M/s Chaitanya Properties (P) Ltd., Bangalore V. DCIT, Bangalore

ITA 1141/BANG/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8502 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-02-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 22-08-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SWATI S PATIL CITIIDR
• Keywords: Business income; Difference of opinion; Revised return; Revenue expenditure
• Section: 133(6); 37(1); 44AB; 13; 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.1141/BANG/2008 ASSESSMENT YEAR : 2005-06 M/S. CHAITANYA PROPERTIES PVT. LTD., SHANTINIKETAN, SADARMANGALA, WHITEFIELD, BANGALORE. : APPELLANT VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(2), BANGALORE. : RESPONDENT ITA NO.1183/BANG/2008 ASSESSMENT YEAR : 2005-06 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(2), BANGALORE. : APPELLANT VS. M/S. CHAITANYA PROPERTIES PVT. LTD., SHANTINIKETAN, SADARMANGALA, WHITEFIELD, BANGALORE. : RESPONDENT ASSESSEE BY : SHRI S. PARTHASARATHI, ADVOCATE REVENUE BY : SMT. SWATI S. PATIL, CIT-II(DR) ITA NO.1141& 1183/B/08 PAGE 2 OF 17 O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER 1. THESE TWO APPEALS PREFERRED ONE BY THE ASSESSEE COMPANY AND THE ANOTHER BY THE REVENUE - ARE DIRECTED AGAINST THE ORDER OF THE LD. CIT (A)-1, BANGALORE IN ITA NO:23 1/DC-11(2)/CIT (A)-I/7-8 DATED: 9.7.2008 FOR THE ASSESSMENT YEAR 2005-06. ITA NO: 1141/08 (BY THE ASSESSEE): 2. THE ASSESSEE COMPANY (THE ASSESSEE IN SHORT) HAS RAISED FOUR GROUNDS. HOWEVER, THE CRUX OF THE GRIEVANCE O F THE ASSESSEE IS CONFINED TO THE CIT(A) ERRED TO APPRECIATE THAT THE EXPENDITURE INCURRED WAS PART OF BUSINESS WHICH WAS EXPENDED WHOLLY AND EXCLUSIVE LY FOR THE BUSINESS, AS SUCH, THE ENTIRE EXPENDITURE IS TO BE ALLOWED . ITA NO: 1183/08 (BY THE REVENUE): 3. THE REVENUE HAS RAISED EIGHT GROUNDS, OUT OF WH ICH, GROUND NOS: 1, 7 AND 8 BEING GENERAL IN NATURE AND SINCE N O SPECIFIC ISSUES INVOLVED, THEY HAVE BECOME NON-CONSEQUENTIAL. IN T HE REMAINING GROUNDS, THE LONE GRIEVANCE HAS BEEN DESCRIBED IN AN ILLUSTRATIVE AND NARRATIVE MANNER. THE SUBSTANCE OF THE ISSUE, AT BEST, CAN B E HIGHLIGHTED, IN A CONCISE MANNER, AS UNDER: THE CIT (A) HAS ERRED IN HOLDING THAT THE PAYMENT O F RS.14.27 CRORES MADE IN RESPECT OF CONTRACTUAL OBLIGATION AS BUSIN ESS EXPENDITURE U/S 37(1) OF THE ACT. COMMON ORDER: 4. AS THE ISSUES RAISED BY THE RIVAL PARTIES WERE DIRECTED AGAINST THE ORDER OF THE CIT (A) FOR THE SAME AY, THESE APP EALS WERE HEARD, ITA NO.1141& 1183/B/08 PAGE 3 OF 17 CONSIDERED AND DISPOSED OFF, FOR THE SAKE OF CONVEN IENCE AND CLARITY, IN THIS COMMON ORDER. BRIEF: 5. THE ASSESSEE ENGAGED IN REAL ESTATE DEVELOPMENT BUSINESS, FURNISHED ITS ROI FOR THE AY UNDER DISPUTE, ADMITTI NG A LOSS OF RS.2.22 CRORES. CONSEQUENT UPON THE ACTION U/S 133(6) OF T HE ACT, THE ASSESSEE CAME UP WITH A REVISED ROI, ADMITTING ADDITIONAL IN COME OF RS.4.16 CRORES AND SUBSEQUENTLY, THE ASSESSMENT WAS CONCLUDED BY T HE AO, DETERMINING ITS INCOME AT RS.25.19 CRORES. WHILE DOING SO, THE AO, AMONG OTHERS, MADE DISALLOWANCE OF BUSINESS PROMOTION EXPENSES OF RS.5 CRORES WITH AN OBSERVATION THAT IN TERMS OF AN AGREEMENT BETWEEN T HE ASSESSEE AND GEMINI FILM CIRCUIT DATED 14.6.2004, THE ASSESSEES PROJECT SHANTINIKETAN HAD TO BE GIVEN PUBLICITY DURING THE SONG SEQUENCES WHILE TELECASTING THE TWO FEATURE FILMS, NAMELY, SHANKAR DADA MBBS AND UPPI DADA MBBS IN TELUGU AND KANNADA LANGUAGES RESPECTIVELY FOR WHIC H THE ASSESSEE HAD AGREED TO PAY RS.5 CRORES BY WAY OF ROYALTY. THE A O, HOWEVER, FOUND OUT FROM THE LETTER DATED 1.3.2005 OF THE FILM DISTRIBU TOR THAT THE PUBLICITY TO THE SAID PROJECT WAS GIVEN ONLY ON ONE FEATURE FILM. IT WAS FURTHER NOTICED THAT THE ASSESSEE HAD PAID THE ENTIRE AMOUNT OF RS.5 CRO RES TO THE FILM DISTRIBUTOR EVEN THOUGH PUBLICITY TO THE ASSESSEES PROJECT WAS GIVEN IN THE TELECAST OF ONLY ONE FEATURE FILM. THE AO, THEREFO RE, DISALLOWED 50% OF THE PAYMENT MADE TO THE FILM DISTRIBUTED. 