2015 (2) TMI 201 - AT - Income Tax

Disallowance of architect & engineering fees, tender & survey expenses and advertisement & sponsorship and brand building expenses treating them as a part of the construction work in process - Held that - As long as the assessee is carrying a particular business during the year, income there-from has to be computed u/s.28 of the Act, allowing it all permissible deductions, i.e., in accordance with the provisions of sections 30 to 43D (refer section 29). Whether the method of accounting followed by the assessee, i.e., the project completion method, is a correct method in accordance with the law, i.e., given that it follows mercantile method of accounting, is another matter altogether, which has not been impugned by the Revenue in any manner. We, accordingly, find no merit in the Revenue s case. The assessee s plea merits acceptance, and is upheld. - Decided in favour of assessee. Disallowance of repair and maintenance expenses of a rented premises - Held that - The impugned expenditure is in fact only toward effectuating the decision of acquiring the premises (by way of lease) in the first place, by making it fit for use, both in terms of capacity and capability, in-as-much as it has both quantitative and qualitative attributes, so as to constitute an improvement. It is not a case of a lumpsum payment in lieu of annual business expenditure. The benefit arising out of a capital expenditure, again, does not imply permanence, in which case no expenditure even on regular maintenance, or for keeping it in a state of good repairs, a stipulation that marks most tenancy agreements, would be required. The said benefit, though, cannot also be said to be limited to the period of lease, which may well be extended. Further, that the same, i.e., capital expenditure, is excluded, stands amply clarified per Explanations to sections 30 and 31 of the Act, brought on the statute by Finance Act, 2003 w.e.f. 01.04.2004. The expenditure, in our view, thus stands rightly considered by the ld. CIT(A) to form a part of an admissible asset in view of Explanation 1 below section 32(1)(ii), carving an exception for depreciation, which is generally allowed only on assets owned by an assessee, on a building not owned by it, but in respect of which it holds a lease or other right of occupancy. - Decided against assessee. Capitalization of 80% of the general, administrative expenses, including on employee and director remuneration, toward workin- progress (WIP) - Held that - We consider 50% of the personnel costs, claimed at ₹ 40.22 lacs, i.e., including director s remuneration, as liable for inclusion in the project cost, to be allocated on some systematic or rational basis which would capture project execution, which is a composite activity commencing with site identification to the construction in a deliverable state. No such proportion could be applied to rent, rates and taxes, which, at ₹ 70.53 lacs, constitutes the second major component of the impugned expenditure. The same would need to be examined with reference to the purpose for which each item comprising the same is incurred, to be decided accordingly. If not for any specific project, no part of the said cost could be capitalized. Rent for office premises, however, if forming part thereof, would stand to be allocated on the basis of the balance expenditure of ₹ 22.48 lacs. Again, as no particulars in respect of these expenses stand specified; the account head describing only the nature of the expense and not its purpose or the activity in relation to which it is incurred, we consider 20% of such expenditure to be allocable to WIP toward project overhead cost, again on the same parameter as applied to the personnel costs. Further, renovation expenses (which is the subject matter of Gd. 1), include ₹ 1.20 lacs paid to a vaastu consultant, Sh. Kirti Sheth . The same is toward consultancy for various sites at Mumbai. The said expenditure, thus, as it appears, is not toward renovation (as claimed) and, rather, relatable to projects located at different sites, and would therefore require being considered in proper perspective - Decided partly in favour of assessee.

Issues Involved:
1. Disallowance of architect & engineering fees, tender & survey expenses, and advertisement & sponsorship and brand building expenses.
2. Disallowance of repair and maintenance expenses of a rented premises.
3. Capitalization of general, administrative expenses, including on employee and director remuneration, toward work-in-progress (WIP).
4. Disallowance under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Architect & Engineering Fees, Tender & Survey Expenses, and Advertisement & Sponsorship and Brand Building Expenses:
The first issue pertains to the disallowance of expenses amounting to Rs. 20,57,297/- by treating them as part of the construction work in process. The assessee argued that these expenses were related to redevelopment/construction proposals that did not materialize and thus should be considered as a loss or selling cost, not directly related to any specific project. The Revenue contended that the entire expenditure was related to the assessee's construction business. The Tribunal found that the expenses for architect & engineering fees, tender & survey expenses, and advertisement & sponsorship and brand-building expenses were not directly related to any project and thus should not be capitalized. The assessee's plea was accepted, and Ground 1 was allowed.

2. Disallowance of Repair and Maintenance Expenses of a Rented Premises:
The second issue involved the disallowance of repair and maintenance expenses amounting to Rs. 42.66 lacs for a rented office premises. The assessee claimed that the expenses were incurred to achieve the functional utility of the premises and should be allowed under Section 30(a)(i) of the Act. The Revenue argued that the nature and volume of the expenditure were capital in nature and should be capitalized, eligible for depreciation under Section 32. The Tribunal observed that the expenditure was extensive and aimed at making the premises functional, thus capital in nature. The Tribunal upheld the Revenue's view, dismissing the assessee's Ground 2.

3. Capitalization of General, Administrative Expenses Toward Work-in-Progress (WIP):
The third issue dealt with the capitalization of 80% of general, administrative expenses, including employee and director remuneration, toward WIP. The assessee argued that these expenses were general and administrative in nature and not allocable to any specific project. The Revenue contended that the expenses were predominantly related to the assessee's principal activity of construction, justifying the allocation. The Tribunal held that only costs directly related to a particular project should be capitalized. It was decided that 50% of personnel costs and 20% of other general administrative expenses should be allocated to WIP. The Tribunal provided a detailed method for allocation based on systematic and rational criteria, partly allowing the assessee's Ground 3.

4. Disallowance under Section 14A:
The fourth issue regarding disallowance under Section 14A was not pressed by the assessee at the time of hearing and was accordingly dismissed as not pressed.

Conclusion:
The assessee's appeal was partly allowed. The Tribunal accepted the assessee's plea on the first issue, upheld the Revenue's view on the second issue, provided a balanced approach on the third issue by allowing partial capitalization, and dismissed the fourth issue as it was not pressed.

Order Pronouncement:
The order was pronounced in the open court on February 04, 2015.

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