Alcon Developers,, Panaji vs Department Of Income Tax

ITA NO. 377/PNJ/2013 : (Asst. Year - 2009-10)

Asst. Commissioner of Income Tax, Vs. M/s. Alcon Developers Circle-1(1), Panaji, Goa (Appellant) Sukerker Mansion, 1st floor, Opp. Government Printing Press, Panaji, Goa (Respondent) PAN : AACFA0290L

Appellant by : Dr. S. Sundaresan, DR Respondent by : None

Date of Hearing : 12/01/2015 Date of Order : 23/01/2015

ORDER

PER BENCH :

1. The above appeal has been filed by the Revenue against the order of CIT(A) dt. 11.9.2013 for A.Y 2009-10 by taking the following effective grounds of appeal :

"2) The Ld CIT(A) erred in deleting the disallowance of Rs. 21.69 lakhs made u/s. 14A of the Income-tax Act in accordance with Rule 8D of Income-tax Rules, as provided by the decision given by the Mumbai Special Bench of ITAT in the case of ITO vs Daga Capital Pvt. Ltd.(2009) 117 lTD 169.

3) The Ld CIT(A) erred in deleting the additions of Rs. 17.60 lakhs on account of "Professional/Consultance/Survey fees" as routine administrative and business expenditure when this expenditure is project specific and incurred on a particular project which is to be capitalized for the particular project.

4) The Ld CIT(A) erred in deleting addition of Rs.2.22 crores on account of profits on sale of plots of one year is shifted to another year which is incorrect method of accounting 2 ITA NO. 377/PNJ/2013 (A.Y : 2009-10)

which results in diminishing the assessment of the taxable profit of the year as held by Apex court in the case of CIT vs British Paints India Ltd. (1991) 188 ITR 44."

2. Ground no. 1 is general in nature and therefore does not require any adjudication.

3. None appeared on behalf of the Assessee even though the appeal had been adjourned on 28.10.2014 at the request of the Assessee. We therefore decided to dispose off the appeal after hearing the ld. DR.

4. The brief facts of the case are that the Assessee is a firm engaged in the business of real estate activities such as construction of residential-cum- commercial project, developing of plots etc. In the year under appeal, the Assessee declared an income of Rs. 3,51,67,540/-. The AO made the following additions in the business loss declared at Rs. 3,52,869/- :-

(i) Disallowance u/s 14A Rs. 23,22,638/- (ii) Addition on account of Professional/ Consultancy fees Rs. 17,59,743/- (iii) Addition u/s 41(1) Rs. 3,56,605/- (iv) Profit on sale of plots Rs. 2,22,47,248/-

Thus, total addition of Rs. 2,66,86,234/- was made. The Assessee went in appeal before the CIT(A). CIT(A) partly allowed the appeal of the Assessee.

5. The first ground relates to deletion of disallowance made u/s 14A to the extent of Rs. 21.69 lacs. The facts relating to this ground are that the AO noted that the Assessee had made investment in the shares dividend income of which is exempt from tax. The AO, therefore, after perusing the books of accounts as well as the bank statement of the Assessee noted that the Assessee has exclusively used sum of Rs. 79.3 lacs out of the bank overdraft taken from Saraswat Bank for the purchase of shares of Counto Automobiles. The AO noted that the interest on the overdraft was Rs. 8,27,899/- on a total 3 ITA NO. 377/PNJ/2013 (A.Y : 2009-10)

sum of Rs.105.30 lacs. Proportionate interest was computed at Rs.6,20,924/-. The AO also noted that the total interest paid includes sum of Rs. 73,00,131/- paid as interest to partners on their capital. The Assessee since did not produce any evidence to prove that the capital brought in, on which the interest was paid was not utilized for the purchase of the shares, the AO being satisfied rejected the Assessee's claim that no expenditure had been incurred for earning the exempt income on shares. Therefore, the AO applied Rule 8D and worked out the disallowance as under :

"(i) Amount of expenditure directly relating to income which does not form part of total income. - Rs.6,20,924/-

(ii) In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount commuted in accordance with the following formula, namely:- [A x B]/C=

A. Amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year - Rs.73,00131/-

B. The average of value of investment, income from which does not or shall not form part of the total income appearing in the balance sheet of the assessee on the first day and the last day of the previous year

Rs.3,61,28,216 + Rs.22,33,14,515 =Rs.31,65,44,668/-

Average of the above =Rs.3,37,37,416/-

C. The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year Rs. 9,32,30,153 + Rs.22,33,14,515 = Rs.31,65,44,668/-

Average of the above - Rs.15,82,72,334/-

Accordingly:-[AxB]/C = Rs.73,00,131 x Rs.3,37,37,416 Rs.15,82,72,334 = Rs. 15,33,027/-

4 ITA NO. 377/PNJ/2013 (A.Y : 2009-10) (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not from part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.

=Rs.3,37,37,416 x .005 = Rs.1,68,687/-

Accordingly, a sum of Rs.23,22,638/-

(Rs. 6,20,924/- + Rs.15,33,027/- + Rs.1,68,687/-) is disallowed u/s 14A read with Rule 8D as expenditure incurred for earning the exempted income and same is added to the total income."

The Assessee went in appeal before CIT(A). CIT(A) sustained the disallowance to Rs. 1,53,662/-.

6. We heard the submissions made by the ld. DR and carefully considered the same alongwith the order of the tax authorities below. We noted that the Assessee has not submitted any evidence to discharge the onus before the CIT(A) except the contention that he has not made the investment in shares of Counto Automobiles out of the bank overdraft. Even we noted that no evidence has been placed on record that the interest paid on the capital invested by the partner in the firm does not relate to the investment made in the shares out of the capital. In our opinion, once the AO is satisfied about the claim made by the Assessee by adducing evidence in the form of bank statement as well as capital account of the partners, the onus is on the Assessee to prove that the Assessee has not invested any borrowed funds but the investment has been made out of surplus funds bearing no interest. We noted that the CIT(A) just gave a finding under para 3.4 that the Assessee had surplus funds available which was invested. We do not find any material to support this finding, especially when the AO has given a specific finding that out of the loan taken from Saraswat Bank amounting to Rs. 105.30 lacs, sum of Rs. 79.3 lacs has exclusively been used for the purchase of shares from Counto Automobiles. We do not find any material being brought on record 5 ITA NO. 377/PNJ/2013 (A.Y : 2009-10)

by the Assessee and referred to by the CIT(A) while giving this finding. We find that the finding given by the CIT(A) is perverse and the onus is on the Assessee to prove that it has invested the surplus funds in purchase of the shares. Under these circumstances, we are of the view that the AO has correctly disagreed with the claim of the Assessee. We do not find any infirmity or illegality in applying Rule 8D or in the computation of the disallowance made by the AO in accordance with Rule 8D. We, therefore, set aside the order of CIT(A) on this issue and restore the order of the AO. Thus, this ground stands allowed.

7. Ground no. 2 relates to deletion of disallowance amounting to Rs.17,59,743/- made by the AO under the head "Professional/Consultancy/ Survey fees". The AO noted from the profit and loss account that the Assessee has debited a sum of Rs. 17,59,743/- under the head "Professional/Consultancy/ Survey fees". The AO further noted that these expenses relate to the projects in progress and therefore he took the view that these expenses should have been debited to the work in progress and therefore he disallowed the sum. The Assessee went in appeal before the CIT(A). CIT(A) deleted the disallowance.

8. After hearing the submissions made by the ld. DR and going through the order of the tax authorities below, we noted that the Assessee has taken the contention before the CIT(A) that the professional fees were paid to various consultants. As such, same are for different works for business purposes. It was also submitted that all the works are not related to the work in progress and these fees also included payment made to the consultants for availing advice on legal and taxation matters relating to the firm's affairs. On the basis of this submission of the Assessee, CIT(A) deleted the disallowance by holding that there is no mandate to capitalize these routine necessary 6 ITA NO. 377/PNJ/2013 (A.Y : 2009-10)

expenses and even if these expenses are taken to closing work in progress, the value of the opening work in progress in the subsequent year shall increase resulting in reduction of the income in the subsequent year. In our opinion, the basis for deleting the disallowance cannot be that if expenses are taken to closing work in progress it will increase value of the opening work in progress in the subsequent year. Expenditure has to be allowed while computing the income as per the provisions given under the Income Tax Act i.e. Sec. 30 to 37. If an expenditure is a capital expenditure u/s 37 it cannot be allowed merely on the ground that if the expenditure is a capital expenditure in the impugned year and in the next year it will become revenue expenditure, it has to be allowed in the year when it has been incurred as capital expenditure. We do not agree with the finding of the CIT(A), especially when the Assessee himself has stated before him as per para 4.2 of the order that all the works are not related to the work in progress. This implies that part of the expenditure relates to work in progress. Expenditure has to be allowed in the year to which it relates.

9. We may point out that u/s 145(2) two Accounting Standards (AS) have been notified by notification no. 9949 dt. 25.1.1996 by the Central Govt. The Assessee is engaged in business and therefore the Assessee is bound to follow the accounting standards. The Assessee is following mercantile system of accounting and as per clause (6) of AS-I "accrual" has been defined to mean that revenues and costs are accrued, that is, recognized as they are earned or incurred and recorded in the financial statement of the period to which they relate. If the expenditure does not relate to the impugned assessment year, in view of AS-I, in our opinion, it cannot be allowed to the Assessee merely on the basis that if expenditure is taken to the closing work in progress in this year it will increase the value of the opening work in progress in the subsequent year. Each assessment year is independent and income for each 7 ITA NO. 377/PNJ/2013 (A.Y : 2009-10)

assessment year has to be computed independently. We, therefore, set aside the order of CIT(A) on this issue and restore this issue to the file of CIT(A) with the direction that the CIT(A) shall re-decide this issue after getting the evidences from the Assessee as to what extent these expenses relate to the current year and to what extent these expenses relate to the work in progress. Further, the CIT(A) should also obtain evidences that these expenses have been incurred by the Assessee genuinely for the purpose of the business. To the extent these expenses relate to the work in progress, it should be disallowed. Only the expenses which the Assessee proves to have been genuinely incurred for the purpose of the business and does not relate to work in progress be allowed. Thus, this ground is allowed for statistical purposes.

10. Ground no. 3 relates to the deletion of the addition of Rs. 2,22,47,248/-. After hearing the submissions made by the ld. DR and going through the order of the tax authorities below, we noted that the AO found on the basis of the details furnished by the Assessee that the Assessee has completed the development work of the plot as on 31.3.2009 and in respect of the plots he has received around 70-80% of the sale proceeds but still the Assessee has not shown the sale proceeds in the profit and loss account. Since the development has already been completed, therefore, the AO re-computed the profit relating to these projects completed crediting the sale proceeds to the profit and loss account. The Assessee has contended that he was showing sales when the registration of the sale deed was carried out. The Assessee went in appeal before the CIT(A). CIT(A) took the view as if the AO has changed the method from project completion method to percentage completion method and accordingly he deleted the addition.

11. We heard the submissions made by the ld. DR and have gone through the order of the tax authorities below. We noted that the AO has noticed that 8 ITA NO. 377/PNJ/2013 (A.Y : 2009-10)

the Assessee has accounted the accrual of the sale proceeds on the basis of registration of sale deed in favour of the intended buyer. This method adopted by the Assessee, in our opinion, cannot be regarded to be in accordance with the mercantile system of accounting. The Assessee is engaged in construction business. As observed by the CIT(A) and contended by the Assessee before CIT(A), AS-9 is not applicable to a person who is engaged in construction business. Even this accounting standard does not lay down that the sale proceeds should be accounted for when the sale deed is registered. In the case of the Assessee it is not disputed that the Assessee is following mercantile system of accounting as well as project completion method. The AO in this case noted that the development of the plots has been carried out fully by the Assessee as on 31.3.2009 but against this the Assessee has received consideration to the extent of 70-90% and balance consideration has to be received. As per the project completion method the Revenue has to be recognized when the project has been completed. The Assessee contended before CIT(A) and CIT(A) has also agreed that the Assessee was following the project completion method but we noted that the Assessee has not recognized the revenue on the basis of the project completion method. It is an undisputed fact that the development work on the plots has been completed. Registration of the sale deed represents only the transfer of the title in favour of the buyer from the Assessee. It has nothing to do with the method of accounting followed by the Assessee. The Assessee, we noted, contends and as understood by the CIT(A), was not following percentage of completion method. Under the percentage of completion method revenue is recognized in the profit and loss account in the accounting period to the extent the work is completed. In case the revenue has to be recognized on the basis of receipt of payment from the plot-holders, that will also not be regarded to be percentage of completion method. It is not a case where the AO has rejected the accounts of the Assessee on the ground that it had not followed AS-7 for 9 ITA NO. 377/PNJ/2013 (A.Y : 2009-10)

recognition of revenue on the basis of percentage of completion method. The method as has been followed by the Assessee, in our opinion, is neither project completion method nor percentage of completion method. Percentage of completion method is not linked with the consideration received by the Assessee from the intended buyer. We noted that the Assessee has recognized the revenue only when the registration of the sale deed has been done by the Assessee in favour of the buyer. Under AS-7 this is not a recognized method of recognizing the revenue. This method is neither project completion method nor percentage of completion method. The method adopted by the Assessee, therefore, cannot be regarded to comply with the ingredients as laid down u/s 145 of the Income Tax Act. Sec. 145 of the Income Tax Act makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. Recognizing the revenue when the sale deed has been registered by the Assessee in favour of the buyer cannot be regarded to be either cash or mercantile system of accounting. We, therefore, set aside the order of CIT(A) and restore the order of the AO.

12. In the result, the appeal filed by the Revenue is partly allowed for statistical purposes.

13. Order pronounced in the open court on 23/01/2015.

Sd/- Sd/- (D.T.Garasia) (P.K. Bansal) Judicial Member Accountant Member Place : PANAJI Dated : 23/01/2015 *SSL* 10 ITA NO. 377/PNJ/2013 (A.Y : 2009-10)

Copy to : (1) Appellant (2) Respondent (3) CIT concerned (4) CIT(A) concerned (5) D.R (6) Guard file True copy, By order