M/s Pragnya Crest Properties Pvt Ltd , Bangalore V. Deputy Commissioner of Income Tax Circle-3(1)(2), Bangalore

ITA 1576/BANG/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3888 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-02-2020
• Assessment Year: 2012-2013
• Appeal Filed On: 20-07-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B R RAMESH
• Assessee Lawyers: SATHYANARAYANA MURTHI
• Keywords: Depreciation; Earning of tax free income; Revenue expenditure
• Section: 143(3); 14A; 13

Judgement Text

ITA NO. 1576 (B)/201 7 1 IN THE INCOME TAX APPELLATE TRIBUNAL B ENGALURU BENCHES : A , B ENGALURU BEFORE SHRI P RADIP KUMAR KEDIA, AM & SMT.BEENA PILLAI, J M ITA NO. 1 576 (BANG)/201 7 (ASSESSMENT YEAR : 2012 - 13 ) M/S PRAGNYA CREST PROPERTIES PVT.LTD., (EARLIER KNOWN AS HABITAT PRAGNYA PROPERTY PVT.LTD ) OPP: ZURI H OTEL, RAJAPALYA HOODI, MAHADEVAPURA POST, BANGALORE - 560 0 4 8 PAN NO. A A ECM0660KK APPELLANT VS . THE DEPUTY COMMISSIONER OF INCOME T AX , CIRCLE - 3 ( 1 ) (2) , , BANGALORE RESPONDENT APPELLANT BY : S HRI S ATHYANARAYANAMURTHI, C A REVENUE BY : SHRI B.R.RAMESH, JC IT DATE OF HEARING : 2 5 - 0 2 - 20 20 DATE OF PRONOUNCEMENT : 03 - 0 3 - 2020 O R D E R PER PRA DIP KUMAR KEDIA : A M THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 5 , B ENGALURU DATED 12 - 0 4 - 2017 ARISING IN THE ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE IT ACT, 1961 ( THE ACT ) RELATING TO ASSESSMENT YEAR 2012 - 13 . 2. G ROUNDS OF APPEAL RAISED BY THE ASSESSEE READS AS UNDER; ITA NO. 1576 (B)/201 7 2 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) IN NOT APPRECIATING THE FACT THAT THE ASSESSEE COMPANY HAS NOT INCURRED ANY EXPENDITURE TOWARDS EARNED EXEMPT INCOME AND THE INVESTMENT MADE WERE OUT OF SURPLUS FUND AND DISALLOWANCE UNDER SECTION 14A OF RS.1,86,900/ - IS NOT WARRANTED. 2. 1 ON THE FACTS AND CIRCUMSTANCES OF THE C ASE THE LD. CIT(A) ERRE D IN NOT APPRECIATING THE FACT THAT THE ASSE S SEE CO M PANY IS IN THE BUSINESS OF CONSTRUCTION BUSINESS AND SELLING EXPENSES INCURRED IS REVENUE IN NATURE. 2.2 O N THE FACTS AND CIRCUMSTANCES OF THE C A SE, THE LD.CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT SELLING AND PROMOTION EXPENSES ARE REVENUE IN NATURE AND ARE ALLOWABLE EXPENDITURE. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.AO ERRED IN INITIATING PENALTY PROCEEDING UNDER SECTION 271 OF IT ACT, 1961. 3. GROUND NO.1 CONCERN S DISALLOWANCE U/S 14A OF THE ACT WHICH IS DISMISSED AS NOT PRESSED. 4. BY WAY OF G ROUND NO.2 , THE ASSESSEE SEEKS TO IMPUGN THE ACTION OF THE REVENUE AUTHORITIES IN TREATING THE SELLING EXPENSES AS PART OF THE PROJECT COST AND THUS CAPITAL IN NATURE AS AG AINST THE CLAIM OF THE ASSESSEE AS REV E NUE EXPENDITURE. 5. BRIEFLY STATED , THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOP MENT AND CONSTRUCTION OF COMMERCIAL AND RESIDENTIAL BUILDING NEAR W HITEFIELD, B ENGALURU . THE COMPANY WHILE SELLING ITS RESIDENTIAL APARTMENTS , CLAIMS TO HAVE ENTERED INTO TWO AGREEMENTS NAMELY; AGREEMENT ITA NO. 1576 (B)/201 7 3 TO SELL AND CONSTRUCTION AGREEMENT. IT IS FURTHER CLAIMED THAT THE POS SESSION OF THE APARTMENT WILL BE GIVEN TO THE CUSTOMERS ON COMPLETION OF THE CONSTRUCTION. AS PER THE ACCOUNTING POLICY ADOPTED , THE REVENUE FROM REAL ESTATE UNDER DEVELOPMENT IS RECOGNIZED UPON TRANSFER OF ALL SIGNIFICANT RISKS AND RE WARDS OF OWNERSHIP OF SUCH REAL ESTATE AS PER THE TERMS OF THE CONTRACT ENTERED INTO WITH BUYERS. THE CONTRACTS WHERE THE COMPANY IS UNDER OBLIGATION TO PERFORM SUBSTANTIAL ACTS , EVEN AFTER THE TRANSFER OF SIGNIFICANT RISK AND REWARDS, THE REVENUE IS RECOGNIZED ON PERCENTAGE OF COM PLETION METHOD WHEN THE STATE OF COMPLETION OF EACH PROJECT REACHES A REASONABLE LEVEL OF PROGRESS. 6. THE AO , AT THE TIME OF FRAMING THE ASSESSMENT UNDER S.143(3) OBSERV E D THAT THE ASSESSEE HAS INTERALIA CLAIMED SELLING EXPENSES OF RS.1,3 8 , 22,515 / - IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2012 - 13 IN QUESTION AS REVENUE EXPENSES. IT WAS FURTHER OBSERVED BY THE AO THAT THE ASSESSEE HAS NOT RECOGNIZED ANY REVENUE FROM SALE OF UNITS IN THE YEAR. IT WAS OBSERVED THAT THE ASSESSEE I S ENGAGED IN THE DEVELOPMENT OF SINGLE PROJECT W HERE THE SALES HAVE BEEN RECOGNIZED ONLY IN THE SUBSEQUENT YEARS. THE AO FURTHER OBSERVED THAT THE SELLING EXPENSES WERE MOSTLY CO MPRISED OF ADVERTISING EXPENSES OF W HITE FIELD PROJECT . I N THE ABSENCE OF ANY REVENUE RECOGNIZED FROM THE PROJECT , THE AO APPLIED DOCTRINE OF MATCHING PRINCIPLES AND HELD THAT ONLY THOSE EXPENSES RELATABLE TO SALES REVENUE RECOGNIZED IN A YEAR CAN BE CLAIMED AS REVENUE EXPENSES. IT WAS THUS HELD BY THE AO THAT SELLING EXPENSES CLAIMED AS RE VENUE EXPENDITURE REQUIRES TO BE CAPITALIZED WITH THE PROJECT COST AND CANNOT BE REGARDED A EXPENDITURE IN REVENUE NATURE. THE CLAIM OF SELLING EXP ENSES AS THE REVENUE EXPENSES W ERE THUS DISALLOWED BY THE AO AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE TOTAL LOSS W A S THUS ASSESSED AT RS.29,97,445/ - AS AGAINST RETURN LOSS OF RS.1 , 7 0 ,06,860/ - ITA NO. 1576 (B)/201 7 4 7. THE CIT(A) IN FIRST APPEAL MAINLY REITERATED THE OBSERVATIONS OF THE AO AND CONFIRMED THE ACTION OF THE AO. 8. FURTHER AGGRIEVED, THE ASSESSEE PREFERRED APP EAL BEFORE THE TRIBUNAL. 9. BEFORE THE TRIBUNAL , THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBMITTED THAT THE ASSESSEE BEING ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT , THE REVENUE FROM THE PROJECT CAN BE RECOGNIZED BASED ON PERCENTAGE COMPLETION METHOD. AS PER THE A CCOUNTING S TANDARD AS - 7 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) TOWARDS ACCOUNTING FOR CONSTRUCTION /CONTRACT, THE RELEVANT REVENUE RECOGNITION PARAMETERS ARE YET T O BE MET AT THE END OF THE FINANCIAL YEAR ON 31 - 03 - 2012. IT WAS THUS SUBMITTED THAT REVENUE COULD NOT BE RECOGNIZED DUE TO NON - FULFI L LMENT OF PARAMETERS LAID DOWN IN AS - 7 . IN THE SAME VA IN, THE LEARNED COUNSEL POINTED OUT THAT SUBSTANTIAL REVENUE HAS BEEN DULY R ECOGNIZED (89.12 CRORES) IN THE FINANCIAL YEAR 2013 - 14 WHEN THE PARAMETER NOTIFIED IN THE ACCOUNTING STANDARD WERE BROADLY MET. IN ELABORATION, IT WAS SUBMITTED THAT REVENUE COULD NOT BE RECOGNIZED IN THE ABSENCE OF TRANSFER OF SIGNIFICANT RISK AND REWARDS TO THE P OTENTIAL BUYERS. 9.1 THE L D.AR , FURTHER REFERRED TO PARA - 19 & 20 OF THE ACCOUNTING S TANDARD - 7 WHICH READS AS UNDER; 19. COSTS THAT CANNOT BE ATTACHED TO CONTRACT ACTIVITY OR CANNOT BE ALLOCATED TO CONTRACT ARE EXCLUDED FROM THE COSTS OF A CONSTRUCTION CONTRACT. SUCH COSTS INCLUDE: (A) GENERAL ADMINISTRATION COSTS FOR WHICH REIMBURSEMENT IS NOT SPECIFIED IN THE CONTRACT; (B) SELLING COSTS; ITA NO. 1576 (B)/201 7 5 (C) RESEARCH AND DEVELOPMENT COSTS FOR WHICH REIMBURSEMENT IS NOT SPECIFIED IN THE CONTRACT; AND (D) DEPRECIATION OF IDLE PLANT A ND EQUIPMENT THAT IS NOT USED ON A PARTICULAR CONTRACT 20. CONTRACT COSTS INCLUDE THE COSTS ATTRIBUTABLE TO A CONTRACT FOR THE PERIOD FROM THE DATE OF SECURING THE CONTRACT TO THE FINAL COMPLETION OF THE CONTRACT. HOWEVER, COSTS THAT RELATE DIRECTLY TO A CONTRACT AND WHICH ARE INCURRED IN SECURING THE CONTRACT ARE ALSO INCLUDED AS PART OF THE CONTRACT COSTS IF THEY CAN BE SEPARATELY IDENTIFIED AND MEASURED RELIABLY AND IT IS PROBABLE THAT THE CONTRACT WILL BE OBTAINED. WHEN COSTS INCURRED IN SECURING A CON TRACT ARE RECOGNIZED AS AN EXPENSE IN THE PERIOD IN WHICH THEY ARE INCURRED, THEY ARE NOT INCLUDED IN CONTRACT COSTS WHEN THE CONTRACT IS OBTAINED IN A SUBSEQUENT PERIOD. 9.2. WITH REFERENCE TO THE ABOVE CLAUSE OF AS - 7 ISSUED BY ICAI, THE LD. COUNSEL SUBMITTED THAT THE PERIOD COSTS ARE NOT ATTRIBUTABLE TO THE CONTRACT ACTIVITY. I T WAS POINTED OUT THAT SELLING COST INCURRED IN CONSTRUCTION CONTRACT IS SPECIFICALLY EXCLUDED FROM THE COST OF THE CONSTRUCTION CONTRACT. I T WAS FURTHER STATED TH AT THE SELLING COST INCURRED ALSO CANNOT BE REGARDED AS COST INCURRED IN SECURING THE CONTRACT, AS SUCH SELLING COSTS WE RE INCURRED TO ACHIEVE SALE OF A PROJECT AND NOT FOR SECURING CONTRACT PER SE. UNDER THESE CIRCUMSTANCES, IT WAS POINTED OUT THAT THE AC TION OF THE ASSESSEE IN TREATING THE SELLING COST S AS REVENUE EXPENDITURE IS IN CONFORMITY WITH THE PRESCRIBED ACCOUNTING STANDARD. ITA NO. 1576 (B)/201 7 6 9.3 IT WAS THEREAFTER CONTENDED IN THE ALTERNATIVE THAT ALL EXPENSES INCURRED IN THE NORMAL COURSE OF BUSINESS IS REQUIRED TO BE ALLOWED AS REVENUE EXPENDITURE AFTER SETTING UP OF BUSINESS IRRESPECTIVE OF THE FACT WHETHER REVENUE IS YET EARNED OR NOT. IT WAS SUBMITTED THAT IN THE INSTANT C A SE, THE REAL EST ATE DEVELOPMENT BUSINESS HAS NOT ONLY BEEN SET UP BUT ALSO COMMENCED AND IS IN VOGUE. IN TH IS SITUATION, THE EXPENSES AS CLAIMED ARE REQUIRED TO BE ALLOWED. 9.4 IT WAS FURTHER SUBMITTED IN THE ALTERNATIVE THAT THE ASSESSEE HAS FILED RETURN OF LOSS FOR THE ASSESSMENT YEAR 2012 - 13 IN QUESTION AT RS.1,70,06,860/ - AND THEREFORE , THE ASSE S SEE DOES NOT STAND TO ANY BENEFIT BY WRONGLY CLAIMING SELLING EXPENSES AT A PREMATURE STAGE AND INFLATE THE LOSSES. IT IS NOT THE CASE OF THE REVENUE THAT THE SELLING E XPENSES ARE NOT BONAFIDE AND THEREFORE, THE LOSSES INCURRED ON ACCOUNT OF SELLING EXPENSES ARE EVENTUALLY AL LOWABLE IN THE YEAR OF PROFITS. THUS, THE WHOLE EXERCISE IS REVENUE IN NEUTRAL AND THEREFORE, IT DOES NOT CALL FOR ANY INTERFERENCE. 1 0 . THE LD.DR ON THE OTHER HAND, POINTED OUT THAT IN THE ABSENCE OF ANY SALE REVENUE, THE WHOPPING AMOUNT OF SELLING EXPENSES CANNOT BE ALLOWED IN THE LIGHT OF MATCHING CONCEPT , AS HELD BY THE LOWER AUTHORITIES. IT WAS FURTHER SUBMITTED THAT THE SELLING EXPENSES ARE ATTRIBUTABLE TO THE PROJECT IN PROGRESS AND THEREFORE, THE EXPENSES CAN BE CLAIMED IN THE RELEVANT YEAR WHEN THE REVENUE IS RECOGNIZED . 1 1 . WE HAVE CAREFULLY CONSID ERED THE RIVAL SUBMISSIONS . THE SUBSTANTIVE ISSUE FOR DETERMINATION IS WHETHER THE SELLING EXPENSES INCURRED BY THE ASSES S EE ARE ALLOCABLE TO THE SPECIFIC DEVELOPMENT CONTRA C T UNDER TAKEN BY THE ASSESSEE AND THUS REQUIRED TO BE ADDED TO ITA NO. 1576 (B)/201 7 7 THE CONTRACT COSTS IN PROGRESS OR SUCH EXPENSES CAN BE ALLOWED AS REVENUE EXPENDITURE. ON PERUSAL , IT IS NOTICED THAT THE ACCOUNTING STANDARD - 7 ISSUED BY ICAI CLEARLY SPELLS OUT THAT THE SELLING AND ADMINISTRATIVE COST ARE REQUIRED TO BE EXCLUDED FROM THE CONTRACT COST S WHI LE DRAWING FINANCIAL STATEMENTS. HENCE, T HE ACTION OF THE ASSESSEE RESONATES THAT THE PARAMETE R S OF AS - 7 REFERRED TO IN THE INSTANT CASE . 1 2 . WE ALSO FIND MERIT IN THE PLEA OF THE ASSESSEE THAT EXPENSES INCURRED IN THE NORMAL COURSE OF BUSINESS IS REQUIRED TO BE ALLOWED, AFTER SETTING UP OF BUSINESS IRRESPECTIVE OF THE FACT WHETHER THE REVENUE IS NOT YET EARNED IN VIEW OF THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD. 26 ITR 151 (BOM.). THE ACTION OF THE ASSESSEE IN ANY CASE IS A REVENUE NEUTRAL AFFAI R AND THE REVENUE IS NOT PUT TO ANY TAX LOSS PER SE BY SUCH A LLEGED PREMATURE CLAIM. 1 3 . WE FURTHER FIND THAT THE CONTROVERSY IS NO LONGER RESINTEGRA AND CLEARLY COVERED BY THE DECISION OF THE CO - ORDINATE BENCH OF THE TRIBUNAL IN SU NNY VISTA REALTORS PT.LTD. V S ACIT IN ITA NO.4580/MUM/2013 VIDE ORDER DATED 11 - 01 - 2017 . I N THE SIMILARLY PL A CED SITUATION , THE CO - ORDINATE BENCH HAS ADJUDICATED THE I S SUE IN FAVOUR OF THE ASSES S EE BY A DETAILED ORD E R. 1 4 . IN PARITY WITH THE VIEW TAKEN BY THE CO - ORDINATE BENCH AND HAVING REGARD TO THE TAX NEUTRALITY , WE FIND CONSIDERABLE MERIT IN THE OBJECTION R A ISED BY THE ASSESSEE. 1 5 . GROUND NO.2 OF THE ASSESSEE S APPEAL IS ACCORDINGLY, ALLOWED. ITA NO. 1576 (B)/201 7 8 1 6 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 03 - 03 - 2020 SD/ - S D/ - (BEENA PILLAI) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: BENGALURU DATED: 03 - 02 - 2020 * AM COPY OF THE ORDER FORWARDED TO: 1.APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5. DR 6 .GUARD FILE BY ORDER ASST. REGISTRAR ITA NO.155(B)/2017 9