2022 (2) TMI 696 - AT - Income Tax

Appellate Tribunal allows capitalization of business expenses for assessee, emphasizing genuineness & accounting method.

The Appellate Tribunal partially allowed the appeal in favor of the assessee, directing the Assessing Officer to permit the capitalization of claimed ... Expenditure for project related activities and also incurred other fixed administrative costs - AR made limited alternative submissions that the business expenditure is genuine and therefore, the same may be allowed to be capitalized during this year - allowable business expenditure - HELD THAT:- It could be gathered that whether the business had been set up/commenced or not would not be much germane to the facts of the case since AO has already allowed admissible depreciation to the assessee which would establish that the fact of commencement of business has been accepted by AO. The finding that the expenditure has been claimed as deferred revenue expenditure in the books whereas full expenditure has been claimed in the computation of income, is not a correct finding. The perusal of details of other expenses as debited in Profit & Loss Account and the details of construction expenses would show that the set of expenditures are altogether different and therefore, it is not a case where the assessee has claimed deferred revenue expenditure. The findings rendered by Ld. AO are not correct. We are convinced with Ld. AR's submissions that since the genuineness of the expenditure is not under question, the capitalization of the same as work-in-progress may be allowed. These submissions find all the more favor in the background of the fact that the assessee is following percentage of completion method of accounting. Therefore, we direct Ld. AO to allow capitalization as 'other expenses'. No other ground has been urged before us. Issues:- Disallowance of business expenditure by lower authorities on the grounds of business not commencing during the year.Analysis:1. The appeal pertains to the Assessment Year 2012-13 and arises from the order of the Commissioner of Income Tax (Appeals) dated 28-12-2018. The assessee contended that business-related expenditure was not allowed by lower authorities due to the business not commencing during the year.2. The Appellant argued that the business expenditure was genuine and should be allowed to be capitalized. The Respondent, however, maintained that since the business had not commenced, the expenditure could not be permitted.3. The assessee, engaged in construction business, declared a loss of Rs. 279.78 Lacs and claimed construction expenses of Rs. 277.70 Lacs. The Assessing Officer disallowed the claimed expenses as no business income was generated, resulting in a loss adjustment to Rs. 2.07 Lacs. The AO rejected the assessee's claim that the expenses were capitalized under work-in-progress for future years.4. The Appellate Tribunal noted that the assessee followed the percentage of completion method of accounting. The Tribunal found that revenue recognition was tied to units sold, which had not occurred due to the business not commencing. The Tribunal upheld the AO's decision based on these grounds.5. The Tribunal observed that the acceptance of depreciation by the AO implied the acknowledgment of the business commencement. It further clarified that the expenses claimed were not deferred revenue expenditure, as alleged by the lower authorities.6. Considering the genuineness of the expenditure and the accounting method followed by the assessee, the Tribunal directed the AO to allow capitalization of the claimed expenses. The appeal was partly allowed in favor of the assessee.7. In conclusion, the Tribunal ruled in favor of the assessee, allowing the capitalization of Rs. 277.70 Lacs and other expenses of Rs. 45.90 Lacs. The decision emphasized the genuineness of the expenditure and the consistent accounting method employed by the assessee.