Treatment of compensation to reacquire the plot allotted to the customer

Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
Adverting first to ground no.1 in the appeal, facts, in brief, as per relevant orders are that return declaring income of ``4,18,02,660/- filed on 31.03.2006 by the assessee, a real estate company, after being processed u/s 143(1) of the Income–tax Act,1961[hereinafter referred to as the ’Act’] was selected for scrutiny with the service of a notice u/s 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee claimed deduction of ``36,60,500/- on account of compensation to 7 persons mentioned in para 3 of the assessment order. To a query by the AO, the assessee replied that it used to receive sale consideration in installments. Unless the entire sale consideration, registration charges and other expenses were received, the sale deed in respect of land was not executed in favour of the intended purchaser. Similarly, the assessee allowed possession of the land to the intending purchaser only after payment of full consideration and registration of sale deed. In some cases, since the intending purchaser did not want to buy the land as per mutual agreement and advance received was refunded along with some excess amount as return on investment. This excess amount was termed as compensation. However, the AO did not accept the submissions of the assessee on the ground that compensation was nothing but consideration to reacquire the rights in plots allotted to the various customers of the assessee. As such, it was a part of purchase which could only be capitalized and could not be allowed as revenue expenditure. Since the payment of compensation was not under any obligation, statutory or otherwise, the AO disallowed the claim, treating the amount as part of capital work in progress.

Citation :
Assistant CIT, Central Ci rcle-20, New Delhi Vs.M/s Vat ika Landbase Pvt . Ltd. , [Now Vatika Ltd. ] , 308 Vishal Bhawan, Nehru Place, New Delhi.(PAN: .AABCV 5747 G)(Appellant) (Respondent)