Commissioner of Income Tax vs V.G.P. Housing (P.) Ltd.

R. Sudhakar, J.—These appeals are filed by the Revenue challenging the order of the Income-tax Appellate Tribunal "C" Bench, Chennai, dated December 21, 2010, made in I.T.A. Nos. 641 to 647 and 515 to 521/Mds./2012 for the assessment years 2003-04 to 2009-10, by raising the following substantial questions of law:

"(for all the assessment years)

Whether, on the facts and in the circumstances of the case, the Tribunal was right in restricting the disallowance, including the offer made by the assessee, shall not exceed 10 per cent of the land development expenses incurred in cash by the assessee?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in restricting the disallowance, including the offer made by the assessee, shall not exceed 10 per cent of the land development expenses and if such direction is followed the income determined after the appeal effect will be less than the income offered by the assessee?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the interest disallowance without noting that the assessee has not produced any evidence for the advances given were out of interest-free funds?

(except for the assessment years 2003-2004 and 2008-2009)

Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the depreciation claimed by the assessee as per the old provisions, without noting that the Assessing Officer has correctly allowed depreciation as per the depreciation chart applicable to the relevant assessment year?

(for the assessment year 2009-10)

Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the addition on account of drawings of directors without noting that the assessee has debited the amount under the head ''Sales promotion and travelling expenses''?"

1.1. The brief facts of the case are as under: A search and seizure operation was conducted in the VGP group on March 3, 2009. Consequent to such search operation, notice under section 153A of the Income-tax Act 1961 (for brevity, "the Act"), dated March 17, 2010, was duly served upon the assessee. Thereafter, notice under sections 142(1) and 143(2) of the Act were duly served upon the assessee. In response to the notice under section 153A of the Act, the assessee filed revised return of income on July 29, 2010, for all assessment years except 2009-10. For the assessment year 2009-10, the assessee filed its returns on September 30, 2009.

1.2. In the course of search, it was found by the Department that the assessee was suppressing its profits through claim of inflated land development expenditure. It is the case of the Revenue that the assessee purchased land at a nominal rate; developed the same and sold them in plots at a low rate and such sale price of each plot included the land development charges, apart from the basic value of the plot and other expenses like stamp duty, registration expenses, etc. The assessee debited the expenditure incurred on development of the plots project-wise to the profit and loss account filed along with the return of income. The assessee produced vouchers in respect of the expenditure incurred towards land development and that was perused by the Department and found to be self-serving documents. The Department was of the view that the expenditure incurred by the assessee for the land development is inflated.

1.3. During the course of the search proceedings on March 3, 2009, one of the directors of VGP Housing P. Ltd. admitted that there was an element of inflation of expenses towards the land development and he stated that the inflation in respect of the land development expenses would be around Rs. 1.20 crores in respect of all the concerns of the group for the years 2002-03 to 2008-09. On such premise, the Assessing Officer restricted the claim of development expenses to 80 per cent of the actual claim, warranting a disallowance of 20 per cent.

1.4. In addition to the above, the Assessing Officer disallowed the claim of the assessee for interest payment in respect of loans availed of from banks and financial institutions, stating that it has advanced certain amounts to the group companies without any interest. The Assessing Officer observed that the assessee had not furnished any business exigency, necessity or compulsion to advance loans to its group companies without any interest.

1.5. The next issue which was considered by the Assessing Officer was the claim of the assessee for depreciation on roads and electrical fittings at the rate of 20 per cent. The Assessing Officer held that the assessee had claimed excess depreciation at the rate of 20 per cent as against the eligible rate of 10 per cent and 15 per cent, respectively, for all the assessment years except 2003-04 and 2008-09. The Assessing Officer disallowed the claim of the assessee for depreciation at 20 per cent

1.6. Apropos of drawings by the directors debited under the head "sales promotion and travelling expenses" during the assessment year 2009-10, the Assessing Officer held that the expenses debited under the said head are purely personal expenditure of the individual directors and the same cannot be debited in the company''s accounts. Thus, the Assessing Officer disallowed the claim of the assessee under this head.

1.7. The assessee appealed against the said order to the Commissioner of Income-tax (Appeals), who by order dated December 22, 2011, made in I.T.A. Nos. 200 to 206/10-11, restricted the disallowance on the land development expenses to 5 per cent, as against 20 per cent, disallowance ordered by the Assessing Officer.

1.8. The claim of the assessee for interest payment, which was disallowed by the Assessing Officer, was deleted by the Commissioner of Income-tax (Appeals) holding as follows:

"14. I have considered the facts and circumstances and the arguments of the learned authorised representative. As contended, there is no diversion of borrowed funds for non-business purposes. Moneys have not been advanced during this year. Moneys advanced in the earlier year were out of interest-free funds. Even the moneys advanced have been used by the sister concerns only for the purpose of business. The decision of the hon''ble Tribunal, in a sister concern of this group, on identical facts, is seen to apply to the case of the appellant. Therefore, the disallowances made for all the years is hereby directed to be deleted."

1.9. Anent the claim of depreciation on roads and electrical fittings for all assessment years except 2003-04 and 2008-09, the Commissioner of Income-tax (Appeals), noticing that it is an expenditure incurred towards maintenance of roads in the amusement park, came to hold that 20 per cent, depreciation claimed by the assessee is perfectly in order. The relevant portion of the order passed by the Commissioner of Income-tax (Appeals) reads as under:

"24. I have considered the arguments of the learned authorised representative and the decisions relied upon. The fact that these roads connect the various amusement rides within the park with one another has not been disputed. That the roads are not pucca roads and are only kutcha roads have also not been disputed. Since these roads are not adjunct to any building and there is no other construction except these roads, the decisions relied upon by the appellant are applicable to the facts of this case. The electrical fittings are beside these roads. Therefore, it is directed that depreciation as claimed on the roads, as well as the electrical fittings is to be allowed. The grounds on these issues are therefore fully allowed for all the years in question."

1.10. With regard to the next issue relating to drawings of directors and debiting the amount under the head "Sales promotion and travelling expenses", the Commissioner of Income-tax (Appeals) accepted the contention of the assessee that the said amount was debited to the partnership firm, in which the directors were partners, and these moneys are due to the assessee from the partnership firm and are shown as either recovered or recoverable during the subsequent assessment years and held that the claim made by the assessee is justified. The relevant portion of the said order reads as under:

"30. During the course of appeal proceedings, it was shown that the moneys drawn from the appellant company were debited to the partnership firm in which the directors were partners. The said entries in the ledger account of the directors were basically posted for keeping track of the transactions. While finalizing the accounts, the moneys drawn from the company were debited to the account of the partnership firms and these money due to the appellant company from the partnership firms were either recovered or shown as recoverable for the subsequent assessment years.

In short, the moneys drawn from the appellant are transferred to the firms. The appellant shows it as due from the firms. The firms take it to the individual account of the partners. This is the accounting procedure followed. I have examined the entries and I find that the explanation offered by the appellant is correct."

1.11. Assailing the said order passed by the Commissioner of Income-tax (Appeals), the assessee as well as the Revenue preferred appeals before the Tribunal, which partly allowed the appeals filed by either side. The Tribunal, in effect, held as under:

(i) directed the Assessing Officer to restrict the disallowance of expenses towards land development to 10 per cent ;

(ii) confirmed the order of the Commissioner of Income-tax (Appeals) in respect of deleting the disallowance of interest payment;

(iii) confirmed that 20 per cent, depreciation claimed by the assessee is perfectly in order; and

(iv) the drawings of directors and debiting the amount under the head "Sales promotion and travelling expenses" is fully justified.

1.12. Aggrieved by the said order passed by the Tribunal, the Revenue has filed these appeals raising the substantial questions of law, referred supra. The assessee has not chosen to file any appeal.

We have heard the learned counsel on either side and perused the orders passed by the Tribunal and the authorities below.

The substantial questions of law raised are dealt with on the trot as under.

4.1. On the issue relating to the disallowance of land development expenses, the assessee as well as the Department preferred appeals before the Tribunal stating that the percentage of disallowance ordered is erroneous and the Tribunal held as under:

"11. We agree with the view of the Assessing Officer that the nature of business of the assessee is such that incurring such expenses in cash towards land development is necessary, especially for labour payments. We also agree that it is very difficult to obtain third party vouchers as the labourers employed are uneducated and, therefore, the assessee is forced to support such expenses only by self-generated vouchers. At the same time, it cannot be held that the entire expenses recorded by the assessee should be allowed, especially when it was found that the assessee has inflated the expenses substantially. The Assessing Officer established with reference to the seized material in a number instances that the land development charges claimed are at 70 per cent to 80 per cent of the land cost and in some instances it went up to 90 per cent of the total sale consideration. Taking into consideration the nature of business, the totality of the facts and circumstances of the case, we direct the Assessing Officer to restrict the disallowance of expenses towards land development incurred in cash to 10 per cent after taking into consideration the offer made by the assessee. In other words, the total disallowance, including the offer made by the assessee should not exceed 10 per cent of the land development expenses incurred in cash by the assessee."

