INCOME TAX OFFICER, WARD-2-2, JAIPUR V. M/S SHRI KHATU SHYAM BUILDIRS, JAIPUR

ITA 988/JPR/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6757 (ITAT-JAIPUR)
• Duration Of Justice: 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-04-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 24-08-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MAHALA
• Assessee Lawyers: RAJEEV SOGANI CA DH RKJ
• Keywords: Business income; Depreciation

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE A JAIPUR JH FOT; IKY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SI NGH YADAV, AM VK;DJ VIHY LA- @ ITA NO. 988/JP/2018 FU/KZKJ.K O'K Z @ ASSESSMENT YEAR :2014-15 ITO, WARD- 2(2), JAIPUR CUKE VS. SHRI KHATU SHYAM BUILDERS, 298, AJMER ROAD, OPP. HATHROI SCHOOL, JAIPUR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: ABZFS6260Q VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT JKTLO DH VKSJ LS @ REVENUE BY : SHRI A. K. MAHALA (JCIT) FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI ROHAN SOGANI & SHRI RAJEEV SOGANI (CA) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 07/03/2019 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT: 16/04/2019 VKNS'K@ ORDER PER: VIKRAM SINGH YADAV, A.M. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A)-1, JAIPUR DATED 11.06.2018 FOR AY 2014-15 WH EREIN THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL AS UNDER: - 1. WHETHER IN THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN ALLOWIN G THE ENTIRE EXPENSES CLAIMED BY THE ASSESSEE IGNORING THE FACT THAT THE ASSESSEE HAS NOT INCURRED THE EXPENSES FOR THE BUSI NESS PURPOSES AND HENCE THE SAME ARE NOT ALLOWABLE AS PE R PROVISIONS OF INCOME TAX ACT ? 2. WHETHER IN THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN DIRECTI NG THE AO TO TREAT INCOME FROM OTHER SOURCES AS BUSINESS INCOM E AND TO ALLOW SET-OFF OF EXPENSES DESPITE THE FACT THAT AO IN HIS ORDER ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 2 CITED THE CASE OF TUTICORIN ALKALI CHEMICALS & OTHE RS VS CIT DECIDED BY HONBLE APEX COURT WHEREIN IT WAS HELD INTEREST AND FINANCE CHARGES ALONGWITH OTHER PREPRODUCTION EXPEN SES WILL HAVE TO BE CAPITALIZED AND THE INTEREST INCOME HAVE TO B E TAXED AS INCOME FROM OTHER SOURCES? 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION AND DEVELOP MENT OF GROUP HOUSING PROJECTS. IT FILED ITS RETURN OF INCOME ON 15.11.2014 DECLARING BUSINESS LOSS OF RS. 1,24,16,176/-. DURING THE COUR SE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER, AFTER REVIEW OF THE ASSESSEES PROFIT AND LOSS ACCOUNT, OBSERVED THAT THE ASSESSEE IS DOI NG THE WORK OF CONSTRUCTION AND DEVELOPMENT, NO SALES HAVE COMMENC ED TILL THE END OF FINANCIAL YEAR UNDER CONSIDERATION, HOWEVER, THE AS SESSEE HAS DEBITED HUGE INTEREST AND OTHER EXPENSES IN ITS PROFIT & LO SS ACCOUNT AND HAS DECLARED AND CLAIMED CURRENT YEAR LOSS OF RS. 1,24, 16,176/-. THE ASSESSEE COMPANY WAS ASKED TO SHOW-CAUSE AS TO WHY THE EXPENSES CLAIMED IN PROFIT & LOSS ACCOUNT MAY NOT BE DISALLO WED AND CAPITALIZED, AS THE SALE OF PROJECT HAS NOT STARTED. IN RESPONSE , THE ASSESSEE SUBMITTED THAT IT FOLLOWS PERCENTAGE PROJECT COMPLE TION METHOD FOR REVENUE RECOGNITION. THE ASSESSEE HAD SECURED DEVEL OPMENT RIGHTS IN RESPECT OF PLOT OF LAND AND THE LOAN WAS UTILIZED F OR PURCHASING THE LAND WHICH CONSTITUTED STOCK IN TRADE IN ITS HAND AS THE ASSESSEE HAD UNDERTAKEN THE PROJECT OF CONSTRUCTION OF FLATS AND ACCORDINGLY THE INTEREST INCURRED THEREON CONSTITUTED PART OF REVEN UE EXPENDITURE. AS PER SECTION 36(1)(III), THE INTEREST PAID BY ASSESS EE ON THE CAPITAL BORROWED BY THE ASSESSEE IS AN ITEM OF DEDUCTION AN D UTILIZATION OF THE CAPITAL WAS IRRELEVANT FOR THE PURPOSE OF ADJUDICAT ING THE CLAIM FOR ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 3 DEDUCTION UNDER SECTION 36(1)(III) OF THE I.T. ACT WHERE AN ASSESSEE CLAIMS DEDUCTION OF INTEREST PAID ON CAPITAL BORROW ED FOR THE PURPOSE OF THE BUSINESS. IT WAS FURTHER SUBMITTED THAT OTHER I NDIRECT EXPENSES ARE NOT DIRECTLY RELATED TO SITE AND CONSTRUCTION OF BU ILDING. THESE ARE RELATED TO GENERAL OFFICE EXPENSES, ADMINISTRATION EXPENSES AND RELATED DAY-TO-DAY WORKING OF BUSINESS ACTIVITIES AND THE S AME HAVE ACCORDINGLY BE DEBITED IN THE PROFIT & LOSS ACCOUNT AS THE SAME CANNOT BE CAPITALIZED AS PART OF STOCK OF WORK IN PROGRESS . THE REPLY SO FILED BY THE ASSESSEE WAS CONSIDERED, HOWEVER, NOT FOUND ACC EPTABLE TO THE ASSESSING OFFICER. AS PER THE ASSESSING OFFICER, TH E REPLY OF THE ASSESSEE THAT THE EXPENSES DEBITED IN THE PROFIT & LOSS ACCOUNT ARE NOT RELATED TO THE SITE EXPENSES IS NOT CORRECT AS IS C LEAR FROM THE SCHEDULE- 15 OF PROFIT AND LOSS ACCOUNT WHEREIN THE ASSESSEE HAS DEBITED VARIOUS SITES EXPENSES. IT WAS FURTHER HELD BY THE AO THAT ONLY THOSE EXPENSES ARE ALLOWABLE WHICH ARE INCURRED FOR BUSINESS PURPO SE OR TO EARN THE INCOME. DURING THE YEAR, NO INCOME HAS ACCRUED, THE REFORE, NO EXPENSES ARE ALLOWABLE. IN SUPPORT, RELIANCE WAS PL ACED ON THE HONBLE SUPREME COURT DECISION IN CASE OF TUTICORIN ALKALI CHEMICALS VS. CIT WHEREIN IT WAS HELD THAT INTEREST AND FINANCE CHARG ES ALONGWITH OTHER PREPRODUCTION EXPENSES WILL HAVE TO BE CAPITALIZED. FURTHER, IN RESPECT OF INTEREST INCOME, THE SAME WAS BROUGHT TO TAX AS INCOME FROM OTHER SOURCES AND NO SET OFF AGAINST BUSINESS LOSS WAS AL LOWED. THUS, IN VIEW OF DECISION OF HONBLE APEX COURT, THE EXPENSES DEB ITED WERE CAPITALIZED AND THE LOSS CLAIMED WAS DISALLOWED AND THE INTEREST RECEIPT WAS BROUGHT TO TAX UNDER HEAD INCOME FROM OTHER SO URCES. 3. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTE R IN APPEAL BEFORE LD. CIT(A). IT WAS SUBMITTED THAT THE ASSES SEE FIRM, IN THE ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 4 RELEVANT PREVIOUS YEAR AND IN THE IMMEDIATELY PRECE DING YEAR, HAD PURCHASED LAND IN JAGATPURA FOR THE PURPOSE OF CARR YING OUT TWO REAL ESTATE PROJECTS, THE WORK ON WHICH STARTED IMMEDIAT ELY. SUCH LAND FORMED PART OF THE STOCK IN TRADE OF THE ASSESSEE F IRM. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE FOLLOWS PERCENTAGE OF C OMPLETION METHOD IN ACCORDANCE WITH THE GUIDANCE NOTE ON RECOGNITION OF REVENUE ON REAL ESTATE TRANSACTIONS, ISSUED BY THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA FOR PURPOSE OF REVENUE RECOGNI TION. AS PER THE GUIDANCE NOTE, THE REVENUE SHOULD BE RECOGNIZED ONL Y WHEN THE STAGE OF COMPLETION OF THE PROJECT REACHES A REASONABLE L EVEL OF DEVELOPMENT AND REASONABLE LEVEL OF DEVELOPMENT IS NOT ACHIEVED IF THE EXPENDITURE INCURRED ON CONSTRUCTION AND DEVELOPMENT COSTS, DUR ING THE RELEVANT PREVIOUS YEAR, IS LESS THAN 25% OF THE TOTAL ESTIMA TED CONSTRUCTION AND DEVELOPMENT COST FOR THE ENTIRE PROJECT. DURING TH E YEAR, GIVEN THAT THE ASSESSEE COMPANY HAS INCURRED APPROXIMATELY 10% OF THE TOTAL ESTIMATED PROJECT COST, IT HAS NOT RECOGNIZED REVEN UES. HOWEVER, IN THE SUBSEQUENT YEARS, WHERE THE ASSESSEE COMPANY HA S INCURRED TOTAL EXPENDITURE ON CONSTRUCTION AND DEVELOPMENT COSTS W HICH WAS MORE THAN 25% OF THE TOTAL ESTIMATED CONSTRUCTION AND DE VELOPMENT COSTS ON THE PROJECT, REVENUES HAVE BEEN RECOGNIZED IN SUCH FINANCIAL YEARS. IT WAS FURTHER SUBMITTED THAT FOR COMPUTATION OF REVEN UE, THE STAGE OF COMPLETION WAS ARRIVED AT WITH REFERENCE TO THE ENT IRE PROJECT COSTS INCURRED INCLUDING LAND COSTS, BORROWING COSTS AND CONSTRUCTION AND DEVELOPMENT COSTS. THUS, PERCENTAGE OF COMPLETION W AS APPLIED ON THE SALE CONSIDERATION OF THE FLATS SOLD, AND SUCH PROP ORTION WAS USED TO RECOGNIZE REVENUE. THE REVENUE ALREADY RECOGNIZED T ILL THE PREVIOUS REPORTING PERIOD, IF ANY, WAS DEDUCTED AND THE BALA NCE WAS RECOGNIZED AS REVENUE DURING THE FINANCIAL YEAR UNDER CONSIDER ATION. FURTHER, THE ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 5 MATCHING PROPORTIONATE COSTS, TO BE RECOGNIZED IN T HE PROFIT AND LOSS A/C, HAS BEEN COMPUTED BY MULTIPLYING THE COST INCU RRED, AS ON THE REPORTING DATE, WITH PROPORTION OF AREA SOLD, AS ON SUCH DATE, AND TOTAL SALEABLE AREA OF THE PROJECT WHICH DETERMINED THE C OST WHICH WAS RECOGNIZED AS ON THE REPORTING DATE, AND COSTS, IF ANY, ALREADY RECOGNIZED WERE SUBTRACTED WHICH GAVE THE COST TO B E RECOGNIZED IN EACH OF THE FINANCIAL YEAR. THE BALANCE COSTS BEING LEFT UNRECOGNIZED WAS SHOWN AS WIP IN THE BALANCE SHEET. IN VIEW OF T HE ABOVE, IT WAS SUBMITTED THAT THE ASSESSEE COMPANY HAS BEEN CONSIS TENTLY APPLYING PERCENTAGE OF COMPLETION METHOD FOR RECOGNIZING REV ENUE IN ACCORDANCE WITH THE GUIDANCE NOTE ISSUED BY ICAI. 4. IT WAS FURTHER SUBMITTED