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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ C ’
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI JASON P. BOAZ
O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.30.1.2015 for Assessment Year 2010-11.
The facts of the case, briefly, are as under :- 2.1 The assessee, an individual deriving income form house property, business and capital gains, filed her return of income for Assessment Year 2010-11 on 31.7.2010 declaring income of Rs.2,32,23,680. The assessee's case was taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed loss of Rs.20,80,549 2 under the head ‘Business’ and the same was set off against income admitted under the other heads of income and proceeded to examine the aforesaid claim of business loss. On examination thereof, the Assessing Officer held that since the assessee had not shown any income at all from business, there was factually no loss and therefore disallowed the assessee's claim. The assessment was completed under Section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dt.11.3.2013 wherein the income of the assessee was determined at Rs.2,74,02,776 in view of the disallowance of the business loss of Rs.20,89,549 claimed by the assessee from property development. 2.2 Aggrieved by the order of assessment for Assessment Year 2010-11 dt.11.3.2013, the assessee preferred an appeal before the CIT (Appeals) – IV, Bangalore. Before the learned CIT (Appeals), the assessee vide letter filed on 12.1.2015 (placed at pages 38 & 39 of AR’s Paper Book), contending that the loss shown by the assessee was purely administrative expenses of Rs.20,89,549 incurred in the conduct of business of property development. The assessee submitted that she was developing a project ‘Cronos Zahara’ at Rahat Bagh Enclave and the expenditure incurred on development was transferred to work-in-progress. However, the administrative expenditure which cannot be directly attributed to the cost of development was claimed as a deduction to the profit and loss account as they cannot be added to the work-in- progress of the project development. The learned CIT (Appeals), however, did not accept the assessee's contentions and proceeded to disallow the assessee's claim on the ground that there was no business activity carried out by the assessee during this year and therefore, the loss 3 claimed by the assessee cannot be allowed. In that view of the matter, the learned CIT (Appeals) dismissed the assessee's appeal vide order dt.30.1.2015. 3. Aggrieved by the order of the CIT (Appeals) – IV, Bangalore, the assessee has preferred this appeal before the Tribunal raising the following grounds :- “
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2.1 The learned CIT (Appeals) is not justified in sustaining the disallowance of Rs.20,89,549 being the loss claimed by the appellant from the business of property development under the facts and in the circumstances of the appellant’s case. 2.2 The learned CIT (Appeals) failed to appreciate that the business of property development had commenced with the construction activity on the Rahat Bagh Enclave Project and that the appellant had rightly capitalized the direct expenditure related to the project to the work-in-progress account and charged the administration expenses as period cost to the profit and loss account for the year, which ought to have been accepted. 2.3 The learned CIT (Appeals) further failed to appreciate that the aforesaid loss represents legitimate expenditure incurred by the appellant for the purpose of the business and that these costs are not directly related to the project under development and therefore, the appellant had rightly charged off the same as expenditure for the year under appeal. 2.4 The learned CIT (Appeals) failed to appreciate the fact that the appellant is a developer and not a contractor and that the policy of accounting and revenue recognition followed by the appellant is in order and that there was no requirement under law that expenditure can be allowed only if the appellant has declared revenue from the project during the year under appeal.
3. Without prejudice to the right ot seek waiver with the Hon'ble CCIT / DG, the appellant denies himself liable to be charged to interest under Section 234A and 234B of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.
4. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
4. The Grounds at S.Nos. 1 & 4 are general in nature and not being urged before us in appellate hearings, are rendered infructuous and are accordingly dismissed.
5. In Ground No.3, the assessee denies itself liable to be charged interest under Section 234A and 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234A and 234B of the Act, if any, while giving effect to this order.
6. Ground No.2 (2.1 to 2.4) - Business Loss – Rs.20,89,549. 6.1.1 The sole issue for consideration and adjudication is in respect of the disallowance of Rs.20,89,549; being the loss claimed by the assessee form the business of property development. The learned Authorised Representative drew the attention of the Bench to the Paper Book filed and particularly to the computation of total income and the profit and loss account for the year under consideration (pages 1 to 8 of Paper Book). It was pointed out that the assessee was carrying out the business of property development and had undertaken a construction project. It was submitted that the assessee was following the project completion method, since she was a developer and not a contractor and the method of accounting followed by the assessee was a recognized method. In support of this proposition, of the aforesaid method of accounting, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Varun Developers in ITA Nos.372 & 373/Bang/2013 dt.5.12.2013.
