SUNNY VISTA REALTORS P. LTD, MUMBAI V. ASST CIT CIR 3(3), MUMBAI

ITA 4580/MUM/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8988 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: E
• Next Hearing Date: 07-04-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 10-06-2013
• Court: TRIBUNAL
• Department Lawyers: SUNIL K JHA
• Assessee Lawyers: CHETAN KARIA
• Keywords: Depreciation; Business expenditure; Revenue expenditure
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E, MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER) I.T.A. NO.4580/MUM/2013 (ASSESSMENT YEAR: 2009-10) SUNNY VISTA REALTORS PVT LTD 514, DALAMAL TOWERS, 211, FDPJ MARG, NARIMAN POINT, MUMBAI-21 VS THE ACIT, CIR.3(3), MUMBAI PAN : AAKCS1269E (APPELLANT) (RESPONDENT) APPELLANT BY SHRI CHETAN KARIA RESPONDENT BY SHRI SUNIL K JHA DATE OF HEARING : 15-12-2016 DATE OF ORDER : 11 -01-2017 O R D E R PER ASHWANI TANEJA, AM: THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-7, MUMBAI [HER EINAFTER CALLED CIT(A)] DATED 18-03-2013 PASSED AGAINST THE ASSESSMENT ORDE R OF THE AO DATED 25-12- 2011 U/S 143(3) FOR AY. 2009-10 ON THE FOLLOWING GR OUNDS:- GROUND 1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS)-7, MUMBAI ['CJ T(A)'] ERRED IN CONFIRMING THE ACTION OF THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE - 3(3) (THE AO') IN DISALLOWING THE BUSINESS EXPENDIT URE OF RS. 21,27,95,930 AND BY TREATING IT AS WORK-IN PROGRESS ('WIP') OF T HE APPELLANT. 2 GROUND 2 2. ON THE FACTS OF THE CASE, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LEARNED AO IN CONCLUDING THAT THE APP ELLANT UNDERTAKES ONLY A SINGLE CONTRACT AND HENCE THE ENTIRE EXPENDI TURE INCURRED BY IT IS ALLOCABLE TO THE SAID CONTRACT ONLY, UNDER THE GENE RALLY ACCEPTED ACCOUNTING PRINCIPLES ('GAAP') ISSUED BY THE ICAI A ND APPLICABLE IN THE CASE OF THE APPELLANT. GROUND 3 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEA RNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LEARNED AO IN CONCLUDI NG THAT THE MARKETING AND GENERAL ADMINISTRATIVE COSTS INCURRED BY THE APPELLANT ARE ALLOCABLE TO THE SPECIFIC CONTRACT UNDERTAKEN B Y THE APPELLANT AND THUS RESTATING THE DULY AUDITED ACCOUNTS DRAWN BY T HE APPELLANT IN ACCORDANCE WITH THE GAAP AND BY ADDING THE SAID COS TS TO THE WIP. 4. GROUND 4 4 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LEARNED AO IN LEVYING INTEREST OF RS.46,91,973 UNDER SECTION 234B OF THE INCOME-TAX A CT, 1961 ('THE ACT'). THE APPELLANT PRAYS THAT IT BE HELD TO DELETE THE L EVY OF INTEREST UNDER SECTION 234B OF THE ACT. GROUND 5 5 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LEARNE D AO IN LEVYING INTEREST UNDER SECTION 234D OF THE ACT. THE APPELLANT PRAYS THAT IT BE HELD TO DELETE THE L EVY OF INTEREST UNDER SECTION 234D OF THE ACT. 2. GROUNDS 1 TO 3 DEAL WITH SOLITARY ISSUE WHEREIN THE ASSESSEE IS AG GRIEVED WITH THE ACTION OF THE LOWER AUTHORITIES IN HOLDING THAT BUSINESS EXPENDITURE AGGREGATING TO RS.21,27,95,930 COMPRISING OF ADMINI STRATIVE EXPENSES, MARKETING AND SELLING EXPENSES AND FINANCE EXPENSES SHOULD BE ADDED TO WORK-IN-PROGRESS (WIP) AND SHOULD NOT BE TREATED AS EXPENDITURE FOR THE YEAR UNDER CONSIDERATION. 3. THE BRIEF BACKGROUND OF THE CASE IS THAT IT WAS NOT ED BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS 3 OF REAL ESTATE DEVELOPMENT. THE ASSESSEE COMPANY W AS INCORPORATED IN FINANCIAL YEAR 2006-07 WITH THE OBJECT OF UNDERTAKING DEVELOP MENT OF REAL ESTATE INCLUDING DEVELOPMENT OF SPECIAL ECONOMIC ZONE (SEZ) AND IT A LSO RECEIVED NOTIFICATION IN FINANCIAL YEAR 2008-09 FROM THE MINISTRY OF COMMERC E NOTIFYING THE COMPANY AS DEVELOPER UNDER THE SEZ ACT FOR AN AREA OF 138.83 HECTARES. IT WAS FURTHER NOTED BY THE AO THAT ASSESSEE FOLLOWED PERCENTAGE C OMPLETION METHOD AS BASIS OF ITS ACCOUNTING AND ITS REVENUE WAS TO BE BOOKED ON PROPORTIONATE BASIS AFTER COMPLETION OF CERTAIN PERCENTAGE OF WORK / PROJECT. DURING THE YEAR, THE ASSESSEE HAD NOT SHOWN ANY INCOME OR RECEIPT OR REVENUE FROM THE SALE OF ANY PROJECT IN HAND. THE EXPENSES RELATING TO PROJECT INCLUDING I NITIAL EXPENSES OF CONSTRUCTION WERE SHOWN AS PART OF WIP OF THE PROJECT AT THE END OF THE YEAR AND CARRIED FORWARD TO THE NEXT YEAR. HOWEVER, BUSINESS EXPENS ES FOR THE YEAR WERE DEBITED IN THE P & L ACCOUNT AS EXPENSES PERTAINING TO THE YEAR UNDER CONSIDERATION. IT WAS FURTHER NOTED BY THE AO THAT THOUGH THE EXPENSE S RELATING TO THE CONSTRUCTION OF THE PROJECT WERE MADE PART OF WIP, BUT EXPENSES INCURRED ON GENERAL ADMINISTRATION, MARKETING AND SELLING EXPEN SES AND FINANCE EXPENSES WERE NOT DEBITED TO WIP, BUT WERE DEBITED TO THE P & L ACCOUNT BY TREATING THEM AS EXPENSES OF THE YEAR UNDER CONSIDERATION. THE A O THEREFORE ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE THAT WHY THESE EXPENSES SHOU LD NOT BE ADDED TO THE COST OF WIP. THE ASSESSEE REPLIED THAT THESE EXPENSES ARE NOT RELATED TO THE CONSTRUCTION OR DEVELOPMENT OF PROJECT, BUT THESE ARE ITEMS OF P ERIOD COST, THEREFORE, THESE EXPENSES HAVE BEEN CORRECTLY DEBITED IN THE P & L A CCOUNT FOR THE YEAR UNDER CONSIDERATION. HOWEVER, THE AO WAS NOT SATISFIED W ITH THE REPLY OF THE ASSESSEE. HE REFERRED TO ACCOUNTING STANDARD-7 (AS-7) ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND ON THE BASIS OF SAM E IT WAS HELD BY HIM THAT THE ENTIRE COST SHOULD BE DEBITED TO THE PROJECT SINCE THE ASSESSEE IS HAVING ONE SINGLE PROJECT ONLY. IT WAS HELD BY HIM THAT THE PERIOD C OST CAN BE ALLOCATED TO THE YEAR UNDER CONSIDERATION ONLY IF THE ASSESSEE IS HAVING MANY PROJECTS IN HAND. UNDER 4 THESE CIRCUMSTANCES, AFTER MAKING DETAILED DISCUSSI ON IN THE ASSESSMENT ORDER, HE MADE AN AGGREGATE ADDITION OF RS.21,27,95,930 IN WI P BY CONCLUDING IN THE ASSESSMENT ORDER AS UNDER:- 6.9 IN VIEW OF THE DISCUSSIONS MADE IN ABOVE PARAS , IT IS HELD THAT THE ASSESSEE HAS MIS-INTERPRETED THE PRESCRIPTION OF AS -7 AND THEREBY INCORRECTLY APPLIED THE PROVISIONS THEREOF. SINCE THE ASSESSEE IS ENGAGED IN ONLY ONE SINGLE CONTRACT, THE BIFURCA TION/ ALLOCATION OF VARIOUS COSTS CANNOT BE RESORTED TO. THE ASSESSEE F OLLOWS THE PERCENTAGE COMPLETION METHOD OF ACCOUNTING AND AS-7 BEING THE RELEVANT ACCOUNTING GUIDELINE FOR SUCH METHOD OF AC COUNTING, THE PRESCRIPTION THEREOF ARE REQUIRED TO BE FOLLOWED IN LETTER AND SPIRIT. SINCE THE ENTIRE BUSINESS EXPENSES ARE DEMONSTRABLY RELATED TO ONE SINGLE CONTRACT, THE SAME HAVE TO BE TREATED AS THE WORK-IN- PROGRESS OF THE PROJECT BEING CONSTRUCTED BY THE AS SESSEE 6.10 IN VIEW OF THE FACTS AS DISCUSSED IN ABOVE PAR AS COUPLED WITH THE FACT THAT THE ASSESSEE IS FOLLOWING PERCENTAGE COMPLETION METHOD OF ACCOUNTING AS PER AS-7, AND IT IS NOT CARRYING O N ANY OTHER BUSINESS ACTIVITY EXCEPT CONSTRUCTION OF THE RESIDE NTIAL PROJECT ON HAND, THE ENTIRE BUSINESS EXPENSES CLAIMED OF RS.21 ,27,95,930/- (15323695 + 176969132 20503103) IS DISALLOWED BY CAPITALIZING IT, TREATING IT AS WORK-IN-PROGRESS OF THE PROJECT BEING CONSTRUCTED BY THE ASSESSEE. IN VIEW OF THE ABOVE, THE WORK-IN- PROGRESS FOR THE YEAR IS COMPUTED AS UNDER:- (RS.) WIP SHOWN BY THE ASSESSEE IN P & L A/C 336635834 ADD: AMOUNT TAKEN TO WIP AS DISCUSSED ABOVE 21 2795930 AMOUNT CARRIED FORWARD AS WORK-IN-PROGRESS 549431764 5. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE LD. C IT(A) WHEREIN DETAILED SUBMISSIONS WERE MADE, COMPLETE FACTS WERE BROUGHT ON RECORD SHOWING NATURE OF EXPENSES INCURRED. IT WAS ALSO SUBMITTED THAT T HOUGH THE ASSESSEE COMPANY WAS ENGAGED IN THE DEVELOPMENT OF SEZ, BUT THERE WE RE MANY SMALLER PROJECTS 5 AND SUB-PROJECTS IN HANDS, THEREFORE, COMMON COST A ND EXPENSES RELATED TO THE PERIOD COULD NOT HAVE BEEN ADDED AS COST OF WIP. I T WAS FURTHER SUBMITTED IN DETAIL THAT THE AO HAS WRONGLY UNDERSTOOD AND APPLI ED THE GUIDANCE PROVIDED IN AS-7. REFERENCE WAS MADE BY THE ASSESSEE TO AS-2 W HICH RELATED TO VALUATION OF INVENTORY. FURTHER REFERENCE WAS ALSO MADE TO GUID ANCE NOTE ON ACCOUNTING FOR REAL ESTATE TRANSACTIONS (REVISED IN 2012) ISSUED B Y ICAI. IT WAS SUBMITTED THAT ACCOUNTING HAS BEEN DONE BY THE ASSESSEE KEEPING IN VIEW THE RELEVANT ACCOUNTING STANDARDS AS WELL AS PROVISIONS OF THE C OMPANIES ACT, 1956 AND ALSO TAKING CARE OF PROVISIONS OF INCOME-TAX ACT. THE A O HAS MISUNDERSTOOD THE FACTS OF THE CASE AND WRONGLY MADE THE ADDITION. BUT, LD . CIT(A) WAS NOT CONVINCED WITH THE SUBMISSIONS OF THE ASSESSEE. THE MAIN REA SON GIVEN BY LD. CIT(A) WAS THAT IN THE CASE OF ASSESSEE, THE ENTIRE COST WAS A TTRIBUTABLE AND RELATABLE TO ONE SINGLE CONTRACT WHICH WAS IN HAND, THEREFORE AS SUC H NONE OF THE COSTS CAN BE EXCLUDIBLE FROM IT AND SINCE ENTIRE BUSINESS EXPENS ES ARE RELATED TO ONE SINGLE CONTRACT, THE SAME HAVE TO BE TREATED AS WIP OF THE PROJECT BEING CONSTRUCTED BY THE ASSESSEE. THUS, HE UPHELD THE ACTION OF THE AO AND REJECTED THE SUBMISSIONS OF THE ASSESSEE. 6. STILL BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BE FORE THE TRIBUNAL. DURING THE COURSE OF HEARING BEFORE US, THE LD. COUNSEL OF THE ASSESSEE VEHEMENTLY DISPUTED THE ACTION OF THE LOWER AUTHORITIES. IT W AS SUBMITTED THAT NATURE AND GENUINENESS OF THE EXPENSES HAVE NOT BEEN DOUBTED B Y ANY OF THE LOWER AUTHORITIES. THE ONLY DISPUTE IS WHETHER THE IMPUG NED EXPENSES SHOULD BE MADE PART OF P & L ACCOUNT OR WIP. IT WAS SUBMITTED THA T BOTH THE AUTHORITIES HAVE MISUNDERSTOOD THE PROVISIONS OF AS-7. ASSESSEE IS HAVING VARIOUS PROJECTS IN HAND. DEVELOPMENT OF SEZ MAY BE TERMED AS ONE INTE GRATED PROJECT, BUT IT HAS MANY PARTS OF IT. THEREFORE, DIFFERENT KINDS OF EX PENSES ARE INCURRED FROM TIME TO TIME. THOSE ITEMS WHICH PERTAIN TO THE PERIOD UNDE R CONSIDERATION HAVE TO BE 6 NECESSARILY CONSUMED DURING THE SAID PERIOD ITSELF, AS IT DOES NOT MAKE ANY VALUE ADDITION TO THE INVENTORY IN HAND. THIS METHOD OF ACCOUNTING IS CONSISTENTLY FOLLOWED BY ASSESSEE AS WELL AS ALL THE PERSONS IN THIS INDUSTRY. IT WAS ALSO STATED THAT ALL THE EXPENSES PERTAINED TO THE YEAR UNDER C ONSIDERATION WHICH