Prajay Engineers Syndicate Limited, ... vs Assessee

1415/Hyd/10 2006-07 M/s. Prajay Engineers Addl. CIT, Range-16, Syndicate Ltd., Hyderabad 260/Hyd/11 2007-08 Hyderabad

(PAN AACCP 2287 M)

321/Hyd/2011 2007-08 Asstt. Commissioner of M/s. Prajay Engineers 368/Hyd/2013 2008-09 Income-tax, Syndicate Ltd., 260/Hyd/2013 2009-10 Circle 16(3), Hyderabad Hyderabad (PAN AACCP 2287 M)

Assessee by : Shri Mohd. Afzal

Department by : Shri Bandi Ramakrishna DR

Date of Hearing 23.12.2014 Date of Pronouncement 20.01.2015

ORDER

Per Bench:

Out of these five appeals, two appeals, being ITA Nos.260 and 321/Hyd/2011, are cross-appeals for assessment year 2007-08, while the appeal for assessment year 2006-07, being ITA No.1415/Hyd/2010, is the appeal filed by the assessee, and the remaining two appeals being ITA Nos.368 and 260/Hyd/2013 are appeals filed by the Revenue for the assessment years 2008-09 and 2009-10. Since some of the issues involved in these appeals are common, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience.

2 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

2. First, we shall take up the appeal of the assessee for assessment year 2006-07, being ITA No.1415/Hyd/2010, which is directed against the order of the learned Commissioner of Income- tax(Appeals) V, Hyderabad dated 3.9.2010. Ground No.1 raised by the assessee in this appeal is general which does not call for any specific adjudication.

3. The issue raised in ground No.2 relates to the disallowance of assessee's claim for deduction under S.80IB(10) as made by the Assessing Officer and confirmed by the CIT(A) to the extent of Rs.59,49,280.

4. The assessee in the present case is a company, which is engaged in the business of construction and hospitality. The return of income for the year under consideration was filed by it on 27.11.2006 declaring total income of Rs.16,29,19,420, after claiming deduction under S.80IB(10) at Rs.11,50,92,475. The said deduction was claimed in respect of profit derived from three projects, namely, Sai Gardens, Prajay Homes and Prajay Shelters and such profit was worked out by the assessee as under-

Sai Garden Prajay Prajay Others Total Homes Shelters Sales 1,94,57,395 11,32,68,289 15,22,08,000 34,19,87,768 62,69,21,452 Cost of 1,12,04,600 6,31,45,500 7,53,70,805 15,55,33,775 30,52,54,680 construction % of sales to 3,1036 18,0674 24,2786 54,5503 100 Total Sales Apportioned 13,80,046 80,33,731 1,07,95,591 2,42,56,019 4,44,65,387 indirect cost including depreciation Profit from 68,72,749 4,20,89,058 6,60,41,604 16,21,97,974 27,72,01,385 project 3 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

5. During the course of assessment proceedings, the claim of the assessee for deduction under S.80IB(10) was examined by the Assessing Officer and on such examination, he found that the total sales of other projects taken by the assessee at Rs.34,19,87,767, while working out the profits of different projects, was inclusive of the land related sales of Rs.14,25,15,074. According to him, the expenditure relatable to such sale of land would be meager and negligible and therefore, while making apportionment of indirect costs in the ratio of sales of each project vis-à-vis total sales of the construction unit as done by the assessee, the amount of land sales was liable to be excluded from the sales of other projects as well as total sales of the construction unit. Accordingly, the apportionment of indirect costs to different projects was worked out by the Assessing Officer as under-

Sai Prajay Prajay Others Total Garden Homes Shelters

Sales 1,94,57,395 11,32,68,289 15,22,08,000 19,95,72,693 48,45,06,378

% of sales 4.0159 23.3781 31.4150 41.1909 100 to Total sales

Apportioned indirect 17,85,685 1,03,95,163 1,39,68,801 1,83,15,738 4,44,65,387 cost includ- ing depre- ciation

6. On the basis of the apportionment of indirect cost to the different projects made by him as above, the Assessing Officer worked out the project-wise profits of the construction unit of the assessee as under-

4 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

".......

Sai Prajay Prajay Others Total Garden Homes Shelters

Sales 1,94,57,395 11,32,68,289 15,22,08,000 34,19,87,768 62,69,21,452

Cost of 1,12,04,600 6,31,45,500 7,53,70,805 15,55,33,775 30,52,54,680 con- struc- tion % of 4,0159 23,3781 31,4150 41,1909 100

sales to Total Sales Apporti 17,85,685 1,03,95,163 1,39,68,801 1,83,15,738 4,44,65,387 oned indirect cost includ- ing depre- ciation Profit 64,67,110 3,97,27,626 6,28,68,394 16,81,38,255 27,72,01,385 from project

After relevant adjustment of depreciation claimed as per Company Act and Income Tax Depreciation Schedule, the unit wise profit is determined as under :

Sai Prajay Prajay Others Total Garden Homes Shelters Profit after 64,73,192 3,97,63,031 6,29,15,971 16,82,45,153 27,73,97,347 depreciation

...."

On the basis of the above working, the assessee was held to be eligible for deduction under S.80IB(10) by the Assessing Officer to the extent of Rs.10,91,52,195 as against the claim of Rs.11,50,92,475. Accordingly, a disallowance of Rs.59,40,280 was made by the Assessing Officer on this issue in the assessment completed under S.143(3) vide order dated 24.12.2008.

5 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

7. Against the order passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A) challenging inter-alia the disallowance made by the Assessing Officer on account of its claim for deduction under S.80IB(10) to the extent of Rs.59,40,280. Before the learned CIT(A), it was submitted on behalf of the assessee that indirect expenses related to the general administrative, marketing and finance, were incurred by the construction Division as a whole and such expenditure not being incurred in relation to any particular project and the same being related to general administration, marketing and finance of the construction Division, the same was rightly apportioned in the ratio of sales even to the projects where there was no construction activity and there was only sale of land. This stand of the assessee was not found acceptable by the learned CIT(A) and he confirmed the disallowance made by the Assessing Officer on account of deduction under S.80IB for the following reasons given in paragraph 6.2 and 6.3 of his impugned order-

"6.2. I have considered the arguments of the appellant as well as the facts of the case carefully. It is the duty of the appellant to keep proper accounts from which all relevant financial costs can be reduced. Since such details pertaining to indirect administrative expenditure have not been kept, it is obviously important to find a logical method of allocating the total indirect expenditure between various projects. First of all, it is seen that the indirect expenditure is made up of general administration expenses, marketing expenses, financial charges and other corporate overheads. With respect to sale of land, there are no marketing expenses, no financial charges relating to construction Division, negligible administration expenses and hardly any other overheads incurred. On the contrary, with respect to construction Division, people are employed every day to oversee construction activity. Even otherwise, electricity expenses, marketing expenses regarding sales of villas and flats, etc., are incurred only with respect to the construction Division. I therefore, find merit in the argument of the Assessing Officer that for calculation of indirect expenses, the sale value of the land must be removed from total sales because 6 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

negligible amount of indirect expenditure relates to direct sale of land.

6.3. Given the above facts and circumstances, I find that the Assessing Officer has rightly re-allocated indirect expenditure as discussed above and correctly recalculated the deduction claimed u/s.80IB of the Act. Accordingly, the addition is confirmed. "

8. We have heard the arguments of both the sides and also perused the relevant material on record. It is no doubt true that the turnover of the project involving only sale of land cannot be equated with or compared with the turnover of the project which involved construction and sale of a commercial or residential building for the purpose of apportionment of indirect expenses incurred by the assessee company in the construction Division and this position is not disputed even by the learned counsel for the assessee. At the same time, it is also true that it cannot be said that the activity involving purchase and sale of land does not require incurring of any indirect expense, which mainly involved general administrative expenses and this position is not disputed even by the Learned Departmental Representative. In this situation, we are of the view that neither the apportionment of indirect expenses made by the assessee on the basis of sales nor the apportionment of indirect expenses made by the Assessing Officer on the basis of sales but excluding the sale of land, can be said to be correct. In our opinion, it would be fair and reasonable to make such apportionment of indirect expenses in the ratio of 4:1 in the case of turnover of projects involving construction and sale of commercial and residential buildings, and projects involving only sale of lands. It means that the turnover of sale of land should be taken only to the extent of 25% while making the apportionment of indirect cost to different projects and based on such apportionment, the profit of different projects eligible for deduction under S.80IB 7 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

has to be worked out. Accordingly, we direct the Assessing Officer to recompute the deduction allowable to the assessee under S.80IB and allow partly ground No.2 of the assessee's appeal.

9. The issue involved in ground No.3 of the assessee's appeal orf 2006-07 relates to the addition of Rs.14,39,614 made by the Assessing Officer and confirmed by the learned CIT(A) on account of interest income.

10. During the year under consideration, the assessee had completed FCCB issue and the expenditure incurred in connection with the said issue was capitalized by it. From the perusal of the working furnished by the assessee in this regard, it was noticed by the Assessing Officer that interest of Rs.14,39,614 received by the assessee on the bank deposit made from the proceeds of FCCB issue was credited to the FCCB Expenditure Account. According to the Assessing Officer, this treatment given by the assessee to the interest income was not correct and relying on the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (227 ITR 172), he brought to tax the interest income of Rs.14,39,614 in the hands of the assessee. On appeal, the learned CIT(A) confirmed the addition made by the Assessing Officer on this issue, holding that net interest income received by the assessee from bank deposit being in the nature of revenue receipt, the same was chargeable to tax in the hands of the assessee.

11. We have heard the arguments of both the sides and also perused the relevant material on record. As rightly submitted by the Learned Departmental Representative, there being no nexus between the interest income received by the assessee on bank 8 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

deposits and the expenses incurred in connection with FCCB issue, the netting of interest income against such expenditure as done by the assessee is not permissible and the learned counsel for the assessee has also not been able to establish before us any such nexus. We therefore find no justifiable reason to interfere with the impugned order of the learned CIT(A) confirming the addition made by the Assessing Officer to the total income of the assessee on account of interest income received on bank deposits, treating the same as receipt of revenue nature taxable in the hands of the assessee. Ground No. 3 of the assessee's appeal is accordingly dismissed.

12. In the result, appeal of the assessee for assessment year 2006-07 is partly allowed.

Cross Appeals for Assessment year 2007-08:

13. Now, we shall take up the cross appeals for assessment year 2007-08 being ITA No.260/Hyd/2011 (Assessee's appeal) and ITA No.321/Hyd/2011 (Revenue's appeal), which are directed against the order of the learned CIT(A) V, Hyderabad dated 20.12.2010.

14. Grounds No.1 and Ground No.10 raised in the appeal of the assessee for assessment year 2007-08 are general in nature, requiring no specific adjudication.

15. The issue involved in Ground No.2 of the assessee's appeal relates to the assessee's claim for apportionment of managerial commission of Rs. 5.45-crores between the construction and hospitality Divisions.

9 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

16. In the return of income filed for assessment year 2007- 08 on 31.10.2007, total income was declared by the assessee at Rs.37,83,65,390, after claiming deduction of Rs.53,43,94,191 under S.80IA. While computing the profit of the Construction Division eligible for deduction under S.80IA, the expenditure on managerial commission amounting to Rs.5.45 crores was allocated by the assessee at Rs.2.93 crores to Hospitality Division and Rs 2.51 crores to Construction Division. In this regard, it was noted by the Assessing Officer that the sales of the Hospitality Division was only Rs.12.6 cores, whereas sales of Construction Division was Rs.188.92 crores. He also noted that the Direct Cost of hospitality Division was only Rs.7.60 crores, whereas it was Rs.85.30 crores in the case of Construction Division. Keeping in view these facts and figures, the assessee was required by the Assessing Officer to justify the allocation of managerial commission to the extent of Rs.2.93 crores to Hospitality Division out of the total managerial commission of Rs.5.45 crores. In reply, it was submitted by the assessee that more efforts of the Director were directed towards Hospitality Division specifically, since the same was a new Division and considering these extra efforts, managerial commission to the extent of Rs.2.93 crores was allocated to the Hospitality Division. This explanation of the assessee was not found acceptable by the Assessing Officer. According to him, the managerial commission was claimed to be paid to the Director for enhancing the overall profitability of the company and if this theory of the assessee was to be accepted, no payment of commission was required to be made to the Directors, who were looking after the Hospitality Division, as there was no profitability in that Division. He held that since the managerial commission was paid on the basis of overall profitability of the company, there was no justification for allocating Rs.2.93 crores of managerial commission to the Hospitality Division 10 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

and the same should be done proportionately on the basis of the total sales of each unit made during the year under consideration. Accordingly, the managerial commission to the extent of Rs.1.69 crores and Rs.3.76 crores was allocated by the Assessing Officer to the Hospitality Division and Construction Division respectively and the claim of the assessee for deduction under S.80IA was restricted by him to that extent.

17. The disallowance made by the Assessing Officer on account of its claim for deduction under S.80IA, by changing the allocation of managerial commission between the two Divisions, was challenged by the assessee in an appeal filed before the learned CIT(A). During the course of appellate proceedings before the learned CIT(A), it was submitted on behalf of the assessee that the efforts of Shri D.Vijaysen Reddy and Shri M.Ravinder Reddy, Directors were utilised solely for the purpose of Hospitality Division and accordingly the remuneration including managerial commission paid to the said directors was allocated to the Hospitality Division. This explanation of the assessee was not found acceptable by the learned CIT(A), and he proceeded to uphold the order of the Assessing Officer on this issue, for the following reasons given in paragraph 5.3 of his impugned order-

"5.3 I have considered carefully the arguments of the appellant and all the facts of the case. I do not find any justification whatsoever in the arguments of the appellant regarding the apportionment of commission. By its very nature, the managerial commission is not a fixed payment. It is invariably an allocation in the form a variable productivity linked payment based on a certain percentage. The appellant has not disclosed the exact percentage or the methodology for calculating the managerial commission. However, it is clear that the excessive allocation towards the Hospitality Division which otherwise is showing an operating loss is solely for purpose of increasing the profits of the construction division so that the claim of deduction under 11 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

section 80IB(10) of the Act is maximized. It is also worth highlighting that the sales of the Hospitality Division are Rs.12.6 Crores while those of the Construction Division are Rs. 188.2 Crores. In other words, the turnover of the Construction Division is 1493% more when compared to Hospitality Division. All other expenses, for example, the direct cost, etc. are also in the similar ratios. However, when it comes to a huge cost like the commission paid, a huge amount of Rs.2.93 Crores i.e. nearly 25% of the turnover of the Hospitality Division is allocated to that Division while a lesser commission of Rs.2.51 Crores i.e. 1.3% of the relevant turnover is allocated to the Construction Division. Given the above facts and circumstances, I have no hesitation in holding that the allocation is not genuinely made and has been done with the sole purpose of increasing the profits of the Construction Division so as to increase the deduction under section 80IB(10) of the Act. Accordingly, I hold that the reallocation made by the Assessing officer is correct and needs no interference."

18. The learned counsel for the assessee submitted that the Hospitality Division of the assessee company was relatively new as compared to the Construction Division and therefore, more efforts of the Directors were diverted to develop the Hospitality Division. He contended that the Assessing Officer as well as the learned CIT(A), however, overlooked this vital fact and allocated the managerial commission on the basis of sales of the two Divisions, which is not justified. He also contended that business exigencies were taken into consideration by the assessee, while allocating the managerial commission. In reply to a query raised by the Bench, he, however, could not explain satisfactorily the basis adopted by the assessee for allocation of managerial commission of Rs.2.93- crores to the Hospitality Division, which not only had achieved substantially low turnover than the Construction Division, but had also suffered a loss during the year under consideration.

19. The Learned Departmental Representative submitted that there was no basis that could be given by the assessee for 12 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

apportionment of more managerial commission to the Hospitality Division, despite the loss suffered by the said Division. He contended that the Assessing Officer as well as the learned CIT(A) are in fact quite fair and reasonable to apportion managerial commission in the ratio of sales, which should have been done more appropriately on the basis of profitability. He contended that it is a clear case, where the assessee has allocated more managerial commission to the Hospitality Division and lower to the Construction Division to claim higher deduction u/s 80IA/80IB by showing more profitability in the construction division.

20. We have heard the rival submissions and also perused the relevant material on record. As rightly submitted by the Learned Departmental Representative, the basis of allocation of managerial commission of Rs.2.93 crores out of total of Rs.5.45 Crores to the Hospitality Division in spite of lower turnover and loss shown by the said Division has not explained by the assessee before the authorities below and even at the time of hearing before us, the learned counsel for the assessee has not been able to explain any such basis satisfactorily. As rightly observed by the learned CIT(A) in his impugned order, managerial commission is generally paid on the basis of performance of the company as reflected in the profitability and since the Hospitality Division had suffered a loss for the year under consideration, there was no justification on the part of the assessee to allocate more managerial commission to the Hospitality Division and less to the Construction Division, which was performing better and earning good profits. As rightly submitted by the learned Departmental Representative, this was done apparently by the assessee to show more profit in Construction Division, in order to claim more deduction under S.80IA. As such, having regard to all the facts and circumstances of 13 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

the case, we are of the view that allocation of managerial commission done by the authorities below on the basis of sales of the two Divisions of the assessee is fair and reasonable and there is no merit in ground No.2 raised in the appeal of the assessee.

21. The common issue involved in grounds No.3 and 4 of the assessee's appeal for A.Y. 2007-08 relates to the addition of Rs.2,31,98,781 made by the Assessing Officer and confirmed by the CIT(A) by way of restricting assessee's claim for deduction u/s 80IA by altering the apportionment of indirect costs.

22. At the time of hearing before us, learned representatives of both the sides have agreed that the issue involved in these grounds of appeal for assessment year 2007-08 is similar to the one involved in ground No.2 of the assessee's appeal for assessment year 2006-07, which has been decided by us in the foregoing paras of this order. As the material facts relating to this issue, as involved in assessment year 2007-08 are similar to assessment year 2006-07, we follow our decision rendered for assessment year 2006-07 on similar issue and direct the Assessing Officer to consider the turnover of sale of land only to the extent of 25% while making the apportionment of indirect cost to different projects and to re-compute the profit of different projects eligible for deduction under S.80IB based on such apportionment. Accordingly, grounds No.3 and 4 of the assessee's appeal are treated as partly allowed.

23. The next issue involved in grounds No.5 and 6 relates to the disallowance of Rs.10,38,606 made by the Assessing Officer and confirmed by the learned CIT(A) on account of interest.

14 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

24. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee company has given advances of Rs.64.43 crores and Rs.21.81 crores to its subsidiary companies, viz. M/s. Prajay Holdings Pvt. Ltd. and MVL Trading Co. Ltd. respectively. Since no interest on the said advances was charged by the assessee, the Assessing Officer required it to offer its explanation in the matter. In reply to it, it was submitted by the assessee that the amounts in question were advanced to the subsidiaries for outright purchase of land at Maheswaram. It was submitted that the assessee company had envisaged a very large housing and commercial project at Maheswram, which required a huge lay out. It was also submitted that Lehman Brothers had agreed to participate in the said project, and in order to ensure that Lehman Brothers get share only in the profits and losses of the development activity of the property, the lands were purchased by the assessee company in the names of its subsidiaries instead of purchasing the same in its own name. It was contended that the benefit from the property development in any case was to be enjoyed by the assessee company and the commercial expediency was very much there in giving the advances to the subsidiary companies. Reliance in support of this contention was placed by the assessee on the decision of the Hon'ble Supreme Court in the case of SA Builders Ltd. V/s. CIT (288 ITR 1), wherein it was held that the expression 'commercial expediency' is one of wide import and includes such expenditure which assessee incurs as a prudent business-man for the purpose of business. These submissions made by the assessee were not found acceptable by the Assessing Officer. He held that since the ownership of land purchased by the subsidiaries was vested in them, there was no way by which the assessee company was going to enjoy the benefit of investment made in land, as claimed. He 15 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

held that the said investment thus was going to benefit only the subsidiaries and not the assessee company and there was no commercial expediency in the interest free advances given by the assessee company to its subsidiaries. He, therefore, worked out the interest attributable to the interest free advances paid by the assessee company to its subsidiaries at Rs.10,38,606 and made a disallowance to that extent.

25. On appeal, the learned CIT(A) confirmed the disallowance made by the Assessing Officer on account of interest holding that there was no evidence brought on record by the assessee in the form of agreement, etc. to support and substantiate its claim that the investment in land was made by the assessee in the names of subsidiaries and not in its own name, since Lehman Brothers had agreed to participate in the project. He also held that the assessee also could not establish its case of commercial expediency, which prompted it to divert interest bearing funds for giving interest free advances to its subsidiaries.

26. We have heard the arguments of both the sides and also perused the relevant material on record. Although the learned counsel for the assessee has reiterated before us the submissions made before the authorities below that there being business expediency in giving interest free advances to the sister concerns for making investments in land, no disallowance of interest expenditure attributable to such advances could be made as held by the Hon'ble Supreme Court in the case of SA builders (supra), he has not produced relevant documentary evidence to support and substantiate his stand. As held by the learned CIT(A), no evidence in the form of agreement etc. was produced by the assessee to establish that the Lehman Brothers having agreed to join the 16 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

project development, the investment in land for the said project was made by the assessee in the names of its subsidiary companies and not in its own name. This plea of the assesse, as raised before the authorities below as well as before us, to establish the commercial expediency in giving interest free advances to its subsidiaries itself is not supported by any documentary evidence. In the absence of such documentary evidence, we agree with the learned CIT(A) that the claim of the assessee for such commercial expediency is not substantiated by the documentary evidence and it is thus a case of diversion of interest bearing borrowed funds by the assessee to give interest free advances to its subsidiaries, other than for business purposes, as rightly held by the Assessing Officer. The interest attributable to such advances thus was rightly disallowed by the Assessing Officer, and we find no infirmity in the impugned order of the learned CIT(A) confirming the said disallowance. Grounds No.5 and 6 of the assessee's appeal are accordingly dismissed.

27. Grounds no.7 to 9 of the assessee's appeal and grounds No.1 and 2 of the Revenue's appeal involve a common issue relating to the addition of Rs.72,62,000 made by the Assessing Officer, which has been sustained by the learned CIT(A) to the extent of Rs.60 lakhs. The said grounds read as under-

Grounds in assessee's appeal:

7. Learned CIT(A) ought to have deleted the entire addition of Rs.72,67,000 instead of reducing the disallowance to the extent of factual inaccuracy of Rs.12,67,000/-.

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8. The learned CIT(A) ought to have appreciated that the addition was made u/s. 69 of the Act which applies in cases of failure to record investments in books of account whereas in the appellant's case, the addition is based on unsubstantiated allegation of receipt of extra consideration.

9. The learned CIT(A) ought not to have upheld the addition made in the case of the appellant based on the proceedings before another authority and that too without confronting the assessee with factual evidence.

Grounds in Revenue's appeal:

1. The learned CIT(A) erred in facts and in law in ignoring the fact that the declared sale consideration as adopted is a typographical mistake since the understated sale consideration as per deeds vide Annex 1 & annex 2 was only Rs.16,87,500/- and assessee's share therein would be Rs.5,62,500/- as against the actual sale consideration of RS.1.16 crores affirmed under oath by the vendee. Hence, the CIT(A) ought to have not only upheld the addition but also should have enhanced the addition.

2. The learned CIT(A) erred in facts and in law in ignoring the fact that there was no basis of figure of Rs.56,00,000/-

taken as sale consideration by the Assessing Officer which was only a typographical error.

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28. As noted by the Assessing Officer, the assessee company during the year under consideration had shown to have purchased land at Bogaram Village for Rs.43,33,000 and sold the same for Rs.56,00,000. As further noted by the Assessing Officer, a survey under S.133A was carried out in the case of seller, i.e. M/s. Sai Krupa Enclave (AOP), during the course of which a sworn statement of one Shri G.Nageswara Reddy, a member of the AOP was recorded. In the said statement, Shri G.Nageswara Reddy stated to have paid an amount of Rs.1.16 crores for the purchase of land from the assessee. According to the Assessing Officer, there was thus a difference of Rs.72,67,000 in the value of land declared by the assessee and in the absence of any documentary evidence produced by the assessee in the form of the copies of the relevant agreements, etc., in support of the value of Rs.43,33,000 declared by it, the Assessing Officer treated the difference of Rs.72,67,000 as the unexplained investment of the assessee made in the purchase of land. The same was accordingly added by him to the total income of the assessee under S.69.

29. The addition made by the Assessing Officer under S.69 was challenged by the assessee in an appeal filed before the learned CIT(A) and the following submissions were made on behalf of the assessee in support of its case on this issue:

"2.1 Assessee purchased land at Bogaram village for Rs.43,33,000/- and also sold the land for Rs.56,00,000/-. It appears that a surevy u/s.133A was conducted at the premises of an AOP named M/s.Sai Krupa Enclave. During the survey, a statement was stated to have been recorded from one Sri G.Nageswara Reddy, a member of the AOP. The Assessing Officer mentioned that the said Sri Nageswara Reddy deposed that he had paid an amount of RS.1.16 crores for purchase of these lands from the assessee. The A.O mentioned that accordingly, there was a difference of Rs.72,67,000 (1,16,OO,000 - 43,33,000) between the value admitted by the assessee and the value admitted by the purchaser. This amount was added as unexplained investment in the assessment of the assessee.

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2.2 The Assessing Officer has added a sum of Rs.72,67,OOO/- which was alleged to have been paid to the assessee company. In this case. the assessee entered into a registered agreement of sale cum GPA whereunder land was purchased for Rs.43,33,OOO/-. The same was sold again under a deed of sale by the assessee. These deeds constitute 'prima facie evidence as regards the amount paid by the assessee for acquisition of the land in question and the amount received by the assessee on sale of the land.

2.3 The Assessing Officer made addition u/s.69 of the I.T Act. Sec.69 applies where the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory.

2.4 On the facts narrated in the assessment order, it is clear that the investment alleged to have been made by a third party is added in the hands of the assessee. There is no basis for the allegation that assessee. received monies on sale of land and not recorded the same in its books. 1f at all an addition is to be made, the same should have been under Sec.69A, that too if the assessee were found to be the owner of any money not recorded in the books of account. The assessee submits that the proceedings before another authority ought not to have been made the basis for addition in the hands of the assessee.

2.5 In the case of ITO ward 14(8) vs Pukhraj Jain 95 ITD 281(Mum), the A.O made addition based on the order of the custom collector and statements of a third party. The Hon'ble ITAT held that the A.O being a quasi-judicial authority, could not base his decision on findings/conclusions of another authority viz., Customs Collector drawn under Customs Act."

30. After considering the above submissions made by the assessee and the material available on record, the learned CIT(A) decided this issue vide para 8.2 of the impugned order as under-

"8.2 I find that the Assessing Officer has clear evidence along with a sworn statement of Sri G. Nageshwara Reddy, a member of M/s Sai Krupa Enclave(AOP), ECIL Road, Hyderabad. This statement was recorded during survey under section 133A of the Act on the seller. The appellant has not provided any details of transaction nor any agreements or deeds either during the assessment proceedings or during appeal proceedings. However, I find that there is a factual inaccuracy as far as the calculation made by the Assessing Officer is concerned. The appellant is correct in pointing out that it had shown the sale of land at Rs.56 lakhs. On the other hand, the Assessing Officer has shown the unexplained part of 20 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

the sale of land as Rs.72,67,000/- (1,16,00,000 - 43,33,000).This figure should be 1,16,00,000 - 56,00,000 i.e. Rs.60,00,000. On this factual issue, I agree with the appellant because the Assessing Officer has himself stated that Rs.56 lakhs has been disclosed by the appellant as sale price. Accordingly, the unaccounted part is only Rs.60 lakhs. The appellant gets relief accordingly."

The learned CIT(A) thus restricted the addition of Rs.72,67,000 made by the Assessing Officer on this issue to Rs.60 lakhs.

31. We have heard the arguments of both the sides on this issue and also perused the relevant material on record. Keeping in view the contradictions in the facts relevant to this issue as narrated by the Assessing Officer in his order, as stated by the assessee in the submissions made before the CIT(A) as well as before us and as mentioned in the grounds raised in the Revenue's appeal, we have directed the learned counsel for the assessee to place on record before us copies of the relevant agreements for purchase and sale of the land in question at Bogaram. On perusal of the said agreements, we have noted that the land admeasuring 12 acres and 24 guntas was purchased by the assessee form Shri M. Srinivas and Shri M.Rambabu on 17.4.2006 for a total consideration of Rs.30 lakhs and the same was subsequently sold by two separate agreements dated 13.12.2006 (four acres) and 8.1.2007 (8 Acres and 27 guntas) to Shri G.Nageswra Reddy for a consideration of Rs.8,53,000 and Rs.8,34,500 respectively. Shri G.Nageswra Reddy thus has purchased the land from the assessee and it is not a case of purchase of land by the assessee form him, as presumed by the Assessing Officer. In the assessment order, the Assessing Officer has thus wrongly referred to Shri G.Nageswara Reddy as seller at one place and has mentioned at other place that Shri G.Nagewara Reddy in his statement accepted of having paid an amount of Rs.1.16 crores for purchase of land 21 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

from the assessee. The Assessing Officer however finally concluded that the difference of Rs.72,67,000 represented the excess amount invested by the assessee in the purchase of land and treated the same as unexplained investment made by the assessee under S.69. There are thus factual contradictions in the order of the Assessing Officer. The learned CIT(A) to some extent appreciated these factual contradictions and rightly held that the amount of Rs.1.16 crores was stated to be paid by Shri G.Nageswara Reddy for purchase of land from the assessee as against the consideration of Rs.56 lakhs declared by the assessee. Accordingly, he restricted the addition of Rs.72,67,000 made by the Assessing Officer under S.69 to Rs.60 lakhs, but without dealing with the argument of the assessee that extra consideration allegedly received by the assessee on sale of land could not be added under S.69. Moreover, the consideration received by the assessee against the sale of land, as stated in the relevant agreement, was Rs.16,87,500 and not Rs.56 lakhs as taken by the learned CIT(A), while sustaining the addition to the extent of Rs.60 lakhs and relying on this sale consideration mentioned in the relevant sale deed, the Revenue has raised an issue in its appeal that the learned CIT(A) should have enhanced the income of the assessee on this issue. The learned counsel for the assessee has also raised the plea that the amount of addition made by the Assessing Officer and sustained by the learned CIT(A) is based on the statement of Shri G.Nageswra Reddy recorded during the course of survey, but the copy of the said statement was never made available to the assessee before using the same as evidence against the assessee to make the impugned addition. Keeping in view the factual contradictions mentioned above and having regard to the submissions made by both the sides, we consider it fair and proper and in the in the interests of justice to set aside the impugned order of the learned 22 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

CIT(A) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh, after verifying the facts and figures from the relevant agreements and after giving the assessee proper and sufficient opportunity of being heard.

32. Revenue's appeal for assessment year 2007-08 involving this solitary issue as well as grounds No.7 to 9 of the assessee's appeal are thus treated as allowed for statistical purposes.

33. In the result, out of the corss appeals for assessment year 2007-08, Revenue's appeal is partly allowed for statistical purposes and the assessee's appeal is treated as partly allowed.

Revenue's appeal for Assessment Year 2008-09:

34. Now, we take up the Revenue's appeal for assessment year 2009-10, which is directed against the order of the learned CIT(A) V, Hyderabad dated 27.12.2012.

35. Grounds No.1 and 5 raised by the Revenue in this appeal are general seeking no specific adjudication.

36. As regards the issue involved in ground No.2 relating to the allocation of managerial commission to Hospitality Division and Construction Division, it is observed that a similar issue has already been decided by us while dealing with the assessee's appeal for assessment year 2007-08. The facts and circumstances for the assessment year 2008-09 relating to this issue are similar to those considered by us for assessment year 2007-08, except for the fact that in the assessment year 2008-09, the CIT(A) has accepted the 23 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

claim of the assessee and granted relief on this issue. Hence, following our decision for assessment year 2006-07, we set aside the impugned order of the CIT(A) on this issue and restore the order of the Assessing Officer making disallowance out of the claim of the assessee for deduction under S.80IB of the Act by allocating the managerial commission between the Construction Division and Hospitality Division in the ratio of sales. Ground no. 2 of Revenue's appeal is accordingly allowed.

37. As regards the issue involved in grounds no.3 and 4, it is observed that the common issue involved therein relating to apportionment of indirect expenses for the purpose of computing deduction allowable to the assessee under S.80IB is similar to the one involved in ground No.2 of the assessee's appeal for assessment year 2006-07, which has been decided by us in the foregoing paras of this order. As the material facts relating to this issue as involved in assessment year 2008-09 are similar to assessment year 2006-07, except for the fact that the CIT(A) in the impugned order for the assessment year 2008-09 has allowed the claim of the assessee on this issue, we follow our decision rendered for assessment year 2006-07 on this issue and direct the Assessing Officer to consider the turnover of sale of land only to the extent of 25% while making the apportionment of indirect cost to different projects and to re-compute the profit of different projects eligible for deduction under S.80IB based on such apportionment. Accordingly, grounds No.3 and 4 of the Revenue's appeal are treated as partly allowed.

