Dev Arjuna Promoters & Developers Private Limited, Ludhiana V. DCIT, Ludhiana

ITA 392/CHANDI/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9802 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-07-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 10-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S K MITTAL
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER ITA NO. 532/CHD/2013 ASSESSMENT YEAR: 2009-10 THE DCIT, VS M/S DEV ARJUNA PROMOTERS & CENTRAL CIRCLE-I, DEVELOPERS (P) LTD., LUDHIANA. REGD. OFFICE 3, INDUSTRIAL AREA-A EXTENSION, LUDHIANA. PAN : AABCD9200H & ITA NO. 392/CHD/2013 ASSESSMENT YEAR: 2009-10 M/S DEV ARJUNA PROMOTERS & VS THE DCIT, DEVELOPERS (P) LTD., CENTRAL CIRCLE-I, REGD. OFFICE 3, LUDHIANA. INDUSTRIAL AREA-A EXTENSION, LUDHIANA. PAN : AABCD9200H (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI S.K.MITTAL RESPONDENT BY : SHRI ASHWANI KUMAR DATE OF HEARING : 13.07.2016 DATE OF PRONOUNCEMENT : 20.07.2016 O R D E R BOTH THE CROSS APPEALS ARE DIRECTED AGAINST THE ORD ER OF LD. CIT(APPEALS)-I LUDHIANA DATED 11.02.2013 FOR ASSESSMENT YEAR 2009-10. 2 2. THE REVENUE HAS FILED ITS APPEAL ON THE FOLLOWIN G GROUNDS : 1. THAT THE LD. CIT(A)-1 ,LUDHIANA HAS ERRED IN LAW AND ON FACTS IN RESTRICTING THE INTEREST DISALLOWED T O LAND PURCHASES FOR ASSESSMENT YEAR 2007-08 ONWARDS INSTEA D OF DISALLOWANCE OF TOTAL INTEREST DEBITED IN THE PROFIT AND LOSS ACCOUNT. 2. THAT THE LD. CIT(A)-1 ,LUDHIANA HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACTS THAT THE EXPEND ITURE OF INTEREST DEBITED TO THE PROFIT AND LOSS ACCOUNT AMOUNT ING TO RS. 1,13,12,039/- IS RELATABLE TO THE DEVELOPMENT OF THE COLONY AND IS A PART OF DEVELOPMENT EXPENSES. 3. THE ASSESSEE HAS FILED ITS APPEAL ON THE FOLLOWI NG GROUND : THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) ERRED IN LAW AND ON FACTS IN SUSTAINING THE ADDITION OF RS.60,86,230/-WITHOUT CONSIDERING THE VALUE OF LAND SOLD WHICH IS UTILIZED AGAINST THE PURCHASE OF LAND. THE AMOUNT OF ADDITION SHOULD HAVE BEEN REDUCED AFTER CONSIDERIN G SALE VALUE OF LAND FOR THE LAST THREE ASSESSMENT YEARS I. E. A.Y. 2007-08, 2008-09 AND 2009-10. 4. I HAVE HEARD LD. REPRESENTATIVES OF BOTH THE PAR TIES AND PERUSED THE FINDINGS OF AUTHORITIES BELOW. 5. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE CLAIMED BEFORE LD. CIT(APPEALS) THAT ASSESSING OFFI CER HAS WRONGLY DISALLOWED AN INTEREST OF RS. 1,13,12,039/- BY TREATING THE SAME TO BE REDUCED FROM DEFERRED DEVEL OPMENT 3 EXPENDITURE. THE ASSESSING OFFICER IN THIS REGARD HAS OBSERVED THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS. 1,13,12,039/- AS INTEREST ON TERM LOANS/UNSECURED L OANS AND THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF COLONY AND THE SAID TERM LOANS WERE APPARENTLY FOR THE PURPOSE OF DEVELOPMENT OF THE CO LONY AND THEREFORE THE SAME SHOULD BE DEBITED DEVELOPMEN T ACCOUNT. THE ASSESSEE WITH REFERENCE TO THIS OBSERV ATION OF THE ASSESSING OFFICER SUBMITTED HIS EXPLANATION BEF ORE HIM AS