2021 (1) TMI 303 - AT - Income Tax

Deduction u/s 80 IB (10) - allowable expenses to project - assessee is engaged in the business of development of real estate - AO considering the status of the project completion estimated @ 15% of the common expenses attributable to the project Classique, accordingly reduced the deduction under section 80 IB - CIT(A) rejected the proposition of the AO and enhanced the allocable expenses to the project Classique by observing that the common expenses has to be allocated based on the ratio of sales - HELD THAT - We notice that assessee is into construction of flats and also sale of TDR. Ld CIT(A) treated the activity of sale of TDR as sundry activity and cannot be regarded as business of the assessee.The details submitted by the assessee that some of the expenses incurred by the assessee relating to sale of TDR. Assessee is in real estate business and any sale of transferable development rights will fall within the activity of real estate business. Therefore, all the expenses relevant for the business is eligible to be apportioned between all the activities carried on by the assessee. The expenses attributable to the industrial unit or profit centre should have relevance to such industrial unit or profit centre. In the given case, the expenses of administrative and other common expenditure have direct relevance to the respective profit centres i.e., 2 projects and other activities of sale of TDR. We notice that the administrative functions carried on by the assessee are common to all the projects and activities carried on by the assessee. The expenses can be direct to the ongoing project, allocable or reasonably estimated with relevance to the respective projects carried on by the assessee. Since all the administrative expenses cannot be linked to the activities reasonably, it can be allocated reasonably to all the activities carried on by the assessee. We notice that assessee is currently carrying on 2 projects by name Classique and Royal and other activities i.e., sale of TDR - common administrative expenses must be allocated on all the activities carried on by the assessee therefore allocated based on gross revenue. Accordingly we direct AO to allocate the expenses relevant for the project Classique in the ratio of gross revenue and closing WIP i.e. total common expenses divided by total gross revenue including closing WIP multiplied by revenue from Classique Project - Appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Allocation of common administrative expenses between different projects.
2. Eligibility of the deduction under Section 80 IB (10) for the Classique Project.

Detailed Analysis:

1. Allocation of Common Administrative Expenses:

The assessee, engaged in real estate development, maintained separate financial records for two projects: Classique and Royal. The Classique Project was completed in a previous year, with only a few flats sold in the current assessment year. The Royal Project did not claim any benefits under Section 80 IB. The assessee claimed a deduction under Section 80 IB (10) for the Classique Project, declaring profits without allocating common administrative expenses to this project.

During the assessment proceedings, the Assessing Officer (AO) observed that the assessee had claimed various common expenditures such as employee costs, professional fees, marketing expenses, and other administrative expenses without allocating them to the Classique Project. The AO estimated that 15% of these common expenses should be attributable to the Classique Project and reduced the deduction under Section 80 IB accordingly.

The Commissioner of Income Tax (Appeals) [CIT(A)] issued an enhancement notice, suggesting that common expenses should be allocated between the Classique and Royal Projects in proportion to their sales, excluding the sale of Transferable Development Rights (TDR). The assessee argued that minimal expenses should be allocated to the Classique Project as the flats were booked years ago and no significant work remained. The CIT(A) rejected this argument and enhanced the disallowance, directing the AO to allocate general expenses proportionately to all projects and increase the work in progress.

Upon appeal, the Income Tax Appellate Tribunal (ITAT) considered the submissions and material on record. It was noted that the assessee's business included construction and sale of flats, as well as the sale of TDR. The ITAT disagreed with the CIT(A)'s view that TDR sales were a sundry activity, asserting that TDR sales were part of the real estate business. The ITAT held that common administrative expenses should be allocated to all activities based on gross revenue, including closing work in progress (WIP).

2. Eligibility of Deduction under Section 80 IB (10):

The assessee claimed a deduction under Section 80 IB (10) for profits from the Classique Project. The AO and CIT(A) had different views on the allocation of common expenses, which affected the deduction amount. The ITAT noted that the Classique Project was completed in a previous year, with only three flats sold in the current year. The ITAT emphasized that only expenses directly related to the project should be considered for deduction purposes, referencing the case of Zandu Pharma.

The ITAT directed the AO to allocate common expenses based on the ratio of gross revenue and closing WIP, ensuring a fair distribution of expenses. The ITAT provided a detailed calculation method, resulting in a reduced allocation of expenses to the Classique Project.

Conclusion:

The ITAT partly allowed the appeal, directing the AO to allocate common expenses proportionately based on gross revenue, including closing WIP, and to rework the deduction under Section 80 IB (10) for the Classique Project accordingly. The order was pronounced in the open court on 08/12/2020.