M/S MAYA VENTURES PRIVATE LIMITED V. THE ASSISTANT COMMISSIONER OF INCOME TAX-4(1)(2),

ITA/136/2018

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The case involves M/s. Maya Ventures Private Limited, which entered into a Joint Development Agreement with Mr. D. Ramesh for developing residential apartments. To commence the project, the company had to pay various compensations to tenants and eventually paid Rs. 65 Lakhs to Mr. Damesh to settle a dispute with his sister, which was necessary to clear the title of the property. The Assessing Officer disallowed this payment as a deductible business expense, a decision initially overturned by the Commissioner of Income-Tax (Appeals) but later reinstated by the Appellate Tribunal. The High Court, upon appeal, found that the expenditure was indeed for business purposes and should be allowed as a deduction.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 763140 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 18-02-2021
• Assessment Year: misc
• Other Referred Cases: Dalmia Jain and Co. Ltd. Vs. CIT, CIT Vs. Deluxe Film Distributors Ltd., CIT Vs. Bhowrisankara Steam Ferry Co., DCIT Vs. B.Kumara Gowda, S.A. Builders Vs. CIT (Appeals) and Another, Karnataka Trade Corporation Ltd. Vs. Assistant Commissioner of Income-tax, Central Circle-2(2), Bangalore
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: A SHANKAR; M LAVA
• Keywords: Business expenditure; Income Tax; Joint Development Agreement; Legal fees; Settlement Payment
• Section: 143(3); 143(1); 37; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 18TH DAY OF FEBRUARY, 2021 PRESENT THE HON’BLE MR. JUSTICE SATISH CHANDRA SHARMA AND THE HON’BLE MR. JUSTICE V. SRISHANANDA I.T.A. NO. 136/2018 BETWEEN: M/S. MAYA VENTURES PRIVATE LIMITED REP. BY ITS MANAGING DIRECTOR, SRI.M.N. KARTHIK, #19 & 19/1, 3RD FLOOR, SOUTH END ROAD, BASAVANAGUDI, BENGALURU – 560 004 PAN NO. AAECEM1257G .... APPELLANT (BY SRI. A. SHANKAR, SENIOR ADVOCATE FOR SRI. M. LAVA, ADVOCATE) AND: THE ASSISTANT COMMISSIONER OF INCOME TAX – 4(1)(2), BMTC BUILDING, 6TH BLOCK, KORAMANGALA, 80 FEET ROAD, BENGALURU-560 095. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADVOCATE) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND TO ANSWER THE SAME IN FAVOUR OF THE APPELLANT AND TO SET ASIDE THE FINDINGS THEREIN TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE INCOME-TAX 2 APPELLATE TRIBUNAL, “A” BENCH, BANGLORE, IN ITA NO.840/BANG/2015 DATED 28.09.2017 FOR THE ASSESSMENT YEAR 2010-2011 (VIDE ANNEXURE-A) AND TO PASS SUCH OTHER ORDERS AS THIS HON’BLE COURT DEEMS FIT AND PROPER TO MEET THE ENDS OF JUSTICE. THIS I.T.A. HAVING BEEN HEARD AND RESERVED ON 12.02.2021, COMING ON FOR PRONOUNCEMENT OF JUDGMENT THIS DAY, SATISH CHANDRA SHARMA . J., DELIVERED THE FOLLOWING: JUDGMENT The present appeal is arising out of the order dated 28.09.2017 passed by the Income Tax Appellate Tribunal ”A” Bench, Bangalore (hereinafter for brevity referred to as ‘Appellate Tribunal’) in ITA No.840/Bang/2015 dated 28.09.2011 (The Assistant Commissioner of Income-tax Vs. M/s. Maya Ventures Pvt. Ltd. 2. The facts of the case reveal that, the appellant is a private limited company registered under the Companies Act, 1956, having its main object of carrying on the real estate development, building residential apartments etc. The appellant-company being assessed for income-tax since a decade, had filed its returns of income on 29.03.2011 and declared an income of Rs.4,57,030/- and paid taxes thereon to the extent of Rs.6,07,789/-. 3 2.1. The return was processed under Section 143(1) of the Income Tax Act, 1961 (hereinafter for brevity referred to as ‘Act’) and the case was selected for scrutiny. The Assessing Officer passed an order under Section 143(3) of the Act on 22.03.2013 by disallowing payment of Rs.65 Lakhs paid to the landlord towards the land expenses. 2.2. The facts further reveal that the appellant- Company has entered into a Joint Development Agreement dated 10.06.2004 with one Mr. D. Ramesh, the landlord for development of residential apartments measuring 2 acres and 7 guntas in Sy. No.70 of Jaraganahalli, Bangalore. The property in question was having various tenants and the Appellant-Company could not get possession to commence the work. The appellant-Company had to pay compensation on account of landlord to various tenants from time to time to get the possession of the property for development. The appellant-Company also spent by way of legal fees etc. to commence the work at its earliest time and to complete the project. 3. The appellant-Company developed on the land a residential building in the name and style of 4 “M/s. Maya Indraprastha” containing 106 residential apartments. It is pertinent to note that at the time of completion of the project, one of the sisters of the land lord namely Smt. Malini filed a partition suit and also got an interim stay restraining the appellant to proceed ahead with construction and from alienating the suit property, and the appellant-Company has availed financial assistance from the Banks and Financiers. The appellant-Company in order to settle the dispute and was forced to pay Rs.65 Lakhs to get clear title of the property, and the amount was paid to the landlord to settle the dispute with his sister and to withdraw the partition suit. The Assessing Officer did not take Rs.65 Lakhs paid to Mr.D.Ramesh for the purpose of settling his dispute with his sister, as an expenditure towards the property. The appellant-Company being aggrieved by the additions made in the Order of Assessment of the Assessing Officer, preferred an appeal before the Commissioner of Income-Tax (Appeals)-4 and the Commissioner of Income-Tax has decided the appeal in favour of the assessee by order dated 04.03.2015. 5 4. The Department thereafter, preferred an appeal before the Appellate Tribunal and the Appellate Tribunal has upheld the order passed by the Assessing Officer by passing an order on 28.09.2017. Being aggrieved by the order passed by the Appellate Tribunal, the present appeal has been filed and this Court has admitted the appeal on the following substantial questions of law:- i) Whether the Tribunal was justified in law in holding that the Appellant is not eligible for deduction of Rs.65,00,000/- under section 37 of the Act in respect of the expenditure incurred for removing encumbrance on the property held by the Appellant as stock in trade under a Joint Development Agreement and consequently passed a perverse order on the facts and in the circumstances of the case. ii) Whether the Tribunal was justified in law in ignoring the various agreements and arbitration proceedings entered into subsequent to the original joint development agreement and consequently denied the appellant the deduction of 65 lakhs thus passed a perverse order on the facts and circumstances of the case. 6 iii) Whether the Tribunal was justified in law in not adjudicating the issue of levy of interest under Section 234A, 234B, and 234C of the Act, 1961 on the facts and circumstances of the case.” 5. The Income Tax Appellate Tribunal vide order dated 28.09.2017 has allowed the appeal preferred by the Department. Paragraphs 2 to 7 of the said order reads as under:- “2.The grounds raised by the revenue are as under:-. 1. The Order of the Ld. CIT (A) is opposed to the law and facts of the case. 2. The Ld.CIT(A) ought to have appreciated the fact that the payment of Rs.65 lakhs made to the owner’s sister has not been established to be laid out for the purpose of business, when Clause 33 & 34 of the Joint Development Agreement entered into by the assessee and the owner of the land, stipulates that the owner will bear the expenditure to keep the title clear and make the land usable for development till the developer’s share is transferred. 7 3. The Ld.CIT(A) ought to have appreciated the fact that the assessee has not adduced any evidence to prove that the onus to cure the defective title was shifted to the assessee during the course of assessment proceedings. 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) in so far as it is relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5. The appellant craves leave to add, alter, amend and/or delete any of the grounds that may be urged. 3. The Id.DR of revenue supported the assessment order. He also submitted that as per the JDA copy submitted by him, in para nos.33 and 34, it is clearly specified that all the expenditure incurred to make the schedule land usable for development shall be borne by the owner or such amount shall be debited to his account. He also submitted that as per the assessment order, Shri Ramesh to whom the amount in question was paid decided to transfer three flats of his share to the assessee company for Rs.1,40,11,200/- and it was from this money paid to Shri.Ramesh, the amount in question of Rs.65 lakhs was transferred to expenses account without any valid basis. 8 4. The Id. AR of assessee supported the order of CIT (A). He also submitted that he has already filed the written submissions as per which reliance has been placed on several judicial pronouncements in support of his contention for payments made to third parties to be in business and claimed as business expenses on account of business exigency and expediency, deduction is allowable u/s 37 of IT Act. He submitted that these written submissions should be considered to decide this issue. The judgments cited are as under. 1. CIT Vs. Deluxe Film Distributors Ltd., (114 ITR 434) (Call) 2. Dalmia Jain and Co. Ltd., Vs. CIT (81 ITR 754) (SC) 3. CIT Vs. Bhowrisankara Steam Ferry Co. (87 ITR 650) (AP) 4. DCIT Vs. B.Kumara Gowda (396 ITR 386) (Kar) He also submitted that the amount in question was paid to Shri Ramesh for settling dispute with his sister so the development work of the property can be carried out smoothly and therefore, it should be accepted that this payment was for business exigency. 5. We have considered the rival submissions. There is no dispute that as per the para no.33 and 34 of JDA entered into between the 9 assessee company and Shri.Ramesh. Ramesh was required to bear the expenditure incurred to make the schedule land usable for development and even if such expenses is paid by the other party, the same is to be debited to his account. In view of this clear understanding as per JDA, it cannot be accepted that this expenditure of Rs.65 lakhs is because of business exigency because whatever may be the dispute between Shri.Ramesh and his sister, it was to be settled by Shri.Ramesh at his own cost and such expenses is not required to be borne by the assessee company. 6. In this view of the matter, we are of the considered opinion that the order of CIT (A) is not sustainable because these paras of JDA were not considered by CIT (A) at all. Regarding various judgments cited by Id. AR of assessee, we would like to observe that in view of this fact that the assessee had not been able to establish that the payment in question was on account of business exigency and it was required to be borne by the assessee company and not by Shri.Ramesh, none of the judgments cited by Id. AR of assessee is relevant in the present case of the assessee. We therefore reverse the order of CIT (A) and restore that of AO. 7. In the result, the appeal filed by the revenue is allowed.” 10 6. This Court has heard the learned counsel for the parties at length. The appellant decided to settle the dispute between Mr. D. Ramesh and his sister in order to continue with the construction of project on reliasation of the property that may arise from the sale of apartments and under those circumstances, the amount was paid to Mr.D.Ramesh. the Tribunal has merely relied upon certain clauses of the Joint Development Agreement which was entered into at the initial stage of the project. During the course of the project, there occurred many obstacles and hurdles and they were faced by the appellant and therefore, merely relying on the Joint Development Agreement, the Tribunal erred in law and facts, especially when the Tribunal has not doubted the genuineness of the expenditure incurred by the appellant. The amount which was paid to Mr.D. Ramesh was rightly treated as cost of the project as evidenced by the accounts which was certainly within the knowledge of the Assessing Officer and the Appellate Authority. The cost of the project includes the sum paid to Mr. D. Ramesh and the entire project has been sold out as reflected in the profit and loss account. Therefore, the Tribunal has certainly on erroneous 11 assessment of facts, not allowed the amount paid to Mr.D.Ramesh as deduction, as cost towards the project. The Tribunal was certainly having no power to re-write the agreement and if the parties have modified the understanding by an agreement, the same should not have been ignored specially when the amount paid to Mr.D. Ramesh was certainly an expenditure, it should have been allowed as a deduction. 7. Learned counsel has placed reliance on the judgment of the Hon’ble Supreme Court in the case of Dalmia Jain & Co. Ltd. Vs. Commissioner of Income Tax reported in (1971)81 ITR 754. In the aforesaid case, the assessee appointed by the Company was working as an agent of State Government in respect of limestone quarry and there was a suit against the Government suing for a specific performance of earlier agreement of lease for damages. In the aforesaid case, the amount spent by the assessee for defending the suit was treated as the ‘Business Expenditure’. Therefore, in the present case also, the amount paid to Mr.D. Ramesh should have been treated as a ‘Business Expenditure’. 12 8. In the case of CIT, West Bengal-I, Calcutta Vs. DE Luxe Film Distributors Ltd., reported in (1978) 114 ITR 434 (Cal.), the amount paid to clear title in carrying on business was treated as a ‘Business Expenditure’. 9. Similarly, the Madras High Court, in the case of Mettur Industries Ltd. Vs. Commissioner of Income-tax, Madras, (Income Tax Reports, Vol-114, Page-438) has held that the lump-sum amount set apart for payment of gratuity at future dates will constitute reserve for the purpose of computation of capital. 10. In the case of S.A. Builders Vs. CIT (Appeals) and Another reported in (2007) 288 ITR 1(SC), the Hon’ble Supreme Court dealt with the phrase for the purpose of business expenditure. The Hon’ble Supreme Court has held as under: “In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under Section 36(1)(iii) of the Income-Tax Act, 1961, one has to enquire 13 whether the loan was given by the assessee as a measure of commercial expediency. The expression ‘Commercial expediency” is one of wide import and includes such expenditure as a prudent business-man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.” 11. In the case of Deputy Commissioner of Income –Tax Vs. B. Kumara Gowda, reported in (2017) 396 ITR 386 (KAR), the Karnataka High Court has held that, the legal expenditure to protect lease is certainly a ‘business expenditure’. 12. Lastly, in the case of Karnataka Trade Corporation Ltd. Vs. Assistant Commissioner of Income-tax, Central Circle-2(2), Bangalore reported in (2015) 62 taxmann.com 239 (Karnataka), again on the issue of ‘business expenditure’, this Court has looked into the meaning of ‘Business Expenditure’ and the ‘expenses’ in order to perfect title of movable and immovable properties were to be allowed as business 14 expenditure. Paragraph-15 of the said judgment, reads as under:- “15. As per the conditions of agreement of sale, the appellant-assessee has to hand over the cement factory in running condition; to renew the mining lease license and perfect various titles to the property and to purchase the remaining lands, for which the assessee has to incur expenditure. These expenditure are the expenditure incurred to perfect the title and other expenditure are the revenue expenditure. Hence, the assessee is entitled for deduction of the same. Though the assessee has not earned any income to perfect the title to the properties the expenditure incurred are allowable deductions against the balances written back of Rs.34,01,644/-, which is assessable as business income. This Court in a judgment in (CIT Vs. Lawrence D’souza (2011) 203 Taxman 200/15 taxmann.com 148 held that though the business was stopped in the year 1994, the expenses are incurred in connection with the business. This Court allowed the deduction holding that the expenses are continued to be incurred in connection with the business, until it is sold. The Tribunal denied the expenditure solely on the ground that the business activities are closed in view of the transfer of cement factory, 15 plant and machinery, However, as per the agreement, the assessee has to fulfill other obligations, for which they have to incur expenditure and these are the revenue expenditure. Hence, the assessee is entitled for deduction in respect of expenditure incurred in relation to transfer of plant and machinery to M/s. MCL. As stated earlier, the Assessing Officer has accepted the expenditure for the assessment year 2004-05 and 2006-07. Hence, issues No.1 and 2 are held in favour of the assessee and against the Revenue.” 13. This Court, in the light of the aforesaid, is of opinion that the order of the Tribunal deserves to be set aside and is accordingly set aside. The substantial questions of law are answered in favour of the appellant and against the revenue. The appeal is allowed. Sd/- JUDGE Sd/- JUDGE KGR* "