparative chart of expenses incurred and claimed by the appellant during the year as well as in the preceding year to show that the expenses have been all along allowed. The appellant has also contended that similar issue arose in the case of M/s DLF Commercial Developers Ltd. for AY 2008-09 and the same has been deleted in appeal vide order dated 19.12.2012 in Appeal No.71/12-13.

8.31 I have considered the submissions of the appellant and have perused the details filed by the appellant on this issue. It is seen that the allocation made by the Assessing Officer from the salary expenses of senior management and expenses under the head ‘other expenses’ have been made without bringing any adverse information on record. The appellant has given details of headwise expenses incurred on SEZ and non-SEZ activities and such information cannot be brushed aside without pointing out any mistake in the allocation of expenses. The allocation cannot be made on the basis of presumptions and some material has to be brought on record to justify such reallocation of expenses for working out deduction U/s 80 IAB. It is seen that this issue has been considered by me while passing the appellate order dated 19.12.2012 in appeal No.71/12-13 in the case of DLF Commercial Developers Ltd. where the similar disallowance has been directed to be deleted.

In view of the factual position, the Assessing Officer is directed to allow the deduction U/s 80 IAB as claimed by the appellant in the return of income without making any reallocation.”

52. The Ld. Spl. Counsel appearing on behalf of the Revenue, after referring to the facts as noted in the assessment order, also summarised the findings of the AO given from pages 31 to 81 of the assessment order, in his written submissions.

53. At the outset, he submitted that in the Assessment Year 2009-10, the Hon’ble High Court in the case of DLF Commercial Developers Ltd., (2018) 92 com 10 has remanded the matter to the Tribunal analyzed the case in the light of the provision of SEZ Act, 2005 which Tribunal has not independently done and set aside the matter back to the file of the Tribunal to decide afresh and in accordance with law. The relevant observation of the Hon’ble High Court reads as under:

In the present appeals, the ITAT has merely followed the decision rendered in a previous order. The earlier decision in this regard is the one rendered in 2007-08 in the case of DLF Infocity Developers (Chennai) Ltd. There, the Assessing Officers’ (AO) order granting deduction u/s 80IAR was interfered with by the CIT(A) u/s 263 of the Income Tax Act, 1961”. The ITAT proceeded to set-aside the order, holding on merits that the assessee was entitled to the deduction claimed. That order has been followed on merits by the ITAT in the current A. Y 2009-10 and 2010-11. This Court is of the opinion that the ITAT’s decision merely reproduced that CIT(A) ‘s judgement and has not analysed independently, in either of the AYs the applicability of Section 80IAB towards the education claimed in the light of the transactions reported and the documents disclosed. Furthermore, those facts have also to be analysed in the light of the provisions of SEZ Act, 2005, which the ITAT has not independently done. For these reasons, the Impugned orders of the ITAT are set-aside and are remitted for fresh consideration by the ITAT in accordance with the law. All rights and contentions of the parties are reserved.”

54. He further submitted that in order to ascertain the nature of income, it is necessary to examine the relevant issues as per SEZ Act and Rules which according to him should be analyzed as under:

i. In the schedule 13 of the Audit Report under the head “Related party disclosures” DLF Assets Pvt. Ltd., the codeveloper, has been stated to be entity under the subsidiary companies. The entire income claimed to be exempt under section 80 IAB has been shown as received on account of sale of buildings to this related party.

ii. The commercial terms for sale to DLF Assets Pvt. Ltd (DAPL) were decided by the Memorandum of understanding for Co-developer Agreement, Co- Developer agreements and addendums to Co-developers agreements executed. It is significant to note that the intention here, from the very beginning, was to transfer the entire land and buildings to the co-developer and the assessee company never engaged itself in the business of development of SEZ. Some of these clauses were later amended only with a purpose to show that it might not appear to approving authorities that the intention was to transfer both land and buildings to the codeveloper, particularly when they realized that sale of land in SEZ was not permitted. This fact can be vouched from point 3 of the facts of the case mentioned above. Combined reading of all the clauses of Co-Developer Agreement and Lease deed clearly shows that the intention of the assessee company was to sell land to their related company and they have booked business income out of the transaction. Thereafter the deduction u/s 80-IAB has been claimed out of the business income which should not be allowed for the reason that sale of land is not permitted as per SEZ Act and Rules.

iii. When the Board of Approval (BoA) later examined this issue, they were of the categorical view that transfer and handover of buildings on payment of development consideration was against the spirit of SEZ. This issue will be discussed in detail later. The fact remains that the assessee merely built the structure and sold the same to the codeveloper.

iv. It is seen that section 3(8) of SEZ Act specifically states that the Central Government may prescribe the requirements for establishment, namely:

a. The minimum area of land and other terms and conditions subject to which Board shall approve, modify or reject any proposal received by it under sub section(2) to (4); and

b. the terms and conditions, subject to which the Developer shall undertake the authorized operations and entitlements.

v. Further section 3(11) of SEZ Act while referring to the agreement between developer and co-developer stipulates that section 3(8) quoted above shall apply to the said proposal. Thus, the condition regarding examination of taxability of the transactions by Assessing officer is one of the main requirements subject to which the Co-developer agreement has been approved by competent authority.

vi. Section 7 of SEZ Act further restricts the exemptions of Developer from taxes, duties of cess to any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area thus clearly specifying the activities for which exemption from tax will be granted to the developer. In the present case, the assessee company has sold assets and income derived there from does not fall in this category.

vii. Section 9 of SEZ Act clearly define duties, powers and functions of Board of Approval (BOA) which includes granting of approval or rejecting proposal or modifying such proposals for establishment of SEZ.

viii. It is very relevant to note that transfer of buildings by the developer to the co­developer was considered by the BoA as against the spirit of SEZ as pointed out by the Department of Revenue and agreed to by BOA unanimously. (i.e. it is not the business of development of SEZ.) This is the reason that BOA has put the condition of examination of the issue of taxability after determining the nature of income by the Assessing Officer. In this respect minutes of 32nd meeting and of 34th meeting of SEZ BOA held on 23rd February 2009 and 19th June 2009, which discussed the assessee company’s case as one of the co-developer, are very important and are reproduced as follows:

32nd Meeting

“The representative of the DoR (Department of Revenue i.e representative of CBDT) pointed out that the co-development agreement refers to transfer and hand over deeds which states that co-developer shall be the owner of the SEZ buildings on payment of development consideration, which is against the spirit of SEZ Act and Rules. 34th Meeting

“The Board noted that in the meeting held on 23.02.2009 it was decided to defer the 4 proposals of co-developers in respect of same Developer, i.e., M/s DLF Limited as the representative of the DoR pointed out that the co-developer agreement refers to transfer and hand over deeds which states that co-developer shall be the owner of the SEZ buildings on payment of development consideration, which is against the spirit of SEZ Act and Rules. Following this observation, the proposals were deferred and it was decided to examine the case on file. DoC examined these proposals on file in consultation with CBDT and the agreements were revised by the co-developer. The proposals were approved subject to the condition that particular terms and conditions of lease agreement will not have any bearing on the treatment of income by way of lease rentals/down payment/premium etc. for the purpose of assessment under the prevalent Income Tax Act and Rules. The Assessing Officer, will have the right to examine the taxability of these amounts under the income tax Act. “

Copy of Minutes of 32nd Meeting and 34th Meeting of BOA are enclosed with these Submissions.

ix. Section 27 of the SEZ Act which deals with provisions of Income Tax Act, 1961 to apply with certain modification in relation to Developers and entrepreneurs clearly states that the provisions of the Income Tax Act, as in the force, for the time being, shall apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a SEZ. The notification for IT SEZ’s authorized operations does not include sale of building from which income has been shown by the assessee company on which deduction u/s 80IAB has been claimed.

x. Rule 11(10) of SEZ Rules 2006 specifies that the developer shall not sell the land in a SEZ. As sale of land is prohibited and the land has been given to co-developer through an arrangement of lease of land which is nothing but a ploy to overcome this prohibition. This is the reason that BOA said such arrangement was against the spirit of SEZ and asked the assessing officer to examine the taxability of such income.

xi. SEZ Act notifies specific authorized operations which alone would qualify for exemptions, concessions and drawbacks. Sale or transfer of assets is not an authorized operation and therefore income from such operation would not be eligible for exemption as per notification no. S.O.1846 (E) dated 27th October 2006.

Copy of the Notification dated 2Th October 2006 is enclosed with these submissions.

xii. That the copy of CBDT letter dated 26th May 2009 is on page 210 of the paper book II filed by the assessee counsel. Para 4 of the letter clearly states that approval will have no bearing on tax treatment of income arising out of such transaction which will be decided as per the relevant provisions of the Income Tax Act.”

55. If these issues are examined in detail then following facts are established:

a. “That the assessee company has not developed the SEZ rather only constructed the buildings. The deduction u/s 80- IAB is available only in the case of development of SEZ. Mere construction of Bare shell buildings will allow the assessee the deduction u/s 80-IAB. Section 80-IAB states that profit and gains derived from business of developing SEZ. Thus, the deduction is only available once the SEZ is developed and it cannot be allowed before the stage of development of SEZ.

b. Sale of buildings to the co-developer is neither an activity of development of SEZ nor one of the authorized operations for SEZ notified by the competent authority. It is an isolated transaction giving one time income from transfer of capital assets. It is very clear from the Co- Developer agreement and lease deed that the intention on the part of the assessee company, from the very beginning was to construct and sale the buildings as a onetime activity. Such isolated transaction can never be termed as business activity. Co-developer agreement and lease deed very clearly shows that the developer has sold the land and building and loses all rights over these transferred capital assets and the relinquishment of right is irrevocable.

c. Though SEZ Act prohibits for sale of land thereby implicitly denying any benefit to a developer who is basically interested in deriving income by transfer of assets, the assessee has found a way to overcome this prohibition by creating 49 years lease in favour of co-developer. It is pertinent to note that the lease deed is renewable further and thus effectively transferring the land also. Para 2.3 and 5.1 of the Lease Deed clearly allows the parties to renew the lease deed. Thus, the assessee company has transferred the land in actual sense and substance of this present transaction means sale of land. In most of the cases, substance of the transaction and its form are one and the same. However, the substance can be different from the form of the transaction in many cases. In the present case, the assessing officer has rightly gone for the substance of the transaction and disallowed the deduction u/s 80-IAB claimed by the assessee company as the lease deed is mere eye wash and actual transaction was sale of land which is clearly not permissible under SEZ Act. Relevant paras of Lease deed are at page 135 & 136 of the Paper Book II filed by the Counsel of the assessee.

d. The transfer of building is absolute and as per the amended agreement and lease deed , Co-developer shall be treated as owner of the bare shell building and the warm shell building after additions etc and will have exclusive rights to let, mortgage, or allow use of all or any part of buildings.

e. That if the deduction u/s 80-IAB is allowed to the assessee company in this case and the Co-developer does not develop the SEZ later on, how can we say that the SEZ has been developed and why should the deduction be allowed to the assessee company at this stage where the development of SEZ has not been done. Allowing the deduction at the stage of construction of bare shell building would be against the provisions of SEZ and Income Tax Act.

56. Thus, he submitted that assessee’s income from sale of assets is not eligible for deduction u/s.80IAB and once it is established that the transfer of buildings to co­developer is not a business activity and the income from such transfer is not business income, it is clear that sale of such buildings, in the nature of capital assets, has generated capital gains and, therefore, income shown by the assessee on this count has to be treated as capital gains. In this respect the most important aspect to be examined is whether by co-developer agreement entered in the Financial Year 2007­08, the transfer of the building can be deemed to be transfer for the purpose of taxability.

57. Thereafter, he referred to the provision of Section 2(47)(v) r.w.s. 53A of Transfer of Property Act and submitted that in such cases capital gain should be taxable in the year in which such transaction is entered into even if the transfer of the immovable property is not complete under the general law. He further submitted that in the light of provisions of section 2(47)(v), this issue was examined in great details by AAR Tribunal in the case of Mr. Jasbir Singh Sarkaria (2007) 294 ITR196, it was held that the transaction of the nature referred to in clause (v) of section 2(47) had taken place on a particular date, the actual date of taking physical possession need not be probed into. It is enough if the transferee has by virtue of that transaction a right to enter upon and exercise the acts of possession effectively. It was further held that to attract clause (v) of section 2(47), it is not necessary that the entire sale consideration up to the last installment should be received by the owner.

In the above-mentioned case the judges have gone into detailed examination of the issue and applicability of provisions section 2(47)(v). To make the issue clearer, it is relevant to reproduce some relevant paragraphs as under: “There is no doubt that the agreement to transfer the entire right, title and interest of the owners for a consideration specified in the agreement and in accordance with the terms thereof answers the description of a contract falling within the scope of section 53-A of the Transfer of Property Act. The crucial question then arises – at what point of time the transaction allowing the taking of possession in partperformance of such contract had taken place. Incidentally it raises the question as to how the expression ‘transaction’ is to be understood. One view that could possibly be taken is that the execution of the agreement under the terms of which the purchaser is enabled to take possession even before the execution of conveyance deed is itself the ‘transaction’ contemplated by section 2(47)(v). It is enough if the agreement/contract falling within the description of Section 53-A provides for taking possession at some stage before the ownership is transferred in a manner known to law.

What is contemplated by section 2(47)(v) is a transaction which has direct and immediate bearing on allowing the possession to be taken in part performance of the contract of transfer. It is at that point of time that the deemed transfer takes place. In this context, the observations of a Division Bench of Bombay High Court speaking through S.H. Kapadia, J in Chaturbhuj Dwarkadas v. CIT are apposite: We quote the same:

If the Contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of the contract would be relevant to decide the year of chargeability.

Further, if ‘possession’ referred to in clause (v) is to be understood as exclusive possession of the transferee/developer, then, the very purpose of the amendment expanding the definition of transfer for the purpose of capital gains may be defeated. The reason is this: the owner of the property can very well contend, as is being contended in the present case, that the developer will have such exclusive possession in his own right only after the entire amount is paid to the owner to the last pie. There is then a possibility of staggering the last installment of a small amount to a distant date may be, when the entire building complex gets ready. Even if some amount, say 10 per cent, remains to be paid and the developer/transferee fails to pay, leading to a dispute between the parties, the right to exclusive and indefeasible possession may be in jeopardy. In this state of affairs, the transaction within the meaning of clause (v) cannot be said to have been effected and the liability to pay capital gains may be indefinitely postponed. True, it may not be profitable for the developer to allow this situation to linger for long as the process of transfer of flats to the prospective purchasers will get delayed. At the same time, the other side of the picture cannot be overlooked. There is a possibility of the owner with the connivance of the transferee postponing the payment of capital gain tax on the ostensible ground that the entire consideration has not been received and some balance is left. The mischief sought to be remedied, will then perpetuate. We are, therefore of the view that possession given to the developers need not ripen itself into exclusive possession on payment of all the installments in entirety for the purpose of determining the date of transfer.

While on the point of possession, we would like to clarify one more aspect. What is spoken to in clause (v) of section 2(47) is the ‘transaction’ which involves allowing the possession to be taken. By means of such transaction, a transferee like a developer is allowed to undertake development work on the land by assuming general control over the property in part performance of the contract. The date of that transaction determines the date of transfer. The actual date of taking physical possession or the instances of possessory acts exercised is not very relevant. The ascertainment of such date, if called for, leads to complicated inquiries, which may frustrate the objective of the legislative provision. Relying upon the aforesaid decision, he submitted that income received during the year from sale of assets to the developer is taxable under the head “Short Term Capital Gain” in Assessment Year 2008-09 due to following reasons.

a. The co-developer agreement, giving full ownership rights over buildings to co-developers, was signed on 20103/2008 and substantial amount of sale consideration was also received during the year 2007-08.

b. There is a transfer of assets in the form of land and bare shell buildings which is not stock-in-trade in the books of the assessee company, and has been shown as addition to fixed assets in the co-developer’s case (i.e. the buyer).

c. There is a specific sales consideration, which has been fixed for this transaction.

d. The transfer of building is absolute and as per clause 7.1 of the Co- Developer Agreement dated 20.03.2008, the Co- Developer shall have exclusive rights to let, sub-let, mortgage, or to allow use of all or any part of the SEZ buildings in accordance with the SEZ Act, on such terms and conditions as the Co-developer may impose and agreed to. In the amended clause 2.4 to the addendum to MOU also it has been made clear that Co-developer shall own the bare shell buildings and shall continue to own warm shell building also.

e. Sale of buildings is not one of authorized operations in the SEZ as per the notification dated 27th October, 2006 issued by the Ministry of Commerce and Industry, Govt, of India.

f. As the sale of bare shell buildings to the co-developer, i.e. DLF Commercial Developers Ltd. in accordance with the codeveloper agreement, is against the spirit of SEZ Act & Rules and is not one of the authorized operations of SEZ, the assessee did not derive income from business of developing SEZ. Such isolated transaction of sale of bare shell buildings to the co-developer is nothing but sale of capital assets as the assessee has relinquished all rights over the buildings. Accordingly, the income from sale of bare shell buildings is capital gains on sale of buildings.

g. Sale of buildings to the co-developer is not an activity of development of SEZ. It is an isolated transaction giving one time income from transfer of capital assets. It is very clear from the agreement that the intention from the very beginning was to construct and sale the buildings as a onetime activity. Such isolated transaction can never be termed as business activity. CO-developer agreement is very clearly showing that the developer loses all rights over these assets and the relinquishment of right is irrevocable.”

58. Referring to the provisions contained in Section 80IAB, he submitted that the word ‘derived’ is very crucial in appreciating any kind of deduction which would fall within the ambit of the said provision. Here, in this case, the source of income is a sale of bare shell of the building and there is no question of development of SEZ. The same has been done by co-developer. In support, he has also relied upon the following decisions.

“CYBER PEARL INFORMATION TECHNOLOGY PARK P. LTD V. INCOME TAX OFFICER- (2017) 399 ITR 310(Mad)

Hon’ble Madras High Court held that the consistent view of the courts has been that wherever, in such like sections, the expression “derived” is used, as against “attributable to”, the width and the amplitude is narrower. Therefore, courts have held consistently that in order to come to a conclusion as to whether such pro fits or gains, i.e., income, would be amenable to deduction, the effective source of such income is to be looked at. Once, it is found that the income is derived from a secondary source, which is not the effective source, it falls outside the purview of such like provisions, which provide for deductions with purpose of giving fillip to the designated activity, which, in the instant case, is the business of developing a Special Economic Zone.

PANDIAN CHEMICALS LTD. V. COMMISSIONER OF INCOME TAX – (2003) 262 ITR 278(SC)

Hon’ble Supreme Court held that the words “derived from” in Section 80HH of the Income Tax Act 1961, must be understood as something which has a direct or immediate nexys with the assessee’s industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for is supply is a step removed from the business of industrial undertaking. Held accordingly, that interest derived by the industrial undertaking of the assessee on the deposits made with the Electricity Board for supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the special deduction under Section 80HH.

COMMISSIONER OF INCOME TAX V. STERLING FOODS – (1999) 237 ITR 579 (SC)

Hon’ble Supreme Court held that there must be, for the application of the words “derived from’, a direct nexus between the profits and gains and the industrial undertaking. Copies of the Judgments are enclosed with these submissions.”

59. He further referred to the Supreme Court’s judgment in the case of Commissioner of Custom vs. Dileep Kumar & Co. (supra) wherein it was held that tax exemption has to be interpreted wherein the benefit of doubt should go in favour of the Revenue and also referred to observations of Their Lordships in paragraph 49 to 52. Thus, he submitted that assessee is not eligible for claim of deduction u/s.80IAB.

60. By way of counter submission, learned counsel for the assessee submitted that the Revenue’s counsel has merely reiterated the observations of the Assessing Officer and no new arguments have been taken in respect of claim of deduction u/s.80IAB. He has tabulated the various arguments and point-wise rebuttal of ld. Special counsel in his written submissions.

61. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material referred to before us. The main issue is with regard to allowability of claim of deduction u/s.80IAB in respect of profit arising from sale of bare shell building in SEZ by assessee to M/s. DLF Pvt. Ltd. As a part of its business activities, the assessee has undertaken to develop SEZ project in a Govt. designate Special Economic Zone after obtaining requisite approval under SEZ Act and SEZ Rules in terms of provisions of Section 80IAB of the Income Tax Act. As brought on record, assessee had undertaken to develop SEZ project which was duly approved by Government of India and later on had entered into MOU with co­developer, wherein it was agreed that assessee shall develop the bare shell building and transfer to M/s. DLF Pvt. Ltd. (co-developer) for further development and lease of the same to eligible tenants. It was also agreed that land on which building was to be constructed will not be sold to the co-developer, M/s. DLF Ltd. but will be leased out for a definite period. It was the profit from such developmental activity, amounting to ₹ 11,19,06,82,702/- arising from transfer of bare shell building was claimed as deduction u/s.80IAB, after obtaining the approvals from ‘Board of Approvals, Ministry of Commerce and Industry’, Government of India in respect of SEZ Project. In order to appreciate the facts, it would be relevant to highlight the sequence of event in this regard: –

    • The assessee company was in possession of land admeasuring 29.8062 Acres of land located in Village Silokhera, Tehsil and Distt. Gurgaon.
    • It further took on lease adjacent parcel of land admeasuring 7.1875 Acres from M/s. Chandrajyoti Estate Developers Pvt. Ltd.
    • The assessee was granted approval by the Ministry of Commerce & Industry (SEZ Section) for setting up a sector specific SEZ for IT/ITES sector at Sector 30, Silokhera, Gurgaon. An area of 12.06 Hectares and an additional area of 2.96 Hectares were notified by the Ministry of Commerce & Industry, vide notifications dated 06.12.2006 & 19.03.2007.
    • The authorized operations to be undertaken by the assessee were also approved by a separate approval by the Govt. of India, Ministry of Commerce & Industry (SEZ Section) vide letter dated 14.02.2007.
    • The assessee entered into a MOU dated 29.01.2007 with the co-developer and filed the copy of the MOU for the approval before the Board of Approvals.
    • An addendum thereto was also entered into amending the terms of the original MOU on 23.04.2007.
    • The authorized operations to be taken up by the codeveloper in the said Silokhera SEZ was also approved by the Ministry of Commerce & Industry (SEZ Section) vide letter dated 22.05.2007 which included development of office space also (Warm Shell).
    • In order to consolidate the MOU and addendums thereto a co-developer agreement was entered into between the assessee and DLF Assets Pvt. Ltd. on 20.03.2008 which was also filed before the Board of approvals and the approval was also granted to this agreement vide letter dated 01.06.2009 by the Ministry of Commerce & Industry (SEZ Section).

62. The case of the Assessing Officer for making the disallowance on various counts can be summarized in the following manner: –

A. The ownership of land on which SEZ has been developed is in dispute in view of the decision of Punjab & Haryana High Court and as such the claim of deduction is inadmissible in absence existence of SEZ project.

B. Transfer of building cannot be considered as activity of development of SEZ and as such the profit arising from such transfer is not eligible for deduction u/s 80IAB. The activity of development and sale of building is neither an authorized operation under SEZ Act nor approved by competent authority. Further, lease of land for 30 years to M/s. DLF Asset Ltd. tantamount to transfer of land which is an impermissible activity in terms of Rule 11(9) of SEZ Rules, 2006. (Which AO has wrongly construed the period of lease as 49 Years)

C. Isolated transaction of sale of building is assessable under the head income from capital gain and as such the provisions of section 80IAB are not applicable. Further, as the purchaser M/s. DLF Asset Ltd. has shown the said bare shell building as fixed asset in its Balance Sheet, the same constitute capital asset of the appellant and as such profit arising from sale of bare shell is in the nature of Short-Term Capital Gain.

E. Alternatively, the profit from the project should be apportioned and spread over 49 years (correct figure 30 years) and as such only the proportionate claim of deduction u/s 80IAB is allowable.

63. The ‘SEZ Act, 2005’ defines co-developer as a person, who has been granted by the Central Government letter of approval u/s. 3(12) and developer u/s. 3(10) of the SEZ Act. Further, the Board of Approval authorizes the developer to undertake in a SEZ such operation as Central Government may authorize after granting the approval of the authorized operation to an eligible entity, who is authorized to carry out the operation in Special Economic Zone. Now the relevant portion of Section 80IAB Act reads as under:

80-IAB. (1) Where the gross total income of an assessee, being a Developer, includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone, notified on or after the 1st day of April, 2005 under the Special Economic Zones Act, 2005, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.

(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which a Special Economic Zone has been notified by the Central Government:

Provided that where in computing the total income of any undertaking, being a Developer for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (13) of section 80-IA, the undertaking being the Developer shall be entitled to deduction referred to in this section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in subsection (1) or sub-section (2), as the case may be:

Provided further that in a case where an undertaking, being a Developer who develops a Special Economic Zone on or after the 1st day of April, 2005 and transfers the operation and maintenance of such Special Economic Zone to another Developer (hereafter in this section referred to as the transferee Developer), the deduction under sub-section (1) shall be allowed to such transferee Developer for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee Developer.

(3) The provisions of sub-section (5) and sub-sections (7) to (12) of section 80-IA shall apply to the Special Economic Zones for the purpose of allowing deductions under sub-section (1).

Explanation-For the purposes of this section, “Developer” and “Special Economic Zone” shall have the same meanings respectively as assigned to them in clauses (g) and (za) of section 2 of the Special Economic Zones Act, 2005.”

64. Ergo, the benefit u/s.80IAB is eligible only in respect of project approved by Board of Approval under the aegis of Ministry of Commerce and Industry and once the approval is granted by BOA, the statutory benefit has to be granted so as to give effect to such approval. The SEZ Act, 2005 has been enacted as a self-contained code and is a Special Act which has an overriding effect on any other Act including the Income Tax Act, 1961, in view of provision of Section 51 and r.w.s. 27 of the SEZ Act 2005.

65. Before us, the learned counsel has given the sequence of various approvals which are quite relevant for examining the claim of the assessee, which are as under:

i. That SEZ project undertaken by the assessee was approved by Government of India (BOA) vide letter dated 25/10/2006 which was subsequently notified in Official Gazette.

ii. Vide letter dated 14/02/2007, approval was granted to the assessee to carry out authorized operations in SEZ which included development of infrastructure facility.

iii. The MOU filed vide letter dated 22/03/2007 before BOA for treating M/s. DLF Assets P. Ltd. as co-developer for the purpose of developing of SEZ project was approved by Ministry of Commerce and Industry, Government of India (SEZ Section) vide approval dated 07/05/2007.

iv. Vide approval letter dated 22/05/2007, BOA approved authorized operations that could be carried out by M/s. DLF Assets P. Ltd. which inter-alia included development of warm shell.

v. The MOU dated 29/01/2007 got culminated into definitive agreement dated 20/03/2008 which was duly considered while granting approval to M/s. DLF Assets P. Ltd. vide letter dated 01/06/2009.

vi. That assessee further sought clarifications vide letter dated 10/01/2011 from Ministry of Commerce and Industry, Government of India (SEZ Section) which were answered by letter dated 18/01/2011 wherein it was categorically stated that lease of land to co-developer is permissible under Rule 11(9) of SEZ Rules. It was further clarified by the Ministry that Co-developer can acquire / purchase building on the leased land to perform approved operations. Moreover, the transaction envisaged in the MOU and agreement with M/s. DLF Assets P. Ltd. has been specifically approved in reply to Query No.6 & 7 of the said letter. This position was once again clarified in reply dated 20/01/2011.

vii. The BOA also sought clarification from CBDT regarding activity proposed to be carried out by the assessee and co-developer and CBDT duly approved by the same vide letter dated 01.06.2009 with disclaimer that Income Tax Department shall have right to examine the taxability of transaction involving lease of land.

66. One of the main reasons for denying the claim of benefit u/s.80IAB by the Assessing Officer was that the ownership of land on which SEZ has been developed is in dispute in view of decision of Hon’ble Punjab and Haryana High Court, and therefore, such a claim is inadmissible. In this connection, learned counsel before us has clarified that assessee was a bona fide purchaser of the property in respect of which approval for development of SEZ project was duly granted by Government of India. In any case, the Hon’ble P&H High Court has not commented upon SEZ Project developed on said piece of land and the decision will not at all affect the right of the assessee. In these circumstances, the decision of P&H High Court shall have no bearing on the claim of deduction u/s 80IAB of the Act particularly when the infrastructure project has already been executed and completed. In any case, the order of P&H High Court pronounced on 03/02/2011 was challenged before Supreme Court by the assessee and other parties and now the Hon’ble Supreme Court vide order dated 20/06/2011 has stayed the operation of judgment of P&H High Court and therefore, the adverse inference on the basis of order of P&H High Court is not sustainable. He clarified that assessment order was passed on 27/04/2011, i.e., before passing of the order by the Hon’ble Supreme Court and thus, the observation of the assessing officer is no longer relevant and this controversy has no legs to stand.

67. We find that, even the ld. CIT (A) has considered this fact in light of the judgment of the Hon’ble Supreme Court and on this basis has rejected the observations made by the Assessing Officer. Thus, when the operation of the order of the Hon’ble Punjab and Haryana High Court has been stayed by the Hon’ble Supreme Court vide judgment and order dated 20.06.2011, then blindly relying upon the order of the Hon’ble High Court cannot be the ground for rejecting the claim of deduction. Even otherwise also, in case the acquisition of land by State Government and consequential ownership of the land by the assessee in future is cancelled by the Hon’ble Supreme Court, then as a consequence, assessee will have to return the entire consideration to the co-developer and in such a situation there would arise no occasion to charge any income tax or give any consequential benefit u/s.80IAB. Thus, the reasoning given by the ld. CIT (A) to reject this ground is affirmed and is upheld.

68. Now coming to the Assessing Officer’s reasoning that transfer of a building cannot be considered as activity of development of SEZ, and therefore, profit arising from such transfer is not eligible for deduction u/s.80IAB; and lease of land for further 30 years to M/s. DLF Asset Ltd. tantamount to transfer of land. All these reasoning of the ld. Assessing Officer at the threshold cannot be entertained or appreciated, in view of series of approvals from ‘Board of Approval’, which is a body authorised by the statute and by the Govt. of India. Assessing Officer has mainly considered/examined the issue of disallowance of claim of deduction on the ground that activity of developing of building and subsequent transfer of bare shell to co-developer is not the authorized operation under SEZ Act. As stated above, before undertaking the activity of development of SEZ, the assessee has obtained approvals from time to time so as to comply strictly within the provisions of SEZ Act r.w.s. 80IAB of I.T. Act. The Board has granted approval not only to the assessee for building the bare shell but also to the co­developer after examining the various clauses of MOUs dated 29.01.2007 and 20.03.2008, wherein particulars of development activity are extensively laid down. The provision of Section 80IAB mandates that assessee must be a developer under the SEZ Act and income must be derived from business of developing SEZ notified under the SEZ Act, 2005. Here in this case, all the conditions stood satisfied and Assessing Officer has also not pointed out as to which of the conditions have not been fulfilled. Likewise, in the present case, it is an undisputed fact that, firstly, the area has been notified as Special Economic Zone vide notification dated 06.12.2006 and 19.03.2007; secondly, the assessee has been approved as Developer by BOA vide letter dated 25.10.2006 and 14.12.2007; and lastly, the operation of developing of building has been approved as authorized operations and as such the income has been derived from developing and sale of bare shell building in SEZ. The term ‘Developing a Special Economic Zone’ has to be seen in terms of authorized operations specified by BOA under the SEZ Act, 2005. Though Income Tax Act does not define the term ‘Developing a Special Economic Zone’, however, the meaning of the same has to be deduced from the SEZ Act. Here, in this case, not only the BOA has recognized the existence of SEZ but has also approved the activity of developing and transfer of bare shell as authorized operation of developing of SEZ and assessee has been recognized as developer. Accordingly, all the conditions spelt out in Section 80IAB stands fulfilled.

69. The Assessing Officer has also drawn adverse inference from the fact that sale of land is not allowed in SEZ, because as per SEZ Rules the assessee has transferred the land for 49 years lease, which in fact is not correct, because the same was for 30 years, and also it is against the spirit of Rule 11(9) of ‘SEZ Rule 2006’. It has been brought on record and has been contended at every stage that assessee has not transferred the ownership of the land to co-developer M/s. DLF Pvt. Ltd. at any point of time, as the same has been given on lease for the period of 30 years and this fact is clearly borne out from the clauses of MOU and definitive agreements that the ownership of the land remains with the assessee and there is no case of transfer of land. Rule 11(9) of SEZ Rules, 2006 only prohibits sale of land and same is not applicable in the case of lease. This position is also corroborated from specific reply of BOA in letter dated 18.01.2011 and 20.01.2011. This clarification issued by BOA clearly clinches the issue in favour of the assessee, because BOA in clear words and terms has clarified the legality and permissibility of transaction of bare shell building to co-developers and lease of land in terms of provision of SEZ Act, 2005. Thus, any doubts regarding authorized operation have been set at rest by BOA. Hence, the allegations of the Assessing Officer are totally misconceived and are rejected.

70. The ld. CIT(A) vide his finding recorded in paragraph 8.17 to 8.27 had specifically referred to the minutes of BOA meets as well as comments obtained from CBDT with regard to the lease of land. The Director CBDT vide letter dated 26.05.2009 has conveyed its approval for the project under consideration with the right to examine the taxability of income arising from such transaction under the Income Tax Act. The BOA only after considering the reply from the CBDT, granted the approval vide letter dated 01.06.2009 to Codeveloper, M/s. DLF Assets P. Ltd. on definitive agreement dated 20.03.2008 after inserting clause (xvii) of Para 3, wherein it was clarified that approval to lease agreement will not have any bearing on treatment of income by way of lease /rental/down payment/premium etc. under the Income tax Act, 1961. It was specifically pointed out by the Ld. Counsel that there was nothing in the minutes of meetings of Board of Approval held on 23.02.2009 and 19.06.2009, indicating that there was any objection with regard to proposed transfer of bare shells by the assessee to Co­developer. The assessing officer has relied upon clause (xvii) of Para 3 of letter dated 01.06.2009 while reaching to the erroneous conclusion that taxability of entire transaction is open for examination and assessment. However, it is seen that the assessing officer in fact has failed to appreciate the above clause in right perspective and has attempted to make use of the same for justifying the denial of claim of deduction u/s 80IAB of the Act. It is pertinent to note here that clause (xvii) of Para 3 is only with regard to terms and conditions of lease agreement and same cannot be inferred to dispute the transaction of transfer of bare shell building and profit arising therefrom. In the present case, the assessee has claimed deduction of profit from sale of bare shell building and as such the clause relating to issue of taxability of lease income is of no help to the revenue. The CIT(A) has given express finding on this issue vide para 8.25 of his order which is quite relevant and allay the charge of the AO. Further, it is seen that the Disclaimer Clause in approval dated 01.06.2009 granted to Co-Developer has been primarily inserted by the BOA in the approval to put a curb on the wrong practice of leasing the land for long periods and receiving onetime payment in the form of lease rentals/down payments/premium etc. which tantamount to sale of Land in the guise of long-term lease. Thus, the reliance by AO on such disclaimer is misplaced as the disclaimer per se shall have no bearing on taxability of development of the building and income by way of sale of bare shell buildings in the hands of the assessee. The assessee has obtained requisite approvals from the Board of Approval in by disclosing not only the development consideration but also the basis for determining the same.

71. The entire controversy as to whether the transfer of bare shell buildings to the Co­developer was an Authorized operation or not as highlighted by the Ld. Counsel before us, has been set at rest by further clarifications dated 18.01.2011 and 20.01.2011 issued by the Ministry of Commerce. In our opinion, the Revenue authorities do not have jurisdiction to question the validity or the legality of ‘authorized operations’ once it has been approved by the Board of Approval/Central Government under a statute and any attempt to dispute the same would be contrary to the provisions of the SEZ Act, which has an overriding effect. In the garb of disclaimer, the AO cannot usurp the functions of the Board of Approval and sit over the judgement on what constitutes an authorized operation within the meaning of SEZ Act/SEZ Rules. Merely because a deduction is allowed to transferee developer in respect of profits derived from operation and maintenance would not lead to inference that the deduction for development of a SEZ would not be available to the developer. The mandate of Section 80IAB is that a developer is entitled to deduction in respect of “profits and gains” derived from “any business of developing a Special Economic Zone” and for what constitutes ‘developing a Special Economic Zone’, one has to refer to the provisions of the SEZ Act. When the assessee has been granted approval as a Developer and all the authorized operation were approved including transfer of bare shells to the Co-developer for a development consideration by the Board of Approval, the business activity carried out by the assessee pursuant to such approvals constitute business of ‘Developing a Special Economic Zone’ within the meaning of Section 80IAB of the Act. Under section 80IAB, the AO’s authority is limited to examine whether the provisions of section 80IAB read along with the relevant Rules have been complied or not. For instance, some of the conditions as stipulated in the section which the AO may examine may include: –

Whether the assessee is a developer under the SEZ Act and is in the business of developing a SEZ.

-The SEZ has been notified on or after the 1st day of April 2005 under the Special Economic Zone Act, 2005.

-Whether the profits have been derived from the business of development, operation and maintenance of a SEZ.

72. The case of assessee has been that the land has been given on lease for a period of 30 years and lease rentals per annum are being received over a period of lease term on annual basis and not up-front for all the years under the lease. The disclaimer condition mentioned in clause 3(xvii) of the approval letter dated 01.06.2009 does not give any additional power to the AO to examine the taxability of the transaction of hand over and transfer of bare shells but has to be restricted only to examine the transaction of lease of Land, as expressly clarified by the Ministry of Commerce in the clarification dated 18.01.2011 so that the transactions of sale of land in the guise of long term lease by receiving premium/down payments etc. do not escape the scrutiny under the Income Tax Act as there is an express prohibition on sale of Land in the SEZ. Under these facts and circumstances, we do not find the reasoning given by the AO to disallow the claim is justified.

73. Before us, learned Special counsel referring to the same reasoning given by the Assessing Officer had submitted that transfer of building of co-developer cannot be treated as a business activity and the income from such transfer cannot be treated as business income. In fact, it is a sale of a building in the nature of capital asset. The contention raised on behalf of the Revenue in the facts of the present case cannot be sustained because all the conditions laid down under the SEZ Act have been examined minutely by the authorized authority, i.e., Board of Approval. Once assessee has been notified as developer under the SEZ Act and his activity has been approved by BOA and the SEZ in which the assessee has carried out its business activity has been notified under the SEZ Act, 2005 then profits derived from business of development, operation and maintenance of a SEZ has to be taken from such activity and consequently is entitled for claim of deduction u/s.80IAB.

74. Thus, in view of our reasoning given above, we hold that Assessing Officer was not justified in denying the benefit of deduction u/s.80IAB arising from sale of bare shell building to co-developer.

75. Before us, learned counsel for the assessee has also pointed out that in a group concern, this Tribunal in the case of DLF Info City Developer (Chennai) Ltd. and M/s. DLF Cyber City Developers Ltd. on identical circumstances and similar reasoning given by the AO has allowed the claim of deduction u/s.80IAB. The copy of these judgments has been placed before us in paper books.

76. From the perusal of the aforesaid, we find that precisely same reasoning were given by the Assessing Officer in these cases wherein the Tribunal after analyzing the provision of SEZ Act, 2005 and on exactly similar set of activities have held that assessee is eligible for deduction u/s.80IAB because they were in consonance not only under the SEZ but also BOA has approved such activities.

77. The Assessing Officer as an alternative has also held that isolated transaction of sale of building is assessable under the head ‘income from capital gain’, and therefore, provision of Section 80IAB is not applicable and since the purchaser M/s. DLF Ltd. has shown the bare shell building as fixed assets with balance-sheet, therefore, the same constitutes the capital assets of the assessee and thus, the profit arising from sale of bare shell is in the nature of Short Term Capital Gain. The aforesaid observations of the ld. Assessing Officer cannot be accepted because assessee is engaged assessee is engaged in the business of real estate and the building in SEZ has been shown as stock-in-trade on which revenue has been recognized as per Percentage Completion method (POCM) prescribed under AS-7. The SEZ project was part of regular business activity of the assessee and as such there is no case to treat this transaction in different context so as to re-characterize income under the head capital gain merely to defeat the claim of deduction based on requisite approval and provisions of section 80IAB. In fact, even during the year under reference, AO has considered various other projects under the head business income. Further, when the books of account of the assessee were subjected to Special Audit u/s 142(2A) and the Special Auditor has accepted the treatment of income from sale of bare shell building as part of business profits, then such an income arising from sale of bare shell building would fall in the nature of business income eligible for deduction u/s 80IAB of the Act. Apart from that, it is noted that assesseecompany was formed with the object of real estate development and has been engaged in this activity since inception. It is the intention of the assessee which is relevant and determining factor whether the asset is held as stock or capital asset. In the present case, the assessee moved an application for setting up of SEZ project which was duly approved as Developer by BOA. The cost incurred on development of bare shell building was disclosed as stock and revenue was recognized as per POCM. Under these circumstances, the income from sale of building is purely in the nature of business income. The assessee is engaged in organized activity of development of infrastructure facility in SEZ and as such operations ostensibly are in the nature of business in terms of section 2(13) of the Income tax Act, 1961. Thus, re-characterising the income as short-term capital gain by the AO is rejected.

78. Coming to another alternative finding of the ld. Assessing Officer that, since the land has been leased for 49 years, therefore, the income from sale of bare shell building should also be bifurcated and proportionate recognized over a period of 49 years. We find that the Ld. CIT (A) has discussed this issue in detail and has held that the lease is only in respect of land and same cannot be applied on transfer of building. In any case, the recognition of revenue relating to real estate projects is governed by AS-7 and the assessee has been consistently following POCM which has accepted by the Tribunal in assessee’s own case for AY 2006-07. Hence, such a reasoning of the AO to disallow proportionate deduction cannot be sustained.

79. Thus, in view of our finding given above, the order of the ld. CIT (A) in allowing the claim of benefit u/s.80IAB is confirmed and consequently the ground raised by the Revenue is dismissed.

80. Lastly, in so far as the reliance placed by the Ld. Spl. Counsel for the revenue that the Hon’ble High Court in the case of one of the sister concerns, has set-aside the issue for deciding on merits while upholding the revision us/s 263 by the CIT, is also sans any merits, because, nowhere the Hon’ble High Court has adversely commented on the claim of deduction u/s 80IAB on merits. In fact, matter has been restored back to the Tribunal to decide the issue on merits afresh after considering all the facts and the relevant provisions of SEZ Act, which we have already discussed in detail. Thus, reliance placed by the Revenue to draw any adverse inference on merits cannot be sustained.”

7. The learned departmental representative could not show was any reason to deviate from the order of the coordinate bench. The learned CIT – A has also decided the issue accordingly in favour of the assessee. In view of this ground number one of the appeal is dismissed and the order of the learned CIT appeal is confirmed to that extent.

8. The ground number two is with respect to the deletion of addition on account of disallowance of deduction for short allocation of overheads to SEZ division of ₹ 93,02,00,000. Both the parties agreed that the CIT – A has deleted the identical addition on this issue for assessment year 2008 – 09 and which has been confirmed by the coordinate bench in assessee’s own case. Further the learned authorised representative submitted that the Department has not preferred any appeal against the order of the coordinate bench for that assessment year and therefore same should be followed. On careful consideration of the fact it is found that this issue is covered at page number 138 at para number 125 wide ground number 12 of the appeal of the assessee for assessment year 2008 – 09 wherein the coordinate benches allowed the issue in favour of the assessee following the order of the coordinate bench in assessee’s own case for assessment year 2006 – 07 as Under:-

“125. In ground no.12, the Revenue has challenged the deletion of addition ₹ 15,02,99,365/- on account of disallowance of expenses towards non allocation of overheads.

126. Ld. Assessing Officer based on Special auditor’s observation noted that there were certain discrepancies with regard to apportionment of common overhead expenses incurred by the assessee company but attributable to group concern were benefitting from such expenditure. Based on the observations of the Special Auditors, the Assessing Officer required the assessee as to why the expenditure of ₹ 15,02,99,365/- benefit of which has accrued to the group entities like, DLF Infocity developers (Chennai Limited) and DLF Cyber City Developers Ltd. be apportioned to them and correspondingly the same should be disallowed in the hands of the assessee. In response, the assessee has submitted the detail reply and submitted that if income expenditure has been incurred on behalf of company, the same have been duly recovered from those companies specifically and assessee has not debited to the P&L account. For the specific expenses which were debited to the concern group companies there is no expenditure which pertains to other group companies and all the expenses debited in the P&L account are related to the business of the assessee. Even the Special auditors have not been pointed out even a single voucher pertaining to other group company which has been wrongly debited to the P & L account of the assessee. Regarding overhead allocation the assessee has submitted as under:

a. That the assessee company has not developed the SEZ rather only constructed the buildings. The deduction u/s 80-IAB is available only in the case of development of SEZ. Mere construction of Bare shell buildings will allow the assessee the deduction u/s 80-IAB. Section 80-IAB states that profit and gains derived from business of developing SEZ. Thus, the deduction is only available once the SEZ is developed and it cannot be allowed before the stage of development of SEZ.

b. Sale of buildings to the co-developer is neither an activity of development of SEZ nor one of the authorized operations for SEZ notified by the competent authority. It is an isolated transaction giving one time income from transfer of capital assets. It is very clear from the Co- Developer agreement and lease deed that the intention on the part of the assessee company, from the very beginning was to construct and sale the buildings as a onetime activity. Such isolated transaction can never be termed as business activity. Co­developer agreement and lease deed very clearly shows that the developer has sold the land and building and loses all rights over these transferred capital assets and the relinquishment of right is irrevocable.

c. Though SEZ Act prohibits for sale of land thereby implicitly denying any benefit to a developer who is basically interested in deriving income by transfer of assets, the assessee has found a way to overcome this prohibition by creating 49 years lease in favour of co-developer. It is pertinent to note that the lease deed is renewable further and thus effectively transferring the land also. Para 2.3 and 5.1 of the Lease Deed clearly allows the parties to renew the lease deed. Thus, the assessee company has transferred the land in actual sense and substance of this present transaction means sale of land. In most of the cases, substance of the transaction and its form are one and the same. However, the substance can be different from the form of the transaction in many cases. In the present case, the assessing officer has rightly gone for the substance of the transaction and disallowed the deduction u/s 80-IAB claimed by the assessee company as the lease deed is mere eye wash and actual transaction was sale of land which is clearly not permissible under SEZ Act. Relevant paras of Lease deed are at page 135 & 136 of the Paper Book II filed by the Counsel of the assessee.

d. The transfer of building is absolute and as per the amended agreement and lease deed, Co-developer shall be treated as owner of the bare shell building and the warm shell building after additions etc and will have exclusive rights to let, mortgage, or allow use of all or any part of buildings.

e. That if the deduction u/s 80-IAB is allowed to the assessee company in this case and the Co-developer does not develop the SEZ later on , how can we say that the SEZ has been developed and why should the deduction be allowed to the assessee company at this stage where the development of SEZ has not been done . Allowing the deduction at the stage of construction of bare shell building would be against the provisions of SEZ and Income Tax Act.

127. Ld. Assessing Officer after considering the assessee’s reply had observed as under:

“12.5 The reply of the assessee has been considered and from the reply it emerges that the assessee has stated that it is a listed company and not incurred any expenditure on behalf of its associated companies. The assessee company has argued that in case of both the companies to which the expenses have been allocated the main project undertaken by the two companies is development of SEZ and hence administrative activities in these companies are minimal and there is no need for allocation of further overheads. Both these companies have incurred overhead expenditure which formed part of development cost considered in POCM. This argument of the company is not tenable as the two companies DLF Info City Developers (Chennai) Ltd and DLF Cyber City Developer Ltd. during the Asstt. year 2008-09 had earned development income of ₹ 1,68,686.15 lacs and ₹ 1,63,049.03 lacs respectively and against the same the overhead expenditure shown by these companies is ₹ 71.58 lacs and ₹ 1,194.51 lacs respectively. In fact, in case of DLF Cyber City Developers, the expenditure of ₹ 1194.51 lacs includes commission and brokerage expenditure of ₹ 1155.79 Lacs and if this is reduced then the overhead expenditure incurred would be just ₹ 38.72 Lacs. It is difficult to imagine that the two companies earning development income of ₹ 168686 lacs and ₹ 163049 lacs would have incurred overhead expenditure of ₹ 71.58 lac and 38.72 lacs only. This clearly points to the fact that these two companies must have benefitted from the overhead expenditure incurred by DLF Ltd. In the previous year’s also DLF Ltd has itself allocated overhead expenditure to its associated concerns.

12.6 The assessee has contended that revenue impact of whole of this exercise is revenue neutral since if certain amount of expenses is held to be allocable to group entities, the same will have to be allowed in the hands of those entities. In this respect the point to be observed is that the two companies identified by the Special Auditors which had incurred negligible overheads have earned income from development of SEZ and claimed deduction equal to 100% of profit earned on SEZ development u/s 801AB, hence the argument of the assessee that this exercise would be revenue neutral is incorrect.

12.7 The assessee has stated in the reply that in these two companies even though construction activities were going on, there was no marketing, planning or any other HO level administrative work involved during the year. The assessee has not been able to substantiate this argument with any documentary evidence.

12.8 The assessee has relied on certain citations wherein it has been held that expenses incurred for business requirement are allowable and any incidental benefit arising to a third party out of such expenditure cannot be made basis for disallowing the same. These citations are not relevant in the present case since the expenses incurred by the assessee have benefitted the associated companies of the assessee who are in similar line of business as that of the assessee and in the past also the assessee itself had allocated certain expenditure to its associated companies. The assessee has also mentioned certain citations regarding business expediency and stated that the expenses must be incidental to the business of the assessee. The question here is that the expenses incurred by the assessee have benefitted the associated concerns and therefore the same are to be apportioned to the associated concerns. The associated concerns during the year have developed SEZ and the assessee company during the year had also earned income from development of SEZ but there is substantial variance in the level of expenses incurred and accordingly some expenses are to be attributable for the benefit of associated concerns since there is similar line of business. The associated concerns has claimed 100% deduction u/s 80IAB and therefore by transferring the expenses of associated concerns to the assessee company some portion of such expenses are to be allocated to the associated companies.

12.9 The assessee has also cited judgement in the case of Nestle India Limited Vs DCIT (2009) 27 SOT 9(Delhi). In this case it was held that the assessee company had incurred expenditure on account of advertisement and sales promotion in respect of only those products in which the Indian company dealing in. Thus, the expenditure had been incurred to promote sales in India. Therefore, those expenses were incurred wholly and exclusively for the purpose of business of the assessee. In this case the associated concerns of Nestle India are situated outside India and it was easily established by Nestle that the advertisement expenses were incurred in respect of products dealt by the Indian company. However, in the case of the assessee the line of business of the assessee company and its associated concerns is identical and therefore the percentage of overhead expenditure incurred by the assessee and its associated concerns would be similar. The Special Auditor in their report have reported that DLF Ltd have incurred administrative overheads of 3.18% of the total turnover but in the case of DLF Info City Developers (Chennai) Ltd. the company has incurred administrative overheads of ₹ 71.58 Lacs against development income of ₹ 168686 Lacs which is just 0.042% of total turnover and DLF Cyber City Developers Ltd have incurred administrative overheads of ₹ 38.72 Lacs (after reducing brokerage and commission) against development income of ₹ 163049 Lacs which is just 0.023% of total turnover. The line of business of the assessee company and associated concern being identical, the proportion of overhead expenditure to the level of business should also be similar but as mentioned above there is substantial variance in the proportion of overhead expenditure incurred by the assessee company vis-a-vis the two associated concerns. The judgment of Nestle quoted by the assessee is not at all relevant in the present case since the assessee has not been able to prove that the overhead expenses incurred were wholly and exclusively for its benefit and had not benefitted the associated concerns. The assessee has not been able to convincingly explain the extremely low level of administrative overhead expenditure incurred by the two associated concerns as compared to the assessee company considering the similar line of business.

12.10 In view of the same it can be inferred that a part of overhead expenses relatable to the two entities stand in the books of the assessee. Since the benefit of such expenditure does not accrue to the assessee but to the two group entities also, the expenditure of ₹ 15,02,99,365/- as worked out by the special auditors is disallowed.”

12.10 Ld. CIT(A) has deleted the addition in the following manner:

“19.22 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, order of the CIT (A)-XVIII for the A.Y. 2006-07 and my own order for A.Y. 2007­08 wherein this issue has been decided in favour of the appellant, and various case laws relied upon by the appellant on this issue. It is seen that appellant company was allocating over head expenses to its associate companies till October 2006. However, after October 2006, the appellant company stopped allocating overhead expenses to its group companies and transferred the concerned staff, who were previously looking after the affairs of group entities, to the respective entities. After October 2006, the group entities started incurring their own expenses themselves and this fact has been verified by the Special Auditors during the course of Special Audit. It is seen that there are certain heads of expenses which were exclusively pertaining to the appellant company and could not have been allocated to the other group entities. It is also seen from the Special Audit report that the Special Auditors have not brought out any instance of expenditure specifically pertaining to other group companies but has been claimed in the profit and loss account of appellant company during the year. The allocation made out by the Special Auditors was based on the presumption without bringing any material on record. No allocation of overheads is needed in the case of M/s. DLF Info City Developers (Chennai) Ltd. and DLF Cyber City Developers Ltd. because these subsidiaries have their own resources and are meeting out their expenses own their own. In the case of M/s DLF Info City Developers (Chennai) Ltd. it is seen that this company has only one project that is the development of SEZ at Chennai. The only activity in this company is the development of SEZ building and the administrative activity is bare minimum and hence there was no requirement of the allocation of further expenses. Apart from the above the company had incurred overhead expenditure which formed part of the development cost which has been considered for POCM. The details of such expenditure was furnished to the Assessing Officer at page No.1 of appellant’s letter dated 31.3.2011. The amount of overhead expenditure forming part of development cost comes to ₹ 13,12,65,162/-. This expenditure includes the overhead expenses incurred by the DLF Infocity Developer (Chennai) Ltd. In the case of M/s. DLF Cyber City Developers Ltd, it is noted that the main project was only development of SEZ project at Sector 25 Gurgaon. Besides, the above project this company has only rental income. The administrative activity in this company is also minimal and hence there is no need of allocation of any further overheads. This Company is again self sufficient and has its own resources to carry out the activity and hence no further allocation is required. Apart from the above, the company had incurred overhead expenditure which formed part of the development cost which has been considered for POCM. The details of such expenditure was furnished to the Assessing Officer at page No.2 of appellant’s letter dated 31.3.2011. The total cost of the overhead expenditure forming part of development cost is ₹ 9,73,06,213/-. This expenditure includes the overhead expenses incurred by the DLF Cybercity Developer Ltd.

19.23 Hence, it is clear that no benefit has accrued to group companies namely DLF Info City Developers (Chennai) Ltd. and DLF Cyber City Developers Ltd from the expenses of ₹ 150,299,365/-, as these expenses were exclusively for the business of the appellant company. There was no justification for disallowing these expenses. The ASSESSING OFFICER as well as Special Auditors have not brought any material on record which can prove that expenditure debited in the P&L account of the appellant company was not incurred for the bonafide business needs of the appellant company. The appellant company is main group company and expenditure incurred in this company are bound to be higher and in the process of incurring such expenditure if other group companies derived some benefit from such expenses, the expenditure cannot be allocated to the companies who have also derived some benefit. The genuineness of the impugned expenditure for the purpose of business has not been disputed by the AO. Further, under the facts and circumstances as discussed above, it cannot be denied that the said expenditure was not incurred wholly and exclusively for the purpose of the appellant’s business. Further, as argued by the learned AR that all the above group companies of the appellant are subject to tax at the same rate and hence shifting of such expenditure from appellant company to other group companies would be futile and revenue neutral exercise. Considering the above, the impugned disallowance of ₹ 15,02,99,365/- made by the Assessing Officer cannot be sustained. The same is, therefore, deleted.”

129. The Tribunal in Assessment Year 2006-07 has dismissed the Revenue’s appeal on this issue after observing and holding as under:

“121. We have carefully considered the rival contentions. The brief fact is that certain overhead expenses incurred by the assessee have been apportioned to the other group companies for the reason that by incurring those expenses, the assessee has passed on some benefit to those companies. The amount of 75% of that expenditure has been transferred to the group companies and 30% of that expenditure is borne by the assessee company. During the course of assessment proceedings, the AO found that an amount of ₹ 20,79,10,574/- expenditure pertaining to payment to Directors, advertisements, printing and stationery, security charges, leave encashment and salary and wages are not apportioned to group companies and, therefore, AO disallowed 70% of those expenditure amounting to ₹ 14,55,37,401/-. It is not the case of the AO that these amount of expenditure are not incurred by the assessee and further veracity of those expenditure have also not been doubted. The only reason for disallowance is that assessee has not allocated this expenditure to its various group companies and, therefore, AO was of the view that this expenditure has not been incurred wholly and exclusively for the business purpose of the company. On perusal of the expenditure and the orders of the lower authorities, it is apparent that the director’s salary is being paid to the directors of the company including a commission thereof is for the purpose of managing the business of the DLF – assessee. Further, for the protection of the interest of the company even if the directors have given their time for looking after other group activities it is merely a shareholders’ activity. Furthermore, the advertisements, salary and wages, leave encashment expenditure and printing expenses etc. are all pertaining to the business of the company. No evidence / instances have been cited by AO that any of this expenditure has not been incurred by the company and they are not related to the business of the assessee. It may happen that by incurring certain expenditure by the assessee for the purpose of his business may result into some indirect benefit to the group companies but that cannot be the ground for disallowance of that expenditure in the hands of the assessee. The CIT (A) relying upon the decision of ITAT, Delhi Bench in the case of Nestle India Ltd. vs. DICT – 27 SOT 9 has deleted the addition. We do not find any infirmity in the order of the CIT (A) and revenue could not controvert the fact of any expenditure with instances that these are not incurred by the assessee wholly and exclusively for the purposes of the business of the assessee. Hence, we confirm the order of the CIT (A) deleting the addition of ₹ 14,55,37,400/-. Ground No.4 of the revenue’s appeal is dismissed.”

130. In view of the aforesaid observation and the finding of the Tribunal which is applicable in this year also, therefore, respectfully following the same, the Revenue’s ground is dismissed.”

As the revenue could not dispute that the issue is covered by the decision of the coordinate bench, we respectfully following the decision of the coordinate bench dismissed ground number two of the appeal and confirm the order of the learned CIT – A to that extent.

9. Ground number three of the appeal is with respect to the deletion of addition on account of estimated ITC charges and P commencement of the construction cost. Both the parties confirm that this issue is covered by the paragraph number 81/87 of the order of the coordinate bench for assessment year 2008 – 09 as Under:-

“86. We find that the similar issue was also involved before this Tribunal in the appeal for the Assessment Year 2006-07, wherein the Tribunal has decided this issue in favour the assessee in the following manner:

“42. We have carefully considered the rival contentions and also given a careful thought to the offer of ld. DR for setting aside this ground of appeal to the file of the AO for determination of threshold limit of 30% of the total project cost incurred up to this year or not. Before that we would like to address the issue of threshold percentages determined by the assessee of 30% instead of 25 % provided in the guidance note on accounting for real estate transactions issued by ICAI in 2012. Firstly assessee has submitted the instances where in the identical facts and circumstances there is trade practice of adopting threshold of 30 % of the achievement of total project cost for commencement of recognising of revenue. According to that guidance note it is provided that “5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognised under the percentage completion method only when the events in (a) to (d) below are completed.

(a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable:

(i) Environmental and other clearances.

(ii) Approval of plans, designs, etc.

(iii) Title to land or other rights to development/ construction.

(iv) Change in land use

(b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5.

(c) At least 25% of the saleable project area is secured by contracts or agreements with buyers.

(d) At least 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate – If there are 10 Agreements of sale and 10 % of gross amount is realised in case of 8 agreements, revenue can be recognised with respect to these 8 agreements.”

According to the above guidance note the revenue of the project can be recognised only when the above conditions specified therein. According to one of the conditions specified there in is reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2 (c) read with paragraphs 2.3 to 2.5. Therefore the threshold suggested by ICAI is the minimum threshold and it is not prohibited that looking to the business conditions assessee cannot fix up higher threshold. More so when the assessee has stated that many identical companies are also following similar threshold of 30 % of the total project cost, no fault can be found with the estimate made by the assessee. It is also undisputed that in subsequent years the special auditor appointed by revenue has accepted the threshold of 30 % adopted by assessee and AO has accepted the same. In view of above we are of the opinion that assessee has rightly accepted the threshold of 30 % of achievement of total project cost for commencement of revenue recognition. Further the working of the total project should also include all types of development charges required to be included in the same. Ld. AR has stated that the details o f percentage of completion of project are available in the assessment order itself. However after careful consideration and agreed by both the parties, we set aside this issue to the file of the AO to determine with respect to Magnolia Project and Summit Project following :-

(i) To determine the total project cost of both these projects including the cost of internal and external development charges of the project

(ii) To determine whether the actual cost of expenditure incurred up to 31.03.2006 is less than 30% of the total project cost estimated by the assessee;

(iii) If the threshold limit of 30% is crossed then to determine the income of both these projects on percentage completion method in this year;

(iv) To give appropriate relief in subsequent years, if any income is taxed on these projects in those years;

(v) If the project cost incurred up to this year has not crossed threshold of 30% limit of the total project cost estimated then to delete the addition of ₹ 1,02,84,93,509/-.

While deciding this issue AO may however keep in mind the principle laid down by honorable Supreme court in case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295, if AO is satisfied that issue is revenue neutral the matter may be set at rest.

Therefore, ground no.8 of the appeal is allowed with above direction.”

87. Thus, following the earlier year precedence, we decide the issue in favour of the assessee and revenue’s appeal is consequently, dismissed.”

In absence of any contrary decision pointed out before us, we find that issue squarely covered by the decision of the coordinate bench. Accordingly the order of the learned CIT – capital is confirmed in ground number three of the appeal is dismissed.

10. Ground number four of the appeal is against the deletion of the addition on account of capitalization of interest. Both the parties confirm that this issue is also covered against the revenue by the order of the coordinate bench as per paragraph number 97 – 98 of the decision of the coordinate bench wherein the coordinate bench has decided this issue for assessment year 2008 – 09 following the order of the coordinate bench in assessee’s own case for assessment year 2006 – 07 as Under:-

“97. This issue too has been decided in favour of the assessee after detailed discussion by the Tribunal and the relevant observation of the Tribunal reads as under:

“49. We have carefully considered the rival contentions. It appears that the AO has made this addition mainly because of note mentioned by assessee in its accounting policies with respect to borrowing costs according to Accounting Standard 16 issues by ICAI. We have perused notes attached to financial statements and we are of opinion that these notes have arisen in the financial statement of the assessee because of the issue of applicability of Accounting Standard 16 issued by the ICAI. According to Accounting Standard 1 i.e. disclosure of accounting policies, each and every company is required to disclose the accounting policy with respect to various significant income, expenditure and assets and liabilities etc. applicable to it. Borrowing cost is also one of them. ICAI has issued Accounting Standard 16 Accounting for Borrowing Cost wherein it is provided that in case of interest expenditure incurred by the company, it is required to be capitalized if the borrowing is related to the qualifying assets. In this case the inventory is a qualifying assets as it is held for more than 12 months and therefore interest attributable to it is required to be capitalized in the books of accounts as per AS -16. Therefore we do not agree with the arguments of AR that AS -16 does not apply to inventory. However, those are the provisions which are applicable for the maintenance of the accounts of the company and interest is allowable according to provisions of section 36(1) (iii) of the act. Further according to us, the provisions of Accounting Standards and provisions of the Act are two different set of regulations and while deciding this issue, it is well settled judicial precedent that is if there is a contradiction between the two, the provisions of the Act shall prevail. Provisions of section 36(1)(iii) provides that the amount of interest paid in respect of capital borrowed for the purposes of the business or profession deduction is required to be allowed. Proviso inserted w.e.f. 01.04.2004 is the only restriction if condition laid down u/s 36(1) (iii) are satisfied by the assessee. The proviso says that any amount of the interest paid in respect of capital borrowed for acquisition of an asset whether capitalized in books of accounts or not for any period beginning from the date on which the capital asset was borrowed for acquisition of the asset till the date on which such asset was put to use shall not be allowed as deduction. The deduction is to be disallowed even if the interest is capitalized in the books of accounts or not. Hon’ble Supreme Court in the case of Core Healthcare [298 ITR 194] has held that provisions of section 36(1)(iii) is a code in itself. In the present case, the interest paid by the assessee is not for the purpose of acquisition of any capital asset but for its inventory. We do not find any restriction in provisions contained u/s 36(1)(iii) which provides that the interest can be disallowed if incurred for the purpose of inventory as provided under Accounting Standard 16. Apparently, in this case, there is no allegation that interest is not paid on capital borrowed for the purpose of the business. Hon’ble Mumbai High Court in the case o f CIT vs. Lokhandwala Constructions Industries Ltd. [ 131 taxman 810] has held as under :-

“4. From the facts found by the Tribunal on record, it is clear that assessee undertook two-fold activities. It bought and sold flats. Secondly, the assessee was also engaged in the business of construction of buildings. The profits from both the activities were assessed under section 28 of the Income-tax Act. In this case, we are concerned with the second activity (hereinafter referred to, for the sake of brevity, as “Kandivali Project”). According to the Commissioner, loan was raised for securing land/development rights from the Mandal. That, the loan was utilised for purchasing the development rights, which, according to the Commissioner, constituted a capital asset. According to the Commissioner, since the loan was raised for securing capital asset, the interest incurred thereon constituted part of capital expenditure. This finding of the Commissioner was erroneous. In the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 , it was held by the Supreme Court that in cases where the act of borrowing was incidental to carrying on of business, the loan obtained was not an asset. That, for the purposes of deciding the claim of deduction under section 10(2)(iii) of the Income-tax Act, 1922 [section 36(1)(iii) of the present Income-tax Act], it was irrelevant to consider the purpose for which the loan was obtained. In the present case, the assessee was a builder. In the present case, the assessee had undertaken the Project of construction of flats under the Kandivali Project. Therefore, the loan was for obtaining stock-in-trade. That, the Kandivali Project constituted the stock-in-trade of the assessee. That, the Project did not constitute a fixed asset of the assessee. In this case, we are concerned with deduction under section 36(1)(iii). Since the assessee had received loan for obtaining stock-intrade (Kandivali Project), the assessee was entitled to deduction under section 36(1)(iii) of the Act. That, while adjudicating the claim for deduction under section 36(1)(iii) of the Act, the nature of the expense – whether the expense was on capital account or revenue account – was irrelevant as the section itself says that interest paid by the assessee on the capital borrowed by the assessee was an item of deduction. That, the utilization of the capital was irrelevant for the purposes of adjudicating the claim for deduction under section 36(1)(iii) of the Act – Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 (Bom.). In that judgment, it has been laid down that where an assessee claims deduction of interest paid on capital borrowed, all that the assessee had to show was that the capital which was borrowed was used for business purpose in the relevant year o f account and it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset. The said judgment of the Bombay High Court applies to the facts of this case.”

Further, in the following decisions of various coordinate Benches, the deduction of interest has been allowed u/s 36(1)(iii) even where the assesse has followed the projection completion method :-

(i) ACIT vs. Tata Housing Development Company Ltd. – 45 SOT 9 (Bom.);

(ii) DCIT vs. Thakar Developers – 115 TTJ 841 (Pune);

(iii) DCIT vs. K. Raheja Pvt. Ltd. – (2006) TIOL 220 ITAT-MUM.;

(iv) Raheja Development Corporation vs. DCIT in ITA No.240/Bang./97 dated 22.09.1997 – In this case, reference application filed by the Department has also been rejected by the Hon’ble Karnataka High Court vide its order dated 08.11.2000 in Civil Petition No.832/2000 (IT).

Before us, ld. DR could not cite any decision against the claim of the assesse, therefore, respectfully following the decision of Hon’ble Bombay High Court and as well as various coordinate Benches, cited above, we do not concur with the view of CIT (A) on disallowance of interest of ₹ 24.75 crores u/s 36(1) (iii) of the Act. The alternative argument of the assesse regarding adoption of any artificial formula for the purpose of computing interest disallowance. Ld. CIT (A) has presumed proportion of utilisation of funds in absence of the nexus holding that assesse has used mixed funds. Honourable Bombay High court in case of CIT V Reliance Utilities & Power limited 313 ITR 340 has held that

“The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments.”

Therefore we are of the view that presumption is to be assumed in favour of the assesse and not against assesse. Hence, we reject the formulae adopted by CIT (A) of working out proportionate disallowance by adopting artificial formulae. Therefore respectfully following decisions of Honourable Bombay High court in CIT vs. Lokhandwala Constructions Industries Ltd. [ 131 taxman 810] and CIT V Reliance Utilities & Power limited [313 ITR 340] We reverse the order of the CIT (A) confirming the disallowance of expenditure of ₹ 27.40 crores and direct the AO to allow this interest expenditure u/s 36(1) (iii) of the Act.”

98. Accordingly, respectfully following the aforesaid precedence which is applicable on the facts of the present year also, we decide this issue in favour of the assessee.”

In absence of any contrary decision pointed out before us by the learned departmental representative, we respectfully following the decision of the coordinate bench, dismiss ground number four of the appeal and confirm the order of the learned CIT – A to that extent.

11. Ground number five of the appeal is against the deletion of addition on account of brokerage and commission expenditure. Both the parties confirm that this issue is covered in favour of the assessee by the director of number 99 – 103 of the order of the coordinate bench in assessee’s own case for assessment year 2008 – 09 as Under:

“99. In ground no.6, the Revenue has challenged the deletion of addition on account of disallowance of brokerage and commission of ₹ 2,99,74,610/-.

100. Assessing Officer on the basis of comments of Special Auditors observed that certain expenses such as brokerage and commission are being claimed in the P&L account while the matching revenues are not credited to the P&L account. He has discussed in detail various observations and note of the Special Auditors and observed that assessee’s reliance on accounting standard-7 is not misplaced as it applies to construction contract and not to development project undertaken by the assessee himself. Further, the reliance placed by the assessee upon the order of the ld. CIT(A) for the Assessment Year 1983-84 is also misplaced as accounting policy is followed for recognition of revenue in Assessment Year 1983-84 is to be from the accounting policy followed for the year under assessment. The assessee has not paid this brokerage as a selling cost for procuring any construction contract. He has paid this money for selling of this various project even before the construction project was started. He further held liability of expenditure for the purpose of determining the taxable income is determined by the Income Tax Act and not by the accounting standard. He also made reference to the judgment of Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT, (1997) 225 ITR 0802 (SC) and out of total claim of ₹ 10,63,46,742/-, he made disallowance of ₹ 3,64,25,771/-.

101. CIT(A) has discussed the issue in detail and has allowed part relief after observing and holding as under:

“13.20 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, accounting standard AS-2 & AS-7 and judgment of ITAT in earlier years and CIT (Appeals) in appellant’s own case for A.Y₹ 2006-07 and 2007-08. It is seen that as per para-19 of AS-7, it is mentioned that the selling cost cannot be attributed to contract activity or cannot be allocated to a contract under construction. Even as per AS-2 “Valuation of Inventory” issued by ICAI, it is seen that selling and distribution cost cannot be considered as part of the cost of inventory and such expense has to recognized in the period in which they are incurred. The cost which can be attributed /allocated over the inventory should comprise all the cost of purchase, cost of conversion and other cost incurred in bringing the inventory to their present location and condition. In the case of construction activities the cost of purchase of land and construction cost can only be attributed over the project. The brokerage expenses are purely a selling cost and cannot form a part of inventory. In view of the accounting standard, the brokerage expenses being a selling cost cannot be capitalized with the cost of inventory and cannot be allocated to the construction activity. During the year the appellant has paid brokerage of ₹ 10,63,46,742/- for selling of the flats and other properties and properties given on lease to various brokers. The brokerage expenses to the extent of ₹ 9,98,95,581/- pertains to selling of flats and other property. Therefore, such expenses has to be allowed as selling cost in the year in which such expenditure is incurred. The selling cost cannot be capitalized with the inventory as per AS-2 and AS-7 issued by ICAI. Hence, the brokerage paid for selling of flats and property to the extent of ₹ 9,98,95,581/-is an allowable expenditure during the year and disallowance to that extent of ₹ 2,99,74,644/- is deleted.

It is also seen that this issue has been decided in favour of the appellant by Hon’ble ITAT in its order for A.Y. 1984-85. However, the ASSESSING OFFICER has observed that the accounting policy followed by the appellant company for recognition of revenue in the A.Y. 1983-84 were different from the accounting policy followed during the year under consideration. It is seen that in A.Y. 1983-84 also the selling cost i.e. brokerage and commission were claimed in the year in which they are incurred and same were not recognized on the basis of revenue recognition. Therefore, the ratio of the said judgment is still applicable in the case of appellant and the brokerage and commission has to be allowed in the year in which they are incurred and cannot be associated with construction cost. The contention of the ASSESSING OFFICER that the brokerage expenditure to be postponed to subsequent year as per AS-9 cannot be accepted, as brokerage and commission are related to the sale of flats and properties. By incurring the same the appellant has not derived any enduring advantage in subsequent years.

The ASSESSING OFFICER has relied upon the Supreme Court judgment in the case of Madras Industrial Investment Corp. 225 ITR 802. (SC), and has held that the expenses have to be spread over in several years if the benefit of such expenditure is continued in the ensuing years. The facts of this judgment cannot be applied to the appellant’s case as Brokerage and Commission linked with the services rendered by the brokers to the appellant for selling the flats and other properties. There is a nexus between the expenses and services rendered which cannot be spread to several years. The benefit of the brokerage and commission is related to a particular property or flat sold and it cannot be extended to other properties. Therefore, brokerage expenses cannot be postponed for the future years. Therefore, ratio of the said judgment is not applicable in the case of appellant.

13.21 The appellant has placed reliance on the decision of the jurisdictional High Court in the case of Nokia Corporation vs. DIT, Delhi, 2007, 162 Taxman 369 (Delhi), wherein it is held that even if the Department has filed further appeal against the last order, which is in favour of the appellant, the last order is judicially binding on the subordinate authority. Hence, respectfully following the order of the Hon’ble Income Tax appellate Tribunal for AY 1984-85 and the order of CIT(Appeals) for the immediately preceding years relevant to the Assessment Yea₹ 2006-07 and 2007-08 in appellant’s own case. In view of the above, the addition to the extent of ₹ 2,99,74,600/-(₹ 2,82,93,983 + ₹ 16,80,717) pertaining to payment of brokerage and commission is deleted.

13.22 However, expenses of ₹ 64,51,161/- pertains to brokerage paid for giving property on lease. These brokerage expenses have been incurred for giving the Grand Mall and Town Square Mall on rent. This expenditure does not pertain to selling of the inventory or stock in trade, therefore, such expenses cannot be covered under AS-2 and AS-7. This brokerage expenditure of ₹ 64,51,161/-is inextricably linked with the giving Grand Mall and Town Square Mall on rent. The income of the Grand Mall and Town Square Mall received or receivable from rent is assessable under the head “house property”. As per the provisions of IT Act no expenditure is allowable against the income from house property except deduction @30% and interest payment on the loan for construction of house u/s 24 of the IT Act. There is no provision of deduction of brokerage paid for giving the property on rent, therefore, the expenditure incurred by the appellant of ₹ 64,51,161/-( for Grand Mall ₹ 3,65,378/- + town square mall ₹ 60,85,783/-) is not an allowable expenditure.

In the result, this ground of appeal is partly allowed and appellant gets a relief of ₹ 2,99,74,600/-.”

102. Again, this issue has been decided in favour of the assessee by the Tribunal in assessee’s own case for Assessment Year 2006-07 in the following manner:

“69. We have carefully considered the rival contentions. We have also perused the order of ITAT in assessee’s own case for AY 1984-85 submitted before us by the ld. AR. This decision has also been considered by the AO at page 188 of the assessment order. The AO has not followed this decision as it could not be verified whether the issue has been taken up by the department before the Hon’ble Delhi High Court or not. Before us, ld. DR also could not point out that why this decision cannot be followed nor we could find any reason for not following the same by AO except that whether it is accepted by the department or not is not verified. Ld. CIT (A) has also deleted the addition following the order of coordinate Bench of ITAT for AY 1984- 85 in the case of the assessee. Merely because the decision is not accepted by revenue disallowance has been made. As observed by the CIT (A), these expenses related to brokerage of flats as part of selling expenses and, therefore, cannot be included in the cost of construction for the purpose of value o f closing stock of WIP and in view of Accounting Standards issued by the ICAI. Respectfully following the decision of Honourable high court in case of CIT V DLF universal Limited in ITA no 1136/2009 dated 16.04.2015 while deciding ground no 4 of the appeal of the revenue honourable high court has held that expenditure towards brokerage and commission paid to brokers for booking and sale of certain properties is allowable firstly in view f the facts that assessee’s treatment of such expenditure has been decided in favour of the assessee and revenue has not challenged it and secondly such expenditure are allowable. In view of the above facts and following the decision of coordinate Bench as facts are not distinguished by revenue, we confirm the order of CIT (A) in deleting the addition of ₹ 20,87,70,567/- on account of brokerage expenses for sale of various properties. Therefore, ground no.14 is dismissed.”

103. Thus, in view of the aforesaid precedence of the earlier year this issue is decided in favour of the assessee.”

Therefore respectfully following the decision of the coordinate bench we dismiss ground number five of the appeal of the learned assessing officer and confirmed the order of the learned CIT – A to that extent.

12. The ground number six is with respect to the deletion of addition on account of disallowance of net contingency deposit. This issue is stated to be covered in favour of the assessee by the order of the coordinate bench for assessment year 2008 – 09 which followed the order of the coordinate bench in assessee’s own case for assessment year 2006 – 07 and which has not been agitated by the learned assessing officer before the honourable High Court. Further the learned assessing officer himself has not made any addition on this issue in assessment year 2016 – 17 and therefore the coordinate bench decision binds us. The coordinate bench decided the issue as Under:-

108. The next issue for deletion of addition on account of net contingency deposit received at ₹ 1,14,837/-. Ld. Assessing Officer observed that the deposits have been received from the customers as part of total sale price to meet out various contingency expenses and this amount has neither paid back to the customers nor was intended to be paid back. Accordingly, he treated the amount of ₹ 1,14,837/- as income of the assessee.

109. Ld. CIT(A) has deleted the addition in the following manner:

15.6 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, orders of the CIT(Appeals) for the Assessment Veal 2006-07 and 2007-08, which are in favour of the appellant, and the other material available on record. It is seen that these contingency deposits were received from the customers at the time of sale or agreement to sale of plot/flat to meet out the future liability which may arise on account of enhancement of compensation to the land owners or any demand from Govt. of Haryana on account o f development or providing external services to the plot/flat holders. Therefore, such deposits were kept in a separate account and shown under the head ‘liability’. These receipts are not trading receipts of the appellant and same have been received to meet out any unforeseeable liability which may occur in future. In the event of non spending of this amount on any liability, such deposits were required to be refunded to the owners of the plot/flat holders. Since these deposits have been collected for specific purposes, therefore, the same cannot be treated as receipts of the appellant and same cannot be taxed in the head of the appellant as ‘trading receipts’. It is also seen from this deposit account that there is a regular movement of funds and large amounts have been incurred on account of meeting the contingent liabilities like fixing of transformers, laying of electric of line and other demands from Govt. of Haryana. Since this deposit account is maintained for performance of contractual obligations as per clause- 4 of the agreement to sell entered with the respective customers, the same cannot be treated as trading receipts of the appellant. Hence, the addition on account of these receipts amounting to l 1,14,837/- is deleted.”

110. The Tribunal also in Assessment Year 2006-07 has dismissed the Revenue’s appeal after observing and holding as under:

“236. We have carefully considered the rival contentions. This amount has been collected by the assessee at predetermined rate from the buyers which has obligation to incur expenditure on “account of contingent nature for the projects. It is not a fact that this amount has not been utilised as it is evident that in March 2006, assessee has incurred the cost of l 9.87 crores. Furthermore, in the preceding two years as well as succeeding two years, the assessee has incurred expenditure out of this sum. We agree with the contention of the ld. AR that each and every receipt cannot be charged to tax unless it partakes the character of revenue. Further, we also agree with the observation of the ld. DR that receipts if revenue in nature and camouflaged as deposits cannot escape the taxation. In between these two use, facts of the case show that there is a regular movement in this account and expenditure of ₹ 9.87 crores as noted by the CIT (A) has been incurred. Therefore, we are of the view that these are the security deposits which would be utilised in performance of the contractual obligation of the assessee towards those buyers. Anyway, it is not the case of the AO that these receipts have been received during the year, it is also not the case that the payers or the depositors are unidentified and it is not the case of the AO that these amounts have been paid by the buyers without any obligation on the assessee to perform by providing the services. In view of this, we confirm the order of CIT (A) in deleting the addition of ₹ 4,94,00,550/-. on account of security deposits. In the result, the ground no.27 of the revenue’s appeal is dismissed.”

111. Accordingly, following the same precedence this issue is decided in favour of the assessee.”

Therefore, respectfully following the decision of the coordinate bench we dismiss ground number six of the appeal and confirm the order of the learned CIT – A.

13. Ground number seven is with respect to the disallowance of addition on account of net interest free security deposit placed deleted by the learned CIT – A. Both the parties confirm that this issue is covered in favour of the assessee by the order of the coordinate bench in assessee’s own case for assessment year 2008 – 09 wherein coordinate bench followed the decision of the coordinate bench in assessee’s own case for assessment year 2006 – 07 and revenue has not prefer any appeal before the honourable High Court and further from assessment year 2016 – 17 onwards the learned assessing officer himself has not made any addition in the hands of the assessee. The coordinate bench decided this issue as Under:-

“112. In ground no.9, the Revenue has challenged the deletion of addition on account of net interest fee security deposits receipt of ₹ 3,30,893/-. This amount has been added by the Assessing Officer on the ground that maintenance charges collected by the assessee are the same as has been collected by the maintenance agencies. There was no liability of the assessee to pay back this amount to the buyers, and therefore, this amount is income generated by the assessee which should be liable to be taxed.

113. Ld. CIT(A) has deleted the addition made by the Assessing Officer in the following manner:

“16.9 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, decision of CIT (Appeals) for A.Y. 2006-07 and A.Y. 2007-08 which have decided this issue in favour of the appellant company and various judicial pronouncements available on the issue. It is seen that that these deposits were received in terms of sale agreement from customers as interest free security deposits on account of buyers obligation to regularly pay to the appellant or any other agency appointed by the appellant in respect of insurance premium, maintenance etc. These amounts are refundable to customers/ resident associations, once a society or association is formed. In the agreement to sell, it is specifically mentioned that these interest free deposits were taken from the customers to meet certain future liabilities like insurance premium and maintenance charges of the building. For these receipts, a separate account is maintained and as and when the buildings or the complex is handed over to the resident association or condominium association such deposits are handed over to them for maintaining the building and payment of insurance premium of building out of interest received from such deposits. Such deposits are not forming part of sale proceeds, therefore, the same cannot be treated as trading receipts in the hands of the appellant. There is a regular movement of funds for utilization of the same for maintenance and payment of insurance premium from this account. Hence, the addition made by the ASSESSING OFFICER on account of interest free deposits is deleted. The reliance in this regard is placed to the decision of jurisdictional high court in the case of CIT vs. Goyal Gases Pvt. Ltd. ( Supra), wherein security deposits received by the said company were not held as revenue receipt.”

114. The Tribunal also in Assessment Year 2006-07 has dismissed the Revenue’s appeal after observing and holding as under:

“240. We have carefully considered the rival contentions. It is a fact that these deposits are received in terms of sale agreement for customers as security deposit till the formation of condominium and society. These deposits are taken as a safeguard to defray the maintenance expenditure of the society and to keep these deposits for insurance premium and maintenance. They are refundable to resident welfare associations. CIT (A) relying on the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Goel Gases Pvt. Ltd. – 188 ITR 216 (Del.) held that security deposit cannot be charged to tax as an income. In view of this, we do not find any infirmity in the order of the CIT (A) when deposits are with a purpose, the depositors are identified, there is a regular method of accounting adopted in past for treatment of this income which is accepted by the revenue and there is an obligation cast upon the assessee. Hence, ground no.28 of the revenue’s appeal is dismissed.”

115. Accordingly, following the aforesaid order, this issue is decided in favour of the assessee and revenue’s ground is dismissed.”

Accordingly following the order of the coordinate bench in assessee’s own case we dismiss ground number seven of the appeal.

14. Ground number eight is against the deletion of addition on account of net registration charges. Both the parties confirm that this issue is covered in favour of the assessee by the order of the coordinate bench for assessment year 2008 – 09 wherein it followed the decision of the coordinate bench in assessee’s own case for assessment year 2006 – 07 and the revenue has not prefer any appeal against that order and further the learned assessing officer himself has not made any addition on this issue from assessment year 2012 – 13 onwards and therefore the issue becomes conclusively decided in favour of the assessee. These facts are not disputed by the learned departmental representative. The coordinate bench decided this issue as Under:-

“116. The next issue relates to deletion of addition on account of net registration charges received at ₹ 8,49,20,884/-.

117. Ld. Assessing Officer noted that as per clause 13 of the ‘Buyers’ agreement’, it is mentioned that the company along with subsidiary company will prepare and execute Conveyance Deed in favour of the buyer only after receiving the full payment of the total price of the property, parking space, all security deposits, registration charges etc. If the buyer is in default of any of the payment, then the company can withhold the registration of the Conveyance Deed in favour of the buyer till the full payment is made by the buyer. This clause means an obligation on the buyer to undertake the Conveyance Deed within the time stipulated by the company, failing which, in terms of clause 12 of the Agreement, the company can cancel the allotment and forfeit the amount received from the buyer. The assessee’s contention before the Assessing Officer was that real nature of the balance is that buyers have paid advance bills to the assessee and accordingly this has been shown as liability in the balance-sheet and this method has been consistently followed by the assessee in the earlier assessment years. However, the ld. Assessing Officer held that these are not correct fact because similarly additions have been made in the Assessment Yea₹ 2006-07 and 2007-08 by the Assessing Officer. The Assessing Officer has also accompanied the assessee company has furnished company-wise, property wise of the persons from whom registration charges were received during the financial year 2007-08 which cannot contains the subsequent dates of payment of registration charges till 31.12.2010. From these details, Assessing Officer held that it is difficult to assessed the amount spent up to the period ending 31.02.2010 which corresponding to the amount received in the financial year 2007-08 and whether the amount of ₹ 8,49,20,884/- received in the year was actually spend till 31.12.12010 assessee has also not given proof of deposit of registration charges and has only enclosed the list. He thus concluded assessee has not utilized the amount received in account for more than two years, and therefore, it is in the nature of income and assessee may claim the expenditure against such income in the year when the registration charges are paid to the concern parties in these manner he has made the addition.

118. Ld. CIT (A) has deleted the addition after observing as under:

17.15 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, decision of CIT (Appeals) for Assessment Veal 2006-07 and 2007-08 in appellant’s own case wherein this issue has been decided in favour of the appellant and various judicial pronouncements on the issue. It is seen that registration charges are received from the buyers of the plots/flats alongwith other charges to get the flats/plots registered in the name of buyer. There is time gap between the receipt of such charges and actual registration of the flat/plot. Before actual registration takes place, the appellant has to pay stamp charges or it has to get the documents franking for the stamp charges. Therefore, after payment of franking/stamp charges a date is fixed for registration of the property. This procedure takes time, therefore, the amount received on account of registration charges are credited in the account maintained under the head ‘registration charges’. These registration charges have been shown as liability in the balance sheet of the appellant. It is also seen that some time registration charges are received from the customers but actual registration could not takes place due to non availability of person concerned or for want of other formalities or documents. Therefore, the money received in this account is kept in a separate account under the head ‘Current Liability’ as the same does not belong to the appellant. The appellant is a custodian of this amount which ultimately is to be paid to the Government. As observed by the Special Auditors that out of an amount of l 24.76 crore received during the year, an amount of l 16.29 crore has been spent on registration charges. This shows that there is a regular movement of funds by way of credit or debit in this account which has been utilized for registration of conveyance deed in favour of the customers. Hence, the assessing officer was not justified in treating the registration charges as appellant’s income. Hence, the addition of l 8,49,20,884/- made by the ASSESSING OFFICER is deleted.”

119. We find that similar issue was decided by the Tribunal in assessee’s own case in Assessment Year 2007-08 has dismissed the Revenue’s appeal after observing and holding as under:

“244. We have carefully considered the rival contentions. It is noted that this is the amount which is collected by the buyers with specific object of getting exclusion of conveyance deed in favour of the buyer. In fact, it is an advance collected by the assessee from the buyer towards registration charges with the office of the Registrar for conveyance deed registration. At the time of registration, assessee incurs this expenditure by debiting to this account of that particular customer. The total receipt of registration charges is identified with respect to each of the buyer and there are movement in respective accounts. In fact, it is a past through cost collected by the assessee from the buyer to be incurred by assessee on behalf of the buyer. In view of these facts, these receipts cannot partake character of the revenue in the hands of the assessee. It is also not the case of the AO that the depositors are not identified and despite the conveyance deed executed by the assessee, the amount has not been incurred. In absence of this finding, it is not possible to confirm the disallowance. Therefore, we confirm the order of the CIT (A) in deleting the addition of l 18,66,82,603/- being credit balance of registration charges received from the customers. Ground No.29 of the revenue’s appeal is dismissed.”

2. Further, the department has accepted this issue as the above finding of Hon’ble ITAT in AV 2006-07 has not been challenged before High Court. Also, the assessing officer himself has accepted this claim from AV 2012-13 onwards and no addition has been made in this regard.”

120. Further, learned counsel has informed that this issue is decided in favour of the assessee by ld. CIT (A) in assessee’s own case for Assessment Year 2007-08 and the Department has not preferred any second appeal and further, no addition has been made from Assessment Year 2012-13 onwards. In view of the Tribunal order and as a matter of consistency, in this year also we delete the said addition.”

Therefore respectfully following the decision of the coordinate bench we confirm the order of the learned CIT – A deleting the addition of ₹ 6,34,45,144/– and dismiss ground number eight of the appeal.

15. Ground number nine of the appeal is with respect to the deletion of disallowance on account of expenses towards non-allocation of override to group companies. The learned assessing officer has disallowed the sum of ₹ 62,452,456/– the learned authorised representative submitted that this issue is covered in favour of the assessee by the order of the coordinate bench for assessment year 2008 – 09 in assessee’s own case wherein the coordinate bench followed the decision of the ITAT in assessee’s own case for assessment year 2006 – 07 and against that order of the revenue has not preferred any appeal before the honourable High Court. Further the learned assessing officer himself has also not made any addition on this issue from assessment year 2012 – 13 onwards. The learned departmental representative could not dispute the above facts. The coordinate bench decided this issue in favour of the assessee as Under:-

“125. In ground no.12, the Revenue has challenged the deletion of addition ₹ 15,02,99,365/- on account of disallowance of expenses towards non allocation of overheads.

126. Ld. Assessing Officer based on Special auditor’s observation noted that there were certain discrepancies with regard to apportionment of common overhead expenses incurred by the assessee company but attributable to group concern were benefitting from such expenditure. Based on the observations of the Special Auditors, the Assessing Officer required the assessee as to why the expenditure of ₹ 15,02,99,365/- benefit of which has accrued to the group entities like, DLF Infocity developers (Chennai Limited) and DLF Cyber City Developers Ltd. be apportioned to them and correspondingly the same should be disallowed in the hands of the assessee. In response, the assessee has submitted the detail reply and submitted that if income expenditure has been incurred on behalf of company, the same have been duly recovered from those companies specifically and assessee has not debited to the P&L account. For the specific expenses which were debited to the concern group companies there is no expenditure which pertains to other group companies and all the expenses debited in the P&L account are related to the business of the assessee. Even the Special auditors have not been pointed out even a single voucher pertaining to other group company which has been wrongly debited to the P & L account of the assessee. Regarding overhead allocation the assessee has submitted as under:

a. That the assessee company has not developed the SEZ rather only constructed the buildings. The deduction u/s 80-IAB is available only in the case of development of SEZ. Mere construction of Bare shell buildings will allow the assessee the deduction u/s 80-IAB. Section 80-IAB states that profit and gains derived from business of developing SEZ. Thus, the deduction is only available once the SEZ is developed and it cannot be allowed before the stage of development of SEZ.

b. Sale of buildings to the co-developer is neither an activity of development of SEZ nor one of the authorized operations for SEZ notified by the competent authority. It is an isolated transaction giving one time income from transfer of capital assets. It is very clear from the Co- Developer agreement and lease deed that the intention on the part of the assessee company, from the very beginning was to construct and sale the buildings as a onetime activity. Such isolated transaction can never be termed as business activity. Co-developer agreement and lease deed very clearly shows that the developer has sold the land and building and loses all rights over these transferred capital assets and the relinquishment of right is irrevocable.

c. Though SEZ Act prohibits for sale of land thereby implicitly denying any benefit to a developer who is basically interested in deriving income by transfer of assets, the assessee has found a way to overcome this prohibition by creating 49 years lease in favour of co-developer. It is pertinent to note that the lease deed is renewable further and thus effectively transferring the land also. Para 2.3 and 5.1 of the Lease Deed clearly allows the parties to renew the lease deed. Thus, the assessee company has transferred the land in actual sense and substance of this present transaction means sale of land. In most of the cases, substance of the transaction and its form are one and the same. However, the substance can be different from the form of the transaction in many cases. In the present case, the assessing officer has rightly gone for the substance of the transaction and disallowed the deduction u/s 80-IAB claimed by the assessee company as the lease deed is mere eye wash and actual transaction was sale of land which is clearly not permissible under SEZ Act. Relevant paras of Lease deed are at page 135 & 136 of the Paper Book II filed by the Counsel of the assessee.

d. The transfer of building is absolute and as per the amended agreement and lease deed, Co-developer shall be treated as owner of the bare shell building and the warm shell building after additions etc and will have exclusive rights to let, mortgage, or allow use of all or any part of buildings.

e. That if the deduction u/s 80-IAB is allowed to the assessee company in this case and the Co-developer does not develop the SEZ later on , how can we say that the SEZ has been developed and why should the deduction be allowed to the assessee company at this stage where the development of SEZ has not been done . Allowing the deduction at the stage of construction of bare shell building would be against the provisions of SEZ and Income Tax Act.

