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Commissioner Of Income Tax-Xi Vs. M/s. Dlf Commercial Project Corporation
July, 30th 2015

                                                      Reserved on: 24.03.2015
                                                    Pronounced on: 15.07.2015
+      ITA 627/2012
+      ITA 507/2013

       COMMISSIONER OF INCOME TAX-XI..................Plaintiff


                 Through: Sh. P. Roy Chaudhuri, Sr. Standing Counsel
                 for the Revenue in ITA 627/2012 and Sh. N.P. Sahni, Sr.
                 Standing Counsel for the Revenue in ITA 507/2013.

                          Sh. Ajay Vohra, Sr. Advocate with Ms. Kavita Jha and
                          Sh. Vaibhav Kulkarni, Advocates, for the respondent.


1.     This judgment disposes off two appeals, concerning the same
assessee, preferred by the Revenue against the orders of the Income Tax
Appellate Tribunal ("ITAT") dated 09.09.2011 and 22.02.2013, for AY
2007-08 (ITA No. 627 of 2012) and AY 2008-09 (ITA No. 507 of 2013)
respectively. The common question of law involved in both the appeals is as

ITA 627/2012 & 507/2013                                                  Page 1
      "Whether the amount received by the assessee towards transfer
      of development rights could be treated as sale consideration in
      the circumstances of the case?"

2.     An additional question that arises in ITA No. 507 of 2013 is:
      "Did the Income Tax Appellate Tribunal (ITAT) fall into error in
      its findings with respect to the addition on account of
      reimbursement of interest within Section 40(a)(ia) on the issue of
      non-deduction of TDS on the payments made on reimbursement
      of service charges?"

3.     The relevant facts are that the assessee, a firm set up in 1984-85, is in
the business of developing land for commercial, residential, retail, industrial
parks, information technology parks, SEZ, etc. During AY 2007-08, the
assessee filed its return reporting an income of 1,67,95,360. Scrutiny
assessment notice Section 143(2) of the Income Tax Act, 1961 (hereafter
referred to as "the Act") was issued on 22.07.08. During assess ment
proceedings, the Assessing Officer ("AO") observed that the assessee had
in its Balance Sheet shown stock of  34,55,60,19,667/- and Current
Liabilities as  34,86,09,08,730/-, whereas in the Cash Flow Statement,it
had shown stock of  34,55,54,73,615/- and Current Liabilities as
34,85,91,89,394/-. Further, the AO asked the assessee to explain the
transaction in respect of which advance of  3038.65 crores was received
from M/s DLF Ltd. and also the transaction of  446.30 crores with M/s
Caitlin Builders and Developers Private Limited ("CBDL"), 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

ITA 627/2012 & 507/2013                                                    Page 2
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
financial year ending 31.03.2007, treated the advance given to the assessee
as ,,stock. Similarly, CBDL had also shown the same treatment in the
annual 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 was of the opinion 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  30,37,15,779/- was made to the income of the assessee.
4.     Similarly, for AY 2008-09, the AO added  15,70,196/- on account of
undisclosed sale of development rights. Further, the AO added a sum of 
19,09,83,236/- under Section 40(a)(ia) of the Act 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.
5.     The assessee appealed against the AOs orders for the two assessment
years before the Commissioner of Income Tax (Appeals) (hereafter
"CIT(A)"). The 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. In the second appeal, on the issue of addition of  19,09,83,236/-

ITA 627/2012 & 507/2013                                                  Page 3
for non-deduction of TDS as well, the 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. The Revenues appeals in both the
cases were dismissed by the ITAT, which upheld the findings of CIT(A).
Aggrieved, the Revenue is in appeal before this Court.
Submissions on Behalf of Revenue:

6.     Mr. N.P. Sahni, learned counsel for the Revenue, assails the decisions
of the ITAT in respect of the first issue on the ground that the stock and
current liabilities shown in the cash flow statement do not match with that
shown in the balance sheet. He submits that the decreased stock in cash flow
statement implies that the assessee has actually sold the development rights
during the year while decreased amount under current liabilities is receipt
against the decrease in stock.
7.     Learned counsel submits that in terms of the assessee's accounting
policy, sale of developed plots was recognized in the financial year in which
the agreement to sell is executed. The AO had rightly concluded that the
assessee had not declared the net receipts of sale of development rights in its
income-tax return. He submits that by agreement to sell dated 02.08.2006,
the assessee agreed to assign or transfer the development rights to M/s DLF
Ltd. or its affiliate and the MoU dated 06.12.2006 entered into with CBDL
established that the development rights purchased by the assessee till
06.12.2006 were sold to M/s DLF Ltd. The payment received by the
assessee pursuant to such sale of development rights was now being claimed
as advance received by the assessee.The assessees submission that the same

ITA 627/2012 & 507/2013                                                  Page 4
was shown as income for subsequent assessment years is nothing but
deferment of tax liability to other years.
8.     On the second issue arising in ITA No. 507 of 2013, learned counsel
submits that the assessee ought to have deducted TDS on the total amount
reimbursed by it to M/s DLF Land Ltd., and the TDS actually deducted by
the assessee towards M/s DLF Land Ltd.s service charge does not suffice.
Therefore, the CIT(A) and ITAT were wrong in deleting the addition of 
19,09,83,236/- made by the AO.
Submissions on Behalf of Assessee:

9.     Mr. Ajay Vohra, learned senior counsel appearing on behalf of the
assessee supports the findings of the CIT(A) and ITAT and submits that the
AO erroneously added the amounts on account of income arising from sale
of development rights in the two assessment years in question.
10.    Mr.Vohra contends that the assessee had itself not acquired
development rights in the lands which, according to the Revenue, had been
transferred to DLF Ltd. In fact, the assessee was in the final stages of
negotiations for acquisition of development rights for certain lands situated
in Gurgaon, Haryana from various land owning companies, and there was no
way it could assign or transfer development rights either to M/s DLF
Limited or to CBDL. It was further contended that transfer/sale of
development rights is dependent on various terms and conditions of such
agreements. These agreements contain clauses which give the option to
parties to terminate the arrangement if certain conditions are not fulfilled. It
was pointed out by the assessee that it mainly received these amounts as
advance as per its regular system of accounting and that no income has

ITA 627/2012 & 507/2013                                                   Page 5
actually accrued or arisen to the assessee from such agreements. The
assessee follows the mercantile system of accounting. The assessee submits
that in terms of consistently followed accounting practice, sales and
purchases are recognized only on registration of sale/purchase deed. Till the
sale deed is registered, the amount received from M/s DLF is treated as
"advance" and the amounts paid to land owning companies also be treated
as advance paid only. Assessing Officer has misunderstood this position and
tried to imply that the assessee is following Cash System of accounting and
has accordingly made the addition.The amount received by the assessee
cannot be treated as income in the hands of the assessee.
11.    Mr.Vohra further submits that deletion of amount paid to M/s DLF
Land Ltd. from the income of the assessee under Section 40(a)(ia) of the Act
is justified as the payment was made for the purposes of reimbursement of
expenses handled by M/s DLF Land Ltd. on behalf of the assessee, and the
assessee had duly deducted TDS on the service charges paid to M/s DLF
Land Ltd. by the assessee. The assessee entered into an agreement dated
01.04.2007 with the said company to carry out activities like maintenance of
books of accounts and getting the accounts audited, maintenance of
secretarial records, filing with various statutory authorities etc. M/s DLF
Land Ltd. was entitled to service charges @ 5% of the total expenditure
incurred. During AY 2008-09, the assessee reimbursed  19,69,83,236/- and
also paid service charges @ 5% on it amounting to  98,49,106/-. It
deducted TDS amounting to 10,35,057/- and deposited the said amount.
Since the reimbursement of expenses was not taxable, learned senior counsel
submits that the assessee was not required to deduct TDS on the entire
amount.Reliance is placed on this Courts rulings in CIT v. Industrial

ITA 627/2012 & 507/2013                                                 Page 6
Engineering Projects Pvt. Ltd., 202 ITR 1014 (Delhi) and CIT v. Fortis
Health Care Ltd., [2009] 181 Taxman 257 and the Supreme Courts decision
in Hindustan Coca Cola Beverage Pvt. Ltd. v. CIT, [2007] 293 ITR 226
Analysis and Conclusions:

Question No. 1

12.     The assessee was engaged in the business of development of land for
various purposes. It acquired development rights from various LOCs, who
were also responsible for obtaining the necessary licences from statutory
authorities. The Revenues case is based on the premise that the assessee
sold development rights of certain land to M/s DLF Ltd. and CBDL and the
income generated from the same was not disclosed. However, the ITAT
rejected the Revenues contention on the ground that there was no material
to support a finding of sale of development rights by the assessee to
aforesaid two entities. The ITAT observed as follows:
      "...Undeniably, as observed by the ld. 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

ITA 627/2012 & 507/2013                                                   Page 7
      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 Courts opinion, adequately explained by the CIT(A)
as follows:
      "The learned 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."

13.    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 assessment years. 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 ITATs finding on this
14.    The revenue places reliance on the assessees accounting policy ­
mentioned in Schedule 7 of the auditors 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

ITA 627/2012 & 507/2013                                                   Page 8
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.
15.    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 assessees accounting policy is provided for in Accounting Standard 4,
Schedule 9. Para 3 of the schedule deals with recognition of Revenue and
Related costs:
      "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 revenues attempt to bring t o 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 dated
02.08.2006 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

ITA 627/2012 & 507/2013                                                   Page 9
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.
16.    Therefore, this Court affirms the ITATs ruling on the first question of
law and holds that the AO had erroneously added the amounts to the
assessees income on account of sale of development rights for AY 2007 -08
and AY 2008-09.
Question No. 2
17.    The AO disallowed the amount of  19,69,83,236/- as deduction for
the reason that the assessee deducted TDS only on the service charges paid
by it to M/s DLF Land Ltd. According to the AO, TDS ought to have been
deducted under the amount paid by the assessee towards reimbursement
expenses to M/s DLF Land Ltd. This Court holds that the CIT(A) and the
ITAT rightly set aside the AOs order, ruling that the assessee was not
required to deduct TDS on reimbursement expenses paid to M/s DLF Land
18.    The assessee has correctly relied upon this Courts ruling in Industrial
Engineering Projects Pvt. Ltd., (supra). A Division Bench of this Court 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 the Supreme Courts decision in CIT v.
Tejaji Farasram Kharawalla Ltd., [1968] 67 ITR 95 (SC), 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. (supra) has also held that amount received towards
reimbursement of expenses is not taxable under the Act.

ITA 627/2012 & 507/2013                                                 Page 10
19.    In the instant case, it is undisputed that M/s DLF Land Ltd. had
deducted TDS on the payments made by it under various heads on behalf of
the assessee. Further, it is also not disputed that the assessee deducted TDS
on the service charge paid by it to M/s DLF Land Ltd. on the reimbursement
expenses. In such circumstances, this Court holds that the entire amount paid
by the assessee to M/s DLF Land Ltd. is entitled to deduction as
20.    In arriving at the aforesaid conclusion, this Court derives support
from the Gujarat High Courts decision in Commissioner of Income Tax-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 revenues 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 special leave petition
preferred by the revenue against the High Courts decision was dismissed by
the Supreme Court on 17.01.2014 (in SLC CC No. 175 of 2014). This court
is also supported in its reasoning by the text of Section 194C (TDS for
"work") and Section 194J (TDS of income from "professional services"- the
latter expression defined expansively by Section 194J (3) Explanation (a)).
Neither provision obliges the person making the payment to deduct anything
from contractual payments such as those made for reimbursement of

ITA 627/2012 & 507/2013                                                Page 11
expenses, other than what is defined as "income". 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.
21.    The facts of this case are identical to those in Gujarat Narmada
Valley (supra) and for the reasons stated above, this Court does not find any
compelling ground to arrive at a different conclusion. Thus, the ITATs
ruling in this regard is upheld.
22.    In light of the above, both questions of law are answered in favour of
the assessee and against the revenue. The ITATs 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.

                                                     S. RAVINDRA BHAT

                                                              R.K. GAUBA
JULY15, 2015

ITA 627/2012 & 507/2013                                                Page 12
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