TaxTMI 
TaxTMI 
2015 (9) TMI 1113
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....unting Standard 16 issued by the ICAI 1.2 That on the facts the exempt income had been offered to tax and therefore, provisions of section 14A of the Income Tax Act, 1961 are not applicable. ITA No. 4431/Del/2013 (revenue's appeal) 1. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs. 1,81,53,159/- made by the AO on account of brokerage expenses related to various projects the revenue of which were not fully recognized during the year under consideration, based on Percentage of Completion Method, followed by the assessee? 2. The brief facts of the case are that the company is engaged in real estate business and is a company of DLF group. As per facts noted in the assessment order, during the year under consideration, the company was in the process of developing real estate project. The case of the assesee was selected for scrutiny. During assessment proceedings, the AO made the following two additions :- i) disallowance of proportionate brokerage expenses - the AO observed that assessee was following Percentage of Completion Method in recognising its revenue and had recognised only 40.29% as revenue out ....
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....unch of any project. Assessing Officer further contended that decision of the appeal for A.V. 1983-84 is not applicable to Appellant as accounting policies followed in A.V. 1983- 84 were different from the Accounting Policies followed in the year under consideration On the other hand, Appellant has submitted before me that even if these brokerage expenses are being incurred for selling the specific project, these are not considered as part of inventory cost since these are incurred to sell the inventory and accordingly debited in Profit & loss account in the year in which they are incurred in terms of both AS-2 (para -13) and AS-7 (Para-19). Further Appellant submitted that the brokerage does not in any way increase the cost of project, it rather reduces the realization of sales. The appellant submitted that Brokerage is payable as soon as a booking is done through a broker and specified conditions are fulfilled. Thereafter, appellant has no recourse to broker and it is one time permanent outgo. The appellant further contended that it does not in any way impact the future costs to be incurred on a project and it is a permanent one time dent on the sale value and hence even in norma....
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....he A.Y. 2006-07. It has been verified that accounting policies of the Appellant for the year under consideration is same as that of DLF Ltd. in A.Y. 2006-07. Considering the facts discussed above, I am of the considered opinion that the expenses on brokerage for flats etc. are part of selling expenses and cannot be included in the cost of construction for the purpose of valuation of closing stock of WIP. The accounting standard of ICAI also does not support the proposition of capitalization of brokerage. I am, therefore of the opinion that this expenditure cannot be capitalized and has to be allowed as a revenue expenditure. Therefore, the addition of Rs. 1,81,53,159/- is deleted. The ASSESSING OFFICER has relied upon the Supreme Court judgment in the case of Madras Industrial Investment Corp. 225 ITR 802. (SC), and has held that the expenses has to be spread over in several years if the benefit of such expenditure is continuing in the ensuing years. The facts of this judgment cannot be applied to the appellant's case as Brokerage and Commission linked with the services rendered by the broker to the appellant for selling the flats and other properties. There is a nexus betwee....
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....vestment of temporary surplus funds, borrowed for the execution of the project are required to be reduced from the cost of the Projects in progress. Accordingly, the cost of Project in Progress has been reduced by the income from investment in Mutual Funds and the same has been offered for tax. It is seen from the working that there was no interest expenditure incurred for earning this exempt income, therefore, there can be no disallowance on account of interest expenditure as per Rule 8D(2)(ii) of the IT Rule 1962. However, it is observed t at appellant has earned dividend income of Rs. 306,88,926/-on the investments of Rs. 72,98,72,442/- made in the mutual funds during the year. It is seen that appellant has not attributed any indirect expenditure on earning such exempt income. It is seen that earning of dividend income is not a passive activity. In the present age of making of investments, maintaining or continuing with investments and time of exit from the investment are well informed and well coordinated management decision involving not only inputs from various sources but also acumen of senior management functionaries. Therefore, cost is inbuilt even in so called passive i....
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.... certain surplus funds which it invested in mutual fund for earning of some income and the income earned therefrom was reduced from the work in progress. The Ld. AR submitted that the treatment of income earned during setting up of the project was made in accordance with accounting standard 16 issued by Institute of Chartered Accountant of India. He further elaborated that in fact the assessee had by reducing cost of project with the dividend income had offered tax on this income as taxable profits will be more to the extent of dividend income reduced from cost of project. Inviting our attention to paper book page 12, the Ld. AR invited our attention to schedule VII placed at paper book at page 12 and invited our attention to the expenses incurred on work in progress which included finance cost (net of finance income). The Ld. AR submitted that the dividend income earned from mutual fund was reduced from finance cost and thus the assessee booked lower cost of project to the extent of dividend income and therefore profits offered from sale of project will be more to the extent of dividend income. Inviting our attention to assessment order, the Ld. AR submitted that these were not bo....
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.... in question No. 4 the relevant finding of Hon'ble Court as contained in para 8 and 9 reproduced below:- "8. The assessee had claimed Rs. 61,78,414/- as expenditure towards brokerage and commission. The amount was paid to its brokers for booking and sale of certain properties during the assessment year. The Assessing Officer disallowed this expenditure on the ground that during the year the conveyance of the sale deeds were not executed. The CIT(A) and ITAT accepted the assesee's contentions and set aside the disallowance. At the outset, we notice that the assessee's explanation clearly stated is as follows :- "In this connection it is submitted that brokerage and commission is not a direct expenses for acquiring to a specific property but it is in fact financial cost/selling expenses and is fully allowable in the year in which the same is incurred. The property brokers who have rendered their services to obtain advances on booking of properties are entitled to the payment of commission in terms of agreement entered into with them. Therefore, the expenses incurred on brokerage and commission on booking of properties being a finance/selling expenses are allowable in full. In thi....
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....d any expenditure directly or indirectly for earning of exempt income. Moreover, we find that Hon'ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd. (supra) held that if during setting up of a project assessee earned any amount from funds which are inextricably linked with the process of setting up of the project the income will go to reduce the cost of its project and the receipts are of a capital nature and cannot be taxed as income. The relevant finding of the Hon'ble Court are contained in para 7 are reproduced below :- "7. The appellant, however, relied upon the decision of this Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. CIT (supra). That case dealt with the question whether investment of borrowed funds prior to commencement of business, resulting in earning of interest by the assessee would amount to the assessee earning any income. This Court held that if a person borrows money for business purposes, but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken, will n....
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.... borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income." 10. Above all we find that AO has not recorded any satisfaction as to why he was not satisfied with the claim of assessee that no expenditure was incurred for earning exempt income. The relevant findings of AO as contained in Para 5.19 onwards are reproduced below :- "5.19 The earning of exempt income is not in nature of passive activity having no input. In fact in present situation making of Investment, maintaining or continuing investment and time of exit from investment are well informed and well coordinated management decisions involving not only inputs from various source but also acumen of senior management functionaries. The....
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....he judicial pronouncement in the case of M/s. Dhanuka and Sons vs. Commissioner of Income Tax (2011) 339 ITR 0319 (Cal. High Court). 5.24 As per Rule 8D, the expenditure in relation to income which does not form part of the total income shall be aggregate of following amounts :- i) the amount of expenditure directly relating to income which does not form part of total income Nil ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A x B/C Where A- Interest : Rs. NIL B - Average investment : Rs. 922545692 C-Average Assets : Rs. =A x B/C A- Amount of expenditure by way of interest other than the amount of interest included n clause (i) incurred during the previous year; =NIL B- The average of value of investment, income from which does not or shall not form part of the total income as appearing in the balance sheet of the assesee, on the first day and the last day of the previous year; =Rs. NIL C- The average of total assets as appearing in the balance sheet of the assesee, on the fir....