Brief of the case
In the case of Commissioner of Income Tax vs. DLF Commercial Project Corporation Delhi High Court held that Advance received cannot be treated as income of the assessee and TDS is not deductible on reimbursement of Expenses since it is not an income.
Facts of the case
1. The assessee is in the business of developing land for commercial, residential, retail, industrial parks, information technology parks, SEZ, etc. For AY 2007-08, during assessment proceedings, the Assessing Officer (“AO”) observed that the assessee had in its Balance Sheet shown stock of Rs 34,55,60,19,667/- and Current Liabilities as Rs 34,86,09,08,730/-, whereas in the Cash Flow Statement, it had shown stock of Rs 34,55,54,73,615/- and Current Liabilities as Rs 34,85,91,89,394/-.
2. The AO asked the assessee to explain the transaction in respect of which advance of Rs 3038.65 crores was received from M/s DLF Ltd. and also the transaction of Rs 446.30 crores with M/s Caitlin Builders and Developers Private Limited (“CBDL”), later known as M/s DLF New Gurgaon Homes Developers Pvt. Ltd. The assessee responded that it had entered into an agreement with the said companies for development of land and in pursuance of the agreement, it had also advanced sums to certain Land Owning Companies (LOCs) which were engaged in acquiring licenses from relevant State authorities as well as land from various land-holders.
3. The AO observed that M/s DLF Ltd., for financial year ending 31.03.2007, treated the advance given to the assessee as „stock‟. Similarly, CBDL had also shown the same treatment in the annual accounts under the head “money and advance – advance for land purchased”.
4. The AO inferred that since the assessee was in the business of purchase and sale of development rights, it had sold development rights in the financial year in question. The AO was of the opinion that while development rights were actually sold the same did not reflect in the sales account- due to understated values in the Cash Flow Statement as compared to the Balance Sheet. After working out the difference between Current Liabilities and Stock, an addition of Rs 30,37,15,779/- was made to the income of the assessee.
5. Similarly, for AY 2008-09, the AO added ₹ 15,70,196/- on account of undisclosed sale of development rights. Further, the AO added a sum of ₹ 19,09,83,236/- under Section 40(a)(ia) of the Act for non-deduction of TDS on reimbursement expenditure paid to M/s DLF Land Ltd., though the latter entity had deducted TDS on the payments made by it as a facilitator on behalf of the assessee.
6. On appeal to CIT(A), the CIT(A) held that no rights had crystallized in the financial years in question, and the AO had not furnished any evidence to prove the contrary and on the issue of addition of Rs 19,09,83,236/-for non-deduction of TDS as well, the CIT(A) ruled in favour of the assessee and deleted this amount .
7. Thereafter, Revenue appeal in Tribunal and Tribunal has dismissed the appeal of revenue.
Aggrieved by the decision of Tribunal, assessee-company filed appeal before High Court.
1. Whether the amount received by the assessee towards transfer of development rights could be treated as sale consideration in the circumstances of the case?”
2. Whether Tribunal fall into error in its findings with respect to the addition on account of reimbursement of interest within Section 40(a)(ia) on the issue of non-deduction of TDS on the payments made on reimbursement of service charge.
1. That the stock and current liabilities shown in the cash flow statement do not match with that shown in the balance sheet. He submits that the decreased stock in cash flow statement implies that the assessee has actually sold the development rights during the year while decreased amount under current liabilities is receipt against the decrease in stock.
2. The assessee’s accounting policy, sale of developed plots was recognized in the financial year in which the agreement to sell is executed. The AO had rightly concluded that the assessee had not declared the net receipts of sale of development rights in its income-tax return. He submits that by agreement to sell dated 02.08.2006, the assessee agreed to assign or transfer the development rights to M/s DLF Ltd. or its affiliate and the MoU dated 06.12.2006 entered into with CBDL established that the development rights purchased by the assessee till 06.12.2006 were sold to M/s DLF Ltd. The payment received by the assessee pursuant to such sale of development rights was now being claimed as advance received by the assessee. The assessee‟s submission that the same was shown as income for subsequent assessment years is nothing but deferment of tax liability to other years.
3. That the assessee ought to have deducted TDS on the total amount reimbursed by it to M/s DLF Land Ltd., and the TDS actually deducted by the assessee towards M/s DLF Land Ltd.‟s service charge does not suffice. Therefore, the CIT(A) and ITAT were wrong in deleting the addition of ₹ 19,09,83,236/- made by the AO.
1. That the assessee had itself not acquired development rights in the lands which, according to the Revenue, had been transferred to DLF Ltd. In fact, the assessee was in the final stages of negotiations for acquisition of development rights for certain lands situated in Gurgaon, Haryana from various land owning companies, and there was no way it could assign or transfer development rights either to M/s DLF Limited or to CBDL.
2. It was further contended that transfer/sale of development rights is dependent on various terms and conditions of such agreements. These agreements contain clauses which give the option to parties to terminate the arrangement if certain conditions are not fulfilled. It was pointed out by the assessee that it mainly received these amounts as advance as per its regular system of accounting and that no income has actually accrued or arisen to the assessee from such agreements. The assessee follows the mercantile system of accounting. The assessee submits that in terms of consistently followed accounting practice, sales and purchases are recognized only on registration of sale/purchase deed. Till the sale deed is registered, the amount received from M/s DLF is treated as “advance” and the amounts paid to land owning companies also be treated as advance paid only.
3. Assessing Officer has misunderstood this position and tried to imply that the assessee is following Cash System of accounting and has accordingly made the addition.The amount received by the assessee cannot be treated as income in the hands of the assessee.
4. The income of the assessee under Section 40(a)(ia) of the Act is justified as the payment was made for the purposes of reimbursement of expenses handled by M/s DLF Land Ltd. on behalf of the assessee, and the assessee had duly deducted TDS on the service charges paid to M/s DLF Land Ltd. by the assessee. The assessee entered into an agreement dated 01.04.2007 with the said company to carry out activities like maintenance of books of accounts and getting the accounts audited, maintenance of secretarial records, filing with various statutory authorities etc. M/s DLF Land Ltd. was entitled to service charges @ 5% of the total expenditure incurred.
5. During AY 2008-09, the assessee reimbursed Rs 19,69,83,236/- and also paid service charges @ 5% on it amounting to Rs 98,49,106/-. It deducted TDS amounting to Rs 10,35,057/- and deposited the said amount. Since the reimbursement of expenses was not taxable, learned senior counsel submits that the assessee was not required to deduct TDS on the entire amount.
High Court decision / observations
1. The discrepancy between the figures with respect to current liabilities and stock appearing in the Balance Sheet and Cash Flow Statement, was, in this Court‟s opinion, adequately explained by the CIT(A) as follows:
“The learned AO ought to have appreciated that cash flow statement only reflects transactions made in cash, and therefore, the figures of current liabilities and stock will match with the balance sheet only if all transactions were made in cash.”
2. The concurrent findings of fact of the CIT(A) and the ITAT affirm that the LOCs had not acquired any development rights during the concerned assessment years. In such a situation, it is inconceivable as to how the assessee could have acquired such rights from the LOCs, let alone transferring them to M/s DLF Ltd. and CBDL. This Court does not find any basis provided by the Revenue to interfere with ITAT‟s finding on this aspect. The assessee follows the accrual system of accounting. The accrual system of accounting takes into consideration all gains and losses pertaining to the accounting period for which income is being ascertained, irrespective of whether income has been actually received or whether expenses were paid out. Similarly, every receipt is not treated as an income of the assessee.
3. In the instant case, since no sale occurred, no income can be said to have accrued to the assessee.The assessee’s submission that sale is deemed to have taken place when proper conveyance is executed, in the circumstances is sound. In the absence of any sale, the revenue‟s attempt to bring to tax the advances received by the assessee must also fail, given that such advances were not towards any income that the assessee was entitled to receive in the two assessment years. The assessee and CBDL indicate that the advances received by the assessee from M/s DLF Ltd. and CBDL were for sale of development rights. Since the assessee failed to sell any such rights in the two years in question, the advances received cannot be classified as income. Therefore, this Court affirms the ITAT‟s ruling on the first question of law and holds that the AO had erroneously added the amounts to the assessee‟s income on account of sale of development rights for AY 2007-08 and AY 2008-09.
3. It is undisputed that M/s DLF Land Ltd. had deducted TDS on the payments made by it under various heads on behalf of the assessee. Further, it is also not disputed that the assessee deducted TDS on the service charge paid by it to M/s DLF Land Ltd. on the reimbursement expenses. In such circumstances, this Court holds that the entire amount paid by the assessee to M/s DLF Land Ltd. is entitled to deduction as expenditure.
4. In arriving at the aforesaid conclusion, this Court derives support from the Gujarat High Court‟s decision in Commissioner of Income Tax-III v. Gujarat Narmada Valley Fertilizers Co. Ltd. (in Tax Appeal No. 315 of 2013, decided on 25.06.2013), where the facts were similar to those in the present case. The Court therein rejected the revenue‟s contention that non-deduction of TDS on reimbursement expenses would lead to disallowance of such reimbursement expenditure. The Court noted that the payee therein had already deducted tax on the various payments made by it to third parties (such as towards transport charges and other charges). Since the payments made by the assessee therein were only for the reimbursement of expenses incurred by the payee on behalf of the assessee, the Court held that no TDS was required to be deducted by the assessee.
5. A special leave petition preferred by the revenue against the High Court‟s decision was dismissed by the Supreme Court on 17.01.2014 (in SLC CC No. 175 of 2014). This court is also supported in its reasoning by the text of Section 194C (TDS for “work”) and Section 194J (TDS of income from “professional services”- the latter expression defined expansively by Section 194J (3) Explanation (a)). Neither provision obliges the person making the payment to deduct anything from contractual payments such as those made for reimbursement of expenses, other than what is defined as “income”. The law thus obliges only amounts which fulfil the character of “income” to be subject to TDS in such cases; for other payments towards expenses, the deduction to those entitled (to be made by the payeee) the obligation to carry out TDS is upon the recipient or payee of the amounts.
6. The facts of this case are identical to those in Gujarat Narmada Valley (supra) and for the reasons stated above, this Court does not find any compelling ground to arrive at a different conclusion. Thus, the ITAT‟s ruling in this regard is upheld.