M/S PRAGNYA CREST PROPERTIES PVT LTD ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-3(1)(2), BANGALORE

The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-5, Bengaluru dated 12-04-2017 arising in the order passed by the Assessing Officer u/s 143(3) of the IT Act, 1961 (‘The Act’) relating to assessment year 2012-13.

Grounds of appeal raised by the assessee reads as under; (B)/2017 2 1. On the facts and circumstances of the case, the ld.CIT(A) in not appreciating the fact that the assessee company has not incurred any expenditure towards earned exempt income and the investment made were out of surplus fund and disallowance under section 14A of Rs.1,86,900/- is not warranted. 2.1 On the facts and circumstances of the case the ld.CIT(A) erred in not appreciating the fact that the assessee company is in the business of construction business and selling expenses incurred is revenue in nature. 2.2 On the facts and circumstances of the case, the ld.CIT(A) erred in not appreciating the fact that selling and promotion expenses are revenue in nature and are allowable expenditure.

Briefly stated, the assessee is engaged in the business of real estate development and construction of commercial and residential building near Whitefield, Bengaluru. The company while selling its residential apartments, claims to have entered into two agreements namely; agreement (B)/2017 3 to sell and construction agreement. It is further claimed that the possession of the apartment will be given to the customers on completion of the construction. As per the accounting policy adopted, the revenue from real estate under development is recognized upon transfer of all significant risks and rewards of ownership of such real estate as per the terms of the contract entered into with buyers. The contracts where the company is under obligation to perform substantial acts, even after the transfer of significant risk and rewards, the revenue is recognized on percentage of completion method when the state of completion of each project reaches a reasonable level of progress.

The AO, at the time of framing the assessment under s.143(3) observed that the assessee has interalia claimed selling expenses of Rs.1,38,22,515/- in the previous year relevant to assessment year 2012-13 in question as revenue expenses. It was further observed by the AO that the assessee has not recognized any revenue from sale of units in the year. It was observed that the assessee is engaged in the development of single project where the sales have been recognized only in the subsequent years. The AO further observed that the selling expenses were mostly comprised of advertising expenses of ‘White field project’. In the absence of any revenue recognized from the project, the AO applied doctrine of matching principles and held that only those expenses relatable to sales revenue recognized in a year can be claimed as revenue expenses. It was thus held by the AO that selling expenses claimed as revenue expenditure requires to be capitalized with the project cost and cannot be regarded a expenditure in revenue nature. The claim of selling expenses as the revenue expenses were thus disallowed by the AO and added to the total income of the assessee. The total loss was thus assessed at Rs.29,97,445/- as against return loss of Rs.1,70,06,860/- (B)/2017 4 7. The CIT(A) in first appeal mainly reiterated the observations of the AO and confirmed the action of the AO.

Further aggrieved, the assessee preferred appeal before the Tribunal.

Before the Tribunal, the learned counsel for the assessee at the outset submitted that the assessee being engaged in the business of real estate development, the revenue from the project can be recognized based on percentage completion method. As per the Accounting Standard AS-7 issued by the Institute of Chartered Accountants of India (ICAI) towards accounting for construction/contract, the relevant revenue recognition parameters are yet to be met at the end of the financial year on 31-03- 2012. It was thus submitted that revenue could not be recognized due to non-fulfillment of parameters laid down in AS-7. In the same vain, the learned counsel pointed out that substantial revenue has been duly recognized (89.12 Crores) in the financial year 2013-14 when the parameter notified in the accounting standard were broadly met. In elaboration, it was submitted that revenue could not be recognized in the absence of transfer of significant risk and rewards to the potential buyers.

The ld.DR on the other hand, pointed out that in the absence of any sale revenue, the whopping amount of selling expenses cannot be allowed in the light of matching concept, as held by the lower authorities. It was further submitted that the selling expenses are attributable to the project in progress and therefore, the expenses can be claimed in the relevant year when the revenue is recognized.

We have carefully considered the rival submissions. The substantive issue for determination is whether the selling expenses incurred by the assessee are allocable to the specific development contract under taken by the assessee and thus required to be added to (B)/2017 7 the contract costs in progress or such expenses can be allowed as revenue expenditure. On perusal, it is noticed that the Accounting Standard -7 issued by ICAI clearly spells out that the selling and administrative cost are required to be excluded from the contract costs while drawing financial statements. Hence, the action of the assessee resonates that the parameters of AS-7 referred to in the instant case.

We also find merit in the plea of the assessee that expenses incurred in the normal course of business is required to be allowed, after setting up of business irrespective of the fact whether the revenue is not yet earned in view of the decision of the Hon’ble Bombay High Court in the case of Western India Vegetable products Ltd. 26 ITR 151 (Bom.). The action of the assessee in any case is a revenue neutral affair and the revenue is not put to any tax loss per se by such alleged premature claim.

We further find that the controversy is no longer resintegra and clearly covered by the decision of the co-ordinate Bench of the Tribunal in Sunny Vista Realtors Pt.Ltd. vs ACIT in vide order dated 11-01-2017. In the similarly placed situation, the co-ordinate Bench has adjudicated the issue in favour of the assessee by a detailed order.

In parity with the view taken by the co-ordinate Bench and having regard to the tax neutrality, we find considerable merit in the objection raised by the assessee.

Ground no.2 of the assessee’s appeal is accordingly, allowed. (B)/2017 8 16. In the result, the appeal of the assessee is partly allowed.