DCIT - 10 (3)(1), MUMBAI vs. NOUVEAU DEVELOPERS PVT. LTD., MUMBAI

However, the AO did not accept the aforesaid reply of the assessee. And according to him, the finance cost is directly related to the cost of project and hence financial cost of Rs.2,88,03,287/- (including Rs.40,06,934/- already capitalized by assessee), needs to be capitalized and included in the WIP and in that process the carry forward business loss got reduced to the extent of that amount (Rs.2,47,96,353/-). Aggrieved, by the action of the AO to capitalize the entire finance cost and added to the WIP, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to delete the same by holding as under: - “4.1 Ground no. 1: I have carefully considered the submission and argument of the AR of the appellant company. I have also gone through the assessment Order. he appellant has agitated the disallowance of interest expense of Rs.2,47,96,535/. I find that appellant has already has incurred interest expenses totaling to Rs. 2,88,03,287 during the year under consideration. The said interest cost consists of interest on secured 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. loans, unsecured loans, processing charged and bank charges. The appellant is following the percentage completion method of accounting the income and expenses. I find that appellant has himself capitalised interest amounting to Rs. 40,06,934/- out of the total interest cost on the basis of project inflows, project outflows, cumulative funds utilisation. Further the appellant has followed the Accounting standard -16 Borrowing Cost issued by ICAI for determining the quantum of the interest cost which was debited to profit and loss account. The appellant has vehemently contended that that it has duly followed the accounting standard -16 for capitalising the interest cost to WIP and determining the interest cost that is to be debited to Profit and loss account.

We have heard both the parties and perused the records. We note that the assessee is a builder & real estate developer and is following the percentage completion method of accounting the income and expenditure. The assessee has claimed interest expenditure (Rs.2,47,96,353/-) in its P & L account and capitalized interest expenditure of Rs.40,06,934/-. However, the AO disallowed the interest cost of Rs.2,47,96,353/- as not admissible to be claimed as expenses and added the same to the WIP of the project. The Ld. CIT(A) has reversed the action of AO and thereby allowed the claim of assessee by taking note that assessee is following the percentage Completion Method for purpose of accounting and thereby the assessee had capitalized interest of Rs.40,06,934/- out of total interest of Rs.2,88,03,287/- during AY. 2013-14. Further, it also noted that the assessee has followed accounting policy for recognition and capitalization of borrowing cost as per the Accountant Standard-16 “Borrowing Cost” as recognized by the ICAI for determining the quantum of interest cost which was debited to P & L account. The assessee company has followed accounting policy for recognition & capitalization of borrowing cost which is as per the AS-16 “Borrowing Costs”. Therefore, the assessee had capitalized interest of Rs.40,06,934/- out of the total interest of Rs.21,88,03,287/- during the AY. 2013-14. And the interest expenses amounting to 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. Rs.2,47,96,353/- was debited to P & L Account and not capitalized to Work-in-Progress. The assessee company has capitalized interest of Rs.40,06,934/- out of the total interest cost on the basis of inflow, project out flow, cumulative funds utilization. As per the Guidance Note on Accounting for Real Estate transactions issued by ICAI, the project cost which are directly attributable to the project shall only be capitalized. (refer 2.2 project cost revised in 2012) wherein it has been clearly stated under (b) Borrowing cost” “in accordance with Accounting Standard-16, borrowing cost which are incurred directly in relation to the project or which are apportioned to a project”. Only the cost which are directly attributable to the project should be capitalized to the cost of WIP and hence the assessee has debited the financial cost which are not directly attributable to the project. It is noted that the financial cost of Rs.40,06,934/- out of the total Rs.2,88,03,287/- has been capitalized and became part of the WIP since it was directly related to the project whereas the financial cost of Rs.2,47,96,353/- was debited to the P & L account since it was not directly attributable to the project. We find that the AO was aware of the fact that assessee has capitalized only Rs.40,06,934/- out of the total financial cost to the tune of Rs.2,88,03,287/- and has claimed as revenue expenses and debited in profit & loss account of Rs.2,47,96,353/-. However, it is noted that the AO has not disallowed interest expenditure for the reason that it was in-genuine or not for the purpose of business. Having accepted the genuineness of the interest 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. expenditure the only action taken by the AO was that he has capitalized the same of Rs.2,47,96,535/-. However, since the assessee is following the percentage completion method of Accounting Standard -16, the borrowing cost which are incurred directly in relation to the project should only be capitalized. And therefore, the Ld. CIT(A) has rightly allowed the claim of the assessee which action of the Ld. CIT(A) does not require any interference from our side. And therefore, we dismiss the ground of appeal of the revenue.

Brief facts as noted by the AO on this issue is as under: - “6.1 As per point no.27(b)(i) of Form 3CD submitted, M/s Nouveau Developers Pvt Ltd has not deducted TDS under section 194C and 194J of I.T. Act, 1961 on payment of Rs.3,76,80,186/-. Since, the assessee failed to deduct TDS on payment made to M/s NCCL, Vatkar & Associates, Laqshya Media Pvt Ltd and E-18.com Pvt Ltd totaling to Rs.3,76,80,186/-, the same amount is liable to be disallowed and the work-in-progress of construction project will be accordingly reduced to the extent of these amount. In this regard, Reliance is placed on the judgment ITAT Mumbai Bench ‘J’ Savla Associates vs. Income tax Officer, Navi Mumbai 35 SOT 148 [2010]. It was held by the ITAT that if certain expenditure is not allowable under the Act, the work in progress will be reduced by that amount. Such expenses are to be excluded from the work-in-progress if same are included by the assessee. In the light of abovementioned facts, amount of 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. Rs.3,76,80,186/- is disallowed and the work-in-progress of the construction project is accordingly reduced to the extent of these amount.”

Aggrieved by the aforesaid action of the AO, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to delete the same. Aggrieved by the aforesaid action of the Ld. CIT(A), the revenue is before us. After having heard both the sides and after careful perusal of the records, we cannot countenance the action of the Ld. CIT(A) deleting the disallowance made by the AO on this issue. We note that the recognition/identification of income under the Act is tenable by other method of accounting considering the nature of business activities. In respect of the construction business one of the accounting method is percentage completion method and the cost of the project is accumulated under the one head of account “work-in- progress”. So when the assessee claims to have incurred cost of a project, then the work-in-progress (WIP) will increase by that much cost/expenditure. However, it should be kept in mind that such expenses claimed by the assessee are to be excluded from the work- in-progress, if the AO on examination finds the expenses as not allowable as an expenditure. Then to that extent, the WIP has to be reduced. So if the AO finds on examination of the assessee’s claim of expenditure are allowable only if TDS was deducted or subject to TDS liability, then that expenses cannot be allowed and so resultantly it cannot be part of WIP. And therefore, if an expenses claimed is 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. disallowable u/s 40(a)(ia) of the Act, then the AO should correct the amount of work-in-progress by reducing the work-in-progress to the amount disallowed for non-compliance of TDS provisions. Therefore, we do not agree with the action of the Ld. CIT(A) deleting the disallowance made by the AO and therefore we reverse the impugned action of Ld CIT(A) and uphold the action of AO. And needless to say if the assessee has deducted the TDS on these expenses in subsequent year/years, then the same is allowable as expenditure as per law, and then the assessee can include the same in WIP. With this observation, we reverse the action of Ld. CIT(A) and uphold the action of AO on this issue.

Ground no. 3 is against the action of the Ld. CIT(A) in deleting the disallowance of Prior Period Expenses of Rs.1,58,94,460/-.

Brief fact as noted by the AO is as under: - “7. Disallowance of Prior Period Expenses of Rs.1,58,94,460/- 7.1 On perusal of Note 17 ‘Construction Costs’ of Rs.8,04,13,248/-, it is seen that assessee has debited amount of Rs.1,54,94,960/- on account of Cost of land, development rights and related expenses. In this regard, the assessee was requested to furnish the details of copy of agreements, payment details, invoices to substantiate the claim of expenditure incurred for the purpose of business and profession. Upon verification of copy of agreements and payment details filed by the assessee company, it is found that expenditure incurred of Rs.1,58,94,960/- on account of Cost of land, development: rights and 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. related expenses is related to ‘Prior Period’ and not pertaining to A.Y.2013-14, which is not allowable as per provisions of the Income Tax Act, 1961. It is settled that deduction can be in be permitted in respect of only those expenses which are incurred / accrued in the relevant accounting for the purpose of computing yearly Profits and Gains, the expenditure is related to earlier years and since the assessee is following the mercantile system of accounting, the same is not allowable in the current financial year. Accordingly, an amount of Rs.1,58,94,960/- is disallowed and the work-in-progress of the construction project is according reduced to the extent of these amounts.”

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to give relief to the assessee by holding as under: - “4.4 I have carefully considered the submission and argument of the AR of the appellant company. I have also gone through the assessment Order. The appellant has agitated the disallowance and reduction of WIP to the extent of Rs. 1,58 94,460/-stating the same as prior period expenses. I find that the appellant has debited the rights and related expenses of Rs 1,58,94,960/- and cost of land, capitalized to Work in progress for the year under consideration. I find that appellant has not actually incurred the cost of land amounting to Rs 1,58,94,960/during the year under consideration but just for the purpose of presentation of financial statement has transferred the amount of Rs 1,58,94,960/- from Land under the head Inventories to Cost of Land, Developments Rights, etc, under the head Profit & Loss Account. Further, from Cost of land, Developments Rights, etc, it has 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. been transferred to work in Progress under the head Inventories of Rs 1,58,94,960/- on account of construction activities which has been commenced on the said land. Accordingly, the direct impact of cost of land amounting to Rs. 1.,58,94,960/- has been, transferred from Opening Balance of Land to Work in Progress under the head Inventories. I find that appellant has not claimed such expenses for the year under consideration. I| find that there is no revenue loss on this count as no expenses are claimed to profit and loss account for year under consideration and accordingly there is no question of incurring prior period expenses. I find that the expenses incurred in earlier year has been merely been transferred from one head to another head, without claiming any expense in profit and loss account. The act of the AO of reducing the expenses treating them as prior period is in correct therefore the amount of Rs. 1,58,94,960/- should not be reduced from WIP. Thus this ground of appeal

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position.

In the result, the appeal of the revenue for AY. 2013-14 is partly allowed and for AY. 2014-15 is dismissed.