PER N.R.S.GANESAN, JUDICIAL MEMBER This appeal of the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-11, Chennai, dated 26.2.2015 and pertains to assessment year 2010-11.

2. Shri D.Anand, ld. Counsel for the assessee submitted that the first issue arises for consideration is disallowance of ` 50 lakhs. According to the ld. Counsel, the assessee-company engaged itself in ITA No. 1354/15 :- 2 -: the business of real estate, construction of residential complexes etc. In the course of its business activity, the assessee entered into an agreement for purchase of 6.68 acres of land at Ambattur, Madhavaram Village for a total sale consideration of ` 17.50 crores. In pursuance of the agreement dated 12.10.2007, the assessee has paid a sum of ` 50 lakhs towards advance. According to the ld. Counsel, the Board of Directors of the Company decided not to proceed with the project due to unanticipated lull in the real estate market due to financial crisis in US. According to the ld. Counsel, most of the prospective buyers of the flats are non-resident Indians and software employees. Financial crisis in US, affected the real estate market in India since the assessee is targeting mainly software employees and non-resident Indians. Therefore, the assessee-company could not make any progress in respect of the land purchased at Ambattur, Madhavaram Village and hence, the Board of Directors decided to abandon the project. The land owners, however, forfeited the advance given by the assessee. Therefore, the advance given by the assessee to the extent of ` 50 lakhs was not refunded by the land owners and hence, this was treated as loss and claimed while computing the total income. However, the Assessing Officer rejected the claim of the assessee on the ground that the sale of the land as such would have resulted in more gain than incurring loss to the ITA No. 1354/15 :- 3 -: assessee. Moreover, the sellers of the land treated the land as capital asset and treated the transaction itself as capital transaction even after forfeiting of the advance. The sellers of the land have also not treated the advance forfeited by them as income in their hands. Therefore, the loss suffered by the assessee is a capital loss hence, it cannot be allowed as business loss while computing the total income. According to the ld. Counsel, merely because the sellers treated the amount in question as capital asset in their hands that does not automatically be treated as capital asset in the hands of the assessee-company. Admittedly, the assessee-company is engaged in the business of real estate and construction of flats/residential complexes, therefore, the land purchased by the assessee is stock-in-trade in the hands of the assessee. Due to various reasons including the financial crisis in the US, the assessee could not proceed further in respect of the project, therefore, the loss suffered by the assessee is on the revenue field and it has to be allowed as business loss. According to the ld. Counsel, the CIT(A) is not justified in confirming the order of the Assessing Officer.

3. On the other hand, Shri P. Radhakrishnan, ld. Departmental Representative submitted that the assessee is engaged in the real estate and construction of residential complexes. The assessee is also ITA No. 1354/15 :- 4 -: one of the reputed builder in the city of Chennai and purchasing huge track of land with an intention of exploit the same in the business of construction of flats. According to the ld. DR, there was substantial increase in the land prices in an around the urban areas. According to the ld. DR, the assessee constructs apartments mainly catering to the luxury segment of the prospective purchasers. Therefore, the claim of the assessee that the advance was forfeited by the vendors of the land is farfetched one especially when the prices of the land are increasing day by day. Moreover, the vendors of the land treated the land in question as capital transaction, therefore, the amount forfeited by them has to be treated as capital income in the hands of the vendors of the land. According to the ld. DR, the advance given by the assessee even though it was forfeited cannot be treated as business loss. Therefore, the CIT(A) has rightly upheld the order of the Assessing Officer.

4. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee engaged itself in the business of real estate and construction of flats/residential apartments. The contention of the ld. DR is that the assessee has purchased the land for construction of flats for catering to the luxury segment of the prospective buyers. Whether the ITA No. 1354/15 :- 5 -: assessee concentrate on construction of flats for the luxury segment or to the other section of the public, it is not for the Revenue to treat the business of the assessee separately merely because the assessee concentrates on the luxury segment of the prospective buyers of the flats. The fact remains that the assessee is engaged in the business of construction of flats and in order to promote the construction of flats, the assessee intended to purchase 6.68 acres of land at Ambattur, Madhavaram Village. After entering into an agreement, the assessee has also paid ` 50 lakhs as advance. The payment of ` 50 lakhs as advance for purchase of 6.68 acres of land is not in dispute. The assessee, for the reasons best known to it, decided not to proceeded with the project and accordingly abandoned the project which resulted in forfeiture of the advance amount of ` 50 lakhs by the vendors of the land. It is for the assessee to decide whether it intend to proceed with the project or not. The Assessing Officer cannot comment upon the decision of the assessee. When the assessee decided not to proceed with the project, whatever may be the reason, it was the decision taken by the assessee in the course of the business activity, therefore, the forfeited amount is a loss in the business. It is not in dispute that the advance paid by the assessee to acquire stock-in-trade in the course of the business was forfeited. Therefore, this Tribunal is of the considered opinion that the assessee ITA No. 1354/15 :- 6 -: has suffered the loss in the regular course of business. The Assessing Officer treated the loss as capital loss on the ground that the land in question was treated as capital transaction by the vendors of the land. The Assessing Officer has also found that if the land was retained and sold, the assessee would have earned more gain than incurring loss. We are unable to uphold the reasoning of the authorities below. As discussed earlier, it is for the assessee to decide whether to proceed with the project or not. The assessee can also decide to sell the land as such by keeping the same. The Assessing Officer cannot step into the shoes of the assessee and suggest what should be for the best interest of the assessee. The assessee being a businessman knows well how to arrange its affairs for earning maximum profit. This Tribunal is of the considered opinion that merely because the assessee abandoned the project after paying advance of ` 50 laks, that cannot be a reason for treating the loss claimed by the assessee as capital loss.

5. The next reason for the Assessing Officer to treat the loss as capital loss is that the vendors of the land treated the transaction as capital transaction. This Tribunal is of the considered opinion that the land may be a capital asset in the hands of the vendors. However, when the land comes to the possession of the assessee, it becomes a ITA No. 1354/15 :- 7 -: stock-in-trade since the assessee is admittedly engaged in the business of construction of flats. An asset may be a capital asset in the hands of the seller and it may be a stock-in-trade in the hands of the purchaser. It all depends upon the transaction. For example, when a manufacturing industry purchases a machinery for its manufacturing activity from the industry which manufactures the machinery, the machinery purchased by the manufacturing industry may be a stock-in-trade in the hands of the company which manufactures machinery. However, it is a capital asset in the hands of the company which purchases the machinery for using the same in its manufacturing activity. Similarly, when the land owners sell the land to a real estate dealer, the land is a capital asset in the hands of the land owner. However, the same land purchased by the real estate dealer becomes a stock-in-trade. Therefore, the treatment in the hands of the vendors of the land cannot be a determining factor to allow the claim of the assessee either as revenue loss or as capital loss. It has to be decided whether the loss has occurred in the course of the business activity for acquiring a stock-in-trade in the hands of the assessee. In this case, admittedly, the assessee acquired a stock-in-trade for construction of residential flats at Ambattur in Madhavaram Vilalge. Therefore, the loss, if any, suffered in the course of the acquisition of the stock-in-trade has to be necessarily allowed a ITA No. 1354/15 :- 8 -: revenue loss, hence, it has to be allowed as business loss while computing the total income. In view of the above, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow ` 50 lakhs as business loss while computing the taxable income of the assessee.

6. The next ground of appeal is with regard to disallowance of labour expenditure.

7. Shri D. Anand, ld. Counsel for the assessee submitted that the assessee has claimed `12,45,73,509/- towards labour expenditure. However, the Assessing Officer found that the vouchers maintained by the assessee are not complete. Accordingly, he disallowed 3% of the total expenditure claimed by the assessee. According to the ld. Counsel, the payment was made to labourers for construction of the building. The labourers engaged by the assessee are illiterate, therefore, it is not possible to get any voucher for receipt of money by the individual labour therefore, the assessee has prepared self-made vouchers. According to the ld. Counsel, without making payment, the assessee could not have completed the project. The ld. Counsel further submitted that the labourers used to move from one place to another, therefore, locating the labourers who ITA No. 1354/15 :- 9 -: actually received the money is difficult. When the work was carried on by the assessee, according to the ld. Counsel, the assessee has to necessarily make the payment. Therefore, merely because the assessee made only self-made vouchers, that cannot be a reason for disallowing the claim of the assessee.

8. On the contrary, Shri P. Radhakrishnan, ld. DR submitted that the assessee claimed labour expenses to the extent of `12,45,73,509/- in the Profit & Loss Account. On verification of the bills and vouchers produced by the assessee, the Assessing Officer found that the bills and vouchers are improperly vouched or self-made and it could not be verified. Since the assessee claims that all labourers were unskilled labourers with high mobility and scarcity of labour force on day today basis, the Assessing Officer keeping in view the fact that the labourers were uneducated, disallowed the expenditure at 3% of the total claim made by the assessee. According to the ld. DR, when the vouchers were not verifiable, the Assessing Officer has reasonably estimated the disallowance at 3%. Therefore, the assessee cannot have any grievance.

9. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee is engaged in the business of construction of residential flats. ITA No. 1354/15 :- 10 -: The labourers in the construction industry are in the unorganized sector and most of the labourers are uneducated. The labourers who engaged in construction industry used to migrate from one place to another on day today basis depending upon the availability of work. Therefore, obtaining proper voucher from such kind of unorganized laboruers is something beyond the control of the assessee. Therefore, the assessee has to necessarily make self-made vouchers to evidence the payment of salary to such labourers engaged in the construction activity. Therefore, the Assessing Officer has to examine whether there was any inflation of the expenditure claimed by the assessee after comparing the nature of the work carried out by them. In the case before us, it is nobodys case that the assessee has inflated the expenditure. In the absence of any allegation that the assessee has inflated the expenditure, this Tribunal is of the considered opinion that merely because self-made vouchers are made with regard to payment made to labourers who engaged in the construction activity that alone cannot be reason for disallowing any part of the expenditure on estimate basis. Therefore, this Tribunal is of the considered opinion that the disallowance made by the Assessing Officer at 3% of the total expenditure is not called for. Accordingly, the orders of the lower authorities are set aside and the disallowance ITA No. 1354/15 :- 11 -: made by the Assessing Officer @ 3% to the extent of ` 37,37,206/- is deleted.

10. The next ground of appeal is with regard to disallowance of brought forward losses and unabsorbed depreciation to the extent of `86,84,479/-.

11. Shri D. Anand, ld. Counsel for the assessee submitted that the during the financial year 2008-09 the assessee has borrowed loan for housing project at Thaiyur, Chennai. There was a delay in commencement of the project due to approvals from multiple authorities, therefore, the interest cast on the borrowed funds was deferred. The assessee in fact treated the interest on the borrowed fund as deferred revenue expenditure in the books of account. The ld. Counsel further submitted that the project at Thaiyur was completed during the financial year 2012-13. Upto the financial year 2011-12, the deferred revenue expenditure became current asset and accordingly, it was treated as closing stock as per the Accounting Standard 7. The ld. Counsel further submitted that necessary adjustments were also made in computing the taxable income in the year in which the project was fully accounted. According to the ld. Counsel, the interest on the borrowed fund has to be allowed to be carried forward as claimed in the return of income. ITA No. 1354/15 :- 12 -:

12. On the contrary, Shri P. Radhakrishnan, ld. DR submitted that the assessee claimed deferred revenue expenditure in respect of the interest on borrowed funds as allowable expenditure. According to the ld. DR, interest on the borrowed fund was prior to the commencement of the project. Since the expenditure was forming part of the pre-commencement period, it has to be capitalized on the project. As rightly observed by the Assessing Officer, only the expenditure which was deferred in the books of account has to be considered as allowable expenditure on the commencement of the project as claimed by the assessee. In fact, the assessee is maintaining regular books of account for construction of the flats. When the assessee is maintaining regular books of account and claiming the expenditure after commencement of the project on the interest payment, there is no reason to deviate from the same while computing the taxable income. According to the ld. DR, the interest on the borrowed fund before commencement of the project cannot be allowed as expenditure either for assessment year 2009-10 or for assessment year 2010-11. Therefore, the CIT(A) has rightly confirmed the addition made by the Assessing Officer. ITA No. 1354/15 :- 13 -:

13. We have considered the rival submissions on either side and also perused the material available on record. The assessee is admittedly engaged in the business of construction of flats. During the course of business activity, the assessee proposed to construct residential flats at Thaiyur, Chennai. The assessee has also borrowed loan for the abovesaid housing project. The assessee is claiming interest on the borrowed funds as revenue expenditure. Since the construction of flats was not commenced due to delay in getting approvals from multiple authorities, the assessee carried forward the deferred revenue expenditure and claimed the same during the year under consideration. The question arises for consideration is when the assessee is in the business of construction of residential flats and borrowed funds for the purpose of business, whether the interest on such borrowed funds is an allowable expenditure or not? This Tribunal is of the considered opinion that when the assessee borrowed funds for the purpose of business, merely because the project in Thaiyur could not be commenced for whatever reason, the assessee is very much in the business of construction industry, therefore, the interest on the borrowed funds is an allowable expenditure while computing the total income. The fact that the assessee deferred the expenditure in the earlier assessment year cannot be reason to disallow the claim of the assessee. The ITA No. 1354/15 :- 14 -: Assessing Officer found that in the Annual Report, the assessee claims that the expenditure is yet to be capitalized for the relevant project. This Tribunal is of the considered opinion that the entry in the books of account is irrelevant for the computation of taxable income. The income is computed as per the Income-tax Act, 1961 irrespective of the entries made in the books of account. When the assessee borrowed funds and paid interest on such borrowed funds, this Tribunal is of the considered opinion that the interest paid on the borrowed funds has to be allowed as business expenditure. Thaiyur is one of the project proposed by the assessee. Merely because the loan was borrowed for Thaiyur project there is no restriction for the assessee to use the borrowed funds for other projects. The borrowed funds can also be utilized for other projects. It is not the case of the Revenue that the assessee is not constructing any other flats or residential complex at the relevant point of time. When the assessee is constructing residential complexes during the relevant period of time and also proposed to commence a project at Thaiyur, this Tribunal is of the considered opinion that the expenditure on the borrowed funds has to be necessarily allowed. In view of the above, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed ITA No. 1354/15 :- 15 -: to allow the payment of interest on the borrowed funds claimed by the assessee while computing the taxable income.

14. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 13th April, 2016, at Chennai. Sd/- Sd/- (. ) (A. MOHAN ALANKAMONY) /ACCOUNTANT MEMBER (... )) (N.R.S. GANESAN)  /JUDICIAL MEMBER $/Chennai %/Dated: 13th April, 2016   () *)/Copy to:

1. /Appellant 4. +/CIT

2. /Respondent 5. )  ./DR

3. + ()/CIT(A) 6.  /GF