Tribunal favors cost basis over turnover for expense allocation & includes land sale profits in deduction

The Tribunal upheld the CIT(A)'s decision favoring the cost basis over the turnover basis for allocating common expenses for 80IB deduction. The Tribunal also ruled in favor of the assessee regarding the inclusion of profits from the sale of undivided interest in land for deduction u/s 80IB. For the deletion of addition made u/s 14A, the matter was remitted back to the AO to determine actual expenditure incurred. The appeal for AY 2006-07 was dismissed, and for AY 2007-08, it was partly allowed for statistical purposes.

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Issues Involved:
1. Allocation of common expenses for 80IB deduction.
2. Deduction u/s 80IB in respect of profit on sale and development of land.
3. Deletion of addition made u/s 14A in respect of expenditure relating to earning of exempt income.

Summary:

1. Allocation of Common Expenses for 80IB Deduction:

The revenue challenged the CIT(A)'s decision on the allocation of common expenses for 80IB deduction. The AO had allocated overhead expenses based on turnover, while the assessee used the cost incurred during the year. The CIT(A) followed the Tribunal's order for AY 2005-06, which favored the cost basis. The Tribunal upheld the CIT(A)'s decision, stating that the cost/expenditure basis is more reasonable than the turnover basis. Thus, ground nos. 2 and 3 raised by the revenue were dismissed.

2. Deduction u/s 80IB in Respect of Profit on Sale and Development of Land:

The AO excluded profits from the sale of undivided interest in land while computing deduction u/s 80IB for certain projects. The CIT(A), following the Tribunal's order for AY 2005-06, ruled in favor of the assessee, stating that the profits from the sale of undivided interest in land should not be excluded. The Tribunal upheld this decision, dismissing ground no. 4 raised by the revenue.

3. Deletion of Addition Made u/s 14A in Respect of Expenditure Relating to Earning of Exempt Income:

For AY 2007-08, the AO applied Rule 8D and disallowed a sum of Rs. 12,51,750/- as expenditure related to exempt income. The CIT(A) allowed the assessee's appeal, citing the absence of evidence of actual expenditure incurred. The Tribunal noted that Rule 8D applies from AY 2008-09 and remitted the matter back to the AO to determine if any expenditure was incurred in relation to the exempt income, following the Bombay High Court's judgment in Godrej and Boyce Mfg. Co. Ltd. v DCIT. Thus, ground no. 5 was allowed for statistical purposes.

Conclusion:

The appeal for AY 2006-07 was dismissed, while the appeal for AY 2007-08 was partly allowed for statistical purposes.

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