ACIT, Jabalpur V. M/s. Samdariya Dharamchand Tejraj, Jabalpur

ITA 75/JAB/2010

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5607 (ITAT-JABALPUR)
• Duration Of Justice: 3 year(s) 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 19-07-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K K UPADHYAY
• Keywords: Depreciation; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, JABALPUR BENCH, JABALPUR BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER ITA NO.75/JAB/2010 ASSESSMENT YEAR: 2007-08 ASSTT, COMMISSIONER OF INCOME TAX, VS. M/S SAMDARIY A DHARAMCHAND TEJRAJ, CIRCLE 1 (1), JABALPUR. 16, SARAFA BAZAR, JABALP UR. (PAN AAJHS 3497 Q). (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.K. UPADHYAY, D.R. RESPONDENT BY : SHRI ANIL GUPTA, C.A. DATE OF HEARING : 25.03.2014 DATE OF PRONOUNCEMENT : 28 .03.2014 ORDER PER T.S. KAPOOR, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A) DATED 29.03.2010. 2. THE ONLY GROUND OF APPEAL TAKEN BY THE REVENUE I S ITS GRIEVANCE OF THE ACTION OF LD. CIT(A) IN DELETING THE ADDITION OF RS .70,64,740/- ON ACCOUNT OF DISALLOWANCE OF LOSS MADE BY THE A.O. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A BUILDER AND IS INVOLVED IN CONSTRUCTION OF MANY PROJECTS. HE PREPARES PROFIT & LOSS ACCOUNT AND BALANCE ITA NO.75 /JAB/2010 A.Y. 2007-08 2 SHEET OF EACH PROJECT INDIVIDUALLY AND THEN A CONSO LIDATED BALANCE SHEET AND PROFIT & LOSS OF THE WHOLE CONCERN IS PREPARED. ONE OF TH E PROJECTS UNDERTAKEN BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION IS A P ROJECT NAMED AS SAMDARIYA JDA COMMERCIAL COMPLEX. AS PER THE ASSESSMENT ORDER, T HE PROJECT WAS STARTED IN JUNE 2006 AND THE ASSESSEE HAD CREATED A CLOSING ST OCK OF WORK IN PROGRESS AMOUNTING TO RS.10.61 CRORES. THE ASSESSEE HAD ALS O DEBITED ADMINISTRATIVE AND INTEREST EXPENSES OF RS.64.76 LACS AND DEPRECIATION AMOUNTING TO RS.5.93 LACS IN HIS PROFIT & LOSS ACCOUNT. THE ASSESSEE THUS CLAIM ED A LOSS OF RS.70.64 LACS CONSISTING OF THESE THREE ITEMS OF EXPENDITURES. T HE ASSESSING OFFICER DISALLOWED THE LOSS ON TWO COUNTS FIRST BEING THAT THE ASSESSE E HAD TRANSFERRED THIS BUSINESS TO A PRIVATE LIMITED COMPANY IN NEXT YEAR AND SECONDLY A S PER THE ASSESSING OFFICER IN CASE OF BUILDERS THERE WERE ONLY TWO METHOD OF RECO GNIZING INCOME AND EXPENDITURE, ONE IS PROJECT COMPLETION METHOD AND O THER IS PERCENTAGE OF PROJECT COMPLETION. THE ASSESSING OFFICER ALLEGED THAT THE ASSESSEE HAD NOT FOLLOWED ANY OF THE ABOVE METHODS. THEREFORE, HE DISALLOWED TH E LOSS ON MERITS ALSO. WHILE DISALLOWING THE LOSS, THE ASSESSING OFFICER OBSERVE D AS UNDER :- SECONDLY, EVEN ON MERITS, IT IS FOUND THAT THE LOS S IS NOT ALLOWABLE. IT IS FOUND THAT THERE HAS BEEN NO SALE S WHATSOEVER IN THIS PROJECT IN THE SAID PARTICULAR YEAR. IN FACT, THER E HAS HARDLY BEEN ANY SALE IN THIS PROJECT FOR A VERY LONG TIME. ACCORDIN GLY, ONLY THE WORK IN PROGRESS IS THERE. HOWEVER, THE ASSESSEE HAS CONVE NIENTLY TAKEN OUT ADMINISTRATIVE EXPENSES AND THE SAME AMOUNT ALONG W ITH DEPRECIATION HAVE BEEN TERMED AS LOSS. THIS IS TOTALLY UNACCEPT ABLE. ONE WONDERS THAT IF ADMINISTRATIVE EXPENSES CAN BE TAKEN OUT AN D CLAIMED AS LOSS, ITA NO.75 /JAB/2010 A.Y. 2007-08 3 WHAT PREVENTED THE ASSESSEE FROM CLAIMING THE ENTIR E WORK IN PROGRESS OF RS.10,61,66,712/- AS LOSS ! AFTER ALL, THE LOGI C AND ARGUMENT SHALL BE THE SAME. ACTUALLY, IN THE CASE OF BUILDERS, THERE ARE TWO AC CEPTED METHODS OF SHOWING PROFITS, NAMELY, PERCENTAGE COMP LETION METHOD AND SECONDLY, PROJECT COMPLETION METHOD. IN THE CA SE OF PERCENTAGE COMPLETION METHOD THE ASSESSEE EVERY YEAR SHOWS A C ERTAIN PERCENTAGE OF THE WIP AS HIS TAXABLE INCOME ON PRES UMPTIVE BASIS. THIS GOES ON TILL THE LAST SALE IS COMPLETE AND THE REAFTER, THE ACTUAL P&L ACCOUNT OF THE PROJECT IS PREPARED AND THE EXAC T TAXABLE INCOME IS COMPUTED. FROM THIS, THE SET-OFF OF INCOME SHOW N SO FAR IS TAKEN AND THE BALANCE IS OFFERED AGAIN FOR INCOME. IN THE CASE OF PROJECT COMPLETION METHOD, THE ASSES SEE POSTPONES SHOWING PROFITS ALTOGETHER. ONLY WHEN TH E LAST SALE IS COMPLETE THAT THE ACTUAL PROFIT IS COMPUTED AND THE N, THE SAME IS OFFERED FOR TAXATION. THE SECOND METHOD HAS BEEN Q UITE CONTROVERSIAL AND THE DEPARTMENT ALWAYS FAVOURS PERCENTAGE COMPLE TION METHOD. HOWEVER, NOBODY HAS HEARD OF THIS SYSTEM WHERE A PA RT OF WIP CAN BE TAKEN OUT AND SHOWN AS LOSSES. THIS IS ABSO LUTELY NEW AND UNCALLED FOR. IF THE ASSESSEE IS NOT SHOWING PROFI TS, IT CANNOT ALSO CLAIM LOSSES PARTICULARLY SINCE THERE HAS BEEN NO S ALES WHATSOEVER. 4. ON APPEAL BEFORE THE LD. CIT(A), THE LD. CIT(A) DELETED THE ADDITION BY HOLDING AS UNDER :- NOW THE CONTENTION OF THE APPELLANT IS FOUND TO BE CORRECT. THE ASSESSING OFFICERS OBJECTION THAT THE PROPERTY IN QUESTION WAS NO LONGER OWNED BY THE ASSESSEE AS IT HAD BEEN TRANSFE RRED TO SAMDARIYA BUILDERS PVT. LTD. WAS MISCONCEIVED APPARENTLY ON T HE FACT OF THE CASE ITSELF BECAUSE THE ASSESSING OFFICER HIMSELF HAS OB SERVE D THAT IT WAS TRANSFERRED IN THE F.Y. 2008-09. NOW WE ARE CONCER NED WITH THE APPELLANTS ACTIVITIES OF BUSINESS TAKEN PLACE IN T HE PREVIOUS YEAR 2006-07, THE INCOME OF WHICH WAS ASSESSABLE FOR A.Y . 2007-08. DURING THIS PERIOD THE PROPERTY WAS VERY MUCH IN TH E OWNERSHIP OF THE APPELLANT HUF AND IT WAS ONLY TRANSFERRED TO SAMDAR IYA BUILDERS P. ITA NO.75 /JAB/2010 A.Y. 2007-08 4 LTD. AFTER THE CLOSURE OF F.Y. 2007-08 I.E. IN THE F.Y. 2008-09. THEREFORE ON THIS BASIS, DISALLOWANCE OF LOSSES WAS INCORRECT AND AGAINST THE FACTS OF THE CASE AND AGAINST THE LAW. EVEN ON MERITS THIS PROJECT OF SAMDARIYA JDA COMMERCIAL COMPLEX CANNOT BE VIEWED IN ISOLATION BUT HAS TO BE TAKEN IN ITS TOTALITY OF TH E ASSESSEES ENTIRE BUSINESS WHICH INCLUDES DIFFERENT PROJECTS. IT IS PROFIT OF ALL THE DIFFERENT PROJECTS TOGETHER WHICH IS SUBJECTED TO T AX IN ONE ASSESSMENT YEAR, THEREFORE THE EXPENSES INCURRED FOR ALL THE P ROJECTS TOGETHER NEED NECESSARILY TO BE ALLOWED WHILE ARRIVING AT TH E PROFIT. THE ADMINISTRATIVE EXPENSES INCURRED WERE IN RESPECT OF RUNNING BUSINESS AND AS HELD IN THE CASE, AS REPORTED IN 72 ITR 114 (MAD) JUST BECAUSE THERE WAS NO SALE, IT COULD NOT BE CONSTRUED THAT T HERE WAS NO BUSINESS ACTIVITY OR THAT THE BUSINESS HAD CEASED TO EXIST. IT IS SUFFICIENT, IF THE ASSESSEE WAS MAINTAINING THE ESTABLISHMENT AND INCU RRING EXPENDITURE. IT WAS NOTHING BUT REVENUE EXPENDITUR E AND HENCE ALLOWABLE. IN THE INSTANT CASE THE EXPENSES WERE A CTUALLY INCURRED AND THEY WERE INCURRED WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF BUSINESS AND THEREFORE WERE ALLOWABLE U/S 36 OF THE I.T. ACT. THE NATURE OF EXPENSES MAKE IT CLEAR THAT NONE OF THEM WAS OF SUCH NATURE THAT IT COULD BE CAPITALIZED AND INCLUDED AS PART O F W.I.P. THEREFORE, THE DISALLOWANCE OF LOSS OF RS.70,64,740/- WAS NOT CORRECT AND IN ACCORDANCE WITH THE LAW AND ACCORDINGLY ADDITION OF THIS AMOUNT OF RS.70,64,740/- HEREBY DELETED. 5. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 6. AT THE OUTSET, THE LD. DEPARTMENTAL REPRESENTATI VE ARGUED THAT THE LD. CIT(A) HAS NOT CONSIDERED THE ENTIRE FACTS IN ITS ENTIRETY AND SUBMITTED THAT PROJECT WAS STARTED IN THE F.Y. ITSELF AND WAS UNDER CONSTRUCTI ON AND DURING THE CONSTRUCTION PERIOD ALL EXPENSES INCLUDING HUGE AMOUNT OF INTERE ST RELATED TO CONSTRUCTION OF PROJECT WAS INCURRED. HE FURTHER SUBMITTED THAT TH E EXPENSES WERE NOT REVENUE IN NATURE AND MOREOVER THERE WAS NO BUSINESS DURING TH E YEAR AS THERE WAS NO SALE IN ITA NO.75 /JAB/2010 A.Y. 2007-08 5 THE YEAR AND ALL EXPENSES RELATED TO CONSTRUCTION O NLY. HE FURTHER ARGUED THAT EVEN OTHERWISE ALSO THE EXPENSES WERE NOT ALLOWABLE AS T HE ASSESSEE HAD TRANSFERRED THE ENTIRE BUSINESS TO A PRIVATE LIMITED COMPANY AND, T HEREFORE, THE ASSESSING OFFICER HAS RIGHTLY MADE THE ADDITION. 6. THE LD. AUTHORISED REPRESENTATIVE, ON THE OTHER HAND, ARGUED THAT THE ASSESSEE IS A BUILDER AND WAS CONSTRUCTING A MALL A T HIS OWN AND NO CONTRACT WAS MADE WITH ANY OUTSIDER AND THEREFORE ACCOUNTING STA NDARD-7 WAS NOT APPLICABLE AND FURTHER SUBMITTED THAT THE ASSESSEE WAS LIKE A TRADER IN PROPERTY AND THE CONSTRUCTION WORKS WERE EQUIVALENT TO HIS INVENTORI ES AND, THEREFORE, HE HAD VALUED THE INVENTORY AS PER ACCOUNTING STANDARD-2 ISSUED B Y INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. REGARDING APPLICABILITY OF A S-7 RELATING TO CONSTRUCTION CONTRACTS, THE LD. AUTHORISED REPRESENTATIVE ARGUED THAT THIS ACCOUNTING STANDARD WAS NOT APPLICABLE TO THE ASSESSEE AS THERE WAS NO CONTRACT INVOLVED AND THE ASSESSEE WAS CONSTRUCTING THE PROPERTY AT HIS OWN. INVITING OUR ATTENTION TO PAPER BOOK PAGE NOS.59 ONWARDS, THE LD. AUTHORISED REPRES ENTATIVE SUBMITTED THAT SCOPE OF APPLICATION OF AS-07 RESTRICTS TO CONSTRUCTION C ONTRACT WHEREIN THE EXISTING OF CONSTRUCTION CONTRACT IS A MUST. IN THIS RESPECT, HE INVITED OUR ATTENTION TO DEFINITION OF CONSTRUCTION CONTRACTS CONTAINED IN T HE STANDARD AS PLACED IN PAPER BOOK PAGE NO.60. THEREFORE, IN VIEW OF THE ABOVE D EFINITION, IT WAS ARGUED THAT THE ITA NO.75 /JAB/2010 A.Y. 2007-08 6 AS-7 WAS NOT APPLICABLE AND ONLY AS-2 WAS APPLICABL E AND THE ASSESSEE WAS RIGHTFULLY FOLLOWING ABOVE ACCOUNTING STANDARD AND VALUED THE INVENTORIES AS PER THE METHOD PRESCRIBED IN THE STANDARD WHICH INCLUDE S COST OF PURCHASE AND COST OF CONVERSION ETC. THE LD. AUTHORISED REPRESENTATIVE FURTHER RELIED ON CASE LAW OF CIT VS. LOKHANDWALA CONSTRUCTION INDUSTRIES LIMITE D, 260 ITR 579 (MUMBAI) WHEREIN UNDER SIMILAR CIRCUMSTANCES THE INTEREST PA ID WAS CONSIDERED TO BE REVENUE EXPENDITURE. IN VIEW OF THE ABOVE JUDGMENT OF MUMBAI HIGH COURT, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT CASE OF TH E ASSESSEE IS SIMILAR AND, THEREFORE, THE LD. CIT(A) HAS RIGHTLY DELETED THE A DDITION. 7. WE HAVE HEARD THE RIVAL PARTIES AND GONE THROUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT THE ASSESSEE IS A BUILDER AND HAS BEEN UNDERTAKING VARIOUS PROJECTS. THE PROFIT & LOSS ACCOUNT AND BALANCE SH EET OF EACH PROJECT IS BEING PREPARED SEPARATELY AND AT THE END OF FINANCIAL YEA R PROFIT & LOSS ACCOUNT AND BALANCE SHEET OF EACH PROJECT IS MERGED AND A CONSO LIDATED PROFIT & LOSS ACCOUNT AND BALANCE SHEET IS PREPARED. THE COMMON EXPENSES OF RUNNING ENTIRE BUSINESS IS INCURRED AT THE H.O. AND ARE CLAIMED IN THE PROF IT & LOSS ACCOUNT. THE CONSOLIDATED PROFIT & LOSS ACCOUNT IS PLACED AT PA PER BOOK PAGE NO.43 WHEREIN THE ASSESSEE HAS CLAIMED EXPENSES OF RS.1,20,78,888 /-. THE BREAK-UP OF THESE EXPENSES IS PLACED AT PAPER BOOK PAGE NO.46. THESE EXPENSES ARE REVENUE ITA NO.75 /JAB/2010 A.Y. 2007-08 7 EXPENSES AND HAVE BEEN RIGHTLY CLAIMED BY THE ASSES SEE IN THE PROFIT & LOSS ACCOUNT AND THESE ARE THE EXPENSES WHICH THE ASSESS EE HAS INCURRED IN CARRYING OUT THE BUSINESS. THE EXPENSES CLAIMED ON A PARTICULAR PROJECT I.E. SAMDARIYA JDA COMMERCIAL COMPLEX AMOUNTING TO RS.70.64 LACS IN FA CT ARE EXPENSES SPECIFICALLY INCURRED FOR THE PURPOSE OF EXECUTION OF THE PROJEC T. HAD THESE BEEN EXPENSES OF REVENUE NATURE CARRIED OUT IN THE RUNNING OF BUSINE SS OF THE ASSESSEE, THESE WOULD HAVE BEEN DEBITED IN THE CONSOLIDATED PROFIT & LOSS ACCOUNT. THE BOOKING OF EXPENDITURE SEPARATELY UNDER THE PARTICULAR PROJECT ITSELF MEANS THAT THERE WERE SPECIFIC EXPENSE INCURRED FOR THIS PROJECT ONLY. T HE LD. CIT(A) WHILE GIVING RELIEF TO THE ASSESSEE HAS IGNORED THIS IMPORTANT POINT. AS REGARDS THE CASE LAW RELIED UPON BY THE ASSESSEE, IN THE CASE OF CIT VS. LOKHAN DWALA CONSTRUCTION INDUSTRIES LIMITED, 260 ITR 579 (MUMBAI), WE DO NOT HAVE ANY H ESITATION IN ACCEPTING THE DECISION GIVEN BY HONBLE MUMBAI HIGH COURT BUT IN THAT CASE THE EXPENSES WERE INCURRED IN CARRYING OUT THE BUSINESS OF THE ASSESS EE AND IN THE PRESENT CASE, THE ASSESSEE HAS ALREADY CLAIMED SUCH EXPENSES IN THE C ONSOLIDATED PROFIT & LOSS ACCOUNT. THE LD. AUTHORISED REPRESENTATIVE HAD HEA VILY RELIED UPON THE ACCOUNTING STANDARD-2 TO CLAIM THAT THE AS-2 WAS AP PLICABLE TO THE ASSESSEE AND, THEREFORE, THE ASSESSEE HAD TREATED THE WORK IN PRO GRESS AS INVENTORIES WHEREAS THE FACT REMAINS THAT THE ASSESSEE DID NOT TREAT THE WO RK IN PROGRESS AS INVENTORIES AND RATHER INCLUDED THE SAME AS CLOSING STOCK. MOREOV ER, WE FIND AS-2 RELATING TO ITA NO.75 /JAB/2010 A.Y. 2007-08 8 VALUATION OF INVENTORIES SPECIFICALLY EXCLUDES FROM ITS SCOPE VALUATION OF WORK IN PROGRESS ARISING UNDER CONSTRUCTION CONTRACTS AS ME NTIONED IN THE SCOPE IN ACCOUNTING STANDARD AS-2. THOUGH THE ASSESSEE HAS NOT ENTERED INTO A CONTRACT WITH RESPECT TO CONSTRUCTION BUT THE FACT REMAINS T HAT THE ACTIVITIES OF ASSESSEE ARE CONSTRUCTION BASED AND MORE RELEVANT ACCOUNTING STA NDARD TO BE FOLLOWED BY THE ASSESSEE SHOULD HAVE BEEN ACCOUNTING STANDARD-7 WIT H RESPECT TO CONSTRUCTION CONTRACT INSTEAD OF AS-2 WITH RESPECT TO VALUATION OF INVENTORIES. THE LD. AUTHORISED REPRESENTATIVE HAS ARGUED THAT SINCE IN THE PRESENT CASE THERE WAS NO CONTRACT SO AS-7 RELATING TO CONSTRUCTION CONTRACT WERE NOT APPLICABLE. IN THE SAME WAY, WE FIND THAT AS-2 RELATING TO VALUATION OF INV ENTORIES IS ALSO NOT STRICTLY APPLICABLE TO THE ASSESSEE. THEREFORE, IN THE CIRC UMSTANCES THAT STANDARD SHOULD BE FOLLOWED WHICH IS MORE NEARER TO THE FACTS AND CIRC UMSTANCES OF THE PRESENT CASE AND IN THAT CASE THE ACCOUNTING STANDARD RELATING T O CONSTRUCTION CONTRACT MERITS FOR CONSIDERATION. HOWEVER, EVEN IF THE CONTENTION OF THE ASSESSEE IS ACCEPTED, EVEN THEN AS PER AS-2, THE COST OF INVENTORIES HAS TO BE VALUED AS COST OF PURCHASE PLUS COST OF CONVERSION PLUS OTHER COSTS. THE COST OF PURCHASE CONSISTS OF PURCHASE PRICE INCLUDING DUTIES, TAXES FREIGHT INWARD AND OT HER EXPENSES ATTRIBUTABLE TO THE ACQUISITION WHEREAS THE COST OF CONVERSION INCLUDES COST DIRECTLY RELATED TO UNIT AND PRODUCTION SUCH AS DIRECT LABOUR AND ALLOCATION OF FIXED VALUABLE PRODUCTION OVERHEAD WHICH ARE NECESSARY FOR CONVERTING THESE M ATERIAL INTO FINISHED PRODUCTS ITA NO.75 /JAB/2010 A.Y. 2007-08 9 AND OTHER COSTS INCLUDES THOSE COSTS WHICH ARE INCU RRED IN BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION. THEREFORE , FOR THE PURPOSE OF VALUATION OF INVENTORIES SUCH DIRECT EXPENSES NEED TO BE ADDED I N THE CLOSING STOCK OF INVENTORIES WHICH ASSESSEE HAS NOT DONE. IN VIEW O F THESE FACTS AND CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT APPEAL OF THE REVENUE BE REMITTED BACK TO THE OFFICE OF LD. CIT(A) FOR FRESH CONSIDERATION. KEEP ING IN VIEW THE ABOVE POINTS, THE LD. CIT(A) SHOULD PASS A SPEAKING ORDER AFTER RECOR DING HIS COMPLETE FINDING IN THIS REGARD AND AFTER PROVIDING NECESSARY OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. IN VIEW OF THE ABOVE, APPEAL FILED BY THE REVENUE IS A LLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. (ORDER PRONOUNCED IN THE OPEN COURT ON 28.03.2014) SD/- SD/- (BHAVNESH SAINI) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 28 TH MARCH, 2014 PBN/* COPY OF THE ORDER FORWARDED TO :- 1) APPELLANT 2) RESPONDENT 3) CIT (APPEALS) CONCERNED 4) CIT CONCERNED 5) D.R., ITAT, JABALPUR BENCH, JABALPUR 6) GUARD FILE. BY ORDER, SR. PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL, CAMP AT JABALPUR