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The Pr. Commissioner Of Income Tax-3 vs. Dlf Home Developers Ltd.
February, 06th 2019
*      IN THE HIGH COURT OF DELHI AT NEW DELHI
                                  Decided on: 23.01.2019

+      ITA 54/2019, C.M. APPL.3290/2019
       THE PR. COMMISSIONER OF INCOME TAX -3..... Appellant
                     Through : Sh. Ruchir Bhatia, Sr. Standing
                     Counsel.

                           versus

       DLF HOME DEVELOPERS LTD                    ..... Respondent
                    Through : Ms. Kavita Jha, Advocate.

       CORAM:
       HON'BLE MR. JUSTICE S. RAVINDRA BHAT
       HON'BLE MR. JUSTICE PRATEEK JALAN
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
1.   Four questions of law are urged by the Revenue under Section 260A
of the Income Tax Act, 1961 [hereafter "the 1961 Act"]. It is contending that
the ITATs decision impugned in these proceedings is erroneous and
unsupported by law:
       (i)     with respect to disallowance under Section 14A;
       (ii)    with respect to the claim of expenses incurred for software
       upgradation and services;
       (iii)   in regard to payment of brokerage expenses, and
       (iv)    with regard to payment made towards IBM and Bharti Airtel for
       providing computer maintenance and broadband services to the group.
2.     The assessee, which is a builder and developer for Assessment Year
(AY) 2008-09 filed its returns and had claimed deduction on account of
various expenditures. For the purposes of this appeal, the Revenue urges four




ITA 54/2019                                                         Page 1 of 8
issues ­ outlined in the previous paragraph. The Assessing Officer (AO) had
disallowed all four heads of expenditures. As the assessee follows the
percentage method mandated (under Accounting Standards 7) [hereafter also
referred to as "AS-7"], and recognised under Section 145 of the 1961 Act,
the past claim with respect to the expenditure of `6.8 crores towards
brokerage payable was disallowed by the AO. The AO was of the opinion
that at best the assessee could claim portion of the brokerage amount claimed
for the particular assessment year and also after picking the expenditure.
3.      CIT(A) and ITAT, however, disagreed and set aside the findings of
AO. It is contended by the Revenue that the findings of the lower appellate
authority are erroneous inasmuch as the Revenue recognised by the assessee
based upon the percentage completion method presupposes that it can claim
percentage of proportion in the whole expenditure which is incurred or likely
to incur in the particular year. It was emphasized furthermore that the
assessee had to actually pick the expenditure even if its claim for proportion
has to be considered and allowed. Learned counsel soguht to distinguish the
ruling of this Court in CIT v. DLF Universal Ltd. 2017 (79)
TAXMANN.COM 382. Although the AO had disallowed the expenditure,
we notice that the CIT(A) reasoned as follows while accepting the assessees
plea:
               "It is seen that as per para 19 of AS-17, it is mentioned
        that the selling cost cannot be attributed to contract activity or
        cannot be allocated to a contract under construction. Even as
        per AS-2 Valuation of inventory issue by ICAI, it is seen that
        selling and distribution cost cannot be considered as part of the
        cost of inventory and such expenses has to recognize in the
        period in which they are incurred. The cost which can be
        attributed/allocated over the inventory should comprise all the




ITA 54/2019                                                            Page 2 of 8
       cost of purchase, cost of conversion and other cost incurred in
       bringing the inventory to their present location and condition.
       In the case of construction activities the cost of purchase of land
       and construction cost can only be attributed over the project.
       The brokerage expenses are purely a selling cost and cannot
       form a part of inventory. In view of the accounting standard, the
       brokerage expenses being a selling cost cannot be capitalized
       with the cost of inventory and cannot be allocated to the
       construction activity.






       It is also seen that this issue has been decided in favour of one
       of the group company named DLF Ltd. by Hon'ble ITAT in its
       order for AY 1984-85. However, the ASSESSING OFFICER has
       observed that the accounting policy followed by the group
       company for recognition of revenue in the AY 1983-84 were
       different from the accounting policy followed during the year
       under consideration. It is seen that in AY 1983-84 also the
       selling cost i.e. brokerage and commission were claimed in the
       year in which they were incurred and same were not recognized
       on the basis of revenue recognition. Therefore, the ratio of the
       said judgment still applicable in the case of appellant and the
       brokerage and commission has to be allowed in the year in
       which it has been incurred and cannot be associated with
       construction cost. The contention of the ASSESSING OFFICER
       that the brokerage expenditure to be postponed to subsequent
       year as per AS-9 cannot be accepted, as brokerage and
       commission are related to the sale of flats and properties. By
       incurring the same the appellant has not derived any enduring
       advantage in subsequent years.

