M/s Nitesh Estates Pvt. Ltd., V. DCIT,

ITA 804/BANG/2013

• Counselvise Citation: 80421114 RSA 2013
• Duration Of Justice: 1 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 28-05-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: V SRINIVASAN
• Keywords: Capital asset; Business expenditure; Rule of consistency; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NOS.804 & 805/BANG/2013 ASSESSMENT YEARS : 2008-09 & 2009-10 M/S. NITESH ESTATES PVT. LTD., 7 TH FLOOR, NITESH TIMESQUARE, # 8, M.G. ROAD, BANGALORE 560 001. PAN : AABCN 9267C VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI V. SRINIVASAN, C.A. RESPONDENT BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II(DR) DATE OF HEARING : 18.08.2014 DATE OF PRONOUNCEMENT : 28.08.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THESE ARE APPEALS BY THE ASSESSEE AGAINST THE TWO ORDERS, BOTH DATED 27.3.2013, OF CIT(A)-III BANGALORE, RELATING TO ASSESSMENT YEARS 2008-09 & 2009-10. 2. IN THE APPEAL RELATING TO AY 09-10, IN GROUND NO .3, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF EXPENSES INCURRE D IN EARNING INCOME ITA NOS. 804 & 805/BANG/2013 PAGE 2 OF 18 WHICH IS NOT CHARGEABLE TO TAX BY INVOKING THE PROV ISIONS OF SEC.14A OF THE INCOME TAX ACT, 1961 (ACT). THE SAME WAS, HOWEVER, NOT PRESSED FOR ADJUDICATION AT THE TIME OF HEARING. THEREFORE THE SAID GROUND OF APPEAL IS DISMISSED AS NOT PRESSED. 3. THE ONLY COMMON ISSUE THAT REQUIRES ADJUDICATION BY US IN THESE TWO APPEALS IS AS TO WHETHER THE DISALLOWANCE OF A SUM OF RS.4,48,69,595/- IN AY 08-09 AND A SUM OF RS.50,00,884/- IN AY 09-10 BE ING COMPENSATION PAYABLE TO MR. MAHESH BHUPATHI, CLAIMED AS A DEDUCT ION BY THE ASSESSEE WHILE COMPUTING INCOME FROM THE PROJECT NITESH LON G ISLAND, ON THE GROUND THAT THE SAID EXPENDITURE IS NOT RELATABLE T O THE PROJECT NITESH LONG ISLAND, IS PROPER. 4. THE FACTS THAT ARE NECESSARY FOR ADJUDICATION OF THE AFORESAID COMMON ISSUE ARE AS FOLLOWS. 5. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT WHICH INCLUDES EXECUTING ENGINEE RING CONTRACTS, DEVELOPMENT AND MAINTENANCE OF BUILDINGS AND REAL E STATE BUSINESS. IN THE COURSE OF ITS BUSINESS IT ENTERED INTO AN AGREE MENT DATED 24.5.2005 FOR PURCHASE OF LAND MEASURING 5 ACRES AND 29.35 GUNTAS FROM M/S. SUNRISE REALTY AND LEISURE PRIVATE LIMITED (SRLPL) IN SUR VEY NO.1B CONSISTING OF EIGHT BLOCKS NUMBERED 3,4,7,8,13,14,18, & 23 AT JAK KUR PLANTATION VILLAGE, YELAHANKA HOBLI, BANGALORE NORTH TALUK, [HEREINAFTE R REFERRED TO AS THE PROPERTY OF SRLPL], FOR A SALE CONSIDERATION OF R S.19,64,91,699/-. ITA NOS. 804 & 805/BANG/2013 PAGE 3 OF 18 6. BY AN AGREEMENT DATED 16.6.2005 BETWEEN THE ASSE SSEE AND ITC LIMITED, THE ASSESSEE AGREED TO FACILITATE THE TRAN SFER OF THE PROPERTY OF SRLPL TO ITC LIMITED AND ITC LIMITED ALSO AGREED TO ENGAGE THE ASSESSEE FOR THE PURPOSE OF DEVELOPING THE PROPERTY OF SRLPL BY CONSTRUCTION OF MULTI-STORIED RESIDENTIAL APARTMENT COMPLEX MEASURING APPROXIMATELY 3,31,990 SQ.FT. SUPER BUILT UP AREA O N A TURNKEY BASIS. 7. ON 1-4-2006, SRLPL EXECUTED A SALE DEED IN RESPE CT OF THE PROPERTY OF SRLPL TO ITC LIMITED FOR A SALE CONSIDE RATION OF RS.19,29,10,470/-. THE SALE DEED WAS DULY REGISTER ED IN THE OFFICE OF THE REGISTRAR OF ASSURANCES. THE ASSESSEE THUS FACILIT ATED THE TRANSFER OF THE PROPERTY OF SRLPL. ON THE VERY SAME DAY I.E., 1-4- 2006, ITC LIMITED ENTERED INTO A CONSTRUCTION AGREEMENT WITH THE ASSE SSEE WHEREBY THE ASSESSEE WAS ENTRUSTED WITH THE JOB OF CONSTRUCTING 3,32,467 SQ.FT. OF SUPER BUILT UP AREA OVER THE PROPERTY OF SRLPL AS P ER THE TERMS AND CONDITIONS AND SPECIFICATIONS OF BUILDING AS SET OU T IN THE SAID AGREEMENT. THE CONSTRUCTION PROJECT OF THE SUPER BUILT UP AREA OVER THE PROPERTY OF SRLPL WAS NAMED AS NITESH LONG ISLAND (NLI). 8. THE ASSESSEE OFFERED INCOME FROM THE PROJECT NLI BY FOLLOWING THE PERCENTAGE OF COMPLETION METHOD OF ACCOUNTING (POC) . UNDER THE POC METHOD, RECOGNITION OF REVENUE IS BASED ON THE PERC ENTAGE OF COMPLETION (POC). THE OTHER METHOD FOLLOWED BY REAL ESTATE DE VELOPERS IS COMPLETED CONTRACT METHOD. COMPANIES FOLLOWING THE POC METHO D DETERMINE THE ITA NOS. 804 & 805/BANG/2013 PAGE 4 OF 18 STAGE OF COMPLETION AT EVERY REPORTING PERIOD AND R ECOGNIZE PROJECT REVENUE AND COSTS BASED ON THAT. AS AGAINST THAT, C OMPANIES THAT FOLLOW THE COMPLETED CONTRACT METHOD GENERALLY ACCUMULATE PROJECT COSTS AS WORK IN PROGRESS IN THEIR BALANCE SHEET AND RECOGNIZE P ROJECT REVENUE AND PROFITS ONLY WHEN THE CONSTRUCTION IS COMPLETE AND POSSESSION IS HANDED OVER TO THE BUYERS. THE AO ACCEPTED THE POC METHOD FOLLOWED BY THE ASSESSEE AND THERE IS NO DISPUTE IN THIS REGARD. 9. IN AY 07-08, THE ASSESSEE DECLARED INCOME FROM T HE PROJECT NLI OF RS.8,15,39,390 BY FOLLOWING THE POC METHOD. THE TO TAL REVENUE FROM THE PROJECT WAS ESTIMATED BY THE ASSESSEE AT RS.70 CROR ES AND COST OF THE PROJECT WAS ESTIMATED AT RS.50.58 CRORES. THE ASSE SSEE CLAIMED THAT 11.38% OF THE PROJECT WAS COMPLETED AND ACCORDINGLY RECOGNISED INCOME. WHILE RECOGNISING THE EXPENDITURE OF THE PROJECT NL I, THE ASSESSEE CLAIMED DEDUCTION OF RS.96,76,744 WHICH IS 11.38% OF A SUM OF RS.8.5 CRORES PAYABLE AS COMPENSATION TO ONE MR.MAHESH BHUPATHI F OR NON-PERFORMANCE OF AN AGREEMENT FOR SALE BETWEEN THE ASSESSEE AND M R.MAHESH BHUPATHI. 10. THE FACTUAL BACKGROUND OF THE PAYMENT OF COMPEN SATION OF RS.8.5 CRORES BY THE ASSESSEE TO MR.MAHESH BHUPATHI ARE AS FOLLOWS: 11. MR.MAHESH BHUPATHI OWNED AN EXTENT OF ABOUT 3 A CRES OF LAND IN S.NO.1B IN BLOCK NO.30, 31 & 40 OF JAKKUR PLANTATIO N VILLAGE, YELAHANKA HOBLI, BANGALORE NORTH TALUK, BANGALORE, [HEREINAFT ER REFERRED TO AS THE PROPERTY OF BHUPATHI]. THE PROPERTY OF BHUPATHI H AS NOTHING TO DO WITH THE ITA NOS. 804 & 805/BANG/2013 PAGE 5 OF 18 PROPERTY OF SRLPL. THE TWO PROPERTIES ARE NOT ADJA CENT TO EACH OTHER AND LOCATED AT DIFFERENT LOCATIONS THOUGH THEY ARE IN T HE VICINITY OF EACH OTHER. A PLAN SHOWING THE PROPERTY OF BHUPATHI AND THE PROPERTY OF SRLPL IS ENCLOSED AS ANNEXURE-I TO THIS ORDER FOR BETTER APP RECIATION OF FACTS. 12. THE ASSESSEE ENTERED INTO A JOINT DEVELOPMENT A GREEMENT DATED 25.9.2004 WITH MR.MAHESH BHUPATHI WHEREBY THE ASSES SEE AGREED TO DEVELOP THE PROPERTY OF BHUPATHI WHEREBY THE ASSES SEE WOULD CONSTRUCT MAXIMUM PERMISSIBLE CONSTRUCTION OVER THE PROPERTY OF BHUPATHI AT ITS COST AND WOULD DELIVER 28% OF THE BUILT UP AREA TO MR.MA HESH BHUPATHI, IN CONSIDERATION OF MR.MAHESH BHUPATHI SELLING 72% UND IVIDED SHARE OF THE LAND OF THE PROPERTY OF BHUPATHI TOGETHER WITH A RI GHT TO SELL THE 72% BUILT UP AREA BY THE DEVELOPER TO THIRD PARTIES. THE AGREE MENT DATED 25.9.2004 WAS CANCELLED BY THE PARTIES BY AN AGREEMENT DATED 14.7.2005. UNDER THE AGREEMENT DATED 14.7.2005 WHICH IS TERMED AS COMPE NSATION AGREEMENT, THE ASSESSEE AGREED TO PAY A SUM OF RS. 8.5 CRORES TO MR.MAHESH BHUPATHI FOR NOT FULFILLING THE AGREEMENT DATED 25.9.2004. IN THE PREAMBLE TO THIS AGREEMENT THERE IS A REFERENCE TO THE PROJECT BETWEEN THE ASSESSEE AND ITC LIMITED. THE SAME READS THUS: C. THE PARTIES HAVE BEEN APPROACHED BY ITC LIMIT ED (ITC) FOR PARTICIPATION IN A PROJECT INVOLVING THE DEVELO PMENT OF LAND AND CONSTRUCTION OF A RESIDENTIAL COMPLEX FOR THEIR USE. THE SCHEDULE PROPERTY BEING INSUFFICIENT, ITC HAS IDENT IFIED CERTAIN OTHER IMMOVABLE PROPERTY ADJACENT TO THE SCHEDULE P ROPERTY, FOR DEVELOPING AND CONSTRUCTING THEREON A MULTISTORIED RESIDENTIAL COMPLEX. (PROJECT). ITA NOS. 804 & 805/BANG/2013 PAGE 6 OF 18 13. BY ANOTHER SUPPLEMENTARY AGREEMENT DATED 16.10. 2008, THE COMPENSATION PAYABLE BY THE ASSESSEE WAS REDUCED TO RS.6.70 CRORES INSTEAD OF RS.8.5 CRORES. 14. IT WAS THE PLEA OF THE ASSESSEE BEFORE THE AO I N THE ASSESSMENT PROCEEDING FOR AY 07-08 THAT THE SUM OF RS.8.5 CROR ES SHOULD BE CONSIDERED AS EXPENDITURE FOR THE PROJECT NLI AS TH E PROPERTY OF BHUPATHI WAS ORIGINALLY IDENTIFIED FOR CONSTRUCTION OF BUILD ING FOR ITC AND BECAUSE ITC FELT THE AREA WAS LESS, THE PROPERTY OF SRLPL W AS IDENTIFIED AND THEREFORE THE COMPENSATION PAID TO MR.MAHESH BHUPAT HI HAS NEXUS WITH THE PROJECT NIL AND HAD TO BE CONSIDERED AS EXPENDI TURE FOR THE SAID PROJECT. 15. THE AO WHILE COMPLETING THE ASSESSMENT OF THE A SSESSEE FOR AY 07-08 ON THIS ISSUE OBSERVED AS FOLLOWS: 5. THUS, AS ABOVE IT HAD ALLOCATED 11.38% OF THE A BOVE COMPENSATION OF RS. 96,76,744/- TOWARDS THE COST OF THIS PROJECT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSEE SUBMITTED THAT THE ABOVE AGREEMENT WAS REVISED AND FRESH AGREEMENT HAS BEEN ENTERED ON 16/10/08. THE ASSESSE E WAS ASKED TO FURNISH THE SAME. FROM THE VERIFICATION OF REVIS ED AGREEMENT, IT IS KNOWN THAT THE ABOVE COMPENSATION VALUE HAS BEEN REVISED TO RS. 6.7 CRORES. THUS, THE COST SHOULD ALSO HAVE BEE N REVISED AS PER ABOVE PRICE SUBSEQUENTLY BUT THE ASSESSEE HAS NOT D ONE THE SAME. THIS DISCREPANCY BROUGHT TO THE NOTICE OF A/R FOR H IS COMMENTS. THE A/R SUBMITS THAT THE REVISED AGREEMENT WAS ENTE RED ON 16/10/08 AND THE COST TO THIS EXTENT HAS BEEN GIVEN EFFECT TO IN THE BOOKS OF ASSESSEE IN THE SUBSEQUENT YEARS, THEREFOR E, ADJUSTMENTS NOT TO BE MADE IN THIS ASSESSMENT YEAR. THE A/R FUR THER ARGUES THAT, THE ASSESSEE HAS BEEN FOLLOWING ACCRUAL SYSTE M OF ACCOUNTING ACCORDINGLY IN THE A.Y. 2009-10 ADJUSTME NTS AS PER ITA NOS. 804 & 805/BANG/2013 PAGE 7 OF 18 REVISED COST HAS ALREADY BEEN MADE THEREFORE, ADJUS TMENTS IN THIS YEAR ARE NOT PROPER. HOWEVER, THE ASSESSEES CONTENTIONS ARE NOT ACCEP TABLE. THE PROPORTIONATE COST HAS BEEN DEBITED IN P & L A/ C AS PER ORIGINAL AGREEMENT AND REMAINING BALANCE HAS BEEN B ECOME PART OF CLOSING STOCK IN THE BOOKS OF THE ASSESSEE AND T HE REVISED COMPENSATION WILL BE SPREAD OVER AS PER PERCENTAGE COMPLETION METHOD. THUS, TILL THE COMPLETION OF THE PROJECT TH E ACTUAL COMPENSATION PAYABLE IS SUBJECTED