Accrued Business Liability vs. Contingent Liability: ITAT Mumbai Upholds ₹8 Crore Deduction for Occupant Compensation — ITO vs. Svadeshi Enterprises

Background and Context

The Income Tax Appellate Tribunal, Mumbai Bench, recently delivered a significant ruling in the case of ITO vs. Svadeshi Enterprises, arising from Assessment Year 2016-17. The dispute involved both a Revenue appeal and a Cross Objection filed by the assessee, both stemming from an order passed by the CIT(A)/NFAC dated 21.09.2024. The central question before the Tribunal was whether a provision of ₹8 crore, recognised by a builder-assessee toward compensation payable to occupants and tenants, qualified as an accrued business liability deductible under Section 37(1) of the Income Tax Act, 1961, or whether it should be treated as a contingent liability not eligible for deduction.

The ruling carries considerable weight for assessees in the real estate and development sector who routinely recognise provisions for future settlement obligations arising out of ongoing litigation, negotiations, and regulatory changes.

Facts of the Case

The assessee, Svadeshi Enterprises, is a partnership firm carrying on the business of builders and developers. The firm had acquired a property at Chunabhatti, Mumbai from Svadeshi Mills Co. Ltd. back in 1988. The said property was occupied by 56 occupants and tenants, and as part of its commercial arrangement with the developer, the assessee was under an obligation to deliver clear and marketable title — which necessarily required vacating all 56 occupants through monetary compensation.

During the year under consideration (A.Y. 2016-17), the assessee received compensation of ₹12.25 crore from M/s. Shelter Developers in connection with the said property. Simultaneously, the assessee recognised an additional liability of ₹8 crore during the year, based on correspondence dated 11.03.2016 received from M/s. Nazo Developers Pvt. Ltd., reflecting the escalating compensation demands of the occupants. This brought the aggregate recognised liability to ₹25 crore, having built up progressively from ₹14 crore in F.Y. 2007-08 and a further ₹3 crore in F.Y. 2013-14.

Assessing Officer's Position

The Assessing Officer, during assessment proceedings, noted that the ₹8 crore debited in the accounts toward occupant/tenant liability remained entirely unpaid as on 31.03.2016. He further observed that:

  • Settlement negotiations with the occupants were still ongoing
  • Multiple litigations before various judicial forums remained pending
  • The exact quantum of compensation payable to individual occupants had not been finally determined

On the basis of these observations, the Assessing Officer concluded that the liability had not crystallized during the relevant year and was, therefore, merely a contingent liability. Accordingly, the ₹8 crore was disallowed and added back to the income of the assessee.

CIT(A)/NFAC's Findings

The assessee challenged the disallowance before the CIT(A)/NFAC, placing the full factual matrix on record. The following key submissions were advanced: