TaxTMI 
TaxTMI 
2019 (5) TMI 1691
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....On facts and in circumstances of the case and in law, the CIT(A) has erred in upholding that the amount paid of Rs. 50.84 Crores by the appellant was towards purchase of equity shares of the company Mohan Entertainment Co. Ltd. (MECL) from the Reddy family and not as part of the Project Cost as claimed by the appellant for improving & betterment of its Development Rights of the project Fantasia Business Park at Plot No.47, Sector 30-A, Vashi, Navi Mumbai. The CIT(A) has further erred in not accepting the appellant's plea that the value of purchase consideration paid in respect of the equity shares of MECL, acquired from the Reddy family was Rs. 39,99,000/- only, and that the amount of Rs. 50.84 Crores paid to the Reddy Family by the appellant was for improving & betterment of its Development Rights of the project Fantasia Business Park at Plot No.47, Sector 30-A, Vashi, Navi Mumbai. The payment of Rs. 50.84 Crores being part of the Project Cost should have been allowed. 2. The revenue in its cross appeal has raised the following grounds of appeal: 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 1....
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....1/-. 4. The facts leading to additions are that during assessment proceedings the assessing officer noted that the assessee was developing a commercial project "Fantasia Business Park", Plot No. 47, Sector 30A, Vashi, Navi Mumbai. As per the approved plan, the total constructed area is 12652.3 sq. mtr. The assessee claimed that it has regularly following the Project Completion Method (PCM) for revenue recognition. No income was offered from the project, as project was not completed till the end of March 2012. The assessee acquired development right in the project from Mohan Entertainment Company Ltd. (MECL) in the year 2003. The Assessing Officer also noted that assessee has paid an amount of Rs. 50.84 Crore towards the development right for the project in previous year 2011-12 and claimed it as revenue expenditure. The assessee was asked to substantiate the claim with documentary evidences. 5. In response to the notice, the assessee filed its reply dated 09.03.2015. In the reply, the assessee stated that assessee-company entered into development agreement with MECL on 27.03.2009, then owned by Reddy Family for developing of land admeasuring 12677.30 Sq. Mtr. at Plot No. 47, ....
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.... from customers for sale of unit in the project, the year wise bread-up of closer balance of March 2010, 2011 & 2012 as under: Sr. No. Particulars As at 31/03/2010 As at 31/03/2011 As at 31/03/2012 i Site work in progress Multiplex 47/30A, vashi site "Fantasia" 20,95,75,331 33,38,71,924 89,74,96,057 ii Advances received from customers for said project "Fantasia" 19,52,71,949 57,68,81,571 80,90,12,552 8. As both the groups were claiming control on the management of MECL through Board which were disputed by the other group i.e. MECL was claimed by Reddy Group and Haware Group. Subsequently, with the intervention of well-wisher and common friends, the entire dispute and difference between Haware Group and Reality Group were resolved as per the agreement of settlement/ substituted agreement for settlement dated 05.02.2012 with addendum dated 18.03.2012 and further addendum dated 18.05.2012. As per the substituted agreement for settlement dated 15.02.2012, the assessee group agreed to pay a lump sum compensation of Rs. 110 Crore for (i) transfer of share of Real Optimist India Ltd. (earlier known as MECL), (ii) sett....
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....ounted as project cost in the Financial Year ending on March 2012 (Rs. 50 Crore and balance Rs. 59.60 Crore in the Financial Year 2013). 11. The assessee also provided the details of (i) Civil Suit No. 758 & 759/2011 filed by Reddy Group for cancellation of development agreement preparing for possession of land including permanent injunction for development and sale of property, wherein Reddy Group made Sub- Registrar, Thane, Architecture, Chartered Accountant, Navi Mumbai Municipal Corporation, Cosmos Bank Ltd. and Registrar of Companies and Directors of Haware Group and sister concern as a parties to the Civil Suit. (ii) The Occupancy Certificate issued by Navi Mumbai Municipal Corporation was stayed on 08.12.2011 on the application dated 03.12.2011 filed by Rohit Reddy. Copy of public notice issued by issued by Reddy Group issued dated 19.03.2012 published in Times of India warning the public at which so as not entered into transaction with Haware Infrastructure in respect of Plot No. 47, Sector 30A, Vashi, Navi Mumbai. The details of status qua order granted for Civil Suit No. 758/2011 by Civil Judge (Senior Division, Thane). The details of payment made in pursuance of agree....