TO REVISIONS AS P ER BUSINESS CONDITIONS. THEREFORE, THE EXACT AMOUNT OF COMPENSA TION PAYABLE IS LIKELY TO CHANGE ANY TIME DURING THE TIME OF THE PROJECT. THUS, THE COMPENSATION PAYABLE IS SORT OF UNASCERTAINED L IABILITY. MOREOVER, ITS ONLY NON COMPETE COMPENSATION, BUT N OT OF ANY ACTUAL EXPENDITURE INCURRED. ACCORDINGLY, THE APPRO PRIATE COMPENSATION NEEDS TO BE REDUCED AS PER REVISION AG REEMENT. IN VIEW OF THIS, ALLOCATION OF COMPENSATION REWORKED O N THE BASIS OF REVISED VALUE I.E. 6.7 CRORES. THUS, 11.38% OF 6.3 CRORES WORKS OUT TO RS. 76,24,600/- INSTEAD OF RS. 96,76,744/- A S DEBITED BY THE ASSESSEE. THUS, THE EXCESS AMOUNT OF RS. 20,52,144/ - IS HEREBY ADDED TO THE RETURNED INCOME. 16. IT CAN THUS BE SEEN FROM THE ABOVE THAT THE CLA IM OF THE ASSESSEE FOR CONSIDERING THE COMPENSATION PAID TO MR. MAHESH BHUPATHI WAS CONSIDERED AS AN EXPENDITURE OF THE PROJECT NLI BY THE AO IN AY 07-08. HOWEVER IN AY 08-09 & 09-10, THE AO TOOK A STAND TH AT THE COMPENSATION PAID TO MR. MAHESH BHUPATHI HAS NOTHING TO DO WITH THE PROJECT NLI AND THEREFORE THE SAID PAYMENT CANNOT BE REGARDED AS EX PENDITURE OF THE PROJECT NLI. THE FOLLOWING WAS THE CLAIM MADE BY T HE ASSESSEE FOR DEDUCTION IN AY 08-09:- ITA NOS. 804 & 805/BANG/2013 PAGE 8 OF 18 AS PER THE RETURN OF INCOME TOTAL COMPENSATION PAYABLE 85000000 POC 64.20% GROSS AMOUNT RECOGNISED AS EXPENDITURE FOR THE AY 2008-09 54566339 AMOUNT ALREADY CHARGED TO P/L ACCOUNT IN THE AY 2007-08 9696744 NET AMOUNT CHARGED TO P/L ACCOUNT IN THE AY 2008-09 44869595 THE JUSTIFICATION OF THE ASSESSEE FOR CLAIMING DEDU CTION OF THE AFORESAID SUM BEFORE THE AO WAS EXPLAINED IN A NOTE WHICH REA DS THUS: M/S. NITESH ESTATES PRIVATE LIMITED ENTERED INTO DEVELOPMENT AGREEMENT WITH MR. MAHESH BHUPATHI FOR DEVELOPMENT OF PROPERTY AT JAKKUR AT SY. NO: 1B BLO CK NOS: 30,31 &40 TOTALLY 3 ACRES. THE COMPANY WAS NEGOTIATING WITH M/S ITC LIMITED FOR PARTICIPATION IN A PROJECT INVOLVING DEVELOPMENT OF LAND AND CONSTRUCT ION OR RESIDENTIAL APARTMENTS FOR ITS OFFICERS. AS M/S. ITC LIMITED REQUIREMENT WAS AROUND 6 TO 7 ACRES THE COMPANY IDENTIFIED AROUND 7 ACRES OF LAND BELONGING TO M/S SUNRISE REALTY AND LEISURE PVT LTD . M/S. SUNRISE REALTY AND LEISURE PVT LTD HAD AGREED TO SELL THE LAND TO M/S ITC LTD ON THE CONDITION THAT THE LAND BELONGING TO M/S MAHESH BHUPATHI IS SOLD TO THEM. HOWEVER MAHESH BHUPATHI HAS AGREED TO CANCEL THE JOINT DEVELOPMENT AGREEMENT AND AGREED TO SELL THE LAND TO M/S. SUNRISE REALTY AND LEISURE PVT LTD ONL Y ON THE CONDITION THAT HE BE PAID A COMPENSATION OF RS. 8.5 CRORE TO HIM. HENCE, M/S. NITESH ESTATES PRIVATE LIMITED INSISTED ITC LIMITED THAT THE LAND M/S. SUN RISE REALTY AND LEISURE PVT LTD WOULD BE SOLD TO M/S ITC LIMITED, ONLY IF AND IF THE DEVELOPMENT AND CONSTRUCTION AGREEMENT IS AWARDED TO THEM. HOWEVER, AS THE CASH FLOWS FROM THE DEVELOPMENT AND CONSTRUCTION FORTHCOMING OVER A PERIOD TWO TO THREE YEARS, THE AMOUNT PAYABLE TO MAHESH BHUPATHI WAS ITA NOS. 804 & 805/BANG/2013 PAGE 9 OF 18 TREATED AS COST OF THE PROJECT AND AMORTISED OVER T HE CONTRACT PERIOD. 