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TMI Blog2016 (11) TMI 709X X X X Extracts X X X X X X X X Extracts X X X X ..... - ITA No. 310/M/2012, ITA No. 1566/M/2011, ITA No.7317/M/2013, ITA No.433/M/2012, ITA No.6658/M/2013 - - - Dated:- 23-9-2016 - Shri D. Karunakara Rao, Accountant Member And Shri Saktijit Dey, Judicial Member Assessee by : Shri Pankaj Toprani, A.R. Revenue by : Shri A.B. Koli, D.R. ORDER Per D. Karunakara Rao, Accountant Member: There are five appeals under consideration involving three assessment years. We shall deal with the appeals in assessment year wise and to start with, the appeal for the assessment year 2007-08 is taken up. ITA No.1566/M/2011 (A.Y.2007-08) Assessee s Appeal 2. Assessee raised three grounds in this appeal out of which ground No.3 is not pressed. Accordingly the said ground is dismissed as not pressed and the balance of grounds Nos.1 and 2 are extracted as under: 1) The Learned CIT (A) has grossly erred both in law as well as on facts in sustaining the addition of ₹ 75,88,422/- (Interest on Car Loan ₹ 51,50,934/-, Advertising Exp. ₹ 17,92,052/-, Brokerages ₹ 77,736/-, Loan processing Fees ₹ 5,67,700/-) in the Work In Progress for the purpose of ascertaining Gross Profit @ 20% which is completely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k-in-progress (WIP) should be increased by 75% of the indirect expenses. Eventually, the work-in-progress as per the Assessing Officer works out to ₹ 5,33,28,339/-. The gross profit on this at 20% works out to ₹ 1,06,65,668/- (supra). Aggrieved with the above changes by the Assessing Officer, the assessee is in appeal before the CIT(A) for the assessment year 2007-08. CIT(A) confirmed addition with reference to direct expenses of ₹ 75,88,422/-, i.e., 75% of the ₹ 1,05,34,615/-. Regarding the addition relating to the changes on account of indirect expenses of ₹ 21,72,144/-, CIT(A) deleted the addition to that extent. Accordingly, CIT(A) granted part relief to the assessee. Aggrieved with the confirming of the said addition amounting to ₹ 75,88,472/-, the assessee is in appeal before us with the grounds raised extracted above. Further, the Revenue accepted the said order of the CIT(A). 4. Before us, learned counsel for the assessee explained the above facts of the case and mentioned that the said amount of ₹ 75,88,472/- constitutes direct expenses and it has four elements and relevant break up is as under: a. Interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the project . He read out it is for this reason that interest cost is normally considered as only a period cost and charged to the operating statement for the year under which the same is inquired. He has submitted that the said decision of the Tribunal rely heavily on the cited judgment in the case of Lokhandwala Construction Industries Ltd. (supra). Further, he brought our attention to various other decisions to demonstrate that in a case, where percentage computation method is adopted by the assessee, out of the gross profit computed by that method, the interest expenditure for the year on the borrowed capital, is fully allowable in the year under consideration against the said gross profits. Therefore, the decision of the CIT(A) in allowing only 25% and capitalizing the balance of 75% of the interest fixed cost, should be restored as claimed by the assessee. Regarding the claim of advertisement expenses of ₹ 17,92,052/-, learned counsel submitted that this claim of the assessee should also be fully allowed without restricting to 25% of the claim. Otherwise, AO capitalized 75% of the cliam. Bringing our attention to the decision of the Tribunal in the case of Vardha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the project. In the background of these changes, ground No.2 raised by the assessee has to be understood and we need to decide if such changes are validly done by the Assessing Officer or otherwise. We shall take up the appeal ground wise issues in the following paragraphs: 6. Ground No.1 of the appeal relates to the addition of some of the expenses to the WIP account i.e. interest on unsecured loan/fixed deposits (siccar loan), advertisement expenses, brokerage expenses and loan processing fees. Assessing Officer considered the above expenses as relatable to the work-in-progress account and recomputed the WIP account at ₹ 5,33,28,339/-. Assessee contends that the above said expenditure is fully allowable in the year under consideration. In this regard, assessee relied on various decisions. This issue is relevant for A.Ys/appeals under consideration. We shall take up expenditure-account wise adjudication in the following paragraphs: A) Interest on unsecured loans and fixed deposits: It is the claim of the assessee that the entire interest expenditure is allowable as it is a time related fixed finance cost on the borrowed capital. The claim of the assessee should be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations or on capital account; the instant case being decidedly of the former, but whether the said cost, having been incurred, is to be capitalized as a part of the project cost and, thus, taken into account for the purpose of valuation of inventory (stock-in-trade) as at the year-end and, consequently, the determination of gross profit for the year. It is only the cost that is incurred and otherwise allowable, which, it may be appreciated, would stand to be considered thus, where it otherwise qualifies for being reckoned as a part of the cost of production/construction, and thus of the inventory or the project cost as at the year-end. The deductibility of the said cost u/s. 36(1)(iii) is thus neither in doubt nor in dispute. Further, it may also be in place to state that section 36(1)(iii) stands since amended by Finance Act, 2003 w.e.f. 01/4/2004, by way of insertion of a proviso thereto, so that any interest cost on capital account is to be necessarily capitalized. Accordingly, it is only the interest cost for the period post acquisition of a capital asset, that would stand to be deductible in computing the business income qua the business of which the relevant asset is a o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn of income. Accordingly, this part of the ground No.1 is allowed in favour of the assessee. B) Regarding advertisement expenditure amounting to ₹ 17,92,052/- as stated by Ld. Counsel, we perused the order of the Tribunal in the case of M/s. Vardhaman Developers Ltd. 35 Taxman.com 370 and we find such expenses are found allowable as discussed by the Tribunal in the para 4 of the said order of the Tribunal. Relevant extracts from the said para is inserted as under: 4. . Similarly advertisement expenses are only in the nature of selling cost of the construction business which would not therefore stand to be capitalized in as much as the same could only be in respect of direct cost which adds value to or otherwise adds to its cost of production to the assessee. As regards the argument of there being no corresponding income as it being not relatable to any revenue stream the same to our mind of little significance as long as the assessee is carrying a particular business during the year the income there from has to be computed under section 28 of the Act allowing it all permissible deductions . whether the method of accounting being followed by the assessee i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleted the penalty as per the discussion given in para 4.3 of his order. The CIT(Appeals) held that the assessee is entitled to relief on the ground of debatability. Aggrieved with the same the Revenue is in appeal before us. II. Before us, both the counsels submitted that the adjudication of this penalty appeal becomes academic, if the appeal of the assessee is on quantum additions is allowed in favour of the assessee. As can be seen in the proceeding paragraphs of this order relating to the quantum appeal ITA No.1566/M/2011, it is the finding of the Tribunal that the adjustment made by the Assessing Officer/ CIT(Appeals) to the WIP account are uncalled for inv view of the judgment of jurisdictional High Court in the case of M/s. Lokhandwala Construction Industries Ltd. (supra), Rohan Estates Pvt. Ltd. (supra) etc. Therefore, it is a fact that additions stand deleted and the income returned by the assessee in the return of income was approved. Therefore, we are of the opinion that the decision given by the CIT(Appeals) for this reason also does not call for any interference. Accordingly, the grounds raised by the Revenue are dismissed. 12. In the result, appeal of the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 75% of the administrative expenses of (indirect expenses) ₹ 1,64,55,863/- and the direct expenses amounting to ₹ 78,91,474/-. However, the Assessing Officer adopted the different GP rate of 20% and recalculated the profit amounting to ₹ 2.38 crores (rounded off). However, CIT(Appeals) deviated from the above manner of assessment of the AO. CIT(A) studied the extent of sale proceeds earned out of sale of the flats upto the year and found that the assessee recorded total sales of 50.96% of the project sales. Thus, the CIT(Appeals) proceeded to consider only that percentage of the Indirect/Administrative expenses. Thus, the CIT(Appeals) allowed ₹ 83,85,000/- of the administrative expenses out of ₹ 1.65 crores (rounded off) and capitalized the balance of ₹ 80,69,955/- out of the gross administrative expenses of ₹ 1,64,55,863/-. Accordingly, the WIP as per the CIT(Appeals) is reworked out and the GP at the rate of 22%, as adopted by the assessee, is considered. Finally, the GP is worked out at ₹ 2,15,09,102/-. After allowing the administrative expenses amounting to ₹ 83,85,908/-, the taxable net profit is worked out at ₹ 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork-in progress at the rate of 22%. In effect, Ld. Counsel for the assessee submitted that the method of accounting and the method of computation of taxable profits are consistently followed by the assessee for the project of Agarwal Negri. Referring to the administrative expenses, being indirect expenses, the same should be allowed in full as they are required for running of the business of the assessee. In support of the said claim, Ld. Counsel for the assessee brought our attention to the Tribunal s order in the face of its sister concern i.e. Rohan Estates Pvt. Ltd. (supra). According to him the administrative expenses being employees remuneration, salaries, fixed expenditure etc. are required for maintenance of the office, projects and other over heads. It is not the case of the Assessing Officer that any of these expenses have an element of direct expenditure. Referring to the direct expenses, the Ld. Counsel submitted that the arguments made by the assessee s counsel in connection with the claims relating to the direct expenses in the ITA No.1566/M/2011 are relevant and apply equally for this appeal too. Referring to the said decision in apportioning the administrative e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in the return, if the Revenue has jurisdiction at all to bring changes once if at all method of accounting is accepted in the earlier assessment years qua the project of Agarwal Negri . We shall adjudicate these issues one by one in the following paragraphs: A. Regarding administrative and indirect expenses, we find that the administrative expenses are entirely allowable as they are nothing to do with the direct cost of the likely stock in trade. The similar claim is allowed in the case of Rohan Estates Pvt. Ltd. (supra). Relevant extract from para 3.1 is placed here as under: 3.1 The administrative expenses as it appears are only general in nature and even with regard to the employees remuneration there is nothing to indicate that it represents element of either direct cost of production or even of production over head, which only would enable its inclusion as a part of the cost of production/construction. As such, being a fixed period cost these stand to be written off to the P L account in the year being incurred . Therefore the administrative expenses amounting to ₹ 1,64,55,863/- is entirely allowable. There is nothing on record to demo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 79,80,097/- being financial and other expenses, without appreciating the fact that the method of accounting adopted by the assessee was faulty and does not disclose true and correct income? 4. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary. 19. From the above, Ld. Counsel submitted that the assessee filed the return of income declaring the loss of ₹ 54,57,003/-. The assessee worked out the GP at the rate of 40% on the work in progress. Assessing Officer, as in the earlier years, increased the WIP account to the extent of interest expenses, advertisement expenses, brokerage expenses, loan processing fees and indirect expenses (75%). CIT(Appeals) granted relief on account of both direct and indirect expenses. Aggrieved with the same Revenue is in appeal before us. 20. On perusal of the order of the CIT(Appeals) (para 5) and the other related paragraph, we find both direct expenses and indirect expenses are fully allowable for the reasons mentioned by us in connection with the appeals for the assessment year 2007-08 and 2008-09 above. Accordingly, the grounds raised by the Revenue for this year also are d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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