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Income Tax Appellate Tribunal, “G”
Before: SHRI S. RIFAUR RAHMAN, AM & SHRI RAM LAL NEGI, JM
PCIT -9, M/s Golden Realty & Room No. 214, 2nd floor Infrastructure Ltd. बिधम/ Aayakar Bhavan, M.K. 2nd floor, Tobacco House, S. Vs. Road, Mumbai-400 020 V. Road, Vile Parle (W), Mumbai – 400 056 स्थायीलेखासं./जीआइआरसं./PAN No. AADCG2567Q (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant : Shri Vinod Kumar Bindal, AR by प्रत्यथीकीओरसे/Respondentby : Shri T. Kipgen, DR सुनवाईकीतारीख/ : 24.09.2019 Date of Hearing घोषणाकीतारीख / : 27.11.2019 Date of Pronouncement आदेश / O R D E R
Per S. Rifaur Rahman, Accountant Member:
1. The present Appeal has been filed by the assessee against the order of Ld. Pr. Commissioner of Income Tax - 9 in short referred as ‘Ld. PCIT’, Mumbai, dated 29.03.19 for Assessment Year (in short AY) 204-15. M/s Golden Realty & Infrastructure Ltd.
The brief facts of the case are that assessment order passed by the AO u/s 143(3) of the Income Tax Act on 16.12.2016 assessing the total loss of the assessee at Rs. (-)13,14,07,260/-. On verification of the assessment records, Pr.CIT observed that AO had allowed the interest expenditure of Rs 20,40,72,764/- crores claimed by the assessee and the above said expenditure was claimed on advance paid to acquire development rights on land. Pr. CIT observed that AO did not appreciate that there was no business activity during the relevant period for the project under consideration and, therefore, the interest expenditure should have been capitalized as work in progress. Accordingly, a show cause notice u/s 263 of the Act was issued and served on the assessee. In response to the above said notice, assessee contended that by borrowing the money and then advancing the same for acquisition of plots to carry on development activities, itself amounts to commencement of the business even though the construction activities were yet to begin. In this regard, assessee relied on the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT reported in 243 ITR 83(SC) and submitted that for invoking the provisions of section 3 M/s Golden Realty & Infrastructure Ltd. 263 of the Act, it is pre requisite that both the conditions required under the Act, has to be satisfied i.e. erroneous but also prejudicial to the interest of revenue. 3. After considering the submission of the assessee, Pr.CIT rejected the contentions of the assessee with following observations as given below:-
I have carefully considered the assessment order, submissions made by the A.R. as noted above, as well as the case records maintained by the AO for this purpose. On merits, the AR's principle argument is that the assessee company had commenced its business by borrowing funds for acquisition of plots to carry on development activities. Hence, the interest expenditure is allowable's a business expenditure. It has been agreed/admitted by the assessee that the Interest expenditure was incurred on funds borrowed to acquire development rights over land. It is also ^agreed or admitted by the assessee that the company intends to utilize that land for construction of group housing complex and development of land including construction of roads, water supply, street lighting etc (as detailed in Development Agreement submitted during the course of assessment proceedings). Hence, t is not disputed that the interest expenditure was M/s Golden Realty & Infrastructure Ltd. incurred for a Land development project which is the business activity of the assessee.
The pertinent question is whether the said expenditure is allowable as a revenue expenditure during the year under consideration or should it be capitalized as Work In progress. The assessee company follows accrual accounting system and hence all costs including costs related to acquisition of land/development rights over land, construction and development costs and any incidental expenses and borrowing costs which are incurred directly in relation to a project or which are apportioned to a project, should be included in project costs. And the same has to be matched against revenue recognized for the said project following matching principle. Hence as per the accounting standards, the assessee should have capitalized the expenditure related to the said project till the revenue is recognized.
Further, Pr. CIT opined that AO has not made necessary inquiry before completing the assessee and by relying on the decision in the case of Marigold Nirman Pvt. Ltd. and Subhalakshmi Vanijya Pvt. Ltd. distinguished the decision in the case of Malabar Industrial Co. Ltd. (supra) and came to the conclusion that order passed u/s 143(3) is erroneous and M/s Golden Realty & Infrastructure Ltd. prejudicial to the interest of revenue. Accordingly, Pr. CIT set aside the assessment order and directed the AO to pass afresh assessment order after conducting necessary enquiries and after giving proper opportunity to the assessee.
Aggrieved by the above order of Ld. PCIT, assessee preferred the appeal before us on the ground mentioned herein below:-
1. The learned CIT erred in law and on facts in setting aside the assessment order passed on 16/12/2016 by the Assessing Officer u/s 143(3) of the Act ignoring that the twin conditions laid down in the Act to take action u/s 263 of the Act were not fulfilled. Thus, the order passed u/s 263 of the Act should be cancelled.
2. The learned CIT erred in law and on facts in holding the assessment order passed u/s 143(3) of the Act as erroneous ignoring that a) the assessing officer raised enquiries about the business activities (including its existence) of the appellant who filed complete details of the same, b) it is not necessary that Assessing Officer should discuss in the assessment order each and M/s Golden Realty & Infrastructure Ltd. every query raised by him during the assessment proceedings or every verification made from the books of account in the assessment folder or the order sheet, c) the Pr. CIT cannot direct the assessing officer as to what and in which manner the assessing officer should have conducted the assessment proceedings as it was the sole prerogative of the assessing officer as how the verification of the claims in the return of income should be made from the books of account wherefrom every claim made in the return of income and the profit and loss account of the relevant period is verifiable, d) none of the conditions mentioned in the Explanation 2 u/s 263 of the Act are applicable in this case e) without prejudice, the Assessing Officer has taken one of the two possible views after verification which is sustainable in law.
Thus, the assessment order was not erroneous at all and the condition laid down for taking action u/s 263 of the Act was not fulfilled. Thus the order passed by the CIT should be cancelled.
M/s Golden Realty & Infrastructure Ltd. 3. The PCIT has passed the impugned order just to accept the audit objection without applying her mind independently and examining the material submitted on record of the assessing officer during the assessment proceedings. Thus, the impugned order is itself illegal and void ab initio and must be quashed.
4. The Pr. CIT erred in law and on facts in setting aside the order passed u/s 143(3) of the Act ignoring that action u/s 263 of the Act cannot be taken merely on the basis of an opinion of the Pr. CIT that necessary enquiries were not made in the desired manner by the assessing officer. Thus the order passed u/s 263 of the Act on this basis should be cancelled.
5. The appellant craves the leave to add, substitute, modify, delete or amend all or any ground of appeal either before or at the time of hearing.
Before us, Ld. AR filed a synopsis of the case in support of his arguments, which is reproduced below:-
Assessment re-opened u/s 263 of the Act is based on audit objection
Under the RTI Act after passing the impugned revisional order, the assessee received the information M/s Golden Realty & Infrastructure Ltd. that the impugned assessment is subject to revision on the basis of an audit objection where the Assessing Officer strongly objected to the proposed audit objection (Page nos.2 to 5 of PB) by stating that the entire information about this transaction is on record and endorsed the fact that the company had already come into business in the preceding assessment years when it entered into the joint development agreement and payment was made for the plots of land by borrowing funds. The audit objection is at Page nos. 6 to 8 of the PB wherein on page 7 last para the reasons for proposing action u/s 263 of the Act has been given.
2. The only contention of the PCIT to direct revision of the assessment order is that though the assessee had given advances for acquiring development rights in plots of land but it did not commence construction activity on the said plots of land. Therefore,in her opinion, the interest on loans borrowed from Indiabulls Financial Services Ltd debited in the Profit and Loss Account should be disallowed and be capitalized as work in progress. Factually, the appellant is not a contractor to commence construction but is real estate developer where amounts were advanced for acquiring plots of land for the purpose and the business had already been set M/s Golden Realty & Infrastructure Ltd. up in the earlier years when the advances were given by borrowing funds.
3. The assessment cannot be revised on the basis of an audit objection as has been held by the Apex Court in PCIT vs S. Chand & Co. Ltd.[2018] 100 taxmann.com 353 (SC) date of judgment 16/11/2018 confirming the order of the Hon 'ble Delhi High Court. Copies of the orders of the Apex Court and the Hon'ble Delhi High Court are placedat Page nos. 75 and 76 of the PB compilation dated 10/07/2019 of case laws.
Business had already been set UP and expenses incurred thereafter are allowable as revenue expenditure irrespective of the business receipts It is a settled law u/s 3 of the Act that all business expenses incurred after the date of setup of the business are allowable as revenue expense and actual commencement of business is not material.
