2014 (6) TMI 226 - HC - Income Tax

Capitalization of expenses for project real estate project - development of a residential colony - project yet to commence - Held that - They were/are engaged in the real estate development business and had undertaken development of the project - It has to be examined whether the expenditure incurred on development of the project should be taxed by applying Accounting Standard No.7 and in case, the said Accounting Standard has not been followed, the effect thereof has to be ascertained and considered - The exercise has not been undertaken in the case - Tribunal in the order without dwelling on the aspect, held that the expenditure was capital, as corresponding income from the project was not recorded or brought to tax the matter should be remitted to the AO for a fresh adjudication as to whether other expenses can be allowed as expenditure, in accordance with law, i.e. Accounting Standard as applicable, read with Section 145/145A of the Act Decided in favour of Assessee.

Summary

Issues involved:
1. Capitalization of expenses related to a real estate project for Assessment Year 2008-09 under Section 260A of the Income Tax Act, 1961.

Analysis:
1. The appellant declared nil income for the Assessment Year 2008-09, claiming expenses of Rs.32,33,814, with no business income but an increase in closing stock of land. The assessment order directed capitalization of all expenses as no business income was derived during the year.
2. The Commissioner (Appeals) noted that the appellant had a license to develop a residential colony but had not commenced the project, leading to contradictory observations on capitalizing expenses. The tribunal upheld the capitalization of expenses related to the project, considering the appellant's actions of capitalizing expenses incurred for the project.
3. The tribunal allowed certain day-to-day expenses as revenue expenses, emphasizing that expenses necessary for the business activity should be allowed, following Accounting Standards and Section 145/145A of the Act.
4. The Senior Standing Counsel argued for following Accounting Standard No.7, highlighting the need for clarity and consistency in applying accounting standards to avoid confusion.
5. The High Court found merit in the Senior Standing Counsel's contention and directed a fresh examination by the Assessing Officer to determine the allowability of development expenses under applicable accounting standards and commercial principles, remitting the matter for a fresh decision. The court emphasized the importance of aligning expenses with accounting standards and commercial principles under Sections 145/145A of the Act.

This comprehensive analysis of the judgment delves into the intricacies of the capitalization of expenses related to a real estate project for the specified Assessment Year, highlighting the application of accounting standards and the need for a fresh examination by the Assessing Officer to ensure compliance with relevant legal provisions.