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2017 (2) TMI 626 - AT - Income TaxDisallowance u/s 14A computation - Held that - Revenue has invoked Rule 8D of Income-tax Rules, 1962 for making disallowance u/s 14A of the Act in a stereo typed manner without having regard to the accounts of the assessee and without satisfying the mandate of Section 14A(2) of the Act before making disallowance u/r 8D(2)(iii) of Income-tax Rules, 1962 read with Section 14A of the Act which in our considered view cannot be sustained in the instant appeal keeping in view facts and circumstances of the case moreso without pointing out and defect by the Revenue as to how the working of the disallowance submitted by the assessee u/s 14A of the Act is not correct having regard to the accounts of the assessee. AO did not made any attempt to work out disallowance of expenses incurred in relation to earning of income which does not form part of total income having regards to the accounts of the assessee in accordance with mandate of Section 14A(2) of the Act and also no attempt was made by the AO to dislodge the claim of the assessee in bringing forth and working disallowance u/s 14A of the Act having regard to the accounts of the assessee. In our considered view, the disallowance made by the A.O. in the instant appeal u/s 14A of the Act r.w.r. 8D(2)(iii) of Income-tax Rules, 1962 cannot be sustained and the disallowance of the expenses is to be made keeping in view expenses debited to the Profit and Loss Account (including , inter-alia, PMS Fees) having regard to the accounts of the assessee in accordance with mandate of Section 14A of the Act and hence, the issue is set aside to the file of the AO for making de-novo disallowance of expenses u/s 14A of the Act on merits in accordance with directions in this order in accordance with provisions of Section 14A of the Act. Needless to say that proper and adequate opportunity of being heard shall be provided by the AO to the assessee in accordance with principles of natural justice in accordance with law before de-novo determination of disallowance of expenses u/s 14A of the Act on merits.
Issues Involved:
1. Whether the CIT(A) was justified in deleting the disallowance of ?1,05,70,443/- on account of administrative and other overheads. 2. Whether the disallowance under Section 14A read with Rule 8D was correctly computed. Issue-wise Detailed Analysis: 1. Deletion of Disallowance of ?1,05,70,443/- on Account of Administrative and Other Overheads: The Revenue's appeal questioned the CIT(A)'s decision to delete the disallowance of ?1,05,70,443/- on administrative and other overheads. The AO had disallowed these expenses, arguing that the assessee had not commenced its business as the construction of the mall was still in progress, and thus, the expenses should have been capitalized under 'Capital work-in-progress.' Assessee's Argument: - The assessee contended that expenses directly attributable to the project were classified under Work in Progress, while common expenses were debited to the Profit & Loss Account. - It was argued that administrative costs are period costs and cannot be recouped, hence debited to the Profit & Loss Account. - The assessee relied on Accounting Standards AS-7 and AS-2, which exclude general administrative costs from construction costs. - The assessee cited judicial precedents, including the Guwahati High Court's decision in MKB (Asia) (P.) Ltd. v. CIT, which supports the assessee's method of accounting. AO's Argument: - The AO maintained that the assessee was constructing a capital asset, and thus, expenses should be capitalized. - The AO referenced the assessee's own financial statements, which classified construction expenses as 'Capital Work-in-Progress.' - The AO cited several judicial decisions to support the disallowance. CIT(A)'s Decision: - The CIT(A) held that the business activities had commenced with the acquisition of land and initial development activities. - The CIT(A) found that the assessee followed prescribed accounting standards and that general administrative expenses were correctly debited to the Profit & Loss Account. - The CIT(A) relied on judicial precedents that support the assessee's method of accounting and the distinction between setting up and commencement of business. Tribunal's Ruling: - The Tribunal upheld the CIT(A)'s decision, agreeing that the business was set up when the assessee acquired land and obtained necessary approvals. - It was noted that the assessee consistently followed mandatory accounting standards AS-2 and AS-7. - The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal. 2. Disallowance Under Section 14A Read with Rule 8D: The assessee's appeal challenged the AO's disallowance of ?31,17,478/- under Section 14A read with Rule 8D, arguing that the disallowance was excessive and not correctly computed. Assessee's Argument: - The assessee contended that the AO wrongly included direct expenses incurred for constructing the mall, which were capitalized under 'Capital Work-in-Progress,' in the disallowance computation. - The assessee argued that advertisement and business promotion expenses were directly attributable to taxable business income and should not be considered for disallowance under Section 14A. - The assessee had made a voluntary disallowance of ?2,00,000/- under Section 14A, which it argued was appropriate. AO's Argument: - The AO maintained that the assessee had not satisfactorily bifurcated expenses related to earning exempt income. - The AO invoked Rule 8D to compute the disallowance, resulting in an additional disallowance of ?29,17,478/-. CIT(A)'s Decision: - The CIT(A) accepted the assessee's contention that direct expenses capitalized to 'Capital Work-in-Progress' should not be included in the disallowance computation. - However, the CIT(A) upheld the AO's disallowance of ?29,17,478/- under Rule 8D for expenses debited to the Profit & Loss Account. Tribunal's Ruling: - The Tribunal found that the AO did not provide cogent reasons for the disallowance and did not have regard to the accounts of the assessee. - The Tribunal noted that the AO failed to dislodge the assessee's claim and did not attempt to work out the disallowance having regard to the accounts of the assessee. - The Tribunal set aside the issue to the AO for de-novo determination of disallowance under Section 14A, directing the AO to consider the expenses debited to the Profit & Loss Account and to provide a proper opportunity for the assessee to be heard. Conclusion: - The Revenue's appeals in ITA No. 1540/Mum/2015 and ITA No. 1539/Mum/2015 were dismissed. - The assessee's appeals in ITA No. 1306/Mum/2015 and ITA No. 1308/Mum/2015 were partly allowed for statistical purposes, with the issue of disallowance under Section 14A set aside for re-determination by the AO.
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