TMI Blog2015 (6) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted the project completion method for recognition of revenue and accordingly, has assessed the income of the project on the same method. Thus, a contrary view cannot be taken for this year. - Decided against revenue. Disallowance of interest u/s. 36(1 )(iii) on loans - Held that:- So far as the advance of ₹ 50 lakhs, it is seen from the record that the said amount was given for purchase of plot of land pertaining to Survey No. 187, Hissa 4A, situated at village Kharghar, Taluq Panvel. Since the assessee is the developer of the project, the said land was intended to be purchased for developing the project at PanvelOnce the advance has been given for the purchase of plot of land which is for business purposes then no adverse inference can be drawn so as to disallow the interest on the ground that the same is for non-business purpose. Similarly, the loan to the partnership firm has been in which the partners are common. The said firm too is engaged in the business of developer. Further, from the perusal of the balance sheet as pointed out by the ld. Counsel, it is seen that interest free funds in the form of capital is more than ₹ 2.85 crores, whereas the advance/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hreat or coercion and which was not retracted till the date of filing of return. 3. Exactly similar ground has been raised by the Revenue in ITA No. 1267/Mum/2013 for A.Y. 2009-10 also. 4. Brief facts of the case are that, the assessee is a partnership firm having two partners, namely, Shri Vijay Ravji Gajra and Shri Amrut Kanji Nisar, which came into existence, w.e.f. 1-1-2007. The assessee firm is engaged in the business of builder and developer and had undertaken the development of a project, namely, Ellora Fiesta in Navi Mumbai. A search and seizure action u/s 132(1) of the Act was carried out in the case of Gajra Group on 19-2-2009. During the course of search proceeding, a sum of ₹ 15 crores was voluntarily admitted and offered for whole as a Gajra Group. Out of the said declaration of ₹ 15 crores, sum of ₹ 63 lakhs pertains to the assessee for A.Y. 2008-09 on account of income from the project and ₹ 73 lakhs for A.Y. 2009-10. However, at the time of the filing of the return of income, the assessee did not offer this income in the return of income filed in response to notice u/s 153A. Accordingly, the assessee was required to show cause as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognition on the completion of the project and there are various decisions which have also endorsed the same proposition. Further, the assessee submitted that it is not a contractor but real estate developer and the project completion method is also one of the revised methods of accounting the income. The ld. CIT(A) after considering the assessee s submission and reasoning of the A.O., held that for the purpose of recognition of income in the case of a contractor or developer as per AS 7, there are two methods of accounting for realization of revenue in the construction business viz. (i) percentage completion method (ii) completed contract method and both are recognized for disclosing the profit. There is no specific method prescribed by the Income Tax Act for revenue recognition in the case of builder or real estate developer. It is the discretion of the developer/builder to adopt any of the two method of revenue recognition which is best suited. Thereafter, he noted down the entire facts and the statement recorded during the course of search survey operation, and deleted the addition after observing and holding as under:- 5. In the instant case, the project of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d: 12/04/2009 filed before the Addl. DIT (Inv.) Kalyan. In my opinion, giving such a guidance or advice in the statement recorded during the survey was beyond the jurisdiction of the search/survey party. On such an advice, the appellant offered the estimated additional income for the period under consideration which is an estimated figure without any real working of the profits. From the facts mentioned above, it can be observed that the act of offering the additional income was not voluntary but under a misbelief inculcated by the search party that the declaration of the profits on percentage completion method is mandatory as per AS-15 and section 145 of the I.T. Act, 1961. Thus, the offer of income was not voluntary but under the guidance and direction given by the search party to do the same. Even in the letter of offer, nowhere it is mentioned that the appellant is offering the above additional income voluntarily and therefore the argument of the AO that the appellant offered the above additional income for the year under consideration voluntarily, is not correct. Even section 145 of the Income-tax Act, 1961 provides that the business income of the assessee for an assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The accounting standards have been revised from 01/04/2003 and as per the revised standards and AS-7 is prescribed for the contractors and revised AS-9 has been prescribed for the real estate developers or the builders. It has been prescribed in the AS-9 that the revenue in the case of real estate sales should be recognised when all the following conditions are satisfied :- i) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate transferred to a degree usually associated with the ownership; ii) At the time of the transfer of all significant risks and rewards of ownership, it is not unreasonable to expect the ultimate collections; and iii) No significant uncertainty exists regarding the amount of consideration that will be derived. 4.9. If the above prescribed revised accounting standards AS-9 for the real estate developers are applied to the project of the appellant, can it be definitely concluded that the appellant has transferred to the buyer all significant risks and rewards of ownership and the appellant retains no effective control of the shops / flats transferred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the A.O. himself in the assessment year 2012-13 had completed the assessment on the basis of project completion method when the said project was completed. Now, the Revenue is taking different stand, that in the earlier year the revenue should be recognized as per percentage completion method and in the subsequent year it should be on the basis of project completion method. This, she submitted cannot be upheld. In support, she filed a copy of assessment order dated 25-2-2015 for the A.Y. 2012-13. 