CIT Vs Somnath Buildtech Pvt. Ltd. (Delhi High Court)
The Revenue in these proceedings admits to the genuineness of the expenditure. There is also no dispute that the Assessee is bound to draw up its Profit and Loss account and balance sheet in compliance with the accounting standards of the ICAI. The learned counsel for the Respondent has failed to point out any ground for contending that the Guidance Note issued by ICAI for applying the Accounting Standard (AS-7) is not applicable to the Assessee. The contention of the Revenue that the disallowed expenses are of an ‘enduring nature’ and should therefore be capitalized to the cost of the project is not based on any legal principle. The Revenue does not dispute that these expenses are not a direct cost of the specific project but are indirect costs incurred by the Assessee for development of its real estate business. The Revenue does not dispute that these expenses are admittedly not incurred as cost towards completion of the on-going real estate project and therefore in our considered view these expenses cannot be added toward the cost of valuation of the specific asset.
The expenses such as advertising expenses, business promotion and brokerage and commission have been incurred by the Assessee towards building its reputation and network in the real estate market and so also the software development charges are incurred towards administrative expenses.
We do not find any error in the findings of the ITAT, which holds that the said expenses incurred by the Assessee are in the nature of general administration cost and selling cost as classified by the Guidance Note issued by ICAI. The said expenses had been incurred by the Assessee for its business and therefore, it qualifies for deduction as revenue expenditure, as per the decision of this court in Gopal Dass (Supra).
Further, the appellant’s contention that the expenses should be capitalised and added to the value of the project in effect postpones the realisation of the said expense to the year of sale and would be liable for deduction in the hands of the Assessee in the year of sale of the project. The admissibility of the deduction is therefore not denied by Revenue but it is only the year of deduction which is sought to be postponed. It is in these facts the ITAT has held the classification of the expense is revenue neutral. It would be pertinent to note the decision of the Supreme Court on the issue of “revenue neutrality” wherein the Apex Court in the decision of Excel Industries Ltd. (Supra) held as follows:
28. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did derive benefits under the advance license and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. ……………….”
We, therefore, do not find any infirmity in the order of the ITAT and that any substantial question of law arises for consideration in the present appeal. Accordingly, the same is dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. Present appeal has been filed under Section 260A of the Income Tax Act, 1961, (‘the Act’) for setting aside the impugned order dated 22nd November, 2017, passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No.2940/Del/2014 for the Assessment Year (‘AY’) 2009-10.
2. The learned counsel for the appellant, Revenue, states that the ITAT has erred in deleting the addition of Rs. 4,50,38,586/- made by the Assessing Officer (‘AO’) in the hands of Assessee as a capital expense. He states that ITAT has erred in upholding the Assessee’s reliance on Accounting Standard (AS-7) and the Guidance Note issued by the Institute of Chartered Accountants of India (ICAI), as the Assessee is admittedly a “developer” and not a “contractor”, sums received as advances by it were not under a “construction contract” and the Assessee was not following the ‘Percentage of Completion Method’ (‘POCM’). He states that the ITAT itself made the self-contradictory finding that the respondent was following the “completed contract method” (‘CCM’). Therefore, the said expenses being capital in nature should have been disallowed in accordance with provisions of Section 37(1) of the Act. He states that the ITAT failed to appreciate that the expenses incurred by the Assessee were not intended to earn revenue during the subject AY and were spent for an ‘enduring benefit’ of the real estate project over a significant period of time, consisting of a number of AYs till the completion and sale of the project.
3. He states that the ITAT fell in error in holding that the amount expended by the Assessee towards ‘advertisement expenses’ and ‘business promotion expenses’ are related to the ‘general administrative cost’ of the Respondent. He states that ITAT erred in holding that the amount expended by the Assessee towards ‘brokerage and commission’ was incurred for the purpose of sale of the project, whereas admittedly the project was ongoing and unsold in this AY and the Assessee was following the CCM method which necessitates that the additions by the AO should be capitalised till the completion of the relevant project in a later AY. He further states that the ITAT erred in holding that the amount expended by the Assessee towards ‘software development charge’ has been incurred for the purpose of day to day operations of the Respondent as the ITAT failed to appreciate that the said expense was in the nature of one-off payment, which included customization of such software for the benefit of the Assessee.
4. He states that ITAT erred in holding that the disallowed expenses were revenue in nature, merely by relying on the classification of such sums by the Assessee in its books of accounts. He further states that the said expenses, in view of the provision of Section 37(1) of the Act, are barred from being deducted against taxable income under the head of ‘profits and gains from business or profession’ irrespective of purported ‘revenue neutrality’ of classification of such expenses by the Assessee.
5. In reply, the learned counsel for the Respondent, Assessee, has contended that both the Commissioner of Income Tax (Appeal) [‘CIT(A)’] and the ITAT, after perusing the documents on record, have returned concurrent findings of fact that the disallowance of expenses made by the AO is incorrect. He submits that the expenses on advertisement, business promotion, brokerage and commission and software development charges aggregating to Rs. 450,38,586/- are revenue expenses and were rightly classified as such by the Assessee in accordance with the binding Accounting Standards (AS-7), which were followed in preparation of accounts as per Sections 209 and 211 of the erstwhile Companies Act, 1956.
6. He also relies upon the judgment of this Court in Gopal Dass Estates & Housing Pvt. Ltd vs. CIT in ITA 210/2003 dated 20th March, 2019 for supporting classification of the aforesaid expenses as ‘revenue expense’ and judgment of the Supreme Court in Commissioner of Income Tax vs. Excel Industries Ltd., 2014 13 SCC 459 to substantiate the reasoning of the ITAT with respect to the classification of the expenses being a ‘revenue neutral’ exercise.
7. We have heard the counsel for the parties and perused the paper-book. The brief facts are that the Assessee is a developer engaged in the business of real estate and in the relevant assessment year was constructing residential and commercial projects in the state of Rajasthan. The Assessee had undertaken its first residential-cum-commercial project on 26th November, 2007. The Assessee had collected advances from various customers to the tune of Rs. 21,38,62,554/- and recorded the same in the balance sheet of the relevant AY. The development of the project began during the Financial Year (‘FY’) 2008-09 and the company incurred expenses under several heads.
8. The Assessee filed its Return of Income (‘ITR’) on 30th September, 2009. In the ITR, the Assessee claimed expenses of 16,52,57,997/- under various heads, which included the sums incurred towards purchase of land and cost of construction amounting to Rs. 11,21,57,074/-. The expense incurred by the Assessee towards cost of land and cost of development were capitalised as stock-in-trade.
The balance expenses amounting to Rs. 5,31,00,923/- was charged to the Profit & Loss Account and claimed as business expense. The Assessee had total twenty eight (28) heads of indirect expenses, the AO disallowed the following four (4) heads of expenses as revenue expenditure and instead re-classified the same as capital expenses:-
