2015 (2) TMI 911 - HC - Income Tax

Project management fee - ITAT deleted dis allowances - whether fees accrued in the preceding assessment year i.e. 2006-07 not allowable to the assessee in A. Y. 2007-08 under the mercantile system of accounting? - Held that - CIT( A) and the Tribunal have reached a concurrent finding of fact that the amount claimed as an expenditure of ₹ 339 lakhs being paid as project management fees to M/s. Kumar Builders was only in respect of amount received for sale in the Assessment Year 2007-08. Consequently, no occasion can arise to disallow any part of the expenditure of ₹ 339 lakhs on the assumption that some amount thereof is attributable to an earlier Assessment Year. The finding of fact arrived at by the CIT(A) and the Tribunal is not shown in any manner to be perverse and/or arbitrary. Decided in favour of assessee.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal for Assessment Year 2007-08 regarding disallowance of project management fees accrued in the preceding year under mercantile system of accounting.

Analysis:
The Appeal under Section 260A of the Income Tax Act, 1961 contested the Tribunal's decision on the disallowance of project management fees accrued in the previous assessment year. The Revenue raised two key questions of law for consideration. Firstly, whether the ITAT was justified in deleting the disallowance of a specific amount accrued in the preceding assessment year, which was not allowable under the mercantile accounting system for the current assessment year. Secondly, whether the ITAT was correct in disregarding the requirement for the assessee, being a company, to adhere to the mercantile accounting system as per Section 145, thereby upholding the CIT(A)'s decision.

The Respondent-Assessee had a contractual agreement with a construction company for project management services, where fees were based on a percentage of gross sale proceeds. The dispute arose when the Assessing Officer disallowed a portion of the project management fees claimed as expenditure for the current assessment year, citing it related to sales from the previous year. However, the CIT(A) found that the fees claimed were solely for sales made in the current assessment year and not for the previous year.

Upon further appeal, the Tribunal affirmed that the entire project management fees paid were for sales made in the current assessment year, and no disallowance was warranted. Both the CIT(A) and the Tribunal concurred that the fees claimed pertained only to sales from the current assessment year, eliminating the need for any disallowance based on an earlier period. Consequently, the questions of law raised by the Revenue were deemed irrelevant as the deduction was rightfully claimed for the current assessment year's sales proceeds.

Ultimately, the High Court dismissed the Appeal, emphasizing that the fees paid for project management were directly related to sales made in the current assessment year, as established by the findings of both the CIT(A) and the Tribunal. The Court found no grounds to consider any substantial questions of law, leading to the dismissal of the Appeal without costs.