Compensation to owner of flats for delay is part of work-in-progress – ITAT

Compensation to owner of flats for delay in handing over possession to be treated as a part of work-in-progress – ITAT

ABCAUS Case Law Citation:
ABCAUS 3771 (2023) (06) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in National Faceless Appeal Centre (NFAC) confirming the disallowance towards the amount paid to the landlord as compensation.

The assessee was a Promoter and Builder who had purchased certain piece of land for construction of flats. Pursuant to the agreement, the assessee was to hand over certain constructed flats to the seller of the land.

The Assessing Officer (AO) observed that the assessee in the Profit & Loss account had claimed a deduction in respect of `Compensation paid to the Tenant’. The AO called upon the assessee to explain the reasons for such deduction. The assessee explained that the project was supposed to be completed four years earlier, however, it was actually completed with delay.  As a result of delay, the assessee after negotiating with the landlord, agreed to pay a compensation towards    non-completion and handing over the possession as stipulated.

The asssessee stated that out of total such compensation 2/3 payment was paid in earlier years and was capitalised as work-in-progress. The remaining amount of compensation was paid during the year under consideration.

The AO did not agree with the assessee’s submission on noticing section 18 of the Real Estate Regulatory Authority (RERA), 2016, which talks for providing compensation to the flat owners and not to the seller of the land. He, therefore, did not accept the assessee’s claim, which came to be affirmed in the first appeal.

The case of the assessee was that the compensation was paid to the seller of the land not towards purchase of the land but towards the delay in handing over the possession of the built up area, as was stipulated in the agreement.

The Tribunal observed that there was some conflict between the stand taken by the assessee at the time of filing the return and that before the AO during the course of assessment proceedings.  At the initial stage, the assessee claimed such compensation to have been paid to Tenant, whereas, during the course of assessment proceedings, the assessee claimed it as compensation to the seller.

The assessee as additional evidence referred to the agreement of Sale cum Development made to support the contention that the payment so made was compensation to the owner of the flats for delay in handing over of the possession.

The Tribunal opined that it would be just and fair if the impugned order was set aside and the matter is remitted to the AO for verifying the relevant clauses of the agreement.

The Tribunal opined that if the payment was found to be compensation to the owner of the flats for delay in handing over of the possession, such amount should be treated as a part of work-in-progress. In the otherwise scenario, the AO will decide the nature of payment as per law after affording reasonable opportunity of hearing to the assessee.

Accordingly, the appeal was partly allowed.

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