2015 (2) TMI 201 - AT - Income Tax

Disallowance of architect the account head describing only the nature of the expense and not its purpose or the activity in relation to which it is incurred we consider 20% of such expenditure to be allocable to WIP toward project overhead cost again on the same parameter as applied to the personnel costs. Further renovation expenses (which is the subject matter of Gd. 1) include Rs. 1.20 lacs paid to a vaastu consultant Sh. Kirti Sheth . The same is toward consultancy for various sites at Mumbai. The said expenditure thus as it appears is not toward renovation (as claimed) and rather relatable to projects located at different sites and would therefore require being considered in proper perspective - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance of architect & engineering fees, tender & survey expenses, and advertisement & sponsorship and brand building expenses.
2. Disallowance of repair and maintenance expenses of a rented premises.
3. Capitalization of general, administrative expenses, including on employee and director remuneration, toward work-in-progress (WIP).
4. Disallowance under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Architect & Engineering Fees, Tender & Survey Expenses, and Advertisement & Sponsorship and Brand Building Expenses:
The first issue pertains to the disallowance of expenses amounting to Rs. 20,57,297/- by treating them as part of the construction work in process. The assessee argued that these expenses were related to redevelopment/construction proposals that did not materialize and thus should be considered as a loss or selling cost, not directly related to any specific project. The Revenue contended that the entire expenditure was related to the assessee's construction business. The Tribunal found that the expenses for architect & engineering fees, tender & survey expenses, and advertisement & sponsorship and brand-building expenses were not directly related to any project and thus should not be capitalized. The assessee's plea was accepted, and Ground 1 was allowed.

2. Disallowance of Repair and Maintenance Expenses of a Rented Premises:
The second issue involved the disallowance of repair and maintenance expenses amounting to Rs. 42.66 lacs for a rented office premises. The assessee claimed that the expenses were incurred to achieve the functional utility of the premises and should be allowed under Section 30(a)(i) of the Act. The Revenue argued that the nature and volume of the expenditure were capital in nature and should be capitalized, eligible for depreciation under Section 32. The Tribunal observed that the expenditure was extensive and aimed at making the premises functional, thus capital in nature. The Tribunal upheld the Revenue's view, dismissing the assessee's Ground 2.

3. Capitalization of General, Administrative Expenses Toward Work-in-Progress (WIP):
The third issue dealt with the capitalization of 80% of general, administrative expenses, including employee and director remuneration, toward WIP. The assessee argued that these expenses were general and administrative in nature and not allocable to any specific project. The Revenue contended that the expenses were predominantly related to the assessee's principal activity of construction, justifying the allocation. The Tribunal held that only costs directly related to a particular project should be capitalized. It was decided that 50% of personnel costs and 20% of other general administrative expenses should be allocated to WIP. The Tribunal provided a detailed method for allocation based on systematic and rational criteria, partly allowing the assessee's Ground 3.

4. Disallowance under Section 14A:
The fourth issue regarding disallowance under Section 14A was not pressed by the assessee at the time of hearing and was accordingly dismissed as not pressed.

Conclusion:
The assessee's appeal was partly allowed. The Tribunal accepted the assessee's plea on the first issue, upheld the Revenue's view on the second issue, provided a balanced approach on the third issue by allowing partial capitalization, and dismissed the fourth issue as it was not pressed.

Order Pronouncement:
The order was pronounced in the open court on February 04, 2015.