2024 (6) TMI 270 - AT - Income Tax

Estimation of profit @8% of WIP - addition was made on the basis of increase in WPI as reflected at the year end - HELD THAT - Tribunal 2019 (1) TMI 1953 - ITAT AHMEDABAD had come to the conclusion that the assessee was the developer, and the WPI did not belong to it. The assessee was consistently following mercantile system of accounting and receipts in the form of development fees were recognized on completion of project. AO without any basis had construed that the WPI belonged to the assessee. Accordingly, the Tribunal had confirmed the claim of the assessee and the ld. CIT(A) in the current year had followed the order of the Tribunal. CIT(A) has reproduced the order of the ITAT in entirety in order to properly appreciate the facts of the case. No reason to deviate from the finding of the ld. CIT(A) which was based on the finding of the ITAT in the assessee s own case cited supra. We, therefore, upheld and confirm the deletion of addition on account of estimation of profit @ 8% of WPI. Disallowance u/s. 14A r.w.r. 8D - CIT(A) restricted the disallowance u/s. 14A to the extent of exempt income earned during the year - HELD THAT - It is found that this issue was involved in the earlier years as well wherein it was held that the assessee has sufficient interest free funds in excess of investment made for earning tax free income. In any case, the disallowance u/s. 14A was required to be restricted to the exempt income earned, as held in the case of PCIT vs. Caraf Builders and Construction Pvt. Ltd. 2020 (1) TMI 135 - SC ORDER - CIT(A) had rightly restricted the disallowance to the extent of exempt income earned by the assessee. Thus ground taken by the Revenue is dismissed.

Summary

Issues:
1. Addition of Rs. 5,08,94,301/- on account of estimation of profit @ 8% of WIP.
2. Restriction of addition of Rs. 55,80,775/- u/s. 14A r.w.r. 8D to Rs. 5,12,548/-.

Analysis:

Issue 1: Addition of Rs. 5,08,94,301/- on account of estimation of profit @ 8% of WIP:
The Revenue challenged the deletion of the addition made by the Assessing Officer based on estimation of profit at 8% of Work in Progress (WIP). The Tribunal reviewed the facts where the assessee, engaged in development projects, did not follow the percentage completion method, leading to the Assessing Officer estimating profit at 8% of WIP. The CIT(A) deleted the addition, citing previous ITAT decisions in the assessee's favor for similar assessment years. The Tribunal upheld the CIT(A)'s decision, emphasizing that the WIP did not belong to the assessee, who followed the mercantile system of accounting. The Tribunal found no basis for the Assessing Officer's assumption that the WIP belonged to the assessee, affirming the deletion of the addition.

Issue 2: Restriction of addition of Rs. 55,80,775/- u/s. 14A r.w.r. 8D to Rs. 5,12,548/-:
The second ground of appeal by the Revenue related to the restriction of disallowance under section 14A r.w.r. 8D. The Assessing Officer disallowed Rs. 55,80,775/- due to the assessee's mixed bag of interest-bearing and interest-free funds. The CIT(A) limited the disallowance to Rs. 5,12,548/-, corresponding to the exempt income earned during the year. The Revenue contended that the CIT(A)'s decision did not align with CBDT Circular No. 5/2014. However, the Tribunal upheld the CIT(A)'s decision, noting that the disallowance should be restricted to the exempt income earned, citing relevant Supreme Court and High Court decisions. The Tribunal found the CIT(A)'s order appropriate and dismissed the Revenue's appeal.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The judgments were based on the application of relevant legal principles and precedents, resulting in the rejection of the Revenue's grounds of appeal.