2020 (12) TMI 162 - AT - Income Tax

Disallowance of loss arising on valuation of inventory (which is nothing but accumulated expenses of earlier years included as part of work-in progress - A.R. submitted that the income tax is to be charged on real income thus submitted that the assessee has treated the revenue expenses as work in progress and did not write off the same, since no business income was available - HELD THAT - CIT(A) has noticed that the expenditure of ₹ 2.51 crores consisted of only revenue expenses . He has further given a finding that, if at all these expenses are related to any abandoned project, the claim should have been made by the assessee in FY 2009-10, since the Joint Development Agreement was terminated in that year only. As earlier noticed that the assessee has treated these expenses as pre-operative expenses till 31.3.2010 and only in the financial year 2010-11, the assessee has converted the same as work in progress . It is a well settled proposition of law that the accounting treatment given in the books of account is not binding on the assessee/revenue to determine the correct amount of total income under the Income tax Act. However, in order to claim any amount as expenditure or loss, the conditions or procedures prescribed under the Income tax Act should have been followed by the assessee. A.R. submitted that the accumulated amount of ₹ 2.51 crores represented only revenue expenses and hence the assessee could have claimed the same as business loss in the earlier years. In that case, the brought forward business loss would have been allowed as deduction. This submission of the assessee appears to be attractive. However, the Income tax Act prescribes conditions for filing of loss returns and for carry forward of losses. None of those conditions have been followed by the assessee and no loss was claimed or determined in any of the past years. Hence it cannot be presumed or deemed that the claim of the assessee represented brought forward loss. Accordingly, this contention of the assessee is liable to be rejected. As noticed that the amount of ₹ 2.51 crores represented expenses incurred by the assessee upto 31.3.2010. As observed by Ld CIT(A), the claim should have been made by the assessee in FY 2009-10 relevant to A.Y. 2010-11, since the Joint development agreement was terminated in that year. Hence we agree with the view of the Ld CIT(A) that this amount cannot be claimed during the year under consideration. In view of the above, we do not find it necessary to interfere with the order passed by Ld CIT(A). - Appeal of the assessee is dismissed.

Summary

Issues:
- Disallowance of claim of loss arising on valuation of inventory
- Treatment of accumulated expenses as work in progress
- Justification for claiming expenditure as allowable

Issue 1: Disallowance of Claim of Loss Arising on Valuation of Inventory

The appellant, a private limited company engaged in housing and real estate development, appealed against the disallowance of a claim of ?2,51,54,293 as a loss arising on the valuation of inventory. The dispute stemmed from the expenses accumulated under "Preliminary & Pre-operative expenses" until 2010, which were then transferred to "Work in Progress" in 2011. During the relevant assessment year 2012-13, the appellant wrote off a portion of the work in progress amount. The Assessing Officer disallowed the claim, stating that expenses related to an abandoned project cannot be considered allowable expenditure under section 37. The appellant argued that the expenses were of a revenue nature and were reduced from the value of closing stock as per the company's policy. The appellant cited a judgment to support the deductibility of expenses related to unaccomplished projects as revenue expenditure. However, the CIT(A) found discrepancies in the appellant's claims, noting that the project was abandoned in 2009-10, not in 2011-12 when the write-off occurred. The CIT(A) concluded that the expenses did not relate to any specific project and should have been written off earlier. The tribunal upheld the CIT(A)'s decision, dismissing the appellant's appeal.

Issue 2: Treatment of Accumulated Expenses as Work in Progress

The appellant argued that the accumulated expenses were treated as work in progress due to the absence of business income until the assessment year 2012-13. The appellant contended that the expenses were written off as they were not related to the project under execution. The appellant further claimed that if the expenses had been declared as business loss in past years, the net result would have been the same. The tribunal noted that the accounting treatment in the books of account is not determinative for tax purposes. While the appellant's argument seemed plausible, the tribunal found that the conditions for filing loss returns and carry forward of losses under the Income Tax Act were not met. Therefore, the claim for deduction in the current year was disallowed. The tribunal agreed with the CIT(A) that the expenses should have been claimed in the relevant year when the project was terminated, and hence dismissed the appeal.

Issue 3: Justification for Claiming Expenditure as Allowable

The appellant provided justifications for claiming the expenditure as allowable, citing the nature of the expenses and the absence of net realizable value. However, discrepancies were found in the timing of the write-off compared to the project termination. The tribunal emphasized the need for expenses to be project-specific for write-offs and highlighted the importance of following prescribed procedures under the Income Tax Act. Despite the appellant's arguments, the tribunal upheld the CIT(A)'s decision, emphasizing the lack of compliance with the Act's requirements for claiming losses. The tribunal concluded that the expenses should have been claimed in the appropriate year and dismissed the appeal.

This detailed analysis of the judgment addresses the issues involved comprehensively, outlining the arguments presented by the appellant, the findings of the CIT(A), and the tribunal's final decision on each issue.