5.1. ON APPEAL, IT WAS CONTENDED BEFORE THE CIT(A) THAT THE ENTIRE EXPENDITURE WAS RELATABLE TO THE YEAR IN QUESTION A S PUBLICITY TO THE PROJECT ITA NO.1141& 1183/B/08 PAGE 4 OF 17 WAS GIVEN IN BOTH THE FEATURE FILMS DURING THE YEAR AND, HENCE, THE AO SHOULD HAVE ALLOWED THE EXPENDITURE AS CLAIMED. 5.2. AFTER DUE CONSIDERATION OF THE ASSESSEES VER SION AS WELL AS THE REMAND REPORT OF THE AO, THE LD. CIT(A) WAS OF THE VIEW THAT 5THE EXPENSE RELATES TO PAYMENT OF RS.5 CROR ES TO GEMINI FILM FOR ADVERTISING THE PROJECT IN THE TWO FILMS PRODUCED BY THEM. THE TWO ASPECTS ARISING FROM THE APPELLAN TS CLAIM AND DISCUSSED IN THE REMAND REPORT IS WHETHER THE ALLOW ANCE OF EXPENDITURE IS TO BE DEFERRED TO THE YEAR IN WHICH REVENUE IS REALIZED (PROJECT COMPLETION METHOD) OR NOT AND SEC ONDLY IF SUCH EXPENDITURE WAS TO BE ALLOWED IN THE CURRENT YEAR T HEN WHETHER ONLY 50% OF SUCH EXPENDITURE IS TO BE DISALLOWED U/ S 37(1). GOING BACK TO THE FIRST ISSUE, IT IS NOW SETTLED THAT THE PROPER SYSTEM OF ACCOUNTING IN THIS CASE BEING FOLLOWED BY THE APPEL LANT ALSO IS MERCANTILE. THEREFORE, WHATEVER EXPENDITURE IS INC URRED WILL HAVE TO BE EXAMINED WHETHER IT IS ALLOWABLE OR NOT U/S 3 7(1). GOING BY THE FACT THAT AO HAS POINTED OUT THAT OUT OF THE TW O FILMS VIZ. SHANKAR DADA AND UPPI DADA, ONLY SHANKAR DADA WAS R ELEASED. THE OTHER FILM UPPI DADA WAS RELEASED ONLY ON 3/2/0 6, THEREFORE THE ENTIRE EXPENDITURE OF RS. FIVE CRORE CANNOT BE HELD TO HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY F OR THE PURPOSES OF BUSINESS OR PROFESSION. ACCORDINGLY, THE EXPEN SES ALLOWABLE WOULD BE RESTRICTED TO 50% I.E., TO AN AMOUNT OF RS .2.5 CRORE ONLY. THE ACTION OF THE AO IN RESTRICTING IT TO 50% IS IN ORDER AND, THEREFORE, AN AMOUNT OF RS.2.5 CRORE OUT OF RS.FIVE CRORE WOULD BE DISALLOWED U/S 37(1) FOR THE RELEVANT YEAR. 6. AGGRIEVED, THE ASSESSEE HAS COME UP WITH THE PR ESENT APPEAL. THE LD. A R REITERATED MORE OR LESS WHAT H AS BEEN CONTENDED BEFORE THE LD. CIT (A). IN FURTHERANCE, THE SUBMISS IONS OF THE LD. A R ARE SUMMARIZED AS UNDER: (I) AS THE ASSESSEE WAS INTERESTED IN PROJECTING THE PR OJECT FOR SUCCESSFUL COMMERCIAL SALE, IT HAD APPROACHED GEMIN I FILM CIRCUIT [GFC] FOR DISPLAY OF THE ASSESSEES PROJECT IN THE FILMS PRODUCED BY GFC, ESPECIALLY ITS LOGO OF THE PROJECT IS DISPLAYED IN THE FILM UPPI DADA MBBS THROUGH ITS FILM SONG AND A LSO IN THE CINEMA HALL/THEATRE IN SELECT CITIES OF KARNATAKA; ITA NO.1141& 1183/B/08 PAGE 5 OF 17 - THERE WILL BE A DISPLAY OF THE ASSESSEES PROJECT A ND ITS LOGO WHEREVER THE SONG WAS DISPLAYED AND ALSO BY WAY OF EXHIBITING THE PROJECT IN THE THEATRES WHERE THESE FILMS RUN; - A SIMILAR ADVERTISING WAS ALSO MADE IN SHANKAR DADA MBBS PRODUCED BY GFC WHICH WAS TO BE CIRCULATED IN AP; - ADEQUATE PUBLICITY TO THE PROJECT OF THE ASSESS IS TO BE GIVEN AND SUCH EXPENDITURE IS DEFINITELY A REVENUE EXPEND ITURE INCIDENTAL TO THE BUSINESS OF THE ASSESSEE; (II) THE AO HAD FAILED TO APPRECIATE THAT THE EXPENDITUR E HAD NO RELEVANCE TO THE WORK-IN-PROGRESS AS THIS EXPENDITU RE WAS NOT INCURRED TOWARDS THE COST OF THE PROJECT; - THIS EXPENDITURE WAS NO RELATION TO THE DEVELOPMENT AL ACTIVITIES OF THE PROJECT. THE MERE FACT THAT THE BUSINESS PROMOTION EXPENDITURE DID NOT RESULT IN INCOME DURI NG THE RELEVANT YEAR WAS OF NO CONSEQUENCE WITH REGARD TO THE ALLOWANCE OF EXPENDITURE. THE