2022 (8) TMI 1417 - AT - Income Tax

Allowable business expenses - Disallowance of expenses which do not pertain to the project but are in the nature of selling cost and general administration cost - expenses disallowed as assessee has not routed these expenses through P L account and claimed directly in the computation - assessee was allotted by land by NOIDA land acquired by the assessee is the stock-in-trade of the business and construction work has started during the year - CIT(A) confirmed the action of the AO holding that the construction has not been started the approvals were pending the land has not been fully paid for and it becomes apparent that the project is an infantile stage. Therefore the CIT(A) held that the business could not be said to have been setup or commenced . HELD THAT - Noida Authority-Interest and Late registration charges - The assessee was allowed 16 half yearly installments to pay the amount of Rs. 302.31 Cr. to NOIDA and in case of default interest @ 14% compounded half yearly leviable for the default period on the defaulted amount. The balance sheet also reflects cost of land of Rs. 387.25 Cr. which has been capitalized. Since the interest is attributable to the cost of land the interest expenditure is not allowable as per Section 36(1)(iii). Similarly the registration charges and the fee/penalty/damages/price for late registration amounts to an integral part of cost of acquisition of land has also to be allotted to the cost of project and to be treated as part of capital work-in-progress. Hence we hereby affirm the order of the CIT(A) on these two issues. Advertisement Expenses Brokerage Commission - 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 brokerage and commission which are incurred for running of the business operations and to bring revenues to the company are to be treated as revenue expenditure. Hence we hereby affirm the order of the ld. CIT(A) on account of the disallowance on Noida Authority-Interest and Late Registration Charges (LRC) and hold that the disallowance affirmed by the CIT(A) on account of Advertisement Expenses and Brokerage Commission are liable to be obliterated. Appeal of the assessee is partly allowed.

Summary

Issues:
Disallowance of expenses not routed through P&L account, disallowance of interest and late registration charges, treatment of advertising expenses and brokerage as revenue expenditure.

Analysis:
The appeal was filed against the CIT(A)'s order confirming the disallowance of expenses amounting to Rs. 15,50,59,250. The AO disallowed the expenses as they were not routed through the P&L account. The CIT(A) upheld this decision stating that the project was in an infantile stage and not set up or commenced. The Tribunal considered the nature of different expenses claimed by the assessee.

Noida Authority-Interest and Late registration charges:
The assessee claimed penal interest and late registration charges related to land acquisition. The Tribunal found that these expenses were attributable to the cost of land and should be treated as part of capital work-in-progress. Therefore, the disallowance of these expenses was affirmed.

Advertisement Expenses, Brokerage & Commission:
The Tribunal noted that the assessee had already commenced business operations and capitalized a significant amount. It held that expenses like advertising, brokerage, and commission for booking flats should be treated as revenue expenditure, not capital expenditure. Citing a judgment, it emphasized that once business operations start, related expenses should be treated as revenue expenditure. The Tribunal differentiated between pre-operative expenses and revenue expenditure, concluding that expenses like advertisement and brokerage should not be disallowed. Consequently, the disallowance of these expenses was overturned.

In conclusion, the Tribunal partially allowed the appeal, affirming the disallowance of interest and late registration charges while overturning the disallowance of advertising expenses and brokerage.