2006 (7) TMI 252 - AT - Income Tax

Tribunal Rejects Revenue's Appeal Citing Nil Tax Effect, CBDT Instruction; Upholds Deduction for Project Expenditure.

The ITAT dismissed the Revenue's appeal, citing the nil tax effect and the binding nature of CBDT Instruction No. 1979, which precludes appeals with a tax ... Overhead expenses - Appellate Tribunal - whether the appeal filed by the revenue is maintainable in view of the CBDT Instruction No. 1979, dated 27-3-2000 which states that where the tax effect in an appeal is less than Rs. 1 lakh, then the department should not file any appeal before the Tribunal - HELD THAT:- We find that the CBDT vide Instruction No. 2/2005, issues guidelines to the Revenue authorities with regard to filing of appeal before the Tribunal, High Court and Supreme Court. From the above instruction, it is evident that since 1987, the CBDT is instructing its officers not file the appeal where the tax effect is below certain monetary limits. Vide Instruction No. 1903, the monetary limit was revised upward and the officers were directed not file the appeal before the Income-tax Appellate Tribunal where the tax effect was below Rs. 25,000. The above monetary limit was further revised upward by Instruction No. 1979 and the officers were directed not file the appeal to ITAT where the tax effect is below Rs. 1 lakh. Thereafter in partial modification of the above instruction, the Board vide Instruction No. 2/2005, has further raised the above monetary limit to Rs. 2 lakhs with the same directions. Thus, the CBDT since 1987 has not only taken a consistent approach of instructing its officers for not filing the appeal where the tax effect is below the monetary limit, but such monetary limit is also revised upward from time to time. Thus, we are of the considered opinion that the tax effect in the present year under appeal is less than Rs. 1 lakh following the Instruction No. 1979, the present appeal filed by the Revenue is not maintainable and is required to be dismissed. We do so. In the result, the appeal of the Revenue is dismissed in limine. Issues Involved:1. Whether the assessee engaged in the real estate business and following the project completion method is justified in claiming project expenditure on an accrual basis in the year of incurring, while income is reflected only in the year of completion of the project.2. Whether the appeal filed by the Revenue is maintainable given the CBDT Instruction No. 1979, which states that appeals should not be filed where the tax effect is below Rs. 1 lakh.Detailed Analysis:Issue 1: Claiming Project Expenditure on Accrual BasisThe core question was whether the assessee, engaged in real estate and using the project completion method, could claim project expenditure on an accrual basis in the year incurred, even though income is reflected only upon project completion. The Assessing Officer disallowed a deduction of Rs. 69,84,089 for overhead expenses, arguing that under the mercantile system, such expenses should be included in the project cost and shown as work-in-progress. However, the CIT(A) allowed the deduction, and this decision was contested by the Revenue.Issue 2: Maintainability of the AppealThe maintainability of the Revenue's appeal was questioned based on CBDT Instruction No. 1979, which directs not to file appeals where the tax effect is below Rs. 1 lakh. The assessee argued that since the assessed loss was Rs. (-) 5,74,69,643, the tax effect was nil, and the appeal should be dismissed. The Revenue, however, contended that even in loss cases, the tax effect is not nil because losses can be carried forward and offset against future profits.Tribunal's Decision:On Maintainability of the Appeal:1. Tax Effect Calculation: The Tribunal noted that the tax effect in this case was indeed nil. The disallowed expenditure of Rs. 69,84,089 was added to the income in the assessment year 1997-98, thus nullifying any tax effect for the year under appeal.2. Binding Nature of CBDT Instructions: The Tribunal emphasized that CBDT instructions are binding on the Department. The Tribunal cited various High Court decisions, including the Bombay High Court in Camco Colour Co. and the Delhi High Court, affirming that appeals filed contrary to CBDT instructions should not be admitted.3. Previous Tribunal Decisions: The Tribunal observed that similar issues in preceding and subsequent assessment years had been decided in favor of the assessee and were accepted by the Department, indicating a consistent method of accounting by the assessee.4. Substantial Question of Law: The Tribunal rejected the Revenue's argument that the issue involved a substantial question of law merely because it was referred to a Special Bench. The Tribunal held that the referral to a Special Bench does not automatically imply a substantial question of law.5. Public Policy Consideration: The Tribunal reiterated that the CBDT's instructions are public policy decisions aimed at reducing unnecessary litigation and should be followed.Final Ruling:The Tribunal concluded that the appeal filed by the Revenue was not maintainable due to the nil tax effect and the binding nature of the CBDT Instruction No. 1979. Consequently, the appeal was dismissed in limine.Conclusion:The Tribunal's judgment emphasized adherence to CBDT instructions regarding the filing of appeals and recognized the consistent accounting practices of the assessee. The appeal was dismissed due to the lack of a substantial tax effect and in line with public policy to avoid unnecessary litigation.