2009 (10) TMI 923 - AT - Income Tax

Summary

Issues Involved:
1. Whether the loss incurred on the purchase of capital assets (land) should be treated as revenue loss.
2. Whether the penalty levied u/s 271(1)(c) of the Income-tax Act, 1961, is sustainable.

Issue 1: Treatment of Loss on Purchase of Capital Assets as Revenue Loss

The assessee claimed a loss of Rs. 9.50 lakhs due to the forfeiture of an advance paid for the purchase of land. The Assessing Officer (AO) disallowed this claim, treating the expenditure as capital loss, not revenue loss, and initiated penalty proceedings u/s 271(1)(c). The CIT(A) upheld the AO's decision, stating that the amount was paid for a capital asset and no business nexus was established.

The assessee argued that the forfeiture occurred due to adverse financial conditions, and since no capital asset was acquired, the expenditure should be treated as a business loss u/s 37(1) or alternatively u/s 28 of the Act. The assessee relied on the Supreme Court's decision in Patnik & C. Ltd. v. CIT and the Gujarat High Court's decision in CIT v. Gujarat Steel Tubes Ltd., which supported the treatment of such expenditures as revenue losses when no capital asset is acquired.

The Tribunal found that the assessee's project to start manufacturing did not materialize, and no capital asset came into existence. Therefore, the expenditure should be treated as a business loss. The Tribunal allowed the assessee's claim, reversing the lower authorities' findings.

Issue 2: Penalty u/s 271(1)(c)

Since the Tribunal deleted the addition in the quantum appeal, the penalty levied by the AO and confirmed by the CIT(A) u/s 271(1)(c) was also deleted.

Conclusion:

Both appeals of the assessee were allowed, with the Tribunal treating the forfeited advance as a business loss and deleting the penalty u/s 271(1)(c). The order was pronounced in open court on 16/10/2009.