2022 (11) TMI 1291 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions, dismisses revenue's appeals for AY 2010-11 and 2013-14

The Tribunal dismissed the revenue's appeals for AY 2010-11 and AY 2013-14, upholding the CIT(A)'s decisions to delete the disallowances made by the AO. ... Revenue expenditure vs capital expenditure - allowability of expenditure on abandonment of project - year of allowance - crystallisation under mercantile system/events after balance sheet date - contingent liability versus liability crystallised by settlement or adjudication - deductibility of deposits written off on surrender of development rights as business expenditure - commercial expediencyRevenue expenditure vs capital expenditure - allowability of expenditure on abandonment of project - commercial expediency - Deletion of addition of expenditure written off on abandonment of 'Neighbourhood Apartments' project treated as allowable revenue loss - HELD THAT: - The Tribunal upheld the order of the CIT(A) that the expenditure written off on abandonment of the apartment project was revenue in nature and allowable in the year of write off. The assessee had developed the project in the normal course of its real estate business, treated the expenditure as work in progress and, upon commercial decision to surrender the project, wrote off the accumulated costs. The AO's contrary findings (refund of security deposit and alleged enduring benefit / transfer to sister concern) were considered and rejected on the material before the appellate authorities. Precedents where pre operative or work in progress expenditure on abandoned projects was allowed as revenue expenditure were followed. The Tribunal found no infirmity in the CIT(A)'s factual and legal conclusion and dismissed the revenue's grounds. [Paras 16]Addition of Rs. 7,57,24,129/- disallowed; deletion by CIT(A) upheld and revenue's appeal dismissed for AY 2010-11.Year of allowance - crystallisation under mercantile system/events after balance sheet date - contingent liability versus liability crystallised by settlement or adjudication - Allowability in AY 2013-14 of customer settlement claims debited in the P&L though certain formal settlement actions occurred after the balance sheet date but before finalisation of accounts - HELD THAT: - The Tribunal agreed with the CIT(A) that the claims had a direct and intimate connection with the assessee's business and that the settlements crystallised for accounting purposes before the adoption of audited accounts. The order of the State Consumers Disputes Redressal Commission and execution of settlement/cancellation instruments were available before the auditor signed the financial statements. Applying mercantile accounting principles and ICAI guidance on events after the balance sheet date, and having regard to the fact that the tax rates for the two assessment years were the same, the Tribunal found no error in treating the debited settlement amounts as allowable in the relevant year. [Paras 32]Addition of Rs. 2,55,05,608/- deleted; CIT(A)'s order upheld and revenue's ground dismissed.Deductibility of deposits written off on surrender of development rights as business expenditure - commercial expediency - Allowability in AY 2013-14 of deposits written off on surrender of development rights (loss on part refund of refundable security deposit) - HELD THAT: - The Tribunal upheld the CIT(A)'s acceptance that the refundable deposit was given in the ordinary course of the assessee's real estate business and that, upon surrender/cancellation of development rights for one project unit (CASA II), a proportionate part of the deposit was refunded while a balance was not returned. The assessee treated the unreturned balance as a business loss written off on commercial exigency. The AO's objections concerning allocation of a single deposit between two contiguous projects and lack of corresponding income in the counterparty's books were considered but found not to vitiate the character of the write off as arising from business exigency. The Tribunal, applying commercial principles and relevant precedents, sustained the deletion of the addition. [Paras 42, 43, 44]Addition of Rs. 3,63,51,366/- deleted; CIT(A)'s order upheld and revenue's ground dismissed.Final Conclusion: Both appeals filed by the revenue are dismissed: the Tribunal upheld the CIT(A)'s deletions - the expenditure written off on the abandoned apartment project was held revenue and allowable (AY 2010-11); the customer settlement claims and deposits written off on surrender of development rights were held allowable in AY 2013-14. Issues Involved:1. Disallowance of expenditure written off.2. Disallowance of customer settlement claims.3. Disallowance of deposits written off on surrender of land development rights.Issue-wise Detailed Analysis:1. Disallowance of Expenditure Written Off:The assessee, a company engaged in real estate development, filed its return for AY 2010-11 declaring nil income after setting off brought forward losses. The AO determined the total income of the assessee at Rs. 8,22,43,320/-, including an addition of Rs. 7,57,24,129/- as disallowed expenditure written off. The AO noted that the assessee surrendered its development rights for the 'Neighborhood Apartments' project to M/s. Fortune Constructions (P) Ltd., a sister concern, and claimed the incurred cost as a sunk cost. The AO rejected this claim on the grounds that the expenditure was reimbursed by M/s. Fortune Constructions, was a prior period expenditure, and was capital in nature.The CIT(A) initially deleted the addition, but the Tribunal restored the issue for fresh consideration. Upon re-examination, the CIT(A) again deleted the addition, noting that the expenditure was revenue in nature and crystallized during the year. The Tribunal upheld the CIT(A)'s decision, citing that the abandonment of the project was due to commercial expediency and that the refunded amount was part of the security deposit, not related to the incurred expenditure.2. Disallowance of Customer Settlement Claims:For AY 2013-14, the assessee claimed Rs. 2,55,05,608/- towards customer settlement claims. The AO disallowed this amount, stating that the liability arose in the subsequent financial year (FY 2013-14) based on the dates of the settlement agreements and orders from the AP State Consumer Disputes Redressal Commission. The AO considered the liability as contingent.The CIT(A) deleted the addition, reasoning that the liability had crystallized before the finalization of the accounts and was thus allowable in the relevant year. The Tribunal upheld the CIT(A)'s decision, emphasizing that the direct connection between the claim and the business was not disputed, and the liability was established before the adoption of the audited accounts.3. Disallowance of Deposits Written Off on Surrender of Land Development Rights:The assessee claimed Rs. 3,63,51,366/- as deposits written off on surrender of land development rights for the 'CASA II' project. The AO rejected the claim, arguing that the development agreement did not provide for forfeiture of the refundable deposit, and the liability was not reduced in the books of Platinum Properties Pvt. Ltd., the counterparty in the agreement.The CIT(A) deleted the addition, accepting the assessee's explanation that the refundable deposit was part of the business practice in real estate and the write-off was due to commercial expediency. The Tribunal upheld the CIT(A)'s decision, noting that the surrender of development rights and the partial refund of the deposit were substantiated by the registered document, and the balance amount was written off due to business exigency.Conclusion:The Tribunal dismissed the revenue's appeals for both AY 2010-11 and AY 2013-14, upholding the CIT(A)'s decisions to delete the disallowances made by the AO. The Tribunal emphasized the principles of commercial expediency, the timing of liability crystallization, and the nature of the expenditure in its judgments.