Brokerage Paid to Obtain Refund of Amount Invested in Cancelled Project is Allowable as Deduction u/s 57 | ITAT

Case Details: Deepak N. Sippy v. ACIT - [2024] 166 taxmann.com 590 (Mumbai-Trib.)

Judiciary and Counsel Details

• Ms Kavitha Rajagopal, Judicial Member & Girish Agrawal, Accountant Member
• Dr. Gopalakrishna, CA for the Appellant.
• Smt. Mahita Nair, Sr. DR for the Respondent.

Facts of the Case

The Assessee invested in a project with a builder, which was cancelled due to the non-receipt of necessary permissions from the Government. The builder refused to return the money, due to which the assessee had to take the services of a group of brokers.

The assessee paid a brokerage of certain amount for securing a refund of the entire money invested by him in the project. The refund of money included two components, namely, the principal amount and the interest component thereon. The assessee claimed deduction of brokerage under section 57(iii).

During the assessment proceedings, the Assessing Officer (AO) disallowed a portion of brokerage paid by the assessee towards the principal amount. On appeal, the CIT(A) sustained the disallowance and the matter reached the Mumbai Tribunal.

ITAT Held

The Tribunal held that the assessee paid the brokerage under a clear and specific understanding that he shall receive the full amount due from the builder, including the principal amount and the interest thereon. The amount of brokerage agreed between the two parties was a lump sum amount of Rs. 50 lakhs, which was wholly and exclusively paid to recover the total amount due from the builder.

The consideration agreed upon was not in terms of a percentage of the amount recovered by the brokers from the builder. It was a lump sum amount agreed to to recover the entire amount from the builder due to the assessee. The expenditure incurred by the assessee was for the sole purpose of recovering the amount due to him from the builder.

The assessee had no option except to incur the expenditure to make possible the recovery of the amount, including earning income in the form of interest on the principal amount. The expenditure incurred has been laid out and expended wholly and exclusively to recover the amount, including the income in the form of interest, duly reported under the heading ‘income from other sources’.

Expense incurred is neither in the nature of capital expenditure nor in the nature of personal expenses of the assessee. It is also important to note that the payment of Rs 50 lakhs is a lump sum payment made by the assessee in terms of the memorandum of understanding where there is no bifurcation or split of this expenditure relating to recovery of principal and recovery of interest, both of which were due to be received from the builder by the assessee, nor it is linked on a percentage basis depending upon the quantum of recovery out of the total due.

Therefore, the deduction of brokerage expenses claimed by the assessee was justified.

List of Cases Reviewed

• Virmati Ramakrishna v. CIT [1981] 131 ITR 659 (Guj.) (para 8)
• Atir Textile Industries (P.) Ltd. v. DCIT [2015] 55 taxmann.com 380 (Guj) (para 10.2) followed.

List of Cases Referred to

• Smt. Virmati Ramkrishna v. CIT [1981] 131 ITR 659 (Gujarat) (para 5.1)
• Atir Textile Industries (P.) Ltd. v. Dy. CIT [2015] 55 taxmann.com 380/230 Taxman 104 (Gujarat) (para 10.2)
• Vijaya Laxmi Sugar Mills Ltd. v. CIT [1991] 59 Taxman 22/191 ITR 641 (SC) (para 11.1).