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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’ NEW DELHI
Before: SHRI PRASHANT MAHARISHI & SHRI K.NARASIMHA CHARY
ORDER PER K. NARASIMHA CHARY, JM Challenging the order dated 23.12.2015 in Appeal No. 598/2014-15, passed by the Learned Commissioner of Income Tax (Appeals)-4, New Delhi (Ld. CIT(A)), revenue preferred this appeal.
2 2. Brief facts of the case are that the assessee is engaged in the construction of residential group housing project which is underway during the year under consideration. They have filed their return of income on 28.9.2012 declaring a total loss of Rs.1,82,92,104/-. During scrutiny, learned AO noticed that in the profit and loss account for the year, the assessee had debited expenses amounting to Rs.2,86,23,313/- against income of Rs.1,03,96,618/- shown as other income. Such other income was earned on account of interest income on deposits and others, amount forfeited on cancellation, booking transfer charges and miscellaneous income. While computing the taxable income under the heqad “Business and Profession”, the assessee computed business loss of Rs.2,81,61,440/- and the income from other sources at Rs.1,00,39,829/- which resulted in the net loss of Rs.1,82,92,104/-, as such, in the return of income, the assessee had shown the total loss of Rs.1,82,92,104/-.
Learned AO observed that the assessee company was required to be considered being engaged in pre-operative phase and expenses claimed in the profit and loss account should be capitalized to the cost of project and income from other sources should be taxed accordingly. Learned AO placed reliance on the judgment of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs CIT (1997) 227 ITR 172 (SC). It was submitted by the assessee before the learned AO that the assessee company is currently undertaking only construction of the projects which are still in progress; that certain amounts relating to projects have also been capitalized by the assessee which fact is evident from the schedule of financial statement for the year under consideration; and that no sale was booked in the current financial year as well as in the last three years because the condition for 3 recognizing the sales/revenue as per applicable accounting standards were not fulfilled.
Learned AO drew the conclusion that the assessee company is in pre operative stage of business and business has not been set up and, therefore, the Income-tax Act, 1961 does not provide any deduction of expenses which are incurred in the pre operative stage. He, therefore, proceeded to disallow the expenses claimed in the profit and loss account to the tune of Rs.2,86,23,313/- and brought to tax the other income amounting to Rs.1,03,96,618/-.
Aggrieved by such an addition, assessee preferred an appeal. It was submitted before the first appellate authority that the assessee is in the business of construction and building activities whereas in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the assessee was engaged in construction of a factory for the purpose of manufacturing. It was further submitted before the learned CIT(A) that the total cost of the project was Rs.410 crores and the bookings for residential flats were totaled into Rs.73 crores till Assessment Year 2012-13. The assessee has been maintaining its accounts on percentage of completion method in terms of AS-7 and the sales have to be considered in the profit and loss account only when the total sales exceeds 25% of the project. It was further submitted that the learned AO wrongly added Rs.1,03,96,618/- twice under the head “Income from non speculative business” and again under the head “Income from other sources”.
Learned AO considered all the submissions made by the assessee in the light of recording and held that the ratio of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) has no application to the case of the assessee inasmuch as the assessee’s were operating in two different domains; and that inasmuch as the 4 sales have not reached 25% of the project, the assessee had not booked the sales in the years till the current financial year since the condition for recognizing the sales/revenue was not fulfilled as per the applicable accounting standards. Learned CIT(A) further returned a finding to the effect that on going through para 3 on page 2 of the assessment order, it is clear that the AO had added the same amount of Rs.1,03,96,618/- twice. Learned CIT(A), therefore, allowed the appeal and deleted the additions.
Revenue is, therefore, in this appeal challenging the impugned order on the grounds that the assessee company is currently undertaking construction of projects which are still in progress and that certain amounts relating to such projects were also capitalized by the assessee which fact is evident from the schedule of the financial statements. Further neither any computation for arriving at sales being below 25% was filed by the assessee or by the tax auditors, nor the figures of cost of project saleable area etc. were furnished.
It is submitted by the learned DR that the learned CIT(A) should have followed the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). He heavily placed reliance on the assessment order and submitted that nowhere in the return of income or in the tax audit report the figures relating to the total cost of the project was mentioned and the assessee also did not bring it to the notice of the AO about the same. It is further submitted that the assessee never claimed before the AO that the sales were booked in accordance with AS-7 and there is no mention to such a fact in the return of income.
None appeared for the assessee. We have gone through the record. In the assessment order at para 5, learned AO recorded that it was submitted by the assessee that they are currently engaged in construction of projects which are in 5 progress, certain amounts relating to such projects were capitalized but no sales were booked in the financial years till the current financial year in view of the fact that the conditions for recognizing the sales/revenue were not fulfilled as per applicable accounting standards. When it is mentioned by the assessee by letter dated 27.1.2015, there cannot be any denial of the fact that the assessee followed the usual practice of booking the sales in accordance with AS-7. Nothing prevented the learned AO from ascertaining the cost of the project when the assessee submitted before the learned AO that the value of the work in progress was about Rs.95 crores being part of the balance sheet. It, therefore, goes without saying that the balance sheet of the assessee was before the learned AO wherefrom it could be gathered that the value of the work in progress was Rs.95 crores. It could also be inferred that the assessee was booking the sales in AS-7 as is the usual practice of builders.
10. In these circumstances, learned CIT(A) rightly took cognizance of these facts and held that inasmuch as the assessee company is maintaining its accounts on percentage of completion method (AS-7), the sales could be considered in the profit and loss account only when the total sales exceeds 25% of the project. Learned CIT(A) rightly distinguished the facts of the assessee in this case and the case of Tuticorin Alkali Chemicals & Fertilizers Ltd (supra). Further the assessment order clearly speaks that the sum of Rs.1,0396,618/- was considered twice.
For the above reasons, we do not find any illegality or irregularity in the order of the learned CIT(A) and consequently, do not find any merit in this appeal. Appeal is liable to be dismissed and is accordingly dismissed.