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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’ NEW DELHI
Before: SHRI N.K. SAINI & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER:
The present appeal arises from the order of the ld.CIT(A)-XXV, New Delhi vide order dated 28.11.2011 for assessment year 2008-09 on the following grounds of appeal:
“1. On the facts and in the circumstances and in law the ld. CIT(A) has erred in deleting the demand of Rs.36,39,571/- on A/c of disallowance on brokerage and commission expenses. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal”. 2. Brief facts arising from the order of the ld.AO are as under:
2.1. The assessee had filed its return of Income on 30.09.2008 declaring a total income of Rs.16,50,890/- The case was selected for scrutiny and notices were issued u/s. 143(2) of the Act. The assessee is carrying on business activity of real estate and development of property. The assessee is the proprietor of M/s Ganpati Builders and has declared the turnover of Rs.11,04,22,164/-, the GP of Rs.1,65,18,864/-, the NP of Rs.17,49,646/- and has filed the return income of Rs.16,50,890/-. The assessee has claimed the selling expenses of Rs.1,14,84,425/- which includes the commission and brokerage of Rs.83,73,119/- and the AO has disallowed the commission and brokerage of Rs.5,60,000/- on the selling of plots and another amount of Rs.30,79,571/- on the sale of flats and as such the total disallowance of Rs.36,39,571/- (Rs.5,60,000/- (+) Rs.30,79,571/-) has been made out of the total claim of Rs.83,73,119/-. The disallowance has been made by the AO on the ground that the assessee has claimed the commission and brokerage expenses even though the revenue is yet to be recognized.
Aggrieved by the order of the Ld.AO, the assessee preferred an appeal before ld.CIT(A), who held as under:
“4.4.1 I have considered the disallowance/order of the AO and the submissions of the assessee and I find considerable merit in the submission of the assessee. It is apparent from the perusal of the order of the AO that the AO has not been above to make out a clear as to why the commission and brokerage expenses which are even otherwise allowable as business expenses and such the AO is not justified to make such disallowances. It is also apparent that the AO has not been able to make out a case of any inflated or bogus expenses which could be disallowed. After considering all the facts and circumstances of the case, I am of the view that there is no AO are deleted.”
Aggrieved by the order of the ld.CIT(A), the Revenue is in appeal before us.
We have perused the orders of the authorities below, paper book filed by the assessee and the arguments advanced by both the parties.
5.1. The Ld. DR submitted that the brokerage and the commission paid by the assessee in respect of sale of plots has been rightly disallowed by the assessing officer, since the revenue in respect of the sale of plots on which brokerage has been paid, have not been recognised by the assessee during the year under consideration. The ld. DR further submitted that the cost should be matched with the Revenue. He emphasised that since the revenue from all the projects are not fully recognised, the brokerage and commission payable also must be recognised to that extent only.
5.2. Ld. DR therefore submitted that the assessing officer was right in allowing the brokerage proportionately towards the projects.
On the contrary, the ld.AR submitted that the commission and brokerage was wholly and exclusively for the purposes of assessee’s business. These payments are part and parcel of the assessee’s business and are made regularly to the brokers, without which asessee’s business could not be run. The ld.AR submitted that against the payment of commission and brokerage made by the assessee, TDS have been deducted. The Ld AR submitted that in the assessing office has allowed similar payments in the immediately preceding year at the time of assessment proceedings u/s.143(3) of the Act.
It has been observed from the paper book filed by the assessee that the assessee has been consistently following mercantile system of accounting.. The assessee has been recognising the income in respect of incomplete flats on percentage completion method and the revenue in respect of such flats were recognised in proportion of actual sale price agreed with the purchaser to the extent of the work accomplished during the year. The assessee has placed reliance on the decision of Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd., reported in 312 ITR 254, wherein the Hon’ble Court has held as under:
“Under the mercantile system of accounting, what is due is brought into credit before it is actually received: it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. The accounting method followed by an assessee continuously for a given period of time has to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect true and correct profits.” 7.1. The Hon’ble Supreme Court has followed its decision in the case of United Commercial Bank vs. CIT, reported in [1999] 240 ITR 355 (SC).
7.2. We have perused Accounting Standard 2(AS 2) issued by ICAI, which has been produced before us. It is observed that, as per AS 2, the actual cost on which revenue was recognised, was the proportionate land and development cost incurred on the flats, and revenue to that extent, has to be recognised to the extent of work performed, and work accomplished on the flats at the end of the financial year. Thus Brokerage and commission which did not contribute to performing of any work on the flat and has to be excluded from the actual cost incurred on the flat. Instead the brokerage and commission were sales incentive, which was given to brokers and the same could not be considered to be a part of the cost of work accomplished on the flats. The same has to be recognised as expenses for the period in which the said expenses were incurred.
7.3. It was submitted by the ld.AR that the brokerage and the commission paid by the assessee, was not chargeable to any purchaser, nor the said brokerage and commission was to be reimbursed by any of the purchaser. It was exclusively to be borne by the assessee. This is evident form the agreement placed in the paper book at page 37 to 39. It was also submitted by the assessee that the expenses of brokerage and commission were nither incurred on initial booking made by the purchaser, nor at launch of any site, but it was incurred only after site was developed.
7.4. On the basis of the above discussions, findings and the ratio laid down by the Hon’ble Supreme Court in case of Woodward Governer Pvt.Ltd. (supra), we do not find any infirmity with the order of the ld. CIT(A).
7.5. The ground raised by the Revenue is therefore dismissed.