5 6.1.2 The learned Authorised Representative submitted that the entire loss of Rs.20,89,549, claimed by the assessee during the year, was on account of administrative expenses of the business, which are required to be claimed irrespective of the extent of construction activity carried on by the assessee. It was submitted that these expenses are a period cost and were rightly charged to the profit and loss account by the assessee. The learned Authorised Representative drew the attention of the Bench to the similar treatment followed by the assessee for the subsequent Assessment Years 2011-12 and 2012-13 wherein the administrative expenses were charged off to the profit and loss account and the construction expenses being carried to the work-in-progress in each of these years. The learned Authorised Representative submitted that ultimately the assessee completed the project during the period relevant to Assessment Year Assessment Year 2013-14 and has offered income from sale of flats and transferred the work-in-progress to the profit and loss account of the said year. With regard to the claim of allowance of the administrative expenditure as loss arising during the year, reliance was placed on the decision of the co-ordinate bench of this Tribunal in the case of Bangalore Goa Estates Pvt. Ltd. in ITA No.988/Bang/2014 dt.31.8.2015. 6.2 Per contra, the learned Departmental Representative submitted that the disallowance of the loss claimed was justified. It was submitted that the assessee had only a single business, viz. development of a single property and that while all direct expenses on construction were considered as part of work-in-progress by the assessee, who is following the project completion method, the assessee incorrectly claimed administrative expenses 6 in the profit and loss account. It is submitted that even these expenses ought to have been taken to work-in-progress of the project and claimed ultimately when the project was completed and the income on this project was offered during the Assessment Year 2013- 14. The learned Departmental Representative submitted that there was no justification for a different treatment with regard to administrative expenses and vehemently supported the orders of the authorities below. 6.3.1 We have heard the rival contentions and perused and carefully considered the material on record. It is seen from the facts that emerge from the record that the assessee is carrying on the business of property development and following the project completion method for recognizing revenue from the business of property development; in respect of the project ‘Cronos Zahara’. In the back drop of the aforesaid facts, the issue that arises for our consideration is whether the administrative expenses of the business are also to be regarded as part of work-in-progress in the financial statements of the assessee. In the decision of the co-ordinate bench of this Tribunal in the case of Bangalore Goa Estates Pvt. Ltd. (supra) relied upon by the assessee, the co-ordinate bench has considered a similar issue in the case of that assessee carrying on similar business of real estate wherein, the administrative expenses were charged off to the profit and loss account and claimed as loss from business. The co-ordinate bench, after considering the judgment of the Hon'ble Delhi High Court in the case of Dhoom Ketu Builders and Development Pvt. Ltd. has held as under at paras 10 to 13 of its order :- “10. We have heard both sides of the argument and perused the material on record and learned Assessing Officer has relied on the judgment of Hon'ble Supreme Court M/s.
7 Tuticorin Alkali Chemicals and Fertilisers Ltd. (supra) while evaluating this case with the present case. We find that the major question is when a business can be considered as set up and commenced. The concept of set up and commencement will differ industry to industry. M/s. Tuticorin Alkali Chemicals and Feritlisers Ltd. (supra) was a manufacturing concern. Setting up and commencement incase of the real estate business is entirely different. The concept of set up and commencement are different. The first is capacity to start its earning capacity whereas the latter is actual commercialization of the business. Normally, a manufacturing business require turnaround time of less than six months, whereas a real estate business may require more than one accounting year.
We find that the case of Dhoom Ketu (supra) of Hon'ble Delhi High Court is similar to the relevant case in hand. We are of the view that the commencement of real estate business will start with acquisition of land property by an assessee whose intention is develop it and do real estate. Assessee had spent considerable sum for developing the pieces of land. This would clearly show that it had set up the business. The assessee had spent the following amount for development of land purchased. Land at Electronic City : Rs.1073984/- Land at Goa : Rs.776909/- Land at Whitefield : Rs.845956/- 12. As for interest income, it has been rightly put under the head ‘income from other sources’ but nevertheless it has to be allowed for claim of set off against business loss of the assessee.
For the foregoing reasons we are of the view that the expenditure incurred by the company in managing the business activity was allowable as business expenditure. Ordered accordingly.” 6.3.2 We find that the co-ordinate bench in its decision in the aforesaid case of Bangalore Goa Estates Pvt. Ltd. (supra) has held that expenditure incurred by that assessee company in managing the business activity was allowable as business expenditure. The assessee, in the case on hand, has consistently followed the method of accounting of recognizing construction related expenditure as work-in-progress and administrative expenses not directly relatable were debited as business expenditure in the profit and loss account. This treatment is in keeping with the accounting standards and the guidance note on accounting transactions issued by ICAI. In this factual matrix, we are of the considered view that the accounting treatment of the assessee does not warrant any interference and the Assessing Officer’s view, that the said 8 administrative expenses incurred for managing the assessee's real estate business is not allowable as expenditure to be claimed against business, as no business activity was carried on by the assessee, is not sustainable in the facts and circumstances of the case on hand. The Assessing Officer is, therefore, directed to allow the loss of Rs.20,89,549 as claimed by the assessee. It is ordered accordingly.
In the result, the assessee's appeal for Assessment Year 2010-11 is allowed as indicated above. Order pronounced in the open court on 28th October, 2015.