2007 (10) TMI 315 - AT - Income Tax

Advertisement expenditure - treating such expenditure as capital work-in-progress - HELD THAT - We feel that once it is held that these advertisement expenses have to be capitalized in work-in-progress of individual project opening balance of work-in-progress of individual project will go up in the relevant year when these projects were completed and in that year income has to be computed after considering increased opening work-in-progress of the relevant project. Accordingly we direct the AO that in the year when these projects i.e. Millennium Gardens and Madhuban projects were completed income on account of these projects should be computed after considering increased opening balance of work-in-progress due to addition of advertisement expenses in work-in-progress of these projects in the present year. With these observations appeal of the Revenue for AY 2001-02 under reference is therefore disposed of. In the result this appeal of the Revenue is allowed pro tanto.

Issues involved:
1. Disallowance of advertisement expenditure for ongoing projects.
2. Capitalization of advertisement expenses.
3. Allocation of expenses to specific projects.
4. Applicability of judgments on capitalization of expenses.
5. Allowance of deduction for expenses in the year of project completion.

Detailed Analysis:
1. The primary issue in this case was the disallowance of advertisement expenditure for ongoing projects by the Revenue. The Revenue contended that the advertisement expenses should be capitalized as they were incurred for new projects. However, the assessee argued that these expenses were common across all ongoing projects and should be allowed as they follow the accounting principle of debiting all revenue expenses common across projects to the Profit and Loss account for that year. The AO disallowed the expense, but the CIT (A) deleted the disallowance, stating that advertisement expenses should not be treated differently from other administrative expenses as they are non-allocable to any specific project undertaken by the assessee.

2. The issue of capitalization of advertisement expenses was crucial in this judgment. The Revenue argued that the expenses should be capitalized as they were related to new projects. However, the assessee provided detailed evidence to show that the expenses were allocated to specific projects within the Dynamix group, with a portion allocated to the assessee. The Tribunal found that the advertisement expenses incurred by the assessee were directly relatable to individual projects within the group and should be capitalized as work-in-progress, following the principles established in the Wall Street Construction Ltd. case.

3. Another significant issue was the allocation of expenses to specific projects. The Tribunal examined the allocation of advertisement expenses to individual projects within the Dynamix group and found that the expenses borne by the assessee could be allocated to individual projects based on the proportion of projects advertised. This allocation was deemed appropriate for advertisement expenses but not for other administrative expenses, which could not be allocated to individual projects on a rational basis.

4. The judgment relied heavily on the applicability of previous judgments, particularly the Wall Street Construction Ltd. case. The Tribunal found that the principles established in this case regarding the capitalization of expenses were directly applicable to the present case, leading to the decision to capitalize the advertisement expenses as work-in-progress. The Tribunal distinguished the Paranjape Griha Nirman Ltd. case, stating that the facts were different and did not support the assessee's case in this instance.

5. Lastly, the issue of allowing deduction for expenses in the year of project completion was raised as an alternative contention. The Tribunal directed the AO to allow the deduction for advertisement expenses in the year when the projects were completed, considering the increased opening balance of work-in-progress due to the addition of advertisement expenses. This decision aimed to ensure that income was computed accurately after considering the impact of the advertisement expenses on the relevant projects.

Overall, the judgment addressed the various issues raised by the Revenue and the assessee regarding the treatment of advertisement expenses for ongoing projects, emphasizing the importance of proper allocation and capitalization of expenses in line with accounting principles and previous legal precedents.

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