Income Tax Appellate Tribunal - Mumbai
Macrotech Construction P.Ltd, Mumbai vs Acit Cen Cir 42, Mumbai on 27 December, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" Bench, Mumbai
Before Shri R.C. Sharma, Accountant Member
and Shri Amarjit Singh, Judicial Member
ITA No. 5283/Mum/2014
(Assessment Year: 2007-08)
M/s. Macrotech Consntruction A C I T, Circle 6(3)
Pvt. Ltd. Room No. 522, 5th Floor
412, Floor-4, 17G Vardhaman Vs. Aayakar Bhavan, M.K. Road
Chamber, Cawasji Patel Road Mumbai 400020
Fort, Mumbai 400001
PAN - AAACM6092K
Appellant Respondent
ITA No. 5303/Mum/2014
(Assessment Year: 2007-08)
ACIT, Central Circle 42 M/s. Macrotech Consntruction
Room No. 655, 6th Floor Pvt. Ltd.
Aayakar Bhavan, M.K. Road Vs. 412, Floor-4, 17G Vardhaman
Mumbai 400020 Chamber, Cawasji Patel Road
Fort, Mumbai 400001
PAN - AAACM6092K
Appellant Respondent
Assessee by: Shri Vijay Mehta
Revenue by: Shri Suman Kumar
Date of Hearing: 05.10.2018
Date of Pronouncement: 27.12.2018
ORDER
Per R.C. Sharma, AM
These are cross appeals filed by the assessee and Revenue against the order of the CIT(A)-38, Mumbai dated 24.04.2014 for A.Y. 2007-08 in the matter of order passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter "the Act").
2 ITA No. 5283/Mum/2014M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3)
2. The assessee has taken the following grounds of appeal: -
"1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) („CIT(A)'] erred in confirming addition made by Assistant Commissioner of Income-tax ['ACIT'] by not accepting method of accounting adopted by the Appellant, which is in conformity with the Accounting Standards and the Guidance Note on Accounting for Real Estate Transactions issued by Institute of Chartered Accountants of India. Hence, impugned disallowance upheld by the CIT(A) to be deleted.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the addition made by the ACIT without appreciating that the assessee has been consistently following the Accounting Policy for determining the work-in-progress as well as the profitability of its construction development project on year to year basis. Hence, impugned disallowance upheld by the CIT(A) to be deleted.
3. On the facts and in the circumstances of the case and in law, the ACIT erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the ACIT to be directed to drop the penalty proceedings under section 271(1)(c) of the Act."
The ground of appeal raised by Revenue reads as under: -
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition made as per the provisions of Section 14A of the I.T. Act without appreciating the fact as assessee has incurred indirect expenses for earning exempt income."
3. Rival contentions have been heard and record perused. The brief facts of the case are that the assessee is engaged in the business of construction. During the course of scrutiny assessment the AO disallowed expenses by invoking provisions of Section 14A of the Act. Addition was also made on account of expenditure pertaining to employee cost, administrative expenses and selling and marketing expenses debited to the Profit & Loss Account. The AO was of the view that expenditure incurred by the assessee under these heads should be capitalised and cannot be allowed as revenue expenditure. By the impugned order the CIT(A) upheld the action of the AO by placing reliance on the decision of the Hon'ble Supreme Court in the case 3 ITA No. 5283/Mum/2014 M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3) of CIT vs. Madras Industrial Investment Corporation 225 ITR 802 and the decision of the Hon'ble Bombay High Court in the case of CIT vs. Taparia Tools Ltd. 260 ITR 102. However, the addition made under Section 14A was deleted by the CIT(A) after having the following observations: -
7.0 The facts of the case, the stand taken by the A.O in the assessment order, the grounds of appeal and the written submissions filed by the appellant during the appeal proceedings have been carefully considered. As submitted by the appellant, a sum of Rs.54.01 crore was received on account of security premium and during the year the maximum outstanding investment made is Rs.36.50 crore and therefore, the matter is covered by the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. 313 ITR 340. It was held by the Hon'ble High Court that if there are funds available both, interest-free and over draft and/or loans are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. Since in the appellant‟s case, own funds are more than the investments made, respectfully following the decision of the Hon'ble High Court of Bombay in the case of Reliance Utilities and Power Ltd., referred above, the disallowance made by the A.O. u/s 14A of the Act is hereby deleted."
4. Against the above order of the CIT(A), both assessee and Revenue are in further appeal before us. Revenue is aggrieved for deleting the addition made under Section 14A of the Act, whereas the assessee is aggrieved for disallowing the expenditure incurred on employee cost, administrative expenses and selling and marketing expensed debited to Profit & Loss Account.
5. We have considered the rival contentions and carefully gone through the order of Authorities below and deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us.
4 ITA No. 5283/Mum/2014M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3) From the record we found that the assessee is a developer and undertaking construction activity of building for the purpose of sale. The AO was of the view that the expenditure incurred on the above heads were to be capitalised and cannot be allowed as Revenue expenditure. From the record we found that assessee follows mercantile system of accounting. In order to recognise the revenue from the project, it follows percentage completion method of accounting. All the expenses incurred by the assessee which are directly attributable to the project have been debited to work in progress and the expenses which were not attributable to the project have been debited to Profit & Loss Account During the assessment year under consideration, the assessee company has incurred various expenses which inter alia includes (i) salary and employee related expenses of Rs. 6, 88, 74, 859/- (ii) Office and administrative expenses of Rs. 3,72,71 ,119/- and (Hi) selling and marketing expenses of Rs. 1, 99,50,317/-. All the expenses incurred by the assessee Company have been debited/capitalised to the work in progress except that part which relates to administration of business; as under:
Sr. Particulars Expenses Expenses Expenses debited to No. Incurred Capitalised profit & Loss A/c.
i) Salary and employee 6,88,74, 859/~ 5,50,99,8877- 1,37,74,972/-
related expenses
ii) Office and 3,72,71, 119/- 2J2,40,668/~ 1,00,30,451/-
administrative expenses 5 ITA No. 5283/Mum/2014 M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3)
iii) selling and marketing 1,99,50,317/- f,99,50,3777- expenses Total 12,60,96,295/- 8,23,40,5557- 4,37,55,740/-
6. In the above table, in the case of employee cost and administrative expenses, the expenses capitalised to work in progress represents 80% of the total expenses incurred and remaining 20% is debited to Profit & Loss Account. Detailed workings of expenses incurred are given in statement filed before lower authorities.
7. The above expenses have been individually determined and debited to either work in progress or to Profit & Loss Account. In order to calculate the work in progress and for recording the transaction it has relied on 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", wherein it was stated that 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 Chartered Accountant of India (ICAI). Operational Part of the report is reproduced as under:-
Following queries have been considered by the EAC: (a) Whether the revised AS 7 would be applicable to the company for accounting for new housing project, which may be undertaken by the company on or after 1.4.2003 on the same business model as mentioned in the facts of the case.6 ITA No. 5283/Mum/2014
M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3)
(b) In case revised AS 7 is not applicable to the company, whether the company can value its inventories in accordance with the Accounting Standard (AS) 2, Valuation of Inventories', issued by the Institute of the Chartered Accountants of India, considering the definition of Inventory as 'an asset in the process of production for the purpose of sale', i.e. whether the activity of developing housing projects on its own account as a I commercial venture by the company can be construed as a production activity. j
(c) If the activities of the company cannot be considered as a production activity and consequently AS 2 is also not applicable, which Accounting Standard should be followed for recognition and valuation of its construction of its construction work-in-progress?" [Emphasis supplied] The above queries have been answered by the EAC as under:
(a) The revised AS 7 would not be applicable to the company for accounting for new housing project which are undertaken by the company during the accounting periods commencing on or after 1.4.2003.
(b) The activity of developing housing projects on its own account as a commercial venture by the company is of the nature of production activity and, therefore, should be construed as such. The inventories should be valued by the company in accordance with AS 2 as explained in paragraph 2 above.
(c) AS 2 is relevant for the valuation of inventories including construction work-in-progress and not for recognition of revenue. AS 9 would be relevant for recognition of revenue;
8. It is very clearly evident from the above that for valuing the work-in-
progress, Accounting Standard 2 has to be followed as categorically stated by the EAC, which has been duly followed by the assessee for determining the work in progress. The AS 2 refers to valuation of Inventories. On perusal of the AS 2 (inventory valuation) at paragraph 13, following expenses have been categorically stated to be excluded from the inventories being work-in-
progress in the assessee's case:
(a) abnormal amounts of wasted materials, labour or other production costs;
(b) storage costs, unless those costs are necessary in the production process before a further production stage;7 ITA No. 5283/Mum/2014
M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3)
(c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and
(d) selling costs.
9. Therefore, it is very clear from the above wordings ofAS-2 that the administrative expenses which are not related to bringing the inventories (work-in-progress) to their present location and condition are to be excluded from the Inventories being work in progress in the assessee's case.
Moreover, it is also categorically stated that the selling expenses shall not form part of Inventories. The assessee being following the accounting policies framed by the ICAI by way of AS 2 and report of EAC, worked out the closing work in progress considering the expenses directly attributable to the construction of the project and the expenses which were not directly attributable to work in progress has been debited to Profit & Loss account.
10. The above accounting method followed by the assessee has been also fortified by the "Guidance Note on Accounting for Real Estate Transaction"
issued by the Institute of the Chartered Accountants which vide paragraph 2.2 defines the "Project Cost (i.e. which expenses shall be included while determining the project cost) and at paragraph 2.4 it has been specifically stated that:
"The following cost should not be considered part of construction cost and development cost if they are material:
(a) General administration costs;
8 ITA No. 5283/Mum/2014
M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3)
(b) Selling cost;
(c) Research and development cost;
(d) Depreciation of idle plant and equipment;
(e) Cost of unconsumed or uninstalled material delivered at site; and
(f) Payment made to sub-contractors in advance of work performed."
11. Furthermore, in Guidance note on Accounting for Real Estate Transaction also it was stated that the general administration cost and selling cost shall not form part of work in progress (fefer page 66 of paper book}. In short, the accounting treatment given in Guidance note on Real Estate Transaction is at par with AS 2 reproduced above and the assessee has followed these accounting principles in preparing its accounts year after year including the year under consideration. We found that the assessee, in compliance to these accounting principles, determined the expenses which are not related to the work in progress and debited the same to the profit & loss account being administrative expenses and selling expenses incurred for day to day functioning of the business and marketing; likewise, the expenses directly attributable to the work in progress have been debited to work in progress.
12. Moreover it is not possible to run a business without incurring the administrative cost Apart from the construction related expenses, the assessee was also obliged to incur various administrative and selling 9 ITA No. 5283/Mum/2014 M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3) expenses in order to run its business smoothly which is purely in the nature of revenue expenses not related to constriction activity of the assessee; hence, they are allowable in the year in which they are incurred.
13. As per our considered view the revenue expenditure in the nature of employee cost, etc. cannot be capitalised to work-in-progress as per the Accounting Standard as well as the accounting policy and judicial pronouncements. We also found that the method adopted by the assessee is duly supported by the consistent practice of the assessee both in preceding as well succeeding years which have been accepted by the Department under scrutiny assessments. The issue under consideration is also covered by the decision of the Tribunal in assessee's sister concern, Sunny Vista Realtors Pvt. Ltd. in ITA No. 4580/Mum/2013 dated 11th January, 2017. In this case also the Tribunal was placed with similar situation which is evident from the facts mentioned on page No. 7 of the said order. We find that disallowance of expenditure made by the AO in that case was on account of sales and marketing, administrative expenses and finance expenses. After taking note of the Accounting Standard-7 in para 9, the Tribunal came to the conclusion in para 10 of its order that the Accounting Standared-7 has no applicability in the case of developer. We observe that in the case of assessee the CIT(A) has also held that Accounting Standard-7 is not applicable in the case of the assessee. Furthermore, the Tribunal on page 15 onwards have held that the revenue expenditure in the nature of administrative expenditure, etc. cannot be capitalised and finally deleted the addition after relying upon the Tribunal's decision in the case of another sister concern, M/s. Lodha Plazz as well as Hiranandani Palace Pvt. Ltd. Reliance can also be placed on the decision of the Coordinate Bench in the case of sister concern of the assessee, namely, M/s. Lodha Palazzo in ITA 10 ITA No. 5283/Mum/2014 M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3) No. 2298/Mum/2012 dated 10.12.2014. The relevant part of the above decision is reproduced herein below:
"11. We have considered rival contentions and carefully gone through the orders of the authorities below. The percentage completion method of accounting has been regularly followed by the assessee. In the succeeding assessment year 2010-11, the A.O has accepted the deducibility of the identical nature of expenses in the assessment order passed u/s 143(3) of the I.T. Act. We agree with contention of the Ld. Counsel for the assessee that the employee cost refers to salary paid to the employees who are looking after the administration of office and not directly 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 ICAI, Accounting Standard AS-2 and AS-7. The assessee has regularly and consistently been following the said method of accounting as per the provision of section 145A of the IT. Act. The A.O has not assigned any cogent reason as to why the method, which has been consistently followed by the 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 ICAI 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 the lower authorities on this issue are hereby ordered to be deleted."
