Real estate selling expenses are revenue in nature and need not be capitalised into work-in-progress under the project completion method.

Advertisement, brokerage and marketing expenses incurred by a real estate developer for sale of completed units were held to be revenue expenditure under section 37 of the Income-tax Act, 1961. Following the project completion method did not change their character, because the absence of project revenue recognition in the year did not make such selling costs part of work-in-progress. The expenses did not bring any asset into existence and were not project construction costs, so they were allowable as a deduction and not liable to capitalisation.

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Issues: Whether advertisement, brokerage and marketing expenses incurred by a real estate developer were allowable as revenue expenditure under section 37 of the Income-tax Act, 1961, or were required to be capitalised to work in progress because no project revenue had been recognised during the year.

Analysis: The assessee carried on real estate development and followed the project completion method. The expenditure was incurred towards advertisement, brokerage and marketing of completed units, and its quantum was not disputed. The mere fact that revenue from the project had not been recognised in the year did not alter the character of such expenditure. Expenses incurred for marketing and sale of units are selling costs and do not bring an asset into existence or form part of the project cost. They are revenue in nature and are not to be included in work in progress.

Conclusion: The expenditure was allowable as revenue expenditure under section 37 of the Income-tax Act, 1961 and was not liable to be capitalised.

Ratio Decidendi: In real estate development, advertisement, brokerage and marketing expenses incurred for sale of units are revenue expenditure and do not become part of work in progress merely because project revenue is recognised only on completion.

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