LAKSHYA REALINFRA PVT. LTD.,NOIDA vs. ACIT, CIRCLE- 15(1), NEW DELHI

O R D E R PER C. M. GARG, J. M.:

1. 1. This appeal has been filed by the assessee against the order of the ld CIT(A)-5, Delhi dated 05.04.2017 for AY 2012-13.

2. The assessee has raised the following grounds of appeal:- “1. That the Ld. CIT(A) has erred on facts and under the law in confirming the disallowance of Rs.64,08,489/- (73,84,910 minus 9,76,723) as made by the AO out of employee benefit expense, finance cost, administration expenses and depreciation by treating such expenditure as capital work-in-progress despite admitting the fact that Appellant had started/commenced its business during the year under consideration.

2. Without prejudice to Ground No. 1 above, the Ld. CIT(A)/AO have erred on facts and under the law in capitalizing the expenditure of Rs.64,08,489/- to capital work- in-progress instead of capitalizing the same to inventory viz. work-in-process - construction of project.

3. That the Ld. AO was legally unjustified in assessing income from foreign exchange fluctuation, administration fee, rebate & discount Lakshya Realinfra Pvt. Ltd and sundry balances written off aggregating to Rs.4,10,426/- as income from other sources as against business income.” Ground Nos. 1 and 2 3. The ld counsel submitted that the ld CIT(A) has erred on facts and under the law in confirming the disallowance of Rs.64,08,489/- (73,84,910 minus 9,76,723) as made by the AO out of employee benefit expense, finance cost, administration expenses and depreciation by treating such expenditure as capital work-in-progress despite admitting the fact that Appellant had started/commenced its business during the year under consideration. He further submitted that without prejudice to Ground No. 1 above, the Ld. CIT(A)/AO have erred on facts and under the law in capitalizing the expenditure of Rs.64,08,489/- to capital work- in- progress instead of capitalizing the same to inventory viz. work-in-process - construction of project. The ld counsel drawing our attention towards relevant part of the assessment order and submitted that the assessee has adopted mercantile system of accounting and has shown revenue from operations, therefore, business of assessee was started during the AY 2012-13 and expenses incurred by the assessee on various heads has to be allowed as revenue expenses. The ld counsel alternatively submitted that without prejudice to the contention of the assessee in ground No. 1 the authorities below have grossly erred on facts and law in capitalizing the same to inventory viz. which work in progress and construction of project therefore, the appeal of assessee may kindly be allowed.

4. Replying to the above the ld Sr. DR supported the orders of the authorities below and submitted that the expenditure claimed by the assessee was not allowable as the same was to be allowed as deduction only when there is direct and intimate connection between the expenditure and character of the assessee as trader and not as owner of assets. He further submitted that the AO was right in holding that since the income of assessee from business and profession has been computed at Nil therefore, the expenses so disallowed are part of capital work in ITA No. 4393/Del/2017 Lakshya Realinfra Pvt. Ltd progress. The ld Sr. DR also submitted that even alternative prayer of assessee is not allowable as expenditure claimed have no linkage with the construction work in progress of the project undertaken by the assessee. He finally submitted that both the ground of assessee may kindly be dismissed upholding the orders of the authorities below.

5. On careful consideration of the above submission we note that the AO allowed relief to assessee amounting to Rs. 9,76,723/- by way of reducing claim of expenditure of the amount of interest income and receipts of administrative fee amounting to Rs. 5,65,997/- and Rs. 3,34,178/- respectively. The AO made disallowance of Rs. 64,08,789/- by observing that certain statutory expenses are essential to maintain the entity of the company as well as expenses necessary to earn income from other sources are to be allowed as per provision of section 57 of the Income Tax Act, 1961.

6. From relevant part of the first appellate order, we note that the ld CIT(A) upheld the action of the AO with the following observation and finding at para 4.4 and 4.5:- “4.4 Having examined the facts of the case, it is necessary to see what the courts have held in this regard. At this stage, I propose to discuss the Special Bench decision of Mumbai ITAT in the case of Wall Street Construction Ltd. (101 ITD 156) wherein on the basis of the facts that the assessee was following a system of accounting where interest expenditure was being allocated project-wise and being added to the value of WIP in the books of accounts, the ITAT held that claim of deduction of such interest expenditure u/s 36(1)(iii) against income of other projects which were completed during the impugned years, resulted into distortion of the correct profits, as per the project completion method followed. While reaching this conclusion, the ITAT discussed the then Bombay High Court decision in the case of Taparia Tools Ltd. (260 ITR 102), now affirmed by the Hon'ble Supreme Court of India) wherein the principle of matching concept had been upheld. Similarly as can be seen from the assessment order and from the financial statements filed before me, the appellant capitalized total expenditure under various heads amounting to Rs.19,53,24,096/-. Expenses of similar nature amounting to Rs.9,73,05,401/- were also capitalized in the preceding year. In the circumstances, since the costs are identified and determined by the appellant itself, and allocated to the building project in the books of accounts, the claim of deduction made separately in accordance with accounting standards, would result in distortion of profits, which are yet to be earned. Page | 3 Lakshya Realinfra Pvt. Ltd 4.5 I may also refer to the decision of the Mumbai ITAT in the case of Panchvati Developers (173 Taxman 26) wherein advertisement expenses claimed towards upcoming projects of the assessee, had been claimed as revenue expenditure, but following the Wall Street Construction decision (supra) the advertisement expenses were held to be allocable and capitalized as WIP. In the present case since all the expenses in question relate to the project, particularly, advertisement and publicity expenses [Rs.12.62 lacs], commission payment [Rs.28.94 lacs], entertainment expenses [Rs.1.19 lacs] etc., these expenses ought to be capitalized and added to the WIP. It is noted that the AO himself has discussed at Page 3 of the assessment order that the expenses so disallowed are part of capital work in progress. Keeping in view the aforesaid discussion, it is held that the capitalization of expenses of Rs.64,08,489/- is in order. Ground no.2 is dismissed.”

7. The logical evaluation of the basis taken by the AO as well as detailed findings and conclusion drawn by the ld CIT(A), we note that the expenditure on similar nature amounting to Rs. 9,73,05,401/- were also capitalized in the preceding year and this fact have not been disputed by the ld counsel of the assessee. The ld CIT(A) in para 4.5 noted that the all the expenditure in question relate to the project particularly on advertisement and publicity expenses of Rs. 12.63 lakhs, commission payment of Rs. 28.94 lakhs, entertainment expenses of Rs. 1.19 lakhs and these expenses ought to be capitalized and added to the work in progress.

8. In my humble understanding neither the AO nor the Id CIT(A) has disputed the quantum and incurring all expenses for the purpose of business of assessee. The issue remains as to whether the claim of expenditure is allowable as revenue or the same required to be capitalized either as a part of capital work in progress or as part of work in progress of construction of project. The basis taken by the AO in presuming that business of the assessee has not commenced, the assessee has shown Nil income from business and profession and has already shown income from other sources. In our considered view, when the construction of project has started and this fact has not been disputed by the authorities below Lakshya Realinfra Pvt. Ltd