2022 (7) TMI 997 - AT - Income Tax

Addition w.r. to Advertisement, Consultancy expenses classified as other expenses - As transpired that the assessee claimed expenditure whereas there was no revenue from operations and the construction activity was going on - assessee defended the claim on the ground that all direct costs of constructions activity have been classified as construction cost whereas indirect costs not specifically allocable to any specific project have been debited to Profit Loss Account - HELD THAT - As observed that the assessee is following percentage of completion method of accounting to recognize the revenue under the project. Since the project has not commenced, the assessee has capitalized the direct costs. However, indirect costs which are in the nature of selling costs and professional costs could not be attributed to any specific project and it is a period cost. The applicable guidance note issued by ICAI mandate the assessee to claim the same as period cost and the assessee has followed the same treatment. The action of the assessee is in consonance with the mandatory guidance note and therefore, the same could not be faulted with.

Issues:
1. Allowance of expenditure by Ld. CIT(A) for Assessment Year 2016-17.
2. Treatment of indirect costs in relation to a construction project.
3. Application of percentage of completion method for revenue recognition.
4. Compliance with ICDS and guidance notes on accounting for real estate transactions.

Analysis:
1. The appeal by the Revenue for Assessment Year 2016-17 challenges the order of the Commissioner of Income Tax (Appeals) allowing expenditure disallowed by the Assessing Officer. The Revenue contends that the expenses related to Advertisement and Consultancy were directly linked to a construction project for which no revenue was recognized, and thus should not have been allowed as deductions. The key issue is whether these expenses should be considered as construction costs or general administrative and selling costs.

2. The material facts reveal that the assessee claimed significant expenditure for professional/consultancy charges and advertisement expenses, specifically related to a project where no revenue had been generated. The disagreement arose over the classification of these indirect costs, with the Revenue arguing that they should not be considered as construction costs due to the absence of revenue recognition. The Assessing Officer disallowed the expenses, reducing the loss claimed by the assessee.

3. During the appellate proceedings, the assessee justified their treatment of indirect costs by referring to the percentage of completion method for revenue recognition in real estate transactions. The assessee argued that certain costs, such as general administration and selling costs, should not be included in project costs and should be expensed in the year they occur. The principles outlined in guidance notes and ICDS were cited to support this position, along with relevant judicial precedents.

4. The Commissioner (Appeals) agreed with the assessee's contentions, emphasizing that the expenses in question fell under general administrative and selling costs, not construction costs. Citing the decision in Vardhaman Developers Ltd. vs. ITO, the Commissioner allowed the expenses as admissible revenue expenditure for the assessment year. The Revenue, aggrieved by this decision, appealed further.

5. The Tribunal upheld the decision of the Commissioner, highlighting that the assessee's treatment of indirect costs was in accordance with the percentage of completion method and guidance notes issued by ICAI. The Tribunal found no fault in the assessee's compliance with the mandatory accounting standards and dismissed the appeal by the Revenue.

In conclusion, the judgment centered on the classification of indirect costs in a construction project, the application of accounting methods for revenue recognition, and the adherence to ICDS and guidance notes. The Tribunal affirmed the allowance of expenses by the Commissioner, emphasizing the consistent treatment of indirect costs as period costs rather than project costs in the absence of revenue recognition.

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