Kokolath Builders & Developers Pvt. Ltd. Pre operative Expenditure

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IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: ‘D’: NEW DELHI

BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER, AND
SHRI L.P. SAHU, ACCOUNTANT MEMBER,

ITA No. 4346 & 4347/Del /2012
Assessment Year: 2006-07 & 2007-08

The D.C.I.T. Vs. M/s Kokolath Builders & Developers Pvt Ltd
Circle -10(1) I-E, Jhandewalan Extension, Naaz Cinema
New Delhi Complex, New Delhi

PAN : AACCK 7721 R

[Appellant] [Respondent]

Date of Hearing : 14.03.2016
Date of Pronouncement : 31.03.2016

Appellant by : Shri Shravan Gotru, Sr- DR
Respondent by : Shri R.S. Singhvi, CA

ORDER
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PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

Both these appeals filed by the Revenue are directed

against the separate orders of the CIT(A)-XIII, New Delhi,

dated 07/05/2012 for AY 2006-07 and dated 04.05.2012 for

A.Y 2007-08 respectively.

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ITA No. 4346/Del/2012 [A.Y 2006-07]

2. The Revenue has raised the following grounds of appeal:

“1. Whether the CIT(A) under the facts and circumstances of
the case and in law was justified in allowing the business loss
claimed by the assessee amounting to Rs.67,72,057/- which was
disallowed by the AO treating the same as pre-operative
expenditure related to investments?

2. Whether in the facts and circumstances Ld CIT(A) was
right in holding that the credit of Rs. 78,86,140/- appearing in the
name of Sh. Mast Ram, which assessee during the course of
assessment proceedings claimed to be in the name of M/s Vikram
Electric Equipment Pvt Ltd as genuine ?

3. Whether in the facts and circumstances of the case and
without prejudice above grounds Ld CIT(A) was right in holding
that the payment allowed to M/s Vikram Electric Equipment Pvt
Ltd for consolidation of land are not in the nature of commission ?

4. Whether in the facts and circumstances of the case Ld
CIT(A) has erred in not holding that consolidation charges are
merely different nomenclature for commission as such liable for
deduction of tax and consequent disallowance u/s 40(i)(a) of the
I. T. Act, 1961 in the event of default?”

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3. The brief facts of the case are that the assessee filed its

return of income declaring loss of Rs. 68,51,574/- and AO had

completed the assessment u/s 143(3) of the Income tax Act,

1961 [for short, ‘the Act’] at an income of Rs. 78,86,140/-. In

the assessment order AO has mentioned that the assessee has

not started its business in the relevant year as the land

purchased had been declared as investment and not stock in

trade. During the year, the assessee has received unsecured

loan of Rs. 33.39 crores from DLF Universal Limited and also

accepted unsecured loan of Rs. 16,92,20,500/- each from M/s

Ciel Builders & Developers Pvt. Ltd. and M/s Odette Builders &

Construction Pvt. Ltd which was utilized in repayment of loan

from DLF Universal Ltd. The AO has held in his order that all

expenses claimed by the assessee are pre-operative hence

business loss is assessed at Nil. During the course of assessment,

the AO asked the assessee to prove the identity of Mast Ram to

whom an amount of Rs. 78,86,140/- was payable. In the

assessment order, the AO has observed that assessee has taken

U-turn and changed the name of the creditor from Mast Ram to

M/s Vikram Electrical Equipment Pvt. Ltd. Further the AO has

noticed that payment made to M/s Vikram Electrical

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Equipments Pvt. Ltd. was in the nature of commission and,

therefore, liable for deduction of TDS. Further the AO held

that amount payable to M/s Vikram Electrical Equipment Pvt.

Ltd. was a bogus creditor. Therefore, said amount of Rs.

78,86,140/- was disallowed by AO by treating it as bogus

creditor and also held that the assessee has contravened TDS

Provisions.

Ground No. 1

4. At the very outset of the hearing of Ground No. 1 of the

appeal of the Revenue, the business loss claimed by the assessee

amounting to Rs.67,72,057/- which was disallowed by the AO treating

the same as pre-operative expenditure related to investments, the

rival representatives agreed that the issue is squarely covered in favor

of the assessee vide order dated 14.10.2015 in Ground No. 1 dealt at

para 11 page 11 of the order of the ITAT Delhi ‘B’ Bench in ITA No.

