TaxTMI 
TaxTMI 
2022 (7) TMI 1631
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....units/complexes and any other types of infrastructure projects etc, on ownership basis. The assessee company had filed its return of income on 30.09.2013 (for AY. 2013-14) declaring total loss of Rs. (2,57,84,522/-). The AO upon verification of the financials of the assessee company, noted that the Inventory of Rs. 24,18,92,000/- related to the on-going project is lying in the balance sheet of the assessee company as on 31.03.2013. The AO noted that the assessee company has received advances of Rs. 19,76,32,188/- from various customers against the booking of flats. Further the AO noted that the project is under construction and only 15.04% work of the project was completed and since no revenue has been realized, no income has been offered for taxation. He noted that the Reserves & Surplus of the assessee company is negative of Rs. (-) 9,76,61,419/- and short term borrowings obtained from group companies of the assessee company against construction of the project was to the tune of Rs. 25,59,40,847/- and inventory of the project was to the tune of Rs. 24,18,92,000/-. And that the assessee company has utilized the borrowed funds for construction of the ....
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.... the AO to capitalize the entire finance cost and added to the WIP, the assessee preferred an appeal before the Ld. CIT (A) who was pleased to delete the same by holding as under: - "4.1 Ground no. 1: I have carefully considered the submission and argument of the AR of the appellant company. I have also gone through the assessment Order. he appellant has agitated the disallowance of interest expense of Rs. 2,47,96,535/. I find that appellant has already has incurred interest expenses totaling to Rs. 2,88,03,287 during the year under consideration. The said interest cost consists of interest on secured loans, unsecured loans, processing charged and bank charges. The appellant is following the percentage completion method of accounting the income and expenses. I find that appellant has himself capitalised interest amounting to Rs. 40,06,934/- out of the total interest cost on the basis of project inflows, project outflows, cumulative funds utilisation. Further the appellant has followed the Accounting standard -16 Borrowing Cost issued by ICAI for determining the quantum of the interest cost which was debited to profit and loss account. The appellan....
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....mpany has followed accounting policy for recognition & capitalization of borrowing cost which is as per the AS-16 "Borrowing Costs". Therefore, the assessee had capitalized interest of Rs. 40,06,934/- out of the total interest of Rs. 21,88,03,287/- during the AY. 2013-14. And the interest expenses amounting to Rs. 2,47,96,353/- was debited to P & L Account and not capitalized to Work-in-Progress. The assessee company has capitalized interest of Rs. 40,06,934/- out of the 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". Only the cost which are directly attributable to the project should be capitalized to the cost of WIP and hence the assessee has debited the financial cost which are not directly at....
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....e work-in-progress if same are included by the assessee. In the light of abovementioned facts, amount of Rs. 3,76,80,186/- is disallowed and the work-in-progress of the construction project is accordingly reduced to the extent of these amount." 9. Aggrieved by the aforesaid action of the AO, the assessee preferred an appeal before the Ld. CIT (A) who was pleased to delete the same. Aggrieved by the aforesaid action of the Ld. CIT(A), the revenue is before us. After having heard both the sides and after careful perusal of the records, we cannot countenance the action of the Ld. CIT (A) deleting the disallowance made by the AO on this issue. We note that the recognition/identification of income under the Act is tenable by other method of accounting considering the nature of business activities. In respect of the construction business one of the accounting method is percentage completion method and the cost of the project is accumulated under the one head of account "work-in-progress". So when the assessee claims to have incurred cost of a project, then the work-in-progress (WIP) will increase by that much cost/expenditure. However, it should be kept in mind that such expenses....
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....ts and Gains, the expenditure is related to earlier years and since the assessee is following the mercantile system of accounting, the same is not allowable in the current financial year. Accordingly, an amount of Rs. 1,58,94,960/- is disallowed and the work-in-progress of the construction project is according reduced to the extent of these amounts." 12. Aggrieved, the assessee preferred an appeal before the Ld. CIT (A) who was pleased to give relief to the assessee by holding as under: - "4.4 I have carefully considered the submission and argument of the AR of the appellant company. I have also gone through the assessment Order. The appellant has agitated the disallowance and reduction of WIP to the extent of Rs. 1,58 94,460/-stating the same as prior period expenses. I find that the appellant has debited the rights and related expenses of Rs 1,58,94,960/- and cost of land, capitalized to Work in progress for the year under consideration. I find that appellant has not actually incurred the cost of land amounting to Rs 1,58,94,960/during the year under consideration but just for the purpose of presentation of financial statement has transferred the amount of ....
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....& loss account for the year under consideration. And accordingly the question of incurring of prior period expenses did not even arise in this factual back ground and the AO erred in wrongly assuming so and the Ld. CIT (A) has correctly appreciated the same and allowed the relief to the assessee. Therefore, we are inclined to uphold the action of the Ld. CIT (A) on this issue. 14. Coming to the revenue appeal for AY. 2014-15, we note that the first ground is similar to ground no. 1 for AY. 2013-14. And since there is no change in facts or law, for the same reason stated therein mutatis mutandis will apply for this year and therefore the action of the Ld. CIT (A) is upheld. 15. Ground no. 2 is against the action of the Ld. CIT (A) in reversing the action of the AO in respect of the expenses claimed by the assessee in respect of advertisement expenses amounting to Rs. 48,15,669/- which has been capitalized by the AO. 15. At the outset it has been brought to our notice that similar issue arose in the earlier AY. 2013-14 wherein the AO had disallowed the advertisement expenses claimed by the assessee to the tune of Rs. 24,20,587/- which was also capitalized by the AO....