ITO, WARD-6(1), MOHALI vs. QUARKCITY INDIA PVT. LTD., MOHALI

6. Heard both the parties and pursued the material available on record. During the course of assessment proceedings, the assessee submitted that it is in the business of construction and the buildings being constructed have a long construction time spanning over a number of years. As an accounting process all the material which is directly consumed during the construction is allocated to the cost of the asset which is under construction and none of such expense is being debited to the P&L account. It was submitted that as per the matching principle of accounting, the scrap generated during the process of construction is also not shown as other income but reduced from the cost of the construction. The AO didn’t agree with the said explanation and amount of Rs 15,23,493/- on account of sale of scrap was brought to tax and cost of construction was increased correspondingly. On appeal, the ld CIT(A) following the decision of the Coordinate Bench in assessee’s own case for A.Y 2007-08 has held that receipts on account of sale of scrap during the course of construction period will go to reduce the cost of construction and shall not be brought to tax separately. Nothing has been brought on record where the said decision of the Coordinate Bench has either been challenged or overruled by the Hon’ble High Court. Therefore, we don’t see any justifiable basis to deviate from a settled position and following the rule of consistency, the action of the ld CIT(A) is confirmed and the ground of appeal

so taken by the Revenue is hereby dismissed.

7. In Ground No. 3, the Revenue has challenged the action of the Ld. CIT(A) in deleting the addition of Rs. 4,50,58,943/- on account of Capital Works in Progress (CWIP) and Project Work in Progress (PWIP).

8. In this regard, the relevant facts and the findings of the Ld. CIT(A) which are under challenge before us read as under: “5. Ground No.5 is against disallowance of Rs. 53,56,583/- under the head salaries and wages and Rs.174,205/- for leave encashment and Rs.347,284/- for adjustment for leave gratuity which is already 100% disallowed in ITR. According to the assessing officer, "During the assessment proceedings details of expenses relating to Capital Works In Progress (CWIP) and Project Work In Progress (PWIP) which has been, capitalised were also called for. It was seen that out of the total expenses of Rs. 4,13,96,912 - under the head salary and wages, and an amount of Rs.91,13,869/- (22%) has been treated as directly linked to CWIP by the assessee and capitalised. Further, the assessee company had added back a sum of Rs. 62,28,004 (15.06%) while filing the Income Tax Return apart from a sum of Rs. 91,13,869/- (22%). It was noticed from the books of account of the assessee that the % applied was not in ratio to the expenditure incurred on CWIP viz a viz PWIP. These facts were confronted to the assessee as why the percentage rate may not be increased to 50%> of the expenses. The assessee did not furnish anything contrary to the above. In view of the facts of case pertaining to CWIP and PWIP, after discussion with the representatives of the assessee, I hold that 50% of the expenses under the head of salary and wages are directly linked to the CWIP. Therefore, in view of this, an amount of Rs. 53,56,583/- (Rs. 2,06,98,456/- (50% of 4,13,96,912/- minus Rs. 91,12,869 + 62,28,004), on account of salaries and wages which are directly linked to the CWIP, is added to the returned loss of the assessee company. The amount of Rs. 53,56,583/- for capitalisation under CWIP is also increased to this extent.". 5.1 The appellant submitted that, In this regard it is respectfully submitted that the Labor charges incurred during the year for CWIP and PWIP were directly booked under them as labor contractor were raising the invoices separately both for CWIP & PWIP. During the year under consideration the Assessee Company incurred a sum of Rs. 4,13,96,912/- under the head salary and wages. These salary and wages were relating to various departments involved in CWIP, PWIP, renting of property and general corporate departments. The details of which were provided before the AO which are in Annexure -V (Refer Page No. 15). The salary and wages relating to the department like Civil, electrical, plumbing etc. involved in CWIP and PWIP were already directly allocated to them which were amounting to Rs. 1,53,63,939/- as per Annexure -V (Refer Page No. 15) which was placed before the AO and was also separately shown in Schedule "N" of the Audited balance sheet. The balance salary and wages of Rs. 2,60,32,973/- were relating to the Departments such as maintenance, housekeeping, HR, Administration, IT, Legal Accounts etc. which were directly related to operating of rental building and general corporate departments and hence were directly charged to P&L account as these were not in any way linked with PWIP & CWIP. However, Out of Rs. 4,13,96,912/-, the Assessee Company added back a sum of Rs. 5,21,489/- on account of gratuity and leave encashment. However, the Ld. AO did not take into this consideration the basis of allocation of salary and wages and the material produced before the AO in its support. Further, the Ld. AO did not raise any dispute or objections with regard to this basis and the material produced. On the contrary the Ld. AO allowed 50% of the claimed salary and wages and allocated the remaining 50% to PWIP and CWIP arbitrarily on surmises and conjecture and is not based on any martial and without basis. The Ld. AO has also failed to bring any material on record to support its allocation on the basis of 50%. Further, the Ld. AO also gave the reason that as 50% of salaries were allowed in the previous year and hence applied the same in the current year too. This approach of the Ld. AO is totally against the Law. The principal of resjudicata does not apply to the tax proceedings as decided by the Supreme court in the case of Radhasamy Satsang vs. CIT 193 ITR 321. In this case it was decided that each year's assessment is final only for that year and does not govern later years because it determines the tax for a particular period, we also relied on the Judgment in the case of ITO Vs. Lake Palace Hotels and Motels Pt Ltd (Calcutta Tribunal) 13 TTJ 216 in which it was decided that mere disallowance of similar expenses earlier is not a valid ground for making disallowance in the subsequent years. On the other hand, the Assessee Company has provided all the material and basis to support its allocation. The Assessing Officer vide an order passed u/s 154 of the Income Tax Act, 1961 on 26.03.2012, reduced the addition of Rs. 53,56,583/-to Rs. 50,96,839."

5.2 The Commissioner of Income Tax (Appeals), Chandigarh in appellant's own case has passed appeal order dated 01.01.2014 for AY 2007-08 and has held as under: The contention of the appellant, in fact, is correct as per the computation provided, which is reproduced below: Total Salary & Wages Rs. 3,51,29,775/- Less: Expenditure transferred directly to Rs. 89.34,401/ respective account Net Salary & Wages Rs. 2,61,95,374/- Allocated to CWIP Rs. 1,52,03,795/- % of allocated CWIP 58% It appears that there was some confusion in the mind of the Assessing Officer, because he has not taken into account the expenditure transferred directly to the respective account. The addition has wrongly been made and so the same is deleted. From the above discussion it is clear that the AO did not raise any dispute or objections with regard to audited books of accounts or the specific amounts being credited to PWIP and CWIP. The assessing officer assumed that 50% of the expenses under the salary and wages are directly linked to the CWIP. The AO also assumed that the salaries and wages were proportionately related to contribution to PF and other funds. As the allocation to CWIP and PWIP was already made by the appellant on the basis of actual payments there is no need of further reallocation and lumpsum addition. Hence the disallowance of wages and salaries by capitalizing the same is hereby deleted and the ground no 5 raised by the appellant is allowed.

reallocation and percentage addition. Hence the disallowance of staff welfare expenses by capitalizing the same is hereby deleted and the ground no 6 raised by the appellant is allowed.

7.1 It was established in earlier assessments that the company has commenced its operation in the financial year 2004-05. So the depreciation is not claimed as part of pre-commencement operations. The assessee is in the business of renting out of office building and developing new residential and commercial space. The appellant submitted details of furniture, fixtures, computer hardware and software, office equipments etc. and it is clear that they are related to rented building and have no connection to Capital or Project Work in progress of the appellant. Income from rent Rs.3,26,09,538 is already brought to the PnL account by the appellant. In the case of K.M. Sugar Mills Ltd. (373 ITR 42, 2015) Supreme court has held that once the assessee has proved ownership of assets and income generated from use of those assets is treated as business income, the assessee was entitled to depreciation under section 32 of the Income Tax Act. The depreciation claimed against work in progress is not claimed by the appellant. As the items on which depreciation was claimed are part of finished building, being used or are ready to be used by the appellant, there is no basis for a summary disallowance of 50% by the assessing officer. In the case of CIT v. Star Resorts (P) Ltd (P&H, 335 ITR 587, 2009) it was held by the jurisdictional High Court that depreciation cannot be determined on the basis of estimate. Hence ground no 7 being raised in appeal by the assessee is allowed.

administrative and corporate expenditures that includes legal and professional charges (Rs. 43.95 lacs) Communication expenses (Rs. 17.83 lacs), Travelling & Conveyance expenses (Rs. 13.91 lacs) etc. Your Honor will find that being General administrative and corporate expenditure they have nothing to do with CWIP and PWIP and hence does not required any allocation. The supporting documents along with allocation sheet were produced before the AO. The AO didn't take into consideration such material on record. However, The AO arbitrary applied the method of 50% as done in the case of Salary & Wages. The act of the AO is totally without basis and is based on conjecture and surmises and not based on any material on record. The Assessing Officer vide an order passed u/s 154 of the Income Tax Act, 1961 on 26.03.2012, reduced the addition of Rs. 1,16,92,374/- to Rs. 88,26,990" 8.3 The AO has held that, it has been noticed that out of an amount of Rs. 2,59,39,592/- related to the account of cafeteria and other expenses. Assessee should have capitalized amount of Rs. 2,81,92,672/-. However, assessee has capitalized only Rs. 2,34,17,005/-. There is difference of Rs. 47,75,667/- which should have also been capitalized. The same is being capitalized now and added back to the income of the assessee. The appellant has submitted that, "It is respectfully submitted that the Ld. AO has already dealt the issue relating to salary and wages of Rs. 4,13,96,912/- in Para 2 of the Assessment order by allowing 50% of the expenditure as allowable expenses that included the salary relating to cafeteria and 8 the Ld. AO again dealt the same issue relating to salary and wages concerning cafeteria and other expenses separately in Para 7 of the assessment order while salary and wages relating to cafeteria and others were already included in the salary and wages of Rs. 4,13,96,912/- as dealt in Para 2 of the Assessment Order. Since this was already adjudicated by the Ld. AO in Para 5 of the Assessment Order hence the same cannot be again adjudicated separately as this will result into double taxation." 8.4. As discussed in para 5.2, it is clear that the AO did not raise any dispute or objections with regard to audited books of accounts or the specific amounts being credited to PWIP and CWIP. The assessing officer assumed that 50% of all expenses including even cafeteria expenses are directly linked to the CWIP. As held in relation to salary and wages, since the allocation to CWIP and PWIP was already made by the appellant on the basis of actual expenses there is no need of further reallocation and percentage addition. Moreover Income Tax Appellate Tribunal, Chandigarh Bench (A) in the case of Assessee Company for the AY 2005-06 had held that common expenses such as salaries, travelling, insurance, rates and taxes, legal and professional expenses, and promotional expenses which are not allocable to any project are allowed as revenue expenditure. Hence the disallowance of miscellaneous expenses, administrative expenses and cafeteria expenses by capitalizing the same is hereby deleted and the grounds 8, 9 and 10 raised by the appellant are allowed. Obviously, Capital Work in Progress as shown by the appellant shall remain unaltered.”

As per the assessee, there are various departments involved in activities of CWIP, PWIP, property renting and general corporate departments. It has been further explained that salary and wages relating to departments such as civil, electrical, plumbing etc. involved in CWIP and PWIP have already been allocated which constitute 37.06% of total salary and wages expenditure and remaining expenses have only been claimed in the profit/loss account relating to rental of properties and general corporate departments. Similarly, other office and administrative and misc. expenses related to departments involved in CWIP and PWIP have already been allocated by the assessee. The AO however, didn’t accept the said factual assertion on part of the assessee and has held that 50% of expenses were directly linked to CWIP and PWIP and accordingly has carried out reallocation of these expenses which on appeal has been set-aside by the ld CIT(A). The ld CIT(A) has returned a finding that the AO did not raise any dispute or objections with regard to audited books of accounts or the specific amounts being credited/allocated to PWIP and CWIP, that the Assessing officer assumed that 50% of the expenses under the salary and wages are directly linked to the CWIP and as the allocation to CWIP and PWIP was already made by the appellant on the basis of actual payments, there is no need of further reallocation and lumpsum addition as so made by the AO. During the course of hearing, nothing has been brought on record to challenge the quantum of amount already stood allocated by the assessee as well as the basis of 50% allocation as so determined by the AO. In view of the same, we donot find any infirminity in the findings of the ld CIT(A) and the same are hereby confirmed and the ground of appeal so taken by the Revenue is hereby dismissed.

10. In Ground No. 4, the Revenue has challenged the action of the Ld CIT(A) in deleting the disallowance of Rs. 11,83,973/- on account of foreign exchange fluctuation gain.

11. In this regard, the relevant facts and the findings of the Ld. CIT(A) which are under challenge before us read as under:

“10. Ground No.12 is against disallowance of Rs. 11,83,973 on account of foreign exchange fluctuation gain. The AO has held that, during the year under review the assessee company has earned a net income of Rs. 11,83,973/- from the Foreign Exchange Fluctuation gain on account of import of Plant and Machinery/equipments. The assessee has shown this income in Profit & Loss account against business income though this income should have been shown as income from other sources. The assessee Company has submitted their reply that, "During the year under review the Assessee Company had earned a net income of Rs.11,83,973/- from the Foreign Exchange Fluctuation gain on account of import of Plant and Machinery/ Equipments, detailed ledger accounts of the said income were produced before the AO. It is respectfully submitted that since the gain on account of Foreign Exchange fluctuation relating to plant and machinery which forms part of the business of the Assessee Company, hence the same has been shown as operating business of the Assessee Company. This has been done in compliance of Accounting Standards No. 21" 10.1 The law is well settled by the Supreme Court in Sutlej Cotton Mills Ltd, (116 ITR 1) that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. There is no dispute that forex gain was attributable to import of Plant and Machinery and it is clear that they are wholly and exclusively for the purposes of the business of the appellant. The appellant has declared this as income from business whereas he could have very well disputed that this is not an income at all, as Plant and Machinery can be capitalised. In the case of CIT v. Woodward Governor India (P.) Ltd. (312 ITR 254 , 2009) the Supreme Court reiterated that the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet was an item of expenditure under section 37(1). In the same manner the profit made on account of exchange rate fluctuation is income from business and hence ground no 12 is allowed.”

13. In Ground No. 5, the Revenue has challenged the action of the Ld. CIT(A) in deleting the disallowance of Rs. 22,35,709/- on account of advances not recoverable whereas the AO has verified the facts during assessment proceedings and the assessee was unable to prove the genuineness of such advances.

14. In this regard, the relevant facts and the findings of the Ld. CIT(A) which are under challenge before us read as under:

“12. Ground No.14 is against disallowance of Rs.22,35,709 on account of advances not recoverable. The AO has held that, during the year assessee has written off Rs. 22,35,709/- from profit and loss account on account of old advances which were not recoverable. However, no documentary evidences pertaining to the existence of these accounts and regarding genuineness and authenticity of transaction were furnished to substantiate its claim. The appellant has submitted that "the advances of Rs.22,35,709/- Lacs written off, the Assessee company had exchanged various letters, correspondence with the vendors for recovery of above old advances and despite of effort the assessee company was not able to get back these advances and thus had to write off in the books of accounts of the Assessee company". '12.1 As can seen from appellant's audit report, a provision for doubtful advances is created every year which is added back before arriving at net profit. Doubtful advances are initially shown as part of income and are actually written off only when it is confirmed as bad debts. Supreme Court in the case of Mysore Sugar Co. Ltd 46 ITR 649 held that since the trade advance was made during the course of its business by the assessee, any loss on account of recoverability would automatically fall under the category of trade debt / receivable and hence is allowable as business loss. As there is no doubt that the appellant has actually extended these advances which have now become irrecoverable, ground no 14 is allowed.”

16. In Ground No. 6, the assessee has challenged the action of the Ld. CIT(A) in deleting disallowance of Rs. 20,00,000/- on account of personal expenses whereas the AO has arrived at a reasonable figure for disallowance based upon the facts and submission made by the assessee in the case.

17. In this regard, the relevant facts and the findings of the Ld. CIT(A) which are under challenge read as under:

“14. Ground No.16 is against disallowance of capitalized Rs.20,00,000/- on account of expenditure claimed in the P&L Account. The AO has held that it cannot be ruled out that assessee might not have incurred expenses of personal nature and also expenses not pertaining to the business activities of the assessee. Accordingly, keeping in view the volume of the business and also in view of the nature of business carried out by the assessee, I think it reasonable to disallow an amount of Rs. 20,00,000/- as expenditure claimed in the P & L account on account of above reasons to cover up any such incidence of expenses incurred by the assessee during the relevant. 14.1 This summary disallowance is made by the AO under the presumption that some expenses may be personal or not attributable to business. This is a general disallowance and not based on any item in PnL account. As seen in para 9 above, the AO has already disallowed Rs. 15,28,184/- as expenditure not supported by bills and vouchers. So there is no need of further ad-hoc disallowance without any basis. As a result ground no 16 is allowed.”

so taken by the Revenue is hereby dismissed.

19. In the result, the appeal filed by the Revenue is dismissed.

20. Both the parties fairly submitted that the facts and circumstances of the case in to 266 / Chd/2023 for A.Y’s 2010-11 to 2017-18 are identical and similar contentions as raised in for A.Y 2009-10 be considered, therefore, our findings and directions given in ITA No. 258/Chd/2023 shall apply mutatis mutandis to these appeals which are accordingly dismissed. 21. In the result, all the appeals filed by the Revenue are dismissed.