Case Law Details
ITO Vs Logical Properties Private Limited (ITAT Mumbai)
Income Tax Appellate Tribunal (ITAT) Mumbai dismissed an appeal filed by the Income Tax Officer (ITO) against the order of the National Faceless Appeal Centre (NFAC), Delhi, concerning Logical Properties Private Limited. The dispute centered on additions and disallowances made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, and the disallowance of compensation paid for a breach of contract.
The AO had added ₹6.9 crore to the company’s income, citing unexplained advances received from three entities: Central Park Securities Holding Pvt. Ltd., Sanara Reality, and Peninsula Land Limited. The AO also disallowed ₹25 lakh paid as compensation to Sameer Savara for project delays, deeming it a penalty for breach of contract. The NFAC, however, deleted these additions and disallowances, leading to the revenue’s appeal.
The ITAT reviewed the case, focusing on the nature of the advances and the compensation payment. Regarding the advances, the ITAT noted that the AO’s remand report confirmed these were received in the normal course of business and were reflected in the company’s financial statements for preceding assessment years. The company also provided letters of intent and receipts to support its claims. Consequently, the ITAT upheld the NFAC’s decision to delete the ₹6.9 crore addition, stating the AO had incorrectly invoked Section 68.
Concerning the ₹25 lakh compensation, the ITAT examined the circumstances of the payment. The company had received an advance of ₹1 crore from a customer in 2013, which was later refunded in 2016-17. The customer demanded compensation for the delayed project, and after negotiations, the company paid ₹25 lakh. The AO disallowed this, arguing it was a penalty and lacked contractual support.
The ITAT, however, relied on precedents, specifically the decisions in M/s. Eplus Green and Vatika Town Ships Pvt. Ltd., where it was held that compensation paid for breach of contract in real estate business is an allowable business expense under Section 37(1) of the Act. The ITAT noted that the company had provided evidence of the payment and its business activities. Therefore, it upheld the NFAC’s decision to allow the compensation as a deduction. Furthermore, the ITAT stated that business loss could be set off against income from other sources as per section 71(2) of the income tax act.
In conclusion, the ITAT dismissed the revenue’s appeal, confirming the NFAC’s order and affirming that compensation for breach of contract can be a legitimate business expense.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. The present appeal preferred by the Revenue is directed against the order, dated 22/04/2024, passed by the National Faceless Appeal Centre (NFAC), Delhi, [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the CIT(A) had allowed the appeal against the Assessment Order, dated 11/06/2021, passed under Section 143(3) read with Section 144B of the Act for the Assessment Year 2018-19.
2. The Revenue has raised following grounds of appeal :
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of advances received of Rs.6,90,00,000/- from the three entities i.e. Rs. 1,90,00,000/- from Central Park Securities Holding Pvt. Ltd., Rs.2,75,00,000/- from Sanara Really and Rs 2,25,00,000/- from Peninsula Land Limited ignoring the fact that the Assessee is using the modus operandi to introduce money through letter of intents which are nothing but mere entries on papers, this company is not carrying out any business activities, filing loss in return of income since the inception of the company Le. A.Y. 2011-12, the company did not has its own profit making apparatus and was not involved in business activity, the inflow and outflow of the funds is forming neither the part of the total turnover of the company nor is reflected in the profit and loss account or net income of the Assessee company.
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of amount of advance received of Rs. 1,90,00,000/- ignoring the findings of the AO given in the Remand Report that neither Assessee nor Central Park Securities Holding Pvt. Ltd has produced evidence with regard to its claim that transaction was occurred in F.Y. 2012-13. Furthermore, the letter of intent submitted by the Assessee is dated 04/03/2013 and not counter signed by the Central Park Securities Holding Pvt. Ltd.
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of amount of advance received of Rs. 1,90,00,000/- ignoring the findings of the AO given in the assessment order and Remand Report that the total advance received of Rs 2,75,00,000/-has not been repaid to the Sanara Reality till the date of assessment and Remand Report
4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of advance received from Peninsula Land Limited ignoring the fact that the Assessee has admitted that possession clause of 24 month was applicable in the case of Peninsula Land Limited and the same was not applied and advances was returned back in F.Y. 2019- 20 which is not returned within 24 months as per the possession clause of 24 months.
5. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of compensation paid of Rs.25,00,000/- ignoring the fact that non-furnishing any agreement/contract note which prescribed that in case of cancellation of agreement/contract, the amount of compensation would be paid and at which rate it would be paid. Further, in remand proceedings the Assessing Officer has clearly noted that documents submitted by the Assessee did not show that Shri Sameer Savara had demand any compensation.”
