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Income Tax Appellate Tribunal, KOLKATA ‘B’ BENCH, KOLKATA
Before: Sri Aby T. Varkey & Sri Manish Borad
Appearances by: Sh. Amitava Bose, A/R, appeared on behalf of the Assessee. Smt. Ranu Biswas, Addl. CIT, appeared on behalf of the Revenue. Date of concluding the hearing : September 14th, 2021 Date of pronouncing the order : September 16th, 2021 ORDER
Per Manish Borad, Accountant Member:
This appeal filed by the assessee pertaining to the Assessment Year (in short “AY”) 2015-16 is directed against the order of ld. Commissioner of Income-tax (Appeals)-2, Kolkata [in short ld. “CIT(A)”] dated 01.02.2019 vide appeal no. 10517CIT(A)-2/17-18 which is arising out of the assessment order framed u/s 143(3) of the Income Tax Act (in short the “Act”) dated 14.12.2017 by ACIT, Circle-6(2), Kolkata.
Brief facts of the case as confirmed from the records are that the assessee is a Private Limited Company engaged in real estate development and has e-filed its return of income for the Financial Year 2014-15 relevant to the AY 2015-16 on 28.09.2015 declaring loss of ₹4,56,48,945/-. Case was selected for scrutiny under CASS followed by serving notices u/s 143(2) and 142(1) of the Act. Various information, as called by the ld. Assessing Officer (in short ld. “AO”), were submitted. Ld. AO on perusal of the details, came to a conclusion that expenses incurred on legal and professional charges and other related expenses, pertaining to the building project in progress amounting to ₹24,13,204/- should have been added in the work-in-progress
2 I.T.A. No.: 679/Kol/2019 Assessment Year: 2015-16 Shrachi Realty (P) Ltd. and cannot be claimed as revenue expenditure. Ld. AO also observed that the interest expenditure amounting to ₹1,06,00,823/- taken by the assessee against the project named Shrachi Green Projects is disallowable as the project has not been completed and the loan was taken from Allahabad Bank for construction of project only. Similar type of disallowance of interest expenditure of ₹2,61,29,653/- was also made for want of completion of project. Ld. AO also made addition u/s 14A of the Act at ₹67,82,105/-. In view of the above addition, total income was computed or assessed at ₹2,55,710/- and book loss u/s 115JB (MAT) of the Act computed at ₹2,06,66,837/-.
Aggrieved, the assessee preferred an appeal before the ld. CIT(A), and partly succeeded in this issue raised before him. Now, the assessee is in appeal before the Tribunal raising the following grounds:
1. For that on the facts and in the circumstances of the case Ld. CIT(Appeals) was wrong in upholding the addition of Rs.2413201/- being difference in construction cost and work in progress. The observation made in this regards are wrong and incorrect. He was wrong in not properly appreciating the submission and details made before him during the course of appeal. He was wrong in stating that no cogent material evidence was produced".
2. For that on the facts and in the circumstances of the case Ld. CIT(Appeal) was wrong in confirming the disallowance the following amounts out of interest paid:- a) Rs.2,61,29,653/- b) Rs.1,06,00,823/- He was wrong in not properly appreciating the submission and details made before him during the course of appeal. He was wrong in stating that "no cogent material evidence was produced".
3. For that on the facts and in the circumstances of the case Ld. CIT(Appeal) was wrong in confirming disallowance u/s.14A read with rule 8D(2](ii) of Rs.6735915/- and under rule 8D(2)(iii) of Rs.46190/- totaling to Rs.6782105/-. He was wrong in not properly appreciating the submission and details made before him during the course of appeal. He was wrong in stating that "no cogent material evidence was produced".
4. For that the appellant craves leave to adduce and/or alter further ground/s on or before hearing of the appeal.”
4. Ld. Counsel for the assessee firstly took us to the paper book containing pages 1-69 and also referred to the following written submissions:
3 I.T.A. No.: 679/Kol/2019 Assessment Year: 2015-16 Shrachi Realty (P) Ltd. “1. Assessee Company's main business is development of real estate. The details of projects taken-up by the Company are on page no. 4 of the Paper Book.
