2017 (7) TMI 1445 - AT - Income Tax

Disallowance of revenue expenses - assessee has claimed part of employees cost office and administrative expenses selling and marketing expenses and interest charges as revenue expenditure - assessee has capitalised major part of these expenses under the head land construction and development - HELD THAT - Annual Report filed by the assessee would show that the assessee is also engaged in other activities such as relating to acquisition of agricultural land entering into developing agreement etc. Besides being a limited company the assessee is required to incur certain expenses for maintenance of the company. Hence it cannot be said that development of present project of the assessee is the only activity carried on by it. Assessee has capitalised major part of the impugned expenses and it has claimed only a portion of the same as revenue expenditure which was considered as relatable to the administrative and other activities carried on by the assessee. We notice that the tax authorities have not found fault with the segregation made by the assessee. However they have taken the view that all expenses are required to be capitalized since the project was under construction. We notice that the view taken by the tax authorities is not in accordance with the established accounting principles discussed above. An identical issue relating to the claim of employees cost in the case of M/s. Lodha Palazzo 2014 (12) TMI 1272 - ITAT MUMBAI and the same was decided in favour of the assessee - we are of the view that the assessee was justified in claiming the above said expenditure as revenue expenses. Decided in favour of assessee.

Summary

Issues: Disallowance of revenue expenses in construction project

Analysis:
1. The appeal was filed against the order confirming the disallowance of revenue expenses of Rs. 1.79 crores related to a construction project for A.Y. 2008-09.
2. The Assessing Officer disallowed the expenses as revenue, stating they should be capitalized due to the project being under construction.
3. The Assessee argued that Accounting Standards and ICDS prescribe the treatment of such expenses. The AR highlighted that interest and borrowing costs should be capitalized, while administrative and selling costs should not be included in inventory valuation.
4. The AR referred to the Annual Report and Accounting Policies followed by the Assessee, emphasizing the capitalization of borrowing costs directly attributable to long-term projects. The AR also cited a Tribunal case supporting the deduction of certain expenses.
5. The AR contended that not all expenses were solely related to the project, as the Assessee was engaged in various activities. Thus, a portion of the expenses was rightfully claimed as revenue expenditure.
6. The Departmental Representative argued that since the Assessee had minimal income besides project-related earnings, the disallowance was justified.
7. The Tribunal observed that the Assessee had capitalized a significant portion of the expenses as per financial statements, contrary to the claim that all expenses were treated as revenue.
8. The Tribunal noted that the Assessee adhered to Accounting Standards and ICDS, and engaged in activities beyond the project under consideration, justifying the segregation of expenses.
9. The Tribunal held that the tax authorities' view of capitalizing all expenses due to the project's construction phase was not aligned with accounting principles.
10. Citing a similar Tribunal case, the Tribunal ruled in favor of the Assessee, allowing the claimed expenses as revenue expenditure.
11. Consequently, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to allow the Assessee's claim for the expenses.

This detailed analysis of the judgment highlights the arguments presented, the application of accounting standards, the Tribunal's reasoning, and the final decision in favor of the Assessee regarding the disallowance of revenue expenses in the construction project.