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

17

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

Date of order: 20^th 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.

On appeal
by the assessee, the Delhi High Court reversed the decision of the Tribunal and
held as under:

“i)   In the instant case, the assessee has a
plausible explanation for making such payment of compensation to protect its
‘business interests.’ While it is true that there was no ‘contractual obligation’
to make the payment, it is plain that the assessee was also looking to build
its own reputation in the real estate market.

ii)   Further, the mere fact that the recipients
treated the said payment as ‘capital gains’ in their hands in their returns
would not be relevant in deciding the issue whether the payment by the assessee
should be treated as ‘business expenditure.’ It is the point of view of the
payer which is relevant.

iii)   The payment made by the assessee to the
allottees of the flats for surrendering the rights therein should be allowed as
business expenditure of the assessee.”