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2015 (12) TMI 1649 - AT - Income TaxDisallowance of business expenditure - treating it as Work-in progress ( WIP ) - Held that - We find that rather the case of the assessee is on better footing as the assessee was carrying out different projects though at the same location hence it was not a case of single project. Even otherwise the resultant income from the project is a loss even after capitalisation of expenditure by the AO to work in progress. Hence there is no tax implication so far as the year under consideration is concerned and the loss otherwise also has to be carried forward. Under such circumstances it cannot be said that the assessee has adopted the above stated accounting method to avoid tax on income for the year under consideration. The assessee thus has followed the accounting method which has been consistently followed by it and which is as per the recognized principles of accounting. In view of the above discussion of the matter and following the above decision of the Tribunal for the sake of consistency this issue is decided in favour of the assessee. Chargeability of interest income AO called upon the assessee to show cause as to why the interest income earned on bank F.Ds should not be treated as Income from Other Sources - Held that - The decision of Hon ble Bombay High Court in the case of CIT vs. Lok Holdings (2008 (1) TMI 365 - BOMBAY HIGH COURT) is squarely applicable. In that case the assessee was engaged in development of properties. Advance from customers intending to purchase flats was deposited with the banks in the course of business. The interest income was held to be assessable as business income and not as income from other sources. Following the decision of Hon ble Bombay High Court in the case of Lok Holdings (Supra) the interest income earned from temporary deposits pending their utilization out of customer advances on the booking of flats related to the project of the assessee is assessable as business income. The A.O. is accordingly directed to assess the same as business income. This ground of appeal is also allowed.
Issues Involved:
1. Disallowance of business expenditure and treatment as Work-in-Progress (WIP). 2. Conclusion that the appellant undertakes only a single contract. 3. Allocation of marketing and general administrative costs to the specific contract. 4. Characterization of interest income as 'Income from Other Sources' versus 'Business Income'. 5. Levy of interest under Section 234B of the Income-tax Act, 1961. Issue-wise Detailed Analysis: Grounds No. 1 to 3: Disallowance of Business Expenditure and Treatment as WIP The assessee, engaged in Real Estate Development, followed the percentage completion method for accounting. The AO observed that the assessee had not shown any income from the project and treated the business expenditure of Rs. 43,20,80,449 as WIP. The AO disallowed the claimed revenue expenditure, asserting that all costs were attributable to a single project and should be capitalized as WIP. The CIT(A) upheld this decision. The assessee argued that there were multiple buildings under construction, and each building was a separate project for revenue recognition. The assessee allocated direct and indirect construction overheads to the project, inventorizing them as WIP. The selling and marketing costs, along with general administrative costs, were claimed as revenue expenditures. The Tribunal referred to the decision in "M/s. Lodha Palazzo Vs. ACIT" where it was held that excluding indirect expenses such as administrative and marketing costs from inventory valuation was consistent with recognized accounting principles. The Tribunal found that the assessee's method of accounting, which excluded indirect expenses from WIP, was in line with Accounting Standards AS-2 and AS-7 and the provisions of section 145A of the Act. The Tribunal held that the AO's rejection of the assessee's accounting method was unjustified and ordered the deletion of the additions made by the lower authorities. Ground No. 4: Characterization of Interest Income The AO treated the interest income earned on fixed deposits as "Income from Other Sources" instead of "Business Income." The assessee contended that the surplus funds were temporarily invested in bank deposits as part of its business activities and should be characterized as business income. The Tribunal referred to the decision of the Hon'ble Bombay High Court in "CIT vs. Lok Holdings," where interest income from temporary deposits of customer advances was held to be assessable as business income. The Tribunal directed the AO to assess the interest income as business income, following the precedent set by the Bombay High Court. Ground No. 5: Levy of Interest under Section 234B This ground was deemed consequential and did not require adjudication at this stage. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the business expenditure claimed should not be treated as WIP and that the interest income should be characterized as business income. The Tribunal's decision was based on consistent accounting practices and relevant judicial precedents.
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