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TMI Blog2010 (11) TMI 655X X X X Extracts X X X X X X X X Extracts X X X X ..... sider the issue in accordance with law. X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs.52.14 Crores on 31.10.2005. Subsequently, it filed its revised return on 10.1.2006 declaring a loss of Rs.61,11,28,165. During the course of assessment proceedings under section 143(3), the Assessing Officer observed that the assessee has claimed an amount of Rs.64,74,05,370 as 'compensation paid' in its profit and loss account. The details of such compensation paid was called for and the assessee vide letter dt.18.1.2007 stated that it has entered into an agreement with M/s Manipal Infocom Pvt. Ltd., (in short MIPL)for sale of its rights in respect of four properties in Bangalore for Rs.22 Crores and since it could not handover the properties as per the agreement within the time stipulated, the purchaser has claimed for compensation and the issue was taken up before the Arbitrator and the compensation was paid as per the Arbitration Award. The Assessing Officer sought certain clarifications from the assessee for verification of the claim. He issued show cause notice on 20.12.2007 stating that the debit of compensation of Rs.64.14 Crores is the major reason for loss of Rs.61.23 Crores claimed in the revised return of income and on a perusal of the papers filed by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the agreement dt.10.3.2004 between Sri Pai and Manipal Universal Learning Pvt. Ltd. was taken cognizance of and it was observed that due to change in law in India, Manipal Universal Learning Pvt. Ltd. is no longer allowed to purchase and develop real estate properties and therefore it is proposed to assign and novate its rights and obligations under the original agreement in favour of Caraka Academy of Lifelong Learning Pvt. Ltd. (in short CALL) The parties thus entered into supplemental agreement to incorporate the clauses to the Assignment and Novation Agreement dt.5.4.2005. vi) There is an order dt.11.7.2006 passed by the sole Arbitrator setting out the points of compromise between the parties, according to which the assessee shall refund a sum of Rs.22.00 Crores to the CALL (claimant), and the claimant shall not claim any interest on the sum of Rs.22.00 Crores and the assessee was to further pay to the claimant a sum of Rs.64.00 Crores as compensation in the Schedule mentioned therein and if the assessee does not make the payment of Rs.86.00 Crores within the stipulated time, then the assessee shall be liable to pay interest thereon @ 8% on the outstanding sums due to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also over and above the compensation. As the assessee was not able to honour the agreement before 31.3.2005, and had defaulted and as the assessee was following Mercantile System of Accounting, it was liable to pay interest and compensation as on 31.3.2005 though the same had been quantified by the arbitration award subsequently. It was also submitted that the firm had entered into an agreement with the developers for development of the project in which the agreed built up area was to be handed over to the assessee but since the project could not be taken up within the stipulated time on account of various hurdles, the assessee had defaulted and had to pay the compensation as per the agreement. After considering the assessee's explanation, the Assessing Officer held that the amount of compensation of Rs.64.7 Crores paid to CALL is to be disallowed on the ground that the agreement with M/s Manipal Infocom Pvt. Ltd. was entered in to by Sri Dayanand Pai in his individual capacity and it is also not clear whether the firm had entered into any joint development agreement with M/s Manipal Infocom Pvt. Ltd. He further held that the Arbitration Order is dt.11.7.2005, while the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see firm could not honour the said agreement and could not hand over the said properties within the stipulated period, the assessee was bound to return the sale consideration and also pay the compensation as per the terms of the agreement and accordingly the parties had approached the arbitrator and had paid the compensation as per the award of the arbitrator. He submitted that as the assessee was following mercantile system of accounting and the liability to pay interest and compensation had accrued as on 31-03-2005 and therefore, the assessee had rightly accounted for the same in its boos of account and both the AO and CIT(A)have erroneously held that the agreements are entered into by Shri Dayanand Pai in his individual capacity and not on behalf of the assessee firm. 5. The learned DR on the other hand, supported the orders of the authorities below and submitted that the assessee has not been able to prove, with evidence that the properties belonged to the assessee firm and Shri Dayanand Pai entered into the agreement for the sale of the properties on behalf of the assessee firm. 6. The learned DR submitted that the firm and the individual are two different entities and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he joint development agreements before us and the CIT(A) has held that the assessee firm was not having any right in the property before or after entering into the joint development agreement. 8. The other findings of the CIT(A) was that the agreement were entered into by Shri Dayanand Pai in his individual capacity and his name is mentioned as representative of the assessee firm only in the arbitration award. On perusal of the copies of the said agreement dated 02-04-2002 and 04-06-2005, we find that the status of Shri Dayanand Pai, is in his capacity as individual and not in the capacity of the Managing Partner of the assessee firm. But, another point worth taking note of and cannot be ignored is that the assessee firm had received the sale consideration of Rs.22.00 Crores as reflected in its accounts and therefore, it is the case of the assessee that it is the beneficiary of the said agreement and therefore, will have to fulfill the liability of paying the compensation. The assessee firm has shown it as an advance in its books of accounts. This gives credence to the argument of the assessee that Shri Dayanand Pai being the sheet anchor of the group had entered into the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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