2023 (7) TMI 1305 - AT - Income Tax

Nature of interest expenditure - CIT(A) capitalizing interest expenditure Partly and balance be capitalized as work-in-progress (WIP) - HELD THAT - CIT(A) has not given any reason for making such an adjustment without pointing out any mistake in working as shown by assessee in this regard. Since the assessee has been following the AS-16 and since there is no doubt about genuineness of the interest expenditure as well as the fact that the assessee has debited the financial cost which are not directly attributed to the project as revenue expenditure, the same ought to be allowed unless the Ld. CIT(A) is able to show that the amount was interest cost which was directly attributable to the project and therefore, should have been capitalized to the cost of WIP. Since we note that the interest expenditure fulfil the criteria mentioned in AS-16, the apportionment made by assessee ought not to have been interfered with unless it is shown to be incorrectly claimed by assessee. And we further note that by debiting such expenses to the profit and loss account, there is no loss to the revenue, as even by capitalization of such expenses, the same will be debited to the revenue in future years. Accordingly, the treatment of debiting interest expenses to the tune to the profit and loss account ought to have been allowed. And therefore, we dismiss the appeal of the revenue and allow the CO of the assessee and direct the AO to allow the claim of the assessee. Commission and brokerage of expenses - AO did not accept the assessee s reliance on para -19 of AS-7 issued by ICAI for Construction Contracts stating that the General Administration Cost and Selling Cost are to be excluded from the Construction Cost, since these costs/expenses cannot be attributed to contract activity or cannot be allocated to a contract - HELD THAT - As noted that brokerage and commission is a financial cost/selling expenses which the assessee has incurred wholly and exclusively for the purpose of business. And the selling cost has been incurred by the assessee for the services rendered by brokers who canvas booking of flats of projects in advance which is not project specific and irrespective of whether a project is implemented or not, the brokerage cost/commission paid to broker s need to be allowed being revenue in nature. And since, the commission paid are in terms of agreement rendered between the assessee and the broker, and the genuineness of the expenditure has not been questioned, we are of the opinion that the expenses incurred on brokerage and commission on booking of properties need not be considered as part of business of Construction of units/flats, and are revenue in nature, which needs to be allowed. Estimation of ALV - Deemed rent calculated @ 2% of the closing stock of unsold flats and shops where occupancy certificates were received - HELD THAT - As per decision of this Tribunal in M/s. Inorbit Malls 2022 (10) TMI 1150 - ITAT MUMBAI we set aside the impugned order of the Ld. CIT(A) and restore the matter back to the file of the AO and direct as given in M/s. Inorbit Malls (supra) wherein the Tribunal has held that the AO was correct in computing ALV on deemed rent on unsold stock. Tribunal directed the AO to do so by considering the following facts. Firstly, the flats or units on which assessee has received any advance in this year or in the earlier years but has not delivered or given final possession of the said flat/unit to the buyer, then no notional/deemed rent can be charged as it tantamount to sale. Secondly, if unit of flat is shown as work-in- progress in the books then also no notional rent be computed. And Lastly, the AO to estimate the ALV after ascertaining Municipal Letable Value for computing the notional rent as held in the case of CIT Vs. Tip Top Typography 2014 (8) TMI 356 - BOMBAY HIGH COURT or @ 2% which was estimated by AO whichever is less. Therefore, the ground no. 3 of the revenue is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Capitalization of Interest Expenditure
2. Disallowance of Commission and Brokerage Expenses
3. Deemed Rent on Unsold Flats

Summary:

1. Capitalization of Interest Expenditure:
The primary issue was whether the interest expenditure of Rs.7,55,87,118/- claimed by the assessee as revenue expenditure should be capitalized as part of work-in-progress (WIP). The Assessing Officer (AO) disallowed the interest cost and added it to the WIP. The Commissioner of Income Tax (Appeals) [CIT(A)] partly reversed this by allowing Rs.5,29,71,264/- as revenue expenditure and capitalizing Rs.1,40,18,981/-. The Tribunal noted that the assessee followed Accounting Standard (AS)-16 and capitalized interest directly attributable to the project, debiting the remaining interest to the profit and loss account. The Tribunal found no reason to interfere with the assessee's method and directed the AO to allow the entire interest expenditure of Rs.7,55,87,118/- as revenue expenditure.

2. Disallowance of Commission and Brokerage Expenses:
The AO disallowed Rs.9,81,384/- out of the total commission and brokerage expenses of Rs.17,43,949/- debited to the profit and loss account, arguing that these should be capitalized. The CIT(A) allowed the entire amount, noting that selling and marketing costs, including commission and brokerage, are revenue in nature and should be allowed in the year they are incurred. The Tribunal upheld CIT(A)'s decision, confirming that these expenses are revenue in nature and should be allowed in full.

3. Deemed Rent on Unsold Flats:
The AO added deemed rent of Rs.28,73,543/- on unsold flats with occupancy certificates, treating it as income from house property. The CIT(A) deleted the addition, relying on the amendment brought by Finance Act 2017 and judicial precedents, stating that no notional rental income can be assessed for unsold flats held as stock-in-trade prior to AY 2018-19. The Tribunal, however, set aside CIT(A)'s order and directed the AO to compute the Annual Letable Value (ALV) based on municipal ratable value or 2% of the closing stock value, whichever is less, and to exclude units with advances received or shown as work-in-progress from this computation.

Conclusion:
- The Tribunal allowed the entire interest expenditure as revenue expenditure.
- Commission and brokerage expenses were upheld as revenue expenditure.
- The matter of deemed rent on unsold flats was remanded back to the AO for recomputation based on specific guidelines.