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Deputy Commissioner of Income Tax Vs. Thakker Developers - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Pune
Decided On
Judge
Reported in(2008)115TTJ(Pune.)841
AppellantDeputy Commissioner of Income Tax
RespondentThakker Developers
Excerpt:
.....is offered for taxation. o that the ao's action was based on the decision of tribunal, mumbai (special bench) in the case of wall street construction ltd. v. jt. cit (supra).6. shri k.a. sathe, the learned authorised representative reiterated the arguments put forward on behalf of the assessee before the ao and the cit(a). the submissions made by him are summarized below: o that during the year in question the assessee raised various loans which were used for different buildings/construction projects. o that the bank statements, submitted by the assessee, showing the utilization of loans raised, substantiate the above point. o that though the loan of rs. 1 crore from hdfc was raised for funding the manohar nagar project, these funds were not solely utilized for the said project but.....
Judgment:
1. This appeal filed by the Department is directed against the order of CIT(A) dt. 12th Nov., 2001 for asst. yr. 1998-99.

2. The main issue involved in this appeal is about the applicability of the decision of the Tribunal (Special Bench) in the case of Wall Street Construction Ltd. v. Jt. CIT , to the case of a builder assessee, who was consistently following a 'modified project completion method' of accounting, and which was accepted by the AO during earlier years.

3. The assessee company was deriving income from its business as a builder and civil contractor. The return for asst. yr. 1998-99 was filed on 24th Nov., 1998 showing total income of Rs. 25,21,880. In the assessment order passed Under Section 143(3) on 30th March, 2001, the AO assessed the total income at Rs. 43,63,796 after making additions, inter alia, as under: 4. The CIT(A) deleted the aforesaid additions and his order has been challenged by the Department in the present appeal.

1. On the facts and in the circumstances of the case the CIT(A)-I erred in deleting the addition made to the total income on account of interest paid to HDFC of Rs. 6,45,848 on loan taken for Manohar Nagar Project but not included in arriving at cost of work-in-progress.

2. On the facts and in the circumstances of the case the CIT(A)-I erred in deleting the addition made to the total income on account of loan processing fees of Rs. 2,50,000 incurred on the loan taken for Manohar Nagar Project but not included in arriving at cost of work-in-progress.

4. On the facts and in the circumstances of the case CIT(A) failed to appreciate the fact that the interest paid to HDFC as mentioned at (1) above and the loan processing fees mentioned at (2) above should go to form part of the cost of work-in-progress of Manohar Nagar Project as they were directly attributable to the project. By not doing so, the assessee was not declaring its true taxable income for the year under consideration.

5. Shri S. Bains, the learned Departmental Representative placed reliance on the order of the AO. He vehemently argued saying that the order of the CIT(A) be reversed and that of the AO be restored. The submissions made by him are summarized below: o that the assessee, as a builder, was following the 'project completion method' of accounting.

o that the assessee had obtained from the HDFC a loan of Rs. 1 crore for its Manohar Nagar Project in Nashik; comprising construction of flats and row houses.

o that the processing fee of Rs. 2,50,000 and interest of Rs. 6,45,846 in respect of the aforesaid loan was debited to the P&L a/c for the year ending 31st March, 1998, though the Manohar Nagar Project was not completed during the year ending 31st March, 1998.

o that the loan processing fee of Rs. 2,50,000 and interest of Rs. 6,45,848 could not be allowed against the income from the other projects.

o that the aforesaid expenses should have been considered as part of the work-in-progress of the Manohar Nagar Project.

o that in the 'project completion method' of accounting, interest is allowed only in the year in which the project is completed and when the income from that project is offered for taxation.

o that the AO's action was based on the decision of Tribunal, Mumbai (Special Bench) in the case of Wall Street Construction Ltd. v. Jt.

CIT (supra).

