2014 (9) TMI 203 - AT - Income Tax

Tribunal denies project compensation claim for lack of nexus.

The Tribunal upheld the decision of the CIT(A) to disallow the compensation paid to Mr. Mahesh Bhupathi as an expenditure for the project 'Nitesh Long ... Compensation payable disallowed – Existence of compensation agreement – Nexus between expenses and project - Held that:- None of the documents between the parties, except a casual reference in the compensation agreement dated 14.7.2005, speak about the nexus between the property of Bhupathi and the NLI property - Even in the compensation agreement dated 14.7.2005, there is a reference to the property of Bhupathi having been considered for development of residential complex by ITC, but since the place was small, the same was given up - No evidence has been brought on record by the assessee to show that the property of Bhupathi was first identified by ITC for development of residential complex - There is nothing on record to show that SRLPL imposed a condition for sale of the property of SRLPL to the assessee that the assessee should arrange for sale of the property of Bhupathi to SRLPL - the property of Bhupathi was not sold to SRLPL or its nominee - The property was ultimately sold to a third party - There is no basis whatsoever for fixation of compensation of ₹ 8.5 crores - There is nothing on record to show as to how the same was quantified, who committed the breach and as to whether any claim was made by Bhupathi in this regard. Mr. Mahesh Bhupathi agreed that his property would be sold in favour of the nominees of the Second Party - the agreement cannot be said to be a compensation agreement entered into for breach of the agreement dated 25.9.2004 - in none of the registered documents by which the property of SRLPL was conveyed, is there a reference to the agreement between the assessee and Bhupathi - the conclusion of the revenue authorities that the payment of ₹ 8.5 crores has no nexus with NLI property is correct and therefore has to be upheld - the plea of commercial expediency in making the payment to Mr. Mahesh Bhupathi for NLI property cannot also be accepted – the order of the CIT(A) is upheld – Decided against Assessee. Issues Involved:1. Disallowance of expenses under Sec. 14A of the Income Tax Act.2. Deduction of compensation paid to Mr. Mahesh Bhupathi as expenditure for the project 'Nitesh Long Island' (NLI).Detailed Analysis:1. Disallowance of Expenses under Sec. 14A of the Income Tax Act:- In the appeal for AY 2009-10, the Assessee challenged the disallowance of expenses incurred in earning income not chargeable to tax by invoking the provisions of Sec.14A of the Income Tax Act, 1961. However, this ground of appeal was dismissed as it was not pressed for adjudication at the time of hearing.2. Deduction of Compensation Paid to Mr. Mahesh Bhupathi as Expenditure for the Project 'Nitesh Long Island' (NLI):- Background and Facts:- The Assessee, engaged in real estate development, entered into an agreement with ITC Limited to facilitate the transfer of land from M/s. Sunrise Realty and Leisure Private Limited (SRLPL) and to develop the property into a residential complex named 'Nitesh Long Island' (NLI).- The Assessee had also entered into a Joint Development Agreement (JDA) with Mr. Mahesh Bhupathi for developing his property, which was later canceled, and a compensation of Rs. 8.5 crores was agreed upon for non-performance of the agreement.- The compensation was later reduced to Rs. 6.7 crores by a supplementary agreement.- Assessee's Claim:- The Assessee claimed the compensation paid to Mr. Mahesh Bhupathi as an expenditure for the NLI project, arguing that the property of Bhupathi was initially identified for ITC's project but was later found to be insufficient, leading to the identification of SRLPL's property.- The Assessee followed the Percentage of Completion (POC) method for recognizing revenue and costs and claimed the compensation as part of the project's cost.- Assessment by the AO:- For AY 2007-08, the AO accepted the POC method and allowed the compensation as part of the project cost.- For AYs 2008-09 and 2009-10, the AO disallowed the compensation, stating that the payment to Mr. Bhupathi had no nexus with the NLI project and was not a cost of the NLI project.- The AO noted discrepancies in the Assessee's claim and highlighted that the property of Bhupathi was ultimately sold to a third party, not SRLPL, and there was no evidence of SRLPL imposing a condition for the sale of Bhupathi's property.- CIT(Appeals) Decision:- The CIT(A) upheld the AO's decision, agreeing that there was no nexus between Bhupathi's property and the NLI project.- The CIT(A) found no evidence of business expediency or any advantage to the Assessee from the compensation paid to Bhupathi.- Tribunal's Conclusion:- The Tribunal emphasized that the properties of Bhupathi and SRLPL were at different locations and entered into at different times.- There was no substantial evidence to show that the property of Bhupathi was initially identified by ITC or that SRLPL imposed a condition for the sale of Bhupathi's property.- The Tribunal concluded that the payment of Rs. 8.5 crores had no nexus with the NLI project and upheld the disallowance of the compensation as an expenditure for the project.- The Tribunal also noted that the AO for AY 2007-08 did not apply his mind to the question of nexus, and therefore, the principle of consistency did not apply in this case.Final Judgment:- The appeals by the Assessee were dismissed, and the orders of the CIT(Appeals) for both assessment years were upheld. The Tribunal concluded that the compensation paid to Mr. Mahesh Bhupathi was not related to the NLI project and could not be claimed as an expenditure for the project.