38. In the result, Revenue's appeal for assessment year 2008-09 is treated as partly allowed.

24 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

Revenue's Appeal for assessment year 2009-10.

39. Grounds no.1 and 4 of the Revenue's appeal for A.Y. 2009-10 are general in nature seeking no specific adjudication. In ground no.2, the Revenue has challenged the action of the learned CIT(A) in considering certain evidences filed before him for the first time to give relief to the assessee by way of accepting its claim of returned income of Rs.84,36,877 as against Rs.7,21,04,185 adopted by the Assessing Officer, without giving any opportunity to the Assessing Officer to examine the said evidences, which is in violation of Rule 46A of the Income-tax Rules, 1962.

40. In the return of income filed for the year under consideration, the total income of Rs.84,36,887 was declared by the assessee. In the computation of total income filed alongwith the return, the total income for the year under consideration, however, was shown by the assessee at Rs.7,21,04,185. Since no satisfactory explanation in respect of this difference could be offered on behalf of the assessee, the Assessing Officer adopted the income returned by the assessee at Rs.7,21,04,185 while completing the assessment under S.143(3) vide order dated 30.12.2011.

41. During the course of appellate proceedings, it was submitted on behalf of the assessee before the learned CIT(A) that the difference in total income as shown in the computation and as declared in the return was due to hedging loss of Rs.4.86 crores, which was inadvertently added in the computation of total income. The nature of the said loss was also explained by the assessee before the learned CIT(A), giving relevant facts and figures. Reliance was also placed by the assessee on various judicial 25 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

pronouncements in support of its stand that the said loss was allowable as a business loss. The learned CIT(A) found merit in the claim of the assessee and directed the Assessing Officer to reduce the hedging loss of Rs.4.86 crores from the returned income of Rs.7,21,04,185 adopted by him.

42. We have heard the arguments of both the sides and also perused the relevant material on record. As rightly submitted by the Learned Departmental Representative, the claim of the assessee for hedging loss of Rs.4.,86 crores made for the first time before the learned CIT(A) was accepted by him, without giving any opportunity to the Assessing Officer to verify the same in the light of the relevant details furnished by the assessee in this regard as well as the evidence filed in support. The said details and evidence were filed by the assesse for the first time before the learned CIT(A) and keeping in view that the claim for hedging loss was not even made by the assessee before the Assessing Officer in spite of the fact that opportunity was afforded by the Assessing Officer to the assessee to explain the difference in the income declared in the return and the income shown in the computation, it was incumbent upon the learned CIT(A) to give an opportunity to the Assessing Officer to verify the same. Keeping in view these facts and circumstances of the case, we are of the view that there is clear violation of Rule 46A of the Income-tax Rules 1962 by the learned CIT(A), while giving relief to the assessee on this issue and this position is not disputed even by the learned counsel for the assessee at the time of hearing before us. He has also fairly agreed that this issue deserves to be restored to the file of the Assessing Officer for giving him an opportunity to verify and examine the claim of the assessee for hedging loss of Rs.4.86 crores. Accordingly, the impugned order of the learned CIT(A) on this issue 26 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

is set aside and the matter is restored to the file of the Assessing Officer for deciding the same afresh in accordance with law, after giving the assessee a proper and sufficient opportunity of being heard. Ground No.2 accordingly is allowed for statistical purposes.

43. In ground no.3, the Revenue has challenged the action of the learned CIT(A) in deleting the disallowance of Rs.2,42,49,117 made by the Assessing Officer under S.14A read with Rule 8D of the Income-tax Rules, 1962.

44. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has made substantial investments in acquiring shares of several companies. He also noticed that the assessee has borrowed huge funds from different banks, on which interest paid amounting to Rs.17,49,53,504 was claimed as deduction. Although no dividend income, which is exempt from tax, was received by the assessee during the year under consideration, the Assessing Officer was of the view that interest expenditure incurred by the assessee to the extent attributable to the investment made in the shares of companies was liable to be disallowed under S.14A, being expenditure incurred in relation to exempt income. He, therefore, required the assessee to offer its explanation in the matter. In reply, it was submitted on behalf of the assessee that the provisions of S.14A are not applicable in its case, as there was no expenditure incurred by it for earning any exempt income. This explanation of the assessee was not found acceptable by the Assessing Officer. According to him, the assessee must have borrowed funds for the purpose of making the investments in shares, which was to the tune of Rs.99.37 cores and therefore, certain interest expenditure incurred on such borrowed funds might have been in relation to the 27 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

exempt income. Accordingly, such interest on borrowed funds relatable to the expenditure incurred for earning exempt income was worked out by him at Rs.2,42,41,117 and disallowance to that extent was made by him under S.14A read with Rule 8D of the Income-tax Rules.

45. The disallowance made by the Assessing Officer on account of interest under S.14A was challenged by the assessee in the appeal before the learned CIT(A) and the following submissions were made on behalf of the assessee in support of its case on this issue-

.

"a) The investment in the shares of the subsidiaries is purely of business perspective or the subsidiaries are purely project specific where the entire work of the company will be undertaken by the holding company only.

b) The investments are not made during the subject financial year, the investments are accumulating over a period of time. The investment details are enclosed herewith for your reference as Annexure 1.

c) Section 14A of the Income Tax Act could be applied only when the tax payer earns any income which did not form part of the total income under the Act and in the absence of any such income, disallowance under Section 14A of the Income Tax Act cannot be invoked. The same was also held by the Hon'ble Chennai bench of ITAT in the case of Siva Industries and Holdings Ltd.

3) The Punjab & Haryana High Court had, in the case of CIT V/s. Winsome Textiles Industries Ltd. (319 ITR 204 (PH), held that section 14A of the Act, cannot apply when the tax payer did not make any claim for exemption in its return of income.

e) The Apex Court in CIT vs. Walfort Share and Stock Brokers P Ltd. (326 ITR 1) (SC) held that 28 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

disallowance under section 14A can be made when there is a proximate cause between the expenditure claimed and tee tax exempt income.

f) Section 14A of the Act states that "for the purpose of computing the total income under this Chapter" and "expenditure incurred in relation to income which does not form part of the total income under this Act". Clearly, there should be income and such income should not form part of the total income under the Act. If either of these conditions is absent, then section 14(1) will have no applicability.

g) None of the investments of the tax payer generated any dividend income during the subject financial year. Hence, there is no

income, which is claimed as not forming pat of eh total income and consequently, no disallowance under sec 14A can be made on the taxpayer for the relevant assessment year.

h) We also submit before your goodself that the share capital and reserves of the appellant amounts to Rs.6,03,72,88,000/-, which are very much higher than the investments of Rs.99,37,76,000.

i) We also submit that the investments are made out of interest free funds."

46. The learned CIT(A) found merit in the submissions made by the assessee and accordingly deleted the disallowance made by the Assessing Officer under S.14A inter alia for the following reasons given in paragraph 5.2 of his impugned order-

"5.2 I have carefully considered the facts of the case and submissions of the appellant. On a careful consideration of the entire circumstances of the case, it is seen that none of the investments made by the appellant company have generated any exempt income during the year. The appellant also submitted a statement showing the investments made by it. From the statement, it is clear that all the investments are 29 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

not made during current financial year and most of the investments are accumulated over a period of time. It is also submitted that the share capital and reserves of the appellant are Rs.7,03,72,00/-, which is much higher than the investments made by the appellant company,. The appellant also submitted a statement pertaining to loans taken and purpose of loans alongwith the loan approval letters. From these documents, I find that the loan from TATA Capital has been taken for developing commercial and residential complexes alongwith projects. The loan from APSFC has been taken for construction of independent houses at Masjidpur (V), Shampeerpet (M).The loan from Indian Overseas Bank has been utilized for meeting the working capital requirement of four large size projects. The loan from Punjab National Bank has been utilized from working capital for the construction of six specific housing projects. From above, it is clear that no part of the borrowed money had any link or nexus with the investments made by the appellant company during the year. The Assessing officer also not proved any nexus or expenditure attributable to the exempt income, which is not at all claimed during the year by the appellant company."

47. We have heard the arguments of both the sides and also perused the relevant material on record. Although the learned representatives of both the sides have raised various legal contentions in support of their respective stands on this issue, we find from the relevant portion of the impugned order of learned CIT(A), as contained in paragraph 5.2 extracted above, that the relief has been allowed by the learned CIT(A) by deleting the disallowance made by the Assessing Officer under S.14A on appreciation of the facts of the case. It is worthwhile to note here that as per the provisions of S.14A, no deduction shall be allowed, for the purpose of computing the total income under Chapter IV, in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income. The basic 30 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

question thus is whether the assessee in the facts and circumstances of the case can be said to have incurred any interest expenditure in relation to the investment made in the shares of the companies, which is capable of earning exempt dividend income. In this regard, the learned CIT(A) has noted in the impugned order that the assesse, at the relevant time, had its own funds in the form of capital and reserves to the extent of Rs.603.72 crores, which were more than the investment made in the shares of other companies. He also found from the facts and figures furnished by the assessee that no part of the funds borrowed by the assessee had any link or nexus with the investments made in the shares of other companies. As held by the learned CIT(A), no interest expenditure on borrowed funds thus was incurred by the assessee in relation to the investment made in the shares of other companies, warranting any disallowance under S.14A and the learned Departmental Representative has not been able to dispute this position. He, however, has contended that all these facts and figures furnished by the assessee before the learned CIT(A) and relied upon by him to give relief to the assessee on this issue, were not furnished before the Assessing Officer during the course of assessment proceedings and the Assessing Officer therefore had no opportunity to verify the same. We find merit in this contention of the Learned Departmental Representative. Accordingly, we set aside the impugned order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer for the limited purpose of verifying the stand of the assessee that sufficient own funds were available with it for making the investments in the shares of other companies and that the interest bearing borrowed funds were not utilised for making such investments. If the claim of the assessee is found to be correct on such verification, the Assessing Officer shall not make any disallowance under S.14A.

31 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

Ground No.3 of the Revenue's appeal for assessment year 2009-10 is accordingly treated as allowed for statistical purposes.

48. In the result, revenue's appeal for assessment year 2009-10 is allowed for statistical purpose.

49. To sum up:

(a) Appeal of the assessee for assessment year 2006-07 is partly allowed.

(b) Out of the cross-appeals for assessment year 2007-08, assessee's appeal is partly allowed for statistical purposes and Revenue's appeal is allowed for statistical purposes.

(c) Revenue's appeal for assessment year 2008-09 is partly allowed

(d) Revenue's appeal for assessment year 2009-10 is allowed for statistical purposes.

` ``

Order pronounced in the court on 20th January, 2015

Sd/- Sd/-

(Asha Vijayaraghavan) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 20th January, 2015

Copy forwarded to:

1. M/s. Prajay Engineers Syndicate Ltd., 4-1-23, Eden Gardens, Ram Koti, Hyderabad 500 001

2. Addl. Commissioner of Income-tax Range 16, Hyderabad Asst. Commissioner of Income-tax Circle 16(3), Hyderabad 32 ITA No.1415/Hyd/2010 & four others M/s. Prajay Engineers Syndicate Ltd., Hyderabad

3. Commissioner of Income-tax(Appeals) V, Hyderabad

4. Commissioner of Income-tax IV, Hyderabad

5. Departmental Representative, ITAT, Hyderabad.

B.V.S