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2016 (11) TMI 1307 - ITAT KOLKATA

2016 (11) TMI 1307 - ITAT KOLKATA - TMI - Disallowance of expenses made on account of Travelling & Conveyance, Brokerage & Commission, Advertisement, Publicity & marketing, legal & professional charges, service maintenance charges, rent, rates & taxes, security expenses, consultancy charges and miscellaneous expenses - Held that:- We find that out of the total expenses incurred of ₹ 48,16,12,000/-, a sum of ₹ 31,22,58,000/- was transferred by assessee to work in progress and ₹ .....

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not be included in the project cost as per the guidance note supra. However, we find that the assessee had erroneously claimed insurance as a revenue expenditure instead of allocating the same to project costs as per the guidance note. To that extent, the argument of the ld DR is well appreciated. We find that the other expenditures incurred by the assessee supra are squarely to be allowed as revenue in nature as they are not related to project cost. Hence we find that the ld CITA had rightly gr .....

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squarely allowable as deduction. Moreover, as per para 2.4 of the Guidance Note on Accounting of Real estate transactions, the said expenditure cannot be added to the project cost and hence the assessee had rightly charged off the same as revenue expenditure. Accordingly, the Grounds raised by the revenue are dismissed for the Asst Year 2007-08. - Addition on account of interest - Held that:- We find that the assessee had duly proved before the ld CITA that only the own funds lying in UTI Ba .....

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ilized only for business purposes of the assessee. Hence it could be safely concluded that only the own funds were utilized for advancing interest free funds to Mr Ashoke Dasgupta. In such an event, whether to charge interest or not on the said advance, becomes the prerogative of the assessee and the business nexus of such advance has not been doubted by the revenue. Hence there is no question of adding the notional interest income on the said advance without any basis. - I.T.A Nos. 2157 & 2158/ .....

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) for AYs 2007-08 and 2009-10 vide his separate orders dated 27.12.2010 and 19.12.2011. Since issues are identical and facts are common and for the sake of brevity, we dispose of both the appeals by this consolidated order. 2. The first issue to be decided in these appeals is as to whether the ld CITA is justified in deleting the disallowance of expenses , made on account of Travelling & Conveyance, Brokerage & Commission, Advertisement, Publicity & marketing , legal & professio .....

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following Accounting Standard - 9 on Revenue Recognition ( AS-9 issued by ICAI) and guidance note on recognition of revenue by Real Estate Developers. During the relevant year under appeal, the development activities being at the initial stage, the assessee did not recognize any revenue. Further the expenditure that were purely incidental to the project were transferred to work in progress and those not relating to project were debited to profit and loss account. The basis of allocation was dul .....

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on of revenue by Real Estate Developers issued by ICAI. For valuation of its inventory, the assessee is governed by AS-2 wherein vide para 13, it is specifically provided that the following are to be excluded from the cost of inventories:- 13. In determining the cost of inventories in accordance with paragraph 6, it is appropriate to exclude certain costs and recognize them as expenses in the period in which they are incurred. Examples of such costs are: (a) Abnormal amounts of wasted materials, .....

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f contract cost and what not. Para 19 of the said accounting standard provides as under:- 19. Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract. Such costs include : (a) general administration costs for which reimbursement is not specified in the contract ; (b) selling costs ; (c) research and development costs for which reimbursement is not specified in the contract ; and (d) depreciation of idle plan .....

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elvant year under appeal, it incurred various expenses under the major group head which included Construction Expenses, Expenses on Employees, Administrative and Marketing Expenses and Interest cost. The expenses which were directly allocable to Project or were indirectly identifiable with project development have been transferred to WIP as part of cost of WIP. Other expenses, which are related to administrative office or selling/marketing expenses being not allocable to Project have been debite .....

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enses related to Project have been transferred to Project Cost. The other expenses being incurred for administrative and marketing purpose have been debited to P/L account. Interest 32,229 27,217 Nil Transferred to Fixed Assets ₹ 5012 Sub- Total 4,81,612 3,57,990 1,18,610 Less: Trnfd from WIP to Fixed Assets/Other Adjustments 45,732 Total 3,12,258 Accordingly it was explained that out of the total expenses incurred of ₹ 48,16,12,000/-, ₹ 31,22,58,000/- has been transferred to w .....

