2022 (1) TMI 925 - AT - Income Tax

ITAT Ahmedabad upholds CIT(A) decisions on WIP profit estimation & sec 14A disallowance (A)

DCIT, Cent. Cir. 1 (1) Ahmedabad. Versus M/s. Navratna Organizers & Developers P. Ltd.

The ITAT Ahmedabad dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on the estimation of profit on work-in-progress and the disallowance ... Estimation of profit @8% of the work-in-progress - HELD THAT:- We find that Co-ordinate bench of the Tribunal in the assessee’s own case [2009 (9) TMI 1060 - ITAT AHMEDABAD] and [2019 (1) TMI 1953 - ITAT AHMEDABAD]has examined and discussed at length issue of estimation of net profit at the rate of 8% on the alleged work-in-progress, and came to the conclusion that the assessee was a developer, and the WIP did not belong to it. The assessee is consistently following mercantile system of accounting, where receipts in the form of development fees have been recognized on completion of project. The ld.AO without any basis construed that WIP belonged to the assessee, Accordingly, the Tribunal confirmed claim of the assessee. CIT(A) has reproduced order of the Tribunal in entirety for appreciating the facts in right perspective. In view of this fact, there is no reason for us to deviate from the findings of the ld.CIT(A) based on findings of the ITAT in the assessee’s own case cited (supra), and therefore, which we uphold and confirm deletion of additions on account of estimation of work-in-progress for both the years. Thus, ground no.1 of both appeals of the Revenue stand rejected. Addition u/s 14A read with Rule 8D - disallowance of interest expenses - assessee explained that the investment was made out of interest free funds available with the assessee, and therefore, no expenditure was incurred by the assessee towards investment for making such investment which yielded exempt income - HELD THAT:- .AO in making disallowance under section 14A read with Rule 8D was not justified in view of the fact that the assessee has demonstrated that it has sufficient funds for making investment which yielded exempt income. As per the figures demonstrated by the assessee, assessee’s interest free funds far exceeded investment made for earning exempt, against which, there is no material with the Department to establish that borrowed funds were utilized by the assessee for the impugned investment. The ld.CIT(A) in the impugned order noticed that the assessee had sufficient interest free funds in excess of investment made for earning tax free income. After examining the explanation of the assessee and based on decision of the Tribunal in assessee’s own case for the Asstt.Year 2011-12 cited (supra), the ld.CIT(A) deleted the interest portion of the disallowance and the balance amount was sustained. We do not find any infirmity in the order of the ld.CIT(A) on this issue, which accordingly confirmed, and this ground of the Revenue stands dismissed. Issues:1. Estimation of profit on work-in-progress for assessment years 2005-06 and 2013-14.2. Disallowance under section 14A of the Act for assessment year 2013-14.Estimation of Profit on Work-in-Progress:The Revenue appealed against the deletion of additions totaling &8377; 3,68,66,552/- for 2005-06 and &8377; 7,03,93,962/- for 2013-14, made based on estimation of profit at 8% of work-in-progress. The Assessing Officer (AO) contended that the assessee, a developer, should have followed the percentage completion method for income assessment. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim of the assessee, citing previous ITAT orders. The ITAT upheld the CIT(A)'s decision, emphasizing that the WIP did not belong to the assessee, who followed the mercantile system of accounting. The Tribunal rejected the Revenue's appeal, confirming the deletion of the additions for both years.Disallowance under Section 14A for 2013-14:The AO disallowed &8377; 4,44,107/- under section 14A as the assessee made investments yielding tax-exempt income, suspecting they were funded by borrowed funds. The CIT(A) deleted &8377; 3,06,946/- of the disallowance, citing the assessee's demonstration of sufficient interest-free funds for investments. The Revenue appealed against the deletion of the interest component. The Tribunal upheld the CIT(A)'s decision, noting the surplus interest-free funds exceeding investments for tax-free income, with no evidence of borrowed funds used. The Tribunal dismissed the Revenue's appeal, confirming the deletion of the interest portion of the disallowance.In conclusion, the ITAT Ahmedabad dismissed both appeals of the Revenue, upholding the CIT(A)'s decisions on the estimation of profit on work-in-progress and the disallowance under section 14A for the relevant assessment years. The Tribunal's detailed analysis considered the accounting methods, previous ITAT orders, and the sufficiency of interest-free funds for investments, leading to the rejection of the Revenue's contentions in both issues.