M/s. NTS Corporation, Vadodara V. The ITO, Ward-1(2)(1), Vadodara

ITA 341/AHD/2020

AI Insights

The case involves M/s. NTS Corporation, a company engaged in the construction of residential complexes, appealing against the order of the CIT(A)-5, Vadodara, which confirmed certain disallowances made by the Assessing Officer (AO) for the Assessment Year 2013-14. The primary contention was regarding the disallowance of Rs.10,15,000 paid as compensation for the cancellation of flat bookings by customers, which the AO and CIT(A) deemed not wholly and exclusively incurred for business purposes. The Tribunal examined the nature of these transactions, including the buyback and subsequent resale of the flats, and concluded that the compensation was part of a profitable business strategy, thus an allowable business expenditure. The Tribunal also addressed other grounds related to the disallowance of employee's contribution towards PF and the levying of interest under various sections of the Income Tax Act, upholding some and dismissing others based on legal precedents and statutory provisions.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 129372 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: SMC
• Next Hearing Date: 01-02-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 18-06-2020
• Other Referred Cases: Chekmate Services Pvt. Ltd. vs. CIT (2022) 448 ITR 518
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Principle of natural justice
• Section: 143(1); 143(2)

Judgement Text

ITA No.341/Ahd/2020 Assessment Year: 2013-14 Page 1 of 5 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “SMC” BENCH, AHMEDABAD BEFORE Ms. SUCHITRA KAMBLE, JUDICIAL MEMBER ITA No.341/Ahd/2020 Assessment Year: 2013-14 M/s. NTS Corporation, vs. Income Tax Officer, A-1, Poonam Bunglows, Ward – 1(2)(1), Vadodara. B/h. Manav Mandir Dharm Ashram, Manjalpur, Vadodara – 390 011. [PAN – AAHFN 3783 G] (Appellant) (Respondent) Assessee by : Shri Tushar Hemani, Sr. Advocate & P.B. Parmar, AR Revenue by : Shri Ramesh Kumar, JCIT Date of hearing : 02.02.2023 Date of pronouncement : 22.02.2023 O R D E R This appeal is filed by the Assessee against order dated 11.02.2020 passed by the CIT(A)-5, Vadodara for the Assessment Year 2013-14. 2. The Assessee has raised the following grounds of appeal :- “1. The learned CIT(A) has erred in law and on facts in confirming the disallowance of expense incurred towards compensation of Rs.10,15,000/- under Section 37/28 of the act. 2. The learned CIT(A) has erred both in law and on the facts of the case in confirming the action of the AO of disallowing employee’s contribution towards PF amounting to Rs.45,470/- u/s.36(1)(va) r.w.s. 2(24)(x) of the Act. 3. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and principles of natural justice and therefore deserves to be quashed. 4. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld. AO in levying interest u/s.234A/B/C of the Act.” ITA No.341/Ahd/2020 Assessment Year: 2013-14 Page 2 of 5 3. The return of income was filed on 01.09.2013 declaring loss at Rs.23,490/-. The assessee is engaged in the business of construction of Residential Complex. The return of income was processed under Section 143(1) of the Income Tax Act, 1961. Notice under Section 143(2) of the Act was issued on 08.09.2014. The Assessing Officer observed that the assessee debited compensation against booking cancelled of Rs.10,15,000/- in the Profit & Loss Account for the year under consideration. The assessee submitted that the said compensation was paid against the booking of residential complex cancelled by the customers. Since the bookings have been cancelled by the customers suo moto, there was no necessity or business exigency for payment of such compensation. The Assessing Officer observed that the question for payment of compensation arises only when the assessee induces the customers to cancel the booking for any reason and for such cancellation the customer can be paid compensation. The assessee admitted that the booking of flats were cancelled by the customers themselves. Therefore, Assessing Officer made addition of Rs.10,15,000/- claimed to have been paid by the assessee for the booking of flats cancelled by the customers. The Assessing Officer made further addition of Rs.25,000/- in respect of adjustment against VAT liability and Rs.45,370/- on account of late payment of Employees’ Contribution to Provident Fund. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. 5. In respect of ground no.2, the Ld. AR submitted that the same is covered against the assessee vide decision of Hon’ble Apex Court in the case of Chekmate Services Pvt. Ltd. vs. CIT (2022) 448 ITR 518. Hence, ground no.2 is dismissed. 6. As regards to Ground nos.3 to 5, the same are general in nature and hence no adjudication is required at this juncture. 