LODHA DEWELLERS P. LTD, MUMBAI V. ACIT CIR 6(3), MUMBAI

ITA 2818/MUM/2012

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9800 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-05-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 26-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAGADSIH P JANGID
• Assessee Lawyers: A V SONDE
• Keywords: Cost of acquisition; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI BEFORE S/ SHRI B.R. BASKARAN (AM) & SANDEEP GOSAIN (JM) I.T.A. NO. 2818 /MUM/20 1 2 (ASSESSMENT YEAR 20 08 - 0 9 ) LODHA DWELLERS PVT. LTD. 216, SHAH & NAHAR INDUSTRIAL ESTATE OFF DR.E MOSSES ROAD WORLI, M UMBAI - 400 018. PAN: AABCL1117D. VS. ACIT CC - 6(3) ROOM NO. 522 AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY SHRI A.V. SONDE DEPARTMENT BY SHRI JAGADSIH P. JANGID DATE OF HEARING 18.5 . 201 7 DATE OF PRONOU NCEMENT 26 . 7 . 201 7 O R D E R PER B.R. BASKARAN (AM) : - THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 31.1.2012 PASSED BY THE LEARNED CIT(A) - 38, MUMBAI AND IT RELATES TO A.Y. 2008 - 09. 2. THE ASSESSEE IS AGGRIEVED BY THE D ECISION OF THE LEARNED CIT(A) IN CONFIRMING THE DISALLOWANCE OF REVENUE EXPENSES EARNED BY THE ASSESSEE TO THE TUNE OF ` 1.79 CRORES. 3. FACTS RELATING TO THE ISSUE ARE STATED IN BRIEF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION. DURING THE Y EAR UNDER CO N SIDERATION, THE ASSESSEE WAS DEVELOPING A PROJECT NAMED CASA BELLA AT DOMBILVALI, MUMBAI. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF FOLLOWING EXPENSES: - LODHA DWELLERS P. LTD. 2 NATURE OF EXPENSES ` (I) EMPLOYEE COST 25 ,71,891/ - (II) OFFICE AND ADMINISTRATION EXPENSES 83,40,913/ - (III) SELLING AND MARKETING EXPENSES 3,13,493/ - (IV) INTEREST CHARGES 6 7,09,846/ - 1,79,36,143/ - THE ASSESSING OFFICER TOOK THE VIEW THAT THESE EXPENSES CANNOT BE ALLOWED AS REVENU E EXPENSES AS THE PROJECT IS UNDER CONSTRUCTION AND HENCE THEY ARE REQUIRED TO BE CAPITALISED. ACCORDINGLY, HE DISALLOWED THE CLAIM OF ABOVE SAID EXPENSES. THE LEARNED CIT(A) ALSO CONFIRMED THE SAME AND HENCE THE ASSESSEE HAS FILED THIS APPEAL BEFORE US. 4. LEARNED AR SU B MITTED THAT THE ASSESSEE HA S FOLLOW ED THE A CCOUNTING S TANDARD S ISSU ED BY THE INSTITUTE OF CHARTERED ACCOUNTANT S OF INDIA (ICAI) IN THE MATTER OF ACCOUNTING OF VARIOUS EXPENSES. REFERRING TO THE OPINION GIVEN BY THE EXPERT ADVISORY C OMMITTE E OF ICAI , THE LEARNED AR SUBMI TTED THAT THE A CCOUNTING STANDARD SPECIFIES THAT THE ACTIVITY OF DEVELOPING HOUSING PROJECT ON ITS OWN ACCOUNT AS A COMMERCIAL VENTURE BY A COMPANY IS IN THE NATURE OF PRODUCTION ACTIVITY. HENCE, THE ACCOUNTING STANDARD RELAT ING TO THE VALUATION OF INVENTORIES SHALL ALSO APPLY TO THE CONSTRUCTION ACTIVITIES HELD AS WORKING IN PROGRESS. LEARNED AR FURTHER SUBMITTED THAT ACCOUNTING STANDARD - 2 PRESCRIBED THE METHOD OF VALUATION OF INVENTORIES. CLAUSE 12 OF ACCOUNTING STANDARD - 2 S PECIFICALLY STATES THAT INTEREST AND OTHER BORROWING COSTS ARE USUALLY CONSIDERED AS NOT RELATING TO BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND THEREFORE USUALLY NOT INCLUDED IN THE COST OF INVENTORIES. CLAUSE 13 OF ACCOUNTING STANDARD - 2 FURTHE R STATES THAT ADMINISTRATIVE OVERHEADS AND SELLING AND DISTRIBUTION COSTS ARE REQUIRED TO BE EXCLUDED FROM THE COST OF INVENTORIES. LEARNED AR FURTHER SUBMITTED THAT THE G UID ANCE N OTE ISSUED BY ICAI ON A CCOUNTING FOR REAL ESTATE TRANSACTIONS ALSO SPECIFI ES THAT THE GENERAL ADMINISTRATIVE COST AND SELLING COST SHOULD NOT BE CONSIDERED AS PART OF CONSTRUCTION COSTS. IT FURTHER STATES THAT THE BORROWING COSTS ATTRIBUTABLE TO THE PROJECT ACTIVITY CAN BE ALLOCATED TO PURCHASE COST. HE FURTHER SUBMITTED THAT TH E CBDT HAS ISSUED I NCOME COMPUTATION AND D ISCLOSURE STANDARD - II LODHA DWELLERS P. LTD. 3 (ICDS) RELATING TO VALUATION OF INVENTORIES . C LAUSE - 11 OF THE SAME SPECIFIES THAT INTEREST AND OTHER BORROWING COST S SHALL NOT BE INCLUDED IN THE COST S OF INVENTORIES UNLESS THEY ME E T THE CRI TERIA SPECIFIED IN THE ICDS - IX. LEARNED AR FURTHER SUBMITTED THAT ICDS - IX STATES THAT THE BORROWING COSTS THAT ARE DIRECTLY ATTRIBUTABLE TO THE PROJECT SHALL BE CAPITALISED AND OTHER BORROWING COSTS CAN BE RECOGNISED IN ACCORDANCE WITH THE PROVISIONS OF TH E ACT. 5. LEARNED AR INVITED OUR ATTENTION TO THE ANNUAL REPORT , MORE PARTICULARLY CLAUSE G OF ACCOUNTING POLICY STATED THEREIN AND SUBMITTED THAT THE ASSESSEE HAS FOLLOWED POLICY OF CAPITALISING BORROWING COSTS AS PART OF PROJECT COST IF THEY ARE DIRECTL Y ATTRIBUTABLE TO LONG TERM PROJECT DEVELOPMENT. LEARNED AR SUBMITTED THAT THE ASSESSEE HAS CAPITALISED A SUM OF ` 27 16 .82 LAKHS OUT OF INTEREST AND FINANCE CHARGES AND HAS CLAIMED A SUM OF ` 67.09 LAKHS ONLY AS REVENUE EXPENDITURE. HE SUBMITTED THAT THE EMPLOYEES COST ATTRIBUTABLE TO THE ADMINISTRATIVE AND OTHER ACTIVIT IES, ONLY HAS BEEN CLAIMED AS REVENUE EXPENDITURE AND REMAINING EMPLOYEES COST HAVE BEEN DULY CAPITALISED. HE SUBMITTED THAT IDENTICAL ISSUE RELATING TO EMPLOYEES COST CAME BEFORE THE COORD INATE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. LODHA PALAZZO VS. ACIT (ITA NO. 2298/MUM/2012 DATED 10.12.2014). THE TRIBUNAL, AFTER CONSIDERING ACCOUNTING STANDARD - 2 & AS - 7, ISSUED BY ICAI HELD THAT EMPLOYEES SALARY, ADMINISTRATIVE EXPENSES AND MARKETING & SELLING EXPENSES CLAIMED BY THE ASSESSEE AS PER THE RECOGNISED PRINCIPLES OF ACCOUNTING SHOULD BE ALLOWED AS DEDUCTION. 6. LEARNED AR FURTHER SUBMITTED THAT THE ASSESSEE IS ALSO CARRYING ON OTHER ACTIVITIES , SUCH AS ACQUISITION OF LAND , DEVELOPMENT OF OTHER LAND ETC., AND SAME IS MENTIONED IN CLAUSE 3,4&6 OF THE N OTES TO ACCOUNTS ATTACHED TO THE B ALANCE SHEET. ACCORDINGLY LEARNED AR SUBMITTED THAT ALL EXPENSES INCURRED BY THE ASSESSEE CANNOT BE CONSIDERED TO BE RELATED TO THE PROJECT DEVELOPMENT ACTIVI TY. HENCE THE ASSESSEE HAS SEGREGATED PART OF THE EXPENSES AS PER ACCOUNTING PRINCIPLES AND HAS CLAIMED THEM AS REVENUE EXPENDITURE. LODHA DWELLERS P. LTD. 4 ACCORDINGLY, HE SUBMITTED THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE SHOULD BE ALLOWED. 7. ON THE CONTRARY, LEARNED DEP ARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS NOT GENERATE D ANY INCOME DURING THE YEAR EXCEPT A SUM OF ` 70,000/ - BY WAY OF RENT AND ` 11,337/ - BY WAY OF WRITE OFF OF UNCLAIMED CREDIT BALANCES. THE ASSESSEE WAS FULLY ENGAGED IN DEVELOPING A HOUS ING PROJECT AND HENCE THE LEARNED CIT(A) WAS JUSTIFIED IN UPHOLDING THE VIEW OF THE ASSESSING OFFICER THAT THE REVENUE EXPENSES CLAIMED BY THE ASSESSEE CANNOT BE ALLOWED , SINCE THEY HAVE TO BE CAPITALISED. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE RECORD. T HE ASSESSEE HAS CLAIMED PART OF EMPLOYEES COST, OFFICE AND ADMINISTRATIVE EXPENSES, SELLING AND MARKETING EXPENSES AND INTEREST CHARGES AS REVENUE EXPENDITURE. PERUSAL OF THE FINANCE STATEMENT S OF THE YEAR UNDER CONSIDERATION WOULD SHOW THA T THE ASSESSEE HAS CAPITALISED MAJOR PART OF THESE EXPENSES UNDER THE HEAD LAND, CONSTRUCTION AND DEVELOPMENT. WE NOTICED THAT THE ASSESSEE HAS CAPITALISED A SUM OF ` 2716.82 LAKHS OUT OF INTEREST AND FINANCE EXPENSES, ` 51.82 LAKHS OUT OF OFFICE AND ADM INISTRATIVE EXPENSES AND ` 295.76 LAKHS OUT OF EMPLOYEES COST. HENCE IT IS NOT THE CASE, AS OBSERVED BY LD CIT(A), THAT ENTIRE EXPENSES HAVE BEEN CLAIMED BY THE ASSESSEE AS REVENUE EXPENDITURE. 9. THE ASSESSEE HAS CARRIED US THROUGH THE ACCOUNTING STAN DARD - 2 RELATING TO VALUATION OF INVENTORIES. THE EXPERT ADVISORY C OMMITTEE OF ICAI HAS CLARIFIE D THAT THE ACTIVITIES OF DEVELOPING HOUS ING PROJECT ON ITS OWN ACCOUNT AS COMMERCIAL VENTURE BY A COMPANY IS OF THE NATURE OF PRODUCTION ACTIVITY . THEREFORE IN VENTORIES SHOULD BE VALUED BY THE COMPANY AS PER ACCOUNTING STANDARD - 2. WE NOTICED THAT CLAUSE 13 OF ACCOUNTING STANDARD - 2 SPECIFICALLY STATES THAT SELLING AND DISTRIBUTION COSTS SHOULD NOT BE INCLUDED IN THE COST OF INVENTORIES. IT FURTHER STATES THAT TH E ADMINISTRATIVE OVERHEADS THAT DO NOT CONTRIBUTE TO BRING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION LODHA DWELLERS P. LTD. 5 SHOULD ALSO NOT BE INCLUDED IN THE VALUE OF INVENTORIES. WITH REGARD TO THE INTEREST AND BORROWING COSTS ALSO, IT IS STATED IN THE ACCOUNTING STANDARD - 2 THAT IT SHOULD NOT BE INCLUDED IN THE VALUE OF INVENTORIES. ICDS ISSUED BY CBDT ALSO STATES THAT INTEREST AND BORROWING COSTS SHALL NOT BE INCLUDED IN THE COSTS OF INVENTORIES UNLESS THEY MEET THE CRITERIA FOR RECOGNISING THE INTEREST AS A COMP ONENT OF THE COST. 10. THUS, WE NOTICED THAT THE ASSESSEE HAS DU LY FOLLOWED THE ACCOUNTING PRINCIPLES PRESCRIBED BY THE ACCOUNTING STANDARD AND ICDS FOR ACCOUNTING THE IMPUGNED EXP EN SES. ANNUAL REPORT FILED BY THE ASSESSEE WOULD SHOW THAT THE ASSESSEE I S ALSO ENGAGED IN OTHER ACTIVIT IES SUCH AS RELATING TO ACQUISITION OF AGRICULTURAL LAND, ENTERING INTO DEVELOPING AGREEMENT ETC. BESIDES, BEING A LIMITED COMPANY, THE ASSESSEE IS REQUIRED TO INCUR CERTAIN EXPENSES FOR MAINTENANCE OF THE COMPANY. HENCE, IT CANNOT BE SAID THAT DEVELOPMENT OF PRESENT PROJECT OF THE ASSESSEE IS THE ONLY ACTIVITY CARRIED ON BY IT. WE HAVE ALREADY NOTICED THAT THE ASSESSEE HAS CAPITALISED MAJOR PART OF THE IMPUGNED EXPENSES AND IT HAS CLAIMED ONLY A PORTION OF THE SAME AS REVEN UE EXPENDITURE , WHICH WAS CONSIDERED AS RELATABLE TO THE A DMINISTRATIVE AND OTHER ACTIVITIES CARRIED ON BY THE ASSESSEE. WE NOTICE THAT THE TAX AUTHORITIES HAVE NOT FOUND FAULT WITH THE SEGREGATION MADE BY THE ASSESSEE. HOWEVER, THEY HAVE TAKEN THE VIEW THAT ALL EXPENSES ARE REQUIRED TO BE CAPITALIZED, SINCE THE PROJECT WAS UNDER CONSTRUCTION. WE NOTICE THAT THE VIEW TAKEN BY THE TAX AUTHORITIES IS NOT IN ACCORDANCE WITH THE ESTABLISHED ACCOUNTING PRINCIPLES DISCUSSED ABOVE . 11. WE HAVE NOTICED THAT THE COORDINATE BENCH OF THE TRIBUNAL HAS CONSIDERED AN IDENTICAL ISSUE RELATING TO THE CLAIM OF EMPLOYEES COST IN THE CASE OF M/S. LODHA PALAZZO (SUPRA) AND THE SAME WAS DECIDED IN FAVOUR OF THE ASSESSEE. FOR THE SAK E OF CONVENIENCE, WE EXTRA CT BELOW OPERATIVE PORTION OF THE ORDER PASSED BY THE COORDINATE BENCH IN THE ABOVE SAID CASE. 11. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE PERCENTAGE COMPLETION METHOD OF LODHA DWELLERS P. LTD. 6 ACCOUNTING HAS BEE N REGULARLY FOLLOWED BY THE ASSESSEE. IN THE SUCCEEDING ASSESSMENT YEAR 2010 - 11, THE AO HAS ACCEPTED THE DEDUCTIBILITY OF THE IDENTICAL NATURE OF EXPENSES IN THE ASSESSMENT ORDER PASSED U/S 143(3) OF THE I.T. ACT . WE AGREE WITH CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE EMPLOYEE COST REFERS TO SALARY PAID TO THE EMPLOYEES WHO ARE LOOKING AFTER THE ADMINISTRATION OF OFFICE AND NOT DIRECTLY RELATED TO CONSTRUCTION OF THE PROJECT BUT IS PART OF THE ADMINISTRATIVE EXPENSES. SIMILARLY, THE OFFICE AND ADMINISTRATIVE EXPENSES AND SELLING AND MARKETING EXPENSES ARE TO BE CHARGED TO THE PROFIT & LOSS ACCOUNT IN THE VERY SAME YEAR IN WHICH THEY ARE INCURRED AND HAVE TO BE EXCLUDED FROM THE COST OF INVEN TORIES FOR WORKING OUT CLOSING WIP AS PER THE GUIDELINES ISSUED BY THE ICAI, ACCOUNTING STANDARD AS - 2 AND AS - 7. THE ASSESSEE HAS REGULARLY AND CONSISTENTLY BEEN FOLLOWING THE SAID METHOD OF ACCOUNTING AS PER THE PROVISIONS OF SECTION 145A OF THE I.T. ACT. THE ITA NO.2298/M/2012 7 M/S. LODHA PALAZZO AO HAS NOT ASSIGNED ANY COGENT REASON AS TO WHY THE METHOD, WHICH HAS BEEN CONSISTENTLY FOLLOWED BY ASSESSEE AND ACCEPTED BY THE DEPARTMENT IN PAST AS WELL IN SUCCEEDING ASSESSMENT YEARS AND WHICH IS IN ACCORDANCE WITH THE RECOGNIZED PRINCIPLES OF ACCOUNTING BY ICAI, IS BEING REJECTED. IN OUR VIEW, THE ACTION OF THE REVENUE AUTHORITIES IN REJECTING THE ASSESSEE'S ACCOUNTING METHOD, WITHOUT ASSIGNING ANY REASON I S NOT JUSTIFIED. THE ACCOUNTING METHOD FOLLOWED BY THE ASSESSEE AND THEREBY EXCLUDING THE INDIRECT EXPENSES SUCH AS OFFICE EMPLOYEES' SALARY, ADMINISTRATIVE EXPENSES AND MARKETING & SELLING EXPENSES IS AS PER THE RECOGNIZED PRINCIPLES OF ACCOUNTINGS AND AS SUCH THE CLAIM OF THE ASSESSEE DESERVES TO BE ALLOWED. WE HOLD ACCORDINGLY. THE ADDITIONS MADE BY THE LOWER AUTHORITIES ON THIS ISSUE ARE HEREBY ORDERED TO BE DELETED. 12 . IN VIEW OF THE FORGOING DISCUSSION, WE ARE OF THE VIEW THAT THE ASSESSEE WAS J USTIFIED IN CLAIMING THE ABOVE SAID EXPENDITURE AGGREGATING TO ` 1.79 CRORES AS REVENUE EXPENSES. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE LEARNED CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE. 13. IN TH E RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER HAS BE E N PRONOUNCED IN THE COURT ON 28 .7 .201 7. SD/ - SD/ - (SANDEEP GOSAIN ) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER M UMBAI ; DATED : 28 / 7 / 20 1 7 LODHA DWELLERS P. LTD. 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( DY./ASSTT. REGISTRAR) PS ITAT, MUMBAI