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Facts
The assessee, a real estate developer, debited brokerage charges of Rs. 2,51,11,858/- to its Profit & Loss account. The Assessing Officer (AO) disallowed this amount, capitalizing it as work-in-progress, on the grounds that the assessee followed the percentage completion method and had not recognized income from the projects.
Held
The Tribunal held that the brokerage expenses are selling expenses and revenue in nature. They should be debited to the Profit & Loss account in the year incurred and cannot be capitalized, especially as per IND AS 2 and the Guidance Note on Accounting for Real Estate Transaction. The AO's observation of no income being offered was factually incorrect.
Key Issues
Whether brokerage expenses incurred by a real estate developer are allowable as a revenue expenditure in the year incurred or should be capitalized as work-in-progress under the percentage completion method.
Sections Cited
143(3), 37
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Before: SHRI NARENDER KUMAR CHOUDHRY & SHRI PRABHASH SHANKAR
आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The present appeal arising from the appellate order dated 31.12.2024 is filed by the Revenue against the order passed by the Learned Commissioner of Income-tax, Appeal/CIT(A) 49, Mumbai [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 29.12.2017 for the Assessment Year [A.Y.] 2015-16.
A.Y. 2015-16 Bellissimo Healthy Constructions and Developers Private Limited 2. The grounds of appeal are as under:- 1. “On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the brokerage expenses of Rs. 2,51,11,858/- without considering the fact that expenditure claimed as a business expense must be directly linked to the business activities and services rendered.” 2. “On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the brokerage expenses of Rs. 2,51,11,858/- without considering the fact that the assessee had failed to provide proof of services rendered by the brokers in relation to the sale of the flats and thus the brokerage expense in this cannot be allowed as a deduction.”
3. The brief facts of the case are that the assessee company is engaged in the business of construction and development of real estate. The assessment was completed u/s 143(3) of the Act. According to the assessment order, it was noted that the assessee had debited Brokerage charges to the Profit & Loss account of Rs. 2,51,11,858/- paid to a broker at the rate of 2% of sales consideration. In response to the query in this regard by the ld.AO, the assessee submitted certain details including copies of few invoices of broker. The AO noted that the assessee had been following ‘Percentage Completion Method’ for accounting revenues. According to him, as per this method unless and until the completion was above 25%, the assessee did not work out proportional income of the project. For the year under consideration the assessee had shown nil income from the from the projects i.e. the assessee has not booked any income for the same which meant that the Project was still below 25% completion although it had already sold certain number of A.Y. 2015-16 Bellissimo Healthy Constructions and Developers Private Limited flats through brokers and incurred brokerage expense on the same. He concluded that the assessee failed to establish proof of services rendered by the brokers for the sale of the flats. Therefore, the brokerage of Rs. 2,51,11,858/- was disallowed though the same was allowed to be capitalized as work in progress.
4. In the subsequent appeal before the ld.CIT(A), detailed submissions were made by the assessee in support of the contention that the said expenses were allowable as business expenditure. The relevant paras of the appellate order are reproduced as below for ready reference: “II. Appellant Submission Ground No.1: The Ld AO erred in disallowing Brokerage expenses of Rs. 2,51,11,858 and adding the same to the cost of inventory Facts of the case: 6. During the year, the appellant had incurred brokerage expenses of Rs. 2,51,11,858 and the same was debited to Profit & Loss account. Copy of invoices on sample basis were submitted during the course of assessment proceedings. The Ld AO summarily disregarded the submission made by appellant and held that brokerage expenses are to be capitalized to inventory as revenue recognition has not started being project completion below 25%. Brokerage expenses are revenue in nature 7. It is submitted that brokerage expenses are selling expenses and accordingly is revenue in nature and should be debited to profit and loss account and cannot be capitalized. Your Honors kind attention is invited in the case of Principal Commissioner of Income Tax-3 Vs DLF Home Developers Ltd [2020] 114 taxmann.com 98 (SC) (Copy of order enclosed as Annexure-1) where the Hon’ble Supreme Court has upheld the decision of Hon’ble Gujarat High Court where it is observed as under:
“3. So far as the question of brokerage is concerned, the issue stands covered in decided on 23.01.2019. The court had then observed as under: — In DLF Universal Limited (supra), this Court after framing questions with respect to allowance under brokerage and commission claimed by the assessee in the context of percentage completion method adopted by it held as follows:
'8. The assessee had claimed Rs. 61,78,414/- as expenditure towards brokerage and commission. The amount was paid to its brokers for booking and sale of certain properties during the assessment year. The Assessing Officer disallowed this expenditure on the ground that during the year the conveyance of the sale deeds were not executed. The CIT (A) and ITAT accepted the assessee's contentions and set aside the disallowance. At the outset, we notice that the assessee's explanation clearly stated is as follows: — "In this connection it is submitted that brokerage and commission is not a direct expenses for acquiring to a specific property but it is in fact financial cost/selling expenses and is fully allowable in the year in which the same is incurred. The property brokers who have rendered their services to obtain advances on booking of properties are entitled to the payment of commission in terms of agreement entered into with them. Therefore, the expenses incurred on brokerage and commission on booking of properties being a finance/selling expenses are allowable in full. In this connection your attention is invited to the various orders of CIT (A) on this point where in the addition on account has been deleted. Your attention is also drawn to order dt. 20.7.1994 of Hon'ble ITAT, New Delhi for the assessment year 1983-84 of the Income-tax wherein an additional ground taken by the Deptt. for inclusion of the amount of brokerage and commission in the sales promotion expenses u/s 37(2)(a) have been dismissed. We understand that the Deptt. has not filed any reference application in the High Court against this order."
It is not disputed by the Revenue that for the other years, the assessee's treatment of such expenses has been in his favour and the Revenue has not chosen to challenge it. Even otherwise, we are of the opinion that such expenditure has to be allowed. The question of law is consequently answered in favour of the assessee and against the Revenue.”
The report of the "Expert Advisory Committees" (EAC) on "Applicability of revised AS 7 to enterprises undertaking the construction activities on their own account as a venture of commercial nature", states that the work in progress shall constitute inventory for the builders and shall be valued as per IND AS 2 prescribed under Rule 7 of Companies (Accounts) Rule 2014 read with section 133 of Companies Act, 2013. On perusal of the IND AS 2 (inventory valuation) at paragraph 16, following expenses have been categorically stated to be excluded from the inventories being work-in progress in the assessee's case:
(a) abnormal amounts of wasted materials, labour or other production costs; (b) storage costs, unless those costs are necessary in the production process before a further production stage; (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and (d) selling costs Therefore, it is very clear from the above wordings of IND AS-2 that the administrative and selling expenses which are not related to bringing the inventories (work-in-progress) to their present location and condition are to be excluded from the Inventories being work in progress in the appellant’s case. The appellant being following the IND AS 2 notified under section 133 of the Companies Act worked out the closing work in progress considering the expenses directly attributable to the construction of the project and the expenses which were not directly attributable to work in progress has been debited to Profit & Loss account.
The above accounting method followed by the appellant has been also fortified by the “Guidance Note on Accounting for Real Estate Transaction" issued by the Institute of the Chartered Accountants which vide paragraph 2.2 defines the "Project Cost (i.e. which expenses shall be included while determining the project cost) and at paragraph 2.4 it has been specifically stated that: "The following cost should not be considered part of construction cost and development cost if they are material: a) General administration costs; (b) Selling cost; (c) Research and development cost; (d) Depreciation of idle plant and equipment; (e) Cost of unconsumed or uninstalled material delivered at site; and (f) Payment made to sub-contractors in advance of work performed.”
9. Furthermore, in Guidance note on Accounting for Real Estate Transaction also it was stated that the general administration cost and selling cost shall not form part of work in progress. In short, the accounting treatment given in Guidance note on Real Estate Transaction is at par with IND AS 2 reproduced above and the appellant has followed these accounting principles in preparing its accounts for the year under consideration. The appellant, in compliance to these accounting principles, determined the expenses which are not related to the work in progress and debited the same to the profit & loss account being brokerage expenses incurred for functioning of the business.
Since brokerage expenses are a part of selling expenses and incurred in order to run its business smoothly which is purely in the nature of revenue expenses not related to construction activity of the appellant; hence, they have been charged to profit and loss account.
It is further submitted that the assesse company has incurred the brokerage expenses which is in the nature of revenue expenditure, and it is wholly and exclusively incurred for the purposes of business.
Further, Your Honor have already ruled the decision of selling expenses in favour of one of the group concerns of appellant i.e. Lodha Estate Private Limited - Appeal No CIT (A), Mumbai49/10369/2017-18 vide order dated 11.02.2020. (Copy of order enclosed as Annexure-2) On appeal to the Hon’ble Mumbai ITAT, the revenue’s appeal was dismissed. Deputy Commissioner of Income Tax CC-7(3) Vs M/s Macrotech Developers Limited (Successor to Lodha Estate Pvt Ltd)
(Copy of order is enclosed as Annexure-3) where it was held as under:
“8. We have deliberated at length on the issue in hand in the backdrop of the orders of the lower authorities and the contentions advanced by the ld. Authorized representatives for both the parties. Admittedly, the assessee had incurred the sales promotion expenses of Rs. 2,02,86,452/- and advertisement expenses of Rs. 6,68,13,114/- for launching of its project and attracting the customers. The A.O had treated the aforesaid expenses as a part of the project cost i.e W.I.P cost, and thus, declined the assessee’s claim for deduction of the same as a revenue expenditure. In our considered view, as observed by the ld. CIT(A), and rightly so, the sales promotion expenses, advertisement etc. cannot be capitalized to work-in-progress as per the Accounting Standards prescribed for the real estate sector as well as the accepted accounting policies and judicial pronouncements. The assessee had consistently been following the method of valuing its inventory in accordance with AS2. We find that Accounting Standard 2 (AS 2) provides as under:
Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to included overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories.
Further, Para 13 of the AS-2 provide for some exclusions from the cost of inventories as under; “Exclusions from the Cost of Inventories :
In determining the cost of inventories in accordance with paragraph 6, it is appropriate to excluded certain costs and recognize them as expenses in the period in which they are incurred. Examples of such costs are : (a). abnormal amounts of wasted materials, labour, or other production costs; (b). storage costs, unless those costs are necessary in the production process prior to a further production stage; (c). administrative overheads that do not contribute to bringing the inventories to their present location and condition; and (d). selling and distribution costs.”
On a perusal of the aforesaid, 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.
Further, we find that the Hon’ble High Court of Delhi in the case of Gopal Das Estates & Housing Pvt. Ltd. Vs. CIT (2019) 412 ITR 489 (Del), 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. Our aforesaid view is fortified by the order of the ITAT, Mumbai in the case of the assessee’s sister concerns, namely, M/s Lodha Palazzo, dated 10.12.2014; and M/s Macrotech Construction Pvt. Ltd., ITA No. 5283/Mum/2014. Also, support is drawn from the order of the Tribunal in the case of M/s Vardhman Developers Ltd., 35 Taxman.com 370. 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 for deduction of sales promotion expenses of Rs. 2,02,86,452/- and advertisement expenses of Rs. 6,68,13,114/-, thus, uphold his order to the said extent. The Ground of appeal No. 2 is dismissed.”
13 The above view is also followed by the order of the Hon’ble ITAT, Mumbai in the following cases of the appellant’s group companies: a. M/s Lodha Palazzo Vs ACIT 15(1), Mumbai (Copy of order is enclosed as Annexure-4) b. M/s Macrotech Construction Pvt Ltd Vs ACIT, Circle 6(3) ITA No 5283/Mum/2014. (Copy of order is enclosed as Annexure-5)
6.1. Appellant has further filed another submission dated 5/12/2024, in which it has stated that 1. “The Ld. Assessing Officer (‘AO’) in his order dated 31 March 2015 passed under section 143(3) of the Act has mentioned as under :
For the year under consideration the assessee had shown Nil Income from the projects taken by the assessee i.e. the assessee has not booked any income for the same means the project is still below 25% completion. In light of this fact it is seen that the assessee has submitted that it has already sold a given number of flats through brokers and incurred brokerage expense on the same. Considering this it is seen that the assessee failed to establish proof of services rendered by the brokers for the sale of the flats. Therefore, the brokerage of Rs. 2,51,11,858 is disallowed and added back to the income of the assessee and allow to capitalization.
In this connection, the audited financials for the year under consideration are enclosed as Annexure 1. Upon perusal of the same, your goodself will observe that the Appellant has earned revenue from operations amounting Rs. 260.19 crs. However, the Ld. AO, inadvertently mentioned that there was no revenue recognition during the year under consideration. The Ld. AO disallowed brokerage expenses on the ground that the Appellant has not booked any income from project. The Ld. AO, has merely based on his surmises and conjectures, disallowed the said brokerage expenses without appreciating the fact that revenue of Rs. 260.19 crs. was recognized by the Appellant during the year.
Further, the Appellant submits that brokerage expenses were incurred wholly and exclusively for the purposes of business as has been explained in detail at para 7 to para 13 of earlier submission dated 20 May 2022.
In view of the above, the Appellant humbly submits that the brokerage expenses of Rs. 2,51,11,858 ought to be allowed during the year under consideration.
Appellant has made further submission as under:
In continuation to our earlier submissions dated 20 May 2024 and 5 December 2024, the Appellant submits herewith copy of Brokerage ledger for the year under consideration as Annexure. The Appellant further submits that tax has been deducted appropriately on the same. We trust that the above submissions will meet with your requirements. The Appellant shall be pleased to provide any further details/ clarifications as may be required by your goodself.
7. DECISION:- I have considered the facts of the case, discussion made in the assessment order and the submission made by the appellant. The appeal arises out of addition of Rs 2,51,11,858/- made on disallowance of brokerage expenses claimed by the appellant. Appellant, being in the business of building & construction, had claimed brokerage expenses of Rs 2,51,11,858/- in the profit and loss account. The AO has observed that the appellant is following percentage completion method as per which it does not work out proportional income unless the completion is above 25% and hence it had shown nil income from the projects. AO has further held that the Appellant had failed to establish proof of services rendered by the brokers for the sale of the flats. The brokerage expenses were disallowed and added to the income. The same were, however, allowed for capitalization. Before me, the appellant has argued that the brokerage expenses are selling expenses and accordingly are revenue in nature and should be debited to profit and loss account and cannot be capitalized.
7.1. I find that the primary ground for disallowance of brokerage expenses is that the appellant is following percentage completion method and had not shown any income from the project during the year under consideration. The observation made by the AO is factually incorrect because the appellant has offered a revenue of Rs. 260.19 Crores for the year under consideration, as seen in its profit and loss account. Further, on the issue of capitalization of brokerage expenses, it is evident that the said expenses were incurred as selling cost and therefore cannot be made part of work in progress. According to the IND AS 2(Inventory valuation), the administrative and selling expenses, which are not related to bringing the inventories (work-inprogress) to their present location and condition are to be excluded from the Inventories being work in progress. Going by the IND AS 2, the brokerage expenses cannot be capitalized, which implies that they will have to be allowed in the year in which they are incurred. Appellant has relied upon number of judicial pronouncements including the decision of Hon’ble Supreme Court in the case of Principal Commissioner of Income Tax-3 Vs DLF Home Developers Ltd [2020] 114 taxmann.com 98 (SC) and decisions of Hon’ble ITAT, Mumbai in its group concerns, where the identical issue is decided in its favour.
7.2. Considering the overall facts and circumstances of the case and the decisions of the Hon’ble Courts & Tribunals, as relied upon by the appellant, I hold that the brokerage expenses of Rs 2,51,11,858 are allowable as deduction in the year under consideration. AO is directed to delete the addition of Rs 2,51,11,858/-. 7.4. Ground no 1 is allowed.”
Per contra, the ld.DR has argued that the disallowance was rightly made as the assessee could not establish that the impugned sum was wholly and exclusively incurred for the purposes of business in terms of section 37 of the Act. It was further stated that considering the A.Y. 2015-16 Bellissimo Healthy Constructions and Developers Private Limited fact that the assessee was following Percentage Completion Method, the amount was correctly capitalized.
We have carefully considered all the relevant facts of the case and the rival submissions. We do not find any infirmity in the conclusion drawn by the ld.CIT(A).The AO has apparently made the disallowance on wrong appreciation of facts on record. The assessee did disclose substantial income from this business activity having sold a number of flats and booked the revenue therefrom in the accounts, contrary to the observation of the AO that no income was disclosed during the year under consideration by the assessee. The brokerage has been paid through banking channels and are duly supported with invoices, none of which have been disputed by the AO. Books of accounts are duly maintained and audited. With regard to the capitalization of brokerage expenses, we find sufficient merits in the contentions of the assessee that the said expenses were incurred as selling cost and therefore could not be made part of work in progress which is also in consonance with the IND AS-2. Thus,brokerage expenses cannot be capitalized and have to be allowed in the year in which they are incurred. Moreover, considering the fact that the assessee company is engaged on large scale in the business of building construction activity, the payment of brokerage is nothing unusual, A.Y. 2015-16 Bellissimo Healthy Constructions and Developers Private Limited being part of its selling expenses. Accordingly, we are of the considered view that there is no infirmity in the order of the Ld. CIT(A) in deleting the impugned addition in respect of Brokerage expenses. Therefore, the appellate order is upheld dismissing the grounds of the Revenue.
In the result, appeal of the Revenue stands Dismissed.
Order pronounced in the open court on 28/04/2025.