DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-3(1)(1), BANGALORE vs. M/S INDIBUILD HOMES PVT LTD , BANGALORE

The effective grounds of appeal urged by the assessee read as under:

The effective grounds urged by the revenue read as under: “2. The Ld CIT(A) erred in allowing the expenditure claimed by the assessee when the business of the appellant had not commenced and the assessee was not eligible for set off of business loss against income from other sources. 3. The Ld.CIT(A) erred in allowing the appeal of the assessee by not following the decision of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd wherein the Hon'ble SC has clearly laid down the law that: a. Before the commencement of the business of the assessee, income earned in the form of interest on deposits made with banks out of the funds borrowed from banks and financial institutions which was not immediately required or the purpose of setting up of the business should be assessed to tax under the head income from other sources"

The facts relating to the case are stated in brief. The assessee company is engaged in the business of real estate development. It filed its return of income declaring loss of Rs.4,14,82,994/-. It included interest income of Rs.1,25,06,325/-. During the course of assessment proceedings, the assessee submitted that it is promoting a project in White Field area in Bangalore. It was submitted that the revenue from this project is recognized in accordance with the provisions of Accounting Standard-9 of revenue recognition issued by ICAI under “Percentage Completion method”. On examination of the financial statements and reply of the assessee, the A.O. noticed that the assessee has purchased land and started booking advances from customers. However, the assessee has not recognized any income on percentage completion method, but it has claimed certain expenses and declared business loss. Accordingly, the A.O. took the view that the business activity of the assessee has not commenced and hence loss claimed by the assessee cannot be allowed. Accordingly, the A.O. disallowed the claim of business loss and assessed interest income of Rs.1,25,40,420/-.

In the appellate proceedings, the Ld. CIT(A) held that the business activities of the assessee had already commenced and hence it is eligible to claim deduction of business expenses. The Ld.

The revenue is aggrieved by the decision of Ld. CIT(A) in holding that the business of the assessee has commenced. The assessee has filed appeal challenging the allocation of expenditure to the project account.

The Ld. A.R. submitted that the assessee had purchased land in the financial year 2010-11 and started developing the land. The expenditure incurred on construction activities has been shown as “work in progress” in the books of accounts. Hence, the business of the assessee has already commenced when the land was acquired and hence the decision rendered by the Ld. CIT(A) on this issue does not call for any interference. The Ld. A.R. further submitted that the revenue received by the assessee during the year under consideration was around 17% only and hence according to the Accounting Standard-7 & 9 issued by ICAI, no revenue needs to be recognized under percentage completion method, if the receipts are less than 25% on estimated construction and development cost. The Ld. A.R. further submitted that the Ld. CIT(A) did not consider Accounting Stadard-2, 7 and 9 while allocating some of the expenditure to the project account. The Ld. A.R. submitted that the expenditure claimed by the assessee in the P&L account do not specifically relate to project undertaken by the assessee and hence

The Ld. D.R., on the contrary, supported the order passed by Ld. CIT(A). The Ld. D.R. submitted that the assessee has not proved that the business of the assessee has been commenced and hence the Ld. CIT(A) was not justified in holding that the business of the assessee has commenced.

We heard the rival contentions and perused the record. The only issue urged by the revenue is whether the assessee has commenced his business or not? We notice that the Ld. CIT(A) has addressed the issue in the following manner:- “4.1 During appellate proceedings the appellant has made detailed submissions, which are in substance same as made before the AO. The appellant has argued that its business had already commenced as it had acquired land and the same was registered in its name in FY 2010-11. The land was part of its inventory in its books of account. The appellant submitted that the construction activities had also started and there was work in progress (WIP) to the extent of Rs 71,01,11,630/- as on 31.03.2015. The appellant submitted that the construction costs already incurred constituted 17.06% of its estimated cost of construction. The appellant submitted that only routine administrative expenses had been debited to the P&L account and the construction/project related expenses had been capitalized. 4.2 The submissions of the appellant have duly been considered_ As per appellant its business activities had already commenced and he had already purchased land. The WIP shows expenses incurred on various construction related activities including expenses related to various approvals from the relevant authorities. The appellant had paid money to the land owners as well as spent money towards construction activities. A perusal of the financials of the appellant shows that there was work in progress of Rs 71,01,11,630/- as on 31.03.2015 and Rs.48,69,47,520/- as on 31.3.2014. This includes money paid to the land owners as well as money spent on construction activities.

A perusal of the order passed by Ld. CIT(A) would show that the assessee has acquired the land in financial year 2010-11 and declared the same as its inventory. The assessee is in the real estate business and it has commenced a project of construction of building by purchasing land. The Ld. CIT(A) has also noticed that the assessee has incurred a sum of Rs.71.01 crores as on 31.3.2015 on its construction activities. Since the assessee has purchased the land as its stock in trade in financial year 2010-11 itself and also incurred on construction activities, in our view, the A.O. was not correct in holding that the assessee has not commenced its business activity even in the year relevant to assessment year 2015-16. Accordingly, we are of the view that the Ld. CIT(A) was justified in holding that the assessee has already commenced its business. Accordingly, we reject the grounds raised by the revenue in this regard.

So far as the grounds urged by the assessee, which relate to allocation of various expenses to the Project account, it is the submission of the Ld. A.R. that the Ld. CIT(A) has allocated a portion of expenses to the project account without considering the Accounting Standards issued by the ICAI. Accordingly, we are of the view that allocation of expenses to project account made by the Ld. CIT(A) requires fresh examination at his end by duly considering the Accounting Standards issued by ICAI. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and restore them to his file for examining it afresh duly considering the applicable accounting standards.

The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order