2016 (7) TMI 1285 - AT - Income Tax

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

The Tribunal partly allowed the appeal, upholding the disallowance of expenses on the solar power project but allowing the expenses for the Ahmedabad ... Disallowance of expenses incurred on solar power project - Held that:- We have perused the Memorandum of Association available at page no.121 onwards of the paper books. As far as the contention of the ld.counsel for the assessee that construction of power plant or its maintenance is being provided in the main object is concerned, according to our mind, it is not related to power plant and related to civil construction work. This aspect was also otherwise not considered by the AO in the assessment order nor it is discernible. Considering the smallness of the issue, we deem it not necessary to set aside the issue, and we concur with the finding of this ld.CIT(A). This ground of appeal is rejected. Disallowance of incurred for a new project namely, Ahmedabad Township Office Project - Held that:- It is in the line of the assessee’s existing business, which cannot be treated as a separate individual and new business for which expenditure has been incurred, which deserves to be capitalized. The ld.CIT(A) has not appreciated the facts in right perspective. Section 37 of the income Tax Act contemplates that if an assessee incurs any expenditure, which is not of the nature described in section 30 to 36, not being in the nature of capital expenditure or personal expenditure, and it was laid out wholly and exclusively for the purpose of business then, it is to be allowed. The expression “wholly” refers to the quantum and “exclusively” refers to object/motive. Now in the present case, assessee is in the real estate development business. It has incurred this expenditure to fulfill its requirement in this line. Therefore, the expenses could not be disallowed. We allow this ground and delete the disallowance. Enhancement to the income of the assessee - Held that:- The ld.CIT(A) failed to take cognizance of the amendment made to the partnership deed. Non-consideration of this amendment had led the ld.CIT(A) to observe that the assessee had made capital contribution to other firm also, where the assessee is a partner. It is pertinent to mention here that the case of the assessee is that it has taken from loan from two concerns, whenever it has an idle fund, these were being used by other concerns also. But specifically, ultimately the loans travelled to M/s.Pratham Dosti Realty and that firm has recognized its obligation to pay interest as per the amendment made to the partnership deed. The assessee has demonstrated as to how interest bearing funds were provided to a firm where it is a partner. It has also demonstrated that interest was given to the assessee by the firm as provided in the partnership deed. The ld.First Appellate Authority has created an artificial distinction about the user of interest bearing funds. It was construed by the ld.CIT(A) that the interest bearing funds were used by the assessee as a capital contribution in other three firms from where share of profit would be tax free. The ld.CIT(A) failed to consider that if payment of interest on capital of partners is being provided in the partnership deed that interest income would not be exempt from tax, and section 14 will not be applicable. In the present case, assessee has demonstrated that interest expenditure was incurred on earning interest income from the partnership firm. 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.