ITAT directs proper expense allocation for real estate projects, considers TDR sales. Recalculates deduction under Section 80 IB (10).

The Income Tax Appellate Tribunal (ITAT) partly allowed the appeal by directing the Assessing Officer to allocate common administrative expenses proportionately based on gross revenue, including closing work in progress, for both the Classique and Royal Projects. The ITAT emphasized that Transferable Development Rights (TDR) sales were integral to the real estate business and should be considered in expense allocation. The ITAT also instructed a recalculated deduction under Section 80 IB (10) for the Classique Project, reducing the allocation of expenses to align with the project's actual activities.

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Issues Involved:
1. Allocation of common administrative expenses between different projects.
2. Eligibility of the deduction under Section 80 IB (10) for the Classique Project.

Detailed Analysis:

1. Allocation of Common Administrative Expenses:

The assessee, engaged in real estate development, maintained separate financial records for two projects: Classique and Royal. The Classique Project was completed in a previous year, with only a few flats sold in the current assessment year. The Royal Project did not claim any benefits under Section 80 IB. The assessee claimed a deduction under Section 80 IB (10) for the Classique Project, declaring profits without allocating common administrative expenses to this project.

During the assessment proceedings, the Assessing Officer (AO) observed that the assessee had claimed various common expenditures such as employee costs, professional fees, marketing expenses, and other administrative expenses without allocating them to the Classique Project. The AO estimated that 15% of these common expenses should be attributable to the Classique Project and reduced the deduction under Section 80 IB accordingly.

The Commissioner of Income Tax (Appeals) [CIT(A)] issued an enhancement notice, suggesting that common expenses should be allocated between the Classique and Royal Projects in proportion to their sales, excluding the sale of Transferable Development Rights (TDR). The assessee argued that minimal expenses should be allocated to the Classique Project as the flats were booked years ago and no significant work remained. The CIT(A) rejected this argument and enhanced the disallowance, directing the AO to allocate general expenses proportionately to all projects and increase the work in progress.

Upon appeal, the Income Tax Appellate Tribunal (ITAT) considered the submissions and material on record. It was noted that the assessee's business included construction and sale of flats, as well as the sale of TDR. The ITAT disagreed with the CIT(A)'s view that TDR sales were a sundry activity, asserting that TDR sales were part of the real estate business. The ITAT held that common administrative expenses should be allocated to all activities based on gross revenue, including closing work in progress (WIP).

2. Eligibility of Deduction under Section 80 IB (10):

The assessee claimed a deduction under Section 80 IB (10) for profits from the Classique Project. The AO and CIT(A) had different views on the allocation of common expenses, which affected the deduction amount. The ITAT noted that the Classique Project was completed in a previous year, with only three flats sold in the current year. The ITAT emphasized that only expenses directly related to the project should be considered for deduction purposes, referencing the case of Zandu Pharma.

The ITAT directed the AO to allocate common expenses based on the ratio of gross revenue and closing WIP, ensuring a fair distribution of expenses. The ITAT provided a detailed calculation method, resulting in a reduced allocation of expenses to the Classique Project.

Conclusion:

The ITAT partly allowed the appeal, directing the AO to allocate common expenses proportionately based on gross revenue, including closing WIP, and to rework the deduction under Section 80 IB (10) for the Classique Project accordingly. The order was pronounced in the open court on 08/12/2020.

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