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
