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TMI Blog2021 (11) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... ny income from the projects undertaken during the year under consideration - As per AO Expenditure should have been treated as work in progress - CIT- A deleted the addition - HELD THAT:- No infirmity in the order of Ld. CIT(A) as the CIT(A) has correctly appreciated the facts in the light of ratio laid down by the Hon ble Jurisdictional High Court rendered in the case of CIT vs Samsung India Electronics Ltd . [ 2013 (7) TMI 335 - DELHI HIGH COURT] and ESPN SOFTWARE INDIA P. LTD. [ 2008 (3) TMI 90 - DELHI HIGH COURT] - Revenue could not rebut the finding of Ld.CIT(A) that brokerage forms part of selling cost therefore, allowable expenditure. The Ground No.2 raised by the Revenue is dismissed. Interest free advance given to group companies - HELD THAT:- CIT(A) has categorically given a finding that from the financial statement, it was observed that interest was paid to Greater Noida Authority for late payment of installment of the land purchased on deferred credit. It was also recorded that the advances given to the associate concern was out of interest free advances received from booking of the flats. This finding on fact was not rebutted by the Revenue by furnishing any con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aggrieved against this, the assessee preferred appeal before Ld.CIT(A), who after considering the submissions and material placed before him, partly allowed the appeal. Thereby, Ld.CIT(A) deleted the addition of ₹ 15,65,60,883/- made on account of applying POCM, of ₹ 1,63,15,044/- made on account of disallowance of brokerage of ₹ 9,85,667/- made on account of disallowance of interest expenses and confirmed the addition of ₹ 70,520/- as made by making disallowance u/s 14A of the Act. 4. The first ground of Revenue s appeal is in respect of addition made on account of recognition of revenue on the basis of POCM of the project. 5. Ld.CIT DR, Shri Satpal Gulati supported the assessment order and submitted that Ld.CIT(A) committed an error for not sustaining the impugned addition. He submitted that the assessee is engaged in the business of development of housing projects. Therefore, as per Accounting standards as prescribed by ICAI, the assessee was required to recognize the Revenue on the basis of POCM. 6. On the contrary, Ld. Counsel for the assessee opposed the submissions of Ld.CIT DR. He submitted that the law is well settled that no addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Act, 1961 states as under: 145. (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time 2 [income computation and disclosure standards] to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) 3[has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under subsection (2)], the Assessing Officer may make an assessment in the manner provided in section 144.] As per aforesaid provisions of section 145, it is apparent that income of the assessee has to be computed as per method of accounting regularly employed by the assessee. It is provided in sub-section (3) that where the assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only at discussion stage and has not been finalized as yet, therefore, it is not mandatory for the appellant to follow percentage of completion method in AY. 2014-15. It is also seen that Section 145 has not prescribed any such conditions for recognizing the revenue in the real estate transactions. Had the percentage of completion method been mandatory earlier, there would have been no need for the CBDT for releasing the draft of ICDS in May 2017. This implies that POCM is not mandatory for the assessment years prior to 2017-18. In view of these facts, it is held that observation of the Assessing Officer with regard to POCM in the case of appellant is not based on correct appreciation of facts. Accordingly, the POCM method applied by the AO for recognizing revenue in the case of appellant for the year under consideration is rejected and addition made on the basis of such method of ₹ 15,65,60,883/- is deleted. In this regard, reliance is placed on the following judicial pronouncements on the issue: The Hon'ble Supreme Court in the case of Commissioner of Income Tax v. Bilahari Investment P Ltd. (2008) 299 ITR 1 (Hon'ble Supreme Court) held as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed by the Assessee. As pointed out by the CIT (A) in the order dated 2nd July, 2010, the AS of the ICAI did not have any statutory recognition under the Act although it was binding under the Companies Act, 1956. The method of accounting followed by the Assessee in the present case i.e. project completion method was certainly one of the recognized methods and has been consistently following by it. In para 22 of the above judgment, the Court observed as under: 22. The other aspect that appears to have escaped the attention of the ITAT is that the Assessee offered to tax in the subsequent FY the amounts received and therefore there was no actual loss to the revenue. In similar circumstances, the Supreme Court in CIT v. Excel Industries Limited 2013 ITR 295 (SC) observed that the dispute if any raised at the instance of the Revenue would be at best academic. The stand of the Assessee in the present case also finds support in the decision of the Gujarat High Court in CIT-IV v. ShivalikBuildwell (P) Ltd. (2013) 40 taxmmann.com 219 (Gujarat). It was held that the Assessee in that case, who was a developer, was entitled to book the amount received as booking advance as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been transferred to the buyer. If something happens to the building structure, the loss will be of the appellant and