17. THE AO HOWEVER REJECTED THE CLAIM OF THE ASSESS EE FOR CONSIDERING THE AFORESAID SUM AS EXPENDITURE RELATABLE TO THE P ROJECT NLI. ACCORDING TO THE AO THE ASSESSEE HAD ENTERED INTO AGREEMENTS WIT H MR. MAHESH BHUPATHI AND ITC LTD AT DIFFERENT POINTS OF TIME FO R DEVELOPMENT OF THEIR RESPECTIVE LANDED PROPERTY. UNDER SUCH CIRCUMSTANCE S, COMPENSATION AMOUNT PAID TO MR. MAHESH BHUPATHI FOR CANCELLATION OF JDA CANNOT BE CONSIDERED AS COST OF PROJECT NLI WHICH IN ITSELF I S A DIFFERENT TRANSACTION. THE AO ALSO FOUND THAT THE ASSESSEE HAD ENTERED INT O A SEPARATE MOU WITH SRLPL FOR PURCHASE OF THE PROPERTY OF SRLPL ON 4.05.2005. SUBSEQUENTLY, WHEN ITC LTD APPROACHED THE ASSESSEE, A SEPARATE MOU WAS SIGNED ON 16.06.2005 AND THE SAME LAND WAS THEN TRANSFERRED TO ITC LTD VIDE SALE DEED ON 1.04.2006. ON ACCOUNT OF THIS TRANSFER, THE ASSESSEE IN THE CAPACITY OF CONFIRMING PARTY, HAS RECEIVED C ONSIDERATION OF RS 67344214/- FROM ITC LTD. WHICH IT HAD OFFERED AS IN COME IN THE AY 2007-08. ACCORDING TO THE AO THE ABOVE EVENT INDICATED THAT THE ROLE OF THE ASSESSEE IN FACILITATING THE TRANSFER OF LAND FROM SRLPL WAS PRIMARILY TO EARN PROFIT AND NOT TO SECURE THE CONSTRUCTION AND DEVELOPMENT CONTRACT FROM TO ITC LTD AS CLAIMED IN THE NOTE. THE AO ALS O HELD THAT IF THE COMPENSATION OF RS 85000000 PAYABLE TO MR. MAHESH B HUPATHI WAS IN LIEU OF CANCELLATION OF JDA AND ENABLE TRANSFER OF PROPE RTY OF SRLPL THEN THE SAME SHOULD HAVE BEEN CLEARLY SPECIFIED IN THE COMP ENSATION AGREEMENT. ITA NOS. 804 & 805/BANG/2013 PAGE 10 OF 18 INSTEAD THE AGREEMENT ONLY REQUIRES MR. MAHESH BHUP ATHI TO TRANSFER THE PROPERTY TO THE NOMINEES OF THE ASSESSEE. THE RELEV ANT CLAUSE IN THE AGREEMENT READ AS BELOW, 3.3 THE FIRST PARTY (MR. MAHESH BHUPATHI) SHALL TRANSFER AND CONVEY THE SCHEDULE PROPERTY IN FAVOUR OF THE NOMINEES OF THE SECOND PARTY (NEPL) WITHIN SUCH TIME AND IN SUCH MANNER AS MAY BE STIPULATED BY THE SECOND PARTY IN WRITING 18. THE AO ALSO FOUND THAT THE LAND OWNED SRLPL WAS TRANSFERRED TO ITC LTD ON 1.4.2006 I.E. WITHIN A YEAR OF SIGNING T HE COMPENSATION AGREEMENT. IF THE CLAIM OF THE ASSESSEE AS PER THE NOTE SUBMITTED WERE TO BE CORRECT, THEN THE EVENT OF TRANSFER OF LAND FROM MR. MAHESH BHUPATHI TO SRLPL OUGHT TO HAVE NECESSARILY PRECEDED THE EVENT OF TRANSFER OF LAND FROM SRLPL TO ITC LTD. THE AO ALSO CALLED UPON THE ASSESSEE TO EXPLAIN THE STATUS OF THE LAND BELONGING TO MR.MAHESH BHUPA THI AND PRODUCE NECESSARY EVIDENCE. HOWEVER, THE ASSESSEE DID NOT P RODUCE ANY EXPLANATION OR DETAILS IN THIS REGARD. THE AO THERE FORE HELD THAT THE ASSESSEE FAILED TO EXPLAIN THAT THE EXECUTION OF NL I PROJECT WAS DEPENDENT ON FULFILLING CERTAIN IMPORTANT CONDITIONS, ONE OF WHICH IS THE TRANSFER OF LAND FROM MR. MAHESH BHUPATHI TO SRLPL. THE AO DISALLOWE D THE CLAIM OF THE ASSESSEE FOR DEDUCTION FINALLY CONCLUDING AS FOLLOW S: 4. IN VIEW OF THE FACT AND CIRCUMSTANCES DISCUSS ED ABOVE, I AM OF THE OPINION THAT ITA NOS. 804 & 805/BANG/2013 PAGE 11 OF 18 1. NEPL FACILITATED THE TRANSFER OF LAND FROM M/S SUNRISE REALTY LEISURE PVT LTD PRIMARILY TO EARN PROFIT AND NOT TO SECURE THE CONSTRUCTION AND DEVELOPMENT CONTRACT FROM TO ITC LTD 2. NEPL HAS INDEPENDENTLY AND SEPARATELY ENTERED IN TO AGREEMENTS WITH MR. MAHESH BHUPATHI AND ITC LTD FOR DEVELOPMENT OF THE PROPERTY AT DIFFERENT POINTS OF TIME. 3. THERE IS NO NEXUS BETWEEN THE COMPENSATION PAYAB LE ON ACCOUNT OF CANCELLATION OF JOINT DEVELOPMENT AGREEMENT WITH MR.MAHESH BHUPATHI AND THE PROJECT NLI THAT IS EXECUTED ON THE LAND OWNED BY ITC LTD. ACCORDINGLY THE SUM OF RS. 44869595 DEBITED TO THE PROFIT AND LOSS ACCOUNT IS DISALLOWED AS EXPENDITURE . 19. IN AY 09-10, THE CLAIM OF THE ASSESSEE WAS AS FOLLOWS: AS PER THE RETURN OF INCOME TOTAL COMPENSATION PAYABLE 6,70,00,000 POC 88.91% GROSS AMOUNT RECOGNISED AS EXPENDITURE FOR THE AY 2009-10 5,95,67,223 AMOUNT ALREADY CHARGED TO P/L ACCOUNT IN THE AY 2008-09 5,45,66,339 NET AMOUNT CHARGED TO P/L ACCOUNT IN THE AY 2009-10 50,00,884 20. FOR THE SAME REASONS GIVEN IN AY 08-09, THE AO REJECTED THE CLAIM OF THE ASSESSEE. 21. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CON FIRMED THE ORDER OF THE AO. ITA NOS. 804 & 805/BANG/2013 PAGE 12 OF 18 22. BEFORE THE CIT(APPEALS), THE AO HAD POINTED OU T THAT THE PROPERTY OF BHUPATHI WAS ULTIMATELY SOLD UNDER SALE DEED DAT ED 24.4.2006 TO ONE RAGHUNATH VISHWANATH DESPHANDE (RVD) AND NOT TO SRL PL AND THIS FACT GOES TO SHOW THAT THE PLEA OF THE ASSESSEE THAT SRL PL AGREED TO SELL THE PROPERTY OF SRLPL TO ASSESSEE/ITC, ONLY IF THE ASSE SSEE ARRANGES FOR SALE OF THE PROPERTY OF BHUPATHI TO SRLPL. ON THE ABOVE PLEA OF THE AO, THE ASSESSEE SUBMITTED THAT MR. RVD WAS REPRESENTING SR LPL AND THEREFORE NO ADVERSE INFERENCE CAN BE DRAWN IN THIS REGARD. 23. THE CIT(APPEALS), HOWEVER, WAS OF THE VIEW THA T THE PROPERTY OF BHUPATHI HAD NOTHING TO DO WITH NLI PROPERTY AND TH AT THE CLAIM OF THE ASSESSEE REGARDING NEXUS BETWEEN THE PROPERTY OF BH UPATHI AND NLI PROPERTY IS NOT FOUND ANYWHERE IN THE VARIOUS AGREE MENTS BETWEEN THE PARTIES. THE CLAIM OF THE ASSESSEE WAS THEREFORE H ELD BY THE CIT(A) TO BE BASELESS. THE CIT(A) ALSO FOUND THAT THERE WAS NOT HING TO SHOW THAT MR. RVD WAS REPRESENTATIVE OF SRLPL IN THE MATTER OF PU RCHASE OF PROPERTY OF BHUPATHI. THE CIT(A) HELD THAT BUSINESS EXPEDIENCY OF THE TRANSACTION FOR PAYMENT OF COMPENSATION IS ALSO NOT PROPERLY EXPLAI NED. THE CIT(A) HELD THAT THERE WAS NOTHING TO SHOW THAT PAYMENTS MADE T O BHUPATHI HAD RESULTED IN ANY BUSINESS ADVANTAGE TO THE ASSESSEE, BUT WAS ONLY TO REDUCE THE INCOME FROM NLI PROPERTY. FOR ALL THESE REASONS, THE CIT(A) CONFIRMED THE ORDER OF THE AO. ITA NOS. 804 & 805/BANG/2013 PAGE 13 OF 18 24. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), T HE ASSESSEE HAS PREFERRED THE PRESENT APPEALS BEFORE THE TRIBUNAL. 25. THE LD. COUNSEL FOR THE ASSESSEE REITERATED TH E SUBMISSIONS AS WERE MADE BEFORE THE AO. ACCORDING TO HIM, THE RECITALS IN THE COMPENSATION AGREEMENT DATED 14.7.2005 BY WHICH MR. MAHESH BHUPA THI WAS TO BE PAID RS.8.5 CRORES AS COMPENSATION AS THE PROPERTY OF BH UPATHI WAS ORIGINALLY IDENTIFIED FOR USE OF ITC AND WAS LATER FOUND TO BE NOT SUITABLE FOR ITC, CAN BE SUFFICIENT TO SHOW THAT NLI AND THE AGREEMENTS F OR PURCHASE OF THE PROPERTY OF BHUPATHI HAD NEXUS. IT WAS SUBMITTED T HAT THE ASSESSEE AS A BUSINESSMAN HAS TAKEN A DECISION TO PAY COMPENSATIO N TO MR. MAHESH BHUPATHI KEEPING IN MIND COMMERCIAL EXPEDIENCY. IT WAS SUBMITTED THAT THE REVENUE CANNOT SIT IN JUDGMENT OVER THE SAME. RELIANCE WAS PLACED BY THE LD. COUNSEL FOR THE ASSESSEE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT, 288 ITR 1 (SC) , WHEREIN THE HONBLE APEX COURT HELD THAT THE EXPRESSION COMMER CIAL EXPEDIENCY IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. IT WAS FURTHER HELD THAT THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER AN Y LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE, IF IT IS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. THE LD. COUNSEL FOR THE ASS ESSEE ALSO PLACED RELIANCE ON THE ORDER OF THE AO FOR A.Y. 2007-08 WH EREIN THE AO ACCEPTED IDENTICAL CLAIM OF THE ASSESSEE. THE LD. COUNSEL A LSO RELIED ON THE SEQUENCE OF EVENTS THAT OCCURRED IN THE MATTER OF A GREEMENTS BETWEEN THE ITA NOS. 804 & 805/BANG/2013 PAGE 14 OF 18 ASSESSEE AND MAHESH BHUPATHI ON THE ONE HAND, AND T HE AGREEMENT BETWEEN THE ASSESSEE AND ITC ON THE OTHER HAND. AC CORDING TO HIM, THE SEQUENCE OF TIME AT WHICH THE AGREEMENTS WERE ENTER ED INTO BETWEEN THE PARTIES WILL ONLY GO TO SHOW THAT THE TRANSACTION F OR PURCHASE OF THE PROPERTY OF BHUPATHI AND THE PROPERTY OF SRLPL HAD NEXUS AND WERE BEING LOOKED UPON BY THE ASSESSEE AS ALTERNATIVE AVENUE FOR DEVE LOPMENT OF RESIDENTIAL COMPLEX FOR ITC. 26. THE LD. DR PLACED STRONG RELIANCE ON THE ORDER OF THE CIT(A) / AO. IT WAS SUBMITTED BY HIM THAT IN THE A.Y. 2007-08, T HE AO DID NOT GO INTO THE QUESTION OF NEXUS BETWEEN THE PROPERTY OF BHUPATHI AND THE PROPERTY OF SRLPL. HE PROCEEDED ON AN ERRONEOUS ASSUMPTION THA T RS.8.5 CRORES RELATES TO THE NLI PROPERTY. ACCORDING TO HIM, TH E SAID ORDER CANNOT STAND IN THE WAY OF REVENUE TAKING A STAND IN A.YS. 2008- 09 & 2009-10 THAT THE SAID EXPENDITURE HAS NO NEXUS WITH THE NLI PROPERTY . 27. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. AT THE OUTSET, IT NEEDS TO BE EMPHASIZED THAT THE P ROPERTY OF BHUPATHI AND THE PROPERTY OF SRLPL ARE AT DIFFERENT PLACES. AS ALREADY STATED, A COPY OF THE PLAN SHOWING ALLOCATION OF BOTH THE PROPERTIES IS ANNEXED TO THIS ORDER. IT IS ALSO A FACT THAT THE AGREEMENT FOR PURCHASE O F PROPERTY OF BHUPATHI AND THE PURCHASE OF PROPERTY OF SRLPL WERE ENTERED INTO AT DIFFERENT POINTS OF TIME. NONE OF THE DOCUMENTS BETWEEN THE PARTIES, E XCEPT A CASUAL REFERENCE IN THE COMPENSATION AGREEMENT DATED 14.7. 2005, SPEAK ABOUT ITA NOS. 804 & 805/BANG/2013 PAGE 15 OF 18 THE NEXUS BETWEEN THE PROPERTY OF BHUPATHI AND THE NLI PROPERTY. EVEN IN THE COMPENSATION AGREEMENT DATED 14.7.2005, THERE I S A REFERENCE TO THE PROPERTY OF BHUPATHI HAVING BEEN CONSIDERED FOR DEV ELOPMENT OF RESIDENTIAL COMPLEX BY ITC, BUT SINCE THE PLACE WAS SMALL, THE SAME WAS GIVEN UP. THIS RECITAL IN THE COMPENSATION AGREEMENT DATED 14 .7.2005, IN OUR VIEW, ALSO DOES NOT SHOW ANY NEXUS BETWEEN THE PROPERTY O F BHUPATHI AND THE NLI PROPERTY. NO EVIDENCE HAS BEEN BROUGHT ON RECO RD BY THE ASSESSEE TO SHOW THAT THE PROPERTY OF BHUPATHI WAS FIRST IDENTI FIED BY ITC FOR DEVELOPMENT OF RESIDENTIAL COMPLEX. IN THIS REGARD , THESE FACTS HAVE NOT EVEN BEEN CONFIRMED BY ITC. THERE IS NOTHING ON RE CORD TO SHOW THAT SRLPL IMPOSED A CONDITION FOR SALE OF THE PROPERTY OF SRLPL TO THE ASSESSEE THAT THE ASSESSEE SHOULD ARRANGE FOR SALE OF THE PROPERTY OF BHUPATHI TO SRLPL. THE FACT REMAINS THAT ULTIMATEL Y THE PROPERTY OF BHUPATHI WAS NOT SOLD TO SRLPL OR ITS NOMINEE. THE SAID PROPERTY WAS ULTIMATELY SOLD TO A THIRD PARTY. THERE IS NO BASI S WHATSOEVER FOR FIXATION OF COMPENSATION OF RS.8.5 CRORES. THERE IS NOTHING ON RECORD TO SHOW AS TO HOW THE SAME WAS QUANTIFIED, WHO COMMITTED THE BREA CH AND AS TO WHETHER ANY CLAIM WAS MADE BY BHUPATHI IN THIS REGARD. APA RT FROM ALL THE ABOVE, CLAUSE 3.3 OF THE COMPENSATION AGREEMENT DATED 14.7 .2005 READS AS FOLLOWS:- 3.3 THE FIRST PARTY SHALL TRANSFER AND CONVEY THE SCHEDULE PROPERTY IN FAVOUR OF THE NOMINEES OF THE SECOND PA RTY WITHIN SUCH TIME AND IN SUCH MANNER AS MAY BE STIPU LATED BY THE SECOND PARTY IN WRITING. ITA NOS. 804 & 805/BANG/2013 PAGE 16 OF 18 28. A PERUSAL OF THE AFORESAID CLAUSE WOULD SHOW T HAT MR. MAHESH BHUPATHI AGREED THAT HIS PROPERTY WOULD BE SOLD IN FAVOUR OF THE NOMINEES OF THE SECOND PARTY. WE FAIL TO SEE AS TO HOW IN L IGHT OF THE AFORESAID CLAUSE THAT THE AGREEMENT IN QUESTION CAN IT BE SAI D TO BE A COMPENSATION AGREEMENT ENTERED INTO FOR BREACH OF THE AGREEMENT DATED 25.9.2004. IT IS ALSO SEEN THAT IN NONE OF THE REGISTERED DOCUMENTS BY WHICH THE PROPERTY OF SRLPL WAS CONVEYED, IS THERE A REFERENCE TO THE AGR EEMENT BETWEEN THE ASSESSEE AND BHUPATHI. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE CONCLUSION OF THE REVENUE AUTHORITIES THAT THE PAYMENT OF RS.8.5 CRORES HAS NO NEXUS WITH NLI PROPERTY IS CORRECT AND THERE FORE HAS TO BE UPHELD. IN VIEW OF THE ABOVE CONCLUSIONS, THE PLEA OF COMME RCIAL EXPEDIENCY IN MAKING THE PAYMENT TO MR. MAHESH BHUPATHI FOR NLI P ROPERTY CANNOT ALSO BE ACCEPTED. 29. AS FAR AS THE ORDER OF THE AO FOR A.Y. 2007-08 IS CONCERNED, WE FIND THAT THE AO DID NOT APPLY HIS MIND TO THE QUESTION AS TO WHETHER THE PAYMENT OF COMPENSATION TO MAHESH BHUPATHI HAS ANY NEXUS WITH THE NLI PROPERTY. IN FACT, THE AO PROCEEDED ON THE BASIS T HAT SUCH NEXUS EXISTED AND DID NOT QUESTION THE SAME AT ALL. HOWEVER, IN A.YS. 2008-09 & 2009- 10, THE AO WENT INTO THIS QUESTION AND HAS RIGHTLY COME TO THE CONCLUSION THAT THERE WAS NO NEXUS WHATSOEVER. SINCE THE ORDE R OF THE AO FOR THE A.Y. 2007-08 DID NOT CONSIDER THE QUESTION OF NEXUS, THE SAME, IN OUR VIEW, WILL NOT BE BINDING ON THE AO WHILE CONCLUDING ASSESSMEN TS FOR THE A.YS. 2008- ITA NOS. 804 & 805/BANG/2013 PAGE 17 OF 18 09 & 2009-10. THE AO WAS FREE TO TAKE A DIFFERENT VIEW IN THESE ASSESSMENT YEARS. THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE IN TAX PROCEEDINGS, HOWEVER THE PRINCIPLE OF CONSISTENCY I S APPLICABLE. NEVERTHELESS, WHEN IT IS SHOWN THAT THERE WAS LACK OF APPLICATION OF MIND WHEN THE EARLIER VIEW WAS TAKEN OR WHEN IT IS SHOWN THAT THE EARLIER VIEW WAS CONTRARY TO THE FACTS ON RECORD, THE SAME SHOUL D NOT BE FOLLOWED. IN OUR VIEW, THE ORDER OF THE AO FOR THE A.Y. 2007-08 WAS THEREFORE NOT BINDING AND CONCLUSIVE IN THE MATTER. 30. IN VIEW OF THE REASONS GIVEN ABOVE, WE ARE OF THE VIEW THAT THE ORDERS OF THE CIT(APPEALS) DO NOT CALL FOR ANY INTE RFERENCE. ACCORDINGLY, THE ORDERS OF THE CIT(APPEALS) FOR BOTH THE ASSESSM ENT YEARS ARE UPHELD AND BOTH THESE APPEALS BY THE ASSESSEE ARE DISMISSE D. 31. IN THE RESULT, THE APPEALS ARE DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF AUGUST , 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 28 TH AUGUST , 2014 . ENCL : ANNEXURE-I /D S/ ITA NOS. 804 & 805/BANG/2013 PAGE 18 OF 18 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.