Income Tax Appellate Tribunal - Chandigarh
Dev Arjuna Promoters & Developers (P) ... vs Department Of Income Tax on 20 July, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
'SMC' BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
ITA No. 532/CHD/2013
Assessment Year: 2009-10
The DCIT, Vs M/s Dev Arjuna Promoters &
Central Circle-I, Developers (P) Ltd.,
Ludhiana. Regd. Office - 3,
Industrial Area-A Extension,
Ludhiana.
PAN : AABCD9200H
&
ITA No. 392/CHD/2013
Assessment Year: 2009-10
M/s Dev Arjuna Promoters & Vs The DCIT,
Developers (P) Ltd., Central Circle-I,
Regd. Office - 3, Ludhiana.
Industrial Area-A Extension,
Ludhiana.
PAN : AABCD9200H
(Appellant) (Respondent)
Department by : Shri S.K.Mittal
Respondent by : Shri Ashwani Kumar
Date of Hearing : 13.07.2016
Date of Pronouncement : 20.07.2016
O R D E R
Both the cross appeals are directed against the order of ld. CIT(Appeals)-I Ludhiana dated 11.02.2013 for assessment year 2009-10.
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2. The revenue has filed its appeal on the following grounds :
1. That the Ld. CIT(A)-1 ,Ludhiana has erred in law and on facts in restricting the interest disallowed to land purchases for assessment year 2007-08 onwards instead of disallowance of total interest debited in the Profit and Loss Account.
2. That the Ld. CIT(A)-1 ,Ludhiana has erred in law and on facts in not appreciating the facts that the expenditure of interest debited to the Profit and Loss Account amounting to Rs. 1,13,12,039/- is relatable to the development of the colony and is a part of development expenses.
3. The assessee has filed its appeal on the following ground :
The Learned Commissioner of Income Tax (Appeal) erred in law and on facts in sustaining the addition of Rs.60,86,230/-without considering the value of land sold which is utilized against the purchase of land. The amount of addition should have been reduced after considering sale value of land for the last three assessment years i.e. A.Y. 2007-08, 2008-09 and 2009-10.
4. I have heard ld. Representatives of both the parties and perused the findings of authorities below.
5. Briefly the facts of the case are that the assessee claimed before ld. CIT(Appeals) that Assessing Officer has wrongly disallowed an interest of Rs. 1,13,12,039/- by treating the same to be reduced from deferred development 3 expenditure. The Assessing Officer in this regard has observed that the assessee had debited an amount of Rs.
1,13,12,039/- as interest on term loans/unsecured loans and the assessee was engaged in the business of development of colony and the said term loans were apparently for the purpose of development of the colony and therefore the same should be debited development account. The assessee with reference to this observation of the Assessing Officer submitted his explanation before him as under :-
Letter dated 21.11.2011 :
During the year under consideration, we have claimed interest of Rs. 91,79,683/- paid to Punjab National Bank and Rs. 21,32,356/- paid against unsecured loan, as expenditure. In this regard your honour has' asked us to explain as to why interest expenditure should not be added in the cost of value of closing stock of land. In this reference, it is submitted that the company is in Real Estate Business since F.Y. 2002-03. The company has treated the entire value of land as a part of closing stock. Till 31st .March, 2007 the assessee has maintained parallel pre operative income & expenditure a/c in which various expenditure including interest expenditure not directly linked with the value of purchase price of land have been shown. The total pre operative expenditure as on 31/03/2007 was Rs. 56,83,575/-. These pre operative expenditures have been capitalized in F.Y. 2006-07. During 4 F.Y. 2006-07 the company has sold plots having total sale value Rs. 16,71,395/-. During the F.Y. 2006-07 total development works was not completed therefore for calculating pre unit cost of plot, the company has charged future development expenditure under the head Deferred Development Expenditure. The sole purpose of creating deferred development expenditure was for calculation of per unit cost so that appropriate profit could be shown in the balance sheet. Once the future expenditure has been charged for calculating the value of stock, the value of stock will not be further increased on account of various expenditures. These various expenditures will only be the part of expenditure in profit & loss account. Due to this reasoning, the interest expenditure has been claimed as a part of profit and loss account. It is further submitted that loan -sanctioned by Punjab National Bank is for the development of land therefore, working capital in nature. To understand the implication of these interest expenditures, we have to look into the affairs in context of manufacturing organization where interest expenditure against working capital loan is ways a part of profit and loss account. Since we have shown entire value of land as a part of closing stock hence the moment any part of closing stock is being sold we have to prepare profit and loss account and exercising of capitalization of expenditure is not required. This is very clear in pro vision of section 36(I)(iii) of the Act.5
5(i) Even during the financial year 2007-08 the assessee has purchased land for Rs. 3,64,50,810/-. The assessee has also taken interest free unsecured loan of Rs. 1,63,92,000/-. Further the assessee has sold closing stock for Rs. 2,09,22,705/-. Similarly during the F.Y. 2008-09 the assessee has purchased land (part of closing stock) for Rs.33,78,000/- whereas assessee has taken interest free loan of Rs.2,14,50,000/-. In this way entire land of closing stock so purchased was from interest free fund. In the light of above submission it is respectfully requested that kindly allow the interest expenditure as a part of profit and loss account as loading over the value of closing stock by interest expenditure is not warranted. Letter dated 16/12/11 "The company was formed with objective to start Real Estate Business. The company was incorporated on 08.05.2002. In the financial year 2002-03 the company has started purchasing land for the development for residential &. commercial use. The company has got registration as promoter for conducting business of development & construction of colony & apartment by Punjab Urban Planning & development authority vide registration No. ACA.PUDA/LDH/49/1703 dated 04/04/2003. Latter on company has granted license to develop colony vide letter dated 20/12/2006. Since license for development work was awarded by PUDA in FY 2005-06 hence only after that the development was started. In the F.Y. 2006-07 the company 6 has incurred total development expenditure of Rs.
54,66,927/-. In this year the company has sold plot falling in under PUDA Approved Area. Therefore, during F.Y. 2006-07 the company has made provision against future expenditure to be incurred for the development of colony under the head development expenditure deferred. The sole objective of charging future development expenditure was to account for profit against the sale of project land on the basis of project completion method. This method of accounting is being followed by the company in the subsequent year including the year under consideration. This method of accounting is in accordance with AS-7 issued by the institute of chartered accountants of India. In case of completion method we are presuming that the project is comp1eted and for that matter development expenditure deferred account is required otherwise cost per unit will not be determined. The development expenditure deferred account is adjusted against the relevant expenditure as and when it is actually incurred. No such expenditure is further debited in the project cost."
6. The Assessing Officer after considering the submission of the assessee concluded that it was not adopting any particular method for calculation of its profit and it had to be determined in accordance with the method adopted by it. The Assessing Officer observed that the assessee had reduction in development expenditure/deferred liability to the tune of Rs. 2,86,11,240/- which meant that the said 7 amount had been utilized for the purposes of development expenses during the year under consideration. The Assessing Officer concluded the interest amount of Rs. 1,13,12,039/- should also be reduced from the deferred development expenditure instead of debiting it to the profit and loss account.
7. The assessee challenged the addition before ld. CIT(Appeals) and arguments of the assessee are as under :
"The Assessee Company is in the Real Estate Business since inception. The company has started its business in the F.Y. 2002-2003. This is the f irst Balance Sheet, the company has prepared. Since F.Y.2002-03 the company has started purchasing Land. Till F.Y.2005-06 the total land purchased by the company is of Rs.30755551/-. The Total Land comprises of Rs.l5485000/- is related with PUDA Approved Project and Rs.15270551/- against non approved land (considered as other l and). These lands are purchased f rom promoters o wn f und both equity and unsecured loans given to company without any interest. The year wise breakup of land purchased and promoters' contribution is as under:-
E x t r a c t e d f r o m B a l a n c e S h e e t f i l e d wi t h I n c o me T a x D e p a r t me n t Financial Equity/Share Borrowed Interest Land year Application Fund 2002-03 100000 8892294 -- 7853708 100000 19944254 -- 20418773 2003-04 2004-05 100000 28489254 -- 27661101 2005-06 5385000 33674254 -- 30755551 In the F.Y. 2006-07 the assessee company has sold some l and of approved project. So this is the 1 s t year, the company has to adopt method f or recognizing its revenue against the sale of project land. There are two methods to recognize revenue in case, of Real Estate Business having development expenditure. These methods are
1. Completed Contract or Project method
2. Percentage of Completion Method (POCM). 8
In order to give fair status of revenue, the company has implemented completed contract method. Whil e implementing completed contract method assessee has f aced one biggest problem as to ho w f uture development expenditure which is not yet incurred in the year in which revenue is to be recognized but part of the pro ject cost, is to be considered f or calculating revenue prof it. If assessee company do not consider f uture development expenditure, the f air net income against the sale of land could not be derived. So in order to determine fair income all the future development expenditure was considered. In the books of accounts f ollo wing book entry is passed:
Development Expenditure (Def erred) Rs.102068730/- Dr Development expenditure def erred Rs.102068730/- Cr Debit entry is a part of development expenditure sho wn in the Prof it and Loss account and Credit entry is a part of f uture expenditure to be appropriated against the actual expenditure to be incurred in f uture. The breakup of development expenditure (def erred) is as under :
Cost of Project Amount
(Rs. In Lacs)
Boundary Wall 216.74
Road/Path Cost 277.48
Civil Construction Cost 235.94
Electricals 134.35
Bridge 48.00
Misc. Fixed Assets 30.84
Pre-Operative Expenditures 83.61
PUDA Development Charges 129.21
PUDA Fee/Consultancy Charges 50.10
Total Expenditure for Project 1244.16
Less:- Actual expenses incurred under 223.48
different heads as mentioned above
till 31.03.2007
Total 1020.68
The development expenditure (deferred) does not include borrowing cost i.e. interest. Because for the purchase of land as well as development expenditure incurred, promoters own fund both equity and unsecured loans was used. Till F.Y. 2005-06, no interest was paid against unsecured loans taken by the company.9
In the F.Y. 2006-07, the company has sold part of PUDA approved land so in this Financial Year the company has prepared its first Profit and Loss account. Till F.Y. 2005-06 the company was preparing pre-operative account in which all the expenditure other than land cost is accounted for. The total pre-operative expenditure of Rs. 5683575/-which is accumulated up to 31.003.2006 is charged in the profit and loss account in the F.Y. 2006-07. The extract of the Trading account of F.Y, 2006-07 is as under:-
For Financial Year 2006-07 (Amount in Rs.) Opening Stock 15485000 Sale of Land 1671395 Pre-Operative 5683575 FDR Interest 20256 Expenditure Development 16664531 Closing Stock 138998822 Expenditure Development Expenditure 102068730 Deferred Profit 788637 Total 140690473 Total 140690473 Since entire land is a part of closing stock hence after freezing the value of closing stock all the expenditure other than development expenditure has been sho wn as a part of profit and loss account and af ter that loss or prof it as the case may be, is determined. The assessee has followed the same method of accounting in the F.Y. 2008-09 (A.Y. 2009-10) which was applied in the F.Y. 2006-07. There is no deviation in the method of accounting f ollo wed by the company in the earlier years.
SUBMISSION
1. FINDING OF ASSESING OFFICER The Learned -Assessing Off icer, in the assessment order reported in Para 2.2, has observed as under:-
a. A bare perusal of its accounts sho ws that it is not adopting any particul ar method f or calculation of its profit. The income of the assessee has to be 10 determined in consistent with the method adopted by.
b. Since the amount of Rs.11312039/- on account of interest paid was expenditure relatable to the activity of development of the project and as such this amount of interest should also have been reduced from such liabil ity instead of debiting to the P&.L account.
Regarding observation No. (a), it is strongly being opposed that the company is not adopting any method of accounting and also the company is not following any consistent method f or determining its prof it. In f act the company has adopted project completion method since F.Y. 2006-07 and the same method has also been adopted in the F.Y. 2007-08 and F.Y. 2008-09. Theref ore there is no doubt regarding the consistency in the method of accounting adopted by the assessee. Under this f act, the observation made by the Assessing Off icer is incorrect and against the fact of the case. Simil arly the second observation is also not correct as the borro wing cost i.e. interest was not a part of development expenditure def erred theref ore there is no question of being appropriated. In f act borro wing cost like other expenditure is a part of development of the project therefore considered in the profit and loss account.
2. METHOD OF ACCOUNTING IN CASE OF REAL ESTATE BUSINESS There is a disparity in the method of accounting followed by different companies having Real Estate Business. Most of the listed Real Estate Companies have f ollowed the percentage of completion method (POCM). Some of the companies are f ollowing completed contract method in which timing of tax payment def ers till the completion of projects.
Ho wever in the case of assessee although completed contract method is f ollowed at tax liability has not been def erred. The Institute of Chartered Accountants of India has prescribed Accounting Standard -7 related to construction contract. In this Standard percentage completion method was made mandatory in the project commencing af ter 01.04.2003. Recently The Institute of Chartered Accountants of India published Guidance Note on accounting f or Real Estate Transaction (revised 2012). This Guidance supersedes the Guidance Note 11 on recognition of revenue by Real Estate Developers issued by the Institute in 2006. This ne w Guidance was issue to settle diverse practices. Under these Guidance percentage of completion method is mandatory which is applied to al l project in Real Estate Sector having commenced its business af ter 01.04.2012. it means the assessee has rightl y adopted completion method f or recognizing its revenue.
3. METHOD ADOPTED BY THE ASSESSEE COMPANY The assessee company has adopted completion contract method for recognizing its revenue. Here it is most important to understand that if future expenditure is not considered then under completion contract method revenue will be recognized in the year of completion of the project. In that situation percentage of completion method should be - adopted for recognizing the revenue. The company has consistently f ollowing completion contract method since F.Y. 2006-07.
4. SCOPE OF DISALLOWANCES OF BORROWING COST The assessee company has not charged borro wing cost i.e. interest in the very f irst year when value of stock of land was determined af ter considering land cost and cost of development. Theref ore borro wing cost will be the part of loss as there is no land which is sho wn as investment.
5. SCOPE OF DEVELOPMENT EXPENDITURE DEFERRED VIS-A-VIS COST OF COMPLETION METHOD Development expenditure def erred was created in the F.Y. 2006-07 f or the purpose of implementing cost of completion method f or recognizing the revenue of the project. If we don't consider future development expenditure then the implementation of cost completion method has got no meaning as unexpended development expenditure shall be remained unaccounted f or in the value of total cost which is to be deducted f rom sale proceeds.
6. CASUAL APPROACH OF ASSESSING OFFICER TO UNDERSTAND THE FACT OF THE CASE AND MAKING DISALLOWANCES The Learned Assessing Off icer has f ailed to understand the method of accounting adopted by the company and also overlooked the method adopted in the previous years. Even the Assessing Off icer has 12 ignored the f act that in the immediately preceding Previous Year, Borro wing cost i.e. Interest has been charged to Prof it and Loss account. Follo wing the previous method, the company has put Interest cost in the Prof it and Loss Account in the Financial Year 2008-09 (Assessment Year 2009-10). Theref ore, the justif ication taken by the assessing Off icer for disallo wing interest of Rs.113120.39/- is against the f act of the case and arbitrary in nature without having been corroborated.
In the l ight of above submission it is respectf ully submitted that kindly the addition of Rs.1,13,12,039/-
8. The ld. CIT(Appeals) considering submissions of the assessee, restricted the disallowance to Rs. 60,86,230/- and rest of the addition was deleted.
9. The findings of ld. CIT(Appeals) in para 5 of the impugned order reads as under :
"5. I have considered the basis of disallowance made by the Assessing Officer and the arguments of the AR on the issue. It is apparent that the Assessing Officer has not found anything in consistency with the method of accounting adopted by the assessee for working out its profit on year to year basis. The issue to be decided here is whether the entire amount of interest expenditure debited to "profit and loss account is revenue expenditure or not. It is seen that there is no interest debited to profit and loss account till assessment year 2006-07 as there were no interest bearing funds. The interest burden with respect to land purchases in Asstt. Year 2007-08 onwards was clearly in the nature of capital expenditure and therefore required to be capitalized. The rest of the expenditure logically falls in the category of revenue. The year wise breakup of land purchased as mentioned by, the assessees as under:-13
Asstt. Year Value of land purchased
2007-08 1,08,89,775/-
2008-09 3,64,50,810/-
2009-10 33,78,000/-
Therefore the interest @ 12% on this amount of Rs.
5,07,18,585/- is attributable to the purchases of land which is not part of the revenue stream and therefore required to be capitalized to the cost of land. This amount to be disallowed works out to Rs. 60,86,230/- the rest of the addition is directed to be deleted.
In the result appeal is partly allowed."
10. The ld. DR relied upon order of the Assessing Officer.
11. On the other hand, ld. counsel for the assessee reiterated the submissions made before authorities below and submitted that assessee company is in Real Estate business and raised construction at various places. The interest expenditure is, therefore, not a capital asset. The interest is part of business expenditure being borrowing cost, therefore, interest is to be allowed as revenue expenditure. Therefore whole addition is unjustified.
12. I have considered rival submissions. It is not in dispute that assessee company is in Real Estate business since long. The assessee company has treated the entire value of land as a part of the closing stock. The assessee maintained parallel preoperative Income & Expenditure 14 Account. The assessee explained that it has implemented Completed Contract Method. In the financial year 2006-07, the assessee company has sold part of PUDA approved land, so in this financial year, the company has prepared its first Profit & Loss Account. Till financial year 2005-06, the company was preparing preoperative account in which all the expenses other than land cost is accounted for. The total preoperative expenditure which is accumulated upto 31.03.2006 was charged to Profit & Loss Account in financial year 2006-07. The detail of same is also noted in the submissions of the assessee. According to the assessee, the assessee company has adopted Project Completion Method since financial year 2006-07 and same method have been adopted for subsequent financial years 2007-08 and 2008-09 ( i.e. assessment year 2009-10 under appeal). It was, therefore, claimed that there was no doubt regarding the consistency in the method of accounting adopted by the assessee. It, therefore, appears that the Assessing Officer did not appreciate the method of accounting adopted by the assessee company which was adopted in preceding assessment years. The Assessing Officer also did not appreciate that in the preceding assessment years borrowing cost i.e. interest has been charged to Profit & Loss Account. The assessee followed the same method of accounting and taken the interest cost in the Profit & Loss Account for year under consideration.
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13. The ld. CIT(Appeals), considering the explanation of the assessee, found the contention of the assessee to be correct that assessee maintained same method of accounting in assessment year under appeal as was adopted in the preceding assessment years. No inconsistency in the method of accounting adopted by the assessee for working out its profit on year to year basis was found. The ld. CIT(Appeals), in this view of the matter, considered part of the expenditure to be revenue. It, therefore, appears that the facts which have been misunderstood by the Assessing Officer, have been partially misunderstood by the ld. CIT(Appeals) as well. Since same method of accounting have been followed by the assessee in preceding two assessment years in which no defects have been pointed out, therefore, there was no reason for ld. CIT(Appeals) to bifurcate the borrowing cost for the purpose of disallowing part of the interest. Since the entire land is part of the closing stock, therefore, the interest shall have to be considered as revenue expenditure as per Project Completion method. The entire interest shall have to be allowed as deduction on account of revenue expenditure.
14. I, therefore, find that there was no justification for 16 ld. CIT(Appeals) to have restricted part disallowance on this issue. I, accordingly, set aside the orders of authorities below and delete the entire addition.
15. In the result, departmental appeal is dismissed and appeal of the assessee is allowed.
Order pronounced in the Open Court.
Sd/-
(BHAVNESH SAINI) JUDICIAL MEMBER Dated : 20 t h July,2016.
'Poonam' Copy to:
The Appellant, The Respondent, The CI T(A), The CI T,DR Assistant Registrar, I TAT Chandigarh