Income Tax Appellate Tribunal - Delhi
Vatika Town Ships Pvt. Ltd., New Delhi vs Department Of Income Tax on 28 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : H : NEW DELHI
BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
ITA No.2832/Del/2012
Assessment Year : 2001-02
DCIT, Vs. Vatika Town Ships Pvt. Ltd.,
Central Circle-20, 301, Vishal Bhavan,
Room No.333, 95, Nehru Place,
E-2, ARA Centre, New Delhi.
Jhandewalan Extn.,
New Delhi. PAN : AAACV4656Q
(Appellant) (Respondent)
Assessee by : Shri C.S. Aggarwal, Sr. Advocate
Revenue by : Shri Tarun Seem, Sr.DR
ORDER
PER A.D. JAIN, JUDICIAL MEMBER
This is an appeal filed by the department for Assessment Year 2001-02 against the order dated 28.03.2012 passed by the CIT (A)- XXXI, New Delhi, contending that the Ld. CIT (A) has erred in deleting the addition of ` 21,02,000/- made on account of compensation charges claimed by the assessee as revenue expenditure.
2. The assessee claimed deduction of ` 21,02,000/- on account of compensation expenses. On query, the assessee submitted the following to be the details of the expenses:-
2 ITA No.2832/Del/201231.03.2001 Amount paid to Shakeela Begum for 388,500 surrender back of plot No.C-259 to company 31.03.2001 Amount paid to Aqil Ahmed for surrender 388,500 back of plot No.C-209 to company 31.03.2001 Amount paid to Deepika Kumar for 1,300,000 surrender back of plot No.B-234 to company 31.03.2001 Amount paid to Ved Jaie & Shalini Uppal for 25,000 surrender of plot Total 2,102,000
3. The Assessing Officer observed that the assessee had paid the amount of ` 21,02,000/- during the year to four persons, on account of surrender back of plots by them; that the assessee was engaged in the business of sale and purchase of plots/land and these plots constituted the assessee's stock in trade; that any amount paid by the assessee for surrender of plots would enhance the stock in trade by an equivalent amount, but these expenses could not be allowed as revenue expenses; that thus, the assessee company re-purchased these plots from the allottees and had paid purchase consideration, which had been claimed as compensation; that the assessee had not paid any compensation to the allottees, but it had re-purchased these plots, as the allottees had surrendered their rights therein; that therefore, the compensation paid could not be said to be a business expenditure; that rather, it was an investment in purchase of stock in trade, naming it as compensation, so as to give the colour of genuine business expenditure; that in 'Rama Krishna & Co. vs. CIT', 88 ITR 406 (Mad), 'New Precision (India) Pvt. Ltd. vs. CIT', 72 ITR 657 (MP) and 'CIT vs. Lucky Bharat Garage', 174 ITR 526 (MP), such expenditure has been held to be capital expenditure; that the assessee had paid the compensation amount in one go to re-possess the property in the possession of the allottees; that this was, in fact, a sale consideration not allowable as business expenditure; that there had been no loss to the plot owners and there was no previous contract between the 3 ITA No.2832/Del/2012 allottees and the assessee company for payment of compensation; that there was no question of payment of any compensation to the allottees by the assessee company; that the intention of the assessee company was to pursue the allottees to surrender their rights in the plots, so as to earn more profit in future; and that being not allowable as a revenue expenditure, the amount could not be debited in the Profits & Loss Account. It was in this manner that the Assessing Officer increased the assessee's capital work in progress by the amount of ` 21,02,000/- and the compensation paid was disallowed and added back to the income of the assessee company.
4. Vide order dated 06.01.2005, the Ld. CIT (A) held that there was no re-purchase of the plots, as the plots had never been sold to the buyers; that the advances had been received against the agreement which would have been fulfilled only at the time of full payment and transfer of rights. The Ld. CIT (A) also followed the orders for the earlier years in allowing the claim of compensation as a business expenditure.
5. The department carried the matter in appeal before the Tribunal and the Tribunal, vide its order dated 5.10.2007, in ITA No.1505/Del/2005, remitted the matter to the file of the Ld. CIT (A), observing as follows:-
"No doubt the expenses incurred by the assessee are the revenue expenses and have been incurred for the purposes of the business, as in our opinion, commercial expediency demands that such expenses should be incurred by the assessee while making the refund to the allottees. But the question arises whether these expenses will form part of the stock in trade or not. This is in our opinion will depend on the method of the accounting consistently followed by the assessee for the valuation of the closing stock. Whether the assessee is following project completion method or work certified method. These facts have not been brought on record before us from 4 ITA No.2832/Del/2012 either of the side. We, therefore, in the interest of the justice and fair play to both the parties set aside the order of the Commissioner of Income Tax (Appeals) and restore this issue to the file of the Commissioner of Income Tax (Appeals) with the direction that the Commissioner of Income tax (Appeals) to re- examine this issue afresh in the light of the various case law cited before us, method of accounting followed by the assessee, method of valuation of the closing stock consistently followed by the assessee and also verify the fact whether such expenditure has been allowed to the assessee in the earlier years or not after giving the proper and sufficient opportunity to the assessee. The assessee is also free to adduce all the necessary evidence on which he may rely before the Commissioner of Income Tax (Appeals). Thus the appeal of the Revenue is allowed for statistical purposes."
6. By virtue of the order dated 28.03.2012, which is the order presently under appeal, the claim of compensation as a business expenditure was again allowed by the Ld. CIT (A).
7. The Ld. DR has contended before us that the Ld. CIT (A) has wrongly deleted the addition correctly made. It has been contended that the Ld. CIT (A), in para 8 of the impugned order, has wrongly observed that the Tribunal, in its order dated 5.10.2007, had affirmed the expenses incurred by the assessee company to be revenue expenses and that the matter was set aside by the Tribunal only to re- examine the issue of method of accounting followed by the assessee, method of valuation of closing stock consistently followed by the assessee and to verify the fact as to whether such expenditure had been allowed to the assessee in the earlier years. It has further been contended that the Ld. CIT (A) has failed to consider that the payment was made by the assessee for surrender of plots by the allottees; that the amount thus represented purchase consideration for the plots re- purchased from the allottees by the assessee; that it was this, which was misleadingly termed and claimed as 'compensation', whereas, since there was no default attributable to the assessee, there was no question of any compensation having to be paid by the assessee to the 5 ITA No.2832/Del/2012 allottees; that this methodology was a clever device adopted by the assessee to give the colour of genuine business expenditure to the transaction, whereas it is well settled that payment of acquiring right, title and interest in lease in respect of the business premises is a capital expenditure, being the sale consideration paid for re-possession of the property vesting in the original allottees.
8. The ld. counsel for the assessee, on the other hand, has strongly supported the impugned order. It has been contended that no sale of the plots was made by the assessee; that the allottees of the plots had voluntarily surrendered the plots; that the amount in question represented advances deposited by the allottees for acquisition of agricultural land; that however, full payments were never made and the plots never got to be registered in the names of the allottees; that as such, the ownership of the and remained vested with the assessee company; that the amount of ` 21,02,000/- in fact represented the advance amount received, along with interest thereon, as returned by the assessee to the allottees; that since the payment was of this nature, it was debited as 'compensation expenses' and not as 'interest' in the Profit & Loss Account ; that as per M/s Amar Raj Computers vs. ACIT', 91 ITD 280 (Hyd), a revenue expenditure, income relatable to which will arise for a number of years, must be allowed in its entirety in the year in which it is incurred, even though it is written off by the assessee in the books of account over a period of years; that the assessee did not make any purchase of any capital asset during the year; that therefore, the payment in question was nothing other than a revenue expenditure allowable as a business expenditure for the year.
9. We have heard the parties and have perused the material on record. The issue to be decided is as to whether the Ld. CIT (A) has correctly held the compensation charges claimed by the assessee as 6 ITA No.2832/Del/2012 revenue expenditure and whether the Ld. CIT (A) has, consequently, correctly deleted the addition made by the Assessing Officer.
10. The assessee private limited company, during the year, was dealing in real estate transactions, purchasing agricultural land, developing it into saleable plots of farm land and selling them. The assessee made payment of ` 21,02,000/- to four parties and claimed it as compensation expenses, allowable as business expenses. The Assessing Officer concluded that these expenses were not payment of any compensation by the assessee, but they were in the nature of sale consideration for re-purchase of the plots.
11. In this regard, it is seen that undisputedly, the amounts disbursed by the assessee as compensation expenditure included amounts received as advance towards prospective sale of plots as per the agreements between the assessee company and the intending purchasers. However, these sales could not fructify and the advance amounts, received many years back (1989 in the case of the first three parties and 1994 regarding the last party), which were lying with the assessee, were returned by the assessee along with interest thereon in the year under consideration. Since the full payment in any of these four cases had never been made, the sale never got to be complete and the plots remained in the ownership and possession of the assessee company without being transferred to the names of the four prospective buyers. It has not been shown otherwise. Thus, the conclusion of the Assessing Officer that the amount in question represented sale consideration for re-purchase of the plots by the assessee remains a conclusion unsubstantiated by anything on record. Other than observing that any amount paid for surrender of plots would enhance the stock in trade of the assessee by an equivalent amount, the Assessing Officer did not refer to any other document or 7 ITA No.2832/Del/2012 circumstance showing that the assessee had, in fact, re-purchased the plots from the allottees and had claimed the purchase consideration as compensation.
12. A perusal of the operative portion of the Tribunal Order dated 5.10.2007 shows that indeed, the expenditure has been held by the Tribunal to be revenue expenses. This is clear from the very first sentence of para 6 of the order, which says "no doubt the expenses incurred by the assessee are the revenue expenses and have been incurred for the purposes of the business, as in our opinion commercial expediency demands that such expenses should be incurred by the assessee while making the refund to the allottees." The Tribunal set the matter aside to the file of the Ld. CIT (A) to re-examine the issue of the method of accounting followed by the assessee, the method of valuation of the closing stock consistently followed by the assessee and to verify the fact as to whether such expenditure had been allowed to the assessee in the earlier years. As is available from the order, this was done to determine as to whether the expenses would form part of the assessee's stock in trade or not. The objection of the Ld. DR in this regard is, therefore, devoid of merit and is rejected as such.
13. The payment of interest for the amount of advance which kept lying with the assessee for a number of years, we find, is entirely justified. The sales may not have fructified for reasons best known to the parties. These reasons may be varied. However, the fact remains that the amount of advance was with the assessee company and once it was decided to be returned, it had, by necessity, to be accompanied with due interest thereon. That this interest is exorbitant or not due, is not the case of the department. Further, since it was not interest per se, but the interest accompanying the original amount of advance, this was the reason why it was not termed as interest while debiting it in 8 ITA No.2832/Del/2012 the Profit & Loss Account by the assessee. The nomenclature accorded to any payment, by itself, is not determinative of the character of such payment. It is the real nature of the payment and not the heading used, which is to be taken into consideration. In the present case, as correctly noted by the Ld. CIT (A) also, the payment was made to compensate the prospective buyers who had booked space, area and land on payment of an advance amount to the assessee company. These advance amounts were returned along with interest, thereby compensating the customers and the payment or expenditure was incurred for the business purposes of the assessee.
14. Apropos the directions issued by the Tribunal while remitting the matter to the file of the Ld. CIT (A), proper inquiry has been carried out by the Ld. CIT (A). With regard to the accounting policy of the assessee company, the Ld. CIT (A) found that the assessee company enters into an agreement to sell when the occasion arises, i.e., when an intending buyer intends to purchase farm land in the project being developed by the assessee company. The consideration is received in installments as part payment. The sale, however, is recognized only when the sale consideration along with the registration and other expenses is received and possession is delivered to the intending purchaser. If the sale falls through, the booking is cancelled and the amount of deposit with some compensation/interest is paid, as a business exigency, by the assessee company to the party, with mutual consent.
15. So far as regards the method of valuation of closing stock, it was found by the Ld. CIT (A) that the assessee company was regularly valuing its stock of land at cost. The cost of land with incidental expenses was being considered as stock of land. Whenever a plot was registered in the name of a purchaser and possession was handed over, proportionate cost of such land was reduced and the resultant 9 ITA No.2832/Del/2012 amount was shown under the Schedule of Inventories, whereas the direct expenses incurred on the development of land were debited to the project under development.
16. Pertaining to the issue of consistency, the CIT (A) found the amount paid by the assessee to have been allowed to the assessee as revenue expenditure in the earlier years, as follows:-
Assessment Amount of Amount of
Year compensation compensation
claimed allowed
1995-1996 4,98,250 4,98,250
1996-1997 13,65,000 13,65,000
1997-1998 4,15,000 4,15,000
1998-1999 3,04,165 3,04,165
1999-2000 3,75,000 3,75,000
[u/s 143 (1)(a)]
2000-2001 2,46,638 2,46,638
[u/s 143 (1)(a)]
2001-2002 21,02,000 --- Disputed before CIT (Appeals)
who had allowed it but has
been restored by Tribunal to
be decided afresh
For A.Y.s 1995-96 to 1998-99, the allowance was, as evident from the above chart, in scrutiny assessment.
17. The Ld. CIT (A) further found that in the assessee's books of account, no land stock, qua which the assessee claimed to have paid compensation, stood shown as sold.
18. Thus, the transaction entered into by the assessee, shown as payment of compensation and claimed as a revenue expenditure, cannot be said to be a mere camouflage or subterfuge designed by the assessee. The assessee 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 10 ITA No.2832/Del/2012 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.
19. 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 been 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 11 ITA No.2832/Del/2012 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 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 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. Bhagvandas 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."12 ITA No.2832/Del/2012
In a similar case of M/s Gopal Dass Estate and Housing Ltd. ITA No.3096/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."
20. Before us, the categorical findings recorded by the Ld. CIT (A) have remained unshaken and for the reasons discussed hereinabove, the order under appeal is hereby confirmed, rejecting the grievance sought to be raised by the department.
21. In the result, the appeal filed by the department is dismissed.
The order pronounced in the open court on 21.06.2013.
Sd/- Sd/-
[SHAMIM YAHYA] [A.D. JAIN]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 21.06.2013.
dk
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches