2013 (2) TMI 818 - AT - Income Tax

Compensation loss on non lifting of materials of as speculative loss - Held that - It is a situation in which there could not have been any possibility of actual delivery of the goods because even at the point of time when delivery was to take place, the factory was not even likely to come back to the possession of the assessee. The factory was given on lease and as such the purchases cannot be said to have been made for bonafide actual user purposes. CIT(Appeals) has painstakingly analyzed the various contract provision - namely clause 7 to 9, these clauses have inbuilt speculation element embedded in the agreement. The factum of actual non delivery or impact of non delivery could be relevant only in the cases in which genuine business transactions are involved. On the facts of the present cases, these aspects are not really relevant. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(Appeals) and decline to interfere in the matter. Nature of expenditure - loss on cancellation of booking of 100 TPD Klin, proposed expansion of steel unit - Held that - We find that in the case of CIT-vs.- Anjani Kumar Co. Ltd. (2002 (7) TMI 44 - RAJASTHAN HIGH COURT) was in seisin of a situation in which advance was paid to acquire land for expansion of business but since land was not acquired, no capital asset came into existence and there was no question of allowing depreciation on the said asset. On these facts, Their Lordships upheld the view that since no land was acquired and no capital asset came into existence, the loss of advance was to be allowed as business loss. In this view of the matter, and having noted that the loss was incurred in connection with expansion of existing business, we are of the considered view that loss of advance has to be allowed as a revenue deduction of business loss. The question of expense being capital in nature would have arisen only if the machinery was actually acquired; that is not the case here.

Summary

Issues:
1. Treatment of compensation loss as speculative loss.
2. Disallowance of loss incurred on cancellation of booking.

Issue 1: Treatment of Compensation Loss as Speculative Loss

The appellant challenged the correctness of the Commissioner of Income Tax (Appeals)'s order regarding the assessment under section 143(3) r.w.s. 153A of the Income Tax Act, 1961, for the assessment year 2009-10. The appellant claimed a loss of Rs. 51,00,000 paid to Global Alloys Pvt. Ltd. as compensation for non-lifting of ordered materials. The Assessing Officer treated this loss as speculative loss as it was settled without delivery and not part of regular business activity. The CIT(Appeals) upheld this treatment, emphasizing the speculative nature of the contract clauses. The agreement explicitly accounted for non-delivery scenarios, making the loss speculative and arising directly from the terms of the business contract. The Tribunal concurred, highlighting the absence of actual delivery possibilities due to the factory being leased out, affirming the speculative nature of the transaction. The Tribunal upheld the CIT(Appeals)'s order, dismissing the appeal.

Issue 2: Disallowance of Loss Incurred on Cancellation of Booking

The appellant disputed the disallowance of a Rs. 26,00,000 loss on the cancellation of booking with Tata Steel Limited. The Assessing Officer considered this loss as capital expenditure, not revenue in nature, due to the proposed expansion of the steel unit. The CIT(Appeals) upheld this disallowance, stating that the loss of the advance to Tata Steel Ltd. was a capital loss. However, the Tribunal referred to a precedent where a loss on advance payment for land acquisition was allowed as a business loss since no capital asset materialized. Applying this reasoning, the Tribunal ruled in favor of the appellant, allowing the Rs. 26,00,000 loss as a revenue deduction for business loss. Consequently, the Tribunal allowed this ground of appeal, partially allowing the appellant's overall appeal.

In conclusion, the Tribunal upheld the treatment of compensation loss as speculative loss due to the contractual clauses and allowed the loss incurred on cancellation of booking as a revenue deduction for business loss. The appellant received partial relief as the Tribunal allowed the second ground of appeal while dismissing the first ground.