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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: HON’BLE SHRI MAHAVIR SINGH, VP & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आयकरअपील सं./ (िनधा"रण वष" / Assessment Year: 2013-14) & आयकरअपील सं./ (िनधा"रण वष" / Assessment Year: 2014-15) Alliance Mall Developers Co.Pvt. Ltd. DCIT-Central Circle-2(3) बनाम/ 803, 8t h Floor, Pratishtha Bhavan, 105/106, Provogue House Old CGO Building Off. New Link Road Vs. M.K. Road, Mumbai-400 020. Andheri (W), Mumbai- 400 053. "थायीलेखासं./जीआइआरसं./PAN/GIR No. AAGCA-5970-N (अपीलाथ"/Appellant) (""थ" / Respondent) : Assessee by : Shri Rushabh Mehta -Ld.AR Revenue by : Shri Michael Gerald-Ld. DR सुनवाई की तारीख/ : 20/02/2020 Date of Hearing घोषणा की तारीख / : 12/03/2020 Date of Pronouncement आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeals by assessee for Assessment Years [in short referred to as ‘AY’] 2013-14 and 2014-15 contest common appellate order on certain common grounds of appeal
. Therefore, the appeals were heard together and are now being disposed-off by way of this common order for the sake of convenience & brevity. -43/Mum/2018 Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14- 2.1 Aggrieved by the order of Ld. Commissioner of Income-Tax (Appeals)-48, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-48/IT-133 & 192/DCCC-2(3)/2016-17 dated 28/03/2018, the assessee is under appeal before us with following grounds: - 1.(a) The learned Commissioner of Income Tax {Appeals} - 48, Mumbai ("the Id. CIT(A)-48") erred in facts and law in sustaining the disallowance of Rs.1,44,29,341/- made by the learned Assessing Officer, without appreciating that the revenue expenses so claimed are allowable as deduction in the year under consideration as the business of the assessee is already commenced in earlier years. (b) The Id. CIT(A) - 48 erred in facts and law in deviating in her view in spite of the fact that the Hon'ble ITAT had allowed such expenditure in AY 2012-13 under the same set of facts and circumstances. 2.(a) Without prejudice to 1 above, the Id. CIT(A)-48 erred in facts and law in not directing the Id. Assessing Officer to include the expenses disallowed amounting to Rs.1,44,29,341/- in 'project cost' / 'capital work-in-progress1. (b) Without prejudice to above, the Id. CIT(A)-48 erred in facts and law in not even granting depreciation on the expenses treated as intangible assets.
3. The Id. CIT(A) erred in facts and law in not adjudicating or deleting the alternate disallowance of Rs.17,38,143/- made u/s. 14A read with Rule 8D of the Act by the Id. Assessing Officer.
4. Your appellant prays that- (a) The disallowance of Rs.1,44,29,341/- be deleted; (b) Without prejudice to 4(a) above, the disallowance of expenditure amounting to Rs. 1,44,29,341/- be treated as part of project cost; (c) Without prejudice to 4(a) and 4(b) above, depreciation may be allowed on the expenses treated as intangible assets; (d) The disallowance of Rs. 17,38,143/- made u/s. 14A be deleted; (e) Such other relief, as may be deemed fit in the matter, be granted.
5. Each of the above grounds of appeal are independent and without prejudice to one another.
The impugned order is common order for AYs 2013-14 & 2014-15 and therefore, the grievance of the assessee in both the years is similar. 2.2 Although the Ld. Authorized Representative for Assessee (AR), at the outset, submitted that issues are squarely covered in assessee’s favour by the decision of this Tribunal in cross-appeals for AY 2012-13 in assessee’s own case as well as assessee’s group concern namely M/s Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14-15 Hagwwod Commercial Developers Private Ltd., ITA Nos.1306/Mum/2015 & ors., common order dated 08/02/2017 but Ld. DR submitted that the said case law has been found by Ld. CIT(A) to be not applicable to the year under consideration. 2.3 We have carefully considered the arguments advanced by both the representative and perused relevant material on record including the documents placed on the paper-book. We have also gone through the cited order of Tribunal in assessee’s own case as well as its group concern vide common order dated 08/02/2017. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. 3.1 Briefly stated, the assessee being resident corporate assessee stated to be engaged as builder and developer, was assessed for year under consideration u/s.143(3) on 23/03/2016 wherein income of the assessee was determined at Rs.220.80 Lacs after certain disallowances as against returned income of Rs.76.51 Lacs e-filed by the assessee on 26/09/2013. 3.2 During assessment proceedings, it transpired that the assessee debited administrative expenditure of Rs.158.95 Lacs in the Profit & Loss Account, which were broadly as follows: - No. Items Amount (Rs.) 1. Advertisement and business promotion Rs.106.84 Lacs 2. Legal & Professional Fees Rs.45.08 Lacs 3. Travelling Expenses Rs.4.13 Lacs 4. Other misc. exp. Like rates and taxes, Rs.2.90 Lacs printing, communication, auditor’s remuneration and misc. expenses Total Rs.158.95 Lacs The Ld. AO proceeded to treat the same as capital expenditure. The assessee submitted that expenses directly related to the projects were Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14-15 already classified under Work-in-Progress and the balance common expenses were debited to the Profit & Loss Account. It was explained that the assessee was developing a mall and a residential project at Coimbatore. The cost of land, construction expenses and other direct expenses relating to the project were accumulated under the head work- in-progress and the balance expenses being in the nature of period cost were debited to Profit & Loss Account. These expenses were not incurred directly in relation to the projects. A plea was raised that the assessee was consistently following the Accounting Standards as prescribed by Sec. 145 of the Act. Further, the aforesaid accounting treatment, in the books of accounts, was stated to be as per Accounting Standard-7 as well as Accounting Standard-2 issued by The Institute of Chartered Accountants of India. In the above background, it was submitted that the expenses were incurred towards day-to-day activities of the assessee. Reliance was placed on the judgment of Hon’ble Guwahati High Court rendered in MKB (Asia) Private Limited Vs CIT [2006 167 Taxman 256] to support the submissions. 3.3 However, Ld.AO, referring to assessee’s Annual Accounts, opined that the assessee was not a builder or developer but actually constructing a capital asset and therefore, the project related expenditure were accumulated under the head Capital Work-in-progress. The assessee was showing the same as Capital Work-in-progress and not as Work-in-progress forming part of inventory or stock-in-trade. It was also concluded that the business was neither set-up nor commenced during the year and therefore, the expenditure would fall ITA No.2742-43/Mum/2018 Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14-15 under the head pre-operative expenses. It was also observed that the claim would fall on account of Matching Concept since the assessee was not showing any business income during the year but was claiming the expenditure and therefore, the assessee could claim expenditure only when the income was offered out of business. Finally, the aforesaid expenditure of Rs.158.94 Lacs was disallowed. Since, the assessee, in its computation of income, had already disallowed expenditure of Rs.24.94 Lacs, the balance amount i.e. Rs.134 Lacs was proposed to be added back to the income of the assessee. 3.4 The Ld. AO, in the alternative, proposed disallowance u/s 14A in view of the fact that the assessee was having year-end investments of Rs.4550.75 Lacs. Although the assessee submitted that it already made an estimated disallowance of Rs.0.75 Lacs, however, disregarding the same, Ld. AO computed the same at Rs.18.13 Lacs, being 0.5% of average investments as per Rule 8D(2)(iii). Since part of the expenses were debited in Profit & Loss Account and part were debited in Capital Work-in-progress, Ld. AO opined that 50% of this disallowance would suffice. However, since, entire expenditure of Rs.158.94 Lacs was already disallowed, separate disallowance u/s 14A was not made while computing the income of the assessee. 4.1 Before Ld. CIT(A), although the assessee relied on the cited order of this Tribunal in assessee’s own case for AY 2012-13, but Ld. CIT(A), at para 6.1 of the impugned order, observed that Tribunal has adjudicated only on the basis of issue whether business was set up or not. It has given a finding that the business was actually set up and Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14-15 these expenses claimed were not pre-construction expenses. However, no finding has been given on the main argument of Ld. AO the project expenses were all part of capital work-in-progress. There was no finding to the contrary by Tribunal regarding the actual nature of expenses claimed and whether they have to be part of Capital Work-in-Progress. No finding was stated to be rendered on Matching Principle as pointed out by Ld. AO. 4.2 The assessee reiterated that it was developing a mall and would earn income from letting out of shops. For residential projects, though advances are received but work had not started. However, a conclusion was drawn that the assessee was constructing only a Capital Asset and therefore, all the expenses incurred were for Capital Work-in-progress and are capital expenses. 4.3 Preceding further, Ld. CIT(A) observed that major expenses claimed as Advertisement and business promotion were brand management fees paid to and entity namely M/s Prozone Capital Shopping Centre Ltd. The perusal of nature of expenditure would establish that the same were for promotion of Brand. 4.4 Finally, the action of Ld. AO was upheld by observing that the expenditure was capital-in-nature to set up the business of the assessee and for long term benefit of the project. The expenditure being capital expenditure would not be allowable u/s 37(1). This was further supported by the fact that the basic principle of Matching Concept was not followed by the assessee. -43/Mum/2018 Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14-15 4.5 The alternative claim of the assessee that the expenditure should be allowed as project cost was also denied in view of the fact that Brand Building should be intangible assist for the assessee and therefore the same should not be part of work-in-progress which undisputedly was stock-in-trade and hence, should consist only of revenue expenses. Aggrieved, the assessee is under further appeal before us.
