HIGWOOD COMMERICAL DEVELOPERS P.LTD, MUMBAI V. ACIT CEN CIR 13, MUMBAI

ITA 1306/MUM/2015

• Counselvise Citation: 130619914 RSA 2015
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2012-2013
• Appeal Filed On: 05-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR SANTOSH MANKASKARDR
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Principle of natural justice; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 143(3); 153A; 14A; 145; 37; 132

Judgement Text

H IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.1306/ MUM/2015 ( / ASSESSMENT YEAR : 2012-13) M/S HAGWOOD COMMERCIAL DEVELOPERS PVT. LTD., 105/106, PROVOGUE HOUSE, OFF. NEW LINK ROAD, ANDHERI (WEST), MUMBAI 400 053. / V. ACIT, CC -13, OLD CGO, M.K. ROAD, CHURCHGATE, MUMBAI. ./ PAN : AABCH7508Q ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO.1540/ MUM/2015 ( / ASSESSMENT YEAR : 2012-13) DCIT, CC -2(3), ROOM NO. 803, 8 TH FLOOR, OLD CGO ANNEXE BLDG., MUMBAI- 400 020. / V. M/S HAGWOOD COMMERCIAL DEVELOPERS PVT. LTD., 105/106, PROVOGUE HOUSE, OFF. NEW LINK ROAD, ANDHERI (WEST), MUMBAI 400 053. ./ PAN : AABCH7508Q ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO.1308/ MUM/2015 ( / ASSESSMENT YEAR : 2012-13) M/S ALLIANCE MALL DEVELOPERS CO. PVT. LTD., 105/106, PROVOGUE HOUSE, OFF. NEW LINK ROAD, ANDHERI (WEST), MUMBAI 400 053. / V. ACIT, CC -13, OLD CGO, M.K. ROAD, CHURCHGATE, MUMBAI. ./ PAN : AAGCA5970N ( / APPELLANT ) .. ( / RESPONDENT ) ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 2 ./ I.T.A. NO. 1539/ MUM/2015 ( / ASSESSMENT YEAR : 2012-13) DCIT, CC -2(3), ROOM NO. 803, 8 TH FLOOR, OLD CGO ANNEXE BLDG., MUMBAI- 400 020. / V. M/S ALLIANCE MALL DEVELOPERS CO. PVT. LTD., 105/106, PROVOGUE HOUSE, OFF. NEW LINK ROAD, ANDHERI (WEST), MUMBAI 400 053. ./ PAN : AAGCA5970N ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY : SHRI RUSHABH MEHTA REVENUE BY : DR. SANTOSH MANKASKAR,DR / DATE OF HEARING : 10-11-2016 / DATE OF PRONOUNCEMENT : 08-02-2017 / O R D E R PER BENCH THESE ARE BUNCH OF FOUR APPEALS PERTAINING TO TWO DIFFERENT ASSESSEES CONSISTING OF CROSS APPEALS BY THE ASSESSEE AS WELL REVENUE. OUT OF THESE FOUR APPEALS, TWO APPEALS ARE BY TWO DIFFERENT ASSE SSEES BEING ITA NOS. 1306/MUM/2015 AND 1308/MUM/2015 AND OTHER TWO APPEA LS BY THE REVENUE ARE WITH RESPECT TO THOSE TWO DIFFERENT ASS ESSEES BEING ITA NOS. 1540/MUM/2015 AND ITA NO. 1539/MUM/2015 ARE CROSS A PPEALS FOR THE ASSESSMENT YEAR 2012-13 WHICH ARE DIRECTED AGAINST SEPARATE APPELLATE ORDERS BOTH DATED 29-12-2014 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEAL)-48, MUMBAI (HEREINAFTER CALLED THE CIT (A)), THE APPELLATE PROCEEDINGS BEFORE LEARNED CIT(A) HAS ARISEN OUT OF TWO DIFFERENT ASSESSMENT ORDERS BOTH DATED 09-01-2014 PASSED BY LEARNED ACIT , CENTRAL CIRCLE-13, MUMBAI(HEREINAFTER CALLED THE AO) U/S 143(3) OF THE INCOME-TAX ACT,1961(HEREINAFTER CALLED THE ACT). THE ISSUES INVOLVED IN THESE APPEALS ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 3 ARE COMMON; THE SAME HAVE BEEN HEARD TOGETHER AND A RE BEING DISPOSED OF BY THIS SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONV ENIENCE. FIRST WE SHALL TAKE UP REVENUES APPEAL IN ITA NO. 1540/MUM/2015 FOR ASSESSMENT YEAR 2012-13. 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPE AL IN THE MEMO OF APPEAL FILED WITH THE INCOME-TAX APPELLATE TRIBUNAL (HEREINAFTER CALLED THE TRIBUNAL) : (I) 'WHETHER ON FACTS AND CIRCUMSTANCES OF THE CAS E THE LEARNED CIT(A) WAS JUSTIFIED IN DELETING THE DISALLOWANCE O F RS.1,05,70,443/- ON ACCOUNT OF ADMINISTRATIVE & OTH ER OVERHEADS WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAD NOT COMMENCED ITS BUSINESS AS CONSTRUCTION OF MALL WAS NOT STARTED UP TO A.Y.2012-13, THEREFORE, THE EXPENDITURE INCUR RED BY IT SHOULD HAVE BEEN CAPITALIZED UNDER THE HEAD 'CAPITA L WORK-IN- PROGRESS' AS AGAINST REVENUE EXPENDITURE CLAIMED BY THE ASSESSEE? (II) THE APPELLANT CRAVES LEAVE TO ADD, TO AMEND AN D /OR TO ALTER ANY OF THE GROUNDS OF APPEAL, IF NEED BE. (III) THE APPELLANT, THEREFORE, PRAYS THAT ON THE G ROUNDS STATED ABOVE, THE ORDER OF THE CIT(A)-37 , MUMBAI BE SET A SIDE AND THAT OF THE ASSESSING OFFICER RESTORED.' 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS ENGAGED IN CONSTRUCTION OF A MALL AT NAGPUR. A SEARCH AND SEIZ URE ACTION U/S 132 OF THE ACT WAS CARRIED OUT ON 20 TH JANUARY, 2012 AT THE OFFICES OF PROVOGUE INDIA LTD. AND RESIDENCE OF ITS DIRECTORS, ETC.. THE SEA RCH WAS CONCLUDED ON 17 TH MARCH, 2012. DURING THE COURSE OF SEARCH OF THE OF FICE PREMISES OF PROVOGUE (INDIA) LTD. LOCATED AT 105/106, PROVOGUE HOUSE, LO OSE PAPERS FROM SERIAL NO. 9 TO 32 WERE FOUND AND SEIZED , WHICH WERE TRIAL BA LANCES OF FOLLOWING THREE COMPANIES:- ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 4 `(I) ALLIANCE MALL DEVELOPERS CO. PVT. LTD. (II) HAGWOOD COMMERCIAL DEVELOPERS P. LTD. (III) EMPIRE MALL PVT. LTD. THE REVENUE INVOKED SECTION 153C OF THE ACT AFTER S ATISFACTION NOTE HAS BEEN RECORDED AGAINST THE ASSESSEE COMPANY, AS THE DOCUM ENTS BELONGING TO THE ASSESSEE COMPANY HAD BEEN SEIZED IN THE SEARCH ACTI ON IN THE CASE OF M/S PROVOGUE (INDIA) LIMITED. NOTICES DATED 13-08-2013 WERE ISSUED TO THE ASSESSEE U/S 153A R.W.S. 153C OF THE ACT . THE ASSE SSEE FILED RETURN OF INCOME ON 22-08-2013 DECLARING INCOME OF RS.13,29,532/- WH ICH INCLUDED UNDISCLOSED INCOME OF RS. NIL. THE AO , THEREAFTER , ISSUED NOTICES U/S 143(2) ON 23.08.2013 WHICH WAS DULY SERVED ON THE ASSESSEE WHICH WAS FOLLOWED WITH NOTICES U/S 142(1)OF THE ACT ALONG WITH DETAI LED QUESTIONNAIRE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A. O. OBSERVED THAT THE ASSESSEE HAS DEBITED EXPENSES OF RS. 1,08,25,966/- TO P&L ACCOUNT. THE A.O. ASKED THE ASSESSEE AS TO WHY EXPENSES DEBITED TO P &L ACCOUNT SHOULD NOT BE DISALLOWED SINCE THERE WAS NO BUSINESS ACTIVITY AND THERE WAS NO BUSINESS INCOME AND THE PROJECT IS STILL UNDER PROGRESS. TH E ASSESSEE IN REPLY SUBMITTED BEFORE THE AO , SUBMISSIONS DATED 18.11.2 013 WHEREIN IT WAS CONTENDED AS UNDER:- WITH REFERENCE TO YOUR QUERY REGARDING ALLOWABILIT Y OF EXPENSES CLAIMED BY DEBITING TO PROFIT & LOSS ACCOUNT AND NO T TO CAPITALISE IT AS PROJECT COST, WE WISH TO STATE THAT EXPENSES WHICH ARE DIRECTLY ATTRIBUTABLE TO THE PROJECT UNDERTAKEN ARE CLASSIFIED UNDER WORK IN PROGRESS AND THE BALANCE COMMON EXPEN SES ARE DEBITED TO PROFIT & LOSS ACCOUNT. WITH RESPECT TO CLAIMING OF EXPENSES IN THE PROFIT AND LOSS ACCOUNT, WE FURTHER WISH TO SUBMIT AS UNDER:- ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 5 A) THE ASSESSEE COMPANY IS A BUILDER AND DEVELOPER AND IS DEVELOPING A RESIDENTIAL PROJECT AT NAGPUR NAMED 'R OYAL PALMS AND A MALL. B) AS REGARDS ACCUMULATION OF COST IN WIP ACCOUNT, THE COST OF LAND, CONSTRUCTION EXPENSES AND OTHER DIRECT EXPENS ES RELATING TO THE PROJECT ARE ACCUMULATED AND BALANCE EXPENSES BE ING IN NATURE OF PERIOD COST ARE DEBITED TO PROFIT AND LOS S ACCOUNT. IT WILL BE APPRECIATED THAT SUCH A TREATMENT IS SUPPORTED B Y TWO BASIC PRINCIPLES OF DETERMINATION OF BUSINESS INCOME BOT H FOR THE PURPOSES OF ACCOUNTING AS WELL AS INCOME TAX. C) THE FIRST PRINCIPLE IS REGARDING TREATING OF PRO JECT EXPENSES AS CAPITAL WORK-IN-PROGRESS. IT IS PERTINENT TO NOTE T HAT THE ASSESSEE IS IN BUSINESS OF DEVELOPMENT AND CONSTRUCTION OF M ALLS AND RESIDENTIAL PROJECTS. YOUR HONOUR WOULD APPRECIATE THAT THE ASSESSEE HAS ADOPTED THE METHOD OF TREATING ALL THE CONSTRUCTION EXPENSES AS CAPITAL WORK-IN-PROGRESS. THE ADMINISTR ATIVE COSTS ARE NOT ADDED TO CAPITAL WORK-IN-PROGRESS AS THE SA ME IS NOT INCURRED FOR THE PURPOSE OF THE PROJECT. D) SECONDLY, ADMINISTRATIVE COSTS ARE PERIOD COSTS AND CANNOT BE RECOUPED, THEREFORE, ARE DEBITED TO THE PROFIT AND LOSS ACCOUNT OF THE YEAR IN WHICH THEY ARE INCURRED. E) IN REGARD TO THE ABOVE REFERRED EXPENSES DEBITED IN THE PROFIT & LOSS ACCOUNT AS REVENUE EXPENDITURE, IT WILL BE APP RECIATED THAT THEY ARE IN NATURE OF ADMINISTRATIVE EXPENSES. ALSO SOME OF THE EXPENSES LIKE AUDITORS REMUNERATION ARE INCIDENTAL EXPENSES FOR THE FUNCTIONING OF THE ASSESSEE COMPANY. THEY ARE N EITHER EXPENSES INCURRED IN RELATION TO THE PROJECTS UNDER TAKEN NOR THEY CAN BE RECOUPED. AS SUCH THEY HAVE TO BE DEBITED TO PROFIT AND LOSS ACCOUNT AND ARE ALLOWABLE IN THE YEAR IN WHICH THEY ARE INCURRED. F) THE ASSESSEE FURTHER SUBMITS THAT KEEPING IN VIE W THE BUSINESS OF THE ASSESSEE COMPANY, IT IS CONSISTENTLY FOLLOWI NG THE ACCOUNTING STANDARDS AS REQUIRED U/S. 145 OF THE IN COME TAX ACT, 1961. G) IN THIS REGARD, WE WISH TO FURTHER STATE THAT CO ST OF THE CONSTRUCTION CONTRACT NEEDS TO BE ACCOUNTED AS PER THE ACCOUNTING STANDARD -7 ISSUED BY THE ICAI. ACCORDIN G TO THE SAID AS-7, THE CONTRACT COSTS SHOULD COMPRISE OF:- ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 6 (I) COSTS THAT RELATE DIRECTLY TO THE SPECIFIC CONT RACT; (II) COSTS THAT ARE ATTRIBUTABLE TO CONTRACT ACTIVI TY IN GENERAL AND CAN BE ALLOCATED TO THE CONTRACT; AND (III) SUCH OTHER COSTS AS ARE SPECIFICALLY CHARGEAB LE TO THE CUSTOMER UNDER THE TERMS OF THE CONTRACT. H) FURTHER, AS-7 ALSO PROVIDES THAT COSTS THAT CAN NOT BE ATTRIBUTED TO CONTRACT ACTIVITY OR CANNOT BE ALLOCA TED TO A CONTRACT ARE EXCLUDED FROM THE COSTS OF A CONSTRUCTION CONTR ACT. SUCH COSTS INCLUDE: (I) GENERAL ADMINISTRATION COSTS FOR WHICH RE-IMBUR SEMENT IS NOT SPECIFIED IN THE CONTRACT; (II) SELLING COSTS; (III) RESEARCH & DEVELOPMENT COSTS FOR WHICH REIMBU RSEMENT IS NOT SPECIFIED IN THE CONTRACT; AND (IV) DEPRECIATION OF IDLE PLANT AND EQUIPMENT THAT IS NOT USED ON A PARTICULAR CONTRACT. I) THUS, IN VIEW OF THE ACCOUNTING STANDARD-7, THE ASSESSEE COMPANY IN COMPUTING THE CONTRACT COSTS UNDER THE H EAD WORK- IN-PROGRESS' HAS EXCLUDED THE ADMINISTRATIVE EXPENS ES. THESE EXPENSES ARE INCURRED FOR THE PURPOSE OF CARRYING T HE DAY-TO-DAY ACTIVITIES OF THE COMPANY. J) IN VIEW OF THE ABOVE, THE TREATMENT ADOPTED BY T HE ASSESSEE FOR VALUATION OF THE WORK-IN-PROGRESS AND DEBITING THE ABOVE EXPENSES IN THE PROFIT & LOSS A/C AS REVENUE EXPEND ITURE IS CORRECT AND IS IN LINE WITH THE AS-7. K) MOREOVER, WE ALSO WISH TO SUBMIT THAT THE VALUAT ION OF WORK IN PROGRESS IS GOVERNED BY AS-2 'VALUATION OF INVENTOR IES'. AS PER AS-2 ON VALUATION OF INVENTORIES ISSUED BY THE ICAI , COST OF INVENTORIES COMPRISES OF ALL COST OF PRODUCTION, CO ST OF CONVERSION AND OTHER COST INCURRED IN BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION. IT FURTHER SPECIFIC ALLY EXCLUDES ADMINISTRATION AND SELLING & DISTRIBUTION COSTS INC URRED FROM THE COST OF THE INVENTORY. ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 7 L) ALTERNATIVELY, WE ALSO WISH TO STATE THAT THE AS SESSEE IS MAINTAINING ITS ACCOUNTS FOLLOWING THE ACCOUNTING S YSTEM AS CONTEMPLATED IN AS-2 BY THE ICAI DULY AUDITED BY A QUALIFIED CHARTERED ACCOUNTANT. MAINTENANCE OF THE ACCOUNTS A S WELL AS THE VALUATION OF THE WORK-IN-PROGRESS WOULD NOT PREJUDI CE EITHER SIDE. FURTHER , WE WOULD LIKE TO DRAW YOUR KIND ATTENTION TOWARDS THE JUDICIAL PRONOUNCEMENT GIVEN BY THE HON'BLE GUWAHAT I HIGH COURT IN THE CASE OF MKB (ASIA) (P.) LTD. V. CIT , WHEREBY IT HELD AS UNDER:- 'THE INCOME TAX AUTHORITY HAS NO OPTION/JURISDICTIO N TO MEDDLE IN THE MATTER EITHER BY DIRECTING THE ASSESS EE TO MAINTAIN ITS ACCOUNTS IN A PARTICULAR MANNER OR ADO PT A DIFFERENT METHOD FOR VALUING THE WORK-IN-PROGRESS. AN ASSESSEE HAS THE OPTION / LIBERTY TO ADOPT ANY RECO GNIZED METHOD OF ACCOUNTING FOR ITS BUSINESS AND THE INCOM E SHOULD BE COMPUTED IN ACCORDANCE WITH SUCH REGULARL Y MAINTAINED ACCOUNTING SYSTEM. THUS) THE TRIBUNAL WA S NOT RIGHT IN NOT ACCEPTING THE VALUATION OF CLOSING WOR K-IN- PROGRESS IN ACCORDANCE WITH THE ACCOUNTING STANDARD -7. M) THE ASSESSEE FURTHER SUBMITS THAT EVEN AS PER S. 37 READ WITH 43(2) OF THE INCOME-TAX ACT, EXPENSES INCURRED DURI NG THE YEAR HAVE TO BE ALLOWED AS DEDUCTION. THE ABOVE REFERRED EXPENSES HAVE BEEN INCURRED DURING THE YEAR AND ARE ALLOWABL E AS DEDUCTION. WE, THEREFORE WISH TO STATE THAT THE WORK-IN-PROGRE SS HAS BEEN VALUED CORRECTLY AND THE REVENUE EXPENSES HAVE BEEN RIGHTLY CLAIMED IN THE PROFIT & LOSS ACCOUNT DURING THE YEA R UNDER CONSIDERATION. WITHOUT PREJUDICE TO THE ABOVE, IF ANY SUCH EXPENDI TURE, BEING REVENUE IN NATURE, IS DISALLOWED ON ANY GROUND, THE SAID EXPENDITURE AS DISALLOWED HAS TO BE ADDED TO THE CO ST AND ACCORDINGLY THE COST OF THE PROJECT WILL BE INCREAS ED TO THAT EXTENT. THE A.O. REJECTED THE CONTENTIONS OF THE ASSESSEE BY HOLDING AS UNDER:- (I) THE ASSESSEE HAS CLAIMED IN ITS SUBMISSIONS TH AT HE IS A BUILDER & DEVELOPER AND IS DEVELOPING A RESIDENTIAL PROJECT AT ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 8 NAGPUR NAMED 'ROYAL PALMS' AND A MALL. THE CONTENTI ON OF THE ASSESSEE IS NOT CORRECT. (II] IN CLAUSE-B8 APPENDED TO SCHEDULE-13 OF THE AN NUAL ACCOUNTS FOR THE F.Y. 2007-08 AND IN CLAUSE-B9 APPENDED TO S CHEDULE-13 OF THE ANNUAL ACCOUNTS FOR THE F.Y. 2008-09, IT IS MENTIONED AS UNDER: 'THE COMPANY IS CONSTRUCTING A MALL AT NAGPUR. THE EXPENDITURE INCURRED DURING THE CONSTRUCTION PERIOD ARE CLASSIFIED AS PROJECT DEVELOPMENT EXPENDITURE PENDI NG CAPITALIZATION INCLUDED IN CAPITAL WORK-IN-PROGRESS AND WILL BE APPORTIONED TO THE ASSETS ON THE COMPLETION OF T HE PROJECT. ' (III) IN