Income Tax

Section 43CA Can’t Be Invoked In Presence of a Consensus B/W Parties

On 20^th December 2022, the Income Tax Appellate Tribunal Mumbai pronounced a judgement in the case titled ACIT Vs Triple Securities Pvt. Ltd against the appeal filed by the Revenue challenging the order, dated 05.10.2021, passed by the Ld. CIT (Appeals), NFAC, Delhi for the AY 2016-17 whereby the Ld. CIT(A) had partly allowed   assessee’s  appeal against the Assessment Order, dated 30.12.2018 passed under section 143(3) of the IT Act 1961. The tribunal held that the provisions of 43CA can’t be invoked in the presence of consensus between the parties. The consensus was reached by the way of a meeting held between the parties before the Deputy Chief Engineer, MBR&RB and duly signed by him. The present article discussed the aspects covered in the case.

Facts of the Case

• The Assessee is a Pvt Ltd Company with the business of development of land and construction of the building as builder and developer whose ITR for AY 2016-17  was filed on 17.10.2016 declaring a loss of INR 1,56,22,487/-which led to the case being selected for scrutiny  by the AO who completed assessment u/s 143(3) of the Act vide Assessment Order, dated 30th December 2018 after making the addition of INR 2,18,84,138/- u/s  43CA of the Act and disallowing the  interest expenditure of INR 1,55,42,291/-.
• Being aggrieved by order of the AO, the Assessee preferred an appeal before CIT(A), who granted relief to the Assessee, vide order dated 30.12.2018, by deleting the above addition/disallowance made by the Assessing Officer.
• The Revenue filed an appeal before the tribunal against the order pronounced by the CIT (A) on the grounds, which are taken up in seriatim hereinafter.
• Only one re-development project was undertaken by the assessee wherein the assessee redeveloped an old tenanted residential building, namely Govind Niwas‟ [hereinafter referred to as the Old Building‟]. 
• According to the redevelopment plan, the Assessee needed to construct & develop a new building and rehabilitate the tenants therein by way of allotment of the units with specified carpet area.
• The Mumbai Building Repair & Reconstruction Board (MBR&RB) on 19.10.2001, vide Approval Letter bearing No. R/NOC/F-10825/3274/MBRRD, hereinafter referred to as the Approval, gave the No Objection Certificate‟ (NOC) for the re-development of the Old Building.
• As per the Approval Letter, the Assessee was required to allot to the tenants a carpet area of a minimum of 20.90 Sq. Mtrs. (225 Sq. Ft.) and the maximum carpet area specified was 70 Sq. Mtrs (as per Maharashtra Housing and Area Development Act, 1976^[1] (MHADA).
• In January 2002, a Permanent Alternative Accommodation Agreement (PAAA) was executed between parties However, even after the completion of 4 years, the Assessee couldn’t undertake development work due to the demand of the tenants for a higher carpet area. In fact, some of the tenants had the occupancy of more area in the Building as compared to the area specified in the Approval and, therefore, were unwilling for forgo the possession and/or accept units having lesser carpet area.
• For breaking the deadlock, a meeting was held on 7th August 2006 in the presence of DCE (S), MBR&RB, wherein a consensus was reached, and the assessee started the redevelopment work in accordance with the same, and the new building was constructed. The final PAAA with the tenants were registered in the Previous Year, 2015-16, and relevant to the Assessment Year, 2016-17.  
• During the relevant PY, the AO received the Annual Information Report that the Assessee carried out six transactions related to the property. Therefore, the AO asked the assessee to explain the transaction because, as per the Profit & Loss Account, the Assessee had declared his income as NIL.
• The Assessee, vide letter dated 25.10.2018, replied that the aforesaid six property-related transactions were in respect of registration of PAAA entered with the tenants rehabilitated under the redevelopment project.
• Since the tenants were allotted carpet area in the additional area specified in the Approval, the Assessee was asked to show cause, vide notice dated 27.12.2018, as to why stamp duty valuation of the area in excess of the approved area should not be deemed to be the full value of consideration for the sale of additional area (which is the stock-in-trade of the Assessee) in terms of Section 43CA of the Act and brought to tax in the hands of the Assessee.
• The Assessee filed the reply vide letter dated 29.12.2018, submitting that the provisions of Section 43CA could not be applied as there was an absence of a sale of any of the stock-in-trade by the Assessee. The carpet area allotted to the tenants, though in excess of the carpet areas specified in the Approval, was as per the consensus reached and recorded in the minutes of the meeting held on 07.08.2006 in the presence of an MB&RB official.
• However, the AO proceeded to compute income regarding the additional area allotted to the tenants by applying the provisions of Sec 43CA of the Act as he was not convinced with the submission/explanation furnished by the Assessee and, therefore, took the stamp duty value of the additional area as per the registered PAAA, he made aggregate addition at INR 2, 18, 84,138/-.
• In an appeal before CIT (A) on this issue, the assessee contended that the AO had erred in applying the provisions of Sec- 43CA of the Act as there wasn’t any sale or transfer. The area (including the additional area) was given to the tenants as per the redevelopment of the Old Building.
• The transaction can be considered as an exchange‟ which took place during the FY 2005-06 when the assessee was granted the redevelopment rights by the tenants for which they received the possession of the area occupied in the Old Building as per the allotment of the area in the new building which was developed by the Assessee.
• The area (including the additional area) which was to be allotted to the tenants was already pre-assigned in accordance with the Approval, and the meeting held on 07.08.2006 and, therefore, couldn’t be treated as Assessee’s stock-in-trade available for sale to any customer.
• Allotting the additional area to the existing tenants as per the re-development was a prudential call adopted by the Assessee for the purpose of avoiding huge losses due to delay in the execution of the re-development project.
• The CIT (A) favoured the above-mentioned submission of the assessee and was pleased to delete the addition made by the AO u/s 43CA of the Act, holding that providing carpet area in the re-developed building to the tenants cannot be taken into the purview of Section 43CA of the Act.
• During the assessment proceedings, the AO’s attention was drawn to the fact that the Assessee has claimed a deduction for interest expenditure of INR 1, 55, 42,291/- while the Revenue declared during the whole year is NIL‟. 
• The Assessee was asked to explain the reasons for which the expenditure was allowable under the provision of the Act. The assessee filed the reply for the same to the Assessing Officer on 20.11.2018, stating that the interest cost pertains to the loan availed from M/s Bajaj Finance Ltd, which has been utilized for the purpose of repayment of the original loan taken by the Assessee from directors shareholder and which were utilized for the construction of the building.
• The Interest expenses incurred throughout the year were revenue in nature, thereby making it allowable under Section 36(1)(ii) of the Act having been incurred wholly or exclusively for business purposes of the Assessee.
• However, the AO disallowed a deduction for interest expenditure, observing that the claim of interest expenditure was violative of the matching principle prescribed in Section 28 of the Act. The profits arising from the difference between the Revenue and Expenditure of the business of the relevant previous year are taxable to the relevant AY.
• Since the Assessee hasn’t offered any income during the year, deduction of this interest cost violates the ‘matching’ principle and hence cannot be allowed. Further, the loan has been used for the purpose of discharging a personal loan and, therefore, has been utilised for personal purposes rather than the assessee’s business purposes. Thus, the AO disallowed a deduction for the interest of INR 1,55,42,291/-.
• The assessee filed an appeal wherein the CIT (A) deleted the disallowance of interest, holding that the Assessing Officer had failed to bring on record any material to show that the loan was utilized for personal purposes. Further, the fact that no income has been offered to tax by the Assessee is not a good reason to disallow the deduction for interest expenditure of INR 1,55,42,291/- incurred by the Assessee during the relevant previous year.

Grounds of Appeal

1. Deletion of the addition of INR 2,18,84,138/- made by the AO u/s 43CA of the Act by holding the provision to be inapplicable in  the case of the assessee.
2. The CIT (A) allowed the deduction of the interest expenditure of INR 1,55,42,291 u/s 36(1)(iii) of the Act.

Contentions of the DR

• The DR made a submission that the provisions of Section 43CA of the Act were clearly applicable in the facts of the present case, as the transfer of the area was made by the assessee without any consideration. Since the additional area constituted as Assessee’s stock-in-trade, its stamp value was to be adopted as the full value of consideration as per sec – 43CA of the Act.
• Therefore, the DR supported the order of the AO with regard to making the addition of INR 2,18,84,138/-.She further submitted that the agreement between the tenants and the Assessee was clearly violative in terms of the Approval and, therefore, couldn’t be relied upon, avoiding the assessee’s tax liability.
• The additional area allotted to six tenants is a clear transfer of the asset, as the same was the stock-in-trade of the Assessee, resulting in profits being taxable for the Assessee.
• Concluding her submissions, she submitted that the AO has correctly invoked the provisions of Section 43CA for the computation of the aforesaid profits and the deletion if the addition by the CIT (A) has erred in incorrectly interpreting provisions of Section 43CA of the Act.
• Another submission was that the Assessee is following the project completion method of accounting for revenues from its solitary construction project. No revenue has been offered to tax by the Appellant during the relevant AY, and therefore, no deduction for expenses can be allowed.
• The Assessee should have capitalized the interest expenses by loading the same on to cost of the closing finished goods inventory. She also submitted that claim of deduction for the interest cost being violative of the matching principles of accounting contained in Section 28 of the Act.
• She further submitted that the AO had returned a finding that the loan was utilized for personal purposes, and for this reason also, the interest deduction cannot be allowed under Section 36(1)(iii) of the Act.

