2022 (6) TMI 999 - AT - Income Tax

Deduction of interest expenditure u/s 36(1)(ii) - diversion of the assessee s interest bearing funds for making the interest free investment - assessee had during the year under consideration invested in OPCD. Although, it was the claim of the assessee that OPCD was redeemable at an aggregate return of 12% p.a, however, the same did not find favor with the A.O as he was of the view that the assessee had invested in OPCD @0.1% p.a. - HELD THAT - We concur with the view taken by the CIT(A) that as the assessee had own funds which were far more than the investments in OPCD, therefore, the presumption would be that the investments were made from own funds and no disallowance of any part of interest expenditure claimed by the assessee u/s 36(1)(iii) was called for in the hands of the assessee. Our aforesaid view is fortified by the judgments of the Hon ble High Court of Bombay in the case of CIT vs. Reliance Utilities 2009 (1) TMI 4 - BOMBAY HIGH COURT and CIT-2, Mumbai Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT - We, thus, finding no infirmity in the view taken by the CIT(A) as regards the aforesaid issue under consideration uphold his order to the said extent. The Ground of appeal No. 1 is dismissed. Addition towards sales promotion expenses and Advertisement expenses made by the A.O by capitalizing the same to the work-in-progress - CIT-A deleted the addition - HELD THAT - We find that the selling and distribution costs, advertisement expense etc. are to be excluded from the cost of inventories as they do not contribute towards bringing the inventories to their present location and condition. Our aforesaid view that selling costs are no to be considered as a part of the project cost i.e W.I.P cost is also supported by the Guidance Note on Accounting for Real Estate Transactions (Revised 2012) wherein at Para 2.4(b) it is provided that selling costs are not to be considered as part of the construction costs and development costs. Hon ble High Court of Delhi in the case of Gopal Das Estates Housing Pvt. Ltd. 2019 (3) TMI 1272 - DELHI HIGH COURT had observed, that that the expenditure incurred on advertising being necessary for promotion of its business is to be allowed as a business expenditure and would not form part of the project cost. Apart from that, we find that as the assessee s claim for deduction of sales promotion, advertisement etc. was consistently allowed by the department not only in the preceding but also in the succeeding years, therefore, there was no justification on its part in declining the assessee s claim for deduction of the said expenses during the year under consideration.We, thus, in terms of our aforesaid observations finding no infirmity in the view taken by the CIT(A) who by a well reasoned order had vacated the disallowance of the assessee s claim - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 5,26,52,120/- made under section 36(1)(iii) of the Income-tax Act, 1961.
2. Deletion of addition of Rs. 2,02,86,452/- towards sales promotion expenses and Rs. 6,68,13,114/- on account of advertisement expenses by capitalizing the same to the work-in-progress.

Detailed Analysis:

1. Deletion of Addition under Section 36(1)(iii):

The revenue challenged the CIT(A)'s deletion of the addition of Rs. 5,26,52,120/- made by the Assessing Officer (A.O) under section 36(1)(iii) of the Income-tax Act. The assessee had sufficient own funds, which were more than the investments made in Optionally Convertible Debentures (OPCD) of M/s Sarvavasa Buildtech & Farms Pvt. Ltd. and M/s Kundam Realtors. The CIT(A) concluded that it could be presumed that the investments were made from such own funds, thus no disallowance of interest expenditure was warranted. The CIT(A) relied on the judgments of the Hon'ble High Court of Bombay in CIT vs. Reliance Utilities, 313 ITR 340 (Bom) and CIT-2, Mumbai Vs. HDFC Bank Ltd., 366 ITR 505 (Bom).

Upon review, the Tribunal upheld the CIT(A)'s decision, agreeing that the assessee had sufficient own funds to cover the investments in OPCD, and thus no part of the interest expenditure claimed under section 36(1)(iii) was to be disallowed. The Tribunal dismissed the revenue's appeal on this ground.

2. Deletion of Addition of Sales Promotion and Advertisement Expenses:

The revenue also contested the CIT(A)'s deletion of Rs. 2,02,86,452/- towards sales promotion expenses and Rs. 6,68,13,114/- on account of advertisement expenses. The A.O had capitalized these expenses to the work-in-progress (WIP) cost, arguing that they should not be allowed as deductions pending revenue recognition. The assessee contended that these expenses were incurred for launching a new project and attracting customers, and should be charged to the Profit & Loss account as per Accounting Standard 2 (AS-2).

The CIT(A) observed that the sales promotion and advertisement expenses were incurred for launching the project and attracting customers. As per AS-2, selling and distribution costs, advertisement costs, etc., should be excluded from the cost of inventories as they do not contribute to bringing the inventories to their present location and condition. The CIT(A) concluded that these expenses were neither deferred revenue expenditure nor capital in nature, as they were incurred repetitively to promote the project. The CIT(A)'s decision was supported by judicial pronouncements and consistent accounting practices followed by the assessee.

The Tribunal agreed with the CIT(A)'s reasoning, noting that the sales promotion and advertisement expenses could not be capitalized to WIP as per AS-2 and accepted accounting policies. The Tribunal also referenced the "Guidance Note on Accounting for Real Estate Transactions" and various judicial precedents, including the Hon'ble High Court of Delhi's decision in Gopal Das Estates & Housing Pvt. Ltd. Vs. CIT, 412 ITR 489 (Del), which supported the view that such expenses should be allowed as business expenditure. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the revenue's appeal in its entirety, upholding the CIT(A)'s order to delete the additions of Rs. 5,26,52,120/- under section 36(1)(iii) and Rs. 8,70,99,566/- towards sales promotion and advertisement expenses. The judgment emphasized the importance of adhering to established accounting standards and judicial precedents in determining the allowability of such expenses.