Pre-operative expenses incurred for running the business and bringing revenue are revenue expenditures, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) deleted the disallowance of advertisement expenses and brokerage & Commission.
Sh. V. K. Aggarwal, CA & Ms Shweta Bansal, CA appeared on behalf of the assessee and Sh. T. Kipgen appeared on behalf of the revenue.
The assessee, Logix Infra Developers (P) Ltd engaged in the business of the real estate. The assessee was allotted land by NOIDA which was acquired as the stock-in-trade of the business. The assessee claimed the Advertisement Expenses 9,75,19,715/-, Brokerage & Commission1,17,11,109/- Noida Authority-Interest 94,76,736/- and Noida Authority-late registration charges 3,63,51,690/- which was disallowed by the Assessing Officer on the grounds that the assessee has not routed these expenses through the P&L account and claimed directly in the computation.
The AO held that since the assessee has not started showing the revenue from operations, they will not be allowed to debit the expenditure. On appeal, the CIT(A) confirmed the action of the AO holding that the construction has not been started, the approvals were pending, the land has not been fully paid for and it becomes apparent that the project is an infantile stage.
A Coram of Sh. Saktijit Dey, Judicial Member and Dr B. R. R. Kumar, Accountant Member observed that since the interest is attributable to the cost of land, the interest expenditure is not allowable as per Section 36(1)(iii) of the Income Tax Act, 1961.
It was observed that there wasa difference between the commencement of the business and the setting off of the business. All the expenses incurred pre-commencement are to be treated as pre-operative expenses and the expenses incurred which do not form part of the “work in progress” (WIP) like office expenses, salaries, advertising, brokerage and commission which are incurred for running the business operationsand to bring revenues to the company are to be treated as revenue expenditure.
The bench affirmed the order of the CIT(A) on account of the disallowance of Noida Authority-Interest and Late Registration Charges(LRC) and deleted the disallowance affirmed by the CIT(A) on account of Advertisement Expenses and Brokerage & Commission.
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