2021 (10) TMI 1093 - AT - Income Tax

Disallowance of certain expenses specifically incurred for the project and also interest disallowance - assessee submitted as alleged disallowance of interest and administration expenditure pertains to projects under construction and the disallowance is rightly made and also made a request that suitable direction should be given to the AO that the year in which these projects can be completed, the assessee should be entitled to claim the alleged disallowance of expenses - HELD THAT - Since the assessee is following percentage completion method, the alleged expenses and interest expenditure which were having direct nexus with the projects undergoing during the year cannot be claimed as revenue expenditure for the year under appeal and, therefore, should form part of the work-in-progress and the assessee shall be eligible to claim the amount as an expenditure when the projects with which they are connected are completed and assessee starts selling the units of the project.- Decided against assessee. Disallowance u/s 14A r.w.r. 8D - HELD THAT - It is a settled judicial precedence that disallowance of interest expenditure u/s 14A of the Act is not called for if the assessee has sufficient capital and reserve and surplus that interest free funds available are in excess of the investments held during the year. Since the interest free funds available with the assessee are in excess of the investment in equity shares at the close of the year and there being no specific finding by the AO about the nexus of the interest bearing funds having been applied for investment in equity shares, we find no justification in the finding of the ld. CIT(A) confirming the interest disallowance u/s 14A of the Act made by the AO. We accordingly set aside the finding of the ld. CIT(A) and allow the ground no. 3 raised by the assessee.

Summary

Issues Involved:
1. Addition of ?24,13,204/- being the difference in construction cost and work-in-progress.
2. Disallowance of interest expenditure of ?1,06,00,823/- and ?2,61,29,653/-.
3. Disallowance under Section 14A read with Rule 8D(2)(ii) and Rule 8D(2)(iii) totaling ?67,82,105/-.

Issue-wise Detailed Analysis:

1. Addition of ?24,13,204/- being the difference in construction cost and work-in-progress:
The assessee, a Private Limited Company engaged in real estate development, filed its return for AY 2015-16 declaring a loss of ?4,56,48,945/-. During scrutiny, the AO disallowed ?24,13,204/- incurred on legal and professional charges related to the building project in progress, stating these should be added to work-in-progress and not claimed as revenue expenditure. The CIT(A) upheld this addition. The Tribunal noted that the expenses were related to the Shrachi Green Projects, which were delayed and thus not capitalized following Accounting Standard 2 (AS2) and auditors' advice. The Tribunal agreed with the AO that these expenses should form part of the work-in-progress and can be claimed when the project is completed and units are sold. Therefore, the addition of ?24,13,204/- was upheld.

2. Disallowance of interest expenditure of ?1,06,00,823/- and ?2,61,29,653/-:
The AO disallowed interest expenditures amounting to ?1,06,00,823/- and ?2,61,29,653/- related to loans taken for the Shrachi Green Projects and EK Tower Project, as the projects were incomplete. The CIT(A) confirmed these disallowances. The Tribunal observed that the interest expenses were not capitalized due to project delays and followed AS16, as advised by auditors. The Tribunal concurred with the AO's view that these expenses should be part of the work-in-progress and allowed to be claimed when the projects are completed. The Tribunal dismissed the assessee's appeal on this issue but directed that these expenses should be allowed in the year the projects are completed.

3. Disallowance under Section 14A read with Rule 8D(2)(ii) and Rule 8D(2)(iii) totaling ?67,82,105/-:
The AO made a disallowance of ?67,82,105/- under Section 14A, comprising ?67,35,915/- under Rule 8D(2)(ii) and ?46,190/- under Rule 8D(2)(iii). The CIT(A) upheld this disallowance. The Tribunal noted that the assessee had sufficient interest-free funds (share capital and reserves totaling ?49,83,50,396/-) exceeding the investments in equity shares (?19,57,75,320/-). Citing the Bombay High Court's judgment in CIT vs. Reliance Utilities & Power Ltd., the Tribunal held that no disallowance of interest expenditure under Section 14A is warranted if interest-free funds exceed the investments. Therefore, the Tribunal set aside the CIT(A)'s finding and allowed the assessee's appeal on this issue.

4. General Grounds:
The Tribunal noted that ground no. 4 was general in nature and required no adjudication.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the additions related to construction cost and interest expenditure but allowed the appeal regarding the disallowance under Section 14A.