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The Companies Act, 1956

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Income Tax Appellate Tribunal - Chennai
Mahindra World City Developers ... vs Department Of Income Tax on 19 September, 2011

IN THE INCOME-TAX APPELLATE TRIBUNAL

CHENNAI 'D' BENCH, CHENNAI.

Before Dr. O.K. Narayanan, Vice President and

Shri Hari Om Maratha, Judicial Member

I.T.A. Nos. 427 and 428/Mds/2011 & 2071 and 2072/Mds/2010 Assessment Years: 2003-04, 2006-07, 2004-05 and 2007-08 The Deputy Commissioner of M/s. Mahindra World City Developers Income Tax Vs. Ltd., Ground Floor, No.17/18, Pattulos Company Circle - IV(1), Road, Chennai 600 002. Chennai - 34. [PAN:AAACM6904A] (Appellant) (Respondent) Revenue by Shri K.E.B. Rengarajan,

:

Jr. Standing Counsel

Assessee by : Shri R.Subramanian, C.A.

Date of Hearing : 18.08.2011

Date of pronouncement 19.09.2011

ORDER

PER Hari Om Maratha, J.M.

This bunch of four appeals filed by the Revenue against the same assessee were heard together and, therefore, for the sake of convenience and brevity, we are proceeding to decide them by this common order. ITA No. 427/Mds/2011: AY 2003-04

2. This appeal filed by the Revenue, for the assessment year 2003-04, is directed against the order of the ld. CIT(A) V, Chennai dated 13.12.2010. 2.1 The assessee company filed its return of income for the year under consideration on 17.10.2003 in which a loss of `.1,37,65,913/- was declared. Earlier, the assessment order passed for this year was set aside by the ld. CIT, Chennai III, Chennai - 34, qua the issue of admissibility of expenses pertaining to earlier years. The assessee company had debited a sum of `.6,04,22,437/- as 2 I.T.A. Nos.427 & 428/Mds/11 and

Nos 428/Mds/

/Mds/11

ITA Nos. 2071 & 2072/Mds/10

legal and professional charges. In the Notes to the Accounts, it was mentioned that the legal and professional charges including the amount payable in respect of earlier years, being a sum of `.5,51,93,900/-. The contention of the assessee is that as per Notes to the Accounts (Schedule 12, Item 8) furnished along with return of income stating that the legal and professional charges debited in the profit and loss account included earlier years expenses of `.5,51,93,900/-. In the profit and loss account of the earlier assessment year, this sum had been deducted and taken to Capital Work in Progress. Thus, in substance, the contention of the assessee is that this sum was not claimed as expenditure in the return of income of this year. But, the Assessing Officer was not agreeable as according to him the assessee has not prove this fact conclusively. Therefore, he has disallowed this amount and has thus, computed total taxable amount at `.57,839/-. As against this, the ld. CIT(A) has accepted the version of the assessee and has deleted the impugned amount by accepting the return of income.

3. Now, the Revenue has disputed the findings of the ld. CIT(A). Both the parties took similar stand before us also, as has been their consistent stand. After hearing them, we have found that the main business of the assessee consists of procurement of lands and development thereof with requisite infrastructure and seeking approval of the concerned authorities and also selling them to prospective buyers. It is an undeniable fact of the case that the assessee company has developed plots under SEZ scheme and also under Non-SEZ category (DTA) as per norms of Government.

4. The expenditure incurred by the assessee during the normal course of its 3 I.T.A. Nos.427 & 428/Mds/11 and

Nos 428/Mds/

/Mds/11

ITA Nos. 2071 & 2072/Mds/10

business activity several over heads on day-to-day basis and these are being debited to Profit and Loss Account. At the end of the year, the details of these expenses are identified under each category and expenses which are directly attributable towards cost of development of each category are classified and included as integral part of cost of work in progress (inventory). Other overheads which do not form part of such classification are absorbed as part of the expenses incurred during the relevant year and treated as part of the business expenditure. This fact is found from item No.8 of the Note in Schedule - 12 in the Annual Accounts of the Company. The assessee filed a copy of Audited Profit and Loss Account for the year ended 31.03.2003, wherein a sum of `.52,83,09,707/- has been transferred to Work in Progress (Inventory) and shown as deduction from the total expenditure for overheads incurred for the year and reflected in the Profit and Loss Account. In the break-up of the details of cost of Work in Progress a sum of `.5,51,93,900/-, being legal and professional charges, pertaining to earlier years debited in the Profit and Loss Account has also been included. Thus, it has become clear that the assessee has not claimed `.5,51,93,900/- as deductable expenditure although it has debited to profit and loss account and this amount has subsequently been transferred and included in the cost of Work in Progress at the end of the year and thus does not form part of expenses claimed by way of deduction in the assessment.

