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Income Tax Appellate Tribunal - Mumbai

Jain Builders (Vasai) , Mumbai vs Department Of Income Tax on 27 October, 2009

            IN THE INCOME TAX APPELLATE TRIBUNAL
                 MUMBAI BENCHES "I", MUMBAI

     BEFORE SHRI. D.K. AGARWAL (J.M.) AND SHRI T.R. SOOD (A.M.)

                       ITA No.264/MUM/2010
                     Assessment Year : 2006-2007

ACIT 12(1)                                    Jain Builders (Vasai)
R.No.117, Aayakar Bhavan,                     221, Ishaq Manzil, Lamington
M.K. Rd., Mumbai - 400 020.                   Rd., Mumbai - 400 007.
                                     Vs.      PAN : AAEFJ6972G

           (Appellant)                                (Respondent)


                         Appellant by : Shri A.K. Nayak
                       Respondent by : Shri Ashok J. Patil

                               ORDER

PER D.K. AGARWAL, J.M.

This appeal preferred by the Revenue is directed against the order dated 27.10.2009 passed by the learned CIT(A) for the Assessment Year 2006-07.

2. Briefly stated facts of the case are that the assessee is a partnership firm engaged in the business of Builders & Land Developers, filed return of income at ` 31,24,060/-. During the assessment proceedings it was interalia observed by the Assessing Officer that during the year, the assessee firm has sold a plot of land for ` 1,25,00,000/-. Against the sale consideration, the expense claimed are cost of land ` 30,62,154/-, Administration & Other Expenses ` 28,80,209/- and Brought Forward expenditure not pertaining to the current financial year ` 41,47,255/-. In all, an expenditure of ` 1,00,89,618/- has been claimed against the sale 2 ITA No.264/MUM/2010 A.Y.: 2006-2007 proceeds. The assessee was asked to show as to how the brought forward expenditure of ` 41,47,255/- not pertaining to the year under consideration is admissible. At the same time, out of the Administrative & Other expenses, there is an accumulated claim of interest of ` 17,43,036/-. The majority of interest portion is not pertaining to current financial year. It was submitted that the assessee is maintaining its accounts on the cash basis and therefore all the expenses were debited to the current year's Profit & Loss account. It was also stated that such expenditure are allowable as assessee follows Project Completion Method. It was further stated that since assessee is following Project Completion Method, the provision of section 72(3) of the I.T. Act are not applicable. It was also mentioned that for the sake of convenience and for the better understanding amongst the partners, said expenses were debited to Profit & Loss a/c on year-to-year basis. The Assessing Officer after considering the assessee's submissions observed that in Form No.3CD, col. No.11(a) the method of accounting mentioned is 'Mercantile' and not 'Cash system of accounting' as contended by the assessee. He further observed that in Tax Audit Report nowhere it is mentioned that assessee is following Project Completion Method for the computation of income/profit. He further observed that on perusal of the past records, it is evident that the assessee firm has filed its return of income from year-to-year with Profit & Loss a/c. and Balance Sheet. In theses returns, nowhere it is stated that assessee is following Project Completion Method as well as cash system of accounting for maintaining the books of accounts. He further observed that as a matter of fact, for the Assessment Year 1994-95, a detailed order u/s.143(3) has been passed by the Assessing Officer on 31.03.1997. In this scrutiny assessment also, nowhere it is stated or mentioned 3 ITA No.264/MUM/2010 A.Y.: 2006-2007 that assessee is following cash system of accounting. The Assessing Officer on going through the details filed, observed that the interest on the loans borrowed have been paid from year to year with tax deducted at source. A ledger account of all the loan creditors have been furnished to indicate that the interest being paid from year to year and a separate account is maintained each year. He further observed that in the return of income filed earlier to Assessment Year 2006-07, nowhere it is mentioned that expense incurred are being accumulated and shown as work-in-progress. The losses incurred on account of payment of interest on loans as well as other administrative & establishment expenses were never sought to be allowed to be carried forward. In view of foregoing observations and more particularly, relying on the Tax Audit Report, that is filed for the first time in the current assessment year for the Assessment Year 2006-07, the Assessing Officer held that the assessee-firm is keeping their books on mercantile basis and also showing the income/losses from year to year and the assessee firm is not following Projects Completion Method. Therefore the Assessing Officer disallowed brought Forwarded expenses of ` 47,41,255/- and added back to the assessee's total income for the year under assessment. The Assessing Officer further disallowed ` 13 lakhs out of interest of ` 17,43,036/- keeping in view the possibility of payment of some interest pertaining to current financial year out of total payment of ` 17,43,036/-. Further the Assessing Officer in the absence of any supporting material also disallowed payment of Architect fees ` 2,00,000/- and accordingly completed the assessment on an income of ` 93,65,320/- vide order dated 01.12.2008 passed u/s.143(3) of the Income Tax Act, 1961 (the Act).