4.2. The plea of the Revenue before us is that the Tribunal, while directing the Assessing Officer to restrict the disallowance to 10 per cent, ought not to have stated that including the offer made by the assessee, the disallowance should not exceed 10 per cent of the land development charges incurred by the assessee.

4.3. However, this issue appears to have been clarified by the Tribunal by order dated June 7, 2013, made in M.P. Nos. 61 to 68/Mds./2013. In paragraph (5) of the said order, the Tribunal held as under:

"5. Considering the submissions of both the parties and on going through the order of this Tribunal, we notice that there is a mistake apparent on record in the above said portion of the order which should be modified and shall be read as under:

''11... Taking into consideration the nature of business, the totality of the facts and circumstances of the case, we direct the Assessing Officer to restrict the disallowance of expenses towards land development incurred in cash to 10 per cent after taking into consideration the offer made by the assessee. In other words, the total disallowance including the offer made by the assessee should not exceed 10 per cent of the land development expenses incurred in cash by the assessee. We make it clear that in any of the these assessment years in case the offer made by the assessee is more than 10 per cent of land development expenses incurred in cash, in such circumstances, the Assessing Officer should restrict the disallowance to the offer made by the assessee and not 10 per cent of land development expenses incurred in cash.''"

4.4. In view of the subsequent order passed by the Tribunal on June 7, 2013, in M.P. Nos. 61 to 68/Mds./2013, the Revenue is not aggrieved by the order impugned in these appeals on this issue. The assessee is also not aggrieved by the subsequent order passed by the Tribunal.

4.5. In view of the above, the substantial questions of law (1) and (2) does not require to be considered any further and, accordingly, they are not answered.

5.1. This issue pertains to interest payment. The Assessing Officer disallowed the interest on the ground that the assessee extended loans to its group companies without any interest. On appeal, the Commissioner of Income-tax (Appeals) held that monies have not been advanced during the year and they were advanced in earlier years out of interest-free funds and, therefore, there is no diversion of borrowed funds by the assessee for non-business purposes. In such view of the matter, the Commissioner of Income-tax (Appeals) deleted the disallowance of interest.

5.2. The Tribunal, while considering the said issue, noticed that similar transaction came for scrutiny in the case of VGP Investments in I.T.A. Nos. 975, 976/Mds./02 and 677/Mds./03, dated October 12, 2007, and the earlier co-ordinate Bench of the Tribunal has held in favour of the assessee and that order has been accepted by the Revenue and was not appealed against. The Tribunal held that the facts in the present case are identical to the earlier case and the Department having not produced any material to controvert the findings of the Commissioner of Income-tax (Appeals), the order of the Commissioner of Income-tax (Appeals) was confirmed on the said issue.

5.3. It is not in dispute that the Department has not appealed against the order of the Tribunal in I.T.A. Nos. 975, 976/Mds./02 and 677/Mds./03, dated October 12, 2007, passed under identical circumstances. That apart, the Department has not produced before this court any iota of material rebutting the finding arrived at by the Tribunal in this case. The Department has also not pointed out any specific error of law committed by the Tribunal on this issue.

5.4. In such view of the matter, this substantial question of law is answered against the Revenue.

6.1. This issue relates to depreciation on roads and electrical fittings. The Assessing Officer rejected the claim of the assessee for depreciation at the rate of 20 per cent and held that the assessee is eligible for depreciation only at the rate of 10 per cent and 15 per cent On appeal, the Commissioner of Income-tax (Appeals) modified the same and allowed depreciation at 20 per cent by placing reliance on a decision of the Supreme Court in Indore Municipal Corporation Vs. Commissioner of Income Tax, and a decision of the Bombay High Court in Commissioner of Income Tax Vs. Chemaux Ltd., . The Tribunal, on appeal, confirmed the order passed by the Commissioner of Income-tax (Appeals).

6.2. In the case of Indore Municipal Corporation Vs. Commissioner of Income Tax, , the reason for granting higher depreciation was justified by stating that the road in question was not adjunct to any buildings and, therefore, cannot be classified under buildings for depreciation purposes. In Commissioner of Income Tax Vs. Chemaux Ltd., , the Bombay High Court held that any expenditure incurred for repair or resurfacing of kutcha roads inside the factory is revenue expenditure.

6.3. The Tribunal, while confirming the order of the Commissioner of Income-tax (Appeals), held that since in the case on hand the roads are not adjunct to any building and there is no other construction except these roads, the decisions, referred supra, would squarely apply and granted depreciation as claimed by the assessee.

6.4. To shed light on this issue, it would be relevant to refer to the Table of rates at which depreciation is admissible, which finds place in old Appendix I (applicable for the assessment years 2003-04 to 2005-06). The relevant portion of the table reads as under:

The note to the said old Appendix I states as under:

"1. "Buildings" include roads, bridges, culverts, wells and tube-wells."

6.5. In the case on hand, admittedly, the roads connect the various amusement rides within the park with one another. The Commissioner of Income-tax (Appeals) as well as the Tribunal proceeded on the basis that the roads are not adjunct to any buildings and, therefore, cannot be classified under buildings for depreciation purposes. A reading of the above said provision makes it clear that building includes roads, bridges, culverts, wells and tubewells. The said provision is not restricted to only roads adjacent to buildings. The Commissioner of Income-tax (Appeals) as well as the Tribunal having not considered this aspect fell into error in accepting the assessee''s plea that 20 per cent depreciation on roads and electrical fittings should be allowed. In our considered opinion, the Assessing Officer was justified in restricting the depreciation to 10 per cent and 15 per cent, as applicable in the respect assessment years, in terms of the old Appendix I (applicable for the assessment years 2003-04 to 2005-06).

6.6. In such view of the matter, this substantial question of law is answered in favour of the Revenue and against the assessee.

Substantial question of law - (5)/(For the assessment year 2009-10)

7.1. This issue pertains to drawings by the directors debited under the head "Sales promotion and travelling expenses" during the assessment year 2009-10.

7.2. We find that the Commissioner of Income-tax (Appeals) as well as the Tribunal has accepted the contention of the assessee that the said amount was debited to the partnership firm, in which the directors were partners, and these moneys are due to the assessee from the partnership firm and are shown as either recovered or recoverable during the subsequent assessment years and held that the claim made by the assessee is justified.

7.3. To controvert the abovesaid view taken by the Commissioner of Income-tax (Appeals) and the Tribunal, the learned standing counsel for the Department relied upon the statement made by one of the directors and we extract the same hereunder for better clarity on this issue:

"Whenever any personal expenses (not incidental to the business) is incurred by any director, the expenses are recorded by debiting personal account of the director and the amounts are transferred as loan to the partnership firms (VGP and Co., VGP Investments) and, subsequently, booked as drawings in the partner''s capital/current account. However, no actual transfer of funds to the partnership firms and drawings from the firms takes place. Personal expenses are met out of the bank accounts of VGP Housing Pvt. Ltd. only. Apart from this, the personal expenses such as credit card expenses, foreign travel expenses of directors, household expenses, etc., are debited under the head ''Sales promotion and travelling expenses'' in the VGP Housing (P.) Ltd./VGP and Co. Pvt. Ltd. books of account. I admit that the extent of such personal expenses (consolidated for all group concerns) debited under these heads of account would be around Rs. 1 crore for the period 2003-04 to 2008-09."

7.4. A reading of the above said statement makes it clear that there is a clear admission by the director that the personal expenses are met out of the bank accounts of the assessee only. It is also stated that credit card expenses, foreign travel expenses of directors, household expenses, etc., are debited under the head "Sales promotion and travelling expenses" in the VGP Housing (P.) Ltd./VGP and Co. Pvt. Ltd. books of account.

7.5. The Assessing Officer, on the basis of the said statement, held that the expenses under the head "Sales promotion and travelling expenses" are purely personal expenditure of the individual directors and the same cannot be debited in the company''s accounts. We find that the there is a clear contradiction between the statement made by the director, referred to above and the findings of the Commissioner of Income-tax (Appeals) and the Tribunal. The facts do not support the finding rendered by the appellate authorities.

7.6. The learned counsel for the assessee states that there are materials to substantiate the plea that there was reversal of entries relating to monies transferred from the assessee-company to the firm. No material has been placed before us, except the said statement made by the learned counsel for the assessee. In any event, that is an issue which has to be decided on facts by the competent authority, by considering the materials that may be produced by the assessee in contradiction to the stand taken by the Department on the basis of the statement made by one of the directors of the assessee.

7.7. In such view of the matter, we hold that the issue relating to deleting the addition on account of drawings of directors should be considered by the Assessing Officer on the merits based on materials to be produced by the assessee. Only to determine this issue, the matter is remanded to the Assessing Officer.

Resultantly, these appeals are disposed of in the above terms. No costs. Consequently, M.P. No. 1 of 2013 (13 petitions) are closed.