ACIT 18(2), MUMBAI V. ADITYA CORPORATION, MUMBAI

ITA 4131/MUM/2013

• Counselvise Citation: 413119914 RSA 2013
• Duration Of Justice: 2 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 22-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINITA J MENON
• Section: 143(3)

Judgement Text

1 , ' INCOME TAX APPELLATE TRIBUNAL,MUMBAI - A,BENCH , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMB ER & SANJAY GARG,JUDICIAL MEMBER /. ITA NO. 4131 /MUM/201 3 , / ASSESSMENT YEAR - 200 8 - 09 ASSTT. CIT - 18(2) ROOM NO.115, 1 ST FLOOR PIRAMAL CHAMBERS PAREL, MUMBAI - 400 012. VS M/S. ADITYA C ORPORATION 402/403, EK - DANT SOCIETY S.K. BOLE ROAD, AGAR BAZAR DADAR (W) MUMBAI - 400 028 . PAN: AAMFA 7764 R ( / APPELLANT ) ( / RESPONDENT ) /ASSESSEE BY :SHRI ANIL S ATHE / REVENUE BY :MS. VINITA J. MENON / DATE OF HEARING : 08 - 0 9 - 2015 / DATE OF PRONOUNCEMENT : 08 - 09 - 201 5 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 4.2.2013 OF THE CIT(A)16, MUMBAI THE ASSESSING OFFICER (AO) HAS RAISED THE FOLLOWING GROUNDS OF APPEAL. 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING THE AO TO RESTRICT THE PROPORTIONATE CAPITALIZATION OF INTEREST EXPENDITURE ONLY TO THE COM MENCED PROJECTS AND NOT TO THE PROJECTS WHICH ARE YET TO COMMENCE. 2. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THOUGH THE ASSESSEE IS FOLLOWING THE PROJECT COMPLETION METHOD WHERE COST IN CURRED FOR THE PROJECTS ARE ADDED TO WIP IN ACCORDANCE WITH THE BASIC PRINCIPLES OF ACCOUNTANCY, THE ASSESSEE FAILED TO ALLOCATE THE INTEREST EXPENDITURE TO THE VALUE OF WORK IN PROGRESS OF PARTICULAR PROJECTS. 3. 'ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A) FAILED TO CONSIDER THE FACT THAT A TRUE DISCLOSURE OF INCOME EMERGES ONLY WHEN ALL EXPENDITURE REGARDING A PARTICULAR PROJECT IS DEBITED TO THE ACCOUNT OF THAT PROJECT. 4. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE LD.CIT{A) ERRED IN NOT CONSIDERING THE FACT THAT THE ONUS WAS ON THE ASSESSEE TO PRESENT CLEAR PICTURE OF ACCOUNT AND TO ADOPT CORRECT METHOD TO APPORTION THE INTEREST EXPENDITURE. 5. FOR THESE AND OTHER REASONS IT IS SUBMITTED THAT THE ORDER OF THE CIT{A) MAY BE SET - ASIDE AND THAT OF THE AO RESTORED. 6. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ASSESSEE - FIRM, ENGAGED IN THE BUSINESS OF BU I LDE RS AND REAL ESTATE DEVELOPERS, FILED ITS RETURN OF INCOME 29.9.2008, DE CLARING TOTAL INCOME AT RS.NIL. THE AO COMPLETED THE ASS ESSMEN T U/S. 143(3) OF THE ACT ON 30.12.2012 DECLARING INCOME OF THE ASSESSEE AT RS.2,16,610/ - 2. E FFECTIVE G ROUND OF APPEAL IS ABOUT DIRECTING THE AO TO RESTRICT THE PROPORTIONATE CAPITALISATION OF INTEREST EXPENDITURE.DURING THE ASS ESSMENT PROCEEDING, THE AO FOUND THAT ASSESSEE WAS CARRYING ON CONSTRUCTION ACTIVITIES AT 9 LOCATIONS NAMELY: HER AMB, VINAYAK, EKDANT, KALAMBOLI 4131 /M/13 ADITYA CORP. 2 PLOT NO.48, KHANDA COLONY PLOT B - 30, MAYURESHWAR PLOT 166, MORESHWAR PLOT 102, N EW PANVEL PLOT NO.44 AND SIDDEHSWAR. HE FURTHER FOUND THAT ALL THE ABOVE PROJECTS WERE AT VARIOUS STAGES OF CONSTRUCTION, THAT IT HAD ALMOST COMPLETED WORK AT HERAM B PROJECT (HP) , THAT PROFIT IN RESPECT OF HP WAS OFFERED FOR TAX DURIN G THE YEAR UNDER APPEAL, THAT FROM THE HP IT HAD ALREADY SOLD 9 FLATS AND HAD OFFERED PROFIT ARISING OUT IF SEVEN F L ATS IN THE P&L ACCOUNT, THAT APART FROM HP IT HAD ALSO RECEIVED ADVANCES FROM ITS CUSTOMERS FROM OTHER PROJECTS UNDER CONSTRUCT I ON , THAT THE ASSESSEE WAS FOLLOWING PROJECT COMPLETION METHO D OF ACCOUNT (PCM), THAT IT HAD TREATED INCOME RE L ATED TO HP AND D EBITED AN AM OUN T OF RS. 53.86 LA C S UNDER THE HEAD INTEREST PAID, THA T THE INTEREST PAI D BY IT INCLUDE D THE INTEREST PA I D TO PARTN E RS ON THEIR RE SPECTIVE CAPITAL ( RS. 39.73 LACS) AND REMAINING INTEREST ( RS. 17.09 LACS) PERTAIN ED TO BORROWINGS OF VARIOUS PARTIES. HE FOUND THAT OUT OF THE TOTAL EXPENDITURE OF RS. 4.19 CRORES THE EXPENDITURE TO H P WA S 9.52% ONLY.THEREFORE,HE HELD THAT FUND WERE UTILIS ED FO R ALL THE PROJECTS AND CORRESPONDING INTEREST ON T H OSE FUNDS WERE DEBITED ONLY AGAINST HP. IN THIS BACKGROUND HE ASKED THE ASSESSEE TO GIVE JUSTIFICATION REG ARDING CLAIM MADE BY IT AND ALSO TO EXPLAIN AS TO WHY THE INTEREST AM OUN T SHOULD NOT BE CAPITALI S ED. VIDE ITS LETTER D A T ED 2.11. 20 10 THE ASSESSEE FILED ITS REPLY. A FTER CONSIDERING THE SAME, THE A O HELD THAT FOR DET ER MINATION OF PROFIT FROM DIFFERENT CONSTRUCTION PROJECT TH E ASSESSEE WAS FOLLOWING PCM, THAT IT WAS NOT MAIN TA I NI NG SEPARATE BOOKS OF ACC OUNT FOR SEPA RATE PROJECTS, THAT THE PRACTICE FOLLOWED BY IT WAS AGAINST THE CBDT CIR CULAR ,/INSTRUCTION AND AGAINST THE ICAI GUILDELINES AS WELL AS THE BASIC PRINCIPLES OF ACCOUNTING, THAT IT HAD NOT ALLOCATED/ADDED THE INTEREST COST TO WIP VALUE.THE AO REFE RRED TO THE DECISION OF MADRAS IND USTRIA L INVESTMENT C ORPORATION AND TAPARIA TO O LS LTD. AND HELD THAT THE ASSESSEE HAD FAILED TO ESTABLISH THE NEXUS OF INTEREST EXPENDITURE WITH REGARD TO PROJECTS UNDERTAKEN