2023 (9) TMI 1077 - AT - Income Tax

Revenue's appeal on capitalization of expenses dismissed for AY 2010-11 & 2011-12. Tribunal upholds revenue expenditure.

The appeal of the revenue in ITA No. 2849/Del/2016 for AY 2010-11 and ITA No. 2850/Del/2016 for AY 2011-12, involving capitalization of selling and ... Nature of selling and marketing expenses - Revenue or Capital Expenditure - Treatment to the expenses while recognition of income - Guidance Note on Accounting for Real Estate transactions issued by ICAI - assessee is following ‘Percentage of Completion’ Method for recognition of revenue from real estate transactions carried out by the assessee - HELD THAT:- We find that the fact of assessee not recognizing any income from sale of flats in accordance with the Guidance Note issued by ICAI while following ‘Percentage of Completion’ Method, is not disputed by the ld. AO in the instant case. We find that the ld. AO had not doubted the incurrence of selling and marketing expenses for business purposes AO had not stated that the same are personal in nature ; the ld. AO had not stated that the same are capital in nature and the AO had not stated that the same were incurred in violation of Explanation 1 to Section 37(1) of the Act. Whether the selling and marketing expenses could be claimed as revenue expenditure independently by not including the same by capitalizing to Project Costs? - We find as per the Guidance Note issued by ICAI on ‘Accounting for Real Estate Transactions’, the selling and marketing expenses had to be charged off to revenue in the year of incurrence and not to be included in the project costs, which has been factually done by the assessee in the instant case. This fact is duly appreciated by the ld. CIT(A) in the instant case while granting relief to the assessee, subject to assessee complying with the provisions of section 40(a)(ia) of the Act. Hence we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, the grounds raised by the revenue are dismissed. Disallowance made on account of gifts - It is not in dispute that the assessee is in the real estate business wherein purchase of land and sale of projects is the most critical and commercially important activity and hence it was very important for the assessee to keep land aggregators and brokers in good humor. The assessee had submitted that it had purchased land parcels worth Rs. 399 crores till the year end. It is customary to incur these expenses on various auspicious occasions especially festivals like Diwali to be given to brokers, persons who work on behalf of the assessee company, customers and suppliers of the assessee, in order to keep them in good humor. It is a fact that by incurrence of these expenditure at the proper time like Diwali occasion would certainly strengthen the relationship of the assessee with the persons who work for the assessee company, customers and suppliers which in turn would enable the company to have continued relationship with the parties. Hence we hold that the said expenditure is held for the purpose of business as per the principle of commercial expediency. Issues Involved:1. Deletion of addition of Rs. 3,44,55,262/- by CIT(A) regarding capitalization of selling and marketing expenses.2. Deletion of disallowance of expenditure on gifts amounting to Rs. 10,16,616/-.Summary:Issue 1: Deletion of Addition of Rs. 3,44,55,262/- on Capitalization of Selling and Marketing ExpensesThe first identical issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in deleting the addition of Rs. 3,44,55,262/- on the ground that the capitalization of selling and marketing expenses by the ld. AO is contrary to Guidance Note on Accounting for Real Estate transactions issued by ICAI.The assessee, a private limited company engaged in real estate development, filed its return for AY 2010-11 declaring Nil income with a loss of Rs. 4,46,56,632/-. Following a search and seizure, the AO issued a notice u/s 153A and the assessee filed its return again declaring nil income. The AO noticed that the assessee had claimed expenses on Publicity, Advertisement, and Business/Sales promotion of Rs. 3,97,41,443/- as revenue expenditure, which the AO capitalized as 'Project in Progress'. The CIT(A) allowed Rs. 3,44,55,262/- as revenue expenditure, citing the ICAI Guidance Note which states that selling and marketing expenses should not form part of project cost.The Tribunal upheld the CIT(A)'s decision, noting that the assessee's accounting treatment was in line with the ICAI Guidance Note and that the AO had not disputed the incurrence or business purpose of the expenses. Accordingly, the grounds raised by the revenue were dismissed.Issue 2: Deletion of Disallowance of Expenditure on Gifts Amounting to Rs. 10,16,616/-The Ground No. 3 raised by the revenue is challenging the deletion of disallowance of expenditure incurred on gifts amounting to Rs. 10,16,616/-.The AO disallowed the expenditure on gifts, stating that the assessee failed to produce details of recipients and reasons for the gifts. The CIT(A) allowed the expenditure, noting that the gifts were given to land aggregators and brokers on Diwali, which is customary in the real estate business to maintain good relationships. The Tribunal upheld this decision, recognizing the commercial expediency of the expenditure.Accordingly, the Ground No. 3 raised by the revenue was dismissed.Conclusion:In the result, the appeal of the revenue in ITA No. 2849/Del/2016 for A.Y. 2010-11 is dismissed and cross objection of the assessee in CO No. 235/Del/2016 is also dismissed as infructuous. The appeal of the revenue in ITA No. 2850/Del/2016 for A.Y. 2011-12 is dismissed and cross objection of the assessee in CO No. 236/Del/2016 is also dismissed as infructuous. The grounds raised by the revenue in the case of Ireo Pvt Ltd for A.Ys. 2010-11 and 2011-12 are hereby dismissed. All the appeals of the revenue are dismissed and all the cross objections of the assessee are dismissed in both the cases for both the assessment years.