EXPENDITURE WAS INCU RRED TOWARDS BUSINESS PROMOTION WHICH HAS DIRECT NEXUS T O THE BUSINESS OF THE ASSESSEE; - THE PUBLICITY GAINED WOULD PROVIDE ADEQUATE RESPONS E TO THE PROJECT OF THE ASSESSEE WHICH WOULD PROMOTE ITS BUS INESS; - THE EXPENDITURE WAS INCURRED DURING THE RELEVANT PE RIOD AND IRRESPECTIVE OF THE FACT THAT THERE WAS NO INCOME E ARNED ON ACCOUNT OF THE EXPENDITURE, THE EXPENDITURE IS LIAB LE O BE ALLOWED AS A DEDUCTION; - RELIES ON THE CASE LAW OF CIT V. RAJENDRA PRASAD MO ODY (1978) 115 ITR 519 (SC) - THE AO HAD OBSERVED THAT THE FILM SHANKAR DADA MBBS HAD BEEN RELEASED AND THERE WAS ADEQUATE PUBLICITY GENE RATED THROUGH THAT FILM DURING THAT YEAR AND CONSEQUENTLY AT 50% OF THE EXPENDITURE WAS LIABLE TO BE ALLOWED, BUT HAVIN G HELD, HE DEFERRED THE ALLOWANCE, HOLDING THAT THERE WAS ONLY A PARTIAL COMPLIANCE OF THE TERMS AND CONDITIONS OF THE AGREE MENT; - WITH REGARD TO UPPI DADA WHICH WAS RELEASED ONLY ON 3.2.06, IT WAS OBSERVED THAT THE EXPENDITURE INCURRED IN RE LATION TO 50% WAS NOT LIABLE TO BE ALLOWED; (III) SINCE THE ASSESSEE HAD INCURRED THE EXPENDITURE IN THE RELEVANT AY, THE SAME WAS LIABLE TO BE ALLOWED ONLY IN THIS YEAR IRRESPECTIVE OF THE FACT THAT THE ACTUAL PUBLICITY WAS POSTPONED ON ACCOUNT OF DELAY IN PRODUCTION OF THE SAID FILM. 6.1. DURING THE COURSE OF HEARING, THE LD. AR FURNISHED A PAPER BOOK CONTAINING 1 57 PAGES WHICH AMONGST CONTAINI NG COPIES OF (I) ITA NO.1141& 1183/B/08 PAGE 6 OF 17 WRITTEN SUBMISSION FILED BEFORE THE CIT (A), (II) R EMAND REPORT OF THE AO; (III) ASSESSEES REJOINDER; (IV)AGREEMENT BETWEEN THE ASS ESSEE AND GFC ETC. 6.2. ON THE OTHER HAND, THE LD D R WAS OF THE VIEW THAT THE AO HAD INDEED DISCUSSED THE ISSUE AT LENGTH AND ENDORS ED HIS VIEW THAT THE BUSINESS PROMOTION WAS NOT IN THE NATURE OF ENSURIN G THE GENERAL PUBLICITY OF THE COMPANYS NAME, THAT IT WAS A DIRECT EXPENDI TURE INCURRED TO PROPAGATE THE SHANTHINIKETAN PROJECT, THE INCOME FROM WHICH WAS NOT RECOGNIZED FOR THE CURRENT YEAR AS THE ASSESSEE HAD DECIDED TO RECOGNIZE THE INCOME ON COMPLETION OF THE PROJECT AND THUS, T HE AO WAS RIGHT IN CONCLUDING THAT THE EXPENDITURE ENHANCES THE VALUE OF THE PROJECT AND WAS TO BE INCLUDED IN THE VALUE OF THE WORK-IN-PROGRESS , DEFERRING ITS ALLOWANCE TO THE YEAR IN WHICH INCOME FROM THE PROJECT MATERI ALIZES. SHE WAS, THEREFORE, OF THE VIEW THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN ALLOWING THE EXPENDITURE TO THE EXTENT OF RS.2.5 CRORES U/S 37(1 ) OF THE ACT FOR THE REASONS SET-OUT IN HIS IMPUGNED ORDER WHICH IS IN D ISPUTE. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS, SCRUPULOUSLY PERUSED THE RELEVANT RECORDS AND ALSO THE EVIDENCES ADVANCED BY THE LD. A R IN THIS REGARD. 7.1. THE VIEW OF THE AO WAS THAT THE BUSINESS PRO MOTION NOT IN THE NATURE OF ENSURING THE GENERAL PUBLICITY OF THE COMPANYS NAME, THAT IT WAS A DIRECT EXPENDITURE INCURRED TO PROPAGATE THE SHANTHINIKETAN PROJECT, THE INCOME FROM WHICH WAS NOT RECOGNIZED FOR THE CU RRENT YEAR AS THE ASSESSEE HAD DECIDED TO RECOGNIZE THE INCOME ON COM PLETION OF THE PROJECT AND, THUS, THE EXPENDITURE ENHANCES THE VALUE OF TH E PROJECT AND WAS TO BE ITA NO.1141& 1183/B/08 PAGE 7 OF 17 INCLUDED IN THE VALUE OF THE WORK-IN-PROGRESS, DEFE RRING ITS ALLOWANCE TO THE YEAR IN WHICH INCOME FROM THE PROJECT MATERIALIZES. 