2022 (3) TMI 1016 - AT - Income Tax

Interest Disallowance u/s 36(1)(iii) - As assessee said interest expenditure has been apportioned between the various properties on pro-rata basis and the properties were held as current assets for re-sale / development and not as a capital asset - HELD THAT - We find that the assessee is engaged in real estate and procure land for business purposes. The interest paid by the assessee has been added on pro-rate basis to various land owned by it. In the year of sale, cost of land including interest has been debited in the Profit Loss Account. The assessee has consistently followed this method of accounting for various years and the same has been accepted by the revenue. If the interest cost is not allowed to the assessee, the same would never be allowed to the assessee since it is not the case of Ld. AO that the assessee is claiming double deduction of interest expenditure. It could also be seen that interest cost is a period cost and allowable to the assessee in the year in which it has been incurred - assessee has chosen to claim the same only in the year when the land is sold. Thus, no infirmity could be found in the impugned order, on this issue. The ground thus raised stand dismissed. Disallowance of compensation Paid - joint-owners of this property entered into joint development agreement (JDA) with another entity GHLPL which was unable to progress with development, the agreement was cancelled and the owners entered into another MOU with the assessee for development of the property and compensation was stated to be paid by the assessee to GHLPL and the same was claimed as project expenditure - claim was rejected by AO on the ground that it was the duty of land owners to give possession of the land free from any claim or encumbrance payment was nothing but charity and the payment was not supported by the terms of the agreement / MOU - HELD THAT - We find that the amount was paid by the assessee in the regular course of its business to settle the claim of the earlier developer. It is also undisputed fact that the amount was subsequently recovered by the assessee and offered to tax during AY 2011-12. Therefore, impugned order does not call for any interference on our part. The grounds thus raised stands dismissed. Bad-Debts written-off - Expenditure was held to be allowable expenditure u/s 37(1) - HELD THAT - We find that this amount has been lost by the assessee in the regular course of its business. Any such loss has rightly been held to be allowable u/s 37(1). Finding no infirmity in the impugned order on this issue, we dismiss the grounds thus raised by the revenue.

Summary

Issues:
1. Disallowance of interest cost
2. Disallowance of compensation expenses
3. Disallowance of bad debts

Disallowance of Interest Cost:
The appeal by Revenue for Assessment Year 2010-11 concerns the disallowance of interest cost made by the Assessing Officer. The Revenue contended that the assessee, engaged in real estate and construction business, did not treat land as "Stock in trade" in the Profit & Loss Account. However, the assessee consistently followed the method of distributing interest expenditure across properties held for re-sale/development. The Ld. CIT(A) upheld the assessee's method, noting that the interest cost was distributed pro-rata and matched with revenue recognition based on project completion method. The Tribunal found the assessee's accounting method acceptable and dismissed the Revenue's appeal on this issue.

Disallowance of Compensation Expenses:
Regarding the disallowance of compensation expenses of ?2 crores paid by the assessee, the Ld. AO rejected the claim stating it was not supported by the agreement terms. However, the Ld. CIT(A) allowed the claim, considering it a regular business expense incurred by the assessee. The Tribunal concurred, noting that the amount was paid in the regular course of business, subsequently recovered, and offered for tax in the following year. The Tribunal upheld the Ld. CIT(A)'s decision and dismissed the Revenue's appeal on this issue.

Disallowance of Bad Debts:
The assessee claimed bad debts of ?20 lakhs written off against a party. The Ld. AO disallowed the claim, stating it was not allowable under any provision. However, during appellate proceedings, it was explained that the amount was lost in the regular course of business and thus claimed as bad debts. The Ld. CIT(A) allowed the claim as allowable expenditure u/s 37(1). The Tribunal found the claim justifiable and held it as an allowable loss under section 37(1), dismissing the Revenue's appeal on this issue.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s decisions on all issues, dismissing the Revenue's appeal for the Assessment Year 2010-11.