2023 (8) TMI 284 - AT - Income Tax

Addition of employee benefit expense, finance cost, administration expenses and depreciation - treating such expenditure as capital work-in-progress - As submitted Appellant had started/commenced its business during the year under consideration - whether the claim of expenditure is allowable as revenue or the same required to be capitalized either as a part of capital work in progress or as part of work in progress of construction of project? - HELD THAT - The basis taken by the AO in presuming that business of the assessee has not commenced, the assessee has shown Nil income from business and profession and has already shown income from other sources - when the construction of project has started and this fact has not been disputed by the authorities below then the impugned expenditure if not allowable as revenue expenditure then the same required to be treated as capital work in progress. Since, CIT(A) himself noted that the impugned expenses relates to project then the same should have been included as project work-in-progress as the sole activity of assessee during relevant period was construction of only project - AO is directed to allow the impugned expenditure as project work in progress.

Summary

Issues involved:
The appeal challenges the disallowance of expenses as capital work-in-progress, the treatment of expenditure in inventory, and the assessment of certain income as other sources instead of business income.

Ground Nos. 1 and 2:
The appellant contested the disallowance of expenses amounting to Rs. 64,08,489/- as capital work-in-progress despite commencing business during the relevant year. The counsel argued that under the mercantile system of accounting, expenses should be allowed as revenue expenses. Additionally, it was argued that the expenses should have been capitalized to inventory related to work-in-process. The Senior DR supported the disallowance, stating that the expenses lacked a direct connection to the business income and were rightly treated as part of capital work in progress. The Tribunal noted the AO's allowance of certain relief to the assessee and upheld the disallowance based on the necessity of certain expenses to maintain the entity of the company.

Ground No. 3:
The third ground raised by the appellant was deemed to be raised in error and was withdrawn. The Tribunal dismissed this ground accordingly.

Judgment:
After considering the submissions and findings, it was observed that similar expenses were capitalized in the preceding year and were related to the ongoing project. The Tribunal noted that the expenses in question, such as advertisement and publicity expenses, commission payments, and entertainment expenses, should be capitalized and added to work in progress. The Tribunal concluded that the expenses, if not allowable as revenue expenditure, should be treated as capital work in progress or as part of the construction project. The appeal was partly allowed, directing the AO to allow the impugned expenditure as project work in progress. The third ground raised in error was dismissed as withdrawn.