JAY PROPERTIES PRIVATE LIMITED, MUMBAI V. DY COMMISSIONER OF INCOME TAX CIRCLE-6(3)(1), MUMBAI

ITA 2268/MUM/2022

AI Insights

The case involves Jay Properties Pvt. Ltd., which appealed against the order of the Commissioner of Income Tax (Appeals) that upheld the disallowance of liquidated damages amounting to Rs. 2,25,00,000 by the Assessing Officer. The damages were claimed as business expenses under section 37 of the Income Tax Act, 1961, following a Memorandum of Understanding (MOU) with Essel Infraprojects Ltd for developing a Special Economic Zone. The Tribunal found that the CIT(A) did not adequately consider the assessee's detailed submissions or the terms of the MOU, leading to the decision to remand the case back to the CIT(A) for a thorough re-examination.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299236 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 01-05-2023
• Assessment Year: 2009-2010
• Appeal Filed On: 08-09-2022
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital expenditure
• Section: 37; 143(3); 142(1); 250; 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA no.2268/Mum./2022 (Assessment Year : 2009–10) Jay Properties Pvt. Ltd. 18 th Floor, A–Wing, Marathon Futurex N.M. Joshi Marg, Lower Parel Mumbai 400 013 PAN – AAACJ1369C ................ Appellant v/s Dy. Commissioner of Income Tax Circle–6(3)(1), Mumbai ................Respondent Assessee by : None Revenue by : Ms. Vranda U. Matkari Date of Hearing – 02/05/2023 Date of Order – 04/05/2023 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The present appeal has been filed by the assessee challenging the impugned order dated 10/08/2022, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2009–10. 2. When the present appeal was called for hearing neither anyone appeared on behalf of the assessee nor was any application seeking adjournment filed. Therefore, in view of the above, we proceed to dispose off the present appeal Jay Properties Pvt. Ltd. ITA no.2268/Mum./2022 Page | 2 ex–parte, qua the assessee after hearing the learned Departmental Representative (“learned DR”) and on the basis of material available on record. 3. In this appeal, the assessee has raised the following grounds:– “1. The Commissioner of Income Tax (Appeals) [hereinafter referred to as "the CIT(A)] erred in upholding the action of the Assessing Officer [hereinafter referred to as "the AO"] in disallowing liquidated damages of Rs. 2,25,00,000/- for reasons which are wrong and contrary to the facts of the case and against the provisions of law; 2. The AO CIT(A) failed to appreciate that the liquidated damages are crystallized in impugned assessment year under consideration and incurred by the assessee in the normal course of the business and hence an allowable business expense u/s 37 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"); 3. The above grounds / sub-grounds are without prejudice to each other; 4. The appellant craves the leave to add, alter or amend all or any of the grounds of appeal.” 4. The only grievance of the assessee, in the present appeal, is against disallowance of liquidated damages of Rs.2,25,00,000. 5. We have considered the submissions of the learned DR and perused the material available on record. The brief facts of the case pertaining to the issue under consideration are that the assessee is a company and is engaged in the business of running and maintaining business centre services and dealing in real estate, properties, development, construction, etc. For the year under consideration, the assessee filed its return of income on 30/09/2009 declaring a total income of Rs.53,36,160. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee the scrutiny assessment under section 143(3) of the Act was passed on 23/12/2011 determining the total Jay Properties Pvt. Ltd. ITA no.2268/Mum./2022 Page | 3 income at Rs.5,68,31,630, after, inter-alia, making a disallowance of Rs. 2,25,00,000 on account of liquidated damages. The learned CIT(A) dismissed the appeal filed by the assessee. In further appeal, the coordinate bench of the Tribunal restored the matter to the file of the Assessing Officer (“AO”) for fresh adjudication. Accordingly, as per the directions of the Tribunal, the AO asked the assessee to produce the details of the said liquidated damages along with supporting documents and justification for allowance of the said expenses. The assessee duly responded to the notice issued by the AO in the remand proceedings. The AO vide order dated 28/09/2017 passed under section 143(3) r/w section 254 of the Act did not agree with the submissions of the assessee and held that the liability towards liquidated damages was not crystallised in the relevant financial year as though the intimation about this liability was made on 31/03/2009, however, the assessee requested for waiver of the said damages on 03/04/2009. The AO further held that the amount of liquidated damages has been shown under the head “unsecured loans” taken during the year from Essel Infraprojects Ltd and thus the payment of liquidated damages is nothing but repayment of the existing loan which amounts to a transaction capital in nature. Accordingly, the AO came to the conclusion that the claim of liquidated damages is nothing but a colourable transaction that has no relevance to any business activity of the assessee, and thus the whole arrangement is not a genuine transaction. Consequently, the AO disallowed the claim of liquidated damages of Rs.2,25,00,000 and added the same to the total income of the assessee. Jay Properties Pvt. Ltd. ITA no.2268/Mum./2022 Page | 4 6. In appeal before the learned CIT(A), the assessee filed detailed submissions through the ITBA portal, submitting as under:-  During the year, pursuant of its business activity, the assessee entered into a Memorandum of Understanding (“MOU”) with Essel Infraprojects Ltd on 01/10/2008 for developing a specific Special Economic Zone of Recreational Tourism Development Zone. It was further submitted that Essel Infraprojects Ltd had already received an in- principle approval from the Government of India, Ministry of Commerce and Industry, Department of Commerce (SEZ section) for the creation of SEZ and therefore, pending the formal approval from the Ministry of Commerce, Essel Infraprojects Ltd approached the assessee company to establish and develop an Entertainment special SEZ.  The assessee accepted the proposal for developing SEZ and received a token amount of Rs.20 crores from Essel Infraprojects Ltd as per the MOU.  Further, as per the MOU, on receiving the final approval from the Ministry of Commerce the assessee was required to submit a detailed plan for development of the property to Essel Infraprojects Ltd.  As per the MOU, the assessee started working on a detailed plan for the development of the property. However, due to certain circumstances beyond the assessee’s control, i.e., due to certain market conditions, the plan could not be prepared in time and therefore, the assessee could not submit the detailed plan for the development of the property to Essel Infraprojects Ltd, as agreed in the MOU.  Accordingly, the assessee was liable to pay liquidated damages of Rs.2.25 crores as per the terms of the MOU. Considering the above changes and the overall market conditions and turmoil, the development of SEZ no longer appeared to be viable and hence, the assessee cancelled the MOU. Jay Properties Pvt. Ltd. ITA no.2268/Mum./2022 Page | 5  Later, the assessee received a letter dated 31/03/2009 from Essel Infraprojects Ltd requesting to refund the token money of Rs.20 crores along with the liquidated damages of Rs.2.25 crores as per the terms of the MOU.  As the liability of liquidated damages incurred in the course of the business of the assessee, the assessee debited the expenses to the profit and loss account and claimed the same in the return of income. The assessee requested for waiver of the damages but to no avail. Such a request was denied by Essel Infraprojects Ltd vide letter dated 05/04/2009. Thus the assessee was under liability to make the payment of the whole of the damages of Rs.2.25 crores.  The assessee submitted that it has been regularly following the mercantile system of accounting and accounting of liability being liquidated damages is in line with the provisions of the Act, as the liability accrued on 31/03/2009, i.e. the date on which it received a letter from Essel Infraprojects Ltd for payment of liquidated damages Rs.2.25 crores, as per the terms of the MOU.  The assessee also submitted that the liquidated damages are nothing but development expenses incurred on the normal course of business due to the non-performance of the business contract. Further, these expenses are neither a capital expenditure nor expenditure of the type described in section 30 to section 36 of the Act and incurred wholly exclusively for the purpose of the business. Therefore, the expenditure on account of liquidated damages is an allowable expenditure under section 37 of the Act.  The assessee also submitted that the view taken by the AO is not correct as the entries made in the books of account are not determinative of the nature of an item. Jay Properties Pvt. Ltd. ITA no.2268/Mum./2022 Page | 6 7. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee observing as under:- “6.5 I have perused the matter, submission of the appellant and the assessment order. It is noticed that the appellant is not able to bring out any new fact on record and all these explanations were submitted during original assessment proceeding also which have been examined and found to be not acceptable for reasons given in detail in the order u/s 143(3) r.w.s. 254 dated 28/09/2017 by the AO. The claim of the appellant of liquidated damages is devoid of any merit in absence of any substantiating documents. 6.6 In view of the above facts and circumstances of the case and respectfully following the order of the CIT(Appeals)-14, Mumbai dated 07/11/2013, I am of the considered view that the action of the Assessing Officer is required to be upheld. Accordingly, addition made by the AO is confirmed and the ground of appeal is dismissed.” 8. Therefore, from the above findings in the impugned order, it is evident that the learned CIT(A) did not consider the detailed submissions filed by the assessee, as quoted in the impugned order from pages 3-15. The learned CIT(A) also neither examined the terms of the MOU pursuant to which the liability on account of liquidated damages accrued to the assessee nor examined the correspondences between the parties to the MOU. The learned CIT(A) also did not analyse various judicial pronouncements and principles of the Accounting Standard relied upon by the assessee in its written submissions. It is trite that the power of the learned CIT(A) is co-terminus to the AO, however, in the present case the learned CIT(A) did not examine any of the contentions raised by the assessee and nor called for any further information to upheld the addition made by the AO. Therefore, in view of the above, we deem it appropriate to restore the issues raised in the present appeal to the file of the learned CIT(A) for de novo adjudication after examination of all the documents/submissions filed by the assessee. Needless Jay Properties Pvt. Ltd. ITA no.2268/Mum./2022 Page | 7 to mention that the learned CIT(A) shall have the liberty to call for any further information from the assessee and in this regard, a due opportunity to respond may also be provided to the AO, as per the law. As a result, grounds raised in the present appeal are allowed for statistical purposes. 9. In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 04/05/2023 Sd/- B.R. BASKARAN ACCOUNTANT MEMBER Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 04/05/2023 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai