2021 (5) TMI 590 - AT - Income Tax

Disallowance of expenditure on assets transferred to work in progress - looking at the accounting treatment assessee has claimed this amount as deductible expenses - as per assessee cost of parking space for shops already sold cannot be carried on in work in progress but has to be charged to the profit and loss account and therefore the value of this land has not been carried in work in progress at the end of the year - HELD THAT - Assessee has met its obligation by providing a plot of land to be used as a parking space by the shop owners and therefore the assessee is entitled to claim deduction of the cost of land given for parking space. Even after passing of almost a decade, the assessee has not sold that plot of land, which was used as a parking space by the shop owners. Even if it would be sold at any later point of time by the assessee, as assessee is a legal owner, the necessary profit is required to be charged to tax. In fact in the present case the full consideration received by the assessee would be income of the assessee as assessee has already taken the cost of the plot as a deduction u/s 37 (1) or u/s 28 of the income tax act. By providing the plot of land assessee has incurred a cost of the project for providing the parking space to the shop owners, which was a commercial obligation on the assessee, the above cost is required to be granted as deduction to the assessee. Whether there was any legal obligation on the assessee for providing a parking spaces is also established as the assessee was granted permission to construct shopping mall only if it had a proper parking facility as per HUDA Rules. Thus assessee has also legal obligation to provide parking spaces to buyers of shopping complex. In view of this, we direct the assessing officer to delete disallowance on account of parking space provided to shop owners/office owners of the mall. Therefore, we reverse the orders of the lower authorities and allow the appeal of the assessee.

Issues Involved:
1. Disallowance of expenditure of ?37,909,943/- claimed by the assessee.
2. Legal and commercial obligation of the assessee to provide parking space.
3. Treatment of compensation received for acquired parking space.
4. Valuation and accounting treatment of the land used for parking.

Detailed Analysis:

1. Disallowance of Expenditure of ?37,909,943/- Claimed by the Assessee:
The primary issue is the disallowance of an expenditure of ?37,909,943/- claimed by the assessee, M/s Crown International, for the assessment year 2014-15. The assessee, a partnership firm engaged in real estate and renting properties, claimed this amount as deductible expenses in their profit and loss account. The expenditure was related to converting a plot of land into a parking area after the original parking space was acquired by DMRC for a Metro Rail project. The assessing officer (AO) disallowed this expenditure, considering the land as a non-depreciable capital asset still owned by the assessee.

2. Legal and Commercial Obligation of the Assessee to Provide Parking Space:
The assessee argued that it was under a commercial obligation to provide parking space to the shop owners of the mall, as per the sanctioned plan and agreements made during the sale of commercial spaces. The Commissioner of Income Tax (Appeals) [CIT(A)] and the AO, however, held that there was no legal obligation for the assessee to provide this parking space and that the land was still in the name of the assessee, allowing them to sell it in the future.

3. Treatment of Compensation Received for Acquired Parking Space:
The assessee received compensation of ?9 crores for the acquisition of the original parking area by DMRC, which was offered for taxation as business income. The assessee then claimed the expenditure of ?37,909,943/- for converting an adjoining plot into a parking area, arguing that it was a commercial necessity to fulfill the promise made to the shop owners.

4. Valuation and Accounting Treatment of the Land Used for Parking:
The assessee did not include the cost of the land used for parking in the work-in-progress at the end of the year, arguing that the market value of this land was zero since it was now dedicated to parking and could not be used for any other purpose. The AO and CIT(A) disagreed, maintaining that the land's value could not be considered zero as the title remained with the assessee.

Judgment:
The tribunal carefully considered the rival contentions and the evidence presented, including the sanctioned plans and agreements. It was established that the assessee had a commercial obligation to provide parking space, as per the approved plan and the agreements with shop owners. The tribunal noted that the assessee fulfilled this obligation by converting an adjacent plot into a parking area, which was now used by shop owners and the public.

The tribunal held that the expenditure of ?37,909,943/- incurred for providing the parking space was a legitimate business expense and should be allowed as a deduction. It was also noted that the assessee had not sold the plot even after a decade, reinforcing the commercial obligation to provide parking.

The tribunal directed the AO to delete the disallowance of ?37,909,943/- and allowed the appeal of the assessee, reversing the orders of the lower authorities.

Conclusion:
The appeal of the assessee was allowed, with the tribunal recognizing the commercial obligation to provide parking space and directing the AO to allow the expenditure as a deduction. The judgment emphasized the importance of fulfilling commercial obligations as per sanctioned plans and agreements in the real estate business.

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