2013 (6) TMI 622 - AT - Income Tax

Compensation charges - revenue v/s capital - CIT(A) held the charges as revenue expenditure - Held that - The transaction entered into by the assessee, shown as payment of compensation and claimed as a revenue expenditure, cannot be said to be a mere camouflage or subterfuge designed by the assessee. The assessee had received advance amounts against the booking of plots. These amounts kept lying with the assessee for over a decade. However, the deals could not finalise and the plots remained under the ownership and possession of the assessee company only. The payment was only a part payment, which was returned by the assessee along with the proportionate interest thereon. This payment of interest is not only payment due to the depositor, but it is also payment made as a sound business policy, lest other prospective buyers be shooed away by the factum of non-payment of interest to the earlier customers, even though the advance amounts kept lying with the assessee for years together. Since the payment was in the course of business of the assessee company, it was rightly claimed as a business expenditure. The nomenclature of the payment being not determinative of the nature thereof, it matters little that it was termed as compensation which, otherwise too, it indeed is, as discussed. The payment, however, has never been shown to be sale consideration for re-purchasing the plots, as tried to be made out by the Assessing Officer. Once the plots never left the ownership and possession of the assessee, there is no question of their being re-purchased by the assessee company. CIT (A) also found the amount paid by the assessee to have been allowed to the assessee as revenue expenditure pertaining to the issue of consistency. In favour of assessee.

Issues Involved:
1. Whether the compensation charges claimed by the assessee as revenue expenditure are allowable.
2. Whether the amount paid by the assessee for the surrender of plots by the allottees represents purchase consideration or compensation.
3. The method of accounting and valuation of closing stock followed by the assessee.
4. Consistency in the allowance of similar expenditures in previous years.

Detailed Analysis:

Issue 1: Allowability of Compensation Charges as Revenue Expenditure

The assessee claimed a deduction of Rs. 21,02,000/- as compensation expenses, which included amounts paid to four individuals for the surrender of plots. The Assessing Officer (AO) disallowed this claim, treating the payments as capital expenditure, arguing that these payments were for the re-purchase of plots, thus enhancing the stock in trade. The AO cited case laws to support that such expenditure is capital in nature.

The CIT (A) initially allowed the claim, stating that the plots were never sold to the buyers; hence, there was no re-purchase. The Tribunal remitted the matter back to the CIT (A) to re-examine the issue considering the method of accounting and whether such expenditure was allowed in earlier years.

Upon re-examination, the CIT (A) again allowed the claim, concluding that the payments were refunds of advances along with interest and thus were revenue expenses. The Tribunal upheld this view, noting that the payments were made to compensate the prospective buyers who had booked plots but never completed the purchase, and the plots remained with the assessee.

Issue 2: Nature of Amount Paid for Surrender of Plots

The AO contended that the payments made by the assessee for the surrender of plots were misleadingly termed as 'compensation' and were actually purchase consideration for re-purchasing the plots. The CIT (A) and the Tribunal found that the plots were never sold to the buyers, and the payments were refunds of advances with interest, not re-purchase considerations. The Tribunal emphasized that the real nature of the payment, not its nomenclature, should be considered, and in this case, the payments were rightly termed as compensation.

Issue 3: Method of Accounting and Valuation of Closing Stock

The Tribunal had directed the CIT (A) to re-examine the method of accounting and valuation of closing stock followed by the assessee. The CIT (A) found that the assessee consistently followed the cost method for valuing land stock and recognized sales only upon full payment and possession transfer. The compensation payments did not form part of the stock in trade but were treated as business expenses.

Issue 4: Consistency in Allowance of Similar Expenditures

The CIT (A) noted that similar compensation expenses were allowed as revenue expenditure in previous years during scrutiny assessments. The Tribunal confirmed that such consistency in treatment supported the assessee's claim for the current year.

Conclusion:

The Tribunal upheld the CIT (A)'s decision, confirming that the compensation charges claimed by the assessee as revenue expenditure were allowable. The payments were refunds of advances with interest, not re-purchase considerations, and were consistent with the assessee's accounting practices and previous allowances. The appeal filed by the department was dismissed.

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