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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: SHRI JASON P. BOAZ (AM) & SHRI RAM LAL NEGI (JM)
This appeal has been preferred by the revenue against order dated 10/12/2012 passed by the Ld. CIT (A)-4, Mumbai, whereby the Ld. CIT (A) partly allowed the appeal filed by the assessee against Assessment Order passed u/s 143 (3) of the Income Tax Act, 1961 (“for short the Act”).
Brief facts of the case are that the assessee company engaged in the business of development of properties, project management and consultancy etc., terminated a MOU for development of commercial complex with M/s Kanakias Spaces Pvt. Ltd. by signing the deed of release and for surrender of its rights and protect the interest of Kanakias. Kanakias paid Rs. 10 crore as compensation to the assessee. On the other hand the assessee had cancelled the letter of allotment of space issued in favour of “Saraf and Tayal families” and had paid compensation of Rs. 6,10,00,000/- including Rs. 33,63,817/- received from the said family as allotment money. Accordingly the assessee filed its return of income for the relevant assessment year declaring the total income of Rs. 3,60,07,640/- after claiming loss of Rs. 5,76,36,183/- from one of the projects. The AO made disallowance of Rs. 5,76,36,183/- claimed by the assessee as loss and passed assessment order u/s 143 (3) of the Act determining the total income at Rs. 9,36,43,823/-.
3. Feeling aggrieved by the assessment order, the assessee carried the matter before the Ld. CIT (A). The Ld. CIT (A) after hearing the assessee allowed deduction of Rs. 5,76,96,183/- claimed by the assessee holding that the assessee has paid the compensation out of the compensation received by it therefore, the claim of the assessee is to be allowed for deduction against income of receipt for the year under consideration.
The revenue is in appeal against the impugned order passed by the Ld. CIT (A) on the following effective grounds of appeal:-
1. “The order of the CIT (A) is opposed to law and facts of the case.” 2. “On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in holding that the compensation paid by the assessee is naturally out of the compensation received and therefore, compensation paid by the assessee of Rs. 5,76,96,183/- is to be allowed as deduction in the year under consideration.”
3. “On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in holding that the payment of compensation claimed by the assessee amounting to Rs. 5,76,96,183/- is to be allowed for deduction against the income/receipt for the year under consideration.”
4. “For these and other grounds that may be urged at the time of hearing, the decision of the CIT (A) may be set aside and that of the AO restored.”
The Ld. Departmental Representative (DR) relying on the assessment order submitted that the Ld. CIT(A) has wrongly held that the payment of compensation paid by the assessee amounting to Rs. 5,76,96,183/- is to be allowed for deduction against the income/receipt for the year under consideration. The Ld. DR further submitted that by making payment of Rs. 5,76,96,183/- to the allottees the assessee has acquired fresh rights /assets which are benefits of enduring nature. Therefore the said payment was made as the cost of acquisition of the said assets /rights. On the other hand Rs. 10 crore was received by the assessee as a consideration for release of the rights in favour of Kanakia which had nothing to do with the right acquired by the assessee by making payment of Rs. 5,76,96,183/-. Hence, the assessee is not entitled for deduction claimed by it. Therefore, the impugned order is liable to be set aside.
On the other hand the Ld. Counsel for the assessee submitted that through the allotment letter dated 16/09/2005, nine persons (Neina P. Tayal and others) were allotted different units on the ground floor of B wing of the north Town Mall. The assessee company paid to Rs. 6,10,00,000/- as compensation and the refund amount for cancellation of the allotment for shop/ units. The assessee therefore treated the amount of Rs. 5,76,36,183/- as loss from the project of North Town Mall and set off the said loss against the compensation Rs. 10 crore received from Kanakias in connection with the commercial premises proposed to be developed and delivered to Metro Cash Carry Trading Co. Pvt. Ltd. The Ld. Counsel further submitted that compensation received on termination of MOU with Kanakias and compensation paid on cancellation of allotment on commercial space of Saraf and Tayal families are related to each other because unless the claim of Saraf and Tayal families is settle the assessee could not have protected Kanakia for development of Metro Complex as per deed of release for which compensation of Rs. 10 crore was received by the assessee. Hence the assessee had to settle the dispute with Saraf and Tayal families to fulfill its obligations under the deed of lease. Hence there is no merit in the appeal of the assessee.
7. We have heard the rival submissions and also gone through the material placed before us including the orders of authorities below. The only question to be decided in this case is whether the amount of Rs. 6,10,00,000/- (-) 33,63,817=5,76,96,183/- paid by the assessee to the allotees as compensation is to be allowed as deduction in the year under consideration or not. The Ld. CIT(A) has decided this issue in favour of the assessee and allowed the same to be deducted against the income/receipt for the year under consideration holding as under:-
“I have considered the facts of the case and submissions of the assessee. The facts of the case relating to purchases of development rights by the assessee, MOU with Kanakias, allotment of commercial space to “Saraf and Tayal families” by the assessee and termination of MOU with Kanakias and allotment of commercial space to “Saraf and Tayal families” as well as the compensation of Rs. 10 crore received from Kanakias and the net compensation of Rs. 5,76,36,183/- paid by the assessee to “Saraf and Tayal families” are not dispute and they have been accepted by the A.O. There is also no dispute that compensation paid by the assessee to “Saraf and Tayal families” is to be allowed as business expenditure. The only dispute is whether the net compensation paid by the assessee Rs. 5,76,36,183/- to “Saraf and Tayal families” on cancellation of their allotment of commercial space is to be allowed as business expenditure/loss in the year under consideration or it is to be included in the work in progress of the alternative residential project developed by the assessee on the same site. Assessee has claimed it in the year under consideration,
whereas, A.O. has allowed it to be included in the work in progress of the alternative new residential project being developed by the assessee on the same site. The other dispute relates to the amount of compensation which is to be allowed as business loss/expenditure, which A.O. has held that it cannot be more than twice the allotment money paid by “Saraf and Tayal families” to the assessee at the time of booking of commercial space.
7.1 This is a very complex transaction in which assessee has received and paid compensation on termination of the MOU with Kanakias and cancellation of allotment of “Saraf and Tayal families”. The Cable Corporation of India was owning a huge plot of land at Datta Pada Road, Borivili (E), Mumbai – 400066, it was measuring about 1,51,327.9 sq. mtrs. as submitted by the assessee. Out of this plot land, assessee acquired development rights on a plot measuring 36,700 sq. mtrs. in F.Y. 2004-05. Subsequently, assessee also acquired development rights on another plot of 3,436 sq.mtrs. in F.Y. 2006-07. Both the plots in respect of which assessee acquired development rights were adjacent to each other and, therefore, assessee was holding development right on the plot measuring 40,136 sq.mtrs. in total. The right to load TDR (Transferable Development Rights) on the said development rights over 40,136 sq.mtrs. of the plot were also with the assessee and, therefore, the assessee’s right included right to develop the said plot measuring 40,136 sq.mt. and to load TDR on this plot. The right to load TDR was also acquired by the assessee from Cable Corporation along with the development rights. Out of the remaining plot of land with Cable Corporation, M/s Kanakias acquired right to development on a plot of land measuring 50,828 sq.mtrs. (11,216 sq.mtrs. + 39,612 sq.mtrs.) But they got no right to load TDR on their plot of land. Subsequently, in F.Y. 07-08 assessee and M/s. Kanakias entered into a MOU for joint development of a part of plot of land measuring 8,122 sq.mtrs. on the same plot of land for which the right to develop were with M/s. Kanakias. Both the parties were going to develop it as AOP and M/s. Metro Cash & Carry India Pvt. Ltd. (referred as Metro) was also a party to the said MOU for whom mainly the project was to be developed. This project was going to be referred as “Metro Complex”. In this project assessee was required to contribute TDR and was also required to supervise the project as joint developer, M/s. Kanakias were required to mainly contribute their right to develop the plot and M/s. Metro had to make payment to the AOP as per the agreed milestones as per the MOU. On the other hand, assessee had proposed to develop a commercial complex/mall (referred as 'North Town Mail") on the plot on which it had acquired the development rights. In this proposed project of commercial mall assessee allotted certain space to "Saraf and Tayal families". In total about 8,000 sq.ft. area was allotted to “Saraf and Tayal families” by the assessee. - 7.2 In September, 2007, when assessee and Kanakias were developing the “Metro Complex", the Metro issued a public notice dated 28/09/07 regarding objections by any person against development of the project. In response to such notice, "Saraf and Tayal families" raised an objection against the development of “Metro Complex” and gave legal notice dated 9/4/08, copy of which has been filed by the assessee and, therefore, hurdle was created in the development of “Metro Complex” and there were chances that the total project will be stalled. Therefore, assessee exited from the project vide deed of release dated 30/04/08. In the release deed, in addition to other things, assessee agreed to take care of or indemnify Kanakias against effect of any right or title or interest of Kanakias under MOU, vide clause 2 and 3 of the release deed which are reproduced below:
“2 EIPL agrees and undertakes to sign all such papers and documents as may be reasonably required by Kanakia for more fully assuring the absolute right, title, and interest under the August 2007 MOU at the cost of EIPL.
EIPL confirms that since the date of the MOU it has neither acted on the MOU nor assigned or encumbered in any manner, its rights and interest therein. In respect of the above EIPL agrees and undertakes to indemnify Kanakia accordingly.”
(Here EIPL stands for Entertainment India Pvt. Ltd., which is the earlier name of the assessee company)
7.3 Therefore, assessee was required to protect all rights and interest of M/s. Kanakias in the development of “Metro Complex”, which may be resulting due to the rights, title, interest of the assessee, hence assessee was required to take care of the objections raised by “Saraf and Tayal families” against the development of Metro project and, therefore, the assessee was given Rs. 10 crore as compensation. This compensation naturally included any amount which may be required to be paid by the assessee to protect the right and interest of M/s Kanakias and naturally it also included the amount which may be required to be paid “Saraf and Tayal families” by the assessee to protect the right and interest of M/s. Kanakias. Therefore, the assessee cancelled the allotment of “Saraf and Tayal families” in the “North Town Mall” which was creating obstruction for the “Metro Complex” because “Saraf and Tayal families” were creating obstructions in the project of “Metro Complex”, because of their right and interest in the “North Town Mall” which existed on the same bigger plot of land belonging to Cable Corporation on which “Metro Complex” was also being constructed. Therefore, assessee paid the compensation to the “Saraf and Tayal families” is dependent and the result of the obligation of the assessee under the release deed for which compensation of Rs. 10 crore is received. Hence, the compensation paid to “Saraf and Tayal families” is allowable as an expenditure against the compensation received by the assessee. The major concern of the assessee is paying compensation “Saraf and Tayal families” was to protect the right and interest of M/s Kanakias and later on change of its project of “North Town Mall” to residential complex may be consequential. Therefore, the payment of compensation to “Saraf and Tayal families” was not related to change of the project from “North Town Mall” to residential complex and A.O. has also not brought on record anything in this regard to suggest any such relation of compensation with the change of the project. It is only a suspicion or guess of the A.O. that the “Saraf and Tayal families” were compensated because assessee wanted to change the project, whereas, there is no evidence or document on record which suggest that compensation is paid to “Saraf and Tayal families” for change of project. Therefore, assessee had claimed both the compensations, received and paid, related and dependent on each other and, therefore, claimed as income/loss on account of both compensations in the year under consideration only.
7.4 By termination of MOU with Kanakias, the “Metro Complex” project had come to an end as far as the assessee is concerned. Later on the “Metro Complex” project is claimed to have been completed alone by M/s Kanakias. After cancellation of “Saraf and Tayal families” booking in “North Town Mall” assessee cancelled its project to develop the mall and, therefore, this project is also ended or came to an end as far as assessee is concerned. Subsequently on the same plot of land on which “North Town Mall” was to be developed, assessee proposed another new residential project for which new sanctions were taken, which is being completed by the assessee subsequently. Therefore, assessee has claimed that both the projects of “Metro Complex” and “North Town Mall” have ended or finished as far as assessee is concerned in the year under consideration and, therefore, assessee has claimed income/expenditure received/paid relating to these projects on account of compensation is to be assessed in the year under consideration only and the expenditure/loss claimed on account of payment of compensation to “Saraf and Tayal families have no relation with the new residential project developed by the assessee.
7.5 In view of the above facts and discussion, I agree with assessee that compensation received on termination of MOU with Kanakias and compensation paid on cancellation of allotment of commercial space of “Saraf and Tayal families” are related to each other and dependent on each other. It is because unless the claim of “Saraf and Tayal families” is settled, the assessee could not have protected Kanakias for development of Metro Complex” as per deed of release from which compensation of Rs. 10 crore is received by the assessee. Therefore, to fulfil its obligation given under the deed of release against compensation of Rs. 10 crore, assessee had to settle the dispute with the “Saraf and Tayal families” by way of cancellation of allotment of commercial space and payment of compensation. Hence, it is correct to claim by the assessee that the compensation paid to “Saraf and Tayal families” was inherently included in the compensation received by the assessee from Kanakias on termination of MOU, because unless the right of “Saraf and Tayal families” were settled, the assessee could not have fulfilled the terms of agreement to terminate the MOU through deed of release. Therefore, the compensation paid by the assessee Rs. 5,76,36,183/- is to be allowed in the year under consideration only. Even otherwise it is correct for the assessee to claim that both the projects, “Metro Complex” and “North Town Mall” have come to an end or finished in the year under consideration, as far as the assessee is concerned and, therefore, income / expenditure or loss relating to both these projects is assessable in the year under consideration.”
We notice that the Ld. CIT(A) has treated the compensation received on termination of MOU with Kanakias and compensation paid on cancellation of allotment of commercial space of “Saraf and Tayal families” are related to each other considering the contention of the assessee that unless the claim of “Saraf and Tayal families” is settled, the assessee could not have protected the rights of Kanakias for development of Metro Complex” as per deed of release from which compensation of Rs. 10 crore was received by the assessee and that to fulfill its obligation given under the deed of release against compensation of Rs. 10 crore, assessee had to settle the dispute with the “Saraf and Tayal families” by way of cancellation of allotment of commercial space and payment of compensation. The Ld. CIT(A) has rightly appreciated the contention of the assessee. We also find merit in the contention of the assessee that both the transactions of receiving compensation and payment of compensation are the inseparable parts the assessee’s business therefore, the assessee is entitled for deduction of the said business loss. Hence, in our considered opinion, the impugned order does not suffer from any infirmity either factual or legal to interfere with. We, therefore, uphold the findings of the Ld. CIT(A) and dismiss the appeal of the revenue.
In the result, appeal filed by the revenue for assessment year 2009-2010 is dismissed.
Order pronounced in the open court 28th February, 2017.