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TMI Blog2025 (5) TMI 1551X X X X Extracts X X X X X X X X Extracts X X X X ..... the business activities and services rendered." 2. "On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the brokerage expenses of Rs. 2,51,11,858/- without considering the fact that the assessee had failed to provide proof of services rendered by the brokers in relation to the sale of the flats and thus the brokerage expense in this cannot be allowed as a deduction." 3. The brief facts of the case are that the assessee company is engaged in the business of construction and development of real estate. The assessment was completed u/s 143(3) of the Act. According to the assessment order, it was noted that the assessee had debited Brokerage charges to the Profit & Loss account of Rs. 2,51,11,858/- paid to a broker at the rate of 2% of sales consideration. In response to the query in this regard by the ld.AO, the assessee submitted certain details including copies of few invoices of broker. The AO noted that the assessee had been following 'Percentage Completion Method' for accounting revenues. According to him, as per this method unless and until the completion was above 25%, the assessee did not work out proportional income of the project. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad claimed Rs. 61,78,414/- as expenditure towards brokerage and commission. The amount was paid to its brokers for booking and sale of certain properties during the assessment year. The Assessing Officer disallowed this expenditure on the ground that during the year the conveyance of the sale deeds were not executed. The CIT (A) and ITAT accepted the assessee's contentions and set aside the disallowance. At the outset, we notice that the assessee's explanation clearly stated is as follows: - "In this connection it is submitted that brokerage and commission is not a direct expenses for acquiring to a specific property but it is in fact financial cost/selling expenses and is fully allowable in the year in which the same is incurred. The property brokers who have rendered their services to obtain advances on booking of properties are entitled to the payment of commission in terms of agreement entered into with them. Therefore, the expenses incurred on brokerage and commission on booking of properties being a finance/selling expenses are allowable in full. In this connection your attention is invited to the various orders of CIT (A) on this point where in the addition on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The above accounting method followed by the appellant has been also fortified by the "Guidance Note on Accounting for Real Estate Transaction" issued by the Institute of the Chartered Accountants which vide paragraph 2.2 defines the "Project Cost (i.e. which expenses shall be included while determining the project cost) and at paragraph 2.4 it has been specifically stated that: "The following cost should not be considered part of construction cost and development cost if they are material: a) General administration costs; (b) Selling cost; (c) Research and development cost; (d) Depreciation of idle plant and equipment; (e) Cost of unconsumed or uninstalled material delivered at site; and (f) Payment made to sub-contractors in advance of work performed." 9. Furthermore, in Guidance note on Accounting for Real Estate Transaction also it was stated that the general administration cost and selling cost shall not form part of work in progress. In short, the accounting treatment given in Guidance note on Real Estate Transaction is at par with IND AS 2 reproduced above and the appellant has followed these accounting principles in preparing its accounts for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to included overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories." Further, Para 13 of the AS-2 provide for some exclusions from the cost of inventories as under; "Exclusions from the Cost of Inventories : 13. In determining the cost of inventories in accordance with paragraph 6, it is appropriate to excluded certain costs and recognize them as expenses in the period in which they are incurred. Examples of such costs are : (a). abnormal amounts of wasted materials, labour, or other production costs; (b). storage costs, unless those costs are necessary in the production process prior to a further production stage; (c). administrative overheads that do not contribute to bringing the inventories to their present location and condition; and (d). selling and distribution costs." On a perusal of the aforesaid, we find that the selling and distribution costs, advertisement expense etc. are to be excluded from the cost of inventori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'AO') in his order dated 31 March 2015 passed under section 143(3) of the Act has mentioned as under : "For the year under consideration the assessee had shown Nil Income from the projects taken by the assessee i.e. the assessee has not booked any income for the same means the project is still below 25% completion. In light of this fact it is seen that the assessee has submitted that it has already sold a given number of flats through brokers and incurred brokerage expense on the same. Considering this it is seen that the assessee failed to establish proof of services rendered by the brokers for the sale of the flats. Therefore, the brokerage of Rs. 2,51,11,858/- is disallowed and added back to the income of the assessee and allow to capitalization." 2. In this connection, the audited financials for the year under consideration are enclosed as Annexure 1. Upon perusal of the same, your good self will observe that the Appellant has earned revenue from operations amounting Rs. 260.19 crs. However, the Ld. AO, inadvertently mentioned that there was no revenue recognition during the year under consideration. The Ld. AO disallowed brokerage expenses on the ground that the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect during the year under consideration. The observation made by the AO is factually incorrect because the appellant has offered a revenue of Rs. 260.19 Crores for the year under consideration, as seen in its profit and loss account. Further, on the issue of capitalization of brokerage expenses, it is evident that the said expenses were incurred as selling cost and therefore cannot be made part of work in progress. According to the IND AS 2(Inventory valuation), the administrative and selling expenses, which are not related to bringing the inventories (work-in progress) to their present location and condition are to be excluded from the Inventories being work in progress. Going by the IND AS 2, the brokerage expenses cannot be capitalized, which implies that they will have to be allowed in the year in which they are incurred. Appellant has relied upon number of judicial pronouncements including the decision of Hon'ble Supreme Court in the case of Principal Commissioner of Income Tax-3 Vs DLF Home Developers Ltd [2020] 114 taxmann.com 98 (SC) and decisions of Hon'ble ITAT, Mumbai in its group concerns, where the identical issue is decided in its favour. 7.2. Considering the overa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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