THAT THE INTEREST EXPEN SES HAVE BEEN INCURRED BY THE ASSESSEE ON THE LOAN TAKE FOR THE P URPOSE OF PURCHASING THE LAND WHICH FORMS PART OF STOCK IN TRADE OF THE ASSESSEE AND THE INTEREST EXPENDITURE ON SUCH LOAN IS TO BE ALLOWED IN THE YEAR IN WHICH THEY ARE INCURRED. IN SUPPORT, RELIANCE WAS PLACED ON THE CO-ORDINATE BENCH DECISION IN CASE OF ADITYA PROPCON (P) LTD. (ITA NO. 762/JP/2012 VIDE ORDER DATED 30.01.2014) WHICH HAS SUBSEQUENTLY BEEN UPHELD BY THE HONBLE JURISDICTIONAL HIGH COURT IN ITS ORDER DATED 10.10.2017. FURTHER RELIANCE WAS PLACED ON THE KOLKATA HIGH COU RT DECISION IN CASE OF CELLICE DEVELOPERS (P.) LTD. [2015] 57 TAXMANN.C OM 119 (CALCUTTA). IT WAS FURTHER SUBMITTED THAT THE DECISION OF HONB LE SUPREME COURT IN CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LT D. SO RELIED UPON BY THE AO IS DISTINGUISHABLE AS THE ISSUE INVOLVED THEREIN WAS IN CONTEXT OF TAXABILITY OF INTEREST EARNED DURING THE CONSTRUCTI ON PERIOD ON SHORT TERM INVESTMENT OF FUNDS. ACCEPTING THE AFORESAID CONTENTIONS, THE LD CIT(A) HAS ALLOWED THE RELIEF TO THE ASSESSEE AND N OW THE REVENUE IS IN APPEAL BEFORE US. ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 6 5. WE NOW REFER TO THE RELEVANT FINDINGS OF THE LD CIT(A) WHICH ARE UNDER CHALLENGE BEFORE US AND THE SAME ARE CONTAINE D AT PARA 3.1.2 OF HIS ORDER WHICH ARE REPRODUCED AS UNDER:- 3.1.2 DETERMINATION: (I) I HAVE DULY CONSIDERED THE SUBMISSIONS OF THE APPEL LANT, ASSESSMENT ORDER AND THE MATERIAL PLACED ON RECORD. THE BRIEF FACTS OF THE CASE ARE THAT THE APPELLANT FIRM WAS ENGAGED IN THE BUSINESS OF DEVELOPER AND BUILDER. IN ITS PROFIT AND LOSS ACCOU NT FOR THE YEAR UNDER CONSIDERATION, IT HAS NOT DECLARED ANY SALES BUT HA S DEBITED VARIOUS EXPENSES TOTALING TO RS. 1,24,41,230/- AND HAS CLAI MED NET LOSS OF RS. 1,24,16,176/-. IN THE ASSESSMENT ORDER, THE AO HAS DISALLOWED THE ENTIRE EXPENSES OF RS. 1,24,41,230/- BY OBSERVING T HAT SINCE THERE WAS NO INCOME DURING THE YEAR UNDER CONSIDERATION, THER EFORE, NO EXPENSES ARE ALLOWABLE. IT WOULD BE APPROPRIATE TO SUMMARIZE THE EXPENSES CLAIMED BY THE APPELLANT IN ITS PROFIT AND LOSS ACC OUNT AS UNDER:- HEAD OF EXPENSES AMOUNT (IN RS.) FINANCE COST 225 DEPRECIATION 1,95,731 OTHER EXPENSES 77,39,725 INTEREST PAID TO PARTNERS 45,06,249 TOTAL 1,24,41,930 (II) IT IS AN UNDISPUTED FACT THAT THERE WAS NO SALE IN THE PRECEDING YEAR AND THE YEAR UNDER CONSIDERATION. HOWEVER, IT IS NOTED FROM THE FINANCIAL STATEMENTS OF THE APPELLANT THAT DURING T HE YEAR UNDER CONSIDERATION, THE APPELLANT HAS PURCHASED GROUP HO USING PLOT AND ALSO PURCHASED CONSTRUCTION MATERIAL INVOLVING HUGE AMOU NTS. FURTHER, IT ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 7 COULD BE SEEN FROM DETAILS OF OTHER EXPENSES THAT T HE MAJOR HEADS ARE RELATING TO THE ADVERTISING EXPENSES, INTEREST PAID TO