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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the Revenue challenging the impugned order dated 01/03/2023, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)-48, Mumbai [“learned CIT(A)”], for the assessment year 2014-15.
In this appeal, the Revenue has raised the following ground:-
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred by deleting the disallowances made by the AO without appreciating that such expenses (Interest Cost, Selling & Marketing Expenses, Other expenses) should have been allowed only to the extent attributable to the revenue offered and the rest amount capitalized to the Work-in-progress.”
Keystone Realtors Pvt. Ltd. ITA no.1845/Mum./2023
The only dispute raised by the Revenue is against deletion of disallowance on account of interest, selling and marketing expenses, and other expenses.
The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of constructing, purchasing, acquiring, hiring, operating, managing, and developing land of any real estate and personal estate property on ownership basis or on Built Own Lease and Transfer basis. For the year under consideration, the assessee filed its return of income on 27/09/2014, declaring a loss of Rs.3,13,82,352. The assessee subsequently revised the return of income on 17/10/2015, declaring a loss of Rs.3,13,82,352. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. In response to the same, the assessee filed basic details such as a copy of the return, audit report, profit and loss account, balance sheet, and accompanying enclosures. During the assessment proceedings, it was observed that the assessee has shown capital work in progress (WIP) of Rs.4,48,68,14,710 as on 31/03/2014, and the same includes addition to WIP of Rs.1,34,04,15,631. During the assessment proceedings, the assessee was asked to furnish the details of Capital WIP. On perusal of the written submission filed by the assessee, it was observed that selling and marketing expenses of Rs.56,93,031, interest of Rs.15,75,55,429, and other expenses of Rs.59,28,330, have not been included in the WIP. It was further observed that the said expenses have been debited to the profit and loss account and claimed as Revenue expenditure. Accordingly, the Keystone Realtors Pvt. Ltd. ITA no.1845/Mum./2023 assessee was asked to show cause as to why the aforesaid expenses should not be disallowed and transferred to Capital WIP. In response thereto, the assessee submitted that it has capitalised expenses that are directly related to the project and the expenses which could not be capitalised have been debited to the profit and loss account. The assessee further submitted that it has received interest income of Rs.13,76,81,591, against which it has claimed interest expenditure to the extent of Rs.1,38,73,523. The assessee further submitted that the selling and marketing expenses and other cost relates to the regular office administrative and selling expenses pertains to day-to-day business activities and does not directly relate to any project of the company. Accordingly, such expenses do not form part of the construction cost or the work in progress.
The Assessing Officer (“AO”) vide order dated 24/12/2016, passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that inspite of several opportunities, the assessee has not submitted the details of interest expenditure based on the projects and completion of the individual project. The AO further held that the finance cost has a direct nexus with the specific projects and once the interest is attributable to the project, the same is allowable as business expenditure in the ratio of revenue offered from the project. As regards selling and marketing expenses and other expenses, the AO held that since these expenses are directly attributable to projects, the same are allowable to be debited to the cost of construction and to be allowed in the proportion of revenue recognised from the project. In the absence of a project-wise breakup of the above expenses and details of the Keystone Realtors Pvt. Ltd. ITA no.1845/Mum./2023 ratio in which revenue has been offered to tax and WIP at the end of the year, the AO transferred the aforesaid expenditure aggregating to Rs.16,91,76,790, to the Capital work in progress and added the same to the income of the assessee.
The learned CIT(A), vide impugned order, allowed the appeal filed by the assessee following the decision of its predecessor in the case of Rustomjee Evershine JV for the assessment year 2014-15. The relevant findings of the learned CIT(A), in the impugned order, are reproduced as under:-
“DECISION “6. I have carefully perused the fact of the case, the submission of the appellant and the order of the Assessing Officer. It is observed that identical issue came for consideration in the case of Rustomjee Evershine JV in A.Y.2014-15 (Appeal No. CIT(A)-48, Mumbai/10440, 10726 & 10225/2016-17, 2017-18 & 2018-19). Vide order dated 10.05.2022, the undersigned on this issue has followed earlier years' decision in the group cases, in the following manner - "5.7 Identical issue came for consideration before my predecessor Ld. CIT(A) in the case of one of the group concerns, M/s Kapstone Construction Private Limited for AY 2013-14 and 2014-15. In AY 2013- 14, vide order dated 07.07.2020, it is held that: “6.7 I have examined the facts of the case and the contention of the assessee. At the outset I would like to clarify that there are no doubts about the genuineness of interest expenditure, which has been paid to the financial institutions on borrowed funds. The issue is only apportioning the interest in ratio of percentage of projects completed, in view of accounting standard AS- 16. I also agree with the assessee that interest income