Land not a Capital Asset but a “Work-in-Progress” for Real Estate Company, Expenses to be treated as Revenue Expenditure: ITAT

The Income Tax Appellate Tribunal (ITAT), Bangalore bench has held that Land is not a Capital Asset but a 'Work-in-Progress' for a Real Estate Company. It was also observed that the Expenses incurred in connection with the same shall be treated as Revenue Expenditure.

The assessee company filed nil return wherein the case was selected for scrutiny to reconcile “large difference in closing stock shown in the balance sheet and profit and loss account as per the return”. Assessee submitted the break-up of Work-in-Progress (W-I-P) and produced documents for purchase of land.

The assessee's contentions were rejected and the Assessing Officer (AO) observed that the main source of income was income from deposits. The fixed deposits were made out of its capital funds. The assessee has not carried out its main business and has not generated any revenue from it.

Aggrieved by the order, assessee filed appeal before the Commissioner of Income Tax (Appeals) (CIT(A)) and it upheld the order of the AO giving direction to re-compute the income.

The assessee filed appeal before the ITAT stating that the AO has wrongly considered Stock-in-Trade as capital asset. It stated that business activity has been carried out as per the main objects of its Memorandum Of Association (MOA). The expenses that are of enduring nature were capitalized and others were charged to revenue account. The income against these expenses were of administrative nature helping the company to sustain itself which is not attributable to any particular asset held. All efforts were made to make the land fit for project work, the assessee added.

The Tribunal observed that the assessee has not changed its main object clause as stated in its MOA or re-characterized the assets from current assets into capital assets. After acquiring the land, assessee approached the Electricity Department for removal of high-tension electric wires which were eventually shifted from assessee’s land. Assessee also tried to acquire adjacent land to get access to the road. Therefore, it cannot be said that the assessee is not doing Business activity.

The single-member tribunal bench of Shri Laxmi Prasad Sahu (Accountant Member) held that the lower authorities have taken wrong view that no business activities have been done after the purchase of land and the value appearing under the head W-I-P are capital assets.

It was thus held that the expenditure incurred by the assessee are revenue expenditure and allowed as deduction under Section 37 of the Income Tax Act, 1961.

The appeal of the assessee was partly allowed for statistical purpose.

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