3. The relevant facts in brief are that the Assessee filed return of income for the Assessment Year 2018-2019 on 26/09/2018 declaring loss of INR.26,73,450/-. Subsequently, the case of the Assessee was selected for scrutiny under the e-Assessment Scheme 2019 on the following issues – (a) Investments/Advances/Loans, (b) Business Loss, and (c) Investment in immovable property. The Assessing Officer completed the assessment, vide Assessment Order dated 11/06/2021, passed under Section 143(3) read with Section 144B of the Act at the assessed income of INR.11,87,86,927/-, inter alia, after making following additions/disallowance:
(a) Addition of INR.6,90,00,000/- under Section 68 of the Act in respect of (i) advance of INR.1,90,00,000/- received from Central Park Securities Holding Pvt.;(ii) advance of 2,75,00,000/- received from Central Park Securities Holding Pvt. Ltd.; and (iii) advance of INR.2,25,00,000/- received from Peninsula Land Limited
(b) Disallowance of INR.25,00,000/- in respect amount paid by the Assessee to Mr. Sameer Savara as compensation for delay in execution of the project
4. In appeal preferred by the Assessee, vide order dated 22/04/2024, the CIT(A) deleted the above said addition/disallowance made by the Assessing Officer. Hence the present appeal by the Revenue challenging the aforesaid order passed by the CIT(A) on the grounds reproduced in paragraph 2 above.
5. We have heard the rival submissions and perused the material on record.
6. The Assessee, at the relevant time, was engaged in the business of development of real estate including construction of houses, commercial complexes, and construction activity in general. In the course of its business activities, the Assessee had undertaken a project – ‘Clover Green Acres’ involving acquisition of a large area of land from various Owner(s)/parties, and plotting the same into smaller plots to be sold to various customers. For the aforesaid project the Assessee entered into Memorandum of Understanding(s)/Agreements with various parties for acquisition/aggregation of land parcels. However, some the parties failed to perform their obligations and did not handover possession of land parcels to Assessee. As a result, the Assessee was constrained to take recourse to legal action by filing suits for specific performance/recovery. Since the legal proceedings were taking time, the Assessee could not proceed with the aforesaid project.
7. The contention of the Assessee before the CIT(A) was that the advances aggregating to INR,6,90,00,000/- were received by the Assessee in relation to the aforesaid project in the preceding assessment years and therefore, no addition could have been made by the Assessing Officer in respect of the same during the relevant assessment year. Whereas, payment of INR.25,00,000/- was made by the Assessee as compensation to one of the customers from whom advance was received for the purchase of plot which could not be delivered in view of pending litigation. The CIT(A) called for a remand report from the Assessing Officer and after considering the same, the CIT(A) deleted the additions/disallowances.
Ground No.1 to 4
8. In relation to advances aggregating to INR.6,90,00,000/- the CIT(A) concluded as under:
“11. In his remand report, the Assessing Officer stated that to examine these transactions, notices under Section 133(6) of the Act were issued to these parties during the remand proceedings and the Assessing Officer gave the findings as below:
Central Park Securities Holding Pvt. Ltd – This company did not submit when INr.1,90,00,000/- was paid to the Assessee but submitted that this amount was paid on earlier years for intended purchase of plot. However, this amount of advance is reflected in the balance sheets of this company Central Park Securities Holding Pvt. Ltd. in the Financial Year 2015-16, 2016-17 and 2017-18 and this company confirmed that this amount was received back from the Assessee during the Financial Year 2020-21 with relevant bank account statement.
Sanara Reality – This firm confirmed that the payment of INR.1,75,00,000/- in Financial Year 2012-13 and INR. 1,00,00,000/- in Financial Year 2013-14 was made for advance for property to the Assessee with bank account statement. This firm also submitted ledger of the Assessee in its book. As per this ledger, the Assessee did not refund this amount to this firm. The Assessee also confirmed that this amount of INR.2.75 crore is not repaid.
Peninsula Land Limited – This company confirmed that the payment of INR.1,50,00,000/- in Financial Year 2013-14 and INR. 50,00,000/- in Financial Year 2015-16 was made to the Assessee deposit given for facilitating land acquisition through aggregation with relevant bank account statement and ledger. This company also confirmed that this amount was received back by this company from the Assessee in Financial Year 2019-20 and subsequent Financial Years along with relevant bank account statement.
9. In rejoinders to remand report, the Assessee stated that it had filed copies of some civil suits to prove that its’ intended project (for which the impugned advances were taken by it) could not take off, that such advances were taken in regular course of business and that when the Assessee could not start the project as intended, it had to refund advances to those entities who demanded it.
10. In view of the facts germinating from the report of the Assessing Officer and submissions of the Assessee, it is clear that such advances were taken in usual course of business of the appellant, the creditors had confirmed the payment & receipts (wherever applicable) of such advances back from the appellant and the sources of the creditors were not doubted by the Assessing Officer. Considering the above, as no case has been made, after the remand proceedings, to sustain additions of INR.6,90,00,000/- made by the Assessing Officer under Section 68 of the Act, such additions are hereby deleted. Ground no. 3 and sub-grounds therein are allowed.”
