TaxTMI 
TaxTMI 
2022 (11) TMI 1291
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....pleted the assessment u/s. 143(3) on 27.03.2013 determining the total income of assessee at Rs. 8,22,43,320/- by computing as under:- Income Returned Rs.3,43,74,506 Add: Addition on account of Profit arrived as per revenue recognition method as discussed above Rs.3,36,54,704/- Disallowance of expenditure written off Rs.7,57,24,129/- Less:Brought forward losses: Rs.14,37,53,339/- A.Y.2007-08 :3,38,34,078/- A.Y 2008-09 :1,67,36,751/- A.Y 2009-10 :1,09,39,190/- Rs.6,15,10,019/- Assessed Income Rs.8,22,43,320 3. So far as the disallowances of expenditure written off at Rs. 7,57,24,129/- is concerned, the AO noted from point no. 10 of the notes on accounts that during the year under consideration the assessee company surrendered the 'Neighborhood apartments' project and the total cost incurred aggregating to Rs. 7,57,24,129/- had been considered by the assessee ....
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.... the assessee. The assessee company has incurred the initial expenditure towards the development of the land and surrendering it to its sister concern. It is a colourable device adopted by the assessee company to reduce the profit from 'Neighborhood Villas project' by booking the expenditure on the initial development on 'Neighborhood Apartments Project' in the hands of the assessee and surrendering the said project to its sister concern. Thus the expenditure of Rs. 7,57,24,129/- incurred by the assessee company can not be considered as incurred for the purpose of business of the assessee since the partially developed land has been surrendered/transferred to its sister concern and no longer the project exists in the hands of the assessee company. 3) The expenditure incurred by the assessee company on the development of Neighborhood apartment land does not pertain to the year under consideration. The expenditure of Rs. 7,57,24,129/- was a prior period expenditure which was incurred by the assessee in earlier years and the same cannot be allowed as expenditure in the year under consideration. 4) Tile said expenditure incurred by the assessee is capit....
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....e appellant has given a detailed submission along with balance sheet, profit and loss account, etc., explaining the circumstances under which the project was abandoned, and the same were considered. The main explanation was that the commercial expediency to give up its rights for development of apartment projects and surrendered the same in favour of the land owner i.e. M/s. Fortune Constructions Pvt. Ltd. vide a supplementary agreement dated 07.01.2010, which was verified and considered. 4.2 With regard to Rs. 13 crores of security deposit which was refund of security deposit from M/s. Fortune Constructions Pvt. Ltd. as per Schedule 8 of Balance Sheet, this amount was decreased by 13 crores from Rs. 40 crores as submitted by the appellant, This fact was verified and found that as per Schedule 8 of balance sheet as on 31.03.2009, the security deposit was of Rs. 80 crores and as on 31.03.2010 it was reduced to Rs. 67 crores, Therefore, the expenditure incurred till date amounting to Rs. 7,57,24,127/- which was written off during this year to be treated as loss arising out of abandoning of project crystallized during this year. Therefore, all the submissions of the appellant....
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.... submitted that the Hon'ble High Court in the said decision has held that expenditure incurred for construction/acquisition of new facility which was subsequently abandoned at work-in-progress stage was allowable in year of write off as incurred wholly and exclusively for purpose of assessee's business. 12. Referring to various other decisions copies of which are filed in paper book, the ld. counsel for the assessee submitted that the order of the ld. CIT(A) being in accordance with law should be upheld and the grounds raised by the revenue should be dismissed. 13. We have considered the rival arguments made by both the sides, perused the orders of the AO and ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case made addition of Rs. 7,57,24,129/- being expenses written off on the ground that M/s. Fortune Construction Pvt. Ltd. has refunded an amount of Rs. 13 crores from the security deposit paid by the assessee company under the project development agreement. Further, as per the agreement with M/s. Fortune Construction Pvt. Ltd., M/s. Fortune Construction Pvt. L....
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....t bungalows in the name of "Neighbourhood Houses" and (ii) balance land admeasuring 13.25 acres for development of Multi-storied Apartments by name "Neighbourhood apartments' Two separate plans. to that effect, were prepared and necessary sanctions were obtained Thus, the Appellant had planned two distinct projects to cater to the needs of two different sections of customers. Further, as required by the said Sub-development agreement, the Appellant paid a sum of Rs. 40,00,00,000/(Rupees forty crores only) to Fortune Constructions P Ltd. towards Refundable Security Deposit for the entire project. 2.3. Subsequently, the Appellant Company started developing the Independent bungalows project in right earnest as the demand for such segment was higher and the income therefrom had been declared in the returns of Income filed from year to year. However, the Apartments Project viz., "Neighbourhood Apartments" could not be pursued due to acute recession in the Real Estate Sector, that had set in subsequently, which was more pronounced in this particular segment. Considering the escalation in costs and the downfall in demand, it was decided not to go ahead with this project as it....
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.... conditions prevalent during the relevant period, and as such it was commercially expedient to give up its rights in lieu of the refund of' security deposit rather than to go ahead with the project. Under such circumstance, by no stretch of imagination neither the Appellant could have made a claim in respect of the cost incurred on development nor would the land owner be willing to pay any amount on that account. In this regard. the Appellant further submits that the learned Assessing Officer had completely misread and mis appreciated the purpose and intent of reference to "cost incurred on development" in clause 3 of the agreement. The sole object of such reference was only to make it abundantly clear that the Appellant was not entitled to any amount, except the refund out of security deposit, and thereby to avoid any disputes in that regard. The amount received from Fortune Constructions P Ltd. represents refund of Security Deposit only. This fact is also evident from Schedule-8 to Balance Sheet as on 31.03.2010 as per which the amount of Security Deposit as on such date was less by Rs. 13,00,00,000/- than the amount as on the corresponding date of the preceding year. ....
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....2.2011 (vi) CIT Vs Mukta Arts P Ltd. (Born HC) in ITA No. 584 of 2001 dt. 25.08.2008 2.6. The Appellant further submits that the observation of the learned Assessing Officer, that both Omega and Fortune were sister concerns and the surrender of rights by the Appellant to its sister concern was a colourable device to reduce its profits, is absolutely misconceived and misplaced. While coming to such conclusion, he completely failed to appreciate the facts of the case in their right perspective. At the outset, this is to submit that the allegation that both the companies were sister concerns was factually incorrect. In fact, about 65% of the paid-up capital of the Appellant Company was held by FDI investors, who had no interest, what so ever, in Fortune Constructions P. Ltd. No prudent investor would permit diversion of his share of profit to any other entity in Which he was not interested, Further, it was from Fortune Constructions P Ltd., which was in absolute ownership of 100% rights in the property in question, from which the rights of development were acquired by the Appellant Company. On deciding to abandon the Apartment Project, the Proportionate rights had to....
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.... was selected for scrutiny and accordingly notices were issued by the Assessing Officer. In response to the notices, the AR of the assessee appeared and filed the information. After going through the information, the Assessing Officer completed the assessment u/s. 143(3) of the I.T. Act by making additions of Rs. 2,55,05,608/- towards disallowance of customer settlement claims, Rs. 3,63,51,366/- towards deposits written off, Rs. 3,04,461/- towards loss on sale of fixed assets and Rs. 69,92,428/- towards provision of doubtful advances. The AO accordingly assessed the total income at Rs. 19,50,967/-" 18. In appeal, the ld. CIT(A) gave part relief to the assessee wherein she deleted addition of Rs. 2,55,05,608/- made by the AO towards disallowance of customer settlement claim and Rs. 3,63,51,366/- on account of deposits written off. So far as the other additions are concerned the ld. CIT(A) gave part relief to the assessee. 19. Aggrieved with such order of the ld. CIT(A), the revenue is in appeal before the Tribunal by raising the following grounds. 1. On the facts and in the circumstances of the case, and in law, the CIT(A) erred in deleting the disallowance of Custome....
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....egal notice in respect of CVS Enterprises was received in August, 2012 itself. But, the claim of the assessee cannot be accepted, as a dispute regarding contractual liability will be only a contingent liability. The liability arises only when the dispute is settled or finally adjudicated. He referred to the decision of Hon'ble Gujarat High Court in the case of Alembic Chemical Works Ltd. Vs DCIT (266 ITR 47) where it is held the in case of an assessee following mercantile system of accounting, a liability is said to be properly incurred when the dispute between the parties is amicably settled or finally adjudicated, where the liability in question is not a statutory liability. Referring to various other decisions, he held that the amount of Rs. 2,55,05,608/- is a contingent liability and therefore, he disallowed the same. 24. Before the ld. CIT(A) the assessee submitted that (i) The direct and intimate connection between the claim and the business has not been denied by the Assessing Officer. (ii) It was not the case of Assessing Officer that there was no settlement of the claims, by the appellant pursuant to the legal process arising out of the contractual liability in the ....
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....13 and further order was passed on 10-10-2013. Therefore, this settlement has arisen only in the F.Y. 2013-14 relevant to A.Y. 2014-15. In this regard, the appellant's submissions that keeping in view of the appellant's nature of business and by following mercantile system of accountings, therefore, the liability debited during this year to be considered as expenditure for this assessment year. Therefore, the submissions of the appellant along with case laws relied upon by the appellant were considered and hence, the addition made by the Assessing Officer deleted. 28. Aggrieved with such order of the Tribunal, the revenue is in appeal before the Tribunal. 29. The ld. DR strongly objected to the order passed by the ld. CIT(A) deleting the addition. Referring to the para 4.1 of the assessment order, the ld. DR submitted that the AO had given reasons while making the addition and the ld. CIT(A) without addressing the various issues raised by the AO deleted the addition which is not justified. He accordingly submitted that the grounds raised by the revenue should be allowed. 30. The ld. counsel for the assessee on the other hand heavily relied on the order of the ld. C....
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.... paragraph. It is the submission of the ld. CIT-DR that this being a contingent liability no deduction should be allowed for this year and deduction, if any, can be allowed only in AY 2014-15. It is the submission of the ld. counsel for the assessee that the order was available at the time of finalization of accounts and the rate of tax for both the assessment years i.e. 2013-14 & 2014-15 being same, the order of the ld. CIT(A) is in accordance with the law. 32.1. We find force in the arguments advanced by the ld. Counsel for the assessee. It is an admitted fact that the direct and intimate connection between the claim and business is not in dispute before the lower authorities. The settlement of the claim by the assessee pursuant to the legal process arising out of the contractual liability is in the course of carrying on of its business and the same is also not in dispute. Further, the claim being revenue in nature is also not disputed by the AO. It is also relevant to mention here that the accounts were duly audited and signed by the auditor on 29.09.2013 before which the order of the State Consumers Disputes Redressal Commission was available and therefore, in view of the gu....
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.... not completed within the time frame and both the parties have decided to enter this agreement for (i) and relinquishment/surrender of rights of Omega with respect to the Scheduled land in favour of Platinum Properties and refund Deposit of Rs. 13,67,10,000/-. The same has been effected during the year under consideration. We are herewith enclosing both the agreements for your verification and consideration - Annexure I." 35. On being asked by the AO to justify the claim, the assessee subsequently filed a note on Sunk cost and breakup of loss of deposit for surrendering of right. With regards to the Sunk cost, the assessee reduced the amount of Rs. 2,19,94,351/spent on CASA " Project from the closing work-in-progress as a result of surrender of development rights to Platinum Properties Pvt. Ltd. The assessee filed the details of various expenses incurred on this project. With regards to the Loss on deposit for said surrender of rights, the assessee furnished the following details: Proje ct Name Area Paid to Platinum Received 12-13 Balance in PPPL Loss shown in Omega Proportion Casa II 24.06 9 ....
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.... loss to the assessee in respect of the surrender of development rights of the project (CASA II) claimed is as under: i) Sunk Cost i.e. expenditure towards Work-in-progress Incurred by the assessee & reduced from CI. WIP - Rs. 2,19,94,351 ii) Loss of Deposit on surrender of rights - Rs. 3,63,51,366 On the whole, if the project is viewed, the assessee had given interest free deposit to Platinum Properties Pvt. Ltd. and then incurred expenditure to the extent of Rs. 2.20 crores which has been written off as sunk cost. Accordingly the assessee has incurred substantial loss ready. Under these circumstances, no prudent business concern will agree for further loss by foregoing a part of the deposit. d) During the course of assessment proceedings, the assessee was asked to file confirmation from Platinum Properties Pvt. Ltd. in respect of surrender of part of the deposit and also that the same has been offered as income by them since the surrender of deposit of Rs. 3,63,51,366/- by the assessee is the gain for Platinum Properties Pvt. Ltd. and accordingly, partakes the character of income in their hands. However, the assessee has not filed any such conf....
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....ered as Doc. No. 4758/2012 in the office of Sub-Registrar, Medchal. vi) Pursuant to the cancellation of the development rights, as against the deposit amount of Rs. 17,80,61,366/- the developer returned i only an amount of Rs. 14,17,10,000/-. The balance amount of deposit has not been returned by the developer. 38. It was submitted that the assessee deals in the real estate business and parting of refundable deposit, when development agreement is entered into is part of the business exigency, and the prevalent practice in the commercial sphere of real estate business. In the event the project is delayed, or for some reason or other the project is abandoned, foregoing a part of deposit in the real estate business is common. The deed of cancellation of surrender of rights is categorical in the preamble mentioned to the effect that the deposit amount refunded was only Rs. 13,67,10,000/-. As a point of fact further amount of Rs. 50 lakhs was received on 22.02.2013, i.e., after the cancellation of agreement entered into because of the persuasion by the assessee. These factors substantiate that the developer agreed to forego the deposit to be received from the land owners on ....
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....A I and CASA II. CASA I pertains to 30 acres of land unit. CASA II, pertains to 24.069 acres of land unit. Both the lands are situated side by side and the land owners are different. There is a common development agreement for both the units put together, entered into on 11-05-2006. In terms of the development agreement, a refundable deposit of Rs. 40 crores was given for both the units put together. The break up of the deposit area wise is as under: CASA I 22,19,38,634 CASA II 17,80,61,366 40,00,00,000 42.1. We find from the details so furnished that CASA I, project was implemented and carried. The development rights of project CASA II, were surrendered in terms of registered document dt. 31-10-2012, duly registered as Doc. No. 4758/2012 in the office of Sub-Registrar, Medchal. Pursuant to the cancellation of the development rights, as against the deposit amount of Rs. 17,80,61,366/- the developer returned only an amount of Rs. 14,17,10,000/-. The submission of ld. counsel for the assessee that the balance amount of deposit has not been returned by the developer has not been controverted by the revenue. 42.2. The deed of cancellation of surrender o....