2017 (11) TMI 2006 - AT - Income Tax

Nature of expenditure - advertisement expenses business promotion brokerage and commission and software developing charges - revenue or capital expenditure - HELD THAT - The facts are that the assessee is developing a project and for which the assessee has incurred the cost of the project on the land and its development charges. The same have been capitalized as work in progress by the assessee. Certain expenditure such as advertisement expenditure brokerage expenditure business promotion expenditure and software development charges were not capitalized by the assessee but claimed as revenue expenditure. The guidance has been provided by the Institute of chartered accountants of India for accounting in case of real estate projects. These guidelines are undisputedly applicable to the facts of the case before us. None of the expenditure incurred by the assessee were not found to be not genuine. Looking from the another angle about the expenditure claimed by the assessee it would be apparent that if the assessee follows the completed contract method then the assessee would be carrying on the cost of the project for the period till the project is sold. Naturally the cost of the project would be increased by these amounts and the revenue is duty bound to grant the deduction of this cost of project at the time of sale. Therefore in that particular scenario the amount of expenditure incurred by the assessee would be allowed to the assessee is a deduction in that particular year. If the deduction is allowed to the assessee during this year and the assessee has incurred loss assessee is duty bound to set of this loss within a specified number of assessment year specified under section 72 of the Income Tax Act i.e. 8 years. If the assessee cannot set of these losses during that particular period then the assessee forgoes the tax advantage of claim of the loss. Therefore even if the expenditure is allowed to the assessee for this year as deduction it does not make the case of the revenue at any disadvantageous position in fact it puts assessee into some disadvantage On the identical facts and circumstances of the case the coordinate bench in case 2016 (11) TMI 709 - ITAT MUMBAI for assessment year 2008-09 has allowed the claim of the assessee for deduction under section 37 (1) on account of advertisement expenses brokerage expenses. Therefore respectfully following the decision of the coordinate bench we also allow the claim of the assessee with respect to the deduction of advertisement expenses business promotion expenses brokerage and commission and software development charges. Furthermore we do not find any infirmity in the order of the Ld. CIT (A) hence we confirm the same and direct the Ld. assessing officer to delete the addition - ground in the appeal of the revenue is dismissed.

Summary

Issues:
Appeal against deletion of additions made by the assessing officer under various heads of expenses treated as capital in nature.

Analysis:
1. The assessing officer made additions to the total income of the assessee amounting to Rs. 45,03,8586 under heads like advertisement expenses, business promotion expenses, brokerage and commission, and software developing charges, treating them as capital in nature. The assessing officer noted that these expenses directly related to the ongoing project and should have been capitalized. The assessed income was determined at Rs. (-) 67,12,775 against the returned loss of Rs. 5,17,51,361.

2. The first appellate authority allowed the claim of the assessee, holding that treating the expenses as capital expenditure would not impact the taxation of the appellant. The authority noted that these expenses were necessary for the business purpose of the appellant and should be treated as revenue expenditure. The authority also cited accounting standards and judicial precedents to support the decision. Consequently, the appeal of the assessee was allowed, and the assessing officer was directed to treat the expenses as revenue expenditure.

3. The departmental representative argued that the expenses should be capitalized as the assessee had already capitalized project costs of land and construction. He contended that the completed contract method was followed, and revenue had not been recognized. Therefore, he claimed that the expenses should not be allowed as revenue expenditure.

4. The authorized representative supported the first appellate authority's decision, emphasizing that the expenses were revenue expenditure in nature. He relied on accounting guidance and judicial decisions to argue that the expenses were allowable. He also highlighted the principle of revenue neutrality and cited a decision of a coordinate bench in a similar case to support the claim.

5. The tribunal analyzed the facts and considered the guidance provided by the Institute of Chartered Accountants of India for real estate projects. The tribunal noted that the advertisement expenses, business promotion expenses, and software development charges were related to general administrative costs and not specific project costs. Following the guidance note, the tribunal concluded that these expenses should be expensed and not capitalized. The tribunal also noted that the expenses were genuine and that allowing the deduction would not put the revenue at a disadvantageous position. Therefore, the tribunal confirmed the first appellate authority's decision and directed the assessing officer to delete the additions made.

6. The tribunal dismissed the appeal of the revenue, upholding the decision to treat the expenses as revenue expenditure. The order was pronounced in open court on 22/11/2017.