ITAT: Expenses Linked to Abandoned Project Cannot Remain Capitalised; Must Be Allowed as Deduction

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of M/s Edenic Propbuild Private Limited and allowed the company’s claims relating to project abandonment expenses, lease rent payments, and administrative expenses for the Assessment Year 2015-16.

The assessee is primarily engaged in real estate, construction and development and had entered into an agreement with the Royal Calcutta Turf Club (RCTC) in 2007 for the development of a club and hotel project. The matter went into arbitration and litigation due to serious disputes between the parties, which ultimately led the company to abandon the project completely.

During assessment proceedings in the present case, the Assessing Officer (AO) disallowed a total expenditure of Rs 31.74 crore, including project expenses written off, lease rent expenses, and administrative expenses. Thereafter, the entire disallowance was added to the assessee’s income. The aggrieved assessee filed an appeal before the lower appellate authority, i.e., the Commissioner (Appeals). Where the addition relating to project expenses of Rs 9.70 crore was deleted, however, the other two disallowances of lease rent of Rs 21.79 crore and administrative expenses of Rs 23.70 lakh were sustained.

Still aggrieved with the CIT(A)’s order, the assessee approached the ITAT Delhi, arguing that once the project was permanently abandoned, the related expenditure could no longer remain capitalised and should be allowed as a revenue expenditure. It also contended that the lease rent payment was made pursuant to an arbitration award and was necessary to protect its financial interests, including a substantial refundable security deposit already placed with RCTC.

When the tribunal analysed the case in full, it noted that the project in question had been conclusively abandoned and, relying on an earlier ruling in the Indo Rama Synthesis case, held that expenses related to abandoned projects are allowable as revenue expenditure in the year of abandonment. Accordingly, the CIT(A)’s decision of deleting the Rs 9.70 crore project expenses was upheld and also allowed the lease rent claim of Rs 21.79 crore.

The Tribunal further held that routine administrative expenses incurred for maintaining the company and meeting statutory obligations remain allowable as long as the company continues to exist legally. Consequently, the disallowance of Rs 23.70 lakh was also deleted.

The tribunal held that “regarding the administrative expenses disallowed by the Ld. AO and affirmed by the Ld. CIT(A) it deserves to be held that as long as the assessee company existed in the eyes of law then there would be statutory liabilities which would need to be fulfilled. We find that the expenses claimed under the broad head of administrative expenses pertain to routine expenses required to maintain the assessee company. Accordingly, we do not find it fit to support the Ld. CIT(A)’s actions in disallowing the impugned amounts.”

As a result, the Revenue’s appeal was dismissed, while the assessee’s appeal was allowed in full.