2020 (3) TMI 1230 - AT - Income Tax

Disallowance of expenditure incurred by the assessee towards project - non commencement of business - Methods of accounting - HELD THAT - Upon perusal of clause-19 we find that General administration costs and selling costs are generally not considered a part of contract cost unless they are contract specific. Applying the same to the fact of the case we find that the assessee has debited expenditure of such a nature only in the Profit Loss Account. Theses expenditure was not project specific and allowable as period cost. Nothing on record establishes that there was any change in aforesaid method of accounting by the assessee during the year under consideration. As held that AS-7 as an approved system of accounting and regular accounting methodology adopted by the assessee could not be disregarded by the department. On the basis of above discussion it could be observed that the assessee was consistently following a particular method of accounting which was in accordance with Accounting Standard issued by ICAI and which is well accepted by higher courts. Therefore there being no change in fact the said methodology could not be rejected by the revenue. Most importantly the Tribunal in assessee s own case for AY 2012- 13 had held that it was not necessary that the business had actually commenced for claiming of expenses but the relevant fact was that the business was set up or not. It is quite evident from the financial statements that the assessee had already set up its business and was undertaking various projects the expenditure of which was being accumulated under the head Capital Work-in-progress. Therefore the observation of Ld. CIT(A) that the business was not set up could not be sustained. Keeping in view the entirety of facts and circumstances the disallowance as confirmed by Ld. CIT(A) could not be sustained in the eyes of law. By deleting the same we allow ground no.1 Disallowance u/s 14A r.w.r. Rule 8D(2)(iii) - HELD THAT - We find that no adjudication has been rendered by Ld. first appellate authority in this regard since the same was termed as academic in nature. However going by the factual matrix we find that the assessee has already offered suo-moto disallowance of 0.75 Lacs against the exempt income and Ld. AO without considering the basis of disallowance has proceeded to apply Rule 8D. We find that the issue of disallowance u/s 14A for AY 2012-13 has already been sent back by the Tribunal to Ld.AO for fresh adjudication. Therefore with a view of enable the revenue to take consistent stand in the matter the matter of disallowance u/s 14A would stand remitted back to the file of Ld. AO on similar lines.

Summary

Issues Involved:
1. Disallowance of ?1,44,29,341/- as revenue expenses.
2. Treatment of disallowed expenses as part of project cost or capital work-in-progress.
3. Granting depreciation on expenses treated as intangible assets.
4. Disallowance of ?17,38,143/- under Section 14A read with Rule 8D of the Income Tax Act.

Detailed Analysis:

1. Disallowance of ?1,44,29,341/- as Revenue Expenses:
The assessee contested the disallowance of ?1,44,29,341/- made by the Assessing Officer (AO) and sustained by the Commissioner of Income-Tax (Appeals) [CIT(A)], arguing that the expenses were allowable as deductions since the business had already commenced. The AO treated these expenses as capital expenditure, asserting that the business was not set up or commenced during the year, thus categorizing the expenses as pre-operative. The CIT(A) upheld the AO’s decision, emphasizing that the expenses were capital in nature and should be part of the capital work-in-progress. However, the tribunal found that the assessee consistently followed a recognized method of accounting as per Accounting Standard-7 (AS-7) issued by ICAI, which allowed such expenses to be debited to the Profit & Loss Account. The tribunal concluded that the disallowance could not be sustained and deleted the same, thereby allowing ground no.1 of the appeal.

2. Treatment of Disallowed Expenses as Part of Project Cost or Capital Work-in-Progress:
The assessee alternatively argued that if the expenses were not allowed as revenue expenses, they should be included in the project cost or capital work-in-progress. The CIT(A) denied this claim, stating that brand-building expenses should be considered intangible assets and not part of work-in-progress, which consists only of revenue expenses. The tribunal, having allowed the primary claim of the assessee regarding the revenue nature of the expenses, found this ground to be infructuous.

3. Granting Depreciation on Expenses Treated as Intangible Assets:
The assessee also sought depreciation on the expenses treated as intangible assets. Since the tribunal allowed the expenses as revenue expenses, this ground became irrelevant and required no specific adjudication.

4. Disallowance of ?17,38,143/- under Section 14A read with Rule 8D:
The AO proposed an alternative disallowance under Section 14A, considering the assessee's investments, and computed the disallowance at ?18.13 Lacs as per Rule 8D(2)(iii). The CIT(A) did not adjudicate on this matter, terming it academic. The tribunal noted that the assessee had already made a suo-moto disallowance of ?0.75 Lacs and found the AO's application of Rule 8D without considering the basis of disallowance inappropriate. Referring to the tribunal's decision for AY 2012-13, the matter was remitted back to the AO for fresh adjudication, allowing ground no.3 for statistical purposes.

Conclusion:
The tribunal allowed the appeals in part, deleting the disallowance of ?1,44,29,341/- as revenue expenses and remitting the issue of disallowance under Section 14A back to the AO for fresh adjudication. The other grounds were rendered infructuous or required no specific adjudication. Both appeals were partly allowed.