Delay compensation to flat owners is allowable business expenditure where the developer's statutory liability arises on delayed possession.

Compensation paid by a developer to flat owners for delayed possession was treated as allowable business expenditure because the liability arose from the promoter's statutory obligations under the Maharashtra Ownership Flats Act, 1963. The payment was supported by confirmations, was compensatory rather than penal, and was incurred to meet business exigencies and protect commercial interests. The later statutory framework under the Real Estate (Regulation and Development) Act, 2016 was noted as consistent with recognising delay compensation to allottees as a builder liability. The disallowance was therefore reversed in favour of the assessee.

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Issues: (i) whether compensation paid to flat owners for delay in handing over possession was an allowable business expenditure.

Analysis: The assessee was a developer bound by the Maharashtra Ownership Flats Act, 1963. Under section 8, failure to give possession within the stipulated time exposed the promoter to refund the amounts received with interest, and the liability existed even if the agreement did not contain an express compensation clause. The delay in handing over possession was substantial, and the payment made to the flat owners was supported by confirmations and was far less than the liability that could have arisen under the statute. The expenditure was incurred to meet business exigencies and protect commercial interests, and the payment was compensatory in nature rather than a penalty for breach of contract. The statutory scheme reflected in the later Real Estate (Regulation and Development) Act, 2016 also supported the view that delay compensation to allottees is a recognised builder liability.

Conclusion: The compensation paid to the flat owners was allowable as a business expenditure and the disallowance was set aside in favour of the assessee.

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