Compensation for Cancelled Land Sale Allowed as It Was for Commercial Expediency: ITAT Chennai

ACIT Vs Annai Builders Real Estate Private Limited (ITAT Chennai)

Closing Stock Addition Deleted Because Compensation Did Not Enhance Land Value; Cost Over-Run Deduction Allowed Because Liability Had Already Crystallized; Arbitration Proceedings Cannot Convert Actual Project Costs into Contingent Liabilities: ITAT Chennai.

The Chennai Income Tax Appellate Tribunal (ITAT) allowed the assessee’s appeal and dismissed the Revenue’s appeal in a dispute involving multiple additions and disallowances arising from assessment proceedings for AY 2011-12. The issues related to closing stock valuation, project expenditure, site expenses, disallowance under Section 40(a)(ia), advances written off, and alleged suppression of sales.

The first issue concerned the Tiruvottiyur project. The assessee had cancelled an agreement for sale of land and paid compensation of ₹21 crore to the prospective purchaser. The Assessing Officer (AO) treated the compensation as part of the land cost and added ₹17.43 crore to closing stock on the basis that only 32.64% of project revenue had been recognized under the percentage completion method. The Tribunal held that the compensation was paid due to commercial expediency, as the assessee expected better business prospects from developing residential units. It found that the compensation was incurred wholly and exclusively for business purposes and qualified as revenue expenditure under Section 37. The Tribunal observed that the compensation neither enhanced the value of the land nor formed part of closing stock under Accounting Standard-2. It also noted that the recipient had already offered the compensation to tax. Accordingly, the addition of ₹17.43 crore was directed to be deleted.

The second issue related to a disallowance of ₹2.66 crore described as “cost over-run” in the Perumbakkam project. The AO treated the amount as a contingent liability because arbitration proceedings were pending between the assessee and its contractor. The Tribunal found that the expenditure had actually been incurred and paid during the relevant year and was supported by bills, payments, and tax deduction records. It held that the liability had crystallized during the year and could not be treated as contingent merely because arbitration proceedings existed. The Tribunal further observed that the outcome of arbitration would not alter the character of expenses already incurred. It therefore upheld the CIT(A)’s order deleting the addition and dismissed the Revenue’s appeal on this issue.

The third issue concerned disallowance of site expenses amounting to ₹2.51 crore incurred on various projects. The AO and CIT(A) treated these as pre-operative expenses that should form part of work-in-progress because no corresponding income had been recognized from the projects. The Tribunal disagreed and held that the expenditure was incurred in the ordinary course of the assessee’s real estate business for evaluating and developing project sites. It observed that such expenditure was incurred wholly and exclusively for business purposes and could be allowed under Section 37. The Tribunal further noted that allowability of expenditure could not be denied merely because no income had yet been recognized from the projects. Accordingly, it directed deletion of the disallowance.

The fourth issue involved disallowance of ₹5.16 lakh under Section 40(a)(ia) for non-deduction of tax on brokerage and commission payments. The assessee relied on the second proviso to Section 40(a)(ia). Following a coordinate bench decision, the Tribunal restored the matter to the AO for verification of whether the recipients had disclosed the income and paid tax on it. It directed that no disallowance should survive if such conditions were satisfied.

The fifth issue related to advances written off amounting to ₹57.05 lakh. The CIT(A) had already deleted ₹30 lakh on the ground that it had resulted in double addition in a subsequent assessment year but sustained the balance ₹27.05 lakh. The Tribunal observed that the disputed sums were reflected as advances for land purchases in the balance sheet and had not been claimed as revenue expenditure through the profit and loss account. Considering the factual position and findings of the lower authorities, it remanded the issue relating to ₹27.05 lakh to the AO for fresh examination after providing an opportunity to the assessee.

The final issue involved an addition of ₹2.70 crore on account of alleged suppression of sales. The AO had compared stock records showing outward movement of stock with sales reported in the financial statements and treated the difference as unaccounted sales. The assessee explained that the difference arose from stock reversal entries passed to rectify earlier accounting errors. The Tribunal accepted that entries recorded as “outwards” did not necessarily represent sales and noted that the assessee had furnished a reconciliation explaining the discrepancy. It also observed that no corroborative evidence of suppressed sales had been found during assessment. Holding that the stock reversal entries had no revenue impact and that the reconciliation had not been disproved, the Tribunal directed deletion of the addition.

Consequently, the assessee’s appeal was allowed, while the Revenue’s appeal was dismissed.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

The present cross appeals filed by the assessee and Revenue are against the order dated 24.07.2025 passed by the learned Commissioner of Income Tax (Appeals), Chennai – 20 (hereinafter referred to as “Id. CIT(A)”), pertaining to Assessment Year (A.Y.) 2011-12.

2. The brief facts of the present case are that the assessee had filed its return of income for the AY under consideration on 03.04.2012 by declaring a total income at Rs.3,66,67,470/-. The said return of income was selected for scrutiny assessment proceedings u/s.143(3) of the Act by way of issuance of notice u/s.143(2) of the Act on 10.09.2012. The assessment order was passed u/s.143(3) of the Act on 28.03.2014 by making the following additions, which were challenged before the Id.CIT(A):

3. The brief facts of the case leading to the abovementioned additions are captured in the succeeding paragraphs:

Issue No. 1 — Tiruvottiyur project Closing Stock:

3. The AO during the course of assessment proceedings observed that the assessee had debited a sum of Rs.31,02,52,805/- in the Profit and Loss account under the head “Purchases” at Schedule 14.

4. The assessee had furnished the details regarding the said sum claimed as purchases and it was submitted before the AO that an amount of Rs.21 crores was shown as paid to Shri Uttam Chand, which sum was claimed and debited under the head purchases. The assessee submitted that during the course of assessment proceedings that the company had entered an agreement for sale of land at Tiruvottiyur for a consideration of Rs.12 crores, out of which Rs.3 crores was received as advance. However, it was submitted that the said sale agreement was cancelled with a mutual understanding upon payment of compensation of Rs.21 crores by the assessee.

5. The assessee submitted that at Tiruvottiyur, a project was carried out wherein three blocks were constructed, and corresponding income was admitted in the Profit and loss account and the Accounting Standard as per AS — 7 were adopted in respect of the income earned from such project. The assessee had further submitted that it had carried out two projects under the Project name — Smart Home Phase I & Phase II at Perumbakkam and three projects under the Project name — Ananya Garden Phase I, Phase II and Ananya Garden at Tiruvottiyur and the admitted income at Rs.28,03,34,937/-.

6. Furthermore, the compensation sum amounting to Rs.21 crores was taken into the cost of land amounting Rs.4,88,76,566/- and hence the total cost of land located at Tiruvottiyur aggregated to Rs.25,88,76,566/-, which sum was considered under the estimated cost as well as actual cost in the Project Income admitted by the assessee relatable to Tiruvottiyur project.

7. However, the AO observed that the assessee had only offered to tax an income equivalent to 32.64% under the Percentage Completion Method in respect of Tiruvottiyur project, while on the other hand, the total cost of land with regard to Tiruvottiyur project to debited into the Profit & Loss account was debited as claimed as an expenditure in the year under consideration when the actual project was yet to be completed. Hence, the AO observed that the assessee ought to have admitted the corresponding portion of stock, i.e. 67.36% amounting to Rs.17,43,79,255/- in the closing stock, which the assessee had not accounted for in the books of accounts. The AO had accordingly added back a sum of Rs.17,43,79,255/- being 67.36% of the total cost of land with regard to Tiruvottiyur project (Rs.25,88,76,566/-) as income of the assessee.

8. According to the assessee, it had had entered into an agreement for sale of vacant house sites situated at Ernavoor village, Thiruvallur District with Mr.Uttamchand for a sale consideration of Rs.12 crores and paid a sum of Rs.3 crores as advance on executing an agreement for sale on 29.05.2009 and that a Memorandum of Understanding was executed on 05.04.2010 to mutually agree on termination of the above referred agreement for sale. The assessee had paid a compensation of Rs.21 crores as consideration towards settlement with a view to earn more profits if it constructs residential houses on the said site than selling the vacant sites to Mr.Uttamchand and further had entered into a construction agreement with the contractor on 01.02.2010. The assessee had furnished copies of the said agreements and MoU in contending that the compensation of Rs.21 crores paid to Mr.Uttamchand towards failure to fulfil the contract obligation is a completely different transaction and this cost of compensation will not enhance the value of land, so as to add the same with the cost of land. Thus, the assessee had claimed that this amount of compensation paid falls within the scope of deduction allowable u/s.37 of the Act, since it is an expenditure incurred wholly and exclusively for the purpose of business. The assessee had further submitted that Mr.Uttamchand has offered the entire compensation received of Rs.21 crores on account of breach of contract as income and remitted the due taxes in the AY 2011-12. The assessee had furnished the P & L a/c, statement of computation of total income and ITR-V of Mr.Uttamchand. The assessee accordingly submitted that the entire amount paid on account of compensation for breach of contract is a business loss and therefore an allowable expenditure in the computation of business income.

9. The Ld.CIT(A) after taking into consideration the said submissions, had proceeded to confirm the action of the AO in adding back a sum of Rs.17,43,79,255/- as income of the company by holding as follows:

“6.2.3. I have perused the submissions made by the appellant as well as the assessment order. The appellant had entered into an agreement with one Mr. S. Uttamchand on 29.05.2009 for sale of land situated at Tiruvottiyur for Rs.12 crores, out of which Rs.3 crores was received as advance. Later, the appellant decided to cancel the sale agreement and construct residential houses on the said site. The appellant entered into a Memorandum of Understanding dated 05.04.2010 with Mr. S. Uttamchand for termination of the sale agreement on payment of Rs.21 crores in addition to Rs.3 crores towards the advance amount. The appellant had also paid the entire sum of Rs.24 crores to Mr. S. Uttamchand from 05.05.2010 to 10.03.2011. The contention of the appellant is that the compensation of Rs.21 crores paid to Mr. Uttamchand towards failure to fulfil the contract obligation cannot be added to the cost of land and this amount of compensation paid falls within the scope of deduction allowable u/s 37 of the Act. It is seen from para 4.1 of the assessment order that the appellant had submitted before the AO that the corresponding income from Tiruvottiyur project was admitted in the profit and loss account and the expenditure of Rs.21 crores was added to the cost of land pertaining to Tiruvottiyur project. Therefore, it can be seen that the appellant itself had added the said amount of Rs.21 crores to the original cost of land of Rs.4,88,76,566/- for Tiruvottiyur project and the AO also accepted the same and did not make any disallowance towards payment of the said amount. Thus, there is no question of allowing deduction u/s 37 of the Act for the same amount as it would amount to double deduction. Further, when the said amount of Rs.21 crores is added by the appellant to the cost/purchases (as per Schedule 14 to P&L a/c) and also allowed by the AO, the cost of unsold land must also be valued based on the cost of the land in the books. The total cost of land as per books of accounts is Rs.25,88,76,566/-(Rs.4,88,76,566 + Rs.21,00,00,000) but the appellant had not considered the amount of Rs.21 crores in the valuation of closing stock It is undisputed that the appellant had admitted only 32.64% under the percentage completion method in respect of Tiruvottiyur project in the year under consideration and the balance 67.36% remained unsold as on 31.03.2011. Hence, the proportionate amount i.e. Rs.17,43,79,255/- (67.36% of Rs.25,88,76,566) ought to have been considered as work-in-progress/closing stock which has been omitted by the appellant to include the part of the value of closing stock Thus, the AO was justified in making the addition of Rs.17,43,79,255/-. Therefore, the addition made by the AO is confirmed and these grounds of appeal are dismissed. However, it is also noted that the appellant was offering the business income arising out of the 67.36% of unsold closing stock in the subsequent assessment years from AY 2013-14 onwards. In this regard, the AO is directed to allow the adjustment of value of opening stock starting from AY 2012-13 with respect to the increase in the value of closing of Rs.17,43,79,255/- and recompute the profit for those AYs in which the appellant had recognized the income out of the said project by adopting the percentage completion method”

Issue No. 2 — Perumbakkam project Cost Over-run:

10. The AO had observed that with regard to the project at Perumbakkam, Project name — Smart Home Phase I & Phase II, the assessee had claimed a sum of Rs.2,66,42,233/- as cost over-run. The assessee during the course of assessment proceedings had submitted that the assessee had entered into a construction contract with M/s.Keystone (Chennai) Construction & Interiors Pvt.Ltd. to carry out the construction of 47 residential units at the Perumbakkam site vide construction agreement dated 16.10.2009 and 313 units at Tiruvottiyur site vide construction agreement dated 01.02.2010.

11. The assessee had paid an advance amount of Rs.25 lakhs on 03.02.2010, during the year 2009-10, a sum of Rs.57,64,600/-, a sum of Rs.7,81,28,179/- in the year 2010-11 & further a sum of Rs.1,29,78,821/- in 2011-12. The assessee had submitted that all these payments were made on the basis of bills submitted by Keystone and the work completion certificate issued by the assessee’s Chief Engineer.

12. However, the assessee after internal checks and inspection had found that the scheduled works were not completed as required to be done at various stages and the quality of work was not up to the standards sought for. Thus, out of the total sum of Rs.7,18,11,583/- paid during the year, a sum of Rs.2,66,42,233/- paid by the assessee was considered to be excessive considering the poor services, delayed time schedule and also the customers complaints against Keystone.

13. The assessee had thus terminated the contract agreements entered with M/s.Keystone and the incomplete projects were entrusted to M/s.Rajalakshmi Constructions and M/s.Y & S Foundations.

14. Hence, the assessee submitted during the course of Assessment proceedings that proceedings were initiated before the Arbitrator, wherein the said entity had sought for Rs.4.10 crores to be paid by the assessee towards various works done by them and the assessee had also filed a counter complaint against M/s.Keystone for an amount of Rs.3.76 crores being the excess amount incurred by the assessee.

15. However, the AO had reckoned such expenditure as a liability in the nature of contingent and the same was not allowable as deduction in the computation of business income and accordingly added back a sum of Rs.2,66,42,233/- as income of the assessee.

16. According to the assessee, it was submitted that it had accounted / reported the cost incurred over and above the estimated (budget) cost as “Cost Over Run” and the use of this terminology had resulted in the AO making the disputed addition of Rs.2,66,42,233/- by treating the same as a contingent liability. The assessee had submitted that the amount mentioned as “Cost Over Run” was an indicative figure of the excess amount spent by the company in order to complete the work and handover the flats to the customers. The assessee had contended that the amount spent to the extent of Rs.2,66,42,233/- was an actual expenditure incurred for completion of the project and the same could not be treated as contingent liability. The assessee had submitted that in order to reckon a liability as a contingent liability, the same ought to be dependent on a subsequent event, whereas, in the case of the assessee, the said expenditure was already incurred. The assessee had further submitted that it had claimed the actual expenditure incurred during the year for which due payment had also been made and it had not created any provision in order to create any potential liability against M/s.Keystone inasmuch the same amount was debited to profit & loss account, fully paid by the assessee and it was not a mere creation of liability so as to validly consider the same as contingent liability.

17. The Ld.CIT(A) after taking consideration of the above submissions had accepted the same stand of the assessee that said expenditure was not a contingent liability, but an actual liability incurred and accounted for by the company. In the process, the Ld.CIT(A) had observed as follows:

“6.3.3. I have perused the submissions made by the appellant. It is noticed that the actual expenditure of Rs.7,18,11,583/- incurred by the appellant during the year under construction and the amount of cost over run of Rs.2,66,42,233/-was part of the said expenses. The amount of “cost overrun” was worked out by the appellant to identify the expenses incurred by the appellant over and above the estimated expenses whereas the appellant had claimed the actual expenditure of Rs.7,18,11,583/- in the year under consideration. The appellant had submitted before the AO that these expenses are actual expenses and these payments were made after deduction of tax at source on the basis of actual bills raised by M/s Keystone (Chennai) Construction & Interiors Pvt Ltd. The AO has made a disallowance only on the reason that the amount of Rs.2,66,42,233/- is in the nature of contingent liability and could not find any discrepancy regarding the genuineness of these expenses. On the basis of the facts available, it is observed that the said amount does not fall under any provision made towards these expenses. In this case, these are the actual expenses which have been incurred by the appellant and also debited in the profit and loss account as Direct Cost. Thus, it can be said that the appellant’s liability to pay became crystallized in the year under consideration. Therefore, it is established that the cost overrun of Rs.2,66,42,233/- cannot be treated as a contingent liability as observed by the AO and I am of the opinion that it needs to be allowed as expense for the year under consideration while working out the income arising out of the said projects on the basis of the consistent method of estimating the income.

6.3.4. With regard to the arbitration complaint filed by Keystone against the appellant seeking Rs.4.10 crores and counter complaint filed by the appellant seeking Rs.3.76 crores, the same has to be considered as a separate event on finalization of the arbitration. The final outcome of the arbitration proceedings is not yet known. Anyways, the outcome of the arbitration proceedings will not change the nature of expenses already accounted in the books of accounts of the appellant in the year under consideration. It is also observed that it is a well settled law that the liability to pay as a result of the arbitration proceedings would be eligible for deduction in the year in which the liability is crystallized. Similarly, the award as a result of the arbitration proceedings would also be taxable in the year in which the award is made. Thus, the outcome of the arbitration proceedings cannot impact the eligibility of the appellant to claim the expenses already incurred by the appellant during the year under consideration. Accordingly, the AO is directed to delete the addition of Rs.2,66,42,233/- and these grounds raised by the appellant are allowed.”

Issue No. 3 — Pre-Operative Expenses:

18. Further, the AO observed that a sum of Rs.2,51,99,256/- was incurred by the assessee in the nature of site expenditure, while the corresponding income from such site was not offered by the assessee in the return of income. The details of such expenditure incurred is as follows:

19. The AO observed from a perusal of ledger account furnished by the assessee, the project situated at Anakaputhur and Madambakkam were yet to be completed during the year under consideration, and the said projects were only completed during AY 2012-13.

20. The AO further had observed from the details of closing stock filed along with the return of income that against the above sites, there was no outwards either by quantity or by value. The AO had accordingly disallowed the said expenditure incurred in the nature of site expenses amounting to Rs.2,51,99,256/- in view of the assessee not having offered the corresponding income from such these sites.

21. The AO considered the said amount of over-run cost of Rs.2,66,42,233/-as a contingent liability and relied on various case laws wherein it was held that contingent liabilities do not constitute expenditure and cannot be claimed as deduction. Accordingly, the AO added an amount of Rs.2,66,42,233/- to the total income of the assessee.

22. According to the Assessee, it was submitted that the AO had disallowed the said site expense incurred during the year to the extent of Rs.2,51,99,256/-on the ground that no corresponding income was admitted from these sites. The assessee had submitted that the amount debited in the profit & loss account towards the site expenses were in the nature of initial expenses incurred during the year towards visit to the site in order to satisfy whether the site is capable to be purchased inasmuch the said expenditure was incurred and claimed that in the ordinary course of engaging with the proposals to develop the various sites. The assessee in the process had incurred certain expenses in the nature of travelling, petrol, food, water, xerox charges, document scanning charges, stationery, obtaining copies and necessary approval from the local authority and in support of the same, the assessee had also submitted ledger copies in respect of said sites and had claimed the same to be allowable as revenue expenditure.

23. However, the Ld.CIT(A) had rejected the submissions of the said expenditure being a revenue expenditure by holding as follows:

“6.4.3. I have perused the submissions made by the appellant. It is noted that the appellant is adopting project completion method as per Accounting Standard 7. In such case, the said expenses disallowed by the AO are pre-operative expenses that should have been booked in the respective site account and the same should have been taken as work-in-progress to be adjusted against the future receipts from the said site projects. Since there is no income recognized from these projects during the financial year, the appellant should have taken these expenses in work-in-progress and claimed the same in the year(s) of sale proportionate to the percentage of units sold. Thus, I am in agreement with AO regarding the disallowance of site expenses of Rs.2,51,99,256/- with respect to the projects under construction. Accordingly, the disallowance made by the AO is upheld and these grounds of appeal are dismissed. However, the AO is directed to take these site expenses into the value of opening stock from the AY 2012-13 and recompute the profit for those AYs in which the appellant had recognized the income out of these sites by adopting the percentage completion method.”

Issue 4: Disallowance u/s.40(a)(ia) of the Act:

24. The AO had observed that the assessee had incurred expenditure towards brokerage and commission and had not deducted tax for the following payments:

25. The AO had accordingly disallowed a sum of Rs.5,16,000/- by invoking the provisions in Section 40(a)(ia) of the Act. The Id.CIT(A) had rejected the grounds raised by the Assessee has not pressed.

Issue 5: Disallowance of advances written off:

26. The AO had observed that the assessee had written off a sum of Rs.57,05,500/- as advance written off during the assessment year under consideration. The details of the same are as follows:

27. The AO had added back the same as income of the assessee by holding that the assessee had not demonstrated the steps taken to recover the said advances, whether the corresponding project is pending nor the income from such corresponding project has been offered while proceeding to add back a sum of Rs.57,05,500/- as income of the assessee.

28. According to the Assessee, it had placed on record the group summary and ledger account of the parties in contending that the said amounts was shown as a balance sheet item and not treated as revenue expenditure, thereby making it eligible to be allowed as advance written off.

29. The Ld.CIT(A) had observed that out of total sum of Rs.57,05,500/-, a sum of Rs.30,00,000/- was already disallowed on similar grounds for the succeeding AY 2012-13, resulting in double addition and accordingly had deleted the same. However, with regard to the remaining portion of disputed addition, i.e. a sum of Rs.27,05,500/- was sustained by holding as follows:

“6.6.3. I have perused the submissions made by the appellant. It is seen that the AO has made a finding that the appellant had written off the said amount of Rs.57,05,500/-. The AO has also stated in the assessment order that the appellant could not adduce with evidence as to how these advances could be claimed as revenue expenditure. During the appeal proceedings for the AY 2012-13 which is also pending for disposal, the appellant has submitted that a component of the addition made of Rs.43,22,240/- includes the disallowance made in the AY 2012-13. During the course of hearing for the AY 2011-12 & 2012-13, the AR of the appellant had identified the actual amount which was disallowed in AY 2011-12 which pertains to AY 2012-13 was only Rs.30,00,000/-. On examination of the parties to whom the said advances were written off in the assessment order of AY 2011-12 & 2012-13, it was found that the advances made to the following persons were written off only in the AY 2012-13 & not in the year under consideration:

Further, it is also found that the AO had disallowed sum of Rs.43,22,240/-, which includes the above sum of Rs.30,00,000/- in the order passed u/s 153A r.w.s 143(3) of the Act for the AY 2012-13. Since the appellant had written of the sum of Rs.30,00,000/- in the AY 2012-13, the addition made by the AO to the extent of Rs.30,00,000/- is deleted. With regard to the balance sum of Rs.27,05,500/-, the appellant could not adduce with evidence as to how these advances could be claimed as revenue expenditure both in the assessment and appeal proceedings. It is also observed that the appellant has not furnished the breakup of the total advances made as on 31.03.2011 to prove whether the said amount advanced to the remaining parties are included in the total advances made as on 31.03.2011. Further, the appellant was also unable to prove that these amounts are not claimed as expenses in the Profit & Loss account during the appeal proceedings also. For these reasons, the disallowance of Rs.27,05,500/-made by the AO seems to be justified. Accordingly, these grounds raised by the appellant are partly allowed.”

Issue 6: Addition on sales:

30. The AO while scrutinizing the details of sale of land reported at Rs.27,61,56,446/-, the assessee had furnished the said details amounting to Rs.32,93,72,344/-, which had included an undivided share of land amounting to Rs.5,32,18,901/- relating to project income. The said amount of Rs.5,32,18,901/- was included along with the project income of Rs.28,03,34,937/-. The AO observed that out of the total advance received from customers at Rs.56,32,79,340/-, a sum of Rs.28,03,34,937/- was reported as project income, recognized on completion of stage wise construction and admitted in P & L a/c.

31. However, upon cross verifying with the stock statement filed along with the return of income, the AO found out that an amount of Rs.35,63,86,650/- was shown under the head “Outwards” as against the total sale admitted at Rs.32,93,72,344/- by the assessee. The AO accordingly concluded that there was a difference of Rs.2,70,14,306/- (Rs.35,63,86,650/- minus Rs.32,93,72,344/-) which was omitted to be admitted by the assessee under the head Sales and had proceeded to add back the same as income of the assessee.

32. According to the Assessee, it had submitted that a rectification petition was filed in terms of Section 154 of the Act on 07.04.2014 seeking rectification of the scrutiny assessment order passed u/s.143(3) of the Act by furnishing the reconciliation statement in explaining that the difference was due to stock reversal entries passed in the books of accounts. The assessee had submitted that the difference between the stock statement and sales declared in the financials for the year was only due to the fact that in the books of accounts of the assessee, there were certain entries passed in relation to reversal of stock thereby resulting in increased value of sales under the head “Outwards” in comparison with sales income shown in financial statement. The assessee has also submitted the reconciliation statement of sales as under:

33. The assessee had submitted that it had reported the correct sales income and the difference of Rs.2,70,11,304/- is the stock reversal entry made in the books of accounts and the same was erroneously added as income of the assessee.

34. However, the Ld.CIT(A) had confirmed the said addition forming part of the scrutiny assessment order by holding as follows:

“6.7.3. The assessment order and appellant’s submissions have been perused. On perusal, it is noted that the appellant had shown the excess outflow of stock to the tune of Rs.2,70,14,306/- over the income admitted on account of sale of land and the project income. The explanation given by the appellant in the course of appeal proceedings is that there was a reversal entry made in the books of accounts of the appellant for the same amount. In support of the claim, the appellant had furnished two Journal Vouchers having dated 01.04.2010 for Rs.2,05,65,831/- with Item Name “Source (Consumption) Sri Varadhapuram Reversal” having narration “Stock Jornal Reversal Entry Passed” and dated 31.03.2011 for Rs.64,45,472/- with Item Name ” Source (Consumption) Sri Rangam Reversal” having narration “Stock Jornal Reversal Entry Passed”. Beyond these journal voucher, the appellant could not furnish any details and the reason for such reversal. In addition to that the appellant could not even explain why such a reversal was required at the first instance. It was only two journal vouchers submitted during the course of appeal proceedings could not explain the purpose of making such reversal entry and also the allowability of such reduction of closing stock without adducing any evidence is not allowable. Hence, I am of the opinion that the reduction of closing stock as outward during the year without offering the corresponding income has to be considered as the suppressed sales for the year under consideration and the addition made by the AO is sustained. This ground of the appeal is dismissed.”

35. The assessee filed aggrieved by the issues confirmed by the Ld.CIT(A) has filed the present appeal before us as well as the cross appeal by the Income Tax Department being aggrieved by the action of the Ld.CIT(A) deleting the disputed addition(s) vide the impugned order dated 24.07.2025.

36. The Ld.AR during the course of hearing of the appeals took by the bench through the paperbook filed before the Tribunal, the details furnished before the AO during the course of scrutiny assessment proceedings, written submissions along with the documentary evidence submitted before the First Appellate Authority during the course of appellate proceedings in support of the arguments put forth before us and pleaded for deleting the additions / disallowances sustained by the Ld.CIT(A) forming part of the impugned order in the present appeal.

37. Per contra, the Ld.DR supported the order of the Ld.CIT(A) in pleading for dismissal of the appeal filed by the assessee. In so far as the appeal filed by the Department, the Ld.DR argued that the disallowance of the said expenditure was erroneously deleted by the Ld.CIT(A) and took the Bench through the issues arising therefrom and pleaded for reversing the action of the Ld.CIT(A) in restoring the order of the AO in this regard.

38. On the other hand, the Ld.AR argued that the action of the Ld.CIT(A) was legally sustainable both on facts and in law and accordingly pleaded for dismissing the appeal filed by the Revenue in confirming the order of the Ld.CIT(A) on this issue.

39. We have heard both the parties perused the material available on record and gone through the orders of the authorities along with the paperbook(s) filed by the assessee before us.

40. With regard to the 1st issue of re-valuation of the closing stock, we find that the assessee had cancelled the agreement entered into with Shri Uttamchand and had paid the compensation of Rs. 21 crores as agreed since the company was of the view that it had better business prospects in the said land by construction and sale of residential flats. Hence, the decision to cancel the agreement entered with Shri Uttamchand was a decision that was taken keeping in mind the principles of commercial expediency, considering the accrual of future economic benefits from execution of construction projects of residential units in the said land. The incurring such expenses for the purposes of business is not disputed by the AO and the only dispute is with respect to the extent of claim allowable to the AY under consideration. Hence, such expenditure so incurred being in the nature of compensation, would very much be eligible to be claimed as revenue expenditure u/s.37 of the Act, since the same was incurred wholly and exclusively for the purpose of business activities carried out by the assessee.

41. The test of allowability of an expenditure u/s.37 of the Act should be considered within the ambit of the phase ‘wholly and exclusively for the purposes of the business.’ The said two expressions are not synonymous; the latter is wider than the former. Expenditure may be for the purpose of the business although it may not be incurred for the purpose of earning the profits of the business. This is established by the decision of the Hon’ble Supreme Court in Meenakshi Mills Ltd. v. CIT, reported in 63 ITR 207. The expression “for the purposes of business” is wider than the expression “for the purpose of earning income.” The former would include within its scope expenditure incurred on grounds of commercial expediency.” The said expenditure was undisputedly incurred for the purpose of earning business income for the assessment year under consideration.

42. We are of the view that both the AO as well as the Ld.CIT(A) went wrong in characterizing such expenditure incurred as an expenditure incurred for the purpose of enhancing the value of the land so as justify the inclusion of the same in the closing stock of the said project in the books of accounts of the assessee. We find that neither that the AO nor the Ld.CIT(A) had brought any on record to justify their action in including the said expenditure as part of the closing stock nor relatable to a single project.

43. The term “Closing stock” in accounting parlance pertains to the amount of unsold stock lying in the books of accounts of the assessee on a given date. To put it the other way, it’s the inventory which is still in the books of accounts waiting to be sold for a given period.

44. Furthermore, the valuation of closing stock is subject to the accounting principles in Accounting Standards-2. The AS 2 governs valuation of inventories and the ‘Cost’ comprises all of the costs of purchase, cost of completion and other costs incurred “in bringing the inventories to their present location and condition” and that which is not relevant to bringing the stock to its present condition or location cannot be a part of its value. Under AS 2, not everything that relates to stock can be added to its value.

45. We find that Accounting Standard 2 (AS 2) provides as under:

“Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to included overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories.”

46. Further, Para 13 of the AS-2 provide for some exclusions from the cost of inventories as under:

“Exclusions from the Cost of Inventories:

In determining the cost of inventories in accordance with paragraph 6, it is appropriate to excluded certain costs and recognise them as expenses in the period in which they are incurred. Examples of such costs are:

(a) Abnormal amounts of wasted materials, labour, or other production costs;

(b) Storage costs, unless those costs are necessary in the production process prior to a further production stage;

(c) Administrative overheads that do not contribute to bringing the inventories to their present location and condition, and

(d) Selling and distribution costs.”

47. We are of the view that if the said exclusion is to be applied on the facts of the present case, then the compensation paid would be an ‘extraordinary item’ and as such the same would not be the ‘cost’ of completion of the project. Therefore, such compensation cannot be added to the value of the stock and trade of the assessee, since the same does not contribute towards bringing the inventories to their present location and condition. Our aforesaid view of ‘said cost is not to be considered as a part of the project cost / closing stock’ is also supported by the “Guidance Note on Accounting for Real Estate Transactions” (Revised 2012) wherein at Para 2.4(b) it is provided that selling costs are not to be considered as part of the construction costs and development costs.

48. Further, we find that the Hon’ble High Court of Delhi in the case of Gopal Das Estates & Housing (P) Ltd. v. CIT, reported in 412 ITR 489 had observed, that that the expenditure incurred on advertising being necessary for promotion of its business is to be allowed as a business expenditure and would not form part of the project cost. Furthermore, our view is also fortified by the decision of the Hon’ble Madras High Court in the case of CIT v. Mangal Tirth Estates Ltd. reported in 303 ITR 366. The said case was one where the Assessee therein had also followed the CCM. It was engaged in the business of construction and sale of a multi-storeyed office cum shopping complex. The assessee had under the development agreement agreed to provide air conditioning to the shops and to also allot car park space. The assessee claimed deduction on advertisement, sales promotion, legal charges and claimed losses in its return. The AO rejected the claim on the ground that only a portion of the expenditure related to the space already constructed could be allowed. It was held that since the assessee had maintained the system of accounts on mercantile basis by adopting CCM, the revenue expenditure “normally, must be allowed in its entirety in the year in which it was incurred. The assessee was held entitled to deduction of the entire legal and advertisement expenses in the year in which it was incurred.”

49. On a similar analogy, in the present case, the payment of compensation is to be allowed in full in the year of payment of such compensation. Hence, we agree with the argument of the Ld.AR that the said expenditure incurred in the nature of compensation paid aggregating to Rs.21 crores had not enhanced the value of the subject project. We find that both the authorities erred in holding that said expenditure incurred ought to be included in value of closing stock proportionately.

50. Moreover, we find that a sum of Rs.21 crores paid to Shri Uttamchand has had been duly offered to tax by him in his Return of Income filed for the subject AY 2011-12. The assessee had placed on record the copy of Shri Uttamchand’s Profit & Loss account, Statement of computation of Total Income and acknowledgement of filing Income Tax Return for the AY 2011-12. Hence, we are of the view, since the due taxes had already been remitted by the said tax payer, there is no loss to revenue and adding it again in the hands of the assessee would tantamount to taxing the same sum twice which is against the fundamental principles of taxation.

51. In any event, the sole issue in dispute is the year of allowability of such claim and in this regard, having noted the fact that the recipient had reported the said income in his return of income, we find that the attempt of the AO to postpone such expenditure by treating the same as project cost as per Accounting Standard — 7 deserves to be interfered with. We are of the considered opinion in view of the undisputed facts that the deferment of expenses to be carried out by the Revenue, would be tax neutral. We also find that the decision of the Supreme Court on a similar issue wherein the Apex Court in the decision of Excel Industries Ltd. reported in 358 ITR 295 had held as follows:

“28. 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 derive benefits under the advance license 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.”

52. Hence, for the forgoing reasons, we direct the AO to delete the addition made to the tune of Rs.17,43,79,255/- with respect to closing stock valuation of the Tiruvottiyur project. Thus, the grounds of appeal raised by the Assessee are allowed.

53. With regard to the second issue being the disallowance of claim of expenditure incurred in the nature of Cost Over Run in respect of Perumbakkam projects, we find that said expenditure was already incurred by the assessee and the same could not possibly be reckoned as ‘Contingent liability’. The AO was presumably mis-guided by the usage of the nomenclature ‘Cost Over Run’ by the assessee. The AO had erroneously considered such expenditure as a ‘Contingent liability’ and not permissible to be deducted in the computation of business income. The assessee during the course of proceedings had placed on record the details regarding the expenditure incurred by the assessee in the nature of ledger account of M/s.Keystone & Construction cost, Form 16A and a reconciliation statement of the amount paid to M/s.Keystone as per books of accounts as against the TDS certificates. Thus, we find that the sum debited to the Profit and Loss account has been, in fact, fully paid by the assessee and hence cannot be treated as ‘contingent liability’. The AO went wrong in not noticing the fact that the said sum claimed as expenditure in the assessee’s books of accounts was not arising from any Arbitration Award that was pending at the said point in time so as to give rise to any expenditure in the nature of contingent liability. Thus, it can be said that the assessee’s liability to pay became crystallized in the year under consideration.

54. Further, with regard to the arbitration complaint filed by M/s.Keystone against the assessee seeking Rs.4.10 crores and counter complaint filed by the company seeking Rs.3.76 crores, the same has to be considered as a separate event on finalization of the arbitration. We find that the assessee vide their written submissions dated 21.02.2023 filed before the First Appellate Authority had submitted that an arbitration proceedings initiated and pending with M/s.Keystone (Chennai) Construction & Interiors P Ltd. was terminated under Section 32(2)(c) of the Arbitration and Conciliation Act, 1996 vide order passed on 13.07.2022 and that both the claim and the counter-claim had been terminated.

55. Nonetheless, we are of the view that the outcome of the arbitration proceedings would not change the nature of expenses already accounted in the books of accounts of the assessee in the year under consideration. We are of the view that the liability to pay as a result of the arbitration proceedings would be eligible for deduction in the year in which the liability is crystallized. Similarly, the award as a result of the arbitration proceedings would also be taxable in the year in which the award is made. Thus, the outcome of the arbitration proceedings cannot impact the eligibility of the assessee to claim the expenses already incurred by the assessee during the year under consideration. Thus, we find no infirmity with the order of the Ld.CIT(A) and hence we are decline to interfere with the same. The grounds of appeal raised by the revenue are dismissed.

56. The third issue in the present case pertains to the disallowance of site expenditure incurred aggregating to Rs.2,51,99,256/-, we find that the said expenditure was incurred towards ascertaining the feasibility of the project. The assessee had incurred the expenditure in the normal course of its business, i.e. being engaged in real estate development, identification of suitable sites, incurring incidental expenditure. The said expenditure would undoubtfully be classified as an expenditure that was incurred wholly and exclusively for business purposes and was eligible to be claimed as deduction u/s.37 of the Act. We find force in the submissions of the assessee that when the site was purchased, such expenditure could be capitalized as part of the cost incurred and in the event of the otherwise, it would very much be eligible to be claimed as an expenditure u/s.37 of the Act.

57. The Hon’ble Madras High Court in the case of Commissioner of Income- tax, Chennai v. Ceebros Hotels (P.) Ltd, reported in 440 ITR 200 while adjudicating the allowability of claim of interest expenditure on the loan taken by the said assessee (engaged in the real estate) as deduction u/s.36(1)(iii) of the Act, in view of the action of the AO disallowing the same on the ground that there is no activity had commenced in the said new project and land was not put to use, interest paid on loan borrowed for purchase of said land was to be capitalized and added back to work-in-progress account, had held as follows:

“15. The Assessing Officer, though admits that the assessee is in the business of Real Estate Development, came to the conclusion that the MRC Nagar project should be treated as stand-alone project, since no activity had commenced in the MRC Nagar project and the expenditure including the interest paid on the loan borrowed for the purchase of the land, needs to be capitalised and added back to the Work-in-Progress account. In this regard, the Assessing Officer has referred to the Form AS-16 issued by ICAI and the principles of Matching Concept of accounting to support his findings and according to the Assessing Officer, unless revenue is recognized from the project, corresponding expenditure cannot be allowed.

16. Section 36 of the Act deals with “Other deductions”. Sub-clause (1) of section 36 states that the deductions provided for in the various clauses enumerated thereunder, shall be allowed in respect of matters dealt with therein, in computing the income referred to in section 28 of the Act. For the purpose of the case on hand, clause (iii) could be relevant, which states that the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession would be allowable as deduction. The proviso in section 36(1) states that, provided that any amount of the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.

17. Therefore, the question which was examined by the Tribunal was the allowability or otherwise of the interest paid on the loan borrowed by the assessee from IFCI Limited and whether it would fall within the scope of section 36(1)(iii) of the Act.

18. As rightly noted by the Tribunal, the loan which was obtained by the assessee from IFCI Limited is for the purpose of business of the assessee and having accepted the said fact, the deduction of interest was disallowed only on the ground that the asset purchased by the assessee in MRC Nagar was not put to use in the Assessment Year under consideration for the purpose of business of the assessee. This appears to be factually incorrect, as could be seen from the material facts which were placed before the CIT(A) and noted by the CIT(A). When the appeal was being heard by the CIT(A), the assessee furnished an Abstract of Expenses pertaining to MRC Nagar project and the expenses were in the nature of advertisement expenses, architect fees, CMDA charges, consultancy charges, electricity charges, legal fees, rent, security charges, site expenses, various labour charges and purchase of materials. The assessee had also furnished the ledger accounts for these expenses and also the facts that they carried on major work of demolition of the existing structure which was newly built by the previous owner for Hotel business and this demolition was done by the assessee. This factual position would go to show that the land was put to use in the Assessment Year under consideration. On this issue, the Tribunal had rightly noted that the term “put to use” in the proviso in section 36(1)(iii) would be applied to capital asset/income earning apparatus/facilitating the business activity and therefore, the Statute envisages the importance of such capital asset should be put to use in the business in contra distinction to the inventory of the assessee.

19. Further, the Tribunal noted that the inventory in the business/holding of inventory in the business by itself is a business activity in the normal course and in continuation of business of construction pursued by the assessee. Therefore, it held that the attempt to apply the proviso to the case of the assessee would lead to wrong interpretation of law and therefore, the reasons given by the Assessing Officer to disallow the interest expenditure by applying the provisions of section 36(1)(iii) is not in accordance with law. Further, the Tribunal noted that the assessee is into the business of Real Estate Development and in the process of executing two projects at different places and the Assessing Officer was not justified in treating the two projects on stand-alone basis and also that the property in MRC Nagar was not put to use. Further, the Tribunal observed that the purchase of inventory in the course of carrying on business should be reckoned as continuation of same business activity in the normal course and cannot be equated or termed as extension of business activity. Furthermore, the Tribunal noted that the assessee has offered substantial income from the Atlantic project and the attempt to apply Matching Concept principle is misconceived.

20. So far as the decision of the Special Bench of the Tribunal in Wall Street Construction Ltd. case (supra) is concerned, the issue was whether, where the assessee has followed the Project Completion Method of accounting, the interest identifiable with that project should be allowed as deduction in the year when the project is completed and the income is offered from the project or it should be allowed on a year to year basis. In our considered view, the said question does not arise in the case on hand and therefore, the said decision cannot be applied to the facts before us.

21. Thus, we are of the view that the Tribunal was right in allowing the appeal filed by the assessee and holding that the term “put to use” applies to capital asset only because capital asset is held to facilitate the business activity and sometimes, it needs to be prepared after it is acquired for being used to facilitate the business activity and in the instant case, the assessee was able to establish that substantial activities had been done in the project, which would go to show that the property purchased has been put to use”

58. The Hon’ble Madras High Court in the aforesaid decision had observed that the allowability of an expenditure would not be dependent upon the reporting of corresponding income from the project in which such expenditure was so incurred, especially when the tax payer under consideration is into the business of real estate inasmuch as it is an undisputed fact that there is a common management, interlacing and interdependence of the projects pursued by the Assessee.

59. In any event, we find that neither of the authorities had doubted the genuineness of the said expenditure or rather the allowability of the claim of such expenditure for the assessment year under consideration, which also fortifies the allowability of the claim of expenditure in the hands of the assessee herein. The law laid down by the Hon’ble Supreme Court in the case of Excel Industries Ltd. (supra), relied upon by this Tribunal for adjudicating the 1st issue in the preceding paragraphs, would be squarely applicable to the present issue too. Respectfully following the aforesaid binding judicial precedent, we direct the AO to delete the disallowance of claim of site expenditure. The grounds of appeal raised by the assessee are allowed.

60. With regard to the fourth issue in the present case being the disallowance u/s.40(a)(ia) of the Act, the main stand of the Assessee on the applicability of the 2^nd proviso to Section 40(a)(ia) of the Act to the factual matrix of the present case. In this regard, the Ld.AR placed reliance on the decision of the Co­ordinate Bench of the Tribunal in the case of M/s.Hamosons Exports P. Ltd. in ITA No.623/CHNY/2020 wherein the Tribunal had held as under:

“However, in this appeal, the Ld.CIT(A) has confirmed the action of AO on one more ground to disallow the claim i.e. disallowance made since no TDS was deducted while making payment to M/s.Edelweiss under Section 40(a)(ia) of the Act,. In light of this particular reason emanating from this appeal, we set aside the impugned order of the Ld. CIT(A) and restore the matter back to the file of the AO with a direction that if M/s.Edelweiss has shown the amount in question in the return of income for AY 2015-16 and offered for tax the same, then there is no need of ANY disallowance u/s.40(a)(ia) of the Act. And for verification of this fact, the AO may call for necessary details, directly from M/s.Edelweiss and verify. Therefore, only for limited purpose, we remit this issue back to the file of the AO, and no disallowance is warranted if it is found that M/s Edelweiss has offered the same for taxation in its return of income, then in such an event, disallowance made to be deleted accordingly. Needless to say opportunity may be granted to assessee during verification as directed supra and assesee is at liberty to file relevant documents during the verification.”

61. Respectfully following the decision of the Co-ordinate Bench of the Tribunal, we direct the AO to examine the applicability of 2^nd proviso to Section 40(a)(ia) of the Act in accordance with the decision referred to hereinbefore by allowing the related grounds of appeal raised by the assessee.

62. With regard to the fifth issue in the present case, we find that the sum referred to by the AO were not been written off by taking it to Profit & Loss account as revenue expenditure during the year and the said amount stood as advances for land purchases as a balance sheet item. The assessee during the course of proceedings had furnished the copy of group summary and the ledger account of the parties wherein it is clearly evident that the above said amount has been shown forming part of the ‘Advances for Land Purchases’ amounting to Rs.21,19,53,837/- shown under Schedule 9 – ‘Loans and advances’ as on 31.03.2011 and was not treated as revenue expenditure which fact was overlooked by the lower authorities. The only disputed component in the present appeal is to the tune of Rs. Rs.27,05,500/- and considering the findings of the lower authorities, we are of the view that the matter requires to be remanded to the file of the AO to re-examine the issue afresh in the interest of natural justice. Needless to say, the assessee shall justify its plea before the AO for which an opportunity shall be granted by the AO. Hence, the grounds of appeal raised by the Assessee are allowed for statistical purposes.

63. With regard to the sixth and last issue in the present case, we find that the sole reason for the AO was on account of the difference between the sum shown under the head “Outwards” Rs.35,63,86,650/- in the stock statement and the total sales admitted by the assessee at Rs.32,93,72,344/-. The AO had concluded that there was a difference of Rs. 2,70,14,306/- (Rs.35,63,86,650/-minus Rs.32,93,72,344/-) which was omitted to be admitted by the assessee under the head Sales and had proceeded to add back the same as income of the assessee.

64. The assessee during the course of proceedings had submitted that the sum of Rs.2,70,14,306/- pertains to reversal entries passed in the Tally books to rectify the earlier erroneous entries passed inasmuch the said sum pertains to such stock reversal entries. We find force in the submissions of the assessee, although the said entry appears under the head ‘Outwards’, the same would not necessarily partake the character of sales. The assessee had filed reconciliation to this effect before the authorities as well as before us. Further, we find that neither of the Authority had found any corroborative evidence in the support of the alleged sale suppression during the course of assessment proceedings.

65. Moreover, in the same Stock summary’, the ‘Inwards’ column shows a value of Rs.13,74,04,833/-, Opening stock a value of Rs.41,52,12,563/- and Closing stock a value of Rs.39,97,36,121/-, while the opening stock and closing stock value matches with that of the books, the ‘Inwards’ value is not reflected in the Financials with the same number, but, is subject to reconciliation. Hence, this very fact substantiates that the ‘Inward / Outward’ entries were subject to reconciliation and ought not to be considered as such without due consideration of the appropriate reconciliation made in this regard.

66. The stock reversal is nothing but the factorization of the realized value / sales reported and hence the said reversal entry had no revenue impact especially the other factors not being disputed. The financial statements were fully analysed and dehors the special audit report, there are no material to prove such income being received by the Assessee. The motivated special audit report on the face of it should be rejected as not reliable inasmuch as the special audit cannot get into the domain of the AO. On the facts of the case, the special audit report on a plain reading had exceeded its purpose and its scope.

67. Hence, we find that action of the Ld.CIT(A) in sustaining the disputed component of the advances written off is not tenable for the above reasons and we direct the AO to delete the addition.

68. Hence, for all reasons stated in the preceding paragraphs, the said addition is liable to be deleted.

69. In result, the appeal filed by the assessee is allowed and the appeal filed by the revenue is dismissed.

Order pronounced in the court on 04th May, 2026 at Chennai.