GAMMON NEELKANTH REALTY CORPORATION, MUMBAI V. ITO WD 15(3)(1), MUMBAI

ITA 6679/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8649 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 24-09-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 17-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Keywords: Business income; Depreciation; Business expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 6679/MUM/2010 (ASSESSMENT YEAR: 2005-06) M/S. GAMMON NEELKANTH REALTY CORPORATION, 5 TH FLOOR, FINE HOUSE, ANANDJI LANE, M.G. ROAD, OPP. DENA BANK, GHATKOPAR (E), MUMBAI -400 077 PAN: AAFFG 0913 P VS THE INCOME-TAX OFFICER, WARD- 15(3) (1), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VIJAY MEHTA RESPONDENT BY : SHRI A.K. NAYAK DATE OF HEARING: 24-09-2012 DATE OF PRONOUNCEMENT: 10-10-2012 O R D E R PER VIVEK VARMA, JM: THE APPEAL IS FILED BY THE ASSESSEE, AGAINST THE ORDER OF THE CIT(A) 26, MUMBAI, DATED 30.06.2010, WHEREIN, THE ASSESSEE HA S TAKEN THE FOLLOWING GROUNDS: 1. IN THE CIRCUMSTANCES AND FACTS OF OUR CASE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN:- (A) UPHOLDING THE CAPITALIZATION OF ADMINISTRATIVE EXPENSES OF RS 10,13,025/- TO WORK IN PROGRESS ACCOUNT WHICH IS UN WARRANTED AND UNLAWFUL AND ON WRONG APPRECIATION OF FACTS AND EVIDENCE TENDERED TO HIM. (B) ASSESSING THE INTEREST INCOME ON FIXED DEPOSIT UNDER THE HEAD INCOME FROM OTHER SOURCES INSTEAD OF UNDER THE HE AD PROFITS AND GAINS OF BUSINESS AND PROFESSION. 2. AT THE TIME OF HEARING, THE AR CONCEDED THAT THERE W AS A DELAY OF FILING OF APPEAL BY 2 DAYS. HE FURTHER INFORMED THAT REASONS FOR THE M/S. GAMMON NEELKANTH REALTY CORPORATION ITA NO. 6679/MUM/2010 2 DELAY, HAVE BEEN DULY SUBMITTED VIDE AFFIDAVIT DATED 21.09.20 12, WHICH HAS BEEN FILED. ON GOING THROUGH THE AFFIDAVIT AND THE REASONS GIVEN THEREIN, OBJECTIONS WERE SOUGHT FROM THE DR, WHO DID NOT OBJECT TO THE PROSECUTION OF THE APPEAL. ON NOTING THE NO OBJEC TION FROM THE DR, WE PROCEED WITH THE APPEAL, AS FILED BY THE ASSESSEE. 3. THE AR FURTHER CONCEDED THAT GROUND NO. 1(B) IS NOT P RESSED. SINCE THE GROUND IS NOT PRESSED, GROUND NO. 1(B) IS DISMISSE D AS NOT PRESSED. 4. WE ARE, THUS LEFT WITH THE SOLITARY GROUND, I.E. GROUND N O. 1(A), WHICH IS AGAINST THE CAPITALIZATION OF ADMINISTRATIVE EXPENSES OF RS. 10,13,025 TO WIP. 5. THE FACTS PERTAINING TO THE CASE ARE, THE ASSESSEE IS A PARTNERSHIP FIRM CONSISTING OF TWO PARTNERS 1) M/S GAMMON HOUSING & ESTATE DEVELOPERS LTD AND 2) NEELKANTH MANSIONS PVT. L TD. IN THE PROFIT SHARING RATIO OF 34% AND 66% RESPECTIVELY. THE BUSIN ESS CARRIED BY THE FIRM IS THAT OF DEVELOPMENT OF PROPERTY. THE ASSE SSEE HAS ENTERED INTO AN AGREEMENT WITH M/S VIDYA VIHAR CONTAINER LTD. A COMPANY, THE OWNERS OF THE LAND, FOR DEVELOPMENT OF PROPER TY AT VIDYAVIHAR, MUMBAI. COPY OF APPROVAL OF PLAN APPROVED BY AS STT. ENGINEER VIDE ITS NO. CE/6274/BPES/AM/01-11-04 DEVELOPME NT OF WORK IN RESPECT OF LAND, SURROUNDINGS, SITE OFFICE, SAMPLE FLATS , ROAD AND ENTRANCE HAS BEEN UNDERTAKEN BY THE ASSESSEE DU RING THE YEAR AND ALL THE EXPENSES INCURRED FOR THE WORK COMPLETED AS ON 31-03- 2005 IS REFLECTED IN THE WORK IN PROGRESS ACCOUNT. THE WORK IN PR OGRESS IS SHOWN AT RS 3,01,25,340/-. THE ADVANCE RECEIVED AGAINST SALE OF FLATS ARE SHOWN AT RS 6,15,22,115/-. ON VERIFICATION OF THE P& L ACCOUNT FILED WITH RETURN IT IS SEEN THAT DURING THE YEAR THE ASSESSEE HAS RECEIVED INTEREST INCOME ON FIXED DEPOSIT WITH HDFC B ANK OF RS. 8,06,223/- AND AFTER DEDUCTING CONSTRUCTION & DEVELOPMENT & OTHER M/S. GAMMON NEELKANTH REALTY CORPORATION ITA NO. 6679/MUM/2010 3 EXPENSES OF RS. 10,13,023/- THE ASSESSEE HAS DECLARED LOS S OF RS. 2,06,810/-. THE ASSESSEE HAS CAPITALIZED THE DIRECT EXPENS ES AND THE INDIRECT EXPENSES OF RS. 10,13,023/- ARE DEBITED TO P&L A CCOUNT AND DEDUCTED FROM INTEREST INCOME ON FIXED DEPOSIT AND DECLAR ED BUSINESS LOSS OF RS 2,06,800/-. THE INTEREST INCOME RECEIVED FROM THE FIXED DEPOSIT OF UNUTILIZED FUNDS SHOULD BE ASSESSED AS INCOME FRO M OTHER SOURCES AND NOT AS BUSINESS INCOME AS DECLARED BY THE ASSESSEE. VIDE LETTER NO. ITO15(3)(1)/142(1)/07-08 DT. 24-10-2007 A SHOW CA USE WAS ISSUED TO THE ASSESSEE AS TO WHY IT SHOULD NOT BE ASSE SSED AS INCOME FROM THE OTHER SOURCES. IN RESPONSE TO WHICH THE ASSES SEE HAS FILED LETTER DATED 7-11-2007. WITHOUT PREJUDICE TO THE FACT TH AT INTEREST INCOME ON FIXED DEPOSITS OUGHT TO BE ASSESSED UNDER TH E HEAD PROFITS OR GAIN FROM BUSINESS OR PROFESSION, THERE WOULD BE NO EFF ECT ON THE RETURNED LOSS SINCE BY YOUR ASSESSING THE INTEREST ON FI XED DEPOSIT UNDER THE HEAD INCOME FROM OTHER SOURCES, BUSINESS LO SS WOULD BE ASSESSABLE AT RS. 10,13,025/- AND INCOME FROM OTHER SOURC ES WOULD BE ASSESSABLE AT RS. 8,06,223/- AND THEREFORE, ALSO THERE WOULD BE NET LOSS OF WHOLLY ALLOWABLE BUSINESS EXPENSES IS EVIDENT FROM TH E VARIOUS HEADS OF EXPENSES LISTED IN THE SAID PROFIT AND LOSS. AS Y OU ARE AWARE AND THERE IS NO DISPUTE THAT WE HAVE ALREADY COMMENCED OUR BUSINESS OF CONSTRUCTION AND THEREFORE ADMINISTRATIVE AND OTHER E XPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT AFTER COMMENCEMEN T OF OUR BUSINESS ARE WHOLLY ALLOWABLE BUSINESS EXPENDITURE. IN VIEW OF THE ABOVE, THERE IS NO EFFECT ON THE RETURNED LOSS. 6. THE AO, AFTER CONSIDERING ALL THE REPLIES IN DETAIL, CONCLUDED, REGARDING THE ASSESSEES PLEA THAT THE IF THE INTE REST INCOME IS ASSESSED TO TAX AS INCOME FROM OTHER SOURCES. THE B USINESS LOSS WOULD BE RS. 10,13,025/- AND INCOME FROM OTHER SOUR CES WOULD BE RS. 8,06,225/- AND THEREFORE ALSO THE NET LOSS W OULD BE RS. 2,06,802/- AS RETURNED. ON VERIFICATION OF THE DETA ILS FILED WITH THE RETURN OF INCOME AND OTHER DETAILS FILED AND OB TAINED, IT IS SEEN THAT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS PROJECT COMPLETION METHOD. THEREFORE THE ENTIRE EXP ENSES RELATING, WHICH IS IDENTIFIABLE WITH THE PROJECT, H AS TO BE ACCUMULATED, ALLOWED IN THE YEAR WHEN THE INCOME FR OM PROJECT M/S. GAMMON NEELKANTH REALTY CORPORATION ITA NO. 6679/MUM/2010 4 IS COMPUTED.THE ASSESSEE HAS CAPITALIZED ALL THE DI RECT EXPENSES INCURRED ON THE PROJECT AND REGARDING THE INDIRECT EXPENSES THE SAME HAVE NOT BEEN CAPITALIZED AND BUT CLAIMED AS EXPENSES AND DEDUCTED FROM THE INTEREST INCOME A ND DECLARED BUSINESS LOSS AT RS. 2,06,800/-. IN THE C IRCUMSTANCES THE INDIRECT EXPENSES CLAIMED AND DEDUCTED AS BUSIN ESS EXPENSES FOR THE YEAR IS NOT ALLOWED AND THE AMOUNT OF RS. 10,13,023/- HAS TO BE ACCUMULATED AND ALLOWED IN TH E YEAR WHEN THE INCOME IS OFFERED. 7. THE AO, THEREFORE, DISALLOWED RS. 10,13,023. 8. AGGRIEVED, THE ASSESSEE, APPROACHED THE CIT(A), WHO SU STAINED THE DISALLOWANCE. 9. AGGRIEVED THE ASSESSEE IS NOW BEFORE THE ITAT. 10. BEFORE US, THE AR WHILE GIVING THE BRIEF BACK GROUND O F THE CASE POINTED OUT THAT THE ASSESSEE HAD CAPITALIZED ALL DIRECT E XPENSES TO THE WIP AS PER THE AS 7 GUIDELINES. HE PRODUCED BEFORE US TH E COPY OF P&L ACCOUNT AND POINTED OUT THAT COMPLETE DETAILS OF EXPENSE S DEBITED TO THE P&L ACCOUNT (SCH. E), WHEREIN THERE WAS A COMPLETE BR EAK UP OF EXPENSES HAD BEEN GIVEN, SHOWING DIRECT EXPENSES TAKEN TO WIP AND ADMINISTRATIVE EXPENSES, BEING COMMON EXPENSES, WHICH AMOU NTED TO RS. 10,13,023 (BEING THE IMPUGNED EXPENSES). 11. THE AR SUBMITTED THAT IN SUCH A CASE, WHERE THE AS SESSEE HAD ITSELF BIFURCATED THE ENTIRE EXPENSES AND ALSO GAVE A COMP LETE HEADWISE DETAILS, THE REVENUE AUTHORITIES HAD ERRED IN NOT ACCEPTIN G THE SAME AND CONTRARILY ALLOCATING THE SAME TOWARDS WIP. 12. THE AR POINTED OUT THAT IN A SIMILAR CASE IN COORDINATE BENCH AT CHENNAI IN ITAS NO.1512, 1513, 1514 TO 1518/MDS/2010 IN T HE CASE OF M/S SHRIRAM CHITS TAMILNADU PVT. LTD. AND OTHER ASSESSE ES CASES, THE CHENNAI BENCH IN PARA 19 HAS HELD, M/S. GAMMON NEELKANTH REALTY CORPORATION ITA NO. 6679/MUM/2010 5 IN GROUNDS 3.1 TO 3.3 THE REVENUE HAS CHALLENGED T HE ACTION OF THE LEARNED CIT(A) IN DIRECTING THE ASSESSING OFFICER T O DELETE THE DISALLOWANCE OF THE ADMINISTRATION AND OTHER EXPENS ES BEING INTEREST IN FINANCE CHARGES AND DEPRECIATION. IT WAS THE SUBMIT TED BY THE LEARNED DR THAT THE ASSESSEE WAS FOLLOWING A COMPLETED CONT RACT METHOD. IT WAS SUBMITTED THAT THE EXPENSES WHICH HAVE BEEN DIS ALLOWED BY THE ASSESSING OFFICER WAS ADMINISTRATIVE AND OTHER EXPE NSES, INTEREST AND FINANCE CHARGES AND DEPRECIATION RELATING TO THE PR OJECTS WHICH WERE UNDER PROGRESS. IT WAS THE SUBMISSION THAT IN VIEW OF THE DECISION OF THE MUMBAI SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE O F WALL STREET CONSTRUCTION LTD., REPORTED IN 101 ITD 156, THE IDE NTIFIABLE EXPENSES IN RELATION TO PROJECTS WHICH