Svadeshi Enterprises v. ITO

Case snapshot

Sections / provisions: 145; 28; 37(1)

Questions before the Court / Tribunal

• Accrued compensation liability to tenants/occupants; mercantile accounting: The reported decision concerns a builder's provision for compensation payable to occupants. It treats a commercially crystallised liability as deductible despite later quantification/payment, while also rejecting the taxpayer's alternative attempt to recharacterise the related business receipt as capital.

Material facts and background

Brief facts of the case are that the assessee is a partnership firm engaged in the business of builders and developers. During the year under consideration, the assessee received compensation of Rs.12.25 crores from M/s. Shelter Developers in connection with property situated at Chunabhatti, Mumbai. The said property was occupied by 56 occupants/tenants and the assessee had undertaken obligation to get the said occupants vacated by compensating them.

of assessment proceedings, the Assessing Officer observed that the assessee had debited an amount of Rs.8 crores towards liability payable to occupants/tenants. The Assessing Officer noted that the said amount remained unpaid as on 31.03.2016 and the matter relating to settlement with occupants/tenants was still under litigation and negotiation. The Assessing Officer therefore held that the liability had not crystallized and represented merely contingent liability. Accordingly, the Assessing Officer disallowed the claim of Rs.8 crores and added the same to the income of the assessee. 2

ITA No.5850/M/2024 &CO No.176/M/2025 Svadeshi Enterprises (Mumbai)

Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). The assessee explained complete factual background of the transaction and submitted that the liability arose from business obligation undertaken by the assessee in relation to the Chunabhatti property. It was submitted that the assessee had acquired the property from Svadeshi Mills Co. Ltd. in the year 1988 and there were 56 occupants/tenants on the said property. The assessee was required to provide clear and marketable title and therefore was under obligation to vacate the occupants.

that because of multiple litigations before various judicial forums and change in Development Control Regulations, compensation demands of occupants/tenants substantially increased over the years. Initially, liability of Rs.14 crores was recognized in F.Y. 2007-08 and thereafter additional liability of Rs.3 crores was recognized in F.Y. 2013-14. During the year under consideration, based on correspondence dated 11.03.2016 received from M/s. Nazo Developers Pvt. Ltd., additional liability of Rs.8 crores was recognized thereby taking aggregate liability to Rs.25 crores. 5.

The assessee contended before the Ld. CIT(A) that the liability had accrued during the year under mercantile system of accounting and the same was allowable in accordance with Accounting Standard-29 and matching

precedents including Bharat Earth Movers vs. CIT, Rotork Controls India Pvt. Ltd. vs. CIT and Toyota Kirloskar Motors Pvt. Ltd.

Appellant / assessee submissions

Per contra, the Ld. Authorised Representative relied upon the order of the Ld. CIT(A). The Ld. AR submitted that the assessee had undertaken contractual and business obligation of vacating the occupants/tenants and the liability arose directly from commercial arrangement entered into by the assessee. It was further submitted that

The Ld. AR further submitted that under mercantile system of accounting and matching principle, the expenditure relatable to income earned from the transaction was required to be recognized in the same accounting period. It was argued that the assessee had already offered compensation received from M/s. Shelter Developers and therefore corresponding liability incurred towards vacating occupants was required to be allowed in order to compute real business profits.

We have considered the submissions of the Ld. AR and perused

Revenue / respondent submissions

Before us, the Ld. Departmental Representative strongly relied upon the assessment order. The Ld. DR made elaborate submissions contending that the impugned liability represented only contingent provision and not actual accrued expenditure. It was argued that the matter regarding compensation payable to occupants/tenants was still under litigation and no final settlement had taken place during the year under consideration. The Ld. DR further submitted that exact compensation payable to each occupant was not determined and therefore the liability lacked certainty and finality. The Ld. DR further argued that the assessee merely created book provision without incurring actual expenditure and therefore deduction was not allowable under section 37(1) of the Act. It was submitted that the decision of Hon’ble Supreme Court in Bharat Earth Movers relied upon by the Ld. CIT(A) was distinguishable on facts since in the present case the liability itself remained uncertain and contingent upon outcome of future litigations and negotiations.

Court / Tribunal analysis and reasoning

The Ld. AR further submitted that under mercantile system of accounting and matching principle, the expenditure relatable to income earned from the transaction was required to be recognized in the same accounting period. It was argued that the assessee had already offered compensation received from M/s. Shelter Developers and therefore corresponding liability incurred towards vacating occupants was required to be allowed in order to compute real business profits.

We have heard the rival submissions and perused the material available on record. The short controversy before us is whether the additional liability of Rs.8 crores recognized by the assessee during the year towards payment to occupants/tenants represented accrued business liability or merely contingent liability as alleged by the Revenue.

occupants/tenants. Therefore, the provision made by the assessee cannot be characterized as hypothetical or imaginary provision without any supporting material. 12.

cost of vacating occupants/tenants was an admitted business obligation arising from commercial transaction undertaken by the assessee. The liability arose directly from the business arrangement connected with development of the property and therefore constituted integral part of business expenditure incurred by the assessee. 14.

receipt has been held to be capital in nature, the same by itself cannot be determinative in the hands of the assessee without independently examining nature and treatment of receipt in assessee’s own case. In the present case, the assessee itself has consciously credited the amount to its Profit & Loss Account and claimed deduction of related expenditure therefrom. Therefore, the conduct of the assessee and manner of accounting treatment adopted clearly demonstrate that the 8

Operative decision and relief

Copy of the order forwarded to: 1. Appellant 2. Respondent 3. The CIT 4. The CIT (Appeals) 5. The DR, I.T.A.T. By order

Authorities and precedents appearing in the judgment

• Bharat Earth Movers vs. CIT
• Pvt. Ltd. vs. CIT and Toyota Kirloskar Motors Pvt. Ltd
• Supreme Court in the case of Bharat Earth Movers vs. CIT reported in 245 ITR 428 has held that if business liability has
• Supreme Court in Rotork Controls India Pvt. Ltd. vs. CIT reported in

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Accrued compensation liability to tenants/occupants; mercantile accounting. The operative result is classified as Operative order controls. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Accrued compensation liability to tenants/occupants; mercantile accounting. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Use the judgment as a fact-specific precedent: match the statutory version, assessment period, procedural stage and evidentiary record before relying on the result.
• Check whether a later High Court/Supreme Court order has affirmed, reversed, distinguished or rendered the decision academic.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

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