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Judgment
PER SANJAY AWASTHI, ACCOUNTANT MEMBER:
This is a batch of two appeals pertaining to the same assessee, where ITA No.7337 has been filed by the Revenue and ITA No.7320 has been filed by the assessee. Since the issues are interconnected hence these two appeals are being disposed of through a single order.
This appeal arises from order dated 28.06.2019, passed by the Ld. CIT(A)-34, New Delhi, u/s 250 of the Income Tax Act, 1961 (hereafter as “the Act”).
It is seen that the assessee is primarily engaged in the business of real estate, construction and development. The Ld. AO added an amount of Rs.31,74,10,824/- claimed by the assessee in the profit and loss account on the ground that the nexus between this expenditure and business activities could not be established by the assessee. The breakup of this consolidated amount of addition is as under: -
Project expenses written off Rs.970,88,219/- (this addition has been deleted by the Ld. CIT(A), for which the Revenue is in appeal);
Lease rent expenses amounting to rs.21,79,51,620/- (this addition has been confirmed by the Ld. CIT(A), for which the assessee is in appeal);
Other administrative expenses amounting to Rs.23,70,985/-(this addition has been confirmed by the Ld. CIT(A), for which the assessee is in appeal).
For the sake of background it needs to be mentioned that the assessee entered into an agreement dated 24.11.2007 with Royal Calcutta Turf Club (RCTC), whereby a development right was granted to the assessee to develop a piece of land owned by RCTC to operate a club/hotel. In this connection the assessee incurred expenditure aggregating to Rs.970,88,219/- which was duly reflected as Capital Work-in-Progress (CWIP) in the balance sheet. However, as is evident from the records before us, there were serious performance related disputes between the assessee and RCTC due to which there were prolonged arbitration and litigation proceedings. Due to these factors the assessee decided to not go ahead with the project and as a result abandoned the same completely. In light of this the CWIP of Rs.970,88,219/- was written off. The second point of contention pertains to lease rent expenses written off at Rs.21,79,51,620/-. Here it is seen that as per the development agreement dated 24.11.2007, the assessee was obligated to pay an annual contribution in the form of lease rent to RCTC. Here it was brought to our notice that the assessee had also paid an interest free refundable security deposit of Rs.72,65,05,405/- to RCTC. It is seen that the parties preferred arbitration due to the dispute, where an award was granted dated 24.09.2010. As per this award (w.e.f. April, 2014) the assessee was required to pay an annual contribution of the higher of Rs.21,79,51,621/- per annum or 10% of the annual top line revenue of the said project. As per the arbitration award this amount was payable even if the project was not completed by March, 2014. It is seen that the assessee ended up paying Rs.21,79,51,620/- as part of the arbitration award, which was disallowed by the Ld. AO and confirmed at first appeal stage. The last issue pertains to a disallowance of Rs.23,70,985/- by the Ld. AO under the head “other administrative expenses”, on the ground that during the year under consideration the assessee was not carrying on any business and hence, he could not be eligible for any expenditure u/s 37(1) of the Act.
As mentioned earlier the Revenue is in appeal on account of the deletion of expenses pertaining to project expenses written off (Rs.970,88,219/-) and the assessee is in appeal on account of the two additions confirmed by the Ld. CIT(A) pertaining to lease rent expenses (Rs.21,79,51,620/-) and other administrative expenses (Rs.23,70,985/-). The grounds of appeal by both the Revenue and the Assessee effectively challenge these issues only.
Before us the Ld. AR argued on behalf of the assessee and briefly took us through the factual details of the case and the chronology of the events culminating in the arbitration award dated 24.09.2010 and also the fact that there was a substantial amount of Rs.72,65,05,405/-available with RCTC as a security deposit which could have been forfeited to the detriment of the assessee. The Ld. AR stated that once it was decided to totally abandon the project then the assessee was left with no option but to safeguard his financial interest and get out of the terms of the agreement dated 24.11.2007 with RCTC with as little damage to its financials as possible. It was further stated that it was not even a case where there was any chance that the said agreement could be revived in future and the assessee could continue to show the impugned expenses as would be appropriate for an ongoing business or even a business in which there was a temporary lull. The Ld. AR relied on the cases of Alcove Industries Ltd. reported in 65 taxmann.com 311 (Cal.) and Binani Cement Ltd. reported in 60 taxmann.com 384 (Cal.), to canvass the point that once a business was terminated or abandoned then the expenses of the nature under consideration in the present adjudication would be allowable u/s 37(1) of the Act. The Ld. AR also relied on the case of Indo Rama Synthesis (I) Ltd. reported in 333 ITR 18 (Del.) to canvass the point that the lease rent expenses of Rs.21,79,51,620/- were purely revenue expenses allowable u/s 37(1) of the Act. Regarding the administrative expenses (Rs.23,70,985/-), it was averred that the assessee company had considerable statutory liabilities as long as it was not wound up and would be required to pay certain amounts for legal and professional fees, audit fees, rates and taxes, office maintenance, bank charges & unrealized exchange difference; as has been done by the assessee. It was stated that these were broadly the head of expenses which the Ld. AO has treated as non-business in nature.
Ld. DR supported the Ld. AO’s findings and the findings of CIT(A) regarding lease rent expenses and other administrative expenses. The Ld. DR pointed out that the assessee had claimed project expenses written off and lease rent expenses on the same logic, that of abandonment of the project under consideration and the Ld. CIT(A) has contradicted himself when he has allowed relief under project expenses written off but has confirmed lease rent expenses. Incidentally the Ld. DR also relied on the case of Indo Rama Synthesis (supra).
We have gone through the records before us, perused the orders of the authorities below and heard the Ld. AR/DR. What is not in doubt is that the project with M/s RCTC has been conclusively abandoned by the assessee. Accordingly, there is no way in which expenses could continue to be capitalized. We find that the cases of Binani Cement Limited (supra) and Alcove Industries Ltd. (supra) would squarely decide the issue in favour of the assessee as through these case laws the point that has been established is that in situations where projects have been abandoned then the project related expenses have to be treated as revenue expenditure in the year in which such a decision is taken. Both these case laws are virtually on identical facts as compared to the present matter and thus, we support the Ld. CIT(A) in terms of his decision to delete the addition of Rs.970,88,219/- under project expenses written off and on the same reasoning do not support the confirmation of addition of Rs.21,79,51,620/- under lease rent expenses. As a result, while the Revenue fails with respect to the amount of Rs.970,88,219/-, the assessee succeeds with respect to the amount of Rs.21,79,51,620/- under lease rent expenses written off. We find that the case of Indo Rama Synthesis (supra) actually supports the assessee’s case whereby in this case the abandoned project due to non-procurement of land from the Government of Karnataka resulted in project related expenses being allowed as revenue expenditure.
Regarding the administrative expenses disallowed by the Ld. AO and affirmed by the Ld. CIT(A) it deserves to be held that as long as the assessee company existed in the eyes of law then there would be statutory liabilities which would need to be fulfilled. We find that the expenses claimed under the broad head of administrative expenses pertain to routine expenses required to maintain the assessee company. Accordingly, we do not find it fit to support the Ld. CIT(A)’s actions in disallowing the impugned amounts. The assessee succeeds in this regard.
In the result, the appeal of the Revenue is dismissed, whereas the appeal of the assessee is allowed.