7.2. THE VIEW OF THE AO HAS BEEN COUNTERED BY THE ASSESSEE THAT THIS EXPENDITURE HAD NO RELATION TO THE DEVELOPMENT AL ACTIVITIES OF THE PROJECT. THE MERE FACT THAT THE BUSINESS PROMOTION EXPENDITURE DID NOT RESULT IN INCOME DURING THE RELEVANT YEAR WAS OF NO CONSEQUENCE WITH REGARD TO THE ALLOWANCE OF EXPENDITURE. THE EXPEND ITURE WAS INCURRED TOWARDS BUSINESS PROMOTION WHICH HAD DIRECT NEXUS T O THE BUSINESS OF THE ASSESSEE; THAT THE PUBLICITY GAINED WOULD PROVIDE A DEQUATE RESPONSE TO THE PROJECT OF THE ASSESSEE WHICH WOULD PROMOTE ITS BUS INESS; THAT THE EXPENDITURE WAS INCURRED DURING THE RELEVANT PERIOD AND IRRESPECTIVE OF THE FACT THAT THERE WAS NO INCOME EARNED ON ACCOUNT OF THE EXPENDITURE, THE EXPENDITURE IS LIABLE TO BE ALLOWED AS A DEDUCTION. 7.2.1. CLAUSE 10 OF THE AGREEMENT ENTERED INTO BET WEEN THE ASSESSEE AND GFC ON 14.6.2004 WHICH SUBSCRIBES THAT THE DURATION OF THIS AGREEMENT WILL BE FOR ONE YEAR FROM THE DATE O F RELEASE OF EACH VERSION SUBJECT TO WHAT IS OTHERWISE HEREIN PROVIDED AND ON THE EXPIRATION OF THE SAID PERIOD THIS AGREEMENT WILL STAND TERMINATED UN LESS THE PERIOD IS EXTENDED BY THE MUTUAL CONSENT OF THE PARTIES HERET O. [SOURCE: P 56 OF PB AR]. 7.2.2. AFTER CONSIDERING THE CONTENTIONS OF BOTH S IDES, THE CIT(A) AVERRED THAT THE TWO ASPECTS ARISING FROM THE ASSES SEES CLAIM AND DISCUSSED IN THE REMAND REPORT IS WHETHER THE ALLOW ANCE OF EXPENDITURE IS ITA NO.1141& 1183/B/08 PAGE 8 OF 17 TO BE DEFERRED TO THE YEAR IN WHICH REVENUE IS REAL IZED (PROJECT COMPLETION METHOD) OR NOT AND SECONDLY IF SUCH EXPENDITURE WAS TO BE ALLOWED IN THE CURRENT YEAR THEN WHETHER ONLY 50% OF SUCH EXPENDIT URE IS TO BE DISALLOWED U/S 37(1) OF THE ACT. CONSIDERING THAT THE ACCOUNT ING BEING FOLLOWED BY THE ASSESSEE WAS MERCANTILE, WHATEVER EXPENDITURE WAS I NCURRED WAS TO BE EXAMINED WHETHER IT IS ALLOWABLE OR NOT U/S 37(1). GOING BY THE FACT THAT AO HAS POINTED OUT THAT OUT OF THE TWO FILMS VIZ. SHANKAR DADA MBBS AND UPPI DADA MBBS, ONLY SHANKAR DADA MBBS WAS RELE ASED AND THE OTHER FILM UPPI DADA WAS RELEASED ONLY ON 3/2/06, T HE ENTIRE EXPENDITURE OF RS.FIVE CRORE CANNOT BE HELD TO HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OR PROFESS ION. ACCORDINGLY, THE EXPENSES ALLOWABLE WAS RESTRICTED TO 50% I.E., TO A N AMOUNT OF RS.2.5 CRORE ONLY. HE, THUS, CONCLUDED THAT THE ACTION OF THE A O IN RESTRICTING IT TO 50% WAS IN ORDER AND, THEREFORE, AN AMOUNT OF RS.2.5 CR ORES OUT OF RS.5 CRORES CLAIMED WAS DISALLOWED U/S 37(1) FOR THE RELEVANT A SSESSMENT YEAR UNDER DISPUTE. 7.2.3. WITH RESPECTS, WE HAVE PERUSED THE RULING O F THE HONBLE SUPREME COURT IN THE CASE OF CIT V. RAJENDRA PRASAD MOODY REFERRED SUPRA, WHEREIN THE ISSUE BEFORE THE HONBLE COURT W AS THAT WHETHER INTEREST PAID ON MONEY BORROWED FOR INVESTING IN SH ARES IS DEDUCTIBLE WHEN NO DIVIDENDS ARE RECEIVED?, AND RULED THAT IT IS DEDUCTIBLE UNDER S. 57(III) OF IT ACT 1961. THIS, IN OUR VIEW, HAS NO RELEVANCE TO THE ISSUE ON HAND. 7.2.4. IN AN OVER ALL CONSIDERATION OF THE FACTS O F THE ISSUE, ASSESSEES CONTENTIONS, STAND OF THE REVENUE AND AL SO WELL REASONING THE ITA NO.1141& 1183/B/08 PAGE 9 OF 17 LD. CIT (A), BESIDES THE CLAUSE 10 OF THE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND GFC REFERRED SUPRA, WE ARE OF THE FIRM VIEW THAT SINCE THE LD. CIT(A) ARRIVED AT A CONCLUSION WHICH HAS TH E BACKING OF THE RELEVANT PROVISIONS OF THE ACT, NO INTERFERENCE IS CALLED FOR AT THIS STAGE. IT IS ORDERED ACCORDINGLY. 8. LET US NOW ADDRESS TO THE GRIEVANCE OF THE REVE NUE. TREATING OF RS.14.27 CRORES AS BUSINESS EXPENDITU RE U/S 37(1) OF THE ACT : . 8.