6. Shri K.A. Sathe, the learned Authorised Representative reiterated the arguments put forward on behalf of the assessee before the AO and the CIT(A). The submissions made by him are summarized below: o that during the year in question the assessee raised various loans which were used for different buildings/construction projects.

o that the bank statements, submitted by the assessee, showing the utilization of loans raised, substantiate the above point.

o that though the loan of Rs. 1 crore from HDFC was raised for funding the Manohar Nagar Project, these funds were not solely utilized for the said project but were used for other business purposes.

o that the amount of said loan was credited in the cash credit account of the assessee with Nashik People's Co-operative Bank and was utilized for various business purposes.

o that the expenditure of interest was consistently claimed by the assessee as period cost in the P&L a/c.

o that the funds were so mixed up that the interest paid thereon could not be identified and allocated to individual projects.

o that the above method, consistently followed by the assessee during earlier years, was never disturbed by the AO. o that reliance was placed on the decision of Tribunal, Hyderabad in the case of T.C.I. Finance Ltd. v. Asstt. CIT .

o that the facts in the case of Wall Street Construction Ltd. (supra) were distinguishable and therefore the decision of the Tribunal (Special Bench), did not apply to the case of the present assessee.

7. We have considered the rival submissions in the light of material on record and the precedents cited.

8. The learned Departmental Representative reiterated that the issue involved in this case was squarely covered by the decision of Tribunal, Mumbai (Special Bench) in the case of Wall Street Construction Ltd. v.Jt. CIT (supra). Therefore, to begin with, we proceed to discuss the relevant facts in the case of Wall Street Construction Ltd. (supra) and the decision of the Tribunal (Special Bench), in five-following paras.

9. The facts-in the case of Wall Street Construction Ltd. (supra), in brief, are that the assessee was following 'project completion method' of accounting, that in the books of account the interest expenditure was allocated to different projects, that in the books of account the interest expenditure referable to a particular project was consistently identified and added to the value of the work-in-progress in respect of that project, and that in respect of the entire interest expenditure deduction was claimed Under Section 36(1)(iii) against the income of other projects which were completed during the relevant year. The AO rejected the claim and held that the interest expenditure has to be added to the value of work-in-progress, because the assessee was following the 'project completion method' of accounting. The CIT(A) upheld the AO's view. Since there was divergence of opinion on this issue between different Benches of the Tribunal a Special Bench was constituted by the President of the Tribunal, to consider and decide the following issue: Whether, where an assessee following project completion method of accounting, the interest identifiable with that project should be allowed as deduction in the year when the project is completed and income is offered from the project or it should be allowed on year to year basis.

10. During the hearing before the Special Bench, Shri Y.P. Trivedi, senior Counsel for the assessee, had posed the following six questions, which according to him were relevant to the issue.

(a) In the case of a builder, following project completion method, engaged in simultaneously construction of multiple project, whether interest cost is a period cost or it has to be added to the value of work-in-progress? (b) Whether interest on such borrowing which cannot be directly linked to a particular project, is to be allowed from year to year or is to be added to the value of work-in-progress? (d) Whether the Bombay High Court decision in the case of CIT v. Lokhandwala Construction Inds. Ltd. concludes the controversy? (e) Whether in the case of a builder following project completion method, the work-in-progress is to be considered as stock-in-trade or capital assets? (f) Whether a system of accounting consistently followed by the assessee and accepted by the Department in earlier years can be discarded by the Department having regard to the ratio of the Bombay High Court in the case of CIT v. Goodlas Nerolac Paints Ltd. .

11. It was reiterated by the learned Authorised Representative before the Special Bench that the issue stood concluded by the decision of the Bombay High Court in the case of CIT v. Lokhandwala Construction Inds.

Ltd. . In paras 23 to 25 of its order, the Tribunal (Special Bench), after discussing the facts in detail, observed that the decision of the Bombay High Court, in the case of CIT v.Lokhandwala Construction Inds. Ltd. (supra), arose in entirely different facts.

12. Finally, in para 30 of its order, the Tribunal (Special Bench) held as under: 30...In the present cases, the assessees have identified interest cost and have allocated such cost to different projects in the books of account, but deduction in respect of interest is claimed Under Section 36(1)(iii) against the income of some other projects which are completed during the relevant years. In our view, this procedure results into distortion of the correct profits which must be determined as per the project completion method followed by the assessee.

13. In the present case, Shri K.A. Sathe, the learned Authorised Representative reiterated that the decision of the Special Bench in the case of Wall Street Construction Ltd. (supra), was distinguishable on facts. He contended that in the present case, the loans were borrowed and utilized for all the projects, that the funds were mixed up, that it was not possible to identify and allocate the interest cost to a particular project, that the interest cost was consistently treated as period cost along with the administrative cost and was claimed in the P&L a/c without being added to the value of work-in-progress, and that this method was accepted by the AO during earlier years.

14. Shri Sathe, submitted that, the expenditure of interest claimed in the P&L a/c, as period cost, in earlier years, was as under: 15. The bank-wise break up of above interest claimed in the P&L a/c was as under:____________________________________________________________________________S. No.Particulars____________________________________________________________________________ Asst yr. Asst. yr. Asst. yr. Asst. yr. Asst. yr.____________________________________________________________________________ 1996 97 1997-98 1998-99 1999-2000 2000-01 3.

Others 5,32,602 14,65,299 47,96,159 Total 6,40,343 13,22,277 49,95,284 96,22,976 1,68,48,535____________________________________________________________________________ 16. The above method consistently followed by the assessee in earlier years was, admittedly, never disturbed by the AO. It appears that, for the first time in asst. yr. 1998-99, the year in question, the AO wanted to make a partial departure, to include interest and processing charges in the value of work-in-progress only in respect of the loan of Rs. 1 crore merely because it was taken from HDFC for a specific project.

17. In our opinion the AO's action has created an anomalous situation.

The total interest debited to P&L a/c was Rs. 49,95,284. It had three Components and one of the components was Rs. 6,45,846 paid to HDFC. In other words the AO appears to have no objection to the claim of interest amounting to Rs. 43,49,438 debited to P&L a/c, as period cost.

18. In order to buttress his argument with regard to 'consistency', Shri Sathe, the learned Authorised Representative placed reliance on the decision of Tribunal, Hyderabad in the case of T.C.I. Finance Ltd. v. Asstt. CIT (supra). In the case of T.C.I. Finance Ltd. (supra) the Tribunal held as under: ...The Revenue cannot require the assessee to change its method of accounting unless para 9 of AS II which reads as under, is satisfied (1996) 130 CTR (St) 33 : 1996) 218 ITR (St) 1 (p. 3): 9 A change in an accounting policy shall be made only if the adoption of a different accounting policy is required by statute or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statement by an assessee.

Thus, when the Revenue could not demonstrate that the consistent method of accounting followed by the assessee is in violation of AS I, the disallowance made on that ground cannot be sustained.

19. AS I and II were notified by the Central Government in pursuance of Section 145(2) vide Notification No. S.O. 69(E) dt. 25th Jan., 1996 [(1996) 130 CTR (St) 33 : (1996) 218 ITR (St) 1]. This notification came into effect from 1st April, 1996 and accordingly applies to asst.

yr. 1997-98 and subsequent assessment years. The AS I mandates that 'consistency' is a fundamental accounting assumption.

20. In our considered opinion, the AO's action not only suffers from inconsistency but smacks of arbitrariness. It is not the case of the AO that since the assessee was following the 'project completion method' the entire interest cost should be identified and allocated to different projects and added to the value of the work-in-progress in respect of those projects. But, curiously enough, the AO wants to follow the decision of Tribunal (Special Bench) only in respect of a small component of interest of Rs. 6,45,846 the processing cost, and in respect of the balance of Rs. 43,49,438, he does not mind making a departure and allowing the claim of interest, having been debited to P&L a/c, as period cost. In our opinion, such as an inconsistent stand cannot be sustained.

21. One can clearly see from the above facts that the decision of the Special Bench in the case of Wall Street Construction Ltd. (supra) is not applicable to the present case. It is true that in the present case also the assessee builder was following the 'project completion method' of accounting, but the similarity of facts ends at this stage, because in the books of account the expenditure of interest was neither identified nor allocated to different projects, the interest expenditure referable to a particular project was neither determined nor added to the value of work-in-progress in respect of different projects, and the entire interest expenditure was claimed in the P&L a/c, as period cost. In fact the method followed by the assessee could more, appropriately be called a 'modified project completion method.

22. We find that the expression 'modified project completion methodvvas used by the Bombay High Court in the case of Lokhandwala Construction Inds. Ltd. (supra) and that this was referred to by the Special Bench in para 23 of its order (supra). Interestingly, this 'method', consistently adopted by the assessee, was accepted by the AO in earlier years.

