Expenses not directly contributing to bringing inventories to their present location and condition, such as general business promotion, advertisement, and commission, are allowable as revenue expenditure under Section 37(1) of the Income Tax Act, whereas project-specific costs are to be capitalized as Work-in-Progress.

Per Arun Khodpia, AM:

The captioned appeal is preferred by the assessee against the order of Commissioner of Income Tax (Appeals)-54, Mumbai [in short “Ld. CIT(A)”] dated 05.09.2025 for the Assessment Year (AY) 2010-11, which in turn arises from the order under section 143(3) of the Income Tax Act, 1961 (the Act) passed on 29.12.2012 by the ACIT, Circle-10(2), Mumbai.

2. The sole ground of appeal raised by the assessee, reads as under:

“On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in treating revenue expenditure amounting to Rs. 1,26,30,686/- as capital expenditure and accordingly capitalized in work in progress, without considering the facts and circumstances of the case.”

3. Briefly stated, the assessee is engaged in the business of real estate, developing Bunglows and Villas. The assessee follows Project Completion Method (PCM) of accounting during the year under consideration; the assessee has only one project at Alibaug, which till the end of year was in progress. The case of assessee was selected for scrutiny, wherein the ld. AO observed that the assessee has claimed various expenses incurred towards ongoing projects namely ‘Pavillion’, as revenue expenses instead of treating the same as work-in-progress. Accordingly, the assessee was called for to submit the details of such expenses to clarify the nature along with supporting evidences. The details of expenses chosen for clarification are as under:

4. In response to the query raised by the ld. AO, the assessee submitted that all the aforesaid expenditure are incurred wholly and exclusively for the purpose of assessee’s business. The expenses are not directly co-related to any of the construction activities, but they are incurred for building up the image of the company, also are not one to one matchable with the project and hence the same is required to be treated as revenue expenditure of the company. The contentions of assessee could not found favour before the ld. AO, therefore all the aforesaid expenditure were added to the income of assessee by treating the same part of WIP or not allowable under section 37(1) of the Act. The assessed income of the assessee thereby enhanced and determined at Rs. 7,94,438/- in placed of returned loss of Rs. (1,31,13,794/-).

5. Being aggrieved the assessee preferred an appeal before the ld. CIT(A), who had partly allowed the appeal of assessee by deleting the addition made under section 37(1) of the Act, however the finding of ld. AO regarding treating the expenditure as WIP was sustained and modified with the observation that the disallowance as WIP would be replaced with the word enhancement of WIP as capitalization, accordingly the disallowances made by the ld. AO by treating the expenditure to be treated as WIP was sustained.

6. Being aggrieved, the assessee challenged the order of ld. CIT(A) by way of present appeal before us.

7. On the issue of treating the expenditure which were debited to P&L A/c being capital in nature or revenue, ld. AR submitted before us that as per AS-2 even in PCM certain expenditures are allowed to be treated as revenue expenditure, which does not constitute the cost of pur