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Publicity expenses Marketing expenses 19,926 10,998 8,573 19,926 10,998 8,573 Nil Nil Nil Being in the nature of selling and marketing expenses, not allocable to project cost Brokerage & Commission 26,556 26,556 Nil Being in the nature of selling and marketing expenses, not allocable to project cost Car Hire Charges 789 789 Nil Being incurred on head office account for administrative purpose and hence not allocable to project cost. Insurance charges 41 41 Nil Being expenses pertaining to so .....

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ayment to WBSEB for electricity connection at project has been allocated to Project. Other electricity charges paid for administrative office/purposes are not allocable to project cost. Rent, rates and taxes 3,998 3,801 197 Rent expenses incurred on payment of apartment rent of Project managers have been allocated to Project cost. Rent expenses incurred in administrative office/non project managerial persons are not allocable to project. Property Development expenses 4,352 4,352 Nil Expenses bei .....

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rpose are not allocable to project cost. Legal and Professional charges 8,626 8,626 Nil Legal and Professional expenses incurred are purely to comply with various statutory formalities and are not allocable to project cost. Service and Maintenance Charges 1,469 1,469 Nil Includes expenses incurred on apartment maintenance, electrical maintenance, motor vehicle maintenance, office maintenance which are purely administrative expenses and are not allocable to project cost. Security expenses 3,472 3 .....

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. The same being purely for administrative purpose, are not allocable to project cost. Miscellaneous Expenses 3,048 2,887 88 Food expenses and medical expenses incurred on project staffs have been allocated to Project cost. The other miscellaneous expenses being incurred for administrative staffs/purposes, are not allocable to project cost. TOTAL 115,920 110,153 5,767 2.4. It was further submitted that the mere fact that the company has not recognized revenue during the relevant year, does not e .....

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en charged to P/L account of the relevant year and allowable u/s. 37(1) of the Income Tax Act. The ld AO however proceeded to disallow majority of the expenditure as debited to profit and loss account under the head Administrative and Marketing Expenses on the ground that the assessee was not able to provide any documentary evidences in respect of its claim. The facts for the Asst Year 2009-10 are also similar except with variance in figures. 2.5. Before the ld CITA, it was submitted that the ld .....

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does not include administrative /selling/ marketing expenses. The said expenses were incurred independent of sale of stock in trade /revenue generation and they are inherent in running of business. Since the business had already commenced, these expenses are squarely allowable as deduction u/s 37(1) of the Act. The ld CITA on going through the Guidance Note on Accounting for Real Estate Transactions (Revised 2012) together with AS -2 and AS -9 issued by ICAI accepted the method of accounting ado .....

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,26,000/-, Service & Maintenance Charges of ₹ 2,94,000/-, Rent, rates and taxes of ₹ 38,01,000/-, Security expenses of ₹ 26,04,000/-, Consultancy charges of ₹ 31,42,720/- and Miscellaneous expenses of ₹ 20,57,517/- aggregating ₹ 9,07,63,237/- without appreciating the findings of the AO that the assessee has not recognized any revenue from the operations since the development activities are at initial stage and most of the expenses are relating to the work .....

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only Accounting Standards 1 (Disclosure of accounting policies) and Accounting Standard 4 (Prior Period and Extraordinary Items) are notified and hence assessee adopting AS 7 & AS 9 are not relevant for the purpose of income tax act. He accordingly supported the order of the ld AO. 2.7. In response to this, the ld AR filed a comparative chart of the treatment of the disputed expenditures with regard to allocation of the same to work in progress , charge to profit and loss account from Asst .....

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r 2006-07. While this is so, he argued that there is no good reason for the ld AO to dispute the allocation of expenditure to various projects for Asst Years 2007-08 and 2009-10 alone (i.e the years under appeal before us). The ld AR also placed reliance on the paper book filed by him containing the copies of audited financial statements for the years ended 31.3.2006 to 31.3.2013 comprising of pages 1 to 204 of the paper book. He drew the attention of the bench to pages 20 & 21 of the paper .....

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lowed the principles laid down in the AS-7, AS -9 and Guidance Note on Accounting of Real Estate Developers with regard to the treatment of expenditure and its allocation to project costs. Admittedly the Accounting Standards 7 & 9 issued by ICAI are mandatorily to be followed by the assessee as per the mandate provided in the provisions of section 210 of the Companies Act, 1956. We find that the assessee had also followed the Guidance Note on Accounting for Real Estate Transactions wherein v .....

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. Costs that may be attributable to project activity in general and can be allocated to specific projects include : (a) Insurance ; (b) Costs of design and technical assistance that is not directly related to a specific project ; (c) Construction or development overheads ; and (d) Borrowing costs Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of project a .....

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se facts are not in dispute before us. We find that the expenditure incurred towards advertisement, marketing, publicity expenses, printing and stationery, brokerage, commission, car hire charges, legal and professional charges etc fall under the head General Administrative Costs which should not be included in the project cost as per the guidance note supra. However, we find that the assessee had erroneously claimed insurance as a revenue expenditure instead of allocating the same to project co .....

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es. Accordingly, the ground no. 1 raised by the revenue for the Asst Years 2007-08 and 2009-10 is partly allowed. 3. The next issue to be decided in this appeal of the revenue for Asst Year 2007-08 is as to whether the ld CITA is justified in deleting the disallowance of gifts of ₹ 6,48,000/- in the facts and circumstances of the case. 3.1. The brief facts of this issue is that the ld AO observed that the assessee incurred a sum of ₹ 6,48,000/- on account of expenses incurred on gift .....

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2007-08. Before the ld CITA, the assessee vide its written submission submitted that the assessee had already booked number of flats in the concerned project and the prospective customers who visit the site were offered a small token gift. It was also submitted that the assessee had suffered fringe benefit tax (FBT) on the said gifts and filed FBT return accordingly. The ld CITA held that the business nexus of the said expenditure is proved that the same is given to customers who have booked fla .....

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e disallowance of gifts of ₹ 6,48,000/- without appreciating the findings of the AO that the same was not in connection with the business activities of the assessee since the project of the assessee was at the initial stage and gift to customers has no credibility. 3.2. The ld DR argued that the business nexus of incurring this expenditure was not proved by the assessee. He vehemently relied on the order of the ld AO. In response to this, the ld AR argued that the gift expenses falls under .....

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ote on Accounting of Real estate transactions, the said expenditure cannot be added to the project cost and hence the assessee had rightly charged off the same as revenue expenditure. Accordingly, the Grounds 2 & 3 raised by the revenue are dismissed for the Asst Year 2007-08. 4. The next common issue to be decided in these appeals is as to whether the ld CITA is justified in deleting the addition on account of interest in the sum of ₹ 10,00,000/- in the facts and circumstances of the .....

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The ld AO observed that when the assessee is paying interest on its borrowings used for the purpose of its project, there is no reason for not charging any interest on amount advanced to a party who would be supplying some services in future. Infact, any interest received / accrued thereon from such party would have gone to reduce the interest burden on the assessee. Accordingly he estimated the interest rate at 10% on the sum of ₹ 1 crore advanced to Mr Ashoke Dasgupta and added a sum of .....

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48 with UTI Bank. An amount of ₹ 2 crores was transferred on 20.2.2006 from Escrow account with UTI Bank to the abovementioned current account with UTI Bank for the purpose of disbursement. Immediately before the transfer of ₹ 2 crores , the balance lying in the said current account was ₹ 4,36,818/- only. Moreover, as per the terms of sanction of specific loan, all collections / receipts from customers were required to be deposited in Escrow account with UTI Bank. Thus the mone .....

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llowing ground:- AY 2007-08 4. That on the facts and circumstances of the case Ld. CIT(A) erred in deleting the addition of ₹ 10,00,000/- on account of interest without appreciating the finding of the AO. AY 2009-10 2. That on the facts and circumstances of the case Ld. CIT(A) erred in deleting the addition of ₹ 10,00,000/- on account of interest without appreciating the finding of the AO. 4.3. The ld DR vehemently relied on the order of the ld AO. In response to this, the ld AR argu .....

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