TaxTMI 
TaxTMI 
TaxTMI 
2019 (8) TMI 549
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....li Chemicals & Others vs CIT decided by Hon'ble Apex Court wherein it was held "Interest and finance charges alongwith other preproduction expenses will have to be capitalized and the interest income have to be taxed as income from other sources?" 2. Briefly stated the facts of the case are that the assessee is engaged in the business of construction and development of Group housing projects. It filed its return of income on 15.11.2014 declaring business loss of Rs. 1,24,16,176/-. During the course of assessment proceedings, the Assessing Officer, after review of the assessee's profit and loss account, observed that the assessee is doing the work of construction and development, no sales have commenced till the end of financial year under consideration, however, the assessee has debited huge interest and other expenses in its profit & loss account and has declared and claimed current year loss of Rs. 1,24,16,176/-. The assessee company was asked to show-cause as to why the expenses claimed in profit & loss account may not be disallowed and capitalized, as the sale of project has not started. In response, the assessee submitted that it follows percentage project completion method ....
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....essee firm, in the relevant previous year and in the immediately preceding year, had purchased land in Jagatpura for the purpose of carrying out two real estate projects, the work on which started immediately. Such land formed part of the stock in trade of the assessee firm. It was further submitted that the assessee follows percentage of completion method in accordance with the guidance note on recognition of Revenue on Real Estate Transactions, issued by the Institute of Chartered Accountants of India for purpose of Revenue recognition. As per the guidance note, the Revenue should be recognized only when the stage of completion of the project reaches a reasonable level of development and reasonable level of development is not achieved if the expenditure incurred on construction and development costs, during the relevant previous year, is less than 25% of the total estimated construction and development cost for the entire project. During the year, given that the assessee company has incurred approximately 10% of the total estimated project cost, it has not recognized revenues. However, in the subsequent years, where the assessee company has incurred total expenditure on construct....
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.... during the construction period on short term investment of funds. Accepting the aforesaid contentions, the ld CIT(A) has allowed the relief to the assessee and now the Revenue is in appeal before us. 5. We now refer to the relevant findings of the ld CIT(A) which are under challenge before us and the same are contained at para 3.1.2 of his order which are reproduced as under:- "3.1.2 Determination: (i) I have duly considered the submissions of the appellant, assessment order and the material placed on record. The brief facts of the case are that the appellant firm was engaged in the business of developer and builder. In its profit and loss account for the year under consideration, it has not declared any sales but has debited various expenses totaling to Rs. 1,24,41,230/- and has claimed net loss of Rs. 1,24,16,176/-. In the assessment order, the AO has disallowed the entire expenses of Rs. 1,24,41,230/- by observing that since there was no income during the year under consideration, therefore, no expenses are allowable. It would be appropriate to summarize the expenses claimed by the appellant in its profit and loss account as under:- Head of expenses Amount (in Rs.) ....
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....it has recognized revenue from operations to the tune of Rs. 6.71 Crore and 6.06 Crore respectively. (iv) Therefore, in view of the above discussion and looking to the totality of facts and circumstances of the case, especially to the fact that the appellant is following percentage of completion method, I do not find any justification for the AO to disallow the total expenditure claimed by the appellant in its profit and loss account and thus, the AO is hereby directed to allow the same. Hence, this ground of appeal is hereby allowed." 6. Both the parties were heard at length during the course of hearing and relevant material available on record have been examined. 7. We agree with the findings of the ld CIT(A) that mere absence of sales during the year cannot be a basis to hold that the business of the assessee has not commenced and consequently, the expenses claimed will be disallowed. In the instant case, the assessee has purchased the plot of land, hired manpower and has incurred expenditure on construction and other activities, and has also received advances from its customers. Therefore, mere absence of sale cannot be a basis to deny the claim of the expenses. At the s....
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....ect cost in relation to a project ordinarily comprise of borrowing cost which are incurred directly in relation to a project or which are apportioned to a project in accordance with AS-16 on Borrowing costs. As per AS-16, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of cost of that asset and other borrowing costs are recognized as an expense in the period in which they are incurred. A qualifying asset has been defined as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale which includes manufacturing plants, power generating facilities, inventories that require a substantial period of time to bring them to a saleable condition. In the instant case, interest cost has been incurred in relation to purchase of land which is stock-in-trade of the assessee and thus qualify as an qualifying asset. Given that the development of such plot of land as a housing project to make it saleable where finished residential units will be sold to customers will take its own time and is not an instantaneous activity, any interest cost incurred in relatio....