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TMI Blog2015 (6) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... not retracted till the date of filing of return." 3. Exactly similar ground has been raised by the Revenue in ITA No. 1267/Mum/2013 for A.Y. 2009-10 also. 4. Brief facts of the case are that, the assessee is a partnership firm having two partners, namely, Shri Vijay Ravji Gajra and Shri Amrut Kanji Nisar, which came into existence, w.e.f. 1-1-2007. The assessee firm is engaged in the business of builder and developer and had undertaken the development of a project, namely, "Ellora Fiesta" in Navi Mumbai. A search and seizure action u/s 132(1) of the Act was carried out in the case of Gajra Group on 19-2-2009. During the course of search proceeding, a sum of Rs. 15 crores was voluntarily admitted and offered for whole as a Gajra Group. Out of the said declaration of Rs. 15 crores, sum of Rs. 63 lakhs pertains to the assessee for A.Y. 2008-09 on account of income from the project and Rs. 73 lakhs for A.Y. 2009-10. However, at the time of the filing of the return of income, the assessee did not offer this income in the return of income filed in response to notice u/s 153A. Accordingly, the assessee was required to show cause as to why the income of Rs. 63 lakhs should not be added t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have also endorsed the same proposition. Further, the assessee submitted that it is not a contractor but real estate developer and the project completion method is also one of the revised methods of accounting the income. The ld. CIT(A) after considering the assessee's submission and reasoning of the A.O., held that for the purpose of recognition of income in the case of a contractor or developer as per AS - 7, there are two methods of accounting for realization of revenue in the construction business viz. (i) percentage completion method & (ii) completed contract method and both are recognized for disclosing the profit. There is no specific method prescribed by the Income Tax Act for revenue recognition in the case of builder or real estate developer. It is the discretion of the developer/builder to adopt any of the two method of revenue recognition which is best suited. Thereafter, he noted down the entire facts and the statement recorded during the course of search & survey operation, and deleted the addition after observing and holding as under:- "5. In the instant case, the project of the appellant "Ellora Fiesta" at Sanpada, Navi Mumbai, has commenced construction vide comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce or advice in the statement recorded during the survey was beyond the jurisdiction of the search/survey party. On such an advice, the appellant offered the estimated additional income for the period under consideration which is an estimated figure without any real working of the profits. From the facts mentioned above, it can be observed that the act of offering the additional income was not voluntary but under a misbelief inculcated by the search party that the declaration of the profits on percentage completion method is mandatory as per AS-15 and section 145 of the I.T. Act, 1961. Thus, the offer of income was not voluntary but under the guidance and direction given by the search party to do the same. Even in the letter of offer, nowhere it is mentioned that the appellant is offering the above additional income voluntarily and therefore the argument of the AO that the appellant offered the above additional income for the year under consideration voluntarily, is not correct. Even section 145 of the Income-tax Act, 1961 provides that the business income of the assessee for an assessment year shall be computed based on the method of accounting consistently followed by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AS-7 is prescribed for the contractors and revised AS-9 has been prescribed for the real estate developers or the builders. It has been prescribed in the AS-9 that the revenue in the case of real estate sales should be recognised when all the following conditions are satisfied :- i) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate transferred to a degree usually associated with the ownership; ii) At the time of the transfer of all significant risks and rewards of ownership, it is not unreasonable to expect the ultimate collections; and iii) No significant uncertainty exists regarding the amount of consideration that will be derived. 4.9. If the above prescribed revised accounting standards AS-9 for the real estate developers are applied to the project of the appellant, can it be definitely concluded that the appellant has transferred to the buyer all significant risks and rewards of ownership and the appellant retains no effective control of the shops / flats transferred to a degree usually associated with the ownership or can it be concluded that no significant uncertainty exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on method" when the said project was completed. Now, the Revenue is taking different stand, that in the earlier year the revenue should be recognized as per percentage completion method and in the subsequent year it should be on the basis of project completion method. This, she submitted cannot be upheld. In support, she filed a copy of assessment order dated 25-2-2015 for the A.Y. 2012-13. 9. We have heard the rival submissions and also perused the relevant findings given in the impugned order. The sole reason for making the addition by the A.O. is that, at the time of search the assessee had offered to disclose the income on the basis of percentage completion method which has been retracted later on. However, there is no finding that the assessee has been following percentage completion method regularly since beginning or in any other project. There is no such evidence or documents which have been found during the course of search indicating that the assessee had been following percentage completion method regularly. If the assessee has been following one of the recognized methods as prescribed by AS-9, then it cannot be held that the Revenue can impose a different method upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had advanced interest free loan of Rs. 32 lakhs on 18-6-2007 to M/s Gahlot Construction and Rs. 50 lakhs on 14-8-2007 to M/s Konark Enterprises, aggregating to Rs. 82 lakhs. On the other hand, the assessee has also borrowed interest bearing secured and unsecured loan for which it has debited interest cost of Rs. 45,33,852/- in work-in-progress account. In response to the show cause as to why interest should not be disallowed on interest free loan, the assessee submitted and stated as under:- "In this respect we have to state that the advances given to M/s Gahlot Construction are for a short term basis. With respect to the advances given to M/s Konark Enterprises we have to state that the said advances are given for plot of land. Secondly our above client is following project completion method wherein all the expenses are debited to Work-in-Progress account. Even if the interest is proportionately disallowed, it should not be added to the total income but it should be reduced from Work-in-progress." 14. However, the A.O. rejected the assessee's contention and held that interest free funds borrowed by the assessee will be utilized for their own business purposes and such borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... litigation and therefore, the transaction has not yet taken place. There is no material on record to show that this was not for purchase of land. As regards the allegation of the ld. CIT(A) that in the suit petition filed by M/s Konark Enterprises which shows that the land in question has already been purchased by them before the date of advance, she submitted that it will not make any difference as long as the party to whom advance was given was towards purchase of plot which has been confirmed by the said party. So far as the assessee is concerned, it has given money for purchasing the plot of land from M/s Konark Enterprises for its business purpose and, therefore, such an advance given for the purposes of business, no disallowance of interest is called for. Lastly, she submitted that the interest has been capitalized by the assessee as the assessee has been following project completion method, where all the expenses have been debited to WIP account and if any disallowance is called for, the same should be reduced from the WIP account and no addition should be made on this account. Regarding loan of Rs. 32 lakhs given to sister concern M/s Gahlot Construction, she submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional High Court in the case of Reliance Utilities and Power Ltd. (supra) wherein the Hon'ble High Court observed and held as under:- "If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interestfree funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. 's case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woocombers of India Ltd.'s case (supra) the Calcutta High Court had come to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been affirmed by the ld. CIT(A). 21. After hearing both the sides, first of all, we do not find any reason to disallow the said amount, because the assessee has debited the same to WIP and if at all any disallowance is called for, then the same will go to reduce from the WIP. It cannot be added to the total income of the assessee during the year. On this ground alone, we do not find any reason to uphold such disallowance. Accordingly, ground No. 2 raised by the assessee is treated as allowed. 22. In ground No. 3, the assessee has challenged the addition of Rs. 16,292/- paid towards professional fees for registration of trademark with logo on the ground that the same is capital expenditure. 23. In this regard, the assessee had contended that this expense has been debited to WIP and, therefore, in view of the reasoning given above, the same cannot be disallowed and added to the income of the assessee for this year, because if at all the disallowance is called for, it will go to reduce the WIP only. Accordingly, the disallowance made in this year cannot be sustained. Ground No. 3 is allowed. 24. Ground No. 4 is alternative argument which has already been dealt for and no sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est debited to the WIP, therefore, no disallowance can be made in this year. 28. After hearing both the parties, we find that so far as the advance/loan given to Raja Mirani, the same appears to be purely for business purpose, there're, no disallowance is called for. Regarding other two parties also, it is seen that the assesee had interest free funds in the capital account which was at Rs. 3,52,58,440/-, whereas the advance given to these two parties comes to Rs. 70 lakhs and if other advances are also taken into consideration, then the same is approximately Rs. 2.72 crores. Thus in view of the decision in the case of Reliance Utilities & Power Ltd. (supra), no disallowance of interest can be made on the ground that interest free funds have been given for the purpose of business. Thus, the disallowance of interest on proportionate basis is deleted. 29. Lastly, in any case, no disallowance can be made to the income of the assessee in this year as the assessee had debited the said expenses to the WIP and any disallowance is made, then it will go to reduce the WIP. Hence, no addition can be made on this ground also. 30. In the result, both the appeals of the assessee are allowed, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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