Contentions of the AR

• Per contra, the Ld. AR vehemently contended that the provisions of Section 43CA of the Act couldn’t be attracted in the facts of the present case.
• He submitted that there was an absence of any transfer of land and/or building‟ in the present case. Further, the value of additional area given to the tenants can, at best, be considered as the cost of acquisition of re-development rights acquired by the Assessee during the previous year 2006-07 and not as the transfer.
• The Assessing Officer was incorrect in holding that the additional area was allotted devoid of any consideration. He supported the decision of the CIT (A) that the consideration received by the Assessee was development rights obtained by the Assessee with the concurrence of the tenants of the Old Building, which was not considered by the AO.
• Further, the additional area was transferred in accordance with the settlement arrived at b/w the parties in a meeting conducted in the presence of Deputy Chief Engineer (S), MBR&RB.
• Therefore, the contention raised by the Ld. DR regarding the allotment of the area over and above the limited specified in the Approval being violative of MHADA is devoid of any merit.
• The further submission was that the Assessee had to allot additional area to some of the tenants to ensure that the project wasn’t delayed further, leading to huge losses, and it must be noted that no development work could take place till 2006 despite the PAAA being executed in January 2002.
• It was only after the issues were settled in the meeting held on 07.08.2006 that the Assessee was able to proceed with the re-development project. Allotment of the area (including the additional area) to be allotted to each of the tenants was approved by MBR&RB and formed part of the minutes of the meeting held on 07.08.2006.
• Without prejudice to the aforesaid, he submitted that the AO had also made an error in the computation of the amount of additional area allotted to the tenants.
• Per contra, the Learned AR for Assessee submitted that for the purpose of redevelopment of the building, the Assessee had availed loans from the various lenders (including directors and shareholders) as when required since 2006 and had used the same for the construction project.
• The funds that were borrowed from the lenders were blocked in the project for numerous years due to considerable delay in the execution of the project, and the lenders were demanding repayment of their loan resulting in the assessee availing a loan from Bajaj Finance Limited for refinancing purposes.
• The amount borrowed from Bajaj Finance Limited wasn’t used for any other purpose or for personal purposes, as alleged by Assessing Officer. Other than the assessee’s business purpose and, the Interest expenses were incurred wholly & exclusively for Assessee’s business purpose during the relevant previous year.
• The Assessee furnished a copy of the sanctioned letter, a copy of the bank statement and the fund utilization statement to show the nexus and utilization of loans that the assessee availed from Bajaj Finance Ltd. for business purposes before the Assessing Officer, which wasn’t disputed by the AO.
• Thus, the interest expenditure was allowable as a deduction u/s 36(1)(iii) of the Act. In lieu of the same, he relied upon the Hon’ble Bombay HC decision in the case of Lokhandwala Construction Industries Ltd. [2003] 260 ITR 579.
• He further submitted that Part Occupancy Certificate was issued to the Assessee in the PY 2014-15 relevant to AY 2015-16, making all work-in-progress construction expenses capitalized in the FY 2014-15 and shown as closing finished goods inventory. The amount of interest incurred for the AY 2016-17 is a period cost for which deduction is permitted u/s  36(1)(iii) of the Act.
• In rejoinder, the Ld. DR submitted that the judgment in the case of Lokhandwala Construction) cited by the Ld. Authorised Representative for the Assessee can’t be applied in the present case as Section 36(1)(iii) has since been amended by way of insertion of proviso to Sec- 36(1)(iii) of the Act specifically provides that no deduction would be allowed for the amount of the interest paid regarding capital borrowed for acquisition of an asset (whether capitalized in the books of accounts or not).

Judgement

With regard to the first issue, the tribunal held that the provisions of 43CA can’t be invoked as, firstly, the assessee wasn’t the owner of the land or the old building and was merely working on the building for the purpose of redevelopment of the same and had allotted the additional land as per the terms and conditions of the minutes of the meeting which the Deputy Chief Engineer, MBR&RB on 7th August officially signed. Thus, the additional area allotted to tenants could not be considered stock-in-trade for the Assessee as the Assessee was never entitled to hold/sell the same.

Regarding the second ground of appeal, it was observed by the tribunal that since the assessee had taken the loan from Bajaj Finance for the purpose of redevelopment, which is part of the business purpose of the assessee rather than the personal purpose. The deduction cannot be disallowed by the assessee, thereby upholding the disallowance of u/s 36(1)(iii).

Conclusion

The judgement provides clarity on the applicability of section 43CA of the IT Act and the circumstances wherein the provisos of this section can’t be invoked by the Assing Officer along with the clarifications regarding the disallowance of u/s 36(1)(iii). The said case can be a great precedent for future cases and help in avoiding any confusions on such subject.

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