2018 (6) TMI 354 - AT - Income Tax

Disallowance u/s 14A - Held that - The disallowance under section 14A of the Act has been prescribed for segregating the expenses related to exempt income, which have been debited in computation of taxable income - the assessee has not claimed the said amount of interest of ₹ 5,88,75,200/- in the profit and loss account during the year under consideration, the question of disallowance cannot arise The amount of ₹ 7,64,000/- was invested in LIC mutual funds - once the said investment of ₹ 7,64,000/- is not part of the average value of investment, which could yield exempted income, the computation of net amount of investment of ₹ 1,50,01,500/- and subsequent working of 0.5% of said value by the Ld. CIT(A) has been made correctly and we do not find any error in the same - appeal of revenue is dismissed. Disallowance of advertisement expenses - Disallowance of commission and brokerage expenses - Choice of method of accounting - Held that - In absence of information like advertisement expenses incurred may be related to brand development or may be related to specific projects, it is not possible for us to decide, what part of advertisement expenses were related specifically to the project and constitute cost of project. Similarly, no such information is available on record in respect of commission and brokerage expenses - thus the matter is restored to the file of the Ld. CIT(A) for deciding afresh.

Summary

Issues Involved:
1. Deletion of disallowance under Section 14A read with Rule 8D.
2. Deletion of disallowance of advertisement expenses.
3. Deletion of disallowance of commission and brokerage expenses.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 14A read with Rule 8D:

The Revenue challenged the deletion of ?5,66,266/- disallowance made by the Assessing Officer (AO) under Section 14A read with Rule 8D(2)(ii) and the restriction of disallowance under Rule 8D(2)(iii) to ?37,500/-. The AO had made the disallowance based on the average value of investment in assets yielding exempt income. The assessee argued that no interest was debited to the profit and loss account, and the interest expenditure was related to specific projects not reflected in the profit and loss account due to the percentage completion method. The CIT(A) deleted the disallowance under Rule 8D(2)(ii) and restricted the disallowance under Rule 8D(2)(iii) to ?37,500/-, excluding investment in LIC mutual funds which yielded taxable interest income. The Tribunal upheld the CIT(A)'s decision, noting that the interest was not debited in the profit and loss account, and thus, the disallowance could not arise.

2. Deletion of Disallowance of Advertisement Expenses:

The Revenue contested the deletion of ?25,38,714/- disallowance against advertisement expenses. The AO had allowed only 1/5th of the expenses, treating the rest as capital expenditure. The assessee argued that the advertisement expenses were incurred for project awareness and were revenue in nature. The CIT(A) deleted the disallowance, stating that the AO's action lacked justification and the expenses were wholly and exclusively for business purposes, thus allowable under Section 37 of the Act. The Tribunal restored the issue to the CIT(A) for fresh adjudication, noting that the advertisement expenses should be included in the project cost under the percentage completion method if they are related to the project.

3. Deletion of Disallowance of Commission and Brokerage Expenses:

The Revenue challenged the deletion of ?15,96,756/- disallowance against commission and brokerage expenses. The AO disallowed the entire amount, citing no sales during the year. The assessee argued that the expenses were incurred for booking amounts from prospective customers and were necessary for business operations. The CIT(A) deleted the disallowance, stating that the expenses were incurred for business purposes and were allowable under Section 37 of the Act. The Tribunal restored the issue to the CIT(A) for fresh adjudication, noting that the commission and brokerage expenses should be considered as part of the project cost under the percentage completion method.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on the deletion of disallowance under Section 14A read with Rule 8D. However, it restored the issues of advertisement and commission and brokerage expenses to the CIT(A) for fresh adjudication, emphasizing the need to consider these expenses as part of the project cost under the percentage completion method. The appeal was partly allowed for statistical purposes.