PARTIES, SALARY-SITE EXPENSES ETC. IT IS ALSO NOTED THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAS RECEIVED A SUM OF RS. 2,07,81,618 /- AS ADVANCE FROM PARTIES. THEREFORE, IN VIEW OF THESE FACTS, IN THE ABSENCE OF SALES DURING THE YEAR UNDER CONSIDERATION, IT CANNOT BE SAID THA T THERE WERE NO BUSINESS ACTIVITIES. IT IS ALSO NOTED THAT THE INTE REST EXPENSES HAVE BEEN INCURRED BY THE APPELLANT ON THE LOAN TAKEN FOR THE PURPOSE OF PURCHASING LAND WHICH FORMS STOCK IN TRADE OF THE A PPELLANT AND THE INTEREST EXPENDITURE ON SUCH LOAN IS TO BE ALLOWED IN THE YEAR IN WHICH IT IS INCURRED. THE AO HAS PLACED RELIANCE ON THE J UDGMENT OF HONBLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICAL S AND FERTILIZERS LTD. FOR MAKING THE DISALLOWANCE UNDER CONSIDERATION BUT IT IS OBSERVED THAT THE FACTS OF THE SAID CASE ARE ENTIRELY DIFFERENT F ROM THE FACTS OF THE INSTANT CASE UNDER CONSIDERATION AND HENCE, NOT APP LICABLE TO THE INSTANT CASE UNDER CONSIDERATION. (III) IT IS ALSO NOTED THAT IN NOTES TO FINANCIAL STATEME NTS, IT HAS BEEN STATED THAT SINCE THE FIRM DEALS WITH CONSTRUCTIONS CONTRACTS, ACCOUNTING STANDARD -7 (AS 7 CONSTRUCTION CONTRA CTS) WAS FOLLOWED IN PREPARATION OF FINANCIAL STATEMENTS. DURING THE APPELLATE PROCEEDINGS, IT WAS SUBMITTED BY THE APPELLANT THAT THE REVENUE IS RECOGNIZED ON PERCENTAGE OF COMPLETION METHOD IN AC CORDANCE WITH THE GUIDANCE NOTE ON RECOGNITION OF REVENUE BY REAL EST ATE TRANSACTION ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA AND SINCE, THE EXPENDITURE DURING THE YEAR UNDER CONSIDERATION ON CONSTRUCTION AND DEVELOPMENT COST WAS APPROXIMATELY 10% OF THE TOTAL ESTIMATED PROJECT COST, THEREFORE, NO REVENUE WAS RECOGNIZED DURING THE YEAR UNDER CONSIDERATION. HOWEVER, IN THE SUBSEQUENT YEA RS I.E. AY 2015-16 ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 8 AND 2016-17, IT HAS RECOGNIZED REVENUE FROM OPERATI ONS TO THE TUNE OF RS. 6.71 CRORE AND 6.06 CRORE RESPECTIVELY. (IV) THEREFORE, IN VIEW OF THE ABOVE DISCUSSION AND LOOK ING TO THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, ES PECIALLY TO THE FACT THAT THE APPELLANT IS FOLLOWING PERCENTAGE OF COMPL ETION METHOD, I DO NOT FIND ANY JUSTIFICATION FOR THE AO TO DISALLOW T HE TOTAL EXPENDITURE CLAIMED BY THE APPELLANT IN ITS PROFIT AND LOSS ACC OUNT AND THUS, THE AO IS HEREBY DIRECTED TO ALLOW THE SAME. HENCE, THIS G ROUND OF APPEAL IS HEREBY ALLOWED. 6. BOTH THE PARTIES WERE HEARD AT LENGTH DURING THE COURSE OF HEARING AND RELEVANT MATERIAL AVAILABLE ON RECORD H AVE BEEN EXAMINED. 7. WE AGREE WITH THE FINDINGS OF THE LD CIT(A) THAT MERE ABSENCE OF SALES DURING THE YEAR CANNOT BE A BASIS TO HOLD THA T THE BUSINESS OF THE ASSESSEE HAS NOT COMMENCED AND CONSEQUENTLY, THE EX PENSES CLAIMED WILL BE DISALLOWED. IN THE INSTANT CASE, THE ASSES SEE HAS PURCHASED THE PLOT OF LAND, HIRED MANPOWER AND HAS INCURRED EXPEN DITURE ON CONSTRUCTION AND OTHER ACTIVITIES, AND HAS ALSO REC EIVED ADVANCES FROM ITS CUSTOMERS. THEREFORE, MERE ABSENCE OF SALE CAN NOT BE A BASIS TO DENY THE CLAIM OF THE EXPENSES. AT THE SAME TIME, GIVEN THAT THE ASSESSEE IS IN THE BUSINESS OF DEVELOPMENT AND CONS TRUCTION OF GROUP HOUSING PROJECT, IT FOLLOWS THE PERCENTAGE METHOD O F COMPLETION FOR THE PURPOSES OF RECOGNITION OF REVENUES AND CORRESPONDI NG COSTS. THEREFORE, THE TAXABILITY OF REVENUES AND THE ALLOW ABILITY OF EXPENSES HAVE TO BE SEEN IN DUE RECOGNITION OF SUCH METHOD O F ACCOUNTING. THE ASSESSEE HAS NOT RECOGNIZED THE REVENUES DURING THE YEAR AS IT HAS NOT ACHIEVED THE PRESCRIBED THRESHOLD OF 25% OF TOTAL P ROJECTED CONSTRUCTION AND DEVELOPMENT COST AT THE CLOSE OF T HE FINANCIAL YEAR. ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 9 ACCORDINGLY, THE REVENUES HAVE BEEN SHOWN AS ADVANC ES DURING THE YEAR. SIMILARLY, THE CONSTRUCTION AND DEVELOPMENT COST HAVE BEEN SHOWN AS WORK-IN-PROGRESS AND NOT BEEN DEBITED IN T HE PROFIT/LOSS ACCOUNT. WHAT HAS BEEN DEBITED IN THE PROFIT/LOSS ACCOUNT IS FINANCE COST, DEPRECIATION, INTEREST PAID TO PARTNERS AND O THER EXPENSES, AND WHICH HAVE ALSO BEEN CLAIMED FOR TAX PURPOSES AS BU SINESS LOSS AND WHICH IS NOW BEING DISPUTED BY THE REVENUE. TO OUR MIND, ONCE A PARTICULAR METHOD OF REVENUE RECOGNITION AND METHOD OF ACCOUNTING HAS BEEN FOLLOWED BY THE ASSESSEE, THERE HAS TO BE CONS ISTENCY IN SUCH APPROACH. THE ASSESSEE CANNOT PLEAD THAT FOR ALL IT S REVENUE RECOGNITION AND COST ALLOWABILITY, IT IS FOLLOWING THE PRESCRIB ED METHOD OF ACCOUNTING AND FOR THE PURPOSES OF CLAIM OF INTERES T EXPENDITURE, IT WILL DEVIATE FROM THE PRESCRIBED METHOD OF ACCOUNTING AN D CLAIM ALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT. NO DOUBT SECT ION 36(1)(III) PROVIDES FOR ALLOWABILITY OF INTEREST EXPENDITURE INCURRED F OR THE PURPOSES OF BUSINESS AND THERE CANNOT BE ANY DENIAL OF THE SAID POSITION, HOWEVER, IN THE FACTS OF THE PRESENT CASE, WHERE THE ASSESSE E IS ACCUMULATING ALL ITS CONSTRUCTION AND DEVELOPMENT COSTS AS PART OF W ORK-IN-PROGRESS AS WELL AS ACCUMULATING THE ADVANCES RECEIVED FROM THE CUSTOMERS, WILL IT BE CORRECT TO ALLOW THE INTEREST COST ON PURCHASE O F LAND AS SO CLAIMED BY THE ASSESSEE IN THE YEAR OF INCURRENCE OR A BETT ER AND CONSISTENT APPROACH WOULD BE TO ACCUMULATE SUCH COST AS ANY OT HER DEVELOPMENT AND CONSTRUCTION COST, BEING INTRINSIC PART OF PROJ ECT COST, AS WORK-IN- PROGRESS AND THEN ALLOW THE SAME AS AND WHEN THE AS SESSEE ACHIEVE THE DESIRED PROJECT COMPLETION THRESHOLD AND STARTS RECOGNITION OF REVENUES AND CORRESPONDING COSTS. 8. AS PER GUIDANCE NOTE ON ACCOUNTING FOR REAL ESTA TE TRANSACTIONS, PROJECT COST IN RELATION TO A PROJECT ORDINARILY CO MPRISE OF BORROWING ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 10 COST WHICH ARE INCURRED DIRECTLY IN RELATION TO A P ROJECT OR WHICH ARE APPORTIONED TO A PROJECT IN ACCORDANCE WITH AS-16 O N BORROWING COSTS. AS PER AS-16, BORROWING COSTS THAT ARE DIRECTLY ATT RIBUTABLE TO THE ACQUISITION, CONSTRUCTION OR PRODUCTION OF A QUALIF YING ASSET SHOULD BE CAPITALIZED AS PART OF COST OF THAT ASSET AND OTHER BORROWING COSTS ARE RECOGNIZED AS AN EXPENSE IN THE PERIOD IN WHICH THE Y ARE INCURRED. A QUALIFYING ASSET HAS BEEN DEFINED AS AN ASSET THAT NECESSARILY TAKES A SUBSTANTIAL PERIOD OF TIME TO GET READY FOR ITS INT ENDED USE OR SALE WHICH INCLUDES MANUFACTURING PLANTS, POWER GENERATI NG FACILITIES, INVENTORIES THAT REQUIRE A SUBSTANTIAL PERIOD OF TI ME TO BRING THEM TO A SALEABLE CONDITION. IN THE INSTANT CASE, INTEREST C OST HAS BEEN INCURRED IN RELATION TO PURCHASE OF LAND WHICH IS STOCK-IN-T RADE OF THE ASSESSEE AND THUS QUALIFY AS AN QUALIFYING ASSET. GIVEN THA T THE DEVELOPMENT OF SUCH PLOT OF LAND AS A HOUSING PROJECT TO MAKE IT S ALEABLE WHERE FINISHED RESIDENTIAL UNITS WILL BE SOLD TO CUSTOMER S WILL TAKE ITS OWN TIME AND IS NOT AN INSTANTANEOUS ACTIVITY, ANY INTEREST COST INCURRED IN RELATION TO AND FOR PURCHASE OF SUCH PLOT OF LAND W ILL BE REQUIRED TO BE ACCUMULATED AS PART OF THE PROJECT COSTS AND CANNOT BE CLAIMED IN THE YEAR OF INCURRENCE. IN OUR VIEW, THE PROVISIONS OF SECTION 36(1)(III) HAVE TO BE READ IN CONTEXT OF FACTS AND CIRCUMSTANCES OF EACH CASE AND IN THE INSTANT CASE, WHERE THE ASSESSEE IS IN THE BUSI NESS OF DEVELOPMENT AND CONSTRUCTION OF GROUP HOUSING PROJECT, THE INTE REST COST THOUGH ALLOWABLE HAVE TO BE ACCUMULATED AS PER THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE WHEREIN IT IS ACCUMULATING ALL THE PROJECT COSTS AND THE SAME IS CLAIMED AS AND WHEN IT ACHIEVES THE PRESCRIBED CONSTRUCTION AND DEVELOPMENT THRESHOLD. MORE SO, WH ERE IT IS THE STATED POSITION OF THE ASSESSEE THAT FOR COMPUTATION OF RE VENUES, THE STAGE OF COMPLETION WAS ARRIVED AT WITH REFERENCE TO THE ENT IRE PROJECT COSTS ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 11 INCURRED INCLUDING LAND COSTS, BORROWING COSTS AND CONSTRUCTION AND DEVELOPMENT COSTS. IN OUR VIEW, SUCH AN APPROACH W ILL GIVE A TRUE AND CORRECT PICTURE OF STATE OF AFFAIRS OF THE ASSESSEE S BUSINESS ACTIVITIES AND THUS SHOULD PRECEDE OVER THE CLAIM OF THE ASSES SEE OF SUCH INTEREST COST IN THE YEAR OF INCURRENCE. THE VARIOUS DECISI ONS WHICH HAVE BEEN RELIED UPON BY THE LD AR WERE RENDERED SOLELY IN CO NTEXT OF SECTION 36(1)(III) AND THE ISSUE RELATING TO THE METHOD OF ACCOUNTING, AND THE INTERPLAY BETWEEN SECTION 36(1)(III) AND METHOD OF ACCOUNTING HAVE NOT BEEN EXAMINED IN THOSE DECISIONS AND HENCE, THE SAI D DECISIONS DOESNT SUPPORT THE CASE OF THE ASSESSEE. IN THE RESULT, T HE FINANCE COST AND INTEREST PAID TO PARTNERS AND OTHERS WILL BE REQUIR ED TO BE ACCUMULATED AS PART OF WORK-IN-PROGRESS AND CANNOT BE CLAIMED I N THE YEAR UNDER CONSIDERATION. 9. FURTHER, IN RESPECT OF OTHER EXPENSES DEBITED IN THE PROFIT/LOSS ACCOUNT, WE FIND THAT THESE INCLUDE JDA EXPENSES, S ALARY OF EMPLOYEES AT SITE, SITE OFFICE EXPENSES. THESE EXPENSES ARE DIRECTLY RELATED TO CONSTRUCTION AND DEVELOPMENT ACTIVITIES AND SHOULD THEREFORE FORM PART OF WORK-IN-PROGRESS AND THEREFORE, CANNOT BE CLAIME D IN THE YEAR UNDER CONSIDERATION. REST ALL EXPENSES ARE IN NATURE OF GENERAL ADMINISTRATIVE AND OVERHEAD EXPENSES AND HAS RIGHTLY BEEN CLAIMED FOR TAX PURPOSES. 10. IN THE RESULT, WE SET-ASIDE THE ORDER OF THE L D CIT(A) TO THE EXTENT OF THE FINANCE COST, INTEREST PAID TO PARTNE RS AND OTHERS, JDA EXPENSES, SALARY OF EMPLOYEES AT SITE AND SITE OFFI CE EXPENSES AS ALL THESE COSTS/EXPENSES ARE DIRECTLY CONNECTED TO THE HOUSING PROJECTS BEING UNDERTAKEN BY THE ASSESSEE AND ARE REQUIRED T O BE ACCUMULATED AS PART OF WORK-IN-PROGRESS AND CANNOT BE CLAIMED I N THE YEAR UNDER CONSIDERATION AND THE ORDER OF THE ASSESSING OFFICE R TO THIS EXTENT IS ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 12 SUSTAINED. IN THE RESULT, THE GROUND OF REVENUES APPEAL IS PARTLY ALLOWED. 11. IN GROUND NO. 2, THE REVENUE HAS CHALLENGED THE RECLASSIFICATION OF INCOME FROM THE HEAD OF INCOME FROM OTHER SOURC ES TO BUSINESS INCOME AND ALSO THE FACT THAT THE SAME HAS BEEN DIR ECTED TO BE ALLOWED SET-OFF AGAINST BUSINESS LOSS CLAIMED BY THE ASSESS EE. WE FIND THAT IN SCHEDULE 11: OTHER INCOME OF THE FINANCIAL STATEMEN TS, THE ASSESSEE HAS SHOWN DISCOUNT RECEIVED OF RS 8494 AND INTEREST REC EIVED OF RS 17,260. THE DISCOUNT RECEIPT SEEMS TO BE RELATED TO SOME BU SINESS PURCHASE AND IS CLEARLY IN THE NATURE OF BUSINESS RECEIPT. THE NATURE OF INTEREST INCOME IS NOT CLEAR FROM THE RECORD. NOTWITHSTANDI NG THE SAME, AS WE HAVE HELD ABOVE THAT THE ASSESSEE IS ELIGIBLE TO CL AIM CERTAIN ADMINISTRATIVE AND OTHER OVERHEADS EXPENSES INCURRE D DURING THE YEAR, THE SAME WOULD RESULT IN A LOSS UNDER THE HEAD BUS INESS INCOME AND THE INTEREST INCOME EVEN WHERE CLASSIFIED UNDER THE HEAD INCOME FROM OTHER SOURCES CAN BE SET OFF AGAINST SUCH BUSINESS LOSS. IN THE RESULT, THE GROUND OF REVENUES APPEAL IS DISMISSED. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 16/04/2019. SD/- SD/- FOT; IKY JKO FOE FLAG ;KNO (VIJAY PAL RAO) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 16/04/2019 * GANESH KR. VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- ITO, WARD-2(2), JAIPUR ITA NO. 988-JP-2018 ITO, JAIPUR VS. MS SHRI KHA TU SHYAM BUILDERS, JAIPUR 13 2. IZR;FKHZ@ THE RESPONDENT- M/S SHRI KHATU SHYAM BUILDERS, JAIP UR 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR. 6. XKMZ QKBZY@ GUARD FILE {ITA NO. 988/JP/2018} VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR