2010 (2) TMI 848 - AT - Income Tax

Disallowance of interest - business of development of power projects - assessee is incurring expenditure and the same has been shown in the Balance Sheet as advances recoverable - assessee in its computation of income has claimed the same as revenue expenditure - Held that - no infirmity in the order of the CIT(A) in holding that the entire expenditure claimed inclusive of the expenditure which has been subjected to disallowance would have to be treated as work-in-progress and as and when if a project does come to a financial closure and the revenue is realised by the assessee, the necessary expenditure will be allocated on a pro-rata basis depending on the volume of revenue and other financial parameters. Disallowance of proportionate interest paid - held that - the cost which has been incurred by the assessee on the project in the year under consideration is nothing else but the work-in-progress of the project since during the year under consideration there was not even a confirmed party for which the project was being carried out. Therefore, we agree with the findings of the CIT(A) that the correct treatment would have been to treat the entire interest expenses as work-in-progress and the prorata disallowances made during the year have to be actually be made for the following year. Disallowance of salary and other expenses - According to the Assessing Officer the original return was filed after enclosing audited accounts. Therefore, the plea that certain changes were made during the course of audit was not acceptable. - held that - there is no dispute to the fact that there is a difference of Rs.32,46,000 on account of expenses in the original return as well as in the revised return. - no evidence could be produced by the learned counsel for the assessee to substantiate the genuineness of such increase in the expenses - decided against the assessee.

Summary

Issues Involved:
1. Disallowance of interest paid amounting to Rs.20,28,413.
2. Disallowance of Rs.2,67,80,989 claimed as revenue expenditure.
3. Disallowance of professional fees amounting to Rs.85,00,500 and Rs.38,60,542.
4. Consideration of total expenses incurred in connection with development of various projects as cost of work-in-progress.
5. Disallowance of proportionate interest paid amounting to Rs.45,29,236.
6. Disallowance of Rs.32,46,000 on account of salary and other expenses.
7. Consideration of Rs.6,77,250 as income from other sources.
8. Charging of interest u/s. 234B of the Act.

Detailed Analysis:

1. Disallowance of Interest Paid (Rs.20,28,413):
The assessee challenged the CIT(A)'s confirmation of the Assessing Officer's (AO) disallowance of interest paid on unsecured loans. The AO observed that the assessee had advanced interest-free loans to various companies while claiming interest on borrowed funds. The assessee argued that these transactions were expenses recoverable and not loans. However, the AO concluded that the assessee erred by not attributing interest to these advances and disallowed Rs.20,28,413 on a pro-rata basis. The CIT(A) upheld this decision, noting the speculative nature of the business and the uncertainty of revenue generation.

2. Disallowance of Rs.2,67,80,989 as Revenue Expenditure:
The AO disallowed Rs.2,67,80,989 claimed by the assessee as revenue expenditure, treating it as work-in-progress. The assessee contended that these were third-party expenses recoverable upon financial closure of projects. The AO and CIT(A) rejected this argument, emphasizing the uncertainty of revenue realization and the speculative nature of the business. The CIT(A) upheld the AO's decision, treating the expenditure as work-in-progress to be allocated upon project completion.

3. Disallowance of Professional Fees (Rs.85,00,500 and Rs.38,60,542):
The AO disallowed professional fees related to power and BPO projects, treating them as work-in-progress. The assessee argued these were revenue expenses. The CIT(A) upheld the AO's decision, noting the speculative nature of the business and the uncertainty of revenue realization. The expenses were treated as work-in-progress to be allocated upon project completion.

4. Consideration of Total Expenses as Cost of Work-in-Progress:
The AO treated the total expenses incurred for project development as work-in-progress. The CIT(A) upheld this, emphasizing the speculative nature of the business and the uncertainty of revenue generation. The expenses were to be allocated upon project completion.

5. Disallowance of Proportionate Interest Paid (Rs.45,29,236):
The AO disallowed interest expenses related to the BPO project, treating them as work-in-progress. The CIT(A) upheld this, noting the absence of a firm commitment from any party and the speculative nature of the business. The interest expenses were to be treated as work-in-progress and allocated upon project completion.

6. Disallowance of Rs.32,46,000 on Account of Salary and Other Expenses:
The AO disallowed an increase in salary and other expenses claimed in the revised return, noting the lack of evidence. The CIT(A) upheld this decision, emphasizing the need for evidence to support the increase in expenses. The assessee failed to provide such evidence, and the disallowance was upheld.

7. Consideration of Rs.6,77,250 as Income from Other Sources:
Both parties agreed to remand the issue back to the AO for a fresh decision, as the facts were unclear. The AO was directed to decide the issue afresh after giving the assessee an opportunity to be heard.

8. Charging of Interest u/s. 234B of the Act:
The charging of interest u/s. 234B was deemed mandatory and consequential. The CIT(A) upheld the AO's decision, and the assessee's ground was dismissed.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with most disallowances upheld and one issue remanded for fresh consideration. The decision emphasized the speculative nature of the business and the uncertainty of revenue realization, leading to the treatment of various expenses as work-in-progress.