TaxTMI 
TaxTMI 
2016 (11) TMI 1307
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....rges, service maintenance charges, rent, rates & taxes, security expenses, consultancy charges and miscellaneous expenses , in the facts and circumstances of the case. 2.1. The brief facts of this issue is that the assessee is a private limited company engaged in the business of development of Integrated Satellite Township in India. . The assessee filed its return for the Asst Year 2007-08 on 30.10.2007 declaring total loss of Rs. 11,83,94,738/-. The assessee recognized revenue by following Accounting Standard - 9 on 'Revenue Recognition' ( AS-9 issued by ICAI) and guidance note on recognition of revenue by Real Estate Developers. During the relevant year under appeal, the development activities being at the initial stage, the assessee did not recognize any revenue. Further the expenditure that were purely incidental to the project were transferred to work in progress and those not relating to project were debited to profit and loss account. The basis of allocation was duly verified and audited by the statutory auditors and no adverse comments were reported. The ld AO issued show cause notice to the assessee as to why the expenses, debited under the head ' Administrative and Marke....
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....head which included Construction Expenses, Expenses on Employees, Administrative and Marketing Expenses and Interest cost. The expenses which were directly allocable to Project or were indirectly identifiable with project development have been transferred to WIP as part of cost of WIP. Other expenses, which are related to administrative office or selling/marketing expenses being not allocable to Project have been debited to the P/L account. Following is the break up of expenses which have been transferred to WIP and those debited to P/L account. Figures in (000) Head of expenses Total amount Transferred to WIP Debited to P/L Account Remarks Construction Expenses 3,21,885 3,21,885 Nil Being directly related to Project development cost Expenses on employees 11.577 3,121 8.456 Cost of Employees involved in project have been allocated to Project cost Administrative and Marketing Expenses 1,15,921 5,767 110,154 Expenses related to Project have been transferred to Project Cost. The other expenses being incurred for administrative and marketing purpose have been debited to P/L account. Interest 32,229 27,217 Nil Transferred to Fixed Assets Rs. 5....
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.... Nil Expenses being capital in nature have been suomotto offered to tax in the computation of income. Printing & Stationery 514 514 Nil Expenses are purely of administrative nature and hence not allocable to project. Gifts 648 648 Nil Being in the nature of selling and marketing expenses, not allocable to project cost Communication expenses 1,567 1,396 171 Expenses of telephone of project site/Project Managers have been allocated to Project Cost. Other telephone expenses incurred for administrative/office purpose are not allocable to project cost. Legal and Professional charges 8,626 8,626 Nil Legal and Professional expenses incurred are purely to comply with various statutory formalities and are not allocable to project cost. Service and Maintenance Charges 1,469 1,469 Nil Includes expenses incurred on apartment maintenance, electrical maintenance, motor vehicle maintenance, office maintenance which are purely administrative expenses and are not allocable to project cost. Security expenses 3,472 3,472 Nil Being expenses on safety and security are not allocable to project cost. Filing fees 1,252 1,252 Nil Being purel....
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....ch forms part of work in progress (WIP) represents stock in trade which does not include administrative /selling/ marketing expenses. The said expenses were incurred independent of sale of stock in trade /revenue generation and they are inherent in running of business. Since the business had already commenced, these expenses are squarely allowable as deduction u/s 37(1) of the Act. The ld CITA on going through the Guidance Note on Accounting for Real Estate Transactions (Revised 2012) together with AS -2 and AS -9 issued by ICAI accepted the method of accounting adopted by the assessee in allocation of expenses and deleted the disallowances made thereon. Aggrieved, the revenue is in appeal before us on the following ground:- "1. That on the facts and circumstances of the case Ld. CIT(A) erred in deleting the disallowances of Travelling & Conveyance expenses of Rs. 81,34,000/-, Brokerage & Commission expenses of Rs. 2,65,56,000/-, Advt. publicity & marketing expenses of Rs. 3,55,48,000/-, Legal & Professional charges of Rs. 86,26,000/-, Service & Maintenance Charges of Rs. 2,94,000/-, Rent, rates and taxes of Rs. 38,01,000/-, Security expenses of Rs. 26,04,000/-, Consultancy charg....
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....d stated the manner in which the statutory audit has been performed by him and the treatment of inventory at the end of the year. He also argued that the statutory auditor had not made any qualification in his audit report regarding the treatment of expenditure given by the assessee. He vehemently relied on the order of the ld CITA. 2.8. We have heard the rival submissions. We find that the assessee had followed the principles laid down in the AS-7, AS -9 and Guidance Note on Accounting of Real Estate Developers with regard to the treatment of expenditure and its allocation to project costs. Admittedly the Accounting Standards 7 & 9 issued by ICAI are mandatorily to be followed by the assessee as per the mandate provided in the provisions of section 210 of the Companies Act, 1956. We find that the assessee had also followed the Guidance Note on Accounting for Real Estate Transactions wherein vide para 2.4 , it is mentioned as below:- 2.4. The following costs should not be considered part of construction costs and development costs if they are material : (a) General administration costs ; (b) Selling costs; (c) Research and development costs; (d) Depreciation of idle plan....
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....Asst Year 2007-08 is as to whether the ld CITA is justified in deleting the disallowance of gifts of Rs. 6,48,000/- in the facts and circumstances of the case. 3.1. The brief facts of this issue is that the ld AO observed that the assessee incurred a sum of Rs. 6,48,000/- on account of expenses incurred on gift in the course of sales promotion activities. The ld AO observed that the project is at its initial stage and in all likelihood such gifts were given to some dignitaries in connection with the project. He held that in the absence of specific details, it would not be unusual to hold such gifts were made gratuitously and hence does not qualify as business expenditure. Accordingly he held that the same needs to be taken to the project costs and not allowable as revenue expenditure in the Asst Year 2007-08. Before the ld CITA, the assessee vide its written submission submitted that the assessee had already booked number of flats in the concerned project and the prospective customers who visit the site were offered a small token gift. It was also submitted that the assessee had suffered fringe benefit tax (FBT) on the said gifts and filed FBT return accordingly. The ld CITA held ....
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....e assessee replied that this advance was given in Asst Year 2006- 07 to the said party for business purpose in connection with setting up facilities for future services to the company at concessional rate. The ld AO observed that when the assessee is paying interest on its borrowings used for the purpose of its project, there is no reason for not charging any interest on amount advanced to a party who would be supplying some services in future. Infact, any interest received / accrued thereon from such party would have gone to reduce the interest burden on the assessee. Accordingly he estimated the interest rate at 10% on the sum of Rs. 1 crore advanced to Mr Ashoke Dasgupta and added a sum of Rs. 10,00,000/- as interest income of the assessee. 4.2. Before the ld CITA, it was submitted that the loan borrowed from UTI Bank in Asst Year 2006-07 was a specific purpose loan and was not utilized for providing interest free advance. The interest free loan of Rs. 1 crore was given out of the receipt of collections from customers against booking of bungalows. The said advance to Mr Ashoke Dasgupta was disbursed vide Cheque No. 032095 dated 27.2.2006 from Current A/c No. 191010200003148 wit....