CLAUSE- II9 APPENDED TO SCHEDULE-L0 OF THE ANNUAL ACCOUNTS FOR THE F.Y. 2009-10 AND IN CLAUSE B11 APP ENDED TO SCHEDULE 11 OF THE ANNUAL ACCOUNTS FOR THE F.Y. 201 0-11, IT IS MENTIONED AS UNDER: 'THE COMPANY IS PLANNING A RETAIL CENTRIC MIXED USE D DEVELOPMENT PROJECT AT NAGPUR. THE EXPENDITURE INCU RRED DURING THE CONSTRUCTION PERIOD ARE CLASSIFIED AS PR OJECT DEVELOPMENT EXPENDITURE PENDING CAPITALIZATION INCL UDED IN CAPITAL WORK-IN-PROGRESS AND WILL BE APPORTIONED TO THE ASSETS ON THE COMPLETION OF THE PROJECT. IN CLAUSE (8) OF NOTE 1 OF THE ANNUAL ACCOUNTS FOR THE F.Y. 2011- 12, IT IS MENTIONED AS UNDER:- 'I. EXPENDITURE OF CAPITAL NATURE INCURRED DURING T HE CONSTRUCTION PERIOD IN RESPECT OF A PROJECT BEING E XECUTED BY THE COMPANY IS GROUPED UNDER CAPITAL WORK IN PRO GRESS. SUCH EXPENDITURE WOULD BE CAPITALIZED UPON THE COMMENCEMENT OF COMMERCIAL OPERATIONS OF THE PROJEC T. II. INCIDENTAL EXPENDITURE DURING CONSTRUCTION PERI OD PENDING ALLOCATION INCLUDED IN CAPITAL WORK IN PROG RESS REPRESENTS EXPENDITURE INCURRED IN CONNECTION WITH THE PROJECT WHICH IS INTENDED TO BE CAPITALIZED TO THE PROJECT. EXPENDITURE NOT ATTRIBUTABLE TO PROJECT ARE CHARGED TO REVENUE ACCOUNT. ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 9 III. COMMON EXPENDITURE IS ALLOCATED TO PROJECT COS T ON CERTAIN BASIS AS CONSIDERED APPROPRIATE BY MANAGEME NT. (IV) IT IS EVIDENT FROM THE ABOVE-REFERRED NOTES TO ACCOUNT FORMING PART OF AUDITED ANNUAL ACCOUNTS OF THE ASSESSEE REP RODUCED ABOVE THAT THE ASSESSEE IS NOT A BUILDER & DEVELOPE R. THE ASSESSEE IS ACTUALLY CONSTRUCTING A CAPITAL ASSET A ND THAT IS WHY, THE EXPENDITURE INCURRED BY IT HAVE BEEN CLASSIFIED UNDER THE HEAD 'CAPITAL WORK-IN-PROGRESS' FORMING PART OF 'FI XED ASSETS' IN THE BALANCE SHEET. NOTWITHSTANDING THE ASSESSEE CLA SSIFYING THE RENT AND OTHER RECEIPTS FROM THE IMPUGNED MALL ON I TS COMPLETION, UNDER THE HEAD 'INCOME FROM HOUSE PROPE RTY' OR UNDER THE HEAD 'PROFIT & GAINS FROM BUSINESS OR PRO FESSION', THE MALL WILL REMAIN A CAPITAL ASSET AND NOT ITS STOCK- IN-TRADE. THE OTHER DETAILS FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON 19.09.2013 ALSO CONFIRMS THAT THE ASSESSEE IS NE ITHER A BUILDER & DEVELOPER ENGAGED IN DEVELOPING REAL ESTA TE FOR SALE TO CONSUMERS NOR A CONTRACTOR ENGAGED IN CONSTRUCTION ACTIVITY. THEREFORE, THE CLAIM OF THE ASSESSEE THAT AS-7 AND AS-9 APPLY TO THE FACTS OF THE ASSESSEE IS NOT CORRECT. IN ITS BO OKS OF ACCOUNT THE ASSESSEE ITSELF IS SHOWING THE CONSTRUCTION EXPENSE S INCURRED AS CAPITAL WORK-IN-PROGRESS AND NOT AS WORK-IN-PROGRES S FORMING PART OF INVENTORY OR STOCK-IN-TRADE. (V) IN SUBSEQUENT YEARS, THE ASSESSEE MAY SHOW INCO ME FROM THE MALL UNDER THE HEAD PROFIT & GAINS FROM BUSINESS. B UT DURING THE YEAR, THE BUSINESS HAS NOT BEEN SET-UP AND, THE REFORE, THE EXPENSES INCURRED PRIOR TO SETTING UP OF THE BUSINE SS AND COMMENCEMENT OF THE BUSINESS FALLS UNDER THE CATEGO RY OF PRE-OPERATIVE EXPENSES. THE PROVISO TO SECTION 3 CL EARLY SPECIFY THE 'PREVIOUS YEAR' AS UNDER:- 'PROVIDED THAT, IN THE CASE OF A BUSINESS OR PROFES SION NEWLY SET UP, OR A SOURCE OF INCOME NEWLY COMING IN TO EXISTENCE) IN THE SAID FINANCIAL YEAR) THE PREVIOUS YEAR SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS OR PROFESSION OR, AS THE CASE MAY BE, THE DATE ON WHICH THE SOURCE OF INCOME NEWLY COMES INTO EXISTEN CE AND ENDING WITH THE SAID FINANCIAL YEAR. (VI] FURTHER, ONCE THE EXPENSES LIKE SALARY & WAGES , PROFESSIONAL FEES, MANAGEMENT CONSULTANCY, FOREIGN TRAVELLING, S ITE DEVELOPMENT COSTS, ETC. HAVE BEEN CLASSIFIED BY THE ASSESSEE ITSELF AS PROJECT DEVELOPMENT EXPENSES AND INCLUDED IN CAP ITAL WORK-IN- ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 10 PROGRESS, THERE IS NO REASON AS TO WHY THE ASSESSEE HAS CLAIMED ADMINISTRATIVE AND OTHER EXPENSES LIKE PROFESSIONAL FEES, AUDITORS REMUNERATION, ADVERTISEMENT & BUSINESS PROMOTION, E TC. IN P&L A/C AND FURTHER CLAIMED THE SAME AS LOSS UNDER THE HEAD PROFITS & GAINS OF BUSINESS. (VII) FURTHER, THE CLAIM OF THE ASSESSEE THAT THE V ALUATION OF INVENTORIES IS GOVERNED BY ACCOUNTING STANDARDS (AS )-2 IS NOT RELEVANT AS THE ASSESSEE HAS NOT SHOWN THE CONSTRUC TION AS STOCK-IN-TRADE. THEREFORE, THE DECISION OF THE HON' BLE GAUHATI HIGH COURT IN THE CASE OF MKB (ASIA) PVT. LTD. VS. CIT (SUPRA) QUOTED BY THE ASSESSEE IS ALSO NOT APPLICABLE TO TH E FACTS OF THE ASSESSEE. (VIII] FURTHER THE CLAIM OF THE ASSESSEE THAT THE A DMINISTRATIVE EXPENSES SHOULD HAVE BEEN ALLOWED AS PER SECTION 37 R.W.S. 43(2) OF THE ACT IS ALSO NOT CORRECT. SINCE THE BUSINESS OF THE ASSESSEE HAS NOT COMMENCED, THE EXPENSES CANNOT BE HELD AS W HOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. (IX) FURTHER, THE CONTENTION OF THE ASSESSEE FAILS ON ACCOUNT OF THE FACT THAT THERE ALSO PREVAILS A CONCEPT CALLED 'MAT CHING CONCEPT'. ON ONE SIDE, THE ASSESSEE HAS NOT BEEN EARNING ANY BUSINESS INCOME IN THE YEAR AND ON OTHER SIDE, IT IS CLAIMIN G EXPENSES WHICH ARE FACTUALLY IN CONNECTION WITH THE CONSTRUC TION ACTIVITY UNDERTAKEN BY THE ASSESSEE. IN VIEW OF THIS, THE AS SESSEE WOULD BE ELIGIBLE TO CLAIM THE EXPENDITURE ONLY WHEN ANY INCOME IS OFFERED OUT OF THE BUSINESS AND UPTO THAT STAGE, NO CLAIM OF EXPENSE SHALL BE GIVEN. (X] FURTHER, RELIANCE IS PLACED ON THE FOLLOWING DE CISIONS: (A) KINGFISHER TRAINING & AVIATION SERVICES LTD. VS . ACIT (2011) 15 TAXMAN.COM 325 BANGALORE. (B) MAC INDUSTRIAL PRODUCTS VS. ACIT CC-1(5) CHENNA I. (2006) 101 ITD (CHENNAI) (TM) (C) C.I.T. VS. SUNIL SYNCHEM LTD. (2002) 123 TAXMAN 593 (RAJ). HENCE, EXPENSES OF RS. 1,08,25,966/- WAS DISALLOWED BY THE A.O. AFTER GIVING CREDIT FOR THE AMOUNT OF RS. 2,55,523/-, VOL UNTARILY DISALLOWED BY THE ASSESSEE, WHEREIN DISALLOWANCE OF EXPENSES WORK ED OUT TO ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 11 RS.1,05,70,443/- BY THE AO VIDE ASSESSMENT ORDER DA TED 09-01-2014 PASSED BY THE AO U/S 143(3) OF THE ACT. 4. AGGRIEVED BY THE ASSESSMENT ORDER DATED 09-01-20 14 PASSED BY THE A.O. U/S 143(3) OF THE ACT, THE ASSESSEE CARRIED TH E MATTER BEFORE THE LD. CIT(A) BY FILING FIRST APPEAL. THE LD. CIT(A) AFTE R CONSIDERING THE FACTS OF THE CASE ALLOWED THE APPEAL OF THE ASSESSEE VIDE A PPELLATE ORDERS DATED 29-12-2014 BY HOLDING AS UNDER:- 5.6 GROUND OF APPEAL NO. 3 AND 6(B) IS IN RESPECT OF DISALLOWANCE OF EXPENSES OF RS.10,04,082/-. THE APP ELLANT ARGUED THAT IT WAS IN THE BUSINESS OF DEVELOPMENT A ND CONSTRUCTION OF MALLS AND RESIDENTIAL PROJECTS. THE METHOD OF ACCOUNTING ADOPTED WAS OF TREATING ALL THE CONST RUCTION EXPENSES AS CAPITAL WORK IN PROGRESS. THE ADMINISTR ATIVE COST WERE NOT ADDED TO CAPITAL WORK IN PROGRESS AS IT WAS NOT INCURRED SPECIFICALLY FOR THE PROJECT AND THAT IT WAS PERIOD COST. THE EXPENSES LIKE AUDITORS REMUNERATIO N , ADVERTISEMENT , BUSINESS PROMOTION EXPENSES ARE INCIDENTAL EXPENSES AND ARE NOT INCURRED IN RELATIO N TO THE PROJECTS UNDERTAKEN. THE BUSINESS PROMOTION EXPENSE S ARE INCURRED YEAR AFTER YEAR TO CREATE AWARENESS IN RES PECT OF PROSPECTIVE CUSTOMERS ABOUT THE PROJECT. THESE ARE NEITHER DEFERRED REVENUE EXPENDITURE NOR CAPITAL IN NATURE SINCE THERE ARE INCURRED REPETITIVELY TO PROMOTE THE PROJ ECT. AS REGARDS THE VIEW OF THE A.O. THAT THE APPELLANT COM PANY HAD NOT SET UP AND COMMENCED ITS BUSINESS AND THE N ATURE OF WORK PERFORMED WAS PURCHASE OF LAND . IT WAS NOT NECESSARY THAT ALL CATEGORIES OF BUSINESS ACTIVITIE S MUST SUPPORT SIMULTANEOUSLY . UNLESS THE LAND IS PURCHAS ES, APPROVAL OBTAINED IN CONSTRUCTION ETC., THE MALL CA NNOT BE CONSTRUCTED AND THE PROPERTY CANNOT BE SOLD. 5.7 IN CONSIDERING WHETHER BUSINESS 'IS ESTABLISHED , IT MUST BE NOTED THAT BUSINESS CONNOTES A CONTINUOUS COURSE OF ACTIVITIES BUT IT IS NOT NECESSARY THAT ALL THE ACT IVITIES SHOULD BE STARTED AT THE SAME TIME, THE APPELLANT R ELIED ON THE APEX COURT DECISION IN THE COURSE OF CIT V/S SA RABHAI MANAGEMENT CORPN. LTD. (192 ITR 151) WHERE IT WAS H ELD THAT WHAT IS MATERIAL IS THE DATE WHEN THE COMPANY WENT ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 12 INTO OR STARTED ONE OR THE OTHER OF ITS COMPONENT A CTIVITIES. IN THE PRESENT CASE, THE APPELLANT SET UP ITS BUSIN ESS IN AY 2008-09. RELIANCE WAS PLACED ON THE DECISION OF BOM BAY HIGH COURT IN THE CASE OF M/S WESTERN INDIA VEGETAB LE PRODUCTS (26 ITR 151) WHEREIN IT WAS HELD THAT THE EXPENSES SHOULD BE ALLOWED IN THE YEAR IN WHICH BUS INESS IS SET UP, AND A DISTINCTION WAS DRAWN BETWEEN BUSI NESS BEING SETUP AND COMMENCEMENT OF BUSINESS. IT IS NOT NECESSARY THAT INCOME SHOULD BE EARNED FOR EXPENSES TO BE CLAIMED AS HELD BY DELHI HIGH COURT IN THE CASE OF CIT V/S E. FUNDS INTERNATIONAL INDIA (162 TAXMAN 1) (DELHI) . THE APPELLANT AGAIN RELIED ON ACCOUNTING STANDARD 7, ACCOUNTING STANDARD 2 FOR ITS COMPUTATION OF INCOME AND ACCOUNTING METHOD FOLLOWED. THE APPELLANT RELIED ON GUWAHATI HIGH COURT DECISION IN THE CASE OF MKG (AS IA) (P) LTD. V/S CIT, WHEREIN IT WAS HELD, 'THE INCOME TAX AUTHORITY HAS NO OPTION/JURISDICTION TO MEDDLE IN T HE MATTER EITHER BY DIRECTING THE ASSESSEE TO MAINTAIN ITS ACCOUNTS IN THE PARTICULAR MANNER OR ADOPT A DIFFER ENT METHOD FOR VALUING THE WORK-IN-PROGRESS. AN ASSESSE E HAS THE OPTION/LIBERTY TO ADOPT ANY RECOGNIZED METHOD O F ACCOUNTING FOR ITS BUSINESS AND THE INCOME SHOULD B E COMPUTED IN. ACCORDANCE WITH SUCH REGULARLY MAINTAI NED ACCOUNTING SYSTEM. THUS, THE TRIBUNAL WAS NOT RIGHT IN NOT ACCEPTING THE VALUATION OF CLOSING WORK-IN-PROGRESS IN ACCORDANCE WITH THE ACCOUNTING STANDARD 7.' 5.8. IT IS SEEN THAT LAND WAS ACQUIRED, CLEARING OF PLOT, LEVELING AND EXCAVATION WORK BEGAN IN AY 2008-09. T HIS IS A CASE OF A COMPANY WHICH IS ALREADY FORMED AND IT IS MANDATORY TO GET ITS ACCOUNTS AUDITED AND COMPLY WI TH STATUTORY LIABILITIES. IT HAS COMMENCED ACTIVITIES FOR SETTING UP THE MALL. THUS THE BUSINESS ACTIVITIES HAVE COMM ENCED. 5.9. THE DIRECT COSTS HAVE BEEN CAPITALIZED AS WORK IN PROGRESS. THE ASSESSEE HAS FOLLOWED THE ACCOUNTING STANDARDS PRESCRIBED, AND THE ASSESSING OFFICER HAS NOT SHOWN ANY VIOLATION OF THE ACCOUNTING STANDARDS. EV EN IN THE GUIDANCE NOTE ON ACCOUNTING FOR REAL ESTATE TRANSACTIONS (REVISED) 2012, THE TERMS PROJECT COST S HAS BEEN DEFINED. IT IS CATEGORICALLY MENTIONED IN PARA 2.4. THAT: ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 13 '2.4. THE FOLLOWING COST SHOULD NOT BE CONSIDERED P ART OF CONSTRUCTION COST AND DEVELOPMENT COSTS IF THEY ARE MATERIAL: (A) GENERAL ADMINISTRATION COSTS (B) SELLING COSTS (C) RESEARCH AND DEVELOPMENT COSTS (D) DEPRECIATION OF IDLE PLANT AND EQUIPMENT (E) COST UNCONSUMED OR UNINSTALLED MATERIAL DELIVERED A T SITE; AND (F) PAYMENTS MADE TO SUB CONTRACTORS IN ADVANCE OF WORK PERFORMED. 5.10. THUS, THE ITEMS OF EXPENDITURE NOT ADDED TO W ORK IN PROGRESS ACCOUNT IS AS PER THE ACCOUNTING STANDARDS . IT IS ALSO SEEN THAT IN SUBSEQUENT YEARS, FROM THE BALANC E SHEET FILED WITH RETURN FOR AY 2013-14, WHICH WAS AVAILAB LE WITH AO BEFORE ASSESSMENT ORDER WAS PASSED, ADVANCES OF RS 789.64 LAKHS WAS RECEIVED AS ADVANCE FROM CUSTOMERS . 5.11. INSOFAR AS THE METHOD OF ACCOUNTING IS CONCER NED, IT SHOULD BE A METHOD RECOGNIZED UNDER SECTION 145 OF THE ACT AND IT SHOULD BE USED CONSISTENTLY. THE CHOICE OF THE METHOD HAS BEEN LEFT TO THE ASSESSEE. IN THIS CONTE XT, THE FOLLOWING OBSERVATION OF THE HON'BLE GUJARAT HIGH C OURT, MADE WHILE RENDERING ITS DECISION IN THE CASE OF CI T V. ADVANCED CONSTRUCTION CO. (P) LTD. (275 ITR 30), WO ULD BE CONTEXTUALLY IMPORTANT. 'THE PROVISION THEREFORE SPECIFICALLY PROVIDES THAT THE CHOICE OF METHOD OF ACCOUNTING LIES WITH THE ASSESSEE, THE ONLY CAVEAT BEING THAT IT HAS TO SHOW THAT THE METHOD HAS BEEN REGULARLY FOLLOWED. THE SECTION IS COUCHED IN MANDATORY TERMS AND THE DEPARTMENT IS BOUND TO ACCEPT THE ASSESSEE'S CHOICE OF METHOD REGULARLY EMPLOYED, EXCEPT FOR THE SITUATION, WHEREIN THE ASSESSING OFFICER IS PERMITT ED TO INTERVENE, IN CASE IT IS FOUND THAT TRUE INCOME, PROFITS AND GAINS CANNOT BE ARRIVED AT BY THE METHOD.' ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 14 5.12. IN THE PRESENT CASE, THE ACCOUNTING TREATMENT FOLLOWED BY ASSESSEE IS AS PER THE PRESCRIBED ACCOU NTING STANDARDS. THE DISALLOWANCE MADE BY ASSESSING OFFIC ER IS THEREFORE DELETED. GROUND OF APPEAL NO 3 AND 6(B) A RE ALLOWED. 5. AGGRIEVED BY THE APPELLATE ORDER DATED 29-12-201 4 PASSED BY THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNA L. 6. THE LD. D.R. SUBMITTED THAT THE ASSESSEE HAS NOT SET UP ANY BUSINESS DURING THE IMPUGNED ASSESSMENT YEAR AS THE MALLS WERE UNDER CONSTRUCTION AND NO BUSINESS WAS SET UP. THE ASSESSEE IS NOT A BUILDER, THE ASSESSEE SET UP A MALL AS A CAPITAL AS SET. THE ASSESSEE HAD SHOWN THE SAID CONSTRUCTION AS CAPITAL WORK-IN PRO GRESS AND HENCE THE ASSESSEE IS NOT CONSTRUCTING MALLS AS STOCK-IN-TRAD E. HENCE, IT IS SUBMITTED THAT ALL THE ADMINISTRATIVE EXPENSES NEED TO BE CAPITALIZED. THE LD. D.R. FURTHER RELIED ON THE ORDER OF THE A.O . 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY. THE ASSESSEE IS CONSTRUCT ING A MALL AND RESIDENTIAL COMPLEX AT NAGPUR WHICH IS UNDER CONSTR UCTION. IT WAS SUBMITTED THAT VARIOUS APPROVALS WERE OBTAINED BY T HE ASSESSEE FOR CONSTRUCTION OF MALL AND RESIDENTIAL COMPLEX. HE S UBMITTED THAT THE ASSESSEE IS BOUND TO FOLLOW THE ACCOUNTING STANDARD S NOTIFIED IN ACCORDANCE WITH SECTION 211(3C) OF THE COMPANIES AC T,1956 AS WERE APPLICABLE DURING THE IMPUGNED ASSESSMENT YEAR. TH E ASSESSEE IS FOLLOWING THE ACCOUNTING STANDARD CONSISTENTLY IN A CCORDANCE WITH LAW AND IT COULD NOT BE SAID THAT BY FOLLOWING THE SAID ACCOUNTING STANDARDS SO MANDATORILY REQUIRED TO BE FOLLOWED BY THE ASSES SEE COMPANY THE PROFITS OF THE ASSESSEE COMPANY COULD NOT BE COMPUT ED. IT WAS SUBMITTED THAT THE ASSESSEE HAD SET UP THE BUSINESS BY ACQUIRING THE LAND AND OBTAINING VARIOUS APPROVALS FROM VARIOUS G OVERNMENT ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 15 AUTHORITIES . THE LD. COUNSEL DREW OUR ATTENTION T O THE ORDERS OF AUTHORITIES BELOW WHICH DETAILED THE ACTIVITIES UND ERTAKEN BY THE COMPANY TILL THE END OF THE RELEVANT PREVIOUS YEAR IN CONNECTION WITH THE CONSTRUCTION OF MALL AT NAGPUR AS UNDER: A.Y. 2008-09 CLEANING OF PLOT AND LEVELING OF LAND, EARTH EXCAVA TION AND OTHER LAND DEVELOPMENT ACTIVITIES , ETC. ALSO, LAND DIVIDATION AND BARBED WIRE FENCING WERE CARRIED OUT. A.Y.2010-11 THE NO OBJECTION CERTIFICATE (NOC) HAS BEEN RECEIVE D FROM THE TEHSILDARS OFFICE. A.Y.2011-12 CONSTRUCTION OF THE BOUNDARY WALL SURROUNDING THE P LOT OF CONSTRUCTION AND OTHER ALLIED LAND DEVELOPMENT ACTIVITIES. AY 2012-13 CONSTRUCTION OF WATER BOUND MACADEM ROAD, LEVELING OF SITE AND LAYING HARD MURUM. FURTHER, HEIGHT CLEARANCE WAS ALSO RECE IVED FROM THE AIRPORTS AUTHORITY OF INDIA(AAI) AND BHARAT SANCHAR NIGAM LID(BSNL) THE ASSESSEES COUNSEL SUBMITTED THAT THE IS ENTIT LED TO CLAIM THE ADMINISTRATIVE AND OTHER EXPENSES WHICH ARE NOT CON NECTED SPECIFICALLY TO CONSTRUCTION ACTIVITIES BUT ARE GENERAL OVERHEAD AS BUSINESS EXPENSES AS PER SECTION 3 OF THE ACT AS THE ASSESS EES BUSINESS WAS DULY SET UP IN THE PREVIOUS YEAR RELEVANT TO THE AS SESSMENT YEAR 2008- 09 ITSELF, WHICH IS REPRODUCED BELOW:- 'PREVIOUS YEAR' DEFINED. 3. FOR THE PURPOSES OF THIS ACT, 'PREVIOUS YEAR' MEANS THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE ASSESSMENT YEAR : PROVIDED THAT, IN THE CASE OF A BUSINESS OR PROFESSION NEWL Y SET UP, OR A SOURCE OF INCOME NEWLY COMING INTO EXISTENCE, IN THE SAID FINANCIAL YEAR, THE PREVIOUS ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 16 YEAR SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS OR PROFESSION OR, AS THE CASE MAY BE, THE DATE ON WHIC H THE SOURCE OF INCOME NEWLY COMES INTO EXISTENCE AND ENDING WITH THE SAID FINAN CIAL YEAR. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD SET UP ITS BUSINESS FROM THE DATE WHEN ONE OF ITS B USINESS ACTIVITIES WAS STARTED IN ASSESSMENT YEAR 2008-09 AND IT IS NO T NECESSARY THAT ALL BUSINESS SHOULD COMMENCE BEFORE CLAIMING EXPENSES. HE SUBMITTED THAT ALL THE DIRECT EXPENSES ARE CAPITALIZED WHILE THE INDIRECT EXPENSES ARE BEING CLAIMED AS BUSINESS EXPENSES IN ACCORDANC E WITH AS-2 AND AS-7 ISSUED BY ICAI AND NOTIFIED BY CENTRAL GOVERNM ENT IN EXERCISE OF POWERS U/S 211(3C) OF THE COMPANIES ACT,1956 WHICH THE ASSESSEE COMPANY IS MANDATORILY REQUIRED TO FOLLOW. IT WAS SUBMITTED THAT NOW THE PROJECT IS CONVERTED INTO MALL AND RESIDENTIAL PROJECT . HE SUBMITTED THAT THE ASSESSEE HAS RECEIVED ADVANCES FROM VARIOU S PARTIES AND THE MALL/RESIDENTIAL COMPLEX IS STILL UNDER CONSTRUCTIO N. THE CIVIL ENGINEER CERTIFICATE IS PLACED ON RECORD AT PAGE 38/PAPER BO OK WHICH WAS ALSO PLACED BEFORE AUTHORITIES BELOW THE LD. COUNSEL RE LIED ON THE FOLLOWING JUDICIAL DECISIONS AND SUBMITTED THAT THE BUSINESS EXPENSES ARE TO BE ALLOWED:- 1. CIT V. DHOOMKETU BUILDERS & DEVELOPMENT (P.) LTD. [ 2013] 34 TAXMANN.COM 18 (DELHI). 2. CIT V. SARABHAI MANAGEMENT CORPN. LTD. [1991] 192 I TR 151 (SC) WHEREIN HONBLE SUPREME COURT AFFIRMED THE DECISION OF HONBLE GUJARAT HIGH COURT IN SARABHAI MANAGEMENT CORP. LTD . V. CIT IN (1976) 102 ITR 25(GUJ.) THE LD. COUNSEL SUBMITTED THAT IN THE INSTANT CASE BUSINESS WAS SET UP WHEN THE ASSESSEE ACQUIRED LAND AND OBTAINED PERMIS SIONS FROM GOVERNMENT TO CONSTRUCT MALL AND RESIDENTIAL PROJEC T AT NAGPUR. HE ALSO DREW OUR ATTENTION TO PAPER BOOK PAGE NO. 11 W HEREBY IT IS CERTIFIED BY THE AUDITORS THAT THE APPLICABLE ACCOUNTING STA NDARDS REFERRED TO IN ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 17 SECTION 211(3C) OF THE COMPANIES ACT, 1956 WERE FOL LOWED REGULARLY BY THE ASSESSEE. IT WAS SUBMITTED THAT THE ASSESSEE WA S FOLLOWING MANDATORY ACCOUNTING STANDARDS AS-7 AND AS-2 ISSUED BY ICAI AND IT COULD NOT BE SAID THAT BY FOLLOWING SAID ACCOUNTING STANDARDS , THE PROFIT OF THE ASSESSEE COULD NOT BE COMPUTED CORREC TLY AS PROVIDED U/S 145 OF THE ACT. IN SUPPORT, THE LD. COUNSEL ALSO RE LIED ON THE FOLLOWING DECISIONS:- 1. CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009]179 TAXMAN 326 (SC). 2. MKB (ASIA) (P.) LTD. V. CIT [2008] 167 TAXMAN 256 ( GAU-HC) 3. WESTERN INDIA VEGETABLE PRODUCTS LTD. V. CIT (1954) 26 ITR 151(BOM.) 8. WE HAVE CONSIDERED RIVAL CONTENTIONS AND ALSO PE RUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CAREFUL LY GONE THROUGH THE JUDICIAL PRECEDENTS PLACED ON RECORD. WE HAVE OBSE RVED THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN CO NSTRUCTING A MALL AND RESIDENTIAL COMPLEX AT NAGPUR. THE ASSESSEE PU RCHASED LAND AND OBTAINED VARIOUS GOVERNMENT APPROVALS FROM TIME TO TIME IN PRECEDING ASSESSMENT YEARS . THE CONSTRUCTION OF THE MALL AND RESIDENTIAL COMPLEX IS IN PROGRESS DURING THE PREVIOUS YEAR REL EVANT TO THE IMPUGNED ASSESSMENT YEAR. THE ACTIVITY CHART AS DE TAILED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AS UNDER COUL D NOT BE CONTROVERTED BY AUTHORITIES BELOW/ DR , THE SAID A CTIVITY CHART AS EXTRACTED FROM THE ORDERS OF THE AUTHORITIES BELOW IS AS UNDER:- A.Y. 2008-09 CLEANING OF PLOT AND LEVELING OF LAND, EARTH EXCAVA TION AND OTHER LAND DEVELOPMENT ACTIVITIES , ETC. ALSO, LAND DIVIDATION AND BARBED WIRE FENCING WERE CARRIED OUT. A.Y.2010-11 ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 18 THE NO OBJECTION CERTIFICATE (NOC) HAS BEEN RECEIVE D FROM THE TEHSILDARS OFFICE. A.Y.2011-12 CONSTRUCTION OF THE BOUNDARY WALL SURROUNDING THE P LOT OF CONSTRUCTION AND OTHER ALLIED LAND DEVELOPMENT ACTIVITIES. AY 2012-13 CONSTRUCTION OF WATER BOUND MACADEM ROAD, LEVELING OF SITE AND LAYING HARD MURUM. FURTHER, HEIGHT CLEARANCE WAS ALSO RECE IVED FROM THE AIRPORTS AUTHORITY OF INDIA(AAI) AND BHARAT SANCHAR NIGAM LID(BSNL) WE HAVE OBSERVED THAT ACTIVITY TOWARDS CONSTRUCTION OF MALL AND RESIDENTIAL COMPLEX WAS STARTED WAY BACK IN ASSESSM ENT YEAR 2008-09 ONWARDS AS EMERGING FROM THE RECORDS. WE FIND THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING AS-2 & AS-7 ISSUED BY ICAI W HICH ARE MANDATORY STANDARDS WHEREBY THE DIRECT COSTS ARE ADDED TO THE CAPITAL WORK-IN- PROGRESS BEING CONSTRUCTION OF THE MALL AND RESIDEN TIAL COMPLEX AND ALL THE INDIRECT EXPENSES BEING GENERAL OVERHEAD ARE CH ARGED TO THE P&L ACCOUNT. WE HAVE OBSERVED THAT THE ASSESSEE HAS SE T UP THE BUSINESS BY ACQUIRING LAND AND OBTAINING APPROVAL FOR CONSTR UCTION OF MALL AND RESIDENTIAL COMPLEX ALTHOUGH THE MALL HAS NOT COMME NCED BUSINESS TILL THE END OF THE RELEVANT PREVIOUS YEAR . THE ASSESS EE HAS RIGHTLY CHARGED THE GENERAL OVERHEAD EXPENSES BEING INDIRECT EXPENS ES INCURRED IN THE P&L ACCOUNT IN COMPLIANCE WITH AS-2 & AS-7 WHICH IS MANDATORY AS PER ICAI AND NOTIFIED BY CENTRAL GOVERNMENT AS PER SECTION 211(3C) OF THE COMPANIES ACT, 1956 WHEREIN THE COMPANIES ARE S TATUTORILY REQUIRED TO FOLLOW THE SAME. IT COULD NOT BE POINTE D OUT BY LEARNED DR THAT HOW BY FOLLOWING THE AFORE-STATED ACCOUNTING S TANDARDS WHICH ARE MANDATORY ACCOUNTING STANDARDS, PROFITS OF THE ASSE SSEE COULD NOT BE COMPUTED CORRECTLY. THE ACCOUNTING STANDARDS ISSUED BY ICAI WHICH IS ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 19 AN EXPERT BODY CANNOT BE DISCARDED LIGHTLY UNLESS I T IS SHOWN THAT BY FOLLOWING THE SAID ACCOUNTING STANDARDS THE PROFITS COULD NOT COMPUTED CORRECTLY IN ACCORDANCE WITH PROVISIONS OF SECTION 145 OF THE ACT OR THE SAID ACCOUNTING STANDARDS ARE DIRECTLY IN CONFLICT WITH PROVISIONS OF THE ACT. SECTION 3 OF THE ACT STIPULATE THAT THE PREVIO US YEAR SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS OR PROFESSION OR, AS THE CASE MAY BE, THE DATE ON WHIC H THE SOURCE OF INCOME NEWLY COMES INTO EXISTENCE AND ENDING WITH T HE SAID FINANCIAL YEAR AND THUS IT IS NOT NECESSARY THE BUSINESS HAD ACTUA LLY COMMENCED FOR CLAIMING THE EXPENSES BUT THE RELEVANT IS THE S ETTING UP OF THE BUSINESS WHICH IN OUR CONSIDERED VIEW IN THE INSTAN T APPEAL BUSINESS WAS SET-UP WHEN THE ASSESSEE TOOK STEPS TO PURCHASE LAND AND OBTAINED NECESSARY APPROVALS FOR SETTING UP OF MALL AND RESIDENTIAL COMPLEX AT NAGPUR. IN OUR CONSIDERED VIEW, THERE I S NO INFIRMITY IN THE WELL REASONED ORDER OF THE LD. CIT(A) WHICH WE ARE NOT INCLINED TO INTERFERE WITH WHOM WE AGREE AS IN OUR CONSIDERED V IEW THE GENERAL OVERHEAD EXPENSES BEING INDIRECT EXPENSES WERE RIGH TLY DEBITED BY THE ASSESSEE TO THE P&L ACCOUNT AS NORMAL BUSINESS EXPE NSES, KEEPING IN VIEW FACTS AND CIRCUMSTANCES OF THE CASE. WE ORDER ACCORDINGLY. 9. IN THE RESULT, REVENUES APPEAL IN ITA NO. 1540/ MUM2015 FOR THE ASSESSMENT YEAR 2012-13 IS DISMISSED. NOW, WE SHALL TAKE UP ASSESSEES APPEAL IN ITA NO. 1306/MUM/2015 FOR ASSESSMENT YEAR 2012-13. 10. THE BRIEF FACTS OF THE CASE ARE THAT ON PERUSAL OF THE P&L ACCOUNT, IT WAS OBSERVED BY THE A.O. THAT THE ASSESSEE HAS I NVESTMENT IN SHARES AND MUTUAL FUNDS AMOUNTING TO RS. 56,00,10,000/- IN COME FROM WHICH IS EXEMPT FROM TAX U/S. 10 OF THE ACT. THE ASSESSE E WAS ASKED TO ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 20 FURNISH DETAIL OF THE EXPENSES DISALLOWED U/S 14A O F THE ACT OUT OF THE EXPENSES DEBITED UNDER VARIOUS HEADS IN P&L ACCOUNT IN RELATION TO EARNING OF EXEMPTED INCOME. IN RESPONSE, THE ASSES SEE REPLIED AS UNDER:- WE WISH TO STATE THAT TOTAL EXPENDITURE DURING THE YEAR AMOUNTS TO RS. 1,12,35,654/ -. ALSO, A SUM OF RS. 4 5,178/- RELATES TO DEPRECIATION, WHICH IS AN ALLOWANCE AND NEITHER RELATED TO INVESTMENT AND NOT ANY EXPENDITURE WHICH ATTRACTS ANY DISALLOWANCE U/ S. 14A. EMPLOYEE BENEFITS EXPENSE INCURRED OF RS. 10,90,195 /- IS DIRECTLY CONNECTED TO THE BUSINESS ACTIVITIES OF TH E ASSESSEE COMPANY AND NOT TO THE INVESTMENTS MADE FROM WHICH EXEMPT INCOME IS EARNED. FURTHER, IT MAY BE NOTED T HAT THE INVESTMENT DECISIONS ARE SOLELY TAKEN CARE OF BY TH E PORTFOLIO MANAGER - 'TRUST CAPITAL SERVICES PVT. LT D.. OTHER EXPENSES CLAIMED OF RS. 1,01,12,014/- IS BIFU RCATED AS BELOW: S NO. PARTICULARS AMOUNT STATUS A) PROFESSIONAL FEES 7,50,690 OUT OF THIS RS. 4,09,690/- TOWARDS PORTFOLIO MANAGEMENT FEES OF TRUST CAPITAL SERVICES P.LTD. IS ALREADY DISALLOWED. B) RATES & TAXES 3,201 C) ADVERTISEMENT AND BUSINESS PROMOTION EXPENSES 89,61,150 REFER NOTE BELOW D) TRAVELLING EXPENSES 2,52,878 E) COMMUNICATION EXPENSES 7,689 F) PRINTING & STATIONERY EXPENSES 4,447 G) AUDITORS REMUNERATION 1,00,000 H) OFFICE EXPENSES 18,496 I) MISCELLANEOUS EXPENSES 13,462 TOTAL EXPENSES 1,01,12,014 NOTE ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 21 IN REGARD TO THE CLAIM OF THE AFORESAID EXPENSES, W E HAVE TO STATE AS UNDER:- A) THE ASSESSEE HAS ALREADY DISALLOWED THE AMOUNT O F RS. 2,00,000/- U/S 14A IN FURTHERANCE TO THE LEGAL & PR OFESSIONAL FEES INCURRED AMOUNTING TO RS. 4,09,690/- INCURRED IN RE LATION TO THE PORTFOLIO MANAGEMENT FEES (BROKER) WHO TAKES CARE O F THE INVESTMENT DECISIONS. FOR THE PURPOSE OF SAID DISA LLOWANCE, THE ASSESSEE HAS CONSIDERED THE COMMON EXPENSES WHICH M AY BE SAID TO HAVE ATTRIBUTABLE TOWARDS TAXABLE INCOME AS WELL AS EXEMPT INCOME. ACCORDINGLY, THE WORKING OF THE DIS ALLOWANCE IS AS UNDER:- PARETICULARS OF COMMON EXPENSES AMOUNT RATES & TAXES 3,201 TRAVELLING EXPENSES 2,52,878 COMMUNICATION EXPENSES 7,689 PRINTING & STATIONERY EXPENSES 4,447 LEGAL AND PROFESSIONAL FEES (7,50,690 4,09,690) 3 ,41,000 AUDITORS REMUNERATION 1,00,000 OFFICE EXPENSES 18,496 MISCELLANEOUS EXPENSES 13,462 TOTAL EXPENSES 7,41,173 TOTAL INCOME (A) 1,37,16,615 DIVIDEND INCOME (B) 14,06,951 TOTAL EXPENSES AS PER ABOVE (C) 7,41,173 PROPORTIONATE DISALLOWANCE (D=C*B/A 76,024 B) FURTHER, AS REGARDS THE EXPENSES PERTAINING TO A DVERTISEMENT & BUSINESS PROMOTION EXPENSES OF RS. 89,61,150/-, WE WISH TO STATE THAT THE SAME ARE DIRECTLY ATTRIBUTABLE TO THE TAXA BLE BUSINESS INCOME EARNED AND HENCE, SHALL NOT BE CONSIDERED FO R THE PURPOSE OF 14A DISALLOWANCE. IN THIS REGARD, WE WIS H TO STATE THAT THE PARTY-WISE DETAILS OF THE ADVERTISEMENT & BUSIN ESS PROMOTION EXPENSES INCURRED IN THE YEAR UNDER CONSIDERATION H AS ALREADY BEEN SUBMITTED IN OUR EARLIER SUBMISSION. C) YOUR HONOUR MAY ALSO NOTE THAT NO INTEREST EXPEN SES ARE CLAIMED BY THE ASSESSEE. IN VIEW OF THE ABOVE SUBMISSION, WE REQUEST YOUR HO NOUR NOT TO MAKE ANY DISALLOWANCE U/ S. 14A R. W. R. 8D AS THE ASSESSEE HAS ADOPTED THE APPROPRIATE METHOD IN MAKING SUCH DISAL LOWANCE IN THE RETURN OF INCOME. ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 22 THE A.O. REJECTED THE CONTENTIONS OF THE ASSESSEE O N THE GROUND THAT THE ASSESSEE HAS NOT DONE ANY BUSINESS DURING THE YEAR AND HAD NOT EARNED ANY INCOME FROM ITS REGULAR BUSINESS. IT WAS OBSERVED B Y THE AO THAT DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS MADE AN IN VESTMENT IN THE SHARES OF ANOTHER COMPANIES AND INCURRED EXPENSES ON CONSTRUC TION OF MALL AND CAPITALIZED THE SAME UNDER THE HEAD CAPITAL WORK-IN -PROGRESS . THE EXPENSES INCURRED ON SALARY AND WAGES( RS. 47,72,015) , BONU S (RS. 71,076) , BOARDING AND LODGING (RS.16,701) , TRAVELLING (RS. 98,240) E TC. HAVE BEEN TRANSFERRED TO CAPITAL WORK-IN-PROGRESS. THE AO OBSERVED THAT THE ASSESSEE INCURRED EXPENSES ON CONSTRUCTION OF MALL AND CAPITALIZED TH E SAME UNDER THE HEAD CAPITAL WORK-IN-PROGRESS. THE AO OBSERVED THAT SOM E PORTION OF EXPENSES INCURRED BY THE ASSESSEE ON SALARY, ADMINISTRATIVE EXPENSES, BUSINESS PROMOTION EXPENSES, WHICH ARE EITHER DEBITED TO PRO FIT AND LOSS ACCOUNT OR TRANSFERRED TO CAPITAL WORK-IN-PROGRESS , PERTAIN T O THE ACTIVITY OF INVESTMENT IN SHARES LIABLE TO EARN EXEMPT INCOME. THE AO OBSE RVED THAT THE ASSESSEE HAS NOT BIFURCATED SATISFACTORILY THE RELEVANT EXPE NSES OUT OF THE TOTAL EXPENSES INCURRED. IT WAS ALSO OBSERVED BY THE AO T HAT THE ASSESSEE HAS WRONGLY STATED THAT THE LEGAL AND PROFESSIONAL FEES OF RS. 4,09,690/- WAS DISALLOWED U/S 14A OF THE ACT BUT THE SAID EXPENSES HAD BEEN CLAIMED U/S 57 OF THE ACT UNDER THE HEAD-INCOME FROM OTHER SOUR CES. THE AO OBSERVED THAT HE IS SATISFIED THAT THE DISALLOWANCE OF EXPEN SES OF RS. 2,00,000/- BY THE ASSESSEE U/S 14A OF THE ACT IN RELATION TO INCOME W HICH DOES NOT FORM PART OF TOTAL INCOME IS NOT CORRECT HAVING REGARDS TO THE A CCOUNTS OF THE ASSESSEE, DIVIDEND INCOME EARNED OF RS.14,06,951/- AND HUGE I NVESTMENTS IN SHARES. THE AO INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME-TAX RULES, 1962 AND MADE THE DISALLOWANCE AS UNDER:- PARTICULARS AMOUNT (RS.) (I) DIRECT EXPENSES IN CONNECTION TO THE INCOME WH ICH DOES NOT FORM PART OF TOTAL INCOME AS PER RULE 8D((2)(I) NIL ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 23 (II) INTEREST EXPENSES IN CONNECTION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME AS PER RULE 8D((2)(II) NIL (III) AN AMOUNT EQUAL TO HALF PERCENT OF THE AVERAG E OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST AND LAST DAY OF THE PREVIOUS YEAR AS PER RULE 8D((2)(III) {[(68,69,81,000+56,00,10,000)/2] * 0.5% } 31,17,478 TOTAL DISALLOWANCE U/S. 14A R.W.R. 8D 31,17,478 LESS : EXPENSES DISALLOWED U/S14A 2,00,000 NET DISALLOWANCE U/S. 14A R.W.R.8D 29,17,478 SINCE, THE AO DISALLOWED WHOLE OF EXPENDITURE DEBIT ED TO PROFIT AND LOSS ACCOUNT ON THE GROUNDS THAT NO BUSINESS HAD BEEN SE T UP BY THE ASSESSEE, NO SEPARATE DISALLOWANCE WAS MADE ON ACCOUNT OF SECTIO N 14A OF THE ACT IN COMPUTATION OF INCOME. HOWEVER, SINCE THE ASSESSEE ALSO DEBITED EXPENSES TO CAPITAL WORK-IN-PROGESS, IT WAS ASSUMED BY THE AO T HAT 50% OF THE ABOVE DISALLOWANCE IS TO BE APPORTIONED TO CAPITAL WORK-I N-PROGRESS AND HENCE CAPITAL WORK-IN-PROGRESS WAS REDUCED ACCORDINGLY BY 50% OF THE ABOVE DISALLOWANCE , VIDE ASSESSMENT ORDER DATED 09-01-20 14 PASSED BY THE AO U/S 143(3) OF THE ACT. 11. AGGRIEVED BY THE ASSESSMENT ORDER DATED 09-01-2 014 PASSED BY THE A.O. U/S 143(3) OF THE ACT, THE ASSESSEE CARRIED THE MAT TER BEFORE THE LD. CIT(A) IN FIRST APPEAL, WHO REJECTED THE CONTENTIONS OF THE A SSESSEE. HOWEVER , LEARNED CIT(A) ACCEPTED THE CONTENTIONS OF THE ASSESSEE THA T THE DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT IS TO RESTRICTED OUT OF THE EXPENSES DEBITED TO ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 24 PROFIT AND LOSS ACCOUNT AND THE SAME CANNOT BE EXTE NDED TO THE DIRECT COST INCURRED TOWARDS THE CONSTRUCTION OF MALL WHICH IS CAPITALIZED TO CAPITAL WORK- IN-PROGRESS ACCOUNT AS THE SAID EXPENSES ARE DIRECT EXPENSES TOWARDS THE PROJECT , VIDE APPELLATE ORDERS DATED 29-12-2014 . 12. AGGRIEVED BY THE APPELLATE ORDER DATED 29-12-20 14 PASSED BY THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUN AL. IT IS PERTINENT TO MENTION THAT THE REVENUE IS NOT IN APPEAL W.R.T. RELIEF GRA NTED BY LEARNED CIT(A) W.R.T. DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT MADE BY THE AO W.R.T. DIRECT EXPENSES CAPITALIZED TO THE CAPITAL WORK-IN-PROGRES S WHICH WERE NOT DEBITED TO PROFIT AND LOSS ACCOUNT. 13. IT IS THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE A.O. HAS DISALLOWED THE EXPENSES U/S 14A OF THE ACT BY INVOK ING RULE 8D OF INCOME-TAX RULES, 1962. THE AO HAS ALSO INCLUDED THE DIRECT E XPENSES INCURRED FOR CONSTRUCTION OF MALL AND RESIDENTIAL COMPLEX WHICH WERE DEBITED BY THE ASSESSEE TO THE CAPITAL WORK-IN-PROGRESS AGAINST WH ICH LEARNED CIT(A) HAS GIVEN RELIEF VIDE APPELLATE ORDERS DATED 29-12-2104 . RULE 8D OF INCOME-TAX RULES, 1962 WAS INVOKED BY THE A.O. FOR MAKING DIS ALLOWANCE U/S 14A OF THE ACT. THE DISALLOWANCE WERE MADE TO THE TUNE OF RS. 29,17,478/- BY THE AO U/R 8D(2)(III) OF INCOME-TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT , AS AGAINST WHICH THE ASSESSEE HAD MADE VOLUNTARY DISAL LOWANCE OF RS. 2 LACS. IT IS SUBMITTED THAT DIVIDEND INCOME EARNED OF RS. 14, 06,951/- AND THE ASSESSEE HAD MADE SUO-MOTU DISALLOWANCE OF RS. 2 LA CS. IT WAS SUBMITTED THAT THE ASSESSEE SUBMITTED ALL DETAILS OF EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT AND AFTER EXPLAINING IN DETAILS NATURE OF E ACH OF SUCH EXPENSES , THE ASSESSEE WORKED OUT DISALLOWANCE OF RS. 76,024/- U/ S 14A OF THE ACT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AGAINST WHIC H VOLUNTARY DISALLOWANCE OF RS.2,00,000/- WERE MADE. THE DETAILS ARE ENUMERA TED IN THE ORDERS OF AUTHORITIES BELOW AND IT WAS SUBMITTED THAT ADVERTI SEMENT AND BUSINESS ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 25 PROMOTION EXPENSES OF RS. 89,61,150/- WERE NOT INC LUDED FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE ACT AS THE SAME WERE DI RECTLY ATTRIBUTABLE TO THE TAXABLE BUSINESS INCOME EARNED BY THE ASSESSEE FOR WHICH COMPLETE DETAILS WERE SUBMITTED BEFORE THE AUTHORITIES BELOW AND THE AUTHORITIES BELOW COULD NOT POINT OUT ANY DEFECT IN THE SAME. IT IS SUBMIT TED THAT THERE ARE NO FRESH INVESTMENTS MADE DURING THE YEAR. OUR ATTENTION WAS DRAWN TO PAGE 16 AND 25/PAPER BOOK FILED WITH THE TRIBUNAL . THE LD. COU NSEL SUBMITTED THAT THE A.O. HAS NOT GIVEN ANY COGENT REASONS HENCE THE ORD ER OF THE A.O. IS BAD IN LAW. THE LD. COUNSEL RELIED ON THE DECISION OF THE DELHI TRIBUNAL IN THE CASE OF POWER GRID CORPORATION OF INDIA LIMITED V. DCIT IN ITA NO. 2397 AN 2398/DEL/2014 VIDE ORDERS DATED 06.10.2016. 14. THE LD. D.R. RELIED ON THE ORDER OF LD. CIT(A). 15. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND AL SO PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE CASE LAWS. WE HA VE OBSERVED THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY WHICH IS ENGA GED IN CONSTRUCTING A MALL AND RESIDENTIAL COMPLEX AT NAGPUR. THE ASSESSE E HAS SET UP BUSINESS OF CONSTRUCTING MALL AND RESIDENTIAL COMPLEX AND THE E XPENSES ARE ALLOWED AS BUSINESS EXPENSES AS CLAIMED BY THE ASSESSEE BY US IN THE FOREGOING PARAS OF THIS COMMON ORDER IN ITA NO. 1540/MUM/2015 ON THE G ROUNDS THAT BUSINESS HAS BEEN SET UP AND THE ASSESSEE IS ENTITLED FOR CL AIMING DEDUCTION OF EXPENSES IN ACCORDANCE WITH MANDATE OF SECTION 3 OF THE ACT. WE WILL PROCEED IN THIS APPEAL KEEPING IN VIEW OUR DECISION IN ITA NO. 1540/MUM/2015 IN PRECEDING PARAS. THE ASSESSEE HAS CAPITALIZED DIRE CT EXPENSES INCURRED TOWARDS CONSTRUCTION OF MALL AND RESIDENTIAL COMPLE X BY TRANSFERRING THE SAID EXPENSES TO CAPITAL WORK-IN-PROGRESS WHICH WERE ALS O CONSIDERED BY THE AO FOR DISALLOWANCE U/S 14A OF THE ACT BY INVOKING RUL E 8D(2)(III) OF THE INCOME- TAX RULES, 1962 AGAINST WHICH LEARNED CIT(A) GAVE R ELIEF TO THE ASSESSEE AND THE REVENUE IS NOT IN APPEAL AGAINST THE RELIEF GRA NTED BY LEARNED CIT(A), ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 26 THUS, THE EXPENSES WHICH WERE CAPITALIZED BEING DIR ECT EXPENSES DEBITED TO CAPITAL WORK-IN-PROGRESS BEING INCURRED FOR CONSTRU CTION OF MALL AND RESIDENTIAL COMPLEX CANNOT BE CONSIDERED FOR DISALL OWANCE UNDER SECTION 14A OF THE ACT . THE ASSESSEE HAS ELABORATELY EXPLAINE D THE NATURE AND DETAILS OF EXPENSES WHICH WERE DEBITED TO PROFIT AND LOSS ACCO UNT AND ITS NEXUS WITH EARNING OF INCOME WHICH DOES NOT FORM PART OF THE T OTAL INCOME AND THE REVENUE COULD NOT POINT OUT ANY ERROR IN THE SAID E XPLANATION OFFERED BY THE ASSESSEE. THE ASSESSEE WHILE EXPLAINING THE EXPENS ES DEBITED TO PROFIT AND LOSS ACCOUNT HAS SUBMITTED THAT ADVERTISEMENT AND B USINESS PROMOTION EXPENSES OF RS.89,61,150/- WERE DIRECTLY ATTRIBUTAB LE TO THE EARNING OF TAXABLE BUSINESS INCOME EARNED AND HENCE THE SAME S HALL NOT BE CONSIDERED FOR THE PURPOSES OF DISALLOWANCE UNDER SECTION 14A OF THE ACT . THE REVENUE COULD NOT POINT OUT ANY DISCREPANCY IN THE SAID CON TENTION OF THE ASSESSEE. THE ASSESSEE HAS ALSO INVESTMENT IN NON-CURRENT INV ESTMENT OF RS. 56 CRORES AS AT 31-03-2012 WHICH IS SAME AS IN THE PRECEDING YEAR AS AT 31-03-2011. THE ASSESSEE HAS ALSO INVESTED IN CURRENT INVESTMEN TS VIZ. BONDS WHICH YIELDED INTEREST INCOME AS WELL TAXABLE CAPITAL GAI NS CHARGEABLE TO TAX AS WELL THE ASSESSEE HAD INVESTMENTS IN MUTUAL FUNDS REFLEC TED AS CURRENT INVESTMENT WHICH YIELDED TAX-FREE DIVIDENDS. THE AS SESSEE HAS INCURRED PORTFOLIO MANAGEMENT SERVICES (PMS) FEE OF RS. 4,09 ,690/- WHICH IS TO BE APPROPRIATED BETWEEN THE TAX-FREE INSTRUMENTS AND T AXABLE INSTRUMENTS INVESTED BY THE ASSESSEE REFLECTED IN CURRENT AS WE LL NON-CURRENT INVESTMENT AS CHARGED BY PORTFOLIO MANAGERS AND CHARGEABILITY BY PORTFOLIO MANAGERS OF PMS FEES BE APPORTIONED ACCORDINGLY FOR DISALLOWANC E U/S 14A OF THE ACT BETWEEN CURRENT AND NON-CURRENT INVESTMENT AS ALSO KEEPING IN VIEW INVESTMENT IN TAXABLE AS WELL TAX-FREE INSTRUMENTS , WHILE THE ASSESSEE HAS DEDUCTED THE SAID PMS EXPENSES U/S 57 OF THE ACT. THE REVENUE HAS INVOKED RULE 8D OF INCOME-TAX RULES, 1962 FOR MAKING DISALL OWANCE U/S 14A OF THE ACT IN A STEREO TYPED MANNER WITHOUT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AND WITHOUT SATISFYING THE MANDATE OF SECT ION 14A(2) OF THE ACT ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 27 BEFORE MAKING DISALLOWANCE U/R 8D(2)(III) OF INCOME -TAX RULES, 1962 READ WITH SECTION 14A OF THE ACT WHICH IN OUR CONSIDERED VIEW CANNOT BE SUSTAINED IN THE INSTANT APPEAL KEEPING IN VIEW FACTS AND CIRCUM STANCES OF THE CASE MORE- SO WITHOUT POINTING OUT AND DEFECT BY THE REVENUE A S TO HOW THE WORKING OF THE DISALLOWANCE SUBMITTED BY THE ASSESSEE U/S 14A OF THE ACT IS NOT CORRECT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE AO DID NOT MADE ANY ATTEMPT TO WORK OUT DISALLOWANCE OF EXPENSES INCURR ED IN RELATION TO EARNING OF INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAVING REGARDS TO THE ACCOUNTS OF THE ASSESSEE IN ACCORDANCE WITH MANDATE OF SECTION 14A(2) OF THE ACT AND ALSO NO ATTEMPT WAS MADE BY THE AO TO DISLO DGE THE CLAIM OF THE ASSESSEE IN BRINGING FORTH AND WORKING DISALLOWANCE U/S 14A OF THE ACT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. IN O UR CONSIDERED VIEW, THE DISALLOWANCE MADE BY THE A.O. IN THE INSTANT APPEAL U/S 14A OF THE ACT R.W.R. 8D(2)(III) OF INCOME-TAX RULES, 1962 CANNOT BE SUST AINED AND THE DISALLOWANCE OF THE EXPENSES IS TO BE MADE KEEPING IN VIEW EXPEN SES DEBITED TO THE PROFIT AND LOSS ACCOUNT (INCLUDING , INTER-ALIA, PMS FEES) HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IN ACCORDANCE WITH MANDATE OF SECTION 14A OF THE ACT AND HENCE, THE ISSUE IS SET ASIDE TO THE FILE OF THE AO FOR MAKING DE-NOVO DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT ON MERI TS IN ACCORDANCE WITH DIRECTIONS IN THIS ORDER IN ACCORDANCE WITH PROVISI ONS OF SECTION 14A OF THE ACT. NEEDLESS TO SAY THAT PROPER AND ADEQUATE OPPOR TUNITY OF BEING HEARD SHALL BE PROVIDED BY THE AO TO THE ASSESSEE IN ACCO RDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WITH LAW BEFORE DE-NO VO DETERMINATION OF DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT ON MERI TS. WE ORDER ACCORDINGLY. 16. IN THE RESULT APPEAL OF THE ASSESSEE IN ITA NO. 1306/MUM/2015 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AS INDICATED ABOVE . 17. OUT DECISION IN ITA NO. 1540/MUM/2015 (REVENUE S APPEAL) SHALL APPLY MUTATIS MUTANDIS TO THE REVENUES APPEAL IN I TA NO. 1539/MUM/2015 ITA 1306/MUM/2015,1540/MUM/2015, 1308/MUM/2015 AND 1 539/MUM/2015 28 IN THE CASE OF ASSESSEE NAMELY M/S ALLIANCE MALL DE VELOPERS COMPANY PRIVATE LIMITED WHEREIN REVENUE APPEAL IS DISMISSED AS FACT S ARE IDENTICAL AND OUR DECISION IN ITA NO. 1306/MUM/2015 (ASSESSEES APPEA L) SHALL APPLY MUTATIS MUTANDIS TO THE ASSESSEE NAMELY M/S ALLIANCE MALL D EVELOPERS COMPANY PRIVATE LIMITED APPEAL IN ITA NO.1308/MUM/2015 WHER EIN ASSESSEE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AS FACTS AR E IDENTICAL AS INDICATED ABOVE .WE ORDER ACCORDINGLY. 18. IN THE RESULT, APPEALS FILED BY THE REVENUE IN ITA NO. 1540/MUM/2015 AND 1539/MUM/2015 ARE DISMISSED AND APPEAL FILED BY THE ASSESSEES IN ITA NO. 1306/MUM/2015 AND 1308/MUM/2015 ARE ALLOWED FOR STATISTICAL PURPOSES AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH FEBRUARY, 2017. # $% &' 08-02-2017 ( ) SD/- SD/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 08-02-2017 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI I BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR)