Tribunal rules on disallowance & profits in appeal, directs reassessment of fees.

The Tribunal partially allowed the Revenue's appeal, reinstating the Assessing Officer's orders on the disallowance under Section 14A and the addition of profits on the sale of plots. The Tribunal directed the CIT(A) to reassess the disallowance of Professional/Consultancy/Survey fees, emphasizing that expenses should be related to the current year and genuine business expenses only should be allowed.

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Issues Involved:
1. Deletion of disallowance made under Section 14A.
2. Deletion of disallowance of Professional/Consultancy/Survey fees.
3. Deletion of addition on account of profits on sale of plots.

Detailed Analysis:

1. Deletion of Disallowance Made Under Section 14A:
The Revenue contested the deletion of a Rs. 21.69 lakh disallowance made under Section 14A of the Income-tax Act, in accordance with Rule 8D of Income-tax Rules. The Assessing Officer (AO) noted that the Assessee had invested in shares, the dividend income from which is exempt from tax. The AO found that the Assessee used Rs. 79.3 lakhs from a bank overdraft for purchasing shares and computed a proportionate interest of Rs. 6,20,924/-. Additionally, the AO noted that the interest paid included Rs. 73,00,131/- paid as interest to partners on their capital. Since the Assessee did not provide evidence to show that the capital on which interest was paid was not used for purchasing shares, the AO applied Rule 8D to disallow Rs. 23,22,638/-. The CIT(A) reduced this disallowance to Rs. 1,53,662/-. However, the Tribunal found no material to support the CIT(A)'s finding that surplus funds were used for investment and restored the AO's disallowance, setting aside the CIT(A)'s order.

2. Deletion of Disallowance of Professional/Consultancy/Survey Fees:
The AO disallowed Rs. 17,59,743/- debited under "Professional/Consultancy/Survey fees," noting these expenses were related to projects in progress and should be capitalized. The CIT(A) deleted the disallowance, accepting the Assessee's claim that these fees included payments for legal and taxation advice unrelated to work in progress. The Tribunal disagreed with the CIT(A), emphasizing that expenses should be allowed based on the provisions of the Income Tax Act and must be related to the current year. The Tribunal directed the CIT(A) to re-examine the issue, determine the extent to which these expenses relate to the current year versus work in progress, and ensure only genuine business expenses are allowed.

3. Deletion of Addition on Account of Profits on Sale of Plots:
The AO added Rs. 2,22,47,248/- to the Assessee's income, noting that the Assessee completed the development of plots by 31.3.2009 and received 70-80% of the sale proceeds but did not show these proceeds in the profit and loss account. The CIT(A) deleted the addition, interpreting the AO's action as changing the method from project completion to percentage completion. The Tribunal found that the Assessee's method of recognizing revenue only upon registration of the sale deed was not in accordance with the mercantile system or project completion method. The Tribunal noted that the Assessee did not recognize revenue based on project completion, despite completing the development work. The Tribunal restored the AO's order, stating that the Assessee's method did not comply with Section 145 of the Income Tax Act, which mandates following either cash or mercantile system of accounting.

Conclusion:
The Tribunal allowed the Revenue's appeal partly for statistical purposes, restoring the AO's orders on the disallowance under Section 14A and the addition on account of profits on sale of plots, while directing the CIT(A) to re-examine the disallowance of Professional/Consultancy/Survey fees.

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