Property sale advance payments received by cheque satisfy section 43CA requirements despite higher market rates

The ITAT Pune ruled in favor of the assessee on two issues. First, regarding addition under section 43CA, the tribunal held that no addition was warranted since the assessee received advance payments by cheque per the agreement and sale deeds were executed based on agreement value despite higher market prices, satisfying provisions of sub-clauses (3) and (4) of section 43CA. Second, concerning addition under section 40(a)(ia) for non-deduction of TDS on compensation for surrender of rights, the tribunal followed Beacon Projects precedent, ruling that compensation payments for cancellation of apartment booking cannot be classified as interest under section 2(28A), thus no TDS obligation exists.

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Issues Involved:
1. Addition of Rs. 14,70,250/- under section 43CA of the Income Tax Act.
2. Disallowance of Rs. 9,27,000/- under section 40(a)(ia) of the Income Tax Act due to non-deduction of TDS.

Issue-Wise Detailed Analysis:

1. Addition of Rs. 14,70,250/- under section 43CA of the Income Tax Act:
The first issue pertains to the confirmation of an addition of Rs. 14,70,250/- out of the total addition of Rs. 25,02,250/- made by the Assessing Officer (AO) under section 43CA of the Income Tax Act. The assessee, a company engaged in the business of development and building, had booked sales at Rs. 2,48,13,900/- based on agreement value, while the market value of these flats was Rs. 2,73,16,150/-, leading to a difference of Rs. 25,02,250/-. The AO made the addition due to the absence of a satisfactory explanation from the assessee.

The CIT(A) / NFAC, following the Pune Bench Tribunal's decision in Rahul Constructions Vs. DIT, deleted the addition for flats where the difference was less than 10%, but sustained the addition for flats where the difference exceeded 10%. The assessee argued that part of the consideration was received by cheque before the date of the agreement, invoking sub-clauses (3) and (4) of section 43CA, which states that if part of the consideration is received by cheque before the agreement date, no addition can be made merely because the registered value is higher.

The Tribunal found merit in the assessee's argument and noted that advances were indeed received by cheque as per the agreement. Since the sale deeds were executed based on the agreement value, despite the market price being higher, no addition was warranted under section 43CA. Consequently, the Tribunal set aside the CIT(A) / NFAC's order and directed the AO to delete the addition of Rs. 14,70,250/-.

2. Disallowance of Rs. 9,27,000/- under section 40(a)(ia) of the Income Tax Act:
The second issue involves the confirmation of a disallowance of Rs. 9,27,000/- under section 40(a)(ia) due to the assessee's failure to deduct TDS on the payment made to Dipps Hospitality Pvt. Ltd. The AO treated this payment as interest, necessitating TDS deduction. The CIT(A) / NFAC upheld the AO's decision.

The assessee contended that the payment was compensation for the surrender of rights and not interest, citing the Kerala High Court's decision in Beacon Projects (P.) Ltd. vs. CIT, which held that excess payments on cancellation of bookings do not qualify as interest under section 2(28A) and thus do not require TDS deduction.

The Tribunal agreed with the assessee, referencing the Kerala High Court's ruling that such payments do not constitute interest and do not create a debtor-creditor relationship. Therefore, the assessee had no TDS obligation, and section 40(a)(ia) was inapplicable. The Tribunal set aside the CIT(A) / NFAC's order and directed the AO to delete the disallowance of Rs. 9,27,000/-.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the deletion of both the addition of Rs. 14,70,250/- under section 43CA and the disallowance of Rs. 9,27,000/- under section 40(a)(ia). The judgment was pronounced in the open court on 12th August 2024.

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