Expenditure towards abandoned project is available as revenue expenditure

DCIT Vs Omega Shelters Private Limited (ITAT Hyderabad)

ITAT Hyderabad 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 business.

Facts-

AO noted from 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 company as a sunk cost and debited to profit and loss account. The said expenditure of Rs.7,57,24129/- incurred by the assessee on the “Neighborhood Apartments” project was claimed against the gross profit of Rs.11,75,65,798/- earned by the assessee on the “Neighborhood Villas” project thereby reducing the profit from “Neighborhood Villas” project by Rs. 7,57,24,129/-.

AO was not satisfied with the explanation given by the assessee and made an addition of the amount of Rs.7,57,24,129/- to the total income of the assessee.

CIT(A) deleted the addition on the ground that the expenditure incurred on the abandoned project called Neighborhood Apartments is revenue expenditure and not capital expenditure. Being aggrieved, revenue preferred the present appeal.

Conclusion-

A perusal of the same shows that the assessee abandoned the project due to commercial expediency and in terms surrendered the same in favour of the land owner M/s. Fortune Construction Pvt.Ltd. Further, the amount of Rs. 13 crores refunded to the assessee towards security deposits is out of the security deposit of Rs. 80 crores as on 31.03.2009 which reduce to Rs.67 crores as on 31.03.2010. Nothing was produced by the revenue to controvert the submissions filed by the assessee before the ld.CIT(A) and the finding of the ld.CIT(A) on this issue.

We find the Hon’ble Madras High Court in the case of Chemplast Sanmar Ltd has held that where assessee company set up a new project which was subsequently abandoned, since new project was managed from common funds, control over all business units was in hands of assessee and there was unity of control, it could not be said that pre-operative expenditure incurred by assessee was on a new line of business, thus, same was to be allowed as revenue expenditure.

We find the Hon’ble Calcutta High Court in the case of Binani Cement Ltd 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 assesee’s business.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

The above two appeals filed by the revenue are directed against the separate orders dated 20.01.2017 and 16.03.2018 of the Learned Commissioner of Income Tax (Appeals)-4, Hyderabad relating to AYs 2010-11 & 2013-14 respectively. For the sake convenience both these appeals were heard together and are being disposed-of by this common order.

ITA NO.612/HYD/2017 for AY 2010-11

2. This is the second round of litigation before the Tribunal. Facts of the case, in brief, are that the assessee is a company engaged in the business of real estate development and construction. It filed its return of income on 15.10.2020 declaring nil income, after setting off of brought forward losses of Rs.3,43,74,506. The AO completed 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:-

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 company as sunk cost and debited to profit and loss account. The said expenditure of Rs.7,57,24129/- incurred by the assessee on “Neighborhood Apartments” project was claimed against the gross profit of Rs.11,75,65,798/- earned by the assessee on “Neighborhood Villas” project thereby reducing the profit from “Neighborhood Villas” project by Rs. 7,57,24,129/-.

3.1 During the assessment proceedings the assessee produced a copy of the supplementary development agreement dated 07-01­2010 entered into with M/s Fortune Constructions (P) Ltd as per which the assessee company surrendered its development rights in favour of M/s Fortune Constructions (P) L.td with respect to the land admeasuring 13.25 Acres covered under the multi storied apartment blocks viz.. Neighborhood apartments and an amount of Rs 13 crores was refunded to the assessee. The AO noticed that M/s Fortune Constructions (P) Ltd is a sister concern of the assessee company. The asssessee submitted that as the expenditure was incurred by the assessee company in the course of its business, the same is debited to the P&L A/c.

4. However, the AO was not satisfied with the explanation given by the assessee by recording the following reasons:

“ However the assessee’s contention is not acceptable for the following reasons:

1) It is noticed from the Para NO 3 (Page No 4) of the supplementary development agreement dated 07-01-2010 that M/s Fortune Constructions (P) Ltd has refunded amount of Rs 13 crores from the security deposit paid by the assessee company under the project development agreement and it is also mentioned that this amount of Rs 13 crores include the cost incurred on development by the assessee in apartment land. Thus it is clear from the said provision of the supplementary development agreement dated 07-01-2010 that the entire cost incurred by the assessee company on the Neighborhood apartment land was duly reimbursed by M/s Fortune Constructions (P) Ltd.

2) It is mentioned in Para NO 5 (Page No 4) of the supplementary development agreement dated 07-01-2010 that M/s Fortune Constructions (P) Ltd would undertake development of residential multi­storied apartment buildings/blocks on the Apartment land. From the above provision it is clear that the project will be continued by M/s Fortune Constructions (P) Ltd, ‘which is sister concern of 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 capital in nature as the assessee had enduring benefit from the development of land and the same is not an allowable expenditure as per section 37(1) of the IT Act.

5. He accordingly made addition of the amount of Rs.7,57,24,129/- to the total income of the assessee.

6. In appeal the ld.CIT(A) deleted the addition on the ground that the expenditure incurred on the abandoned project called Neighborhood Apartments is revenue expenditure and not capital expenditure. The revenue filed appeal before the Tribunal and the Tribunal vide ITA No.1244/Hyd/2014 order dated 03.02.2016 for AY 2010-11 restored the issue to the file of the ld.CIT(A) by observing as under:-

6. We have considered the submissions of the Learned Departmental Representative and perused the material on record. Grounds raised by the Revenue challenge the direction of the CIT(A) deleting addition of Rs.7,57,24,129. We find from the order of the CIT(A) that while deleting the impugned addition, the Commissioner had not referred to any material brought on record in support of the contention that refund of security deposit of Rs.13 crores by M/s. Fortune Constructions has nothing to do with the expenditure incurred on the project, which is abandoned in favour of M/s. Fortune Constructions Ltd. The CIT(A) had not discussed the circumstances under which the project was abandoned in favour of the said company. Furthermore, the CIT(A) also failed to examine whether the refund of deposit of Rs.13 crores had anything to do with the expenditure incurred. Without discussing any material, he simply accepted the written submissions filed by the respondent-assessee before him, which amounts to total non-application of mind, and therefore, fails to fulfil the requirements of a reasoned/speaking order. Therefore, we are of the considered opinion that interests of justice would be met, if the matter is restored to the file of the CIT(A) for de novo disposal of the appeal in accordance with law. We do so accordingly and direct the learned CIT(A) to dispose of the appeal before him afresh in accordance with law and after giving reasonable opportunity of hearing to the assessee and by passing a speaking order.

7. The ld.CIT(A), therafter deleted the addition by observing as under:-

4.1 I have carefully considered the ITAT order and the detailed reply and submissions of the appellant. The 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 ti1l 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 accepted and the addition made by the Assessing Officer is deleted.

8. 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 expenditure incurred till date amounting to Rs.7,57,24,127/- which was written off during the year by holding that the expenditure is to be treated as loss arising out of abandoning of project crystallized during this year.

2. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing be restored.

9. The ld. DR challenged the order of the ld.CIT(A) in deleting the addition made by the AO. He submitted that the ld.CIT(A) without giving any valid reasons has deleted the addition which is not justified under the facts and circumstances of the case. Referring to page no.12 and 13 of the assessment order the ld. DR drew the attention of the Bench to the findings given by the AO while disallowing the above expenditure. He accordingly submitted that the order of the ld.CIT(A) be set aside and the grounds raised by the revenue be allowed.

10. The ld. counsel for the assessee on the other hand strongly supported the order of the ld.CIT(A). He submitted that the entire four projects are under the control of common management and common directors. The assessee incurred the expenditure exclusively in the course of its business. He submitted that none of the submissions of the assessee has been contradicted by the revenue and the fact of abandonment of project is not disputed. Referring to the decision of the Hon’ble Madras High Court in the case of Chemplast Sanmar Ltd vs ACIT reported in 412 ITR 323, he submitted that the Hon’ble High Court in the said decision has held that where assessee company set up a new project which was subsequently abandoned, since new project was managed from common funds, control over all business units was in hands of assessee and there was unity of control, it could not be said that pre-operative expenditure incurred by assessee was on a new line of business. Thus, same was to be allowed as revenue expenditure.

11. Referring to the decision of Hon’ble Calcutta High Court in the case of Binani Cement Ltd. vs CIT reported in 380 ITR 116, he 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 assesee’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.Ltd. will continue the project, which is a sister concern of the assessee. It is also the case of the AO that the said expenditure incurred by the assessee is capital in nature as the assessee had enduring benefit from the development of land and therefore is not allowable expenditure. We find in appeal the ld.CIT(A) deleted the addition, the reasons of which have already been reproduced at para 6 of the order. We do not find any infirmity in the order of the ld. CIT(A). Before adjudicating the issue on hand, we would first like to reproduce the submission filed by the assessee before the ld. CIT(A), which is the basis for deleting the addition by the ld.CIT(A). The assessee had filed the following submission before ld. CIT(A) on this issue.

2.1. The Appellant Company entered Into a Development Agreement with Fortune Constructions P Ltd in respect of a piece of land admeasuring 49.111 acres in Sy. No. 169 to 179 situated at Gundlapochampally (Village), Medchal (Mandal), Ranga Reddy (Dt). This agreement, titled as Fortune Sub-development Agreement, was duly registered with the office of Sub-Reqistrar, Medchal, vide Document No.12562/06 dt.11.05.2006. Fortune Constructions P Ltd had 85% rights and interest in the said property, as on such date, by virtue of an earlier Development cum GPA Agreement, it had with the original land owners, registered vide Document No. 1601/2001 dt.31.01.2001 It is pertinent to mention here that the other owners, having 15% rights and interest in the lands in question, also sold all their rights and interest to Fortune Constructions P. Ltd for a valid consideration, vide an Agreement of Sale dt.31.07.2007. Thus, Fortune Constructions P Ltd had become the absolute owner in respect of the entire project land of 49.111 acres as on such date.

2.2. As per the terms of the Fortune Sub-development Agreement, the Appellant Company was to undertake the development of a gated residential township after preparing appropriate and suitable lay-out plans and obtaining necessary statutory approvals therefor. Accordingly, the Appellant Company formulated a scheme for development of independent bungalows; row-houses and multi-storeyed apartments in the name and style of “The Neighbourhood” project. Entire physically available land was divided into two segments (i) land admeasuring 35.42 acres for development of independent bungalows in the name of “Neighbourhood Houses” and (ii) balance land admeasuring 13.25 acres for development of Multi-storeyed Apartments by name “Neighbourhood aartments’ 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 was not in the commercial interests of the Appellant Company. To put it differently, the Appellant thought it commercially expedient to give up its rights, for development of Apartments Project, and accordingly surrendered the same in favour of the land owners i.e., Fortune Constructions P Ltd, vide a Supplementary Development Agreement dt. 07.01.2010.

2.4. The clauses of the Supplementary Development Agreement, relevant to the amount receivable on surrender of rights, are extracted hereunder,’ Para 6 at page 3 of Supplementary Agreement:

“Whereas, the Parties have decided to enter into this Supplementary agreement for the relinquishment/ Surrender of rights of Omega with respect to the Apartment Land and for the refund to Omega herein of an amount of Rupees thirteen crores only (Rs.13, 00, 00,000/) all inclusive as mutually agreed upon, and as confirmed by all the parties herein”

“Fortune herein has refunded an amount of Rupees thirteen crores only (13,00,00,000/-) from the Security Deposit (as defined in the Project Development Agreement paid by Omega to Fortune under the Project Development Agreement and this amount shall include the cost incurred on. the development by Omega in the Apartment Land. The Fortune has refunded the said amount vide Cheque No. 072320 dt. 05.10.2009 drawn on Tamilnadu Mercantile Bank Ltd. Secunderabad in full and final settlement for surrendering all their rights and the same is acknowledged by Omega herein. “

A combined reading, of para 6 on page 3 and clause 3 at page 4 of such agreement, leaves no room for any ambiguity that on surrender of the rights of Omega, with regard to the Apartment Project, all that Fortune Constructions P Ltd was required to do was to refund Rs.13,00,00,000/ (Rupees thirteen crores only) out of the total Refundable Security Deposit of Rs.40,00,00,000/- (Rupees forty crores) paid earlier by Omega to Fortune. As the refund of Rs.13,00,00,000/, out of the Security Deposit, was treated as full and final settlement, the Appellant was not entitled to any further amounts on account of costs incurred towards development. Further, it is pertinent to state here that the surrender of rights was at the instance of the Appellant Company, as it felt that the execution of the project was completely unviable, considering the unfavourable market 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.

2.5. With regard to the nature of expenditure, the Appellant Company humbly submits that it was engaged In the business of Real Estate and the project in question was taken up in pursuit or its regular business objects. As the expenditure on such project was incurred in the course of its regular business, it was revenue in nature. Further, such expenditure had not resulted in acquisition of any capital asset In fact, it was in the nature of stock-in-trade and, as such, recorded under the head “Inventories”. This fact is also substantiated by Schedule 5 to Balance Sheet wherein the expenditure in question was treated as WIP forming part of “Inventories” under “Current Assets”. Further, it is also not legally sustainable to deny the allowance of expenditure/ loss incurred in respect of the project given up by the Appellant, as the said decision was driven by commercial expediency. It’s a settled principle of law that the officer cannot sit in the armchair of the business man to decide as to the reasonableness or otherwise of the business considerations and consequent decisions. With regard to the year of allowability, this is to submit that it was the F.Y.2009-10 during which the Appellant Company, after a due consideration of its commercial interests, decided to give up the project and accordingly the expenditure incurred thereon till date, amounting to Rs. 7,57,24, 129/, was written of! in the Previous Year relevant to A.Y.2010-11. Thus, as the loss arising out of abandoning of the project crystallized in such year, it could not have been herd to be prior period expenditure. In view of the above submissions, the disallowance of the said loss, on the grounds that the expenditure was capital m nature and it pertained to prior period, is wholly unsustainable both on facts and in law. Reliance is placed on the decisions in the following cases in support of the claim that the expenditure incurred on an abandoned business project is allowable as deduction in the year of write-off’

(i) Binanai Cement Ltd Vs CIT (2016) 380 ITR 116 (Cal)

(ii) Asia Power Projects P Ltd Vs DCIT [2015) 370 ITR 257(Kar)

(iii} CIT Vs Dream Merchants (Born HC) in ITA No.4243/2010 dt .20.09.2011

(iv) CIT Vs Rajesh Khanna (Born HC) in ITA No.3875/2010 dt.14.09.2011

(v) CIT Vs A.K. Films P Ltd (Born HC) in ITA No.1199/2010 dt: 14.02.2011

(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 be necessarily surrendered to the company from which they were originally acquired and the Appellant had no choice in that regard. Thus, no motive can he attributed to such surrender and, as submitted above, this decision was taken considering the best interests of the Appellant Company. “

13.1 A perusal of the same shows that the assessee abandoned the project due to commercial expediency and in terms surrendered the same in favour of the land owner M/s. Fortune Construction Pvt. Ltd. Further, the amount of Rs. 13 crores refunded to the assessee towards security deposits is out of the security deposit of Rs. 80 crores as on 31.03.2009 which reduce to Rs.67 crores as on 31.03.2010. Nothing was produced by the revenue to controvert the submissions filed by the assessee before the ld.CIT(A) and the finding of the ld.CIT(A) on this issue.

