Introduction: The Income Tax Appellate Tribunal (ITAT) Pune’s recent ruling in the case of Jayant Hari Mulay vs Deputy Commissioner of Income Tax (DCIT) brings clarity to the tax treatment of compensation paid to landlords for delayed possession of constructed flats. The decision centered around the applicability of such compensation as a deductible expense under work-in-progress.
Analysis: The appellant, Jayant Hari Mulay, is a promoter and builder who faced delays in completing a construction project. The delay led to a compensation payout of Rs. 37 lakh to the landlord, out of which Rs. 12 lakh was claimed as a deductible expense for the year in question. The tax authorities disallowed this claim, citing section 18 of the Real Estate Regulatory Authority (RERA), 2016, arguing that it pertains to compensating flat owners rather than land sellers.
In the appeal, the ITAT noted that the compensation was not for the purchase of the land but for the delay in handing over the constructed area. It was further noted that Rs. 25 lakh of this compensation had been claimed in earlier years as part of work-in-progress and was undisputed by the tax authorities. The ITAT considered an agreement provided by the appellant as additional evidence, suggesting the compensation was indeed for delay in possession handover. Considering this, the ITAT deemed it fair to remit the case back to the AO for verification of the agreement’s relevant clauses.
Conclusion: In its judgment, ITAT Pune asserted that if a compensation payment was due to delay in handing over possession, it should indeed be treated as part of work-in-progress. This ruling provides clarity on the tax treatment of such payments, and affirms that builders can deduct them as part of work-in-progress in their income tax computation. The outcome underscores the role of agreements in tax assessments and reemphasizes the need for detailed record-keeping in property transactions. This judgement can have a substantial impact on the real estate industry, where delays in construction and handover are unfortunately quite common.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee is directed against the order dated 01-03-2023 passed by the CIT(A) in National Faceless Appeal Centre, Delhi u/s.250 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2018-19.
2. The only issue raised in this appeal is against the confirmation of disallowance of Rs.12.00 lakh towards the amount paid to the landlord as compensation.
3. Pithily put, the facts of the case are that the assessee is a Promoter and Builder who had purchased certain piece of land for construction of flats. Pursuant to the agreement, the assessee was to hand over certain constructed flats to the seller of the land. A sum of Rs.12.00 lakh was claimed as deduction in respect of `Compensation paid to the Tenant’. The Assessing Officer (AO) called upon the assessee to explain the reasons for such deduction. The assessee explained that the project was supposed to be completed by 20 13-14, however, it was actually completed on 28-07-2017. After negotiating with the landlord, the assessee agreed to pay a sum of Rs.37.00 lakh as compensation towards non-completion and handing over the possession. Out of such Rs.37.00 lakh, a sum of Rs.25.00 lakh was paid in earlier years and capitalised as work-in-progress. The remaining amount of compensation was paid during the year under consideration. The AO did not agree with the assessee’s submission on noticing section 18 of Real Estate Regulatory Authority (RERA), 2016, which talks for providing compensation to the flat owners and not to the seller of the land. He, therefore, did not accept the assessee’s claim, which came to be affirmed in the first appeal.
4. I have heard the rival submissions and perusing the relevant material on record. The case of the assessee is that compensation of Rs.37.00 lakh was paid to the seller of the land not towards purchase of the land but towards the delay in handing over the possession of the built up area, as was stipulated to be. The ld. AR further submitted that a sum of Rs.25.00 lakh was claimed as part of work-in-progress in earlier years, which was not disturbed by the AO. In order to justify the payment made during the year, the assessee relied on an agreement with Mrs. Shobha Srikrushna Sawant, to whom such compensation was paid. It can be seen that there is some conflict between the stand taken by the assessee at the time of filing the return and that before the AO during the course of assessment proceedings. At the initial stage, the assessee claimed such compensation to have been paid to Tenant, whereas, during the course of assessment proceedings, the assessee claimed it as compensation to the seller. In support of the contention, the ld. AR relied on the above referred agreement of Sale cum Development made on 05-12-2008, which has been placed on record to support the contention that the payment so made was compensation to the owner of the flats for delay in handing over of the possession. Since this is an additional evidence which was not there before the authorities below, I am of the considered opinion that it would be just and fair if the impugned order is set aside and the matter is remitted to the AO for verifying the relevant clauses of the agreement. If the payment is found to be compensation to the owner of the flats for delay in handing over of the possession, such amount should be treated as a part of work-in-progress. In the otherwise scenario, the AO will decide the nature of payment as per law after affording reasonable opportunity of hearing to the assessee.
5. In the result, the appeal is allowed for statistical purposes.
Order pronounced in the Open Court on 07th June, 2023.