ORDER
Arun Khodpia, Accountant Member.- The captioned appeal is preferred by theassesseeagainst the order of Commissioner of Income Tax (Appeals)-54, Mumbai [in short “Ld. CIT(A)”] dated 05.09.2025 for the Assessment Year (AY) 2010-11, which in turn arises from the order under section 143(3) of the Income Tax Act, 1961 (the Act) passedon 29.12.2012 by the ACIT, Circle-10(2), Mumbai.
2. The sole ground of appeal raised by the assessee, reads as under:
“On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in treating revenue expenditure amounting to Rs. 1,26,30,686/- as capital expenditure and accordingly capitalized in work in progress, without considering the facts and circumstances of the case.”
3. Briefly stated, the assessee is engaged in the business of real estate, developing Bunglows and Villas. The assessee follows Project Completion Method (PCM) of accounting during the year under consideration; the assessee has only one project at Alibaug, which till the end of year was in progress. The case of assessee was selected for scrutiny, wherein the ld. AO observed that the assessee has claimed various expenses incurred towards ongoing projects namely ‘Pavillion’, as revenue expenses instead of treating the same as work-in-progress. Accordingly, the assessee was called for to submit the details of such expenses to clarify the nature along with supporting evidences. The details of expenses chosen for clarification are as under:
| a. | | Advertisement – Rs. 15,94,657/- |
| b. | | Business Promotion – Rs. 45,78,472/- |
| c. | | Commission – Rs. 18,10,000/- |
| e. | | Loan Processing Charges Rs. 2,22,221/- |
| f. | | Security expenses – Rs. 2,59,007/- |
4. In response to the query raised by the ld. AO, the assessee submitted that all the aforesaid expenditure are incurred wholly and exclusively for the purpose of assessee’s business. The expenses are not directly co-related to any of the construction activities, but they are incurred for building up the image of the company,also are not one to one matchable with the project and hence the same is required to be treated as revenue expenditure of the company. The contentions of assessee could not found favour before the ld. AO, therefore all the aforesaid expenditure were added to the income of assessee by treating the same part of WIP or not allowable under section 37(1) of the Act. The assessed income of the assessee thereby enhanced and determined at Rs. 7,94,438/- in placed of returned loss of Rs. (1,31,13,794/-).
5. Being aggrieved the assessee preferred an appeal before the ld. CIT(A), who had partly allowed the appeal of assessee by deleting the addition made under section 37(1) of the Act, however the finding of ld. AO regarding treating the expenditure as WIP was sustained and modified with the observation that the disallowance as WIP would be replaced with the word enhancement of WIP as capitalization, accordingly the disallowances made by the ld. AO by treating the expenditure to be treated as WIP was sustained.
6. Being aggrieved, the assessee challenged the order of ld. CIT(A) by way of present appeal before us.
7. On the issue of treating the expenditure which were debited to P&L A/c being capital in nature or revenue, ld. AR submitted before us that as per AS-2 even in PCM certain expenditures are allowed to be treated as revenue expenditure, which does not constitute the cost of purchases, cost of conversion and other cost incurred in bringing the inventory to their present location and condition. The ld. AR furnished copy of Accounting Standard (AS-2) regarding valuation of inventories wherein para-13 explains the exclusions from the cost of inventory which reads as under:
“Exclusions from the Cost of Inventories
13. In determining the cost of inventories in accordance with paragraph 6, it is appropriate to exclude certain costs and recognise 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.”
8. Relayingon the aforesaid guidelines from the AS-2, ld. AR submitted that the expenditure incurred by the assessee under various heads i.e. Advertisement, Business Promotion, Commission, Loan Processing Charges, Security Expenses etc. cannot be considered to be attributed towards the costswhich are incurred to bring the inventories to their present location and condition, thus falls within the ambit of exclusions prescribed in AS-2, consequently would not constitute the expenditure to be capitalized as WIP till completion of the project,on the contrary such expenditures are incurred in general for operations of the project for promotion. The ld. AR placed her reliance on the decision of Hon’ble Delhi High Court in the case of Gopal Das Estates & Housing (P.) Ltd. v. CIT (Delhi),wherein the Hon’ble Court has observed that the expenditure incurred on Advertisement being necessary for promotion of business is to be allowed as business expenditure and would not form part of the project cost. It is arguedthat the expenditure which were disputed by the ld. AO to be treated as capital in nature and be added in the project cost under WIP was a misappreciation of the facts and law, whereas the accounting treatment by the assessee has the support of AS-2, as well as the decision of Hon’ble Delhi High Court in the case of Gopal Estate & Housing Pvt. Ltd. (supra), therefore all the aforesaid expenditure shall be allowed as revenue expenditure for the year under consideration and the claim of assessee may be accepted. The addition made by ld. AO, therefore which was sustained by the ld. CIT(A) has to be deleted.