14. We find the Hon’ble Madras High Court in the case of Chemplast Sanmar Ltd (supra) has held that where assessee company set up a new project which was subsequently abandoned, since new project was managed from common funds, control over all business units was in hands of assessee and there was unity of control, it could not be said that pre-operative expenditure incurred by assessee was on a new line of business, thus, same was to be allowed as revenue expenditure.

15. We find the Hon’ble Calcutta High Court in the case of Binani Cement Ltd(supra) 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 assesee’s business.

16. In view of the above discussion and respectfully following the decisions cited (supra), we do not find any infirmity in the order of the ld.CIT(A) on this issue. Accordingly, the same is upheld and the grounds raised by the revenue are dismissed.

ITA NO.1137/HYD/2018 for AY 2013-14

17. Facts of the case, in brief, are that the assessee is a company engaged in the business of development of Real Estate in the form of construction and sale of villas as well as sale of developed plots. It filed its return of income for the A.Y 2013-14 admitting nil income under normal provisions and current year loss of Rs. 6,72,02,896/-. The book loss was shown at Rs. 7,53,09,948/- u/s 115JB of the I.T.Act. The case 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 accordinlgy 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 Customers Settlmetn of Rs.2,55,05,608/- ignoring the fact that the said did not crystalize in the year under consideration and therefore a contingent liability.

2. On the facts and in the circumstances of the case, and in law, the CIT(A) erred in deleting the disallowance of deposits written off of Rs.3,63,51,366/-.

20. So far as the disallowance of customer settlement of Rs.2,55,05,608/- is concerned, the facts of the case, in brief, are that AO during the course of assessment proceedings observed from note no.2.21 to the P&L account relating to Other Expenses that an amount of Rs.2,55,05,608/- is claimed towards customer settlement claims. On being asked by the AO to substantiate the same with necessary evidence the assessee replied as under:-

“We had sold two properties to Joshi Brothers and CVS Enterprises. The matter was in dispute. Later the same was settled. We are herewith enclosing Settlement deeds for your information. Since the settlement amount was debited to P & L Account. The same villas – out of two one villa was sold and sale proceeds are credited to sales and another villa is still unsold showing as stock. This is for your information. “

21. The AO noted the following details from the settlement deeds:-

i) Deed of Cancellation in respect of CVS Enterprises is made and executed on 12.08.2013.

ii) The Agreement in pursuance of the decision of Hon’ble A.P. State Consumer Disputes Redressal Commission was made and executed on 20.06.2014 to pay a sum of Rs. 1,95,80,000/- towards full and final settlement to Joshi Brothers besides penalty of Rs 4,20,000/- claimed to have been paid.

22. Thus, he noticed that both the agreements are not entered in FY 2012-13 that is relevant to the AY 2013-14 but in subsequent financial years. He noted that the order of the AP State consumer Disputes Redressal Commission is itself pronounced on 09.07.2013 and further order was passed on 10.10.2013 wherein the assessee was directed to repay the money along with interest and costs. Thus, the liability for the said settlement has arisen only in FY 2013-14 relevant to AY 2014-15. He, therefore held that the expenditure claimed by the assessee is only in the nature of a provision for AY 2013-14 and it has not accrued.

23. The AO further noted that the case was filed by Joshi Brothers in 2011 and also the legal 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 course of carrying on its business and the claim was notional. (iii) The Assessing Officer did not dispute that the amount debited to P & L account pursuant to the settlement of the claims in the land of its real estate business was revenue in its nature. (iv) The nexus between the settlement of the claims and the purpose of business since stood proved it is not correct on the part of the Assessing Officer to presume the contractual liability as contingent, once the legal obligation has been established in the previous year relevant to the assessment year. (v) The liability since has arisen out of contract, it is not correct on the part of the Assessing Officer to suggest that it is a provision.

25. It was submitted that the financial statements for the previous year ending 31-03-2013 relevant to the A. Y. 2013-14, were duly audited and the auditors singed the accounts on 27-09­2013. On that date the claims of the settlement stand determined as noticeable from the following facts.

(i) In the case of Joshi Brothers, the AP State Consumers Disputes Redressal commission, by its order dated 9-07-2013 which is before the adoption of the audited accounts has ordered the claim.

(ii) In the case of CVS Enterprises, the Deed of Cancellation dated 12- 08­2013 has been executed, which is also before the adoption of audited accounts on 27-09-2013. Accordingly, in both the cases considering the liability arising as an event occurring after the date of balance sheet but before the adoption of the accounts, the claim has been made under the caption “Customer’s Settlement Claims”.

(iii) The date of payment of the claim cannot be the pointer to come to the conclusion that the claims are contingent and do not relate to the year of accounts. In such circumstances, Assessing Officer is not justified in denying the claim on the premise that the claim is contingent.

26. Relying on various decisions, it was argued that the disallowance made by the AO being not in accordance with law should be deleted.

27. Based on the arguments advanced by the assessee, the ld.CIT(A) deleted the addition by observing as under:-

5.3 I have carefully considered the assessment order and submissions of the appellant. The Assessing Officer mainly disallowed this amount based on the order of A.P. State Consumers Disputes Redressal Commission, dt. 09-07-2013 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.CIT(A). He submitted that events occurring after balance sheet date and before finalization of the account has to be considered for filing of the return. He submitted that the tax rate for both the years are same, the incurring of the expenditure is not in dispute and only the dispute is regarding the year of taxability. Referring to the decision of Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd. reported in 358 ITR 295, he drew the attention of the Bench to para 32 of the order which reads as under:-

32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.

31. Relying on various other decisions, he submitted that when the dispute is regarding only the year of taxability without doubting the expenditure and the rate of tax remains same in both years no disallowance/addition should be made.

32. 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 disallowed the amount of Rs.2,55,05,608/- claimed by the assessee on the ground that the order of AP State Consumers Disputes Redressal Commission dated 09.07.2013 and further order was passed on 10.10.2013 and therefore, the settlement was arrived at only in the FY 2013-14 relevant to AY 2013-14 and therefore the assessee is not entitled to claim this deduction since it is following the mercantile system of accounting. We find the ld.CIT(A) deleted the addition, the reasons of which have already been reproduced in the preceding 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 guidelines issued by the ICAI for events occurring after the balance sheet date and considering the fact that the tax rate of both the assessment years are same, we do not find any infirmity in the order of the ld.CIT(A) in deleting the addition. Accordingly, ground of appeal no.1 by the revenue is dismissed.

33. Ground of appeal no.2 by the revenue relates to the order of the ld.CIT(A) in deleting the addition of Rs.3,63,51,366/- made by the AO on account of deposits written off on surrender of land development rights.

33.1 Facts of the case relating to the above addition are that the AO during the course of assessment proceedings noted from note no.2.21 to the P& L account relating to other expenses that an amount of Rs.3,63,51,366 is claimed towards deposits written off on surrender of land development rights. Further, the assessee in its note no.2.29 to the notes on accounts has given the following note.

“During the year the Company has surrender land development rights of one of the projects of the Company viz., “CASA II” and the total cost incurred aggregating to Rs. 21,994,351 has been considered as sunk cost and was accordingly charged off to the Statement of Profit and Loss. The Company had paid security deposit of Rs. 178,061,366/-against the said development rights. The company has received back Rs. 141,710,000/- on surrender of said development rights and hence balance amount of Rs. 36,351,366 has been charged off in the Statement of Profit and Loss.”

34. On being asked by the AO to furnish the relevant details along with necessary evidence, the assessee filed a copy of the agreement for surrender and land development rights with Platinum Properties Pvt Ltd. dated 31.10.2012. Subsequently, the assessee replied as under:-

“Platinum Properties P Ltd & Omega Shelters P Ltd has entered in to a development agreement – Cum General Power of Attorney vide Document No. 12563/06 duly registered for development of gated residential township of land admeasuring Ac 24.069 Gts situated at Gundlapochampally village, Medchal MandaI, RR Dist. And Omega Shelters has given refundable deposit to M/s. Platinum Properties P Ltd. As per the agreement, Omega Shelters has to complete the project within 72 months from the date of receiving sanction of the plans from HUDA and municipality/gram panchayat.

Since the project was 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:

36. The AO noted that the assessee had given the entire interest free refundable deposit of Rs. 40 crores through a single Development Agreement cum General Power of Attorney entered into with Platinum Properties Pvt. Ltd. on 11.05.2006 This agreement is for development of entire 54.069 acres at Gundlapochampally Mandal, Medak Dist. He, therefore rejected the claim of the assessee by recording the following reasons:

a) Though there was a single agreement for the entire 54.069 acres while giving the deposit, the assessee has now allocated the said deposit proportionately for 30 acres and 24.069 acres separately on his own accord and accordingly mentioned the same in the Agreement dated 31.10.2012 for surrender of Development rights relating to 24.069 acres. Based on this allocation, the assessee is claiming loss of Rs. 3,63,51,366/- stating that they have received the deposit back of only Rs. 13,67,10,000/- as against proportionate allotment of Rs. 17,80,61,366/-. Whereas, the agreement for development to the extent of 30 acres with the same company i.e. Platinum Properties Pvt. Ltd. is still in vogue. The assessee should have waited to write-off the deposit till the conclusion of the entire agreement, but should not have claimed in bits, when the original agreement is only one.

b) As per the agreement for surrender of development rights dated 31.10.2012, the amount refunded is Rs. 13,67,10,000/- whereas as per the table reproduced above, furnished by the assessee vide letter dated 24.03.2016, the assessee states that they have received back 14,17,10,000/- in respect of the cancelled project (CASA II). Thus, there is a difference which indicates that the assessee has received an additional amount of Rs. 50 lakhs i.e. more than the amount mentioned in the surrender agreement. If the agreement is final and conclusive, it is not understandable as to why Platinum Properties Pvt. Ltd. paid the additional amount of Rs. 50 lakhs. This casts a doubt on the genuineness of the claim of the assessee with regards to loss of deposit.

c) The total cost or 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 confirmation. Instead, the Director of the company who appeared has informed that Platinum Properties Pvt. Ltd. will consider the benefit received to them on surrender of deposit by the assessee to the extent of Rs. 3,63,51,366/- only after the conclusion of the total agreement i.e. the development agreement entered on 11.05.2006. Thus, no income is offered by them also for Asst. Year 2013­14. In such a situation, it is apparent that the assessee cannot also claim loss till the conclusion of the development agreement.

e) The financial statements of Platinum Properties Pvt. Ltd. for the year ended 31.03.2013 is verified. As seen from Note 4 to the Balance Sheet relating to Long Term Borrowings, the company is reflecting an amount of Rs. 40,00,000/- and Rs. 25,82,90,000/- (and not Rs. 22,19,38,634/- as reflected by the assessee) respectively as Refundable Security Deposit from related parties. The difference between the balance as reflected in the books of account by the assessee and the company, Platinum Properties Pvt. Ltd. is Rs. 3,63,51,366/- which is claimed by the assessee. It is now evident that the company, Platinum Properties Pvt. Ltd. has not reduced their liability to the assessee.

f) As seen from the development agreement entered on 11.05.2006, there is no clause for forfeiture of refund deposit in case of non-adherence to the agreement.

36.1 In view of the above reasons, the AO rejected the claim of the assessee with regards to loss on surrender of development rights and disallowed the same.

37. Before the ld.CIT(A), the assessee submitted that

i) There were two projects by name CASA 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. The land owners are different.

ii) There is a common development agreement for both the units put together, entered into on 11-05-2006.

iii) In terms of the development agreement, a refundable deposit of Rs. 40 crores was given for both the units put together.

iv) 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

v) 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. N0.4758/2012 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 the date of cancellation and yet persuaded the developer for further payments also. Once the developer was sure that it is not possible to receive back any further amount of the deposit, as a commercial expediency the balance amount of Rs. 3,63,51,366/-has been written off, since it is arising out of the business exigency and commercial expediency. Hence, denial by the Assessing Officer is not justified.

The assessee relied on the decision of Apex Court in the case of Sassoon J. David & Co. Pvt. Ltd. (118 ITR 261)(SC) and CIT vs. Delhi Safe Deposit Co. Ltd. (133 ITR 756)(SC).

39. Based on the arguments advanced before him, the ld.CIT(A) deleted the addition by observing as under:-

6.3 I have carefully considered the assessment order and submissions of the appellant. On verification of the submissions of the appellant it is noticed that the appellant company is in real estate development and it has parted the refundable deposit exclusively for the purpose of business. Therefore, the submissions of the appellant are accepted and the addition made by the Assessing Officer deleted.

40. Aggrieved such order of the ld.CIT(A), the revenue is in appeal before the Tribunal.

41. The ld. DR heavily relied on the order of the AO whereas the ld.counsel for the assessee heavily relied on the order of the ld.CIT(A).

42. We have heard 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.3,63,51,366/- rejecting the claim of deposits written off on surrendered of land development rights on the ground that the company Platinum Properties Pvt.Ltd has not reduced their liability to the assessee and as per the development agreement there is no clause for forfeiture of refundable deposit in case of non adherence to the agreement. It is also the case of the AO that no income is offered by the other concern i.e Platinum Properties Pvt. Ltd in AY 2013-14. We find the ld.CIT(A) deleted the addition the reasons which are already given in the preceding paragraph. Although, the order of the ld.CIT(A) is very cryptic, however the same is based on submissions made by the assessee in details. We find in the instant case there were two projects by name CASA 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. 31­10-2012, duly registered as Doc. N0.4758/2012 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 of rights is categorical in the preamble mentioned to the effect that the deposit amount refunded was only Rs.13,67,10,000/-. Once the developer was sure that it is not possible to receive back any further amount of the deposit, as a commercial expediency the balance amount of Rs. 3,63,51,366/- has been written off, since it is arising out of the business exigency and commercial expediency.

43. We find the Hon’ble Supreme Court in the case of CIT vs. Delhi Safe Deposit Co.Ltd.(supra) has held as under:-

4.The first question which needs to be examined is whether the amount in question can be treated as an expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee which is admissible as a deduction under section 37 of the Act. It is no doubt true that the solution to a question of this nature sometimes is difficult to arrive at. But, however difficult the task may be, a decision on that question should be given having regard to the decisions bearing on the question and ordinary principles of commercial trading and of commercial expediency. The facts found in the present case are that the assessee was carrying on business as a partner of the managing agency firm and it also had other businesses. The managing agency agreement with the managed company was a profitable source of income and that the assessee had continuously earned income from that source. But on account of the negligence on the part of one of its partners, there arose a serious dispute which could have ordinarily resulted in a long drawn out litigation between the managing agency firm and the managed company affecting seriously the reputation of the assessee in addition to any pecuniary loss which the assessee as a partner was liable to bear on account of the joint and several liability arising under the law of partnership. The settlement arrived at between the parties prevented effectively the hazards involved in any litigation and also helped the assessee in continuing to enjoy the benefit of the managing agency which was a sound business proposition. It also assisted the assessee in retaining the business reputation unsullied which it had built up over a number of years. It is also material to notice here that it was not shown that the settlement was a gratuitous arrangement entered into by the assessee to benefit the defaulting partner exclusively even though he might have been benefitted to some extent. It is no doubt true that it was voluntary in character but on the facts and in the circumstances of the case whether it would make any difference at all is the point for consideration.

44. In view of the above discussion, we uphold the order of the ld.CIT(A) in deleting the addition. The ground raised by the revenue is dismissed.

45. In the result, both the appeals filed by the revenue are dismissed.

Order pronounced in the Open Court on 31st October, 2022.