UNDER :- LETTER DATED 21.11.2011 : DURING THE YEAR UNDER CONSIDERATION, WE HAVE CLAIM ED INTEREST OF RS. 91,79,683/- PAID TO PUNJAB NATIONAL BANK AND RS. 21,32,356/- PAID AGAINST UNSECURED LOAN , AS EXPENDITURE. IN THIS REGARD YOUR HONOUR HAS' A SKED US TO EXPLAIN AS TO WHY INTEREST EXPENDITURE SHOULD NO T BE ADDED IN THE COST OF VALUE OF CLOSING STOCK OF LAND . IN THIS REFERENCE, IT IS SUBMITTED THAT THE COMPANY IS IN R EAL ESTATE BUSINESS SINCE F.Y. 2002-03. THE COMPANY HAS TREATED THE ENTIRE VALUE OF LAND AS A PART OF CLOSI NG STOCK. TILL 31 ST .MARCH, 2007 THE ASSESSEE HAS MAINTAINED PARALLEL PRE OPERATIVE INCOME & EXPENDITURE A/C IN WHICH VAR IOUS EXPENDITURE INCLUDING INTEREST EXPENDITURE NOT DIRE CTLY LINKED WITH THE VALUE OF PURCHASE PRICE OF LAND HAV E BEEN SHOWN. THE TOTAL PRE OPERATIVE EXPENDITURE AS ON 31/03/2007 WAS RS. 56,83,575/-. THESE PRE OPERATIVE EXPENDITURES HAVE BEEN CAPITALIZED IN F.Y. 2006-07. DURING 4 F.Y. 2006-07 THE COMPANY HAS SOLD PLOTS HAVING TOTA L SALE VALUE RS. 16,71,395/-. DURING THE F.Y. 2006-07 TOTA L DEVELOPMENT WORKS WAS NOT COMPLETED THEREFORE FOR CALCULATING PRE UNIT COST OF PLOT, THE COMPANY HAS CHARGED FUTURE DEVELOPMENT EXPENDITURE UNDER THE HEAD DEFER RED DEVELOPMENT EXPENDITURE. THE SOLE PURPOSE OF CREATI NG DEFERRED DEVELOPMENT EXPENDITURE WAS FOR CALCULATIO N OF PER UNIT COST SO THAT APPROPRIATE PROFIT COULD BE S HOWN IN THE BALANCE SHEET. ONCE THE FUTURE EXPENDITURE HAS BEEN CHARGED FOR CALCULATING THE VALUE OF STOCK, THE VAL UE OF STOCK WILL NOT BE FURTHER INCREASED ON ACCOUNT OF V ARIOUS EXPENDITURES. THESE VARIOUS EXPENDITURES WILL ONLY BE THE PART OF EXPENDITURE IN PROFIT & LOSS ACCOUNT. DUE T O THIS REASONING, THE INTEREST EXPENDITURE HAS BEEN CLAIME D AS A PART OF PROFIT AND LOSS ACCOUNT. IT IS FURTHER SUBM ITTED THAT LOAN -SANCTIONED BY PUNJAB NATIONAL BANK IS FOR THE DEVELOPMENT OF LAND THEREFORE, WORKING CAPITAL IN N ATURE. TO UNDERSTAND THE IMPLICATION OF THESE INTEREST EXPENDITURES, WE HAVE TO LOOK INTO THE AFFAIRS IN C ONTEXT OF MANUFACTURING ORGANIZATION WHERE INTEREST EXPENDITU RE AGAINST WORKING CAPITAL LOAN IS WAYS A PART OF PROF IT AND LOSS ACCOUNT. SINCE WE HAVE SHOWN ENTIRE VALUE OF L AND AS A PART OF CLOSING STOCK HENCE THE MOMENT ANY PART OF CLOSING STOCK IS BEING SOLD WE HAVE TO PREPARE PROFIT AND L OSS ACCOUNT AND EXERCISING OF CAPITALIZATION OF EXPENDI TURE IS NOT REQUIRED. THIS IS VERY CLEAR IN PRO VISION OF S ECTION 36(I)(III) OF THE ACT. 5 5(I) EVEN DURING THE FINANCIAL YEAR 2007-08 THE A SSESSEE HAS PURCHASED LAND FOR RS. 3,64,50,810/-. THE ASSES SEE HAS ALSO TAKEN INTEREST FREE UNSECURED LOAN OF RS. 1,63,92,000/-. FURTHER THE ASSESSEE HAS SOLD CLOSIN G STOCK FOR RS. 2,09,22,705/-. SIMILARLY DURING THE F.Y. 20 08-09 THE ASSESSEE HAS PURCHASED LAND (PART OF CLOSING ST OCK) FOR RS.33,78,000/- WHEREAS ASSESSEE HAS TAKEN INTEREST FREE LOAN OF RS.2,14,50,000/-. IN THIS WAY ENTIRE LAND O F CLOSING STOCK SO PURCHASED WAS FROM INTEREST FREE FUND. IN THE LIGHT OF ABOVE SUBMISSION IT IS RESPECTFULLY REQUESTED TH AT KINDLY ALLOW THE INTEREST EXPENDITURE AS A PART OF PROFIT AND LOSS ACCOUNT AS LOADING OVER THE VALUE OF CLOSING STOCK BY INTEREST EXPENDITURE IS NOT WARRANTED. LETTER DATED 16/12/11 'THE COMPANY WAS FORMED WITH OBJECTIVE TO START REAL ESTATE BUSINESS. THE COMPANY WAS INCORPORATED ON 08.05.2002. IN THE FINANCIAL YEAR 2002-03 THE COMPA NY HAS STARTED PURCHASING LAND FOR THE DEVELOPMENT FOR RES IDENTIAL &. COMMERCIAL USE. THE COMPANY HAS GOT REGISTRATION AS PROMOTER FOR CONDUCTING BUSINESS OF DEVELOPMENT & CONSTRUCTION OF COLONY & APARTMENT BY PUNJAB URBAN PLANNING & DEVELOPMENT AUTHORITY VIDE REGISTRATION NO. ACA.PUDA/LDH/49/1703 DATED 04/04/2003. LATTER ON COMPANY HAS GRANTED LICENSE TO DEVELOP COLONY VIDE LETTER DATED 20/12/2006. SINCE LICENSE FOR DEVELOPMENT WOR K WAS AWARDED BY PUDA IN FY 2005-06 HENCE ONLY AFTER THAT THE DEVELOPMENT WAS STARTED. IN THE F.Y. 2006-07 THE CO MPANY 6 HAS INCURRED TOTAL DEVELOPMENT EXPENDITURE OF RS. 54,66,927/-. IN THIS YEAR THE COMPANY HAS SOLD PLOT FALLING IN UNDER PUDA APPROVED AREA. THEREFORE, DURING F.Y. 2006-07 THE COMPANY HAS MADE PROVISION AGAINST FUTU RE EXPENDITURE TO BE INCURRED FOR THE DEVELOPMENT OF C OLONY UNDER THE HEAD DEVELOPMENT EXPENDITURE DEFERRED. TH E SOLE OBJECTIVE OF CHARGING FUTURE DEVELOPMENT EXPENDITUR E WAS TO ACCOUNT FOR PROFIT AGAINST THE SALE OF PROJECT L AND ON THE BASIS OF PROJECT COMPLETION METHOD. THIS METHOD OF ACCOUNTING IS BEING FOLLOWED BY THE COMPANY IN THE SUBSEQUENT YEAR INCLUDING THE YEAR UNDER CONSIDERAT ION. THIS METHOD OF ACCOUNTING IS IN ACCORDANCE WITH AS- 7 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. IN CASE OF COMPLETION METHOD WE ARE PRESUMING THAT THE PROJECT IS COMP1ETED AND FOR THAT MATTER DEVELOPMENT EXPENDITU RE DEFERRED ACCOUNT IS REQUIRED OTHERWISE COST PER UNI T WILL NOT BE DETERMINED. THE DEVELOPMENT EXPENDITURE DEFE RRED ACCOUNT IS ADJUSTED AGAINST THE RELEVANT EXPENDITUR E AS AND WHEN IT IS ACTUALLY INCURRED. NO SUCH EXPENDITU RE IS FURTHER DEBITED IN THE PROJECT COST.' 6. THE ASSESSING OFFICER AFTER CONSIDERING THE SUBM ISSION OF THE ASSESSEE CONCLUDED THAT IT WAS NOT ADOPTING ANY PARTICULAR METHOD FOR CALCULATION OF ITS PROFIT AND IT HAD TO BE DETERMINED IN ACCORDANCE WITH THE METHOD ADOPTED BY IT. THE ASSESSING OFFICER OBSERVED THAT THE ASSESS EE HAD REDUCTION IN DEVELOPMENT EXPENDITURE/DEFERRED LIABI LITY TO THE TUNE OF RS. 2,86,11,240/- WHICH MEANT THAT THE SAID 7 AMOUNT HAD BEEN UTILIZED FOR THE PURPOSES OF DEVELO PMENT EXPENSES DURING THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER CONCLUDED THE INTEREST AMOUNT OF RS. 1,13,12,039/- SHOULD ALSO BE REDUCED FROM THE DEFER RED DEVELOPMENT EXPENDITURE INSTEAD OF DEBITING IT TO T HE PROFIT AND LOSS ACCOUNT. 