Assistant Commissioner of Income Tax v PACL India Ltd, 26 July 2013 In favour of: The assessee; Business expenditure — Allowability — Land development expenditure — Assessee engaged in business of development of agriculture land — After purchasing land, assessee undertook extensive works of levelling, bush cutting, boulder removing, providing irrigation facility and fencing etc. on various sites through various contractors and sold same — Assessee claimed only expenses relating to land sold in respective years in P&L A/c, balance was debited to land a/c — Thus, remaining expenses on unsold plots were included in land cost which is stock in trade of assessee and same was directly shown in balance sheet — Whenever land was sold, development expenses corresponding to land were debited to P&L A/c subsequently under head ‘Land Cost’, which includes cost price of respective land — Assessee was regularly following this practice in conformity with ICAI guidelines — During course of assessment proceedings on issue of genuineness of expenditure incurred through contractors for development of land, assessee submitted their PAN numbers, bank a/c details, TDS deducted which was paid in govt treasury and other documents — AO disallowed entire development expenditure holding that land development expenses were not genuine relying on report submitted by inspector that parties were not found at given address and five contractors at Rohtak denied having done any work — CIT(A) deleted addition made by AO — Held, in two searches conducted on 22 September 2005 and 25 August 2006, within a span of one year, no incriminating documents were found or seized in respect of land development expenses incurred by the assessee suggesting any non-genuineness — AO had also not taken post search inquiries to logical end and had even not cared to verify whether disallowances made were debited in P&L A/c or not — Expenditure which has been added by AO is not forming part of expenditure debited during these relevant AYs — Assessee had submitted evidence where respective contracts were awarded through proper work contract orders and payments were made by a/c payee cheques — Necessary TDS has been deducted and paid to government and persons were assessed to income tax — AO made no effort to verify details filed by assessee and proceeded to inquire about identity of these contractors by an inspector — Instead of verifying documentary record, Inspector was deputed to carry out inquiries after a long gap, after works were executed — Adverse report of four contractors to whom payments were made and Inspector had adversely reported, cannot override evidence filed by assessee — Assessee had discharged onus cast on it which is effectively not rebutted by department — Further expenditure claimed was allowable u/s 37(1) when land, ie stock in trade was sold and revenue is recognised — Further CIT(A) has given proper finding that expenditure debited during AY is not out of expenditure incurred by assessee which has been capitalised by adding to closing stock — Disallowance can be made only from expenditure debited to P&L A/c — When there is no expenditure debited in P&L A/c, then there cannot be any disallowance — Revenues’ appeal dismissed. CCH Citation: (2013) 36 CCH 193 DelTrib, ITAT Delhi Bench “F”, ITA Nos 2638, 2639 & 3693/Del/2010 (CO Nos 215, 216 & 278/Del/2010), Assessment Years: 2003–2004, 2004–2005 and 2006–2007, R P Tolani, JM and B C Meena, AM, Decided on: 18 June 2013. Held: Revenues’ appeal dismissed. Assessee was engaged in the business of development of agriculture land. The assessee was purchasing land in rural areas and developing the same selling in small pieces to various customers. It is also a fact that in the two searches conducted on 22 September 2005 and 25 August 2006, within a span of one year, no incriminating documents were found or seized in respect of the land development expenses incurred by the assessee suggesting any non-genuineness. It is also a fact that assessee is following a method of accounting where the land development expenses are added to the cost of land purchased and only the expenditure relatable to the land sold during the year are debited in the P&L A/c. Balance remains embedded in the stock in trade. As per the CIT(A)’s finding, the expenditure which has been added by the AO is not forming part of the expenditure debited during these relevant assessment years. Further, the assessee has submitted the evidence where the respective contracts were awarded through proper work contract orders. The payments have been made by a/c payee cheques. The necessary TDS has been deducted and paid to the government. The persons were assessed to income tax. Assessee demonstrated by DVD and photographs that barren lands were developed and sold. AO made no effort to verify all these details filed by the assessee and proceeded to inquire about the identity of these contractors by an inspector. The fact about various contractors being assessed with the income tax department is belied on the basis of four Rohtak contractors. Instead of verifying documentary record, the Inspector was deputed to carry out inquiries after a long gap, after the works were executed. In such a circumstance, in our view the assessee has discharged the onus cast on it which is effectively not rebutted by the department. Further, the expenditure claimed is allowable u/s 37(1) of the IT Act when the land, ie stock in trade was sold and revenue is recognised. The adverse report of four contractors to whom the payments were made and the Inspector has adversely reported, cannot override the evidence filed by the assessee. In such a situation, we find that the CIT(A) was justified in deleting the additions which have been made only on the basis of a doubt created or suspicion in the mind of the AO by the Inspector’s report or four Rohtak contractors which cannot be held to be conclusive. The department has failed to collect any effective evidence in the two searches conducted within a span of one year for giving any adverse inference regarding the expenditure debited in the books of accounts for the AY 2004–2005 to 2006–2007. Nothing has been found and unearthed by search operation with regard to land development expenses. AO had also not taken post search inquiries to the logical end. He had even not cared to verify whether the disallowances made were debited in P&L A/c or not. Therefore the CIT(A) has rightly deleted the additions. Lalchand Bhagat Ambica Ram v CIT Bihar & Orissa 37 ITR 288, relied on. (Para 8) AO as a quasi-judicial authority obliged to follow these guidelines, which are missing in these assessments. With regard to the issue raised by the revenue that expenditure which has been disallowed, is not debited to the P&L A/c in that particular year, was not taken before the AO during the assessment proceedings. With regard to this, we find that AO himself has recorded in para 5 of the assessment order that whole of the expenses incurred by the assessee are not claimed in the P&L A/c and expenses are claimed in respect of land sold in the respective year only. The remaining expenses are included in the land cost which is the stock in trade of the assessee and this stock was directly shown in the balance-sheet. This is a recognised accounting practice, ICAI guidelines and law. Whenever the land is sold development expenses corresponding to the land are debited to the P&L A/c under the head “Land cost”, which includes cost price of the respective land and the development expenses and the assessee was following this practice regularly. Therefore, this ground of the Revenue has no merit that the assessee has not taken the stand before the AO. The CIT(A) has given proper finding that the expenditure debited during the assessment year is not out of the expenditure incurred by the assessee which has been capitalised by adding to the closing stock. Further, the disallowance can be made only from the expenditure debited to the P&L A/c. When there is no expenditure debited in the P&L A/c, then there cannot be any disallowance. Tikola Sugar Mills Ltd v CIT 2010 006 ITR (Trib) 583 ITAT Delhi “C” Bench; Galaxy Saws Pvt Ltd (2011) 13 Taxman Mumbai ITAT; Ashok Marketing Ltd 74 Taxman 126 (Cal), relied on. (Para 8.1-8.3) Ratio decidendi: When there is no expenditure debited in the P&L A/c, then there cannot be any disallowance. CIT(A) was justified in deleting the disallowance made on account of land development expenditure incurred by assessee when assessee has produced documents to show genuineness of expenditure and no incriminating document was found during search. Cases referred: Sarogi Credit Corporation v CIT (1976) 103 ITR 344 (Patna) CIT v Mehrotra Brothers (2004) 270 ITR 157 Lalchand Bhagat Ambica Ram v CIT Bihar & Orissa 37 ITR 288 Tikola Sugar Mills Ltd v CIT 2010 006 ITR (Trib) 583 ITAT Delhi “C” Bench Galaxy Saws Pvt Ltd (2011) 13 Taxman Mumbai ITAT Legislation referred: Income-tax Act, 1961, s 37(1) Counsel appeared: Vibha Bhalla CIT(DR) for the Revenue. D C Aggarwal and Sudha Gupta Advs for the assessee
Posted on: Sat, 27 Jul 2013 17:24:37 +0000
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