Whether if sale of development rights is recognized on accrual basis as per terms of agreements entered into with customers, every receipt is to be treated as income - NO: HC

THE issue before the Bench is - Whether if sale of development rights is recognized on accrual basis in the financial year in accordance with the terms of the agreements entered into with the customers, every receipt can be treated as income of the assessee. NO is the answer.

Facts of the case

The assessee firm is in the business of developing land for commercial, residential, retail, industrial parks, information technology parks, SEZ, etc. During AY 2007-08, it had filed its return of income, which was subjected to scrutiny assessment. AO observed that the assessee in its Balance Sheet and cash flow statement had shown stock and Current Liabilities at different amounts. Further, AO asked the assessee to explain the transaction in respect of 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, 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. The AO observed that M/s DLF Ltd., for FY ending 31.03.2007, treated the advance given to the assessee as 'stock'. Similarly, CBDL had also shown the same treatment in its accounts under the head “money and advance – advance for land purchased”. Based on this, the AO sought an explanation from the assessee as to why these advances received from M/s DLF Ltd. and CBDL should not be treated as sale for the purpose of determining total income. 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 held 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. Similarly, for AY 2008-09, the AO added Rs. 15,70,196/- on account of undisclosed sale of development rights. Further, the AO added a sum of Rs. 19,09,83,236/- u/s 40(a)(ia) 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. On appeal, 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. On further appeal, on the issue of addition for non-deduction of TDS as well, CIT(A) ruled in favour of the assessee and deleted this amount. Thus, the appeals were decided in favour of the assessee for both the assessment years. On further appeal, ITAT had dismissed the Revenue's appeals.

Held that,

Amount received towards transfer of development rights

++ the ITAT observed that undeniably, as observed by the CIT(A), the AO has not been able to bring anything on record to show that during the year, the assessee acquired any development rights. Now, in the absence of acquisition of development rights, as to how any development rights could have been transferred or assigned to M/s. DLF is beyond comprehension. The observations/findings of the AO in this regard were, correctly held by the CIT(A), to be wrong. Such development rights did not get to be acquired, since there was no acquisition at all, during the year, of land by the land owning companies, “LOCs”. In the absence of acquisition of land, the approval/licence from the Town and Country Planning Authorities could not even be applied for, much less obtained. Therefore, by no stretch of imagination can it be, said that there were any development rights in existence at all during the year, with the LOCs. There being no such development rights in existence, there arises no question of any such rights being transferred. Moreover, the AO also did not bring on record any details apropos the rights allegedly transferred, the LOCs concerned, the details of licence obtained from the concerned authorities with regard to the development rights. Further, 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) that the 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. 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 AYs. 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 revenue places reliance on the assessee's accounting policy – mentioned in Schedule 7 of the auditor's report for AY 2007-08 – which states that „sale of developed plots is recognised in the financial year in which the agreement to sell executed'. Pertinently, the financial statement for AY 2008-09 states that „[s]ale of development rights is recognized on accrual basis in the financial year in accordance with the terms of the agreements entered into with the customers'. According to the Revenue, the alleged sale by the assessee to M/s DLF Ltd. and CBDL was of „development rights' acquired from LOCs. However, as held above, since no rights were in fact sold in the two assessment years in question by the assessee to either M/s DLF Ltd. or CBDL, no income from such sale can be brought to tax by the Revenue. 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. The assessee's accounting policy is provided for in Accounting Standard 4, Schedule 9. Para 3 of the schedule deals with recognition of Revenue and Related costs that sale of development rights is recognized on accrual basis in the financial year in accordance with the terms of the agreements entered into with the customers. 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. Indeed, the Business Development Agreement between M/s DLF Ltd. and the assessee and the Memorandum of Understanding dated 06.12.2006 between M/s DLF Ltd., 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;

Reimbursement of interest within Section 40(a)(ia)

++ HC holds that the CIT(A) and the ITAT rightly set aside the AO's order, ruling that the assessee was not required to deduct TDS on reimbursement expenses paid to M/s DLF Land Ltd. The assessee has correctly relied upon this Court's ruling in Industrial Engineering Projects Pvt. Ltd.,. A Division Bench of HC in that case specifically held that “reimbursement of expenses can, under no circumstances, be regarded as revenue receipt” and therefore, it is not liable to income tax. The Court relied upon SC's decision in CIT v. Tejaji Farasram Kharawalla Ltd., 2002-TIOL-556-SC-IT, where the Court had held that it is only the amount that exceeds the expenditure incurred by the agent that would be liable to tax. More recently, this Court in Fortis Health Care Ltd. has also held that amount received towards reimbursement of expenses is not taxable under the Act. This Court holds that the entire amount paid by the assessee to M/s DLF Land Ltd. is entitled to deduction as expenditure. In arriving at the aforesaid conclusion, HC derives support from the Gujarat High Court's decision in CIT-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. A SLP preferred by the revenue against the HC's decision was dismissed by the SC on 17.01.2014 (in SLC CC No. 175 of 2014). 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. The facts of this case are identical to those in Gujarat Narmada Valley 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. In light of the above, both questions of law are answered in favour of the assessee and against the revenue. The ITAT's decisions in ITA Nos. 627 of 2012 and 507 of 2013 are upheld. ITA 627/2012 and ITA 507/2013 are accordingly dismissed. There shall be no order as to costs.