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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
O R D E R
PER PAVAN KUMAR GADALE JM:
The revenue has filed the appeal against the order passed by the Commissioner of Income Tax (Appeals)(CIT(A)-47, Mumbai passed u/s 143(3) and 250 of the Act. The revenue has raised the following grounds of appeal:
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A), was correct in allowing the claim of expenses of Rs.23,49,034/- related to construction of inventory without
M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 2 - considering the fact that the assessee follows Project Completion Method and therefore these expenses were liable to be capitalized to work-in-progress.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A), was correct in allowing the expenditure of Rs.68,53,106/- related to previously completed projects without considering the fact that as the assessee follows Project Completion Method the assessee could not claim any further expenditure on the completed projects.
3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A), was correct in directing the assessing officer to treat the interest income of Rs. 1,22,77,372/-, being interest earned on fixed deposits as 'Business Income' instead of 'Income from Other Sources' without considering the decision of the Hon'ble Supreme Court of India in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (1997) 227 ITR 172, in which the Apex Court has clearly held that the interest income is always revenue in nature unless it is receivable by way of damages or compensation."
The brief facts of the case are that the assessee company is engaged in the business of construction and development activities. The assessee has filed the return of income for the A.Y 2016-17 on 29.09.2016 disclosing a total income of Rs. Nil and the return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS and notice u/s 143(2) and 142(1) of the Act along with questionnaire was issued. In compliance to notice, the assessee has filed the details from time to time. The Assessing Officer (AO) on perusal of the financial statements in M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 3 - particular profit and loss account found that the assessee has debited expenses related to construction activities and was claimed as revenue expenditure, where the assessee has not transferred these expenses to construction work in progress(WIP). The assessee has been following the projection completion method and the expenses on account of construction should have been transferred to work in progress Account. Whereas, the assessee has filed the explanations referred at Para 4.3 of the assessment order emphasizing on the nature and completion of projects. Further the assessee has debited only those expenses which are operational and are required to be incurred for day to day business. The contentions of the assessee are that the expenses are debited in respect of premises sold which are offered as business income and therefore claimed as revenue expenses. Further the assessee has debited the expenses in respect of building completed earlier and offered to tax and also form part of the revenue in nature.Since the expenses are in the nature of construction expenses and not in the nature of administrative expenses, the AO is of the opinion that the expenses should be part of the construction and work in progress and accordingly the claim of revenue expenditure was disallowed and treated as the part of the work in progress and made addition of Rs. 23,49,034/-.
The second disputed issue the AO found that the assessee has debited expenses in respect of earlier completed projects and the same cannot be allowed as revenue expenditure and M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 4 - the AO is of the opinion that the expenses relating previous completed projects of Rs. 68,53,106/- pertaining to earlier projects cannot be allowed and made a disallowance. The third disputed issue that the AO has observed from the financial statements that the assessee has disclosed interest receipts of Rs. 1,22,77,372/- from bank deposits and ICD income as business income and the AO has issued show cause notice to treat as income from other sources. Whereas the assessee has filed the explanations and mentioned that the assessee has obtained loans from banks for working capital and construction activities. Since the payments have been made in piecemeal to the banks and hence the assessee has placed short term deposits with the banks to reduce the burden on interest of loans in the interim period. Whereas the contentions of the assessee was not accepted by the AO and is of the opinion that the amount invested in short term deposits in chargeable to tax as income from other sources and treated interest and interest on ICD income of Rs. 1,22,77,372/- under the head income from other sources and assessed the total income of Rs.1,22,77,370/- and passed the order u/s 143(3) of the Act dated 26.12.2018.
Aggrieved by the order, the assessee has filed an appeal with the CIT(A), the CIT(A) considered the grounds of appeal, submissions of the assessee and findings of the scrutiny assessment and judicial precedents. The CIT(A) on the three disputed issues has granted relief to the assessee and partly
M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 5 - allowed the assessee appeal. Aggrieved by the CIT(A) order, the revenue has filed an appeal before the Hon’ble Tribunal.
At the time of hearing, the Ld. DR submitted that the CIT(A) has erred in granting the relief to the assessee overlooking the various facts that the expenditure claimed by the assessee in the profit and loss account is in the nature of capital expenditure and has to be capitalized under work in progress. Further the expenses pertaining to the completed projects has to be adjusted against the income of the particular projects and same cannot be claimed in the current year and also the interest income and interest on ICD income is form part of income from other sources and cannot be treated as business income and supported the order of the Assessing officer.
Contra, the Ld. AR relied on the order of the CIT(A) and made submissions on the issues with respect to nature of the expenses claimed as revenue expenditure and interest income on deposits and substantiated the submissions with the factual paper book.
We heard the rival submissions and perused the material on record. The Ld. DR’s contentions are that the CIT(A) erred in granting the relief overlooking the various factual findings of the AO. We find on the first disputed issue with respect to capitalization of the expenditure to the work in progress, the CIT(A) has granted relief considering
M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 6 - the facts and the transactions and the assessee’s submissions has observed at page 12 Para 8.0 to 8.2 of the order read as under:
8.0 I have considered the facts of the case, submissions of the Appellant, the materials on record on this issue. Ground no. 1 deal with the addition/disallowance of Rs. 23,49,034/- as Gypsum of Rs. 18,83,203/-, other construction Material of Rs.22,616/-, Electrical items of Rs. 7,981/-, Tiles of Rs. 3,41,553/-, Hardware of Rs. 2,727/- and Plumbing Material of Rs. 90,954/-. While the assessee has treated this expenditure as revenue expenditure the AO has capitalized the same while completing the assessment, which is the subject matter of this ground.
8.1 The assessee has argued that during the year, purchase of Gypsum, other material, electrical items, tiles, hardware and plumbing material was made, a part of which remained unutilized, as the building construction got completed. The assessee therefore sold this material as scrap, income from which has been duly disclosed in the accounts and the relevant details are appearing as under:
Debit Credit Particular Amount Particular Amount Gypsum 1883203.28 Sale of scrap 1948817.33 Other 22616.70 Inter company 339246.99 construction sales material Electrical items 7981.82 Sale of material 1658719.75 Tiles 341553.39 Sale of material 1658719.75 Harware 2727.50 Plumbing 90954.62 material Total 2349034 3936784.07
M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 7 - 8.2 Therefore during the year the assessee has made sales of scrap as also sale of other material to other entities to the tune of Rs. 39,36,784/-. Against this income, the assessee has claimed expenditure on account of purchase of these items, to the tune of Rs. 23,49,034/-. Thus in net terms there is a profit of Rs. 15,87,750/- and as such there is no loss caused to the company by doing these transactions. It may be further stated that building of the assessee already got completed/finished and therefore there was no reason as to why this material could have been capitalized in the accounts of the assessee. From the details submitted by the assessee, it is quite clear that the assessee has earned some profits in respect of sale of scrap and other material and no loss as such has occurred on these transactions to the assessee. Therefore in my considered view no action is warranted against the assessee in this regard. In any case capitalization of expenditure is just not required once the building stands completed and also because the material has not been consumed/utilized for the construction of the building. In the circumstances addition of Rs. 23,49,034/- made by the AO becomes unsustainable in law and is therefore directed to be deleted.
Whereas on the second disputed issue raised by the revenue, the CIT(A) has erred in granting relief in respect of the expenses related to previously completed projects. The contentions raised by the Ld. AR that the claim of the expenses has been considered in the financial statements and the Ld. AR has highlighted the page 4 of the paper book in particular the profit and loss, where the expenses in respect of the project has been claimed and the CIT(A) has considered that the projects have been completed and the income has M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 8 - been offered and therefore the claim has to be allowed. We found that the CIT(A) has dealt on the issues at page 14 Para 11.0 to 11.2 of the order read as under:
11.0 I have considered the facts of the case, submissions of the Appellant, the observations of the AO contained in the assessment order and the other materials on record on this issue. In this ground the assessee has contested addition of Rs. 68,53,106/- made by the AO by disallowing expenditure incurred in respect of Maitri Park A project (Rs. 32,08,919/-) Maitri Park B project (Rs. 23,96,255/-). The AO has mentioned that the assessee is following project completion method and as these projects have already been completed, the assessee could not have claimed any further expenditure on these projects. The assessee on the other hand has argued that even though these projects were completed there are minor finishing works which were being carried out even after the completion and the above expenditure has been incurred on the same the assessee has argued that these expenses have been incurred in purchase of some building material like cement, tiles, paints etc and some labour expenses, with a view to get the project fully ready and habitable so that it may be handed over to the society of the residents. The assessee has argued that lot of work like footpaths, landscaping work, tree plantation, lawn and some beautification works etc are done after obtaining work completion certificate from the BMC, besides some minor works/repairs before handing over the flats to the buyers. Therefore such expenditure is necessarily carried out. The assessee has argued that it is not the case that this expenditure is not verifiable or relevant invoices are not available. It has been argued that this expenditure is wholly and exclusively relatable to the business of the assessee and is therefore allowable.
M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 9 - 11.1 I have considered the arguments of the assessee and inclined to accept the same. It is true that certain minor works like landscaping work, lawns and other such works etc. are done after completion of towers and these works required some expenditure to be carried out by the assessee, to make the complex habitable. Besides some expenses towards repair, painting etc. done at the time of handing over of the flats to the buyers. It appears that entire expenditure is verifiable and relevant details are appearing in the books of accounts of the assessee. In fact the AO has raised no doubts about the genuineness of expenses only question he has raised is that the expenditure is relatable to completed projects. However the same should not be the sole basis for disallowing. As long as expenses is genuine and is connected to the business of the assessee, it should be allowed. In these circumstances it will be unfair if this expenditure is not allowed to the assessee. I therefore direct the AO to allow this expenditure to the assessee.
11 Consequently the ground no. 2 taken by the assessee is allowed.
The last disputed issue with respect of treatment of interest income on deposits. The Ld.AR contented that the interest on fixed deposits has to be treated as income from business whereas the AO has treated as income from other sources. We found that the CIT(A) has relied on the identical decisions in the case of assessee’s group concern and treated as business income and observed at page 17 Para 14.1 to 14.4 of the order read as under:
14.1 I have considered the facts of the case. The issue involved is treatment of interest income from fixed deposits. While the assessee has treated it as income from business, the AO treated the same under the head 'Other Sources'. It is seen that an identical issue
M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 10 - has been decided by my Ld. Predecessor in the case of M/s. Hiranandani Palace Gardens Pvt. Ltd., vide order dated 21.03.2016 wherein he directed to delete the addition by observing as under:
I find that the impugned receipts of Rs. 6,94,26,906/- cannot be treated as receipts that flow to the appellant de hors the business as they are directly and explicitly linked to the business of the appellant. They cannot be treated as 'Income from other Sources'. Respectfully following the above decision of Hon'ble ITAT in appellant's own case, and the ratio of the decision of Hon'ble Apex Court cited above, this ground of appeal is allowed.
14.2 It is seen that identical issue has been decided by the Hon'ble ITAT, Mumbai in the case of M/s. Hiranandani Palace Gardens Pvt. Ltd., dated 03.12.2015, directed to allow the claim of the assessee in this regard by observing as under:
9. We have heard the rival contentions of the Ld. Representatives of the parties. The Ld. AR of the assessee has brought our attention to page 13 of the M/s. Hiranandani Palace Gardens P. Ltd. 10 paper book which is the copy of 'schedule to financial statement' to show that the assessee during the year had received advances from the customers to the tune of Rs.658,839,563/- and further explained that that given the initial years of its operation, the available surplus fund of Rs.1,70,72,127/- only was temporarily deposited in FDRS pending its utilization so as to make best use of it and to re reduce the cost of the project. It was therefore offered as Business Income'. The Ld. AR in this respect has relied upon the various case laws including the decision of Hon'ble Karnataka High Court in the case of Swish Chandra & Co. vs. CIT" 234 ITR 70 (KAR) and decision of Hon'ble Bombay High Court in the case of "CIT Vs. Lok Holdings" 308 ITR 356 (Bom.) and has contended that the said decisions are fully
M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 11 - applicable on the facts of this case. The Ld. DR on the other hand has relied upon the findings of the lower authorities.
We find that in the facts and circumstances of the case in hand, the decision of Hon'ble Bombay High Court in the case of "CIT vs. Lok Holdings" (supra) is squarely applicable. In that case the assessee was engaged in development of properties. Advance from customers intending to purchase flats was deposited with the banks in the course of business. The interest income was held to be assessable as business income and not as income from other sources. Following the decision of Hon'ble Bombay High Court in the case of "Lok Holdings" (Supra) the interest income earned from temporary deposits pending their utilization out of customer advances on the booking of flats related to the project of the assessee is assessable as business income. The A.O. is accordingly directed to assess the same as business income. This ground of appeal is also allowed."
14.3 It is seen that facts of the present year are identical to the case of M/s Hiranandani Palace Gardens Pvt. Ltd. Therefore respectfully following the decision of Hon'ble ITAT Mumbai in the case of M/s Hiranandani Palace Gardens Pvt. Ltd. (supra) and order of my Ld. Predecessor in the case of M/s Hiranandani Palace Gardens Pvt. Ltd. dated 21.03.2016 the addition made by the AO in this regard is directed to be deleted.
14.4 Consequently the ground no. 3 taken by the assessee is allowed.
10. Further the Ld. DR could not controvert the findings of the CIT(A) with new cogent material or information to take a different view and the Ld. AR substantiated the submissions with the factual paper book and explanations which cannot be M/s Hiranandani Constructions Pvt Ltd, Mumbai. - 12 - overruled. Accordingly, we do not find infirmity in the order of the CIT(A) on the disputed issues in granting the relief and uphold the same and dismiss the grounds of appeal of the revenue.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court on 15.11.2022.