By TIOL News Service:

PUNE, NOV 19, 2016: THE issue is - Whether the compensation paid by a developer to flat holders for delay in handing over of flats, is a self assumed liability and hence liable to penalty for breach of contract. NO IS THE VERDICT.

Facts of the case:

The assessee a promoter, builder and developer had filed his return of income for the A/Y 2009-10 on 30-10-2009 declaring total income of Rs.54,75,530. The case of the assessee was selected for scrutiny and accordingly first notice u/s. 143(2) was issued to the assessee on 28-09-2010. The assessee developed housing project ‘K’ As per the terms and conditions of the agreement with the allottees of the flats, the assessee was to handover possession of the flats on or before 31-05-2008. However, the assessee could not complete the project by 31-05-2008. The flats were handed over to the allottees in February-March, 2010. The assessee paid compensation of Rs.8,80,000/- i.e. Rs.40,000/- to each flat owner for delay in handing over of possession. During the course of scrutiny assessment proceedings the AO inter alia made disallowance of compensation paid to flat owners for delayed possession of flats. The CIT(A) upheld the finding qua disallowance of payment of compensation to the flat owners.

On appeal, the Tribunal held:

++ in so far as the objection raised by the Department that there was no covenant in the agreement for payment of compensation is concerned, Tribunal observed that the assessee being a developer and builder of flats was governed by the provisions of Maharashtra Ownership Flat Act, 1963. As per the provisions of section 8 of the said Act the assessee was liable to refund the amount paid by the allottee of the flat with interest in case of failure to give possession within the specified time. Thus, a perusal of the above provisions of the said Act clearly show that whether the covenant for payment of compensation for delay in handing over of possession of flat is contained in the agreement or not, the assessee was bound to compensate the flat owners in the case of delay in handing over of possession of the flats beyond a reasonable time;

++ the Mumbai Bench of the Tribunal in the case of M/s. Malabar Industries Pvt. Ltd. Vs. ITO has held that even if there was no clause permitting payments of compensation to the original allottees in case of cancellation of bookings, the payment of compensation should be allowed as deduction on the principle of business expediency. The assessee was justified in compensating the flat owners as there was delay of more than 20 months in handing over of possession of flats from the date specified in the agreement between the assessee and the flat holders. As per the agreement the due date for handing over of possession was on or before 31-05-2008, whereas, the assessee could give possession of the flats to the flat holders in February-March, 2010. The CIT(A) has observed that compensation paid by the assessee could have been avoided as the assessee could have got reasonable extension for completing the project. The aforesaid observations made by the CIT(A)  are against the facts of the case and documents on record. The reasonable extended period for handing over of possession could have been 3 months to 6 months. However, in the present case the delay in handing over of flats was almost 2 years;

++ the Courts are now taking a very serious view against the delay in handing over of possession of flats by the builders. The Consumer Courts as well as Civil Courts are directing the builders, promoters to pay heavy compensation to the flat holders for delay in handing over of possession of flats. Recently, the Parliament has enacted the Real Estate (Regulation and Development) Act, 2016 to leash the builders and put on hold the unethical practices followed by developers to harass the consumers. The Real Estate Act also aim to curb the practice of delay in handing over of possession of flats to the flat holders. Section 18 of the Real Estate (Regulation and Development) Act, 2016 provides for the payment of compensation by the developer to the allottees of the flats in case the developer fails to complete or is unable to give possession of the apartment/flat, in accordance with the terms of the agreement on or before the specified date. Thus, the assessee was justified in compensating the allottees of the flats for delay in handing over of possession. The amount paid by the assessee was certainly on account of business expediency;

++ another reason for disallowing the payment of compensation was that the amount paid by the assessee was in the nature of penalty for Breach of contract. The Delhi Bench of the Tribunal in the case of DCIT Vs. M/s. Achiever Builders (P) Ltd. , where the revenue disallowed the amount paid by the assessee to the customers for delay in handing over of possession of properties holding it to be penal in nature held, that the amount paid by the assessee to customers is compensatory in nature and not penal. The compensation was paid for delay in handing over of possession of the property, the liability to pay such compensation arose in the course of business of assessee. In the present case the assessee paid compensation to the assessee under similar circumstances and not out of any liability arising from invoking of penal provisions of any statute. Thus, the compensation paid by the assessee cannot be held to be penal in nature. It is held that the expenditure incurred by the assessee on payment of compensation to the flat owners for delay in possession as allowable.

(See 2016-TIOL-1985-ITAT-PUNE)