5. In our considered opinion, the ld. CIT(A) has correctly directed the Assessing Officer to delete the disallowance of `.5,51,93,900/- and to reinstate the loss of `.1,37,65,913/- as has been claimed by the assessee. Accordingly, we do 4 I.T.A. Nos.427 & 428/Mds/11 and

Nos 428/Mds/

/Mds/11

ITA Nos. 2071 & 2072/Mds/10

not find any merits in the appeal of the Revenue and dismiss the same. ITA No. 2071/Mds/2010: A.Y. 2004-05

6. This appeal of the Revenue, for the assessment year 2004-05, is directed against the order of the ld. CIT(A) V, Chennai dated 08.09.2010. 6.1 The assessee company, for the assessment year 2004-05, filed the return of income showing a total loss of `.21,03,47,302/- on 312.10.2004. The original assessment under section 143(3) was completed on 30.11.2006. It was revised under section 263 by the ld. CIT and as per his direction, the Assessing Officer has completed the assessment once again under section 143(3) on 09.12.2009. In the revised assessment order dated 09.12.2009, the Assessing Officer has added back a sum of `.16,26,42,790/- by way of interest. The assessee has disputed this action of the Assessing Officer.

6.2 The case of the assessee is that the land in its hand is current assets and not a capital asset. To acquire land, the company utilized its own capital and also borrowed funds from Banks, etc. to finance the cost of land and development thereon for which interest on borrowings was paid. The company has reckoned 31.07.2003 as cutoff date for closure of pre-operative stage and commencement of commercial operations. Accordingly, the cost of interest and other relatable expenses up to 31.07.2003 have been included as an integral part of cost of land and development constituting the cost of inventory under current assets. The interest incurred during the period 01.08.2003 to 31.03.2004, subsequent to commercial operations has been claimed as revenue expenditure in the return of income. The Assessing Officer has disallowed the entire interest amount for the 5 I.T.A. Nos.427 & 428/Mds/11 and Nos 428/Mds/

/Mds/11

ITA Nos. 2071 & 2072/Mds/10

year ending 31.03.2004 and has added the same by invoking section 136(1)(iii) of the Act.

6.3 But the ld. CIT(A) has found that this provision is not applicable in the case of the assessee company and has also found that the Assessing Officer has not appreciated the facts correctly. The Revenue has disputed this findings of the ld. CIT(A).

7. After hearing both the sides, we are in agreement with the findings of the ld. CIT(A) that the assessee company has included as part of the cost of inventory a portion of the cost of investment namely `.8,25,74,767/- incurred up to 31.07.2003, prior to commencement of commercial operations representing pre-operative expenses. Thus, we can safely conclude that the assessee company has effectively claimed the interest for the period of 01.08.2003 to 31.03.2004, amounting to `.8,00,68,023/-, as a revenue expenditure. In our opinion, the Assessing officer has inadvertently added the entire amount. We have also found that the proviso appended to section 36(1)(iii) of the Act is not applicable because this proviso applies to such cases where there is an expansion of existing business activities involving additional capital expenditure in relation to fixed assets/capital assets, which are put to use subsequently. In the case of the assessee, there is no expansion of business. The moneys borrowed were undeniably utilized for acquisition of land and developmental work. So, the entire addition of `.16,26,42,790/- has to be deleted as it does not form part of capital asset as per the Act. The assessee company has already capitalized the interest amount of `.8,25,74,767/- up to 31.07.2003 and has claimed the interest of `.8,00,68,023/- for 6 I.T.A. Nos.427 & 428/Mds/11 and Nos 428/Mds/

/Mds/11

ITA Nos. 2071 & 2072/Mds/10

the period from 01.08.2003 to 31.03.2004 as a revenue expenditure. So, this addition is without any basis and is to be deleted. We do not find any infirmity in the impugned appellate finding and hence this appeal of the Revenue cannot be allowed. Accordingly this appeal of the Revenue is dismissed. ITA No. 428/Mds/2011: A.Y. 2006-07

8. This appeal of the Revenue, for the assessment year 2006-07, is directed against the order of the ld. CIT(A) V, Chennai dated 13.12.2010. 8.1 For this assessment year, the assessee company filed its return of income on 25.11.2006, admitting NIL income under the normal computation and paid taxes for the book profits under section 115JB of the Act. Subsequently, the assessment order was framed under section 143(3) on 26.12.2008. In the assessment order, the Assessing Officer has reworked the cost of sales claimed by the assessee as against SEZ and Non-SEZ categories and has arrived at the profit for the year by recomputing the total income. As we have discussed about the assessee, who has been claiming and arriving at the profit in respect of SEZ and Non-SEZ activities by maintaining separate accounts, so this conclusion of the Assessing Officer cannot be treated as correct. The ld. CIT(A) has correctly allowed this plea of the assessee, which is a subject matter of ground No.2 of this appeal. We do not find that this is a colourable device of the assessee company, therefore, we dismiss this ground and uphold the findings of the ld. CIT(A). 8.2 Secondly, the Assessing Officer has reworked and recomputed the tax 7 I.T.A. Nos.427 & 428/Mds/11 and

Nos 428/Mds/

/Mds/11

ITA Nos. 2071 & 2072/Mds/10

payable under section 115JB. The working of the assessee to compute Maximum Alternate Tax (MAT) under section 115JB is as under: Net Profit as per Profit & Loss Account 2,18,39,025 LESS: Unabsorbed Depreciation or Loss whichever is lower 1,31,72,456 As per Companies Act

Balance Book Profits 86,66,569 Tax on the above at 7.5% 6,49,993 Surcharge @ 10% 64,999 7,14,992

Cess @ 2% 14,300 Total MAT Payable 7,29,292 As against this, the Assessing Officer has reworked the profit in the assessment order of SEZ and Non-SEZ and has arrived at the net profit of `.2,18,39,205/- after adjusting the loss of SEZ as per the following working: Net Profit as per Profit & Loss Account 2,18,39,025 Tax on the above at 7.5% 16,37,927 Surcharge @ 10% 1,63,793 Cess @ 2% 36,034 Total MAT Payable 18,37,754 8.3 This reworking was challenged by the assessee before the ld. CIT(A) and by following the decision in the case of Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC), in which, it has been held that the Assessing Officer cannot disturb results of the computation of 115JB as reflected in the audited accounts of the company, the ld. CIT(A) has allowed relief to the assessee. The Revenue has challenged this finding of the ld. CIT(A).

8.4 After hearing both the sides, we have found that the books of account of the assessee company are audited and the return of income is based thereon. The legal position on this issue is not res integra in more and the ld. CIT(A) has 8 I.T.A. Nos.427 & 428/Mds/11 and Nos 428/Mds/

/Mds/11

ITA Nos. 2071 & 2072/Mds/10

followed the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (supra). Consequently, this issue is also decided against the Revenue. Accordingly, this appeal of the Revenue is dismissed. ITA No. 2072/Mds/2010: A.Y. 2007-08

9. This appeal of the Revenue, for the assessment year 2007-08, is directed against the order of the ld. CIT(A) V, Chennai dated 08.09.2010. In this appeal, following grounds has been raised:

"1. The order of the learned CIT(A) is contrary to law and facts of the case. 2.1. The learned CIT(A) has erred in directing the Assessing Officer to accept the cost of land and expenses thereof as per audited the accounts. 2.2 The learned CIT(A) failed to appreciate that the expenses have been disproportionately booked between SEZ and non SEZ categories. 2.3 The learned CIT(A) failed to appreciate that the assessee has not maintained separate books of accounts for SEZ and non SEZ and hence its stand that the expenses have been bifurcated on actual basis is not correct. 2.4 The learned CIT(A) failed to appreciate that the Assessing Officer has allocated the expenditure on turn over basis which is a widely accepted basis. 2.5 Having regard to the observations of the Hon'ble Apex Court in the case of McDowell Company Ltd. v. CTO (154 ITR 148) that 'colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods', the learned CIT(A) ought to have upheld the action of the assessing officer.

3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.

9.1 After hearing both the sides, we follow our decision given in the assessment year 2006-07 as above in which, we have held that SEZ and Non-SEZ accounts debited the expenditure apportioned on the basis of separate books of accounts 9 I.T.A. Nos.427 & 428/Mds/11 and

Nos 428/Mds/

/Mds/11

ITA Nos. 2071 & 2072/Mds/10

maintained and have accepted the claim of the assessee. Consequently, we cannot allow the sole ground raised in the appeal by the Revenue. Accordingly, this appeal of the Revenue is dismissed.

10. To summarize, all the appeals of the Revenue are dismissed. Order pronounced in the open Court on 19.09.2011.

Sd/- Sd/- (O.K. NARAYANAN) (HARI OM MARATHA) VICE PRESIDENT JUDICIAL MEMBER Chennai, Dated, the 19.09.2011

Vm/-

To: The assessee//A.O./CIT(A)/CIT/D.R.