2021 (3) TMI 735 - HC - Income Tax

Court allows deduction of Rs. 65,00,000 payment as business expenditure under Income Tax Act

The Court ruled in favor of the appellant, setting aside the Tribunal's decision. It held that the payment of Rs. 65,00,000 to settle a dispute was a ... Disallowance of payment paid to the landlord towards the land expenses - appellant-Company had to pay compensation on account of landlord to various tenants from time to time to get the possession of the property for development - HELD THAT:- The appellant decided to settle the dispute between Mr. D. Ramesh and his sister in order to continue with the construction of project on reliasation of the property that may arise from the sale of apartments and under those circumstances, the amount was paid to Mr.D.Ramesh. Tribunal has merely relied upon certain clauses of the Joint Development Agreement which was entered into at the initial stage of the project. During the course of the project, there occurred many obstacles and hurdles and they were faced by the appellant and therefore, merely relying on the Joint Development Agreement, the Tribunal erred in law and facts, especially when the Tribunal has not doubted the genuineness of the expenditure incurred by the appellant. The amount which was paid to Mr.D. Ramesh was rightly treated as cost of the project as evidenced by the accounts which was certainly within the knowledge of the Assessing Officer and the Appellate Authority. The cost of the project includes the sum paid to Mr. D. Ramesh and the entire project has been sold out as reflected in the profit and loss account. Therefore, the Tribunal has certainly on erroneous assessment of facts, not allowed the amount paid to Mr.D.Ramesh as deduction, as cost towards the project. The Tribunal was certainly having no power to re-write the agreement and if the parties have modified the understanding by an agreement, the same should not have been ignored specially when the amount paid to Mr.D. Ramesh was certainly an expenditure, it should have been allowed as a deduction. - Decided against revenue. Issues Involved:1. Deduction eligibility of Rs. 65,00,000 under Section 37 of the Income Tax Act.2. Consideration of various agreements and arbitration proceedings subsequent to the original Joint Development Agreement.3. Adjudication on the levy of interest under Sections 234A, 234B, and 234C of the Income Tax Act.Detailed Analysis:1. Deduction Eligibility of Rs. 65,00,000 under Section 37 of the Income Tax Act:The core issue was whether the Rs. 65,00,000 paid by the appellant to settle a dispute with the landlord's sister could be considered a deductible business expenditure under Section 37 of the Income Tax Act. The Tribunal upheld the Assessing Officer's decision, stating that the expenditure was not for business purposes since the Joint Development Agreement (JDA) clearly stipulated that the owner (Mr. D. Ramesh) was responsible for clearing any encumbrances on the property. The Tribunal argued that the appellant failed to establish that the expenditure was a business necessity and should not bear the cost of settling the dispute, which was the owner's responsibility.2. Consideration of Various Agreements and Arbitration Proceedings:The appellant contended that the Tribunal ignored subsequent agreements and arbitration proceedings which modified the original terms of the JDA. The appellant argued that these modifications necessitated the payment to clear the title and continue with the project. The Tribunal, however, relied solely on the original JDA clauses and did not consider the subsequent developments, leading to a decision that the payment was not a business expenditure.3. Adjudication on the Levy of Interest under Sections 234A, 234B, and 234C of the Income Tax Act:The Tribunal did not adjudicate the issue of interest levied under Sections 234A, 234B, and 234C of the Income Tax Act. The appellant raised this as a substantial question of law, arguing that the Tribunal's failure to address this issue was a significant oversight.Court's Judgment:The Court set aside the Tribunal's order, ruling in favor of the appellant on all substantial questions of law. The Court emphasized that the Tribunal erred by not considering the subsequent agreements and arbitration proceedings that modified the original JDA. The Court highlighted that the expenditure was genuine and necessary for the continuation of the project, thus qualifying as a business expenditure under Section 37 of the Income Tax Act. The Court referenced several judgments to support its decision, including:- Dalmia Jain & Co. Ltd. Vs. Commissioner of Income Tax: The Supreme Court treated legal expenses to defend a suit as business expenditure.- CIT, West Bengal-I, Calcutta Vs. DE Luxe Film Distributors Ltd.: The Calcutta High Court treated payments to clear title as business expenditure.- S.A. Builders Vs. CIT (Appeals): The Supreme Court held that expenses incurred for commercial expediency are allowable as business expenditure.- Deputy Commissioner of Income-Tax Vs. B. Kumara Gowda: The Karnataka High Court treated legal expenses to protect a lease as business expenditure.- Karnataka Trade Corporation Ltd. Vs. Assistant Commissioner of Income-tax: The Karnataka High Court allowed expenses incurred to perfect title as business expenditure.The Court concluded that the Tribunal's reliance on the original JDA without considering subsequent developments was erroneous. The payment to Mr. D. Ramesh was necessary for the project's continuation and should be allowed as a business expenditure. The appeal was allowed, and the Tribunal's order was set aside.