HAVE NOT BEEN COMPLETED WAS LIABLE TO BE DISALLOWED AND SUCH EXPENSES WERE ALLOWABLE ONLY WH EN THE PROJECTS WERE COMPLETED AS THE ASSESSEE WAS FOLLOWING PROJEC T COMPLETION METHOD. IT WAS THE SUBMISSION THAT HE HAD NO OBJECT ION IF THIS ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR R E-ADJUDICATION IN LINE WITH THE DECISION OF THE SPECIAL BENCH OF THIS TRIB UNAL IN THE CASE OF WALL STREET CONSTRUCTION LTD., REFERRED TO SUPRA. 13. THE AR ALSO CITED THE CASE OF CIT VS MANGAL TIRATH ES TATES LTD., REPORTED IN 303 ITR 366, WHEREIN HONBLE MADRAS HIGH COURT HELD, THE FACTS PECULIAR TO THE FACTS OF AN ASSESSMENT W ITH REFERENCE TO THE MAINTENANCE OF ACCOUNTS COULD NOT BE IGNORED. HENC E, THE NATURE OF BUSINESS AND THE RELEVANCY OF EXPENDITURE AND THE C HARACTER OF THE SAME, ORDER OF THE TRIBUNAL WAS CONFIRMED IN SO FAR AS LEGAL EXPENSES AND ADVERTISEMENT WERE CONCERNED. IN THE CIRCUMSTA NCES, THE ASSESSEE WAS ENTITLED TO HAVE THE DEDUCTION OF THE EXPENDITU RE ON ADVERTISEMENT AND LEGAL EXPENSES IN FULL IN THE YEAR IN WHICH IT WAS INCURRED. 14. THE AR, THEREFORE, PLEADED THAT THE REVENUE AUTHORITIE S ERRED IN ALLOCATING INDIRECT EXPENSES AMOUNTING TO RS. 10,13,025 TO WIP. 15. THE DR POINTED OUT THAT IT IS AN ADMITTED FACT THAT T HE ASSESSEE HAD UNDERTAKEN JUST ONE PROJECT IN HAND AND THAT WAS THE ONLY BUSINESS THAT WAS BEING CONDUCTED BY IT. HE FURTHER POINT ED OUT THAT EVEN THE CIT(A) HAS CATEGORICALLY CITED ELECTRICITY AND SEC URITY EXPENSES, CLAIMED UNDER INDIRECT EXPENSES TO BE PURELY IN DIRECT AND NOT ALLOCABLE TO THE DIRECT EXPENSES, AS SHOWN BY THE AS SESSEE. THE DR ALSO SUBMITTED THAT, UNDER ALL CIRCUMSTANCES, IT IS THE ASS ESSEE WHO HAS TO EXPLAIN THE NATURE OF EXPENSE AND IN A SITUATION LIK E THAT OF THE M/S. GAMMON NEELKANTH REALTY CORPORATION ITA NO. 6679/MUM/2010 6 ASSESSEE, WHERE THERE IS NO OTHER BUSINESS ACTIVITY, ALL EX PENSES HAVE TO BE TREATED ALIKE. 16. THE DR ALSO POINTED OUT THAT THE CIT(A) WAS CATEGORIC AL IN OBSERVING THAT EXCEPT FOR SECURITY AND ELECTRICITY EXPENSES, ALL EXPE NSES ARE MINOR AND THUS THE CIT(A) WAS CORRECT IN SUSTAINING TO CAPITALIZE THE EXPENSES TO WIP. 17. WE HAVE HEARD THE ARGUMENTS FROM EITHER SIDE AND HA VE ALSO PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AND THE DETAILS PLACED BEFORE US ALONG WITH THE CASES CITED. THE ISSUE BEFORE US IS WHETH ER THE EXPENSES OF RS. 10,13,023 ARE ALLOWABLE AS NORMAL BUSINESS E XPENSE, OR TO BE LOADED TO WIP, AS THE REVENUE AUTHORITIES HAVE DONE. 18. WE HAVE SEEN THAT THE ACCOUNTS ARE BEING MAINTAINED ON MERCANTILE BASIS ON PROJECT COMPLETION METHOD, AS PER THE GUIDELINES ISSUED BY THE ICAI. THE BASIC ARGUMENT OF THE REVENUE AUTHORITIES AND THE DR ARE THAT, BECAUSE THE ASSESSEE DID NOT HAVE AN Y OTHER BUSINESS ACTIVITY, THEREFORE, THESE EXPENSES ALSO, HAVE TO BE TAKE N AS A PART OF WIP, AND HENCE, CANNOT BE ALLOWED IN THE YEAR. THIS ARGUME NT, AS SUCH, WE CANNOT ACCEPT, BECAUSE EXPENSE HAS TO BE ALLOC ATED AS PER ITS NATURE, I.E. WHETHER IT IS A ROUTINE BUSINESS EXPENSE OR AN EXPENSE, WHICH HAS SOME SPECIFIC NATURE. WE FIND THAT AS PER SCHEDU LE E, THE ASSESSEE PROVIDED A COMPREHENSIVE HEAD WISE DETAIL OF ALL T HE EXPENSES, AND ALSO DISTINGUISHED THEM, WHEREIN THE ASSESSEE ITSELF LOADED ALL THE DIRECT EXPENSES TO WIP AND SEPARATED THE EXPENSES, WHICH IT CONSIDERED TO BE NORMAL AND OF ROUTINE BUSINESS E XPENSE. WE ARE WELL SUPPORTED BY THE DECISION CITED BY THE AR, IN THE CASE OF SHRIRAM CHITS TAMILNADU PVT. LTD. (SUPRA), WHEREIN, THE COORD INATE BENCH HAD REFERRED TO THE CASE OF MANGAL TIRTH ESTATES (SUPRA) AND IN PARA 21 CONCLUDED, M/S. GAMMON NEELKANTH REALTY CORPORATION ITA NO. 6679/MUM/2010 7 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PE RUSAL OF THE ASSESSMENT ORDER CLEARLY SHOWS THAT THE ADMINISTRATION AND OTHER EXPENSES, INTEREST & FINAN CE CHARGES AND DEPRECIATION HAD BEEN TAKEN FROM THE P & L A/C OF THE ASSESSEE. THE ASSESSING OFFICER HAS GIVE N A CATEGORICAL FINDING THAT THESE WERE CARRIED FORWARD AS CAPITAL WORK-IN-PROGRESS. THE FACT THAT THESE AMOUN TS HAD BEEN TAKEN FROM THE P&L ACCOUNT CLEARLY SHOWS T HAT THESE ARE NOTHING BUT THE REGULAR BUSINESS EXPENDIT URE AND ARE NOT RELATED TO ANY SPECIFIC PROJECTS. FURTH ER A PERUSAL OF THE STATEMENT OF FACTS FILED BEFORE THE LEARNED CIT(A) ALSO CLEARLY SHOWS THE BREAK-UP OF THE ADMINISTRATION EXPENSES, DEPRECIATION, INTEREST AND FINANCIAL CHARGES WHICH ARE NOT IN RELATION TO ANY SPECIFIC PROJECT. AS IT IS NOTICED THAT THE DISALLOWANCE IS NOT RELATED TO ANY SPECIFIC CONTRACT, WE ARE OF THE VIE W THAT THE SAME CANNOT BE DISALLOWED JUST BECAUSE THE ASSESSEE IS FOLLOWING THE COMPLETED CONTRACT METHOD . IT IS ONLY SUCH EXPENDITURE WHICH IS RELATED TO ANY SPECI FIC IDENTIFIABLE EXPENDITURE RELATED TO THE PROJECT, TH AT CAN BE DISALLOWED. IN THE CIRCUMSTANCES, WE ARE OF THE VIE W THAT THE FINDING OF THE LEARNED CIT(A) IS ON A RIGHT FOO TING AND DOES NOT CALL FOR ANY INTERFERENCE. 19. WE, IN THE LIGHT OF THE ABOVE OBSERVATIONS HOLD THAT TH E REVENUE AUTHORITIES HAD ERRED IN LOADING AND CAPITALIZING THE IMPUGNE D AGGREGATE EXPENSES OF RS. 10,13,025 TO WIP. 20. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND DIRECT THE AO TO ALLOW THE EXPENSE OF RS. 10,13,025 AS CLA IMED AND RE COMPUTE THE INCOME ACCORDINGLY. 21. THE APPEAL IS THUS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 10/10/2012. SD/- (P.M. JAGTAP) ACCOUTANT MEMBER SD/- (VIVEK VARMA) JUDICIAL MEMBER MUMBAI, DATE: 10/10/2012 M/S. GAMMON NEELKANTH REALTY CORPORATION ITA NO. 6679/MUM/2010 8 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)-26, MUMBAI. 4) THE CIT, CITY -15, MUMBAI, 5) THE D.R. G BENCH, MUMBAI. 6) COPY TO GUARD FILE. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN