2016 (11) TMI 1307 - AT - Income Tax

Disallowance of expenses made on account of Travelling & Conveyance, Brokerage & Commission, Advertisement, Publicity & marketing, legal & professional charges, service maintenance charges, rent, rates & taxes, security expenses, consultancy charges and miscellaneous expenses - Held that - We find that out of the total expenses incurred of ₹ 48,16,12,000/-, a sum of ₹ 31,22,58,000/- was transferred by assessee to work in progress and ₹ 11,86,10,000/- being expenses not related to project development was debited to profit and loss account and balance sum of ₹ 5,07,44,000/- was transferred to fixed assets by way of capitalization. These facts are not in dispute before us. We find that the expenditure incurred towards advertisement, marketing, publicity expenses, printing and stationery, brokerage, commission, car hire charges, legal and professional charges etc fall under the head General Administrative Costs which should not be included in the project cost as per the guidance note supra. However, we find that the assessee had erroneously claimed insurance as a revenue expenditure instead of allocating the same to project costs as per the guidance note. To that extent, the argument of the ld DR is well appreciated. We find that the other expenditures incurred by the assessee supra are squarely to be allowed as revenue in nature as they are not related to project cost. Hence we find that the ld CITA had rightly granted relief by deleting the disallowance made on that count. The decision rendered herein for the Asst Year 2007-08 would apply with equal force for the Asst Year 2009-10 also except with variance in figures. The ground no. 1 raised by the revenue for the Asst Years 2007-08 and 2009-10 is partly allowed. Disallowance of gifts - Held that - We find that the expenditure on gifts is related to the project of the assessee and hence the business nexus is proved beyond doubt. Hence the same is squarely allowable as deduction. Moreover, as per para 2.4 of the Guidance Note on Accounting of Real estate transactions, the said expenditure cannot be added to the project cost and hence the assessee had rightly charged off the same as revenue expenditure. Accordingly, the Grounds raised by the revenue are dismissed for the Asst Year 2007-08. Addition on account of interest - Held that - We find that the assessee had duly proved before the ld CITA that only the own funds lying in UTI Bank was utilized for advancing interest free advance to Mr Ashoke Dasgupta. Moreover, this advance was given in Asst Year 2006-07. In any case, we are in agreement with the argument of the ld AR that no notional interest income could be brought to tax. On what basis 10% rate of interest was assumed by the ld AO is not brought on record by the ld AO. The ld AO had not made any disallowance of interest paid by the assessee on its borrowings. This itself goes to prove that the borrowed funds were utilized only for business purposes of the assessee. Hence it could be safely concluded that only the own funds were utilized for advancing interest free funds to Mr Ashoke Dasgupta. In such an event, whether to charge interest or not on the said advance, becomes the prerogative of the assessee and the business nexus of such advance has not been doubted by the revenue. Hence there is no question of adding the notional interest income on the said advance without any basis.

Summary

Issues Involved:
1. Deletion of disallowance of various expenses (Travelling & Conveyance, Brokerage & Commission, Advertisement, Publicity & Marketing, Legal & Professional charges, Service Maintenance charges, Rent, Rates & Taxes, Security expenses, Consultancy charges, and Miscellaneous expenses).
2. Deletion of disallowance of gifts.
3. Deletion of addition on account of interest.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Various Expenses:

The primary issue was whether the CIT(A) was justified in deleting the disallowance of various expenses made by the AO. The assessee, a private limited company engaged in the development of Integrated Satellite Township, filed its return declaring a total loss. The AO disallowed expenses debited under 'Administrative and Marketing Expenses' on the grounds that the assessee did not provide sufficient documentary evidence and had not recognized any revenue during the year.

The assessee argued that it followed Accounting Standards (AS-2, AS-7, and AS-9) and the Guidance Note on Accounting for Real Estate Developers. It transferred expenses directly related to the project to Work in Progress (WIP) and debited non-project-related expenses to the Profit and Loss (P&L) account. The CIT(A) accepted this method based on the accounting standards and guidance notes, deleting the disallowances.

The Tribunal found that the assessee followed the accounting standards and guidance note correctly, which excluded general administrative costs and selling costs from project costs. However, it noted that insurance should have been allocated to project costs. The Tribunal upheld the CIT(A)'s deletion of disallowances except for the insurance expense, which was to be allocated to project costs. Thus, the appeal was partly allowed.

2. Deletion of Disallowance of Gifts:

The AO disallowed expenses on gifts, suspecting they were given gratuitously and not for business purposes. The assessee contended that the gifts were for prospective customers visiting the project site and had suffered Fringe Benefit Tax (FBT) on the gifts.

The CIT(A) held that the business nexus was proved as the gifts were given to customers who booked flats, thus deleting the disallowance. The Tribunal agreed, noting that the expenses on gifts were related to the project and allowable as revenue expenditure under the Guidance Note on Accounting for Real Estate Transactions. The Tribunal dismissed the revenue's grounds on this issue.

3. Deletion of Addition on Account of Interest:

The AO added notional interest income, estimating a 10% interest on an interest-free advance of ?1 crore given by the assessee to a third party, suspecting it was given out of loan funds. The assessee argued that the advance was given out of its own funds from customer collections, not loan funds.

The CIT(A) accepted the assessee's explanation and deleted the addition, stating that only real income should be taxed, not notional income. The Tribunal upheld this decision, noting that the assessee proved the advance was given from its own funds and the business nexus was not doubted by the revenue. The Tribunal dismissed the revenue's grounds on this issue.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on most issues, allowing the revenue's appeal only to the extent of reallocating the insurance expense to project costs. The appeals were partly allowed.