2019 (4) TMI 259 - AT - Income Tax

Allowable revenue expenditure - business of Real Estate - WIP in construction development - Disallowance of expenditure incurred on employee cost, administrative expenses and selling and marketing expenses debited to P& L Account - Guidance Note on Accounting for Real Estate Transaction - proof of incurring indirect expenses - CIT-A deleted the addition - HELD THAT - From the wordings of AS-2 that the administrative expenses which are not related to bringing the inventories (work-in-progress) to their present location and condition are to be excluded from the Inventories being work in progress in the assessee s case. Moreover, it is also categorically stated that the selling expenses shall not form part of Inventories. The assessee being following the accounting policies framed by the ICAI by way of AS 2 and report of EAC, worked out the closing work in progress considering the expenses directly attributable to the construction of the project and the expenses which were not directly attributable to work in progress has been debited to Profit & Loss account. The above accounting method followed by the assessee has been also fortified by the Guidance Note on Accounting for Real Estate Transaction issued by the Institute of the Chartered Accountants which vide paragraph 2.2 defines the Project Cost (i.e. which expenses shall be included while determining the project cost) Accounting treatment given in Guidance note on Real Estate Transaction is at par with AS 2 reproduced above and the assessee has followed these accounting principles in preparing its accounts year after year including the year under consideration. We found that the assessee, in compliance to these accounting principles, determined the expenses which are not related to the work in progress and debited the same to the profit & loss account being administrative expenses and selling expenses incurred for day to day functioning of the business and marketing; likewise, the expenses directly attributable to the work in progress have been debited to work in progress. No merit for the disallowance made by the AO on account of employee, cost, administrative expenditure and selling and marketing expenses, which are essentially in the nature of revenue expenditure. - Decided in favour of assessee. Addition u/s 14A - HELD THAT - As recorded by the CIT(A) that during the year assessee has received ₹ 54.01 crores on account of security premium whereas maximum outstanding amount of investment made was ₹ 36.50 crores. Since own fund was more than the investment, no disallowance was warranted in terms of the decision in the case of Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT . The finding so recorded with regard to the availability of interest free funds vis-a-vis investment has not been controverted by the learned D.R. by bringing on any cogent material on record. No infirmity in the order of the CIT(A) for deleting the addition under Section 14A by recording definite finding - Decided in favour of assessee.

Issues Involved:
1. Confirmation of addition made by ACIT by not accepting the method of accounting adopted by the assessee.
2. Addition made by ACIT without appreciating the consistent accounting policy of the assessee.
3. Initiation of penalty proceedings under section 271(1)(c) of the Act.
4. Deletion of addition made under Section 14A of the Act by CIT(A).

Issue 1: Confirmation of Addition by ACIT
The assessee argued that the CIT(A) erred in confirming the addition made by ACIT by not accepting the method of accounting adopted, which is in conformity with the Accounting Standards and the Guidance Note on Accounting for Real Estate Transactions issued by the Institute of Chartered Accountants of India. The assessee follows the percentage completion method of accounting and debits expenses directly attributable to the project to work in progress, while other expenses are debited to the Profit & Loss Account. The Tribunal noted that the assessee's method is supported by the "Expert Advisory Committees Report" and the "Guidance Note on Accounting for Real Estate Transactions." It was found that the method adopted by the assessee is consistent and has been accepted in preceding and succeeding years. The Tribunal concluded that the revenue expenditure in the nature of employee cost, administrative expenses, and selling and marketing expenses cannot be capitalized as per the Accounting Standards and judicial pronouncements.

Issue 2: Addition by ACIT Without Appreciating Consistent Accounting Policy
The assessee contended that the CIT(A) upheld the addition made by the ACIT without appreciating the consistent accounting policy for determining the work-in-progress and profitability of its construction development project. The Tribunal observed that the accounting method followed by the assessee is in compliance with the accounting principles framed by the ICAI, specifically AS 2 and the "Guidance Note on Accounting for Real Estate Transactions." The Tribunal emphasized that administrative expenses not related to bringing inventories to their present location and condition, and selling costs should not be included in work-in-progress. The Tribunal found that the assessee's method of excluding such expenses from work-in-progress and debiting them to the Profit & Loss Account is justified and consistent with recognized accounting principles.

Issue 3: Initiation of Penalty Proceedings Under Section 271(1)(c)
The assessee argued that the ACIT erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Tribunal did not specifically address this issue in the detailed analysis provided, focusing instead on the substantive issues related to the accounting method and the nature of expenses.

Issue 4: Deletion of Addition Under Section 14A by CIT(A)
The Revenue appealed against the deletion of the addition made under Section 14A of the Act by CIT(A). The CIT(A) deleted the addition based on the observation that the assessee had received ?54.01 crores on account of security premium, and the maximum outstanding investment was ?36.50 crores. The CIT(A) relied on the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd., which held that if there are sufficient interest-free funds available, a presumption arises that investments are made out of interest-free funds. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not provide any cogent material to controvert the finding regarding the availability of interest-free funds.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, confirming that the accounting method adopted by the assessee is in line with recognized accounting principles and judicial pronouncements. The Tribunal dismissed the Revenue's appeal, upholding the deletion of the addition under Section 14A by the CIT(A). The order was pronounced in the open court on 27/12/2018.

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