Tribunal affirms deletion of selling & administrative expenses, rules against capitalization. AS-7 upheld. Revenue's appeal dismissed.

The tribunal upheld the decision of the Ld. CIT(A) to delete the addition of Rs. 2,94,02,417/- made on account of selling and administrative expenses, ruling that these expenses should not be capitalized as they were not direct or indirect costs of construction. The tribunal also affirmed the applicability of Accounting Standard-7 (AS-7) issued by ICAI, noting that the assessee had consistently followed this standard in previous years. Consequently, the Revenue's appeal was dismissed, and the assessee's cross objections were deemed infructuous.

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Issues Involved:
1. Deletion of addition made on account of selling and administrative expenses.
2. Applicability of Accounting Standard-7 (AS-7) issued by the Institute of Chartered Accountants of India (ICAI).

Detailed Analysis:

1. Deletion of Addition Made on Account of Selling and Administrative Expenses:
The primary issue contested in the appeal is whether the Ld. CIT(A) erred in deleting the addition of Rs. 2,94,02,417/- made on account of selling and administrative expenses. The Revenue argued that these expenses, which include advertisement and publicity, selling and marketing costs, commission and brokerage, and professional & legal charges, should have been capitalized as they are related to the project. The assessee, however, claimed these as revenue expenditure.

During the assessment proceedings, it was noted that the assessee's project, 'Global City,' had not generated any taxable income up to 31/03/2010. The assessee had capitalized the entire cost of construction but claimed selling & administrative costs, personnel costs, and finance costs in the Profit & Loss Account as revenue expenditure. The Ld. AO disallowed these expenses, arguing they should be capitalized, and added them to the closing Capital Work-in-Progress (WIP).

Upon appeal, the Ld. CIT(A) deleted the disallowance, observing that the expenses were neither direct nor indirect costs of construction. The CIT(A) referenced Accounting Standards AS-7, which states that selling expenses and general administration costs should not be considered part of construction costs and development costs. The CIT(A) concluded that the action of the assessing officer was not supported by Accounting Standards and would result in complicated and cumbersome accounting without any gain to revenue.

2. Applicability of Accounting Standard-7 (AS-7) Issued by ICAI:
The Revenue contended that since no income from the project was offered to tax during the impugned AY, all expenditure incurred should be capitalized. The assessee argued that it was mandatorily required to follow Accounting Standard-7 (AS-7) issued by ICAI and had consistently followed this method in subsequent years, which was accepted by the Revenue.

The tribunal examined the relevant portions of AS-7, which outlines that general administration costs and selling costs are generally not considered part of contract costs unless they are contract-specific. The tribunal also referenced the judgment of the Hon’ble Guwahati High Court in MKB (Asia) Private Limited Vs CIT, which upheld the assessee's right to adopt any recognized method of accounting for its business, provided it is consistently followed and regularly maintained.

The tribunal noted that the assessee had consistently followed the accounting method prescribed by AS-7 over several years, and this method was accepted by the Revenue in subsequent assessments. The tribunal concluded that the Revenue was precluded from changing its stand, particularly when both assessment orders were framed by the same assessing officer on the same date.

Conclusion:
The tribunal found no reason to interfere with the order of the Ld. CIT(A), as it was in accordance with settled judicial pronouncements. Consequently, the tribunal dismissed the Revenue's appeal and declared the assessee's cross objections as infructuous.

Final Order:
The Revenue's appeal and the assessee's cross objections were dismissed. The order was pronounced in the open court on 08th December, 2017.

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