TMI Blog2019 (4) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... s account. The above accounting method followed by the assessee has been also fortified by the “Guidance Note on Accounting for Real Estate Transaction” issued by the Institute of the Chartered Accountants which vide paragraph 2.2 defines the “Project Cost (i.e. which expenses shall be included while determining the project cost) Accounting treatment given in Guidance note on Real Estate Transaction is at par with AS 2 reproduced above and the assessee has followed these accounting principles in preparing its accounts year after year including the year under consideration. We found that the assessee, in compliance to these accounting principles, determined the expenses which are not related to the work in progress and debited the same to the profit & loss account being administrative expenses and selling expenses incurred for day to day functioning of the business and marketing; likewise, the expenses directly attributable to the work in progress have been debited to work in progress. No merit for the disallowance made by the AO on account of employee, cost, administrative expenditure and selling and marketing expenses, which are essentially in the nature of revenue expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case and in law, the ACIT erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the ACIT to be directed to drop the penalty proceedings under section 271(1)(c) of the Act. The ground of appeal raised by Revenue reads as under: - 1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition made as per the provisions of Section 14A of the I.T. Act without appreciating the fact as assessee has incurred indirect expenses for earning exempt income. 3. Rival contentions have been heard and record perused. The brief facts of the case are that the assessee is engaged in the business of construction. During the course of scrutiny assessment the AO disallowed expenses by invoking provisions of Section 14A of the Act. Addition was also made on account of expenditure pertaining to employee cost, administrative expenses and selling and marketing expenses debited to the Profit Loss Account. The AO was of the view that expenditure incurred by the assessee under these heads should be capitalised and cannot be allowed as revenue expenditure. By the impugned order the CIT(A) upheld the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture incurred on the above heads were to be capitalised and cannot be allowed as Revenue expenditure. From the record we found that assessee follows mercantile system of accounting. In order to recognise the revenue from the project, it follows percentage completion method of accounting. All the expenses incurred by the assessee which are directly attributable to the project have been debited to work in progress and the expenses which were not attributable to the project have been debited to Profit Loss Account During the assessment year under consideration, the assessee company has incurred various expenses which inter alia includes (i) salary and employee related expenses of ₹ 6, 88, 74, 859/- (ii) Office and administrative expenses of ₹ 3,72,71 ,119/- and (Hi) selling and marketing expenses of ₹ 1, 99,50,317/-. All the expenses incurred by the assessee Company have been debited/capitalised to the work in progress except that part which relates to administration of business; as under: Sl. No. Particulars Expenses Incurred Expenses Capitalised Expenses debited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of sale', i.e. whether the activity of developing housing projects on its own account as a I commercial venture by the company can be construed as a production activity. j (c) If the activities of the company cannot be considered as a production activity and consequently AS 2 is also not applicable, which Accounting Standard should be followed for recognition and valuation of its construction of its construction work-in-progress? [Emphasis supplied] The above queries have been answered by the EAC as under: (a) The revised AS 7 would not be applicable to the company for accounting for new housing project which are undertaken by the company during the accounting periods commencing on or after 1.4.2003. (b) The activity of developing housing projects on its own account as a commercial venture by the company is of the nature of production activity and, therefore, should be construed as such. The inventories should be valued by the company in accordance with AS 2 as explained in paragraph 2 above. (c) AS 2 is relevant for the valuation of inventories including construction work-in-progress and not for recognition of revenue. AS 9 would be relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of work performed. 11. Furthermore, in Guidance note on Accounting for Real Estate Transaction also it was stated that the general administration cost and selling cost shall not form part of work in progress (fefer page 66 of paper book}. In short, the accounting treatment given in Guidance note on Real Estate Transaction is at par with AS 2 reproduced above and the assessee has followed these accounting principles in preparing its accounts year after year including the year under consideration. We found that the assessee, in compliance to these accounting principles, determined the expenses which are not related to the work in progress and debited the same to the profit loss account being administrative expenses and selling expenses incurred for day to day functioning of the business and marketing; likewise, the expenses directly attributable to the work in progress have been debited to work in progress. 12. Moreover it is not possible to run a business without incurring the administrative cost Apart from the construction related expenses, the assessee was also obliged to incur various administrative and selling expenses in order to run its business smoothly which is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with contention of the Ld. Counsel for the assessee that the employee cost refers to salary paid to the employees who are looking after the administration of office and not directly related to construction of the project but is part of the administrative expenses. Similarly, the office and administrative expenses and selling and marketing expenses are to be charged to the profit loss account in the very same year in which they are incurred and have to be excluded from the cost of inventories for working out closing WIP as per the guidelines issued by the ICAI, Accounting Standard AS-2 and AS-7. The assessee has regularly and consistently been following the said method of accounting as per the provision of section 145A of the IT. Act. The A.O has not assigned any cogent reason as to why the method, which has been consistently followed by the assessee and accepted by the department in past as well in succeeding assessment years and which is in accordance with the recognized principles of accounting by ICAI is being rejected. In our view, the action of the Revenue Authorities in rejecting the assessee's accounting method, without assigning any reason is not justified. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. 372 ITR 605 has been subsequently reversed by the Hon'ble Supreme Court. Not only this, the Hon'ble Supreme Court has duly considered the earlier decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation (supra), which has also been relied upon by the CIT(A). The relevant paragraphs of the Hon'ble Supreme Court decision reads as under:- 15. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same ..... X X X X Extracts X X X X X X X X Extracts X X X X
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