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD ENTERED INTO AN AGREE MENT WITH UNITECH LTD. BY WHICH THE ASSESSEE HAD RELINQUISHED THE RIGHT OF DEVELOPMENT OF A PORTION OF THE LAND AND IN LIEU OF THE ABOVE THE A SSESSEE RECEIVED RS.23.22 CRORES. HE HAD FURTHER NOTICED THAT UNITECH LTD. DI D NOT TAKE ANY DEVELOPMENT WORK WHEREAS THE ASSESSEE CONSTRUCTED A CONVENTION CENTRE AND A HOTEL BUILDING CONSTRUCTION WAS COMMENCED ON THE PORTION OF THE PROPERTY BELONGING TO IT. BY VIRTUE OF AN AGREEMEN T OF CANCELLATION DATED: 28/2/2005, THE ASSESSEE REGAINED THE POSSESSION OF THE LAND FROM UNITECH LTD BY REVOKING THE POA GIVEN IN FAVOUR OF UNITECH LTD. IN RESPECT OF WHICH RS.37.5 CRORES WAS PAID AS CONSIDERATION IN INSTALL MENTS. RS.14.27 CRORES WAS THE DIFFERENCE BETWEEN THE SUM OF RS.37.50 CRO RES PAID TO UNITECH LIMITED AND THE AMOUNTS OF RS.23.20 CRORES RECEIVED FROM UNITECH LTD. EARLIER BY THE ASSESSEE. IN ITS P & L ACCOUNT, THE ASSESSEE HAD DEBITED RS.14.27 CORES AS COMPENSATION PAID TO UNITECH LTD. IN LIEU OF CANCELLATION OF THE CONTRACT. OBSERVING THAT THE ASSESSEE HAD I NCOMES FROM VARIOUS SOURCES, BESIDES FROM INTEREST AND MISCELLANEOUS SE RVICE AND THAT NO ITA NO.1141& 1183/B/08 PAGE 10 OF 17 PORTION OF THE PAYMENT OF RS.37.5 CRORES WAS ATTRIB UTABLE TO EARNING THE INCOME FROM SUCH SOURCES, THE AO DISALLOWED RS.14. 27 CRORES U/S 37(1) OF THE ACT AS THE EXPENDITURE CLAIMED WAS NOT LAID OUT WHOLLY AND EXCLUSIVELY TO EARN THE BUSINESS INCOME OF THE YEAR. 8.1.1 ON APPEAL, AFTER DUE CONSIDERATION OF THE AS SESSEES CONTENTION AS WELL AS THE REMAND REPORT OF THE AO, THE LD. CIT(A) HAS OBSERVED THUS 3.5THE FACTS IN THIS REGARD IS THAT THE APP ELLANT AS PART OF ITS ACTIVITY OF PROPERTY DEVELOPMENT HAS SI GNED INITIALLY AN AGREEMENT (17/5/96) WITH UNITECH LTD. TO DEVELOP TH E LAND OWNED BY IT UNDER A PROJECT. THEN DUE TO CERTAIN DIFFERENCES I N JOINT DEVELOPMENT A SECOND AGREEMENT (18/11/99) IS ENTERED INTO BETWEEN THE APPELLANT AND UNITECH. AGAIN THERE IS A DIFFERENCE OF OPINION AN D FINALLY A THIRD AGREEMENT (28/2/05),THE MATTER IS RESOLVED. THIS A GREEMENT IS BASICALLY A CANCELLATION AGREEMENT I.E., A CANCELLA TION SPECIFICALLY OF ALL THE EARLIER OBLIGATION WHICH COULD ONLY MEAN TH E OBLIGATION THAT SUBSISTED AFTER THE FIRST AGREEMENT DATED 18/11/99. BY THIS CANCELLATION AGREEMENT, THE APPELLANT HAS RELIEVED HIMSELF OF IT S OBLIGATION UNDER THE EARLIER AGREEMENT. THUS AFTER ADJUSTING THE AD VANCE ALREADY RECEIVED BY IT, THE APPELLANT PAID RS.14.27 CRORES TO UNITECH IN TERMS OF THE CANCELLATION AGREEMENTS AND DID NOT TRANSFER TO UNITECH A PART OF THE LAND WHICH WAS ITS STOCK IN TRADE. THAT LAND IS THE APPELLANTS STOCK-IN-TRADE IS EVIDENCED FROM A PERUSAL OF THE A PPELLANTS BALANCE SHEET DATED 31/3/05. NOW, THEREFORE BY THE CANCELL ATION AGREEMENT, THE APPELLANT GOT RELIEVED OF IS OBLIGATION TO DELIVER PART OF ITS STOCK IN TRADE TO UNITECH. THE OBVIOUS QUESTION WHICH NEEDS AN ANSWER HERE IS WHAT IS THE NATURE OF EXPENDITURE? LAND IS STOCK-I N-TRADE IN THE HANDS OF THE APPELLANT. IN FACT, THE APPELLANT WITH A VI EW TO DEVELOP THE PROPERTY AND TO COMMERCIALLY EXPLOIT IT ENTERED INT O AN AGREEMENT WITH UNITECH. THIS WAS CLEARLY A COMMERCIAL ACTIVITY CA RRIED BY THE APPELLANT WHEN THE AGREEMENT FOR DEVELOPMENT WAS EX ECUTED WITH UNITECH AND ALSO WHEN ADVANCE WAS TAKEN FROM UNITEC H. FINALLY BECAUSE OF DISPUTE THE APPELLANT RETURNED THE ADVAN CE AND IN ADDITION PAID RS.14.27 CRORES TO TERMINATE THE EARLIER AGREE MENT OBLIGATIONS AND TO HAVE UNENCUMBERED LAND HOLDING. THIS EXPENS E THEREFORE IS IN THE NATURE OF A BUSINESS EXPENSE AS THE SAME HAS BE EN PAID BY THE APPELLANT TO HAVE HIS STOCK-IN-TRADE UNENCUMBERED . I AM THEREFORE INCLINED TO AGREE WITH THE AO AND THE ADDL. CIT WHO IN THE REMAND REPORT DATED 21/5/08 HAVE STATED THAT THE P ROPERTY WAS ITA NO.1141& 1183/B/08 PAGE 11 OF 17 STOCK-IN-TRADE OF THE COMPANY, AND THE LOSS WAS INC URRED IN PERFECTING THE TITLE OF THE LAND. IT IS THEREFORE ADMISSIBLE UNDER SECTION 37(1). THE EXPENDITURE INCURRED BEING A REVENUE EXPENDITUR