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Income Tax Appellate Tribunal, DELHI BENCHES “E”: DELHI
Before: SHRI ANIL CHATURVEDI & SHRI N.K. CHOUDHRY
Date of Hearing : 09.03.2023 Date of Pronouncement : 17.03.2023 ORDER PER ANIL CHATURVEDI, A.M. : This appeal filed by the Revenue is directed against the Order of the Ld. CIT(A)-5, New Delhi, dated 19.03.2019 in Appeal No. Del/CIT(A)-5/0292/2016-17 relating to the A.Y. 2013-14.
The relevant facts as culled from the material on records are as under :
2 ITA.No.5400/Del./2019 2.1. Assessee is a company which is stated to be engaged in the business of real estate. Assessee filed revised return of income declaring loss of Rs. 12,54,30,938/- on 29.10.2013. The case of the assessee company was selected for scrutiny and thereafter, assessment was framed under section 143(3) of the I.T. Act, 1961 vide order dated 09.03.2016 and the total loss of the assessee was determined at Rs. 2,21,37,430/- .
2.2. Aggrieved by the order of the AO, the assessee carried the matter in appeal before the Ld. CIT(A) who vide order dated 19.03.2019 in Appeal No. Del/CIT(A)- 5/0292/2016-17, granted substantial relief to the assessee.
3. Aggrieved by the order of the Ld. CIT(A), the Revenue is now in appeal and has raised the following grounds:-
The Ld.CIT(A) has erred on facts and in law in allowing the assessee to claim expenses directly in the computation of income, when such expenses had not been claimed by the assessee itself in its audited books of accounts.
2. The Ld. CIT(A) has erred on fact and in law holding that the expenses disallowed y the AO were in the nature of 3 ITA.No.5400/Del./2019
relate to general/normal expenses or/and related to the selling expenses. 3. That the appellant craves leave to add, amend, alter or forgo any grounds of appeal either before or at the time of hearing of the appeal.
4. Before us at the outset Ld. DR submitted that though revenue has raised various ground but all the ground are interlinked and interconnected.
During the course of assessment proceedings, AO on perusing the computation of income noticed that assessee had claimed deduction of Rs.10,32,93,504/- on account of “expenses claimed as per audit report” directly in the computation of income. He also noted that the amount was not routed through Profit and Loss account. The assessee was asked to furnished details and give justification of the expenditure claimed by the assessee. In response to the query of the AO assessee made detailed submissions which are reproduced by the AO in the assessment order. The submission of the assessee was not found acceptable to AO. AO noted that the assessee was following Accounting Standard 7 issued by the Institute of 4 ITA.No.5400/Del./2019 Chartered Accountants of India, according to which assessee would start reporting Revenue once 25% of the project is complete and before that all the expenses will go in cost of development and would not be allowed to be debited to the Profit and Loss account. AO was of the view that once the assessee starts showing Revenue from operations, he would be allowed to debit the expenses. AO on perusal of the breakup expenses of the noted that Rs. 1,31,77,533/- was on account of advertisement expenses, Rs. 3,70,50,734/- was on account of brokerage expenses, and Rs. 5,30,65,237/- was on account of interest payment to Noida Authority. AO was of the view that all these expenses were relatable to the project being undertaken by the assessee. He was further of the view that since the assessee was going through preoperative phase of its operation and till it reports income at the completion of 25% of project as per AS7, which the assessee was following, the amount of expenses cannot be allowed as expenditure. He was further of view that assessee had not conducted any business activity and had only done construction work
5 ITA.No.5400/Del./2019 which was debited to construction work in progress. He was therefore of the view that there was no justification of claiming expenses. He accordingly disallowed aggregate expenditure of Rs. 10,32,93,504/-.
6. Aggrieved by the order of the A.O, assessee carried the matter before the Ld. CIT(A). CIT(A) deciding the issue in favour of the assessee by observing as under:-
9.1 I have carefully considered the assessment order, submissions by the appellant and appellate order in the case of M/s Logix City Developer Pvt. Ltd. for AY 2013-14 which is a sister concern of the appellant where the issues involved are same. 9.2 The main allegation of the A is that no business has been commenced as there is no revenue generation and only interest income has been shown by the appellant. However, it was admittedly mentioned by the AO that the construction work has been started and the appellant has shown work in progress etc. It has not been brought on record that how these expenses are not related to the business activity of the appellant and disallowable within the meaning of the provisions of sec 37 of the Act. AO disallowed only on the pretext that business not commenced, expenses are not justified and also capitalized in its balance sheet and claimed directly in the computation of income. 9.3 The same issue was also in the case of M/s Logix City developer Pvt. Ltd. for AY 2013-14 and the appeal was party allowed in that case by following the order of my predecessor in the case of Ms Logix City developer Pvt. Ltd. itself for AY 2012-13 wherein the appeal was allowed after detailed discussion, holding that the 6 ITA.No.5400/Del./2019 business has been set up and therefore, the business expenditure claimed by the appellant are allowed. Since there is similarity in the facts of both the cases I do not have anything to differ from the case of M/s Logix City developer Pvt. Ltd. and therefore, considering the said order and relying upon the case laws and arguments mentioned therein, it is held that the business has been set up and the activities commenced. 9.4 It is observed that the expenses claimed by the appellant during the year under consideration under different heads, as mentioned in detailed chart in its submission, reproduced earlier, are in the nature of selling and normal expenditures and therefore, in parity with the guidance note on accounting for real estate transactions, issued by ICAI, and hence to be treated as allowed business expenditure, except interest paid to Noida authority on account of delay in payment of installment of lease money, which is being discussed in the succeeding paragraphs. 9.5 It is seen that the following expenses claimed in the computation of income, which has been disallowed by the AO:- S.No. Particulars Amount 1 Advertisment Expenses 1,31,77,533 2 Brokerage 3,70,50,734 3 Noida Authority –Interest on 5,30,65,237 late Payment Total 10,32,93,504
9.6 Sl. No. 1 & 2 of the above table relates to the selling expense. Nothing has been brought on record to say that brokerage and advertisement expenses are related to WIP and looking to the guidance note where selling expenses are considered as revenue in nature, hence, these expenses are related to sales and thus looking to the commencement of business, the same is allowed as revenue expense.
7 ITA.No.5400/Del./2019
9.7 With regard to the interest on late payment to Noida authority amounting to Rs. 5,30,65,237/-, it is observed that this is in relation to the acquisition of land where such interest is payable due to delay in payment of the scheduled amount, therefore, this expense cannot be termed as revenue expenditure and liable to be disallowed. As this interest is related to the project, the expense should have been capitalized towards work in progress of project cost. Here it is pertinent to mention that similar type of payments towards interest has been taken as project cost and capitalized in the case of other group companies of the appellant and not claimed in computation. In the case of M/s. Logix City Developers Pvt. Ltd. on the same facts this issue has been decided against appellant and held to be capital expenditure, related to work in progress. Therefore, no interference is required to be made towards this addition. 9.8 Accordingly, looking to the facts and circumstances of this case and in law, it is held that the business of the appellant has been set up and therefore, advertisement and brokerage expenses totaling Rs. 5,02,28,267/-(1,31,77,533 + 3,70,50,734) are allowed being revenue in nature as discussed in forgoing paragraphs whereas interest paid to Noida authority are directly related to project therefore, interest of Rs. 5,30,65,237/- is to be capitalized towards work in progress. Therefore, interest paid to Noida authority amounting to Rs. 5,30,65,237/- remained disallowed/confirmed. Out of total disallowance of Rs. 10,32,93,504, Rs. 5,02,28,267/-(1,31,77,533 + 3,70,50,734) is hereby deleted and Rs. 5,30,65,237/- capitalized by the AO is hereby confirmed. These grounds of appeal are partly allowed. 9.9 It has been stated by appellant that above claim of expenses in computation of income have already been capitalized towards project cost in the balance sheet and not routed through profit and loss account, therefore, the amount allowed as revenue expenses, discussed above, should be reduced from capitalized
8 ITA.No.5400/Del./2019 project cost (WIP) while offsetting the value of cost form Sale proceeds in future so that it cannot be allowed twice. 7. Aggrieved by the order of Ld. CIT(A), Revenue is now before us.
Before us, Ld. AR reiterated the submissions made before the lower authorities and further submitted that the issue raised in the present appeal is covered by the decision of the Tribunal in assessee’s own case for A.Y. 2012-13 by order dated 25.08.2022. He placed on record the copy of the aforesaid order in and submitted that since the facts of the case in the year under consideration are identical to that of earlier years no interference to the order of CIT(A) is called for.
Ld. DR on the other hand supported the order of AO, but however did not controvert the factual submissions made by Ld. AR.
10. We have heard the rival submissions and perused the material on record. The issue in the present ground is about the disallowance of expenses made by AO, but allowed by CIT(A). We find that identical issue arose in the 9 ITA.No.5400/Del./2019 case of the assessee in A.Y. 2012-13 before the co-ordinate bench of Tribunal. The co-ordinate bench of Tribunal vide order dated 25.08.2022 in deciding the issue in favour of the assessee by observing as under:-
The assessee is engaged in the business of real estate . During the year, the assessee was allotted by land by NOIDA. The land acquired by the assessee is the stock-in-trade of the business. The construction work has started during the year. The assessee incurred and claimed the following expenditure which have been disallowed by the Assessing Officer on the grounds that the assessee has not routed these expenses through P&L account and claimed directly in the computation. Particulars Amount Advertisment Expenses 9,75,19,715/- Brokerage & Commission 1,17,11,109/- Noida Authority –Interest 94,76,736/- Noida Authority –late 3,63,51,690/- registration charges Total 15,50,59,250/-
The AO held that since the assessee has not started showing the revenue from operations, they will not be allowed to debit the expenditure.
5. The ld. CIT(A) confirmed the action of the AO holding that the construction has not been started, the approvals were pending, the land has not been fully paid for and it becomes apparent that the project is an infantile stage. Therefore, the ld. CIT(A) held that the business could not be said to have been “setup” or “commenced”.
10 ITA.No.5400/Del./2019
Heard the arguments of both the parties and perused the material available on record. Noida Authority-Interest and Late registration charges: 7. We find that the assessee has claimed the penal interest payable @ 14% annually on the default o f payment of installment. The entry reads as under: S.No. Date Name of Party Amount Purpose of Expendi ture 1. 3/31/20222 NOIDA Authority (Penal Intt.) 94,76,736 Late payable being penalty @14% paymen annually on interest to t of 1st NOIDA is recognized with install- regards to 1st ment Instalment of default interest. Calculation = 166274471 × 14% ×149 days /366 day s
8. The assessee was allowed 16 half yearly installments to pay the amount of Rs.302 .31 Cr. to NOIDA and in case o f default interest @ 14% compounded half yearly leviable for the default period on the defaulted amount. The balance sheet also reflects cost o f land o f Rs.387.25 Cr. which has been capitalized. Since, the interest is attributable to the cost of land, the interest expenditure is not allowable as per Section 36(1)(iii) o f the Income Tax Act, 1961. Similarly, the registration charges and the fee/penalty/damages/price for late registration amounts to an integral part of cost of acquisition o f land has also to be allotted to the “cost of project” and to be treated as part of capital work-in-progress. Hence, we hereby affirm the order of the ld. CIT(A) on these two issues. Advertisement Expenses, Brokerage & Commission: 9. The assessee has already started business operations, construction is in progress and an amount o f approximately Rs .390 crores has already been 11 ITA.No.5400/Del./2019 capitalized. Hence, it cannot be said that the assessee has not commenced business operations. The expenses being advertising, brokerage and commission for booking of the flats which are in the nature of revenue expenses cannot be treated as capital expenditure. Reliance is being placed on the judgment of Hon’ble High Court of Bombay in the case of CIT Vs Piem Hotel Pvt. Ltd., (209 ITR 0616) wherein it was held that once business is set up, expenditure incurred relating to such business have to be treated as revenue expenditure and allowed as deduction. As soon as an activity which is essential to carrying on the business is started the business must be said to have commenced.
The project cost in relation to a project comprises of cost of land and cost of development rights, borrowing cost, construction and development cost. In relation to land, the entire cost of land and development rights, stamp duty registration charges and other incidental expenses have to be capitalized. With relation to the borrowing cost, the interest directly related to the project is to be capitalized. Further, all the direct costs relating to the construction and development of the specific project have to be capitalized. The construction cost includes conversion cost, municipal sanction fee, expenses incurred, site labour cost, cost of material, cost of hiring plant & machinery, cost of designs and claims o f the third party. The general administrative cost, advertisement, brokerage, selling cost, depreciation of the vehicles and office expenditure are part o f the revenue expenditure and need not be capitalized.
There is difference between commencement of the business and setting off o f the business. All the expenses incurred pre-commencement are to be treated as pre-operative expenses and the expenses incurred which do not form the part of the “work in progress” (WIP) like office expenses, salaries, advertising, brokerage and commission which are incurred for running of the business operations and to bring
12 ITA.No.5400/Del./2019 revenues to the company are to be treated as revenue expenditure. 12. Hence, we hereby affirm the order of the ld. CIT(A) on account of the disallowance on Noida Authority- Interest and Late Registration Charges(LRC) and hold that the disallowance affirmed by the ld. CIT(A) on account of Advertisement Expenses and Brokerage & Commission are liable to be obliterated.
11. Before us Ld. DR could neither point out any fallacy in the findings of CIT(A), nor could point out any distinguishable facts in the present case and that of A.Y. 2012-13. In such a situation, we find no reason to interfere with the order of CIT(A) and thus the grounds of Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.