The Income Tax Appellate Tribunal (ITAT) Pune Bench recently held that builders are eligible for income tax deduction under section 37 of income tax act 1961 in respect of compensation to flat buyers on cancellation of booking.
Section 37 of the Income Tax Act 1961 provides that for the progress of company or profession the person who spend any expenditure shall be considered for calculating income under the head of profits and gains of business or profession.
The aforesaid observation was made by the Pune ITAT,when an appeal was filed by the assessee Shri Naresh Jagumal, against the order under section 271(1)(c) Income Tax Act 1961,passed by the Assessing officer for the assessment year 2013-14, 2014-15 & 2015-16
Sanket Milind Joshi, appeared counsel for assessee and Ramnath P. Murkunde appeared for the revenue
Assessee was a major shareholder of M/s. Karda Constructions (KPCL)and M/s. Shree Sainath Land Development India Pvt. Ltd (SSCDIPL) and both are sister concern.Assessee received and advanced money from KPCL an interest of 15% per annum. Knowing this assessing officer issued show cause notice for taxing the amount as deemed dividend but assessee said that the amount was received from KPCL is not an loan amount, but it was business advance for purchase a plot from the assessee, AO was observed that assessee purchased the plot through borrowing fund from KPCL and found that there was an irregularities in the transaction between assesese and KPCL. Further AO found that the amount advanced from KPCL was not for purchase plot but the same was a loan advance. Assessing officers conclude that these loan /advance amounts will attract section 2(22)c of the Income Tax Act 1961.
During course of assessment proceedings assessing officer determine that assessee had received advances from customers and sale booked by the assessee.Again the assessing officer found some differences in the sale transaction values and make addition under section 43CA of Income Tax Act 1961 along with disallowance of compensation of Rs.7,51,068/- paid to customers upon cancellation of bookings of flats.
After considering the contentions of the both parties the ITAT bench comprising GD Padmashali (Accountant Member), and Satbeer Singh Godara, (Judicial Member), allowed the impugned sum of Rs.7, 51,068/- as an allowable business expenditure deduction under section. 37 of the Income Tax Act 1961 and held that “neither the Assessing Officer nor the CIT(A) reject genuineness of the impugned compensation amounts paid by the assessee wholly and exclusively for the purpose of its day-to-day business activity in line of development and building construction etc.”
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