By TIOL News Service

HYDERABAD, SEPT 07, 2016: THE issue is - Whether AMP expenses can be said to be revenue in nature when real estate project itself has not commenced. NO is the answer.

Facts of the case

The assessee is in the business of logistics and real estate development. It filed its return of income. The A.O. on verification of the books of account noticed that the assessee had paid to another entity, by way of journal entry from its investment account towards its share of business promotion expenses as per the Memorandum of Understanding. The AO observed that the amount paid as upfront fee and no details were furnished regarding utilisation of the amount for which it was meant to be spent. Moreover, the property development had also not commenced and therefore, the question of spending such huge amount towards marketing expenses like advertisements, sales promotion, gift schemes, sales incentives, participation in property exhibition, hoardings, printing of project broachers etc., did not arise. Taking note of the journal entry passed towards purported payment, the A.O. observed that it only implied that a part of the investment was artificially diverted towards revenue expenditure. He accordingly, proceeded to disallow the expenditure claimed towards business promotion expenses. Aggrieved by the order of the A.O. assessee filed an appeal before the CIT(A) who confirmed the order of the AO. Aggrieved by the same the assessee filed appeal before the Tribunal.

Having heard the parties, the Tribunal held,

++ it is self evident from the ledger account that the payments have been exchanged inter se by both the parties frequently as an open mutual and current account. The manner in which the transactions has been executed in a regular interval over a period of time clearly gives an impression that these payments were made as well as received back as a part of accommodation to the sister concern. The CIT(A) has demonstrated in its order that the building permission was granted by the HMDA on 25.09.2012 i.e., much later to the MOU giving raise to the purported obligation of sales promotion expenses. We do not find any answer to the purport of incurring such huge expenses as claimed at the stage when the project itself is yet to make any serious headway. The facts do not coincide. The assessee could not support the need for such exorbitant expenditure at the stage when no permission for construction was available at its disposal. Some meager expenditure of Rs.7.7 lakhs and Rs.6.06 lakhs have been stated to be actually incurred in the subsequent years;

++ in the circumstances, a mere journal entry and MOU with sister concern to convert advance already lying with the sister concern into revenue expenditure of this magnitude is highly unpalatable. We find ourselves in complete agreement with the observations and findings of the CIT(A) for dismissal of the claim of the assessee. The assessee has neither demonstrated the necessity to incur this expenditure to establish bonafide nor has demonstrated the actual expenditure incurred. Notwithstanding, the aforesaid claim in the nature of revenue expenditure when the project itself has apparently not commenced cannot be approved. Accordingly, we find no merit in the appeal of the assessee.

(See 2016-TIOL-1610-ITAT-HYD)