M/s Indiabuild Villas Development Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-3(1)(1), Bangalore

ITA 2242/BANG/2018

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 0692 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 01-11-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 23-07-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Opportunity of being heard; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO. 2242/BANG/2018 ASSESSMENT YEAR : 2012 - 13 INDIABUILD VILLAS DEVELOPMENT PVT. LTD., NO.6/A, 2 ND FLOOR, KABRA EXCELSIOR, 7 TH CROSS, 1 ST BLOCK, KORAMANGALA, BANGALORE 560 034. PAN: AACCI 3931K VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), BANGALORE. APP ELLANT RESPONDENT APP ELLANT BY : SHRI SIDDESH GADDI, CA RESPONDENT BY : SHRI RAJENDRA CHANDEKAR , JT.CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 23 .0 8 .2018 DATE OF PRONOUNCEMENT : 03.10 . 2018 O R D E R THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATED 7.6.2018 OF THE CIT(APPEALS) 3, BENGALURU RELATING TO ASSE SSMENT YEAR 2012-13. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF DERIVING INCOME FROM CARRYING OUT REAL ESTATE DEVELOPMENT. THE ASSESSEE WAS INCORPORATED ON 10.8.2010. FOR AY 2012-13, THE ASS ESSEE FILED RETURN OF INCOME ON 29.9.2012 DECLARING A LOSS OF RS.74,69,22 2. THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR DID NOT SHOW ANY INCOME UNDER THE HEAD INCOME FROM BUSINESS AND HAD SHOWN ONLY INCOME OF RS.12,28,420 UNDER THE HEAD INCOME FROM OTHER SOURCES. UNDER THE HE AD INCOME FROM BUSINESS, THE ASSESSEE HAD CLAIMED EXPENSES OF RS. 92,02,720 AND SET OFF ITA NO. 2242/BANG/2018 PAGE 2 OF 8 THOSE EXPENSES AS LOSS UNDER THE HEAD INCOME FROM B USINESS AND SET OFF THE SAME AGAINST THE INCOME FROM OTHER SOURCES. THI S IS HOW THE ASSESSEE DECLARED A LOSS IN THE RETURN OF INCOME FILED. 3. THERE WAS A DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE AS TO WHETHER THE ASSESSEE CAN CLAIM REVENUE EXPENSES UND ER THE HEAD INCOME FROM BUSINESS BECAUSE THE ASSESSEE HAD NOT SET UP T HE BUSINESS DURING THE RELEVANT PREVIOUS YEAR AND THEREFORE THESE EXPE NSES HAVE TO BE CAPITALISED AS CAPITAL COST AND SHOWN IN THE BALANC E SHEET FOR CLAIMING DEPRECIATION ON SUCH COST IN FUTURE. ORIGINALLY, T HE CLAIM OF THE ASSESSEE WAS REJECTED BY THE AO IN HIS ORDER OF ASSESSMENT U /S. 143(3) OF THE INCOME-TAX ACT, 1961 [THE ACT] DATED 22.12.2014. THE ASSESSEE FILED APPEAL BEFORE THE CIT(APPEALS), WHO BY HIS ORDER DA TED 31.3.2017 ACCEPTED THE CLAIM OF THE ASSESSEE THAT ITS BUSINES S WAS SET UP DURING THE RELEVANT PREVIOUS YEAR, BUT DID NOT ALLOW EXPENSES OF RS,15,65,000 CLAIMED UNDER THE HEAD ADVERTISEMENT AND BUSINESS PROMOTIO N EXPENDITURE OF RS.9,10,000 AND RS.5,30,000 CLAIMED UNDER THE HEAD LEGAL AND PROFESSIONAL CHARGES. ACCORDING TO THE CIT(APPEAL S), THESE TWO ITEMS OF EXPENSES WERE LINKED TO THE PROJECT ALREADY UNDERTA KEN BY THE ASSESSEE AND THEREFORE OUGHT TO BE CAPITALISED AS PART OF WO RK-IN-PROGRESS AND PROJECT COST OF THE ASSESSEE. IT IS NOT IN DISPUTE THAT THE ASSESSEE FOLLOWS AS-9 WHICH IS AN ACCOUNTING STANDARD PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI). THE FOLLOW ING DESCRIPTION OF REVENUE RECOGNITION AND THE NOTES TO THE ACCOUNTS O F THE ASSESSEE CLARIFIES THIS POSITION:- 3. REVENUE RECOGNITION : I. REVENUE IN CASE OF REAL ESTATE SALES ARE RECOGN ISED WHEN ALL THE FOLLOWING CONDITIONS ARE SATISFIED: ITA NO. 2242/BANG/2018 PAGE 3 OF 8 A. ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP H AVE BEEN TRANSFERRED TO THE BUYER AND THE COMPANY RETAINS NO EFFECTIVE CONTROL OF THE REAL ESTATE TO A DEGREE US UALLY ASSOCIATED WITH OWNERSHIP; B. NO SIGNIFICANT UNCERTAINTY EXISTS REGARDING THE AMOUNT OF THE CONSIDERATION THAT WILL BE DERIVED FROM THE VEA L ESTATE SALES', AND IT IS NOT UNREASONABLE TO EXPECT ULTIMA TE COLLECTION. 4. AGGRIEVED BY THE AFORESAID ORDER OF THE CIT(APPE ALS), THE ASSESSEE PREFERRED APPEAL BEFORE THE TRIBUNAL AND THE TRIBUN AL IN ITA NO.1270/BANG/2017 BY ORDER DATED 11.01.18 REMANDED THE ISSUE FOR A FRESH CONSIDERATION BY THE CIT(APPEALS). PURSUANT TO THE AFORESAID DIRECTION OF THE TRIBUNAL, THE CIT(APPEALS) HAS PAS SED THE IMPUGNED ORDER. BEFORE THE CIT(APPEALS), THE PLEA OF THE ASSESSEE W AS THAT AS PER AS 2 WHICH IS AN ACCOUNTING STANDARD PRESCRIBED BY ICAI FOR DETERMINATION OF VALUE AT WHICH INVENTORIES SHOULD BE VALUED IN THE FINANCIAL STATEMENTS, IN TERMS OF CLAUSE 3.4 & 13, ADVERTISEMENT AND BUSINES S PROMOTION EXPENDITURE, LEGAL AND PROFESSIONAL CHARGES SHOULD NOT BE CAPITALISED AS PART OF WORK IN PROGRESS. THE RELEVANT CLAUSES O F AS 2 READS THUS:- ' DEFINITIONS 3. THE FOLLOWING TERMS ARE USED IN THIS STATEMENT W ITH THE MEANINGS SPECIFIED: INVENTORIES ARE ASSETS: (A) HELD FOR SALE IN THE ORDINARY COURSE OF BUSINESS; (B) IN THE PROCESS OF PRODUCTION FOR SUCH SALE; OR (C) IN THE FORM OF MATERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION PROCESS OR IN THE RENDERING OF SERVICES. ITA NO. 2242/BANG/2018 PAGE 4 OF 8 NET REALISABLE VALUE IS THE ESTIMATED SELLING PRICE IN THE ORDINARY COURSE OF BUSINESS LESS THE ESTIMATED COSTS OF COMP LETION AND THE ESTIMATED COSTS NECESSARY TO MAKE THE SALE. 4. INVENTORIES ENCOMPASS GOODS PURCHASED AND HELD FOR RESALE, FOR EXAMPLE, MERCHANDISE PURCHASED BY A RET AILER AND HELD FOR RESALE, COMPUTER SOFTWARE HELD FOR RESALE, OR LAND AND OTHER PROPERTY HELD FOR RESALE. INVENTORIES ALSO EN COMPASS FINISHED GOODS PRODUCED, OR WORK IN PROGRESS BEING PRODUCED, BY THE ENTERPRISE AND INCLUDE MATERIALS, MAINTENANCE S UPPLIES, CONSUMABLES AND LOOSE TOOLS AWAITING USE IN THE PRO DUCTION PROCESS. INVENTORIES DO NOT INCLUDE MACHINERY SPARE S WHICH CAN BE USED ONLY IN CONNECTION WITH AN ITEM OF FIXED AS SET AND WHOSE USE IS EXPECTED TO BE IRREGULAR; SUCH MACHINERY SPA RES ARE ACCOUNTED 14 IN ACCORDANCE WITH ACCOUNTING STANDARD (AS) 10, ACCOUNTING FOR FIXED ASSETS.' ' EXCLUSIONS FROM THE COST OF INVENTORIES 13. IN DETERMINING THE COST OF INVENTORIES IN ACCOR DANCE WITH PARAGRAPH 6, IT IS APPROPRIATE TO EXCLUDE CERTAIN C OSTS AND RECOGNISE THEM AS EXPENSES IN THE PERIOD IN WHICH T HEY ARE INCURRED. EXAMPLES OF SUCH COSTS ARE: (A) ABNORMAL AMOUNTS OF WASTED MATERIALS, LABOUR, OR OT HER PRODUCTION COSTS; (B) STORAGE COSTS, UNLESS THOSE COSTS ARE NECESSARY IN THE PRODUCTION PROCESS PRIOR TO A FURTHER PRODUCTION ST AGE; (C) ADMINISTRATIVE OVERHEADS THAT DO NOT CONTRIBUTE TO BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION; AND (D) SELLING AND DISTRIBUTION COSTS. 5. THE CITA DEALT WITH THE AFORESAID ARGUMENTS BY H OLDING THAT (A) AS- 2 IS NOT APPLICABLE TO CONSTRUCTION CONTRACTS AS WI LL BE CLEAR THAT IT WAS ONLY APPLICABLE FOR PURCHASE OF GOODS HELD FOR RESALE AS WOULD BE CLEAR FROM PARA 4 OF AS-2, (B) ADVERTISEMENT AND BUSINESS PROM OTION EXPENSES AS WELL AS LEGAL & PROFESSIONAL CHARGES WERE RELATED T O A PROJECT AND CANNOT ITA NO. 2242/BANG/2018 PAGE 5 OF 8 BE ALLOWED AS A REVENUE EXPENDITURE AND HAVE TO BE CAPITALISED AS CAPITAL COST OF THE PROJECT. AGGRIEVED BY THE AFORESAID OR DER OF CITA, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 6. I HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR. THE LD. COUNSEL FOR THE ASSESSEE R EITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE CITA. HE FILED A PAPERBOOK CONTAINING SEVERAL CASE LAWS WHICH RELATE TO APPLIC ABILITY OF AS-7 AND AS-2. SINCE THE ASSESSEE IN THE PRESENT CASE IS FOLLOWING AS-9, THESE DECISIONS ARE NOT RELEVANT AND THE LD. COUNSEL FOR THE ASSESS EE WAS ALSO APPRISED OF THIS POSITION. THE LD. COUNSEL FOR THE ASSESSEE PL ACED RELIANCE ON OPINION OF EXPERT COMMITTEE OF ICAI DATED 16.7.2003 WHEREIN AGAIN THE QUESTION WAS IN THE CONTEXT OF AS-2 VIS-A-VIS AS-7 AND THERE FORE EVEN THIS OPINION IS NOT OF ANY USE IN THE PRESENT CASE. THE LD. COUNSE L FOR THE ASSESSEE POINTED OUT THAT BOTH ITEMS OF EXPENSES WHICH WERE TREATED AS CAPITAL EXPENSES ATTRIBUTABLE TO THE PROJECT REQUIRING CAPI TALISATION AS WORK-IN- PROGRESS HAD NO RELEVANCE TO THE PROJECT AND WAS GE NERAL ADMINISTRATIVE EXPENSES OF THE ASSESSEE AND THEREFORE OUGHT TO BE ALLOWED AS DEDUCTION. 7. I HAVE EXAMINED THIS ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE AND I FIND THAT THE ADVERTISEMENT & BUSINESS PROMOT ION EXPENSES OF RS.15,65,000 WAS A PAYMENT MADE BY THE ASSESSEE TO OGILVY MATHER P. LTD. [OGILVY FOR SHORT]. THE AGREEMENT BETWEEN AS SESSEE AND OGILVY IS AT PAGES 88 TO 90 OF PB. PERUSAL OF THE SAME SHOWS TH AT THE ASSESSEE HAS ENGAGED THE SERVICES OF OGILVY FOR THE PURPOSE OF C ORPORATE BRAND IDENTITY EXERCISE, LOGO DESIGN AND COLLATERAL DESIGN. IN MY OPINION, THIS WOULD BE IN THE NATURE OF GENERAL EXPENSES NOT ATTRIBUTABLE TO ANY PROJECT AND PAYMENT TO THE EXTENT IT RELATES TO THE AFORESAID EXPENSES CANNOT BE CAPITALISED AND HAD TO BE ALLOWED AS REVENUE EXPENDITURE. THERE IS ALSO ANOTHER AGREEMENT FOR ADVERTISING WITH OGILVY DATED 5.9.201 1. THIS AGREEMENT IS FOR SPECIFIC PURPOSE OF ADVERTISING OF PROJECTS AND THEREFORE PAYMENTS MADE ITA NO. 2242/BANG/2018 PAGE 6 OF 8 FOR THE SAID PURPOSE WILL HAVE TO BE TREATED AS ATT RIBUTABLE TO SPECIFIC PROJECT AND CAPITALISED. THE AO IS DIRECTED TO EXAMINE THE PAYMENT OF RS.15,65,000 AND TO THE EXTENT IT RELATES TO CORPOR ATE BRAND IDENTITY EXERCISE AND LOGO DESIGN SHOULD BE ALLOWED AS REVEN UE DEDUCTION. THE AO WILL ALLOW OPPORTUNITY OF BEING HEARD TO THE ASS ESSEE. 8. AS FAR AS LEGAL & PROFESSIONAL CHARGES ARE CONCE RNED, IT IS CLEAR FROM THE AGREEMENT BETWEEN THE ASSESSEE AND PRASHANT RAN A AND LENIN R.K. THAT THE ASSESSEE HAD ENGAGED PROFESSIONALS FOR CAR RYING OUT LIASONING WORK IN RELATION TO SARJAPUR SITE. THEREFORE PAYME NT MADE TO THESE TWO PERSONS ARE REFERABLE TO A PARTICULAR PROJECT AND T HEREFORE THESE EXPENSES HAVE TO BE CAPITALISED TO THE CONCERNED PROJECT. W E THEREFORE UPHOLD THE ORDER OF THE CIT(APPEALS) TO THIS EXTENT. 