Facts of the Case

  • The assessee company was engaged in construction and sale of commercial space and followed the Completed Contract Method (CCM).
  • It developed a commercial building “Gopal Das Bhawan” in Delhi.
  • Certain allottees surrendered their rights due to change in usage classification by NDMC.
  • The assessee refunded advances and additionally paid ₹1.18 crore as compensation to buyers.
  • The assessee treated this compensation as revenue expenditure in its Profit & Loss Account.
  • The Assessing Officer treated the payment as capital expenditure, considering it as repurchase of flats.

Issues Involved

  1. Whether compensation paid to flat buyers for surrender of rights is revenue expenditure or capital expenditure?
  2. Whether Section 154 could be invoked by the Revenue?
  3. Whether TDS credit can be allowed even when corresponding income is not declared?
  4. Whether rental income from stock-in-trade should be taxed as:
    • Business Income OR
    • Income from House Property

Petitioner’s Arguments (Assessee)

  • Flats constituted stock-in-trade, not capital assets.
  • Compensation was paid for commercial expediency to:
    • Avoid litigation
    • Maintain goodwill
    • Enable resale at higher prices
  • Under CCM, income is recognized only after project completion.
  • Compensation was not part of cost of construction, hence not capital in nature.
  • Rental income, even from stock, is taxable under Income from House Property.

Respondent’s Arguments (Revenue)

  • Payment was effectively repurchase of flats, hence capital expenditure.
  • Compensation was not contractual and was extraneous in nature.
  • Buyers treated receipts as capital gains → should be capital in assessee’s hands.
  • Rental income should be treated as business income.

Court Findings / Order

1. Compensation = Revenue Expenditure

  • Unsold flats were stock-in-trade, hence related expenditure is revenue in nature.
  • Payment was made for commercial expediency, not capital acquisition.
  • No transfer of ownership had occurred → no “repurchase.”
  • Compensation was an extraordinary item, not part of inventory cost (AS-2).
  • ITAT’s finding of “extraneous consideration” was held perverse.

 Held: Compensation allowed as business expenditure.

2. Rental Income Classification

  • Rental income from stock-in-trade properties is taxable as Income from House Property, not business income.
  • Rule of consistency applied (Revenue had accepted this position in earlier years).

3. Section 154 Issue

  • Rectification under Section 154 not applicable where issues are debatable in nature.

Important Clarifications

  • Commercial expediency overrides absence of contractual obligation.
  • Treatment in hands of recipient does not determine nature of expenditure for payer.
  • Not all expenses related to stock form part of inventory cost (AS-2 distinction).

Rule of consistency is crucial in tax litigation.
Sections Involved

  • Section 260A – Appeal to High Court
  • Section 154 – Rectification of Mistake
  • Section 24 – Deductions from House Property
  • Section 36(1) – Business Expenditure Principles
  • Relevant Accounting Standards: AS-7, AS-2

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:1681-DB/SMD20032019ITA6112005.pdf

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