INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Project management expenses claimed as deduction pursuant to change of method of accounting due to suspension of project activities - Earlier such expenses stood capitalized to WIP -

Assessee company engaged in real-estate development projects claimed deduction of project management expenses. AO taking note of the fact that project management expenses had been capitalized during the earlier years did not accept claim of assessee and disallowed project management expenses debited into profit and loss account and added back to capital wrok in progress acount shown under the head investment in property under construction. Assessee submitted that due to certain legal hurdles, allotment of entire land by KIADB, as per agreement was not complete. Therefore, assessee had temporarily suspended its project from 1-7-2011.Held: According to assessee, change in accounting method for accounting project management expenses was due to temporarily suspension of construction activities for non allotment of entire parcel of land by the KIADB, as per agreement for more than three years. As a result, the project was temporarily suspended and all construction activities were suspended from 1-7-2011. Therefore, it had debited said project management expense into the profit and loss account and claimed deduction under section 37(1). AO had never doubted the fact that business of assessee was set up and also not doubted the fact that impugned expenditure was in the nature of revenue exepnditure. The only ground for AO to deny deduction claimed under section 37(1) was change in method of accounting. There is no estoppel against law. If, an assessee follows a particular method of acounting to account an item of income and expenditure for a particular date, if such changes is in accordance with law and its within the provisions of principles of accounting. In the instant case, assessee had changed method of accounting in respect of project management exepnses from a particular date and said method of acounting had been continued in subsequent years and had been accepted by revenue. Further, change in method of accounting was also supported by a reason of temporarily suspension of business activity due to circumstances beyond the control of assessee. Therefore, assessee was well within its right to change the method for accounting particular expenditure. AO without appreciating the facts has simply rejected claim of assessee, without assigning any reasons, how the changed method of acounting was not in accordance with principles of accounting followed by assessee. Hence, project management expenses claimed by assessee were duly deductible under section 37(1).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2012-13

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