7. THE ASSESSEE CHALLENGED THE ADDITION BEFORE LD. CIT(APPEALS) AND ARGUMENTS OF THE ASSESSEE ARE AS U NDER : THE ASSESSEE COMPANY IS IN THE REAL ESTATE BUSINESS SINCE INCEPTION. THE COMPANY HAS STARTED ITS BUSINESS IN THE F.Y. 2002-2003. THIS IS THE FIR ST BALANCE SHEET, THE COMPANY HAS PREPARED. SINCE F.Y.2002-03 THE COMPANY HAS STARTED PURCHASING LAND. TILL F.Y.2005-06 THE TOTAL LAND PURCHASED BY THE COMPANY IS OF RS.30755551/-. THE TOTAL LAND COMPRISES OF RS.L5485000/- IS RELATED WITH PUDA APPROVED PROJECT AND RS.15270551/- AGAINST NON APPROVED LAND (CONSIDERED AS OTHER LAND). THESE LANDS ARE PURCHASED FROM PROMOTERS OWN FUND BOTH EQUITY AND UNSECURED LOANS GIVEN TO COMPANY WITHOUT ANY INTEREST. THE YEAR WISE BREAKUP OF LAND PURCHASED AND PROMOTERS' CONTRIBUTION IS AS UNDER:- EXTRACTED FROM BALANCE SHEET FILED WITH INCOME TAX DEPARTMENT IN THE F.Y. 2006-07 THE ASSESSEE COMPANY HAS SOLD SOME LAND OF APPROVED PROJECT. SO THIS IS THE 1 ST YEAR, THE COMPANY HAS TO ADOPT METHOD FOR RECOGNIZING ITS REVENUE AGAINST THE SALE OF PROJECT LAND. THERE ARE TWO METHODS TO RECOGNIZE REVENUE IN CASE, OF REAL ESTATE BUSINESS HAVING DEVELOPMENT EXPENDITURE. THESE METHODS ARE 1. COMPLETED CONTRACT OR PROJECT METHOD 2. PERCENTAGE OF COMPLETION METHOD (POCM). FINANCIAL YEAR EQUITY/SHARE APPLICATION BORROWED FUND INTEREST LAND 2002-03 100000 8892294 7853708 2003-04 100000 19944254 20418773 2004 - 05 100000 28489254 27661101 2005-06 5385000 33674254 30755551 8 IN ORDER TO GIVE FAIR STATUS OF REVENUE, THE COMPAN Y HAS IMPLEMENTED COMPLETED CONTRACT METHOD. WHILE IMPLEMENTING COMPLETED CONTRACT METHOD ASSESSEE HAS FACED ONE BIGGEST PROBLEM AS TO HOW FUTURE DEVELOPMENT EXPENDITURE WHICH IS NOT YET INCURRED I N THE YEAR IN WHICH REVENUE IS TO BE RECOGNIZED BUT PART OF THE PROJECT COST, IS TO BE CONSIDERED FOR CALCULATING REVENUE PROFIT. IF ASSESSEE COMPANY DO NOT CONSIDER FUTURE DEVELOPMENT EXPENDITURE, THE FA IR NET INCOME AGAINST THE SALE OF LAND COULD NOT BE DERIVED. SO IN ORDER TO DETERMINE FAIR INCOME ALL T HE FUTURE DEVELOPMENT EXPENDITURE WAS CONSIDERED. IN THE BOOKS OF ACCOUNTS FOLLOWING BOOK ENTRY IS PASSED: DEVELOPMENT EXPENDITURE (DEFERRED) RS.102068730/- DR DEVELOPMENT EXPENDITURE DEFERRED RS.102068730/- CR DEBIT ENTRY IS A PART OF DEVELOPMENT EXPENDITURE SHOWN IN THE PROFIT AND LOSS ACCOUNT AND CREDIT ENTRY IS A PART OF FUTURE EXPENDITURE TO BE APPROPRIATED AGAINST THE ACTUAL EXPENDITURE TO BE INCURRED IN FUTURE. THE BREAKUP OF DEVELOPMENT EXPENDITURE (DEFERRED) IS AS UNDER : COST OF PROJECT AMOUNT (RS. IN LACS) BOUNDARY WALL 216.74 ROAD/PATH COST 277.48 CIVIL CONSTRUCTION COST 235.94 ELECTRICALS 134.35 BRIDGE 48.00 MISC. FIXED ASSETS 30.84 PRE-OPERATIVE EXPENDITURES 83.61 PUDA DEVELOPMENT CHARGES 129.21 PUDA FEE/CONSULTANCY CHARGES 50.10 TOTAL EXPENDITURE FOR PROJECT 1244.16 LESS:- ACTUAL EXPENSES INCURRED UNDER DIFFERENT HEADS AS MENTIONED ABOVE TILL 31.03.2007 223.48 TOTAL 1020.68 THE DEVELOPMENT EXPENDITURE (DEFERRED) DOES NOT INCL UDE BORROWING COST I.E. INTEREST. BECAUSE FOR THE PURCHA SE OF LAND AS WELL AS DEVELOPMENT EXPENDITURE INCURRED, PROMOTERS OWN FUND BOTH EQUITY AND UNSECURED LOANS WAS USED. TILL F.Y. 2005-06, NO INTEREST WAS PAID AGAIN ST UNSECURED LOANS TAKEN BY THE COMPANY. 9 IN THE F.Y. 2006-07, THE COMPANY HAS SOLD PART OF PUDA APPROVED LAND SO IN THIS FINANCIAL YEAR THE COMPANY H AS PREPARED ITS FIRST PROFIT AND LOSS ACCOUNT. TILL F. Y. 2005-06 THE COMPANY WAS PREPARING PRE-OPERATIVE ACCOUNT IN WHIC H ALL THE EXPENDITURE OTHER THAN LAND COST IS ACCOUNTED FOR. THE TOTAL PRE-OPERATIVE EXPENDITURE OF RS. 5683575/-WHICH IS ACCUMULATED UP TO 31.003.2006 IS CHARGED IN THE PROFIT AND LOSS ACCOUNT IN THE F.Y. 2006-07. THE EXTRACT OF THE TR ADING ACCOUNT OF F.Y, 2006-07 IS AS UNDER:- FOR FINANCIAL YEAR 2006-07 (AMOUNT IN RS.) OPENING STOCK 15485000 SALE OF LAND 1671395 PRE-OPERATIVE EXPENDITURE 5683575 FDR INTEREST 20256 DEVELOPMENT EXPENDITURE 16664531 CLOSING STOCK 138998822 DEVELOPMENT EXPENDITURE DEFERRED 102068730 PROFIT 788637 TOTAL 140690473 TOTAL 140690473 SINCE ENTIRE LAND IS A PART OF CLOSING STOCK HENCE AFTER FREEZING THE VALUE OF CLOSING STOCK ALL THE EXPE NDITURE OTHER THAN DEVELOPMENT EXPENDITURE HAS BEEN SHOWN AS A PART OF PROFIT AND LOSS ACCOUNT AND AFTER THAT LOSS OR PROFIT AS THE CASE MAY BE, IS DETERMINED. T HE ASSESSEE HAS FOLLOWED THE SAME METHOD OF ACCOUNTING IN THE F.Y. 2008-09 (A.Y. 2009-10) WHICH WAS APPLIED IN THE F.Y. 2006-07. THERE IS NO DEVIATION IN THE METHOD OF ACCOUNTING FOLLOWED BY T HE COMPANY IN THE EARLIER YEARS. SUBMISSION 1. FINDING OF ASSESING OFFICER THE LEARNED -ASSESSING OFFICER, IN THE ASSESSMENT ORDER REPORTED IN PARA 2.2, HAS OBSERVED AS UNDER:- A. A BARE PERUSAL OF ITS ACCOUNTS SHOWS THAT IT IS NOT ADOPTING ANY PARTICULAR METHOD FOR CALCULATION OF ITS PROFIT. THE INCOME OF THE ASSESSEE HAS TO BE 10 DETERMINED IN CONSISTENT WITH THE METHOD ADOPTED BY. B. SINCE THE AMOUNT OF RS.11312039/- ON ACCOUNT OF INTEREST PAID WAS EXPENDITURE RELATABLE TO THE ACTIVITY OF DEVELOPMENT OF THE PROJECT AND AS SUCH THIS AMOUNT OF INTEREST SHOULD ALSO HAVE BEEN REDUCED FROM SUCH LIABILITY INSTEAD OF DEBITING TO THE P&.L ACCOUNT. REGARDING OBSERVATION NO. (A), IT IS STRONGLY BEING OPPOSED THAT THE COMPANY IS NOT ADOPTING ANY METHOD OF ACCOUNTING AND ALSO THE COMPANY IS NOT FOLLOWING ANY CONSISTENT METHOD FOR DETERMINING ITS PROFIT. IN FACT THE COMPANY HAS ADOPTED PROJECT COMPLETION METHOD SINCE F.Y. 2006-07 AND THE SAME METHOD HAS ALSO BEEN ADOPTED IN THE F.Y. 2007-08 AND F.Y. 2008-09. THEREFORE THERE IS NO DOUBT REGARDING THE CONSISTENCY IN THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. UNDER THIS FACT , THE OBSERVATION MADE BY THE ASSESSING OFFICER IS INCORRECT AND AGAINST THE FACT OF THE CASE. SIMILARLY THE SECOND OBSERVATION IS ALSO NOT CORR ECT AS THE BORROWING COST I.E. INTEREST WAS NOT A PART OF DEVELOPMENT EXPENDITURE DEFERRED THEREFORE THERE IS NO QUESTION OF BEING APPROPRIATED. IN FACT BORROWING COST LIKE OTHER EXPENDITURE IS A PART OF DEVELOPMENT OF THE PROJECT THEREFORE C ONSIDERED IN THE PROFIT AND LOSS ACCOUNT. 