TaxTMI 
TaxTMI 
2019 (4) TMI 259
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....e on Accounting for Real Estate Transactions issued by Institute of Chartered Accountants of India. Hence, impugned disallowance upheld by the CIT(A) to be deleted. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the addition made by the ACIT without appreciating that the assessee has been consistently following the Accounting Policy for determining the work-in-progress as well as the profitability of its construction development project on year to year basis. Hence, impugned disallowance upheld by the CIT(A) to be deleted. 3. On the facts and in the circumstances of the case and in law, the ACIT erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the ACIT to be directed to drop the penalty proceedings under section 271(1)(c) of the Act." The ground of appeal raised by Revenue reads as under: - "1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition made as per the provisions of Section 14A of the I.T. Act without appreciating the fact as assessee has incurred indirect expenses for earning exempt income." ....
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....as the assessee is aggrieved for disallowing the expenditure incurred on employee cost, administrative expenses and selling and marketing expensed debited to Profit & Loss Account. 5. We have considered the rival contentions and carefully gone through the order of Authorities below and deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us. From the record we found that the assessee is a developer and undertaking construction activity of building for the purpose of sale. The AO was of the view that the expenditure incurred on the above heads were to be capitalised and cannot be allowed as Revenue expenditure. From the record we found that assessee follows mercantile system of accounting. In order to recognise the revenue from the project, it follows percentage completion method of accounting. All the expenses incurred by the assessee which are directly attributable to the project have been debited to work in progress and the expenses which were not attributable to the project have been debited to Profit & Loss Account During the assessment year under consider....
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....can value its inventories in accordance with the Accounting Standard (AS) 2, Valuation of Inventories', issued by the Institute of the Chartered Accountants of India, considering the definition of Inventory as 'an asset in the process of production for the purpose of sale', i.e. whether the activity of developing housing projects on its own account as a I commercial venture by the company can be construed as a production activity. j (c) If the activities of the company cannot be considered as a production activity and consequently AS 2 is also not applicable, which Accounting Standard should be followed for recognition and valuation of its construction of its construction work-in-progress?" [Emphasis supplied] The above queries have been answered by the EAC as under: (a) The revised AS 7 would not be applicable to the company for accounting for new housing project which are undertaken by the company during the accounting periods commencing on or after 1.4.2003. (b) The activity of developing housing projects on its own account as a commercial venture by the company is of the nature of production activity and, therefore, should be cons....
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....f 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." 11. Furthermore, in Guidance note on Accounting for Real Estate Transaction also it was stated that the general administration cost and selling cost shall not form part of work in progress (fefer page 66 of paper book}. In short, the accounting treatment given in Guidance note on Real Estate Transaction is at par with AS 2 reproduced above and the assessee has followed these accounting principles in preparing its accounts year after year including the year under consideration. We found that the assessee, in compliance to these accounting principles, determined the expenses which are not related to the work in progress and debited the same to the profit & loss account being administrative expenses and selling expenses incurred for day to day functioning of the business and marketing; likewise, the expenses directly attributable to the ....
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....nd 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 A.O has accepted the deducibility of the identical nature of expenses in the assessment order passed u/s 143(3) of the I.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 and not directly related to construction of the project but is part of the administrative expenses. Similarly, the office and administrative expenses and selling and marketing expenses are to be charged to the profit & loss account in the very same year in which they are incurred and have to be excluded from the cost of inventories for working out closing WIP as per the guidelines issued by the ICAI, Accounting Standard AS-2 and AS-7. The assessee has regularly and consistently been following the said method of accounting as per the provision of section 145A of the IT. Act. The A.O has not assigned any cogent reason as to why the method, which has been consistently followed by the asses....
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....ommittee Report of the Institute of Chartered Accounts of India. 17. We also found that the CIT(A) has relied upon the decision of the Hon'ble Supreme Court in the case Madras Industrial Investment Corporation (supra) and the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. (supra). However, the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. 372 ITR 605 has been subsequently reversed by the Hon'ble Supreme Court. Not only this, the Hon'ble Supreme Court has duly considered the earlier decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation (supra), which has also been relied upon by the CIT(A). The relevant paragraphs of the Hon'ble Supreme Court decision reads as under:- "15. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of busin....