Loading judgment…
No AI summary yet for this case.
Before: Shri A. Mohan Alankamony & Shri Duvvuru RL Reddy
आयकर अपील�य अ�धकरण, ‘‘सी’’ �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI �ी ए. मोहन अलंकामणी, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri A. Mohan Alankamony, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member आयकर अपील सं./I T.A. No. 377/Mds/2017 �नधा�रण वष�/Assessment Year:2013-14 The Deputy Commissioner of M/s. Add Albatross Properties Pvt. Ltd., Income Tax, Vs. No. 1/4A, Rajiv Gandhi Road (OMR), Corporate Circle 1(1), Egattur, Thiruporur, Chennai 600 130. Chennai 600 034. [PAN:AAHCA8036E] (अपीलाथ� /Appellant) (��यथ�/Respondent) अपीलाथ� क� ओर से / Appellant by : Shri A.V. Sreekanth, JCIT ��यथ� क� ओर से/Respondent by : Shri K.N. Mohandass, CA सुनवाई क� तार�ख/ Date of hearing : 26.04.2017 घोषणा क� तार�ख /Date of Pronouncement : 30.06.2017 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) 1, Chennai dated 11.11.2016 relevant to the assessment year 2013-14. The only effective ground raised in the appeal of the Revenue is that the ld. CIT(A) has erred in allowing the disallowance of business loss of ₹.3,24,05,339/- claimed by the assessee to be carried forward for future years.
2 I.T.A. No.377/M/17
Brief facts of the case are that the assessee has filed the return of income on 28.09.2013 admitting total loss of ₹.9,30,73,729/-. Subsequently, the assessee filed revised return of income on 25.09.2014 returning loss of ₹..3,24,05,339/-. The return filed by the assessee was selected for scrutiny and notice under section 143(2) Income Tax Act, 1961 [“Act” in short] dated 03.09.2014 was issued and served on the assessee. In response thereto, the assessee filed all the details. After considering the submissions of the assessee and verification of other details, the Assessing Officer has concluded the assessment under section 143(3) of the Act by disallowing the business loss of ₹. 3,24,05,339/- claimed by the assessee as well as disallowing ₹.6,65,474/- under section 40(a)(ia) of the Act on the ground that TDS was not deducted.
The assessee carried the matter in appeal before the ld. CIT(A) and made various submissions. After considering the submissions of the assessee, the ld. CIT(A) has allowed the appeal filed by the assessee by observing as under: “8. I have carefully considered the facts, order of the AO, submissions made by the appellant and material on record. The issue which arises for consideration verges on the allowability of the claim as business loss of a sum of Rs.3,24,05,339. The AO took the view that the same was not allowable as there was no revenue during the year in the P&L a/c and hence all expenses are have to be capitalized as pre- commencement expenses as distinct from operative expenses. The appellant taking the contrary view pressed for the claim for the reason that it had incurred such expenses which were operative comprising of administrative costs which include employee benefit expenses, finance
3 I.T.A. No.377/M/17
cost, depreciation, advertisement, professional fees, rates & taxes, printing & stationery etc. In this regard it was specifically pleaded that the project expenses incurred to the tune of Rs.25, 11 ,43,499 consisting of construction cost of Rs.19,08,12,677 and borrowing cost of Rs.6,03,30,822 being directly attributable to the project have not been claimed as business loss or as revenue expenditure during the year. The project expenses incurred have been included in the inventories and disclosed in the financial statements. Therefore, the loss being general administrative in nature not attributable to project was allowable as a business loss during the year which was wholly and exclusively incurred for the purposes of business. As against the view taken by the AO that the expenditure related to pre-commencement period, the appellant assailed the finding saying that the business has long commenced and relied on facts obtaining in its own case as also ratio laid down in CIT v. Dhoomketu Builders & Development P Ltd (supra) wherein it was held that the commencement of real estate business would normally start with acquisition of land and the intent of the company to acquire a land would by itself tantamount to setting up of business, therefore actual acquisition of land may be first step in the commencement of business. The financials filed in this regard support the claim of the appellant. The major chunk of the expenditure under the had other expenses of RS.2,61,23,302 comprises of items such as advertisement of Rs.1,15,90,031, legal and professional fees of Rs.88,52,190 and other incidental expenses as in Schedule 16 to the balance-sheet and P&L a/c. 9. It was also noticed from the financials that the appellant had received advances from customers to the tune of Rs.10,72,57,596 which was shown under the schedule for other current liabilities. Keeping in view the accounting standards applicable for revenue recognition the appellant was issued a show-cause vide this office letter 18.10.2016 to show-cause as to why revenue be not recognized in accordance with guidelines in AS9 applicable to the appellant. The appellant filed a detailed reply dated 21.11.2016 submitting inter alia the following: (i)that mercantile system of accounting was followed for accounting of project expenditure. That during the year under consideration project undertaken did not qualify for revenue recognition as per AS-9 - "Revenue Recognition read with the Guidance Note on Accounting for Real Estate Transactions (Revised 2012). (ii)as per AS-9 revenue from sales or service transactions should be recognized when the requirements as to performance set out in
4 I.T.A. No.377/M/17
paragraphs 11 & 12 of the said standard are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. It is further specified that if at the time of raising any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed. (iii)Reference was made to requirement of performance in case of sale of goods as per para 11 of AS-9, requirement of performance in case of rendering of services as per para 12 of AS-9 highlighting the conditions which require to be fulfilled with regard to transfer by the seller of goods to the buyer of property of all significant risks and rewards for a price. Also in transaction involving rendering of services performance should be measured either under Completed Service Contract method or under the Proportionate Completed Method etc. (iv)Reference was made to Guidance Note on Accounting for Real Estate transaction as revised in 2012 and para 3.3 specifically where the attributes of real estate project are stated in a detailed manner. (v)Real estate project described in Guidance Note has same economic substance as that of construction contract specified in AS-7 relating to construction contracts. (vi) it was ascertained that the above conditions / indicators being satisfied the project carried out by the appellant company qualifies as a Real Estate Project as envisaged in the Guidance Note and accordingly, percentage Completion Method needs to be applied for recognizing the revenue. (vii) further the Percentage Completion Method can be applied only when the outcome of the real estate project can be reliably estimated subject to satisfaction of conditions laid therein. (viii)the Guidance Note further specifies that there is a rebuttable presumption that the outcome of the project can be reliably estimated only when the events specified therein are completed. (ix)when the stage of completion of project reaches a reasonable level of development, as in, if the expenditure incurred on construction and development costs is less than 25% of the construction and development costs as defined in para 2.2(c) r.w. paragraphs 2.3 to 2.5.
5 I.T.A. No.377/M/17
(x)atleast 25% of the saleable project area is secured by contracts or agreements by buyers. (xi) atleast 10% of the total revenue as per agreements of sale or any other legally enforceable documents are realized at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties of such contracts will comply with the payment terms as defined in the contracts. 10. In other words, only when all the above events are completed the appellant company would be obligated to recognize the revenue based on the principles of Percentage Completion Method. In this background it is seen that the appellant company had proposed to construct a multi- storey residential building project at Egattur, Old Mahablipuram Road, Chennai in a total area of 8.35 acres purchased for Rs.108 crores at an estimated construction cost of Rs.428 crores. The relevant aspects relating to the project are as follows: (i) As against the same in relation to the project, by the end of 31.3.2013 which is under consideration the appellant had not obtained the environmental clearance as evidenced by the certificate dated 27.6.2013 issued by the State Level Environment Impact Assessment Authority, Tamilnadu. (ii) Further, the stage of completion of the project had not reached a reasonable level of development, as no development cost were incurred, in the absence of developmental clearance and the work-in-progress as on 31.3.2013 mainly comprises of the cost of land and interest borne 'on it and the advances paid for project design and development. (iii) The total cost of project is estimated at Rs.428 crores excluding the cost of land and the appellant had incurred only a sum of Rs.44.96 crores towards the project and that too mainly to interest costs on purchase of land (approval design and development cost of Rs.29,63,63,597 and borrowing cost of Rs.15,32,45,786). (iv) The total number of flats proposed to be constructed were 687 in as many as 5 towers while the booking advances were received in respect of 90 flats only. (v) Further, none of the flats were secured by way of contracts as the necessary critical approvals were not received as at the end of the year under consideration.
6 I.T.A. No.377/M/17
(vi) The appellant had not entered into any contracts with the proposed buyers during the year under consideration and therefore the amounts receivable towards the contract could not be ascertained therefore the last conditions that 10% of the total revenue as per agreements has to be realized is also not satisfied. 11. In view of the above the appellant company did not recognize any revenue during the year under consideration, as none of the conditions stipulated in the Guidance Note are complied with. Therefore, the appellant has followed the AS-9 for the purpose of recognizing revenue from the real estate project for the reasons discussed in the foregoing. It may be also mentioned here that the appellant has soft launched the project for specific customers in priority and have collected booking advances to the order of Rs.10,72,57,596 with no specific contracts or agreements being entered into with them this is so as necessary critical approvals were not obtained as at the end of the year under consideration. The appellant also placed on record that there was a change in the management during the financial year 2013-14 relevant to AY. 2014-15 wherein the entire equity shares were acquired by M/s. Emami Home P Ltd. The new management has discontinued the project subsequently and all books advances received from the customers were refunded in the F.Y. 2013-14 relevant to AY. 2014-15. In this connection, it was also submitted that the booking advances outstanding as on 31.3.2014 was Rs.46,33,194 as against Rs.10,72,57,594 as on 31.3.2013. The same outstanding continues still 31.3.2016 also. 12. Taking the sum totality of facts before me into account, I am of the considered view that the appellant has not incurred any project development expenditure apart from incurring interest cost of borrowing funds as evidenced from financials. Further, that the revenue recognition for accounting of revenues did not trigger in view of non-fulfillment of the critical conditions laid down in AS-9 and guidelines revised(2012). The claim of the appellant with regard to expenditures incurred wholly and exclusively for the purpose of business as claimed by it during the year therefore cannot be denied. The expenditure claimed is of revenue in nature and qualifies to be allowed as business loss. That the ratio in Orient Cosmetics relied upon by the AO are not applicable to the facts of this case. The view taken by the AO cannot be sustained. The plea of the appellant is upheld. This ground of appeal is allowed.”
7 I.T.A. No.377/M/17
On being aggrieved, the Revenue is in appeal before the Tribunal and challenged allowing the business loss claimed by the assessee. The ld. DR has submitted that the assessee has not carried out any business activity during the financial year 2012-13 as is evidenced by the NIL revenue shown in the profit and loss account and the project was only under construction and further, the expenses incurred by the assessee are in the nature of pre- operative expenses only and not in the nature of revenue expenditure. It was further submitted that the assessee has not even obtained the critical approval from the competent authorities as on 31.03.2013 and hence the project cannot be said to have commenced as on the said date and further expenditure relating to business can only be allowed as deduction, if the business was actually carried on at any time during the previous year. Having no carried out any business activity in this case, no expenditure is allowable for the financial year 2012-13 and pleaded that the order passed by the ld. CIT(A) should be reversed and restored that of the Assessing Officer. On the other hand, the ld. Counsel for the assessee strongly supported the order passed by the ld. CIT(A).
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. In the assessment order, the Assessing Officer has noticed that the assessee has not carried on any business during the year under consideration. He further observed that the
8 I.T.A. No.377/M/17
expenses claimed by the assessee are towards setting up of business and are capital in nature, which is not allowable under the provisions of section 30 to 43D of the Act. Admittedly, the assessee is engaged in the business of real estate development. The assessee has proposed to construct a multi- storeyed residential building project at Egattur, OMR, Chennai in a total area of 8.35 acres purchased for ₹.108 crores at an estimated construction cost of ₹.428 crores. The commencement of real estate business would normally start-up with the acquisition of land or immovable property. The assessee has acquired land in the assessment year under consideration with the intention to develop a project would by itself amount to setting up of business. Therefore, the contention of the Assessing Officer that no business was carried on by the assessee during the year under consideration is not acceptable. Further, the Assessing Officer has viewed that there was no revenue during the year in the profit and loss account and all the expenses are to be capitalized as pre-commencement expenses as distinct from operative expenses shall only be applicable to manufacturing entities and not in the real estate business.
During the year under consideration, the assessee has incurred project expenses to the tune of ₹.25,11,43,499/- consisting of construction cost of ₹.19,08,12,677/- and borrowing cost of ₹.6,03,30,822/- being directly attributable to the project have not been claimed as business loss or as
9 I.T.A. No.377/M/17
revenue expenditure during the year. On perusal of the computation of income along with enclosures filed by the assessee, it is clear that the project expenses incurred have been included in the inventories and disclosed in the financial statements. The loss claimed by the assessee is of general administrative in nature not attributable to project, wholly and exclusively incurred for the purposes of business, which was contended to be allowed as a business loss during the year under consideration.
The assessee has been following mercantile system of accounting for accounting the project expenditure and followed the Accounting Standard 9 [AS9] for the purpose of recognizing revenue. Since the assessee has been engaged in the real estate business and as envisaged in the Guidance Note on Accounting for Real Estate Transactions (Revised 2012), Percentage Completion Method needs to be applied for recognizing the revenue subject to the conditions laid thereon. In this case the total cost of the project was estimated at ₹.428 crores excluding the cost of land and the assessee has incurred only ₹.44.96 crores towards the project and that too mainly on interest costs towards purchase of land [approval design and development cost of ₹.29,63,63,597/- and borrowing cost of ₹.15,32,45,786/-]. The assessee has not incurred any development cost towards the project pending clearance from the State Level Environment Impact Assessment Authority, Tamil Nadu, and therefore, the work-in-progress as on 31.03.2013
10 I.T.A. No.377/M/17
mainly comprises of the cost of land and interest borne on it and the advances paid for project design and development. In view of the above, the expenditure incurred wholly and exclusively for the purpose of business should be treated as revenue in nature, as claimed by the assessee during the year under consideration and cannot be denied. In view of the above, we find no reason to interfere with the well reasoned order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue is dismissed.
In the result, the appeal filed by the Revenue is dismissed. Order pronounced on the 30th June, 2017 at Chennai.
Sd/- Sd/- (A. MOHAN ALANKAMONY) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 30.06.2017 Vm/- आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant, 2.��यथ�/ Respondent, 3. आयकर आयु�त (अपील)/CIT(A), 4. आयकर आयु�त/CIT, 5. �वभागीय ��त�न�ध/DR & 6. गाड� फाईल/GF.