No specific ICDS, ITAT Disallows Deduction On Marketing & Sales Expenses To Real Estate Developer

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has disallowed the deduction of marketing and sales expenses accumulated in work-in-progress as per accounting standards and revenue recognition policy.

The bench of Rajpal Yadav (Vice President) and Girish Agrawal (Accountant Member) has observed that no specific Income Computation and Disclosure Standards (ICDS) have been notified for real estate developers; revenue and cost recognition are governed by the applicable accounting standards and Ind AS.

The assessee/appellant is in the business of real estate, primarily in the development of residential as well as commercial complexes. The assessee company had undertaken the development of Avidipta II real estate projects. In respect of project Avidipta II, expenses incurred on advertisement and publicity, brokerage, commission, and business promotion have been charged to the work-in-progress since the project is yet to be completed. These expenses have not been charged to the profit and loss account and thus have not been claimed as a deduction when computing the total income in the return originally filed by the assessee.

In terms of the adoption of Ind AS 115 for revenue recognition, revenue is recognized only when the project is completed, i.e., when the customer obtains control over the promised good under the contract. Under this method, by following the matching concept of accounting principles, costs are accumulated during the course of the contract. Profit and loss are established in the last accounting period only when the contract is completed and the performance obligation is satisfied by transferring control of the dwelling unit to the customer.

Marketing and sales expenses attributable to the Avidipta II project, as certified by the Chartered Accountants, are incurred in relation to the project, are directly linked with it, and will be realized by way of revenue from the project only. Thus, following the matching principle of cost and revenue, the profit will result in the year when the performance obligation is satisfied by transferring control of the dwelling unit to the customer. Until then, all the attributable costs will get parked as ‘work-in-progress’, without any charge to the profit and loss account.

The assessee took grounds before the CIT (A) to claim deduction of marketing and sales expenses from the computation of total income by asserting that entries in books of account are not determinative or conclusive for computing the assessee's total income.

The CIT (A) summarily dismissed the appeal by stating that ‘since the assessee had not claimed the said expenses in the return and that no disallowance was made by the AO, thus the question of allowing it does not arise.

The ITAT has held that the claim of deduction made by the assessee towards marketing and sales expenses relating to Project Avidipta-II is not allowable in the year under consideration when computing the total income under the provisions of the Act. However, since the expenses have been accumulated in work-in-progress as per the accounting standard and revenue recognition policy and also considering the matching concept of accounting principle, these have to be allowed in the year in which the project is completed and sales are booked in the profit and loss account.

Case Title: Bengal Peerless Housing Development Company Limited Versus Deputy Commissioner of Income Tax

Case No.: ITA No. 317/Kol/2022

Date: 01/03/2023

Counsel For Appellant: Soumitra Choudhury

Counsel For Respondent: G. Hukugha Sema

Click Here To Read The Order