Upon careful consideration of factual matrix as enumerated hereinabove, the undisputed position that emerges is that all the direct expenditure incurred by the assessee towards project were capitalized in the books of accounts whereas the period cost was charged to Profit & Loss Account. The assessee was consistently following the same method of accounting which is evident from perusal of financial statements, as placed on record. The said accounting treatment, in our opinion, was in accordance with Accounting Standard-7 [AS-7] titled as Construction Cost issued by ICAI, which read as follows: - Contract Costs 15. Contract costs should comprise: (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; and (c) such other costs as are specifically chargeable to the customer under the terms of the contract.
Costs that relate directly to a specific contract include: (a) site labour costs, including site supervision; (b) costs of materials used in construction; (c) depreciation of plant and equipment used on the contract; (d) costs of moving plant, equipment and materials to and from the contract site; (e) costs of hiring plant and equipment; (f) costs of design and technical assistance that is directly related to the contract; (g) the estimated costs of rectification and guarantee work, including expected warranty costs; and (h) claims from third parties. -43/Mum/2018 Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14-15 These costs may be reduced by any incidental income that is not included in contract revenue, for example income from the sale of surplus materials and the disposal of plant and equipment at the end of the contract.
Costs that may be attributable to contract activity in general and can be allocated to specific contracts include: (a) insurance; (b) costs of design and technical assistance that is not directly related to a specific contract; and (c) construction overheads. Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of construction activity. Construction overheads include costs such as the preparation and processing of construction personnel payroll. Costs that may be attributable to contract activity in general and can be allocated to specific contracts also include borrowing costs as per Accounting Standard (AS) 16, Borrowing Costs.
Costs that are specifically chargeable to the customer under the terms of the contract may include some general administration costs and development costs for which reimbursement is specified in the terms of the contract.
Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract. Such costs include: (a) General administration costs for which reimbursement is not specified in the contract; (b) selling costs; (c) research and development costs for which reimbursement is not specified in the contract; and (d) depreciation of idle plant and equipment that is not used on a particular contract.
Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. However, costs that relate directly to a contract and which are incurred in securing the contract are also included as part of the contract costs if they can be separately identified and measured reliably and it is probable that the contract will be obtained. When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period.
Upon perusal of clause-19, we find that General administration costs and selling costs are generally not considered a part of contract cost unless they are contract specific. Applying the same to the fact of the case, we find that the assessee has debited expenditure of such a nature only in the Profit & Loss Account. Theses expenditure was not project specific and allowable as period cost. Nothing on record establishes that there -43/Mum/2018 Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14-15 was any change in aforesaid method of accounting by the assessee during the year under consideration.
Qua method of accounting, the Hon’ble Guwahati High Court in MKB (Asia) Private Limited Vs CIT [supra] observed as under: - 7. Learned Counsel for the appellant has produced before us the text of accounting standards AS-7 issued by the ICAI. It shows that this system was introduced in the year 1983 and it was made mandatory in the year 1990. There is no dispute at the Bar that this accounting system is an approved system of maintenance of accounts applicable to construction works contract. Sri Bhuyan, Learned Counsel for the respondents, has submitted that the question raised is more or less academic as in the long run, the assessee is not affected as the liability of tax on the income of the total works contract remains the same and the question is at what stage the tax is to be paid. Mr. Joshi was fair enough to submit that it is not a question of additional liability of tax, but the question is whether the IT Department can force the assessee to adopt a particular system of accounting, or whether the assessee has the option. While going through AS-7, we find the executor of the works contract is required to pay income-tax even on the part completion of the work also, but a formula has been provided for the purpose regarding valuation, etc., keeping in mind the ultimate payment to be received against the entire work.
In the present case, the factual part is not under dispute and hence we would confine to the question raised.
A similar question had arisen in the case of CIT vs. Doom Dooma India Ltd. (1994) 117 CTR (Gau) 156 : (1993) 200 ITR 496 (Gau), wherein the question of valuation of stock arose as a result of the accounting system. Referring to the provision of s. 145 of the Act, This Court held: “It is for the assessee to adopt any recognized method of accounting for his business. The income shall be computed in accordance with the method of accounting regularly employed by the assessee. In other words, it is open to the assessee to opt for such method of accounting as he deems reasonable and appropriate. He may opt to adopt the manufacturing cost price method or the market price method provided the method is followed in regard to both the opening stock and the closing stock. It is not open to him to adopt one method for valuing the opening stock and a different method of valuing the closing stock so as to intentionally suppress the income derived or derivable in the particular previous year. Even where an assessee has adopted a particular method for a period of years, there is no provision of law which prevents him from changing to any other method, provided the changeover is not made in the same assessment year. The proviso to sub-s.(1) empowers the AO to compute the income on such basis and in such manner as he determines if the accounts are correct and complete but the method adopted is such that, in his opinion, the income cannot properly be deduced therefrom. The jurisdiction can be invoked where he is of the opinion that the income cannot properly be deduced therefrom. He cannot exercise the jurisdiction merely on the ground that the method adopted, which is otherwise regular or fair, is detrimental to the Revenue or advantageous to the assessee. If the AO is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the AO may make an assessment in the manner provided in s. 144.”
In support of the above findings, this Court had placed reliance on the following decisions of the apex Court: -43/Mum/2018 Alliance Mall Developers Co. Private Limited Assessment Years :2013-14 & 14-15 (1) Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC); (2) Investment Ltd. Vs. CIT (1970) 77 ITR 533 (SC); and (3) A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC).
We may recapitulate the following observations of the Hon’ble Supreme Court in Investment Ltd. Vs. CIT(supra) : “ A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the Departmental Authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if in the opinion of the taxing authorities’ income of the trade cannot be properly deduced therefrom. Valuation of stock at cost is one of the recognized methods. No inference may, therefore, arise from the employment by the company of the method of valuing stock at cost, that the stock valued was not stock-in-trade.”
As stated above, the accounting system AS-7 is an approved system of accounting by the ICAI and as such the authenticity of the said accounting system is not under challenge. The assessee firm/appellant being a private limited company was maintaining its accounts following the said system and the accounts were duly audited by a qualified chartered accountant, maintenance of the accounts as well as the valuation of work-in-progress will not prejudice either side. Admittedly, the particular work contract was not completed and it comes under the category of work- in-progress. There is also no dispute that the ultimate liability of the assessee as regards tax will be dependent upon the total (fixed) amount received by the assessee against the particular work contract.
We, therefore, hold that the IT authority has no option/jurisdiction to meddle in the matter either by directing the assessee to maintain its accounts in a particular manner or adopt a different method for valuing the work-in-progress. We reiterate the decision in Doom Dooma India Ltd.(supra) and hold that an assessee has as the option/liberty to adopt any recognized method of accounting for his business and the income shall be computed in accordance with such regularly maintained accounting system.
It was held that AS-7 as an approved system of accounting and regular accounting methodology adopted by the assessee could not be disregarded by the department.
On the basis of above discussion, it could be observed that the assessee was consistently following a particular method of accounting which was in accordance with Accounting Standard issued by ICAI and which is well accepted by higher courts. Therefore, there being no change in fact, the said methodology could not be rejected by the revenue.