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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
The present appeal has been filed by the assessee against the order dated 31.01.12 of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] relevant to assessment year 2009-010.
The assessee has taken following grounds of appeal. “Ground 1
1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals)-7, Mumbai ['CIT(A)'] erred in confirming the action of the Assistant Commissioner of Income-tax (OSD) Circle- 3(1) ('the AO') in disallowing the business expenditure of Rs.43,20,80,449 and by treating it as Work-in progress ('WIP') of the Appellant. The Appellant prays that it be held to allow the business expenditure as stated above in calculating the total taxable income of the Appellant and not treat the same as WIP. Ground 2
2. On the facts of the case, the learned CIT(A) erred in confirming the action of the 2 M/s. Hiranandani Palace Gardens P. Ltd. learned AO in concluding that the Appellant undertakes only a single contract and hence the entire expenditure incurred by it is allocable to the said contract only, under the Generally Accepted Accounting Principles ('GAAP') issued by the ICAI and applicable in the case of the Appellant. The Appellant prays that it be held that the above conclusion is incorrect having regard to the facts of the case of the Appellant. Ground 3
3. On the facts and circumstances of the case, the learned CIT(A) erred in confirming the action of the learned AO in concluding that the marketing and general administrative costs incurred by the Appellant are allocable to the specific contract undertaken by the Appellant and thus restating the duly audited accounts drawn by the Appellant in accordance with the GAAP and by adding the said costs to the WIP. The Appellant prays that it be held that the marketing and general administrative expenses cannot be added to the WIP. Ground 4
4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in characterizing the interest income of Rs. 1,70,72,127 (earned on fixed deposits placed with banks out of temporary surplus business funds available with the Appellant) as 'Income from Other Sources' as against 'Business Income'. The Appellant prays that it be held to characterize the interest income as Business income and not as Income from other sources. Ground 5
5. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in levying interest of Rs.917,020 under Section 234B of the Income-tax Act, 1961 (‘the Act’). The Appellant prays that it be held to delete the levy of interest under Section 234B of the Act.
The Appellant craves leave to add to, alter, amend or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”
Grounds No. 1 to 3 3. The brief facts relating the issue under consideration are that the assessee company has been engaged in the business of Real Estate Development for Residential Township and Commercial Premises. The assessee company has undertaken development of multipurpose residential township at Thriveni Academy, Thriveni Nagar, Vadapattu Village, Distt. 3 M/s. Hiranandani Palace Gardens P. Ltd. Chennai. During the course of assessment proceedings, the Assessing Officer (hereinafter referred to as the AO) observed that the project of the Residential Township was being constructed by the assessee on the land belonging to its wholly owned subsidiary companies. The assessee company was incorporated in F.Y. 2006-07 and the possession of land was obtained from the subsidiaries and the development and construction work was started thereafter. The assessee has been following percentage completion method as the basis of its accounting system and the revenue was stated to be booked on proportionate basis after completion of certain percentage of the work/project. During the year under consideration, the assessee had not shown any income or receipt of revenue from the project in question. The construction and other expenses relating to project including initial expenses of construction were either shown as work-in- progress of the project at the end of the year or as Business Expense for the year. That out of the total expenditure incurred of Rs.14,187.67 lakhs, the assessee had shown an amount of Rs.9,866.87 lakhs as work-in-progress of project by capitalizing it as the project cost and balance amount of Rs.4,320.80 lakhs had been claimed as revenue/business expenditure. He further noted that out of total revenue expenditure claimed of Rs.4320.80 lakhs, expenses amounting to Rs.3232.42 lakhs had been on account of Marketing Costs, Sales Commission & Sales Promotion and Advertisement Expenses. Further, against the business expenditure claimed of 4320.80 lacs the assessee had shown interest & other income of Rs.166.68 lacs and the net loss as per P&L A/c. had been worked out at Rs.4154.12 Lacs. In the computation of income, after adjusting allowable and disallowable expenses, the net business loss had been computed at Rs.4053.53 Lacs. The AO called upon the assessee to show cause as to why the business loss claimed of Rs.4053.53 Lacs should not be disallowed by treating it as work-in-progress of the ongoing project of its company. The assessee submitted that the above stated claim of revenue expenditure was rightly worked out as per the 4 M/s. Hiranandani Palace Gardens P. Ltd. accounting policy, which had been consistently followed by the assessee for the last so many years. The assessee explained that the finance cost claimed was not attributable to work in progress and that the office and administrative expenses were incurred for office and administration purposes further that the selling and marketing expenses had been incurred for selling and marketing of flats and the above stated expenses were not having any nexus with the project under construction; hence, the same had been claimed as deductible revenue expenditure for the year. The AO, however, rejected the assessee’s claim and held that that as per the clause 19 of AS: 7, the costs that cannot be attributed to contract activity or cannot be allocated to a contract had to be excluded from the costs of a construction contract. However, in the case of the assessee, the entire costs incurred were attributable and relatable to one single project and as such none of the costs could be excludable from it and therefore, all expenses were required to be capitalised to work-in-progress and should have been claimed as deduction in subsequent year in proportion of income offered. He accordingly disallowed the above stated entire business expenditure claimed of Rs.4320.80 Lacs by capitalizing it, treating it as work-in- progress of the project being constructed by the assessee. Similarly miscellaneous revenue receipts received during the year, which are directly related to the construction of project were reduced from the WIP shown at the end of the year. The assessee unsuccessfully contested this issue in appeal before the Ld. CIT(A). Being aggrieved by the order of the Ld. CIT(A), the assessee has come in second appeal before us.
The Ld. AR of the assessee, before us, has submitted that the observation of the lower authorities that there was a single project in hand was factually wrong. There were total 27 buildings under construction. 11 low rise buildings and 4 high rise buildings consisting of 496 apartments had been ITA No.4579/M/2013 5 M/s. Hiranandani Palace Gardens P. Ltd. completed and handed over as on date (31.03.2015). 12 buildings consisting of 1088 apartments had been under construction. Though at a single location, the project was not one and each building was a separate project for recognizing revenue from the project. The assessee had allocated all direct and indirect construction overheads relating to the project to project and which had been inventorised as WIP. He explained that out of Rs.43,20,80,449/- of business expenses, Rs.32,32,42,000/- were sales and marketing costs and Rs.10,88,38,000/- were on account of depreciation, finance and general administration cost. That out of total Finance cost of Rs.16,08,50,000/- only a sum of Rs.23,91,000/- had been claimed as period cost and balance had been inventorised to WIP. The nature of expenses was also undisputed as the AO had carried out due verification of the expenses as noted in the assessment order itself. The contention of the Ld. AR has been that the selling cost and general administration cost cannot be treated as part of inventory or work in progress as they do not contribute to bring the inventory to its present location and status. The Ld. AR of the assessee has further submitted that the issue is squarely covered by the decision of the co-ordinate bench of the Tribunal on almost identical facts in the case of “M/s. Lodha Palazzo Vs. ACIT” vide order dated 10.12.2014. The Ld. DR has also fairly admitted that the issue is squarely covered by the above decision of the Tribunal.
We have considered the rival contentions and have gone through the records and also the decision of the co-ordinate bench of the Tribunal in the case of “M/s. Lodha Palazzo Vs. ACIT” (Supra) (One of us i.e. Judicial Member, being party to the said decision), wherein the Tribunal after deliberating upon the various clauses of Accounting Standard AS-2 and AS- 7 and the provisions of section 145A of the act has held that as per the accounting method consistently followed by the assessee and thereby 6 M/s. Hiranandani Palace Gardens P. Ltd. excluding the indirect expenses such as office employees’ salary, administrative expenses and marketing & selling expenses was as per the recognized principles of accountings and as such the claim of the assessee deserved to be allowed. The relevant findings of the Tribunal for the sake of completeness are reproduced as under: “6. We have heard the rival contentions and gone through the records. The Ld. counsel for the assessee has relied upon the “Expert Advisory Committees Report (EAC) on applicability of revised AS 7 to enterprises undertaking the construction activities on their own account as a venture of commercial nature” (copy placed at page 49 & 50 of paper book) wherein it has been stated that revised AS -7 shall not be applicable to the builders undertaking the commercial activity on their own and it was also stated that the work in progress shall constitute inventory for the builders and shall be valued as per AS-2 issued by the Institute of Chartered Accountant of India (ICAI). The Ld. Counsel has further submitted that the assessee has accordingly followed the Accounting Standard -2 for determining the work in progress. He has further brought our attention to para 13 of As-2, wherein it has been mentioned that the following expenses have to be excluded from the cost of inventories being work-in-progress: “(a) abnormal amounts of wasted materials, labour or other production costs; (b) storage costs, unless those costs are necessary in the production process before a further production stage; (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and (d) selling costs.”
The Ld. Counsel has further relied upon para 2.4 of the “Guidance Note on Accounting for Real Estate Transaction” issued by the Institute of the Chartered Accountants wherein it has been stated that: “The following cost should not be considered part of construction cost and development cost if they are material: (a) General administration costs; Selling cost; (b) Research and development cost; (c) Depreciation of idle plant and equipment; (e) Cost of unconsumed or uninstalled material delivered at site; and (f) Payment made to sub-contractors in advance of work performed.”
The Ld. Counsel therefore has stated that as per the above guidelines, the administrative and selling expenses have been specifically excluded from the cost of inventory for work for closing WIP. The Ld. Counsel has further submitted that even 7 M/s. Hiranandani Palace Gardens P. Ltd. as per AS -7 vide paragraph 19 it has been mentioned that the general administrative cost and selling cost does not constitute the cost of the project. He, therefore, has submitted that as per Guidance note, AS 2 and even AS 7, the general administrative expenses and selling expenses are not project cost and are to be charged to the profit & loss account in the very same year in which they are incurred. In view of the above facts and following the Guidance Notes and Accounting Standards, the assessee has individually worked out the expenses directly related to work in progress and expenses not related to work in progress and accordingly debited in respective heads. The Ld. Counsel has further relied upon section 145A of the Act, which read as under: “[Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145,— (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be— (i) in accordance with the method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.”
9. The Ld. Counsel, therefore, has contended that the assessee has been regularly following the method of accounting recognized by the accounting principles to value the inventory. The assessee had followed the same method of valuing the inventory in preceding year as well as in succeeding years. Even in the assessment year 2010-11, it has debited and claimed the identical nature of expenses which had been accepted as deductible expenses in assessment order passed u/s 143(3) of the I.T. Act. The assessee being regularly following the accounting method duly recognized by the accounting principles and guidelines as stated above and in view of the provisions of section 145A has rightly claimed the proportionate salary expenses, administrative expenses and selling expenses as revenue expenditure. The Ld. counsel has further contended that the Special Bench decision of the Tribunal relied upon by the lower authorities in the case of “Wall Street Construction Ltd. Vs JCIT” [101 ITD 156] is relating to interest expenditure identifiable with the project. In assessee’s case, dispute is not with respect to interest as the assessee itself has added the interest cost to the work-in-progress and claimed it in subsequent year in the proportion of revenue offered. Thus, the facts in assessee’s case are quite distinguishable and the decision of Special Bench (supra) is not applicable to the facts of the assessee’s case.
10. The ld. DR on the other hand has relied upon the findings of the lower authorities. He has stressed that the Ld. CIT(A) has rightly appropriated the indirect expenses to the WIP in proportion to the percentage of completion in respect of the area sold.
We have considered rival contentions and carefully gone through the orders of the authorities below. The percentage completion method of accounting has 8 M/s. Hiranandani Palace Gardens P. Ltd. been regularly followed by the assessee. In the succeeding assessment year 2010- 11, the AO has accepted the deductibility of the identical nature of expenses in the assessment order passed u/s 143(3) of the I.T. Act. We agree with contention of the Ld. Counsel for the assessee that the employee cost refers to salary paid to the employees who are looking after the administration of office and not directly related to construction of the project but is part of the administrative expenses. Similarly, the office and administrative expenses and selling and marketing expenses are to be charged to the profit & loss account in the very same year in which they are incurred and have to be excluded from the cost of inventories for working out closing WIP as per the guidelines issued by the ICAI, Accounting Standard AS-2 and AS-7. The assessee has regularly and consistently been following the said method of accounting as per the provisions of section 145A of the I.T. Act. The AO has not assigned any cogent reason as to why the method, which has been consistently followed by assessee and accepted by the department in past as well in succeeding assessment years and which is in accordance with the recognized principles of accounting by ICAI, is being rejected. In our view, the action of the Revenue Authorities in rejecting the assessee's accounting method, without assigning any reason is not justified. The accounting method followed by the assessee and thereby excluding the indirect expenses such as office employees’ salary, administrative expenses and marketing & selling expenses is as per the recognized principles of accountings and as such the claim of the assessee deserves to be allowed. We hold accordingly. The additions made by the lower authorities on this issue are hereby ordered to be deleted.”