       It is also seen that Appellant's claim is also covered by the
       order of CIT(Appeals)-XVII, New Delhi in one of group
       company named M/s. DLF Ltd. passed for the AY 2006-07. It
       has been verified that accounting policies of the appellant for
       the year under consideration was same as that of DLF Ltd. in
       AY 2006-07. Considering the facts discussed above I am of the
       considered opinion that the expenses on brokerage for flats etc.
       are part of selling expenses and cannot be included in the cost




ITA 54/2019                                                            Page 3 of 8
       of construction for the purpose of valuation of closing stock of
       WIP. The accounting standard of ICAI also does not support the
       proposition of capitalization of brokerage. I am, therefore, of
       the opinion that this expenditure cannot be capitalized and has
       to be allowed as arevenue expenditure. The above addition of
       Rs.6,80,52,340/- is therefore, deleted.

       The ASSESSING OFFICER has relied upon the Supreme Court
       judgment in the case of Madras Industrial Investment Corp. 225
       ITR 802 (SC) and has held that the expenses has to be spread
       over in several years if the benefit of such expenditure is
       continuing in the ensuing years. The facts of this judgment
       cannot be applied to the appellant's case as Brokerage and
       Commission linked with the services rendered by the broker to
       the appellant for selling the flats and other properties. There is
       a nexus between the expenses and services rendered which
       cannot be spread to several years. The benefit of the brokerage
       and commission is related to a particular property or flat sold
       and it cannot be extended to other properties. Therefore,
       brokerage expenses cannot be postponed for the future years.
       Therefore, ratio of the said judgment is not applicable in the
       case of appellant.

       Further, reliance is placed on the decision of the jurisdictional
       High Court in the case of Nokia Corporation v. DIT, Delhi 2007
       162 Taxman 369 (Delhi), wherein it is held that even if the
       Department has filed further appeal against the last order,
       which is in favour of the appellant, the last order is judicially
       binding on the subordinate authority. Hence, respectfully
       following the order of the Hon'ble Income Tax Appellate
       Tribunal for AY 1984-85 and the order of CIT(A)-XVIII for the
       immediately preceding year in one of the group company of the
       appellant, the addition/disallowance made by the AO amounting
       to Rs.6,80,52,340/- on account of brokerage expenses for sale of
       various properties cannot be sustained. Therefore, the
       addition/disallowance of Rs.6,80,52,340/- is deleted."

4.     The ITAT affirmed the order of the CIT(A) by the following




ITA 54/2019                                                           Page 4 of 8
reasoning:
       "6.3 We have considered the arguments advanced by the
       parties and gone through the material on record including
       order of ITAT for AY 1984-85 and order of Tribunal and the
       decision of the Hon'ble Delhi High Court in the case of sister
       concern of the assessee. As rightly pointed out by ld. Counsel
       for the assessee, we find that identical issue has been
       considered by Tribunal in the case of M/s. DLF Ltd. (supra)
       wherein also the assessee was following POCM method of
       revenue recognition and disallowance of brokerage on similar
       reasoning was deleted by Tribunal by observing as follows:

              169. We have carefully considered the rival contentions.
              We have also perused the order of ITAT in assessee's
              own case for AY 1984-85 submitted before us by the ld.
              AR. This decision has also been considered by the AO at
              page 188 of the assessment order. The AO has not
              followed this decision as it could not be verified whether
              the issue has been taken up by the Department before the
              Hon'ble Delhi High Court or not. Before us, ld. DR also
              could not point out that why this decision cannot be
              followed nor we could find any reason for not following
              the same by AO except that whether it is accepted by the
              department or not is not verified. Ld. CIT(A) has also
              deleted the addition following the order of coordinate
              Bench of ITAT for AY 1984-85 in the case of the assessee.
              Merely because the decision is not accepted by revenue
              disallowance has been made. As observed by the CIT(A),
              these expenses related to brokerage of flats as part of
              selling expenses and, therefore, cannot be included in the
              cost of construction for the purpose of value of closing
              stock of WIP and in view of Accounting Standards issued
              by the ICAI. Respectfully following the decision of
              Honourable High Court in the case of CIT vs. DLF
              Universal Limited in ITA No.1136/2009 dated 16.04.2015
              while deciding ground No.4 of the appeal of the revenue
              honourable high Court has held that expenditure towards
              brokerage and commission paid to brokers for booking



ITA 54/2019                                                          Page 5 of 8
              and sale of certain properties is allowable firstly in view
              of the facts that assessee's treatment of such expenditure
              has been decided in favour of the assessee and revenue
              has not challenged it and secondly such expenditure are
              allowable in view of the above facts and following the
              decision of Coordinate Bench as facts are not
              distinguished by revenue, we confirm the order of CIT(A)
              in deleting the addition of Rs.20,87,70,567/- on account
              of brokerage expenses for sale of various properties.
              Therefore, ground no.14 is rejected."

5.     In DLF Universal Limited (supra), this Court after framing questions
with respect to allowance under brokerage and commission claimed by the
assessee in the context of percentage completion method adopted by it held
as follows:
       "8. The assessee had claimed `61,78,414/- as expenditure
       towards brokerage and commission. The amount was paid to its
       brokers for booking and sale of certain properties during the
       assessment year. The Assessing Officer disallowed this
       expenditure on the ground that during the year the conveyance
       of the sale deeds were not executed. The CIT (A) and ITAT
       accepted the assessee's contentions and set aside the
       disallowance. At the outset, we notice that the assessee's
       explanation clearly stated is as follows: -

                    "In this connection it is submitted that brokerage
              and commission is not a direct expenses for acquiring to
              a specific property but it is in fact financial cost/selling
              expenses and is fully allowable in the year in which the
              same is incurred. The property brokers who have
              rendered their services to obtain advances on booking of
              properties are entitled to the payment of commission in
              terms of agreement entered into with them. Therefore, the
              expenses incurred on brokerage and commission on
              booking of properties being a finance/selling expenses
              are allowable in full. In this connection your attention is









ITA 54/2019                                                            Page 6 of 8
              invited to the various orders of CIT (A) on this point
              where in the addition on account has been deleted. Your
              attention is also drawn to order dt. 20.7.1994 of Hon'ble
              ITAT, New Delhi for the assessment year 1983-84 of the
              Income-tax wherein an additional ground taken by the
              Deptt. for inclusion of the amount of brokerage and
              commission in the sales promotion expenses u/s 37(2)(a)
              have been dismissed. We understand that the Deptt. has
              not filed any reference application in the High Court
              against this order."

       9.    It is not disputed by the Revenue that for the other years,
       the assessee's treatment of such expenses has been in his favour
       and the Revenue has not chosen to challenge it. Even otherwise,
       we are of the opinion that such expenditure has to be allowed.
       The question of law is consequently answered in favour of the
       assessee and against the Revenue."

6.     It is not disputed that for past years as well, the treatment given by the
assessee was accepted by the Revenue. Furthermore, the project completion
method which this Court alluded to in DLF Universal Ltd. (supra) finds
reflection as an approved method in the decision of the Supreme Court.
Furthermore, this Court notices that as to what appropriate methods of
treatment of expenditure in the hands of a particular business per se have to
be adopted, is the subject matter of Accounting Standards. In the present
case, after 2007, every builder must necessarily follow the percentage of
completion method by following the AS-7. If the Revenues arguments were
to be accepted too, the expenditure which is clearly discernable and which
may accrue in a particular year and even be paid has to necessarily be
disallowed in substantial part and never proportionality granted. In such
event, the likely result would be that for next succeeding year, the AO must
find himself bound by previous determination and depend upon the balance



ITA 54/2019                                                             Page 7 of 8
amount paid. Given the statement in CIT v. Bilahari Investment Pvt. Ltd.
2008 (299) ITR 1 that adoption of one or more methods and the
implementation of it, is largely revenue neutral.
7.     This Court is of the opinion that no question of law arises on this
aspect. So far as the disallowance under Section 14A goes, the Revenue
appellate authorities noticed that for the concerned AY, the assessee did not
indicate ,,tax exempt income to attract the provision. Therefore, the decisio n
in Cheminvest Ltd. v. CIT 2015 (378) ITR 33 clearly applied which the ITAT
followed. No question of law, therefore, arises.
8.     With respect to treatment of software expenditure claims, the Court is
of the opinion that the findings of the CIT(A) and ITAT are pure findings of
fact. Moreover, as held by the CIT(A), the AO did not even care to examine
the terms of agreement which the assessee entered into with the service
provider. As far as the software expenditure goes, the Court is of the opinion
that the findings of fact rendered by the CIT(A) and ITAT cannot be faulted.
No question of law, therefore, arises. The appeal is accordingly dismissed.



                                                      S. RAVINDRA BHAT
                                                                (JUDGE)



                                                         PRATEEK JALAN
                                                               (JUDGE)
JANUARY 23, 2019




ITA 54/2019                                                           Page 8 of 8

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