E IS REQUIRED TO BE ALLOWED IN THE YEAR IN WHICH IT W AS INCURRED AND AS PER THE MERCANTILE SYSTEM THE CLAIM OF EXPENDITURE CANNOT BE SHIFTED TO ANY OTHER LATER YEARS. IN MY OPINION THE EXPENDITU RE IS TO BE ALLOWED FOR THE AY 2005-06 SINCE THE AGREEMENT WAS EXECUTED DURING THE RELEVANT YEAR AND THE PAYMENTS WERE ALSO MADE IN TH E RELEVANT YEAR.. 9. DISILLUSIONED WITH THE FINDING OF THE LD. CIT (A), THE REVENUE HAS COME UP BEFORE US WITH THIS APPEAL. THE SUBSTA NCE OF THE ARGUMENT OF THE REVENUE IS SUMMARIZED AS UNDER: (I) THE LD. CIT(A) HAD FAILED TO APPRECIATE THE PRINCIP LES OF PROJECT COMPLETION METHOD HIGHLIGHTED BY THE AO IN THE ASSE SSMENT ORDER, WHILE DISALLOWING THE EXPENSES CLAIMED BY THE ASSES SEE TOWARDS CONTRACTUAL OBLIGATION OF RS.14.27 CRORES; HE OUGH T TO HAVE APPRECIATED THAT UNDER THE PROJECT COMPLETION METH OD THE ASSESSEE WAS NOT ENTITLED TO CLAIM THE EXPENDITURE WHEN THERE WAS NO REALIZATION OF REVENUE BY THE ASSESSEE FOR THE P ERIOD RELEVANT TO THE AY 05-06; & (II) THE CIT(A) HAS ERRED IN ARRIVING AT HIS FINDINGS AF TER WRONGLY OBSERVING THAT IN THE REMAND REPORT DATED 21.5.2008 , THE ASSESSING OFFICER AND THE ADDL. CIT HAD STATED THAT THE PROPERTY WAS STOCK IN TRADE OF THE COMPANY AND THE LOSS WAS INCURRED IN PERFECTING THE TITLE OF THE LAND. IT IS THEREFORE ADMISSIBLE UNDER SECTION 37(1) IN PARA 3.5 ON PAGE 5 OF THE APPELLA TE ORDER. 9.1. DURING THE COURSE OF HEARING, THE LD. D R CAM E UP WITH A VOLUMINOUS PAPER BOOK CONTAINING 1 135 PAGES WHIC H CONSISTS OF, AMONG OTHERS, COPIES OF (I) SHAREHOLDERS AGREEMENT, (II) BOARDS RESOLUTION, (III) AGREEMENT DT.18.11.99, (IV) JOINT DEV. AGREEMENT DT .5.2.05, (V) P & L ACCOUNT, BALANCE SHEET ETC. TO DRIVE HOME THE REVE NUE POINTS OF VIEW. ITA NO.1141& 1183/B/08 PAGE 12 OF 17 9.1.1. EQUALLY, THE LD. A R WAS VEHEMENT IN HIS RE SOLVE THAT THE LD. CIT(A), AFTER ANALYZING THE ISSUE IN DEPTH, EXTENSI VELY REFERRING TO THE VARIOUS AGREEMENTS ENTERED INTO WITH UNITECH LTD AND COMPREHENSIVELY QUOTING THE SEQUENCE UNDER WHICH THE PROJECT FELL T HROUGH ETC., CAME TO A CONCLUSION IN A JUDICIOUS MANNER THAT THE EXPENDITU RE CLAIMED BY THE ASSESSEE IS TO BE ALLOWED FOR THE AY UNDER DISPUTE IN HIS FINDING WHICH REQUIRES NO INTERFERENCE AT THIS STAGE. 9.2. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMIS SIONS, PERUSED THE RELEVANT RECORDS AND EVIDENCES PRODUCED BY EITH ER PARTY IN THE SHAPE OF PAPER BOOKS. 9.2.1 ON A GLIMPSE OF THE ASSESSMENT ORDER, WE FIN D JUSTIFICATION THE WELL REASONING OF THE AOS CONCLUSION THAT THE EFFECT OF THE CANCELLATION AGREEMENT DATED: 28.2.2005 WAS TO FREE THE TITLE OF THE LAND FROM THE ENCUMBRANCE CREATED IN FAVOUR OF UNITECH. TAKING I NTO CONSIDERATION THE SUBSTANTIAL INCREASE IN THE VALUE OF LAND IN INTERV ENING PERIOD BETWEEN 1999 AND 2005, THE PREMIUM OF RS.14.27 CRORES PAID TO UN ITECH WAS TOWARDS CREATING A CLEAR TITLE FOR THE LAND AND WAS TO BE D IRECTLY ATTRIBUTED TOWARDS INCREASE IN THE VALUE OF THE LAND. HE WENT FURTHER TO CEMENT HIS STAND THAT - (ON PAGE 3) CONSEQUENTLY, THE ASSESSEE HAS INITIATED A PROJECT PRESTIGE SHANTHINIKETAN TO DEVELOP THE SAME LAND. FOR THIS PURPOSE, THE ENTIRE PROPERTY CONSISTING OF LAND AND BUILDING WERE CONVERTED TO STOCK-IN-TRADE. THE VALUE OF THE LAND AND ALL EXPENSES PERTAINING TO THE LAND HAD BEEN RECOGNIZED AS WORK- IN-PROGRESS ON THE GROUND THAT INCOME FROM THE PROJECT IS RECOGNIZ ED ON COMPLETION OF THE PROJECT ON THE LAND. THE AMOUNT OF RS.14.27 CRORES WHICH WAS PAID TO UNITECH LTD IS A DIRECT EX PENDITURE ATTRIBUTABLE TO THE INCREASE IN THE VALUE OF THE LA ND. IT SHOULD ALSO BE RECOGNIZED AS PROJECT EXPENDITURE INCURRED TOWAR DS PRESTIGE SHANTHINIKETAN