Consistent Business Expense Deductions Allowed Despite No Project Revenue Recognition Under Income Tax Rules

ITAT Delhi held that the assessee's consistent method of claiming revenue expenditure deductions, not directly related to the project but incurred wholly and exclusively for business purposes, is allowable. Since no revenue from the project was recognized, such expenditures should be capitalized as part of project cost or inventory and not deducted. However, given the assessee's consistent accounting practice accepted by the revenue in earlier years except for finance costs, the ITAT allowed the deduction for the year under appeal. The disallowance of 90% of revenue expenditure was not upheld, affirming the deductibility of such expenses based on the assessee's consistent approach from AY 2011-12 onwards.

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ISSUES:

Whether the ad-hoc disallowance of 90% of the revenue expenditure debited to the profit and loss account is justified when no revenue from the project has been recognized under the Percentage of Completion Method (POCM).Whether expenditure incurred and claimed as business expenditure, but related to ongoing real estate projects with no income recognized, should be capitalized as part of inventory/project cost or allowed as deduction under section 37 of the Income-tax Act, 1961.Whether the application of Accounting Standard 7 (AS-7) and the Guidance Note on Accounting of Real Estate Transactions issued by ICAI is determinative for the allowability of expenditure in such cases.

RULINGS / HOLDINGS:

The ad-hoc disallowance of 90% of the revenue expenditure was held to be arbitrary and unjustified as the expenditure was incurred "wholly and exclusively for the purpose of business" and the genuineness and business nexus of such expenditure were not doubted by the revenue.Expenditure debited to the profit and loss account, which is not directly related to the project cost and is in accordance with the AS-7 and Guidance Note on Accounting of Real Estate Transactions, is allowable as deduction even if no revenue is recognized during the year under POCM.The consistent accounting practice followed by the assessee and accepted by the revenue in other assessment years supports the allowability of the deduction of such expenditure.

RATIONALE:

The Court applied the legal framework under section 37 of the Income-tax Act, 1961, which allows deduction of expenditure "wholly and exclusively" for business purposes, irrespective of whether income has been earned during the year.The Court relied on Accounting Standard 7 (AS-7) on Construction Contracts and the Guidance Note on Accounting of Real Estate Transactions issued by the Institute of Chartered Accountants of India (ICAI), which prescribe the method of accounting for revenue and project expenses under the Percentage of Completion Method (POCM).The Court noted that the revenue did not dispute the genuineness or business nexus of the expenditure, nor reject the books of account under section 145(3) of the Act.Precedent from the Supreme Court recognizing the relevance of Accounting Standards and Guidance Notes for income recognition under the Income Tax Act was cited to support the approach.A coordinate bench's decision was followed, which held that expenditure not linked or attributable directly to the project is allowable as deduction.The Court found the AO's allowance of 10% of the expenditure as deduction inconsistent with the ad-hoc disallowance of 90%, deeming the latter arbitrary.The Court emphasized the consistent accounting treatment adopted by the assessee in previous and subsequent years, reinforcing the legitimacy of the claimed deductions.

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