2019 (5) TMI 1066 - HC - Income Tax

Allowable business expenditure u/s 37 - advertisements and business proportion as indirect revenue expenditure - project completion method for recognition of revenue - AO taking all the selling and market expenses to WIP as project had been completed to an extent of less than 30%, the revenue receipts were shown as advance from customers under the head current liability - CIT-A agreed with the Assessee by following the guidance note of ICAI as regards accounts of real estate transactions and held that the AO was in error in taking all the selling and market expenses to work in progress - HELD THAT - Test adopted by the CIT (A) was the right one. Further, the guidance note of the ICAI which lays down the accounting standards to be followed in such circumstances has been correctly applied, both by the CIT (A) as well as the ITAT. These are purely indirect not related to the cost of the project and therefore, same could not have been taken the project as workin- progress. Such an advertisement expenditure on account of brand promotion advertisement, etc are indirect revenue expenditure which are otherwise allowable as business expense u/s 37 (1). As per the . guidance note of accounting for real estate issued by lCAI, selling cost is not included in the cost of construction and development and since it is an indirect cost, therefore, it has to be allowed irrespective of any link with the construction of work in-progress. - Decided against revenue

Summary

Issues:
1. Delay in filing the appeal
2. Treatment of expenditure towards advertisements and business proportion as 'indirect revenue expenditure'

Delay in filing the appeal:
The High Court condoned the delay in filing the appeal based on the reasons explained in the application. The delay was allowed, and the application was accepted.

Treatment of expenditure towards advertisements and business proportion as 'indirect revenue expenditure':
The appeal by the Revenue was against the order passed by the Income Tax Appellate Tribunal (ITAT) concerning the Assessment Year 2011-12. The Revenue contested the ITAT's decision to treat the expenditure claimed by the Assessee towards advertisements and business proportion as 'indirect revenue expenditure' and allowed it as business expenditure under Section 37(1) of the Income Tax Act, 1961.

The Assessee had declared a loss in its income tax return and was scrutinized as it had launched two residential projects. The Revenue argued that a specific expenditure should have been considered 'work in progress' instead of being claimed as 'indirect expenses' in the profit and loss account. The Commissioner of Income Tax (Appeals) agreed with the Assessee, following the guidance note of the Institute of Chartered Accountants of India (ICAI) regarding real estate transactions.

The ITAT dismissed the Revenue's appeal, stating that the expenditure on advertisements and business promotion was in the nature of advertising and sales promotion for launching the residential project. The ITAT held that such expenses were indirect revenue expenditure allowable as business expenses under Section 37(1). The guidance note of the ICAI was correctly applied by the CIT (A) and the ITAT. The High Court upheld the decision, concluding that no substantial question of law arose for consideration, and hence, the appeal was dismissed without costs.