2022 (3) TMI 464 - AT - Income Tax

Disallowance of expenditure considered as capital-work-in-progress by the AO - Scope of addition u/s 40A(2)(b)assessee has claimed consultancy charges, legal and professional charges and marketing expenses - HELD THAT - Revenue ground is not clear whether they have challenged the deletion of disallowance by invoking the provisions of section 40A(2)(b) of the Act. The only challenge to the order is deleting the disallowance of expenditure considered by the AO as capital-work-in-progress and accordingly capitalized by the AO. As we have noted that this ground is not clear and according to us, the Revenue has not challenged the disallowance made by the AO u/s. 40A(2)(b) of the Act, as is clear from the Ground No. 2.1 raised by Revenue. Consultancy charges, legal and professional charges and marketing expenses - We noted that the assessee is engaged in the business of infrastructure development and real estate related projects and the assessee prior to launching of real estate project i.e., Centralis @ ABM Avenue , it is engaged in the business of real estate as it has taken lease of around 81 acres of land from Coromandel Fertilizers Ltd., vide lease dated 27.03.2008, which was notified under SEZ Act, 2005 as Special Economic Zone. This land was sub-leased to Silk Road Sugars Pvt. Ltd., for setting up of sugar refinery. The assessee received lease rental from SEZ and has offered to tax. As regards to the bifurcation of expenditure given by the assessee and the payment made by the assessee, we noted that the payment made to EID Parry India Ltd., being holding company should be considered u/s. 40A(2)(b) of the Act but no other payments as they are not related to the assessee. The assessee has made a payment of ₹ 1.2 crores to EID Parry India Ltd., as per the Business Advisory Agreement dated 04.11.2010 but these cannot be disallowed because these are paid according to agreement and actual services rendered and even the AO has not given any finding as regards to unreasonableness of the payment. Further, the only amount disallowed by AO of ₹ 20,38,461/- the CIT(A) has held only as falling under the provisions of section 40A(2)(b) of the Act which are not challenged by the assessee. Hence, we confirm the order of CIT(A) and appeal of Revenue is dismissed.

Issues Involved:
1. Deletion of disallowance of expenditure considered as capital-work-in-progress by the AO.
2. Application of provisions of section 40A(2)(b) of the Income Tax Act, 1961.

Issue 1: Deletion of Disallowance of Expenditure Considered as Capital-Work-in-Progress

The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the disallowance of ?3,25,01,491/- considered as capital-work-in-progress by the Assessing Officer (AO). The AO had capitalized the expenses, arguing that no income had been offered by the assessee from the impugned project during the year, following the Revenue-Cost Matching Concept. The CIT(A) found that the AO did not provide a basis for applying section 40A(2)(b) and that the expenditure incurred was reasonable and for the purpose of business, thus allowable under section 37 of the Act. The CIT(A) directed the AO to delete the addition of ?3,04,63,030/- while sustaining the addition of ?20,38,461/- under section 40A(2)(b).

Issue 2: Application of Provisions of Section 40A(2)(b) of the Income Tax Act, 1961

The AO applied the provisions of section 40A(2)(b), disallowing expenses on the grounds that they were unreasonable payments to sister concerns. The CIT(A) noted that the AO did not substantiate the unreasonableness of the payments. The CIT(A) allowed most of the expenses, except for ?20,38,461/- paid to EID Parry India Ltd. for manpower supply, which was disallowed due to lack of substantiation of reasonableness. The Revenue did not clearly challenge this application of section 40A(2)(b) in their grounds of appeal.

Detailed Analysis:

1. Deletion of Disallowance of Expenditure Considered as Capital-Work-in-Progress:

The assessee, engaged in infrastructure projects, claimed consultancy charges, legal and professional charges, and marketing expenses totaling ?3,25,01,491/-. The AO capitalized these expenses, arguing that they did not pertain to the revenue recognized during the year, thus considering them as capital-work-in-progress. The CIT(A) found that the AO did not provide a valid basis for this capitalization. The CIT(A) noted that the expenses were incurred for business purposes and allowable under section 37. The CIT(A) directed the deletion of ?3,04,63,030/- while sustaining ?20,38,461/- under section 40A(2)(b). The Tribunal upheld the CIT(A)’s decision, noting that the Revenue did not clearly challenge the application of section 40A(2)(b).

2. Application of Provisions of Section 40A(2)(b):

The AO disallowed expenses under section 40A(2)(b), arguing that payments to sister concerns were unreasonable. The CIT(A) found that the AO did not substantiate the unreasonableness of the payments. The CIT(A) allowed most expenses, except for ?20,38,461/- paid to EID Parry India Ltd. The Tribunal noted that the Revenue’s grounds of appeal did not clearly challenge the application of section 40A(2)(b). The Tribunal upheld the CIT(A)’s decision, confirming that the disallowed amount of ?20,38,461/- was correctly sustained under section 40A(2)(b).

Conclusion:

The Tribunal dismissed the Revenue’s appeal, upholding the CIT(A)’s order that allowed the deletion of ?3,04,63,030/- as business expenditure under section 37 and sustained the disallowance of ?20,38,461/- under section 40A(2)(b). The Tribunal found that the Revenue did not clearly challenge the application of section 40A(2)(b) and that the AO did not substantiate the unreasonableness of the payments. The appeal filed by the Revenue was dismissed.

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