2019 (5) TMI 1691 - AT - Income Tax

Nature of expenditure - revenue or capital expenditure - Expenses for removing encumbrances, settlement of pending issues in various legal Forums, acquisition of clear development right - HELD THAT - Assessee incurred/paid expenses of ₹ 50.84 Crore for removing encumbrances, settlement of pending issues in various legal Forums, acquisition of clear development right pertaining to clock underneath the project Fantasia. Therefore, the disallowance made by AO and reducing the same from work-in-progress was not justified. Thus, he we set-aside the order of lower authorities and direct the Assessing Officer to treat the expenses as Revenue Expenditure. In the result, the grounds of appeal raised by assessee are allowed. Accrual of income - addition on account of Capital Expenditure worked out the profit of project and added the same to the income of assessee - HELD THAT - There is no dispute that initially Occupancy Certificate of the project was issued on 21.10.2011 by NMMC. The operation of Occupancy Certificate was stayed by NMMC on the application of Rohit Reddy. It is an admitted fact that ld. Civil Judge of City Civil Court restrained the assessee and directed to maintain status quo till the disposal of Suit. The Reddy Group withdrew the said suit on 14.12.2012, during the Assessment Year 2013- 14. The assessee has shown the Project Completion in Assessment Year 2013-14. The treatment of revenue recognition on project completion is not in dispute. Therefore considering the facts that the assessee was restrained to handover the units in the project by the order of Civil Court and the occupancy certificate was also stayed by operation of injunction order. The injunction order was lifted on the withdrawal of the civil suit on 14.12.2013. The assessee has shown the completion of the project in assessment year 2012-13, therefore, the action of the assessing officer in bringing the profit in the year under consideration was not justified. Thus, we affirm the view taken by the ld CIT(A). In the result, the grounds of appeal raised by the revenue are rejected. Appeal of the revenue is dismissed.

Issues Involved:
1. Disallowance of ?50.84 Crores paid by the appellant for development rights.
2. Deletion of addition of ?114.84 Crores on account of revenue recognition from the Fantasia building project.

Issue-Wise Detailed Analysis:

1. Disallowance of ?50.84 Crores Paid by the Appellant for Development Rights:

Facts and Background:
The appellant, a real estate development company, claimed ?50.84 Crores as revenue expenditure for development rights in the Fantasia Business Park project. The Assessing Officer (AO) disallowed this, treating it as capital expenditure for acquiring shares of Mohan Entertainment Co. Ltd. (MECL) from the Reddy family.

Arguments by the Appellant:
The appellant argued that the payment was for improving and bettering its development rights and not for purchasing equity shares. The appellant contended that the ?50.84 Crores was part of the project cost and should be allowed as a revenue expenditure.

Arguments by the Revenue:
The revenue, supported by findings from a survey by the Directorate of Income-tax (Investigation), Hyderabad, argued that the payment was for the acquisition of shares, thus capital in nature. The revenue cited statements from the Reddy family treating the receipt as capital gains.

Tribunal's Analysis:
The Tribunal examined the nature of the payment, considering the commercial expediency and the surrounding circumstances, including litigation and disputes between the appellant and the Reddy family. The Tribunal referred to several judicial precedents, emphasizing that expenditures incurred for protecting business interests and removing encumbrances are allowable as revenue expenditure.

Conclusion:
The Tribunal concluded that the payment of ?50.84 Crores was made for commercial expediency to settle disputes and ensure smooth project completion. Therefore, it should be treated as revenue expenditure. The disallowance by the AO was not justified, and the Tribunal directed the AO to treat the expenses as revenue expenditure.

2. Deletion of Addition of ?114.84 Crores on Account of Revenue Recognition from the Fantasia Building Project:

Facts and Background:
The AO added ?114.84 Crores to the appellant's income, arguing that the project was completed in the relevant assessment year as the Occupancy Certificate was received. The appellant contended that due to legal disputes and a stay order, the revenue could not be recognized in the said year.

Arguments by the Appellant:
The appellant argued that the project was not complete due to ongoing legal disputes and an injunction order from the Civil Court, which restrained the appellant from creating third-party rights and maintaining the status quo. The revenue recognition was deferred to the subsequent year when the legal issues were resolved.

Arguments by the Revenue:
The revenue argued that the receipt of the Occupancy Certificate indicated project completion, and thus, the revenue should be recognized in the relevant assessment year.

Tribunal's Analysis:
The Tribunal noted that the appellant consistently followed the Project Completion Method for revenue recognition. It acknowledged the legal disputes and the stay order, which prevented the appellant from recognizing revenue in the relevant year. The Tribunal referred to the Civil Court's order and the subsequent withdrawal of the suit, which allowed the appellant to recognize revenue in the subsequent year.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?114.84 Crores, concluding that the appellant rightly deferred revenue recognition due to the legal constraints. The Tribunal affirmed that the AO's action was not justified, and the grounds of appeal raised by the revenue were rejected.

Summary:
The Tribunal allowed the appellant's appeal regarding the disallowance of ?50.84 Crores, treating it as revenue expenditure incurred for commercial expediency. It also dismissed the revenue's appeal, upholding the deletion of ?114.84 Crores, recognizing the legal constraints that prevented revenue recognition in the relevant assessment year.

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