2019 (4) TMI 364 - AT - Income Tax

Allowability of revenue expenses in construction business - expenses related to assured returns on capital investment - capital as part of WIP or revenue - POCM method followed - preliminary expenses u/s 35D - HELD THAT - The nature of expenses incurred by assessee by giving assured returns to customers from whom capital was received from customers which should form part of construction project. In our opinion these expenditure are to be considered as part of capital project. Thus such capital expenditure spending would impact Balance Sheet and cannot form part of Profit & Loss account directly. We thus do not agree with analogy applied by CIT(A) regarding assured returns expenses in the nature of selling cost . Assessee placed reliance upon decision of CIT vs M/s Doomketu Builders 2013 (4) TMI 668 - DELHI HIGH COURT . It is observed that the issue before Hon ble Court was, whether business in real estate development was set up during relevant accounting year, which is not the case before us. There is no dispute regarding the business being set up during the year. We are therefore of the view that assured returns to be capitalized/shown as work-in-progress. As regards other expenses deleted by Ld.CIT (A), it is observed that assessee stated it to be in the nature of professional charges and commission. No details regarding the same was furnished by way of vouchers/bills, to ascertain true nature for its allowability. Before CIT(A) also assessee has not filed any details, and merely submitted that these are preliminary expenses. Audited accounts filed before us also do not reveal exact nature of these payments. Thus it could not have been ascertained whether these expenses were incurred towards professional charges & commission. Even before us, assessee did not file any details/evidences/documents, which could throw light on nature of expenses. We therefore uphold the view taken by AO and restore disallowance towards other expenses. As regards a sum of ₹ 35, 370/-, it is observed that assessee has not provide details regarding the same either before Ld.AO or Ld.CIT(A). We therefore uphold the disallowance by Ld.A.O - decided against assessee.

Summary

Issues:
1. Computation of income using the POCM method.
2. Allowance of various expenses under the POCM method.
3. Deduction of preliminary expenses.
4. Addition of assured return as selling cost.
5. Addition of other expenses as general administrative expenses.
6. Allowance of deductions without proper documentation.
7. Disallowance of expenses being capital in nature.

Analysis:

Issue 1: Computation of income using the POCM method
The appeal was filed by the revenue against the order passed by the Ld. CIT (A) for assessment year 2009-10. The contention was that the income of the assessee should be computed in accordance with the Percentage of Completion Method (POCM). The assessee argued that as the construction of the building had not started during the year, the POCM method was not applicable. The Ld. CIT (A) erred in holding that the income should be computed using the POCM method without considering this argument.

Issue 2: Allowance of various expenses under the POCM method
The Ld. CIT (A) allowed deductions for various expenses under the POCM method without properly examining whether the business of the assessee had commenced. The revenue contended that these expenses, such as assured returns and other expenses, should have been capitalized as they were spent for setting up the business, especially since no business activity had started during the year.

Issue 3: Deduction of preliminary expenses
The Ld. CIT (A) erred in allowing the deduction of preliminary expenses without considering that the business of the assessee had not yet started, making it ineligible for such deductions. The revenue argued that these preliminary expenses should have been capitalized instead of being treated as revenue expenses.

Issue 4: Addition of assured return as selling cost
The revenue challenged the deletion of the addition of assured returns by the Ld. CIT (A), arguing that these expenses were in the nature of selling costs and should have been capitalized. The tribunal disagreed with the CIT (A) and held that assured returns should be capitalized as part of the construction project and not treated as selling costs.

Issue 5: Addition of other expenses as general administrative expenses
The revenue also contested the deletion of other expenses as general administrative expenses by the CIT (A). The tribunal upheld the AO's decision to disallow these expenses as the nature of the expenses was not adequately supported by documentation, and the true nature of the payments could not be ascertained.

Issue 6: Allowance of deductions without proper documentation
The Ld. CIT (A) allowed deductions for assured returns and other expenses without proper examination of the nature of these expenses and without adequate details being submitted before the AO or the CIT (A). The tribunal upheld the disallowance of these deductions due to the lack of supporting documentation.

Issue 7: Disallowance of expenses being capital in nature
The tribunal upheld the disallowance of certain expenses as they were considered capital in nature and should have been capitalized instead of treated as revenue expenses. The tribunal restored the disallowance of these expenses, emphasizing the importance of proper categorization of expenses based on their nature and purpose.