TMI Blog2014 (2) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... of those units - The assessee has made a reasonable estimate of entire cost and its proportion to the units already sold - The expenditure finally incurred is higher than the estimate made by the assessee – there was no infirmity in the order passed by the CIT(A) – Decided against Revenue. Deletion of amount including interest cost – Held that:- The books of accounts of the assessee are audited and the Auditor has not given any adverse comment for not following the accounting standards which are mandatory for a company u/s 211 of the Companies Act, 1956 - the inventory of land cannot be valued at a price higher than it is bought - the AS-16 does not allow capitalisation of interest cost alongwith the cost of land - the purchase of inventory is continuation of the same business activity in routine course and cannot be termed as extension of the business activity - The proviso has been inserted to disentitle claim of interest on funds borrowed for acquisition of capital assets for the period upto the asset is put to use - purchase and holding of inventory item itself is a business activity - In absence of this proviso, section 36(1)(iii) earlier entitled assessees to claim interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed the cost of goods sold at Rs. 3,84,85,063/-. Hence, it claimed the excess cost by Rs. 48,96,290/-. He had given the following calculation: Particulars Amount (in Rs.) Total cost of goods sold (Rs. 3,21,68,446 18,11,84,901/89,966)* 15,973 Cost to be incurred apportioned on area sold @ Rs. 14,20,327 88.92 per sq. Feet * 15,973 Total 3,35,88,773 2.0 In the first appeal, the Ld. CIT(A) has found that Ld. AO did not accord the proper cognizance to the facts of the present case. It is the case of real estate developer, the completion of a particular project is always spread over a number of years. Ld CIT(A) has observed that assessee is consistently following a method of accounting whereby the revenue is recognized in the books of accounts when the possession of the unit is handed over to the customers through a registered sale deed. He held that AO had worked out the cost of construction on pro-rata basis, which could have very well been applied on the construction cost but land cost cannot be apportioned amongst various units in the same manner. He further observed that the selling rate of various units always fetched up different prices since the units on ground floor c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting adopted by the assessee consistently and regularly couldn't be discarded by the department authorities on the view that he should have adopted a different method of keeping account or of valuation. It can be discarded only if in the opinion of taxing authorities, income of the trade could not be properly deduced there from. 3.0 Before us, the ld. DR submitted that the ld. AO's method of computation of cost was correct as the cost per square feet of all the units should be same. Ld. DR also pointed out ground no. 2 wherein the department has challenged entertaining of the additional evidences in connection with the computation of cost. According to him the AO did not examine the computation of cost of each and every unit made by the assessee. He therefore urged that the addition has wrongly been deleted. 4.0 The ld. AR on the other hand supported the order of ld CIT(A) by inviting our attention to statement at paper book pages 1 to 4. The statement shows allocation of total cost of construction of Rs. 11,32,38,123/- and the total cost of land of Rs. 7,59,46,350/- to each and every unit constructed in Project 1. Accordingly the total combined cost of land and constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and and the frontage of land towards the road or other location advantages. b. The government also, while deciding the circle rate for registration of the property, considered this fact and accordingly, the DLC rates of lower floors were higher than the rates of upper floors. The appellant also submitted a copy of DLC rates and the manner of calculation of these rates showing that eh reason for difference on such rate on each floor was due to taking different value of land at different floors. c. The application of proportionate land as done by AO gave absurd profit margin figures in the case of different flats as stated in the table given in the order of ld CIT(A). The said table showed cases of loss in case of flats at higher floors where the selling prices were low which was not correct. He submitted that the assessee had taken a better method of allocating cost. The construction cost had been equally divided in all the units. However, the cost of land was proportionately divided in the weighted average proportion of area rate of each unit. It was submitted that the overall total profit of the project spread in various financial years would be same. A method of estimating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears whenever sale of the unit is recognized in the books of accounts. In our considered opinion the method adopted by the assessee is more logical and does not leave any possibility of leakages in revenue also. In these facts and circumstances we find no merit in the first ground of departmental appeal. Regarding the second ground, we find that the working shown by the assessee was the basis of financial statements and preparation of books of accounts. There is no finding of the assessing officer that any of the information regarding financial statement or books of account was no provided by the assessee. In such circumstances, it is wrong to consider the calculation as additional evidences. The ld. CIT(A) has, to his satisfaction, verified the calculations which he found has correct. We find no merit in the arguments of ld. DR that verification of computation of allocation of cost, which has not been done by the AO is not within the jurisdiction of the ld. CIT(A). We accordingly dismiss ground no. 2 of the departmental appeal also. 8.0 The third ground of appeal is taken against