2. METHOD OF ACCOUNTING IN CASE OF REAL ESTATE BUSINESS THERE IS A DISPARITY IN THE METHOD OF ACCOUNTING FOLLOWED BY DIFFERENT COMPANIES HAVING REAL ESTATE BUSINESS. MOST OF THE LISTED REAL ESTATE COMPANIES HAVE FOLLOWED THE PERCENTAGE OF COMPLETION METHOD (POCM). SOME OF THE COMPANIES ARE FOLLOWING COMPLETED CONTRACT METHOD IN WHICH TIMING OF TAX PAYMENT DEFERS TILL THE COMPLETION OF PROJECTS. HOWEVER IN THE CASE OF ASSESSEE ALTHOUGH COMPLETED CONTRACT METHOD IS FOLLOWED AT TAX LIABILITY HAS NO T BEEN DEFERRED. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA HAS PRESCRIBED ACCOUNTING STANDARD -7 RELATED TO CONSTRUCTION CONTRACT. IN TH IS STANDARD PERCENTAGE COMPLETION METHOD WAS MADE MANDATORY IN THE PROJECT COMMENCING AFTER 01.04.2003. RECENTLY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA PUBLISHED GUIDANCE NOTE ON ACCOUNTING FOR REAL ESTATE TRANSACTION (REVISED 2012). THIS GUIDANCE SUPERSEDES THE GUIDANCE NOTE 11 ON RECOGNITION OF REVENUE BY REAL ESTATE DEVELOPERS ISSUED BY THE INSTITUTE IN 2006. THIS NEW GUIDANCE WAS ISSUE TO SETTLE DIVERSE PRACTICES. UNDER THESE GUIDANCE PERCENTAGE OF COMPLETION METHOD IS MANDATORY WHICH IS APPLIED TO ALL PROJECT IN REAL ESTATE SECTOR HAVING COMMENCED ITS BUSINESS AFTER 01.04.2012. IT MEANS THE ASSESSEE HAS RIGHTLY ADOPTED COMPLETION METHOD FOR RECOGNIZING ITS REVENUE. 3. METHOD ADOPTED BY THE ASSESSEE COMPANY THE ASSESSEE COMPANY HAS ADOPTED COMPLETION CONTRACT METHOD FOR RECOGNIZING ITS REVENUE. HERE I T IS MOST IMPORTANT TO UNDERSTAND THAT IF FUTURE EXPENDITURE IS NOT CONSIDERED THEN UNDER COMPLETION CONTRACT METHOD REVENUE WILL BE RECOGNIZED IN THE YEAR OF COMPLETION OF THE PROJECT. IN THAT SITUATIO N PERCENTAGE OF COMPLETION METHOD SHOULD BE - ADOPTED FOR RECOGNIZING THE REVENUE. THE COMPANY HAS CONSISTENTLY FOLLOWING COMPLETION CONTRACT METHOD SINCE F.Y. 2006-07. 4. SCOPE OF DISALLOWANCES OF BORROWING COST THE ASSESSEE COMPANY HAS NOT CHARGED BORROWING COST I.E. INTEREST IN THE VERY FIRST YEAR WHEN VALU E OF STOCK OF LAND WAS DETERMINED AFTER CONSIDERING LAND COST AND COST OF DEVELOPMENT. THEREFORE BORROWING COST WILL BE THE PART OF LOSS AS THERE IS NO LAND W HICH IS SHOWN AS INVESTMENT. 5. SCOPE OF DEVELOPMENT EXPENDITURE DEFERRED VIS-A-VIS COST OF COMPLETION METHOD DEVELOPMENT EXPENDITURE DEFERRED WAS CREATED IN THE F.Y. 2006-07 FOR THE PURPOSE OF IMPLEMENTING COST O F COMPLETION METHOD FOR RECOGNIZING THE REVENUE OF TH E PROJECT. IF WE DON'T CONSIDER FUTURE DEVELOPMENT EXPENDITURE THEN THE IMPLEMENTATION OF COST COMPLETION METHOD HAS GOT NO MEANING AS UNEXPENDED DEVELOPMENT EXPENDITURE SHALL BE REMAINED UNACCOUNTED FOR IN THE VALUE OF TOTAL COST WHICH IS TO BE DEDUCTED FROM SALE PROCEEDS. 