Expenses Towards Advertisement, Brokerage And Commission, Incurred By A Real Estate Developer; Deductible As Revenue Expenditure: Delhi High Court

The Delhi High Court has ruled that advertisement expenses, Software Developing Charges, and expenses towards brokerage and commission, incurred by a real estate developer, are in the nature of general administration cost and selling cost, as classified by the Guidance Note issued by the ICAI. Thus, they qualify for deduction as revenue expenditure. The bench of Justices Manmohan and Manmeet Pritam Singh Arora observed that the dispute involving the year of deduction, which was sought to be postponed by the revenue department, was revenue neutral, having no tax affect and that it did not put the revenue department at any disadvantageous position. The assessee- Somnath Buildtech Pvt. Ltd., is a developer engaged in the business of real estate. The assessee commenced its residential-cum-commercial project, for which it collected advances from various customers. The assessee filed its Income Tax Return, claiming various expenses as business expenditure. The Assessing Officer (AO) disallowed certain expenses claimed by the assessee, including the expenses claimed under the head Advertisement Expenses and Software Developing Charges. The AO re-classified the same as capital expenses and capitalised them towards the cost of the development project undertaken by the assessee. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) ruled that the said expenses were incurred by the assessee for its business purpose and that they were indirect expenses of the development project undertaken by the assessee. Thus, the CIT(A) held that the said expenses were not directed to any specific asset and therefore, could not be considered as capital expense. The CIT(A) directed the AO to delete the disallowances made by it. The revenue department challenged the order passed by the CIT(A) before ITAT. The ITAT, after referring to the Guidance Note provided by the Institute of Chartered Accountants of India (ICAI) with respect to accounting in real estate projects, held that the said guidelines were applicable to the assessee. The ITAT opined that the classification of the said expenses as revenue expenditure would not place the revenue department at any disadvantageous position. Observing that the revenue authorities had failed to show how the accounting followed by the assessee was not proper as per the guidance note issued by ICAI, the Tribunal held that the genuineness of the expenditure incurred by the assessee was not in dispute. Thus, the ITAT ruled that the said expenses must be allowed as revenue expenditure. Against this, the revenue department filed an appeal before the High Court. The Court noted that the lower authorities had concluded that the said expenses incurred by the assessee could not be assigned to a specific asset and that they must be allowed as revenue expenditure in conformity with the applicable Accounting Standard (AS-7). While holding that the expenses incurred by the assessee were indirect costs incurred by it towards the development of its real estate business, the High Court rejected the contention of the revenue department that since the expenses were of an 'enduring nature', therefore, they must be capitalized to the cost of the project. The Court added that the said contention was not based on any legal principle. "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 bench laid down that the advertising and business promotion expenses, including the expenses towards brokerage and commission, were incurred by the assessee towards building its reputation and network in the real estate market. Further, the software development charges were incurred towards administrative expenses. Ruling that the said expenses were in the nature of general administration cost and selling cost, as classified by the Guidance Note issued by ICAI, the High Court held that since the expenses were incurred by the assessee for its business, they qualified for deduction as revenue expenditure. Further, the Court took into account that if the said expenses were capitalised and added to the value of the project, as contended by the revenue department, it would in effect postpone the realisation of the said expenses. Consequently, the expenses would be liable for deduction in the hands of the ...

Expenses Towards Advertisement, Brokerage And Commission, Incurred By A Real Estate Developer; Deductible As Revenue Expenditure: Delhi High Court

Parina Katyal

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