2023 (11) TMI 582 - AT - Income Tax

ITAT Mumbai allows Section 14A deletion, directors' salary, and depreciation on sample flat as revenue expenditure

ITAT Mumbai upheld CIT(A)'s decision favoring the assessee on multiple issues. Section 14A disallowance was deleted as own funds exceeded investments ... Disallowance u/s 14A - AO did not accept the submissions of the assessee that own funds are more than the investments - AO hold that all investments including purchase of shares for gaining control over the investing company to be considered for making disallowance u/s 14A and therefore held that the total current and non-current investments are more than the shareholders funds as of 31.03.2015 as well as 31.03.2016 - HELD THAT:- The submission of the Ld.AR in order to substantiate the claim that assessee’s own funds are more than the investments earning tax free income, with the breakup of own funds and investments to be considered for the purpose of section 14A is extracted in the earlier part of this order. From the perusal of the said details it is clear that the investments made by the assessee are funded out of the own funds of the assessee. It is a settled principle that when the own funds are more than the investments, no disallowance is warranted towards operating cost and therefore, we see no infirmity in the order of CIT(A) deleting the disallowance made under section 8D(2)(ii) read with section 14A. Disallowance u/s 8D(2)(iii) r.w.s. 14A, the Special Bench in the case of Vireet Investments Private Ltd (2017 (6) TMI 1124 - ITAT DELHI) wherein it has been held that only those investments which yielded exempt income during the year are to be considered for computing the average value of investment. Respectfully following the Special Bench decision, we see no merit in the ground raised by the Revenue. MAT computation - Disallowance u/s 14 A of the act cannot be added to the book profit under section 115JB. Disallowance of Director’s Salary & handover facilities - AO did not accept the submissions of the assessee and disallowed 50% of the expenses towards capitalization to the cost of project - CIT(A) held that the directors salary and handover facility expenses are incurred year after year and they are related to the business of the assessee in general and not project specific expenses - HELD THAT:- CIT(A) correctly held that these expenses are neither capital in nature nor deferred revenue expenditure. CIT(A) relied on the decision of the co-ordinate bench in assessee’s sister concern’s case M/s Lodha Palazzo [2014 (12) TMI 1272 - ITAT MUMBAI] and held that director’s salary and handover facility expenses had to be allowed in the year of spending as the same is in the nature of overhead cost not specific to any project. TP Adjustment - ALP of guarantee commission - HELD THAT:- As similar view has been held by the co-ordinate bench in assessee's own case [2023 (5) TMI 153 - ITAT MUMBAI] where the co-ordinate bench upheld guarantee commission @0.3523%. Respectfully following the above decisions of the co-ordinate bench, we do not see any infirmity in the findings given by the CIT(A). Depreciation on sample flat - number of days asset used - assessee submitted that the depreciation @ 50% was claimed during AY 2015-16 since the asset was put to use for less than 180 days and that the balance 50% is claimed during the year consideration - assessee also made an alternate claim before the AO that since the expenses incurred towards sample flat is for the purpose of business the same should be allowed as a deduction under section 37(1) - CIT(A) has allowed the claim stating that the depreciation claim in terms rate etc., can be questioned only in the first year of claim and once allowed in the first year cannot be disturbed in the subsequent year - HELD THAT:- From the perusal of the assessment order we notice that the assessing officer has not disputed the fact that the sample flat is a temporary structure since the AO himself is holding that the gestation period is four years based on the assessee's submission that the sample flat is demolished in 2020. Taking note of the fact that temporary structures are entitled to depreciation at the rate of 100% as per the depreciation rates under Income-tax Rules, 1962, as per rule 5, Appendix-I, and considering the fact that the structure being temporary not controverted by the Revenue, we see no infirmity in the claim of the assessee to the entire amount of expenditure on construction of temporary flat as sample flat is eligible for depreciation at 100% . Further the revenue has allowed the claim of 50% of the depreciation claimed by the assessee in the first year when the sample flat was put use for less than 180 days and nothing has been brought on record to show that the said claim is disputed by the revenue. Considering the facts that the revenue has not disputed the fact that the sample flat is a temporary structure and no contrary findings being brought on record in present case we hold that the assessee's claim of 50% of the cost of construction for the year under consideration be allowed. The disallowance made in this regard is deleted. Capitalization of foreign exchange loss to work-in-progress - HELD THAT:- As relying on own case [2023 (5) TMI 153 - ITAT MUMBAI] we hold that the foreign exchange loss cannot be included in the cost of project and accordingly should be allowed as a deduction. The accounting treatment of the assessee is supported by the authoritative pronouncement of the Institute of chartered accountants of India as well as the Ministry of corporate affairs. In view of this, we do not find any substance in the findings of the lower authority that foreign exchange loss on purchase of material should be included in the cost of project. Accordingly, the foreign exchange loss incurred by the assessee is revenue expenditure and cannot be included in the cost of project - The ground of the revenue in this regard is rejected. Issues Involved:1. Disallowance under section 14A2. Disallowance under section 14A while computing book profit u/s 115JB3. Disallowance of Director's salary and handover facility expenses4. Transfer Pricing (TP) Adjustment of Guarantee Commission5. Disallowance of depreciation on sample flat6. Capitalization of foreign exchange loss to work in progressSummary:Disallowance under section 14A:The Assessing Officer (AO) disallowed expenses under section 14A related to exempt income, which the CIT(A) deleted, citing sufficient own funds. The Tribunal upheld the CIT(A)'s decision, noting that the investments were funded from the assessee's own funds, and disallowance under rule 8D(2)(ii) was unwarranted. The Tribunal also agreed with CIT(A) on recalculating disallowance under rule 8D(2)(iii) and excluding section 14A disallowance from book profits under section 115JB, following judicial precedents.Disallowance under section 14A while computing book profit u/s 115JB:The CIT(A) held that disallowance under section 14A cannot be added to book profits under section 115JB, following various judicial precedents. The Tribunal upheld this, referencing the Special Bench decision in Vireet Investments Private Limited and the assessee's own case in previous years.Disallowance of Director's salary and handover facility expenses:The AO capitalized 50% of director's salary and handover facility expenses to the cost of the project, which the CIT(A) reversed, stating these were general business expenses. The Tribunal upheld the CIT(A)'s decision, referencing similar decisions in the assessee's sister concerns.Transfer Pricing (TP) Adjustment of Guarantee Commission:The AO made a TP adjustment by applying a 1.25% guarantee commission rate, which the CIT(A) reduced to 0.3523%, following the interest saving approach. The Tribunal upheld the CIT(A)'s decision, referencing consistent rulings in the assessee's own case and other judicial precedents that supported the lower rate.Disallowance of depreciation on sample flat:The AO allowed only 25% depreciation on a sample flat, treating it as a temporary structure, while the CIT(A) allowed 100% depreciation, noting it was a temporary structure eligible for full depreciation. The Tribunal upheld the CIT(A)'s decision, affirming that the structure was temporary and depreciation should be allowed as claimed.Capitalization of foreign exchange loss to work in progress:The AO capitalized foreign exchange loss to the cost of construction, which the CIT(A) reversed, citing the Supreme Court decision in Woodward Governor (I.) Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, noting that foreign exchange loss on purchase of materials should be treated as revenue expenditure, not capitalized.Conclusion:Both appeals (I.T.A. No.2382/Mum/2022 and I.T.A. No.2383/Mum/2022) were dismissed, with the Tribunal upholding the CIT(A)'s decisions on all grounds.