AO failed to Consider Supplementary Agreement: ITAT Uphold Deletion of Rs 4 Crore Tax Addition over Development Cost [Read Order]

The case concerned a partnership firm involved in land development, which had entered into agreements with a non-trading corporation (RNTC) for the purchase and development of land parcels. The Assessing Officer had disallowed ₹1.52 crore in material costs and ₹2.40 crore in plot development expenses, arguing that such costs were contractually the liability of RNTC and not the developer.

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Pushparaj Corporation, the respondent assessee is a partnership firm engaged in the activities of purchase of agricultural land in the name of partners. Thereafter, the agricultural land was converted into nonagricultural land. The assessee had entered into a development agreement dated 27.12.2008 with Ravi (Hansol) Non Trading Corporation (“RNTC”), as per which RNTC had decided to purchase the land of various Survey numbers of Kundal Village including the land already purchased by the assessee.

Further, the assessee was also assigned the work of development of the land. As per the agreement, the sale consideration was fixed at Rs.200/- per sq. meter for the land to be sold by the assessee to RNTC. Further, the assessee company was made responsible for construction of roads, common amenities, streetlights, club house, garden etc., the expenditure for which was to be reimbursed to the assessee by RNTC.

The Assessing Officer (‘the AO’) noticed that the assessee had claimed expenditure of Rs.5.96 Crores under the head “purchase” and Rs.3.46 Crores under the head “direct expense” in Schedule-14 of the Profit & Loss account, the details of which was called for and examined. The AO found that the total expense for the material purchased was Rs.1,91,00,181/-, out of which Rs.38,10,181/- was capitalised and balance Rs.1,52,90,000/- was claimed as deduction in P&L account. Further, in Schedule-15 of ‘direct expense’, the assessee had debited Rs.38,15,718/- on account of labour charges which was capitalised and deduction of Rs.2.60 Crores on account of “plot development charges” was claimed in the P&L account.

On verification of the details of the expenses, the AO found that these expenses were incurred in contravention to the terms and conditions of the Memorandum of Understanding for development of land executed on 27.12.2008 between the assessee and the RNTC. Therefore, the material expense of Rs.1,52,90,000/- and plot development expenses of Rs.2.60 Crores was disallowed by the AO and added to income.

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The AO further noticed that the assessee had claimed deduction of Rs.30.30 Lakhs on account of commission and brokerage expense paid for four persons. On examination, the AO found that there was wide variation in rate of commission from Rs.50/- per sq. yard to Rs.200/- per sq. yard and the commission paid was @ 31% of the sale consideration, which was abnormally high. The AO further noticed that since the RNTC was the actual owner of the plots sold, no commission was required to be incurred by the assessee for the sale of the plots. The AO was also not convinced with the genuineness of the expense. He, therefore, disallowed the commission and brokerage expense of Rs.30.30 Lakhs. As the commission expenses was capitalised by the assessee in closing stock of land, the closing stock was accordingly reduced by the amount of Rs.30.30 lakhs. The assessment was completed under Section 143(3) of the Act on 31.03.2014 at a total income of Rs.4,54,00,220/-.

As per the development agreement between the assessee and RNTC, at the first stage, the assessee was required to make the even level surface of land, obtain the NA permission from the authorities and then sell the land to RNTC at a consideration of Rs.200/- per sq. meter. In the second stage, the assessee was required to create and develop common road, common amenities, streetlight, club house, garden and other development. As per the agreement, the expenses for the development was to be paid separately by RNTC to the assessee.

The Assessing Officer had disallowed material expense of Rs.1,52,90,000/- and plot development expense of Rs.2,60,00,000/- on the understanding that these expenses pertained to second stage of the development agreement which were required to be incurred by the RNTC. According to the AO, these expenses were incurred for construction of sample bungalow, club house, construction/development of swimming pool, roads, common amenities etc. From the perusal of ledger account of RNTC brought on record in the paper-book, it is found that the assessee had debited the account of RNTC in respect of Garden Expense, Common Amenity Expense, Club House Preparing Expense and Road Construction Labour to the total amount of Rs.2,23,42,961/-.

The assessee had brought on record supplementary agreement dated 29.01.2009 between the assessee and RNTC which was not considered by the AO. As per the supplementary agreement, certain expenses such as construction including compound wall, land filling and levelling as per the customer requirement of individual plots, was to be incurred by the assessee for which it was entitled to charge Rs.100/- per sq. meter from the respective plot owners.

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The two member bench of T.R. Senthil Kumar (Judicial Member) and Narendra Prasad Sinha, Accountant Member has observed that the Assessing Officer failed to consider a supplementary agreement allowing the firm to carry out additional work for individual plot owners.

Merely because some of the parties did not respond to the notice of the AO, the entire expenditure cannot be held as non-genuine. It is found that the CIT(A) had correctly appreciated the facts of the case and thereafter had rightly allowed the relief to the assessee. The tribunal upheld the deletion of additions made by the AO in respect of material expense of Rs.1,52,90,000/- and development expense of Rs.2.60 Crores, by the CIT(A).

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