2019 (8) TMI 549 - AT - Income Tax

Allowable business expenses in construction project - recognition of income expenses including cost of borrowings - AS 7 on Construction Contracts - AS 16 on Borrowing costs - revenue expenses or cost of project need to capitalised with capital WIP - HELD THAT - In the instant case, where the assessee is in the business of development and construction of group housing project, the interest 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, where it is the stated position of the assessee that for computation of revenues, the stage of completion was arrived at with reference to the entire project costs incurred including land costs, borrowing costs and construction and Development Costs. In our view, such an approach will 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 assessee of such interest cost in the year of incurrence. The various decisions which have been relied upon by the ld AR were rendered solely in context 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 said decisions doesn t support the case of the assessee. In the result, the finance cost and interest paid to partners and others will be required to be accumulated as part of work-in-progress and cannot be claimed in the year under consideration. In respect of other expenses debited in the profit/loss account, we find that these include JDA expenses, salary 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 claimed 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.- In the result, the ground of revenue s appeal is partly allowed. Reclassification of income from the head of Income from other sources to business income - HELD THAT - The same has been directed to be allowed set-off against business loss claimed by the assessee. We find that in schedule 11 other income of the financial statements, the assessee has shown discount received of ₹ 8494 and interest received of ₹ 17,260. The discount receipt seems to be related to some business purchase and is clearly in the nature of business receipt. The nature of interest income is not clear from the record. Notwithstanding the same, as we have held above that the assessee is eligible to claim certain administrative and other overheads expenses incurred during the year, the same would result in a loss under the head Business 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 revenue s appeal is dismissed.

Summary

Issues Involved:
1. Allowability of business expenses claimed by the assessee.
2. Classification of income from "other sources" as business income and set-off against business loss.

Detailed Analysis:

1. Allowability of Business Expenses Claimed by the Assessee:

Facts and Submissions:
The assessee, engaged in the business of construction and development of group housing projects, filed a return declaring a business loss of ?1,24,16,176/- for AY 2014-15. The Assessing Officer (AO) observed that the assessee had debited significant interest and other expenses in its profit & loss account without any sales commencement. The AO disallowed these expenses, arguing they should be capitalized since no income had accrued. The AO relied on the Supreme Court decision in Tuticorin Alkali Chemicals vs. CIT, which held that interest and finance charges along with other preproduction expenses should be capitalized.

CIT(A) Findings:
The CIT(A) allowed the expenses, noting that the assessee follows the percentage of completion method for revenue recognition, as per the guidance note issued by the Institute of Chartered Accountants of India (ICAI). The CIT(A) observed that the assessee had incurred costs on purchasing land and construction material, which formed part of the stock in trade. The CIT(A) distinguished the case from Tuticorin Alkali Chemicals, stating that the interest expenses were incurred for purchasing land, which is stock in trade, and should be allowed in the year incurred.

Tribunal’s Analysis:
The Tribunal agreed with the CIT(A) that mere absence of sales does not imply that the business has not commenced. The assessee had incurred costs on land purchase, construction, and received advances from customers. The Tribunal emphasized consistency in the method of accounting and held that the interest cost on the purchase of land, being a part of the project cost, should be accumulated as work-in-progress and not claimed in the year of incurrence. The Tribunal cited AS-16 on Borrowing Costs, which requires capitalization of borrowing costs directly attributable to the acquisition of a qualifying asset. The Tribunal concluded that the interest cost and other directly related expenses should be accumulated as part of the project costs.

Conclusion:
The Tribunal set aside the CIT(A)'s order to the extent of finance cost, interest paid to partners, JDA expenses, salary of employees at site, and site office expenses, directing these to be accumulated as work-in-progress. The rest of the general administrative expenses were allowed as claimed.

2. Classification of Income from "Other Sources" as Business Income and Set-off Against Business Loss:

Facts and Submissions:
The AO classified interest income as "income from other sources" and did not allow set-off against business loss. The CIT(A) reclassified this income as business income and allowed the set-off.

Tribunal’s Analysis:
The Tribunal examined the financial statements, noting that the assessee had shown discount received and interest received. The discount received was related to business purchases and deemed a business receipt. The nature of the interest income was not clear, but the Tribunal held that even if classified under "income from other sources," it could be set off against business loss, given the allowable administrative and other overhead expenses resulting in a business loss.

Conclusion:
The Tribunal dismissed the Revenue's appeal on this ground, allowing the set-off of interest income against business loss.

Final Order:
The appeal of the Revenue was partly allowed, with specific directions on the treatment of certain expenses and the classification of income. The order was pronounced in the Open Court on 16/04/2019.