2012 (8) TMI 594 - AT - Income Tax

Interest expenditure on borrowed funds - assessee engaged in the business of construction and development following completed contract method - Revenue contended that interest identifiable with the project should be allowed only in the year when the project is completed and the income from that project is offered for taxation - Held that - Since the assessee follows project completion method and recognises revenue on completion of contract method and all costs relatable to individual project is shown as work in progress, therefore, interest attributable to the project should be allowed only in that year when the project is completed and the income from that project is offered for taxation. In present case, since only 1 project is completed, matter is restored to the file of the AO to determine and allow the proportionate interest attributable to the said project completed. Dis-allowance of development charges and extra payments - Revenue contended that same will be allowable only against the particular project in respect of which the same has been incurred and not as overhead expenses - AY 08-09 - Held that - It is undisputed that plot in question for which the expenditure has been incurred was sold during AY 2006- 07 and no provision what so ever has been provided for future obligation on account of sale of the said property. Transaction has been completed and profit has already been booked during AY 2006-07. Hence, in absence of any legal or contractual obligation to incur any further expenditure the said expenses cannot be allowed as a revenue expenditure during the impugned assessment year. Dis-allowance u/s 40(a)(ia) on account of non-deduction of TDS from Audit fees - Held that - Though assessee contended that TDS on audit fees was made on the basis of the bills issued by the Auditors subsequently, however, no proof for this has been produced by the assessee either before the AO or before the CIT(A) and even before us. Hence, dis-allowance upheld.

Summary

Issues Involved:
1. Disallowance of interest expenditure.
2. Disallowance of development charges and extra payments.
3. Disallowance of audit fees.

Detailed Analysis:

1. Disallowance of Interest Expenditure:
Facts and Arguments:
- The assessee, a construction and development partnership firm, claimed an interest expenditure of Rs. 2,13,94,745/-.
- The AO allowed the interest on machinery loans but disallowed the interest on other loans, arguing that interest identifiable with a project should be allowed only in the year when the project is completed.
- The CIT(A) upheld the AO's decision, referencing the Special Bench decision in Wall Street Construction Ltd. vs. JCIT, which supports the project completion method for interest deduction.

Judgment:
- The Tribunal noted that the assessee follows the project completion method and recognizes revenue upon project completion.
- Since only the "Vantage Point" project was completed, the Tribunal directed the AO to allow proportionate interest expenditure for this project and capitalize the remaining interest for other ongoing projects.
- The first ground of appeal was partly allowed for statistical purposes.

2. Disallowance of Development Charges and Extra Payments:
Facts and Arguments:
- The assessee incurred Rs. 53,37,982/- for development charges and extra payments related to a plot at Baner.
- The AO disallowed these expenses, reasoning they should be allowed only against the specific project they were incurred for.
- The CIT(A) upheld the AO's decision, stating that the expenses related to a sale recognized in FY 2005-06 and should have been accounted for then.

Judgment:
- The Tribunal agreed with the CIT(A), noting that the expenses related to a sale in FY 2005-06 and no provision was made for these expenses at that time.
- The Tribunal found no legal or contractual obligation for these expenses in the current year and upheld the disallowance.
- The second ground of appeal was dismissed.

3. Disallowance of Audit Fees:
Facts and Arguments:
- The AO disallowed Rs. 10,11,240/- of audit fees due to non-deduction of TDS under section 40(a)(ia).
- The CIT(A) upheld this disallowance, noting no evidence was provided to support the claim.

Judgment:
- The Tribunal found no evidence was provided by the assessee for TDS deduction on audit fees.
- The Tribunal upheld the disallowance but noted that the assessee could seek relief in subsequent years as per law.
- The third ground of appeal was dismissed.

Conclusion:
The appeal was partly allowed for statistical purposes, with a direction to the AO to allow proportionate interest expenditure for the completed project and capitalize the remaining interest. The disallowances of development charges, extra payments, and audit fees were upheld.