not the buyer. Similarly, the reward of ownership has not been transferred to the buyer. Only a builder buyer agreement has been signed as per which it has been clearly provided that conveyance deed / lease deed shall be executed only after full and final payments including all additional charges are paid by the buyer and until that, the ownership of the property shall remain vested with the appellant. The relevant clause of Para 3 of builder-buyer agreement is reproduced here under :- The Sub-Lease Deed / Conveyance deed shall be executed, only after the Allottee(s) has made full final payments, including all other additional charges which are due and payable to the Company. Till the execution of the Sub-Lease Deed / Conveyance Deed and handing over the possession of the Unit, the ownership of the Unit shall remain vested with the Company. This clause clearly establishes that all significant risk and reward of ownership has not been transferred to the buyer, therefore, even as per revised guidance note and AS-9, no revenue could be recognized by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to and from the project site; (f) costs of hiring plant and equipment; (g) costs of design and technical assistance that is directly related to the project; (h) estimated costs of rectification and guarantee work, including expected warranty costs; and (i) claims from third parties. 2.4 The following costs should not be considered part of construction costs and development costs if they are material: (a) General administration costs; (b) selling costs; (c) research and development costs; (d) depreciation of idle plant and equipment; (e) cost of unconsumed or uninstalled material delivered at site; and (f) payments made to sub-contractors in advance of work performed. 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; and (c) construction or development overheads; and (d) borrowing costs. From the above stated facts, it is clear that for recognizing revenue as per the guidance note, one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of brokerage expenses. 10. Ld.CIT DR supported the order of Assessing Officer and submitted that the assessee company had not declared any income from the projects undertaken during the year under consideration. However, the assessee company claimed the expenses incurred towards brokerage related to the project. Ld.CIT DR took us through the assessment order and submitted as per the Assessing Officer, the expenditure should have been treated as work in progress. 11. Per contra, Ld. Counsel for the assessee opposed these submissions and supported the findings of Ld.CIT(A). He submitted that brokerage is a selling expenditure which cannot be capitalized alongwith inventory. He submitted that as per the Accounting Standard 7 which specifically states that selling cost cannot be allocated as cost of construction contract. Further, Ld. Counsel for the assessee reiterated the submissions as made before Ld.CIT(A). 12. We have heard the rival contentions and perused the material available on record. Ld.CIT(A) decided the issue by observing as under:- Decision: I have considered the submission of the appellant and observations of the assessing officer made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prise all the cost of purchase, cost of conversion and other cost incurred in bringing the inventory to their present location and condition. In the case of construction activities the cost of purchase of land and construction cost can only be attributed over the project. The brokerage expenses are purely a selling cost and cannot form a part of inventory. In view of the accounting standard, the brokerage expenses being a selling cost cannot be capitalized with the cost of inventory and cannot be allocated to the construction activity. The brokerage expenses paid are selling expenses and not for acquiring or developing or constructing any asset. Therefore, the same cannot be taken to the work in progress. Even as per para 2.2 of revised Guidance Note (2012) on real estate transactions referred by the A.O., the project cost comprises of: a) Cost of land plus related charges b) Borrowing cost (Attributable to project) c) Construction and development cost As per para 2.4 of the aforesaid Guidance Note provides that Selling Cost shall not be considered as part of construction and development cost. Thus, the brokerage expenses are part of selling expenses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment cost and same has to be allowed in the year in which they have been incurred. Accordingly, the brokerage expenses incurred by the appellant for booking of the flats are allowable expenditure and disallowance made by the AO of ₹ 1,63,15,044/- is deleted. 13. We do not see any infirmity in the order of Ld. CIT(A) as the CIT(A) has correctly appreciated the facts in the light of ratio laid down by the Hon ble Jurisdictional High Court rendered in the case of CIT vs Samsung India Electronics Ltd. vide its judgement dated 09.07.2013 and CIT vs ESPN Software Ltd. [301 ITR 368 (Del)]. Moreover, the Revenue could not rebut the finding of Ld.CIT(A) that brokerage forms part of selling cost therefore, allowable expenditure. The Ground No.2 raised by the Revenue is dismissed. 14. Ground No.3 raised by the Revenue is against the deletion of addition of ₹ 9,85,667/- made by the Assessing Officer on account of interest free advance given to group companies. 15. Ld.CIT DR supported the order of Assessing Officer and relied on the findings given in the assessment order. 16. On the contrary, Ld. Counsel for the assessee supported the order of the Ld.CIT(A) a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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