9911796707
Advanced Search 
TMI Blog2014 (2) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... n received during the year belongs to Project-1 only. During the course of assessment proceedings vide reply dated 4.8.2011, the complete details of expenditure incurred on Project-1 along with total expenses incurred till 31.3.2009 on project-1 were submitted. It was further submitted that the total construction area of project-1 was 89,966 sp. Feet and out of the said total area, 15,973 sq. feet area was sold for consideration of Rs. 5,48,70,223/-. The break-up of the cost of said Project-1 as submitted before the AO is summarized as under:- Particulars Amount (in Rs.) Opening WIP (Project-1) 15,08,48,293 Add: Expenditure incurred during the year 3,03,36,608 Total expenditure incurred 18,11,84,901 The following is break up of total area:- Particulars Sq. Feet Total area of construction 89,966 Sold during the year 15,973 Area remaining to be sold 73,993 The AO alleged that according to the above facts and the elements of cost taken by the assessee itself, the cost of goods sold came out to be Rs. 3,35,88,773/- whereas the assessee had claimed the cost of goods sold at Rs. 3,84,85,063/-. Hence, it claimed the excess cost by Rs. 48,96,290/-. He had given the following calcul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the ld. CIT(A), the method of allocation of land cost on the basis of weighted average selling price is not only rational but also justified. He observed that even otherwise, there will not be any gain to the revenue as the assessee would be entitled to claim the remaining cost of construction in the subsequent years thereby reducing the profits of those years. He placed reliance in the case of DCIT vs Mahesh Edible Oil Ind. Ltd. (2010-TIOL-479-ITAT-Delhi) where it is held that the method of valuation of closing stock consistently and regularly adopted by the assessee since last so many years could not be rejected merely on the view of the AO that the assessee should have adopted a different method unless the method followed was found to be incorrect and unsustainable one. He further supported his finding with the help of decision of Hon'ble supreme court in the case of Investment Ltd Vs CIT (77 ITR 533), where it was held that a tax payer is free to deploy his own method of keeping accounts for the purpose of his trade. A method of accounting adopted by the assessee consistently and regularly couldn't be discarded by the department authorities on the view that he should h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the assessee. According to the ld. A/R while computing the cost of sales, AO had made simple proportion of both the land cost and the construction cost which was not correct for the following reasons: a. The construction cost is to be proportionately divided in the area of each unit, however the land cost could not be so divided. The rate of units varied from floor to floor (higher rates on the ground floor and lower on higher floors) and location to location (higher rates in front and lower rates in the back side). For example, the following rates had been realized for various units of the building: Unit No. Rate charged Floor Location Type of Property 20 2250 Basement Corner Commercial 24 7000 Ground Front Commercial 130 3000 First Back Commercial 212 2500 Second Front Commercial 406 1800 Fourth Front Residential The rate charged for all the units was indicated in the above chart. The construction cost for all floors was same and higher rates attributed to the land only which might be because of proximity of unit with land and the frontage of land towards the road or other location advantages. b. The government also, while deciding the circle rate for registration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod adopted by the assessee to make such computation but also verified and accepted the calculations which is within his jurisdiction. 7.0 We have heard the rival parties. On perusal of material on record and orders of the authorities below, we find that the assessee has allocated the entire cost on each and every unit. The cost of construction is pro-rata in the ratio of area of each unit but the cost of land is allocated on weighted average selling rate of each unit as there are large variations in the selling rates of the units depending on their respective location. Major difference is because of the floor. Government also recognises it for the purpose of stamp duty valuation and take different value of land for registration of property at different floors. The manner in which AO has allocated the cost is giving distorted result of profit/loss on each unit as against which the formula drawn by the assessee balances the same. There is no dispute as to the fact that the same basis is adopted for all the units and in all the years whenever sale of the unit is recognized in the books of accounts. In our considered opinion the method adopted by the assessee is more logical and doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st attributable to the revenue and without deducting the same, the true profit of the sale transactions could not be computed. Since the installation of lifts, pump sets and other development work could not be completed in the year under reference, the estimation was required to be made against the expenses to be incurred in future towards the same. The liability to incur this expenditure had arisen in the current year on the sale of units. The Ld. CIT(A) has noticed that assessee had made provision of Rs. 80 lacs towards these expenses and details filed by the counsel of the appellant showed that the amount actually incurred was at Rs. 89,76,491/- in the subsequent year. He further observed that as it is imperative to incur this expenditure and it was also out of business expediency, the most appropriate method of accounting was to provide for this expenditure at the fixed rate or certain percentage of the turnover on past experience as it fulfilled both accrual concept as well as the matching concept. Further, the Ld. CIT(A) has made a reliance on the decision of Hon'ble S.C decision in the case of Bharat Earthmovers Vs CIT (245 ITR 428) where it was held that if a business liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. 10. Before us, the ld. DR submitted emphasized that the assessee cannot be allowed an expenditure which has not yet been actually incurred. Accordingly, he submitted that action of the AO was correct in making disallowance of such provision made on estimated basis for expenditure which is still to be incurred. He placed reliance on the order of AO and submitted that ld. CIT(A) has wrongly allowed the relief to the assessee on this issue. 11.0 The ld. AR supported the order of ld CIT(A). He submitted that the assessee had made a best estimation of cost of work to be done for completion of the project at the end of the year. The assessee had actually incurred a higher cost of Rs. 89,76,491/- in the subsequent years than the estimation so made to complete the project. The details were as under: S.No. Expenses head Estimation made at the end of Actual expenses the year incurred Amount Rs. Basis of estimation 1 Lift 30,00,000 Quotations 31,80,844 received from the suppliers 2 Labour/Wages 35,00,000 Work to be 38,97,149 executed 3 Pump Sets 2,50, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the units already sold. The expenditure finally incurred is higher than the estimate made by the assessee. There cannot be any better approach for such estimation. We accordingly find no infirmity in the order passed by the CIT(A) on this issue and therefore reject this ground of the departmental appeal. 13.0 The forth ground of appeal is taken against deletion of addition of Rs. 3,73,69,323/- in respect of including the interest costs incurred for project-2 in the value of inventory of project -2. The AO has found that Assessee participated in a bid by the Rajasthan Housing Board and purchased a piece of land at Plot no.1, Sector-8, Pratap Nagar, Sanganer, Jaipur for a sum of Rs. 26,11,44,000/- . Along with the further cost incurred on registration etc., the assessee accounted total amount of Rs. 28,83,42,266/- as inventory for Project no. 2. To source the funds for purchase of this land, the assessee obtained loan from RIICO and also other unsecured loans. The assessee incurred interest of Rs. 2,51,22,324/- and Rs. 1,22,46,999/- on loan from RIICO and unsecured loan respectively and charged the same to the Profit & Loss Account. The said interest is claimed as expenditure allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st appeal, the ld CIT(A) has observed that the land was purchased for project-2 and same constituted stock in hand for the assessee. The land was purchased for carrying out real estate business activity of the assessee. Soon after purchase, the directors realised that demand of constructed commercial/ residential units had been substantially reduced and it was not economically viable to take up the construction activity for the said project at that point of time. Accordingly, no construction activity commenced for the project 2. The assessee applied for approval of construction plan on 04.09.2008 before Rajasthan Housing Board. However, no activity has been done till now. Since the project-2 was postponed for indefinite period, the interest cost was charged to P&L A/c considering that it was an allowable deduction u/s 36(1)(iii). There is no dispute that the interest cost of Rs. 3,73,69,323/- was incurred in the relevant year and paid to RIICO for the said period. The loans were borrowed in respect of business activity of the assessee and what was purchased constituted stock in trade and not capital asset out of borrowed fund. Further observed that both the project i.e. project-1 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made, and periodically lists should be prepared showing items that have been inactive for specified periods, which depend on the basic stock groups and nature of the industry. Sometimes items are also listed where the inventory is in excess of sales or disbursements for the last six months or year. The lists of inactive items should be reviewed by proper officials for decision as to action to be taken." It was not shown that method adopted by assessee was either improper or patently false. There was, therefore, no justification requiring the assessee to change the method which had been consistently followed. The Ld. CIT(A) also noticed that AO has overemphasized the fact AS-2 and AS-16 for valuation of inventory and borrowing cost respectively. Further noticed that it is not in dispute that even as per Para 11 of AS-2, the interest and other borrowing cost are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventory and therefore these are usually not included in the cost of inventory. Further Para 12 of AS-2 stipulates that interest and other borrowing cost are usually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was not bound to add the interest to the inventory. Similarly, as per AS-2 the inventory of this land was to be valued at cost or net realizable value which ever was lower. Since the net realizable value of the land did not exceed the price at which it was purchased, it was rightly valued at the cost. The CIT(A) further observed that nothing could have stopped the assessee from claiming the interest u/s 36(1)(iii) in the computation of income even if it had been capitalized in the books of account. The Accounting Standards do not override the provisions of I.T. Act. The ld. CIT(A) relied on the decision of Hon'ble Rajasthan High Court in the case of CIT Vs Wolkem India Ltd. (315 ITR 211). The following question was answered by the Court in this case :- "whether, on the facts and circumstances of the case as well as in the law, the learned ITAT was justified in directing to value the obsolete stores at 10 percent of the cost without following the AS-2 issued by ICAI in letter and spirit, and the provision of section 145A of Income Tax Act ?" In this case, it was contended that ITAT had grossly erred in law as well as in facts while holding that the revised AS-2 issued by ICAI wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the interest should be added to the cost of land and it cannot be claimed as expenditure in the year of incurrence. He submitted that proviso does not specify the Capital Asset or asset held as Stock in Trade. Since the land of project-2 has not been put to use, the interest cost has to be added to the value of asset only. He also submitted that as per the Accounting Standard 16 also, borrowing cost as to specific project has to be allocated to such project and added to the value of the inventory rather than charging the same to the profit & loss account. He supported the order of Assessing Officer and submitted that ld. CIT(A) has wrongly allowed the relief. 16.0 The Ld. AR supported the order of ld CIT(A) by stating the facts of the case that the land in question was purchased for the purpose of carrying out a commercial project for sale in terms of the business activity of the assessee. However, soon after the purchase of land the directors of the assessee company had felt substantial reduction in the anticipated demand of the commercial spaces in the area. They also carried out a feasibility study of the project on the basis of anticipated revenues based on market enquiries. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be valued at lower of cost or net realisable value. As there is no increase in the value of similar land in the same locality, the net realizable value of land can't be said to have increased and therefore also, the value of land inventory can't be taken at a value of higher than the price at which it is acquired. According to the ld. A/R, where there is any evidence of land price being lower to the price at which it is purchased, the value has to be taken at such lower price even below the cost price. He also invited our attention to the assessee's letter dated 13.12.2011 (PB Page 86-92, internal Page 5 of the letter), wherein the assessee had specifically requested the AO to inform the result of any specific enquiry made by the AO to arrive at the finding that the net realisable value of the land is higher than the price at which it was bought. However, no such evidence of higher prices has been brought on record by the AO. As against this, ld. A/R invited our attention towards certain documents which show that there was no increase in the realisable value of the land in question. As per these documents, plot no. 1 in sector 8 Pratap Nagar was proposed for auction at reser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... projects and necessary in course of construction, interest cost cannot be added to the value of the project land in terms of AS-16.As explained earlier, there are specific evidences that the realisable value of the land is not more than the cost of land in this case, the interest cost has to be excluded from the cost of land in this case in terms of both the Accounting Standards, AS-2 & AS-16. As per Para 7 of AS-16, Borrowing cost are included as part of qualifying asset only when it is probable that they will result in future economic benefit to the enterprise. In the present market scenario, there is no evidence of economic benefit associated with incurring of the said borrowing cost. Para 14 of this standard allows commencement of capitalization of borrowing cost when activities that are necessary to prepare the asset for the intended use of sale are in progress. The activities associated with development of the project are not intended to be taken up till an uncertain period. This is normal period necessarily required for preparation to take up the project. Therefore, the assessee does not fulfil the condition to of para-14. Ld. A/R also referred Last Lines of Para 16 of AS-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et forces. There is specific requirement of AS-16, not to capitalise the interest cost along with the cost of land if it is held without any associated development activity. Accordingly, the accounting treatment of the interest cost is perfectly in line with the Accounting Standards. We further find that despite any accounting treatment, the interest on capital borrowed for the purpose of business is allowable u/s 36(1)(iii). A proviso has been inserted w.e.f 1.4.2004 which reads as under :- "Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction." The proviso specifically referred to the interest paid in respect of capital borrowed for acquisition of any asset for extension of existing business. The present case is of acquisition of land for its development in course of real estate activity of the assessee. Assessee is about to complete on ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
