2021 (11) TMI 769 - AT - Income Tax

Real estate business expenses reclassified as revenue by ITAT; section 14A disallowance dismissed

Varapradha Real Estate Pvt. Ltd. Versus Income Tax Officer, Ward-3 (2) Hyderabad

The ITAT allowed the appeal of the assessee, engaged in real estate business, by permitting the expenses treated as capital expenditure by the Assessing ... Disallowance of expenses u/s 37(1) - legal, professional and consultancy charges was not allowed by treating the same as capital expenditure - CIT(A) observed that this expenditure may be allowed u/s. 35D, but not u/s. 37(1) - HELD THAT:- We observe that the assessee has entered joint development agreement on 18/01/2008 for the development of the land, which means, the commencement of the business was started in case of real estate business, which the assessee is doing. Therefore, there is no confusion in this regard that the assessee has not started its business. JDA was entered for development of the property which is to be treated as assessee started its business in the line of real estate business. The case law relied upon by the ld. AR support the assessee's case. The expenditure incurred by the assessee towards legal, professional and consultancy charges is hereby allowed as revenue expenditure. Our decision is support by the judgment of Indian Railway Stations Development Corporation Ltd [2019 (4) TMI 816 - DELHI HIGH COURT] as opined that the assessee's activity, which it claims to be preliminary steps towards the fulfilment of the purpose, which is embodied in the MoU clearly indicates that it had set up its business and that these steps were for the ultimate fulfilment of its purposes, which was the preparation of development plans leading to the projects. - Decided in favour of assessee. Issues involved:1. Disallowance of expenses treated as capital expenditure by the Assessing Officer.2. Disallowance u/s. 14A r.w.r 8D not pressed by the assessee.3. Appeal against the order of CIT(A) for AY 2009-10 under section 143(3) of the Income Tax Act, 1961.Issue 1: Disallowance of expenses treated as capital expenditure by the Assessing Officer:The case involved the assessee, engaged in real estate business, appealing against the CIT(A)'s decision confirming the Assessing Officer's treatment of certain expenses as capital expenditure incurred before the commencement of business. The expenses in question included legal, professional, and consultancy charges. The AO observed that these expenses were incurred before the business commenced and hence treated them as capital expenditure. The CIT(A) upheld the AO's decision. However, the ITAT allowed the appeal, stating that the joint development agreement entered into by the assessee on a specific date indicated the commencement of the real estate business. The ITAT referred to various case laws supporting the assessee's position and allowed the expenses as revenue expenditure, citing a judgment of the Delhi High Court in a similar case.Issue 2: Disallowance u/s. 14A r.w.r 8D not pressed by the assessee:The ITAT noted that the disallowance under section 14A r.w.r 8D was not pressed by the assessee during the hearing. As a result, the ITAT dismissed this ground as not pressed, indicating that the issue was not further pursued by the assessee.Issue 3: Appeal against the order of CIT(A) for AY 2009-10 under section 143(3) of the Income Tax Act, 1961:The appeal was filed by the assessee against the CIT(A)'s order for the assessment year 2009-10 under section 143(3) of the Income Tax Act, 1961. The grounds of appeal included contentions regarding the erroneous application of law by the CIT(A), the treatment of routine business expenses as capital expenditure, and the disallowance under section 14A r.w.r 8D. The ITAT adjudicated on the specific issues raised by the assessee, allowing the appeal on the disallowance of expenses treated as capital expenditure and dismissing the disallowance u/s. 14A r.w.r 8D as not pressed by the assessee.In conclusion, the ITAT's judgment favored the assessee by allowing the expenses in question as revenue expenditure, emphasizing the commencement of the real estate business through a joint development agreement. The ITAT's decision was supported by relevant case laws and a judgment of the Delhi High Court. The issues raised in the appeal were thoroughly analyzed and decided upon by the ITAT, providing clarity on the treatment of expenses and disallowances under the Income Tax Act, 1961.