TMI Blog2018 (2) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... the compensation paid @ 10.30% (interest amount is computed on advances of ₹ 49.23 crore on day to day basis till the date of refund in May 2012) was only marginally higher. As the award given by the arbitrator is bereft of calculation, we direct the AO to restrict the compensation/damages to 9.5% on ₹ 49.23 crore in place of 10.30% on day to day basis till the date of refund in May 2012. The assessee would file the details of before the AO. We hold that the compensation/damages paid by TEDPL is an allowable expense u/s 37 of the Act - Decided in favour of assessee. - ITA No. 3184/MUM/2014 - - - Dated:- 9-2-2018 - SHRI D.T. GARASIA (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) For The Revenue by : Mr. Manjunatha Swamy, CIT-DR For The Assessee : Mr. Rajan.R. Vora, AR ORDER PER N.K. PRADHAN, AM This is an appeal filed by the Revenue. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-40, [in short CIT(A) ] Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the Act ). 2. The effective grounds of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal expenses of ₹ 44,42,32,177/-, TEDPL had incurred expenses of ₹ 12,16,74,177/- under various heads incidental to its business activities of real estate and it had paid ₹ 20 crore to TET as compensation. The AO disallowed compensation of ₹ 20 crore paid by TEDPL to TET on the following grounds: (i) Since both are part of the Thakur Group, the payment of ₹ 20 crore as compensation from TEDPL to TET was to divert the above sum from the taxable bracket to the tax-free bracket under the scheme of the Act, (ii) TEDPL had paid excessive compensation to TET in lieu of cancellation of the MoU dated 14.12.2007, (iii) The compensation did not arise out of any business exigencies and conduct, (iv) The compensation paid of ₹ 20 crore by TEDPL to TET is just an eyewash in consultation with the arbitrator to evade tax and create a scheme to be put forth before the Income-tax authorities, (v) At no point of time, during the course of assessment proceedings, TEDPL could give any reasonable explanation to the excessive compensation paid to TET and why it should be allowed. On the basis of the above reasons, the AO made an addition of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... got ₹ 20 crore as compensation means that the return on investment for TET is more than 12% per annum, which is more than the FDR interest offered by the scheduled banks. The Ld. DR thus submits that the promptness with which TEDPL and TET have responded to each other s proposal and the manner in which the arbitration award has been given is only an eyewash and a mechanism to evade tax. Reliance is placed by him on the decision in McDowell v. CTO 154 ITR 148 (SC). The Ld. DR thus submits that the order passed by the Ld. CIT(A) be set aside and the one passed by the AO be confirmed. 6. Per contra, the Ld. counsel of the assessee files a Paper Book (P/B) containing inter alia (i) copy of MoU between TEDPL. and TET dated 14 December 2007, (ii) copy of order from Charity Commissioner dated 21 August 2008, (iii) copy of documents in respect of litigation with Varde and family dated 4 December 2008 along with English translated copy, (iv) copy of N.A. order dated 12 October 2009 alongwith English translated copy, (v) copy of Memorandum of understanding between TEDPL and Jai Mata Di Corporation dated 3rd December 2007, (vi) copy of letter dated 10 December 2010 to TET to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t no. 91 and it had also right to claim compensation/damages from TEDPL and to go for arbitration by sole arbitrator as per MoU. The Ld. counsel submits that TEDPL had declared profit of ₹ 28,95,46,027/- on sale of plot no. 91 and 92 and paid taxes thereon of ₹ 7,19,12,529/-. In fact, had TET invested the amount in bank FDR, it would have earned interest at about 9.5%. As against this, the compensation paid @ 10.30% (interest amount is computed on advances of ₹ 49.23 crore on day to day basis till the date of refund in May 2012) was only marginally higher. Further, as per the MoU, if TET does not pay money to TEDPL as per schedule, then they had to pay interest @ 15%. 6.3 The Ld. counsel submits that payment of damage for breach of contract as in the present case is an allowable expenditure u/s 37 of the Act. Reliance is placed by him on the decision in CIT v. Hans Machoo Co. 247 ITR 79 (Del), CIT v. SA Builder Pvt. Ltd. 299 ITR 88 (P H) and CIT v. Murari Lal Ahuja Sons 177 ITR 228 (P H). 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for decision are given below. The facts in detail have been de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided by and between the parties hereto under the Arbitration and Conciliation Act 1996 or any modification or re-enactment thereof. Thus it is clear that TET, on cancellation of the said agreement by TEDPL had a right to receive compensation/damages as per clause 9 and clause 10 of MoU. 7.2 We may refer here to the decisions cited before us. In McDowell (supra), relied on by the Ld. DR, the issue involved was a simple question under the Andhra Pradesh sales-tax law the uncomplicated issue being whether excise duty voluntarily paid directly to the state by the buyer should be included in the turnover of the manufacturer who contended that sales-tax was payable on the contractual sale price which did not include excise. The court had merely to decide whether the manufacturer could legitimately reduce his sales-tax liability in this manner. We have brought out the relevant facts in the instant case at para 7 and 7.1 hereinbefore. A bare perusal of it indicates that the case TEDPL is distinguishable from the above case relied on by the Ld. DR. 7.3 Now we turn to the decisions relied on by the Ld. counsel of the assessee. In Jamna Auto Industries (supra), it is held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The respondents are not entitled to any counter-claim against the claimant. 3. I direct that the respondent will pay to the claimant a sum of R.20 crores for cancellation of the contract as compensation/damages in addition to refund of principal amount paid. We do not propose to award interest to the claimant for any period. The above sum shall be paid to the respondents within a period of 24 months of the date of this award. If the above damages/compensation is not repaid with principal amount of advances given, by the above date then interest at the rate of 18% p.a. shall be paid from the date of this award till the payment of entire amount. A perusal of the above clearly indicates that the compensation of ₹ 20 crore arrived at by the arbitrator is not based on a calculation. During the course of hearing, the Ld. counsel of the assessee files a written submission stating that had TET invested the amount in bank FDR, it would have earned interest @ 9.5%. As against this, the compensation paid @ 10.30% (interest amount is computed on advances of ₹ 49.23 crore on day to day basis till the date of refund in May 2012) was only marginally higher. As the aw ..... X X X X Extracts X X X X X X X X Extracts X X X X
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