ITAT Upholds Assessee’s Consistent 70:30 Allocation of Sales Promotion and Financial Expenses Between Revenue and Capital Work-in-Progress [Read Order]
ITAT restores the assessee's consistent 70:30 split of sales promotion and financial expenses between revenue and capital.
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) allowed the appeal on the issue of sales promotion and financial expenses after noting that the assessee had consistently followed a 70:30 allocation method for many years, and that the Department had accepted this practice in earlier scrutiny assessments.
The assessee, Dattani Construction, a partnership firm engaged in real estate development, had debited sales promotion, administrative, and financial expenses against its miscellaneous income for Assessment Year 2011–12.
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The assessee followed its long-standing method of treating 70% of these expenses as revenue deductible and capitalizing 30% to Capital Work-in-Progress (CWIP) as part of the cost of its real-estate projects.
However, for that year, the Assessing Officer (AO) departed from the accepted pattern and transferred the entire expenditure, including ₹9,17,014 of sales promotion expenses and ₹23,74,386 of financial expenses to CWIP, disallowing them as revenue expenditure.
Before the CIT(A), the assessee relied on its consistent accounting practice, which had been accepted in prior assessments.
The Commissioner accepted the claim only in part that is allowing the 70:30 split for administrative expenses, but upheld the AO’s disallowance of the sales promotion and financial expenses, treating them as fully capital in nature.
The Bench comprising OmPrakash Kant (Accountant Member) and Raj Kumar Chauhan (Judicial Member) examined the nature of the expenses. It noted that sales promotion costs consisted of advertisement, publicity, and brand-visibility expenses that benefited the business as a whole, and not merely a specific project. Similarly, financial expenses which included brokerage, discount, and interest were partly linked to project funding and partly to general working capital requirements.
The Tribunal emphasised the principle of consistency, observing that a uniform accounting method accepted in earlier years cannot be disturbed without a material change in facts or law.
The Tribunal also noted that whether the expenditure is allowed now or capitalized for later years was revenue-neutral, making the deviation by the AO unwarranted.
Accordingly, the ITAT set aside the order of the CIT(A) on this issue and directed the AO to follow the consistent 70:30 allocation adopted in prior years, capitalizing 30% of the sales promotion and financial expenses to CWIP and allowing the remaining 70% as revenue expenditure.
The assessee was represented by Prateek Jain, while Annavaram Kasuri appeared for the Revenue.Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