The assessee has filed several orders on identical facts where it has been held as soon as the assessee takes steps to set up its business though the actual commencement is much later, the expenses incurred after setting of the business are allowable. Reference is drawn to the following:
Cases M/s Golden Realty & Infrastructure Ltd. Sr. No Particulars Page nos. of the case laws compilation a) Daimler India Commercial Case laws PB-II, Vehicles Pvt. Ltd. 2019- Page No. 25 TIOL-1497-HC-MAD-IT b) Pinebridge India (P) Ltd Case laws PB-II, (2018) 99 Taxmann.com 58 Page No. 1 (Mumbai - Trib.) c) Arcane Developers (P) Ltd. Case laws PB-II, (2014) 42 Taxmann.com 10 Page No. 9 (Delhi) d) Samsara Hospitality (P) Ltd Case laws PB-II, (2017) 85 Taxmann.com 36 Page No. 13 (Mumbai - Trib.) e) Western India Vegetable Case laws PB-II, Products Ltd (1954) 26 ITR Page No. 21 151 (Bom.)
The assessee is not a contractor which would be a different person.The assessee is a real estate developer and the activities of a builder are different from the contractor. The developer initiates steps to consolidate the plots of land for development of real estate project and construction is one of the activities therein. As a developed project has many elements other than construction activity.
M/s Golden Realty & Infrastructure Ltd. Due to some litigation of the plot owners with the erstwhile owners, the registration of those plots was delayed till 05/01/2012 (one sample copy at Page nos. 1 to 31 of the II PB), all the development activities on the plots of land could not commence, though requisite steps had been taken to draft development / building plans on the said plots.
8. A photocopy of the joint development agreement dated 13/08/2010 is placed at Page nos. 32 to 64 of the PB II dated 22/07/2019. A photocopy of the loan agreement dated 30/12/2011 of the plot owners and the appellant with Indiabulls is also placed at Page nos. 65 to 134 of the IIPB.
Allowance of this business expenditure in the earlier years The assessee entered joint development of plots of the land owners in year 2010 but borrowed interest bearing funds in the year 2011 from Indiabulls Financial Services Ltd and paid interest thereon to the said lender and since then the same has been allowed as a business expense year after year as below: A.Y. Amount of interest fRs.) 2012-13 5,78,85,755 M/s Golden Realty & Infrastructure Ltd. 2013-14 30,09,79,624 Total 35,88,65,379 The above interest has been allowed by the revenue in the earlier assessment years as above. The assessment of income for the AY 2013-14 was completed u/s 143(3) of the Act on 21/03/2016 after proper examination of the facts and information. A photocopy of the assessment order for the A.Y. 2013-14 is enclosed at Page nos. 135 to 139 of the third PB. For the other years, the income returned has been accepted without issuing any notice u/s 143(2) of the Act, thus accepting the facts on record of the revenue. Once, the revenue accepts interest as an allowable revenue expenses then the same has to be allowed in every subsequent year on the same facts.
10. Admittedly, here no facts were changed. The only reason taken by the PCIT to issue the show cause notice as mentioned in the impugned revisional order is that the assessee has not commenced the construction activity on the plots of land for the joint development of which advances were given. Thus, admittedly the fact of making advances by borrowing money in the earlier year for the business is accepted. The construction activity is subsequent to the same.
M/s Golden Realty & Infrastructure Ltd. The said premises of the PCIT are totally farce and the impugned revisional order must be quashed. The Assessing Officer made detailed enquiries as has been mentioned by him in the report / reply sent to the audit party as above.
Enquiry by the assessing officer during the assessment proceedings
In the questionnaire dated 12.08.2016 vide Question Nos. 9,10and 23 at page nos. 69-70 of the first paper book dated 04/07/2019 issued by the Assessing Officer, he specifically raised the issue of allowance of interest, joint development agreement and interest free advance and once he has made an enquiry then the manner of the enquiry to be conducted in a different manner must only be considered as holding a different opinion and no revision u/s 263 of the Act is permitted as has been held in the following legal authorities: Sr. Name of the Case Page nos. of No the case laws compilation a) Om RudraPriya Holiday Resort Case laws PB- Pvt Ltd 20 1 9-TIOL- 1 49 1 -HC- II, Page No. 36 RAJ-IT b) Greenworld Corporation [2009] Case laws PB-I, ISlTaxmannlll (SC) Page No. 6 M/s Golden Realty & Infrastructure Ltd. c) V. Dhana Reddy & Co. [2018] Case laws PB-I, 100 Taxmann.com 358 (SC) Page No. 32 d) Fine Jewellery (India) Ltd. [2015] Case laws PB-I, 55 Taxmann.com 514 (Bombay) Page No. 35 e) Bismillah Trading Co. 2000 Case laws PB-I, Taxmann.com 1588 (kerala) Page No. 41 (Equivalent citation [2001] 248 ITR 292 (Kerala)) f> Venkata Krishna Rice Co. [1987] Case laws PB-I, 30 Taxmann 528 (Madras) Page No. 54 Equivalent citation [1987] 163 ITR 129 (mad.)) g) Sanspareils Grenlands (P) Ltd New Case Law, [2018] 99 Taxmann.com 222 Page No. 1 and (Delhi - Trib.) Para 5.9 h) M/s Meerut Roller Flour Mills New Case Law, Pvt. Ltd. High Court of Delhi in Page No. 1 & of 2013 12 12. As per settled law, out of the possible two views, the favourable to the assessee has to be accepted. Reference is invited to following case laws: • Gokuldas Exports [2012] 20 Taxmann.com 491 (Karnataka) - Case laws PB-I, Page No. 62 • Century Plyboards (I) Ltd [2019] 103 Taxmann.com 179 (SC) - Case laws PB-I, Page No. 72 (Reference by Others) • M/s Maharashtra Hybrid Seeds Co. Ltd, High Court of Bombay, ITA No. 47 of 2002 (DOJ: 4th September, 2018) - New Case, Page No. 7 & 8 M/s Golden Realty & Infrastructure Ltd. • Jaswinder Singh, [2013] 31 Taxmann.com 80 (Chandigarh - Trib.) - New Case, Page No. 1 & Para 23 Reference is invited to the following pages: PB -1, Page No. 16, 17, 20, 21, 29, 35, 36, 37, 39 (Identical Facts), 68, 70 7. On the other hand, Ld. DR relied upon the orders passed by Ld. PCIT and also relied upon the decision of Hon’ble Gujrat High Court in the case of N. K. Industries Vrs. ITO (OSD) (2014) 362 ITR 502 (Guj HC). He submitted that the bench observed that Pr. CIT in his findings in para no. 3 that “It has been agreed /admitted by the assessee that interest expenditure was incurred on funds borrowed to acquire development rights over land. It is agreed or admitted by the assessee that the company intends to utilize that land for construction of group housing complex and development of land including construction of road, water supply, street lighting, etc. Hence it is not disputed that the interest expenditure was incurred for a 16 M/s Golden Realty & Infrastructure Ltd. land development project which is the business activity of the assessee.”
Now the question is whether the assessee has accepted the same before Pr. CIT. After inquiry and referring the file, Ld. DR submitted that no such admission was made by the assessee and no record is available in this regard. However, he submitted that it is inferred by Pr. CIT with the available record in the assessment file.
Considering the rival submission and material placed on record as well as considering the detail synopsis and paper book filed by the assessee, we notice that it is clear that AO verified this issue and then allowed the deduction. All the relevant information was already available before AO. However, from the record, we notice that AO has asked the information relating to the expenditure and also in the earlier assessment years, AO has allowed the expenditure as business expenditure.
M/s Golden Realty & Infrastructure Ltd.
On merit, we notice that assessee has incurred this expenditure in order to acquire development rights on the land and due to some reason, the project got delayed. Any interest expenditure which assessee has incurred during this period cannot be capitalized. Since it is a period cost and in real estate, the interest cost will be charged to P & L account based on period and it cannot be capitalized. The cost of construction can be capitalized and any interest expenditure which is period cost cannot be capitalized in the real estate business. Since assessee is in the development business and the cost is link to the revenue and the additional cost can never be linked with the revenue. In this line of business, it can only be charged to Profit & Loss account as additional period cost. Since assessee has made this payments to acquire development rights and as and when assessee needs the development rights to develop the projects, on that point of time itself business has actually set up and actual activity may take place subsequently as held in the catena of cases. In Income Tax Act, assessee can claim expenditure as soon M/s Golden Realty & Infrastructure Ltd. as the business is set up. Therefore, in our considered view in order to invoke the provision of section 263 of the Act, the twin condition has to be satisfied and merely erroneous order or it is prejudicial to the interest of revenue, but not erroneous. In the given case, it is noticed that the order passed by AO is after duly considering the allowability of interest expenditure. Therefore, it is not erroneous and also business is already set up.
11. With the above observations, we do not see the order is erroneous, therefore the order passed by Pr. CIT is accordingly set aside as dismissed. Hence, the grounds raised by the assessee are allowed.