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2018 (12) TMI 1381 - AT - Income TaxDisallowance of proportionate revenue expenditure - allocating adhoc 10% of other expenses to work-in-progress account - Held that - Neither, the assessee has furnished any details and reasons for allocating adhoc 10% of other expenses to work-in-progress account nor the AO has given any reasons for adopting the basis of capital deployment, i.e. work-in-progress ratio to the total assets ratio to allocate other expenses. The assessee as well as the AO has gone on adhoc basis of allocation of expenses. From this, it is clear that neither the assessee has justified treatment of other expenses being revenue in nature, nor the AO has proved that these expenses are directly relatable to the project undertaken by the assessee to be capitalized to work-in-progress account - neither the assessee has justified its allocation of 10% expenses to work-in-progress nor the AO has justified in allocating the expenditure on the basis of work-in-progress to total asset ratio. A reasonable percentage of expenditure debited under the head other expenses needs to be allocated to work-in-progress account. Accordingly, we direct the AO to allocate 25% of other expenses of ₹ 24,74,231 as directly related to the project to be capitalized under the head work-in-progress account . We, order accordingly.
Issues:
1. Disallowance of expenses related to work in progress (WIP) in the assessment order for AY 2012-13. Analysis: 1. The appeal was filed against the order of the CIT(A)-3, Mumbai for AY 2012-13, where the assessee challenged the disallowance of expenses amounting to ?11,26,059 related to WIP. The assessee argued that the indirect expenses debited to the Profit & Loss account were not directly related to the project and should not have been capitalized to WIP. The CIT(A) upheld the AO's decision, stating that the assessee failed to provide evidence justifying the treatment of these expenses as allowable revenue expenditure. The ITAT noted that neither the assessee nor the AO provided sufficient reasoning for the allocation of expenses. Consequently, the ITAT directed the AO to allocate 25% of the other expenses directly related to the project to be capitalized under the WIP account, partially allowing the appeal. 2. The assessee, engaged in development and construction, had capitalized direct project expenses to the WIP account but debited certain indirect expenses, including MCGM property tax and other expenses, to the P&L account. The AO disallowed a portion of these expenses, reworking them based on the work-in-progress account to total assets ratio. The ITAT observed that both the assessee and the AO had used an adhoc basis for expense allocation without proper justification. Consequently, the ITAT determined a reasonable percentage (25%) of the other expenses to be directly related to the project and ordered their capitalization under the WIP account. 3. The judgment highlighted the lack of justification for the allocation of expenses to the WIP account by both the assessee and the AO. The ITAT emphasized the need for a reasonable allocation of expenses related to the project and directed the AO to capitalize 25% of the other expenses to the WIP account. This decision aimed to resolve the dispute regarding the treatment of expenses, partially allowing the appeal filed by the assessee against the disallowance of expenses in the assessment order for AY 2012-13.
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