M/S Nitesh Estates Private ... vs Deputy Commissioner Of Income Tax
2022 Latest Caselaw 11074 Kant

                                      I.T.A No.31/2015

                          1


  IN THE HIGH COURT OF KARNATAKA AT BENGALURU

      DATED THIS THE 22ND DAY OF JULY, 2022

                      PRESENT

    THE HON'BLE MR. JUSTICE P.S. DINESH KUMAR

                        AND
 THE HON'BLE MR. JUSTICE ANANT RAMANATH HEGDE

                I.T.A No.31 OF 2015

BETWEEN :

M/s. NITESH ESTATES PRIVATE LIMITED
REP. BY ITS EXECUIVE DIRECTOR,
SRI. L.S. VAIDYANATHAN
#8, NITESH TIMESQUARE
7TH FLOOR, M.G.ROAD
BANGALORE - 560 001                     ... APPELLANT

(BY SHRI. A. SHANKAR, SENIOR ADVOCATE FOR
    SHRI. M. LAVA, ADVOCATE)

AND :

DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE 12(2)
#14/3, NRUPATHUNGA ROAD
BANGALORE - 560 001               ... RESPONDENT

(BY SHRI. K.V. ARAVIND, ADVOCATE)

      THIS ITA IS FILED UNDER SECTION 260-A OF THE
INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED:
28/08/2014 PASSED IN ITA NO. 804 & 805/BANG/2013, FOR
THE ASSESSMENT YEAR 2008-09 AND 2009-10. PRAYING TO
FROMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS
STATED AND ANSWER THE SAME IN THE FAVOR OF THE
APPELLANT. TO ALLOW THE APPEAL AND SET ASIDE THE
FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN
                                                      I.T.A No.31/2015

                                    2


ORDER PASSED BY THE INCOME TAX APPELLANT TRIBUNAL,
BANGALORE BENCH IN ITA NOS. 804 & 805/BANG/2013
RELATING TO ASSESSMENT YEARS 2008-09 AND 2009-10
RESPECTIVELY  VIDE   ITS COMMON     ORDER   DATED
28/08/2014.


     THIS ITA, HAVING BEEN HEARD AND RESERVED FOR
JUDGMENT     ON    07.06.2022  COMING   ON    FOR
PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S.DINESH
KUMAR J, PRONOUNCED THE FOLLOWING:-


                              JUDGMENT

This appeal by the assessee has been

admitted to consider following questions of law:

"1. Whether the Tribunal is correct in law in upholding the disallowance by the assessing officer of compensation paid by the appellant and claimed as business expenditure of Rs. 4,48,69,595/- and Rs. 50,00,884/- for the assessment years 2008-09 and 2009-10 respectively, on the facts and circumstances of the case?

2. Whether the Tribunal was justified in law in holding that there was no nexus between the compensation paid by the appellant and the project under execution even when the assessing officer had accepted the claim of expenditure in the earlier assessment year 2007-08 on the facts and circumstances of the case?

3. Without prejudice, whether the Tribunal was justified in law in not holding that the I.T.A No.31/2015

compensation paid by the appellant for the cancellation of the agreement was business expenditure which is otherwise allowable as expenditure under Section 37(1) of the Act on the facts and circumstances of the case?"

2. Brief facts of the case are, appellant is a

company engaged in the business of real estate

development including execution of Contracts,

development and maintenance of buildings. For

assessment year 2008-09 and 2009-10, the

appellant filed its return of income by declaring a

total income of `2,72,24,140/- and `7,60,68,990/-

respectively.

3. The appellant's case was selected for

scrutiny by issuance of notices. The Assessing

Officer made disallowance of compensation of

`4,48,69,595/- and `50,00,884/- for the

assessment year 2008-09 and 2009-10 paid to one

Shri Mahesh Bhupathi. Aggrieved by the order

passed by the Assessing Officer, the appellant I.T.A No.31/2015

preferred appeals1 before the CIT2(Appeals), who

vide separate orders dated March 27, 2013,

dismissed the appeals. Assessee challenged the

said orders before ITAT3 and the same have been

dismissed by the impugned common order dated

August 28, 2014.

4. Shri. Shankar, learned Senior Advocate

submitted that assessee had entered into a Joint

Development Agreement4 dated September 25,

2004 with one Shri. Mahesh Bhoopathi for

development of land measuring 3 acres in Sy.

No.1B, Block 30, 31 and 40 in Jakkur Plantation,

Bengaluru. Later, assessee found a better business

opportunity to develop land measuring about

5 acres and 29 guntas in Sy. No.1B consisting of

eight blocks, which belonged to M/s. Sunrise Realty

ITA No. 235/C-12 (2)/CIT (A)- III/ Bang/10-11 and ITA No. 347/C-12(2)/CIT (A)- III/ Bang/2011- 12

Commissioner of Income Tax

Income Tax Appellate Authority, B- Bench, Bengaluru

'JDA' for short I.T.A No.31/2015

and Leisure Pvt. Ltd. Both these properties were in

the same vicinity. Assessee entered into an MoU5

with M/s. Sunrise Realty, to purchase its land and

paid an advance Sale consideration of Rs.One

Crore. M/s. ITC Ltd., agreed to purchase the

property belonging to M/s. Sunrise Realty.

Assessee entered into an MoU dated June 16, 2005

with ITC agreeing to facilitate transfer of property

belonging to M/s. Sunrise Realty. In the same MoU,

ITC had agreed to award Development and

construction Contract to the assessee.

5. Assessee approached Shri. Mahesh

Bhoopathi for cancellation of the JDA and the

parties agreed that assessee shall pay `8.50 Crores

as compensation to Shri. Mahesh Bhoopathi.

6. On April 1, 2006, M/s. Sunrise Realty &

Leisure Pvt. Ltd. executed a Sale deed in favour of

Memorandum of Understanding I.T.A No.31/2015

ITC. ITC entered into a construction agreement

with the assessee for development of the said

property and the project was named as Nitesh Land

Island6.

7. Assessee claimed the compensation

amount of `6.70 Crores which was finally paid to

Shri. Mahesh Bhoopathi, as expenditure by debiting

the same to the Profit and Loss Account in the same

percentage of completion of work. Accordingly, the

assessee debited a sum of `96,96,744/- for the A.Y.

2007-08. The Assessing Officer has accepted

assessee's contention that the said expense had

nexus with NLI Project. However, the assessee has

disallowed the compensation of `4,48,69,595/- for

(A.Y. 2008-09) and `50,00,884/- for (A.Y. 2009-10)

paid to Shri. Mahesh Bhoopathi. In the appeal filed

before the CIT (Appeals), Assessing Officer's view

has been upheld.

'NLI Project' for short I.T.A No.31/2015

8. In support of these appeals,

Shri. Shankar mainly contended that:

• the Assessing Officer has allowed the

expenditure for the A.Y. 2007-08;

• the Assessing Officer has not questioned the

genuineness of the transactions for the

A.Y. 2008-09 and 2009-10;

• assessee initially had entered into a JDA with

Shri. Mahesh Bhoopathi. Since a better

business opportunity was available to get the

construction work in a larger area of 5 acres,

assessee decided to cancel the JDA with

Shri. Mahesh Bhopathi. He had initially,

demanded `8.5 Crores and finally agreed to

receive `6.7 Crores as compensation.

• assessee had facilitated transfer of land

belonging to Sunrise Realty in favour of ITC I.T.A No.31/2015

and Shri. Mahesh Bhoopathi's land in favour

of Sunrise Realty.

9. In substance, Shri. Shankar submitted

that assessee had taken decision to cancel the JDA

with Shri. Mahesh Bhoopathi as the assessee got a

better business opportunity and paid compensation

to Shri. Mahesh Bhoopathi to get the agreement

cancelled.

10. Opposing the appeal, Shri. K.V. Aravind

submitted that:

• The transactions between Sunrise Realty and

ITC have no nexus with the payment of

compensation to Shri. Mahesh Bhoopathi;

• assessee has obtained the construction

Contract from ITC. Even this transaction has

no nexus with the JDA between assessee and

Shri. Mahesh Bhoopathi;

I.T.A No.31/2015

• even if it is construed that both transactions

have some nexus, the sale of Shri. Mahesh

Bhoopathi's property is not in favour of

Sunrise Realty, but in favour of an individual;

• the Sale deeds executed either by Sunrise

Realty or Shri. Mahesh Bhoopathi do not

contain any condition that the Construction

Contract shall be awarded to the assessee;

• all three Authorities have recorded concurrent

findings of facts; and

• the Authorities cited by Shri. Shankar are all

with reference to the facts of those respective

cases and not applicable to this case.

11. We have carefully considered rival

contentions and perused the records.

I.T.A No.31/2015

12. All three questions of law framed by this

Court hinge around the fact whether there was

nexus between the compensation paid by the

assessee to Shri. Mahesh Bhoopathi with the 'NLI

project '.

13. Undisputed facts are, assessee had

entered into JDA with Shri. Mahesh Bhoopathi. On

July 14, 2005, parties entered into a compensation

agreement whereunder, assessee agreed to pay a

sum of `8.50 Crores to Shri. Mahesh Bhoopathi,

which was subsequently reduced to `6.70 Crores

towards cancellation of the JDA. Perusal of the

Compensation agreement shows that both

Shri. Mahesh Bhoopathi and the assessee had

approached ITC for participation in the project. The

ITC had identified certain other immovable property

to construction multi-storied residential complex.

I.T.A No.31/2015

The relevant clause in the agreement reads as

follows:

"C. The Parties have been approached by ITC

Limited ("ITC") for participation in a project involving the development of land and construction of a residential complex for their use. The Schedule Property being insufficient, ITC has identified certain other immovable property adjacent to the Schedule Property, for developing and constructing thereon a multistoried residential

complex. ("Project");"

14. Under the Sale deed dated April 1, 2006,

Sunrise Realty has sold 5 acres 27.4 guntas in

favour of ITC. In the said Sale deed, assessee is

first confirming party. On the same day, a

construction agreement has been entered into

between assessee and ITC Ltd., in respect of the

very same land.

15. For the A.Y. 2007-08, the assessee has

deducted a sum of `96,76,744/-, as expenditure I.T.A No.31/2015

out of the compensation amount paid to

Shri. Mahesh Bhoopathi and the same has been

accepted by the Assessing Authority. For the

subsequent two years, which are under

consideration in this appeal, the Revenue has

disallowed the expenditure.

16. Shri. Shankar has placed reliance on

S.A. Builders Ltd. v. CIT7. In that case, the

assessee had advanced interest-free loan to its

subsidiary Company. The Assessing Officer

disallowed the proportionate interest relating to the

said amount. The CIT (Appeals) accepted partial

claim. Cross-appeals were filed before ITAT and the

Tribunal allowed Revenue's appeal. On further

appeal, the High Court upheld Tribunal's order. The

Hon'ble Supreme Court of India, held that the

money can be said to be advanced to a sister

(2007) 288 ITR 1 (SC) (para 34) I.T.A No.31/2015

concern for commercial expediency in many

circumstances.

17. In CIT Vs. Dalmia Cement (Bharat) Ltd.8,

it is held that once it is established that there is

nexus between the expenditure and the purpose of

business, the Revenue cannot cannot justifiably

claim to put itself in the armchair of the

businessman or in the position of the Board of

Directors and assume the role to decide how much

is reasonable expenditure having regard to the

circumstances of the case. No businessman can be

compelled to maximise its profit. The tax authorities

must not look at the matter from their viewpoint

but that of a prudent businessman.

(2002)254 ITR 377 I.T.A No.31/2015

18. Thus, what is required to be examined

is, whether there was nexus between the

compensation paid to Shri. Mahesh Bhoopathi and

the construction agreement. The answer must be in

the affirmative firstly, because, in para 3 of the JDA

cancellation agreement, it is stated that M/s. ITC

had approached the parties to the said cancellation

agreement. Thus, assessee, Shri.Mahesh Bhoopathi

and ITC were considering the proposal for

construction of multi-storied residential Complex.

Secondly because, in the Sale deed dated April 1,

2006 executed by Sunrise Realty, assessee is one

of the confirming parties. Thirdly, because, the

Construction Agreement has been entered into

between ITC and the assessee on April 1, 2006, and

on the very same day, Sunrise Realty has sold the

property to M/s. ITC Ltd. Unless the Construction

Agreement was finalized earlier, it would not have

been possible to execute the same on the date of I.T.A No.31/2015

purchase of the property. Fourthly because,

Shri. Mahesh Bhoopathi had sold his property,

which was subject matter of JDA in favour of

Sunrise Realty. Shri. Aravind contended that the

sale is in the name of individual in the name of

Shri. Raghunath Vishwanath Deshpande. Shri.

Shankar's reply to this contention is, Sunrise Realty

was owned by Deshpande family. Further, fifthly

because, the Revenue has allowed the expenditure

for the A.Y. 2007-08.

19. In view of the above, we are of the

considered view that there was nexus between the

cancellation of JDA and execution of Construction

Agreement. Hence, following the authority in S.A.

Builders, we are of the view that this appeal merits

consideration and it is accordingly allowed.

I.T.A No.31/2015

20. The questions framed by this Court are

answered in favour of assessee and against the

Revenue.

No costs.

Sd/-

JUDGE

Sd/-

JUDGE

SPS