2014 (1) TMI 1297 - AT - Income Tax

Nature of Receipts Business receipts or not Compensation received by the assessee Held that - The assessee firm made the payment in the course of purchase of land - Prior to the same, assessee firm was brought into existence for business activities - The intention of the assessee was to develop the land which could not be materialized because the Government of Maharashtra denied to sell the land to the assessee though there was no breach of terms and conditions on the part of the assessee - The Hon ble Supreme Court has not directed the State Government to give possession as per agreement but allowed compensation to be paid to the assessee as a measure to quantify the amount of compensation at 11% p.a. simple interest - the amount payable to the assessee will be for hardship or prejudice occasioned to the assessee thus, it makes clear that the amount received by the assessee was in the nature of compensation Thus, the CIT(A) was justified in holding that the amount received by the assessee is a business receipt Decided against Revenue. Year of accrual and taxability of the compensation received Held that - The compensation is received for breach of terms by government of Maharashtra - The compensation is received for loss sustained by the assessee accrued in the year of receipt as decided in CIT Vs. A. Gajapathy Naidu 1964 (4) TMI 6 - SUPREME Court - The amount of compensation has crystallized on the event of decision of the Hon ble Supreme Court which has taken place in the F.Y. 2004- 05 relevant to the A.Y. 2005-06 thus, The amount of compensation received was liable for consideration as business receipt in A.Y. 2005-06 as claimed by the assessee after considering allowable deductions under the Income- tax Act, 1961 - the CIT(A) was justified in directing the Assessing Officer to delete the addition for A.Y. 2001-02 , 2002-03 and 2003-04 Decided against Revenue. Disallowance of pre-operative expenses u/s 37(1) of the Act - Held that - The order of the CIT(A) upheld - The assessee has incurred expenditure during the period AY. 2000-01 to 2003-04 in relation to the proposed transaction of land purchase - The assessee has treated the said expenses as deferred expenses and has shown the same under the head pre-operative expenses on the asset side of the Balance sheet - All the expenses relating to a particular project are identified and are claimed as deduction only in the year the project is completed - The income of the project is offered to tax in the year in which the project is completed - The project got terminated in the A.Y. 2005-06 and hence the expenditure in relation to the project incurred under the head pre-operative expenses during the course of the project i.e. A.Y. 2000-01 to 2005-06 has been claimed in A.Y. 2005-06 - Relying upon Wall Street Construction Ltd. Vs. JCIT 2005 (9) TMI 228 - ITAT BOMBAY-F - in the case of assessee following project completion method true profits can be determined only when entire cost of the project, direct or indirect including financing cost is added to the value of work in progress - the CIT(A) deleted the pre- operative expenses claimed by the assessee in the A.Y. 2005-06 Decided against Revenue.

Issues Involved:
1. Nature of interest received from the Government of Maharashtra.
2. Taxability of interest in the year of receipt.
3. Allowability of preoperative expenses and compensation as deductible expenses under Section 37(1) of the Income Tax Act.
4. Reopening of the assessment.

Detailed Analysis:

1. Nature of Interest Received from the Government of Maharashtra:
The primary issue was whether the interest at 11% per annum received by the assessee from the Government of Maharashtra, as directed by the Hon'ble Supreme Court, constituted business receipts. The assessee, a partnership firm engaged in the business of Developers and Builders, had entered into an agreement to purchase land but was denied possession. Consequently, the matter reached the Hon'ble Supreme Court, which directed the Government to refund the payment along with interest calculated at 11% per annum. The Assessing Officer (AO) treated this interest as 'Income from other sources,' while the CIT(A) considered it as business receipts. The Tribunal upheld the CIT(A)'s view, stating that the interest received was indeed in the nature of compensation for the hardship faced by the assessee due to the breach of contract by the Government, thus qualifying it as a business receipt.

2. Taxability of Interest in the Year of Receipt:
The second issue was whether the interest should be taxed in the year of receipt or on an accrual basis. The AO contended that the interest income accrued from year to year and should be taxed accordingly. However, the CIT(A) and subsequently the Tribunal held that the compensation crystallized upon the Supreme Court's decision, which took place in the financial year 2004-05, relevant to the assessment year 2005-06. Therefore, the interest was rightly taxable in the year of receipt, i.e., A.Y. 2005-06, as claimed by the assessee.

3. Allowability of Preoperative Expenses and Compensation as Deductible Expenses:
For A.Y. 2005-06, the Revenue questioned the allowability of preoperative expenses amounting to Rs. 62,22,513 and compensation of Rs. 1,92,44,540 under Section 37(1) of the Income Tax Act. The AO disallowed these expenses, arguing they were not incurred wholly and exclusively for business purposes. The CIT(A) observed that the assessee had incurred these expenses in relation to the proposed land purchase transaction and treated them as deferred expenses, claiming them in A.Y. 2005-06 when the project terminated. The Tribunal upheld the CIT(A)'s decision, referencing the Special Bench's ruling in Wall Street Construction Ltd. Vs. JCIT, which supported the assessee's method of accounting for project expenses.

4. Reopening of the Assessment:
The Tribunal noted that since the issues on merits were decided in favor of the assessee, the preliminary issue regarding the reopening of the assessment became academic and did not require further deliberation.

Conclusion:
The Tribunal dismissed all appeals by the Revenue, affirming the CIT(A)'s decisions on all counts. The interest received was deemed business receipts taxable in the year of receipt, and the preoperative expenses were allowed as deductions under Section 37(1). The reopening of the assessment was rendered moot by the favorable rulings on the substantive issues.

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