The Income Tax Appellate Tribunal (ITAT), Mumbai bench, held that compensation paid for the closure of agreements entered with private companies in the real estate development business is allowable expenditure. The assessee, Sentinel Properties Pvt. Ltd, is in the business of land development and had bought several parcels of land over the years. It is engaged in the property development business.
It filed a return of income on 31/10/2017, showing a total income of ₹23,955,760 as per the normal computation of taxable income and computed book profit under section 115JB at ₹24,011,587. This return of income was picked up for scrutiny.
During the assessment proceedings, the assessing officer found that the assessee had paid compensation of ₹159,954,736 to a private limited company, namely Emtelle India Ltd. When questioned, the assessee submitted that the company had entered into an agreement for sale without possession with the above company for the entire non-agricultural land. Due to a sudden rise in the price of land, the assessee sold the property to other parties, leading to the cancellation of the agreement with the private limited company by paying compensation.
The assessing officer rejected the explanation of the assessee and held that the compensation paid to Emtelle India Private Limited was disallowed. Aggrieved by the order, the assessee filed an appeal before the tribunal, which allowed the appeal. Therefore, the revenue filed another appeal before the tribunal.
During the proceedings, Sanjay N. Kapadia, the assessee’s representative, relied upon the decision of CIT(A) and argued that the agreement executed between the assessee and the company was not an afterthought and not a sham agreement between related parties. Thus, the payment of compensation in the course of the real estate business is allowable expenditure.
Kishor Dhule, Counsel for Revenue, argued that the agreement between the parties is without any consideration and is between related parties. He further stated that there was no reference when the property was sold to other buyers regarding any pre-existing right of the company to whom compensation is paid, and no disclosure in the annual accounts of the buyer to show any right in the property.
The tribunal observed that the assessee and the company to whom compensation was paid are not related parties either under the Companies Act or under the Income Tax Act, as they have not disclosed each other in the related party disclosures in their annual accounts and tax audit report.
The fact shows that there is an agreement entered into by the assessee with an unrelated party, documented on a non-judicial stamp paper, with an agreed sale price. The assessing officer has not examined that party. Therefore, the bench concluded that M/s Emtelle India Private Limited has a pre-existing right in the land, which has been surrendered by it in favor of the assessee, for which compensation is paid.
After reviewing the facts and records, the two-member bench of Prashant Maharishi (Accountant Member) and Sandeep Singh Karhail (Judicial Member) held that compensation paid for the closure of agreements entered with private companies in the real estate development business is allowable expenditure.
Thus, the bench dismissed the appeal of revenue.
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