The Income Tax Appellate Tribunal (ITAT), Mumbai, has ruled that a redevelopment firm's ₹8 crore provision towards tenant compensation cannot be disallowed merely because the amount had not been paid or finalised. According to reports from Mint and The Economic Times, the tribunal held that the liability was an accrued business obligation arising from a redevelopment agreement and not a contingent liability, dismissing the Income Tax Department's appeal in the case relating to Assessment Year (AY) 2016-17.
The dispute stemmed from a redevelopment project in Mumbai's Chunabhatti, where a partnership firm was engaged by a builder to get 56 occupants to vacate the property. As reported by Mint and The Economic Times, the firm had already recognised liabilities of ₹17 crore towards tenant compensation in earlier years. During AY 2016-17, it recognised an additional liability of ₹8 crore, taking the total estimated compensation payable to ₹25 crore.
The Assessing Officer disallowed the ₹8 crore deduction, arguing that the liability remained contingent because negotiations with the occupants were still underway, some disputes were under litigation and the exact compensation payable had not been finalised. According to Mint and The Economic Times, the department held that since the amount remained unpaid, it had not crystallised and therefore could not be claimed as a business expense. However, the Commissioner of Income Tax (Appeals) deleted the addition, following which the tax department challenged the order before the ITAT.
Upholding the appellate order, the ITAT relied on the Supreme Court's rulings in Bharat Earth Movers v. CIT and Rotork Controls India Pvt. Ltd. v. CIT. As reported by Mint and The Economic Times, the tribunal noted that under the mercantile system of accounting, a business liability is allowable as a deduction if the obligation has arisen during the accounting year and can be reasonably estimated, even if the payment is made or finally quantified at a later date. The tribunal observed that disallowing the liability would effectively result in taxing gross commercial receipts without allowing the related business obligation, leading to taxation of hypothetical profits instead of real income.
The ITAT dismissed both the tax department's appeal and the assessee's cross-objection seeking to treat the ₹12.25 crore received from the builder as a capital receipt. According to Mint and The Economic Times, the tribunal held that since the assessee had itself recognised the amount as business income while claiming the corresponding expenditure, it could not subsequently contend that the receipt was capital in nature. The provision was supported by documentary evidence, including correspondence with occupants, draft consent terms and pending litigation, and therefore could not be regarded as hypothetical or ad hoc.
