2023 (3) TMI 281 - AT - Income Tax

Adjustments in the processing of return u/s 143(1) - disallowance u/s 40(a)(ia) and 43B - HELD THAT - As referred to the computation of taxable income to demonstrate that adjustments made in the processing of return u/s 143(1) of the Act, in respect of disallowance made u/s 40(a)(ia) and 43B had already been added by the assessee suo motto. CIT(A) has merely given directions to the ld. AO to verify the records and based on his verification of the records, he may consider the additions / disallowances to be made. We note that approach adopted by the ld. CIT(A) is not in accordance with the provisions of section 250 of the Act which prescribes the procedure in appeal to be complied with by the ld. CIT(A). Further, section 251 adequately empowers the ld. CIT(A) to exercise his powers while disposing the appeal. Despite such non adherence of the provisions of law by the ld. CIT(A), we ourselves find it proper to verify the records in this respect for the meritorious disposal. Considering the facts on record and going through the computation of taxable income referred above, we without any hesitation hold that disallowance made u/s 40(a)(ia) and 43B is not warranted. MAT computation u/s 115JB - In respect of arbitrary adjustment made in the book profit computed u/s 115JB of the Act, assessee has adequately explained his case that this amount represented the amount withdrawn from reserve/provision and the same stands credited in the profit and loss account for the year under consideration and was reduced from the book profit since it was already offered to tax in the earlier years. We note that certain specific adjustments are only permitted to be made under the provisions of Section 143(1) of the Act.we direct to delete the adjustment made while computing the book profit u/s 115JB of the Act. Claim of deduction made by the assessee towards marketing and sales expenses relating to project Avidipta-II - accounting treatment in terms of applicable accounting standard and accounting principles - assessee has adopted control approach for revenue recognition prescribed under the Ind AS 115 by considering satisfaction of performance obligation over time which is taken to be analogous to PCM - HELD THAT - Section 145 and 145A of the Act provides for computation of income under the head profits and gains from business or profession and income from other sources by applying the Income Computation and Disclosure Standards (ICDS) . Since no specific ICDS has been notified for real estate developers, revenue and cost recognition is governed by the applicable accounting standards and Ind AS discussed Considering the discussion made on the accounting treatment in terms of applicable accounting standard and accounting principles as well as judicial precedents, we are of the considered view that claim of deduction made by the assessee towards marketing and sales expenses relating to project Avidipta-II are not allowable in the year under consideration while computing the total income under the provisions of the Act. However, keeping in mind the detailed discussion made above on the accounting treatment, we are of the considered view to hold that since these expenses have been accumulated in work-in-progress as per the above stated accounting standard and revenue recognition policy and also considering the matching concept of accounting principle, these have to be allowed and considered against the revenue in the year in which performance obligation is satisfied, in other words, in the year in which the said project is completed and sales are booked in the profit and loss account. Accordingly, ground no. 3 and 4 are dismissed.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) and 43B of the Income-tax Act.
2. Adjustment in book profit under section 115JB of the Income-tax Act.
3. Deduction of marketing expenses not claimed in the original return.

Issue-wise Detailed Analysis:

1. Disallowance under section 40(a)(ia) and 43B of the Income-tax Act:
The assessee, engaged in real estate development, filed a return of income reporting a total income of Rs. 11,17,38,170/-. The return was processed by the Centralized Processing Centre (CPC), which made adjustments aggregating to Rs. 18,35,758/- under sections 40(a)(ia) and 43B of the Act. The assessee contended before the CIT(A) that these disallowances were already added in the computation of income, and making these adjustments again resulted in double taxation. The CIT(A) directed the AO to verify the facts and consider the adjustments based on verification. The Tribunal found that the CIT(A) did not follow the procedure prescribed under section 250 and 251 of the Act. After verifying the records, the Tribunal held that the disallowance of Rs. 18,35,758/- was not warranted, as it would amount to taxing the same amount twice.

2. Adjustment in book profit under section 115JB of the Income-tax Act:
The CPC made an arbitrary adjustment of Rs. 1,62,91,689/- to the book profit computed under section 115JB. The assessee explained that this amount represented the withdrawal from reserves/provisions already offered to tax in earlier years. The Tribunal noted that only specific adjustments are permitted under section 143(1) and directed the deletion of the adjustment made while computing the book profit under section 115JB.

3. Deduction of marketing expenses not claimed in the original return:
The assessee raised additional grounds before the CIT(A) for the deduction of Rs. 3,82,54,259/- towards marketing expenses, which were not claimed in the original return. The CIT(A) dismissed these additional grounds, stating that since the expenses were not claimed in the return and no disallowance was made by the AO, the question of allowing the same does not arise. The Tribunal examined the accounting treatment of these expenses, noting that the assessee adopted Ind AS 115 for revenue recognition, which follows the matching principle. The marketing expenses were included in the work-in-progress and not charged to the profit and loss account. The Tribunal concluded that these expenses should be allowed against revenue in the year the project is completed and sales are booked. Consequently, the Tribunal dismissed the additional grounds raised by the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee in part. It deleted the disallowances under sections 40(a)(ia) and 43B and the adjustment in book profit under section 115JB. However, it dismissed the additional grounds for the deduction of marketing expenses, stating they should be allowed in the year the project is completed. The order was pronounced in the open court on 01.03.2023.