×Latest Case Laws on Income Tax by various High Courts of India
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20-03-2019, GOPAL DAS ESTATES, Section 260-A, 36(1)(ii), HIGH COURT OF DELHI
1. These are 11 appeals under Section 260-A of the Income Tax Act, 1961 („Act‟) of which 1 is by the Assessee and 10 are by the Revenue. Apart from the facts being similar, the questions of law too are common to many of the appeals. They are accordingly disposed of by this common judgment.
2. The Assessee is engaged to the business of construction and sale of commercial space. The Assessee developed the 17 storied building known as Dr. Gopal Das Bhawan in Connaught Place in New Delhi. The Assessee follows the Completed Contract Method („CCM‟) as compared to the Percentage Completion Method („PCM‟). The case of the Assessee is that since it follows the CCM, income is not recognised till the completion of the project. All receipts are treated as „advance‟ and all direct expenses are accounted for as „capital work and progress.‟ A reference is made to the Accounting Standard („AS‟) 7 issued by the Institute of Chartered Accountants of India („ICAI‟) initially in 1983 which was revised first in 2002 and then in 2016. According to the Assessee, only on completion or substantial completion of the project, revenue is recognised. Payment of compensation to flat/space buyers
3. The Assessee states that the Gopal Das Bhawan Project was completed in the Financial Year („FY‟) 1994-95 relevant to Assessment Year („AY‟) 1995-96. Some of the allottees of the flats refused to take them for completion since the New Delhi Municipal Council („NDMC‟) changed the usage of the Lower Ground Floor („LGF‟). The Assessee then started negotiating with the relevant flat buyers and persuaded them to surrender their ownership and allotment letters. The Assessee decided to repay the advance money received from these flat owners which worked out to Rs.32,08,271. The Assessee also decided to pay in addition compensation amounting to Rs.1,18,38,705 in lieu of surrender of their rights in the flat.
This expenditure was claimed by the Assessee as „revenue in nature‟ and was charged to the Profit and Loss Account („P&L Account‟). Proceedings before the AO
4. The Assessing Officer („AO‟) who picked up for scrutiny the Assessee‟s return for AY 1995-96 by an order-sheet entry dated 5th December 1997 required the Assessee to give the full details and addresses of the persons to whom the aforementioned compensation amounts were paid. The Assessee was asked to explain why the said amounts should not be disallowed as capital expenditure/loss as it had not been paid for business purposes.
5. By a reply dated 15th December 1997 the Assessee contended that the space to be sold was in its stock and trade. The space allotted to various persons had been surrendered by them for various reasons. Such persons who surrendered had insisted that since they had invested money with the Assessee which had remained with the Assessee for a number of years, the Assessee should compensate them for the loss of the interest income on such investment. Considering that the space surrendered by such allottees would give the Assessee an opportunity to sell the same space at a higher rate, the Assessee considered it commercially prudent to pay them compensation in order to get the spaces surrendered. The Assessee‟s contention was that since such payment pertained to stock and trade, it cannot be considered as capital expenditure or capital loss.
6. The AO negatived the above plea of the Assessee by holding that the Assessee had not paid any compensation to the allottees but had in fact “repurchased these flats” since the allottees had “surrendered their rights in those flats.” Consequently, it was held that the compensation paid to the flat owners could not be said to be business expenditure but rather was “capital investment in purchase of stock and trade.” It was, however, observed that the Assessee was free to include the cost of compensation in the cost of the flats so acquired and claim deduction of the amount at the time of sale as cost of purchase of the flats. It is observed that the Assessee had paid compensation amount “once and for all to repurchase the property” and this was “in fact a sale consideration and cannot be allowed as business expenditure.”
7. The AO further observed that enquiries had been made with some of flat owners to ascertain the treatment they had given to the said receipt of compensation in their books of accounts and income tax returns. All of them had shown the amount received from the Assessee as capital gains in their books of accounts as well as income tax returns after indexation of the cost of acquisition. This was an additional ground for the AO to reject the plea of the Assessee that the payment of compensation was business expenditure. Accordingly, the payment of compensation towards “repurchase of the flat”