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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
Date of hearing 03-10-2018 Date of pronouncement 03-10-2018 O R D E R
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against order of the CIT(A)-3, Mumbai dated 06-02-2017 and it pertains to AY 2012-13. The assessee has raised the following grounds of appeal:-
“1. The Hon'ble CIT(A) has erred in confirming the order of Ld. Assessing officer by disallowing expenses to the tune of Rs 11,26,059/- being the part of other expenses which has been debited and claimed in Profit & Loss account as part of Work in Progress (WIP) without considering the facts and circumstances of the case. The disallowed expenses were capitalised to the WIP. It is to state that direct expenses related to project were already capitalized by appellant company and indirect expenses which could not be directly allocated has been claimed in Profit and loss account and therefore, capitalisation of such expenses based on proportion of WIP to total assets is unjustifiable and therefore, such addition made of Rs 11,26,059/- for the year under consideration should be deleted.”
2 ITA 3474/Mum/2017
The brief facts of the case are that the assessee company is engaged in the business of development and construction of building, filed its return of income for AY 2012-13 on 26-09-2012 declaring total income of Rs.39,46,147. The case was selected for scrutiny and the assessment was completed u/s 143(3) of the Act, on 08-02-2015 determining total income at Rs.50,72,210 by making addition towards disallowance of proportionate revenue expenditure claimed by the assessee for Rs.11,26,059.
Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee submitted that the AO was erred in disallowing revenue expenses being MCGM property tax and other expenses debited to the P&L account on adhoc basis without assigning any reasons as to how such revenue expenditure is directly related to work-in-progress. The assessee further submitted that it has debited all direct expenses incurred on the project to work-in- progress account; however, the remaining expenses in the nature of revenue expenses has been debited to P&L account. Therefore, the AO’s action of disallowing expenses on adhoc basis, without assigning any reasons, is incorrect. The Ld.CIT(A), after considering relevant submissions of the assessee held tht the assessee has not produced any evidence to justify its claim of expenses debited to P&L account to 3 ITA 3474/Mum/2017 be treated as allowable revenue expenditure. Mere academic discussion is not sufficient to delete the addition made by the AO by capitalizing the expenses relatable to work-in-progress. Therefore, he opined that there is no error in allocation of other expenses to work-in- progress account and hence, upheld addition made by the AO and dismissed the appeal filed by the assessee. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before us.
None appeared for the assessee. We have heard the Ld.DR and perused the material available on record. The assessee is engaged in the business of development and construction of building. During the year under consideration, it has developed a project and whatever direct expenses incurred on the project has been capitalized to work-in- progress account. The asseassee has debited certain expenditure including MCGM property tax, bad debt written off and other expenses to P&L account. The AO has allowed MCGM property tax and TDR scrutiny fees alongwith bad debt written off, as claimed by the assessee.
In respect of other expenses of Rs.24,74,231, the AO has rejected the explanations of the assessee for allocation of 10% of such expenses to work-in-progress account and re-worked other expenses on the basis of work-in-progress account to total assets and determined disallowance of Rs.11,26,059. Neither, the assessee has furnished any details and 4 ITA 3474/Mum/2017 reasons for allocating adhoc 10% of other expenses to work-in-progress account nor the AO has given any reasons for adopting the basis of capital deployment, i.e. work-in-progress ratio to the total assets’ ratio to allocate other expenses. The assessee as well as the AO has gone on adhoc basis of allocation of expenses. From this, it is clear that neither the assessee has justified treatment of other expenses being revenue in nature, nor the AO has proved that these expenses are directly relatable to the project undertaken by the assessee to be capitalized to work-in- progress account. Therefore, we are of the considered view that neither the assessee has justified its allocation of 10% expenses to work-in- progress nor the AO has justified in allocating the expenditure on the basis of work-in-progress to total asset ratio. Under these circumstances, to resolve the dispute, we are of the considered view that a reasonable percentage of expenditure debited under the head ‘other expenses’ needs to be allocated to work-in-progress account.
Accordingly, we direct the AO to allocate 25% of other expenses of Rs.24,74,231 as directly related to the project to be capitalized under the head ‘work-in-progress account’. We, order accordingly.
In the result, the appeal filed by the assessee is partly allowed.
5 ITA 3474/Mum/2017 Order pronounced in the open court on 03rd October, 2018.