HAVE BEEN DEBITED IN THE P & L ACCOUNT. THE FINANCE COST INC URRED IN THE FORM OF INTEREST ON BANK OVERDRAFT, INTEREST ON VEHICLE LOAN AND BANK C HARGES HAVE BEEN INCURRED FOR THE WORKING CAPITAL OF THE COMPANY, WHICH IS NOT CO NNECTED WITH CONSTRUCTION OF ANY PROJECT. THE ASSESSEE IS INCURRING OTHER HUGE COST FOR WHICH WORKING CAPITAL WAS REQUIRED. THE INTEREST DEBITED IN THE P & L AC COUNT DOES NOT RELATE TO ANY AMOUNT OF LOAN UTILIZED IN CONSTRUCTION OF PROJECT. COMPLETE BREAK UP OF EXPENSES WERE FILED IN THIS REGARD. IT WAS FURTHER SUBMITTE D THAT BUSINESS OF THE ASSESSEE WAS SET UP DURING THE YEAR AS WOULD BE EVIDENT FROM THE FACT THAT ALL THE REQUISITE APPROVALS HAVE BEEN OBTAINED, SALES AND MARKETING B ROCHURES WERE ISSUED AND ADVANCE WAS RECEIVED FROM AS MANY AS 1,485 CUSTOMER S. IT WAS SUBMITTED THAT IN ANY CASE, THESE EXPENSES ARE ALLOWABLE AS THESE EXP ENSES HAVE BEEN INCURRED AFTER THE SETTING UP OF THE BUSINESS OF THE ASSESSE E. RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS:- 1. LODHA PALAZZO VS ACIT (ITA NO.2298/MUM/2012 DT 10-1 2-2014) 2. HIRANANDANI PALACE RESIDENCE PVT LTD VS ACIT (ITA 4 579/MUM/2013 DT 3-12-2015) 3. CIT VS SARABHAI MANAGEMENT CORPORATION LTD 192 ITR 151 (SC) 7. PER CONTRA, THE LD. DR VEHEMENTLY SUPPORTED THE ORD ERS OF THE LOWER AUTHORITIES. IT WAS SUBMITTED THAT SINCE COMPLETE DETAILS WERE NOT AVAILABLE WITH REGARD TO THE EXPENSES INCURRED, THEREFORE, TH IS ISSUE MAY BE SENT BACK TO THE FILE OF THE AO FOR PROPER EXAMINATION. IT WAS ALSO SUBMITTED THAT IN ANY CASE, LOWER AUTHORITIES HAVE TAKEN A STAND THAT SIN CE EXPENSES WERE RELATED TO 7 SINGLE PROJECT, THIS SHOULD HAVE BEEN MADE AS PART OF THE PROJECT COST. UNDER THESE CIRCUMSTANCES, THE ACTION OF LOWER AUTHORITIE S SHOULD BE UPHELD. 8. WE HAVE GONE THROUGH THE ORDERS PASSED BY LOWER AUT HORITIES, SUBMISSIONS MADE BY BOTH THE SIDES AS WELL AS JUDGE MENTS RELIED UPON BEFORE US AND ALSO VARIOUS EVIDENCES SHOWN TO US DURING TH E COURSE OF HEARING. THE SOLITARY ISSUE THAT WE HAVE TO DECIDE IN THIS APPEA L IS WHETHER THE EXPENSES DEBITED BY THE ASSESSEE IN THE P & L ACCOUNT UNDER THE HEAD OF SALES AND MARKETING, ADMINISTRATIVE EXPENSES AND FINANCE EXPE NSES PERTAIN TO THE YEAR UNDER CONSIDERATION AND SHOULD BE ALLOWED AS BUSINE SS EXPENSES OF THE YEAR UNDER CONSIDERATION AS HAS BEEN CLAIMED BY THE ASSE SSEE OR THESE SHOULD BE ADDED TO THE COST OF WIP OF THE PROJECTS UNDER CONS TRUCTION AND DEVELOPMENT BY THE ASSESSEE, AS HAS BEEN DONE BY THE AO. THE C ASE OF THE ASSESSEE IS THAT ASSESSEE IS A DEVELOPER-CUM-BUILDER ENGAGED IN DEVE LOPMENT OF REAL ESTATE INCLUDING SPECIAL ECONOMIC ZONE (SEZ). THE EXPENSE S WHICH WERE DIRECTLY RELATED TO THE CONSTRUCTION / DEVELOPMENT OF THE PR OJECT WERE ADDED TO WIP OF THE PROJECT, WHEREAS OTHER AFORESAID EXPENSES WHICH WERE NOT DIRECTLY LINKED TO ANY PARTICULAR PROJECT, BUT PERTAINED TO THE PER IOD UNDER CONSIDERATION WERE DEBITED IN THE P & L ACCOUNT AS BUSINESS EXPENSES O F THE IMPUGNED YEAR. ON THE OTHER HAND, THE AO HAS REFERRED TO ACCOUNTING S TANDARD -7 (AS-7) ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND HELD THAT THE ENTIRE EXPENSES SHOULD HAVE BEEN ADDED TO THE COST OF WIP SINCE ASSESSEE IS HAVING ONE SINGLE INTEGRATED PROJECT. THE CASE OF THE ASS ESSEE BEFORE US IS THAT THE AO HAS MISUNDERSTOOD THE PROVISIONS OF AS-7 AND MIS APPLIED THE SAME IN THE CASE OF THE ASSESSEE, AND IN ANY CASE, THE BUSINESS OF THE ASSESSEE HAS ALREADY BEEN SET UP, THEREFORE EXPENSES INCURRED IN THE NOR MAL COURSE OF THE BUSINESS WHICH ARE NOT DIRECTLY ALLOCABLE TO A PARTICULAR PR OJECT SHOULD BE ALLOWED AS BUSINESS EXPENSES OF THE PERIOD UNDER CONSIDERATION . WE HAVE EXAMINED THE 8 ARGUMENTS MADE BY BOTH THE SIDES ONE BY ONE. 9. WE HAVE FIRST OF ALL GONE THROUGH AS-7 ISSUED BY IC AI. IT IS NOTED AT THE OUTSET BY US THAT THE SCOPE OF AS-7 HAS BEEN MENTIO NED THEREIN AS UNDER:- SCOPE 1. THIS STATEMENT SHOULD BE APPLIED IN ACCOUNTING F OR CONSTRUCTION CONTRACTS IN THE FINANCIAL STATEMENTS OF CONTRACTOR S. DEFINITIONS 2. THE FOLLOWING TERMS ARE USED IN THIS STATEMENT W ITH THE MEANINGS SPECIFIED: A CONSTRUCTION CONTRACT IS A CONTRACT SPECIFICALLY NEGOTIATED FOR THE CONSTRUCTION OF AN ASSET OR A COMBINATION OF ASSETS THAT ARE CLOSELY INTERRELATED OR INTERDEPENDENT IN TERMS OF THEIR DE SIGN, TECHNOLOGY AND FUNCTION OR THEIR ULTIMATE PURPOSE OR USE. A FIXED PRICE CONTRACT IS A CONSTRUCTION CONTRACT IN WHICH THE CONTRACTOR AGREES TO A FIXED CONTRACT PRICE, OR A FIXED RATE P ER UNIT OF OUTPUT, WHICH IN SOME CASES IS SUBJECT TO COST ESCALATION CLAUSES. A COST PLUS CONTRACT IS A CONSTRUCTION CONTRACT IN WHICH THE CONTRACTOR IS REIMBURSED FOR ALLOWABLE OR OTHERWISE DE N COSTS, P LUS PERCENTAGE OF THESE COSTS OR A FIXED FEE. 10. THUS, FROM THE PERUSAL OF THE ABOVE, IT IS CLEAR T HAT AS-7 IS ACTUALLY APPLICABLE UPON CONTRACTOR WHEREAS THE ASSESSEE IS A BUILDER / DEVELOPER AND NOT A CONTRACTOR. THEREFORE, AS-7 IS NOT STRICTLY APPLICABLE ON THE FACTS OF THE CASE OF THE ASSESSEE. BUT, THE ENTIRE THRUST OF TH E REVENUE HAS BEEN BASED UPON THE PREMISE THAT THE ASSESSEE SHOULD HAVE BOOK ED THE EXPENSES IN ACCORDANCE WITH AS-7, AS PER WHICH THE ENTIRE EXPEN SES SHOULD BE DEBITED TO THE COST OF THE PROJECT SINCE THERE WAS ONE SINGLE PROJECT ONLY. THUS, WE FIND 9 THAT ENTIRE PREMISE OF THE REVENUE WAS BASED ON THE ERRONEOUS ASSUMPTION OF APPLICABILITY OF AS-7 UPON THE ASSESSEE. 