TMI Blog2017 (2) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with mandate of Section 14A(2) of the Act and also no attempt was made by the AO to dislodge the claim of the assessee in bringing forth and working disallowance u/s 14A of the Act having regard to the accounts of the assessee. In our considered view, the disallowance made by the A.O. in the instant appeal u/s 14A of the Act r.w.r. 8D(2)(iii) of Income-tax Rules, 1962 cannot be sustained and the disallowance of the expenses is to be made keeping in view expenses debited to the Profit and Loss Account (including , inter-alia, PMS Fees) having regard to the accounts of the assessee in accordance with mandate of Section 14A of the Act and hence, the issue is set aside to the file of the AO for making de-novo disallowance of expenses u/s 14A of the Act on merits in accordance with directions in this order in accordance with provisions of Section 14A of the Act. Needless to say that proper and adequate opportunity of being heard shall be provided by the AO to the assessee in accordance with principles of natural justice in accordance with law before de-novo determination of disallowance of expenses u/s 14A of the Act on merits. - I .T.A. No.1306/Mum/2015, I .T.A. No.1540 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged in construction of a mall at Nagpur. A search and seizure action u/s 132 of the Act was carried out on 20th January, 2012 at the offices of Provogue India Ltd. and residence of its directors, etc.. The search was concluded on 17th March, 2012. During the course of search of the office premises of Provogue (India) Ltd. Located at 105/106, Provogue House, loose papers from serial no. 9 to 32 were found and seized , which were trial balances of following three companies:- `(i) Alliance Mall Developers Co. Pvt. Ltd. (ii) Hagwood Commercial Developers P. Ltd. (iii) Empire Mall Pvt. Ltd. The Revenue invoked Section 153C of the Act after satisfaction note has been recorded against the assessee company, as the documents belonging to the assessee company had been seized in the search action in the case of M/s Provogue (India) Limited. Notices dated 13-08-2013 were issued to the assessee u/s 153A r.w.s. 153C of the Act . The assessee filed return of income on 22-08-2013 declaring income of ₹ 13,29,532/- which included undisclosed income of Rs. NIL. The AO , thereafter , issued notices u/s 143(2) on 23.08.2013 which was duly served on the assessee which was followed wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Also some of the expenses like auditors remuneration are incidental expenses for the functioning of the assessee company. They are neither expenses incurred in relation to the projects undertaken nor they can be recouped. As such they have to be debited to profit and loss account and are allowable in the year in which they are incurred. f) The assessee further submits that keeping in view the business of the assessee company, it is consistently following the accounting standards as required u/s. 145 of the Income Tax Act, 1961. g) In this regard, we wish to further state that Cost of the construction contract needs to be accounted as per the Accounting Standard -7 issued by the ICAI. According to the said AS-7, the Contract Costs should comprise of:- (i) Costs that relate directly to the specific contract; (ii) Costs that are attributable to contract activity in general and can be allocated to the contract; and (iii) Such other costs as are specifically chargeable to the customer under the terms of the contract. h) Further, AS-7 also provides that Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting Standard-7. m) The assessee further submits that even as per S. 37 read with 43(2) of the Income-Tax Act, expenses incurred during the year have to be allowed as deduction. The above referred expenses have been incurred during the year and are allowable as deduction. We, therefore wish to state that the Work-in-Progress has been valued correctly and the revenue expenses have been rightly claimed in the Profit Loss account during the year under consideration. Without prejudice to the above, if any such expenditure, being revenue in nature, is disallowed on any ground, the said expenditure as disallowed has to be added to the cost and accordingly the cost of the project will be increased to that extent. The A.O. rejected the contentions of the assessee by holding as under:- (i) The assessee has claimed in its submissions that he is a builder developer and is developing a residential project at Nagpur named Royal Palms and a mall. The contention of the assessee is not correct. (ii] In clause-B8 appended to Schedule-13 of the annual accounts for the F.Y. 2007-08 and in clause-B9 appended to Schedule-13 of the annual accounts for the F.Y. 2008-09, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment proceedings on 19.09.2013 also confirms that the assessee is neither a builder developer engaged in developing real estate for sale to consumers nor a contractor engaged in construction activity. Therefore, the claim of the assessee that AS-7 and AS-9 apply to the facts of the assessee is not correct. In its books of account the assessee itself is showing the construction expenses incurred as capital work-in-progress and not as work-in-progress forming part of Inventory or stock-in-trade. (v) In subsequent years, the assessee may show income from the Mall under the head Profit Gains from Business. But during the year, the business has not been set-up and, therefore, the expenses incurred prior to setting up of the business and commencement of the business falls under the category of pre-operative expenses. The proviso to section 3 clearly specify the previous year as under:- Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence) in the said financial year) the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 1,05,70,443/- by the AO vide assessment order dated 09-01-2014 passed by the AO u/s 143(3) of the Act. 4. Aggrieved by the assessment order dated 09-01-2014 passed by the A.O. u/s 143(3) of the Act, the assessee carried the matter before the ld. CIT(A) by filing first appeal. The ld. CIT(A) after considering the facts of the case allowed the appeal of the assessee vide appellate orders dated 29-12-2014 by holding as under:- 5.6 Ground of appeal no. 3 and 6(b) is in respect of disallowance of expenses of ₹ 10,04,082/-. The appellant argued that it was in the business of development and construction of Malls and residential projects. The method of accounting adopted was of treating all the construction expenses as capital work in progress. The administrative cost were not added to capital work in progress as it was not incurred specifically for the project and that it was period cost. The expenses like auditors remuneration , advertisement , business promotion expenses are incidental expenses and are not incurred in relation to the Projects undertaken. The business promotion expenses are incurred year after year to create awareness in respect of prospective customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t land was acquired, clearing of plot, leveling and excavation work began in AY 2008-09. This is a case of a company which is already formed and it is mandatory to get its accounts audited and comply with statutory liabilities. It has commenced activities for setting up the Mall. Thus the business activities have commenced. 5.9. The direct costs have been capitalized as work in progress. The assessee has followed the Accounting Standards prescribed, and the assessing officer has not shown any violation of the accounting standards. Even in the Guidance Note on Accounting for Real Estate Transactions (Revised) 2012, the terms Project Costs has been defined. It is categorically mentioned in Para 2.4. that: 2.4. The following cost should not be considered part of construction cost and development costs if they are material: (a) General administration costs (b) Selling costs (c) Research and development costs (d) Depreciation of idle plant and equipment (e) Cost unconsumed or uninstalled material delivered at site; and (f) Payments made to sub contractors in advance of work performed. 5.10. Thus, the items of expenditure not added to work in progress account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll and residential complex. He submitted that the assessee is bound to follow the Accounting Standards notified in accordance with section 211(3C) of The Companies Act,1956 as were applicable during the impugned assessment year. The assessee is following the Accounting Standard consistently in accordance with law and it could not be said that by following the said accounting standards so mandatorily required to be followed by the assessee company the profits of the assessee company could not be computed. It was submitted that the assessee had set up the business by acquiring the land and obtaining various approvals from various government authorities . The ld. Counsel drew our attention to the orders of authorities below which detailed the activities undertaken by the company till the end of the relevant previous year in connection with the construction of Mall at Nagpur as under: A.Y. 2008-09 Cleaning of plot and leveling of land, earth excavation and other land development activities , etc. Also, land dividation and barbed wire fencing were carried out. A.Y.2010-11 The No Objection Certificate (NOC) has been received from the Tehsildar s Office. A.Y.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13] 34 taxmann.com 18 (Delhi). 2. CIT v. Sarabhai Management Corpn. Ltd. [1991] 192 ITR 151 (SC) wherein Hon ble Supreme Court affirmed the decision of Hon ble Gujarat High Court in Sarabhai Management Corp. Ltd. v. CIT in (1976) 102 ITR 25(Guj.) The ld. Counsel submitted that in the instant case business was set up when the assessee acquired land and obtained permissions from Government to construct Mall and residential project at Nagpur. He also drew our attention to paper book page No. 11 whereby it is certified by the Auditors that the applicable accounting standards referred to in Section 211(3C) of the Companies Act, 1956 were followed regularly by the assessee. It was submitted that the assessee was following mandatory accounting standards AS-7 and AS-2 issued by ICAI and it could not be said that by following said accounting standards , the profit of the assessee could not be computed correctly as provided u/s 145 of the Act. In support, the ld. Counsel also relied on the following decisions:- 1. CIT v. Woodward Governor India (P.) Ltd. [2009]179 Taxman 326 (SC). 2. MKB (Asia) (P.) Ltd. v. CIT [2008] 167 Taxman 256 (Gau-HC) 3. Western India Vegetable Products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Central Government as per Section 211(3C) of the Companies Act, 1956 wherein the Companies are statutorily required to follow the same. It could not be pointed out by learned DR that how by following the afore-stated Accounting Standards which are mandatory accounting standards, profits of the assessee could not be computed correctly. The Accounting Standards issued by ICAI which is an expert body cannot be discarded lightly unless it is shown that by following the said accounting standards the profits could not computed correctly in accordance with provisions of Section 145 of the Act or the said Accounting Standards are directly in conflict with provisions of the Act. Section 3 of the Act stipulate that the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year and thus it is not necessary the business had actually commenced for claiming the expenses but the relevant is the setting up of the