9. WE MAY ALSO ADD THAT THE RELEVANT STATUTORY PROV ISIONS REGARDING METHOD OF ACCOUNTING UNDER THE ACT, ARE SEC.145 OF THE ACT (PRIOR TO ITS AMENDMENT BY THE FINANCE ACT, 2014 W.E.F. 1.4.2015 APPLICABLE IN THE PRESENT CASE) DEALS WITH METHOD OF ACCOUNTING AND I T READS THUS:- SEC.145: METHOD OF ACCOUNTING: (1) INCOME CHARGEA BLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON OR INCOME FROM OTHER SOURCES SHALL, SUBJECT TO THE PROVISION S OF SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSE SSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLO WED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF IN COME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECT ION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2) HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESS ING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SE CTION 144. ITA NO. 2242/BANG/2018 PAGE 7 OF 8 10. VIDE NOTIFICATION NO. 9949, DATED 25-1-1996 [(1 996) 130 CTR (ST) 33], ACCOUNTING STANDARD I RELATING TO DISCLOSURE O F ACCOUNTING POLICIES AND ACCOUNTING STANDARD II RELATING TO DISCLOSURE OF PR IOR PERIOD AND EXTRAORDINARY ITEMS AND CHANGES IN ACCOUNTING POLIC IES HAD ALONE BEEN NOTIFIED AS ACCOUNTING STANDARDS TO BE FOLLOWED BY AN ASSESSEE AND NO OTHER ACCOUNTING STANDARD HAS BEEN NOTIFIED. 11. AS-7, AS-9 ISSUED BY ICAI OR THE ICAI GUIDANCE NOTE ON ACCOUNTING FOR REAL ESTATE TRANSACTIONS, 2006, HAVE NOT BEEN N OTIFIED AND HENCE THEY DO NOT HAVE STATUTORY FORCE. THE ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING. AS-7 OR AS-9 OR ICAI GUIDANCE NOTE ON ACCOUNTING FOR REAL ESTATE TRANSACTIONS, 2006, CANNOT BE SAID TO BE EIT HER CASH SYSTEM OR MERCANTILE SYSTEM OF ACCOUNTING. ALL THESE SYSTEMS OF RECOGNIZING REVENUE HAVE TRAPPINGS OF BOTH CASH SYSTEM OR MERCANTILE SY STEM BUT CANNOT BE SAID TO FALL STRICTLY WITHIN THE PARAMETERS OF EITH ER CASH SYSTEM OR MERCANTILE SYSTEM OF ACCOUNTING. FOR EXAMPLE, IN A REAL ESTAT E PROJECT IF NONE OF THE FLATS CONSTRUCTED ARE SOLD THERE IS NO NEED TO RECO GNIZE REVENUE AS NO INCOME HAS ACCRUED OR ARISEN. HOWEVER IN POCM, YOU HAVE TO PRESUME ACCRUAL OF INCOME BASED ON THE STAGE OF COMPLETION OF THE PROJECT. THIS IS DEFINITELY NOT IN TUNE WITH THE MERCANTILE SYSTEM O F ACCOUNTING. SIMILARLY IN PCM, EVEN PRIOR TO COMPLETION OF THE PROJECT SALE O F SOME OF THE FLATS IN A PROJECT COULD BE MADE, BUT INCOME FROM SUCH SALE IS NOT RECOGNIZED BUT POSTPONED. THEREFORE PCM IS ALSO NOT STRICTLY NOT IN TUNE WITH THE MERCANTILE SYSTEM OF ACCOUNTING. WE HOWEVER WISH TO MAKE IT CLEAR THAT THE AFORESAID OBSERVATIONS WILL HOLD GOOD ONLY FOR AY UPTO AY 2012-13 BECAUSE SEC.145 OF THE ACT HAS UNDERGONE SOME STATU TORY AMENDMENTS AND THE POSITION AFTER SUCH AMENDMENT IS NOT AND CA NNOT BE SUBJECT OF DECISION IN THIS APPEAL. 12. FOR THE REASONS GIVEN ABOVE, I REJECT THE ARGUM ENT OF THE LD. COUNSEL FOR THE ASSESSEE ON HIS RELIANCE ON AS-2. ITA NO. 2242/BANG/2018 PAGE 8 OF 8 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 3 RD DAY OF OCTOBER, 2018. SD/- ( N.V. VASUDEVAN ) JUDICIAL MEMBER BANGALORE, DATED, THE 3 RD OCTOBER, 2018. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.