ITAT Allows Deduction of Rs 8.7 Cr Revenue Expenditure Disallowed on Ad-hoc Basis

ITAT Allows Deduction of Rs 8.7 Cr Revenue Expenditure Disallowed on Ad-hoc Basis

The assessee, engaged in the construction and development of real estate projects, was following the Percentage of Completion Method (POCM) prescribed under AS-7 and the ICAI Guidance Note. Since the minimum threshold for recognition of revenue was not reached during the relevant year, no income from projects was offered. Of the total expenses incurred, Rs. 46.06 crore was transferred to project cost (inventory), while Rs. 9.70 crore was debited to the profit and loss account and claimed under Section 37.

The Assessing Officer held that the expenditure claimed was directly or indirectly connected to the projects and, since no revenue was recognised, it should be treated as part of inventory. On this basis, an ad-hoc disallowance of 90% amounting to Rs. 8,73,10,314 was made, allowing only 10% as deductible. The CIT(A) upheld this view.

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Issue Before ITAT
Whether revenue expenditure debited to the profit and loss account and claimed under Section 37 can be disallowed merely on the ground that no project revenue was recognised under POCM in the relevant year.

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ITAT’s Decision: The Tribunal observed that the genuineness and business nexus of the expenses were not doubted by the Revenue. The assessee had followed AS-7 and the ICAI Guidance Note in allocating project costs and charging other expenses to revenue. The Assessing Officer himself allowed 10% of the claim, confirming that the expenses were incurred wholly for business; the balance 90% disallowance was therefore arbitrary.

It was further noted that the assessee had consistently followed the same method from AY 2011-12 onwards and that it was accepted by the department in earlier and later years. Applying the principle that deduction under Section 37 does not depend on recognition of income in the same year, the Tribunal deleted the disallowance of Rs. 8,73,10,314 and allowed the expenditure in full. The appeal was accordingly allowed.

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