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

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR, VP AND SHRI ABY T. VARKEY, JM आयकर अपील सं/ I.T.A. No. 8047/Mum/2019 (निर्धारण वर्ा / Assessment Year: 2013-14) DCIT-10(3)(1) बिधम/ M/s. Nouveau Developers Pvt. 1st Room No.217/212, Ltd. Vs. Floor, Aayakar Bhawan, 701, Natraj, M. V. Road, Churchgate, Mumbai- Junction, Western Express 400020. Highway, Andheri East, Mumbai-400072.

आयकर अपील सं/ I.T.A. No. 7039/Mum/2018 (निर्धारण वर्ा / Assessment Year:2014-15) बिधम/ DCIT-10(3)(1) M/s. Nouveau Developers Pvt. Room No.212, 2nd Floor, Ltd. Vs. Aayakar Bhawan, M. K. 702, Natraj, M. V. Road, Road Churchgate, Junction, Western Express Mumbai-400020. Highway, Andheri East, Mumbai-400069. स्थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AACCN5280G (अपीलाथी /Appellant) .. (प्रत्यथी / Respondent) Revenue by: Dr. Pratap Narayan Sharma (Sr.AR) Assessee by: Shri Naresh Kumar सुनवाई की तारीख / Date of Hearing: 27/06/2022 घोषणा की तारीख /Date of Pronouncement: 12/07/2022 आदेश / O R D E R PER ABY T. VARKEY, JM: These are appeals of the revenue preferred against the order of the Ld. CIT(A)-17, Mumbai dated 24.10.2019 for A.Y.2013-14; and order dated 07.09.2018 for AY.2014-15.

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. have been included in the work-in-progress (WIP) by the AO and not allowing the same as revenue expenditure. 3. Brief facts as noted by the AO is that the assessee was incorporated on 13.04.2007 and is engaged in the business to construction, purchase, acquire, hire, operate, manage and develop land of any real and personnel estate property such as residential units/complexes and any other types of infrastructure projects etc, on ownership basis. The assessee company had filed its return of income on 30.09.2013 (for AY. 2013-14) declaring total loss of Rs. (2,57,84,522/-). The AO upon verification of the financials of the assessee company, noted that the Inventory of Rs.24,18,92,000/- related to the on-going project is lying in the balance sheet of the assessee company as on 31.03.2013. The AO noted that the assessee company has received advances of Rs.19,76,32,188/- from various customers against the booking of flats. Further the AO noted that the project is under construction and only 15.04% work of the project was completed and since no revenue has been realized, no income has been offered for taxation. He noted that the Reserves & Surplus of the assessee company is negative of Rs.(-) 9,76,61,419/- and short term borrowings obtained from group companies of the assessee company against construction of the project was to the tune of Rs.25,59,40,847/- and inventory of the project was to the tune of Rs.24,18,92,000/-. And that the assessee company has utilized the borrowed funds for construction of the project and had incurred

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. borrowing cost of Rs.2,88,03,287/- in connection with the on-going project. The AO noted that out of this total borrowing cost of Rs.2,88,03,287/-, the assessee had only capitalized Rs.40,06,934/- which was made part of work-in-progress and balance amount has been debited to profit & loss account resulting in carry forward business loss of Rs.2,64,23,881/-. Considering the aforesaid facts, the AO asked the assessee as to why the financial cost of Rs.2,88,03,287/- (which includes Rs.40,06,934/-) should not be capitalized and grouped under WIP. The assessee pursuant to the show cause notice, replied that the assessee follows process for transferring the finance cost proportionately to work-in-progress which is explained in its reply as follows: -

“4.3 In response to the same, assessee filed the submission vide letter dtd.29/02/2016 Stating that company follows process for transferring the finance cost proportionately to work in progress and profit & loss account which is as follows: Cash flows of each project are identified. Cash inflows and outflows are compared to identify whether there has been a net inflow or outflow. If there is net inflow of cash, then it is concluded that no financing is required for the project and hence, no finance cost is allocated. If there is.net outflow of cash, then it is concluded that the excess amount spent on the project over and above the cash inflows is financed by way of borrowings.

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. Finance cost is allocated to all projects which have been financed by way of borrowings @ 16% p.a. The above exercise is carried out on a monthly basis and finance cost is allocated to each project every month depending on net cash inflow or outflow. The amount of finance cost not allocated to work in progress is transferred to profit and loss account.” 4. 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

ITA Nos. 7039/Mum/2018 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.

I find that the case laws relied by the appellant are directly applicable to the facts of the appellant company. Further I find that the act of disallowance of the interest expenses and adding the same to WIP is not in conformity with the accounting standards. Accordingly, the treatment adopted by the appellant is for construction accounting and debiting such interest expenses is acceptable. Further the interest expenses fulfil the criteria as mentioned in Accounting standard -16 Borrowing cost and shall be treated as expenditure. Moreover, by debiting such expenses to the Profit and loss account is not loss to the Revenue, as even by capitalization of such expenses, the same will be debited to the revenue in future years. Accordingly, the treatment of debiting the interest expenses of Rs. 2,47,96,535/- to profit and loss account is correct and this ground of appeal is allowed.”

