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TMI Blog2016 (11) TMI 1307X X X X Extracts X X X X X X X X Extracts X X X X ..... usly claimed insurance as a revenue expenditure instead of allocating the same to project costs as per the guidance note. To that extent, the argument of the ld DR is well appreciated. We find that the other expenditures incurred by the assessee supra are squarely to be allowed as revenue in nature as they are not related to project cost. Hence we find that the ld CITA had rightly granted relief by deleting the disallowance made on that count. The decision rendered herein for the Asst Year 2007-08 would apply with equal force for the Asst Year 2009-10 also except with variance in figures. The ground no. 1 raised by the revenue for the Asst Years 2007-08 and 2009-10 is partly allowed. Disallowance of gifts - Held that:- We find that the expenditure on gifts is related to the project of the assessee and hence the business nexus is proved beyond doubt. Hence the same is squarely allowable as deduction. Moreover, as per para 2.4 of the Guidance Note on Accounting of Real estate transactions, the said expenditure cannot be added to the project cost and hence the assessee had rightly charged off the same as revenue expenditure. Accordingly, the Grounds raised by the revenue are dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is that the assessee is a private limited company engaged in the business of development of Integrated Satellite Township in India. . The assessee filed its return for the Asst Year 2007-08 on 30.10.2007 declaring total loss of ₹ 11,83,94,738/-. The assessee recognized revenue by following Accounting Standard 9 on Revenue Recognition ( AS-9 issued by ICAI) and guidance note on recognition of revenue by Real Estate Developers. During the relevant year under appeal, the development activities being at the initial stage, the assessee did not recognize any revenue. Further the expenditure that were purely incidental to the project were transferred to work in progress and those not relating to project were debited to profit and loss account. The basis of allocation was duly verified and audited by the statutory auditors and no adverse comments were reported. The ld AO issued show cause notice to the assessee as to why the expenses, debited under the head Administrative and Marketing Expenses other than normal filing fees and auditors remuneration which were not transferred to work in progress, should not be disallowed in the assessment. The assessee replied that for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly allocable to Project or were indirectly identifiable with project development have been transferred to WIP as part of cost of WIP. Other expenses, which are related to administrative office or selling/marketing expenses being not allocable to Project have been debited to the P/L account. Following is the break up of expenses which have been transferred to WIP and those debited to P/L account. Figures in (000) Head of expenses Total amount Transferred to WIP Debited to P/L Account Remarks Construction Expenses 3,21,885 3,21,885 Nil Being directly related to Project development cost Expenses on employees 11.577 3,121 8.456 Cost of Employees involved in project have been allocated to Project cost Administrative and Marketing Expenses 1,15,921 5,767 110,154 Expenses related to Project have been transferred to Proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible in the Project Cost. Travelling and Coveyance 14,652 10,713 4011 Expenses incurred on project managers travelling cost have been wholly transferred to Project cost. Similarly travelling expenses for administrative purpose are not allocable to project cost. Travelling expenses incurred by managerial persons involved both in administrative/Project purpose have been allocated on reasonable basis. Electricity charges 1,683 383 1,300 Electricity payment to WBSEB for electricity connection at project has been allocated to Project. Other electricity charges paid for administrative office/purposes are not allocable to project cost. Rent, rates and taxes 3,998 3,801 197 Rent expenses incurred on payment of apartment rent of Project managers have been allocated to Project cost. Rent expenses incurred in administrative office/non project managerial persons are not allocable to project. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of ERP package for maintenance of Accounts and for MIS reporting purposes. The same being purely for administrative purpose, are not allocable to project cost. Miscellaneous Expenses 3,048 2,887 88 Food expenses and medical expenses incurred on project staffs have been allocated to Project cost. The other miscellaneous expenses being incurred for administrative staffs/purposes, are not allocable to project cost. TOTAL 115,920 110,153 5,767 2.4. It was further submitted that the mere fact that the company has not recognized revenue during the relevant year, does not entitle the administrative expenses/selling and distribution cost to form part of WIP. Expenses which forms part of WIP represents cost of stock in trade which does not include administrative expenses/selling/marketing expenses. The said expenses are incurred independent of sale of stock in trade/revenue generation and are inherent in running of business. The business of the company being already commenced, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO that the assessee has not recognized any revenue from the operations since the development activities are at initial stage and most of the expenses are relating to the work in progress of the project. 2.6. The ld DR took to the relevant portion of the Guidance note relied upon by the assessee and stated that the insurance portion is to be allocated to the cost of the project whereas , the assessee has claimed it as revenue expenditure. Hence, it has been rightly disallowed by the ld AO. With regard to accounting standards followed by the assessee, they are relevant only for preparation of accounts under the Companies Act, 1956, whereas in Income Tax Act u/s 145(2), only Accounting Standards 1 (Disclosure of accounting policies) and Accounting Standard 4 (Prior Period and Extraordinary Items) are notified and hence assessee adopting AS 7 AS 9 are not relevant for the purpose of income tax act. He accordingly supported the order of the ld AO. 2.7. In response to this, the ld AR filed a comparative chart of the treatment of the disputed expenditures with regard to allocation of the same to work in progress , charge to profit and loss account from Asst Years 2006-07 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Sub-contractors in advance of work performed. We also find vide para 2.5 of the said guideline as below:- 2.5. Costs that may be attributable to project activity in general and can be allocated to specific projects include : (a) Insurance ; (b) Costs of design and technical assistance that is not directly related to a specific project ; (c) Construction or development overheads ; and (d) Borrowing costs Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of project activity. Construction overheads include costs such as the preparation and processing of construction personnel payroll. 2.8.1. We find that out of the total expenses incurred of ₹ 48,16,12,000/-, a sum of ₹ 31,22,58,000/- was transferred by assessee to work in progress and ₹ 11,86,10,000/- being expenses not related to project development was debited to profit and loss account and balance sum of ₹ 5,07,44,000/- was transferred to fixed assets by way of capitalization. These facts are not in dispute before us. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the same is given to customers who have booked flats at the project of the assessee. Accordingly, he deleted the disallowance. Aggrieved, the revenue is in appeal before us on the following grounds :- 2. That on the facts and circumstances of the case Ld. CIT(A) erred in deleting the disallowance of gifts of ₹ 6,48,000/- without appreciating the facts of the case that the said disallowance was made in absence of specific details/documents from the assessee. 3. That on the facts and circumstances of the case Ld. CIT(A) erred in deleting the disallowance of gifts of ₹ 6,48,000/- without appreciating the findings of the AO that the same was not in connection with the business activities of the assessee since the project of the assessee was at the initial stage and gift to customers has no credibility. 3.2. The ld DR argued that the business nexus of incurring this expenditure was not proved by the assessee. He vehemently relied on the order of the ld AO. In response to this, the ld AR argued that the gift expenses falls under the head selling costs which are not entitled to be taken to the project cost as per para 2.4 of the Guidance Note on Accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of ₹ 2 crores was transferred on 20.2.2006 from Escrow account with UTI Bank to the abovementioned current account with UTI Bank for the purpose of disbursement. Immediately before the transfer of ₹ 2 crores , the balance lying in the said current account was ₹ 4,36,818/- only. Moreover, as per the terms of sanction of specific loan, all collections / receipts from customers were required to be deposited in Escrow account with UTI Bank. Thus the money lying in escrow account was receipts from customers. Hence it was proved by the assessee that the interest free advance of ₹ 1 crore was given out of own funds of the assessee. The ld CITA appreciating the aforesaid contentions of the assessee, held that only real income is to be taxed and not the notional income and deleted the addition of ₹ 10,00,000/- in the assessment. Similar relief was granted in Asst Year 2009-10 also. Aggrieved, the revenue is in appeals before us on the following ground:- AY 2007-08 4. That on the facts and circumstances of the case Ld. CIT(A) erred in deleting the addition of ₹ 10,00,000/- on account of interest without appreciating the finding of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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