Built-up area and related expense allocation rules shaped deductions, group payments, interest advances and sales promotion disallowance.

Section 80IB(10) deduction was held allowable for a housing project approved before 1 April 2005, because the 16th floor terrace was not sold as part of the flats and did not form part of the built-up area; only balcony area was treated as included. Payments for business centre and administrative charges to a group concern were found not excessive and the section 40A(2)(b) disallowance was deleted. Indirect expenses were to be apportioned on a work-in-progress basis, not profit basis. Interest disallowance on advances to sister concerns was remanded for verification of sufficient interest-free funds. Sales promotion was allowed subject to a 10% disallowance.

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Issues: (i) Whether deduction under section 80IB(10) could be denied for the project on the footing that the 16th floor terrace formed part of the built-up area and caused the flat size limit to be exceeded; (ii) Whether disallowance under section 40A(2)(b) for business centre and administrative charges paid to a group concern was justified; (iii) Whether indirect expenses were to be apportioned on the basis of profit or work-in-progress; (iv) Whether interest disallowance was warranted where interest-free advances were given to sister concerns; (v) Whether sales promotion expenses were to be disallowed in part.

Issue (i): Whether deduction under section 80IB(10) could be denied for the project on the footing that the 16th floor terrace formed part of the built-up area and caused the flat size limit to be exceeded.

Analysis: The project had been commenced pursuant to a commencement certificate issued before 01.04.2005 and the plans, agreements and architect's certificate showed that the terrace was not sold as part of either flat and was accessible from the common passage and staircase. The terrace was therefore not part of the built-up area of the residential unit, while the balcony area alone could be treated as part of the built-up area. The amended understanding of built-up area was not applied to this earlier approved project.

Conclusion: Deduction under section 80IB(10) was allowable in respect of all flats, including flats Nos. 1602 and 1603; the denial was set aside in favour of the assessee.

Issue (ii): Whether disallowance under section 40A(2)(b) for business centre and administrative charges paid to a group concern was justified.

Analysis: The payments represented reimbursement for facilities maintained centrally for group entities, and the issue had already been accepted in the assessee group's own cases. No material was shown to establish that the expenditure was excessive or not for business purposes.

Conclusion: The disallowance under section 40A(2)(b) was not sustainable and was deleted in favour of the assessee.

Issue (iii): Whether indirect expenses were to be apportioned on the basis of profit or work-in-progress.

Analysis: The method adopted by the Assessing Officer on a profit basis was rejected because it could produce unrealistic results. The better approach, consistent with the earlier tribunal view in the assessee's own case, was allocation on the basis of work-in-progress for the relevant activities.

Conclusion: The apportionment of indirect expenses on a work-in-progress basis was upheld in favour of the assessee.

Issue (iv): Whether interest disallowance was warranted where interest-free advances were given to sister concerns.

Analysis: The assessee had substantial interest-free funds, which were more than the interest-free advances made. In such a situation, the settled presumption is that the advances are out of interest-free funds and not out of borrowed funds, subject to verification of the factual position by the Assessing Officer.

Conclusion: The issue was restored for fresh examination on the availability of interest-free funds, thereby granting the assessee partial relief.

Issue (v): Whether sales promotion expenses were to be disallowed in part.

Analysis: The expenses were incurred for business promotion of the hotel business and were not wholly unverifiable. However, considering the nature of the vouchers and the cash payments, a partial disallowance was called for.

Conclusion: The disallowance was restricted to 10% of the expenses, granting the assessee partial relief.

Final Conclusion: The revenue's appeals failed, the assessee succeeded on the core deduction issue and related disallowance issues, and the matter on interest was sent back for limited fresh verification.

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