2020 (4) TMI 224 - AT - Income Tax

Nature of expenditure - Allowable Revenue expenditure - selling expenses - whether as part of the project cost and thus capital in nature? - HELD THAT - The substantive issue for determination is whether the selling expenses incurred by the assessee are allocable to the specific development contract under taken by the assessee and thus required to be added to the contract costs in progress or such expenses can be allowed as revenue expenditure. On perusal, it is noticed that the Accounting Standard -7 issued by ICAI clearly spells out that the selling and administrative cost are required to be excluded from the contract costs while drawing financial statements. Hence, the action of the assessee resonates that the parameters of AS-7 referred to in the instant case. We also find merit in the plea of the assessee that expenses incurred in the normal course of business is required to be allowed, after setting up of business irrespective of the fact whether the revenue is not yet earned in view of the decision in the case of Western India Vegetable products Ltd. 1954 (3) TMI 59 - BOMBAY HIGH COURT . The action of the assessee in any case is a revenue neutral affair and the revenue is not put to any tax loss per se by such alleged premature claim. The controversy is no longer resintegra and clearly covered by the decision of the co-ordinate Bench of the Tribunal in Sunny Vista Realtors Pt.Ltd. vs ACIT 2017 (2) TMI 954 - ITAT MUMBAI - In the similarly placed situation, the co-ordinate Bench has adjudicated the issue in favour of the assessee by a detailed order. In parity with the view taken by the co-ordinate Bench and having regard to the tax neutrality, we find considerable merit in the objection raised by the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A of the IT Act
2. Treatment of selling expenses as revenue or capital expenditure
3. Initiation of penalty proceedings under section 271 of the IT Act

Issue 1: Disallowance under section 14A of the IT Act
The disallowance under section 14A of the IT Act was dismissed as not pressed, indicating that this issue was not pursued further in the appeal.

Issue 2: Treatment of selling expenses as revenue or capital expenditure
The main issue revolved around whether the selling expenses incurred by the assessee should be treated as part of the project cost (capital expenditure) or as revenue expenditure. The Assessing Officer (AO) disallowed the claim of selling expenses as revenue expenditure, stating that these expenses should be capitalized with the project cost since no revenue was recognized from the project in the relevant year. The Commissioner of Income Tax (Appeals) affirmed the AO's decision. However, the Tribunal, after considering the arguments presented by both parties, ruled in favor of the assessee. The Tribunal noted that the selling and administrative costs should be excluded from the contract costs as per Accounting Standard -7 issued by ICAI. Additionally, the Tribunal agreed with the assessee's contention that expenses incurred in the normal course of business should be allowed as revenue expenditure, even if revenue has not been earned yet, citing the decision of the Hon'ble Bombay High Court in a relevant case. The Tribunal also referred to a decision by a co-ordinate Bench in a similar case where the issue was adjudicated in favor of the assessee. Ultimately, the Tribunal allowed ground no.2 of the assessee's appeal, concluding that the selling expenses should be treated as revenue expenditure.

Issue 3: Initiation of penalty proceedings under section 271 of the IT Act
The issue of initiating penalty proceedings under section 271 of the IT Act was raised by the AO but was not the primary focus of the appeal. No specific judgment or decision was mentioned regarding this issue in the summary of the judgment provided.

In summary, the Tribunal partially allowed the assessee's appeal, specifically regarding the treatment of selling expenses as revenue expenditure, based on the interpretation of relevant accounting standards and legal precedents. The judgment highlighted the importance of distinguishing between capital and revenue expenditure in the context of real estate development businesses and emphasized the principle of allowing business expenses even before revenue is earned.