2007 (11) TMI 266 - HC - Income Tax

Deductibility of the entire expenditure incurred under completed contract method of accounting - business of construction and sale of multi-storeyed office-cum-shopping complex - assessee has to provide air-conditioning to the shops and to allot car parking facility amount received for providing above facility are assessable in year of receipt & could not be spread over several years legal and advertisement expenses entitled to deduction in full in the year in which it was incurred

Summary

Issues Involved:
1. Treatment of amenity charges for central air-conditioning.
2. Treatment of receipts for car park allotment.
3. Deductibility of expenditures under the completed contract method of accounting.

Issue-wise Detailed Analysis:

1. Treatment of Amenity Charges for Central Air-conditioning:

The primary issue was whether the amenity charges paid for central air-conditioning of shops should be treated as an advance or a trading receipt. The Tribunal held that the charges should be spread over five years, aligning with the agreement's terms. However, the High Court rejected this view, stating that the entire shopping complex was centrally air-conditioned, and the charges collected were part of the sale consideration. The court concluded that the sum received was a revenue receipt and should be assessed in the year of receipt, not spread over five years. The court emphasized that the separate agreement for air-conditioning was a device to suit the convenience of the assessee.

2. Treatment of Receipts for Car Park Allotment:

The court examined whether the receipt for car park allotment should be treated as a returnable deposit or a trading receipt. The Tribunal had treated it as a refundable amount, but the High Court disagreed. The court noted that the car park space was inseparable from the sale of the undivided share of the land and the apartment. The court held that the receipt for car park allotment was a trading receipt and should be assessed in the year of receipt, aligning with the sale agreement's terms.

3. Deductibility of Expenditures Under the Completed Contract Method of Accounting:

The issue here was whether the entire expenditure incurred during the year should be allowed as a deduction, despite the assessee following the completed contract method of accounting. The Tribunal allowed the full deduction for legal and advertisement expenses but remanded the sales promotion expenses back to the Assessing Officer. The High Court upheld the Tribunal's decision, stating that the nature of the business and the character of the expenses justified the full deduction in the year incurred. The court emphasized that the completed contract method was consistently followed by the assessee, and the expenses were relevant to the completed phase of construction.

Conclusion:

The High Court reversed the Tribunal's decision on the treatment of amenity charges and car park receipts, holding that they are revenue receipts assessable in the year of receipt. However, the court confirmed the Tribunal's decision on the deductibility of legal and advertisement expenses, allowing the full deduction in the year incurred. The court's judgment emphasized the importance of aligning the treatment of receipts and expenses with the terms of the agreements and the nature of the business.