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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI H.S.SIDHU & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
This appeal is preferred by the Ld. deputy Commissioner of income tax, circle, 9 (1), New Delhi (the Ld. AO) against the order of the Ld. Commissioner of income tax (appeals)- XI, New Delhi (the Ld. CIT (A), the Ld. 1st appellate authority) dated 25/2/2014 wherein the addition made by the Ld. assessing officer wide order dated 30/12/2011 under section 143 (3) of the income tax act (in short the act) for assessment year 2009 – 10 of Rs. 45038586/– is deleted. This is the solitary ground of appeal, which is as under:-
On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in law and on facts of the case in deleting the additions made by the Ld. AO amounting to Rs. 45038586/– comprising advertisement expenses of Rs. 1667436/–, business promotion of Rs. 1124141/–, brokerage and commission of Rs. 430540, 09/– and software developing charges of Rs. 205500/– treating them as capital in nature.
As assessee is a company engaged in the business of real estate and constructing residential and commercial projects mainly in the state of Rajasthan. For the assessment year 2009 – 10. It filed its return of income declaring loss of Rs. 51751361/– on 30/9/2009. Notice under section 143 (2) was sent on 19/8/2010. During the assessment proceedings, the assessee has shown gross receipt of Rs. 425570/– and other income of Rs. 923498/–. The assessee has claimed the total expenditure of Rs. 165257997/– under various heads. The assessee has capitalized cost of land and cost of construction amounting to Rs. 112157074/–. The balance DCIT Vs Somnath Buildtech Pvt. Ltd, (Assessment Year: 2009-10)
amount of Rs. 53100923/- is been charged to the profit and loss and claimed as expenses. On enquiry the assessing officer noted that the assessee has made huge expenses under the head of advertisement expenses, business promotion expenses, brokerage and commission and software development charges amounting in all to Rs. 4503 8586. It was noted by the Ld. assessing officer that the assessing officer enquired about the same with the assessee as to why not the above expenses be also capitalized as the same directly relates to the ongoing project. As stated by the Ld. AO the assessee did not offer any explanation but agreed for the same. Therefore, accordingly, the addition of Rs. 45038586/– was made to the total income of the assessee and the assessed income was determined at Rs. (-) 6712775/– against the returned loss of Rs. 51751361/–.
The assessee being aggrieved with the order of the Ld. assessing officer preferred an appeal before the Ld. 1st appellate authority. Wide order dated 25/2/2014, the Ld. CIT (A) allowed the claim of the assessee, holding that treatment of such expenses as capital expenditure. Instead of revenue, shall in no way impact the taxation of the appellant because in case of treating the same as capital expenditure. These expenses will be allowed in the year when the transfer of property take place on the sale is booked. The Ld. CIT (A also appreciated the argument of the assessee that about disallowance/treatment is not in accordance with the accounting standard issued by the Institute of chartered accountants of India and would not be in consonance with the provisions of section 209 and 211 of the Companies Act, 1956. It was further held by him that no tangible asset is being created by treating these expenses as capital expenditure. As these expenses are necessarily been incurred for the prize business purpose of the appellant and these are allowable expenses. He also took the help of several judicial precedents to allow the claim of the assessee. Consequently, the appeal of the assessee was allowed and the Ld. assessing officer was directed to treat the above expenditure as revenue expenditure and not as capital expenditure. Aggrieved, the Ld. assessing officer is preferred appeal before us.
The Ld. departmental representative vehemently supported the order of the Ld. assessing officer and stated that the assessee has capitalized the project cost of land and cost of construction. Therefore, it is following the completed contract method and revenue has not been recognized. Therefore, the above expenditure cannot be allowed as expenditure but are required to be capitalized to the cost of the project of the assessee. He further submitted that the Ld. CIT (A) has not appreciated the accounting treatment given to the completed contract method in case of real estate projects. He anyways and stated that there is no reason that DCIT Vs Somnath Buildtech Pvt. Ltd, (Assessment Year: 2009-10)
these expenditure should be allowed as revenue expenditure. During the year as such, it would be a loss incurred by the assessee only and the expenditure are necessarily related to the project.
