2013 (6) TMI 220 - AT - Income Tax

Revenue Expenses disallowed - assessee has maintained four separate divisions of cost centers - Held that - As in earlier year the HO expenses were allocated at 93% capital and 7% revenue as only one Multiplex was in operation for part of the period. But the basis of allocation is the cost of the project. This year the investment in operational project was at Rs. 124.01 crores whereas other projects was at Rs. 60.63 crores. Therefore assessee allocated the expenditure at 67.16% revenue and 32.84% capital during the year. There is justification in the claim of assessee as the newly operational projects also require more attention and in some projects there was no activity except purchase of land. In the absence of any details of manpower allocation time spend on each project the only rationale method adopted by assessee is capital cost allocation. This cannot be faulted as AO did not examine any other method to allocate but estimated at two thirds capital and one third revenue (as against the similar ratio of assessee in contrary method ie. 1/3rd 2/3rd). Bangalore project does not require any allocation as only land was purchased. Even one takes the operational under construction ratio it is 3 3 i.e. 50% capital and 50% revenue. Looking at it either way the allocation made by AO has no basis or logic. In view of this the allocation made by assessee on cost of project basis which is the only rationale method on the given facts. Therefore AO is directed to delete the amount so treated. In favour of assessee. Taxing the interest income arose during the preoperative period - Held that - AO observed that assessee has credited interest income to the Capex Account of projects under completion & has not given any specific reason as to why this amount should be allowed as interest capitalized added it as revenue receipt and brought to taxation. The appellant earned an interest which was given to it by the Head Office. The said income is a income which cannot be capitalized and has to be treated as Income from other sources. The AO therefore has rightly treated the income as income from other sources as held by CIT(A) - No reason to disturb the findings of AO and the CIT. Against assessee. Disallowance of Prior Period Expenses - Held that - As seen from the order of AO AO has not examined the nature of expenditure inspite of giving the details. Otherwise he would not have disallowed the depreciation which was actually disallowed by assessee in computation. Just because the income and expenditure was classified as prior period they need not be excluded or disallowed. AO has to examine whether the expenditure crystallized during the year or not. Moreover there may be some capital expenditure as noted by the CIT (A) but the same was not examined or adjusted to the project. These aspects require examination. Therefore the issue in this ground is restored to AO for detailed examination and to consider the contention of assessee - in favour of assessee for statistical purposes. Treatment to entertainment tax in respect of Multiplexes at Ahmedabad Andheri (Mumbai) and Chandigarh - revenue v/s capital receipt - Held that - The issue requires examination by AO. The respective State Govt. Policies and the orders are required to be examined whether the contentions of assessee is correct or not thus the matter is restored to the file of AO for adjudication. In favour of assessee for statistical purposes. Basis for allowing depreciation claim - Held that - First of all there is no basis for working out the utilized and unutilized areas as was done by AO when the entire Multiplex was put to use. Assessee has started operation in only three places and balance of projects are under various stages of construction. Therefore what assessee claimed was depreciation of projects under operation and repairs and maintenances of the same. Once the entire project has commenced the business operation just because part of it was not leased out or commercially exploited cannot be a basis for disallowing of depreciation and expenditure. Following the concept of block assets of an asset has entered into Block of Assets and depreciation has been granted on it the claim of depreciation cannot be denied in subsequent years. See CIT Vs. Sonal Gum Industries 2009 (2) TMI 84 - GUJARAT HIGH COURT . In favour of assessee. Claim of revenue expenditure on repairs and maintenance - Held that - No merit in action of AO in disallowing the amounts. In favour of assessee.

Summary

Issues Involved:
1. Disallowance of Revenue Expenses
2. Taxability of Interest Income
3. Disallowance of Prior Period Expenses
4. Treatment of Entertainment Duty Subsidy
5. Proportionate Disallowance of Depreciation
6. Disallowance of Repairs and Maintenance Expenses

Issue-wise Detailed Analysis:

1. Disallowance of Revenue Expenses:
The assessee claimed 68% of head office (HO) expenses as revenue expenditure, while the Assessing Officer (AO) allowed only 33.33%, capitalizing the rest. The AO's allocation was based on the presumption that significant resources were devoted to new projects. The CIT (A) upheld this allocation. However, the Tribunal found that the assessee's method of allocating expenses based on project costs was rational and directed the AO to delete the disallowed amount. The Tribunal stated, "We concur with the allocation made by assessee on cost of project basis which is the only rationale method on the given facts."

2. Taxability of Interest Income:
The AO treated an interest income of Rs.3,82,712, earned during the preoperative period, as revenue receipt and brought it to tax. The CIT (A) upheld this decision, stating, "The AO therefore, has rightly treated the income as income from other sources." The Tribunal agreed with the AO and CIT (A), dismissing the assessee's ground.

3. Disallowance of Prior Period Expenses:
The AO disallowed prior period expenses of Rs.26,09,033, stating the assessee failed to prove these expenses crystallized during the year. The CIT (A) upheld this disallowance, noting the expenses related to payments made to M/s VSD Confin Ltd and should be capitalized. The Tribunal found that the AO did not examine the nature of expenses and restored the issue to the AO for detailed examination, directing that "if any expenditure is in capital nature, to examine whether they can be capitalized to the project."

4. Treatment of Entertainment Duty Subsidy:
The CIT (A) dismissed the additional ground raised by the assessee regarding the treatment of Entertainment Tax Subsidy as a capital receipt, stating the issue did not emanate from the AO's order. The Tribunal restored the matter to the AO for examination, noting, "The respective State Govt. Policies and the orders are required to be examined whether the contentions of assessee is correct or not."

5. Proportionate Disallowance of Depreciation:
The AO disallowed proportionate depreciation of Rs.1,62,87,723 on assets not put to use, based on the unutilized area. The CIT (A) allowed the assessee's claim, stating, "Once it is proved that block of asset is used for the purposes of appellant business... proportionate disallowances of depreciation is not warranted." The Tribunal upheld the CIT (A)'s decision, agreeing that the entire project was put to use and the concept of block assets supports the claim.

6. Disallowance of Repairs and Maintenance Expenses:
The AO disallowed Rs.11,47,169 out of repairs and maintenance expenses related to the unutilized area. The CIT (A) deleted the disallowance, reasoning that the expenses were incurred for the upkeep of the entire premises. The Tribunal upheld the CIT (A)'s decision, noting, "There is no merit in action of AO in disallowing the amounts."

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal provided detailed reasoning for each issue, emphasizing rational allocation methods, proper examination of expenses, and adherence to the concept of block assets.