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....re of the company sans the liability as per books was insignificant. No third party could have paid more beyond the face value of shares, as the share did not have intrinsic value since the development right was already transferred. The claim of Reddy's group of capital gain of share should have been verified in the backgrounds of facts, plethora of documents and various cases filed and settled by the parties. The assessee paid consideration for transfer of share of Real Optimist India Ltd. (supra), settlement of all pending issues /disputes in various Forums, acquisition of clear development right regarding the project in order to buy peace. The assessee also stated that as stated in reply dated 09.03.2015 as also assuming that it was a capital receipt in the hand of recipient i.e. under both the circumstances, the assessee-company is concerned, the payment is necessarily, solely, explicitly and only for the purpose of betterment of its development right which was wrongfully denied by Reddy's and under duress to get rid of various disputes, as the prohibitory order of the Court for getting Occupancy Certificate, the payment was made thereof has to be inevitably nothing but a reven....
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....ating third right and to maintain status qua vide stay order dated 13.12.2011. The said order was vacated only on 14.01.2012. No revenue was recognized in the Financial Year ending on 31.03.2012. The revenue was recognized for the Financial Year ending on 31.03.2013. The submission of assessee was not accepted by Assessing Officer. The Assessing Officer concluded that the assessee received Occupancy Certificate during the relevant previous year. Once the project is completed and Occupancy Certificate is obtained. The Assessing Officer further concluded that it is clearly established that once Occupancy Certificate is obtained in respect of any project, the project must have completed in all practical purpose. As the assessee has obtained Occupancy Certificate, nothing is left to establish that project has already completed before the date of issuance of Occupancy Certificate by Navi Mumbai Municipal Corporation. The Assessing Officer further concluded that the assessee simply delayed the revenue recognition on the ground that there was dispute and that matter was sub-judice before Civil Judge, Thane. The ld. CIT(A) concluded that in his opinion, even if, there is dispute, cannot af....
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....ect the assessee company received advances from various prospective buyers against sale of various units in the project. The breakup of closing balance as on 31st March 2010, 31st of March 2011, 31st March 2012 and 31 March 2013 was provided to the assessing officer. Unfortunately, the founder promoter Directors of both the companies i.e. assessee as well as of MECL expired. The remaining shareholders and directors of MECL finding an opportunity of unfair advantages refused to acknowledge the un-registered agreement, acted upon earlier by both the parties in the regime of its founder promoters / shareholders. This episode give rise to the serious dispute, which multiplied due to the claims and counter claims and drives to many areas such as Accounts, Company Law matters, Contracts filing of Criminal Complaints and Civil Suits. As a result of dispute and a number of complaints were filed against the assessee. The assessee company has already spent huge amount on development, thus, the assessee was on a defensive stand due to an arm-twisting tactics of the Reddy's family. The assessing officer as well as learned CIT (A) was provided the copy of the development agreement and the detai....
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....ly agreed to withdraw all the suits, complaints, petitions and to release the project for further commercial exploitation by the assessee company. 19. The learned AR for the assessee further submits that as an incidental, commercial requirement share Reddy's family owned company MCPL of worth Rs. 40.00 lakhs were also surrendered by Reddy family, they having achieved their ulterior motive of upfront cashing their proud of flesh. Out of which Rs. 109.60 crore towards acquisition of development rights regarding the plot of land and sum of Rs. 39.99 lakh (399900 Share x Rs. 10/-) was paid for a consideration of acquisition of the balance shares from Reddy family. The shares of company had no significant value having an agreed to give clean project to the assessee company. However, as a matter of convenience the value of shares was arrived at an aggregate value of Rs. 39.99 lakhs. The valuation of Rs. 10/- per share was adopted as per Rule 11UA of Income -tax Rules 1962. The acquisition of share of MECL by the assessee from Reddy family was only incidental for smooth handling and exploitation of the project fantasy which had received occupation certificate but not a single sale cond....
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....ess, without which the business could have come to a standstill. In the receipt executed by the family members of Reddy's are in respect of development rights of plot No 47 Sector 30-A Vashi, Navi Mumbai. The lower authorities were incorrect in appreciating the above facts while interpreting the settlement document. 21. The learned AR further submits that if the apparent is not real, then the onus is on the person who alleges to do so. The learned Commissioner (Appeals) merely relying on the para 6(d)(iii) of the agreement to arrive at a conclusion that entire consideration was paid for purchase of share by ignoring the facts mentioned in the complete agreement and the facts of the case. Therefore, the conclusion of learned Commissioner (Appeals) is not correct. 22. The learned AR of the assessee in his without prejudice to his earlier submissions submits that the plot underneath development of fantasy project was allotted to MECL by CIDCO. After the allotment of said plot the said company was not able to even pay full consideration to CIDCO and to make construction on the said plot. Thus, vide unregistered development agreement dated 27th September 2003 the said MECL entered....
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....) it was held by Hon'ble Supreme Court that the expression wholly and exclusively laid out or expended for the purpose of business need not necessarily be construed for the purposes of earning profits. For the purpose of business is wider than the scope of expression for the purposes of earning profits. Its range is so wide, it may take in not only the day to day running of a business and for protection of its assets and property from expropriation coercive process or assertion of hostile title. Further, in Meenakshi Mills Ltd. (63 ITR 207 SC) the Hon'ble Supreme Court held that the expression for the purposes of business is wider than the purpose of earning income. The former would include within its scope expenditure incurred on the grounds of commercial expediency. In Dalmia Jain Co. Ltd. (81 ITR 754 SC), the Hon'ble Supreme Court held that where litigation expenses are incurred by an assessee for the purposes of creating, curing or completing the assessee's title to capital, then the expenditure incurred must be considered as capital but if litigation expenses are incurred to protect the business of the assessee they must be considered as revenue expenditure. 24. It was ....
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....led to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying real test of human probabilities. 25. The ld. AR also referred the decision of Hon'ble Bombay High Court in the case of CIT V/s. Chemosyn Ltd. (371 ITR 427), wherein it has been held that "Due difference between groups, assessee company was directed to buy 34 per cent of shareholding of one of warring group, as said expenditure was incurred only to enable smooth running of business, it was a deductible expenditure". 26. It was argued that in this case the dispute is between the assessee and the shareholders of the Mohan Entertainment Pvt. Ltd. from whom the assessee has acquired the development rights. The ld. AR submits that Hon'ble Madras High Court in the case of CIT V/s. Sarada Binding Works, (102 ITR 187), held that in order to decide whether some particular expenditure of a trader should be brought into account, four tests, similar to those considered in relation to receipts, should be applied. First, is the expenditure wholly and exclusively laid out for the purposes of the trade. If not, it will be excluded. Secondly, is the expenditure of revenue....
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....ain status-quo till disposal of suite No.758 of 2011. 237 - 239 16. Copy of Public Notice dtd.29.02.2012 issued by Reddy family in the Times of India, Hyderabad and later on, on 29.03.2012 issued in the Times of India, Mumbai, cautioning people not to enter any agreements with the assessee in respect of the property - Fantasia. 240 17. Copy of the application dtd.14.12.2012 & Prayer filed by Mohan Entertainment Co. Ltd. & Reddy Family in special civil Suit No.: 758/2011 (City Civil Judge, (SD) Thane at Thane Court) withdrawing the suit filed against the assessee and its Directors. At Page 242 on 14.12.2012, the Judge allows the plaintiff to withdraw the suit. 241 - 246 18. Copy of the application dtd.14.12.2012 in City Civil Suit No.: 759/2011 filed by filed by Mohan Entertainment Co. Ltd. & Reddy Family in special civil Suit No.: 759/2011 (City Civil Judge, (SO) Thane at Thane Court) withdrawing the suit filed against the assessee and its Directors. At Page 248 on 14.12.2012, the Judge allows the plaintiff to withdraw the suit. 247 - 252 19. ....
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....ion has to be taken in each case on the facts and surrounding circumstances. 30. During the assessment, the Assessing Officer received letter from DIT (Inv.)/133A/2014-15 dated 05.03.2015 that assessee has claimed revenue expenditure of Rs. 109.60 Crore as revenue expenditure (for F.Y. 2011-12 Rs. 49.65 Crore and F.Y. 2012-13 Rs. 59.94 Crore) toward project cost. It was noted by Assessing Officer that the said payments were made for acquisition of share of MECL. On verification of break-up of work-inprogress furnished during the course of assessment, the Assessing Officer recorded that assessee claimed payment of Rs. 50.84 Crore for payment of development rights from Reddy Group. The assessee was issued showITA cause notice as to why the claim of Rs. 50.84 Crore should not be disallowed. The assessee filed its detailed reply dated 25.03.2015. The sum and substance of reply is the same as explained by ld. AR of the assessee in his submission. The assessee claimed that the expenses were incurred exclusively, solely and only for the purpose of betterment of its development right which were wrongfully denied by Reddy's after the death of their founder Director. The assessee under du....
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....uisition of shares, it is the payment for capital investment and therefore, capital in nature. The assessee explained that compensation of Rs. 110 Crore was paid to ensure that it run the project fantasia smoothly and to acquire the share of MECL and that all complaints lodged against the assessee were withdrawn. The reliance by assessee on case law of Hon'ble Bombay High Court in Chemosyn Ltd. (Appeal No. 361 of 2013) was also distinguished by ld. CIT(A) holding that facts of the said case are different. Issues involved in the said case were of family settlement, however, in the present case, the additional amount incurred to acquire further step in MECL. The other case law relied by assessee in Empire Jute Company Ltd. (1980) 3 Taxman 69 (SC) was also distinguished. The ld. CIT(A) concluded that issue in that case was the nature of purchase of looms was capital or revenue, whereas in the present case, the issue is complete acquisition of share of another group in assessee's favour. Thus, the ld. CIT(A) concurred with the finding of Assessing Officer. 32. Now let us examine the facts of the case and the circumstances under which assessee paid/incurred the expenses of Rs. 50.84 ....
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....ts. Its range is so wide, it may take in not only the day to day running of a business and for protection of its assets and property from expropriation coercive process or assertion of hostile title. 34. Further, in Meenakshi Mills Ltd. (supra) the Hon'ble Supreme Court held that the expression for the purposes of business is wider than the purpose of earning income. The former would include within its scope expenditure incurred on the grounds of commercial expediency. 35. In Dalmia Jain Co. Ltd. (supra), the Hon'ble Supreme Court held that where litigation expenses are incurred by an assessee for the purposes of creating, curing or completing the assessee's title to capital, then the expenditure incurred must be considered as capital but if litigation expenses are incurred to protect the business of the assessee they must be considered as revenue expenditure. 36. The Hon'ble Delhi High Court in South Asia Industries Pvt. Ltd. (supra) held that expenditure incurred to protect business and reputation of the company is a amounts spent for safeguarding and saving the assets of the assessee's business and keeping it on a sound footing expenditure incurred for this purp....
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....ductible expenditure". 42. Keeping in view the above referred case law vis a vis the facts and surrounding circumstances of the present case. We are of the view that assessee incurred/paid expenses of Rs. 50.84 Crore for removing encumbrances, settlement of pending issues in various legal Forums, acquisition of clear development right pertaining to clock underneath the project Fantasia. Therefore, the disallowance made by Assessing Officer and reducing the same from work-in-progress was not justified. Thus, he we set-aside the order of lower authorities and direct the Assessing Officer to treat the expenses as Revenue Expenditure. In the result, the grounds of appeal raised by assessee are allowed. 43. In the result, appeal of assessee is allowed. ITA No. 1185/Mum/2018 by revenue 44. The ld. DR supported the order of Assessing Officer. The ld. DR for the revenue submits that once the Occupancy Certificate was issued, the project was completed for all practical purpose. The assessee instead of offering the revenue in the year under consideration has offered in subsequent Assessment Year. Thus, the ld. DR strongly relied upon the order of Assessing Officer. 45. On the ....
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....dy also filed application before NMMC for cancellation of Occupancy Certificate and the operation of Occupancy Certificate was also stayed by NMMC. The ld. CIT(A) after considering the explanation and written submission furnished by assessee observed that by specific order of City Civil Court dated 13.12.2011, the assessee was restrained and directed to maintain status qua in respect of project till the disposal of appeal (in Civil Suit) by Reddy Group and MECL. By following the order of Civil Court, the assessee did not recognize the revenue which would lead to contempt of court. The ld. CIT(A) after considering the facts of the case and the surrounding circumstances concluded that the assessee could not carried out the activities of buy or sale or lease or any other related activities of the project and had to maintain the status quo. The Occupancy Certificate was itself in litigation. The assessee was not in a position to carry out any activities in the project due to direction of Civil Court to maintain status quo. On the above observation, the ld. CIT(A) concluded that assessee has rightly not recognized the revenue and directed the Assessing Officer to delete the addition. ....