OM CONSTRUCTION P.LTD,MUMBAI vs. ITO 5(2)(1), MUMBAI

Besides this, in ground no. 5 & 6, the assessee has taken without prejudice grounds that such a disallowance made on the basis of DVO’s report could not have been made and otherwise these expenses were purely for commercial expediency. In ground no. 7, the assessee has challenged the levy of penal interest.

At the outset, ld. Counsel submitted that ground no. 4 challenging the addition of Rs.7,22,726 is not pressed, accordingly, same is being dismissed as not pressed.

Brief facts of the case qua the additions/disallowances made are that, Assessee Company is engaged in the business of builder and developing of housing project. The assessee had undertaken construction work of one housing project, the commencement of the said project started in the AY 1988-89. Though the said project was completed quite an extent in an around AY1995-96, however, on account of litigation before the Bombay High Court and City Civil Court, wherein the assessee was required to provide necessary parking space and compound wall etc., the said project was not submitted for completion. The assessee declared its project completed in the assessment year 2007-08 i.e., in the impugned assessment year. From the assessment year 1998-99 to 2005-06, the assessee did not file its return of income on the ground that project was not yet completed. The AO had earlier referred the entire project for valuation to the DVO and notices u/s 148 were issued for these years. During the course of such valuation, the assessee had contended that major part of the construction was completed before 1997, however, the amount was not offered for tax, because of the litigation in the Court. In the earlier year the issue, whether the assessee has been following the project completion method or not, has attained finality from the stage of the Tribunal, wherein the project completion method has been accepted. Against the said order of the Tribunal appeal before the High Court was filed by the Department u/s 260A, however, the Department withdrew the appeal later on and accordingly; the 3 M/s Om Construction Pvt Ltd Tribunal became final. From assessment year 1998-99 onwards, the assessee had incurred some minor construction expenses which from the assessment year 1998-99 to 2001-02 aggregated to Rs. 9,22,726/-. This amount was capitalized in the books as work-in-progress. Likewise the administrative expenses from the AY 1998-99 to 2007-08 aggregated to Rs. 1,97,34,474/-, which too was capitalised. However, the AO in the earlier years had disallowed these expenses on adhoc basis after applying some percentage, which was deleted by the appellate authorities. In this manner major part of the expenses debited to the work-in-progress account stood allowed. In this year the AO has disallowed the administrative expenses and construction expenses on the ground that the assessee had shown construction expenses of Rs. 9,22,726/-after the completion of the project and also the administrative expenses of Rs.1,97,34,469/- do not pertain or form part of the cost of the project as the project was completed in 1997-98. His entire reasoning was based on the DVO’s report that no construction was done post AY 1997-98. Accordingly, AO disallowed these expenses. Further, the assessee had made a provision of expenses of Rs. 50 lakhs on the ground that, certain work was still to be carried out for which the expenses estimated by the management was at Rs. 50 lakhs. The assessee’s contention before the AO was that the entire sale proceeds received/receivable on this project has been credited to the profit & loss account. The items which are not completed, company was require to complete, and certain expenditures were incurred. Since P&L account of the project has been determined during the year, therefore, the expenditure on incomplete work have been provided in the books of accounts, which are deductible. Ld. AO, however, rejected the assessee’s contention for the same reason.

Before the CIT(A), again the assessee made very elaborate submission which has been incorporated from pages 8 to 11 of the appellate order. However, the Ld. CIT(A) too confirmed the said

After hearing both the parties at length, we find that in the past it has been accepted that, assessee has been following project completion method. Most of the construction of the project had commenced from assessment year 1998-99 and was finished uptill AY 1997-98. It was due to litigation in the Bombay High Court, the project was not treated as complete. From assessment year 1998- 99 to 2005-06, the assessee’s case was completed under scrutiny proceedings u/s 148 r.w.s. 143(3), wherein the expenses on account of construction and administration (which were capitalized in the books as work-in-progress) were partly allowed by the AO, in as much as the AO had made ad-hoc disallowances @ 15% of the administrative expenses. Now such disallowances stands deleted by the Ld. CIT(A) which has been upheld by the Tribunal. Even the revenue’s appeal challenging the order of the Tribunal has been dismissed by the Hon’ble High Court. In AY 2006-07, the assessee had again claimed “administrative expenditure” of Rs. 10,26,036/- which was disallowed by the AO completely on the ground that in the DVO’s report, it was mentioned that the construction was completed in the year 1997 itself and no work was undertaken thereafter, therefore, the expenses claimed by the assessee cannot be allowed. However, in the first appellate stage, such a 5 M/s Om Construction Pvt Ltd AO was deleted on the ground that assessee has been following project completion method and project was actually completed in AY 2007-08. Assessee has not claimed any deduction for expenses but same has been capitalized as work-in-progress, therefore any allowbility or disallowbility of the expenses can be seen in the AY 2007-08 only. The Tribunal in the second appeal filed by the revenue for the AY 2006-2007, vide order dated 15th February, 2011 upheld the order of the CIT(A) for allowing the expenditure capitalized to work-in-progress in AY 2006-07. Now, in the present assessment year, the assessee has shown the entire income on project completion method by showing the sale consideration of the project in this year. All such expenditure capitalized in work-in-progress has been aggregated and claimed accordingly. From the past assessment records, it is evident that, so far as the expenses on “construction account” for sums aggregated to Rs. 9,22,726/- had been incurred and capitalized until 2001-02 i.e. from 1998-99 to 2001-02, has been already allowed in the earlier years as these expenses were also subject matter of scrutiny inasmuch as part of it were disallowed by the AO but they have been allowed by the CIT(A) right from 1998-99 to 2001-02. As regards administration expenses also, sums amounting to Rs. 1,65,14,107/- stands allowed uptill the stage of CIT(A) and Tribunal from AY 1998-99 to 2005-06. Now the addition left to be examined is regarding expenses for the AY 2006- 07 i.e., the amount disallowed of Rs. 10,21,036/- which has been directed to be examined in this year and the expenses for this assessment year 2007-08 which is Rs. 21,99,331/- which has been completely disallowed by the AO as well as CIT(A). The overall position of the expenses claimed; disallowed by the AO; and finally allowed after giving effect of the CIT(A) as well as ITAT order are as under :-

As regards disallowance of provision made for incomplete work at Rs. 50 lakhs, we do not find any merits in the contention of the Ld. Counsel made before us that assessee was required to construct garden and parking space for which assessee has earmarked provision of Rs. 50 lakhs. Such a provision cannot be allowed firstly, for the reason that assessee could not produce any evidence to show that it was required to construct such space for which it has to incurred 50 lakhs and the assessee has not been able to show by way of any evidence as to why such a requirement could not be fulfilled even after a passage of long time. The finding and the observation made by the AO as well as CIT(A) on this score cannot be deviated without any proper material to show that assessee was required to incur such an expenditure or had incurred this expenditure in future especially when the income from entire project has been shown in the accounts in this year. Accordingly, ground no. 3 is dismissed.

Ground no. 5 & 6 are alternate ground, which are adjudicated upon as being purely academic and accordingly, both the grounds are dismissed.

In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 30th October, 2015.