Facts of the Case

The assessee company was engaged in construction and sale of commercial spaces and followed the Completed Contract Method (CCM) of accounting. It developed a commercial building (Gopal Das Bhawan, Connaught Place).

Due to a change in usage approval by NDMC (Lower Ground Floor classified as storage instead of commercial space), several buyers refused to accept allotment. The assessee refunded advances and paid additional compensation to buyers for surrendering their rights.

The assessee claimed such compensation as revenue expenditure. However, the Assessing Officer treated it as capital expenditure, stating it amounted to repurchase of property.

Additionally:

  • Interest & guarantee commission paid on borrowed funds were questioned.
  • Advertisement expenses were disputed.
  • Rental income from unsold units (stock-in-trade) was also contested.

 Issues Involved

  1. Whether compensation paid to buyers for surrender of space is revenue expenditure or capital expenditure?
  2. Whether interest and guarantee commission paid on loans given to sister concerns is allowable?
  3. Whether advertisement expenses are allowable under CCM?
  4. Whether rental income from unsold stock should be taxed as business income or income from house property?

Petitioner’s Arguments (Revenue)

  • Compensation was in nature of capital expenditure as it resulted in reacquisition of property.
  • Assessee had earlier capitalized similar expenses; inconsistency should not be allowed.
  • Payments were not contractually required and hence not business expenditure.
  • Rental income should be treated as business income since property was stock-in-trade.
  • Interest expenses were not for business purposes as loans were given to sister concerns.

 Respondent’s Arguments (Assessee)

  • Property constituted stock-in-trade, hence compensation related to business operations.
  • Payment was made on grounds of commercial expediency to protect reputation and avoid litigation.
  • Under CCM, expenses are allowable in the year incurred.
  • Compensation was not cost of construction; hence cannot be capitalized.
  • Rental income from owned property must be taxed as income from house property.

 Court Findings / Judgment

1. Compensation is Revenue Expenditure

  • Unsold flats were stock-in-trade, not capital assets.
  • Payment was made for commercial expediency, not acquisition of asset.
  • No transfer of ownership had occurred; hence not “repurchase”.
  • Compensation paid after project completion is extraordinary item (AS-2) and cannot be added to inventory cost.
  • Even without contractual obligation, expenditure qualifies if incurred for business purposes.

 Court relied on principles of commercial expediency and held ITAT’s earlier adverse finding as perverse.

2. Rental Income = Income from House Property

  • Even if property is stock-in-trade, rental income is taxable under house property.
  • Consistency principle applied as Revenue had accepted this view in earlier years.

 3. Other Expenses (Interest, Advertisement etc.)

  • Allowed as business expenditure based on consistent accounting method and CCM.

 Important Clarifications by Court

  • Commercial Expediency Principle:
    Business decisions made to protect goodwill or avoid loss are allowable even without legal obligation.
  • Stock vs Capital Distinction:
    Same transaction can be capital for one party and revenue for another.
  • Accounting Standards Binding Effect:
    CCM must be consistently followed once adopted.
  • Recipient Treatment Irrelevant:
    Tax treatment in hands of recipient (capital gain) does not determine nature of expenditure for payer.
  • Consistency Rule:
    Revenue cannot take different stands in different assessment years without justification.

Sections Involved

  • Section 37(1) – Business Expenditure
  • Section 28 – Business Income
  • Section 24 – Income from House Property
  • Section 260A – Appeal to High Court
  • Accounting Standard (AS-7) – Construction Contracts
  • Accounting Standard (AS-2) – Valuation of Inventories

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:1680-DB/SMD20032019ITA5812010.pdf

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