deletion of addition of Rs. 14,20,327/- in respect of proportionate cost of area sold during the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over on past experience as it fulfilled both accrual concept as well as the matching concept. Further, the Ld. CIT(A) has made a reliance on the decision of Hon'ble S.C decision in the case of Bharat Earthmovers Vs CIT (245 ITR 428) where it was held that if a business liability has arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at future date. What should be certain is incurring of the liability. It should be capable of being estimated with a reasonable certainty though the actual quantification may not be possible. It does not make any difference if the future date on which liability shall have to be discharged is not certain. It was found that the assessee made a provision of Rs. 80 Lacs and had incurred an expenditure of Rs. 89,76,491/- in the subsequent years. The Ld CIT (A) has observed that this system of accounting was regularly followed by the assessee since last many years and no deviation was ever made. Further reliance was made on the decision of Hon'ble S.C. held in the case of Calcutta Co Ltd Vs CIT (37 ITR 1) wherein it was held that when the assessee was following the mercantile system o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails were as under: S.No. Expenses head Estimation made at the end of Actual expenses the year incurred Amount Rs. Basis of estimation 1 Lift 30,00,000 Quotations 31,80,844 received from the suppliers 2 Labour/Wages 35,00,000 Work to be 38,97,149 executed 3 Pump Sets 2,50,000 Quotations 2,80,000 received from the suppliers 4 Other expenses 12,50,000 Work to be 16,18,498 executed 80,00,000 89,76,491 The first reason given by the AO was that the estimate was not scientific. It was argued that the estimates were made on the basis of information available with the assessee at the time of end of the year. Even otherwise the total expenditure actually incurred was higher than the said estimation. Thus, if the assessing officer alleges that the estimation was not correct, he should make his own estimate on the basis of information available with him. He should have made deduction on the basis of cost actually incurred in such circumstances. The details of cost actually incurred was provided to the AO vide letter dated 20.10.2011. The allegation made about certainty of expenditure was without nay basis when the assessee had given the details of actual incurrence of expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtained loan from RIICO and also other unsecured loans. The assessee incurred interest of Rs. 2,51,22,324/- and Rs. 1,22,46,999/- on loan from RIICO and unsecured loan respectively and charged the same to the Profit Loss Account. The said interest is claimed as expenditure allowable u/s 36(1)(iii) against the income accounted by the assessee which mainly pertains to the other project, i.e. Project no. 1. In the queries raised during the course of assessment proceedings, the AO asked as to why this interest cost should not be added to the cost of land for project 2. In response, the assessee explained that inclusion of such interest in the cost of inventory value is not permissible as per the AS-2 on valuation of inventory value and also as per AS-16 on borrowing costs. He also submitted that it interest is otherwise an allowable expenditure u/s 36(1)(iii) as it is not towards a capital asset but it is towards stock in trade. The AO, however, did not agree with the same. He noticed that interest was a direct cost qua project-2. Further, while valuing the inventory of project 1, the assessee included interest cost incurred on that project in the value of stock. He mentioned that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incurred in the relevant year and paid to RIICO for the said period. The loans were borrowed in respect of business activity of the assessee and what was purchased constituted stock in trade and not capital asset out of borrowed fund. Further observed that both the project i.e. project-1 and project-2 constituted the same business and not two different businesses. Even if AO treated the project 1 2 as two different businesses then also the loss of one business could be set off against the profit of the other business. For which reliance was made on CIT Vs Alembic Glass Industries Ltd. (103 ITR 715), Gujarat High Court where it was held that there was inter-connection and inter-dependence between the two units and that the Tribunal was, therefore, justified in law in holding that the new factory at Bangalore did not constitute a new business but was only an expansion existing business at Baroda. Moreover, the interest paid on capital borrowed for the purpose of business is an allowable deduction u/s 36(1)(iii) of IT Act as held by the Hon,ble Madras High Court in the case of CIT Vs Carborandum Universal Ltd (205 CTR 498). Reliance is also placed in the case of CIT Vs B Amrithala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventory and therefore these are usually not included in the cost of inventory. Further Para 12 of AS-2 stipulates that interest and other borrowing cost are usually not to be included in the inventory. However that the interest cost can be included in the inventory in terms of principles enumerated in AS-16. As per Para 6 of AS-16, Borrowing costs that are directly attributable to the acquisition, construction or production of qualifying asset should be included as part of the cost of that asset. However in Para 7 of the AS-16, there is a very important rider. As per para-7, Borrowing cost are included as part of qualifying asset only when it is probable that they will result in future economic benefit to the business. In other cases, these were needed to be expenses in the periods in which there were incurred. Here activities relating to project-2 were suspended for the time being. There was no economic benefit to the assessee in relation to land pertaining to project-2. Further, Para 14 of AS-16 allows commencement of capitalization of borrowing cost whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stores at 10 percent of the cost without following the AS-2 issued by ICAI in letter and spirit, and the provision of section 145A of Income Tax Act ?" In this case, it was contended that ITAT had grossly erred in law as well as in facts while holding that the revised AS-2 issued by ICAI was mandatory for chartered accountants for finalization of accounts but it was not mandatory for the Department. It was argued by the revenue that since the assessee had valued its stores/inventories on the cost or market price, whichever is less, therefore, it could not be now valued on realization value. As per the provisions of s. 145A the income from business under the head "Profits and gains from business" has to be computed in accordance with method of accounting regularly employed by the assessee. Similarly, s. 145A provides that the inventory shall be valued in accordance with the method of accounting employed by the assessee, therefore, if the method of valuation adopted by the assessee is recognized method then the same cannot be rejected on the ground that the net realizable value/market value has been determined on the basis of certain estimate. It is to be noticed that the AO while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, soon after the purchase of land the directors of the assessee company had felt substantial reduction in the anticipated demand of the commercial spaces in the area. They also carried out a feasibility study of the project on the basis of anticipated revenues based on market enquiries. As per the details submitted the AO on 02.12.2011, the directors of the assessee company were not finding it appropriate time to take up the project in the market conditions prevalent during the F.Y. 2008-09. Still to be ready for taking up the project as 4 th soon as the situation approves, they applied for the approval of construction plan on September, 2008 without any intention to take up the project soon after approval. As one can observe that when it came for depositing sum of Rs.21,25,539/- for the said approvals and a demand letter was issued by the Housing Board on 26.10.2008, the company delayed the same. But, on reminder by the Housing Board on 17.12.2008, the company made the payment of the fee but resolved to postpone the project till market condition/expected realization improved. Even after more than 2 years, till date, the company has not started the activity for developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prices has been brought on record by the AO. As against this, ld. A/R invited our attention towards certain documents which show that there was no increase in the realisable value of the land in question. As per these documents, plot no. 1 in sector 8 Pratap Nagar was proposed for auction at reserved price @ Rs. 40,000/- per sq. meter on 26.02.2009 (assessee purchased plot at @ Rs. 40,500/- per sq. meter). Nobody turned up in this auction and the housing board again proposed the same plot for auction in the year2011. This is a clear evidence of no increase in Fair Market Value of the land held by the assessee in stock in trade as on 31.03.2009. He further submitted that the Valuation of Inventory has been accepted as correct by the statutory auditors of the company. 17.0 He also pointed out that as per Para-12 of AS-2, Interest and other borrowing cost are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventory. The interest cost can only be included in the cost of inventory in terms of principles contained in Accounting Standard relating to Borrowing Cost (AS-16). As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iated with development of the project are not intended to be taken up till an uncertain period. This is normal period necessarily required for preparation to take up the project. Therefore, the assessee does not fulfil the condition to of para-14. Ld. A/R also referred Last Lines of Para 16 of AS-16, i.e. "Borrowing cost incurred while land acquired for building purpose is held without any associated development activities do not qualify for capitalization." Ld. A/R accordingly submitted that only getting the approval of map without any intention of starting up the development activity does not allow the assessee to include the borrowing cost in the cost of project. The said intention of the assessee is reflected by action of not taking up the project for next 4 years. No associated activity other than statutory requirement of taking approval of MAP has been carried out by assessee till date. The approval etc. has been taken only to be ready when the market conditions get favorable. He therefore submitted that the order of the CIT(A) is correct and need no interference. 18.0 We have heard the parties and perused the material available on record and also the orders of the authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." The proviso specifically referred to the interest paid in respect of capital borrowed for acquisition of any asset for extension of existing business. The present case is of acquisition of land for its development in course of real estate activity of the assessee. Assessee is about to complete one project and to continue the activities has purchased another land to develop another project. The argument of the ld. DR that the proviso would apply to the assessee's case cannot be accepted. We are of the considered opinion that the purchase of inventory is continuation of the same business activity in routine course and cannot be termed as extension of the business activity. The proviso has been inserted to disentitle claim of interest on funds borrowed for acquisition of capital assets for the period upto the asset is put to use. The term 'put to use' here applies to capital asset only because a capital assets is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate the business activity. As against this, purchase and holding of inventory item itself is a business activity. In absence of this proviso, sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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