11. NOTWITHSTANDING THE ABOVE SITUATION, WE HAVE EXAMI NED THE RELEVANT PARA IN AS-7 WHICH DEALS WITH TREATMENT OF COST AND EXPE NSES, SO AS TO EXAMINE THE SITUATION OF ASSESSEE IF AS-7 IS APPLIED ON THE FAC TS OF THIS CASE. IN THIS REGARD, RELEVANT PART OF AS-7 STATES AS UNDER:- CONTRACT COSTS 15. CONTRACT COSTS SHOULD COMPRISE: (A) COSTS THAT RELATE DIRECTLY TO THE SPECIFIC CONT RACT; (B) COSTS THAT ARE ATTRIBUTABLE TO CONTRACT ACTIVIT Y IN GENERAL AND CAN BE ALLOCATED TO THE CONTRACT; AND (C) SUCH OTHER COSTS AS ARE SPECIFICALLY CHARGEABLE TO THE CUSTOMER UNDER THE TERMS OF THE CONTRACT. 16. COSTS THAT RELATE DIRECTLY TO A SPECIFIC CONTRA CT INCLUDE: (A) SITE LABOUR COSTS, INCLUDING SITE SUPERVISION; (B) COSTS OF MATERIALS USED IN CONSTRUCTION; (C) DEPRECIATION OF PLANT AND EQUIPMENT USED ON THE CONTRACT; (D) COSTS OF MOVING PLANT, EQUIPMENT AND MATERIALS TO AND FROM THE CONTRACT SITE; ( E) COSTS OF HIRING PLANT AND EQUIPMENT; (F) COSTS OF DESIGN AND TECHNICAL ASSISTANCE THAT I S DIRECTLY RELATED TO THE CONTRACT; (G) THE ESTIMATED COSTS OF RECTIFICATION AND GUARAN TEE WORK, INCLUDING EXPECTED WARRANTY COSTS; AND (H) CLAIMS FROM THIRD PARTIES. THESE COSTS MAY BE REDUCED BY ANY INCIDENTAL INCOME THAT IS NOT INCLUDED IN CONTRACT REVENUE, FOR EXAMPLE INCOME FROM THE SALE OF SURPLUS MATERIALS AND THE DISPOSAL OF PLANT AND EQUIPMENT AT THE END OF THE CONTRACT. 17. COSTS THAT MAY BE ATTRIBUTABLE TO CONTRACT ACTI VITY IN GENERAL AND CAN 10 BE ALLOCATED TO SPECIFIC CONTRACTS INCLUDE: (A) INSURANCE; (B) COSTS OF DESIGN AND TECHNICAL ASSISTANCE THAT I S NOT DIRECTLY RELATED TO A SPECIFIC CONTRACT; AND (C) CONSTRUCTION OVERHEADS. SUCH COSTS ARE ALLOCATED USING METHODS THAT ARE SYS TEMATIC AND RATIONAL AND ARE APPLIED CONSISTENTLY TO ALL COSTS HAVING SI MILAR CHARACTERISTICS. THE ALLOCATION IS BASED ON THE NORMAL LEVEL OF CONSTRUC TION ACTIVITY. CONSTRUCTION OVERHEADS INCLUDE COSTS SUCH AS THE PREPARATION AND PROCESSING OF CONSTRUCTION PERSONNEL PAYROLL. COSTS THAT MAY BE A TTRIBUTABLE TO CONTRACT ACTIVITY IN GENERAL AND CAN BE ALLOCATED TO SPECIFI C CONTRACTS ALSO INCLUDE BORROWING COSTS AS PER ACCOUNTING STANDARD (AS) 16, BORROWING COSTS. 18. COSTS THAT ARE SPECIFICALLY CHARGEABLE TO THE C USTOMER UNDER THE TERMS OF THE CONTRACT MAY INCLUDE SOME GENERAL ADMINISTRA TION COSTS AND DEVELOPMENT COSTS FOR WHICH REIMBURSEMENT IS SPECIF IED IN THE TERMS OF THE CONTRACT. 19. COSTS THAT CANNOT BE ATTRIBUTED TO CONTRACT ACT IVITY OR CANNOT BE ALLOCATED TO A CONTRACT ARE EXCLUDED FROM THE COSTS OF A CONSTRUCTION CONTRACT. SUCH COSTS INCLUDE: (A) GENERAL ADMINISTRATION COSTS FOR WHICH REIMBURS EMENT IS NOT SPECIFIED IN THE CONTRACT; (B) SELLING COSTS; (C) RESEARCH AND DEVELOPMENT COSTS FOR WHICH REIMBU RSEMENT IS NOT SPECIFIED IN THE CONTRACT; AND (D) DEPRECIATION OF IDLE PLANT AND EQUIPMENT THAT I S NOT USED ON A PARTICULAR CONTRACT. 20. CONTRACT COSTS INCLUDE THE COSTS ATTRIBUTABLE T O A CONTRACT FOR THE PERIOD FROM THE DATE OF SECURING THE CONTRACT TO THE [MAL COMPLETION OF THE CONTRACT. HOWEVER, COSTS THAT RELATE DIRECTLY TO A CONTRACT A ND WHICH ARE INCURRED IN SECURING THE CONTRACT ARE ALSO INCLUDED AS PART OF THE CONTRACT COSTS IF THEY CAN BE SEPARATELY IDENTIFIED AND MEASURED RELIABLY AND IT IS PROBABLE THAT THE CONTRACT WILL BE OBTAINED. WHEN COSTS INCURRED IN SECURING A CONTRACT ARE RECOGNISED AS AN EXPENSE IN THE PERIOD IN WHICH THEY ARE INCURRED, THEY ARE NOT INCLUDED IN CONTRACT COSTS WHEN THE CONTRAC T IS OBTAINED IN A SUBSEQUENT PERIOD. 11 12. PERUSAL OF THE AFORESAID LAYS DOWN THAT ENTIRE COS T IS NOT REQUIRED TO BE ADDED TO THE COST OF THE PROJECT. ONLY THOSE CONTR ACT COSTS WHICH ARE ATTRIBUTABLE TO A CONTRACT ARE REQUIRED TO BE ADDED TO THE COST OF PROJECT. COST THAT CANNOT BE ATTRIBUTED TO CONTRACT ACTIVITY OR C ANNOT BE ALLOCATED TO A CONTRACT ARE EXCLUDED FROM THE COST OF CONSTRUCTION , FOR EXAMPLE, GENERAL ADMINISTRATION COSTS, SELLING COSTS, DEPRECIATION O N THOSE ASSETS WHICH ARE NOT USED IN CONSTRUCTION ACTIVITIES, ETC. IN THE LIGHT OF THE AFORESAID PROVISIONS, WE HAVE ANALYSED THE EXPENSES WHICH WERE DEBITED BY TH E ASSESSEE IN THE P & L ACCOUNT BUT DISPUTED BY THE AO. DURING THE COURSE OF HEARING BEFORE US, FOLLOWING BREAK UP OF THESE EXPENSES HAS BEEN PROVI DED TO US:- DETAILS OF EXPENSES TOTAL AMOUNT TRANSFERRED TO WIP AMOUNT DEBITED TO P&L ADMINISTRATIVE EXPENSES MARKETING & SELLING EXPENSES FINANCE EXPENSES OPERATING EXPENSES CIVIL WORKS 78,53,018 78,53,018 - - DIRECT MANAGEMENT AND GENERAL SERVICES 3,97,14,697 3,97,14,697 - - LEGAL AND PROFESSIONAL FEES 27,82,63,263 27,27,15,289 55,47,974 55,47,974 INSURANCE 39,20,585 38,44,402 84,183 84,183 OCCUPANCY COST 1,64,69,099 1,00,45,872 64,23,227 OTHER DIRECT COST 37,65,141 23,75,183 13,89,958 13,89,958 TRAVELLING EXPENSES 19,65,726 87,373 18,78,353 18,78,353 TOTAL (A) 35,19,59,529 33,66,35,834 1,53,23,696 OTHER EXPENSES AUDIT FEES 8,95,291 - 8,95,291 RATES & TAXES 1,22,42,033 - 122,42,033 1,22,42,033 MARKETING SERVICES COST 11,01,36,914 - 11,01,36,914 11,01,36,914 REPAIRS AND MAINTENANCE 13,01,709 13,01,709 13,01,709 SALES COMMISSION 1,65,80,101 1,65,80,101 1,65,80,101 SALES PROMOTION AND ADVERTISEMENT EXPENSES 3,34,90,810 3,34,90,810 3,34,90,810 MISCELLANEOUS EXPENSES 23,22,274 23,22,274 WRONGLY TAKEN BY AO 1,53,23,695 - TOTAL (B) 19,22,92,827 - 19,22,92,827 FINANCE CHARGES INTEREST ON BANK OVERDRAFT 2,00,28,581 2,00,28,581 INTEREST ON VEHICLE LOAN 2,61,795 2,61,795 BANK CHARGES 2,12,727 2,12,727 TOTAL (C) 2,05,03,103 2,05,03,103 TOTAL (A) + (B)+ (C) 56,47,55,459 33,66,35,834 19,22,92,827 3,20,85,002 16,02,07,826 2,05,03,103 12 13. WE HAVE GONE THROUGH THE DETAILS OF THE EXPENSES ON THE BASIS OF FEW DOCUMENTARY EVIDENCES BROUGHT BEFORE US. IT IS NOT ED FROM THE PERUSAL OF THESE EXPENSES THAT NONE OF THESE EXPENSES APPEAR TO BE D IRECTLY RELATED TO A PARTICULAR PROJECT IN HAND. IT IS NOTED THAT THE A SSESSEE HAS HIMSELF PUT VARIOUS EXPENSES IN WIP CATEGORY, E.G. THE COST OF CIVIL WO RKS (RS.78,53,018/-) AND DIRECT MANAGEMENT AND GENERAL SERVICES (RS.3,97,14,797/-) HAVE BEEN DEBITED IN ENTIRETY TO THE COST OF WIP AND NO PORTION OF IT HA S BEEN DEBITED IN THE P & L ACCOUNT AS EXPENSES OF THE PERIOD UNDER CONSIDERATI ON. SIMILARLY, WITH REGARD TO THE LEGAL AND PROFESSIONAL FEE, OUT OF AGGREGATE AMOUNT OF RS.27.82 CRORES, ONLY SMALL PORTION OF RS.55.47 LAKHS HAS BEEN DEBIT ED TO THE P & L ACCOUNT WHEREAS THE SUBSTANTIAL PORTION OF RS.27.27 CRORES HAS BEEN ADDED TO THE COST OF WIP BY THE ASSESSEE ITSELF. SIMILARLY, WITH REG ARD TO THE OTHER EXPENSES ALSO, THE ASSESSEE BIFURCATED THEM ON THE BASIS OF NATURE OF EXPENSES. IT WAS CONTENDED THAT OTHER COMMON EXPENSES LIKE AUDIT FEE , RATES AND TAXES, REPAIR AND MAINTENANCE ETC WERE ALLOCATED TO THE P & L ACC OUNT SINCE THESE CANNOT BE CO-RELATED TO ANY PARTICULAR PROJECT. SIMILARLY, W ITH REGARD TO THE MARKETING SERVICE COST-CUM-SALES PROMOTION AND ADMINISTRATION EXPENSES, IT HAS BEEN SUBMITTED THAT THESE WERE COMMON EXPENSES AND WERE NOT RELATED TO ANY PARTICULAR PROJECT IN HAND. THEREFORE, THESE HAVE BEEN DEBITED IN THE P & L ACCOUNT AS PERIOD COST. WITH REGARD TO THE FINANCE CHARGES (COMPRISING OF INTEREST AND BANK CHARGES), IT WAS STATED THAT INTE REST ON VEHICLE LOANS WAS PAID WITH REGARD TO THE VEHICLES WHICH WERE USED IN GENE RAL ADMINISTRATION. FURTHER, THE BANK OVERDRAFT WAS NOT UTILIZED AT ALL IN THE C ONSTRUCTION ACTIVITIES. THEREFORE, THESE EXPENSES HAVE BEEN INCLUDED AS PER IOD COST IN THE P & L ACCOUNT. IT IS FURTHER NOTED BY US THAT THE LD. CO UNSEL HAS REPEATEDLY STATED THAT COMPLETE BOOKS OF ACCOUNT AND ALL THE DETAILS AS WERE REQUIRED BY THE AO WERE SUBMITTED TO HIM TO SHOW NATURE OF THE EXPENSE S AND THEIR NEXUS WITH THE 13 PROJECT. BUT NOTHING HAS BEEN BROUGHT ON RECORD BY THE AO TO NEGATE THE CLAIM OF THE ASSESSEE THAT NONE OF THESE EXPENSES RELATED TO ANY PARTICULAR PROJECT. THEREFORE, THE ACTION OF THE AO IN TREATING THESE E XPENSES AS PART OF THE COST ATTRIBUTABLE TO A PARTICULAR PROJECT WAS BASED UPON PRESUMPTION, SURMISES AND CONJECTURES. 14. FURTHER, WITH REGARD TO THE ASSERTION OF THE AO THA T ASSESSEE WAS HAVING ONE SINGLE PROJECT, IT HAS BEEN VEHEMENTLY STATED B Y THE LD. COUNSEL THAT THE ASSERTION MADE BY THE AO IS FACTUALLY INCORRECT. I T IS TRUE THAT ASSESSEE IS DEVELOPING A LARGE INTEGRATED SEZ PROJECT, BUT APAR T FROM THIS, THE ASSESSEE IS HAVING VARIOUS PROJECTS/ SUB-PROJECTS IN HAND. EVE N IN THE SEZ PROJECT, THERE ARE VARIOUS SMALL AND BIG PROJECTS. IN SUPPORT OF HIS ARGUMENT, LD. COUNSEL BROUGHT BEFORE US FOLLOWING DETAILS TO SHOW THAT VARIOUS PR OJECTS HAVE BEEN TAKEN BY THE ASSESSEE, AS BRIEFLY STATED BELOW: 14 15. NOTHING WRONG OR INCORRECT ON FACTS HAS BEEN POINT ED OUT BY THE LD. DR IN THE AFORESAID DETAILS SUBMITTED BY THE LD. COUNSEL. THUS, FROM THE ABOVE, IT IS 15 NOTED BY US THAT AOS ASSUMPTION AND ASSERTIONS APP EAR TO BE FACTUALLY WRONG. UNDER THESE CIRCUMSTANCES, WE FIND THAT THE AOS AC TION IN DISALLOWING THESE EXPENSES BY TREATING THEM AS PART OF THE PROJECT CO ST IS NOT IN CONSONANCE WITH THE FACTS OF THIS CASE AND PROVISIONS OF LAW AS DIS CUSSED ABOVE. IT IS NOTED, AS DISCUSSED IN DETAIL ABOVE THAT IT IS A CASE OF A BU ILDER / DEVELOPER, THEREFORE, AS- 7 IS NOT APPLICABLE. ALTERNATIVELY, EVEN IF AS-7 I S APPLIED, IT NOWHERE SUGGESTS THAT ASSESSEE IS REQUIRED TO TREAT ALL THE EXPENSES AS PART OF THE COST OF PROJECT WHETHER ATTRIBUTABLE TO A PROJECT OR NOT. 16. IN ADDITION TO THE ABOVE, WE HAVE EXAMINED THE CASE OF THE ASSESSEE FROM ANOTHER ANGLE ALSO. SINCE IT HAS BEEN HELD BY US T HAT AS-7 IS NOT APPLICABLE ON THE ASSESSEE, UNDER THESE CIRCUMSTANCES, WE NEED TO EXAMINE WHETHER EXPENSES OF THE ASSESSEE CAN BE ALLOWED IN THE YEAR UNDER CONSIDERATION SINCE THE AO HAS OBJECTED THAT NO REVENUE FROM SALES HAS BEEN BOOKED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. UNDE R THESE CIRCUMSTANCES, WE ANALYSED PRIMARY CONTENTION OF LD. DR THAT NO EXPEN SES CAN BE ALLOWED AS BUSINESS EXPENSES OF THE YEAR UNDER CONSIDERATION U NLESS REVENUE FROM THE BUSINESS IS EARNED AND CREDITED IN THE P & L A/C. W HEREAS LD. COUNSEL OF THE ASSESSEE HAS SUBMITTED THAT ALL EXPENSES INCURRED I N THE NORMAL COURSE OF BUSINESS SHALL BE ALLOWABLE AFTER THE SETTING UP OF BUSINESS IRRESPECTIVE OF THE FACT WHETHER REVENUE IS YET EARNED OR NOT. WE HAVE PONDERED OVER THIS ISSUE AND FOUND THAT THIS ISSUE IS NOT RES INTEGRA. IN THIS REGARD WE HAVE FIRSTLY TAKEN GUIDANCE FROM THE JUDGEMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD. (26 ITR 151) WHEREIN IT WAS HELD THAT EXPENSES ARE ALLOWABLE AFTER SETTING UP OF THE BUSI NESS. THIS JUDGMENT HAS BEEN FOLLOWED IN MANY CASES. THIS ISSUE WAS ALSO DELIBER ATED BY MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF PINEBRIDGE INVESTMENTS CAPITAL INDIA PRIVATE LIMITE D (I.T.A. NO. 2940/MUM/2011 DT 27TH JULY, 2016). IN T HIS CASE ISSUE BEFORE THE BENCH WAS TO DECIDE THAT IN THE CASE OF NEWLY SET U P COMPANY WHETHER THE 16 EXPENSES ARE ALLOWABLE ONLY AFTER THE BUSINESS WAS COMMENCED OR AFTER IT WAS SET-UP, AND WHEN THAT STAGE CAN BE SAID TO BE ACH IEVED IN THE CASE OF A COMPANY. IT WAS HELD BY THE BENCH THAT AS PER LAW E XPENSES ARE ALLOWABLE AFTER THE BUSINESS IS SET UP EVEN IF IT IS NOT YET ACTU ALLY COMMENCED. RELEVANT PART OF OBSERVATIONS CONTAINING REASONING GIVEN BY THE B ENCH IS REPRODUCED HEREUNDER: .THE DISTINCTION IS THIS THAT WHEN A BUSINESS IS ESTABLISHED AND IS READY TO BE COMMENCED THEN IT CAN BE SAID THAT BUSINESS I S SET UP. BUT BEFORE IT IS READY TO COMMENCE BUSINESS, IT IS NOT SET UP. IN OTHER WORDS, FOR SETTING UP OF BUSINESS, WHAT IS REQUIRED IS READINESS FOR C OMMENCEMENT OF BUSINESS AND ACTUAL COMMENCEMENT OF BUSINESS WOULD NOT BE NECESSARY ..IT MAY BE NOTED FROM THE PERUSAL OF TH E PROVISO TO SECTION 3 THAT IN THE CASE OF NEWLY SET UP BUSINESS, THE PREVIOUS YEA R SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINE SS OR, AS THE CASE MAY BE, THE DATE ON WHICH THE SOURCE OF INCOME NEWLY CO MES INTO EXISTENCE AND ENDING WITH THE SAID FINANCIAL YEAR. THUS, WE NEED TO FIND OUT WHEN THE BUSINESS OF THE ASSESSEE COMPANY CAN BE SAID TO BE SET-UP. THE BUSINESS MAY BE COMMENCED SUBSEQUENTLY, BUT FOR THE PURPOSE OF ALLOWING THE EXPENSES, IT HAS TO BE SEEN THAT WHEN THE BUSINESS CAN BE SAID TO BE SET- UP... 17. SIMILAR VIEW WAS TAKEN IN ANOTHER JUDGMENT IN THE CASE OF M/S DHL EXPRESS (I) PVT. LTD. VS. ACIT 124 TTJ 108 (MUMBAI) OBSERVING THAT THE DATE OF SETTING UP OF BUSINESS AND DATE OF COMMENCEMENT OF BUSINESS AR E DISTINCT AND THE EXPENSES INCURRED AFTER THE SETTING UP OF THE BUSIN ESS ARE DEDUCTIBLE AS REVENUE EXPENDITURE AS HELD BY THE DELHI HIGH COURT IN CIT VS. ESPN SOFTWARE INDIA (P) LTD. 17 18. TURNING BACK TO THE FACTS OF THE CASE, WE HAVE EXA MINED WHETHER THE BUSINESS OF THE ASSESSEE WAS YET SET UP OR NOT. WH ILE EXAMINING THE FACTS OF THE CASE, WE CAME ACROSS THE CHRONOLOGY OF EVENTS OF DE VELOPMENT OF PROJECTS OF THE ASSESSEE, WHICH READS AS UNDER:- CHRONOLOGY OF EVENT FOR PROJECT 18 I.T.A. NO.4580/MUM/2013 19. THUS, FROM THE AFORESAID EVENTS IT CAN BE NOTED TH AT ALL THE LEGAL FORMALITIES HAVE ALREADY BEEN COMPLETED EVEN BEFORE THE BEGINNI NG OF THE IMPUGNED FINANCIAL YEAR. FURTHER, THE ASSESSEE HAS ALREADY PURCHASED LAND AS IS EVIDENT FROM THE PERUSAL OF THE BALANCE-SHEET SHOWING THAT ASSESSEE HAD ALREADY MADE INVESTMENT IN LAND FOR AN AGGREGATE AMOUNT OF RS.129,00,89,390 /- AS ON 31-03-2008 (I.E. BEGINNING OF THE IMPUGNED FINANCIAL YEAR). IN ADDI TION TO THE SAID MAIN POINT, IT HAS BEEN NOTED BY US THAT THE ASSESSEE HAS ALREADY DONE PROVISIONAL BOOKING BY RECEIVING ADVANCE FROM VARIOUS CUSTOMERS IN AS MANY AS 1,485 CASES FOR AN AGGREGATE AMOUNT OF RS.23,95,51,585/-. ALL THESE F ACTS ARE FURTHER FORTIFIED WITH THE FACT THAT SUBSTANTIAL AMOUNT OF REVENUE (INCOME ) HAS BEEN RECOGNIZED BY THE ASSESSEE IN SUBSEQUENT ASSESSMENT YEARS. IT WAS BR OUGHT TO OUR NOTICE THAT IN A.Y. 2012-13 FLATS WERE SOLD FOR A TOTAL SALE CONSIDERAT ION OF RS.115,46,51,912/- AS AGAINST WHICH PROPORTIONATE REVENUE OF RS.45,92,68, 343/- HAS BEEN RECOGNIZED IN A.Y. 2012-13. IT HAS ALSO BEEN NOTED BY US THAT AS SESSEE HAS ISSUED ALLOTMENT LETTERS TO NUMEROUS CUSTOMERS IN THE IMMEDIATELY SU BSEQUENT ASSESSMENT YEAR. 20. THUS, FACTS OF THIS CASE SHOWING THAT ALL REQUISITE APPROVALS HAVE BEEN RECEIVED BY THE ASSESSEE, SUFFICIENT LAND HAS ALREA DY BEEN PURCHASED, MARKETING BROCHURES WERE ISSUED, ADVANCE WAS RECEIVED FROM TH E CUSTOMERS AND TAKING INTO ACCOUNT THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, IT CAN CLEARLY BE SAID THAT BUSINESS OF THE ASSESSEE WAS SET UP . IT IS WELL SETTLED LAW THAT ONCE BUSINESS IS SET UP, ALL THE EXPENSES THAT RELATE TO THE PERIOD UNDER CONSIDERATION SHOULD BE ALLOWED AS BUSINESS EXPENSES OF THE SAID PERIOD. IN THIS REGARD, THE LD. COUNSEL OF THE ASSESSEE HAS RIGHTLY RELIED UPON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS SARABHAI MANAGEMENT CORP ORATION LTD (SUPRA) . THE LD. COUNSEL HAD ALSO RELIED UPON TWO DECISIONS OF T HE TRIBUNAL AS HAVE BEEN MENTIONED ABOVE, WHICH ALSO SUPPORT THE VIEW TAKEN BY US. REFERENCE CAN BE MADE TO THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S LODHA PALAZZO VS ACIT (SUPRA) WHEREIN, ON IDENTICAL FACTS, THE AO HAD TRE ATED THE EXPENSES CLAIMED BY THE ASSESSEE AS BUSINESS EXPENS ES AS PART OF COST OF WIP. AFTER ANALYZING THE COMPLETE FACTS OF THE CASE, THE BENCH HELD THAT THE EXPENSES INCURRED IN THE NORMAL COURSE OF BUSINESS, WHICH AR E NOT RELATABLE TO A PARTICULAR PROJECT SHOULD BE ALLOWED AS EXPENSES INCURRED FOR THE YEAR UNDER CONSIDERATION BY OBSERVING AS UNDER:- 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE 19 I.T.A. NO.4580/MUM/2013 RECORDS. THE LD. COUNSEL FOR THE ASSESSEE HAS RELIE D UPON THE 'EXPERT ADVISORY COMMITTEES REPORT (EAC) ON APPLICABILITY O F REVISED AS 7 TO ENTERPRISES UNDERTAKING THE CONSTRUCTION ACTIVITIES ON THEIR OWN ACCOUNT AS A VENTURE OF COMMERCIAL NATURE' (COPY PL ACED AT PAGE 49 & 50 OF PAPER BOOK) WHEREIN IT HAS BEEN STATED THAT REVISED AS -7 SHALL NOT BE APPLICABLE TO THE BUILDERS UNDERTAKING THE COMMERCIAL ACTIVITY ON THEIR OWN AND IT WAS ALSO STATED THAT T HE WORK IN PROGRESS SHALL CONSTITUTE INVENTORY FOR THE BUILDERS AND SHA LL BE VALUED AS PER AS-2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTAN T OF INDIA (ICAI). THE LD. COUNSEL HAS FURTHER SUBMITTED THAT THE ASSE SSEE HAS ACCORDINGLY FOLLOWED THE ACCOUNTING STANDARD -2 FOR DETERMINING THE WORK IN PROGRESS. HE HAS FURTHER BROUGHT OUR ATTENT ION TO PARA 13 OF AS-2, WHEREIN IT HAS BEEN MENTIONED THAT THE FOLLOW ING EXPENSES HAVE TO BE EXCLUDED FROM THE COST OF INVENTORIES BEIN G WORK-IN-PROGRESS: '(A) ABNORMAL AMOUNTS OF WASTED MATERIALS, LABOUR OR OT HER PRODUCTION COSTS; (B) STORAGE COSTS, UNLESS THOSE COSTS ARE NECESSARY IN THE PRODUCTION PROCESS BEFORE A FURTHER PRODUCTION STAGE; (C) ADMINISTRATIVE OVERHEADS THAT DO NOT CONTRIBUTE TO BRINGING INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION ; AND (D) SELLING COSTS.' 7. THE LD. COUNSEL HAS FURTHER RELIED UPON PARA 2.4 OF THE 'GUIDANCE NOTE ON ACCOUNTING FOR REAL ESTATE TRANSACTION' ISS UED BY THE INSTITUTE OF THE CHARTERED ACCOUNTANTS WHEREIN IT H AS BEEN STATED THAT: 'THE FOLLOWING COST SHOULD NOT BE CONSIDERED PART O F CONSTRUCTION COST AND DEVELOPMENT COST IF THEY ARE MATERIAL: (A) GENERAL ADMINISTRATION COSTS; (B) SELLING COST; (C) RESEARCH AND DEVELOPMENT COST; (D) DEPRECIATION OF IDLE PLANT AND EQUIPMENT; (E) COST OF UNCONSUMED OR UNINSTALLED MATERIAL DELI VERED AT SITE; AND 20 I.T.A. NO.4580/MUM/2013 (F) PAYMENT MADE TO SUB-CONTRACTORS IN ADVANCE OF W ORK PERFORMED.' 8. THE LD. COUNSEL THEREFORE HAS STATED THAT AS PER TH E ABOVE GUIDELINES, THE ADMINISTRATIVE AND SELLING EXPENSES HAVE BEEN SPECIFICALLY EXCLUDED FROM THE COST OF INVENTORY FOR WORK FOR CL OSING WIP. THE LD. COUNSEL HAS FURTHER SUBMITTED THAT EVEN AS PER AS - 7 VIDE PARAGRAPH 19 IT HAS BEEN MENTIONED THAT THE GENERAL ADMINISTRATIVE COST AND SELLING COST DOES NOT CONSTITUTE THE COST OF THE PROJECT. HE, TH EREFORE, HAS SUBMITTED THAT AS PER GUIDANCE NOTE, AS 2 AND EVEN AS 7, THE GENERAL ADMINISTRATIVE EXPENSES AND SELLING EXPENSES ARE NOT PROJECT COST AND ARE TO BE CHARGED TO THE PROFIT & LOSS ACCOUNT IN THE VERY SAME YEAR IN WHICH THEY ARE INCURRED. IN VIEW OF THE ABOVE FACTS AND FOLLOWING THE GUIDANCE NOTES AND ACCOUNTING STANDARDS, THE ASSESSEE HAS INDIVIDUALLY WORKED OUT THE EXPENSES DIRECTLY RELATED TO WORK IN PROGRESS AND E XPENSES NOT RELATED TO WORK IN PROGRESS AND ACCORDINGLY DEBITED IN RESPECT IVE HEADS. THE LD. COUNSEL HAS FURTHER RELIED UPON SECTION 145A OF THE ACT, WHICH READ AS UNDER: 'METHOD OF ACCOUNTING IN CERTAIN CASES. 145A. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONT AINED IN SECTION 145,- (A) THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' SHALL BE- ' (I) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REG ULARLY EMPLOYED BY THE ASSESSEE; AND (II) FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CO NDITION AS ON THE DATE OF VALUATION.' 