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2024 (9) TMI 1384 - HC - Income TaxAllowable business/revenue expenditure - admissibility of compensation paid as expenditure u/s 37 (1) - as submitted respondent has not incurred the said expenditure for the purpose of business - ITAT justification in allowing the claim of assessee u/s 37 (1) when the assessee has not acquired the said property as fixed asset nor it has started yielding revenue? - Revenue assailing the order of the Tribunal contends that the assessee is not the owner of any of the properties, which were the subject matter of the agreement with the purchaser and the agreement entered into with the purchaser was not entered into by the assessee. That the chronology indicates that the transaction is a sham transaction and damages cannot be claimed u/s 37 (1) HELD THAT - The properties/rights which were the subject matter of the agreement dated 2.4.2002 did not belong to the firm during the said period i.e., AY 2005-06. Further, the assessee admittedly did not contract with MIPL to provide the built up area in the four properties mentioned in the agreement dated 2.4.2002 nor were any of the four properties mentioned in the said agreement belonged to the assessee nor that the assessee had any manner of right, title or interest in the said properties. The contention of the assessee that the properties belonged to the assessee by virtue of Section 14 of the Act of 1932 is ex facie untenable and liable to be rejected having regard to the fact that there is no material placed on record to demonstrate that the said properties were brought into or were part of the stock of the firm. Hence, the properties cannot by any stretch of imagination be held to be the properties of the assessee firm. The reasoning of the Tribunal that the advance of Rs. 22.00 crores having been shown in the books of accounts of the assessee and earlier transactions made by Sri Dayanand Pai having been shown as transactions made by the assessee, will also not aid the case of the assessee since the context of the said transaction has not been looked into. In view of the admitted position that the assessee was not the owner of the properties as also that the assessee did not have any manner of right, title or interest in the said properties, which were the subject matter of the agreements dated 2.4.2002 or 10.3.2004, the question of permitting the assessee to claim a deduction u/s 37 (1) does not arise. Reasoning of the Tribunal that the properties which were the subject matter of the agreement are identified and there was no doubt or ambiguity of the properties to be developed and identified by the assessee for development through other developers and that registration was not a prerequisite condition for acquiring interest, right or title in the constructed area of the properties being developed, is erroneous having regard to the admitted position that the assessee was not a signatory to the agreement dated 2.4.2002 or that the assessee had any manner of right, title or interest in the properties which were the subject matter of the said agreement. It is the vehement contention on behalf of the assessee that crystallization having been done and the liability having been provided for, the assessee was entitled to claim expenditure during AY 2005-06. The said contention is untenable and liable to be rejected since there is no factual basis for the same, inasmuch as there is no material placed before the authorities to indicate that the liability was crystallized or provided for during AY 2005-06. Tribunal erred in allowing the appeal of the assessee and setting aside the well considered, concurrent findings of fact recorded by the AO and the Commissioner. The reasoning adopted by the Tribunal is clearly erroneous and contrary to law as noticed above. Decided against assessee.
Issues Involved:
1. Whether the respondent/assessee can claim compensation paid as expenditure under Section 37(1) of the Income Tax Act, 1961, when the expenditure was not incurred for the purpose of business. 2. Whether the ITAT is legally justified in allowing the claim under Section 37(1) of the Income Tax Act, 1961, when the respondent/assessee has not acquired the property as a fixed asset nor has it started yielding revenue. Issue-wise Detailed Analysis: 1. Claiming Compensation as Expenditure under Section 37(1) of the IT Act: - The Revenue argued that the assessee was not the owner of any properties involved in the agreement with MIPL and that the transaction was a sham, not qualifying as business expenditure under Section 37(1) of the IT Act. The liability was not crystallized in AY 2005-06 since the arbitral award was passed on 30.8.2005. - The assessee contended that the agreement was entered into by a partner of the firm, and under Section 14 of the Partnership Act, 1932, the transaction was recorded in the firm's books, making it eligible for deduction. - The Tribunal had allowed the appeal of the assessee, holding that the properties were identified in the agreement, and the receipt of Rs. 22.00 crores from MIPL was recorded in the books of the assessee firm. The Tribunal found that Dayanand Pai acted on behalf of the firm, not in his personal capacity, and thus, the compensation was a business expenditure. - The High Court, however, found that the properties did not belong to the firm during the relevant period, and the agreements were entered into by Dayanand Pai in his individual capacity. The Court held that the properties were not part of the firm's stock, and the assessee could not claim the expenditure since it did not own the properties or have any right, title, or interest in them. 2. Legality of ITAT's Justification in Allowing the Claim: - The Tribunal had justified the claim by stating that the properties were identified, and the practice of the assessee doing transactions through Dayanand Pai was recognized and accepted by the AO in previous assessment years. - The High Court disagreed, noting that the agreements did not mention Dayanand Pai acting on behalf of the firm. The properties were not brought into the stock of the firm, and the compensation could not be claimed as a business expenditure under Section 37(1) of the IT Act. - The Tribunal's reasoning that the liability was crystallized when the assessee realized it could not honor the agreement was rejected by the High Court, which found no material indicating that the liability was crystallized or provided for during AY 2005-06. Conclusion: - The High Court answered the substantial questions of law in favor of the Revenue and against the assessee. The Tribunal's order allowing the appeal of the assessee was set aside, and the well-considered, concurrent findings of the AO and the Commissioner were upheld. The High Court concluded that the compensation paid could not be claimed as a business expenditure under Section 37(1) of the IT Act for AY 2005-06.
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