June 2019

Section 37(1) – Business expenditure – Compensation paid by assessee developer to allottees of flats for surrendering their rights was to be allowed as business expenditure

K. B. BHUJLE
Advocate

17

Gopal Das Estates & Housing (P) Ltd. vs. CIT; [2019] 103 taxmann.com 334 (Delhi)

Date of order: 20th March, 2019

 

Section 37(1) – Business expenditure – Compensation paid by assessee developer to allottees of flats for surrendering their rights was to be allowed as business expenditure

 

The assessee was engaged in the business of construction and sale of commercial space. The assessee developed a 17-storeyed building known as GDB in New Delhi. It followed the Completed Contract Method (CCM) as compared to the Percentage Completion Method (PCM). It booked flats to various persons after receiving periodical amounts as advance. 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 repaid advance money received from these flat owners and also paid compensation in lieu of surrender of their rights in the flats. This expenditure was claimed by the assessee as 'revenue in nature' and was charged to the profit and loss account (P&L Account).

 

The A.O. 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 could not be allowed as business expenditure.' He observed further that flat owners had shown the amount received from the assessee as capital gains in their books of account as well as income tax returns after indexation of the cost of acquisition. Accordingly, the payment of compensation towards 'repurchase of the flat' was disallowed by holding that it was 'a capital expenditure’. The said amount was added back to the income of the assessee.

     

The Commissioner (Appeals) directed that compensation paid to the allottees of the flats for surrendering the rights therein be allowed as business expenditure of the assessee. But the Tribunal set aside the order of the Commissioner (Appeals) and restored the order of the A.O.

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