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When the income had arisen, the corresponding expenditure, even if is to be incurred subsequently, is to be allowed
Diamond Enterprises Vs ACIT
ITA No. 2852/Mum/2015
Income arising to a developer can be assessed without allowing development expenses to be incurred qua relevant project in future, simply because same had not been incurred/ accrued – NO:
– Assessee’s appeal partly allowed: MUMBAI ITAT
The assessee, a Mumbai based partnership firm in the business of development of real-estate, purchased non-agricultural land ad measuring 1517.4 sq. mtrs. at Village Kole Kalyan, Kalina, Santacruz (East), Mumbai (together with building consisting of ground and two upper floors, called ‘Serovilla’ building) for a consideration of Rs. 175 lakhs.
The assessee constructed a new building comprising Ground and seven floors, selling the same, being residential flats (around the year 1992) to buyers, who formed a Society called ‘Diamond Deck Co-operative Housing Society’ (DDS)), to which (Society) the assessee was obliged to execute a lease, i.e., in respect of the land beneath the said building, @ Rs. 10 per month.
The assessee also filed suits for eviction of the twelve occupants of the Serovilla Building (SB). Vide consent decree, each of the twelve occupants of the Serovilla flats agreed to vacate their flats (suit premises) by 31.01.2007 to enable the assessee to demolish the Serovilla building and construct a new building in its place, to be completed within a period of twenty-four months.
The assessee was required to, and did indeed pay, Rs. 4.50 lakhs to each of the occupants as refundable security deposit, refundable on the assessee handing over the possession of the new flats by way of permanent alternate accommodation on ownership basis, free-of-cost, i.e., in lieu of the suit premises.
Failure to do so would oblige the assessee to pay a monthly sum of Rs. 5,000/- as rent/lease charges toward acquiring temporary accommodation, which obligation would continue up to the date of grant of vacant possession of the permanent alternate accommodation, only upon which was the assessee entitled to receive back the security deposit of Rs. 4.50 lakhs.
Till such time, the existing relationship of landlord and tenant would continue between the assessee and the 12 occupants qua the Serovilla flats (suit premises).
Though the assessee obtained vacant possession of the Serovilla building (from the occupants), it did not construct any building nor, as it appears, even demolish the Serovilla building.
The assessee, vide conveyance deed sold its’ rights in the 1517.4 sq. mtrs. of land to M/s. RSB Developers Pvt. Ltd. (‘RSB’) for a consideration of Rs. 175 lakhs.
However, as the entire sum was received by it during the financial year (f.y.) 2009-10, the same was offered to tax for that year.
Three, albeit inter-related, issues have arisen in the assessment of the income arising to the assessee on the said sale, and which are the subject matter of dispute between the assessee and Revenue in the present case.
The first was the deduction of the cost of transferable development rights (TDRs), claimed at Rs. 14,41,900.
These were acquired for 130 sq. mtrs. from one, M/s. Shah Construction Co., Bandra, vide Agreement for Rs. 13,99,320 to be utilized on the proposed building at the site of SB.
The same were accordingly loaded to the building plan for proposed construction, duly approved by the Municipal Corporation.
There was, however, no mention or reference to the TDRs in the conveyance deed. RSB, with whom the Assessing Officer therefore communicated in the matter, while acknowledging the purchase of property from the assessee vide conveyance deed, declined, i.e., on inquiry by the AO, to have purchased any TDRs in respect of the said property, i.e., purchased from the assessee-firm.
The AO, accordingly, disallowed same.
The TDRs being a valuable right, being admittedly divested by the assessee, he inferred their sale during the year, at Rs. 82.94 lakhs, on the basis of the sale rate applicable to a residential building at Mankhurd area, i.e., one of the two areas from which the TDRs arose.
Allowing deduction for the purchase cost of TDRs (Rs. 14.42 lacs), the difference of Rs. 68.52 lakhs was brought to tax.
On appeal, the FAA confirmed both, the disallowance (for Rs. 14.42 lacs) and the addition (for Rs. 68.52 lacs).
He was further of the view that the tenants were not a party to the conveyance deed, which was executed without any reference to them.
The period for the construction of a building at the site of Serovilla flats expired in July, 2009, after which the assessee was to pay the occupants Rs. 5,000 per month each.
There was nothing in the conveyance deed to show that RSB acknowledged its’ liability to the tenants, i.e., of having assumed the liability toward the monthly compensation.
There was equally nothing to show that the tenants were obliged to refund the purchaser (RSB) the security deposit received from the assessee (at an aggregate of Rs. 54 lakhs).
In fact, the assessee had not received back the security deposit (of Rs. 54 lakhs) as it had failed to comply with the terms of the consent decree.
The assessee was, therefore, not entitled to the deduction of Rs. 54 lakhs in computing the business income arising to it on the sale of its’ rights in the land and, accordingly, directed the AO to disallow the same.
On appeal, the ITAT on the issue of whether income arising to a developer can be assessed without allowing development expenses to be incurred qua relevant project in future, simply because same had not been incurred/ accrued. ITAT hele as No.
It observed as under :
++ taking a practical stance, the consent decree is no longer operative in July, 2010, when the conveyance deed was executed, or even in March, 2010, which signifies the receipt of the sale consideration of Rs. 175 lakhs from RSB. That is, the assessee had, by not fulfilling the consent terms, already suffered a loss of Rs. 54 lacs, i.e., prior to and independent of the transaction/ agreement with RSB.
Put differently, even in the absence of an agreement with RSB, as where it had not occurred, the assessee had lost the right to the refund from the tenants and, consequently, the obligation to provide them alternate accommodation, which was therefore no more than a paper obligation, against (or in lieu of) which the assessee is claiming the impugned loss.
True, as stated, there was a remote possibility of the tenants, who were also not being paid the monthly compensation – payable latest since August, 2009, by the assessee, seeking the Court’s intervention for construction, which was in fact to commence in February/March, 2007, and which had admittedly not been so even in July, 2010, when the conveyance deed with RSB was executed.
The tenants may not have approached the Court as they had already received the tentative cost of their right in the form of an interest-free deposit, which would also be required to be, in that case, repaid. Nobody could be expected to wait endlessly for an accommodation, which would have been secured by them. At the same time, it cannot be said that the assessee’s obligation to them had extinguished, or was only notional.
The assessee’s rights in the land were encumbered inasmuch as the tenants had first right to any construction at the said site, whether by demolishing the existing structure or otherwise.
Rather, they could even claim a set-off of their liability to repay Rs. 4.5 lakhs to the assessee (builder) against the monthly compensation, which would get squared up in 90 months (seven-and-a-half years), while there was no provision for interest on the security deposit after January/July, 2009 in the consent decree.
A tenant approaching the assessee (or any other builder in its’ place, as RSB) for accommodation in the construction, if any, at the site would, thus, subject to the repayment of the security deposit, or whatever was left of it, obliged to so provide. In other words, the same cannot be overlooked or dismissed as nonexistent;
++ the rising cost of construction over time – while the obligation of repayment is fixed at Rs. 4.50 lacs, makes it a distinct possibility, which may practically translate into a tenant being paid an agreed monetary compensation, i.e., in lieu of accommodation.
That is, represents a real possibility/obligation and, thus, stands rightly provided for in the conveyance deed, together with the liability toward monthly compensation.
It cannot, accordingly, be regarded as a make-believe, as done by the CIT(A). His other objections to be nonadmissibility of the claim of Rs. 54 lakhs by the assessee are, equally, not well founded.
The assessee has disposed its’ rights in land, encumbered by the obligation to re-compense the displaced occupants/ tenants, so that the cost suffered toward the same, by way of its forfeiture or transfer of the right to receive in favour of the purchaser, whichever way one may look at the transaction, is an associated cost, integral to the said transfer. It cannot, therefore, be regarded as the capital cost.
The third objection is of the same arising in the following year. In fact, this is in contradiction of the claim of the loss having already arisen, i.e., independent of, and prior to, the transaction of transfer in March/July, 2010.
That apart, when the income arising from the transfer is being subject to tax for AY 2010-11, how could a related cost possibly arise for being claimed/allowed in a subsequent year?
The same militates against the concept of income (or income computation), which is (to be) at net of all expenditure incurred in relation thereto.
The income arising to the assessee-developer was assessed without allowing development expenses to be incurred qua the relevant project in future, on the ground that the same had not been incurred/ accrued.
The Apex Court clarified that when the income had arisen, the corresponding expenditure, even if is to be incurred subsequently, is to be allowed there-against, making a best possible estimate thereof.
This would also explain the basis for bringing the income arising on the transfer to tax for the current year in the instant case.
The assessee having received the consideration in toto (Rs. 175 lakhs) by March, 2010, on its’ own account, and with no further obligation to incur in its respect, the income in respect of the transfer can only be regarded as having arisen.
Section 5 of the Act in any case makes it clear that income can be brought to tax either in the year of its receipt or its accrual.
The objections by the ld. CIT(A) to the disallowance of the cost of Rs. 54 lakhs are, therefore, not valid.