2022 (9) TMI 1641 - AT - Income Tax

Disallowance of brokerage expenses and advertisement expenses - whether the said expenditure claimed by the assessee in the profit and loss account should be capitalized to work in progress or should be allowed in the year in which such expenditure has been incurred and debited to the profit and loss account? HELD THAT - As per Accounting Standard 16 relating to Borrowings interest on borrowings which is used for acquiring an asset can only be capitalized. Interests on other borrowings have to be treated as revenue expense. Since there was no identifiable Asset purchased by Adrika Developers it was not possible to capitalize the interest. Proviso to Section 36(l)(iii) will apply only when borrowing is for acquiring a specific Asset and not for general business purpose. Interest cost which pertains to project Dosti Imperia have been capitalized by the assessee. The amount of interest of Rs 15.04 crore did not pertain to any asset therefore the same has not been capitalized. The Hon ble Bombay High Court in the case of CIT v Lokhandwala Construction Inds. Ltd 2003 (1) TMI 93 - BOMBAY HIGH COURT it was held that deduction of interest u/s 36(l)(iii) was allowable when capital was borrowed for obtaining stock in trade and not fixed Asset. CIT (A) has already held that advance was given for commercial expediency and M/s Adrika Developers Pvt. Ltd. is a subsidiary of assessee. If the loan was given on account of commercial expediency then the interest expenses has to be allowed as business expenditure. It has been pointed out before us by Ld. Counsel that in AY 2011-12 to 2013-14 the interest expenditure on this loan has been allowed. Otherwise also the aforesaid observation in the finding of CIT (A) as noted above is factual and legally correct therefore the same is confirmed. Appeal filed by the revenue is dismissed.

Summary

Issues Involved:

1. Deletion of brokerage expenses.
2. Deletion of interest expenses on debentures.
3. Deletion of advertising expenses.

Issue-wise Detailed Analysis:

1. Deletion of Brokerage Expenses:

The revenue contested the deletion of brokerage expenses amounting to Rs. 29,50,168/-. The Assessing Officer (AO) had capitalized a portion of these expenses to the work-in-progress account, arguing that they were directly attributable to the ongoing project 'Dosti Imperia'. However, the Commissioner of Income Tax (Appeals) [CIT(A)] held that brokerage expenses are part of selling costs and should not be capitalized as they do not directly relate to the construction activity. The CIT(A) relied on the "Guidance Note on Accounting for Real Estate Transactions" issued by the Institute of Chartered Accountants of India, which states that selling costs should be excluded from construction costs. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, confirming that the brokerage expenses should be allowed as revenue expenditure in the year they are incurred.

2. Deletion of Interest Expenses on Debentures:

The AO disallowed the interest expenses of Rs. 15,04,76,347/- on debentures, arguing that these should be capitalized as they were intended for acquiring a qualifying asset. However, the CIT(A) found that the interest was a business expenditure incurred out of commercial expediency, as the funds were advanced to a related entity, M/s Adrika Developers Pvt. Ltd., for acquiring land. The CIT(A) referred to the Supreme Court's decision in S A Builders Ltd. v. CIT, which supports the allowance of interest as a business expense when the funds are advanced for business purposes. The CIT(A) also noted that the interest expense was allowed in previous assessment years. The ITAT agreed with the CIT(A), emphasizing that since no qualifying asset was acquired, the interest could not be capitalized and should be allowed as a revenue expense.

3. Deletion of Advertising Expenses:

The AO had capitalized a portion of advertising expenses, amounting to Rs. 1,00,00,884/-, arguing that they were related to the ongoing project 'Dosti Imperia'. The CIT(A) disagreed, stating that advertising expenses are incurred to increase sales and should be treated as period costs rather than being capitalized. The CIT(A) relied on the ITAT Mumbai bench's decision in Macrotech Construction Pvt. Ltd. vs. ACIT, which supports the treatment of advertising expenses as revenue expenses. Additionally, the CIT(A) found that the AO had incorrectly disallowed certain expenses that were billed to other group companies. The ITAT upheld the CIT(A)'s decision, confirming that advertising expenses should be allowed as revenue expenditure in the year they are incurred.

In conclusion, the ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decision to allow the brokerage, interest, and advertising expenses as revenue expenditures. The tribunal confirmed that these expenses were not directly attributable to the construction of the project and should be recognized in the period they were incurred, in line with accounting standards and legal precedents.