2019 (9) TMI 858 - AT - Income Tax

Nature of expenditure - Treatment of expenditure - expenditure pertaining to commercial project and capitalized to work in progress - revenue or capital expenditure - HELD THAT - It is not in dispute that the commercial project had been undertaken by the assessee from the earlier years and had not been completed during the year under consideration. The aforesaid treatment of expenditure i.e partly towards capital work in progress in respect of direct project related expenses and partly towards revenue expenditure in respect of routine administrative expenses has been consistently followed by the assessee in the earlier years also and the same stand was taken by the assessee during the year under consideration. There is no reason for the ld AO to take a divergent stand with regard to the treatment of expenditure given by the assessee in the books which is similar to treatment for income tax purposes also. In any case, we find that these administrative expenses, even if transferred to capital work in progress, would eventually find its way to the profit and loss account in the year of completion of project , in view of the fact that the revenue had not doubted the genuineness of incurrence of those expenditure and the business nexus of the same. Lower authorities had not appreciated the action of the assessee wherein the routine administrative expenses that are not directly connected with the project, need to be charged off as revenue expenditure. Hence we direct the AO to grant deduction of the revenue expenditure that were debited to profit and loss account by the assessee. - Decided in favour of assessee.

Summary

Issues:
Whether the expenditure debited to profit and loss account should be treated as revenue expenditure or capitalized to work in progress for a commercial project.

Analysis:
The appeal in ITA No.7430/Mum/2013 for A.Y.2010-11 concerns the treatment of expenditure amounting to ?1,09,84,625 debited to the profit and loss account by the assessee. The primary issue is whether this expenditure should be considered as pertaining to a commercial project and capitalized to work in progress, as done by the ld. AO, or treated as revenue expenditure, as claimed by the assessee.

The assessee, engaged in real estate development, incurred various administrative and general expenses during the year under consideration. The ld. AO disallowed the claimed loss of ?1,08,35,377 and capitalized it to work in progress, citing that the project had not commenced during that year. The details of the expenditure debited to the profit and loss account were presented, showing a range of routine administrative expenses.

The assessee argued that these expenditures were administrative in nature, not directly connected to the project, and had been consistently treated as revenue expenses in previous years. The assessee had already capitalized project-related expenses to work in progress as per Accounting Standards (AS-7). The Tribunal found no reason for the ld. AO to diverge from the assessee's consistent treatment, especially since the revenue had not questioned the legitimacy or business relevance of these administrative expenses.

Consequently, the Tribunal directed the ld. AO to allow the deduction of the revenue expenditure amounting to ?1,09,84,625 that had been debited to the profit and loss account by the assessee. As a result, Ground No. 1 raised by the assessee was allowed. The adjudication of Ground No. 2 was deemed academic and left open, as it would not impact the computation of the total income for the relevant year.

In conclusion, the appeal was partly allowed, and the order was pronounced on 21/08/2019 by the Appellate Tribunal ITAT Mumbai.