TMI Blog2008 (2) TMI 501X X X X Extracts X X X X X X X X Extracts X X X X ..... de, our decision in the present case is based on four considerations, one, the decision of the Tribunal (Special Bench) in the case of Wall Street Construction Ltd. is not applicable to the facts of the present case, two, the method consistently followed by the assessee and accepted by the AO during earlier years could not be interfered with, without valid reasons, three, the AS I mandates that 'consistency' was a fundamental accounting assumption , and four, the action of the AO, in disallowing interest and processing charges suffers from inconsistency and arbitrariness, and is devoid of any logic. The ground Nos. 1, 2, and 4 are, accordingly, rejected. Addition made under s. 41(1) - unpaid brokerage liability - HELD THAT:- The provisions of sub-s. (1) of s. 41, inter alia, provide that, where an assessee, who had been allowed deduction in respect of any expenditure or trading liability, obtains any amount in respect of such expenditure or any benefit by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him is deemed to be profits and gains of business. Here one has to remember that the 'receipt' of amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t but not included in arriving at cost of work-in-progress. 4. the facts and in the circumstances of the case CIT(A) failed to appreciate the fact that the interest paid to HDFC as mentioned at (1)above and the loan processing fees mentioned at (2) above should go to form part of the cost of work-in-progress of Manohar Nagar Project as they were directly attributable to the project. By not doing so, the assessee was not declaring its true taxable income for the year under consideration." 5. Shri S. Bains, the learned Departmental Representative placed reliance on the order of the AO. He vehemently argued saying that the order of the CIT(A) be reversed and that of the AO be restored. The submissions made by him are summarized below : - that the assessee, as a builder, was following the 'project completion method' of accounting. - that the assessee had obtained from the HDFC a loan of Rs. 1 crore forits Manohar Nagar Project in Nashik; comprising construction of flatsand row houses. - that the processing fee of Rs. 2,50,000 and interest of Rs. 6,45,846 in respect of the aforesaid loan was debited to the P L a/c for the year ending 31st March, 1998, though the Manohar Nagar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts cited. The learned Departmental Representative reiterated that the issue involved in this case was squarely covered by the decision of Tribunal, Mumbai (Special Bench) in the case of Wall Street Construction Ltd. v. Jt. CIT. Therefore, to begin with, we proceed to discuss the relevant facts in the case of Wall Street Construction Ltd. and the decision of the Tribunal (Special Bench), in the following paras. 8. The facts in the case of Wall Street Construction Ltd., in brief, are that the assessee was following 'project completion method' of accounting, that in the books of account the interest expenditure was allocated to different projects, that in the books of account the interest expenditure referable to a particular project was consistently identified and added to the value of the work-in-progress in respect of that project, and that in respect of the entire interest expenditure deduction was claimed under s. 36(1)(iii) against the income of other projects which were completed during the relevant year. The AO rejected the claim and held that the interest expenditure has to be added to the value of work-in-progress, because the assessee was following the 'project completio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its order, the Tribunal (Special Bench) held asunder : "30.........In the present cases, the assessees have identified interest cost and have allocated such cost to different projects in the books of account, but deduction in respect of interest is claimed under s. 36(1)(iii) against the income of some other projects which are completed during the relevant years. In our view, this procedure results into distortion of the correct profits which must be determined as per the project completion method followed by the assessee." 12. In the present case, Shri K.A. Sathe, the learned Authorised Representative reiterated that the decision of the Special Bench in the case of Wall Street Construction Ltd., was distinguishable on facts. He contended that in the present case, the loans were borrowed and utilized for all the projects, that the funds were mixed up, that it was not possible to identify and allocate the interest cost to a particular project, that the interest cost was consistently treated as period cost along with the administrative cost and was claimed in the P L a/c without being added to the value of work-in-progress, and that this method was accepted by the AO during ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... components and one of the components was Rs. 6,45,846 paid to HDFC. In other words the AO appears to have no objection to the claim of interest amounting to Rs. 43,49,438 debited to P L a/c, as period cost. 16. In order to buttress his argument with regard to 'consistency', Shri Sathe, the learned Authorised Representative placed reliance on the decision of Tribunal, Hyderabad in the case of T.C.I. Finance Ltd. v. Asstt. CIT. In the case of T.C.I. Finance Ltd. the Tribunal held as under : ".........The Revenue cannot require the assessee to change its method of accounting unless para 9 of AS II which reads as under, is satisfied [1996] 130 CTR (St) 33 : (1996) 218 ITR (St) 1: '9 A change in an accounting policy shall be made only if the adoption of a different accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statement by an assessee.' Thus, when the Revenue could not demonstrate that the consistent method of accounting followed by the assessee is in violation of AS I, the disallowance made on that ground cannot be sustained." 17. The AS I and II were notified by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of a builder following, 'project completion method' of accounting, the determination of profit chargeable to tax is postponed to the year in which the project is completed, that the true profit 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 the work-in-progress, and that this proposition is fortified by the matching concept, as propounded by the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. v. Jt CIT [2003] 180 CTR (Bom) 256 : [2003] 260 ITR 102 (Bom). 21. We find it extremely difficult to apply the above observations/conclusions of the Tribunal (Special Bench) to the facts of the present case, simply because of the inconsistent and self-contradictory, stand taken by the AO, which gave rise to an anomalous situation. During the previous year relevant to asst. yr. 1998-99, the total expenditure on interest incurred by the assessee for all its projects was Rs. 49,95,284, which was debited to the P L a/c as period cost, but the AO wanted to apply the decision of Wall Street Construction Ltd. only to one component of Rs. 6,45,846, and he had no objection to the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. In view of the above facts it is clear that the liability which is 5 years old has ceased to exist. Therefore, the above sum of Rs. 98,715 is added as profit chargeable to tax as per the provisions of s. 41(1) of the IT Act, 1961. The sum of Rs. 98,715 is added to the total income." 25. The CIT(A) deleted the addition, saying that it was not proper for the AO to make the disallowance merely on the ground of period of limitation. 26. We have considered the rival submissions in the light of material on record. The provisions of sub-s. (1) of s. 41, inter alia, provide that, where an assessee, who had been allowed deduction in respect of any expenditure or trading liability, obtains any amount in respect of such expenditure or any benefit by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him is deemed to be profits and gains of business. Here one has to remember that the 'receipt' of amount or benefit is a necessary condition, and there is no material on record to show that this condition is fulfilled in the present case. This is a deeming provision which has been invoked by the AO on mere assumption. Therefore, we are agr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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