6. CASUAL APPROACH OF ASSESSING OFFICER TO UNDERSTAND THE FACT OF THE CASE AND MAKING DISALLOWANCES THE LEARNED ASSESSING OFFICER HAS FAILED TO UNDERSTAND THE METHOD OF ACCOUNTING ADOPTED BY THE COMPANY AND ALSO OVERLOOKED THE METHOD ADOPTED IN THE PREVIOUS YEARS. EVEN THE ASSESSING OFFICER HAS 12 IGNORED THE FACT THAT IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR, BORROWING COST I.E. INTEREST HAS BEE N CHARGED TO PROFIT AND LOSS ACCOUNT. FOLLOWING THE PREVIOUS METHOD, THE COMPANY HAS PUT INTEREST COST IN THE PROFIT AND LOSS ACCOUNT IN THE FINANCIAL YEAR 2008-09 (ASSESSMENT YEAR 2009-10). THEREFORE, THE JUSTIFICATION TAKEN BY THE ASSESSING OFFICER FOR DISALLOWING INTEREST OF RS.113120.39/- IS AGAINST T HE FACT OF THE CASE AND ARBITRARY IN NATURE WITHOUT HA VING BEEN CORROBORATED. IN THE LIGHT OF ABOVE SUBMISSION IT IS RESPECTFULLY SUBMITTED THAT KINDLY THE ADDITION OF RS.1,13,12,03 9/- 8. THE LD. CIT(APPEALS) CONSIDERING SUBMISSIONS OF THE ASSESSEE, RESTRICTED THE DISALLOWANCE TO RS. 60,86, 230/- AND REST OF THE ADDITION WAS DELETED. 9. THE FINDINGS OF LD. CIT(APPEALS) IN PARA 5 OF TH E IMPUGNED ORDER READS AS UNDER : 5. I HAVE CONSIDERED THE BASIS OF DISAL LOWANCE MADE BY THE ASSESSING OFFICER AND THE ARGUMENTS OF THE AR ON THE ISSUE. IT IS APPARENT THAT THE ASSESS ING OFFICER HAS NOT FOUND ANYTHING IN CONSISTENCY WITH THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE FOR WORKING O UT ITS PROFIT ON YEAR TO YEAR BASIS. THE ISSUE TO BE DECIDE D HERE IS WHETHER THE ENTIRE AMOUNT OF INTEREST EXPENDITURE D EBITED TO 'PROFIT AND LOSS ACCOUNT IS REVENUE EXPENDITURE OR NOT. IT IS SEEN THAT THERE IS NO INTEREST DEBITED TO PROFIT AND LOSS ACCOUNT TILL ASSESSMENT YEAR 2006-07 AS THERE WERE N O INTEREST BEARING FUNDS. THE INTEREST BURDEN WITH RESPEC T TO LAND PURCHASES IN ASSTT. YEAR 2007-08 ONWARDS WAS CLEA RLY IN THE NATURE OF CAPITAL EXPENDITURE AND THEREFORE REQUI RED TO BE CAPITALIZED. THE REST OF THE EXPENDITURE LOGICALLY FALLS IN THE CATEGORY OF REVENUE. THE YEAR WISE BREAKUP OF LAND P URCHASED AS MENTIONED BY, THE ASSESSEES AS UNDER:- 13 ASSTT. YEAR VALUE OF LAND PURCHASED 2007-08 1,08,89,775/- 2008-09 3,64,50,810/- 2009-10 33,78,000/- THEREFORE THE INTEREST @ 12% ON THIS AMOUNT OF RS. 5,07,18,585/- IS ATTRIBUTABLE TO THE PURCHASES OF LA ND WHICH IS NOT PART OF THE REVENUE STREAM AND THEREFORE REQUIR ED TO BE CAPITALIZED TO THE COST OF LAND. THIS AMOUNT TO BE DISALLOWED WORKS OUT TO RS. 60,86,230/- THE REST OF THE ADDITI ON IS DIRECTED TO BE DELETED. IN THE RESULT APPEAL IS PARTLY ALLOWED. 10. THE LD. DR RELIED UPON ORDER OF THE ASSESSING O FFICER. 11. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND SUBMITTED THAT ASSESSEE COMPANY IS IN REAL ESTA TE BUSINESS AND RAISED CONSTRUCTION AT VARIOUS PLACES. THE INTEREST EXPENDITURE IS, THEREFORE, NOT A CAPITAL A SSET. THE INTEREST IS PART OF BUSINESS EXPENDITURE BEING BORR OWING COST, THEREFORE, INTEREST IS TO BE ALLOWED AS REVEN UE EXPENDITURE. THEREFORE WHOLE ADDITION IS UNJUSTIFI ED. 12. I HAVE CONSIDERED RIVAL SUBMISSIONS. IT IS NOT IN DISPUTE THAT ASSESSEE COMPANY IS IN REAL ESTATE BUS INESS SINCE LONG. THE ASSESSEE COMPANY HAS TREATED THE E NTIRE VALUE OF LAND AS A PART OF THE CLOSING STOCK. THE ASSESSEE MAINTAINED PARALLEL PREOPERATIVE INCOME & EXPE NDITURE 14 ACCOUNT. THE ASSESSEE EXPLAINED THAT IT HAS IMPLEM ENTED COMPLETED CONTRACT METHOD. IN THE FINANCIAL YEAR 2 006-07, THE ASSESSEE COMPANY HAS