2019 (5) TMI 685 - AT - Income Tax

Disallowance of enhanced compensation paid to land owners - payment on the basis of the decision of the High Court and claimed as general expenses - according to the AO the assessee is entitled to recover it from the lessee from whom the loan was taken thus allowed payment of enhanced compensation to the extent of amount recovered from the lessee which was offered as income and the balance compensation payable was not allowed by AO - CIT-A deleted the disallowance - HELD THAT - Neither the AO nor the CIT(A) has examined the lease agreements based on which the assessee is entitled to recover the enhanced amount of compensation from the lessee. Without examining the lease agreement entered into by the assessee with the lessee it is not possible for us to hold that to what extent the assessee is entitled for the claim of enhanced compensation as an expenditure. If there is enforceable clause in the lease agreement based on which the property was leased out by the assessee the assessee can recover the amount of enhanced compensation from the lessee. Hence the amount to the extent received or receivable from the lessee is to be brought to tax. I When the assessee is claiming the payment of enhanced compensation as an expenditure it is incumbent on the part of the assessee to offer the recoverable amount of compensation from its lessee. The assessee cannot pick and choose only the claim of expenditure towards payment of enhanced compensation and cannot withhold the offering of receipt of enhanced compensation from its lessee. Hence it is appropriate to remit the issue to the file of the AO to examine the relevant lease agreement entered into by the assessee with its lessee and decide thereupon. However we make it clear that if the assessee offered the receipt of enhanced compensation from its lessee in any other assessment year there cannot be double taxation in these years. With this observation we remit this issue to the file of the Assessing Officer for fresh consideration. Appeals filed by the Revenue are partly allowed for statistical purposes.

Issues Involved:
1. Deletion of disallowance of ?2,75,24,248/- made on account of enhanced compensation paid to landowners claimed as general expenses.
2. Reference to various case laws and their applicability to the assessee’s case.
3. Absence of written clauses in sublease agreements regarding enhanced compensation.
4. Conclusion that the issue is revenue-neutral and there is no loss to the revenue.
5. Request to set aside the orders of the CIT(A) and uphold the Assessing Officer's decision.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of ?2,75,24,248/-:
The Revenue challenged the CIT(A)'s decision to delete the disallowance of ?2,75,24,248/- made by the Assessing Officer (AO) on account of enhanced compensation paid to landowners, which was claimed as general expenses by the assessee. The AO had disallowed this expenditure, arguing that the compensation was not allowable as revenue expenditure under Section 37(1) of the Income Tax Act because there was no specific clause in the sublease agreements to recover the enhanced compensation from the sub-lessees. The CIT(A) reworked the allowable expenses and allowed the claim, referencing the consistent accounting policy followed by the assessee and accepted by the Revenue in previous years.

2. Reference to Various Case Laws:
The CIT(A) relied on the Supreme Court decisions in CIT v. Realest Builders and Services Ltd. (307 ITR 202) and CIT v. Bilahari Investment Pvt Ltd (299 ITR 1). These cases established that if the AO disturbs the accounting method followed by the assessee, they must provide facts and figures demonstrating the underestimation of profits. The CIT(A) concluded that the AO did not demonstrate any underestimation or under-reporting of taxable income under the accounting practice/method consistently followed by the assessee.

3. Absence of Written Clauses in Sublease Agreements:
The AO found that there was no provision in the sublease agreements to recover the enhanced compensation from the sub-lessees. The assessee argued that due to the lack of enforceable clauses in the sublease agreements, there was a high degree of uncertainty in collecting the enhanced compensation from sub-lessees. Therefore, the assessee accounted for and offered the income relating to enhanced compensation as and when it was actually recovered, following the Accounting Standards notified by the Central Government.

4. Conclusion that the Issue is Revenue-Neutral:
The CIT(A) observed that any change in the accounting system on an accrual-mercantile basis would create inter-temporal entries and transfers that are revenue-neutral in the long run. The consistent treatment by the Department of these receipts in the accounts of the assessee over the preceding financial years provided for a valid claim in the current financial year too. The CIT(A) held that the AO's disallowance interfered with the accounting practice/method consistently followed by the assessee, which had been accepted by the Revenue in the past.

5. Request to Set Aside the Orders of the CIT(A):
The Revenue appealed against the CIT(A)'s order, arguing that the payment of enhanced compensation should not be treated as general expenses and does not come under the provisions of Section 37(1) of the Income Tax Act. The Revenue requested that the orders of the CIT(A) be set aside and the AO's decision be upheld.

Final Judgment:
The Tribunal concluded that neither the AO nor the CIT(A) examined the lease agreements to determine the extent to which the assessee could recover the enhanced compensation from the lessees. The Tribunal remitted the issue to the AO to examine the relevant lease agreements and decide accordingly. The Tribunal also clarified that if the assessee offered the receipt of enhanced compensation from its lessee in any other assessment year, there should be no double taxation in these years.

Conclusion:
The appeals filed by the Revenue were partly allowed for statistical purposes, and the case was remitted to the AO for fresh consideration. The Tribunal emphasized the need to examine the lease agreements to determine the recoverability of the enhanced compensation and ensure that there is no double taxation.

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