Compensation paid to Buyers of Flats is Deductible as Business Expenditure of the Developer: ITAT Pune [Read Order]

In a recent decision, the Pune bench of the Income Tax Appellate Tribunal held that the compensation paid to the buyer for delayed possession of flat is business expense and therefore, it is deductible from the hands of the Developer under the provisions of the Income Tax Act, 1961.

In the instant case, the assessee, a builder had developed a housing project ‘Kamdhenu Siddhi’. Due to delay in completing the project within stipulated time, the assessee had paid each flat owner a compensation of Rs 40,000. Both the assessing Officer and the first appellate authority had disallowed the above claim of the assessee by finding that the pay outs to the buyers would not amount to business expense. Aggrieved with these orders, the assessee approached the Appellate Tribunal on second appeal.

Before the Tribunal, the Revenue submitted that the amount paid was not out of any contingent liability but out of self assumed liability which is not allowable as per the provisions of Income Tax Act.

The division bench further observed that the amount paid by the assessee was certainly on account of business expediency.

Regarding the nature of the payment, it was observed that the compensation paid by the developer, in the instant case, cannot be held to be penal in nature. In this regard, the Tribunal noted that “The Delhi Bench of the Tribunal in the case of DCIT Vs. M/s. Achiever Builders (P) Ltd. (supra) where the Department disallowed the amount paid by the assessee to the customers for delay in handing over of possession of properties holding it to be penal in nature held, that the amount paid by the assessee to customers is compensatory in nature and not penal. The compensation was paid for delay in handing over of possession of the property, the liability to pay such compensation arose in the course of business of assessee. In the present case the assessee paid compensation to the assessee under similar circumstances and not out of any liability arising from invoking of penal provisions of any statute. Thus, the compensation paid by the assessee cannot be held to be penal in nature.”

Read the full text of the order below.