TaxTMI 
TaxTMI 
2017 (2) TMI 954
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....he action of the learned AO in concluding that the Appellant undertakes only a single contract and hence the entire expenditure incurred by it is allocable to the said contract only, under the Generally Accepted Accounting Principles ('GAAP') issued by the ICAI and applicable in the case of the Appellant. Ground 3 3. On the facts and circumstances of the case, the learned CIT(A) erred in confirming the action of the learned AO in concluding that the marketing and general administrative costs incurred by the Appellant are allocable to the specific contract undertaken by the Appellant and thus restating the duly audited accounts drawn by the Appellant in accordance with the GAAP and by adding the said costs to the WIP. 4. Ground 4 4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in levying interest of Rs. 46,91,973 under Section 234B of the Income-tax Act, 1961 ('the Act'). The Appellant prays that it be held to delete the levy of interest under Section 234B of the Act. Ground 5 5. On the facts and in the circumstances of the case....
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.... but these are items of period cost, therefore, these expenses have been correctly debited in the P & L account for the year under consideration. However, the AO was not satisfied with the reply of the assessee. He referred to Accounting Standard-7 (AS-7) issued by Institute of Chartered Accountants of India (ICAI) and on the basis of same it was held by him that the entire cost should be debited to the project since the assessee is having one single project only. It was held by him that the period cost can be allocated to the year under consideration only if the assessee is having many projects in hand. Under these circumstances, after making detailed discussion in the assessment order, he made an aggregate addition of Rs. 21,27,95,930 in WIP by concluding in the assessment order as under:- "6.9 In view of the discussions made in above paras, it is held that the assessee has mis- interpreted the prescription of AS- 7 and thereby incorrectly applied the provisions thereof. Since the assessee is engaged in only one single contract, the bifurcation/ allocation of various costs cannot be resorted to. The assessee follows the percentage completion method of accounting and AS-7....
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....ore as such none of the costs can be excludible from it and since entire business expenses are related to one single contract, the same have to be treated as WIP of the project being constructed by the assessee. Thus, he upheld the action of the AO and rejected the submissions of the assessee. 6. Still being aggrieved, the assessee filed appeal before the Tribunal. During the course of hearing before us, the Ld. Counsel of the assessee vehemently disputed the action of the lower authorities. It was submitted that nature and genuineness of the expenses have not been doubted by any of the lower authorities. The only dispute is whether the impugned expenses should be made part of P & L account or WIP. It was submitted that both the authorities have misunderstood the provisions of AS-7. Assessee is having various projects in hand. Development of SEZ may be termed as one integrated project, but it has many parts of it. Therefore, different kinds of expenses are incurred from time to time. Those items which pertain to the period under consideration have to be necessarily consumed during the said period itself, as it does not make any value addition to the inventory in hand. This metho....
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....er consideration and should be allowed as business expenses of the year under consideration as has been claimed by the assessee or these should be added to the cost of WIP of the projects under construction and development by the assessee, as has been done by the AO. The case of the assessee is that assessee is a developer-cum-builder engaged in development of real estate including special economic zone (SEZ). The expenses which were directly related to the construction / development of the project were added to WIP of the project, whereas other aforesaid expenses which were not directly linked to any particular project, but pertained to the period under consideration were debited in the P & L account as business expenses of the impugned year. On the other hand, the AO has referred to Accounting Standard -7 (AS-7) issued by Institute of Chartered Accountants of India (ICAI) and held that the entire expenses should have been added to the cost of WIP since assessee is having one single integrated project. The case of the assessee before us is that the AO has misunderstood the provisions of AS-7 and misapplied the same in the case of the assessee, and in any case, the business of the ....
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....ectly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; and (c) such other costs as are specifically chargeable to the customer under the terms of the contract. 16. Costs that relate directly to a specific contract include: (a) site labour costs, including site supervision; (b) costs of materials used in construction; (c) depreciation of plant and equipment used on the contract; (d) costs of moving plant, equipment and materials to and from the contract site; (e) costs of hiring plant and equipment; (f) costs of design and technical assistance that is directly related to the contract; (g) the estimated costs of rectification and guarantee work, including expected warranty costs; and (h) claims from third parties. These costs may be reduced by any incidental income that is not included in contract revenue, for example income from the sale of surplus materials and the disposal of plant and equipment at the end of the contract. 17. Costs that may be attributable to contract activity in general....
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....contract activity or cannot be allocated to a contract are excluded from the cost of construction, for example, general administration costs, selling costs, depreciation on those assets which are not used in construction activities, etc. In the light of the aforesaid provisions, we have analysed the expenses which were debited by the assessee in the P & L account but disputed by the AO. During the course of hearing before us, following break up of these expenses has been provided to us:- Details of Expenses Total Amount Transferred to WIP Amount Debited to P&L Administrative Expenses Marketing & Selling expenses Finance Expenses Operating Expenses Civil Works 78,53,018 78,53,018 - - Direct Management and general services 3,97,14,697 3,97,14,697 - - Legal and professional fees 27,82,63,263 27,27,15,289 55,47,974 55,47,974 Insurance 39,20,585 38,44,402 84,183 84,183 Occupancy cost 1,64,6....
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....,53,018/-) and direct management and general services (Rs.3,97,14,797/-) have been debited in entirety to the cost of WIP and no portion of it has been debited in the P & L account as expenses of the period under consideration. Similarly, with regard to the legal and professional fee, out of aggregate amount of Rs. 27.82 crores, only small portion of Rs. 55.47 lakhs has been debited to the P & L account whereas the substantial portion of Rs. 27.27 crores has been added to the cost of WIP by the assessee itself. Similarly, with regard to the other expenses also, the assessee bifurcated them on the basis of nature of expenses. It was contended that other common expenses like audit fee, rates and taxes, repair and maintenance etc were allocated to the P & L account since these cannot be co-related to any particular project. Similarly, with regard to the marketing service cost-cum-sales promotion and administration expenses, it has been submitted that these were common expenses and were not related to any particular project in hand. Therefore, these have been debited in the P & L account as period cost. With regard to the finance charges (comprising of interest and bank charges), it wa....
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....we need to examine whether expenses of the assessee can be allowed in the year under consideration since the AO has objected that no revenue from sales has been booked by the assessee during the year under consideration. Under these circumstances, we analysed primary contention of Ld. DR that no expenses can be allowed as business expenses of the year under consideration unless revenue from the business is earned and credited in the P & L A/c. Whereas Ld. Counsel of the assessee has submitted that all expenses incurred in the normal course of business shall be allowable after the setting up of business irrespective of the fact whether revenue is yet earned or not. We have pondered over this issue and found that this issue is not res integra. In this regard we have firstly taken guidance from the judgement of Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. (26 ITR 151) wherein it was held that expenses are allowable after setting up of the business. This judgment has been followed in many cases. This issue was also deliberated by Mumbai Bench of the Tribunal in the case of PineBridge Investments Capital India Private Limited (I.T.A. No. 2940/Mum/2011 d....
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.... Further, the assessee has already purchased land as is evident from the perusal of the balance-sheet showing that assessee had already made investment in land for an aggregate amount of Rs. 129,00,89,390/- as on 31-03-2008 (i.e. beginning of the impugned financial year). In addition to the said main point, it has been noted by us that the assessee has already done provisional booking by receiving advance from various customers in as many as 1,485 cases for an aggregate amount of Rs. 23,95,51,585/-. All these facts are further fortified with the fact that substantial amount of revenue (income) has been recognized by the assessee in subsequent assessment years. It was brought to our notice that in A.Y. 2012-13 flats were sold for a total sale consideration of Rs. 115,46,51,912/- as against which proportionate revenue of Rs. 45,92,68,343/- has been recognized in A.Y. 2012-13. It has also been noted by us that assessee has issued allotment letters to numerous customers in the immediately subsequent assessment year. 20. Thus, facts of this case showing that all requisite approvals have been received by the assessee, sufficient land has already been purchased, marketing brochures wer....
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....fore a further production stage; (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and (d) selling costs." 7. The Ld. Counsel has further relied upon para 2.4 of the "Guidance Note on Accounting for Real Estate Transaction" issued by the Institute of the Chartered Accountants wherein it has been stated that: "The following cost should not be considered part of construction cost and development cost if they are material: (a) General administration costs; (b) Selling cost; (c) Research and development cost; (d) Depreciation of idle plant and equipment; (e) Cost of unconsumed or uninstalled material delivered at site; and (f) Payment made to sub-contractors in advance of work performed." 8. The Ld. Counsel therefore has stated that as per the above guidelines, the administrative and selling expenses have been specifically excluded from the cost of inventory for work for closing WIP. The Ld. Counsel has further submitted that even as per AS -7 vide paragraph 19 it has been mentioned that the general administrative cost and selling ....
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..... In assessee's case, dispute is not with respect to interest as the assessee itself has added the interest cost to the work-in-progress and claimed it in subsequent year in the proportion of revenue offered. Thus, the facts in assessee's case are quite distinguishable and the decision of Special Bench (supra) is not applicable to the facts of the assessee's case. 10. The Id. DR on the other hand has relied upon the findings of the lower authorities. He has stressed that the Ld. CIT(A) has rightly appropriated the indirect expenses to the WIP in proportion to the percentage of completion in respect of the area sold. 11. We have considered rival contentions and carefully gone through the orders of the authorities below. The percentage completion method of accounting has been regularly followed by the assessee. In the succeeding assessment year 2010-11, the AO has accepted the deductibility of the identical nature of expenses in the assessment order passed u/s 143(3) of the l.T. Act. We agree with contention of the Ld. Counsel for the assessee that the employee cost refers to salary paid to the employees who are looking after the administration of office....
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.... directed to be deleted. 23. The AO is directed to allow the expenses as have been claimed by the assessee. The consequential effect shall also be given by the AO while passing order giving appeal effect for the amount of closing WIP of the year under consideration as well as opening WIP of the immediately subsequent assessment year. Thus, with these directions, the grounds 1 to 3 raised by the assessee are allowed. 24. Ground 4 & 5 were argued as consequential, therefore, these are dismissed. 24. As a result, appeal of the assessee is partly allowed. Order pronounced in the court on this 11th day of January, 2017. ============= Document 1 SUNNY VISTA REALTORS PVT.LTD. A.Y. 2009-10 - ITA NO 4580/M/13 DETAILS OF PROJECTS UNDERTAKEN Residential Sr No. Building Name No Apartment No of Total Area Storey Revenue recognised in ay 1 Apollo 66 49,962 11 2012-13 2 Argus 116 1,99,268 30 2012-13 3 Artemis 120 2,32,920 30 4 Athena 66 49,962 11 2012-13 5 Atlas 116 1,54,772 30 2012-13 6 Aura 116 1,80,996 30 2012-13 7 Aurora 116 ....