Advertisement, Brokerage & Marketing Expenses in Real Estate: Revenue Expenditure Allowable Even Without Revenue Recognition
Case Overview: ACIT Vs Airmid Real Estate Limited (ITAT Mumbai)
The Mumbai Bench of the Income Tax Appellate Tribunal recently ruled on a significant question concerning the deductibility of advertisement, brokerage, and marketing expenses incurred by a real estate developer during a year in which no revenue was formally recognized. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-54, Mumbai, pertaining to Assessment Year 2017–18.
Background and Facts of the Case
The assessee, engaged in the business of real estate development, filed its return of income for AY 2017–18 declaring nil total income. The return was picked up for scrutiny under CASS. During assessment proceedings, the Assessing Officer (AO) disallowed the following expenses claimed by the assessee:
- Advertisement Expenses: ₹19,47,928/-
- Brokerage & Marketing Expenses: ₹4,96,03,997/-
The basis for this disallowance was straightforward from the AO's perspective — since the assessee had not recognized any revenue from its real estate project during the relevant financial year, the AO held that such expenditure ought to have been capitalized and added to the work-in-progress (WIP) rather than claimed as a revenue deduction.
The assessee was following the Project Completion Method for recognizing revenue from its real estate projects — a widely accepted method in the industry where profits are booked only upon project completion and transfer of possession.
Nature of Brokerage Paid
A substantial portion of the brokerage and marketing expenses — amounting to ₹4,92,11,508/- — was paid to Indiabulls Distribution Services pursuant to a formal agreement dated 17.03.2019 between the assessee and Indiabulls. Under this arrangement, Indiabulls was engaged as a marketing and sales consultant specifically for the housing project "Indiabulls Sierra", and was entitled to commission/brokerage on unit bookings at mutually agreed rates as specified in Annexure-B of the agreement. The assessee also submitted debit notes raised by Indiabulls in support of the payments made.
Proceedings Before the Commissioner of Income Tax (Appeals)
The assessee challenged the AO's disallowance before the First Appellate Authority. After examining the submissions, the applicable Income Computation and Disclosure Standards (ICDS) notified by the CBDT, and various judicial precedents, the CIT(A) ruled in favour of the assessee. The key finding of the CIT(A) was that:
Even if no income is earned from a business during a particular year, business expenditure that is otherwise allowable under the provisions of the Act cannot be denied merely on account of the absence of income recognition.
Accordingly, the CIT(A) reversed the AO's order and held that advertisement, brokerage, and marketing expenses are allowable under Section 37 of the Income Tax Act, 1961. Aggrieved by this decision, the Revenue filed the present appeal before the ITAT Mumbai.
Arguments Advanced Before the Tribunal
Revenue's Contention
The Departmental Representative (DR), Shri Manoj Kumar Sinha, appeared on behalf of the Revenue and supported the assessment order. The Revenue's argument was that: