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TMI Blog2022 (11) TMI 1291X X X X Extracts X X X X X X X X Extracts X X X X ..... e said that pre-operative expenditure incurred by assessee was on a new line of business, thus, same was to be allowed as revenue expenditure. Hon'ble Calcutta High Court in the case of Binani Cement Ltd [ 2015 (3) TMI 849 - CALCUTTA HIGH COURT] has held that expenditure incurred for construction/acquisition of new facility which was subsequently abandoned at work-in-progress stage was allowable in year of write off as incurred wholly and exclusively for purpose of assessee's business. We do not find any infirmity in the order of the ld. CIT(A) on this issue. Accordingly, the same is upheld and the grounds raised by the revenue are dismissed. Disallowance of Customers Settlement Claims - said amount did not crystallize in the year under consideration and therefore a contingent liability - direct and intimate connection between the claim and the business - HELD THAT:- It is an admitted fact that the direct and intimate connection between the claim and business is not in dispute before the lower authorities. The settlement of the claim by the assessee pursuant to the legal process arising out of the contractual liability is in the course of carrying on of its busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10-11 2013-14 respectively. For the sake convenience both these appeals were heard together and are being disposed-of by this common order. ITA No. 612/HYD/2017 for AY 2010-11 2. This is the second round of litigation before the Tribunal. Facts of the case, in brief, are that the assessee is a company engaged in the business of real estate development and construction. It filed its return of income on 15.10.2020 declaring nil income, after setting off of brought forward losses of Rs. 3,43,74,506. The AO completed the assessment u/s. 143(3) on 27.03.2013 determining the total income of assessee at Rs. 8,22,43,320/- by computing as under:- Income Returned Rs.3,43,74,506 Add: Addition on account of Profit arrived as per revenue recognition method as discussed above Rs.3,36,54,704/- Disallowance of expenditure written off Rs.7,57,24,129/- Less:Brought forward losses: Rs.14,37,53,339/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent by the assessee in apartment land. Thus it is clear from the said provision of the supplementary development agreement dated 07-01-2010 that the entire cost incurred by the assessee company on the Neighborhood apartment land was duly reimbursed by M/s. Fortune Constructions (P) Ltd. 2) It is mentioned in Para NO 5 (Page No. 4) of the supplementary development agreement dated 07-01-2010 that M/s. Fortune Constructions (P) Ltd. would undertake development of residential multi-storied apartment buildings/blocks on the Apartment land. From the above provision it is clear that the project will be continued by M/s. Fortune Constructions (P) Ltd., 'which is sister concern of the assessee. The assessee company has incurred the initial expenditure towards the development of the land and surrendering it to its sister concern. It is a colourable device adopted by the assessee company to reduce the profit from 'Neighborhood Villas project' by booking the expenditure on the initial development on 'Neighborhood Apartments Project' in the hands of the assessee and surrendering the said project to its sister concern. Thus the expenditure of Rs. 7,57,24,129/- incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, fails to fulfill the requirements of a reasoned/speaking order. Therefore, we are of the considered opinion that interests of justice would be met, if the matter is restored to the file of the CIT(A) for de novo disposal of the appeal in accordance with law. We do so accordingly and direct the learned CIT(A) to dispose of the appeal before him afresh in accordance with law and after giving reasonable opportunity of hearing to the assessee and by passing a speaking order. 7. The ld. CIT(A), thereafter deleted the addition by observing as under:- 4.1 I have carefully considered the ITAT order and the detailed reply and submissions of the appellant. The appellant has given a detailed submission along with balance sheet, profit and loss account, etc., explaining the circumstances under which the project was abandoned, and the same were considered. The main explanation was that the commercial expediency to give up its rights for development of apartment projects and surrendered the same in favour of the land owner i.e. M/s. Fortune Constructions Pvt. Ltd. vide a supplementary agreement dated 07.01.2010, which was verified and considered. 4.2 With regard to Rs. 13 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Chemplast Sanmar Ltd. vs ACIT reported in 412 ITR 323, he submitted that the Hon'ble High Court in the said decision has held that where assessee company set up a new project which was subsequently abandoned, since new project was managed from common funds, control over all business units was in hands of assessee and there was unity of control, it could not be said that pre-operative expenditure incurred by assessee was on a new line of business. Thus, same was to be allowed as revenue expenditure. 11. Referring to the decision of Hon'ble Calcutta High Court in the case of Binani Cement Ltd. vs CIT reported in 380 ITR 116, he submitted that the Hon'ble High Court in the said decision has held that expenditure incurred for construction/acquisition of new facility which was subsequently abandoned at work-in-progress stage was allowable in year of write off as incurred wholly and exclusively for purpose of assessee's business. 12. Referring to various other decisions copies of which are filed in paper book, the ld. counsel for the assessee submitted that the order of the ld. CIT(A) being in accordance with law should be upheld and the grounds ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the entire project land of 49.111 acres as on such date. 2.2. As per the terms of the Fortune Sub-development Agreement, the Appellant Company was to undertake the development of a gated residential township after preparing appropriate and suitable lay-out plans and obtaining necessary statutory approvals therefore. Accordingly, the Appellant Company formulated a scheme for development of independent bungalows; row-houses and multi-storied apartments in the name and style of The Neighbourhood project. Entire physically available land was divided into two segments (i) land admeasuring 35.42 acres for development of independent bungalows in the name of Neighbourhood Houses and (ii) balance land admeasuring 13.25 acres for development of Multi-storied Apartments by name Neighbourhood apartments' Two separate plans. to that effect, were prepared and necessary sanctions were obtained Thus, the Appellant had planned two distinct projects to cater to the needs of two different sections of customers. Further, as required by the said Sub-development agreement, the Appellant paid a sum of Rs. 40,00,00,000/(Rupees forty crores only) to Fortune Constructions P Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to do was to refund Rs. 13,00,00,000/(Rupees thirteen crores only) out of the total Refundable Security Deposit of Rs. 40,00,00,000/- (Rupees forty crores) paid earlier by Omega to Fortune. As the refund of Rs. 13,00,00,000/, out of the Security Deposit, was treated as full and final settlement, the Appellant was not entitled to any further amounts on account of costs incurred towards development. Further, it is pertinent to state here that the surrender of rights was at the instance of the Appellant Company, as it felt that the execution of the project was completely unviable, considering the unfavourable market conditions prevalent during the relevant period, and as such it was commercially expedient to give up its rights in lieu of the refund of' security deposit rather than to go ahead with the project. Under such circumstance, by no stretch of imagination neither the Appellant could have made a claim in respect of the cost incurred on development nor would the land owner be willing to pay any amount on that account. In this regard. the Appellant further submits that the learned Assessing Officer had completely misread and mis appreciated the purpose and intent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly unsustainable both on facts and in law. Reliance is placed on the decisions in the following cases in support of the claim that the expenditure incurred on an abandoned business project is allowable as deduction in the year of write-off' (i) Binanai Cement Ltd. Vs CIT (2016) 380 ITR 116 (Cal) (ii) Asia Power Projects P Ltd. Vs DCIT [2015) 370 ITR 257(Kar) (iii) CIT Vs Dream Merchants (Born HC) in ITA No. 4243/2010 dt. 20.09.2011 (iv) CIT Vs Rajesh Khanna (Born HC) in ITA No. 3875/2010 dt. 14.09.2011 (v) CIT Vs A.K. Films P Ltd. (Born HC) in ITA No. 1199/2010 dt: 14.02.2011 (vi) CIT Vs Mukta Arts P Ltd. (Born HC) in ITA No. 584 of 2001 dt. 25.08.2008 2.6. The Appellant further submits that the observation of the learned Assessing Officer, that both Omega and Fortune were sister concerns and the surrender of rights by the Appellant to its sister concern was a colourable device to reduce its profits, is absolutely misconceived and misplaced. While coming to such conclusion, he completely failed to appreciate the facts of the case in their right perspective. At the outset, this is to submit that the allegation that both the companies were siste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the order of the ld. CIT(A) on this issue. Accordingly, the same is upheld and the grounds raised by the revenue are dismissed. ITA No. 1137/HYD/2018 for AY 2013-14 17. Facts of the case, in brief, are that the assessee is a company engaged in the business of development of Real Estate in the form of construction and sale of villas as well as sale of developed plots. It filed its return of income for the A.Y 2013-14 admitting nil income under normal provisions and current year loss of Rs. 6,72,02,896/-. The book loss was shown at Rs. 7,53,09,948/- u/s. 115JB of the I.T. Act. The case was selected for scrutiny and accordingly notices were issued by the Assessing Officer. In response to the notices, the AR of the assessee appeared and filed the information. After going through the information, the Assessing Officer completed the assessment u/s. 143(3) of the I.T. Act by making additions of Rs. 2,55,05,608/- towards disallowance of customer settlement claims, Rs. 3,63,51,366/- towards deposits written off, Rs. 3,04,461/- towards loss on sale of fixed assets and Rs. 69,92,428/- towards provision of doubtful advances. The AO accordingly assessed the total income at Rs. 19,50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He noted that the order of the AP State consumer Disputes Redressal Commission is itself pronounced on 09.07.2013 and further order was passed on 10.10.2013 wherein the assessee was directed to repay the money along with interest and costs. Thus, the liability for the said settlement has arisen only in FY 2013-14 relevant to AY 2014-15. He, therefore held that the expenditure claimed by the assessee is only in the nature of a provision for AY 2013-14 and it has not accrued. 23. The AO further noted that the case was filed by Joshi Brothers in 2011 and also the legal notice in respect of CVS Enterprises was received in August, 2012 itself. But, the claim of the assessee cannot be accepted, as a dispute regarding contractual liability will be only a contingent liability. The liability arises only when the dispute is settled or finally adjudicated. He referred to the decision of Hon'ble Gujarat High Court in the case of Alembic Chemical Works Ltd. Vs DCIT (266 ITR 47) where it is held the in case of an assessee following mercantile system of accounting, a liability is said to be properly incurred when the dispute between the parties is amicably settled or finally adjudicated, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in denying the claim on the premise that the claim is contingent. 26. Relying on various decisions, it was argued that the disallowance made by the AO being not in accordance with law should be deleted. 27. Based on the arguments advanced by the assessee, the ld. CIT(A) deleted the addition by observing as under:- 5.3 I have carefully considered the assessment order and submissions of the appellant. The Assessing Officer mainly disallowed this amount based on the order of A.P. State Consumers Disputes Redressal Commission, dt. 09-07-2013 and further order was passed on 10-10-2013. Therefore, this settlement has arisen only in the F.Y. 2013-14 relevant to A.Y. 2014-15. In this regard, the appellant's submissions that keeping in view of the appellant's nature of business and by following mercantile system of accountings, therefore, the liability debited during this year to be considered as expenditure for this assessment year. Therefore, the submissions of the appellant along with case laws relied upon by the appellant were considered and hence, the addition made by the Assessing Officer deleted. 28. Aggrieved with such order of the Tribunal, the revenue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he instant case disallowed the amount of Rs. 2,55,05,608/- claimed by the assessee on the ground that the order of AP State Consumers Disputes Redressal Commission dated 09.07.2013 and further order was passed on 10.10.2013 and therefore, the settlement was arrived at only in the FY 2013-14 relevant to AY 2013-14 and therefore the assessee is not entitled to claim this deduction since it is following the mercantile system of accounting. We find the ld. CIT(A) deleted the addition, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the ld. CIT-DR that this being a contingent liability no deduction should be allowed for this year and deduction, if any, can be allowed only in AY 2014-15. It is the submission of the ld. counsel for the assessee that the order was available at the time of finalization of accounts and the rate of tax for both the assessment years i.e. 2013-14 2014-15 being same, the order of the ld. CIT(A) is in accordance with the law. 32.1. We find force in the arguments advanced by the ld. Counsel for the assessee. It is an admitted fact that the direct and intimate connection between the claim and business is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered in to a development agreement - Cum General Power of Attorney vide Document No. 12563/06 duly registered for development of gated residential township of land admeasuring Ac 24.069 Gts situated at Gundlapochampally village, Medchal Mandal, RR Dist. And Omega Shelters has given refundable deposit to M/s. Platinum Properties P Ltd. As per the agreement, Omega Shelters has to complete the project within 72 months from the date of receiving sanction of the plans from HUDA and municipality/gram panchayat. Since the project was not completed within the time frame and both the parties have decided to enter this agreement for (i) and relinquishment/surrender of rights of Omega with respect to the Scheduled land in favour of Platinum Properties and refund Deposit of Rs. 13,67,10,000/-. The same has been effected during the year under consideration. We are herewith enclosing both the agreements for your verification and consideration - Annexure I. 35. On being asked by the AO to justify the claim, the assessee subsequently filed a note on Sunk cost and breakup of loss of deposit for surrendering of right. With regards to the Sunk cost, the assessee reduced the amount of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the conclusion of the entire agreement, but should not have claimed in bits, when the original agreement is only one. b) As per the agreement for surrender of development rights dated 31.10.2012, the amount refunded is Rs. 13,67,10,000/- whereas as per the table reproduced above, furnished by the assessee vide letter dated 24.03.2016, the assessee states that they have received back 14,17,10,000/- in respect of the cancelled project (CASA II). Thus, there is a difference which indicates that the assessee has received an additional amount of Rs. 50 lakhs i.e. more than the amount mentioned in the surrender agreement. If the agreement is final and conclusive, it is not understandable as to why Platinum Properties Pvt. Ltd. paid the additional amount of Rs. 50 lakhs. This casts a doubt on the genuineness of the claim of the assessee with regards to loss of deposit. c) The total cost or loss to the assessee in respect of the surrender of development rights of the project (CASA II) claimed is as under: i) Sunk Cost i.e. expenditure towards Work-in-progress Incurred by the assessee reduced from CI. WIP - Rs. 2,19,94,351 ii) Loss of Deposit on surrender of rights - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts and disallowed the same. 37. Before the ld. CIT(A), the assessee submitted that i) There were two projects by name CASA I and CASA II. CASA I pertains to 30 acres of land unit. CASA II, pertains to 24.069 acres of land unit. Both the lands are situated side by side. The land owners are different. ii) There is a common development agreement for both the units put together, entered into on 11-05-2006. iii) In terms of the development agreement, a refundable deposit of Rs. 40 crores was given for both the units put together. iv) The break up of the deposit area wise is as under: CASA I 22,19,38,634 CASA II 17,80,61,366 40,00,00,000 v) CASA I, project was implemented and carried. The development rights of project CASA II, were surrendered in terms of registered document dt. 31-10-2012, duly registered as Doc. No. 4758/2012 in the office of Sub-Registrar, Medchal. vi) Pursuant to the cancellation of the development rights, as against the deposit amount of Rs. 17,80,61,366/- the developer returned i only an amount of Rs. 14,17,10,000/-. The balance amount of deposit has not been returned by the developer. 38. It was submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s cited before us. We find the AO in the instant case made addition of Rs. 3,63,51,366/- rejecting the claim of deposits written off on surrendered of land development rights on the ground that the company Platinum Properties Pvt. Ltd has not reduced their liability to the assessee and as per the development agreement there is no clause for forfeiture of refundable deposit in case of non adherence to the agreement. It is also the case of the AO that no income is offered by the other concern i.e. Platinum Properties Pvt. Ltd in AY 2013-14. We find the ld. CIT(A) deleted the addition the reasons which are already given in the preceding paragraph. Although, the order of the ld. CIT(A) is very cryptic, however the same is based on submissions made by the assessee in details. We find in the instant case there were two projects by name CASA I and CASA II. CASA I pertains to 30 acres of land unit. CASA II, pertains to 24.069 acres of land unit. Both the lands are situated side by side and the land owners are different. There is a common development agreement for both the units put together, entered into on 11-05-2006. In terms of the development agreement, a refundable deposit of Rs. 40 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a long drawn out litigation between the managing agency firm and the managed company affecting seriously the reputation of the assessee in addition to any pecuniary loss which the assessee as a partner was liable to bear on account of the joint and several liability arising under the law of partnership. The settlement arrived at between the parties prevented effectively the hazards involved in any litigation and also helped the assessee in continuing to enjoy the benefit of the managing agency which was a sound business proposition. It also assisted the assessee in retaining the business reputation unsullied which it had built up over a number of years. It is also material to notice here that it was not shown that the settlement was a gratuitous arrangement entered into by the assessee to benefit the defaulting partner exclusively even though he might have been benefited to some extent. It is no doubt true that it was voluntary in character but on the facts and in the circumstances of the case whether it would make any difference at all is the point for consideration. 44. In view of the above discussion, we uphold the order of the ld. CIT(A) in deleting the addition. The gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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