2025 (3) TMI 646 - AT - Income Tax

Addition on account of commission paid on sale of Flat bookings Disallowance of expenses incurred on selling and promotions - HELD THAT - As in decision of M/s Hiranandani Palace Gardens P. Ltd. Mumbai 2015 (12) TMI 1649 - ITAT MUMBAI wherein the Tribunal after deliberating upon the various clauses of Accounting Standard AS-2 and AS. 7 and the provisions of section 145A of the act has held that as per the accounting method consistently followed by the assessee and thereby excluding the indirect expenses such as office employees salary administrative expenses and marketing and selling expenses was as per the recognized principles of accountings and as such the claim of the assessee deserved to be allowed. Thus addition /disallowances made by the AO and confirmed by the Ld. CIT(A) on account of commission paid on sale of Flat bookings and disallowance of expenses incurred on selling and promotions are deleted. Decided in favour of assessee. Nature of expenses - Disallowance of loan processing fee by treating the same as capital in nature - HELD THAT - In the instant case the assessee has failed to prove that the loan processing fees was the revenue expenditure CIT(A) relying the decision of the Bilt Power Ltd. New Delhi 2015 (3) TMI 319 - ITAT DELHI rightly held that the loan processing fees expenses is capital in nature. Thus we find that the assessee has failed to prove that loan processing fees was the revenue expenditure. Decided against assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment include:

1. Whether the disallowance of Rs. 3,18,63,611/- on account of commission expenses by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] was justified.

2. Whether the disallowance of Rs. 63,44,468/- on account of selling and promotion expenses by the AO and confirmed by the CIT(A) was justified.

3. Whether the disallowance of Rs. 55,00,000/- on account of loan processing fees, treated as capital in nature by the AO and confirmed by the CIT(A), was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Disallowance of Commission Expenses

- Relevant legal framework and precedents: The issue was analyzed in light of the Accounting Standard -7 (AS-7) issued by the Institute of Chartered Accountants of India (ICAI), which excludes selling and general administrative costs from contract costs. The Tribunal also considered precedents from similar cases, including decisions from ITAT Mumbai and ITAT Bangalore.

- Court's interpretation and reasoning: The Tribunal noted that the AO and CIT(A) did not doubt the genuineness of the expenses. The Tribunal found that the expenses were not directly related to the construction project and should not be included in the cost of construction contracts.

- Key evidence and findings: The Tribunal relied on the decision in the case of M/s Hiranandani Palace Gardens P. Ltd. Mumbai, where similar expenses were allowed as per recognized accounting principles.

- Application of law to facts: The Tribunal applied the principles of AS-7 and the guidance note on accounting for real estate transactions, concluding that the commission expenses should be allowed as they are not part of the project costs.

- Treatment of competing arguments: The Tribunal rejected the arguments of the lower authorities, emphasizing the consistency of the accounting method followed by the assessee.

- Conclusions: The Tribunal allowed the appeal on this issue, deleting the disallowance of Rs. 3,18,63,611/- made by the AO.

2. Disallowance of Selling and Promotion Expenses

- Relevant legal framework and precedents: Similar to the commission expenses, the Tribunal considered AS-7 and related precedents.

- Court's interpretation and reasoning: The Tribunal found that selling and promotion expenses are not directly related to the construction project and should be excluded from the cost of inventory for work-in-progress.

- Key evidence and findings: The Tribunal referred to the decision in M/s Hiranandani Palace Gardens P. Ltd. Mumbai, supporting the exclusion of such expenses from project costs.

- Application of law to facts: The Tribunal applied the accounting standards and found that the selling and promotion expenses should be treated as revenue expenses.

- Treatment of competing arguments: The Tribunal dismissed the lower authorities' approach of capitalizing these expenses, emphasizing the established accounting practices.

- Conclusions: The Tribunal allowed the appeal on this issue, deleting the disallowance of Rs. 63,44,468/- made by the AO.

3. Disallowance of Loan Processing Fees

- Relevant legal framework and precedents: The Tribunal considered the nature of loan processing fees and relevant case law, including the decision in DCIT Circle -11 (1) New Delhi Versus Indus Towers Ltd.

- Court's interpretation and reasoning: The Tribunal found that the loan processing fees were capital in nature, as they provided an enduring benefit to the assessee.

- Key evidence and findings: The Tribunal noted that the assessee failed to prove that the loan processing fees were revenue expenses.

- Application of law to facts: The Tribunal applied the principles from the Bilt Power Ltd. case, concluding that the fees should be capitalized.

- Treatment of competing arguments: The Tribunal agreed with the lower authorities that the fees were capital in nature and should not be treated as revenue expenses.

- Conclusions: The Tribunal upheld the disallowance of Rs. 55,00,000/- as capital in nature.

SIGNIFICANT HOLDINGS

- Core principles established: The Tribunal reaffirmed the principle that selling and administrative expenses should not be included in the cost of construction projects as per AS-7 and related accounting standards.

- Final determinations on each issue: The Tribunal allowed the appeal regarding the disallowance of commission and selling expenses, while it upheld the disallowance of loan processing fees as capital in nature.

Order pronounced in the open court on 12.02.2025.