2022 (11) TMI 250 - HC - Income Tax

Nature of expenses - expenses on advertisement, business promotion, brokerage and commission and software development charges - Revenue or capital expenditure - classification of the expenses being a revenue neutral exercise - ITAT referred to the Guidance Note provided by the ICAI for accounting in the case of real estate projects and concluded that the expenses under the four (4) heads disallowed by the AO are covered by paragraph no. 2.4 of the Guidance Note and are therefore, administrative expenditure and thus, these expenses cannot be carried forward and should be expensed and classification of the said expenditure as revenue expenditure would not place the Revenue at any disadvantageous position whereas it may put the Assessee to some disadvantage - HELD THAT - The contention of the Revenue that the disallowed expenses are of an enduring nature and should therefore be capitalized to the cost of the project is not based on any legal principle. The Revenue does not dispute that these expenses are not a direct cost of the specific project but are indirect costs incurred by the Assessee for development of its real estate business. Revenue does not dispute that these expenses are admittedly not incurred as cost towards completion of the on-going real estate project and therefore in our considered view these expenses cannot be added toward the cost of valuation of the specific asset. The expenses such as advertising expenses, business promotion and brokerage and commission have been incurred by the Assessee towards building its reputation and network in the real estate market and so also the software development charges are incurred towards administrative expenses. No error in the findings of the ITAT, which holds that the said expenses incurred by the Assessee are in the nature of general administration cost and selling cost as classified by the Guidance Note issued by ICAI. The said expenses had been incurred by the Assessee for its business and therefore, it qualifies for deduction as revenue expenditure, as per the decision of this court in Gopal Dass 2019 (3) TMI 1272 - DELHI HIGH COURT The admissibility of the deduction is therefore not denied by Revenue but it is only the year of deduction which is sought to be postponed. It is in these facts the ITAT has held the classification of the expense is revenue neutral. It would be pertinent to note the decision of the Supreme Court on the issue of revenue neutrality wherein the Apex Court in the decision of Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT held in the subsequent accounting year, the assessee did derive benefits under the advance license and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic. No infirmity in the order of the ITAT and that any substantial question of law arises for consideration in the present appeal. Accordingly, the same is dismissed.

Summary

Issues Involved:
1. Whether the expenses incurred by the Assessee towards advertisement, business promotion, brokerage and commission, and software development charges should be treated as capital or revenue expenditure.
2. The applicability of Accounting Standard (AS-7) and the Guidance Note issued by the Institute of Chartered Accountants of India (ICAI) in determining the nature of these expenses.
3. The concept of "revenue neutrality" in the classification of expenses.

Detailed Analysis:

1. Capital vs. Revenue Expenditure:
The primary issue in this case was whether the expenses incurred by the Assessee towards advertisement, business promotion, brokerage and commission, and software development charges should be classified as capital or revenue expenditure. The Assessing Officer (AO) disallowed these expenses as revenue expenditure and reclassified them as capital expenditure, arguing that these expenses provided an 'enduring benefit' to the real estate project over multiple assessment years. However, both the Commissioner of Income Tax (Appeal) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) concluded that these expenses were revenue in nature. The CIT(A) noted that the AO's action of selecting only four out of twenty-eight heads of indirect expenses was arbitrary and not justified. The ITAT further held that these expenses were administrative and selling costs, which should be expensed and not capitalized.

2. Applicability of Accounting Standard (AS-7) and ICAI Guidance Note:
The Assessee relied on Accounting Standard (AS-7) and the Guidance Note issued by the ICAI to classify the expenses as revenue expenditure. The ITAT referred to the Guidance Note provided by the ICAI for accounting in the case of real estate projects and held that the guidelines were applicable to the Assessee's case. The ITAT concluded that the expenses under the four heads disallowed by the AO were covered by paragraph no. 2.4 of the Guidance Note, which classifies such expenses as administrative expenditure, thereby supporting their classification as revenue expenditure. The appellate authorities concurred that the expenses should be allowed as revenue expenditure in conformity with the then applicable Accounting Standard (AS-7).

3. Revenue Neutrality:
The ITAT also addressed the concept of "revenue neutrality," stating that the classification of the expenses as revenue expenditure would not place the Revenue at any disadvantageous position, whereas it might put the Assessee at a disadvantage. The ITAT reasoned that if the expenses were capitalized, they would be allowed as a deduction in the year of sale of the project, making the issue of timing rather than the admissibility of the deduction. The Supreme Court's decision in Commissioner of Income Tax vs. Excel Industries Ltd. was cited to substantiate the reasoning that the dispute was academic and had a minor tax effect since the tax rate remained the same in the subsequent assessment year.

Conclusion:
The High Court upheld the findings of the ITAT, agreeing that the expenses incurred by the Assessee were in the nature of general administration and selling costs as classified by the ICAI Guidance Note. The Court found no error in the ITAT's conclusion that these expenses should be treated as revenue expenditure. The Court also noted that the Revenue's contention to capitalize the expenses was not based on any legal principle and that the expenses were not direct costs of the specific project but were incurred for the overall development of the Assessee's real estate business. The appeal was dismissed as no substantial question of law arose for consideration.