2022 (8) TMI 432 - AT - Income Tax

Allowable business expenses u/s 37(1) - site encroachment charges, land owners payment etc. - DR submitted that impugned payments were not the liability of the assessee and the sale agreement was done with respect to already encroached property - HELD THAT - There was continuous litigation at various fronts which led SVC wanting to cancel the deal. Since M/s SVC incurred eviction charges, it sought reimbursement of the same from the assessee and accordingly, the expenditure has been debited as work-in-progress with corresponding credit to M/s SVC. It could also be seen that the payments were made by SVC through banking channel and acknowledgment / receipts from evictees were placed before Ld. AO. The details of payment so made were furnished to lower authorities. The assessee was also able to produce two of the evictees who confirmed having received the eviction charges. Merely because the evictees did not have PAN or not assessed to tax, the same would not jeopardize the claim of the assessee. M/s SVC responded to notice u/s 133(6) and confirmed the payments. There is nothing adverse on record except for mere allegation that the transaction appeared to be collusive one and the bona-fides of the transactions were doubtful. There is no concrete material to substantiate this conclusion. It could also be seen that the assessee was into the business of real estate development and such expenditure would fulfill the test laid down u/s 37(1) and it could very well be said that the expenditure was incurred for business purposes of the assessee Thus the claim as made by the assessee was allowable as business expenditure. To dispel the concern of the Ld. DR that the same amount could have been claimed as expenditure by M/s SVC, we direct Ld. AO to verify the fact that the aforesaid expenditure was never claimed by M/s SVC. If so, the expenditure would be allowable to the assessee. The same would be allowed to be capitalized and proportionate expenses as claimed by the assessee would be allowed.

Summary

Issues:
Deduction of expenditure of Rs. 811.75 Lacs in computing taxable total income.

Analysis:
Assessment Proceedings:
The appellant, a resident corporate assessee engaged in real estate business, faced disallowance of Rs. 811.75 Lacs expenditure by the Assessing Officer (AO) for payments made to clear encroachment on a property purchased in 2008. The AO found lack of substantiation for the claim, reducing the work-in-progress value and arriving at a taxable income of Rs. 50.84 Lacs.

Appellate Proceedings:
During the appeal, the appellant argued that the encroached property was sold to a buyer who incurred the eviction charges, supported by receipts and bank statements. However, the Commissioner of Income Tax (Appeals) upheld the disallowance, questioning the genuineness of the transaction and the absence of reimbursement conditions in the sale agreements.

Findings and Adjudication:
Upon review, the Appellate Tribunal found that the appellant, unable to fully clear encroachments, entered sale agreements with the buyer. Continuous litigation led the buyer to seek reimbursement of Rs. 811.75 Lacs eviction charges. The Tribunal noted banking transactions, receipts, and efforts to produce evictees as evidence. It concluded the expenditure was for business purposes, allowable under section 37(1). The Tribunal directed verification to ensure the buyer did not claim the same expenditure, allowing the appellant's claim and capitalization of expenses.

Conclusion:
The appeal was allowed, permitting the deduction of Rs. 811.75 Lacs expenditure in computing the taxable total income. The Tribunal's order emphasized the business nature of the expenditure and directed the Assessing Officer to verify the non-claim by the buyer to allow the deduction.