4344/Del/2012 in the case of M/s DLF Homes Panchkula Pvt Ltd

wherein on identical facts and circumstances, the ITAT has held as

under:

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“11. We have considered the submissions of both the parties and
carefully gone through the material available on the record. In
the present case, it is an admitted fact that the AO accepted the
incurring of expenditure for business purpose, his only objection
was that those expenses were capital in nature and not revenue
in nature as claimed by the assessee, on the basis that the
commercial activity of the assessee did not commence. In the
instant case it is an admitted fact that the assessee company
was incorporated on 09.04.2007 and it acquired development
rights on 172.46 acres of land for the purpose of Real Estates
Development at Village Bhagwanpur, Tehsil Kalka, District
Panchkula. The assessee acquired the approval from the State
Government for setting up of residential township on 136.89
acres, the approval was published in Official Gazette on
26.09.2007 and the expenses in question were incurred by the
assessee for its business purposes. However, the project which
was started in this year did not reach to the stage where
revenue could be recognized but it cannot be said that the
expenses incurred by the assessee were not for the business
purposes. On a similar issue the Hon’ble Jurisdictional High Court
affirmed the decision of the ITAT Delhi, in deleting the similar
type of addition which was made by the AO in similar
circumstances in the case of CIT Vs Dhoomketu Builders and DLF
Homes Panchkula Pvt. Ltd. development Pvt. Ltd. (supra). The
Hon’ble Jurisdictional High Court in the said case has held as
under:

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“There is a difference between the setting up and
commencement of business. When a business is established
and is ready to commence business then it can be said of
that business that it is set up. But before it is ready to
commence business it is not set up. But there may be an
interregnum, there may be an interval between a business
which is set up and a business which is commenced and all
expenses incurred after the setting up of the business and
before the commencement of the business, all expenses
during the interregnum, would be permissible deductions.
The question as to when a business can be said to have
been set up is a question of fact to be ascertained on the
facts and circumstances of each case and considering the
nature and type of the particular business and no universal
test or formula applicable to all types of businesses can be
laid down. The commencement of real estate business
would normally start with the acquisition of land or
immovable property. When an assessee whose business is
to develop real estate, is in a position to perform certain
acts towards the acquisition of land, that would clearly
show that it is ready to commence business and, as a
corollary that it has already been set up. The actual
acquisition of land is the result of such efforts put in by
the assessee; once the land is acquired the assessee may be
said to have actually commenced its business which is that
of development of real estate. The actual acquisition of
land may be the first step in the commencement of the
business but section 3 of the Act does not speak of

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commencement of the business, it speaks only of setting up
of the business.”

12. We, therefore, keeping in view the ratio laid down by the
Hon’ble Jurisdictional High Court in the aforesaid referred to
case, do not see any infirmity in the order of the ld. CIT(A).
Accordingly, we do not see, any merit in this appeal of the
department.”

5. We have heard the arguments of both the sides and carefully

perused the relevant material placed on record before us. We

have also carefully treaded through the Tribunal order [supra]

and find that the Tribunal has decided the issue in favour of the

assessee. We find that the facts and circumstances of the case

are exactly identical to those in the case of DLF Homes [supra].

Accordingly, respectfully following our own order, we dismiss the

ground No. 1 of appeal raised by the revenue. Ground No. 1

stands dismissed.

Gruond No. 2, 3 and 4

6. Vide ground Nos. 2, 3 and 4, Revenue has disputed the

credit of Rs. 78,86,140/- appearing in the name of Shri Mast Ram,

which the assessee claimed to be in the name of M/s Vikram

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Electric Equipment Pvt. Ltd held by the ld. CIT(A) as genuine.

During the course of assessment proceedings, the AO treated the

expenditure as bogus creditor and also held that the TDS was not

deducted on this payment although same was applicable. When

the aggrieved assessee went in appeal before the ld. CIT(A), it

was held by the ld. CIT(A) that the cost incurred in purchase of

land including Rs. 78,86,140 paid to M/s Vikram Electric

Equipment Pvt. Ltd was duly reflected in the books of accounts of

the assessee and the same was capitalised in the books of the

assessee. The ld. CIT(A) came to the conclusion that the AO was

not correct in treating the credit as bogus. The ld. CIT(A) further

held that the provisions of section 40(a)(ia) are not attracted in

this case as the assessee has not claimed any deduction for any

expenses on account of payment made to M/s Vikram Electric

Equipment Pvt. Ltd either in its profit and loss account or in the

computation of taxable income filed.

7. Both us also, the rival representatives reiterated their

submissions made before the lower authorities. The ld. AR

furnished a copy of the Tribunal order dated 11.2.2016 in the

case of Philana Builders and Developers P. Ltd in ITA No.

1949/Del/2011 for A.Y 2007-08 stating that the issue is covered

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by the aforementioned Tribunal decision. The ld. DR fairly

concurred to the submission of the ld. AR.

8. We have heard the arguments of both the sides and carefully

perused the relevant material placed on record before us. At the

very outset, we find that the issue under consideration is

squarely covered by the Tribunal order dated 11.2.2016 in the

case of Philana Builders and Developers P. Ltd in ITA No.

1949/Del/2011 for A.Y 2007-08 wherein at para 9 page 10 of the

order, the Tribunal has given a finding in this context as under:

“We have perused the agreement in this regard. It is seen that
clause 3.2 of the MOU between the assessee and Vikram Electric
Equipment P. Ltd. makes it clear that Vikram Electric Equipment
P. Ltd. or its agent agreed to assign their rights to purchase the
land in favour of the assessee. It would be appropriate to
reproduce here, the said clause 3.2:

3.2 In consideration of the consolidator or its agent/nominee
assigning its right to purchase the land in favour of the Buyer
Company and causing the land owners to execute the sale deeds
directly in favour of the Buyer Company, the Buyer Company
shall pay the consolidator such sum as may be mutually agreed.
However, it is specifically agreed by the consolidator that no
sum shall accrue to it on this account till it procures 27 acres of
land for the Buyer company (unless the Buyer Company decides
to procure less than 27 acres through the consolidator) and all
the issues relating to possession and mutation of such land are
settled to the satisfaction of the Buyer Company.

