JCIT (OSD), New Delhi V. M/s A.N. Buildwell Pvt. Ltd., New Delhi

ITA 2185/DEL/2016

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 9667 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2022
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2011-2012
• Appeal Filed On: 21-04-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation

Judgement Text

ITA. No.2185/Del/2016 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E” NEW DELHI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ.अ.सं . I.T.A No. 2185/Del/2016 िनधाᭅरण वषᭅ/Assessment Year: 2011-12 JCIT (OSD) Circle : 1 (1) New Delhi. बनाम Vs. M/s. A. N. Buildwell Pvt. Ltd., 504, Bhikaji Bhawan, Bhikaji Cama Place, New Delhi – 110 066. PAN No. AAFCA4943E अपीलाथᱮ/ Appellant ᮧ᭜यथᱮ/ Respondent िनधाᭅᳯरतीकᳱओरसे / Assessee by : N o n e; राज᭭वकᳱओरसे / Department by : Ms. Rinku Singh, [CIT] – D. R.; सुनवाईकᳱतारीख/ Date of hearing : 24.08.2022 उ᳃ोषणाकᳱतारीख/Pronouncement on : 29.09.2022 आदेश / O R D E R PER C. N. PRASAD, J.M. 1. This appeal is filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-1 [hereinafter referred ITA. No.2185/Del/2016 2 to CIT (Appeals)] New Delhi, dated 4.02.2016 for assessment year 2011-12. 2. The Revenue has raised the following subastantive grounds of appeal:- “1. On the facts and in the circumstances of the case, the ld. CIT (A) has erred in deleting the addition on account of disallowance of the following ignoring the fact that these expenses incurred by the assessee are of capital in nature. (i) Disallowance of External Development Charges. Rs.2,24,48,451/- (ii) Disallowance of Advertisement and Marketing Expenses. Rs.2,54,39,493/- (iii) Disallowance of Brokerage and Incentive. Rs.8,48,12,831/-“ 3. In spite of service of notice none appeared on behalf of the assessee nor any adjournment was sought. 4. The ld. DR submits that the Tribunal decided the identical issues in assessee’s own case for assessment year 2009-10 by restoring the issues to the file of the Assessing Officer for deciding afresh. Therefore, following the said order the issues in appeal may also be restored to the file of the Assessing Officer. 5. Heard the ld. DR perused the orders of the Tribunal. The Tribunal by consolidated order dated 17.01.2018 in ITA. No. 1710/Del/2013 (by the assessee) and ITA. No. 2099/Del/2013 (by the Revenue) decided the issues as under:- ITA. No.2185/Del/2016 3 “4. When these appeals were called for hearing, neither anyone attended on behalf of the assessee nor any application for adjournment was placed before the Bench. On perusal of the record, we find that these appeals are pending since, 2013 and on many occasions, the case was adjourned on the request of the assessee. The Ld. counsel of the assessee also filed two paper books containing written submission on 14/02/2014 and 18/08/2016 respectively. During the hearing dated 25/04/2017, the Ld. counsel of the assessee requested for issue of notice of hearing on the official liquidator of the company, at the address provided by him. In view of his request, notice for hearing was issued on 23/08/2017 on the Assistant Official Liquidator at his address located on 8th floor, Loknayak Bhawan, Khan market, New Delhi fixing the date of hearing on 04/10/2017. On perusal of the record, we find that this notice has not been returned unserved. On said date also, none attended on behalf of the official liquidator of the company. Again a fresh notice was issued on 27/11/2017 fixing the appeal on 18/12/2017 but none attended on behalf of the assessee. In view of the above, we are of the considered view that further adjournment of these appeals would not serve any purpose and these appeals may be disposed on the basis of the record after hearing the Ld. DR on behalf of the Revenue. We, therefore, proceeded to hear and adjudicate these appeals accordingly. 5. The briefly stated facts of the case are that during the year under consideration, the assessee company was engaged in construction and development of a technology Park namely “SPIRE EDGE” in ‘Manesar’, (Haryana). The company acquired land measuring approximately 1.3 million square-feet and started construction work thereon. Out of the saleable area of 12,22,959.60 square feet, the assessee booked sales of 1,99,326 square feet till the end of the relevant year under consideration and received advances of Rs.50,41,05,499/- from 187 customers on booking of commercial units. 5.1 The assessee filed return of income on 30/09/2009 declaring nil income. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and complied with. During assessment proceeding, the Assessing Officer observed that expenses incurred on land and construction work debited to work in progress account reflected as inventory in the balance sheet and no revenue was recognized. The Assessing Officer noted work in progress of Rs. 43.51 crores and advance from customers of Rs.54.35 crores as on 31/03/2009. The assessee did not recognize any revenue from the project and the only income which was reflected in the profit and loss account was on account of interest income on deposits with banks. The Assessing Officer further observed that the assessee claimed expenses of Rs. 12.80 crores including expenses of Rs. 7.80 crores under the head administrative expenses, Rs. 3.54 crores on brokerage, Rs. 1.34 ITA. No.2185/Del/2016 4 crores on assured returns and Rs. 11 lakhs on depreciation. The assessee provided detail of the administrative expenses as under: Particulars Total Amount Transferred to inventories Balance claimed as revenue expenditure Basis of Transfer Salaries and Bonus 8612713 2109667 6503046 Related to employees worked for project Travelling and conveyance expenses 1038407 111514 926893 Related to employees worked for project Legal and professional expenses 4366080 2446149 19,19,931 Service taken for projects Marketing Expenses 58449543 58449543 Service taken for projects Miscellaneous expenses 913221 252496 660725 Bifurcated for the project. 5.2 The assessee further provided detail of the advertisement/marketing expenses of Rs.5,84,49,543/- as under:- 1. Broucher Printing Rs. 1,99,028 2. Hoardings Rs.41,71,603 3. Conference and meetings Rs. 88,636 4. Exhibitions Rs. 3,31,590 5. SMS/Website Rs. 28,77,082 6. Mobile Van Rs. 40,83,504 7. Newspapers Rs.3,29,04,358 8. Others Rs. 33,445 9. Marketing Expenses Rs.1,37,60,287 ITA. No.2185/Del/2016 5 5.3 The assessee claimed that advertisement expenses were made for the purpose of marketing of it goods and these expenses were not for acquiring, extending or improving any assets and, therefore, there was no value addition in the inventory of the company due to the advertising and marketing expenses debited to profit and loss account. 5.4 The contention of the assessee that expenses related to the projects were already transferred to inventory and the expenses which were not specific to any project were claimed as revenue expenditure. 5.5 In view of the Assessing Officer, the project was under early stage of development and all expenditure claimed being related to the project, same should have been capitalized. Accordingly, the Assessing Officer disallowed following expenses claimed by the assessee as revenue and treated the same as part of the inventory:- Expenses Head Amount (In Rs.) Advertisement &. marketing expenses 5,84,49,543 Employees Salary 65,03,046 Travelling expenses 9,26,893 Legal expenses 19,19,931 Brokerage Expenses 3,54,42,663 Assured Return 1,34,37,679 Total expenses 11,66,79,755 5.6 Aggrieved, the assessee filed appeal before the Ld. CIT-(A) and partly allowed the appeal of the assessee. The learned CIT-(A) allowed the disallowances except amount of Rs.1,34,37,679/- related to assured returns. 5.7 Aggrieved, both the assessee and the Revenue are in appeal before the Tribunal raising the respective grounds as above. 6. Before us, the Ld. CIT(DR) arguing both the ground of the appeal of the assessee as well as grounds of the appeal of the Revenue, submitted that the assessee in its submission before the learned CIT-(A) has accepted the fact of following the guidance note of ICAI for revenue ITA. No.2185/Del/2016 6 from real estate developers and according to which the assessee was required to recognize the revenue corresponding to the sales booked, if substantial work was already done on the project and substantial risk and rewards have been transferred to the customer. According to her, in view of the Percentage Completion Method (PCM) provided for real estate developers in guidance note of ICAI and income accrued or arisen in terms of section 5 of the Income Tax Act in case of the assessee following Mercantile method, the assessee was required to recognize revenue from sales booked of Rs. 54.35 crores in proportion to the expenses incurred in respect of the project. In view of her, rather than disallowing the expenses, the authorities should have recognized the Revenue and the income should have been assessed accordingly. She, therefore, requested that matter may be restored to the file of the Assessing Officer for deciding the issue afresh. 7. We have heard the submission of the Ld. CIT(DR) on the issue in dispute. We agree with the contention of the Ld. CIT(DR) that in the facts and circumstances of the case rather than disallowing the expenditure claimed by the assessee in treating the same as part of inventory, the Assessing Officer should have examined the income accrued or arise in on account of the work already completed on the project and after determining the revenue recognized from sales booked in proportion to the work already completed, the Assessing Officer was required to compute the profit from the project in the year under consideration. On perusal of page 15 of the paper book of the assessee containing 1-42 pages filed on 14.02.2014, which is part of Schedule 11 to notes of the account for the relevant year ending, we find that the assessee itself has followed percentage completion method for recognizing the revenue. The relevant clause of notes of accounts is reproduced as under:- “Revenue recognition i) Income from real estate sales Is recognized on the transfer of all significant risk and rewards of ownership to the buyers and when it Is not unreasonable to expect ultimate collection and no significant uncertainty exists regarding the amount of consideration. However if, at the time of transfer, substantial acts arc yet to be performed under the contract, revenue is recognized on the basis of percentage of actual cost incurred thereon, Including land and total estimated construction and development cost of projects under execution, subject to the reliability of the outcome of the project. The estimates of saleable area and costs are reviewed periodically by the management and any effect of changes in estimates Is recognized in the period ITA. No.2185/Del/2016 7 such changes are determined. However, when the total project cost is estimated to exceed total revenues from the project, the loss is recognized immediately. Determination of revenues under the percentage of completion method necessarily involves making estimates by the Company, some of which are technical in nature, concerning, where relevant, the percentage of completion, costs to completion, and the expected revenues from the projects and the foreseeable losses to completion. ii) Interest income is accounted for on accrual basis.” 8. We note that ICAI has issued Guidance Note on recognition of Revenue by the Real Estate Developers (2006), which has been made part of pages 25 to 28 of the paper book, dated 14/02/2014. The relevant clause 6 of Guidelines is submitted by the assessee is reproduced as under:- “6. Revenue in case of real estate sales should be recognized when all the following conditions are satisfied: (i) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership; (ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the real estate sales; and (iii) It is not unreasonable to expect ultimate collection. 9. We have further observed that the Institute of the Chartered Accountants of India (ICAI) has revised the Guidance Note on Accounting for Real Estate Transaction (Revised 2012), which is available on page 29 to 33 of the paper book of the assessee dated 14/02/2014. In para-5.2 of the said note, it is provided that Percentage Completion Method (PCM) is applied when the outcome of a real estate project can be estimated reliably and when all the conditions mentioned are satisfied. The relevant para of the guidelines is reproduced as under:- para-5.2 to para-5.4 of the guidance note ITA. No.2185/Del/2016 8 “5.2 This method is applied when the outcome of a real estate project can be estimated reliably and when all the following conditions are satisfied: (a) total project revenues can be estimated reliably; (b) it is probable that the economic benefits associated with the project will flow to the enterprise; (c) the project costs to complete the project and the stage of project completion at the reporting date can be measured reliably; and (d) the project costs attributable to the project can be clearly identified and measured reliably so that actual project costs incurred can be compared with prior estimates. When the outcome of a project can be estimated reliably, project revenues and project costs associated with the project should be recognized as revenue and expenses respectively applying the percentage of completion method in the manner detailed in paragraphs 5.3 to 5.8 below. 5.3 Further to the conditions in paragraph 5.2 there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognized under the percentage completion method only when the events in (a) to (d) below are completed. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable: (i) Environmental and other clearances. (ii) Approval of plans, designs, etc. (iii) Title to land or other rights to development/ construction. (iv) Change in land use ITA. No.2185/Del/2016 9 (b) When the stage of completion of the project reaches a Reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the construction and development costs as defined in paragraph 2.2(c) read with paragraphs 2.3 to 2.5. (c) At least 25% of the saleable project area is secured by contracts or agreements with buyers. (d) At least 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realized at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts. To illustrate - If there are 10 Agreements of sale and 10 % of gross amount is realized in case of 8 agreements, revenue can be recognized with respect to these 8 agreements. 5.4 When the outcome of a real estate project can be estimated reliably and the conditions stipulated in paragraphs 5.2 and 5.3 are satisfied, project revenue and project costs associated with the real estate project should be recognized as revenue and expenses by reference to the stage of completion of the project activity at the reporting date. For computation of revenue the stage of completion is arrived at with reference to the entire project costs incurred including land costs, borrowing costs and construction and development costs as defined in paragraph 2.2. Whilst the method of determination of stage of completion with reference to project costs incurred is the preferred method, this Guidance Note does not prohibit other methods of determination of stage of completion, e.g., surveys of work done, technical estimation, etc. However, computation of revenue with reference to other methods of determination of stage of completion should not, in any case, exceed the revenue computed with reference to the 'project costs incurred' method. Illustration appended to this Guidance Note clarifies the method of computation of revenue.” ITA. No.2185/Del/2016 10 10. In terms of section 5 of the Act also the total income of the assessee include incomes from whatever sources accrued or arisen to him in India during such year. Further, in terms of section 145(1) of the Act profit and gains of the business or profession is computed in accordance with either cash or Mercantile System regularly employed by the assessee. 11. In the present case, the assessee is following Mercantile system of accounting therefore, the assessee was required to disclose the profit which accrued corresponding to the part of the work of the project executed by the assessee. The Assessing Officer was required to examine the agreement to sale for units and record whether any specified area of plot of land was allocated to the customers and significant risk relating to the said plot like price risk, any regulatory risk (related to state government or any local authority) was transferred by the assessee. He was also required to examine whether there was any restriction on the buyer to sale or transfer his interest in the property to a third person till complete sale consideration is paid. In our opinion, if the significant risk and reward are transferred to the buyer, the amounts received from the buyer to the extent of stage of completion of the project has accrued to the assessee and it should be subject to tax in terms of section 5 of the Act. Before us, the percentage of work completed by the assessee on the project, is not available and, thus, we are unable to compute the revenue recognized from the project. 12. In view of the above facts and circumstances, we feel it appropriate to set aside the order of lower authorities on the issue in dispute raised in both the appeals and restore the matter to the file of the Assessing Officer for deciding afresh in view of observation made by us above. The assessee shall be afforded adequate opportunity of being heard. Accordingly, the grounds raised in both the appeals are allowed for statistical purposes.” 6. Following the above consolidated order of the Tribunal, we restore the issues in grounds of appeal of the Revenue to the file of the Assessing Officer for de novo adjudication after providing adequate opportunity of being heard to the assessee. 7. In the result, appeal of the Revenue is allowed for statistical purpose. ITA. No.2185/Del/2016 11 Order pronounced in the open court on 29/09/2022 Sd/- Sd/- ( SHAMIM YAHYA ) ( C. N. PRASAD ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 29/09/2022 *MEHTA* Copy forwarded to : 1. Appellant; 2. Respondent; 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, New Delhi. Date of dictation 27.09.2022 Date on which the typed draft is placed before the dictating member 28.09.2022 Date on which the typed draft is placed before the other member 29.09.2022 Date on which the approved draft comes to the Sr. PS/ PS 29.09.2022 Date on which the fair order is placed before the dictating member for pronouncement 29.09.2022 Date on which the fair order comes back to the Sr. PS/ PS 29.09.2022 Date on which the final order is uploaded on the website of ITAT 29.09.2022 Date on which the file goes to the Bench Clerk 29.09.2022 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order