Case: The PR Commissioner of Income Tax v. DLF Home Developers,

Forum: Supreme Court

Background:

Supreme Court Dismisses Revenue’s Appeal [SLP(C)] to Disallow brokerage related expenses. Given below is the summary of the case when appealed in Delhi HC for reference along with all the related links.

Case: The PR Commissioner of Income Tax v. DLF Home Developers


Background

  • The assessee, a builder, had filed its returns for the FY 2008-09 and had claimed deduction on certain expenses inter alia including brokerage expenses, expenses for software up-gradation and services and broadband services.
  • The AO disallowed these heads of expenditures on the ground that as percentage method of accounting is followed, at best portion of brokerage amount claimed for the particular assessment year could be claimed.
  • The AO also alleged that the ITAT’s decision with regard to disallowance under section 14 and the aforementioned expenditure heads is erroneous and not supported by law.
  • Consequently, AO disallowed the claim of INR 6.8 Crores towards brokerage payable.
  • CIT(A) and ITAT disagreed with the AO and set aside the disallowance.
  • Hence, Revenue filed an appeal with the High Court.
  • The High Court rejected the appeal and the matter was then taken to the Supreme Court. Supreme Court, upheld the High Court’s decision and in view of the dismissal of the petition in the High Court, dismissed Revenue’s appeal.

Revenue’s Arguments

  1. As the percentage method of accounting is followed, at best, the portion of the brokerage amount claimed for the particular assessment year could be claimed
  2. The assessee can claim a percentage of proportion in the whole expenditure which is incurred or likely to incur in the particular year. The revenue further argued that the assessee was required to pick the expenditure even if its claim for proportion was considered and allowed.
  3. The accounting method used in the decisions of the assessee’s group companies (decision rendered by ITAT in AY 1984-85 and 2006-07) on the same issue are different from the present fact situation.
  4. These decisions cannot be accepted as it is still not clear if the department has accepted its ratio.

Assessee’s Arguments/CIT(A) and ITAT’s Order

The CIT(A) and ITAT accepted the plea of the assessee on the following grounds:

  1. Brokerage expenses being a selling cost cannot be capitalized with the cost of inventory. They cannot be allocated to the construction activity and hence have to be deducted as revenue expenditure.
  2. The CIT(A) relied on two judgements rendered in favour of group companies of the assessee in AY 1984-85 and 2006-07 on the same issue.
  3. The CIT(A) relied on the decision in Nokia Corporation v. Director of Income Tax in order to apply the ratio of the aforementioned decisions.

High Court’s Judgement (As accepted and upheld by the Supreme Court).

  1. The High Court held that no question of law arises on the issue of brokerage expenses and upheld the decisions of CIT(A) and ITAT.
  2. On the issue of disallowance under Section 14A, it was held that no tax-exempt income was shown to attract the provision.
  3. On the issue of software expenditure, the High Court held that findings of CIT(A) and ITAT were purely based on fact and cannot be interfered with.
  4. The High Court relied on CIT Delhi v. DLF Universal Ltd. and CIT v. Bilahari Investment Pvt. Ltd
  5. The High Court consequently, dismissed the appeal.
  6. The decision was appealed again in the Supreme Court but was dismissed, in view of the dismissal of similar petitions. This implies, that the issue pertaining to the classification of brokerage expenses as revenue expenditure and their deduction as an expense is a settled one now.

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The PR Commissioner of Income Tax v DLF Home Developers


Soumya Shekhar, legal writer @ Riverus.

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