SOLD PART OF PUDA APPROVED LAND, SO IN THIS FINANCIAL YEAR, THE COMPANY HAS PREPARED ITS FIRST PROFIT & LOSS ACCOUNT. TILL FINANCIAL YEAR 2005-06 , THE COMPANY WAS PREPARING PREOPERATIVE ACCOUNT IN WHICH ALL THE EXPENSES OTHER THAN LAND COST IS ACCOUNTED FOR. THE TOTAL PREOPERATIVE EXPENDITURE WHICH IS ACCUMULATED UPTO 31.03.2006 WAS CHARGED TO PROFIT & LOSS ACCOUNT IN FINANCIAL YEAR 2006-07. THE DETAIL OF SAME IS ALSO NOTED IN THE SUBMISSIONS OF THE ASSESSEE. ACCORDING TO THE A SSESSEE, THE ASSESSEE COMPANY HAS ADOPTED PROJECT COMPLETION METHOD SINCE FINANCIAL YEAR 2006-07 AND SAME METHOD HAVE BEEN ADOPTED FOR SUBSEQUENT FINANCIAL YEARS 2007-08 AND 2008-09 ( I.E. ASSESSMENT YEAR 2009-10 UNDER APPEAL ). IT WAS, THEREFORE, CLAIMED THAT THERE WAS NO DOUBT REG ARDING THE CONSISTENCY IN THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT, THEREFORE, APPEARS THAT THE ASSESSIN G OFFICER DID NOT APPRECIATE THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE COMPANY WHICH WAS ADOPTED IN PRECEDING ASSESSMENT YEARS. THE ASSESSING OFFICER ALSO DID N OT APPRECIATE THAT IN THE PRECEDING ASSESSMENT YEARS BORROWING COST I.E. INTEREST HAS BEEN CHARGED TO PR OFIT & LOSS ACCOUNT. THE ASSESSEE FOLLOWED THE SAME METHO D OF ACCOUNTING AND TAKEN THE INTEREST COST IN THE PROFI T & LOSS ACCOUNT FOR YEAR UNDER CONSIDERATION. 15 13. THE LD. CIT(APPEALS), CONSIDERING THE EXPLANATI ON OF THE ASSESSEE, FOUND THE CONTENTION OF THE ASSE SSEE TO BE CORRECT THAT ASSESSEE MAINTAINED SAME METHOD OF ACCOUNTING IN ASSESSMENT YEAR UNDER APPEAL AS WAS ADOPTED IN THE PRECEDING ASSESSMENT YEARS. NO INCONSISTENCY IN THE METHOD OF ACCOUNTING ADOPTED B Y THE ASSESSEE FOR WORKING OUT ITS PROFIT ON YEAR TO YEAR BASIS WAS FOUND. THE LD. CIT(APPEALS), IN THIS VIEW OF T HE MATTER, CONSIDERED PART OF THE EXPENDITURE TO BE REVENUE. IT, THEREFORE, APPEARS THAT THE FACTS WHICH HAVE BEEN MISUNDERSTOOD BY THE ASSESSING OFFICER, HAVE BEEN P ARTIALLY MISUNDERSTOOD BY THE LD. CIT(APPEALS) AS WELL. SIN CE SAME METHOD OF ACCOUNTING HAVE BEEN FOLLOWED BY THE ASSE SSEE IN PRECEDING TWO ASSESSMENT YEARS IN WHICH NO DEFECTS HAVE BEEN POINTED OUT, THEREFORE, THERE WAS NO REASON FO R LD. CIT(APPEALS) TO BIFURCATE THE BORROWING COST FOR TH E PURPOSE OF DISALLOWING PART OF THE INTEREST. SINCE THE ENTIRE LAND IS PART OF THE CLOSING STOCK, THEREFORE , THE INTEREST SHALL HAVE TO BE CONSIDERED AS REVENUE EXP ENDITURE AS PER PROJECT COMPLETION METHOD. THE ENTIRE INTER EST SHALL HAVE TO BE ALLOWED AS DEDUCTION ON ACCOUNT OF REVEN UE EXPENDITURE. 14. I, THEREFORE, FIND THAT THERE WAS NO JUSTIF ICATION FOR 16 LD. CIT(APPEALS) TO HAVE RESTRICTED PART DISALLOWAN CE ON THIS ISSUE. I, ACCORDINGLY, SET ASIDE THE ORDERS O F AUTHORITIES BELOW AND DELETE THE ENTIRE ADDITION. 15. IN THE RESULT, DEPARTMENTAL APPEAL IS DISMISSED AND APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- (BHAVNESH SAINI) JUDICIAL MEMBER DATED : 20 TH JULY,2016. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR, ITAT CHANDIGARH