2016 (11) TMI 1303 - AT - Income Tax

Disallowance of payment of compensation to flat owners - delay in handing over of possession to the flat owners - Held that - The assessee was justified in compensating the allottees of the flats for delay in handing over of possession. The amount paid by the assessee was certainly on account of business expediency. Another reason for disallowing the payment of compensation was that the amount paid by the assessee was in the nature of penalty for Breach of contract. The Delhi Bench of the Tribunal in the case of DCIT Vs. M/s. Achiever Builders (P) Ltd. ( 2014 (6) TMI 251) where the Department disallowed the amount paid by the assessee to the customers for delay in handing over of possession of properties holding it to be penal in nature held, that the amount paid by the assessee to customers is compensatory in nature and not penal. The compensation was paid for delay in handing over of possession of the property, the liability to pay such compensation arose in the course of business of assessee. In the present case the assessee paid compensation to the assessee under similar circumstances and not out of any liability arising from invoking of penal provisions of any statute. Thus, the compensation paid by the assessee cannot be held to be penal in nature. Thus we hold the expenditure incurred by the assessee on payment of compensation to the flat owners for delay in possession as allowable. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of salary paid to Payal K. Mutha.
2. Disallowance of payment of compensation to flat owners.

Detailed Analysis:

1. Disallowance of Salary Paid to Payal K. Mutha:
The assessee did not press this ground during the appeal, leading to its dismissal as not pressed.

2. Disallowance of Payment of Compensation to Flat Owners:
The primary issue in this appeal is the disallowance of compensation paid by the assessee to flat owners for the delay in handing over possession of flats in the housing project "Kamdhenu Siddhi." The assessee contended that the compensation was paid out of commercial expediency and in accordance with a mutual agreement with the flat owners. The compensation was paid to 22 flat owners by account payee cheques, and confirmations from all flat owners were produced.

Arguments by the Assessee:
- The compensation was paid due to a delay in handing over possession, which was initially agreed to be on or before 31-05-2008 but was delayed until February-March 2010.
- The compensation was paid to maintain goodwill and avoid higher liabilities under the Maharashtra Ownership Flats Act, 1963, which mandates refunding the amount received from flat owners along with interest if possession is delayed beyond a reasonable period.
- The compensation was not penal but compensatory in nature, as the delay was significant (20 months) and beyond the reasonable extension period allowed under the Act (6 months).
- The assessee relied on precedents from the Delhi Bench of the Tribunal (DCIT Vs. M/s. Achiever Builders (P) Ltd.) and Mumbai Bench of the Tribunal (M/s. Malabar Industries Pvt. Ltd. Vs. ITO) to support the claim that the compensation was paid out of business expediency.

Arguments by the Revenue:
- The compensation was not based on any contingent liability but was a self-assumed liability, which is not allowable under the Income Tax Act.
- There was no covenant in the agreement between the assessee and flat owners regarding compensation for delayed possession.
- The compensation, if paid under the Maharashtra Ownership Flats Act, 1963, would be in the nature of a penalty, which is not an allowable expenditure.

Tribunal's Findings:
- The Tribunal observed that the assessee, as a developer, was governed by the provisions of the Maharashtra Ownership Flats Act, 1963, which mandates compensation for delay in possession beyond a reasonable period.
- The Tribunal referenced the Mumbai Bench of the Tribunal's decision in M/s. Malabar Industries Pvt. Ltd. Vs. ITO, which allowed compensation as a deductible expense on the principle of business expediency, even without a specific clause in the agreement.
- The Tribunal noted that the compensation paid by the assessee was significantly lower than the potential liability under the Act if the flat owners demanded a refund with interest.
- The Tribunal disagreed with the Commissioner of Income Tax (Appeals) that the delay was minor and that the compensation was avoidable. The delay was almost two years, far exceeding the reasonable extension period.
- The Tribunal emphasized that recent legal developments, such as the Real Estate (Regulation and Development) Act, 2016, underscore the seriousness of delays in handing over possession and mandate compensation for such delays.
- The Tribunal concluded that the compensation paid was on account of business expediency and not penal in nature, referencing the Delhi Bench of the Tribunal's decision in DCIT Vs. M/s. Achiever Builders (P) Ltd.

Conclusion:
The Tribunal allowed the expenditure incurred by the assessee on payment of compensation to the flat owners for delay in possession as an allowable deduction, thus partly allowing the appeal of the assessee. The order was pronounced on September 16, 2016.