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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI INTURI RAMA RAO
Per Asha Vijayaraghavan, Judicial Member
This appeal is by the revenue against the order dated 18.05.2015 of the CIT(Appeals)-1, Bengaluru for the assessment year 2009-10 on the following grounds of appeal:-
2. The assessee is engaged in the business of development of residential layouts and real estate operations and has taken up the projects under the names ‘Pragathi Nagar Project’, ‘Pragathi Paradise Project’ and 'Pragathi Garden Project’. The assessee has been following the percentage completion method for recognition of revenue. Financial year 2008-09 (AY 2009-10) is the first year of recognition of income from the business operations in respect of Pragathi Nagar Project and no income is recognised from other projects. The assessee has filed its Return of Income for the Asst. year 2009-10 declaring a total Income of Rs.21,96,668/-. The Assessing Officer in his Assessment Order u/s 143(3) of the Income Tax Act disallowed the following sums and added the same to the returned income:-
Sl. Particulars Amount in Rs. No. a. Brokerage paid towards Pragathi Paradise Project 46,89,104 b. Project expenses of Pragathi Garden Project 58,77,997 c. Disallowances of Travelling Expenses 12,17,679 d. Disallowances of Sales Promotion Expenses 3,00,972 e. Interest on loans pertaining to other projects 1,90,61,055 Total 3,11,46,812
Aggrieved, the assessee filed appeal before the CIT(Appeals) and submitted with respect to brokerage and commission expenses of Rs.46,89,104 as follows:-
“As can be seen from the expenses debited to the profit & Loss account during the year, as against the Revenue recognised in respect of Pragathi Nagar Project, expenditure towards Brokerage and Commission on purchase of Lands is only a sum of Rs. 18,75,731/-, which comprise out of the total expenditure categorised under the Project Expenses of Pragathi Nagar Project of Rs. 1,64,67,311/- vide sch 10 of the Audited statements.
Project wise breakup of the said expenditure is submitted as under:- Description Pragathi Pragathi Total Nagar Paradise Project Project Amount incurred up to 31- 2,00,148,869 46,89,104 2,47,03,973 03-2009 Less: Amount apportioned 18,75,731 Nil 18,75,371 as a matching cost on the basis of revenue recognized (Charged to P&L Account) Balance carried as Closing 1,81,39,138 46,89,104 2,28,28,242 WIP as on 31-3-2009 It can be seen that the closing Work In Progress as on 31-3-2009 carries the amount spent on Pragathi Paradise Project. However as per the noting of the Assessing Officer vide item (a) page 5, the Assessing Officer misconstrued that the expenses were charged to Profit and Loss Account and disallowed the same, though no such quantum of expenditure has been charged to Profit and Loss account during the year against the revenue recognised from the residential project namely Pragathi Nagar Project. The Assessing Officer's contention that the amount of Rs.46,89,104/- belongs to Pragathi Paradise Project was never been disputed during the course of assessment proceedings and appellant has also agreed on the same but has disagreed with disallowance of the same as if it has been charged to Profit & Loss Account.
The CIT(Appeals) went through the accounts of the assessee and observed that it was prudent to account the brokerage and commission on land procurement of Rs.46,89,104 for Pragathi Paradise Project as project expenses and that the same has been correctly retained as WIP Project Expenses as a balance sheet item. The CIT(A) further observed that the assessee had rightly charged the same against the respective revenue, when revenue recognition takes place from the project in the subsequent years. The CIT(A) concluded that the AO is not correct in disallowing a sum of Rs.46,89,104 when the same is retained as WIP Project expenses as part of the WIP.
Aggrieved, the department has come up in appeal before the Tribunal and raised ground No.2 which is as follows:
“2. The CIT(A) erred in directing the AO to reduce the brokerage paid towards pragathi paradise project from total project cost of pragathi nagar project and to recomputed the project revenue without appreciating the fact that the debiting of the impugned expenditure was wrong and the same view was accepted by the AR during the assessment proceedings.”
The ld. counsel for the assessee reiterated the submissions made before the CIT(Appeals) before us. The ld. counsel also produced the balance sheet and profit & loss account before us. We are of the opinion that the assessee has correctly retained as WIP Project expenses as a balance sheet item and charged the same against the respective revenue. The assessee has correctly accounted the brokerage and commission on land procurement of Rs.46,89,104 for the Pragathi Paradise Project as project expenses. Hence, we confirm the order of CIT(Appeals) in allowing a sum of Rs.46,89,104.
