Tribunal dismisses Revenue's appeal on expenses, upholds 1% disallowance rate

The Revenue's appeal challenging the disallowance of expenses for capital work-in-progress was dismissed by the Tribunal, upholding a 1% disallowance rate for employee and administrative expenses. The assessee's appeal against disallowance under section 14A succeeded, with the Tribunal deleting the disallowance for lack of justification. The Tribunal deemed the interest charge under section 234-B as consequential, dismissing the Revenue's appeal and partly allowing the assessee's appeal. The judgment was issued on March 11, 2016, in Ahmedabad.

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Issues Involved:
1. Disallowance of expenses incurred for capital work-in-progress.
2. Disallowance made under section 14A of the Income Tax Act.
3. Charging of interest under section 234-B of the Act.

Issue 1: Disallowance of expenses incurred for capital work-in-progress:

The Revenue's appeal challenged the restriction of the addition made by the Assessing Officer (AO) towards the estimate of expenses incurred for capital work-in-progress. The AO had made an addition of a certain amount on an estimation basis, which was partly allowed by the ld.CIT(A). The Revenue contended that the ld.CIT(A) erred in restricting the addition to 5% instead of 10%. However, the assessee argued that a similar issue was decided in their favor by a Coordinate Bench in a previous case. The Tribunal upheld the decision of the Coordinate Bench, directing the AO to adopt a disallowance rate of 1% for employee cost and administrative expenses, consistent with the previous decision. Consequently, the Revenue's appeal was dismissed.

Issue 2: Disallowance made under section 14A of the Income Tax Act:

The assessee's appeal contested the confirmation of disallowance of expenditure to the extent of 5% and the disallowance made under section 14A of the Act. The Tribunal referred to a previous decision by a Coordinate Bench for AY 2008-09, where a lump sum disallowance of 1% of employee cost and administrative expenses was sustained. The Tribunal nullified the ld.CIT(A)'s order and directed the AO to restrict the disallowance to 1% of employee cost, administrative expenses, and other expenses. Regarding the disallowance under section 14A, the Tribunal found that the AO had not provided sufficient justification for applying Rule 8D of the Income Tax Rules, 1962. Therefore, the disallowance made by the AO was deleted, and this ground of the assessee's appeal was allowed.

Issue 3: Charging of interest under section 234-B of the Act:

The Tribunal noted that the issue of charging interest under section 234-B was consequential in nature and required no separate adjudication. As a result, the appeal of the Revenue was dismissed, while the appeal of the assessee was partly allowed. The judgment was pronounced on March 11, 2016, in Ahmedabad.

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