9. We have heard the rival submissions and also perused the relevant findings given in the impugned order. The sole reason for making the addition by the A.O. is that, at the time of search the assessee had offered to disclose the income on the basis of percentage completion method which has been retracted later on. However, there is no finding that the assessee has been following percentage completion method regularly since beginning or in any other project. There is no such evidence or documents which have been found during the course of search indicating that the assessee had been following percentage completion method regularly. If the assessee has been following one of the reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of ₹ 6,80,853/- on account of proportionate interest u/s 36(1)(iii) are that, the A.O. on perusal of the Balance Sheet noted that the assessee had advanced interest free loan of ₹ 32 lakhs on 18-6-2007 to M/s Gahlot Construction and ₹ 50 lakhs on 14-8-2007 to M/s Konark Enterprises, aggregating to ₹ 82 lakhs. On the other hand, the assessee has also borrowed interest bearing secured and unsecured loan for which it has debited interest cost of ₹ 45,33,852/- in work-in-progress account. In response to the show cause as to why interest should not be disallowed on interest free loan, the assessee submitted and stated as under:- In this respect we have to state that the advances given to M/s Gahlot Construction are for a short term basis. With respect to the advances given to M/s Konark Enterprises we have to state that the said advances are given for plot of land. Secondly our above client is following project completion method wherein all the expenses are debited to Work-in-Progress account. Even if the interest is proportionately disallowed, it should not be added to the total income but it should be reduced from Work-in-progress. 14. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said confirmation it has been clearly stated that the amount of ₹ 50 lakhs was in the nature of advance for the purchase of plot of land. However, the said plot had become subject matter of litigation and therefore, the transaction has not yet taken place. There is no material on record to show that this was not for purchase of land. As regards the allegation of the ld. CIT(A) that in the suit petition filed by M/s Konark Enterprises which shows that the land in question has already been purchased by them before the date of advance, she submitted that it will not make any difference as long as the party to whom advance was given was towards purchase of plot which has been confirmed by the said party. So far as the assessee is concerned, it has given money for purchasing the plot of land from M/s Konark Enterprises for its business purpose and, therefore, such an advance given for the purposes of business, no disallowance of interest is called for. Lastly, she submitted that the interest has been capitalized by the assessee as the assessee has been following project completion method, where all the expenses have been debited to WIP account and if any disallowance is called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce/loan given is only ₹ 82 lakhs and once the assessee had interest free funds, then presumption can be drawn that the same has been given from interest free funds. This proposition have been upheld by the Hon ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd. (supra) wherein the Hon ble High Court observed and held as under:- If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interestfree funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. 's case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpletion of the project. Further, since the assessee has been following project completion method, wherein all the expenses have been debited to WIP, therefore, such disallowance cannot be added to the total income but will go to reduce the WIP. The action of the A.O. has been affirmed by the ld. CIT(A). 21. After hearing both the sides, first of all, we do not find any reason to disallow the said amount, because the assessee has debited the same to WIP and if at all any disallowance is called for, then the same will go to reduce from the WIP. It cannot be added to the total income of the assessee during the year. On this ground alone, we do not find any reason to uphold such disallowance. Accordingly, ground No. 2 raised by the assessee is treated as allowed. 22. In ground No. 3, the assessee has challenged the addition of ₹ 16,292/- paid towards professional fees for registration of trademark with logo on the ground that the same is capital expenditure. 23. In this regard, the assessee had contended that this expense has been debited to WIP and, therefore, in view of the reasoning given above, the same cannot be disallowed and added to the income of the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Gajra Group through its nominee Shri Raja Ratilal Mirani. The deed of conveyance in respect of this property was also executed on 3-6-2008. Later on, the assessee firm entered into a joint development agreement with Raja Ratilal Mirani and, therefore, the same was for business purpose. Similarly, loan given to other two persons were also for the purpose of business and same argument has been placed before us that it is out of surplus funds. Lastly, it has been contended that the interest debited to the WIP, therefore, no disallowance can be made in this year. 28. After hearing both the parties, we find that so far as the advance/loan given to Raja Mirani, the same appears to be purely for business purpose, there re, no disallowance is called for. Regarding other two parties also, it is seen that the assesee had interest free funds in the capital account which was at ₹ 3,52,58,440/-, whereas the advance given to these two parties comes to ₹ 70 lakhs and if other advances are also taken into consideration, then the same is approximately ₹ 2.72 crores. Thus in view of the decision in the case of Reliance Utilities Power Ltd. (supra), no disallowance of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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