TaxTMI 
TaxTMI 
2016 (11) TMI 709
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....in sustaining the addition of Rs. 75,88,422/- (Interest on Car Loan Rs. 51,50,934/-, Advertising Exp. Rs. 17,92,052/-, Brokerages Rs. 77,736/-, Loan processing Fees Rs. 5,67,700/-) in the Work In Progress for the purpose of ascertaining Gross Profit @ 20% which is completely unjustified and uncalled for. 2) The Learned CIT (Appeal) has further erred in not appreciating the fact that the Percentage of Completion Method is continuously followed by the appellant therefore not accepting the said method and making the adjustment in the Work In Progress is completely unjustified." 3. The brief facts of the case and the grounds are that the assessee is a builder since the year 1979. Assessee completed a project named 'Green Gagan' in the assessment year 2004-05. The assessee followed percentage computation method qua the cost of the project. Subsequently assessee started another project named "Agrawal Negri" at Vasant East relevant to the assessment year 2006-07. The assessee followed the percentage computation method for this project also. This project is said to have been completed in assessment year 2011-12. In the assessment year 2006-07, assessee declared profits @15% of ....
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....el for the assessee explained the above facts of the case and mentioned that the said amount of Rs. 75,88,472/- constitutes direct expenses and it has four elements and relevant break up is as under: a. Interest on term loan/unsecured laon Rs.51,59,134/- b. Advertisement expenses Rs. 17,92,052/- c. Brokerage Rs. 77,736 d. Loan processing fees Rs.5,67,700/- Ld. A.R. argued that these expenses are fully allowable in view of the applicable provision of section 36(1)(iii) (interest expenses) and the 37(1) of the Act. He also submitted that the claims are allowable in view of the finding of the similar issues for the A.Y. 2006-07. Referring to the interest amount of Rs. 51,59,134/-, learned counsel for the assessee demonstrated that there is a typographical error in the ground no.1 and the error relates to the description of the "car loan" but the interest should read as "interest on term loan/unsecured loan". Further arguing for allowing for the entire interest expenditure in the year under consideration out of gross profit and offered by the assessee, Ld. counsel submitted that the same should not be capitalized as done by the AO for the reason that such int....
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.... Bringing our attention to the decision of the Tribunal in the case of "Vardhaman Developers Ltd." 35 Taxman.com 370. Ld. Counsel submitted, in the said case also, the issue of advertisement expenses against the gross profit came up and the Tribunal fully allowed. In the order, this view of AO was not appreciated by the Tribunal Mumbai Bench and held that the advertisement expenses were only in the nature of selling cost which would not be capitalized for inclusion in the workin- progress account. Learned counsel brought our attention to paragraph 4 of the said order of the Tribunal and demonstrated that the said advertisement expenses is fully allowable as the same is in the nature of selling cost. Further, bringing our attention to the brokerage expenses of Rs. 77,736/-, Ld. counsel submitted that these expenses are also fully allowable as cost of the business u/s.37(1) of the Act. Further, the learned counsel extracted the above argument to claim of loan processing fees of Rs. 5,67,700/-. 5. On the other hand, learned CIT-DR for the Revenue has heavily relied upon the order of the CIT(A). According to him, the advertisement expenses, brokerage and loan processing fees are req....
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.... on the borrowed capital. The claim of the assessee should be allowed in full in view of the various decisions on this issue. To start with, we perused the order of the Tribunal in the case of Rohan Estates Pvt. Ltd. (supra) which is one of the sister concerns of the assessee. We perused the para 3.2 of the said order of the Tribunal and find it is a self explanatory and the decision of the Tribunal supports the case of the assessee. Under comparable facts of the assessee, interest cost was allowed in favour of the assessee relying on binding jurisdictional High Court judgment in the case of M/s. Lokhandwala Construction Industries Ltd. (supra). For the sake of completeness of this order we extract relevant para 3.2 of the order which is reproduced as under: "3.2. With regard to the interest expenditure, ............ The interest cost on the corresponding capital borrowed would nevertheless continue to be incurred, without any corresponding increase in the value of the inventory or the project. Similarly, a project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion. While revenue would stand to be booked only on the part, if....
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....mputing the business income qua the business of which the relevant asset is a or is to constitute a part (also refer Explanation 8 to s.43(1)). The said decision may, thus, in the given facts and circumstances of the case, as well as the amended law, not be of much assistance." 7. We have also perused the said binding High Court judgment in the case of M/s. Lokhandwala Construction Industries Ltd. (supra) and find the same is relevant for the following conclusion - "construction project undertaken by the assessee builder constituted its stock in trade and the assessee was entitled to deduction under section 36(1)(iii) of the Act in respect of the interest on the loan obtained for execution of said project". Relying on the another judgment of Hon'ble Bombay High Court in the case of Calico Dyeing and Printing Works 34 ITR 265 Bombay, Hon'ble Bombay High Court concluded that the interest expenditure relating to the borrowed capital is allowable under section 36(1)(iii) of the Act. The relevant lines from the para 4 reads as under:- "that, while adjudicating the claim for deduction under section 36(1)(iii) of the Act the nature of expense - whether the expenditure was on c....
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....permissible deductions ....... whether the method of accounting being followed by the assessee i.e. project completion method is a correct method in accordance with the law i.e. given that it follows mercantile method of accounting, is another matter altogether. ........" 8. From the above it is evident that the advertisement expenses is an allowable expenditure in the year of spending as the same is the nature of selling cost of the construction business. Considering the same, we are of the view that the finding of the Assessing Officer and the decision of the CIT(Appeals) on this issue is required to be reversed and allow the same in favour of the assessee. Regarding other claim of expenditure on account of brokerage and loan processing fee, we find the said claims should be allowed in favour of the assessee as they are otherwise found allowable under section 37(1) of the Act. In our view, these expenses constitute some kind of administrative expenses. The said administrative expenses are allowable as they are relatable to the business activities of the assessee. As such, it is not the Assessing Officer's case that the claims are ingenuine and not qualified the conditions spec....
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....ngly, the grounds raised by the Revenue are dismissed. 12. In the result, appeal of the Revenue is dismissed. CROSS APPEALS FOR THE ASSESSMENT YEAR 2008-09 (ITA Nos.310 & 433/M/2012) 13. There are cross appeals under consideration for the assessment year 2008-09. The grounds raised by the assessee and the Revenue are as under: Grounds of appeal of Assessee: "1. The learned CIT (A) has erred both in law as well as on facts in not accepting the consistently followed method of accounting by the appellant and accepted by the department in the past. Therefore capitalizing the expenses to the extent of 49.04% in determining the work in progress and not allowing the same as revenue expenses is completely unjustified. 2. The learned CIT (A) has further erred in not appreciating the nature of expenses incurred therefore addition @ 49.04% of the administrative and financial expenses in working out capital work in progress are completely unjustified. 3. The learned CIT (A) has completely erred in not allowing whole of the expenses of Rs. 164,55,863/- for determining the net profit. Therefore disallowances to the extent of 49.04% are completely unjusti....
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..... 83,85,908/-, the taxable net profit is worked out at Rs. 1,31,23,194/-. Otherwise, both Assessing Officer and the CIT(Appeals) did not deviate from the fact of "percentage completion method" as adopted by the assessee. However, the deviation is only with reference to the reworking of the WIP account and tinkering with the GP rate. Aggrieved with the deviation of the CIT(Appeals) from that of assessment order, the Revenue is in appeal with the ground extracted above. Further, aggrieved with the order of the CIT (Appeals) and his method of working out the WIP account, the assessee is also in appeal with the grounds referred above. It is relevant to mention here that the project completion method is adopted by both the authorities. While the Assessing Officer has adopted the only 20% of the reworked out WIP account the CIT(Appeals) has adhered to the assessee's percentage of 22%. Regarding the changes of WIP, Assessing Officer reworked the WIP at sum of Rs. 11,89,00,000/- (rounded off). The Assessing Officer added, an account of indirect expenses, 75% of Rs. 1,64,55,863/- to WIP account; On direct expenses account Assessing Officer added sum of Rs. 78,91,474/-. Further, both the ....
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....sion in apportioning the administrative expenses in the ratio of extent of sales recorded in the year under consideration, the Ld. Counsel submitted that once a method of accounting is accepted by the Revenue, no deviation whatsoever is required validly. For this proposition Ld. Counsel brought our attention to various decisions. 1. The decision of Kolkata Bench of ITAT in the case of "M.N. Dastur and Co. Ltd." ITA No.1918 & 1919 (Calcutta) 1995, 2. Bakshi Vikram Vikas Construction Pvt. Ltd." 158 taxman 61 (Delhi), 3. Chabra Land and Housing Ltd." 152 taxman 68. 4. Mangal Teerth Estates Ltd., Madras - 303 ITR 366. All the above decisions are relevant for the proposition that the ITO is not justified in departing from the consistently followed method of accounting followed scientifically by the assessee with respect to a project. CIT(Appeals) is not justified in linking the profits to the sales up to an year as the assessee's method of computing the profits is linked to the cost of the project-WIP. 16. Referring to the Revenue's appeal, the solitary ground raised by the Revenue relating to changes adopted by the CIT(Appeals), the Ld. Counsel....
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....4,55,863/- is entirely allowable. There is nothing on record to demonstrate that the above expenditure is anyway constitutes a direct expenses of the project in any form. Coming to the direct expenses of Rs. 7,88,91,474/- we find an identical expenditure was claimed by the assessee in the preceding assessment year 2007-08 which is the subject matter of addition and the litigation vide the appeal No.ITA 1566/M/2011 for similar reasons we allow the same and in favour of the assessee. To sum up, the entire administrative expenses of Rs. 1,64,55,863/- and direct expenses of Rs. 78,91,474/- is fully allowable, as claimed by the assessee in the P & L account for this year, against the gross profits computed by the assessee. Therefore, the WIP account as maintained by the assessee is approved and no modifications are called for to this. B. The percentages of GP rate and adopting the 50.69 : 49.31 formula: In this regard, we find no justification for changes in these figures, thus the GP rate of 22% as offered by the assessee is reasonable and no change is warranted. In effect relying on various judgments cited by the assessee the percentage completion method as followed by the assessee....