The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that Compensation amount not having any relation with the cost towards the sale of area cannot be treated as capital expenditure under section 37 of the Income Tax Act.
The assessee is a private limited company and said to be engaged in the business of construction of commercial buiings for the purposes of sale and letting out. For the year under consideration, it had filed return of income declaring total income of Rs.5,91,38,960/-. The return was selected for scrutiny and statutory notices were issued to the assessee. In response to the statutory notices, the assessee filed submissions, which were examined by the AO.
The AO noted that the assessee had claimed project expenses amounting to Rs.20,09,00,560/-. In the breakup of the expenses the AO noted that the assessee had paid a sum of Rs.2 crores as compensation. The AO was of the opinion that the compensation cannot be considered as project cost as it is directly linked to buy back of built up area of the assessee, which is attributable directly to cost of capital.
The AO arrived at such conclusion as asseseee had shown brought back built up space as capital assets. The AO opined that as the 75% of project is capital asset, the amount paid acquiring the asset shou have been capitalized as cost for capital asset. He thus, disallowed the sum of Rs.2 crores being compensation for buying back of built up space.
Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(A). After that aggrieved by the order of CIT(A), the assessee appealed before the tribunal.
After hearing both the parties, the tribunal noted that The assessee is placed, bank account where payment has been made towards compensation. The bench noted that the date of payment is 20/01/2017, and, therefore, the observation of the CIT(A) that payment is to be commensurate to the date of cancellation agreement cannot be accepted.
The two member bench consisting of Chandra Poojari (Accountant member) and Beena Pillai (Judicial member) held that though the agreement to cancel the construction was entered into by asseseee with Shri Dev in the year 2016 but the payment was actually made in the year 2017 relevant to the assessment year under consideration. Therefore the AO was directed to allow the claim towards proportionate compensation of Rs.70,053/- made by the assessee for the year under consideration as business expenditure in the hands of the assessee. Thus the appeal was allowed.
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