2018 (10) TMI 721 - AT - Income Tax

Claim of business expenditure u/s 37(1) - concept of Revenue Recognition - assessee had not set up the business during the relevant previous year - advertisement & business promotion expenses - Held that - This would be in the nature of general expenses not attributable to any project and payment to the extent it relates to the aforesaid expenses cannot be capitalised and had to be allowed as revenue expenditure. There is also another agreement for advertising with Ogilvy dated 5.9.2011. This agreement is for specific purpose of advertising of projects and therefore payments made for the said purpose will have to be treated as attributable to specific project and capitalised. The AO is directed to examine the payment of ₹ 15,65,000 and to the extent it relates to corporate brand identity exercise and logo design should be allowed as revenue deduction. The AO will allow opportunity of being heard to the assessee. - Decided partly in favor of assessee. Legal & professional charges - Held that - the assessee had engaged professionals for carrying out liasoning work in relation to Sarjapur site. Therefore payment made to these two persons are referable to a particular project and therefore these expenses have to be capitalised to the concerned project. - Decided against the assessee.

Summary

Issues:
1. Claim of revenue expenses under the head 'income from business' when the business was not set up during the relevant previous year.
2. Dispute regarding the treatment of advertisement and business promotion expenses, and legal and professional charges as revenue or capital expenditure.
3. Applicability of Accounting Standards (AS-2) in valuing inventories and determining expenses.
4. Interpretation of statutory provisions under Sec. 145 of the Income Tax Act regarding method of accounting.

Analysis:
1. The appeal involved a dispute over the assessee's claim of revenue expenses under 'income from business' despite the business not being set up during the relevant year. The CIT(Appeals) initially rejected the claim, but later accepted that the business was set up. However, certain expenses were disallowed, leading to the appeal before the Tribunal.

2. The Tribunal considered the treatment of advertisement and business promotion expenses, and legal and professional charges as either revenue or capital expenditure. The assessee argued that as per AS-2, these expenses should not be capitalized as work in progress. The Tribunal upheld the capitalization of expenses related to a specific project, emphasizing the need to distinguish between general administrative expenses and project-specific costs.

3. The Tribunal addressed the applicability of AS-2 in valuing inventories and determining expenses. It clarified that AS-2 is not applicable to construction contracts but to goods held for resale. The Tribunal rejected the argument that these expenses should not be capitalized, emphasizing the project-specific nature of certain expenses.

4. The judgment delved into the interpretation of statutory provisions under Sec. 145 of the Income Tax Act regarding the method of accounting. It highlighted that certain Accounting Standards like AS-7 and AS-9 had not been notified and did not have statutory force. The Tribunal emphasized that the observations made were specific to the relevant assessment year and subject to statutory amendments post the said year.

In conclusion, the Tribunal partially allowed the appeal for statistical purposes, directing the Assessing Officer to re-examine specific expenses in light of the distinctions between general administrative costs and project-specific expenses. The judgment provided detailed analysis on the treatment of expenses, applicability of Accounting Standards, and interpretation of statutory provisions, ensuring clarity on the issues raised in the appeal.