9911796707
TMI Blog2022 (11) TMI 1291X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 determining the total income of assessee at Rs. 8,22,43,320/- by computing as under:- Income Returned Rs.3,43,74,506 Add: Addition on account of Profit arrived as per revenue recognition method as discussed above Rs.3,36,54,704/- Disallowance of expenditure written off Rs.7,57,24,129/- Less:Brought forward losses: Rs.14,37,53,339/- A.Y.2007-08 :3,38,34,078/- A.Y 2008-09 :1,67,36,751/- A.Y 2009-10 :1,09,39,190/- Rs.6,15,10,019/- Assessed Income Rs.8,22,43,320 3. So far as the disallowances of expenditure written off at Rs. 7,57,24,129/- is concerned, the AO noted from point no. 10 of the notes on accounts that during the year under consideration the assessee company surrendered the 'Neighborhood apartments' project and the total cost incurred aggregating to Rs. 7,57,24,129/- had been considered by the assessee company as sunk cost and debited to profit and loss account. The said expenditure of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrendering it to its sister concern. It is a colourable device adopted by the assessee company to reduce the profit from 'Neighborhood Villas project' by booking the expenditure on the initial development on 'Neighborhood Apartments Project' in the hands of the assessee and surrendering the said project to its sister concern. Thus the expenditure of Rs. 7,57,24,129/- incurred by the assessee company can not be considered as incurred for the purpose of business of the assessee since the partially developed land has been surrendered/transferred to its sister concern and no longer the project exists in the hands of the assessee company. 3) The expenditure incurred by the assessee company on the development of Neighborhood apartment land does not pertain to the year under consideration. The expenditure of Rs. 7,57,24,129/- was a prior period expenditure which was incurred by the assessee in earlier years and the same cannot be allowed as expenditure in the year under consideration. 4) Tile said expenditure incurred by the assessee is capital in nature as the assessee had enduring benefit from the development of land and the same is not an allowable expenditure as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject was abandoned, and the same were considered. The main explanation was that the commercial expediency to give up its rights for development of apartment projects and surrendered the same in favour of the land owner i.e. M/s. Fortune Constructions Pvt. Ltd. vide a supplementary agreement dated 07.01.2010, which was verified and considered. 4.2 With regard to Rs. 13 crores of security deposit which was refund of security deposit from M/s. Fortune Constructions Pvt. Ltd. as per Schedule 8 of Balance Sheet, this amount was decreased by 13 crores from Rs. 40 crores as submitted by the appellant, This fact was verified and found that as per Schedule 8 of balance sheet as on 31.03.2009, the security deposit was of Rs. 80 crores and as on 31.03.2010 it was reduced to Rs. 67 crores, Therefore, the expenditure incurred till date amounting to Rs. 7,57,24,127/- which was written off during this year to be treated as loss arising out of abandoning of project crystallized during this year. Therefore, all the submissions of the appellant accepted and the addition made by the Assessing Officer is deleted. 8. Aggrieved with such order of the ld. CIT(A), the revenue is in appeal before the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at work-in-progress stage was allowable in year of write off as incurred wholly and exclusively for purpose of assessee's business. 12. Referring to various other decisions copies of which are filed in paper book, the ld. counsel for the assessee submitted that the order of the ld. CIT(A) being in accordance with law should be upheld and the grounds raised by the revenue should be dismissed. 13. We have considered the rival arguments made by both the sides, perused the orders of the AO and ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case made addition of Rs. 7,57,24,129/- being expenses written off on the ground that M/s. Fortune Construction Pvt. Ltd. has refunded an amount of Rs. 13 crores from the security deposit paid by the assessee company under the project development agreement. Further, as per the agreement with M/s. Fortune Construction Pvt. Ltd., M/s. Fortune Construction Pvt. Ltd. will continue the project, which is a sister concern of the assessee. It is also the case of the AO that the said expenditure incurred by the assessee is capital in nature as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. to that effect, were prepared and necessary sanctions were obtained Thus, the Appellant had planned two distinct projects to cater to the needs of two different sections of customers. Further, as required by the said Sub-development agreement, the Appellant paid a sum of Rs. 40,00,00,000/(Rupees forty crores only) to Fortune Constructions P Ltd. towards Refundable Security Deposit for the entire project. 2.3. Subsequently, the Appellant Company started developing the Independent bungalows project in right earnest as the demand for such segment was higher and the income therefrom had been declared in the returns of Income filed from year to year. However, the Apartments Project viz., "Neighbourhood Apartments" could not be pursued due to acute recession in the Real Estate Sector, that had set in subsequently, which was more pronounced in this particular segment. Considering the escalation in costs and the downfall in demand, it was decided not to go ahead with this project as it was not in the commercial interests of the Appellant Company. To put it differently, the Appellant thought it commercially expedient to give up its rights, for development of Apartments Project, and ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etch of imagination neither the Appellant could have made a claim in respect of the cost incurred on development nor would the land owner be willing to pay any amount on that account. In this regard. the Appellant further submits that the learned Assessing Officer had completely misread and mis appreciated the purpose and intent of reference to "cost incurred on development" in clause 3 of the agreement. The sole object of such reference was only to make it abundantly clear that the Appellant was not entitled to any amount, except the refund out of security deposit, and thereby to avoid any disputes in that regard. The amount received from Fortune Constructions P Ltd. represents refund of Security Deposit only. This fact is also evident from Schedule-8 to Balance Sheet as on 31.03.2010 as per which the amount of Security Deposit as on such date was less by Rs. 13,00,00,000/- than the amount as on the corresponding date of the preceding year. 2.5. With regard to the nature of expenditure, the Appellant Company humbly submits that it was engaged In the business of Real Estate and the project in question was taken up in pursuit or its regular business objects. As the expenditure on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sister concern was a colourable device to reduce its profits, is absolutely misconceived and misplaced. While coming to such conclusion, he completely failed to appreciate the facts of the case in their right perspective. At the outset, this is to submit that the allegation that both the companies were sister concerns was factually incorrect. In fact, about 65% of the paid-up capital of the Appellant Company was held by FDI investors, who had no interest, what so ever, in Fortune Constructions P. Ltd. No prudent investor would permit diversion of his share of profit to any other entity in Which he was not interested, Further, it was from Fortune Constructions P Ltd., which was in absolute ownership of 100% rights in the property in question, from which the rights of development were acquired by the Appellant Company. On deciding to abandon the Apartment Project, the Proportionate rights had to be necessarily surrendered to the company from which they were originally acquired and the Appellant had no choice in that regard. Thus, no motive can he attributed to such surrender and, as submitted above, this decision was taken considering the best interests of the Appellant Company. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Rs. 2,55,05,608/- towards disallowance of customer settlement claims, Rs. 3,63,51,366/- towards deposits written off, Rs. 3,04,461/- towards loss on sale of fixed assets and Rs. 69,92,428/- towards provision of doubtful advances. The AO accordingly assessed the total income at Rs. 19,50,967/-" 18. In appeal, the ld. CIT(A) gave part relief to the assessee wherein she deleted addition of Rs. 2,55,05,608/- made by the AO towards disallowance of customer settlement claim and Rs. 3,63,51,366/- on account of deposits written off. So far as the other additions are concerned the ld. CIT(A) gave part relief to the assessee. 19. Aggrieved with such order of the ld. CIT(A), the revenue is in appeal before the Tribunal by raising the following grounds. 1. On the facts and in the circumstances of the case, and in law, the CIT(A) erred in deleting the disallowance of Customers Settlement of Rs. 2,55,05,608/- ignoring the fact that the said did not crystallize in the year under consideration and therefore a contingent liability. 2. On the facts and in the circumstances of the case, and in law, the CIT(A) erred in deleting the disallowance of deposits written off of Rs. 3,63,51,366/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Alembic Chemical Works Ltd. Vs DCIT (266 ITR 47) where it is held the in case of an assessee following mercantile system of accounting, a liability is said to be properly incurred when the dispute between the parties is amicably settled or finally adjudicated, where the liability in question is not a statutory liability. Referring to various other decisions, he held that the amount of Rs. 2,55,05,608/- is a contingent liability and therefore, he disallowed the same. 24. Before the ld. CIT(A) the assessee submitted that (i) The direct and intimate connection between the claim and the business has not been denied by the Assessing Officer. (ii) It was not the case of Assessing Officer that there was no settlement of the claims, by the appellant pursuant to the legal process arising out of the contractual liability in the course of carrying on its business and the claim was notional. (iii) The Assessing Officer did not dispute that the amount debited to P & L account pursuant to the settlement of the claims in the land of its real estate business was revenue in its nature. (iv) The nexus between the settlement of the claims and the purpose of business since stood proved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year. Therefore, the submissions of the appellant along with case laws relied upon by the appellant were considered and hence, the addition made by the Assessing Officer deleted. 28. Aggrieved with such order of the Tribunal, the revenue is in appeal before the Tribunal. 29. The ld. DR strongly objected to the order passed by the ld. CIT(A) deleting the addition. Referring to the para 4.1 of the assessment order, the ld. DR submitted that the AO had given reasons while making the addition and the ld. CIT(A) without addressing the various issues raised by the AO deleted the addition which is not justified. He accordingly submitted that the grounds raised by the revenue should be allowed. 30. The ld. counsel for the assessee on the other hand heavily relied on the order of the ld. CIT(A). He submitted that events occurring after balance sheet date and before finalization of the account has to be considered for filing of the return. He submitted that the tax rate for both the years are same, the incurring of the expenditure is not in dispute and only the dispute is regarding the year of taxability. Referring to the decision of Hon'ble Supreme Court in the case of CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the ld. CIT(A) is in accordance with the law. 32.1. We find force in the arguments advanced by the ld. Counsel for the assessee. It is an admitted fact that the direct and intimate connection between the claim and business is not in dispute before the lower authorities. The settlement of the claim by the assessee pursuant to the legal process arising out of the contractual liability is in the course of carrying on of its business and the same is also not in dispute. Further, the claim being revenue in nature is also not disputed by the AO. It is also relevant to mention here that the accounts were duly audited and signed by the auditor on 29.09.2013 before which the order of the State Consumers Disputes Redressal Commission was available and therefore, in view of the guidelines issued by the ICAI for events occurring after the balance sheet date and considering the fact that the tax rate of both the assessment years are same, we do not find any infirmity in the order of the ld. CIT(A) in deleting the addition. Accordingly, ground of appeal no. 1 by the revenue is dismissed. 33. Ground of appeal no. 2 by the revenue relates to the order of the ld. CIT(A) in deleting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being asked by the AO to justify the claim, the assessee subsequently filed a note on Sunk cost and breakup of loss of deposit for surrendering of right. With regards to the Sunk cost, the assessee reduced the amount of Rs. 2,19,94,351/spent on CASA " Project from the closing work-in-progress as a result of surrender of development rights to Platinum Properties Pvt. Ltd. The assessee filed the details of various expenses incurred on this project. With regards to the Loss on deposit for said surrender of rights, the assessee furnished the following details: Proje ct Name Area Paid to Platinum Received 12-13 Balance in PPPL Loss shown in Omega Proportion Casa II 24.06 9 178,061,3 66 141,710,0 00 - 36,351,3 66 178,061,3 66 Casa I 30.00 0 221,938,6 34 221,938,6 34 22,938,63 4 Total 54.06 9 400,000,0 00 141,710,0 00 221,938,6 34 36,351,3 66 400,000,0 00 36. The AO noted that the assessee had given the entire interest free refundable deposit of Rs. 40 crores through a single Development Agreement cum General Power of Attorney entered into with Platinum Properties Pvt. Ltd. on 11.05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has incurred substantial loss ready. Under these circumstances, no prudent business concern will agree for further loss by foregoing a part of the deposit. d) During the course of assessment proceedings, the assessee was asked to file confirmation from Platinum Properties Pvt. Ltd. in respect of surrender of part of the deposit and also that the same has been offered as income by them since the surrender of deposit of Rs. 3,63,51,366/- by the assessee is the gain for Platinum Properties Pvt. Ltd. and accordingly, partakes the character of income in their hands. However, the assessee has not filed any such confirmation. Instead, the Director of the company who appeared has informed that Platinum Properties Pvt. Ltd. will consider the benefit received to them on surrender of deposit by the assessee to the extent of Rs. 3,63,51,366/- only after the conclusion of the total agreement i.e. the development agreement entered on 11.05.2006. Thus, no income is offered by them also for Asst. Year 2013-14. In such a situation, it is apparent that the assessee cannot also claim loss till the conclusion of the development agreement. e) The financial statements of Platinum Properties Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject is abandoned, foregoing a part of deposit in the real estate business is common. The deed of cancellation of surrender of rights is categorical in the preamble mentioned to the effect that the deposit amount refunded was only Rs. 13,67,10,000/-. As a point of fact further amount of Rs. 50 lakhs was received on 22.02.2013, i.e., after the cancellation of agreement entered into because of the persuasion by the assessee. These factors substantiate that the developer agreed to forego the deposit to be received from the land owners on the date of cancellation and yet persuaded the developer for further payments also. Once the developer was sure that it is not possible to receive back any further amount of the deposit, as a commercial expediency the balance amount of Rs. 3,63,51,366/- has been written off, since it is arising out of the business exigency and commercial expediency. Hence, denial by the Assessing Officer is not justified. The assessee relied on the decision of Apex Court in the case of Sassoon J. David & Co. Pvt. Ltd. (118 ITR 261)(SC) and CIT vs. Delhi Safe Deposit Co. Ltd. ( 133 ITR 756)(SC). 39. Based on the arguments advanced before him, the ld. CIT(A) deleted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of registered document dt. 31-10-2012, duly registered as Doc. No. 4758/2012 in the office of Sub-Registrar, Medchal. Pursuant to the cancellation of the development rights, as against the deposit amount of Rs. 17,80,61,366/- the developer returned only an amount of Rs. 14,17,10,000/-. The submission of ld. counsel for the assessee that the balance amount of deposit has not been returned by the developer has not been controverted by the revenue. 42.2. The deed of cancellation of surrender of rights is categorical in the preamble mentioned to the effect that the deposit amount refunded was only Rs. 13,67,10,000/-. Once the developer was sure that it is not possible to receive back any further amount of the deposit, as a commercial expediency the balance amount of Rs. 3,63,51,366/- has been written off, since it is arising out of the business exigency and commercial expediency. 43. We find the Hon'ble Supreme Court in the case of CIT vs. Delhi Safe Deposit Co. Ltd. (supra) has held as under:- 4. The first question which needs to be examined is whether the amount in question can be treated as an expenditure laid out or expended wholly and exclusively for the purposes of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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