The Ld. authorized representative vehemently supported the order of the Ld. CIT (A). Firstly, he denied that the assessee has not agreed during the course of assessment proceedings that these disallowances may be made by treating the above expenditure as capital expenditure. He submitted that had there been an agreement to that assessee would not have come into this appeal. On the issue on the merit he vehemently relied upon the order of the Ld. CIT (A) and submitted that all these expenditure are revenue expenditure in nature. He vehemently relied upon the guidance not issued by the Institute of chartered accountants of India on real estate accounting. He submitted that the advertisement and business promotion expenditure are general administrative overheads and brokerage and commission expenditure incurred for the purpose of the sale of the project. Therefore, it’s the sales cost. Regarding the software development charges, he submitted that these expenditure are been incurred for the purpose of day-to-day operation of the company and has nothing to do with the project. He further relied on the decision of the Hon’ble Supreme Court in case of Excel industries in 358 ITR and pressed the argument of revenue neutrality. His argument was that if the expenditure has not been allowed to the assessee during this year then the expenditure would have been allowable to the assessee in the year in which the assessee shows income. In both the years the rate of taxes are identical. Therefore, instead of granting the above deduction in this year, the deduction would be granted in the year of the sale. He further submitted that the expenditure incurred by the assessee was not found to be non-genuine and therefore there is no question of not allowing the claim of the assessee, in this year, or in subsequent years. He further relied upon the decision of the coordinate bench in case of Aashish Builders Private Limited (ITA No. 310//2012 for assessment year 2008 – 09) to submit that in the identical facts and circumstances, the Ld. Coordinate bench has allowed the deduction on account of advertisement expenditure incurred by the assessee as well as the interest expenditure. He further stated that brokerage and loan processing fees were also granted as deduction vide para No. 8 of that decision. Summarily his argument was that the claim of the assessee is covered by this decision of the coordinate bench.
We have carefully considered the rival contention and perused the orders of the lower authorities. The facts are that the assessee is developing a project and for which the assessee has incurred the cost of the project on the land and its development charges. The same have DCIT Vs Somnath Buildtech Pvt. Ltd, (Assessment Year: 2009-10)
been capitalized as work in progress by the assessee. However, certain expenditure such as advertisement expenditure, brokerage expenditure, business promotion expenditure and software development charges were not capitalized by the assessee, but claimed as revenue expenditure. The guidance has been provided by the Institute of chartered accountants of India for accounting in case of real estate projects. These guidelines are undisputedly applicable to the facts of the case before us. According to that guideline what are the expenditure which are required to be capitalized and what are the expenditure which are required to be expressed out have been specifically mentioned. “2.2 Project Costs – Project costs in relation to a project ordinarily comprise (a) Cost of land and cost of development rights -All costs related to the acquisition of land, development rights in the land or property including cost of land, cost of development rights, rehabilitation costs, registration charges, stamp duty, brokerage costs and incidental expenses. (b) Borrowing Costs – In accordance with Accounting Standard (AS) 16, Borrowing Costs which are incurred directly in relation to a project or which are apportioned to a project. (c) Construction and development costs – These would include costs that relate directly to the specific project and costs that may be attributable to project activity in general and can be allocated to the project. 2.3 Construction costs and development costs that relate directly to a specific project include (a) land conversion costs, betterment charges, municipal sanction fee and other charges for obtaining building permissions; (b) site labour costs, including site supervision; (c) costs of materials used in construction or development of property; (d) depreciation of plant and equipment used for the project ; (e) costs of moving plant, equipment and materials to and from the project site; (f) costs of hiring plant and equipment; (g) costs of design and technical assistance that is directly related 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 Page | 4 DCIT Vs Somnath Buildtech Pvt. Ltd, (Assessment Year: 2009-10)
(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; (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 preparation and processing of construction personnel payroll.”
The expenditure that is stated to be capitalized by the Ld. Assessing Officer are the advertisement expenses and business promotion expenses which are related to the general administrative cost of the assessee. The brokerage and commission expenditure are related to selling costs, which is not disputed. Further, the software development expenditure incurred by the assessee are for the purpose of day to day running of the company and not related to the specific project. As stated in the guidance note of the Institute of chartered accountants of India, as per para No. 2.4 that on relate administrative expenditure as well as the selling cost should not be carried forward and capitalizing the project cost but should be expensed. The Ld. departmental representative could not point out that how the accounting made by the assessee is not proper with respect to the guidance note issued by the Institute of chartered accountants of India. Further, none of the expenditure incurred by the assessee were not found to be not genuine. Looking from the another angle about the expenditure claimed by the assessee, it would be apparent that if the assessee follows the completed contract method, then the assessee would be carrying on the cost of the project for the period till the project is sold. Naturally the cost of the project would be increased by these amounts and the revenue is duty bound to grant the deduction of this cost of project at the time of sale. Therefore in that particular scenario, the amount of expenditure incurred by the assessee would be allowed to the assessee is a deduction in that particular year. If the deduction is allowed to the assessee during this year and the assessee has incurred loss assessee is duty bound to set of this loss within a specified number of assessment year specified under section 72 of the Income Tax Act, i.e. 8 years. If the assessee cannot set of these losses during that particular period then the assessee forgoes the tax advantage of claim of the loss. Therefore, even if the expenditure is allowed to the assessee for this year as deduction, it does not make the case of the revenue at any disadvantageous position, in fact, it puts assessee into some disadvantage. Page | 5 DCIT Vs Somnath Buildtech Pvt. Ltd, (Assessment Year: 2009-10)