DELHI HIGH COURT - GRANITE GATE PROPERTIES PVT. LTD. V. PRINCIPAL COMMISSIONER OF INCOME TAX

19.12.2018

Summarised Judgement (Scroll for Complete Judgement)

The appeals were admitted for hearing vide order of this Court dated 24.01.2018 by framing the following substantial question of law. Did the Income Tax Appellate Tribunal (ITAT) fall into error in holding that the penalty under Section 271(1)(c) of the Income Tax Act, 1961 was leviable in the circumstances of the case, when the assessee asserted that it had commenced business at the relevant time? ITA Nos.398 & 399 of 2017 

The facts which are required to be noticed in the present appeals are rather short and brief.

1.  The appellant-assessee is a company engaged in real-estate development.  Appellant-assessee had commenced construction of two housing projects Lotus Boulevard and Lotus Panache in Noida, during the period relevant to the assessment years 2010-11 and 2011-12, respectively.

2.    The appellant-assessee was following and recognizing revenue from the projects based upon the Percentage of Completion Method of accounting (PoC Method for short). PoC Method was recognized under the Accounting Standards 2002 prescribed and applicable namely, Accounting Standard 7 (AS-7 for short). ITA Nos.398 & 399 of 2017 Page 4 of 18

3.      Appellant-assessee in the returns of income for the assessment years 2010-11 and 2011-12 had declared loss of Rs.10,98,42,458/- and Rs.21,22,38,055/- respectively.

4.     4.5. Appellant-assessee had not recognized revenue from the Lotus Boulevard and Lotus Panache projects till construction and development had crossed threshold of 30%. Till then the construction and development costs incurred was booked under the head capital work in progress.

5.   Threshold of 30% of development for the Lotus Boulevard project was crossed during the financial year relevant to the Assessment Year 2010-

The Assessing Officer observed and held that the appellant-assessee had erroneously and wrongly booked indirect project expenses relating two projects in the two years, while the revenue earned from the Lotus Boulevard project was proportionately booked in in the assessment year 2011-12 and revenue from Lotus Panache project was proportionately booked in the assessment year 2012-13. Indirect costs like cost of construction and development for the Lotus Boulevard project for the assessment year 2010-11 and Lotus Panache project for the assessment year 2011-12 should be booked and treated as capital work in progress. For this reason, addition of Rs.11,03,88,382/- and Rs.21,28,05,101/- was made in the returned income for the assessment years 2010-11 and 2011-12, respectively.

7. The appellant-assessee did not appeal and the assessment orders have attained finality.

8. As noticed above, the issue raised in the present appeal relates to imposition of penalty under Section 271(1)(c) of the Act on account of the said additions.

9. The Tribunal in the impugned order has reversed the findings recorded by the CIT (Appeals) and affirmed the order of the Assessing Officer imposing penalty under clause (c) to sub-section (1) of section 271 of the Act

15. The appellant-assessee has pointed out with merit that the tax effect in the present cases was minimal as taxable income as assessed even after the additions/disallowance were Rs.3,55,933/- and Rs.5,67,040/- for the assessment year 2010-11 and 2011-12, respectively. According to the assessee, they did not deem it appropriate to file appeals and get involved in litigation and incur legal costs specially when the additions/disallowances made were revenue neutral and had been allowed as expenses reducing the ITA Nos.398 & 399 of 2017 Page 17 of 18 income in the subsequent assessment years. The appellant-assessee was not to gain any substantial benefit and advantage by shifting profits or loss from one year to another.

16. These facets and aspects have been completely ignored by the Tribunal in their reasoning. These aspects were relevant and had required due consideration when examining the issue of bona-fides in making the claim.

18. Given the aforesaid facts, i.e. the relevant clauses of AS-7, applicable Guidance Notes, the fact that the accounts were duly audited and the disclosures made in the audit notes, the loss income as declared, small taxable income as assessed even after the additions were made and that the expenses as claimed were otherwise eligible and allowed in the next assessment year, we would accept that the appellant-assessee had shown that they had acted bona fidely. Thus, the appellant-assessee should not have been burdened with penalty for concealment of income under Section 271(1)(c) of the Act.

19. Accordingly, we answer the substantial question of law in favour of the appellant-assessee and against the respondent-revenue. However, in the facts of the case, there would be no order as to costs. All the pending applications stand disposed of.

 ======================================

Complete Judgement

INCOME TAX APPELLATE TRIBUNAL - DELHI

GRANITE GATE PROPERTIES PVT. ... VS ACIT, CENTRAL CIRCLE- 6, NEW DELHI ON

15 MARCH, 2019

BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND

             SHRI SANDEEP GOSAIN, JUDICIAL MEMBER

 ITA No. 7026/DEL/2017

ITA No. 7027/DEL/2017

[AYs: 2013-14 & 2014-15]

M/s Granite Gate Properties Pvt Ltd     Vs.            The A.C.I.T

C - 23, Greater Kailash, Part -1                       Central Circle -6

New Delhi                                              New Delhi

PAN No: AADCR 6248 M

   (APPELLANT)                                          (RESPONDENT)

Assessee By                    :    Shri Sanjiv Sapra, FCA

 Department By                :   Shri Sanjay I Bara, CIT-DR

Date of Hearing                  :   12.03.2019

Date of Pronouncement       :   15.03.2019

ORDER

PER N. K. BILLAIYA, AM:-

The above two appeals by the assessee are preferred against the order dated 23/10/2017 framed u/s 153A r.w.s 144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] pertaining to A.Ys. 2013-14 and 2014-15. Since the appeals were heard together and involve common grievance, they are being disposed of by this common order for the sake of convenience and brevity.

2. At the very outset, the ld. counsel for the assessee stated that the common grievance in both the appeals relates to the adjustment on account of interest payable/paid by the assessee on Fully and Compulsorily Convertible Debentures [FCCDs] as issued by it to its Associated Enterprises [AEs]. The quantum of adjustment is same in both the years amounting to Rs. 10,70,37,882/-.

3. The ld. counsel for the assessee fairly conceded that the issues are identical in both the years. On such concession, we heard the ld. counsel for the assessee on the facts of assessment year 2013-14.

4. During the course of assessment proceedings, the A.O observed that the assessee has issued FCCD as per the following schedule:

Financial Year Debentures Name of the AE Coupon Rate 2008-09 131,45,520 FCCD Twilzon Cyprus debentures of Rs. 100/- Limited, ____________________ 2009-10 112,79,394/- FCCD of Rs. 100 each Twilzon Cyprus Limited 2011-12 79,68,000/-FCCD of Rs ___________________ 100/-each Twilzon Cyprus Limited

5. Since an international transaction with the AE was involved, a reference was made u/s 92CA(1) of the Act. The assessee was asked to explain its international transaction and whether the same is at Arm's Length Price [ALP].

6. In its reply, the assessee explained that interest @ 16%, 14.75% and 17.75% has been paid, which includes SBI PLR + 300 basis points to cover the risk because of funds and administrative cost. The assessee further stated that since the FCCDs issued to AEs are rupee denominated, and interest payments are also paid in Indian rupees, therefore, LIBOR is not applicable in the case of the assessee.

7. The TPO was of the firm belief that the 300 basis points over and above the base rate PLR is excessive and needs to be disallowed and accordingly made the adjustment as under:

        Particulars                                         Amount in !NR

       
        Interest paid at 16%                          Rs. 21.03,28.320.0.0

        Interest arm's length of 12.25%        Rs. 16,10,32,620.00

        Adjustment                                       Rs. 4,92,95,700.00

        
        Particulars                                        Amount in INR

        
        Interest paid at 14.75%                    Rs 16,63,71,062.00

        Interest arm's length of 11.75%       Rs. 13,25,32,879.90

        Adjustment                                      Rs. 3.38,38,182.10

        Particulars                                       Amount in INR

        Interest paid at I 7.75%                   Rs. 14,14,32,000.00

Interest arm's length of 14.75% Rs. 11,75,28,000.00 Adjustment Rs. 2,39,04,000.00 Total Adjustment 10,70,37,882.10

8. The assessee raised objections before the DRP, but without any success.

9. Before us, the ld. counsel for the assessee stated that identical issues were considered by the Tribunal in assessee's own case in ITA Nos. 7022 to 7024/DEL/2017 for assessment years 2009-10 to 2011-12. It is the say of the ld. counsel for the assessee that the Tribunal has decided the quarrel in favour of the assessee and against the revenue.

10. Per contra, the ld. DR could not bring any distinguishing decision in favour of the revenue.

11. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also perused the orders of the co-ordinate bench relied upon by the ld. counsel for the assessee. The undisputed fact is that the FCCDs were issued during FY 2008-09, 2009-10 and 2011-12, which means that no fresh FCCDs were issued during the year under consideration. The year wise details of interest rate, interest amount payable and interest rate and amount restricted by the TPO can be understood from the following chart:

Amount of Differential Amount of Differential amount Interest rate interest Rate of Interest rate of interest Interest of interest as per S No Type of FCCD's as per payable on as per TPO to payable at ITPO.

12. On the basis of the aforesaid facts, the co-ordinate bench in ITA No. 7022/DEL/2017 and others had considered this issue and held as under:

"27. On merit also, the AO/TPO made the addition on account of differential rate of interest on FCCDs. The assessee applied the interest rate on the basis of SBI PLR rate plus 300 basis points for the reasons that the FCCDs being unsecured and hybrid/quasi equity instrument as compared to plain vanilla loan instrument.

Therefore, the SBI PLR plus 300 basis points over it was reasonable and on the arm's length, particularly when the same was permissible under Foreign Exchange Control Regulations. The AO/TPO, however, restricted the interest rate to 12.25%. The variance in the rate of interest as per TPO/AO to be adjusted and added was 3.75% which was within the permissible range of 5% as permitted by second proviso to Section 92C(2) of the Act. It is also relevant to point out that the percentage of 3% in the aforesaid proviso has been inserted by the Finance Act, 2012 w.e.f.

01.04.2013 and prior to that amendment, this percentage was at 5%. In the present case, since the difference is less than 5%, therefore, no addition on account of arm's length price could have been made ITA Nos. 7022 to 7024/Del/2017 Granite Gate Properties Pvt. Ltd. 19 by the AO/TPO. As such on merit also, no addition could have been made."

13. Similarly, in ITA No. 7025/DEL/2017, the findings given by the co-ordinate bench read as under;

"14. Therefore, in view of the above finding of a coordinate bench of this Tribunal in assessee's own case for the immediately preceding years, we are of the considered opinion that the issue is no longer res integra and this bench is required to follow the same in the absence of any change of circumstances. No change of circumstances is pleaded before us. We, therefore, while respectfully following the above decision, reach a conclusion that it is reasonable on facts and also permissible under law to include 300 points basis while calculating the interest rate. Further, in view of the fact that the variance does not exceed 5% for the FCCDs issued during the FYs 2008-09 and 3% for the FCCDs issued subsequently interference by the Ld. TPO with the value of the international transaction. The addition, therefore, cannot be sustained and shall be directed to be deleted. We accordingly direct the learned AO/TPO to delete the same."

14. As no distinguishing decision has been brought to our notice, respectfully following the findings of the co-ordinate bench, we direct the Assessing Officer /TPO to delete the impugned adjustments.

15. In the result the appeals of the assessee in ITA Nos. 7026 & 7027/DEL/2017 are allowed.

The order is pronounced in the open court on 15.03.2019.