BY IT AND HAD NOT DISCHARGED ITS ONUS, THAT THE BEST POSSIBLE METHOD AVAILABLE WAS TO APPORTION THE INTEREST EXPENDITURE ON PERCENTAGE BASIS, THAT THE RESPONSIBILITY WAS ON THE ASSESSEE TO PRESENT CLEAR PICTURE OF ACCOUNT AND TO ADOPT CORRECT METHOD SO THAT TRUE INC OME WAS BROUGHT TO TAX.FINALLY, TH E INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE AGAINST THE PROFIT OF HP WAS APPORTIONED BY THE AO TAKING THE BASE OF 9.52% OF THE EXPENDITURE INCURRED BY IT FO R THE SAID PROJECT.ACCORDINGLY, HE ALLOWED INTEREST EXPENDITURE OF RS.5.08 LACS AND BALANCE INTE REST OF RS.51.42 LACS WAS CAPITALIZED AGAINST OTHER PROJECTS IN PROPORTION TO THE COST INCURRED. 3. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLAT E AUTHORITY (FAA).BEFORE HIM, IT WAS ARGUED THAT THE ASSERTION OF T HE AO THAT THE ASSESSEE WAS REQUIRED TO MAINTAIN PROJECT WISE BOOKS OF ACCOUNT WAS CONTRARY TO LAW, THAT ICAI OR THE CBDT HAD NEVER ISSUED SUCH GUIDELINES, THAT REJECTING THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE ASSESSEE ON THAT GROUND WAS UNJ USTIFIED, THAT IT HAD MAINTAINED THE DETAILED RECORDS OF EACH PROJECT UNDERTAKEN WHEREIN ALLOCATION OF ITS DIRECT COST WITH THE REV ENUE WAS MADE AND SAME WAS PRESENTED DURING THE COURSE OF ASST PROCEEDINGS , THAT IT HAD FULFILLED THE MAT C H HING CONCEPT OF CO ST AND REVENUE WHILE ALLOCATING ALL COSTS TO RESPECTIVE JOBS FOR WHIC H THEY WERE INCURRED, THAT THE GENERAL ADMINISTRATIVE COST AND FINANCE COST WERE NOT ATTRIBUTABLE TO ANY SPECIFIC PROJECT,THAT SAME HAD BEEN DEBITED TO P&L ACCOUNT FOR THE YEAR UNDER CON SIDERATION, THAT THE PRINCIPLE WAS THAT THE COST WHICH DID NOT ADD ANY VALUE TO PROJECT/PRODUCT WAS NOT REQUIRED TO BE SHOWN AS PART OF THE COST, THE INTEREST EXPENDITURE WAS PERIOD COST AND WAS RECOGNIZED IN THE P ERIOD IN WHICH IT WAS INCURRED, THAT THE C ASES RELI ED UPON BY THE AO SUPPORTED THE CONTENTION OF THE ASSESSEE , THAT THE ASSESSEE HAD DISCHARGED ITS ONUS, THAT THE INTEREST COST WAS DIRECT COST AND WAS ATTRIBUTABLE TO PROJ ECT ITSELF, THAT IT WAS AN ACCEPTED PROPOSITION THAT INTEREST PAID ON PARTNE RS CAPITAL AS WELL AS LOAN WAS EXPENDITURE OF THE ASSESSEE . IT WAS FUR T HE R ARGUED THAT THE AO HAD APPLIED THE RATIO O F DIRECT COST INCURRED BY THE ASSESSEE ON VARIOUS PROJECTS FOR ALLOCATION OF FINANCE COST OF RS. 56.83 4131 /M/13 ADITYA CORP. 3 LACS, THAT THE EXERCISE OF ALLOCATI ON OF FIN ANCE CO S T WAS DONE PURELY ON THE DIRECT COST INCURRED ON ALL PROJECTS UNDERTAKEN BY THE ASSESSEE , THAT HE DID NOT CONSIDER THE DIFFERENT STAG E S OF COMPLETION OF EACH PROJECT AND THE NATURE OF COSTS INCURRED. THE ASSESSEE FILED THE LEVELS OF COMPLET ION OF ALL PROJECTS UNDER CONSIDERATION AS UNDER: S.NO. PARTICULARS DATE OF COMMENCEMENT COMPLETION DATE 1. HERAMB 30.12.2005 25.04.2008 2 VINAYAK 04.05.2007 13.04.2009 3 EKDANT 26.06.2007 27.05.2009 4 KALAMBOLI PLOT NO.48 SEC.16 NOT COMMENCED 5 KHAND A COLONY PL.NO.B - 30 NOT COMMENCED 6 MAYURESHWAR PLOT NO.166 19.06.2008 12.07.2010 7 MORESHWAR PLOT NO.102 16.08.2008 12.07.2010 8 PLOT NO.44 SECTOR - 8, NEW PANVEL NOT COMMENCED 9 SIDDESHWAR 16.08.2008 07.07.2010 IT WAS STATED THAT FIRST THREE PROJECTS WERE COMMENCED DURING THE YEAR UNDER APPEAL AND WERE SUBSTANTIALLY COMPLETED EITHER DURING THE YEAR OR IN THE IMMEDIATELY SUBSEQUENT PERIOD, THAT FOR THE REMAINING OTHER PROJECTS THE ASSESSEE HAD ONLY ACQUIRED PLOTS OF LAND DURING THE YEAR, THAT THERE WAS NO DEVELOPMENT ACTIVITY CARRIED OUT WITH REGARD TO OTHER PROJECTS. REFERRING TO THE A CCOUNTING STANDARD 16(AS - 16), THE ASSESSEE CONTENDED THAT WHERE A DEVELOPER /BUILDER ACQUIRED A P LOT OF LAND FOR ITS IN T EN D ED USE OF DEVELOPMENT AND FUTURE SALE THE COST OF FINANCE ATTACHED TO SUCH ACQUISITION OF LAND FOR THE PROJECT DID NOT QUALIFY FOR CAPITALIZATION, THAT IT NEEDED TO BE RECOGNIZED AS AN EXPENSE FOR THE PERIOD IN WHICH SAME WAS INCURRED, THAT IF IT WAS NECESSARY TO ALLOCATE THE INTEREST COST TO THE PROJ E CT THA N IT SHOULD BE APPORTIONED IN THE RATIO OF DEVELOPMENT ACTIVITY. THE ASSESSEE STATED THAT OUT OF RS.56.83 LACS A SUM OF RS.15.93 LACS COULD BE CAPITALIZED AND BALANCE (RS.40.89 LACS) SHOULD BE ALLOWED AS PERIOD COST. THE ASSESSEE RELIED ON THE CASE OF LOKHANDAWAL A CONSTRUCTION ( 260 ITR 579) ; RAHEJA (P) LTD. (102 ITR 414) . AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASS ESSMENT O RDER HE HELD THAT IN THE CASE OF BU I LDER, FOLLOWING PCM, THE DETERMINATION OF PROFIT WERE POSTPO N ED TO THE YE AR IN WHICH THE PROJ ECT WAS COMPLETED/SUBSTANTIALLY COMPLETED, THAT THE TRUE PROFIT IN SUCH A CASE COULD BE DET E RMINED ONLY WHEN THE ENTIRE COST OF PROJECT WAS ADDED TO THE VALUE OF WORK IN PROGRESS, THAT THE ASSESSEE HAD NOT MAINTAINED SEPARATE ACCOUNTS FOR SEPARATE PROJECTS THAT THE INTEREST EXPENDITURE WAS RIGHTLY APPORTIONED ON PERCENTAGE BASIS BY THE AO.WITH REGARD TO THE ASSESSEE S ALTERNATE CONTENTION THAT THE ALLOCATION AS MADE BY THE AO REQUIRED MODIFICATION WAS TO BE CONSIDERED, THAT THE ALLOCATI ON HAD TO BE MADE WITH REGARD TO THE PROJECTS WHERE THE DEVELOPMENT ACTIVITIES HAD COMMENCED BUT PROJECTS WERE INCOMPLETE THAT NO PROPORTIONATE DISALLOWANCE COULD BE MADE FOR THE PROJECTS WHICH H AD NOT COMMENCED. THE FAA DIRECTED THE AO TO VERIFY THE WORKIN G FURNISHED BY THE ASSESSEE AND TO CONSIDER THE SUBMISSION GIVEN BY IT.HE ALSO DIRECTED THE AO TO RESTRICT THE PROPORTIONATE CAPITALIZATION TO THE PROJECTS WHERE DEVELOPMENT ACTIVITIES HAD COMMENC ED BUT PROJECTS WERE INCOMPLETE,BUT NOT TO THE PROJECTS WHIC H H AD NOT COMMENCED. 4. BEF O RE US,THE DEPARTMENTAL REPRESENTATIVE ( DR ) SUPPORTED THE OR D ER OF THE AO AND CONTENDED THAT THE ASSESSEE WAS FOLLOWING PCM, THAT ALL THE INTEREST EXPENDITURE PERTAINING TO OTHER PROJECTS HAD BEEN DE BITED AGAINST THE INCOME OF HP , THAT THE AO HAD RIGHTLY APPORTIONED THE INTEREST 4131 /M/13 ADITYA CORP. 4 EXPENDITURE.THE AUTHORISED REPRESENTATIVE ( AR ) REFERRED TO AS - 16 AND SUBMITTED THAT THE FAA RIGHTLY HELD THAT APPORTIONMENT SHOULD BE DONE FOR THE PROJECTS WHICH H AD COMMENCED BUT NOT COMPLETED. WE FIND THA T AS - 16, ISSUED BY THE ICAI STIPULATES AS UNDER : - 16. THE ACTIVITIES NECESSARY TO PREPARE THE ASSET FOR ITS INTENDED USE OR SALE ENCOMPASS MORE THAN THE PHYSICAL CONSTRUCTION OF THE ASSET. THEY INCLUDE TECHNICAL AND ADMINISTRATIVE WORK PRIOR TO THE COM MENCEMENT OF PHYSICAL CONSTRUCTION, SUCH AS THE ACTIVITIES ASSOCIATED WITH OBTAINING PERMITS PRIOR TO THE COMMENCEMENT OF THE PHYSICAL CONSTRUCTION. HOWEVER, SUCH ACTIVITIES EXCLUDE THE HOLDING OF AN ASSET WHEN NO PRODUCTION OR DEVELOPMENT THAT CHANGES THE ASSET'S CONDITION IS TAKING PLACE. FOR EXAMPLE, BORROWING COSTS INCURRED WHILE LAND IS UNDER DEVELOPMENT ARE CAPITALISED DURING THE PERIOD IN WHICH ACTIVITIES RELATED TO THE DEVELOPMENT ARE BEING UNDERTAKEN. HOWEVER, BORROWING COSTS INCURRED WHILE LAND AC QUIRED FOR BUILDING PURPOSES IS HELD WITHOUT ANY ASSOCIATED DEVELOPMENT ACTIVITY DO NOT QUALIFY FOR CAPITALISATION. WE FIND FAA HAD ISSUED DIRECTION TO THE AO WHICH ARE IN ACCORDANCE WITH AS - 16. THEREFORE, WE ARE OF THE OPINION THAT HER ORDER DOES NOT SUF FER FROM ANY LEGAL INFIRMITY. CONFIRMING THE ORDER OF THE FAA WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. AS A RESULT APP EALS FILED BY THE AO STANDS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH ,SEPTEMBER,2015. 8 , 2015 SD/ - SD/ - ( / SANJAY GARG) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 08 .09.2015 . . . JV. SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.