2019 (11) TMI 138 - AT - Income Tax

Compensation for Non-Fulfillment of Contracts: Business Expenditure vs. Land Acquisition Costs

ACIT 29 (1) Mumbai Versus M/s. Eplus Green 9

The Tribunal upheld the CIT(A)'s decision that the compensation paid by the assessee for non-fulfillment of contracts was a business expenditure/loss and ... Allowable business expenses/loss - compensation expenses attributable to unsold part of land - HELD THAT:- There is no dispute regarding genuineness of the payment. In this view of the matter there is no accounting mandate that business expenditure incurred need to be allocated to the entire cost of land which is in stock of assessee to artificially increase the cost. In fact this is not sustainable as per accounting principle as the compensation paid has not been incurred for acquisition of land. The value of land is the cost incurred and other incidental expenses incurred for acquisition of land. The work-in-progress in this regard would be development activity done, which enhance the value of land. By no stretch of imagination the compensation paid for breach of contract can be treated as development activity in the land. There is no concept of deferred revenue expenditure in tax laws. If the expenditure incurred is revenue in nature the same has to be allowed as expenditure/loss and the same is not to be allocated over some years. Decision of Vatika Town Ships P. Ltd. [2013 (6) TMI 622 - ITAT DELHI] (to which one of the Accountant Member was a party) is fully applicable in the facts of the case wherein as held that when advances are returned alongwith interest, for booking of plots, when deal could not be materialized the compensation paid was business expenditure. This decision has been elaborately quoted by learned CIT(A) in his order reproduced above. Similarly, Hon'ble Delhi High Court in the case of CIT Vs. Bhagwan Das Rameshwar Dayal [1984 (5) TMI 35 - DELHI HIGH COURT] has held that damages paid on account of breach of contract are normal loss incidental to business. There is no infirmity in the order of learned CIT(A) that the compensation paid by the assessee is business expenditure/loss and the same is allowable in the present assessment year itself. - Decided against revenue Issues Involved:1. Whether the CIT(A) erred in quashing the order passed under section 143(3) by the AO and deleting the additions of Rs. 22,15,44,625/-.2. Whether the compensation expenses attributable to the unsold part of the land are allowable as expenses for the year under consideration.Detailed Analysis:Issue 1: Quashing the Order Passed Under Section 143(3) by the AOThe Revenue appealed against the CIT(A)'s decision to quash the AO's order, which included the deletion of the additions amounting to Rs. 22,15,44,625/-. The AO had apportioned the compensation paid by the assessee over the entire 62 acres of land and allowed a proportionate deduction, while the CIT(A) allowed the entire compensation as a deduction.Issue 2: Allowability of Compensation ExpensesThe assessee, a partnership firm engaged in real estate, had acquired land and treated it as stock in trade. The assessee entered into agreements to sell part of the land and received advances. Due to non-fulfillment of contractual obligations, the assessee paid additional compensation as per court orders. The AO disallowed a portion of this compensation, treating it as part of the land cost, to be allowed when the remaining land was sold.Analysis by CIT(A):- Nature of Compensation: The CIT(A) held that the compensation paid did not change the legal condition or title of the land and thus could not be added to the cost of inventory. It was treated as a business loss incurred during the year.- Revenue vs. Capital Expenditure: The CIT(A) referred to the ITAT decision in the case of DCIT Vs. Vatika Town Ships (P) Ltd., which held similar compensation as revenue expenditure. The CIT(A) also cited the Supreme Court decision in Taparia Tools Ltd. vs. JCIT, emphasizing that revenue expenditure incurred in a particular year should be allowed in that year.- Business Loss: The additional compensation was deemed a business loss due to non-fulfillment of contracts, arising during the course of business. The CIT(A) concluded that it should be allowed as a deduction in the year it arose.Tribunal's Decision:- Business Expenditure: The Tribunal agreed with the CIT(A) that the compensation paid was a business expenditure and not related to the acquisition of land. The compensation was for non-fulfillment of contracts and thus a business loss.- Accounting Treatment: The Tribunal found the AO's approach of treating the compensation as part of the land cost to be fallacious. The compensation was not for acquiring land but for business operations.- Precedent and Legal Principles: The Tribunal cited the decision in Vatika Town Ships P. Ltd. and the Delhi High Court's ruling in CIT Vs. Bhagwan Das Rameshwar Dayal, supporting the view that damages for breach of contract are normal business losses.- Tax Neutrality: The Tribunal noted that the AO's treatment was tax-neutral as the compensation would eventually be allowed when the land was sold. Thus, the issue was only about the timing of the allowance.Conclusion:The Tribunal upheld the CIT(A)'s decision, confirming that the compensation paid by the assessee was a business expenditure/loss allowable in the current assessment year. The appeal by the Revenue was dismissed.