9.1. The above clause also makes it evident that unless the
assessee decided to procure less than 27 acres of land through

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Vikram Electric Equipment P. Ltd. Vikram Electric Equipment P.
Ltd. was to procure 27 acres of land for the assessee, failing
which, no payment was to be made by the assessee to Vikram
Electric Equipment P. Ltd.

9.2. This clearly shows that Vikram Electric Equipment P. Ltd.
was transacting on a principle to principle basis and it cannot be
said that the payment was made by the assessee to Vikram
Electric Equipment P. Ltd. for rendering of any service. The
provisions of sec. 194H of the Act are, therefore, not at all
applicable.

9.3. Moreover, the amount paid to Vikram Electric Equipment P.
Ltd. was duly reflected by the assessee in the purchases closing
stock. No sales had been made during the year under
consideration. It has not been shown to be otherwise. In such a
scenario, in our considered opinion, no disallowance is called
for.

9.4. Pertinently, no addition having been made for the year by
the Assessing Officer, the alternate contention of the assessee
to the effect that no addition can be made during the year,
stands accepted by both the Authorities below. 9.5. The
provisions of section 40(a)(ia) of the Act in any case do not
apply, the assessee having not claimed any deduction for any
expenses on account of payment to Vikram Electric Equipment P.
Ltd. either in its profit and loss account or in the computation of
taxable income filed. It was only that the Assessing Officer
recorded a loss of Rs. 19,700/-. This obviously, did not include
any addition of either Rs. 4.02 crores or Rs. 1.24 crores.

9.6. In view of the above discussions, the grievance of the
assessee is found to be correct and is accepted as such.

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In that view of the matter, respectfully following the Tribunal

order [supra] and find no discrepancy in the finding of the ld.

CIT(A), we decline to interfere with the same. Accordingly, we

dismiss Ground No. 2 of the Revenue’s appeal.

ITA No. 4347/Del/2012 [A.Y 2007-08]

9. This appeal has been fixed for hearing in view of the recent CBDT

Instruction No. 21/2015 dated 10.12.2015, revising the monetary limit

of Rs.10 lakhs for not filing the appeal before the Tribunal in terms of

section 268A(1) of the Income-tax Act.

10. The CBDT in its recent Circular No. 21/2015 dated

10.12.2015 has provided that no departmental appeal shall be

filed before the ITAT wherein the tax effect involved is less than

Rs.10 lakhs. Further, in para 10 of the Circular, it is provided

that this instruction would apply retrospectively and the pending

appeals below the specified tax limit of Rs.10 lakhs may be

withdrawn/not pressed.

11. The learned CIT-DR appearing on behalf of the Revenue

before us, at the outset, submitted that appeal can be withdrawn

only after getting the approval of competent authority. He

further referred to para 7 of the Circular to submit that dismissal

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of appeal, however, in any case, on account of low tax effect

should not be considered as a precedence in the matters of

subsequent years where the tax effect is above the monetary

limit prescribed by this Circular and the issue should be decided

on merits.

12. The learned counsel for the assessee, on the other hand, stated

that the Circular is squarely applicable to the present appeal of the

Revenue.

13. After considering the rival submissions, we find that prima

facie, the tax effect involved in this appeal by the Revenue is

below Rs. 10.00 lakhs and, therefore, we deem it proper to

dismiss the appeal particularly because the pending appeal is

covered by Circular in view of para 10 of the circular. However,

we may clarify that if on receipt of this order, the Assessing

Officer finds that the tax effect is above Rs.10 lakhs or in any

other manner, the Circular is not applicable in view of exceptions

culled out in the Circular, he will be at liberty to file

miscellaneous application for recalling of this order which the

Tribunal will consider in accordance with law. We further find

considerable force in the contention of the CIT/DR that this order

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cannot be considered as an acceptance by the Revenue on the

issue involved in this appeal and will not be an estoppel for the

Revenue to take up the issue, involved in this appeal, before ITAT

on merits if the tax effect in those years is more than Rs.10

lakhs.

14. Keeping in view the above Circular and the provisions of

section 268A of the Income-tax Act, 1961 and without going into

merits of the case, we dismiss the instant appeal filed by the

Revenue as tax effect in the appeal is less than Rs.10 lakhs.

15. In the result, the appeal of the Revenue stands

dismissed.

The order is pronounced in the open court on 31.03.2016.

Sd/- Sd/-
(L.P. SAHU) (C.M. GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 31 st
March, 2016

VL/

Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar,
ITAT, New Delhi
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Shalin Kapadia is pursuing Chartered Accountancy and working as an article assistant at Rasesh Shah and Associates and can be reached at k.shalin1310@gmail.com. His dream is to travel the world.

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