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2015 (11) TMI 492 - ITAT DELHI

2015 (11) TMI 492 - ITAT DELHI - TMI - Treatment to pre operative expenses - revenue v/s capital expenditure - Held that:- In the instant case it is an admitted fact that the assessee company was incorporated on 09.04.2007 and it acquired development rights on 172.46 acres of land for the purpose of Real Estates Development at Village Bhagwanpur, Tehsil Kalka, District Panchkula. The assessee acquired the approval from the State Government for setting up of residential township on 136.89 acres, .....

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r : Sh. R. S. Singvi, CA For the Respondent : Smt. Parwinder Kaur, Sr. DR ORDER Per N. K. Saini, A. M. This is an appeal by the department against the order dated 24.05.2012 of the ld. CIT(A)-XIII, New Delhi. 2. The only effective ground raised in this appeal reads as under: Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of ₹ 3,71,92,193/- made by the Assessing Officer by treating the revenue expenditure as pre operative e .....

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e project was at very initial stage. The AO further observed that the assessee had shown income of ₹ 1,50,898/- which was mainly because of liability return back and there was no income on account of business activity. However, in the expenditure side the assessee had booked expenditure of ₹ 3,73,40,511/-. According to the AO the assessee should have capitalized all those expenses because the business operation of the assessee has not started. He, therefore, added back the expenditur .....

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that Assessee was incorporated on 09.04.2007 and is engaged in Real Estate Business. In the Assessment Order it has also been verified that company is engaged in development of housing project at Panchkula. Further, while passing the Assessment Order, Assessing Officer has given findings in the Order which are contradicted to the final calculations. In the Assessment Order at page 2 in para 3, Assessing Officer has mentioned as under:- "The Assessee should have capitalized all these expens .....

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up of an integrated residential township on 136.89 acres. In this matter please find enclosed copy of audited annual accounts for the year ending 31.03.2009 relevant to the assessment year 2009-10 at page 1 to 25. Kind reference is invited to schedule -5 (inventory) of the Balance Sheet which contained the details of inventory evidencing the fact that the project is already in progress and the assessee has commenced its business. Further Note No. 7 to 9 of schedule - 15 (Notes to Accounts) of th .....

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icial gazette under section 4 of The Land Acquisition Act, 1894 notifying their intention to acquire the specified land for the purpose of development of residential area. Land measuring 26 acres forming part of the Company's above project got covered under the Government's land acquisition notification. Since the Company had applied for license for development of township prior to the date of government notification, the Company filed its objection under Section 5A of the Land Acquisiti .....

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roject layout and other development activities for execution of the project. The management believes that upon launch of the project, the balance project costs shall be funded out of advances from customers and from funding in the form of compulsorily convertible debentures for which the Company already has commitment from its existing debenture holders to the extent of ₹ 146,250,000 as at the balance sheet date. Accordingly, these financial statements have been prepared on a going concern .....

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26, 2007. The Company has also entered into collaboration agreements with the land owners on December 20, 2007 for development of the said land. The said land is covered under the Government Land Acquisition notice under section 4 of The Land Acquisition Act, 1894. The management believes that the Company will be able to develop the said land under the collaboration agreement once the Company receives the licence for development of its 136.89 acres of land as mentioned in Note 7 above and the a .....

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3/- iv) Depreciation - ₹ 2,142/- v) Preliminary expenses - ₹ 2580/- (1/5 of ₹ 12,900/-) vi) Less: other income ₹ 1,50,898/- Major head of expense "Operating and Other expenses" ₹ 3,36,68,287/- was containing Advertising & Publicity Expenses amounting to ₹ 2,84,87,958/- relating to publicize the marketing campaign of its new project launched at Panchkula and the assessee had incurred expenses on advertisement in newspaper, printing of banners etc. .....

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d and all expenses incurred after the commencement of business are allowable. Keeping in view the nature of expenses and commercial expediency of the business, you will kindly appreciate that all expenses have been incurred wholly and exclusively for the purpose of business and are allowable as revenue expenditure. 5. The reliance was placed on the following case laws: CIT Vs Modi Olivetti Ltd. 84 TTJ 1038 (Del) CIT Vs Berger Paints (India) Ltd. 254 ITR 503 DCIT Vs Core Healthcare Ltd. 308 ITR 2 .....

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red after the business is set up may be allowed u/s 30 to 37 of the Act even if it is incurred before the business had actually commenced. It was further contended that a similar issue has been decided by the ITAT Delhi Bench C , New Delhi in favour of one of group companies M/s Regency Park Property Management Services Pvt. Ltd. Vs CIT for the assessment year 2005-06. It was submitted that the business of the assessee had been set up as soon as it had acquired development rights in lands. There .....

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ool of India Ltd. Vs JCIT (2008) 19 SOT 593 CIT Vs Sponge Iron Ltd. 201 ITR 770, 780 (AP) M/s Club Resorts Pvt. Ltd. 287 ITR 552 (Mad) DCIT Vs Core Health Care Ltd. 298 ITR 194 (2008) (SC) 7. The ld. CIT(A) after considering the submissions of the assessee deleted the addition made by the AO by observing in para 4.3 of the impugned order as under: 4.3 I have considered the observation of the Assessing Officer and submission of the appellant. It is seen that the appellant company was incorporated .....

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same was published in Official Gazette on 26.09.2007. Further appellant has placed on record copy of audited annual accounts for the year ending 31.03.2009. Schedule-5 (inventory) of the Balance Sheet which contained the details of inventory evidencing the fact that the project is already in progress and the appellant has commenced its business. The appellant has spent ₹ 268.34 crores on purchasing various inventories which is shown as work in progress at Schedule-5 page 11 of the paper b .....

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he project has started during the year and work is in progress, therefore, no revenue could be recognized during the year by appellant company. However, facts prove that appellant was in the business and same continued in the subsequent year. If there are no Sales in a particular year that does not mean that appellant was not doing its business activities. In the construction business revenues are recognized after the project raised to some stage. In the current year the project was started and .....

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enses incurred on making publicity of the projects are wholly and exclusively for the business purposes of the appellant and such expenses are fully allowable. In view of the facts discussed above it is held that business of the appellant company has commenced during the year and expenses of ₹ 3,71,92,193/- were incurred mainly on salary and advertisement were wholly and exclusively for business purposes. Hence, the same are held allowable and disallowance made by the Assessing Officer is .....

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appeal. The ld. DR strongly supported the assessment order dated 29.12.2011 and reiterated the observations made in the said order. It was further stated that the assessee did not commence its business activity, therefore, the expenses incurred were capital in nature and were not allowable as revenue expenditure. Therefore, the ld. CIT(A) was not justified in deleting the addition made by the AO. 10. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made befor .....

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objection was that those expenses were capital in nature and not revenue in nature as claimed by the assessee, on the basis that the commercial activity of the assessee did not commence. In the instant case it is an admitted fact that the assessee company was incorporated on 09.04.2007 and it acquired development rights on 172.46 acres of land for the purpose of Real Estates Development at Village Bhagwanpur, Tehsil Kalka, District Panchkula. The assessee acquired the approval from the State Gov .....

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ion of the ITAT Delhi, in deleting the similar type of addition which was made by the AO in similar circumstances in the case of CIT Vs Dhoomketu Builders and development Pvt. Ltd. (supra). The Hon ble Jurisdictional High Court in the said case has held as under: There is a difference between the setting up and commencement of business. When a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence busin .....

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