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TMI Blog2023 (9) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 1 to Section 37(1) of the Act. Whether the selling and marketing expenses could be claimed as revenue expenditure independently by not including the same by capitalizing to Project Costs? - We find as per the Guidance Note issued by ICAI on Accounting for Real Estate Transactions , the selling and marketing expenses had to be charged off to revenue in the year of incurrence and not to be included in the project costs, which has been factually done by the assessee in the instant case. This fact is duly appreciated by the ld. CIT(A) in the instant case while granting relief to the assessee, subject to assessee complying with the provisions of section 40(a)(ia) of the Act. Hence we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, the grounds raised by the revenue are dismissed. Disallowance made on account of gifts - It is not in dispute that the assessee is in the real estate business wherein purchase of land and sale of projects is the most critical and commercially important activity and hence it was very important for the assessee to keep land aggregators and brokers in good humor. The assessee had submitted that it had purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together and disposed of by this common order for the sake of convenience. 3. With the consent of both the parties, the appeal of the revenue in the case of IREO Waterfront Pvt Ltd in ITA No. 2849/Del/2016 for A.Y. 2010-11 and Cross Objections of the assessee in CO No. 235/Del/2016 are taken up first. 4. The first identical issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in deleting the addition of Rs. 3,44,55,262/- on the ground that the capitalization of selling and marketing expenses by the ld. AO is contrary to Guidance Note on Accounting for Real Estate transactions issued by ICAI. 4.1. We have heard the rival submissions and perused the materials available on record. The assessee is a private limited company engaged in the business of construction and development of real estate business. The return of income for the A.Y. 2010-11 was filed by the assessee company on 15.10.2010 declaring Nil income with loss for the year under consideration declared at Rs. 4,46,56,632/-. A search and seizure action u/s 132 of the Act was carried out on 19.10.2010 in the case of IREO Group of Cases, wherein the assessee was also covered. Pursuant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motion expenses. Out of this total amount, major amount i.e. Rs. 78,00,008/- has been paid to Matthew Brain Roche towards production of creation of CG image, animation lightshow for Ludhiana, Rs. 79,19,451/- to Lead Advertisers towards the display charges for project in Ludhiana and balance amount of is towards various activities like printing of Brochure, making website, organizing Conference, meals for business promotion advertisement gifts, publishing of full page advertisement in The Indian Express Newspaper, launch campaign for Ludhiana Township project etc. Business Promotion:- The assessee company has incurred expenses of Rs. 48,16,532/- in this a major amount is paid to Matthew Brain Roche for supply of Ludhiana Township Architectural Model for sales office, purchase of gifts for business promotion purposes. It is a part of custom to distribution gifts to promote business. The assessee company has paid expenses wholly and exclusively for the purpose of its business to maintain enhance its cordial relationships with various people important for business. 4.4. The ld. AO observed that assessee had shown Rs. 429.14 crores as Project in Progress in its Bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndeed launched the project at Ludhiana and had collected advance from customers (shown in the liabilities side of balance sheet under current liabilities) and had also shown the Project in Progress in the asset side of the balance sheet in respect of all expenditures incurred which are directly attributable to the project. This accounting is done strictly in accordance with the Guidance Note issued for Accounting for Real Estate Transactions by ICAI. For the sake of convenience, the relevant portion of the Guidance Note issued by ICAI are reproduced below:- 1.3 The Guidance Note primarily provides guidance on application of percentage of completion method where it is appropriate to apply this method as explained in subsequent paragraphs as such transactions and activities of real estate have the same economic substance as construction contracts. For this purpose, the Guidance Note draws upon the principles enunciated in Accounting Standard (AS) 7, Construction Contracts. In respect of transactions of real estate which are in substance similar to delivery of goods principles enunciated in Accounting Standard (AS) 9, Revenue Recognition, are applied. 1.4 Real estate -t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated to the project; (h) estimated costs of rectification and guarantee work, including expected warranty costs; and (i) claims from third parties. 2.4 The following costs should not be considered part of construction costs and development costs if they are material: (a) General administration costs; (b) selling costs: (c) research and development costs; (d) depreciation of idle plant and equipment; (e) cost of unconsumed or uninstalled material delivered at site; and (f) payments made to sub-contractors in advance of work performed. 2.5 Costs that may be attributable to project activity in general and can be allocated to specific projects include: (a) insurance; (b) costs of design and technical assistance that is not directly related to a specific project; and (c) construction or development overheads; and (d) borrowing costs. Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of project activity. Construction overheads include costs such as the prepara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing the Accounting Standards, no income has been shown by the appellant. Therefore, to say that the expenditure incurred on business promotion and advertisements etc. is not related to the income earned by the appellant for the year under consideration is factually incorrect. 8.3 Further, the AO has not questioned about the eligibility of claim of this expenditure however disallowed it and stated that this should be taken into work in progress. The AO was unable to establish that it is a capital expenditure related to the project cost, whereas, as per the Accounting Standards, the expenditure of this nature cannot be taken into work in progress but has to be claimed and allowed as revenue expenditure, in view of the provisions of Section 37(1) of the Act. As stated earlier, the conditions embedded in the provisions of Section 37(1) are satisfied. 8.4 Further, it is a trite law that the AO cannot guide or question the manner of the execution of the business by the assessee regarding necessity or otherwise of incurring any expenditure in the interest of its business. It is not upto the revenue authority to dictate the assessee as to how he should conduct his business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 40(a)(ia) is not applicable. In case proper compliance related to the provision of TDS has not been made by the appellant, adequate action may be initiated, as per law. 8.9 In the result, the appeal is partly allowed on this ground. 4.8. We find that the fact of assessee not recognizing any income from sale of flats in accordance with the Guidance Note issued by ICAI while following Percentage of Completion Method, is not disputed by the ld. AO in the instant case. We find that the ld. AO had not doubted the incurrence of selling and marketing expenses for business purposes ; the ld. AO had not stated that the same are personal in nature ; the ld. AO had not stated that the same are capital in nature and the ld. AO had not stated that the same were incurred in violation of Explanation 1 to Section 37(1) of the Act. The only dispute before us is whether the selling and marketing expenses could be claimed as revenue expenditure independently by not including the same by capitalizing to Project Costs. We find as per the Guidance Note issued by ICAI on Accounting for Real Estate Transactions , the selling and marketing expenses had to be charged off to revenue in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. AO regarding this expenditure and the assessee came to know of this only from the assessment order. It is not in dispute that the assessee is in the real estate business wherein purchase of land and sale of projects is the most critical and commercially important activity and hence it was very important for the assessee to keep land aggregators and brokers in good humor. The assessee had submitted that it had purchased land parcels worth Rs. 399 crores till the year end. It is customary to incur these expenses on various auspicious occasions especially festivals like Diwali to be given to brokers, persons who work on behalf of the assessee company, customers and suppliers of the assessee, in order to keep them in good humor. It is a fact that by incurrence of these expenditure at the proper time like Diwali occasion would certainly strengthen the relationship of the assessee with the persons who work for the assessee company, customers and suppliers which in turn would enable the company to have continued relationship with the parties. Hence we hold that the said expenditure is held for the purpose of business as per the principle of commercial expediency. 8.3. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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