Routine establishment Expenses and Interest on Loan taken for General Business Purposes is required to be allowed as Deduction: ITAT sets aside order passed by CIT (A) [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) sets aside the order passed by CIT (A), emphasizing that routine establishment expenses and interest on loans taken for general business purposes must be allowed as deductions.

The assessee was engaged in the business of construction and sale of office spaces. In the earlier years, it had purchased land and proposed to develop a project consisting of five towers, viz., A1, A2, B1, C1 and D1. However, construction was only carried out for Tower D1. The occupancy certificate for Tower D1 was obtained from the Pune Municipality on 19-07-2011. It is noted that all flats within Tower D1 were completed and transferred to buyers during the fiscal year 2011-2012, pertinent to the assessment year 2012-2013.

The AO noticed that the assessee has claimed various expenses to the tune of Rs. 2,35,05,021/- as deduction. In addition, these expenses have been incurred during the financial year relevant to AY 2013-14. Since the assessee had completed construction of Tower D-1 in the preceding year itself, the AO took the view that the above said expenses are not related to the above said project and accordingly disallowed the same.

The assessee furnished break-up details of expenses of Rs.2,35,05,021/- under three heads, viz., Construction expenses, Establishment Expenses and Interest expenses. With regard to the construction expenses, the assessee has submitted that they were incurred in respect of Tower D-1 only and they consisted of either payment of pending bills or expenses incurred towards completion of pending works.

With regard to the Establishment expenses, it was submitted that they are in the nature of day to day expenses incurred in carrying on the business of assessee. It was submitted that the interest expenses are related to the loans borrowed for the purpose of business of the assessee. 

The CIT(A) examined the conveyance deeds of individual buyers of flats and noticed that it contained clauses that the expenses, if any, incurred after handing over of the flat shall be borne by the buyer. Accordingly, the CIT (A) took the view that various construction expenses claimed by the assessee should have been borne by the buyers.

Accordingly, it was held that the additional claim of Rs.2.35 crores made by the assessee is not allowable. He further noticed that these expenses have been incurred on the entire piece of land held by the assessee, while a portion of land only pertained to Tower D1.

Accordingly, the CIT (A) held that these expenses cannot be considered to have been incurred exclusively for Tower D1. Accordingly, he took the view that under “Revenue Cost matching principle”, these expenses cannot be allowed. Accordingly, the CIT (A) upheld the disallowance.

The bench observed that the assessee had acquired land in previous years with plans for constructing five towers. Despite completing construction and selling all flats in Tower D1 in the preceding year, the assessee did not declare any income from the sale of Tower D1 flats during that period. However, the entire income from these transactions was disclosed in the current year, with the assessee providing a credible explanation for this approach. Additionally, it was noted that the AO acknowledged and accepted both the explanation provided by the assessee and the revenue disclosed in the current year.

Furthermore observed that the assessee is maintaining its business establishment and continuing to carry on business activities, then the routine establishment expenses and interest on loan taken for general business purposes is required to be allowed as deduction, there is no requirement to link them to the Tower D1.

Accordingly, the two-member bench comprising Aby T Varkey (Judicial Member) and B.R. Baskaran (Accountant Member), the order passed by the CIT(A) has been overturned, reinstating all issues to the AO’s file for a thorough reevaluation, taking into account any additional evidence presented, and adhering to established principles. Following due process and providing ample opportunity for input, the AO is empowered to make decisions in compliance with the law.

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