2023 (8) TMI 283 - AT - Income Tax

Disallowance of claim of surrender right fee - allowable business expenditure or not? - AO has held the expenditure claimed by the assessee is not allowable as that there is no obligation on the part of assessee to pay an amount and secondly the payment is prohibited by law as sharing of profits on sale of agricultural land is prohibited by law - CIT(A) has deleted the addition - HELD THAT - As agreement entered between the appellant and Tricone Projects India Ltd. (TPI) wherein the appellant had agreed to make available 175 acres of land at Village - Assessee had transferred 150 acres and further 32.01 acres of land on two different dates - However, the remaining land as per the agreement could not be aggregated and there was other issue involving necessary permissions with regard to land which assessee was not able to get. The assessee then sent a proposal to TPI to take possession of the original title deeds of 2.5 acres of land which assessee had aggregated for transfer to TPI of which sale deed could not be executed in favour of the TPI for the reasons of non-compliance of the terms of agreement. TPI accepted the proposal of assessee - This 2.5 acres land was subsequently, sold by assessee. Thus it was not a single transaction of sale and purchase of land with TPI but the assessee was into a long term association with TPI starting from Feb, 2006. It is also established that the assessee was handicapped in fulfilling the commitment towards TPI and at the same time was handicapped with regard to 2.5 acre land of which the original sale deeds were lying with TPI. Thus there was justification on the part of assessee, to have made a proposal to the TPI in response to which TPI had replied on 15.06.2012. Thus, CIT(A) was not in error to allow the payment as one u/s 37 having commercial expediency. Further TPI has shown the amount receipt from assessee as revenue from renunciation from development rights. There is no substance in the observation of AO of diversion of sharing of profits with TPI as admittedly the amount was paid to TPI prior to the sale of 2.5 acre lands to Smt. Naina Lal Kidvai on 16.07.2012. DR has relied the various provisions of the agreement to contend that there was no obligation under the agreement to make disputed payment as contractual liability but same is also meted out from the fact that clause 2.2 of the agreement provided right to TPI to terminate the agreement, in case, the assessee was not able to get necessary approvals and clause 3.4 provided that upon termination of the agreement as a result of failure to receipt approvals all advances granted by buyer to seller have to be returned in 30 days. AO has considered clause 5.2 to rebut the argument that there was a charge created in favour of TPI without appreciating that this clause was to remedy the situation where parties believed that for all good reasons beyond the control of parties the approvals were not received and parties had to settle their account. This very much allowed parties to settle for an agreement which concluded with the letter dated 15.06.2012 by which TPI accepted the offer of Assessee to be compensated in lieu of release of sale deeds of 2.5 Acre land held by TPI. Decided against revenue.

Summary

Issues Involved:

1. Disallowance of 'surrender right fee' as business expenditure.
2. Obligation under the agreement to pay compensation.
3. Diversion of income vs. breach of contractual obligation.
4. Validity of agreement between the parties.

Summary:

Issue 1: Disallowance of 'surrender right fee' as business expenditure

The Revenue appealed against the CIT(A)'s order that deleted the disallowance of Rs. 2,90,47,619/- claimed as 'surrender right fee' by the assessee. The CIT(A) found that the compensation paid was for breach of contractual obligations and was wholly and exclusively for business purposes, thus allowable under Section 37 of the Income Tax Act, 1961. The CIT(A) referenced the case of CIT v. S.A. Builders [2008] 299 ITR 88 (P&H), which held that compensation for breach of contract is an allowable deduction.

Issue 2: Obligation under the agreement to pay compensation

The CIT(A) determined that the payment was in consequence of an agreement dated 03.02.2006 between the appellant and Tricone Projects India Ltd. (TPI). The agreement stipulated that the appellant would provide contiguous land and obtain necessary approvals. Due to the appellant's failure to aggregate the land and obtain approvals, a compensation was agreed upon. The CIT(A) found that the payment was justified and necessary for the business, thus allowable as an expenditure.

Issue 3: Diversion of income vs. breach of contractual obligation

The Revenue argued that the payment was a diversion of income and not a result of a contractual obligation. However, the CIT(A) concluded that the payment was for the release of title deeds and compensation for breach of contract, not a sharing of profits. The payment was made before the sale of the land to a third party, which further supported the claim that it was not a diversion of income.

Issue 4: Validity of agreement between the parties

The Revenue contended that there was no clause in the agreement obligating the payment of compensation. However, the CIT(A) found that the agreement allowed for remedial measures and accounting settlements in the event of failure to obtain necessary approvals. The compensation was part of a negotiated settlement, which was within the scope of the agreement. The CIT(A) rejected the Revenue's argument that the agreement was invalid or that TPI could not enter into such an agreement.

Conclusion:

The Tribunal upheld the CIT(A)'s order, finding no error in the deletion of the disallowance. The compensation paid was deemed to be for business purposes and allowable under Section 37. The appeal by the Revenue was dismissed.