9. Per contra, the ld. Sr. DR representing the revenue vehemently supported the orders of revenue authorities, have submitted that the assessee was running a single project,have received advances but notdeclared any revenue in the year under consideration following the PCM of accounting.The ld. CIT(A) had rightly decided the issue by accepting the findings of the ld. AO, that the expenditure should be part of the WIP, which can be claimed by the assessee by recognizing the same as deferred revenue expenditure to claim it when the project is completed. It was the submission that the addition made by ld. AO and sustained by ld. CIT(A) deserves to be upheld. The ld. DR placed her reliance on the decision of S.K. Estates (P.) Ltd. v. Asstt. CIT [1997] 60 ITD 621 (Mumbai),wherein the ITAT, Mumbai has considered AS-7, wherein the finance cost incurred was carried forward from year to year basis, the said judgment do supports the contention of revenue, for the costs directly attributedtowards the constructed inventory of the assessee to bring it in a tradable state.Ld. DR tried to distinguish the case relied by the assessee Gopal Das Estate (supra) and placed reliance on Hiranandani Palace Gardens (P.) Ltd. v. ACIT [IT Appeal No. 4579 (Mum.) of 2023] to support her contentions.
10. We have considered the rival submissions, perused the material available on record and the case laws relied upon by the parties. Admittedly, in present case the expenditure incurred by the assessee, which to the extent added by the ld. AO and sustained by the ld. CIT(A) treating the same to be capitalized under WIP are relating to the business of the assessee so there is no doubt about the genuineness of the expenditure, the only controversy remains before us is, as to whether the expenditure under question are to be allowed during the year under consideration as Revenue Business Expenditure or to be capitalized as work-in-progress,while the assessee is following the method of accounting of (Project Completion Method) having a single project in operation. From the decision quoted by the ld. AR in the case of Gopal Estate & Housing Pvt. Ltd. (supra), wherein the terminology of AS-2 has been discussed by the Hon’ble Delhi High Court and has held as under:
“26. There is merit in the contention of the Assessee, based on AS 2 that compensation paid subsequent to the completion of the project is an extraordinary item. It was not ‘cost’ of completion of the project and, therefore, such compensation could not be added to the value of the stock and trade of the Assessee. AS 2 governs valuation of inventories. ‘Cost’ comprises all of the costs of purchase, cost of completion and other costs incurred “in bringing the inventories to their present location and condition.” That which is not relevant to bringing the stock to its present condition or location cannot be a part of its value”
11. Similar issue has been deliberated upon by the Co-ordinate Bench of ITAT, Mumbai in the case of ACIT v. Airmid Real Estate Ltd. [IT Appeal No. 2378 (Mum.) of 2021, dated 23-05-2023] for AY 2017-18, wherein on identical facts, the Tribunal has decided that the Advertisement, Sales Promotion Expenses incurred by the assessee engaged in Real Estate Development, following project completion method, are allowable as revenue expenditure under section 37(1) of the Act and the same would not form part of the project cost,the relevant findings of the Tribunal in the aforesaid case are extracted hereunder for the sake of interpretation of the issue:
“5. We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the documents and the decision on which the Id. Counsel for assessee has placed reliance. The short issue in appeal before us is with respect to allowability of advertisement, brokerage and marketing expenses as revenue expenditure. There is no dispute with regard to quantum of expenditure. The assessee is engaged in the business of real estate development. Undisputedly, in the period relevant to the assessment year under appeal, the assessee has not recognised any revenue from real estate business. However, the assessee has claimed advertisement expenses Rs.19,47,928/- and expenditure towards brokerage and marketing Rs.4,96,03,997/-. The contention of the Revenue is that since, no profit has been recognised from the real estate project in the impugned assessment year, the aforesaid expenditure cannot be allowed as revenue, the assessee ought to have capitalised it. In First Appellate Proceedings, the CIT(A) decided the issue in favour of assessee holding expenditure as revenue allowable u/s 37 of the Act. We are of considered view that the assessee is following project completion method for recognising revenue, any expenditure incurred towards advertisement, marketing and sales of completed units cannot be held as capital in nature. Method of recognisation of revenue would not determine the nature of such expenditure. Advertisement and marketing expenditure are revenue in nature, hence, cannot form part of work in progress.
6. In the case of DCIT v. Macrotech Developer Limited (supra), the AO had disallowed sales promotion expenses and advertisement expenses and capitalised the same to work in progress. The CIT(A) reversed the findings of AO. The Revenue carried the issue in appeal before Tribunal. The Tribunal upheld the findings of CIT(A) by observing as under:
“8. We have deliberated at length on the issue in hand in the backdrop of the orders of the lower authorities and the contentions advanced by the Id. Authorized representatives for both the parties. Admittedly, the assessee had incurred the sales promotion expenses of Rs.2,02,86,4524 and advertisement expenses of Rs.6,68,13,114/- for launching of its project and attracting the customers. The AO had treated the aforesaid expenses as a part of the project cost i.e. WIP cost, and thus, declined the assessee’s claim for deduction of the same as a revenue expenditure. In our considered view, as observed by the Id. CIT(A), and rightly so, the sales promotion expenses, advertisement etc. cannot be capitalized to work-in-progress as per the Accounting Standards prescribed for the real estate sector as well as the accepted accounting policies and judicial pronouncements. The assessee had consistently been following the method of valuing its inventory in accordance with AS-2. We find that Accounting Standard 2 (AS 2) provides as under:
“Other costs are included in the cost 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:
In determining the cost of inventories in accordance with paragraph 6, it is appropriate to excluded certain costs and recognise 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 inventories as they do not contribute towards bringing the inventories to their present location and condition. Our aforesaid view that selling costs are no to be considered as a part of the project cost i.e. WIP cost is also supported by the “Guidance Note on Accounting for Real Estate Transactions” (Revised 2012) wherein at Para 2.4(b) it is provided that selling costs are not to be considered as part of the construction costs and development costs. Further, we find that the Hon’ble High Court of Delhi in the case of Gopal Das Estates & Housing (P) Ltd. v. CIT , had observed, that that the expenditure incurred on advertising being necessary for promotion of its business is to be allowed as a business expenditure and would not form part of the project cost.”
(Emphasized by us)
7. The Co-ordinate Bench after considering Accounting Standard 2, decision of Hon’ble Delhi High Court and various other decisions, concluded that advertisement and sales promotion expenses incurred by assessee engaged in real estate development are allowable as revenue expenditure u/s 37(1) of the Act.”
12. Adverting to the case relied upon by the Department whichneed to beappreciated on facts and law, the analogy drawn on a composite reading of the aforesaid case laws and accounting principles, suggests that the expenditure directly attributed to project to bring the inventories to their present location and condition would be the part of WIP, but the expenditure incurred being necessary for promotion of business or which do not directly contribute to bring the inventories to their present location and condition are allowable as revenue expenditure in the year in which it has been expended.
13. In backdrop of aforesaid facts and circumstances and jurisprudence, we are of the considered opinion that the expenditure incurred which are not necessarily paid exclusively to bring the inventories to their present location and condition but are general in nature for promotion of the business, the same are allowable as Business Expenditure and would not form part of the project cost, therefore the contentions of the revenue to add it for enhancement or work-in-progress would not succeed. In present case the expenditure for Advertisement, Business Promotion and Commission to agents are in promotionaland general in nature but not contributing to bring the inventories to their present location and condition.Whereas, the expenditure made for loan processing charges and security expenses are project specific, therefore these would constitute the expenditure necessary to bring the inventories to their present location and condition,accordingly, are to be added in the work-in-progress.
14. In sum and substance, the first three expenditure i.e. Advertisement, Business Promotion and commission would be allowed to assessee as Business Expenditure in the year in which it has been incurred and would not form part of project cost, whereas the project specific and direct expenditure i.e. loan processing charges and security expenses would be added to the WIP of the assessee under Project Completion Method of Accounting.
15. In terms of aforesaid observations, the grounds of appeal raised by the assessee are partly allowed by allowing the particular expenditures to be treated as revenue expenditure and remaining to be capitalized under WIP.
16. In result, the instant appeal of the assessee is partly allowed, in terms of our aforesaid observations.
