Advertising, brokerage and software development expenditures incurred are revenue expenditures: Delhi HC

Facts of the Case

• The respondent is a developer engaged in real estate business. The respondent commenced its residential-cum-commercial project, for which it collected advances from various customers. The respondent filed its Income Tax Return, claiming various expenses as business expenses.
• The Assessing Officer (AO) disallowed certain expenses claimed by the respondent under the head Advertisement Expenses and Software Developing Charges. The AO re-classified the same as capital expenses and capitalised them towards the cost of the development project undertaken by the respondent.
• Against this, the respondent filed an appeal before the Commissioner of Income Tax. The CIT(A) ruled that the said expenses were incurred by the respondent for its business purpose and that they were indirect expenses of the development project undertaken by the respondent.
• However, the revenue department challenged the order passed by the CIT before Delhi High Court.

Decision

• The court ruled that the advertising and business promotion expenses, including the expenses towards brokerage and commission, were incurred by the respondent building its reputation and network in real estate market. Further, the software development charges were incurred towards administrative expenses.
• Ruling that the said expenses were in the nature of general administration cost and selling cost, as classified by the Guidance Note issued by ICAI, the High Court held that since the expenses were incurred by the respondent for its business, they qualified for deduction as revenue expenditure.
• Further, the court took into account that if the said expenses were capitalised and added to the value of the project, as contended by the revenue department, it would in effect postpone the booking of the said expenses. Consequently, the expenses would be liable for deduction in the hands of the respondent in the year of sale of the project.

Our Opinion

Since the above-mentioned advertisement and software development charges were not directed to any specific asset, therefore the above expenses are to be charged to the Statement of Profit & Loss Account.

Nitin, Audit Associate, SW India

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