Real Estate- Deduction for land purchase cost without sale- IT Act, 1961

Legal aspects on the deductions from income from business and profession -  iPleadersWhen any person is engaged in the business of real estate, the immovable property purchased is represented as stock (mostly as Work In Progress ‘WIP’) and when it is sold it is taxable under the head ‘PGBP”.

However, one issue arose before the Delhi ITAT in the case of Crown International vs. ACIT, Circle 41(1), New Delhi, [2021] 128 taxmann.com 421 wherein the assessee being involved in the business of real estate, constructed a mall and also purchased a parking space to be provided to the shop owners of the mall.

However, later-on, the parking space was compulsorily acquired by the Government for construction of Metro Railway thereon on some compensation.

Although, the difference of the amount of compensation received and cost of purchase parking land was offered for tax, the assessee was under legal obligation under various laws to compulsorily provide the parking space to shop owners of mall and therefore purchased another parking space nearby.

The amount of such additional cost for purchase of land for parking space was claimed to be allowed as deduction as business expenditure u/s 37(1) of the Income Tax Act, 1961 and not to be represented as stock (WIP) since practically it is never saleable by the assessee due to legal obligations.

Delhi ITAT allowed it as deductible expense u/s 37(1) of the Income Tax Act, 1961 and along with also clarified that although practically the said land is not saleable, if it would be sold in future the entire consideration shall be taxable in the hand of the assessee without the claim towards cost of purchase, since it is allowed now.

The above decision can be used for claiming deduction in another practical scenarios faced by Real Estate Businesses including others.

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