Pranav B Prem

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has set aside tax additions exceeding ₹4 crore made by the Assessing Officer (AO) in relation to development costs incurred by a real estate partnership firm, holding that the disallowances stemmed from a misinterpretation of the terms of a supplementary development agreement.

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The Bench comprising Judicial Member T.R. Senthil Kumar and Accountant Member Narendra Prasad Sinha was dealing with an appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which had deleted disallowances of ₹1.52 crore in material costs and ₹2.40 crore in plot development expenses. The case related to M/s Pushparaj Corporation, a partnership firm engaged in purchase and development of land, which had entered into a development agreement dated 27 December 2008 with Ravi (Hansol) Non-Trading Corporation (RNTC) for purchase and development of land in Kundal Village.

Under the agreement, the assessee was to sell the land to RNTC at ₹200 per sq. metre and undertake development works such as construction of roads, streetlights, clubhouse, and other amenities, with costs to be reimbursed by RNTC. However, during assessment, the AO disallowed the aforesaid material and development expenses on the ground that, as per the main development agreement, such costs were to be borne by RNTC and not the assessee.

The assessee’s defence before the CIT(A) and Tribunal was that the AO had failed to consider a supplementary agreement dated 29 January 2009, under which the assessee was authorised to carry out additional works for individual plot owners, including compound wall construction, levelling, and filling as per customer requirements, for which it could charge ₹100 per sq. metre. As reflected in its Profit & Loss account, the assessee received ₹4.97 crore as “administrative and development income” from plot owners, against which it incurred ₹4.51 crore in expenses, leaving a net income of ₹46 lakh.

The Tribunal noted that ledger records showed that common development expenses for roads, gardens, and clubhouses totalling ₹2.23 crore were actually borne by RNTC, and that the expenses claimed by the assessee related to individual plot works under the supplementary agreement. It observed: “The disallowance was made on wrong presumption and without correctly appreciating the facts of the case and the supplementary development agreement.”

It further recorded that the AO had verified the genuineness of most transactions through notices issued under Sections 133(6) and 131, and that non-response from some parties could not render the entire expenditure non-genuine. Upholding the CIT(A)’s deletion of these additions, the Tribunal dismissed the Revenue’s grounds on this issue.

However, the Tribunal reversed the CIT(A)’s decision in relation to a separate disallowance of ₹30.30 lakh in commission expenses. The AO had held that commission payments to four parties at varying and unusually high rates—between ₹50 and ₹200 per sq. yard—were unjustified, as the land had already been sold to RNTC, making further commission on plot sales the buyer’s responsibility. The assessee’s alternative argument that these payments were discounts for bulk purchases was rejected as self-contradictory and inconsistent with contractual terms, since the development agreement did not provide for such discounts.

The Bench observed that Clause 7 of the agreement permitted the assessee to incur expenses for advertising and registering new members but not for paying commission on sale of plots already transferred to RNTC. It held: “Since the ownership of the land was vested with RNTC, the commission for sale of individual plots was to be borne by RNTC and not by the assessee.” Accordingly, the ITAT upheld the AO’s disallowance of the commission expense and reduction of the same from the capitalised closing stock.

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The Tribunal partly allowed the Revenue’s appeal—while affirming the deletion of ₹3.92 crore in material and development expenses, it restored the disallowance of ₹30.30 lakh in commission expenses, holding them as not deductible by the assessee.

Appearance

Counsel For Appellant: Mehul K. Patel, AR

Counsel For Respondent: Hargovind Singh, Sr. DR

Cause Title: M/s. Pushparaj Corporation V. ACIT

Case No: ITA No.1457/Ahd/2018

Coram: T.R. Senthil Kumar [Judicial Member], Narendra Prasad Sinha [Accountant Member]