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Income Tax Appellate Tribunal, “E” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Ravish Sood (JM)
Per Shamim Yahya (AM) :- This appeal by the Revenue is directed against the order of learned CIT(A) dated 22.6.2018 and pertains to A.Y. 2015-16.
Grounds of appeal read as under :- Whether, On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in quashing the order passed u/s 143(3) by the AO and deleting the additions of Rs 22,15,44,625/- without appreciated the facts that the compensation expenses of Rs 22,15,44,625/- out of total 41,08,20,000/- was attributable to unsold part of land not allowable as expenses for the year under consideration. The appellant craves leave to add, to amend, alter, substitute of modify any of the above ground or add a fresh ground as and when found necessary either before or at the time of hearing.
Brief facts of the case are as under :- The facts of the issue under consideration are that the assessee is a partnership firm and its main object is to trade in Real Estate. The assessee had acquired/purchased land of about 110 acres in Pune and treated the 2 M/s. Eplus Green same as stock in trade. Purchases were made over the period from the year 2008 onwards, from various farmers. The assessee had agreed to sell part of the land measuring 110 acres to various parties under various agreements, with a stipulation of delivery of land with development and also with all permission within three years or period extended with mutual consent, and - had received advances from them aggregating to Rs. 28,20,00,000/-. With the consent of these persons/parties the assessee had entered into a development agreement for development of said land with M/s Vascon Engineers Ltd (VEL) and had received an amount of Rs. 7,50,00,000/- as deposit. The VEL had insisted for timely acquisition of land and obtaining necessary permissions from Government Authorities. The assessee could not acquire all land and obtained required Govt. permission and hence the VEL sent a legal notice claiming compensation and also filed a case in the Civil Court for Additional Compensation/Interest, in addition to the money given to the assessee. The Hon’ble Court, vide its order dated 18.09.2014 directed the assessee to pay additional compensation/interest of Rs. 7.50 crores to VEL for relinquishing their right on land. The assessee decided to sell about 40 acres of land which was in Development Zone. The persons/parties from whom the assessee had received the advances filed legal suit to claim additional compensation and the Court vide its order dated 30.03.2015 directed the assessee to pay additional compensation and accordingly the assessee paid compensation to these persons/parties, from whom advances were received, and also entered into cancellation agreement with them. The assessee had to pay a sum of Rs. 69,28,20,000/- to these persons/parties and since the assessee had received a sum of Rs. 28,20,00,000/- as advance from them, the balance of Rs. 41,08,20,000/- was charged/debited to P & L account. The said compensation paid was claimed as revenue expenditure by the assessee on the ground that the same had arisen during the course of business. During the relevant financial year the assessee could sell 31.795 acres land out of 40 acres, since only 31.795 acres were in Development Zone and sale receipt was shown as business receipt in the Profit & loss account.
3 M/s. Eplus Green
The Ld. AO did not accept the claim of the assessee for deduction of additional compensation paid by the assessee in full. While completing the assessment the Ld. AO observed that the assessee has claimed deduction of the additional compensation of Rs. 41,08,20,000/- which was paid to persons/parties for cancellation of agreement. With these parties the assessee had entered into agreement to sell the land aggregating to 62 acres and had received advance of Rs. 28,20,00,000/-. The Ld. AO further observed that out of said 62 acres of land for which additional compensation was paid by the assessee, land admeasuring 28.565 acres only was sold (this 28.565 acres land was part of 31.795 acres of land sold by the appellant during the year). The Ld. AO held that since the additional compensation was paid in respect of 62 acres of land, it should be apportioned over 62 acres of land and should form part of land cost. Accordingly, the AO allowed deduction of 18,92,75,375/- to the assessee on proportionate basis (as against claim of deduction of Rs. 41,08,20,000/-) and held that the balance amount of Rs. 22,15,44,625/- will form part of cost of land and will be allowable in the year in which the balance land was sold.
Assessing Officer further also observed as under :- “It is pertinent to mention here that this is not the addition which creates loss to the assessee forever but it is to be allowed by the revenue as and when the land is sold by the assessee. At the time of sale of land in future the cost of saleable land will be cost as shown in balance sheet plus the amount of apportioned compensation paid by the assessee to get the land free from encumbrance for future sale. Hence the assessee is going to get the benefit by the increased cost of land at the time of sale of the land in future”.
Against the above order the assessee is in appeal before learned CIT(A).
Learned CIT(A) elaborately considered the contention of the assessee. Learned CIT(A) was of the opinion that the assessee has paid compensation pursuant to court order. He noted that the compensation does not bring any change in condition legal or title of the assessee of the said land. Hence he held that it cannot be added to the cost of inventory. He opined that additional compensation paid by the assessee has been treated as business loss incurred
4 M/s. Eplus Green by the assessee during the year. Hence, he held that the same has to be allowed as deduction to the assessee. He found that on similar issue of ITAT has decided the issue in favour of the assessee in the case of DCIT Vs. VAtika Town Ships (P) Ltd. (60 SOT 115). Learned CIT(A) further observed that the Revenue expenditure incurred in a particular year have to be allowed as such and there cannot be issue of deferred revenue expenditure. In this regard learned CIT(A) referred to Hon'ble Apex Court decision in the case of Taparia Tools Lt. Vs. JCIT (55 taxmann.com 361). Accordingly, learned CIT(A) deleted the disallowance of amount allocated by the Assessing Officer to the cost of land.
Against the above order the Revenue is in appeal before us.
Before proceeding further, we may gainfully refer to the order of learned CIT(A) in this case as under :- “5.5. The contentions of the assessee have been considered carefully. It is admitted fact that the assessee had entered into agreement with the VEL for development of same land which has been held as stock in trade and the assessee had entered into agreement to sell part the said land and received advances therefore. Due to appellant's failure in fulfilling agreement with the VEL for devilment of the land, the appellant had to pay compensation/interest to VEL amounting to Rs. 7,50,00,000/- as per the Court's order. Similarly, due TO appellant's failure in fulfilling the terms of the agreements entered into for selling the part of same land, the appellant had pay additional compensation, (apart from return of advances received) to various persons/parties as per Court's order. Vide Para No. 5.1.3, the Ld. AO has discussed the issue and has allowed the claim of compensation/interest paid to VEL, the developer, at Rs. 7.5 Crores after holding that the said payment has been made in accordance with the court order and further, the same is not being spread over years because the liability to pay said interest crystallised only in the assessment year under consideration. Thus, the Ld. AO has held the compensation/interest paid to VEL, the developer, who was supposed to develop the land held as stock in trade, to be revenue expenditure. However, the Ld. AO has held that the expenditure incurred on account of additional compensation to land purchasers was not a revenue expense as it has been spent for specific asset and need to be capitalised with the cost of land.
5.6. It is undisputed fact that the appellant is engaged in real estate business and over the years had acquired the land under consideration as stock in trade. The Ld. AO has also accepted the said fact because income from sale of part of said land has been assessed as "business income" and not as 5 M/s. Eplus Green
"capital gain/loss" and unsold land has been treated as "closing stock". However, the Ld. AO has enhanced the value of closing stock of the land by the amount of additional compensation disallowed during the year.
5.7. In the present case, the additional compensation paid by the appellant has arisen due to not fulfilling the contractual obligation. The said contracts of selling and delivery of part of land were entered with various persons/parties during the course of appellant's business and hence the liability to pay-additional compensation had arisen during the course of business. The question to be decided is - whether the said additional compensation liability is revenue -in nature and whether the same is required to be apportioned to the cost of land.
5.8. In the present case the appellant had entered into agreements with various persons/parties to sell and deliver un-demarcated parts of land held by appellant as stock in trade. It had also received advances from such persons/parties. Due to reasons discussed above, the appellant could not fulfill its commitment as per the contract and hence, as per court's order it had to pay additional compensation to such parties. The said liability had not arisen for acquisition/sale of any capital asset, but said liability had arisen during the course of business. It is settled legal position that any loss or income arising out of non fulfillment of contract of supply the goods is revenue in nature and is allowable or taxable, as the case may be, in the year in which the same arises or accrues. Similar law has been laid down by the Hon'ble ITAT, Delhi in the case of DCIT vs. Lear Automotive India P. Ltd. 64 taxmann.com 417 and the Hon'ble ITAT, Jaipur in the case of Mewar Oil & General Mills 34 Taxman 102(JP)(MAG.).
5.9. The next question arises that even when the said compensation paid for non fulfilment of contractual obligation is revenue expense, as to whether the same needs to be apportioned to the cost of land. The ICAI has formulated accounting standards for valuation of inventory or closing stock and as per the same the Inventory' or 'Closing Stock' should be valued at the lower of the cost or the net realisable value and the cost should compromise of all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. In the present case the land, which has been held and accounted as stock in trade, was already purchased/acquired for a definite price and the same has been reflected as cost of the land. The appellant had only agreed to sell the land to various persons/parties and received advances towards the same; however, the sale was not complete. Till the sale was not complete, the legal right in the land remained with the appellant and hence the same was forming part of closing stock of the appellant. It is not the case that by returning the advances and making payment of additional compensation to the persons/parties, from whom advances were received, the appellant has repurchased the land or the original title of the appellant in the land has improved in any manner. Further, the land remains the same, in the same location and condition. Thus, payment of additional compensation does not bring any change in condition, location or title of the appellant in the said land and it cannot be added to the cost of inventory of the appellant under provisions of section 145A of the I.T. Act or guidelines of ICAI for valuation of closing stock.
6 M/s. Eplus Green
Additional compensation paid by the appellant has to be treated as business loss incurred by the appellant during the year and has to be allowed as deduction to the appellant. On similar facts, the Hon^ble ITAT, Delhi in the case of DCIT vs. Vatika Town Ships P Ltd reported in 36 taxmann.com has held that such compensation paid is revenue in nature and allowable as such and the same cannot form part of cost of land. The Hon'ble Delhi ITAT in said case has held as under :-
"The appellant had received advance amounts against the booking of plots. These amounts kept lying with the assessee for over a decade. However, the deals could not finalise and the plots remained under the ownership and possession of the assessee company only. The payment was only a part payment, which was returned by the assessee along with the proportionate interest thereon. This payment of interest is not only payment due to the depositor, but it is also payment made as a sound business policy, lest other prospective buyers be shooed away by the factum of non-payment of interest to the earlier customers, even though the advance amounts kept lying with the assessee for years together. Since the payment was in the course of business of the assessee company, it was rightly claimed as a business expenditure. The nomenclature of the payment being not determinative of the nature thereof, it matters little that it was termed as 'compensation' which, otherwise too, it indeed is, as discussed. The payment, however, has never been shown to be sale consideration for re-purchasing the plots, as tried to be made out by the Assessing Officer. Once the plots never left the ownership and possession of the assessee, there is no question of their being re-purchased by the assessee company. Moreover, in earlier years, such payments by the assessee to other customers have also been allowed consistently to the assessee as business expenditure, as taken note of by the Ld. CIT (A), as observed in para 16 above.
The Ld. CIT (A) has passed an elaborate speaking order and we extract hereunder . the relevant portion thereof :-
'B)........... I have satisfied myself from the records of the case that method of accounting policy followed by the appellant is to claim the expenses in the year when the compensation was paid on the revocation of the agreement entered with the customers. The assessments have been framed u/s 143 (3) of the Income Tax Act, 1961 from the assessment year 1995-1996 to 1998-1999 when such a claim of expenses has not been disallowed by the Assessing Officer and thus the claim stood allowed. In so far assessment years 1999-2000 to 2000-2001 are concerned assessment were not taken up for scrutiny assessment, however, the expenses had he en incurred in those years too. In the subsequent Assessment Year 2002-2003 and 2004-2005 the Assessing Officer did not disallow the expense incurred. It is only in the year 2003-2004, no such expense had been incurred. Further the method of valuation of closing stock was the cost method 'which did not include the amount paid as compensation which was not treated by the appellant company as the capital cost as it represented the expenses incurred on account of commercial expediency. Thus on facts I find the 7 M/s. Eplus Green submissions made by appellant and recorded in para 9 & 10 above are true and correct. I further find that the appellant itself has shown the income from sale of aforesaid land and had shown the income without including the aforesaid sum as cost of the land sold and thus it has shown the income and therefore there is also no loss of revenue."
"(E) On the basis of above and for the reasons under mentioned I hold the compensation paid as revenue expenditure:—
(i) The space surrendered by various proposed buyers was never sold or possession handed over to them and as such the question of repurchasing the same is totally a misconception and as against the facts on record.
(ii) The showing of the amounts received by the payees from the appellant as capital or revenue account is not relevant factor for deciding the issue as the same transaction can have different effect on the various persons keeping in view the nature of their businesses. None of the recipients of the compensation was in the business of real estate whereas the appellant was in the business of real estate as such appellant rightly claimed it as revenue expenditure.
(iii) One time payment theory also does not determine the nature of payment.
(iv) It was merely an advance received from the buyers which were repaid with compensation. There is no transfer of title till a sale deed is executed or possession of the premise given in pursuance to part performance u/s 53A of the transfer of property Act. The compensation paid was for utilizing the funds made available by the buyers.
(v) In a business, when a compensation is paid in respect of stock in trade for non-performance of a contract, the compensation paid is always considered as revenue expenditure.
(vi) In a decision of Delhi High Court in the matter of CIT vs. Bhagwandas Rameshwar Dayal 149 ITR 387 it was held that "if a contract is broken for any reason and one party is unable to give delivery or other party is unable to take delivery, it is a case of breach of contract and the damage paid on account of such breach of contract was a normal loss incidental to business.
In a similar case of M/s Gopal Dass Estate and Housing Ltd. Del/2000 for A.Y. 1997-98 the compensation was allowed as revenue expenditure. The Hon'ble Tribunal Delhi has held that there is no repurchase of the plot (against the compensation) as the plots were not sold to the said buyers.'
Before us, the categorical findings recorded by the Ld. CIT (A) have remained unshaken and for the reasons discussed hereinabove, the 8 M/s. Eplus Green
order under appeal is hereby confirmed, rejecting the grievance sought to be raised by the department.
In the result, the appeal filed by the department is dismissed. "
5.10. In view of above discussion, it is apparent that the payments made by the appellant on account of additional compensation were revenue in nature and the same cannot be apportioned to the cost of land. Now the question arises as to whether, the expenses which are revenue in nature and have arisen during the relevant previous year should be allowed as such in that year or the same can be deferred over the year following the principle of "Matching Concept", as done by the Ld. AO. It is settled law that the revenue expenditure paid/incurred in a particular year is to be allowed in that year if the assessee claims the same in that year. Hon'ble Supreme Court in the case of Taparia Tools Ltd vs JCIT reported in 55 taxmann.com 361 has held as under:-
"18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures"
5.11. In the present case, the appellant had not deferred revenue expenditure, being additional compensation paid during the year, over the years but has claimed as deduction in the year under consideration and hence in view of the above discussed law laid down by the Hon'ble Supreme Court the same need to be allowed in the present assessment year itself.
5.12. In view of the facts and law discussed above, I am of the considered opinion that the claim of additional compensation paid under consideration is revenue in nature and the same cannot either be apportioned to the cost of land or deferred over the years, but the same has to be in the assessment year under consideration. Therefore, the Ld. AO is directed to allow the same, Accordingly, the disallowance of Rs. 22,15,44,625/- made by the AO is directed to deleted and the Grounds of appeal No. 2 to 5 are allowed.
5.13. Since, the impugned disallowance of Rs. 22,15,44,625/-, by which the Ld. AO had enhanced the value of closing stock of land, stands deleted, the Ld. AO is directed to adopt the value of closing stock of land without including the said amount of Rs. 22,15,44,625/- and the opening stock of land in next year should be adopted accordingly.”
We have heard both the counsel and perused the records. Learned Departmental Representative relied upon the order the Assessing Officer. He submitted that the Assessing Officer has rightly allocated compensation
9 M/s. Eplus Green expenditure incurred to the cost of land on prorate basis. He submitted that since only portion of land has been sold, expenditure allocated to the balance portion of land has been added to the cost of land by the Assessing Officer. He submitted that this is the correct accounting adopted by the Assessing Officer and the same needs to be restored.
Per contra, learned Counsel of the assessee submitted that the assessee has paid compensation pursuant to court’s order to the prospective buyers with whom agreement for sale could not be carried out through. He submitted that this compensation paid has nothing to do with the acquisition of land. He submitted that these are expenditure incurred during the course of business. He submitted that compensation paid is in fact a business loss which has occurred to the assessee and as such is to be allowed in the current year itself. He submitted that there is no question of artificially inflating the cost of land by denying business loss actually incurred by the assessee. Hence, he submitted that the order of learned CIT(A) is correct and the same needs to be upheld.
Upon careful consideration, we note that the assessee is engaged in real estate business. The assessee has acquired/purchased land over a period of time from various farmers. The assessee has agreed to sale part of land to various parties under various agreements with stipulation of delivery of land with development and also with all necessary permits within a certain time frame. The assessee has received an advance in this regard to the extent of Rs. 28,20,00,000/-. With consent of these parties the assessee has further entered into development agreement with M/s. Vascon Engineering Ltd.(VEL) and has received deposit of Rs. 7,50,00,000/-. VEL insisted that timely acquisition of land and after obtaining government permission. In the absence thereof the said parties made plaints for compensation and interest. Pursuant to the courts order the assessee paid compensation to the parties from whom assessee received advances. These parties also filed legal suit claimed additional compensation. The assessee has paid compensation of Rs.
10 M/s. Eplus Green 69,28,20,000/- to these persons. Since the assessee has received Rs. 28,20,00,000/- from them as advance, balance of Rs. 41,08,20,000/- were charged to the profit and loss account. During the said financial year the assessee has sold land measuring to 31.795 acres of land and receipt was accounted for as business receipt as profit and loss account. The Assessing Officer was of the opinion that compensation paid pertains to entire 62 acres of land which were under consideration for sale and accordingly he allocated it proportionately. Since only 28,656 acres of land was sold. Accordingly, he pro rata disallowed Rs. 22,15,44,625/- as addition to the cost of the land remaining in stock of the assessee.
Now, we find that this approach of the Assessing Officer is totally fallacious. Learned CIT(A) is quite correct in holding that the compensation paid by the assessee to the prospective buyers was business loss liable to be allowed in the said year itself. The said amount was not incurred in connection with acquiring of land. Hence, there is no question at all of increase in cost/value of work-in-progress by artificial increase in cost of land. As a matter of fact while doing so the Assessing Officer has himself observed that said compensation will be revenue expenses to the assessee as and when land is sold by the assessee in future. This is a clear case of treating revenue expense as capital expenditure without any cogent basis. This we note is not at all sustainable in law.
We find that by so observing the Assessing Officer has himself given a finding that accounting treatment given by him is tax neutral in as much as compensation portion allocated by him to the cost of land will be allowed as expenditure in subsequent year of sale of land. In such scenario the issue in dispute becomes only regarding period of allowance of expenditure. There is no issue of difference in tax rate in different years. In this view of the matter decision of Hon'ble Apex Court in the case of CIT Vs. Excel Industries Ltd. CIVIL APPEAL NO.125 OF 2013 dated 8.10.2013 supports the case of the assessee. In this case Hon'ble Apex Court has expounded that when the issue
11 M/s. Eplus Green is only of year of allowance of expenditure and there is no issue of difference in tax rate the issue will become tax neutral and the revenue cannot agitate the issue. In this view of the matter when issue becomes tax neutral, we do not find any reason to uphold the order of the Assessing Officer.
Another limb of learned CIT(A) adjudication is that this compensation has been paid not for any acquisition of land but the same were compensation paid when the agreement with prospective customers could not fructify. Hence, this expenditure was a business expenditure incurred during the ordinary course of business of the assessee. There is no dispute regarding genuineness of the payment. In this view of the matter there is no accounting mandate that business expenditure incurred need to be allocated to the entire cost of land which is in stock of assessee to artificially increase the cost. In fact this is not sustainable as per accounting principle as the compensation paid has not been incurred for acquisition of land. The value of land is the cost incurred and other incidental expenses incurred for acquisition of land. The work-in- progress in this regard would be development activity done, which enhance the value of land. By no stretch of imagination the compensation paid for breach of contract can be treated as development activity in the land. Furthermore, there is no concept of deferred revenue expenditure in tax laws. If the expenditure incurred is revenue in nature the same has to be allowed as expenditure/loss and the same is not to be allocated over some years. Furthermore, decision of Vatika Town Ships P. Ltd. (supra) (to which one of the Accountant Member was a party) is fully applicable in the facts of the case. In this case it was held that when advances are returned alongwith interest, for booking of plots, when deal could not be materialized the compensation paid was business expenditure. This decision has been elaborately quoted by learned CIT(A) in his order reproduced above. Similarly, Hon'ble Delhi High Court in the case of CIT Vs. Bhagwan Das Rameshwar Dayal (149 ITR 387) has held that damages paid on account of breach of contract are normal loss incidental to business.
12 M/s. Eplus Green
Accordingly, in the background of the aforesaid discussion and precedent, we hold that there is no infirmity in the order of learned CIT(A) that the compensation paid by the assessee is business expenditure/loss and the same is allowable in the present assessment year itself.
In the result, this appeal filed by the Revenue stands dismissed. Order has been pronounced in the Court on 19.9.2019.