23. We are aware of the observations made by the Tribunal (Special Bench) in its order (supra), saying, that in the case of a builder following, 'project completion method' of accounting, the determination of profit chargeable to tax is postponed to the year in which the project is completed, that the true profit in such a case can be determined only when the entire cost of the project, direct or indirect, including finance cost is added to the value of the work-in-progress, and that this proposition is fortified by the matching concept, as propounded by the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. v. Jt. CIT 24. We find it extremely difficult to apply the above observations/ inclusions of the Tribunal (Special Bench) to the facts of the present case, simply because of the inconsistent and self-contradictory stand taken by the AO, which gave rise to an anomalous situation. During the previous year relevant to asst. yr. 1998-99, the total expenditure on interest incurred by the assessee for all its projects was Rs. 49,95,284, which was debited to the P&L a/c as period cost, but the AO wanted to apply the decision of Wall Street Construction Ltd. (supra) only to one component of Rs. 6,45,846, and he had no objection to the balance, having been claimed in the P&L a/c as period cost, being allowed.

25. Admittedly, in earlier years, the claim of the assessee in respect of the expenditure of interest was allowed by the AO without any interference. Also, we are conscious of the fact that the issue involved before us, in this year, is only about interest of Rs. 6,45,846 and processing charges of Rs. 2,50,000, and that there is no dispute about the balance of the interest expenditure of Rs. 43,49,438, which was claimed by the assessee as period cost, by debiting it to P&L a/c, and allowed by the AO. If we sustain such an inconsistent action of the AO we will be giving our approval to a totally anomalous situation, which is devoid of any logic.

26. To conclude, our decision in the present case is based on four considerations, one, the decision of the Tribunal (Special Bench) in the case of Waff Street Construction Ltd. (supra) is not applicable to the facts of the present case, two, the method consistently followed by the assessee and accepted by the AO during earlier years could not be interfered with, without valid reasons, three, the AS I mandates that 'consistency' was a fundamental accounting assumption, and four, the action of the AO, in disallowing interest of Rs. 6,45,846 and processing charges of Rs. 2,50,000, suffers from inconsistency and arbitrariness, and is devoid of any logic. The ground Nos. 1, 2, and 4 are, accordingly, rejected.

3. On the facts and in the circumstances of the case the CIT(A)-I erred in deleting the addition made Under Section 41(1) on account of unpaid brokerage liability of Rs. 98,715.

5. On the facts and in the circumstances of the case the CIT(A)-I failed to consider the fact that the assessee was unable to give details of the unpaid brokerage liability mentioned at (3) above either before the AO or the CIT(A)-I.27. During assessment proceeding, it was noticed by the AO that a sum of Rs. 98,715 representing 'unpaid brokerage' was included in the list of 'outstanding liabilities'. The AO made an addition of Rs. 98,715 for the reasons given in para 6 of his order as under: I have carefully considered the above submission of the assessee. It is admitted that the brokerage has been claimed as deduction during the asst. yr. 1995-96 (accounting year 1994-95). Thus it is evident that this amount has not been paid for more than 3 years. In view of the above facts it is clear that the liability which is 5 years old has ceased to exist. Therefore, the above sum of Rs. 98,715 is added as profit chargeable to tax as per the provisions of Section 41(1) of the IT Act, 1961. The sum of Rs. 98,715 is added to the total income.

28. The CIT(A) deleted the addition, saying that it was not proper for the AO to make the disallowance merely on the ground of period of limitation.

29. We have considered the rival submissions in the light of material on record. The provisions of Sub-section (1) of Section 41, inter alia, provide that, where an assessee, who had been allowed deduction in respect of any expenditure or trading liability, obtains any amount in respect of such expenditure or any benefit by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him is deemed to be profits and gains of business. Here one has to remember that the 'receipt' of amount or benefit is a necessary condition, and there is no material on record to show that this condition is fulfilled in the present case. This is a deeming provision which has been invoked by the AO on mere assumption. Therefore, we are agreement with the conclusions reached by the CIT(A). These grounds are accordingly rejected.


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