2017 (2) TMI 954 - AT - Income Tax

Business expenditure comprising of administrative expenses, marketing and selling expenses and finance expenses - whether should be added to work-in-progress (WIP) and should not be treated as expenditure for the year under consideration? - Applicability of AS-7 - Held that - It is clear that AS-7 is actually applicable upon contractor whereas the assessee is a builder / developer and not a contractor. Therefore, AS-7 is not strictly applicable on the facts of the case of the assessee. But, the entire thrust of the Revenue has been based upon the premise that the assessee should have booked the expenses in accordance with AS-7, as per which the entire expenses should be debited to the cost of the project since there was one single project only. Thus, we find that entire premise of the Revenue was based on the erroneous assumption of applicability of AS-7 upon the assessee. These expenses have been included as period cost in the P & L account. It is further noted by us that the Ld. Counsel has repeatedly stated that complete books of account and all the details as were required by the AO were submitted to him to show nature of the expenses and their nexus with the project. But nothing has been brought on record by the AO to negate the claim of the assessee that none of these expenses related to any particular project. Therefore, the action of the AO in treating these expenses as part of the cost attributable to a particular project was based upon presumption, surmises and conjectures. Further, with regard to the assertion of the AO that assessee was having one single project, it has been vehemently stated by the Ld. Counsel that the assertion made by the AO is factually incorrect. It is true that assessee is developing a large integrated SEZ project, but apart from this, the assessee is having various projects/ sub-projects in hand. Even in the SEZ project, there are various small and big projects. AO s assumption and assertions appear to be factually wrong. Under these circumstances, we find that the AO s action in disallowing these expenses by treating them as part of the project cost is not in consonance with the facts of this case and provisions of law as discussed above. It is noted, as discussed in detail above that it is a case of a builder / developer, therefore, AS- 7 is not applicable. Alternatively, even if AS-7 is applied, it nowhere suggests that assessee is required to treat all the expenses as part of the cost of project whether attributable to a project or not. All requisite approvals have been received by the assessee, sufficient land has already been purchased, marketing brochures were issued, advance was received from the customers and taking into account the totality of the facts and circumstances of the case, it can clearly be said that business of the assessee was set up . It is well settled law that once business is set up, all the expenses that relate to the period under consideration should be allowed as business expenses of the said periodwe find that action of the AO in treating the impugned expenses as part of WIP was not justified and was contrary to law and facts. The claim made by the assessee is in line with the method of accounting consistently followed by the assessee and is in accordance with law and facts of this case. Therefore, addition made by the AO is directed to be deleted. The AO is directed to allow the expenses as have been claimed by the assessee. The consequential effect shall also be given by the AO while passing order giving appeal effect for the amount of closing WIP of the year under consideration as well as opening WIP of the immediately subsequent assessment year. - Decided in favour of assessee

Issues Involved:
1. Disallowance of business expenditure by treating it 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. Levy of interest under Section 234B of the Income-tax Act, 1961.
5. Levy of interest under Section 234D of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Business Expenditure by Treating it as Work-in-progress (WIP)
The primary issue involves the disallowance of business expenditure amounting to ?21,27,95,930 by treating it as WIP instead of expenditure for the year under consideration. The assessee, engaged in real estate development, followed the percentage completion method for accounting. While project-related expenses were shown as WIP, administrative, marketing, selling, and finance expenses were debited to the P&L account as period costs. The AO, referencing Accounting Standard-7 (AS-7), added these expenses to WIP, arguing that all costs must be treated as WIP due to the single project nature of the business. The Tribunal found that AS-7 applies to contractors, not developers, and even if applied, general administrative and selling costs should not be included in project costs. The AO's assumption of a single project was factually incorrect as the assessee had multiple sub-projects. The Tribunal concluded that the expenses should be allowed as business expenses for the year under consideration.

Issue 2: Conclusion that the Appellant Undertakes Only a Single Contract
The AO's conclusion that the appellant undertakes only a single contract was disputed. The assessee argued that while developing a large integrated SEZ project, it had multiple smaller projects and sub-projects. The Tribunal noted that the AO's assertion was factually incorrect, as evidenced by the various projects and sub-projects in hand. This misinterpretation led to the erroneous treatment of expenses as WIP.

Issue 3: Allocation of Marketing and General Administrative Costs to the Specific Contract
The AO allocated marketing and general administrative costs to the specific contract, treating them as part of the project cost. The Tribunal found this allocation incorrect, as these expenses were not directly related to any particular project but were period costs. The Tribunal emphasized that general administrative and selling costs should be excluded from project costs, as per AS-7 and other relevant accounting standards. The consistent accounting method followed by the assessee, which excluded these costs from WIP, was deemed appropriate and in line with recognized accounting principles.

Issue 4: Levy of Interest under Section 234B of the Income-tax Act, 1961
The assessee contested the levy of interest amounting to ?46,91,973 under Section 234B. This issue was argued as consequential, implying that the outcome depended on the resolution of the primary issues regarding the disallowance of expenses. Since the Tribunal ruled in favor of the assessee on the primary issues, the consequential levy of interest under Section 234B was dismissed.

Issue 5: Levy of Interest under Section 234D of the Income-tax Act, 1961
Similar to the previous issue, the levy of interest under Section 234D was also argued as consequential. Given the Tribunal's decision to allow the expenses as claimed by the assessee, the consequential levy of interest under Section 234D was dismissed.

Conclusion:
The Tribunal allowed the appeal partly, directing the AO to allow the expenses as claimed by the assessee and to give consequential effect for the amount of closing WIP and opening WIP for the subsequent assessment year. The grounds related to the levy of interest under Sections 234B and 234D were dismissed as consequential.

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