2023 (4) TMI 1152 - AT - Income Tax

Treatment of interest and other expenses - Disallowance of expenses added to the total work-in- progress of the project - assessee failed to establish the nexus between revenue offered and the expenses claimed and closing work- in- progress - only contention of the assessee in support of claiming the interest and other expenses as revenue expenses is that project was on the verge of completion and, therefore, this amount of interest / finance and other cost is not justified for adding into WIP - CIT-A deleted the addition - HELD THAT - We find that the project of the assessee was completed on 08/05/2012 as per paper book page 31, which falls in subsequent assessment year i.e. A.Y. 2013-14. In such circumstances, if the expenses related to project are not included in the project cost, then profit from the project will be distorted which will be against the principle of percentage completion method. The section 4 of the Act prescribes for income which has accrued to the assessee, during the year for the purpose of taxation since in long term projects, when substantial part of the project is completed, the risk and rewards shift from the assessee and corresponding income accrue to the assessee, which is offered computed following the percentage completion method, however, the expenses which pertain to project cost cannot be allowed to be debited to P L Account. In the case, the assessee did not provide details of the borrowings and purpose for which those borrowings were utilized and corresponding interest expenditure. Similarly regarding other expenses also, particularly advertisement publicity and commission brokerage, no details have been provided for determination whether those expenses pertain directly to the undergoing project. The interest and other expenses, which are directly related to the project should not be included in project cost and balance should be debited to P L Account. The gross profit from project is then credited to P L Account and the expenses in the nature of Administration and General, which are not specific to project like directors remuneration, office expenses are debited in P L Account and then net profit / loss is computed as per accounting principles. But in the case, assessee is seeking to debit whole of interest and other expenses to profit loss account. The interest and other expenses, which are directly related to the project should not be included in Project cost and balance should be debited to P L account. Thus we restore this issue back to the file of the Ld. CIT(A) for determining the quantum of interest and other expenses related directly to the project.Ground No.1 of the Revenue is allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of expenses and their treatment as capital expenditure instead of revenue expenditure.
2. Nexus between revenue offered and expenses claimed.
3. Application of Accounting Standards (AS-7 and AS-16) in the context of construction projects.

Detailed Analysis:

Issue 1: Disallowance of Expenses and Their Treatment as Capital Expenditure
The primary issue in these appeals is the disallowance of expenses amounting to Rs. 4,97,38,505/- in the case of M/s Rustomjee Buildcon Pvt Ltd for A.Y. 2012-13, Rs. 10,10,59,304/- in the case of M/s Rustomjee Construction Pvt Ltd for A.Y. 2012-13, and Rs. 34,996,200/- for A.Y. 2013-14. The Assessing Officer (AO) argued that these expenses should be added to the Work-in-Progress (WIP) of the project rather than being treated as revenue expenditure. The AO's position was based on the assertion that the expenses were directly related to the project costs and should be included in the WIP to accurately reflect the project's financial status.

Issue 2: Nexus Between Revenue Offered and Expenses Claimed
The AO contended that the assessee failed to establish a direct nexus between the revenue offered and the expenses claimed. Specifically, the AO noted that the assessee did not provide project-wise break-up of expenses or details on how the expenses were allocated between revenue and WIP. Consequently, the AO disallowed the expenses, arguing that they were not justified as revenue expenditure and should be capitalized instead.

Issue 3: Application of Accounting Standards (AS-7 and AS-16)
The assessee argued that the treatment of expenses was in conformity with Accounting Standards AS-7 and AS-16, which support the inclusion of certain costs as revenue expenses when a project is near completion. The assessee maintained that since the projects were on the verge of completion, the expenses should be charged to the Profit & Loss (P&L) Account rather than being added to the WIP.

Analysis of Judgments:

M/s Rustomjee Buildcon Pvt Ltd for A.Y. 2012-13
The AO disallowed Rs. 4,97,38,505/- in expenses, arguing they should be added to the WIP. The CIT(A) reversed this decision, aligning with the assessee's argument that the expenses were in conformity with AS-7 and AS-16 and that adding them to the WIP was not justified given the project's near-completion status. However, the Tribunal found that the assessee did not provide sufficient details to support its claim and restored the matter to the CIT(A) for a fresh determination of the quantum of expenses directly related to the project.

M/s Rustomjee Construction Pvt Ltd for A.Y. 2012-13 and A.Y. 2013-14
The AO disallowed Rs. 10,10,59,304/- for A.Y. 2012-13 and Rs. 34,996,200/- for A.Y. 2013-14, citing a lack of nexus between the revenue offered and the expenses claimed. The CIT(A) initially sided with the assessee, but the Tribunal found the CIT(A)'s findings to be based on incorrect facts and restored the matter for a fresh decision.

M/s Rustomjee Realty Pvt Ltd for A.Y. 2012-13 and A.Y. 2013-14
The findings in these cases were identical to those in M/s Rustomjee Construction Pvt Ltd. The Tribunal found the CIT(A)'s decisions to be perverse on facts and restored the matters for fresh consideration, following the same rationale as in the case of M/s Rustomjee Construction Pvt Ltd.

Conclusion
The Tribunal allowed all the appeals by the Revenue for statistical purposes, directing the CIT(A) to re-examine the issues with correct facts and adequate details provided by the assessee. The Tribunal emphasized the need for a clear nexus between the revenue offered and the expenses claimed, in line with the applicable accounting standards and the Income Tax Act's provisions.