Income Tax Appellate Tribunal - Mumbai
Lodha Palazzo , Mumbai vs Assessee on 10 December, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "A", MUMBAI
BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND
SHRI SANJAY GARG, JUDICIAL MEMBER
ITA No.2298/M/2012
Assessment Year: 2008-09
M/s. Lodha Palazzo, ACIT, 15(1), Mumbai
216, Shah & Nahar Industrial 1st Floor, Matru Mandir,
Estate, Vs. Tardeo,
Off Dr. E. Moses Road, Worli, Mumbai - 400 007.
Mumbai - 400 018
PAN: AACFL6609G
(Appellant) (Respondent)
Assessee by : Shri Vijay Mehta, A.R.
Revenue by : Shri Asghar Zain VP., D.R.
Date of Hearing : 08.10.2014
Date of Pronouncement : 10.12.2014
ORDER
Per Sanjay Garg, Judicial Member:
The present appeal has been filed by the assessee against the order dated 31.01.12 of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] relevant to assessment year 2008-09. The assessee has taken the following grounds of appeal:
"On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) - 38, Mumbai, erred in law and in facts in considering aggregate indirect expenditure of Rs.48,74,727 i.e. employee cost Rs.760,169, administrative expenses Rs.137,574 (both net of expenses allocated to property under development) and selling/marketing expenses Rs.39,76,983 for calculating closing work- in-progress as on 31 March 2008 for the reason that same is not allowable as revenue expenditure.
2. Without prejudice to ground no. 1 above, on the facts and in the ITA No.2298/M/2012 2 M/s. Lodha Palazzo circumstances of the case and in law, the learned CIT(Appeals) erred in law and in facts in calculation of Rs.29,94,659 to be added to work in progress in respect of expenditure mentioned in ground no. 1 above.
3. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in not adjudicating on set off of brought forward losses of Rs.20,77,926 for assessment year 2007- 08".
Grounds No.1 &2
2. The assessee through grounds No.1 &2 of the appeal has agitated the disallowance of Rs.7,60,169/- being employee cost, Rs.1,37,574/- being office and administrative expenses and Rs.39,76,983/- being selling and administrative expenses.
3. The brief facts of the case are that the assessee is a partnership firm engaged in the business of builders and property developers. During the financial year 2006-07, the assessee had started the construction of a project named as "Lodha Palazzo". The Assessee had been following percentage completion method for recognising the revenue from the project. During the year under consideration, the assessee had completed 64% of the construction of the project. The assessee had sold flats measuring aggregate area of 19,000 sq. feet and on the basis of 64% of the construction completed, the assessee recognised the revenue of Rs.11,23,72,609/- for the year under consideration, which was computed in proportion of area sold to the total construction area of 31,529 sq. ft.. The assessee claimed revenue expenditure of Rs.7,60,169/- being proportionate employee cost, Rs. 1,37,574/- being proportionate office and administrative expenses and Rs. 39,76,983/- being selling and administrative expenses and debited the same to its Profit & loss account.
4. During the course of assessment proceeding, Assessing Officer (hereinafter referred to as the AO) asked the assessee to explain as to why the above stated ITA No.2298/M/2012 3 M/s. Lodha Palazzo expenses relating to proportionate Employees cost, Office and administrative expenses and selling & marketing expenses should not be disallowed and carried forward to the work-in-progress. The assessee explained that the employee cost of Rs.7,60,169/- was in respect of salary paid to the employees who were looking after the administration of office and not directly related to construction of the project. Similarly, for the office and administrative expenses, the same were incurred for office and administration purposes further that the selling and marketing expenses had been incurred for selling and marketing of flats. The above stated expenses were not having any nexus with the project under construction; hence, the same had been claimed as deductible revenue expenditure for the year. The AO, however, rejected the assessee's claim and held that as the assessee had only one project under construction and therefore, all expenses were required to be capitalised to work-in-progress and should have been claimed as deduction in subsequent year in proportion of income offered. The AO, therefore, recomputed the closing work-in-progress at Rs.16,46,22,383/- as against the closing work-in- progress of Rs.13,72,72,448/- reflected by the assessee in its accounts.
5. In appeal, the Ld. CIT(A) held that the indirect expenses such as Employees cost, Office & administration and marketing and selling expenses have to be allowed as revenue expenditure in the previous relevant year only in proportion to the percentage of completion in respect of the area sold. The balance amount has to be added to arrive at the closing WIP. He therefore recomputed the amount to be carried forward to the closing work-in-progress at Rs.29,94,659/- and worked the closing work-in-progress for the year under consideration at Rs.14,02,67,107/-. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
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 ITA No.2298/M/2012 4 M/s. Lodha Palazzo 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 Chartered Accountant of India (ICAI). The Ld. Counsel has further submitted that the assessee has accordingly followed the Accounting Standard -2 for determining the work in progress. He has further brought our attention to para 13 of As-2, wherein it has been mentioned that the following expenses have to be excluded from the cost of inventories being work-in-progress:
"(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;
(c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and
(d) selling costs."
7. The Ld. Counsel has further relied upon para 2.4 of the "Guidance Note on Accounting for Real Estate Transaction" issued by the Institute of the Chartered Accountants wherein it has been stated that:
"The following cost should not be considered part of construction cost and development cost if they are material:
(a) General administration costs;
(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."
8. The Ld. Counsel therefore has stated that as per the above guidelines, the administrative and selling expenses have been specifically excluded from the cost of inventory for work for closing WIP. The Ld. Counsel has further submitted that even as per AS -7 vide paragraph 19 it has been mentioned that ITA No.2298/M/2012 5 M/s. Lodha Palazzo the general 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) 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 I.T. Act. The assessee being regularly following the accounting method duly recognized by the accounting principles and guidelines as stated above and in view of the provisions of section 145A has rightly claimed the proportionate salary expenses, administrative expenses and selling expenses as revenue expenditure. The Ld. counsel has further contended ITA No.2298/M/2012 6 M/s. Lodha Palazzo that the Special Bench decision of the Tribunal relied upon by the lower authorities in the case of "Wall Street Construction Ltd. Vs JCIT" [101 ITD 156] is relating to interest expenditure identifiable with the project. In assessee's case, dispute is not with respect to interest as the assessee itself has added the interest cost to the work-in-progress and claimed it in subsequent year in the proportion of revenue offered. Thus, the facts in assessee's case are quite distinguishable and the decision of Special Bench (supra) is not applicable to the facts of the assessee's case.
10. The ld. DR on the other hand has relied upon the findings of the lower authorities. He has stressed that the Ld. CIT(A) has rightly appropriated the indirect expenses to the WIP in proportion to the percentage of completion in respect of the area sold.
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 AO has accepted the deductibility 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 provisions of section 145A of the I.T. Act. The ITA No.2298/M/2012 7 M/s. Lodha Palazzo 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 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.
Ground No.3
12. The Ld, representatives of the parties have stated that since the Ld. CIT(A) has failed to adjudicate this ground, the same should be restored to the CIT(A) for adjudication. This ground/issue is accordingly restored to the file of the CIT(A) for adjudication after giving the parties a proper opportunity to present their case.
13. In the result, the appeal of the assessee is hereby allowed.
Order pronounced in the open court on 10.12.2014.
Sd/- Sd/-
(D. Karunakara Rao) (Sanjay Garg)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 2014.
* Kishore, Sr. P.S.
ITA No.2298/M/2012
8 M/s. Lodha Palazzo
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT (A) Concerned, Mumbai
The DR Concerned Bench
//True Copy// [
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.