Compensation Paid By Builder For Delay In Handing Over Possession Of Flat Is Part Of Work-In-Progress: ITAT Allows Deduction

The case pertains to Mr. Jayant Hari Mulay, a promoter and builder who had purchased a plot of land for the construction of flats. According to the agreement, Mulay was obligated to hand over certain completed flats to the land seller. As a consequence, the builder claimed a deduction of Rs. 12.00 lakh for the compensation paid to the tenant.

The appeal filed by Mr. Mulay was directed against the order passed by the Commissioner of Income Tax (Appeals) in the National Faceless Appeal Centre, Delhi, under Section 250 of the Income-tax Act, 1961, for the assessment year 2018-19.

The sole issue raised in this appeal concerned the disallowance of Rs. 12.00 lakh, which represented the amount paid to the landlord as compensation.

The facts of the case reveal that the builder, Jayant Hari Mulay, had purchased the land with the intention of constructing flats. The project was originally slated for completion in 2013-14, but it was actually finished on July 28, 2017. After negotiations with the landlord, Mulay agreed to pay a compensation amount of Rs. 37.00 lakh for the delay in completion and handing over possession of the flats.

Out of the total compensation, Rs. 25.00 lakh had been paid in previous years and was capitalized as work-in-progress. The remaining amount was paid during the year under consideration. However, the Assessing Officer (AO) did not accept the builder's claim, citing Section 18 of the Real Estate Regulatory Authority (RERA) Act, 2016, which states that compensation should be provided to flat owners rather than the land seller. The AO's decision was subsequently upheld in the first appeal.

The ITAT bench, comprising R.S. Syal (Vice President), noted the discrepancy between the assessee’s initial claim that the compensation was paid to the tenant and the subsequent claim made during the assessment proceedings, where it was stated that the compensation was paid to the seller of the land. The builder supported the latter claim by presenting an agreement with one, Shobha Srikrushna Sawant, to whom the compensation had been paid.

"It would be just and fair if the impugned order is set aside and the matter is remitted to the AO for verifying the relevant clauses of the agreement. If the payment is 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," the bench held while allowing appeal for statistical purposes.

Case Title: Jayant Hari Mulay vs. DCIT,Circle-2, Pune /ITA No.508/PUN/2023