Kyra Investments, Mumbai vs Assessee

/Assessee by : Shri Mayur Kisnadwalla & Shri Mayur Dhami /Revenue by : Shri Sachidanand Dubey

Date of Hearing : 29th December,2014 Date of Pronouncement : 18th February,2015

ORDER

PER R.C.SHARMA (A.M.) :

This is an appeal filed by the assessee against the order of CIT(A) ,

dated 22-12-2010, for the assessment year 2007-08, in the matter of

order passed under Section 143(3) of the I.T. Act, wherein following

ground has been taken by the assessee :-

"1. The Learned CIT(A)-26 has erred in disallowing the administrative and financial expenses to various projects arbitrarily on the grounds that these expenses are related to various projects, however, the fact is that this expenses are general office expenses and would be incurred even if no projects are on going. The same method has been adopted since inception and has been allowed during the assessment in the previous years also.

In view of the above the appellant craves the basis on which the disallowance is made unjustified and should be deleted."

2 ITA No.1365/2011 2. Rival contentions have been heard and record perused. From the

record we found that assessee is engaged in building and construction

activity. During the year under consideration, administrative and financial

expenses of Rs, 25,31,478/- was disallowed by the Assessing Officer by

allocating the indirect expenses of Rs.47,96,487/- to the various projects.

The AO mentioned that assessee had undertaken 3 projects as

developers viz. Villa Kavarana & Clefepete at, Bandra (W) and Praneta at

Juhe, Mumbai, Out of the projects, Kavarana is completed during the year

however, other two projects were on going and the project viz. Praaeta

was completed only upto 75%, and Clefepete upto 15%. Due to that the

investment in these projects were shown as work-in-progress. According

to the AO, assessee has prepared a contract and Profit and loss account

showing net income from Praneta and Clefepete project However, in P &

L account, assessee had debited office expenses of Rs.47,96,487/- and

entire office expenses had been claimed against the gross profit of

Kavarana project, which according to the AO is not allowable because

such expenses are also relevant and related to other two projects,

therefore, in view of this, the AO issued a notice u/s.142(1) dated

10.12.2009 asking the assessee as to why entire office expenses should

be allowed in respect of profit of Kavarana project and why there should

not be re-allocation of the office expenses proportionately in respect of

other projects of which independent profit is not taken in the accounts.

The reply of the assessee dated 14.12.2009 was considered by the

Assessing Officer but was not found to be acceptable, hence he has

proportionately disallowed the expenditure. The AO noted that in respect 3 ITA No.1365/2011

of Kavarana project, assessee shown gross profit of Rs.50,82,965/- but

debited the entire office expenses of Rs.47,96,487/- and shown the profit

only of Rs.9,38,608/- including rent of Rs.6,30,000/-, thus, according to

the AO, there is very less profit disclosed by the assessee in respect of

the project Kavarana and expenses related to other project has not been

capitalized and further he has observed that assessee is not able to

specify the project-wise expenses hence, such office expenses have been

allocated proportionately as Rs.22,65,008/- to the Kavarana project and

inconsequence has disallowed an amount of Rs.25,31,478/- as

expenditure relevant to other projects and has added to the total income

of the assessee. We found that the assessee has debited interest

expenditure of Rs.12,81,690/- under the head 'office expenses' whereas

there is substantial interest bearing loan of Rs.2,98,25,519/- from

Zoroastrian Co-op Bank Ltd. which has not been fully utilized in respect of

Kavarana project only but by other projects also. Such interest expenses

are liable to apportioned projectwise. All other expenses were indirect

expenses liable to be debited to profit and loss account.

3. The issue regarding apportionment of interest expenditure

pertaining to particular project is required to be treated as work-in-

progress in respect of the contracts not completed, has been decided by

ITAT Special Bench in the case of Wall Street Construction ltd., 101

ITD 156(Mum)(SB), wherein it was held that where the assessee was

following project completion method of account, the interest identifiable

with that project should be allowed only in the year when the project is

completed and the income from that project is offered for taxation, such 4 ITA No.1365/2011

interest expenditure cannot be deducted as period cost from year to year.

The true profits in such a case can be determined only when the entire

cost of the project, direct or indirect, including finance cost is added to the

value of work-in-progress.

4. In view of the above discussion, we restore the matter back to the

file of AO for determining precisely the finance cost attributable to the

project which has not been completed. Such finance cost is not required

to be allowed as revenue expenditure against the profit on projects which

have been completed. The assessee is also directed to furnish complete

details with regard to the funds utilized for various projects, so that interest

pertaining to the same can be determined and added to the work in

progress. The only interest pertaining to the projects which have been

completed is required to be allowed as revenue expenditure against that

project. We direct accordingly.

5. In the result, appeal filed by the assessee is allowed in part for statistical purposes.

Order pronounced in the open court on this 18th Feb.2015.

18th Feb,2015

Sd/- Sd/- ( ) ( ) (VIJAY PAL RAO) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 18/02/2015 /pkm, PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A), Mumbai. 4. / CIT 5. / DR, ITAT, Mumbai 5 ITA No.1365/2011

6. Guard file. / BY ORDER, //True Copy//

(Asstt. Registrar) / ITAT, Mumbai