2013 (4) TMI 969 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of deduction u/s 80IA.
2. Disallowance of Mission Reach Project expenditure.
3. Disallowance of interest not charged on security deposits u/s 36(1)(iii).
4. Disallowance of sales promotion expenses.
5. Reduction of deduction u/s 80IA(4) by loss from operation and maintenance activities.
6. Disallowance of labor charges u/s 40A(2)(b).
7. Levy of penalty u/s 271(1)(c).

Summary:

1. Disallowance of Deduction u/s 80IA:
The assessee claimed deductions u/s 80IA for multiple AYs, which were disallowed by the AO on the grounds that the assessee did not "own" the infrastructure facility and was merely a "contractor." The CIT(A) upheld this view. However, the ITAT referred to previous rulings, including the case of Patel Engineering Ltd., and concluded that the assessee qualifies as a "developer" and thus is entitled to the deduction u/s 80IA(4). The ITAT also noted that the infrastructure facility need not be owned by the assessee, aligning with the decision in ABG Heavy Industries Ltd. Consequently, the assessee's claim for deduction was allowed.

2. Disallowance of Mission Reach Project Expenditure:
The AO disallowed the expenditure on the Mission Reach Project, noting it was not directly related to the business of the assessee. The CIT(A) upheld this decision. The ITAT agreed, stating the expenditure was for an educational institution and not connected to the business activity, thus not allowable u/s 37(1).

3. Disallowance of Interest Not Charged on Security Deposits u/s 36(1)(iii):
The AO disallowed interest on advances to Directors, considering it as a diversion of funds for non-business purposes. The CIT(A) upheld this view. The ITAT reversed this, citing that the assessee had sufficient reserves and surpluses, and following the precedent set by Reliance Utilities and Power Ltd., the interest-free funds were presumed to be used for the advances. Thus, the disallowance was deleted.

4. Disallowance of Sales Promotion Expenses:
The AO disallowed Rs. 12,50,000/- claimed as sales promotion expenses, considering it a donation to Surat Municipal Corporation. The CIT(A) upheld this. The ITAT allowed the claim, noting the expenditure was connected to the business and aimed at establishing goodwill and business relationships, thus allowable u/s 37(1).

5. Reduction of Deduction u/s 80IA(4) by Loss from Operation and Maintenance Activities:
The AO reduced the deduction u/s 80IA(4) by the loss incurred in one of the infrastructure projects. The ITAT upheld this, stating the provisions of section 80IA(4) require the computation of net income, including any losses from the projects.

6. Disallowance of Labor Charges u/s 40A(2)(b):
The AO disallowed 10% of the labor charges paid to a related party, considering it excessive. The CIT(A) reversed this, stating the AO did not provide comparable instances to justify the disallowance. The ITAT upheld the CIT(A)'s decision, noting the genuineness of the expenditure was not doubted, and there was no motive to divert income as the assessee was entitled to 100% deduction u/s 80IA(4).

7. Levy of Penalty u/s 271(1)(c):
Penalties were levied on the disallowance of deduction u/s 80IA(4) and Mission Reach expenditure. The ITAT deleted the penalties, noting the deduction u/s 80IA(4) was allowed, and the disallowance of Mission Reach expenditure was due to a difference of opinion, not concealment or furnishing inaccurate particulars.

Final Outcome:
The assessee's appeals for AYs 2005-06, 2006-07, 2007-08, and 2009-10 were partly allowed. The Revenue's appeals for AYs 2005-06, 2006-07, and 2007-08 were dismissed. The penalty appeals filed by the assessee for AYs 2005-06, 2006-07, and 2007-08 were allowed.