127. Ld. Assessing Officer after considering the assessee’s reply had observed as under:

“12.5 The reply of the assessee has been considered and from the reply it emerges that the assessee has stated that it is a listed company and not incurred any expenditure on behalf of its associated companies. The assessee company has argued that in case of both the companies to which the expenses have been allocated the main project undertaken by the two companies is development of SEZ and hence administrative activities in these companies are minimal and there is no need for allocation of further overheads. Both these companies have incurred overhead expenditure which formed part of development cost considered in POCM. This argument of the company is not tenable as the two companies DLF Info City Developers (Chennai) Ltd and DLF Cyber City Developer Ltd. during the Asstt. year 2008-09 had earned development income of ₹ 1,68,686.15 lacs and ₹ 1,63,049.03 lacs respectively and against the same the overhead expenditure shown by these companies is ₹ 71.58 lacs and ₹ 1,194.51 lacs respectively. In fact, in case of DLF Cyber City Developers, the expenditure of ₹ 1194.51 lacs includes commission and brokerage expenditure of ₹ 1155.79 Lacs and if this is reduced then the overhead expenditure incurred would be just ₹ 38.72 Lacs. It is difficult to imagine that the two companies earning development income of ₹ 168686 lacs and ₹ 163049 lacs would have incurred overhead expenditure of ₹ 71.58 lac and 38.72 lacs only. This clearly points to the fact that these two companies must have benefitted from the overhead expenditure incurred by DLF Ltd. In the previous year’s also DLF Ltd has itself allocated overhead expenditure to its associated concerns.

12.6 The assessee has contended that revenue impact of whole of this exercise is revenue neutral since if certain amount of expenses is held to be allocable to group entities, the same will have to be allowed in the hands of those entities. In this respect the point to be observed is that the two companies identified by the Special Auditors which had incurred negligible overheads have earned income from development of SEZ and claimed deduction equal to 100% of profit earned on SEZ development u/s 801AB, hence the argument of the assessee that this exercise would be revenue neutral is incorrect.

12.7 The assessee has stated in the reply that in these two companies even though construction activities were going on, there was no marketing, planning or any other HO level administrative work involved during the year. The assessee has not been able to substantiate this argument with any documentary evidence.

12.8 The assessee has relied on certain citations wherein it has been held that expenses incurred for business requirement are allowable and any incidental benefit arising to a third party out of such expenditure cannot be made basis for disallowing the same. These citations are not relevant in the present case since the expenses incurred by the assessee have benefitted the associated companies of the assessee who are in similar line of business as that of the assessee and in the past also the assessee itself had allocated certain expenditure to its associated companies. The assessee has also mentioned certain citations regarding business expediency and stated that the expenses must be incidental to the business of the assessee. The question here is that the expenses incurred by the assessee have benefitted the associated concerns and therefore the same are to be apportioned to the associated concerns. The associated concerns during the year have developed SEZ and the assessee company during the year had also earned income from development of SEZ but there is substantial variance in the level of expenses incurred and accordingly some expenses are to be attributable for the benefit of associated concerns since there is similar line of business. The associated concerns has claimed 100% deduction u/s 80IAB and therefore by transferring the expenses of associated concerns to the assessee company some portion of such expenses are to be allocated to the associated companies.

12.9The assessee has also cited judgement in the case of Nestle India Limited Vs DCIT (2009) 27 SOT 9(Delhi). In this case it was held that the assessee company had incurred expenditure on account of advertisement and sales promotion in respect of only those products in which the Indian company dealing in. Thus, the expenditure had been incurred to promote sales in India. Therefore, those expenses were incurred wholly and exclusively for the purpose of business of the assessee. In this case the associated concerns of Nestle India are situated outside India and it was easily established by Nestle that the advertisement expenses were incurred in respect of products dealt by the Indian company. However, in the case of the assessee the line of business of the assessee company and its associated concerns is identical and therefore the percentage of overhead expenditure incurred by the assessee and its associated concerns would be similar. The Special Auditor in their report have reported that DLF Ltd have incurred administrative overheads of 3.18% of the total turnover but in the case of DLF Info City Developers (Chennai) Ltd. the company has incurred administrative overheads of ₹ 71.58 Lacs against development income of ₹ 168686 Lacs which is just 0.042% of total turnover and DLF Cyber City Developers Ltd have incurred administrative overheads of ₹ 38.72 Lacs (after reducing brokerage and commission) against development income of ₹ 163049 Lacs which is just 0.023% of total turnover. The line of business of the assessee company and associated concern being identical, the proportion of overhead expenditure to the level of business should also be similar but as mentioned above there is substantial variance in the proportion of overhead expenditure incurred by the assessee company vis-a-vis the two associated concerns. The judgment of Nestle quoted by the assessee is not at all relevant in the present case since the assessee has not been able to prove that the overhead expenses incurred were wholly and exclusively for its benefit and had not benefitted the associated concerns. The assessee has not been able to convincingly explain the extremely low level of administrative overhead expenditure incurred by the two associated concerns as compared to the assessee company considering the similar line of business.

12.10 In view of the same it can be inferred that a part of overhead expenses relatable to the two entities stand in the books of the assessee. Since the benefit of such expenditure does not accrue to the assessee but to the two group entities also, the expenditure of ₹ 15,02,99,365/- as worked out by the special auditors is disallowed.”

128. Ld. CIT(A) has deleted the addition in the following manner:

“19.22 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, order of the CIT (A)-XVIII for the A.Y. 2006-07 and my own order for A.Y. 2007-08 wherein this issue has been decided in favour of the appellant, and various case laws relied upon by the appellant on this issue. It is seen that appellant company was allocating over head expenses to its associate companies till October 2006. However, after October 2006, the appellant company stopped allocating overhead expenses to its group companies and transferred the concerned staff, who were previously looking after the affairs of group entities, to the respective entities. After October 2006, the group entities started incurring their own expenses themselves and this fact has been verified by the Special Auditors during the course of Special Audit. It is seen that there are certain heads of expenses which were exclusively pertaining to the appellant company and could not have been allocated to the other group entities. It is also seen from the Special Audit report that the Special Auditors have not brought out any instance of expenditure specifically pertaining to other group companies but has been claimed in the profit and loss account of appellant company during the year. The allocation made out by the Special Auditors was based on the presumption without bringing any material on record. No allocation of overheads is needed in the case of M/s. DLF Info City Developers (Chennai) Ltd. and DLF Cyber City Developers Ltd. because these subsidiaries have their own resources and are meeting out their expenses own their own. In the case of M/s DLF Info City Developers (Chennai) Ltd. it is seen that this company has only one project that is the development of SEZ at Chennai. The only activity in this company is the development of SEZ building and the administrative activity is bare minimum and hence there was no requirement of the allocation of further expenses. Apart from the above the company had incurred overhead expenditure which formed part of the development cost which has been considered for POCM. The details of such expenditure was furnished to the Assessing Officer at page No.1 of appellant’s letter dated 31.3.2011. The amount of overhead expenditure forming part of development cost comes to ₹ 13,12,65,162/-. This expenditure includes the overhead expenses incurred by the DLF Infocity Developer (Chennai) Ltd.

In the case of M/s. DLF Cyber City Developers Ltd, it is noted that the main project was only development of SEZ project at Sector 25 Gurgaon. Besides, the above project this company has only rental income. The administrative activity in this company is also minimal and hence there is no need of allocation of any further overheads. This Company is again self sufficient and has its own resources to carry out the activity and hence no further allocation is required. Apart from the above, the company had incurred overhead expenditure which formed part of the development cost which has been considered for POCM. The details of such expenditure was furnished to the Assessing Officer at page No.2 of appellant’s letter dated 31.3.2011. The total cost of the overhead expenditure forming part of development cost is ₹ 9,73,06,213/-. This expenditure includes the overhead expenses incurred by the DLF Cybercity Developer Ltd.

19.23 Hence, it is clear that no benefit has accrued to group companies namely DLF Info City Developers (Chennai) Ltd. and DLF Cyber City Developers Ltd from the expenses of ₹ 150,299,365/-, as these expenses were exclusively for the business of the appellant company. There was no justification for disallowing these expenses. The ASSESSING OFFICER as well as Special Auditors have not brought any material on record which can prove that expenditure debited in the P&L account of the appellant company was not incurred for the bonafide business needs of the appellant company. The appellant company is main group company and expenditure incurred in this company are bound to be higher and in the process of incurring such expenditure if other group companies derived some benefit from such expenses, the expenditure cannot be allocated to the companies who have also derived some benefit. The genuineness of the impugned expenditure for the purpose of business has not been disputed by the AO. Further, under the facts and circumstances as discussed above, it cannot be denied that the said expenditure was not incurred wholly and exclusively for the purpose of the appellant’s business. Further, as argued by the learned AR that all the above group companies of the appellant are subject to tax at the same rate and hence shifting of such expenditure from appellant company to other group companies would be futile and revenue neutral exercise. Considering the above, the impugned disallowance of ₹ 15,02,99,365/- made by the Assessing Officer cannot be sustained. The same is, therefore, deleted.”

129. The Tribunal in Assessment Year 2006-07 has dismissed the Revenue’s appeal on this issue after observing and holding as under:

“121. We have carefully considered the rival contentions. The brief fact is that certain overhead expenses incurred by the assessee have been apportioned to the other group companies for the reason that by incurring those expenses, the assessee has passed on some benefit to those companies. The amount of 75% of that expenditure has been transferred to the group companies and 30% of that expenditure is borne by the assessee company. During the course of assessment proceedings, the AO found that an amount of ₹ 20,79,10,574/- expenditure pertaining to payment to Directors, advertisements, printing and stationery, security charges, leave encashment and salary and wages are not apportioned to group companies and, therefore, AO disallowed 70% of those expenditure amounting to ₹ 14,55,37,401/-. It is not the case of the AO that these amount of expenditure are not incurred by the assessee and further veracity of those expenditure have also not been doubted. The only reason for disallowance is that assessee has not allocated this expenditure to its various group companies and, therefore, AO was of the view that this expenditure has not been incurred wholly and exclusively for the business purpose of the company. On perusal of the expenditure and the orders of the lower authorities, it is apparent that the director’s salary is being paid to the directors of the company including a commission thereof is for the purpose of managing the business of the DLF – assessee. Further, for the protection of the interest of the company even if the directors have given their time for looking after other group activities it is merely a shareholders’ activity. Furthermore, the advertisements, salary and wages, leave encashment expenditure and printing expenses etc. are all pertaining to the business of the company. No evidence / instances have been cited by AO that any of this expenditure has not been incurred by the company and they are not related to the business of the assessee. It may happen that by incurring certain expenditure by the assessee for the purpose of his business may result into some indirect benefit to the group companies but that cannot be the ground for disallowance of that expenditure in the hands of the assessee. The CIT (A) relying upon the decision of ITAT, Delhi Bench in the case of Nestle India Ltd. vs. DICT – 27 SOT 9 has deleted the addition. We do not find any infirmity in the order of the CIT (A) and revenue could not controvert the fact of any expenditure with instances that these are not incurred by the assessee wholly and exclusively for the purposes of the business of the assessee. Hence, we confirm the order of the CIT (A) deleting the addition of ₹ 14,55,37,400/-. Ground No.4 of the revenue’s appeal is dismissed.”

130. In view of the aforesaid observation and the finding of the Tribunal which is applicable in this year also, therefore, respectfully following the same, the Revenue’s ground is dismissed.”

Therefore respectfully following the decision of the coordinate bench, we confirm the order of the learned CIT – capital and deleting the above addition of ₹ 62,452,456/– and accordingly ground number nine of the appeal is dismissed.

16. Ground number 10 of the appeal is against the disallowance deleted by the learned CIT – A u/s 14 A of the income tax act. The learned authorised representative submitted that this issue is interlinked with the ground number one of the assessee’s appeal. The assessee has challenged it stating that the learned assessing officer has not recorded any satisfaction with respect to the disallowance offered by the assessee and therefore the only addition is required to be deleted. The learned assessing officer has disallowed ₹ 1,326,681,000 u/s 14 A of the act read with rule 8D of the income tax rules. The AO observed that the investment in partnership firm’s and in shares of the companies in mutual funds the income of is exempt has been made out of the interest yielding funds and therefore there is a direct nexus between the funds borrowed in the investment made. The AO has further noted that apart from the interest disallowance of ₹ 11,138.83 lakhs the disallowance of administrative expenditure amounting to Rs 2146.13 lakhs has also been made. The learned assessing officer as per showcause notice dated 1/11/2012 and 4/8/2014 required the appellant to show cause as to why the disallowance should not be made u/s 14 A read with rule 8D of the act. The assessee has submitted that on its own it has disallowed a sum of ₹ 1,815,695 on account of expenses in admissible u/s 14 A of the income tax act. Assessee has also submitted that no further disallowance is required. The learned assessing officer rejected the contention of the assessee and stated that there is bound to be some more expenditure of administrative nature pertaining to earning of the exempt income and expenditure shown by the assessee is not correct. The employees could not have worked in vacuum and definitely the assessee has borne some cost on account of infrastructure and facilities of the assessee used by these employees. Moreover the participation of senior functionaries in the decision making with regard to the investment in exempt income cannot further be ruled out. Therefore the learned assessing officer not satisfied with the correctness of the claim of the assessee and invokes the provisions of rule 8D to make further disallowance u/s 14 A of the income tax act. The learned authorised representative submitted that there is no satisfaction recorded by the learned assessing officer that how the claim of the assessee is incorrect with respect to the accounts of the assessee. It was further stated that the learned assessing officer has made a general remark and could not point out about the correctness or otherwise of the disallowance made by assessee. The assessee has also supported this argument with several judgments of the various courts and tribunals to submit that according to the provisions of Section 14 A (2) of the act the learned assessing officer should have recorded the satisfaction about the correctness of the claim of the assessee with respect to the accounts of the assessee. In absence of any such satisfaction, the total addition/disallowance made by the learned assessing officer deserves to be cancelled.

17. The learned departmental representative vehemently supported the order of the lower authorities and submitted that the learned assessing officer has given a categorical finding that there has to be an involvement of the staff, there has to be further infrastructure expenditure as well as the involvement of the senior officers and hence the satisfaction has been properly recorded.

18. We have carefully considered the rival contention and perused the orders of the lower authorities. Apparently in this case the learned assessing officer has not recorded the satisfaction stating that why the claim of the assessee that it has incurred only ₹ 1,815,695 on account of in admissible expenditure u/s 14 A of the act. The learned assessing officer has only given a general observation. The issue is squarely covered by the decision of the honourable Delhi High Court in case of Eicher Motors Ltd. v. Commissioner of Income-tax-III*  [2017] 86 taxmann.com 49 (Delhi)/[2017] 250 Taxman 532 (Delhi)/[2017] 398 ITR 51 (Delhi)

“13. As regards the disallowance of expenditure for earning exempt income in terms of Section 14A of the Act, the settled legal position is that the AO had to record reasons for disagreeing with the submission of the Assessee that it had incurred no expenditure for earning such exempt income. This is plain even from Rule 8D (1) which requires the AO to mandatorily record his satisfaction that the claim made by the Assessee that no expenditure has been incurred is incorrect “having regard to the accounts of the assessee.” In this case, a perusal of the AO’s reasoning shows that the AO has merely conjectured that there is an inbuilt cost even in passive investment as also incidental expenditure like collection, telephone, follow up etc., The AO thus concludes that the expenses are embedded as indirect expenses. This is not as per the requirements of Rule 8D. There is no satisfaction recorded Rs. based on the accounts of the assessee’. The AO simply presumes that since the exempt income exists and is being claimed by the Assessee, some portion of the expenses ought to be added back. This is not sufficient as per the law. Once this mandatory requirement is itself not fulfilled, in terms of the law explained by this Court in Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272/[2011] 203 Taxman 364/15 taxmann.com 390 (Delhi), the question of remanding the matter to the CIT (A) and to call for a remand report from the AO for the purposes of rectifying this jurisdictional defect simply did not arise. In this context, the Court also notices that in the order passed by the AO on 28/30th December 2016 pursuant to the impugned order of the ITAT on remand, the AO had simply repeated his entire assessment order passed in the first instance. Be that as it may, the Court is of the view that the ITAT erred in overlooking the correct legal position in remanding the matter to CIT (A).

14. Accordingly, both the questions are answered in favour of the Assessee and against the Revenue. The impugned order of the ITAT and the consequential order of the AO dated 28/30th December 2016 are hereby set aside but without any order as to costs.”

Therefore respectfully following the decision of Honourable Delhi High Court, we direct the learned assessing officer to delete the disallowances u/s 14 A of the act by invoking rule 8D without recording of satisfaction. Accordingly ground number 10 of the appeal of the learned assessing officer is dismissed and ground number one of the appeal of the assessee is allowed.

19. Ground number 11 of the appeal is with respect to the deletion of addition on account of reclassification of income from income from house property to income from business and profession. Both the parties confirm that this issue is decided by the coordinate bench in assessee zone case for assessment year 2006 – 07 on 11 March 2016 which has been followed in the subsequent year i.e. assessment year 2008 – 09 by the coordinate bench dated 27/05/2019. For assessment year 2008 – 09 coordinate bench decided this issue as Under:-

“157. Ld. Assessing Officer based on similar observation and following the judgment of Hon’ble Gujarat High Court in the case of CIT vs. Neha Builders, 296 ITR 661, reiterated the addition and computation made by the Special Auditor.

158. Ld. CIT (A) has deleted the addition in the following manner:

“27.13 I have considered the submission of the appellant and observation of the ASSESSING OFFICER and decision of Hon’ble ITAT for A.Y. 1996-97 in appellant’s own case and decision of the Hon’ble CIT(A)-XVIII for A.Y. 2006-07 and my own decision in appellant’s own case for A.Y. 2007-08. It is seen that the issue in this ground is covered in favour of the appellant by the order of Hon’ble ITAT in appellant’s own case for AY 1996-97. The appellant has received income from the properties owned by it and such properties are reflecting in balance sheet as stock in trade. The appellant has furnished the receipt of house tax payment with respect to above said properties during the course of assessment proceedings which establish that said properties belong to appellant and owned by it. It is noticed that the Assessing Officer has made the addition by reclassifying the income by relying upon the judgment of Hon’ble Gujarat High Court in the case of CIT vs. Neha Builders Pvt. Ltd. (supra). However, there is no dispute on the facts noted above. Taking into consideration the order of Hon’ble ITAT in the appellant’s own case for earlier years and the decision in CIT vs. National & Grindlays Bank Limited (supra) and CIT (A)’s order for the immediately preceding years relevant to AY 2006-07 & 2007-08 in appellant’s own case, the income received from the properties owned by the appellant and shown in the balance sheet has to be assessed as income from house property. Therefore, the ASSESSING OFFICER is directed to treat the income from such properties as income from “house property” and allow deduction u/s 24(a) of the IT Act. Hence, the addition made by the ASSESSING OFFICER of ₹ 9,40,52,455/- is deleted.”

159. The Tribunal in assessee’s own case for Assessment Year 2006-07 has dismissed the Revenue’s appeal after observing and holding as under:

“184. Further, Ld. DR has relied upon the decision of Hon’ble Supreme Court in the case of Chennai Properties and Investment Ltd. vs. CIT in Civil Appeal No.4494/2004 wherein Hon’ble Supreme Court has held that letting out of the properties is in fact the business of the assessee. We have gone through the decision of Hon’ble Supreme Court and we are of the view that this decision favours the argument of the assessee. At page 4 of the decision, the Hon’ble Supreme Court has considered the judgement of that court in East India Housing and Land Trust Ltd. The court has considered that decision that where the main objection the company is buying and developing land and properties and promoting and developing markets and some rent is turned out of that, the character of that income shall be income from house property. Therefore, in this case too, the assessee company is a developer and hence, the decision of Hon’ble Supreme Court in the case of Chennai Properties is rendered in the context of the company which is formed with the main object of renting up of the properties. In view of the above, respectfully following the decision of coordinate Bench of the ITAT in the case of assessee for AY 2005-06, we confirm the order of CIT(A) in taxing the rental income as income from house property. In the result the ground no.17 of the revenue’s appeal is dismissed.”

160. Since this issue has been dealt by the Tribunal in various years, therefore, consistent with the view taken, the order of the ld. CIT (A) has confirmed and consequently the Revenue’s ground is dismissed.”

Therefore respectfully following the decision of the coordinate bench we dismiss ground number 11 of the appeal accordingly.

20. Ground number 12 of the appeal is against the deletion of addition on account of notional rent/additional annual lighting value in respect of the vacant and leased out properties amounting to ₹ 629,430/–. Both the parties agreed that this issue is also covered in favour of the assessee by the decision of the coordinate bench for assessment year 2008 – 09 wherein it has been decided as Under:-

“161. In ground no.19, the Revenue has challenged the deletion of addition of ₹ 12,28,340/- on account of disallowance of notional rent/additional annual letting value in respect of the vacant property.

162. Assessing Officer noted that Special Auditor has pointed out that number of immovable property owned by the assessee were lying vacant and notional rent in respect of such properties has been worked out at ₹ 12,28,340/-.

163. CIT (A) has deleted the addition in the following manner:

“28.13 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and various judicial pronouncements available on the issue and order of Commissioner of Income Tax (Appeals)- XVIII for AY 2006-07 and my own order for AY 2007-08 in the case of appellant wherein this issue was decided in favour of appellant. It is seen that impugned addition made on account of notional rent on properties that remained vacant for part of the previous year, the AR reiterated submissions made before the AO and emphasized that the matter is covered in favour of the appellant by judgment in the case of one of the appellant’s group concerns M/s DLF Office Developers Vs. ACIT reported in 23 SOT 19 (Del) and orders of CIT (Appeals) in appellant’s own case for the Assessment yea₹ 2006-07 and 2007- 08. It is observed that” where there was an intention to let out the house property and assessee took steps to let it but could not get suitable tenant, in such cases the annual value will have to be worked out under section 23(1)(c) of the IT Act and according to this clause, if the actual rent received /receivable during the year is Nil then that has to be taken as annual value of the property in order to compute the income from property.”

In the case of appellant, the appellant had intention to let such properties but could not get suitable tenant. In such a situation, the ALV will be Nil as per provision of section 23(1)(c) of the IT Act. Section 23(1)(a) r.w.s 23(1)(c) clearly provides that if the property remain vacant wholly or partly during the party, then actual rent received or receivable will be taken as the ALV of such properties. In the case of appellant the property is remained vacant, therefore, the ALV of such properties will be Nil. Hence, no notional rent can be estimated in the case of vacant properties. The decision of the ASSESSING OFFICER was not justified.”

164. The Tribunal also in assessee’s own case for Assessment Year 2006-07 has dismissed the Revenue’s appeal after observing and holding as under:

“196. We have carefully considered the rival contentions. We have also perused the order of the coordinate Bench of the ITAT in ITA No.3561/Del/2013 wherein ground no.3 have considered the identical issue where in para no 16 to 23 addition is deleted by ITAT as under :-

“16. The Assessing Officer made an addition of ₹ 3,02,61,251/- on account of notional rent/ additional annual letting value (ALB) u/s 23(1) (a) of the Income tax Act,1961, in respect of vacant properties.

The details of the addition as per the assessment order is as under:

– DLF City Centre 2,36,01,310/-
– DLF Commercial Shopping Complex 27,21,360/-
DLF Corporate Park 1,69,07,688/-
4,32,30,358/-
Less: Standard Deduction u/s 24(1) 1,29,69,107/-
3,02,61,250/-

17. The Ld. CIT (A) has deleted the addition after discussing the case of the assessee in detail and following the decision cited before him in this regard including decision of ‘D’ Bench of the Tribunal on an identical issue in the assessee’s group concern M/s DLF Office Developers vs. ACIT reported in 23 SOT 19 (Del) and first appellate orders in the assessee’s own case for the assessment yea₹ 2006-07, 2007-08 and 2008-09.

18. In support of the ground the Ld. Departmental Representative has basically placed reliance on the assessment order.

19. The Ld. AR on the other hand reiterated the submissions made before the Ld. CIT (A) and the decisions cited and relied upon before him.

20. Considering the above submission, we find that the Ld. CIT (A) has decided the issue in favour of the assessee narrating the observation made in the cited decisions in case of M/s DLF Office Developers vs. ACIT (Supra) and other that where there was an intention to let out the house property and assessee took steps to let it but could not get suitable tenant, in such cases the annual value have to be worked out u/s 23(1) (c) of the IT Act and according to this clause if the actual rent received/ receivable during the year is Nil then that has to be taken as annual value of the property in order to compute the income from property. He has accordingly held that in case of the assessee where the property remained vacant then the ALV of such property will be Nil. Hence, no notional rent can be estimated in the case of vacant properties.

21. In absence of rebuttal of above aspect of the facts in the case of present assessee, we are of the view, that the Ld. CIT (A) has rightly decided the issue in favour of the assessee taking assistance of the cited decisions before him. We find that the Ld. CIT (A) has discussed the issue in appeal and has passed a speaking order, which is being reproduced hereunder:

7.15 I have considered the submission of the appellant, observation of the ASSESSING OFFICER and various judicial pronouncements available on the issue and order of Commissioner of Income Tax (Appeals)-XVIII for AY 2006-07 and my own orders for A Y 2007-08 & 2008-09 in the case of appellant wherein this issue was decided in favour of appellant. It is seen that impugned addition made on account of notional rent on properties that remained vacant for part of the previous year, the AR reiterated submissions made before the AO and emphasized that the matter is covered in favour of the appellant by judgment in the case of one of the appellant’s group concerns M/s DLF Office Developers Vs. ACIT reported in 23 SOT 19 (Del) and orders of CIT(Appeals) in appellant’s own case for the Assessment yea₹ 2006-07, 2007-08 & 2008-09. It is observed that “where there was an intention to let out the house property and assessee took steps to let it but could not get suitable tenant, in such cases the annual value will have to be worked out under section 23(l)(c) of the IT Act and according to this clause, if the actual rent received / receivable during the year is Nil then that has to be taken as annual value of the property in order to compute the income from property. “

In the case of appellant, the appellant had intention to let such properties but could not get suitable tenant. In such a situation, the AL V will be Nil as per provision of section 23(1)(c) of the IT Act. Section 23(1)(a) r.w.s 23(1)(c) clearly provides that if the property remain vacant wholly or partly during the year, then actual rent received or receivable will be taken as the ALV of such properties. In the case of appellant the property is remained vacant, therefore, the ALV of such properties will be Nil. Hence, no notional rent can be estimated in the case of vacant properties. The decision of the Assessing Officer was not justified.

As regards, the Assessing Officer’s decision of computing the notional rent based on highest rent in respect of each building, it is seen that the properties have been given to various parties which are not related to the appellant and some of them are of International repute like GE Capital, KPMG. The rent has been charged based on the location of the property, area of lease property and timing of lease agreement. It is seen that appellant has filed copies of the all lease agreement before Assessing Officer for verification and no discrepancy in the rental income in the books of accounts, as compared to the lease agreement was pointed out by the Assessing Officer. It is not the case that appellant has received some under hand rent from the tenants. In this regard the Assessing Officer has not brought any evidence on record and no enquiry in this direction was conducted by him. Therefore, assuming the rent for all properties based on the highest lease agreement was not justifiable. As regards Assessing Officer’s reliance on various judgments in the assessment order, it is seen that the facts of the said judgments are squarely different with that of the appellant’s case. In the case of appellant, none of the properties have been rented out/leased to the related parties. Therefore, the ratio of the said judgment cannot be applied in the appellant case. In view of the above, the bonafide lease agreement between the appellant and third parties cannot be disregarded without having any adverse information in this regard and based on conjectures and surmises. Hence, the addition made by the Assessing Officer on this issued is deleted.

Facts of the above cited judicial pronouncements are identical with the facts of the appellant’s case. Therefore, ratio of the said judgment is squarely applicable to the facts of the appellant’s case. Hence, the notional addition made by the Assessing Officer of ₹ 3,02,61,251/- under the head “income from house property” on account of notional income u/s 23(1) (a) of the Income Tax Act is deleted.”

22. We find that the first appellate order on the issue as discussed above is reasonable and view supported with this decision. Hence, we are not inclined to interfere with the order, the same is upheld. Ground no.3 is accordingly rejected.”

197. Therefore, following the decision of the coordinate Bench of the ITAT in the case of the assessee for AY 2005-06 , the addition of ₹ 3,27,52,542/-is deleted. In the result, ground no.19 is dismissed.”

165. Once this issue has been consistently decided in favour of th the assessee, then in this year, without any change in material facts no different view can be taken. Respectfully following the aforesaid decision of the Tribunal, we dismiss the ground raised by the Revenue.”

Accordingly we confirm the order of the learned CIT – A and dismiss ground number 12 of the appeal.

21. Ground number 13 is against the deletion of addition/disallowance on account of depreciation claimed on DLF Centre building. Both the parties confirm that this issue is identical to the issue in assessee’s own case for assessment year 2008 – 09 wherein the coordinate bench has deleted the above disallowance confirming the order of the learned CIT – A as Under:-

“166. In ground no.20, the Revenue has challenged the deletion of addition ₹ 7,17,794/- on account of depreciation claimed on DLF Centre Building.

167. The Assessing Officer on the basis of Special Audit Report observed that assessee company has charged excess depreciation of ₹ 914277/- on certain portion in respect of building on DLF Center which was earlier let out but during the Assessment Year the same has been converted into self occupied already therefore excess depreciation has been charged since the assessee has claimed depreciation existing on 01.04.1999 whereas depreciation is allowable on WVS on 01.04.2005 the Assessing Officer worked out the excess depreciation of ₹ 8,03,807/-.

168. Ld. CIT(A) has deleted the addition in the following manner:

“30.7 I have considered the submission of the appellant and observation of the ASSESSING OFFICER and order of CIT (A) XVIII for AY 2006-07 and my own order for AY 2007-08 in appellant’s case, where this issue was decided in favour of the appellant company. It is seen that the AO has recalculated written down value as on 01.04.2005 by notionally deducting depreciation from the WDV as on 01.04.1999. The amount of notional depreciation for the period 01.04.1999 01.04.2005 during which period the property had been leased and the income taxed under the head “Income from House Property” after allowing deductions permissible under Section 24 of the Income Tax Act. Deductions by way of depreciation allowance are dealt in section 32 of the Income Tax Act which provides for allowing depreciation on the basis of Written Down Value of the assets under section 32(1)(ii). The definition of the word written down value is in section 43(6)(b) of the Income Tax Act which provides that in the case of assets acquired before the previous year written down value means the actual cost to the appellant less all depreciation actually allowed under the Act. From the facts and the judgment of Hon’ble Supreme Court in the case of CIT vs. Doomdooma India Limited (2009) 178 Taxman 261 (SC), it is clear that the depreciation is to be allowed on the basis of actual WDV and same cannot be reduced on notional basis for the period for which property was not used for business purposes and no depreciation was claimed on such part of the property. From the facts as narrated above and respectfully following the judgment of Hon’ble Supreme Court in the case of CIT vs. Doomdooma India Limited (2009) 178 Taxman 261 (SC) and the judgment of the CIT (Appeals) in the case of the appellant for A.Y. 2006-07 and 2007-08 (supra), the disallowance of depreciation of ₹ 7,17,794/- made by the ASSESSING OFFICER is deleted.”

169. The Tribunal also in assessee’s own case for Assessment Year 2007-08 has dismissed the Revenue’s appeal after observing and holding as under:

“151. We have gone through the submission of the parties. The CIT(A) has observed that this very issue arose in the preceding year and relief allowed at the first appellate stage was accepted by the revenue as no appeal was filed against the same before ITAT. In the light o f above position and as per the decision of Hon’ble Supreme Court in the case of CIT v. J K Charitable Trust [2008] 308 ITR 161 (SC), the revenue could not be permitted to agitate the very same issue in the year under reference. Accordingly, the order of CIT(A) is confirmed.”

170. In view of the above, this issue is decided against the Revenue.”

Therefore respectfully following the decision of the coordinate bench we dismiss ground number 13 of the appeal.

22. Ground number 14 is against the deletion of addition on account of prior period expenditure. Both the parties confirm that this issue is identical to the order of the coordinate bench for assessment year 2008 – 09 wherein the coordinate bench followed the order in case of the assessee for assessment year 2006 – 07 and the revenue has not referred further appeal before the honourable High Court and AO himself has not made any disallowances on this issue with respect to the assessment year 2016 – 17 onwards. The coordinate bench decided this issue as Under:-

“42. In so far as the first issue is concerned, the facts in brief are that the Special Auditors have pointed out that assessee has claimed prior period expenses amounting to ₹ 70,12,062/- on the basis of which, ld. Assessing Officer issued a show cause notice to the assessee. In response, the assessee submitted that first of all, an amount of ₹ 14,63,017/- was on account of purchase of assets being the cost of office equipment and computers and was never claimed as admissible expenses but have been capitalized as fixed assets. The balance amount was stated to be on account of reimbursement to their employees on account of telephone expenses, travelling, printing and stationary and these are reimbursed if the employees submit the claims after proper verification. The claim though relates to earlier years, but bills were presented and settled during the year under reference, therefore, the same is allowable in this year. Similarly, with regard to legal and professional charges which was paid to various consultants, these payments were made after due verification of the services rendered and the claim was finally settled during the year, hence, allowable in this year only. Likewise, repair and maintenance expenses, the same was on account of annual maintenance, contract overlapping in the subsequent year or miscellaneous repair maintenance for which bills were received after the closing of the year, therefore, all these expenses were crystallized during the year. Ld. Assessing Officer, however, disallowed the amount of ₹ 55,36,471/- which was on account reimbursement relating to employee’s; and legal and professional expenses.

43. CIT(A) relying upon the judgment of Hon’ble Delhi High Court in the case of CIT vs. Modipon Ltd., 334 ITR 102 (Del) has allowed the appeal.

44. After considering the rival submissions, we find that precisely similar issue has arisen in assessee’s own case for assessment year 2006-07 wherein the Tribunal has allowed the same nature of expenditures, after observing and holding as under:

“231. We have carefully considered the rival contentions. ₹ 18.51 lakhs were regarding to the leave travel assistance claims of the assessee an ₹ 63 lakhs were on account of reimbursement and telephone and conveyance expenses of the assessee. These expenses were disallowed by the AO. The details of these expenses are enclosed as per Annexure ‘A’ at page 101 along with explanatory statement. These bills are pertaining to the regular staff of the employees and are payable and paid at the time of settlement of their entitlement. It is irrespective of the time when employee has actual travelled. In same way, the telephone and conveyance expenses are also reimbursement of the expenditure which would be determining the claim of the employees and admitted by the employer. The special auditor has held so because of the reason that the actual travelling has taken in the previous year. Naturally, it is a matter of common sense for the purpose of LTA claim, the travelling of the employees is prior to the claims submitted by the employees. The CIT (A) has specifically dealt with one instance in para 27.3 of his order. After verification of the details, it was received by the assessee from its employees during this period and after following the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Shriram Piston – 174 taxman 147, the disallowance is deleted. The reliance of the ld. AR on the decision of Hon’ble Delhi High Court in CIT vs. Modipan Ltd. – 334 ITR 102 is also apt as the expenditure are settled during the year. Further genuineness of these expenditure is not in doubt and allowabaility of these expenditure is also not in question except classifying them as prior period expenses and there is no difference in rate of taxes for respective years. In the result, we confirm the order of the CIT (A) in deleting the addition of ₹ 22,98,510/- on account of prior period expenditure. In the result, ground no.26 of the revenue’s appeal is dismissed.”

45. Since, similar issue has been allowed by the Tribunal following the ratio and principle laid down by the Hon’ble Jurisdictional High Court in the case of CIT vs. Modipon Ltd. (supra), therefore, following the same precedence, we allow the claim of the assessee and consequently the Revenue’s ground is dismissed.”

Therefore respectfully following the decision of the coordinate bench in assessee’s own case we confirm the order of the learned CIT – A and dismiss ground number 14 of the appeal.

23. Ground number 15 is with respect to the disallowance of capital expenditure of ₹ 71,461,134/–. Both the parties confirm that this issue is covered in favour of the assessee by the order of the coordinate bench for assessment year 2000 809 wherein the coordinate bench followed the decision of the coordinate bench in assessee’s own case for assessment year 2006 – 07 and the revenue did not further appeal before the honourable High Court as well as the learned assessing officer himself has not made any disallowances on this issue from assessment year 2016 – 17 onwards. The coordinate bench dealt with this issue as Under:-

“133. In ground no.14, the Revenue has challenged the deletion of addition of ₹ 1,26,11,958/-on account of disallowance /capitalization of preoperative expenses (on SEZ projects not commenced).

134. Assessing Officer has treated the various business expenses relating to development of various commercial projects to be part of project cost, and therefore, such cost of the project needs to be capitalized.

135. Ld.  CIT (A) has deleted the addition in the following manner:

“22.12 I have considered the submission of the appellant, observation of the ASSESSING OFFICER, and various judicial pronouncements relied upon by the appellant and my own order for AY 2007-08 in the case of appellant, wherein this issue was decided in favour of the appellant company. It is seen that the appellant is engaged in the business of developing real estate like development of plots, multi storey buildings, commercial complexes etc. During the year, the appellant has incurred certain expenditure on market study, feasibility report and viability report on possibility of developing SEZ projects at various locations like Jaipur, Bhuvaneshwar, Gandhinagar, Ambala, Ludhiana, West Bengal, etc. On these studies, the appellant has incurred an expenditure of ₹ 1,26,11,958/-. In the assessment proceedings these expenses have been treated as pre-operative expenses by the ASSESSING OFFICER. It is claimed by the appellant that conducting feasibility and viability study for developing SEZ was not a new line of business but it was expansion/extension of the same line of business.

Development of SEZ is very akin development of commercial projects which falls within the objectives of the MOA of the appellant company. Any expenditure incurred for expansion or extension of same line of business with complete unity of control, common fund and with the common management is a revenue expenditure and same cannot be held as capital expenditure. The feasibility and viability study was to extend the business of the appellant in same line, therefore, the expenditure incurred on such study is revenue expenditure and by exploring the possibility of obtaining/developing or extension of the existing business at various stations identified, the appellant was only planning to expand its business and no new asset much less capital asset have been created. The Assessing Officer was not justified in treating these expenses as pre-operative expenses and same is to be capitalized. The question of capitalization does not arise as these expenses were incurred on conducting feasibility and viability study of taking various projects at the stations mentioned above. However, after the feasibility and viability study these places were not found suitable for developing SEZ Projects and same were abandoned. The expenses were incurred for extension of same line business and such expenses have to be allowed as revenue expenditure. Therefore, respectfully following the decisions of jurisdictional High Court and my own order for AY 2007-08 in appellant’s own case (Page 222-229), the disallowance of ₹ 1,26,11,958/- made by the Assessing Officer on this account is deleted. “

136. Before us, the learned counsel for the assessee submitted that the disallowance of expenses incurred towards conducting feasibility study, market study and viability report in relation to SEZ projects at various locations like Jaipur, Buvaneshwar, Gandhinagar, Ambala, Ludhiana etc.. The assessing officer has capitalized these expenses on the basis of observation of Special Auditor. However, the genuineness and nature of these expenses is not in dispute. The assessee is engaged in the business of real estate and the claim of expenses towards feasibility and viability report is part of regular business operations and as such the assessing officer was not justified in identifying these expenses with specific project and capitalizing the same. It is pertinant to note that development of SEZ is part of business activities of the assessee and cannot be considered as altogether a new line of business. The CIT (A) therefore has rightly deleted the disallowance after examining the purpose of these expenses in the light of principle laid down by Hon’ble Delhi High Court.

137. We find that the Tribunal also in Assessment Year 2006-07 has dismissed the Revenue’s appeal after observing and holding as under:

“96. We have carefully considered the rival contention. Admittedly assessee is in business s of the real estate development. The tender fees paid for bidding of modernization of airport cannot be said to be the new line of business but it is the same line of business i.e. of development of real estate. Therefore according to us the expenditure if incurred for the tender fees same is allowable u/s 37(1) of the act. The decision cited by the AR of the appellant has held that the when the assessee proposed to set up new project which had inextricable linkage with the existing business of the assessee, The proposed business was not an individual business but vertical expansion of the existing business and Thus, the test of existing business with common administration and common fund was met. Since the project was abandoned, no new asset also came to be created. The expenditure was deductible. Therefore the facts of the expenditure disallowed are also similar. Hence following the decision of Honourable Delhi high court in case of Indo Rama Synthetics India Ltd. v. Commissioner of Income-tax [2011] 333 ITR 18 (del) we reverse the order of CIT (A) and delete the disallowance of ₹ 1,47,70, ,222/- on account of tender fees for modernisation of airports. Therefore ground no 16 of the appeal is allowed.”

“ 216. We have carefully considered the rival contentions. The assessee has incurred this expenditure on proportionate and feasibility of various construction projects in which business the assessee is engaged into. Before embarking on to any of the projects, it is a common practice to obtain a feasibility and economic viability of construction projects at different geographical location. These expenses are for facilitating the existing business of the assessee. It is not the case of the revenue that it is altogether a new line of the business or unrelated to the business of the assessee. Therefore, in our view, this expenditure are wholly and exclusively incurred for the purposes of the business of the assessee. Hence, we confirm the order of CIT (A) and delete this ground of revenue’s appeal.”

138. Since on the similar issue the Tribunal has accepted the assessee’s contention, therefore, consistent with the same view, we affirm the order of the ld. CIT (A) and dismissed the Revenue’s ground.”

XXXXX

142. We find that the Tribunal also in Assessment Year 2006-07 has dismissed the Revenue’s appeal after observing and holding as under:

“216. We have carefully considered the rival contentions. The assessee has incurred this expenditure on proportionate and feasibility of various construction projects in which business the assessee is engaged into. Before embarking on to any of the projects, it is a common practice to obtain a feasibility and economic viability of construction projects at different geographical location. These expenses are for facilitating the existing business of the assessee. It is not the case of the revenue that it is altogether a new line of the business or unrelated to the business of the assessee. Therefore, in our view, this expenditure are wholly and exclusively incurred for the purposes of the business of the assessee. Hence, we confirm the order of CIT (A) and delete this ground of revenue’s appeal.

143. Thus, when similar nature of expenditure has been incurred for the purpose of business then in this year also we do not find any reason to deviate from such a finding and accordingly ground of the Revenue on this score is dismissed.”

In view of the order of the coordinate bench covering the identical issue in favour of the assessee which has not been challenged by the learned assessing officer before the honourable High Court and further has been accepted for assessment year 2016 – 17 onwards, respectfully following the decision of the coordinate bench we dismiss ground number 15 of the appeal.

24. Ground number 16 and 17 of the appeal is with respect to the disallowance of expenses not incurred wholly and exclusively for business purposes amounting to ₹ 49,629,551 and operational expenditure of ₹ 387,449,073/–. This issue has been raised by the learned assessing officer wherein he disallowed the expenditure of the above sum considering the same as a personal in nature and disallowed 66.6% of the expenditure amounting to ₹ 387,449,073 on the maintenance of the aircraft and helicopter observing that assessee has not proved business expediency of the expenditure and those expenditure appeal to be personal in nature. The learned CIT – A has dealt with this issue at para number 23 of his order at page number 177 – 196 noting that assessee is engaged in the business of development of real estate and it is one of the largest realistic developer in the field of colonization and township developments all over the country the procurement of the various material is source from the various countries across the globe. The company takes technical assistance/know-how from the repeated technical consultants globally. The company requires two flights directors, senior executives, ingenious and consultants both on its rolls and hired in India and abroad which various project sites located all over the country. Due to the frequency of such transportation the company deemed it fit to acquire the aircraft and helicopter rather than only hire such services. Therefore the expenditure on maintenance and operation of the helicopter and aircraft and chartering of aircraft and other routine expenditure were expended for the purposes of the business. It was further held by him that assessee is a public limited companies are distinct assessable entity as per the definition of person u/s two (31) of the act therefore it cannot be stated that the expenditure identified as expended by the directors and other employees of the company is personal in nature because of the limited company is an in animated person and there cannot be anything personal about such an entity. He further followed the decision in case of Sayaji Iron and engineering Co Ltd. 253 ITR 749 and deleted the addition/disallowance. The learned departmental representative could not show us any reason to state that the expenditure incurred by the assessee on such travel expenditure of aircraft and helicopter can be considered as a personal expenditure of a company. There were no contrary decision is pointed out before us. In view of this we do not find any infirmity in the order of the learned CIT – A in deleting the above disallowance. Accordingly ground number 16 and 17 of the appeal of the learned assessing officer is dismissed.

25. Ground number 18 and 19 is with respect to the disallowance of interest expenditure of ₹ 693,100,000 and ₹ 45,515,013/– the learned authorised representative confirmed that this issue is covered in favour of the assessee by the decision of the coordinate bench in the case of one of the group concern which was confirmed by the honourable Delhi High Court as per order dated 11 August 2015 in ITA number 559/2015.

26. The issue before us that the learned assessing officer has made the addition of ₹ 693,100,000 on account of short charging of interest from the subsidiaries and further disallowed a sum of Rs 455,15,030 on account of not charging of interest on loans given to related parties for business purposes. The main reason for the disallowances that the assessee has given funds borrowed at a higher rates from financial institution and banks to group entities at lower rates which is distorting the correct taxable profits of the company. Therefore the learned assessing officer computed the disallowance of ₹ 69.31 crores. The learned CIT appeal noted that the order of the assessment passed by the assessing officer wherein it has been held that the company is close to its subsidiaries at the rate of 6.5% in most of the cases and 12 – 14% in case of some of the advances. The company has taken loan from the banks and other financial institution where the weighted average interest cost is 9 – 9.5 % and therefore the disallowance has been made. He deleted the disallowance holding that in the instant case the learned assessing officer has not raised the question regarding the capital borrowed for the purposes of the business. The only objection is that the borrowing is at the rate higher than the amount of interest charged from its subsidiaries. He deleted the disallowance relying on the decision of the honourable Supreme Court in case of SA builders (288 ITR 1) and M/s Taparia Tools V JCIT wherein he noted that the honourable Supreme Court has observed that while examining the allowability of deduction of the interest the AO is required to consider the genuineness of the business borrowing and that the borrowing was for the purposes of the business and not an illusionary and colourable transaction. Once the genuineness of the borrowing is proved and the interest is paid on the borrowing it is not within the powers of the learned assessing officer disallowed the deduction either on the ground that the rate of interest is unreasonably high of that the assessee had himself charged the lower rate of interest on the money which it has advanced. The learned departmental representative could not controvert the above finding of the learned CIT – A. In view of this, we confirm the order of the learned CIT – capital and dismiss ground number 18 and 19 of the appeal.

27. The ground number 20 of the appeal is with respect to the disallowance of ₹ 24,098,125 on account of non-ending back of the disallowance of the items to the competition of total income. With respect to this the learned CIT – A has directed the learned assessing officer to go through the necessary evidences filed during the assessment proceedings and delete the addition if it is found that the assessee has already offered the above amount for the taxation. We do not find any reason why the learned assessing officer is aggrieved with the direction of the learned CIT – A. The learned that authorised representative further submitted that no such direction has been carried out by the learned assessing officer given by the learned CIT – A. We direct the learned assessing officer to carry out the necessary verification is required by the order of the learned CIT – A. Accordingly we do not find any reason that how the assessing officer is aggrieved when the matter is set aside to his file for verification. Accordingly ground number 20 of the appeal is dismissed.

28. Ground number 21 of the appeal is with respect to the addition on account of non charging of interest on loans given to Saket Courtyard hospitality a sister concern of the assessee. This issue is already covered by our direction in ground number 18 and 19 of the appeal of the learned assessing officer. Hence same is dismissed.

29. Ground number 22 of the appeal of the learned assessing officer is general in nature and therefore it does not require any adjudication, hence, same is dismissed.

30. Accordingly ITA number 4793/del/2015 filed by the learned assessing officer is dismissed.

31. Now we come to the appeal of the assessee in ITA number 4187/del/2015. The ground number 1 of the appeal is already been adjudicated while deciding ground number 10 of the appeal of the learned assessing officer. Accordingly ground number one of the appeal is allowed.

32. Ground number 2 of the appeal is with respect to the confirmation of the addition on account of notional rent whether security deposit received but no rental income has been shown. The learned authorised representative submitted that identical issue arose in case of the assessee for assessment year 2008 – 09 wherein this issue has been decided by the coordinate bench in favour of the assessee and therefore same needs to be followed. The learned departmental representative relied upon the order of the lower authorities. We have carefully considered the rival contention and find that this issue is covered in favour of the assessee by the decision of the coordinate bench in assessee’s own case for assessment year 2008 – 09 is per paragraph number 21 – 24 of the order. In the present case the disallowance confirmed by the learned CIT – A is of ₹ 769,038. We do not find any distinction between the issue before the coordinate bench for assessment year 2008 – 09 and the issue in the impugned appeal. The coordinate bench decided this issue as Under:-

“21. Coming to the issue of addition on account on notional rent where security deposits were received but no rental was shown, amounting to ₹ 10,91,270/-. It has been pointed out by both the parties that this issue now stands covered in favour of the assessee by the Tribunal in assessee’s own case for the Assessment Year 2007-08 vide order dated 01.11.2017 in ITA No. 3846/D/2012.

22. The addition has been made on the ground that assessee despite being owner of the Kiosks has not disclosed rental income in its books and the same has been transferred to M/s. DLF Services Ltd. by over riding title. M/s. DLF Services Ltd is providing maintenance and upkeep services of the mall including Kiosks. In return for consideration for these services, the appellant vide authority letter dated 12/12/2005 has granted M/s DLF Services Ltd., right to recover the rental receipts from the third parties using said Kiosks. Assessee has not claimed any expenditure in the name of M/s DLF Services Ltd. in connection with maintenance services of the mall. In view of above arrangement, M/s. DLF Services Ltd. is showing the receipts from the Kiosk as a part of its income which is duly subjected to tax in its hands and accordingly there is no loss to the revenue.

23. This precise issue had come up for consideration before the Tribunal in assessee’s own case in the earlier year, wherein it has been observed and held as under:

‘42. We have heard the rival submissions and perused the material on record. The ground is regarding addition of ₹ 12,60,000/- as rental income. The Assessing Officer observed that the assessee was owner of Kiosks installed at Malls which were leased to various parties at the lease rent of ₹ 18,00,000/- per annum. The Assessing Officer after accepting statutory deduction of 30%, considered the net rental income at ₹ 12,60,000/-. The CIT(A) confirmed the finding of the Assessing Officer.

43. The appellant contended that M/s. DLF Services Ltd. was appointed as maintenance agency for upkeep and maintenance of Mall, owned and run by appellant. For maintenance services being rendered by DLF Services Ltd., the appellant assigned the lease rental to DLF Services Ltd. as part of maintenance cost. The appellant contended that the diversion of lease rent was towards reimbursement of maintenance services rendered by M/s. DLF Services Ltd. and as such diversion was towards provisions of maintenance services. It was further contended that the rental income as diverted to DLF Services Ltd. has being subjected to tax in the case of M/s. DLF Services Ltd. and there is no case of subjecting the same income again in the case of appellant. In this connection, the appellant made reference to decision of Supreme Court in the case of M/s. Ashish Plastic Industries Vs. ACIT 373 ITR 45, as per which same income cannot be subjected to tax again in the case of the appellant.

44. The Ld. CIT DR supported the order of the Assessing Officer and CIT(A).

45. After hearing both the parties, we are of the view that the appellant assigned DLF Services Ltd. right to recover lease rent for maintenance and upkeep services of Mall and as such there was a genuine business arrangement between the parties. If the lease income is considered as chargeable to tax in the case of appellant, the appellant may be eligible for claim of expenses on account of maintenance of Mall which was owned and run by the appellant and as such appellant has not derived any tax benefit on the basis of such arrangement and for diversion of lease rent. It is further relevant to take note of the fact that such lease rent has been subjected to tax in case of M/s. DLF Services Ltd.

46. After considering the facts of the case, we are of the view that there is no justification for addition of ₹ 12,60,000/- as same was towards business obligation and for specific services rendered by M/s. DLF Services Ltd. and accordingly the impugned disallowance is directed to be deleted.”

24. Thus, following the aforesaid precedence in assessee’s own case, we decide this issue in favour of the assessee and the impugned addition is directed to be deleted”.

Therefore respectfully following the decision of the coordinate bench we allow ground number 2 of the appeal and the direct the learned assessing officer to delete the disallowance of ₹ 759,038/–.

33. Ground number three of the appeal is with respect to the disallowance of registration fees paid for the Gujarat and Karnataka windmills as capital in nature. The learned authorised representative submitted that identical issue arose in case of the assessee for assessment year 2008 – 09 wherein the same issue is allowed in favour of the assessee’s and it is also connected to the ground number 15 of the appeal of the learned assessing officer wherein the disallowance of the capital expenditure of ₹ 74,061,134/– was considered. The learned departmental representative also did not dispute the same. Therefore on the basis of our decision for the ground number 15 of the appeal of the learned assessing officer we direct the learned AO to delete the disallowance of ₹ 2,042,053/– with respect to the registration expenditure. Accordingly ground number three of the appeal is allowed.

34. Ground number 4 is general in nature and therefore same is dismissed.

35. The assessee has raised another additional ground before us with respect to the disallowance of expenses of Rs 116,31,062 out of the rates and taxes and legal and professional expenses which were treated as a capital expenditure. The additional ground raised by the assessee states as Under:-

“that the learned CIT – A in law and on facts in confirming the disallowance of Rs. 116,31,062/– out of legal and professional expenses by holding the same as expenditure of capital nature ignoring the fact that the appellant had itself added back in its computation of total income and amount of ₹ 5,181,585/– out of Rs 1,16,31,062/– and the balance amount to the extent of ₹ 6,449,477/– as is permissible deduction as revenue expenditure.”

36. The learned authorised representative submitted that this issue is interlinked to the ground of various expenditure disallowed by the ld learned assessing officer and dealt with by the learned CIT – A at paragraph number 24.1 of the order. It was submitted that this ground is left inadvertently at the time of filing of the original appeal. He therefore submitted that in the interest of justice same may be admitted. He further submitted that assessee has preferred an application u/s 154 before the assessing officer pointing out that the disallowance of Rs. 1, 16,31,062 already includes a sum of ₹ 5,181,585 disallowed by the assessee in its return of income. Therefore it was submitted that the only grievances that the learned assessing officer should have looked into the application made by the assessee.

37. The learned departmental representative vehemently objected to the same and stated that now the assessee cannot raise this ground of appeal. He further stated that it requires fresh examination also. He further stated that there is no evidence available that the assessee has itself disallowed a sum of ₹ 5,181,585/–.

38. We have carefully considered the rival contention and perused the grounds of appeal raised before us is an additional ground. It is merely an examination of the fact that whether the expenses of ₹ 5,181,555/– which has been disallowed by the learned assessing officer and confirmed by the learned CIT – A already been disallowed by the assessee in its computation of total income not. It merely requires the examination of the fact that whether there is a double disallowance of particular expenditure or not stop in view of this we admit this ground of appeal.

39. The assessee has submitted that the other expenditure disallowed by the learned assessing officer are also allowable as revenue expenditure in view of the decision of the coordinate bench in assessee’s own case considered in ground number 15 of the appeal. In view of the facts stated before us and the application u/s 154 filed by the assessee before the AO pointing out the above double disallowance, we direct the learned assessing officer to consider the above application and if the fact of double disallowance is found to be correct, then to determine the correct income of the assessee, suitably adjust the total income of the assessee by passing an appropriate order. In view of this additional ground raised by the assessee is admitted, adjudicated and set aside to the file of the learned assessing officer allowing it accordingly.

40. In the result appeal filed by the assessee in ITA number 4187/del/2015 is allowed.

41. Order pronounced in the open court on 29/09/2020.

Download Judgment/Order

Author Bio

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

October 2020
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031