2014 (7) TMI 762 - AT - Income Tax

Expenses incurred directly for phase 1 of project Road Expenses - Whether there should be any allocation of road expenditure or not and whether the Commissioner (Appeals) is justified in allocating 19% of the road expenses on account of Phase I and II Held that - The road expenditure cannot be allocated for Phase II, for the reason that, firstly, for developing the plot and particularly the Phase I, road was required to be constructed for getting access to the plot which was land locked - secondly, the road has been handed over to the municipal corporation of Mumbai for public use at large and not for assessee s project alone that the assessee has received the TDRs - there cannot be any basis for allocation of road expenses to the Phase II - The expenses has to be seen on a matching principle i.e., the cost incurred for the purpose of generating the revenue - If the matching principle is to be applied, then the entire road expenditure has to be allowed from the revenue receipts of the TDR disclosed in the year, because it has been shown against TDR receipts. A basis of allocation of expenses @ 19% as applied by the Commissioner (Appeals) seems to be quite reasonable and rational basis in the absence of other material or criteria for allocation for the purpose of making the allocation of the expenses between Phase I and Phase II - the disallowance of 19% on the road expenses should be restricted to net expenditure incurred by the assessee i.e., ₹ 1 crore and not ₹ 1,12,20,280, because the assessee got the reimbursement of ₹ 12,20,285 - the disallowance on account of road expenses should be restricted to ₹ 19 lakhs. Disallowance of loss on sale of TDR Held that - Disallowance of loss on account of TDR was not the subject matter of either the original assessment proceedings or the mandate of the Tribunal order - the reasons adopted by the CIT(A) that the sale of TDR to one Mr. Vijay M. Parkih is at lower cost is without any enquiry or any adverse material on record that the assessee has suppressed the sale made to this aprty - secondly, to hold that the payment of legal fee is not a necessary expenditure is again based on surmises that to be without any enquiry or based on some evidence - Even under the law, the Commissioner (Appeals) cannot disallow the loss in the round of proceedings, which is in pursuance of Tribunal s order, issuing specific directions, which are only in relation to allocation of expenditure CIT(A) could not have gone to disallow the entire loss in the TDR account, which was not the subject matter of earlier proceedings - already the road expenditure has been disallowed on the basis of proportionate allocation between Phase I and Phase II and such a road expense is a part of TDR - no separate disallowance under the head TDR cost or expenditure should be made - the disallowance of loss as made by the CIT(A) cannot be sustained and it is to be set aside Decided partly in favour of Assessee.

Summary

Issues Involved:

1. Confirmation of Assessing Officer's order by CIT(A) without considering evidence.
2. Disallowance of expenses related to Phase I and Phase II of the project.
3. Enhancement of disallowance of expenses relating to TDR by CIT(A).
4. Levy of interest under section 234B.

Detailed Analysis:

Issue 1: Confirmation of Assessing Officer's order by CIT(A) without considering evidence

The assessee raised a ground that the CIT(A) erred in confirming the order of the Assessing Officer without considering various evidences filed, thus violating the principles of natural justice. However, this ground was dismissed as "not pressed" by the assessee's counsel during the proceedings.

Issue 2: Disallowance of expenses related to Phase I and Phase II of the project

The assessee, a joint venture engaged in land development and construction, undertook a project in two phases. The Assessing Officer disallowed certain expenses claimed for Phase I, arguing that some should be allocated to Phase II. The Tribunal directed a rational allocation of expenses between the phases. The CIT(A) allocated 19% of certain expenses (road expenses, legal & professional fees, and labor charges) to Phase II based on the land area ratio. The Tribunal upheld this allocation method as reasonable and rational. However, the disallowance of road expenses was restricted to Rs. 19 lakhs, considering the reimbursement received by the assessee.

Issue 3: Enhancement of disallowance of expenses relating to TDR by CIT(A)

The CIT(A) disallowed the entire loss of Rs. 57,06,488 on the sale of TDR, citing discrepancies in sale rates and legal fees. The Tribunal found this disallowance unsustainable, both factually and legally. It noted that the CIT(A) could not transgress beyond the Tribunal's directions, which were limited to the allocation of expenses. The Tribunal deleted the disallowance, emphasizing that the road expenses already allocated should not be double-counted against TDR expenses.

Issue 4: Levy of interest under section 234B

The levy of interest under section 234B was acknowledged as consequential by both parties. The Tribunal directed the Assessing Officer to recompute the income and apply the interest accordingly, in line with the Tribunal's findings.

Revenue's Appeal:

The Revenue contested the CIT(A)'s restriction of disallowance to 19% based on land area allocation, arguing that the assessee failed to provide details for Phase I and II. However, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s allocation method as reasonable and in accordance with the Tribunal's earlier directions.

Conclusion:

The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal directed the Assessing Officer to recompute the income and apply the interest under section 234B accordingly. The order was pronounced in the open court on 11th June 2014.