14. We have also carefully gone through the assessment order passed in assessee's case under Section 143(3) of the Act, wherein the AO himself has accepted assessee's contention of this expenditure being revenue in nature. We also found that the assessee has already capitalised large part of expenditure incurred and its opening work-in-progress and closing work-in- progress are Rs.202.91 crores and Rs.256.24 crores, respectively. In this 11 ITA No. 5283/Mum/2014 M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3) view of the matter the bonafide of the assessee's consistent accounting policy cannot be doubted.
15. We observe that while disallowing these expenditure as revenue expenditure the CIT(A) in para 5.5 of his order observed that Accounting Standared-1 is not applicable for valuation of work-in-progress. This is factually incorrect as is evident from the paragraph No.1 of Accounting Standared-2. As per the said paragraph the Accounting Standard would not be applicable in respect of work-in-progress of construction contracts to which Accounting Standared-7 is applicable. Furthermore, Accounting Standared-2 is not applicable in respect of work-in-progress of business of service providers. Under these facts and circumstances it is not correct to say the Accounting Practice-2 is not applicable to developers and since assessee is in the business of development of building, Accounting Standared-2 is applicable to the assessee.
16. We also observed that in the case of M/s. Lodha Plazzo, the Tribunal has specifically observed in page 3, para 6 that Accounting Standard-2 would be applicable in the case of developer. The Tribunal has arrived at this conclusion after considering the Expert Advisory Committee Report of the Institute of Chartered Accounts of India.
17. We also found that the CIT(A) has relied upon the decision of the Hon'ble Supreme Court in the case Madras Industrial Investment Corporation (supra) and the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. (supra). However, the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. 372 ITR 605 has been subsequently reversed by the Hon'ble Supreme Court. Not only this, the Hon'ble Supreme Court has duly considered the earlier decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation (supra), which has also been relied upon by the CIT(A). The 12 ITA No. 5283/Mum/2014 M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3) relevant paragraphs of the Hon'ble Supreme Court decision reads as under:-
"15. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same.
17. Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.
18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, , which up to now has been restricted to the cases of debentures."
18. In view of the above discussion, we do not find any merit for the disallowance made by the AO on account of employee, cost, administrative expenditure and selling and marketing expenses, which are essentially in the nature of revenue expenditure.
19. In the result, appeal filed by the assessee is allowed in terms indicated hereinabove.
20. With regard to Revenue's appeal, we observed that a categorical finding has been recorded by the CIT(A) that during the year assessee has received Rs.54.01 crores on account of security premium whereas maximum outstanding amount of investment made was Rs.36.50 crores. Since own 13 ITA No. 5283/Mum/2014 M/s. Macrotech Consntruction P. Ltd./A C I T - 6(3) fund was more than the investment, no disallowance was warranted in terms of the decision of the Hon'ble Jurisdictional High Court in the case of Reliance Utilities and Power Ltd. 313 ITR 340. The finding so recorded with regard to the availability of interest free funds vis-a-vis investment has not been controverted by the learned D.R. by bringing on any cogent material on record. We do not find any infirmity in the order of the CIT(A) for deleting the addition under Section 14A by recording definite finding and applying the proposition of law laid down by the Hon'ble Jurisdictional High Court in the case of Reliance Utilities and Power Ltd. (supra) .
21. In the result, the appeal filed by the assessee is allowed in terms indicated hereinabove whereas the appeal filed by Revenue is dismissed.
Order pronounced in the open court on 27/12/2018.
Sd/- Sd/-
(Amarjit Singh) (R.C. Sharma)
Judicial Member Accountant Member
Mumbai, Dated: 27/12/2018
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) -38, Mumbai
4. The CIT - Central-IV, Mumbai
5. The DR, "B" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.