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TMI Blog2018 (1) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts and in the circumstances of the case and in law the Assessing Officer {DEPUTY COMMISSIONER OF INCOME TAX. Circle 3(1)(1) Bangalore} has erred in considering the Site Administrative expenditure of ₹ 28,14,140 and Legal and Professional Fees of ₹ 4,700 both being administrat ive overheads, to be capitalized to Inventory i.e. project cost even though the same is not eligible to capitalized to Inventory as per Accounting Standard 2 on Inventory read with section 145 of the IT ACT, and should be allowed as an revenue expenditure in the year in which the expenditure is incurred. The Learned CIT (A) - II has fur ther erred in confirming the said disallowance. Ground No. 2 The Assessing Officer on the facts and in the circumstances of the case and in law, has er red in arbitrar i ly disal lowing the deduct ion on interest expendi ture of ₹ 151,370 being an amount beyond 12% Interest rate by stating in i ts remand repor t that interest should be restricted to 12% being market rate. The Assessing Officer has not provided any basis of the market rate of interest of 12%. The Learned CIT (A) - I I has fur ther erred in confirming the said dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flected in the balance sheet under Inventories . In the second category, the assessee identified the administrative expenses and the expenses incurred towards selling and distribution costs. The same has been claimed as expenses in the Profit Loss account. The CIT(A) re-examined the issue in the light of the assessee s contentions but was not convinced by it. The relevant observation of the CIT(A) is extracted hereunder for the sake of reference: 7. Considering the specific facts of the case and the submissions made by the appellant, the detai ls of expenses which were furnished dur ing the appeal proceedings were forwarded to the AO with a specif ic direct ion to ver ify the expenses and to confirm whether such expenses have been actually incurred during the year under consideration under the specific heads, as claimed by the appellant. The AO was also directed to call for the Books of Accounts and other relevant records to verify whether the expenses have been actually incurred for the specific purpose as claimed in the financial statements. 7.1 In response, the AO furnished his repor t dated 06/01/2017. The AO examined the expenses incurred under various heads su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. In the case referred, the appellant company was engaged in the real estate business and had advanced monies to various land owners for the purpose of acquiring and dealing in landed properties. Considering the facts the Hon'ble Tribunal had held that the moment the company was incorporated and amounts have been advanced for the purpose of acquiring and dealing in landed proper ty, the business of the assesse should be t reated as commenced. The specific observations made by the Hon'ble Tribunal are stated as under: 4. I have heard the r ival submissions E and perused the records. The fact that the assessee s main business is real estate business is not in dispute. The fact that the assessee had advanced money to various land owners for the purpose of acquiring and dealing in landed properties is not in dispute. Therefore, as rightly contended by the learned counsel for assessee, the moment company is incorporated and the amounts have been advanced for the purpose of acquiring and dealing in landed property, the business of the assessee should have been treated as commenced. Interest earned there cannot be treated as pre-operative. The case of Tuticorin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that the business of the appellant was not set up during the year ending 31/03/2012. Therefore the contention of the AO rejecting the claim of the appellant is not found to be legally correct. The business of the appellant company is held to have been set up dur ing the year under consideration and accordingly the appellant is found to be eligible to claim deduction in respect of the expenses incur red dur ing the year, subject to the observat ions made below. 10. Dur ing the year under considerat ion the appellant has claimed to have incurred expenditure of ₹ 85,24,700/- on var ious heads and after adjusting the interest income of ₹ 15,08,040/- it has repor ted loss of ₹ 70,16,660/- in the Profit Et Loss account. The following are the details of expenses claimed to have been incurred by the appellant . Sl. No. Nature of expenditure Amount 1. Employee benefit expenses 16,42,200 2. Finance cost 6,19,720 3. Depreciation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work in progress. Accordingly the same are held to be capital in nature. i i ) i i i ) Legal and professional charges. The appellant has claimed to have incurred expenditure of ₹ 8,11,750/- in this regard. The amount of ₹ 70,500/- paid towards Audit fees, ₹ 30,000/- paid for market research services and ₹ 2,93,749/- paid as monthly retainer charges, are clearly found to be on revenue account. However, the amounts paid towards legal consultancy and to JLL Property Consultants for market research are found to be primarily incurred largely in connection with the project and therefore should have been capitalised as part of the project cost. Accordingly, the above expenditure of ₹ 4,17,500/- is held to be capital in nature and cannot be allowed as deduction. The balance amount should be allowed as revenue expenditure. The AO is directed accordingly. iv) iii) Rent, rates and Taxes : The appellant has claimed expenditure of ₹ 11,56,270/- under this head. These expenses are found to be primarily incurred in connection with the hiring of office accommodation and other miscellaneous expenses. Therefore, considering the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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