Both the Ld. representatives of the parties have submitted that the issue is squarely covered by the above decision of the Tribunal. We find that rather the case of the assessee is on better footing as the assessee was carrying out different projects though at the same location, hence it was not a case of single project. Even otherwise the resultant income from the project is a loss even after capitalisation of expenditure by the AO to work in progress. Hence, there is no tax implication, so far as the year under consideration is concerned and the loss otherwise also has to be carried forward. Under such circumstances, it cannot be said that the assessee has adopted the above stated accounting method to avoid tax on income for the year under consideration. The assessee, thus, has followed the accounting method which has been consistently followed by it and which is as per the recognized principles of accounting. In view of the above discussion of the matter and following the above decision of 9 M/s. Hiranandani Palace Gardens P. Ltd. the Tribunal for the sake of consistency, this issue is decided in favour of the assessee.
Ground No.4 7. The issue raised vide this ground is relating to the head of the chargeability of interest income earned by the assessee during the year. During the year under consideration the assessee had earned income from fixed deposits kept with the bank and the said income had been set-off against the business expenses claimed during the year. In the course of assessment proceedings, the AO called upon the assessee to show cause as to why the interest income earned on bank F.Ds should not be treated as "Income from Other Sources" and assessed accordingly. In response, the assessee furnished reply vide letter dated 19.12.2011, the relevant portion of which is reproduced as under: “At the outset, we may like to mention that the Company is engaged in the business of real estate development and has no other business activity. In this regard, the company has raised funds from shareholders as well as from financial institutions and regularly deploys them in its business. Besides, the company also receives business advances in course of its business activity. Given the initial years of operations of the company, the company does have surplus funds on a temporary basis from such sources. Pending the deployment of its funds for the project, the company has temporarily invested such surplus funds in deposits with bank and earned interest income thereon. The said interest income arising to the company from bank deposits has been characterized as Business Income on the basis that the investment made in the bank deposits yielding interest income was done to temporarily park the surplus funds available with the company in the course, and as a part, of the business of the company.”
8. The AO, however, was not convinced with the above reply of the assessee. He therefore assessed the interest income as ‘Income from other sources’. Being aggrieved, the assessee preferred appeal before the Ld. CIT(A) but remained unsuccessful on this issue also.
We have heard the rival contentions of the Ld. Representatives of the parties. The Ld. AR of the assessee has brought our attention to page 13 of the 10 M/s. Hiranandani Palace Gardens P. Ltd. paper book which is the copy of ‘schedule to financial statement’ to show that the assessee during the year had received advances from the customers to the tune of Rs.658,839,563/- and further explained that that given the initial years of its operation, the available surplus fund of Rs.1,70,72,127/- only was temporarily deposited in FDRs pending its utilization so as to make best use of it and to reduce the cost of the project. It was therefore offered as 'Business Income'. The Ld. AR in this respect has relied upon the various case laws including the decision of Hon'ble Karnataka High Court in the case of “Swish Chandra & Co. vs. CIT” 234 ITR 70 (KAR) and decision of Hon'ble Bombay High Court in the case of “CIT Vs. Lok Holdings” 308 ITR 356 (Bom.) and has contended that the said decisions are fully applicable on the facts of this case. The Ld. DR on the other hand has relied upon the findings of the lower authorities.
We find that in the facts and circumstances of the case in hand, the decision of Hon'ble Bombay High Court in the case of “CIT vs. Lok Holdings” (supra) is squarely applicable. In that case the assessee was engaged in development of properties. Advance from customers intending to purchase flats was deposited with the banks in the course of business. The interest income was held to be assessable as business income and not as income from other sources. Following the decision of Hon'ble Bombay High Court in the case of “Lok Holdings” (Supra) the interest income earned from temporary deposits pending their utilization out of customer advances on the booking of flats related to the project of the assessee is assessable as business income. The A.O. is accordingly directed to assess the same as business income. This ground of appeal
is also allowed. 11 M/s. Hiranandani Palace Gardens P. Ltd.
11. Ground No.5 is consequential in nature and does not require any adjudication at this stage.
In the result, the appeal of the assessee is hereby allowed.
Order pronounced in the open court on 30.12.2015.