2015 (7) TMI 611 - AT - Income Tax

Eligibility for deduction u/s.80IB(10) - CIT(A) allowed claim - assessee is engaged in the business of real estate development and construction - Held that - All the conditions for claiming deduction u/s.80IB has been fulfilled and the CIT(A) has denied the claim in respect of flat No.1602 & 1603 on the plea that their area was more than 1000 sq.ft. We had verified the copies of the relevant pages of the agreement for sale in respect of flat no.1602 wherein the area is mentioned at page no.9 and the relevant clause no.(j) relied on by AO and ld.CIT(A) is as under - Flat 1602 admeasuring 921 sq.ft. built up (including area of balconies where applicable) (with the adjoining terrace if applicable) on the 16th floor in the said building being constructed on the said property and also car parking space admeasuring (nil. Sq.ft. thereabout). On page No.20, the plan of the flat is also attached with the agreement which shows that terrace is separate and not attached with the flat and that has not marked as the area sold. For Flat No.1603, similar clause (j) is on page no.28 and the similar plan attached with the agreement is also at page no.39 which also indicates that area of the terrace is not sold to the flat owner and further from the plan it is clear that terrace is not openable from the flat while the way to the terrace is from the passage of the 16th floor. We had also verified the sanctioned plan of the building placed at page 2 of the paper book from which it is also clear that flat no.1602 and 1603 are separate and the terrace is not openable from inside of any flat and access to the terrace is from the staircase and passage of the 16th floor. The terrace is not part of the built-up area, though balcony is part of the built-up area; terrace is a common area shared with the other residential areas, and accordingly, the finding of the AO and CIT(A) merely relying on the higher sale price of flat no.1603, that the terrace has been exclusively given to flat no.1603 is not correct as, from the agreement and the plan and the certificate of the architect, it is clear that terrace is neither attached with the flat nor this has been given to flat no.1603 for exclusive use and it is for the use of all the members. Furthermore, the amended provision with regard to calculating the area of flat is not applicable in respect of the projects approved and started prior to 01.04.2005 and it is very clear that the commencement certificate for the project was issued on 11-6-2001 when the construction was started and it was completed on 5.11.2004. Thus following the proposition of law laid down in the case of Saroj Sales Corp. 2008 (1) TMI 420 - ITAT BOMBAY-E we direct the AO to allow assessee s claim of deduction u/s.80IB in respect of all the 61 flats in Ganga Tower II. - Decided in favour of assessee. Disallowance u/s.40A(2) - Held that - Respectfully following the decision of the Tribunal in group cases of the assessee vis- -vis the finding recorded by the CIT(A), we do not find any reason to interfere in the order of CIT(A) with regard to deletion of disallowance made u/s.40A(2). Distribution of proportionate indirect expenses on the basis of work-in-progress in place of profit of each year - The tribunal in assessee s own case for the assessment year 1994-95 dismissed revenue s appeal by relying on the finding of CIT(A) to the effect that assessee had not diverted its interest bearing funds for advancing interest free loans to sister concern, by relying on the decision of Bombay Samachar Ltd. 1969 (6) TMI 2 - BOMBAY High Court and Indian Explosive Ltd. 1990 (12) TMI 21 - CALCUTTA High Court . In view of the above, we restore the matter with regard to disallowance of interest to the file of AO with a direction to decide afresh keeping in view the proposition of law laid down by jurisdictional High Court in the case of Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY , wherein it was held that in case of availability of interest free funds presumption is that the same has been utilized for advancing interest free loans, therefore, no disallowance is to be made. The AO is directed to decide the issue after verifying interest free funds available with the assessee in terms of decision of Hon ble jurisdictional High Court as well as other High Courts cited hereinabove. - Decided in favour of assessee for statistical purposes. Disallowance of sales promotion expenses - CIT(A) restricted the disallowance to 25% - Held that - The hotel is situated at New Bombay and the assessee has paid cash to auto rickshaw and taxi drivers to get customers to the hotel. These expenses are genuine. Keeping in view the totality of facts and circumstances of the case, we restrict the disallowance to the extent of 10% of the expenses. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Deduction under section 80IB(10) of the Income Tax Act.
2. Disallowance under section 40A(2) of the Income Tax Act.
3. Allocation of indirect expenses.
4. Disallowance of interest on loans.
5. Disallowance of sales promotion expenses.
6. Penalty under section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IB(10):
The primary issue revolves around the assessee's claim for deduction under section 80IB(10) for the project "Ganga Tower II." The project, initiated on 11th June 2001 and completed by 5th November 2004, was scrutinized by the AO, who questioned the built-up area of flats, particularly on the 16th floor. The AO disallowed the deduction for flats 1602 and 1603, arguing their built-up area, including balconies and projections, exceeded 1000 sq.ft. The CIT(A) upheld the AO's decision for these flats but allowed the deduction for other flats. Upon appeal, it was found that the terrace area was not exclusive to any flat and the project met all conditions for deduction under section 80IB. The Tribunal directed the AO to allow the deduction for all 61 flats, including those on the 16th floor.

2. Disallowance under Section 40A(2):
The AO disallowed expenses claimed under section 40A(2) related to payments made for Business Centre Facility and Administration Charges to a sister concern, M/s Kukreja Services Pvt. Ltd. The CIT(A) deleted the disallowance, referencing previous Tribunal decisions in similar cases of group concerns. The Tribunal upheld the CIT(A)'s decision, finding no disproportionate claims and following precedent.

3. Allocation of Indirect Expenses:
The AO allocated indirect expenses based on proportionate sales, whereas the CIT(A) reallocated these based on work-in-progress, following a Tribunal decision for A.Y. 2001-02. The Tribunal upheld the CIT(A)'s method, finding it more logical and consistent with past decisions.

4. Disallowance of Interest on Loans:
The AO disallowed interest on bank loans, arguing the assessee advanced interest-free loans to sister concerns. The CIT(A) found the assessee had sufficient interest-free funds and thus allowed the interest deduction. The Tribunal directed the AO to verify interest-free funds and decide per the Bombay High Court's ruling in Reliance Utilities & Power Ltd., which presumes interest-free loans are given from interest-free funds available.

5. Disallowance of Sales Promotion Expenses:
The AO disallowed 50% of sales promotion expenses for the K-Star Hotel, citing cash payments and self-made vouchers. The CIT(A) reduced the disallowance to 25%. The Tribunal further reduced it to 10%, recognizing the genuineness of the expenses for promoting the hotel.

6. Penalty under Section 271(1)(c):
The AO imposed a penalty for the disallowed deduction under section 80IB(10). Since the Tribunal allowed the deduction for the entire project, the penalty was rendered unsustainable and thus annulled.

Conclusion:
The Tribunal dismissed the revenue's appeals and allowed the assessee's appeals, directing the AO to allow deductions and reconsider certain disallowances based on established legal principles and precedents. The order was pronounced on 15.5.2015.