2022 (7) TMI 1308 - HC - Income Tax

Court allows appeal, rejects Revenue's disallowance of business expenditure; emphasizes nexus between expenditure and business purpose.

The court allowed the appeal in favor of the appellant, rejecting the Revenue's disallowance of compensation claimed as business expenditure for the ... Disallowance of compensation paid by the appellant and claimed as business expenditure - whether there was nexus between the compensation paid by the assessee to Shri. Mahesh Bhoopathi with the 'NLI project '? - HELD THAT:- In CIT Vs. Dalmia Cement (Bharat) Ltd [2001 (9) TMI 48 - DELHI HIGH COURT] it is held that once it is established that there is nexus between the expenditure and the purpose of business, the Revenue cannot cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximise its profit. The tax authorities must not look at the matter from their viewpoint but that of a prudent businessman. Whether there was nexus between the compensation paid to Shri. Mahesh Bhoopathi and the construction agreement? - The answer must be in the affirmative firstly, because, in para 3 of the JDA cancellation agreement, it is stated that M/s. ITC had approached the parties to the said cancellation agreement. Thus, assessee, Shri.Mahesh Bhoopathi and ITC were considering the proposal for construction of multi-storied residential Complex. Secondly because, in the Sale deed dated April 1, 2006 executed by Sunrise Realty, assessee is one of the confirming parties. Thirdly, because, the Construction Agreement has been entered into between ITC and the assessee on April 1, 2006, and on the very same day, Sunrise Realty has sold the property to M/s. ITC Ltd. Unless the Construction Agreement was finalized earlier, it would not have been possible to execute the same on the date of purchase of the property. Fourthly because, Shri. Mahesh Bhoopathi had sold his property, which was subject matter of JDA in favour of Sunrise Realty. Shri. Aravind contended that the sale is in the name of individual in the name of Shri. Raghunath Vishwanath Deshpande. Shri. Shankar's reply to this contention is, Sunrise Realty was owned by Deshpande family. Further, fifthly because, the Revenue has allowed the expenditure for the A.Y. 2007-08. We are of the considered view that there was nexus between the cancellation of JDA and execution of Construction Agreement. Hence, following the authority in S.A. Builders [2006 (12) TMI 82 - SUPREME COURT] we are of the view that this appeal merits consideration and it is accordingly allowed. Issues:1. Disallowance of compensation paid by the appellant claimed as business expenditure for the assessment years 2008-09 and 2009-10.2. Justification of the disallowance and nexus between the compensation paid and the project under execution.3. Allowability of compensation paid for the cancellation of the agreement as business expenditure under Section 37(1) of the Act.Issue 1: Disallowance of Compensation as Business ExpenditureThe appellant, engaged in real estate development, filed returns for 2008-09 and 2009-10, declaring income. The Assessing Officer disallowed compensation paid to Shri Mahesh Bhupathi. Appeals to CIT (A) and ITAT were dismissed.Issue 2: Nexus Between Compensation and ProjectThe appellant entered a Joint Development Agreement (JDA) with Shri Mahesh Bhupathi but later canceled it for a better opportunity. Compensation was paid, and a Construction Agreement was signed with ITC. The question was whether there was a nexus between the compensation and the 'NLI Project.'Issue 3: Allowability of Compensation as Business ExpenditureThe appellant claimed the compensation as business expenditure, debiting it to the Profit and Loss Account. The Assessing Officer disallowed the compensation for 2008-09 and 2009-10. Arguments were made regarding the genuineness of the transactions and the business rationale behind the cancellation of the JDA.The judgment analyzed the facts, agreements, and transactions involved. It was observed that the compensation agreement showed a link between the parties and ITC for a residential complex project. The Sale deed and Construction Agreement further indicated the connection between the compensation paid and the project.The appellant's reliance on legal precedents like S.A. Builders Ltd. v. CIT and CIT Vs. Dalmia Cement (Bharat) Ltd. was noted. The court emphasized the need to establish a nexus between expenditure and business purpose, considering the circumstances from a businessman's perspective.The court concluded that there was a clear nexus between the cancellation of the JDA and the Construction Agreement, as evidenced by various agreements and transactions. Citing the authority in S.A. Builders, the appeal was allowed, and the questions framed were answered in favor of the assessee, rejecting the Revenue's disallowance.In summary, the judgment addressed the disallowance of compensation, the nexus between the payment and the project, and the allowability of the compensation as business expenditure under Section 37(1) of the Act, ultimately ruling in favor of the appellant based on the established connections and legal principles.