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2013 (9) TMI 376 - AT - Income TaxChit Funds - Addition u/s 41(1) - ceasation of liability - Defaulted subscription - The assessee contended before the Assessing Officer that though the chit is closed and amounts become payable to the subscribers, since they are standing as guarantor to other subscribers, the amount payable to them is withheld for appropriation against any default in case of the principle subscriber. The Assessing Officer observed that the amounts kept as chit lien are not actually disbursed to the defaulters even within the time allowed by the Chit Fund Act. - Held that - the assessee has not claimed as a deduction in respect of these liabilities while computing the income of the assessee in any assessment year and also it cannot be said that there is cessation of liability. Being so, there is no question of invoking the provisions of section 41(1) of the Act. The addition made by the Assessing Officer is not justified and the same is deleted. - Decided in favor of assessee. Bad debts - bid loss - writing off the bid loss - Held that - Sometimes, successful bidder fails to furnish the surety and necessary documents during the stipulated time. In that event the bid claim of the bidder would be forfeited and the assessee has to conduct fresh auction of the respective chit. In the course of fresh auction, the assessee incurs certain loss i.e., the assessee receives lesser amount than the original bid amount. This amount has been claimed by the assessee as bid loss. This loss arose in the course of assessee s normal business and incurred wholly and exclusively for the purpose of its business and it cannot be considered as non- business expenditure and it is to be allowed u/s. 37 of the Act, as the amount is incurred wholly and exclusively for the purpose of its business - Decided in favour of assessee. Disallowance of inadmissible expenditure - expenditures like donations, marriage gifts, festival expenses, Enams, etc. - Held that - the assessee is a business concern. In the course of its business, the assessee has to incur certain incidental business expenditures. That expenditure is to be allowed except expenditure in the nature of capital expenditure or expenditure of personal nature and the expenditure incurred which is oppose to the public policy. Considering these facts we direct the Assessing Officer to disallow donations and expenditure in the nature of capital expenditure - Decided partly in favour of assessee. Capital receipt or Revenue receipt - sale of land - capital asset or agricultural asset - transaction in the nature of trade - Held that - land in question is classified in the Revenue records as agricultural land and there is no dispute regarding this issue and actual cultivation has been carried on this land and income was declared from this land in the return of income filed by the assessee for the earlier years as agricultural income. It is also an admitted fact that the AO has not brought on record any evidence to show that the agricultural land was used for non-agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities at the relevant point of time of sale of the land. One of the essential elements in an adventure of the trade is the intention to trade; that intention must be present at the time of purchase. The mere circumstances that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show, an intention to trade at the inception. In a case where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise as strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted. In the present case, considering the facts and circumstances of the case it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations and even there was no intention to sell the land in future at that point of time. It was due to the boom in real estate market came into picture at a later stage, the assessee has sold the land. Merely because of the fact that the land was sold for profit, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade. The period of holding should not suggest that the activity was an adventure in the nature of trade - when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income - Decided in favour of assessee.
Issues Involved:
1. Addition under the head "defaulted subscriptions" (Rs. 12,97,908). 2. Addition towards bid loss (Rs. 10,00,000). 3. Disallowance towards inadmissible expenditure (Rs. 10,00,000). 4. Deletion of addition on account of sale of land (Rs. 16.29 crores). Issue-wise Detailed Analysis: 1. Addition under the head "defaulted subscriptions" (Rs. 12,97,908): - Facts: The Assessing Officer (AO) observed a current liability of Rs. 7,87,32,188 under "defaulted subscriptions" in the balance sheet. The assessee argued that the amount payable to subscribers who stood as guarantors was withheld to secure payment from other subscribers. - AO's Decision: The AO added Rs. 12,97,908 as "chit lien" to the income, treating it as cessation of liability under section 41(1) of the Act. - CIT(A)'s Decision: The CIT(A) confirmed the addition, agreeing with the AO's observation. - Tribunal's Decision: The Tribunal deleted the addition, stating that the assessee did not claim a deduction for these liabilities in any assessment year, and there was no cessation of liability. Hence, invoking section 41(1) was not justified. 2. Addition towards bid loss (Rs. 10,00,000): - Facts: The assessee claimed a bid loss of Rs. 83,81,399. The AO disallowed Rs. 10,00,000, stating that the loss could have been minimized. - CIT(A)'s Decision: The CIT(A) sustained the addition, agreeing with the AO's reasoning. - Tribunal's Decision: The Tribunal allowed the assessee's claim, stating that the bid loss arose in the normal course of business and was incurred wholly and exclusively for business purposes under section 37 of the Act. 3. Disallowance towards inadmissible expenditure (Rs. 10,00,000): - Facts: The assessee claimed Rs. 6,47,68,153 under "Miscellaneous Expenditure," which included Rs. 57,73,909 for donations, marriage gifts, festival expenses, etc. The AO disallowed Rs. 10,00,000 as inadmissible expenditure. - CIT(A)'s Decision: The CIT(A) sustained the disallowance, agreeing with the AO's observations. - Tribunal's Decision: The Tribunal partly allowed the assessee's claim, directing the AO to disallow only donations and capital expenditure. 4. Deletion of addition on account of sale of land (Rs. 16.29 crores): - Facts: The assessee sold agricultural land for Rs. 17,51,00,000, claiming the gain as exempt. The AO treated the profit as taxable, either under "business or profession" or "other sources." - CIT(A)'s Decision: The CIT(A) deleted the addition, stating that the land was agricultural, situated beyond 8 km from municipal limits, and used for agricultural purposes. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, confirming that the land was agricultural, used for agricultural operations, and situated beyond 8 km from municipal limits. The Tribunal concluded that the sale did not constitute an adventure in the nature of trade, and the profit was not taxable. Final Decision: - Assessee's Appeal: Partly allowed. - Revenue's Appeal: Dismissed. Order Pronounced: In the open court on 5th September, 2013.
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