SOBHA LIMITED,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(4), BENGALURU, BENGALURU

The Assessee has raised the following grounds of appeal: 1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The learned CIT[A] is not justified in upholding the disallowance of a sum of Rs.8,07,80,522/- u/s.37[1] of the Act in respect of the VAT/GST payments relating to the landowner’s share of built-up area on the ground that the said expenditure was not laid out wholly and exclusively for the purpose of business under the facts and in the circumstances of the appellant’s case. 3. The learned CIT[A] erred in holding that the claim for deduction of the landowner’s share of VAT/GST that was not recovered from the landowner on account of commercial expediency due to the clause enabling the landowner to claim compensation for delay in completion under the Joint Development Agreement was not established or acceptable under the facts and circumstances of the appellant’s case. 4. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant’s case and the levy deserves to be cancelled.

For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs. 3. Briefly, a search and seizure action under section 132 of the Income-tax Act was initiated on 2 August 2017 in the case of Shri Doddahalahalli Kempegowda Shivakumar and his group concerns, pursuant to a warrant of authorisation. The search also covered the residence of Mr. D. V. Harish at No. 1072, Tower C, Mantri Green Apartment, Malleswaram, Bengaluru, where documents belonging to and containing information relating to M/s Sobha Limited were found and seized. Further, during a survey under section 133A conducted on 4 February 2019 at the premises of M/s Sobha Limited, 55/1, Deverabisanahalli, Bellandur Post, Sarjapur, Marathahalli ORR, Bengaluru, certain documents were impounded. A notice dated 7 November 2018 under section 143(2) was duly served on the Assessee, requiring it to produce documents, accounts, or evidence in support of its return of income. By letter dated 20 November 2018, the Assessee sought an extension of time. The Assessee had filed its original return for AY 2018–19 on 25 October 2018, vide acknowledgement No. 346494421251018, declaring a total income of Rs. 44,40,66,100/-.

During the survey under section 133A of the Income-tax Act, 1961, at the office premises of M/s Sobha Limited, a sheet containing the ledger account of Mr. D. K. Shivakumar was found and impounded. Analysis of the impounded material indicated that the Assessee-company had discharged VAT/GST liability of approximately Rs. 13 crores on his behalf. To verify this amount, the AO issued a notice under section 142(1) on 29 August 2019, requiring the Assessee to explain the payment and show cause why it should not be disallowed.

The Assessee explained that it had charged Service Tax/GST of Rs. 8,07,80,522/- to expenditure in FY 2017–18, with the balance in FY 2018– 19. Under the applicable Service Tax/GST law, the developer was responsible for discharging the tax on the landowner' s share, while recovery from the landowner was a matter of commercial arrangement. Under the Joint Development Agreement executed in 2005, as subsequently amended, the Company became entitled to recover GST/Service Tax/VAT on the owners constructed area only upon its completion. Although the Company' s tax liability arose and was payable according to the level of construction activity in the respective years, completion of the mall had been substantially delayed and was expected only in FY 2019–20. Copies of the Joint Development Agreement and supplementary agreements were enclosed as Annexure 6. The 2005 agreement required the Company to pay delay compensation of Rs. 25 per square foot of super built- up area per month for delayed completion of the owners constructed area. During discussions, the landowners indicated that they would set off this compensation against the GST/Service Tax/VAT recoverable by the Company upon completion. As the anticipated delay compensation exceeded approximately Rs. 13 crores paid towards VAT and Service Tax, the Company considered recovery of that amount improbable and therefore charged it to expenditure rather than recognising it as a trade receivable, in accordance with recognised accounting principles. At the same time, because the Company intended to contest the delay- compensation claim on technical, commercial, and other grounds, it did not recognise a corresponding liability. The parties would determine the recoverability of the taxes and the delay compensation upon completion of the building, after which the resulting revenue or expenditure would be recognised. Accordingly, the Assessee contended that it had acted bona fide and that no disallowance of the Service Tax/GST paid on the landowner’s share was warranted.

The learned AO noted that the Assessee had claimed an expenditure of Rs. 80,783,033 towards Service Tax payable on the landowner’s share in Sobha Global Mall and stated that it had discharged the landowners’ Service Tax liability of Rs. 8,07,83,033. As the Company considered recovery from the landowners unlikely, it debited the amount to the profit and loss account. The AO rejected this explanation, holding that tax paid on behalf of a third party could not be deducted because it was neither the Assessee’s own liability nor expenditure incurred wholly and exclusively for its business. Accordingly, the AO concluded that Service Tax/GST of Rs. 8,07,80,522/- paid on behalf of Mr. D. K. Shivakumar was not an allowable business expenditure, disallowed the amount, and added it to the Assessee’s total income for AY 2018–19. The assessment order was passed on 31 December 2019.

Aggrieved by the assessment order, the Assessee preferred an appeal before CIT(A). Before the CIT(A), the Assessee contended that it had incurred Rs. 8,07,80,522/- in Service Tax/GST on the landowners’ share of the built-up area pursuant to its statutory obligation. Under the Joint Development Agreement, these levies were recoverable from the landowners only upon completion and delivery of their constructed area. However, due to the delay in construction, the landowners sought to adjust their substantially higher claim for delay compensation against the levies recoverable by the Assessee. As recovery of the amount was therefore improbable, the Assessee, in accordance with the principle of prudence and recognised accounting principles, charged the amount to expenditure rather than recognising it as receivable. Nevertheless, the AO disallowed the expenditure under section 37(1) of the Act on the ground that it represented payment of a third party’s liability and was not incurred wholly and exclusively for the purposes of the Assessee’s business. The Assessee submitted that the liability to pay Service Tax/GST was statutorily cast upon it and that, in view of the impossibility of recovery from the landowners, the expenditure was incurred wholly and exclusively for its business. Accordingly, the Assessee prayed that the disallowance be deleted.

The ld. CIT (A) held that the JDA is clear on who has to pay the GST/VAT/Service tax. As per Clause 12.4 of the JDA, the First Party, which is the landowner, has to pay the VAT/GST/Service tax in connection with the owner's constructed area. If the Second Party pays the aforesaid taxes for which the First Party is liable, the First Party has to pay the same to the Second Party on completion of the owner's constructed area in full, or proportionate to the area completed. The appellant chose to pay the GST/VAT liabilities and not recover them from the owners, contending that there was considerable delay in completing the construction, and in its absence it could have ended up paying much more in delay compensation. The appellant cited commercial expediency in not choosing to recover the statutory liabilities from the land owners. On perusal of the relevant clauses of the JDA, it is observed that it is the land owner's liability to pay the GST/VAT on its share of the constructed area, and if paid by the Builder, it has to repay it in proportion to the area completed, to say the least. But in this case, the appellant chose not to recover the entire statutory liability, citing delay in completion of the project, for which it could have ended up paying compensation for the delay. These two clauses are totally unrelated. The clause on discharge of the statutory liabilities by the land owners is clear that it is the liability of the land owners. The delay clause, as mentioned in Clause 9.6, says that the builder is liable to pay Rs25/sq.foot of the Super BUA per month. The JDA was entered into in the year 2005, and the project was agreed to be completed within four years from the date of sanction of the licence and plan. The delay clause seems not to have been enforced, as it is clear that even in the year under consideration the project was not complete. The reason for commercial expediency is established in this case, as the appellant has not adequately demonstrated that the landowners have pressurized the appellant to pay the compensation for delay in completing the project even after 12 years of entering the JDA. The principle of commercial expediency cannot be applied blindly to every case. It depends on the facts of each case. In this case, payment of statutory liabilities in lieu of payment of delay compensation for completion of the project does not even border on commercial expediency, as both are on different footing. One is a statutory liability, and the other is a penalty or fine for delay in completion of the project, which cannot be equated at all. He did not find any merit in the submissions of the appellant on this issue. The addition made by the AO was confirmed.

Thus, the assessee is aggrieved and in appeal before us. And it authorised representatives Sri Srinivasan furnished paper book containing various details and also submitted a written submission which is under: -

The appellant has instituted the captioned appeal being aggrieved by the order passed u/s. 153C rws 143[3] rws 153D of the Act dated 31/12/2019, by the learned Deputy Commissioner of Income Tax, Central Circle – 1(4), Bangalore [herein referred to as the “AO”] for the above assessment year 2018-19 determining the total income of the appellant of Rs. 52,48,46,622/-. In the impugned order passed, the learned AO has made a solitary disallowance of Rs. 8,07,80,522/- in respect of the expenditure claimed on the VAT/GST paid by the appellant, which disallowance is the sole issue that arises for your Honour’s consideration in this appeal.

Before coming to the grievances of the appellant as voiced in the grounds of appeal, it may be mentioned that the background facts relevant for appreciating the grievances of the appellant have been set-out in the Statement of Facts filed along with the appeal memo, which may kindly be averted to avoid the risk of repetition.

Briefly stated, the appellant company carries on the business of real estate development and execution of construction contracts.

SEARCH:

IMPUGNED ORDER:

GROUND NO. 2 – DISALLOWANCE U/S. 37[1] OF THE ACT – RS. 8,07,80,522/-

Ground No. 3 canvassed by the appellant is in relation to the levy of interest u/s 234B and 234C, which may kindly be disposed off in accordance with law.

The learned authorised representative further referred to the Joint Development Agreement between the Assessee and the landowners and submitted that the Assessee had written off the service tax liability relating to the landowners’ share on grounds of commercial expediency. In support of this contention, he relied on the decision of the Hon’ble Supreme Court in S.A. Builders Ltd. 11. The learned Departmental Representative strongly supported the orders of the lower authorities. He submitted that the expenditure was not allowable under section 37(1) of the Income-tax Act because it was not incurred wholly and exclusively for the purposes of the Assessee’s business. Referring extensively to the assessment order and the order of the CIT(A), he contended that the Assessee had failed to establish this requirement and that the disallowance was therefore rightly confirmed. He further submitted that the orders of the lower authorities disclosed no infirmity on this issue. According to him, the decision of the Hon’ble Supreme Court in S.A. Builders Ltd. was inapplicable to the facts of the case because the Assessee had not established any commercial expediency. He maintained that the expenditure represented a third party’s liability and was therefore not deductible under section 37(1) of the Act. 12. We have considered the rival submissions and examined the orders of the lower authorities. The Assessee, a developer, entered into a Joint Development Agreement dated 12 October 2005 for the development of the property. Under the agreement, the landowners were allotted 45% of the constructed area, and the Assessee was allotted the remaining 55%. The landowners’ share of the constructed property was also subject to service tax, which the Assessee discharged in accordance with the applicable service tax laws but did not recover from the landowners. During the survey conducted at the Assessee’s premises under section 133A of the Income-tax Act, a working sheet was found recording that the Assessee had deposited approximately Rs. 13 crores towards service tax on behalf of the landowners. Of this amount, the Assessee wrote off Rs. 8,07,80,522 in FY 2017–18 and claimed it as a deduction under section 37(1) of the Act; the balance was debited in the following financial year. The Assessing Officer questioned whether the deduction was allowable. The Assessee explained that, under the Joint Development Agreement, the Assessee was liable to pay service tax on the landowners’ share as the developer when the tax became due. As the project, which commenced under the agreement executed in 2005, was delayed, the Assessee became liable to pay delay compensation to the landowners. Since no such compensation had been paid, the Assessee considered it prudent to write off the service tax paid on their behalf and claim it as a deduction under section 37(1) of the Act. In support, the Assessee produced the rates and taxes ledger, journal vouchers, and the Joint Development Agreement. The Assessee discharged the service tax liability relating to the landowners’ share; otherwise, it would have been liable to pay delay compensation. The JDA was executed on 12 October 2005, whereas the project was completed only in FY 2019–20. Although the Assessee could recover the service tax liability from the landowners, it did not. In view of the project delay and for commercial expediency, the Assessee bore the liability and wrote off the service tax amount. Accordingly, the expenditure is allowable under section 37(1) of the Act. The Assessing Officer rejected the Assessee’s explanation and held that the expenditure was not allowable under section 37(1) of the Act.

Before the CIT(A), the Assessee reiterated that, had it sought to recover the service tax from the landowners, it would have been liable to pay delay compensation. It therefore submitted that, for commercial expediency, it did not recover the service tax and instead wrote off the amount. The CIT(A) held that the liability to reimburse service tax and the liability to pay delay compensation arose under distinct and unrelated clauses of the JDA and were not comparable. Accordingly, the CIT(A) rejected the Assessee’s contention and confirmed the disallowance. 14. We find that the Assessee deposited service tax of approximately Rs. 13 crores on behalf of the landowners in accordance with the service tax law, and that the amount was recoverable from them. The Assessee contended that recovery would have exposed it to a claim for delay compensation. However, no evidence was produced before the lower authorities or before us to show that the landowners had made any such claim. Nor is there material to establish whether the delay was attributable to the Assessee or to the landowners. Without such evidence, no nexus is established between the service tax recoverable from the landowners and any delay compensation allegedly payable to them. We therefore find no reason to interfere with the lower authorities' orders. 15. Section 37(1) permits deduction of expenditure, other than that covered by sections 30 to 36 and capital or personal expenditure, only where it is laid out wholly and exclusively for the purposes of the business or profession. In the present case, the Assessee did not incur any expenditure during the year; it merely wrote off service tax recoverable from the landowners. Of the approximately Rs. 13 crores paid on their behalf in earlier years and debited to their account, the Assessee claimed Rs. 8,07,80,522 as a deduction during this year and stated that the balance was claimed in the subsequent year. The Assessee provided no basis or justification for bifurcating the amount between the two years. Further, although the sum was debited to the rates and taxes account, the write-off itself did not constitute rates and taxes. As neither the expenditure nor the liability arose during the year, the claim fails to satisfy the conditions of section 37(1) of the Act. 16. In the absence of any claim by the landowners for delay compensation or supporting evidence, the alleged liability to pay such compensation and the service tax recoverable from the landowners are separate and unconnected matters. Accordingly, the Assessee has failed to establish any commercial expediency for writing off the service tax amount. The decision relied upon by the learned authorised representative does not assist the Assessee. In view of the foregoing, grounds Nos. 2 and 3 of the Assessee’s appeal are dismissed. 17. Ground No. 4 is consequential in nature and is therefore dismissed. 18. In the result, the appeal filed by the Assessee is dismissed. Order pronounced in the open court on 15th October, 2026. Sd/- Sd/- SOUNDRARAJAN K. PRASHANT MAHARISHI JUDICIAL MEMBER VICE PRESIDENT Bangalore Dated: 15.10.2026 *TNTS* Copy to: SOBHA LIMITED MARATHAHALLI, OUTER RING ROAD, 1 BELLANDUR POST, BENGALURU-560103, KARNATAKA DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(4), CENTRAL REVENUE BUILDING, 2 QUEENS ROAD, BENGALURU-560001, KARNATAKA 3 THE PCIT / CIT, 4 THE CIT(APPEALS) 5 THE D.R., ITAT, BANGALORE BENCH BY ORDER