2015 (2) TMI 320 - AT - Income Tax

Disallowance made u/s 14A - CIT(A) deleted the disallowance - Held that - CIT(A) just gave a finding that the Assessee had surplus funds available which was invested with no material to support this finding especially when the AO has given a specific finding that out of the loan taken from Saraswat Bank amounting to Rs. 105.30 lacs sum of Rs. 79.3 lacs has exclusively been used for the purchase of shares from Counto Automobiles. We do not find any material being brought on record by the Assessee and referred to by the CIT(A) while giving this finding. We find that the finding given by the CIT(A) is perverse and the onus is on the Assessee to prove that it has invested the surplus funds in purchase of the shares. Under these circumstances we are of the view that the AO has correctly disagreed with the claim of the Assessee. We do not find any infirmity or illegality in applying Rule 8D or in the computation of the disallowance made by the AO in accordance with Rule 8D. - Decided in favour of revenue. Disallowance under the head Professional/Consultancy/ Survey fees - AO noted that these expenses relate to the projects in progress and therefore should have been debited to the work in progress and thus disallowed the sum - CIT(A) deleted the disallowance - Held that - Each assessment year is independent and income for each assessment year has to be computed independently. We therefore set aside the order of CIT(A) on this issue and restore this issue to the file of CIT(A) with the direction that the CIT(A) shall re-decide this issue after getting the evidences from the Assessee as to what extent these expenses relate to the current year and to what extent these expenses relate to the work in progress. Further the CIT(A) should also obtain evidences that these expenses have been incurred by the Assessee genuinely for the purpose of the business. To the extent these expenses relate to the work in progress it should be disallowed. Only the expenses which the Assessee proves to have been genuinely incurred for the purpose of the business and does not relate to work in progress be allowed - Decided in favour of revenue for statistical purposes. Addition to income - AO re-computed the profit relating to the projects completed crediting the sale proceeds to the profit and loss account - CIT(A) took the view as if the AO has changed the method from project completion method to percentage completion method and accordingly he deleted the addition - Held that - The method as has been followed by the Assessee in our opinion is neither project completion method nor percentage of completion method. Percentage of completion method is not linked with the consideration received by the Assessee from the intended buyer. We noted that the Assessee has recognized the revenue only when the registration of the sale deed has been done by the Assessee in favour of the buyer. Under AS-7 this is not a recognized method of recognizing the revenue. This method is neither project completion method nor percentage of completion method. The method adopted by the Assessee therefore cannot be regarded to comply with the ingredients as laid down u/s 145 of the Income Tax Act. Sec. 145 of the Income Tax Act makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. Recognizing the revenue when the sale deed has been registered by the Assessee in favour of the buyer cannot be regarded to be either cash or mercantile system of accounting. We therefore set aside the order of CIT(A) and restore the order of the AO. - Decided in favour of revenue.

Summary

Issues Involved:
1. Deletion of disallowance made under Section 14A.
2. Deletion of disallowance of Professional/Consultancy/Survey fees.
3. Deletion of addition on account of profits on sale of plots.

Detailed Analysis:

1. Deletion of Disallowance Made Under Section 14A:
The Revenue contested the deletion of a Rs. 21.69 lakh disallowance made under Section 14A of the Income-tax Act, in accordance with Rule 8D of Income-tax Rules. The Assessing Officer (AO) noted that the Assessee had invested in shares, the dividend income from which is exempt from tax. The AO found that the Assessee used Rs. 79.3 lakhs from a bank overdraft for purchasing shares and computed a proportionate interest of Rs. 6,20,924/-. Additionally, the AO noted that the interest paid included Rs. 73,00,131/- paid as interest to partners on their capital. Since the Assessee did not provide evidence to show that the capital on which interest was paid was not used for purchasing shares, the AO applied Rule 8D to disallow Rs. 23,22,638/-. The CIT(A) reduced this disallowance to Rs. 1,53,662/-. However, the Tribunal found no material to support the CIT(A)'s finding that surplus funds were used for investment and restored the AO's disallowance, setting aside the CIT(A)'s order.

2. Deletion of Disallowance of Professional/Consultancy/Survey Fees:
The AO disallowed Rs. 17,59,743/- debited under "Professional/Consultancy/Survey fees," noting these expenses were related to projects in progress and should be capitalized. The CIT(A) deleted the disallowance, accepting the Assessee's claim that these fees included payments for legal and taxation advice unrelated to work in progress. The Tribunal disagreed with the CIT(A), emphasizing that expenses should be allowed based on the provisions of the Income Tax Act and must be related to the current year. The Tribunal directed the CIT(A) to re-examine the issue, determine the extent to which these expenses relate to the current year versus work in progress, and ensure only genuine business expenses are allowed.

3. Deletion of Addition on Account of Profits on Sale of Plots:
The AO added Rs. 2,22,47,248/- to the Assessee's income, noting that the Assessee completed the development of plots by 31.3.2009 and received 70-80% of the sale proceeds but did not show these proceeds in the profit and loss account. The CIT(A) deleted the addition, interpreting the AO's action as changing the method from project completion to percentage completion. The Tribunal found that the Assessee's method of recognizing revenue only upon registration of the sale deed was not in accordance with the mercantile system or project completion method. The Tribunal noted that the Assessee did not recognize revenue based on project completion, despite completing the development work. The Tribunal restored the AO's order, stating that the Assessee's method did not comply with Section 145 of the Income Tax Act, which mandates following either cash or mercantile system of accounting.

Conclusion:
The Tribunal allowed the Revenue's appeal partly for statistical purposes, restoring the AO's orders on the disallowance under Section 14A and the addition on account of profits on sale of plots, while directing the CIT(A) to re-examine the disallowance of Professional/Consultancy/Survey fees.