The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that compensation paid for project delays in the real estate business is a deductible expense as it was an expense incurred in the ordinary course of business.
Logical Properties Private Limited, the assessee, is a real estate development company engaged in land acquisition and plotting under its project ‘Clover Green Acres.’ In January 2013, the company received an advance of Rs. 1 crore from a prospective buyer for a plot of land.
Due to legal disputes delaying the project, the assessee refunded the advance in the financial year 2016-17. The buyer demanded compensation for the delay, and after negotiations, the dispute was settled with a payment of Rs. 25,00,000.
The Assessing Officer (AO) disallowed the deduction, arguing that the assessee failed to provide an agreement or contract specifying compensation terms and that the payment was like a penalty rather than a business expense. The AO argued that the assessee had no business income so the compensation could not be set off against income from other sources.
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On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the assessee, holding that that compensation paid for breach of contract in real estate transactions is an allowable deduction under Section 37(1) as it is a normal business loss.
The Revenue challenged the CIT(A)’s decision before the ITAT, arguing that the compensation was a penalty and that the absence of business income precluded any deduction.
The two-member bench comprising Om Prakash Kant (Accountant Member) and Rahul Chaudhary (Judicial Member) found that the payment was made in the course of business and was a genuine liability incurred due to unforeseen project delays.
The tribunal ruled that compensation paid to a buyer for delayed possession is a deductible business expense under Section 37(1) of the Income Tax Act, 1961. The tribunal also confirmed that the business loss was eligible for set-off against income under Sections 71 and 72. The tribunal dismissed the Revenue’s appeal.
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