2017 (6) TMI 515 - AT - Income Tax

Disallowance of compensation paid on breach of contract - failure to fulfill the sale agreement of property - property was not belonging to the assessee - crystallization of liabiltiy - bogus or colourable device to avoid taxation - Held that - Assessee need not to be the owner of the property and still enter into a contract with promoters to sell such property to deliver in future to the buyer of the property - this nature of business of assessee has been accepted by AO for the AY 2008-09 - Liability to pay damages arises only on passing award by arbitrator and not on the date of breach of contract and further it has been held that Liability can be said to have crystallized only when the damages is determined and accepted by both the parties as per the decision of Kerala High Court in the case if Asuma Cashew Co. v. CIT 1989 (2) TMI 23 Entries in the books of accounts are not conclusive of matter if the same are not in conformity with the accounting principles - true nature of the transaction and whether it has resulted in profit or loss to the assessee is required - assessee firm has maintained its accounts on mercantile system - the principle of prudence seeks to ensure that provision ought to be made for all known liabilities and losses even though there may remain some uncertainty with its determination - The liability to pay the compensation and damages is also a certain liability as per the terms and conditions of the agreement - the failure of the assessee to fulfill its obligation is in the nature of default of business obligation and therefore the compensation paid by the assessee would become an allowable claim being the business loss - when the assessee has realized in definite terms that it would not be possible for it to honour the commitment and obligation under the agreement then the liability arises under the agreement is a certain liability - therefore the liability to pay the compensation was never disputed by the assessee only the quantum was settled through Arbitration - liability to pay the compensation was crystallized when the assessee accepted its failure to perform its part under the agreement within the stipulated time period - The assessee has offered the income arising from the project in question to tax and therefore the transaction of development of properties in question cannot be held as a bogus or colourable device - Decided in favor of assessee

Issues Involved:
1. Whether the agreements were entered by Shri P. Dayananda Pai in his individual capacity or on behalf of the assessee firm.
2. Whether the properties agreed to be sold belonged to the assessee.
3. Whether the liability had crystallized in the previous year relevant to the Assessment Year 2005-06.

Issue-Wise Analysis:

1. Agreements Entered by Shri P. Dayananda Pai:
The Assessing Officer (AO) objected to the claim by stating that the agreements were entered into by Shri P. Dayananda Pai in his individual capacity. The assessee countered this by presenting evidence that all transactions were entered in the name of Shri P. Dayananda Pai, who is the Managing Partner of the assessee firm. The assessee provided details of various transactions and balance sheets showing property advances paid, which were accepted by the AO in earlier and subsequent assessment years. The Tribunal noted that the AO had accepted similar transactions in the past, and thus, the AO could not treat the transaction differently merely because the assessee incurred a loss. The Tribunal concluded that the transactions were entered into by Shri P. Dayananda Pai for and on behalf of the assessee firm and were duly recorded in the books of accounts.

2. Ownership of Properties:
The AO contended that the properties did not belong to the assessee. The assessee argued that it acquired interest, rights, and title over the properties without registering them in its name and offered income from such transactions to tax. The Tribunal found that the properties were identified and the JDAs (Joint Development Agreements) were produced by the assessee. The Tribunal held that the properties were duly identified in the agreement dated 2.4.2002 and that the assessee had acquired rights in these properties through JDAs. Therefore, the Tribunal found no merit in the AO's objection regarding ownership.

3. Crystallization of Liability:
The AO argued that the liability had not crystallized in the previous year relevant to the Assessment Year 2005-06, as the extended time for delivery of the constructed area was up to 10.03.2006. The assessee asserted that the liability stood crystallized on 31.3.2005, based on the principle of prudence and conservatism. The Tribunal referred to AS-4 (Accounting Standard 4) and noted that adjustments to assets and liabilities are required for events occurring after the balance sheet date if they provide additional information affecting the amounts relating to conditions existing at the balance sheet date. The Tribunal concluded that the liability to pay compensation was certain and crystallized when the assessee accepted its failure to perform its obligations within the stipulated time. The Tribunal allowed the claim of the assessee.

Additional Objections by the AO:
The AO raised other objections, such as the property not yielding income and the transaction being a colourable device. The Tribunal found these objections baseless, noting that yielding of income is not a precondition for allowing the deduction and that there was no evidence of the transaction being a colourable device. The compensation paid was considered income by the recipient, and the transaction was part of the regular business activities of the assessee.

Conclusion:
The Tribunal set aside the orders of the authorities below and allowed the claim of the assessee. The appeal of the assessee was allowed.

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