3. On appeal the learned CIT(A) after considering the assessment orders for the Assessment Years 1989-90 and 1994-95 and the accounts of the assessee observed that in the present case, no profits have been shown in the earlier year only expense have been shown as capitalised which are mainly interest expenditure and accordingly directed the Assessing Officer to compute the income on the basis of Project Completion Method.

4. Being aggrieved by the order of the learned CIT(A) the Revenue is in appeal before us challenging in all the grounds the direction of the learned CIT(A) to compute the income under Project Completion Method and in deleting the disallowance of brought forward expense ` 47,41,255/- and administration and other expenses of ` 13 lakhs.

5. At the time of hearing the ld DR submits that for the reasons as mentioned in the assessment order, the learned CIT(A) was not justified in directing the Assessing Officer to compute the income on the basis of Project Completion Method and in deleting the disallowance of brought forward expenses of ` 47,41,255/- and disallowance of Administration expenses and other expenses ` 13 lakhs. He, therefore, submits that the disallowance made by the Assessing Officer be restored.

6. On the other hand, the learned counsel for the assessee while relying on the order of the learned CIT(A) submits that since the assessee is following the Project Completion Method therefore, the learned CIT(A) was fully justified in deleting the disallowance made by the Assessing Officer. The reliance was also placed on the decision of Hon'ble Jurisdictional High Court in the case of CIT vs. Lokhandwala 5 ITA No.264/MUM/2010 A.Y.: 2006-2007 Construction Inds. Ltd. 260 ITR 579 [2003] (Bom.) for the proposition that the assessee is entitled to deduction of interest.

7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that in this case land was acquired in the year 1987 which was lying as it is without any development. During the year, the assessee firm sold plot of land for ` 1,25,00,000/- and has claimed various expenses on the ground that the assessee is following the Project Completion Method therefore, according to him in the year of sale of land the expenses claimed under the head Administration and other expenses ` 28,80,209/- and brought forward expenses ` 41,47,255/- are allowable, besides cost of land ` 30,62,154/-. However, we find that there is no iota evidence to show that the assessee has carried out any construction on the said plot of land and this fact has also been admitted by the learned counsel for the assessee at the time of present hearing that no construction has been taken place on the said plot of land. It was also admitted by the learned counsel for the assessee that the land was shown by the assessee as stock-in-trade and same was sold in the year under consideration. In this view of the matter and keeping in view that no construction activity has been carried out by the assessee after acquisition of land in the year 1987 and cost of land was treated by the assessee as stock-in-trade, we are of the view that the learned CIT(A) was not justified in holding that the income of the assessee is to be computed on the basis of the Project Completion Method. Since there is no activity of construction, keeping in view that the assessee is following the mercantile system of accounting and in the absence of any details of brought forward expenditure of ` 41,47,255/- and also as to how the same are allowable in the year under consideration in 6 ITA No.264/MUM/2010 A.Y.: 2006-2007 the absence of any project carried on by the assessee we are of the view that the Assessing Officer was justified in disallowing the same and the learned CIT(A) has erred in directing the Assessing Officer to compute the income on the basis of the Project Completion Method. The grounds taken by the Revenue in this regard is, therefore, allowed.

8. As regards the disallowance of interest ` 13 lakhs we find that the Assessing Officer out of interest claimed ` 17,43,036/- has disallowed ` 13 lakhs on estimate basis. According to learned counsel for the assessee the interest is allowable in view of the decision of Hon'ble Jurisdictional High Court in the case of Lokhandwala Construction Inds. Ltd.(supra). After considering the facts of the case and keeping in view that since this issue has not been properly examined either by the Assessing Officer or by learned CIT(A) that the interest was paid for the business purposes, we are of the view that in the interest of justice the matter should go back to the file of the Assessing Officer and accordingly we set aside the order passed by the Revenue authorities on this account and send back to the file of the Assessing Officer who shall decide the same afresh and in the light of our observation herein above and according to law including the decision in Lokhandwala Construction Inds. Ltd.(supra) relied on the learned counsel for the assessee after providing reasonable opportunity of being heard to the assessee. The grounds taken by the Revenue in this regard are therefore partly allowed for the statistical purposes.

9. In the result, Revenue's appeal stands partly allowed for the statistical purposes.

Order pronounced on this 9th day of February, 2011.

                 Sd/-                                       Sd/-
             (T.R. SOOD)                              (D.K. AGARWAL)
         ACCOUNTANT MEMBER                           JUDICIAL MEMBER


Mumbai, Dated 9th February, 2011.

Janhavi



Copy to:
1.   The Appellant
2.   The Respondent
3.    Commissioner of Income Tax (Appeals)-     , Mumbai
4.    Commissioner of Income Tax, City- , Mumbai

5. Departmental Representative, Bench ' ', Mumbai //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI