2020 (2) TMI 153 - AT - Income Tax

Disallowance of project management expenses claimed u/s 37 - Change in method of accounting in respect of project management expenses - Whether expenditure incurred after 01/07//2011 i.e.. after the suspension of the business cannot be capitalized as the property construction was not in existence during this period and there was no work in progress during this period? - HELD THAT - In this case there is no doubts with regard to the fact that the assessee has followed a consistent method of accounting for accounting project management expenses in the past but due to changed circumstances it has changed its method of accounting from a particular date and such changes was bonafide and need of the hour. AO as well as the Ld.CIT(A) were erred in coming to the conclusion that the assessee has changed its method of accounting without there being any changes in facts and circumstances and such changes was not bonafide. Hon ble Bombay High Court in the case of Bajaj Auto Limited vs CIT 2016 (9) TMI 1047 - BOMBAY HIGH COURT had taken similar view and held that the assesee was well within its rights to bring about changes so long as the assesse adopts such change bonafide and propose to employee the new method regularly. In this case the assessee has changed method of accounting inrespect of project management expenses from a particular date and said method of accounting has been continued in subsequent years and which has been accepted by the revenue. Change in method of accounting was also supported by a reason of temporarily suspension of business activity due to circumstances beyond the control of the assessee. Therefore assesee was well within its right to change method of accounting for accounting particular expenditure. The Ld. AO and Ld.CIT(A) without appreciating the fact that has simply rejected the claim of the assessee without assigning any reasons how the changed method of accounting was not in accordance with the principles of accounting followed by the assesse. Hence we are of the considered view that the Ld. AO as well as the Ld.CIT(A) were erred in disallowed project management expenses claimed by the assessee u/s 37(1) - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Project Management Expenses claimed by the assessee under Section 37 of the Income Tax Act, 1961.
2. Change in the method of accounting for project management expenses from capital to revenue.

Detailed Analysis:

1. Disallowance of Project Management Expenses:
The primary issue revolves around the disallowance of Rs. 48,16,592/- claimed by the assessee as project management expenses under Section 37 of the Income Tax Act, 1961. The assessee argued that these expenses were incurred after the suspension of the business on 01/07/2011 and should be treated as revenue expenditure since the property construction was not in existence, and there was no work in progress during this period. The Assessing Officer (AO) disallowed these expenses, arguing that the assessee had consistently capitalized such expenses in the past and had not provided a valid reason for the sudden change in accounting treatment. The AO added these expenses back to the capital work in progress account.

2. Change in Method of Accounting:
The assessee contended that the business had been temporarily suspended due to legal hurdles, and the change in the method of accounting was necessary and bona fide. The assessee had capitalized project management expenses up to 30/06/2011 but started debiting these expenses to the profit and loss account from 01/07/2011. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that there was no justification for adopting a different method of accounting from a certain date during the relevant period. The CIT(A) emphasized the principle of consistency and noted that the business had not ceased but was merely in a temporary lull.

Judgment:
The Tribunal examined the arguments and facts presented by both parties. It noted that the nature and genuineness of the expenditure were not in dispute. The Tribunal acknowledged the temporary suspension of the business due to legal hurdles and the resultant change in the method of accounting by the assessee. It was observed that the change was bona fide and necessary under the given circumstances.

The Tribunal highlighted that once a business is set up, any revenue expenditure incurred should be allowed as a deduction under Section 37(1), irrespective of whether the business has commenced or revenue has been generated. The Tribunal referred to legal precedents, including the decisions of the Karnataka High Court in CIT vs. Corporation Bank Ltd. and the Bombay High Court in Bajaj Auto Limited vs. CIT, to support the view that an assessee has the right to change the method of accounting, provided the change is bona fide and followed regularly.

The Tribunal concluded that the assessee was within its rights to change the method of accounting for project management expenses due to the temporary suspension of business activities. It held that the AO and CIT(A) erred in disallowing the project management expenses claimed by the assessee under Section 37(1) of the Income Tax Act, 1961. Consequently, the Tribunal deleted the additions made by the AO and directed the AO to allow the deductions as claimed by the assessee.

Conclusion:
The appeal filed by the assessee was allowed, and the Tribunal directed the AO to allow the project management expenses as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The judgment emphasized the importance of consistency in accounting methods and recognized the assessee's right to change the method of accounting under bona fide circumstances.