AND BE ACCOUNTED (FOR) TO INCREASE T HE VALUE OF ITA NO.1141& 1183/B/08 PAGE 13 OF 17 WORK-IN-PROGRESS.THEREFORE, NO PORTION O F THE PAYMENT OF RS.37.5 CRORES IS ATTRIBUTABLE TO EA RNING THE INCOME FROM THESE SOURCES. THE EXPENDITURE THUS INCURRED IS RIGHTLY A DIRECT ATTRIBUTE TO THE COST OF SHANTHINIKETAN PROJ ECT. IT IS TO BE ADDED ON TO INCREASE THE VALUE OF THE WORK-IN-PROGR ESS OF SHANTHINIKETAN PROJECT. THE ASSESSEE IS ENTITLED T O SET OFF THE EXPENDITURE IN THE YEAR IN WHICH REVENUE IS REALIZE D FROM THE WORK- IN-PROGRESS. THE EXPENDITURE OF RS.142765043 IS DI SALLOWED U/S 37(1) AS IT IS NOT LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY TO EARN THE BUSINESS INCOME FOR THE CURRENT YEAR. 9.2.2. HOWEVER, DUE TO MISCONCEPTION ON THE PART O F THE LD. CIT (A) [OF THE REMAND REPORT OF THE AO] WHICH LED HIM TO A RRIVE AT A CONCLUSION THAT - (AT THE COST OF REPETITION) I AM THEREFORE INCLINED TO AGREE WITH THE AO AND THE ADDL. CIT WHO IN THE REMAND REPORT DATED 21/5/0 8 HAVE STATED THAT THE PROPERTY WAS STOCK-IN-TRADE OF THE COMPANY, AND THE LOSS WAS INCURRED IN PERFECTING THE TITLE OF THE LAND. IT IS THEREFORE ADMISSIBLE UNDER SECTION 37(1). WHEREAS ON A CLOSE SCRUTINY OF THE SAID REMAND REPO RT [SOURCE: PAGES 44 45 OF PB AR], WE FIND THAT THE AO HAD INDEED NARRAT ED THE POINTS RAISED BY THE ASSESSEE THUS - THE FOLLOWING POINTS HAVE BEEN RAISED BY THE ASSESS EE AND REFERRED FOR COMMENTS IN THIS CASE: CLAIM OF ALLOWANCE OF RS.14.27 CRORES AS REVENUE EXPENDITURE THE PROPERTY WAS STOCK-IN-TRADE OF THE COMPANY, AND THE LOSS WAS INCURRED IN PERFECTING THE TITLE OF THE LAND. IT I S THEREFORE ADMISSIBLE UNDER S.37(1). HOWEVER, THE CONTENTION IS THE YEAR IN WHICH THE AMOUNT IS TO BE ALLOWED AS REVENUE EXPENDITURE.. FOR THE ABOVE POINT RAISED BY THE ASSESSEE, THE AO HAD GIVEN HIS COMMENTS THUS - (PAGE 2) IT MAY ALSO BE NOTED THAT DURING THE YEAR THE ASSESSEE EARNED REVENUE FROM WORKS CONTRACT. THE TRUE PROFI TS OF THE WORKS CONTRACT WILL NOT BE REFLECTED IF EXPENDITURE OF AN OTHER PROJECT FROM ITA NO.1141& 1183/B/08 PAGE 14 OF 17 WHICH NO REVENUE IS RECOGNIZED, IS CHARGED OFF AGA INST THE WORKS CONTRACT REVENUE. IN THE ABOVE CIRCUMSTANCES, EXPENDITURE IN THE SHANTHINIKETAN PROJECT HAS BEEN DEFERRED FOR THE CURRENT YEAR. TH E ASSESSEE IS PERMITTED TO CLAIM EXPENDITURE IN THE YEAR IN WHICH REVENUE FROM SHANTHINIKETAN PROJECT IS RECOGNIZED. 9.2.3. DURING THE COURSE OF HEARING, THE LD. D R D REW THE ATTENTION OF THIS BENCH TO THE FACT THAT A MISC. PETITION WAS PREFERRED BY THE AO BEFORE THE CIT (A)-I ON 6.10.2008 WITH A PLEA THAT THE ORDER OF THE CIT(A) MISQUOTED THE REMAND REPORT OF AO AS WELL AS CONVEY ING THE AGREEMENT OF THE ASSESSING AUTHORITIES WITH ASSESSEES CLAIM. T HE REMARK OF THE CIT (A) REQUIRES TO BE DELETED AS IT WAS FACTUALLY INCORREC T. 9.2.4. AFTER DUE CONSIDERATION OF THE REVENUES P LEA AND ALSO THE CONTENTION OF THE ASSESSEES AR WHO WAS PRESENT DUR ING THE COURSE HEARING OF THE MP, THE CIT(A)-I, VIDE HIS ORDER IN MP NO.2/DC 11(2)/A-I/07- 08 DATED: 10.9.2009, HAD OBSERVED THUS A PERUSAL OF THE REMAND REPORT SHOWS THAT THE AO HA S OFFERED HIS COMMENTS FROM THE ISSUES RAISED BY THE APPELLANT ON LY IN THE LAST PARAGRAPH. THIS IS REPRODUCED BELOW: BOTH THESE POINTS HAVE BEEN ADEQUATELY DISCUSSED IN THE ASSESSMENT ORDER AND AS NO FRESH FACTS HAVE BEEN BR OUGHT OUT BY THE ASSESSEE, A DECISION MAY BE TAKEN ON THE MERITS OF THE CASE THEREFORE, THE CONTENTION OF THE MISCELLANEOUS PETI TION IS FOUND CORRECT AND THE OBSERVATION OF THE CIT APPEALS) IS BEING DELETE D HEREWITH. 9.2.5 IN AN OVERALL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AS DELIBERATED UPON IN THE FORE-GOING PARA GRAPHS, WE ARE OF THE UNANIMOUS VIEW THAT THE LD. CIT (A) WHILE DECIDING THIS ISSUE HAD MADE A ITA NO.1141& 1183/B/08 PAGE 15 OF 17 FAUX PAS AND MISTOOK THE ASSESSEES CONTENTION AS THAT OF TH E REVENUES ENDORSEMENT WHICH HAD, PERHAPS, INFLUENCED THE CIT (A) TO ARRIVE AT A CONCLUSION THAT THE EXPENDITURE WAS TO BE ALLOWED F OR THE AY 2005-06. THUS, THE ACTION OF THE CIT (A), IN OUR VIEW, LED T O MISCARRIAGE OF JUSTICE. THE AO HAS RIGHTLY OBSERVED THAT THE INCOME FROM CO NSTRUCTION CONTRACTS DISCLOSED IN ITS RETURN OF INCOME CONSISTS OF MANAG EMENT DEVELOPMENT FEES ARISING FROM EXECUTION OF A TURN KEY CIVIL CONTRACT FOR CONSTRUCTION OF A CAMPUS ON BEHALF OF M/S. TESCO WHICH WAS EXECUTED D URING THE COURSE OF THE YEAR. THE PAYMENT OF RS.37.5 CRORES IS NOT ATT RIBUTABLE TO THIS INCOME. THIS EXPENDITURE IS ATTRIBUTABLE TO THE PROJECT SHA NTHINIKETAN SINCE IT WAS INCURRED TO PERFECT THE TITLE OF THE LAND ON WHICH THIS PROJECT WAS TO BE IMPLEMENTED. ON ACCOUNTING SUCH PROJECTS, THE PRO JECTS COST METHOD HAS TO BE FOLLOWED AS LAID DOWN IN THE ACCOUNTING STAND ARDS 7 BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. BEING SO, THIS EXPENDITURE OF RS.37.5 CRORES (VIZ., NET AMOUNT RS.14,27,65,043) HAS TO BE ADDED TO THE WORK IN PROGRESS OF THE PROJECT AS RIGHTLY FOUND BY THE AO. THE REVISED (2002) AS 7; RELATES TO CONSTRUCTION CONTRACTS; ISSUED BY THE COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND CAME INTO EFFECT IN RESPECT OF ALL CONTRACTS ENTERED INTO DURING ACCOUNTING PERIODS ON OR AFTER 1.4.2003. THE PRIMARY OBJECT OF AS 7 IS THE ALLOCATION OF CONTRAC T REVENUE AND CONTRACT COSTS TO THE ACCOUNTING PERIODS IN WHICH CONSTRUCTI ON WORK IS PERFORMED. THIS STATEMENTS OF ACCOUNTING STANDARDS USES THE RE COGNITION CRITERIA ESTABLISHED IN THE FRAME WORK OF THE PREPARATION AN D PRESENTATION OF THE FINANCIAL STATEMENTS TO DETERMINE WHEN CONTRACT REV ENUE AND CONTRACT COSTS SHOULD BE RECOGNIZED AS REVENUE AND EXPENSES IN THE STATEMENT OF ITA NO.1141& 1183/B/08 PAGE 16 OF 17 PROFIT & LOSS. FURTHER AS 7 COVERS THE CONTRACTS F OR THE RENDERING OF SERVICES WHICH ARE DIRECTLY RELATED TO THE CONSTRUC TION OF AN ASSET I.E., THOSE FOR THE SERVICES OR PROJECT MANAGERS ETC. AS IN THE CASE ON HAND. AS 7 STIPULATE THAT ANY CLAIM FROM THIRD PARTIES COULD B E INCLUDED IN THE COST OF THE PROJECT IF IT IS ATTRIBUTABLE TO THE PROJECT. THEREFORE THE AMOUNT OF RS.14.27 CRORES PAID FOR THE RELEASE OF THE LAND FR OM LEGAL COMPLEXITIES, ON WHICH THE PROJECT SHANTHINIKETAN WAS TO BE EXECUTED , WILL DEFINITELY FORM PART OF THE COST OF THE PROJECT SHANTHINIKETAN AND IT IS HAS TO BE RECOGNIZED AS SUCH. THIS EXPENDITURE OF RS.14.27 CRORES CANNO T BE WRITTEN OFF AGAINST PROFIT DERIVED FROM OTHER CONTRACTS AS THE ASSESSEE HAS CLAIMED. NEEDLESS TO MENTION THAT AS 7 IS MANDATORY IN RESPECT OF FIN ANCIAL STATEMENTS AUDITED U/S. 44AB OF THE INCOME-TAX ACT, 1961, AS P RESCRIBED BY THE COUNCIL OF INSTITUTE OF CHARTERED ACCOUNTANTS OF IN DIA. 9.2.6. WELL, TO PUT IT IN A NUT-SHELL, WE REAFFIRM THE AOS STAND THAT, THE ASSESSEE IS ENTITLED TO SET OFF THE EXPENDITURE IN THE YEAR IN WHICH REVENUE IS REALIZED FROM THE WORK-IN-PROGRESS. IN ESSENCE, THE FINDING OF THE AO IS IN ORDER WHICH REQUIRES NO INTERFERENCE. IT IS ORDERED ACCORDINGLY. 10. IN THE RESULT: (I) THE ASSESSEES APPEAL IS DISMISSED; & (II) THE REVENUES APPEAL IS ALLOWED. ITA NO.1141& 1183/B/08 PAGE 17 OF 17 PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MARCH, 2010. SD/- SD/- (GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 31 ST MARCH, 2010. DS/- COPY TO: 1. ASSESSEE 2. REVENUE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.