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Facts
The assessee, engaged in Real Estate Development, claimed expenses and declared a business loss. The Assessing Officer disallowed the expenses, leading to a penalty. The assessee's appeal to the CIT(A) was dismissed, prompting this appeal to the ITAT. The core issue revolves around the timing of expense allowability.
Held
The ITAT held that the expenditure incurred by the assessee should be considered part of work-in-progress and charged to Profit and Loss Account in accordance with the Percentage Completion Method. Since the ITAT had previously ruled in favor of the assessee on a similar matter, they found no reason to deviate.
Key Issues
Whether the penalty under Section 271(1)(c) was rightly imposed and confirmed when the dispute was primarily about the year of expense allowability and not concealment of income or furnishing inaccurate particulars.
Sections Cited
271(1)(c)
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Income Tax Appellate Tribunal, JAIPUR BENCHES,”SMC’’ JAIPUR
Before: Hon’ble SHRI SANDEEP GOSAINvk;dj vihy la-@ITA No. 486/JP/2024
ORDER PER: SANDEEP GOSAIN, JM This appeal filed by the assessee is directed against order of the ld. CIT(A)- 4, Jaipur dated 16-02-2024 for the assessment year 2014-15 raising therein following grounds of appeal. ‘’1. In the facts and circumstances of the case and in law, the ld CIT(A) has erred in confirming the action of the AO in imposing penalty u/s 271(1)(c)of the Act without specifically pointing out in the show cause notice, whether the penalty was proposed on concealment of income or for furnishing inaccurate particulars of income. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by delting the entire penalty of 2 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR Rs.19,22,450/- imposed by the AO and confirmed by the ld. CIT(A).
2. In the facts and circumstances of the case and in law, the ld CIT(A) has erred in confirming the action of the AO in imposing penalty of Rs.19,22,450/-u/s 271(1)(c)of the Act. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the entire penalty of Rs.19,22,450/- imposed by the AO and confirmed by the ld. CIT(A). 2.1 During the course of hearing, the ld.AR of the assessee has not pressed the Ground No.
1. Hence, the same is dismissed being not pressed. 3.1 Apropos Ground No. 2 of the assessee wherein brief facts of the case are that Assessee firm is engaged in the business of Real Estate Development. Assessee firm, for the relevant previous year, filed its Return of Income on 15.11.2014, declaring total income Nil, with business loss of Rs. 1,24,16,176. In this case, the Assessment was completed under Section 143(3),vide order dated 19.11.2016, wherein, the entire claim of interest and other expenses amounting to Rs. 1,24,41,930 was rejected by the ld. AO, thereby, disallowing the entire loss claimed by the assessee firm. 3.2 Aggrieved by the order passed by the ld. AO, assessee preferred appeal before the ld. CIT(A), who, vide order dated 11.06.2018, in Appeal No. 1/10958/2016-17, allowed the appeal of the assessee firm. As a result, entire
3 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR claim of expenses of Rs. 1,24,41,930, consisting of interest and other expenses, was allowed to be claimed, during the relevant previous year itself. 3.3 It is noted that against the order of ld. CIT(A), Department preferred appeal before ITAT, Jaipur Bench, Jaipur who vide its order dated 16.04.2019, in ITA No. 988/JP/2018 partly allowed the appeal of the Department. It is worthwhile to mention that ITAT, in the aforementioned order, in the case of the assessee firm, held that expenses which were directly incurred in relation to the Real Estate Project undertaken by the assessee firm, such as expenses in relation to the finance cost, interest paid to partners, JDA expenses, certain salary expenses, totaling to Rs. 62,21,493, should form part of the work-in-progress and thus should not be allowed to be claimed as expenditure, during the relevant previous year. Such expenses were allowed to be claimed in accordance with the Percentage of Completion method followed by the assessee firm. The claim of the remaining expenditure, of Rs. 62,20,437, was allowed by ITAT, thereby upholding the decision of ld. CIT(A) to that extent. However, the AO, in the penalty proceedings, levied penalty, of Rs. 19,22,450 under Section 271(1)(c) on account of the expenses of Rs. 62,21,493 not allowed to be claimed by ITAT, specifically during the relevant previous year, in the quantum proceedings. 3.4 Against the order of AO dated 29-11-2019 in the penalty proceedings, assessee firm preferred appeal before the ld. CIT (A)-IV, Jaipur, who vide order
4 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR dated 16.02.2024, in Appeal No.CIT(A),JAIPUR-1/10711/2019-20 dismissed the appeal of the assessee firm. Thereafter, against the order of ld. CIT (A), the present appeal has been preferred by the assessee firm before the ITAT, Jaipur Bench, Jaipur. 3.5 During the course of hearing, the ld.AR of the assessee has filed following detailed written submission praying therein to delete the penalty u/s 271(1)© of the Act amounting to Rs.19,22,450/- imposed by the AO and confirmed by the ld. CIT(A) in toto. ‘’2. SUBMISSIONS 2.1 It is submitted that the aforementioned expenditure has not been disallowed by the Hon’ble ITAT, Jaipur Bench. What has been held by the Hon’ble ITAT is that such expenditure should form part of the work in progress, on which percentage completion method should be made applicable.
2.2 Resultantly, in accordance with the decision of the Hon’ble ITAT, the aforementioned expenditure would not be allowed in the current year but will be allowed in the subsequent years as and when the corresponding revenue is recognized, following the Guidance Note issued in this regard. 2.3 It is submitted that the interest and other expenses claimed by the assessee have not been considered to be bogus or not for the purpose of business by the Hon’ble ITAT and thus have not been disallowed “permanently”. Such expenses are otherwise eligible for deduction in the subsequent years. 2.4 Thus, it is only a matter of difference in the year of allowability of the said expenses.What was claimed by the assessee firm in Year 1 has been 5 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR allowed by the Hon’ble ITAT to be claimed in subsequent years, say, next 2-3 years. 2.5 The assessee firm had fully disclosed details of all the aforementioned expenses in its Audited Financial Statements for the relevant year. Full disclosures were even made during the quantum proceedings, which fact is undisputed. There was no attempt on the part of the assessee firm to conceal any income, by making excessive claim of the expenditure. 2.6 The assessee firm was under a bona fide belief that such expenses were not to form part of the work-in-progress, being indirect in nature and thus, should be charged to the Profit and Loss Account for the relevant year itself. This view was supported by decision of Hon’ble Jurisdictional High Court, in the case of Aditya Propcon (P.) Ltd. (supra). Accordingly, relief was also granted to the assessee firm, by ld. CIT(A), in the first appellate proceedings itself. 2.7 Assessee firm was of the view that for allowability of interest expenses is to be seen with reference to the provisions of Section 36(1)(iii). Proviso to Section 36(1)(iii) requires interest expenses to be capitalized only when incurred for acquisition of an “asset” and not “stock-in-trade”. In the present case, interest expenses had been incurred by the assessee firm, being a Real Estate Developer, for purchasing land, on which project had to be developed. 2.8 Hon’ble ITAT accepted the legal position that interest expenditure was otherwise allowable under section 36(1)(iii) having been incurred for the purpose of business, however it was of the view that the treatment has also to be in consonance with the method of accounting followed by the assessee. Nowhere, the Hon’ble ITAT, in its order, observed that any wrong claim with any mala fide intention was made by the assessee firm. 2.9 Hon’ble Delhi High Court, under identical set of facts, in the case of Granite Gate Properties (P.) Ltd. v. Principal Commissioner of Income-tax [2019] 414 ITR 130 (Delhi) [CLC - 40 -50 ],deleted the penalty levied by the ld. AO and held as under: “….HEAD NOTES - Section 271(1)(c), read with section 37(1), of the Income-tax Act, 1961 - Penalty – For concealment of income (Disallowance of claim, effect of) - Assessment years 2010-11 and 2011-
6 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR 12 - Assessee company, engaged in real-estate development, had commenced construction of two housing projects - Assessee incurred indirect project expenses like cost of construction and development and claimed deduction of same - Assessing Officer disallowed expenses claimed by assessee and, further, imposed penalty under section 271(1)(c) upon it - It was noted that expenditures disallowed during relevant assessment years were otherwise eligible and same were allowed in next assessment years - Further, full details with regard to these expenses was disclosed by assessee in return of income and figures given in columns and heads were not disturbed by Assessing Officer and no addition was made by doubting and disturbing figures and amounts mentioned - Whether, on facts, impugned imposition of penalty under section 271(1)(c) was to be set aside - Held, yes [Paras 14, 17 and 18] [In favour of assessee]” 2.10 The fact that entire claim of expenses of the assessee firm was allowed by the ld. CIT(A), in first appellate proceedings, proves that the view of the assessee firm, for claiming deduction of the aforementioned expenses, was one of the plausible views. 2.11 Hon’ble ITAT Mumbai Bench, in the case of Salman Khan, I.T.A. No. 2560/Mum/2013 & I.T.A. No.2559/Mum/2013[CLC -51-57 ], held that: “Although the Tribunal has reversed the decision of the ld. CIT(A) on this issue, the fact that the claim of the assessee was accepted by the ld. CIT(A) on merit clearly shows that the said claim made by the assessee was based on a possible view of the matter” 2.12 It is a settled law that when there are two views possible and if the assessee firm considered one of the plausible views and even if such view is rejected, then no penalty can be levied under section 271(1)(c). 2.13 Hon’ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd [2010] 322 ITR 158 (SC)[CLC – 58-62 ]“……We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely because the assessee had claimed
7 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR the expenditure, which claim was not accepted or was not acceptable to the revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c). If we accept the contention of the revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature….” 2.14 In the present case, the explanation, even though was not accepted, was not held to be not true or lacking in bona-fides. Needless to mention that all facts were placed before the ld. AO. In view of this, provision of Explanation 1 to section 271(1) is not attracted. Otherwise also, disallowances are not based on any specific evidence brought to the fore by the ld. AO which could prove that the assessee firm was actively involved in concealing its income. 2.15 It may be pointed that before penalty could be imposed on the assessee, the ld. AO was duty bound, in the entirety of circumstances, to point, with concrete evidences, to the conclusion that assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars. 2.16 The assessee firm did not recognize revenue for the relevant previous year. As a result, even if such expenses would have not been claimed by the assessee, there would not have been any tax outflow, which further proves the bona fides of the assessee firm in claiming such expenditure in entirety. 2.17 Hon’ble High Court in the case of Principal Commissioner of Income-tax, Gurgaon v. Atotech India Ltd. [2017] 391 ITR 117 (Punjab & Haryana)[CLC –63-64]held that: “….HEAD NOTES - Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income (Disallowance of bona fide or wrong claim, effect of) - Assessment year 2004-05 - Rejection of wrong claim of assessee of setting off of brought forward business loss in its return of income would not be liable for penalty under section 271(1)(c) when even allowance of such claim would have no financial implication for future [In favour of assessee]”
8 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR 2.18 The disallowance by the ld. AO, in the quantum proceedings, was solely on the account that no income had been booked by the assessee, resultantly, no expenditure should be allowed. On this particular aspect, satisfaction for levy of penalty was recorded by the ld. AO. The relevant portion of the order of ld. AO, in the quantum proceedingsis as under: [AO Quantum Order – Page 2,PB:2] “The assessee is doing work of construction and development. No sales have commenced till the end of financial year under consideration. However, the assessee has debited huge interest and other expenses in profit & loss account. The assessee has declared current year loss of Rs. 1,24,16,176/-. Vide order sheet entry dated 04.11.2016 the assessee is asked to show-cause why the expenses claimed in profit & loss account may not be disallowed and capitalized, as the sale of project is not started?” [AO Quantum Order – Page 4,PB:4] “The reply filed by assessee is considered, however, not found fully tenable. The assessee has debited expenses on account of interest paid to partners & others and site expenses. The reply filed by assessee that the expenses debited are not related to site expenses is not correct. This fact is clear from the Schedule-15 of Profit and Loss account. Only those expenses are allowable which are incurred for business purpose or earn the income. During the year, no income is incurred, therefore, no expenses are allowable.” 2.19 However, Hon’ble ITAT, on totally different footing, held that such expenditure should be allowed by following percentage completion method, irrespective of the fact whether income was booked by the assessee firm or not. Thus, the issue decided was totally on technical grounds and not for expenditure claimed by the assessee firm in a wrongful manner to conceal its income. 2.20. It is also pertinent to note that the entire basis, on which ld. AO recorded his satisfaction and initiated penalty proceedings, has undergone a complete change. Accordingly, the present penalty is illegal and without fulfilling the requirements of section 271(1)(c).
