2016 (7) TMI 1285 - AT - Income Tax

Appeal partially allowed: Expenses disallowed for solar project, allowed for township project. Income addition deleted.

Pratham Reality Pvt. Ltd. Versus ACIT, Cir. 4, Vadodara

Pratham Reality Pvt. Ltd. Versus ACIT, Cir. 4, Vadodara - TMI Issues Involved:1. Disallowance of expenses incurred on a solar power project.2. Disallowance of expenses incurred for the Ahmedabad Township Project.3. Disallowance of administrative and statutory expenses.4. Addition made by enhancing the income of the assessee.Issue-wise Detailed Analysis:1. Disallowance of Expenses Incurred on a Solar Power Project:The first grievance of the assessee pertains to the disallowance of Rs. 2,60,507/- incurred on a solar power project. The CIT(A) confirmed this disallowance, treating the expenditure as capital in nature since it was for a new line of business that did not materialize. The CIT(A) relied on the decision of the Gujarat High Court in Saurashtra Cement and Chemical Industries Ltd., where expenditure for acquiring a new asset was deemed capital in nature. The assessee contended that the expenditure should be allowed as revenue expenditure, arguing that constructing a power plant was within the main objects of its Memorandum of Association (MOA). However, the Tribunal concurred with the CIT(A), rejecting the appeal on this ground, as the construction of a power plant was not related to the assessee's existing business of civil construction.2. Disallowance of Expenses Incurred for the Ahmedabad Township Project:The next grievance involved the disallowance of Rs. 14,72,347/- for the Ahmedabad Township Project. The CIT(A) treated this as a capital expenditure for a new project that did not materialize. However, the Tribunal found that the assessee was in the business of development and construction, and the expenditure was in line with its existing business activities. Section 37 of the Income Tax Act allows deduction of expenses wholly and exclusively for business purposes, provided they are not capital or personal in nature. The Tribunal allowed this ground, deleting the disallowance, as the expenditure was deemed to be in the line of the assessee’s existing business.3. Disallowance of Administrative and Statutory Expenses:The assessee challenged the disallowance of Rs. 82,426/- and Rs. 1,99,111/- on administrative and statutory expenses under section 14A. However, the assessee's counsel did not press this ground of appeal. Consequently, these additions were confirmed.4. Addition Made by Enhancing the Income of the Assessee:The final grievance was the CIT(A)'s addition of Rs. 1,30,36,783/- by enhancing the income of the assessee. The assessee, a partner in four firms, had availed loans and advanced them to M/s. Pratham Dosti Realty, earning interest of Rs. 1,30,55,413/-. The CIT(A) disallowed the interest expenditure, attributing it to earning tax-free income from other firms. The Tribunal found that the amendment to the partnership deed of M/s. Pratham Dosti Realty, effective from 1.4.2010, authorized partners to receive interest on loans provided to the firm. The CIT(A) failed to consider this amendment, leading to an erroneous conclusion. The Tribunal allowed this ground, deleting the addition of Rs. 1,30,36,783/-, as the interest expenditure was incurred to earn taxable interest income from the partnership firm.Conclusion:The appeal of the assessee was partly allowed. The Tribunal upheld the disallowance of expenses on the solar power project but allowed the expenses for the Ahmedabad Township Project and deleted the addition of Rs. 1,30,36,783/-. The disallowance of administrative and statutory expenses was confirmed as the assessee did not press this ground. The order was pronounced on 12th July 2016 at Ahmedabad.