of Rs. 22,36,89,787/- has been offered in the Profit and loss account, which is from short term deployment of the borrowed funds and therefore net interest of only Rs. 47,25,20,568/- stands debited in the account. Now we have to only see as to how much out of this interest is allowable and how much should be taken to closing WIP. I have gone through the working shown by the assesse in the table in foregoing paras and agree with the working in respect of projects Accura CD, Atelier and Accura ABE, where in interest has been claimed only in the ratio of percentage of project completed. Further I also agree with the working in respect of corporate office interest, which is in respect of the business as a whole and can not be attributed to a particular project and therefore should be allowed infull. However I am unable to agree in respect of project Lanward, Landward TMC and HDH Project. Since the works of these projects had not started and no revenue as such has been offered, in my Page | 4
Keystone Realtors Pvt. Ltd. ITA no.1845/Mum./2023 considered view entire interest in respect of these projects is to be taken to closing WIP. This issue has been examined by me in the case of the assessee for A.Y 2013-14 and the facts of the present case are identical. Now the eligible interest would work out to Rs. 43,46,59,203-1,79,130/- – 39,38,583/- – 27,33,842/- = 42,78,07,648/-, as per table below:
Proportionate %age of Revenue Finance Cost Net finance Interest project Allowable Project Recognized Debited to P&L cost debited to income offered complet interest during the year A/c P&L account to tax ed Acura CD 47,00,82,036 7,16,24,012 2,30,12,528 4,86,11,484 74.25 3,60,94,027 Atelier 50,20,04,311 8,05,52,487 2,58,81,213 5,46,71,274 58.80 3,05,06,571 Acura ABE 12,83,56,314 77,18,508 24,79,928 52,38,580 77.49 40,59,376 Athena 5,91,23,491 2,23,08,812 71,67,738 1,51,41,074 – 1,51,41,074 (Completed) Astrea – 24,70,362 7,93,718 16,76,644 – 16,76,644 (Completed) Corporate – 50,14,41,113 16,11,11,157 34,03,29,956 – 34,03,29,956 KCPL Landward – 2,63,930 84,800 1,79,130 – – Landward – 58,03,096 18,64,513 39,38,583 – – TMC Handover Urbania Infra – – – – – – Health & – – – – – – Commercial Azziano – – – – – – School HDH – 40,28,035 12,94,193 27,33,842 – Azziano ABC 85,45,47,689 – – – – – Total 2,01,41,13,8 69,62,10,355 22,36,89,787 47,25,20,568 427807648 40
6.8 Therefore the amount of interest to be disallowed works out to Rs. 4,47,12,920 (47,25,20,568/--42,78,07,648/-), which is confirmed and rest of the expenditure is allowed, following my own order in the case of the assesse for A.Y. 2014-15. The AO is directed to do the same. 6.9 The ld.AR in this regard also relied upon various decisions of my ld. Predecessors, which are discussed as below:- 6.10. The CIT(A) 36, vide order dated 28.02.2017 in case of M/s. Rustomjee Buildcon Pvt. Ltd., A.Y. 2012-13 in the identical circumstances allowed the claim of the assesse in nature of interest by observing as under "I have carefully considered the submissions of the appellant vis-à-vis assessment order. On perusal of the same, I find that the A.O. has disallowed expenses amounting to Rs.4,97,38,505/- by holding that the same are require to be added to the WIP of the Project. On the other hand, I find that the Appellant is following Percentage Completion Method for purpose of Accounting. It is further contended by the Appellant that the Project is on the verge of completion and therefore adding the impugned expenses to the WIP would not be Justified in such circumstances. In fact, the Appellant vehemently contended that the Accounting Standard of ICAI supports their case. The Appellant further submitted that in such a scenario that the administrative Page | 5
Keystone Realtors Pvt. Ltd. ITA no.1845/Mum./2023 expenses need to be charged off to Profit & Loss Account. I also find that the Appellant submitted guidance note on completion method issued by ICAI while presenting their case during proceedings. Apart from this, the Appellant also submitted the breakup of Revenue recognized for 4 years, sample copies of invoices, break up of costs for 4 years, value of sale deeds executed and documents to support expenses. However, the A.O. reiterated his earlier stand in remand proceedings as well. I have also perused detailed submissions dated 29.11.2016 and find that the treatment given by the Appellant is in conformity with the AS 7 & AS 16. 1, therefore, find that the disallowance made by the A.O. is against the said Accounting Standards. Moreover, the documentary evidences produced during the Remand Proceedings also advanced the case of the Appellant. After considering stage of completion, facts of the case and the case laws relied upon by the Appellant, all favoring the treatment adopted by the Appellant for Construction Accounting. Moreover, by capitalization there is no loss or profit to the Revenue. Accordingly, the disallowance made by the A.O. of Rs.4,97,38,505/- is deleted." 6.11 Similarly the Commissioner of Income Tax(Appeals)-18, Mumbai vide order dated 28.06.2017 allowed an identical claim of the assesse in nature of interest, in the case of M/s. Rustomjee Realty Pvt. Ltd., for A.Y 2013-14, held as under: "I have carefully considered the submissions of the appellant vis-à-vis assessment order. On perusal of the same, I find that the A.O. has disallowed expenses amounting to Rs.19,23,77,680/- by holding that the same are require to be added to the WIP of the Project. On the other hand, I find that the Appellant is following Percentage Completion Method for purpose of Accounting. It is further contended by the Appellant that the Project is on the verge of completion and therefore adding the impugned expenses to the WIP would not be justified in such circumstances. In fact, the Appellant vehemently contended that the Accounting Standard of ICAI supports their case. The Appellant further submitted that in such a scenario that the administrative expenses need to be charged off to Profit & Loss Account. I also find that the Appellant submitted guidance note on completion method issued by ICAI while presenting their case during proceedings. Apart from this, the Appellant also submitted the breakup of Revenue recognized for 4 years, sample copies of invoices, break up of costs for 4 years, value of sale deeds executed and documents to support expenses. However, the A.O. reiterated his earlier stand in remand proceedings as well. I have also perused detailed submissions dated 23.05.2017 and find that the treatment given by the Appellant is in conformity with the AS 7 & AS 16. I, therefore, find that the disallowance made by the A.O. is against the said Accounting Standards. Moreover, the documentary evidences produced during the Remand Proceedings also advanced the case of the Appellant. After considering stage of completion, facts of the case and the case laws relied upon by the Appellant, all favouring the treatment adopted by the Appellant for Construction Accounting. Moreover, by capitalization there is no loss or profit to the Revenue. Accouringly, the disallowance made by the A.O. of Rs.19,23,77,680/- is deleted." Page | 6
Keystone Realtors Pvt. Ltd. ITA no.1845/Mum./2023 6.12 Similar decision has been rendered by the ld. Commissioner of Income Tax(Appeals)-18, Mumbai vide order dated 28.02.2017 in case of M/s. Rustomjee Realty Pvt. Ltd., A.Y 2012-13 and allowed the claim of the asseessee towards interest in identical circumstances, by observing as under: "I have carefully considered the submissions of the appellant vis-à-vis assessment order. On perusal of the same, I find that the A.O. has disallowed expenses amounting to Rs.3,10,97,295/- by holding that the same are require to be added to the WIP of the Project. On the other hand, I find that the Appellant is following Percentage Completion Method for purpose of Accounting. It is further contended by the Appellant that the Project is on the verge of completion and therefore adding the impugned expenses to the WIP would not be justified in such circumstances. In fact, the Appellant vehemently contended that the Accounting Standard of ICAI supports their case. The Appellant further submitted that in such a scenario that the administrative expenses need to be charged off to Profit & Loss Account. I also find that the Appellant submitted guidance note on completion method issued by ICAI while presenting their case during proceedings. Apart from this, the Appellant also submitted the breakup of Revenue recognized for 4 years, sample copies of invoices, break up of costs for 4 years, value of sale deeds executed and documents to support expenses. However, the A.O. reiterated his earlier stand in remand proceedings as well. I have also perused detailed submissions dated 24.11.2016 and find that the treatment given by the Appellant is in conformity with the AS 7 & AS 16. I, therefore, find that the disallowance made by the A.O. is against the said Accounting Standards. Moreover, the documentary evidences produced during the Remand Proceedings also advanced the case of the Appellant. After considering stage of completion, facts of the case and the case laws relied upon by the Appellant, all favouring the treatment adopted by the Appellant for Construction Accounting. Moreover, by capitalization there is no loss or profit to the Revenue. Accordingly, the disallowance made by the A.O. of Rs.3,10,97,295/- is deleted." 6.14 Accordingly, out of the disallowance of Rs. 69,61,27,650/- as interest made by the AO, an amount of Rs. 4,47,12,920/- is confirmed and balance is directed to be deleted. Consequently, ground no 1 is partly allowed"
As the issue remain identical in the present year too, it is held that the A.O. is not justified in making addition of Rs.16,91,76,790/- on account of interest and other expenses and transferred to work in progress (WIP). Hence, the impugned addition is deleted. The A.O. is directed accordingly.”
Being aggrieved, the Revenue is in appeal before us.
7. We have considered the submissions of both sides and perused the material available on record. From the impugned order, it is evident that in the Keystone Realtors Pvt. Ltd. ITA no.1845/Mum./2023 facts of the decisions relied upon by the learned CIT(A), the project was on the verge of completion and therefore addition of expenses to the WIP was held to be not justified. However, without analysing the applicability of these decisions to the facts of the present case, we find that the learned CIT(A) deleted the addition made by the AO by transferring the expenses to the work in progress. During the hearing, the learned Authorised Representative submitted that in para 2.2 of the impugned order, the learned CIT(A) has noted the facts of some other case. Further, both sides pointed out that in assessee’s own case, for the assessment years 2012-13 and 2013-14, the coordinate bench of the Tribunal in DCIT v/s Rustomjee Constructions Private Limited, in ITAs No.6305 and 6282/Mum./2017, has restored this issue to the file of the learned CIT(A) for de novo adjudication. Accordingly, both sides agreed that the issue arising in the present appeal be also restored to the file of learned CIT(A) for a fresh adjudication. Therefore, in view of the above, we set aside the impugned order and restore the matter to the file of the learned CIT(A) for de novo adjudication. As a result, the sole ground raised by the Revenue is allowed for statistical purposes.
In the result, the appeal by the Revenue is allowed for statistical purposes. Order pronounced in the open Court on 11/09/2023