The Pr. Commissioner Of Income Tax, Central-2 … v. Samudra Developers Pvt. Ltd. …

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL (IT) NO. 375 OF 2018 The Pr. Commissioner of Income Tax, Central-2… AppellantVersusSamudra Developers Pvt. Ltd.… Respondent Mr. Akhileshwar Sharma a/w Ms. Shilpa Goel for Appellant.None present for Respondent. P.C. : CORAMK. R. SHRIRAM &DR. N. K. GOKHALE, JJ.DATED:30[th] August 2023 1.The following substantial questions of law are proposed : a.Whether on the facts and in the circumstances of thecase an in Law, the Hon’ble ITAI was correct in holding thatexpenses in respect of Sales Support Services andManagement Fee had no direct nexus with the project andwas not subject to proportionate disallowance as perAccounting Standards AS-7? b.Whether on the facts and in the circumstances of thecase and in Law, the Hon’ble ITAT was correct in deleting theproportionate disallowance on account of Sales SupportService and allocation of management fee even though theAssessee was following Project Completion Method ofAccounting (AS-7) and the project was completed upto26.32% and had offered income to the extent of 26.32% buthad claimed these expenses in full? 2.Respondent-Assessee is a builder engaged in the business ofreal estate. Respondent filed its E-Return of Income forAssessment Year 2010-2011 on 15[th] October 2010 declaring anincome of Rs. 1,33,54,562/-. The case was selected for scrutinyand during the course of assessment proceedings, it was found thatRespondent had undertaken construction of a residential project“The Address” at Bandra (East), Mumbai. Respondent had debiteda sum of Rs. 2,75,87,391/- and Rs. 26,40,390/- on account ofSales Support Services and Management Expenses, respectively.The Assessing Officer (“AO”) allowed 26.32% of these debitedamounts because in the opinion of AO, Respondent followedProject Completion Method of accounting and the project wascompleted only upto 26.32%. Accordingly 73.68% of Rs.3,02,27,781/- (Rs. 2,75,87,391/- + Rs. 26,40,390/-) amountingto Rs. 2,22,71,831/- was disallowed and added to the totalincome. Sponsorship fees of Rs. 16,21,061/- and management feesof Rs. 6,08,533/-, the AO treated them as capital expenditure asthe AO felt it was enduring in nature. AO allowed 25%depreciation on the said amounts. Certain further disallowancesand also additions were made by AO and the assessment under Section 143(3) of the Income Tax Act, 1961 (“the Act”) wascompleted on 22[nd] February 2013. 3.Being aggrieved by the said order, Respondent preferred anAppeal before the Commissioner of Income Tax (Appeal)(“CIT(A)”). The CIT(A) allowed the Appeal by an order dated 19[th]August 2013. The CIT(A) directed to delete the entireadditions/disallowances but upheld the disallowance of 25% of thetravelling expenses debited by Respondent in its Profit and LossAccount. 4.The dissatisfied Revenue preferred an Appeal before theIncome Tax Appellate Tribunal (“ITAT”). ITAT dismissed the Appealand upheld the view expressed by the CIT(A). It is this order ofITAT which is impugned in this Appeal. 5.Respondent though served, is absent. The substantialquestions of law proposed are restricted to AO’s stand that only26.32% of the debited amounts of Rs. 2,75,87,391/- + Rs.26,40,390/- = Rs. 3,02,27,781/-, on account of Sales SupportServices and Management Expenses, respectively, is correct because Respondent followed Project Completion Method ofaccounting and had completed the project only upto 26.32%. Thebalance 73.68% of debited amount should be disallowed andadded to the total income. 4.The dissatisfied Revenue preferred an Appeal before theIncome Tax Appellate Tribunal (“ITAT”). ITAT dismissed the Appealand upheld the view expressed by the CIT(A). It is this order ofITAT which is impugned in this Appeal. 5.Respondent though served, is absent. The substantialquestions of law proposed are restricted to AO’s stand that only26.32% of the debited amounts of Rs. 2,75,87,391/- + Rs.26,40,390/- = Rs. 3,02,27,781/-, on account of Sales SupportServices and Management Expenses, respectively, is correct because Respondent followed Project Completion Method ofaccounting and had completed the project only upto 26.32%. Thebalance 73.68% of debited amount should be disallowed andadded to the total income. 6.The CIT(A) after hearing the parties on facts came to aconclusion that these amounts debited had been incurred inrespect of salaries of 23 employees, who were looking after theconstruction work, as also sales and marketing on day to day basisand those expenses were purely revenue in nature. Identicalexpenditure had also been incurred in subsequent AssessmentYears, viz., 2011-2012 and 2012-2013. The CIT(A) came to theconclusion that it was not a one-time expenditure incurred inAssessment Year 2010-2011, which is the year in question or thatthe expenditure incurred would provide Respondent any benefit ofenduring nature. 7.On facts, a conclusion has been arrived at that it wasincurred towards day to day expenditure incurred on project staffand sales team, which was necessary for exhibition or promotion ofa construction project. The CIT(A) held, in view thereof, there was no justification for restricting the expenditure of project to 26.32%only. 8.The ITAT concurred with the view expressed by the CIT(A).Both appellate authorities found that there was no doubt about thegenuineness of the expenses incurred, that expenditure wasincurred for various personnel and that it had direct correlation tothe business of Respondent. Both appellate authorities alsoaccepted that no construction business would run withoutincurring such kind of expenditure. 9.Mr. Sharma, the counsel for Revenue supported the order ofAO and stated that Respondent-Assessee had completed only26.32% of the project and AO had rightly allowed theproportionate expenditure. Mr. Sharma submitted that there wasno justification in deleting the additions made by AO, who hadrightly included the balance expenditure as part of work inprogress. 10.In our view the CIT(A) and ITAT having come to factualfinding that the expenses incurred by the Respondent-Assessee on Digitally signedGITALAXMIby GITALAXMIKRISHNAKRISHNAKOTAWADEKARKOTAWADEKARDate:2023.09.0114:38:38 +0545 salary of the office employees/management fees do not have anydirect nexus with the project and can not be disallowed on theproportionate basis because such expenditure fall in the categoryof expenditure incurred for running of day to day business, nosubstantial question of law arises. 11.In the circumstances, Appeal dismissed. (DR. N. K. GOKHALE, J.) (K. R. SHRIRAM, J.)