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. 5. Aggrieved by the aforesaid action of Ld. CIT(A) of reversing the action of AO on this issue, the revenue is before us. 6. 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

ITA Nos. 7039/Mum/2018 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

ITA Nos. 7039/Mum/2018 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.

“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

ITA Nos. 7039/Mum/2018 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.” 9. 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

ITA Nos. 7039/Mum/2018 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.

“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

ITA Nos. 7039/Mum/2018 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.”

“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

ITA Nos. 7039/Mum/2018 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 is allowed.” 13. We have heard both the parties and perused the records. We find that the Ld. CIT(A) was right to find that the expenses incurred in earlier year has been merely transferred from one head to another head, without claiming any expenses in the P & L account. We note that the Ld. CIT(A) has rightly found that the assessee 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 inventories to Cost of Land, development rights etc,. Further, from the cost of land, development rights it has been

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. 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. Thus, this amount of Rs.1,58,94,960/- has been transferred from opening balance of land to work-in-progress under the head inventories. Therefore, we agree with the Ld. CIT(A) that the assessee has not claimed such expenses for the year under consideration since no such expense was claimed to the profit & loss account for the year under consideration. And accordingly the question of incurring of prior period expenses did not even arise in this factual back ground and the AO erred in wrongly assuming so and the Ld. CIT(A) has correctly appreciated the same and allowed the relief to the assessee. Therefore, we are inclined to uphold the action of the Ld. CIT(A) on this issue. 14. Coming to the revenue appeal for AY.2014-15, we note that the first ground is similar to ground no. 1 for AY. 2013-14. And since there is no change in facts or law, for the same reason stated therein mutatis mutandis will apply for this year and therefore the action of the Ld. CIT(A) is upheld. 15. Ground no. 2 is against the action of the Ld. CIT(A) in reversing the action of the AO in respect of the expenses claimed by the assessee in respect of advertisement expenses amounting to Rs.48,15,669/- which has been capitalized by the AO.

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. 15. At the outset it has been brought to our notice that similar issue arose in the earlier AY. 2013-14 wherein the AO had disallowed the advertisement expenses claimed by the assessee to the tune of Rs.24,20,587/- which was also capitalized by the AO which action of the AO was reversed and the same was allowed as expenditure by the Ld. CIT(A). However, the revenue did not challenge the same, in the grounds of appeal raised before us for AY. 2013-14 (supra). And we note that the Ld. CIT(A) has given relief to the assessee for this assessment year (AY. 2014-15) also on the same reasons, as he did for AY. 2013-14. Since the department did not prefer any appeal for this claim of assessee which was allowed by Ld. CIT(A) on identical reason, we are inclined to uphold the action of the Ld. CIT(A) and dismiss the ground of appeal of the revenue. For taking such a view, we note that in case of ITO Vs. Niche Health Option Pvt. Ltd ITA. No. 1373/Mum/2020 for AY. 2014-15 dated 29.06.2022 wherein Tribunal taking note of the fact that the revenue accepted the action of Ld CIT(A) for one assessment year and did not prefer any appeal before this Tribunal, but preferred an appeal on the same issue in another assessment year. So, the Tribunal held the issue as not maintainable in law and rejected in limine by holding as under: - “4. This decision of the CIT(A) was accepted by the revenue authorities, and the matter rests at that. As stated by the learned counsel, and as we have also verified from our records, no appeal was filed against this decision of the CIT(A). Yet on the same issue, in this

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. immediately following year, the Assessing Officer is in appeal before us. The question that we really need to consider is whether such a deviation from the past practice of not filing an appeal on this issue is permissible.

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. order was not challenged on account of low tax effect or any other technical reason. Once the stand of the CIT(A), on an issue, is accepted in one year, unless there are good and sufficient reason to take a different stand later, similar findings for a subsequent year cannot be challenged in further appeal either. For this reason alone, the grievance raised by the revenue is not maintainable in law and deserves to be rejected in limine. 16. Respectfully, following the ratio of the decision of this Tribunal in Niche Health Option Pvt. Ltd (supra), we hold that the issue is not maintainable and dismiss the same.

Order pronounced in the open court on 12/07/2022.

Sd/- Sd/- (PRAMOD KUMAR) (ABY T. VARKEY) VICE PRESIDENT JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 12/07/2022. Vijay Pal Singh, (Sr. PS)

ITA Nos. 7039/Mum/2018 8047/Mum/2019 A.Ys.2014-15 & 2013-14 Nouveau Developers Pvt. Ltd. आदेश की प्रनिनिनि अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. आयकर आयुक्त(अपील) / The CIT(A)- 4. आयकर आयुक्त / CIT 5. दवभागीय प्रदतदनदि, आयकर अपीलीय अदिकरण, मुंबई / DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. आदेशधिुसधर/ BY ORDER, सत्यादपत प्रदत //True Copy// उि/सहधयक िंजीकधर /(Dy./Asstt. Registrar) आयकर अिीिीय अनर्करण, मुंबई / ITAT, Mumbai