Ground No.3 raised by the revenue reads as follows:-
“3. The CIT(A) erred in holding that the project expenses of pragathi garden project has never been charged to P&L a/c and directing the AO to reduce the said expenditure from total project cost of pragathi nagar project and to recompute the project revenue without appreciating the fact that the assessee has debited the said expenditure to P&L a/c but the same has not been incurred towards pragathi nagar project.”
With respect to project expenses of Pragathi Garden Project amounting to Rs.58,77,997, the submissions of the assessee were as follows:-
“The Assessing Officer has observed a particular expense of Rs. 58,77,997 relates to Pragathi Garden Project which has been part of the development expenses of Pragathi Nagar Project of Rs.8,15,78,154 as disclosed in Schedule No. 16 of the Audited Financials submitted. The Assessing Officer has not brought any material to justify that the above amount is not connected to Pragathi Nagar Pro but assumed that the same is connected , . ject to Pragathi Garden Project. Furth the Assessing Officer is not , er correct in concluding the above amount is charged as expenses fully in the Profit & Loss account , instead of treating the same as direct cost of the referred project to be included as part the closing WIP of the project which is still under implementation. Without Prejudice to the above, the components of the Direct costs if not considered in one Project, the same would merit the consideration of being included in the other project but not automatically merit a disallowance and an addition to income returned.”
The CIT(Appeals) rightly held that the expenses pertained to Pragati Nagar Project only and proportionate expenses have been charged to profit & loss account as per the revenue recognition method and the balance has been carried as closing WIP as a balance sheet item. Hence, we confirm the order of CIT(Appeals) in allowing a sum of Rs.58,77,997 which has not been debited to the profit & loss account.
The department has come up in appeal in ground No.4 stating as follows:-
“4. The CIT(A) erred in directing the AO to exclude the interest expenses pertaining to the other projects of Rs.25,03,134/- being 6.05% of Rs.4,13,74,116/- without appreciating the fact that the AR failed to produce the breakup of the said expenses so that the AO was forced to arrive at interest on loans pertaining to other projects based on the area of the projects.”
Before the CIT(Appeals), the ld. counsel for the assessee submitted that the AO has disallowed a sum of Rs.1,90,61,055 (out of Rs.4,13,74,116) on the basis of the land area under development in three different projects irrespective of stage of implementation/development of each project. The AO’s version of version of allocation of interest incurrence of Rs. 4,13,74,116 based on the number of acres purchased with respect to the three projects undertaken by the Firm, is an arbitrary and statistical compilation and to attribute an amount of interest of Rs. 1,90,61,655 (out of Rs.4,13,74,116) to Pragathi Paradise and Pragathi Garden is not correct. The assessee filed a statement in respect of the total expenses incurred towards the project and the expenses debited to the profit & Loss account during the year and submitted that as can be seen from the expenses debited to the profit & Loss account during the year, only a sum of Rs. 31,41,468/- was debited to the profit & Loss account towards interest expenditure and the Assessing Officer is not correct in disallowing the sum of Rs. 1,90,61,055/- when the expenditure debited to the profit & Loss account under the head 'Interest' is only a sum of Rs. 31,41,468/-. Copies of the Sanction Letters from the Bank in respect of Federal Bank and HUDCO were submitted wherein the sanction references indicate that the Loans were sanctioned for Pragathi Nagar Project only. It was submitted that the AO has not brought out any evidence to show that the money has been sanctioned/utilised for other projects other than for Pragathi Nagar Project. In all, the AO has disallowed various items to the tune of Rs. 2,96,28,156 as against Rs. 1,64,07,311/- debited to the Profit & Loss account. It was submitted that the AO is not correct in presuming that a part of the closing WIP to the extent of Rs. 2,96,28,156, and has been shown as an Asset to that extent has been debited to the Profit & Loss account.
The CIT(Appeals) after perusing the submissions of the assessee and the remand report by the AO held that the AO’s basis for disallowance of interest i.e., the area of the land sought to be developed in different projects and to apply the same ratio to the total interest incurred in arriving at the disallowance of Rs.1,90,61,055 is not correct. The CIT(A) observed that that the fact that the assessee has not maintained separate books for utilization of funds for each project vis-à-vis the expenses incurred during the period such as the sources of interest bearing loan accounts including bank funds, non-interest bearing funds and capital of the firm for the implementation of the projects undertaken by the assessee. The CIT(A) held that in such a situation, it is prudent and logical to bifurcate the interest costs incurred based on the total project expenses incurred (excluding interest costs) for allocation of the same to the respective projects proportionately. He further held that the interest bearing loans sourced to meet the development costs of the projects as per the submissions made by the assessee and also the AO did not dispute the interest expenses of Rs.4,13,74,116 upto 31.3.2009. The CIT(A) further held as follows:-
“……. the proportion of interest bifurcation between the projects has to be computed based on the total project expenses incurred among the projects undertaken by the Appellant. From the details placed on record extracted below) it is noted that the total project expenses incurred up to 31.03.2009 before charging interest expenditure is proportioned at 93.95% and 6.05% to Pragathi Nagar project and other projects respectively. Sl. Particulars Amount belongs Amount belongs Total No. to Pragathi Nagar to other Projects Project 1 Total Project 16,41,48,234 1,05,67,101 17,47,15,335 Expenses incurred (93.95%) (6.05%) (100%) 2 The interest 3,88,70,982 25,03,134 4,13,74,116 expenses allocation
Thus it is directed to exclude the interest expenses pertaining to the other projects computed as above of Rs. 25,03,134/ - from the total project costs of "Pragathi Nagar” Project of Rs.25,03,134/- and to recompute the Project Revenue, Matching Costs for the Revenue Recognised and the closing WIP based on the Percentage Completion Method as followed by the Appellant and also agreed by the Assessing Officer.”
Aggrieved, the department is in appeal before us.
We have heard both the parties. We find that the CIT(Appeals) has correctly directed to exclude the interest expenses pertaining to other projects computed at Rs.25,03,134 from the total project costs of Pragathi Nagar project of Rs.21,60,89,451. The CIT(A) rightly directed the AO to recompute the project revenue, matching costs for the revenue recognized and closing WIP based on percentage completion method which is being followed by the assessee. Hence we confirm the order of the CIT(Appeals).
Ground No.5 of the department is as under:-
“5. The CIT(A) failed to appreciate that the working of the taxable profits, project revenue, matching costs and the closing WIP, excluding the expenditure of Rs.1,30,70,235/- is unwarranted as the order giving effect to the order of CIT(A) results in lesser income than the returned income.”
The power of the CIT(A) is coterminous with that of the AO. Therefore, the CIT(A) not only has the power to enhance the assessment of income which is not part of the returned income, but also to allow deduction or delete the income which will result in the income being computed at less than the returned income. The object of the appellate proceedings is to determine the correct tax liability of the assessee. The Hon’ble Apex Court in the case of Goetze (India) Ltd. v. CIT, 284 ITR 323 (SC) has held that the claim made by an assessee otherwise through a return/revised return cannot be entertained by the AO, but such fetters will not apply to appellate authorities. The CIT(A) ought to grant deductions, if claimed by the assessee for the first time in appeal, if it is otherwise allowable in law, notwithstanding the fact that as a result, the income of the assessee would be less than the returned income.
Ground No.6 raised by the revenue reads as under:-
6. The assessee is declaring income on percentage completion method and the CIT(A) ought to have appreciated that the expenses relating to other projects which have not commenced, cannot be allowed from the income so computed because the corresponding income of these projects is not offered to tax.
The assessee is carrying on the business of development of residential layouts and real estate operations and has taken up the projects under the names ‘Pragathi Garden Project’, ‘Pragathi Paradise Project’ and ‘Pragathi Nagar Project’. The assessee has been following the percentage completion method for recognition of revenue. Financial year 2008-09 (AY 2009-10) is the first year of recognition of income from the business operations in respect of Pragathi Nagar Project and no income is recognized from other projects. The First Appellate authority after examination of records and submissions has come to the factual finding that the allocation of expenditure among the projects were proper. The profit offered for the Pragathi Nagar project under the percentage completion method is in accordance with the accepted method of accounting. Expenses incurred for the project has been added to the WIP and only that proportion of expense and income based on the percentage of completion of project has been incorporated in the Profit and Loss determination. The Assessee has also established the method of allocating interest and other project expenses on the basis of total project expenses and proportion allocable to individual projects. The AO had disallowed expenses more than the amounts in the case of interest and other project expenses debited to the P&L, which is not correct. In the circumstances we find that the order of the First Appellate Authority dealing with these disallowance/addition is based on facts and documents and is in accordance with accepted accounting principles regarding revenue recognition in respect of Housing construction and development business. Therefore, we uphold the order of the CIT(Appeals) on this issue.
Ground Nos. 1, 7 & 8 are general in nature requiring no specific adjudication.
In the result, the appeal by the department is dismissed.
Pronounced in the open court on this 24th day of June, 2016.