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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 ..... equired 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. 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 incorrect. It is true that assessee is developing a large integrated SEZ project, but apart from this, the assessee is having various projects/ sub-projects in hand. Even in the SEZ project, there are various small and big projects. AO’s assumption and assertions appear to be factually wrong. Under these circumstances, we find that the AO’s action in disallowing these expenses by treating them as part of the project cost is not in consonance with the facts of this case and provisions of law as discussed above. It is noted, as discussed in detail above that it is a case of a buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the learned CIT(A) erred in confirming the action of the learned AO in concluding that the Appellant undertakes 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 ₹ 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 cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development of project, but these are items of period cost, therefore, these expenses have been correctly debited in the P L account for the year under 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The main reason given by Ld. CIT(A) was that in the case of assessee, the entire cost was attributable and relatable to one single contract which was in hand, therefore as such none of the costs can be excludible from it and since entire business expenses are related to one single contract, the same have to be treated as WIP 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses debited by the assessee in the P L account under the head of sales and marketing, administrative expenses and finance expenses pertain to the year under consideration and should be allowed as business expenses of the year under consideration as has been claimed by the assessee or these should be added to the cost of WIP of the projects 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AS-7 states as under:- Contract Costs 15. Contract costs should comprise: (a) costs that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; and (c) such other costs as are specifically chargeable to the customer under the terms of the contract. 16. Costs that relate 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e attributed to contract activity or cannot be allocated to a contract are excluded from the cost of construction, for example, general administration costs, selling costs, depreciation on those assets which are not used in construction activities, etc. In the light of the aforesaid provisions, we have analysed the expenses which were debited by the assessee in the P L account but disputed by the AO. During the course of hearing before us, following 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 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wrongly taken by AO 1,53,23,695 - Total (B) 19,22,92,827 - 19,22,92,827 Finance Charges Interest on bank overdraft 2,00,28,581 2,00,28,581 Interest on vehicle loan 2,61,795 2,61,795 Bank charges 2,12,727 2,12,727 Total (C) 2,05,03,103 2,05,03,103 Total (A) + (B)+ (C) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incorrect. It is true that assessee is developing a large integrated SEZ project, but apart from this, the assessee is having various projects/ sub-projects in hand. Even in the SEZ project, there are various small and big projects. In support of his argument, Ld. Counsel brought before us following details to show that various projects have been taken by the assessee, as briefly stated below: 15. Nothing wrong or incorrect on facts has been pointed out by the Ld. DR in the aforesaid details submitted by the Ld. Counsel. Thus, from the above, it is noted by us that AO s assumption and assertions appear to be factually wrong. Under these circumstances, we find that the AO s action in disallowing these expenses by treating them as part of the project cost is not in consonance with the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 period beginning with the date of setting up of the business or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year. Thus, we need to find out when the business of the assessee company can be said to be set-up . The business may be commenced subsequently, but for the purpose of allowing the expenses, it has to be seen that when the business can be said to be set- up ... 17. Similar view was taken in another judgment in the case of M/s DHL Express (I) Pvt. Ltd. Vs. ACIT 124 TTJ 108 (Mumbai) observing that the date of setting up of business and date of commencement of business are distinct and the expenses incurred after the setting up of the business are deductible as revenue expenditure as held by the Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 not relatable to a particular project should be allowed as expenses incurred for the year under consideration by observing as under:- 6. We have heard the rival contentions and gone through the records. The Ld. counsel for the assessee has relied upon the Expert Advisory Committees Report (EAC) on applicability of revised AS 7 to enterprises undertaking the construction activities on their own account as a venture of commercial nature (copy placed at page 49 50 of paper book) wherein it has been stated that revised AS -7 shall not be applicable to the builders undertaking the commercial activity on their own and it was also stated that the work in progress shall constitute inventory for the builders and shall be valued as per AS-2 issued by the Institute of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. 9. The Ld. Counsel, therefore, has contended that the assessee has been regularly following the method of accounting recognized by the accounting principles to value the inventory. The assessee had followed the same method of valuing the inventory in preceding year as well as in succeeding years. Even in the assessment year 2010-11, it has debited and claimed the identical nature of expenses which had been accepted as deductible expenses in assessment order passed u/s 143(3) of the IT Act. The assessee being regularly following the accounting method duly recognized by the accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 per the recognized principles of accountings and as such the claim of the assessee deserves to be allowed. We hold accordingly. The additions made by lower authorities on this issue are hereby ordered to be deleted. 21. Similar view has been followed by the Mumbai Bench in the case of Hiranandani Palace Garden Pvt Ltd vs ACIT (supra). It has also brought to our notice that same method of accounting has been consistently followed by the assessee in all the subsequent years. Once a particular method of accounting has been followed consistently and apparently the same is not contrary to law or facts of the case, then the AO is not permitted to disturb the same only because as per him the some other method ..... X X X X Extracts X X X X X X X X Extracts X X X X
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