2010 (11) TMI 655 - AT - Income Tax

Disallowance of payment of compensation - agreement in respect of sale of rights in properties - failure to fulfill the conditions of the agreement - Partnership firm versus individual capacity of the partners - whether the agreement entered into by Shri Dayanand Pai with M/s MIPL and also subsequently with M/s CALL is in his individual capacity or in the capacity as the Managing Partner of the assessee firm - it was held by the CIT(A) that the joint development agreements have been entered into only after the agreement has been entered into on 02-04-2002 and therefore the assessee or Shri Dayanand Pai for that matter had no right in the said properties to transfer the same - it is the case of the assessee that it is the beneficiary of the said agreement and therefore will have to fulfill the liability of paying the compensation - Appeal is allowed by way of remand to AO with a direction to examine the parties to the agreements and also to examine the joint development agreements and to reconsider the issue in accordance with law.

Issues Involved:
1. Disallowance of liability to pay compensation as a business deduction.
2. Clarification of agreements entered by the individual partner versus the firm.
3. Justification of compensation payment to M/s. Birla Brothers Pvt. Ltd. and M/s. Central India Industries Ltd.
4. Liability to interest under section 234B of the IT Act.

Issue-wise Detailed Analysis:

1. Disallowance of Liability to Pay Compensation as a Business Deduction:
The assessee, a partnership firm engaged in real estate, claimed a compensation payment of Rs. 64.74 Crores as a deduction, which was disallowed by the Assessing Officer (AO). The AO noted that the agreements leading to the compensation were entered by Sri P. Dayanand Pai in his individual capacity, not on behalf of the firm. The CIT(A) upheld the AO's decision, stating that the agreements were not for the business purposes of the firm and thus not allowable under section 37(1) of the IT Act. The Tribunal found that the firm received the sale consideration of Rs. 22 Crores, suggesting it was the beneficiary and thus liable for the compensation. The Tribunal remanded the issue back to the AO to examine the parties involved and the joint development agreements to determine the true nature of the agreements.

2. Clarification of Agreements Entered by the Individual Partner versus the Firm:
The AO observed that Sri P. Dayanand Pai entered into agreements with M/s Manipal Infocom Pvt. Ltd. (MIPL) and later with Caraka Academy of Lifelong Learning Pvt. Ltd. (CALL) in his individual capacity. The Tribunal noted that while the agreements were in Sri Pai's name, the firm received the sale consideration and showed it as an advance in its books. The Tribunal directed the AO to further investigate whether Sri Pai acted on behalf of the firm by examining the other parties to the agreements and the joint development agreements.

3. Justification of Compensation Payment to M/s. Birla Brothers Pvt. Ltd. and M/s. Central India Industries Ltd.:
The Tribunal did not specifically address the disallowance of compensation payable to M/s. Birla Brothers Pvt. Ltd. and M/s. Central India Industries Ltd. in detail. The primary focus was on the compensation paid to CALL and the agreements involving Sri Pai and MIPL.

4. Liability to Interest under Section 234B of the IT Act:
The assessee contested the liability to interest under section 234B. The Tribunal noted that this ground is consequential and remanded it to the AO for reconsideration based on the final determination of the primary issues.

Conclusion:
The Tribunal remanded the case to the AO for a thorough examination of the agreements and the parties involved to determine the true nature of the transactions. The AO was directed to reconsider the issues in accordance with the law, providing the assessee a fair opportunity to present their case. The appeal was allowed for statistical purposes, and the issue of interest under section 234B was also remanded for reconsideration.

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