2021 (9) TMI 1462 - AT - Income Tax

Disallowance of expenses as no business activity was carried out by the assessee during the year under consideration - difference between commencement of the business and setting off of the business - HELD THAT - The project cost in relation to a project comprises of cost of land and cost of development rights, borrowing cost, construction and development cost. In relation to land, the entire cost of land and development rights, stamp duty registration charges and other incidental expenses have to be capitalized. With relation to the borrowing cost, the interest directly related to the project is to be capitalized. All the direct costs relating to the construction and development of the specific project have to be capitalized. The construction cost includes conversion cost, municipal sanction fee, expenses incurred, site labour cost, cost of material, cost of hiring plant machinery, cost of designs and claims of the third party. The general administrative cost, advertisement, brokerage, selling cost, depreciation of the vehicles and office expenditure are part of the revenue expenditure and need not be capitalized. There is difference between commencement of the business and setting off of the business. All the expenses incurred pre-commencement are to be treated as pre-operative expenses and the expenses incurred which do not form the part of the work in progress (WIP) like office expenses, salaries, advertising, travelling expenses which are incurred for running of the business operations are to be treated as revenue expenditure. Hence, the disallowance made by the AO is liable to be obliterated. Appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance of expenses deemed to be revenue in nature
2. Capitalization of expenses related to business operations

Analysis:
1. The appeal was filed against the order of the ld. CIT(A) confirming the assessment order passed by the ld. AO, which the assessee claimed to be illegal, arbitrary, and against the principles of natural justice and the provisions of the IT Act, 1961. The disallowance of Rs. 2,27,16,104/- was contested by the assessee, arguing that the expenses did not pertain to the project but were general administration and selling expenses. The CIT(A) upheld the disallowance based on the predecessor's order from a previous assessment year, which the appellant argued was based on distinguishable case laws. The facts revealed that the assessee, a real estate company, had already capitalized a significant amount for capital work in progress and preoperative expenses. The Assessing Officer held that the expenses in question should also be capitalized as no business activity was conducted during the year. The CIT(A) agreed, emphasizing that income computation must adhere to the Income Tax Act, irrespective of accounting standards.

2. The arguments presented by the parties focused on whether the expenses should be treated as capital or revenue expenditure. The assessee contended that since business operations had commenced, the expenses for advertising, brokerage, and commission should be considered revenue expenses and deductible. Reference was made to a judgment of the Bombay High Court and Accounting Standards to support this position. On the other hand, the Revenue argued that without sales reflected in the Profit and Loss Account, the matching concept of income to expenditure was not satisfied. The Tribunal analyzed the project cost components, distinguishing between capital and revenue expenditures. It was clarified that general administrative costs, advertisement, brokerage, selling costs, and office expenses are considered revenue expenditures and should not be capitalized. The Tribunal concluded that expenses incurred for running business operations, not forming part of work in progress, should be treated as revenue expenditure. Consequently, the disallowance made by the AO was overturned, and the appeal of the assessee was allowed.

In conclusion, the Tribunal's decision favored the assessee, emphasizing the distinction between capital and revenue expenditures in the context of business operations. The judgment highlighted the importance of correctly categorizing expenses to ensure accurate income computation and deduction eligibility, aligning with the provisions of the Income Tax Act.