9. THE LD. COUNSEL, THEREFORE, HAS CONTENDED THAT THE ASSESSEE HAS BEEN REGULARLY FOLLOWING THE METHOD OF ACCOUNTING R ECOGNIZED BY THE ACCOUNTING PRINCIPLES TO VALUE THE INVENTORY. THE A SSESSEE HAD FOLLOWED THE SAME METHOD OF VALUING THE INVENTORY IN PRECEDING Y EAR AS WELL AS IN 21 I.T.A. NO.4580/MUM/2013 SUCCEEDING YEARS. EVEN IN THE ASSESSMENT YEAR 2010- 11, IT HAS DEBITED AND CLAIMED THE IDENTICAL NATURE OF EXPENSES WHICH HAD BEEN ACCEPTED AS DEDUCTIBLE EXPENSES IN ASSESSMENT ORDER PASSED U/S 143(3) OF THE IT ACT. THE ASSESSEE BEING REGULARLY FOLLOWING THE ACCOUNTI NG METHOD DULY RECOGNIZED BY THE ACCOUNTING PRINCIPLES AND GUIDELI NES AS STATED ABOVE AND IN VIEW OF THE PROVISIONS OF SECTION 145A HAS RIGHT LY CLAIMED THE PROPORTIONATE SALARY EXPENSES, ADMINISTRATIVE EXPEN SES AND SELLING EXPENSES AS REVENUE EXPENDITURE. THE LD. COUNSEL HA S FURTHER CONTENDED THAT THE SPECIAL BENCH DECISION OF THE TRIBUNAL REL IED UPON BY THE LOWER AUTHORITIES IN THE CASE OF 'WALL STREET CONSTRUCTIO N LTD. VS JCIT' [101 ITD 156] IS RELATING TO INTEREST EXPENDITURE IDENTIFIAB LE WITH THE PROJECT. IN ASSESSEE'S CASE, DISPUTE IS NOT WITH RESPECT TO INT EREST AS THE ASSESSEE ITSELF HAS ADDED THE INTEREST COST TO THE WORK-IN-PROGRESS AND CLAIMED IT IN SUBSEQUENT YEAR IN THE PROPORTION OF REVENUE OFFERE D. THUS, THE FACTS IN ASSESSEE'S CASE ARE QUITE DISTINGUISHABLE AND THE D ECISION OF SPECIAL BENCH (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE ASSES SEE'S CASE. 10. 10. THE ID. DR ON THE OTHER HAND HAS RELIED UPON TH E FINDINGS OF THE LOWER AUTHORITIES. HE HAS STRESSED THAT THE LD. CIT (A) HAS RIGHTLY APPROPRIATED THE INDIRECT EXPENSES TO THE WIP IN PR OPORTION TO THE PERCENTAGE OF COMPLETION IN RESPECT OF THE AREA SOL D. 11. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE PERCENTAGE COMPLETION METHOD OF ACCOUNTING HAS BEEN REGULARLY FOLLOWED BY THE AS SESSEE. IN THE SUCCEEDING ASSESSMENT YEAR 2010-11, THE AO HAS ACCE PTED THE DEDUCTIBILITY OF THE IDENTICAL NATURE OF EXPENSES I N THE ASSESSMENT ORDER PASSED U/S 143(3) OF THE L.T. ACT. WE AGREE WITH CO NTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE EMPLOYEE COST REF ERS TO SALARY PAID TO THE EMPLOYEES WHO ARE LOOKING AFTER THE ADMINISTRAT ION 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 WHIC H THEY ARE INCURRED AND HAVE TO BE EXCLUDED FROM THE COST OF INVENTORIE S FOR WORKING OUT CLOSING WIP AS PER THE GUIDELINES ISSUED BY THE ICA L, ACCOUNTING STANDARD AS-2 AND AS-7. THE ASSESSEE HAS REGULARLY AND CONSI STENTLY BEEN FOLLOWING THE SAID METHOD OF ACCOUNTING AS PER THE PROVISIONS OF SECTION 145A OF THE L.T. ACT. THE AO HAS NOT ASSIGNED ANY C OGENT REASON AS TO 22 I.T.A. NO.4580/MUM/2013 WHY THE METHOD, WHICH HAS BEEN CONSISTENTLY FOLLOWE D BY ASSESSEE AND ACCEPTED BY THE DEPARTMENT IN PAST AS WELL IN SUCCE EDING ASSESSMENT YEARS AND WHICH IS IN ACCORDANCE WITH THE RECOGNIZE D PRINCIPLES OF ACCOUNTING BY ICAL, IS BEING REJECTED. IN OUR VIEW, THE ACTION OF THE REVENUE AUTHORITIES IN REJECTING THE ASSESSEE'S ACC OUNTING METHOD, WITHOUT ASSIGNING ANY REASON IS NOT JUSTIFIED. THE ACCOUNTING METHOD FOLLOWED BY THE ASSESSEE AND THEREBY EXCLUDING THE INDIRECT EXPENSES SUCH AS OFFICE EMPLOYEES' SALARY, ADMINISTRATIVE EX PENSES AND MARKETING & SELLING EXPENSES IS AS PER THE RECOGNIZED PRINCIP LES OF ACCOUNTINGS AND AS SUCH THE CLAIM OF THE ASSESSEE DESERVES TO BE AL LOWED. WE HOLD ACCORDINGLY. THE ADDITIONS MADE BY LOWER AUTHORITIE S ON THIS ISSUE ARE HEREBY ORDERED TO BE DELETED. 21. SIMILAR VIEW HAS BEEN FOLLOWED BY THE MUMBAI BENCH IN THE CASE OF HIRANANDANI PALACE GARDEN PVT LTD VS ACIT (SUPRA). IT HAS ALSO BROUGHT TO OUR NOTICE THAT SAME METHOD OF ACCOUNTING HAS BEEN CONS ISTENTLY FOLLOWED BY THE ASSESSEE IN ALL THE SUBSEQUENT YEARS. ONCE A PARTI CULAR METHOD OF ACCOUNTING HAS BEEN FOLLOWED CONSISTENTLY AND APPARENTLY THE S AME IS NOT CONTRARY TO LAW OR FACTS OF THE CASE, THEN THE AO IS NOT PERMITTED TO DISTURB THE SAME ONLY BECAUSE AS PER HIM THE SOME OTHER METHOD OF ACCOUNTING SHOU LD HAVE BEEN FOLLOWED BY THE ASSESSEE. 22. THUS, TAKING INTO ACCOUNT ALL THE FACTS AND CIRCUMS TANCES OF THE CASE, WE FIND THAT ACTION OF THE AO IN TREATING THE IMPUGNED EXPENSES AS PART OF WIP WAS NOT JUSTIFIED AND WAS CONTRARY TO LAW AND FACTS. T HE CLAIM MADE BY THE ASSESSEE IS IN LINE WITH THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE ASSESSEE AND IS IN ACCORDANCE WITH LAW AND FACTS OF THIS CASE. THE REFORE, ADDITION MADE BY THE AO IS DIRECTED TO BE DELETED. 23. THE AO IS DIRECTED TO ALLOW THE EXPENSES AS HAVE BE EN CLAIMED BY THE ASSESSEE. THE CONSEQUENTIAL EFFECT SHALL ALSO BE G IVEN BY THE AO WHILE PASSING ORDER GIVING APPEAL EFFECT FOR THE AMOUNT OF CLOSING WIP OF THE YEAR UNDER CONSIDERATION AS WELL AS OPENING WIP OF THE IMMEDIATELY SUBSEQUEN T ASSESSMENT YEAR. THUS, WITH THESE DIRECTIONS, THE GROUNDS 1 TO 3 RAISED BY THE ASSESSEE ARE ALLOWED. 23 I.T.A. NO.4580/MUM/2013 24. GROUND 4 & 5 WERE ARGUED AS CONSEQUENTIAL, THEREFOR E, THESE ARE DISMISSED. 24. AS A RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOW ED. ORDER PRONOUNCED IN THE COURT ON THIS _11 TH DAY OF JANUARY, 2017. SD/- SD/- (MAHAVIR SINGH ) (ASHWANI TANEJA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT: 11 TH JANUARY, 2017 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE , E-BENCH (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES