TaxTMI 
TaxTMI 
2017 (2) TMI 626
X X X X Extracts X X X X
X X X X Extracts X X X X
....(Appeal)-48, Mumbai (hereinafter called "the CIT(A)"), the appellate proceedings before learned CIT(A) has arisen out of two different assessment orders both dated 09-01-2014 passed by learned ACIT, Central Circle-13, Mumbai(hereinafter called " the AO") u/s 143(3) of the Income-tax Act,1961(hereinafter called "the Act"). The issues involved in these appeals are common; the same have been heard together and are being disposed of by this single consolidated order for the sake of convenience. First we shall take up Revenue's appeal in ITA No. 1540/Mum/2015 for assessment year 2012-13. 2. The Revenue has raised following grounds of appeal in the memo of appeal filed with the Income-Tax Appellate Tribunal (hereinafter called " the tribunal") : "(i) "Whether on facts and circumstances of the case the learned CIT(A) was justified in deleting the disallowance of Rs. 1,05,70,443/- on account of administrative & other overheads without appreciating the fact that the assessee had not commenced its business as construction of Mall was not started up to A.Y.2012-13, therefore, the expenditure incurred by it should have been capitalized under the head 'Capital work-inprogress' as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and the balance common expenses are debited to Profit & Loss Account. With respect to claiming of expenses in the profit and loss account, we further wish to submit as under:- a) The assessee company is a builder and developer and is developing a residential project at Nagpur named "Royal Palms" and a mall. b) As regards accumulation of cost in WIP account, the cost of land, construction expenses and other direct expenses relating to the project are accumulated and balance expenses being in nature of period cost are debited to profit and loss account. It will be appreciated that such a treatment is supported by two basic principles of determination of business Lincome both for the purposes of accounting as well as income tax. c) The first principle is regarding treating of project expenses as Capital Work-in-Progress. It is pertinent to note that the assessee is in business of development and construction of malls and residential projects. Your Honour would appreciate that the assessee has adopted the method of treating all the construction expenses as Capital Work-in-Progress. The administrative costs are not added to capital work-in-progress as the same is not incurre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es in the Profit & Loss A/c as revenue expenditure is correct and is in line with the AS-7. k) Moreover, we also wish to submit that the valuation of work in progress is governed by AS-2 "valuation of Inventories". As per AS-2 on valuation of Inventories issued by the ICAI, cost of inventories comprises of all cost of production, cost of conversion and other cost incurred in bringing the inventories to their present location and condition. It further specifically excludes administration and selling & distribution costs incurred from the cost of the inventory. l) Alternatively, we also wish to state that the assessee is maintaining its accounts following the accounting system as contemplated in AS-2 by the ICAI duly audited by a qualified chartered accountant. Maintenance of the accounts as well as the valuation of the work-in-progress would not prejudice either side. Further , we would like to draw your kind attention towards the judicial pronouncement given by the Hon'ble Guwahati High Court in the case of MKB (Asia) (P.) Ltd. v. CIT , whereby it held as under:- "The income tax authority has no option/jurisdiction to meddle in the matter either by directing the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rk-in-progress and will be apportioned to the assets on the completion of the project." In clause (8) of Note 1 of the annual accounts for the F.Y. 2011- 12, it is mentioned as under:- "i. Expenditure of capital nature incurred during the construction period in respect of a project being executed by the company is grouped under capital work in progress. Such expenditure would be capitalized upon the commencement of commercial operations of the Project. ii. Incidental expenditure during construction period pending allocation included in capital work in progress represents expenditure incurred in connection with the project which is intended to be capitalized to the project. Expenditure not attributable to project are charged to revenue account. iii. Common expenditure is allocated to project cost on certain basis as considered appropriate by management." (iv) It is evident from the above-referred notes to account forming part of audited annual accounts of the assessee reproduced above that the assessee is not a builder & developer. The assessee is actually constructing a capital asset and that is why, the expenditure incurred by it have been classifi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Standards (AS)-2 is not relevant as the assessee has not shown the construction as stock-in-trade. Therefore, the decision of the Hon'ble Gauhati High Court in the case of MKB (Asia) Pvt. Ltd. Vs. CIT (supra) quoted by the assessee is also not applicable to the facts of the assessee. (viii] Further the claim of the assessee that the administrative expenses should have been allowed as per section 37 r.w.s. 43(2) of the Act is also not correct. Since the business of the assessee has not commenced, the expenses cannot be held as wholly and exclusively incurred for the purpose of business. (ix) Further, the contention of the assessee fails on account of the fact that there also prevails a concept called "matching concept". On one side, the assessee has not been earning any business income in the year and on other side, it is claiming expenses which are factually in connection with the construction activity undertaken by the assessee. In view of this, the assessee would be eligible to claim the expenditure only when any income is offered out of the business and upto that stage, no claim of expense shall be given. (x] Further, reliance is placed on the following decisions: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld be started at the same time, The appellant relied on the Apex Court decision in the course of CIT v/s Sarabhai Management Corpn. Ltd. (192 ITR 151) where it was held that what is material is the date when the company went into or started one or the other of its component activities. In the present case, the appellant set up its business in AY 2008-09. Reliance was placed on the decision of Bombay High Court in the case of M/s Western India Vegetable Products (26 ITR 151) wherein it was held that the expenses should be allowed in the year in which business is set up, and a distinction was drawn between business being setup and commencement of business. It is not necessary that income should be earned for expenses to be claimed as held by Delhi High Court in the case of CIT v/s E. Funds International India (162 Taxman 1) (Delhi). The appellant again relied on Accounting Standard 7, Accounting Standard 2 for its computation of income and accounting method followed. The appellant relied on Guwahati High Court decision in the case of MKG (Asia) (P) Ltd. v/s CIT, wherein it was held, "The income tax authority has no option/jurisdiction to meddle in the matter either by directing the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on therefore specifically provides that the choice of method of accounting lies with the assessee, the only caveat being that it has to show that the method has been regularly followed. The section is couched in mandatory terms and the Department is bound to accept the assessee's choice of method regularly employed, except for the situation, wherein the Assessing Officer is permitted to intervene, in case it is found that true income, profits and gains cannot be arrived at by the method." 5.12. In the present case, the accounting treatment followed by assessee is as per the prescribed accounting standards. The disallowance made by assessing officer is therefore deleted. Ground of appeal no 3 and 6(b) are allowed. 5. Aggrieved by the appellate order dated 29-12-2014 passed by the ld. CIT(A), the Revenue is in appeal before the tribunal. 6. The ld. D.R. submitted that the assessee has not set up any business during the impugned assessment year as the malls were under construction and no business was set up. The assessee is not a builder, the assessee set up a mall as a capital asset. The assessee had shown the said construction as 'capital work-in progress' and hence the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "Previous year" defined. 3. For the purposes of this Act, "previous year" means the financial year immediately preceding the assessment year : Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year". The learned counsel for the assessee submitted that the assessee had set up its business from the date when one of its business activities was started in assessment year 2008-09 and it is not necessary that all business should commence before claiming expenses. He submitted that all the direct expenses are capitalized while the indirect expenses are being claimed as business expenses in accordance with AS-2 and AS-7 issued by ICAI and notified by Central Government in exercise of powers u/s 211(3C) of the Companies Act,1956 which the assessee company is mandatorily required to follow. It was submitted that now the project is converted into Mall and resi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty chart as extracted from the orders of the authorities below is as under:- "A.Y. 2008-09 Cleaning of plot and leveling of land, earth excavation and other land development activities , etc. Also, land dividation and barbed wire fencing were carried out. A.Y.2010-11 The No Objection Certificate (NOC) has been received from the Tehsildar's Office. A.Y.2011-12 Construction of the boundary wall surrounding the plot of construction and other allied land development activities. AY 2012-13 Construction of Water Bound Macadem road, leveling of site and laying hard murum. Further, height clearance was also received from the Airports Authority of India(AAI) and Bharat Sanchar Nigam Lid(BSNL) We have observed that activity towards construction of mall and residential complex was started way back in assessment year 2008-09 onwards as emerging from the records. We find that the assessee is consistently following AS-2 & AS-7 issued by ICAI which are mandatory standards whereby the direct costs are added to the capital work-inprogress being construction of the mall and residential complex and all the indirect expenses being general overhead are charged to the P&L account....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt, it was observed by the A.O. that the assessee has investment in shares and mutual funds amounting to Rs. 56,00,10,000/- income from which is exempt from tax u/s. 10 of the Act. The assessee was asked to furnish detail of the expenses disallowed u/s 14A of the Act out of the expenses debited under various heads in P&L account in relation to earning of exempted income. In response, the assessee replied as under:- "We wish to state that total expenditure during the year amounts to Rs. 1,12,35,654/ -. Also, a sum of Rs. 45,178/- relates to depreciation, which is an allowance and neither related to Investment and not any expenditure which attracts any disallowance u/ s. 14A. Employee benefits expense incurred of Rs. 10,90,195/- is directly connected to the business activities of the assessee company and not to the investments made from which exempt income is earned. Further, it may be noted that the investment decisions are solely taken care of by the portfolio manager - "Trust Capital Services Pvt. Ltd.". Other Expenses claimed of Rs. 1,01,12,014/- is bifurcated as below: S No. Particulars Amount Status a) Professional fees 7,50,690 Out of this Rs. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot to make any disallowance u/ s. 14A r. w. r. 8D as the assessee has adopted the appropriate method in making such disallowance in the return of income." The A.O. rejected the contentions of the assessee on the ground that the assessee has not done any business during the year and had not earned any income from its regular business. It was observed by the AO that during the relevant previous year, the assessee has made an investment in the shares of another companies and incurred expenses on construction of mall and capitalized the same under the head capital work-in-progress . The expenses incurred on salary and wages( Rs. 47,72,015) , bonus (Rs. 71,076) , Boarding and Lodging (Rs.16,701) , travelling (Rs. 98,240) etc. have been transferred to capital work-in-progress. The AO observed that the assessee incurred expenses on construction of mall and capitalized the same under the head capital work-in-progress. The AO observed that some portion of expenses incurred by the assessee on salary, administrative expenses, business promotion expenses, which are either debited to profit and loss account or transferred to Capital work-in-progress , pertain to the activity of investment in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O. u/s 143(3) of the Act, the assessee carried the matter before the ld. CIT(A) in first appeal, who rejected the contentions of the assessee. However , learned CIT(A) accepted the contentions of the assessee that the disallowance of expenses u/s 14A of the Act is to restricted out of the expenses debited to Profit and Loss Account and the same cannot be extended to the direct cost incurred towards the construction of Mall which is capitalized to capital workin- progress account as the said expenses are direct expenses towards the project , vide appellate orders dated 29-12-2014 . 12. Aggrieved by the appellate order dated 29-12-2014 passed by the ld. CIT(A), the assessee is in appeal before the Tribunal. It is pertinent to mention that the Revenue is not in appeal w.r.t. relief granted by learned CIT(A) w.r.t. disallowance of expenses u/s 14A of the Act made by the AO w.r.t. direct expenses capitalized to the capital work-in-progress which were not debited to Profit and Loss Account. 13. It is the contention of the ld. Counsel for the assessee that the A.O. has disallowed the expenses u/s 14A of the Act by invoking Rule 8D of Income-tax Rules, 1962. The AO has also included ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the assessee by us in the foregoing paras of this common order in ITA no. 1540/Mum/2015 on the grounds that business has been set up and the assessee is entitled for claiming deduction of expenses in accordance with mandate of Section 3 of the Act. We will proceed in this appeal keeping in view our decision in ITA no. 1540/Mum/2015 in preceding para's. The assessee has capitalized direct expenses incurred towards construction of mall and residential complex by transferring the said expenses to capital work-in-progress which were also considered by the AO for disallowance u/s 14A of the Act by invoking Rule 8D(2)(iii) of the Incometax Rules, 1962 against which learned CIT(A) gave relief to the assessee and the Revenue is not in appeal against the relief granted by learned CIT(A), thus, the expenses which were capitalized being direct expenses debited to capital work-in-progress being incurred for construction of mall and residential complex cannot be considered for disallowance under Section 14A of the Act . The assessee has elaborately explained the nature and details of expenses which were debited to Profit and Loss Account and its nexus with earning of income which does not....