2023 (9) TMI 160 - HC - Income Tax

Allowability of expenses in respect of Sales Support Services and Management Fee - whether they had no direct nexus with the project and was not subject to proportionate disallowance as per Accounting Standards AS-7? - ITAT confirmed deleting the proportionate disallowance as done by CIT(A) - AO stated that Assessee had completed only 26.32% of the project and had rightly allowed the proportionate expenditure - HELD THAT - Both appellate authorities found that there was no doubt about the genuineness of the expenses incurred, that expenditure was incurred for various personnel and that it had direct correlation to the business of Respondent. Both appellate authorities also accepted that no construction business would run without incurring such kind of expenditure. CIT(A) and ITAT having come to factual finding that the expenses incurred by the Respondent-Assessee on salary of the office employees/management fees do not have any direct nexus with the project and can not be disallowed on the proportionate basis because such expenditure fall in the category of expenditure incurred for running of day to day business, no substantial question of law arises.

Summary

Issues:
The issues involved in the judgment are:
1. Whether expenses in respect of Sales Support Services and Management Fee had a direct nexus with the project and were subject to proportionate disallowance as per Accounting Standards AS-7?
2. Whether the Assessee was correct in claiming these expenses in full despite following the Project Completion Method of Accounting (AS-7) and completing the project only up to 26.32%?

Comprehensive Details:

Issue 1:
The Respondent, a builder engaged in real estate, filed its E-Return of Income for Assessment Year 2010-2011. During scrutiny, it was found that expenses on Sales Support Services and Management Fee were debited. The Assessing Officer disallowed 73.68% of these amounts based on the completion percentage of the project and added it to the total income. The AO also treated certain fees as capital expenditure. The CIT(A) allowed the Appeal and directed to delete the additions/disallowances except for 25% of the travelling expenses. The ITAT upheld the CIT(A)'s decision, stating that the expenses had a direct correlation to the business and were necessary for the project's promotion.

Issue 2:
The CIT(A) concluded that the expenses were revenue in nature and necessary for day-to-day operations, as they were incurred on project staff and sales team for promoting the construction project. The ITAT concurred with this view, emphasizing the genuineness and necessity of the expenses for the business. The Revenue argued that only 26.32% of the expenses should be allowed due to the project's completion percentage. However, the court held that the expenses were incurred for running the day-to-day business and did not need to be proportionately disallowed based on the project's completion status.

In conclusion, the court dismissed the appeal, as no substantial question of law arose regarding the expenses incurred by the Respondent-Assessee on salaries and management fees, which were deemed necessary for the day-to-day business operations and had a direct correlation to the business activities.