R-TECH HOUSING PRIVATE LIMITED,GURGAON VS. ACIT, CIRCLE-20(2), NEW DELHI, ITA 1893/DEL/2020
In a major relief to real estate developers, the Income Tax Appellate Tribunal (ITAT) Delhi has held that commission and selling expenses are allowable as revenue expenditure, even if project revenue is not recognized in the same year.
This ruling comes in the case of R-Tech Housing Pvt. Ltd. vs ACIT for AY 2015–16, and is expected to help real estate players following the percentage completion method (PCM) or deferring revenue recognition under Accounting Standard 7 (AS-7).
🔍 Case Highlights:
- Assessee: R-Tech Housing Pvt. Ltd.
- Disallowances challenged:
- ₹3.18 crore: Commission on flat bookings
- ₹63.44 lakh: Selling and promotional expenses
- Department’s argument: No revenue recognized; hence, expenses not allowable
- ITAT verdict: Expenses allowed even if revenue is deferred
🧾 Tribunal’s Observations:
The ITAT noted:
“Selling and general administrative costs cannot be attributed to construction activity and are excluded from contract costs under AS-7.”
It further relied on the decision in Hiranandani Palace Gardens Pvt. Ltd. [2015 (12) TMI 1649], where it was held that:
“Administrative and marketing expenses are not project costs and must be charged to profit and loss in the year they are incurred.”
✅ Why This Matters
Under AS-7, real estate companies often defer revenue until certain project milestones are achieved. The tax department tends to deny deductions for expenses like brokerage and marketing in such years.
However, the Tribunal clarified that:
- Such indirect expenses are not part of work-in-progress (WIP)
- If incurred during the year, they are revenue in nature and deductible, regardless of revenue deferral
⚖️ Judicial Precedents Relied Upon:
- Hiranandani Palace Gardens Pvt. Ltd. – ITAT Mumbai
- AS-7 & AS-2 guidelines from ICAI
- CBDT’s recognition of such principles under Circular No. 7/2016
🧠 Key Takeaway
If you’re a real estate developer or construction company:
Commission and marketing expenses are deductible in the year they are incurred—even if project revenue isn’t yet booked.
Ensure consistency in accounting and maintain documentation of costs as per ICAI and AS-7 norms.