8.1. On perusal of the above, it is clear that in the remand report the Assessing Officer had returned a finding that (a) the advances aggregating to INR.6,90,00,000/- were received during the normal course of business and (b) the same were not received during the relevant previous year as the same were reflected in the financial statements of the Assessee for the preceding assessment years. Further, we also note that the Assessee had filed copy of the relevant Letter of Intent and Receipts in relation to the aforesaid advances before the Assessing Officer along with letter, dated 02/03/2021. A copy of the aforesaid Letter of Intent and Receipts has also been placed before us at pages 1 to 7 of the paper-book along with the relevant ledger accounts. The aforesaid documents support the finding returned by the CIT(A) on the basis of the remand report to the effect that the advances under consideration were not received during the relevant previous year. Therefore, we do not find any infirmity in the order passed by the CIT(A). In our view, the Assessing Officer had invoked the provisions contained in Section 68 of the Act without appreciating the correct facts. Accordingly, we confirm the order passed by the CIT(A) deleting the addition of INR.6,90,00,000/- made by the Assessing Officer under Section 68 of the Act. Accordingly, Ground No. 1 to 4 raised by the Revenue are dismissed.
Ground No.5
9. As regards, the compensation of INR 25,00,000/- paid to the Customer is concerned, a perusal of record reveals that the Customer had given advance of INR. 1 Crore for purchase of plot in January 2013 and the same was refunded to him during the Financial Year 2016-17 by cheque. However the Customer demanded compensation for failure to deliver the plot of land as originally agreed upon. After negotiation, the dispute was settled on payment of compensation of INR.25,00,000/-. As the Assessee company itself admitted that this payment of 25,00,000/- was made due to non-fulfillment of obligations by the company, the Assessing Officer disallowed the deduction claimed by the Assessee in respect of the aforesaid compensation amount holding that the same was in the nature of penalty for breach of contract. The Assessing Officer also noted that the Assessee had failed to provide any agreement/contract provided for payment of such compensation. Further, the Assessing Officer was of the view that since the Assessee does not have business receipts, the Assessee could not claim deduction/set-off of the aforesaid compensation amount with the income under the head ‘Income from Other Sources’.
9.1 In appeal, the CIT(A) deleted the above disallowance of INR.25,00,000/- following the decision of Tribunal in case of M/s. Eplus Green [I.T.A. No. 5514/Mum/2018, decision dated 19/09/2019], and Deputy Commissioner of Income Tax, Central Circle – 20 Vatika Town Ships Pvt. Ltd: [2013] 60 SOT 115, rendered in identical facts and circumstances. The CIT(A) concluded that the Assessee is entitled to claim deduction under Section 37(1) of the Act is respect of compensation paid to the prospective buyer and the business loss of INR.25,00,000/- arising to the Assessee would have been eligible for set up against income under the head ‘Income from Other Sources’ in terms of Section 71 and 72 of the Act.
11. During the course of hearing the learned Departmental Representative relied upon the Assessment Order while the Learned Authorised Representative for the Assessee supported the order passed by CIT(A).
9.2 We have perused the above decisions of the Tribunal in the case of Eplus Green (Supra) and Vatika Town Ships Pvt. Ltd (Supra) relied upon by the CIT(A) while granting relief to the Assessee. In the aforesaid decisions it has been held by the Tribunal that compensation paid by an Assessee engaged in real estate business to a prospective buyer on account of breach of contract is to be allowed as deduction under Section 37(1) of the Act being normal loss incidental to business. In the present case, the Assessee had filed letter confirming the payment of the said amount of INR.25,00,000/- as compensation along with the receipt and the relevant extract of the bank statement. The Financial Statements furnished by the Assessee shows that the Assessee was engaged in undertaking real estate projects at the relevant time. Therefore, given the facts and circumstances of the present case and respectfully following the decisions of the Tribunal in the case of Eplus Green (Supra) and Vatika Town Ships Pvt. Ltd (Supra), we hold that the Assessee was entitled to claim deduction for compensation of INR.25,00,000/- paid to the respective buyer as business loss. Further, as per Section 71(2) of the Act where the net result of computation under the head ‘Profits and Gains of Business or Profession’ is a loss and the Assessee has income assessable under ‘Income from Other Sources’. Therefore, we do not find any infirmity in the order passed by the CIT(A) deleting the addition of INR.25,00,000/- and decline to interfere with the same. Accordingly, Ground No.5 raised by the Revenue is dismissed.
12. In result, the present appeal preferred by the Revenue is dismissed.
Order pronounced on 30.12.2024.
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