2020 (8) TMI 948 - AT - Income Tax

Disallowance of expenses related to completed projects - as the project was completed in a previous year no further expenditure could be allowed - Assessee argued even if the project had been completed on completion contract method it did not mean that the residual and incidental expenses related to the project cannot be accounted for in the succeeding year - assessee is following the completed contract method but the impugned expenditure was general in nature and did not impact the recognition of Revenue in Assessment Year 2010-11 - HELD THAT - We find that the Hon ble Delhi High Court in the case of Gopal Das Estates Housing Pvt. Ltd. 2019 (3) TMI 1272 - DELHI HIGH COURT has held that in the case of an assessee following completed contract method the expenditure incurred subsequent to the completion of the project had to be allowed as Revenue expenditure. In this case the assessee was engaged in construction and sale of commercial space and followed completed contract method of accounting. When the project was still under construction interest expenditure was capitalized and once the project was completed the said expenditure was claimed as Revenue expenditure. This was disputed by the Department. The Hon ble Delhi High Court held that for the assessee following the completed contract method the expenditure incurred subsequent to the completion of the project had to be allowed only as Revenue expenditure. As not disputed that this expenditure has been incurred by the assessee. Also it remains undisputed that the expenditure was incurred for the purposes of the business of the assessee. Therefore it is our considered opinion that even though the assessee has been following the completed contract method of accounting the assessee s claim for allowance of expenditure pertaining to the project Uniworld Garden-1 deserves to be allowed during the year under consideration notwithstanding the fact that the project had already been completed in the immediately preceding assessment year. We draw support from the judgment of Gopal Das 2019 (3) TMI 1272 - DELHI HIGH COURT as mentioned in the preceding paragraph. Accordingly the order of the Ld. CIT (A) on the issue is set aside and the Assessing Officer is directed to delete the disallowance. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenses related to completed projects - Uniworld Garden-1
2. Tax treatment of interest-free advances to holding company
3. Tax treatment of interest on FDRs

Analysis:

Issue 1: Disallowance of expenses related to completed projects - Uniworld Garden-1
The assessee, engaged in Real Estate Development, filed a return declaring total income for Assessment Year 2011-12. The Assessing Officer disallowed an expenditure of Rs.60,84,530 related to completed project Uniworld Garden-1, stating that since the project was completed in a previous year, no further expenditure could be allowed. The Ld. CIT (A) partly allowed the appeal, confirming the disallowance but directed deletion of notional interest on interest-free advances given to the holding company. The assessee challenged this before the Tribunal, arguing that residual expenses of a completed project can be accounted for in the succeeding year. The Tribunal, citing precedents, held that under the completed contract method, expenditure incurred after project completion must be allowed as revenue expenditure. Consequently, the disallowance was set aside, directing the Assessing Officer to delete it.

Issue 2: Tax treatment of interest-free advances to holding company
The Assessing Officer added Rs.15,14,28,410 as interest foregone on interest-free advances to the holding company, treating it as a colorable device to reduce income. The Ld. CIT (A) directed the holding company to be taxed as deemed dividend under section 2(22)(e) of the Income Tax Act due to free reserves. The Tribunal did not address this issue specifically as it was not pressed by the assessee.

Issue 3: Tax treatment of interest on FDRs
The Assessing Officer taxed interest on FDRs under "Income from other sources" instead of "Income from Business," as claimed by the assessee. The Tribunal dismissed this ground as not pressed by the assessee, thus not providing a detailed analysis.

In conclusion, the Tribunal partly allowed the appeal, setting aside the disallowance of expenses related to the completed project Uniworld Garden-1. The tax treatment of interest-free advances and interest on FDRs was not extensively discussed due to the assessee not pressing those grounds. The judgment provides clarity on the treatment of post-completion expenditure under the completed contract method, aligning with relevant legal precedents.