7. As regards to ground no.1, confirming addition of Rs.10,15,000/- relating to compensation for cancellation of booking of residential complex, the Ld. AR submitted that during the year under consideration the assessee was engaged in the business of construction of residential complex. In F.Y. 2009-10 three customers booked three flats in residential project constructed by the assessee and the booking was for the ITA No.341/Ahd/2020 Assessment Year: 2013-14 Page 3 of 5 purpose of investment and with the intension of reselling the flats in future. Certain booking amounts were also received from those three customers. During the F.Y. 2012-13 i.e. the year under consideration, those customers approached the assessee for cancellation of booking, the assessee bought back the flats from them at the prevailing market rate. The market rate would take into account appreciation in value of flats. The assessee returned the booking amount received and compensation on buyback to the original buyers. Later, those flats were sold by the assessee to new customers at the prevailing market rate. The Ld. AR pointed out the details of original transactions and anew transactions which are as per Annexure-A to the chart given at the time of hearing. The Ld. AR further submitted that the Assessing Officer took a view that such compensation cannot be said to be incurred wholly and exclusively for the business of the assessee. The Ld. AR submitted that the Assessing Officer or CIT(A) never disputed that the payments of compensation was genuine. The Ld AR further submitted that the impugned disallowance was made merely because the Authorities below are of the view that such expenses cannot be said to have been incurred wholly and exclusively for the business of the assessee. The assessee is engaged in the construction of residential complex and many occasions the customers find it difficult to find buyer for such flat themselves. Hence, they contact the builder for finding a new buyer for their property. In such a scenario, the builder usually buys back the property from such customers at the prevailing market rate, returns the booking amount alongwith additional sum which takes care of appreciation in the value of property. In turn, sells such property to new customers and earns profit on such sale. In the above process, additional sum paid by builder to erstwhile buyers upon cancellation of booking/buyback of property would be a business expenditure in the hands of the builder and needs to be allowed while computing income of such builder. In this case, assessee paid compensation of Rs.10,15,000/- upon cancellation of booking/buyback of flats as per normal business practice and hence such expenditure is an allowable business expenditure. The Ld. AR submitted details relating to original buyers and new buyers. Other documentary evidences which were produced indicates compensation to original buyers of flats is equivalent to the difference between consideration for flat ain both the transactions. Confirmation, PAN and Aadhar Card of original buyers are on record, transactions are through proper banking channel, sale deed and construction work agreements as well as corresponding income on such sale accounted for in books. Ld. AR submitted that the ITA No.341/Ahd/2020 Assessment Year: 2013-14 Page 4 of 5 assessee has followed percentage completion method of accounting prescribed under AS-7 and gross revenue from business is Rs.5,12,96,372/-. Ld. AR further submitted that in remand report called by the CIT(A) the there was no dispute as to the fact that assessee had made payments to these parties through banking channel in respect of compensation. Therefore, the Ld. AR submitted that the Assessing Officer as well as the CIT(A) have taken into account this amount as expenses related to business 8. The Ld. DR submitted that the cancellation was by buyers/customers and, therefore, paying the customers who are willingly cancelled the booking, the question of payment of compensation does not arise. The Ld. DR relied upon the Assessment Order and the order of the CIT(A). 9. Heard both the parties and paused all the relevant material available on record. It is pertinent to note that there is a delay of 47 days in filing the present appeal which has been explained by the assessee through affidavit and the delay appears to be genuine and hence the delay is condoned. From the perusal of the records, it can be seen that the customers approached the assessee for cancellation of booking and from Annexure-A, B & C it can be seen that the assessee by paying the limited compensation has made profit after entering into new transactions. Thus, the assessee made profit after paying minimum compensation to these three parties. The assessee has already given all the documentary evidences with respect to original buyers in respect of bank statement, Aadhar Card, PAN and confirmation from these buyers. The assessee has also given details of the new buyers of the said flat, bank statement, Sale Deed as well as the amount upon which the new transaction has taken into consideration. In fact, the flat was booked for Rs.35,50,000/- and the new transaction shows that the flat was sold for Rs.37,50,000/- by paying only Rs.18,00,000/- to the original buyer as the booking amount paid by the original buyer was Rs.16,00,000/- only. Thus, the assessee has made profit and it was business strategy for earning the profit. The Assessing Officer as well as the CIT(A) never disputed the new transactions which has earned profit to the assessee. Therefore, the Assessing Officer as well as the CIT(A) was not justified in making the addition. ITA No.341/Ahd/2020 Assessment Year: 2013-14 Page 5 of 5 10. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open Court on this 22 nd day of February, 2023. Sd/- (SUCHITRA KAMBLE) Judicial Member Ahmedabad, the 22 nd day of February, 2023 PBN/* Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad