TaxTMI 
TaxTMI 
2023 (7) TMI 1305
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....s.7,55,87,118/- claimed by the assessee as revenue expenditure by holding that Rs.5,29,71,264/- as revenue expenditure, and balance Rs.1,40,18,981/- be capitalized as work-in-progress (WIP). Assessee is against the part-relief not granted by Ld CIT(A). 3. Brief facts are that the assessee is a Joint Venture carrying out business in the name of M/s. Rustomjee Evershine Joint Venture which is engaged in the business of Construction and Real Estate Development and Commercial and Residential Projects. The assessee filed its return of income for AY 2013-14 on 30.09.2013 declaring total loss at Rs.28,16,17,718/-. The assessee in its profit and loss account had shown revenue of Rs.211,95,60,101/-, and had shown interest income of Rs.7,55,87,187- from short term deployment of borrowed funds and thus claimed to have incurred interest expenditure (net) only to the tune of Rs.15,24,56,505/- out of which the assessee had capitalized an amount of Rs.7,68,69,388/- which was made part of WIP (work-in-progress) and balance amount (Rs.7,55,87,118/-) has been debited to profit and loss account which was claimed as revenue expenditure. The AO show caused the assessee as to why the revenue expendit....
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....of an enterprise debt instruments are used to borrow funds at varying rates of interest and such borrowings are not readily identifiable with a specific qualifying asset. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset is often difficult and the exercise of judgment is required. Commencement of Capitalisation 16. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset's condition is taking place. For example, borrowing costs incurred while land is under development are capitalized during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held ....
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....Commissioner of Income Tax (Appeals)-18 and 36, Mumbai. It can be seen that, consistently the decisions are given on same line, hence the same are to be followed. 7.5 On this issue, the appellant has already filed submission during the appellate proceedings the same is considered by me. No new submission has been made. At the outset I would like to clarify that there are no doubts about the genuineness of interest expenditure, which has been paid to the financial institutions on borrowed funds. The issue is only with respect to apportioning, the interest in the ratio of percentage of projects completed, in view of accounting standard AS-16. I have also examined the working given by the assessee. Undoubtedly, the assessee had revenue from sale of flats of Rs. 212 Crs, as is clear from statement of profit and loss account and therefore, no doubt the assessee is eligible for reasonable expenditure in the nature of interest to carry out such turn over. I also agree with the assessee that interest income of Rs. 7,55,87,117/- has been offered in the Profit and loss account, which is from short term deployment of the borrowed funds and therefore net interest of only Rs. 15,24,56,....
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....th revenue as well as assessee has preferred an appeal/CO before us. 6. We have heard both the parties and perused the records. We note that the assessee is a JV (Joint Venture) carrying out the business of Construction and Development of Commercial and Residential Projects and is following the percentage completion method of accounting to recognize the income and expenditure. The assessee has claimed interest expenditure of Rs.7,55,87,117/- in its P & L Account and capitalized interest expenditure of Rs.7,68,69,388/-. However, the AO disallowed the interest cost of Rs.7,55,87,118/- as not admissible to be claimed as revenue expenses and added the same to the WIP of the project. The Ld. CIT(A) has partly reversed the action of the AO by allowing the claim of the assessee to the tune of Rs.5,29,71,264/- as revenue expenditure and balance to be capitalized i.e. Rs.1,40,18,981/- to be added to the WIP. For doing so, the Ld. CIT(A) has found that the interest expenditure which was paid to the financial institution on borrowed funds was genuine; and also noted that the assessee has been following the percentage of project completion method in accordance to Accounting Standard (AS)-16....
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....s.7,68,69,388/- out of the total interest of Rs.15,24,56,505/- during the AY. 2013-14. And the balance interest expenses amounting to Rs.7,55,87,118/- was debited to P & L Account and not capitalized to WIP. We further note that the assessee company has capitalized interest of Rs.7,68,69,388/- out of total interest cost on the basis of inflow, project out flow, cumulative funds utilization. As per the Guidance Note on Accounting, for Real Estate transactions issued by ICAI, the project cost which are directly attributable to the project shall only be capitalized. (refer 2.2 project cost revised in 2012) wherein it has been clearly stated under (b) "Borrowing Cost" "in accordance with Accounting Standard-16, borrowing cost which are incurred directly in relation to the project or which are apportioned to a project". Therefore, only the cost which are directly attributable to the project should be capitalized to the cost of WIP, and hence it is noted that the assessee has capitalized the financial cost which are directly attributable to the project to the cost of WIP; and the assessee has debited the financial cost which are not directly attributable to the project and claimed as rev....
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....that by debiting such expenses to the profit and loss account, there is no loss to the revenue, as even by capitalization of such expenses, the same will be debited to the revenue in future years. Accordingly, the treatment of debiting interest expenses to the tune of Rs.7,55,87,118/- to the profit and loss account ought to have been allowed. And therefore, we dismiss the appeal of the revenue and allow the CO of the assessee and direct the AO to allow the claim of the assessee the balance amount of Rs.1,40,18,981/- and confirm the action of the Ld. CIT(A) allowing interest expenditure of Rs.5,29,71,264/-. Thus, the assessee's claim of interest expenditure to the tune of Rs.7,55,87,118/- as revenue expenditure is allowed. 7. Next ground of appeal of the revenue is against the action of the Ld. CIT(A) disallowing the commission and brokerage of expenses Rs.17,43,949/-. 8. Brief facts as noted by the AO are that the assessee has debited commission and brokerage expenditure of Rs.17,43,949/- to the profit and loss account. The AO did not accept the assesse's reliance on para -19 of AS-7 issued by ICAI for "Construction Contracts" stating that the General & Administration Cost an....
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....t is not a rational approach, considering the nature of expenditure. 6.5 It is relevant to mention that most of the selling and marketing expenses are incurred by the assessee company, irrespective of whether a project is ongoing or otherwise. In other words these costs are a sort of found costs which are to be incurred by the company under all circumstances during its entire tenure of carrying on its business operations. Further most of these expenses are not associated with any particular project. Such expenses therefore cannot be carried forward under the earmarked project costs, since they are general in nature. Therefore capitalizing the same under a particular project and treating the same as a part of a project cost does not justify the generally accepted accounting practices, charging off to revenue justifies the matching principle, where expenses of a particular period are to be matched and charged to revenue of the said period alone. 6.6 Further as per the Accounting Standard-7, issued by the ICAL, the project cost includes - (i) Cost of land and cost of development rights -All costs related to the acquisition of land, development rights in the ....
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.... most of the expenditure in nature of advertisement is carried out at head office level, which comprises of all the projects. In any case the expenditure is genuine and therefore liable to be allowed as business expenditure, in accordance with the provisions of Section 29 to Section 43B of the Act. 6.10 Coming to the provisions of sec 37, of the Income Tax Act, 1961 which are been reproduced here as under: 37.(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession 6.11 Thus for claiming an expenditure u/s 37 of the Act, the following conditions should be satisfied: Condition 1: The expenditure should not be of the nature described under Section 30 to 36. Condition 2: It should not be in the nature of capital expenditure. Condition 3: It should not be personal expenditure of the assessee. Condition 4: It should....
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....in the relevant accounting year. The entire exercise in the computation and assessment of business profits is to arrive at the true profits of the year which are liable to tax. The unit of assessment is the year and the receipts and expenditure which have to be taken into account must relate to the relevant accounting year. Therefore, if the expenditure of an earlier year is taken into account in a later year, the true profits of the later year cannot be determined and the result would be lopsided and unreal." 6.17 The Hon'ble Delhi High Court in the case of CIT vs. Manish Buildwell Pvt. Ltd. vide order dated 15/1/2011 in ITA No. 928/2011 had ruled that AS7 issued by the Institute of Chartered Accountants of India recognizes the position that in the case of construction contracts the assessee can follow either the project completion method or percentage completion method. Neither revised guidance notes 2012 issued by Institute of Chartered Accountants of India nor "Exposer Draft for Guidance Note on recognition of revenue" issued by Institute of Chartered Accountants of India in 2011 were mandatory. It was option of assessee to follow either completed contract method o....
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.... raised by the AO has been clarified by the appellant. In view of the facts mention as above and following the decision of my Ld. Predecessor, this issue as mentioned in the ground of appeal is decided in favour of the appellant. Therefore, this ground of appeal is Allowed." 9. Aggrieved, the revenue is before us. 10. We have heard both the parties and perused the records. We note that the assessee has claimed brokerage and commission expenses to the tune of Rs.17,43,949/- which was debited in the P & L account. The Ld. CIT(A) has allowed the claim by taking note that the selling and marketing costs consist of the expenditure in the nature of advertisement and publicity expenditure, miscellaneous expenses, commission and brokerage, sales promotion expenditure and exhibitions etc. It is noted that the assessee claimed Rs.17,43,949/- as expenditure towards brokerage and commission. According to the assessee, the amount was paid to its brokers who aid in bringing customers for booking and sale of its flats/properties during the assessment year. It is noted that brokerage and commission is a financial cost/selling expenses which the assessee has incurred wholly and exclusively fo....
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....firm his action of allowing the interest cost of Rs.1,45,93,760/- as revenue expenditure. This ground of revenue is dismissed. 14. Ground no. 2 is against the action of the Ld. CIT(A) allowing the commission and brokerage cost of Rs.13,27,767/- which ground we note is similar to ground no. 2 for AY. 2013-14 and since there is no change of facts or law, for the same reasoning stated therein, we confirm the action of Ld. CIT(A) and our decision will apply mutatis mutandis for upholding the action of Ld CIT(A). Therefore, the impugned action of the Ld. CIT(A) is upheld. 15. Ground no. 3 is against the action of the Ld. CIT(A) deleting the addition of Rs.28,73,543/- on account of deemed rent calculated @ 2% of the closing stock of unsold flats and shops where occupancy certificates were received. 16. Brief facts as noted by the AO is that he noted from the balancesheet of the assessee that it had inventories as on 31.03.2016 which included closing stock of unsold flats of Rs.54,41,25,101/-. So he issued notice to the assessee calling upon the response from it as to why the Annual Letting Value (ALV) of the finished properties which was held in stock should not be assessed unde....
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.... property. 14.4 In the instant case, there is no dispute between the AD and appellant that the unsold flats are stock in trade of the appellant. There is also no dispute that the appellant had not let out its unsold flats to any persons. Hence, in my considered opinion, there cannot be any assessment of notional rental income or deemed rental income under the head income from business in the absence of specific provisions contained in the statute. The amendment brought in the Act is through section 23 sub-section (5) is applicable prospectively Le from JAY 2018-19 onwards, while the appellants case belongs to period prior to this date. 14.5 It is also observed that Hon'ble Mumbai ITAT in the case of ITO vs Arihant Estate Pvt Limited (TTA No 6037/Mum/2016) dated 27/06/2018 has considered the Hon'ble Delhi High Court decisions of Ansal Housing & Construction & Ansal Housing Finance & Leasing Co. Ltd. (supra) and held as under: "We have heard the rival submissions and perused the orders of the authorities below and the decisions relied upon. It is an undisputed fact that the assessee are in the business of builders, developers and construction. Both ....
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....estion was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy. 9. From the statement of the assessee, it would clearly appear that it was treating the property as 'stock-intrade'. Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a 'stock- intrade". 9. Similarly the Coordinate Bench has considered similar issue as to whether the unsold property which is held as stock in trade by the assessee can be assessed under the head 'income from house property by notionally computing the annual letting value from such property and the Coordinate Bench considering the decision of the Hon'ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra) which the AO relied upon and the decision of the Hon'ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT reported in 373 ITR 673, held that unsold flats which are in stock in trade should be assessed unde....
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....xed as business income. Accordingly, we do not find any justification in the order of AO for estimating rental income from these vacant flats u/s 23 which is assessee's stock in trade as at the end of the year. Accordingly, the AO is directed to delete the addition made by estimating letting value of the flats u/s.23 of the LT. Act." 10. In the case on hand before us it is an undisputed fact that both assessee have treated the unsold flats as stock in trade in the hooks of account and the flats sold by them were assessed under the head income from business'. Thus, respectfully following the above said decisions we hold that the unsold flats which are stock in trade when they were sold they are assessable under the head 'income from business' when they are sold and therefore the AO is not correct in bringing to tax notional annual letting value in respect of those unsold flats under the head 'income from house property. Thus, we direct the AO to delete the addition made under Section 23 of the Act as income from house property." 6. Admittedly in this case on hand the unsold property being shops were held as stock in trade. In the circumstances, ....
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....Neha Builders Pvt. Ltd. (supra) was distinguishable because the assessee (M/s. Neha Builder) had offered the income on flats it held as stock-in-trade "as income from house property" whereas M/s. Runawal Construction decided by the Tribunal there was no computation of ALV. Thereafter, the AO taking note of the fact that occupancy certificate was only in respect of unsold stock/flats to the tune of Rs.20,52,53,093/-, estimated the ALV @ 2% of the closing stock which works out to Rs.41,05,061/- and thereafter allowed 30% standard deduction as provided u/s 24(a) of the Act, and resultantly assessed the income from house property at Rs.23,73,543/-. On appeal, the Ld. CIT(A) has deleted the addition by taking note of the amendment brought in by Finance Act, 2017 and referring to the decision of the Hon'ble Gujarat High Court in the case of M/s. Neha Properties and Hon'ble Supreme Court decision in the case of M/s. Chennai Properties (373 ITR 673). We do not countenance the action of the Ld. CIT(A), since his reliance on the decision of Hon'ble Supreme Court in M/s. Chennai Properties (supra) and Hon'ble Gujarat High Court in M/s. Neha Builders (supra) and amendment brought in by Finance....
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....ue of the present case. However, on this issue there is a direct decision of Hon'ble Delhi High Court in the case of Ansal Housing Finance and Leasing Company reported in 354 ITR 180 (DEL) wherein it was held that the vacant units in the possession of assessee are liable to be charged under the head "Income from House Property" on the basis of its ALV. And, we note that similar issue had come up for consideration before this Tribunal in the case of DCIT Vs. M/s. Inorbit Malls Pvt. Ltd. in ITA. No.2220/Mum/2021 for AY.2017-18 dated 11.10.2022 wherein this Tribunal considered the Finance Act 2017 and decision of Hon'ble Supreme Court in Chennai Properties and Hon'ble Gujarat High Court in Neha Builders and Hon'ble Delhi High Court in Ansal Housing (supra) and held as under: - "1. The aforesaid appeal has been filed by the revenue against order dated 06.08.2021, passed by the Ld. CIT(A)-52 Mumbai for the quantum of assessment passed under section 153A r.w.s 143(3) for the assessment year 2017-18. In the grounds appeal the revenue has raised following grounds: i) "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in deleting th....
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.... acceptable. AO accordingly, proceeded to compute the income of the Assessee under "income from house property‟ by adopting 8.5% of the value of inventory, i.e., unsold stock of flats as its rental income. Thus, the income has been computed at Rs. 6,66,43,442/- under the head income from house property after allowing 30% standard deduction. 3. The Ld CIT(A) on the other hand referring to various decisions of ITAT Mumbai Bench including the judgment of; i) Haware Construction (P) Ltd. (2019) 101 taxmann.com 168(Mumbai-Trib); ii) M/s Runawal Constructions ITA No. 5408/Mum/2016 (AY: 2012-13); & iii) M/s C.R. Development Pvt. Ltd., 2477/Mum/2022(AY: 2009-2010), held that the Tribunal Benches have relied upon the judgment of Hon‟ble Gujarat High Court in the case of CIT Vs. Neha Builders, reported in 296 ITR 661, which has been inferred that Hon‟ble High Court has decided this issue in favour of the Assessee. 4. Here the case of the Assessing Officer is that, since Hon‟ble Delhi High Court in the case of M/s Ansal Housing Finance and Leasing Company (Supra) has held that vacant units in the position of the appellant is liable to be charged of no....
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....ouse property". It has been canvassed before us that, there are divergent views on this issue, one view proposed by the judgment of Hon'ble Gujarat High Court in the case of CIT Vs. Neha Builders (Supra) which is in the favour of the Assessee, whereas the other view has been proposed in the decision of the Hon‟ble Delhi High Court in the case of the CIT Vs. Ansal Housing Financial Leasing Ltd. (Supra) which is in favor of the revenue. Therefore, judgment favorable the Assessee should be followed. 8. We have gone through the judgment in the case of CIT vs. Neha Builders, wherein following question of law was referred to the Hon‟ble High Court:- "Whether, on the facts and in the circumstances of the case the rental income received from any property in the construction business can be claimed under the head of 'Income from property even though they said property was included in the closing stock and expenses on maintenance were debited to the profit and loss account?" The facts in that case was that the Assessee Company was engaged in the business of construction of property and one of the building property was included the closing stock in the balanc....