9 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR 2.20.i Hon’ble Allahabad High Court in the case of Shadiram Balmukand [1972] 84 ITR 183 (ALL.)[CLC - 65-66 ] held that “…It seems to us clear that the provision contemplates distinct jurisdictions in the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal in relation to the proceedings pending before those respective authorities so far as the imposition of penalty is concerned. It will be apparent from the language employed in the sub-section that the authority imposing the penalty can do so only upon being satisfied that a person has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, and that satisfaction must be in the course of proceedings under the Act. Those proceedings must be proceedings before that authority, and they must be proceedings necessarily under some provision of the Act other than section 28. In the instant case, the Appellate Assistant Commissioner found cash credits in the amount of Rs. 46,601 to represent income from undisclosed sources. If a penalty could be imposed in respect of that amount, it lay within the jurisdiction of the Appellate Assistant Commissioner. The amounts were discovered in the course of the appellate proceeding before him. They were discovered by him. It was for him then to impose the penalty if he was satisfied that the assessee had concealed the particulars of his income or had deliberately furnished inaccurate particulars of it. The Income-tax Officer was seized of the assessment proceeding, and it was not during the assessment proceeding that the sum of Rs. 46,601 was discovered. We are satisfied that the Tribunal is right in holding that the penalty order was bad in law…” 2.20.ii Hon’ble Calcutta High Court in the case of Ananda Bazar Patrika Pvt. Ltd. [1979] 1 Taxman 445 (Cal.)[CLC –67-72], following the above mentioned judgment of Hon’ble Allahabad High Court, held that “….The Allahabad High Court in the cases of Shadiram Balmukand [1972] 84 ITR 183 and Dwarka Prasad Subhas Chandra [1974] 94 ITR 154 and the Gujarat High Court in the case of Lakhdhir Lalji [1972] 85 ITR 77 have held that when the original basis of initiation of the penalty proceeding is altered or modified by the appellate authority, the authority initiating the penalty proceedings has no jurisdiction thereafter to proceed on the basis of the findings of the appellate authority. These cases have neither been distinguished by Mr. B.L. Pal nor has he cited any authority to the contrary. We respectfully follow the said decisions. The AAC in the case before us admittedly 10 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR modified the original assessment and held that the said sum of Rs. 1,63,000 was not concealed income of the assessee from "Other sources" as held by the ITO but was concealed "Business income" and also enhanced the business income of the assessee on other evidence. Therefore, it was no longer open to the ITO to proceed to impose penalty on the assessee on the basis of the said findings of the AAC…” 2.20.iii Attention is also drawn towards the decision of Hon’ble Delhi High Court, in the case of FORTUNE TECHNOCOMPS (P) LTD., ITA 313/2016 in which the revenue’s appeal was dismissed against the order passed by the Hon’ble ITAT, deleting the penalty imposed u/s 271(1)(c). In this case, in the quantum proceedings, ld. AO made addition on account of bogus purchases. Ld. CIT (A) disallowed the loss claimed by the Assessee on sale of some of the unbranded items out of the purported purchases. Further certain sum was added as additional income by applying the estimated gross profit rate on the declared sales. Hon’ble ITAT concluded that the CIT(A) had made the overall addition on ‘estimated basis’. Consequently, the ITAT felt that this is not a case where a penalty was leviable under Section 271(1) (c) of the Act. Hon’ble ITAT also relied on the judgment of the Hon’ble Calcutta High Court in the case Ananda Bazar Patrika Pvt. Ltd. (Supra) and held that "once the basis for initiation of penalty proceedings was altered or modified by the first appellate authority, the Assessing Officer has no jurisdiction thereafter to proceed on the basis of the findings of the first appellate authority." Finally, Hon’ble Delhi High Court vide its order dated 13.05.2016 in ITA 313/2016 concurred with the view of Hon’ble ITAT and held that “…Once the assessment order of the AO in the quantum proceedings was altered by the CIT (A) in a significant way, the very basis of initiation of the penalty proceedings was rendered non- existent. The AO could not have thereafter continued the penalty proceedings on the basis of the same notice. Also, the Court concurs with the CIT (A) and the ITAT that once the finding of the AO on bogus purchases was set aside, it could not be said that there was any concealment of facts or furnishing of inaccurate particulars by the Assessee that warranted the imposition of penalty under Section 271 (1) (c) of the Act…”. 2.21 Lower Authorities have failed to bring to the fore any material which can to accepted as an evidence for falsity of the claim of the 11 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR assessee or that the assessee consciously concealed any particulars of Income. On the other hand, the lower authorities in a mechanical manner levied penalty on the premise that when any disallowances sustained irrespective of the facts of the case penalty has to be levied. 2.22 Hon’ble Supreme Court in the case of Khoday Eswarsa & Sons [1972] 83 ITR 369 (SC) held that “…From the above it is clear that penalty proceedings being penal in character, the department must establish that the receipt of the amount in dispute constitutes income of the assessee. Apart from the falsity of the explanation given by the assessee, the department must have before it before levying penalty cogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars in respect of the same and that the disputed amount is a revenue receipt. No doubt the original assessment proceedings, for computing the tax may be a good item of evidence in the penalty proceedings but the penalty cannot be levied solely on the basis of the reasons given in the original order of assessment.In the case before us we have already pointed out that in the order levying penalty the Income-tax Officer has categorically stated that the reasons for adding the disputed amounts in the total income of the assessee have been already discussed in the original order of assessment and that they need not be repeated again. The Appellate Assistant Commissioner, we have already pointed out, has made only a guess-work. That clearly shows that except the reasons given in the original assessment order, for including the disputed items in the total income, the department had no other material or evidence from which it could be reasonably inferred that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars. For all the reasons given above, it follows that there is no merit in the appeal and it is accordingly dismissed….” 2.23 The extent of onus in quantum proceedings is different and higher on the assessee. As against this, the extent of onus in penalty proceedings is different and higher on the revenue. 2.24 Hon’ble Bombay High Court in the case of Upendra V. Mithani ITA (L) No. 1860 of 2009, decided on 05.08.2009, observed in the matter of levy of penalty under section 271(1)(c) of the Act, that if 12 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR the assessee gives an explanation which is unproved but not disproved i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee’s case is false, then no penalty can be imposed in such cases. Same ratio was laid down by the Hon’ble Gujarat High Court in the case of National Textiles (2001) 249 ITR 0125 (Guj-HC). 2.25. AO, in his penalty order, has relied on number of decisions of different High Courts and Supreme Court and held that the assessee firm concealed its income. Ld. AO completely ignored the following factual position, as stated herein before, summarized as under:- 2.25.i Hon’ble ITAT did not held the expenses to be not allowable but held it to be allowable in subsequent years, based on the method of accounting followed by the assessee firm, i.e. Percentage Completion Method. 2.25 ii Assessee, under a bona fide belief, considering the legal position, claimed the entire expenses during the relevant year itself. 2.25.iii The claim of the assessee firm was even accepted by ld. CIT(A) in the first appellate proceedings, wherein, ld. CIT(A) allowed the appeal of the assessee firm in entirety. 2.25 iv There is no observation in the quantum proceedings that the assessee willfully made a wrong claim of expenditure and tried to conceal its income. 2.266. The above legal position, with respect to non-levy of penalty in the given factual position, was put forth before the ld. CIT (A), by way of written submissions, which are also forming part of the Paper Book from Pages 31 to 43. However, the submissions were completely ignored by the ld. CIT(A). 2.27. Ld. CIT (A) stated that in relation to suppression of income, it was not necessary for the Department to make enquiry with respect to the intention on the part of the assessee firm. Further, ld. CIT(A) also held that the presence of mens reais not required to be established. Lastly, it was stated by the ld. CIT(A) that it was not necessary for the 13 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR Department, to establish conscious concealment of Income on the part of the assessee. 2.27.i All such legal positions as have been stated by the ld. CIT(A) are bereft of the submissions already made before him in the first appellate proceedings. 2.27.ii It is a settled proposition that in case of penalty proceedings, the Department has to bring to the fore intention of the assessee. 2.27 iii If the intention of the assessee is to conceal its income, then penalty should be levied. 2.27 iv However, on the contrary, if there is no intention of the assessee to conceal its income, no penalty can be levied. 2.27 v In the present case, disallowance is only due to accounting treatment followed by the assessee firm, for which there cannot be any penalty which can be levied on the assessee firm. 2.28 Ld. CIT (A) at Page 18 of his order has relied upon the decision in case of MAK Data Private Limited (2013) 38 taxmann.com448(SC).It is submitted that the facts of the case are completely different from the facts of the case at hand. In the case of MAK Data Private Limited(supra), the assessee had surrendered its income. 2.28.i Whereas, in the present case, the assessee has not surrendered any income. The only issue is that whatever expense was to be allowed, has been held by the Hon’ble ITAT to be allowed in the subsequent years and not during the year under consideration. 2.29 Ld. CIT(A) has placed reliance on the decision of Madras High Court in the case of Sundaram Finance Limited (2013) 35 taxmann.com 65. In the said case, it was a specific finding that the transaction entered by the assessee was not genuine. Moreover, in the said case the assessee had also accepted to have overstated the cost of the machinery so as to claim higher depreciation.
14 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR 2.29.i However, there is no such specific finding in the present case. 2.29. ii The only issue, in the present case, is with regard to the year in which the expenses are to be allowed to the assessee firm. The expenses have not been found to be non-genuine or bogus by the lower authorities. 2.30 Ld. CIT(A) has also relied upon the decision of Delhi High Court in the case of HCIL Kalindee Arsspl (2013) 37 taxmann.com 347. In the said case, it was specific finding that the claim made by the assessee under Section 80-IA was not correct as the assessee, with its nature of business, was not eligible to such deduction. 2.30. i However, no such finding has been given by the lower authorities in the present case. 2.31 Accordingly, ld. CIT(A) was not correct in placing reliance on the aforementioned judgments. In view of the above, penalty levied on the assessee deserve to be deleted in to-to.’’ 3.6 During the course of hearing, the ld. DR strongly supported the order of the ld. CIT(A) and rely upon the decision of Hon’ble Madras High Court in the case of Gangotri Textiles Ltd vs DCIT, Corporate Circle-2, Coimbatore, 276 Taxman 356 (Mad) which is in favour of the Revenue. 3.7 The Bench has heard both the parties and perused the materials available on record. Brief facts in this case is that the assessee firm, during the relevant previous year and in the immediately preceding previous year, purchased land in Jagatpura for the purpose of carrying out two Real Estate Projects, the work on which started 15 ITA NO. 486/JP/2024 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR immediately. Such land formed part of the stock-in-trade of the assessee firm. It is noted that the assessee firm followed Percentage of Completion method for recognition of revenue and the related expenses, in accordance with the Guidance Note issued by Institute of Chartered Accountants of India. Resultantly, the entire cost of purchase of the land and also related expenses, directly attributable, to the construction of the Real Estate Project were not charged to the Profit and Loss Account and were considered as part of the work-in-progress to be recognized in proportion to the recognition of revenue on the project in accordance with the Guidance Note. Similarly, even the amount received by the assessee firm, with respect to sale of flats was not treated as part of revenue, during the relevant previous year, and was treated as Advance from Customers. This was for the reason that Guidance Note allowed recognition of revenue only when at least 25% of the expected total project cost had been incurred by the Real Estate Developer. However, the following expenditure incurred by the assessee firm was considered as part of the Profit and Loss Account allowable fully during the relevant previous year for computing the taxable income.
S. No. Name of Expense Amount (Rs.) 1 Finance Costs 225 2 Depreciation 1,95,731 3 45,06,249 Interest Paid to 16 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR Partners 4 JDA Expenses 7,19,842 5 Salary Site 9,90,578 6 Site Office Expenses 4,599 7 Other Expenses 60,24,706 Total 1,24,41,930 It is also noted that during the course of assessment proceedings, ld. AO, on noticing the fact that although such expenditure was claimed by the assessee firm on its return of income, however, the assessee firm did not generate any revenue from sale of its Real Estate Project. Thus, ld. AO disallowed the claim of the entire aforementioned expenses.Before the ld. CIT(A) in the quantum proceedings, it was submitted that the assessee firm has been consistently following Percentage of Completion Method and since the threshold, as setout therein, was not fulfilled, no revenue was recognized.It was further submitted that the aforementioned expenditure was incurred for the purpose of business, which was even undisputed by ld. AO and thus, the entire such expenditure was to be allowed. It was submitted that, if any expenditure is incurred for the purpose of business, then irrespective of the fact whether any corresponding revenue has been generated or not, such expenditure is to be allowed under the provisions of the Income Tax Act, 1961. The Bench observed that Specifically, with regard to the interest expenses 17 ITA NO. 486/JP/2024 SHRI KHATU SHYAM BUILDERS VS ACIT, CENTRAL CIRCLE-2, JAIPUR incurred, the assessee firm was of the view that since the borrowings, on which such interest expenses were incurred, were utilized for purchasing land forming part of stock in trade,resultantly, there would not be any applicability of Section 36(1)(iii). Section 36(1)(iii), being applicable only in the case of capital borrowed for acquisition of an asset, and not for the purpose of stock-in-trade. Reliance, in this regard was placed on the decision of Hon’ble ITAT Jaipur Bench in the case of Aditya Propcon (P.) Ltd., ITA No. 762/JP/2012[CLC-1 -28]. Subsequently, such decision was upheld by Hon’ble Rajasthan High Court inD.B. Income Tax Appeal No. 82/2014[CLC- 29 to 39].Based on the aforementioned view submitted before ld. CIT(A), the entire additions made by ld. AO were deleted by ld. CIT(A). Thereafter, in appeal preferred by the Department, against the order of ld. CIT(A), Hon’ble ITAT held that for the below mentioned expenditure, the same should be considered as part of work-in-progress and not directly charged to the Profit and Loss Account during the current year.