business which in our considered view in the instant appeal business was set-up when the assessee took steps to pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89,61,150 Refer note below d) Travelling expenses 2,52,878 e) Communication expenses 7,689 f) Printing Stationery expenses 4,447 g) Auditors remuneration 1,00,000 h) Office expenses 18,496 i) Miscellaneous expenses 13,462 Total expenses 1,01,12,014 Note In regard to the claim of the aforesaid expenses, we have to state as under:- a) The assessee has already disallowed the amount of ₹ 2,00,000/- u/s 14A in furtherance to the legal Professional fees incurred amounting to ₹ 4,09,690/- incurred in relation to the portfolio management fees (broker) who takes care of the investment decisions. For the purpose of said disallowance, the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal work-in-progress . The expenses incurred on salary and wages( ₹ 47,72,015) , bonus (Rs. 71,076) , Boarding and Lodging (Rs.16,701) , travelling (Rs. 98,240) etc. have been transferred to capital work-in-progress. The AO observed that the assessee incurred expenses on construction of mall and capitalized the same under the head capital work-in-progress. The AO observed that some portion of expenses incurred by the assessee on salary, administrative expenses, business promotion expenses, which are either debited to profit and loss account or transferred to Capital work-in-progress , pertain to the activity of investment in shares liable to earn exempt income. The AO observed that the assessee has not bifurcated satisfactorily the relevant expenses out of the total expenses incurred. It was also observed by the AO that the assessee has wrongly stated that the legal and professional fees of ₹ 4,09,690/- was disallowed u/s 14A of the Act but the said expenses had been claimed u/s 57 of the Act under the head-income from other sources. The AO observed that he is satisfied that the disallowance of expenses of ₹ 2,00,000/- by the assessee u/s 14A of the Act in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance of expenses u/s 14A of the Act is to restricted out of the expenses debited to Profit and Loss Account and the same cannot be extended to the direct cost incurred towards the construction of Mall which is capitalized to capital workin- progress account as the said expenses are direct expenses towards the project , vide appellate orders dated 29-12-2014 . 12. Aggrieved by the appellate order dated 29-12-2014 passed by the ld. CIT(A), the assessee is in appeal before the Tribunal. It is pertinent to mention that the Revenue is not in appeal w.r.t. relief granted by learned CIT(A) w.r.t. disallowance of expenses u/s 14A of the Act made by the AO w.r.t. direct expenses capitalized to the capital work-in-progress which were not debited to Profit and Loss Account. 13. It is the contention of the ld. Counsel for the assessee that the A.O. has disallowed the expenses u/s 14A of the Act by invoking Rule 8D of Income-tax Rules, 1962. The AO has also included the direct expenses incurred for construction of mall and residential complex which were debited by the assessee to the capital work-in-progress against which learned CIT(A) has given relief vide appellate orders dated 29- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses in accordance with mandate of Section 3 of the Act. We will proceed in this appeal keeping in view our decision in ITA no. 1540/Mum/2015 in preceding para s. The assessee has capitalized direct expenses incurred towards construction of mall and residential complex by transferring the said expenses to capital work-in-progress which were also considered by the AO for disallowance u/s 14A of the Act by invoking Rule 8D(2)(iii) of the Incometax Rules, 1962 against which learned CIT(A) gave relief to the assessee and the Revenue is not in appeal against the relief granted by learned CIT(A), thus, the expenses which were capitalized being direct expenses debited to capital work-in-progress being incurred for construction of mall and residential complex cannot be considered for disallowance under Section 14A of the Act . The assessee has elaborately explained the nature and details of expenses which were debited to Profit and Loss Account and its nexus with earning of income which does not form part of the total income and the Revenue could not point out any error in the said explanation offered by the assessee. The assessee while explaining the expenses debited to Profit and Los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working disallowance u/s 14A of the Act having regard to the accounts of the assessee. In our considered view, the disallowance made by the A.O. in the instant appeal u/s 14A of the Act r.w.r. 8D(2)(iii) of Income-tax Rules, 1962 cannot be sustained and the disallowance of the expenses is to be made keeping in view expenses debited to the Profit and Loss Account (including , inter-alia, PMS Fees) having regard to the accounts of the assessee in accordance with mandate of Section 14A of the Act and hence, the issue is set aside to the file of the AO for making de-novo disallowance of expenses u/s 14A of the Act on merits in accordance with directions in this order in accordance with provisions of Section 14A of the Act. Needless to say that proper and adequate opportunity of being heard shall be provided by the AO to the assessee in accordance with principles of natural justice in accordance with law before de-novo determination of disallowance of expenses u/s 14A of the Act on merits. We order accordingly. 16. In the result appeal of the assessee in ITA no. 1306/Mum/2015 is partly allowed for statistical purposes as indicated above . 17. Out decision in ITA No. 1540/Mum/2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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