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....-out the same, then that would be the "business" and the business stocks, which may include movable and immovable, would be taken to be "stock-in-trade", and any income derived from such stocks cannot be termed as "income from property". Even otherwise, it is to be seen that there was distinction between the "income from business" and "income from property" on one side, and "any income from other sources" The Tribunal, in our considered opinion, was absolutely unjustified in comparing the rental income with the dividend income on the shares or interest income on the deposits. Even otherwise, this question was not raised before the subordinate Tribunals and, all of sudden, the Tribunal started applying the analogy. From the statement of the assessee, it would clearly appear that it was treating the property as "stock-in-trade". Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a "stock in-trade". Agreeing with the submissions made by Mr. Naik, learned counsel for the Revenue, we hol....
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....perty. 11. Then, again in the case of CIT Vs. Sane & Doshi Enterprises reported in (2015) 377 165 (Bombay), Hon‟ble High Court held that rental income received from unsold portion of the property constructed by the Assessee Real Estate Developer is assessable as income from house property. The Hon‟ble Jurisdictional High Court again after analyzing the entire jurisprudence and various judgments of Hon‟ble Supreme Court, finally held that rental income received from unsold portion of property constructed by Assessee, Real Estate Developers is assessable as income from house property and not business income. The Hon‟ble High Court had further observed that the treatment given in the books of account as stock-in-trade would not therefore, alter the character or nature of the income. 12. In another case of CIT Vs. Gundecha Builders reported in (2019) 102 taxmann.com 27 (Bombay), where the Assessee was engaged in the business of development of "Real Estate Project" rental income received from unsold portion of property constructed by it was assessable tax as income from house property. 13. Thus, in all these cases there was actual recei....
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.... stock-in trade and therefore the ALV of the flats could not be brought to tax under the head "Income from house property". The AO however did not accept the stand of the assessee and therefore, added the notional value of unsold flats to the total income of the assessee. On appeal by the assessee, the CIT(A) however set aside the addition made by the AO. The revenue's appeal to the Tribunal was unsuccessful. 16. Hon‟ble Delhi High Court after referring to various judgments of Hon‟ble Supreme Court, finally observed as held in under: "In the present case, the assessee is engaged in building activities. It argues that flats are held as part of its inventory of stock-in- trade, and are not let out. The further argument is that unlike in the other instances, where such builders let out flats, here there is no letting out and that deemed income which is the basis for assessment under the ALV method, should not be attributed. This Court is of the opinion that the argument, though attractive cannot be accepted. As repeatedly held, in East India, Housing & Land Development Trust's case (supra) Sultan Bros's case (supra) and Karan Pura Development ....
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....elhi High Court will have both binding and persuasive value. No direct contrary decision has been brought to our knowledge of any other High Court and we have already noted above that the decision of Hon‟ble Gujarat High Court in the case of Neha Builder (supra) was not on the issue on notional rent from unsold stock. Therefore, it cannot be held that on this issue the judgment of Hon‟ble Gujarat High Court is in favor of the Assessee and therefore, the judgment of Delhi High Court in the case of Ansal Housing Finance Leasing Company Ltd (Supra) should not be followed. Thus, in our opinion this Tribunal in the case of Dimple Enterprises vs. DCIT (Supra) as cited and relied upon by the Ld. DR has correctly appreciated this distinction. 18. One very important development took place post these judgments, that an amendment has been brought in the statute in section 23(5) which is applicable from AY 2018-2019 which reads as under, "Where the property consisting of any building or land appurtenant there to is held as stock-in trade and the property of any part of the property is not let during the whole or any part of the previous year, the annual value of s....
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....not delivered or given final possession of the said flat/unit to the buyer, then no notional rent can be charged as it tantamount to sale. Secondly, if unit of flat is shown as work-in-progress in the books then also no notional rent can be computed. And Lastly, Ld. Assessing Officer is not justified in making estimate of 8.5% of investment as ALV which is unsustainable in view of the decision of Hon‟ble Bombay High Court in the case CIT Vs. Tip top Typography reported in 368 ITR 330, wherein, it has been held that rent should be computed at Municipal ratable value. We accordingly direct the AO to ascertain the Municipal ratable value for computing the notional rent. This is also been held by ITAT Mumbai Bench in the case of Dimple Enterprise Vs. DCIT (Supra), in the following manner:- "Now the question is of the rental value. The assessing officer has not levied the deemed rent on municipal ratable value or any nearly similar instance. The reliability of municipal ratable value has been duly upheld in several decisions. The Assessing Officer cannot make any ad hoc computation of deemed rent. Honorable Bombay High Court decision in the case of CIT vs. Tip Top Typogra....