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TMI Blog2017 (2) TMI 954X X X X Extracts X X X X X X X X Extracts X X X X ..... s only a single contract and hence the entire expenditure incurred by it is allocable to the said contract only, under the Generally Accepted Accounting Principles ('GAAP') issued by the ICAI and applicable in the case of the Appellant. Ground 3 3. On the facts and circumstances of the case, the learned CIT(A) erred in confirming the action of the learned AO in concluding that the marketing and general administrative costs incurred by the Appellant are allocable to the specific contract undertaken by the Appellant and thus restating the duly audited accounts drawn by the Appellant in accordance with the GAAP and by adding the said costs to the WIP. 4. Ground 4 4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in levying interest of Rs. 46,91,973 under Section 234B of the Income-tax Act, 1961 ('the Act'). The Appellant prays that it be held to delete the levy of interest under Section 234B of the Act. Ground 5 5. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in levying interest under Section 234D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. However, the AO was not satisfied with the reply of the assessee. He referred to Accounting Standard-7 (AS-7) issued by Institute of Chartered Accountants of India (ICAI) and on the basis of same it was held by him that the entire cost should be debited to the project since the assessee is having one single project only. It was held by him that the period cost can be allocated to the year under consideration only if the assessee is having many projects in hand. Under these circumstances, after making detailed discussion in the assessment order, he made an aggregate addition of Rs. 21,27,95,930 in WIP by concluding in the assessment order as under:- "6.9 In view of the discussions made in above paras, it is held that the assessee has mis- interpreted the prescription of AS- 7 and thereby incorrectly applied the provisions thereof. Since the assessee is engaged in only one single contract, the bifurcation/ allocation of various costs cannot be resorted to. The assessee follows the percentage completion method of accounting and AS-7 being the relevant accounting guideline for such method of accounting, the prescription thereof are required to be followed in letter an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P of the project being constructed by the assessee. Thus, he upheld the action of the AO and rejected the submissions of the assessee. 6. Still being aggrieved, the assessee filed appeal before the Tribunal. During the course of hearing before us, the Ld. Counsel of the assessee vehemently disputed the action of the lower authorities. It was submitted that nature and genuineness of the expenses have not been doubted by any of the lower authorities. The only dispute is whether the impugned expenses should be made part of P & L account or WIP. It was submitted that both the authorities have misunderstood the provisions of AS-7. Assessee is having various projects in hand. Development of SEZ may be termed as one integrated project, but it has many parts of it. Therefore, different kinds of expenses are incurred from time to time. Those items which pertain to the period under consideration have to be necessarily consumed during the said period itself, as it does not make any value addition to the inventory in hand. This method of accounting is consistently followed by assessee as well as all the persons in this industry. It was also stated that all the expenses pertained to the year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under construction and development by the assessee, as has been done by the AO. The case of the assessee is that assessee is a developer-cum-builder engaged in development of real estate including special economic zone (SEZ). The expenses which were directly related to the construction / development of the project were added to WIP of the project, whereas other aforesaid expenses which were not directly linked to any particular project, but pertained to the period under consideration were debited in the P & L account as business expenses of the impugned year. On the other hand, the AO has referred to Accounting Standard -7 (AS-7) issued by Institute of Chartered Accountants of India (ICAI) and held that the entire expenses should have been added to the cost of WIP since assessee is having one single integrated project. The case of the assessee before us is that the AO has misunderstood the provisions of AS-7 and misapplied the same in the case of the assessee, and in any case, the business of the assessee has already been set up, therefore expenses incurred in the normal course of the business which are not directly allocable to a particular project should be allowed as business e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate directly to a specific contract include: (a) site labour costs, including site supervision; (b) costs of materials used in construction; (c) depreciation of plant and equipment used on the contract; (d) costs of moving plant, equipment and materials to and from the contract site; (e) costs of hiring plant and equipment; (f) costs of design and technical assistance that is directly related to the contract; (g) the estimated costs of rectification and guarantee work, including expected warranty costs; and (h) claims from third parties. These costs may be reduced by any incidental income that is not included in contract revenue, for example income from the sale of surplus materials and the disposal of plant and equipment at the end of the contract. 17. Costs that may be attributable to contract activity in general and can be allocated to specific contracts include: (a) insurance; (b) costs of design and technical assistance that is not directly related to a specific contract; and (c) construction overheads. Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... break up of these expenses has been provided to us:- Details of Expenses Total Amount Transferred to WIP Amount Debited to P&L Administrative Expenses Marketing & Selling expenses Finance Expenses Operating Expenses Civil Works 78,53,018 78,53,018 - - Direct Management and general services 3,97,14,697 3,97,14,697 - - Legal and professional fees 27,82,63,263 27,27,15,289 55,47,974 55,47,974 Insurance 39,20,585 38,44,402 84,183 84,183 Occupancy cost 1,64,69,099 1,00,45,872 64,23,227 Other direct cost 37,65,141 23,75,183 13,89,958 13,89,958 Travelling expenses 19,65,726 87,373 18,78,353 18,78,353 Total (A) 35,19,59,529 33,66,35,834 1,53,23,696 Other expenses Audit fees 8,95,291 - 8,95,291 Rates & taxes 1,22,42,033 - 122,42,033 1,22,42,033 Marketing services cost 11,01,36,914 - 11,01,36,914 11,01,36,914 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand. Therefore, these have been debited in the P & L account as period cost. With regard to the finance charges (comprising of interest and bank charges), it was stated that interest on vehicle loans was paid with regard to the vehicles which were used in general administration. Further, the bank overdraft was not utilized at all in the construction activities. Therefore, these expenses have been included as period cost in the P & L account. It is further noted by us that the Ld. Counsel has repeatedly stated that complete books of account and all the details as were required by the AO were submitted to him to show nature of the expenses and their nexus with the project. But nothing has been brought on record by the AO to negate the claim of the assessee that none of these expenses related to any particular project. Therefore, the action of the AO in treating these expenses as part of the cost attributable to a particular project was based upon presumption, surmises and conjectures. 14. Further, with regard to the assertion of the AO that assessee was having one single project, it has been vehemently stated by the Ld. Counsel that the assertion made by the AO is factually incorre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue was also deliberated by Mumbai Bench of the Tribunal in the case of PineBridge Investments Capital India Private Limited (I.T.A. No. 2940/Mum/2011 dt 27th July, 2016). In this case issue before the bench was to decide that in the case of newly set up company whether the expenses are allowable only after the business was 'commenced' or after it was 'set-up', and when that stage can be said to be achieved in the case of a company. It was held by the bench that as per law expenses are allowable after the business is 'set up' even if it is not yet actually 'commenced'. Relevant part of observations containing reasoning given by the bench is reproduced hereunder: ".......The distinction is this that when a business is established and is ready to be commenced then it can be said that business is 'set up'. But before it is ready to commence business, it is not set up. In other words, for setting up of business, what is required is readiness for commencement of business and actual commencement of business would not be necessary......... ........It may be noted from the perusal of the proviso to 'section 3' that in the case of newly set up business, the previous year shall be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all requisite approvals have been received by the assessee, sufficient land has already been purchased, marketing brochures were issued, advance was received from the customers and taking into account the totality of the facts and circumstances of the case, it can clearly be said that business of the assessee was 'set up'. It is well settled law that once business is set up, all the expenses that relate to the period under consideration should be allowed as business expenses of the said period. In this regard, the Ld. Counsel of the assessee has rightly relied upon the judgment of Hon'ble Supreme Court in the case of CIT vs Sarabhai Management Corporation Ltd (supra). The Ld. Counsel had also relied upon two decisions of the Tribunal as have been mentioned above, which also support the view taken by us. Reference can be made to the decision of Mumbai Bench of the Tribunal in the case of M/s Lodha Palazzo vs ACIT (supra) wherein, on identical facts, the AO had treated the expenses claimed by the assessee as business expenses as part of cost of WIP. After analyzing the complete facts of the case, the Bench held that the expenses incurred in the normal course of business, which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral administrative cost and selling cost does not constitute the cost of the project. He, therefore, has submitted that as per Guidance note, AS 2 and even AS 7, the general administrative expenses and selling expenses are not project cost and are to be charged to the profit & loss account in the very same year in which they are incurred. In view of the above facts and following the Guidance Notes and Accounting Standards, the assessee has individually worked out the expenses directly related to work in progress and expenses not related to work in progress and accordingly debited in respective heads. The Ld. Counsel has further relied upon section 145A of the Act, which read as under: "Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145,- (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be- ' (i) in accordance with the method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to construction of the project but is part of the administrative expenses. Similarly, the office and administrative expenses and selling and marketing expenses are to be charged to the profit & loss account in the very same year in which they are incurred and have to be excluded from the cost of inventories for working out closing WIP as per the guidelines issued by the ICAl, Accounting Standard AS-2 and AS-7. The assessee has regularly and consistently been following the said method of accounting as per the provisions of section 145A of the l.T. Act. The AO has not assigned any cogent reason as to why the method, which has been consistently followed by assessee and accepted by the department in past as well in succeeding assessment years and which is in accordance with the recognized principles of accounting by ICAl, is being rejected. In our view, the action of the Revenue Authorities in rejecting the assessee's accounting method, without assigning any reason is not justified. The accounting method followed by the assessee and thereby excluding the indirect expenses such as office employees' salary, administrative expenses and marketing & selling expenses is as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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