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TMI Blog2019 (8) TMI 549X X X X Extracts X X X X X X X X Extracts X X X X ..... ch interest cost in the year of incurrence. The various decisions which have been relied upon by the ld AR were rendered solely in context of section 36(1)(iii) and the issue relating to the method of accounting, and the interplay between section 36(1)(iii) and method of accounting have not been examined in those decisions and hence, the said decisions doesn t support the case of the assessee. In the result, the finance cost and interest paid to partners and others will be required to be accumulated as part of work-in-progress and cannot be claimed in the year under consideration. In respect of other expenses debited in the profit/loss account, we find that these include JDA expenses, salary of employees at site, site office expenses. These expenses are directly related to construction and development activities and should therefore form part of work-in-progress and therefore, cannot be claimed in the year under consideration. Rest all expenses are in nature of general administrative and overhead expenses and has rightly been claimed for tax purposes.- In the result, the ground of revenue s appeal is partly allowed. Reclassification of income from the head of Income from ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee is engaged in the business of construction and development of Group housing projects. It filed its return of income on 15.11.2014 declaring business loss of ₹ 1,24,16,176/-. During the course of assessment proceedings, the Assessing Officer, after review of the assessee s profit and loss account, observed that the assessee is doing the work of construction and development, no sales have commenced till the end of financial year under consideration, however, the assessee has debited huge interest and other expenses in its profit loss account and has declared and claimed current year loss of ₹ 1,24,16,176/-. The assessee company was asked to show-cause as to why the expenses claimed in profit loss account may not be disallowed and capitalized, as the sale of project has not started. In response, the assessee submitted that it follows percentage project completion method for revenue recognition. The assessee had secured development rights in respect of plot of land and the loan was utilized for purchasing the land which constituted stock in trade in its hand as the assessee had undertaken the project of construction of flats and accordingly the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was further submitted that the assessee follows percentage of completion method in accordance with the guidance note on recognition of Revenue on Real Estate Transactions, issued by the Institute of Chartered Accountants of India for purpose of Revenue recognition. As per the guidance note, the Revenue should be recognized only when the stage of completion of the project reaches a reasonable level of development and reasonable level of development is not achieved if the expenditure incurred on construction and development costs, during the relevant previous year, is less than 25% of the total estimated construction and development cost for the entire project. During the year, given that the assessee company has incurred approximately 10% of the total estimated project cost, it has not recognized revenues. However, in the subsequent years, where the assessee company has incurred total expenditure on construction and development costs which was more than 25% of the total estimated construction and development costs on the project, revenues have been recognized in such financial years. It was further submitted that for computation of Revenue, the stage of completion was arrived a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt findings of the ld CIT(A) which are under challenge before us and the same are contained at para 3.1.2 of his order which are reproduced as under:- 3.1.2 Determination: ( i) I have duly considered the submissions of the appellant, assessment order and the material placed on record. The brief facts of the case are that the appellant firm was engaged in the business of developer and builder. In its profit and loss account for the year under consideration, it has not declared any sales but has debited various expenses totaling to ₹ 1,24,41,230/- and has claimed net loss of ₹ 1,24,16,176/-. In the assessment order, the AO has disallowed the entire expenses of ₹ 1,24,41,230/- by observing that since there was no income during the year under consideration, therefore, no expenses are allowable. It would be appropriate to summarize the expenses claimed by the appellant in its profit and loss account as under:- Head of expenses Amount (in Rs.) Finance cost 225 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture during the year under consideration on construction and development cost was approximately 10% of the total estimated project cost, therefore, no revenue was recognized during the year under consideration. However, in the subsequent years i.e. AY 2015-16 and 2016-17, it has recognized revenue from operations to the tune of ₹ 6.71 Crore and 6.06 Crore respectively. ( iv) Therefore, in view of the above discussion and looking to the totality of facts and circumstances of the case, especially to the fact that the appellant is following percentage of completion method, I do not find any justification for the AO to disallow the total expenditure claimed by the appellant in its profit and loss account and thus, the AO is hereby directed to allow the same. Hence, this ground of appeal is hereby allowed. 6. Both the parties were heard at length during the course of hearing and relevant material available on record have been examined. 7. We agree with the findings of the ld CIT(A) that mere absence of sales during the year cannot be a basis to hold that the business of the assessee has not commenced and consequently, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other development and construction cost, being intrinsic part of project cost, as work-inprogress and then allow the same as and when the assessee achieve the desired project completion threshold and starts recognition of revenues and corresponding costs. 8. As per guidance note on accounting for real estate transactions, project cost in relation to a project ordinarily comprise of borrowing cost which are incurred directly in relation to a project or which are apportioned to a project in accordance with AS-16 on Borrowing costs. As per AS-16, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of cost of that asset and other borrowing costs are recognized as an expense in the period in which they are incurred. A qualifying asset has been defined as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale which includes manufacturing plants, power generating facilities, inventories that require a substantial period of time to bring them to a saleable condition. In the instant case, interest cost has been incurred in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration. Rest all expenses are in nature of general administrative and overhead expenses and has rightly been claimed for tax purposes. 10. In the result, we set-aside the order of the ld CIT(A) to the extent of the finance cost, interest paid to partners and others, JDA expenses, salary of employees at site and site office expenses as all these costs/expenses are directly connected to the housing projects being undertaken by the assessee and are required to be accumulated as part of work-in-progress and cannot be claimed in the year under consideration and the order of the Assessing officer to this extent is sustained. In the result, the ground of revenue s appeal is partly allowed. 11. In ground no. 2, the Revenue has challenged the reclassification of income from the head of Income from other sources to business income and also the fact that the same has been directed to be allowed set-off against business loss claimed by the assessee. We find that in schedule 11: other income of the financial statements, the assessee has shown discount received of ₹ 8494 and interest received of ₹ 17,260. The discount receipt seems to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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