BERGGRUEN HOTELS P.LTD, MUMBAI V. ITO WD 9(1)(2), MUMBAI

ITA 4948/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75572 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-02-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 01-08-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AS HIAM K MODI
• Assessee Lawyers: SANJEEV M SHAH
• Keywords: Depreciation; Proportionate interest
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE S/SHRI B.R.MITTAL,(JM) AND RAJENDRA (AM) . . , , ./I.T.A. NO.4948/MUM/2012 ( / ASSESSMENT YEAR : 2009-10) BERGGRUEN HOTELS PVT LTD. C/556, 6 TH FLOOR, SPAN CENTRE, SOUTH AVENUE ROAD, SANTACRUZ (W), MUMBAI--400054. / VS. INCOME TAX OFFICER (9(1)(2), AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020 ( & / APPELLANT) .. ( ' & / RESPONDENT) ./ ./PAN/GIR NO. : AACCB9701G & / APPELLANT BY : SHRI SANJEEV M SHAH ' & * /RESPONDENT BY : SHRI AS HIAM K MODI * - / DATE OF HEARING : 13.2.2014 * - /DATE OF PRONOUNCEMENT : 19.2.2014 / O R D E R PER B.R.MITTAL, JM: THE ASSESSEE HAS FILED THIS APPEAL FOR ASSESSMENT Y EAR 2009-10 AGAINST ORDER OF LD. COMMISSIONER OF INCOME TAX(A) DATED 2.5.201 1. 2. IN GROUND NO.1 OF THE APPEAL, THE ASSESSEE HAS DISPUTED THE ORDER OF LD. CIT(A) IN REDUCING THE CAPITAL ADVANCES OF RS.6,02,44,102 /- GIVEN TO SUPPLIERS AND ADVANCE OF RS.61,68,825/- GIVEN FOR ACQUISITION OF LAND FROM CAPITAL-WORK-IN- PROGRESS(HEREINAFTER REFERRED TO AS CWIP). 3. THE RELEVANT FACTS GIVING RISE TO THIS APPEAL ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTING, OPERATING AND MANAGE MENT OF HOTEL AND RESORT AND SERVICE APARTMENT. THE ASSESSEE FILED RETURN OF IN COME DECLARING TOTAL INCOME OF RS.10,57,640/-. I.T.A. NO.4948/MUM/2012 2 4. DURING THE COURSE OF ASSESSMENT PROCEEDING, AO OBSERVED THAT THE ASSESSEE CLAIMED TO HAVE INCURRED EXPENSES WHICH ARE BEING C APITALIZED UNDER THE TWO HEADS I.E CWIP EXPENDITURE AND PREOPERATIVE EXPENSES PEND ING ALLOCATIONS. AO STATED THAT ON VERIFICATION OF THE DETAILS OF CAPITAL EXPENDITU RES, IT IS NOTICED THAT THE ASSESSEE HAS GIVEN ADVANCES AMOUNTING TO RS.6,02,44,108/- TO T HE SUPPLIERS OF MATERIAL AND OR CONTACTORS AND ADVANCES AMOUNTING TO RS.61,68,825/ - IS CLAIMED TO HAVE BEEN GIVEN FOR PURCHASE OF LAND PROPERTY. THAT THESE ADVANCES H AVE BEEN INCLUDED IN THE CWIP OF THE HOTEL CONSTRUCTION. AO AFTER SEEKING THE EXPLA NATION FROM THE ASSESSEE STATED THAT ACTUAL COST HAS NOT ARISEN TO THE ASSESSED DURING THE YEAR AND THEREFORE THE ADVANCES CANNOT BE A PART OF CWIP OR EXPENDITURE OF THE YEA R. AO HAS STATED THAT WITHOUT PREJUDICE TO THE ABOVE , AS THE ASSESSEE IS FOLLOW ING MERCANTILE METHOD OF ACCOUNTING, IT CANNOT TAKE PLEA THAT IN WHATEVER FORM THE PAYME NTS HAVE BEEN MADE WILL BE PART OF THE EXPENDITURE OF THE YEAR. AO ACCORDINGLY RED UCED CWIP OF THE ADVANCES GIVEN TO THE SUPPLIERS OF RS.6,02,44,107.75 AND ADVANCES GIV EN OR ACQUIRING LAND OF RS.61,68,825/- AS HE DID NOT ALLOW THE SAME TO BE PART OF CWIP. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE FIRST APPELLAT E AUTHORITY. 5. ON BEHALF OF THE ASSESSEE, IT WAS CONTENDED THAT AS PER REQUIREMENT OF ACCOUNTING STANDARD AND GENERALLY ACCEPTED ACCOUNTI NG PRINCIPLES, CWIP INCLUDES FIXED ASSETS PENDING CAPITALIZATION, PREOPERATIVE EXPENSE S AND CAPITAL ADVANCES. THESE ADVANCES MADE EVENTUALLY TURN INTO FIXED ASSETS AS AND WHEN, THE ASSETS ARE RECEIVED/WORK DONE AND CAPITALIZED AND DEPRECIATION WILL BE CLAIMED ACCORDINGLY OR IN CASE WORK IS NOT DONE, THE AMOUNT NET OF REFUND RECEIVED WILL BE DE-CAPITALIZED /REDUCED FROM CWIP. THAT THE ASSESSEE HAS NOT CLAIM ED ANY EXPENSES NOR CAPITALIZED THE SAME TO FIXED ASSETS AND HAS NOT CLAIMED ANY D EPRECIATION ON THESE ADVANCES. THUS, THE CAPITAL ADVANCES SHOULD NOT BE REDUCED FR OM CWIP. 6. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAS CONFIRMED THE ACTION OF THE AO VIDE PARA 3.3 OF THE IMPUGNED OR DER WHICH READS AS UNDER : 3.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, THE SUBMISSION OF THE APPELLANT AND ASSESSMENT ORDER. I AGREE WITH THE F INDINGS OF THE AO THAT THE ADVANCES GIVEN BY THE APPELLANT IS NOT TOWARDS ANY CONFIRMED EXPENDITURE BUT TOWARDS EXPENDITURE THAT MAY ARISE OR MAY NOT ARISE IN FUTURE IN A SITUATION IF THE EXPENDITURE DOES NOT ARISE IN FUTURE THEN THE APPE LLANT WILL RECOVER THE ADVANCES. THUS, THE AO IS RIGHT IN HOLDING THAT SINCE THE ACTUAL COST HAS NOT ARISEN TO THE ASSESSEE DURING THE YEAR, THE ADVANCE S CANNOT FORM PART OF WIP. IN VIEW OF THIS, I UPHOLD THE CONTENTION OF THE A O AND DISMISS THE CLAIM OF THE APPELLANT . GROUND NO.1 IS DISMISSED. I.T.A. NO.4948/MUM/2012 3 HENCE, ASSESSEE IS IN FURTHER APPEAL BEFORE THE TR IBUNAL.. 7. DURING THE COURSE OF HEARING, LD. AR REITERATED THE SUBMISSIONS AS MADE BEFORE THE AUTHORITIES BELOW. HE FURTHER FILED A COPY OF NOTES ON ACCOUNTING STANDARD AND SUBMITTED THAT EVEN IF THE PAYMENTS MADE TO CONTRA CTORS AS ADVANCES FROM TIME TO TIME OR IN ACCORDANCE WITH SPECIFIC TERMS OF CONTR ACT, THE ASSESSEE CAN CAPITALIZE THE EXPENDITURE DURING THE CONSTRUCTION OF PRE-PRODUCTI ON. HOWEVER, THE SAID ADVANCES SHOULD NOT BE SEGREGATED OR CLASSIFIED AGAINST AN Y SPECIFIED FIXED ASSET UNTIL THE WORK IS COMPLETED. THE LD. AR RELIED ON THE DECISIONS OF HONBLE APEX COURT IN THE CASE OF . CHALLAPALLI SUGARS LTD. V/S CIT [1975] 98 ITR 167 (SC) AND CIT V/S G PARTHASARATHY NAIDU AND OTHERS (1999) 236 ITR 350 (SC) AND SUBMIT TED THAT EXPENSES PRIOR TO COMMENCEMENT OF BUSINESS CAN BE CAPITALIZED. HE, THEREFORE, SUBMITTED THAT THE ORDERS OF AUTHORITIES BELOW BE REVERSED AND THE SAI D ADVANCES GIVEN BY ASSESSEE SHOULD NOT BE REDUCED FROM THE CWIP. 8. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. HE SUBMITTED THAT PAYMENT ARE MERELY THE ADVANCES. HE FURTHER SUBMITTED THAT EVEN IF THE ASSESSEE HAS NOT CLAIMED DEPRECIATION IN THE ASSESS MENT YEAR UNDER CONSIDERATION BUT THE SAME HAS REVENUE EFFECT IN THE SUCCEEDING YEAR. HE SUBMITTED THAT AS AND WHEN THE WORKS IS EXECUTED, THE ASSESSEE COULD CAPITALIZ ED THE EXPENSES AND MERELY THE ADVANCES GIVEN FOR EXECUTION OF WORK IN FUTURE CANN OT BE CAPITALIZED TILL THE WORK IS EXECUTED AND THE AMOUNT HAS ACTUALLY BECOME DUE TO THE CONTRACTOR/SUPPLIERS. HE FURTHER SUBMITTED THAT CASES CITED BY LD. AR (SUP RA) DO NOT APPLY TO THE FACTS OF THE CASE AS IN THOSE CASES THE LIABILITY WERE ACTUALLY INCURRED IN RESPECT OF INSTALLING THE MACHINERY AND PLANT PRIOR TO THE COMMENCEMENT OF T HE PRODUCTION AND WHEREAS IN THE CASE OF ASSESSEE THE WORK IS YET TO BE EXECUTED A ND MERELY THE ADVANCES WERE MADE BY ASSESSEE. 9. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF AUTHO RITIES BELOW AND THE SUBMISSIONS OF LD. REPRESENTATIVES OF THE PARTIES. WE HAVE ALSO CONSIDERED THE CASES CITED BY LD AR (SUPRA) AND HAVE CAREFULLY CONSIDERE D THE NOTE ON ACCOUNTING STANDARD PLACED BEFORE US. 9.1 WE OBSERVE THAT THE ASSESSEE HAS MERELY GIVEN THE ADVANCES TO THE SUPPLIERS/CONTACTORS/SELLERS AND THE EXPENSES HAVE NOT BEEN ACTUALLY INCURRED. NOR ANY I.T.A. NO.4948/MUM/2012 4 BILLS HAVE BEEN RAISED BY THE PERSONS TO WHOM THE ADVANCES HAVE BEEN MADE. MERELY MAKING ADVANCES FOR THE PROSPECTIVE SUPPLIES OF MA TERIAL/ CONTRACTORS TO EXECUTE THE WORK/SELLERS OF LAND AND WITHOUT SPECIFYING AS TO WHICH MATERIAL IS TO BE PROCURED BY ASSESSEE, WHAT MATERIAL IS TO BE PROCURED BY ASSES SEE AND ALSO DID NOT INDICATE AS TO HOW THE ADVANCES, WOULD BE ADJUSTED TOWARDS CAPITA L WORK TO BE EXECUTED, WE ARE OF THE CONSIDERED VIEW THAT THE LD. CIT(A) HAS RIGHT LY HELD THAT THE SAID ADVANCES GIVEN BY ASSESSEE TOWARDS EXPENDITURE THAT MAY ARISE OR MAY ARISE IN FUTURE CANNOT BE SAID TO BE CAPITAL IN NATURE. THAT THERE IS NO CONFIRM ATION REGARDING EXPENDITURE INCURRED OR TO BE INCURRED BY ASSESSEE. HENCE, LD. CIT(A) HAS RIGHTLY CONFIRMED THE ACTION OF THE AO THAT THE SAID ADVANCES CANNOT FORM PART OF CW IP. WE AGREE WITH LD. DR THAT THE CASES CITED BY LD. AR (SUPRA) ARE NOT APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. HENCE, GROUND NO.1 OF THE APPEAL TAKEN BY ASSESSE E IS REJECTED BY CONFIRMING THE ORDER OF LD. CIT(A). 10. IN GROUND NO.2 OF THE APPEAL, THE ASSESSEE HAS DISPUTED THE ORDER OF LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF RS.6,32,887/- C OMPRISING OF DISALLOWANCE OF INTEREST OF RS.1,54,765/- AND RS.4,78,122/- CALCULATED AS PE R RULE 8D OF THE INCOME TAX RULES, 1962 FOR THE PURPOSE OF MAKING DISALLOWANCE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961. 11. AO HAS STATED THE THE ASSESSEE HAS CLAIMED EXEM PT DIVIDEND INCOME AMOUNTING TO RS.51,95,116/- EXEMPT U/S 10 OF THE ACT. HE HA S STATED THAT THE ASSESSEE HAS NOT ATTRIBUTED ANY EXPENDITURE TOWARDS EARNING OF EXEMP T INCOME U/S 14A OF THE ACT. AO AFTER CONSIDERING THE DECISION OF THE HONBLE BOMB AY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (2010) 328 ITR 81 (BOM) AND THE PROVISIONS OF SECTION 14A OF THE ACT AS ALSO THE CBDT NOTIFICATION NO.45/200 8 DATED 24.3.2008 APPLIED RULE 8D OF THE RULES AND CALCULATED THE SAME AT RS.1,54,76 5/- TOWARDS PROPORTIONATE INTEREST AND SUM OF RS.4,78,122/- THE AMOUNT EQUAL TO 0.5% OF THE VALUE OF INVESTMENT AS THE EXPENSES DISALLOWABLE U/S 14A OF THE ACT. THUS, AO DISALLOWED AGGREGATE AMOUNT OF RS.6,32,887/- FROM PREOPERATIVE EXPENSES. BEING AG GRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 12. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAS UPHELD THE ACTION OF AO. HENCE, ASSESSEE IS IN FURTHER APPE AL BEFORE THE TRIBUNAL. I.T.A. NO.4948/MUM/2012 5 13. AT THE TIME OF HEARING, LD. AR SUBMITTED THAT THE ASSESSEE HAS NOT USED ANY BORROWED MONEY FOR THE PURPOSE OF OF MAKING INVEST MENT. HE REFERRED PAGES 28 AND 29 OF THE PAPER BOOK WHICH IS A COPY OF BALANCE-SHE ET AS ON 31.3.2009 AND SUBMITTED THAT IN THE FINANCIAL YEAR RELEVANT TO THE ASSESS MENT YEAR UNDER CONSIDERATION THERE WAS A REDUCTION IN INVESTMENT FROM RS.11.22 CRORES TO RS.7.90 CRORES. HE SUBMITTED THAT IN THE EARLIER THERE WAS NO LOAN TAKEN BY ASSE SSEE. HE FURTHER SUBMITTED THAT SECURITY LOAN TAKEN BY ASSESSEE IN THE ASSESSMENT Y EAR UNDER CONSIDERATION WAS RS.20.07 CRORES FROM IDFC FOR THE SPECIFIC PURPOS E FOR SETTING UP OF HOTEL PROJECT. THAT THE DISBURSEMENT OF THE SAID LOAN WAS MADE ON 19.2. 2009 AND 23.3.2009. HENCE NO BORROWED FUNDS WERE USED FOR THE PURPOSE OF INVEST MENT. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE TO E ARN DIVIDEND INCOME AND THEREFORE NO ADMINISTRATIVE DISALLOWANCE IS TO BE MADE. LD. DR RELIED ON THE ORDER OF LD. CIT(A). 14. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF AUT HORITIES BELOW AND SUBMISSIONS OF LD. REPRESENTATIVES OF THE PARTIES. WE HAVE ALSO C ONSIDERED THE BALANCE-SHEET OF THE ASSESSEE AND THE PROFIT AND LOSS ACCOUNT READ WITH SCHEDULE E PLACED AT PAGE 5 OF THE PAPER BOOK. IN RESPECT OR DISALLOWANCE OF INV ESTMENT OF RS.1,54,765/- UNDER RULE 8D (II) OF THE RULES, WE ARE OF THE CONSIDERED VIE W THAT THE CONTENTION OF LD. AR HAS MERITS THAT NO BORROWED FUNDS WERE USED BY ASSESSEE FOR MAKING THE SAID INVESTMENT. MOREOVER, THE BORROWED MONEY WAS TAKEN BY ASSESSE E FROM IDFC AS SECURED LOAN WHICH THE ASSESSEE COULD UTILIZED ONLY FOR SETTING UP HOTEL PROJECT. FURTHER IT IS A FACT THAT IN THE RELEVANT FINANCIAL YEAR TOTAL INVESTMEN T HAS COME DOWN FROM RS.11.22 CRORES TO RS.7.90 CRORES AS ON 31.3.2009. THEREFORE, THE SAID DISALLOWANCES OF RS.1,54,765/- OUT OF INTEREST IS NOT JUSTIFIED ON THE FACTS OF THE CASE. 14.1 AS FAR AS DISALLOWANCE OF RS.4,78,122/- CAL CULATED AS PER RULE 8D(III), BEING 0.5% OF VALUE OF INVESTMENT, WE OBSERVE THAT THE A SSESSEE HAS ADMITTEDLY NOT ATTRIBUTED ANY EXPENDITURE TOWARDS EARNING OF EXEM PT DIVIDEND INCOME OF RS.51,95,166/-. IT IS A FACT THAT THE ASSESSEE WH EN MAKES A DECISION FOR MAKING INVESTMENT HAS TO DIRECTLY OR INDIRECTLY INCURRED AN EXPENDITURE. THE LEGISLATURE HAS LAID DOWN RULE 8D FOR CALCULATING ADMINISTRATIVE E XPENSES VIDE RULE 8D WHICH IS APPLICABLE FROM AY 2008-09. AO HAS MADE DISALLOWA NCE OF EXPENSES OF RS.4,78,122/- AS PER RULE 8D(III) OF THE RULES, THE FORMULA PR ESCRIBED BY LEGISLATURE WHICH IS ADMITTEDLY APPLICABLE FROM ASSESSMENT YEAR UNDER CO NSIDERATION. CONSIDERING THE FACTS OF THE CASE AND THE FACT THAT THERE IS NO ARBITRAR ILY DISALLOWANCE, MADE BY AO BUT HAS FOLLOWED THE STATUTORY FORMULA TO MAKE THE DISALLOW ANCE TOWARDS ATTRIBUTABLE I.T.A. NO.4948/MUM/2012 6 ADMINISTRATIVE EXPENSES WHICH COME TO RS.4,78,122/- , WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) CONFIRMING T HE DISALLOWANCE OF RS.4,78,122/-. IN VIEW OF ABOVE, GROUND NO.2 OF THE APPEAL TAKEN BY A SSESSEE IS ALLOWED IN PART BY DELETING THE DISALLOWANCE OF RS.1,54,765/- OUT OF T OTAL DISALLOWANCE OF RS.6,32,887/- U/S 14A READ WITH RULE 8D OF THE RULES . 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED IN PART. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 19TH FEBRUARY, 2014 . 1 2 19TH FEBRUARY, 2014 * SD SD ( / RAJENDRA) ( . . /B.R.MITTAL) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI: ON THIS 19TH DAY OF FEBRUARY, 2014 . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. & / THE APPELLANT 2. ' & / THE RESPONDENT. 3. 6 ( ) / THE CIT(A)- CONCERNED 4. 6 / CIT CONCERNED 5. 7 '9 , - 9 , / DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) - 9 , /ITAT, MUMBAI