2. The Ld. Assessing Officer has disallowed the following amounts on the Ground that these expenses should have been capitalised to the work-in-Progress (WIP) and these are not revenue expenses as claimed by the Company. a) Legal & other expenses related to Shrachi Greens (vide Rs. 24,13,204/- para 4, page 2 of the Assessment order) The Projects at Jamsedhpur is named "Greens" work of which was delayed and as such the administrative expenses were not capitalized following the Accounting Standard 2(AS2) and on the advice of the auditors. The details of administrative expenses of Rs.24,13,204/- is on page no.4 of the Paper Book. Copy of relevant portion of AS2 is also enclosed in page no.8 of the Paper Book. b) Interest expenses not revenue expenditure as per A.O. Rs. 1,06,00,823/- (vide para 5 page 3 & 4 of the Assessment order) Details of interest paid to Allahabad Bank for 2(two) Projects and debited to P/L a/c of Rs.4,38,08,248/-is on page no. 5 & 6 of the Paper Book. Interest paid for Shrachi Green Projects of Rs.2,88,98,502/- was not capitalized due to suspension of the Project beyond expected time line as mandated by AS16 para 17 & 18 and on the advice of the auditors (copy of relevant portion of AS16 is enclosed on page no. 9 & 10 of the Paper Book). Interest incurred for EK Tower Project was not capitalized because loan availed was not utilized for the construction activities of the Projects, rather the same was given to Bengal Shrachi Housing Development Ltd. as an interest bearing loan and interest income was shown in P/L a/c. Calculation of disallowance of Rs.1,06,00,823/-
Interest on Term loan to Allahabad Bank For EK Tower Rs.1,47,11,079/- Rajahat Less: Proportionate interest for loan given to Bengal Shrachi Rs. 41,10,256/- Housing Development Ltd Rs.1,06,00,823/- Rs.2,61,29,653/- c) Capitalisation of interest (vide para 6, page 7 & 8 of the Assessment Order) Break-up of disallowance of Rs. 2,61,29,653/- Total Interest paid Rs.4,35,12,581/- Less: Rs.1,06,00,823/- a) Disallowance as per para 4 of the Asstt. order b) Disallowance of interest under Rs. 67,82,105/- Rs.1,73,82,928/- disallowance u/s 14A Para 5 of the Asstt. order Rs. 2,61,29,653/- The Company is regularly following the accounting method since inception on the basis of Accounting Standard (AS) specified by Institute of Chartered Accountant of India and on the advice of auditors. As such the company has followed the AS 2 4 I.T.A. No.: 679/Kol/2019 Assessment Year: 2015-16 Shrachi Realty (P) Ltd. for debiting the sum of Rs.24,13,204/- and AS 16 for debiting the sum of Rs. 1,06,00,823/- as well as Rs.2,61,29,653/-. Without prejudice to the above that appellant company has debited the aforesaid amounts by following accounting method as prescribed by Institute of Chartered Accountant of India. As such the Ld. Assessing officer may please be directed to allow the following expenses as and when projects are complete. a) Rs. 24,16,204/- b) Rs. 1,06,00,823/- c) Rs. 2,61,29,653/- d) Disallowance U/s 14A Rs. 67,82,105/- (vide para 6, page 5, 6 & page 7 of the assessment order) The aforesaid disallowance consists of following:- Disallowance under Rule 8D(2)(ii) Rs.67,35,915/- Disallowance under Rule 8D(2)(iii) Rs. 46,190/- Rs.67,82,105/- While disallowing the above sum of Rs.67,82,105/- the Id. Assessing Officer has stated that probability of use of unsecured loan in the non-current investment could not be ignored (para 6.3 page-5 of the assessment order). It was submitted before the Assessing Officer and the Ld.CIT(A) that total investment in shares is Rs.19.58 Crores whereas total Capital and Reserve is Rs.49.84 Crores. Therefore investment was out of own funds. Even date of acquisition of shares was also furnished (page no.llof Paper Book) which shows that shares were acquired till February, 2010 whereas first disbursement of loan from Allahabad Bank for projects were 27th January 2011 and 19th November 2013. Therefore it is clear that no loan was utilized for acquiring the shares and no disallowance on account of interest of rs.67,35,915/- can be made (under Rule 8D(2)(ii). As regards disallowance under Rule 8D(2)(iii) of Rs.46,190/-, the appellant has no objection. The Ld. CIT(A) has summarily confirmed the all the disallowances without considering the submissions properly made before him.”
Per contra, the ld. Departmental Representative (in short ld. “D/R”) has vehemently argued supporting the orders of both the lower authorities and she also stated that the assessee should have filed the projected time for completion of the project and also the projected profits from the projects undertaken.
We have heard the rival contentions and perused the records and carefully gone through the documents filed before us. We observe that the assessee is in the business of real estate development and is carrying out various projects/buildings which are under construction during the year under appeal.
5 I.T.A. No.: 679/Kol/2019 Assessment Year: 2015-16 Shrachi Realty (P) Ltd. 6.1. As regards, ground no. 1 & 2 pertaining to addition of ₹24,13,204/- for disallowance of certain expenses specifically incurred for the project and also interest disallowance of ₹2,61,29,653/- & ₹1,06,00,823/-, we find that in the written submissions filed by the ld. Counsel for the assessee and also during the course of hearing, it was stated that on account of following the Accounting Standard 2 (AS2), the alleged expenses were not capitalized. It was also admitted that legal and other expenses of ₹23,13,204/- relates to Shrachi Green Projects carried out at Jamshedpur which could not be completed in due time. It is also an admitted fact that the assessee took loan from Allahabad Bank for two projects namely Shrachi Green Projects and EK Tower Project which are under construction during the year. Ld. Counsel for the assessee has admitted before us that the alleged disallowance of interest and administration expenditure pertains to projects under construction and the disallowance is rightly made and also made a request that suitable direction should be given to the AO that the year in which these projects can be completed, the assessee should be entitled to claim the alleged disallowance of expenses of ₹24,13,204/- and disallowance of interest of ₹3,67,30,476/-. Ld. D/R did not oppose to this submission made by the ld. Counsel for the assessee.
6.2. We, therefore, under the given facts and circumstances are of the considered view that since the assessee is following percentage completion method, the alleged expenses and interest expenditure which were having direct nexus with the projects undergoing during the year cannot be claimed as revenue expenditure for the year under appeal and, therefore, should form part of the work-in-progress and the assessee shall be eligible to claim the amount as an expenditure when the projects with which they are connected are completed and assessee starts selling the units of the project.
6.3. Thus, for the year under appeal, the finding of the ld. CIT(A) needs no interference and ground nos. 1 & 2 raised by the assessee are dismissed as per the terms indicated above.
As regards, ground no. 3 for the disallowance u/s 14A of the Act made at ₹67,35,915/- computed under Rule 8D of the Income Tax Rules, 1962, we
6 I.T.A. No.: 679/Kol/2019 Assessment Year: 2015-16 Shrachi Realty (P) Ltd. find that the alleged disallowance is made out of the interest expenditure. It is a settled judicial precedence that disallowance of interest expenditure u/s 14A of the Act is not called for if the assessee has sufficient capital and reserve and surplus that interest free funds available are in excess of the investments held during the year. For this proposition, we draw support from the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. reported in [2009] 313 ITR 340 (Bombay).
7.1. On examining the facts of the above judgment, we find that as on 31.03.2015, the assessee had share capital of ₹50,39,000/- and reserve and surplus of ₹49,33,11,396/-. Against these interest free funds pertaining to ₹ 49,83,50,396/-, the investments in equity shares fetching exempt income shown under the head “Non-current investments” amount to ₹19,57,75,320/-. Therefore, since the interest free funds available with the assessee are in excess of the investment in equity shares at the close of the year and there being no specific finding by the AO about the nexus of the interest bearing funds having been applied for investment in equity shares, we find no justification in the finding of the ld. CIT(A) confirming the interest disallowance u/s 14A of the Act made by the AO. We accordingly set aside the finding of the ld. CIT(A) and allow the ground no. 3 raised by the assessee.
Ground no. 4 is general in nature which needs no adjudication.