Commissioner Of Income Tax v. Somnath Buildtech Pvt. Ltd

$~16 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 494/2018 COMMISSIONER OF INCOME TAX versus SOMNATH BUILDTECH PVT. LTD ..... RespondentThrough:Mr. Kapil Goel, Advocate throughVideo-conferencing. %Date of Decision: 13[th]October, 2022 CORAM: HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMEET PRITAM SINGH ARORA, J (ORAL): 1.Present appeal has been filed under Section 260A of the Income TaxAct, 1961, (‘the Act’) for setting aside the impugned order dated 22[nd]November, 2017, passed by the Income Tax Appellate Tribunal (‘ITAT’) inITA No.2940/Del/2014 for the Assessment Year (‘AY’) 2009-10. 2.The learned counsel for the appellant, Revenue, states that the ITAThas erred in deleting the addition of Rs. 4,50,38,586/- made by the AssessingOfficer (‘AO’) in the hands of Assessee as a capital expense. He states thatITAT has erred in upholding the Assessee’s reliance on AccountingStandard (AS-7) and the Guidance Note issued by the Institute of CharteredAccountants 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 ‘Percentageof Completion Method’ (‘POCM’). He states that the ITAT itself made theself-contradictory finding that the respondent was following the “completedcontract method” (‘CCM’). Therefore, the said expenses being capital innature should have been disallowed in accordance with provisions ofSection 37(1) of the Act. He states that the ITAT failed to appreciate that theexpenses incurred by the Assessee were not intended to earn revenue duringthe subject AY and were spent for an ‘enduring benefit’ of the real estateproject over a significant period of time, consisting of a number of AYs tillthe completion and sale of the project. 3.He states that the ITAT fell in error in holding that the amountexpended by the Assessee towards ‘advertisement expenses’ and ‘businesspromotion expenses’ are related to the ‘general administrative cost’ of theRespondent. He states that ITAT erred in holding that the amount expendedby the Assessee towards ‘brokerage and commission’ was incurred for thepurpose of sale of the project, whereas admittedly the project was ongoingand unsold in this AY and the Assessee was following the CCM methodwhich necessitates that the additions by the AO should be capitalised till thecompletion of the relevant project in a later AY. He further states that theITAT erred in holding that the amount expended by the Assessee towards‘software development charge’ has been incurred for the purpose of day today operations of the Respondent as the ITAT failed to appreciate that thesaid expense was in the nature of one-off payment, which includedcustomization of such software for the benefit of the Assessee. 4.He states that ITAT erred in holding that the disallowed expenseswere 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 saidexpenses, in view of the provision of Section 37(1) of the Act, are barredfrom being deducted against taxable income under the head of 'profits andgains from business or profession' irrespective of purported 'revenueneutrality' of classification of such expenses by the Assessee. 4.He states that ITAT erred in holding that the disallowed expenseswere 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 saidexpenses, in view of the provision of Section 37(1) of the Act, are barredfrom being deducted against taxable income under the head of 'profits andgains from business or profession' irrespective of purported 'revenueneutrality' of classification of such expenses by the Assessee. 5.In reply, the learned counsel for the Respondent, Assessee, hascontended that both the Commissioner of Income Tax (Appeal) [‘CIT(A)’]and the ITAT, after perusing the documents on record, have returnedconcurrent findings of fact that the disallowance of expenses made by theAO is incorrect. He submits that the expenses on advertisement, businesspromotion, brokerage and commission and software development chargesaggregating to Rs. 450,38,586/- are revenue expenses and were rightlyclassified as such by the Assessee in accordance with the bindingAccounting Standards (AS-7), which were followed in preparation ofaccounts 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 20[th]March, 2019 forsupporting classification of the aforesaid expenses as ‘revenue expense’ andjudgment of the Supreme Court in Commissioner of Income Tax vs. ExcelIndustries Ltd., 2014 13 SCC 459 to substantiate the reasoning of the ITATwith 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 businessof real estate and in the relevant assessment year was constructingresidential and commercial projects in the state of Rajasthan. The Assessee hadundertakenitsfirstresidential-cum-commercialprojecton26[th]November, 2007. The Assessee had collected advances from variouscustomers to the tune of Rs. 21,38,62,554/- and recorded the same in thebalance sheet of the relevant AY. The development of the project beganduring the Financial Year (‘FY’) 2008-09 and the company incurredexpenses under several heads. 8.The Assessee filed its Return of Income (‘ITR’) on 30[th]September,2009. In the ITR, the Assessee claimed expenses of 16,52,57,997/- undervarious heads, which included the sums incurred towards purchase of landand cost of construction amounting to Rs. 11,21,57,074/-. The expenseincurred by the Assessee towards cost of land and cost of development werecapitalised as stock-in-trade. The balance expenses amounting to Rs. 5,31,00,923/- was charged tothe Profit & Loss Account and claimed as business expense. The Assesseehad total twenty eight (28) heads of indirect expenses, the AO disallowedthe following four (4) heads of expenses as revenue expenditure and insteadre-classified the same as capital expenses:- Signature Not Verified The AO capitalised the aforesaid expenses towards the cost of theproject. Pertinently, the genuineness of the said expenses is not in dispute.9.The Assessee aggrieved by the order of the AO filed an appeal beforethe CIT(A). The CIT(A) held that the AO’s action of disallowing four (4)items of expenses out of twenty eight (28) items appears to have been drivenby the fact that the benefit of such expenses shall be of ‘enduring nature’and the Assessee shall receive the benefits beyond the current assessmentyear. The CIT(A) after perusing the record concluded that the said expenseshave been incurred for the business purpose of Assessee and these expensescannot be tagged with any specific asset as the expenses are indirectexpenses of the entire project. The CIT(A), therefore, concluded that theAO’s action in treating the select four (4) indirect expenses as capitalexpenditure is not justified and directed the said disallowance to be deleted.The relevant finding of the CIT(A) in this regard is as follows:- “10.2. The appellant has challenged the AO's action in treating theseexpenses as capital expenditure as such action would be in totaldisregard to section 209 and 211 of the Companies Act 1956and accounting standards framed by the ICAI which aremandatory for every company. It was emphasized that theaccounting treatment of various expenses in real estate businesshas been done as per accounting standards and accordingly alldirect costs were capitalized and the indirect cost mostlypertaining to selling and distribution expense like commissionto brokers and advertisement expenses etc were charged torevenue as they are related to the revenue once the businessactivities of the appellant have commenced. The appellant hasgiven the complete ledger accounts of these four expenses and itwas submitted that out of total 28 heads of expenses under theindirect expenses, the AO's action in choosing only fourexpenses as capital expenditure as such action would be in totaldisregard to section 209 and 211 of the Companies Act 1956and accounting standards framed by the ICAI which aremandatory for every company. It was emphasized that theaccounting treatment of various expenses in real estate businesshas been done as per accounting standards and accordingly alldirect costs were capitalized and the indirect cost mostlypertaining to selling and distribution expense like commissionto brokers and advertisement expenses etc were charged torevenue as they are related to the revenue once the businessactivities of the appellant have commenced. The appellant hasgiven the complete ledger accounts of these four expenses and itwas submitted that out of total 28 heads of expenses under theindirect expenses, the AO's action in choosing only four expenses is arbitrary and hence not justified.The appellant hascited the decisions of various courts in support of itssubmissions. 10.3. On considering the facts of the case as well as the submissionsmade by the appellant, it is observed that so far as the AO'sobservation that it agreed for capitalization of four expensesduring the assessment proceedings, the same is not supportedwith the fact that it is being contested in appeal. In itssubmissions, the appellant has highlighted that the treatment ofsuch expenses as capital expenditure instead of revenue shall noway impact the taxation of the appellant because in case oftreating the same as capital expenditure, this expense will beallowed in the year when the transfer of property takes place orthe sale is booked. However, it was again highlighted that itwould not be as per the accounting standards issued by ICAIand would be in complete disregard to the provisions of section209 & 211 of the Companies Act, 1956.Secondly, there is nobasis for selecting only four items out of 28 items on expensesclaimed by the appellant under the indirect expenses head, itappears that the AO had chosen these heads of expenses solelyon the ground that the benefits of such expenses shall be ofenduring nature and the appellant shall reap the benefitsbeyond the current assessment year.However, the AO has lostsight of the fact during such action that these expenses in noway were directed to the specific asset as the business of theappellant is in real estate. Thus, these expenses cannot betagged with any of the specific asset as these expenses areindirect expenses of the entire projects. At the same time, it isalso noticed that no tangible asset is being created by treatingthese expenses as capital expenditure. Since the expenses arenecessarily being incurred for the business purposes of theappellant, these are allowable expenses.In support of its claimthe appellant has relied upon the decisions of Hon'ble Courts inthe case of M/s Godrej Tea Ltd. vs. DCIT (2010) (4) ITR 649(Mum.), Southern Roadways Ltd. (2008) 220 CTR 298 (Mad.),CIT Vs. Indian Visit Com. (P) Ltd. (2009), 176 Taxman 164(Del) and Brehan Maharashtra Sugar Syndicate Ltd. Vs. DCIT(2009) 28 DTR 265 (Bom) and Club Resorts Pvt. Ltd. vs. CIT (2006) 203 CTR 587 (Mad.). On considering the facts anddetails mentioned hereinabove as well as the judicial decisionsof the Courts on the subject, the AO's action in treating theexpenses under the abovementioned four heads as capitalexpenditure is not justified and the same is directed to bedeleted. Ground No. 2, 3 & 4 of the appeal are allowed.” (Emphasis supplied) 10.The Revenue aggrieved by the said order filed an appeal before theITAT. The ITAT referred to the Guidance Note provided by the ICAI foraccounting in the case of real estate projects. The ITAT held that the saidguidelines are applicable to the facts of the case of the Assessee. The ITATconcluded that the expenses under the four (4) heads disallowed by the AOare covered by paragraph no. 2.4 of the Guidance Note and are therefore,administrative expenditure and thus, these expenses cannot be carriedforward and should be expensed. The ITAT also held that the classificationof the said expenditure as revenue expenditure would not place the Revenueat any disadvantageous position whereas it may put the Assessee to somedisadvantage. This finding of the ITAT as regards ‘revenue neutrality’ hasnot been disputed by the learned counsel for the Respondent. The finding ofthe ITAT reads as follows:- “7.The expenditure that is stated to be capitalized by the Ld.Assessing Officer are the advertisement expenses and businesspromotionexpenseswhicharerelatedtothegeneraladministrativecostoftheassessee.Thebrokerageandcommission expenditure are related to selling costs, which isnot disputed. Further, the software development expenditureincurred by the assessee are for the purpose of day to dayrunning of the company and not related to the specific project.As stated in the guidance note of the Institute of charteredAssessing Officer are the advertisement expenses and businesspromotionexpenseswhicharerelatedtothegeneraladministrativecostoftheassessee.Thebrokerageandcommission expenditure are related to selling costs, which isnot disputed. Further, the software development expenditureincurred by the assessee are for the purpose of day to dayrunning of the company and not related to the specific project.As stated in the guidance note of the Institute of chartered accountants of India, as per para No. 2.4 that on relateadministrative expenditure as well as the selling cost should notbe carried forward and capitalizing the project cost but shouldbe expensed.The Ld. departmental representative could notpoint out that how the accounting made by the assessee is notproper with respect to the guidance note issued by the Instituteof chartered accountants of India.Further, none of theexpenditure incurred by the assessee were not found to be notgenuine.Looking from the another angle about the expenditureclaimed by the assessee, it would be apparent that if theassessee follows the completed contract method, then theassessee would be carrying on the cost of the project for theperiod till the project is sold. Naturally the cost of the projectwould be increased by these amounts and the revenue is dutybound to grant the deduction of this cost of project at the time ofsale. Therefore in that particular scenario, the amount ofexpenditure incurred by the assessee would be allowed to theassessee is a deduction in that particular year. If the deductionis allowed to the assessee during this year and the assessee hasincurred loss assessee is duty bound to set of this loss within aspecified number of assessment year specified under section 72of the Income Tax Act, i.e. 8 years. If the assessee cannot set ofthese losses during that particular period then the assesseeforgoes the tax advantage of claim of the loss.Therefore, evenif the expenditure is allowed to the assessee for this year asdeduction, it does not make the case of the revenue at anydisadvantageous position, in fact, it puts assessee into some”disadvantage. (Emphasis supplied) (Emphasis supplied) 11.The appellate authorities have after perusing the evidence placed onrecord before them, returned findings of fact that the genuineness of theexpenditure incurred by the Assessee is not in dispute. The appellateauthorities have further concurred that the said expenses have to be allowedas a revenue expenditure in conformity with the then applicable AccountingStandard (AS-7) and these expenses cannot be assigned to a specific asset. This court similarly in case of a developer in the case of Gopal Dass(Supra) with respect to classification of expenses incurred held as under: “.... 26. There is merit in the contention of the Assessee, based on AS 2that compensation paid subsequent to the completion of the project isan ‘extraordinary item’. It was not ‘cost’ of completion of the projectand therefore, such compensation could not be added to the value ofthe stock and trade of the Assessee. AS 2 governs valuation ofinventories. ‘Cost’ comprises all of the costs of purchase, cost ofcompletion and other costs incurred “in bringing the inventories totheir present location and condition”. That which is not relevant tobringing the stock to its present condition or location cannot be partof its value. ................... 27. There is, therefore, merit in the contention of the Assessee that thecompensation paid to the flat buyers upon surrender of the respectiveallotted commercial spaces cannot be added to the value of ‘stock andtrade’. In the considered view of the Court, the view expressed by theCIT(A) merits acceptance. The conclusion of the ITAT that thepayment was made for ‘extraneous consideration’ appears to bebased on surmises and conjectures. ..................... 31.The result of the above discussion is that the Court holds thatthe payment made by the Assessee to the allottees of the flats for theirsurrendering the rights therein should be allowed as businessexpenditure of the Assessee. .....” 12.The Revenue in these proceedings admits to the genuineness of theexpenditure. There is also no dispute that the Assessee is bound to draw upits Profit and Loss account and balance sheet in compliance with theaccounting standards of the ICAI. The learned counsel for the Respondenthas failed to point out any ground for contending that the Guidance Noteissued by ICAI for applying the Accounting Standard (AS-7) is not applicable to the Assessee. The contention of the Revenue that thedisallowed expenses are of an ‘enduring nature’ and should therefore becapitalized to the cost of the project is not based on any legal principle. TheRevenue does not dispute that these expenses are not a direct cost of thespecific project but are indirect costs incurred by the Assessee fordevelopment of its real estate business. The Revenue does not dispute thatthese expenses are admittedly not incurred as cost towards completion of theon-going real estate project and therefore in our considered view theseexpenses cannot be added toward the cost of valuation of the specific asset. The expenses such as advertising expenses, business promotion andbrokerage and commission have been incurred by the Assessee towardsbuilding its reputation and network in the real estate market and so also thesoftware development charges are incurred towards administrative expenses. 13.We do not find any error in the findings of the ITAT, which holds thatthe said expenses incurred by the Assessee are in the nature of generaladministration cost and selling cost as classified by the Guidance Noteissued by ICAI. The said expenses had been incurred by the Assessee for itsbusiness and therefore, it qualifies for deduction as revenue expenditure, asper the decision of this court in Gopal Dass (Supra). The expenses such as advertising expenses, business promotion andbrokerage and commission have been incurred by the Assessee towardsbuilding its reputation and network in the real estate market and so also thesoftware development charges are incurred towards administrative expenses. 13.We do not find any error in the findings of the ITAT, which holds thatthe said expenses incurred by the Assessee are in the nature of generaladministration cost and selling cost as classified by the Guidance Noteissued by ICAI. The said expenses had been incurred by the Assessee for itsbusiness and therefore, it qualifies for deduction as revenue expenditure, asper the decision of this court in Gopal Dass (Supra). 14.Further, the appellant’s contention that the expenses should becapitalised and added to the value of the project in effect postpones therealisation of the said expense to the year of sale and would be liable fordeduction in the hands of the Assessee in the year of sale of the project. Theadmissibility of the deduction is therefore not denied by Revenue but it isonly the year of deduction which is sought to be postponed. It is in thesefacts 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 issueof “revenue neutrality” wherein the Apex Court in the decision of ExcelIndustries Ltd. (Supra) held as follows: “... 28. Thirdly, the real question concerning us is the year in which theassessee is required to pay tax. There is no dispute that in thesubsequent accounting year, the assessee did derive benefits underthe advance license and the duty entitlement pass book and paid taxthereon. Therefore, it is not as if the Revenue has been deprived ofany tax. We are told that the rate of tax remained the same in thepresent assessment year as well as in the subsequent assessmentyear. Therefore, the dispute raised by the Revenue is entirelyacademic or at best may have a minor tax effect. There was,therefore, no need for the Revenue to continue with this litigationwhen it was quite clear that not only was it fruitless (on merits) butalso that it may not have added anything much to the public coffers. .....” 15.We, therefore, do not find any infirmity in the order of the ITAT andthat any substantial question of law arises for consideration in the presentappeal. Accordingly, the same is dismissed. MANMEET PRITAM SINGH ARORA, J OCTOBER 13, 2022/msh/tb MANMOHAN, J