2022 (4) TMI 1063 - AT - Income Tax

Disallowance of administrative and selling expenses - assessee's accounting method - AO proceeded to disallow the entire administrative and selling expenses debited in the profit and loss account by the assessee and claimed as deduction and added the same to closing work-in-progress of the construction project in progress - HELD THAT - As decided in own case assessee has regularly and consistently been following the said method of accounting as per the provisions of section 145A - AO has not assigned any cogent reason as to why the method, which has been consistently followed by assessee and accepted by the department in past as well in succeeding assessment years and which is in accordance with the recognized principles of accounting by ICAI, is being rejected. In our view, the action of the Revenue Authorities in rejecting the assessee's accounting method, without assigning any reason is not justified. The accounting method followed by the assessee and thereby excluding the indirect expenses such as office employees' salary, administrative expenses and marketing selling expenses is as per the recognized principles of accounting and as such the claim of the assessee deserves to be allowed. We hold accordingly. The additions made by the lower authorities on this issue are hereby ordered to be deleted. 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. - Decided against revenue. Taxability of interest of income on fixed deposits - HELD THAT - Admittedly, the surplus funds had been generated by the assessee out of its business. Hence, it could be safely concluded that the monies generated by the assessee were from its business and hence, only the business funds has been parked with the bank in the form of fixed deposits which had eventually yielded interest income. Admittedly, the business of the assessee had already commenced in as much as the construction activity had been started by the assessee and the cost incurred thereon were included in the closing work in progress in the balance sheet. Only, in view of the fact that assessee is following the project completion method for recognition of revenue, there is no income from construction activity disclosed by the assessee in the profit and loss account. This does not mean that assessee had not commenced its business. In fact the assessee is given an option either to follow percentage completion method or project completion method for recognition of Revenue from construction projects. The assessee had made fixed deposits with banks and derived interest income thereon only to recover the interest expenditure paid by it on the loans borrowed by it for the purpose of business. Hence, the interest income squarely partakes the character of business income. Admittedly, the business income from construction projects would be offered in the year of project completion of the project followed by the assessee. This interest income would go to reduce the closing work in progress of construction project carried out by the assessee, which has been done by the assessee in the return of income. Hence, no fault could be attributed in the accounting treatment and the income tax treatment given by the assessee. Also find from the perusal of the balance sheet that similar interest income has been earned by the assessee in A.Y.2014-15 also for which no addition was made by the ld. AO. Hence, even going by the principle of consistency when there is no change in the facts and circumstances of the case as has been held by the Hon ble Supreme Court in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT the interest income earned on fixed deposits in the instant case would only go to reduce the cost of construction of closing work in progress and cannot be taxed separately as income from other sources. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance of business expenditure of ?7,65,94,120.
2. Treatment of interest income of ?23,62,179 from fixed deposits as "Business Income" instead of "Income from Other Sources."

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Business Expenditure of ?7,65,94,120:

The Revenue challenged the deletion of the disallowance made by the Assessing Officer (AO) regarding the business expenditure of ?7,65,94,120 debited to the Profit & Loss account. The AO had added this amount to the construction Work-in-Progress (WIP) of the project under development by the assessee, a private limited company engaged in real estate development. The assessee follows the completed contract method for accounting and recognizes revenue when it is probable that economic benefits will flow and can be reliably measured.

The assessee argued that the administrative and selling expenses amounting to ?7,65,94,120 were not directly related to the project and should be debited to the Profit & Loss account, in accordance with Accounting Standards (AS)-2 and AS-7, and the Guidance Note on "Accounting for Real Estate Transactions" issued by the Institute of Chartered Accountants of India (ICAI). These standards and guidelines specify that general administrative costs and selling costs should not be included in the cost of inventory for WIP.

Despite these submissions, the AO disallowed the expenses and added them to the closing WIP. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance by relying on a decision by the Mumbai Tribunal in the case of Hiranandani Palace Residence Pvt. Ltd., which supported the treatment of such expenses as revenue expenditure.

The Tribunal upheld the CIT(A)'s decision, citing consistency with the assessee's accounting method, which is in line with recognized accounting principles and has been accepted by the department in previous and subsequent years. The Tribunal emphasized that the AO did not provide a cogent reason for rejecting the method consistently followed by the assessee.

2. Treatment of Interest Income of ?23,62,179 from Fixed Deposits as "Business Income":

The AO treated the interest income of ?23,62,179 earned on fixed deposits as "Income from Other Sources," arguing that the funds were idle and citing the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. However, the assessee contended that the funds were surplus business funds temporarily parked in fixed deposits, and the interest income should be considered as "Business Income."

The CIT(A) agreed with the assessee, stating that the business had commenced, and the funds were generated from business activities. The interest income was used to offset interest expenses on loans borrowed for business purposes, thus partaking the character of business income. The Tribunal supported this view, noting that the interest income would reduce the closing WIP of the construction project and should not be taxed separately as "Income from Other Sources."

The Tribunal also referenced a similar case, DCIT vs. Saudela Constructions Pvt. Ltd., where interest income from fixed deposits during the period between borrowing and deployment was treated as business income. Additionally, the Tribunal pointed out that similar interest income in the previous year (A.Y. 2014-15) was not added by the AO, reinforcing the principle of consistency.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The disallowance of business expenditure was deleted, and the interest income from fixed deposits was treated as "Business Income," consistent with the assessee's accounting method and previous judicial precedents. The order was pronounced on 31/03/2022.