TaxTMI 
TaxTMI 
2019 (5) TMI 1691
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.... 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. 114.84 crores on account of Revenue recognition from the Fantasia b....
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....ing 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, Sector 30A, Vashi, Navi Mumbai. As per the agreement, the assessee has to pay 3/4th of the le....
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....h 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) settlement of all pending issues in various Forums, (iii) acquisition of acquire development right regarding the plot in order to buy peace. As a res....
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.... 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 agreement dated 15.02.2012 and details of withdrawal of different Suits/litigations in pursuance of agreement dated 15.02.2012. The assessee also contended that perusal of various documents made it clear that the complete project namely Fantasia handled in all respect including financia....
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....hould 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 revenue expenditure. 14. The contention of assessee was not accepted by Assessing Officer. The Assessing Officer observed that DIT (Inv.), Hyderabad conducted a survey under section 133A in Muthu Rohit Reddy (Reddy's Group), in the said survey, the enquiry was also made from assessee-compa....
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....ssee 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 affect the status of project completion. The Assessing Officer worked out the profit of project in the following manner: "Agreement value of sale Rs. 153,75,22,278 WIP shown in the books Rs. 89,74,96,057 Less: Profit discussed in Para-5 Rs. 50,84,00,000 Rework....
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....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 details of various litigations launched by the Reddy family. 18. The learned AR submits that in the Civil Suit filed before Civil Judge Senior Division vide Suit No. 758 & 559/2011by Reddy family. The ld. Civil Judge granted injunction order on 14.12.2011, wherein, the assessee was restrained from creating third party right and ....
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....ered 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 condition consideration could be received appropriated due to various legal obstructions. As per substituted agreement dated 15th February 2012 between assessee group and Reddy group the assessee agreed to pay sum of Rs. 110 Crore to Reedy group a lump sum compensation, details of which were provided to the lower authorities. Out of....
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....ed 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 into agreement with Assessee Company to assigned development right on the plot on the term agreed as per the agreement. The assessee company, thereafter started construction in full speed and also sold the unit to various parties from time to time and received advances. When the project was near completion the Reddy family disputed t....
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.... 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 submitted by ld. AR of the assessee that Hon'ble Delhi High Court in South Asia Industries Pvt. Ltd. (132 ITR 144 Del.) 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 incu....
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....ps, 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, and not of a capital in nature. Unless it is of a revenue nature it will be excluded. Thirdly, may tax be deducted and retained on payment. If so, it will be excluded. Finally, is there some other special provision of the Income-tax Act which permits, or requires, the payment to be brought in or left out of accounts. 27. The ld. AR of the ....
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....o.: 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. Copy of the Acknowledgement and Computation of Income for AY 2013-14, including revised return of Income. 253 - 256 20. Audit financial statement for the year ended March 2013. 257-279 21. Chart pertaining to breakup of agreement values of Rs. 153.75 Crores considered by the AO In the assessment order. 280 - 301 22. Copy of Assessment Order for AY 2013-14. 302 - 319 28. On the other hand, the ld. Departmental Representative (DR) for the revenue supported the order of lower authorities. The ld. DR further submits that during the su....
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....ed 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 duress and to get rid of various cases as well as prohibitory order passed by Civil Court and Occupancy Certificate was stayed by Administrator of Navi Mumbai, the payments were made, it was nothing but revenue expenditure. The explanation of assessee was not accepted by Assessing Officer. The Assessing Officer concluded that in the survey conducted under section 133A on the Reddy Group, the investigation wing came to conclusion that the payment is nothing but payment made for acquisition of share of MECL. The Assessing Officer also recorded the bifurcation of payments received by va....
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....sent 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 crore was made by the assessee. From the facts as narrated above, it is brought on record that complete project namely Fantasia on the plot was handled including financial, contractual, legal and other technical inputs. There was no significant value remained with MEPL. Due to dispute between the Reddy Group and assessee group, Civil Court restrained the assessee from selling unit or creating any third party interest. The disputes were ultimately settled on payment of Rs. 110 Crore by assessee group to Reddy Group. The Reddy Group while acknowledging the receipt of, part of settlement ....
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....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 purpose is allowable expenditure. 37. Further, Hon'ble Delhi High Court in Gopaldass Estates & Housing Pvt. Ltd. (supra) held that compensation paid by the assessee developer to allotees of commercial spaces for surrender of their rights, therein could not be set to be disallowed on the grounds of such payments having being made for extraneous considerations. Assessee has a plausible explanation for making such payments of compensation to protect its business interest. While it is true that there was no contractual obligation to make payment, it is plain that the assessee was also looking to buil....
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....enses 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 other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee submits that the assessee in the assessment order has clearly recorded that the assessee was consistently following the Project Completion Method for revenue recognition. In earlier years, the expenses on project is taken but work-in-progress. The ld. AR further submits that assessee received the Occupancy Certificate of project on 21.10.2011 issued by NMMC, however, the same was stayed by NMMC on 13.12.2011 on the application/objection made by Rohit Reddy vide application dated 18.12.2011. The ld. AR of the asse....