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2016 (4) TMI 752 - AT - Income TaxAllowability of expenditure - whether the expenditure claimed by the assessee is revenue in nature, which in turn, is allowable in the hands of assessee under section 37(1) or since the assessee was following project completion method, the said expenses were to be carried forward as work-in-progress, to be allowed in the respective year when the units were sold? - Held that - Where the expenditure is relatable to day to day running of the business, the said expenditure is allowable as revenue expenditure in the hands of assessee irrespective of the fact that the assessee was following percentage completion method of recognizing its revenue. The expenses admittedly, which are relatable to the cost of construction of project are to be allowed as an expenditure in the hands of assessee on recognition of revenue to which it relates. However, the recognition of work-in-progress by the assessee does not imply that all the other expenses are also to be treated as work-in-progress. The nature of expenditure incurred by the assessee decides its allowability as business expenditure. Payments made under Meter expenses to MSEB - Held that - Admittedly, after the installation, the Transformer becomes the property of MSEB and MSEB is at liberty to transmit electricity to persons other than the assessee. Further, the assessee had paid sum of ₹ 13,24,400/- against the cost of service line connection. This expenditure was also incurred in relation to the provision of electricity connection to the assessee. Such expenditure incurred by the assessee for carrying on of its business from day to day is business expenditure and allowable in the hands of assessee under section 37(1) of the Act and cannot be part of work-in-progress of the expenditure which are incurred by the assessee. The expenditure incurred for commercial exigency of carrying on of its business, as held by various Hon ble High Courts and Hon ble Supreme Court is an allowable expenditure in the hands of assessee. With regard to allowability of expenditure of Meter expenses (MSEB), we find support from the ratio laid down in Chief Project Manager, Railway Electrification, Indian Railway Vs. ITO (TDS) 2012 (7) TMI 544 - ITAT, Chandigarh Interest expenditure claimed under section 36(1)(iii) - Held that - The assessee is in the business of developer and once the assessee has purchased land for the development purpose, then the assessee has started its business and under section 36(1)(iii) of the Act, it is very clearly provided that the interest paid on borrowed funds, which in turn, has been utilized for the purpose of carrying on of the business of assessee is duly allowable as business expenditure. Hence, the interest expenditure claimed by the assessee where the assessee is following percentage completion method is duly allowable as expenditure in the hands of assessee. Similarly, the Society charges is to be allowed as expenditure. Further, the Site expenses and Supervision charges are relatable to carrying on of projects and the same are to be taken as part of work-inprogress. The claim of the assessee before us is that similar expenditure was allowed in the earlier year. However, we find no merit in the claim of assessee as nature of expenditure itself shows it is in relation of construction activities carried on by the assessee and the same is rejected.
Issues Involved:
1. Whether the CIT(A) passed a 'speaking order' as warranted by Section 250(6) of the Income Tax Act, 1961. 2. Whether the expenses disallowed should form part of the closing Work-in-Progress (WIP). 3. Whether disallowance of expenses implies they were not incurred for business purposes. 4. Whether the addition of expenses to the closing WIP results in double taxation. 5. Whether the method of accounting followed by the assessee distorts income. 6. Whether the closing WIP for one year should be considered as the opening WIP for the next year. 7. Whether the CIT(A) followed the Tribunal's directions regarding income, profits, and gains. 8. Whether the disallowance of specific expenses (Supervision Charges, Site Expenses, Society Charges, Interest on Loan, Meter Expenses) was justified. 9. Whether the levy of interest under Sections 234B and 234C was justified. Detailed Analysis: 1. Speaking Order under Section 250(6): The assessee contended that the CIT(A) failed to pass a 'speaking order' as required by Section 250(6) and did not follow the Tribunal's directions from the previous appeal. The Tribunal noted that the CIT(A) did not provide a detailed explanation for the decisions made, which was necessary for a 'speaking order.' 2. Expenses and Closing Work-in-Progress (WIP): The assessee argued that disallowed expenses were part of the closing WIP, which was valued consistently by the assessee. The Tribunal observed that the CIT(A) failed to consider the consistent method followed for WIP valuation and simply confirmed the disallowance made by the Assessing Officer (A.O.). 3. Disallowance of Expenses and Business Purposes: The assessee claimed that disallowance of expenses suggested they were not genuine business expenses. The Tribunal noted that the CIT(A) did not consider the impact of disallowances on the closing WIP, which was then without such expenses. 4. Double Taxation: The assessee argued that adding expenses to the closing WIP resulted in double taxation. The Tribunal observed that the CIT(A) accepted the accounting method followed by the assessee but failed to address the issue of double taxation. 5. Method of Accounting and Distorted Income: The assessee contended that the method of accounting followed did not distort income. The Tribunal noted that the CIT(A) did not properly address whether the income, profits, and gains could be deduced from the method followed by the assessee. 6. Closing WIP as Opening WIP for Next Year: The assessee argued that the closing WIP for one year should be considered as the opening WIP for the next year. The Tribunal noted that the CIT(A) did not direct the A.O. to consider the enhanced closing WIP as the opening WIP for the subsequent year. 7. Following Tribunal's Directions: The assessee claimed that the CIT(A) did not follow the Tribunal's directions regarding the deducibility of income, profits, and gains. The Tribunal observed that the CIT(A) failed to address the basic directions issued by the Tribunal. 8. Disallowance of Specific Expenses: - Supervision Charges: The Tribunal found no merit in the disallowance of supervision charges as similar expenses were allowed in previous years. - Site Expenses: The Tribunal held that site expenses were related to construction activities and should be part of the WIP. - Society Charges: The Tribunal allowed society charges as business expenditure. - Interest on Loan: The Tribunal allowed interest on loan as business expenditure under Section 36(1)(iii). - Meter Expenses (MSEB): The Tribunal allowed meter expenses as business expenditure, supporting the assessee's claim with precedents. 9. Levy of Interest under Sections 234B and 234C: The Tribunal did not specifically address the issue of interest levy under Sections 234B and 234C, implying that the primary focus was on the disallowance of expenses and their treatment in WIP. Conclusion: The Tribunal partly allowed the appeals, directing the A.O. to allow certain expenses as business expenditure and disallow others as part of the WIP. The Tribunal emphasized the need for a consistent method of accounting and proper consideration of the Tribunal's directions in previous orders.
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