S. 37(1) : Business expenditure-Builder-Payments to tenants /occupants-Compensation payable for vacating the occupants-Mercantile system of accounting-Provision for liability towards payment to occupants/tenants-Accrued liability allowable – Mere deferment of quantification or payment does not render liability contingent. [S 28, 145, Accounting Standard-29]
The assessee, a builder and developer, received compensation of ₹12.25 crore from a developer in respect of a property occupied by 56 tenants/occupants and claimed a deduction of ₹8 crore being additional liability recognised towards compensation payable for vacating the premises occupied by the occupants. The Assessing Officer disallowed the claim, holding that the liability was contingent as the matter was under litigation and the amount had not been paid. The CIT(A) deleted the addition. On appeal by the Revenue, the Tribunal upheld the order of the CIT(A) and held that the assessee had undertaken a binding commercial obligation to obtain vacant possession of the property, and the additional liability had crystallised during the year based on contemporaneous correspondence, escalation in rehabilitation entitlements, ongoing settlement process and other supporting material. The provision was not an ad hoc or hypothetical estimate but was made on a rational and scientific basis in accordance with the mercantile system of accounting and Accounting Standard-29. The Tribunal observed that once the compensation received from the developer had been recognised as business income, the corresponding expenditure incurred for earning such income was required to be allowed in the same year by applying the matching principle. Merely because the exact quantification or payment of the liability was to take place in future or litigation was pending, the liability could not be regarded as contingent. Accordingly, the Revenue’s appeal was dismissed. The Tribunal also dismissed the assessee’s Cross Objection, holding that, having treated the compensation as a business receipt in its Profit & Loss Account and claimed corresponding expenditure, the assessee could not subsequently contend that the same receipt was a capital receipt not chargeable to tax. (AY. 2016 -17 ) (ITA No. 5850/Mum/2024 & CO No. 176/Mum/2025, order dated 12-05-2026)
Svadeshi Enterprises v. ITO (Mum.)(Trib.) www.itatonline.org .
[Coram : Hon’ble Smt. Beena Pillai, JM and Hon’ble Shri Jagadish, AM]