Selling cost not part of construction / WIP cost as per ICAI guidance note on real estate accounting

Selling cost not part of cost of construction or WIP as per ICAI guidance note on accounting for real estate. ITAT delete addition made to Work in Progress

ABCAUS Case Law Citation:
ABCAUS 2638 (2018) (11) ITAT

The appeal was preferred by the Revenue against the order of the Commissioner of Income Tax (Appeals) in deleting the addition made by the Assessing Officer (AO) on account of expenses incurred on business promotion and advertisement.

The Assessee Company was in the business of real estate development. During the year the company launched two residential projects and started booking the sale of residential units to the customers.

The company was following “project completion method” for recognition of revenue as per the prescribed guidance notes on real estate issued by the ICAI. For the one project, the company had booked sale for residential unit sold. However  for the second project, since the project completed was less than 30%, the revenue receipt was shown as advance from customers under the head ‘current liabilities’.

The AO held that, since assessee had not shown income from the second project, the expenditure incurred from towards advertisement and business promotion as selling expenses which was in the nature of hoardings, sponsorships, posters, etc. should have been capitalised towards work in progress.

Accordingly, the AO made the disallowance of the said expenses.

However, in view of the guidance note issued by the ICAI, CIT (A) held that AO was not correct in taking all the selling and market expenses to the work-in-progress. He held that AO’s action in capitalising these expenses was not based on any sound footing and thus disallowance made by the AO was deleted.

The Tribunal observed that the company had incurred the disallowed expenditure towards advertisement and business promotion expenses which was in the nature of advertising and sales promotion for launching of its residential project and attracting the customers.

The Tribunal further noted that the AO had treated expenditure to be part of work-inprogress, because assessee has not disclosed any income from such a project.

These are purely indirect expenditure not related to the cost of the project and therefore, same could not have been taken the project as work-in-progress.

The Tribunal opined that advertisement expenditure on account of brand promotion advertisement, etc., are indirect revenue expenditure which are otherwise allowable as business expense u/s 37 (1).

The Tribunal opined that as per the guidance note of accounting for real estate issued by ICAI, selling cost is not included in the cost of construction and development and since it is an indirect cost, therefore, it has to be allowed irrespective of any link with the construction of work-in-progress.

The Tribunal held that the Accounting Standard gives a categorical finding that selling and marketing expenses being indirect expenditure cannot be taken to the work in progress and therefore such the disallowance made by the AO treating it to part of work-in-progress had rightly been deleted by the CIT(A).

Accordingly, the Tribunal upheld the order of the CIT (A) and the appeal was dismissed.

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